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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 March 31, 1999
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Common Stock, $.50 par value 260,532,378
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TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
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Page No.
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 43
Consolidated Income Statement - Five Quarter Trend 44
Consolidated Statement of Cash Flows 46
Consolidated Statement of Changes in Shareholders' Equity 48
Notes to Financial Statements 49
Part II - Other Information
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Legal Proceedings (Item 1) 54
Exhibits and Reports on Form 8-K (Item 6) 54
Signature 56
Corporate Information 57
Index to Exhibits 58
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; planned
divestitures; 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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FINANCIAL HIGHLIGHTS Quarter ended
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(dollar amounts in millions, except per share amounts) MARCH 31, 1999 Dec. 31, 1998 March 31, 1998
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FINANCIAL RESULTS - PRE-SPLIT BASIS (a)
<S> <C> <C> <C>
Diluted earnings per common share:
Operating $ .87 (b) $ .84 $ .78
Tangible operating (c) .98 (b) .94 .88
Reported .96 .84 .78
Net income applicable to common stock:
Operating $231 (b) $222 $206
Tangible operating (c) 260 (b) 252 231
Reported 254 222 206
Return on common equity (d):
Operating 20.9% (b) 20.1% 21.6%
Tangible operating (e) 40.4 (b) 40.2 39.5
Reported 23.1 20.1 21.6
Return on assets (d):
Operating 1.84% (b) 1.76% 1.89%
Tangible operating (e) 2.16 (b) 2.07 2.17
Reported 2.03 1.76 1.89
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SELECTED KEY DATA - PRE-SPLIT BASIS (a)
Fee revenue as a percentage of net interest and fee revenue (FTE) 68% 68% 66%
Efficiency ratio excluding amortization of intangibles (f) 62 65 62
Dividends paid per common share $ .36 $ .36 $ .33
Dividends paid on common stock 94 94 84
Closing common stock price $ 70.38 $ 68.75 $ 63.50
Market capitalization 18,335 18,007 16,523
Average common shares and equivalents outstanding -
diluted (in thousands) 265,644 265,748 263,136
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FINANCIAL RESULTS AND SELECTED KEY DATA - POST-SPLIT BASIS (a)
Diluted earnings per common share:
Operating $ .43 (b) $ .42 $ .39
Tangible operating (c) .49 (b) .47 .44
Reported .48 .42 .39
Dividends per common share $ .18 $ .18 $ .17
Closing common stock price $35.19 $34.38 $31.75
Average common shares and equivalents outstanding -
diluted (in thousands) 531,288 531,496 526,272
CAPITAL RATIOS AT PERIOD END
Shareholders' equity to assets:
Reported 9.12% 8.90% 8.62%
Tangible (e) 5.60 5.41 5.19
Tier I capital 6.89 6.53 6.80
Total (Tier I plus Tier II) capital 11.22 10.80 11.28
Leverage capital 6.60 6.73 7.04
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</TABLE>
(continued)
2
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<TABLE>
<CAPTION>
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FINANCIAL HIGHLIGHTS (CONTINUED) Quarter ended
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(dollar amounts in millions, except per share amounts) MARCH 31, 1999 Dec. 31, 1998 March 31, 1998
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<S> <C> <C> <C>
AVERAGE BALANCES
Loans $31,467 $31,503 $29,389
Total interest-earning assets 39,811 39,427 36,644
Total assets 50,677 50,110 46,229
Total tangible assets (e) 48,755 48,153 44,726
Deposits 34,087 34,492 32,725
Notes and debentures 3,351 3,164 2,797
Trust-preferred securities 991 991 991
Total shareholders' equity 4,469 4,391 3,974
Tangible common shareholders' equity (e) 2,608 2,487 2,370
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</TABLE>
(a) See the "Significant financial events" section on page 6 for a discussion
of the two-for-one stock split payable May 17, 1999.
(b) Operating and tangible operating results for the first quarter of 1999
exclude a $49 million after-tax net gain from divestitures and a $26
million after-tax charge for the cumulative effect of a change in
accounting principle.
(c) Excludes the after-tax impact of amortization of goodwill and other
intangibles from purchase acquisitions.
(d) Annualized.
(e) Certain goodwill and other intangibles amortization is tax deductible.
Beginning December 31, 1998, the amount of goodwill and other identified
intangibles subtracted from common equity and total assets is net of the
tax-deductible portion. Prior-period ratios and amounts were restated.
(f) See page 20 for the definition of this ratio.
Note: All calculations are based on unrounded numbers.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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Diluted earnings per common share and net income applicable to common stock, on
a reported basis, totaled $.96, on a pre-split basis, and $254 million for the
first quarter of 1999. First quarter 1999 reported results included a $49
million after-tax net gain from divestitures, or $.19 per common share, and a
$26 million after-tax charge for the cumulative effect of a change in accounting
principle, or $.10 per common share. The annualized return on common equity and
return on assets, on a reported basis, were 23.1% and 2.03%, respectively, for
the first quarter of 1999.
Excluding the net gain from divestitures and the charge for a change in
accounting principle, first quarter 1999 diluted operating earnings per common
share totaled $.87, on a pre-split basis, an increase of 12%, compared with $.78
in the first quarter of 1998. Operating net income applicable to common stock in
the first quarter of 1999 was $231 million, an increase of 12%, compared with
$206 million in the first quarter of 1998. The annualized return on common
equity and return on assets, on an operating basis, were 20.9% and 1.84%,
respectively, for the first quarter of 1999, compared with 21.6% and 1.89%,
respectively, for the first quarter of 1998.
Diluted tangible operating earnings per common share totaled $.98, on a
pre-split basis, in the first quarter of 1999, an increase of 12%, compared with
$.88 in the first quarter of 1998. Tangible operating net income applicable to
common stock was $260 million, an increase of 13%, compared with $231 million in
the first quarter of 1998. The annualized return on tangible common equity and
return on tangible assets, on an operating basis, were 40.4% and 2.16%,
respectively, in the first quarter of 1999, compared with 39.5% and 2.17%,
respectively, in the first quarter of 1998.
3
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OVERVIEW (CONTINUED)
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Fee revenue for the first quarter of 1999 was $789 million, up $91 million from
$698 million in the prior-year period. The first quarter of 1998 included $22
million of fee revenue from the electronic filing of income tax returns. This
service was discontinued at the end of 1998. Excluding the impact on fee revenue
from the 1998 acquisitions of Founders Asset Management, LLC (Founders) and
Newton Management Limited (Newton) and fees from the electronic filing of income
tax returns in the first quarter of 1998, fee revenue increased 11% in the first
quarter of 1999 compared with the first quarter of 1998. This increase was led
by higher investment management revenue, up 15% over the prior-year period.
Excluding the gain on the sale of the merchant card processing business in
December 1998, fee revenue increased approximately 3%, or at an annualized rate
of 13%, compared with the fourth quarter of 1998.
Net interest revenue, on a fully taxable equivalent basis, was $371 million in
the first quarter of 1999, up $4 million compared with $367 million in the
prior-year period and down $11 million from $382 million in the fourth quarter
of 1998. The increase from the prior-year period was primarily due to a higher
level of interest-earning assets. The decrease compared with the fourth quarter
of 1998 primarily resulted from common stock repurchase costs, narrowing
spreads, lower loan fees and two fewer days in the first quarter of 1999
compared with the fourth quarter of 1998.
Operating expense before trust-preferred securities expense and net revenue from
acquired property for the first quarter of 1999 was $760 million, up $63 million
from $697 million in the first quarter of 1998 and down $45 million from $805
million in the fourth quarter of 1998. The increase, compared with the
prior-year period, primarily resulted from the impact of acquisitions and
business growth. Excluding the effect of acquisitions, operating expense before
trust-preferred securities expense and net revenue from acquired property
increased less than 2% in the first quarter of 1999 compared with the first
quarter of 1998. The decrease, compared with the fourth quarter of 1998,
resulted primarily from lower consulting and equipment expenses.
Credit quality expense was $15 million in the first quarter of 1999, compared
with $14 million in the first quarter of 1998 and $15 million in the fourth
quarter of 1998. Net credit losses were $17 million in the first quarter of
1999, compared with $18 million in the first quarter of 1998 and $17 million in
the fourth quarter of 1998.
Nonperforming assets totaled $161 million at March 31, 1999, compared with $140
million at December 31, 1998, and $191 million at March 31, 1998. The
Corporation's ratio of nonperforming assets to total loans and net acquired
property was .53% at March 31, 1999, compared with .44% at December 31, 1998,
and .63% at March 31, 1998.
4
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SIGNIFICANT FINANCIAL EVENTS
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Completed and pending divestitures
Enhancement of common stock repurchase program
In January 1999, the Corporation announced its intentions to sell its credit
card business, mortgage businesses and network services transaction processing
unit as part of an initiative to sharpen its strategic focus on businesses with
the highest return potential. These businesses employ approximately 2,300 staff
and generated approximately $470 million of fee and net interest revenue in
1998. The combined impact of the divestitures when completed is expected to
reduce the Corporation's balance sheet by approximately $3.5 billion, of which
approximately $3 billion are loans and mortgage servicing rights. The
Corporation will retain its jumbo mortgage loan business, which is conducted
nationwide through The Boston Company. The divestitures will have a favorable
impact on the Corporation's capital ratios as a result of the lower asset
levels.
On March 31, 1999, the Corporation completed the sale of the credit card
business to Citibank, a unit of Citigroup. In addition, on March 31, 1999, a
definitive sale agreement was signed to sell the $14 billion commercial mortgage
servicing business to GMAC Commercial Mortgage Corporation (GMACCM). The
Corporation expects to complete the sales of the commercial mortgage servicing
business in the second quarter of 1999 and the residential mortgage business and
the network services transaction processing unit by the end of the third quarter
of 1999. On May 11, 1999, a definitive sale agreement was signed to sell the
network services transaction processing unit to U.S. Bancorp.
In the first quarter of 1999, the Corporation recorded an $83 million pre-tax
net gain from the completed and pending divestitures. The after-tax impact from
these transactions totaled $49 million, or $.19 per common share on a pre-split
basis. The net gain resulted from a gain on the sale of the credit card business
partially offset by a loss on the commercial mortgage servicing business and a
write-down to reflect the estimated sale proceeds to be received for the
residential mortgage business. For an analysis of the financial impact of these
divestitures, see the "Completed/Pending Divestitures" disclosure in the
"Business sectors" section on pages 8 through 11. Excluding gains or divestiture
charges on the sales, the future impact of the sales on the Corporation's
earnings and results of operations is not expected to be material.
Proceeds from the sales will be invested in the Corporation's remaining
businesses, used for acquisitions or to repurchase common stock. In a related
action, in January 1999, the Corporation's board of directors approved an
enhancement to an existing common share repurchase authorization by increasing
the number of shares authorized for repurchase to 10 million shares, on a
pre-split basis, of the Corporation's common stock. In the first quarter of
1999, 2.7 million shares, on a pre-split basis, were repurchased. All such
repurchases will be used for general corporate purposes.
Cumulative effect of a change in accounting principle
On January 1, 1999, the Corporation adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position (SOP) No. 98-5
on reporting on the costs of start-up activities. This SOP requires that costs
of start-up activities be expensed as incurred. Initial application of the SOP
is to be reported as a cumulative effect of a change in accounting principle.
Due to this change in accounting principle, the Corporation recognized a
one-time after-tax charge of $26 million (pre-tax cost of $43 million), or $.10
per share on a pre-split basis, in the first quarter of 1999. The charge was
related to underwriting fees paid by the Corporation during the successful
initial public offering in the second quarter of 1998 of a $920 million Dreyfus
closed-end mutual fund. In September 1998, the Financial Accounting Standards
Board staff concluded that fees paid by advisors of closed-end funds should be
expensed as incurred and that any fees capitalized prior to July 24, 1998,
should be written off upon the adoption of SOP 98-5 and
5
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SIGNIFICANT FINANCIAL EVENTS (CONTINUED)
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reported as a cumulative effect of a change in accounting principle. This
accounting change will have no impact on a cash-flow basis in 1999 or future
periods since the underwriting fees were paid in the first half of 1998.
Common dividend increased 11%
On April 20, 1999, the Corporation announced an 11% increase in its quarterly
common dividend to $.40 per share on a pre-split basis. This cash dividend on
the Corporation's common stock is payable May 17, 1999, to shareholders of
record at the close of business on April 30, 1999. This is the ninth quarterly
common dividend increase that the Corporation has announced since the beginning
of 1993, resulting in a total common dividend per share increase of
approximately 240%.
Two-for-one common stock split
On April 20, 1999, the Corporation announced a two-for-one split of the
Corporation's common stock. The two-for-one stock split is being structured as a
stock dividend of one additional share of common stock paid on each issued share
of common stock. The additional shares resulting from the split will be
distributed on May 17, 1999, to shareholders of record at the close of business
on May 3, 1999.
6
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TANGIBLE OPERATING RESULTS
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Except for the merger with Dreyfus in 1994, 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. Operating results, excluding the impact of
intangibles, are shown in the table below.
<TABLE>
<CAPTION>
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Quarter ended
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(dollar amounts in millions MARCH 31, Dec. 31, March 31,
except per share amounts; ratios annualized) 1999 (a) 1998 1998
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<S> <C> <C> <C>
Operating net income applicable to common stock $ 231 $ 222 $ 206
After-tax impact of amortization
of intangibles from purchase acquisitions 29 30 25
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Tangible operating net income applicable to common stock $ 260 $ 252 $ 231
Increase over prior-year period 13% 19% 14%
Tangible operating earnings per common share - diluted -
pre-split basis $ .98 $ .94 $ .88
Increase over prior-year period 12% 16% 14%
Average common equity $ 4,469 $ 4,391 $ 3,873
Less: Average goodwill and other identified intangibles,
net of tax benefit (b) (1,922) (1,957) (1,503)
Plus: Average minority interest (c) 61 53 -
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Average tangible common equity (b) $ 2,608 $ 2,487 $ 2,370
Return on tangible common equity (b) 40.4% 40.2% 39.5%
Average total assets $50,677 $50,110 $46,229
Average total tangible assets (b) $48,755 $48,153 $44,726
Return on tangible assets (b) 2.16% 2.07% 2.17%
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</TABLE>
(a) Tangible operating results for the first quarter of 1999 exclude the $49
million after-tax net gain from divestitures and the $26 million after-tax
charge for the cumulative effect of a change in accounting principle.
