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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding as of
Class June 30, 1999
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<S> <C>
Common Stock, $.50 par value 514,211,202
</TABLE>
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TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
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<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Financial Highlights 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Items 2 and 3) 3
Financial Statements (Item 1):
Consolidated Income Statement 51
Consolidated Income Statement - Five Quarter Trend 53
Consolidated Balance Sheet 55
Consolidated Statement of Cash Flows 56
Consolidated Statement of Changes in Shareholders' Equity 58
Notes to Financial Statements 60
Part II - Other Information
Legal Proceedings (Item 1) 67
Submission of Matters to a Vote of Security Holders (Item 4) 67
Exhibits and Reports on Form 8-K (Item 6) 67
Signature 69
Corporate Information 70
Index to Exhibits 71
</TABLE>
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; 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 Six months ended
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JUNE 30, March 31, June 30, JUNE 30, June 30,
1999 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Diluted earnings per common share:
Operating $.45 (a) $.43 (a) $.40 $.88 (a) $.79
Cash operating (b) .50 (a) .49 (a) .45 .99 (a) .89
Reported .45 .48 .40 .93 .79
Net income applicable to common stock (in millions):
Operating $236 (a) $231 (a) $215 $467 (a) $421
Cash operating (b) 266 (a) 260 (a) 243 526 (a) 474
Reported 238 254 215 492 421
Return on common equity (annualized):
Operating 21.4% (a) 20.9% (a) 20.8% 21.2% (a) 21.2%
Cash operating (b) 41.1 (a) 40.4 (a) 44.1 40.8 (a) 41.3
Reported 21.6 23.1 20.8 22.3 21.2
Return on assets (annualized):
Operating 1.90% (a) 1.84% (a) 1.79% 1.87% (a) 1.84%
Cash operating (b) 2.23 (a) 2.16 (a) 2.12 2.19 (a) 2.14
Reported 1.92 2.03 1.79 1.97 1.84
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SELECTED KEY DATA
Fee revenue as a percentage of net interest
and fee revenue (FTE) 69% 68% 66% 68% 66%
Efficiency ratio excluding amortization of
intangibles (c) 62% 62% 63% 62% 63%
Assets under management (in billions)(d) $ 426 $ 406 $ 350
Assets under administration or
custody (in billions)(d) 2,061 1,928 1,791
Dividends paid per common share $ .20 $ .18 $ .18 $ .38 $ .35
Dividends paid on common stock (in millions) 104 94 93 198 177
Closing common stock price (d) $36.38 $35.19 $34.84
Market capitalization (in millions)(d) 18,704 18,335 18,168
Average common shares and equivalents
outstanding - diluted (in thousands) 525,712 531,288 531,696 528,516 529,036
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CAPITAL RATIOS AT PERIOD END
Shareholders' equity to assets:
Reported 8.77% 9.12% 8.92%
Tangible (b) 5.29 5.60 5.22
Tier I capital 6.87 6.89 6.51
Total (Tier I plus Tier II) capital 11.18 11.22 10.83
Leverage capital 6.70 6.60 6.65
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</TABLE>
(continued)
2
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<TABLE>
<CAPTION>
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FINANCIAL HIGHLIGHTS (CONTINUED) Quarter ended Six months ended
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JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1999 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C>
AVERAGE BALANCES FOR THE PERIOD
Loans $30,504 $31,467 $30,302 $30,983 $29,848
Total interest-earning assets 39,015 39,811 37,734 39,410 37,192
Total assets 49,766 50,677 47,965 50,219 47,102
Total tangible assets (b) 47,878 48,755 46,057 48,314 45,419
Deposits 33,358 34,087 33,548 33,721 33,139
Notes and debentures 3,387 3,351 3,003 3,369 2,900
Trust-preferred securities 991 991 991 991 991
Total shareholders' equity 4,417 4,469 4,126 4,442 4,050
Tangible common shareholders' equity (b) 2,591 2,608 2,218 2,600 2,317
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</TABLE>
(a) Operating and cash operating results for the second quarter of 1999 exclude
a $38 million after-tax net gain from divestitures and $36 million of
nonrecurring expenses after taxes. The first quarter of 1999 excludes 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.
(b) See page 7 for a definition of amounts and ratios.
(c) See page 28 for the definition of this ratio.
(d) Period-end amount.
Note: All calculations are based on unrounded numbers. In addition, per common
share amounts and average shares outstanding have been restated to
reflect the two-for-one common stock split distributed on May 17, 1999.
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, were $.45 and $238 million for the second quarter of 1999.
Second quarter 1999 reported results included a $38 million after-tax net gain
from divestitures and $36 million of nonrecurring expenses after taxes. The
annualized return on common equity and return on assets, on a reported basis,
were 21.6% and 1.92%, respectively, for the second quarter of 1999.
Excluding the net gain from divestitures and the nonrecurring expenses, second
quarter 1999 diluted operating earnings per common share totaled $.45, an
increase of 13% compared with $.40 in the second quarter of 1998. Operating net
income applicable to common stock in the second quarter of 1999 was $236
million, an increase of 10% compared with $215 million in the second quarter of
1998. The annualized return on common equity and return on assets, on an
operating basis, were 21.4% and 1.90%, respectively, for the second quarter of
1999, compared with 20.8% and 1.79%, respectively, for the second quarter of
1998. In the first quarter of 1999, diluted operating earnings per common share
totaled $.43 and operating net income applicable to common stock was $231
million.
Diluted cash operating earnings per common share totaled $.50 in the second
quarter of 1999, an increase of 11%, compared with $.45 in the second quarter of
1998. Cash operating net income applicable to common stock was $266 million, an
increase of 9% compared with $243 million in the second quarter of 1998. The
annualized cash
3
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OVERVIEW (CONTINUED)
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return on tangible common equity and cash return on tangible assets, on an
operating basis, were 41.1% and 2.23%, respectively, in the second quarter of
1999, compared with 44.1% and 2.12%, respectively, in the second quarter of
1998. In the first quarter of 1999, diluted cash operating earnings per common
share totaled $.49 and cash operating net income applicable to common stock was
$260 million.
Fee revenue for the second quarter of 1999 was impacted by the March 1999 sale
of the credit card business. Excluding credit card revenue from the prior
periods, fee revenue, which totaled $787 million in the second quarter of 1999,
increased $98 million compared with the second quarter of 1998 and $16 million
compared with the first quarter of 1999. Excluding the impact on fee revenue
from the sale of the credit card business and the October 1998 acquisition of
Newton Management Limited (Newton), fee revenue increased 10% in the second
quarter of 1999 compared with the second quarter of 1998. This increase was led
by higher trust and investment management revenue, up 12% over the prior-year
period excluding the Newton acquisition. The $16 million, or 8% annualized,
increase excluding credit card revenue, compared with the first quarter of 1999,
primarily resulted from higher trust and investment management revenue. At June
30, 1999, assets under management totaled $426 billion, a 22% increase from June
30, 1998, and assets under administration or custody totaled $2,061 billion, a
15% increase from June 30, 1998.
Net interest revenue on a fully taxable equivalent basis was $363 million in the
second quarter of 1999, down $11 million compared with $374 million in the
prior-year period and down $8 million from $371 million in the first quarter of
1999. These decreases resulted from the sale of the credit card business.
Excluding the net interest revenue generated by the credit card business in the
prior periods, net interest revenue increased $4 million compared with the
second quarter of 1998 and $7 million compared with the first quarter of 1999,
reflecting a higher level of interest free funds.
Operating expense before trust-preferred securities expense and net revenue from
acquired property for the second quarter of 1999 was $809 million, up $88
million from $721 million in the second quarter of 1998 and up $49 million from
$760 million in the first quarter of 1999. These increases primarily resulted
from $56 million of nonrecurring expenses as well as the impact of acquisitions
and business growth. In the second quarter of 1999, the Corporation recorded a
$30 million expense for a charitable contribution to the Mellon Bank Foundation,
as well as $26 million of expenses primarily related to replacing obsolete
computer equipment and closing facilities as part of Mellon's Third Century
strategic initiatives. Excluding the effect of nonrecurring expenses,
acquisitions and the credit card divestiture, operating expense before
trust-preferred securities expense and net revenue from acquired property
increased 2% in the second quarter of 1999 compared with the second quarter of
1998 and 1%, or 3% on an annualized basis, compared with the first quarter of
1999.
Credit quality expense was $5 million in the second quarter of 1999, compared
with $13 million in the second quarter of 1998 and $15 million in the first
quarter of 1999. The lower expense in the second quarter of 1999 compared with
prior periods primarily resulted from a lower provision for credit losses due to
the sale of the credit card business, as well as higher net revenue from
acquired property. Net credit losses were $11 million in the second quarter of
1999, compared with $13 million in the second quarter of 1998 and $17 million in
the first quarter of 1999.
Nonperforming assets totaled $142 million at June 30, 1999, compared with $161
million at March 31, 1999, $140 million at December 31, 1998, and $170 million
at June 30, 1998. The Corporation's ratio of nonperforming assets to total loans
and net acquired property was .46% at June 30, 1999, compared with .53% at March
31, 1999, .44% at December 31, 1998, and .55% at June 30, 1998.
4
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OVERVIEW (CONTINUED)
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Year-to-date 1999 compared with year-to-date 1998
For the first half of 1999, the Corporation reported diluted earnings per common
share of $.93 and net income applicable to common stock of $492 million.
Year-to-date 1999 results included an $87 million after-tax net gain from
divestitures, or $.17 per common share, $36 million of nonrecurring expenses
after taxes, or $.07 per common share, and a $26 million after-tax charge for
the cumulative effect of a change in accounting principle, or $.05 per common
share. The annualized return on common equity and return on assets, on a
reported basis, were 22.3% and 1.97%, respectively, for the first half of 1999.
Excluding the net gain from divestitures, the nonrecurring expenses and the
charge for a change in accounting principle, year-to-date 1999 diluted operating
earnings per common share totaled $.88, an increase of 12%, compared with the
$.79 in the first half of 1998. Operating net income applicable to common stock
in the first half of 1999 was $467 million, an increase of 11% compared with
$421 million in the first half of 1998. For the first half of 1999, diluted cash
operating earnings per common share totaled $.99, an increase of 11% compared
with $.89 in the first half of 1998. Cash operating net income applicable to
common stock totaled $526 million, an increase of 11% compared with $474 million
in the first six months of 1998.
Excluding credit card fees, fee revenue resulting from acquisitions and fees
from the electronic filing of income tax returns in the first six months of
1998, fee revenue increased 11% in the first half of 1999, compared with the
first half of 1998. Excluding the effect of the nonrecurring expenses,
acquisitions and expenses related to the credit card business, operating expense
before trust-preferred securities expense and net revenue from acquired property
increased less than 3% in the first half of 1999 compared with the first half of
1998.
SIGNIFICANT FINANCIAL EVENTS
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Completed and pending divestitures
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 growth and return potential. In March 1999, the Corporation
completed the sale of the credit card business to Citibank, a unit of Citigroup
and signed a definitive sale agreement to sell the commercial mortgage servicing
business to GMAC Commercial Mortgage Corporation. The commercial mortgage
transaction is closing on a portfolio-by-portfolio basis and is expected to be
completed during the third quarter of 1999. In addition, on June 30, 1999, the
Corporation completed the sale of the network services transaction processing
unit to U.S. Bancorp. On August 4, 1999, a definitive sale agreement was signed
to sell the residential mortgage business to Chase Mortgage Company, a
subsidiary of The Chase Manhattan Corporation. The Corporation also currently
expects to complete the sale of the residential mortgage business by the end of
the third quarter of 1999.
In the second quarter of 1999, the Corporation recorded a $59 million pre-tax
net gain from the completed and pending divestitures. The after-tax net gain
from these transactions totaled $38 million, or $.07 per common share. The net
gain primarily resulted from a gain on the sale of the network services
transaction processing unit partially offset by an adjustment to the write-down
that was recorded in the first quarter of 1999 to reflect the currently
estimated sales proceeds to be received for the residential mortgage business.
Including the $83 million pre-tax net gain from the first quarter of 1999, the
pre-tax net gain from completed and pending divestitures totaled $142 million
for the first half of 1999. For an analysis of the financial impact of these
divestitures, see the
5
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SIGNIFICANT FINANCIAL EVENTS (CONTINUED)
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"Completed/Pending Divestitures" disclosure in the "Business sectors" section on
pages 8 through 18. Excluding gains or divestiture charges on the sales, the
future impact of these divestitures on the Corporation's earnings is not
expected to be material.
Proceeds from these divestitures 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 20 million shares of the
Corporation's common stock. During the second quarter of 1999, 8 million shares
of common stock were repurchased, bringing year-to-date repurchases to 13.4
million shares and leaving 6.6 million shares available for repurchase. All such
repurchases will be used for general corporate purposes.
Two-for-one common stock split
In April 1999, the Corporation announced a two-for-one split of the
Corporation's common stock. The two-for-one stock split was 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 were distributed
on May 17, 1999, to shareholders of record at the close of business on May 3,
1999. All earnings, dividend per share and stock repurchase figures have been
restated to reflect the stock split.
Common dividend increase
In the second quarter of 1999, the Corporation increased its quarterly common
stock dividend by 11% to $.20 per common share. This was the ninth quarterly
common dividend increase that the Corporation announced since the beginning of
1993, resulting in a total common dividend per share increase of approximately
240%.
Sale of Mellon (MD) Retail Offices
On July 22, 1999, Mellon Bank (MD) National Association entered into an
agreement to sell its seven Maryland retail offices, including approximately
$235 million of deposits and $35 million of loans, to Sandy Spring National Bank
of Maryland. The sale is part of the Corporation's initiative to sharpen its
strategic focus on businesses with the highest growth and return potential. The
sale, which is expected to close by the end of the third quarter of 1999, will
not have a material impact on the Corporation's financial position or results of
operations.
6
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CASH 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 accruing to shareholders under either
accounting method is the same assuming a given financing mix. Operating results,
excluding the impact of intangibles, are shown in the table below.
<TABLE>
<CAPTION>
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Quarter ended Six months ended
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(dollar amounts in millions JUNE 30, March 31, June 30, JUNE 30, June 30,
except per share amounts; ratios annualized) 1999 (a) 1999 (a) 1998 1999 (a) 1998
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<S> <C> <C> <C> <C> <C>
Operating net income applicable to
common stock $ 236 $ 231 $ 215 $ 467 $ 421
After-tax impact of amortization
of intangibles from purchase acquisitions 30 29 28 59 53
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Cash operating net income applicable
to common stock $ 266 $ 260 $ 243 $ 526 $ 474
Increase over prior-year period 9% 13% 18% 11% 16%
Cash operating earnings per common
share - diluted (b) $ .50 $ .49 $ .45 $ .99 $ .89
Increase over prior-year period 11% 12% 15% 11% 15%
Average common equity $ 4,417 $ 4,469 $ 4,126 $ 4,442 $ 4,000
Less: Average goodwill and other identified
intangibles, net of tax benefit (c) (1,888) (1,922) (1,908) (1,905) (1,683)
Plus: Average minority interest (d) 62 61 -- 63 --
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Average tangible common equity (c) $ 2,591 $ 2,608 $ 2,218 $ 2,600 $ 2,317
Cash return on tangible common equity (c) 41.1% 40.4% 44.1% 40.8% 41.3%
Average total assets $ 49,766 $ 50,677 $ 47,965 $ 50,219 $ 47,102
Average total tangible assets (c) $ 47,878 $ 48,755 $ 46,057 $ 48,314 $ 45,419
Cash return on tangible assets (c) 2.23% 2.16% 2.12% 2.19% 2.14%
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</TABLE>
(a) Cash operating results for the second quarter of 1999 exclude a $38 million
after-tax net gain from divestitures and $36 million of nonrecurring
expenses after taxes. The first quarter of 1999 excludes a $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) Prior-period per common share amounts have been restated to reflect the
two-for-one common stock split distributed on May 17, 1999.
(c) The amount of goodwill and other identified intangibles subtracted from
common equity and total assets is net of $368 million, $374 million, $253
million, $371 million and $254 million, respectively, of average tax
benefits related to tax deductible goodwill and other intangibles.
(d) 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 June
30, 1999, and March 31, 1999, totaled $64 million and $62 million,
respectively.
7
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<TABLE>
<CAPTION>
BUSINESS SECTORS
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FOR THE QUARTER ENDED JUNE 30,
Global Global Regional Specialized
Wealth Investment Investment Consumer Commercial
Management Management Services Banking Banking
(dollar amounts in millions, ---------- ---------- -------- ------- -------
averages in billions) 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net interest revenue (expense) $ 39 $ 35 $ (2) $ (2) $ 12 $ 10 $ 122 $ 126 $ 101 $ 93
Fee revenue 82 68 246 197 229 206 46 35 21 26
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Total revenue 121 103 244 195 241 216 168 161 122 119
Credit quality expense (revenue) -- (1) -- -- -- -- 2 3 4 3
Operating expense:
Intangible amortization 5 5 7 5 3 3 12 12 8 8
Trust-preferred securities 1 -- -- -- -- -- 1 1 2 2
Other 60 52 152 115 181 173 98 97 57 53
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Total operating expense 66 57 159 120 184 176 111 110 67 63
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Income (loss) before taxes 55 47 85 75 57 40 55 48 51 53
Income taxes (benefits) 21 18 35 32 23 16 20 18 20 21
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Net income (loss) $ 34 $ 29 $ 50 $ 43 $ 34 $ 24 $ 35 $ 30 $ 31 $ 32
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Cash net income (loss) (a) $ 39 $ 33 $ 55 $ 47 $ 37 $ 27 $ 44 $ 39 $ 38 $ 39
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Average assets $6.3 $5.5 $2.0 $1.6 $1.7 $1.2 $14.2 $12.5 $12.0 $10.6
Average common equity $0.4 $0.3 $0.5 $0.4 $0.5 $0.4 $ 0.6 $ 0.6 $ 0.7 $ 0.6
Average Tier I preferred equity $ -- $ -- $ -- $ -- $ -- $ -- $ 0.1 $ 0.1 $ 0.1 $ 0.1
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Return on shareholders' equity (b) 37% 33% 38% 39% 28% 24% 21% 19% 17% 20%
Return on assets (b) 2.16% 2.12% NM NM NM NM 0.98% 0.95% 1.05% 1.28%
Pretax operating margin 46% 46% 35% 38% 23% 18% 33% 30% 42% 45%
Pretax operating margin (c) 50% 51% 38% 40% 25% 20% 41% 37% 50% 54%
Efficiency ratio (c) 50% 51% 62% 60% 75% 80% 58% 60% 47% 44%
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<CAPTION>
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FOR THE SIX MONTHS ENDED JUNE 30,
Global Global Regional Specialized
Wealth Investment Investment Consumer Commercial
Management Management Services Banking Banking
(dollar amounts in millions, ---------- ---------- -------- ------- -------
averages in billions) 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net interest revenue (expense) $ 76 $ 67 $ (5) $ -- $ 24 $ 22 $ 246 $ 251 $ 200 $ 181
Fee revenue 158 131 482 362 445 406 81 68 53 51
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Total revenue 234 198 477 362 469 428 327 319 253 232
Credit quality expense (revenue) (2) (1) -- -- -- -- 5 7 8 6
Operating expense:
Intangible amortization 10 9 15 8 6 6 24 24 15 14
Trust-preferred securities 1 -- -- -- -- -- 2 2 5 5
Other 120 100 302 218 356 343 197 193 110 105
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Total operating expense 131 109 317 226 362 349 223 219 130 124
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Income (loss) before taxes and
cumulative effect of
accounting change 105 90 160 136 107 79 99 93 115 102
Income taxes (benefits) 40 34 66 58 43 32 37 35 44 39
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Income (loss) before cumulative
effect of accounting change 65 56 94 78 64 47 62 58 71 63
Cumulative effect of
accounting change (d) -- -- -- -- -- -- -- -- -- --
Net income (loss) $ 65 $ 56 $ 94 $ 78 $ 64 $ 47 $ 62 $ 58 $ 71 $ 63
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Cash net income (loss) (a) $ 74 $ 64 $104 $ 85 $ 70 $ 53 $ 80 $ 76 $ 84 $ 74
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Average assets $6.2 $5.3 $1.9 $1.4 $1.7 $1.2 $14.1 $12.7 $11.9 $10.2
Average common equity $0.4 $0.4 $0.5 $0.4 $0.5 $0.4 $ 0.7 $ 0.6 $ 0.7 $ 0.6
Average Tier I preferred equity $ -- $ -- $ -- $ -- $ -- $ -- $ 0.1 $ 0.1 $ 0.1 $ 0.1
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Return on shareholders' equity (b) 35% 34% 37% 38% 27% 25% 19% 18% 20% 20%
Return on assets (b) 2.10% 2.12% NM NM NM NM 0.88% 0.92% 1.21% 1.27%
Pretax operating margin 45% 46% 33% 37% 23% 18% 30% 29% 45% 44%
Pretax operating margin (c) 49% 50% 37% 40% 24% 20% 38% 37% 53% 52%
Efficiency ratio (c) 51% 51% 63% 60% 76% 80% 60% 61% 43% 45%
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</TABLE>
(a) Excludes the after-tax impact of the amortization of goodwill and other
intangibles from purchase acquisitions.
(b) Annualized.
(c) Excludes amortization of intangibles and trust-preferred securities
expense.
