<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-7410
MELLON BANK CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code -- (412) 234-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class March 31, 1998
----- --------------
Common Stock, $.50 par value 260,210,372
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<PAGE> 2
TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
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Page No.
--------
Part I - Financial Information
Financial Highlights 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Items 2 and 3) 3
Financial Statements (Item 1):
Consolidated Balance Sheet 41
Consolidated Income Statement - Five Quarter Trend 42
Consolidated Statement of Cash Flows 43
Consolidated Statement of Changes in Shareholders' Equity 45
Notes to Financial Statements 46
Selected Statistical Information:
Deposits 50
Selected Key Data 50
Part II - Other Information
Legal Proceedings (Item 1) 51
Changes in Securities and Use of Proceeds (Item 2) 51
Exhibits and Reports on Form 8-K (Item 6) 51
Signature 53
Corporate Information 54
Index to Exhibits 55
Cautionary Statement
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This Quarterly Report on Form 10-Q contains statements relating to future
results of the Corporation that are considered "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, the Year 2000 project, credit
loss reserve adequacy, simulation of changes in interest rates and litigation
results. Actual results may differ materially from those expressed or implied as
a result of certain risks and uncertainties, including, but not limited to,
changes in political and economic conditions, interest rate fluctuations,
competitive product and pricing pressures within the Corporation's markets,
equity and fixed income market fluctuations, personal and corporate customers'
bankruptcies, inflation, acquisitions and integrations of acquired businesses,
technological change, changes in law, changes in fiscal, monetary, regulatory
and tax policies, monetary fluctuations, success in gaining regulatory approvals
when required as well as other risks and uncertainties detailed from time to
time in the filings of the Corporation with the Securities and Exchange
Commission. Such forward-looking statements speak only as of the date on which
such statements are made, and the Corporation undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events.
<PAGE> 3
<TABLE>
<CAPTION>
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Quarter ended
FINANCIAL HIGHLIGHTS ---------------------------------------
(dollar amounts in millions, MARCH 31, Dec. 31, March 31,
except per share amounts) 1998 1997 1997
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<S> <C> <C> <C>
PER COMMON SHARE
Net income - diluted $ .78 $ .75 $ .69
Dividends paid .33 .33 .30
Closing common stock price 63.50 60.63 36.38
Book value at period-end 15.70 14.39 13.60
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FOR THE QUARTER
Net income $ 215 $ 195 $ 191
Net income applicable to common stock 206 191 182
Dividends paid on common stock 84 83 77
Average common shares and equivalents
outstanding - diluted (in thousands) 263,136 259,430 263,204
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KEY PERFORMANCE MEASURES
Return on average common shareholders' equity (annualized) 21.6% 21.2% 21.2%
Return on average assets (annualized) 1.89 1.75 1.83
Fee revenue as a percentage of total revenue (FTE) 66 66 59
Efficiency ratio (a) 65 67 62
Efficiency ratio excluding amortization of intangibles 62 65 59
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TANGIBLE OPERATING RESULTS (b)
Tangible earnings per common share - diluted $ .88 $ .83 $ .77
Tangible net income applicable to common stock 231 212 203
Return on tangible common shareholders' equity (annualized) 43.3% 38.3% 36.3%
Return on tangible assets (annualized) 2.18 2.00 2.09
Tangible book value per common share at period-end $8.33 $8.77 $8.88
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MARCH 31, Dec. 31, March 31,
1998 1997 1997
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BALANCES
Loans $30,343 $29,142 $27,525
Total assets 47,414 44,892 42,068
Deposits 33,096 31,305 29,936
Common shareholders' equity 4,086 3,652 3,503
Market capitalization 16,523 15,386 9,372
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CAPITAL RATIOS
Common shareholders' equity to assets 8.62% 8.13% 8.33%
Tangible common shareholders' equity to assets (c) 4.76 5.12 5.60
Tier I capital 6.80 7.77 8.74
Total (Tier I plus Tier II) capital 11.28 12.73 13.65
Leverage capital 7.04 8.02 8.75
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</TABLE>
(a) See page 20 for the definition of this ratio.
(b) See page 10 for the definition of tangible operating results.
(c) See page 26 for the definition of this ratio.
NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS.
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT FINANCIAL EVENTS
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Acquisition of United Bankshares, Inc.
On February 2, 1998, the Corporation acquired United Bankshares, Inc. and its
principal subsidiary, United National Bank, a full-service commercial bank
serving South Florida. With approximately $850 million in assets, including
approximately $425 million in loans and lease finance assets, United National
Bank is a nationally chartered bank with headquarters in Miami and 11 regional
banking offices in Dade, Broward and Palm Beach counties. United services small
and midsize businesses, lawyers, accountants, real estate developers and other
professionals. In addition, United also provides both private banking services
and trade financing. The Corporation acquired United National Bank with a
combination of approximately 5 million shares of common stock, reissued from
treasury stock acquired in 1997, and cash. United National Bank is operating as
a separate entity under the name Mellon United National Bank.
Acquisition of 1st Business Corporation
On February 17, 1998, the Corporation acquired 1st Business Corporation and its
principal subsidiary, 1st Business Bank, a full-service commercial bank serving
midsize business firms in southern California. 1st Business Bank is a
state-chartered bank, headquartered in Los Angeles, with approximately $1.2
billion in assets, including approximately $550 million in loans and lease
finance assets. It serves approximately 1,700 business customers in the
manufacturing, wholesale trade and service industries. It also provides personal
banking services to professionals, entrepreneurs, and owners and officers of its
business clients. The Corporation purchased privately owned 1st Business
Corporation with cash. 1st Business Bank is operating as a separate entity under
the name Mellon 1st Business Bank.
Common dividend increased 9%
On April 21, 1998, the Corporation announced a 9% increase in its quarterly
common dividend to $.36 per common share. The increased dividend is payable May
15, 1998, to shareholders of record at the close of business on April 30, 1998.
This is the seventh quarterly common dividend increase that the Corporation has
announced since the beginning of 1994, resulting in a total common dividend per
share increase of 184%.
Acquisition of Founders Asset Management, Inc. on April 1, 1998
In December 1997, the Corporation announced that it had reached a definitive
agreement to acquire Founders Asset Management, Inc. (Founders), a manager of
growth-oriented no-load equity mutual funds and other investment portfolios.
Founders offers 11 no-load mutual funds, including nine equity funds, with
approximately $5 billion in assets among total assets under management of
approximately $7 billion. Founders was purchased with cash and is operating as a
separate subsidiary, headquartered in Denver, under Mellon Bank, N.A. With the
inclusion of Founders' funds, the Dreyfus/Founders family of funds now total
more than $100 billion of assets managed, including more than $31 billion of
proprietary equity mutual funds.
3
<PAGE> 5
SIGNIFICANT FINANCIAL EVENTS (CONTINUED)
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Strategic alliance with Brascan Brazil
In February 1998, the Corporation and Brascan Brazil entered into a strategic
alliance through which the Corporation acquired 40% of Banco Brascan, a Rio de
Janeiro-based investment bank. In addition, the Corporation and Banco Brascan
formed Mellon Brascan Asset Management (MBAM), an investment management joint
venture combining the Corporation's global asset management expertise with
Brascan's 100 years of experience in Brazil. An affiliate of Brascan Brazil,
Banco Brascan provides corporate and institutional financial services including
corporate finance, capital markets, foreign exchange, merger and acquisition
financing and advisory, and securities trading and brokerage. MBAM will provide
an array of Brazilian and U.S. equity and fixed-income products and asset
management services to the rapidly growing Brazilian market. MBAM will offer its
retail products under the brand name of The Dreyfus Corporation and will utilize
the investment expertise of both Mellon Bank and Dreyfus.
OVERVIEW
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The Corporation reported record first quarter 1998 diluted earnings per common
share of $.78, an increase of 13%, compared with $.69 in the first quarter of
1997. Net income applicable to common stock in the first quarter of 1998 was
$206 million, an increase of 13%, compared with $182 million in the first
quarter of 1997. Diluted tangible earnings per common share totaled $.88 in the
first quarter of 1998, an increase of 14%, compared with $.77 in the first
quarter of 1997. Diluted earnings per common share totaled $.75, and net income
applicable to common stock was $191 million in the fourth quarter of 1997.
Annualized return on common shareholders' equity and return on assets were 21.6%
and 1.89%, respectively, in the first quarter of 1998, compared with 21.2% and
1.83%, respectively, in the first quarter of 1997 and 21.2% and 1.75%,
respectively, in the fourth quarter of 1997. Annualized return on tangible
common shareholders' equity and return on tangible assets were 43.3% and 2.18%,
respectively, in the first quarter of 1998, compared with 36.3% and 2.09%,
respectively, in the first quarter of 1997 and 38.3% and 2.00%, respectively, in
the fourth quarter of 1997.
Net interest revenue, on a fully taxable equivalent basis, was $367 million in
the first quarter of 1998, down $6 million compared with $373 million in the
prior-year period and up $5 million from $362 million in the fourth quarter of
1997. The decrease from the prior-year period primarily resulted from funding
costs related to the repurchase of common stock, the December 1997 transfer of
CornerStone(sm) credit card loans into an accelerated resolution portfolio and
preferred stock redemptions, primarily offset by the favorable effect of
acquisitions and loan growth.
Fee revenue was $698 million in the first quarter of 1998, up $162 million, or
30%, compared with $536 million in the first quarter of 1997 and up $34 million,
or 5%, compared with $664 million in the fourth quarter of 1997, excluding the
$43 million gain on the sale of the corporate trust business recorded in the
fourth quarter. The increase in fee revenue, compared with the first quarter of
1997, was primarily attributable to higher trust and investment fees resulting
from the mid-1997 Buck acquisition, an increase in the market value of assets
under management and new business, as well as higher foreign exchange fees.
Excluding $78 million of fee revenue in the first quarter of 1998 related to the
Buck acquisition, fee revenue increased $84 million, or 16%, compared with the
first quarter of 1997.
4
<PAGE> 6
OVERVIEW (CONTINUED)
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Operating expense before trust-preferred securities expense and net revenue from
acquired property for the first quarter of 1998 was $697 million, up $132
million from $565 million in the first quarter of 1997 and down $25 million from
$722 million in the fourth quarter of 1997. The increase, compared with the
first quarter of 1997, primarily resulted from the Buck and Dreyfus Brokerage
Services acquisitions in 1997, the Mellon United National Bank and Mellon 1st
Business Bank acquisitions in February 1998, an increase in the amortization of
mortgage servicing assets, and business growth.
Credit quality expense was $14 million in the first quarter of 1998, compared
with $22 million in the first quarter of 1997, reflecting a $10 million decrease
in the provision for credit losses. Credit quality expense was $61 million in
the fourth quarter of 1997, reflecting additional provision for credit losses
related to the credit card portfolio. Net credit losses were $18 million in the
first quarter of 1998, down $14 million compared with the prior-year period and
down $88 million from the fourth quarter of 1997, that included $65 million of
credit losses taken on the CornerStone(sm) loans that were transferred to an
accelerated resolution portfolio.
Nonperforming assets totaled $191 million at March 31, 1998, compared with $181
million at December 31, 1997, and $170 million at March 31, 1997. The
Corporation's ratio of nonperforming assets to total loans and net acquired
property was .63% at March 31, 1998. This ratio has been less than 1% for 15
consecutive quarters.
The Corporation's ratio of common shareholders' equity to assets was 8.62% at
March 31, 1998. The Tier I, Total and Leverage capital ratios were 6.80%, 11.28%
and 7.04%, respectively, at March 31, 1998, well in excess of the ratios
required to maintain well-capitalized status.
5
<PAGE> 7
BUSINESS SECTORS
<TABLE>
<CAPTION>
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FOR THE THREE MONTHS ENDED MARCH 31,
Consumer Business
(dollar amounts in millions, Fee Services Banking Fee Services Banking
averages in billions) 1998 1997 1998 1997 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $200 $166 $ 297 $ 299 $416 $296 $ 130 $ 126
Credit quality expense (revenue) - 1 11 28 - - 4 1
Operating expense:
Intangible amortization expense 3 1 16 13 5 8 6 5
Trust-preferred securities expense - - 2 2 - - 7 7
Other operating expense 152 127 158 150 305 214 49 46
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Total operating expense 155 128 176 165 310 222 62 58
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Income before taxes 45 37 110 106 106 74 64 67
Income taxes 17 15 40 38 39 29 23 25
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Net income $ 28 $ 22 $ 70 $ 68 $ 67 $ 45 $ 41 $ 42
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Tangible net income $ 31 $ 23 $ 83 $ 78 $ 72 $ 51 $ 45 $ 46
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Average assets $ 3.7 $2.0 $ 21.3 $20.5 $ 2.3 $ 1.5 $ 17.4 $16.3
Average common equity $ 0.4 $0.3 $ 1.1 $ 1.0 $ 0.7 $ 0.6 $ 1.4 $ 1.3
Average Tier I preferred equity $ - $ - $ 0.1 $ 0.1 $ - $ - $ 0.4 $ 0.4
Return on common
shareholders' equity (a) 32% 32% 25% 28% 36% 30% 12% 13%
Return on assets (a) NM NM 1.33% 1.35% NM NM 0.95% 1.04%
Pretax operating margin 23% 23% 37% 35% 25% 25% 49% 53%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 24% 23% 43% 40% 27% 28% 59% 63%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 76% 76% 53% 50% 73% 72% 38% 36%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
Note: The table above and the discussion that follows present the operating
results of the Corporation's major business sectors, analyzed on an internal
management reporting basis. Amounts are presented on a taxable equivalent basis.
Capital is allocated quarterly using the federal regulatory guidelines as a
basis, coupled with management's judgment regarding the risks inherent in the
individual lines of business. The capital allocations may not be representative
of the capital levels that would be required if these sectors were nonaffiliated
business units.
Income before taxes for the Corporation's core sectors was $325 million in the
first quarter of 1998, an increase of $41 million, or 15%, compared with the
prior-year quarter. This increase resulted from a $156 million increase in
revenue and a $15 million decrease in credit quality expense, partially offset
by a $130 million increase in operating expense. Return on common shareholders'
equity for the core sectors was 23% in the first quarter of 1998, unchanged from
the first quarter of 1997. Return on assets was 1.87% in the first quarter of
1998, compared with 1.78% in the first quarter of 1997.
6
<PAGE> 8
<TABLE>
<CAPTION>
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Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1998 1997 1998 1997 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C> <C>
$1,043 $ 887 $ 1 $ 8 $ 26 $ 18 $1,070 $ 913
15 30 (1) (3) - (5) 14 22
30 27 - - - - 30 27
9 9 - - 11 11 20 20
664 537 1 1 2 - 667 538
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703 573 1 1 13 11 717 585
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325 284 1 10 13 12 339 306
119 107 - 3 5 5 124 115
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$ 206 $ 177 $ 1 $ 7 $ 8 $ 7 $ 215 $ 191
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$ 231 $ 198 $ 1 $ 7 $ 8 $ 7 $ 240 $ 212
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$ 44.7 $40.3 $ 0.1 $ 0.2 $1.4 $ 1.7 $ 46.2 $42.2
$ 3.6 $ 3.2 $ - $ - $0.3 $ 0.3 $ 3.9 $ 3.5
$ 0.5 $ 0.5 $ - $ - $0.6 $ 0.7 $ 1.1 $ 1.2
23% 23% NM NM NM NM 22% 21%
1.87% 1.78% NM NM NM NM 1.89% 1.83%
31% 32% NM NM NM NM 32% 33%
35% 36% NM NM NM NM 36% 39%
64% 60% NM NM NM NM 62% 59%
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</TABLE>
Consumer Fee Services
Consumer Fee Services includes private asset management services, retail mutual
funds, residential mortgage loan origination and servicing and brokerage
services. Income before taxes for the Consumer Fee Services sector was $45
million in the first quarter of 1998, up $8 million, or 20%, from the prior-year
period. This improvement resulted from higher private asset management fee
revenue, fees generated from Dreyfus Brokerage Services, Inc., higher mortgage
servicing fees and gains on the disposition of assets. This sector provided
strong returns, as the annualized return on common shareholders' equity was 32%
in the first quarter of 1998, unchanged from the first quarter of 1997.
Consumer Banking
Consumer Banking includes consumer lending and deposit products, business
banking, credit card and jumbo residential mortgage lending. Income before taxes
for this sector totaled $110 million in the first quarter of 1998, compared with
$106 million in the first quarter of 1997, an increase of 4%. Revenue decreased
$2 million, compared with the prior-year period, primarily as a result of lower
revenue due to the December 1997 transfer of $231 million of CornerStone(sm)
credit card loans into an accelerated resolution portfolio. Partially offsetting
this revenue decrease was the favorable impacts of the Mellon United National
Bank and Mellon 1st Business Bank acquisitions. Credit quality expense decreased
$17 million primarily resulting from the transfer of the CornerStone(sm) credit
card loans to an accelerated resolution portfolio. Operating expense increased
$11 million, compared with the prior-year period, primarily due to the impact of
the acquisitions. The annualized return on common shareholders' equity for this
sector was 25% in the first quarter of 1998, compared with 28% in the first
quarter of 1997.
7
<PAGE> 9
BUSINESS SECTORS (CONTINUED)
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Business Fee Services
Business Fee Services includes institutional asset and institutional mutual fund
management and administration, institutional trust and custody, securities
lending, foreign exchange, cash management, stock transfer, commercial mortgage
loan origination and servicing, corporate trust, network services, benefits
consulting and administrative services and services for defined contribution
plans. Income before taxes for this sector was $106 million in the first quarter
of 1998, an increase of $32 million, or 43%, compared with the first quarter of
1997. Revenue increased $120 million primarily due to the Buck acquisition,
higher institutional asset management fees, increased institutional trust fees,
higher cash management fees, higher foreign exchange fees as well as higher
mutual fund management and administration fees. Partially offsetting this
increase was a decrease in fee revenue due to the sale of the corporate trust
business in November 1997, and a decrease in fee revenue resulting from the
formation of CIBC Mellon Trust Company, accounted for on an equity basis.
Operating expense increased $88 million due to the Buck acquisition, higher
transaction volumes and technology investments, partially offset by lower
expenses resulting from the sale of the corporate trust business and the
formation of CIBC Mellon Trust Company. This sector provided excellent returns
as annualized return on common shareholders' equity for this sector was 36% in
the first quarter of 1998, compared with 30% in the first quarter of 1997.
Business Banking
Business Banking includes large corporate and middle market lending, asset-based
lending, lease financing, commercial real estate lending, insurance premium
financing, securities underwriting and trading, and international banking.
Income before taxes for the Business Banking sector was $64 million for the
first quarter of 1998, a decrease of $3 million, or 3%, from the first quarter
of 1997. Revenue increased $4 million primarily as a result of higher revenue
from the lease financing businesses. Credit quality expense increased $3
million. Operating expense increased $4 million in support of business growth
and development. The annualized return on common shareholders' equity for this
sector was 12% in the first quarter of 1998, compared with 13% in the first
quarter of 1997.