(b) Certain goodwill and other intangibles amortization is tax deductible.
Beginning December 31, 1998, the amount of goodwill and other identified
intangibles subtracted from common equity and total assets is net of the
tax-deductible portion. Prior-period amounts and ratios were restated.
(c) Following the fourth quarter 1998 acquisition of a majority interest in
Newton, the Corporation began to include minority interest in the
calculation of average tangible common equity. Minority interest at March
31, 1999, and December 31, 1998, totaled $62 million and $60 million,
respectively.
7
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<TABLE>
<CAPTION>
BUSINESS SECTORS
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FOR THE QUARTER ENDED MARCH 31,
Consumer (a) Business (b)
(dollar amounts in millions, Fee Services Banking Fee Services Banking
averages in billions) 1999 1998 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net interest revenue $ 6 $ 8 $ 199 $ 187 $ 34 $ 39 $ 96 $ 89
Fee revenue 152 125 49 43 416 341 55 38
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Total revenue 158 133 248 230 450 380 151 127
Credit quality expense (revenue) - - 2 4 - - 3 4
Operating expense:
Mortgage servicing and credit
card amortization - - - - - - - -
Intangible amortization 3 2 19 16 8 4 6 6
Trust-preferred securities - - 2 2 - - 8 7
Other 99 83 141 130 331 282 45 45
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Total operating expense 102 85 162 148 339 286 59 58
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Income before taxes and cumulative
effect of accounting change 56 48 84 78 111 94 89 65
Income taxes 22 19 33 30 44 38 32 24
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Income before cumulative effect of
accounting change 34 29 51 48 67 56 57 41
Cumulative effect of accounting
change (c) - - - - - - - -
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Net income $ 34 $ 29 $ 51 $ 48 $ 67 $ 56 $ 57 $ 41
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Tangible net income (d) $ 37 $ 31 $ 66 $ 62 $ 74 $ 61 $ 61 $ 45
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Average assets $ 1.1 $ 0.9 $ 23.2 $ 20.3 $ 4.7 $ 3.7 $ 16.2 $ 15.5
Average common equity $ 0.2 $ 0.2 $ 1.1 $ 1.0 $ 1.0 $ 0.8 $ 1.5 $ 1.4
Average Tier I preferred equity $ - $ - $ 0.1 $ 0.1 $ - $ - $ 0.4 $ 0.4
Return on common
shareholders' equity (e) 62% 57% 18% 19% 29% 30% 16% 12%
Return on assets (e) NM NM 0.89% 0.97% NM NM 1.42% 1.08%
Pretax operating margin 35% 36% 34% 34% 25% 25% 59% 52%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 38% 38% 42% 42% 27% 26% 68% 62%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 62% 62% 57% 57% 73% 74% 30% 35%
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</TABLE>
(a) The annualized return on common shareholders' equity for the Total Consumer
sector was 25% for both the quarter ended March 31, 1999 and March 31,
1998.
(b) The annualized return on common shareholders' equity for the Total Business
sector was 21% and 19%, respectively, for the quarter ended March 31, 1999
and March 31, 1998.
(c) The cumulative effect of an accounting change has not been allocated to any
of the Corporation's reportable sectors.
(d) See page 7 for the definition of tangible operating results.
(e) Annualized.
(f) Includes an $83 million net gain from completed and pending divestitures.
(g) Ratios exclude the impact of the net divestiture gain.
NM - Not meaningful.
Various lines of business that offer different products and services but share
similar basic and economic characteristics have been combined into the four
major business sectors shown in the table above. The Corporation's "core"
business sectors are first identified by the nature of the service
provided--fee-based services and banking services. These service groupings are
further divided by type of customer--consumer and business. In addition, the
effect of Completed/Pending Divestitures has been displayed separately, as
discussed further on page 11. The table above and discussion that follows
present the operating results of the Corporation's major business sectors,
analyzed on an internal management reporting basis. Net interest revenue, fee
revenue and income taxes are presented on a taxable equivalent basis. There is
no intercompany profit or loss on intersector activity. In addition, the
accounting policies of the business sectors are the same as those described in
note 1 of the 1998 Annual Report to Shareholders. Capital is allocated quarterly
using the federal regulatory
8
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<TABLE>
<CAPTION>
Real Estate
Total Completed/Pending Workout/Other Consolidated
Core Sectors Divestitures Corporate Activity Results
1999 1998 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 335 $ 323 $ 27 $ 27 $ 9 $ 17 $ 371 $ 367
672 547 196 (f) 140 14 16 882 703
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1,007 870 223 167 23 33 1,253 1,070
5 8 10 7 - (1) 15 14
- - 42 45 - - 42 45
36 28 1 2 - - 37 30
10 9 1 - 9 11 20 20
616 540 64 63 1 19 681 622
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662 577 108 110 10 30 780 717
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340 285 105 50 13 4 458 339
131 111 43 17 4 (4) 178 124
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209 174 62 33 9 8 280 215
- - - - - - (26) -
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$ 209 $ 174 $ 62 $ 33 $ 9 $ 8 $ 254 $ 215
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$ 238 $ 199 $ 62 $ 33 $ 9 $ 8 $ 283 $ 240
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$ 45.2 $40.4 $ 4.0 $ 4.3 $ 1.5 $ 1.5 $ 50.7 $ 46.2
$ 3.8 $ 3.4 $ 0.3 $ 0.2 $ 0.4 $ 0.3 $ 4.5 $ 3.9
$ 0.5 $ 0.5 $ - $ - $ 0.5 $ 0.6 $ 1.0 $ 1.1
22% 21% NM NM NM NM 23% 22%
1.88% 1.76% NM NM NM NM 2.03% 1.89%
34% 33% NM NM NM NM 32% (g) 32%
38% 37% NM NM NM NM 37% (g) 36%
61% 62% NM NM NM NM 62% (g) 62%
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</TABLE>
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.
Following the decision to sell the mortgage businesses, credit card business and
network services transaction processing unit, the Corporation's core business
sectors were restated to exclude these businesses. In addition, core business
sectors were restated to exclude: the results of the merchant card processing
business that was sold in December 1998; the results of a mutual fund
administration service provided under a long-term contract that expires in May
2000; and fee revenue from the electronic filing of income tax returns, which
was discontinued at the end of 1998. These businesses' results are now reported
as "Completed/Pending Divestitures." Furthermore, the Real Estate Workout
sector, which previously had been reported separately, was combined with Other
Corporate Activity. The Real Estate Workout sector has diminished in
significance as the level of nonperforming assets has decreased. Also, in the
first quarter of 1999, the Corporation made some minor revisions to its revenue
and expense allocation methodology. The prior-year period's results have been
restated reflecting these actions.
Income before taxes for the Corporation's core sectors was $340 million in the
first quarter of 1999, an increase of $55 million, or 19%, compared with the
prior-year period. This increase resulted from a $137 million increase in
revenue, partially offset by an $85 million increase in operating expense. The
increase in revenue was due primarily to internal business growth and
acquisitions. Operating expense increased due primarily to acquisitions.
9
<PAGE> 11
BUSINESS SECTORS (CONTINUED)
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Annualized return on common shareholders' equity for the core sectors was 22% in
the first quarter 1999, compared with 21% in the first quarter of 1998.
Annualized return on average assets was 1.88% in the first quarter of 1999,
compared with 1.76% in the first quarter of 1998.
Consumer Fee Services
Consumer Fee Services includes private asset management services, retail mutual
funds and brokerage services. Income before taxes for the Consumer Fee Services
sector was $56 million in the first quarter of 1999, up $8 million, or 17%, from
the prior-year period. Revenue increased $25 million, or 19%, due to higher
private asset management fees, the Founders acquisition and higher brokerage
fees. Operating expense increased $17 million in support of business growth and
the Founders acquisition. This sector provided very strong returns, as the
annualized return on common shareholders' equity was 62% in the first quarter of
1999 compared with 57% in the first quarter of 1998.
Consumer Banking
Consumer Banking includes consumer lending and deposit products, business
banking and jumbo residential mortgage lending. Income before taxes for this
sector totaled $84 million in the first quarter of 1999, compared with $78
million in the first quarter of 1998, an increase of $6 million, or 7%. Revenue
increased $18 million, or 8%, due primarily to the Mellon United National Bank
and Mellon 1st Business Bank acquisitions in February 1998. Also contributing to
the revenue increase was growth in the business banking and private banking
groups. Operating expense increased $14 million due primarily to the
acquisitions. The annualized return on common shareholders' equity for this
sector was 18% in the first quarter of 1999, compared with 19% in the first
quarter of 1998.
Business Fee Services
Business Fee Services includes institutional asset and institutional mutual fund
management, institutional trust and custody, securities lending, foreign
exchange, cash management, stock transfer, benefits consulting and
administrative services, and services for defined contribution plans. Income
before taxes for this sector was $111 million in the first quarter of 1999, an
increase of $17 million, or 18%, compared with the first quarter of 1998.
Revenue increased $70 million, or 18%, primarily due to higher institutional
asset management and mutual fund fees due, in part, to the Newton and Founders
acquisitions. Also contributing to the revenue increase was higher foreign
exchange fees, increased benefits consulting fees and higher cash management
revenue. Operating expense increased $53 million due to the Newton and Founders
acquisitions and in support of business growth. This sector provided excellent
returns as the annualized return on common shareholders' equity for this sector
was 29% in the first quarter of 1999, compared with 30% in the first quarter of
1998.
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 $89 million for the
first quarter of 1999, an increase of $24 million, or 36%, from the first
quarter of 1998. This improvement resulted from higher revenue from equity
investments and loan growth. The annualized return on common shareholders'
equity for this sector was 16% in the first quarter of 1999, compared with 12%
in the first quarter of 1998.
10
<PAGE> 12
BUSINESS SECTORS (CONTINUED)
- -------------------------------------------------------------------------------
Completed/Pending Divestitures
Completed/Pending Divestitures includes residential mortgage loan origination
and servicing that had previously been reported in Consumer Fee Services; credit
card and a portion of merchant card processing that had previously been reported
in Consumer Banking and in addition, 1998 results include the fee revenue from
the electronic filing of income tax returns service, which was discontinued at
the end of 1998 and had been previously reported in Consumer Banking; and
commercial mortgage loan origination and servicing, network services transaction
processing, and a portion of merchant card processing that had previously been
reported in Business Fee Services. In addition, Completed/Pending Divestitures
includes the results of a mutual fund administration service provided under a
long-term contract with a third party that expires in May 2000, that had
previously been reported in Business Fee Services. Income before taxes was $105
million in the first quarter of 1999 and $50 million in the first quarter of
1998. The first quarter of 1999 primarily consists of the net gain from
completed and pending divestitures, as further discussed in "Significant
financial events" on page 5, and the results of the mutual fund administration
service while the first quarter of 1998 primarily consists of the results of the
mutual fund administration service and the fee revenue from the electronic
filing of income tax returns.
Real Estate Workout/Other Corporate Activity
Real Estate Workout/Other Corporate Activity primarily includes business
activities that are not separate lines of business or have not been allocated,
for management reporting purposes, to the lines of business. The Real Estate
Workout/Other Corporate Activity sector's pretax income for the first quarter of
1999 was $13 million, compared with $4 million in the first quarter of 1998.
Revenue 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. Operating expense includes
trust-preferred securities expense and various nonrecurring charges for items
not attributable to the operations of a business sector. Average assets
primarily include assets of certain support areas not allocated to the major
business sectors. Average common and Tier I preferred equity represents capital
in excess of that required for the core sectors.
11
<PAGE> 13
<TABLE>
<CAPTION>
FEE REVENUE
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust and investment fee revenue:
Investment management fee revenue $278 $257 $202
Administration and custody fee revenue 139 137 132
Benefits consulting 56 59 52
Brokerage fees 15 12 10
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 488 465 396
Cash management and deposit transaction charges 66 70 61
Mortgage servicing fees 52 48 55
Foreign currency and securities trading revenue 43 47 41
Credit card fees 18 22 24
Information services fees 13 12 11
Gain on sale of merchant card processing business - 35 -
Other 109 100 110
- ----------------------------------------------------------------------------------------------------------------------------------
Total fee revenue $789 $799 $698
- ----------------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of net interest and fee revenue (FTE) 68% 68% 66%
Trust and investment fee revenue as a percentage
of net interest and fee revenue (FTE) 42% 39% 37%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fee revenue increased $91 million, or 13%, in the first quarter of 1999,
compared with the first quarter of 1998. Excluding the fee revenue resulting
from the Founders and Newton acquisitions and fees from the electronic filing of
income tax returns in the first quarter of 1998, fee revenue increased 11%
compared with the prior-year period. This increase was attributable to higher
trust and investment fees. The electronic filing of income tax returns service
was discontinued at the end of 1998.
Total trust and investment fee revenue
The $92 million, or 23%, increase in trust and investment fee revenue in the
first quarter of 1999, compared with the prior-year period, reflects a $76
million increase in investment management revenue, a $7 million increase in
administration and custody revenue, a $4 million increase in benefits consulting
and a $5 million increase in brokerage fees. These increases resulted from net
new business, higher transaction volumes and an increase in the market value of
assets under management, as well as revenue resulting from the Founders and
Newton acquisitions. Excluding the revenue from these acquisitions, trust and
investment fees increased 12% compared with the first quarter of 1998. On a pro
forma basis, including the trust and investment fees generated by the
Corporation's joint ventures, trust and investment fees increased 15% compared
with the first quarter of 1998.
12
<PAGE> 14
FEE REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
Investment management fee revenue
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed mutual fund fees (a):
Equity funds $ 61 $ 54 $ 33
Taxable money market funds:
Institutional 25 23 18
Individuals 9 11 8
Tax-exempt bond funds 23 24 24
Fixed-income funds 12 12 7
Tax-exempt money market funds 8 8 7
Nonproprietary 6 4 3
- ----------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund fees 144 136 100
Private asset 71 63 52
Institutional asset 63 58 50
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment management fee revenue $278 $257 $202
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of quarterly mutual fund fees waived and fund expense reimbursements of
$8 million, $9 million and $11 million at March 31, 1999, December 31,
1998, and March 31, 1998, respectively.
