ML20239A009
| ML20239A009 | |
| Person / Time | |
|---|---|
| Site: | Beaver Valley |
| Issue date: | 12/31/1986 |
| From: | Barnes J, Daniel R, Farrell G MELLON BANK CORP. |
| To: | |
| Shared Package | |
| ML20239A003 | List: |
| References | |
| NUDOCS 8709170012 | |
| Download: ML20239A009 (77) | |
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n ellon Bank Corpora; tion,one of the largest bank holding companies in the
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a ness" ~
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. United States, provides a banking,ub6hmalm ,
comprehensive range of investment banking ?
. quality fmancial services to service han1 ring Th '
domestic consumer and com. this annual report, we -
. mercial markets, and se- view our 1986 accompl4 i lected international markets. ments in each of these- $h8; The Corporation's bank-ing subsidiaries are located businesses,and current and planned eft'detaila orts principally in the Central to add greater balance to
', Atlantic region,specifically the organization. >{ 1 Pennsylvania, Delaware and l u Maryland,with additional l 5 locations in key business centers throughout the United States and in select-ed cities abroad. Banking- y
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related subsidiaries operate :
in 26 states. $
Mellon, which histori-cally concentrated on whole-
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sale banking,is pursuing a l s .s *'
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Contente +h..$.,
2 In The Year 1986 , t ;%
4 To Our Shareholders -
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7 A Strategy.Of Balance
' 7 t 'e'l 1
Community Banking '
Wholesale Banking '
Investment Banking -i ,
Service Banking . . ,
21 Financial Section '. *D I , 72 PrincipaIi Domesticlocations' ' ~
di,
- and Operating Entities '%
6 74 Dirwetors and Management $$)
78 CorporatelnfonnettonJm(\
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I In The Year 1986 Net income was $183.3 mil. The Corporation acquired lion, or $6.20 per common Commonwealth National share, compared with $201.7 Financial Corporation of million, or $7.13 per common Harrisburg, Pennsylvania.
share, in 1985, in April:certain assets and deposit liabilities of Com-Total assets increased by 39 munity Savings and Loan, to $34.5 billion: loans and Inc. of Bethesda, Maryland, leases increased by 59 to in May; and several service
$23.5 billion. organizations in such businesses as data process-Service revenue increased ing, mutual fund processing, by 449 to $525.1 million: securities pricing, securities net credit revenue increased transfer, and trust by 89 to $941.3 million. accounting.
Gains on the sale ofinvest-ment securities were $134.6 million, compared with
$92.5 million in 1985.
The Corporation's net addition to the reserve for possible credit losses was
$119.2 million.
I i
Net income per Common Share Return on Assets Assets to Common Idollars per share > (percent) Shareholders' Equity (asnets - common shareholders' eqtutyi iratto based on averagest B 00 .80 20 0 82 B3 b4 BS B6 0 B2 83 64 B5 b6 0 62 63 b4 e5 66 2
'f a odollar amounts un millions. Increase /
except per share amounfxi 1985 1986 (decreasel For the year Net income S 201.7 S 183.3 S(18.4) (9)9 Net income applicable to common stock 191.5 169.6 (21.9) (11)
Dividends on common stock 71.9 75.4 3.5 5 Per common share Net income S 7.13 $ 6.20 $ (.53) (13)G Dividends 2.68 2.76 .08 3 At year-end Total assets S33,406 $34,499 S1,093 39 Loans and lease finance assets 22,319 23,529 1,210 5 Deposits 18.583 21,647 3,064 16 Common shareholders' equity 1,637 1.751 114 7 ,
Ratios Return on assets .63 9 .50 9 Assets to common shareholders' equity 19.4 19.7 I Return on common shareholders' equity 12.3 % 9.9 G Primary capital as a percentage of total assets 6.62 % 7.23 %
-teturn on Cornmon Loans and Leases Preferred Stock and Common Shareholders' Equity < average > Shareholders' Equity tpercent) (billionn of dollars) tyear end) a millions of dollarsi 16 24 2100 0 62 B3 M b6 B6 0 82 63 64 65 h6 0 82 83 M e5 66 5 Redeemable preferred stock 5 Convertible preferred stock s common shareholders' equity 3
_ _ _ _ _ . _ _ _ _ _ . _ _ _ _ _ _ . _ _ ___. i
- i To Our Shareholders At Mellon Bank Corpora- sighted and imprudent tion, our objective is to over-emphasis on any single achieve consistently strong business. Balance offers sig-financial performance amid nificant advantages, includ-dramatic changes that are ing earnings stability, reshaping the financial serv- risk diversification, and ices industry. Although the improved liquidity.
Corporation's 1986 financial Consistent with our results did not meet expec- effort to achieve greater tations, we achieved positive balance, we are investing in outcomes in many of our a variety of businesses that businesses and implemented provide opportunities for strategies that enhance growth and in which we our future earnings growth believe we can achieve potential. sustainable competitive Net income for 1986 advantages.
was $183.3 million, com. Our 1986 merger with pared with $201.7 million in Commonwealth National 1985. Net income per com- Financial Corporation, mon share was $6.20, com- headquartered in Harris-pared "ith $7.13 a year ago. burg, expands our commu-Return on assets was .50 nity banking presence in percent in 1986, compared Pennsylvania. During the with .63 percent the prior year, we also entered the year, and return on common high-growth Maryland con-shareholders' equity was 9.9 sumer banking market by percent, compared with 12.3 purchasing certain assets of percent in 1985. We remain Community Savings and committed to reaching our Loan. Inc. of Bethesda, and long term profitability goals creating Mellon Bank (MD),
cf.80 percent return on a state-chartered, federally- ;
assets and 16 percent return insured bank. l on equity. Our acquisitions in 1986 Our fundamental of several service organiza-strategy is one of balance- tions reflect Mellon's contin-between cyclical and non- ued strategic emphasis on cyclical businesses; between the development ofservi~
interest and noninterest revenue, an effort in which revenue sources; and among our technological expertise various market segments. In provides us a significant a banking environment in competitive advantage. The which change has become service businesses acquired the norm, we view as short- bolster our existing data dof ,.
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Domestic wholesale banking markets in 1986 )
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.. embers of the Corporate Office iclockwise from nght fore-
' ground e J. Da vid llarnen. Chair.
',.< ,- i man and Chier Executis c officer:
Elmer G. Grant. Vice Chairman:
" ,* G. Christian 1 antn.ch. Vice Chair.
.y man and Treasurer: Norman M.
Steere, Vice Chairman: George T.
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Farrell. President: Edu ard A.
Montgomery. Jr.. Vice Chairman:
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were marked by asset qual- Achievements in each ity problems, and we, like ofour primary busmess seg-many other major bank ments-community bc.ak-holding companies, experi- ing, wholesale banking, '
enced unusually high levels investment banking and '
ofloan losses and non- service banking-reflect perfbrming assets. We acted our progress in building a decisively to write down balanced organization. As Richard H. Daniel impaired credits-the larg- we implement our strategy Vice Chairman :
est concentration of which of balance, we are expand-were related to the energy ing our productivity industry and the sharp de-cline in energy prices-and improvement initiatives, through which we intend to [
to increase loan loss re-control costs and utilize re-serves. In wholesale lending, we are fbcusing on portfolio sources mora effectively.
With a sound strategy
\s' Elmer G. Grant l
composition-tt. rough in place, a solid financial po. Vice Chairman which we are dispersing sition, and more than 18,000 credit risk by industry and associates dedicated to qual-region-and returns on both assets and equity. Mellon is ity performance, we look ahead with great confidence.
g/,/y g committed to remaining a leader in wholesale banking.
We are enhancing our G. Christian Lantzsch -
1 investment banking capabil. Vice Chairman and ities, including underwrit. D casurer ing debt offerings, managing j the Corporation's invest-ment portfolio, securities g~~p, ~g_
t rading, Ibreign exchange, f public finance and loan ,
sales. We also are placing J. David Barnes !
substantial emphasis on pro- Chairman and Edward A. Montgomery,Jr. I viding the sophisticated rate Chief Executive Officer Vice Chairman b risk management products increasingly required by cor-porate customers. In 1986, we Ibrmed Mellon Securities # -)f
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advantage of merchant banking opportunitiasi not George T. Farrell Norman M. Steere i available domt sticany. President Vice Chairman i
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Reflecting our esorts to - - 7'5%i6dWes ..
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' .{E. he environment for Mellon today comprises four to consider only
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, forces afecting the industry ment banking and service value. MAi[f.,
' are economic volatility; Sanking. From time to time,anyAY "disintermediation of finan. Confident in our histori- one ofour four primary busU f cial markets; growing com- cal strength and expertisein ness segments may reprwT.@
petitive inequity with non- wholesale banking,we have sent a more immediate strW banks weakness in certe.in focused our recent efforts tegic priority than anotheeQ
'segme;nts of the economy; an on building our capabilities - In thelong run, thoughf$
' increasingly informed and and market coveragein our each of these four busiassesse ;
. sophisticated society; and other three primary busi-- is equallyimportant totlWM
.the effect of tax reform on nesses. For example, over
' Corporation's Mk Joertain financial services the past severalyears we .
Detailed on the fofutgre."k',"
usinesses. have dedicated significant ing pages are the4trategies.g&
At Mellon, we believe effort and resources to en- we are pursuingin comanu-id, buccess in such a; environ- hancingour investment nity banking, wholesalen *
' ment requires certain key banking skills. banking, investment bank ~
strengths, including a diver- In that same period, we ing and service banking. Iri A isified earnings base, exper- have builtourexisting serv- dividuallyand collectively, '
time in numerous financial ice businesses and axpanded our efforts in these busi d services businesses, and the by acquisition'our sources of nesses reflect two essential? :
e careful management and al- service revenue Currently, Corporate objectivese % e location of resources. These are essential components of d, our stratap plaoss high ' . priority'ostagitera' *
-Mellon's geelis ting to in-.A S n.
our strategy of balance. balanced h=adpl
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, provides opportunities to al- [_ UE hN , 4investin)an Ih) hiseO$5feename[anntm O .Trkwecilmach locate risk; to offer the .
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} Community Banking and San Francisco. The Boston office, opened in Community banking is an 1986, serves most of New area ofgreat strategic im- England. We also serve com-portance to Mellon Bank munity markets through Corporation. Community Mellon Financial Services' markets are especially im- Commercial and Consumer portant because they pro- Finance Group, based in h vide the opportunity for re- Oak Brook, Illinois, with 117 turns on assets that are offices across the United more attractive than those States, and through mort-available in other markets gage banking subsidiaries and tend, over the long based in Cleveland, Denver, term, to be less cyclical than Houston and New Orleans.
wholesale markets. Essential to our success j In our existing com- in community banking is the munity markets, we are provision of quality prod-striving to maximize loan ucts and services that meet growth, core deposits, mar- customers' needs. In 1986, A ket share and customer our products met with good base. We are a leader in marketplace acceptance. Con-most orour community mar- sumer borrowing was strong kets-serving one out of across our community every five households-and will continue our efforts to further solidify our position '
in community banking.
Our community bank- o ellon is a leading pro-ing operation comprises vider of financial services to seven banks serving individuals, small businesses consumers, small businesses and middle sized companies and the middle market in in the Central Atlantic re-Pennsylvania's largest gion. We play an important banking markets, through- role in communities through-out the state of Delaware, out Pennsylvania and Dela-and in the Maryland ware, and in the Maryland suburbs of Washington, D C. suburbs of Washington, D.C.
We serve selected regional Our community banking middle markets through business also includes middle representative offices in At- market lending, mortgage lanta, Baltimore, Boston, banking and consumer fi-Chicago. Dallas Edison, nance activities in other re-N.J., Los Angeles, New York gions of the United States.
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Community Banking markets, due primarily to the Mellon Telephone Bank-continued the falling interest rate en. ing Center is serving be- 1 markets. Especially note- vironment that existed in tween 300 and 350 custom- )
worthy were increases in both 1986. Generally, we do not ers each business day. A unsecured personal credit seek mortgages as assets but number of the Corporation's ]
lines and home equity per- offer them in order to fully banking subsidiaries provide sonalcredit lines. We antici- serve our customers. As part similar telephone banking pate continued growth in ofour service banking func. services.
home equity financings due tion, we subsequently sell Middle market loan de-to their favorable treatment and service mortgages we mand was strong in 1986.
under tax reform legislation. originate. We have a significant share Our Premium Money Mar- In all our community of middle market business ket Account,on which we of- markets, we are carefully in eastern and western fer a tiered interest rate evaluating our branch and Pennsylvania. In our re-structure based on deposit other delivery systems, gional middle market busi-levels, met with strong con- and, where appropriate, ness, we will concentrate on sumer acceptance upon its reconfiguring those systems building market share in initialintroduction in west- to improve market coverage current locations before con-ern Pennsylvania. and realize greater effi- sidering further expansion We effected significant ciency. We will expand our of our middle market enhancements in 1986 to branch system only selec- coverage.
our credit card business. We tively-and, in all likeli- Loans to small busi-selectively increased credit hood, minimally-in the near nesses increased substan-lines in our 850,004 account future. In addition, we tially in 1986, and we were cardholder base and intro- manage the placement of our Pennsylvania's single larg-duced our first widely- automated teller machines est generator ofloans guar-offered premium credit card. ( ATMs) to ensure that they anteed by the Small Busi-Our consumer fmance oper- serve our communities well ness Administration.
ation experienced less than and meet transaction level In order to ensure that anticipated growth in expectations. our community banks are outstanding in 1986, but re- In addition to ATMs, we responsive to the needs of alized strong results from a are developing other non- their local markets, each diversified sales finance unit traditional community makes its own pricing deci-tproviding financing for site- banking delivery systems. In sions and has the mandate built and modular housing, 1986, we opened Pennsylva- to run its business as appro-mobile homes and marine nia's first chartered tele- priate for local market con-equipment) acquired from phone banking branch, ditions. At the same time, Avco Financial Services, Inc. through which existing and we have realized significant early in the year. potential customers in efficiencies through joint Demand for residential western Pennsylvania can product development and j mortgages increased dra- call a toll-free number to marketing. In 1986, this ef-l matically in our retail bank- make a variety of banking fort included the develop-( ing and mortgage banking transactions. On average, ment and deployment across I
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all our community markets good credit quality custom- remain an imterte at pro-ofsingle marketing cam- ers in industries with signif- vider ofservice to che en-paigns for Individual Retire- icant growth potential. In ergy industry. O .r involve-ment Accounts, consumer 1986, we emphasized lend- ment will be gu .ie i by our loans and personal credit lines. ing to the communications historical comt .itr.ient to Going forward, our em- industry-particularly the strong credit standards and phases in community bank- cable, broadcast and pub- practices. In addition, we ing will be increasing prof- lishing sectors-which we will continue to deal with itability; delivering quality believe possesses both only the best companies in products and services; and strong growth potential and selected segments of the in-improving productivity. acceptable credit risk. Other dustry. We continue to serve industries ofemphasis were major domestic and interna-Wholesale Banking retailers, service companies tional oil companies, as well and bcttlers. We are bolster- as the higher quality inde-Throughout its history, the ing our efforts to serve pri- pendent oil and gas produe-Corporation has been a vate corporations, which ers. We are not, and do not leader in serving the do- tend to share our commit- intend to be, a factor in the mestic corporate market. ment to relationship banking. oil field services segment of Today, Mellon ranks among We also provide financ- the energy business.
the top 10 commercial and ing for banks, thrift insti- As we focus more on industriallenders in the tutions, insurance compa- managing the returns on United States. nies and brokerage firms. loans, our level ofcommer-In wholesale banking, We increased our lending to cial and industrial loans we continue to emphasize these industries in 1986; outstanding may not in-strong credit standards. We loan demand was especially crease at historical rates. In also are focusing on the com- strong for bank holding 1986, we reduced our level position of our portfolio, company and thrift merger ofiow margin . loans, and, in ;
which is well-balanced by and acquisition financing. a combined effort of our both industry and geogra. In 1986, the Corpora- wholesale banking and in- l' phy. As always, our whole- tion, like many other major vestment banking busi-sale banking efforts are bank holding companies, nesses, began to sell more guided by an emphasis on experienced credit quality loans to increase our return. ,
relationship management, problems as a consequence By year-end, we had trans-through which we stress of the sharp decline in en- acted more than $1 billion development oflong term ergy prices. Our wholesale in commercial loan sales, banking relationships and lending, mortgage banking Loan sales enable us to ac-commit ourselves to being and commercial real estate commodate customers' fi-responsive to the full spec- finance businesses all were nancing needs at terms they i trum ofcustomers' needs as adversely affected by the find acceptable and competi. !
they arise. downturn in the energy in- '
tive. We anticipate that, We continue to concen- dustry. In our view, the en- over time, we will sell in- l trate our corporate market- ergy business, in time, will creasing percentages of the i ing efforts on prospects and recover. Mellon intends to commercial and industrial 11 :
l Wholesale Banking mitments increased in 1986 i
continued from the prior year.
loans we originate. We believe that Mellon Even as corporate fi- has several long-term com-nancing needs continue to petitive advantages in com-evolve away from working mercial real estate finance.
capital requirements, we These include long standing believe that there is still a relationships with many of very strong market for the nation's most estab-wholesale banking, increas- lished developers; our appli-ingly, customers require spe- cation of traditional credit cialized financing support in standards to real estate trans-such areas as acquisition actions; and our in house and recapitalization credits, expertise in appraisal and project finance and receiv- design / cost feasibility anal-able purchase facilities. We ysis. Our commercial real are enhancing our ability to estate portfolio is, in addi-provide specialized financ- tion, well-balanced geograph-ings. Our project finance ically and by product type.
business, for example, grew In 1986, we bolstered substantially in 1986. Our our ability to compete in the recently-formed Project rapidly-expanding Florida Finance Team has closed 11 real estate markets by open-transactions generating net ing an office in Boca Raton.
commitments exceeding We now have better market -
$300 million. knowledge and can work Another area of focus more effectively with has been rate risk manage-ment products. Working jointly, our wholesale bank- "
ing and investment banking operations are emphasizing .- ellon has long been an swap, option and futures ac- important force in domestic tivities. We cumpleted more wholesale banking markets.
than $1 billion ofsuch We ranked among the 10 transactions in 1986. largest commercial and in-Commercial construc- dustriallenders in 1986, and tion markets were weak are enhancing our ability to throughout 1986, as supply provide specialized financ-of most major product lines ing services. Our wholesale
-especially office buildings banking business also in-
-exceeded demand. Still, cludes commercial real es-our level of new project com- tate finance and leasing. .
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e~~ Wholesale Banking atively affect demand in cer-continued tain traditional market Florida-based developers. sectors. At the same time.
The elimination ofcer- we believe that, for virtually tain tax advantages associ- all businesses, leasing will ated with commercial build- take on greater importance
- j ing investment may dramat- than ever from a corporate ically affect the commercial tax management perspec-real estate business, espe- tive, and will be especially cially in light of the excess useful for those organiza-supply of commercial real tions wishing to avoid the estate in certain markets. newly-created alternative We believe, however, that minimum tax. Leasing-commercial real estate mar- which offers returns that kets will offer future oppor- are among the most attrac-tunities for well-positioned tive available among all of financial institutions. our businesses-is one rShe Another area in which few tax sensitive busine.ses tax reform is likely to have on which the Tax Refbrm a significant impact is our Act of1986 places no leasing business. Repeal of restrictions.
the investment tax credit Mellon has many com-and changes in both c.epreci- petitive advantages in v ation and tax rates may neg- wholesale banking, and we are dedicated to maintaining our position as a leader in serving wholesale markets.
he Corporation contin. Investment Banking ues to increase its expertise in investment banking,in- The development ofin- ,
cluding asset / liability man- vestment banking skills is l agement, capital markets an effort to which Mellon h T- products and dealer busi- has dedicated substantial re-nesses. In one dealer busi- sources over the past several ness, regional securities, we years. Investment banking often structure financings capabilities are essential in for colleges and universities, order to offer comprehensive This involves advisory serv- services to the Corporation's ices to the schools and the customer base; to capitalize eventual structuring, under- on the continuing trend to-
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Investment Banking the past few years. In geted, disciplined, niche ap-continued capital-driven trading,in proach to investment bank-funding markets that, in- which we attempt to take ing. It is not our intent to creasingly, are global in - advantage of very short. compete fully with the na-scope. term market movements in tion's leading investment Our investment bank- securities and foreign ex- banks; rather, ours is a ing activities have three pri- change, we have signifi- strategy of building in-mary components- asset /li- cantly improved our capabil- vestment /t-ading skills and ability management, dealer ity. This activity is supported providing our customer base businesses, and capital mar- by excellent trading facilities -especially large corporate kets products. throughout the world. and middle market custom-Asset / liability manage- We are offering our ers-with a comprehensive ment involves funding the customer base the sophisti- array of financing options.
Corporation and taking se- cated capital markets and fi- We expect our invest-lected interest rate risk posi- nancial advisory products ment banking business to tions. In our fundinb etivi- that have become increas- contribute regularly to the ties, we maintain excellent ingly important in corporate Corporation's earnings and liquidity and are guided by finance. Targeted for contin- to capitalize on extraordi-prudent ir,terest rate risk ued development are our nary market opportunities parameters. We carefully abilities in mergers and ac- that occur periodically.
compare our assets'sensi- quisitions, private place-tivity to interest rate ments, valuations, interest Service Banking changes with that ofour rate and currency swaps, supporting funds, and forward rate agreements, Mellon's service revenue strictly limit any resulting and interest rate growth has been dramatic mismatches, called " gaps." guarantees. over the past several years, These gaps are adjusted In 1986, we also estab- reflecting the Corporation's from time to time to reflect lished Mellon Securities strategic emphasis on devel-market conditions. Limited, a London-based or- oping noninterest revenue In 1986, gains on the ganization through which sources. Our principal serv-sale ofinvestment securities the Corporation can serve ice banking businesses are reached $134.6 million, ex- its U.S. based customers by trust and investment, data ceeding the strong results underwriting Eurosecurities processing, cash manage-achieved in 1985. and serving other needs in ment, mortgage servicing, !