Real Estate Workout
Real Estate Workout includes commercial real estate recovery and mortgage
banking recovery operations. Income before taxes for Real Estate Workout was $1
million in the first quarter of 1998, compared with $10 million in the first
quarter of 1997, reflecting the lower level of real estate workout assets in
1998.
Other
The Other sector's pretax income for the first quarter of 1998 was $13 million,
compared with $12 million in the first quarter of 1997. Revenue for the first
quarters of 1998 and 1997 primarily reflects earnings on the use of proceeds
from the trust-preferred securities and earnings on capital above that required
for the core sectors. Credit quality revenue for 1997 represents loan loss
recoveries from loans to lesser developed countries.
8
<PAGE> 10
BUSINESS SECTORS (CONTINUED)
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The following tables distribute net income and return on average common
shareholders' equity for the Corporation's core sectors between customers
serviced and services provided.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Customers serviced
-----------------------------------------
Total Total
FOR THE THREE MONTHS ENDED MARCH 31, Consumer Business
(dollar amounts in millions) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net income $98 $90 $108 $87
Return on average common
shareholders' equity (a) 27% 29% 20% 19%
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</TABLE>
(a) Annualized.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Services provided
-----------------------------------------
Total Total
FOR THE THREE MONTHS ENDED MARCH 31, Fee Services Banking Services
(dollar amounts in millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $95 $67 $111 $110
Return on average common
shareholders' equity (a) 35% 30% 18% 20%
- ------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
9
<PAGE> 11
TANGIBLE OPERATING RESULTS
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Except for the merger with Dreyfus, which was accounted for under the "pooling
of interests" method, the Corporation has been required to account for business
combinations under the "purchase" method of accounting. The purchase method
results in the recording of goodwill and other identified intangibles that are
amortized as noncash charges in future years into operating expense. The pooling
of interests method does not result in the recording of goodwill or intangibles.
Since goodwill and intangible amortization expense does not result in a cash
expense, the economic value to shareholders under either accounting method is
essentially the same.
Tangible results for the first quarter of 1998, compared with the first quarter
of 1997, reflect the effect of the acquisitions of Buck Consultants, Inc. (Buck)
in mid-1997, Dreyfus Brokerage Services, Inc. in November 1997, and Mellon
United National Bank and Mellon 1st Business Bank in February 1998. Results,
excluding the impact of intangibles, are shown in the table below.
<TABLE>
<CAPTION>
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Quarter ended
----------------------------------------------
(dollar amounts in millions, except per MARCH 31, Dec. 31, March 31,
share amounts; ratios annualized) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock $ 206 $ 191 $ 182
After-tax impact of amortization of
intangibles from purchase acquisitions 25 21 21
- ----------------------------------------------------------------------------------------------------------
Tangible net income applicable to common stock $ 231 $ 212 $ 203
Tangible earnings per common share - diluted $ .88 $ .83 $ .77
Average common equity $ 3,873 $ 3,573 $ 3,490
Average goodwill and other identified intangibles 1,711 1,378 1,223
- ----------------------------------------------------------------------------------------------------------
Average tangible common equity $ 2,162 $ 2,195 $ 2,267
Return on tangible common equity 43.3% 38.3% 36.3%
Average total assets $46,229 $44,266 $42,187
Average tangible assets $44,518 $42,888 $40,964
Return on tangible assets 2.18% 2.00% 2.09%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 12
NET INTEREST REVENUE
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Net interest revenue, on a fully taxable equivalent basis, for the first quarter
of 1998 totaled $367 million, compared with $373 million in the first quarter of
1997 and $362 million in the fourth quarter of 1997. The net interest margin was
4.06% in the first quarter of 1998, compared with 4.37% in the first quarter of
1997 and 4.07% in the fourth quarter of 1997.
The $6 million decrease in fully taxable equivalent net interest revenue in the
first quarter of 1998, compared with the first quarter of 1997, primarily
resulted from the funding costs related to the repurchase of common stock, the
effect of the December 1997 transfer of $231 million of CornerStone(sm) credit
card loans into an accelerated resolution portfolio and preferred stock
redemptions. Primarily offsetting these factors were the favorable impacts of
the Mellon United National Bank, Mellon 1st Business Bank and Dreyfus Brokerage
Services, Inc. acquisitions, net of funding costs, and loan growth.
Excluding the effect of the acquisitions, average loans in the first quarter of
1998 grew by approximately $1.1 billion, compared with the prior-year period,
primarily in the residential mortgage warehouse portfolio and wholesale lending.
11
<PAGE> 13
NET INTEREST REVENUE (CONTINUED)
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CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Three months ended
---------------------
MARCH 31, 1998
AVERAGE AVERAGE
(dollar amounts in millions) BALANCE YIELDS/RATES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets Interest-earning assets:
Federal funds sold and securities under resale agreements $ 967 5.58%
Interest-bearing deposits with banks 655 5.24
Other money market investments 90 6.46
Trading account securities 242 6.35
Securities:
U.S. Treasury and agency securities (a) 5,071 6.98
Obligations of states and political subdivisions (a) 35 8.71
Other (a) 148 6.92
Loans, net of unearned discount (a) 29,367 7.99
--------
Total interest-earning assets 36,575 7.72
Cash and due from banks 3,220
Premises and equipment 562
Customers' acceptance liability 123
Net acquired property 49
Other assets (a) 6,120
Reserve for credit losses (492)
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Total assets $46,157
- ------------------------------------------------------------------------------------------------------------
Liabilities, Interest-bearing liabilities:
trust-preferred Deposits in domestic offices:
securities and Demand $ 309 2.43%
shareholders' Money market and other savings accounts 10,801 2.91
equity Retail savings certificates 7,596 5.04
Other time deposits 1,702 5.59
Deposits in foreign offices 2,550 4.98
--------
Total interest-bearing deposits 22,958 4.04
Federal funds purchased and securities under repurchase agreements 1,765 5.44
Term federal funds purchased 546 5.80
U.S. Treasury tax and loan demand notes 418 5.35
Short-term bank notes 313 5.76
Commercial paper 200 5.60
Other funds borrowed 351 8.83
Notes and debentures (with original maturities over one year) 2,797 7.01
--------
Total interest-bearing liabilities 29,348 4.54
Total noninterest-bearing deposits 9,767
Acceptances outstanding 123
Other liabilities (a) 2,001
------------------------------------------------------------------------------------------
Total liabilities 41,239
------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991
------------------------------------------------------------------------------------------
Shareholders' equity (a) 3,927
------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $46,157
- ------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.72%
Cost of funds supporting interest-earning assets 3.66
------------------------------------------------------------------------------------------
Net interest margin:
Taxable equivalent basis 4.06%
Without taxable equivalent increments 4.04
------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts and yields exclude adjustments to fair value required by FAS No.
115.
Note: Average rates are annualized and calculated on a taxable equivalent basis,
at tax rates approximating 35%, using
12
<PAGE> 14
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended
- ----------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1997 Sept. 30, 1997 June 30, 1997 March 31, 1997
Average Average Average Average Average Average Average Average
balance yields/rates balance yields/rates balance yields/rates balance yields/rates
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 792 5.05% $ 601 5.59% $ 438 5.28% $ 407 5.34%
468 5.16 496 5.14 547 4.89 562 5.09
137 5.77 134 5.73 96 5.36 63 4.00
159 5.41 171 5.44 210 5.69 161 5.58
5,129 6.71 5,315 6.74 5,470 6.84 5,855 6.72
26 7.78 29 7.63 47 7.68 51 7.93
105 7.80 109 5.92 107 7.45 113 6.36
28,461 8.07 27,583 8.18 27,810 8.27 27,403 8.21
-------- -------- -------- --------
35,277 7.75 34,438 7.84 34,725 7.93 34,615 7.85
3,026 2,875 2,798 2,674
592 601 581 573
253 315 255 260
53 71 72 75
5,510 5,057 4,523 4,513
(495) (512) (517) (526)
- ----------------------------------------------------------------------------------------------------------------------------------
$44,216 $42,845 $42,437 $42,184
- ----------------------------------------------------------------------------------------------------------------------------------
$ 239 2.15% $ 231 2.50% $ 228 1.49% $ 227 1.42%
10,128 2.89 9,840 2.84 10,010 2.87 10,209 2.77
7,514 5.08 7,336 5.06 7,081 4.98 6,723 4.88
1,456 5.78 1,710 5.77 1,767 5.71 2,223 5.41
2,594 4.92 2,425 4.88 2,737 4.90 2,814 4.83
--------- --------- --------- ---------
21,931 4.07 21,542 4.05 21,823 4.02 22,196 3.92
1,522 5.66 1,163 5.58 1,457 5.62 1,417 5.16
631 5.83 570 5.86 724 5.67 471 5.46
401 5.36 467 5.40 596 5.39 408 5.11
231 5.30 199 6.52 69 5.81 76 5.61
70 5.54 58 5.45 67 5.38 82 5.28
556 7.75 435 8.19 378 8.28 318 8.30
2,781 6.94 2,832 6.83 2,716 7.01 2,517 7.10
--------- --------- --------- ---------
28,123 4.58 27,266 4.56 27,830 4.54 27,485 4.38
9,154 8,807 8,290 8,084
253 315 255 260
1,961 1,776 1,470 1,632
- ----------------------------------------------------------------------------------------------------------------------------------
39,491 38,164 37,845 37,461
- ----------------------------------------------------------------------------------------------------------------------------------
990 990 990 990
- ----------------------------------------------------------------------------------------------------------------------------------
3,735 3,691 3,602 3,733
- ----------------------------------------------------------------------------------------------------------------------------------
$44,216 $42,845 $42,437 $42,184
- ----------------------------------------------------------------------------------------------------------------------------------
7.75% 7.84% 7.93% 7.85%
3.68 3.60 3.64 3.48
- ----------------------------------------------------------------------------------------------------------------------------------
4.07% 4.24% 4.29% 4.37%
4.05 4.22 4.27 4.34
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
dollar amounts in thousands and actual number of days in the periods, and are
before the effect of reserve requirements. Loan fees, as well as nonaccrual
loans and their related income effect, have been included in the calculation of
average interest yields/rates.
13
<PAGE> 15
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $15 $73 $25
Net revenue from acquired property (1) (12) (3)
- --------------------------------------------------------------------------------------------
Credit quality expense $14 $61 $22
- --------------------------------------------------------------------------------------------
</TABLE>
Credit quality expense, defined as the provision for credit losses less the net
revenue from acquired property, decreased $8 million in the first quarter of
1998, compared with the first quarter of 1997, as a result of a $10 million
decrease in provision for credit losses, partially offset by a $2 million
decrease in net revenue from acquired property. The decrease in the provision
for credit losses primarily resulted from lower credit card net credit losses
following the December 1997 transfer of $231 million of CornerStone(sm) credit
card loans into an accelerated resolution portfolio.
Credit quality expense in the first quarter of 1998 decreased $47 million,
compared with the fourth quarter of 1997, as a result of a $58 million decrease
in the provision for credit losses, partially offset by an $11 million decrease
in net gains on the sale of OREO properties. The higher provision for credit
losses in the fourth quarter of 1997 was primarily made in response to the $65
million of credit losses recorded upon the transfer of CornerStone(sm) credit
card loans to an accelerated resolution portfolio.
A summary of the Corporation's net credit losses is presented on the following
page. The $14 million decrease in net credit losses, compared with the first
quarter of 1997, primarily resulted from a $22 million decrease in credit card
net credit losses, partially offset by lower international loan recoveries. Net
credit losses decreased by $88 million, compared with the fourth quarter of
1997, primarily due to the decrease in credit card net credit losses as well as
lower commercial real estate net credit losses. The net carrying value of the
accelerated resolution portfolio at March 31, 1998, was $130 million, compared
with $157 million at December 31, 1997. The Corporation expects a significant
reduction in credit card net credit losses throughout 1998 as a result of the
actions taken on the CornerStone(sm) portfolio in December 1997.
The Corporation maintains a credit loss reserve that, in management's judgment,
is adequate to absorb future losses inherent in the loan portfolio. Management
establishes the credit loss reserve using a documented loan loss assessment
process that estimates loss potential in the portfolio as a whole. For further
information regarding the methodology used in determining the adequacy of the
reserve, see the "Reserve for credit losses and review of net credit losses"
discussion in the Corporation's 1997 Annual Report to Shareholders. The reserve
for credit losses totaled $496 million at March 31, 1998, compared with $475
million at December 31, 1997, and $518 million at March 31, 1997. The $21
million increase in the reserve for credit losses from December 31, 1997,
resulted from the addition of $24 million of reserves acquired in the Mellon
United National Bank and Mellon 1st Business Bank acquisitions.
The ratio of the loan loss reserve to nonperforming loans at March 31, 1998, was
349%, compared with 356% at year-end 1997 and 543% at March 31, 1997. This ratio
can vary significantly over time as the credit quality characteristics of the
loan portfolio change. This ratio also can vary with shifts in portfolio mix.
The decrease in this ratio from March 31, 1997, primarily resulted from an
increase in the level of nonperforming loans.
14
<PAGE> 16
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY Quarter ended
----------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve at beginning of period $475 $505 $525
Net change in reserve primarily from acquisitions 24 3 -
Credit losses:
Domestic:
Commercial and financial (3) (3) (9)
Commercial real estate (5) (22) (1)
Consumer credit:
Credit cards (10) (21) (a) (33)
Other consumer credit (5) (5) (6)
Lease finance assets (2) (3) -
- ------------------------------------------------------------------------------------------------------------------
Total domestic credit losses (25) (54) (49)
- -------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial 3 3 4
Commercial real estate 1 7 3
Consumer credit:
Credit cards 1 1 2
Other consumer credit 2 1 3
Lease finance assets - 1 -
- ------------------------------------------------------------------------------------------------------------------
Total domestic 7 13 12
International - - 5
- ------------------------------------------------------------------------------------------------------------------
Total recoveries 7 13 17
- ------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Domestic:
Commercial and financial - - (5)
Commercial real estate (4) (15) 2
Consumer credit:
Credit cards (9) (20) (31)
Other consumer credit (3) (4) (3)
Lease finance assets (2) (2) -
- ------------------------------------------------------------------------------------------------------------------
Total domestic (18) (41) (37)
International - - 5
- ------------------------------------------------------------------------------------------------------------------
Net credit losses (18) (41) (32)
Credit losses on credit card assets held for accelerated resolution - (65) -
- ------------------------------------------------------------------------------------------------------------------
Total net credit losses (18) (106) (32)
Provision for credit losses 15 73 25
- ------------------------------------------------------------------------------------------------------------------
Reserve at end of period $496 $475 $518
- ------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.63% 1.63% 1.88%
- ------------------------------------------------------------------------------------------------------------------
Annualized net credit losses
to average loans .24% 1.48% (b) .48%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes $65 million of credit losses related to loans transferred to an
accelerated resolution portfolio.
(b) The ratio of net credit losses, excluding credit losses on assets held for
accelerated resolution, to average loans was .56%.
15
<PAGE> 17
NONINTEREST REVENUE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fee revenue:
Trust and investment revenue:
Investment management:
Mutual fund $ 100 $ 100 $ 87
Private asset 52 51 42
Institutional asset 50 48 37
- ------------------------------------------------------------------------------------------------------
Total investment management revenue 202 199 166
Administration/custody/consulting:
Mutual fund 33 36 30
Private asset 4 4 4
Institutional trust 92 94 66
Benefits consulting 55 54 -
- ------------------------------------------------------------------------------------------------------
Total administration/custody/consulting
revenue 184 188 100
- ------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 386 387 266
Cash management and deposit transaction charges 61 65 56
Mortgage servicing fees 55 56 51
Foreign currency and securities trading revenue 41 36 25
Credit card fees 24 24 24
Gain on sale of corporate trust business - 43 -
Other 131 96 114
- ------------------------------------------------------------------------------------------------------
Total fee revenue 698 707 536
Gains on sale of securities - - -
- ------------------------------------------------------------------------------------------------------
Total noninterest revenue $698 $707 $536
- ------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of total revenue (FTE) 66% 66% 59%
Trust and investment fee revenue
as a percentage of total revenue (FTE) 36% 36% 29%
- ------------------------------------------------------------------------------------------------------
</TABLE>
Fee revenue increased $162 million, or 30%, in the first quarter of 1998,
compared with the prior-year period. Excluding $78 million of revenue resulting
from the mid-1997 Buck acquisition, fee revenue increased $84 million, or 16%,
compared with the prior-year period.
Total trust and investment fee revenue
The $120 million, or 45%, increase in trust and investment fee revenue in the
first quarter of 1998, compared with the prior-year period, reflects $55 million
of benefits consulting fees and $23 million of institutional trust fees from
Buck. Excluding the Buck fees, trust and investment fees increased $42 million,
or 16%, compared with the first quarter of 1997.
The $36 million increase in investment management revenue resulted from a $13
million, or 15%, increase in mutual fund management revenue, a $10 million, or
22%, increase in private asset management revenue and a $13 million, or 35%,
increase in institutional asset management revenue. These increases resulted
from an increase in the market value of assets under management and new
business. Mutual fund management fees are discussed further on the following
page.
16
<PAGE> 18
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
As shown in the table below, the market value of trust assets under management
was $328 billion at March 31, 1998, a $23 billion increase from $305 billion at
December 31, 1997. This increase resulted from a general market increase and net
new business. At March 31, 1998, compared to December 31, 1997, the S&P 500
index increased 13.5% while the Lehman Brothers Long-Term Government Bond Index
increased 1.5%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT - DREYFUS (a)
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in billions) 1998 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mutual funds managed-proprietary:
Taxable money market funds:
Institutions $ 34 $ 33 $ 32 $ 30 $ 27
Individuals 9 9 9 9 10
Equity funds 26 22 22 19 16
Tax-exempt bond funds 16 17 17 17 16
Tax-exempt money market funds 8 7 7 7 8
Fixed-income funds 5 5 5 4 4
- ----------------------------------------------------------------------------------------------------------------------------------
Total proprietary mutual funds managed 98 93 92 86 81
Mutual funds managed-nonproprietary 15 11 10 8 7
- ----------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund assets 113 104 102 94 88
Institutional asset (b) 175 165 163 159 143
Private asset 40 36 34 33 28
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $328 $305 $299 $286 $259
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) "Dreyfus," as defined for purposes of this table, consists of five business
units: Dreyfus Funds, the retail mutual funds area of the Corporation which
includes The Dreyfus Corporation and Founders Asset Management, LLC (as of
April 1, 1998); Dreyfus Brokerage, which includes Dreyfus Investment
Services Corporation and Dreyfus Brokerage Services (formerly Pacific
Brokerage); Dreyfus Retirement Services, the defined contribution business
of the Corporation; Dreyfus Institutional Investors, the investment
management business of the Corporation which includes The Boston Company
Asset Management, Mellon Capital Management, Mellon Equity Associates,
Mellon Bond Associates, Certus Asset Advisors, Franklin Portfolio
Associates, and Pareto Partners; and Mellon Private Asset Management, the
high net worth personal trust and custody business of the Corporation.