The $76 million increase in investment management revenue in the first quarter
of 1999, compared with the prior-year period, resulted from a $44 million, or
44%, increase in mutual fund management revenue, a $19 million, or 36%, increase
in private asset management revenue and a $13 million, or 23%, increase in
institutional asset management revenue. These increases primarily resulted from
acquisitions, net new business and an increase in the market value of assets
under management. Excluding the revenue from acquisitions, investment management
revenue increased 15% in the first quarter of 1999 compared with the prior-year
period.
Mutual fund management fees are based upon the average net assets of each fund.
Average net assets of proprietary funds managed at Dreyfus/Founders/Newton in
the first quarter of 1999 were $125 billion, up $28 billion from $97 billion in
the first quarter of 1998 and up $7 billion from $118 billion in the fourth
quarter of 1998. The increase from the first quarter of 1998 primarily resulted
from increases in average net assets of equity funds, institutional taxable
money market funds and fixed-income funds, due in part to the Founders and
Newton acquisitions. The combined impact on average net assets of proprietary
funds managed during the first quarter of 1999 from the Founders and Newton
acquisitions was approximately $12 billion. Substantially all of the assets
managed in these funds are equities. Proprietary equity funds averaged $42
billion in the first quarter of 1999, compared with $23 billion in the first
quarter of 1998 and $37 billion in the fourth quarter of 1998.
As shown in the table on the following page, the market value of trust assets
under management was $406 billion at March 31, 1999, a $17 billion increase from
$389 billion at December 31, 1998. This increase resulted from net new business
and a general market increase. At March 31, 1999, compared to December 31, 1998,
the S&P 500 Index increased 4.7% while the Lehman Brothers Long-Term Government
Bond Index decreased 4.3%.
13
<PAGE> 15
FEE REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT - DREYFUS (a)
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in billions) 1999 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mutual fund assets managed:
Equity funds $ 43 $ 40 $ 30 $ 34 $ 26
Taxable money market funds:
Institutional 40 40 38 35 34
Individuals 9 9 9 8 9
Tax-exempt bond funds 16 16 17 16 16
Fixed-income funds 8 7 7 7 5
Tax-exempt money market funds 8 8 8 8 8
Nonproprietary 23 21 16 17 15
- ----------------------------------------------------------------------------------------------------------------------------------
Total mutual fund assets managed 147 141 125 125 113
Private asset 50 47 37 41 40
Institutional asset (b) 209 201 172 184 175
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $406 $389 $334 $350 $328
- ----------------------------------------------------------------------------------------------------------------------------------
</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, Founders Asset Management, LLC and Newton
Management Limited; 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,
Prime Advisors, Inc. and Newton Management Limited; and Mellon Private
Asset Management(TM), the high net worth personal trust and custody
business of the Corporation.
(b) Includes assets managed at Pareto Partners of $28 billion at March 31,
1999; $24 billion at December 31, 1998; $24 billion at September 30, 1998;
$25 billion at June 30, 1998; and $24 billion at March 31, 1998. The
Corporation has a 30% equity interest in Pareto Partners.
At March 31, 1999, the combined market values of $23 billion of nonproprietary
mutual funds and $209 billion of institutional assets managed, by asset type,
were as follows: equities, $95 billion; balanced, $40 billion; fixed income, $39
billion; money market, $30 billion; and $28 billion at Pareto Partners,
primarily in currency overlay and global fixed-income products, for a total of
$232 billion.
Administration and custody fee revenue
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Administration and custody:
Institutional trust $100 $100 $ 95
Mutual fund 34 32 33
Private asset 5 5 4
- ----------------------------------------------------------------------------------------------------------------------------------
Total administration and custody fee revenue $139 $137 $132
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
FEE REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
As shown in the table on the prior page, administration and custody fee revenue
increased $7 million in the first quarter of 1999 compared with the first
quarter of 1998. This increase resulted from net new business and higher
transaction volumes. However, this increase was impacted by accounting for the
results of the Russell/Mellon Analytical Services Inc. joint venture
(Russell/Mellon), in the first quarter of 1999, under the equity method of
accounting. The equity method of accounting requires that the results of joint
ventures be reported on a net basis rather than reporting the gross revenues and
expenses separately. The table below shows the pro forma administration and
custody fee revenue including the revenue generated by the Russell/Mellon and
CIBC Mellon Global Securities Services joint ventures. On a pro forma basis,
administration and custody fee revenue increased $24 million, or 17%, compared
to the first quarter of 1998 and $19 million, or 13%, compared to the fourth
quarter of 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA ADMINISTRATION AND CUSTODY FEE REVENUE Quarter ended
-----------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total administration and custody fee revenue - as reported $139 $137 $132
Pro forma adjustment to reflect joint venture revenue 27 10 10
- ----------------------------------------------------------------------------------------------------------------------------------
Pro forma administration and custody fee revenue $166 $147 $142
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mutual fund administration and custody fees are expected to be adversely
impacted beginning in the second quarter of 2000 as a long-term contract with a
third party expires in May of 2000. Fees from this contract totaled
approximately $20 million in the first quarter of 1999.
The market value of assets under administration/custody, shown in the table
below, was $1,928 billion at March 31, 1999, an increase of $25 billion compared
with $1,903 billion at December 31, 1998. This increase resulted from net new
business and a general market increase.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in billions) 1999 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust (a) $1,826 $1,803 $1,556 1,701 $1,564
Mutual fund 69 62 52 54 67
Private asset 33 38 34 36 35
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $1,928 $1,903 $1,642 $1,791 $1,666
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $218 billion of assets at March 31, 1999; $244 billion of assets
at December 31, 1998; $265 billion of assets at September 30, 1998; $316
billion at June 30, 1998; and $317 billion at March 31, 1998, administered
by CIBC Mellon Global Securities Services, a joint venture.
Benefits consulting and brokerage fees
Benefits consulting fees increased $4 million in the first quarter of 1999,
compared with the prior-year period, primarily resulting from net new business
and increased project activity with existing clients. The $5 million increase in
brokerage fees primarily resulted from higher trading volumes. Dreyfus Brokerage
Services, Inc. averaged approximately 9,600 trades per day in the first quarter
of 1999, compared with approximately 8,300 trades per day in the fourth quarter
of 1998 and approximately 5,600 trades per day in the first quarter of 1998.
15
<PAGE> 17
FEE REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
Cash management and deposit transaction charges
The $5 million, or 9%, increase in cash management and deposit transaction
charges in the first quarter of 1999, compared with the prior-year period,
primarily resulted from higher volumes.
Mortgage servicing fees
Mortgage servicing fees decreased $3 million, or 6%, in the first quarter of
1999, compared with the first quarter of 1998. This decrease primarily resulted
from a lower principal balance of mortgages serviced. A definitive sale
agreement with GMACCM was signed on March 31, 1999, in regard to the sale of the
commercial mortgage servicing business. The Corporation expects to complete the
sale of the commercial mortgage servicing business in the second quarter of 1999
and the sale of the residential mortgage business by the end of the third
quarter of 1999.
Foreign currency and securities trading revenue
The $2 million, or 3%, increase in foreign currency and securities trading
revenue in the first quarter of 1999, compared with the first quarter of 1998,
was primarily related to growth in the number of foreign exchange customers and
related volumes, partially offset by lower securities trading gains. The $4
million, or 9% decrease, compared with the fourth quarter of 1998, resulted from
lower foreign exchange customer volumes, relative to the record levels of the
prior period, reduced market volatility and lower securities trading gains. The
January 1, 1999, introduction of the euro was a factor contributing to lower
foreign exchange volumes.
Credit card fees
Credit card fees were $18 million in the first quarter of 1999, a decrease of $6
million compared with $24 million in the first quarter of 1998. The decrease
primarily resulted from the December 1998 sale of the merchant card processing
business. This business generated approximately $7 million of fee and net
interest revenue in the first quarter of 1998. On March 31, 1999, the
Corporation sold its credit card business to Citibank, a unit of Citigroup.
Information services fees
Information services fees totaled $13 million in the first quarter of 1999, an
increase of $2 million, or 16%, compared with the first quarter of 1998. As
discussed previously, the Corporation has entered into several joint ventures,
the most significant being ChaseMellon Shareholder Services and CIBC Mellon
Trust Company, which are stock transfer and shareholder services joint ventures.
The Corporation's joint ventures generated approximately $70 million of gross
fee revenue in the first quarter of 1999, compared with approximately $52
million in both the fourth and first quarters of 1998. The Corporation accounts
for its interest in joint ventures under the equity method of accounting with
the net results primarily recorded as information services fee revenue as well
as trust and investment revenue.
Other fee revenue
Other fee revenue was $109 million in the first quarter of 1999, a decrease of
$1 million compared with the first quarter of 1998. This decrease primarily
resulted from the elimination of fees from the electronic filing of income tax
returns due to the expiration of a contract with a major income tax return
preparer at the end of 1998. The Corporation recorded $22 million of fee revenue
from this service in the first quarter of 1998. This decrease was primarily
offset by higher revenue from equity investments, as well as other factors, none
of which were individually significant.
16
<PAGE> 18
FEE REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
Completed and pending sale of credit card, mortgage and network services
businesses
Completed and pending divestitures are discussed further in the "Significant
financial events" section on page 5. These units generated approximately $350
million of fee revenue in 1998, which is included in mortgage servicing fees,
credit card fees, information services fees and other fee revenue discussed
above. For an analysis of the financial impact of these divestitures, see the
"Completed/Pending Divestitures" disclosure in the "Business sectors" section on
pages 8 through 11.
First quarter 1999 compared with fourth quarter 1998
Excluding the $35 million gain on the sale of the merchant card processing
business in December 1998, fee revenue increased $25 million, or 3%, or at an
annualized rate of 13%, compared with the fourth quarter of 1998. This increase
resulted from growth in trust and investment fee revenue and other revenue.
Compared with the fourth quarter of 1998, trust and investment fee revenue
increased 5%, or at an annualized rate of 19%.
NET INTEREST REVENUE
- -------------------------------------------------------------------------------
Net interest revenue on a fully taxable equivalent basis for the first quarter
of 1999 totaled $371 million, compared with $367 million in the first quarter of
1998 and $382 million in the fourth quarter of 1998. The net interest margin was
3.78% in the first quarter of 1999, compared with 4.06% in the first quarter of
1998 and 3.86% in the fourth quarter of 1998. The $4 million increase in net
interest revenue on a fully taxable equivalent basis in the first quarter of
1999, compared with the first quarter of 1998, was primarily due to a higher
level of interest-earning assets partially offset by acquisition funding costs,
funding costs related to the repurchase of common stock and narrowing spreads.
The Corporation sold its credit card business on March 31, 1999, and intends to
sell its residential mortgage servicing business by the end of the third quarter
of 1999, as discussed further in the "Significant financial events" section on
page 5. Credit card loans sold in the first quarter of 1999 totaled
approximately $800 million at year-end 1998, while the residential mortgage
warehouse portfolio that will be sold as part of the sale of the residential
mortgage servicing business totaled approximately $1.1 billion at March 31,
1999.
First quarter 1999 compared with fourth quarter 1998
The $11 million decrease in net interest revenue on a fully taxable equivalent
basis in the first quarter of 1999, compared with the fourth quarter of 1998,
primarily resulted from the common stock repurchase costs, narrowing spreads,
lower loan fees and the impact of two fewer days in the first quarter of 1999.