Dealer businesses in- the Euronote, Eurocom- and network services.
clude securities underwrit- mercial paper and Eurobond Our trust business ing and distribution, and markets. Essentially, this achieved outstanding per-capital driven trading. Our subsidiary enables Mellon to formance in 1986, as reve-regional securities business, underwrite corporate securi- nue increased dramatically through which we under- ties, an activity from which from the prior year. Even ex-write and distribute certain domestic banks are barred clusive of trust-related municipal securities, has in the United States. mergers, growth in trust grown substantially over Mellon is taking a tar- and investment management l
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rees was substantial. Mellon which are portfolios of se- We are strengthening is a major factor in all as- curities constructed to rep-pects of the trust business. our commitment to meet the resent particular risk needs of the entire range At year-end, we were the exposures. Triangle Portfo- of personal trust customers.
largest personal trust man- lio Associates Inc., based in We have segmented per-ager in the United States, Pittsburgh, offers active sonal trust markets and in-and we also provide a vari- equity management to na- creased consulting and ad-ety of operational /cus- tional corporate employee visory services to ensure tody and investment man- benefit sponsors. At year-agement services to the cor-that customers receive the end, the Corporation oper- services mo= appropriate to porate marketplace, ated six specialized asset their indivLual needs. To In 1986, the Corpora- management service firms better serve our Florida tion completed numerous in the United States and trust cuttomers, we opened trust-related acquisitions, Britain. a second Florida-based trust including the purchase of Among our trust oper. subsidiary, in Sarasota, securities transfer, trust ac- ating services, we enjoyed Our cash management counting and securities prie- another year ofoutstanding products continued to enjoy ing firms. These acquisitions growth in our Master a leading marketplace expand our business lines Trust / Custody business. We position in 1986. We have a and support our goal of be- believe that the Master history of more than 25 ing a major wholesaler of Trust business will continue years of commitment to cash services to trust depart- to undergo consolidation management, and offer ments of other banks. Our over the next several years, more than 50 products to all aim is to provide a wide va. and are committed to bol- wholesale market segments riety of high-quality, cost- stering our position as one served by the Corporation.
effective services. Also of of the largest Master Trus- We continue to expand our key strategic importance in tees in the United States. product lines and, in 1986.
1986 was our acquisition of Master Trust is an excellent added a processing site in a mutual fund processing example of Mellon's strat- Los Angeles to our regional firm, which provides us en- egy ofinvesting in busi- wholesale lockbox network, try into that high growth nesses in which we can Our approach continues to business. develop a sustainable com- be that of a full-service pro-During the year, we petitive advantage. The Cor- vider ofcash management added two new investment poration has committed sig- products and services at a management subsidiaries as nificant resources to this time when many institu-part of our continuing effort business, capitalizing fully tions are becoming more se-to provide unique and vari- on our superior operating lective cash management ous forms of asset manage. and processing skills to providers. Our continued ment. The Mellon Universe build a strong position and attention to meeting cus-Management Group, based reputation in Master Trust. tomer needs and providing in Stamford, Connecticut, At year end 1986, Master quality service has resulted applies active management Trust assets under manage- in our products being rated to investment universes, ment totaled $88 billion, among the best in the 6
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Service Banking financial transactions-continued grew substantially in 1986.
industry. This positions us CashStream, the network well as, increasingly, cash that we manage, grew to management purchase deci. more than 1,800 ATMs in sions are less dependent on Delaware. Maryland, New credit relationships. Jersey, Pennsylvania and Our data processing op- West Virginia. In addition to erations enjoyed another CashStream, we offer our year ofgrowth in 1986. The services to financial insti-landmark event was our ac- tutions that are members of quisition of Data Link Sys- other networks. Combined, tems, Inc., which brings to these activities make Mellon advanced core appli- Mellon one of the industry cation and mortgage bank- leaders in handling elec-ing systems, and a solid tronic transactions. In 1986, customer base. The inte- Mellon became a one-sixth grated core application owner ofCIRRUS, the na-system will enable Mellon's tion's largest shared net-Datacenter to carry allloan work, and continues to par-and deposit programs on a ticipate in directing its single system. We plan to growth. Our primary empha-enhance and upgrade the ses in network services are Data-Link integrated sys- to broaden ATM acceptance tem prior to its installation and usage, and to enhance at Mellon. When in place, it will enable us to design and deliver data processing products more rapidly, and will afford us greater econo-T.E.echnology and the auto-mies of scale in data proc- mated transfer ofinforma-essing. The Data-Link tion are essential to service mortgage banking system, banking. Our technical ex.
utilized by many of the top pertise provides us a signifl.
mortgage banking firms in cant competitive advantage the United States, will be in this processing related used by all Mellon mortgage business. Service banking banking operations. activities include truct and Our network services investment. cash manage-business-through which we ment, data processing, mort-provide ATM network man- gage servicing and network agement and support, and services. Service revenue serve as a clearinghouse for grew significantly in 1986.
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4 Service Banking our long-standing commit-
. continued ment to technological our delivery system through superiority.
new product offerings. In a 1986 study by a ma-Mellon's data process- jor accounting firm, Mellon ing and network services op- was found to be among the
, erations now serve about most efficient processing in-450 financial institutions in stitutions of the 55 banks 38 states and in Washing- studied. Our practice ofin-ton, D.C. stalling advanced IBM and d Our mortgage servicing other manufacturers' com-business grew substantially puting equipment-and in 1986. At year-end, our then selling older computers servicing portfolio exceeded while they are still market-
$11 billion, an increase of able-continually increases more than $2 billion from our processing capacity, 1985. As one of the top ultimately reducing the Cor-
] mortgage servicers in the poration's cost of computing.
United States, we are seek- Our significant investment ing to continue to build our and expertise in computers portfolio, a strategy differ- enables us to run machines ent from that of many other near their capacity, while bank holding companies preserving adequate backup which are selling parts or all should we experience tem-of theirs. We are driven by porary breakdowns in any of volume ef'..ciency- our our computers.
volumes are sufficiently siz- Our technological able that incremental busi- strength allows for substan-ness is very profitable. tial synergies with compa-In general, service busi- nies we merge with or ac-nesses have high costs in quire. Often, we can run comparison to wholesale their programs on our sys-banking. Even small margin tems, providing substantial improvements in these proc- efficiencies and lower proc-essing-related businesses essing costs. For example, can substantially increase most of the trust businesses income. Our goals in service acquired in 1986 have been banking are to effectively converted to Mellon's sys-manage our fixed and varia- tems, and The Common-ble costs; to expand our wealth National Bank-like range of services; to increase a number ofour banke-s volume; and to bring now uses our Datacenter about efficiencies through systems for processing.
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d Financial Review 1
,)
- . Mellon Bank Corporation (and its subsidiaries; Financial Summary tdollar amounts in millions. except per share amounts > 1981 1982 1983 1984 1985 1986 Year ended December 31 Net credit revenue $ 366.4 $ 445.6 $ 614.9 $ 747.1 $ 872.4 8 941.3 103.0 130.7 230.5 302.1 365.1 525.1 Service revenue Trading revenue 1.3 20.7 11.8 5.5 22.6 24.0 Gains on sale ofinvestment securities' (19.4) (15.4) 10.8 3.6 92.5 134.6 Other revenue 10.8 12.3 34.3 25.7 12.4 22.2 , 37.0 68.1 52.2 116.7 148.3 315.6 ! Provision for possible credit losses ('i 1,146.0 Operatitycxpense 300.9 381.9 631.8 815.4 965.6 ( Netincome k $ 115.5 $ 134.4 $ 183.8 $ 158.5 $ 201.7 $ 183.3 I Netincome: l Domestic $ 68.6 $ 91.3 $ 150.7 $ 159.2 $ 197.6 $ 213.4 l International + 46.9 43.1 33.1 (.7) 4.1 (30.1) Per common share , Netincome $ 5.88 3 6.83 $ 7.44 $ 5.64 $ 7.13 $ 6.20 Dividends 2.09 2.24 2.44 2.60 2.68 2.76 Average balances .. Money nnrket investments $ 4,355 $ 4,183 $ 4,298 $ 3,634 $ 3,072 8 2,565 946 1,298 1,672 1,378 2,113 3,868 Investment securities
.' 8,759 10,886 13,935 17,347 20,082 22,704 loans and lease finance assets Interest +ahung assets e l4,218 16,653 20,345 22,821 25,667 29,629 Reservaior possible creditlosses 123 154 220 273 331 435 16,890 19,539 24,232 27,601 30,246 33,834 Totalassem Deposits " 11,166 12,280 14,579 17,009 18,250 20,206 428 417 565 613 1,058 1,430 Notes and debentures Redeemable preferred stock - - 48 89 93 94 Convertible preferred stock - - - - - 52 Common shareholders' equity 932 1,018 1,253 1,438 1,562 1,716 Ratios (based on balance sheet avemges)
Return oniowts" .68% .69% .74% .54% .63% .50% Assets to cornmon shareholders' equity 18.1 19.2 19.3 19.2 19.4 19.7 Return on. common shareholders' equity" 12.4 % 13.2 % 14.3 % 10.3 % 12.3 % 9.9 % Net rate on interest-earning assets computed on a fully taxable equivalent basis ' 3.19 % 3.29 % 3.57 % 3.80 % 3.81 % 3.70 % Ratiosibased on year-end amounts) Primary dapital as a percentage of total assets 5.98 % 6.04 % 6.09 % 6.64 % 6.62 % 7.23 % Total capital as a percentage of total assets 7.54 % 6.83 % 7.28 % 7.71 % 7.92 % 8.66 %
- K)ter- tax gains on the sale ofinvestment securitirs were as follows:1981-$(10.5 million); 1982-$l8.3 million); 1983-55.8 million;
! ;nWS2.3 million; 1985-450.0 mi!! ion; and 1986-$72.7 millbn.
"kt ofdividends on preferred stock.
4 k 22 o
I! L . Earnings Performance (h erview Mellon Bank Corporation's net income for 1986 was . Operating expense increased $180.4 million during
$183.3 million, or $6.20 per common share, compared 1986, primarily as a result ofmerged co'npanies. The Cor-with $201.7 million, or $7.13 per common share, in 1985. poration acquired Commonwealth National l'inancial a
Net income in 1986 reflected a $167.3 million Corporation (" Commonwealth") of Harrisburg, Pennsyl-increase in the provision for possible credit losses from the vania, in April 1986, most of the assets and deposit liabili-
' prior year. This increase resulted from higher net credit ties ofCommunity Savings and Loan, Inc. (creating losses, primarily energy related, as well as management's "Mellon Bank (MD)")of Bethesda, Maryland,in May decision to provide an increase to the reserve of $119.2 1986; and certain other financial services companies dur-million in response to contiruing uncertainties in partic- ing 1986 (the " mergers"). The mergers were accounted for ular areas of the U.S. and international economies. under tbmurchase method of accounting.The results of Domestic net credit losses on energy loans were $63.6 mil- operations of these companies were included in the Corpo-tion, compared with $7.2 million in 1985.' ration's results from their respective dates ofmerger. As a Net credit revenue, on a fully taxable equivalent result ofthe mergers, the Corporation's net income per
~ basis, increased in 1986 by $116.2 million,or 12%, from common share was lower by approximately $.58 per share 1985. This increase primarily reflects a $4.0 billion; or in 1986. j 15%, increase in average interest earning assets. The Corporation's 1985 net income of $201,7 million '
Increased revenues and earnings from the Corpora- - represented a 27% increase from the previous year. Net tion's service businesses and improved profitability in its credit revenue, on a fully taxable (quivalent basis, community banking business reflect management's increased $112.2 million, or 13%,irom 1984. primarily as strategy to achieve greater balance in operations and a result of domestic loan growth and wider spreads ~on sources ofearnings. Service revenue increased $160.0 mil- higher levels of U.S. government securities. The provision lion, or 44 %, in 1986, primarily as a result ofgrowth in for possible credit losses was increased by $31.6 million in existing service businesses. The acquisition of several 1985 from 1984, as a result of higher net credit losses. Ser-financial services companies, as discussed below, also con- vice revenue increased by $63.0 million, or 21%, as a tributed to the increase in service revenue. result ofgrowth in trust and investment management Trading revenue increased 6% despite a $7.8 million fees and higher cash management and data processing aflestax foreign exchange loss that resulted from unau- fees. Higher trading revenue, primarily bond trading prof- J thorized trading by a foreign exchange dealer at Mellon its, resulted in a $9.2 million after-tax increase to earn- ! Bank, N.A.'s Tokyo branch. Gains on the sale ofinvest- ings, while gains on the sale ofinvestment securities j ment securities contributed $72.7 million after-tax, or increased significantly, contributing $47.7 million after- !
$2.66 per common share, to 1986 net income, compared tax, or $1.77 per comn on share, to the increase in net ,
with $50.0 million after-tax, or $1.86 per common share, income from the prior year. Nonrecurring expense ! in 1985. increased significantly in 1985, while nonrecurring reve-nue was lower than in 1984. i b l
)
1 1 23 I
FinAncidl Revisw , continued Net credit revenue 1985/1984 1986/1985 l Increase / Increase /
< dollar amounts in millions) 1984 (decrease) 1985 (decrease) 1986 )
Domestic operations
$ 755 $ 80 $ 835 $ 143 978 l Net credit revenue
- S Average interest-earning assets 16,427 3,067 19,494 4,865 24,359 Net rate on interest-earning assets 4.60 % (.321% 4.28 % (.27)'7c 4.019c ,
Internationaloperations i Net credit revenue * $ 111 $ 33 $ 144 $ (27) s 117 l Average interest earning assets 6,394 (221) 6,173 (903) 5,270 Net rate on interest-earning assets 1.73 % .60% 2.33 % (.10)% 2.23?c - 1 Total
. Net credit revenue * $ 866 $ 113 $ 979 $ 116 $ 1,095 Average interest-earning assets 22,821 2,846 25,667 3,962 29,629 Net rate on interest-earning assets 3.80 % .01% 3.81 % (.11)% 3.70 % .,
i
- Fully taxable equivalent basis.
Net credit revenue, on a fully taxable equivalent basis, increase in average domestic loans and leases. Wider i increased 12% in 1986, resecting a 15% increase in aver- spreads on higher levels of U.S. government securities, age earning assets and a decline in the net rate. Domestic which were funded principally by repurchase agreements, ; net credit revenue increased by 17%, while international also contributed to the 1985 increase in domestic net net credit revenue declined 19%. credit evenue c from 1984.The decrease in the domestic net rate in 1985 resulted from a lower proportion of Dom t ne er re e ue nereased $142.9 million in f" hee i er lo n - 1986, reflecting a $4.9 billion increase in average interest- Domestic cash-basis loans and leases resulted in a earning assets resulting principally from a $2.9 bilhon reduction in domestic net credit revenue of S33.5 million increase m average domestic loans and leases and a $988 in 1936, compared with $28.6 million in 1985 and $15.7 million increase in average state and mumcipal securi-million in 1984. ties. Average domestic ioans and leases mereased 18%. ! i The mergers contributed $1.1 billion to the increase in International net credit revenue doniestic interest-carning assets, mostly loans. Net of the Net credit revenue from international operations l Corporation's interest cost of funding its investment in decreased in 19% from 1985 due to lower levels of these companies, the mergers contributed $27.7 million to interest-earning assets and the effect of higher interest net credit revenue in 1986. The decrease in the domestic receipts on cash-basis loans in 1985 that did not recur in , net rate on interest earning assets in 1986 was primarily 1986. The addition to cash. basis of $47 million in loans to I attributable to the decreased benefit oflow cost core private sector borrowers in Mexico in the fourth quarter j deposits in the lower interest rate environment of 1986, of1986 also contributed to lower net credit revenue in the cost of funds used for the mergers, and a le s ;propor- 1986. International cash-basis loans had a positive effect tion ofinterest free funds supporting earning assets. on net credit revenue of$1.2 million in 1986 and $5.8 The increase in domestic net credit revenue in 1985, million in 1985, compared with a negative effect of $13.5 compared with 1984, was primarily attributable to a 20% million in 1984 l Change in net credit revenue _ 1985/1984 Increase /(decrease) 1986/1985 Increase /(decrease) (dollaramounts in millions) Domestic International Total Domestic International Total Increase /(decrease)in net credit revenue due to changes in: Rate $(17) $7 $ t10) $(59) $ (14) 5(73) i Volume 97 26 123 202 (13) 189 ll l Total S 80 $33 $113 $143 $(27) S116 l Note: Amounts are calculated on a fully taxable equivalent basss; changes arising not solely from mte or volume variances are alloca ted proportionally to mte and volume based on their relative absolute magnntudes. 24
i , , l l l Service and other revenue 1985/1984 1986/1985 Increase / Increase / tin thousands > 1984 (decrease) 1985 (decrease) 1986 Service revenue: Trust and investment management fees S 95,763 $ 21,032 $116,795 $ 81,234 $198,029 Cash management fees and deposit transaction charges 49,812 15,872 65,684 18,319 84,003 Data processing fees 43,049 7,290 50,339 18,239 - 68,578 Mortgage servicing fees 25,807 4,734 30,541 9,532 40,073 Charge service fees 30,930 2,812 33342 4,538 38,280 Letters ofcredit and acceptance fmancing fees 24,103 5,976 30,079 4,461 34,540 Other 32,646 5,290 37,936 23,671 61,607 Totalservice revenue 302,110 63,006 365,116 159,994 525,110 ! Trading revenue: I Trading account profits and commissions 5,966 9,951 15,917 1,338 17,255 Gains on sale of mortgages and mortgage-backed securities (net of market revaluation) (1,569) 2,795 1,226 10,634 11,860 Foreign exchange gains 1,079 4,353 5,432 (10,507) (5,075) Total trading revenue 5,476 17,099 22,575 1,465 24,040 Gains on sale ofinvestment securities 3,556 88,955 92,511 42,138 134,649 Other revenue 25,690 (13.268) 12,422 9,742 22,1f>4 Total service and other revenue $336,832 $155,792 $492,624 $213,339 S705,963 ; Service revenue increased 44% in 1986 and 21% in 1985. Trading revenue contributed $13.0 million after-tax Excluding the effect of the mergers, service revenue to r.et income in 1986, $12.2 million aRer-tax in 1985, and I increased $95.0 million in 1986. $3.0 million after-tax in 1984. The 1986 increase in gains ) The growth in trust and investment management on the sale of mortgages and mortgage-backed securities fees in 1986 was primarily due to the mergers and was due to favorable market conditions, as well as a improved markets fo- bond and equity securities. Growth greater volume of mortgages sold. Foreign exchans gains in sewices provided to employee benefit funds and insti- in 1986 reflect an after-tax loss of $7.8 million due to tutions, as well as increases in Master Trust / Custody and unauthorized trading by a foreign exchange dealer at related senices, contributed to fee growth in 1986 and Mellon Bank N.A.'s Tokyo branch. Gains on the sale of 1985. The mergers accounted for $38.9 million of the 1986 investment securities contributed $72.7 million after-tax, increase in trust and investment management fees. or $2.66 per common share, in 1986; $50.0 million after-Cash management fees and deposit transaction tax, or $1.86 per common share, in 1985; and $2.3 million ; charges increased 28% in 1986 and 327c in 1985. These after tax, or $.09 per common share, in 1984. increases resulted primarily from growth in cash manage- Other revenue in 1986 and 1985 principally reflected ment business, as well as increases in the prices charged gains on the sale of assets previously acquired in connec-for these services. The mergers accounted for $3.0 million tion with loan settlements, other equity securities and of the 1986 increase in cash management fees. Regional other assets. Other revenues in 1984 included a $2.5 mil-lockbox growth also contributed to the 1985 increase. lion after-tax gain on the sale of a Delaware office build-Service revenue in 1986 also grew as a result ofincreased ing, a $2.8 million after-tax settlement ofclaims wit h the data processing services provided to existing customers, government ofIran, and other gains on the sale of assets Of the 1986 increase in data processing fees, $9.4 million totaling $12.7 million aRer-tax. was attributable to the mergers. 1 25 _____________D
, L 'Financid Reillw I continued Operating expense 1985/1984 1986/1985 Increase / Increase / rdollaramounts in thousandsf 1984 (decrease) 1985 (decrease) 1986 Selaries and wages $347,599 $ 45,038 $392,637 8 87,050 $ 479,687 Employeebenefits 94,257 22,461 116,718 (18,131) 98,587 Net occupancy expense 97,535 12,391 109,926 12,708 122,634 Equipment expense 58,472 9,733 68,205 22,577 90,782 Forms and supplies 26,344 3,137 29,481 2,065 31,546 Telephone and telegraph 25,171 3,376 28,547 2,909 31,456 Amortization ofgoodwill and other intangibles 12,053 4,002 16,055 10,987 27,042
- Trevel 16,326 2,623 ' 18,949 1,325 20,274 Advertisingand sales promotion 14,677 392 15,069 2,824 17,893 Shires, capital and franchise taxes 13,631 852 14,483 3,046 17,529 Otherexpense 109,315 46,224 155,539 52,993 208,532 Totaloperating expense $815,380 $150,229 $965,609 $180,353 $1.145,962 Av: rage full-time equivalent staff 14,760 1,047 15,807 2,612 18,419 Excluding the effect ofthe 1986 mergers and nonrecur- Pension expense was $18.3 million in 1985 and $16.5 mil-ring expenses primarily related to the realignment of the lion in 1984. Employee benefits expense in 1985 included a Corporation's international banking and certain other $9.7 million charge for implementation ofan early retire-businesses, operating expense increased in 1986 by $78.4 ment program, ofwhich $6.9 million was included in pen- - million, or 8E Excluding the effect of nonrecurring sion expense.
