<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
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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 June 30, 1998
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Common Stock, $.50 par value 260,707,604
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<PAGE> 2
TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
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Page No.
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Part I - Financial Information
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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 47
Consolidated Income Statement 48
Consolidated Income Statement - Five Quarter Trend 49
Consolidated Statement of Cash Flows 50
Consolidated Statement of Changes in Shareholders' Equity 52
Notes to Financial Statements 54
Selected Statistical Information:
Deposits 59
Selected Key Data 59
Part II - Other Information
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Legal Proceedings (Item 1) 60
Submission of Matters to a Vote of Security Holders (Item 4) 60
Exhibits and Reports on Form 8-K (Item 6) 61
Signature 63
Corporate Information 64
Index to Exhibits 65
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 elsewhere in
this quarterly report or 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.
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<TABLE>
<CAPTION>
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Quarter ended Six months ended
FINANCIAL HIGHLIGHTS ------------------------------------------ --------------------------
(dollar amounts in millions, JUNE 30, March 31, June 30, JUNE 30, June 30,
except per share amounts) 1998 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C>
PER COMMON SHARE
Net income - diluted $ .81 $ .78 $ .71 $ 1.59 $ 1.40
Dividends paid .36 .33 .33 .69 .63
Closing common stock price 69.688 63.50 45.125 69.688 45.125
Book value at period-end 16.24 15.70 13.42 16.24 13.42
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FOR THE PERIOD ENDED
Net income $ 215 $ 215 $ 190 $ 430 $ 381
Net income applicable to common stock 215 206 186 421 368
Dividends paid on common stock 93 84 85 177 162
Average common shares and equivalents
outstanding - diluted (in thousands) 265,848 263,136 259,475 264,518 261,352
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KEY PERFORMANCE MEASURES
Return on average common shareholders'
equity (annualized) 20.8% 21.6% 21.9% 21.2% 21.5%
Return on average assets (annualized) 1.79 1.89 1.79 1.84 1.81
Fee revenue as a percentage of total
revenue (FTE) 66 66 59 66 59
Efficiency ratio (a) 66 65 62 66 62
Efficiency ratio excluding amortization
of intangibles 63 62 59 63 59
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TANGIBLE OPERATING RESULTS (b)
Tangible earnings per common share - diluted $ .91 $ .88 $ .79 $ 1.79 $1.56
Tangible net income applicable
to common stock 243 231 206 474 409
Return on tangible common shareholders'
equity (annualized) 49.7% 43.3% 37.7% 46.4% 37.0%
Return on tangible assets (annualized) 2.13 2.18 2.04 2.16 2.07
Tangible book value per common share
at period-end $7.97 $8.33 $8.66 7.97 $8.66
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JUNE 30, March 31, June 30,
1998 1998 1997
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BALANCES
Loans $30,654 $30,343 $28,144
Total assets 47,448 47,414 43,712
Deposits 33,197 33,096 31,326
Common shareholders' equity 4,234 4,086 3,377
Market capitalization 18,168 16,523 11,353
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CAPITAL RATIOS
Common shareholders' equity to assets 8.92% 8.62% 7.72%
Tangible common shareholders'
equity to assets (c) 4.59 4.76 5.13
Tier I capital 6.51 6.80 7.94
Total (Tier I plus Tier II) capital 10.83 11.28 13.24
Leverage capital 6.65 7.04 8.20
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</TABLE>
(a) See page 24 for the definition of this ratio.
(b) See page 13 for the definition of tangible operating results.
(c) See page 31 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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Common dividend increase
In the second quarter of 1998, the Corporation increased its quarterly common
stock dividend by 9% to $.36 per common share. This is the seventh quarterly
common dividend increase since the beginning of 1994, resulting in a total
common dividend per share increase of 184%.
Acquisition of Founders Asset Management, LLC
On April 1, 1998, the Corporation acquired Founders Asset Management, LLC
(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 $7 billion in assets under management. Founders
was purchased with cash and is operating as a separate subsidiary, headquartered
in Denver. Including the Founders funds, the Dreyfus/Founders family of
proprietary mutual funds now total $108 billion of assets managed, including $34
billion of proprietary equity mutual funds.
Acquisition of Clair Odell Group
On June 1, 1998, the Corporation acquired Clair Odell Group, a full-service
property and casualty insurance agency headquartered in Flourtown, Pa. With more
than $71 million in annual premiums placed, Clair Odell is one of the largest
independent agencies in eastern Pennsylvania and the 75th largest privately
owned agency in the United States based on revenues. In addition to property and
casualty lines, Clair Odell provides life and health, employee benefits, surety,
commercial, bonding and risk management insurance services. Clair Odell is
operating as a separate subsidiary of the Corporation.
Purchase of Minority Interest in Prime Advisors, Inc.
On June 30, 1998, the Corporation purchased a minority interest in Prime
Advisors, Inc. (Prime). Prime, headquartered in Kirkland, Wash., is a market
leader in the specialized property/casualty insurance asset management industry.
With more than $2 billion in assets under management, Prime's principal focus
has been on developing proprietary investment capabilities for property and
casualty insurance companies.
Pending Purchase of Majority Interest in Newton Management Limited
In July 1998, the Corporation announced an agreement to acquire 75% of Newton
Management Limited (Newton), with Newton management and staff retaining an
interest in 25%, either directly or through options. Newton is a leading,
independent U.K.-based investment manager with funds under management of more
than $20 billion. Newton provides investment management services to
institutional, private and retail clients. With the inclusion of the Newton
funds, the Corporation's assets under management, using June 30, 1998 levels,
will total approximately $370 billion. The Corporation will purchase its
majority interest in Newton with cash and loan notes. The transaction is
expected to close in the fourth quarter of 1998, subject to regulatory approval
and certain closing conditions.
3
<PAGE> 5
OVERVIEW
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The Corporation reported record second quarter 1998 diluted earnings per common
share of $.81, an increase of 14%, compared with $.71 in the second quarter of
1997. Net income applicable to common stock in the second quarter of 1998 was
$215 million, an increase of 16%, compared with $186 million in the second
quarter of 1997. Diluted tangible earnings per common share totaled $.91 in the
second quarter of 1998, an increase of 15%, compared with $.79 in the second
quarter of 1997. Diluted earnings per share was $.78, and net income applicable
to common stock was $206 million in the first quarter of 1998.
Annualized return on common shareholders' equity and return on assets were 20.8%
and 1.79%, respectively, in the second quarter of 1998, compared with 21.9% and
1.79%, respectively, in the second quarter of 1997 and 21.6% and 1.89%,
respectively, in the first quarter of 1998. Annualized return on tangible common
shareholders' equity and return on tangible assets were 49.7% and 2.13%,
respectively, in the second quarter of 1998, compared with 37.7% and 2.04%,
respectively, in the second quarter of 1997 and 43.3% and 2.18%, respectively,
in the first quarter of 1998.
Net interest revenue, on a fully taxable equivalent basis, was $374 million in
the second quarter of 1998, up $3 million compared with $371 million in the
prior-year period and up $7 million from $367 million in the first quarter of
1998. The increase from the prior periods primarily resulted from the favorable
impact of acquisitions and loan growth, partially offset by the December 1997
transfer of $231 million of CornerStone(sm) credit card loans into an
accelerated resolution portfolio and the Series K preferred stock redemption.
Fee revenue for the second quarter of 1998 was $712 million, up $172 million
from $540 million in the prior-year period and up $14 million from $698 million
in the first quarter of 1998. Excluding the fee revenue resulting from the
acquisitions of Buck Consultants, Inc. (Buck), Founders and Dreyfus Brokerage
Services, Inc., fee revenue increased 13% in the second quarter of 1998 compared
with the second quarter of 1997. This increase was primarily attributable to
higher trust and investment fees and higher foreign exchange fees. Excluding the
Buck and Founders revenue, trust and investment fees increased 15% in the second
quarter of 1998 compared with the second quarter of 1997. Fee revenue increased
$14 million in the second quarter of 1998 compared with the first quarter of
1998 resulting primarily from higher trust and investment fees, due to new
business and higher transaction volumes, and the Founders acquisition. The
increase in trust and investment fee revenue compared with the first quarter of
1998 was partially offset by the seasonal decrease in the second quarter of 1998
of fees from electronic filing of income tax returns. Excluding the fees
resulting from Founders from the second quarter of 1998 and excluding the tax
return filing fees from both the first and second quarters of 1998, fee revenue
increased 3% in the second quarter of 1998 over the first quarter of 1998.
Operating expense before trust-preferred securities expense and net revenue from
acquired property for the second quarter of 1998 was $721 million, up $150
million from $571 million in the second quarter of 1997 and up $24 million from
$697 million in the first quarter of 1998. These increases primarily resulted
from the impact of acquisitions and business growth. Excluding the effect of the
Buck, Founders, Mellon United National Bank, Mellon 1st Business Bank and
Dreyfus Brokerage Services 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 4% in the second quarter of 1998 compared with the second
quarter of 1997.
Credit quality expense was $13 million in the second quarter of 1998, compared
with $22 million in the second quarter of 1997 and $14 million in the first
quarter of 1998. Net credit losses were $13 million in the second quarter of
1998, down $19 million compared with the prior-year period and down $5 million
from the first quarter of 1998. The decrease from the prior-year period
primarily resulted from a $20 million decrease in credit card net credit losses.
The decrease from the first quarter of 1998 was primarily due to lower
commercial real estate net credit losses.
4
<PAGE> 6
OVERVIEW (CONTINUED)
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Nonperforming assets totaled $170 million at June 30, 1998, compared with $191
million at March 31, 1998, and $162 million at June 30, 1997. The Corporation's
ratio of nonperforming assets to total loans and net acquired property was .55%
at June 30, 1998, compared with .63% at March 31, 1998, and .57% at June 30,
1997. This ratio has been less than 1% for 16 consecutive quarters.
The Corporation's ratio of common shareholders' equity to assets was 8.92% at
June 30, 1998. The ratio of tangible common shareholders' equity to assets was
4.59% at June 30, 1998. The Tier I, Total and Leverage capital ratios were
6.51%, 10.83% and 6.65%, respectively, at June 30, 1998, in excess of the ratios
required to maintain well-capitalized status.
Year-to-date 1998 compared with year-to-date 1997
For the first half of 1998, the Corporation reported diluted earnings per common
share of $1.59 and net income applicable to common stock of $421 million,
compared with $1.40 per common share and $368 million for the first half of
1997. Annualized return on common shareholders' equity and return on assets were
21.2% and 1.84%, respectively, in the first six months of 1998, compared with
21.5% and 1.81%, respectively, in the first six months of 1997. Excluding the
fee revenue resulting from the Buck, Founders and Dreyfus Brokerage Services
acquisitions, fee revenue increased 14% in the first half of 1998, compared with
the first half of 1997. Excluding the effect of these acquisitions as well as
the Mellon United National Bank and Mellon 1st Business Bank acquisitions and
the increase in 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% in the first
half of 1998 compared with the first half of 1997.
For the first half of 1998, the Corporation reported diluted tangible earnings
per common share of $1.79 and tangible net income applicable to common stock of
$474 million, compared with $1.56 per common share and $409 million,
respectively, for the first half of 1997. Annualized return on tangible common
shareholders' equity and return on tangible assets were 46.4% and 2.16%,
respectively, in the first six months of 1998, compared with 37.0% and 2.07%,
respectively, in the first six months of 1997.
5
<PAGE> 7
<TABLE>
<CAPTION>
BUSINESS SECTORS
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FOR THE THREE MONTHS ENDED JUNE 30,
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 $213 $171 $ 282 $ 271 $ 443 $ 321 $ 130 $ 125
Credit quality expense (revenue) 1 - 11 30 - - 4 (2)
Operating expense:
Intangible amortization expense 4 1 19 13 7 7 5 6
Trust-preferred securities expense 1 - 1 2 - - 8 7
Other operating expense 157 124 158 149 319 220 44 47
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Total operating expense 162 125 178 164 326 227 57 60
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Income before taxes 50 46 93 77 117 94 69 67
Income taxes 19 18 34 27 42 37 25 25
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Net income $ 31 $ 28 $ 59 $ 50 $ 75 $ 57 $ 44 $ 42
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Tangible net income $ 34 $ 29 $ 74 $ 59 $ 82 $ 63 $ 47 $ 46
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Average assets $ 4.1 $2.2 $22.0 $19.8 $ 2.5 $ 1.7 $ 17.6 $17.0
Average common equity $ 0.4 $0.3 $ 1.2 $ 1.0 $ 0.8 $ 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% 38% 20% 20% 38% 36% 12% 13%
Return on assets (a) NM NM 1.08% 1.01% NM NM 1.00% 1.01%
Pretax operating margin 23% 27% 33% 29% 26% 29% 53% 54%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 25% 28% 40% 34% 28% 31% 63% 64%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 74% 72% 56% 55% 72% 69% 34% 38%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
<TABLE>
<CAPTION>
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FOR THE SIX MONTHS ENDED JUNE 30,
Consumer 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 $413 $337 $ 579 $ 570 $859 $617 $ 260 $ 251
Credit quality expense (revenue) 1 1 22 58 - - 8 (1)
Operating expense:
Intangible amortization expense 7 2 35 26 12 15 11 11
Trust-preferred securities expense 1 - 3 4 - - 15 14
Other operating expense 309 251 316 299 624 434 93 93
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Total operating expense 317 253 354 329 636 449 119 118
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Income before taxes 95 83 203 183 223 168 133 134
Income taxes 36 33 74 65 81 66 48 50
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Net income $ 59 $ 50 $ 129 $ 118 $142 $102 $ 85 $ 84
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Tangible net income $ 65 $ 52 $ 157 $ 137 $154 $114 $ 92 $ 92
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Average assets $3.9 $2.1 $21.7 $20.1 $2.4 $1.6 $17.5 $16.7
Average common equity $0.4 $0.3 $ 1.1 $ 1.0 $0.8 $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% 35% 23% 24% 37% 33% 12% 13%
Return on assets (a) NM NM 1.20% 1.18% NM NM 0.98% 1.03%
Pretax operating margin 23% 25% 35% 32% 26% 27% 51% 53%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 25% 26% 42% 37% 27% 30% 61% 63%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 75% 74% 55% 53% 73% 70% 36% 37%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
6
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<TABLE>
<CAPTION>
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1998 1997 1998 1997 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,068 $ 888 $ 1 $ 5 $ 23 $ 22 $1,092 $ 915
16 28 (3) (6) - - 13 22
35 27 - - - - 35 27
10 9 - - 9 10 19 19
678 540 1 1 7 3 686 544
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723 576 1 1 16 13 740 590
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329 284 3 10 7 9 339 303
120 107 2 3 2 3 124 113
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$ 209 $ 177 $ 1 $ 7 $ 5 $ 6 $ 215 $ 190
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$ 237 $ 197 $ 1 $ 7 $ 5 $ 6 $ 243 $ 210
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$ 46.2 $40.7 $ 0.1 $ 0.2 $1.7 $ 1.5 $ 48.0 $42.4
$ 3.8 $ 3.2 $ - $ - $0.3 $ 0.2 $ 4.1 $ 3.4
$ 0.5 $ 0.5 $ - $ - $0.5 $ 0.7 $ 1.0 $ 1.2
22% 22% NM NM NM NM 21% 22%
1.81% 1.75% NM NM NM NM 1.79% 1.79%
31% 32% NM NM NM NM 31% 33%
35% 36% NM NM NM NM 36% 38%
64% 61% NM NM NM NM 63% 59%
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</TABLE>
<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> <C>
$2,111 $1,775 $ 2 $ 13 $ 49 $ 40 $2,162 $1,828
31 58 (4) (9) - (5) 27 44
65 54 - - - - 65 54
19 18 - - 20 21 39 39
1,342 1,077 2 2 9 3 1,353 1,082
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1,426 1,149 2 2 29 24 1,457 1,175
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654 568 4 20 20 21 678 609
239 214 2 6 7 8 248 228
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$ 415 $ 354 $ 2 $ 14 $ 13 $ 13 $ 430 $ 381
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$ 468 $ 395 $ 2 $ 14 $ 13 $ 13 $ 483 $ 422
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$ 45.5 $ 40.5 $ 0.1 $0.2 $1.5 $1.6 $ 47.1 $ 42.3
$ 3.7 $ 3.2 $ - $ - $0.3 $0.2 $ 4.0 $ 3.4
$ 0.5 $ 0.5 $ - $ - $0.5 $0.7 $ 1.0 $ 1.2
22% 22% NM NM NM NM 21% 22%
1.84% 1.77% NM NM NM NM 1.84% 1.81%
31% 32% NM NM NM NM 31% 33%
35% 36% NM NM NM NM 36% 38%
64% 61% NM NM NM NM 63% 59%
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</TABLE>
7
<PAGE> 9
BUSINESS SECTORS (CONTINUED)
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Note: The tables on the previous pages 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 $329 million in the
second quarter of 1998, an increase of $45 million, or 16%, compared with the
prior-year quarter. This increase resulted from a $180 million increase in
revenue, due primarily to acquisitions and internal growth in the fee-based
businesses, and a $12 million decrease in credit quality expense, partially
offset by a $147 million increase in operating expense, which was primarily
acquisition related. Income before taxes for the core sectors in the first half
of 1998 totaled $654 million, an increase of $86 million, or 15%, compared with
the prior-year period. This improvement resulted from the same factors
responsible for the second quarter increase. Return on common shareholders'
equity for the core sectors was 22% in both the second quarter and first half of
1998, unchanged from the prior-year periods. Return on assets was 1.81% and
1.84% in the second quarter and first half of 1998, respectively, compared with
1.75% and 1.77% in the second quarter and first half of 1997.