17
<PAGE> 19
<TABLE>
<CAPTION>
NET INTEREST REVENUE (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
-----------------------
MARCH 31, 1999
AVERAGE AVERAGE
(dollar amounts in millions) BALANCE YIELDS/RATES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets Interest-earning assets:
Interest-bearing deposits with banks $ 776 4.85%
Federal funds sold and securities under resale agreements 465 4.84
Other money market investments 45 4.63
Trading account securities 291 5.25
Securities:
U.S. Treasury and agency securities (a) 6,505 6.52
Obligations of states and political subdivisions (a) 112 6.94
Other (a) 97 7.11
Loans, net of unearned discount (a) 31,465 7.50
--------
Total interest-earning assets 39,756 7.24
Cash and due from banks 3,148
Premises and equipment 574
Customers' acceptance liability 114
Net acquired property 36
Other assets (a) 7,488
Reserve for credit losses (498)
-----------------------------------------------------------------------------------------------------------------
Total assets $50,618
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities, Interest-bearing liabilities:
trust-preferred Deposits in domestic offices:
securities and Demand $ 367 1.57%
shareholders' Money market and other savings accounts 12,002 2.75
equity Retail savings certificates 6,923 4.63
Other time deposits 1,864 5.17
Deposits in foreign offices 3,268 4.38
--------
Total interest-bearing deposits 24,424 3.67
Federal funds purchased and securities under
repurchase agreements 2,901 4.67
U.S. Treasury tax and loan demand notes 571 4.60
Short-term bank notes 531 5.07
Term federal funds purchased 479 5.04
Commercial paper 133 5.25
Other funds borrowed 435 8.26
Notes and debentures (with original maturities over one year) 3,351 6.67
--------
Total interest-bearing liabilities 32,825 4.19
Total noninterest-bearing deposits 9,663
Acceptances outstanding 114
Other liabilities (a) 2,594
-----------------------------------------------------------------------------------------------------------------
Total liabilities 45,196
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991
-----------------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 4,431
-----------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $50,618
- -----------------------------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.24%
Cost of funds supporting interest-earning assets 3.46
-----------------------------------------------------------------------------------------------------------------
Net interest margin:
Taxable equivalent basis 3.78%
Without taxable equivalent increments 3.76
-----------------------------------------------------------------------------------------------------------------
(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
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
- -----------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 1998 Sept. 30, 1998 June 30, 1998 March 31, 1998
Average Average Average Average Average Average Average Average
balance yields/rates balance yields/rates balance yields/rates balance yields/rates
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 797 5.27% $ 575 5.27% $ 569 4.93% $ 655 5.24%
663 4.97 665 7.06 853 5.52 967 5.58
65 4.73 111 5.17 175 5.12 90 6.46
258 6.31 266 6.64 239 5.60 242 6.35
5,878 6.44 5,543 6.61 5,385 6.72 5,071 6.98
86 6.88 53 7.26 45 6.67 35 8.71
101 6.70 106 6.99 126 6.93 148 6.92
31,503 7.75 30,421 8.05 30,281 8.05 29,367 7.99
------- -------- ------- --------
39,351 7.44 37,740 7.76 37,673 7.72 36,575 7.72
3,165 3,115 3,281 3,220
573 562 562 562
160 106 92 123
39 60 68 49
7,244 6,794 6,721 6,120
(501) (501) (499) (492)
- ----------------------------------------------------------------------------------------------------------------------------------
$50,031 $47,876 $47,898 $46,157
- ----------------------------------------------------------------------------------------------------------------------------------
$ 365 1.13% $ 354 2.18% $ 347 2.14% $ 309 2.43%
11,646 2.84 11,073 2.96 11,069 2.91 10,801 2.91
7,374 4.78 7,699 4.99 7,680 5.01 7,596 5.04
2,558 5.48 2,071 5.64 2,092 5.55 1,702 5.59
2,898 4.71 2,847 5.18 2,740 4.86 2,550 4.98
-------- --------- -------- ---------
24,841 3.88 24,044 4.09 23,928 4.03 22,958 4.04
2,423 4.84 2,373 5.94 2,257 5.38 1,765 5.44
679 4.65 630 5.37 684 5.32 418 5.35
296 5.45 275 5.69 296 5.68 313 5.76
258 5.48 271 5.74 388 5.63 546 5.80
336 5.21 164 5.57 237 5.55 200 5.60
409 9.14 344 9.18 352 9.16 351 8.83
3,164 6.70 3,003 6.81 3,003 6.88 2,797 7.01
-------- --------- -------- ---------
32,406 4.35 31,104 4.62 31,145 4.53 29,348 4.54
9,651 9,355 9,620 9,767
160 106 92 123
2,484 2,095 1,968 2,001
- ----------------------------------------------------------------------------------------------------------------------------------
44,701 42,660 42,825 41,239
991 991 991 991
- ----------------------------------------------------------------------------------------------------------------------------------
4,339 4,225 4,082 3,927
- ----------------------------------------------------------------------------------------------------------------------------------
$50,031 $47,876 $47,898 $46,157
7.44% 7.76% 7.72% 7.72%
3.58 3.81 3.75 3.66
- ----------------------------------------------------------------------------------------------------------------------------------
3.86% 3.95% 3.97% 4.06%
3.84 3.93 3.95 4.04
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
19
<PAGE> 21
<TABLE>
<CAPTION>
OPERATING EXPENSE
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended
-------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Staff expense $391 $386 $357
Professional, legal and other purchased services 71 97 61
Net occupancy expense 61 63 56
Amortization of mortgage servicing assets and
purchased credit card relationships 42 47 45
Equipment expense 41 59 39
Amortization of goodwill and other intangible assets 37 37 30
Business development 33 38 36
Communications expense 29 28 26
Other expense 55 50 47
- ---------------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-preferred securities
expense and net revenue from acquired property 760 805 697
Trust-preferred securities expense 20 20 20
Net revenue from acquired property - - (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expense $780 $825 $716
- ---------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 29,100 28,500 27,900
- ---------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 65% 68% 65%
Efficiency ratio excluding amortization of goodwill
and other intangible assets 62% 65% 62%
- ---------------------------------------------------------------------------------------------------------------------------------
</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 the net gain from divestitures and the sale of
securities.
Operating expense before trust-preferred securities expense and net revenue from
acquired property increased $63 million, or 9%, in the first quarter of 1999
compared with the prior-year period, primarily resulting from acquisitions and
business growth. Excluding the effect of acquisitions, operating expense before
trust-preferred securities expense and net revenue from acquired property
increased less than 2% compared with the first quarter of 1998.
The sale of the Corporation's credit card business, mortgage businesses and
network services transaction processing unit will impact all expense categories,
particularly staff expense and amortization of mortgage servicing assets and
purchased credit card relationships.
First quarter 1999 compared with fourth quarter 1998
Operating expense before trust-preferred securities expense and net revenue from
acquired property decreased $45 million in the first quarter of 1999, compared
with the fourth quarter of 1998. This decrease primarily resulted from lower
consulting and equipment expenses. The decrease in consulting and equipment
expenses primarily related to fourth quarter 1998 expenditures for strategic
business and reengineering initiatives and the upgrade of computer hardware.
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 year 2000 project plan includes inventory,
assessment,
20
<PAGE> 22
OPERATING EXPENSE (CONTINUED)
- -------------------------------------------------------------------------------
remediation, system testing, enterprise testing, contingency planning and
internal certification. The Corporation's business areas are in various stages
of this project plan. Within the classifications of information technology
systems and non-information technology systems, the Corporation has prioritized
its systems. The two highest categories are systems that are mission critical
and those that are of high business value and priority (although not mission
critical).
Information technology systems:
The Corporation has completed approximately 99% of the remediation and system
testing for internal mission critical information technology systems. In late
1998, the Corporation began significant enterprise testing (e.g., testing
with customers, integration testing between systems and testing with
third-party vendors) of mission critical information technology systems,
which testing is expected to be essentially completed by June 30, 1999. The
Corporation currently expects to have substantially completed remediation and
testing, by June 30, 1999, of information technology systems that the
Corporation has determined are of high business value and priority.
Non-information technology systems:
The Corporation currently expects to have completed, by June 30, 1999,
planned testing of, and mitigation of identified problems involving,
non-information technology systems that the Corporation has determined are
mission critical or of high business value and priority. Currently, more than
90% of the mission critical and high business value non-information
technology systems are year 2000 compliant based upon testing of such systems
or information supplied by manufacturers.
The Corporation incurred expenses throughout 1996, 1997 and 1998 related to this
project and will continue to incur expenses throughout 1999. The Corporation
currently estimates that the costs related to inventory, assessment,
remediation, system testing, enterprise testing, contingency planning and
internal certification will be approximately $95 million. Approximately 15% of
these costs were incurred in 1996 and 1997, approximately 50% were incurred in
1998 and approximately 35% are expected to be incurred in 1999. Expenditures in
1999 will relate primarily to enterprise testing, contingency planning and
internal certification. 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 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 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 identified and
has an on-going process of contacting mission critical third-party vendors and
other significant third parties to determine their year 2000 plans and target
dates. As part of such process, the Corporation has replaced certain third-party
software vendors where the Corporation had significant doubts regarding the year
2000 compliance of their products. Risks associated with 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. The Corporation is monitoring its non-U.S.
subcustodians and is developing contingency plans with respect to non-U.S.
subcustodians where necessary. 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.
21
<PAGE> 23
OPERATING EXPENSE (CONTINUED)
- -------------------------------------------------------------------------------
The Corporation is developing contingency plans to address risks associated with
year 2000 issues. These activities include remediation contingency plans, year
2000 business resumption contingency plans and event management plans.
Remediation contingency plans address the actions that may be taken if the
current approach to remediating a mission critical technology system is falling
behind schedule or may not be completed when required. Such plans principally
involve internal remediation or identifying alternate vendors. The Corporation
has essentially completed the implementation of its remediation contingency
plans. Year 2000 business resumption contingency plans address year 2000
problems that occur, notwithstanding the remediation efforts of the Corporation
and third parties. As part of its year 2000 business resumption contingency
planning, the Corporation is 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 mission critical year
2000 problems that become evident. In this regard, all existing business
resumption plans involving mission critical processes have been reviewed, and
options for addressing potential year 2000 problems have been identified. The
Corporation expects to continue reviewing, enhancing and validating such plans
through mid-1999. Event planning is intended to address year 2000 risks by
actively monitoring operations during the period of time around the end of 1999
with a view to identifying any year 2000 problems that occur and taking action
to manage and resolve such problems. These actions may include implementing
previously developed business resumption contingency plans. Event planning is in
progress and will continue throughout 1999 and the first quarter of 2000. There
can be no assurance that any contingency plans will fully mitigate any year 2000
failures, problems or disruptions. Furthermore, there may be certain mission
critical third parties, such as utilities, communication companies,
transportation companies or governmental entities, where alternative
arrangements or sources are unavailable or severely limited.
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. In addition, the Corporation may be subject to increased risks as a
fiduciary to the extent that issuers of assets it manages or administers fail to
adequately address year 2000 issues and to increased liquidity risks to the
extent of deposit withdrawals or to the extent its lenders are unable due to
year 2000 problems to provide the Corporation with funds. It is not possible,
however, to quantify the potential impact of any such risks or losses at this
time.
Until the year 2000 event actually occurs and for a period of time thereafter,
there can be no assurance that there will be no problems related to year 2000.
The year 2000 technology challenge is an unprecedented event. If year 2000
issues are not addressed adequately by the Corporation and third parties, the
Corporation could face, among other things, business disruptions, operational
problems, financial losses, legal liability and similar risks, and 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 complete remediation and testing of systems,
mitigation of identified systems problems and contingency planning, 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 vendors 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 systems; results of year 2000 testing; adequate
resolution of year 2000 issues by governmental agencies, businesses or other
third parties that 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
22
<PAGE> 24
OPERATING EXPENSE (CONTINUED)
- -------------------------------------------------------------------------------
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.
The foregoing year 2000 discussion constitutes a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
INCOME TAXES
- -------------------------------------------------------------------------------
The provision for income taxes totaled $166 million in the first quarter of
1999, compared with $117 million in the first quarter of 1998. The Corporation's
effective tax rate, excluding the effect of a change in accounting principle,
for the first quarter of 1999 was 37.3% compared with 35.3% for the first
quarter of 1998. Excluding the effect of divestitures, the effective tax rate
was 36.5% for the first quarter of 1999. It is currently anticipated that the
effective tax rate, excluding the effect of divestitures, will be approximately
36.5% for the remainder of 1999.
<TABLE>
<CAPTION>
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended
---------------------------------------------
MARCH 31, Dec. 31, March 31,
(average balances in millions) 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,286 $ 1,525 $ 1,712
Trading account securities 291 258 242
Securities 6,767 6,141 5,301
Loans 31,467 31,503 29,389
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 39,811 39,427 36,644
Noninterest-earning assets 11,364 11,184 10,077
Reserve for credit losses (498) (501) (492)
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $50,677 $50,110 $46,229
- ----------------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $39,774 $39,540 $37,299
Wholesale and purchased funds 10,903 10,570 8,930
- --------------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $50,677 $50,110 $46,229
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $3.2 billion increase in the Corporation's average interest-earning assets
in the first quarter of 1999, compared with the first quarter of 1998, reflects
a $2.1 billion increase in average loans and a $1.5 billion increase in average
securities. Excluding the effect of acquisitions, average loans in the first
quarter of 1999 grew by approximately $1.5 billion, compared with the prior-year
period, primarily in wholesale lending and business banking. The increase in
average loans and securities was partially offset by a lower average level of
money market investments in the first quarter of 1999 compared with the first
quarter of 1998.
Core funds, which are considered to be the most stable sources of funding, are
defined principally as individual money market and other savings deposits,
savings certificates, demand deposits, shareholders' equity, notes and
debentures with original maturities over one year, trust-preferred securities,
and other liabilities. Core funds primarily support core assets, which consist
of loans, net of the reserve, and noninterest-earning assets. Average
23
<PAGE> 25
ASSET/LIABILITY MANAGEMENT (CONTINUED)
- -------------------------------------------------------------------------------
core assets increased $3.4 billion in the first quarter of 1999 from the
prior-year period, reflecting higher levels of loans and noninterest-earning
assets. The increase in noninterest-earning assets includes a higher level of
goodwill resulting from acquisitions. Average core funds increased $2.5 billion
in the first quarter of 1999 from the prior-year period, primarily reflecting
higher levels of deposits, shareholders' equity, and notes and debentures. Core
funds averaged 94% of core assets in the first quarter of 1999, compared with
94% in the fourth quarter of 1998 and 96% in the first quarter of 1998.
Wholesale and purchased funds are defined as deposits in foreign offices,
federal funds purchased and securities under repurchase agreements, negotiable
certificates of deposit, U.S. Treasury tax and loan demand notes, short-term
bank notes, other time deposits, commercial paper and other funds borrowed.
Average wholesale and purchased funds increased $2.0 billion compared with the
prior-year period, primarily reflecting an increase in federal funds purchased
and securities under repurchase agreements, and foreign office deposits. As a
percentage of total average assets, average wholesale and purchased funds were
22% in the first quarter of 1999, compared with 21% in the fourth quarter of
1998 and 19% in the first quarter of 1998.
COMPOSITION OF LOAN PORTFOLIO
- -------------------------------------------------------------------------------
The loan portfolio increased $211 million at March 31, 1999, compared with March
31, 1998, reflecting increases in business banking, commercial real estate
loans, middle market lending and automobile installment loans. These increases
were partially offset by the sale of the credit card business in March 1999 and
a decrease in corporate banking. At March 31, 1999, the composition of the loan
portfolio was 60% commercial and 40% consumer.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial and financial $11,683 $12,060 $11,330 $11,283 $11,158
Commercial real estate 2,504 2,285 2,257 2,134 1,999
Consumer credit:
Consumer mortgage 8,169 8,871 8,701 8,506 8,689
Credit card - 804 788 830 862
Other consumer credit 3,950 3,700 3,745 3,582 3,396
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 12,119 13,375 13,234 12,918 12,947
Lease finance assets 2,836 2,819 2,590 2,570 2,578
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 29,142 30,539 29,411 28,905 28,682
International loans 1,412 1,554 1,641 1,749 1,661
- --------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $30,554 $32,093 $31,052 $30,654 $30,343
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial and financial
Total domestic commercial and financial loans increased by $525 million, or 5%,
at March 31, 1999, compared to March 31, 1998, primarily as a result of an
increase in business banking and middle market lending, partially offset by a
decrease in corporate banking. Commercial and financial loans represented 38% of
the total loan portfolio at March 31, 1999, and 37% at March 31, 1998.