expense and the effect of the 1984 merger with Northwest The increase in net occupancy expense during 1986 Pennsylvania Corp., operating expense increased 15% resulted principally from the mergers, as did approxi-in 1985. mately one-halfof the increase in equipment expense. The mergers contributed $42.3 million to the increase The increase in net occupancy expense in 1985 primarily in salaries and wages in 1986. The remaining increase reflected additional leased space at a number oflocations r flected higher salary levels and an increase of 669 aver- and higher real estate taxes. age full-time equivalent staff from 1985. Staffing levels The increase in other expense in 1986 reflected the have continued to be expanded, primarily to support effects of the mergers, as well as increases in various growth in service businesses. Salaries and wages also categories such as insurance; professional, consulting and included a $4.4 million severance charge in 1986 related legal fees; expenses associated with real estate acquired in to the realignment of the Corporation's international connection with loan settlements; and postage and deliv-banking and certain other businesses. Excluding the ery charges. effect ofthe 1984 Northwest Pennsylvania Corp. merger, The increase in other expense in 1985 reflected write-average equivalent staffincreasmi 889 during 1985. downs in the carrying value ofcertain foreign invest-Employee benefits expense declined 16% in 1986, ments totaling $6.1 million, as well as increases in pro-compared with a 24% increase in 1985. In 1986, pension fessional, consulting and legal fees, charitable donations, expense was a cadit of $7.6 million as a result of the adop- and postage and delivery charges. tion during the year of the Financial Accounting Stand- The Corporation's operating expense as a percentage ards Board's new pension standard for all pension plans, of revenue, excluding securities gains, was lower in 1986, as well as the continued benefit from changes in pension compared with 1985, as shown in the chart on the follow-pl n actuarial assumptions that were made in 1985. ing page. 26 l
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V. , i l l Taxes The Corporation's provision for income taxes decreased to credit loss reserve into taxable income over a four-year
$2.5 million in 1986 from $49.4 million in 1985.In addi- period beginning in 1987. Other major changes affecting tion to the decrease in the tax provision resulting from the
- be Corporation include the repeal (with certain j
$65.4 million decrease in pre-tax income, the Corporation .xceptions) of a deduction for all interest expense on funds recognized a $6.8 million tax benefit in 1986 that resulted borrowed to purchase or carry tar-exempt obligations from the cumulative etfeet of reduced future tax rates on acquired after August 7,1986; additional limitations on income from leveraged leases, as required by generally the utilization offoreign tax credits; and the repeal (with accepted accounting principles. The 1985 tax provision certain exceptions) of the ten-year carry-back period for reflected F14.8 million in investment tax credits. In 1984, losses incurred in taxable years beginning after December l the tax p covision amounted to a credit of S6.7 million, 31,1986. '
reflectir.g a higher proportion of tax-exempt income than The impact ofrate reduction is expected to reduce the in 1985. Corporation's federalincome taxes payable in fbture The Tax Reform Act of1986(the "Act") includes a years; however, the impact of the recapture of the tax number ef provisions that will have an impact on the fed- basis credit loss reserve is expected to increase the Corpo-eralincome tax liabilities of banks and bank holding com- ration's fede*al income taxes payable in future years. panies. Major changes that will affect Mellon Bank Corpo- Overall, it is expected that the Act will result in an ration include a reduction in the corporate income tax increase in the amount of federal income tax that is paid rate; a broadening of the corporate alternative minimum by the Corporation. Although the amount of taxes paid a tax base, as well as an increase in the alternative mini- expected to increase, tax reform is expected to have an mum tax rate; the repeal of the deduction for the provi- immaterial effect on the provision for income taxes in sion for poi.sible credit losses to the extent it exceeds future years. actual net credit losses; and the recapture of the tax basis i Operating Expense Ratio
- I i n d (percent) 600 0 82 83 84 65 66 0 82 83 84 86 86
- Operating expense as a percentage af net credit rvvenue (fully taxable equivalent bania)and service and other revenue, ezeluding gains on the sale c(investment securities. 27 m
. FinancinDQh&w t continued Organizational Performance For analytical purposes. we present the following organi- been prepared on a management reporting basis ,
zational performance review. The data and discussion have and include certain allocations among business units. 1985 1986 Average Net Return Average Net idollaramounts in millions) assets income Return on assets
- assets income on assets
- Mellon Bank, N.A. $23,311 $161 .69% $24,185 $139 .58%
Mellon Bank (East): Mellon Bank (East) 3,997 (3) (.07) 4,726 18 .38 Purchase accounting effect (13) 13 - (2) 7 - Total Mellon Bank (East) 3,984 10 .24 4,724 Community banks:" 25 .53 Community banks 2,211 11 .50 3,577 17 .48 Purchase accounting effect 9 2 - 59 (2) - Totalcommunity banks 2,220 13 .59 3,636 15 .41 Total bankingsubsidiaries 29,515 184 .62 32,545 Mortgage Banking 179 .55 1,193 3 .29 1,591 Leasing (5) (.29) 308 6 1.81 407 10 2.43 Commercialand Consumer Finance 413 5 1.30 535 6 1.08 Parent and other (1,183) 4 - (1,244) (7) - Total Mellon Bank Corporation (and its subsidiaries) $30.246 $202 .63% $33,834 $183 .50 cc
- Calculated using dollar amounts in thousands and net income applicable to common stock.
" includes Commonwealth National Bank, Mellon Bank (CentralI, hiellon Bank iDE), hiellon Bank thiDiand hiellon Bank iNorth L The decrease in the Corporation's net income in 1986 The improvement in earnings was attributable to wider was primarily attributable to lower earnings at Mellon spreads on higher levels ofstate and municipal securities.
Bank. N.A., at the Parent Corporation and in Mortgage growth in the domestic middle market loan portfblio, and Banking. operating expense levels that were essentially unchanged The decrease in earnings at Mellon Bank, N.A. was from the prior year. largely driven by a $132.4 million increase in the provi-The decrease in the return on assets for the commu-sion for possible credit losses. This increase was princi- nity banks resulted primarily from the effect of the pur-pally in the wholesale banking businesses, which histori-chase accounting adjustments related to the acquisition of cally have been the major contributors to the Bank's Commonwealth National Bank and Mellon Bank (MD). earnings. Net credit losses on energy loarm were $60.5 mil-The decrease in earnings at the Mortgage Banking lion in 1986, compared with $6.2 million in 1985. The subsidiaries in 1986 reflected the effects of the decline in Bank also added $82.8 million to its loan loss reserve in energy prices on the housing markets in Louisiana, Texas 1986. Management built the reserve in response to the and Colorado. Net credit losses at these subsidiaries increased level of nonperforming loans and to reflect con- totaled $12.6 million in 1986, compared with $5.2 million 3 tinuing uncertainties in the outlook for real estate values, in 1985. Management also increased the reserve by $14.9 energy prices, certain basic manufacturing industries and l million in the fourth quarter to reflect the contmumg debt renegotiations with lesser developed countries. The l uncertainties in the economies of these areas. { Bank realized increased revenues and profits from its ser. Leasing's increase in net income resulted from appli-vice businesses and improved profitability in its commu- l cation offuture tax rates enacted in 1986 to the method of { nity banking business in 1986, reflecting the strategic recognizing income on leveraged leases as required by ! emphasis on achieving greater balance in operations. The generally accepted accounting principles. increase in service revenue exceeded growth in operating { The decrease in the return on assets in Commercial l expense. The Bank's results also reflected higher gains on and Consumer Finance resulted from a $2.0 million loss ! the sale ofinvestment securities of$109.2 million in 1986 on a single credit. and $84 2 million in 1985. The decrease in net income at the Parent Corporation Net income for Mellon Bank (East)in 1986 reflected resulted primarily from the cost offinancing the 1986 increases in earnings from credit and service businesses, mergers. as well as higher gains on the sale ofinvestment securities. l
1, Balance Sheet Review 1985/1984 1986/1985 Average balances Increase / Increase / (dollar amounta in millions) 1984 (decrease) 1985 (decrease) ' 1986 Assets
- Money market investments $ 3,634 $(562) $ 3,072 8 (507) $ 2,565 1 Trading account securities 462 (62) 400 92 492 Investment securities 1,378 735 2,113 1,755 3,868 Loans and lease finance assets 17,347 2,735 20,082 2,622 22,704 !
Total interest-earning assets 22,821 2,846 25,667 3,962 29,629-Other assets 4,780 (201) 4,579 (374) 4,205 Total assets $27,601 $2,645 $30,246 $3,588 833,834 Funds supporting total assets (available basis) Core funds: Demand $ 2,272 $ 178 $ 2,450 $ 617 8 3,067 Savings accounts 952 -(64) 888 127 1,015 Money market deposit accounts 2,428 913 3,341 984 4:325 Retailsavings certificates 2,813 92 2,905 223 3,128 Negotiable certificates ofdeposit with maturities in excess ofoneyear 1,512 (376) 1,136 824 1,960 Other core funds with maturities in excess ofone year 157 49 206 (45) 161 Totalcore funds 10,134 792 10,926 2,730 13,656 Purchased funds (maturities less than or equal to one year): Negotiable certifzates ofdeposit 1,523 631 2,154 (140) 2,014 Foreign office deposits 2,859 (65) 2,794 (358) 2,436 Other purchased funds 6,418 1,048 7,466 1,322 8,788 Total purchased funds 10,800 1,614 12,414 824 13.238 < Notes and debentures 613 445 1,058 372 1,430 Other 1,274 (5) 1,269 36 1,305 Funds supporting interest-earning assets 22,821 2,846 25,667 3,962 29,629 All other 4,780 (201) 4,579 4374) 4,205 Total $27,601 $2,645 $30,246 $3,588 $33,834 Average domestic purchased funds ratio 29.7 % 33.99c 29.8 % Average interest earning assets increased by $4.0 billion, acceptances as part of an effort to reduce low-margin i or 15%, during 1986. Mergers accounted for $1.1 billion of assets. This was partially offset by an increase in intangi-this increase, Excluding the effect of the mergers, average ble assets, which resulted primarily from the mergers. loans and leases increased by $1.9 billion, or 109c, prima- Core funds are viewed as a stable component of the rily reflecting growth in the Corporation's domestic loan Corporation's mix ofliabilities. Excluding the effect of the portfolio. Excluding the effect of the mergers, average mergers, average core funds increased by $1.8 billion, . investment securities increased by $1.6 billion, or 74%, 179c. Since 1984, the Corporation's liquidity has been principally reflecting higher levels ofstate and municipal enhanced by increases in core funds as a result of mergers securities. and growth in money market deposit accounts. The decrease in money market investments reflects Purchased funds are sources offunding, other than continued emphasis on reducing levels of assets with core deposits, with maturities less than or equal to one lower spreads in favor of higher yielding investment year. Purchased funds increased by 7% in 1986 from 1985, securities. As these assets were supported by short-term Mergers accounted for $127 million of the 1986 increase. purchased funds, this did not have a significant impact on Other purchased funds, which consist primarily of the Corporation's liquidity. repurchase agreements and federal funds purchased, The decrease in other assets resulted from a sub. were increased to support higher levels ofinvestment stantial reduction in the level ofcustomers' liability on securities. The Corporation's domestic purchased funds 29 A
v
. Financi:1 Review continued B lance sheet review continued ratio, which indicates reliance on purchased funds, has 9?c Notes Due March 1,1996; $69 million of Australian decreased since 1985 and continues to compare favorably Dollar Notes Due February 14,1989; and two issues of with that ofother major bank holding companies. Variable Coupon Renewable Notes Due 1987 totaling $450 The increase in average notes and debentures was million.
primarily attributable to the issuance of S125 million of Maturity distribution ofinvestment securities ; December 31,1986 Book value Average Within After Total maturity 12ear 1-5 years 5-10. years 10 years market at year end (dollar amounts in millionsi Amt. Yld. Amt. Yld. Amt. Yld. Amt. Yld. Total value (in years) U.S. Treasury and agency securities $169 8.40% $1,897 7.29 % $213 8.02 % $ 12 9.55% $2,291 $2,323 3.60 Obligations ofstates and l political subdivisions 167 8.62 98 10.37 175 12.73 926 13.00 1,366 1,455 14.26 Other securities: Bonds, notes and debentures 16 7.39 % 70 8.83 % 22 9.39 % 21 9.32 % 129 129 5.27 Stock ofFederal Reserve Bank and other - - - 23 23 23 Total $352 $2,065 $410 $982 $3,809 $3,930 Note: Rates for obligations ofstates and politicalsubdivisions, and bonds, notes and debentures, are calculated on a fully taxable equica. lent basis using a 46% federalincome tax rate. FuIly taxable equivalent increments to inteerst reanue are $5.7 million for maturity due within one vear; $4.1 million for maturity afler one but within fwe years; $9.6 miliion for matunty after five but within 10 years; and
$49.6 million for maturity after 10 years.
Maturity distribution ofloans December 31,1986 fin millions > Within 1 year" 1-5 years After 5 years Total Domestic:* Commercialand financial $6,183 $3,052 $2,117 $11,352 Real estate 1,697 1,281 875 3,853 Total domestic 7,880 4,333 2,992 15,205 International 1,829 1,079 520 3,428 Total $9,709 $5,412 $3,512 $18,633
- Excludes consu mer credit and consumer mortgages.
" includes demand loans and loans with no stated matunty.
l Maturity distribution of domestic time deposits j December 31,1986 Within 3-6 6 12 After (in millions > 3 months months months 1 year Total Time certificates ofdeposit in denominations of l $100,000 or greater $ 824 $ 401 $ 611 $2,465 $4,301 Time certiheates ofdeposit in denominations of less than $100,000 919 704 411 866 2,900 Other time deposits in denominations of S100,000 or greater 197 56 14 149 416 Other time deposits in denominations ofless than $100,000 15 - 11 - 26 Total domestic time deposits $1.955 $1.161 $1,047 $3,480 $7,643 l 30 m1 L____ _
1 Liquidity A fundamental aspect of the Corporation's asset / liability in the prior year. Of this increase, $917 million was pro-management strategy is to maintain adequate liquidity in vided by the Commonwealth and Mellon Bank (MD) order to fund assets and repay maturing liabilities or mergers. The liquidity position of the Corporation was fur-customer deposits in accordance with their terms. The ther enhanced by increases in the average balances of Corporation maintains adequate liquidity through man- negotiable cer tificates ofdeposit with maturities in excess agement ofits worldwide mix of asset and liability posi- ofone year, and by new debt issuances of$736 million dur-tions and its ability to adjust these positions throughout ing 1986. Its worldwide network.
'I he Corporation's principal sources of asset liquidity Core funds, on an available basis, increased on aver-are money market investments, state and municipal age in 1986 by $2.7 billion from 1985 and amounted to securities and loans maturing within one year.
40.4% of average assets in 1986, compared with 36.1% { l Interest rate sensitivity analysis An important factor in the management of the Corpora- repricing characteristics of the major categories of the tion's balance sheet is interest rate sensitivity. The Corpo. Corporation's interest-earning assets and supporting ration actively manages its interest rate sensitivity posi- funds at December 31,1986. The data is based upon con-tion in order to maintain an appropriate balance between tractual repricing or maturities and, where applicable, the maturity and the repricing characteristics ofits assets management's sumptions as to the repricing character-and liabilities and to maximize net credit revenue during istics ofcertain assets and supporting funds, and includes periods ofstable as well as volatile interest rates. the impact offinancial futures contracts and interest rate The interest rate sensitivity table below shows the swaps. l l December 31,1986 l Over 1 j 0-90 91-180 181-365 year and j idollaramounts in millions) days days days fixed rate Total l Interest earning assets s Money marketinvestments $ 2,595 $ 485 $ 28 $ 3,112
$ 4 Trading account securities 322 - - -
322 Investment securities 255 40 141 3,373 3,809 loans andlease finance assets 15,650 1,288 639 5,952 23,529 Totalinterest-earning assets $18,822 $1,813 $ 808 $9,329 $30,772 l Funds wupporting interest-earning assets I Interest-paying deposits (available basis): Demand 89 $- $ - Savings accounts S $ 831 $ 920 85 4 2 987 1,078 Money market deposit accounts 4,709 - - - 4,709 Retail savings certificates 942 753 423 924 3,042
. Negotiable certificates ofdeposit 2,378 159 255 1,231 4,023 Other time deposits 289 49 6 85 429 Foreign office deposits 2,446 121 131 34 2,732 i Totalinterest-paying deposits 10,938 1,086 817 4,092 16,933 !
Short-term borrowed funds 7,862 112 53 111 8,138 Notes and debentures (with original maturities over one year) 1,129 131 102 404 1,766 l Available interest-free demand deposits - - - 2,587 2,587 j All other 733 G68) (153) 1,136 1,348 Total funds supporting interest earning assets l
$20,662 $ 961 $ 819 $8,330 $30,772 l Interest sensitivity gap $ (1,840) $ 852 $ (11) $ 999 $ -
Cumulative gap $ (1,840) $ (988) $(999) $- $ - ) Cumulative gap as a percentage of total assets (2.90)% 1 31 A
. _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - _ - _ _ a
, Finsicici Review _ _ _ - _ ,
continued , Capital and dividends The maintenance of a level ofcapital adequate to support million at December 31,1985, and repurchased the 8.957c business growth is important to the Corporation's ability Promissory Notes, which had a balance of S17 million at to add to future earnings. Common shareholders' eouity December 31,1985. increased to $1.8 billion at December 31,1986, from $1.6 The Federal Reserve Board reviews the level of a billion at December 31,1985, and $1.5 billion at December bank holding company's intangible assets in assessing its 31,1984. Earnings retention was primarily responsible capital adequacy. Federal Reserve Board guidelines state for this growth. The Corporation's internal capital growth that a bank holding company's aggregate intangible rate was 5.5% in 1986 and 7.7% in 1985. assets should not exceed 257c of tangible primary capital. The quarterly dividend on common stock was The unamortized balance ofgoodwill acquired through increased to $.69 in 1986, an increase of 3% ft om 1985. mergers totaled $125 million at December 31,1986; $89 The common stock dividend payout ratio was 447c in million at December 31,1985; and $91 million at Decem-1986, compared with 38% in 1985. The Corporation's ber 31,1984. Capitalized mortgage servicing portfolio long-term targeted payout ratio is 30%. costs, which represent the value of mortgage servicing The Corporation's primary and total capital were rights acquired through mergers and other acquisitions of strengthened during 1986 by the growth in common mortgage servicing portfolios, amounted to $99 million at shareholders' equity, the substantial increase in the December 31,1986; $71 million at December 31,1985; and reserve for possible credit losses, and the issuance of 2.7 $50 million at December 31,1984. Other intangible assets, million shares ofconvertible preferred stock in connection primarily related to the mergers, amounted to $42 million with the Commonwealth merger. Total capital also at December 31,1986. The ratio of aggregate intangible improved as a result of $10 million in 8.75% subordinated assets to tangible primary capital was 11.76% at Decem-debt due through 1997 acquired in the merger with Com- ber 31,1986; 7.71% at Decembo 31,1985; and 7.35% at monwealth, and the issuance of $125 million in 9% Notes December 31,1984. Due March 1,1996. The increase in the Corporation's The Corporation's primary and total capital ratios, total capital ratio in 1985 reflected the issuance of $100 shown in the following table, were substantially higher million in 11.75% Guaranteed Debentures. than the target ratios of 5.50% for primary capital and During 1986, the Corporation redeemed the Converti- 6.00% for total capital that are used by the federal bank ble Floating Rate Notes, which had a balance of $50 regulatcry agencies to measure capital adequacy. 1984 1985 1986 Primary capital as a percentage of total assets 6.64 % 6.627c 7.23 % Total capital as a percentage of total assets 7.71 7.92 8.66 Note: Primary capital, as defined by the Fedem! Reserve Boani, includes common shareholders' equity perpetual preferred stock, the reserve for possible credit losses, perpetual debt, mandatory convertible debt and minority interest in equity ofconsolidated subsidiaries. Total capital includes primary capital, limited life preferred stock and long. term debt teith an original maturity of at least seven years. The ratnos are compu ted based upon total assets at year <nd, as reported, plus the year-end reserte forpossible credit losses. 1 I Ratios of Capital to Assets Common Stock (percent > Av r e a te pract 10.0 80 I J n. ' 7.5 # s 60 'l 5.0 40 y b " l l 26 20 l
!. .l. .!. .! .f. .t 0 82 83 84 85 86 0 e2 83 64 e5 66 m Tbtal capit.1 to tot.l .saets 32 e prim.ryc. pit.itotos.i t.
M
-{ .