(d) The cumulative effect of an accounting change has not been allocated to any
of the Corporation's reportable sectors.
(e) Includes $59 million and $142 million, respectively, in net gains from
pending and completed divestitures for the three and six month periods
ended June 30, 1999.
(f) Ratios exclude the impact of the net divestiture gains and nonrecurring
expenses.
NM - Not meaningful.
8
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<TABLE>
<CAPTION>
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Large Completed/ Real Estate
Corporate Total Core Pending Workout/Other Consolidated
Banking Sectors Divestitures Activity Results
--------------- --------------- --------------- --------------- ---------------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 70 $ 67 $ 342 $ 329 $ 15 $ 34 $ 6 $ 11 $ 363 $ 374
70 60 694 592 152 (e) 116 6 10 852 718
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140 127 1,036 921 167 150 12 21 1,215 1,092
6 -- 12 5 1 11 (8) (3) 5 13
1 1 36 34 1 1 -- -- 37 35
5 5 9 8 -- 1 10 10 19 19
81 79 629 569 85 114 58 3 772 686
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87 85 674 611 86 116 68 13 828 740
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47 42 350 305 80 23 (48) 11 382 339
17 16 136 121 28 8 (20) (5) 144 124
- ----------------------------------------------------------------------------------------------------------------------------------
$ 30 $ 26 $ 214 $ 184 $ 52 $ 15 $(28) $ 16 $ 238 $ 215
- ----------------------------------------------------------------------------------------------------------------------------------
$ 30 $ 26 $ 243 $ 211 $ 53 $ 16 $(28) $ 16 $ 268 $ 243
- ----------------------------------------------------------------------------------------------------------------------------------
$9.6 $10.4 $ 45.8 $41.8 $2.7 $4.5 $1.3 $1.7 $ 49.8 $ 48.0
$1.0 $ 1.0 $ 3.7 $ 3.3 $0.2 $0.3 $0.5 $0.5 $ 4.4 $ 4.1
$0.3 $ 0.3 $ 0.5 $ 0.5 $ -- $ -- $0.5 $0.5 $ 1.0 $ 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
13% 11% 23% 21% NM NM NM NM 22% 21%
1.27% 1.04% 1.87% 1.77% NM NM NM NM 1.92% 1.79%
34% 33% 34% 33% NM NM NM NM 33% (f) 31%
38% 38% 38% 38% NM NM NM NM 38% (f) 36%
58% 62% 61% 62% NM NM NM NM 62% (f) 63%
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Large Completed/ Real Estate
Corporate Total Core Pending Workout/Other Consolidated
Banking Sectors Divestitures Activity Results
--------------- --------------- --------------- --------------- ---------------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$135 $ 129 $ 676 $ 650 $ 43 $ 62 $ 15 $ 29 $ 734 $ 741
132 124 1,351 1,142 348 (e) 254 35 25 1,734 1,421
- ----------------------------------------------------------------------------------------------------------------------------------
267 253 2,027 1,792 391 316 50 54 2,468 2,162
6 -- 17 12 11 19 (8) (4) 20 27
1 1 71 62 3 3 -- -- 74 65
11 11 19 18 1 1 19 20 39 39
159 157 1,244 1,116 192 224 59 13 1,495 1,353
- ----------------------------------------------------------------------------------------------------------------------------------
171 169 1,334 1,196 196 228 78 33 1,608 1,457
- ----------------------------------------------------------------------------------------------------------------------------------
90 84 676 584 184 69 (20) 25 840 678
33 30 263 228 70 25 (11) (5) 322 248
- ----------------------------------------------------------------------------------------------------------------------------------
57 54 413 356 114 44 (9) 30 518 430
-- -- -- -- -- -- -- -- (26) --
$ 57 $ 54 $ 413 $ 356 $114 $ 44 $ (9) $ 30 $ 492 $ 430
- ----------------------------------------------------------------------------------------------------------------------------------
$ 57 $ 54 $ 469 $ 406 $117 $ 47 $ (9) $ 30 $ 551 $ 483
- ----------------------------------------------------------------------------------------------------------------------------------
$9.6 $10.4 $ 45.4 $ 41.2 $3.4 $4.4 $1.4 $1.5 $ 50.2 $ 47.1
$1.0 $ 1.0 $ 3.8 $ 3.4 $0.3 $0.3 $0.3 $0.3 $ 4.4 $ 4.0
$0.3 $ 0.3 $ 0.5 $ 0.5 $ -- $ -- $0.5 $0.5 $ 1.0 $ 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
12% 11% 22% 21% NM NM NM NM 22% 21%
1.21% 1.04% 1.83% 1.74% NM NM NM NM 1.97% 1.84%
34% 33% 33% 33% NM NM NM NM 32% (f) 31%
38% 38% 38% 37% NM NM NM NM 37% (f) 36%
59% 62% 61% 62% NM NM NM NM 62% (f) 63%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
In the second quarter of 1999, the Corporation realigned its business sectors to
better reflect the Corporation's organizational structure, the characteristics
of its products and services, and the customer segments to which those products
and services are delivered. Lines of business that offer similar or related
products and services to common or similar customer segments have been combined
into six major business sectors. All prior periods have been restated. In
addition, the effect of Completed/Pending Divestitures has been displayed
separately, as discussed further on page 15. The operating results of the
Corporation's major business sectors are presented and analyzed on an internal
management reporting basis. Net interest revenue, fee revenue and income taxes
differ from the amounts shown in the Consolidated Income Statement because
amounts presented in Business sectors are 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 guidelines, where applicable, 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 at the
end of 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 Activity. The Real Estate Workout sector has diminished in
significance as the level of nonperforming assets has decreased.
Total Core Sectors
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Six months ended --------------------
----------------------- ----------------------- 2Q 99 6 Mos 99
(dollar amounts in millions, JUNE 30, June 30, JUNE 30, June 30, vs vs
ratios are annualized) 1999 1998 1999 1998 2Q 98 6 Mos 98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $1,036 $921 $2,027 $1,792 12% 13%
Total operating expense 674 611 1,334 1,196 10% 12%
Income before taxes 350 305 676 584 15% 16%
Return on common equity 23% 21% 22% 21%
Pretax operating margin (a) 38 38 38 37
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Income before taxes for the Corporation's core sectors was $350 million in the
second quarter of 1999, an increase of $45 million, or 15%, compared with the
prior-year period. This increase resulted from positive operating leverage as
revenues increased $115 million, or 12%, while operating expense increased $63
million, or 10%, and credit quality expense increased $7 million. The increase
in total revenue was primarily due to higher fee revenue resulting from business
growth as well as the October 1998 Newton acquisition which added $34 million of
fee revenue. Total operating expense increased primarily due to business growth
as well as acquisitions.
10
<PAGE> 12
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Income before taxes for the Corporation's core sectors was $676 million in the
first six months of 1999, an increase of $92 million, or 16%, compared with the
prior-year period, driven by a 13% increase in total revenue partially offset by
a 12% increase in operating expense and higher credit quality expense. This
increase in revenue and expense resulted primarily from business growth, the
Newton acquisition and the April 1998 Founders acquisition.
Wealth Management
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Six months ended --------------------
------------------------- ---------------------- 2Q 99 6 Mos 99
(dollar amounts in millions, JUNE 30, June 30, JUNE 30, June 30, vs vs
ratios are annualized) 1999 1998 1999 1998 2Q 98 6 Mos 98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $121 $103 $234 $198 17% 18%
Total operating expense 66 57 131 109 14% 20%
Income before taxes 55 47 105 90 17% 16%
Return on common equity 37% 33% 35% 34%
Pretax operating margin (a) 50 51 49 50
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Wealth Management includes private asset management services, private banking
and jumbo residential mortgage lending. Income before taxes for the Wealth
Management sector was $55 million in the second quarter of 1999, up $8 million,
or 17%, from the prior-year period. Revenue increased $18 million, or 17%, due
to higher private asset management fee revenue. Private assets under management
increased to $55 billion at June 30, 1999 from $41 billion at June 30, 1998, due
to new business and market appreciation. Operating expense increased $9 million,
or 14%, in support of business growth.
Income before taxes for this sector was $105 million in the first six months of
1999, an increase of $15 million, or 16%, compared with the prior-year period.
Total revenue increased 18% over the prior-year period, primarily due to growth
in private asset management fees, while expenses increased 20% over the same
period, reflecting investments in staff and information systems to support
business growth. It is currently anticipated that operating expenses may
increase at rates comparable to, or at times somewhat in excess of, revenue to
provide a platform for higher business growth.
11
<PAGE> 13
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Global Investment Management
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Six months ended --------------------
----------------------- ----------------------- 2Q 99 6 Mos 99
(dollar amounts in millions, JUNE 30, June 30, JUNE 30, June 30, vs vs
ratios are annualized) 1999 1998 1999 1998 2Q 98 6 Mos 98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $244 $195 $477 $362 25% 32%
Total operating expense 159 120 317 226 31% 40%
Income before taxes 85 75 160 136 14% 18%
Return on common equity 38% 39% 37% 38%
Pretax operating margin (a) 38 40 37 40
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Global Investment Management includes mutual fund management, institutional
asset management and brokerage services. Income before taxes for the Global
Investment Management sector totaled $85 million in the second quarter of 1999,
compared with $75 million in the second quarter of 1998, an increase of $10
million, or 14%. Revenue increased $49 million, or 25%, primarily due to higher
mutual fund management fees due to a higher level of managed assets and the
Newton acquisition. Mutual fund assets managed increased 22% to $151 billion at
June 30, 1999, from $125 billion at June 30, 1998. Institutional assets under
management increased 20% to $220 billion at June 30, 1999, due to new business
and market appreciation, as well as the Newton acquisition. In addition,
brokerage fees increased by $5 million. Total operating expense increased $39
million, or 31%, due to the Newton acquisition and the amortization of the
related goodwill, and investments to support business growth. Excluding the
impact of the Newton acquisition, revenue increased 9% and total operating
expense increased 5%, resulting in a 16% increase in income before taxes.
Income before taxes for this sector was $160 million in the first six months of
1999, an increase of $24 million, or 18%, compared with the prior-year period.
Total revenue increased 32% while expense increased 40%, resulting from the same
factors responsible for the second quarter of 1999 increases as compared to the
prior-year period. In addition, the full six-month impact of the April 1998
Founders acquisition also contributed to these increases. Excluding the impact
of the Newton and Founders acquisitions, revenue increased 12% and expenses
increased 8%, resulting in an 18% increase in income before taxes.
Global Investment Services
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Six months ended --------------------
----------------------- ----------------------- 2Q 99 6 Mos 99
(dollar amounts in millions, JUNE 30, June 30, JUNE 30, June 30, vs vs
ratios are annualized) 1999 1998 1999 1998 2Q 98 6 Mos 98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $241 $216 $469 $428 12% 10%
Total operating expense 184 176 362 349 5% 4%
Income before taxes 57 40 107 79 44% 36%
Return on common equity 28% 24% 27% 25%
Pretax operating margin (a) 25 20 24 20
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Global Investment Services includes institutional trust and custody, foreign
exchange, securities lending, shareholder services, benefits consulting and
administrative services for employee benefit plans and backoffice
12
<PAGE> 14
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
outsourcing for investment managers. Income before taxes for the Global
Investment Services sector of $57 million increased $17 million, or 44%,
compared with the prior-year period. The increase was attributable to a $25
million, or 12%, increase in total revenue resulting, in part, from higher
foreign exchange fees, increased benefits consulting fees and higher
institutional trust and custody fee revenue compared with an increase of only $8
million, or 5%, in total operating expenses. Assets under administration/custody
exceeded $2 trillion at June 30, 1999, an increase of 15% from the prior year.
Income before taxes for this sector was $107 million in the first six months of
1999, an increase of $28 million, or 36%, compared with the prior-year period.
Revenue increased 10% primarily reflecting the same factors responsible for the
second quarter of 1999 increase while expenses increased only 4%.
Regional Consumer Banking
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Six months ended --------------------
----------------------- ----------------------- 2Q 99 6 Mos 99
(dollar amounts in millions, JUNE 30, June 30, JUNE 30, June 30, vs vs
ratios are annualized) 1999 1998 1999 1998 2Q 98 6 Mos 98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $168 $161 $327 $319 4% 3%
Total operating expense 111 110 223 219 --% 2%
Income before taxes 55 48 99 93 17% 7%
Return on common equity 21% 19% 19% 18%
Pretax operating margin (a) 41 37 38 37
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Regional Consumer Banking includes consumer lending and deposit products, direct
banking and sales of insurance products. Income before taxes for this sector
totaled $55 million in the second quarter of 1999, an increase of $7 million, or
17%, compared with the second quarter of 1998. Total revenue increased $7
million, or 4%, due primarily to increased fee revenue. Total operating expense
was essentially unchanged compared with the prior-year period reflecting the
impact of initiatives to improve productivity and operating leverage.
Income before taxes for this sector was $99 million, an increase of $6 million,
or 7% for the first six months of 1999 compared with the first six months of
1998. This increase is due primarily to the factors responsible for the second
quarter 1999 increase as well as a $2 million decrease in credit quality
expense.
13
<PAGE> 15
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Specialized Commercial Banking
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Six months ended --------------------
----------------------- ----------------------- 2Q 99 6 Mos 99
(dollar amounts in millions, JUNE 30, June 30, JUNE 30, June 30, vs vs
ratios are annualized) 1999 1998 1999 1998 2Q 98 6 Mos 98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $122 $119 $253 $232 2% 9%
Total operating expense 67 63 130 124 8% 6%
Income before taxes 51 53 115 102 (7)% 11%
Return on common equity 17% 20% 20% 20%
Pretax operating margin (a) 50 54 53 52
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Specialized Commercial Banking includes middle market lending, business banking,
lease financing, commercial real estate lending, insurance premium financing,
asset-based lending and venture capital. Income before taxes for this sector
totaled $51 million in the second quarter of 1999, down $2 million, or 7%, from
the second quarter of 1998. Revenue increased $3 million, or 2%, due to higher
net interest revenue resulting from loan growth. This revenue growth was
partially offset by lower gains on the sale of equity securities than were
recorded in the second quarter of 1998. Operating expense increased $4 million,
or 8%, from the prior-year period, due to higher business volumes.
Income before taxes for this sector was $115 million for the first six months of
1999, an increase of $13 million, or 11%, compared to the prior-year period.
Revenue increased $21 million, or 9%, due to increased net interest revenue
resulting from loan growth and the Mellon 1st Business Bank acquisition in
February 1998. The $6 million, or 6%, increase in operating expense is primarily
due to the Mellon 1st Business Bank acquisition, and higher business volumes as
previously noted.
Large Corporate Banking
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Six months ended --------------------
----------------------- ----------------------- 2Q 99 6 Mos 99
(dollar amounts in millions, JUNE 30, June 30, JUNE 30, June 30, vs vs
ratios are annualized) 1999 1998 1999 1998 2Q 98 6 Mos 98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $140 $127 $267 $253 11% 6%
Total operating expense 87 85 171 169 3% 1%
Income before taxes 47 42 90 84 14% 9%
Return on common equity 13% 11% 12% 11%
Pretax operating margin (a) 38 38 38 38
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Large Corporate Banking includes cash management, large corporate and
institutional lending, corporate finance and derivative products, securities
underwriting and trading and international banking. Income before taxes was $47
million for the second quarter of 1999, an increase of $5 million, or 14%, from
the second quarter of 1998. An increase in credit quality expense was more than
offset by revenue growth of 11%, while operating expenses increased just 3%. The
revenue growth was driven by higher cash management fee revenue.
14
<PAGE> 16
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Income before taxes for this sector was $90 million in the first six months of
1999, an increase of $6 million, or 9%, compared with the prior-year period.
Revenue increased 6% while expenses increased just 1%. The revenue growth was
driven primarily by higher cash management revenue, while the favorable expense
trend reflects cost control efforts.
Completed/Pending Divestitures
Completed/Pending Divestitures includes residential and commercial mortgage loan
origination and servicing; credit card; merchant card processing; and network
services transaction processing; and, 1998 results include the fee revenue from
the electronic filing of income tax returns service, which was discontinued at
the end of 1998. 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 at the end of May 2000.
Completed/Pending Divestitures income before taxes was $80 million in the second
quarter of 1999 and $23 million in the second quarter of 1998. The second
quarter and first six months of 1999 include the $59 million and $142 million,
respectively, of net gains from completed and pending divestitures, as further
discussed in "Significant financial events" on pages 5 and 6.
Real Estate Workout/Other Activity
Real Estate Workout/Other 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
Activity sector's pretax loss for the second quarter of 1999 was $48 million,
compared with income of $11 million in the second 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. The second quarter of 1999 includes $56
million of nonrecurring expenses related to a $30 million charitable
contribution to the Mellon Bank Foundation and $26 million of expenses as part
of the Mellon Third Century strategic initiatives. Average assets primarily
include assets of certain support areas not identified with the major business
sectors. Average common and Tier I preferred equity represents capital in excess
of that required for the core sectors.
15
<PAGE> 17
BUSINESS SECTORS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE QUARTERS ENDED JUNE 30, AND MARCH 31,
Global Global Regional Specialized
Wealth Investment Investment Consumer Commercial
Management Management Services Banking Banking
------------- --------------- --------------- --------------- ---------------
(dollar amounts in millions, 2ND Q 1st Q 2ND Q 1st Q 2ND Q 1st Q 2ND Q 1st Q 2ND Q 1st Q
averages in billions) 1999 1999 1999 1999 1999 1999 1999 1999 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net interest revenue (expense) $ 39 $ 37 $ (2) $ (3) $ 12 $ 12 $ 122 $ 124 $ 101 $ 99
Fee revenue 82 76 246 236 229 216 46 35 21 32
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue 121 113 244 233 241 228 168 159 122 131
Credit quality expense (revenue) -- (2) -- -- -- -- 2 3 4 4
Operating expense:
Intangible amortization 5 5 7 8 3 3 12 12 8 7
Trust-preferred securities 1 -- -- -- -- -- 1 1 2 3
Other 60 60 152 150 181 175 98 99 57 53
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expense 66 65 159 158 184 178 111 112 67 63
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of accounting
change 55 50 85 75 57 50 55 44 51 64
Income taxes (benefits) 21 19 35 31 23 20 20 17 20 24
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change 34 31 50 44 34 30 35 27 31 40
Cumulative effect of accounting
change (a) -- -- -- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 34 $ 31 $ 50 $ 44 $ 34 $ 30 $ 35 $ 27 $ 31 $ 40
- ----------------------------------------------------------------------------------------------------------------------------------
Cash net income (loss) (b) $ 39 $ 35 $ 55 $ 49 $ 37 $ 33 $ 44 $ 36 $ 38 $ 46
- ----------------------------------------------------------------------------------------------------------------------------------
Average assets $6.3 $6.1 $2.0 $1.9 $1.7 $1.7 $14.2 $14.1 $12.0 $11.7
Average common equity $0.4 $0.4 $0.5 $0.5 $0.5 $0.5 $ 0.6 $ 0.7 $ 0.7 $ 0.7
Average Tier I preferred equity $ -- $ -- $ -- $ -- $ -- $ -- $ 0.1 $ 0.1 $ 0.1 $ 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
Return on shareholders' equity (c) 37% 34% 38% 36% 28% 26% 21% 16% 17% 23%
Return on assets (c) 2.16% 2.03% NM NM NM NM 0.98% 0.78% 1.05% 1.38%
Pretax operating margin 46% 44% 35% 32% 23% 22% 33% 28% 42% 49%
Pretax operating margin (d) 50% 49% 38% 36% 25% 23% 41% 36% 50% 57%
Efficiency ratio (d) 50% 53% 62% 64% 75% 77% 58% 63% 47% 40%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cumulative effect of an accounting change has not been allocated to any
of the Corporation's reportable sectors.
(b) Excludes the after-tax impact of amortization of goodwill and other
intangibles from purchase acquisitions.
(c) Annualized.
(d) Excludes amortization of intangibles and trust-preferred securities
expense.
(e) Includes $59 million and $83 million, respectively, in net gains from
pending and completed divestitures for the quarters ended June 30, 1999 and
March 31, 1999.
(f) Ratios exclude the impact of the net divestiture gains and nonrecurring
expenses.
NM - Not meaningful.