(b) Includes assets managed at Pareto Partners of $24 billion at March 31,
1998, $21 billion at December 31, 1997, $21 billion at September 30, 1997,
$23 billion at June 30, 1997, and $21 billion at March 31, 1997. Since
mid-year 1996, the Corporation has had a 30% equity interest in Pareto
Partners.
At March 31, 1998, the combined market values of $15 billion of nonproprietary
mutual funds and $175 billion of institutional assets managed, by asset type,
were as follows: equities, $80 billion; balanced, $25 billion; fixed income, $55
billion; money market, $6 billion; and $24 billion at Pareto Partners, primarily
in currency overlay and global fixed income products, for a total of $190
billion.
Mutual fund management fees
Mutual fund management fees are based upon the average net assets of each fund.
Average net assets of proprietary mutual funds managed by Dreyfus in the first
quarter of 1998 were $97 billion, up $4 billion from $93 billion in the fourth
quarter of 1997 and up $12 billion from $85 billion in the first quarter of
1997. The increase from the prior-year period primarily resulted from a $7
billion increase in average net assets of equity
17
<PAGE> 19
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
funds which averaged $23 billion for the first quarter of 1998 and had a
period-end total of $26 billion at March 31, 1998, as well as a $5 billion
increase in average net assets of institutional taxable money market funds. With
the acquisition of Founders Asset Management, LLC., on April 1, 1998,
proprietary equity mutual funds now total more than $31 billion.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MANAGED MUTUAL FUND FEE REVENUE Quarter ended
--------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed mutual fund fees $111 $110 $98
Less: Fees waived and fund expense reimbursements 11 10 11
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $100 $100 $87
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees by fund category:
Proprietary funds:
Taxable money market funds:
Institutions $ 18 $ 19 $15
Individuals 8 8 9
Equity funds 33 31 24
Tax-exempt bond funds 24 24 24
Tax-exempt money market funds 7 7 7
Fixed-income funds 7 7 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total proprietary fund fees 97 96 84
Nonproprietary fund management fees 3 4 3
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $100 $100 $87
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Administration/custody/consulting fee revenue increased $84 million in the first
quarter of 1998, compared with the first quarter of 1997, and included $55
million of benefits consulting fees and $23 million of institutional trust fees
resulting from the Buck acquisition. Institutional trust fees increased $6
million, or 10%, compared with the prior-year period, excluding the Buck fees
from the first quarter of 1998 and excluding the fees from the corporate trust
business from the first quarter of 1997. The corporate trust business was sold
in November 1997. Mutual fund administration/custody revenue increased $3
million, or 10%, in the first quarter of 1998, compared with the prior-year
period. These increases resulted primarily from new business and higher
transaction volumes.
The market value of assets under administration/custody, shown in the table on
the following page, was $1,666 billion at March 31, 1998, an increase of $134
billion compared with $1,532 billion at December 31, 1997. This increase
resulted from a general market increase and new business.
18
<PAGE> 20
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in billions) 1998 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust $1,564 (a) $1,440 (a) $1,396 (a) $1,213 (a) $ 976
Mutual fund 67 60 60 63 58
Private asset 35 32 32 30 27
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $1,666 $1,532 $1,488 $1,306 $1,061
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $317 billion of assets at March 31, 1998, $246 billion at December
31, 1997 and September 30, 1997, and $150 billion of assets at June 30,
1997, administered by CIBC Mellon Global Securities Services, a 50% owned
joint venture.
Cash management and deposit transaction charges
The $5 million, or 8%, increase in cash management and deposit transaction
charges in the first quarter of 1998, compared with the prior-year period,
primarily resulted from higher volumes of business in customer receivables,
payables and treasury management products.
Mortgage servicing fees
The $4 million, or 8%, increase in mortgage servicing fees in the first quarter
of 1998, compared with the prior-year period, resulted from a higher level of
mortgage servicing rights. At March 31, 1998, the Corporation's total servicing
portfolio was $85 billion, composed of $68 billion of residential and $17
billion of commercial servicing. At March 31, 1997, the total servicing
portfolio was $74 billion, composed of $64 billion of residential and $10
billion of commercial servicing.
Foreign currency and securities trading revenue
The $16 million, or 68%, increase in foreign currency and securities trading
revenue in the first quarter of 1998, compared with the prior-year period, was
attributable to higher foreign exchange fees earned as a result of higher levels
of customer activity, primarily in the Corporation's global custody business,
and market volatility.
Other fee revenue
Other fee revenue was $131 million in the first quarter of 1998, an increase of
$17 million compared with the first quarter of 1997. This increase resulted, in
part, from fees generated by Dreyfus Brokerage Services, Inc., as well as higher
gains from the sale of equity securities and other assets and the realization of
lease residuals.
First quarter 1998 compared with fourth quarter 1997
Excluding the $43 million gain on the sale of the corporate trust business in
November 1997, fee revenue increased $34 million in the first quarter of 1998,
compared with the fourth quarter of 1997. This increase primarily resulted from
the seasonal fees from the electronic filing of income tax returns in the first
quarter of 1998 totaling $23 million, as well as higher gains on the sale of
assets and equity securities, partially offset by lower syndication fees. Fees
from the electronic filing of income tax returns are expected to be materially
lower in 1999, as a contract with a major income tax return preparer expires at
the end of 1998. This service generated
19
<PAGE> 21
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
$26 million of the fee revenue in 1997. Fee revenue in the first quarter of 1998
compared with the fourth quarter of 1997 was also impacted by two fewer days in
the first quarter of 1998 compared with the prior quarter. Many of the
Corporation's fee based businesses earn and record revenue on a daily basis and
therefore reported results are impacted by the number of days in the reporting
periods.
OPERATING EXPENSE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Staff expense $357 $354 $268
Net occupancy expense 56 64 52
Professional, legal and other purchased services 61 72 46
Business development 36 37 37
Equipment expense 39 65 36
Amortization of mortgage servicing assets
and purchased credit card relationships 45 33 28
Amortization of goodwill and other intangible assets 30 26 27
Communications expense 26 26 26
Other expense 47 45 45
- --------------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-preferred securities
expense and net revenue from acquired property 697 722 565
Trust-preferred securities expense 20 19 20
Net revenue from acquired property (1) (12) (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expense $716 $729 $582
- --------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 27,900 27,500 25,200
- --------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 65% 67% 62%
Efficiency ratio excluding amortization of goodwill
and other intangible assets 62% 65% 59%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before trust-preferred securities expense and net revenue
from acquired property, as a percentage of revenue, computed on a taxable
equivalent basis, excluding gains on the sale of securities.
Operating expense before trust-preferred securities expense and net revenue from
acquired property increased $132 million, or 23%, in the first quarter of 1998
compared with the prior-year period, primarily resulting from the Buck, Dreyfus
Brokerage Services, Inc., Mellon United National Bank and Mellon 1st Business
Bank acquisitions, higher amortization of mortgage servicing assets and business
growth. Excluding the effect of acquisitions and the increase in the
amortization of mortgage servicing assets and purchased credit card
relationships, operating expense before trust-preferred securities expense and
net revenue from acquired property increased approximately 4%.
Staff expense increased $89 million compared with the first quarter of 1997,
primarily from the above acquisitions as well as an increase in
performance-based incentive expense and higher expense of temporary help and
contract programmers.
Net occupancy expense increased $4 million compared with the first quarter of
1997, primarily from the impact of the acquisitions. Professional, legal and
other purchased services increased $15 million compared with the first quarter
of 1997. This increase primarily resulted from an increase in consulting
expenses related to business growth and reengineering initiatives and from the
acquisitions.
20
<PAGE> 22
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
The amortization of mortgage servicing assets and purchased credit card
relationships increased $17 million compared with the first quarter of 1997,
primarily resulting from an acceleration of amortization due to a higher level
of mortgage prepayments, and a higher level of mortgage servicing rights (MSRs).
Declines in interest rates can result in prepayments of the mortgage loans
underlying MSRs, which can decrease future net servicing revenue. Decreases in
expected future net servicing revenue can result in accelerated amortization and
potential impairment of MSRs. The Corporation has entered into various
off-balance-sheet instruments to manage the prepayment risk associated with its
mortgage servicing portfolio. See pages 34 and 35 for a further discussion of
the instruments.
First quarter 1998 compared with fourth quarter 1997
Operating expense before trust-preferred securities expense and net revenue from
acquired property decreased $25 million in the first quarter of 1998, compared
with the fourth quarter of 1997. This decrease primarily resulted from the
one-time expense of upgrading computer hardware, write-downs related to the
consolidation of branch and processing locations and higher consulting expenses
in the fourth quarter of 1997, offset, in part, by an increase in the first
quarter of 1998 in the amortization of mortgage servicing assets and the effect
of acquisitions.
Year 2000 Project
In early 1996, the Corporation formed a Year 2000 project team to identify
software systems and computer-related devices that require modification for the
year 2000. A project plan has been developed with goals and target dates. The
Corporation's business areas are in various stages of this project plan. The
Corporation currently expects to complete programming changes and testing of
internal mission critical computer systems by December 31, 1998.
The Corporation incurred expenses throughout 1996 and 1997 and in the first
quarter of 1998 related to this project and will continue to incur expenses over
the next 21 months. The Corporation currently estimates that the costs related
to systems reprogramming and testing of the mainframe systems will be
approximately $55 to $70 million and that system costs related to distributed
processing will be approximately $15 to $25 million. Approximately 15% of these
costs were incurred in 1996 and 1997 with approximately 50% expected to be
incurred in 1998 and 35% in 1999. A significant portion of total year 2000
project expenses is represented by existing staff that has been redeployed to
this project. Incremental expenses are not expected to materially impact
operating results in any one period.
The Corporation could be negatively affected by the year 2000 date change to the
extent that third parties have not successfully addressed the year 2000 issues.
However, the Corporation has taken actions to reduce this exposure. Third
parties have been identified and contacted to determine their year 2000 plans
and target dates. This process is ongoing. The Corporation will monitor the
progress of mission critical third parties and will implement contingency plans
in the event that such third parties fail to achieve their plans. There can be
no assurance that any contingency plans will fully mitigate the effects of any
such failure.
The Year 2000 project costs referenced above and the date set forth above by
which the Corporation expects to complete programming changes and testing of
internal mission critical computer systems are based on management's best
current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third party service providers and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and convert all relevant computer codes, performance by third parties,
unanticipated systems costs, the need to replace hardware and similar
uncertainties.
21
<PAGE> 23
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes totaled $117 million in the first quarter of
1998, compared with $108 million in the first quarter of 1997. The Corporation's
effective tax rate for the first quarter of 1998 was 35.3%, compared with 36.3%
for the first quarter of 1997. It is currently anticipated that the effective
tax rate will remain at approximately 35.3% for the remainder of 1998.
ASSET/LIABILITY MANAGEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended
---------------------------------------------
MARCH 31, Dec. 31, March 31,
(average balances in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,712 $ 1,397 $ 1,032
Trading account securities 242 159 161
Securities 5,301 5,293 6,018
Loans 29,389 28,476 27,404
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 36,644 35,325 34,615
Noninterest-earning assets 10,077 9,436 8,098
Reserve for credit losses (492) (495) (526)
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $46,229 $44,266 $42,187
- --------------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $37,299 $35,729 $33,758
Wholesale and purchased funds 8,930 8,537 8,429
- --------------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $46,229 $44,266 $42,187
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in the Corporation's average interest-earning assets in the first
quarter of 1998, compared with the first quarter of 1997, reflects a $1,985
million increase in average loans and a $680 million increase in average money
market investments, partially offset by a $717 million decrease in average
securities. Excluding the effect of acquisitions, average loans in the first
quarter of 1998 grew by approximately $1.1 billion, compared with the prior-year
period, primarily in the residential mortgage warehouse portfolio and wholesale
lending. The decrease in average securities reflects a change in the mix of
securities, reducing the need to hold short-term agency securities for pledging
purposes.
Core funds, which are considered to be the most stable sources of funding, are
defined principally as money market and other savings deposits, savings
certificates, demand deposits, shareholders' equity, notes and debentures with
original maturities over one year, and trust-preferred securities. Core funds
primarily support core assets, which consist of loans, net of the reserve and
noninterest-earning assets. Average core assets increased $3,998 million in the
first quarter of 1998 from the prior-year period, reflecting higher loan levels
and a higher level of noninterest-earning assets. The increase in
noninterest-earning assets includes a higher level of goodwill resulting from
the Mellon United National Bank, Buck, Dreyfus Brokerage Services, Inc., and
Mellon 1st Business Bank acquisitions and a higher level of cash and due from
banks, receivables, and mortgage servicing assets. Average core funds increased
$3,541 million in the first quarter of 1998 from the prior-year period,
primarily reflecting higher levels of deposits due, in part, to the
acquisitions. Core funds averaged 96% of core assets in the first quarter of
1998, compared with 95% in the fourth quarter of 1997 and 97% in the first
quarter of 1997.
Wholesale and purchased funds are defined as deposits in foreign offices,
negotiable certificates of deposit, federal funds purchased and securities under
repurchase agreements, U.S. Treasury tax and loan demand notes, other time
22
<PAGE> 24
ASSET/LIABILITY MANAGEMENT (CONTINUED)
- --------------------------------------------------------------------------------
deposits, short-term bank notes, commercial paper and other funds borrowed.
Average wholesale and purchased funds increased $501 million compared with the
prior-year period, primarily reflecting an increase in federal funds purchased
and securities under repurchase agreements, and short-term bank notes. As a
percentage of total average assets, average wholesale and purchased funds was
19% in the first quarter of 1998 and the fourth quarter of 1997, compared with
20% in the first quarter of 1997.
COMPOSITION OF LOAN PORTFOLIO
- --------------------------------------------------------------------------------
The loan portfolio increased $2,818 million at March 31, 1998, compared with
March 31, 1997, reflecting the Mellon 1st Business Bank and Mellon United
National Bank acquisitions as well as increases in consumer mortgages, other
consumer credit, wholesale lending and business banking. Partially offsetting
these increases was a lower level of credit card loans due, in part, to the
transfer of an additional $231 million of CornerStone(sm) credit card loans to
an accelerated resolution portfolio in the fourth quarter of 1997. At March 31,
1998, the composition of the loan portfolio was 57% commercial and 43% consumer.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions) 1998 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $11,158 $10,826 $10,259 $10,796 $10,518
Commercial real estate 1,999 1,509 1,599 1,671 1,598
Consumer credit:
Consumer mortgage 8,689 8,505 8,318 7,870 7,672
Credit card 862 931 1,104 1,161 1,197
Other consumer credit 3,396 3,166 2,785 2,590 2,756
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 12,947 12,602 12,207 11,621 11,625
Lease finance assets 2,578 2,639 2,502 2,512 2,477
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 28,682 27,576 26,567 26,600 26,218
INTERNATIONAL LOANS 1,661 1,566 1,712 1,544 1,307
- --------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $30,343 $29,142 $28,279 $28,144 $27,525
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial and financial
The domestic commercial and financial loan portfolio primarily consists of loans
to corporate borrowers in the manufacturing, service, energy, communications,
wholesale and retail trade, public utilities and financial services industries.
Total domestic commercial and financial loans increased by $640 million, or 6%,
at March 31, 1998, compared to March 31, 1997, primarily as a result of an
increase in business banking as well as the Mellon 1st Business Bank and Mellon
United National Bank acquisitions and wholesale lending. Commercial and
financial loans represented 37% of the total loan portfolio at March 31, 1998,
and 38% at March 31, 1997. Nonperforming domestic commercial and financial loans
were .17% of total domestic commercial and financial loans at March 31, 1998 and
March 31, 1997. This ratio has been less than 1% for 20 consecutive quarters.
Commercial real estate
The Corporation's $1,999 million domestic commercial real estate loan portfolio
consists of $1,278 million of commercial mortgages, which generally are secured
by nonresidential and multifamily residential properties and commercial
construction loans generally with maturities of 60 months or less. Also included
in this portfolio are $721 million of owner-occupied and other loans.
Owner-occupied and other loans are loans that are secured by real estate,
however, the commercial property is not being relied upon as the primary source
of repayment.
23
<PAGE> 25
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
Domestic commercial real estate loans increased by $401 million, or 25%, at
March 31, 1998, compared with March 31, 1997. The increase resulted from the
Mellon United National Bank and Mellon 1st Business Bank acquisitions, partially
offset by net paydowns. Domestic commercial real estate loans were 7% of total
loans at March 31, 1998, up from 6% a year earlier. Nonperforming commercial
real estate loans were 2.67% of total domestic commercial real estate loans at
March 31, 1998, compared with .87% at March 31, 1997. This increase was
primarily due to the addition of one loan to nonperforming status in the fourth
quarter of 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS Percent of
March 31, total loans
(in millions) 1998 outstanding
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial mortgage and construction loans $1,278 4%
Owner-occupied and other loans 721 3
- ------------------------------------------------------------------------------------------------
Total $1,999 7%
- ------------------------------------------------------------------------------------------------
</TABLE>
Consumer mortgage
The consumer mortgage portfolio includes jumbo residential mortgages,
traditional one- to four-family residential mortgages, fixed-term home equity
loans and home equity revolving credit line loans. At March 31, 1998, this
portfolio totaled $8,689 million, a $1,017 million, or 13%, increase from March
31, 1997. This increase resulted from an increase in the one- to four-family
residential mortgage warehouse portfolio.
Jumbo mortgages are variable rate residential mortgages that range from $250,000
to $3 million. These loans totaled $3.6 billion at March 31, 1998, virtually
unchanged from March 31, 1997, as new loan originations were offset by paydowns
and sales.
Loans secured by one- to four-family residential mortgages increased
approximately $940 million to $2.7 billion at March 31, 1998. This increase
primarily resulted from an increase in the loans held in the residential
warehouse portfolio. Fixed-term home equity loans were $1.7 billion at March 31,
1998, virtually unchanged from March 31, 1997. Home equity revolving credit line
loans were $.7 billion at March 31, 1998, compared with $.6 billion at March 31,
1997. Nonperforming consumer mortgages were .65% and .68% of total consumer
mortgages at March 31, 1998, and March 31, 1997, respectively.
