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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 1-7410
MELLON BANK CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (412) 234-5000
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.50 Par Value New York Stock Exchange
7-1/4% Convertible Subordinated Capital Notes Due 1999 New York Stock Exchange
Stock Purchase Rights New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1998, there were 259,743,150 shares outstanding of the
registrant's voting common stock, $0.50 par value per share, of which
257,148,040 common shares having a market value of $16,023,537,243 were held by
nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in the
following parts of this Annual Report.
Mellon Bank Corporation 1998 Proxy Statement-Part III
Mellon Bank Corporation 1997 Annual Report to Shareholders-Parts I, II and IV
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The Form 10-K filed with the Securities and Exchange Commission contains the
Exhibits listed on the Index to Exhibits beginning on page 23, including the
Financial Review and Statements and Notes; Principal Locations and Operating
Entities; Directors and Senior Management Committee; and Corporate Information
Sections of the Registrant's 1997 Annual Report to Shareholders. For a free copy
of the Corporation's 1997 Annual Report to Shareholders, the Proxy Statement for
its 1998 Annual Meeting, or a copy of the Corporation's Management Report on
Internal Controls, as filed with the appropriate regulatory agencies, please
send a written request to the Secretary of the Corporation, 4826 One Mellon Bank
Center, Pittsburgh, PA 15258-0001.
Cautionary Statement
This Annual Report on Form 10-K contains and incorporates by reference
statements relating to future results of the Corporation that are considered
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to, among other things,
the Year 2000 project, loan loss reserve adequacy, simulation of changes in
interest rates and litigation results. Actual results may differ materially from
those expressed or implied as a result of certain risks and uncertainties,
including, but not limited to, changes in political and economic conditions,
interest rate fluctuations, competitive product and pricing pressures within the
Corporation's markets, equity and fixed income market fluctuations, personal and
corporate customers' bankruptcies, inflation, acquisitions and integrations of
acquired businesses, technological change, changes in law, changes in fiscal,
monetary, regulatory and tax policies, monetary fluctuations, success in gaining
regulatory approvals when required as well as other risks and uncertainties
detailed from time to time in the filings of the Corporation with the Securities
and Exchange Commission.
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MELLON BANK CORPORATION
Form 10-K Index
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PART I
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PAGE
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Item 1. Business
Description of Business 3
Supervision and Regulation 5
Competition 8
Employees 8
Statistical Disclosure by Bank Holding Companies 9
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Mellon Bank Corporation (the "Corporation") is a multibank holding company
incorporated under the laws of Pennsylvania in August 1971 and registered under
the Federal Bank Holding Company Act of 1956, as amended. The Corporation
provides a comprehensive range of financial products and services in domestic
and selected international markets. The Corporation's six banking subsidiaries
are located in Pennsylvania, Massachusetts, Delaware, Maryland, New Jersey,
California and Florida. Other subsidiaries are located in key business centers
throughout the United States and abroad. At December 31, 1997, the Corporation
was the twenty-third largest bank holding company in the United States in terms
of assets.
The Corporation's principal direct subsidiaries are Mellon Bank, N.A. ("Mellon
Bank"), The Boston Company, Inc. ("TBC"), Mellon Bank (DE) National Association,
Buck Consultants, Inc. ("Buck") and a number of companies known as Mellon
Financial Services Corporation. The Dreyfus Corporation ("Dreyfus"), one of the
nation's largest mutual fund companies, is a wholly owned subsidiary of Mellon
Bank. Buck is a leading global actuarial and human resources consulting firm.
The Corporation's banking subsidiaries engage in retail financial services,
commercial banking, trust and investment management services, residential real
estate loan financing, mortgage servicing, equipment leasing, mutual fund
activities and various securities-related activities.
Mellon Bank, which has its executive offices in Pittsburgh, Pennsylvania, became
a subsidiary of the Corporation in November 1972. With its predecessors, Mellon
Bank has been in business since 1869. Mellon Bank is comprised of six operating
regions throughout Pennsylvania and southern New Jersey. Dreyfus, headquartered
in New York, New York, serves primarily as an investment adviser, manager and
administrator of mutual funds. TBC, through Boston Safe Deposit and Trust
Company ("BSDT") and other subsidiaries, engages in the business of
institutional trust and custody, institutional asset management, private
investment management, jumbo mortgage lending and other banking services. TBC is
headquartered in Boston, Massachusetts. Buck, headquartered in New York, New
York, is a global actuarial and human resources consulting firm. It provides a
broad array of services in the areas of defined benefit and defined contribution
plans, health and welfare plans, communications and compensation consulting, and
outsourcing and administration of employee benefit programs. Mellon Bank (DE)
National Association, headquartered in Wilmington, Delaware, serves consumer and
small to midsize commercial markets throughout Delaware and provides nationwide
cardholder processing services.
The Corporation's banking subsidiaries operate 1,183 domestic banking locations.
The deposits of the banking subsidiaries are insured by the Federal Deposit
Insurance Corporation ("FDIC") to the extent provided by law.
Other subsidiaries of the Corporation provide a broad range of bank-related
services -- including equipment leasing, commercial loan financing, stock
transfer services, cash management and numerous trust and investment management
services. The types of financial products and services offered by the
Corporation's subsidiaries are subject to change.
For analytical purposes, management has focused the Corporation into four core
business sectors: Consumer Fee Services, Consumer Banking, Business Fee Services
and Business Banking. Further information regarding the Corporation's core
business sectors, as well as certain non-core sectors such as Real Estate
Workout, is presented in the Business Sectors section on pages 32 through 35 of
the Corporation's 1997 Annual Report to Shareholders, which pages are
incorporated herein by reference. A brief discussion of the business sectors is
presented on the following pages. There is considerable interrelationship among
these sectors.
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DESCRIPTION OF BUSINESS (continued)
CONSUMER FEE SERVICES
Consumer Fee Services includes private asset management services, retail mutual
funds, discount brokerage services and residential mortgage loan origination and
servicing. These products and services are offered principally through the
private asset management group of Mellon Bank and BSDT, as well as through
Dreyfus, the discount brokerage operation of Dreyfus Brokerage Services, Inc.
and throughout the Corporation's retail banking network. This sector also
includes the mortgage banking operations through which the Corporation
originates and services residential mortgages for institutional investors and
makes residential loans nationwide.
CONSUMER BANKING
The Consumer Banking sector includes consumer lending and deposit products,
business banking, credit card and jumbo residential mortgage lending. The
consumer lending, branch banking and small business banking services primarily
are offered through the Corporation's retail banking network which is comprised
of 447 retail outlets which includes 290 traditional retail branches, 102
supermarket facilities, 28 downscale/drive-ups, 16 financial centers and 11
specialty stores. The retail banking network also includes 729 ATM's, 6 loan
sales offices and a telephone banking center. This network is primarily located
in the mid-Atlantic region of the United States, southern Florida and
California. This banking network provides a full range of products to
individuals including short- and long-term credit facilities, credit cards,
mortgages, safe deposit facilities and access to ATM's. Jumbo residential
mortgage lending is offered nationally through the private asset management
representative offices.
BUSINESS FEE SERVICES
The Business Fee Services sector serves the institutional markets by providing
institutional asset and institutional mutual fund management and administration,
institutional trust and custody, securities lending, foreign exchange, cash
management, stock transfer, commercial mortgage loan origination and servicing,
network services, benefits consulting and administrative services and services
for defined contribution plans. The Corporation's subsidiaries provide trust and
investment management services while operating under the umbrella name "Mellon
Trust"; in addition, the subsidiaries provide institutional mutual fund
management through Dreyfus. The Corporation also owns a number of subsidiaries
that provide a variety of active and passive equity and fixed income investment
management services, including management of international securities. Through
Buck, the Corporation offers benefits consulting and administrative services and
services for defined contribution plans. Through the Global Cash Management
department, the Corporation offers a broad range of cash management services,
including remittance processing, collections and disbursements, check processing
and electronic services. This sector includes the commercial mortgage
origination and servicing operations of the mortgage banking group. The
Corporation's subsidiaries also provide services relating primarily to defined
contribution employee benefit plans under the umbrella name "Dreyfus Retirement
Services." Stock transfer services are provided in the United States through its
joint venture operating under the name of ChaseMellon Shareholder Services and
in Canada through the CIBC Mellon Trust Company.
BUSINESS BANKING
Business Banking includes large corporate and middle market lending, asset-based
lending, lease financing, commercial real estate lending, insurance premium
financing, securities underwriting and trading and international banking. The
Corporation provides lending and other institutional banking services to
domestic and selected international markets through its Corporate Banking,
Institutional Banking, Capital Markets and Leasing departments. These markets
generally include large domestic commercial and industrial customers, U.S.
operations of foreign companies, multinational corporations, state and local
governments and various financial institutions (including banks, securities
broker/dealers, insurance companies, finance companies and mutual funds). The
Corporation also offers corporate finance and rate risk management products;
syndicates, participates out and sells loans; offers a variety of capital
markets products and services, including private placement and money market
transactions; and provides equipment leasing, financing and lease
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DESCRIPTION OF BUSINESS (continued)
advisory services. The Corporation maintains foreign offices in London, Tokyo,
Hong Kong, Toronto, and Grand Cayman, British West Indies. Through these
offices, the Corporation conducts trade finance activities, engages in
correspondent banking and provides corporate banking and capital markets
services. Included in this sector is a nationwide asset-based lending division
which provides secured lending, principally through accounts receivable and
inventory financing. As part of this sector, Middle Market Banking serves
companies with annual sales between $20 million and $500 million. This group
also specializes in providing services to segments of coal and government
services industries. Real Estate lending consists of the Corporation's
commercial real estate lending activities, through which it originates financing
for commercial, multi-family and other products. The Corporation provides
property and casualty insurance premium financing to small, midsize and large
companies in the United States through the AFCO Credit Corporation and in Canada
through CAFO.
The 1997 Annual Report to Shareholders summarizes principal locations and
operating entities on pages 22 and 23, which pages are incorporated herein by
reference. Exhibit 21.1 to this Annual Report on Form 10-K presents a list of
the subsidiaries of the Corporation as of December 31, 1997.
Year 2000 Project
For a discussion regarding the Corporation's Year 2000 Project, see page 44 of
the Corporation's 1997 Annual Report to Shareholders, which discussion is
incorporated herein by reference.
SUPERVISION AND REGULATION
The Corporation, as a bank holding company, is regulated under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is subject to the supervision
of the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). Generally, the Act limits the business of bank holding companies to
banking, managing or controlling banks, performing certain servicing activities
for subsidiaries, and engaging in such other activities as the Federal Reserve
Board may determine to be closely related to banking and a proper incident
thereto. Certain of the Corporation's subsidiaries are themselves bank holding
companies under the Act. As a result of its Mellon Bank, F.S.B. subsidiary, the
Corporation is also regulated under the Home Owners' Loan Act of 1933 as a
savings and loan holding company.
The Corporation's national banking subsidiaries are subject to primary
supervision, regulation and examination by the Office of the Comptroller of the
Currency (the "OCC"); BSDT is currently subject to supervision, regulation and
examination by the Federal Reserve; and Mellon Bank, F.S.B. is subject to
supervision, regulation and examination by the Office of Thrift Supervision
("OTS"). Mellon Securities Trust Company, The Dreyfus Trust Company and Mellon
Trust of New York are New York trust companies and are supervised by the New
York State Department of Banking. Mellon Trust of California is a California
trust company and is supervised by the State of California Department of
Financial Institutions. Mellon 1st Business Bank is a state non-member bank and
is subject to supervision, regulation and examination by the FDIC and the State
of California Department of Financial Institutions.
The Corporation's nonbank subsidiaries engaged in securities related activities
are regulated by the Securities and Exchange Commission (the "SEC"). Dreyfus
Investment Services Corporation and Dreyfus Brokerage Services, Inc. conduct
brokerage operations, and Mellon Financial Markets, Inc. engages in securities
activities permitted to bank holding company subsidiaries under Section 20 of
the Glass-Steagall Act. Dreyfus Service Corporation, a subsidiary of Dreyfus,
acts as a broker/dealer for the sale of shares of mutual funds, including the
Dreyfus family of mutual funds. Dreyfus Brokerage Services, Inc., a subsidiary
of Mellon Bank, is a self-clearing deep discount broker providing services to
individual investors nationwide. Dreyfus Investment Services Corporation, Mellon
Financial Markets, Inc., Dreyfus Service Corporation and Dreyfus Brokerage
Services, Inc. are registered broker/dealers and members of the National
Association of Securities Dealers, Inc., a securities industry self-regulatory
organization.
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SUPERVISION AND REGULATION (continued)
Certain subsidiaries of the Corporation are registered investment advisers under
the Investment Advisers Act of 1940 and, as such, are supervised by the SEC.
They are also subject to various federal and state laws and regulations and to
the laws of any countries in which they do business. These laws and regulations
are primarily intended to benefit clients and fund shareholders and generally
grant supervisory agencies broad administrative powers, including the power to
limit or restrict the carrying on of business for failure to comply with such
laws and regulations. In such event, the possible sanctions which may be imposed
include the suspension of individual employees, limitations on engaging in
business for specific periods, the revocation of the registration as an
investment adviser, censures and fines. Each investment company (as defined in
the Investment Company Act of 1940) which is advised by a subsidiary of the
Corporation, including the Dreyfus family of mutual funds, is registered with
the SEC, and the shares of most are qualified for sale in all states in the
United States and the District of Columbia, except for investment companies that
offer products only to residents of a particular state or of a foreign country
and except for certain investment companies which are exempt from such
registration or qualification.
Certain of the Corporation's public finance activities are regulated by the
Municipal Securities Rulemaking Board. Mellon Bank and certain of the
Corporation's other subsidiaries are registered with the Commodity Futures
Trading Commission (the "CFTC") as commodity pool operators or commodity trading
advisors and, as such, are subject to CFTC regulation.
The Corporation and its subsidiaries are subject to an extensive system of
banking laws and regulations that are intended primarily for the protection of
the customers and depositors of the Corporation's subsidiaries rather than
holders of the Corporation's securities. These laws and regulations govern such
areas as permissible activities, reserves, loans and investments, and rates of
interest that can be charged on loans. The Corporation and its subsidiaries also
are subject to general U.S. federal laws and regulations and to the laws and
regulations of the states or countries in which they conduct their businesses.
Set forth below are brief descriptions of selected laws and regulations
applicable to the Corporation and its subsidiaries. The references are not
intended to be complete and are qualified in their entirety by reference to the
statutes and regulations. Changes in applicable law or regulation may have a
material effect on the business of the Corporation.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was enacted into Federal law.
Under the Interstate Act, commencing on September 29, 1995, bank holding
companies are permitted to acquire banks located in any state regardless of the
state law in effect at the time. The Interstate Act also provides for the
nationwide interstate branching of banks. Under the Interstate Act, both
national and state-chartered banks are permitted to merge across state lines
(and thereby create interstate branches) commencing June 1, 1997. States were
permitted to "opt-out" of the interstate branching authority by taking action
prior to the commencement date. States could also "opt-in" early (i.e., prior to
June 1, 1997) to the interstate branching provisions. Pennsylvania chose to
"opt-in" early, effective July 6, 1995, thereby enabling Pennsylvania banks,
including national banks having their main office in Pennsylvania, to merge with
out-of-state banks to create interstate branches inside or outside Pennsylvania.
In addition, Pennsylvania has permitted de novo branching into and out of
Pennsylvania as long as the law of the other state involved is reciprocal in
this regard.
There are certain restrictions on the ability of the Corporation and certain of
its non-bank affiliates to borrow from, and engage in other transactions with,
its banking subsidiaries and on the ability of such banking subsidiaries to pay
dividends to the Corporation. These restrictions are discussed in note 22 of the
Notes to Financial Statements on pages 94 and 95 of the Corporation's 1997
Annual Report to Shareholders. This note is incorporated herein by reference.
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Corporation and the Corporation's non-bank subsidiaries, including Mellon
Securities Trust Company, a member of the Federal Reserve System. The OTS has
similar authority with respect to Mellon Bank, F.S.B.
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SUPERVISION AND REGULATION (continued)
Substantially all of the deposits of the banking subsidiaries of the Corporation
are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the
FDIC and are subject to deposit insurance assessments to maintain the BIF. The
FDIC utilizes a risk-based assessment system which imposes insurance premiums
based upon a matrix that takes into account a bank's capital level and
supervisory rating. Such premiums now range from 0 cents for each of $100 of
domestic deposits for the healthiest institutions to 27 cents for each $100 of
domestic deposits for the weakest institutions. In addition, the Deposit
Insurance Fund Act of 1996 authorizes the Financing Corporation ("FICO") to
impose assessments on BIF assessable deposits in order to service the interest
on FICO's bond obligations. The FICO assessment on these deposits is
approximately 1.3 cents for each $100 of domestic deposits.
The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA")
contains a "cross-guarantee" provision that could result in any insured
depository institution owned by the Corporation being assessed for losses
incurred by the FDIC in connection with assistance provided to, or the failure
of, any other depository institution owned by the Corporation. Also, under
Federal Reserve Board policy, the Corporation is expected to act as a source of
financial strength to each of its banking subsidiaries and to commit resources
to support each such bank in circumstances where such bank might not be in a
financial position to support itself.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
substantially revised the depository institution regulatory and funding
provisions of the Federal Deposit Insurance Act and made revisions to several
other federal banking statutes. Among other things, federal banking regulators
are required to take prompt corrective action in respect of depository
institutions that do not meet minimum capital requirements. FDICIA identifies
the following capital tiers for financial institutions: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.
Rules adopted by the federal banking agencies under FDICIA provide that an
institution is deemed to be: "well capitalized" if the institution has a Total
risk-based capital ratio of 10.0% or greater, a Tier I risk-based ratio of 6.0%
or greater, and a leverage ratio of 5.0% or greater, and the institution is not
subject to an order, written agreement, capital directive, or prompt corrective
action directive to meet and maintain a specific level for any capital measure;
"adequately capitalized" if the institution has a Total risk-based capital ratio
of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater, and a
leverage ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate Federal banking agency guidelines), and the institution
does not meet the definition of a well capitalized institution;
"undercapitalized" if the institution has a Total risk-based capital ratio that
is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate Federal banking agency guidelines) and the
institution does not meet the definition of a significantly undercapitalized or
critically undercapitalized institution; "significantly undercapitalized" if the
institution has a Total risk-based capital ratio that is less than 6.0%, a Tier
I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is
less than 3.0% and the institution does not meet the definition of a critically
undercapitalized institution; and "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2.0%. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the capital
category in which an institution is classified.
At December 31, 1997, all of the Corporation's banking subsidiaries were well
capitalized based on the ratios and guidelines noted above. A bank's capital
category, however, is determined solely for the purpose of applying the prompt
corrective action rules and may not constitute an accurate representation of the
bank's overall financial condition or prospects.
The appropriate Federal banking agency may, under certain circumstances,
reclassify a well capitalized insured depository institution as adequately
capitalized. The appropriate agency is also permitted to require an adequately
capitalized or undercapitalized institution to comply with the supervisory
provisions as if the institution were in the next lower category (but not treat
a significantly undercapitalized institution as critically undercapitalized)
based on supervisory information other than the capital levels of the
institution. The statute provides that an institution may be reclassified if the
appropriate
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SUPERVISION AND REGULATION (continued)
Federal banking agency determines (after notice and opportunity for hearing)
that the institution is in an unsafe or unsound condition or deems the
institution to be engaging in an unsafe or unsound practice.
Legislation enacted in August 1993 provides that depositors and certain claims
for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such an institution in the "liquidation or other resolution" of
such an institution by any receiver.
During recent years, regulatory guidelines have been adopted, and legislation
has been proposed in Congress, to address concerns regarding retail sales by
banks of various nondeposit investment products, including mutual funds.
Legislative and regulatory attention to these matters is likely to continue, and
may intensify, in the future. Although existing statutory and regulatory
requirements in this regard have not had a significant effect on the
Corporation's business, there can be no assurance that future requirements will
not have such an effect. Various other legislative initiatives, including
proposals to restructure the banking regulatory system and the separation of
banking from certain securities and other commercial activities, are from time
to time introduced in Congress. The Corporation cannot determine the ultimate
effect that any such potential legislation, if enacted, would have upon its
financial condition or operations.
COMPETITION
The Corporation and its subsidiaries continue to be subject to intense
competition in all aspects and areas of their businesses from bank holding
companies and banks; other domestic and foreign depository institutions, such as
savings and loan associations, savings banks and credit unions; and other
service providers, such as finance, mortgage and leasing companies, brokerage
firms, credit card companies, benefits consultants, mutual funds, investment
banking companies, investment management firms and insurance companies. The
Corporation also competes with nonfinancial institutions, including retail
stores and manufacturers of consumer products that maintain their own credit
programs, as well as governmental agencies that make available loans to certain
borrowers. Also, in the Business Fee Services sector, the Corporation competes
with a wide range of technologically capable service providers, such as data
processing and outsourcing firms. Many of the Corporation's competitors, with
the particular exception of thrift institutions, are not subject to regulation
as extensive as that described under the "Supervision and Regulation" section
and, as a result, they may have a competitive advantage over the Corporation in
certain respects.
EMPLOYEES
The Corporation and its subsidiaries had an average of approximately 27,500
full-time equivalent employees in the fourth quarter of 1997.
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STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Securities Act Industry Guide 3 and the Exchange Act Industry Guide 3 ("Guide
3"), requires that the following statistical disclosures be made in Annual
Reports on Form 10-K filed by bank holding companies.
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
Information required by this section of Guide 3 is presented in the
Rate/Volume Variance Analysis below. Required information is also
presented in the Financial Section of the Corporation's 1997 Annual
Report to Shareholders in the Consolidated Balance Sheet -- Average
Balances and Interest Yields/Rates on pages 36 and 37, and in Net
Interest Revenue, on page 35, which is incorporated herein by reference.
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RATE/VOLUME VARIANCE ANALYSIS
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Year ended December 31,
1997 over (under) 1996 1996 over (under) 1995
Due to change in Net Due to change in Net
(in millions) Rate Volume Change Rate Volume Change
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Increase (decrease) in interest
revenue from interest-earning assets:
Interest-bearing deposits with banks $ (2) $ (8) $(10) $ (6) $ 6 $ -
Federal funds sold and securities
under resale agreements - - - (2) (2) (4)
Other money market investments 1 (2) (1) - 4 4
Trading account securities - 1 1 (3) (8) (11)
Securities:
U.S. Treasury and agency securities 13 (38) (25) - 87 87
Obligations of states and political
subdivisions - - - - (2) (2)
Other (1) (3) (4) 1 (3) (2)
Loans (includes loan fees) (32) 46 14 (162) (9) (171)
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Total (21) (4) (25) (172) 73 (99)
Increase (decrease) in interest
expense on interest-bearing liabilities:
Deposits in domestic offices:
Demand 1 (12) (11) (2) (20) (22)
Money market and other savings accounts (3) 9 6 (39) 42 3
Retail savings certificates 8 32 40 (11) (8) (19)
Other time deposits 4 1 5 2 82 84
Deposits in foreign offices (9) (56) (65) (25) (7) (32)
Federal funds purchased and securities
under repurchase agreements 3 (20) (17) (11) (20) (31)
Other short-term borrowings (5) (11) (16) (4) (34) (38)
Notes and debentures (with original
maturities over one year) (1) 47 46 - 26 26
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Total (2) (10) (12) (90) 61 (29)
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Increase (decrease) in net
interest revenue $ (19) $ 6 $(13) $ (82) $ 12 $ (70)
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Note: Amounts are calculated on a taxable equivalent basis where applicable, at
a tax rate approximating 35% and are before the effect of reserve requirements.
Changes in interest revenue or interest expense arising from the combination of
rate and volume variances are allocated proportionally to rate and volume based
on their relative absolute magnitudes.
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STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
II. Securities Portfolio
A. Carrying values of securities at year-end are as follows:
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INVESTMENT SECURITIES December 31,
(in millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and agency securities $1,994 $2,292 $2,408
Other securities:
Other mortgage-backed 23 29 39
Bonds, notes and debentures 14 16 30
Stock of Federal Reserve Bank 50 37 41
Other 1 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total other securities 88 83 111
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $2,082 $2,375 $2,519
- ----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE December 31,
(in millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and agency securities $2,727 $4,010 $2,769
Obligations of states and political subdivisions 26 49 63
Other securities:
Other mortgage-backed 3 4 7
Bonds, notes and debentures 11 12 12
Other - 36 62
- ----------------------------------------------------------------------------------------------------------------------------------
Total other securities 14 52 81
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $2,767 $4,111 $2,913
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B. Maturity Distribution of Securities
Information required by this section of Guide 3 is presented in the
Corporation's 1997 Annual Report to Shareholders in note 3 of Notes to
Financial Statements on Securities on pages 78 through 80, which note is
incorporated herein by reference.
10
<PAGE> 12
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
III. Loan Portfolio
A. Types of Loans
Information required by this section of Guide 3 is included in the Corporate
Risk section of the Corporation's 1997 Annual Report to Shareholders on
pages 57 through 66, which portions are incorporated herein by reference.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
<TABLE>
<CAPTION>
Maturity distribution of loans at December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
(in millions) Within 1 year (a) 1-5 years Over 5 years Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic:(b)
Commercial and financial $3,258 $5,771 $1,797 $10,826
Commercial real estate 371 750 388 1,509
- ----------------------------------------------------------------------------------------------------------------
Total domestic 3,629 6,521 2,185 12,335
International 964 178 424 1,566
- ----------------------------------------------------------------------------------------------------------------
Total $4,593 $6,699 $2,609 $13,901
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Maturity distributions are based on remaining contractual maturities.
(a) Includes demand loans and loans with no stated maturity.
(b) Excludes consumer mortgages, credit card, other consumer credit and lease
finance assets.
<TABLE>
<CAPTION>
Sensitivity of loans at December 31, 1997, to changes in interest rates
- ----------------------------------------------------------------------------------------------------------------------------
Domestic International
(in millions) operations (a) operations Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans due in one year or less (b) $ 3,629 $ 964 $ 4,593
Loans due after one year:
Variable rates 7,775 494 8,269
Fixed rates 931 108 1,039
- ----------------------------------------------------------------------------------------------------------------------------
Total loans $12,335 $1,566 $13,901
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Maturity distributions are based on remaining contractual maturities.
(a) Excludes consumer mortgages, credit card, other consumer credit and lease
finance assets.
(b) Includes demand loans and loans with no stated maturity.
C. Risk Elements
Information required by this section of Guide 3 is included in the Corporate
Risk section of the Corporation's 1997 Annual Report to Shareholders on
pages 57 through 66, which portions are incorporated herein by reference.
IV. Summary of Loan Loss Experience
The Corporation employs various estimation techniques in developing the
credit loss reserve. Management reviews the specific circumstances of
individual loans subject to more than the customary potential for exposure
to loss. In establishing the level of the reserve, management also
identifies market concentrations, changing business trends, industry risks,
and current and anticipated specific and general economic factors that may
adversely affect collectibility. Other factors considered in determining the
level of the reserve include: trends in portfolio volume, quality, maturity
and composition; historical loss experience; lending policies; new products;
year 2000 issues; the status and amount of nonperforming and past-due loans
and adequacy of collateral. In addition, management assesses volatile
factors such as interest rates and global economic conditions that may
significantly alter loss potential. The loss reserve methodology also
provides for a portion of the reserve to act as an additional buffer against
credit quality deterioration or risk of estimation error. Based on this
evaluation, management believes that the credit loss reserve is adequate to
absorb future losses inherent in the portfolio.
11
<PAGE> 13
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
The reserve is not specifically associated with individual loans or portfolio
segments. Thus, the reserve is available to absorb credit losses arising from
any individual loan or portfolio segment. When losses on specific loans are
identified, management charges off the portion deemed uncollectible. In view of
the fungible nature of the reserve and management's practice of charging off
known losses, the Corporation does not maintain truly specific reserves on any
loan. However, management has developed a loan loss reserve methodology designed
to provide procedural discipline in assessing the adequacy of the reserve. The
allocation of the Corporation's reserve for credit losses presented below is
based on this loan loss reserve methodology.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic reserve:
Commercial and financial $162 $117 $169 $195 $182
Real estate:
Commercial 88 98 92 157 189
Consumer 51 58 61 75 91
Consumer credit 132 198 135 141 102
Lease finance assets 30 43 6 17 15
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic reserve 463 514 463 585 579
International reserve 12 11 8 22 21
- ------------------------------------------------------------------------------------------------------------------------------------
Total reserve $475 $525 $471 $607 $600
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Further information on the Corporation's credit policies, the factors that
influenced management's judgment in determining the level of the reserve for
credit losses, and the analyses of the credit loss reserve for the years
1993-1997 are set forth in the Financial Section of the Corporation's 1997
Annual Report to Shareholders in the Credit Risk section on pages 57 and 58, the
Reserve for Credit Losses and Review of Net Credit Losses section on pages 65
and 66, in note 1 of Notes to Financial Statements under Reserve for Credit
Losses on page 75 and in note 5 on page 81, which portions are incorporated
herein by reference.
For each category above, the ratio of loans to consolidated total loans is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
December 31,
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial and financial 37.1% 37.2% 39.6% 37.5% 37.2%
Real estate:
Commercial 5.2 5.6 5.5 6.1 7.0
Consumer 29.1 28.4 32.4 32.5 33.4
Consumer credit 14.1 14.4 16.4 18.1 15.6
Lease finance assets 9.1 9.2 3.0 3.0 2.9
- -------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 94.6 94.8 96.9 97.2 96.1
International loans 5.4 5.2 3.1 2.8 3.9
- -------------------------------------------------------------------------------------------------------------------------------
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 14
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
V. Deposits
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Maturity distribution of domestic time deposits at December 31, 1997
Within 4-6 7-12 Over
(in millions) 3 months months months 1 year Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time certificates of deposit in denominations
of $100,000 or greater $1,229 $ 677 $ 296 $ 276 $2,478
Time certificates of deposit in denominations
of less than $100,000 1,345 1,322 1,847 1,688 6,202
------------------------------------------------------------------------------------------------------------------
Total time certificates of deposit 2,574 1,999 2,143 1,964 8,680
------------------------------------------------------------------------------------------------------------------
Other time deposits in denominations
of $100,000 or greater 69 1 17 57 144
Other time deposits in denominations
of less than $100,000 17 - - - 17
------------------------------------------------------------------------------------------------------------------
Total other time deposits 86 1 17 57 161
------------------------------------------------------------------------------------------------------------------
Total domestic time deposits $2,660 $2,000 $2,160 $2,021 $8,841
------------------------------------------------------------------------------------------------------------------
</TABLE>
The majority of foreign deposits of approximately $3.4 billion at
December 31, 1997, were in amounts in excess of $100,000. Additional
information required by this section of Guide 3 is set forth in the
Corporation's 1997 Annual Report to Shareholders in Consolidated
Balance Sheet -- Average Balances and Interest Yields/Rates on pages 36
and 37, which pages are incorporated herein by reference.
VI. Return on Equity and Assets
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(1) Return on total assets (a), based on:
Net income 1.80% 1.74% 1.72%
Net income applicable to common stock 1.75 1.64 1.63
(2) Return on common shareholders' equity (a),
based on net income applicable to common stock 21.47 20.38 17.77
Return on total shareholders' equity (a), based on net income 20.83 19.23 16.84
(3) Dividend payout ratio of common stock, based on:
Diluted net income per share (b) 44.00 44.95 44.17
(4) Equity to total assets (a), based on:
Common shareholders' equity 8.14 8.05 9.15
Total shareholders' equity 8.62 9.07 10.24
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Computed on a daily average basis.
(b) Presented in accordance with the requirements of Financial
Accounting Standard No. 128, "Earnings per share," which was adopted by
the Corporation at year-end 1997.
13
<PAGE> 15
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued)
VII. Short-Term Borrowings
Federal funds purchased and securities sold under agreements to
repurchase represent funds acquired for securities transactions and
other funding requirements. Federal funds purchased mature on the
business day after execution. Selected balances and rates are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold
under agreements to repurchase:
Maximum month-end balance $2,063 $2,159
Average daily balance $1,390 $1,765
Average rate during the year 5.5% 5.3%
Balance at December 31 $1,997 $ 742
Average rate at December 31 5.8% 6.1%
----------------------------------------------------------------------------------------------------
</TABLE>
ITEM 2. PROPERTIES
Pittsburgh properties
In 1983 Mellon Bank entered into a long-term lease of One Mellon Bank Center, a
54-story office building in Pittsburgh, Pennsylvania. At December 31, 1997,
Mellon Bank occupied approximately 76% of the building's approximately 1,525,000
square feet of rentable space and subleased substantially all of the remaining
space to third parties.
During 1984 Mellon Bank entered into a sale/leaseback arrangement of the Union
Trust Building in Pittsburgh, Pennsylvania, also known as Two Mellon Bank
Center, while retaining title to the land thereunder. At December 31, 1997,
Mellon Bank occupied approximately 77% of this building's approximately 595,000
square feet of rentable space and subleased substantially all of the remaining
space to third parties.
Mellon Bank owns the 41-story office building in Pittsburgh, Pennsylvania, known
as Three Mellon Bank Center. At December 31, 1997, Mellon Bank occupied
approximately 99% of the approximately 943,000 square feet of rentable space,
with the remainder leased to third parties.
Philadelphia properties
Mellon Bank leases a building in Philadelphia, Pennsylvania, known as Mellon
Independence Center. At December 31, 1997, Mellon Bank occupied approximately
60% of Mellon Independence Center's approximately 882,000 square feet of
rentable space, with the remainder of the space in the building subleased to
third parties.
In 1990 Mellon Bank entered into a 25-year lease for a portion of a 53-story
office building known as Mellon Bank Center, at the corner of 18th and Market
Streets in the Center City area of Philadelphia, Pennsylvania. At December 31,
1997, Mellon Bank leased approximately 19% of the building's approximately
1,245,000 square feet of rentable space.
Boston properties
The Boston Company leases space in a 41-story downtown Boston, Massachusetts
office building known as One Boston Place. At December 31, 1997, The Boston
Company leased approximately 34% of One Boston Place's approximately 770,000
square feet of rentable space.
14
<PAGE> 16
PROPERTIES (continued)
At December 31, 1997, The Boston Company also occupied space in three office
buildings in the Wellington Business Center located in Medford, Massachusetts.
At December 31, 1997, The Boston Company owned a substantial interest in and
fully occupied the approximately 117,000 rentable square foot building known as
Client Services Center II. At December 31, 1997, The Boston Company leased 100%
of the approximately 320,000 rentable square foot building known as Client
Services Center III and leased approximately 22,000 square feet of rentable
space in the building known as Client Services Center I.
New York properties
At December 31, 1997, The Dreyfus Corporation leased approximately 277,000
square feet of rentable space at 200 Park Avenue in New York City. Other than
14,000 square feet of rentable space which is subleased to a third party, all of
the space is currently occupied by Dreyfus. At December 31, 1997, Dreyfus
Service Corporation leased approximately 165,000 square feet of rentable space
in EAB Plaza in Uniondale, New York. This space is 100% occupied by Dreyfus.
At December 31, 1997, Buck leased approximately 55,000 square feet of rentable
space in Two Penn Plaza in New York City. In addition, Buck leased approximately
124,000 square feet of rentable space in Secaucus, New Jersey, for an operations
center.
Other properties
Mellon Bank (DE) owns an 81,000 square foot, three-story office building known
as the Pike Creek Building in New Castle County, Delaware, and currently
occupies the entire building. Mellon Bank (DE) also leases approximately 34,000
square feet of rentable space of an 18-story office building in Wilmington,
Delaware, and approximately 42,000 square feet of rentable space in Pencader,
Delaware, for a credit card operations center.
The banking subsidiaries' retail offices are both owned and leased under leases
expiring at various times through the year 2020.
Other subsidiaries of the Corporation lease office space primarily for their
operations at many of the locations listed on pages 22 and 23 of the Principal
Locations and Operating Entities Section of the Corporation's 1997 Annual
Report, which pages are incorporated herein by reference. For additional
information on the Corporation's premises and equipment, see note 6 of Notes to
Financial Statements on page 81 of the Corporation's 1997 Annual Report, which
note is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust
and other activities. Because of the complex nature of some of these actions and
proceedings, it may be a number of years before such matters ultimately are
resolved. After consultation with legal counsel, management believes that the
aggregate liability, if any, resulting from such pending and threatened actions
and proceedings will not have a material adverse effect on the Corporation's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for vote during the fourth quarter
of 1997.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is set forth in the Corporation's 1997
Annual Report to Shareholders in Liquidity and Dividends on pages 49 through 52,
in Selected Quarterly Data on page 68, in note 22 of Notes to Financial
Statements on pages 94 and 95 and in Corporate Information on page 110, which
portions are incorporated herein by reference.
In October 1996, the board of directors declared a dividend, paid October 31,
1996, of one right (a "Right") issued pursuant to the Shareholder Protection
Rights Agreement, dated as of October 15, 1996 (the "Rights Agreement"), for
each outstanding share of the Corporation's Common Stock (the "Common Stock").
The Rights are not currently exercisable and trade only with the Common Stock
(and are currently evidenced only in connection with the Common Stock). The
Rights would separate from the Common Stock and become exercisable only when a
person or group acquires 15% or more of the Common Stock or ten days after a
person or group commences a tender offer that would result in ownership of 15%
or more of the Common Stock. At that time, each Right would entitle the holder
to purchase for $112.50 (the "exercise price") one one-hundredth of a share of
participating preferred stock, which is designed to have economic and voting
rights generally equivalent to one share of common stock. Should a person or
group actually acquire 15% or more of the Common Stock, each Right held by the
acquiring person or group (or their transferees) would become void and each
Right held by the Corporation's other shareholders would entitle those holders
to purchase for the exercise price a number of shares of the Common Stock having
a market value of twice the exercise price. Should the Corporation, at any time
after a person or group has become a 15% beneficial owner and acquired control
of the Corporation's board of directors, be involved in a merger or similar
transaction with any person or group or sell assets to any person or group, each
outstanding Right would then entitle its holder to purchase for the exercise
price a number of shares of such other company having a market value of twice
the exercise price. In addition, if any person or group acquires 15% or more of
the Common Stock, the Corporation may, at its option and to the fullest extent
permitted by law, exchange one share of Common Stock for each outstanding Right.
The Rights are not exercisable until the above events occur and will expire on
October 31, 2006, unless earlier exchanged or redeemed by the Corporation. The
Corporation may redeem the Rights for one-half cent per Right under certain
circumstances.
The foregoing description is not intended to be complete and is qualified in its
entirety by reference to the Rights Agreement, which is an exhibit to this
Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the Corporation's 1997
Annual Report to Shareholders in the Financial Summary on page 27, in the
Significant Financial Events in 1997 on pages 28 and 29, in the Overview of 1997
results on pages 30 and 31, in the Consolidated Balance Sheet -- Average
Balances and Interest Yield/Rates on pages 36 and 37, and in note 1 of Notes to
Financial Statements on pages 73 through 78, which portions are incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is set forth in the Corporation's 1997
Annual Report to Shareholders in the Financial Review on pages 28 through 68 and
in note 22 of Notes to Financial Statements on pages 94 and 95, which portions
are incorporated herein by reference.
16
<PAGE> 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the Corporation's 1997
Annual Report to Shareholders in the Interest Rate Sensitivity Analysis on pages
52 through 57 and in note 1 of Notes to Financial Statements under
Off-balance-sheet instruments used for risk management purposes and
Off-balance-sheet instruments used for trading activities on pages 77 and 78,
which portions are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 14 on page 20 hereof for a detailed listing of the
items under Financial Statements, Financial Statement Schedules, and Other
Financial Data which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Corporation's proxy
statement for its 1998 Annual Meeting of Shareholders (the "1998 Proxy
Statement") in the Election of Directors-Biographical Summaries of Nominees and
Continuing Directors section on pages 2 through 7 and in Section 16(a)
Beneficial Ownership Reporting Compliance section on page 26, each of which
sections is incorporated herein by reference, and in the following section
"Executive Officers of the Registrant."
EXECUTIVE OFFICERS OF THE REGISTRANT
The name and age of, and the positions and offices held by, each executive
officer of the Corporation as of March 1, 1998, together with the offices held
by each such person during the last five years, are listed below. Mr. Cahouet
has executed an employment contract with the Corporation, and the Corporation
intends to execute employment contracts with Messrs. McGuinn, Condron and
Elliott. All other executive officers serve at the pleasure of their appointing
authority. No executive officer has a family relationship to any other listed
executive officer.
<TABLE>
<CAPTION>
Age Position and Year Elected
--- -------------------------
<S> <C> <C> <C>
Frank V. Cahouet 65 Chairman, President and Chief Executive 1990(1)
Officer of Mellon Bank Corporation
John T. Chesko 48 Vice Chairman, Chief Risk and Chief 1997(2)
Credit Officer, Mellon Bank Corporation
and Mellon Bank, N.A.
</TABLE>
17
<PAGE> 19
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
<TABLE>
<S> <C> <C> <C>
Christopher M. Condron 50 President and Chief Operating Officer, 1998 (3)
Mellon Bank, N.A.
President and Chief Executive Officer, The 1996
Dreyfus Corporation
Vice Chairman, Mellon Bank Corporation 1994
Vice Chairman, The Boston Company 1994
Steven G. Elliott 51 Senior Vice Chairman and Chief Financial 1998 (4)
Officer, Mellon Bank, N.A.
Vice Chairman and Chief Financial 1992
Officer of Mellon Bank Corporation
Treasurer of Mellon Bank Corporation 1990
Jeffery L. Leininger 52 Vice Chairman, Specialized Commercial 1996 (5)
Banking, Mellon Bank Corporation and
Mellon Bank, N.A.
David R. Lovejoy 49 Vice Chairman, Financial Markets and 1994 (6)
Corporate Development, Mellon Bank
Corporation and Mellon Bank, N.A.
Martin G. McGuinn 55 Chairman and Chief Executive Officer, 1998 (7)
Mellon Bank, N.A.
Vice Chairman, Retail Financial Services, 1993
Mellon Bank Corporation
Keith P. Russell 52 Vice Chairman, West Coast, Mellon Bank 1996 (8)
Corporation and Mellon Bank, N.A.
W. Keith Smith 63 Senior Vice Chairman, Mellon Bank, N.A. 1998 (9)
Chairman, Buck Consultants, Inc. 1997
Vice Chairman, Mellon Bank Corporation 1993
Chairman and Chief Executive Officer, The 1993
Boston Company
Chairman of the Board, The Dreyfus 1996
Corporation
Jamie B. Stewart, Jr. 53 Vice Chairman, Wholesale Banking and 1996 (10)
Cash Management, Mellon Bank
Corporation and Mellon Bank, N.A.
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
Executive Officers of the Registrant (continued)
<S> <C> <C> <C>
Michael K. Hughey 46 Senior Vice President and Controller of 1990
Mellon Bank Corporation and Senior
Vice President, Director of Taxes and
Controller, Mellon Bank, N.A.
(1) Mr. Cahouet has executed an employment contract with the Corporation which
expires December 31, 1998. Through February 28, 1998, Mr. Cahouet also
served as Chairman, President and Chief Executive Officer of Mellon Bank,
N.A.
(2) From December 1991 to December 1994, Mr. Chesko was Senior Vice President
and Senior Credit Approval Officer of the Credit Policy Department of
Mellon Bank, N.A. From December 1994 to June 1997, Mr. Chesko was Executive
Vice President, Risk Management, of Mellon Bank, N.A. and Chief Compliance
Officer of Mellon Bank Corporation and Mellon Bank, N.A. In April 1996, Mr.
Chesko was named Chief Credit Officer of Mellon Bank Corporation and Mellon
Bank, N.A.
(3) From June 1989 to January 1994, Mr. Condron was President of Boston Safe
Deposit and Trust Company and Executive Vice President of The Boston
Company. In November 1994, he assumed the title of Vice Chairman, Mellon
Bank Corporation and Mellon Bank, N.A., Deputy Director Mellon Trust. From
October 1995 to August 1996, Mr. Condron was President and Chief Operating
Officer, The Dreyfus Corporation. Through February 28, 1998, Mr. Condron
served as Vice Chairman, Mellon Bank, N.A. and Deputy Director Mellon
Trust.