16
<PAGE> 18
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Large Completed/ Real Estate
Corporate Total Core Pending Workout/Other Consolidated
Banking Sectors Divestitures Activity Results
---------------- ---------------- ---------------- ------------------- ---------------
2ND Q 1st Q 2ND Q 1st Q 2ND Q 1st Q 2ND Q 1st Q 2ND Q 1st Q
1999 1999 1999 1999 1999 1999 1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 70 $ 65 $ 342 $ 334 $ 15 $ 28 $ 6 $ 9 $ 363 $ 371
70 62 694 657 152 (e) 196 (e) 6 29 852 882
- --------------------------------------------------------------------------------------------------------------------------------
140 127 1,036 991 167 224 12 38 1,215 1,253
6 -- 12 5 1 10 (8) -- 5 15
1 -- 36 35 1 2 -- -- 37 37
5 6 9 10 -- 1 10 9 19 20
81 78 629 615 85 107 58 1 772 723
- --------------------------------------------------------------------------------------------------------------------------------
87 84 674 660 86 110 68 10 828 780
- --------------------------------------------------------------------------------------------------------------------------------
47 43 350 326 80 104 (48) 28 382 458
17 16 136 127 28 42 (20) 9 144 178
- --------------------------------------------------------------------------------------------------------------------------------
30 27 214 199 52 62 (28) 19 238 280
-- -- -- -- -- -- -- -- -- (26)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 30 $ 27 $ 214 $ 199 $ 52 $ 62 $(28) $ 19 $ 238 $ 254
- --------------------------------------------------------------------------------------------------------------------------------
$ 30 $ 27 $ 243 $ 226 $ 53 $ 64 $(28) $ 19 $ 268 $ 283
- --------------------------------------------------------------------------------------------------------------------------------
$9.6 $9.7 $ 45.8 $45.2 $2.7 $4.0 $1.3 $1.5 $ 49.8 $ 50.7
$1.0 $1.0 $ 3.7 $ 3.8 $0.2 $0.3 $0.5 $0.4 $ 4.4 $ 4.5
$0.3 $0.3 $ 0.5 $ 0.5 $ -- $ -- $0.5 $0.5 $ 1.0 $ 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
13% 11% 23% 22% NM NM NM NM 22% 23%
1.27% 1.15% 1.87% 1.79% NM NM NM NM 1.92% 2.03%
34% 34% 34% 33% NM NM NM NM 33% (f) 32% (f)
38% 39% 38% 37% NM NM NM NM 38% (f) 37% (f)
58% 61% 61% 62% NM NM NM NM 62% (f) 62% (f)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Income before taxes for the Corporation's core sectors increased $24 million, or
7%, or at an annualized rate of 29%, in the second quarter of 1999 compared to
the first quarter of 1999. This increase resulted from strong operating leverage
across all sectors except Specialized Commercial Banking, as revenues increased
$45 million, or 18% on an annualized basis, while expenses increased only $14
million, or 9% on an annualized basis, and credit quality expense increased $7
million. The revenue growth was driven by increased institutional trust and
custody fees, higher mutual fund management fees, increased cash management
revenue, higher private asset management revenue and higher benefits consulting
and administration fees.
Income before taxes for the Wealth Management sector increased $5 million, or
11%, in the second quarter of 1999 compared to the first quarter of 1999. This
increase resulted from revenue growth of 6% while expenses were virtually
unchanged. The revenue increase was driven primarily by higher private asset
management fees as private assets under management increased by $5 billion, or
7%, from March 31, 1999.
Income before taxes for the Global Investment Management sector increased $10
million, or 11% in the second quarter of 1999 compared to the first quarter of
1999. Revenue increased 4% while expenses were virtually unchanged. The revenue
growth was due primarily to higher mutual fund management fees.
17
<PAGE> 19
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Income before taxes for the Global Investment Services sector increased $7
million, or 12%, in the second quarter of 1999 compared with the first quarter
of 1999. Revenue increased 6% due to higher administration and custody fee
revenue and increased fees from benefits consulting and administrative services.
Total expenses increased 4% in support of business growth.
Income before taxes for the Regional Consumer Banking sector increased $11
million or 27% in the second quarter of 1999 compared to the first quarter of
1999. Revenue increased 6%, while expenses decreased 2%. Revenue increased
primarily due to higher fee revenue. The expense trend reflects continued cost
control efforts.
Income before taxes for the Specialized Commercial Banking sector decreased $13
million in the second quarter of 1999 compared to the first quarter of 1999. The
decline is primarily due to higher venture capital and lease residual gains in
the first quarter of 1999.
Income before taxes for the Large Corporate Banking sector increased $4 million,
or 12%, in the second quarter of 1999 compared with the first quarter of 1999.
Revenue increased 12%, expenses increased 4%, and credit quality expense
increased by $6 million. The revenue growth was driven primarily by higher cash
management revenue.
18
<PAGE> 20
<TABLE>
<CAPTION>
NONINTEREST REVENUE
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
-------------------------------------- -----------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust and investment fee revenue:
Investment management $ 284 $ 278 $ 227 $ 562 $ 429
Administration and custody 147 139 137 286 269
Benefits consulting 61 56 54 117 106
Brokerage fees 16 15 11 31 21
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 508 488 429 996 825
Cash management and deposit transaction charges 70 66 65 136 126
Mortgage servicing fees 51 52 53 103 108
Foreign currency and securities trading revenue 45 43 38 88 79
Credit card fees -- 18 23 18 47
Information services fees 18 13 10 31 21
Other 95 109 94 204 204
- ----------------------------------------------------------------------------------------------------------------------------------
Total fee revenue 787 789 712 1,576 1,410
Net gain from divestitures 59 83 -- 142 -
Gains on the sale of securities -- -- 1 -- 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue $ 846 $ 872 $ 713 $1,718 $1,411
- ----------------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of net interest and
fee revenue (FTE) 69% 68% 66% 68% 66%
Trust and investment fee revenue as a percentage
of net interest and fee revenue (FTE) 44% 42% 39% 43% 38%
Assets under management (in billions)(a) $ 426 $ 406 $ 350
Assets under administration or
custody (in billions)(a) 2,061 1,928 1,791
- ---------------------------------------------------------------------------------------------------
<CAPTION>
2nd Qtr. 1999 2nd Qtr. 1999 Six Mo. 1999
over over over
2nd Qtr. 1998 1st Qtr. 1999 Six Mo. 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust and investment fee revenue growth (b) 12% 17%(c) 13%
Total fee revenue growth (b) 10% 8%(c) 11%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Period-end amount.
(b) Excluding credit card fees, the effect of acquisitions and fees from the
electronic filing of income tax returns.
(c) Presented on an annualized basis.
Fee revenue
Fee revenue increased $75 million, or 11%, in the second quarter of 1999
compared with the second quarter of 1998. Excluding credit card fees from the
second quarter of 1998 and fee revenue resulting from the October 1998 Newton
acquisition, fee revenue increased 10% compared with the prior-year period. This
increase was attributable to higher trust and investment revenue, up 12% over
the prior-year period, excluding the impact of the Newton acquisition.
19
<PAGE> 21
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Total trust and investment fee revenue
The $79 million, or 19%, increase in trust and investment fee revenue in the
second quarter of 1999, compared with the prior-year period, reflects a $57
million increase in investment management revenue, a $10 million increase in
administration and custody revenue, a $7 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 Newton
acquisition. Excluding the revenue from this acquisition, trust and investment
fee revenue increased 12% compared with the second quarter of 1998. Including
the trust and investment fee gross revenue generated by the Corporation's joint
ventures, trust and investment fee revenue increased 15% compared with the
second quarter of 1998.
Investment management fee revenue
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
-------------------------------------- -----------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed mutual fund fees (a):
Equity funds $ 65 $ 61 $ 48 $126 $ 81
Taxable money market funds:
Institutional 27 25 21 52 39
Individuals 9 9 8 18 16
Tax-exempt bond funds 23 23 23 46 47
Fixed-income funds 12 12 9 24 16
Tax-exempt money market funds 7 8 7 15 14
Nonproprietary 6 6 4 12 7
- ----------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund fees 149 144 120 293 220
Private asset 73 71 54 144 106
Institutional asset 62 63 53 125 103
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment management fee revenue $284 $278 $227 $562 $429
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of quarterly mutual fund fees waived and fund expense reimbursements of
$9 million, $8 million and $10 million at June 30, 1999, March 31, 1999,
and June 30, 1998, respectively. Net of year-to-date fees waived and fund
expense reimbursements of $17 million and $21 million at June 30, 1999, and
June 30, 1998, respectively.
The $57 million increase in investment management revenue in the second quarter
of 1999, compared with the prior-year period, resulted from a $29 million, or
25%, increase in mutual fund management revenue, a $19 million, or 34%, increase
in private asset management revenue and a $9 million, or 18%, increase in
institutional asset management revenue. These increases resulted from the Newton
acquisition, net new business and an increase in the market value of assets
under management. Excluding the revenue from the Newton acquisition, mutual fund
management revenue increased $15 million or 13%, private asset management
revenue increased $9 million or 16%, institutional asset management increased $1
million or 1%, and total investment management revenue increased $25 million, or
11%, in the second quarter of 1999 compared with the prior-year period.
Mutual fund management fees are based upon the average net assets of each fund.
The average net assets of proprietary funds managed at Dreyfus/Founders/Newton
in the second quarter of 1999 were $126 billion, up $17 billion from $109
billion in the second quarter of 1998 and up $1 billion from $125 billion in the
first quarter of 1999. The increase from the second quarter of 1998 primarily
resulted from increases in average net assets of
20
<PAGE> 22
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
equity funds and institutional taxable money market funds. Proprietary equity
funds averaged $44 billion in the second quarter of 1999, compared with $33
billion in the second quarter of 1998 and $42 billion in the first quarter of
1999.
As shown in the table below, the market value of trust assets under management
was $426 billion at June 30, 1999, a $20 billion increase from $406 billion at
March 31, 1999, and a $76 billion increase from $350 billion at June 30, 1998.
This increase resulted from net new business and a general market increase. At
June 30, 1999, compared to March 31, 1999, the S&P 500 Index increased 6.7%
while the Lehman Brothers Long-Term Government Bond Index decreased 2.4%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in billions) 1999 1999 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mutual fund assets managed:
Equity funds $ 46 $ 43 $ 40 $ 30 $ 34
Taxable money market funds:
Institutional 39 40 40 38 35
Individuals 9 9 9 9 8
Tax-exempt bond funds 16 16 16 17 16
Fixed-income funds 7 8 7 7 7
Tax-exempt money market funds 8 8 8 8 8
Nonproprietary 26 23 21 16 17
- ----------------------------------------------------------------------------------------------------------------------------------
Total mutual fund assets managed 151 147 141 125 125
Private asset 55 50 47 37 41
Institutional asset (a) 220 209 201 172 184
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $426 $406 $389 $334 $350
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes assets managed at Pareto Partners of $28 billion at June 30, 1999;
$28 billion at March 31, 1999; $24 billion at December 31, 1998; $24
billion at September 30, 1998; and $25 billion at June 30, 1998. The
Corporation has a 30% equity interest in Pareto Partners.
At June 30, 1999, the combined market values of $26 billion of nonproprietary
mutual funds and $220 billion of institutional assets managed, by asset type,
were as follows: equities, $104 billion; balanced, $44 billion; fixed income,
$42 billion; money market, $28 billion; and $28 billion at Pareto Partners,
primarily in currency overlay and global fixed-income products, for a total of
$246 billion.
Administration and custody fee revenue
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
-------------------------------------- -----------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust $104 $100 $ 98 $204 $193
Mutual fund 38 34 34 72 67
Private asset 5 5 5 10 9
- ----------------------------------------------------------------------------------------------------------------------------------
Total administration and custody fee revenue $147 $139 $137 $286 $269
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 23
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
As shown in the table on the prior page, administration and custody fee revenue
increased $10 million, or 7%, in the second quarter of 1999 compared with the
second quarter of 1998. This increase resulted from a $6 million, or 7%,
increase in institutional trust and custody revenue, primarily the result of net
new business and higher transaction volumes, and a $4 million, or 8%, increase
in mutual fund administration revenue. The growth within institutional trust and
custody revenue was tempered by the contribution of business to the
Russell/Mellon Analytical Services Inc. and the CIBC Mellon Global Securities
Services joint ventures. The results of these joint ventures are accounted for
under the equity method of accounting, which reports the results of the joint
ventures on a net basis, rather than reporting the revenues and expenses
separately. The table below shows institutional trust and custody fee revenue
including the gross revenue generated by the Corporation's joint ventures that
provide institutional trust and custody services. Including the institutional
trust and custody gross revenue generated by the Corporation's joint ventures
that provide institutional trust and custody services, institutional trust and
custody revenue increased $23 million, or 22%, compared with the second quarter
of 1998 and $6 million, or 4%, or at an annualized rate of 15%, compared with
the first quarter of 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
INSTITUTIONAL TRUST AND -------------------------------------- -----------------------
CUSTODY FEE REVENUE JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total institutional trust and custody fee
revenue - as reported $104 $100 $ 98 $204 $193
Adjustment to reflect joint venture revenue 28 26 11 54 21
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted institutional trust and custody fee revenue $132 $126 $109 $258 $214
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mutual fund administration and custody fees are expected to be impacted
beginning in the second quarter of 2000 as a long-term contract with a third
party expires at the end of May 2000. Fees from this contract totaled
approximately $22 million in the second quarter of 1999.
The market value of assets under administration/custody, shown in the table
below, was $2,061 billion at June 30, 1999, an increase of $133 billion compared
with $1,928 billion at March 31, 1999, and an increase of $270 billion compared
with $1,791 billion at June 30, 1998. This increase resulted from net new
business and a general market increase.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in billions) 1999 1999 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust (a) $1,954 $1,826 $1,803 $1,556 $1,701
Mutual fund 73 69 62 52 54
Private asset 34 33 38 34 36
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $2,061 $1,928 $1,903 $1,642 $1,791
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $327 billion of assets at June 30, 1999; $218 billion of assets at
March 31, 1999; $244 billion of assets at December 31, 1998; $265 billion
of assets at September 30, 1998; and $316 billion of assets at June 30,
1998, administered by CIBC Mellon Global Securities Services, a joint
venture.
22
<PAGE> 24
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Benefits consulting and brokerage fees
Benefits consulting fees increased $7 million, or 14%, in the second 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,
or 38%, increase in brokerage fees primarily resulted from higher trading
volumes. Dreyfus Brokerage Services, Inc. averaged approximately 9,800 trades
per day in the second quarter of 1999, compared with approximately 9,600 trades
per day in the first quarter of 1999 and approximately 5,900 trades per day in
the second quarter of 1998.
Cash management and deposit transaction charges
The $5 million, or 7%, increase in cash management fees and deposit transaction
charges in the second quarter of 1999, compared with the prior-year period,
primarily resulted from higher volumes.
Mortgage servicing fees
Mortgage servicing fees decreased $2 million, or 4%, in the second quarter of
1999, compared with the second quarter of 1998. This decrease primarily resulted
from a lower principal balance of mortgages serviced. The Corporation currently
expects to complete the divestitures of the mortgage businesses by the end of
the third quarter of 1999.
Foreign currency and securities trading revenue
The $7 million, or 19%, increase in foreign currency and securities trading
revenue in the second quarter of 1999, compared with the second quarter of 1998,
was primarily related to growth in the number of foreign exchange customers and
related volumes.
Credit card fees
The absence of credit card fees in the second quarter of 1999 resulted from the
divestiture of the credit card business.
Information services fees
Information services fees totaled $18 million in the second quarter of 1999, an
increase of $8 million, or 78%, compared with the second quarter of 1998. This
increase was primarily related to higher shareholder services revenue.
Information services fees include the fee revenue generated by the network
services transaction processing unit that was sold on June 30, 1999. This
business generated approximately $14 million and $27 million of fee revenue,
respectively, in the second quarter and first six months of 1999.
As discussed previously, the Corporation has entered into several joint
ventures, including shareholder services, global custody and asset management
joint ventures. The Corporation's joint ventures generated approximately $115
million of gross fee revenue in the second quarter of 1999, compared with
approximately $100 million in the first quarter of 1999 and approximately $70
million in the second quarter 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.
23
<PAGE> 25
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Other fee revenue
Other fee revenue was $95 million in the second quarter of 1999, an increase of
$1 million compared with the second quarter of 1998.
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 pages 5 and 6. 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 18.
Net gain from divestitures
In the second quarter and first quarter of 1999, the Corporation recorded a $59
million and an $83 million, respectively, pre-tax net gain from completed and
pending divestitures. For further analysis of net gain from divestitures, see
the "Completed and pending divestitures" disclosure in the "Significant
financial events" section on pages 5 and 6.
Second quarter 1999 compared with first quarter 1999
Fee revenue, excluding credit card revenue, increased $16 million, or 2%, or at
an annualized rate of 8%, compared with the first quarter of 1999. This increase
resulted from growth in trust and investment fee revenue. Compared with the
first quarter of 1999, trust and investment fee revenue increased 4%, or at an
annualized rate of 17%.
Year-to-date 1999 compared with year-to-date 1998
Fee revenue totaled $1.576 billion in the first six months of 1999, a $166
million increase compared with $1.410 billion in the first six months of 1998.
This increase primarily resulted from the same factors responsible for the
second quarter of 1999 increase as compared to the second quarter of 1998 as
well as fee revenue resulting from the acquisition of Founders Asset Management
in April of 1998. This increase was partially offset by the elimination of fees
from the electronic filing of income tax returns, a service that was
discontinued at the end of 1998. Excluding credit card fees, fee revenue
resulting from acquisitions and the fees from the electronic filing of income
tax returns in the first six months of 1998, fee revenue increased 11% compared
with the first six months of 1998.
24
<PAGE> 26
NET INTEREST REVENUE
- --------------------------------------------------------------------------------
Net interest revenue on a fully taxable equivalent basis for the second quarter
of 1999 totaled $363 million compared with $374 million in the second quarter of
1998 and $371 million in the first quarter of 1999. The net interest margin was
3.74% in the second quarter of 1999, compared with 3.97% in the second quarter
of 1998 and 3.78% in the first quarter of 1999. The $11 million and $8 million
decreases, respectively, in net interest revenue on a fully taxable equivalent
basis in the second quarter of 1999, compared with the prior periods, resulted
from the sale of the credit card business. Excluding the net interest revenue
generated by the credit card business in the prior periods, net interest revenue
increased $4 million compared with the second quarter of 1998 and $7 million
compared with the first quarter of 1999, reflecting a higher level of interest
free funds.
The Corporation sold its credit card business on March 31, 1999, and currently
expects to complete the sale of its residential mortgage servicing business by
the end of the third quarter of 1999, as discussed further in the "Significant
financial events" section on pages 5 and 6. 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
divestiture of the residential mortgage servicing business totaled approximately
$700 million at June 30, 1999.
Year-to-date 1999 compared with year-to-date 1998
Net interest revenue and the net interest margin, on a taxable equivalent basis,
were $734 million and 3.76%, respectively, in the first half of 1999, compared
with $741 million and 4.02%, respectively, in the first half of 1998. The $7
million decrease in net interest revenue on a fully taxable equivalent basis
resulted from the sale of the credit card business, partially offset by a higher
level of interest free funds. Excluding the net interest revenue generated by
the credit card business in the first quarter of 1999 and first half of 1998,
net interest revenue increased $6 million compared with the first six months of
1998.
25
<PAGE> 27
NET INTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended
---------------------------------------------------
JUNE 30, 1999 June 30, 1998
AVERAGE AVERAGE Average Average
(dollar amounts in millions) BALANCE YIELDS/RATES balance yields/rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets Interest-earning assets:
Interest-bearing deposits with banks $ 763 4.78% $ 611 5.09%
Federal funds sold and securities under resale agreements 550 5.20 910 5.55
Other money market investments 52 4.39 133 5.57
Trading account securities 353 5.02 240 5.98
Securities:
U.S. Treasury and agency securities (a) 6,473 6.46 5,230 6.84
Obligations of states and political subdivisions (a) 115 6.68 38 7.82
Other (a) 95 7.24 137 6.91
Loans, net of unearned discount (a) 30,980 7.40 29,827 8.02
------- -------
Total interest-earning assets 39,381 7.14 37,126 7.72
Cash and due from banks 3,113 3,250
Premises and equipment 572 562
Customers' acceptance liability 115 107
Net acquired property 36 59
Other assets (a) 7,427 6,424
Reserve for credit losses (457) (496)
------------------------------------------------------------------------------------------------------------------
Total assets $50,187 $47,032
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Interest-bearing liabilities:
trust-preferred Deposits in domestic offices:
securities and Demand $ 369 1.82% $ 328 2.28%
shareholders' Money market and other savings accounts 12,241 2.77 10,936 2.91
equity Retail savings certificates 6,783 4.55 7,638 5.02
Other time deposits 1,552 5.06 1,898 5.57
Deposits in foreign offices 2,993 4.34 2,646 4.92
-------- --------
Total interest-bearing deposits 23,938 3.60 23,446 4.03
Federal funds purchased and securities under
repurchase agreements 2,588 4.68 2,013 5.40
Short-term bank notes 689 5.01 304 5.72
U.S. Treasury tax and loan demand notes 577 4.59 552 5.33
Term federal funds purchased 494 5.04 467 5.73
Commercial paper 145 5.31 219 5.57
Other funds borrowed 426 7.76 350 9.00
Notes and debentures (with original maturities over one year) 3,369 6.61 2,900 6.94
-------- --------
Total interest-bearing liabilities 32,226 4.14 30,251 4.54
Total noninterest-bearing deposits 9,783 9,693
Acceptances outstanding 115 107
Other liabilities (a) 2,650 1,985
------------------------------------------------------------------------------------------------------------------
Total liabilities 44,774 42,036
------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991 991
------------------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 4,422 4,005
------------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $50,187 $47,032
- ------------------------------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.14% 7.72%
Cost of funds supporting interest-earning assets 3.38 3.70
------------------------------------------------------------------------------------------------------------------
Net interest margin:
Taxable equivalent basis 3.76% 4.02%
Without taxable equivalent increments 3.74 4.00
------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts and yields exclude adjustments to fair value required by FAS No.
115.