24
<PAGE> 26
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
Commercial real estate
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial mortgage and construction loans $1,649 $1,554 $1,509 $1,367 $1,278
Owner-occupied and other loans (a) 855 731 748 767 721
- --------------------------------------------------------------------------------------------------------------------------------
Total $2,504 $2,285 $2,257 $2,134 $1,999
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 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 $505 million, or 25%, at
March 31, 1999, compared with March 31, 1998, reflecting steady loan growth over
the past 12 months. Domestic commercial real estate loans were 8% of total loans
at March 31, 1999, up from 7% a year earlier.
Consumer mortgage
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC CONSUMER MORTGAGE LOANS
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions) 1999 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jumbo residential mortgages $3,640 $3,821 $3,835 $3,673 $3,634
One- to four-family residential mortgages 1,756 2,446 2,312 2,353 2,668
Fixed-term home equity loans 1,975 1,801 1,781 1,777 1,750
Home equity revolving credit line loans 798 803 773 703 637
- ----------------------------------------------------------------------------------------------------------------------------------
Total $8,169 $8,871 $8,701 $8,506 $8,689
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1999, the domestic consumer mortgage portfolio totaled $8,169
million, a $520 million, or 6%, decrease from March 31, 1998. This decrease
resulted from a lower level of one- to four-family residential mortgages.
Included in the $1,756 million one- to four-family residential mortgages at
March 31, 1999, was approximately $1,100 million of residential warehouse loans.
The warehouse portfolio was approximately $400 million lower at March 31, 1999,
compared with March 31, 1998. Residential warehouse loans that exist at the time
of the sale are expected to be sold as part of the planned sale of the
residential mortgage servicing business.
Credit card
The credit card business was sold on March 31, 1999, as discussed further in the
"Significant financial events" section on page 5. The CornerStone(sm) credit
card accelerated resolution portfolio, which had a net carrying value of $67
million at December 31, 1998, and $130 million at March 31, 1998, was included
in the sale. This portfolio had been carried in Other Assets on the balance
sheet.
Other consumer credit
Other consumer credit, which principally consists of student loans, installment
loans, unsecured personal credit lines and margin loans, was $3,950 million at
March 31, 1999, an increase of $554 million, or 16%, from March 31, 1998. The
increase was primarily due to higher levels of automobile installment loans and
unsecured personal credit lines. Other consumer credit loans are both secured
and unsecured and, in the case of student loans, are government guaranteed.
Student loans totaled $1,769 million, or 45% of this portfolio, at March 31,
1999.
25
<PAGE> 27
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- ------------------------------------------------------------------------------
Lease finance assets
Lease finance assets totaled $2,836 million at March 31, 1999, an increase of
$258 million compared with March 31, 1998. Lease finance assets represented 9%
of the total loan portfolio at March 31, 1999, compared with 8% at March 31,
1998.
International loans
Loans to international borrowers totaled $1,412 million at March 31, 1999, down
15% from $1,661 million at March 31, 1998, primarily due to decreased activity
with large corporate customers and foreign banks. There were no nonperforming
international loans at March 31, 1999.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commitments to extend credit $34,027 (a) $33,432 $32,064
Standby letters of credit and foreign guarantees 3,671 (b) 3,830 3,962
Commercial letters of credit 84 86 180
Residential mortgage loans serviced with recourse 115 97 104
Custodian securities lent with indemnification
against broker default of return of securities 36,340 31,802 27,397
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Approximately 38% of these commitments were scheduled to expire within one
year, and approximately 89% were scheduled to expire within five years.
(b) Net of participations and cash collateral totaling $357 million.
26
<PAGE> 28
<TABLE>
<CAPTION>
CAPITAL
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA MARCH 31, Dec. 31, March 31,
(dollar amounts in millions, except per share amounts) 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total shareholders' equity $ 4,502 $ 4,521 $ 4,086
Total shareholders' equity to assets ratio 9.12% 8.90% 8.62%
Tangible shareholders' equity $ 2,659 (a) $ 2,641 (a) $ 2,374
Tangible shareholders' equity to assets ratio (b) 5.60% 5.41% 5.19%
Tier I capital ratio (c) 6.89% 6.53% 6.80%
Total (Tier I plus Tier II) capital ratio (c) 11.22% 10.80% 11.28%
Leverage capital ratio (c) 6.60% 6.73% 7.04%
Total Tier I capital $ 3,199 $ 3,223 $ 3,128
Total (Tier I plus Tier II) capital $ 5,209 $ 5,331 $ 5,189
Total risk-adjusted assets $46,438 $49,352 $46,000
Average assets - leverage capital basis $48,484 $47,917 $44,404
Book value per common share:
Pre-stock split $ 17.28 $ 17.26 $ 15.70
Post-stock split (d) 8.64 8.63 7.85
Tangible book value per common share:
Pre-stock split $ 10.21 $ 10.08 $ 9.12
Post-stock split (d) 5.11 5.04 4.56
Closing common stock price:
Pre-stock split $ 70.38 $ 68.75 $ 63.50
Post-stock split (d) 35.19 34.38 31.75
Market capitalization $18,335 $18,007 $16,523
Common shares outstanding (000):
Pre-stock split 260,532 261,923 260,210
Post-stock split (d) 521,064 523,846 520,420
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $62 million and $60 million, respectively, of minority interest,
primarily related to Newton.
(b) Shareholders' equity plus minority interest and 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. Beginning December 31, 1998, the amount of
goodwill and other intangibles subtracted from shareholders' equity and
total assets is net of any tax-deductible portion. Prior-period amounts and
ratios were restated.
(c) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3+%, respectively.
(d) Reflects the two-for-one common stock split payable May 17, 1999.
The increase in shareholders' equity at March 31, 1999, compared with March 31,
1998, primarily reflects earnings retention. The decrease in shareholders'
equity compared with December 31, 1998, resulted from common stock repurchases
partially offset by earnings retention.
In January 1999, the board of directors approved an enhancement to an existing
common share repurchase authorization by increasing the number of shares
authorized for repurchase to 10 million shares, on a pre-split basis, of the
Corporation's common stock. In the first quarter of 1999, 2.7 million shares of
common stock, on a pre-split basis, were repurchased, leaving 7.3 million
shares, on a pre-split basis, available for repurchase under this authorization.
27
<PAGE> 29
CAPITAL (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON SHARES OUTSTANDING - PRE-SPLIT BASIS
- -------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER Full Year
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning shares outstanding 261.9 253.8
Shares issued for stock-based benefit plans and dividend reinvestment plan 1.3 3.5
Shares issued for Mellon United National Bank acquisition - 5.1
Shares repurchased (2.7)(a) (0.5)(b)
- -------------------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 260.5 261.9
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of $183 million for an average share price of $67.77 per
share.
(b) Purchase price of $27 million for an average share price of $53.53 per
share.
Regulatory capital
For a banking institution to qualify as well capitalized, its Tier I, Total and
Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of
the Corporation's banking subsidiaries qualified as well capitalized at March
31, 1999. 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.
The decrease in the Corporation's regulatory leverage capital ratio, compared
with December 31, 1998 and March 31, 1998, reflects a higher level of average
assets, on a leverage capital basis, during the first quarter of 1999. The
Corporation's capital ratios were favorably impacted by the sale of the credit
card business and will further benefit from the sale of the residential mortgage
business and resultant reduction in assets.
Acquisition-related intangibles
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
ACQUISITION-RELATED INTANGIBLES MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $2,191 $2,221 $1,805
Purchased core deposit intangibles 68 75 95
Other identified intangibles 17 17 18
- ----------------------------------------------------------------------------------------------------------------------------------
Total acquisition-related intangibles $2,276 $2,313 $1,918
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $386 million increase in goodwill from March 31, 1998, resulted from an
approximately $500 million increase related to acquisitions, partially offset by
amortization expense. The amortization of acquisition-related intangibles, based
upon the current level, for the remaining nine months of 1999 will be
approximately $110 million. Based upon the current level of acquisition-related
intangibles and the amortization schedule, the annual amortization for the years
2000 through 2004 is expected to be approximately $134 million, $126 million,
$122 million, $118 million and $117 million, respectively. For the full-year
1999, using common shares and equivalents outstanding at March 31, 1999, the
after-tax impact of the annual amortization is expected to be $119 million, or
approximately $.46 per share on a pre-split basis, and $.23 per share on a
post-split basis. The after-tax impact of the annual amortization for the years
2000 through 2004 is expected to be approximately $111 million, $105 million,
$102 million, $99 million and $98 million, respectively.
28
<PAGE> 30
CAPITAL (CONTINUED)
- -------------------------------------------------------------------------------
Mortgage servicing assets and purchased credit card relationships
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSETS AND PURCHASED CREDIT CARD RELATIONSHIPS MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing assets:
Residential $1,044 $1,046 $1,033
Commercial 54 69 75
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets 1,098 1,115 1,108
Purchased credit card relationships - 17 22
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets and
purchased credit card relationships $1,098 $1,132 $1,130
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation capitalized $80 million and $86 million in the first quarters of
1999 and 1998, respectively, of servicing assets in connection with both
mortgage servicing portfolio purchases and loan originations. These capitalized
mortgage servicing assets were offset by amortization and deferred hedge
results. Mortgage servicing assets are amortized in proportion to estimated net
servicing income over the estimated life of the servicing portfolio. Net
amortization expense totaled $40 million and $44 million in the first quarters
of 1999 and 1998, respectively. The estimated fair value of capitalized mortgage
servicing assets was approximately $1.1 billion at March 31, 1999.
At March 31, 1999, the Corporation's total mortgage servicing portfolio was $77
billion, composed of $63 billion of residential and $14 billion of commercial
servicing. At March 31, 1998, the total mortgage servicing portfolio was $85
billion, composed of $68 billion of residential and $17 billion of commercial
servicing.
The purchased credit card relationships shown in the table above were sold on
March 31, 1999, as part of the sale of the Corporation's credit card business.
Also on March 31, 1999, the Corporation signed a definitive sale agreement for
its commercial mortgage servicing business. The commercial mortgage servicing
assets shown in the table above will be included as part of this sale, which is
expected to close by the end of the second quarter of 1999. The residential
mortgage servicing assets shown above are expected to be sold as part of the
planned sale of the residential mortgage business, which is expected to be
completed by the end of the third quarter of 1999. See the "Significant
financial events" section on page 5 for a further discussion of these completed
and planned sales.
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 17 months 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.
29
<PAGE> 31
LIQUIDITY AND DIVIDENDS (CONTINUED)
- -------------------------------------------------------------------------------
As shown in the consolidated statement of cash flows, cash and due from banks
increased by $85 million during the first three months of 1999 to $3,011
million. The increase resulted from $1,261 million of net cash provided by
investing activities and $918 million of net cash provided by operating
activities, primarily offset by $2,115 million of net cash used in financing
activities. Net cash provided by investing activities primarily reflected
proceeds from the sales of the credit card business and loans, partially offset
by loan growth and an increase in term deposits and money market investments.
Net cash used in financing activities primarily reflected a decrease in
transaction and savings deposits, and short-term borrowings as well as common
stock repurchases.
There were no contractual maturities of the Corporation's long-term debt during
the first quarter of 1999. Contractual maturities of long-term debt will total
approximately $366 million in 1999, including $201 million related to parent
term debt. The Corporation's and Mellon Bank, N.A.'s senior and subordinated
debt ratings are presented in the following table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SENIOR AND SUBORDINATED DEBT RATINGS
AT MARCH 31, 1999 Standard & Poor's Moody's Duff & Phelps Fitch/IBCA
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mellon Bank Corporation:
Senior debt A+ A2 A+ A+
Subordinated debt A A3 A A
Mellon Bank, N.A.:
Senior debt AA- A1 AA- AA-
Subordinated debt A+ A2 A+ A+
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation paid $94 million in common stock dividends in the first quarter
of 1999, compared with $84 million in the prior-year period. The common dividend
payout ratio was 37% in the first quarter of 1999, compared with 41% in the
first quarter of 1998. On a tangible earnings per common share basis, the common
dividend payout ratio was 33% in the first quarter of 1999 and 36% in the first
quarter of 1998. Excluding the after-tax net gain from divestitures and the
after-tax charge for the cumulative effect of the change in accounting
principle, the common dividend payout ratio was 41% and the tangible common
dividend payout ratio was 36% in the first quarter of 1999. Based upon shares
outstanding at March 31, 1999, and the new quarterly common dividend rate of
$.40 per share, on a pre-split basis, announced on April 20, 1999, the
annualized common stock dividend requirement is expected to be approximately
$415 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 1998 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 March 31,
1999, of approximately $980 million, less any dividends declared and plus or
minus net profits or losses, as defined, between April 1, 1999, and the date of
any such dividend declaration.
30
<PAGE> 32
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 choice. For instance,
customers may 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 decisions may cause actual results to differ significantly from the
simulation. Guidelines used by the Corporation for assuming interest rate risk
are presented in the "Interest rate sensitivity analysis" section on pages 50
and 51 of the 1998 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 below
illustrates the simulation analysis of the impact of a 50 and 100 basis point
parallel shift upward or downward in interest rates on net interest revenue,
earnings per share on a pre-split basis and return on common shareholders'
equity. Given the low interest rate environment that currently exists, the
impact of a 200 basis point shift upward or downward in interest rates is not
shown in the simulation sensitivity analysis below. However, the impact of a +/-
200 basis point interest rate movement would not exceed the Corporation's
guidelines. This analysis was prepared using the levels of all interest-earning
assets and off-balance-sheet instruments used for interest rate risk management
at March 31, 1999, assuming that the level of loan fees remains unchanged, and
excludes the impact of interest receipts on nonperforming loans. The impact of
the rate movements was developed by simulating the effect of rates changing in a
parallel fashion over a six-month period from the March 31, 1999, levels and
remaining at those levels thereafter. This analysis excludes the effect that
rate movements can have on the value of mortgage servicing rights, discussed on
pages 34 and 35.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from March 31, 1999 rates
- -----------------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
compared with March 31, 1999: ------------------ ------------------
+50bp +100bp -50bp -100bp
------------------ ------------------
<S> <C> <C> <C> <C>
Net interest revenue increase (decrease) .6% 1.1% (.8)% (1.8)%
Earnings per share increase (decrease) $.02 $.04 $(.03) $(.06)
Return on common equity increase (decrease) 12 bp 23 bp (17) bp ( 37) bp
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 33
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
The anticipated impact on net interest revenue under the 50 and 100 basis point
increase/decrease scenarios showed an impact of less than 2% under all scenarios
at both March 31, 1999, and March 31, 1998. The simulation analysis for both
periods reflects the Corporation's efforts to balance the repricing
characteristics of its interest-earning assets and supporting funds.