(4) Through February 28, 1998, Mr. Elliott served as Vice Chairman of Mellon
Bank, N.A.
(5) From 1988 to February 1994, Mr. Leininger was Senior Vice President and
Manager of the Middle Market Banking Department's western region. From
February 1994 to February 1996, Mr. Leininger was Executive Vice President
and Department Head of Middle Market Banking of Mellon Bank, N.A.
(6) From January 1993 to October 1994, Mr. Lovejoy was Executive Vice President
of Strategic Planning of Mellon Bank, N.A. From November 1994 to February
1996, Mr. Lovejoy was Vice Chairman, Corporate Strategy and Development of
Mellon Bank Corporation and Mellon Bank, N.A.
(7) From October 1992 to November 1993, Mr. McGuinn was Vice Chairman, Special
Banking Services of Mellon Bank Corporation and Mellon Bank, N.A. Through
February 28, 1998, Mr. McGuinn served as Vice Chairman, Retail Financial
Services, Mellon Bank, N.A.
(8) From June 1992 to June 1996, Mr. Russell was Vice Chairman, Chief Risk and
Credit Officer, Mellon Bank Corporation and Mellon Bank, N.A.
(9) From January 1990 to November 1993, Mr. Smith was Vice Chairman, Service
Products of Mellon Bank Corporation and Mellon Bank, N.A. Mr. Smith was
Chief Operating Officer of The Dreyfus Corporation from August 1994 to
January 1995 and Vice Chairman of The Dreyfus Corporation from January 1995
to August 1996. Through February 28, 1998, Mr. Smith served as Vice
Chairman, Mellon Bank, N.A. From November 1994 through February 28, 1998,
Mr. Smith also served as Director Mellon Trust.
(10) From December 1990 to January 1995, Mr. Stewart was Executive Vice
President, Global Corporate Banking Department. In 1995, Mr. Stewart was
Vice Chairman, Corporate Banking of Mellon Bank Corporation and Mellon
Bank, N.A.
</TABLE>
19
<PAGE> 21
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 1998 Proxy Statement in
the Directors' Compensation section on page 9 and in the Executive Compensation
section on pages 14 through 20, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the 1998 Proxy Statement in
the Beneficial Ownership of Stock section on pages 12 and 13, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the 1998 Proxy Statement in
the Business Relationships and Related Transactions and Certain Legal
Proceedings sections on page 11, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements and schedules required for the Annual Report of
the Corporation on Form 10-K are included, attached or incorporated by
reference as indicated in the following index. Page numbers refer to
pages of the Financial Section of the Corporation's 1997 Annual Report to
Shareholders.
<TABLE>
<CAPTION>
(i) Financial Statements Page No.
-------------------- --------
<S> <C>
Mellon Bank Corporation (and its subsidiaries):
Consolidated Income Statement 69
Consolidated Balance Sheet 70
Consolidated Statement of Changes in Shareholders' Equity 71
Consolidated Statement of Cash Flows 72 and 73
Notes to Financial Statements 73 through 108
Report of Independent Auditors 109
</TABLE>
(ii) Financial Statement Schedules
Financial Statement schedules are omitted either because they are not
required or are not applicable, or because the required information is
shown in the financial statements or notes thereto.
(iii) Other Financial Data
<TABLE>
<S> <C>
Selected Quarterly Data 68
</TABLE>
(b) Current Reports on Form 8-K during the fourth quarter of 1997:
A report dated October 14, 1997, which included, under Items 5 and 7, the
Corporation's press release regarding third quarter 1997 and first nine
months 1997 results of operations.
A report dated November 14, 1997, which included, under Items 5 and 7,
the Corporation's press release announcing the completion of its
acquisition of Pacific Brokerage Services, Inc., a self-clearing deep
discount broker and member of the New York Stock Exchange.
20
<PAGE> 22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(continued)
A report dated November 24, 1997, which included, under Items 5 and 7,
the Corporation's press release announcing a definitive agreement to
acquire United Bankshares, Inc. and its principal subsidiary, United
National Bank, a full-service commercial bank.
A report dated November 24, 1997, which described, under Item 5, the
completion of the Corporation's sale of its corporate trustee and agency
business to The Chase Manhattan Bank.
A report dated December 11, 1997, which included, under Items 5 and 7,
the Corporation's press release announcing a definitive agreement to
acquire Founders Asset Management, Inc., which manages growth-oriented
no-load equity mutual funds and other investment portfolios.
(c) Exhibits
The exhibits listed on the Index to Exhibits on pages 23 through 29
hereof are incorporated by reference or filed herewith in response to
this Item. In addition, Exhibit 11.1, Computation of Basic and Diluted
Net Income Per Common Share, is set forth in the Corporation's 1997
Annual Report to Shareholders in note 20 of Notes to Financial Statements
on pages 87 and 88, which portions are incorporated herein by reference.
21
<PAGE> 23
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Mellon Bank Corporation
By: /s/ Frank V. Cahouet
-------------------------
Frank V. Cahouet
Chairman, President
and Chief Executive
Officer
DATED: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacities
--------- ----------
<S> <C>
By: /s/ Frank V. Cahouet Director and Principal
-------------------------------------- Executive Officer
Frank V. Cahouet
By: /s/ Steven G. Elliott Principal Financial Officer
-------------------------------------- and Principal Accounting
Steven G. Elliott Officer
Dwight L. Allison, Jr.; Directors
Burton C. Borgelt; Carol R. Brown;
Christopher M. Condron; J. W. Connolly;
Charles A. Corry; C. Frederick Fetterolf;
Ira J. Gumberg; Pemberton Hutchinson;
George W. Johnstone; Rotan E. Lee;
Andrew W. Mathieson; Edward J. McAniff;
Martin G. McGuinn; Robert Mehrabian;
Seward Prosser Mellon; David S. Shapira;
W. Keith Smith; Joab L. Thomas;
Wesley W. von Schack; and
William J. Young
By: /s/ Carl Krasik DATED: March 20, 1998
--------------------------------------
Carl Krasik
Attorney-in-fact
</TABLE>
22
<PAGE> 24
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Previously filed as Exhibit 3.1 to
Mellon Bank Corporation, as amended the Quarterly Report on Form 10-Q
and restated as of September 2, 1993. (File No. 1-7410) for the quarter ended
September 30, 1993, and incorporated herein
by reference.
3.2 Amendment of April 16, 1997 to Previously filed as Exhibit 3.7 to the
Mellon Bank Corporation's Restated Quarterly Report on Form 10-Q (File
Articles of Incorporation. No. 1-7410) for the quarter ended
June 30, 1997, and incorporated herein by
reference.
3.3 Amendment of September 26, 1997 to Previously filed as Exhibit 4.3 to
Mellon Bank Corporation's Restated Registration Statement on Form S-3
Articles of Incorporation. (Registration No. 333-38213) and
incorporated herein by reference.
3.4 Statement Affecting Series B Preferred Previously filed as Exhibit 3.2 to the
Stock, $1.00 Par Value. Annual Report on Form 10-K (File
No. 1-7410) for the year ended
December 31, 1993, and incorporated
herein by reference.
3.5 Statement Affecting Series D Preferred Previously filed as Exhibit 3.3 to the
Stock, $1.00 Par Value. Annual Report on Form 10-K (File No.
1-7410) for the year ended December 31,
1994, and incorporated herein by reference.
3.6 Statement Affecting Series H Preferred Previously filed as Exhibit 3.1 to the
Stock, $1.00 Par Value. Quarterly Report on Form 10-Q
(File No. 1-7410) for the quarter
ended March 31, 1995, and incorporated
herein by reference.
3.7 Statement Affecting Series I Preferred Stock, Previously filed as Exhibit 3.5 to
$1.00 Par Value. Annual Report on Form 10-K (File
No. 1-7410) for the year ended
December 31, 1996, and incorporated
herein by reference.
3.8 Statement Affecting Series J Preferred Stock, Previously filed as Exhibit 3.6 to
$1.00 Par Value. Annual Report on Form 10-K (File
No. 1-7410) for the year ended
December 31, 1996 and incorporated
herein by reference.
</TABLE>
23
<PAGE> 25
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
3.9 Statement Affecting Series K Preferred Stock, Filed herewith.
1.00 Par Value.
3.10 By-Laws of Mellon Bank Corporation, as Previously filed as Exhibit 4.4 to
amended, effective September 16, 1997. Registration Statement on Form S-3
(Registration No. 333-38213) and
incorporated herein by reference.
4.1 Instruments defining the rights See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
of securities holders. 3.7, 3.8, 3.9 and 3.10 above.
4.2 Shareholder Protection Rights Agreement Previously filed as Exhibit 1 to Form
between Mellon Bank Corporation and 8-A Registration Statement (File
Mellon Bank, N.A., as Rights Agent, No. 1-7410) dated October 29, 1996,
dated as of October 15, 1996. and incorporated herein by reference.
4.3 Amendment No. 1, dated as of June 2, Previously filed as Exhibit 4.1 to the
1997, to Shareholder Protection Rights Quarterly Report on Form 10-Q (File
Agreement between Mellon Bank No. 1-7410) for the quarter ended
Corporation and Mellon Bank, N.A., as June 30, 1997, and incorporated herein
Rights Agent, dated as of October 15, 1996. by reference.
4.4 Junior Subordinated Indenture, dated as of Previously filed as Exhibit 4.1
December 3, 1996, between Mellon Bank to Current Report on Form 8-K
Corporation and The Chase Manhattan Bank, (File No. 1-7410) dated December 3,
as Debenture Trustee. 1996, and incorporated herein by
reference.
4.5(a) Certificate representing the 7.72% Junior Previously filed as Exhibit 4.2
Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K
Series A, of Mellon Bank Corporation. (File No. 1-7410) dated December 3,
1996, and incorporated herein by
reference.
4.5(b) Certificate representing the 7.995% Junior Previously filed as Exhibit 4.2
Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K
Series B, of Mellon Bank Corporation. (File No. 1-7410) dated December 20,
1996, and incorporated herein by
reference.
4.6(a) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3
as of December 3, 1996, of Mellon Capital I, to Current Report on Form 8-K
among Mellon Bank Corporation, as Depositor, (File No. 1-7410) dated December 3,
The Chase Manhattan Bank, as Property Trustee, 1996, and incorporated herein by
Chase Manhattan Bank Delaware, as Delaware reference.
Trustee, and the Administrative Trustees named
therein.
</TABLE>
24
<PAGE> 26
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
4.6(b) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3
as of December 20, 1996, of Mellon Capital II, to Current Report on Form 8-K
among Mellon Bank Corporation, as Depositor, (File No. 1-7410) dated December 20,
The Chase Manhattan Bank, as Property Trustee, 1996, and incorporated herein by
Chase Manhattan Bank Delaware, as Delaware reference.
Trustee, and the Administrative Trustees named
therein.
4.7(a) Certificate representing the 7.72% Capital Previously filed as Exhibit 4.4
Securities, Series A, of Mellon Capital I. to Current Report on Form 8-K
(File No. 1-7410) dated December 3,
1996, and incorporated herein by
reference.
4.7(b) Certificate representing the 7.995% Capital Previously filed as Exhibit 4.4
Securities, Series B, of Mellon Capital II. to Current Report on Form 8-K
(File No. 1-7410) dated December 20,
1996, and incorporated herein by
reference.
4.8(a) Guarantee Agreement, dated as of December 3, Previously filed as Exhibit 4.5
1996, between Mellon Bank Corporation, as to Current Report on Form 8-K
guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated December 3,
Guarantee Trustee. 1996, and incorporated herein by
reference.
4.8(b) Guarantee Agreement, dated as of December 20, Previously filed as Exhibit 4.5
1996, between Mellon Bank Corporation, as to Current Report on Form 8-K
Guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated December 20,
Guarantee Trustee. 1996, and incorporated herein by
reference.
10.1 Purchase Agreement, dated as of Previously filed as Exhibit 10.1
July 25, 1988, among Mellon Bank to Quarterly Report on Form 10-Q
Corporation (as Seller) and Warburg, (File No. 1-7410) for the quarter ended
Pincus Capital Company, L.P. and September 30, 1988, and incorporated
Warburg, Pincus Capital Partners, herein by reference.
L.P. (as Purchasers) relating to the
sale and purchase of Mellon Series D
Junior Preferred Stock.
</TABLE>
25
<PAGE> 27
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
10.2 Exchange Agreement dated as of Previously filed as Exhibit 10.4
March 30, 1990, between Warburg, to Annual Report on Form 10-K
Pincus Capital Company, L. P., (File No. 1-7410) for the year ended
Warburg, Pincus Capital Partners, December 31, 1990, and incorporated
L. P. and Mellon relating to the herein by reference.
exchange of Series D Preferred Stock
for shares of Mellon's Common Stock.
10.3 Lease dated as of February 1, 1983, Previously filed as Exhibit 10.4
between 500 Grant Street Associates to Annual Report on Form 10-K
Limited Partnership and Mellon (File No. 1-7410) for the year ended
Bank, N.A. with respect to One Mellon December 31, 1992, and incorporated
Bank Center. herein by reference.
10.4 First Amendment to Lease Agreement Previously filed as Exhibit 10.1
dated as of November 1, 1983, to Registration Statement on Form
between 500 Grant Street S-15 (Registration No. 2-88266)
Associates Limited Partnership and incorporated herein by
and Mellon Bank, N.A. reference.
10.5* Mellon Bank Corporation Profit Previously filed as Exhibit 10.7
Bonus Plan, as amended. to Annual Report on Form 10-K
(File No. l-7410) for the year ended
December 31, 1990, and incorporated
herein by reference.
10.6* Mellon Bank Corporation Long-Term Previously filed as Exhibit 10.1 to the
Profit Incentive Plan (1996), as Quarterly Report on Form 10-Q (File
amended effective July 15, 1997. No. 1-7410) for the quarter ended
June 30, 1997, and incorporated herein by
reference.
10.7* Mellon Bank Corporation Stock Previously filed as Exhibit 10.2 to the
Option Plan for Outside Directors Quarterly Report on Form 10-Q (File
(1989), as amended effective May 1, 1997. No. 1-7410) for the quarter ended
June 30, 1997, and incorporated herein by
reference.
10.8* Mellon Bank Corporation 1990 Previously filed as Exhibit 10.9 to
Elective Deferred Compensation Plan Annual Report on Form 10-K (File
for Directors and Members of the No. 1-7410) for the year ended
Advisory Board, as amended and December 31, 1996, and incorporated
restated, effective January 1, 1997. herein by reference.
</TABLE>
* Management contract or compensatory plan arrangement.
26
<PAGE> 28
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
10.9* Mellon Bank Corporation Elective Previously filed as Exhibit 10.10 to
Deferred Compensation Plan for Annual Report on Form 10-K (File
Senior Officers, as amended and No. 1-7410) for the year ended
restated, effective January 1, 1997. December 31, 1996, and incorporated
herein by reference.
10.10* Mellon Bank IRC Section 401(a)(17) Previously filed as Exhibit 10.11 to
Plan, as amended and restated, effective Annual Report on Form 10-K (File
January 1, 1993. No. 1-7410) for the year ended
December 31, 1992, and incorporated herein
by reference.
10.11* Mellon Bank Optional Life Insurance Previously filed as Exhibit 10.1 to the
Plan, effective January 1, 1993, as amended Quarterly Report on Form 10-Q (File
effective September 16, 1997. No. 1-7410) for the quarter ended
September 30, 1997, and incorporated herein
by reference.
10.12* Mellon Bank Executive Life Insurance Previously filed as Exhibit 10.13 to
Plan, effective January 1, 1993, as amended Annual Report on Form 10-K (File
effective November 19, 1996. No. 1-7410) for the year ended
December 31, 1996, and incorporated herein
by reference.
10.13* Mellon Bank Senior Executive Life Previously filed as Exhibit 10.14 to
Insurance Plan, effective January 1, 1993, Annual Report on Form 10-K (File
as amended effective November 19, 1996. No. 1-7410) for the year ended
December 31, 1996, and incorporated herein
by reference.
10.14* Mellon Bank Corporation Retirement Plan Previously filed as Exhibit 10.1 to
for Outside Directors, effective Quarterly Report on Form 10-Q (File
January 1, 1994. No. 1-7410) for the quarter ended
June 30, 1995, and incorporated herein by
reference.
10.15* Mellon Bank Corporation Phantom Stock Previously filed as Exhibit 10.3 to the
Unit Plan (1995), as amended, effective Quarterly Report on Form 10-Q (File
May 1, 1997. No. 1-7410) for the quarter ended
June 30, 1997, and incorporated herein by
reference.
</TABLE>
* Management contract or compensatory plan arrangement.
27
<PAGE> 29
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
10.16* Employment Agreement between Mellon Previously filed as Exhibit 10.17 to
Bank, N.A. and Frank V. Cahouet, Annual Report on Form 10-K
effective as of July 25, 1993, and amended (File No. 1-7410) for the year ended
and restated as of October 17, 1995. December 31, 1995, and incorporated
herein by reference.
10.17* Letter Agreement, dated February 20, 1998, Filed herewith.
between Mellon Bank Corporation and
Frank V. Cahouet.
10.18* Employment Agreement between Mellon Previously filed as Exhibit 10.2
Bank, N.A. and W. Keith Smith, to Quarterly Report on Form 10-Q
effective as of July 25, 1993, and amended (File No. 1-7410) for the quarter ended
and restated as of August 1, 1995. September 30, 1995, and incorporated
herein by reference.
10.19* Letter Agreement, dated February 20, 1998, Filed herewith.
between Mellon Bank Corporation and
W. Keith Smith.
10.20* Change in Control Severance Agreement Previously filed as Exhibit 10.4 to the
between Mellon Bank Corporation and Frank V. Quarterly Report on Form 10-Q (File
Cahouet, dated as of February 1, 1997, and No. 1-7410) for the quarter ended
amended effective July 7, 1997. June 30, 1997, and incorporated herein
by reference.
10.21* Form of Change in Control Severance Agreement Previously filed as Exhibit 10.5 to the
between Mellon Bank Corporation and members Quarterly Report on Form 10-Q (File
of the Office of the Chairman. No. 1-7410) for the quarter ended
June 30, 1997, and incorporated herein by
reference.
12.1 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges
and Preferred Stock Dividends--parent
Corporation.
</TABLE>
* Management contract or compensatory plan arrangement.
28
<PAGE> 30
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
12.2 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges and Ratio of
Earnings to Combined Fixed
Charges and Preferred Stock
Dividends--Mellon Bank Corporation
and its subsidiaries.
13.1 All portions of the Mellon Bank Corporation Filed herewith.
1997 Annual Report to Shareholders that are
incorporated herein by reference.
21.1 List of Subsidiaries of the Corporation. Filed herewith.
23.1 Consent of Independent Accountants. Filed herewith.
24.1 Power of Attorney. Filed herewith.
27.1 Financial Data Schedule. Submitted herewith.
</TABLE>
Certain instruments, which define the rights of holders of long-term debt of the
Corporation and its subsidiaries, are not filed herewith because the total
amount of securities authorized under each of them does not exceed 10% of the
total assets of the Corporation and its subsidiaries on a consolidated basis.
The Corporation hereby agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
29
<PAGE> 1
EXHIBIT 3.9
MELLON BANK CORPORATION
STATEMENT AFFECTING 8.20% SERIES K PREFERRED STOCK
$1.00 PAR VALUE
DECREASING THE AUTHORIZED NUMBER OF SHARES OF SUCH SERIES
---------------------------------------------------------
PURSUANT TO THE REQUIREMENTS OF SECTION 1522 OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW
The undersigned Corporation, desiring to decrease the authorized number
of shares of its 8.20% Series K Preferred Stock, $1.00 par value (the "Series K
Preferred Stock"), hereby certifies that:
1. The name of the Corporation is Mellon Bank Corporation.
2. The resolution of the Board of Directors of the Corporation
establishing and designating the Series K Preferred Stock as the
twelfth series of Preferred Stock $1.00 par value, of the
Corporation authorized to be issued by Article FIFTH of its
Articles, as heretofore restated and amended, was filed with the
Department of State in a Statement of Designation on January 19,
1993.
3. By resolutions dated March 18, 1997, (copy attached hereto), the
Board of Directors, as part of the Corporation's Capital and
Funding Plan for 1997, approved the concept of redeeming the
Series K Preferred Stock, authorized the restoration of any shares
redeemed to the status of authorized but unissued shares of
preferred stock of the Corporation, and further appointed a
special committee (the "Redemption Committee") to have and to
exercise all authority of the Board with respect to the redemption
of the Series K Preferred Stock.
4. By resolutions dated January 8, 1998, (copy attached), the
Redemption Committee authorized the Corporation to redeem all
outstanding shares of its Series K Preferred Stock and further
established the terms and conditions of such redemption.
5. Accordingly, the number of shares of preferred stock previously
designated as Series K Preferred Stock is hereby decreased from
8,000,000 shares to -0- shares.
6. Since the filing of the Corporation's Restated Articles of
Incorporation on September 2, 1993, there have been no statements
filed under the
<PAGE> 2
Pennsylvania Business Corporation Law pertaining to the Series K
Preferred Stock.
7. This Statement shall be effective upon the filing thereof in the
Department of State.
IN TESTIMONY WHEREOF, THE UNDERSIGNED Corporation has caused this
Statement to be signed by a duly authorized officer thereof this 17th day of
February, 1998.
MELLON BANK CORPORATION
By: STEVEN G. ELLIOTT
------------------------------------
Steven G. Elliott
Vice Chairman, Chief Financial
Officer and Treasurer
(SEAL)
Attest:
CARL KRASIK
- ----------------------
Carl Krasik
Secretary
<PAGE> 3
RESOLUTIONS AUTHORIZING
REDEMPTION OF 8.20% SERIES K
PREFERRED STOCK
March 18, 1997
WHEREAS, In connection with the Corporation's Capital and
Funding Plan for 1997, the Executive Committee has recommended
that the Board of Directors create a Redemption Committee to
exercise all authority of this Board with respect to the
redemption of the Corporation's 8.20% Series K Preferred
Stock; and
WHEREAS, The Corporation has issued 8.20% Series K Preferred
Stock, $1.00 par value (the "Series K Preferred Stock") which
by its terms is redeemable at the option of the Corporation,
in whole or from time to time in part, at any time on or after
February 15, 1998, at the cash redemption price of $25.00 per
share, plus accrued dividends, the election of the Corporation
to so redeem the Series K Preferred Stock to be evidenced by a
resolution of this Board; NOW, THEREFORE, BE IT
RESOLVED, That a special committee (the "Redemption
Committee") of this Board be, and it hereby is, appointed to
have and to exercise all authority of this Board with respect
to the redemption of the Series K Preferred Stock, including,
without limitation, the designation of amounts, times and
methods of redemption; and it is further
RESOLVED, That the Redemption Committee shall consist of the
following directors: Frank V. Cahouet, W. Keith Smith and
Andrew W. Mathieson, and that the Committee shall meet at such
times and places as it may deem appropriate to exercise the
authority granted to it by the foregoing resolution; and it is
further
RESOLVED, That a majority of the members at any meeting of the
Redemption Committee shall constitute a quorum necessary and
sufficient to transact business; however, if a quorum is not
present, those Committee members who are present shall have
the authority to appoint any member of the Board of Directors
as alternate members of the Redemption Committee, and the
Committee as then constituted shall exercise the powers
granted by the foregoing resolutions; and it is further
RESOLVED, That upon the instruction and authorization of the
Redemption Committee, the Chairman, the Chief Executive
Officer, the President, any Vice Chairman or the Secretary of
the Corporation be, and each hereby is, authorized in the name
and on behalf of the Corporation to implement the redemption
of the Series K Preferred Stock, in whole or from time to time
in part, in accordance with its terms and upon such
<PAGE> 4
further specific terms and conditions, consistent with the
action of the Redemption Committee, as any such officer shall
approve, the approval of such officer and of this Board to be
evidenced conclusively by the action of such officer; and it
is further
RESOLVED, That in accordance with the terms of the Series K
Preferred Stock, any shares of such stock so redeemed shall be
restored to the status of authorized but unissued shares of
preferred stock of the Corporation, without designation as to
series, until such shares are once more designated as part of
a particular series by this Board; and it is further
RESOLVED, That the Chairman, the Chief Executive Officer, the
President, any Vice Chairman or the Secretary of the
Corporation be, and each hereby is, authorized in the name and
on behalf of the Corporation to execute and deliver any and
all agreements and other documents, make such filings and take
any other such actions as any such officer may deem necessary,
appropriate or desirable to effectuate the purposes of the
foregoing resolutions.
<PAGE> 5
REDEMPTION OF SERIES K
PREFERRED STOCK
January 8, 1998
WHEREAS, The Corporation has issued and outstanding a series
of preferred stock, par value $1.00 per share, designated as
8.20% Series K Preferred Stock (the "Series K Preferred
Stock"); and
WHEREAS, Under the terms pursuant to which the Series K
Preferred Stock was issued, such stock is redeemable at the
option of the Corporation, in whole or from time to time in
part, at any time on or after February 15, 1998, at a price of
$25.00 per share, plus accrued dividends; and
WHEREAS, By action taken on March 18, 1997, the Board of
Directors, as part of the Corporation's Capital and Funding
Plan for 1997, approved the concept of redeeming the Series K
Preferred Stock and granted to this Committee all authority of
the Board with respect to such redemption, including, without
limitation, the designation of amounts, times and methods of
redemption; NOW, THEREFORE, BE IT
RESOLVED, That the Corporation be, and it hereby is,
authorized to redeem all the outstanding shares of its Series
K Preferred Stock on February 17, 1998 (the "Redemption
Date"), at a redemption price of $25.00 per share, plus all
dividends accrued and unpaid on such shares to the Redemption
Date, even though not yet declared, (collectively such funds
to be referred to as the "Redemption Funds"); and it is
further
RESOLVED, That in accordance with the terms of the Series K
Preferred Stock as set forth in the Statement of Designation
of such series, the Secretary of the Corporation be, and he
hereby is, authorized to send via first class mail to all
holders of Series K Preferred Stock, at their respective
addresses on the books of the Corporation, a notice in the
form attached hereto as Annex A (the "Redemption Notice"),
with such changes and modifications as the Chairman, the Chief
Executive Officer, the President, any Vice Chairman, or
<PAGE> 6
the Secretary of the Corporation shall approve, the approval
of such officer and of this Committee to be evidenced
conclusively by the action of such officer; and it is further
RESOLVED, That on or before the Redemption Date, such amount
of money as is necessary for the redemption of all shares of
the Series K Preferred Stock in accordance with its terms, be
deposited in a separate account with Mellon Bank, N.A. to be
held in trust for the account of the holders of the shares of
Series K Preferred Stock called for redemption, with
irrevocable instructions and authority to pay the Redemption
Funds to the holders of such shares upon surrender of
certificates therefor at any time on or after the Redemption
Date; and it is further
RESOLVED, That the Chairman, the Chief Executive Officer, the
President, any Vice Chairman, the General Counsel, the
Secretary or any other person so designated by any such
officer be, and each hereby is, authorized in the name and on
behalf of the Corporation, to make all filings with regulatory
authorities and to take any related actions as such officer or
designee may approve as necessary, appropriate or desirable in
connection with such authorities' consideration of the
redemption of the Series K Preferred Stock, the filing or
doing of any such related action by such person conclusively
establishing that person's authority therefor from this
Committee and the approval and ratification by this Committee
of the actions so taken; and
WHEREAS, In accordance with the terms of the Series K
Preferred Stock, any shares of such stock so redeemed shall be
restored to the status of authorized but unissued shares of
preferred stock of the Corporation, without designation as to
series, until such shares are once more designated as part of
a particular series by the Board; NOW, THEREFORE, BE IT
RESOLVED, That in connection with the redemption of the Series
K Preferred Stock as authorized hereby and upon the issuance
of the Redemption Notice, the deposit of the Redemption Funds
and the occurrence of
<PAGE> 7
the Redemption Date, the Chairman, the Chief Executive
Officer, the President, any Vice Chairman, or the Secretary
of the Corporation be, and each hereby is, authorized in the
name and on behalf of the Corporation, under the corporate
seal of the Corporation attested by its Secretary, to execute
and to cause a Statement Affecting Series K Preferred Stock
to be filed with the Department of State of the Commonwealth
of Pennsylvania in accordance with Section 1522 of the
Pennsylvania Business Corporation Law; and it is further
RESOLVED, That any action relating to the redemption of the
Series K Preferred Stock taken by any of the officers of the
Corporation prior to the date of these resolutions that is
otherwise within the authority conferred by these resolutions
be, and it hereby is, ratified, confirmed and approved; and it
is further
RESOLVED, That the Chairman, the Chief Executive Officer, the
President, any Vice Chairman or the Secretary of the
Corporation be, and each hereby is, authorized in the name and
on behalf of the Corporation to execute any and all agreements
and other documents, make such filings and take any other such
actions as such officer may deem necessary, appropriate or
desirable to effectuate the purposes of the foregoing
resolutions.
<PAGE> 1
EXHIBIT 10.17
MELLON BANK CORPORATION Mellon Bank Center
Pittsburgh, PA 15258-0001
February 20, 1998
Mr. Frank V. Cahouet
Chairman, President and Chief Executive Officer
Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, PA 15258-0001
Dear Mr. Cahouet:
Mellon Bank Corporation (the "Company") hereby irrevocably and unconditionally
agrees to make all payments provided for in the Employment Agreement (the
"Agreement") between you and Mellon Bank, N.A. (the "Bank"), effective as of
July 25, 1993, as amended and restated effective October 17, 1995, in the event
that any such payment is not promptly made by the Bank. The Company's
obligation in this letter agreement to make such payments is absolute and
independent of any legal or other right of the Bank not to make such payments,
and shall be binding on the Company irrespective of the enforceability,
validity or voidability of the Agreement. The Company is entering into this
letter agreement in consideration of your services to the Bank, which is the
Company's principal subsidiary, to the Company and to the Company's other
subsidiaries.
Very truly yours,
MELLON BANK CORPORATION
By: /s/ A. W. MATHIESON
---------------------------
Agreed and Accepted:
By: /s/ FRANK V. CAHOUET
---------------------------
Frank V. Cahouet
<PAGE> 1
EXHIBIT 10.19
MELLON BANK CORPORATION Mellon Bank Center
Pittsburgh, PA 15258-0001
February 20, 1998
Mr. W. Keith Smith
Vice Chairman
Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, PA 15258-0001
Dear Mr. Smith:
Mellon Bank Corporation (the "Company") hereby irrevocably and unconditionally
agrees to make all payments provided for in the Employment Agreement (the
"Agreement") between you and Mellon Bank, N.A. (the "Bank"), effective as
of July 25, 1993, as amended and restated effective August 1, 1995, in the
event that any such payment is not promptly made by the Bank. The Company's
obligation in this letter agreement to make such payments is absolute and
independent of any legal or other right of the Bank not to make such payments,
and shall be binding on the Company irrespective of the enforceability,
validity or voidability of the Agreement. The Company is entering into this
letter agreement in consideration of your services to the Bank, which is the
Company's principal subsidiary, to the Company and to the Company's other
subsidiaries.
Very truly yours,
MELLON BANK CORPORATION
By: /s/ FRANK V. CAHOUET
---------------------------
Frank V. Cahouet
Agreed and Accepted:
By: /s/ W. KEITH SMITH
---------------------------
W. Keith Smith
<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>
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(dollar amounts in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Income before income taxes and
equity in undistributed net
income of subsidiaries $351,936 $349,900 $473,554 $434,035 $224,869
2. Fixed charges: interest expense,
one-third of rental expense net
of income from subleases,
trust-preferred securities expense
and amortization of debt issuance costs 175,027 101,010 96,971 95,193 110,739
- --------------------------------------------------------------------------------------------------------------------------------
3. Income before income taxes
and equity in undistributed
net income of subsidiaries,
plus fixed charges (line 1 + line 2) $526,963 $450,910 $570,525 $529,228 $335,608
- --------------------------------------------------------------------------------------------------------------------------------
4. Preferred stock dividend
requirements(b) $ 31,623 $ 68,503 $ 62,035 $124,260 $103,792
- --------------------------------------------------------------------------------------------------------------------------------
5. Ratio of earnings (as defined)
to fixed charges (line 3 divided by line 2) 3.01 4.46 5.88 5.56 3.03
6. Ratio of earnings (as defined)
to combined fixed charges and
preferred stock dividends
[line 3 divided by (line 2 + line 4)] 2.55 2.66 3.59 2.41 1.56
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The parent Corporation ratios include the accounts of Mellon Bank
Corporation (the "Corporation"), Mellon Financial Company, a wholly owned
subsidiary of the Corporation that functions as a financing entity for the
Corporation and its subsidiaries by issuing commercial paper and other debt
guaranteed by the Corporation, and Mellon Capital I and Mellon Capital II,
special purpose business trusts formed by the Corporation, that exist
solely to issue Capital Securities. For purposes of computing these ratios,
earnings represent parent Corporation income before taxes and equity in
undistributed net income of subsidiaries, plus the fixed charges of the
parent Corporation. Fixed charges represent interest expense, one-third
(the proportion deemed representative of the interest factor) of rental
expense net of income from subleases, trust-preferred securities expense
and amortization of debt issuance costs. Because the ratio excludes from
earnings the equity in undistributed net income of subsidiaries, the ratio
varies with the payment of dividends by such subsidiaries.
(b) Preferred stock dividend requirements for all years presented represent the
pretax amount required to cover preferred stock dividends.
<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(a)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(dollar amounts in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Income $ 770,927 $ 732,580 $ 691,534 $ 433,365 $ 460,213
2. Provision for income taxes 398,108 418,264 400,058 278,040 298,034
- ---------------------------------------------------------------------------------------------------------------------------------
3. Income before provision
for income taxes (line 1 + line 2) $1,169,035 $1,150,844 $1,091,592 $ 711,405 $ 758,247
- ---------------------------------------------------------------------------------------------------------------------------------
4. Fixed charges:
a. Interest expense (excluding
interest on deposits) $ 370,712 $ 358,367 $ 401,700 $ 263,054 $ 200,915
b. One-third of rental expense
(net of income from
subleases), trust-preferred
securities expense and
amortization of debt issuance costs 126,737 44,553 44,303 40,140 38,190
- ---------------------------------------------------------------------------------------------------------------------------------
c. Total fixed charges
(excluding interest on
deposits) (line 4a + line 4b) 497,449 402,920 446,003 303,194 239,105
d. Interest on deposits 878,462 902,726 888,580 538,715 454,458
- ---------------------------------------------------------------------------------------------------------------------------------
e. Total fixed charges
(line 4c + line 4d) $1,375,911 $1,305,646 $1,334,583 $ 841,909 $ 693,563
- ---------------------------------------------------------------------------------------------------------------------------------
5. Preferred stock dividend
requirements (b) $ 31,623 $ 68,503 $ 62,035 $ 124,260 $ 103,792
- ---------------------------------------------------------------------------------------------------------------------------------
6. Income before provision for income taxes,
plus total fixed charges:
a. Excluding interest on
deposits (line 3 + line 4c) $1,666,484 $1,553,764 $1,537,595 $1,014,599 $ 997,352
- ---------------------------------------------------------------------------------------------------------------------------------
b. Including interest on
deposits (line 3 + line 4e) $2,544,946 $2,456,490 $2,426,175 $1,553,314 $1,451,810
- ---------------------------------------------------------------------------------------------------------------------------------
7. Ratio of earnings (as defined) to fixed charges:
a. Excluding interest on deposits
(line 6a divided by line 4c) 3.35 3.86 3.45 3.35 4.17
b. Including interest on deposits
(line 6b divided by line 4e) 1.85 1.88 1.82 1.84 2.09
8. Ratio of earnings (as defined) to combined
fixed charges and preferred stock dividends:
a. Excluding interest on deposits
[line 6a divided by (line 4c + line 5)] 3.15 3.30 3.03 2.37 2.91
b. Including interest on deposits
[line 6b divided by (line 4e + line 5)] 1.81 1.79 1.74 1.61 1.82
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
(continued)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(a) For purposes of computing these ratios, earnings represent consolidated
income, before income taxes plus consolidated fixed charges. Fixed
charges, excluding interest on deposits, include interest expense (other
than on deposits), one-third (the proportion deemed representative of the
interest factor) of rental expense net of income from subleases,
trust-preferred securities expense and amortization of debt issuance
costs. Fixed charges, including interest on deposits, include all
interest expense, one-third (the proportion deemed representative of the
interest factor) of rental expense net of income from subleases,
trust-preferred securities expense and amortization of debt issuance
costs.
(b) Preferred stock dividend requirements for all years presented represent
the pretax amount required to cover preferred stock dividends.
<PAGE> 1
EXHIBIT 13.1
PRINCIPAL LOCATIONS AND OPERATING ENTITIES
CONSUMER FEE SERVICES
BOSTON SAFE DEPOSIT AND TRUST COMPANY provides trust and custody administration
for institutional and private clients, private asset management, cash
management, and personal and jumbo mortgage lending.
(617) 722-7000
DREYFUS BROKERAGE SERVICES, INC. provides services to individual investors
nationwide, a significant portion of which are conducted via the Internet.
www.edreyfus.com
(310) 276-0200
THE DREYFUS CORPORATION, one of the nation's leading mutual fund companies,
manages or administers more than $93 billion in assets in more than 150 mutual
fund portfolios.
www.dreyfus.com
(212) 922-6000
DREYFUS INVESTMENT SERVICES CORPORATION provides a full range of securities
brokerage services for individuals and institutional clients of Mellon Bank
Corporation.
1 800 243-7549
DREYFUS RETIREMENT SERVICES provides a full array of investment products,
participant education and administrative services to defined contribution plans
nationwide.
1 800 358-0910
DREYFUS SERVICE CORPORATION is the principal sales agent for the Dreyfus Family
of Funds and a general securities broker/dealer.
(212) 922-6000
CONSUMER BANKING
Mellon Bank Corporation operates the following retail subsidiaries in the United
States: Mellon Bank, N.A., Mellon Bank (DE) National Association, Mellon Bank
(MD) National Association and Mellon United National Bank.
MELLON BANK, N.A. comprises six regions serving consumer and small to midsize
commercial markets throughout Pennsylvania.
Headquarters: Pittsburgh, Pennsylvania (412) 234-5000
MELLON BANK-CENTRAL REGION serves central Pennsylvania.
Headquarters: State College, Pennsylvania
(814) 234-6392
MELLON BANK-COMMONWEALTH REGION serves southcentral Pennsylvania.
Headquarters: Harrisburg, Pennsylvania
1 800 222-9034
MELLON BANK-NORTHEASTERN REGION serves northeastern Pennsylvania.
Headquarters: Wilkes-Barre, Pennsylvania
1 800 222-1992
MELLON BANK-NORTHERN REGION serves northwestern Pennsylvania.
Headquarters: Erie, Pennsylvania
(814) 453-7400
MELLON BANK-WESTERN REGION serves western Pennsylvania.
Headquarters: Pittsburgh, Pennsylvania
(412) 234-5000
MELLON PSFS* serves southeastern Pennsylvania and southern New Jersey.
Headquarters: Philadelphia, Pennsylvania
(215) 553-3000
MELLON BANK (DE) NATIONAL ASSOCIATION serves consumer and commercial markets
throughout Delaware and provides nationwide cardholder processing services.
Headquarters: Wilmington, Delaware
1 800 323-7105
MELLON BANK (MD) NATIONAL ASSOCIATION serves consumer and commercial markets
throughout Maryland, Virginia and Washington, D.C.
Headquarters: Rockville, Maryland
(301) 217-0600
MELLON BANK, F.S.B. provides personal trust services.
Headquarters: Pittsburgh, Pennsylvania
(412) 234-0661
MELLON MORTGAGE COMPANY focuses on the origination and servicing of both
residential and commercial mortgage loans through more than 50 locations
nationwide.
1 800 366-1230
MELLON BANK COMMUNITY DEVELOPMENT CORPORATION, one of the first holding company
CDCs regulated by the Federal Reserve Board, invests in projects significant to
modest-income segments of Delaware, Maryland, New Jersey and Pennsylvania.
(412) 234-4580
MELLON UNITED NATIONAL BANK, a full-service commercial bank, serves South
Florida.
Headquarters: Miami, Florida
(305) 825-9132
* Mellon PSFS is a service mark of Mellon Bank, N.A.
BUSINESS FEE SERVICES
THE BOSTON COMPANY ASSET MANAGEMENT, LLC provides institutional investment
management services.
(617) 722-7029
BOSTON SAFE ADVISORS provides investment management services for individuals and
corporations through brokerage firms throughout the United States.
1 800 992-5560
BUCK CONSULTANTS, INC., a leading global actuarial and human resources
consulting firm, provides a broad array of services in the areas of defined
benefit and defined contribution plans, health and welfare plans, communications
and compensation consulting, and outsourcing and administration of employee
benefit programs.
www.buckconsultants.com
(212) 330-1000
CCF--MELLON PARTNERS, a joint venture with Credit Commercial de France, markets
investment management services in Europe and North America.
(412) 234-3678
CERTUS ASSET ADVISORS is a stable-value market specialist providing investment
management services to defined contribution plan sponsors.
(415) 399-4450
<PAGE> 2
CHASEMELLON SHAREHOLDER SERVICES, a joint venture with The Chase Manhattan
Corporation, provides securities transfer and shareholder services throughout
the United States.
www.chasemellon.com
1 800 313-9450
CIBC MELLON GLOBAL SECURITIES SERVICES COMPANY, the institutional trust and
custody joint venture with Canadian Imperial Bank of Commerce, provides
Canadian-based pension and institutional investors with domestic and global
custody, multicurrency accounting, performance measurement, investment analytics
and information delivery.
(416) 643-5000
CIBC MELLON TRUST COMPANY provides stock transfer, trustee and related services
to Canadian-based companies.
(416) 813-4500
FRANKLIN PORTFOLIO ASSOCIATES provides investment management services for
employee benefit funds and institutional clients.
(617) 790-6400
LAUREL CAPITAL ADVISORS provides investment management services for individuals
and corporations through brokerage firms throughout the United States.
1 800 626-6721
MELLON BOND ASSOCIATES provides structured management of bond portfolios for
institutional clients.
(412) 234-3839
MELLON CAPITAL MANAGEMENT CORPORATION is a global quantitative asset manager for
institutional clients.
(415) 546-6056
MELLON EQUITY ASSOCIATES provides specialized equity and balanced investment
management services to pension plans, and nonprofit and public fund markets.
(412) 234-7500
MELLON FUND ADMINISTRATION is a leading servicer of unit trusts, the equivalent
of mutual funds in the United Kingdom and to the offshore market in Dublin.
(###-##-####) 227300 (Brentwood)
(011-353-1) 790-5000 (Dublin)
MELLON GLOBAL CASH MANAGEMENT(SM) designs solutions through comprehensive cash
management services to meet the specialized treasury needs of middle market to
large, multinational corporations, government agencies, nonprofit organizations
and financial institutions.
1 800 424-3004
MELLON NETWORK SERVICES(SM) provides electronic funds transfer services,
including automated teller machine processing and full-service merchant payment
systems, to financial institutions and corporations nationwide.
1 800 343-7064
MELLON SECURITIES TRUST COMPANY provides securities processing and custody
services.
(212) 374-1970
MELLON TRUST COMPANY OF ILLINOIS provides custody services, primarily for
Illinois insurance companies.
(312) 357-3425
PARETO PARTNERS, a partnership in which Mellon holds a 30 percent interest,
provides investment management services for employee benefit funds and
institutional and high net worth clients.
(212) 527-1800
BUSINESS BANKING
AFCO CREDIT CORPORATION, with its Canadian affiliate, CAFO, Inc., is the
nation's largest insurance premium financing company with offices in the United
States and Canada.
(201) 876-6600
CORPORATE BANKING markets credit and related services to large corporate
customers, exclusive of financial institutions.
(412) 234-8808
INSTITUTIONAL BANKING markets credit and other banking services to
broker/dealers, insurance companies, domestic commercial banks, mutual funds and
investment managers.