Note: Average rates are annualized and calculated on a taxable equivalent basis,
at tax rates approximating 35%, using
26
<PAGE> 28
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999 March 31, 1999 Dec. 31, 1998 Sept. 30, 1998 June 30, 1998
AVERAGE AVERAGE Average Average Average Average Average Average Average Average
BALANCE YIELDS/RATES balance yields/rates balance yields/rates balance yields/rates balance yields/rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 750 4.71% $ 776 4.85% $ 797 5.27% $ 575 5.27% $ 569 4.93%
635 5.47 465 4.84 663 4.97 665 7.06 853 5.52
60 4.22 45 4.63 65 4.73 111 5.17 175 5.12
414 4.87 291 5.25 258 6.31 266 6.64 239 5.60
6,442 6.40 6,505 6.52 5,878 6.44 5,543 6.61 5,385 6.72
118 6.44 112 6.94 86 6.88 53 7.26 45 6.67
93 7.38 97 7.11 101 6.70 106 6.99 126 6.93
30,501 7.30 31,465 7.50 31,503 7.75 30,421 8.05 30,281 8.05
------- ------- ------- ------- -------
39,013 7.05 39,756 7.24 39,351 7.44 37,740 7.76 37,673 7.72
3,078 3,148 3,165 3,115 3,281
570 574 573 562 562
116 114 160 106 92
36 36 39 60 68
7,365 7,488 7,244 6,794 6,721
(416) (498) (501) (501) (499)
- ------------------------------------------------------------------------------------------------------------------------------------
$49,762 $50,618 $50,031 $47,876 $47,898
- ------------------------------------------------------------------------------------------------------------------------------------
$ 369 2.07% $ 367 1.57% $ 365 1.13% $ 354 2.18% $ 347 2.14%
12,477 2.79 12,002 2.75 11,646 2.84 11,073 2.96 11,069 2.91
6,644 4.47 6,923 4.63 7,374 4.78 7,699 4.99 7,680 5.01
1,244 4.90 1,864 5.17 2,558 5.48 2,071 5.64 2,092 5.55
2,722 4.29 3,268 4.38 2,898 4.71 2,847 5.18 2,740 4.86
------- ------- ------- ------- -------
23,456 3.54 24,424 3.67 24,841 3.88 24,044 4.09 23,928 4.03
2,279 4.70 2,901 4.67 2,423 4.84 2,373 5.94 2,257 5.38
846 4.98 531 5.07 296 5.45 275 5.69 296 5.68
584 4.58 571 4.60 679 4.65 630 5.37 684 5.32
508 5.04 479 5.04 258 5.48 271 5.74 388 5.63
157 5.35 133 5.25 336 5.21 164 5.57 237 5.55
417 7.23 435 8.26 409 9.14 344 9.18 352 9.16
3,387 6.55 3,351 6.67 3,164 6.70 3,003 6.81 3,003 6.88
-------- -------- -------- --------- --------
31,634 4.08 32,825 4.19 32,406 4.35 31,104 4.62 31,145 4.53
9,902 9,663 9,651 9,355 9,620
116 114 160 106 92
2,705 2,594 2,484 2,095 1,968
- ------------------------------------------------------------------------------------------------------------------------------------
44,357 45,196 44,701 42,660 42,825
- ------------------------------------------------------------------------------------------------------------------------------------
991 991 991 991 991
- ------------------------------------------------------------------------------------------------------------------------------------
4,414 4,431 4,339 4,225 4,082
- ------------------------------------------------------------------------------------------------------------------------------------
$49,762 $ 50,618 $50,031 $ 47,876 $ 47,898
- ------------------------------------------------------------------------------------------------------------------------------------
7.05% 7.24% 7.44% 7.76% 7.72%
3.31 3.46 3.58 3.81 3.75
- ------------------------------------------------------------------------------------------------------------------------------------
3.74% 3.78% 3.86% 3.95% 3.97%
3.71 3.76 3.84 3.93 3.95
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
27
<PAGE> 29
OPERATING EXPENSE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
-------------------------------------- -----------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1999 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Staff expense $397 $391 $355 $ 788 $ 712
Professional, legal and other purchased services 73 71 67 144 128
Net occupancy expense 64 61 59 125 115
Equipment expense 63 41 41 104 80
Amortization of mortgage servicing assets and
purchased credit card relationships 37 42 44 79 89
Amortization of goodwill and other intangible assets 37 37 35 74 65
Communications expense 30 29 26 59 52
Business development 64 33 42 97 78
Other expense 44 55 52 99 99
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-preferred
securities expense and net revenue from
acquired property 809 760 721 1,569 1,418
Trust-preferred securities expense 19 20 19 39 39
Net revenue from acquired property (5) -- (2) (5) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expense $823 $780 $738 $1,603 $1,454
- ------------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 28,700 29,100 28,600 28,900 28,200
- ------------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 65% 65% 66% 65% 66%
Efficiency ratio excluding amortization of
goodwill and other intangible assets 62% 62% 63% 62% 63%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
2nd Qtr. 1999 2nd Qtr. 1999 Six Mo. 1999
over over over
2nd Qtr. 1998 1st Qtr. 1999 Six Mo. 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense growth (b) 2% 3% (c) 3%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before trust-preferred securities expense, net revenue
from acquired property and second quarter 1999 nonrecurring expenses, as a
percentage of revenue, computed on a taxable equivalent basis, excluding
the net gain on divestitures and the sale of securities.
(b) Operating expense before trust-preferred securities expense and net revenue
from acquired property, excluding nonrecurring expenses, the effect of
acquisitions and the credit card divestiture.
(c) Presented on an annualized basis.
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $809 million in the second quarter of 1999, including $56
million of nonrecurring expenses. In the second quarter of 1999, the Corporation
recorded a $30 million expense for a charitable contribution to the Mellon Bank
Foundation. This expense was classified as business development expense. In
addition, the Corporation recorded $26 million of expenses in connection with
replacing obsolete computer equipment and closing facilities as part of Mellon's
Third Century initiatives, a strategic planning process designed to drive
long-term growth in the Corporation while continuing to produce high returns on
capital. The Third Century expenses were recorded as $21 million of equipment
expense and $5 million of net occupancy expense. Excluding these expenses, the
effect of acquisitions and expenses related to the credit card business,
operating expense before trust-preferred securities expense and net revenue from
acquired property increased 2% compared with the second quarter of 1998.
28
<PAGE> 30
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
As with the sale of the credit card business, the sale of the Corporation's
network services transaction processing unit and mortgage businesses will impact
all expense categories, particularly staff expense and amortization of mortgage
servicing assets and purchased credit card relationships.
Second quarter 1999 compared with first quarter 1999
Excluding the nonrecurring expenses and expenses related to the credit card
business, operating expense before trust preferred securities expense and net
revenue from acquired property increased 1%, or at an annualized rate of 3%, in
the second quarter of 1999 compared with the first quarter of 1999. This
increase primarily resulted from business growth.
Year-to-date 1999 compared with year-to-date 1998
Operating expense before trust-preferred securities expense and net revenue from
acquired property increased $151 million in the first six months of 1999
compared with the prior-year period. This increase resulted from the same
factors responsible for the second quarter of 1999 increase as compared with the
second quarter of 1998. Excluding the effect of the nonrecurring expenses,
acquisitions and expenses related to the credit card business, operating expense
before trust-preferred securities expense and net revenue from acquired property
increased less than 3% compared with the prior-year period.
Year 2000 Project
In early 1996, the Corporation formed a year 2000 project team to identify
information technology and non-information technology systems that require
modification for the year 2000. A project plan has been developed with goals and
target dates. The Corporation's year 2000 project plan includes inventory,
assessment, remediation, system testing, enterprise testing, contingency
planning and internal certification. 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 100% 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
representative customers, integration testing between systems and testing
with third-party vendors) of mission critical information technology systems,
which testing was essentially completed at June 30, 1999. In addition, the
Corporation has completed remediation and system testing, and has essentially
completed enterprise testing, of information technology systems that the
Corporation has determined are of high business value and priority.
Additional enterprise testing will continue throughout 1999.
Non-information technology systems:
At June 30, 1999, the Corporation had completed 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. These mission critical and high business value
non-information technology systems have been determined to be year 2000
compliant based upon testing of such systems by the Corporation, information
supplied by manufacturers, or validated alternative operational methods.
29
<PAGE> 31
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
Any new technology implemented through year end 1999 will be subject to the same
year 2000 readiness process as was technology that was in place at June 30,
1999.
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 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 has developed contingency plans with respect to non-U.S.
subcustodians. 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.
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 addressed the actions that would be taken if the
approach to remediating a mission critical technology system was falling behind
schedule or would not be completed when required. Such plans principally
involved internal remediation or identifying alternate vendors. The Corporation
has 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
has enhanced its existing business recovery plans to reflect year 2000 issues
and has developed 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 recovery plans involving mission
critical processes have been reviewed, and options for addressing potential year
2000 problems have been identified. The Corporation expects to continue
validating such plans. Event planning is intended to address year 2000 risks by
actively monitoring operations during the period of time around the end of 1999
and the beginning of 2000 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 year 2000 business resumption
contingency plans or business recovery plans. Event planning is in progress and
will continue throughout 1999 and the first quarter of 2000. As part of its
Event Plan, the Corporation has announced that key retail bank locations will be
open for business on Saturday and Sunday, January 1 and 2, 2000. In early
December, the Corporation will publicize a list
30
<PAGE> 32
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
of traditional and supermarket offices that will be open for business Saturday,
January 1 and Sunday, January 2, 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 fund redemptions 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. As part of the Corporation's preparation and planning for
possible year 2000 issues, approximately $1.0 billion of short-term funds have
been replaced with floating rate funds with a maturity of approximately one
year. The Corporation expects to replace additional short-term funds with
floating rate funds with a longer maturity in the second half of 1999.
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, and possible public reaction, 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 Corporation's
plans with respect to testing of systems 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 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.
31
<PAGE> 33
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes totaled $302 million, at an effective rate of
36.9%, in the first half of 1999, compared with $233 million, at an effective
rate of 35.3%, in the first half of 1998. The Corporation's effective tax rate,
excluding the effect of the net gain from divestitures and nonrecurring
expenses, for the first half of 1999 was 36.5%. It is currently anticipated that
the effective tax rate, excluding the effect of any net gain or loss from
divestitures, will be approximately 36.5% for the remainder of 1999.
<TABLE>
<CAPTION>
ASSET/LIABILITY MANAGEMENT
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended
--------------------------------------------
JUNE 30, March 31, June 30,
(average balances in millions) 1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,445 $ 1,286 $ 1,597
Trading account securities 414 291 239
Securities 6,652 6,767 5,596
Loans 30,504 31,467 30,302
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 39,015 39,811 37,734
Noninterest-earning assets 11,167 11,364 10,730
Reserve for credit losses (416) (498) (499)
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $49,766 $50,677 $47,965
- ----------------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $40,123 $39,774 $38,328
Wholesale and purchased funds 9,643 10,903 9,637
- ----------------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $49,766 $50,677 $47,965
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $1.3 billion increase in the Corporation's average interest-earning assets
in the second quarter of 1999, compared with the second quarter of 1998,
primarily reflects a $1.1 billion increase in average securities.
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 core
assets increased $722 million in the second quarter of 1999 from the prior-year
period. Average core funds increased $1.8 billion in the second quarter of 1999
from the prior-year period, primarily reflecting higher levels of money market
and other savings deposits, notes and debentures, and shareholders' equity. Core
funds averaged 97% of core assets in the second quarter of 1999, compared with
94% in the first quarter of 1999 and 95% in the second quarter of 1998. Upon the
completion of the pending divestiture of the residential mortgage business, it
is anticipated that the ratio of core funds to core assets will increase with a
related reduction in wholesale and purchased funds.
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 were essentially unchanged compared with
the prior-year period. As a percentage of total average assets, average
wholesale and purchased funds were 19% in the second quarter of 1999, compared
with 22% in the first quarter of 1999 and 20% in the second quarter of 1998. The
diminished reliance on wholesale and purchased funds in the second quarter of
1999 compared with the prior periods reflects higher levels of interest free
funds and notes and debentures.
32
<PAGE> 34
COMPOSITION OF LOAN PORTFOLIO
- --------------------------------------------------------------------------------
The loan portfolio decreased $1,549 million and $110 million, respectively at
June 30, 1999, compared with December 31, 1998, and June 30, 1998, reflecting
the sale of the credit card business in March 1999 and a lower level of consumer
mortgages in the residential warehouse portfolio. The decreases were partially
offset by increases in business banking, middle market lending and commercial
real estate loans. At June 30, 1999, the composition of the loan portfolio was
63% commercial and 37% consumer.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1999 1999 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial and financial $12,383 $11,683 $12,060 $11,330 $11,283
Commercial real estate 2,534 2,504 2,285 2,257 2,134
Consumer credit:
Consumer mortgage 7,446 8,169 8,871 8,701 8,506
Credit card - - 804 788 830
Other consumer credit 3,800 3,950 3,700 3,745 3,582
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 11,246 12,119 13,375 13,234 12,918
Lease finance assets 2,888 2,836 2,819 2,590 2,570
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 29,051 29,142 30,539 29,411 28,905
International loans 1,493 1,412 1,554 1,641 1,749
- --------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $30,544 $30,554 $32,093 $31,052 $30,654
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial and financial
At June 30, 1999, total domestic commercial and financial loans increased by
$323 million, or 3%, compared with December 31, 1998, and by $1,100 million, or
10%, compared with June 30, 1998, primarily as a result of increases in business
banking and middle market lending. Commercial and financial loans represented
41% of the total loan portfolio at June 30, 1999, compared with 38% at December
31, 1998, and 37% at June 30, 1998.
Commercial real estate
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1999 1999 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial mortgage and construction loans $1,687 $1,649 $1,554 $1,509 $1,367
Owner-occupied and other loans (a) 847 855 731 748 767
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic commercial real estate loans $2,534 $2,504 $2,285 $2,257 $2,134
- --------------------------------------------------------------------------------------------------------------------------------
</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.
At June 30, 1999, domestic commercial real estate loans increased by $249
million, or 11%, compared with December 31, 1998, and by $400 million, or 19%,
compared with June 30, 1998, reflecting steady loan growth. Domestic commercial
real estate loans were 8% of total loans at June 30, 1999, up from 7% at both
year-end 1998 and June 30, 1998.
33
<PAGE> 35
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
Consumer mortgage
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC CONSUMER MORTGAGE LOANS
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1999 1999 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jumbo residential mortgages $3,367 $3,640 $3,821 $3,835 $3,673
One- to four-family residential mortgages:
Warehouse 670 1,102 1,588 1,622 1,514
Portfolio 654 654 858 690 839
Fixed-term home equity loans 1,908 1,975 1,801 1,781 1,777
Home equity revolving credit line loans 847 798 803 773 703
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic consumer mortgage loans $7,446 $8,169 $8,871 $8,701 $8,506
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, the domestic consumer mortgage portfolio totaled $7,446
million, a $1,425 million, or 16%, decrease from year-end 1998 and a $1,060
million, or 13%, decrease from June 30, 1998. These decreases resulted primarily
from a lower level of one- to four-family residential mortgages in the
residential warehouse portfolio. Residential warehouse loans were approximately
$900 million lower than at December 31, 1998, and approximately $850 million
lower than at June 30, 1998. Residential warehouse loans that exist at the time
of the divestiture will be sold as part of the pending divestiture 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 pages 5 and 6. The CornerStone(sm)
credit card accelerated resolution portfolio 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 $3,800 million at
June 30, 1999, an increase of $100 million, or 3%, from December 31, 1998, and
$218 million, or 6%, from June 30, 1998. The increases were primarily due to
higher levels of margin loans. Other consumer credit loans are both secured and
unsecured and, in the case of student loans, are government guaranteed. Student
loans totaled $1,706 million, or 45% of this portfolio, at June 30, 1999
compared with $1,765 million at year-end 1998 and $1,718 million at June 30,
1998.
Lease finance assets
Lease finance assets totaled $2,888 million at June 30, 1999, an increase of $69
million, or 2%, compared with December 31, 1998, and $318 million, or 12%,
compared with June 30, 1998. Lease finance assets represented 10% of the total
loan portfolio at June 30, 1999, compared with 9% at year-end 1998 and 8% at
June 30, 1998.
International loans
Loans to international borrowers totaled $1,493 million at June 30, 1999, down
$61 million, or 4%, from year-end 1998 and down $256 million, or 15%, from June
30, 1998, primarily due to decreased activity with large corporate customers and
foreign banks. There were no nonperforming international loans in any of the
periods presented.
34
<PAGE> 36
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK (a)
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit:
Expire within one year $14,287 $15,553 $14,356 $13,283
Expire within one to five years 17,111 17,322 17,440 18,657
Expire over five years 1,047 1,152 1,636 1,638
- ----------------------------------------------------------------------------------------------------------------------------------
Total 32,445 34,027 33,432 33,578
Standby letters of credit and foreign guarantees 3,578 (b) 3,671 3,830 3,696
Commercial letters of credit 139 84 86 181
Residential mortgage loans serviced with recourse 109 115 97 90
Custodian securities lent with indemnification
against broker default of return of securities 33,994 36,340 31,802 31,108
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For a discussion of off-balance-sheet financial instruments with contract
amounts that represent credit risk, see pages 97 and 98 of the 1998 Annual
Report to Shareholders.
(b) Net of participations and cash collateral totaling $354 million.
<TABLE>
<CAPTION>
CAPITAL
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA JUNE 30, March 31, Dec. 31, June 30,
(dollar amounts in millions, except per share amounts) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total shareholders' equity $ 4,303 $ 4,502 $ 4,521 $ 4,234
Total shareholders' equity to assets ratio 8.77% 9.12% 8.90% 8.92%
Tangible shareholders' equity (a) $ 2,498 $ 2,659 $ 2,641 $ 2,378
Tangible shareholders' equity to assets ratio (b) 5.29% 5.60% 5.41% 5.22%
Tier I capital ratio (c) 6.87% 6.89% 6.53% 6.51%
Total (Tier I plus Tier II) capital ratio (c) 11.18% 11.22% 10.80% 10.83%
Leverage capital ratio (c) 6.70% 6.60% 6.73% 6.65%
Total Tier I capital $ 3,199 $ 3,199 $ 3,223 $ 3,055
Total (Tier I plus Tier II) capital $ 5,209 $ 5,209 $ 5,331 $ 5,081
Total risk-adjusted assets $ 46,572 $ 46,438 $ 49,352 $ 46,934
Average assets - leverage capital basis $ 47,727 $ 48,484 $ 47,917 $ 45,919
Book value per common share (d) $ 8.37 $ 8.64 $ 8.63 $ 8.12
Tangible book value per common share (d) $ 4.86 $ 5.11 $ 5.04 $ 4.56
Closing common stock price (d) $ 36.38 $ 35.19 $ 34.38 $ 34.84
Market capitalization $ 18,704 $ 18,335 $ 18,007 $ 18,168
Common shares outstanding (000) (d) 514,211 521,064 523,846 521,416
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $64 million, $62 million, $60 million and $- million,
respectively, of minority interest, primarily related to Newton. In
addition, includes $368 million, $371 million, $373 million and $300
million, respectively, of tax benefits related to tax deductible goodwill
and other intangibles.
(b) Shareholders' equity plus minority interest less goodwill and other
intangibles recorded in connection with purchase acquisitions divided by
total assets less goodwill and other intangibles. The amount of goodwill
and other intangibles subtracted from shareholders' equity and total assets
is net of any tax benefit.
(c) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3%, respectively.
(d) Prior period amounts have been restated to reflect the two-for-one common
stock split distributed on May 17, 1999.
35
<PAGE> 37
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
On April 20, 1999, the Corporation announced a two-for-one split of the
Corporation's common stock. The two-for-one common stock split was 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 were
distributed on May 17, 1999, to shareholders of record at the close of business
on May 3, 1999.
The increase in shareholders' equity at June 30, 1999, compared with June 30,
1998, primarily reflects earnings retention partially offset by common stock
repurchases. The decrease in shareholders' equity compared with March 31, 1999,
resulted from common stock repurchases partially offset by earnings retention.
During the second quarter of 1999, 8 million shares of common stock were
repurchased, bringing year-to-date repurchases to 13.4 million shares and
leaving 6.6 million shares available for repurchase as authorized by the board
of directors in January 1999.
<TABLE>
<CAPTION>
COMMON SHARES OUTSTANDING
- --------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER YEAR TO DATE Full Year
(in millions) 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning shares outstanding 521.1 523.8 507.6
Shares issued for stock-based benefit plans and
dividend reinvestment plan 1.1 3.8 7.0
Shares issued for Mellon United National Bank acquisition -- -- 10.2
Shares repurchased (8.0)(a) (13.4)(b) (1.0)(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 514.2 514.2 523.8
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of $286 million for an average share price of $35.80 per
share.
(b) Purchase price of $469 million for an average share price of $35.03 per
share.
(c) Purchase price of $27 million for an average share price of $26.77 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 June 30,
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 Corporation's capital
ratios were favorably impacted by the sale of the credit card business and will
further benefit from the pending divestiture of the residential mortgage
business and resultant reduction in assets.
36
<PAGE> 38
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
Acquisition-related intangibles
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
ACQUISITION-RELATED INTANGIBLES JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $2,159 $2,191 $2,221 $2,050
Purchased core deposit intangibles 62 68 75 88
Other identified intangibles 16 17 17 18
- ----------------------------------------------------------------------------------------------------------------------------------
Total acquisition-related intangibles $2,237 (a) $2,276 $2,313 $2,156
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Acquisition-related intangibles at June 30, 1999, are composed of $1.047
billion of tax deductible intangibles and $1.190 billion of non-tax
deductible intangibles.