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 $50
million in the second quarter of 1998, up $4 million, or 7%, from the prior-year
period. Income before taxes for the first half of 1998 was $95 million, an
increase of $12 million, or 13%, compared with $83 million in the first half of
1997. These increases resulted from higher profits in private asset management
and at Dreyfus, due in part to the Dreyfus Brokerage Services and Founders
acquisitions, partially offset by a lower contribution from mortgage banking.
The lower contribution from mortgage banking was due to the increased
amortization of mortgage servicing assets, due primarily to a higher level of
mortgage prepayments. This sector provided strong returns, as the annualized
return on common shareholders' equity was 32% in both the second quarter and
first half of 1998, compared with 38% and 35% in the second quarter and first
half 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 $93 million in the second quarter of 1998, compared with
$77 million in the second quarter of 1997, an increase of 20%. Revenue increased
$11 million, compared with the prior-year period, primarily as a result of the
favorable impact of the Mellon United National Bank and Mellon 1st Business Bank
acquisitions, partially offset by lower revenue due to the December 1997
transfer of $231 million of CornerStone(sm) credit card loans into an
accelerated resolution portfolio. Credit quality expense decreased $19 million
primarily resulting from the transfer of the CornerStone(sm) credit card loans
to an accelerated resolution portfolio. Operating expense increased $14 million,
compared with the prior-year period, primarily due to the impact of the
acquisitions. Income before taxes for the first six months of 1998 was $203
million, an increase of $20 million or 11%, compared with the first six months
of 1997. This increase resulted from the same factors responsible for the second
quarter increase. The annualized return on common shareholders' equity for this
sector was 20% and 23% in the second quarter and first half of 1998, compared
with 20% and 24% in the second quarter and first half of 1997.
8
<PAGE> 10
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 $117 million in the second
quarter of 1998, an increase of $23 million, or 25%, compared with the second
quarter of 1997. Revenue increased $122 million primarily due to the Buck
acquisition, higher mutual fund management revenue, due in part to the Founders
acquisition, higher institutional asset management fees, increased foreign
exchange fees, higher institutional trust fees and increased cash management
revenue. 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, now accounted
for on an equity basis. Operating expense increased $99 million due to the Buck
and Founders acquisitions, 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. Income
before taxes for the first six months of 1998 was $223 million, an increase of
$55 million, or 33%, compared with the first six months of 1997. This increase
resulted from the same factors responsible for the second quarter increase. This
sector provided excellent returns as annualized return on common shareholders'
equity for this sector was 38% and 37% in the second quarter and first half of
1998, respectively, compared with 36% and 33% in the second quarter and first
half 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 $69 million for the
second quarter of 1998, an increase of $2 million, or 3%, from the second
quarter of 1997. Revenue increased $5 million due primarily to gains on the sale
of equity securities, higher securities trading revenue and higher revenue from
the lease financing businesses. Credit quality expense increased $6 million.
Operating expense decreased $3 million. Income before taxes in the first six
months of 1998 was $133 million, down $1 million compared with the first six
months of 1997, as higher revenue was offset with higher credit quality expense.
The annualized return on common shareholders' equity for this sector was 12% in
both the second quarter and first half of 1998, compared with 13% in both the
second quarter and first half 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 $3
million and $4 million in the second quarter and first half of 1998,
respectively, compared with $10 million and $20 million in the second quarter
and first half of 1997, reflecting the lower level of real estate workout assets
in 1998.
Other
The Other sector's pretax income for the second quarter and first half of 1998
was $7 million and $20 million, respectively, compared with $9 million and $21
million in the second quarter and first half of 1997. Revenue for the second
quarter and first half of 1998 primarily reflects earnings on the use of
proceeds from the trust-preferred securities and earnings on capital above that
required for the core sectors and gains from the sale of assets. Revenue for
1997 primarily reflects earnings on the use of proceeds from the trust-preferred
securities and earnings on capital above that required for the core sectors.
Credit quality revenue for 1997 represents loan loss recoveries from loans to
lesser developed countries.
9
<PAGE> 11
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
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 JUNE 30, Consumer Business
(dollar amounts in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $90 $78 $119 $99
Return on average common
shareholders' equity (a) 23% 24% 21% 21%
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
(dollar amounts in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $188 $168 $227 $186
Return on average common
shareholders' equity (a) 25% 26% 21% 20%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Services provided
-----------------------------------------
Total Total
FOR THE THREE MONTHS ENDED JUNE 30, Fee Services Banking Services
(dollar amounts in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $106 $85 $103 $92
Return on average common
shareholders' equity (a) 36% 36% 16% 16%
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,
(dollar amounts in millions) 1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
Net income $201 $152 $214 $202
Return on average common
shareholders' equity (a) 35% 34% 17% 18%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
10
<PAGE> 12
<TABLE>
<CAPTION>
BUSINESS SECTORS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
Consumer Business
Fee Services Banking Fee Services Banking
(dollar amounts in millions, JUNE 30, March 31, JUNE 30, March 31, JUNE 30, March 31, JUNE 30, March 31,
averages in billions) 1998 1998 1998 1998 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $213 $200 $ 282 $ 297 $443 $416 $ 130 $ 130
Credit quality expense (revenue) 1 - 11 11 - - 4 4
Operating expense:
Intangible amortization expense 4 3 19 16 7 5 5 6
Trust-preferred securities expense 1 - 1 2 - - 8 7
Other operating expense 157 152 158 158 319 305 44 49
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expense 162 155 178 176 326 310 57 62
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 50 45 93 110 117 106 69 64
Income taxes 19 17 34 40 42 39 25 23
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 31 $ 28 $ 59 $ 70 $ 75 $ 67 $ 44 $ 41
- ----------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 34 $ 31 $ 74 $ 83 $ 82 $ 72 $ 47 $ 45
- ----------------------------------------------------------------------------------------------------------------------------------
Average assets $4.1 $3.7 $22.0 $21.3 $2.5 $2.3 $17.6 $17.4
Average common equity $0.4 $0.4 $ 1.2 $ 1.1 $0.8 $0.7 $ 1.4 $ 1.4
Average Tier I preferred equity $ - $ - $ 0.1 $ 0.1 $ - $ - $ 0.4 $ 0.4
Return on common
shareholders' equity (a) 32% 32% 20% 25% 38% 36% 12% 12%
Return on assets (a) NM NM 1.08% 1.33% NM NM 1.00% 0.95%
Pretax operating margin 23% 23% 33% 37% 26% 25% 53% 49%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 25% 24% 40% 43% 28% 27% 63% 59%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 74% 76% 56% 53% 72% 73% 34% 38%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
NM - Not meaningful.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
JUNE 30, March 31, JUNE 30, March 31, JUNE 30, March 31, JUNE 30, March 31,
1998 1998 1998 1998 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $1,068 $1,043 $ 1 $ 1 $ 23 $ 26 $1,092 $1,070
Credit quality expense (revenue) 16 15 (3) (1) - - 13 14
Operating expense:
Intangible amortization expense 35 30 - - - - 35 30
Trust-preferred securities expense 10 9 - - 9 11 19 20
Other operating expense 678 664 1 1 7 2 686 667
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expense 723 703 1 1 16 13 740 717
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 329 325 3 1 7 13 339 339
Income taxes 120 119 2 - 2 5 124 124
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 209 $ 206 $ 1 $ 1 $ 5 $ 8 $ 215 $ 215
- ----------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 237 $ 231 $ 1 $ 1 $ 5 $ 8 $ 243 $ 240
- ----------------------------------------------------------------------------------------------------------------------------------
Average assets $ 46.2 $ 44.7 $ 0.1 $ 0.1 $1.7 $1.4 $ 48.0 $ 46.2
Average common equity $ 3.8 $ 3.6 $ - $ - $0.3 $0.3 $ 4.1 $ 3.9
Average Tier I preferred equity $ 0.5 $ 0.5 $ - $ - $0.5 $0.6 $ 1.0 $ 1.1
Return on common
shareholders' equity (a) 22% 23% NM NM NM NM 21% 22%
Return on assets (a) 1.81% 1.87% NM NM NM NM 1.79% 1.89%
Pretax operating margin 31% 31% NM NM NM NM 31% 32%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 35% 35% NM NM NM NM 36% 36%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 64% 64% NM NM NM NM 63% 62%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
NM - Not meaningful.
11
<PAGE> 13
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Customers serviced
--------------------------------------------------
Total Total
Consumer Business
FOR THE THREE MONTHS ENDED JUNE 30, March 31, JUNE 30, March 31,
(dollar amounts in millions) 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $90 $98 $119 $108
Return on average common
shareholders' equity (a) 23% 27% 21% 20%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Services provided
--------------------------------------------------
Total Total
Fee Services Banking Services
FOR THE THREE MONTHS ENDED JUNE 30, March 31, JUNE 30, March 31,
(dollar amounts in millions) 1998 1998 1998 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $106 $95 $103 $111
Return on average common
shareholders' equity (a) 36% 35% 16% 18%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
Income before taxes for the total core sectors was $329 million in the second
quarter of 1998, an increase of $4 million compared with $325 million in the
first quarter of 1998. This increase resulted primarily from higher trust and
investment management revenue, due to new business and higher volumes as well as
fees resulting from the Founders acquisition, higher cash management and deposit
transaction charges, and higher net interest revenue. The increase in trust and
investment fees was partially offset by a $20 million decrease in the second
quarter of 1998 of fees from electronic filing of income tax returns.
Substantially all of this revenue is recognized in the first quarter of each
year.
Income before taxes in the Consumer Fee Services sector increased $5 million in
the second quarter of 1998 compared with the first quarter of 1998, primarily
from higher mutual fund management revenue, due in part to the Founders
acquisition.
The $17 million decrease in income before taxes in the Consumer Banking Services
sector primarily resulted from the seasonally lower income tax return filing fee
revenue, partially offset by the full-quarter favorable impact of the Mellon
United National Bank and Mellon 1st Business Bank acquisitions.
Business Fee Services income before taxes in the second quarter of 1998 compared
with the first quarter of 1998 increased $11 million primarily due to higher
trust and investment management revenue, due in part to the Founders
acquisition.
Business Banking Services income before taxes increased $5 million in the second
quarter of 1998 compared with the first quarter of 1998, primarily due to lower
operating expenses.
12
<PAGE> 14
TANGIBLE OPERATING RESULTS
- --------------------------------------------------------------------------------
Except for the merger with Dreyfus, which was accounted for under the "pooling
of interests" method, the Corporation has been required to account for business
combinations under the "purchase" method of accounting. The purchase method
results in the recording of goodwill and other identified intangibles that are
amortized as noncash charges in future years into operating expense. The pooling
of interests method does not result in the recording of goodwill or intangibles.
Since goodwill and intangible amortization expense does not result in a cash
expense, the economic value to shareholders under either accounting method is
essentially the same.