Managing interest rate risk with off-balance-sheet instruments
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--including index amortizing and callable 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. 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. Use of off-balance-sheet
instruments 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. The off-balance-sheet instruments used to manage the Corporation's
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 1998 Annual Report to Shareholders.
32
<PAGE> 34
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
March 31,
(notional amounts in millions) 1999 2000 2001 2002 2003 2004+ 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps (a):
Notional amount $ 20 $ - $ - $ - $450 $550 $1,020
Weighted average rate:
Receive 5.01% - - - 5.65% 6.67% 6.18%
Pay 4.93% - - - 5.05% 4.99% 5.01%
Receive fixed/pay floating
indexed amortizing swaps:
Notional value $ 25 $ 24 $ 11 $ 13 $ - $ - $ 73
Weighted average rate:
Receive 7.10% 6.60% 7.10% 7.10% - - 6.93%
Pay 4.97% 4.98% 4.97% 4.97% - - 4.97%
Receive fixed/pay floating
callable swaps: (b)
Notional value $100 $250 $ - $ - $500 $ - $ 850
Weighted average rate:
Receive 6.54% 5.95% - - 5.41% - 5.70%
Pay 4.97% 5.00% - - 4.97% - 4.98%
Pay fixed/receive floating
generic swaps: (a)
Notional amount $ 13 $ 1 $225 $ 6 $ 1 $ 12 $ 258
Weighted average rate:
Receive 5.06% 4.93% 5.09% 5.08% 4.99% 5.01% 5.08%
Pay 6.28% 5.48% 5.51% 6.36% 5.61% 6.52% 5.62%
Other products (c) $ 17 $ - $ - $ - $ - $349 $ 366
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $175 $275 $236 $ 19 $951 $911 $2,567
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic swaps' notional amounts and lives are not based upon interest rate
indices.
(b) Callable swaps are generic swaps with a call option at the option of the
counterparty. Call options will be exercised or not exercised on the basis
of market interest rates. Expected maturity dates, based upon interest
rates at March 31, 1999, are shown in this table.
(c) Average rates are not meaningful for these products.
33
<PAGE> 35
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
The table below presents the gross notional amounts of off-balance-sheet
instruments used to manage interest rate risk, identified by the underlying
interest rate-sensitive instruments. The gross notional amount of
off-balance-sheet instruments used to manage interest rate risk was lower at
March 31, 1999, compared with December 31, 1998, and March 31, 1998, due to a
change in the interest rate risk profile of the Corporation's on-balance-sheet
instruments. The notional amounts shown in the prior table and the table below
should be viewed in the context of the Corporation's overall interest rate risk
management activities to assess the impact on the net interest margin.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Instruments associated with deposits $ 190 $3,435 $2,842
Instruments associated with other liabilities 1,278 971 705
Instruments associated with loans 1,099 1,482 1,583
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $2,567 $5,888 $5,130
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation entered into these off-balance-sheet products to alter 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 $3 million in the first quarter
of 1999, compared with $6 million in the first quarter of 1998.
Net unamortized deferred losses from off-balance-sheet instruments terminations
totaled approximately $1 million at March 31, 1999. The Corporation amortized
less than $1 million of these net deferred losses into net interest revenue in
the first quarter of 1999.
The Corporation also has entered into off-balance-sheet contracts to manage the
prepayment risk associated with its residential 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 can shorten the expected life of the MSR and reduce its
value. Conversely, an increase in interest rates and an actual (or probable)
decrease in mortgage prepayments typically can lengthen the expected life of the
MSR and increase its value.
To mitigate the potential prepayment risk of decreasing long-term interest
rates, higher-than-expected mortgage prepayments and a potential impairment to
MSRs, the Corporation primarily uses interest rate floor and interest rate swap
contracts. At March 31, 1999, the Corporation had approximately $9.7 billion
notional amount of interest rate floor agreements and $300 million notional
amount of interest rate swap agreements outstanding. In addition, the
Corporation had a $250 million notional amount interest rate spread lock
outstanding at March 31, 1999. At March 31, 1998, the Corporation had entered
into approximately $9.1 billion notional amount of primarily interest rate floor
and interest rate swap agreements to manage potential impairment of MSRs. These
instruments are collectively structured to gain value as interest rates
decrease, therefore offsetting the potential impairment of MSRs. Conversely, the
value of these instruments will decrease if interest rates or spreads increase.
These instruments do not entirely eliminate risk. Mortgage prepayment rates may
not occur as expected. The fair value of these instruments at March 31, 1999,
was $76 million, compared with $260 million at December 31, 1998, and $82
million at March 31, 1998. The decrease in fair value compared to year-end 1998
reflects the impact of an increase in rates and spreads in the first quarter of
1999.
34
<PAGE> 36
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
Gains/losses and cash settlements on these instruments are recorded as
adjustments to the carrying value of the MSRs. At March 31, 1999, the
Corporation had approximately $188 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.
The table below presents the gross notional amounts of off-balance-sheet
instruments used to manage prepayment risk associated with MSRs.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO
MANAGE PREPAYMENT RISK OF MSRS Total at
March 31,
(dollar amounts in millions) 1999 2000 2001 2002 2003 2004+ 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate floors (notional) $ - $ - $ - $300 $8,691 $ 700 $ 9,691
Weighted average strike rates - - - 5.04% 5.48% 5.25% 5.46%
Fair value $ 77
Receive fixed/pay floating interest
rate swaps (notional) $ - $ - $ - $ - $ - $ 300 $ 300
Weighted average rates:
Receive - - - - - 5.79% 5.79%
Pay - - - - - 5.01% 5.01%
Fair value $ -
Interest rate spread lock (notional) $250 $ - $ - $ - $ - $ - $ 250
Fair value $ (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $250 $ - $ - $300 $8,691 $1,000 $10,241
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the risk management instruments previously discussed, the
Corporation utilizes total return swaps to minimize the risk related to the
investment in start-up mutual funds. The Corporation had notional amounts of
$149 million at March 31, 1999, and $147 million at December 31, 1998, with
negative fair values of $10 million and $8 million, respectively. The
Corporation also has entered into contracts to hedge anticipated transactions.
The Corporation has entered into $458 million notional amount of interest rate
futures to lock in the value of certain loans that are anticipated to be sold
and/or securitized. The positive fair value of the contracts related to these
anticipated transactions was approximately $1 million at March 31, 1999.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at March 31, 1999, was a positive $100 million,
compared to a positive $306 million at December 31, 1998. This decrease
primarily resulted from a decrease in the fair value of interest rate floors and
swaps used to hedge MSRs. These values should be viewed in the context of the
overall financial structure of the Corporation, including the aggregate net
position of all on- and off-balance-sheet instruments.
35
<PAGE> 37
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (a)
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(notional amounts in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate risk management instruments (b):
Interest rate swaps $ 2,201 $4,028 $5,102
Options, caps and floors purchased (c) 349 - 28
Futures and forward contracts 17 1,860 -
Mortgage servicing rights risk management instruments:
Interest rate floors 9,691 10,216 6,600
Interest rate swaps 300 900 2,050
Principal only swaps - - 434
Interest rate spread lock 250 250 -
Other products:
Total return swaps 149 147 144
Interest rate swaps and futures contracts hedging
anticipated transactions 458 365 265
- ----------------------------------------------------------------------------------------------------------------------------------
</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
$118 million at March 31, 1999, $330 million at December 31, 1998, and $119
million at March 31, 1998.
(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.
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 from adverse market movements. Value at risk measures
the volatility of the value of equity, which is the present value of future
expected cash flows of assets, liabilities and off-balance-sheet instruments.
Position limits are assigned to each family of financial instruments eligible
for trading such that the aggregate value at risk in these activities at any
point in time will not exceed a specified limit given a significant market
movement. The extent of market movement deemed to be significant is based upon
an analysis of the historical volatility of individual instruments that would
cover 95% of likely daily market movements. The loss analysis includes the
off-balance-sheet instruments used for trading activities as well as the
financial assets and liabilities that are classified as trading positions on the
balance sheet. Using the Corporation's methodology, which considers such factors
as changes in interest rates, spreads and options volatility, the aggregate
value at risk for trading activities, primarily related to foreign currency
contracts, was approximately $2 million at March 31, 1999, unchanged from both
December 31, 1998, and March 31, 1998.
36
<PAGE> 38
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(notional amounts in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $19,635 $17,538 $18,553
Commitments to sell 20,239 17,773 18,702
Foreign currency and other option contracts purchased 456 608 767
Foreign currency and other option contracts written 458 574 734
Interest rate agreements (b):
Interest rate swaps 13,648 11,236 7,483
Options, caps and floors purchased 922 753 812
Options, caps and floors written 973 929 605
Futures and forward contracts 9,620 7,469 9,349
Other products 31 32 -
- ----------------------------------------------------------------------------------------------------------------------------------
</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
$725 million at March 31, 1999, $547 million at December 31, 1998, and $520
million at March 31, 1998.
(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. The Corporation intends to
adopt this statement on January 1, 2000. The Corporation is currently evaluating
the impact that this statement will have on its financial position and results
of operations, but it is not expected to be material.
<TABLE>
<CAPTION>
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended
------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $15 $15 $15
Net revenue from acquired property - - (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Credit quality expense $15 $15 $14
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Credit quality expense and total net credit losses for the first quarter of 1999
were nearly unchanged compared with both the first and the fourth quarters of
1998.
The $86 million decrease in the reserve for credit losses at March 31, 1999,
compared with December 31, 1998, and March 31, 1998, as shown in the table on
the following page, was due to the sale of the credit card business. In
conjunction with this sale, $84 million that had been associated with the credit
card portfolio was removed from
37
<PAGE> 39
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF
NET CREDIT LOSSES (CONTINUED)
- -------------------------------------------------------------------------------
the reserve for credit losses. The Corporation expects that net credit losses
will be significantly lower in the remainder of 1999, compared with the first
quarter of 1999, due to this sale. Annualized net credit losses to average
loans, excluding credit card net credit losses, was .10% in the first quarter of
1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY Quarter ended
-------------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve at beginning of period $496 $498 $475
Net change in reserve primarily from divestitures/acquisitions (84) - 24
Credit losses:
Commercial and financial (3) (4) (3)
Commercial real estate - (1) (5)
Consumer credit:
Credit cards (11) (12) (10)
Other consumer credit (6) (7) (5)
Lease finance assets (2) - (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Total credit losses (22) (24) (25)
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and financial 1 2 3
Commercial real estate - - 1
Consumer credit:
Credit cards 1 1 1
Other consumer credit 2 3 2
Lease finance assets 1 1 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 5 7 7
- -----------------------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Commercial and financial (2) (2) -
Commercial real estate - (1) (4)
Consumer credit:
Credit cards (10) (11) (9)
Other consumer credit (4) (4) (3)
Lease finance assets (1) 1 (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Total net credit losses (17) (17) (18)
Provision for credit losses 15 15 15
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve at end of period $410 $496 $496
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.34% 1.54% 1.63%
Reserve as a percentage of nonperforming loans 323% 479% 349%
Annualized net credit losses to average loans .22% .22% .24%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 40
NONPERFORMING ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(dollar amounts in millions) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $127 $103 $103 $107 $142
Acquired property, net of the OREO reserve 34 37 37 63 49
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $161 $140 $140 $170 $191
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .41% .32% .33% .35% .47%
Total nonperforming assets as a percentage of
total loans and net acquired property .53% .44% .45% .55% .63%
- --------------------------------------------------------------------------------------------------------------------------------
</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.
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 1998 Annual Report to Shareholders.
At March 31, 1999, nonperforming assets totaled $161 million, an increase of $21
million from December 31, 1998, and a decrease of $30 million compared with
March 31, 1998. The increase from December 31, 1998, resulted from the addition
of a commercial loan to a customer in the steel industry to nonperforming status
during the first quarter of 1999. The decrease from March 31, 1998, primarily
resulted from a lower level of acquired property and nonperforming consumer
mortgages. In addition, a decrease in nonperforming commercial real estate loans
was partially offset by the addition of the previously mentioned commercial loan
to nonperforming status. The ratio of nonperforming assets to total loans and
net acquired property was .53% at March 31, 1999. This ratio has been lower than
1% for nearly 5 years, reflecting a strong economy and the effectiveness of the
Corporation's loan underwriting, administration and workout procedures.
39
<PAGE> 41
NONPERFORMING ASSETS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(dollar amounts in millions) 1999 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial and financial $ 66 $ 42 $ 34 $ 18 $ 19
Commercial real estate 6 6 8 18 53
Consumer credit:
Consumer mortgage 44 44 53 55 56
Other consumer credit 1 1 1 4 3
Lease finance assets 10 10 7 12 11
- ------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 127 103 103 107 142
Restructured loans - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (a) 127 103 103 107 142
- ------------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 37 40 40 69 53
Reserve for real estate acquired (5) (5) (5) (9) (9)
- -------------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 32 35 35 60 44
Other acquired assets 2 2 2 3 5
- ------------------------------------------------------------------------------------------------------------------------------
Total acquired property 34 37 37 63 49
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $161 $140 $ 140 $170 $191
- ------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective
loan portfolio segments:
Domestic commercial and financial loans .56% .34% 30% .16% .17%
Domestic commercial real estate loans .25 .28 .35 .85 2.67
Domestic consumer mortgage loans .55 .50 .61 .65 .65
Domestic lease finance assets .36 .37 .26 .48 .40
Total loans .41 .32 .33 .35 .47
Nonperforming assets as a percentage of
total loans and net acquired property .53 .44 .45 .55 .63
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $48 million, $19 million, $21 million, $2 million and $42 million,
respectively, of loans with both principal and interest less than 90 days
past due but placed on nonaccrual status by management discretion.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS FOR THE QUARTER ENDED MARCH 31
Lease Total
Commercial Commercial Consumer Finance ------------------
(in millions) & Financial Real Estate Credit Assets 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of period $42 $6 $45 $10 $103 $133
Reclassification from
segregated assets - - - - - 10
Additions 29 1 8 4 42 26(a)
Payments (b) (2) (1) (4) (1) (8) (14)
Return to accrual status - - (3) (1) (4) (2)
Credit losses (3) - - (2) (5) (10)
Transfers to acquired property - - (1) - (1) (1)
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at March 31 $66 $6 $45 $10 $127 $142
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $6 million of loans acquired in connection with the Mellon United
National Bank and Mellon 1st Business Bank acquisitions in February 1998.