The $109 million increase in goodwill from June 30, 1998, resulted from the
Newton acquisition, partially offset by amortization expense. For the full-year
1999, using common shares and equivalents outstanding at June 30, 1999, the
after-tax impact of the annual amortization is expected to be $118 million, or
approximately $.23 per share. 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. The after-tax impact of the annual amortization for the years 2000
through 2004 is expected to be approximately $111 million, $105 million, $101
million, $99 million and $97 million, respectively.
Mortgage servicing assets and purchased credit card relationships
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSETS AND PURCHASED
CREDIT CARD RELATIONSHIPS JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage servicing assets:
Residential $1,038 $1,044 $1,046 $ 917
Commercial 31 54 69 73
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets 1,069 1,098 1,115 990
Purchased credit card relationships - - 17 20
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets and
purchased credit card relationships $1,069 $1,098 $1,132 $1,010
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation capitalized $17 million and $70 million in the second 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 sales. Mortgage
servicing assets are amortized in proportion to estimated net servicing income
over the estimated life of the servicing portfolio. Net amortization expense
totaled $37 million and $42 million in the second quarters of 1999 and 1998,
respectively. The estimated fair value of capitalized mortgage servicing assets
was approximately $1.1 billion at June 30, 1999.
37
<PAGE> 39
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
At June 30, 1999, the Corporation's total mortgage servicing portfolio was $71
billion, composed of $61 billion of residential and $10 billion of commercial
servicing. At June 30, 1998, the total mortgage servicing portfolio was $75
billion, composed of $59 billion of residential and $16 billion of commercial
servicing. The purchased credit card relationships shown in the table on the
prior page 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 on the prior page will
be included as part of this sale, which is closing on a portfolio-by-portfolio
basis and is expected to be completed during the third quarter of 1999. The
residential mortgage servicing assets shown in the table on the prior page will
be sold as part of the pending divestiture of the residential mortgage business
by the end of the third quarter of 1999. See the "Significant financial events"
section on pages 5 and 6 for a further discussion of these completed and pending
divestitures.
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 14 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.
As shown in the consolidated statement of cash flows, cash and due from banks
increased by $214 million during the first six months of 1999 to $3,140 million.
The increase resulted from $1,525 million of net cash provided by operating
activities and $876 million of net cash provided by investing activities,
primarily offset by $2,225 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 network services transaction processing
unit as well as the sales and securitizations of loans, partially offset by loan
growth and an increase in federal funds sold. Net cash used in financing
activities primarily reflected decreases in federal funds purchased and
securities under repurchase agreements, customer term deposits, and common stock
repurchases.
Contractual maturities of the Corporation's long-term bank level debt totaled
$100 million during the second quarter of 1999. Contractual maturities of
long-term debt will total approximately $266 million in the remainder of 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 table on
the following page. There were no changes to these ratings during the second
quarter of 1999 or for the past twelve months.
38
<PAGE> 40
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SENIOR AND SUBORDINATED DEBT RATINGS
AT JUNE 30, 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 $198 million in common stock dividends in the first half of
1999, compared with $177 million in the prior-year period. The common dividend
payout ratio was 44% in the second quarter of 1999, unchanged from the second
quarter of 1998. On a cash earnings per common share basis, the common dividend
payout ratio was 39% in the second quarter of 1999, unchanged from the second
quarter of 1998. Based upon shares outstanding at June 30, 1999, and the current
quarterly common dividend rate of $.20 per share, the annualized common stock
dividend cash requirement is expected to be approximately $410 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 June 30,
1999, of approximately $935 million, less any dividends declared and plus or
minus net profits or losses, as defined, between July 1, 1999, and the date of
any such dividend declaration.
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.
39
<PAGE> 41
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
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 forwards 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 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 June 30,
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 June 30, 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 42 and
43.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from June 30, 1999 rates
- ----------------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
compared with June 30, 1999: -------------------- --------------------
+50bp +100bp -50bp -100bp
-------------------- --------------------
<S> <C> <C> <C> <C>
Net interest revenue (decrease) increase (.2)% (.5)% .3% .5%
Earnings per share (decrease) increase $-- $(.01) $-- $.01
Return on common equity (decrease) increase (5) bp (10) bp 5 bp 10 bp
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 June 30, 1999, March 31, 1999, and June 30, 1998. The simulation
analysis for these 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 callable and basis swaps--caps and floors,
financial futures and forwards and financial options have been approved by the
board of directors for managing the overall corporate interest rate exposure.
The use of financial futures, forwards 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
40
<PAGE> 42
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
manage the Corporation's interest rate risk are shown in the table below.
Additional information regarding these contracts is presented in note 24 in the
Corporation's 1998 Annual Report to Shareholders.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
June 30,
(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 $ -- $207 $ -- $ -- $450 $550 $1,207
Weighted average rate:
Receive -- 5.23% -- -- 5.65% 6.67% 6.04%
Pay -- 5.00% -- -- 5.06% 4.99% 5.02%
Receive fixed/pay floating callable swaps (b):
Notional value $100 $250 $ -- $ -- $500 $100 $ 950
Weighted average rate:
Receive 6.54% 5.95% -- -- 5.41% 6.38% 5.77%
Pay 5.00% 5.00% -- -- 5.00% 5.03% 5.00%
Pay fixed/receive floating generic swaps (a):
Notional amount $ 6 $ 2 $ 2 $ 108 $ 42 $ 13 $ 173
Weighted average rate:
Receive 5.11% 4.96% 4.96% 5.44% 5.45% 5.13% 5.40%
Pay 6.36% 5.41% 5.41% 6.29% 6.35% 6.40% 6.30%
Receive floating/pay floating basis swaps:
Notional value $ -- $205 $ -- $ -- $ -- $ -- $ 205
Weighted average rate:
Receive -- 5.01% -- -- -- -- 5.01%
Pay -- 5.39% -- -- -- -- 5.39%
Other products (c) $ 9 $ 13 $ 10 $ 26 $ -- $ 35 $ 93
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $115 $677 $ 12 $ 134 $992 $698 $2,628
- ----------------------------------------------------------------------------------------------------------------------------------
</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 June 30, 1999, are shown in this table.
(c) Includes $58 million of index amortizing swaps with expected maturities
from 1999 through 2002 and weighted average receive and pay rates of 7.10%
and 5.00%, respectively.
41
<PAGE> 43
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 essentially
unchanged at June 30, 1999, compared with March 31, 1999, and approximately $2.5
billion lower compared with June 30, 1998. The decrease compared to June 30,
1998, was 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>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Instruments associated with deposits $ 159 $ 190 $3,435 $2,850
Instruments associated with other liabilities 1,105 1,278 971 765
Instruments associated with loans 1,364 1,099 1,482 1,547
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $2,628 $2,567 $5,888 $5,162
- ----------------------------------------------------------------------------------------------------------------------------------
</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 and $6 million in
the second quarter and first half of 1999, compared with $5 million and $11
million in the second quarter and first half of 1998.
Net unamortized deferred losses from off-balance-sheet instruments terminations
totaled approximately $1 million at June 30, 1999. The Corporation amortized
less than $1 million of these net deferred losses into net interest revenue in
both the second quarter and first half 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, at June 30, 1999, the Corporation had entered into approximately $10.1
billion notional amount of interest rate floor agreements and $500 million
notional amount of interest rate locks. At March 31, 1999, and June 30, 1998,
the Corporation had entered into approximately $10.2 billion and $9.1 billion
notional amount, respectively, primarily of 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 which would have an impact on the
sale price of the pending residential mortgage business divestiture. 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 June 30,
1999, was $44 million, compared with $76 million at March 31, 1999, and $137
million at June 30, 1998. The decrease in fair value compared to March 31, 1999,
and June 30, 1998, primarily reflects the impact of an increase in rates and
spreads in the second quarter of 1999.
42
<PAGE> 44
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 June 30, 1999, the Corporation
had approximately $176 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
June 30,
(dollar amounts in millions) 1999 2000 2001 2002 2003 2004+ 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate floors (notional) $ -- $-- $-- $300 $6,650 $3,100 $10,050
Weighted average strike rates -- -- -- 5.04% 5.40% 5.00% 5.26%
Fair value $ 43
Interest rate locks (notional) $500 $-- $-- $ -- $ -- $ -- $ 500
Fair value $ 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total notional amount $500 $-- $-- $300 $6,650 $3,100 $10,550
- ------------------------------------------------------------------------------------------------------------------------------------
</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
$146 million at June 30, 1999, $149 million at March 31, 1999, and $170 million
at June 30, 1998, with negative fair values of $13 million, $10 million and $6
million, respectively. The Corporation also has entered into contracts to hedge
anticipated transactions. The Corporation has entered into $205 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 negative fair value of the
contracts related to these anticipated transactions was approximately $1 million
at June 30, 1999.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at June 30, 1999, was a positive $5 million, compared
to a positive $100 million at March 31, 1999 and a positive $188 million at June
30, 1998. The decreases primarily resulted from decreases in the fair value of
interest rate swaps used to hedge interest rate risk and interest rate floors
used to hedge MSRs. These values must 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.
43
<PAGE> 45
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (a)
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(notional amounts in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management instruments (b):
Interest rate swaps $ 2,593 $2,201 $ 4,028 $5,162
Options, caps and floors purchased (c) 35 349 -- --
Futures and forward contracts - 17 1,860 --
Mortgage servicing rights risk management instruments:
Interest rate floors 10,050 9,691 10,216 7,591
Interest rate swaps -- 300 900 1,200
Principal only swaps -- -- -- 298
Interest rate and spread locks 500 250 250 --
Other products:
Total return swaps 146 149 147 170
Interest rate swaps and futures contracts hedging
anticipated transactions 205 458 365 228
- ----------------------------------------------------------------------------------------------------------------------------------
</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
$45 million at June 30, 1999, $118 million at March 31, 1999, $330 million
at December 31, 1998, and $202 million at June 30, 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 currency and interest-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 June 30, 1999, unchanged from both
March 31,1999, and June 30, 1998.
44
<PAGE> 46
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(notional amounts in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $16,146 $19,635 $17,538 $16,406
Commitments to sell 16,247 20,239 17,773 16,630
Foreign currency and other option contracts purchased 494 456 608 683
Foreign currency and other option contracts written 480 458 574 697
Interest rate agreements (b):
Interest rate swaps 18,491 13,648 11,236 9,937
Options, caps and floors purchased 730 922 753 1,024
Options, caps and floors written 954 973 929 1,202
Futures and forward contracts 6,114 9,620 7,469 8,676
Other products 31 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,
primarily foreign exchange contracts, was $530 million at June 30, 1999,
$725 million at March 31, 1999, $547 million at December 31, 1998 and $451
million at June 30, 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 Standards 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.
The effective date of this statement was delayed one year to January 1, 2001,
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, 2001. 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 Six months ended
---------------------------------- -----------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1999 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for credit losses $10 $15 $15 $25 $30
Net revenue from acquired property (5) -- (2) (5) (3)
- --------------------------------------------------------------------------------------------------------------------------------
Credit quality expense $ 5 $15 $13 $20 $27
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Credit quality expense and total net credit losses for the second quarter of
1999 were lower compared with both the second quarter of 1998 and the first
quarter of 1999. The decreases resulted from the sale of the Corporation's
credit card business in March 1999 as well as higher net revenue from acquired
property.
45
<PAGE> 47
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT
LOSSES (CONTINUED)
- --------------------------------------------------------------------------------
The $89 million decrease in the reserve for credit losses at June 30, 1999,
compared with June 30, 1998, as shown in the table below, 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 the reserve for
credit losses.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY Quarter ended Six months ended
-------------------------------------- -------------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1999 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of period $410 $496 $496 $496 $475
Net change in reserve primarily from
divestitures/acquisitions -- (84) -- (84) 24
Credit losses:
Commercial and financial (14) (3) (1) (17) (4)
Commercial real estate -- -- -- -- (5)
Consumer credit:
Credit cards -- (11) (12) (11) (22)
Other consumer credit (5) (6) (5) (11) (10)
Lease finance assets (1) (2) (4) (3) (6)
- -----------------------------------------------------------------------------------------------------------------------------------
Total credit losses (20) (22) (22) (42) (47)
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and financial 8 1 2 9 5
Commercial real estate -- -- -- -- 1
Consumer credit:
Credit cards -- 1 2 1 3
Other consumer credit 1 2 4 3 6
Lease finance assets -- 1 1 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 9 5 9 14 16
- ----------------------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Commercial and financial (6) (2) 1 (8) 1
Commercial real estate -- -- -- -- (4)
Consumer credit:
Credit cards -- (10) (10) (10) (19)
Other consumer credit (4) (4) (1) (8) (4)
Lease finance assets (1) (1) (3) (2) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Total net credit losses (11) (17) (13) (28) (31)
Provision for credit losses 10 15 15 25 30
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve at end of period $409 $410 $498 $409 $498
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.34% 1.34% 1.62% 1.34% 1.62%
Reserve as a percentage of nonperforming loans 338% 323% 463% 338% 463%
Annualized net credit losses to average loans .13% .22% .17% .18% .21%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 48
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1999 1999 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $121 $127 $103 $103 $107
Acquired property, net of the OREO reserve 21 34 37 37 63
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $142 $161 $140 $140 $170
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .40% .41% .32% .33% .35%
Total nonperforming assets as a percentage of
total loans and net acquired property .46% .53% .44% .45% .55%
- --------------------------------------------------------------------------------------------------------------------------------
</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 June 30, 1999, nonperforming assets totaled $142 million, a decrease of $19
million from March 31, 1999, and $28 million compared with June 30, 1998. These
decreases primarily resulted from sales of acquired property. The ratio of
nonperforming assets to total loans and net acquired property was .46% at June
30, 1999. This ratio has been lower than 1% for five years, reflecting the
effectiveness of the Corporation's loan underwriting, administration and workout
procedures, and a strong economy.
47
<PAGE> 49
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1999 1999 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial and financial $ 61 $ 66 $ 42 $ 34 $ 18
Commercial real estate 6 6 6 8 18
Consumer credit:
Consumer mortgage 43 44 44 53 55
Other consumer credit 1 1 1 1 4
Lease finance assets 10 10 10 7 12
- --------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 121 127 103 103 107
Restructured loans -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (a) 121 127 103 103 107
- --------------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 24 37 40 40 69
Reserve for real estate acquired (4) (5) (5) (5) (9)
- --------------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 20 32 35 35 60
Other acquired assets 1 2 2 2 3
- --------------------------------------------------------------------------------------------------------------------------------
Total acquired property 21 34 37 37 63
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $142 $161 $140 $140 $170
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective
loan portfolio segments:
Commercial and financial loans .50% .56% .34% .30% .16%
Commercial real estate loans .24 .25 .28 .35 .85
Consumer mortgage loans .58 .55 .50 .61 .65
Lease finance assets .33 .36 .37 .26 .48
Total loans .40 .41 .32 .33 .35
Nonperforming assets as a percentage of
total loans and net acquired property .46 .53 .44 .45 .55
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $15 million, $48 million, $19 million, $21 million and $2 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 THREE MONTHS ENDED JUNE 30
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 $ 66 $ 6 $45 $10 $127 $142
Additions 14 1 6 2 23 22
Payments (a) (5) (1) (4) (1) (11) (9)
Return to accrual status - - (1) - (1) (9)
Credit losses (14) - - (1) (15) (3)
Transfers to acquired property - - (2) - (2) (36)
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at June 30 $ 61 $ 6 $44 $10 $121 $107
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest applied to principal and sales.
48
<PAGE> 50
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
A loan is considered impaired, as defined by FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," when based upon current information and
events, it is probable that the Corporation will be unable to collect all
principal and interest amounts due according to the contractual terms of the
loan agreement. Additional information regarding impairment is presented in note
1 in the Corporation's 1998 Annual Report to Shareholders.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS Quarter ended
-------------------------------------------
JUNE 30, March 31, June 30,
(dollar amounts in millions) 1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans - period end (a) $67 $76 $48
Average impaired loans 76 60 52
Interest revenue recognized on impaired loans (b) -- 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $48 million, $53 million and $19 million of impaired loans with a
related impairment reserve of $10 million, $10 million, and $2 million at
June 30, 1999, March 31, 1999, and June 30, 1998, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Quarter ended Six months ended
June 30, June 30,
(in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OREO at beginning of period, net of the OREO reserve $ 32 $44 $ 35 $43
Reclassification from segregated assets -- -- -- 2
Foreclosures 3 37 4 39
Sales (21) (23) (26) (27)
Additional investments, write-downs, losses, OREO
provision and other 6 2 7 3
- --------------------------------------------------------------------------------------------------------------------------------
OREO at end of period, net of the OREO reserve 20 60 20 60
Other acquired assets 1 3 1 3
- --------------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve $ 21 $63 $ 21 $63
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation recognizes any estimated potential decline in the value of OREO
between appraisal dates on a property-by-property basis through periodic
additions to the OREO reserve. Write-downs charged against this reserve are
taken when OREO is sold at a loss or upon the receipt of appraisals which
indicate a deterioration in the fair value of the property. Activity in the
Corporation's OREO reserve is presented in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) Quarter ended Six months ended
June 30, June 30,
(in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $ 5 $9 $ 5 $9
Write-downs on real estate acquired -- -- -- --
Provision (1) -- (1) --
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 4 $9 $ 4 $9
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 51
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming. All
loans in this table are well-secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1999 1999 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 34 $28 $ 31 $ 37 $ 34
Ratio .46% .35% .34% .43% .40%
Credit card (a) -- -- 8 8 9
Ratio -- -- 1.05% 1.06% 1.08%
Student - government guaranteed 47 49 52 48 47
Ratio 2.77% 2.74% 2.95% 2.77% 2.86%
Other consumer 3 2 2 2 1
Ratio .14% .11% .12% .08% .07%
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer 84 79 93 95 91
Ratio .75% .65% .70% .72% .71%
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial (b) 27 9 11 9 10
- --------------------------------------------------------------------------------------------------------------------------------
Total past-due loans $ 111 $88 $ 104 $ 104 $ 101
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The credit card business was sold on March 31, 1999.
(b) Includes lease finance assets.
Note: Ratios are loans 90 days or more past due as a percentage of quarter-end
loan balances.
50
<PAGE> 52
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
-----------------------
JUNE 30, June 30,
(in millions, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees of $31 and $34) $1,135 $1,183
Interest-bearing deposits with banks 18 15
Federal funds sold and securities under resale agreements 14 25
Other money market investments 1 4
Trading account securities 9 7
Securities 214 183
--------------------------------------------------------------------------------------------------------------
Total interest revenue 1,391 1,417
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 363 404
Deposits in foreign offices 65 65
Federal funds purchased and securities under repurchase agreements 60 54
Other short-term borrowings 63 58
Notes and debentures 110 100
--------------------------------------------------------------------------------------------------------------
Total interest expense 661 681
- --------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 730 736
revenue Provision for credit losses 25 30
--------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 705 706
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fee revenue 996 825
revenue Cash management and deposit transaction charges 136 126
Mortgage servicing fees 103 108
Foreign currency and securities trading revenue 88 79
Credit card fees 18 47
Information services fees 31 21
Other 204 204
--------------------------------------------------------------------------------------------------------------
Total fee revenue 1,576 1,410
Net gain from divestitures 142 --
Gains on sales of securities -- 1
----------------------------------------------------------------------------------------------------------------
Total noninterest revenue 1,718 1,411
- --------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 788 712
expense Professional, legal and other purchased services 144 128
Net occupancy expense 125 115
Equipment expense 104 80
Amortization of mortgage servicing assets and purchased credit card relationships 79 89
Amortization of goodwill and other intangible assets 74 65
Communications expense 59 52
Business development 97 78
Other expense 99 99
Trust-preferred securities expense 39 39
Net revenue from acquired property (5) (3)
---------------------------------------------------------------------------------------------------------------
Total operating expense 1,603 1,454
- --------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes and cumulative effect of accounting change 820 663
Provision for income taxes 302 233
--------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 518 430
Cumulative effect of accounting change (26) -
--------------------------------------------------------------------------------------------------------------
Net income 492 430
Dividends on preferred stock - 9
--------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 492 $ 421
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
51
<PAGE> 53
CONSOLIDATED INCOME STATEMENT (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
-----------------------
JUNE 30, June 30,
(in millions, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per common Basic net income per common share:
share (a)
Income before cumulative effect of accounting change $ .99 $ .81
Cumulative effect of accounting change (.05) --
--------------------------------------------------------------------------------------------------------------
Net income $ .94 $ .81
--------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income before cumulative effect of accounting change $ .98 $ .79
Cumulative effect of accounting change (.05) --
Net income $ .93 $ .79
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior period per common share amounts have been restated to reflect the
two-for-one common stock split distributed on May 17, 1999.
See accompanying Notes to Financial Statements.