Credit Risk and Asset Quality Credit policy The Corporation manages credit risk through the estab- by individual lending officers and Credit Policy officers or lishment and implementation ofprudent credit policies by the individuallending officer, and the diversification of the loan and lease portfolios. The Corporation assesses the quality ofits risk assets The credit policies are adopted by the Asset / Liability and assigns a quality rating to substantially all ofits Committee based upon its evaluation ofdevelopments in domestic commercial loan portfolio, and to commercial the political, economic and social environments that could borrowers in most foreign countries. Quality ratings are affect lending risks. reviewed at least annually. Extensions ofcredit in excess ofcertain dollar The Country Review Committee approves country amounts are approved by credit committees staffed by exposure limits for all foreign countries in which the Cor-senior officers from the Credit Policy Department and the poration's exposure is greater than $10 million. Corporation's lending and other relationship depart- The Credit Review Division provides an independent ments. Other credit extensions are approved eitherjointly assessment ofcredit policy and the quality of portfolio assets. Composition ofloan and lease portfolio at year-end December 31, tin millions) 1982 1983 1984 1985 1986 Domestic operations Commercial and industrial $ 4,619 $ 5,904 $ 7,676 $ 8,993 $ 9,124 Financialinstitutions' 768 909 1,331 1,485 1,390 Other 357 402 870 1,115 838 Totalcommercial and financial 5,744 7,215 9,877 11,593 11,352 Commemialconstruction 602 1,137 1,702 2,045 2,038 Commercial mortgage 420 570 683 880 1,455 Consumer mortgage 1,011 1,288 1,266 1,378 1,787 Total real estate 2,033 2,995 3,651 4,303 5,640 Consumer credit 907 1,500 2,014 2.227 2,696 Lease finance assets 198 237 289 387 413 Totaldomestic operations 8,882 11,947 15,831 18,510 20,101 internationaloperations Commercial and industrial 1,488 1,915 2,133 2,025 1,797 Financialinstitutions 909 1,092 1,203 1,245 1,055 Governments and official institutions 225 528 453 517 557 Other 59 7 67 22 19 Totalinternationaloperations 2,681 3,542 3,856 3,809 3,428 Total loans and lease finance assets, net ofunearned discount $11,563 $15,489 $19,687 $22,319 $23,529 Note: No other concen tmtions ofloans to bormwers engaged in similar actientiec exceeded 10% of total consolidated loans and lease tinance assets at December 31,1986. The majority ofdomestic commercial and financial loans The commercial construction loan portfolio is diversi-were made to corporate borrowers in the manufacturing, fled geographically and by type of project, and generally financial services, oil and gas related, wholesale and retail consists ofloans to large and experienced professional trade, service and public utility industries. Domestic loans developers. to oil and gas related borrowers smounted to $1.3 billion A discussion of the Corporation's international out-l at December 31,1986. Loans to companies operating oil aandings is presented on pages 39 through 41. and gas field properties are based upon proven, developed i oil and gas resen es. 33 {
' ' v
- ' Financid Nevi 5w continued Cash basis, past du'e and restructured loan- and lease finance as ,ets at year end
. Cash basis loans and lease fmance assets are those on well secured and in the process ofcollection. Due to regu.
which, in the opinion of management, collection ofinter. latory reporting changes adopted in 1983, included in the est is doubtful. Interest accruals are generally discontin- past due category are past due consumer loans of $19 mil-ued whenever the payment ofinterest is more then 60 lion in 1986; $24 million in 1985; $23 million in 1984; and days past due or payment of principal is past due 90 days $22 million in 1983. In prior years, these loans were or more, or sooner in situations where management excluded from this category. Restructured loans and lease believes it appropriate. fmance assets include those on which a portion ofinterest Past due loans and lease fmance assets are those that or principal has been forgiven and those made at less than are contractually past due 90 days or more but a re not on market rates. cash-basis because they are either consumer loans or are December 31, idollar amounts in millions) 1982 1983 1984 1985 1986 Domestic operations: Cash-basis $195 $246 $310 $382 $608 Past due 7 43' 24 24 19 Restructured 11 10 - 4 63 Total 213 299 334 410 690 ; Internationaloperations: 1 Cash-basis 115. 162 213 190 227 Past due 1 42 5 6 11 Restructured 1 36 1 1 - Total 117 240 219 197 238 Total cash-basis, past due and restructured $330 $539 $553 $607 $928 Total cash-basis, past due and restructured as a percentage of total loans and lease finance assets 2.85 % 3.48 % 2.81 % 2.72 % 3.94 % 1 The increase in domestic cash-basis loans at Decem- increase in international cash-basis loans primarily repre- ! ber 31,1986, compared with December 31,1985, princi- sents loans to private sector borrowers in Mexico. l pally reflected the addition of a number ofoil and gas Domestic cash-basis loans and leases at December 31, i related credits, loans to a large basic manufacturing com- 1985, compared with the previous year, reflect the addi. j pany and real estate loans. The increase in the domestic tion of a large diversified national credit that amounted to ) restructured category reflected the addition ofa loan to a $44 million. ! developer of an office building complex. The 1986 1 Composition of cash basis, p :st due and restructured loans and leases
]
December 31,1986 rin millions) Cash-basis Past due Restructured Total Domesticloans andleases: Commercial and financial: Oiland gas related $127 $- $- $127 Other 228 - 3 231 Realestate 223 7 60 290 Consumer credit 7 12 - 19 Lease finance assets 23 - - 23 Total 608 19 63 690 Internationalloans 227 11 - 238 Total $835 $ 30 $ 63 $928 34
-) <
Foregone interest on cash basin and re tructured loans and lease finance assets at year end Domestic International Cash. Restruc- Cash. Restruc-tin thousandai basis tured Total basis tured Total 1982 Interest revenue foregone $10,835 $ 136 $10,971 $ 6,737 $- $ 6.737 1983 Contractualinterest due $26,616 $ 710 $27,326 $20,870 $2,973 $23,843 Interest revenue recognized 16,500 648 17,148 12,856 2,919 15,775 Interest revenue foregone $10.116 $ 62 $10,178 $ 8,014 $ 54- $ 8,068 1984
' Contractualinterest due $36,670 2 78 $36,748 $30,274 5 64 $30,338 Interest revenue recognized 19,512 49 19,561 11,417 48 11.465 Interest revenue foregone $17,158 $ 29 $17,187 $18,857 $ 16 $18,873 1985 Contractualinterest due $42,273 $ 450 $42,723 $21,990 $ 38 $22.028 Interest revenue recognized 16,552 344 16,896 24,074 33 24,107 Interest revenue foregone $25,721 $ 106 $25.827 $ (2,084) $ 5 $ t2d9) 1986 Contractualinterest due $56,680 $5,312 861,992 $17,725 $- $17,725 Interest revenue recognized 21,272 3,894 25,166 15,627 - 15,B27 Interest revenue foregone f
- l. $35,408 $1,418 836,826 8 2,098 8- $ 2,098 Note: The data in the table above includes interest revenue foregone on loans that were included as "tash basis and restructured"at the end ofeach year. Not included is the eWect ofinterest received on loans that were restored to accrual status or chargedoff during the year.
Real estate acquired Real estate acquired in connection with loan settlements, builders were principally responsible for this increase. included in other assets, amounted to $178 million at The interest cost ofcarry, gains and losses on disposition, December 31,1986, compared with $55 million at Decem- net operating costs, and write downs in carrying value ber 31,1985, and $27 million at December 31,1984. decreased net income by $11.1 million in 1986; $4.9 mil-Foreclosures on loans to commercial and residential lion in 1985; and $597,000 in 1984. i l l ! 35
- 1
.-___--_-_____-_-________O
4 Financial Review continued Summary of credit loss reserve activity Un thousands) 1982 1983 1984 1985 1986 Reserve at beginning of year $134,101 $169,178 $241,504 $ 303,693 $ 361,485 Reserves f' rom mergers and asset acquisitions - 50,207 4,612 652 13,123 Credit losses: Domestic operations: Commercialand industrial (16,999) (16,419) (22,099) (44,724) (123,019) Financialinstitutions (2,200) (4,298) (4,214) (10,091) (9,966) Other (720) (458) (474) (212) (45) Totalcommercial and financial (19,919) (21,175) (26,787) (55 027) (133,030) Commercial construction (18) (220) (1,307) (6,428) (22,117) Commercial mortgage (154) (89) (1,824) (3,548) (4,667) Consumer mortgage (456) (1,123) (1,126) (1,379) (1,715) Total realestate (628) (1,432) (4,257) (11,355) (28,499) Consumer credit (11,881) (12,874) (24,570) (35.446) (35,986) Lease finance assets - - (1,433) (1,397) (6,687) Totaldomestic operations (32,428) (35,481) (57,047) (103,225) (204,202) International operations: - Commercial and industrial (8,098) (11,229) (11,410) (8,363) (10,539) Governments and official institutions - (5,035) (4,519) (8.984) (9,976) (2,186) (4,280) (4,652) _ Financialinstitutions Total international ope'.ations (8,098) (16,264) (18,115) (21,627) (25,167) Total credit losses (40,526) (51,745) (75,162) (124,852) (229,369) Credit recoveries: i Domestic operations: Commercial and industrial 2,818 14,579 8,593 12,196 11,164 Financialinstitutions 263 1 - 8.921 6,012 Other 55 1,018 355 13 - Totalcommercialand financial 3,136 15,598 8,948 21,130 17,176 Commercialconstruction - 2 166 126 920 Commercial mortgage 1,077 628 431 840 258 Consumer mortgage 4 27 48 254 718 Total real estate 1,081 657 645 1,220 1,896 Consumer credit 3,142 4,002 5,894 7,682 10,219 Lease finance assets 17 26 - - 4 Total domestic operations 7,376 20,283 15,487 30,032 29,295 International operations: Commercialand industrial 142 1,382 576 3,637 3,588 Governments and official institutions - - - 2 138 Totalinternational operations 142 1,382 576 3,639 3,726 Totalcredit recoveries 7,518 21,665 16,063 33,671 33,021 Net creditlosses (33,008) (30,080) (59,099) (91,181) (196,348) Provision charged to expense: Domestic operations 53,151 31,069 65,559 103,502 233,539 Internationaloperations 14,934 21,130 51,117 44,819 82,046 Total provision charged to expense 68,085 52,199 116,676 148,321 315,585 Net addition to reserve 35,077 22,119 57,577 57,140 119,237 Reserve at year end $169,178 $241,504 $303,693 $ 361,485 $ 493,845 36 i h
l Reserve and credit loss ratios 1982 1983 1984 1985 1986 l-Reserve fbr possible credit losses to average December loans and leases 1.46'7c 1.587c 1.61 % 1.709c 2.177c Net credit losses to average loans and leases .30 .22 .34 .45 .86 - l l Credit losses The sharp increase in the ratio of net credit losses to aver- at their market value net oferedit quality write-downs of age loans and leases in 1986 was primarily due to the $42 million. Consequently, the Corporation incurred nom-effect of the decline in energy prices during the year. The inal credit losses on these acquired loans in 1983. Corporation also experienced higher losses on loans to From time to time, bank regulatory agencies deter-domestic commercial borrowers in a variety ofindustries mine that credits to certain countries have been impaired - and a slight decrease in losses on consumer loans. Domes- to varying degrees. These agencies direct banks to reflect tic net credit losses on energy loans were $63.6 million in this impairmen. Sy either establishing allocated transfer ' 1986, compared with $7.2 million in 1985. risk reserves or L, electing to take credit losses. The Cor-
, The 1983 ratio of net credit losses to average loans poration has recognized losses on credits related to these 4
- and leases, which was the Corporation's lowest in the last countries in amounts equal to or greater than those speci-l five years, reflected the addition ofloans acquired in the fled by the regulators.
I merger with The Girard Company, which were recorded Reserve for possible credit losses A reserve for possible credit losses is maintained at each million at December 31,1985. The provision in 1986 operating subsidiary at an amount that, in management's included a net addition ofS60.6 million in the reserve
, judgment, is adequate to absorb losses in the loan and assigned to international operations, which increased to lease finance asset portfolio. On the basis of December 5.05% ofinternational loans at December 31,1986, from 1986 average loans and leases, the Corporation's ratio of 2.917c at the prior year-end. The net addition to the the reserve to total loans and leases was 2.17"c, up from reserve assigned to domestic operations was $58.6 million the December 1985 ratio of1.707c. in 1986, which increased the reserve to 1.60% ofdomestic The components of the provision for possible credit loans and leases at December 31,1986, up from 1.35cc at losses are shown in the chart below. Excluding reserves the end ofl985. The Corporation's reserve was increased from mergers and asset acquisitions, the reserve for possi- to cover loan growth and to achieve a higher reserve ratio ble credit losses was increased by $119.2 million during to reflect the continuing uncertainties in particular areas 1986. At December 31,1986, the reserve for possible credit of the U.S. and international economies.
losses was $494 million, compared with a reserve of $361 Components of Provision for Reserve and Credit Loss Ratios Possible Credit Losses < percent)
'millmns of dollars) 320 2.4 240 L6 100 80 .6 I5 82 63 84 65 66 0 82 63 64 e5 66 5 Increase to the reserve for possible E Net credit losses to average loans credit losses and leases E Net credit losses E beerve to average December loans and lease. 3,.,
A
* - Wancial ReviW (
continued y i International Operations Selected financial data (dollar amounts in millions) 1982 1983 1984 1985 1986 Net income from international operations $43.1 $33.1 $(.7) $4.1 $(30.1) Net income from international operations as a percentage ofconsolidated net income 32 % 18 % -% 2% (16)% International operations include international banking $5.8 million in 1985. The international net rate on c.ctivities conducted through the International Banking interest earning assets of2.23% in 1986 declined slightly Department and the global funding activities of the Capi. from 2.33% in 1985. The decrease in earnings also i tal Markets Department. For earnings and related infor- reflected an after-tax loss of $7.8 million due to unauthor- ' mation on international operations and geographic distri- ized trading by a foreign exchange dealer at Mellon Bank, bution ofselected data, see note 18 of notes to financial N.A.'s Tokyo branch. The provision for possible credit statements, losses included a net addition to the reserve of $60.6 mil-Earnings from international operations in 1986 . lion during 1986. The reserve as a percentage ofinterna-decreased by $34.2 million. This decrease was primarily tionalloans at December 31,1986, increased to 5.05%, due to a $37.2 million increase in the provision for possible compared with 2.91% at the end of1985. credit losses and a $26.7 million decrease in net credit In the fourth quarter ofl986, the Corporation revenue on a fully taxable equivalent basis. Net credit announced a realignment ofits international banking revenue, on a fully taxalle equivalent basis, decreased activities. Through realignment, the Co pc cation intends from $144.1 million in 1985 to $117.4 million in 1986, prb to emphasize international businesses in which it can marily as a result oflower levels ofaverage interest. compete most effectively; to better serve its multinational c:rning assets and lower interest receipts on cash-basis corporate customers; and to ensure effective delivery of loans. Cash basis loans and leases had a positive effect on investment banking, correspondent banking and trade-ntt credit revenue of $1.2 million in 1986, compared with related services. Assets by International Monetary Fund classification at year-end 1985 1986 . { Percentage oftotal Percentage of total tdollaramounts in millions) Amount internationalassets Amount internationalassets ; Industrialcountries $4,958 $4,136 OPEC countries 229 65 % 3 67 % ) 251 4 Centrally-planned economies 156 2 83 1 Developing countries: j Emerging exporters of manufactured goods 1,063 14 741 IS j Net oilexporters 669 9 600 10 1 Other middleincome 425 6 372 6 Otherlow income 56 1 24 - 1 Total $7,554 100 % $6,216 100 % l Note: Distributions are based on location ofobligor or investment except for assets guaranteed by a third party where location is that of the guarantor. Country economic classification is based on data published by the international Monetary Fund. See note 18 of notes to financial s ta tements for additional information. ) I I 1 38
International nutstandings Loans in the international portfolio represented 15% of funded by local currency borrowings) related to each of total loans and lease finance assets at December 31,1986. the countries shown below exceeded .75% of total consoli-At December 31,1984,1985 and 1986, the Corpora- dated assets. Country distributions are based on the loca-tion's total public and private sector cross-border out- tion of the obligor or investment, except for assets guaran-standings (loans, acceptances, interest-bearingdeposits _ teed by a third party, where the location is that of the with other banks, other investments and related accrued guarantor. interest, excluding local currency outstanding hedged or Commercial Financial and industrial Governments mstitutions and official (in milliow Public Private Public Private institutions Other Total December 31,1984* Japan $- $ 75 $ 35 $956 $8 $1 $1,075 Mexico 150 223 126 - 91 1 591 Brazil 196 38 63 186 50 1 534 France 52 - 45 329 105 - 531 Australia 1 318 - 148 - 1 468 , United Kingdom 3 78 3 292 13 11 400 Canada - 160 - 193 14 1 368 Republic ofKorea 3 15 179 158 - 1 356 Italy 50 33 126 77 62 1 349 Spain 13 49 7 149 29 - 247 December 31,1985* Japan $- $ 70 $- $798 $ 10 $5 $ 883 Mexico 141 184 131 . 123 - 579 Brazil 197 47 52 129 64 - 489 Australia 30 227 '14 86 - 5 362 ! United Kingdom 13 134 68 112 1 25 353 France 57 1 155 106 - - 319 December 31,1986 Japan 8- 8 57 $- $560 $ 14 84 $ 635 Mexico 138 145 136 - 132 - 551 Brazil 130 21 22 86 88 - 347 France 4 - 11 302 - - 317
- A mounts for 1985 and 1984 have been restated to exclude local currency outstanding hedged or funded by local currency borrowings.
I 39 6
'p FinancidReview continued International outstanding cont m ued The tables and discussions that follow summarize national Monetary Fund (IMF), The World Bank, the changes in outstanding to borrowers in Mexico and Bra- Paris Club (the governments of certain developed nations zil and recent developments concerning refinancing on that lend to developing countries)and The Bank Advisory these obligations. Group for Mexico.
As a result of the negotiations, the Paris Club, the idollar amounts in millions) Mexico Brazil IMF, The World Bank.and The Bank Advisory Group for Outstanding at December 31,1985 $579 $ 489 Mexico in September agreed,in principle, to a financial Net change in short-term trade package that includes tne rehnacing of Mexico's public credits and interbank deposits - (102) sector term debt, issuance of new money credits and provi-Additional outstanding 5 - sion ofcontingency facilities. 3 Interest accrued 46 44 As part of this package, the government of Mexico ' Collections of: has asked banks to refinance its existing term debt of Principal (15) 131 appr;ximately $52.3 billion. The Corporation's Mexican Accrued interest (51) (47) public sector indebtedness under consideration to be re-Other _ (13) (34) financed as part of the proposed financial package would Outstanding at December 31,1986 $551 $ 347 amount to $331 million. The weighted average maturities and interest rates for these loans both before and after the M:xico proposed refinancing are shown in the table below. At December 31,1986, the Corporation had $551 million The Mexican government has also requested the in outstanding to borrowers in Mexico, including $38 mil- banka to grant Mexico new credits of $6 billion on a paral-lion in short-term trade credits and interbank deposits. Of lel and co-financing basis with The World Bank-of which these outstanding, $406 million was to the public sector $500 million would be World Bank guaranteed-to amor-und $145 million was to the private sector. None of the tize in the period between 1991 and 2001 at an interest public sector outstanding and $60 million of the private margin of.81257c over LIBOR or a comparable domestic sector outstanding were classified as cash-basis at interest rate. The Corporation's share under considera-December 31,1986. There have been no material changes tion in this proposed new money package would be $44 in the status of refmancings of private sector outstanding million on a parallel basis and $9 million on a co-financing since December 31,1985. basis-of which $5 million would be World Bank During the first quarter ofl986, the Corporation com- guaranteed. pleted the refinancing of $236 million of the $268 million Finally, the government of Mexico has asked the in obligations of public sector borrowers that were origi- banks to grant it contingent facilities of S1.7 billion-of nally to have matured between 1985 and 1990. This agree- which $250 million would be World Bank guaranteed-to ment provided for the rescheduling of the maturities of amortize in the period between 1990 and 2000 at an inter- L these loans for periods of up to 14 years and for changes in est margin of.8125 crc over LIBOR or a comparable domes- I the interest rates to primarily LIBOR-based interest tic interest rate. Availability of these proposed facilities i rates. This refinancing agreement is being superseded by would be contingent upon several macroeconomic indica- l the 1986/'87 Financing Plans described below. tors. The Corporation's share under consideration in the During 1986, the government of Mexico negotiated proposed contingency facilities would be $15 million, of the terms ofits 1986/'87 Financing Plans with the Inter- which $2 million would be World Bank guaranteed. Mexican refinancing ! Amounts refinanced Weighted average years of maturity Weighted average interest rates
< dollar amoun ts in millions) Pre-refinancing Post-refinancing Pre-refinancing Post-refinancing
$ 35 1994 2001 L125?c over LIBOR* .8125c7c over LIBOR I 104 1993 2000 1.1259c over LIBOR* .8125cc over LIBOR I 119 1994 2000 1.1257c over LIBOR* .81257c over LIBOR 35 1992 1992 1.125Fc over Prime .8125Fc over LIBOR 30 1992 1992 1.125c?c over Prime .81257c over LIBOR 8 1987 1991 1.125Fc over Prime .8125?c over LIBOR
$331
*In terest ra tes under per-vrfinancing agrrements were scheduled to increase to L25% over LiBOR on January 1,1992.
40 l _
inwrnaum.o mtsundine 'n-Brazil the terms of this program, approximately $75 million of At December 31,1986, the Corporation had approxi- the Corporation's outstanding debt to Brazilian commer-mately $347 million in outstanding to public and private cial banks is subject to a limited guaranty of the Central : sector borrowers in Brazil, of which $1 million was classi- Bank of Brazil, covering liquidations, interventions and fied as cash-basis. Outstanding include $19 million in bankruptcies. i short-term trade credits. During the third quarter ofl986, the Corporation During the third quarter ofl986, the Corporation agreed to refinance $87 million in obligations that were
- agreed to refinance certain obligations of public and pri- originally scheduled to mature in 1985 and 1986, but did vate sector borrowers in Brazil that were originally to not renew commitments to maintain interbank deposits have matured after 1984. The agreement amends the and short-term loans. In December, the Central Bank of terms of the 1984 refmancing agreement and covers both Brazil informed Mellon Bank Representaq6es Ltda.. a sub-the $38 million in 1985 maturities and the $49 million in sidiary of the Corporation, that it could not act as Mellon 1986 maturities. The weighted average maturities and Bank's representative in Brazil.
interest rates for loans under the agreement both before On February 20,1987, Brazil announced that it was and after the refinancing are shown in the table below. suspending interest payments on its commercial fbreign During 1986, the Corporation elected to participate in debt. Management cannot presently predict the effect, if the Resolution 63 Insurance Program enacted in June any, of this action on the future financial results of the 1986 by the Brazilian Monetary Council. Pursuant to Corporation. Brazilian refinancing Amounts refinanced Weighted average years ofmaturity Weighted average interest rates . (dollar amounts in millionsi Pre-refinancing Post-refinancing Pre-refinancing Post refinancing
$38 1992 1.75c/c over Prime 1.125Uover LIBOR 49
- On demand until 1.759c over Prime 1.1259 over LIBOR April 15,1987
$87
- Repayment ofprnncipal has been deferred monthly since the original matursty dates.