(b) Includes interest applied to principal and sales.
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
40
<PAGE> 42
NONPERFORMING ASSETS (CONTINUED)
- -------------------------------------------------------------------------------
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 1998 Annual Report to Shareholders.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS Quarter ended
March 31,
(dollar amounts in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans - period end (a) $76 $87
Average impaired loans 60 91
Interest revenue recognized on impaired loans (b) 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $53 million and $48 million of impaired loans with a related
impairment reserve of $10 million and $9 million at March 31, 1999, and
March 31, 1998, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Quarter ended
March 31,
(in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OREO at beginning of period, net of the OREO reserve $35 $43
Reclassification from segregated assets - 2
Foreclosures 1 2
Sales (5) (4)
Additional investments, write-downs, losses, OREO provision and other 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
OREO at end of period, net of the OREO reserve 32 44
Other acquired assets 2 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve $34 $49
- ----------------------------------------------------------------------------------------------------------------------------------
</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
March 31,
(in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $5 $9
Write-downs on real estate acquired - -
Provision - -
- ----------------------------------------------------------------------------------------------------------------------------------
Ending balance $5 $9
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 43
NONPERFORMING ASSETS (CONTINUED)
- ------------------------------------------------------------------------------
The table below presents the amount of loans that were 90 days or more past due
as to principal or interest that are not classified as nonperforming. All loans
in this table are well secured and in the process of collection or are consumer
loans that are not classified as nonaccrual because they are automatically
charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(dollar amounts in millions) 1999 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $28 $ 31 $ 37 $ 34 $ 45
Ratio .35% .34% .43% .40% .52%
Credit card (a) - 8 8 9 8
Ratio - 1.05% 1.06% 1.08% .88%
Student - government guaranteed 49 52 48 47 43
Ratio 2.74% 2.95% 2.77% 2.86% 2.50%
Other consumer 2 2 2 1 1
Ratio .11% .12% .08% .07% .07%
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer 79 93 95 91 97
Ratio .65% .70% .72% .71% .75%
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial (b) 9 11 9 10 11
- ----------------------------------------------------------------------------------------------------------------------------------
Total past-due loans $88 $104 $104 $101 $108
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts in 1998 exclude past-due CornerStone(sm) credit card loans included
in the accelerated resolution portfolio. This portfolio was included in the
sale of the credit card business on March 31, 1999. See "Significant
financial events" on page 5 for further discussion about the sale.
(b) Includes lease finance assets.
Note: Ratios are loans 90 days or more past due as a percentage of quarter-end
loan balances.
42
<PAGE> 44
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(dollar amounts in millions) 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets Cash and due from banks $ 3,011 $ 2,926 $ 3,312
Interest-bearing deposits with banks 723 566 620
Federal funds sold and securities under resale agreements 174 186 549
Other money market investments 42 46 94
Trading account securities 242 193 140
Securities available for sale 5,451 5,373 3,547
Investment securities (approximate fair value of $1,443,
$1,634 and $2,022) 1,421 1,602 1,987
Loans, net of unearned discount of $57, $54 and $64 30,554 32,093 30,343
Reserve for credit losses (410) (496) (496)
-------- -------- --------
Net loans 30,144 31,597 29,847
Customers' acceptance liability 107 166 84
Premises and equipment 561 569 557
Goodwill and other intangibles 2,276 2,313 1,918
Mortgage servicing assets and purchased credit card relationships 1,098 1,132 1,130
Acquired property, net of reserves of $5, $5 and $9 34 37 49
Other assets 4,100 4,071 3,580
----------------------------------------------------------------------------------------------------------------
Total assets $49,384 $50,777 $47,414
----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 9,151 $ 9,976 $ 9,505
Interest-bearing deposits in domestic offices 21,268 21,293 20,956
Interest-bearing deposits in foreign offices 2,929 3,114 2,635
----------------------------------------------------------------------------------------------------------------
Total deposits 33,348 34,383 33,096
Federal funds purchased and securities under
repurchase agreements 1,567 3,594 2,295
Short-term bank notes 724 266 300
Term federal funds purchased 636 208 409
U.S. Treasury tax and loan demand notes 551 290 472
Commercial paper 156 116 259
Other funds borrowed 389 468 319
Acceptances outstanding 107 166 84
Other liabilities 3,010 2,471 2,100
Notes and debentures (with original maturities over one year) 3,403 3,303 3,003
----------------------------------------------------------------------------------------------------------------
Total liabilities 43,891 45,265 42,337
- --------------------------------------------------------------------------------------------------------------------------------
Trust- Guaranteed preferred beneficial interests in
preferred Corporation's junior subordinated deferrable
securities interest debentures 991 991 991
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Common stock - $.50 par value
equity (a) Authorized - 800,000,000 shares
Issued - 294,330,960 shares 147 147 147
Additional paid-in capital 1,907 1,887 1,855
Retained earnings 3,468 3,353 3,003
Accumulated unrealized gains (losses), net of tax (15) 25 30
Treasury stock of 33,798,582; 32,407,960 and
34,120,588 shares, at cost (1,005) (891) (949)
-----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,502 4,521 4,086
----------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $49,384 $50,777 $47,414
----------------------------------------------------------------------------------------------------------------
(a) Shareholders' equity at March 31, 1999, does not reflect the two-for-one stock split payable May 17, 1999.
</TABLE>
See accompanying Notes to Financial Statements.
43
<PAGE> 45
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions, except per share amounts) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees
of $16, $18, $21, $17 and $17) $ 580 $614 $616 $606 $577
Federal funds sold and securities under
resale agreements 9 12 12 12 13
Interest-bearing deposits with banks 9 10 8 6 9
Other money market investments 1 1 1 3 1
Trading account securities 4 4 4 3 4
Securities 108 98 95 93 90
--------------------------------------------------------------------------------------------------------------
Total interest revenue 711 739 736 723 694
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 186 209 211 207 197
Deposits in foreign offices 35 34 37 33 32
Federal funds purchased and securities
under repurchase agreements 37 34 35 30 24
Other short-term borrowings 29 29 27 30 28
Notes and debentures 55 53 51 52 48
--------------------------------------------------------------------------------------------------------------
Total interest expense 342 359 361 352 329
- --------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 369 380 375 371 365
revenue Provision for credit losses 15 15 15 15 15
--------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 354 365 360 356 350
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fee revenue 488 465 432 429 396
revenue Cash management and deposit transaction charges 66 70 66 65 61
Mortgage servicing fees 52 48 44 53 55
Foreign currency and securities trading revenue 43 47 39 38 41
Credit card fees 18 22 23 23 24
Information services fees 13 12 11 10 11
Other 109 135 97 94 110
--------------------------------------------------------------------------------------------------------------
Total fee revenue 789 799 712 712 698
Net gain from divestitures 83 - - - -
Gains on sales of securities - - - 1 -
--------------------------------------------------------------------------------------------------------------
Total noninterest revenue 872 799 712 713 698
- --------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 391 386 358 355 357
expense Professional, legal and other purchased services 71 97 72 67 61
Net occupancy expense 61 63 59 59 56
Amortization of mortgage servicing assets
and purchased credit card relationships 42 47 43 44 45
Equipment expense 41 59 42 41 39
Amortization of goodwill and other intangible assets 37 37 35 35 30
Business development 33 38 33 42 36
Communications expense 29 28 27 26 26
Other expense 55 50 48 52 47
Trust-preferred securities expense 20 20 20 19 20
Net revenue from acquired property - - (3) (2) (1)
--------------------------------------------------------------------------------------------------------------
Total operating expense 780 825 734 738 716
- --------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes and cumulative
effect of accounting change 446 339 338 331 332
Provision for income taxes 166 117 120 116 117
--------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 280 222 218 215 215
Cumulative effect of accounting change (26) - - - -
--------------------------------------------------------------------------------------------------------------
Net income 254 222 218 215 215
Dividends on preferred stock - - - - 9
--------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 254 $222 $218 $215 $206
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
44
<PAGE> 46
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions, except per share amounts) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per common Basic net income per common share:
share
Income before cumulative effect of accounting change $1.07 $ .85 $ .84 $ .82 $ .80
Cumulative effect of accounting change (.10) - - - -
--------------------------------------------------------------------------------------------------------------
Net income, pre-split $ .97 $ .85 $ .84 $ .82 $ .80
--------------------------------------------------------------------------------------------------------------
Net income, post-split $ .49 $ .42 $ .42 $ .41 $ .40
--------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income before cumulative effect of accounting change $1.06 $ .84 $ .82 $ .81 $ .78
Cumulative effect of accounting change (.10) - - - -
--------------------------------------------------------------------------------------------------------------
Net income, pre-split $ .96 $ .84 $ .82 $ .81 $ .78
--------------------------------------------------------------------------------------------------------------
Net income, post-split $ .48 $ .42 $ .41 $ .40 $ .39
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
45
<PAGE> 47
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net income $254 $215
operating activities Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change 26 -
Net gain from divestitures (83) -
Amortization of goodwill and other intangible assets 37 30
Amortization of mortgage servicing assets and
purchased credit card relationships 42 45
Depreciation and other amortization 26 26
Deferred income tax expense 4 30
Provision for credit losses 15 15
Net gains on dispositions of acquired property (1) (2)
Net decrease in accrued interest receivable 14 4
Net increase in trading account securities (48) (60)
Net (decrease) increase in accrued interest payable,
net of amounts prepaid (8) 3
Net decrease in residential mortgages held for sale 458 2
Net decrease (increase) in other operating activities 182 (320)
------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 918 (12)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in term deposits and other money
investing activities market investments (153) (89)
Net decrease in federal funds sold and securities
under resale agreements 12 46
Purchases of securities available for sale (758) (1,179)
Proceeds from sales of securities available for sale 164 555
Proceeds from maturities of securities available for sale 474 507
Purchases of investment securities (2) (4)
Proceeds from maturities of investment securities 135 99
Net decrease in credit card receivables 85 62
Proceeds from sale of credit card business 1,186 -
Net principal disbursed on loans to customers (336) (978)
Loan portfolio purchases - (56)
Proceeds from the sales and securitizations of loan portfolios 632 736
Purchases of premises and equipment (39) (35)
Proceeds from sales of acquired property 7 6
Net cash disbursed in purchase of Mellon United National Bank - (94)
Net cash disbursed in purchase of Mellon 1st Business Bank - (72)
Increase in mortgage servicing assets and purchased credit
card relationships (35) (100)
Net increase in other investing activities (111) (77)
------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,261 (673)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
46
<PAGE> 48
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net decrease in transaction and savings deposits (1,025) (41)
financing activities Net (decrease) increase in customer term deposits (10) 129
Net (decrease) increase in federal funds purchased and
securities under repurchase agreements (2,027) 81
Net increase (decrease) in short-term bank notes 458 (30)
Net increase (decrease) in term federal funds purchased 428 (216)
Net increase in U.S. Treasury tax and loan demand notes 261 25
Net increase in commercial paper 40 192
Repayments of longer-term debt (4) (118)
Net proceeds from issuance of longer-term debt 105 546
Proceeds from issuance of common stock 14 17
Dividends paid on common and preferred stock (94) (95)
Repurchase of common stock (183) -
Redemption of preferred stock - (193)
Net (decrease) increase in other financing activities (78) 37
-----------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (2,115) 334
Effect of foreign currency exchange rates 21 13
- --------------------------------------------------------------------------------------------------------------------------------
Change in cash and Net increase (decrease) in cash and due from banks 85 (338)
due from banks Cash and due from banks at beginning of period 2,926 3,650
-----------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $3,011 $3,312
-----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Interest paid $ 350 $ 326
disclosures Net income taxes paid 13 7
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
47
<PAGE> 49
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
QUARTER ENDED Additional unrealized Total
MARCH 31, 1999 Preferred Common paid-in Retained (loss) gain, 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, 1998 $ - $147 $1,887 $3,353 $25 $ (891) $4,521
Comprehensive results:
Net income 254 254
Other comprehensive results,
net of tax (40) (40)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 254 (40) 214
Dividends on common stock
at $.36 per share (a) (94) (94)
Common stock issued under
dividend reinvestment and
common stock purchase plan 4 4
Exercise of stock options 20 (45) 58 33
Repurchase of common stock (183) (183)
Other 7 7
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $ - $147 $1,907 $3,468 $(15) $(1,005) $4,502
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Quarter ended Additional unrealized Total
March 31, 1998 Preferred Common paid-in Retained (loss) gain, Treasury shareholders'
(in millions) stock stock capital earnings net of tax stock equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $193 $147 $1,818 $2,884 $21 $(1,218) $3,845
Comprehensive results:
Net income 215 215
Other comprehensive results,
net of tax 9 9
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 215 9 224
Dividends on common stock
at $.33 per share (a) (84) (84)
Dividends on preferred stock (9) (9)
Common stock issued under
dividend reinvestment and
common stock purchase plan 3 2 5
Common stock issued in
connection with the Mellon
United National Bank acquisition 22 233 255
Series K preferred stock
redemption (193) (193)
Exercise of stock options (3) 30 27
Other 12 4 16
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ - $147 $1,855 $3,003 $30 $ (949) $4,086
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Dividends per share are presented on a pre-split basis.
See accompanying Notes to Financial Statements.
48
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1 -- Basis of presentation
The unaudited consolidated financial statements of the Corporation are prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements should be read in conjunction with
the Corporation's 1998 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 New Accounting Principles
Cumulative effect of a change in accounting principle - reporting on the costs
of start-up activities
On January 1, 1999, the Corporation adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position (SOP) No. 98-5
on reporting on the costs of start-up activities. This SOP requires that costs
of start-up activities be expensed as incurred. Initial application of the SOP
is to be reported as a cumulative effect of a change in accounting principle.