(412) 234-4494
INTERNATIONAL BANKING provides international trade and correspondent banking
services and markets trade finance and logistics management services for clients
selling products in foreign markets.
(412) 234-6787
INTERNATIONAL REPRESENTATIVE office serves as a liaison between the
Corporation's banking subsidiaries and overseas customers.
(011-81-03) 3216-5861 (Tokyo)
MELLON 1ST BUSINESS BANK provides full commercial banking services to midsize
business firms, professionals, entrepreneurs and business owners, through its
headquarters office and four regional offices in southern California.
(213) 489-1000
MELLON BANK CANADA is a chartered Canadian bank providing credit, cash
management, treasury, custody, asset management, insurance premium financing and
shareholder services to the corporate market throughout Canada.
(416) 860-0777
MELLON BUSINESS CREDIT markets a broad range of commercial finance products and
banking services nationwide to corporations.
(215) 553-2161
MELLON EUROPE-LONDON provides global custody, securities lending, treasury,
foreign exchange, credit and cash management services to domestic and
international customers.
(011-44-171) 623-0800
MELLON FINANCIAL MARKETS, INC., the Corporation's Section 20 underwriting
subsidiary, conducts securities business, providing fixed-income underwriting,
trading and sales services to clients and investors throughout the United
States.
(412) 234-0424
MELLON LEASING CORPORATION markets a broad range of leasing and lease-related
services to corporations throughout the United States and Canada through its
three divisions: Leasing--Large Corporate; Middle Market--Mellon US Leasing; and
Retail/Vendor--Mellon First United Leasing.
(412) 234-5061
MELLON VENTURES, INC. or its affiliates invest in the equity of midsize
operating companies experiencing rapid growth or change in ownership.
(412) 236-3594
MIDDLE MARKET BANKING markets a full range of financial and banking services to
commercial customers with annual sales between $20 million and $500 million.
Mellon's Middle Market group also specializes in providing services to segments
of coal and government services industries.
(412) 236-1197
REAL ESTATE FINANCE provides short- and intermediate-term financing to real
estate developers and investors located in the East, Mid-Atlantic, Southeast,
Midwest, Texas and southern California.
(412) 234-7560
<PAGE> 3
DIRECTORS AND SENIOR MANAGEMENT COMMITTEE
DIRECTORS
MELLON BANK CORPORATION
AND MELLON BANK, N.A.
Dwight L. Allison Jr.(5)(6)
Retired Chairman, President
and Chief Executive Officer
The Boston Company
Burton C. Borgelt(5)(6)
Retired Chairman and
Chief Executive Officer
Dentsply International, Inc.
Manufacturer of artificial teeth
and consumable dental products
Carol R. Brown(2)(6)
President
The Pittsburgh Cultural Trust
Cultural and economic growth
organization
Frank V. Cahouet(1)
Chairman, President and
Chief Executive Officer
Mellon Bank Corporation
Christopher M. Condron(1)
President and
Chief Operating Officer
Mellon Bank, N.A.
J. W. Connolly(1)(2)(4)
Retired Senior Vice President
H. J. Heinz Company
Food manufacturer
Charles A. Corry(1)(2)(3)(4)
Retired Chairman and
Chief Executive Officer
USX Corporation
Energy and steel
C. Frederick Fetterolf(1)(2)(5)(6)
Retired President and
Chief Operating Officer
Aluminum Company of America
Aluminum and chemicals
Ira J. Gumberg(1)(2)(5)
President and Chief Executive Officer
J. J. Gumberg Co.
Real estate management and development
Pemberton Hutchinson(3)(5)(6)
Retired Chief Executive Officer
Westmoreland Coal Company
Coal mining
George W. Johnstone(5)
Retired President and
Chief Executive Officer
American Water Works Company, Inc.
Water services
Rotan E. Lee(5)(6)
Chairman
Talleyrand Atlantic, LLC
Strategic planning company
Andrew W. Mathieson(1)(3)(4)
Vice Chairman
Richard King Mellon Foundation
Philanthropy
Edward J. McAniff(5)(6)
Partner
O'Melveny & Myers
Full-service law firm
Martin G. McGuinn(1)
Chairman and
Chief Executive Officer
Mellon Bank, N.A.
Robert Mehrabian(1)(2)(7)
Senior Vice President and
Segment Executive
Aerospace and Electronics
Allegheny Teledyne Inc.
Specialty metals and diversified businesses
Seward Prosser Mellon
President and Chief Executive Officer
Richard K. Mellon and Sons
Investments
Richard King Mellon Foundation
Philanthropy
David S. Shapira(1)(2)(5)(7)
Chairman and Chief Executive Officer
Giant Eagle, Inc.
Retail grocery chain
W. Keith Smith(1)
Senior Vice Chairman
Mellon Bank, N.A.
Joab L. Thomas(4)(7)
President Emeritus
The Pennsylvania State University
Major public research university
Wesley W. von Schack(1)(3)(4)(6)(7)
Chairman, President and
Chief Executive Officer
New York State Electric & Gas Corporation
Energy services
William J. Young(4)(5)(6)
Retired President
Portland Cement Association
Trade association for the Portland
cement industry
CHAIRMEN EMERITI
J. David Barnes
William B. Eagleson Jr.
James H. Higgins
Nathan W. Pearson
ADVISORY BOARD
Howard O. Beaver Jr.
Retired Chairman and
Chief Executive Officer
Carpenter Technology Corporation
John C. Marous
Retired Chairman and
Chief Executive Officer
Westinghouse Electric Corporation
Masaaki Morita
Chairman
Sony USA Foundation
Nathan W. Pearson
Financial Advisor
Paul Mellon Family Interests
H. Robert Sharbaugh
Retired Chairman
Sun Company, Inc.
Richard M. Smith
Retired Vice Chairman
Bethlehem Steel Corporation
REGIONAL BOARDS
MELLON BANK-CENTRAL REGION
Galen E. Dreibelbis
John Lloyd Hanson
Bruce K. Heim
Carol Herrmann
Daniel B. Hoover
Michael M. Kranich Sr.
Edwin E. Lash
Robert W. Neff
Ralph J. Papa
Nicholas Pelick
Graham C. Showalter
Alvin L. Snowiss
Jamie B. Stewart Jr.
MELLON BANK-COMMONWEALTH REGION
Paul S. Beideman
Burton C. Borgelt
Stephen R. Burke
James E. Grandon Jr.
Ruth Leventhal
Henry E. L. Luhrs
Ralph J. Papa
Gregory L. Sutliff
(1) Executive Committee
(2) Audit Committee
(3) Nominating Committee
(4) Human Resources Committee
(5) Trust and Investment Committee
(6) Community Responsibility Committee
(7) Technology Committee
<PAGE> 4
MELLON BANK-NORTHEASTERN REGION
David T. Andes
Frank J. Dracos
Peter B. Eglin
Alan J. Finlay
Thomas M. Jacobs
Joseph E. Kluger
Jeffery L. Leininger
Joseph R. Nardone
Joseph F. Palchak Jr.
Joseph L. Persico
Arthur K. Ridley
Rhea P. Simms
MELLON BANK-NORTHERN REGION
James D. Berry III
Thomas B. Black
John T. Chesko
Robert H. Cox
Eugene Cross
William S. DeArment
Robert G. Liptak Jr.
Gary W. Lyons
Ruthanne Nerlich
John S. Patton
Paul D. Shafer Jr.
Cyrus R. Wellman
MELLON PSFS
Paul C. Brucker
Frank J. Coyne
Thomas F. Donovan
Lon R. Greenberg
Pemberton Hutchinson
George W. Johnstone
Rotan E. Lee
Roland Morris
William J. Stallkamp
Francis R. Strawbridge III
Stephen A. Van Dyck
SUBSIDIARY BOARDS
THE BOSTON COMPANY, INC. AND BOSTON
SAFE DEPOSIT AND TRUST COMPANY
Dwight L. Allison Jr.
Christopher M. Condron
James E. Conway*
Charles C. Cunningham Jr.
Avram J. Goldberg
Lawrence S. Kash*
David F. Lamere
Robert P. Mastrovita
J. David Officer
James. P. Palermo
W. Keith Smith
Jamie B. Stewart Jr.*
Benaree Pratt Wiley*
Willis F. Williams*
THE DREYFUS CORPORATION
Mandell L. Berman
Burton C. Borgelt
Frank V. Cahouet
Stephen E. Canter
Christopher M. Condron
Lawrence S. Kash
W. Keith Smith
Richard F. Syron
BUCK CONSULTANTS, INC.
William Daniels
Merril S. Delon
Stephen D. Diamond
Edward I. Farb
Richard Koski
Brian W. Kruse
Joseph A. LoCicero
J. Robinson Lynch
Ronald P. O'Hanley
Frederick W. Rumack
Raymond E. Sharp
W. Keith Smith
Barry S. Sutton
John W. Thompson
Vincent M. Tobin
Gregory J. Wiber
MELLON 1ST BUSINESS BANK
John E. Anderson
William S. Anderson
W. Peter Bohn
Richard M. Ferry
Ernest J. Friedman
Robert M. Kommerstad
Robert W. Kummer Jr.
Bill LeVine
Peter W. Mullin
Keith P. Russell
Joseph P. Sanford
Thomas F. Savage
Roland Seidler Jr.
MELLON BANK CANADA
Frederick K. Beard
Peter A. Crossgrove
Keith G. Dalglish
Fraser M. Fell
Thomas C. MacMillan
James A. Riley
Peter Rzasnicki
MELLON BANK (DE) NATIONAL ASSOCIATION
John S. Barry
Robert C. Cole Jr.
Donna M. Coughey
Audrey K. Doberstein
Arden B. Engebretson
Norman D. Griffiths
Garrett B. Lyons
Martin G. McGuinn
W. Charles Paradee Jr.
Bruce M. Stargatt
MELLON BANK, F.S.B.
Bruno A. Bonacchi
Christopher Flanagan
Frank L. Reis Jr.
Donald W. Titzel
Daryl J. Zupan
MELLON BANK (MD) NATIONAL ASSOCIATION
Frederick K. Beard
Michael A. Besche
Lawrence Brown Jr.
Albert R. Hinton
David R. Lovejoy
Martin G. McGuinn
MELLON UNITED NATIONAL BANK
Paul S. Beideman
Joel Friedland
Herschel V. Green
Gerald Katcher
Martin G. McGuinn
J. David Officer
Aaron S. Podhurst
Howard Scharlin
Sherwood M. Weiser
SENIOR MANAGEMENT COMMITTEE
OFFICE OF THE CHAIRMAN
Frank V. Cahouet
Chairman, President
and Chief Executive Officer
Martin G. McGuinn
Christopher M. Condron
W. Keith Smith
Steven G. Elliott
John T. Chesko
Jeffery L. Leininger
David R. Lovejoy
Keith P. Russell
Jamie B. Stewart Jr.
EXECUTIVE MANAGERS
Paul S. Beideman
Joseph A. LoCicero
J. David Officer
D. Michael Roark
Peter Rzasnicki
William J. Stallkamp
Allan P. Woods
SENIOR MANAGERS
Frederick K. Beard
Richard B. Berner
Michael E. Bleier
Paul A. Briggs
Michael A. Bryson
Larry F. Clyde
Paul H. Dimmick
Kenneth R. Dubuque
Paul Holmes
Lawrence S. Kash
Allan C. Kirkman
David F. Lamere
Peter A. Lofquist
Robert G. Loughrey
Sandra J. McLaughlin
John P. O'Driscoll
James P. Palermo
Robert M. Parkinson
Robert W. Stasik
Sherman White
CORPORATE CONTROLLER
Michael K. Hughey
CORPORATE SECRETARY
Carl Krasik
*Director of The Boston Company, Inc. only
<PAGE> 5
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(dollar amounts in millions, except per share amounts) 1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31
Net interest revenue $ 1,467 $ 1,478 $ 1,548 $ 1,508 $ 1,329 $ 1,182
Provision for credit losses 148 155 105 70 125 185
Fee revenue 2,418 2,019 1,670 1,652 1,538 1,154
Gains (losses) on sale of securities -- 4 6 (5) 100 129
Operating expense 2,568 2,195 2,027 2,374 2,084 1,648
Provision for income taxes 398 418 401 278 298 104
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 771 $ 733 $ 691 $ 433 $ 460 $ 528
Net income applicable to common stock 750 689 652 358 397 477
- -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE (a)
Basic net income $ 2.94 $ 2.63 $ 2.27 $ 1.23 $ 1.40 $ 1.84
Diluted net income 2.88 2.58 2.25 1.21 1.36 1.78
Dividends paid 1.29 1.18 1.00 .79 .51 .47
Book value at year end 14.39 13.43 13.09 12.53 12.14 10.69
Average common shares and equivalents
outstanding - diluted (in thousands) 260,829 266,591 290,401 298,405 294,437 272,666
- -------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS (based on balance sheet averages)
Return on common shareholders' equity 21.5% 20.4% 17.8% 9.8% 12.1% 18.5%
Return on assets 1.80 1.74 1.72 1.14 1.29 1.72
Net interest margin on a taxable equivalent basis 4.24 4.26 4.62 4.71 4.39 4.46
Fee revenue as a percentage of total revenue (FTE) 62 58 52 52 52 46
Efficiency ratio (b) 64 63 63 65 64 65
Efficiency ratio excluding amortization of intangibles 62 60 60 62 61 63
- -------------------------------------------------------------------------------------------------------------------------------
TANGIBLE OPERATING RESULTS (c)
Diluted tangible earnings per common share $ 3.19 $ 2.87 $ 2.50 $ 1.47 $ 1.57 $ 1.91
Tangible net income applicable to common stock 832 765 725 434 458 513
Return on tangible common shareholders' equity 37.5% 32.2% 27.1% 16.5% 18.9% 23.9%
Return on tangible assets 2.05 1.97 1.96 1.37 1.50 1.86
- -------------------------------------------------------------------------------------------------------------------------------
RESULTS EXCLUDING CERTAIN ITEMS (d)
Net income applicable to common stock $ 750 $ 689 $ 652 $ 593 $ 456 $ 347
Diluted net income per common share (a) 2.88 2.58 2.25 2.00 1.57 1.30
Return on common shareholders' equity 21.5% 20.4% 17.8% 16.0% 13.7% 13.1%
Return on tangible common shareholders' equity 37.5 32.2 27.1 25.3 21.3 17.3
Return on assets 1.80 1.74 1.72 1.71 1.46 1.29
Return on tangible assets 2.05 1.97 1.96 1.97 1.67 1.43
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Money market investments $ 1,186 $ 1,381 $ 1,222 $ 1,656 $ 3,821 $ 1,905
Securities 5,593 6,184 4,922 5,149 4,804 6,500
Loans 27,823 27,233 27,321 25,097 21,763 18,235
Interest-earning assets 34,777 34,944 33,761 32,282 30,657 26,948
Total assets 42,942 42,013 40,097 38,106 35,635 30,758
Deposits 30,459 30,838 27,951 27,248 26,541 22,684
Notes and debentures 2,712 2,038 1,670 1,768 1,991 1,365
Trust-preferred securities 990 32 -- -- -- --
Common shareholders' equity 3,494 3,381 3,671 3,691 3,323 2,603
Total shareholders' equity 3,700 3,810 4,106 4,277 3,964 3,112
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Common shareholders' equity to assets 8.13% 8.11% 8.83% 9.54% 9.57% 8.85%
Tangible common shareholders' equity to assets (e) 5.12 5.36 6.63 7.05 6.84 7.03
Tier I capital 7.77 8.38 8.14 9.48 9.70 10.20
Total (Tier I plus Tier II) capital 12.73 13.58 11.29 12.90 13.22 13.83
Leverage capital 8.02 8.31 7.80 8.67 9.00 9.45
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Presented in accordance with the requirements of FAS No. 128, "Earnings per
Share," which was adopted by the Corporation at year-end 1997. Prior-period
amounts have been restated. In addition, prior-period amounts also were
restated to reflect the two-for-one common stock split distributed on June
2, 1997.
(b) See page 43 for the definition of this ratio.
(c) See page 31 for the definition of tangible operating results.
(d) Results for 1994 exclude a $130 million after-tax securities lending
charge, $79 million after tax of Dreyfus merger-related expense, $10
million after tax of losses on the disposition of securities available for
sale previously owned by Dreyfus and $16 million of preferred stock
dividends recorded in connection with the redemption of the Series H
preferred stock. Results for 1993 exclude $112 million after tax of merger
expense and $53 million after tax of gains on the sale of securities
related to the acquisition of The Boston Company. Results for 1992 were
calculated by applying a normalized effective tax rate of approximately 38%
to pretax income. The unrecorded tax benefit that existed at the beginning
of 1992 was included in the determination of the return on average common
shareholders' equity.
(e) See page 45 for the definition of this ratio.
NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS.
27
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT FINANCIAL EVENTS IN 1997
- --------------------------------------------------------------------------------
Two-for-one common stock split
In April 1997, the Corporation authorized a two-for-one common stock split. The
additional shares resulting from the split were distributed on June 2, 1997, to
shareholders of record at the close of business on May 1, 1997. All earnings and
dividend per share amounts have been restated to reflect the stock split.
Common dividend increased 10%
In the second quarter of 1997, the Corporation increased its quarterly common
stock dividend by 10% to $.33 per common share. This was the sixth quarterly
common dividend increase that the Corporation announced since the beginning of
1994, resulting in a total common dividend per share increase of 161%.
Acquisition of Buck Consultants, Inc.
In July 1997, the Corporation acquired Buck Consultants, Inc. (Buck), a leading
global benefits consulting firm. Buck is headquartered in New York and has 64
offices in 17 countries. Buck provides a broad array of pension and health and
welfare actuarial services, employee benefit, compensation and human resources
consulting and administrative services, and total benefits outsourcing to
approximately 5,000 clients, ranging from large multinational corporations to
small businesses. The Corporation issued approximately 3.5 million shares of
common stock in connection with this acquisition. These shares were repurchased
in the second quarter of 1997.
Repurchase of common stock
During 1997, the Corporation repurchased approximately 12 million shares of its
common stock, including 3.5 million shares reissued in connection with the Buck
acquisition. Since the beginning of 1995, the Corporation has repurchased
approximately 59 million common shares, prior to any reissuances, as well as
warrants for 9 million additional shares.
Acquisition of Pacific Brokerage Services, Inc.
In November 1997, the Corporation acquired Pacific Brokerage Services, Inc., a
self-clearing deep discount broker and member of the New York Stock Exchange. It
was subsequently renamed Dreyfus Brokerage Services, Inc. (DBS) and operates as
a separate Mellon entity under Mellon Bank, N.A. DBS is registered as a
broker/dealer in all 50 states with headquarters in Los Angeles and additional
offices in Beverly Hills, New York and Chicago. It provides services to
individual investors nationwide, with a significant portion conducted via the
Internet. The Corporation purchased DBS with cash. DBS' Internet address is
http://www.edreyfus.com.
Sale of Mellon corporate trustee and agency business
In November 1997, the Corporation sold its corporate trustee and agency business
to Chase Manhattan Bank. Substantially all of the accounts, the majority of
which consisted of municipal and corporate issues of debt securities, for which
Mellon served as trustee or agent have been transferred to Chase Global Trust.
The sale did not include the Corporation's noncorporate trustee fiduciary
businesses. This business generated $18 million of revenue in the first nine
months of 1997 including approximately $12 million of fee revenue. A gain of $43
million was recorded on the sale.
28
<PAGE> 7
SIGNIFICANT FINANCIAL EVENTS IN 1997 (CONTINUED)
- --------------------------------------------------------------------------------
CornerStone(sm) credit card losses
In December 1997, the Corporation segregated $231 million of CornerStone(sm)
credit card loans into an accelerated resolution portfolio. In connection with
this action, the Corporation evaluated the carrying value of these loans and
recorded a credit loss of $65 million to reflect this portfolio's estimated net
realizable value. Interest and principal receipts, fees and loan loss recoveries
on these loans are applied to reduce the net carrying value of this portfolio,
which totaled $157 million at December 31, 1997.
Pending acquisition of 1st Business Corporation
In April 1997, the Corporation announced that it had reached a definitive
agreement to acquire 1st Business Corporation and its principal subsidiary, 1st
Business Bank, a full-service commercial bank serving midsize business firms in
southern California. 1st Business Bank is a state-chartered bank, headquartered
in Los Angeles, with approximately $1.2 billion in assets, including
approximately $500 million in loans and lease finance assets. It serves
approximately 1,700 business customers in the manufacturing, wholesale trade and
service industries. It also provides personal banking services to professionals,
entrepreneurs, and owners and officers of its business clients. The Corporation
will purchase privately owned 1st Business Corporation with cash. 1st Business
Bank will operate as a separate entity under the name Mellon 1st Business Bank.
The transaction closed in the first quarter of 1998.
Pending acquisition of United Bankshares, Inc.
In November 1997, the Corporation announced that it had reached a definitive
agreement to acquire United Bankshares, Inc. and its principal subsidiary,
United National Bank, a full-service commercial bank serving South Florida. With
approximately $820 million in assets, including approximately $440 million in
loans and lease finance assets, United National Bank is a nationally chartered
bank with headquarters in Miami and 11 regional banking offices in Dade, Broward
and Palm Beach counties. United services small and midsize businesses, lawyers,
accountants, real estate developers and other professionals. In addition, United
also provides both private banking services and trade financing. The Corporation
will acquire United National Bank with a combination of common stock and cash.
To the extent that common stock is issued in this transaction, the Corporation's
board of directors has authorized the repurchase of up to an equivalent number
of common shares. United National Bank will operate as a separate entity under
the name Mellon United National Bank. The transaction closed in the first
quarter of 1998.
Pending acquisition of Founders Asset Management, Inc.
In December 1997, the Corporation announced that it had reached a definitive
agreement to acquire Founders Asset Management, Inc. (Founders), a manager of
growth-oriented no-load equity mutual funds and other investment portfolios.
Founders offers 11 no-load mutual funds, including nine equity funds, with
approximately $4.6 billion in assets among total assets under management of $6.4
billion. Founders will be purchased with cash and will operate as a separate
subsidiary, headquartered in Denver, under Mellon Bank, N.A. With the inclusion
of Founders' funds, the Dreyfus/Founders family of funds will total
approximately $100 billion of assets managed, including approximately $27
billion of equity assets. The transaction is expected to close in the second
quarter of 1998, subject to regulatory approvals and certain closing conditions.
29
<PAGE> 8
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW OF 1997 RESULTS
- --------------------------------------------------------------------------------
The Corporation reported 1997 diluted earnings per common share of $2.88, an
increase of 12%, compared with diluted earnings per common share of $2.58 in
1996. Net income applicable to common stock was $750 million in 1997, compared
with $689 million in 1996. Return on common shareholders' equity and return on
assets were 21.5% and 1.80%, respectively, in 1997, compared with 20.4% and
1.74%, respectively, in 1996.
Diluted tangible earnings per common share in 1997 were $3.19, an increase of
11%, compared with $2.87 in 1996. Return on tangible common shareholders' equity
and return on tangible assets were 37.5% and 2.05%, respectively, in 1997,
compared with 32.2% and 1.97%, respectively, in 1996.
The Corporation's results in 1997 reflect its successful efforts to broaden its
products and distribution network and to generate high returns. Compared with
1996, the Corporation's 1997 results reflected an increase in fee revenue,
partially offset by higher operating expense and lower net interest revenue.
Net interest revenue totaled $1,467 million, down $11 million from $1,478
million in 1996. This reduction primarily resulted from the sale of the American
Automobile Association (AAA) credit card portfolio, funding costs related to the
repurchase of common stock, the insurance premium finance securitization and
lower loan fees. Primarily offsetting these factors were the full-year impact of
the $1.6 billion lease financing acquisitions in 1996 and the use of proceeds
from the $1 billion of trust-preferred securities.
Fee revenue increased to $2,418 million, up $399 million from $2,019 million in
1996. The increase in fee revenue was primarily attributable to higher trust and
investment fees resulting, in part, from the Buck acquisition in the third
quarter of 1997, new business and an increase in the market value of assets
under management. Excluding the Buck acquisition and the gain on the sale of the
corporate trust business, both in 1997, and the gain on the sale of the AAA
credit card portfolio in 1996, fee revenue increased $260 million, or 13%,
compared with 1996.
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $2,509 million in 1997, up $304 million from $2,205
million in 1996. The increase primarily resulted from the Buck acquisition, a
full-year impact of the 1996 lease financing acquisitions and business growth.
The Corporation's effective tax rate for 1997 was 34.1%, compared with 36.3% for
1996. The lower effective tax rate resulted from a fourth quarter 1997
realignment of Corporate entities.
Credit quality expense was $129 million in 1997, a decrease of $13 million
compared with $142 million in 1996. The decrease resulted from a decrease in the
provision for credit losses and higher gains on the sale of other real estate
owned (OREO). Net credit losses totaled $201 million in 1997, an increase of $77
million from $124 million in 1996. The higher level of credit losses in 1997
primarily resulted from $65 million of credit losses recorded on $231 million of
CornerStone(sm) credit card loans that were transferred to an accelerated
resolution portfolio in the fourth quarter of 1997.
Nonperforming assets totaled $181 million at December 31, 1997, an increase of
$7 million from $174 million at December 31, 1996. The Corporation's ratio of
nonperforming assets to total loans and net acquired property was .62% at
December 31, 1997, compared with .63% at December 31, 1996. This ratio has been
less than 1% for 14 consecutive quarters.
The Corporation's ratio of common shareholders' equity to assets was 8.13% at
December 31, 1997. The Tier I, Total and Leverage capital ratios were 7.77%,
12.73% and 8.02%, respectively, at December 31, 1997, well in excess of the
ratios required to maintain well-capitalized status. The Corporation repurchased
approximately 12 million shares of its common stock in 1997, prior to any
reissuances, or nearly 5% of its common shares outstanding at the beginning of
the year.
30
<PAGE> 9
OVERVIEW OF 1997 RESULTS (CONTINUED)
- --------------------------------------------------------------------------------
1996 compared with 1995
The Corporation reported net income applicable to common stock of $689 million,
or $2.58 per common share on a diluted basis, in 1996, compared with $652
million, or $2.25 per common share, in 1995. Net interest revenue was $1,478
million in 1996, a decrease of $70 million compared with 1995, primarily
resulting from the decrease in interest revenue related to the credit card and
home equity loan securitizations and the funding costs related to the repurchase
of common shares, partially offset by a higher level of noninterest-bearing
deposits and loan growth. Fee revenue was $2,019 million in 1996, an increase of
$349 million from 1995, reflecting higher institutional trust fees and mutual
fund management revenue, the gain on the sale of the AAA credit card portfolio,
higher mortgage servicing fees and increased credit card fee revenue. Operating
expense before trust-preferred securities expense and net revenue from acquired
property was $2,205 million in 1996, an increase of $158 million from 1995. The
increase in operating expense primarily resulted from higher staff expense, due
in part to higher incentive expense and the early retirement enhancement
program, as well as higher amortization expense of purchased mortgage servicing
rights. These increases were offset, in part, by lower FDIC deposit insurance
assessment expense in 1996. The provision for credit losses was $155 million in
1996, compared with $105 million in 1995, reflecting an increase in the
provision for credit losses related to the credit card portfolio. Net credit
losses totaled $124 million in 1996, down from $249 million in 1995, principally
reflecting lower losses on the CornerStone(sm) credit card product. The higher
level of credit losses in 1995 primarily resulted from the $106 million of
credit losses recorded on CornerStone(sm) accounts transferred to an accelerated
resolution portfolio in the fourth quarter of 1995.
TANGIBLE OPERATING RESULTS
- --------------------------------------------------------------------------------
Except for the merger with Dreyfus, which was accounted for under the "pooling
of interests" method, the Corporation has been required to account for business
combinations under the "purchase" method of accounting. The purchase method
results in the recording of goodwill and other identified intangibles that are
amortized as noncash charges in future years into operating expense. The pooling
of interests method does not result in the recording of goodwill or intangibles.
Since goodwill and intangible amortization expense does not result in a cash
expense, the economic value to shareholders under either accounting method is
essentially the same. Results, excluding the impact of intangibles, are shown in
the table below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(dollar amounts in millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock $ 750 $ 689 $ 652
After-tax impact of amortization
of intangibles from purchase acquisitions 82 76 73
- ------------------------------------------------------------------------------------------
Tangible net income applicable to common stock $ 832 $ 765 $ 725
Tangible earnings per common share - diluted (a) $ 3.19 $ 2.87 $ 2.50
Average common equity $ 3,494 $ 3,381 $ 3,671
Average goodwill and other identified intangibles 1,275 1,003 993
- ------------------------------------------------------------------------------------------
Average tangible common equity $ 2,219 $ 2,378 $ 2,678
Return on tangible common equity 37.5% 32.2% 27.1%
Average total assets $42,942 $42,013 $40,097
Average tangible assets $41,667 $41,010 $39,104
Return on tangible assets 2.05% 1.97% 1.96%
- ------------------------------------------------------------------------------------------
</TABLE>
(a) Prior-period amounts were restated to reflect the two-for-one common stock
split distributed on June 2, 1997.
31
<PAGE> 10
BUSINESS SECTORS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consumer Business
(dollar amounts in millions, Fee Services Banking Fee Services Banking
averages in billions) 1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $706 $647 $1,108 $1,207 $1,441 $1,093 $ 523 $ 447
Credit quality expense (revenue) 2 1 152 153 - - 2 1
Operating expense:
Intangible amortization expense 6 5 51 52 27 32 21 11
Trust-preferred securities expense - - 7 - - - 30 -
Other operating expense 524 472 607 623 1,038 825 190 153
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expense 530 477 665 675 1,065 857 241 164
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 174 169 291 379 376 236 280 282
Income taxes 62 67 102 139 134 95 98 100
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $112 $102 $ 189 $ 240 $ 242 $ 141 $ 182 $ 182
- ------------------------------------------------------------------------------------------------------------------------------------
Tangible net income $116 $105 $ 227 $ 279 $ 267 $ 167 $ 197 $ 190
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets $2.4 $2.1 $ 20.0 $ 21.0 $ 1.9 $ 1.5 $16.8 $14.9
Average common equity $0.3 $0.3 $ 1.0 $ 1.0 $ 0.7 $ 0.6 $ 1.3 $ 1.3
Average Tier I preferred equity $ - $ - $ 0.1 $ - $ - $ - $ 0.4 $ -
Return on common
shareholders' equity 36% 37% 19% 23% 37% 26% 14% 14%
Return on average assets NM NM 0.95% 1.15% NM NM 1.08% 1.22%
Pretax operating margin 26% 26% 26% 31% 27% 22% 54% 63%
Pretax operating margin
excluding amortization
of intangibles and trust-preferred
securities expense 26% 27% 31% 33% 28% 25% 63% 66%
Efficiency ratio excluding
amortization of intangibles
and trust-preferred securities
expense 74% 73% 55% 54% 72% 75% 36% 34%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM--Not meaningful.
NOTE: THE TABLE ABOVE AND DISCUSSION THAT FOLLOWS PRESENT THE OPERATING RESULTS
OF THE CORPORATION'S MAJOR BUSINESS SECTORS, ANALYZED ON AN INTERNAL MANAGEMENT
REPORTING BASIS. AMOUNTS ARE PRESENTED ON A TAXABLE EQUIVALENT BASIS. CAPITAL IS
ALLOCATED QUARTERLY USING THE FEDERAL REGULATORY GUIDELINES AS A BASIS, COUPLED
WITH MANAGEMENT'S JUDGMENT REGARDING THE RISKS INHERENT IN THE INDIVIDUAL LINES
OF BUSINESS. THE CAPITAL ALLOCATIONS MAY NOT BE REPRESENTATIVE OF THE CAPITAL
LEVELS THAT WOULD BE REQUIRED IF THESE SECTORS WERE NONAFFILIATED BUSINESS
UNITS.
The business sector results for 1996 have been restated to reflect a refinement
in methodology that better reflects the Corporation's current organizational
structure. The changes are as follows: The mortgage banking business line has
been moved from the Consumer Banking sector and divided into two separate
components. The residential business line, including mortgage origination and
servicing, has been moved to the Consumer Fee Services sector while the
commercial mortgage origination and servicing business line has been moved to
the Business Fee Services sector. Also, the Network Services business line,
which primarily encompasses ATM network processing and merchant card processing,
has been moved from the Consumer Banking sector to the Business Fee Services
sector.
Income before taxes for the Corporation's core sectors was $1,121 million in
1997, an increase of $55 million, or 5%, compared with $1,066 million in 1996.
This increase resulted from a $384 million increase in revenue, including $153
million of fee revenue from Buck, partially offset by a $328 million increase in
operating expense, primarily due to acquisitions. Return on common shareholders'
equity for the core sectors was 22% in 1997, compared with 21% in 1996. Return
on average assets was 1.76% in 1997, compared with 1.69% in 1996.
Consumer Fee Services
Consumer Fee Services includes private asset management services, retail mutual
funds and residential mortgage loan origination and servicing. Income before
taxes for the Consumer Fee Services sector was $174 million in 1997, an increase
32
<PAGE> 11
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1997 1996 1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$3,778 $3,394 $ 18 $ 20 $112 $109 $3,908 $3,523
156 155 (22) (13) (5) - 129 142
105 100 - - - - 105 100
37 - - - 41 3 78 3
2,359 2,073 3 7 42 25 2,404 2,105
- -------------------------------------------------------------------------------------------------
2,501 2,173 3 7 83 28 2,587 2,208
- -------------------------------------------------------------------------------------------------
1,121 1,066 37 26 34 81 1,192 1,173
396 401 13 9 12 30 421 440
- -------------------------------------------------------------------------------------------------
$ 725 $ 665 $ 24 $ 17 $ 22 $ 51 $ 771 $ 733
- -------------------------------------------------------------------------------------------------
$ 807 $ 741 $ 24 $ 17 $ 22 $ 51 $ 853 $ 809
- -------------------------------------------------------------------------------------------------
$ 41.1 $ 39.5 $0.2 $ 0.3 $1.6 $2.2 $ 42.9 $ 42.0
$ 3.3 $ 3.2 $ - $ - $0.2 $0.2 $ 3.5 $ 3.4
$ 0.5 $ - $ - $ - $0.7 $0.4 $ 1.2 $ 0.4
22% 21% NM NM NM NM 22% 20%
1.76% 1.69% NM NM NM NM 1.80% 1.74%
30% 31% NM NM NM NM 31% 33%
33% 34% NM NM NM NM 35% 35%
62% 61% NM NM NM NM 62% 60%
- -------------------------------------------------------------------------------------------------
</TABLE>
of $5 million from 1996. This increase resulted from higher profits at private
asset management and Dreyfus offset, in part, by a lower contribution from
mortgage originations. This sector provided strong returns, as return on common
shareholders' equity was 36% in 1997, compared with 37% in 1996.
Consumer Banking
Consumer Banking includes consumer lending and deposit products, business
banking, credit card and jumbo residential mortgage lending. Income before taxes
for 1997 was $291 million, a decrease of $88 million compared with 1996. This
decrease primarily resulted from factors relating to credit card lending.
Revenue decreased $99 million, compared with 1996, primarily resulting from
lower credit card net interest and fee revenue reflecting the sale of the AAA
credit card portfolio in November 1996 and lower fee revenue from the
securitized credit card portfolio, due in part to higher credit losses in this
portfolio. In addition, results in 1996 include the $57 million gain on the sale
of the AAA portfolio. Partially offsetting the decrease in revenue was higher
electronic tax return filing fees. Credit quality expense in 1997 and 1996
included $48 million and $55 million, respectively, of additional provision for
credit losses made in response to credit losses from the CornerStone(sm)
portfolio. The Corporation anticipates that credit quality expense for this
sector will be lower in 1998 than in 1997 as a result of the actions taken to
transfer the problem CornerStone(sm) credit card accounts to an accelerated
resolution portfolio. Operating expense decreased $10 million compared with
1996, primarily resulting from the sale of the AAA credit card portfolio, as
well as $6 million of expense related to the reconfiguration of the retail
delivery system recorded in the first quarter of 1996, partially offset by $7
million of trust-preferred securities expense. The return on common
shareholders' equity for this sector was 19% in 1997, compared with 23% in 1996.
33
<PAGE> 12
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Business Fee Services
Business Fee Services includes institutional asset and institutional mutual fund
management and administration, institutional trust and custody, securities
lending, foreign exchange, cash management, stock transfer, commercial mortgage
loan origination and servicing, corporate trust, network services, benefits
consulting and administrative services and services for defined contribution
plans. Income before taxes for this sector was $376 million in 1997, an increase
of $140 million, or 59%, compared with 1996. Revenue increased $348 million due,
in part, to the $153 million of fee revenue resulting from the Buck acquisition,
higher institutional asset management fees, increased institutional trust fees
including an increase in securities lending revenue, higher cash management
fees, higher mutual fund management and administration fees as well as higher
foreign exchange fees. Partially offsetting this increase was a decline in fee
revenue resulting from the formation of Canadian Imperial Bank of Commerce
(CIBC) Mellon Trust Company, which is now accounted for under the equity method
of accounting. Operating expense increased $208 million due to the Buck
acquisition, higher transaction volumes and technology investments, partially
offset by lower expenses resulting from CIBC Mellon Trust Company. This sector
provided excellent returns as the return on common shareholders' equity for this
sector was 37% in 1997, compared with 26% in 1996.
Business Banking
Business Banking includes large corporate and middle market lending, asset-based
lending, lease financing, commercial real estate lending, insurance premium
financing, securities underwriting and trading, and international banking.
Income before taxes for the Business Banking sector was $280 million for 1997, a
decrease of $2 million from 1996. Revenue increased $76 million, primarily as a
result of higher revenue resulting from the full-year impact of the lease
financing acquisitions. Operating expense increased $77 million as a result of
the full-year impact of the lease financing acquisitions and $30 million of
trust-preferred securities expense. The return on common shareholders' equity
for this sector was 14% in both 1997 and 1996.
Real Estate Workout
Real Estate Workout includes commercial real estate recovery and mortgage
banking recovery operations. Income before taxes for Real Estate Workout was $37
million in 1997, compared with $26 million in 1996. The results in both periods
reflect net revenue from acquired property and the improved credit quality of
the Real Estate Workout portfolio. The Corporation expects that the net revenue
from acquired property will be much lower in 1998.
Other
The Other sector's pretax income was $34 million for 1997 and $81 million for
1996. Revenue for 1997 primarily reflects earnings on the use of proceeds from
the trust-preferred securities and earnings on capital above that required for
the core sectors, and the $43 million gain on the sale of the corporate trust
business. Revenue for 1996 reflects earnings on excess capital not required in
the lines of business, the $28 million gain on the securitization of home equity
loans and a $13 million gain on the partial sale of an equity interest. Credit
quality revenue for 1997 represents loan recoveries from loans to lesser
developed countries. Operating expenses for 1997 includes $41 million of
trust-preferred securities expense and the one-time expense related to the
upgrade of computer hardware. Operating expense for 1996 includes the $18
million charge resulting from the retirement enhancement program.
In June 1997, FAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued and supersedes FAS No. 14, "Financial Reporting
for Segments of a Business Enterprise." This statement establishes standards for
reporting information about segments of a business in the footnotes to annual
financial statements and also requires selected segment information in interim
reports. The statement requires disclosure on a business segment basis, as
defined by the Corporation, to include a description of products and services,
interest income and expense, profit or loss as measured by the Corporation's
management in assessing segment performance and geographic information on assets
and revenue, if material. This statement is effective January 1, 1998, and need
not be applied to interim periods during 1998.
34
<PAGE> 13
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
The following tables distribute net income and return on common shareholders'
equity for the Corporation's core sectors between customers serviced and
services provided.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Customers serviced
---------------------------------------------------------
Total Total
Consumer Business
(dollar amounts in millions) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $301 $342 $424 $323
Return on average common
shareholders' equity 23% 26% 22% 17%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Services provided
---------------------------------------------------------
Total Total
Fee Services Banking Services
(dollar amounts in millions) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $354 $243 $371 $422
Return on average common
shareholders' equity 37% 29% 16% 18%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST REVENUE
- --------------------------------------------------------------------------------
Net interest revenue includes the interest spread on interest-earning assets, as
well as loan fees, cash receipts and interest reversals on nonperforming loans
and revenue or expense on off-balance-sheet instruments used for interest rate
risk management purposes. Net interest revenue on a fully taxable equivalent
basis totaled $1,475 million in 1997, down $13 million from $1,488 million in
the prior year. The net interest margin was 4.24% in 1997, down 2 basis points
compared with 4.26% in 1996.
The decrease in net interest revenue in 1997, compared with the prior year,
principally resulted from the November 1996 sale of the $770 million AAA credit
card portfolio, funding costs related to the repurchase of common stock, the
December 1996 $500 million insurance premium finance securitization and lower
loan fees. Primarily offsetting these factors were the full-year impact of the
$1.6 billion lease financing acquisitions in 1996 and the use of proceeds from
the $1 billion of trust-preferred securities issued in December 1996. The cost
of the trust-preferred securities is reported in operating expense. Excluding
the effects of the loan securitizations and equity repurchases, net interest
revenue and the net interest margin for 1997 would have been approximately
$1,696 million and 4.60%, respectively, compared with approximately $1,649
million and 4.53% in 1996. The foregone net interest revenue from the loan
securitizations is substantially offset by higher servicing fee revenue and
lower net credit losses.
1996 compared with 1995
Net interest revenue on a fully taxable equivalent basis totaled $1,488 million
in 1996, a decrease of $70 million compared with $1,558 million in 1995, while
the net interest margin decreased by 36 basis points to 4.26% in 1996. The
decrease in net interest revenue and the net interest margin primarily resulted
from the effect of the November 1995 $950 million credit card securitization,
the March 1996 $650 million home equity loan securitization and funding costs
related to the repurchase of common stock, partially offset by a higher level of
noninterest-bearing deposits, loan growth and higher loan fees.
35
<PAGE> 14
NET INTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1997
AVERAGE
AVERAGE YIELDS/
(dollar amounts in millions) BALANCE INTEREST RATES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS Federal funds sold and securities under resale
agreements $ 560 $ 30 5.29%
Interest-bearing deposits with banks 518 26 5.06
Other money market investments 108 6 5.41
Trading account securities 175 9 5.54
Securities:
U.S. Treasury and agency securities (a) 5,440 367 6.75
Obligations of states and political subdivisions (a) 38 3 7.77
Other (a) 108 8 6.87
Loans, net of unearned discount (a) 27,816 2,275 8.18
------- ------
Total interest-earning assets 34,763 $2,724 7.83
Cash and due from banks 2,844
Customers' acceptance liability 271
Premises and equipment 587
Net acquired property 68
Other assets (a) 4,905
Reserve for credit losses (512)
----------------------------------------------------------------------------------------------------
Total assets $42,926
----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES, Deposits in domestic offices:
TRUST-PREFERRED Demand $ 232 $ 4 1.90%
SECURITIES AND Money market and other savings accounts 10,046 286 2.84
SHAREHOLDERS' Retail savings certificates 7,166 358 5.00
EQUITY Other time deposits 1,787 101 5.65
Deposits in foreign offices 2,641 129 4.88
------- -----
Total interest-bearing deposits 21,872 878 4.02
Federal funds purchased and securities under
repurchase agreements 1,390 77 5.51
Term federal funds purchased 599 34 5.71
U.S. Treasury tax and loan demand notes 468 25 5.33
Short-term bank notes 144 8 5.83
Commercial paper 69 4 5.41
Other funds borrowed 423 34 8.09
Notes and debentures (with original maturities over one year) 2,712 189 6.97
------- ------
Total interest-bearing liabilities 27,677 $1,249 4.51
Total noninterest-bearing deposits 8,587
Acceptances outstanding 271
Other liabilities (a) 1,711
----------------------------------------------------------------------------------------------------
Total liabilities 38,246
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 990
Shareholders' equity (a) 3,690
----------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $42,926
----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATES YIELD ON TOTAL INTEREST-EARNING ASSETS 7.83%
COST OF FUNDS SUPPORTING INTEREST-EARNING ASSETS 3.59
----------------------------------------------------------------------------------------------------
NET INTEREST INCOME/MARGIN:
TAXABLE EQUIVALENT BASIS $1,475 4.24%
WITHOUT TAXABLE EQUIVALENT INCREMENTS 1,467 4.22
----------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts and yields in 1997, 1996, 1995 and 1994 exclude
adjustments to fair value required by FAS No. 115.