Fourth Quarter Review Net income for the fourth quarter ofl986 was $15.6 mil- The mergers accounted for $9.4 million of this increase, lion, compared with $45.0 million for the fourth quarter of net of the Corporation's interest cost of funding its 1985. On a per common share basis, net income for the investment in these companies. fourth quarter of 1986 was $.42, compared with $1.57 Service revenue for the fourth quarter increased by reported in the fburth quarter of the prior year. $57.3 million from the fburth quarter of1985, principally Net income in the fourth quarter ofl986 of $15.6 mil- due to growth in trust and investment management fees, lion resulted from a pre-tax loss of $17.9 million, offset by cash management fees and deposit transaction charges, a $33.5 million tax benefit. This reflected a $6.8 million and data processing fees. The mergers accounted for $24.7 rede; tion in the income tax provision that resulted from million of this increase, the cumulative effect ofreduced f uture tax rates on The provision for possible credit losses for the fbu rt h income from leveraged leases, as required by generally quarter ofl986 totaled $98.2 million, while net credit losses ' accepted accounting principles. amounted to $55.0 million. This compares with a provision Fourth quarter results reflected management actions of $53.6 million and net credit losses of $33.7 million for to further incre,ase loan loss reserves and to realign the the fourth quarter ofl985. In the fourth quarter of 1986, Corporation's international banking and certain other domestic net credit losses on energy loans totaled $12.0 l businesses. These decisions resulted in a sharply higher million, compared with $2.3 million in the prior year. I provision for possible credit losses and nonrecurring Operating expense for the fourth quarter of 1986 charges. increased to $335.5 million from $255.7 million in the Net credit revenue, on a fully taxable equivalent fourth quarter of1985. Of this increase, $39.9 million i basis, for the fourth quarter of1986 increased to $277.7 resulted from the mergers. The remaining increase was I million, from $257.1 million in the prior year, principally primarily due to the same factors that were responsible fbr reflecting a $3.9 billion increase in average interest- the year-to-year increase. earning assets, primarily investment securities and loans. 41
Fin:ncial Revizw l continued Selected Quarterly Data
)
I- 1985 1986 tdollar amounts in millions, March June Sept. Dec. March June Sept. Dec. execpt per sharr amountal 31 30 30 31 31 30 30 31 Quarterly consolidated income statement Net credit revenue $ 199.3 $ 219.5 $ 226.2 $ 227.4 8 226.0 $ 241.1 $ 234.4 $ 239.7 Service revenue 85.1 88.7 91.4 99.8 107.0 126.2 134.8 157.1 Trading revenue 3.3 14.7 2.6 2.0 16.4 7.6 (5.3) 5.3 Gains on sale ofinvestment securities 5.3 73.1 3.7 10.5 50.2 50.9 28.7 4.8 Other revenue 1.8 3.3 3.7 3.7 4.3 7.1 2.2 8.9 Provision for possible credit losses 20.3 45.3 29.2 53.6 90.4 78.8 48.3 98.2 Operating expense 224.0 249.2 236.7 255.7 241.4 280.2 288.8 335.5 Income beforeincome taxes 50.5 104.8 61.7 34.1 72.1 73.9 57.7 (17.9) Provision forincome taxes 9.0 36.7 14.7 (10.9) 11.7 19.1 5.3 (33.5) Netincome 41.5 68.1 47.0 45.0 60.4 54.8 52.4 15.6 Dividends on preferred stock 2.5 2.6 2.5 2.5 2.5 3.7 3.7 3.7 Netincome applicable to common stock $ 39.0 $ 65.5 $ 44.5 $ 42.5 8 57.9 8 51.1 $ 48.7 $ 11.9 Netincome per common share $ 1.46 $ 2.45 $ 1.65 $ 1.57 $ 2.13 $ 1.87 $ 1.78 $ .42 Quarterly average balances Money marketinvestments $ 3,605 $ 3,471 $ 2,835 $ 2,396 8 2,443 $ 2,496 $ 2,612 $ 2,706 Investment securities 1,595 1,893 2,584 2,366 3,042 3,770 4,343 4,296 z Loans and lease finance assets 19,350 19,881 20,229 20,848 22,049 23,047 23,000 22,651 Interest earning assets 24,917 25,668 25,994 26,074 28,290 29,681 30,568 29,951 Reserve for possible creditlosses 312 315 340 354 377 445 453 465 Total assets 29,797 30,473 30,454 30,253 32,897 34,228 34,522 33,674 Deposits 18,564 18,416 18,025 18,006 18,439 20,245 20,880 21,222 Notes and debentures (with original maturities over one year) 883 1,083 1,135 1,128 1,221 1,378 1,568 1,548 Redeemable preferred stock 93 93 94 94 94 94 94 94 Convertible preferred stock - - - - - 67 68 68 Common shareholders' equity 1,507 1,541 1,585 1,614 1,663 1,714 1,735 1,753 Hee analysis Y an totalinterest. earning assets 11.43 % 11.17 % 10.78 % 10.84 % 10.62 % 10.03 % 9.43 % 9.21 % (. offunds supporting interest-s trning assets 7.77 7.33 6.95 6.93 6.84 6.29 5.84 5.53 Net rate on interest-earning assets 3.66 % 3.84 % 3.83 % 3.91 % 3.78 % 3.74 % 3.59 % 3.68 % Note: Rates are calculated on a fully taxable equivalent basis using actual number ofdays in quarter and year and are before efect of reserve requirements. Fees on loans are included in the calculation of mtes. 42 w _ . _ _ _ _ _ A
.7 ,- ,
t Common and Preferred Stock 'l Common stock Quarter eaded 1985 1986 March June Sept. - Dec. March June Sept. Dec. (dollars persham> 31 30 30 31 31- 30 30 31 Market price range: }
, High 1
$ 51% $ 55 8 56 % $ 54% $ 72% $ 71% $ 70% $ 59%
Low 44 % ' 47 47 % 46 % 51% 64 % 52% 51% Average 48.47 51.10 52.57 49.58 59.36 67.91 60.00 55.11
- Dividends .67 .67 .67 .67 .69 .69 .69 .69 - l 1984 1985 '1986
- Common share data:
Shareholders' equity per share at year end $ 56.21 $60.39 $63.68 Shareholders at year-end 19,185 18,528 18,214 Shares outstanding at year-end 26,675,747 27,109,370 27,496,819 q
~ Averagesharesoutstanding 26,373,880 26,863,972 27,334,592' -I Redeemable preferred stock-Series A Quarter ended 1985 1986 March June Sept. Dec. March June Sept. Dec. -
(dellars per shan> 31 30 30 31 31 30 30 i 31 Market price range: High $ 27 $ 28% $ 30% ! 29 8 31% $ 32% $ 31% $ 31% Low 24 % 26 % 27 % 27 % 28 % 29 % 29 % 29 Average 26.09 26.96 28.55 28.26 29.42 30.63 30.17 30.41 Dividenda .70 .70 .70 .70 .70 .70 .70 - .70 1984 1985 1986 Preferred share data: Shareholder atyear-end 10,230 9,844 9,708 Shares outstanding at year-end 3,643,895 2,653,886 3,659,584 Convertible preferred stock-Series B* j Quarter ended 1986 l June Sept. Dec. (dollan pershare) 30 30 31 Market price range: High $ 28% $ 27% $ 25% Low 26 % 23 % 23 % Average 27.45 25.35 24.43 i Dividends .42 .42 .42 ) 1986 Preferred share data: Shareholder at year-end 1,483 Shares outstanding at year end 2,716,447
%ued April 1986.
43 m,
7 Consolidated Income Statement Mellon Bank Corporation land its subsidiaries) Year ended December 31, ein thousands. except per share amoun tsi 1984 1985 1986 Credit revenue Loans $2,076,652 $2,105.758 $2,085,414 Money market investments: Interest-bearing deposits with banks 242,191 189,641 117,903 Federal funds sold and securities purchased under agreements to resell 110,009 63,985 57,821 Other 18,019 18,926 10,801 Trading account securities 51.366 36,146 33,251 Investment securities: U.S. Treasury and agency securities 94,178 162.283 185,931 Obligations ofstates and political subdivisions 18,708 24,648 95,714 Other 13,553 10,893 12,213 Fees on loans 63,190 87,072 113,568 Lease fmancing revenue 25,285 30,058 38,352 Totalcredit revenue 2.713,151 2.729,410 2,750,968 Interest expense Deposits: Domestic offices 1,020,291 963,561 942,635 Foreign offices 283,640 256,494 191,138 Federal funds purchased and securities sold under agreements to repurchase 381,883 388,360 431,792 Commercial paper .56,747 117,468 97.503 Other funds borrowed 36,954 30,960 30,175 Notes and debentures (with original maturities over one year) f 6,557 100,159 116,390 Totalinterest expense 1,966,072 1,857,002 l,809,633 Net credit revenue Net credit revenue 747,079 872,408 941,335 Provision for possible credit losses 116,676 148,321 315,585 Net credit revenue after provision for possible creditlosses 630,403 724,087 625,750 Service and other Service revenue 302,110 365,116 525,110 l' 5,476 22,575 24,040 revenue Trading revenue Gains on sale ofinvestment securities 3,556 92,511 134,649 l Other revenue 25,690 12,422 22,1F>4 Total service and other revenue 336,832 492,624 705,963 Opci ating expense Salaries and wages 347,599 392,637 479,687 Employee benefits 94,257 116,718 98,587 Net occupancy expense 97,535 109,926 122,834 Equipment expense 58,472 68,205 90,782 Shares, capital and franchise taxes 13,631 14,483 17,529 Other expense 203,886 263,640 336,743 Total operating expense 815,380 965,609 1,145,962 l Ineome Income before income taxes 151,855 251,102 185,751 Provision for income taxes 16,689) 49,407 2,498 Net income 158,544 201,695 183,253 Dividends on preferred stock 9,722 10,224 13,669 Net income applicable to common stock $ 148,822 $ 191,471 $ 169,584 Per common share (Based on 26,373,880; 26,863.972 and 27,334,592 average shares ofcommon stock outstanding) Net income ,
$5.64 $7.13 S6.20 1
44- See accompanying notes to financial statements. . h
Mellon Bank Corporation (and its subsidiaries ) December 31, l tin thousands: 1985 1986 Assets ' Cash and due from banks $ 1,609,791 $ 1,815,690 Money market investments: Interest-bearing deposits with banks 1,173.474 2,095,679 Federal funds sold and securities purchased i under agreements to resell 710,450 942,663 i Other' 168,565 73,668 i Trading account securities 956,865 .322,474 i' Investment securities: 1,848,894 2,291,265 i
! U.S. Treasury and agency securities F Obligations ofstates and political subdivisions 1,118,765 1,365,587 I
Other . 91,990 151,878 Totalinvestment securities 3,059,649 3,808,710 Loans, net of unearned discount ofS157,956 and $218,734 21,931,246 23,115,149 Lease finance assets 387,429 413,451 Totalloans and lease finance assets 22,318,675 23,528,600 Reserve fbr possible creditlosses (361,485) (493,845) i Net loans and lease finance assets 21,957,190 23,034,755 I Customers' acceptance liability 2,235,659 515,691 i Premises and equipment 396,878 450,726 Other assets 1,137,674 1,439,314 ' Totalassets $33,406,195 $34,499,370 Liabilities Deposits in domestic offices: Interest-free $ 3,872,983 S 4,381,795 Interest bearing 12,265,603 14,520.037 Deposits in foreign offices: Interest-free . 11,107 13,808 Interest-bearing 2,432,932 2,731,512 Totaldeposits 18,582,625 21,0>47,152 Federal funds purchased and securities sold under agreements to repurchase 7,372,916 S,402,857; Commercial paper 1,357,164 1,227,686- ! Other funds borrowed 406,628 507,330 Acceptances outstanding 2,235,693 519,387 Otherliabilities 575,060 516,289 Notes and debentures (with original maturities over one year) 1,145,383 1,766,009 Totalliabilities 31,675,463 32,586,710 Iledeemable Redeemable preferred stock-$1.00 par value preferred stock Authorized-3,750,000 shares Issued-3,653,886 and 3,659,584 shares Series A 93,550 93,678 Shareholders' Convertible preferred stock-$1.00 par value equity Authorized-4,250,000 shares Issued-2,716,447 shares Series B - 67,911 Common stock-$.50 par value
! Authorized--60,000,000 and 120,000,000 shares Issued-27,659,959 and 28,063,8% shares 13,831 14,033 Surplus 605,164 627,141 Undivided profits 1,031,301 1,124,117 Treasury stock-550,589 and 567,077 shares at cost (13,114) (14,220#
4 Total shareholders' equity 1,637,182 1,818,982 Total liabilities, redeemable preferred stock and shareholders' equity $33,406,195 $34,499,370 i See accompanying notes to financial statements. 45 A. .
( , , Consolidated Statement of Chang :s in Financial Position i ( Mellon Bank Corporation (and its subsidiaries) Il; Year ended December 31, l 1 ' (in thousands) 1984 1985 1986 l Increaseldecrease> in Financial resources derived from/(applied to): l i financial resources Operations: invested in interest- Netincome $ 158,544 $ 201,695 $ 183,253 earning assets Provision for possible credit losses 116,676 148,321 315,585 Deferred taxes, depreciation and other noncash items 31,649 86,476 44,599 Financial resources derived from operations 306,869 436,492 543,437 Dividends on common and preferred stock (78,299) (82,171) (89,020) 228,570 354,321 454,417 Deposits and other financing activities: Deposits 2,631,152 (519,275) 1,610,735 Borrowed funds (7,249) 3,024,431 (1,242,297) Notes and debentures (with original maturities over one year) 268,944 293,367 608,348 Deposits and other funds acquired in mergers 679,211 104,591 1,709,538 Common stockissued in mergers 29,348 5,167 - Redeemable preferred stock issued in merger 15,997 - - Con vertible preferred stock issued in merger - - 67,911 3,617,403 2,908,281 2,754,235 Other activities: Cash and due from banks (21,676) 219,654 88,939 Premises and equipment (97,149) (105,924) (72,694) Assets and liabilities acquired in mergers, net (64,830) (13,204) (434,638) Other, net (111,432) (153,824) (406,143) (295,087) (53,298) (824,536) Increase in financial resources invested in interest earning assets $3,550,886 $ 3.209,304 $ 2,384,116 5 crease tdecrease)in Money marketinvestments $ (612,118) $(1,427,747) $ 806,767 interest +arning assets Money market investments acquired in mergers 156,449 11,109 252,754 Investment securities (216,561) 1,315,137 485,906 Investment securities acquired in mergers 181,234 38,034 263,155 Trading account securities (155,779) 640,646 (634,301) Loans andlease fmance assets 3,844,866 2,577,512 263,100 Loans and lease finance assets acquired in mergers 352,795 54,613 946,825 Increase in interect-earning assets $3,550,886 $ 3.209,304 $ 2,384,116 See accompanying notes to financial statements. 46 L. .
t IWellon Bank Corporation (consolidated and parent Corporation) Convertible Total Common preferred Undivided Treasury shareholders' (in thousandat stock Surplus stock profits stock equity Balance at January 1,1984 $13,169 $548,793 $- $ 833,797 $(12,686) $1,383,07'3 1984 additions /(deductions): Net income _ 158,544 158,544 Dividends on redeemable preferred stock at $2.80 per share (9,722) (9,722) Dividends on common stock at $2.60 pershare (68,577) -(68,577) Common stockissuedin merger 337 29,075 (64)- 29,348 Issuance ofstock under option plans, net, dividend reinvestment plan and conversion of5.375% Convertible Capital Notes - . -106 7,596 (5) 7,697 Foreign currency translation (877) (877) Balance at December 31,1984 13,612 585,464 - 913,165 (12,755) 1,499,486 1985 additions /(deductions): Netincome 201,695 201,695 Dividendson redeemable preferred stock at $2.80 per share (10,224) (10,224) Dividends on common stock at $2.68 pershare (71,947) (71,947) Common stockissued in merger 58 5,109 5,167 Issuance ofstock under option plans, net, dividend reinvestment plan and conversion of5.375% Convertible Capital Notes . 161 14,591 (359) 14,393 Foreign currency translation (1,388) (1,388) Balance at December 31,1985 13,831 605,164 - 1,031,301 (13,114) 1,637,182 1986 additions /(deductions): Netincome 183,253 183,253 Dividends on redeemable pre-ferred stock at $2.80 per share (10,242) (10,242) Dividends on convertible pre-ferred stock at $1.26 per share (3,427) (3,427) Dividends on common stock at
$2.76 per share (75,351) (75,351)
Convertible preferred stockissued in merger 67,911 67,911 Issuance of stock underoption plans, net, dividend reinvest-l ment plan and conversion of g 5.375% Convertible CapitalNotes 202 21,977 (1,106) 21.073
; Foreign currency translation (1,417) (1,417)
Balance at December 31,1986 $14,033 $627,141 867,911 $1,124,117 $(14,220) 81,818,982 See accompanying notes to financial statements. 47 A
Notes to Financial Statements 1I; l 4 b (oun ing Basis of presentation. The consolidated financial statements of Mellon Bank Corporation a4% < Corporation, a multibank holding company, include the accounts of the Corporation and its wholly-owned subsidiaries. Investments in companies 20 50% owned are carried on the equity basis. Investments in companies less than 20% owned are carried at cost. Intra-corporate transactions are not reflected in the consolidated financial statements. The con-solidared income statement includes results of acquired subsidiaries only from the dates of acquisition. Intangible assets are amortized over the remaining estimated benefit period which approximates, on a weighted average basis,16 years fbr goodwill, five years for capi-talized mortgage servicing portfolio costs, and six years fbr other intangible assets at Decem-ber 31,1986. The parent Corporation financial statements in note 19 include the accounts of the Cor-poration and those of two wholly owned financing subsidiaries that function as financing entities for the Corporation and its subsidiaries and affiliates by issuing commercial paper . I and other debt guaranteed by the Corporation. Financial data for the Corporation and the finaneir g subsidiaries are combined fbr financial reporting due to this limited function of the financing subsidiaries and the unconditional guarantee by the Corporation of all the finan-ing subsidiaries' obligations. Investment and trading account securitics. Investment securities are stated at co$t, adjusted for amortization of premium and accretion ofdiscount on a level earnings rate basis. Gains and losses on sales ofinvestment securities, other than U.S. Treasury bills, are included in service and ot her revenue as gains on the sale ofinvestment securities. Gains and losses on sales of U.S. Treasury bills are included in interest revenue Cost ofinvest-ment securities sold is calculated on a specific identification basis. Trading account securities are stated at market value. Trading account profits and com-missions include both realized gains and I wses and unrealized gains and losses to ref3ect market value. The liability incurred on sh act-sale transactions, representing the obligation to deliver securities, is included in other funds borrowed at market value. Loans. Ioans are reported at the principal amount outstanding, net of any unearned dis-count. 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. Loans on which the accrual ofinterest has been discontinued are designated as cash-basis loans. Loans are generally placed on cash-basis when principal is past due 90 days or more or when interest is more than 60 days past due and the loan is not well secured and is not in the process of collection. loans may be placed on cash-basis sooner when management believes it appropriate. When a loan is placed on cash-basis, previously accrued and uncollected interest is reversed against current period interest revenue. Cash-basis loans are generally restored to an accrual basis when interest and principal payments become current or the loan becomes well secured and in the process ofcollection. Consumer loans generally are charged-offon a formula basis upon reaching varying stages of delinquency. Lease financing. Revenue on direct financing leases is recognized on a basis to achieve a constant periodic ate of return on the outstanding net receivable balance. Revenue on leveraged leases is recognized on a basis to achieve a constant rate of return on the outstand-ing investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Reserve for possible credit losses.The reserve for possible credit losses on loans and lease finance assets is based on management's judgment. Factors considered in determining an adequate reserve include industry concentrations, specific known risks, adequacy of collat- l eral on specific higher risk loans, past experience, the status and amount ofcash-basis, past due and restructured loans and lease finance assets, off balance sheet credit risks, the ratio l of the resarve to loans and lease finance assets outstanding, and current as well as antici-48 l!
%l
i T
^ l d
- i. Accounting pated economic and political conditions that may affect certain borrowers. Losses, net of policies recoveries, are charged against the reserve. Assets acquired in settlement ofindebtedneas l
c 4u are included in othe r assets at the lower ofestimated fair value or carrying amount of the l indebtedness; subsequent write-downs and net direct operating expenses attributable to such assets are included in other expense. l Premises and equipment. Premises and equipment are stated at cost less accumulated - i depreciation and amortization. Depreciation and amortization are calculated over the esti- l mated useful life of the asset, limited in the case ofleasehold improvements to the lease term, using the straight-line method. Taxes.The defer [e5 federal income tax provision results from recognizing certain iterr$s2 revenue and expense in the consolidated financial statements in different years than they are recognized fbr income tax purposes. The Corporation, its domestic subsidiaries texcept life insurance subsidiaries), and its Canadian subsidiary file a consolidated U.S. income tax return. The provision for U.S. income taxes of the Corporation and each subsidiary is calculated as ifeach subsidiary filed > a separate return except that tax benefits oflosses are allocated to the subsidiaries incur-ring such losses to the extent they reduce consolidated taxable income. Foreign currency translation. Assets and liabilities denominated in foreign currencieT are translated at current rates ofexchange. Revenue and expense accounts are translated monthly at month-end rates ofexchange. Net currency exchange positions are valued at rates ofexchange, spot or future as appropriate, prevailing at the end of the period. Result-ing gains or losses are included in the consolidated income statement. Premiums and ) discounts on contracts hedged are accrued over the periods of tha contracts. Translation gains and losses and related hedging gains and losses on investments in foreign entities whose functional currency is not the U.S. dollar are included in common shareholders' 1 equity. l Pension plansi Most of the Corporation's su'osidiaries have trusteed, noncontributory pen-l sion plans covering substantially all salaried associates. In 1986, the Corporation adopted e the Financial Accounting Standards Board's new pension standard, Employers' Accounting for Pensions. The accounting policy and the effect of the change are discussed in note 14. Interest rate futures. Gains and losses on futures contracts used to hedge certain assets and liabilities are deferred and are either recognized as income in the period ofdisposition of the assets or liabilities being hedged, or are amortized over the life of the hedged transac-i tion as an adjustment to interest expense or interest revenue. Gains and losses on futures j contracts used to hedge trading account activities are recognized currently in trading i account profits and commissions.
! Interest rate swaps. Interest rate swaps are undertaken to earn brokerage fee revenue l and to manage the Corporation's own interest rate sensitivity position. Fees for brokerage I arrangements are recognized as service revenue when received. Transaction fees and net interest paid or received on interest rate swaps used in managing the Corporation's interest rate sensitivity position are deferred and amortized to interest expense. On other interest rate swaps where the Corporation acts as principal, these fees and interest are deferred and ;
amortized to service revenue. Net income per common share. Net income per common share is computed by dividiEg net income, after deducting dividends on preferred stock, by the weighted average number l ofcommon shares outstanding during each of the yaars presented. The impact of common I stock equivalents or other potentially dilutive murities is not material. l l l , 49 l A L _ _ __ ___ _ . _ _ _ _ _ _ _
4 ' N:tes to Finrnci:1 St .t;m:nts continued
. 2, Cash ankdue The subsidiary banks of the Corporation are required to maintain with a Federal from bank, Reserve bank reserve balances based principally on deposits outstanding. Balances maintained are included in cash and due from banks. At December 31,1986, the J required reserves were approximately $547,365,000 and for the year averaged approxi-mately $485,518,000.