Credit card
At March 31, 1998, credit card loans totaled $862 million, a $335 million, or
28%, decrease from March 31, 1997. Credit card loans represented 3% of total
loans at March 31, 1998, compared with 4% a year earlier. This decrease
primarily resulted from the transfer of $231 million of CornerStone(sm) credit
card loans to an accelerated resolution portfolio in the fourth quarter of 1997
and from credit losses. Credit card loans are charged off after becoming 180
days delinquent and as such are not placed on nonperforming status prior to
charge-off. The ratio of credit card loans 90 days or more past due to total
credit card loans was .88% at March 31, 1998, compared with .84% at December 31,
1997, and 2.25% at March 31, 1997. The past-due ratios at March 31, 1998, and
December 31, 1997, reflect the transfer of CornerStone(sm) loans to an
accelerated resolution portfolio. The CornerStone(sm) credit card portfolio was
31% of total credit cards at March 31, 1998, compared with 48% at March 31,
1997. The CornerStone(sm) credit card product has historically experienced a
higher past-due ratio and a higher level of credit losses than the Corporation's
other credit card loans.
24
<PAGE> 26
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
Other consumer credit
Other consumer credit, which principally consists of student loans, installment
loans, unsecured personal credit lines and margin loans, was $3,396 million at
March 31, 1998, an increase of $640 million, or 23%, from March 31, 1997. The
increase was primarily due to a higher level of margin loans following the
November 1997 acquisition of Dreyfus Brokerage Services, Inc., as well as a
higher level of automobile loans related to the February 1998 acquisition of
Mellon 1st Business Bank. Other consumer credit loans are both secured and
unsecured and, in the case of student loans, are government guaranteed. Student
loans comprised approximately 51% of this portfolio at March 31, 1998.
Lease finance assets
Lease finance assets totaled $2,578 million at March 31, 1998, an increase of
$101 million, or 4%, compared with March 31, 1997. Lease finance assets
represented 8% of the total loan portfolio at March 31, 1998, compared with 9%
at March 31, 1997. Nonperforming leases were .40% of total leases at March 31,
1998, compared with .27% at March 31, 1997.
International loans
Loans to international borrowers totaled $1,661 million at March 31, 1998, up
27% from $1,307 million at March 31, 1997, primarily due to increased activity
with large corporate customers and foreign banks. There were no nonperforming
international loans at March 31, 1998.
Assets held for accelerated resolution
In December 1997, the Corporation transferred $231 million of CornerStone(sm)
credit card loans into an accelerated resolution portfolio. In connection with
this transfer, the Corporation evaluated the carrying value of these loans and
recorded a credit loss of $65 million to reflect an estimated net realizable
value of $166 million. Interest and principal receipts, fees and loan loss
recoveries on loans in this portfolio are applied to reduce the carrying value
of the portfolio. The net carrying value of the accelerated resolution portfolio
was $130 million at March 31, 1998, compared with $157 million at December 31,
1997. This portfolio is in other assets on the Corporation's balance sheet.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT
CREDIT RISK
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commitments to extend credit $32,064 (a) $30,964 $27,628
Standby letters of credit and foreign guarantees 3,962 (b) 3,897 3,793
Commercial letters of credit 180 105 70
Residential mortgage loans serviced with recourse 104 112 116
Custodian securities lent with indemnification
against broker default of return of securities 27,397 29,830 26,380
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Approximately 29% of these commitments are scheduled to expire within one
year, and approximately 85% are scheduled to expire within five years.
(b) Net of participations and cash collateral totaling $315 million.
25
<PAGE> 27
CAPITAL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA
(dollar amounts in millions, MARCH 31, Dec. 31, March 31,
except per share amounts) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shareholders' equity $ 4,086 $ 3,652 $ 3,503
Common shareholders' equity to assets ratio 8.62% 8.13% 8.33%
Tangible common shareholders' equity $ 2,168 $ 2,227 $ 2,289
Tangible common shareholders' equity to assets ratio (a) 4.76% 5.12% 5.60%
Total shareholders' equity $ 4,086 $ 3,845 $ 3,696
Total shareholders' equity to assets ratio 8.62% 8.56% 8.79%
Tier I capital ratio 6.80 7.77 8.74
Total (Tier I plus Tier II) capital ratio 11.28 12.73 13.65
Leverage capital ratio 7.04 8.02 8.75
Book value per common share $ 15.70 $ 14.39 $ 13.60
Tangible book value per common share $ 8.33 $ 8.77 $ 8.88
Closing common stock price $ 63.50 $ 60.63 $ 36.38
Market capitalization $ 16,523 $ 15,386 $ 9,372
Common shares outstanding (000) 260,210 253,786 257,662
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Common shareholders' equity less goodwill and other intangibles recorded in
connection with purchase acquisitions divided by total assets less goodwill
and other intangibles recorded in connection with purchase acquisitions.
The increase in shareholders' equity at March 31, 1998, compared with March 31,
1997, primarily reflects earnings retention. The increase in shareholders'
equity at March 31, 1998, compared with December 31, 1997, also reflects the
common shares issued in the Mellon United National Bank acquisition. During the
first quarter of 1998, the Corporation issued approximately 5 million shares of
common stock in connection with the Mellon United National Bank acquisition.
These shares were repurchased in 1997. There were no common stock repurchases in
the first quarter of 1998.
Also impacting total shareholders' equity was the February 1998 redemption of
the $200 million Series K preferred stock. The quarter's net income applicable
to common stock included an additional $7 million charge, or $.03 per share, for
the issue costs recorded as preferred stock dividends in connection with the
redemption of the Series K preferred stock.
The Corporation's average level of common stock and stock equivalents used for
the computation of diluted earnings per common share in the first quarter of
1998 was approximately 263 million shares, virtually unchanged compared with the
first quarter of 1997.
26
<PAGE> 28
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
FIRST QUARTER Full Year
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning shares outstanding 253.8 257.3
Shares issued for stock-based benefit plans and dividend reinvestment plan 1.3 5.1
Shares issued for Mellon United National Bank acquisition 5.1 -
Shares issued for Buck acquisition - 3.5
Shares repurchased - (12.1) (a)
- --------------------------------------------------------------------------------------------------------------
Ending shares outstanding 260.2 253.8
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of $534 million for an average share price of $44.01 per
share.
On April 21, 1998, the Corporation's shareholders approved an amendment to the
Corporation's Restated Articles of Incorporation to increase the authorized
number of shares of common stock from 400 million to 800 million.
Regulatory capital
Tier I and Total capital are expressed as a percentage of risk-adjusted assets,
which include various credit risk-weighted percentages of on-balance-sheet
assets, as well as off-balance-sheet exposures. The Leverage capital ratio
evaluates capital adequacy on the basis of the ratio of Tier I capital to
quarterly average total assets as reported on the Corporation's regulatory
financial statements, net of the loan loss reserve, goodwill and certain other
intangibles. For an institution to qualify as well-capitalized, its Tier I,
Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively.
All of the Corporation's banking subsidiaries qualified as well-capitalized at
March 31, 1998. The Corporation intends to maintain the ratios of its banking
subsidiaries above the well-capitalized levels. By maintaining ratios above the
regulatory well-capitalized guidelines, the Corporation's banking subsidiaries
receive the benefit of lower FDIC deposit insurance assessments.
Effective January 1, 1998, the regulatory agencies began to incorporate market
risk into the risk-based capital guidelines. Any bank or bank holding company
whose trading activity is the lesser of: (1) 10% or more of its total assets, or
(2) $1 billion or greater, must measure its exposure to market risk using its
own internal value-at-risk model and hold capital in support of that exposure.
This requirement had minimal impact on the Corporation's risk-based capital
ratios.
27
<PAGE> 29
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier I capital:
Common shareholders' equity (a) $4,045 $ 3,619 $3,541
Qualifying preferred stock - 193 193
Trust-preferred securities (b) 991 991 988
Other items 5 4 (9)
Goodwill and certain other intangibles (1,913) (1,366) (1,132)
- --------------------------------------------------------------------------------------------------
Total Tier I capital 3,128 3,441 3,581
Tier II capital 2,061 2,197 2,013
- --------------------------------------------------------------------------------------------------
Total qualifying capital $5,189 $5,638 $5,594
- --------------------------------------------------------------------------------------------------
Risk-adjusted assets:
On-balance-sheet $31,572 $29,772 $27,666
Off-balance-sheet 14,428 14,515 13,325
- --------------------------------------------------------------------------------------------------
Total risk-adjusted assets $46,000 $44,287 $40,991
Average assets-leverage capital basis $44,404 $42,926 $40,944
Tier I capital ratio (c) 6.80% 7.77% 8.74%
Total capital ratio (c) 11.28 12.73 13.65
Leverage capital ratio (c) 7.04 8.02 8.75
- --------------------------------------------------------------------------------------------------
</TABLE>
(a) In accordance with regulatory guidelines, $41 million of unrealized gains,
$33 million of unrealized gains and $38 million of unrealized losses, net
of tax, on assets classified as available for sale at March 31, 1998,
December 31, 1997 and March 31, 1997, respectively, have been excluded.
(b) The amount of trust-preferred securities that qualifies as Tier I capital
is subject to the same regulatory limit of 25% of total Tier I capital that
is applied to cumulative perpetual preferred stocks.
(c) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3%, respectively.
The decrease in the Corporation's regulatory capital ratios, compared with
December 31, 1997 and March 31, 1997, reflects a higher level of risk-adjusted
assets, and goodwill and other intangibles resulting from acquisitions as well
as the effect of the preferred stock redemption.
When computing Tier I capital, the Corporation deducts all goodwill and certain
other identified intangibles acquired subsequent to February 19, 1992, except
mortgage servicing assets and purchased credit card relationships.
Goodwill and other intangibles
- ------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- ------------------------------------------------------------------------
Goodwill $1,805 $1,341 $1,097
- ------------------------------------------------------------------------
28
<PAGE> 30
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
The $708 million increase in goodwill at March 31, 1998, compared with March 31,
1997, resulted from an approximately $790 million increase related to the Mellon
United National Bank, Mellon 1st Business Bank, Buck and Dreyfus Brokerage
Services, Inc. acquisitions, partially offset by amortization. Including the
goodwill from the Founders Asset Management, LLC. acquisition discussed below,
the amortization of goodwill for the remaining nine months of 1998 will be
approximately $82 million. Based upon the current level and amortization
schedule and including the Founders Asset Management, LLC. acquisition, the
annual amortization of goodwill for the years 1999 through 2003 is expected to
be approximately $109 million, $109 million, $106 million, $104 million and $104
million, respectively. The after-tax impact of the annual amortization of
goodwill for the years 1999 through 2003 is expected to be approximately $95
million, $94 million, $92 million, $90 million and $89 million, respectively.
The level of goodwill will increase by approximately $270 million due to the
Founders Asset Management, LLC. acquisition in April 1998.
- -------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- -------------------------------------------------------------------------------
Purchased core deposit intangibles $95 $65 $ 82
Covenants not to compete - - 2
Other identified intangibles 18 19 33
- -------------------------------------------------------------------------------
Total purchased core deposit
and other identified intangibles $113 $84 $117
- -------------------------------------------------------------------------------
The decrease in purchased core deposit and other identified intangibles from
March 31, 1997, resulted from amortization and the sale of 50% of the R-M Trust
Company, primarily offset by purchased core deposit intangibles related to the
Mellon 1st Business Bank and Mellon United National Bank acquisitions. The
amortization of purchased core deposits and other identified intangibles for the
remaining nine months of 1998 will be approximately $20 million. The annual
amortization of purchased core deposit and other identified intangibles for the
full years 1999 through 2003 is expected to be approximately $27 million, $15
million, $9 million, $7 million and $4 million, respectively. The after-tax
impact of the annual amortization of these items for the full years 1999 through
2003 is anticipated to be approximately $17 million, $10 million, $6 million, $5
million and $3 million, respectively.
Mortgage servicing assets and purchased credit card relationships
- -------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- -------------------------------------------------------------------------------
Mortgage servicing assets $1,108 $1,052 $822
Purchased credit card relationships 22 23 27
- -------------------------------------------------------------------------------
Total mortgage servicing assets and
purchased credit card relationships $1,130 $1,075 $849
- -------------------------------------------------------------------------------
The Corporation capitalized $86 million and $96 million in the first quarters of
1998 and 1997, respectively, of servicing assets in connection with both
mortgage servicing portfolio purchases and loan originations. Mortgage servicing
assets are amortized in proportion to estimated net servicing income over the
estimated life of the servicing portfolio. Amortization expense totaled $44
million and $27 million in the first quarters of 1998 and 1997, respectively.
The estimated fair value of capitalized mortgage servicing assets was $1,159
million at March 31, 1998.
29
<PAGE> 31
LIQUIDITY AND DIVIDENDS
- --------------------------------------------------------------------------------
The Corporation's liquidity management objective is to maintain the ability to
meet commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms, including during
periods of market or financial stress. The Corporation's overall approach to
liquidity management is to ensure that sources of liquidity are sufficient in
amount and diversity to accommodate changes in loan demand and core funding
routinely without a material adverse impact on net income. The Corporation's
liquidity position is managed by maintaining adequate levels of liquid assets,
such as money market assets and securities available for sale. Additional
liquidity is available through the Corporation's ability to participate or sell
commercial loans and to securitize selected loan portfolios. The parent
Corporation also has a $300 million revolving credit agreement, with
approximately two and one-half years remaining until maturity, and a $25 million
backup line of credit to provide support facilities for its commercial paper
borrowings and for general corporate purposes.
As shown in the consolidated statement of cash flows, cash and due from banks
decreased by $338 million during the first quarter of 1998 to $3,312 million at
March 31, 1998. The decrease reflected $673 million of net cash used in
investing activities and $12 million of net cash used in operating activities,
primarily offset by $334 million of net cash provided by financing activities.
Net cash used in investing activities primarily reflected loan growth, the
banking acquisitions and an increase in mortgage servicing assets, partially
offset by a loan securitization. Net cash provided by financing activities
primarily reflected an increase in long-term borrowings, partially offset by the
redemption of the Series K preferred stock.
In February 1998, the Corporation issued $350 million of subordinated debentures
at an interest rate of 6.375%, maturing in 2010, and $200 million of senior
notes at an interest rate of 6%, maturing in 2004. Prior to issuance, the
Corporation hedged the cost of the $350 million of subordinated debentures with
interest rate swaps that were terminated upon issuance of the debt. The
effective interest rate on the $350 million of subordinated debentures,
including the effect of the interest rate swaps, is 6.72%. The proceeds from
both issuances were used for general corporate purposes.
Contractual maturities of the Corporation's long-term debt totaled $117 million
during the first quarter of 1998 and included $12 million of Parent Company term
debt. The remaining $105 million consisted primarily of medium term bank notes.
At March 31, 1998, the Corporation's and Mellon Bank, N.A.'s senior debt were
rated "A2" and "A1," respectively, by Moody's and "A" and "A+," respectively, by
Standard & Poor's. In April 1998, Standard's & Poor's placed the Corporation on
credit watch with positive implications.
On February 17, 1998, the Corporation redeemed the $200 million, 8.20% Series K
preferred stock at a redemption price of $25 per share plus accrued dividends.
The Corporation paid $84 million in common stock dividends in the first quarter
of 1998, compared with $77 million in the prior-year period. The common dividend
payout ratio was 41% in the first quarter of 1998, compared with 43% in the
first quarter of 1997. On a tangible earnings per common share basis, the common
dividend payout ratio was 36% in the first quarter of 1998 and 38% in the first
quarter of 1997. In addition, the Corporation paid $2 million in preferred stock
dividends during the first quarter of 1998 and recorded approximately $7 million
of issue costs as preferred stock dividends in connection with the redemption of
the Series K preferred stock. Based upon shares outstanding at March 31, 1998,
and the new quarterly common dividend rate of $.36 per share, announced on April
21, 1998, the annualized common stock dividend requirement is expected to be
approximately $375 million.
The parent Corporation's principal sources of cash are interest and dividends
from its subsidiaries. There are, however, certain limitations on the payment of
dividends to the parent Corporation by its national and state member bank
subsidiaries. For a discussion of these limitations, see note 22 in the
Corporation's 1997 Annual
30
<PAGE> 32
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
Report to Shareholders. Under the more restrictive limitation, the Corporation's
national and state member bank subsidiaries can, without prior regulatory
approval, declare dividends subsequent to March 31, 1998, of approximately $640
million, less any dividends declared and plus or minus net profits or losses, as
defined, between April 1, 1998, and the date of any such dividend declaration.
The bank subsidiaries declared dividends to the parent Corporation of $100
million in the first quarter of 1998, $450 million in 1997 and $400 million in
1996. Dividends paid to the parent Corporation by nonbank subsidiaries totaled
$31 million in the first quarter of 1998, $34 million in 1997 and $21 million in
1996. In addition, The Boston Company returned $100 million of capital to the
parent Corporation in 1997.
INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------------------------------------
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest revenue and on the net present
value of the Corporation's assets, liabilities and off-balance-sheet
instruments. Interest rate risk is measured using net interest margin simulation
and asset/liability net present value sensitivity analyses. Simulation tools
serve as the primary means to gauge interest rate exposure. The net present
value sensitivity analysis is the means by which the Corporation's long-term
interest rate exposure is evaluated. These analyses provide a full understanding
of the range of potential impacts on net interest revenue and portfolio equity
caused by interest rate movements.
Modeling techniques are used to estimate the impact of changes in interest rates
on the net interest margin. Assumptions regarding the replacement of maturing
assets and liabilities are made to simulate the impact of future changes in
rates and/or changes in balance sheet composition. The effect of changes in
future interest rates on the mix of assets and liabilities may cause actual
results to differ from simulated results. In addition, certain financial
instruments provide customers a certain degree of "optionality." For instance,
customers will migrate from lower-interest deposit products to higher-interest
products. Also, customers may choose to refinance fixed rate loans when interest
rates decrease. While the Corporation's simulation analysis considers these
factors, the extent to which customers utilize the ability to exercise their
financial options may cause actual results to significantly differ from the
simulation. Guidelines used by the Corporation for assuming interest rate risk
are presented in the "Interest rate sensitivity analysis" section on page 52 of
the 1997 Annual Report to Shareholders.
The measurement of interest rate risk is meaningful only when all related on-
and off-balance-sheet items are aggregated and the net positions are identified.
Financial instruments that the Corporation uses to manage interest rate
sensitivity include: money market assets, U.S. government and federal agency
securities, municipal securities, mortgage-backed securities, corporate bonds,
asset-backed securities, fixed rate wholesale term funding, interest rate swaps,
caps and floors, financial futures and financial options. The table on the
following page illustrates the simulation analysis of the impact of a 50, 100 or
200 basis point parallel shift upward or downward in interest rates on net
interest revenue, earnings per share and return on common shareholders' equity.
This analysis was done using the levels of all interest-earning assets and
off-balance-sheet instruments used for interest rate risk management at March
31, 1998, assuming that the level of loan fees remains unchanged, and excludes
the impact of interest receipts on nonperforming loans. The impact of the rate
movements was developed by simulating the effect of rates changing in a parallel
fashion over a six-month period from the March 31, 1998, levels and remaining at
those levels thereafter. This analysis excludes the effect that rate movements
can have on the value of mortgage servicing rights, discussed on pages 34 and
35.