For information on the financial impact of the adoption of this SOP, see the
discussion in "Significant financial events" on pages 5 and 6, which discussion
is incorporated herein by reference.
Accounting for the costs of computer software
On January 1, 1999, the Corporation adopted the provisions of SOP No. 98-1 on
accounting for the costs of computer software developed or obtained for internal
use. This SOP requires the capitalization of certain costs incurred in
connection with developing or obtaining software for internal use. Previously,
the Corporation generally has expensed such costs. The adoption of SOP No. 98-1
was immaterial to the Corporation's financial position and results of
operations.
Note 3 -- Securities
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999 March 31, 1998
------------------------------------------------ ------------------------------------------------
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 $ 190 $ - $ - $ 190 $ 260 $ 1 $ 1 $ 260
U.S. agency mortgage-backed 5,000 45 21 5,024 2,669 41 4 2,706
Other U.S. agency 110 - - 110 487 1 1 487
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 5,300 45 21 5,324 3,416 43 6 3,453
Obligations of states and
political subdivisions 112 1 2 111 45 - - 45
Other mortgage-backed 1 - - 1 2 - - 2
Other securities 15 - - 15 47 - - 47
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $5,428 $46 $23 $5,451 $3,510 $43 $ 6 $3,547
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Gross realized gains were less than $1 million in the first three months
of 1999 and 1998. There were no gross realized losses in the first three months
of 1999 and 1998.
49
<PAGE> 51
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Note 3 -- Securities (continued)
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999 March 31, 1998
------------------------------------------------ ------------------------------------------------
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 $ 4 $ - $ - $ 4 $ 44 $ 7 $ - $ 51
U.S. agency mortgage-backed 1,337 22 - 1,359 1,857 28 - 1,885
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 1,341 22 - 1,363 1,901 35 - 1,936
Other mortgage-backed 14 - - 14 21 - - 21
Other securities 66 - - 66 65 - - 65
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,421 $22 $ - $1,443 $1,987 $35 $ - $2,022
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: On March 31, 1999, as part of the sale of the credit card business, the
Corporation sold $47 million of zero coupon U.S. Treasury securities from the
investment securities portfolio. These securities were purchased and held to
fund the interest rebate associated with the CornerStone(sm) credit card product
and were no longer needed following the sale of the business. A gain of $7
million was realized from the sale of the securities and recorded as part of the
net gain from divestitures.
Note 4 -- Other assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, March 31,
(in millions) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prepaid expense:
Pension $ 490 $ 468 $ 411
Other 97 132 89
Accounts and fees receivable 709 591 599
Interest receivable 248 262 250
Mortgage servicing advances 154 214 207
Receivables related to off-balance-sheet instruments 721 552 524
Assets held for accelerated resolution - 67 130
Other 1,681 1,785 1,370
- ----------------------------------------------------------------------------------------------------------------------------------
Total other assets $4,100 $4,071 $3,580
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5 -- Deposits
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, Dec. 31, Sept. 30, June 30, March 31,
(in millions) 1999 1998 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deposits in domestic offices:
Interest-bearing:
Demand, money market and
other savings accounts $12,686 $12,323 $11,540 $11,611 $11,401
Retail savings certificates 6,772 7,039 7,603 7,704 7,668
Other time deposits 1,810 1,931 2,182 2,035 1,887
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 21,268 21,293 21,325 21,350 20,956
Noninterest-bearing 9,151 9,976 8,334 8,880 9,505
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 30,419 31,269 29,659 30,230 30,461
Deposits in foreign offices 2,929 3,114 3,294 2,967 2,635
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits $33,348 $34,383 $32,953 $33,197 $33,096
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Note 6 -- Preferred stock
The Corporation has authorized 50 million shares of preferred stock, none of
which was issued at March 31, 1999. In February 1998, the 8 million 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 -- 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
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, March 31,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $(21) $(12)
Quarterly change (3) 1
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $(24) $(11)
- ---------------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on
assets available for sale, net of tax
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, March 31,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Beginning balance $ 46 $33
Quarterly change (37) 8
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 9 $41
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated unrealized gains (losses), net of tax
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, March 31,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Beginning balance $ 25 $21
Quarterly change (40) 9
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $(15) $30
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 8 -- Foreign currency and securities trading revenue
The results of the Corporation's foreign currency and securities trading
activities are presented, by class of financial instrument, in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign exchange contracts $ 42 $36
Debt instruments 3 4
Interest rate contracts (9) 2
Futures contracts 7 (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $ 43 $41
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recorded an unrealized loss of $4 million at March 31,
1999, and an unrealized gain of less than $1 million at March 31, 1998,
related to securities held in the trading portfolio.
51
<PAGE> 53
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note 9 -- Computation of earnings per common share (a)
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
------------------------------------------
(dollar amounts in millions, except per MARCH 31, Dec. 31, March 31,
share amounts; common shares in thousands) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Income before cumulative effect of accounting change $ 280 $222 $215
Cumulative effect of accounting change (26) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 254 222 215
Dividends on preferred stock - - 9
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 254 $222 $206
- ----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 261,724 261,541 257,714
Basic earnings per common share:
Income before cumulative effect of accounting change $1.07 $ .85 $ .80
Cumulative effect of accounting change (.10) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income, pre-split $ .97 $ .85 $ .80
Net income, post-split $ .49 $ .42 $ .40
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Income before cumulative effect of accounting change $ 280 $222 $215
Cumulative effect of accounting change (26) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 254 222 215
Dividends on preferred stock - - 9
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock (b) $ 254 $222 $206
- ----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 261,724 261,541 257,714
Common stock equivalents:
Stock options 3,870 4,149 5,339
Common shares issuable upon conversion of
7 1/4% Convertible Subordinated Capital Notes 50 58 83
- ----------------------------------------------------------------------------------------------------------------------------------
Total 265,644 265,748 263,136
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Income before cumulative effect of accounting change $1.06 $ .84 $ .78
Cumulative effect of accounting change (.10) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income, pre-split $ .96 $ .84 $ .78
Net income, post-split $ .48 $ .42 $ .39
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
52
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Note 10 -- 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>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reclassification of segregated assets to loans
and real estate acquired $ - $ 12
Net transfers to real estate acquired 1 2
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 11 -- 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.
53
<PAGE> 55
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1. Legal Proceedings.
------------------
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust
and other activities. Because of the complex nature of some of these actions and
proceedings, it may be a number of years before such matters ultimately are
resolved. After consultation with legal counsel, management believes that the
aggregate liability, if any, resulting from such pending and threatened actions
and proceedings will not have a material adverse effect on the Corporation's
financial condition.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
3.1 Restated Articles of Incorporation of Mellon Bank Corporation, as
amended and restated as of September 17, 1998.
3.2 By-Laws of Mellon Bank Corporation, as amended, effective
November 5, 1998.
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends
(parent corporation).
12.2 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends
(Mellon Bank Corporation and its subsidiaries).
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
54
<PAGE> 56
PART II - OTHER INFORMATION (CONTINUED)
- -------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.(continued)
---------------------------------
(b) Reports on Form 8-K
During the first quarter of 1999, the Corporation filed the following
Current Reports on Form 8-K:
(1) A report dated January 15, 1999, which included, under Items 5
and 7, (i) the Corporation's press release regarding fourth
quarter and full-year 1998 results of operations and (ii) the
Corporation's press release announcing plans to sell its
mortgage business, credit card business and network services
transaction processing unit as part of an initiative to sharpen
its strategic focus on businesses with the highest return
potential as well as an enhancement to its common share
repurchase authorization.
(2) A report dated January 29, 1999, which included, under Item 5, a
description of the Corporation's progress with respect to its
year 2000 project and the milestones that have been achieved
since the filing of its Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
(3) A report dated March 23, 1999, which included, under Item 5, a
description of the Corporation's press release announcing that
it and Citibank, a unit of Citigroup, had signed an agreement
whereby Citibank will acquire the Corporation's credit card
business, including a portfolio of $1.9 billion in credit card
receivables.
(4) A report dated March 31, 1999, which included, under Item 5, (i)
a statement that the Corporation had completed the previously
announced sale of the Corporation's credit card business to
Citibank, a unit of Citigroup and (ii) a description of the
Corporation's press release, dated April 1, 1999, announcing
that it had reached a definitive agreement to sell the $14
billion commercial mortgage servicing portfolio of Mellon
Mortgage Company's Cleveland-based Income Property Division to
GMAC Commercial Mortgage Corporation.
55
<PAGE> 57
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MELLON BANK CORPORATION
(Registrant)
Date: May 11, 1999 By: Steven G. Elliott
---------------------------------------
Steven G. Elliott
Senior Vice Chairman and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer of
the Registrant)
56
<PAGE> 58
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Business Mellon Bank Corporation's principal direct subsidiaries are Mellon Bank, N.A., The Boston Company, Inc.,
of the Buck Consultants, Inc., Newton Management Limited and a number of companies known as Mellon Financial Services
Corporation 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 banking subsidiaries engage in
retail financial services, commercial banking, trust and investment management services, residential real estate
loan financing, 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 Exchange under the trading symbol MEL. Our transfer
Listing agent and registrar is ChaseMellon Shareholder Services, P.O. Box 590, Ridgefield Park, NJ 07660-0590.
For more information, please call 1 800 205-7699.
Dividend Subject to approval of the board of directors, dividends are paid on Mellon's common stock on or about
Payments the 15th day of February, May, August and November.
Direct Stock The Direct Stock Purchase and Dividend Reinvestment Plan provides a way to purchase shares of common stock
Purchase and directly from the Corporation at the market value for such shares. Nonshareholders may purchase their first
Dividend shares of the Corporation's common stock through the plan, and shareholders may increase their shareholding
Reinvestment by reinvesting cash dividends and through optional cash investments. Plan details are in a prospectus, which
Plan may be obtained from ChaseMellon Shareholder Services by calling 1 800 842-7629.
Phone Corporate Communications/ (412) 236-1264 Media inquiries
Contacts Media Relations
Direct Stock Purchase and 1 800 842-7629 Plan prospectus and enrollment materials
Dividend Reinvestment Plan
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
Investor Relations (412) 234-5601 Questions regarding the Corporation's financial
performance
Shareholder Quarterly earnings and other news releases can be obtained by fax by calling Company News on Call at
Publications 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 the Secretary of
the Corporation at One Mellon Bank Center, Room 4826, Pittsburgh, PA 15258-0001.
Internet Mellon: www.mellon.com Dreyfus Retirement Services: drs.dreyfus.com
Access Buck: www.buckconsultants.com Founders: www.founders.com
ChaseMellon Shareholder Services: www.chasemellon.com Newton: www.newton.co.uk
Dreyfus: www.dreyfus.com
Dreyfus Brokerage Services: www.edreyfus.com
Dreyfus Investment Services Corporation: www.disc.mellon.com
</TABLE>
57
<PAGE> 59
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 17, 1998. (File No. 1-7410) for the quarter
ended September 30, 1998, and
incorporated herein by reference.
3.2 By-Laws of Mellon Bank Corporation, as Previously filed as Exhibit 3.2 to
amended, effective November 5, 1998. the Quarterly Report on Form 10-Q
(File No. 1-7410) for the quarter
ended September 30, 1998, 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 Schedule, which is submitted Submitted herewith.
electronically to the Securities and Exchange
Commission for information only and not filed.
</TABLE>
58
<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
<TABLE>
<CAPTION>
Mellon Bank Corporation (parent corporation) (a)
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(dollar amounts in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before income taxes and equity in undistributed
net income (loss) of subsidiaries $ 73 $ 88
Fixed charges: interest expense, one-third of
rental expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 54 47
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $ 127 $ 135
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ - $ 13
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 2.35 2.87
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends 2.35 2.24
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
59
<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
<TABLE>
<CAPTION>
Mellon Bank Corporation (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31,
(dollar amounts in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before income taxes and impact of accounting change $363 (a) $332
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 155 132
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined), excluding
interest on deposits 518 464
Interest on deposits 221 229
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $739 $693
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ - $ 13
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.34 (a) 3.51
Including interest on deposits 1.97 (a) 1.92
Ratio of earnings (as defined) to combined fixed charges and preferred stock
dividends:
Excluding interest on deposits 3.34 (a) 3.19
Including interest on deposits 1.97 (a) 1.85
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The ratio of earnings (as defined) to fixed charges and the ratio of
earnings (as defined) to combined fixed charges and preferred stock
dividends for the quarter ended March 31, 1999, exclude from earnings (as
defined) the $83 million pre-tax net gain from completed and pending
divestitures. Had these computations included this net gain, the ratio of
earnings (as defined) to fixed charges and the ratio of earnings (as
defined) to combined fixed charges and preferred stock dividends both would
have been 3.88 excluding interest on deposits and 2.19 including interest
on deposits.
(b) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
60
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,011
<INT-BEARING-DEPOSITS> 723
<FED-FUNDS-SOLD> 174
<TRADING-ASSETS> 242
<INVESTMENTS-HELD-FOR-SALE> 5,451
<INVESTMENTS-CARRYING> 1,421
<INVESTMENTS-MARKET> 1,443
<LOANS> 30,554
<ALLOWANCE> 410
<TOTAL-ASSETS> 49,384
<DEPOSITS> 33,348
<SHORT-TERM> 4,023
<LIABILITIES-OTHER> 3,117
<LONG-TERM> 3,403
991<F1>
0
<COMMON> 147
<OTHER-SE> 4,355
<TOTAL-LIABILITIES-AND-EQUITY> 49,384<F1>
<INTEREST-LOAN> 580
<INTEREST-INVEST> 108
<INTEREST-OTHER> 19
<INTEREST-TOTAL> 711
<INTEREST-DEPOSIT> 221
<INTEREST-EXPENSE> 342
<INTEREST-INCOME-NET> 369
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 780
<INCOME-PRETAX> 446
<INCOME-PRE-EXTRAORDINARY> 280
<EXTRAORDINARY> 0
<CHANGES> (26)
<NET-INCOME> 254
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.96
<YIELD-ACTUAL> 3.76
<LOANS-NON> 127
<LOANS-PAST> 88
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 496
<CHARGE-OFFS> 22
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 410
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes $991 million of guaranteed preferred beneficial interests in the
Corporation's junior subordinated deferrable interest debentures.
</FN>
</TABLE>