- 3. Investm 5at Book and market values are as follows:
securitles December 31, 1985 1986 ; Book Market Book Market (in thousands > value value value value-U.S. Treasury and agency securities $1,848,894 $1,889,847 $2,291,265 $2,323,254 Obligations ofstates and political subdivisions 1,118,765 1,108,238 1,365,567 1,454,941 Other securities 91,990 89,697 151,878 152,146 Total investment securities $3,059,649 $3,087,782 $3,808,710 $3,930,341
- 4. Pledged assets Investment securities, loane, money market investments and trading account securities with a book value of $3,937,194,000 were pledged at December 31,1986, exceeding the amount required to be r,ledged to secure repurchase agreements, deposits of public funds, and for other purposes, by $1,220,146,000.
l
.i. Loans and lease Loans and lease finance assets outstanding, not of unearned discount, are as follows:
finance assets December 31, (in inillio ts) 1985 1986 Domestic operations: ; Loans: Commercial and industrial $ 8,993 $ 9,124 Financialinstitutions 1,485 1,390 Other 1,115 838 Tctal commercial and financial 11,593 11,352 Commercial construction 2,045 2,398 l Commercial mortgage 880 1,455 Consumer mortgage 1,378 1,787 Total real estate 4,303 5,640 l Consumer credit 2,227 2,696 ) Totalloans 18,123 19,688 Lease finance assets: Direct lease finance assets 177 186 Leveraged lesse finance assets 40 71 Assets on interim rent and other lease assets 170 156 Totallease finance assets 387 413 Total domestic operations 18,510 20,101 International operations (see note 18 for details) 3,809 3,428 Total loans and lease finance assets, net of unearned discount $22,319 $23,529 l So
- 5. Loans and lease Information on cash-basis, past due and restructured loans and lease finance assets finance assets ' at year-end is as follows:
continued December 31, (in millions 1 1985 1986 Outstanding amounts a year-end: Cash-basis $572 '$835 Past due 30 30 Restructured 5' 63 Total $607 $928
- 6. Heserve for Activity is as follows:
possible credit losses (in thousands) 1984 1985 1986 Balance at January 1 $241,504 $ 303,693 $ 361,485 - Reserves from mergers and asset acquisitions 4,612 652 13,123 Additions /(deductions):
} Credit losses (75,162) (124,852) (229,369) l - Recoveries 16,063 33,671 33,021' Net credit losses (59,099) (91,181) (196,348)
Provision charged to expense 116,676 148,321 315,585-Balance at December 31 $303,693 $ 361,485 8 493,845
- 7. Premises and A summary ofyear-end balances is as follows: ;
equipment December 31, (in thousands) 1985 1986 , Land $ 21,588 8 24,126 i Buildings 170,196 195,863 Equipment 325,417 382,025 Leasehold improvements 49,251 60,179 j Subtotal 566,452 662,193 l Accumulated depreciation and amortization (169,574) (211,467) i Total premises and equipment $396,878 $450,726 Included in the above data are capital leases for premises and equipment at a net book value of $3,949,000 and $3,153,000 at December 31,1985 and 1986. Rental expense was $66,044,000, $71,158,000 and $82,703,000, net of related sub-lease revenue of $1,952,000, $4,127,000 and $5,731,000 in 1984,1985 and 1986. Deprecia-tion and amortization expense totaled $38,026,000, $44,980,000 and $57,625,000 in 1984, 1985 and 1986. Maintenance and repairs expense amounted to $43,533,000, $49,228,000 1 and $55,081,000 in 1984,1985 and 1986. As of December 31,1986, the Corporation and its subsidiaries are obligated under noncancellable leases (principally for banking premises) with expiration dates through ; 2012. A summary of the future minimum rental commitments under ncncancelable i leases, net of related sublease revenue totaling $119,538,000, is as follows: { 1987 $63,274,000 1990 $ 63,942,000 1997-2001 $300,020,000 l 1988 59,342,000 1991 58,034,000 2002 2006 346,512,000 1989 73,741,000 1992-1996 284,515,000 2007 2012 177,374,000 l I i 51
Finsncirl Stit:m:nts continued
- 8. Federal funds Federal funds purchased and securities cold under agreements to repurchase represent purchased and funds acquired for portfblio acquisitions, arbitrage activities ano other funding require-securities sold ments. Although funds purchased may extend for periods longer ',han one day, the under agreements majority ofsuch transactions mature on the business day after execution.
to repurchase Selected balances and rates are as follows: rdollar amounts in thousands) 1985 1986 Funds purchased: Maximum month-end balance $7,372,910 $7,950,127 Average daily balance 4,972,512 6,501,202 Average rate during year 7.8?c 6.6% Average rate at December 31 9.1 13.5 Fund.4 purchased, net of funds sold: Maximum month-end balance $6,662,460 $7,374,163 Average daily balance 4,197,397 5,654,137 h 3mmercial paper . ammercial paper borrowings represent obligations of a financing subsidiary, the repayment of which is guaranteed by the Corporation, and the obligations of a foreign bank subsidiary, the repayment of which is guaranteed by Mellon Bank, N.A. The aver-age maturity at December 31,1986, was approximately 27 days. Selected balances and rates are as follows:
<dollaramounts in thousandsI 1985 1986 Maximum month-end balance $1,589,452 S1,478,839 Average daily balance 1,411,813 1,429,310 Average rate during year 8.3% 6.8 %
Average rate at December 31 8.0 6.2 Commercial paper backup lines of credit extended to the Corporation by various nonaffiliated banks were $200,000,000 at December 31,1985 and 1986. Certain lines are for a one-year term. Others are subject to periodic review or 60 days notice of cancella-1,'n. No compensating balances were maintained to support these lines of credit at December 31,1985 and 1986. Lines of credit with a one-year term extended to subsidi-aries of the Corporation by various nonaffdiated banks to support short-term borrowings we e $10,000,000 und $17,000,000 at December 31,1985 and 1986. Compensating bal-ances to support these lines amounted to $200,000 and $72,000 at December 31,1985 and 1986. No borrowirgs were made under any line oferedit in either year. 1 52 \
.i. 1 i
- 10. Notes and .
- December 31, ;
debentures (in thousandst 1985 1986' j (with original _ Parent Corporation: maturities over ' Convertible Floating Rate Notes one year) (8.30% at December 31,1985) .$ 50,000 $ - Floating Rate Notes Due June 1,1989 (8.40% and 6.35% at December 31,1985 and 1986) 18J70 18,304
; Convertible Floating Rate Notes Due June 15,1989 e
(8.057c and 6.05% at December 31,1985 and 1986) . 120,225 103,985 h' Floating Rate Extendible Notes Due April 30,2000 (7.92% and 6.49% at December 31,1985 and 1986) 149,854 149,917- ; Variable Coupon Renewable Notes Due 1987 (6.54% at December 31,1986) 13.50% Notes Due August 15,1987 24,963 430,000 24,984
]l 10.50% Notes Due December 15,1987 74,782 74,883 1 14% Australian Dollar Notes Due February 14,1989 - 68,7.0 l 5.375% Convertible Capital Notes Due June 1,1993 705 603 l 11.75% Guaranteed Debentures Due March 7,1995 - 100,000 100,000 9% Notes Due March 1,1996 - 125,000- ; 8.95% Promissory Notes 17,200 - ;
Various notes-6.625% to 14.00% due 1986-2009 .101,150 162,017 : Banking subsidiaries: Variable-rate notes due 1993-1996 I (8.39% and 6.75% at De-: ember 31,1985 and 1986) 155,000 155,000 Floating Rate Subordinated Capital Notes Due Novernber 1996 (8.31% and 6.25% at December 31, i 1985 and 1986)- 250,000 250,000 J Capital notes-8.30% to 8.50% due 1987-1989 15,845 15,990 Obligations under capital leases-7.00% to 15.00% due 1986-1997 4,863 4,513 Various notes-6.55% to 8.75% due 1986-2005 14,208 13,999 I 3 Nonbanking subsidiaries: i Floating Rate Notes Due 1988 t7.93% and 6.43% at December 31,1985 rand 1986) 47,500 46,302 Obligations under capital leases-10.20% to 16.08% due 1986-1989 473 397 Various notes-5.00% to 9.50% due 1986-1997 16 1,405 - [ Total notes and debentures $1,145,383 $1,766,009
-l The unsecured Floating Rate Notes Due June 1,1989, are repayablo semiannually at par plus accrued interest on any June 1 or December 1, at the option of the holder; the notes are subject to redemption at par plus accrued interest at the option of the Corpora-tion. Interest is payable semiannually at a rate 1% above the yield on certain three-month U.S. Treasury bills. The Corporation may not make any payment or other distri-bution on its stock in shares ofcapital stock of Mellon Bank, N.A. unless the Bank ; guarantees payment of the principal and interest on these notes.
l, 53 9
< Notes ts Fin:nci:1 Statem:nts continued
- 10. Notes and The unsecured Convertible Floating Rate Notes Due June 15,1989, are redeemable debentures at par plus accrued interest at the option of the Corporation. Interest is payable semian-iwith original nually on June 15 and December 15, at a rate .50% above the yield on certain six month maturities over U.S. Treasury bills. The notes are convertible at the option of the holder at any time one yeari prior to June 15,1988, into 8.5(7c debentures due 2009; and at the o tion of the Corpora-continued tion prior to June 15,1988, into fixed-rate debattures due 2009 at an interest rate equal to the higher of 8.5% or .65% over the yield on certain 30-year U.S. Treasury securities.
The unsecured Floating Rate Extendible Notes Due April 30,2000, are repayable in whole or in part on April 30,1988, and on each subsequent election date at the option of the holder at 100% of their principal amount plus accrued intarest. The extendible notes are subject to redemption by the Corporation in whole or in part on April 30,1988, and on each subsequent election date and each rubsequent redemption date at 100% of their principal amount plus accrue 1 interest. Interest is payable quarterly at an interest rate that is subject to adjustment on the business day following each weekly auction of 91-day Treasury bills and will be .65% above the interest yield equivalent of the averaw 91-day Treasury bill at.cti,nt rate. The $200,000,000 unsecured Variable Coupon Renewable Notes and $250,000,000 unsecured Variable Coupon Renewable Notes-Series B will mature on December 17 i and December 24,1987, respectively, unless the maturity of the notes is extended through an automatic renewal feature. Unless the holder terminates the automatic extension of maturity prior to the last day of any 91-day interest period, the maturity of any note shall automatically be extended on the last day of such interest period for an additional 91 days to the 364th day after the last day of such interest period. The notes are redeemable in whole or in part on June 14 and December 20,1990, respectively, and on the first day of any subsequent interest period at the option of the Corporation at 100% of the principal amount plus accrued interest. Interest on the notes is payable quarterly on the fifth day succeeding the last day ofeach interest period. The interest rate on the notes will be equal to 70 basis points above the then applicable weekly reset 91-day Treasury rate. In the event the holder elects to terminate the automatic exten-sion of maturity of any note, the interest rate for the last three 91-day interest periods prior to the maturity ofsuch notes will be 25 basis points above the then applicable weekly reset 91-day Treasury rate. The unsecured 14% Australian Dollar Notes Due February 14,1989, pay interest semiannually. Principal and interest payments on the notes will be paid in U.S. dollars
;,r. at the option of the holder,in Australian dollars. Through principal and inter .t,t rate sw aps, the Corporation has converted its payments on the notes to a U.S. dollar floating rate obligation. The effective U.S. dollar floating rate on the Australian Dollar Notes was approximately 5.86% at December 31,1986.
The unsecured 5.375% Convertible Capital Notes Due June 1,1993, are convertible at the option of the holder into a combination ofcommon and Series A redeemable pre- l ferred stock of the Corporation. The notes may be redeemed at the option of the Corpora-tion, at 100.50% of par from December 31,1986 to May 31,1987; at 100.25% of par from June 1,1987 to May 31,1988; and at par after May 31,1988. Conversions resulted in the issuance of 3,477 and 3,233 common shares and 1,387 and 1,290 Series A redeemable pre-ferred shares in 1985 and 1986. Annual sinking fund payments are required in an ) amount sufficient to redeem $1,000,000 principal amount of the notes. Notes repur- l chased and notes converted may be used to satisfy sinking fund requirements. Sinking l fund requirements wera satisfied for 1985 and 1986 through the application of principal i amounts of notes converted to date. The Corporation has assumed joint and several l 54 l
y - _-___-
.10. Notes and liability with Mellon Bank (East) National Association, formerly Girard Bank, for pay-debentures ment of principal and ir,terest on the notes. The notes are subordinated to obligations to iwith original other creditors of the Corporation and to obligations to depositors and other creditors of maturities over the Bank.
one years The unsecured 11,75% Guaranteed Debentures Due March 7,1995, are subject to continued redemption on or aRer March 7,1992, at the option of the Corporation at a redemption price equal to 100.5% of their principal amount if redeemed during the 12-month period . beginning March 7,1992, and at a redemption price equal to 100% of their principal amount if redeemed on or aner March 7,1993, plus accrued interest in each case. Inte - est payments are made annually in arrears commencing March 7,1986, at an annual rate ofil.75% The unsecured 9.00% Notes Due March 1,1996, are redeemable in whole or in part beginning March 1,1993, at the option of the Corporation, at 100% of the principal amount plus accrued interest. Interest is payable semiannually. The unsecured Floating Rate Subordinated Capital Notes Due November 1996, bear interest, payable quarterly, at a rate equal to 1/8th of1% above the arithmetic mean of the London Interbank Offered Rates for three-month Eurodollar deposits quoted by cer-tain leading banks. Thirty days prior to maturity, the Corporation will purchase the notes for a purchase price equal to the principal amount plus accrued interest for consid- l
. eration ecnsisting of cash, capital securities (common stock, perpetual preferred stock or other primary capital securities) or a combination thereof. The Corpor uion will sell such capital securities on behalf of noteholders who elect to receive cash in exchange for their notes. The notes may be purchased, at the option of the Corporation, or redeemed, at the option of Mellon Bank, N.A., in whole or in part for cash. The notes are subordi-nated to obligations to depositors and other creditors of the Bank.
The unsecured capital notes require Mellon Dank (East) National Association to transfer from its " retained earnings" to " retained earnings appropriated for capital note retirement" a monthly amount equaling 1/120th of the principal outstanding on each of the note issues, up to an aggregate of 50% of the outstanding principal. Transfers com-menced in July 1980 and 1982 for the notes due in 1985 and 1987, respectively, and com-menced in July 1984 for the issue due in 1989. As of December 31,1985 and 1986,
$2,518,125 and $4,169,675 had been transferred for capital note retirement. The notes are subordinated to obligations to depositors and other creditors of Mellon Bank (East),
except other capital noteholders of the Bank with which they rank equally. The aggregate maturities of notes and debentures for the five years 1987 through l 1991 are as follows: $568,000,000, $82,000,000, $252,000,000, $31,000,000 and
$24,000,000.
I1. Preferred stock The Series A redeemable preferred stock outstanding at December 31,1986, bears an j annual, cumulative dividend of $2.80 per share. This stock is not redeemable prior to April 12,1989. From such date until April 30,1993, the stock will be redeemable at j prices declining from $26.40 to $25.28, plus accrued dividends. On April 30,1994, and on : each April 30 thereaRer until and including April 30,2003, the Corporation will be ] required to redeem 10% of the total number ofshares ofSeries A redeemable preferred j stock outstanding at the close of business on April 30,1993, at a price of $25 per share pl's accrued dividends, so that the issue will be completely retired by April 30,2003. The Corporation may, however, elect to satisfy this requirement by crediting shares of Series A redeemable preferred stock optionally redeemed or otherwise acquired by the Corpo- [ ration. In any 12-month period beginning aRer April 30,1993, the Corporation has the 55
,. 6,, g{ } !
Financi:1St tsm:nts continued
=
f V
- 11. Preferred stock noncumulative right to retire an additional 10% of the Series A redeemable preferred continued stock outstanding at the close of business on April 30,1993, at the same price applicable to a mandatory redemption, In the event that the Cor poration is liquidated, and after
. creditors have been paid but before any payments are made with respect to the Corpora-tion's common stock, holders ofeach share ofSeries A redeemable preferred stock wil' be entitled to receive $25 per share plus accrued dividends plus a premium if the liquida-tion is voluntary and occurs before April 30,1993. Any excess of the redemption amount over the carrying amount will be charged to expense in the year of redemption.
The Series B convertible preferred stock outstanding at December 31,1986, bears an annual, cumulative dividend of $1.6875 per share. Each share of this stock is convertible into .327 shares of Mellon Bank Corporation common stock at the option of the holder. This stock may be redeemed by the Corporation at any time after May 1,1991, at a price of $25 per share plus accrued dividends or p-ior to that date if the closing price of com-l mon stock has exceeded the Designated Percentage (as defined below) of the conversion price of $76.50 for a period of 30 con'cutive trading days occurring shortly before the l redemption notice is mailed. The Designated Percentage shall be 140% during the first two years until April 2,1988; 135% during the third year until April 2,1989; and 133% during the fourth and fifth years until April 2,1991,Ifany proposed redemption shall be for less than all of the then outstanding shares of Series B convertible preferred stock, the shares to be redeemed will be selected by lot or pro rata or by any other method determined by the Corporation's board ofdirectors to be equitable. In the event that the Corporation is liquidated, and after creditors have been paid but before any payments are made with respect to the Corporation's common stock, holders of each share of Series B convertible preferred stock will be entitled to receive $25 per share plus accrued dividends. The Series B convertible preferred stock will have parity with Series A pre-ferred stock with respect to payments upon liquidation of the Corporation.
- 12. Service and Components ofservice and trading revenue are as follows:
trading revenue Year ended December 31, fin thousand41 1984 1985 1986 Service revenue: Trust and investment management fees 8 95,763 $116,795 8198,029 Cash mansgement fees and deposit transaction charges 49,812 65,684 84,003 Data processing fees 43,049 50,339 68,578 Mortgage servicing fees 25,807 30,541 40,073 Charge service fees 30,930 33,742 38,280 Letters ofcredit and acceptance financing fees 24,103 30,079 34,540 i Other 32,646 37,936 61,607 Total service revenue $302,110 $365,116 $525,110 Trading revenue: Trading account profits and commissions $ 5,966 $ 15,917 8 17,255 Gains on sale ofmortgages and mortgage-backed securities (net of : market revaluation) ' (1,569) 1,226 11,860 Foreign exchange gains 1,079 5,432 (5,075) Total trading revenue $ 5,476 $ 22,575 8 24,040 56
t
- 13. Taxes Components ofincome tax provisions in the consolidated financial statements are presented below. The current and deferred components of the income tax provision for 1985 have been restated to reflect the tax returns as actually filed.
Year ended December 31, (in thousands) 1984 1985 .1986 Current taxes: Federal (after re i uction for investment tax credits of$35,1d in 1985 and $3,179 in 1986) $ 2,082 $23,746 $ 36,727 State 2,800 2,019 2,952 Foreign 18,501 14.085 13,396 Subtotal 23,383 39,850 53,075 Deferred taxes: Federal (30,335) 9,359 (50,382)' State 263 198 (195) Subtotal (30,072) 9,557 (50,577) Total. $ (6,689) $49,407 $ 2.498 The principal items ofincome and expense that give rise to deferred federal income taxes are shown below: Year ended December 31,' (in thousands) 1984 1985 1986 Provision for possible credit losses $(26,261) $(26,095) $(54,843) Occupancy expense ' (5,823) (6,225) (6,947) ' Employee benefits (1,059) (2,526) .(1,746) - Investment tax credit (6,934) 17,179 2,161 Lease financingincome 8,376 15,215 (2,532) Depreciation and amortization 7,880 5,141 7,879 ' Interest in:ome (676) 656 5,374 Other, net (5,838) 6,014 272 Deferred fede taxes $(30,335) ' $ 9,359 $(50,382) A reconciliation of the federal statutory tax rate to the tax rate based on consolidated income before income taxes is as follows: 1984 1985 1986 Federalstatutory tax rate 46.0 % 46.0 % 46.0 % Statutory tax adjustments: Tax-exempt income from loans and securities (36.3) (18.7) (40.0) Amortization expense 1.6 1.0 4.0 Lease financingincome - - (3.4! Tax +xempt income from purchase accounting adjustments (6.9) (3.4) (2.8) Investment tax credit (4.6) (5.9) (1.7) Other, net (4.2) .7 (.8) Tax rate based on reportedincome (4.4)% 19.7 % 1.36 Income before income taxes generated from locations camiciled outside of the United States was $9,198,000, $10,424,000 and $(9,961,000) for the years ended December 31,1984, 1985 and 1986. l I 1 l 57 l - _ _ _ . _ _ _ . .\
Notes to FinancialStatem:nts wtinued ,
- 14. Emplayee benefits Pension plans. Most subsidiaries of the Corporation sponsor usteed, noncontributory defined benefit pension plans. These plans cover substantially . salaried associates and provide benefits that are based on years ofservice and the asse ate's compensation. In addi-tion, several unfunded plans exist for certam associates or for .2rposes that are not addressed by the funded plans. Effective January 1,1986, tht Arporation adopted the Financial Accounting Standards Board's new pension standard for all domestic pension plans. As required by this standard, the projected unit credit actuarial cost method was adopted and actuarial assumptions were changed to more closely parallel current rates available for investment ofassets and for settlement ofliabilities. These changes reduced pension expense for the year by $18,548,000. Effective January 1,1985, certain actuarial changes were made relating to the principal salaried pension plan as follows: the actuarial ;
cost method was changed from the aggregate method to the projected unit credit method and the asmimed interest rate used to discount the benefit obligation was changed from 7% to 9%. These changes reduced pension expense by $6,843,000 in 1985. Also in 1985, an Enhanced Early Retirement Plan was offered to certain associates covered by the principal salaried pension plan. This increased pension expense by $6,934,000 in 1985. Pension expense and related information are as follows: 1986 tin thousands) 1984 1985 Funded Unfunded Pension expense $ 16,506 $ 18,314 $ (9,111) $ 1,505 Assumptions usedin the accounting: Rates used for expense at January 1: Rate on obligation 8.0% 9.0% 9.9% 9.9#'c Rate on assets 8.0% 9.0 % 0.5 % -% Actuariel salary scale 5.5% 6.5% 6.5% 6.5% Rates used for obligation at December 31: Rate on obligation 9.0% 9.9% 8.6% 8.6% Actuarialsalary scale 6.5% 6.5% 6.5 % 6.5 % Present value ofbenefit obligations at December 31: Vested $138,370 $153,300 $180,589 $ 8,982 1 Nonvested 11,373 10,630 19,129 914 l Accumulated benefit obligation $149,743 $163,930 199.718 9,896 Effect ofprojected future l compensationlevels 110,540 3,187 Projected benefit obligation $310,258 $13,083 Plan assets at fair market value: 1 Cash and U.S. Treasury securities $ 70,782 $ 73,197 $133,970 $- l Lorporate obligations 9,810 17,884 42,452 - l Common stocks and other investments 201,890 243,916 253,548 - Total plan assets at fair l market value $282,482 $337,997 $429,970 $- I l l l l l l I 58 w l d
-14. Employee benefits 1986 continued (in thousands > Funded Unfunded Reconciliation of funded status with financial statements:
Funded status at December 31,1986 $ 119,712 $(13,083 )
' Unamortized portion of net (asset)/ obligation at January 1,1986 .(132,681) 1,589 Net deferred actuarial (gain)/ loss 23,665 1,195' Prepaid /(accrued) expense at December 31,1986 $ 10.696 S(10.299)
Components ofpension expense: Service cost $ ' 9,935 $ 269 Interest cost on projected benefit obligation 22,304 1,074 Return on plan assets (69,081) - Deferral ofactual return on plan assets in excess ofactuarialestirates 35,903 - Amortization ofinitial assets at January 1,1986 (7,961) (51) Total pension expense before settlement gain or specialtermination benefits (8,900) 1.292 Settlement gain (211) -
' Special termination benefits -
213 Total pension expense /(credit to pension expense) $ (9.111) $ 1,505 Long Term Profit Incentive Plan. The Long Term Profit Incentive Plan provides for the issuance ofstock options, stock appreciation rights and performance units to officers and key associates ofthe Corporation and its subsidiaries. Stock options may be granted at - prices not less than the fair market value of the common stock on the date ofgrant. Options may be exercised during fixed periods of time not to exceed 10 years from date ofgrant. As ofDecember 31,1986, options for 462,375 shares am available for grant under the current plan. No shares are available for grant under prior plans of the Corporation. During 1984,1985 and 1986, options for 248,650; 284,000 and 322,425 shares were granted and became exercisable. During 1984,1985 and 1986, options for 18,954; 132,259 and 162,312 shares were exercised. l Additional information concerning options under this plan is as follows: Number Option price ofshares Per share Aggregate ! Shares under option at December 31, rin thousandsi i 1984 553,039 $26.50-47.06 $21,773 ! 1985 696,930 26.50-54.81 32.246 i 1986 842,008 26.50.-60.13 43,831 1 J l I l a t 59 _._______._-.._.____m.