Tangible results for the second quarter of 1998, compared with the second
quarter of 1997, reflect the effect of the acquisitions of Buck in July 1997,
Dreyfus Brokerage Services in November 1997, Mellon United National Bank and
Mellon 1st Business Bank in February 1998 and Founders in April 1998. Results,
excluding the impact of intangibles, are shown in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
--------------------------------------- ------------------------
(dollar amounts in millions, except per JUNE 30, March 31, June 30, JUNE 30, June 30,
share amounts; ratios annualized) 1998 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income applicable to common stock $ 215 $ 206 $ 186 $ 421 $ 368
After-tax impact of amortization of
intangibles from purchase acquisitions 28 25 20 53 41
- ----------------------------------------------------------------------------------------------------------------------------------
Tangible net income applicable
to common stock $ 243 $ 231 $ 206 $ 474 $ 409
Tangible earnings per common
share - diluted $ .91 $ .88 $ .79 $ 1.79 $ 1.56
Average common equity $ 4,126 $ 3,873 $ 3,393 $ 4,000 $ 3,441
Average goodwill and other
identified intangibles 2,161 1,711 1,206 1,938 1,215
- ----------------------------------------------------------------------------------------------------------------------------------
Average tangible common equity $ 1,965 $ 2,162 $ 2,187 $ 2,062 $ 2,226
Return on tangible common equity 49.7% 43.3% 37.7% 46.4% 37.0%
Average total assets $ 47,965 $ 46,229 $ 42,413 $ 47,102 $ 42,301
Average tangible assets $ 45,804 $ 44,518 $ 41,207 $ 45,164 $ 41,086
Return on tangible assets 2.13% 2.18% 2.04% 2.16% 2.07%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 15
NONINTEREST REVENUE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
------------------------------------------- --------------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1998 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fee revenue:
Trust and investment revenue:
Investment management:
Mutual fund $120 $ 100 $ 90 $ 220 $ 177
Private asset 54 52 42 106 84
Institutional asset 53 50 41 103 78
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment management
revenue 227 202 173 429 339
Administration/custody/consulting:
Mutual fund 34 33 33 67 63
Private asset 5 4 4 9 8
Institutional trust 98 95 73 193 139
Benefits consulting 54 52 - 106 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total administration/custody/
consulting revenue 191 184 110 375 210
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and investment
fee revenue 418 386 283 804 549
Cash management and deposit
transaction charges 65 61 59 126 115
Mortgage servicing fees 53 55 53 108 104
Foreign currency and securities
trading revenue 38 41 25 79 50
Credit card fees 23 24 25 47 49
Other 115 131 95 246 209
- ----------------------------------------------------------------------------------------------------------------------------------
Total fee revenue 712 698 540 1,410 1,076
Gains on sale of securities 1 - - 1 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue $713 $698 $540 $1,411 $1,076
- ----------------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of
total revenue (FTE) 66% 66% 59% 66% 59%
Trust and investment fee revenue
as a percentage of total revenue (FTE) 38% 36% 31% 37% 30%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fee revenue increased $172 million, or 32%, in the second quarter of 1998,
compared with the second quarter of 1997. Excluding the revenue resulting from
the Buck, Founders and Dreyfus Brokerage Services acquisitions, fee revenue
increased 13% compared with the prior-year period.
Total trust and investment fee revenue
The $135 million, or 48%, increase in trust and investment fee revenue in the
second quarter of 1998, compared with the prior-year period, reflects revenue
resulting from the Buck and Founders acquisitions, as well as an increase in the
market value of assets under management, new business and higher transaction
volumes. At June 30, 1998, the Corporation managed or administered more than $2
trillion in assets. Excluding the Buck and Founders revenue, trust and
investment fees increased 15% compared with the second quarter of 1997.
The $54 million increase in investment management revenue resulted from a $30
million, or 33%, increase in mutual fund management revenue, a $12 million, or
30%, increase in private asset management revenue and a
14
<PAGE> 16
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
$12 million, or 27%, increase in institutional asset management revenue. These
increases resulted from an increase in the market value of assets under
management, new business and the Founders acquisition. Mutual fund management
fees are discussed further on the following page.
As shown in the table below, the market value of trust assets under management
was $350 billion at June 30, 1998, a $22 billion increase from $328 billion at
March 31, 1998. This increase resulted from a general market increase, net new
business and the Founders acquisition. At June 30, 1998, compared to March 31,
1998, the S&P 500 index increased 2.9% while the Lehman Brothers Long-Term
Government Bond Index increased 4.7%. With the inclusion of the Newton funds,
the Corporation's assets under management, using June 30, 1998 levels, will
total approximately $370 billion.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT - DREYFUS (a)
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in billions) 1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mutual funds managed - proprietary:
Taxable money market funds:
Institutions $ 35 $ 34 $ 33 $ 32 $ 30
Individuals 8 9 9 9 9
Equity funds 34 26 22 22 19
Tax-exempt bond funds 16 16 17 17 17
Tax-exempt money market funds 8 8 7 7 7
Fixed-income funds 7 5 5 5 4
- ----------------------------------------------------------------------------------------------------------------------------------
Total proprietary mutual funds managed 108 98 93 92 86
Mutual funds managed - nonproprietary 17 15 11 10 8
- ----------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund assets 125 113 104 102 94
Institutional asset (b) 184 175 165 163 159
Private asset 41 40 36 34 33
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $350 $328 $305 $299 $286
- ----------------------------------------------------------------------------------------------------------------------------------
</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; 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, Pareto Partners and
Prime Advisors Inc.; 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 $25 billion at June 30, 1998;
$24 billion at March 31, 1998; $21 billion at December 31, 1997; $21
billion at September 30, 1997; and $23 billion at June 30, 1997. The
Corporation has a 30% equity interest in Pareto Partners.
At June 30, 1998, the combined market values of $17 billion of nonproprietary
mutual funds and $184 billion of institutional assets managed, by asset type,
were as follows: equities, $81 billion; balanced, $27 billion; fixed income, $61
billion; money market, $5 billion; and $27 billion, primarily in currency
overlay and global fixed income products, including $25 billion at Pareto
Partners, for a total of $201 billion.
15
<PAGE> 17
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Mutual fund management fees
Mutual fund management fees are based upon the average net assets of each fund.
Including the Founders funds of approximately $7 billion, the average net assets
of proprietary mutual funds managed at Dreyfus/Founders in the second quarter of
1998 were $109 billion, up $24 billion from $85 billion in the second quarter of
1997 and up $12 billion from $97 billion in the first quarter of 1998. The
increases from the prior periods primarily resulted from increases in average
net assets of equity mutual funds and institutional taxable money market funds.
Proprietary equity mutual funds, including the $7 billion of funds related to
Founders, averaged $33 billion in the second quarter of 1998, compared with $17
billion in the second quarter of 1997, and $23 billion in the first quarter of
1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MANAGED MUTUAL FUND FEE REVENUE Quarter ended Six months ended
-------------------------------------------------- ----------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1998 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed mutual fund fees $130 $111 $99 $241 $197
Less: Fees waived and fund expense
reimbursements 10 11 9 21 20
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $120 $100 $90 $220 $177
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees by fund category:
Proprietary funds:
Taxable money market funds:
Institutions $ 21 $ 18 $16 $ 39 $ 31
Individuals 8 8 9 16 18
Equity funds 48 33 26 81 50
Tax-exempt bond funds 23 24 24 47 48
Tax-exempt money market funds 7 7 7 14 14
Fixed-income funds 9 7 6 16 11
- ----------------------------------------------------------------------------------------------------------------------------------
Total proprietary fund fees 116 97 88 213 172
Nonproprietary fund management fees 4 3 2 7 5
- ----------------------------------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $120 $100 $90 $220 $177
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Administration/custody/consulting fee revenue increased $81 million in the
second quarter of 1998, compared with the second quarter of 1997. This increase
reflected benefits consulting and institutional trust fees resulting from the
Buck acquisition, new business and higher transaction volumes. Excluding the
Buck fees from the second quarter of 1998 and excluding the fees from the
corporate trust business which was sold in November 1997, from the second
quarter of 1997, institutional trust fees increased 6% compared with the
prior-year period.
The market value of assets under administration/custody, shown in the table on
the following page, was $1,791 billion at June 30, 1998, an increase of $125
billion compared with $1,666 billion at March 31, 1998. This increase resulted
from new business and a general market increase.
16
<PAGE> 18
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in billions) 1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust (a) $1,701 $1,564 $1,440 $1,396 $1,213
Mutual fund 54 67 60 60 63
Private asset 36 35 32 32 30
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $1,791 $1,666 $1,532 $1,488 $1,306
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $316 billion of assets at June 30, 1998; $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 $6 million, or 11%, increase in cash management and deposit transaction
charges in the second 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
Mortgage servicing fees were unchanged in the second quarter of 1998, compared
with the prior-year period. At June 30, 1998, the Corporation's total servicing
portfolio was $75 billion, composed of $59 billion of residential and $16
billion of commercial servicing. At June 30, 1997, the total servicing portfolio
was $75 billion, composed of $65 billion of residential and $10 billion of
commercial servicing. The Corporation intends to sell its commercial mortgage
servicing business in the second half of 1998. This business generated
approximately $8 million of mortgage servicing fee revenue in the first half of
1998.
Foreign currency and securities trading revenue
The $13 million, or 52%, increase in foreign currency and securities trading
revenue in the second 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.
Credit card fees
Credit card fees were $23 million and $47 million in the second quarter and
first half of 1998, respectively, compared with $25 million and $49 million in
the second quarter and first half of 1997. The Corporation intends to sell its
merchant card processing business in the second half of 1998. This business
generated approximately $15 million of fee revenue in the first half of 1998.
Other fee revenue
Other fee revenue was $115 million in the second quarter of 1998, an increase of
$20 million compared with the second quarter of 1997. This increase resulted
from fees generated by Dreyfus Brokerage Services, higher gains from the sale of
equity securities and other assets, and higher fees from many fee-based
services.
17
<PAGE> 19
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Second quarter 1998 compared with first quarter 1998
Fee revenue increased $14 million in the second quarter of 1998, compared with
the first quarter of 1998, resulting primarily from a $32 million increase in
trust and investment fees, due to new business and higher transaction volumes
and fees resulting from the Founders acquisition. The increase in trust and
investment fees compared with the first quarter of 1998 was partially offset by
a $16 million decrease in other fee revenue. The decrease primarily resulted
from the seasonal decrease in the second quarter of 1998 of fees from the
electronic filing of income tax returns. Substantially all of this revenue is
recognized in the first quarter of each year. 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. Excluding
the fees resulting from Founders in the second quarter of 1998 and excluding the
tax return filing fees from both the first and second quarters of 1998, fee
revenue increased 3% in the second quarter of 1998 over the first quarter of
1998.
Year-to-date 1998 compared with year-to-date 1997
Fee revenue totaled $1,410 million in the first half of 1998, a $334 million
increase compared with the prior-year period, primarily resulting from the same
factors responsible for the second quarter of 1998 increase as compared to the
prior-year period. Excluding the revenue resulting from the Buck, Founders and
Dreyfus Brokerage Services acquisitions, fee revenue increased 14% compared with
the prior-year period.
18
<PAGE> 20
NET INTEREST REVENUE
- --------------------------------------------------------------------------------
Net interest revenue, on a fully taxable equivalent basis, for the second
quarter of 1998 totaled $374 million, compared with $371 million in the second
quarter of 1997 and $367 million in the first quarter of 1998. The net interest
margin was 3.97% in the second quarter of 1998, compared with 4.29% in the
second quarter of 1997 and 4.06% in the first quarter of 1998.
The $3 million increase in fully taxable equivalent net interest revenue in the
second quarter of 1998, compared with the second quarter of 1997, primarily
resulted from the favorable impacts of the Mellon United National Bank, Mellon
1st Business Bank and Dreyfus Brokerage Services acquisitions, net of funding
costs, and loan growth. Primarily offsetting these factors was the effect of the
December 1997 transfer of $231 million of CornerStone(sm) credit card loans into
an accelerated resolution portfolio, the funding costs of other acquisitions
whose revenue is included in fee revenue, and the Series K preferred stock
redemption.
Second quarter 1998 compared with first quarter 1998
Net interest revenue increased $7 million, compared with the first quarter of
1998, primarily resulting from the full-quarter favorable impact of the February
1998 Mellon United National Bank and Mellon 1st Business Bank acquisitions, net
of funding costs, and loan growth, partially offset by the funding costs related
to the Founders acquisition.
Year-to-date 1998 compared with year-to-date 1997
Net interest revenue and the net interest margin, on a taxable equivalent basis,
were $741 million and 4.02%, respectively, in the first half of 1998, compared
with $744 million and 4.33% in the first half of 1997. The $3 million decrease
in net interest revenue in the first six months of 1998, compared with the first
six months of 1997, was primarily due to funding costs related to the Buck and
Founders acquisitions, the transfer of the CornerStone(sm) credit card loans
into an accelerated resolution portfolio and the Series K preferred stock
redemption, partially offset by the favorable impacts of the Mellon United
National Bank, Mellon 1st Business Bank and Dreyfus Brokerage Services
acquisitions, net of funding costs, and loan growth. The 31 basis point
decrease in the net interest margin in the first half of 1998, compared with
the first half of 1997, primarily resulted from funding costs related to the
acquisitions and the Series K preferred stock redemption.