Note: Interest and yields were calculated on a taxable
equivalent basis at a tax rate approximating 35%, using
dollar amounts in thousands and actual number of days in the
years, and are before the effect of reserve requirements.
Loan fees, as well as nonaccrual loans and their related
income effect, have been included in the calculation of
average interest yields/rates.
36
<PAGE> 15
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
Average Average Average Average
Average yields/ Average yields/ Average yields/ Average yields/
balance Interest rates balance Interest rates balance Interest rates balance Interest rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 561 $ 30 5.41% $ 598 $ 34 5.64% $ 762 $ 30 3.98% $ 1,801 $ 54 3.03%
678 36 5.31 567 36 6.27 756 34 4.52 1,592 58 3.62
142 7 5.00 57 3 5.02 138 6 4.29 428 16 3.73
146 8 5.46 296 19 6.59 380 24 6.27 269 15 5.71
5,999 392 6.54 4,671 305 6.52 4,713 269 5.71 4,120 226 5.49
39 3 8.53 64 5 7.73 110 8 7.14 166 11 6.85
153 12 7.67 203 14 7.09 352 17 4.80 518 24 4.49
27,250 2,261 8.30 27,360 2,432 8.89 25,107 1,935 7.71 21,763 1,597 7.34
------- ------ ------- ------ ------- ------ ------- ------
34,968 $2,749 7.86 33,816 $2,848 8.44 32,318 $2,323 7.19 30,657 $2,001 6.53
2,782 2,337 2,337 2,170
252 229 165 133
560 555 537 518
73 80 113 198
3,865 3,703 3,273 2,524
(472) (591) (613) (565)
- ------------------------------------------------------------------------------------------------------------------------------------
$42,028 $40,129 $38,130 $35,635
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
$ 830 $ 15 1.80% $ 1,916 $ 37 1.94% $ 2,143 $ 4 .21% $ 2,034 $ 2 .11%
9,935 280 2.82 8,736 277 3.16 9,439 188 1.99 8,768 146 1.66
6,529 318 4.88 6,683 337 5.05 6,597 240 3.64 7,556 241 3.19
1,766 96 5.42 263 12 4.70 246 15 6.05 422 26 6.00
3,766 194 5.14 3,898 226 5.79 2,053 92 4.46 1,024 40 3.89
------- ----- ------- ----- -------- ------- ------- -------
22,826 903 3.95 21,496 889 4.13 20,478 539 2.63 19,804 455 2.29
1,765 94 5.32 2,128 125 5.87 1,777 76 4.29 1,096 33 3.01
675 38 5.58 644 39 5.98 176 8 4.58 61 2 3.79
286 15 5.17 400 23 5.69 564 22 3.93 224 6 2.85
502 29 5.84 815 50 6.20 29 2 5.68 81 3 3.98
217 12 5.42 226 13 5.87 155 7 4.33 198 6 3.22
279 27 9.89 395 34 8.68 494 38 7.80 401 29 7.13
2,038 143 7.04 1,670 117 7.04 1,768 110 6.20 1,991 121 6.08
------- ------ ------- ------ ------- ------- ------- -------
28,588 $1,261 4.41 27,774 $1,290 4.65 25,441 $ 802 3.15 23,856 $ 655 2.75
8,012 6,455 6,770 6,737
252 229 165 134
1,319 1,533 1,453 944
- ------------------------------------------------------------------------------------------------------------------------------------
38,171 35,991 33,829 31,671
32 - - -
3,825 4,138 4,301 3,964
- ------------------------------------------------------------------------------------------------------------------------------------
$42,028 $40,129 $38,130 $35,635
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
7.86% 8.44% 7.19% 6.53%
3.60 3.82 2.48 2.14
- ------------------------------------------------------------------------------------------------------------------------------------
$1,488 4.26% $1,558 4.62% $1,521 4.71% $1,346 4.39%
1,478 4.23 1,548 4.58 1,508 4.67 1,329 4.34
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 16
<TABLE>
<CAPTION>
CREDIT QUALITY EXPENSE
- -------------------------------------------------------------------------------
(in millions) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $148 $155 $105
Net revenue from acquired property (19) (13) (20)
- -------------------------------------------------------------------------------
Credit quality expense $129 $142 $ 85
- -------------------------------------------------------------------------------
</TABLE>
Credit quality expense, defined as the provision for credit losses less net
revenue from acquired property, decreased $13 million in 1997 compared with
1996, as a result of a $7 million decrease in the provision for credit losses
and a $6 million increase in net revenue from acquired property. The full years
1997 and 1996 included $48 million and $55 million, respectively, of additional
provision for credit losses made in response to credit losses from the
CornerStone(sm) credit card portfolio. The increase in net revenue from acquired
property in 1997, compared with 1996, was primarily due to higher gains on the
sale of OREO properties.
<TABLE>
<CAPTION>
NONINTEREST REVENUE
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fee revenue:
Trust and investment revenue:
Investment management:
Mutual fund $ 374 $ 340 $ 309
Private asset 182 150 132
Institutional asset 171 137 135
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment management revenue 727 627 576
Administration/custody/consulting:
Mutual fund 133 108 115
Private asset 16 12 9
Institutional trust 327 247 206
Benefits consulting 108 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total administration/custody/
consulting revenue 584 367 330
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 1,311 994 906
Cash management and deposit transaction charges 242 211 191
Mortgage servicing fees 213 180 122
Foreign currency and securities trading revenue 118 80 91
Credit card fees 97 120 90
Information services fees 42 50 48
Gain on sale of corporate trust business 43 - -
Gain on sale of credit card portfolio - 57 -
Other 352 327 222
- ----------------------------------------------------------------------------------------------------------------------------------
Total fee revenue 2,418 2,019 1,670
Gains on sale of securities - 4 6
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue $2,418 $2,023 $1,676
- ----------------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of total revenue (FTE) 62% 58% 52%
Trust and investment fee revenue
as a percentage of total revenue (FTE) 34% 28% 28%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fee revenue increased $399 million, or 20%, in 1997, compared with 1996.
Excluding $153 million of revenue resulting from the Buck acquisition, the $43
million gain on the sale of the corporate trust business, both in 1997, and the
$57 million gain on the sale of the AAA credit card portfolio in 1996, fee
revenue increased $260 million, or 13%, compared with the prior year. The
increase in fee revenue, excluding Buck, resulted primarily from a $164 million
increase in trust and investment fees, a $38 million increase in foreign
currency and securities trading revenue, a $33 million increase in mortgage
servicing fees and a $31 million increase in cash management and deposit
transaction charges, partially offset by lower credit card and information
services fees.
38
<PAGE> 17
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Total trust and investment fee revenue
The $317 million, or 32%, increase in trust and investment fee revenue in 1997,
compared with 1996, reflects $108 million of benefits consulting fees and $45
million of institutional trust fees resulting from the Buck acquisition.
Excluding the fees resulting from the Buck acquisition, trust and investment
fees increased $164 million, or 16%, compared with 1996.
The $100 million increase in investment management revenue resulted from a $34
million, or 10%, increase in mutual fund management revenue, a $32 million, or
21%, increase in private asset management revenue and a $34 million, or 25%,
increase in institutional asset management revenue. These increases resulted
from new business and an increase in the market value of assets under
management. Mutual fund management fees are discussed further on the following
pages.
As shown in the table below, the market value of assets under management was
$305 billion at December 31, 1997, a $49 billion increase from $256 billion at
December 31, 1996. This increase resulted from new business and a general market
increase. The equity and fixed income markets both recorded strong performances
during 1997 with the S&P 500 index increasing 31.0% and the Lehman Brothers
Long-Term Government Bond Index increasing 14.9%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT IN WHOLLY OWNED AND AFFILIATED COMPANIES
December 31,
(in billions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mutual funds managed - proprietary:
Taxable money market funds:
Institutions $ 33 $ 27 $ 24
Individuals 9 9 10
Equity funds 22 15 11
Tax-exempt bond funds 17 17 19
Tax-exempt money market funds 7 7 8
Fixed-income funds 5 5 5
- ------------------------------------------------------------------------------------------------------------------------------------
Total proprietary mutual funds managed 93 80 77
Mutual funds managed - nonproprietary 11 7 4
- ------------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund assets 104 87 81
Private asset 36 28 24
Institutional asset (a) 165 141 128
- ------------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $305 $256 $233
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes assets managed at Pareto Partners of $21 billion, $20 billion and
$15 billion at December 31, 1997, 1996 and 1995, respectively. Since
mid-year 1996, the Corporation has had a 30% equity interest in Pareto
Partners. At year-end 1995, the Corporation held a 65% equity interest.
39
<PAGE> 18
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Mutual fund management fees
Mutual fund management fees are based upon the average net assets of each fund.
Average net assets of proprietary funds managed at Dreyfus in 1997 were $89
billion, up $9 billion from $80 billion in 1996. The increase from 1996
primarily resulted from a $6 billion increase in average net assets of equity
funds which averaged $19 billion for 1997 and had a period-end total of $22
billion at December 31, 1997. In addition, average net assets of institutional
taxable money market funds increased $4 billion over 1996 and had a period-end
total of $33 billion.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MUTUAL FUND MANAGEMENT FEE REVENUE
(in millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed mutual fund fees $413 $377 $352
Less: Fees waived and fund expense reimbursements 39 37 43
- -----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $374 $340 $309
- -----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees by fund category:
Proprietary funds:
Taxable money market funds:
Institutions $ 68 $ 60 $ 48
Individuals 35 37 39
Equity funds 111 83 64
Tax-exempt bond funds 96 100 100
Tax-exempt money market funds 28 27 24
Fixed income funds 24 23 23
- -----------------------------------------------------------------------------------------------------------------------------------
Total proprietary fund fees 362 330 298
Nonproprietary fund management fees 12 10 11
- -----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $374 $340 $309
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Administration/custody/consulting fee revenue increased $217 million in 1997,
compared with 1996, and included $108 million of benefits consulting fees and
$45 million of institutional trust fees resulting from the Buck acquisition.
Institutional trust fees, excluding the $45 million of fees resulting from the
Buck acquisition, increased $35 million, or 14%, including a $13 million
increase in securities lending revenue. Mutual fund administration/custody
revenue increased $25 million, or 23%, and private asset administration/custody
revenue increased $4 million, or 35%, in 1997 compared with the prior year.
These increases resulted primarily from new business and higher transaction
volumes.
The market value of assets under administration/custody, shown in the table
below, was $1,532 billion at December 31, 1997, an increase of $486 billion
compared with $1,046 billion at December 31, 1996. This increase resulted from a
higher level of assets administered by CIBC Mellon Global Securities Services, a
50% owned joint venture, as well as new business, the Buck acquisition and a
general market increase, partially offset by the sale of the corporate trust
business and its related assets under administration/custody of approximately
$24 billion.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY IN WHOLLY OWNED AND AFFILIATED COMPANIES
December 31,
(in billions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional trust $1,440 (a) $ 962 $708
Mutual fund 60 57 60
Private asset 32 27 18
- -----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $1,532 $1,046 $786
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $246 billion of assets administered by CIBC Mellon Global
Securities Services, a 50% owned joint venture.
40
<PAGE> 19
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Cash management and deposit transaction charges
The Corporation is a major national provider of a number of cash management
services, including remittance processing, collections and disbursements, check
processing and electronic services to assist corporate clients in the management
of their accounts receivable, accounts payable and treasury management
functions. At December 31, 1997, the Corporation ranked sixth among cash
management banks for market penetration serving approximately one quarter of
U.S. businesses and institutions with annual sales of more than $500 million.
Cash management and deposit transaction charges totaled $242 million in 1997, an
increase of $31 million, or 15%, from 1996. This increase resulted primarily
from higher volumes of business in customer receivables, payables and treasury
management products.
Mortgage servicing fees
Mortgage servicing fees totaled $213 million in 1997, an increase of $33
million, or 18%, compared with 1996, resulting primarily from a higher level of
mortgage servicing rights acquired through portfolio acquisitions. At December
31, 1997, the Corporation's total servicing portfolio was $83 billion, composed
of $66 billion of residential and $17 billion of commercial servicing. At
December 31, 1996, the total servicing portfolio was $69 billion, composed of
$58 billion of residential and $11 billion of commercial servicing.
Foreign currency and securities trading revenue
Foreign currency and securities trading fees were $118 million in 1997, a 48%
increase from $80 million earned in 1996. The increase was primarily
attributable to higher foreign exchange fees earned as a result of higher levels
of market volatility and customer activity, primarily in the Corporation's
global custody business.
Credit card fees
Credit card fee revenue, which principally consists of interchange, cardholder
fees and servicing revenue from the securitized credit card receivables,
decreased by $23 million, or 20%, in 1997. This decrease primarily resulted from
the sale of the AAA credit card portfolio in November 1996 and lower fee revenue
from the securitized credit card portfolio, due in part to higher credit losses
in this portfolio. Additional information on the effect of the credit card
securitization is presented in the table on the following page.
Information services fees
The $8 million, or 16%, decrease in information services fee revenue, compared
with 1996, primarily resulted from the July 1997 sale of 50% of the
Corporation's interest in the R-M Trust Company to the Canadian Imperial Bank of
Commerce (CIBC). The R-M Trust Company, subsequently renamed CIBC Mellon Trust
Company, is one of the largest stock transfer agencies in Canada. It offers
transfer agency, trustee and related services to Canadian and international
organizations. The Corporation accounts for its interest in CIBC Mellon Trust
Company under the equity method of accounting with net results recorded as
information services fee revenue. The R-M Trust Company reported information
services fee revenue of approximately $12 million in the first half of 1997.
Partially offsetting the decrease was an increase in fee revenue related to
third-party ATM transactions processed for network services clients.
Gain on sale of the corporate trust business
In November 1997, the Corporation sold its corporate trust business to Chase
Manhattan Bank. This business generated $18 million of revenue in the first nine
months of 1997 including approximately $12 million of institutional trust
administration/custody fee revenue. The Corporation recorded a gain of $43
million on the sale. The sale is not otherwise expected to materially affect the
Corporation's earnings and will not affect the Corporation's other trust
businesses.
41
<PAGE> 20
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Other fee revenue
Other fee revenue increased $25 million in 1997 from $327 million in 1996. This
increase primarily resulted from a $28 million increase in servicing fee revenue
from the insurance premium finance and home equity loan securitizations.
Additional information on the effect of these securitizations is presented in
the tables below. In addition, the Corporation experienced a net increase of $25
million in 1997 from higher syndication fees, the realization of lease
residuals, higher fees from the electronic filing of income tax returns and the
sale of equity securities and other assets. This increase was offset by the $28
million gain recorded in 1996 on the home equity loan securitization.
1996 compared with 1995
Compared with 1995, fee revenue increased by $349 million, or 21%, in 1996. The
improvement reflected increases of 10% in trust and investment fee revenue, 48%
in mortgage servicing fees, 34% in credit card fees, 10% in cash management and
deposit transaction charges and the $57 million gain on the sale of the AAA
credit card portfolio.
LOAN SECURITIZATIONS
- --------------------------------------------------------------------------------
The Corporation securitized $950 million of credit card receivables in November
1995, $650 million of home equity loans in March 1996 and $500 million of
insurance premium finance loans in December 1996. Securitizations are an
effective way to diversify funding sources and manage the size of the balance
sheet. The Corporation no longer recognizes net interest revenue on the
securitized portfolios; however, the decrease in net interest revenue is
substantially offset by increased servicing fee revenue and lower net credit
losses. The Corporation continues to service the securitized loans. For
analytical purposes, the impact of these securitizations on 1997 and 1996
results are shown below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIZED CREDIT CARD RECEIVABLES
(in millions) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lower net interest revenue $ 86 $ 89
Lower net credit losses 57 47
Higher fee revenue 28 41
Lower loans - average 950 950
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIZED HOME EQUITY LOANS
(in millions) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Lower net interest revenue $ 23 $ 18
Lower net credit losses 1 -
Higher fee revenue 13 11
Lower loans - average 650 494
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIZED INSURANCE PREMIUM FINANCE LOANS
(in millions) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Lower net interest revenue $ 28 $ 1
Lower net credit losses 1 -
Higher fee revenue 27 1
Lower loans - average 500 18
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 21
<TABLE>
<CAPTION>
OPERATING EXPENSE
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Staff expense $1,242 $1,055 $ 957
Net occupancy expense 225 205 205
Professional, legal and other purchased services 219 195 186
Equipment expense 175 145 143
Business development 148 137 136
Amortization of mortgage servicing assets and
purchased credit card relationships 118 107 68
Amortization of goodwill and other intangible assets 105 100 96
Communications expense 102 96 86
Other expense 175 165 170
- ----------------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-preferred securities
expense and net revenue from acquired property 2,509 2,205 2,047
Trust-preferred securities expense 78 3 -
Net revenue from acquired property (19) (13) (20)
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expense $2,568 $2,195 $2,027
- ----------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 26,400 24,600 24,300
- ----------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 64% 63% 63%
Efficiency ratio excluding amortization of
goodwill and other intangible assets 62 60 60
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before trust-preferred securities expense and net revenue
from acquired property, as a percentage of revenue, computed on a taxable
equivalent basis, excluding gains on the sale of securities.
Operating expense before trust-preferred securities expense and net revenue from
acquired property totaled $2,509 million in 1997, an increase of $304 million,
or 14%, compared with 1996. The increase primarily resulted from the Buck
acquisition and a full-year impact of the 1996 lease financing acquisitions,
business growth, business development and reengineering initiatives, and higher
equipment expense.
Staff expense totaled $1,242 million in 1997, an increase of $187 million
compared with 1996. The increase resulted from the Buck acquisition and a
full-year impact of the 1996 lease financing acquisitions, as well as an
increase in performance-based incentive expense and higher expense of temporary
help and contract programmers. Also impacting this comparison was a charge
recorded in the first quarter of 1996 of $18 million for the Corporation's
retirement enhancement program.
Net occupancy expense increased $20 million compared with 1996, primarily from
the Buck and lease financing acquisitions as well as write-downs related to the
consolidation of branch and processing locations.
Professional, legal and other purchased services totaled $219 million in 1997,
an increase of $24 million compared with 1996. This increase primarily resulted
from higher consulting expenses related to business growth and reengineering
initiatives as well as from the Buck and lease financing acquisitions.
Equipment expense increased $30 million compared with 1996, primarily from the
one-time expense of upgrading computer hardware and from the Buck acquisition.
Business development expense increased $11 million compared with 1996, due
mainly to higher expenditures in support of revenue growth.
The amortization of mortgage servicing assets and purchased credit card
relationships increased $11 million compared with 1996, primarily resulting from
a higher level of mortgage servicing rights (MSRs) acquired through portfolio
acquisitions and a higher level of mortgage prepayments. Declines in interest
rates can result in prepayments of the mortgage loans underlying the MSRs, which
can decrease future net servicing revenue. Decreases in expected future net
servicing revenue can result in accelerated amortization and potential
impairment of MSRs. The Corporation has entered into various off-
43
<PAGE> 22
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
balance-sheet instruments to manage the prepayment risk associated with its
mortgage servicing portfolio. See pages 55 and 56 for a further discussion of
these instruments.
The increase in the amortization of goodwill and other intangible assets,
communications expense and other expense reflects the impact of acquisitions and
business growth.
The Corporation sold 50% of its interest in the R-M Trust Company in July 1997.
As a result of this transaction, the Corporation accounts for its remaining
interest under the equity method of accounting. The net results from this
company were recorded as information services fee revenue. The R-M Trust Company
recorded operating expense of approximately $12 million in the first half of
1997, primarily in staff expense.
The $75 million increase in trust-preferred securities expense in 1997, compared
with 1996, resulted from a full-year impact of the issuance of $1 billion of
these securities in December 1996. The proceeds of these securities were used to
fund interest-earning assets. See note 13 of the Notes to Financial Statements
for a further discussion of these securities.
Year 2000 Project
In early 1996, the Corporation formed a Year 2000 project team to identify
software systems and computer-related devices that require modification for the
year 2000. A project plan has been developed with goals and target dates. The
Corporation's business areas are in various stages of this project plan. The
Corporation incurred expenses throughout 1997 related to this project and will
continue to incur expenses over the next 24 months. A significant portion of
total year 2000 project expenses is represented by existing staff that has been
redeployed to this project. Incremental expenses are not expected to materially
impact operating results in any one period. The Corporation could be negatively
affected by the year 2000 date change to the extent that third parties have not
successfully addressed the year 2000 issues. However, the Corporation has taken
actions to help reduce this exposure. Third parties have been identified and
contacted to determine their year 2000 plans and target dates. This process is
ongoing. The Corporation will monitor the progress of critical third parties and
will implement contingency plans in the event that such third parties fail to
achieve their plans. There can be no assurance that any contingency plans will
fully mitigate the effects of any such failure.
1996 compared with 1995
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $2,205 million in 1996, an increase of $158 million, or
8%, compared with 1995. The increase primarily resulted from increases in staff
expense and the amortization of mortgage servicing assets partially offset by
lower FDIC deposit insurance assessment expense. The increase in staff expense
resulted from higher incentive and commission expense and base salaries, as well
as the charge for the retirement enhancement plan offered in 1996. Higher
amortization of mortgage servicing assets resulted from growth in the portfolio.
The lower FDIC deposit insurance premium resulted from the suspension of this
premium in 1996 for healthy institutions.
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes totaled $398 million in 1997, compared with $418
million in 1996 and $401 million in 1995. The Corporation's effective tax rate
for 1997 was 34.1% compared with 36.3% for 1996 and 36.7% for 1995. The lower
effective tax rate in 1997 resulted from a fourth quarter 1997 realignment of
Corporate entities. It is currently anticipated that the effective tax rate will
be approximately 35.3% in 1998.
44
<PAGE> 23
CAPITAL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA
(dollar amounts in millions, December 31,
except per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shareholders' equity $ 3,652 $3,456 $3,590
Common shareholders' equity to assets ratio 8.13% 8.11% 8.83%
Tangible common shareholders' equity $ 2,227 $2,218 $2,632
Tangible common equity to assets ratio (a) 5.12% 5.36% 6.63%
Total shareholders' equity $ 3,845 $3,746 $4,025
Total shareholders' equity to assets ratio 8.56% 8.79% 9.90%
Tier I capital ratio 7.77 8.38 8.14
Total (Tier I plus Tier II) capital ratio 12.73 13.58 11.29
Leverage capital ratio 8.02 8.31 7.80
Book value per common share $ 14.39 $13.43 (b) $13.09 (b)
Tangible book value per common share $ 8.77 $ 8.62 (b) $ 9.60 (b)
Closing common stock price $ 60.63 $35.50 (b) $26.88 (b)
Market capitalization $15,386 $9,134 $7,374
Common shares outstanding (000) 253,786 257,294 (b) 274,374 (b)
- ------------------------------------------------------------------------------------------------------------------------------------
</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 Corporation's capital management objectives are to maintain a strong capital
base--in excess of all regulatory guidelines--while also maximizing shareholder
value. During 1997, the Corporation continued to enhance shareholder value by
returning excess capital to shareholders through the repurchase of common stock
and increased dividends. The increase in the Corporation's common and total
shareholders' equity at December 31, 1997, compared with December 31, 1996,
reflects earnings retention and the common shares issued in the Buck
acquisition, partially offset by common stock repurchases. Also impacting total
shareholders' equity was the February 1997 redemption of the $100 million Series
J preferred stock.
The Corporation returned $534 million to shareholders in 1997, prior to any
reissuances, by repurchasing 12.1 million shares of common stock, or nearly 5%
of common shares outstanding at the beginning of the year. Since the beginning
of 1995, the Corporation has repurchased 59.3 million common shares prior to any
reissuances, as well as warrants for 9 million shares of common stock. In July
1997, the board of directors of the Corporation authorized the repurchase of up
to 6 million shares of common stock.
Average common stock and stock equivalents used in the computation of diluted
earnings per share totaled 260.8 million shares in 1997, compared with 266.6
million shares in 1996. The Corporation's average level of treasury stock was
approximately $300 million higher in 1997 compared with 1996. After giving
effect to funding the higher level of treasury stock, valued at a short-term
funding rate, the lower share count increased diluted earnings per share 1%
while ongoing business growth increased diluted earnings per share 11%.
45
<PAGE> 24
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING
(in millions) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning shares outstanding 257.3 274.4
Shares issued for stock-based benefit plans and dividend reinvestment plan 5.1 4.5
Shares issued for Buck acquisition 3.5 -
Shares repurchased (12.1) (a) (21.6) (b)
- -----------------------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 253.8 257.3
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of $534 million for an average share price of $44.01 per
share.
(b) Purchase price of $596 million for an average share price of $27.55 per
share.
Regulatory capital
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial results. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of the Corporation's and its
banking subsidiaries' assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification also are subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Tier I and Total capital are expressed as a percentage of risk-adjusted assets,
which include various credit risk-weighted percentages of on-balance-sheet
assets, as well as off-balance-sheet exposures. The Leverage capital ratio
evaluates capital adequacy on the basis of the ratio of Tier I capital to
quarterly average total assets as reported on the Corporation's regulatory
financial statements, net of the loan loss reserve, goodwill and certain other
intangibles. To be well capitalized, the Corporation's banking subsidiaries must
maintain Tier I, Total and Leverage capital ratios of at least 6%, 10% and 5%,
respectively. All of the banking subsidiaries qualified as well capitalized at
December 31, 1997 and 1996. The Corporation intends to maintain the ratios of
its banking subsidiaries at the well-capitalized levels. By maintaining ratios
above the regulatory well-capitalized guidelines, the Corporation's banking
subsidiaries receive the financial benefit of lower FDIC deposit insurance
assessments.
46
<PAGE> 25
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS December 31,
(dollar amounts in millions) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier I capital:
Common shareholders' equity (a) $ 3,619 $ 3,457
Qualifying preferred stock 193 290
Trust-preferred securities (b) 991 863
Other items 4 (12)
Goodwill and certain other intangibles (1,366) (1,150)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 3,441 3,448
Tier II capital 2,197 2,140
- ------------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $ 5,638 $ 5,588
- ------------------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets:
On-balance-sheet $29,772 $27,717
Off-balance-sheet 14,515 13,436
- ------------------------------------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $44,287 $41,153
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets-leverage capital basis $42,926 $41,498
- ------------------------------------------------------------------------------------------------------------------------------------
Tier I capital ratio (c) 7.77% 8.38%
Total capital ratio (c) 12.73 13.58
Leverage capital ratio (c) 8.02 8.31
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) In accordance with regulatory guidelines, the $33 million of unrealized
gains and $1 million of unrealized loss, net of tax, on assets classified
as available for sale at December 31, 1997 and 1996, respectively, have
been excluded.
(b) The amount of trust-preferred securities that qualifies as Tier I capital
is subject to the same regulatory limit of 25% of total Tier I capital that
is applied to cumulative perpetual preferred stocks.
(c) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3%, respectively.
The decrease in the Corporation's regulatory capital ratios compared with
year-end 1996 reflects a higher level of risk-adjusted assets as well as a
higher level of goodwill and other intangibles, from acquisitions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS FOR SIGNIFICANT BANKING SUBSIDIARIES
Mellon Boston Safe
Bank, N.A. Deposit and Trust
Capital Well- ---------- -----------------
adequacy capitalized December 31, December 31,
(dollar amounts in millions) guidelines guidelines 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amount:
Tier I capital $ 2,646 $ 2,419 $ 355 $ 426
Total qualifying capital 4,228 3,712 381 460
Risk-adjusted assets 39,319 36,614 2,093 2,743
Average assets-leverage
capital basis 37,555 36,811 4,266 4,157
Ratios:
Tier I capital ratio 4% 6% 6.73% 6.61% 16.95% 15.52%
Total capital ratio 8 10 10.75 10.14 18.20 16.78
Leverage capital ratio 3 5 7.05 6.57 8.31 10.24
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1996, the regulatory agencies adopted a proposal to incorporate market risk
into the risk-based capital guidelines. This amendment requires any bank or bank
holding company whose trading activity is the lesser of: (1) 10% or more of its
total
47
<PAGE> 26
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
assets, or (2) $1 billion or greater, to measure its exposure to market risk
using its own internal value-at-risk model and to hold capital in support of
that exposure. This amendment was effective January 1, 1997, with mandatory
compliance by January 1, 1998. The Corporation anticipates that this requirement
will have a minimal impact on its risk-based capital ratios.
When computing Tier I capital, the Corporation deducts all goodwill and certain
other identified intangibles acquired subsequent to February 19, 1992, except
mortgage servicing assets and purchased credit card relationships.
Goodwill and other intangibles
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $1,341 $1,110 $788
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $231 million increase in goodwill at December 31, 1997, compared with
December 31, 1996, resulted from a $164 million increase related to the Buck
acquisition and a $149 million increase related to the Pacific Brokerage
Services, Inc. acquisition, partially offset by $74 million of amortization.
Based upon the current level and amortization schedule, the annual amortization
of goodwill for the years 1998 through 2000 is expected to be approximately $79
million and decrease to approximately $75 million in 2001 and 2002. The
after-tax impact of the annual amortization of goodwill for the years 1998
through 2000 is expected to be approximately $69 million and decrease to
approximately $65 million in 2001 and 2002. The levels of goodwill and purchased
core deposit intangibles are expected to increase by approximately $750 million
following the closing of the 1st Business Corporation, United Bankshares, Inc.
and Founders Asset Management, Inc. acquisitions in the first half of 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchased core deposit intangibles $65 $ 88 $110
Covenants not to compete - 6 22
Other identified intangibles 19 34 38
- -----------------------------------------------------------------------------------------------------------------------------------
Total purchased core deposit
and other identified intangibles $84 $128 $170
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in purchased core deposit and other identified intangibles from
December 31, 1996, resulted from amortization expense of $31 million and the
sale of 50% of the R-M Trust Company. Based upon the current level and
amortization schedule, the annual amortization of purchased core deposit and
other identified intangibles for the years 1998 through 2002 is expected to be
approximately $24 million, $24 million, $12 million, $7 million and $5 million,
respectively. The after-tax impact of the annual amortization of these items for
the years 1998 through 2002 is anticipated to be approximately $16 million, $16
million, $8 million, $4 million and $3 million, respectively.
Mortgage servicing assets and purchased credit card relationships
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing assets $1,052 $745 $592
Purchased credit card relationships 23 29 90
- -----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets
and purchased credit card relationships $1,075 $774 $682
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 27
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
In 1997 and 1996, the Corporation capitalized $433 million and $285 million,
respectively, of servicing assets in connection with both mortgage servicing
portfolio purchases and loan originations. Mortgage servicing assets are
amortized in proportion to estimated net servicing income over the estimated
life of the servicing portfolio. Amortization expense totaled $112 million, $96
million and $57 million in 1997, 1996 and 1995, respectively. The estimated fair
value of capitalized mortgage servicing assets was $1.2 billion at December 31,
1997. See note 1 of Notes to Financial Statements for a further discussion of
the Corporation's accounting policy for mortgage servicing assets.
On January 1, 1997, FAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," became effective. FAS No.
125 establishes the criteria for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. FAS No. 125
supersedes several accounting standards, including FAS No. 122, "Accounting for
Mortgage Servicing Rights." The adoption of FAS No. 125 was immaterial to the
Corporation's financial position and results of operations.
CORPORATE RISK
- --------------------------------------------------------------------------------
RISK OVERVIEW
- --------------------------------------------------------------------------------
Risk identification and management are essential elements for the successful
management of the Corporation. The four primary risk exposures are liquidity
risk; market risk, which includes interest rate and currency risk; credit risk;
and fiduciary risk. Liquidity risk is the possibility that the Corporation will
not be able to fund present and future financial obligations. Market risk is the
possibility of lower net interest revenue or lower market values of assets and
liabilities as interest rates or exchange rates fluctuate. Credit risk is the
possibility of loss from a counterparty's failure to perform according to the
terms of a transaction. Fiduciary risk is the possibility of loss from actions
taken on behalf of clients. In addition, the Corporation is subject to other
risks, particularly in its fee-generating businesses, that are transaction
oriented. The Corporation controls and monitors these risks with policies,
procedures and various levels of managerial oversight. Because of the nature of
its businesses, external factors beyond the Corporation's control may, at times,
result in losses to the Corporation or its customers.
The Corporation is involved with various financial instruments that potentially
create risk. These instruments are both on and off the balance sheet.
On-balance-sheet instruments include securities, loans, mortgage servicing
rights, deposits and borrowings. Off-balance-sheet instruments include loan
commitments, standby letters of credit, interest rate swaps, foreign exchange
contracts and interest rate futures and forwards.
LIQUIDITY AND DIVIDENDS
- --------------------------------------------------------------------------------
The Finance Committee of the Corporation is responsible for liquidity
management. This committee of senior managers has a Liquidity Policy that covers
all assets and liabilities, as well as off-balance-sheet items that are
potential sources or uses of liquidity. The Corporation's liquidity management
objective is to maintain the ability to meet commitments to fund loans and to
purchase securities, as well as to repay deposits and other liabilities in
accordance with their terms, including during periods of market or financial
stress. The Corporation's overall approach to liquidity management is to ensure
that sources of liquidity are sufficient in amount and diversity to accommodate
changes in loan demand and core funding routinely without a material adverse
impact on net income. The Corporation uses several key primary and secondary
measures to assess the adequacy of the Corporation's liquidity position. The
balance sheet is managed to ensure that these measures are maintained within
approved limits. Each of these measures is monitored on a periodic basis giving
consideration to the Corporation's expected requirements for funds and
anticipated market conditions.
The Corporation's liquidity position is managed by maintaining adequate levels
of liquid assets, such as money market assets and securities available for sale.
Additional liquidity is available through the Corporation's ability to
participate or sell commercial loans and to securitize selected loan portfolios.
The parent Corporation also has a $300 million revolving credit agreement, with
approximately three years remaining until maturity, and a $25 million backup
line of credit to
49
<PAGE> 28
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
provide support facilities for its commercial paper borrowings and for general
corporate purposes. The revolving credit facility contains Tier I ratio, double
leverage ratio and nonperforming asset covenants, as discussed in note 11 of
Notes to Financial Statements.
As shown in the consolidated statement of cash flows, cash and due from banks
increased by $804 million during 1997 to $3,650 million at December 31, 1997.
The increase reflected $517 million of net cash provided by operating
activities, $188 million of net cash provided by investing activities and $70
million of net cash provided by financing activities. Net cash provided by
investing activities principally reflected a decrease in securities available
for sale and proceeds from the sale of loan portfolios, partially offset by loan
growth and an increase in mortgage servicing assets. Net cash provided by
financing activities primarily reflected an increase in short-term borrowings,
partially offset by a decrease in deposits and the repurchase of common stock.
In May 1997, Mellon Bank, N.A., the Corporation's principal banking subsidiary,
issued $300 million of subordinated debt at a fixed rate of 7.375%, maturing in
2007. This subordinated debt qualifies as Tier II capital for the Corporation's
risk-based capital calculation. The proceeds from this issue were used for
general corporate purposes. Contractual maturities of parent term debt totaled
$205 million in 1997 and consisted primarily of the $200 million 6-1/2% Senior
Notes that matured in December 1997. Contractual maturities of long-term debt
will total $118 million in 1998, including $12 million of parent term debt.
At December 31, 1997, the Corporation had a debt shelf registration statement on
file with the Securities and Exchange Commission on which up to $1.25 billion of
debt may be issued. The issuance of any debt securities from this debt shelf
registration will depend on future market conditions, funding requirements and
other factors.
Mellon Bank, N.A. has an existing offering circular, under which it can issue up
to $6 billion of bank notes. Up to $3 billion of these notes, outstanding at any
one time, can have maturities of 7 to 270 days and up to $3 billion, in the
aggregate, can have maturities of more than 270 days to 15 years. At December
31, 1997, the bank had $303 million of notes with original maturities greater
than one year and $330 million of short-term notes outstanding under this
program. Proceeds from these notes are used for general funding purposes of the
bank.
At December 31, 1997, the Corporation's and Mellon Bank, N.A.'s senior debt were
rated "A2" and "A1", respectively, by Moody's and "A" and "A+", respectively, by
Standard & Poor's. In August 1997, Standard & Poor's revised its ratings outlook
on the Corporation and its affiliates to positive from stable.
In February 1997, the Corporation redeemed the $100 million, 8.50% Series J
preferred stock at a redemption price of $25 per share plus accrued dividends.
The Corporation has announced that it will redeem the $200 million, 8.20% Series
K preferred stock on February 17, 1998, at a redemption price of $25 per share
plus accrued dividends.
The Corporation increased its annual common stock dividend to $1.32 per common
share in the second quarter of 1997, an increase of 10% from the previous annual
rate, on a post-split basis, of $1.20. The Corporation has increased its common
stock dividend six times over the last four years, resulting in a 161% increase
during that period. Common dividends of $330 million were paid on the
outstanding shares of common stock during 1997. The dividend payout ratio was
44% in 1997 and 45% in 1996. On a tangible earnings per common share basis, the
dividend payout ratio was 40% in both 1997 and 1996. In addition, the
Corporation paid $18 million in preferred stock dividends in 1997 and recorded
$3 million of issue costs as preferred stock dividends in connection with the
redemption of the Series J preferred stock. The Series K preferred stock
redemption will result in $7 million of issue costs being recorded as preferred
stock dividends in the first quarter of 1998.
Using the current common stock dividend rate and shares outstanding at December
31, 1997, and excluding the Series K preferred stock, the annual dividend
requirement in 1998 is expected to be approximately $335 million. The
Corporation has reduced its annual preferred stock and common stock dividend
requirements by approximately $93 million through the redemption of its
preferred stocks and the repurchase of common stock since 1994, net of
issuances.
50
<PAGE> 29
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
The parent Corporation's principal sources of cash are dividends and interest
from its subsidiaries. The ability of national and state member bank
subsidiaries to pay dividends to the parent Corporation is subject to certain
limitations, as discussed in note 22 of Notes to Financial Statements. Under the
more restrictive limitation, the Corporation's national and state member bank
subsidiaries can, without prior regulatory approval, declare dividends
subsequent to December 31, 1997, of approximately $535 million, less any
dividends declared and plus or minus net profits or losses, as defined, between
January 1, 1998, and the date of any such dividend declaration. The bank
subsidiaries declared dividends to the parent Corporation totaling $450 million
in 1997, $400 million in 1996 and $501 million in 1995. Dividends paid to the
parent Corporation by nonbank subsidiaries totaled $34 million in 1997, $21
million in 1996 and $30 million in 1995. In 1997, The Boston Company returned
$100 million of capital to the parent Corporation. In addition, Mellon Bank,
N.A. and The Boston Company returned $200 million and $150 million,
respectively, of capital to the parent Corporation in 1996. To comply with
regulatory guidelines, the Corporation and its subsidiary banks continually
evaluate the level of cash dividends in relation to their respective operating
income, capital needs, asset quality and overall financial condition.
<TABLE>
<CAPTION>
Balance sheet analysis
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES (in millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,186 $ 1,381 $ 1,222
Trading account securities 175 146 296
Securities 5,593 6,184 4,922
Loans 27,823 27,233 27,321
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 34,777 34,944 33,761
Noninterest-earning assets 8,677 7,541 6,927
Reserve for credit losses (512) (472) (591)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $42,942 $42,013 $40,097
- ------------------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $34,618 $32,068 $30,986
Wholesale and purchased funds 8,324 9,945 9,111
- ------------------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $42,942 $42,013 $40,097
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in the Corporation's average interest-earning assets in 1997,
compared with 1996, reflects a $591 million decrease in average securities and a
$195 million decrease in average money market investments, partially offset by a
$590 million increase in loans. The decrease in average securities reflects a
reduction in deposits with pledging requirements in 1997, compared with 1996.
Average loans increased as a result of the full-year impact of the 1996 lease
financing acquisitions and loan growth, partially offset by the AAA credit card
sale and the insurance premium finance loan securitization.
Core funds, which are considered to be the most stable sources of funding, are
defined principally as money market and other savings deposits, savings
certificates, demand deposits, shareholders' equity, notes and debentures with
original maturities over one year, and trust-preferred securities. Core funds
primarily support core assets, which consist of loans, net of the reserve and
noninterest-earning assets. Average core assets increased $1,686 million in 1997
from the prior year, primarily reflecting a higher level of noninterest-earning
assets. The increase in noninterest-earning assets includes a higher level of
goodwill resulting from the lease financing and Buck acquisitions and higher
levels of receivables, mortgage servicing assets and cash and due from banks.
Average core funds increased $2,550 million in 1997 compared with 1996,
primarily reflecting the issuance of the trust-preferred securities in December
1996, and higher levels of notes and debentures and corporate and retail
deposits. Core funds averaged 96% of core assets in 1997, up from 93% in 1996
and 92% in 1995.
Wholesale and purchased funds are defined as deposits in foreign offices,
negotiable certificates of deposit, federal funds purchased and securities under
repurchase agreements, U.S. Treasury tax and loan demand notes, other time
deposits, short-term bank notes, commercial paper and other funds borrowed.
Average wholesale and purchased funds decreased
51
<PAGE> 30
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
$1,621 million compared with 1996, primarily reflecting a decrease in deposits
in foreign offices, and federal funds purchased and securities under repurchase
agreements. As a percentage of total average assets, average wholesale and
purchased funds decreased to 19% in 1997, compared with 24% in 1996 and 23% in
1995.
INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------------------------------------
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest revenue and on the net present
value of the Corporation's assets, liabilities and off-balance-sheet
instruments. Interest rate risk is measured using net interest margin simulation
and asset/liability net present value sensitivity analyses. Simulation tools
serve as the primary means to gauge interest rate exposure. The net present
value sensitivity analysis is the means by which the Corporation's long-term
interest rate exposure is evaluated. These analyses provide a full understanding
of the range of potential impacts on net interest revenue and portfolio equity
caused by interest rate movements.
Modeling techniques are used to estimate the impact of changes in interest rates
on the net interest margin. Assumptions regarding the replacement of maturing
assets and liabilities are made to simulate the impact of future changes in
rates and/or changes in balance sheet composition. The effect of changes in
future interest rates on the mix of assets and liabilities may cause actual
results to differ from simulated results. In addition, certain financial
instruments provide customers a certain degree of "optionality." For instance,
customers have migrated from lower-interest deposit products to higher-interest
products. Also, customers may choose to refinance fixed rate loans when interest
rates decrease. While the Corporation's simulation analysis considers these
factors, the extent to which customers utilize the ability to exercise their
financial options may cause actual results to significantly differ from the
simulation.
The Corporation has established the following guidelines for assuming interest
rate risk:
Net interest margin simulation--Given a +/- 200 basis point parallel shift in
interest rates, the estimated net interest revenue may not change by more
than 5% for a one-year period.
Portfolio equity simulation--Portfolio equity is the net present value of the
Corporation's existing assets, liabilities and off-balance-sheet
instruments. Given a +/- 200 basis point parallel shift in interest rates,
portfolio equity may not change by more than 20% of total shareholders'
equity.
The measurement of interest rate risk is meaningful only when all related on-
and off-balance-sheet items are aggregated and the net positions are identified.