31
<PAGE> 33
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from March 31, 1998, rates
- -----------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
----------------------------------------------------------------
compared with March 31, 1998: +50bp +100bp +200bp -50bp -100bp -200bp
------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest revenue increase (decrease) .2% .4% .3% (.3)% (.6)% (1.5)%
Earnings per share increase (decrease) $.01 $.01 $.01 $(.01) $(.02) $(.05)
Return on common equity increase (decrease) 5 bp 8 bp 6 bp (6) bp (15) bp (35) bp
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Managing interest rate risk with off-balance-sheet instruments
The Corporation uses interest rate swaps, including index amortizing swaps and
callable swaps, in managing its overall interest rate exposure. By policy, the
Corporation will not implement any new off-balance-sheet activity that, when
aggregated into the total corporate interest rate exposure, would cause the
Corporation to exceed its established interest rate risk limits. Interest rate
swaps, caps and floors, financial futures and financial options have been
approved by the board of directors for managing the overall corporate interest
rate exposure. Their usage for speculative purposes is not permitted outside of
those areas designated as trading and controlled with specific authorizations
and limits. These instruments provide the Corporation flexibility in adjusting
its interest rate risk position without exposure to principal risk and funding
requirements. By using off-balance-sheet instruments to manage interest rate
risk, the effect is a smaller, more efficient balance sheet, with a lower
wholesale funding requirement and a higher return on assets and net interest
margin with a comparable level of net interest revenue and return on common
shareholders' equity.
Interest rate swaps involve the exchange of fixed and variable interest payments
based upon a contractual notional amount. In an index amortizing swap, the
notional amount will vary based upon an underlying index. Generally, as rates
fall, the notional amounts decline more rapidly and, as rates increase, notional
amounts decline more slowly. Callable swaps are generic swaps with a call option
at the option of the counterparty. Callable swaps' notional amounts are not
based on interest rate indices, but call options will be exercised or not
exercised on the basis of market interest rates. The callable swaps entered into
by the Corporation are subject to call options in August 1998, November 1998 and
February 1999, at the option of the counterparty. If after a specified time
period the call options are not exercised, the swaps will remain outstanding
until their contractual maturity date. The use of financial futures and option
contracts is permitted provided that: the transactions occur in a market with a
size that ensures sufficient liquidity; the contract is traded on an approved
exchange or, in the case of over-the-counter option contracts, is transacted
with a credit-approved counterparty; and the types of contracts have been
authorized for use by the board of directors and the Finance Committee. The
Corporation's off-balance-sheet instruments used to manage its interest rate
risk are shown in the table on the following page. Additional information
regarding these contracts is presented in note 24 in the Corporation's 1997
Annual Report to Shareholders.
32
<PAGE> 34
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
March 31,
(notional amounts in millions) 1998 1999 2000 2001 2002 2003+ 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps: (a)
Notional amount $ 22 $ -- $ -- $ -- $ -- $ 700 $ 722
Weighted average rate:
Receive 4.88% -- -- -- -- 6.62% 6.57%
Pay 4.88% -- -- -- -- 5.70% 5.67%
Receive fixed/pay floating
indexed amortizing swaps:
Notional value $ 893 $ 1,537 $121 $ 99 $ 209 $ -- $ 2,859
Weighted average rate:
Receive 6.01% 5.73% 7.14% 7.15% 7.14% -- 6.03%
Pay 5.82% 5.82% 5.85% 5.85% 5.85% -- 5.82%
Receive fixed/pay floating
callable swaps: (b)
Notional value $ 650 $ 400 $ -- $ -- $ -- $ -- $ 1,050
Weighted average rate:
Receive 6.90% 6.86% -- -- -- -- 6.88%
Pay 5.82% 5.82% -- -- -- -- 5.82%
Pay fixed/receive floating
generic swaps: (a)
Notional amount $ 236 $ 220 $ -- $ -- $ 5 $ 10 $ 471
Weighted average rate:
Receive 5.47% 5.71% -- -- 5.81% 5.67% 5.59%
Pay 5.79% 6.18% -- -- 6.59% 6.64% 6.00%
Other products (c) $ -- $ -- $ 28 $ -- $ -- $ -- $ 28
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $ 1,801 $ 2,157 $149 $ 99 $ 214 $ 710 $ 5,130
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic swaps' notional amounts and lives are not based upon interest rate
indices.
(b) Expected maturity dates, based upon interest rates at March 31, 1998, are
shown in this table.
(c) Average rates are not meaningful for these products.
The gross notional amount of off-balance-sheet products used to manage the
Corporation's interest rate risk was $5.1 billion at March 31, 1998, a decrease
of $.4 billion from $5.5 billion at December 31, 1997. This gross notional
amount, which is presented in the table above, should be viewed in the context
of the Corporation's overall interest rate risk management activities to assess
its impact on the net interest margin. These off-balance-sheet instruments were
used to modify the Corporation's natural asset-sensitive position. The table on
the following page presents the gross notional amounts of off-balance-sheet
instruments used to manage interest rate risk, identified by the underlying
interest-rate-sensitive instruments.
33
<PAGE> 35
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- --------------------------------------------------------------------------------
Instruments associated with deposits $2,842 $3,143 $3,506
Instruments associated with other liabilities 705 705 421
Instruments associated with loans 1,583 1,602 1,670
- --------------------------------------------------------------------------------
Total notional amount $5,130 $5,450 $5,597
- --------------------------------------------------------------------------------
The Corporation entered into these off-balance-sheet products to reduce the
natural interest rate risk embedded in its assets and liabilities. The interest
received and interest paid are recorded on an accrual basis in interest revenue
and interest expense associated with the underlying assets and liabilities. The
net differential resulted in interest revenue of $6 million in both the first
quarter of 1998 and the first quarter of 1997.
During the first quarter of 1998, the Corporation terminated interest rate swap
contracts that were used to lock in the cost of the $350 million of subordinated
debt issued in February 1998. These terminations resulted in a deferred loss of
$6 million. This unamortized deferred loss combined with net unaccreted deferred
gains of $12 million resulting from prior terminations resulted in a net
unaccreted deferred gain of approximately $6 million, carried as other
liabilities, at March 31, 1998. The Corporation accreted approximately $1
million of these net deferred gains into net interest revenue in both the first
quarter of 1998 and 1997, respectively.
The Corporation also has entered into off-balance-sheet contracts to manage the
prepayment risk associated with a portion of its mortgage servicing portfolio.
Mortgage servicing rights (MSRs) are interest rate sensitive due to the mortgage
borrower's option to prepay the mortgage loan. If mortgage interest rates
decrease, borrowers may prepay mortgage loans. Since mortgage loans underlie
MSRs, a decrease in interest rates and an actual (or probable) increase in
mortgage prepayments shorten the expected life of the MSR and reduces its value.
Conversely, an increase in interest rates and an actual (or probable) decrease
in mortgage prepayments lengthen the expected life of the MSR and increases its
value.
To mitigate the prepayment risk of decreasing long-term interest rates, higher
than expected mortgage prepayments and a potential impairment to MSRs, the
Corporation uses interest rate floor and interest rate swap contracts tied to
yields on 10-year constant maturity Treasury notes. At March 31, 1998, the
Corporation had approximately $6.6 billion of interest rate floor agreements
outstanding and $2.1 billion of interest rate swap agreements outstanding. In
addition, the Corporation had $434 million of principal only swaps outstanding
at March 31, 1998. These instruments are collectively structured to gain value
as interest rates decrease, therefore reducing the potential impairment of MSRs.
Conversely, the value of these instruments will decrease as interest rates
increase.
Realized gains/losses and cash settlements on these instruments are recorded as
adjustments to the carrying value of the MSRs. At March 31, 1998, the
Corporation had unrecognized gains of approximately $6 million on terminations
of hedges on MSRs. These instruments do not entirely eliminate risk. Mortgage
prepayment rates may not occur as expected. The following table presents the
gross notional amounts of off-balance-sheet instruments used to manage
prepayment risk associated with MSRs.
34
<PAGE> 36
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO
MANAGE PREPAYMENT RISK OF MSRS Total at
March 31
(dollar amounts in millions) 1998 1999 2000 2001 2002 2003+ 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate floors (notional) $ - $ - $ - $ - $1,850 $4,750 $6,600
Weighted average strike rates - - - - 5.67% 5.28% 5.39%
Fair value 69
Receive fixed/pay floating interest
rate swaps (notional) $250 $ - $ - $ - $ - $1,800 $2,050
Weighted average rates:
Receive 6.36% - - - - 6.08% 6.11%
Pay 5.66% - - - - 5.66% 5.66%
Fair value -
Principal only swaps (notional) (a) $434 $ - $ - $ - $ - $ - $ 434
Fair value 13
Total notional amount $684 $ - $ - $ - $1,850 $6,550 $9,084
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Shown as maturing in 1998 because the swaps can be canceled at the
Corporation's discretion. Contractual maturity is $72 million in 1998, $110
million in 2002 and $252 million in 2003.
In addition to the risk management instruments previously discussed, the
Corporation has entered into contracts to hedge anticipated transactions. The
Corporation has entered into $265 million of interest rate futures to lock in
the value of certain loans that are anticipated to be sold and/or securitized in
the second quarter of 1998. There was an unrecognized loss of approximately $3
million related to these anticipated transactions at March 31, 1998.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at March 31, 1998, was a positive $106 million,
compared to a positive $111 million at December 31, 1997. This decrease
primarily resulted from a decrease in the fair value of interest rate and total
return swaps offset by an increase in the fair value of MSR hedges resulting
from a higher level of these hedges compared to December 31, 1997. These values
should be viewed in the context of the overall financial structure of the
Corporation, including the aggregate net position of all on- and
off-balance-sheet instruments.
35
<PAGE> 37
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (a)
MARCH 31, Dec. 31, March 31,
(notional amounts in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate risk management instruments: (b)
Interest rate swaps $5,102 $5,140 $5,462
Options, caps and floors purchased (c) 28 40 55
Futures contracts - - 80
Mortgage servicing rights risk management instruments:
Interest rate floors 6,600 1,850 -
Interest rate swaps 2,050 1,000 -
Principal only swaps 434 273 -
Other products:
Total return swaps 144 139 99
Interest rate swaps and futures contracts
hedging anticipated transactions 265 579 -
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract in a gain position, on which a
counterparty may default. Credit risk associated with these instruments was
$119 million at March 31, 1998, $114 million at December 31, 1997, and $8
million at March 31, 1997.
(b) The credit risk associated with interest rate agreements is calculated
after considering master netting agreements.
(c) There were no options, caps or floors written.
Off-balance-sheet instruments used for trading activities
The Corporation offers off-balance-sheet financial instruments, primarily
foreign exchange contracts, currency and interest rate option contracts,
interest rate swaps, interest rate caps and floors, and interest rate forward
contracts to enable customers to meet their financing objectives and to manage
their interest- and currency-rate risk. Supplying these instruments provides the
Corporation with fee revenue. The Corporation also uses such instruments in
connection with its proprietary trading account activities. All of these
instruments are carried at market value with realized and unrealized gains and
losses included in foreign currency and securities trading revenue. In the first
quarter of 1998, the Corporation recorded $37 million of fee revenue from these
activities, primarily from foreign exchange contracts entered into on behalf of
customers, compared with $23 million in the first quarter of 1997. The total
notional values of these contracts were $57 billion at March 31, 1998, $45
billion at December 31, 1997, and $40 billion at March 31, 1997, and are
included in the off-balance-sheet instruments used for trading activities table
on the following page.
The Corporation has established trading limits and related monitoring procedures
to control trading risk. These limits are approved by the Office of The Chairman
and reviewed by the Executive Committee of the board of directors. All limits
are monitored for compliance by departmental compliance staff and by the
Corporation's Internal Audit department. Exceptions to limits are reported to
the Office of The Chairman and, in certain instances, to the Audit Committee of
the board of directors.
The financial risk associated with trading positions is managed by assigning
position limits and stop loss guidance amounts to individual activities. The
Corporation uses a value at risk methodology to estimate the potential daily
amount that could be lost. Value at risk measures the volatility of the value of
equity, which is the present value of future expected cash flows of assets,
liabilities and off-balance-sheet instruments. Position limits are assigned to
each family of financial instruments eligible for trading such that the
aggregate value at risk in these activities at any point in time will not exceed
a specified limit given a significant market movement. The extent of market
36
<PAGE> 38
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
movement deemed to be significant is based upon an analysis of the historical
volatility of individual instruments that would cover 95% of likely daily market
movements. The loss analysis includes the off-balance-sheet instruments used for
trading activities as well as the financial assets and liabilities that are
classified as trading positions on the balance sheet. Using the Corporation's
methodology, which considers such factors as changes in interest rates, spreads
and options volatility, the aggregate value at risk for trading activities,
primarily related to foreign currency contracts, was approximately $2 million at
March 31, 1998, compared with approximately $1 million at December 31, 1997.
Trading activities are generally limited to products and markets in which
liquidity is sufficient to allow positions to be closed quickly and without
adversely affecting market prices, which limits loss potential below that
assumed for a full-day adverse movement. Loss potential is further constrained
in that it is highly unusual for all trading areas to be exposed to maximum
limits at the same time and extremely rare for significant adverse market
movements to occur in all markets simultaneously. Stop loss guidance is used
when a certain threshold of loss is sustained. If stop loss guidance amounts are
approached, open positions are liquidated to avoid further risk to earnings. The
use of both stop loss guidance and position limits reduces the likelihood that
potential trading losses would reach imprudent levels in relation to earnings
capability.
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(notional amounts in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $18,553 $14,808 $13,303
Commitments to sell 18,702 14,882 13,385
Foreign currency and other option contracts purchased 767 796 863
Foreign currency and other option contracts written 734 789 779
Interest rate agreements: (b)
Interest rate swaps 7,483 5,077 6,338
Options, caps and floors written 605 567 2,168
Options, caps and floors purchased 812 403 2,006
Futures and forward contracts 9,349 7,985 1,521
- --------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract in a gain position, on which a
counterparty may default. Credit risk associated with these instruments was
$520 million at March 31, 1998, $533 million at December 31, 1997, and $487
million at March 31, 1997.
(b) The credit risk associated with interest rate agreements is calculated
after considering master netting agreements.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(dollar amounts in millions) 1998 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $142 $133 $104 $ 90 $ 95
Acquired property, net of the OREO reserve 49 48 71 72 75
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $191 $181 $175 $162 $170
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .47% .46% .37% .32% .35%
Total nonperforming assets as a percentage of
total loans and net acquired property .63% .62% .62% .57% .62%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 39
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
Nonperforming assets is a term used to describe assets on which revenue
recognition has been discontinued or is restricted. Nonperforming assets include
both nonperforming loans and acquired property, primarily other real estate
owned (OREO) acquired in connection with the collection effort on loans.
Nonperforming loans include both nonaccrual and "troubled debt" restructured
loans. Past-due commercial loans are those that are contractually past due 90
days or more but are not on nonaccrual status because they are well secured and
in the process of collection. Past-due consumer loans, excluding consumer
mortgages, are generally not classified as nonaccrual but are charged off on a
formula basis upon reaching various stages of delinquency. Additional
information regarding the Corporation's practices for placing assets on
nonaccrual status is presented in the "Nonperforming assets" discussion and in
note 1 in the Corporation's 1997 Annual Report to Shareholders.
At March 31, 1998, nonperforming assets totaled $191 million, an increase of $10
million from December 31, 1997. This increase resulted primarily from the
reclassification of $10 million of commercial real estate loans to nonperforming
loans and $2 million to real estate acquired from segregated assets following
the expiration of the loss-sharing arrangement with the FDIC on January 1, 1998.
In addition, the acquisitions of Mellon United National Bank and Mellon 1st
Business Bank added $6 million to nonperforming loans. Nonperforming assets
increased $21 million compared with March 31, 1997, primarily resulting from the
same factors responsible for the increase from December 31, 1997, as well as the
addition of a commercial real estate loan to nonperforming status, partially
offset by a lower level of OREO, due to dispositions. The ratio of nonperforming
assets to total loans and net acquired property was .63% at March 31, 1998,
compared with .62% at December 31, 1997 and March 31, 1997. This ratio, which
can be expected to vary over time with changes in the economy, has been lower
than 1% for 15 consecutive quarters.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(dollar amounts in millions) 1998 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic nonaccrual loans:
Commercial and financial $ 19 $ 17 $ 20 $ 11 $ 18
Commercial real estate 53 49 14 9 14
Consumer credit:
Consumer mortgage 56 52 52 54 52
Other consumer credit 3 5 5 5 5
Lease finance assets 11 10 11 9 6
- --------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 142 133 102 88 95
Restructured loans - - 2 2 -
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (a) 142 133 104 90 95
- --------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 53 52 76 77 80
Reserve for real estate acquired (9) (9) (9) (9) (9)
- ---------------------------------------------------------------------------------------------------------------------
Net real estate acquired 44 43 67 68 71
Other assets acquired 5 5 4 4 4
- --------------------------------------------------------------------------------------------------------------------
Total acquired property 49 48 71 72 75
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $191 $181 $175 $162 $170
- --------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective
loan portfolio segments:
Domestic commercial and financial loans .17% .16% .22% .12% .17%
Domestic commercial real estate loans 2.67 3.25 .90 .55 .87
Domestic consumer mortgage loans .65 .62 .62 .68 .68
Domestic lease finance assets .40 .38 .43 .37 .27
Total loans .47 .46 .37 .32 .35
Nonperforming assets as a percentage of
total loans and net acquired property .63 .62 .62 .57 .62
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $42 million, $44 million, $23 million, $10 million and $17
million, respectively, of loans with both principal and interest less than
90 days past due but placed on nonaccrual status by management discretion.
38
<PAGE> 40
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS FOR THE THREE MONTHS ENDED MARCH 31
Domestic
---------------------------------------------------------------
Lease Total
Commercial Commercial Consumer Finance -----------------
(in millions) & Financial Real Estate Credit Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of period $17 $ 49 $57 $ 10 $133 $94
Acquired from Mellon United National
Bank and Mellon 1st Business Bank 1 5 - - 6 -
Reclassification from segregated assets - 10 - - 10 -
Additions 6 2 8 4 20 66
Payments (a) (2) (7) (4) (1) (14) (46)
Return to accrual status - (1) (1) - (2) (7)
Credit losses (3) (5) - (2) (10) (10)
Transfers to acquired property - - (1) - (1) (2)
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at March 31 $19 $53 $59 $11 $142 $95
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest applied to principal and sales.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
ADDITIONAL NONPERFORMING LOAN DATA March 31,
(dollar amounts in millions) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Book balance $142 $ 95
Contractual balance 208 111
Book balance as a percentage of contractual balance 68% 86%
Year-to-date interest receipts applied to reduce principal $ 2 $ -
Year-to-date interest receipts recognized in interest revenue 1 3
- -----------------------------------------------------------------------------------------------
</TABLE>
A loan is considered impaired, as defined by FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," when based upon current information and
events, it is probable that the Corporation will be unable to collect all
principal and interest amounts due according to the contractual terms of the
loan agreement. Additional information regarding impairment is presented in note
1 in the Corporation's 1997 Annual Report to Shareholders.