19
<PAGE> 21
NET INTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended
-----------------------------------------------------
JUNE 30, 1998 June 30, 1997
AVERAGE AVERAGE Average Average
(dollar amounts in millions) BALANCE YIELDS/RATES balance yields/rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets Interest-earning assets:
Federal funds sold and securities under resale agreements $ 910 5.55% $ 422 5.31%
Interest-bearing deposits with banks 611 5.09 554 4.99
Other money market investments 133 5.57 80 4.82
Trading account securities 240 5.98 186 5.64
Securities:
U.S. Treasury and agency securities (a) 5,230 6.84 5,662 6.78
Obligations of states and political subdivisions (a) 38 7.82 49 7.81
Other (a) 137 6.91 110 6.89
Loans, net of unearned discount (a) 29,827 8.02 27,607 8.24
-------- --------
Total interest-earning assets 37,126 7.72 34,670 7.89
Cash and due from banks 3,250 2,736
Premises and equipment 562 577
Customers' acceptance liability 107 257
Net acquired property 59 74
Other assets (a) 6,424 4,518
Reserve for credit losses (496) (521)
------------------------------------------------------------------------------------------------------------------
Total assets $47,032 $ 42,311
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Interest-bearing liabilities:
trust-preferred Deposits in domestic offices:
securities and Demand $ 328 2.28% $ 228 1.45%
shareholders' Money market and other savings accounts 10,936 2.91 10,109 2.82
equity Retail savings certificates 7,638 5.02 6,903 4.93
Other time deposits 1,898 5.57 1,994 5.54
Deposits in foreign offices 2,646 4.92 2,775 4.86
-------- --------
Total interest-bearing deposits 23,446 4.03 22,009 3.97
Federal funds purchased and securities under
repurchase agreements 2,013 5.40 1,438 5.40
U.S. Treasury tax and loan demand notes 552 5.33 502 5.28
Term federal funds purchased 467 5.73 598 5.58
Short-term bank notes 304 5.72 73 5.70
Commercial paper 219 5.57 74 5.33
Other funds borrowed 350 9.00 348 8.29
Notes and debentures (with original maturities over one year) 2,900 6.94 2,617 7.05
-------- --------
Total interest-bearing liabilities 30,251 4.54 27,659 4.46
Total noninterest-bearing deposits 9,693 8,187
Acceptances outstanding 107 257
Other liabilities (a) 1,985 1,551
------------------------------------------------------------------------------------------------------------------
Total liabilities 42,036 37,654
------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991 990
------------------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 4,005 3,667
------------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $47,032 $42,311
- ------------------------------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.72% 7.89%
Cost of funds supporting interest-earning assets 3.70 3.56
------------------------------------------------------------------------------------------------------------------
Net interest margin:
Taxable equivalent basis 4.02% 4.33%
Without taxable equivalent increments 4.00 4.30
------------------------------------------------------------------------------------------------------------------
</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
20
<PAGE> 22
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1998 March 31, 1998 Dec. 31, 1997 Sept. 30, 1997 June 30, 1997
AVERAGE AVERAGE Average Average Average Average Average Average Average Average
BALANCE YIELDS/RATES balance yields/rates balance yields/rates balance yields/rates balance yields/rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 853 5.52% $ 967 5.58% $ 792 5.05% $ 601 5.59% $ 438 5.28%
569 4.93 655 5.24 468 5.16 496 5.14 547 4.89
175 5.12 90 6.46 137 5.77 134 5.73 96 5.36
239 5.60 242 6.35 159 5.41 171 5.44 210 5.69
5,385 6.72 5,071 6.98 5,129 6.71 5,315 6.74 5,470 6.84
45 6.67 35 8.71 26 7.78 29 7.63 47 7.68
126 6.93 148 6.92 105 7.80 109 5.92 107 7.45
30,281 8.05 29,367 7.99 28,461 8.07 27,583 8.18 27,810 8.27
-------- -------- -------- -------- --------
37,673 7.72 36,575 7.72 35,277 7.75 34,438 7.84 34,725 7.93
3,281 3,220 3,026 2,875 2,798
562 562 592 601 581
92 123 253 315 255
68 49 53 71 72
6,721 6,120 5,510 5,057 4,523
(499) (492) (495) (512) (517)
- ------------------------------------------------------------------------------------------------------------------------------------
$47,898 $46,157 $44,216 $42,845 $42,437
- ------------------------------------------------------------------------------------------------------------------------------------
$ 347 2.14% $ 309 2.43% $ 239 2.15% $ 231 2.50% $ 228 1.49%
11,069 2.91 10,801 2.91 10,128 2.89 9,840 2.84 10,010 2.87
7,680 5.01 7,596 5.04 7,514 5.08 7,336 5.06 7,081 4.98
2,092 5.55 1,702 5.59 1,456 5.78 1,710 5.77 1,767 5.71
2,740 4.86 2,550 4.98 2,594 4.92 2,425 4.88 2,737 4.90
- --------- --------- --------- --------- ---------
23,928 4.03 22,958 4.04 21,931 4.07 21,542 4.05 21,823 4.02
2,257 5.38 1,765 5.44 1,522 5.66 1,163 5.58 1,457 5.62
684 5.32 418 5.35 401 5.36 467 5.40 596 5.39
388 5.63 546 5.80 631 5.83 570 5.86 724 5.67
296 5.68 313 5.76 231 5.30 199 6.52 69 5.81
237 5.55 200 5.60 70 5.54 58 5.45 67 5.38
352 9.16 351 8.83 556 7.75 435 8.19 378 8.28
3,003 6.88 2,797 7.01 2,781 6.94 2,832 6.83 2,716 7.01
- --------- --------- --------- --------- ---------
31,145 4.53 29,348 4.54 28,123 4.58 27,266 4.56 27,830 4.54
9,620 9,767 9,154 8,807 8,290
92 123 253 315 255
1,968 2,001 1,961 1,776 1,470
- ------------------------------------------------------------------------------------------------------------------------------------
42,825 41,239 39,491 38,164 37,845
- ------------------------------------------------------------------------------------------------------------------------------------
991 991 990 990 990
- ------------------------------------------------------------------------------------------------------------------------------------
4,082 3,927 3,735 3,691 3,602
- ------------------------------------------------------------------------------------------------------------------------------------
$47,898 $46,157 $44,216 $42,845 $42,437
- ------------------------------------------------------------------------------------------------------------------------------------
7.72% 7.72% 7.75% 7.84% 7.93%
3.75 3.66 3.68 3.60 3.64
- ------------------------------------------------------------------------------------------------------------------------------------
3.97% 4.06% 4.07% 4.24% 4.29%
3.95 4.04 4.05 4.22 4.27
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
21
<PAGE> 23
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
------------------------------------------- ---------------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1998 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for credit losses $15 $15 $25 $30 $50
Net revenue from acquired property (2) (1) (3) (3) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
Credit quality expense $13 $14 $22 $27 $44
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Credit quality expense, defined as the provision for credit losses less the net
revenue from acquired property, decreased $9 million in the second quarter of
1998, compared with the second quarter of 1997, primarily as a result of a $10
million decrease in provision for credit losses. 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.
A summary of the Corporation's net credit losses is presented on the following
page. The $19 million decrease in net credit losses, compared with the second
quarter of 1997, primarily resulted from a $20 million decrease in credit card
net credit losses. Net credit losses decreased by $5 million, compared with the
first quarter of 1998, primarily due to lower commercial real estate net credit
losses.
The decrease in both credit quality expense and net credit losses in the first
half of 1998, compared with the first half of 1997, primarily resulted from
lower credit card net credit losses as a result of the actions taken on the
CornerStone(sm) portfolio in December 1997, offset, in part, by higher
commercial real estate net credit losses and lower international loan
recoveries. The net carrying value of the accelerated resolution portfolio at
June 30, 1998, was $106 million, compared with $130 million at March 31, 1998,
and $157 million at December 31, 1997. The Corporation expects a significant
reduction in credit card net credit losses throughout 1998, compared with 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 $498 million at June 30, 1998, compared with $475
million at December 31, 1997, and $511 million at June 30, 1997. The $13 million
decrease in the reserve for credit losses from June 30, 1997, resulted primarily
from credit losses on the CornerStone(sm) credit card loans, partially offset by
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 June 30, 1998, was
463%, compared with 349% at March 31, 1998, 356% at year-end 1997 and 570% at
June 30, 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 June 30, 1997,
primarily resulted from an increase in the level of nonperforming loans.
22
<PAGE> 24
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY Quarter ended Six months ended
--------------------------------------------- ----- ------------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1998 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of period $496 $475 $518 $475 $525
Net change in reserve primarily
from acquisitions - 24 - 24 -
Credit losses:
Domestic:
Commercial and financial (1) (3) (1) (4) (10)
Commercial real estate - (5) - (5) (1)
Consumer credit:
Credit cards (12) (10) (33) (22) (66)
Other consumer credit (5) (5) (7) (10) (13)
Lease finance assets (4) (2) (2) (6) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Total domestic credit losses (22) (25) (43) (47) (92)
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial 2 3 2 5 6
Commercial real estate - 1 2 1 5
Consumer credit:
Credit cards 2 1 3 3 5
Other consumer credit 4 2 2 6 5
Lease finance assets 1 - 2 1 2
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic 9 7 11 16 23
International - - - - 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 9 7 11 16 28
- ----------------------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Domestic:
Commercial and financial 1 - 1 1 (4)
Commercial real estate - (4) 2 (4) 4
Consumer credit:
Credit cards (10) (9) (30) (19) (61)
Other consumer credit (1) (3) (5) (4) (8)
Lease finance assets (3) (2) - (5) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic (13) (18) (32) (31) (69)
International - - - - 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total net credit losses (13) (18) (32) (31) (64)
Provision for credit losses 15 15 25 30 50
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve at end of period $498 $496 $511 $498 $511
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.62% 1.63% 1.82% 1.62% 1.82%
- ----------------------------------------------------------------------------------------------------------------------------------
Annualized net credit losses
to average loans .17% .24% .46% .21% .47%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 25
OPERATING EXPENSE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
------------------------------------------ --------------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1998 1998 1997 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Staff expense $355 $357 $276 $712 $ 544
Professional, legal and other
purchased services 67 61 46 128 92
Net occupancy expense 59 56 54 115 106
Amortization of mortgage servicing assets
and purchased credit card relationships 44 45 28 89 56
Business development 42 36 38 78 75
Equipment expense 41 39 36 80 72
Amortization of goodwill and
other intangible assets 35 30 27 65 54
Communications expense 26 26 25 52 51
Other expense 52 47 41 99 86
- --------------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-
preferred securities expense and
net revenue from acquired property 721 697 571 1,418 1,136
Trust-preferred securities expense 19 20 19 39 39
Net revenue from acquired property (2) (1) (3) (3) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expense $738 $716 $587 $1,454 $1,169
- --------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 28,600 27,900 25,500 28,200 25,400
- --------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 66% 65% 62% 66% 62%
Efficiency ratio excluding amortization
of goodwill and other intangible assets 63% 62% 59% 63% 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 $150 million, or 26%, in the second quarter of 1998
compared with the prior-year period, primarily resulting from the Buck,
Founders, Mellon United National Bank, Mellon 1st Business Bank and Dreyfus
Brokerage Services acquisitions, higher amortization of mortgage servicing
assets and business growth. Excluding the effect of these 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 $79 million compared with the second quarter of 1997,
primarily from the acquisitions as well as an increase in performance-based
incentive expense.
Professional, legal and other purchased services increased $21 million compared
with the second quarter of 1997. This increase primarily resulted from an
increase in consulting expenses related to business growth and reengineering
initiatives, and from the acquisitions. Net occupancy expense and equipment
expense each increased $5 million compared with the second quarter of 1997,
primarily from the impact of the acquisitions.
The amortization of mortgage servicing assets and purchased credit card
relationships increased $16 million compared with the second quarter of 1997,
primarily resulting from an acceleration of amortization due to a higher level
of mortgage prepayments. Declines in interest rates can result in prepayments of
the mortgage loans underlying mortgage servicing rights (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 hedge the prepayment risk associated with its mortgage servicing
portfolio. See pages 38 and 39 for a further discussion of the instruments.
24
<PAGE> 26
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
Second quarter 1998 compared with first quarter 1998
Operating expense before trust-preferred securities expense and net revenue from
acquired property increased $24 million in the second quarter of 1998, compared
with the first quarter of 1998. This increase resulted primarily from the
Founders acquisition and the full-quarter impact of the February 1998
acquisitions of Mellon United National Bank and Mellon 1st Business Bank, as
well as from business growth offset, in part, by lower severance expense.
Year-to-date 1998 compared with year-to-date 1997
The $282 million increase in operating expense before trust-preferred securities
expense and net revenue from acquired property in the first half of 1998,
compared with the first half of 1997, primarily resulted from the same factors
responsible for the second quarter 1998 increase as compared to the prior-year
period.
Year 2000 Project
In early 1996, the Corporation formed a year 2000 project team to identify
information technology and non-information technology systems 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 have substantially completed
programming changes and internal testing of internal mission critical computer
systems by December 31, 1998, and to have begun significant enterprise testing
of mission critical systems in late 1998, with such enterprise testing
continuing through mid-1999. The Corporation currently expects to have
substantially completed remediation and testing of both information technology
and non-information technology systems that the Corporation has determined are
of high business value and priority by June 30, 1999.
The Corporation incurred expenses throughout 1996 and 1997 and in the first two
quarters of 1998 related to this project and will continue to incur expenses
over the next 18 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. The Corporation does not believe that the redeployment of existing
staff will have a material adverse effect on its business, results of operations
or financial position. Incremental expenses related to the year 2000 project are
not expected to materially impact operating results in any one period.
The impact of year 2000 issues on the Corporation will depend not only on
corrective actions that the Corporation takes, but also on the way in which year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from, the
Corporation, or whose financial condition or operational capability is important
to the Corporation. To reduce this exposure, the Corporation has an ongoing
process of identifying and contacting mission critical third party vendors and
other significant third parties to determine their year 2000 plans and target
dates. Risks associated with any such third parties located outside the United
States may be higher insofar as it is generally believed that non-U.S.
businesses may not be addressing their year 2000 issues on as timely a basis as
U.S. businesses. Notwithstanding the Corporation's efforts, there can be no
assurance that mission critical third party vendors or other significant third
parties will adequately address their year 2000 issues.
25
<PAGE> 27
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation is developing contingency plans for implementation in the event
that mission critical third party vendors or other significant third parties
fail to adequately address year 2000 issues. Such plans principally involve
identifying alternate vendors or internal remediation. The Corporation is also
enhancing its existing business resumption plans to reflect year 2000 issues and
is developing plans designed to coordinate the efforts of its personnel and
resources in addressing any year 2000 problems that become evident after
December 31, 1999. There can be no assurance that any such plans will fully
mitigate any such failures or problems. Furthermore, there may be certain
mission critical third parties, such as utilities or telecommunication
companies, where alternative arrangements or sources are limited or unavailable.
The Corporation's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address year 2000 issues. As a result, there
may be increases in the Corporation's problem loans and credit losses in future
years. It is not, however, possible to quantify the potential impact of such
losses at this time.
If year 2000 issues are not adequately addressed by the Corporation and third
parties, the Corporation's business, results of operations and financial
position could be materially adversely affected.
The foregoing year 2000 discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs, the dates by which
the Corporation expects to substantially complete programming changes,
remediation and testing of systems and the impact of the redeployment of
existing staff, 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 identify and convert all
relevant computer systems, results of year 2000 testing, adequate resolution of
year 2000 issues by governmental agencies, businesses or other third parties who
are service providers, suppliers, borrowers or customers of the Corporation,
unanticipated system costs, the need to replace hardware, the adequacy of and
ability to implement contingency plans and similar uncertainties. The
"forward-looking statements" made in the foregoing year 2000 discussion 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.
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes totaled $233 million in the first half of 1998,
compared with $216 million in the first half of 1997. The Corporation's
effective tax rate for the first half of 1998 was 35.3%, compared with 36.3% for
the first half of 1997. It is currently anticipated that the effective tax rate
will remain at approximately 35.3% for the remainder of 1998.
26
<PAGE> 28
ASSET/LIABILITY MANAGEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------
JUNE 30, March 31, June 30,
(average balances in millions) 1998 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,597 $ 1,712 $ 1,081
Trading account securities 239 242 210
Securities 5,596 5,301 5,600
Loans 30,302 29,389 27,806
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 37,734 36,644 34,697
Noninterest-earning assets 10,730 10,077 8,233
Reserve for credit losses (499) (492) (517)
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $47,965 $46,229 $42,413
- --------------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $38,328 $37,299 $33,965
Wholesale and purchased funds 9,637 8,930 8,448
- --------------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $47,965 $46,229 $42,413
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in the Corporation's average interest-earning assets in the second
quarter of 1998, compared with the second quarter of 1997, reflects a $2,496
million increase in average loans and a $516 million increase in average money
market investments. Excluding the effect of acquisitions, average loans in the
second 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.
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 $5,011 million in the
second quarter of 1998 from the prior-year period, reflecting a higher level of
noninterest-earning assets and higher loan levels. The increase in
noninterest-earning assets includes a higher level of goodwill resulting from
the Mellon United National Bank, Founders, Mellon 1st Business Bank, Buck and
Dreyfus Brokerage Services acquisitions, and a higher level of cash and due from
banks and receivables. Average core funds increased $4,363 million in the second
quarter of 1998 from the prior-year period, primarily reflecting higher levels
of deposits due, in part, to the acquisitions. Core funds averaged 95% of core
assets in the second quarter of 1998, compared with 96% in the first quarter of
1998 and the second 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, short-term bank
notes, commercial paper, other time deposits and other funds borrowed. Average
wholesale and purchased funds increased $1,189 million compared with the
prior-year period, primarily reflecting an increase in federal funds purchased
and securities under repurchase agreements, negotiable certificates of deposit
and short-term bank notes. As a percentage of total average assets, average
wholesale and purchased funds was 20% in the second quarter of 1998, compared
with 19% in the first quarter of 1998, and 20% in the second quarter of 1997.