! Financid Statem:nts continued
- 14. Employee benefits In connection with the mergers of Mellon Bank Corporation with The Girard Company contmued and CCB Bancorp. Inc., options to purchase the common stock of those companies and stock l appreciation rights outstanding at the respective dates of the mergers were converted into options to purchase a combination ofcommon and Series A redeemable preferred shares of the Corporation. During 1986, all remaining options relating to the merger with CCB Bancorp, Inc., either expired or were exercised, and that option plan was, therefore, termi-nated. The shares of the Corporation under option relating to the merger with The Girard Company were 60,087 shares ofcommon stock a a 124,035 shares ofSeries A redeemable preferred stock at December 31,1986. Option prices range from $20.88 to $35.44 for a combi-nation ofshares consisting of.95 shares ofcommon stock and .38 shares ofSeries A redeem-able preferred stock. No further options or stock appreciation rights have been or will be granted under the Girard plan.
Profit Bonus Plan. At the discretion of the Human Resources Committee of the Board of Directors of the Corporation, awards are made to key associates, payable at the election of the participants in cash or in shares ofcommon stock of the Corporation. Awards are gener-ally payable over a period of three years, subject to continued employment of the participants. Amounts awarded were $5,712,000 for 1984; $8,398,000 for 1985; and $4,858,000 for 1986.
- 15. Restrictions The approval ofThe Office of the Comptroller of the Currency is required if the total of all on dividends dividends declared by a national bank in any calendar year exceeds the bank's net profits, as and regulatory defined, for that year combined with its retained net profits for the preceding two calendar limitations years. Under this dividend limitation formula, the Corporation's national bank subsidiaries can, without prior regulatory approval, declare dividends in 1987 of approximately
$265,979,000 of their total undivided profits of $951,863,000 at December 31,1986, plus an ,
additional amount equal to the net profits, as defined, for 1987 up to the date of any such dividend declaration. The Federal Reserve Act limits extensions ofcredit b3 the Corporation's bank subsidi-aries to the Corporation and to certain other affiliates of the Corporation, requires borrowings to such companies to be collateralized and limits the amount ofinvestments by the banks in these entities. At December 31,1986, such extensions ofcredit and investments were limited in amount to $212,031,000 as to the Corporation and any other affiliate and to
$424,062,000 as to the Corporation and all ofits other affiliates.
- 16. Legal proceedings Various legal proceedings are pending against the Corporation and its subsidiaries. Manage-ment believes that the aggregate liability, if any, arising from such proceedings will not have a material adverse effect on the Corporation and its subsidiaries.
- 17. Commitments In the normal course ofbusiness, the Corporation extends commitments and guarantees, and guarantees w' tich, in accordance with generally accepted accounting principles, are not included in the fnancial statements. Management does not anticipate any material losses as a result of t aese transactions.
Standby letters ofcredit and guarantees obligate the Corporation to disburse funds to a third party if the Corporation's customer fails to perform under the terms of the agreement with the beneficiary. The Corporation minimizes its exposure to loss under these commit-l l l I 60 w
4 ., 17 Commitments ments by subjecting them to credit approval and monitoring procedures. Fees on standby and guarantees letters ofcredit are recognized over the commitment term. As of December 31, .1986, the continued Corporation had issued standby letters ofcredit and other guarantee instrume nts, net of participation and cash collateral of $893,640,000, in support of the following obligations: Weighted average idollar amounta in thousands) maturity (in years) Commercial paper and other debt $ 672,450 4.5 Tax-exempt securities 1,250,169 5.6 Bid-or performance-related 831,229- 2.4 Other 394.171 3.0 Total $3,148,019 4.2 Commitments to extend credit that were legally binding, or for which the Corporation has received a fee, were $19,372,752,000 at December 31,1986. Substantially all of these commitments are contingent upon customers maintaining specific credit standards. Futuras and forward contracts represent future commitments to purchase or sell securi. ties or money market instruments at a specified price. Risk arises from market movements in securities values and interest rates, as well as the ability ofcontractual counterparties to meet their obligations under the futures and forward contracts. At December 31,1986, com-mitments to purchase under futures and forward contracts were $412,437,000 and com-mitments to sell under futures and forward contracts wem $1,023,697,000. Commitments to purchase foreign exchange represent the gross amount ofcontracts to purchase foreign currencies and amounted to $5,900,167,000 at December 31,1986. There are two types ofrisk involved in transacting foreign exchange business: the risk ofdealing with counterparties and the market risk associated with trading a volatile commodity.
- 18. International Selected financial data for international operations are as follows:
operations Income statement Year ended December 31, (in millions) 1984 1985 1986 Interest revenue $713 $630 $455 Loan fees 5 4 4 Interest expense 611 494 344 Net credit revenue 107 140 115 i Provision for possible credit losses 51 45 82 Net credit revenue aRer provision j for possible credit losses 56 95 33 J Service and other revenue 26 24 11 Operating expense 90 109 99
]
q Income beforeincome taxes (8) 10 (55) I Provision forincome taxes (7) ' 6 (25) Netincome $ (1) S 4 s(30) l l I 1 61 l., C______._______.______ - . _ . _ . _
> { FinancialStatements continued
- 18. Internation 41 . Balance sheet operations December 31, continued - (in millionar 1985 1986 Assets:
t Money marketinvestments: Interest-bearing deposits $1,168 $1,790 Other, principally corporate placements 169 82 Investment securities 33 53 Trading account securities 36 176 Loans, net of unearned discount: Commercialand industrial 2,025 1,797 Financialinstitutions 1,245 1,055 Governments and official institutions 517 . 557 Other 22 19 Totalloans 3,809 3,428 Reserve for pecible creditlosses (111) (173) Netloans 3,698 3,255 Customers' acceptance liability 2,125 408 Other assets 216 279 Totalassets $7,445 86,043 Liabilities and Capital: Deposits: Demand: Banks in foreign countries, including foreign branches ofU.S. banks 8 89 8 135 Other 114 132 Totaldemand deposits 203 267 Time: Banks in foreign countries, including foreign branches ofU.S. banks 761 931 Foreigngovernments officialinstitutions, f central banks and international institutions 439 298 Other 1,437 1,713 ] I Totaltime deposits 2,637 2,942
]
Totaldeposits 2,840 3,209 Commercial paper 71 100 ; Other funds borrowed 59 93 Acceptances outstanding 2,125 408 Otherliabilities 24 (75) Funds provided from domestic operations and capital 2,326 2,303 ) Totalliabilities and capital $7,445 86,043 ) Note: Time deposits inc!ude $2,635,000.000 and $2.941,000,000 in denominations o($100,000 orgreuter at December 31,1985 and 1986. 1 J 62 L.
i
'l
- 18. International Percentages ofinternational operations to consolidated amounts are as follows: !
operations I continued 1984 1985 1986- l Net credit revenue 14 % 16 % 12 % ! Income beforeincome taxes - 4 (30) ! Netincome - 2 (16) Net income applicable to common stock -- '2 08) Average total assets 32 27 18 Average totalliabilities 33 27 19 Geographic distribution ofnet credit revenue, service and other revenue, income before income taxes and net income is as follows: Net credit Service and Income before revenue other revenue income taxes Net income .- tin millions) 1984 1985 1986 1984 1985 1986 1984 1985 1986 1984 1985. 1986 ~ Europe $ 29 $ 30 $ 22 $4 $5 85 $(1) $ (3) $(10) $1 .$(1) $ (5) North America 10 21 17 7 6 7 (1) 7 3 - 3 - l Asia Pacific 12 19 19 7 8 (2) (18) I (4) (4) (2> (1) (10) Latin America 53 67 55 4 4 2 (6) 6 (30). (2) 2 (15) Middle East and Africa 3 3 2 4 1 1 4 2 - 2 1 - Total- $107 $140 $115 $26 $24 $11 $(8) $10 $(55) $(1) $4 $(30) Geographic distribution of assets at year +nd is as follows: (in millions) 1985' 1986 Europe $2,015 $1,934 North America 1,744 1.351' Asia Pacific 2,063 1,381 Latin America 1,612 1,431 Middle East and Africa 122 119 Total - $7.556 $6,216 Note: A mounts shown are befon deducting the reserve forpossible credit losses. Geogmphic distrn bu. tions of assets and income are based on locaticn ofobligor or investment except for assets guamnteed by a third party where location is that of the guamntor. Income from international operations and the related geographic distribution are determined after internal allocations for taxes, expenses, provision and reserve for pe=sible credit losses, capital and borrowed funds. Such allocations and the underlying assumptions are subjective and may change as management's criteria for evaluating business segment profitability evolve or are revised in response to changing conditions and risks. Expenses charged to international operations include those directly incurred in connection with such activities plus an allwable share ofgeneral support and overhead charges. L----____--. -
V Notes to FinancialStatementa continued
, 19, Mellon Bank The financial statements for Mellon Bank Corporation (parent Corporation), and two l Corporation wholly owned financing subsidiaries, are as fbliows:
(parent Corporation Income statement Year ended December 31, ! (in thousands) 1984 1985 1986 l
- Dividends from bank subsidiaries S 75,116 $ 81,803 $ 84,797 Dividends from nonbank subsidiaries 7,670 8,289 12,638 Interest revenue from bank subsidiaries 83,026 44,695 23,576 Interest revenue from nonbank subsidiaries 107,588 126,358 142,499 Other revenue 3,163 4,898 5,217 Total revenue 276,563 266,043 268,727 Interest expense on commercial paper 147,617 109,576 91,555 Interest expense on funds borrowed from bank subsidiary -
855 732
)
Interest expense on notes and debentures (with original maturities ove one year) 38,212 56,854 80,228 Operating expense 18,728 18,275 24,018 Total expense 204,557 185,560 196,533 Income before income taxes and equity l
. in undistributed income of subsidiaries 72,006 80,483 72,194 Provision for income taxes (2,968) (2,655) (7,217)
Equity in undistributed income ofsubsidiaries: Banks 71,179 112,272 101,900 Nonbanks 12,391 6,285 1,882 Net income 158,544 201,695 183,253 Dividends on preferred stock 9,722 10,224 13,669 Net income applicable to common stock $148,822 $101,471 $169,584 Balance sheet December 31, tin thousands 1 1985 1986 Assets: Due from bank subsidiaries $ 378 $ 5,181 Money market investments with subsidiaries 151,798 215,232 Loans and other receivables due from bank subsidiaries 199,760 159,297 (' Loans and other receivables due from nonbank subsidiaries 1,639,341 1,909,573 Investmentsin bank subsidiaries 1,504,540 1,700,817 Investments in nonbank subsidiaries 162,875 243,136 i* Other assets 38,682 58,417 Total assets $3,697,374 $4,351,653 Liabilities, redeemable preferred stock and shareholders' equity: Commercial paper $1,286,489 $1,128,069 Funds borrowed from bank subsidiary 17,327 - Otherliabilities 5,477 32,521 Notes and debentures (with original maturities over one year) 657,349 1,278,403 Totalliabilities 1,966,642 2,438,993 Redeemable preferredstock 93,550 93,678 Shareholders' equity 1,637,182 1,818,982
' Total liabilities, redeemable preferred stock and sharehold-ers' equity $3,697,374 $4,351,653 G4
- 19. Mellon Bank . Statement of changes in financial position Corporation
, Year ended December 31,
. (parent (orporation) (in thousan&) 1984 1985 1986 continued L Financial resources derived from/(applied to):
1 Operations: , Netincome $ 158,544 $ 201,695 8_183,253 l Less: Equity in undistributed net income of subsidiaries and other noncash items (78,124) (112,448) (94.659) Financial resources derived from operations 80,420 . 89,247 88,594 Dividends on common and rreferred stock (78,299) 182,171) (89,020) 2,121 7,076 (426) Financing activities: Commercial paper 205,903 (151,818) (158.420) Funds borrowed from bank subsidiary - 17,327 (17,327) Notes and debentures (with original maturities over cne year) 24,373. 295,221 621,054 i Common stockissued in mergers 29,348 5,167 - Redeemable preferred stock issued in merger 15,997 - - Convertible preferred stock issued in merger - - 67,911 275,621 165,897 513,218 Other, net f (13,003) (16,608) 18,908 Increase in financial resources invested in subsidiaries and interest +arning assets $ 264,739 $ 156,365 8 531,700 Increase /(decrease) in investment in subsidiaries and interest +arning assets: Money market investments with subsidiaries $(153,013) $(381,073) $ 63,434 lavestmentin subsidiaries 908 10,832 20,212 In vestment in subsidiaries acquired in mergers 75,941 5,176 223,084 Loans and other receivables due from subsidiaries 340,903 521,430 224,970 Increase in investment in subsidiaries and interest +arning assets $ 264,739 $ 156,365 S 531,700 65 i
To the Board of Directors and Shareholders of Mellon Bank Corporation: We have examined the consolidated balance sheet ofMellon Bank Corporation and its sub-sidiaries as of December 31,1986 and 1985, and the related consolidated statements of income, changes in shareholders' equity and changes in financial position for each of the years in the three-year period ended December 31,1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests i of the accounting records and such other auditing procedures as we considered necessary in l the circumstances. In our opinion, the aforementioned consolidated financial statervents present fairly the l
' financial position ofMellon Bank Corporation and its subsidiaries at Decercher 31,1986 and 1985, and the results of their operations and changes in financial position for each of the years in the three year period ended December 31,1986, in conformity with generally accepted accounting principles applied on a consistent basis.
OUL , t Pittsburgh, Pennsylvania January 19,1987 4
~
_ ---------------_____J
Mellon Bank Corporation fand its subsidiaries) (in thousands) 1982 1983 1984 1985 1986' Net credit revenue Net credit revenue' $548,055 $725,334 $866,473 $978,678 81,094,830 Service and other Service revenue: revenue Trust and investment management fees 36,638 73,831 95,763 116,795 198,029 Cash management fees and
. deposit transaction charges 13,157 30,186 49,812 65,684 84,003 Data processinf 'ees 28,748 38,058 43,049 50,339 68,576 Mortgage se,$ > icing fees 9,512 20,682 25,807 30,541 40,073 Charge service fees 6,604 21,487 30,930 33,742 38,280 Letters oferedit and acceptance financing fees 14,985 19,423 24,103 30,079 34,540 Other 21.040 26,813 32,646 37,936 61,607 Total service revenue 130,684 230,480 302,110 365,116 525,110 Trading revenue:
Trading account profits and commissions 9,922 7,826 5,966 15,917 17,255 Gains on sale ofmortgages and mortgage-backed securities (net ofmarket revaluation) 5,183 (325) (1,569) 1,226 11,860 Foreign exchangegains 5,555 4,300 1,079 5,432 (5,075) Totaltrading revenue 20,660 11,801 5,476 22,575 24,040 Gains on sale ofinvestment securities (15,420) 10,797 3,556 92,511 134,649' Other revenue 12,314 34,318 25,690 12,422 22,164 Totalservice and other revenue 148,238 28's,396 336,832 492,624 705,963 Provision for possible Provision for possible credit losses 68,085 52,199 116,676 148,321 315,585 credit losses Operating expense Staffexpense 215,186 349,772 441,856 509,355 578,274 Net occupancy expense 22,954 46,484 97,535 109,926 122,634 Equipment expense 31,443 48,091 53,472 68,205 90,782 Shares, capital and franchise taxes 5,070 13,374 13,631 14,483 17,529 Other expense 107,224 174,078 203,886 263,640 336,743 Totaloperating expense 381,877 631,799 815,380 965,609 1,145,962 Income Income before income taxes
- 246,331 328,732 271,249 357,372 339,246 Provision forincome taxes
- 111,959 144,917 112,705 155,677 155,993 Netincome 134,372 183,815 158,544 201,695 183,253 Dividends on preferred stock - 5,263 9,722 10,224 13,669 -
Netincome applicable to common stock .$134,372 $178,552 $148,822 $191,471 8 169,584 i
- Includes fully taxable equivalent adjustments to net civdit menue.
I l 1 l i 1 67 L__-__-_--__ -
o - Ornsolldated Balance Shcet-Average Balances and Interest Rates Y 1 I Mellon Bank Corporation (and its subsidiaries) 1982 Average Average tdollar amounts in millionsi balance rate Assets Interest-earning assets: Money market investments: Interest-bearing deposits with banks $ 3,305 13.637c Federal funds sold and securities purchased under agreements to resell 663 12.17 Other 215 11.00 Trading account securities 286 '2.71 Investment securities: U.S. Treasury and agency securities 877 11. M Obligations ofstates and political subdivisions 343 10.20 Other 78 9.82 Loans, net of unearned discount 10,704 14.33 Lease finance assets 182 10.49 Totalloans and lease finance assets 10.886 14.27 Totalinterest-earning assets 16,653 13.767c Cash and due from banks 1,315 Customers' acceptance liability 1,094 Premises and equipment 173 Other assets 458 Reserve for possible credit losses (154) Total assets $19,539 Liabilities, redeemable Interest-paying liabilities: preferred stock Deposits in domestic offices: and shareholders' Demand $ 308 5.16c'c equity Savings accounts 752 5.00 Money market deposit accounts 13 9.75 Retail savings certificates 1,693 12.06 Negotiable certificates ofdeposit 4,247 12.43 Other time deposits 55 10.89 Depositsin foreign offices 2,969 12.24 Totalinterest-paying deposits 10,042 11.52 Federal funds purchased and securities sold under agreements to repurchase 2,925 12.00 Commercial paper 1,080 12.98 Other funds borrowed 422 11.93 Notes and debentures (with original maturities over one year) 417 12.09 Totalintet. > paying liabilities 14.886 11.717c Deposits in domestic offices-interest-free 2,220 Deposits in foreign offices-interest free 18 Totalinterest-free deposits 2,238 Acceptances outstanding 1,096 Otherliabilities 301 1 Totalliabilities 18,521 Redeemable preferred stock - Shareholders' equity _ 1,018 i Total liabilities, redeemable peferred stock i and shareholders' equity $19,539 ! Hates Yield on total interest earning assets 13.76?c Cost of funds supporting interest earning assets 10.47 Net rate on interest earning asse0s 3.29?c Note: Rates are calculated on a fully taxable equwalent basis at a rute approximating 46% using actual number of days in year and are before effect of reserve requirements. Fees on loans are included in the calculation ofrutes. Cash basis loans and the rtlated income efect have been included in the 68
p :4 ., I 1983 1984 1985 1986
' Average - Average Average Average Average Average Average Average balance rate balance rate balance rate balance rate
.$ 3,160 9.71 % $ 2,371 10.217c $ 2,091 9.07 % $ 1,589 7.42 %
931 9.34 1,055_ 10.42 775 8.25 847 6.83 207 7,55 208 8.68 206 9.19 129 8.40 440- 10.25 462 11.47 400 9.49' 492 7,85-1,250 10.59 917 10.39 1,633 10.00 2,381 7.79 299 10.99 301 11.41 345 12.82 1,333 12.47 123 8.75 160 9.55 135 9.27 154 8.75 13,729 12.29 17,094 13.08 19,773 11.49 22,300 10.19 206 10.23 253 11.29 309 10.90 404 10.47 13,935 12.26 17,347 13.05 20,082 11.4A 22,704 10.19 20,345 11.50 % 22,821 12.41 % 25,667 11.05 % 29,629 9.80 % 1,529 1,634 1,547 1,561 1,741 2,347 2,076 1,408 241 298 366 439 596 774 921 1,232 (220) (273) (331) (435)
$24,232 $27,601 $30,246 $33,834
$ 565 : 4.81% $ 699 4.81 % $ 621 5.31 % $ 836 5.09 %
900 4.84 983 5.13 914 5.15 1,005 5.19 1,649 '8.55 2,405 9.21 3,309 7.28 4,314 5.97 2,068 10.64 2,863 10.58 2,956 9.39 3,179 3,019
'8.08 9.57 3,060 10.74 3,282 8.80 3,908 7.32 233 9.63 834 10.00 832 9.16 600 7.88 -
3,239 8.90' 2.973 9.54 2,962 8.66 2,535 i 7.54 11.673 8.84 13,817 9.44 .14,876 8.20 16,377 6.92 3,984 9.12 3,694 10.34 4,973 7.81 6,501 6.64 1 1,225 9.32 1,475 10.63 1,412 8.32 1,429 i 6.82 507 9.77 529 10.77 351 8.83 418 7.22 565 10.09 613 10.89 1,058 9.48 1,430 8.15 17,954 8.99 % 20,128 9.77 % 22,670 8.19 % 26,155 2,870 6.927c 3,181 3,364 3,818 36 11 10 11 2,906 3,192 3,374 3,829 1,742 2,349 2.077 1,408 329 405 470 580 22,931 26,074 28,591 31,912 48 89 93 94 1,253 1,438 1,562 1,768
$24.232 - $27,601 $30.246 .