Financial instruments that the Corporation uses to manage interest rate
sensitivity include: money market assets, U.S. government and federal agency
securities, municipal securities, mortgage-backed securities, corporate bonds,
asset-backed securities, fixed rate wholesale term funding, interest rate swaps,
caps and floors, financial futures and financial options. The table below
illustrates the simulation analysis of the impact of a 50, 100 or 200 basis
point parallel shift upward or downward in interest rates on net interest
revenue, earnings per share and return on common shareholders' equity. This
analysis was done using the levels of all interest-earning assets and
off-balance-sheet instruments used for interest rate risk management at December
31, 1997, assuming that the level of loan fees remains unchanged and excludes
the impact of interest receipts on nonperforming loans. The impact of the rate
movements was developed by simulating the effect of rates changing in a parallel
fashion over a six-month period from the December 31, 1997, levels and remaining
at those levels thereafter. This analysis excludes the effect that rate
movements can have on the value of mortgage servicing rights, discussed on pages
55 and 56.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from December 31, 1997, rates
- ------------------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
compared with December 31, 1997: --------------------------------- ---------------------------------
+50bp +100bp +200bp -50bp -100bp -200bp
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest revenue decrease -% (.2)% (.8)% (.1)% (.5)% (1.3)%
Earnings per share decrease $ - $(.01) $(.03) $ - $(.02) $(.05)
Return on common equity decrease - bp (5) bp (21) bp (2) bp (12) bp (33) bp
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 31
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
Managing interest rate risk with off-balance-sheet instruments
The Corporation uses interest rate swaps, including index amortizing swaps and
callable swaps, in managing its overall interest rate exposure. By policy, the
Corporation will not implement any new off-balance-sheet activity that, when
aggregated into the total corporate interest rate exposure, would cause the
Corporation to exceed the interest rate risk limits outlined previously.
Interest rate swaps, caps and floors, financial futures and financial options
have been approved by the board of directors for managing the overall corporate
interest rate exposure. Their usage for speculative purposes is not permitted
outside of those areas designated as trading and controlled with specific
authorizations and limits. These instruments provide the Corporation flexibility
in adjusting its interest rate risk position without exposure to principal risk
and funding requirements. By using off-balance-sheet instruments to manage
interest rate risk, the effect is a smaller, more efficient balance sheet, with
a lower wholesale funding requirement and a higher return on assets and net
interest margin with a comparable level of net interest revenue and return on
common shareholders' equity.
Interest rate swaps involve the exchange of fixed and variable interest payments
based upon a contractual notional amount. In an index amortizing swap, the
notional amount will vary based upon an underlying index. Generally, as rates
fall, the notional amounts decline more rapidly and, as rates increase, notional
amounts decline more slowly. Callable swaps are generic swaps with a call option
at the option of the counterparty. Callable swaps' notional amounts are not
based on interest rate indices, but call options will be exercised or not
exercised on the basis of market interest rates. The callable swaps entered into
by the Corporation are subject to call options in August 1998, November 1998 and
February 1999, at the option of the counterparty. If after a specified time
period the call options are not exercised, the swaps will remain outstanding
until their contractual maturity date. The use of financial futures and option
contracts is permitted provided that: the transactions occur in a market with a
size that ensures sufficient liquidity; the contract is traded on an approved
exchange or, in the case of over-the-counter option contracts, is transacted
with a credit-approved counterparty; and the types of contracts have been
authorized for use by the board of directors and the Finance Committee. The
Corporation's off-balance-sheet instruments used to manage its interest rate
risk are shown in the table on the following page. Additional information
regarding these contracts is presented in note 24 of Notes to Financial
Statements.
53
<PAGE> 32
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
Dec. 31,
(notional amounts in millions) 1998 1999 2000 2001 2002 2003+ 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps: (a)
Notional amount $ 29 $ - $ - $ - $ - $ 700 $ 729
Weighted average rate:
Receive 4.64% - - - - 6.62% 6.54%
Pay 4.59% - - - - 5.86% 5.81%
Receive fixed/pay floating
indexed amortizing swaps:
Notional value $ 755 $1,622 $212 $93 $270 $ - $2,952
Weighted average rate:
Receive 6.19% 5.71% 6.43% 7.15% 7.13% - 6.06%
Pay 5.83% 5.82% 5.83% 5.85% 5.85% - 5.82%
Receive fixed/pay floating
callable swaps: (b)
Notional value $ 650 $ 400 $ - $ - $ - $ - $1,050
Weighted average rate:
Receive 6.90% 6.86% - - - - 6.88%
Pay 5.82% 5.82% - - - - 5.82%
Pay fixed/receive floating
generic swaps: (a)
Notional amount $444 $ 220 $ - $ - $ 5 $ 10 $ 679
Weighted average rate:
Receive 5.78% 5.94% - - 5.81% 5.83% 5.83%
Pay 5.92% 6.18% - - 6.59% 6.64% 6.02%
Other products (c) $ - $ - $ 40 $ - $ - $ - $ 40
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $1,878 $2,242 $252 $93 $275 $ 710 $5,450
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic swaps' notional amounts and lives are not based upon interest rate
indices.
(b) Expected maturity dates, based upon interest rates at December 31, 1997,
are shown in this table.
(c) Average rates are not meaningful for these products.
The gross notional amount of off-balance-sheet products used to manage the
Corporation's interest rate risk was $5.5 billion at December 31, 1997, an
increase of approximately $.6 billion from December 31, 1996. The increase in
these instruments resulted from the addition of approximately $1.1 billion of
callable swaps in the first quarter of 1997. This gross notional amount, which
is presented in the table above, should be viewed in the context of the
Corporation's overall interest rate risk management activities to assess its
impact on the net interest margin. These off-balance-sheet products were used to
modify the Corporation's natural asset-sensitive position.
The table on the following page presents the gross notional amounts of
off-balance-sheet instruments used to manage interest rate risk, identified by
the underlying interest rate-sensitive instruments.
54
<PAGE> 33
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Instruments associated with deposits $3,143 $3,888
Instruments associated with other liabilities 705 415
Instruments associated with loans 1,602 582
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $5,450 $4,885
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation entered into these off-balance-sheet products to reduce the
natural interest rate risk embedded in its assets and liabilities. The interest
received and interest paid are recorded on an accrual basis in interest revenue
and interest expense associated with the underlying assets and liabilities. The
net differential resulted in interest revenue of $23 million in 1997, compared
with interest revenue of $24 million in 1996 and interest expense of $2 million
in 1995. The Corporation's analysis using interest rates at December 31, 1997,
indicates that currently held off-balance-sheet instruments are expected to have
a positive impact of approximately $15 million on the net interest margin in
1998.
In response to tactical asset/liability management considerations, the
Corporation terminated $200 million of pay fixed rate generic interest rate
swaps in 1997, resulting in a net deferred loss of less than $1 million. This
loss will be amortized over the two years remaining on the original hedge. This
net unamortized deferred loss combined with net unaccreted deferred gains of $2
million resulting from the terminations of $4.6 billion of interest rate swaps
during 1996 resulted in a net unaccreted deferred gain of $2 million, carried as
other liabilities, at December 31, 1997. The Corporation accreted $3 million and
$7 million of these gains into net interest revenue in 1997 and 1996,
respectively. In addition, during 1996, the Corporation terminated $800 million
of interest rate agreements that were used to lock in the cost of debt issuances
in 1996. These terminations resulted in net unaccreted deferred gains, carried
as other liabilities, totaling $11 million at December 31, 1997. These deferred
gains are being accreted to interest expense over the term of the debt.
Approximately $1 million of these gains was accreted into interest expense in
both 1997 and 1996, respectively.
The Corporation also has entered into off-balance-sheet contracts to manage the
prepayment risk associated with a portion of its mortgage servicing portfolio.
Mortgage servicing rights (MSRs) are interest rate sensitive due to the mortgage
borrower's option to prepay the mortgage loan. If mortgage interest rates
decrease, borrowers may prepay mortgage loans. Since mortgage loans underlie
MSRs, a decrease in interest rates and an actual (or probable) increase in
mortgage prepayments shorten the expected life of the MSR and reduces its value.
Conversely, an increase in interest rates and an actual (or probable) decrease
in mortgage prepayments lengthen the expected life of the MSR and increases its
value.
To mitigate the prepayment risk of decreasing long-term interest rates, higher
than expected mortgage prepayments and a potential impairment to MSRs, the
Corporation uses interest rate floor and interest rate swap contracts tied to
yields on 10-year constant maturity Treasury notes. At December 31, 1997, the
Corporation had approximately $1.85 billion of purchased interest-rate floor
agreements outstanding and $1.0 billion of interest rate swap agreements
outstanding. In addition, the Corporation had $273 million of principal only
swaps outstanding at December 31, 1997. These instruments are collectively
structured to gain value as interest rates decrease, therefore reducing the
potential impairment of MSRs. Conversely, the value of these instruments will
decrease as interest rates increase.
Realized gains/losses and cash settlements on these instruments are recorded as
adjustments to the carrying value of the MSRs. These instruments do not entirely
eliminate risk. Mortgage prepayment rates may not occur as expected. The
following table presents the gross notional amounts of off-balance-sheet
instruments used to manage prepayment risk associated with MSRs.
55
<PAGE> 34
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO
MANAGE PREPAYMENT RISK OF MSRS Total at
Dec. 31
(dollar amounts in millions) 1998 1999 2000 2001 2002 2003+ 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate floors (notional) $ - $ - $ - $ - $1,850 $ - $1,850
Weighted average strike rates - - - - 5.67% - 5.67%
Fair value 35
Receive fixed/pay floating interest
rate swaps (notional) $ - $ - $ - $ - $ - $1,000 $1,000
Weighted average rates:
Receive - - - - - 6.40% 6.40%
Pay - - - - - 5.82% 5.82%
Fair value 26
Principal only swaps (notional) (a) $273 $ - $ - $ - $ - $ - $ 273
Fair value 13
- ------------------------------------------------------------------------------------------------------------------------------------
Total notional amount $273 $ - $ - $ - $1,850 $1,000 $3,123
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Shown as maturing in 1998 because the swaps can be canceled at the
Corporation's discretion. Contractual maturity is 2002.
In addition to the risk management instruments previously discussed, the
Corporation has entered into contracts to hedge anticipated transactions. The
Corporation has entered into four interest rate swap contracts totaling $350
million to lock in the cost of a debt issuance anticipated in the first quarter
of 1998. The Corporation also has entered into $229 million of interest rate
futures to lock in the value of certain loans that are anticipated to be sold
and/or securitized in the first half of 1998. There was an unrealized loss of
less than $1 million related to these anticipated transactions at December 31,
1997.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at December 31, 1997, was a positive $111 million,
compared to a negative $64 million at December 31, 1996. This increase was
consistent with the decrease in interest rates in 1997, which had the
corresponding effect of decreasing the fair value of on-balance-sheet core
deposits. Also impacting the market value was the positive fair value of the
interest rate floors and swaps entered into in the second half of 1997 to hedge
against value impairment of the Corporation's MSRs. These values should be
viewed in the context of the overall financial structure of the Corporation,
including the aggregate net position of all on- and off-balance-sheet
instruments. As more fully discussed in note 24 of Notes to Financial
Statements, credit risk associated with off-balance-sheet instrument positions
represents the aggregate replacement cost of contracts in a gain position. At
December 31, 1997 and 1996, the amount of credit exposure associated with risk
management instruments was $114 million and $7 million, respectively.
Off-balance-sheet instruments used for trading activities
The Corporation offers off-balance-sheet financial instruments, primarily
foreign exchange contracts, currency and interest rate option contracts,
interest rate swaps, interest rate caps and floors, and interest rate futures
and forward contracts to enable customers to meet their financing objectives and
to manage their interest- and currency-rate risk. Supplying these instruments
provides the Corporation with fee revenue. The Corporation also uses such
instruments in connection with its proprietary trading account activities. All
of these instruments are carried at market value with realized and unrealized
gains and losses included in foreign currency and securities trading revenue. In
1997, the Corporation recorded $115 million of fee revenue from these
activities, primarily from foreign exchange contracts entered into on behalf of
customers, compared with $76 million in 1996. The total notional values of these
contracts were $45 billion at
56
<PAGE> 35
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
December 31, 1997, and $36 billion at December 31, 1996, and are included in the
off-balance-sheet instruments used for trading activities table on page 98 in
note 24 of Notes to Financial Statements. Total credit risk of contracts used
for trading activities was $533 million at December 31, 1997, and $345 million
at December 31, 1996.
The Corporation has established trading limits and related monitoring procedures
to control trading risk. These limits are approved by the Office of The Chairman
and reviewed by the Executive Committee of the board of directors. All limits
are monitored for compliance by departmental compliance staff and by the
Corporation's Internal Audit department. Exceptions to limits are reported to
the Office of The Chairman and, in certain instances, to the Audit Committee of
the board of directors.
The financial risk associated with trading positions is managed by assigning
position limits and stop loss guidance amounts to individual activities. The
Corporation uses a value at risk methodology to estimate the potential daily
amount that could be lost. Value at risk measures the volatility of the value of
equity, which is the present value of future expected cash flows of assets,
liabilities and off-balance-sheet instruments. Position limits are assigned to
each family of financial instruments eligible for trading such that the
aggregate value at risk in these activities at any point in time will not exceed
a specified limit given a significant market movement. The extent of market
movement deemed to be significant is based upon an analysis of the historical
volatility of individual instruments that would cover 95% of likely daily market
movements. The loss analysis includes the off-balance-sheet instruments used for
trading activities as well as the financial assets and liabilities that are
classified as trading positions on the balance sheet. Using the Corporation's
methodology, which considers such factors as changes in interest rates, spreads
and options volatility, the aggregate value at risk for trading activities was
approximately $1 million at December 31, 1997, primarily related to foreign
currency contracts.
Trading activities are generally limited to products and markets in which
liquidity is sufficient to allow positions to be closed quickly and without
adversely affecting market prices, which limits loss potential below that
assumed for a full-day adverse movement. Loss potential is further constrained
in that it is highly unusual for all trading areas to be exposed to maximum
limits at the same time and extremely rare for significant adverse market
movements to occur in all markets simultaneously. Stop loss guidance is used
when a certain threshold of loss is sustained. If stop loss guidance amounts are
approached, open positions are liquidated to avoid further risk to earnings. The
use of both stop loss guidance and position limits reduces the likelihood that
potential trading losses would reach imprudent levels in relation to earnings
capability.
CREDIT RISK
- --------------------------------------------------------------------------------
Credit risk exists in financial instruments that are both on and off the balance
sheet. Financial instruments such as loans and leases are on the balance sheet.
Off-balance-sheet credit exposures include loan commitments, standby letters of
credit and the credit risk associated with financial instruments used for risk
management and trading activities.
The objective of the credit risk management process is to reduce the risk of
loss if a customer fails to perform according to the terms of a transaction.
Essential to this process are stringent underwriting of new loan commitments,
active monitoring of all loan portfolios and the early identification of
potential problems and their prompt resolution. The Corporation establishes
internal ownership, responsibility and accountability for all aspects of asset
quality. Notwithstanding this process, however, asset quality is dependent in
large part upon local, national, international and industry segment economic
conditions that are beyond the Corporation's control.
57
<PAGE> 36
CREDIT RISK (CONTINUED)
- --------------------------------------------------------------------------------
Management maintains a comprehensive centralized process through which the
Corporation establishes exposure limits, extends new loans, monitors credit
quality, actively manages problem credits and disposes of nonperforming assets.
The Corporation's board of directors is kept informed of credit activity through
a series of monthly and quarterly reports. To help ensure adherence to the
Corporation's credit policies, department credit officers report to both the
Corporation's chief risk and credit officer and the head of each respective
lending department. The responsibilities of these credit officers include all
aspects of the credit process except credit review, credit recovery and
aggregate portfolio management, which are centralized at the corporate level.
The Corporation manages both on- and off-balance-sheet credit risk by
maintaining a well-diversified credit portfolio and by adhering to its written
credit policies, which specify general underwriting criteria as well as
underwriting standards for specific industries and control credit exposure by
borrower, counterparty, degree of risk, industry and country. These measures are
adopted by the Credit Policy Committee and are regularly updated to reflect the
committee's evaluation of developments in economic, political and operating
environments that could affect lending risks. The Corporation may adjust credit
exposure to individual industries or customers through loan sales, syndications,
participations and the use of master netting agreements when the Corporation has
more than one transaction outstanding with the same customer.
Except for certain well-defined loans made by the Consumer Banking sector,
primarily to consumers and small businesses, all credit extensions are approved
jointly by officers of the Credit Policy department and officers of the lending
departments. The number and level of officer approvals required are determined
by the dollar amount and risk characteristics of the credit extension. The
amount of collateral, if any, obtained by the Corporation upon the extension of
credit is based on industry practice as well as the credit assessment of the
customer. The type and amount of collateral vary, but the form generally
includes: accounts receivable; inventory; property, plant and equipment; other
assets; and/or income-producing commercial properties with appraised values that
exceed the contractual amount of the credit facilities by pre-approved ratios.
The Corporation continually assesses the quality of its consumer and commercial
credit facilities, and assigns a numerical quality rating to substantially all
extensions of credit in its commercial, real estate and international
portfolios. Lending officers have the primary responsibility for monitoring
their portfolios, identifying emerging problem loans and recommending changes in
quality ratings. To anticipate or detect problems that may result from economic
downturns or deteriorating conditions in certain markets, lending units and
credit management use processes designed to identify potential credit problems,
both for specific customers and for industries that could be affected by adverse
market or economic conditions. When signs of credit deterioration are detected,
credit recovery or other specialists become involved to minimize the
Corporation's exposure to potential future credit losses. The Credit Review
division provides an independent assessment of credit ratings, credit quality
and the credit management process.
For a further discussion of the credit risk associated with off-balance-sheet
financial instruments, see the discussions of the various financial instruments
in note 24 of Notes to Financial Statements.
COMPOSITION OF LOAN PORTFOLIO AT YEAR END
- --------------------------------------------------------------------------------
The loan portfolio increased $1,749 million in 1997, compared with the prior
year, reflecting increases in consumer mortgages, other consumer credit,
business banking, middle market lending and leasing. Partially offsetting these
increases was a lower level of credit card loans due in part to the transfer of
an additional $231 million of CornerStone(sm) credit card loans to an
accelerated resolution portfolio in the fourth quarter of 1997. At December 31,
1997, the composition of the loan portfolio was 57% commercial and 43% consumer,
unchanged from the prior year end.
58
<PAGE> 37
COMPOSITION OF LOAN PORTFOLIO AT YEAR END (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $10,826 (a) $10,196 $10,969 $10,015 $ 9,091
Commercial real estate 1,509 (b) 1,534 1,532 1,624 1,721
Consumer credit:
Consumer mortgage 8,505 7,772 8,960 8,680 8,191
Credit card 931 1,296 1,924 2,381 1,441
Other consumer credit 3,166 2,640 2,612 2,455 2,372
- -----------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 12,602 11,708 13,496 13,516 12,004
Lease finance assets 2,639 2,533 830 815 718
- -----------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 27,576 25,971 26,827 25,970 23,534
INTERNATIONAL LOANS 1,566 1,422 863 763 950
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount (c) $29,142 $27,393 $27,690 $26,733 $24,484
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $7 million of loans subject to the FDIC loss-sharing arrangement
that expired on January 1, 1998.
(b) Includes $26 million of loans subject to the FDIC loss-sharing arrangement
that expired on January 1, 1998.
(c) Excludes segregated assets.
Note: There were no concentrations of loans to borrowers engaged in similar
activities, other than those shown in this table, that exceeded 10% of
total loans at year end.
Commercial and financial
The domestic commercial and financial loan portfolio primarily consists of loans
to corporate borrowers in the manufacturing, service, energy, communications,
wholesale and retail trade, public utilities and financial services industries.
Numerous risk factors impact this portfolio, including industry specific risks
such as the economy, new technology, labor rates and cyclicality, as well as
customer specific factors such as cash flow, financial structure, operating
controls and asset quality. The Corporation diversifies risk within this
portfolio by closely monitoring industry concentrations and portfolios to ensure
that it does not exceed established lending guidelines. Diversification is
intended to limit the risk of loss from any single unexpected economic event or
trend. Total domestic commercial and financial loans increased by $630 million,
or 6%, during 1997, primarily as a result of increases in business banking and
middle market lending to small and midsize businesses. Commercial and financial
loans represented 37% of the total loan portfolio at December 31, 1997 and 1996.
At year-end 1997, nonperforming domestic commercial and financial loans were
.16% of total domestic commercial and financial loans, compared with .21% at
December 31, 1996. This ratio has been less than 1% for nearly five years.
Commercial real estate
The Corporation's $1,509 million domestic commercial real estate loan portfolio
consists of $968 million of commercial mortgages, which generally are secured by
nonresidential and multifamily residential properties, and commercial
construction loans generally with maturities of 60 months or less. Also included
in this portfolio are $541 million of owner-occupied and other loans.
Owner-occupied and other loans are loans that are secured by real estate;
however, the commercial property is not being relied upon as the primary source
of repayment. The commercial real estate loan portfolio includes $26 million of
loans acquired in the December 1992 Meritor retail office acquisition that were
subject to a five-year 95% loss-sharing arrangement with the FDIC. This
loss-sharing arrangement ended on January 1, 1998. Commercial real estate loans
carry many of the same customer and industry risks as the commercial and
financial portfolio, as well as contractor/subcontractor performance risk in the
case of commercial construction loans and cash flow risk based on project
economics. Domestic commercial real estate loans decreased $25 million compared
with December 31, 1996, as paydowns and credit losses were partially offset by
new loan originations. Domestic commercial real estate loans were 5% of total
loans at December 31, 1997, and 6% at December 31, 1996. Nonperforming
commercial real estate loans were 3.25% of total domestic commercial real estate
loans at December 31, 1997, compared with 1.03% at December 31, 1996. This
increase was primarily due to the addition of one loan to nonperforming status.
59
<PAGE> 38
COMPOSITION OF LOAN PORTFOLIO AT YEAR END (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS Percent of
Dec. 31, total loans
(in millions) 1997 outstanding
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial mortgage and construction loans $ 942 3%
Owner-occupied and other loans 541 2
FDIC loss share loans 26 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,509 5%
- -----------------------------------------------------------------------------------------------------------------------------------
</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 December 31, 1997, this
portfolio totaled $8,505 million, up 9%, from $7,772 million at the prior year
end. The $733 million increase in this portfolio from year-end 1996 resulted
from an increase in the one- to four-family residential mortgage warehouse
portfolio.
Jumbo mortgages, which totaled $3.6 billion at year-end 1997, are variable rate
residential mortgages that range from $250,000 to $3 million. These loans were
virtually unchanged from December 31, 1996, as new loan originations were offset
by paydowns and sales. Risks involved in holding jumbo mortgages include less
liquidity than a traditional one- to four-family residential mortgage portfolio
and increased exposure on an individual loan basis. The Corporation attempts to
control these risks by requiring more stringent loan-to-value ratios and higher
liquidity and cash flow requirements for each borrower. At December 31, 1997,
the geographic distribution of the jumbo mortgages was as follows: 29% in the
mid-Atlantic region; 27% in New England; 24% in California; and 20% in other
domestic regions.
The Corporation's one- to four-family residential mortgages increased
approximately $770 million, to $2.5 billion at December 31, 1997, from the prior
year end. This increase primarily resulted from an increase in the loans held in
the residential warehouse portfolio. Fixed-term home equity loans totaled $1.8
billion, unchanged from December 31, 1996. Home equity revolving credit line
loans were unchanged from year-end 1996 at $.6 billion. Risks on these three
portfolios are limited to payment and collateral risk, and are primarily driven
by regional economic factors. Nonperforming consumer mortgages were .62% of
total consumer mortgages at December 31, 1997, compared with .65% at December
31, 1996.
Credit card
At December 31, 1997, credit card loans totaled $931 million, a $365 million, or
28%, decrease from December 31, 1996. The decrease primarily resulted from the
transfer of $231 million of CornerStone(sm) credit card loans to an accelerated
resolution portfolio in the fourth quarter of 1997 and from credit losses. The
transfer of loans to an accelerated resolution portfolio is discussed on the
following page. The primary risk associated with credit card loans is that these
loans are unsecured and are solely dependent upon the credit-worthiness of the
borrower. The Corporation monitors this risk using both internal and external
statistical models. In addition to these models, the Corporation monitors
factors such as portfolio growth, lending policies and economic conditions.
Underwriting standards are continually evaluated and modified based upon these
factors. Credit card loans are charged off after becoming 180 days delinquent
and as such are not placed on nonperforming status prior to charge-off. The
improvement in the ratio of credit card loans 90 days or more past due to total
credit card loans of .84% at December 31, 1997, compared with 2.24% at December
31, 1996 resulted from the transfer of CornerStone(sm) loans to an accelerated
resolution portfolio. The CornerStone(sm) credit card portfolio totaled $266
million, or 29% of total credit cards at year-end 1997, compared with $631
million, or 49%, at year-end 1996. The CornerStone(sm) credit card product has
historically experienced a higher past-due ratio and a higher level of credit
losses than the Corporation's other credit card loans.
60
<PAGE> 39
COMPOSITION OF LOAN PORTFOLIO AT YEAR END (CONTINUED)
- --------------------------------------------------------------------------------
Other consumer credit
Other consumer credit, which principally consists of student loans, installment
loans, unsecured personal credit lines and margin loans, was $3,166 million at
December 31, 1997, an increase of $526 million from year-end 1996. The increase
was primarily due to a higher level of margin loans following the November 1997
acquisition of Pacific Brokerage Services, Inc. Other consumer credit loans are
both secured and unsecured and, in the case of student loans, are government
guaranteed. Approximately 52% of this portfolio at December 31, 1997, consisted
of student loans.
Lease finance assets
Lease finance assets totaled $2,639 million at December 31, 1997, an increase of
$106 million compared with year-end 1996. Lease finance assets represented 9% of
the total loan portfolio at December 31, 1997, unchanged from December 31, 1996.
Nonperforming leases were .38% of total leases at December 31, 1997, compared
with .23% at December 31, 1996.
International loans
Loans to international borrowers totaled $1,566 million at December 31, 1997, up
10% from $1,422 at year-end 1996, primarily due to increased activity with large
corporate customers and foreign banks. There were no nonperforming international
loans at December 31, 1997. In addition, the Corporation's Asian exposure was
minimal at year-end 1997. The Corporation's international lending strategy
centers around establishing relationships with large foreign firms that are
multinational in nature but also carry a significant U.S.
presence.
Assets held for accelerated resolution
In December 1997, the Corporation transferred $231 million of CornerStone(sm)
credit card loans into an accelerated resolution portfolio. In connection with
this transfer, the Corporation evaluated the carrying value of these loans and
recorded a credit loss of $65 million to reflect an estimated net realizable
value of $166 million. Interest and principal receipts, fees and loan loss
recoveries on loans in this portfolio are applied to reduce the carrying value
of the portfolio, which totaled $157 million at December 31, 1997. This
portfolio is in other assets on the Corporation's balance sheet.
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
(dollar amounts in millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $133 $ 94 $167 $151 $202
Acquired property, net of the OREO reserve 48 80 69 88 139
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets (a) $181 $174 $236 $239 $341
- -----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .46% .35% .60% .56% .83%
Total nonperforming assets as a percentage of total loans
and net acquired property .62% .63% .85% .89% 1.39%
- -----------------------------------------------------------------------------------------------------------------------------------
</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 $12 million of segregated assets
acquired in the December 1992 Meritor retail office acquisition. The
loss-sharing arrangement with the FDIC ended as of January 1, 1998. Beginning in
1998, any segregated assets will be reclassified as nonaccrual loans or OREO, as
appropriate. Additional information regarding segregated assets is presented in
note 8 of Notes to Financial Statements. Nonperforming loans include both
nonaccrual and "troubled debt" restructured loans. Past-due commercial loans are
those that are contractually past due 90 days or more but are not on nonaccrual
status because they are well secured and in the process of collection. Past-due
consumer loans, excluding consumer mortgages, are generally not
61
<PAGE> 40
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
classified as nonaccrual but are charged off on a formula basis upon reaching
various stages of delinquency. Additional information regarding the
Corporation's practices for placing assets on nonaccrual status is presented in
note 1 of Notes to Financial Statements.
At December 31, 1997, nonperforming assets totaled $181 million, an increase of
$7 million from December 31, 1996, resulting primarily from the addition of a
commercial real estate loan to nonperforming status, partially offset by a lower
level of OREO. The ratio of nonperforming assets to total loans and net acquired
property was .62% at December 31, 1997, the lowest year-end ratio in the
Corporation's history. This ratio has been lower than 1% for 14 consecutive
quarters, reflecting a strong economy and the effectiveness of the Corporation's
loan administration and workout procedures.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS (a) December 31,
(dollar amounts in millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic nonaccrual loans:
Commercial and financial $ 17 $ 21 $ 65 $ 60 $ 35
Commercial real estate 49 16 29 25 75
Consumer credit:
Consumer mortgage 52 50 61 56 61
Other consumer credit 5 1 2 - 4
Lease finance assets 10 6 - 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Total domestic nonaccrual loans 133 94 157 142 177
International nonaccrual loans - - - 1 7
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 133 94 157 143 184
- -----------------------------------------------------------------------------------------------------------------------------------
Domestic restructured loans:
Commercial and financial - - - 5 4
Commercial real estate - - 10 3 14
- -----------------------------------------------------------------------------------------------------------------------------------
Total restructured loans - - 10 8 18
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans:
Domestic 133 94 167 150 195
International - - - 1 7
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (b) 133 94 167 151 202
- -----------------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 52 86 87 116 175
Reserve for real estate acquired (9) (10) (18) (29) (37)
- -----------------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 43 76 69 87 138
Other assets acquired 5 4 - 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Total acquired property 48 80 69 88 139
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $181 $174 $236 $239 $341
- -----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective loan portfolio segments:
Domestic commercial and financial loans .16% .21% .59% .65% .43%
Domestic commercial real estate loans 3.25 1.03 2.55 1.73 5.17
Domestic consumer mortgage loans .62 .65 .68 .64 .75
Domestic lease finance assets .38 .23 - .11 .21
Total loans .46 .35 .60 .56 .83
Nonperforming assets as a percentage of
total loans and net acquired property .62 .63 .85 .89 1.39
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes $44 million, $13 million, $81 million, $58 million and $74
million, respectively, of loans with both principal and interest less than
90 days past due but placed on nonaccrual status by management discretion.
62
<PAGE> 41
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS (a) Domestic
---------------------------------------------------------
Lease
Commercial Commercial Consumer Finance Total
(in millions) & Financial Real Estate Credit Assets 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of year $21 $16 $51 $ 6 $ 94 $167
Acquired from USL/FUL - - - - - 5
Additions 68 69 44 20 201 137
Payments (b) (55) (8) (17) (5) (85) (125)
Returned to accrual status - (4) (12) (3) (19) (33)
Credit losses (17) (24) (3) (6) (50) (37)
Transfers to acquired property - - (6) (2) (8) (20)
- ------------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at end of year $17 $49 $57 $10 $133 $ 94
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes interest applied to principal and sales.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL NONPERFORMING LOAN DATA (a) December 31,
(dollar amounts in millions) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Book balance $133 $ 94
Contractual balance 191 115
Book balance as a percentage of contractual balance 70% 82%
Full-year interest receipts applied to reduce principal $ 1 $ 1
Full-year interest receipts recognized in interest revenue 8 11
- -----------------------------------------------------------------------------------------------------------------------------------
</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 determination is
presented in note 1 of Notes to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS
(in millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans at year end (a) $ 82 $ 56 $109
Average impaired loans for the year 47 86 116
Interest revenue recognized on impaired loans (b) 8 11 13
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $19 million, $13 million and $59 million of impaired loans with a
related impairment reserve of $2 million, $3 million and $22 million at
December 31, 1997, December 31, 1996 and December 31, 1995, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
Acquired property consists of OREO and other assets acquired in connection with
loan settlements. Acquired property totaled $48 million at December 31, 1997, a
decrease of $32 million compared with year-end 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY December 31,
(in millions) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OREO at beginning of year, net of the OREO reserve $76 $69
Foreclosures 12 23
Sales (47) (20)
Write-downs, losses, OREO provision and other 2 4
- ------------------------------------------------------------------------------------------------------------------------------------
OREO at end of year, net of the OREO reserve 43 76
Other acquired assets 5 4
- ------------------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve (a) $48 $80
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
63
<PAGE> 42
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation recognizes any estimated potential decline in the value of OREO
between appraisal dates on a property-by-property basis through periodic
additions to the OREO reserve. Write-downs charged against this reserve are
taken when OREO is sold at a loss or upon the receipt of appraisals which
indicate a deterioration in the fair value of the property. Activity in the
Corporation's OREO reserve for 1997, 1996 and 1995 is presented in the table
below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE)
(in millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $10 $18 $29
Write-downs on real estate acquired (1) (4) (3)
Provision - (4) (8)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 9 $10 $18
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FOREGONE INTEREST ON NONPERFORMING LOANS Year ended December 31,
(in millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contractual interest due $15 $9 $15 $15 $21
Interest revenue recognized 10 3 5 3 7
- ------------------------------------------------------------------------------------------------------------------------------------
Interest revenue foregone $ 5 $6 $10 $12 $14
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: This table includes interest revenue foregone on loans that were
nonperforming at the end of each year. Interest receipts that the
Corporation applied, for accounting purposes, to reduce principal balances
of nonaccrual loans are included in contractual interest due but not in
interest revenue recognized.
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming. All
loans in this table are well secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS December 31,
(dollar amounts in millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 38 $ 35 $34 $ 27 $25
Ratio .44% .45% .38% .31% .30%
Credit card 8 (a) 29 (a) 13 (a) 32 15
Ratio .84% 2.24% .66% 1.35% 1.04%
Student - government guaranteed 44 47 44 36 37
Ratio 2.69% 3.01% 3.11% 2.71% 3.26%
Other consumer 1 2 1 1 1
Ratio .09% .18% .09% .07% .09%
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer $ 91 $113 $92 $ 96 $78
Ratio .72% .97% .68% .71% .65%
Commercial (b) 13 10 6 10 6
- ------------------------------------------------------------------------------------------------------------------------------------
Total past-due loans $104 $123 $98 $106 $84
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes past-due CornerStone(sm) credit card loans included in an
accelerated resolution portfolio.
(b) Includes lease finance assets.
Note: Ratios are loans 90 days or more past-due as a percentage of year-end
loan balances.
64
<PAGE> 43
RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollar amounts in millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for credit losses at year end (a) $475 $525 $471 $607 $600
Reserve as a percentage of:
Total loans 1.63% 1.92% 1.70% 2.27% 2.45%
Nonperforming loans 356 556 282 403 297
Net credit losses as a
percentage of average loans .72(b) .46 .91(b) .27 .64
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes reserve for segregated assets.
(b) The ratio of net credit losses, excluding credit losses on assets held for
accelerated resolution, to average loans was .49% in 1997 and .53% in 1995.
The reserve for credit losses was $475 million at December 31, 1997, or 1.63% of
total loans, compared with $525 million, or 1.92% of total loans, at December
31, 1996. The $50 million decrease in the reserve for credit losses from
December 31, 1996, primarily resulted from credit losses on the CornerStone(sm)
credit card loans including $65 million of credit losses taken on the
CornerStone(sm) loans that were transferred to an accelerated resolution
portfolio in December 1997. These loans were transferred at their estimated net
realizable value. The excess of the carrying value over the estimated realizable
value was recorded as a credit loss.
The Corporation maintains a credit loss reserve that, in management's judgment,
is adequate to absorb future losses inherent in the loan portfolio. Management
reviews the adequacy of the reserve at least quarterly. For analytical purposes,
the reserve methodology estimates loss potential in both the commercial and
consumer loan portfolios. This methodology includes an evaluation of loss
potential on individual problem credits, as well as a portfolio review of market
concentrations, changing business trends, industry risks, and current and
anticipated specific and general economic factors that may adversely affect
collectability. Other factors considered in determining the level of the reserve
include: trends in portfolio volume, quality, maturity and composition;
historical loss experience; lending policies; new products; year 2000 issues;
the status and amount of nonperforming and past-due loans; and adequacy of
collateral. In addition, management assesses volatile factors such as interest
rates and global economic conditions that may significantly alter loss
potential. The loss reserve methodology also provides for a portion of the
reserve to act as an additional buffer against credit quality deterioration or
risk of estimation error. Although the determination of the adequacy of the
reserve is based upon these factors, the reserve is not specifically associated
with individual loans or portfolio segments.
The ratio of the loan loss reserve to nonperforming loans at December 31, 1997,
was 356%, compared with 556% at December 31, 1996. This ratio is not the result
of a target or objective, but rather is an outcome of two interrelated but
separate processes: the establishment of an appropriate loan loss reserve level
for the portfolio as a whole, including but not limited to the nonperforming
component in the portfolio; and the classification of certain assets as
nonperforming in accordance with established accounting, regulatory and
management policies. The ratio can vary significantly over time as the credit
quality characteristics of the entire loan portfolio change. This ratio also can
vary with shifts in portfolio mix. The decrease in this ratio from December 31,
1996, primarily resulted from an increase in the level of nonperforming loans.
Net credit losses totaled $201 million in 1997, an increase of $77 million from
1996. This increase reflected a higher level of net credit card losses during
the year. Net credit card credit losses totaled $172 million in 1997, or 85% of
total net credit losses. Of the $172 million of net credit card losses, $146
million were from the CornerStone(sm) portfolio, including $65 million of credit
losses on the loans transferred to an accelerated resolution portfolio. The
Corporation expects a significant reduction in net credit card losses in 1998 as
a result of the actions taken in 1997 on the CornerStone(sm) portfolio. In
addition, domestic commercial loan net credit losses increased $23 million in
1997 compared to the prior year reflecting higher commercial real estate credit
losses and lower commercial and financial loan recoveries. The level of credit
losses and recoveries relative to outstanding loans can vary from period to
period as a result of the size and number of individual credits that may require
charge-off and the effects of changing economic conditions.
65
<PAGE> 44
RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY (a)
(in millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of year $525 $471 $607 $600 $506
Net change in reserve primarily
from acquisitions 3 23 8 4 108
Credit losses:
Domestic:
Commercial and financial (16) (19) (14) (42) (54)
Commercial real estate (24) (12) (8) (16) (74)
Consumer credit:
Credit cards (116) (b) (127) (167) (b) (61) (46)
Consumer mortgage (2) (6) (6) (11) (13)
Other consumer credit (23) (21) (19) (17) (22)
Lease finance assets (6) (5) (16) - (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic (187) (190) (230) (147) (210)
International - - - (4) (6)
- ------------------------------------------------------------------------------------------------------------------------------------
Total credit losses (187) (190) (230) (151) (216)
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial 11 25 27 41 40
Commercial real estate 14 14 30 14 13
Consumer credit:
Credit cards 9 13 14 9 7
Consumer mortgage 2 4 3 4 2
Other consumer credit 7 8 8 13 10
Lease finance assets 3 1 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic 46 65 82 81 72
International 5 1 5 3 5
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 51 66 87 84 77
- ------------------------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Domestic:
Commercial and financial (5) 6 13 (1) (14)
Commercial real estate (10) 2 22 (2) (61)
Consumer credit:
Credit cards (107) (114) (153) (52) (39)
Consumer mortgage - (2) (3) (7) (11)
Other consumer credit (16) (13) (11) (4) (12)
Lease finance assets (3) (4) (16) - (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic (141) (125) (148) (66) (138)
International 5 1 5 (1) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net credit losses (136) (124) (143) (67) (139)
Credit losses on credit card assets
held for accelerated resolution (65) - (106) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total net credit losses (201) (124) (249) (67) (139)
Provision for credit losses 148 155 105 70 125
- ------------------------------------------------------------------------------------------------------------------------------------
Reserve at end of year $475 $525 $471 $607 $600
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the reserve and net credit losses on segregated assets.
(b) Excludes $65 million in 1997 and $106 million in 1995 of credit losses
related to loans transferred to an accelerated resolution portfolio.
66
<PAGE> 45
FOURTH QUARTER REVIEW
- --------------------------------------------------------------------------------
The Corporation reported net income applicable to common stock of $191 million
and diluted earnings per common share of $.75 in the fourth quarter of 1997.
These results compare with fourth quarter 1996 net income applicable to common
stock of $179 million and diluted earnings per common share of $.67.
Annualized return on common shareholders' equity and return on assets were 21.2%
and 1.75%, respectively, in the fourth quarter of 1997, compared with 20.9% and
1.80%, respectively, in the fourth quarter of 1996. Annualized return on
tangible common shareholders' equity and return on tangible assets were 38.3%
and 2.00%, respectively, in the fourth quarter of 1997, compared with 36.6% and
2.06%, respectively, in the fourth quarter of 1996. Diluted tangible earnings
per common share in the fourth quarter of 1997 was $.83, compared with $.76 in
the fourth quarter of 1996.
Net interest revenue totaled $361 million in the fourth quarter of 1997, down
from $371 million in the fourth quarter of 1996. The net interest margin on a
taxable equivalent basis was 4.07% in the fourth quarter of 1997, a decrease of
13 basis points from 4.20% in the fourth quarter of 1996. The decrease
principally resulted from the funding costs related to the repurchase of common
stock, loan securitizations and loan sales primarily offset by the use of the
proceeds from the $1 billion of trust-preferred securities issued in December
1996. Excluding the effect of the loan securitizations and the common equity
repurchases, net interest revenue and the net interest margin for the fourth
quarter of 1997 would have been approximately $420 million and 4.46%, compared
with approximately $419 million and 4.49% in the fourth quarter of 1996.
Credit quality expense was $61 million in the fourth quarter of 1997, a decrease
of $16 million compared with the prior-year period. This decrease reflected a $9
million increase in the net revenue from acquired property and a $7 million
decrease in the provision for credit losses. Net credit losses were $106 million
in the fourth quarter of 1997, compared with $36 million in the fourth quarter
of 1996. The increase resulted from a $52 million increase in credit card net
credit losses due to losses in the CornerStone(sm) portfolio associated with the
transfer of loans to an accelerated resolution portfolio, and an $18 million
increase in commercial real estate net credit losses, primarily from one
commercial real estate loan.
Fee revenue was $707 million in the fourth quarter of 1997, up $141 million,
compared with $566 million in the fourth quarter of 1996. The increase was
primarily attributable to higher trust and investment fees resulting, in part,
from the Buck acquisition in July 1997, new business and an increase in the
market value of assets under management. Excluding the Buck acquisition and the
$43 million gain on the sale of the corporate trust business, both in 1997, and
the $57 million gain on the sale of the AAA credit card portfolio in 1996, fee
revenue increased $79 million, or 16%, compared with the prior-year period.
Operating expense before net revenue from acquired property and trust-preferred
securities expense for the fourth quarter of 1997 was $722 million, up $163
million from $559 million in the fourth quarter of 1996. The increase primarily
resulted from the Buck acquisition, business growth, business development and
reengineering initiatives, and higher equipment expense.