COMPOSITION OF LOAN PORTFOLIO
- --------------------------------------------------------------------------------
The loan portfolio increased $2,510 million at June 30, 1998, compared with June
30, 1997, reflecting the Mellon 1st Business Bank and Mellon United National
Bank acquisitions as well as increases in other consumer credit,
27
<PAGE> 29
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
consumer mortgages and small business lending. Partially offsetting these
increases was a lower level of credit card loans due, in part, to the transfer
of $231 million of CornerStone(sm) credit card loans to an accelerated
resolution portfolio in the fourth quarter of 1997. At June 30, 1998, the
composition of the loan portfolio was 58% commercial and 42% consumer.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1998 1998 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $11,283 $11,158 $10,826 $10,259 $10,796
Commercial real estate 2,134 1,999 1,509 1,599 1,671
Consumer credit:
Consumer mortgage 8,506 8,689 8,505 8,318 7,870
Credit card 830 862 931 1,104 1,161
Other consumer credit 3,582 3,396 3,166 2,785 2,590
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 12,918 12,947 12,602 12,207 11,621
Lease finance assets 2,570 2,578 2,639 2,502 2,512
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 28,905 28,682 27,576 26,567 26,600
INTERNATIONAL LOANS 1,749 1,661 1,566 1,712 1,544
- --------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $30,654 $30,343 $29,142 $28,279 $28,144
- --------------------------------------------------------------------------------------------------------------------------------
</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 $487 million, or 5%,
at June 30, 1998, compared to June 30, 1997, primarily as a result of an
increase in small business lending as well as the Mellon 1st Business Bank and
Mellon United National Bank acquisitions. Commercial and financial loans
represented 37% of the total loan portfolio at June 30, 1998, and 38% at June
30, 1997. Nonperforming domestic commercial and financial loans were .16% of
total domestic commercial and financial loans at June 30, 1998, and .12% at June
30, 1997. This ratio has been less than 1% for 21 consecutive quarters.
Commercial real estate
The Corporation's $2,134 million domestic commercial real estate loan portfolio
consists of $1,367 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 $767 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.
Domestic commercial real estate loans increased by $463 million, or 28%, at June
30, 1998, compared with June 30, 1997. This increase primarily resulted from the
Mellon United National Bank and Mellon 1st Business Bank acquisitions. Domestic
commercial real estate loans were 7% of total loans at June 30, 1998, up from 6%
a year earlier. Nonperforming commercial real estate loans were .85% of total
domestic commercial real estate loans at June 30, 1998, compared with .55% at
June 30, 1997.
28
<PAGE> 30
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS Percent of
June 30, total loans
(dollar amounts in millions) 1998 outstanding
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial mortgage and construction loans $1,367 4%
Owner-occupied and other loans 767 3
- ----------------------------------------------------------------------------------------------------------------------------------
Total $2,134 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 June 30, 1998, this
portfolio totaled $8,506 million, a $636 million, or 8%, increase from June 30,
1997. This increase resulted from an increase in the one- to four-family
residential mortgage warehouse portfolio and jumbo mortgages.
Jumbo mortgages are variable rate residential mortgages that range from $250,000
to $3 million. These loans totaled $3.7 billion at June 30, 1998, an increase of
approximately $290 million from June 30, 1997, primarily as a result of new loan
originations, partially offset by paydowns and sales.
Loans secured by one- to four-family residential mortgages increased
approximately $320 million to $2.3 billion at June 30, 1998. This increase
primarily resulted from an increase in the loans held in the residential
warehouse portfolio. Fixed-term home equity loans were $1.8 billion at June 30,
1998, virtually unchanged from June 30, 1997. Home equity revolving credit line
loans were $.7 billion at June 30, 1998, compared with $.6 billion at June 30,
1997. Nonperforming consumer mortgages were .65% and .68% of total consumer
mortgages at June 30, 1998, and June 30, 1997, respectively.
Credit card
At June 30, 1998, credit card loans totaled $830 million, a $331 million, or
28%, decrease from June 30, 1997. Credit card loans represented 3% of total
loans at June 30, 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 1.08% at June 30, 1998, compared with .88% at March 31,
1998, and 2.04% at June 30, 1997. The past-due ratios at June 30, 1998, and
March 31, 1998, 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 June 30, 1998, compared with 47% at June 30, 1997.
Other consumer credit
Other consumer credit, which principally consists of student loans, installment
loans, unsecured personal credit lines and margin loans, was $3,582 million at
June 30, 1998, an increase of $992 million, or 38%, from June 30, 1997. The
increase was primarily due to a higher level of margin loans following the
November 1997 acquisition of Dreyfus Brokerage Services, 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 48% of this portfolio at June 30, 1998.
29
<PAGE> 31
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
Lease finance assets
Lease finance assets totaled $2,570 million at June 30, 1998, an increase of $58
million, compared with June 30, 1997. Lease finance assets represented 8% of the
total loan portfolio at June 30, 1998, compared with 9% at June 30, 1997.
Nonperforming leases were .48% of total leases at June 30, 1998, compared with
.37% at June 30, 1997.
International loans
Loans to international borrowers totaled $1,749 million at June 30, 1998, up 13%
from $1,544 million at June 30, 1997, primarily due to increased activity with
large corporate customers and foreign banks. There were no nonperforming
international loans at June 30, 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 $106 million at June 30, 1998, compared with $130 million at March 31, 1998,
and $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>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, June 30,
(in millions) 1998 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commitments to extend credit $33,578 (a) $32,064 $27,259
Standby letters of credit and foreign guarantees 3,696 (b) 3,962 3,881
Commercial letters of credit 181 180 104
Residential mortgage loans serviced with recourse 90 104 112
Custodian securities lent with indemnification
against broker default of return of securities 31,108 27,397 28,077
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Approximately 30% 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 $327 million.
30
<PAGE> 32
CAPITAL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA
(dollar amounts in millions, JUNE 30, March 31, Dec. 31, June 30,
except per share amounts) 1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shareholders' equity $ 4,234 $ 4,086 $ 3,652 $ 3,377
Common shareholders' equity to assets ratio 8.92% 8.62% 8.13% 7.72%
Tangible common shareholders' equity $ 2,078 $ 2,168 $ 2,227 $ 2,180
Tangible common shareholders' equity
to assets ratio (a) 4.59% 4.76% 5.12% 5.13%
Total shareholders' equity $ 4,234 $ 4,086 $ 3,845 $ 3,570
Total shareholders' equity to assets ratio 8.92% 8.62% 8.56% 8.17%
Tier I capital ratio 6.51 6.80 7.77 7.94
Total (Tier I plus Tier II) capital ratio 10.83 11.28 12.73 13.24
Leverage capital ratio 6.65 7.04 8.02 8.20
Book value per common share $ 16.24 $ 15.70 $ 14.39 $ 13.42
Tangible book value per common share $ 7.97 $ 8.33 $ 8.77 $ 8.66
Closing common stock price $69.688 $ 63.50 $ 60.63 $45.125
Market capitalization $18,168 $16,523 $15,386 $11,353
Common shares outstanding (000) 260,708 260,210 253,786 251,599
- ------------------------------------------------------------------------------------------------------------------------------------
</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 June 30, 1998, compared with June 30,
1997, primarily reflects earnings retention and common shares issued in the Buck
acquisition in July 1997. Also impacting total shareholders' equity, compared
with June 30, 1997, was the February 1998 redemption of the $200 million Series
K preferred stock. The increase in shareholders' equity at June 30, 1998,
compared with March 31, 1998, primarily reflects earnings retention. There were
no common stock repurchases in the first half of 1998. At June 30, 1998,
approximately 4.8 million common shares remain available for repurchase under a
6 million share repurchase program authorized by the board of directors in July
1997. The Corporation currently does not intend to repurchase any common shares
during the remainder of 1998.
COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER YEAR TO DATE Full Year
(in millions) 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning shares outstanding 260.2 253.8 257.3
Shares issued for stock-based benefit plans and dividend reinvestment plan .5 1.8 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 260.7 260.7 253.8
- ------------------------------------------------------------------------------------------------------------------------------
</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.
31
<PAGE> 33
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
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
June 30, 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 exceeds either: (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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS JUNE 30, March 31, Dec. 31, June 30,
(dollar amounts in millions) 1998 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier I capital:
Common shareholders' equity (a) $ 4,200 $ 4,045 $ 3,619 $ 3,375
Qualifying preferred stock - - 193 193
Trust-preferred securities (b) 991 991 991 932
Other items 12 5 4 (7)
Goodwill and certain other intangibles (2,148) (1,913) (1,366) (1,119)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 3,055 3,128 3,441 3,374
Tier II capital 2,026 2,061 2,197 2,250
- ---------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $ 5,081 $ 5,189 $ 5,638 $ 5,624
- ---------------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets:
On-balance-sheet $32,049 $31,572 $29,772 $28,863
Off-balance-sheet 14,885 14,428 14,515 13,611
- ---------------------------------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $46,934 $46,000 $44,287 $42,474
- ---------------------------------------------------------------------------------------------------------------------------------
Average assets - leverage capital basis $45,919 $44,404 $42,926 $41,161
- ---------------------------------------------------------------------------------------------------------------------------------
Tier I capital ratio (c) 6.51% 6.80% 7.77% 7.94%
Total capital ratio (c) 10.83 11.28 12.73 13.24
Leverage capital ratio (c) 6.65 7.04 8.02 8.20
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) In accordance with regulatory guidelines, $34 million, $41 million, $33
million and $2 million of unrealized gains, net of tax, on assets
classified as available for sale at June 30, 1998, March 31, 1998, December
31, 1997, and June 30, 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 March
31, 1998, and June 30, 1997, reflects an increase in goodwill and other
intangibles and a higher level of risk-adjusted assets, resulting from
acquisitions. The Series K preferred stock redemption also was a factor in the
decrease compared with June 30, 1997.
32
<PAGE> 34
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
When computing Tier I capital, the Corporation deducts all goodwill and certain
other identified intangibles acquired subsequent to February 19, 1992, except
mortgage servicing assets and purchased credit card relationships.
Goodwill and other intangibles
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1998 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $2,050 $1,805 $1,341 $1,089
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $961 million increase in goodwill at June 30, 1998, compared with June 30,
1997, resulted from an approximately $1,075 million increase related to the
Mellon United National Bank, Founders, Mellon 1st Business Bank, Buck, Dreyfus
Brokerage Services and Clair Odell Group acquisitions, partially offset by
amortization. The amortization of goodwill for the remaining six months of 1998
will be approximately $55 million. Based upon the current level and amortization
schedule, the annual amortization of goodwill for the years 1999 through 2003 is
expected to be approximately $110 million, $109 million, $107 million, $105
million and $105 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, $95 million, $93 million, $91 million and $90
million, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1998 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchased core deposit intangibles $ 88 $ 95 $65 $ 76
Other identified intangibles 18 18 19 32
- ----------------------------------------------------------------------------------------------------------------------------------
Total purchased core deposit
and other identified intangibles $106 $113 $84 $108
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in purchased core deposit and other identified intangibles from
June 30, 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 six months of 1998 will be approximately $14 million. The annual
amortization of purchased core deposit and other identified intangibles for the
full years 1999 through 2003 is expected to be approximately $28 million, $16
million, $10 million, $8 million and $5 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 $18 million, $10 million, $7 million, $5
million and $3 million, respectively.
Mortgage servicing assets and purchased credit card relationships
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1998 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage servicing assets $ 990 $1,108 $1,052 $960
Purchased credit card relationships 20 22 23 26
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets and
purchased credit card relationships $1,010 $1,130 $1,075 $986
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 35
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation capitalized $70 million and $175 million in the second quarters
of 1998 and 1997, respectively, of servicing assets in connection with both
mortgage servicing portfolio purchases and loan originations. These capitalized
mortgage servicing assets were more than offset by a reduction resulting from
the sale of more than $7 billion of residential servicing in the second quarter
of 1998 as well as from amortization. Mortgage servicing assets are amortized in
proportion to estimated net servicing income over the estimated life of the
servicing portfolio. Amortization expense totaled $42 million and $27 million in
the second quarters of 1998 and 1997, respectively. The estimated fair value of
capitalized mortgage servicing assets was $1,046 million at June 30, 1998.
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 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 $657 million during the first half of 1998 to $2,993 million at
June 30, 1998. The decrease reflected $1,083 million of net cash used in
investing activities, primarily offset by $201 million of net cash provided by
operating activities and $197 million of net cash provided by financing
activities. Net cash used in investing activities primarily reflected loan
growth, an increase in securities available for sale, and acquisitions,
partially offset by proceeds from the sale of loan portfolios and 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 and dividends paid on common and preferred stock.
There were no contractual maturities of the Corporation's long-term debt during
the second quarter of 1998. In May 1998, Standard & Poor's raised the
Corporation's senior debt rating to "A+" from "A" and its subordinated debt
rating to "A" from "A-". In May 1998, Standard & Poor's also raised Mellon Bank,
N.A.'s senior debt rating to "AA-" from "A+" and its subordinated debt rating to
"A+" from "A." At June 30, 1998, Moody's rated the Corporation's and Mellon
Bank, N.A.'s senior debt "A2" and "A1," respectively, and the Corporation's and
Mellon Bank, N.A.'s subordinated debt "A3" and "A2," respectively.
On April 21, 1998, the Corporation announced a 9% increase in the quarterly
common stock dividend to $.36 per common share. The increase in common dividend
was paid on 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%. The Corporation paid $177 million in
common stock dividends in the first half of 1998, compared with $162 million in
the prior-year period. The common dividend payout ratio was 44% in the second
quarter of 1998, compared with 46% in the second quarter of 1997. On a tangible
earnings per common share basis, the common dividend payout ratio was 39% in the
second quarter of 1998 and 41% in the second quarter of 1997. In addition, the
Corporation paid $2 million in preferred stock dividends during the first
quarter of 1998 and recorded
34
<PAGE> 36
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
approximately $7 million in issue costs as preferred stock dividends in
connection with the redemption of the Series K preferred stock. There was no
preferred stock outstanding at June 30, 1998, or during the second quarter of
1998. Based upon shares outstanding at June 30, 1998, and the current quarterly
common dividend rate of $.36 per share, 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 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 June 30,
1998, of approximately $718 million, less any dividends declared and plus or
minus net profits or losses, as defined, between July 1, 1998, and the date of
any such dividend declaration. The bank subsidiaries declared dividends to the
parent Corporation of $240 million in the first half of 1998, $450 million in
1997 and $400 million in 1996. Dividends paid to the parent Corporation by
nonbank subsidiaries totaled $38 million in the first half 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 an 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 June 30,
1998, assuming that the level of loan fees remains unchanged, and excludes the
impact of
35
<PAGE> 37
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
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 June 30, 1998, levels and remaining at those levels
thereafter. In addition, the simulation presumes risk positions are replenished
with like products. This analysis excludes the effect that rate movements can
have on the value of mortgage servicing rights, discussed on pages 38 and 39.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from June 30, 1998, rates
- ----------------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
------------------------------- -----------------------------
compared with June 30, 1998: +50bp +100bp +200bp -50bp -100bp -200bp
------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest revenue increase (decrease) (.1)% (.6)% (1.8)% (.2)% (.4)% (1.1)%
Earnings per share increase (decrease) $ - $(.02) $ (.06) $(.01) $(.02) $ (.04)
Return on common equity increase (decrease) (1) bp (13) bp (40) bp (3) bp (10) bp (24)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, February 1999 and
November 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.