$33,834 11.50 % 12.41 % 3 .05 % 9.80 %
7.93 8.61 7.24 6.10 3.57 % 3.80 % 3.819c 3.70 % cciculation of rates. Rates for notes and debentures and wtal interest. paying liabilities are computed net ofobligations under purthase option forpremises on which interest uns capita!ued ir,1982 and 1983. 69 l
g Domestic and International Balance Sheet-Average Balances and Interest Rates i Mellon Bank Corporation (and its subsidiaries) : 1984 Interest Average revenue / Average idollar amounts in millions) balance expense rate Domestic operations Interest-earning assets: Interest-bearing deposits with banks S 5 $ 1 10.90?c Federal funds sold and securities purchased under agreements to resell 1,055 110 10.42 Other money market investments 34 3 9.51 Trading account securities 449 52 11.53 U.S. Treasury and agency securities 917 95 10.39 Obligations ofstates and political subdivisions 301 34 11.41 Other investment securities 67 7 9.93 l Loans and lease finance assets 13,599 1,809 13.31 l Totalinterest-earning assets 16,427 $2,111 12.85Fc ! Other assets 2,370 Total assets $18,797 Interest payingliabilities: De_ posits m domestic offices: Demand $ 699 $ 34 4.817c Savings accounts 983 50 5.13 Money market deposit accounts 2,405 221 9.21 Retailsavings certificates 2,863 303 10.58 Negotiable certificates ofdeposit 3,038 326 10.72 Other time deposits 588 57 9.65 Totalinterest-paying deposits 10,576 991 9.37 i Federal funds purchased and securities sold under agreements to repurchase 3,694 382 10.34 Other funds borrowed 1,856 199 10.73 Funds provided to international operations (2,644) (283) 10.53 Notes and debentures 613 67 10.89 Totalinterest paying liabilities 14,055 1,356 9.65 Other funds supporting earning assets 2,372 - - Total funds supporting earning assets 16,427 $1,356 8.259c Allother funds 2.370 Totalliabilities and capital $18,797 Domestic net credit revenue and net rate $ 755 4.60cc International Interest earning assets-operations Interest-bearing deposits with banks $ 2,366 $ 241 10.21cc Other money rnarketinvestments 174 15 8.52 Trading account securities 13 1 9.42 Otherinvestment securities 93 9 9.27 Loans 3,748 456 12.14 Totalinterest earning assets 6,394 $ 722 11.28cc Other assets 2,410 Total assets S 8,804 Interest payingliabilities: Deposits $ 3,241 $ 313 9.677c Other funds borrowed 148 15 9.92 Funds provided by domestic operations 2,684 283 10.53 Totalinterest-paying liabilities 6,073 611 10.05 Other funds supporting earning assets 321 - - l Total funds supporting earning assets 6,394 $ 611 9.557c Allother funds 2,4 D Totalliabilities and capital $ 6,804 International net credit revenue and net rate $ 111 1.73Fe Note: Interest menue and expense amounts arv presented on a fully taxable equivalent basis at a mte approximating 46c. Bates art calculated using dollar amounts in thousands and actual number of 70
I-l l' l. 1985 1986 Interest Interest
-Average revenue / Average Average revenue / Average balance expense rate balance expense rate
$- $- -% $ 188 8 13 6.939c 775 64 8.25 847 58 6.83 387 37 9.52 344 28 8.26 1,633 163- 10.00 2,381 186 7,79 345 44 12.82 1,333 166 .12.47 65 7 10.18 104 8 8.15 16,289 '1,883 11.56 19,162 1,984 10.35 19,494 $2,198 11.27 % 24,359 $2,443 10.037c
- 2,573 2,940
$22,067 $27,299
$ 621 S 33 5/,1% $ 836 8 43 5.09 %
914 47 r.15 e 1,005 52 5.19 3,309 241 7.28 4,314 258 5.97 2,956 278 9.39 3,179 257 8.08 3,282 289 8.80 3,908 286 7.32' 570 36 6.36 329 28 8.63 11,652 924 7.93 13,571 924 6.81 4,973 388 7.81 6,501 432 6.64 1,620 137 8.41 1,683 116 6.92 (2,239) (18Fs 8.29 (1,755) (123) 7.01 1,058 ' _1@ 9.48 1,430 ".16 8.15 17,064 1,J63 7.99 21,430 1,465 6.84 2,430 - - 2,929 - - 19.494 $1,363 6.99 % 24,359 81,465 6.029c 2,573 2,940
. $22,067 427,299
$ 835 4.28 % 8 978 4.01rc ;I
$ 2,091 $ 190 9.07 % $ 1,401 8 105 7.48Fc 206 19 9.19 129 11 8.40 13 8.72 70 6 1
8.42 148 10 6.89 ) 50 5 9.93 3,793 422 11.14 3,542 330 9.33 6,173 $ 638 10.34 % 5,270 $ 461 8.769c 2,006 1,265 5 8,179 8 6,535
$ 3,224 $ 296 9.19 % $ 2,806 8 210 7.497c 143 12 8.57 164 11 6.86 2,239 186 8.29 1,755 123 7.01 5.606 404 8.82 4,725 344 7.29 i 567 - -
545 - - t 6,173 $ 494 8.01 % 5,270 $ 344 2,006 6.539c I 1,265 l S 8.179 8 6,535 8 144 2.33 % $ 117 2.23?c days in year and are before efect of reserve requirements. Fees on loans are :ncluded in the calculation ofmtes. Cash. basis loans and the related income efect have been included in the calculation ofmtes. 71
- a Principal Domestic Locations and Operating Entities l1 b California - Georgia Bethesda Los Angeles Atlanta Mellon Bank IMD>
Corporate Banking and Community Leasing Group
- Corporate Banking Serves consumer and small commercial l Banking representative offices and Community Banking representa- markets throughout Maryland.
555 South Flower Street five ollice8 6500 Rock Spring Drive los Angeles, California 90071 225 Peachtree Street, N.E. Bethesda, Maryland 20817 Telephone: 213-624 0913 Atlanta Georgia 30303 Telephone: 301-493-6555 j Telephone. 404-222 2250
;i San Francisco Massachusetts Mellon CapitalManagement
- Illinois Boston !,
Provides portfolio and investment Chicago Franklin Pbrtfolio Associates 7Yust' '; Leasing Gmup*; Corporate Banking, management services. provides investment management leasing Group *; Co omte Banking Custom Banking and Commercial Real services for employee benetit funds and Communsty Banking Estate C nstructi n representative and institutional clients. representative btfices "lli"' Corporate Banking and Custom 595 Market Street 55 West Monroe Street Bankingrepresentativeoffices San Francisco, California 94105 Chicago. Illinois 60603 Telephone: 312-3416666 One Post Office Square Telephone:415-495-5180 Boston, Massachusetts 02109 Dafacenter regionalo// ice Telephone:617-423-4151 fg* #7 55 East Jackson Boulevard Mutual Fund Service Group
- Mortgage Banking Group *; Corporate "
hhica p o, ne\312 3 Provides mutual fund record-keeping Banking and Commercml Real Estate and shareholder services. Construction representative offices 1775 Sherman Street Oak Brook 100SummerStreet Commer Boston, Massachusetts 02110 Denver, Colorado 80203 97,yp. cial and Consumer Finance Telephone: 617-956-1400 g Telephone:303-837 2180 Specializes in commercial and. Datacenter regionaloffice Connecticut ind ustrial loans to, smaller busmesses'
" " II"8I ""8' *dI"Id""I8' d'"I 265 Winter Street Starnford s" Boston, Massachusetts 02154 Mellon Universe Management Group, " "
g oans Telephone: 617-890-7630 nagement to rlvides , activ Community Banking representative CommunityBanking representative office office 300 Broad Street Stamford. Connecticut 06901 1415 West 22nd Street 55 William Street Oak Brook, Illinois 60522 Boston, Massachusetts 02181 Telephone: 203 324-2510 Telephone: 312 572 2000 Telephone:617 239-1110 Delaware Indiana Wiltnington New Jersey . Mellon Bank tDEINational Association
. South Bend Edison i Data Link Systems. Inc. Community Banking representative Serves consumer and small- to middle- Provides data processing ervices and !
saed commercial markets throughout office Delaware. Alsopro soRware licensing to financial Raritan Center cardholder processm,vides g services. nationwide institutions throughout the United Edison,NewJerse 08837 States and Canada. Telephone: 20122[4790 10th & Market Streets Wilmmgton, Delaware 19801 1818 Commerce Drive South Bend, Indiana 46628 Fort Lee Telephone: 302-429 4600 Telephone: 219-282-3300 Fiduciary Services Group-Securities Florida Transfer Service
- Boca Raton Louisiana Provides securities transfer services i
. New Orleans to the banking industry. i Mellon Bank iFL) National Associatio.T Mortgage Banking Gmup
- Provides trust services- One Executive Drive 3850 North Causeway Boulevard Fort Lee, New Jersey 07024 Custom Banking and CommerrialReal Metairie, Louisiana 10002 Telephone: 201-592-4000 Estote Construction representative Telephone:504-831 4811 i offices New York 5550 Glades Road Maryland New York Boca Raton. Flor'da 33431 Battlrnore Mellon RealEstatelneestment Telephone: 305-368-6080 Community Banking representative Management Corporation
- office Provides real estate investment Sarasota 1122 Kenilworth Drive Mellon Bank (FL) National Association management and consulting services.
Baltimore, Maryland 21204 Leasing Gro *; Corporate Banking, Provides trust services. Telephone: 301583-4676 Community anking and Custom 556 South Pineapple Avenue Banking representative offices Sarasota, Florida 33577 Telephone:813-951 0065 551 Madison Avenue New York, New York 10022 Telephone: 212-702-4036 72
Mellon Bank International Pittsburgh offlee Descriptions Engages in international banking Mellon Ba n k. NA. Commercial Real Estate Construction services for domestic / foreign Serves consumer and small commercial representative o# ices market construc-corporations and foreign corres- markets in western Pennsylvania, tion finance products to middle-sized, pondent banks and governments. much of the national middle market, large and very large real estate 88 Pine Street and financialinstitution and large developers. New York, New York 10005 commercial markets throughout the Community Banking representa. Telephone: 212 709-8600 United States and worldwide. tive o# ices market credit services to InvestNet Corporation c mmercialcustomers with annual Afellon Securities Trust Company Provides discount brokerage services.
'** "mil$on
',*, y,QYi[iespr , cessingand Triangle Ibrtfolio Associates
- Corporate Banking representative Datacenter regionalo# ice Provides active e uity mana o# ices market credit and related serv-using systematic) actors metkement ods, ices to corporate customers with 120 Broadway annual sales of more than $125 million, New York, New York 10271 Mellon Bank Center Pittsburgh, Pennsylvania 15258 exclusive of financial institutions.
Telephone: 212 3741970 Custom Banking represento tive Telephone: 412 234-5000 o# ices market credit and related serv-biell 5m investData Corporation .. Fiduciarv Services Group-Accounting ices to high net worth individuals. Provides end-of day securities pricing Service
- Datacenterregionalo# ices market services.
Provides trust accounting, cash data processing and management 161 William Street management processing and IRA inf rmation services to hnancial New York, New York 10038 record keepingservices, data institutions. Telephone: 212 766-2729 processing systems, and retail *The leasing Group markets a marketing products to the domestic broad range ofleasing and lease-O h ,m related services to corporations and international financial services throughout the United States with Cleveland in N stry. Mortgage Banking Group
- Four Station Square annual sales i m re than.$60 million, 1255 Euclid Avenue Pittsburgh, Pennsylvania 15219 7tbanti regfonYit nnualsa$e Cleveland, Ohio 44115 Telephone: 412 391 5210 Telephone: 216696 5432 between $5 million and $60 million.
State College *The Mortgage Banking Group I,e n n%ylva nia markets credit secured by real estate to Mellon Bank tCentral/ National individuals and small-and medium-Harrisburg Association sized corporate customers, and offers i The Commanu calth Natmnal Bank Serves consumer and small- to real estate-related services to medium. { Serves consumer und small- to middle- middle-sized commercial markets sized and large corporate customers i sized commercial markets in south in central Pennsylvania. and investors. I central Pennsylvania. 341 North Science Park Road 10 South Market Square State College, Pennsylvania 16803 Additional Locations l 1 Harrisburg, Pennsylvania 17101 Telephone: 814-2344300 The Corporation's banking entities- j Telephone: 717 564 9500 Commontecalth National Ban k, Mellon l Te w Bank (Centrali, Mellon Bank iDE), i Oil City Dallas Mellon Bank tEast1. Mellon Bank iMDr. ) Mellon Bank tNorthlNational Mellon Bank, N.A. and Mellon Bank i Association Leasing Communitv Grou$a*n; king and Commer.(North Corporate Banking. 6--operate 632 domestic retail Serves consumer and small to middle. cialReal2 state Construction banking locatsons, uncluding 360 com-sized commercial markets in north- representative o# ices m u nity o# ices. Mellon Financsal Sere-western Pennsylvania. tee 8 perates 152 o# ices in 23 states. 2121 San Jacinto'a'ower 100 Seneca Street Dallas, Texas 75201 *A Mellon FinancialServices entity. Oil City, Pennsylvania 16301 Telephone:214-979-0053 (Mellon FinancialServices is a collec. Telephone:814-676-7123 tive name for subsidiaries engaging in Houston various bank related services, sneluding Philadelphia Corporate Ban king represen tative o# ice consumer retail finance, leasing, mort. Mellon Bank tEast> National 1100 Louisiana Street gage banking. and eertain trust Association Houston Texas 77002 services.> Serves consumer and commercial Telephone: 713-650-6066 markets in eastern Pennsylvania, and ; the middle market in man'y eastern Mortgage Banking Group * ; states. 3100Travis Street i Mellon Bank Center Houston, Texas 77006 ; Philadelphia, Pennsylvania 19102 TelePhone:713-525-8000 , Telephone: 215-553-$000 i j Datacenter regional o# ice 2nd & Chestnut Streets ! Philadelphia, Pennsylvania 19106 ( Telephone: 215 3514839 l 4 73 ( L- . _ _ . l
y . - - . - _ _ - _ _ . - - _ Dircctors $ 1 Mellon Bank Corporation Robert E. Kirby Norman M. Steere Retired Chairman and Vice Chairman John M. Arthur ChiefExecutive Officer Mellon Bank Corporation and Chairman Westinghouse Electric Corporation Mellon Bank. N.A. Duquesne Light Company Electric equipment Eletrk utmty Leon H. Sullivan G. Christian Lantzsch astor J. David Barnes Vice Chairman and Treasurer Zion Baptist Church ofPhiladelphia Chairman and ChiefExecutive Officer Mellon Bank Corpnation Chairman of the Board Mellon Bank Corporation and Vice Chairman OICIntern2tional, Inc. Mellon Bank, N A. Mellon Bank, N.A. Manpower skills, worldwide training Howard O. Seaver, Jr. I'* "" " """ # Andrew W. Mathieson Retired Chairman and Executive Vice President L. Stanton Williams ChiefExecutice Officer . Richard K. Mellon and Sons Retired Chairman and Carpenter Technoloay Corporation Investments and philanthropy ChiefExecutive Officer
. Wrought specialty eteel producer PPG Industries. Inc.
Seward Prosser Mellon Manufacturer of flat glassahemicals. Alexander W.Calder President Chairman, President and coatings and resins and fiberglass j Richard K. Mellon and Sons ChiefExecutiec Officer Investments and philanthropy Quentin E. Wood Joy Manufacturing Company Chairman and ChiefExecutice Officer Machine yandequipment Charles F. Merrill Quaker State Oil Ref ning Corporu tion Chairman, President and Edward Donley Manufacturer oflubricants r nd other
, ChiefExecutive Officer consumer products and producer of Chairman of the Executive committee Commontvealth National Bank lubricants and fuels Air Products and Chemicals. Inc.
Industrial gases, chemical products Edward A. Montgomery,Jr. William J. Young and industrial process equipment Vice Chairman . Retired President Mellon Bank Corporation krtland Cement Association Donna R. Ecton Chairrran and Chief Executive Officer Trade association for the portland Vice President-Administration Mellon Bank tEast' CampbeliSoup Compaav cement industry Food processing and consumer products Nathan W. Pearson Financial Advisor George T, Farrell huiMellon FamilyInterests Advisory Board , f flon ank Corporation and Gerald G. Probst Fletcher L. Byrorn Mellon Bank. N.A. Retired Chairman and Michael D. Dingman ChiefExecutive Ofliter C. Frederick Fetterolf Sperry Corporation William B. Eagleson,Jr. Prestdent and chief 0perating Office
- Manufacturer ofinformation Aluminum Company c,(A merica processing systems, electronics and W. H. Krome George Production and sale of alumina and command and control systems chemical products, primary alummum William P.SnyderIII and aluminum mill products Vincent A.Sarn! James W. Wilcock Chairman and ChiefExecutive Officer Thomas C. Graham PPG Industries. Inc.
President Ma nufacturer of flat glass, chemicals, USS. a Dtvision of USX Corporation Chairmen Emeriti coatings and resins and fiber glass Diversified manufacturing and . William B. Eagleson,Jr. energy producing company David S. Shapira President and ChiefExecutive Officer James H. Hn,ggm, s Elmer G. Grant Giant Eagle. In . Vice Chairman Retail grocery store chain John A.Mayer Mellon Bank Corporation and Mellon Bonk. N.A. H. Robert Sharbaugh Retired Chairman Bryce Jordan Sun Company. Inc. President Energy The Iknnsylvania State University Richard M. Smith Retired Vice Chairman 1 Bethlehem SteelCorporation Integrated steel producer engaged pri-marily in the manufacture and sale of steel and steel producte ) 1 74
l Corporate Ottice George T. Farrell Charles F. Merrill President Chairman. President and J. David Barnes Mellon Bank. N.A. ChiefExecutive O6cer Chairman and ChiefExecutive O$cer g g,yg,g Commonu:ealth National Bank George T. Farrell Executive VicePresident Theodore C. Miller President Legal Entities Liaison Executive VicePresident Richard H. Daniel Gary R. Frauenholz #"#E'#'"""" Vice Chairman Executive VicePresident Edward A. Montgomery,Jr. Elmer G. Grant Mortgage Banking Chairman and ChiefExecutn e ogcer Vice chairman Vincent E. Furey, Jr. #' " " ' " G. Christian Lantzsch President Charles J. Myron Vice Chairman and Treasurer Mellon Bank (East) Chairman and ChiefExecutive O@cer Mellon Bank (Norths Edward A. Montgomery,Jr. a
" "'"""" [chakAyi ePresident John B. Olsen Community Bankirg Senior Vice President Norman M. Steere C rpomteManning Vice Chairman Thomas A. Haeussler President Donald J. O'Reilly Mellon Financial Servicer. commercial Senior Vice President and Chief Principal Entitles ""d C "'"*" II"""" G*"P ^"dd #
and Departments J. Thomas Higginbotham #"dNI"# Senior Vice Presndent Charles C. Pearson, Jr. J. David Barnes Government AWairs Chanrman. President and Chairman and ChiefExecutive Off.cer ChiefExecutive O@cer Mellon Bank. N. A. Ralph B. Hurlbutt Mellon Bank tCentral) Executive Vice Pressdent Freuerick K. Beard International Banking Norman Robertson Executive VicePresident Senior Vice President Corporate Banking Davn.d L. Johns . Economics Executice Vice President T. Ronald Casper Technology Products James D. Roy Executsee Vice President Senior Vice President Credit Iblicy H. Harrison Kephart.Jr. Finance Chairman, Pressdent and E. MichaelCaulfield ChiefExecutive Ogcer Peter Rzasnicki Executive Vice President Mellon Bank iDE) Senior Vice President CapitalMarkets . Corporate Consulting David M. Km.g ht Barrie G. Christman Senior Vice President Arthur Denny Scott Chairman. President and Real Estate Management Sep.ior Vice President Chief Executive O$cer Human Resources Mellon Bank tMD) Harry R. Leggett President William J. Stallkamp Barry l. Deutsch Mellon FinancialServices, Leasing Executive Vice President Senior Vice President Group FinancialInstitutions Marketing and Comm:.nications Senior Vice President cy,7gg, y, yo;g,g7 Joseph F. DiMario L**i"E Executive Vice President Executits VicePresident David L. Martin Mellon Bank (EastiCommunity OperatingServices Senior VicePresident Banking George P. DiNardo C rpomteDevelopment Execursee Vice President Martin G. McGuinn information Management and Senior Vice President and General Research Counsel Legal Donald A.McMullen.Jr. Executive Vice President
%st andInvestment 1
Management as of Decem ber 31.19M. ! 75
p p l-Annual Lei me The Annual Meeting ofShareholders will be held in the auditorium on the 10th floor of Two Mellon Bank Center,501 Grant Street, Pittsburgh, Pennsylvania, on Monday, April 20,1987,at 11 A.M. Exchange listint The stock of Mellon Bank Corporation is traded on the New York Stock Exchange. The trading symbols are MEL(common stock)and MEL Pr A and MEL Pr B iSeries A and Series B preferred stock). The Transfer Agent and Registrar is Mellon Bank, N.A., Four Station Square, Pittsburgh, Pennsylvania 15219. Dividend Heins estment Registered holders of Mellon Bank Corporation stock may purchase Mellon co;.. mon and Common Stock stock at a 5% discount from market value through reinvestment ofcommon dividends, Purrhuse Plan preferred dividends or both. Registered shareholders may also buy Mellon common stock at market value with optional cash payments ofat least $50 for each purchase up to
$5,000 per calendar quarter. There are no brokerage commissions or service fees charged on purchases made through the Plan. Plan details are contained in a Prospectus dated December 31,1984, which may be obtained from the Secretary of the Corporation.
1;ividend payment.,, Subject to approval of the Board ofDirectors, dividends are paid on Mellon Bank Corpora-tion's common stock and Series A and Series B preferred stock en or about the 15th day of February,May, August and November. Investo r, broker, Investors, brokers, security analysts and others desiring financial information should con-security analvt contact tact Donald W. Ebbert, Jr., Director ofInvestor Relations for Mellon Bank Corporation. Telephone: 412-234-5601 or
, Outside Pennsylvania 800-245-1094 Inside Pennsylvania 800-872-3019 Shareholder. noteholder Requests for information or assistance regarding stock records or notes should be mquiries directed to the Secretary of the Corporation, Legal Department,30450ne Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
Form 10.K A copy of the Corporation's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished, free ofcharge, upon written request to the Secretary of the Corporation. Charitable contributions Information on the Cohoration's charitable contributions is available upon written : request to the Secretary of the Corporation. ;
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1 h i Ii Mellon entitics are Equal Employment Opportunity / Affirmative Action Employers. Mellon is com mitted to providing eq ual employment opportunities to every assoc:a te and every appli. cant for employment regardless of, bu t not limited to. such factors as race, sex. re!Lgion. no ttonal ort-gin. age, handicap or teteran status. A beliefin the dignity ofevery individual and a sense of respon-sibilay to the common good are the foundanons ofour comnutment. 76 i
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