- --------------------------------------------------------------------------------
IMPAIRED LOANS Quarter ended
March 31,
(dollar amounts in millions) 1998 1997
- --------------------------------------------------------------------------------
Impaired loans - period-end (a) $87 $50
Average impaired loans 91 68
Interest revenue recognized on impaired loans (b) 1 2
- --------------------------------------------------------------------------------
(a) Includes $48 million and $4 million of impaired loans with a related
impairment reserve of $9 million and $1 million at March 31, 1998, and
March 31, 1997, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
Acquired property, net of the OREO reserve, totaled $49 million at March 31,
1998, $48 million at December 31, 1997, and $75 million at March 31, 1997.
39
<PAGE> 41
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Quarter ended
March 31,
(in millions) 1998 1997
- -------------------------------------------------------------------------------
OREO at beginning of period, net of the OREO reserve $43 $76
Reclassification from segregated assets 2 -
Foreclosures 2 3
Sales (4) (8)
Write-downs, losses, OREO provision and other 1 -
- -------------------------------------------------------------------------------
OREO at end of period, net of the OREO reserve 44 71
Other acquired assets 5 4
- -------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve $49 $75
- -------------------------------------------------------------------------------
The Corporation recognizes any estimated potential decline in the value of OREO
between appraisal dates on a property-by-property basis through periodic
additions to the OREO reserve. Write-downs charged against this reserve are
taken when OREO is sold at a loss or upon the receipt of appraisals which
indicate a deterioration in the fair value of the property. Activity in the
Corporation's OREO reserve is presented in the table below.
- --------------------------------------------------------------------------------
CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) Quarter ended
March 31,
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Beginning balance $9 $10
Write-downs on real estate acquired - -
Provision - (1)
- --------------------------------------------------------------------------------
Ending balance $9 $ 9
- --------------------------------------------------------------------------------
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming. All
loans in this table are well secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(dollar amounts in millions) 1998 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 45 $ 38 $ 32 $ 38 $ 37
Ratio .52% .44% .38% .48% .48%
Credit card (a) 8 8 24 24 27
Ratio .88% .84% 2.19% 2.04% 2.25%
Student - government guaranteed 43 44 42 38 40
Ratio 2.50% 2.69% 2.55% 2.46% 2.52%
Other consumer 1 1 1 2 1
Ratio .07% .09% .13% .15% .13%
- ----------------------------------------------------------------------------------------------------------------
Total consumer 97 91 99 102 105
Ratio .75% .72% .81% .88% .91%
- ----------------------------------------------------------------------------------------------------------------
Commercial (b) 11 13 17 9 12
- --------------------------------------------------------------------------------------------------------------
Total past-due loans $108 $104 $116 $111 $117
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes past-due CornerStone(sm) credit card loans included in the
accelerated resolution portfolio.
(b) Includes lease finance assets.
Note: Ratios are loans 90 days or more past-due as a percentage of quarter-end
loan balances.
40
<PAGE> 42
CONSOLIDATED BALANCE SHEET
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets Cash and due from banks $ 3,312 $ 3,650 $ 2,915
Interest-bearing deposits with banks 620 553 614
Federal funds sold and securities under resale agreements 549 383 197
Other money market investments 94 72 48
Trading account securities 140 75 110
Securities available for sale 3,547 2,767 3,376
Investment securities (approximate fair value
of $2,022, $2,118 and $2,274) 1,987 2,082 2,306
Loans, net of unearned discount of $64, $48 and $50 30,343 29,142 27,525
Reserve for credit losses (496) (475) (518)
--------- --------- ----------
Net loans 29,847 28,667 27,007
Customers' acceptance liability 84 182 265
Premises and equipment 557 573 572
Goodwill and other intangibles 1,918 1,425 1,214
Mortgage servicing assets and purchased
credit card relationships 1,130 1,075 849
Acquired property, net of reserves of $9, $9 and $9 49 48 75
Other assets 3,580 3,340 2,520
----------------------------------------------------------------------------------------------------------------
Total assets $47,414 $44,892 $42,068
----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 9,505 $ 7,975 $ 8,371
Interest-bearing deposits in domestic offices 20,956 19,954 18,887
Interest-bearing deposits in foreign offices 2,635 3,376 2,678
----------------------------------------------------------------------------------------------------------------
Total deposits 33,096 31,305 29,936
Federal funds purchased and securities under
repurchase agreements 2,295 1,997 1,368
U.S. Treasury tax and loan demand notes 472 447 730
Term federal funds purchased 409 625 580
Short-term bank notes 300 330 35
Commercial paper 259 67 50
Other funds borrowed 319 278 367
Acceptances outstanding 84 182 265
Other liabilities 2,100 2,252 1,539
Notes and debentures (with original maturities over one year) 3,003 2,573 2,512
----------------------------------------------------------------------------------------------------------------
Total liabilities 42,337 40,056 37,382
- --------------------------------------------------------------------------------------------------------------------------------
Trust- Guaranteed preferred beneficial interests
preferred in Corporation's junior subordinated
securities deferrable interest debentures 991 991 990
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Preferred stock - 193 193
equity Common shareholders' equity:
Common stock - $.50 par value
Authorized - 400,000,000 shares
Issued - 294,330,960 (a); 294,330,960 (a); and 147,165,480 shares 147 147 74
Additional paid-in capital 1,855 1,818 1,875
Retained earnings 3,003 2,884 2,576
Accumulated unrealized gains (losses), net of tax 30 21 (45)
Treasury stock of 34,120,588 (a); 40,545,114 (a); and
18,334,060 shares, at cost (949) (1,218) (977)
-----------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 4,086 3,652 3,503
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,086 3,845 3,696
----------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities
and shareholders' equity $47,414 $44,892 $42,068
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the two-for-one stock split distributed on June 2, 1997.
See accompanying Notes to Financial Statements.
41
<PAGE> 43
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions, except per share amounts) 1998 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees
of $17, $23, $22, $19 and $17) $577 $577 $567 $571 $553
Interest-bearing deposits with banks 9 6 6 7 7
Federal funds sold and securities under
resale agreements 13 10 9 6 5
Other money market investments 1 2 2 1 1
Trading account securities 4 2 2 3 2
Securities 90 88 94 96 99
--------------------------------------------------------------------------------------------------------------
Total interest revenue 694 685 680 684 667
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 197 192 190 186 181
Deposits in foreign offices 32 32 30 33 34
Federal funds purchased and securities
under repurchase agreements 24 22 17 20 18
Other short-term borrowings 28 29 28 28 20
Notes and debentures 48 49 49 47 44
--------------------------------------------------------------------------------------------------------------
Total interest expense 329 324 314 314 297
- --------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 365 361 366 370 370
revenue Provision for credit losses 15 73 25 25 25
--------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for losses 350 288 341 345 345
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fees 386 387 375 283 266
revenue Cash management and deposit transaction charges 61 65 62 59 56
Mortgage servicing fees 55 56 53 53 51
Foreign currency and securities trading 41 36 32 25 25
Credit card fees 24 24 24 25 24
Gain on sale of corporate trust business - 43 - - -
Other income 131 96 89 95 114
--------------------------------------------------------------------------------------------------------------
Total fee revenue 698 707 635 540 536
Gains on sales of securities - - - - -
--------------------------------------------------------------------------------------------------------------
Total noninterest revenue 698 707 635 540 536
- --------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 357 354 344 276 268
expense Net occupancy expense 56 64 55 54 52
Professional, legal and other purchased services 61 72 55 46 46
Business development 36 37 36 38 37
Equipment expense 39 65 38 36 36
Amortization of mortgage servicing assets
and purchased credit card relationships 45 33 29 28 28
Amortization of goodwill and other intangible assets 30 26 25 27 27
Communications expense 26 26 25 25 26
Other expense 47 45 44 41 45
Trust-preferred securities expense 20 19 20 19 20
Net revenue from acquired property (1) (12) (1) (3) (3)
---------------------------------------------------------------------------------------------------------------
Total operating expense 716 729 670 587 582
- --------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes 332 266 306 298 299
Provision for income taxes 117 71 111 108 108
--------------------------------------------------------------------------------------------------------------
Net income 215 195 195 190 191
Dividends on preferred stock 9 4 4 4 9
--------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $206 $191 $191 $186 $182
- --------------------------------------------------------------------------------------------------------------------------------
Per common Basic net income $ .80 $ .76 $ .75 $ .73 $ .70
share Diluted net income $ .78 $ .75 $ .73 $ .71 $ .69
---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
42
<PAGE> 44
CONSOLIDATED STATEMENT OF CASH FLOWS
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended
March 31,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from Net income $215 $191
operating activities Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of goodwill and other intangible assets 30 27
Amortization of mortgage servicing assets and
purchased credit card relationships 45 28
Depreciation and other amortization 26 26
Deferred income tax expense 30 21
Provision for credit losses 15 25
Net gains on dispositions of acquired property (2) (3)
Net decrease in accrued interest receivable 4 3
Net increase in trading account securities (60) (24)
Net increase (decrease) in accrued interest payable,
net of amounts prepaid 3 (14)
Net decrease (increase) in residential mortgages held for sale 2 (85)
Net increase in other operating activities (320) (72)
------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (12) 123
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in term deposits and other money
investing activities market investments (89) (130)
Net decrease in federal funds sold and securities
under resale agreements 46 263
Purchases of securities available for sale (1,179) (2,340)
Proceeds from sales of securities available for sale 555 909
Proceeds from maturities of securities available for sale 507 2,126
Purchases of investment securities (4) (3)
Proceeds from maturities of investment securities 99 72
Net decrease in credit card receivables 62 68
Net principal disbursed on loans to customers (978) (535)
Loan securitization 533 -
Loan portfolio purchases (56) (4)
Proceeds from the sales of loan portfolios 203 404
Purchases of premises and equipment (35) (31)
Proceeds from sales of acquired property 6 11
Net cash disbursed in purchase of Mellon United National Bank (94) -
Net cash disbursed in purchase of Mellon 1st Business Bank (72) -
Increase in mortgage servicing assets and purchased credit
card relationships (100) (103)
Net (increase) decrease in other investing activities (77) 20
-----------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (673) 727
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
43
<PAGE> 45
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended
March 31,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from Net (decrease) increase in transaction and savings deposits (41) 603
financing activities Net increase (decrease) in customer term deposits 129 (2,041)
Net increase in federal funds purchased and
securities under repurchase agreements 81 626
Net decrease in short-term bank notes (30) (100)
Net (decrease) increase in term federal funds purchased (216) 99
Net increase in U.S. Treasury tax and loan demand notes 25 256
Net increase (decrease) in commercial paper 192 (72)
Repayments of longer-term debt (118) (6)
Net proceeds from issuance of longer-term debt 546 -
Proceeds from issuance of common stock 17 21
Dividends paid on common and preferred stock (95) (87)
Repurchase of common stock - (62)
Redemption of preferred stock (193) (97)
Net increase in other financing activities 37 74
-----------------------------------------------------------------------------------------------------
Net cash provided by (used in ) financing activities 334 (786)
Effect of foreign currency exchange rates 13 5
- --------------------------------------------------------------------------------------------------------------------------------
Change in cash and Net (decrease) increase in cash and due from banks (338) 69
due from banks Cash and due from banks at beginning of period 3,650 2,846
-----------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $3,312 $2,915
-----------------------------------------------------------------------------------------------------
Supplemental Interest paid $ 326 $ 311
disclosures Net income taxes paid 7 25
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
44
<PAGE> 46
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional unrealized Total
Preferred Common paid-in Retained gains (losses), Treasury shareholders'
(in millions) stock stock capital earnings net of tax stock equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $193 $147 $1,818 $2,884 $21 $(1,218) $3,845
Comprehensive results:
Net income 215 215
Other comprehensive results,
net of tax:
Net unrealized gain on assets
available for sale, 9 9
less net gain reclassification (1) (1)
Foreign currency translation
adjustment 1 1
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 215 9 224
Dividends on common stock
at $.33 per share (84) (84)
Dividends on preferred stock (9) (9)
Common stock issued under
dividend reinvestment and
common stock purchase plan 3 2 5
Common stock issued in
connection with the Mellon
United National Bank
acquisition 22 233 255
Series K preferred stock
redemption (193) (193)
Exercise of stock options (3) 30 27
Other 12 4 16
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ - $147 $1,855 $3,003 $30 $ (949) $4,086
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional unrealized Total
Preferred Common paid-in Retained gains (losses), Treasury shareholders'
(in millions) stock stock capital earnings net of tax stock equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $290 $74 $1,866 $2,486 $ (7) $(963) $3,746
Comprehensive results:
Net income 191 191
Other comprehensive results,
net of tax:
Net unrealized loss on assets
available for sale (37) (37)
Foreign currency translation
adjustment (1) (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 191 (38) 153
Dividends on common stock
at $.30 per share (77) (77)
Dividends on preferred stock (9) (9)
Common stock issued under
dividend reinvestment and
common stock purchase plan 1 4 5
Series J preferred stock
redemption (97) (97)
Exercise of stock options 6 (14) 38 30
Repurchase of common stock (62) (62)
Other 2 (1) 6 7
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 $193 $74 $1,875 $2,576 $(45) $(977) $3,696
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 -- Basis of presentation
The unaudited consolidated financial statements of the Corporation are prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements should be read in conjunction with
the Corporation's 1997 Annual Report on Form 10-K. In the opinion of management,
all normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations for the periods have been included.
Note 2 -- Adoption of Financial Accounting Standards
In June 1997, FAS No. 130, "Reporting Comprehensive Income," was issued. FAS No.
130 establishes the standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. In
complying with the reporting requirements of this statement, the Corporation
retitled the line item in the Consolidated Balance Sheet and the Statement of
Changes in Shareholders' Equity from "Net unrealized gain (loss) on assets
available for sale, net of tax" to "Accumulated unrealized gains (losses), net
of tax." In addition, it was necessary to reclassify the "foreign currency
translation adjustment" from retained earnings to accumulated unrealized gains
(losses), net of tax. Amounts reclassified from retained earnings at December
31, 1997, March 31, 1997 and December 31, 1996 were $(12) million, $(7) million
and $(6) million, respectively. This statement is effective for financial
statements for both interim and annual periods beginning after December 15,
1997.
On January 1, 1998, FAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" became effective and supersedes FAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." This statement establishes
standards for reporting information about segments of a business in the
footnotes to annual financial statements and also requires selected segment
information in interim reports. The statement requires disclosure on a business
segment basis, as defined by the Corporation, to include a description of
products and services, interest income and expense, profit or loss as measured
by the Corporation's management in assessing segment performance and geographic
information on assets and revenue, if material. This statement need not be
applied to interim periods during 1998.
Note 3 -- Foreign currency and securities trading revenue
The Corporation's trading activities involve a variety of financial instruments,
including U.S. government securities, municipal securities and money market
securities, as well as off-balance-sheet instruments. The majority of the
Corporation's trading revenue is earned by structuring and executing
off-balance-sheet instruments for customers. The resulting risks are limited by
entering into generally matching or offsetting positions. The Corporation also
enters into positions in interest rate, foreign exchange and debt instruments
based upon expectations of future market conditions. Unmatched positions are
monitored through established limits. To maximize net trading revenues, the
market-making and proprietary positions are managed together by product.
The results of the Corporation's foreign currency and securities trading
activities are presented, by class of financial instrument, in the table on the
following page.
46
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 3 -- Foreign currency and securities trading revenue (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Three months ended
March 31,
(in millions) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Foreign exchange contracts $36 $22
Debt instruments 4 2
Interest rate contracts 2 1
Futures contracts (1) -
- ----------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $41 $25
- ----------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recorded an unrealized gain of less than $1 million at
March 31, 1998, and an unrealized loss of less than $1 million at March 31,
1997, related to securities held in the trading portfolio.
Note 4 -- Supplemental information to the Consolidated Statement of Cash
Flows
Noncash investing and financing transactions that, appropriately, are not
reflected in the Consolidated Statement of Cash Flows are listed below.
- ----------------------------------------------------------------------------
Three months ended
March 31,
(in millions) 1998 1997
- ---------------------------------------------------------------------------
Reclassification of segregated assets to loans
and real estate acquired $ 12 $ -
Net transfers to real estate acquired 2 3
Purchase of Mellon United National Bank:
Fair value of noncash assets acquired 1,074 -
Liabilities assumed (725) -
Mellon common stock issued, from treasury (255) -
-------- -----
Net cash disbursed 94 -
Purchase of Mellon 1st Business Bank:
Fair value of noncash assets acquired 1,279 -
Liabilities assumed (1,207) -
-------- -----
Net cash disbursed 72 -
- ---------------------------------------------------------------------------
Note 5 -- Legal proceedings
A discussion of legal actions and proceedings against the Corporation and its
subsidiaries is presented in Part II, Item 1, of this Form 10-Q.
Note 6 -- Preferred stock
The Corporation has authorized 50 million shares of preferred stock. On February
17, 1998, the $200 million of 8.20% Series K preferred stock was redeemed at a
redemption price of $25 per share plus accrued dividends. In connection with
this redemption, the Corporation recorded approximately $7 million of issue
costs as preferred stock dividends.
47
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 7 -- Securities
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1998 March 31, 1997
------------------------------------------------ ------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 260 $ 1 $1 $ 260 $ 166 $ - $ - $ 166
U.S. agency mortgage-backed 2,669 41 4 2,706 2,336 6 50 2,292
Other U.S. agency 487 1 1 487 850 1 2 849
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 3,416 43 6 3,453 3,352 7 52 3,307
Obligations of states and
political subdivisions 45 - - 45 51 - - 51
Other mortgage-backed 2 - - 2 4 - - 4
Other securities 47 - - 47 14 - - 14
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $3,510 $43 $6 $3,547 $3,421 $7 $52 $3,376
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Gross realized gains were less than $1 million in the first quarter of
1998. There were no gross realized gains in the first quarter of 1997. There
were no gross realized losses in the first quarter of 1998 or the first quarter
of 1997.