36
<PAGE> 38
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
June 30,
(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 $ 15 $ - $ - $ - $ - $700 $ 715
Weighted average rate:
Receive 5.22% - - - - 6.62% 6.59%
Pay 5.70% - - - - 5.69% 5.69%
Receive fixed/pay floating indexed
amortizing swaps:
Notional value $ 829 $ 1,603 $ 199 $ 80 $ 64 $ - $2,775
Weighted average rate:
Receive 5.92% 5.79% 7.15% 7.14% 7.10% - 6.00%
Pay 5.66% 5.69% 5.69% 5.69% 5.69% - 5.68%
Receive fixed/pay floating
callable swaps: (b)
Notional value $ 650 $ 500 $ - $ - $ - $ - $1,150
Weighted average rate:
Receive 6.90% 6.80% - - - - 6.85%
Pay 5.69% 5.70% - - - - 5.70%
Pay fixed/receive floating
generic swaps: (a)
Notional amount $ 227 $ 220 $ - $ - $ 5 $ 70 $ 522
Weighted average rate:
Receive 5.46% 5.71% - - 5.72% 5.69% 5.60%
Pay 5.79% 6.18% - - 6.59% 6.09% 6.00%
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $ 1,721 $ 2,323 $ 199 $80 $69 $770 $5,162
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic swaps' notional amounts and lives are not based upon interest rate
indices.
(b) Expected maturity dates, based upon interest rates at June 30, 1998, are
shown in this table.
The gross notional amount of off-balance-sheet products used to manage the
Corporation's interest rate risk was $5.2 billion at June 30, 1998, virtually
unchanged from $5.1 billion at March 31, 1998. 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.
37
<PAGE> 39
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, June 30,
(in millions) 1998 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Instruments associated with deposits $2,850 $2,842 $3,400
Instruments associated with other liabilities 765 705 722
Instruments associated with loans 1,547 1,583 1,926
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $5,162 $5,130 $6,048
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation entered into these off-balance-sheet products to reduce the
natural interest rate risk embedded in its assets and liabilities. The interest
received and interest paid are recorded on an accrual basis in interest revenue
and interest expense associated with the underlying assets and liabilities. The
net differential resulted in interest revenue of $5 million and $11 million in
the second quarter and first half of 1998, respectively, compared with $7
million and $13 million in the second quarter and first half 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 $11 million resulting from prior terminations, resulted in a
net unaccreted deferred gain of approximately $5 million, carried as other
liabilities, at June 30, 1998. The Corporation accreted approximately $1 million
and $2 million of these net deferred gains into net interest revenue in the
second quarter and first half of 1998, respectively. No contracts were
terminated during the second quarter of 1998.
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 June 30, 1998, the
Corporation had approximately $7.6 billion of interest rate floor agreements
outstanding and $1.2 billion of interest rate swap agreements outstanding. In
addition, the Corporation had $298 million of principal only swaps outstanding
at June 30, 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 if interest rates
increase.
Realized gains/losses and cash settlements on these instruments are recorded as
adjustments to the carrying value of the MSRs. As of June 30, 1998, the
Corporation had approximately $43 million of cash received from gains on
terminations of hedges on MSRs and payments on existing hedges. This balance is
amortized over the estimated lives of the underlying mortgage servicing assets.
These instruments do not entirely eliminate risk. Mortgage prepayment rates may
not occur as expected. The table on the following page presents the gross
notional amounts of off-balance-sheet instruments used to manage prepayment risk
associated with MSRs.
38
<PAGE> 40
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO
MANAGE PREPAYMENT RISK OF MSRS Total at
June 30,
(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 $5,741 $7,591
Weighted average strike rates - - - - 5.67% 5.32% 5.41%
Fair value $ 96
Receive fixed/pay floating interest
rate swaps (notional) $ - $ - $ - $ - $ - $1,200 $1,200
Weighted average rates:
Receive - - - - - 6.04% 6.04%
Pay - - - - - 5.66% 5.66%
Fair value $ 20
Principal only swaps (notional) (a) $ 298 $ - $ - $ - $ - $ - $ 298
Fair value $ 21
- ------------------------------------------------------------------------------------------------------------------------------------
Total notional amount $ 298 $ - $ - $ - $1,850 $6,941 $9,089
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Shown as maturing in 1998 because the swaps can be canceled at the
Corporation's discretion. Contractual maturity is $18 million in 1998, $46
million in 2002 and $234 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 $228 million of interest rate futures to lock in
the value of certain loans that are anticipated to be sold and/or securitized in
the last six months of 1998. There was an unrecognized loss of approximately $2
million related to these anticipated transactions at June 30, 1998.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at June 30, 1998, was a positive $201 million,
compared to a positive $106 million at March 31, 1998. This increase primarily
resulted from an increase in the fair value of interest rate swaps, as well as
an increase in the fair value of MSR hedges resulting from a decrease in
interest rates during the second quarter of 1998. 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.
39
<PAGE> 41
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (a)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, June 30,
(notional amounts in millions) 1998 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate risk management instruments: (b)
Interest rate swaps $5,162 $5,102 $5,657
Options, caps and floors purchased (c) - 28 40
Futures contracts - - 337
Forward rate agreements - - 14
Mortgage servicing rights risk management instruments:
Interest rate floors 7,591 6,600 -
Interest rate swaps 1,200 2,050 -
Principal only swaps 298 434 -
Other products:
Total return swaps 170 144 137
Interest rate swaps and futures contracts
hedging anticipated transactions 228 265 -
- ----------------------------------------------------------------------------------------------------------------------------------
</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
$202 million at June 30, 1998, $119 million at March 31, 1998, and $15
million at June 30, 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
second quarter and first half of 1998, the Corporation recorded $42 million and
$79 million, respectively, of fee revenue from these activities, primarily from
foreign exchange contracts entered into on behalf of customers, compared with
$24 million and $47 million in the second quarter and first half of 1997,
respectively. The total notional values of these contracts were $55 billion at
June 30, 1998, $57 billion at March 31, 1998, and $39 billion at June 30, 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
40
<PAGE> 42
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
to each family of financial instruments eligible for trading such that the
aggregate value at risk in these activities at any point in time will not exceed
a specified limit given a significant market movement. The extent of market
movement deemed to be significant is based upon an analysis of the historical
volatility of individual instruments that would cover 95% of likely daily market
movements. The loss analysis includes the off-balance-sheet instruments used for
trading activities as well as the financial assets and liabilities that are
classified as trading positions on the balance sheet. Using the Corporation's
methodology, which considers such factors as changes in interest rates, spreads
and options volatility, the aggregate value at risk for trading activities,
primarily related to foreign currency contracts, was approximately $2 million at
June 30, 1998, unchanged from March 31, 1998.
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>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, June 30,
(notional amounts in millions) 1998 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $16,406 $18,553 $12,457
Commitments to sell 16,630 18,702 12,579
Foreign currency and other option contracts purchased 683 767 661
Foreign currency and other option contracts written 697 734 606
Interest rate agreements: (b)
Interest rate swaps 9,937 7,483 5,499
Options, caps and floors written 1,202 605 1,975
Options, caps and floors purchased 1,024 812 1,966
Futures and forward contracts 8,676 9,349 3,131
- ----------------------------------------------------------------------------------------------------------------------------------
</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
$451 million at June 30, 1998, $520 million at March 31, 1998, and $358
million at June 30, 1997.
(b) The credit risk associated with interest rate agreements is calculated
after considering master netting agreements.
Recently issued accounting standard
In June 1998, the Financial Accounting Standard Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." FAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
This statement is effective January 1, 2000, and need not be applied
retroactively to financial statements of prior periods. The statement may be
adopted early, as of the beginning of any quarter beginning with the third
quarter of 1998. The Corporation intends to adopt this statement January 1,
2000. The Corporation is currently evaluating the impact that this statement
will have on its financial position and results of operation, but it is not
expected to be material.
41
<PAGE> 43
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1998 1998 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $107 $142 $133 $104 $ 90
Acquired property, net of the OREO reserve 63 49 48 71 72
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $170 $191 $181 $175 $162
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .35% .47% .46% .37% .32%
Total nonperforming assets as a percentage of
total loans and net acquired property .55% .63% .62% .62% .57%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 June 30, 1998, nonperforming assets totaled $170 million, a decrease of $21
million from March 31, 1998. The $35 million decrease in nonperforming
commercial real estate loans at June 30, 1998, compared with March 31, 1998,
primarily resulted from the foreclosure on a commercial property and its
transfer to OREO. This increase in OREO was partially offset by sales of other
properties, which resulted in an overall decrease of nonperforming assets at
June 30, 1998, compared with March 31, 1998. Nonperforming assets increased $8
million compared with June 30, 1997, primarily resulting from the addition of
the above mentioned commercial real estate loan to nonperforming status in the
fourth quarter of 1997, the reclassification from segregated assets of $10
million of commercial real estate loans to nonperforming loans and $2 million to
OREO following the expiration of the FDIC loss-sharing arrangement on January 1,
1998, and the addition of $6 million of nonperforming loans from the Mellon
United National Bank and Mellon 1st Business Bank acquisitions in February 1998.
These increases were partially offset by the sale of OREO properties. The ratio
of nonperforming assets to total loans and net acquired property was .55% at
June 30, 1998, compared with .63% at March 31, 1998, and .57% at June 30, 1997.
This ratio, which can be expected to vary over time with changes in the economy,
has been lower than 1% for 16 consecutive quarters.
42
<PAGE> 44
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic nonaccrual loans:
Commercial and financial $ 18 $ 19 $ 17 $ 20 $ 11
Commercial real estate 18 53 49 14 9
Consumer credit:
Consumer mortgage 55 56 52 52 54
Other consumer credit 4 3 5 5 5
Lease finance assets 12 11 10 11 9
- ------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 107 142 133 102 88
Restructured loans - - - 2 2
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (a) 107 142 133 104 90
- ------------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 69 53 52 76 77
Reserve for real estate acquired (9) (9) (9) (9) (9)
- ------------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 60 44 43 67 68
Other assets acquired 3 5 5 4 4
- ------------------------------------------------------------------------------------------------------------------------------
Total acquired property 63 49 48 71 72
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 170 $ 191 $ 181 $ 175 $ 162
- ------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective
loan portfolio segments:
Domestic commercial and financial loans .16% .17% .16% .22% .12%
Domestic commercial real estate loans .85 2.67 3.25 .90 .55
Domestic consumer mortgage loans .65 .65 .62 .62 .68
Domestic lease finance assets .48 .40 .38 .43 .37
Total loans .35 .47 .46 .37 .32
Nonperforming assets as a percentage of
total loans and net acquired property .55 .63 .62 .62 .57
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $2 million, $42 million, $44 million, $23 million and $10 million,
respectively, of loans with both principal and interest less than 90 days
past due but placed on nonaccrual status by management discretion.