52
<PAGE> 54
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions, except per share amounts) 1999 1999 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees
of $15, $16, $18, $21, and $17) $555 $ 580 $614 $616 $606
Interest-bearing deposits with banks 9 9 10 8 6
Federal funds sold and securities under
resale agreements 5 9 12 12 12
Other money market investments -- 1 1 1 3
Trading account securities 5 4 4 4 3
Securities 106 108 98 95 93
----------------------------------------------------------------------------------------------------------------
Total interest revenue 680 711 739 736 723
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 177 186 209 211 207
Deposits in foreign offices 30 35 34 37 33
Federal funds purchased and securities
under repurchase agreements 23 37 34 35 30
Other short-term borrowings 34 29 29 27 30
Notes and debentures 55 55 53 51 52
----------------------------------------------------------------------------------------------------------------
Total interest expense 319 342 359 361 352
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 361 369 380 375 371
revenue Provision for credit losses 10 15 15 15 15
----------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 351 354 365 360 356
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fee revenue 508 488 465 432 429
revenue Cash management and deposit transaction charges 70 66 70 66 65
Mortgage servicing fees 51 52 48 44 53
Foreign currency and securities trading revenue 45 43 47 39 38
Credit card fees - 18 22 23 23
Information services fees 18 13 12 11 10
Other 95 109 135 97 94
----------------------------------------------------------------------------------------------------------------
Total fee revenue 787 789 799 712 712
Net gain from divestitures 59 83 -- -- --
Gains on sales of securities -- -- -- -- 1
----------------------------------------------------------------------------------------------------------------
Total noninterest revenue 846 872 799 712 713
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 397 391 386 358 355
expense Professional, legal and other purchased services 73 71 97 72 67
Net occupancy expense 64 61 63 59 59
Equipment expense 63 41 59 42 41
Amortization of mortgage servicing assets
and purchased credit card relationships 37 42 47 43 44
Amortization of goodwill and other intangible assets 37 37 37 35 35
Communications expense 30 29 28 27 26
Business development 64 33 38 33 42
Other expense 44 55 50 48 52
Trust-preferred securities expense 19 20 20 20 19
Net revenue from acquired property (5) -- -- (3) (2)
----------------------------------------------------------------------------------------------------------------
Total operating expense 823 780 825 734 738
- ----------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes and cumulative
effect of accounting change 374 446 339 338 331
Provision for income taxes 136 166 117 120 116
----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 238 280 222 218 215
Cumulative effect of accounting change -- (26) -- -- --
----------------------------------------------------------------------------------------------------------------
Net income 238 254 222 218 215
Dividends on preferred stock -- -- -- -- --
----------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $238 $ 254 $222 $218 $215
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
53
<PAGE> 55
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions, except per share amounts) 1999 1999 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per common Basic net income per common share:
share (a)
Income before cumulative effect of accounting change $ .45 $ .54 $ .42 $ .42 $ .41
Cumulative effect of accounting change -- (.05) -- -- --
----------------------------------------------------------------------------------------------------------------
Net income $ .45 $ .49 $ .42 $ .42 $ .41
----------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income before cumulative effect of accounting change $ .45 $ .53 $ .42 $ .41 $ .40
Cumulative effect of accounting change -- (.05) -- -- --
----------------------------------------------------------------------------------------------------------------
Net income $ .45 $ .48 $ .42 $ .41 $ .40
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior period per common share amounts have been restated to reflect the
two-for-one common stock split distributed on May 17, 1999.
See accompanying Notes to Financial Statements.
54
<PAGE> 56
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(dollar amounts in millions) 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets Cash and due from banks $ 3,140 $ 3,011 $ 2,926 $ 2,993
Interest-bearing deposits with banks 657 723 566 537
Federal funds sold and securities under resale agreements 359 174 186 240
Other money market investments 59 42 46 105
Trading account securities 318 242 193 126
Securities available for sale 5,241 5,451 5,373 3,957
Investment securities (approximate fair value of $1,332,
$1,443, $1,634 and $1,899) 1,330 1,421 1,602 1,861
Loans, net of unearned discount of $70, $57, $54 and $68 30,544 30,554 32,093 30,654
Reserve for credit losses (409) (410) (496) (498)
-------- -------- -------- ---------
Net loans 30,135 30,144 31,597 30,156
Customers' acceptance liability 117 107 166 78
Premises and equipment 552 561 569 559
Goodwill and other intangibles 2,237 2,276 2,313 2,156
Mortgage servicing assets and purchased credit
card relationships 1,069 1,098 1,132 1,010
Acquired property, net of reserves of $4, $5, $5 and $9 21 34 37 63
Other assets 3,853 4,100 4,071 3,607
----------------------------------------------------------------------------------------------------------------
Total assets $ 49,088 $ 49,384 $ 50,777 $ 47,448
----------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 8,960 $ 9,151 $ 9,976 $ 8,880
Interest-bearing deposits in domestic offices 20,614 21,268 21,293 21,350
Interest-bearing deposits in foreign offices 3,401 2,929 3,114 2,967
----------------------------------------------------------------------------------------------------------------
Total deposits 32,975 33,348 34,383 33,197
Federal funds purchased and securities under
repurchase agreements 2,394 1,567 3,594 1,849
U.S. Treasury tax and loan demand notes 857 551 290 1,006
Short-term bank notes 656 724 266 275
Term federal funds purchased 332 636 208 352
Commercial paper 135 156 116 161
Other funds borrowed 391 389 468 258
Acceptances outstanding 117 107 166 78
Other liabilities 2,634 3,010 2,471 2,044
Notes and debentures (with original maturities over one year) 3,303 3,403 3,303 3,003
----------------------------------------------------------------------------------------------------------------
Total liabilities 43,794 43,891 45,265 42,223
- --------------------------------------------------------------------------------------------------------------------------------
Trust- Guaranteed preferred beneficial interests in
preferred Corporation's junior subordinated deferrable
securities interest debentures 991 991 991 991
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Common stock - $.50 par value
equity Authorized - 800,000,000 shares
Issued - 588,661,920 (a); 294,330,960; 294,330,960 and
294,330,960 shares 294 147 147 147
Additional paid-in capital 1,765 1,907 1,887 1,879
Retained earnings 3,587 3,468 3,353 3,124
Accumulated unrealized (losses) gains, net of tax (90) (15) 25 19
Treasury stock of 74,450,718 (a); 33,798,582; 32,407,960 and
33,623,356 shares, at cost (1,253) (1,005) (891) (935)
-----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,303 4,502 4,521 4,234
----------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $ 49,088 $ 49,384 $ 50,777 $ 47,448
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the two-for-one common stock split distributed on May 17, 1999.
See accompanying Notes to Financial Statements.
55
<PAGE> 57
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net income $ 492 $ 430
operating activities Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change 26 --
Net gain from divestitures (142) --
Amortization of goodwill and other intangible assets 74 65
Amortization of mortgage servicing assets and
purchased credit card relationships 79 89
Depreciation and other amortization 51 51
Deferred income tax (benefit) expense (7) 45
Provision for credit losses 25 30
Net gains on dispositions of acquired property (8) (5)
Net decrease in accrued interest receivable 26 --
Net increase in trading account securities (119) (44)
Net (decrease) increase in accrued interest payable,
net of amounts prepaid (5) 18
Net decrease (increase) in residential mortgages held for sale 904 (109)
Net decrease (increase) in other operating activities 129 (369)
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,525 201
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in term deposits and other money
investing activities market investments (104) (17)
Net (increase) decrease in federal funds sold and securities
under resale agreements (173) 355
Purchases of securities available for sale (1,024) (2,291)
Proceeds from sales of securities available for sale 281 835
Proceeds from maturities of securities available for sale 707 937
Purchases of investment securities (14) (10)
Proceeds from maturities of investment securities 237 232
Net decrease in credit card receivables to date of sale 85 83
Proceeds from sale of credit card business 1,186 --
Proceeds from sale of network services 135 --
Net principal disbursed on loans to customers (1,847) (1,769)
Loan portfolio purchases -- (69)
Proceeds from the sales and securitizations of loan portfolios 1,697 1,286
Purchases of premises and equipment (87) (60)
Proceeds from sales of acquired property 34 32
Net cash disbursed in purchase of Mellon United National Bank -- (94)
Net cash disbursed in purchase of Mellon 1st Business Bank -- (72)
Net cash disbursed in purchase of Founders Asset Management -- (267)
Increase in mortgage servicing assets and purchased credit
card relationships (46) (24)
Net increase in other investing activities (191) (170)
------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 876 (1,083)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
56
<PAGE> 58
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net decrease in transaction and savings deposits (396) (194)
financing activities Net (decrease) increase in customer term deposits (1,012) 383
Net decrease in federal funds purchased and
securities under repurchase agreements (1,200) (365)
Net increase (decrease) in short-term bank notes 390 (55)
Net increase (decrease) in term federal funds purchased 124 (273)
Net increase in U.S. Treasury tax and loan demand notes 567 559
Net increase in commercial paper 19 94
Repayments of longer-term debt (108) (120)
Net proceeds from issuance of longer-term debt 105 562
Dividends paid on common and preferred stock (198) (188)
Proceeds from issuance of common stock 25 26
Repurchase of common stock (469) --
Redemption of preferred stock -- (193)
Net decrease in other financing activities (72) (39)
------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (2,225) 197
Effect of foreign currency exchange rates 38 28
- --------------------------------------------------------------------------------------------------------------------------------
Change in cash and Net increase (decrease) in cash and due from banks 214 (657)
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 $3,140 $2,993
-----------------------------------------------------------------------------------------------------
Supplemental Interest paid $ 666 $ 662
disclosures Net income taxes paid 206 164
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
57
<PAGE> 59
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
QUARTER ENDED Additional unrealized Total
JUNE 30, 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 March 31, 1999 $ -- $147 $1,907 $3,468 $(15) $(1,005) $4,502
Comprehensive results:
Net income 238 238
Other comprehensive results,
net of tax (75) (75)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 238 (75) 163
Dividends on common stock
at $.20 per share (104) (104)
Common stock issued under
dividend reinvestment and
common stock purchase plan 5 5
Exercise of stock options 5 (15) 22 12
Repurchase of common stock (286) (286)
Additional common stock issued
for stock split 147 (147) --
Other 11 11
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ -- $294 $1,765 $3,587 $(90) $(1,253) $4,303
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Quarter ended Additional unrealized Total
June 30, 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 March 31, 1998 $ -- $147 $1,855 $3,003 $30 $(949) $4,086
Comprehensive results:
Net income 215 215
Other comprehensive results,
net of tax (11) (11)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 215 (11) 204
Dividends on common stock
at $.18 per share (93) (93)
Common stock issued under
dividend reinvestment and
common stock purchase plan 3 2 5
Exercise of stock options 8 (1) 9 16
Other 13 3 16
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ -- $147 $1,879 $3,124 $19 $(935) $4,234
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
(continued)
58
<PAGE> 60
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
SIX MONTHS ENDED Additional unrealized Total
JUNE 30, 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 492 492
Other comprehensive results,
net of tax (115) (115)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 492 (115) 377
Dividends on common stock
at $.38 per share (198) (198)
Common stock issued under
dividend reinvestment and
common stock purchase plan 9 9
Exercise of stock options 25 (60) 80 45
Repurchase of common stock (469) (469)
Additional common stock issued
for stock split 147 (147) --
Other 18 18
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ -- $294 $1,765 $3,587 $(90) $(1,253) $4,303
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Six months ended Additional unrealized Total
June 30, 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 430 430
Other comprehensive results,
net of tax (2) (2)
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 430 (2) 428
Dividends on common stock
at $.35 per share (177) (177)
Dividends on preferred stock (9) (9)
Common stock issued under
dividend reinvestment and
common stock purchase plan 6 4 10
Common stock issued in
connection with the Mellon
United National Bank acquisition 22 233 255
Series K preferred stock
redemption (193) (193)
Exercise of stock options 8 (4) 39 43
Other 25 7 32
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ -- $147 $1,879 $3,124 $19 $ (935) $4,234
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
59
<PAGE> 61
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.
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 $.05
per share, 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 reported as a cumulative effect of a change in
accounting principle. This accounting change will have no impact on cash-flow in
1999 or future periods since the underwriting fees were paid in the first half
of 1998.
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.
60
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 3 -- Securities
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999 June 30, 1998
--------------------------------------------------- ---------------------------------------------
GROSS UNREALIZED Gross unrealized
AMORTIZED ---------------- FAIR Amortized ---------------- Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 212 $-- $ 1 $ 211 $ 204 $ -- $-- $ 204
U.S. agency mortgage-backed 4,892 11 111 4,792 3,225 47 1 3,271
Other U.S. agency 115 -- -- 115 413 -- -- 413
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 5,219 11 112 5,118 3,842 47 1 3,888
Obligations of states and
political subdivisions 111 -- 3 108 48 -- -- 48
Other mortgage-backed 1 -- -- 1 2 -- -- 2
Other securities 14 -- -- 14 19 -- -- 19
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $ 5,345 $11 $ 115 $ 5,241 $ 3,911 $ 47 $ 1 $ 3,957
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Gross realized gains were less than $1 million in the first six months of
1999 and $1 million in the first half of 1998. There were no gross
realized losses in the first six months of 1999 or 1998.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999 June 30, 1998
--------------------------------------------------- ---------------------------------------------
GROSS UNREALIZED Gross unrealized
AMORTIZED ---------------- FAIR Amortized ---------------- 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 $ 47 $ 9 $ -- $ 56
U.S. agency mortgage-backed 1,235 6 4 1,237 1,726 29 -- 1,755
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 1,239 6 4 1,241 1,773 38 -- 1,811
Obligations of states and
political subdivisions 16 -- -- 16 16 -- -- 16
Other mortgage-backed 13 -- -- 13 19 -- -- 19
Other securities 62 -- -- 62 53 -- -- 53
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,330 $ 6 $ 4 $1,332 $ 1,861 $ 38 $ -- $ 1,899
- ----------------------------------------------------------------------------------------------------------------------------------
</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 required 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.
61
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 4 -- Other assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid expense:
Pension $ 509 $ 490 $ 468 $ 430
Other 88 97 132 142
Accounts and fees receivable 605 709 591 598
Interest receivable 236 248 262 241
Mortgage servicing advances 134 154 214 197
Receivables related to off-balance-sheet instruments 526 721 552 462
Assets held for accelerated resolution -- -- 67 106
Other 1,755 1,681 1,785 1,431
- ----------------------------------------------------------------------------------------------------------------------------------
Total other assets $3,853 $4,100 $4,071 $3,607
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5 -- Deposits
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1999 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits in domestic offices:
Interest-bearing:
Demand, money market and other savings accounts $12,952 $12,686 $12,323 $11,611
Retail savings certificates 6,536 6,772 7,039 7,704
Other time deposits 1,126 1,810 1,931 2,035
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 20,614 21,268 21,293 21,350
Noninterest-bearing 8,960 9,151 9,976 8,880
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 29,574 30,419 31,269 30,230
Deposits in foreign offices 3,401 2,929 3,114 2,967
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits $32,975 $33,348 $34,383 $33,197
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 6 -- Preferred stock
The Corporation has authorized 50 million shares of preferred stock, none of
which was issued at June 30, 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.
62
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, June 30,
(in millions) 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $(24) $(21) $(11)
Quarterly change 5 (3) (4)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $(19) $(24) $(15)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized gains (losses) on
assets available for sale, net of tax
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, June 30,
(in millions) 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 9 $ 46 $ 41
Quarterly change (80) (37) (7)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $(71) $ 9 $ 34
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Total accumulated unrealized gains (losses), net of tax
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, March 31, June 30,
(in millions) 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $(15) $ 25 $ 30
Quarterly change (75) (40) (11)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $(90) $(15) $ 19
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THESE TABLES INCLUDE THE YEAR-TO-DATE CHANGES IN THE BALANCES OF BOTH THE
ACCUMULATED UNREALIZED GAINS (LOSSES), NET OF TAX AND ITS INDIVIDUAL COMPONENTS.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ (21) $(12)
Year-to-date change 2 (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $ (19) $(15)
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized gains (losses) on
assets available for sale, net of tax
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 46 $ 33
Year-to-date change (117) 1
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $ (71) $ 34
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Total accumulated unrealized gains (losses), net of tax
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, June 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 25 $ 21
Year-to-date change (115) (2)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $ (90) $ 19
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 Six months ended
June 30, June 30,
(in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts $40 $37 $ 82 $73
Debt instruments 5 (4) 8 --
Interest rate agreements -- 5 (2) 6
- ----------------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $45 $38 $ 88 $79
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recorded an unrealized gain of less than $1 million at June
30, 1999, and an unrealized loss of $2 million at June 30, 1998, related to
securities held in the trading portfolio.
Note 9 -- Business sectors
Lines of business that offer similar or related products and services to common
or similar customer segments have been combined into six major business sectors:
Wealth Management, Global Investment Management, Global Investment Services,
Regional Consumer Banking, Specialized Commercial Banking and Large Corporate
Banking. Wealth Management includes private asset management services, private
banking and jumbo residential mortgage lending. Global Investment Management
includes mutual fund management, institutional asset management and brokerage
services. Global Investment Services includes institutional trust and custody,
foreign exchange, securities lending, shareholder services, benefits consulting
and administrative services for employee benefit plans and backoffice
outsourcing for investment managers. Regional Consumer Banking includes consumer
lending and deposit products, direct banking, and sales of insurance products.
Specialized Commercial Banking includes middle market lending, business banking,
lease financing, commercial real estate lending, insurance premium financing,
asset-based lending and venture capital. Large Corporate Banking includes cash
management, large corporate and institutional lending, corporate finance and
derivative products, securities underwriting and trading and international
banking.
For details of business sectors, see the table and the first and second
paragraphs following the table and the Completed/Pending Divestitures and Real
Estate Workout/Other Activity paragraphs in the Business Sectors presentation on
pages 8 through 18. The table and information in those paragraphs are
incorporated by reference into these Notes to Financial Statements.
64
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 10 -- Computation of earnings per common share (a)(b)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Six months ended
---------------------------------------- -------------------------
(dollar amounts in millions, except per JUNE 30, March 31, June 30, JUNE 30, June 30,
share amounts; common shares in thousands) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Income before cumulative effect of
accounting change $ 238 $ 280 $ 215 $ 518 $ 430
Cumulative effect of accounting change -- (26) -- (26) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 238 254 215 492 430
Dividends on preferred stock -- -- -- -- 9
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $238 $254 $215 $492 $421
- ----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 518,273 523,448 520,990 520,846 518,226
Basic earnings per common share:
Income before cumulative effect of
accounting change $ .45 $ .54 $ .41 $ .99 $ .81
Cumulative effect of accounting change -- (.05) -- (.05) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ .45 $ .49 $ .41 $ .94 $ .81
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Income before cumulative effect of
accounting change $ 238 $ 280 $ 215 $ 518 $ 430
Cumulative effect of accounting change -- (26) -- (26) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 238 254 215 492 430
Dividends on preferred stock -- -- -- -- 9
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock (c) $ 238 $ 254 $ 215 $ 492 $ 421
- ----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 518,273 523,448 520,990 520,846 518,226
Common stock equivalents:
Stock options 7,356 7,740 10,562 7,578 10,656
Common shares issuable upon conversion of
7 1/4% Convertible Subordinated Capital Notes 83 100 144 92 154
- ----------------------------------------------------------------------------------------------------------------------------------
Total 525,712 531,288 531,696 528,516 529,036
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Income before cumulative effect of
accounting change $ .45 $ .53 $ .40 $ .98 $ .79
Cumulative effect of accounting change -- (.05) -- (.05) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ .45 $ .48 $ .40 $ .93 $ .79
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior-period amounts have been restated to reflect the two-for-one common
stock split distributed on May 17, 1999.
(b) Calculated based on unrounded numbers.
(c) 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.
65
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Note 11 -- 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 in the
following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reclassification of segregated assets to loans
and real estate acquired $ -- $ 12
Net transfers to real estate acquired 4 39
Purchase of Mellon United National Bank:
Fair value of noncash assets acquired -- 1,074
Liabilities assumed -- (725)
Mellon common stock issued, from treasury -- (255)
------ -------
Net cash disbursed -- 94
Purchase of Mellon 1st Business Bank:
Fair value of noncash assets acquired -- 1,279
Liabilities assumed -- (1,207)
------ ------
Net cash disbursed -- 72
Purchase of Founders Asset Management:
Fair value of noncash assets acquired -- 271
Liabilities assumed -- (4)
---------
Net cash disbursed -- 267
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 12 -- 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.
66
<PAGE> 68
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,
custody, benefits consulting and other activities. Because of the complex nature
of some of these actions and proceedings, it may be a number of years before
such matters ultimately are resolved. After consultation with legal counsel,
management believes that the aggregate liability, if any, resulting from such
pending and threatened actions and proceedings will not have a material adverse
effect on the Corporation's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Corporation's annual meeting of shareholders held on April 20, 1999, for
which proxies were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, the following matters were voted upon by
shareholders. The number of votes shown below are on a pre-split basis.
1. The election of seven directors for a term expiring in 2002:
<TABLE>
<CAPTION>
Name of Director Votes For Votes Withheld
---------------- --------- --------------
<S> <C> <C>
Dwight L. Allison, Jr. 216,961,552 1,766,056
J.W. Connolly 216,949,802 1,777,806
Charles A. Corry 216,932,955 1,794,653
Pemberton Hutchinson 216,886,200 1,841,408
Rotan E. Lee, Esquire 216,992,079 1,735,529
Robert Mehrabian 217,005,590 1,722,018
Wesley W. von Schack 217,033,194 1,694,414
</TABLE>
2. Ratification of KPMG LLP as independent public accountants of the
Corporation for the year 1999:
For: 215,714,761
Against: 1,742,109
Abstain: 1,267,236
Abstentions are not counted for voting purposes under Pennsylvania law, the
jurisdiction of the Corporation's incorporation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Restated Articles of Incorporation of Mellon Bank Corporation, as
amended and restated as of September 17, 1998.