67
<PAGE> 46
SELECTED QUARTERLY DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended,
1997 1996
--------------------------------------------- ---------------------------------------
(dollar amounts in millions, DEC. SEPT. JUNE MARCH Dec. Sept. June March
except per share amounts) 31 30 30 31 31 30 30 31
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY CONSOLIDATED
INCOME STATEMENT
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest revenue $ 361 $ 366 $ 370 $ 370 $ 371 $ 372 $ 372 $ 363
Provision for credit losses 73 25 25 25 80 25 25 25
Fee revenue 707 635 540 536 566 476 474 503
Gains on sale of securities - - - - 3 - - 1
Operating expense 729 670 587 582 559 536 540 560
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 266 306 298 299 301 287 281 282
Provision for income taxes 71 111 108 108 107 106 102 103
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 195 195 190 191 194 181 179 179
Dividends on preferred stock 4 4 4 9 15 9 10 10
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO
COMMON STOCK $ 191 $ 191 $ 186 $ 182 $ 179 $ 172 $ 169 $ 169
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE: (a)
BASIC $ .76 $ .75 $ .73 $ .70 $ .69 $ .67 $ .64 $ .63
DILUTED $ .75 $ .73 $ .71 $ .69 $ .67 $ .66 $ .63 $ .62
Annualized return on common
shareholders' equity 21.2% 21.6% 21.9% 21.2% 20.9% 20.6% 20.4% 19.7%
Annualized return on assets 1.75 1.81 1.79 1.83 1.80 1.71 1.70 1.76
- ---------------------------------------------------------------------------------------------------------------------------------
QUARTERLY AVERAGE BALANCES
- ---------------------------------------------------------------------------------------------------------------------------------
Money market investments $ 1,397 $ 1,231 $ 1,081 $ 1,032 $ 1,272 $ 1,573 $ 1,387 $ 1,290
Trading account securities 159 171 210 161 96 169 181 138
Securities 5,293 5,469 5,600 6,018 6,198 6,538 6,658 5,339
Loans 28,476 27,596 27,806 27,404 27,900 27,170 26,798 27,058
Total interest-earning assets 35,325 34,467 34,697 34,615 35,466 35,450 35,024 33,825
Total assets 44,266 42,879 42,413 42,187 42,636 42,461 42,096 40,848
Deposits 31,085 30,349 30,113 30,280 31,569 31,542 30,949 29,274
Notes and debentures 2,781 2,832 2,716 2,517 2,519 2,102 1,971 1,554
Trust-preferred securities 990 990 990 990 129 - - -
Common shareholders' equity 3,573 3,520 3,393 3,490 3,410 3,327 3,327 3,459
Total shareholders' equity 3,766 3,713 3,586 3,735 3,820 3,762 3,762 3,894
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin (FTE) 4.07% 4.24% 4.29% 4.37% 4.20% 4.20% 4.30% 4.35%
- ---------------------------------------------------------------------------------------------------------------------------------
TANGIBLE OPERATING RESULTS (b)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted tangible earnings
per common share $ .83 $ .80 $ .79 $ .77 $ .76 $ .72 $ .70 $ .69
Tangible net income applicable to
common stock 212 211 206 203 200 190 187 188
Annualized return on tangible common
shareholders' equity 38.3% 37.6% 37.7% 36.3% 36.6% 31.2% 31.3% 30.1%
Annualized return on tangible assets 2.00 2.05 2.04 2.09 2.06 1.92 1.92 1.99
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA (dollars per share) (c)
- ---------------------------------------------------------------------------------------------------------------------------------
Market price range: (a)
High $64 13/16 $57 3/4 $47 1/4 $43 1/8 $ 37 3/8 $30 3/8 $ 30 1/16 $29 1/4
Low 47 1/8 44 7/8 35 3/4 34 1/2 29 15/16 25 1/4 25 13/16 24 1/8
Average 55.70 50.12 41.95 38.81 33.57 27.89 27.77 26.77
Close 60 5/8 54 3/4 45 1/8 36 3/8 35 1/2 29 5/8 28 1/2 27 5/8
Dividends (a) .33 .33 .33 .30 .30 .30 .30 .28
Market capitalization $ 15,386 $13,938 $11,353 $ 9,372 $ 9,134 $ 7,668 $ 7,414 $ 7,317
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Earnings per common share are presented in accordance with the
requirements of FAS No. 128, "Earnings per Share," which was adopted by
the Corporation at year-end 1997. Prior-period amounts have been
restated. In addition, earnings per common share, market price range and
dividends were also restated to reflect the two-for-one common stock
split distributed on June 2, 1997.
(b) See page 31 for the definition of tangible operating results.
(c) At December 31, 1997, there were 23,948 shareholders registered with the
Corporation's stock transfer agent, compared with 23,856 at year-end 1996
and 23,755 at year-end 1995. In addition, there were approximately
16,049, 15,271 and 15,651 Mellon employees at December 31, 1997, 1996 and
1995, respectively, who participated in the Corporation's 401(k)
Retirement Savings Plan. All shares of Mellon Bank Corporation common
stock held by the plans for its participants are registered in the name
of Mellon Bank, N.A. as trustee.
68
<PAGE> 47
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (AND ITS SUBSIDIARIES)
- --------------------------------------------------------------------------------
Year ended December 31,
(dollar amounts in millions, except per share amounts) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE Interest and fees on loans (loan fees of $81, $96 and $79) $2,268 $2,253 $2,425
Federal funds sold and securities under resale agreements 30 30 34
Interest-bearing deposits with banks 26 36 36
Other money market investments 6 7 2
Trading account securities 9 7 19
Securities:
U.S. Treasury and agency securities 367 392 305
Obligation of states and political subdivisions 2 2 3
Other 8 12 14
------------------------------------------------------------------------------------------------------
Total interest revenue 2,716 2,739 2,838
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE Deposits in domestic offices 749 709 663
Deposits in foreign offices 129 194 226
Federal funds purchased and securities under 77 94 125
repurchase agreements
Short-term bank notes 8 29 50
Other short-term borrowings 97 92 109
Notes and debentures 189 143 117
------------------------------------------------------------------------------------------------------
Total interest expense 1,249 1,261 1,290
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE Net interest revenue 1,467 1,478 1,548
Provision for credit losses 148 155 105
------------------------------------------------------------------------------------------------------
Net interest revenue after provision for losses 1,319 1,323 1,443
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE Trust and investment fees 1,311 994 906
Cash management and deposit transaction charges 242 211 191
Mortgage servicing fees 213 180 122
Foreign currency and securities trading revenue 118 80 91
Credit card fees 97 120 90
Information services fees 42 50 48
Gain on sale of corporate trust business 43 - -
Gain on sale of credit card portfolio - 57 -
Other income 352 327 222
------------------------------------------------------------------------------------------------------
Total fee revenue 2,418 2,019 1,670
Gains on sales of securities - 4 6
------------------------------------------------------------------------------------------------------
Total noninterest revenue 2,418 2,023 1,676
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE Staff expense 1,242 1,055 957
Net occupancy expense 225 205 205
Professional, legal and other purchased services 219 195 186
Equipment expense 175 145 143
Business development 148 137 136
Amortization of mortgage servicing assets and
purchased credit card relationships 118 107 68
Amortization of goodwill and other intangible assets 105 100 96
Communications expense 102 96 86
Other expense 175 165 170
Trust-preferred securities expense 78 3 -
Net revenue from acquired property (19) (13) (20)
-------------------------------------------------------------------------------------------------------
Total operating expense 2,568 2,195 2,027
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME Income before income taxes 1,169 1,151 1,092
Provision for income taxes 398 418 401
------------------------------------------------------------------------------------------------------
NET INCOME 771 733 691
Dividends on preferred stock 21 44 39
------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 750 $ 689 $ 652
- ---------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE (a) Basic net income $ 2.94 $ 2.63 $ 2.27
Diluted net income $ 2.88 $ 2.58 $ 2.25
------------------------------------------------------------------------------------------------------
</TABLE>
(a) Presented in accordance with the requirements of FAS No. 128, "Earnings
per Share," which was adopted by the Corporation at year-end 1997.
Prior-period amounts were restated. Prior-period amounts also were
restated to reflect the two-for-one common stock split distributed on
June 2, 1997.
See accompanying Notes to Financial Statements.
69
<PAGE> 48
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (AND ITS SUBSIDIARIES)
- --------------------------------------------------------------------------------
December 31,
(dollar amounts in millions) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 3,650 $ 2,846
Interest-bearing deposits with banks 553 419
Federal funds sold and securities under resale agreements 383 460
Other money market investments 72 113
Trading account securities 75 84
Securities available for sale 2,767 4,111
Investment securities (approximate fair value of $2,118 and $2,365) 2,082 2,375
Loans, net of unearned discount of $48 and $57 29,142 27,393
Reserve for credit losses (475) (525)
------- -------
Net loans 28,667 26,868
Customers' acceptance liability 182 238
Premises and equipment 573 569
Goodwill and other intangibles 1,425 1,238
Mortgage servicing assets
and purchased credit card relationships 1,075 774
Acquired property, net of reserves of $9 and $10 48 80
Other assets 3,340 2,421
------------------------------------------------------------------------------------------------------
Total assets $44,892 $42,596
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES Noninterest-bearing deposits in domestic offices $ 7,975 $ 8,692
Interest-bearing deposits in domestic offices 19,954 19,965
Interest-bearing deposits in foreign offices 3,376 2,717
------------------------------------------------------------------------------------------------------
Total deposits 31,305 31,374
Federal funds purchased and securities under
repurchase agreements 1,997 742
U.S. Treasury tax and loan demand notes 447 474
Term federal funds purchased 625 481
Short-term bank notes 330 135
Commercial paper 67 122
Other funds borrowed 278 293
Acceptances outstanding 182 238
Other liabilities 2,252 1,483
Notes and debentures (with original maturities over one year) 2,573 2,518
------------------------------------------------------------------------------------------------------
Total liabilities 40,056 37,860
- ---------------------------------------------------------------------------------------------------------------------------------
TRUST-PREFERRED Guaranteed preferred beneficial interests in Corporation's
SECURITIES junior subordinated deferrable interest debentures 991 990
- ---------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' Preferred stock 193 290
EQUITY Common shareholders' equity:
Common stock--$.50 par value
Authorized--400,000,000 shares
Issued--294,330,960 (a); and 147,165,480 shares 147 74
Additional paid-in capital 1,818 1,866
Retained earnings 2,872 2,480
Net unrealized gain (loss) on assets available for sale, net of tax 33 (1)
Treasury stock of 40,545,114 (a) and 18,518,290 shares at cost (1,218) (963)
-------------------------------------------------------------------------------------------------------
Total common shareholders' equity 3,652 3,456
------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,845 3,746
------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and shareholders' equity $44,892 $42,596
------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the two-for-one common stock split distributed on June 2, 1997.
See accompanying Notes to Financial Statements.
70
<PAGE> 49
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (CONSOLIDATED AND PARENT CORPORATION)
- --------------------------------------------------------------------------------
Net unrealized gain Total
Additional (loss) on assets share-
Preferred Common paid-in Retained available for sale Treasury holders'
(in millions) stock stock capital earnings Warrants (net of tax) stock equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 435 $ 74 $ 1,851 $1,780 $ 37 $(55) $ -- $4,122
Net income 691 691
Dividends on common stock
at $1.00 per share (288) (288)
Dividends on preferred stock (39) (39)
Common stock issued under dividend
reinvestment and common stock
purchase plan 1 13 14
Repurchase of common stock - related
to the 1993 TBC acquisition (159) (159)
Repurchase of warrants (17) (37) (54)
Repurchase of common stock for
employee benefit purposes (235) (235)
Exercise of stock options 12 (28) 78 62
Repurchase of common stock - other (184) (184)
Net unrealized gain on assets available
for sale, net of tax 73 73
Other 3 2 17 22
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 435 $ 74 $ 1,850 $2,118 $-- $ 18 $ (470) $4,025
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 733 733
Dividends on common stock
at $1.18 per share (310) (310)
Dividends on preferred stock (44) (44)
Common stock issued under dividend
reinvestment and common stock
purchase plan 4 14 18
Series I preferred stock redemption (145) (145)
Repurchase of common stock for
employee benefit purposes (192) (192)
Exercise of stock options 10 (17) 70 63
Repurchase of common stock - other (404) (404)
Net unrealized loss on assets available
for sale, net of tax (19) (19)
Other 2 19 21
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 290 $ 74 $ 1,866 $2,480 $-- $ (1) $ (963) $3,746
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME 771 771
DIVIDENDS ON COMMON STOCK
AT $1.29 PER SHARE (330) (330)
DIVIDENDS ON PREFERRED STOCK (21) (21)
COMMON STOCK ISSUED UNDER DIVIDEND
REINVESTMENT AND COMMON STOCK
PURCHASE PLAN 8 14 22
COMMON STOCK ISSUED IN CONNECTION WITH
THE BUCK ACQUISITION 143 143
SERIES J PREFERRED STOCK REDEMPTION (97) (97)
EXERCISE OF STOCK OPTIONS 20 (22) 97 95
REPURCHASE OF COMMON STOCK - OTHER (534) (534)
NET UNREALIZED GAIN ON ASSETS AVAILABLE
FOR SALE, NET OF TAX 34 34
ADDITIONAL COMMON STOCK ISSUED
FOR STOCK SPLIT 73 (73) --
OTHER (3) (6) 25 16
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 193 $ 147 $ 1,818 $2,872 $-- $ 33 $(1,218) $3,845
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements
71
<PAGE> 50
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM Net income $ 771 $ 733 $ 691
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill and other intangible assets 105 100 96
Amortization of mortgage servicing assets
and purchased credit card relationships 118 107 68
Depreciation and other amortization 108 105 107
Deferred income tax expense 42 95 167
Provision for credit losses 148 155 105
Net gains on dispositions of acquired property (21) (11) (12)
Net (increase) decrease in accrued interest receivable (7) 9 (45)
Net decrease (increase) in trading account securities 19 (15) 12
Net (decrease) increase in accrued interest payable,
net of amounts prepaid (27) 15 35
Net (increase) decrease in residential mortgages held for sale (929) 340 (367)
Net decrease (increase) in other operating activities 190 (270) (204)
-------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 517 1,363 653
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Net (increase) decrease in term deposits and other money
INVESTING ACTIVITIES market investments (93) 103 (158)
Net decrease (increase) in federal funds sold and securities
under resale agreements 249 (235) 158
Purchases of securities available for sale (6,373) (14,768) (5,070)
Proceeds from sales of securities available for sale 2,790 1,453 1,845
Proceeds from maturities of securities available for sale 4,980 12,176 2,898
Purchases of investment securities (26) (219) (175)
Proceeds from maturities of investment securities 317 360 307
Net decrease (increase) in credit card receivables 27 (387) (600)
Sale of credit card portfolio - 886 -
Net principal disbursed on loans to customers (1,914) (884) (1,662)
Loan securitizations 125 1,150 950
Loan portfolio purchases (55) (254) (302)
Proceeds from sales of loan portfolios 966 907 815
Purchases of premises and equipment (111) (125) (101)
Proceeds from sales of acquired property 69 31 49
Cash paid in purchase of Buck (42) - -
Cash paid in purchase of Pacific Brokerage Services, Inc. (137) - -
Cash paid in purchase of USL - (1,688) -
Cash paid in purchase of FUL - (136) -
Cash paid in purchase of Metmor Financial, Inc.,
including warehouse loans purchased of $166
million, net of
cash received and escrow deposits - - (130)
Increase in mortgage servicing assets and purchased credit
card relationships (323) (199) (398)
Net increase in other investing activities (261) (111) (137)
-------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 188 (1,940) (1,711)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-continued-
72
<PAGE> 51
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM Net increase (decrease) in transaction and savings deposits 1,298 (695) 955
FINANCING ACTIVITIES Net (decrease) increase in customer term deposits (1,848) 2,808 500
Net increase (decrease) in federal funds purchased and
securities under repurchase agreements 1,255 (849) (432)
Net increase (decrease) in short-term bank notes 195 (922) 857
Net increase (decrease) in term federal funds purchased 144 (424) 572
Net (decrease) increase in U.S. Treasury tax and loan demand notes (27) 184 (277)
Net (decrease) increase in commercial paper (55) (162) 106
Net proceeds from issuance of Guaranteed preferred
beneficial interests in Corporation's junior subordinated
deferrable interest debentures - 990 -
Repurchase and repayments of longer-term debt (412) (24) (354)
Net proceeds from issuance of longer-term debt 465 1,099 227
Redemption of preferred stock (97) (145) (155)
Net proceeds from issuance of common stock 75 55 58
Dividends paid on common and preferred stock (352) (354) (346)
Repurchase of common stock for employee benefit purposes - (192) (235)
Repurchase of common stock - other (534) (404) (184)
Repurchase of common stock and warrants related to
the 1993 acquisition of TBC - - (213)
Net (decrease) increase in other financing activities (37) 101 17
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 70 1,066 1,096
Effect of foreign currency exchange rates 29 15 19
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND Net increase in cash and due from banks 804 504 57
DUE FROM BANKS Cash and due from banks at beginning of year 2,846 2,342 2,285
------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 3,650 $ 2,846 $ 2,342
------------------------------------------------------------------------------------------------------
SUPPLEMENTAL Interest paid $ 1,276 $ 1,246 $ 1,255
DISCLOSURES Net income taxes paid 364 283 182
------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
Basis of presentation
The accounting and financial reporting policies of Mellon Bank Corporation (the
Corporation), a multibank holding company, conform to generally accepted
accounting principles (GAAP) and prevailing industry practices. The preparation
of financial statements requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and the
disclosure of contingent assets and liabilities and the reported amounts of
related revenue and expense. Actual results could differ from these estimates.
The consolidated financial statements of the Corporation include the accounts of
the Corporation and its majority-owned subsidiaries. Investments in companies
20% to 50% owned are carried on the equity basis. Investments in companies less
than 20% owned are carried at cost. Intracorporate balances and transactions are
not reflected in the consolidated financial statements. The income statement
includes results of acquired subsidiaries and businesses accounted for under the
purchase method of accounting from the dates of acquisition. Securities and
other property held in a fiduciary or agency capacity are not included in the
balance sheet since these are not assets or liabilities of the Corporation.
73
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
The parent Corporation financial statements in note 27 include the accounts of
the Corporation, those of a wholly owned financing subsidiary that functions as
a financing entity for the Corporation and its subsidiaries by issuing
commercial paper and other debt guaranteed by the Corporation and those of the
business trusts discussed in note 13 on page 84. Financial data for the
Corporation, the financing subsidiary and the business trusts are combined for
financial reporting because of the limited function of the financing subsidiary
and the business trusts, and the unconditional guarantee by the Corporation of
their obligations.
Nature of operations
Mellon Bank Corporation is a multibank holding company whose principal wholly
owned subsidiaries are Mellon Bank, N.A., The Boston Company, Inc., Mellon Bank
(DE) National Association and Buck Consultants, Inc. The Dreyfus Corporation,
one of the nation's largest mutual fund management companies, is a wholly owned
subsidiary of Mellon Bank, N.A. The Corporation's banking subsidiaries primarily
engage in retail financial services, commercial banking, mortgage banking, trust
and investment management services, lease financing and mutual funds activities.
Buck Consultants, Inc., a leading global benefits consulting firm, provides a
broad array of pension and health and welfare actuarial services, employee
benefit, compensation and human resources consulting and administrative services
and total benefits outsourcing. While the Corporation's major subsidiaries are
headquartered in the northeast and mid-Atlantic regions, most of its products
and services are offered nationwide and many are offered globally. The
Corporation's customer base is well diversified and primarily domestic.
Trading account securities, securities available for sale and investment
securities
When purchased, securities are classified in the trading account securities
portfolio, the securities available for sale portfolio or the investment
securities portfolio. Securities are classified as trading account securities
when the intent is profit maximization through market appreciation and resale.
Securities are classified as available for sale when management intends to hold
the securities for an indefinite period of time or when the securities may be
used for tactical asset/liability purposes and may be sold from time to time to
effectively manage interest rate exposure, prepayment risk and liquidity needs.
Securities are classified as investment securities when management intends to
hold these securities until maturity.
Trading account securities, including off-balance-sheet instruments, are stated
at fair value. Trading revenue includes both realized and unrealized gains and
losses. The liability incurred on short-sale transactions, representing the
obligation to deliver securities, is included in other funds borrowed at fair
value.
Securities available for sale are stated at fair value. Unrealized gains or
losses on assets classified as available for sale, net of tax, are recorded as
an addition to or deduction from shareholders' equity. Investment securities are
stated at cost, adjusted for amortization of premium and accretion of discount
on a level yield basis. Gains (losses) on sales of securities available for sale
are reported in the income statement. The cost of securities sold is determined
on a specific identification basis.
Loans
Loans are reported net of any unearned discount. Interest revenue on
nondiscounted loans is recognized based on the principal amount outstanding.
Interest revenue on discounted loans is recognized based on methods that
approximate a level yield. Loan origination and commitment fees, as well as
certain direct loan origination and commitment costs, are deferred and amortized
as a yield adjustment over the lives of the related loans. Deferred fees and
costs are netted against outstanding loan balances.
74
<PAGE> 53
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Unearned revenue on direct financing leases is accreted over the lives of the
leases in decreasing amounts to provide a constant rate of return on the net
investment in the leases. Revenue on leveraged leases is recognized on a basis
to achieve a constant yield on the outstanding investment in the lease, net of
the related deferred tax liability, in the years in which the net investment is
positive. Gains on sales of lease residuals are included in other noninterest
revenue.
Certain loans, primarily residential mortgages in the warehouse portfolio, are
held for sale. Such loans are carried at the lower of aggregate cost or market
value. Losses, if any, are recorded in noninterest income.
Commercial loans, including commercial leases, generally are placed on
nonaccrual status when either principal or interest is past due 90 days or more,
unless the loan is well secured and in the process of collection. Management
also places commercial loans on nonaccrual status when the collection of
principal or interest becomes doubtful. Residential mortgage loans generally are
placed on nonaccrual status when, in management's judgment, collection is in
doubt or the loans have outstanding balances of $250,000 or greater and are 90
days or more delinquent, or have balances of less than $250,000 and are
delinquent 12 months or more. Consumer loans, other than residential mortgages,
and certain secured commercial loans are charged off upon reaching various
stages of delinquency depending upon the loan type. When a loan is placed on
nonaccrual status, previously accrued and uncollected interest is reversed
against current period interest revenue. Interest receipts on nonaccrual and
impaired loans are recognized as interest revenue or are applied to principal
when management believes the ultimate collectability of principal is in doubt.
Nonaccrual loans generally are restored to an accrual basis when principal and
interest payments become current or when the loan becomes well secured and is in
the process of collection.
A loan is considered to be impaired, as defined by FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," when it is probable that the Corporation
will be unable to collect all principal and interest amounts due according to
the contractual terms of the loan agreement. The Corporation tests loans covered
under FAS No. 114 for impairment if they are on nonaccrual status or have been
restructured. Consumer credit nonaccrual loans are not tested for impairment
because they are included in large groups of smaller-balance homogeneous loans
that, by definition along with leases, are excluded from the scope of FAS No.
114. Impaired loans are required to be measured based upon the present value of
expected future cash flows, discounted at the loan's initial effective interest
rate, or at the loan's market price or fair value of the collateral if the loan
is collateral dependent. If the loan valuation is less than the recorded value
of the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on the adequacy of
the reserve for credit losses. Impairment reserves are not needed when interest
payments have been applied to reduce principal, or when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.
Loan securitizations
The amount of interest and fee revenue in excess of both interest paid to
certificate holders and credit losses is recognized monthly as servicing
revenue. The servicing revenue from the home equity and insurance premium
finance receivables is reported as "other fee revenue." The servicing revenue
from the credit card securitization is reported in "credit card fee revenue."
Reserve for credit losses
The reserve for credit losses is maintained to absorb future losses inherent in
the credit portfolio based on management's judgment. Factors considered in
determining the level of the reserve include: trends in portfolio volume,
quality, maturity and composition; industry concentrations; lending policies;
new products; adequacy of collateral; historical loss experience; the status and
amount of nonperforming and past-due loans; specific known risks; and current,
as well as anticipated, specific and general economic factors that may affect
certain borrowers. Credit losses are charged against the reserve; recoveries are
added to the reserve.
75
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Acquired property
Property acquired in connection with loan settlements, including real estate
acquired, is stated at the lower of estimated fair value less estimated costs to
sell or the carrying amount of the loan. A reserve for real estate acquired is
maintained on a property-by-property basis to recognize estimated potential
declines in value that might occur between appraisal dates. Provisions for the
estimated potential decrease in fair value between annual appraisals, net gains
on the sale of real estate acquired and net direct operating expense
attributable to these assets are included in net revenue from acquired property.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated over the estimated
useful lives of the assets, limited in the case of leasehold improvements to the
lease term, using the straight-line method.
Goodwill, other identified intangibles, mortgage servicing assets and purchased
credit card relationships
Intangible assets are amortized using straight-line and accelerated methods over
the remaining estimated benefit periods which approximated, on a
weighted-average basis at December 31, 1997, 18 years for goodwill, three years
for core deposit intangibles, five years for credit card relationships and 15
years for all other intangible assets except mortgage servicing assets.
Intangible assets are reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the asset.
Originated mortgage servicing rights (MSRs) are recorded by allocating total
costs incurred between the loan and servicing rights based on their relative
fair values. Purchased MSRs are recorded at cost. MSRs are amortized in
proportion to the estimated servicing income over the estimated life of the
servicing portfolio. In 1997 and 1996, $433 million and $285 million,
respectively, of MSRs were capitalized in connection with both mortgage
servicing portfolio purchases and loan originations. The carrying amount of MSRs
was $1.1 billion at December 31, 1997, with an estimated fair value of $1.2
billion, compared with a carrying amount and estimated fair value of $745
million and $870 million, respectively, at December 31, 1996. The carrying
amount of MSRs is measured for impairment each quarter based on the fair value
of the MSRs. Quoted market prices are used, whenever available, as the basis for
measuring the fair value of servicing rights. When quoted market prices are not
available, fair values are based upon the present value of estimated expected
future cash flows using a discount rate commensurate with the risks involved.
For impairment measurement purposes, all mortgage servicing rights are first
stratified by loan type and then by interest rates within the loan type. If the
carrying value of an individual stratum were to exceed its fair value, a
valuation allowance would be established. No valuation allowances were recorded
at December 31, 1997 and 1996, as the carrying values of the various
stratifications were less than their respective fair value. On a
weighted-average basis at December 31, 1997, the serviced mortgage loan
portfolio had an interest rate of approximately 8.10%.
Assets held for accelerated resolution
During the fourth quarters of 1995 and 1997, the Corporation segregated certain
loans from the CornerStonesm credit card portfolio into an accelerated
resolution portfolio. The excess of the carrying value of these loans over the
estimated net realizable value was recorded as a credit loss. Interest and
principal receipts, fees and loan loss recoveries on loans in this portfolio are
applied to reduce the net carrying value. This portfolio is reported in other
assets in the balance sheet.
76
<PAGE> 55
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Corporation files a consolidated U.S. income tax return. Deferred taxes are
recognized for the expected future tax consequences of existing differences
between the financial reporting and tax reporting bases of assets and
liabilities using enacted tax laws and rates.
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars at the rate of exchange on the balance sheet date. Revenue and expense
accounts are translated monthly at month-end rates of exchange. Net foreign
currency positions are valued at rates of exchange--spot or future, as
appropriate--prevailing at the end of the period, and resulting gains or losses
are included in the income statement. Translation gains and losses on
investments in foreign entities with functional currencies that are not the U.S.
dollar are included in shareholders' equity.
Fee revenue
Trust and investment fees are reported net of fees waived and expense
reimbursements to certain mutual funds. Fees on standby letters of credit are
recognized over the commitment term, while fees on commercial letters of credit,
because of their short-term nature, are recognized when received. Fees on
standby and commercial letters of credit are recorded in fee revenue. Fees for
banking and other services generally are recognized over the periods the related
services are provided.
Off-balance-sheet instruments used for risk management purposes
The Corporation enters into interest rate swaps, interest rate caps and floors,
financial futures and financial options primarily to manage its sensitivity to
interest rate risk. This is accomplished by using these instruments to offset
the inherent price or interest rate risk of specific on-balance-sheet assets or
liabilities. The Corporation uses interest rate floor contracts and interest
rate swap contracts to hedge against value impairment of its MSRs resulting from
a decrease in interest rates. The Corporation also uses total return swaps to
offset the inherent market value risk of investments in startup mutual funds.
All of these instruments are designated as hedges on the trade date and are
highly correlated with the financial instrument being hedged. High correlation
is achieved if the following conditions hold true: The hedge instrument and the
financial instrument being hedged are both of the same currency and fixed rate;
the hedge instrument is structurally similar to the instrument being hedged; or
a mathematical correlation analysis is performed and correlation has been found
to be high. Hedge correlation of interest rate or market value risk management
positions is reviewed periodically. If a hedged instrument is sold or matures,
or correlation criteria are no longer met, the risk management position is no
longer accounted for as a hedge. Under these circumstances, the accumulated
change in market value of the hedge is recognized in current income to the
extent that the hedge results have not been offset by the effects of interest
rate or price changes of the hedged item.
Tactical asset/liability management considerations require the Corporation to
periodically terminate hedge instruments. Any deferred gain or loss resulting
from the termination is amortized to income/expense of the corresponding hedged
instrument over the remaining period of the original hedge or hedged instrument.
The Corporation also enters into off-balance-sheet contracts to hedge
anticipated transactions. If it is determined that an anticipated transaction
that has been hedged will not occur, the results of the hedge will be recognized
currently in the income category where the original anticipated transaction was
to be reported.
77
<PAGE> 56
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Interest revenue or interest expense on hedge transactions is accrued over the
term of the agreement as an adjustment to the yield or cost of the related asset
or liability. Transaction fees are deferred and amortized to interest revenue or
interest expense over the term of the agreement. Realized gains and losses are
deferred and amortized over the life of the hedged transaction as interest
revenue or interest expense, and any unamortized amounts are recognized as
income or loss at the time of disposition of the assets or liabilities being
hedged. Amounts payable to or receivable from counterparties are included in
other liabilities or other assets. The fair values of interest rate swaps, caps
and floors, financial futures and financial options used for risk management
purposes are not recognized in the financial statements. Realized gains/losses
and cash settlements on instruments associated with MSRs are deferred and
included as an adjustment to the carrying value of the MSRs. These amounts are
amortized over the same period as the MSRs. Changes in fair value of total
return swaps are recognized in net unrealized gain/loss on assets available for
sale within shareholders' equity.
Off-balance-sheet instruments used for trading activities
The Corporation enters into foreign exchange contracts, futures and forward
contracts, currency and interest rate option contracts, interest rate swaps, and
interest rate caps and floors to accommodate customers and for its proprietary
trading activities. Realized and unrealized changes in the fair value of these
instruments are recognized in the income statement in foreign currency and
securities trading revenue in the period in which the changes occur. Interest
revenue and expense on instruments held for trading activities are included in
the income statement as part of net interest revenue. The fair value of
contracts in gain positions is reported on the balance sheet in other assets and
the fair value of contracts in loss positions is reported in other liabilities.
Statement of Cash Flows
For the purpose of reporting cash flows, the Corporation has defined cash and
cash equivalents as cash and due from banks. Cash flows from assets and
liabilities that have an original maturity date of three months or less
generally are reported on a net basis. Cash flows from assets and liabilities
that have an original maturity date greater than three months generally are
reported on a gross basis. Cash flows from hedging activities are classified in
the same category as the items hedged.
2. CASH AND DUE FROM BANKS
Cash and due from banks includes reserve balances that the Corporation's
subsidiary banks are required to maintain with a Federal Reserve bank. These
required reserves are based primarily on deposits outstanding and were $405
million at December 31, 1997, and $347 million at December 31, 1996. These
balances averaged $336 million in 1997 and $485 million in 1996.
3. SECURITIES
Gross realized gains on the sale of securities available for sale were $2
million, $4 million and $7 million in 1997, 1996 and 1995, respectively. Gross
realized losses on the sale of securities available for sale were $2 million,
less than $1 million and $1 million in 1997, 1996 and 1995, respectively.
After-tax net gains on the sale of securities were less than $1 million, $3
million and $4 million in 1997, 1996 and 1995, respectively. Proceeds from the
sale of securities available for sale were $2.8 billion, $1.5 billion and $1.8
billion in 1997, 1996 and 1995, respectively. There were no sales of investment
securities in 1997, 1996 and 1995.
Securities available for sale, investment securities, trading account securities
and loans with book values of $3.2 billion at December 31, 1997, and $4.5
billion at December 31, 1996, were required to be pledged to secure public and
trust deposits, repurchase agreements and for other purposes.
78
<PAGE> 57
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 December 31, 1996
----------------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 175 $ - $ - $ 175 $ 395 $ - $ - $ 395
U.S. agency mortgage-backed 2,001 41 - 2,042 1,945 16 24 1,937
Other U.S. agency 509 1 - 510 1,676 2 - 1,678
- -----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and
agency securities 2,685 42 - 2,727 4,016 18 24 4,010
Obligations of states and
political subdivisions 26 - - 26 49 - - 49
Other mortgage-backed 3 - - 3 4 - - 4
Other securities 11 - - 11 42 6 - 48
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $2,725 $42 $ - $2,767 $4,111 $24 $24 $4,111
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------
Contractual maturities at December 31, 1997
Obligations Total
U.S. agency Total of states Other securities
(dollar amounts U.S. mortgage- Other U.S. Treasury and political mortgage- Other available
in millions) Treasury backed U.S. agency and agency subdivisions backed securities for sale
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within one year
Amortized cost $140 $ - $ - $ 140 $ 7 $ - $ 2 $ 149
Fair value 140 - - 140 7 - 2 149
Yield 5.33% - - 5.33% 7.05% - 7.30% 5.43%
1 to 5 years
Amortized cost 35 - 309 344 11 - 6 361
Fair value 35 - 310 345 11 - 6 362
Yield 6.21% - 6.06% 6.08% 7.03% - 6.35% 6.11%
5 to 10 years
Amortized cost - - 200 200 - - 3 203
Fair value - - 200 200 - - 3 203
Yield - - 6.04% 6.04% - - 6.40% 6.06%
Over 10 years
Amortized cost - - - - 8 - - 8
Fair value - - - - 8 - - 8
Yield - - - - 8.85% - - 8.85%
Mortgage-backed
securities
Amortized cost - 2,001 - 2,001 - 3 - 2,004
Fair value - 2,042 - 2,042 - 3 - 2,045
Yield - 6.92% - 6.92% - 6.60% - 6.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $175 $2,001 $509 $2,685 $26 $3 $11 $2,725
Total fair value 175 2,042 510 2,727 26 3 11 2,767
Total yield 5.51% 6.92% 6.05% 6.66% 7.64% 6.60% 6.50% 6.67%
Weighted average
contractual years to
maturity .85 - (a) 1.20 1.11 (b) 6.96 - (a) 4.47
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The average expected lives of "U.S. agency mortgage-backed" and "Other
mortgage-backed" securities were approximately 7.1 years and 2.8 years,
respectively, at December 31, 1997.
(b) Excludes maturities of "U.S. agency mortgage-backed" securities.
Note: Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Rates are calculated on a taxable equivalent basis
using a 35% federal income tax rate.
79
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 December 31, 1996
---------------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 41 $ 7 $ - $ 48 $ 30 $ 2 $ 1 $ 31
U.S. agency mortgage-backed 1,953 30 1 1,982 2,262 5 17 2,250
- -----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and
agency securities 1,994 37 1 2,030 2,292 7 18 2,281
Other mortgage-backed 23 - - 23 29 1 - 30
Other securities 65 - - 65 54 - - 54
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $2,082 $37 $ 1 $2,118 $2,375 $ 8 $18 $2,365
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Contractual maturities at December 31, 1997
U.S. agency Total Other Total
(dollar amounts U.S. mortgage- U.S. Treasury mortgage- Other investment
in millions) Treasury backed and agency backed securities securities
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Within one year
Amortized cost $ - $ - $ - $ - $ - $ -
Fair value - - - - - -
Yield - - - - - -
1 to 5 years
Amortized cost 4 - 4 - - 4
Fair value 4 - 4 - - 4
Yield 5.76% - 5.76% - - 5.76%
5 to 10 years
Amortized cost - - - - 14 14
Fair value - - - - 14 14
Yield - - - - 9.27% 9.27%
Over 10 years
Amortized cost 37 - 37 - 51 (a) 88
Fair value 44 - 44 - 51 (a) 95
Yield 7.02% - 7.02% - 5.86% 6.34%
Mortgage-backed
securities
Amortized cost - 1,953 1,953 23 - 1,976
Fair value - 1,982 1,982 23 - 2,005
Yield - 7.09% 7.09% 7.26% - 7.09%
- ----------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $41 $1,953 $1,994 $23 $65 $2,082
Total fair value 48 1,982 2,030 23 65 2,118
Total yield 6.90% 7.09% 7.08% 7.26% 6.56% 7.07%
Weighted average
contractual years to
maturity 17.09 - (b) 17.09 (c) - (b) 1.59
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes Federal Reserve Bank stock of $50 million with a yield of 6.00%
and no stated maturity.
(b) The average expected lives of "U.S. agency mortgage-backed" and "Other
mortgage-backed" securities were approximately 6.6 years and 4.4 years,
respectively, at December 31, 1997.
(c) Excludes maturities of "U.S. agency mortgage-backed" securities.
Note: Expected maturities may differ from the contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Rates are calculated on a taxable equivalent basis
using a 35% federal income tax rate.
80
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. LOANS
For details of the loans outstanding at December 31, 1997 and 1996, see the 1997
and 1996 columns of the "Composition of loan portfolio at year end" table on
page 59. The information in those columns is incorporated by reference into
these Notes to Financial Statements.
For details of the nonperforming and past-due loans at December 31, 1997 and
1996, see the amounts in the 1997 and 1996 columns of the "Nonperforming assets"
and "Past-due loans" tables on pages 62 and 64. The information in those columns
is incorporated by reference into these Notes to Financial Statements. For
details on impaired loans at December 31, 1997 and 1996, see the "Impaired
loans" table on page 63. The information in this table is incorporated by
reference into these Notes to Financial Statements. There was no foregone
interest on restructured loans in 1997. Foregone interest on restructured loans
was less than $1 million in 1996 and 1995.
5. RESERVE FOR CREDIT LOSSES
For details of the reserve for credit losses for 1997, 1996 and 1995, see the
1997, 1996 and 1995 columns of the "Credit loss reserve activity" table on page
66. The information in those columns is incorporated by reference into these
Notes to Financial Statements.
6. PREMISES AND EQUIPMENT
- -------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996
- ------------------------------------------------------------------------------
Land $ 27 $ 29
Buildings 279 281
Equipment 794 744
Leasehold improvements 204 174
- ------------------------------------------------------------------------------
Subtotal 1,304 1,228
Accumulated depreciation and amortization (731) (659)
- -------------------------------------------------------------------------------
Total premises and equipment $ 573 $ 569
- ------------------------------------------------------------------------------
The table above includes capital leases for premises and equipment at a net book
value of less than $1 million at December 31, 1997, and $2 million at December
31, 1996.
Rental expense was $137 million, $124 million and $121 million, respectively,
net of related sublease revenue of $23 million, $25 million and $25 million, in
1997, 1996 and 1995, respectively. Depreciation and amortization expense totaled
$108 million, $105 million and $107 million in 1997, 1996 and 1995,
respectively. Maintenance, repairs and utilities expenses totaled $98 million,
$93 million and $90 million in 1997, 1996 and 1995, respectively.
As of December 31, 1997, the Corporation and its subsidiaries are obligated
under noncancelable leases (principally for banking premises) with expiration
dates through 2020. A summary of the future minimum rental payments under
noncancelable leases, net of related sublease revenue totaling $83 million, is
as follows: 1998--$141 million; 1999--$150 million; 2000--$142 million;
2001--$136 million; 2002--$135 million; and 2003 through 2020--$903 million.
7. RESERVE FOR REAL ESTATE ACQUIRED
An analysis of the reserve for real estate acquired for 1997, 1996 and 1995 is
presented in the "Change in reserve for real estate acquired" table on page 64
and is incorporated by reference into these Notes to Financial Statements.
81
<PAGE> 60
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
8. SEGREGATED ASSETS
Segregated assets represent commercial real estate and other commercial loans
acquired in the December 1992 Meritor retail office acquisition that are on
nonaccrual status or are foreclosed properties, and that have been subject to a
loss-sharing arrangement with the FDIC. These delinquent assets are reported in
other assets in the balance sheet. The loss-sharing arrangement with the FDIC
ended on January 1, 1998. Thereafter, any segregated assets will be reclassified
as nonaccrual loans or OREO, as appropriate. Segregated assets totaled $12
million at December 31, 1997.
As a result of the loss-sharing arrangement with the FDIC, any of the performing
commercial loans or performing commercial real estate loans acquired in the
Meritor retail office acquisition that became nonaccrual on or before December
31, 1997, were reclassified to segregated assets. During the first five years,
the FDIC paid Mellon Bank, N.A. 80% of the net credit losses on acquired
commercial real estate and other commercial loans.
During 1998 and 1999, the sixth and seventh years of the arrangement, Mellon
Bank, N.A. will pay to the FDIC 80% of any recoveries of charge-offs on such
acquired loans that had occurred during the first five years of the arrangement.
At the end of the seventh year, the FDIC will pay to Mellon Bank, N.A. an
additional 15% of the sum of net charge-offs on the acquired loans that occurred
during the first five years, less the recoveries during the sixth and seventh
years of the arrangement, in excess of $60 million.
The $60 million credit loss threshold was reached in the first quarter of 1993.
The FDIC also will reimburse Mellon Bank, N.A. for expenses incurred to recover
amounts owed and net expenses incurred with respect to foreclosed properties
derived from the acquired commercial real estate or commercial loans. Expenses
are reimbursed by the FDIC in the same proportion as the reimbursement of net
loan losses. In addition, the FDIC reimbursed Mellon Bank, N.A. for up to 90
days of delinquent interest on the assets covered by the loss-sharing
arrangement. Mellon Bank, N.A. was required to administer assets entitled to
loss sharing protection in the same manner as assets held by Mellon Bank, N.A.
for which no loss sharing existed.
9. OTHER ASSETS
- -------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996
- ------------------------------------------------------------------------------
Prepaid expense:
Pension $ 391 $ 307
Other 80 67
Interest and fees receivable 376 322
Accounts receivable 373 283
Mortgage servicing advances 130 82
Receivables related to off-balance-sheet instruments 553 329
Assets held for accelerated resolution 157 30
Segregated assets 12 10
Other 1,268 991
- ------------------------------------------------------------------------------
Total other assets $3,340 $2,421
- ------------------------------------------------------------------------------
10. DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or greater
was approximately $3.9 billion at December 31, 1997, and $6.0 billion at
December 31, 1996.
At December 31, 1997, the scheduled maturity of time deposits for the years 1998
through 2002 and thereafter are as follows: $8,059 million, $1,339 million, $310
million, $137 million and $235 million, respectively.
82
<PAGE> 61
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. REVOLVING CREDIT AGREEMENT
During 1996, the Corporation signed a four-year $300 million revolving credit
agreement with several financial institutions that serves as a support facility
for commercial paper and for general corporate purposes. This revolving credit
facility has several restrictions, including a minimum 6% Tier 1 ratio, a 1.30
maximum double leverage limitation and a minimum nonperforming asset coverage
ratio of 3 to 1. The nonperforming asset coverage ratio is Tier I capital plus
the reserve for credit losses as a multiple of nonperforming assets. At December
31, 1997, the Corporation's double leverage ratio, which includes
trust-preferred securities per the revolving credit agreement, was 1.03 and the
nonperforming asset coverage ratio was 22 to 1. The revolving credit facility is
supplemented by a $25 million backup line of credit, bringing total commercial
paper support facilities to $325 million. There were no other lines of credit to
subsidiaries of the Corporation at December 31, 1997 or 1996. No borrowings were
made under any facility in 1997 or 1996. Commitment fees totaled less than $1
million in each of the years 1995 through 1997.
12. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
(in millions) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Corporation:
6.70% Subordinated Debentures due 2008 $ 249 $ 249
6.30% Senior Notes due 2000 200 200
7-5/8% Senior Notes due 1999 200 200
6-1/2% Senior Notes due 1997 - 200
6-7/8% Subordinated Debentures due 2003 150 150
9-1/4% Subordinated Debentures due 2001 100 100
9-3/4% Subordinated Debentures due 2001 100 100
Medium Term Notes, Series A, due 1998-2001 (10.10% to 10.50% at December 31, 1997,
and 10.00% to 10.50% at December 31, 1996) 22 27
7-1/4% Convertible Subordinated Capital Notes due 1999 2 3
Subsidiaries:
7-3/8% Subordinated Notes due 2007 298 -
7% Subordinated Notes due 2006 300 300
7-5/8% Subordinated Notes due 2007 249 249
6-1/2% Subordinated Notes due 2005 249 249
6-3/4% Subordinated Notes due 2003 149 149
Medium Term Bank Notes due 1998-2007 (5.64% to 8.55% at December 31, 1997, and
6.10% to 8.55% at December 31, 1996) 303 338
Various notes and obligations under capital leases due 1998-2001 (5.03% to 10.50% at
December 31, 1997, and 3.92% to 10.50% at December 31, 1996) 2 4
- ---------------------------------------------------------------------------------------------------------------------
Total unsecured notes and debentures (with original maturities over one year) $2,573 $2,518
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In May 1997, Mellon Bank, N.A., the Corporation's principal banking subsidiary,
issued $300 million of subordinated debt at a fixed rate of 7.375%, maturing in
2007. This subordinated debt qualifies as Tier II capital for the Corporation's
risk-based capital calculation. The proceeds from this issue were used for
general corporate purposes.