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1998 March 31, 1997
------------------------------------------------ ------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 44 $ 7 $ - $ 51 $ 33 $1 $ 2 $ 32
U.S. agency mortgage-backed 1,857 28 - 1,885 2,196 4 35 2,165
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 1,901 35 - 1,936 2,229 5 37 2,197
Other mortgage-backed 21 - - 21 27 - - 27
Other securities 65 - - 65 50 - - 50
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,987 $35 $ - $2,022 $2,306 $5 $37 $2,274
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 8 -- Other assets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prepaid expense:
Pension $ 411 $ 391 $ 317
Other 89 80 67
Interest and fees receivable 404 376 320
Accounts receivable 445 373 227
Mortgage servicing advances 207 223 167
Receivables related to off-balance-sheet instruments 524 553 475
Assets held for accelerated resolution 130 157 19
Other 1,370 1,187 928
- --------------------------------------------------------------------------------------------------------
Total other assets $3,580 $3,340 $2,520
- --------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 9 -- Computation of earnings per common share (a)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Quarter ended
------------------------------------------
(dollar amounts in millions, except per MARCH 31, Dec. 31, March 31,
share amounts; common shares in thousands) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Net income applicable to common stock $206 $191 $182
- ----------------------------------------------------------------------------------------------------
Average common shares outstanding 257,714 253,886 258,010
Basic net income per common share $ .80 $ .76 $ .70
- ----------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (b) $206 $191 $182
- ----------------------------------------------------------------------------------------------------
Average common shares outstanding 257,714 253,886 258,010
Common stock equivalents:
Stock options 5,339 5,456 5,030
Common shares issuable upon conversion of
7-1/4% Convertible Subordinated Capital Notes 83 88 164
- ----------------------------------------------------------------------------------------------------
Total 263,136 259,430 263,204
- ----------------------------------------------------------------------------------------------------
Diluted earnings per common share $ .78 $ .75 $ .69
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on unrounded numbers.
(b) The after-tax benefit of interest expense on the assumed conversion of the
7-1/4% Convertible Subordinated Capital Notes was less than $1 million for
all periods presented.
Note 10 -- Accumulated unrealized gains (losses), net of tax
- ----------------------------------------------------------------------------
Foreign currency translation adjustment
- ----------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- ----------------------------------------------------------------------------
Beginning balance $(12) $ (8) $(6)
Quarterly increase (decrease) 1 (4) (1)
- -----------------------------------------------------------------------------
Ending balance $(11) $(12) $(7)
- -----------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Unrealized gains (losses) on assets
available for sale, net of tax
- ---------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- ---------------------------------------------------------------------------
Beginning balance $33 $24 $(1)
Quarterly increase (decrease) 8 9 (37)
- ----------------------------------------------------------------------------
Ending balance $41 $33 $(38)
- ----------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Accumulated unrealized gains (losses), net of tax
MARCH 31, Dec. 31, March 31,
(in millions) 1998 1997 1997
- -------------------------------------------------------------------------------
Beginning balance $21 $16 $(7)
Quarterly increase (decrease) 9 5 (38)
- --------------------------------------------------------------------------------
Ending balance $30 $21 $(45)
- --------------------------------------------------------------------------------
49
<PAGE> 51
SELECTED STATISTICAL INFORMATION
- --------------------------------------------------------------------------------
DEPOSITS
Mellon Bank Corporation (and its subsidiaries)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions) 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deposits in domestic offices:
Interest-bearing:
Demand, money market and
other savings accounts $11,401 $11,160 $10,082 $10,385 $10,605
Retail savings certificates 7,668 7,421 7,476 7,253 6,742
Other time deposits 1,887 1,373 1,342 1,793 1,540
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 20,956 19,954 18,900 19,431 18,887
Noninterest-bearing 9,505 7,975 8,562 9,483 8,371
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 30,461 27,929 27,462 28,914 27,258
Deposits in foreign offices 2,635 3,376 2,727 2,412 2,678
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits $33,096 $31,305 $30,189 $31,326 $29,936
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SELECTED KEY DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended
(dollar amounts in millions, ------------------------------------------------------------------------------
except per share amounts, MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
common shares in thousands) 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income per common share (a) $ .78 $ .75 $ .73 $ .71 $ .69
Tangible net income per
common share (a)(b) $ .88 $ .83 $ .80 $ .79 $ .77
Net income applicable to
common stock $ 206 $ 191 $ 191 $ 186 $ 182
Tangible net income applicable
to common stock (b) $ 231 $ 212 $ 211 $ 206 $ 203
Return on common shareholders'
equity (c) 21.6% 21.2% 21.6% 21.9% 21.2%
Return on tangible common
shareholders' equity (b)(c) 43.3% 38.3% 37.6% 37.7% 36.3%
Return on assets (c) 1.89% 1.75% 1.81% 1.79% 1.83%
Return on tangible assets (b)(c) 2.18% 2.00% 2.05% 2.04% 2.09%
Common equity to assets 8.62% 8.13% 8.25% 7.72% 8.33%
Tangible common equity to assets (b) 4.76% 5.12% 5.37% 5.13% 5.60%
Fee revenue as a percentage of
total revenue (FTE) 66% 66% 63% 59% 59%
Efficiency ratio excluding
amortization of intangibles 62% 65% 62% 59% 59%
Average common shares and
equivalents outstanding (a) 263,136 259,430 260,306 259,475 263,204
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Diluted.
(b) Excludes the after-tax impact of the amortization of goodwill and other
identified intangibles resulting from accounting for business combinations
under the purchase method of accounting.
(c) Annualized.
Note: All calculations are based on unrounded numbers.
50
<PAGE> 52
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings.
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust
and other activities. Because of the complex nature of some of these actions and
proceedings, it may be a number of years before such matters ultimately are
resolved. After consultation with legal counsel, management believes that the
aggregate liability, if any, resulting from such pending and threatened actions
and proceedings will not have a material adverse effect on the Corporation's
financial condition.
On or about April 23, 1998, two individuals who are purported shareholders of
the Corporation filed a complaint commencing a derivative action in the United
States District Court for the Eastern District of Pennsylvania purportedly on
behalf of and for the benefit of the Corporation naming as defendants certain
members of the Corporation's board of directors and a senior officer. On April
23, 1998, these same two individuals filed a virtually identical complaint in
the United States District Court for the Western District of Pennsylvania. In
these two actions, the plaintiffs allege that the defendants breached their
fiduciary duties to the Corporation and failed to act in good faith and in the
best interest of the Corporation in connection with the April 22, 1998 merger
proposal submitted by The Bank of New York Company, Inc. to the Corporation. In
their complaints, the plaintiffs are seeking monetary damages, a declaration
that the defendants breached their fiduciary duties and an injunction
prohibiting the defendants from rejecting the merger offer. The Corporation
believes that these complaints lack merit, and the defendants intend to
vigorously defend these actions.
Item 2. Changes in Securities and Use of Proceeds.
(c) On February 2, 1998, the Corporation issued 5,069,403 shares of its
common stock, $0.50 par value (the "Shares"), as a portion of the
consideration paid in the Corporation's acquisition of United Bankshares,
Inc., a Florida corporation ("UBI") pursuant to a merger of UBI with and
into the Corporation (the "Merger"). The Shares were issued in the Merger
to the former shareholders of UBI. The issuance of the Shares was exempt
from registration under the Securities Act of 1933 pursuant to section 4
(2) thereof and Rule 506 thereunder. The Shares were issued to a limited
number of sophisticated investors who acquired the Shares for their own
account and who represented that any sales would be made pursuant to an
effective registration statement or an applicable exemption from
registration.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Restated Articles of Incorporation of Mellon Bank Corporation,
as amended and restated as of September 2, 1993.
3.2 Statement Affecting Series B Preferred Stock, $1.00 Par Value.
3.3 Statement Affecting Series D Preferred Stock, $1.00 Par Value.
3.4 Statement Affecting Series H Preferred Stock, $1.00 Par Value.
3.5 Statement Affecting Series I Preferred Stock, $1.00 Par Value.
51
<PAGE> 53
PART II - OTHER INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
(a) Exhibits (continued)
3.6 Statement Affecting Series J Preferred Stock, $1.00 Par Value.
3.7 Statement Affecting Series K Preferred Stock, $1.00 Par Value.
3.8 Amendment of April 16, 1997 to Mellon Bank Corporation's
Restated Articles of Incorporation.
3.9 Amendment of September 26, 1997 to Mellon Bank Corporation's
Restated Articles of Incorporation.
3.10 Amendment of April 22, 1998 to Mellon Bank Corporation's
Restated Articles of Incorporation.
3.11 By-Laws of Mellon Bank Corporation, as amended, effective
September 16, 1997.
10.1 Mellon Bank Corporation Stock Option Plan for Outside
Directors (1989), as amended effective March 17, 1998.
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends (parent Corporation).
12.2 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends (Mellon Bank Corporation and its subsidiaries).
27.1 Financial Data Schedules, which are submitted electronically
to the Securities and Exchange Commission for information only
and not filed.
(b) Reports on Form 8-K
During the first quarter of 1998, the Corporation filed the following
Current Reports on Form 8-K:
(1) A report dated January 8, 1998, which included, under Items 5
and 7, the Corporation's press release announcing that all
outstanding shares of its 8.20% Series K preferred stock will be
redeemed on February 17, 1998, at a redemption price of $25.00
per share, plus accrued dividends.
(2) A report dated January 8, 1998, which included, under Items 5
and 7, the Corporation's press release announcing a strategic
alliance between Mellon Bank Corporation, The Dreyfus
Corporation and BICECORP S.A. (BICECORP) through which Mellon
and BICECORP will create joint ventures involving three BICECORP
subsidiaries.
(3) A report dated January 16, 1998, which included, under Items 5
and 7, the Corporation's press release regarding fourth quarter
and full year 1997 results of operations, as well as the
Corporation's announcement of the board approved management
succession plan.
52
<PAGE> 54
(b) Reports on Form 8-K (continued)
(4) A report dated February 2, 1998, which included, under Items 5
and 7, the Corporation's press release announcing the completion
of its acquisition of United Bankshares, Inc. and its principal
subsidiary, United National Bank, a full-service commercial
bank.
(5) A report dated February 9, 1998, which included, under Item 7,
certain exhibits incorporated by reference into Registration
Statement No. 33-62151 pertaining to certain debt securities of
Mellon Financial Company and the related guarantees of the
Registrant.
(6) A report dated February 17, 1998, which included, under Items 5
and 7, the Corporation's press release announcing the completion
of its acquisition of 1st Business Corporation, parent of 1st
Business Bank, a full-service commercial bank.
(7) A report dated February 24, 1998, which included, under Item 7,
certain exhibits incorporated by reference into Registration
Statement No. 33-62151 pertaining to certain debt securities of
Mellon Financial Company and the related guarantees of the
Registrant.
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MELLON BANK CORPORATION
(Registrant)
Date: May 11, 1998 By: /s/ STEVEN G. ELLIOTT
----------------------
Steven G. Elliott
Vice Chairman and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer of
the Registrant)
53
<PAGE> 55
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Business Mellon Bank Corporation's principal direct subsidiaries are
of the Mellon Bank, N.A., The Boston Company, Inc., Buck Consultants,
Corporation Inc. and a number of companies known as Mellon Financial
Services Corporation. The Dreyfus Corporation, one of the
nation's largest mutual fund companies, and Founders Asset
Management, LLC. are wholly owned subsidiaries of Mellon Bank,
N.A. Mellon's seven banking subsidiaries engage in retail
financial services, commercial banking, trust and investment
management services, residential real estate loan financing,
mortgage servicing, equipment leasing, mutual fund activities
and various securities-related activities. Buck, a global
actuarial and human resources consulting firm, provides a
broad array of services in the areas of defined benefit and
defined contribution plans, health and welfare plans,
communications and compensation consulting, and outsourcing
and administration of employee benefit programs. The Mellon
Financial Services Corporations, through their subsidiaries
and joint ventures, provide a broad range of bank-related
services including equipment leasing, commercial loan
financing, stock transfer services, cash management and
numerous trust and investment management services. Mellon's
principal executive office is located at One Mellon Bank
Center, 500 Grant Street, Pittsburgh, PA 15258-0001
(Telephone: (412) 234-5000).
Exchange Mellon's common stock is traded on the New York Stock
listing Exchange. The trading symbol is MEL. Our Transfer Agent and
Registrar is ChaseMellon Shareholder Services, P.O. Box 590,
Ridgefield Park, NJ 07660-9940. For more information, please
call 1 800 205-7699.
Dividend Subject to approval of the board of directors, dividends are
payments paid on Mellon's common stock on or about the 15th day of
February, May, August and November.
Direct Stock The Direct Stock Purchase and Dividend Reinvestment Plan
Purchase and provides a way to purchase shares of common stock directly
Dividend from the Corporation at the market value for such shares.
Reinvestment Nonshareholders may purchase their first shares of the
Plan Corporation's common stock through the plan, and shareholders
may increase their shareholdings by reinvesting cash dividends
and through optional cash investments. Plan details are in a
Prospectus, which may be obtained from ChaseMellon Shareholder
Services by calling 1 800 842-7629.
<TABLE>
<S> <C> <C> <C>
Phone Corporate Communications/
contacts Media Relations (412) 236-1264 Media inquiries
Direct Stock Purchase and
Dividend Reinvestment Plan 1 800 842-7629 Plan prospectus and enrollment materials
Investor Relations (412) 234-5601 Questions regarding the Corporation's financial
performance
Publication Requests 1 800 205-7699 Requests for the Annual Report or quarterly
information
Securities Transfer Agent 1 800 205-7699 Questions regarding stock holdings, certificate
replacement/transfer, dividends and address
changes
</TABLE>
Shareholder Quarterly earnings and other news releases can be obtained by
Publications fax by calling Company News on Call at 1 800 758-5804 and
entering a six-digit code (552187). Copies of Mellon's filings
with the Securities and Exchange Commission on Form 10-K, 10-Q
and 8-K may be obtained by sending a written request to
Mellon's Secretary at 4826 One Mellon Bank Center, Pittsburgh,
PA 15258-0001.
Internet Mellon: www.mellon.com
Dreyfus: www.dreyfus.com
Buck: www.buckconsultants.com
Dreyfus Brokerage Services: www.edreyfus.com
ChaseMellon Shareholder Services: www.chasemellon.com
Founders Asset Management: www.founders.com
54
<PAGE> 56
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Mellon Previously filed as Exhibit 3.1 to
Bank Corporation, as amended and restated the Quarterly Report on Form 10-Q
as of September 2, 1993. (File No. 1-7410) for the quarter
ended September 30, 1993, and
incorporated herein by reference.
3.2 Statement Affecting Series B Preferred Previously filed as Exhibit 3.2 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1993, and
incorporated herein by reference.
3.3 Statement Affecting Series D Preferred Previously filed as Exhibit 3.3 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1994, and
incorporated herein by reference.
3.4 Statement Affecting Series H Preferred Previously filed as Exhibit 3.1 to
Stock, $1.00 Par Value. the Quarterly Report on Form 10-Q
(File No. 1-7410) for the quarter
ended March 31, 1995, and
incorporated herein by reference.
3.5 Statement Affecting Series I Preferred Previously filed as Exhibit 3.5 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1996, and
incorporated herein by reference.
3.6 Statement Affecting Series J Preferred Previously filed as Exhibit 3.6 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1996, and
incorporated herein by reference.
3.7 Statement Affecting Series K Preferred Previously filed as Exhibit 3.9 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1997, and
incorporated herein by reference.
</TABLE>
55
<PAGE> 57
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.8 Amendment of April 16, 1997 to Mellon Previously filed as Exhibit 3.7 to
Bank Corporation's Restated Articles of the Quarterly Report on Form 10-Q
Incorporation. (File No. 1-7410) for the quarter
ended June 30, 1997, and
incorporated herein by reference.
3.9 Amendment of September 26, 1997 to Mellon Previously filed as Exhibit 4.3 to
Bank Corporation's Restated Articles of Registration Statement on
Incorporation. Form S-3 (Registration
No. 333-38213) and incorporated
herein by reference.
3.10 Amendment of April 22, 1998 to Mellon Bank Filed herewith.
Corporation's Restated Articles of Incorporation.
3.11 By-Laws of Mellon Bank Corporation, as amended, Previously filed as Exhibit 4.4 to
effective September 16, 1997. Registration Statement on
Form S-3 (Registration
No. 333-38213) and incorporated
herein by reference.
10.1 Mellon Bank Corporation Stock Option Plan for Filed herewith.
Outside Directors (1989), as amended effective
March 17, 1998.
12.1 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
(parent Corporation).
12.2 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
(Mellon Bank Corporation and its subsidiaries).
27.1 Financial Data Schedules, which are submitted Submitted herewith.
electronically to the Securities and Exchange
Commission for information only and not filed.
</TABLE>
56
<PAGE> 1
Exhibit 3.10
Microfilm Number 9832, 1034-1036 Filed with the Department of State
on April 22, 1998
Entity Number 227630 Yvette Kane
------------------------------------
Secretary of the Commonwealth
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
In compliance with the requirements of 15 Pa.C.S. Section 1915 (relating to
articles of Amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corporation is: Mellon Bank Corporation
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider
and the county of venue is (the Department is hereby authorized to
correct the following information to conform to the records of the
Department):
(a) One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA 15258,
Allegheny County
(b) c/o: _____________________________________________________________
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office
provider, the county in which the corporation is located for venue and
official publication purposes.
3. The statute by or under which it was incorporated is: Act of May 5,
1933, P.L. 364, as amended
4. The date of its incorporation is: August 23, 1971
5. (Check, and if appropriate complete, one of the following):
X The amendment shall be effective upon filing these Articles of
Amendment in the Department of State.
_____ The amendment shall be effective on: ___________ at ____________
Date Hour
6. (Check one of the following):
X The amendment was adopted by the shareholders (or members) pursuant
to 15 Pa.C.S. Section 1914(a) and (b).
<PAGE> 2
_____ The amendment was adopted by the board of directors pursuant to
15 Pa.C.S. Section 1914(c).
7. (Check, and if appropriate complete, one of the following):
_____ The amendment adopted by the corporation, set forth in full,
is as follows:
X The amendment adopted by the corporation as set forth in full in
Exhibit A attached hereto and made a part hereof.
8. (Check if the amendment restates the Articles):
_____ The restated Articles of Incorporation supersede the original
Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these
Articles of Amendment to be signed by a duly authorized officer thereof this
21st day of April, 1998.
MELLON BANK CORPORATION
-------------------------------
(Name of Corporation)
By: Carl Krasik
----------------------------
(Signature)
Title: Associate General Counsel and
Secretary
<PAGE> 3
EXHIBIT A TO ARTICLES OF AMENDMENT
OF
MELLON BANK CORPORATION
The first paragraph of Article Fifth of the Corporation's Restated Articles of
Incorporation, as amended, shall read as follows:
Fifth: The aggregate number of shares which the Corporation
shall have authority to issue is 850,000,000 of which
50,000,000 shares shall be Preferred Stock, par value $1.00
per share, issuable in one or more series, and 800,000,000
shares shall be Common Stock, par value $0.50 per share.