43
<PAGE> 45
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS FOR THE THREE MONTHS ENDED JUNE 30
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 $19 $53 $59 $11 $142 $95
Additions 5 1 9 7 22 22
Payments (a) (2) (2) (3) (2) (9) (19)
Return to accrual status (3) - (5) (1) (9) (4)
Credit losses (1) - - (2) (3) (4)
Transfers to acquired property - (34) (1) (1) (36) -
- ------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at June 30 $18 $18 $59 $12 $107 $90
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest applied to principal and sales.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS FOR THE SIX MONTHS ENDED JUNE 30
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 11 3 17 11 42 88
Payments (a) (4) (9) (7) (3) (23) (65)
Return to accrual status (3) (1) (6) (1) (11) (11)
Credit losses (4) (5) - (4) (13) (14)
Transfers to acquired property - (34) (2) (1) (37) (2)
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at June 30 $18 $18 $59 $12 $107 $90
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest applied to principal and sales.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL NONPERFORMING LOAN DATA June 30,
(dollar amounts in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Book balance $107 $ 90
Contractual balance 124 105
Book balance as a percentage of contractual balance 87% 85%
Interest receipts applied to reduce principal:
Second quarter $ - $ -
Year-to-date 2 -
Interest receipts recognized in interest revenue:
Second quarter 1 2
Year-to-date 2 5
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 46
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
IMPAIRED LOANS Quarter ended
June 30,
(dollar amounts in millions) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans - period-end (a) $48 $36
Average impaired loans 52 44
Interest revenue recognized on impaired loans (b) 1 2
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $19 million and $7 million of impaired loans with a related
impairment reserve of $2 million and $1 million at June 30, 1998, and June
30, 1997, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
Acquired property, net of the OREO reserve, totaled $63 million at June 30,
1998, $49 million at March 31, 1998, and $72 million at June 30, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Quarter ended Six months ended
June 30, June 30,
(in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OREO at beginning of period, net of the OREO reserve $44 $71 $43 $76
Reclassification from segregated assets - - 2 -
Foreclosures 37 2 39 5
Sales (23) (5) (27) (13)
Write-downs, losses, OREO provision and other 2 - 3 -
- --------------------------------------------------------------------------------------------------------------------------------
OREO at end of period, net of the OREO reserve 60 68 60 68
Other acquired assets 3 4 3 4
- --------------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve $63 $72 $63 $72
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) Quarter ended Six months ended
June 30, June 30,
(in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $9 $9 $9 $10
Write-downs on real estate acquired - - - -
Provision - - - (1)
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $9 $9 $9 $ 9
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming. All
loans in this table are well secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
45
<PAGE> 47
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 34 $ 45 $ 38 $ 32 $ 38
Ratio .40% .52% .44% .38% .48%
Credit card (a) 9 8 8 24 24
Ratio 1.08% .88% .84% 2.19% 2.04%
Student - government guaranteed 47 43 44 42 38
Ratio 2.86% 2.50% 2.69% 2.55% 2.46%
Other consumer 1 1 1 1 2
Ratio .07% .07% .09% .13% .15%
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer 91 97 91 99 102
Ratio .71% .75% .72% .81% .88%
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial (b) 10 11 13 17 9
- ----------------------------------------------------------------------------------------------------------------------------------
Total past-due loans $101 $108 $104 $116 $111
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
46
<PAGE> 48
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(dollar amounts in millions) 1998 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets Cash and due from banks $ 2,993 $ 3,312 $ 3,650 $ 3,447
Interest-bearing deposits with banks 537 620 553 466
Federal funds sold and securities under resale agreements 240 549 383 674
Other money market investments 105 94 72 120
Trading account securities 126 140 75 112
Securities available for sale 3,957 3,547 2,767 3,333
Investment securities (approximate fair value
of $1,899, $2,022, $2,118 and $2,257) 1,861 1,987 2,082 2,249
Loans, net of unearned discount of $68, $64, $48 and $48 30,654 30,343 29,142 28,144
Reserve for credit losses (498) (496) (475) (511)
--------- --------- --------- ----------
Net loans 30,156 29,847 28,667 27,633
Customers' acceptance liability 78 84 182 300
Premises and equipment 559 557 573 581
Goodwill and other intangibles 2,156 1,918 1,425 1,197
Mortgage servicing assets and purchased
credit card relationships 1,010 1,130 1,075 986
Acquired property, net of reserves of $9, $9, $9 and $9 63 49 48 72
Other assets 3,607 3,580 3,340 2,542
----------------------------------------------------------------------------------------------------------------
Total assets $47,448 $47,414 $44,892 $43,712
----------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 8,880 $ 9,505 $ 7,975 $ 9,483
Interest-bearing deposits in domestic offices 21,350 20,956 19,954 19,431
Interest-bearing deposits in foreign offices 2,967 2,635 3,376 2,412
----------------------------------------------------------------------------------------------------------------
Total deposits 33,197 33,096 31,305 31,326
Federal funds purchased and securities under
repurchase agreements 1,849 2,295 1,997 790
U.S. Treasury tax and loan demand notes 1,006 472 447 908
Term federal funds purchased 352 409 625 829
Short-term bank notes 275 300 330 63
Commercial paper 161 259 67 58
Other funds borrowed 258 319 278 351
Acceptances outstanding 78 84 182 300
Other liabilities 2,044 2,100 2,252 1,568
Notes and debentures (with original maturities over one year) 3,003 3,003 2,573 2,959
----------------------------------------------------------------------------------------------------------------
Total liabilities 42,223 42,337 40,056 39,152
- --------------------------------------------------------------------------------------------------------------------------------
Trust- Guaranteed preferred beneficial interests
preferred in Corporation's junior subordinated
securities deferrable interest debentures 991 991 991 990
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Preferred stock - - 193 193
equity Common shareholders' equity:
Common stock - $.50 par value
Authorized - 800,000,000 shares
Issued - 294,330,960 shares 147 147 147 147
Additional paid-in capital 1,879 1,855 1,818 1,812
Retained earnings 3,124 3,003 2,884 2,671
Accumulated unrealized gains (losses), net of tax 19 30 21 (5)
Treasury stock of 33,623,356; 34,120,588; 40,545,114; and
42,732,010 shares, at cost (935) (949) (1,218) (1,248)
-----------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 4,234 4,086 3,652 3,377
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,234 4,086 3,845 3,570
----------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities
and shareholders' equity $47,448 $47,414 $44,892 $43,712
----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
47
<PAGE> 49
CONSOLIDATED INCOME STATEMENT
- --------------------------------------------------------------------------------
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
--------------------------
JUNE 30, June 30,
(in millions, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest revenue Interest and fees on loans (loan fees of $34 and $36) $1,183 $1,124
Interest-bearing deposits with banks 15 14
Federal funds sold and securities under resale agreements 25 11
Other money market investments 4 2
Trading account securities 7 5
Securities 183 195
--------------------------------------------------------------------------------------------------------------
Total interest revenue 1,417 1,351
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 404 367
Deposits in foreign offices 65 67
Federal funds purchased and securities under repurchase agreements 54 38
Other short-term borrowings 58 48
Notes and debentures 100 91
--------------------------------------------------------------------------------------------------------------
Total interest expense 681 611
- --------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 736 740
revenue Provision for credit losses 30 50
--------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 706 690
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fee revenue 804 549
revenue Cash management and deposit transaction charges 126 115
Mortgage servicing fees 108 104
Foreign currency and securities trading revenue 79 50
Credit card fees 47 49
Other 246 209
--------------------------------------------------------------------------------------------------------------
Total fee revenue 1,410 1,076
Gains on sales of securities 1 -
--------------------------------------------------------------------------------------------------------------
Total noninterest revenue 1,411 1,076
- --------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 712 544
expense Professional, legal and other purchased services 128 92
Net occupancy expense 115 106
Amortization of mortgage servicing assets and purchased credit card relationships 89 56
Business development 78 75
Equipment expense 80 72
Amortization of goodwill and other intangible assets 65 54
Communications expense 52 51
Other expense 99 86
Trust-preferred securities expense 39 39
Net revenue from acquired property (3) (6)
---------------------------------------------------------------------------------------------------------------
Total operating expense 1,454 1,169
- --------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes 663 597
Provision for income taxes 233 216
--------------------------------------------------------------------------------------------------------------
Net income 430 381
Dividends on preferred stock 9 13
--------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 421 $ 368
- --------------------------------------------------------------------------------------------------------------------------------
Per common Basic net income $ 1.62 $ 1.43
share Diluted net income $ 1.59 $ 1.40
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
48
<PAGE> 50
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions, except per share amounts) 1998 1998 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees
of $17, $17, $23, $22 and $19) $606 $577 $577 $567 $571
Interest-bearing deposits with banks 6 9 6 6 7
Federal funds sold and securities under
resale agreements 12 13 10 9 6
Other money market investments 3 1 2 2 1
Trading account securities 3 4 2 2 3
Securities 93 90 88 94 96
--------------------------------------------------------------------------------------------------------------
Total interest revenue 723 694 685 680 684
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 207 197 192 190 186
Deposits in foreign offices 33 32 32 30 33
Federal funds purchased and securities
under repurchase agreements 30 24 22 17 20
Other short-term borrowings 30 28 29 28 28
Notes and debentures 52 48 49 49 47
--------------------------------------------------------------------------------------------------------------
Total interest expense 352 329 324 314 314
- --------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 371 365 361 366 370
revenue Provision for credit losses 15 15 73 25 25
--------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 356 350 288 341 345
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fee revenue 418 386 387 375 283
revenue Cash management and deposit transaction charges 65 61 65 62 59
Mortgage servicing fees 53 55 56 53 53
Foreign currency and securities trading revenue 38 41 36 32 25
Credit card fees 23 24 24 24 25
Gain on sale of corporate trust business - - 43 - -
Other 115 131 96 89 95
--------------------------------------------------------------------------------------------------------------
Total fee revenue 712 698 707 635 540
Gains on sales of securities 1 - - - -
--------------------------------------------------------------------------------------------------------------
Total noninterest revenue 713 698 707 635 540
- --------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 355 357 354 344 276
expense Professional, legal and other purchased services 67 61 72 55 46
Net occupancy expense 59 56 64 55 54
Amortization of mortgage servicing assets
and purchased credit card relationships 44 45 33 29 28
Business development 42 36 37 36 38
Equipment expense 41 39 65 38 36
Amortization of goodwill and other intangible assets 35 30 26 25 27
Communications expense 26 26 26 25 25
Other expense 52 47 45 44 41
Trust-preferred securities expense 19 20 19 20 19
Net revenue from acquired property (2) (1) (12) (1) (3)
---------------------------------------------------------------------------------------------------------------
Total operating expense 738 716 729 670 587
- --------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes 331 332 266 306 298
Provision for income taxes 116 117 71 111 108
--------------------------------------------------------------------------------------------------------------
Net income 215 215 195 195 190
Dividends on preferred stock - 9 4 4 4
--------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $215 $206 $191 $191 $186
- --------------------------------------------------------------------------------------------------------------------------------
Per common Basic net income $ .82 $ .80 $ .76 $ .75 $ .73
share Diluted net income $ .81 $ .78 $ .75 $ .73 $ .71
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
49
<PAGE> 51
CONSOLIDATED STATEMENT OF CASH FLOWS
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from Net income $430 $381
operating activities Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill and other intangible assets 65 54
Amortization of mortgage servicing assets and
purchased credit card relationships 89 56
Depreciation and other amortization 51 53
Deferred income tax expense 45 45
Provision for credit losses 30 50
Provision for real estate acquired and other losses 3 2
Net gains on dispositions of acquired property (5) (6)
Net increase in accrued interest receivable - (7)
Net increase in trading account securities (44) (23)
Net increase (decrease) in accrued interest payable,
net of amounts prepaid 18 (14)
Net increase in residential mortgages held for sale (109) (315)
Net increase in other operating activities (372) (5)
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 201 271
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in term deposits and other money
investing activities market investments (17) (54)
Net decrease (increase) in federal funds sold and securities
under resale agreements 355 (214)
Purchases of securities available for sale (2,291) (3,522)
Proceeds from sales of securities available for sale 835 1,114
Proceeds from maturities of securities available for sale 937 3,197
Purchases of investment securities (10) (20)
Proceeds from maturities of investment securities 232 145
Net decrease in credit card receivables 83 75
Net principal disbursed on loans to customers (1,769) (1,332)
Loan securitization 533 -
Loan portfolio purchases (69) (4)
Proceeds from the sales of loan portfolios 753 783
Purchases of premises and equipment (60) (63)
Proceeds from sales of acquired property 32 19
Net cash disbursed in purchase of Mellon United National Bank (94) -
Net cash disbursed in purchase of Mellon 1st Business Bank (72) -
Net cash disbursed in purchase of Founders (267) -
Increase in mortgage servicing assets and purchased credit
card relationships (24) (268)
Net increase in other investing activities (170) (85)
------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,083) (229)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
50
<PAGE> 52
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from Net (decrease) increase in transaction and savings deposits (194) 1,775
financing activities Net increase (decrease) in customer term deposits 383 (1,823)
Net (decrease) increase in federal funds purchased and
securities under repurchase agreements (365) 48
Net decrease in short-term bank notes (55) (72)
Net (decrease) increase in term federal funds purchased (273) 348
Net increase in U.S. Treasury tax and loan demand notes 559 434
Net increase (decrease) in commercial paper 94 (64)
Repayments of longer-term debt (120) (9)
Net proceeds from issuance of longer-term debt 562 450
Proceeds from issuance of common stock 26 37
Dividends paid on common and preferred stock (188) (176)
Repurchase of common stock - (358)
Redemption of preferred stock (193) (97)
Net (decrease) increase in other financing activities (39) 55
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 197 548
Effect of foreign currency exchange rates 28 11
- --------------------------------------------------------------------------------------------------------------------------------
Change in cash and Net (decrease) increase in cash and due from banks (657) 601
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 $2,993 $3,447
-----------------------------------------------------------------------------------------------------
Supplemental Interest paid $ 662 $ 625
disclosures Net income taxes paid 164 159
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
51
<PAGE> 53
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
THREE MONTHS ENDED Additional unrealized Total
JUNE 30, 1998 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 March 31, 1998 $- $147 $1,855 $3,003 $30 $(949) $4,086
Comprehensive results:
Net income 215 215
Other comprehensive results,
net of tax (11) (11)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 215 (11) 204
Dividends on common stock
at $.36 per share (93) (93)
Common stock issued under
dividend reinvestment and
common stock purchase plan 3 2 5
Exercise of stock options 8 (1) 9 16
Other 13 3 16
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $- $147 $1,879 $3,124 $19 $(935) $4,234
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Three months ended Additional unrealized Total
June 30, 1997 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 March 31, 1997 $193 $ 74 $1,875 $2,576 $(45) $ (977) $3,696
Comprehensive results:
Net income 190 190
Other comprehensive results,
net of tax 40 40
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 190 40 230
Dividends on common stock
at $.33 per share (85) (85)
Dividends on preferred stock (4) (4)
Common stock issued under
dividend reinvestment and
common stock purchase plan 2 4 6
Exercise of stock options 6 (6) 19 19
Repurchase of common stock (296) (296)
Additional common stock
issued for stock split 73 (73) -
Other 2 2 4
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $193 $147 $1,812 $2,671 $ (5) $(1,248) $3,570
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 54
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
SIX MONTHS ENDED Additional unrealized Total
JUNE 30, 1998 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 430 430
Other comprehensive results,
net of tax (2) (2)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 430 (2) 428
Dividends on common stock
at $.69 per share (177) (177)
Dividends on preferred stock (9) (9)
Common stock issued under
dividend reinvestment and
common stock purchase plan 6 4 10
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 8 (4) 39 43
Other 25 7 32
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ - $147 $1,879 $3,124 $19 $ (935) $4,234
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Six months ended Additional unrealized Total
June 30, 1997 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 381 381
Other comprehensive results,
net of tax 2 2
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 381 2 383
Dividends on common stock
at $.63 per share (162) (162)
Dividends on preferred stock (13) (13)
Common stock issued under
dividend reinvestment and
common stock purchase plan 3 8 11
Series J preferred stock
redemption (97) (97)
Exercise of stock options 12 (20) 57 49
Repurchase of common stock (358) (358)
Additional common stock
issued for stock split 73 (73) -
Other 4 (1) 8 11
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $193 $147 $1,812 $2,671 $(5) $(1,248) $3,570
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 55
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, and June 30, 1997, were $(12) million and $(7) 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. The Corporation will adopt this
statement at year end 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.
54
<PAGE> 56
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 3 -- Foreign currency and securities trading revenue (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts $37 $23 $73 $45
Debt instruments (4) 1 - 3
Interest rate contracts 9 1 11 2
Futures contracts (4) - (5) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $38 $25 $79 $50
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recorded an unrealized loss of $2 million at June 30, 1998,
and an unrealized loss of less than $1 million at June 30, 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(in millions) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reclassification of segregated assets to loans
and real estate acquired $ 12 $ -
Net transfers from segregated assets - 4
Net transfers to real estate acquired 39 5
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 -
Purchase of Founders:
Fair value of noncash assets acquired 271 -
Liabilities assumed (4) -
--------- ------
Net cash disbursed 267 -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5 -- Legal proceedings
A discussion of legal actions and proceedings against the Corporation and its
subsidiaries is presented in Part II, Item 1, of this Form 10-Q.
55
<PAGE> 57
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 6 -- Preferred stock
The Corporation has authorized 50 million shares of preferred stock. In February
1998, the 8,000,000 authorized and issued shares of the 8.20% Series K preferred
stock was redeemed at a redemption price of $25 per share, or $200 million, plus
accrued dividends. In connection with this redemption, the Corporation recorded
approximately $7 million of issue costs as preferred stock dividends.