3.2 By-Laws of Mellon Bank Corporation, as amended, effective November 5,
1998.
10.1 Mellon Bank Corporation Long-Term Profit Incentive Plan (1996), as
amended, effective May 3, 1999.
67
<PAGE> 69
PART II - OTHER INFORMATION (CONTINUED)
- ------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.(continued)
(a) Exhibits (continued)
10.2 Mellon Bank Corporation Stock Option Plan for Outside Directors
(1989), as amended, effective May 3, 1999.
10.3 Mellon Bank Corporation Phantom Stock Unit Plan (1995), as amended,
effective May 18, 1999.
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.
(b) Reports on Form 8-K
During the second quarter of 1999, the Corporation filed the following
Current Reports on Form 8-K:
(1) 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.
(2) A report dated April 20, 1999, which included, under Items 5 and 7,
the Corporation's press release regarding first quarter 1999 results
of operations, an increase in the Corporation's quarterly cash
dividend and a two-for-one split of the Corporation's common stock.
(3) A report dated May 11, 1999, which included, under Item 5, a statement
that the Corporation and U.S. Bancorp had signed an agreement under
which U.S. Bank will acquire Mellon Network Services' electronic funds
transfer (EFT) processing unit.
(4) A report dated June 21, 1999, which included, under Items 5 and 7, the
Corporation's press release announcing the implementation of a
broad-based employee stock option program designed to expand ownership
of Mellon stock more broadly throughout the Corporation, align the
interests of Mellon's employees and shareholders, and promote an even
more customer-focused work environment.
(5) A report dated June 30, 1999, which included, under Items 5 and 7 (i)
the Corporation's press release, dated June 30, 1999, announcing that
it had completed the previously announced sale of its network services
electronic transaction processing unit to U.S. Bank and (ii) the
Corporation's press release, dated July 2, 1999, announcing that it
had met its June 30, 1999, year 2000 goals.
68
<PAGE> 70
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MELLON BANK CORPORATION
(Registrant)
Date: August 12, 1999 By: /s/ Steven G. Elliott
----------------------------------
Steven G. Elliott
Senior Vice Chairman and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer of
the Registrant)
69
<PAGE> 71
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Business Mellon Bank Corporation's principal direct subsidiaries are
of the Mellon Bank, N.A., The Boston Company, Inc., Buck Consultants,
Corporation Inc., Newton Management Limited and a number of companies
known as Mellon Financial Services Corporation. The Dreyfus
Corporation, one of the nation's largest mutual fund
companies, and Founders Asset Management, LLC are wholly owned
subsidiaries of Mellon Bank, N.A. Mellon's 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
Listing under the trading symbol MEL. Our transfer 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
Payments paid on Mellon's common stock on or about the 15th day of
February, May, August and November.
Direct Stock The Direct Stock Purchase and Dividend Reinvestment Plan
Purchase and provides a way to purchase shares of common stock directly
Dividend from the Corporation at the market value for such shares.
Reinvestment Nonshareholders may purchase their first shares of the
Plan Corporation's common stock through the plan, and shareholders
may increase their shareholding by reinvesting cash dividends
and through optional cash investments. Plan details are in a
prospectus, which may be obtained from ChaseMellon Shareholder
Services by calling 1 800 472-7629.
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
Shareholder Quarterly earnings and other news releases can be obtained by
Publications fax by calling Company News on Call at 1 800 758-5804 and
entering a six-digit code (552187). Copies of Mellon's filings
with the Securities 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.
<TABLE>
<S> <C> <C>
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>
70
<PAGE> 72
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.
10.1 Mellon Bank Corporation Long-Term Profit Filed herewith.
Incentive Plan (1996), as amended, effective
May 3, 1999.
10.2 Mellon Bank Corporation Stock Option Plan Filed herewith.
for Outside Directors (1989), as amended,
effective May 3, 1999.
10.3 Mellon Bank Corporation Phantom Stock Filed herewith.
Unit Plan (1995), as amended, effective
May 18, 1999.
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>
71
<PAGE> 1
Exhibit 10.1
MELLON BANK CORPORATION
LONG-TERM PROFIT INCENTIVE PLAN (1996)
I. Purposes
The purposes of this Long-Term Profit Incentive Plan (1996), as amended and
restated, are to promote the growth and profitability of Mellon Bank Corporation
("Corporation") and its Affiliates, to provide officers and other key executives
of the Corporation and its Affiliates with the incentive to achieve long-term
corporate objectives, to attract and retain officers and other key executives of
outstanding competence, and to provide such officers and key executives with an
equity interest in the Corporation.
II. Definitions
The following terms shall have the meanings shown:
2.1 "Affiliate" shall mean any corporation, limited partnership or other
organization in which the Corporation owns, directly or indirectly, 50% or more
of the voting power.
2.2 "Award" shall mean Options, SARs, Performance Units, Restricted Stock and
Deferred Cash Incentive Awards, as defined in and granted under the Plan.
2.3 "Board of Directors" shall mean the Board of Directors of the Corporation.
2.4 "Change in Control Event" shall mean any of the following events:
(a) The occurrence with respect to the Corporation of a "control
transaction", as such term is defined in Section 2542 of the Pennsylvania
Business Corporation Law of 1988, as of August 15, 1989; or
(b) Approval by the stockholders of the Corporation of (i) any
consolidation or merger of the Corporation where either (x) the holders of
voting stock of the Corporation immediately before the merger or consolidation
will not own more than 50% of the voting shares of the continuing or surviving
corporation immediately after such merger or consolidation or (y) the Incumbent
Directors immediately before the merger or consolidation will not hold more than
50% (rounded to the next whole person) of the seats on the board of directors of
the continuing or surviving corporation, or (ii) any sale, lease or exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Corporation; or
<PAGE> 2
(c) A change of 25% (rounded to the next whole person) in the
membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85% (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the 12-month period and (ii) was not as a result of an actual or
threatened election with respect to directors or any other actual or threatened
solicitation of proxies by or on behalf of any person other than the Board of
Directors. As used in this Section 2.4, the term "Incumbent Director" means as
of any time a director of the Corporation (x) who has been a member of the Board
of Directors continuously for at least 12 months or (y) whose election or
nomination as a director within such period met the requirements of clauses (i)
and (ii) of the preceding sentence.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor statute of similar import, and regulations thereunder, in each case as
in effect from time to time. References to sections of the Code shall be
construed also to refer to any successor sections.
2.6 "Committee" shall mean the Human Resources Committee of the Board of
Directors, or any successor committee.
2.7 "Common Stock" shall mean Common Stock of the Corporation.
2.8 "Deferred Cash Incentive Award" shall mean an Award granted pursuant to
Article VII of the Plan.
2.9 "Fair Market Value" shall mean the closing price of a share of Common Stock
in the New York Stock Exchange Composite Transactions on the relevant date, or,
if no sale shall have been made on such exchange on that date, the closing price
in the New York Stock Exchange Composite Transactions on the last preceding day
on which there was a sale.
2.10 "Incentive Stock Option" shall mean an option qualifying under Section 422
of the Code granted by the Corporation.
2.11 "Options" shall mean rights to purchase shares of Common Stock granted
pursuant to Article IV of the Plan.
2.12 "Participant" shall mean an eligible employee who is granted an Award under
the Plan.
2.13 "Performance Goals" shall mean goals established by the Committee in
compliance with Section 162(m) of the Code covering a performance period set by
the Committee and based on maintenance of or changes in one or more of the
following objective business criteria: earnings or earnings per share; return on
equity, assets or investment; revenues; expenses; stock price; market share;
charge-offs; or non-performing assets. Performance Goals shall be established by
the Committee in connection with the grant of Performance Units and Deferred
Cash Incentive
2
<PAGE> 3
Awards and may be established in connection with the grant of Restricted Stock.
Performance Goals may be applicable to a business unit or to the Corporation as
a whole and need not be the same for each of the foregoing types of Awards or
for each individual receiving the same type of Award. The Committee may retain
the discretion to reduce (but not to increase) the portion of any Award which
will be earned based on achieving Performance Goals.
2.14 "Performance Units" shall mean units granted pursuant to Article VI of the
Plan.
2.15 "Plan" shall mean the Mellon Bank Corporation Long-Term Profit Incentive
Plan (1996), as amended and restated.
2.16 "Reload Option Rights" and "Reload Options" shall have the meanings set
forth in Article IV of the Plan.
2.17 "Restricted Stock" shall mean any share of Common Stock granted pursuant to
Article VIII of the Plan.
2.18 "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended from
time to time, or any successor rule.
2.19 "SAR" shall mean any stock appreciation right granted pursuant to Article V
of the Plan.
III. General
3.1 Administration.
(a) The Plan shall be administered by the Committee, each member of
which shall at the time of any action under the Plan be (i) a "non-employee
director" as then defined under Rule 16b-3 and (ii) an "outside director" as
then defined under Section 162(m) of the Code.
(b) The Committee shall have the authority in its sole discretion from
time to time: (i) to designate the employees eligible to participate in the
Plan; (ii) to grant Awards under the Plan; (iii) to prescribe such limitations,
restrictions and conditions upon any such Award as the Committee shall deem
appropriate; and (iv) to interpret the Plan, to adopt, amend and rescind rules
and regulations relating to the Plan, and to make all other determinations and
take all other action necessary or advisable for the implementation and
administration of the Plan. A majority of the Committee shall constitute a
quorum, and the action of a majority of members of the Committee present at any
meeting at which a quorum is present, or acts unanimously adopted in writing
without the holding of a meeting, shall be the acts of the Committee.
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(c) All actions of the Committee shall be final, conclusive and binding
upon the Participant. No member of the Committee shall be liable for any action
taken or decision made in good faith relating to the Plan or any Award
thereunder.
3.2 Eligibility. The Committee may grant Awards under the Plan to any full-time
corporate officer, key executive, administrative or professional employee of the
Corporation or any of its Affiliates. In granting such Awards and determining
their form and amount, the Committee shall give consideration to the functions
and responsibilities of the employee, his or her potential contributions to
profitability and to the sound growth of the Corporation and such other factors
as the Committee may deem relevant.
3.3 Effective and Expiration Dates of Plan. The amended and restated Plan shall
become effective on the date (herein referred to as the "effective date")
approved by the holders of a majority of the shares present or represented and
entitled to vote at the 1996 Annual Meeting of Shareholders of the Corporation.
No Award shall be granted after December 31, 2005, except that Reload Options
may be granted pursuant to Reload Option Rights then outstanding.
3.4 Aggregate and Individual Limitations on Awards.
(a) The aggregate number of shares of Common Stock reserved for issue
under the Plan on and after its effective date shall not exceed 58,400,000
shares, subject to adjustments pursuant to Section 9.7. No more than 4,000,000
shares of Common Stock may be issued as Restricted Stock. Shares of Common Stock
which may satisfy Awards granted under the Plan may be either authorized and
unissued shares of Common Stock or authorized and issued shares of Common Stock
held in the Corporation's treasury or issued and outstanding shares of Common
Stock held by any employee stock benefit trust established by the Corporation.
(b) For purposes of paragraph (a) of this Section 3.4, shares of Common
Stock that are actually issued upon exercise of an Option shall be counted
against the total number of shares reserved for issuance, except that when
Options are exercised by the delivery of shares of Common Stock the charge
against the shares reserved for issuance shall be limited to the net new shares
of Common Stock issued. In addition to shares of Common Stock actually issued
pursuant to the exercise of Options, there shall be deemed to have been issued
under the Plan a number of shares of Common Stock equal to (i) the number of
shares issued pursuant to SARs which shall have been exercised pursuant to the
Plan, (ii) the number of Performance Units which shall have been paid in shares
of Common Stock pursuant to the Plan and (iii) the number of shares of
Restricted Stock which shall have been granted pursuant to the Plan. For
purposes of paragraph (a) of this Section 3.4, the payment of a Deferred Cash
Incentive Award shall not be deemed to result in the issuance of any shares of
Common Stock in addition to those issued pursuant to the exercise of the related
Option.
(c) For purposes of paragraph (a) of this Section 3.4, any shares of
Common Stock subject to an Option which for any reason either terminates
unexercised, or expires except by
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reason of the exercise of a related SAR, and any shares of Restricted Stock
granted under this Plan which are surrendered or forfeited to the Corporation,
shall again be available for issuance under the Plan.
(d) The maximum number of shares of Common Stock available for grants
of Options or SARs to any one Participant under the Plan during a calendar year
shall not exceed 4,000,000 shares. The limitation in the preceding sentence
shall be interpreted and applied in a manner consistent with Section 162(m) of
the Code. To the extent consistent with Section 162(m) of the Code, a Reload
Option (A) shall be deemed to have been granted at the same time as the original
underlying Option grant and (B) shall not be deemed to increase the number of
shares covered by the original underlying Option.
IV. Options
4.1 Grant. The Committee may from time to time, subject to the provisions of the
Plan, in its discretion grant Options to Participants to purchase for cash or
shares of Common Stock the number of shares of Common Stock allotted by the
Committee. In the discretion of the Committee, any Options or portions thereof
granted pursuant to this Plan may be designated as Incentive Stock Options. The
aggregate Fair Market Value (determined as of the time the Incentive Stock
Option is granted) of Common Stock and any other stock of the Corporation or any
parent, subsidiary or affiliate corporation with respect to which such Incentive
Stock Options are exercisable for the first time by a Participant in any
calendar year under all plans of the Corporation, its subsidiaries and
affiliates shall not exceed $100,000 or such sum as may from time to time be
permitted under Section 422 of the Code. The Committee shall also have the
authority, in its discretion, to award reload option rights ("Reload Option
Rights") in conjunction with the grant of Options with the effect described in
Section 4.7. Reload Option Rights may be awarded either at the time an Option is
granted or, except in the case of Incentive Stock Options, at any time
thereafter during the term of the Option.
4.2 Option Agreements. The grant of any Option shall be evidenced by a written
"Stock Option Agreement" executed by the Corporation and the Participant,
stating the number of shares of Common Stock subject to the Option evidenced
thereby and such other terms and conditions of the Option as the Committee may
from time to time determine.
4.3 Option Price. The option price for the Common Stock covered by any Option
granted under the Plan shall in no case be less than 100% of the Fair Market
Value of said Common Stock on the date of grant. Except as otherwise provided in
the Stock Option Agreement, the option price of an Option may be paid in whole
or in part by delivery to the Corporation of a number of shares of Common Stock
having a Fair Market Value on the date of exercise equal to the option price or
portion thereof to be paid; provided, however, that no shares may be delivered
in payment of the option price of an Option unless such shares, or an equivalent
number of shares, shall have been held by the Participant (or other person
entitled to exercise the Option) for at least six months prior to such delivery.
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4.4 Term of Options. The terms of each Option granted under the Plan shall be
for such period as the Committee shall determine, but for not more than 10 years
from the date of grant thereof. Each Option shall be subject to earlier
termination as provided in Sections 4.6 and 5.4 hereof.
4.5 Exercise of Options. Each Option granted under the Plan shall be exercisable
on such date or dates during the term thereof and for such number of shares of
Common Stock as may be provided in the Stock Option Agreement evidencing its
grant. Pursuant to the terms of the Stock Option Agreement or otherwise, the
Committee may change the date on which an outstanding Option becomes
exercisable; provided, however, that an exercise date designated in a Stock
Option Agreement may not be changed to a later date without the consent of the
holder of the Option. Notwithstanding any other provision of this Plan, unless
expressly provided to the contrary in the applicable Stock Option Agreement, all
Options granted under the Plan shall become fully exercisable immediately and
automatically upon the occurrence of a Change in Control Event.
4.6 Termination of Employment. Except as otherwise provided in the Stock Option
Agreement:
(a) If termination of employment of a Participant is due to retirement
after age 55 with the written consent of the Corporation or an Affiliate, the
Participant shall have the right to exercise his or her Options within the
period of two years after such retirement, to the extent such Options were
exercisable at the time of retirement; provided, however, that such
post-retirement exercise period may be extended by action of the Committee for
up to the full term of such Options.
(b) If a Participant shall die while employed by the Corporation or an
Affiliate or within a period following termination of employment during which
the Option remains exercisable under paragraphs (a), (c) or (d) of this Section
4.6, his or her Options may be exercised to the extent exercisable by the
Participant at the time of his or her death within a period of two years from
the date of death by the executor or administrator of the Participant's estate
or by the person or persons to whom the Participant shall have transferred such
right by will or by the laws of descent and distribution.
(c) If termination of employment of a Participant is by reason of the
total and permanent disability of the Participant covered by a disability plan
of the Corporation or an Affiliate then in effect, the Participant shall have
the right to exercise his or her Options within the period of two years after
the date of termination of employment, to the extent such Options were
exercisable at the time of termination of employment.
(d) In the event the employment of a Participant is terminated by the
Corporation or an Affiliate without cause within two years after the occurrence
of a Change in Control Event,
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the Participant shall have the right to exercise his or her Options within one
year after the date such termination occurred, to the extent such Options were
exercisable at the time of such termination of employment. For purposes of this
paragraph, "without cause" shall mean any termination of employment where it
cannot be shown that the employee has (i) willfully failed to perform his or her
employment duties for the Corporation or an Affiliate, (ii) willfully engaged in
conduct that is materially injurious to the Corporation or an Affiliate,
monetarily or otherwise, or (iii) committed acts that constitute a felony under
applicable federal or state law or constitute common law fraud. For purposes of
this paragraph, no act or failure to act on the Participant's part shall be
considered "willful" unless done, or omitted to be done, by him or her not in
good faith and without reasonable belief that his or her action or omission was
in the best interest of the Corporation or Affiliate.
(e) In the event all employment of a Participant with the Corporation
or an Affiliate is terminated for any reason other than as stated in the
preceding paragraphs (a) - (d), his or her Options shall terminate upon such
termination of employment.
(f) Notwithstanding the foregoing, in no event shall an Option granted
hereunder be exercisable after the expiration of its term.
4.7 Reload Option Rights. Reload Option Rights if awarded with respect to an
Option shall entitle the original grantee of the Option (and unless otherwise
determined by the Committee, in its discretion, only such original grantee),
upon exercise of the Option or any portion thereof through delivery of shares of
Common Stock, automatically to be granted on the date of such exercise an
additional Option (a "Reload Option") (i) for that number of shares of Common
Stock not greater than the number of shares delivered by the Participant in
payment of the option price of the original Option and any withholding taxes
related thereto, (ii) having an option price not less than 100% of the Fair
Market Value of the Common Stock covered by the Reload Option on the date of
grant of such Reload Option, (iii) having an expiration date not later than the
expiration date of the original Option so exercised and (iv) otherwise having
terms permissible for the grant of an Option under the Plan. Subject to the
preceding sentence and the other provisions of the Plan, Reload Option Rights
and Reload Options shall have such terms and be subject to such restrictions and
conditions, if any, as shall be determined, in its discretion, by the Committee.
In granting Reload Option Rights, the Committee, may, in its discretion, provide
for successive Reload Option grants upon the exercise of Reload Options granted
hereunder. Unless otherwise determined by the Committee, in its discretion,
Reload Option Rights shall entitle the Participant to be granted Reload Options
only if the underlying Option to which they relate is exercised by the
Participant during employment with the Corporation or any of its Affiliates.
Except as otherwise specifically provided herein or required by the context, the
term Option as used in this Plan shall include Reload Options granted hereunder.
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V. SARs
5.1 Grant. SARs may be granted by the Committee as stand-alone SARs or in tandem
with all or any part of any Option granted under the Plan. SARs which are
granted in tandem with an Option may be granted either at the time of the grant
of such Option or, except in the case of an Incentive Stock Option, at any time
thereafter during the term of such Option.
5.2 SAR Agreements. The grant of any SAR shall be evidenced by the related Stock
Option Agreement or by a written "Stock Appreciation Rights Agreement" executed
by the Corporation and the Participant, stating the number of shares of Common
Stock covered by the SAR, the base price of a stand-alone SAR and such other
terms and conditions of the SAR as the Committee may from time to time
determine. The base price for stand-alone SARs (the "base price") shall be such
price as the Committee, in its sole discretion, shall determine but shall not be
less than 100% of the Fair Market Value per share of the Common Stock covered by
the stand-alone SAR on the date of grant.
5.3 Payment. SARs shall entitle the Participant upon exercise to receive the
amount by which the Fair Market Value of a share of Common Stock on the date of
exercise exceeds the option price of any tandem Option or the base price of a
stand-alone SAR, multiplied by the number of shares in respect of which the SAR
shall have been exercised. In the sole discretion of the Committee, the
Corporation may pay all or any part of its obligation arising out of a SAR
exercise in (i) cash, (ii) shares of Common Stock or (iii) cash and shares of
Common Stock. Payment shall be made by the Corporation as soon as practicable
after the date of exercise.
5.4 Exercise of Tandem Award. If SARs are granted in tandem with an Option (i)
the SARs shall be exercisable at such time or times and to such extent, but only
to such extent, that the related Option shall be exercisable, (ii) the exercise
of the related Option shall cause a share for share reduction in the number of
SARs which were granted in tandem with the Option; and (iii) the payment of SARs
shall cause a share for share reduction in the number of shares covered by such
Option.