<PAGE> 1
Exhibit 10.1
MELLON BANK CORPORATION
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (1989)
I. Purpose
The purposes of this Stock Option Plan for Outside Directors (1989) are to align
the interests of the outside directors of Mellon Bank Corporation (the
"Corporation") more closely with the interests of the Corporation's
shareholders, to provide such directors with an additional inducement to remain
in the service of the Corporation with an increased incentive to work for its
long-term success, and to establish an effective element of a reasonable
directors' compensation package.
II. Definitions
The following terms shall have the meanings indicated below:
2.1 "Common Stock" shall mean the common stock, par value $.50 per share,
of the Corporation.
2.2 "Corporation" shall mean Mellon Bank Corporation.
2.3 "Business Day" shall mean any day on which the market used to determine
the Fair Market Value of the Common Stock is open for trading.
2.4 "Fair Market Value" shall mean the closing price of the Common Stock on
the New York Stock Exchange on the relevant date. If on the relevant date the
Common Stock is not listed on the New York Stock Exchange, "Fair Market Value"
shall mean the closing price of the Common Stock on the relevant date on the
principal stock exchange on which the Common Stock is listed. If the Common
Stock is not listed on any stock exchange on the relevant date, "Fair Market
Value" shall mean the mean between the bid and asked price of the Common Stock
as reported on the National Association of Securities Dealers Automated
Quotation System on the relevant date.
2.5 "Outside Director" shall mean any individual who on the relevant date
is a member of the Board of Directors of the Corporation but is not an employee
of the Corporation.
2.6 "Plan" shall mean the Mellon Bank Corporation Stock Option Plan for
Outside Directors (1989).
<PAGE> 2
2.7 "Service Year" shall mean the period beginning on the third Business
Day after the Corporation's annual meeting of shareholders at which directors
are elected and ending on the date of such annual meeting in the following year.
2.8 "HR Head" shall mean the head of the Human Resources Department of
Mellon Bank, N.A.
2.9 "Option" shall mean an option granted to an Outside Director pursuant
to the Plan.
2.10 "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended from
time to time, or any successor rule.
III. Administration
3.1 Self-Operative Plan. The Plan is intended to be self-operative to the
maximum extent consistent with prudent business practice. Under no circumstances
shall any individual or group of individuals exercise discretion with respect to
designating the recipient of an Option, the number of shares of Common Stock
that are subject to an Option, the date of grant for an Option or the exercise
price for an Option. Any action of the Nominating Committee of the Board of
Directors to set or recommend retainers or fees shall not be deemed to be such
an exercise of discretion, regardless of such action's effect on the number of
shares that become subject to Options pursuant to the formula in Section 5.4
hereof.
3.2 Certain Administrative Duties. Within the parameters set forth in
Section 3.1 hereof, the HR Head shall administer the Plan. The HR Head's actions
and interpretations under the Plan shall be final, conclusive and binding, the
HR Head shall not be liable for any action taken or decisions made in good faith
relating to the Plan or any Option thereunder.
3.3 Source of Shares. The shares of Common Stock that may be issued upon
the exercise of Options under the Plan may be either authorized but unissued
shares or authorized and issued shares held in the Corporation's treasury. The
aggregate number of shares of Common Stock which may be issued under the Plan
shall not exceed 1,200,000 shares, subject to adjustment pursuant to Section 8.6
hereof.
IV. Grantings of Options
4.1 Timing. Except for individuals who become Outside Directors during the
Service Year (as described in Section 4.3 hereof), Options will be granted once
per Service Year on the third Business Day following the Corporation's annual
meeting of shareholders at which directors are elected.
2
<PAGE> 3
4.2. Recipients. Options will be awarded in equal amounts to all individuals
who are Outside Directors on the date of grant.
4.3 Mid-Service Year Elections. A director who is elected by the Board of
Directors after the start of a Service Year will be granted an Option having
terms (including term, exercise dates, and exercise price) identical to the
Options granted to Outside Directors at the start of that Service Year, except
that the number of shares of Common Stock subject to such Option shall be the
number of shares that are subject to each Option granted at the start of such
Service Year multiplied by a fraction the numerator of which is the number of
days during such Service Year that the recipient of such Option will serve as a
director and the denominator of which is the number of days in the Service Year
(with fractional shares being rounded upward to the nearest whole share).
4.4 Stock Option Agreements. The grant of any Option shall be evidenced by
a written "Stock Option Agreement" executed by the Corporation and the optionee.
The Stock Option Agreement shall contain the number of shares of Common Stock
that are subject to the Option evidenced thereby, the other essential terms of
the Option determined in accordance with Section V hereof, and other terms that
are not inconsistent with the requirements of this Plan.
V. Terms of Options
5.1 Terms of Options. All Options, other than Options granted to an Outside
Director upon his or her election during a Service Year, shall have a term of
ten years from the date of grant, subject to earlier termination pursuant to
Section 5.5 hereof.
5.2 Exercise of Options. All Options, other than Options granted to an
outside Director upon his or her election during a Service Year, shall become
exercisable on the first anniversary of their grant date.
5.3 Exercise Price. The exercise price for all Options, other than Options
granted to an Outside Director upon his or her election during a Service Year,
shall be the Fair Market Value of the Common Stock on the date the Option is
granted.
5.4 Number of Shares. The number of shares of Common Stock that may be
purchased upon exercise of an Option granted for a given Service Year shall be
determined by the following formula:
(Number of dollars in projected annual retainer
for Service Year) x 5.454% = Number of Shares
Fractional shares resulting from the formula shall be rounded upward to the
nearest whole share. The number of shares subject to an Option shall be subject
to adjustment in accordance with Section 8.6 hereof.
3
<PAGE> 4
5.5 Forfeiture. Options that have not become exercisable on the date the
optionee ceases to serve as a director of the Corporation for any reason other
than the optionee's death, disability or completion of the Service Year shall be
forfeited and terminated immediately upon such termination of service. Options
that have become exercisable shall remain exercisable, and shall no longer be
subject to forfeiture, throughout their ten-year terms, regardless of whether
the optionee is a director of the Corporation at the time the Option is
exercised.
VI. Exercise of Options
6.1 Notice of Exercise. An Option shall be exercised by delivery to the
H.R. Head of a written notice of exercise in the form prescribed by the H.R.
Head for use from time to time. Such notice of exercise shall indicate the
number of shares as to which the Option is exercised and shall be accompanied by
the full exercise price for the Options exercised.
6.2 Form of Payment. The exercise price may be paid in cash or, in whole or
in part, by surrender of shares of Common Stock, which shall be credited against
the exercise price at their Fair Market Value on the date the Option is
exercised.
VII. Advisory Board Members
Members of the Corporation's Advisory Board shall be granted options under this
Plan in the same amounts and on the same terms as options granted to Outside
Directors; provided, however, no option shall be granted to an individual upon
his or her election to the Advisory Board after the start of the Service Year.
VIII. Miscellaneous
8.1 General Restriction. Each Option under the Plan shall be subject to the
requirement that, if at any time the H.R. Head shall determine that any listing
or registration of the shares of Common Stock, any consent or approval of any
governmental body, or any other agreement, consent or action is necessary or
desirable as a condition of the granting of an Option or issuance of Common
Stock in satisfaction thereof, such grant or issuance may not be consummated
unless such requirement is satisfied in a manner acceptable to the H.R. Head.
8.2 Non-Assignability. No Option under the Plan shall be assignable or
transferable by the optionee, except by will or pursuant to applicable laws of
descent and distribution. During the life of an optionee, an Option shall be
exercisable only by such optionee.
8.3 Withholding Taxes. Whenever the Corporation issues or transfers shares
of Common Stock under the Plan, the Corporation shall have the right to require
the optionee to remit to the Corporation an amount sufficient to satisfy any
federal, state, and local withholding tax requirements prior to the delivery of
any certificate for such shares.
4
<PAGE> 5
8.4 No Right to Continued Service. Nothing in the Plan or in any agreement
entered into pursuant to the Plan shall confer upon any optionee any right to
continued service as a director of the Corporation or any subsidiary or affect
any right of the Corporation or a subsidiary, acting through their Boards of
Directors or otherwise, to terminate or otherwise affect the service of such
optionee.
8.5 No rights as Shareholders. Holders of Options under the Plan shall have
no rights as shareholders of the Corporation resulting therefrom unless and
until certificates for shares of Common Stock are registered in their names in
satisfaction of a duly exercised Option.
8.6 Adjustments. In the event that the outstanding shares of Common Stock
of the Corporation are changed in number, class or character by reason of any
split-up, change of par value, stock dividend, combination or reclassification
of shares, recapitalization, merger, consolidation or other corporate change, or
shall be changed in value by reason of any spin-off, dividend in partial
liquidation or other special distribution, the Board of Directors of the
Corporation may make any changes it may deem equitable and appropriate in
outstanding Options and/or in the number of shares of Common Stock reserved for
issuance under the Plan. For purposes of this Section 8.6, it is intended that,
absent reasons to the contrary, adjustments to Options be consistent with any
changes or lack of changes to other options on the Common Stock resulting from
the same cause.
8.7 Amendment or Termination of the Plan. The Board of Directors of the
Corporation may amend or terminate the Plan as it deems advisable; provided,
however, no such amendment or termination may (a) impair the rights of an
optionee under an Option previously granted, (b) effect a change to any part of
the formula setting the amount, price and timing of Option grants more often
than permitted under Rule 16b-3 (a change in the level of actual or projected
retainer amounts not being deemed a change to such formula for that purpose), or
(c) without the approval of the Corporation's shareholders, amend any other
provision of Sections IV or V of the Plan.
March 1998
5
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Mellon Bank Corporation (parent Corporation) (a)
- ------------------------------------------------------------------------------
Three months ended
March 31,
(dollar amounts in thousands) 1998 1997
- ------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed net income (loss) of subsidiaries $ 88,204 $30,038
Fixed charges: interest expense, one-third of
rental expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 47,115 43,803
- ------------------------------------------------------------------------------
Total earnings (as defined) $135,319 $73,841
- ------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ 13,347 $13,418
- ------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 2.87 1.69
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends 2.24 1.29
- ------------------------------------------------------------------------------
(a) The parent Corporation ratios include the accounts of Mellon Bank
Corporation (the "Corporation") and Mellon Financial Company, a wholly
owned subsidiary of the Corporation that functions as a financing entity
for the Corporation and its subsidiaries by issuing commercial paper and
other debt guaranteed by the Corporation, and Mellon Capital I and Mellon
Capital II, special purpose business trusts formed by the Corporation, that
exist solely to issue Capital Securities. Because these ratios exclude from
earnings the equity in undistributed net income (loss) of subsidiaries,
these ratios vary with the payment of dividends by such subsidiaries.
(b) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
57
<PAGE> 1
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Mellon Bank Corporation (and its subsidiaries)
- ----------------------------------------------------------------------------
Three months ended
March 31,
(dollar amounts in thousands) 1998 1997
- ----------------------------------------------------------------------------
Income before income taxes $331,861 $298,990
Fixed charges: interest expense (excluding
interest on deposits), one-third of rental
expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 132,176 113,086
- ----------------------------------------------------------------------------
Total earnings (as defined), excluding
interest on deposits 464,037 412,076
Interest on deposits 228,558 214,716
- ----------------------------------------------------------------------------
Total earnings (as defined) $692,595 $626,792
- ----------------------------------------------------------------------------
Preferred stock dividend requirements (a) $ 13,347 $ 13,418
- ----------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.51 3.64
Including interest on deposits 1.92 1.91
Ratio of earnings (as defined) to combined
fixed charges and preferred stock dividends:
Excluding interest on deposits 3.19 3.26
Including interest on deposits 1.85 1.84
- ----------------------------------------------------------------------------
(a) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
58
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,312
<INT-BEARING-DEPOSITS> 620
<FED-FUNDS-SOLD> 549
<TRADING-ASSETS> 140
<INVESTMENTS-HELD-FOR-SALE> 3,547
<INVESTMENTS-CARRYING> 1,987
<INVESTMENTS-MARKET> 2,022
<LOANS> 30,343
<ALLOWANCE> 496
<TOTAL-ASSETS> 47,414
<DEPOSITS> 33,096
<SHORT-TERM> 4,054
<LIABILITIES-OTHER> 2,184
<LONG-TERM> 3,003
991<F1>
0
<COMMON> 147
<OTHER-SE> 3,939
<TOTAL-LIABILITIES-AND-EQUITY> 47,414<F1>
<INTEREST-LOAN> 577
<INTEREST-INVEST> 90
<INTEREST-OTHER> 23
<INTEREST-TOTAL> 694
<INTEREST-DEPOSIT> 229
<INTEREST-EXPENSE> 329
<INTEREST-INCOME-NET> 365
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 716
<INCOME-PRETAX> 332
<INCOME-PRE-EXTRAORDINARY> 332
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 215
<EPS-PRIMARY> .80<F2>
<EPS-DILUTED> .78<F2>
<YIELD-ACTUAL> 4.06
<LOANS-NON> 142
<LOANS-PAST> 108
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 475
<CHARGE-OFFS> 25
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 496
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes $991 million of guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures.
<F2>Reflects the adoption of FAS No. 128, "Earnings per Share," by the Corporation
at year-end 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000064782
<NAME> MELLON BANK CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,915
<INT-BEARING-DEPOSITS> 614
<FED-FUNDS-SOLD> 197
<TRADING-ASSETS> 110
<INVESTMENTS-HELD-FOR-SALE> 3,376
<INVESTMENTS-CARRYING> 2,306
<INVESTMENTS-MARKET> 2,274
<LOANS> 27,525
<ALLOWANCE> 518
<TOTAL-ASSETS> 42,068
<DEPOSITS> 29,936
<SHORT-TERM> 3,130
<LIABILITIES-OTHER> 1,804
<LONG-TERM> 2,512
990<F1>
193
<COMMON> 74
<OTHER-SE> 3,429
<TOTAL-LIABILITIES-AND-EQUITY> 42,068<F1>
<INTEREST-LOAN> 553
<INTEREST-INVEST> 99
<INTEREST-OTHER> 13
<INTEREST-TOTAL> 667
<INTEREST-DEPOSIT> 215
<INTEREST-EXPENSE> 297
<INTEREST-INCOME-NET> 370
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 582
<INCOME-PRETAX> 299
<INCOME-PRE-EXTRAORDINARY> 299
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191
<EPS-PRIMARY> .70<F2>
<EPS-DILUTED> .69<F2>
<YIELD-ACTUAL> 4.37
<LOANS-NON> 95
<LOANS-PAST> 117
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 525
<CHARGE-OFFS> 49
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 518
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes $990 million of guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures.
<F2>Restated primary and diluted earnings per share to reflect the adoption of FAS
No. 128 "Earnings per Share," by the Corporation at year-end 1997. In addition,
a two-for-one common stock split was distributed to shareholders of record on
June 2, 1997 and is reflected in the restated amounts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000064782
<NAME> MELLON BANK CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,846
<INT-BEARING-DEPOSITS> 419
<FED-FUNDS-SOLD> 460
<TRADING-ASSETS> 84
<INVESTMENTS-HELD-FOR-SALE> 4,111
<INVESTMENTS-CARRYING> 2,375
<INVESTMENTS-MARKET> 2,365
<LOANS> 27,393
<ALLOWANCE> 525
<TOTAL-ASSETS> 42,596
<DEPOSITS> 31,374
<SHORT-TERM> 2,247
<LIABILITIES-OTHER> 1,721
<LONG-TERM> 2,518
990<F1>
290
<COMMON> 74
<OTHER-SE> 3,382
<TOTAL-LIABILITIES-AND-EQUITY> 42,596<F1>
<INTEREST-LOAN> 2,253
<INTEREST-INVEST> 406
<INTEREST-OTHER> 73
<INTEREST-TOTAL> 2,739
<INTEREST-DEPOSIT> 903
<INTEREST-EXPENSE> 1,261
<INTEREST-INCOME-NET> 1,478
<LOAN-LOSSES> 155
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 2,195
<INCOME-PRETAX> 1,151
<INCOME-PRE-EXTRAORDINARY> 1,151
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 733
<EPS-PRIMARY> 2.63<F2>
<EPS-DILUTED> 2.58<F2>
<YIELD-ACTUAL> 4.26
<LOANS-NON> 94
<LOANS-PAST> 123
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 471
<CHARGE-OFFS> 190
<RECOVERIES> 66
<ALLOWANCE-CLOSE> 525
<ALLOWANCE-DOMESTIC> 514
<ALLOWANCE-FOREIGN> 11
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes $990 million of guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures.
<F2>Restated primary and diluted earnings per share to reflect the adoption of FAS
No. 128, "Earnings per Share," by the Corporation at year-end 1997. In
addition, a two-for-one common stock split was distributed to shareholders of
record on June 2, 1997 and is reflected in the restated amounts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000064782
<NAME> MELLON BANK CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,342
<INT-BEARING-DEPOSITS> 553
<FED-FUNDS-SOLD> 225
<TRADING-ASSETS> 62
<INVESTMENTS-HELD-FOR-SALE> 2,913
<INVESTMENTS-CARRYING> 2,519
<INVESTMENTS-MARKET> 2,554
<LOANS> 27,690
<ALLOWANCE> 471
<TOTAL-ASSETS> 40,646
<DEPOSITS> 29,261
<SHORT-TERM> 4,317
<LIABILITIES-OTHER> 1,600
<LONG-TERM> 1,443
0
435
<COMMON> 74
<OTHER-SE> 3,516
<TOTAL-LIABILITIES-AND-EQUITY> 40,646
<INTEREST-LOAN> 2,425
<INTEREST-INVEST> 322
<INTEREST-OTHER> 72
<INTEREST-TOTAL> 2,838
<INTEREST-DEPOSIT> 889
<INTEREST-EXPENSE> 1,290
<INTEREST-INCOME-NET> 1,548
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 2,027
<INCOME-PRETAX> 1,092
<INCOME-PRE-EXTRAORDINARY> 1,092
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 691
<EPS-PRIMARY> 2.27<F1>
<EPS-DILUTED> 2.25<F1>
<YIELD-ACTUAL> 4.62
<LOANS-NON> 167
<LOANS-PAST> 98
<LOANS-TROUBLED> 10
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 607
<CHARGE-OFFS> 230
<RECOVERIES> 87
<ALLOWANCE-CLOSE> 471
<ALLOWANCE-DOMESTIC> 463
<ALLOWANCE-FOREIGN> 8
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Restated primary and diluted earnings per share to reflect the adoption of FAS
No. 128, "Earnings per Share," by the Corporation at year-end 1997. In
addition, a two-for-one common stock split was distributed to shareholders of
record on June 2, 1997 and is reflected in the restated amounts.
</FN>
</TABLE>