The Subordinated Notes and Medium Term Bank Notes shown in the table above were
issued by Mellon Bank, N.A. These notes are subordinated to obligations to
depositors and other creditors of Mellon Bank, N.A.
The aggregate amounts of notes and debentures that mature during the five years
1998 through 2002, for the Corporation, are as follows: $118 million, $367
million, $210 million, $205 million and $9 million, respectively. The aggregate
amounts of notes and debentures that mature during the five years 1998 through
2002, for Mellon Bank Corporation (parent Corporation) are as follows:
$12 million, $202 million, $205 million, $205 million and none, respectively.
83
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES (TRUST-PREFERRED SECURITIES)
In the fourth quarter of 1996, the Corporation formed two statutory business
trusts, Mellon Capital I and Mellon Capital II. All of the common securities of
these special purpose trusts are owned by the Corporation; the trusts exist
solely to issue capital securities. For financial reporting purposes, the trusts
are treated as subsidiaries and are consolidated into the financial statements
of the Corporation. The capital securities are presented as a separate line item
on the consolidated balance sheet as guaranteed preferred beneficial interests
in Corporation's junior subordinated deferrable interest debentures
(trust-preferred securities). The trusts have issued the trust-preferred
securities and invested the net proceeds in junior subordinated deferrable
interest debentures (subordinated debentures) issued to the trusts by the
Corporation. The subordinated debentures are the sole assets of the trusts. The
Corporation has the right to defer payment of interest on the subordinated
debentures at any time, or from time to time, for periods not exceeding five
years. If interest payments on the subordinated debentures are deferred, the
distributions on the trust-preferred securities also are deferred. Interest on
the subordinated debentures is cumulative. The Corporation, through guarantees
and agreements, has fully and unconditionally guaranteed all of the trusts'
obligations under the trust-preferred securities.
The Federal Reserve Bank has accorded the trust-preferred securities Tier I
capital status. The ability to apply Tier I capital treatment, as well as to
deduct the expense of the subordinated debentures for income tax purposes,
provided the Corporation with a cost-effective way to raise regulatory capital.
The trust-preferred securities are not included as a component of total
shareholders' equity on the consolidated balance sheet.
For purposes of the table below and discussion that follows, the terms and
conditions of the trust-preferred securities are treated as identical to the
underlying subordinated debentures.
- --------------------------------------------------------------------------------
Liquidation Balances at
(dollar amounts in millions, preference December 31,
except per security amounts) per security 1997 1996
- --------------------------------------------------------------------------------
7.72% Series A $1,000.00 $495 $494
7.995% Series B $1,000.00 496 496
----- -----
Total $991 $990
- --------------------------------------------------------------------------------
The Series A and Series B trust-preferred securities pay cash distributions
semiannually at the rate of 7.72% and 7.995% of the liquidation preference,
respectively, per annum. Any unpaid distribution is cumulative. The Corporation
recorded $78 million and $3 million of expense on these securities in 1997 and
1996, respectively. The securities were each issued for a face value of $500
million and reported net of issuance costs in the table above. The securities
are unsecured and subordinate to all senior debt (as defined) of the
Corporation. The Series A and Series B securities mature on December 1, 2026,
and January 15, 2027, respectively.
The Series A and Series B securities are redeemable, in whole or in part, at the
option of the Corporation on or after December 1, 2006, and January 15, 2007,
respectively, or prior to those dates, in whole, within 90 days following
receipt of a legal opinion that, due to a change in the tax laws or an
administrative or judicial decision, there is a substantial risk that the tax
deductibility of the interest could be disallowed ("tax event") or the
Corporation's reasonable determination that, due to a change in law or
administrative or judicial decision, there is a substantial risk that Tier I
capital treatment could be disallowed ("capital treatment event"). The Series A
and Series B securities are redeemable at 103.86% and 103.9975%, respectively,
of the liquidation amounts, plus accrued distributions, during the 12-month
periods beginning December 1, 2006, and January 15, 2007, respectively (the call
dates). The redemption prices decline for the Series A and Series B securities
by approximately 39 basis points and approximately 40 basis points,
respectively, during each of the following 12-month periods, until a final
redemption price of 100% of the liquidation amount is set for December 1, 2016,
and January 15, 2017, respectively, and thereafter. If the securities are
redeemed following a tax event or capital treatment event, the greater of 100%
of the principal amount or the sum of the present value of the first redemption
price plus the present value of interest payments from the redemption date to
the call dates will be paid.
84
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. PREFERRED STOCK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balances at
December 31, 1997 Dividends
(dollar amounts in millions, Shares Shares ---------------------------- ---------------------
except per share amounts) authorized issued 1997 1996 1995 Per share Aggregate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
8.20% preferred stock (Series K) 8,000,000 8,000,000 $193 $193 $193 $2.05 $16
8.50% preferred stock (Series J) - - - 97 97 .28 2 (a)
9.60% preferred stock (Series I) - - - - 145 - -
------ ------- ----
Total preferred stock $193 $290 $435
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) As a result of the redemption of the Series J preferred stock, the
Corporation recorded an additional $3 million of preferred stock
dividends in 1997. These additional dividends reflect the write-off of
issue costs. Including the additional dividends, total Series J preferred
stock dividends were $5 million in 1997.
The Corporation has authorized 50 million shares of preferred stock. Each series
of preferred stock has or had a par value $1.00 per share and a liquidation
preference of $25 per share.
The Corporation redeemed the Series J preferred stock on February 18, 1997, and
announced on January 8, 1998, that it will redeem the Series K preferred stock
on February 17, 1998. The Series J preferred stock was redeemed, and the Series
K preferred stock will be redeemed at a price of $25 per share plus accrued
dividends.
15. EQUITY PURCHASE OPTIONS (WARRANTS)
In connection with the 1993 acquisition of The Boston Company, the Corporation
issued 9 million 10-year equity purchase options (warrants), on a post-split
basis, each exercisable for one share of common stock. The warrants were
exercisable at $16.66 per share, on a post-split basis, at any time until their
expiration on May 21, 2003. In 1995, the Corporation repurchased all of these
warrants as part of a privately negotiated transaction with American Express
Travel Related Services Company, Inc., a subsidiary of American Express Company.
16. REGULATORY CAPITAL REQUIREMENTS
A discussion about the Corporation's regulatory capital requirements for 1997
and 1996 is presented in the "Regulatory capital" section on pages 46 through 48
and is incorporated by reference into these Notes to Financial Statements.
17. NONINTEREST REVENUE
The components of noninterest revenue for the three years ended December 31,
1997, are presented in the "Noninterest revenue" table on page 38. This table is
incorporated by reference into these Notes to Financial Statements.
18. FOREIGN CURRENCY AND SECURITIES TRADING REVENUE
The Corporation's trading activities involve a variety of financial instruments,
including U.S. government securities, municipal securities and money market
securities, as well as off-balance-sheet instruments. The majority of the
Corporation's trading revenue is earned by structuring and executing
off-balance-sheet instruments for customers. The resulting risks are limited by
entering into generally matching or offsetting positions. The Corporation also
enters into positions in interest rate, foreign exchange and debt instruments
based upon expectations of future market conditions. Unmatched positions are
monitored through established limits. To maximize net trading revenues, the
market-making and proprietary positions are managed together by product.
85
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
18. FOREIGN CURRENCY AND SECURITIES TRADING REVENUE (CONTINUED)
The results of the Corporation's foreign currency and securities trading
activities are presented, by class of financial instrument, in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange contracts $108 $72 $88
Debt instruments 3 4 4
Interest rate contracts 14 2 -
Futures contracts (7) 2 (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $118 $80 $91
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recognized an unrealized loss of less than $1 million at
December 31, 1997 , 1996 and 1995, related to securities held in the
trading portfolio.
19. INCOME TAXES
Income tax expense applicable to income before taxes consists of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(in millions) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes:
Federal $321 $289 $213
State and local 24 25 17
Foreign 11 9 4
- ----------------------------------------------------------------------------
Total current tax expense 356 323 234
- ----------------------------------------------------------------------------
Deferred taxes:
Federal 31 89 138
State and local 11 6 28
Foreign - - 1
- ----------------------------------------------------------------------------
Total deferred tax expense 42 95 167
- ----------------------------------------------------------------------------
Provision for income taxes $398 $418 $401
- ----------------------------------------------------------------------------
</TABLE>
In addition to amounts applicable to income before taxes, the following income
tax expense (benefit) amounts were recorded in shareholders' equity:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation expense for tax purposes in excess
of amounts recognized for financial statement purposes $(40) $(17) $(15)
Change in net unrealized gain (loss) on assets available for sale 19 (10) 39
- --------------------------------------------------------------------------------------------------------
Total tax expense (benefit) $(21) $(27) $ 24
- --------------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
19. INCOME TAXES (CONTINUED)
The provision for income taxes was different from the amounts computed by
applying the statutory federal income tax rate to income before income taxes due
to the items listed in the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35% 35% 35%
Tax expense computed at statutory rate $409 $403 $382
Increase (decrease) resulting from:
State and local income taxes, net of federal tax benefit 23 20 29
Tax exempt income (39) (12) (12)
Other, net 5 7 2
- ------------------------------------------------------------------------------------------------------
Provision for income taxes $398 $418 $401
- ------------------------------------------------------------------------------------------------------
Effective income tax rate 34.1% 36.3% 36.7%
- ------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(in millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Provision for credit losses and
write-downs on real estate acquired $ 223 $205 $230
Occupancy expense 73 72 73
Accrued expense not deductible until paid 58 44 31
Other 15 21 28
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 369 342 362
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Lease financing revenue 451 359 282
Salaries and employee benefits 10 27 21
Other 48 22 33
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities 509 408 336
- -------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $(140) $(66) $ 26
- -------------------------------------------------------------------------------------------------
</TABLE>
The Corporation determined that it was not required to establish a valuation
allowance for deferred tax assets because it is management's assertion that the
deferred tax assets are likely to be realized through carryback to taxable
income in prior years, future reversals of existing taxable temporary
differences and, to a lesser extent, future taxable income.
20. EARNINGS PER COMMON SHARE
Effective December 31, 1997, the Corporation adopted FAS No. 128, "Earnings per
Share." This statement establishes standards for computing and presenting basic
and diluted earnings per common share (EPS). It supersedes Accounting Principles
Board (APB) Opinion No. 15 that required the presentation of both primary and
fully diluted EPS.
Basic EPS is computed by dividing net income applicable to common stock by the
weighted average number of common shares outstanding during the period, without
considering any dilutive items. Diluted EPS is computed by dividing net income
applicable to common stock by the weighted average number of common shares and
common stock equivalents for items that are dilutive, net of shares assumed to
be repurchased using the treasury stock method using the average share price for
the Corporation's common stock during the period. Common stock equivalents arise
from the assumed conversion of outstanding stock options, warrants and
convertible capital notes.
87
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. EARNINGS PER COMMON SHARE (CONTINUED)
As required, all previously reported primary and fully diluted EPS have been
replaced with the presentation of basic and diluted EPS. The impact of the
adoption of this statement and the restatement of prior-period amounts was not
material. The computation of basic and diluted earnings per common share is
shown in the table below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(dollar amounts in millions, except per Year ended December 31,
shares amounts, shares in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Net income applicable to common stock $750 $689 $652
- ------------------------------------------------------------------------------------------------------
Average common shares outstanding 255,356 262,411 286,856
Basic earnings per common share $2.94 $2.63 $2.27
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (a) $750 $689 $652
- ------------------------------------------------------------------------------------------------------
Average common shares outstanding 255,356 262,411 286,856
Common stock equivalents:
Stock options (b) 5,360 3,978 2,755
Warrants - - 537
Common shares issuable upon conversion of
7-1/4% Convertible Subordinated Capital Notes 113 202 253
- ------------------------------------------------------------------------------------------------------
Total 260,829 266,591 290,401
- ------------------------------------------------------------------------------------------------------
Diluted earnings per common share $2.88 $2.58 $2.25
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) The after-tax benefit of interest expense on the assumed conversion of
the 7 1/4% Convertible Subordinated Capital Notes was less than $1
million for all periods presented.
(b) Options to purchase 1,505; 1,453; and 395 shares of common stock were not
included in the computation of diluted earnings per common share because
the options' exercise prices were greater than the average market prices
of the common shares for 1997, 1996 and 1995, respectively.
Note: Per share amounts and average common shares and equivalents for 1996 and
1995 have been restated to reflect the two-for-one common stock split
distributed on June 2, 1997.
21. EMPLOYEE BENEFITS
Pension plans
The Corporation's largest subsidiaries--Mellon Bank, N.A., The Boston Company,
The Dreyfus Corporation and Buck Consultants, Inc.--sponsor trusteed,
noncontributory, defined benefit pension plans. Together, these plans cover
substantially all salaried employees of the Corporation. The plans provide
benefits that are based on employees' years of service and compensation. In
addition, several unfunded plans exist for certain employees or for purposes
that are not addressed by the funded plans.
88
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
21. EMPLOYEE BENEFITS (CONTINUED)
The Mellon Bank, N.A. plan is significantly overfunded and The Boston Company,
Dreyfus and Buck plans are moderately overfunded. The Corporation amortizes all
actuarial gains and losses and prior service costs over a 10-year period. The
tables below report the combined data of these plans.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
(dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded Funded Unfunded
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assumptions used in the accounting:
Rates used for expense at January 1:
Rate on obligation 7.0% 7.0% 7.0% 7.0% 7.5% 7.5%
Rate of return on assets 10.0 - 10.0 - 10.0 -
Actuarial salary scale 3.0 3.0 3.0 3.0 3.5 3.5
- -----------------------------------------------------------------------------------------------------------------------------------
Components of pension expense (credit):
Service cost $ 23 $ 3 $ 20 $ 2 $ 18 $ 1
Interest cost on projected benefit obligation 35 5 27 3 24 3
Return on plan assets (257) - (143) - (201) -
Net amortization and deferral 169 4 74 2 140 1
Special termination benefits - - 15 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total pension expense (credit) $(30) $12 $ (7) $ 7 $ (19) $ 5
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996
(dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions used for obligation at December 31:
Rate on obligation 6.75% 6.75% 7.0% 7.0%
Actuarial salary scale 3.0 3.0 3.0 3.0
- --------------------------------------------------------------------------------------------------------------------------------
Present value of benefit obligation at December 31:
Vested $ 528 $ 79 $ 372 $ 54
Nonvested 34 3 30 1
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 562 82 402 55
- --------------------------------------------------------------------------------------------------------------------------------
Effect of projected future compensation levels 68 8 50 2
- --------------------------------------------------------------------------------------------------------------------------------
Present value of projected benefit obligation $ 630 $ 90 $ 452 $ 57
- --------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair market value at December 31:
Cash and U.S. Treasury securities $ 415 $ - $ 228 $ -
Corporate debt obligations 144 - 64 -
Mellon Bank Corporation common stock (a) 91 - 53 -
Other common stock and investments 755 - 661 -
- --------------------------------------------------------------------------------------------------------------------------------
Total plan assets at fair market value $1,405 $ - $1,006 $ -
- --------------------------------------------------------------------------------------------------------------------------------
Reconciliation of funded status with financial statements:
Funded status at December 31 $ 775 $(90) $ 554 $(57)
Unamortized net transition (asset) obligation (14) 1 (14) 1
Unrecognized prior service cost 9 7 10 11
Net deferred actuarial (gain) loss (379) 13 (243) 8
Adjustment required to recognize minimum liability - (13) - (18)
- ---------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) expense at December 31 $ 391 $(82) $ 307 $(55)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents 1.5 million shares at December 31, 1997, and December 31,
1996. The Mellon Bank, N.A. retirement plan received approximately $2
million of dividends from Mellon Bank Corporation's common stock in both
1997 and 1996.
89
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
21. EMPLOYEE BENEFITS (CONTINUED)
Long-Term Profit Incentive Plan
The Corporation has a Long-Term Profit Incentive Plan (1996) which provides for
the issuance of stock options, stock appreciation rights, performance units,
deferred cash incentive awards and shares of restricted stock to officers and
other key employees of the Corporation and its subsidiaries as approved by the
Human Resources Committee of the board of directors. Stock options may be
granted at prices not less than the fair market value of the common stock on the
date of grant. Options may be exercised during fixed periods of time from one
year to 10 years from the date of grant. In the event of a change in control of
the Corporation, as defined in the plan, these options will become immediately
exercisable, unless otherwise provided in the option agreement. Total
outstanding grants as of December 31, 1997, 1996 and 1995 were 12,942,415;
15,882,628; and 14,928,326 shares, respectively. During 1997, 1996 and 1995,
options for 1,665,336; 4,126,046; and 3,555,250 shares were granted and options
for 3,466,527; 2,706,816; and 2,764,654 shares, respectively, were exercised. At
December 31, 1997, 10,806,771 shares were available for grant.
Included in the December 31, 1997, 1996 and 1995, outstanding grants were
options for 1,188,468; 1,700,332; and 1,721,712 shares, respectively, that
become exercisable in full near the end of their 10-year terms, but the exercise
dates may be accelerated to an earlier date by the Human Resources Committee of
the board of directors, based on the optionee's and the Corporation's
performance. If so accelerated, compensation will be paid in the form of
deferred cash incentive awards to reimburse the exercise price of these options
if exercised prior to the original vesting date. The Corporation recognized $13
million of compensation expense for the acceleration of these options in 1997,
$8 million in 1996 and $9 million in 1995.
Stock Option Plan for Outside Directors
The Corporation's Stock Option Plan for Outside Directors provides for the
granting of options for shares of common stock to outside directors and advisory
board members of the Corporation. The timing, amounts, recipients and other
terms of the option grants are determined by the provisions of, or formulas in,
the Directors' Option Plan. The exercise price of the options is equal to the
fair market value of the common stock on the grant date. All options have a term
of 10 years from the date of grant and become exercisable one year from the
grant date. Directors elected during the service year are granted options on a
pro rata basis to those granted to the directors at the start of the service
year. Total outstanding grants as of December 31, 1997, 1996 and 1995, were
801,152; 829,844; and 752,016 shares, respectively. During 1997, 1996 and 1995,
options for 110,994; 97,928; and 97,200 shares, respectively, were granted and
options for 139,686; 20,100; and 40,858 shares, respectively, were exercised. At
December 31, 1997, options for 112,402 shares were available for grant.
Dreyfus Stock Option Plan
A stock option plan at Dreyfus prior to the August 1994 merger with the
Corporation provided for the issuance of stock options to key employees and key
consultants who rendered services at Dreyfus, at a price of not less than 95% of
the price of Dreyfus' common stock on The New York Stock Exchange on the day the
option was granted. Options were not exercisable within two years nor more than
10 years from the date of grant. Options for Dreyfus stock were automatically
converted into options for the Corporation's common stock on the merger date.
Total outstanding grants as of December 31, 1997, 1996 and 1995, were 535,072;
978,624; and 1,628,414 shares, respectively. No options were granted in 1997,
1996 and 1995. No further options will be granted under this plan. Options for
443,552; 630,972; and 1,812,678 shares were exercised in 1997, 1996 and 1995,
respectively.
The table on the following page summarizes stock option activity for the
Long-Term Profit Incentive Plan, the Stock Option Plan for Outside Directors and
the Dreyfus Plan. Requirements for stock option shares can be met from either
unissued or treasury shares. All shares issued in 1997 and 1996 were from
treasury shares.
90
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
21. EMPLOYEE BENEFITS (CONTINUED)
- -------------------------------------------------------------------------------
Shares subject Average exercise
STOCK OPTION ACTIVITY (A) to option price
- -------------------------------------------------------------------------------
Balance at December 31, 1994 18,638,870 $15.45
Granted 3,652,450 (b) 20.78
Exercised (4,618,190) 13.00
Forfeited (364,374) 17.12
- -------------------------------------------------------------------------------
Balance at December 31, 1995 17,308,756 17.19
Granted 4,223,974 (b) 28.24
Exercised (3,357,888) 15.38
Forfeited (483,746) 17.95
- -------------------------------------------------------------------------------
Balance at December 31, 1996 17,691,096 20.15
Granted 1,776,330 (b) 47.20
Exercised (4,049,765) 17.04
Forfeited (1,139,022) 21.88
- -------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 14,278,639 $24.26
- -------------------------------------------------------------------------------
(a) Restated to reflect the two-for-one common stock split distributed on
June 2, 1997.
(b) Using the Black-Scholes option pricing model, the weighted-average fair
value of options granted in 1997, 1996 and 1995, was estimated at $9.15,
$5.40 and $3.90 per share, respectively.
The following table summarizes the characteristics of stock options outstanding
at December 31, 1997.
- --------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Outstanding Exercisable (b)
----------------------------------------- ----------------------
Average Average
Average exercise exercise
Exercise price range Shares life (a) price Shares price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.58 - $18.00 2,044,603 3.9 $12.50 1,961,201 $12.32
$18.08 - $20.44 6,393,330 6.6 19.25 5,172,997 19.14
$22.25 - $27.75 2,708,397 8.4 26.42 851,501 26.53
$28.50 - $43.75 1,626,989 8.9 32.73 217,478 31.49
$47.75 - $55.06 1,505,320 9.6 48.43 - -
- -----------------------------------------------------------------------------------------------------------------------------------
14,278,639 7.1 24.26 8,203,177 18.61
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Average contractual life remaining in years.
(b) At December 31, 1996, 8,734,446 options were exercisable at an average
exercise price of $16.52. At December 31, 1995, 6,702,110 options were
exercisable at an average exercise price of $14.28.
The Black-Scholes option pricing model requires the use of subjective
assumptions which can materially affect fair value estimates. Therefore, this
model does not necessarily provide a reliable single measure of the fair value
of the Corporation's stock options. The fair value of each stock option granted
was estimated on the date of the grant using the following weighted-average
assumptions for grants in 1997, 1996 and 1995: (1) expected dividend yields
ranged from 3.25% to 4.5%; (2) risk-free interest rates of approximately 6%; (3)
expected volatility of 25%; and (4) expected lives of options ranged from three
to four years.
The Corporation accounts for its stock-based compensation plans under the
provision of APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
Corporation utilizes the intrinsic-value-based method, on which APB No. 25 is
based. In accordance with FAS No. 123, "Accounting for Stock-Based
Compensation," the Corporation adopted the disclosure-only option on January 1,
1996, and continued to apply the provisions of APB No. 25 for financial
statement purposes.
91
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
21. EMPLOYEE BENEFITS (CONTINUED)
Had the compensation cost for the Corporation's stock-based compensation plans
been determined in accordance with the fair-value accounting provisions of FAS
No. 123, net income applicable to common stock, basic net income per common
share and diluted net income per common share for the years ended December 31,
1997, 1996 and 1995, would have been as follows:
<TABLE>
<CAPTION>
(in millions except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock:
As reported $ 750 $ 689 $ 652
Pro forma (a) $ 740 $ 684 $ 651
Basic net income per common share (b):
As reported $2.94 $2.63 $2.27
Pro forma (a) $2.90 $2.61 $2.27
Diluted net income per common share (b):
As reported $2.88 $2.58 $2.25
Pro forma (a) $2.84 $2.57 $2.24
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Because compensation expense associated with an award is recognized over
the vesting period, the initial impact on pro forma results may not be
representative of the pro forma results in future years when the effect
of the amortization of multiple awards would be reflected on the income
statement.
(b) Earnings per common share are presented in accordance with FAS No. 128,
which was adopted by the Corporation at year-end 1997. Prior-period
amounts have been restated. In addition, prior-period amounts were
restated to reflect the two-for-one common stock split distributed on
June 2, 1997.
Retirement Savings Plan
Since April 1988, employees' payroll deductions into retirement savings accounts
have been matched by the Corporation's contribution of common stock, at the rate
of $.50 on the dollar, up to 6% of the employee's annual base salary, with an
annual maximum Corporate contribution of $3,000 per employee. In 1997, 1996 and
1995, the Corporation recognized $11 million, $11 million and $10 million,
respectively, of expense related to this plan and contributed 246,136; 378,024;
and 478,142 shares, respectively. All shares contributed in 1997 and 1996 and a
portion of the shares contributed in 1995 were issued from treasury stock. The
plan held 6,663,606; 7,696,672; and 3,504,818 shares of the Corporation's common
stock at December 31, 1997, 1996 and 1995, respectively. On September 1, 1996,
The Dreyfus Corporation's profit sharing plan was merged into the Corporation's
retirement savings plan. The Dreyfus plan held 4,034,790 shares of the
Corporation's common stock when the plans were merged. Amounts expensed under
the Dreyfus plan were $8 million and $11 million for 1996 and 1995,
respectively.
Buck Consultants, Inc. has a separate retirement savings plan in which
employees' payroll deductions are matched at a rate of between 75% and 100%. The
match is up to 6% of the employees' annual base salary with an annual maximum
contribution of $9,500 per employee. Expense related to this plan was $3 million
in 1997.
Profit Bonus Plan
Performance-based awards are made to key employees at the discretion of the
Human Resources Committee of the board of directors. The granting of these
awards is based upon the performance of the key employees and on the
Corporation's overall performance in achieving its objectives. At the
committee's election, awards may be paid in a lump sum or may be deferred and
paid over a period of up to 15 years. Payouts under this plan were $29 million,
$24 million and $20 million for 1997, 1996 and 1995, respectively, and can be in
the form of cash, common stock, restricted stock or phantom stock units
equivalent to restricted stock. The employee is generally prevented from selling
or transferring restricted stock or phantom stock units for a three-year period
and the shares or units are forfeited if employment is terminated during that
period. Restricted stock totaling 73,150 shares, with a weighted-average fair
value on the date of grant of $62.63 per share,
92
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
21. EMPLOYEE BENEFITS (CONTINUED)
was awarded under this plan for 1997 performance. Restricted stock totaling
79,800 shares, with a weighted-average fair value on the date of grant of $37.35
per share, was awarded under this plan for 1996 performance. In addition to the
restricted stock awarded in 1997 under the profit bonus plan 349,400 shares of
restricted stock, with a weighted-average fair value on the date of grant of
$48.17 per share, were granted to certain senior officers in 1997. Vesting
occurs over a two- to three-year period if certain performance objectives are
met. All restricted stock and phantom stock units were granted at the market
value of the shares on the grant date. At December 31, 1997, 832,640 shares of
restricted stock and phantom stock units were outstanding.
Employee Stock Ownership Plan
In 1989, an Employee Stock Ownership Plan was formed to hold certain shares of
Mellon Bank Corporation common stock previously held in other defined
contribution plans sponsored by the Corporation and its subsidiaries. At
December 31, 1997, 1996 and 1995, this plan held 154,891; 155,574; and 192,110
shares, respectively, of the Corporation's common stock. The Corporation may
make contributions to this plan from time to time. No contributions were made in
1997, 1996 or 1995.
Postretirement benefits other than pensions
The Corporation shares in the cost of providing managed care, Medicare
supplement and/or major medical programs for employees who retired prior to
January 1, 1991. Employees who retire subsequent to January 1, 1991, who were
between the ages of 55 and 65 on January 1, 1991, and who had at least 15 years
of service are provided with a defined dollar supplement to assist them in
purchasing health insurance. Early retirees who do not meet these age and
service requirements are eligible to purchase health coverage at their own
expense under the standard plans that are offered to active employees. In
addition, the Corporation provides a small subsidy toward health care coverage
for other active employees when they retire. These benefits are provided through
various insurance carriers whose premiums are based on claims paid during the
year. The cost of providing these benefits amounted to $7 million in 1997, $9
million in 1996, including $3 million of early retirement charges, and $10
million in 1995.
93
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
21. EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the components of the costs and liability of the
Corporation's postretirement health care and life insurance benefits programs
for current and future retirees.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
Accumulated
Accrued postretirement postretirement Unrecognized
benefit cost benefit obligation transition obligation
-------------------------- -------------------------- -----------------------
(in millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1 $(33) $(26) $(19) $(46) $(55) $(70) $30 $32 $53
- ---------------------------------------------------------------------------------------------------------------------------------
Recognition of components of
net periodic postretirement
benefit costs:
Service cost (2) (1) (1) (2) (1) (1) - - -
Interest cost (3) (3) (6) (3) (3) (6) - - -
Retirement enhancement
program - (3) - - (6) - - - -
Amortization of
transition obligation (2) (2) (3) - - - (2) (2) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
(7) (9) (10) (5) (10) (7) (2) (2) (3)
Adjustment due to
acquisition of Buck (13) - - (13) - - - - -
Change in APBO actuarial
assumptions including a
change in the discount rate - - - 5 15 (1) - - -
Benefit payments 3 2 3 4 4 5 - - -
Plan changes - - - - - 18 - - (18)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $(50) $(33) $(26) $(55) $(46) $(55) $28 $30 $32
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A weighted-average discount rate of 7.0% was used to estimate the 1997 net
periodic benefit cost, and a 6.75% rate was used to value the accumulated
postretirement benefit obligation at year-end 1997. A health care cost trend
rate was used to recognize the effect of expected changes in future health care
costs due to medical inflation, utilization changes, technological changes,
regulatory requirements and Medicare cost shifting. The future annual increase
assumed in the cost of health care benefits was 6.25% for 1998 and was decreased
gradually to 4.25% for 2002 and thereafter. The health care cost trend rate
assumption may have a significant impact on the amounts reported. Increasing the
assumed health care cost trend by one percentage point in each year would
increase the accumulated postretirement benefit obligation by approximately $6
million and the aggregate of the service and interest cost components of net
periodic postretirement health care benefit cost by less than $1 million.
During 1995, the transition obligation was reduced by $18 million due to a
change in the benefit program that requires current and future retirees to
enroll in a managed care program. Previously, retirees were permitted to use any
health care provider.
22. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS
The prior approval of the Office of the Comptroller of the Currency (OCC) or the
Federal Reserve Board, as applicable, is required if the total of all dividends
declared by a national or state member bank subsidiary in any calendar year
exceeds the bank subsidiary's net profits, as defined, for that year, combined
with its retained net profits for the preceding two calendar years.
Additionally, such bank subsidiaries may not declare dividends in excess of net
profits on hand, as defined, after deducting the amount by which the principal
amount of all loans on which interest is past due for a period of six months or
more exceeds the reserve for credit losses.
94
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
22. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS (CONTINUED)
Under the first and currently more restrictive of the foregoing federal dividend
limitations, the Corporation's national and state member bank subsidiaries can,
without prior regulatory approval, declare dividends subsequent to December 31,
1997, of up to approximately $535 million of their retained earnings of $2.702
billion at December 31, 1997, less any dividends declared and plus or minus net
profits or losses, as defined, between January 1, 1998, and the date of any such
dividend declaration.
The payment of dividends also is limited by minimum capital requirements imposed
on all bank subsidiaries. The Corporation's bank subsidiaries exceed these
minimum requirements. The ability of state member banks to pay dividends is also
limited by state banking regulations. The bank subsidiaries declared dividends
to the parent Corporation of $450 million in 1997, $400 million in 1996 and $501
million in 1995. The Federal Reserve Board and the OCC have issued additional
guidelines that require bank holding companies and national banks to continually
evaluate the level of cash dividends in relation to their respective operating
income, capital needs, asset quality and overall financial condition.
The Federal Reserve Act limits extensions of credit by the Corporation's bank
subsidiaries to the Corporation and to certain other affiliates of the
Corporation, and requires such extensions to be collateralized and limits the
amount of investments by the banks in these entities. At December 31, 1997, such
extensions of credit and investments were limited to $507 million to the
Corporation or any other affiliate and to $1,014 million in total to the
Corporation and all of its other affiliates. Outstanding extensions of credit
totaled $680 million at December 31, 1997.
23. LEGAL PROCEEDINGS
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust
and other activities. Because of the complex nature of some of these actions and
proceedings, it may be a number of years before such matters ultimately are
resolved. After consultation with legal counsel, management believes that the
aggregate liability, if any, resulting from such pending and threatened actions
and proceedings will not have a material adverse effect on the Corporation's
financial condition.
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
Off-balance-sheet risk
In the normal course of business, the Corporation becomes a party to various
financial transactions that generally do not involve funding. Because these
transactions generally are not funded, they are not reflected on the balance
sheet and are referred to as financial instruments with off-balance-sheet risk.
The Corporation offers off-balance-sheet financial instruments to enable its
customers to meet their financing objectives and manage their interest- and
currency-rate risk. Supplying these instruments provides the Corporation with an
ongoing source of fee revenue. The Corporation also enters into these
transactions to manage its own risks arising from movements in interest and
currency rates, to manage prepayment risk associated with its mortgage servicing
portfolio and as part of its proprietary trading and funding activities. These
off-balance-sheet instruments are subject to credit and market risk. Credit risk
is limited to the estimated aggregate replacement cost of contracts in a gain
position, should counterparties fail to perform under the terms of those
contracts and any underlying collateral proves to be of no value. The
Corporation manages credit risk by dealing only with approved counterparties
under specific credit limits and by monitoring the amount of outstanding
contracts by customer and in the aggregate against such limits. Counterparty
limits are monitored on an ongoing basis. Credit risk is often further mitigated
by contractual agreements to net replacement cost gains and losses on multiple
transactions with the same counterparty through the use of master netting
agreements. Market risk arises from changes in the market value of contracts as
a result of the fluctuations in interest and currency rates. The Corporation
limits its exposure to market risk by entering into generally matching or
offsetting positions and by establishing and monitoring limits on unmatched
positions.
95
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Position limits are set by the Finance Committee and approved by the Office of
The Chairman and the Executive Committee of the board of directors. Portfolio
outstandings are monitored against such limits by senior managers and compliance
staff independent of line areas.
FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
(in millions) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $30,964 $26,777
Standby letters of credit and foreign guarantees 3,897 3,705
Commercial letters of credit 105 92
Residential mortgage loans serviced with recourse 112 120
Custodian securities lent with indemnification
against broker default of return of securities 29,830 21,626
- ------------------------------------------------------------------------------------------
</TABLE>
Commitments to extend credit
The Corporation enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specific rates and for
specific purposes. Substantially all of the Corporation's commitments to extend
credit are contingent upon customers maintaining specific credit standards at
the time of loan funding. The majority of the Corporation's commitments to
extend credit include material adverse change clauses within the commitment
contracts. These clauses allow the Corporation to deny funding a loan commitment
if the borrower's financial condition deteriorates during the commitment, such
that the customer no longer meets the Corporation's credit standards. The
Corporation's exposure to credit loss in the event of nonperformance by the
customer is represented by the contractual amount of the commitment to extend
credit. Accordingly, the credit policies utilized in committing to extend credit
and in the extension of loans are the same. Market risk arises on fixed rate
commitments if interest rates have moved adversely subsequent to the extension
of the commitment. The Corporation believes the market risk associated with
commitments is minimal. Since many of the commitments are expected to expire
without being drawn upon, the total contractual amounts do not necessarily
represent future cash requirements. The amount and type of collateral obtained
by the Corporation are based upon industry practice, as well as its credit
assessment of the customer. Of the $31 billion of contractual commitments for
which the Corporation has received a commitment fee or which were otherwise
legally binding--excluding credit card plans--approximately 29% of the
commitments are scheduled to expire within one year, and approximately 87% are
scheduled to expire within five years.
Letters of credit and foreign guarantees
There are two major types of letters of credit--standby and commercial letters
of credit. The off-balance-sheet credit risk involved in issuing standby and
commercial letters of credit is represented by their contractual amounts and is
essentially the same as the credit risk involved in commitments to extend
credit. The Corporation minimizes this risk by adhering to its written credit
policies and by requiring security and debt covenants similar to those contained
in loan agreements. The Corporation believes the market risk associated with
letters of credit and foreign guarantees is minimal.
96
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Standby letters of credit and foreign guarantees obligate the Corporation to
disburse funds to a third-party beneficiary if the Corporation's customer fails
to perform under the terms of an agreement with the beneficiary. Standby letters
of credit and foreign guarantees are used by the customer as a credit
enhancement and typically expire without being drawn upon.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES Weighted-average
years to maturity
December 31, at December 31,
(in millions) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper and other debt $ 400 $ 447 1.4 2.0
Tax-exempt securities 972 765 2.1 1.8
Bid- or performance-related 1,747 1,186 .6 .8
Other 778 1,307 .8 .5
------- -----
Total standby letters of credit and foreign guarantees (a) $3,897 $3,705 1.1 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of participations and cash collateral totaling $306 million and $391
million at December 31, 1997 and 1996, respectively.
A commercial letter of credit is normally a short-term instrument used to
finance a commercial contract for the shipment of goods from a seller to a
buyer. This type of letter of credit ensures prompt payment to the seller in
accordance with the terms of the contract. Although the commercial letter of
credit is contingent upon the satisfaction of specified conditions, it
represents a credit exposure if the buyer defaults on the underlying
transaction. Normally, reimbursement from the buyer is coincidental with payment
to the seller under commercial letter of credit drawings. As a result, the total
contractual amounts do not necessarily represent future cash requirements.
Residential mortgage loans serviced with recourse
Certain residential mortgages have been sold with servicing retained in which
the Corporation is subject to limited recourse provisions. The loans are
collateralized by real estate mortgages and in certain instances are supported
by either government-sponsored or private mortgage insurance.
Securities lending
A securities lending transaction is a fully collateralized transaction in which
the owner of a security agrees to lend the security through an agent (the
Corporation) to a borrower, usually a broker/dealer or bank, on an open,
overnight or term basis, under the terms of a prearranged contract. The borrower
will collateralize the loan at all times, generally with cash or U.S. government
securities, exceeding 100% of the market value of the loan, plus any accrued
interest on debt obligations.
The Corporation currently enters into two types of agency securities lending
arrangements--lending with and without indemnification. In securities lending
transactions without indemnification, the Corporation bears no contractual risk
of loss. For transactions in which the Corporation provides an indemnification,
risk of credit loss occurs if the borrower defaults on returning the securities
and the value of the collateral declines. Because the Corporation generally
indemnifies the owner of the securities against borrower default only, which is
indemnification for the difference between the market value of the securities
lent and any collateral deficiency, the total contractual amount does not
necessarily represent future cash requirements. Additional market risk
associated with securities lending transactions arises from interest rate
movements that affect the spread between the rate paid to the securities
borrower on the borrower's collateral and the rate the Corporation earns on that
collateral. This risk is controlled through policies that limit the level of
such risk that can be undertaken.
97
<PAGE> 76
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (A)
- --------------------------------------------------------------------------------
December 31,
1997 1996
-------------------- ---------------------
NOTIONAL CREDIT Notional Credit
(in millions) AMOUNT RISK Amount Risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $14,808 (B) $11,473 (b)
Commitments to sell 14,882 (B) 11,562 (b)
Foreign currency and other option contracts purchased 796 13 438 14
Foreign currency and other option contracts written 789 - 450 -
Interest rate agreements: (c)
Interest rate swaps 5,077 33 6,665 25
Options, caps and floors purchased 403 - 2,047 1
Options, caps and floors written 567 - 2,107 -
Futures and forward contracts 7,985 - 1,421 2
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
(b) The combined credit risk on foreign currency contract commitments to
purchase and sell was $487 million at December 31, 1997, and $303 million
at December 31, 1996.
(c) The credit risk associated with interest rate agreements is calculated
after considering master netting arrangements.
Foreign currency contracts
Commitments to purchase and sell foreign currency facilitate the management of
market risk by ensuring that, at some future date, the Corporation or a customer
will have a specified currency at a specified rate. The Corporation enters into
foreign currency contracts to assist customers in managing their currency risk
and as part of its proprietary trading activities. The notional amount of these
contracts at December 31, 1997, was $14.8 billion of contracts to purchase and
$14.9 billion of contracts to sell. This notional amount does not represent the
actual market or credit risk associated with this product. Market risk arises
from changes in the market value of contractual positions caused by movements in
currency rates. The Corporation limits its exposure to market risk by entering
into generally matching or offsetting positions and by establishing and
monitoring limits on unmatched positions. Credit risk relates to the ability of
the Corporation's counterparty to meet its obligations under the contract and
includes the estimated aggregate replacement cost of those foreign currency
contracts in a gain position. Replacement cost totaled approximately $487
million and $303 million at December 31, 1997 and 1996, respectively, and is
recorded on the balance sheet. There were no settlement or counterparty default
losses on foreign currency contracts in 1997, 1996 or 1995. The Corporation
manages credit risk by dealing only with approved counterparties under specific
credit limits and by monitoring the amount of outstanding contracts by customer
and in the aggregate against such limits. The future cash requirements, if any,
related to foreign currency contracts are represented by the net contractual
settlement between the Corporation and its counterparties.
Foreign currency and other option contracts written and purchased
Foreign currency and other option contracts grant the contract purchaser the
right, but not the obligation, to purchase or sell a specified amount of a
foreign currency or other financial instrument during a specified period at a
predetermined price. The Corporation acts as both a purchaser and seller of
foreign currency and other option contracts. Market risk arises from changes in
the value of contractual positions caused by fluctuations in currency rates,
interest rates and security values underlying the option contracts. Market risk
is managed by entering into generally matching or offsetting positions and by
establishing and monitoring limits on unmatched positions. Credit risk and
future cash requirements are similar to those of foreign currency contracts. The
estimated aggregate replacement cost of purchased foreign currency and other
option contracts in gain positions was $13 million at December 31, 1997, and $14
million at December 31, 1996, and is recorded on the balance sheet. There were
no settlement or counterparty default losses on foreign currency and other
option contracts in 1997, 1996 or 1995.
98
<PAGE> 77
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Interest rate swaps
Interest rate swaps obligate two parties to exchange one or more payments
generally calculated with reference to fixed or periodically reset rates of
interest applied to a specified notional principal amount. Notional principal is
the amount upon which interest rates are applied to determine the payment
streams under interest rate swaps. Such notional principal amounts often are
used to express the volume of these transactions but are not actually exchanged
between the counterparties.
The credit risk associated with interest rate swaps is limited to the estimated
aggregate replacement cost of those agreements in a gain position. Replacement
cost totaled $33 million and $25 million at December 31, 1997 and 1996,
respectively. Credit risk is managed through credit approval procedures that
establish specific lines for individual counterparties and limits of credit
exposure to various portfolio segments. Counterparty and portfolio outstandings
are monitored against such limits on an ongoing basis. Credit risk is further
mitigated by contractual arrangements with the Corporation's counterparties that
provide for netting replacement cost gains and losses on multiple transactions
with the same counterparty. The Corporation has entered into collateral
agreements with certain counterparties to interest rate swaps to further secure
amounts due. The collateral is generally cash, U.S. government securities or
mortgage pass-through securities guaranteed by the Government National Mortgage
Association (GNMA). There were no counterparty default losses on interest rate
swaps in 1997, 1996 or 1995. Market risk arises from changes in the market value
of contractual positions caused by movements in interest rates. The Corporation
limits its exposure to market risk by generally entering into matching or
offsetting positions and by establishing and monitoring limits on unmatched
positions. The future cash requirements of interest rate swaps are limited to
the net amounts payable under these swaps. At December 31, 1997, 83% of the
notional principal amount of interest rate swaps were scheduled to mature in
less than five years.
Options, caps and floors
An interest rate option is a contract that grants the purchaser the right to
either purchase or sell a financial instrument at a specified price within a
specified period of time. An interest rate cap is a contract that protects the
holder from a rise in interest rates beyond a certain point. An interest rate
floor is a contract that protects the holder against a decline in interest rates
below a certain point. The credit risk associated with options, caps and floors
purchased was less than $1 million at year-end 1997 and $1 million at year-end
1996 and is recorded on the balance sheet. Options, caps and floors written do
not expose the Corporation to credit risk. Market risk arises from changes in
the market value of contractual positions caused by movements in interest rates.
The Corporation limits its exposure to market risk by entering into generally
matching or offsetting positions and by establishing and monitoring limits on
unmatched positions.
Futures and forward contracts
Futures and forward contracts on loans, securities or money market instruments
represent future commitments to purchase or sell a specified instrument at a
specified price and date. Futures contracts are standardized and are traded on
organized exchanges, while forward contracts are traded in over-the-counter
markets and generally do not have standardized terms. The Corporation uses
futures and forward contracts in connection with its proprietary trading
activities.