Note 7 -- Securities
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1998 June 30, 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 $ 204 $ - $- $ 204 $ 177 $ - $ - $ 177
U.S. agency mortgage-backed 3,225 47 1 3,271 2,229 18 15 2,232
Other U.S. agency 413 - - 413 860 1 1 860
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 3,842 47 1 3,888 3,266 19 16 3,269
Obligations of states and
political subdivisions 48 - - 48 44 - - 44
Other mortgage-backed 2 - - 2 3 - - 3
Other securities 19 - - 19 17 - - 17
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $3,911 $47 $1 $3,957 $3,330 $19 $16 $3,333
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Gross realized gains were $1 million in the first half of 1998. There were
no gross realized gains in the first half of 1997. There were no gross realized
losses in the first half of 1998 or the first half of 1997.
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1998 June 30, 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 $ 47 $ 9 $- $ 56 $ 34 $ 2 $1 $ 35
U.S. agency mortgage-backed 1,726 29 - 1,755 2,124 12 5 2,131
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 1,773 38 - 1,811 2,158 14 6 2,166
Other mortgage-backed 19 - - 19 26 - - 26
Other securities 69 - - 69 65 - - 65
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,861 $38 $- $1,899 $2,249 $14 $6 $2,257
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 8 -- Other assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1998 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid expense:
Pension $ 430 $ 411 $ 391 $ 327
Other 142 89 80 62
Accounts receivable 439 445 373 221
Interest receivable 241 250 241 242
Mortgage servicing advances 197 207 223 164
Fees receivable 159 154 135 101
Receivables related to off-balance-sheet instruments 462 524 553 365
Assets held for accelerated resolution 106 130 157 9
Other 1,431 1,370 1,187 1,051
- ----------------------------------------------------------------------------------------------------------------------------------
Total other assets $3,607 $3,580 $3,340 $2,542
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 9 -- Computation of earnings per common share (a)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
------------------------------------ -----------------------
(dollar amounts in millions, except per JUNE 30, March 31, June 30, JUNE 30, June 30,
share amounts; common shares in thousands) 1998 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE
<S> <C> <C> <C> <C> <C>
Net income applicable to common stock $215 $206 $186 $421 $368
- ----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 260,495 257,714 254,508 259,113 256,243
Basic earnings per common share $ .82 $ .80 $ .73 $1.62 $1.43
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (b) $215 $206 $186 $421 $368
- ----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 260,495 257,714 254,508 259,113 256,243
Common stock equivalents:
Stock options 5,281 5,339 4,863 5,328 4,975
Common shares issuable upon conversion of
7-1/4% Convertible Subordinated Capital Notes 72 83 104 77 134
- ----------------------------------------------------------------------------------------------------------------------------------
Total 265,848 263,136 259,475 264,518 261,352
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ .81 $ .78 $ .71 $1.59 $1.40
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
57
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 10 -- Accumulated unrealized gains (losses), net of tax
THESE TABLES INCLUDE THE QUARTERLY CHANGES IN THE BALANCES OF BOTH THE
ACCUMULATED UNREALIZED GAINS (LOSSES), NET OF TAX AND ITS INDIVIDUAL COMPONENTS.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $(11) $(7)
Quarterly change (4) -
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $(15) $(7)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized gains (losses) on
assets available for sale, net of tax
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $41 $(38)
Quarterly change (7) 40
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $34 $ 2
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated unrealized gain (losses), net of tax
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $30 $(45)
Quarterly change (11) 40
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $19 $ (5)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THESE TABLES INCLUDE THE YEAR-TO-DATE CHANGES IN THE BALANCES OF BOTH THE
ACCUMULATED UNREALIZED GAINS (LOSSES), NET OF TAX AND ITS INDIVIDUAL COMPONENTS.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $(12) $(6)
Year-to-date change (3) (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $(15) $(7)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized gains (losses) on
assets available for sale, net of tax
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $33 $(1)
Year-to-date change 1 3
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $34 $ 2
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated unrealized gains (losses), net of tax
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $21 $(7)
Year-to-date change (2) 2
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $19 $(5)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE> 60
SELECTED STATISTICAL INFORMATION
- --------------------------------------------------------------------------------
DEPOSITS
Mellon Bank Corporation (and its subsidiaries)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deposits in domestic offices:
Interest-bearing:
Demand, money market and
other savings accounts $11,611 $11,401 $11,160 $10,082 $10,385
Retail savings certificates 7,704 7,668 7,421 7,476 7,253
Other time deposits 2,035 1,887 1,373 1,342 1,793
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 21,350 20,956 19,954 18,900 19,431
Noninterest-bearing 8,880 9,505 7,975 8,562 9,483
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 30,230 30,461 27,929 27,462 28,914
Deposits in foreign offices 2,967 2,635 3,376 2,727 2,412
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits $33,197 $33,096 $31,305 $30,189 $31,326
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SELECTED KEY DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
(dollar amounts in millions, ------------------------------------------------------------------------------
except per share amounts; JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
common shares in thousands) 1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income per common share (a) $ .81 $ .78 $ .75 $ .73 $ .71
Tangible net income per
common share (a)(b) $ .91 $ .88 $ .83 $ .80 $ .79
Net income applicable to
common stock $ 215 $ 206 $ 191 $ 191 $ 186
Tangible net income applicable
to common stock (b) $ 243 $ 231 $ 212 $ 211 $ 206
Return on common shareholders'
equity (c) 20.8% 21.6% 21.2% 21.6% 21.9%
Return on tangible common
shareholders' equity (b)(c) 49.7% 43.3% 38.3% 37.6% 37.7%
Return on assets (c) 1.79% 1.89% 1.75% 1.81% 1.79%
Return on tangible assets (b)(c) 2.13% 2.18% 2.00% 2.05% 2.04%
Common equity to assets 8.92% 8.62% 8.13% 8.25% 7.72%
Tangible common equity to assets (d) 4.59% 4.76% 5.12% 5.37% 5.13%
Fee revenue as a percentage of
total revenue (FTE) 66% 66% 66% 63% 59%
Efficiency ratio excluding
amortization of intangibles 63% 62% 65% 62% 59%
Average common shares and
equivalents outstanding (a) 265,848 263,136 259,430 260,306 259,475
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
(d) See page 31 for the definition of this ratio.
Note: All calculations are based on unrounded numbers.
59
<PAGE> 61
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 and on May 14, 1998, a third individual
filed virtually identical complaints in the United States District Court for the
Western District of Pennsylvania. In these 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. In all three derivative
actions, the Corporation has consented to the plaintiffs' Notice of Voluntary
Dismissal, all of which were filed on July 31, 1998. The action filed in the
United States District Court for the Eastern District of Pennsylvania was
closed, effective July 31, 1998. The actions filed in the United States District
Court for the Western District of Pennsylvania are still pending.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Corporation's annual meeting of shareholders held on April 21, 1998, for
which proxies were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, the following matters were voted upon by
shareholders.
1. The election of seven directors for a term expiring in 2001:
Name of Director Votes For Votes Withheld
---------------- --------- --------------
Ira J. Gumberg 221,719,090 2,076,509
Edward J. McAniff 220,138,963 3,656,636
Martin G. McGuinn 221,687,613 2,107,986
David S. Shapira 221,720,189 2,075,410
W. Keith Smith 221,679,388 2,116,211
Joab L. Thomas 221,707,575 2,088,024
William J. Young 221,676,479 2,119,120
60
<PAGE> 62
PART II - OTHER INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. (continued)
2. Approval of the proposal to amend the Corporation's Restated
Articles of Incorporation to increase the authorized number of
shares of common stock:
For: 210,414,225
Against: 12,697,767
Abstain: 683,607
3. Ratification of KPMG Peat Marwick LLP as independent public
accountants of the Corporation for the year 1998:
For: 222,728,179
Against: 512,241
Abstain: 555,179
Abstentions are not counted for voting purposes under Pennsylvania law, the
jurisdiction of the Corporation's incorporation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Restated Articles of Incorporation of Mellon Bank Corporation,
as amended and restated as of September 2, 1993.
3.2 Statement Affecting Series B Preferred Stock, $1.00 Par Value.
3.3 Statement Affecting Series D Preferred Stock, $1.00 Par Value.
3.4 Statement Affecting Series H Preferred Stock, $1.00 Par Value.
3.5 Statement Affecting Series I Preferred Stock, $1.00 Par Value.
3.6 Statement Affecting Series J Preferred Stock, $1.00 Par Value.
3.7 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.
61
<PAGE> 63
PART II - OTHER INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
(a) Exhibits (continued)
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 second quarter of 1998, the Corporation filed the following
Current Reports on Form 8-K:
(1) A report dated April 1, 1998, which included, under Items 5 and
7, the Corporation's press release announcing the completion of
its acquisition of Founders Asset Management, LLC, which manages
growth-oriented no-load equity mutual funds and other investment
portfolios.
(2) A report dated April 21, 1998, which included, under Items 5 and
7, the Corporation's press release regarding first quarter 1998
results of operations, as well as an increase in the
Corporation's common stock dividend.
(3) A report dated April 22, 1998, which included, under Items 5 and
7, the Corporation's press release quoting Frank V. Cahouet, the
Corporation's chairman, president and chief executive officer,
to the effect that the Corporation was not in negotiations with
The Bank of New York Company, Inc. or anyone else and was not
interested in pursuing a transaction.
(4) A report dated April 26, 1998, which included, under Items 5 and
7, the Corporation's press release announcing that the board of
directors unanimously rejected the unsolicited merger offer from
The Bank of New York Company, Inc., as well as the related
materials that were presented to the investment community.
(5) A report dated May 20, 1998, which included, under Items 5 and
7, the Corporation's press release acknowledging the withdrawal
of The Bank of New York's unsolicited merger proposal.
62
<PAGE> 64
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MELLON BANK CORPORATION
(Registrant)
Date: August 10, 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)
63
<PAGE> 65
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,
insurance products 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
Founders Asset Management: www.founders.com
Buck: www.buckconsultants.com
Dreyfus Brokerage Services: www.edreyfus.com
ChaseMellon Shareholder Services: www.chasemellon.com
64
<PAGE> 66
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>
65
<PAGE> 67
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 Previously filed as Exhibit 3.10 to
Corporation's Restated Articles of Incorporation. the Quarterly Report on Form 10-Q
(File No. 1-7410) for the quarter
ended March 31, 1998, and
incorporated herein by reference.
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.
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>
66
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Mellon Bank Corporation (parent Corporation) (a)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes and equity in
undistributed net income (loss) of subsidiaries $ 93,886 $21,490 $182,090 $ 51,528
Fixed charges: interest expense, one-third of
rental expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 51,703 43,631 98,818 87,434
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $ 145,589 $65,121 $280,908 $138,962
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ - $ 6,431 $ 13,347 $ 19,849
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 2.82 1.49 2.84 1.59
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends 2.82 1.30 2.50 1.30
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The parent Corporation ratios include the accounts of Mellon Bank
Corporation (the "Corporation") and Mellon Financial Company, a wholly
owned subsidiary of the Corporation that functions as a financing entity
for the Corporation and its subsidiaries by issuing commercial paper and
other debt guaranteed by the Corporation, and Mellon Capital I and Mellon
Capital II, special purpose business trusts formed by the Corporation, that
exist solely to issue Capital Securities. Because these ratios exclude from
earnings the equity in undistributed net income (loss) of subsidiaries,
these ratios vary with the payment of dividends by such subsidiaries.
(b) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
67
<PAGE> 1
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Mellon Bank Corporation (and its subsidiaries)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes $331,120 $297,424 $ 662,981 $ 596,414
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 146,093 126,499 278,269 239,585
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined), excluding
interest on deposits 477,213 423,923 941,250 835,999
Interest on deposits 240,378 218,827 468,936 433,543
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $717,591 $642,750 $1,410,186 $1,269,542
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (a) $ - $ 6,431 $ 13,347 $ 19,849
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.27 3.35 3.38 3.49
Including interest on deposits 1.86 1.86 1.89 1.89
Ratio of earnings (as defined) to combined
fixed charges and preferred stock dividends:
Excluding interest on deposits 3.27 3.19 3.23 3.22
Including interest on deposits 1.86 1.83 1.85 1.83
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
68
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,993
<INT-BEARING-DEPOSITS> 537
<FED-FUNDS-SOLD> 240
<TRADING-ASSETS> 126
<INVESTMENTS-HELD-FOR-SALE> 3,957
<INVESTMENTS-CARRYING> 1,861
<INVESTMENTS-MARKET> 1,899
<LOANS> 30,654
<ALLOWANCE> 498
<TOTAL-ASSETS> 47,448
<DEPOSITS> 33,197
<SHORT-TERM> 3,901
<LIABILITIES-OTHER> 2,122
<LONG-TERM> 3,003
991<F1>
0
<COMMON> 147
<OTHER-SE> 4,087
<TOTAL-LIABILITIES-AND-EQUITY> 47,448<F1>
<INTEREST-LOAN> 1,183
<INTEREST-INVEST> 183
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 1,417
<INTEREST-DEPOSIT> 469
<INTEREST-EXPENSE> 681
<INTEREST-INCOME-NET> 736
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 1,454
<INCOME-PRETAX> 663
<INCOME-PRE-EXTRAORDINARY> 663
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 430
<EPS-PRIMARY> 1.62<F2>
<EPS-DILUTED> 1.59<F2>
<YIELD-ACTUAL> 4.02
<LOANS-NON> 107
<LOANS-PAST> 101
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 475
<CHARGE-OFFS> 47
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 498
<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 128, "Earnings per Share", by the Corporation at
year-end 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000064782
<NAME> MELLON BANK CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,447
<INT-BEARING-DEPOSITS> 466
<FED-FUNDS-SOLD> 674
<TRADING-ASSETS> 112
<INVESTMENTS-HELD-FOR-SALE> 3,333
<INVESTMENTS-CARRYING> 2,249
<INVESTMENTS-MARKET> 2,257
<LOANS> 28,144
<ALLOWANCE> 511
<TOTAL-ASSETS> 43,712
<DEPOSITS> 31,326
<SHORT-TERM> 2,999
<LIABILITIES-OTHER> 1,868
<LONG-TERM> 2,959
990<F1>
193
<COMMON> 147
<OTHER-SE> 3,230
<TOTAL-LIABILITIES-AND-EQUITY> 43,712<F1>
<INTEREST-LOAN> 1,124
<INTEREST-INVEST> 195
<INTEREST-OTHER> 27
<INTEREST-TOTAL> 1,351
<INTEREST-DEPOSIT> 434
<INTEREST-EXPENSE> 611
<INTEREST-INCOME-NET> 740
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,169
<INCOME-PRETAX> 597
<INCOME-PRE-EXTRAORDINARY> 597
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 381
<EPS-PRIMARY> 1.43<F2>
<EPS-DILUTED> 1.40<F2>
<YIELD-ACTUAL> 4.33
<LOANS-NON> 88
<LOANS-PAST> 111
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 525
<CHARGE-OFFS> 43
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 511
<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
128, "Earnings per Share", by the Corporation at year end 1997.
</FN>
</TABLE>