For instruments that are traded on an organized exchange, the exchange assumes
the credit risk that a counterparty will not settle and generally requires a
margin deposit of cash or securities as collateral to minimize potential credit
risk. The Corporation has established policies governing which exchanges and
exchange members can be used to conduct these activities, as well as the number
of contracts permitted with each member and the total dollar amount of
outstanding contracts. Credit risk associated with futures and forward contracts
is limited to the estimated aggregate replacement cost of those futures and
forward contracts in a gain position and was less than $1 million at December
31, 1997, and $2 million at December 31, 1996. Credit risk related to futures
contracts is substantially mitigated by daily cash settlements with the
exchanges for the net change in futures contract value. There were no settlement
or counterparty default losses on futures
99
<PAGE> 78
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
and forward contracts in 1997, 1996 or 1995. Market risk is similar to the
market risk associated with foreign currency and other option contracts. The
future cash requirements, if any, related to futures and forward contracts are
represented by the net contractual settlement between the Corporation and its
counterparties.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (A)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
------------------------ ------------------------
NOTIONAL CREDIT Notional Credit
(in millions) AMOUNT RISK Amount Risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management instruments: (b)
Interest rate swaps $5,410 $34 $4,789 $3
Options, caps and floors purchased (c) 40 - 63 -
Futures contracts - - 33 -
Mortgage servicing rights risk management instruments:
Interest rate floors 1,850 35 - -
Interest rate swaps 1,000 26 - -
Principal only swaps 273 13 - -
Other products:
Total return swaps 139 6 118 4
Interest rate swaps and futures
contracts hedging anticipated transactions 579 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
(b) The credit risk associated with interest rate agreements is calculated
after considering master netting arrangements.
(c) At December 31, 1997 and 1996, there were no options, caps and floors
written.
Interest rate swaps
The Corporation enters into interest rate swaps as part of its interest rate
risk management strategy primarily to alter the interest rate sensitivity of its
deposit liabilities, loans and certain other liabilities. At December 31, 1997,
the Corporation used $5,410 million of interest rate swaps for interest rate
risk management purposes, compared with $4,789 million at December 31, 1996. The
credit and market risk associated with these instruments is explained on page 99
under "Interest rate swaps." The replacement cost of swap agreements in a gain
position was $34 million and $3 million at December 31, 1997 and 1996,
respectively. Net interest revenue in 1997 and 1996 included $4 million and $8
million, respectively, of amortized deferred gains from terminated interest rate
swaps.
Options, caps, floors and futures contracts
Other interest rate products--primarily options, interest rate caps, interest
rate floors and futures contracts--are also used by the Corporation as part of
its interest rate risk management strategy. The Corporation had $40 million and
$96 million notional amounts of these instruments outstanding at December 31,
1997 and 1996, respectively. The credit and market risk associated with these
instruments is explained on page 99 under "Options, caps, floors" and "Futures
and forward contracts." The replacement cost of those instruments in a gain
position was less than $1 million at December 31, 1997 and less than $1 million
at December 31, 1996.
100
<PAGE> 79
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Mortgage servicing rights risk management instruments
The value of the Corporation's mortgage servicing portfolio may be adversely
impacted if mortgage interest rates decrease and actual or expected prepayments
of loans serviced increase. To mitigate this risk and the potential resultant
impairment to MSRs, the Corporation holds interest rate contracts including
interest rate floors, interest rate swaps and principal only swaps. In an
interest rate floor agreement, cash interest payments are received only if
current interest rates fall below a predetermined interest rate. Principal only
swaps increase in value if the underlying instrument, consumer mortgages,
prepays at an accelerated rate. The Corporation had $3,123 million notional
amount of these instruments outstanding at December 31, 1997. The replacement
cost of those instruments in a gain position was $74 million at December 31,
1997.
Total return swaps
The Corporation had $139 million and $118 million of total return swaps at
December 31, 1997 and 1996, respectively. Total return swaps are used by the
Corporation to minimize the risk related to the Corporation's investment in
startup mutual funds that are based on specific market indices. Credit risk
associated with these products was $6 million at year-end 1997 and $4 million at
year-end 1996.
Anticipated transactions
The Corporation periodically issues notes and debentures for general corporate
purposes, including the funding of debt maturities. At December 31, 1997, there
were open hedges of anticipated transactions to lock in the cost of a debt
issuance anticipated in the first quarter of 1998 as well as to lock in the
value of certain loans that are anticipated to be sold and/or securitized in the
first half of 1998. There was an unrealized loss of less than $1 million related
to these anticipated transactions at December 31, 1997.
Concentrations of credit risk
The Corporation manages both on- and off-balance-sheet credit risk by
maintaining a well-diversified credit portfolio and by adhering to its written
credit policies, which specify general underwriting criteria as well as
underwriting standards for specific industries and control credit exposure by
borrower, counterparty, degree of risk, industry and country. These measures are
regularly updated to reflect the Corporation's evaluation of developments in
economic, political and operating environments that could affect lending risks.
The Corporation may adjust credit exposure to individual industries or customers
through loan sales, syndications, participations and the use of master netting
agreements when it has more than one transaction outstanding with the same
customer. The amount of collateral, if any, obtained by the Corporation upon the
extension of credit is based on industry practice as well as the credit
assessment of the customer. The type and amount of collateral vary, but the form
generally includes: accounts receivable; inventory; property, plant and
equipment; other assets; and/or income-producing commercial properties with
appraised values that exceed the contractual amount of the credit facilities by
pre-approved ratios. The maximum risk of accounting loss from on- and
off-balance-sheet financial instruments with these counterparties is represented
by their respective balance sheet amounts and the contractual or replacement
cost of the off-balance-sheet financial instruments. The only significant credit
concentrations for the Corporation were consumers and the U.S. government.
Consumer credit exposure consisted principally of loans and the related interest
receivable on the balance sheet and off-balance-sheet loan commitments and
letters of credit. Information on the Corporation's consumer loans is presented
in note 4 of Notes to Financial Statements. Consumers to which the Corporation
has credit exposure primarily are located within the mid-Atlantic region and are
affected by economic conditions within that region.
101
<PAGE> 80
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
The Corporation has credit exposure to the U.S. government, including its
corporations and agencies. Substantially all of this exposure consisted of
investment securities, securities available for sale and the related interest
receivable and balances due from the Federal Reserve. There were no other
significant concentrations of credit risk at December 31, 1997 and 1996,
respectively.
25. FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the estimated fair value of on- and off-balance-sheet
financial instruments. A financial instrument is defined by FAS No. 107 as cash,
evidence of an ownership interest in an entity or a contract that creates a
contractual obligation or right to deliver to or receive cash or another
financial instrument from a second entity on potentially favorable terms.
Fair value estimates are made at a point in time, based on relevant market data
and information about the financial instrument. FAS No. 107 specifies that fair
values should be calculated based on the value of one trading unit without
regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. Because no readily available market exists for a
significant portion of the Corporation's financial instruments, fair value
estimates for these instruments are based on judgments regarding current
economic conditions, currency and interest rate risk characteristics, loss
experience and other factors. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
Therefore, the calculated fair value estimates cannot always be substantiated by
comparison to independent markets and, in many cases, may not be realizable in a
current sale of the instrument. Changes in assumptions could significantly
affect the estimates.
Fair value estimates do not include anticipated future business or the value of
assets, liabilities and customer relationships that are not considered financial
instruments. For example, the Corporation's fee-generating businesses--which
contributed 62% of revenue in 1997--are not incorporated into the fair value
estimates. Other significant assets and liabilities that are not considered
financial instruments include lease finance assets, deferred tax assets, lease
contracts, premises and equipment, and intangible assets. Accordingly, the
estimated fair value amounts of financial instruments do not represent the
entire value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
the fair value of its financial instruments at December 31, 1997 and 1996.
Short-term financial instruments
The carrying amounts reported on the Corporation's balance sheet generally
approximate fair value for financial instruments that reprice or mature in 90
days or less, with no significant change in credit risk. The carrying amounts
approximate fair value for cash and due from banks; money market investments;
acceptances; demand deposits; money market and other savings accounts; federal
funds purchased and securities under repurchase agreements; U.S. Treasury tax
and loan demand notes; commercial paper; and certain other assets and
liabilities.
Trading account securities, securities available for sale and investment
securities
Trading account securities and securities available for sale are recorded at
market value on the Corporation's balance sheet, including amounts for
off-balance-sheet instruments held for trading activities. Market values of
trading account securities, securities available for sale and investment
securities generally are based on quoted market prices or dealer quotes, if
available. If a quoted market price is not available, market value is estimated
using quoted market prices for securities with similar credit, maturity and
interest rate characteristics. The tables in note 3 present in greater detail
the carrying value and market value of securities available for sale and
investment securities at December 31, 1997 and 1996.
102
<PAGE> 81
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loans
The estimated fair value of performing commercial loans and certain consumer
loans that reprice or mature in 90 days or less approximates their respective
carrying amounts adjusted for a credit risk factor based upon the Corporation's
historical credit loss experience. The estimated fair value of performing loans,
except for consumer mortgage loans and credit card loans, that reprice or mature
in more than 90 days is estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality and for similar maturities.
Fair value of consumer mortgage loans is estimated using market quotes or
discounting contractual cash flows, adjusted for prepayment estimates. Discount
rates were obtained from secondary market sources, adjusted to reflect
differences in servicing, credit and other characteristics.
The estimated fair value of credit card loans is developed using estimated cash
flows and maturities based on contractual interest rates and historical
experience. Estimated cash flows are discounted using market rates adjusted for
differences in servicing, credit and other costs. This estimate does not include
the value that relates to new loans that will be generated from existing
cardholders over the remaining life of the portfolio, a value that is typically
reflected in market prices realized in credit card portfolio sales.
The estimated fair value for nonperforming commercial real estate loans is the
"as is" appraised value of the underlying collateral. For other nonperforming
loans, the estimated fair value represents carrying value less a credit risk
adjustment based upon the Corporation's historical credit loss experience.
Deposit liabilities
FAS No. 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits and money market and other savings
accounts, to be the amount payable on demand. Although market premiums paid for
depository institutions reflect an additional value for these low-cost deposits,
FAS No. 107 prohibits adjusting fair value for any value expected to be derived
from retaining those deposits for a future period of time or from the benefit
that results from the ability to fund interest-earning assets with these deposit
liabilities. The fair value of fixed-maturity deposits which reprice or mature
in more than 90 days is estimated using the rates currently offered for deposits
of similar remaining maturities.
Notes and debentures
The fair value of the Corporation's notes and debentures is estimated using
quoted market yields for the same or similar issues or the current yields
offered by the Corporation for debt with the same remaining maturities.
The table on the following page includes financial instruments, as defined by
FAS No. 107, whose estimated fair value is not represented by the carrying value
as reported on the Corporation's balance sheet. Management has made estimates of
fair value discount rates that it believes to be reasonable considering expected
prepayment rates, rates offered in the geographic areas in which the Corporation
competes, credit risk and liquidity risk. However, because there is no active
market for many of these financial instruments, management has no basis to
verify whether the resulting fair value estimates would be indicative of the
value negotiated in an actual sale.
103
<PAGE> 82
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Carrying amount Estimated fair value
December 31, December 31,
(dollars in millions) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale (a) $ 2,767 $ 4,111 $ 2,767 $ 4,111
Investment securities (a) 2,082 2,375 2,118 2,365
Loans (b):
Commercial and financial 12,392 11,618 12,368 11,553
Commercial real estate 1,509 1,534 1,492 1,486
Consumer mortgage 8,505 7,772 8,465 7,661
Other consumer credit 4,097 3,936 4,151 3,924
------- -------
Total loans 26,503 24,860
Reserve for credit losses (b) (445) (482) - -
------- ------- ---------- -----------
Net loans 26,058 24,378 26,476 24,624
Other assets (c) 2,074 1,500 2,099 1,503
Fixed-maturity deposits (d):
Retail savings certificates 7,421 6,660 7,464 6,639
Negotiable certificates of deposit 1,370 2,710 1,369 2,708
Other time deposits 1,289 2,557 1,288 2,554
Other funds borrowed (c) 1,095 784 1,095 783
Notes and debentures (a) 2,573 2,518 2,665 2,555
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Market or dealer quotes were used to estimate the fair value of these
financial instruments.
(b) Approximately 83% and 81% of total performing loans, excluding consumer
mortgages and credit card receivables, reprice or mature within 90 days
at December 31, 1997 and 1996, respectively. Excludes lease finance
assets of $2,639 million and $2,533 million, as well as the related
reserve for credit losses of $30 million and $43 million at December 31,
1997 and 1996, respectively. Lease finance assets are not considered
financial instruments as defined by FAS No. 107.
(c) Excludes non-financial instruments.
(d) FAS No. 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits and money market and other
savings accounts, to be equal to the amount payable on demand. Therefore,
the positive effect of the Corporation's $21,225 million and $19,447
million of such deposits at December 31, 1997 and 1996, respectively, are
not included in this table.
Commitments to extend credit, and standby letters of credit and foreign
guarantees
These financial instruments generally are not sold or traded, and estimated fair
values are not readily available. However, the fair value of commitments to
extend credit, and standby letters of credit and foreign guarantees is
represented by the remaining contractual fees receivable over the term of the
commitments.
Other off-balance-sheet financial instruments
The estimated fair value of off-balance-sheet instruments used for trading
activities--which includes foreign exchange contracts, interest rate swaps,
option contracts, interest rate caps and floors, and futures and forward
contracts--is equal to the on-balance-sheet carrying amount of these
instruments. The estimated fair value of off-balance-sheet instruments used for
risk management purposes--which primarily includes interest rate swaps, interest
rate caps and floors, and futures contracts--is estimated by obtaining quotes
from brokers. These values represent the estimated amount the Corporation would
receive or pay to terminate the agreements, considering current interest and
currency rates, as well as the current credit-worthiness of the counterparties.
Off-balance-sheet financial instruments are further discussed in note 24,
"Financial instruments with off-balance-sheet risk and concentrations of credit
risk."
104
<PAGE> 83
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF COMMITMENTS TO EXTEND CREDIT, AND STANDBY LETTERS OF
CREDIT AND FOREIGN GUARANTEES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 December 31, 1996
---------------------------------------------- -------------------------------------
ASSET Asset
---------------------------- -----------------------
CONTRACT CARRYING ESTIMATED Contract Carrying Estimated
(in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a)fair value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit $30,964 $4 $102 $26,777 $5 $91
Standby letters of credit and
foreign guarantees 3,897 1 19 3,705 2 18
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the on-balance-sheet receivables or deferred income arising
from these financial instruments.
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR TRADING
ACTIVITIES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 December 31, 1996
------------------------------------------- -------------------------------------------
ASSET (LIABILITY) Asset (Liability)
NOTIONAL -------------------------- Notional --------------------------
PRINCIPAL ESTIMATED AVERAGE principal Estimated Average
(in millions) AMOUNT FAIR VALUE (a) FAIR VALUE amount fair value (a) fair value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency contracts $29,690 $ 3 $ 14 $23,035 $ 5 $ 5
Options purchased 796 13 14 438 14 7
Options written 789 12 13 450 12 7
Interest rate swaps 5,077 13 7 6,665 6 4
Options, caps and floors 970 - - 4,154 - -
Futures and forward contracts 7,985 (11) (10) 1,421 2 2
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Recorded at fair value on the Corporation's balance sheet.
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR RISK
MANAGEMENT PURPOSES
DECEMBER 31, 1997 December 31, 1996
---------------------------------------- --------------------------------------
ASSET (LIABILITY) Asset (Liability)
NOTIONAL ------------------------ Notional ------------------------
PRINCIPAL CARRYING ESTIMATED principal Carrying Estimated
(in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a) fair value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management instruments:
Interest rate swaps $5,410 $22 $32 $4,789 $5 $(67)
Options, caps and floors 40 1 - 63 - 1
Futures contracts - - - 33 - -
Mortgage servicing rights risk management
instruments:
Interest rate floors 1,850 23 35 - - -
Interest rate swaps 1,000 6 26 - - -
Principal only swaps 273 (1) 13 - - -
Other products:
Total return swaps 139 - 6 118 - 2
Interest rate swaps and futures
contracts hedging anticipated transactions 579 - (1) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the on-balance-sheet receivables/payables, unamortized
premiums or deferred income arising from these financial instruments.
105
<PAGE> 84
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
26. SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
Noncash investing and financing transactions that, appropriately, are not
reflected in the Consolidated Statement of Cash Flows are listed below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net transfers to real estate acquired $ 12 $ 23 $ 22
Net transfers to segregated assets 12 12 10
Purchase acquisitions (a):
Fair value of noncash assets acquired 1,057 1,954 385
Liabilities and deposits assumed (720) (120) (255)
Common stock issued, from treasury, and notes payable (158) (10) -
------- -------- ------
Net cash paid 179 1,824 130
Transfer of CornerStonesm credit card loans to
accelerated resolution portfolio 231 - 193
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase acquisitions include: Buck Consultants, Inc. and Pacific
Brokerage Services, Inc. in 1997; the business equipment finance unit of
USL and FUL in 1996; and Metmor Financial, Inc. in 1995.
In late 1995, the FASB issued "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities, Questions and
Answers." This guide permitted a one-time reassessment of the appropriateness of
the classifications of securities as available for sale or held for investment.
In 1995, the Corporation elected to redesignate $530 million of GNMA fixed-rate
pass-through securities with an unrealized gain of $22 million and $56 million
of municipal securities with an unrealized gain of less than $1 million, from
the investment securities category to the securities available for sale
category.
106
<PAGE> 85
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
27. MELLON BANK CORPORATION (PARENT CORPORATION)
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENT
- --------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from bank subsidiaries $450 $400 $501
Dividends from nonbank subsidiaries 34 21 30
Interest revenue from bank subsidiaries 39 25 37
Interest revenue from nonbank subsidiaries 25 25 27
Other revenue 6 12 3
- --------------------------------------------------------------------------------------------------------
Total revenue 554 483 598
- --------------------------------------------------------------------------------------------------------
Interest expense on commercial paper 4 12 13
Interest expense on notes and debentures 89 88 83
Other expense 31 29 29
Trust-preferred securities expense 78 3 -
- --------------------------------------------------------------------------------------------------------
Total expense 202 132 125
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 352 351 473
Provision (benefit) for income taxes (38) (21) (17)
Equity in undistributed net income:
Bank subsidiaries 189 228 111
Nonbank subsidiaries 192 133 90
- --------------------------------------------------------------------------------------------------------
NET INCOME 771 733 691
Dividends on preferred stock 21 44 39
- --------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $750 $689 $652
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and money market investments with bank subsidiary $ 337 $ 917
Securities available for sale - 200
Loans and other receivables due from nonbank subsidiaries 566 347
Investment in bank subsidiaries 4,452 4,185
Investment in nonbank subsidiaries 515 362
Subordinated debt and other receivables due from bank subsidiaries 78 108
Other assets 147 108
- -------------------------------------------------------------------------------------------------------
Total assets $6,095 $6,227
- -------------------------------------------------------------------------------------------------------
LIABILITIES:
Commercial paper $ 67 $ 122
Other liabilities 169 140
Notes and debentures (with original maturities over one year) 1,023 1,229
- -------------------------------------------------------------------------------------------------------
Total liabilities 1,259 1,491
- -------------------------------------------------------------------------------------------------------
TRUST-PREFERRED SECURITIES:
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991 990
- -------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock 193 290
Common shareholders' equity 3,652 3,456
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,845 3,746
- -------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and shareholders' equity $6,095 $6,227
- -------------------------------------------------------------------------------------------------------
</TABLE>
107
<PAGE> 86
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
27. MELLON BANK CORPORATION (PARENT CORPORATION) (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 771 $ 733 $ 691
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 12 21 21
Equity in undistributed net income of subsidiaries (399) (361) (201)
Net (increase) decrease in accrued interest receivable (1) 1 3
Deferred income tax benefit (1) (3) -
Net increase in other operating activities 39 10 42
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 421 401 556
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in short-term deposits with affiliated banks 581 (602) 32
Purchases of securities available for sale (605) (200) -
Proceeds from maturities of securities available for sale 807 - -
Loans made to subsidiaries (250) (298) (284)
Principal collected on loans to subsidiaries 191 342 581
Loans collected from (made to) joint venture 14 1 (15)
Net capital returned from subsidiaries 16 350 241
Net increase in other investing activities (52) (20) (14)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) in investing activities 702 (427) 541
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in commercial paper (55) (162) 106
Repayments of long-term debt (205) (20) (326)
Net proceeds from issuance of long-term debt - 247 199
Proceeds from issuance of common stock 75 55 58
Redemption of preferred stock (97) (145) (155)
Net proceeds from issuance of guaranteed preferred beneficial interests
in Corporation's junior subordinated deferrable interest debentures - 990 -
Repurchase of common stock (534) (596) (578)
Repurchase of warrants - - (54)
Dividends paid on common and preferred stock (352) (354) (346)
Net increase in other financing activities 46 11 -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) in financing activities (1,122) 26 (1,096)
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND DUE FROM BANKS:
Net change in cash and due from banks 1 - 1
Cash and due from banks at beginning of year 1 1 -
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 2 $ 1 $ 1
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Interest paid $ 97 $ 95 $ 99
Net income taxes refunded (27) (3) (42)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
108
<PAGE> 87
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MELLON BANK CORPORATION:
We have audited the accompanying consolidated balance sheets of Mellon Bank
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mellon Bank
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
January 15, 1998
109
<PAGE> 88
CORPORATE INFORMATION
Annual Meeting The Annual Meeting of Shareholders will be held on the
10th floor of the Union Trust Building, 501 Grant Street,
Pittsburgh, PA, at 10 a.m. on Tuesday, April 21, 1998.
Form 10-K and For a free copy of the Corporation's Annual Report on
Shareholder Form 10-K or the quarterly earnings news release on
Publications Form 8-K, as filed with the Securities and Exchange
Commission, please send a written request to the
Secretary of the Corporation, 4826 One Mellon Bank
Center, Pittsburgh, PA 15258-0001.
Quarterly earnings and other news releases also can be
obtained by fax by calling Company News on Call at 1
800 758-5804 and entering a six-digit code (552187).
Exchange Listing Mellon's common stock is traded on the New York Stock
Exchange. The trading symbol is MEL. Our Transfer
Agent and Registrar is ChaseMellon Shareholder
Services, P.O. Box 590, Ridgefield Park, NJ 07660-9940.
For more information, please call 1 800 205-7699.
Stock Prices Current prices for Mellon's common stock can be
obtained from any Touch-Tone telephone by dialing (412)
236-0834 (in Pittsburgh) or 1 800 648-9496 (outside
Pittsburgh). When prompted to "enter I.D.," press MEL#
(or 635#). This service is available free of charge, 24
hours a day, seven days a week, from anywhere in the
continental United States.
Dividend Payments Subject to approval of the board of directors,
dividends are paid on Mellon's common stock
on or about the 15th day of February, May,
August and November.
Direct Stock Purchase The Direct Stock Purchase and Dividend Reinvestment
and Dividend Plan provides a way to purchase shares of common
Reinvestment Plan stock directly from the Corporation at the market
value for such shares. Nonshareholders may purchase
their first shares of the Corporation's common stock
through the plan, and shareholders may increase
their shareholdings by reinvesting cash dividends
and through optional cash investments. Plan
details are in a Prospectus, which may be
obtained from ChaseMellon Shareholder Services
by calling 1 800 842-7629.
Electronic Deposit Registered shareholders may have quarterly dividends
of Dividends paid on Mellon's common stock deposited electronically to
their checking or savings account, free of charge. To
have your dividends deposited electronically, please
write to ChaseMellon Shareholder Services, P.O. Box 590,
Ridgefield Park, NJ 07660-9940. For more information,
please call 1 800 205-7699.
<TABLE>
<S> <C> <C> <C>
Phone Contacts Corporate Communications/
Media Relations (412) 236-1264 Media inquiries
Direct Stock Purchase and
Dividend Reinvestment Plan 1 800 842-7629 Plan prospectus and enrollment materials
Investor Relations (412) 234-5601 Questions regarding the Corporation's financial
performance
Publication Requests 1 800 205-7699 Requests for the Annual Report or quarterly information
Securities Transfer Agent 1 800 205-7699 Questions regarding stock holdings, certificate
replacement/transfer, dividends and address changes
</TABLE>
Internet Access Mellon: www.mellon.com
Dreyfus: www.dreyfus.com
Buck: www.buckconsultants.com
Dreyfus Brokerage Services: www.edreyfus.com
ChaseMellon Shareholder Services: www.chasemellon.com
Elimination of To eliminate duplicate mailings, please submit a
Duplicate Mailings written request, with your full name and address the
way it appears on your account, to ChaseMellon
Shareholder Services, P.O. Box 590, Ridgefield Park, NJ
07660-9940. For more information, please call 1 800
205-7699.
Charitable A report on Mellon's comprehensive community
Contributions involvement, including charitable contributions, is
available by calling (412) 234-8680.
MELLON ENTITIES ARE EQUAL EMPLOYMENT OPPORTUNITY/
AFFIRMATIVE ACTION EMPLOYERS. Mellon is
committed to providing equal employment opportunities
to every employee and every applicant for employment,
regardless of, but not limited to, such factors as
race, color, religion, sex, national origin, age,
familial or marital status, ancestry, citizenship,
sexual orientation, veteran status or being a
qualified individual with a disability.
<PAGE> 1
EXHIBIT 21.1
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
Buck Consultants, Inc.
State of Incorporation: New York
o Buck Consultants Actuarios Consultores S.A. de C.V.
Incorporation: Mexico
o Buck Consultants GMbH
Incorporation: Germany
oo Buck Consultants S.A.
Incorporation: Belgium
oo Heissmann/IPC GMbH (25% ownership)
Incorporation: Germany
o Buck Consultants Limited
Incorporation: Canada
o Buck Consultants Limited
Incorporation: England
oo Bevis Trustees Limited
Incorporation: England
oo Buck Investment Consultants Limited
Incorporation: England
oo Buck & Willis Health Care Limited (51% ownership)
Incorporation: England
o Buck Consultants Limited
Incorporation: Trinidad
o Buck Consultants Pty.
Incorporation: Australia
oo Buck Consultants Pty. Ltd. (60% ownership)
Incorporation: Australia
Note: Certain subsidiaries have been omitted from the List of Subsidiaries of
the Corporation. These subsidiaries, when considered in the aggregate as
a single subsidiary, do not constitute a significant subsidiary as
defined in Rule 1-02(w) of Regulation S-X.
<PAGE> 2
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-2-
ooo Buck Consultants Nominees Pty. Ltd.
Incorporation: Australia
ooo Buck Consultants Services Pty. Ltd.
Incorporation: Australia
ooo Buck Consultants Taxation Services Pty. Ltd.
Incorporation: Australia
o Buck Consultants SNC
Incorporation: France
o Buck Investment Services, Inc.
State of Incorporation: New Jersey
o Buck Services Corporation
State of Incorporation: Illinois
Certus Asset Advisors Corporation
State of Incorporation: Delaware
Dreyfus Investment Services Corporation
State of Incorporation: Delaware
Mellon Accounting Services, Inc.
State of Incorporation: Delaware
Mellon Asia Limited
Incorporation: Hong Kong
Mellon Bank Community Development Corporation
State of Incorporation: Pennsylvania
Mellon Bank, N.A.
Incorporation: United States
o AFCO Credit Corporation
State of Incorporation: New York
oo AFCO Acceptance Corporation
State of Incorporation: California
<PAGE> 3
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-3-
o A P Beaumeade, Inc.
State of Incorporation: Delaware
o A P Colorado, Inc.
State of Incorporation: Colorado
o A P Colorado, Inc. #2
State of Incorporation: Colorado
o APD Chimney Lakes, Inc.
State of Incorporation: Florida
o APD Cross Creek, Inc.
State of Incorporation: Florida
o APD Cypress Springs, Inc.
State of Incorporation: Florida
o A P East, Inc.
State of Incorporation: Delaware
o A P Management, Inc.
State of Incorporation: Pennsylvania
o A P Properties, Inc.
State of Incorporation: New Jersey
o AP Properties Minnesota, Inc.
State of Incorporation: Minnesota
o AP Residential Realty, Inc.
State of Incorporation: Pennsylvania
o A P Rural Land, Inc.
State of Incorporation: Pennsylvania
o AP Wheels, Inc.
State of Incorporation: Michigan
o APME Company, Inc.
State of Incorporation: Wisconsin
<PAGE> 4
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-4-
o APU Chimney Lakes, Inc.
State of Incorporation: Florida
o APU Cross Creek, Inc.
State of Incorporation: Florida
o APU Cypress Springs, Inc.
State of Incorporation: Florida
o Citmelex Corporation
State of Incorporation: Delaware
o Commonwealth National Mortgage Company
State of Incorporation: Pennsylvania
o Dreyfus Brokerage Services, Inc.
State of Incorporation: California
o Dreyfus Financial Services Corporation
State of Incorporation: Delaware
o East Properties Inc.
State of Incorporation: Delaware
o Mellon Bank Canada
Incorporation: Canada
oo CAFO, Inc.
Incorporation: Canada
oo CIBC Mellon Global Securities
Services Company (50% ownership)
Incorporation: Canada
oo CIBC Mellon Trust Company (50% ownership)
Incorporation: Canada
oo Mellon Asset Management, Limited
Incorporation: Ontario
<PAGE> 5
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-5-
oo Mellon Bank Canada Leasing Inc.
Incorporation: Canada
oo MBC SPC Leasing Co., Ltd.
Incorporation: Alberta
o Mellon Bond Associates (99% ownership)*
State of Organization: Pennsylvania
o Mellon Consumer Leasing Corporation
State of Incorporation: Pennsylvania
o Mellon Equity Associates (99% ownership)*
State of Organization: Pennsylvania
o Mellon Insurance Agency, Inc.
State of Incorporation: Pennsylvania
o Mellon Leasing Corporation
State of Incorporation: Pennsylvania
oo Mellon International Leasing Company
State of Incorporation: Delaware
oo Pontus, Inc.
State of Incorporation: Delaware
o Mellon Mortgage Company
State of Incorporation: Colorado
oo Mellon Residential Funding Corporation
State of Incorporation: Delaware
o Mellon Overseas Investment Corporation
Incorporation: United States
oo B.I.E. Corporation
Incorporation: British West Indies
* Remaining 1% owned by MMIP, Inc.
<PAGE> 6
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-6-
oo Dreyfus International (Ireland) Limited
Incorporation: Ireland
oo Mellon Bank Representacoes, Ltda.
Incorporation: Brazil
oo Mellon International Investment Corporation
Incorporation: British West Indies
oo Mellon Securities Limited
State of Incorporation: Pennsylvania
o Mellon Trust Company of Illinois
State of Incorporation: Illinois
o Mellon Ventures, Inc.
State of Incorporation: Pennsylvania
o Mellon Ventures, L.P. (98.5% ownership)
State of Organization: Delaware
o Melnamor Corporation
State of Incorporation: Pennsylvania
oo A P Colorado, Inc. #3
State of Incorporation: Colorado
oo A P Meritor, Inc.
State of Incorporation: Minnesota
oo Baldorioty de Castro Development Corporation
Incorporation: Puerto Rico
oo Cacalaba, Inc.
State of Incorporation: New Mexico
oo Casals Development Corporation
Incorporation: Puerto Rico
oo CEBC, Inc.
Incorporation: Puerto Rico
<PAGE> 7
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-7-
oo Costamar Development Corporation
Incorporation: Puerto Rico
oo Festival, Inc.
State of Incorporation: Virginia
oo FSFC, Inc.
State of Incorporation: Pennsylvania
oo Holiday Properties, Inc.
State of Incorporation: Alabama
oo Laplace Land Company, Inc.
State of Incorporation: Louisiana
oo Promenade, Inc.
State of Incorporation: California
oo SKAP #7, Inc.
State of Incorporation: Texas
oo Texas AP, Inc.
State of Incorporation: Texas
oo Trilem, Inc.
State of Incorporation: Pennsylvania
oo Vacation Properties, Inc.
State of Incorporation: North Carolina
o Meritor Mortgage Corporation - East
State of Incorporation: Pennsylvania
oo Central Valley Management Co., Inc.
State of Incorporation: Pennsylvania
o MMIP, Inc.
State of Incorporation: Delaware
<PAGE> 8
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-8-
oo Mellon Bond Associates (1% ownership)*
State of Organization: Pennsylvania
oo Mellon Equity Associates (1% ownership)*
State of Organization: Pennsylvania
o RECR, Inc.
State of Incorporation: Pennsylvania
o The Dreyfus Corporation
State of Incorporation: New York
oo Dreyfus Investment Advisors, Inc.
State of Incorporation: New York
oo Dreyfus - Lincoln, Inc.
State of Incorporation: Delaware
oo Dreyfus Precious Metals, Inc.
State of Incorporation: Delaware
oo Dreyfus Service Corporation
State of Incorporation: New York
oo Dreyfus Transfer, Inc.
State of Incorporation: Maryland
oo Seven Six Seven Agency, Inc.
State of Incorporation: New York
oo The Dreyfus Consumer Credit Corporation
State of Incorporation: Delaware
Boston Group Holdings, Inc.
State of Incorporation: Delaware
o The Boston Company, Inc.
State of Incorporation: Massachusetts
*Remaining 99% owned by Mellon Bank, N.A.
<PAGE> 9
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-9-
oo Boston Safe Deposit and Trust Company
State of Incorporation: Massachusetts
ooo Boston Safe (Nominees) Limited
Incorporation: England
ooo Bridgewater Land Company, Inc.
State of Incorporation: Massachusetts
oooo Mellon Preferred Capital Corporation
State of Incorporation: Massachusetts
ooo Reco, Inc.
State of Incorporation: Massachusetts
oooo Mitlock Limited Partnership
State of Organization: Massachusetts
oooo Tuckahoe Limited Partnership
State of Organization: Massachusetts
ooo TBC Securities Co., Inc.
State of Incorporation: Massachusetts
ooo The Boston Company Financial Services, Inc.
State of Incorporation: Massachusetts
ooo Wellington-Medford Associates II LP (65% ownership)
State of Organization: Massachusetts
oo Boston Safe Advisors, Inc.
State of Incorporation: Massachusetts
oo Franklin Portfolio Associates, LLC (99% ownership)
State of Organization: Massachusetts
oo Franklin Portfolio Holdings, Inc.
State of Incorporation: Massachusetts
ooo Franklin Portfolio Associates, LLC (1% ownership)
State of Organization: Massachusetts
<PAGE> 10
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-10-
oo Mellon Trust of California
State of Incorporation: California
oo Mellon Trust of Florida, National Association
State of Incorporation: Florida
oo Mellon Trust of New York
State of Incorporation: New York
oo The Boston Company Advisors, Inc.
State of Incorporation: Delaware
oo The Boston Company Asset Management, Inc.
State of Incorporation: Massachusetts
oo The Boston Company Energy Advisors, Inc.
State of Incorporation: Massachusetts
oo The Boston Company Financial Strategies, Inc.
State of Incorporation: Massachusetts
oo Wellington-Medford II Properties, Inc.
State of Incorporation: Massachusetts
Mellon Bank (DE) National Association
Incorporation: United States
o Dreyfus Service Organization, Inc.
State of Incorporation: Delaware
oo Dreyfus Insurance Agency of Massachusetts, Inc.
State of Incorporation: Massachusetts
o MBC Insurance Agency, Inc.
State of Incorporation: Delaware
o The Shelter Group, Inc.
State of Incorporation: Delaware
o Wilprop, Inc.
State of Incorporation: Delaware
<PAGE> 11
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-11-
Mellon Bank (MD) National Association
Incorporation: United States
o Baltimore Realty Corporation
State of Incorporation: Maryland
Mellon Capital I**
State of Organization: Delaware
Mellon Capital II**
State of Organization: Delaware
Mellon EFT Services Corporation
State of Incorporation: Pennsylvania
Mellon Financial Company
State of Incorporation: Pennsylvania
Mellon Financial Markets, Inc.
State of Incorporation: Delaware
Mellon Financial Services Corporation #17 (Mellon Securities Transfer Services)
State of Incorporation: Delaware
o ChaseMellon Shareholder Services, L.L.C. (50% ownership)
State of Organization: New Jersey
MBC Investments Corporation
State of Incorporation: Delaware
o Dreyfus Management GMBH
Incorporation: Germany
o Dreyfus Trust Company
State of Incorporation: New York
o Laurel Capital Advisors
State of Incorporation: Pennsylvania
- -----------------
** Trust created for the sole purpose of issuing trust-preferred securities.
<PAGE> 12
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-12-
o Mellon Bank, F.S.B.
Incorporation: United States
o Mellon Capital Management Corporation
State of Incorporation: Delaware
o Mellon Financial Services Corporation #1
State of Incorporation: Delaware
oo Allomon Corporation
State of Incorporation: Pennsylvania
ooo APT Holdings Corporation
State of Incorporation: Delaware
ooo Lucien Land Company, Inc.
State of Incorporation: Florida
oooo APD Crossings, Inc.
State of Incorporation: Florida
oo Mellon Escrow Company
State of Incorporation: Delaware
oo Mellon Financial Services Corporation #2
State of Incorporation: Delaware
oo Mellon Financial Services Corporation #4
State of Incorporation: Pennsylvania
ooo Beaver Valley Leasing Corporation
State of Incorporation: Pennsylvania
ooo Katrena Corporation (80% ownership)
State of Incorporation: Delaware
ooo Mellon Financial Services Corporation #13
State of Incorporation: Alabama
ooo MFS Leasing Corp.
State of Incorporation: Delaware
<PAGE> 13
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-13-
oo Mellon Financial Services Corporation #5
State of Incorporation: Louisiana
ooo Mellon Financial Services Corporation #10
State of Incorporation: Louisiana
oo Mellon Properties Company
State of Incorporation: Louisiana
o Mellon-France Corporation
State of Incorporation: Pennsylvania
oo CCF-Mellon Partners (50% ownership)
State of Organization: Pennsylvania
o Mellon Fund Administration Limited
Incorporation: England
o Mellon Fund Administration (Dublin) Limited
Incorporation: Ireland
o Mellon Global Investing Corp.
State of Incorporation: New York
oo Pareto Partners - U.S. (30% ownership)
State of Incorporation: New York
o Mellon Life Insurance Company
State of Incorporation: Delaware
o Mellon Ventures II, LP (98.25% ownership)
State of Organization: Delaware
o MGIC-UK Ltd.
Incorporation: England
oo Pareto Partners - U.K. (30% ownership)
Incorporation: England
o The Truepenny Corporation
State of Incorporation: New York
<PAGE> 14
MELLON BANK CORPORATION
LIST OF SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1997
-14-
oo The Trotwood Corporation
State of Incorporation: New York
ooo The Trotwood Hunters Corporation
State of Incorporation: New York
ooo The Trotwood Hunters Site A Corporation
State of Incorporation: New York
Mellon Securities Trust Company
State of Incorporation: New York
<PAGE> 1
Exhibit 23.1
The Board of Directors
of Mellon Bank Corporation:
We consent to incorporation by reference in Registration Statement Nos.
33-16658 (Form S-3), 33-21838 (Form S-8), 33-23635 (Form S-8), 33-34430
(Form S-8), 33-41796 (Form S-8), 33-48486 (Form S-3), 33-65824 (Form S-8),
33-65826 (Form S-8), 33-54671 (Form S-8), 33-62151 (Form S-3), 333-16743
(Form S-8), 333-16745 (Form S-8), 333-38213 (Form S-3), and 333-47377
(Form S-3) of Mellon Bank Corporation of our report dated January 15, 1998,
relating to the consolidated balance sheets of Mellon Bank Corporation and its
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, which report is
incorporated by reference in the December 31, 1997, annual report on Form 10-K
of Mellon Bank Corporation.
KPMG PEAT MARWICK LLP
- --------------------------
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
March 20, 1998
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
MELLON BANK CORPORATION
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them,
such person's true and lawful attorney-in-fact and agent, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities, to sign one or more Annual Reports on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, for Mellon Bank Corporation for the year ended December 31, 1997, and
any and all amendments thereto, and to file same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission and with the New York Stock Exchange, Inc., granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and each of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This power of attorney shall be effective as of February 17, 1998 and shall
continue in full force and effect until revoked by the undersigned in a writing
filed with the Secretary of the Corporation.
/s/ FRANK V. CAHOUET /s/ ROTAN E. LEE
- ------------------------------ ----------------------------
Frank V. Cahouet, Director and Rotan E. Lee, Director
Principal Executive Officer
/s/ DWIGHT L. ALLISON, JR. /s/ ANDREW W. MATHIESON
- ------------------------------ ----------------------------
Dwight L. Allison, Jr., Director Andrew W. Mathieson, Director
/s/ BURTON C. BORGELT /s/ EDWARD J. McANIFF
- ------------------------------ ----------------------------
Burton C. Borgelt, Director Edward J. McAniff, Director
/s/ CAROL R. BROWN /s/ MARTIN G. McGUINN
- ------------------------------ ----------------------------
Carol R. Brown, Director Martin G. McGuinn, Director
<PAGE> 2
/s/ CHRISTOPHER M. CONDRON /s/ ROBERT MEHRABIAN
- ------------------------------ ----------------------------
Christopher M. Condron, Director Robert Mehrabian, Director
/s/ J. W. CONNOLLY /s/ SEWARD PROSSER MELLON
- ------------------------------ -------------------------------
J. W. Connolly, Director Seward Prosser Mellon, Director
/s/ CHARLES A. CORRY /s/ DAVID S. SHAPIRA
- ------------------------------ -------------------------------
Charles A. Corry, Director David S. Shapira, Director
/s/ C. FREDERICK FETTEROLF /s/ W. KEITH SMITH
- ------------------------------ -------------------------------
C. Frederick Fetterolf, Director W. Keith Smith, Director
/s/ IRA J. GUMBERG /s/ JOAB L. THOMAS
- ------------------------------ -- ----------------------------
Ira J. Gumberg, Director Joab L. Thomas, Director
/s/ PEMBERTON HUTCHINSON /s/ WESLEY W. von SCHACK
- ------------------------------ -------------------------------
Pemberton Hutchinson, Director Wesley W. von Schack, Director
/s/ GEORGE W. JOHNSTONE /s/ WILLIAM J. YOUNG
- ------------------------------ -------------------------------
George W. Johnstone, Director William J. Young, Director
- 2 -
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,650
<INT-BEARING-DEPOSITS> 553
<FED-FUNDS-SOLD> 383
<TRADING-ASSETS> 75
<INVESTMENTS-HELD-FOR-SALE> 2,767
<INVESTMENTS-CARRYING> 2,082
<INVESTMENTS-MARKET> 2,118
<LOANS> 29,142
<ALLOWANCE> 475
<TOTAL-ASSETS> 44,892
<DEPOSITS> 31,305
<SHORT-TERM> 3,744
<LIABILITIES-OTHER> 2,434
<LONG-TERM> 2,573
991<F1>
193
<COMMON> 147
<OTHER-SE> 3,505
<TOTAL-LIABILITIES-AND-EQUITY> 44,892<F1>
<INTEREST-LOAN> 2,268
<INTEREST-INVEST> 377
<INTEREST-OTHER> 62
<INTEREST-TOTAL> 2,716
<INTEREST-DEPOSIT> 878
<INTEREST-EXPENSE> 1,249
<INTEREST-INCOME-NET> 1,467
<LOAN-LOSSES> 148
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,568
<INCOME-PRETAX> 1,169
<INCOME-PRE-EXTRAORDINARY> 1,169
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 771
<EPS-PRIMARY> 2.94<F2>
<EPS-DILUTED> 2.88<F2>
<YIELD-ACTUAL> 4.24
<LOANS-NON> 133
<LOANS-PAST> 104
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 525
<CHARGE-OFFS> 187
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 475
<ALLOWANCE-DOMESTIC> 463
<ALLOWANCE-FOREIGN> 12
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>THIS TAG INCLUDES $991 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. IN ADDITION, THE CORPORATION ADOPTED FAS NO. 128, "EARNINGS
PER SHARE" AT YEAR-END 1997. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN
RESTATED FOR FAS NO. 128.
</FN>
</TABLE>