5.5 Termination of Employment. Except as otherwise provided in the Stock
Appreciation Rights Agreement:
(a) If termination of employment of a Participant is due to retirement
after age 55 with the written consent of the Corporation or an Affiliate, the
Participant shall have the right to exercise his or her stand-alone SARs within
the period of two years after such retirement, to the extent such SARs were
exercisable at the time of retirement; provided, however, that such
post-retirement exercise period may be extended by action of the Committee for
up to the full term of such SARs.
(b) If a Participant shall die while employed by the Corporation or an
Affiliate thereof or within a period following termination of employment during
which the SARs remain
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exercisable under paragraphs (a), (c) or (d) of this Section 5.5, his or her
stand-alone SARs may be exercised to the extent exercisable by the Participant
at the time of his or her death within a period of two years from the date of
death by the executor or administrator of the Participant's estate or by the
person or persons to whom the Participant shall have transferred such right by
will or by the laws of descent and distribution.
(c) If termination of employment of a Participant is by reason of the
total and permanent disability of the Participant covered by a disability plan
of the Corporation or an Affiliate then in effect, the Participant shall have
the right to exercise his or her stand-alone SARs within the period of two years
after the date of termination of employment, to the extent such SARs were
exercisable at the time of termination of employment.
(d) In the event all employment of a Participant with the Corporation
or an Affiliate is terminated without cause within two years after the
occurrence of a Change in Control Event, the Participant shall have the right to
exercise his or her stand-alone SARs within one year after the date such
termination occurred, to the extent such stand-alone SARs were exercisable at
the time of such termination of employment. For purposes of this paragraph,
"without cause" shall have the meaning provided in Section 4.6(d).
(e) In the event all employment of a Participant with the Corporation
or an Affiliate is terminated for any reason other than as stated in the
preceding paragraphs (a) - (d), his or her stand-alone SARs shall terminate upon
such termination of employment.
(f) Notwithstanding the foregoing, in no event shall a stand-alone SAR
granted hereunder be exercisable after the expiration of its term.
VI. Performance Units
6.1 Grant. The Committee may from time to time grant one or more Performance
Units to eligible employees. Performance Units shall represent the right of a
Participant to receive shares of Common Stock or cash at a future date upon the
achievement of Performance Goals which are established by the Committee.
6.2 Performance Unit Agreements. The grant of any Performance Unit shall be
evidenced by a written "Performance Unit Agreement", executed by the Corporation
and the Participant stating the amount of cash and/or number of shares of Common
Stock covered by the Performance Unit and such other terms and conditions of the
Performance Unit as the Committee may determine, including the performance
period to be covered by the award and the Performance Goals to be achieved.
6.3 Payment. After the completion of a performance period, performance during
such period shall be measured against the Performance Goals set by the
Committee. If the Performance Goals are met or exceeded, the Committee shall
certify that fact in writing in the Committee
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minutes or elsewhere and certify the amount to be paid to the Participant under
the Performance Unit. In the sole discretion of the Committee, the Corporation
may pay all or any part of its obligation under the Performance Unit in (i)
cash, (ii) shares of Common Stock or (iii) cash and shares of Common Stock.
Payment shall be made by the Corporation as soon as practicable after the
certification of achievement of the Performance Goals.
6.4 Termination of Employment. To be entitled to receive payment under a
Performance Unit, a Participant must remain in the employment of the Corporation
or an Affiliate through the end of the applicable performance period; except
that this limitation shall not apply where a Participant's employment is
terminated by the Corporation or an Affiliate without cause (as defined in
Section 4.6(d)) following the occurrence of a Change in Control Event.
6.5 Maximum Cash Payment. The maximum amount that may be paid in cash or in Fair
Market Value of Common Stock (to be valued no later than three days after the
date the Committee certifies the achievement of the Performance Goals) under all
Performance Units paid to any one Participant during a calendar year shall in no
event exceed $1,000,000.
VII. Deferred Cash Incentive Awards
7.1 Granting of Deferred Cash Incentive Awards. Deferred Cash Incentive Awards,
as hereafter described, may be granted in conjunction with all or any part of
any Option (other than an Incentive Stock Option) granted under the Plan, either
at the time of the grant of such Option or at any time thereafter during the
term of such Option.
7.2 Deferred Cash Incentive Agreements. Deferred Cash Incentive Awards shall
entitle the holder of an Option to receive from the Corporation an amount of
cash equal to the aggregate exercise price of all Options exercised by such
Participant in accordance with the terms of a written "Deferred Cash Incentive
Agreement" executed by the Corporation and the Participant. Deferred Cash
Incentive Agreements shall specify the conditions under which Deferred Cash
Incentive Awards become payable, the conditions under which Deferred Cash
Incentive Awards are forfeited and any other terms and conditions as the
Committee may from time to time determine. Under no circumstances may a Deferred
Cash Incentive Award be applied to any purpose other than the payment of the
exercise price of a properly exercised related Option.
7.3 Pre-established Performance Goals.
(a) Except in the event of death, total and permanent disability
covered by a disability plan of the Corporation or an Affiliate then in effect
or the occurrence of a Change in Control Event, any Deferred Cash Incentive
Award shall only be earned and become payable if the Corporation achieves
Performance Goals which are established for a calendar year or longer period by
the Committee. After the completion of a performance period, performance during
such period shall be measured against the Performance Goals set by the
Committee. If the
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Performance Goals are met or exceeded, the Committee shall certify that fact in
writing in the Committee minutes or elsewhere.
(b) The amount payable to a Participant upon achieving the Performance
Goals set by the Committee for the Deferred Cash Incentive Award shall be equal
to the option price of the related Option, which shall be the Fair Market Value
of the shares of Common Stock subject to the Option on the date the Option is
granted. No individual may in any calendar year receive payment of Deferred Cash
Incentive Awards with respect to Options for more than 3,000,000 shares of
Common Stock.
VIII. Restricted Stock
8.1 Award of Restricted Stock. The Committee may from time to time, subject to
the provisions of the Plan and such other terms and conditions as it may
prescribe, grant one or more shares of Restricted Stock to eligible employees.
In the discretion of the Committee, shares of Restricted Stock may be granted
alone, in addition to or in tandem with other Awards granted under the Plan
and/or cash awards made outside of the Plan.
8.2 Restricted Stock Agreements. Each award of Restricted Stock under the Plan
shall be evidenced by a written Restricted Stock Agreement executed by the
Corporation and the Participant in such form as the Committee shall prescribe
from time to time in accordance with the Plan.
8.3 Restrictions. Shares of Restricted Stock issued to a Participant may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, for such period as the
Committee shall determine, beginning on the date on which the Award is granted
(the "Restricted Period"). The Committee may also impose such other restrictions
and conditions on the shares or the release of the restrictions thereon as it
deems appropriate, including the achievement of Performance Goals established by
the Committee. In determining the Restricted Period of an Award, the Committee
may provide that the foregoing restrictions shall lapse with respect to
specified percentages of the awarded shares on specified dates following the
date of such Award or all at once.
8.4 Stock Certificate. As soon as practicable following the making of an award,
the Restricted Stock shall be registered in the Participant's name in
certificate or book-entry form. If a certificate is issued, it shall bear an
appropriate legend referring to the restrictions and it shall be held by the
Corporation on behalf of the Participant until the restrictions are satisfied.
If the shares are registered in book-entry form, the restrictions shall be
placed on the book-entry registration. Except for the transfer restrictions, and
subject to such other restrictions, if any, as determined by the Committee, the
Participant shall have all other rights of a holder of shares of Common Stock,
including the right to receive dividends paid with respect to the Restricted
Stock and the right to vote such shares. As soon as is practicable following the
date on which transfer restrictions on any shares lapse, the Corporation shall
deliver to the Participant the certificates for
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such shares, provided that the Participant shall have complied with all
conditions for delivery of such shares contained in the Restricted Stock
Agreement or otherwise reasonably required by the Corporation.
8.5 Termination of Employment.
(a) Unless expressly provided to the contrary in the applicable
Restricted Stock Agreement, all restrictions placed upon Restricted Stock shall
lapse immediately upon (i) termination of the Participant's employment with the
Corporation or an Affiliate if, and only if, such termination is by reason of
the Participant's death, total and permanent disability covered by a disability
plan of the Corporation or an Affiliate then in effect or (except where
Performance Goals have been set for the Award) retirement after age 55 with the
written consent of the Corporation or an Affiliate or (ii) the occurrence of a
Change in Control Event. In addition, the Committee may in its discretion
(except where Performance Goals have been set for the Award) allow restrictions
on Restricted Stock to lapse prior to the date specified in a Restricted Stock
Agreement.
(b) Except as otherwise provided in the Restricted Stock Agreement,
upon the effective date of a termination for any reason not specified in
paragraph (a) of this Section 8.5, all shares then subject to restrictions
immediately shall be forfeited to the Corporation without consideration or
further action being required of the Corporation. For purposes of this paragraph
(b), the effective date of a Participant's termination shall be the date upon
which such Participant ceases to perform services as an employee of the
Corporation or any of its Affiliates, without regard to accrued vacation,
severance or other benefits or the characterization thereof on the payroll
records of the Corporation or Affiliate.
8.6 Maximum Award. The compensation payable to a Participant upon achieving any
Performance Goals set by the Committee for Restricted Stock shall be equal to
the Fair Market Value of a share of Common Stock for each share of Restricted
Stock that is granted. No individual Participant may in any one calendar year
receive payment of a Restricted Stock Award (where Performance Goals have been
set for the Award) covering more than 400,000 shares of Common Stock.
IX. Miscellaneous
9.1 General Restriction. Each Award under the Plan shall be subject to the
requirement that, if at any time the Committee shall determine that any listing
or registration of the shares of Common Stock or any consent or approval of any
governmental body, or any other agreement or consent is necessary or desirable
as a condition of the granting of an Award or issuance of Common Stock or cash
in satisfaction thereof, such Award may not be consummated unless such
requirement is satisfied in a manner acceptable to the Committee.
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9.2 Non-Assignability. No Award under the Plan shall be assignable or
transferable by a Participant, except by will or by the laws of descent and
distribution or by such other means as the Committee may approve from time to
time. During the life of the Participant, such Award shall be exercisable only
by such Participant or by such other persons as the Committee may approve from
time to time.
9.3 Withholding Taxes. Whenever the Corporation proposes or is required to issue
or transfer shares of Common Stock under the Plan, the Corporation shall have
the right to require the Participant to remit to the Corporation an amount
sufficient to satisfy any federal, state, local or other withholding tax
requirements prior to the delivery of any certificate for such shares. Whenever
under the Plan payments are to be made in cash, such payments shall be net of an
amount sufficient to satisfy any federal, state, local or other withholding tax
requirements.
9.4 No Right to Employment. Nothing in the Plan or in any agreement entered into
pursuant to it shall confer upon any Participant the right to continue in the
employment of the Corporation or an Affiliate or affect any right which the
Corporation or an Affiliate may have to terminate the employment of such
Participant.
9.5 Non-Uniform Determinations. The Committee's determinations under the Plan
(including without limitation its determinations of the employees to receive
Awards, the form, amount and timing of such Awards, the terms and provisions of
such Awards and the establishment of performance goals and performance periods)
need not be uniform and may be made by it selectively among employees who
receive, or are eligible to receive, Awards under the Plan, whether or not such
persons are similarly situated.
9.6 No Rights as Shareholders. Participants as such shall have no rights as
shareholders of the Corporation, except as provided in Section 8.4, unless and
until shares of Common Stock are registered in their name.
9.7 Adjustments of Stock. If there is any change in the Common Stock by reason
of any stock split, stock dividend, spin-off, split-up, spin-out,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares, or any other similar transaction, the number and kind of shares
available for grant under the Plan or subject to or granted pursuant to an Award
and the price thereof, or other numeric limitations under the Plan, as
applicable, shall be appropriately adjusted by the Committee or the Board.
9.8 Amendment or Termination of the Plan. The Committee or the Board may at any
time terminate the Plan or any part thereof and may from time to time amend the
Plan as it may deem advisable. Any such action of the Committee or the Board may
be taken without the approval of the Corporation's shareholders, but only to the
extent that such shareholder approval is not required by applicable law or
regulation, including specifically Rule 16b-3, or the rules of any stock
exchange on which the Common Stock is listed. The termination or amendment of
the
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Plan shall not, without the consent of the Participant, adversely affect such
Participant's rights under an Award previously granted.
9.9 Awards to Foreign Nationals and Employees Outside the United States. To the
extent the Committee deems it necessary, appropriate or desirable to comply with
foreign law or practice and to further the purpose of the Plan, the Committee
may, without amending the Plan, (i) establish special rules applicable to Awards
granted to Participants who are foreign nationals, are employed outside the
United States, or both, including rules that differ from those set forth in this
Plan, and (ii) grant Awards to such Participants in accordance with those rules.
9.10 Previously Granted Awards. Awards outstanding on the date of shareholder
approval of this amended and restated Plan shall continue to be governed by and
construed in accordance with the Plan as in effect prior to amendment and
restatement; except that outstanding Deferred Cash Incentive Awards shall be
subject to the limitations of new Section 7.3(a) and (b) of the Plan and, to the
extent required by Section 162(m) of the Code, a grant of a Reload Option shall
be subject to the limitation of new Section 3.4(d) of the Plan.
May 1999
<PAGE> 1
Exhibit 10.2
MELLON BANK CORPORATION
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (1989)
I. Purpose
The purpose of this Stock Option Plan for Outside Directors (1989) are to align
the interests of the outside directors of Mellon Bank Corporation (the
"Corporation") more closely with the interests of the Corporation's
shareholders, to provide such directors with an additional inducement to remain
in the service of the Corporation with an increased incentive to work for its
long-term success, and to establish an effective element of a reasonable
directors' compensation package.
II. Definitions
The following terms shall have the meanings indicated below:
2.1 "Common Stock" shall mean the common stock, par value $.50 per share, of the
Corporation.
2.2 "Corporation" shall mean Mellon Bank Corporation.
2.3 "Business Day" shall mean any day on which the market used to determine the
Fair Market Value of the Common Stock is open for trading.
2.4 "Fair Market Value" shall mean the closing price of the Common Stock on the
New York Stock Exchange on the relevant date. If on the relevant date the Common
Stock is not listed on the New York Stock Exchange, "Fair Market Value" shall
mean the closing price of the Common Stock on the relevant date on the principal
stock exchange on which the Common Stock is listed. If the Common Stock is not
listed on any stock exchange on the relevant date, "Fair Market Value" shall
mean the mean between the bid and asked price of the Common Stock as reported on
the National Association of Securities Dealers Automated Quotation System on the
relevant date.
2.5 "Outside Director" shall mean any individual who on the relevant date is a
member of the Board of Directors of the Corporation but is not an employee of
the Corporation.
2.6 "Plan" shall mean the Mellon Bank Corporation Stock Option Plan for Outside
Directors (1989).
<PAGE> 2
2.7 "Service Year" shall mean the period beginning on the third Business Day
after the Corporation's annual meeting of shareholders at which directors are
elected and ending on the date of such annual meeting in the following year.
2.8 "HR Head" shall mean the head of the Human Resources Department of Mellon
Bank, N.A.
2.9 "Option" shall mean an option granted to an Outside Director pursuant to
the Plan.
2.10 "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended from
time to time, or any successor rule.
III. Administration
3.1 Self-Operative Plan. The Plan is intended to be self-operative to the
maximum extent consistent with prudent business practice. Under no circumstances
shall any individual or group of individuals exercise discretion with respect to
designating the recipient of an Option, the number of shares of Common Stock
that are subject to an Option, the date of grant for an Option or the exercise
price for an Option. Any action of the Nominating Committee of the Board of
Directors to set or recommend retainers or fees shall not be deemed to be such
an exercise of discretion, regardless of such action's effect on the number of
shares that become subject to Options pursuant to the formula in Section 5.4
hereof.
3.2 Certain Administrative Duties. Within the parameters set forth in Section
3.1 hereof, the HR Head shall administer the Plan. The HR Head's actions and
interpretations under the Plan shall be final, conclusive and binding, the HR
Head shall not be liable for any action taken or decisions made in good faith
relating to the Plan or any Option thereunder.
3.3 Source of Shares. The shares of Common Stock that may be issued upon the
exercise of Options under the Plan may be either authorized but unissued shares
or authorized and issued shares held in the Corporation's treasury. The
aggregate number of shares of Common Stock which may be issued under the Plan
shall not exceed 2,400,000 shares, subject to adjustment pursuant to Section 8.6
hereof.
IV. Grantings of Options
4.1 Timing. Except for individuals who become Outside Directors during the
Service Year (as described in Section 4.3 hereof), Options will be granted once
per Service Year on the third Business Day following the Corporation's annual
meeting of shareholders at which directors are elected.
2
<PAGE> 3
4.2 Recipients. Options will be awarded in equal amounts to all individuals who
are Outside Directors on the date of grant.
4.3 Mid-Service Year Elections. A director who is elected by the Board of
Directors after the start of a Service Year will be granted an Option having
terms (including term, exercise dates, and exercise price) identical to the
Options granted to Outside Directors at the start of that Service Year, except
that the number of shares of Common Stock subject to such Option shall be the
number of shares that are subject to each Option granted at the start of such
Service Year multiplied by a fraction the numerator of which is the number of
days during such Service Year that the recipient of such Option will serve as a
director and the denominator of which is the number of days in the Service Year
(with fractional shares being rounded upward to the nearest whole share).
4.4 Stock Option Agreements. The grant of any Option shall be evidenced by a
written "Stock Option Agreement" executed by the Corporation and the optionee.
The Stock Option Agreement shall contain the number of shares of Common Stock
that are subject to the Option evidenced thereby, the other essential terms of
the Option determined in accordance with Section V hereof, and other terms that
are not inconsistent with the requirements of this Plan.
V. Terms of Options
5.1 Terms of Options. All Options, other than Options granted to an Outside
Director upon his or her election during a Service Year, shall have a term of
ten years from the date of grant, subject to earlier termination pursuant to
Section 5.5 hereof.
5.2 Exercise of Options. All Options, other than Options granted to an Outside
Director upon his or her election during a Service Year, shall become
exercisable on the first anniversary of their grant date.
5.3 Exercise Price. The exercise price for all Options, other than Options
granted to an Outside Director upon his or her election during a Service Year,
shall be the Fair Market Value of the Common Stock on the date the Option is
granted.
5.4 Number of Shares. The number of shares of Common Stock that may be
purchased upon exercise of an Option granted for a given Service Year shall be
determined by the following formula:
(Number of dollars in projected annual retainer
for Service Year) x 10.908% = Number of Shares
Fractional shares resulting from the formula shall be rounded upward to the
nearest whole share. The number of shares subject to an Option shall be subject
to adjustment in accordance with Section 8.6 hereof.
3
<PAGE> 4
5.5 Forfeiture. Options that have not become exercisable on the date the
optionee ceases to serve as a director of the Corporation for any reason other
than the optionee's death, disability or completion of the Service Year shall be
forfeited and terminated immediately upon such termination of service. Options
that have become exercisable shall remain exercisable, and shall no longer be
subject to forfeiture, throughout their ten-year terms, regardless of whether
the optionee is a director of the Corporation at the time the Option is
exercised.
VI. Exercise of Options
6.1 Notice of Exercise. An Option shall be exercised by delivery to the H.R.
Head of a written notice of exercise in the form prescribed by the H.R. Head
for use from time to time. Such notice of exercise shall indicate the number of
shares as to which the Option is exercised and shall be accompanied by the full
exercise price for the Options exercised.
6.2 Form of Payment. The exercise price may be paid in cash or, in whole or in
part, by surrender of shares of Common Stock, which shall be credited against
the exercise price at their Fair Market Value on the date the Option is
exercised.
VII. Advisory Board Members
Members of the Corporation's Advisory Board shall be granted options under this
Plan in the same amounts and on the same terms as options granted to Outside
Directors; provided, however, no option shall be granted to an individual upon
his or her election to the Advisory Board after the start of the Service Year.
VIII. Miscellaneous
8.1 General Restriction. Each Option under the Plan shall be subject to the
requirement that, if at any time the H.R. Head shall determine that any listing
or registration of the shares of Common Stock, any consent or approval of any
governmental body, or any other agreement, consent or action is necessary or
desirable as a condition of the granting of an Option or issuance of Common
Stock in satisfaction thereof, such grant or issuance may not be consummated
unless such requirement is satisfied in a manner acceptable to the H.R. Head.
8.2 Non-Assignability. No Option under the Plan shall be assignable or
transferable by the optionee, except by will or pursuant to applicable laws of
descent and distribution. During the life of an optionee, an Option shall be
exercisable only by such optionee.
8.3 Withholding Taxes. Whenever the Corporation issues or transfers shares of
Common Stock under the Plan, the Corporation shall have the right to require
the optionee to remit to the Corporation an amount sufficient to satisfy any
federal, state, and local withholding tax requirements prior to the delivery of
any certificate for such shares.
4
<PAGE> 5
8.4 No Right to Continued Service. Nothing in the Plan or in any agreement
entered into pursuant to the Plan shall confer upon any optionee any right to
continued service as a director of the Corporation or any subsidiary or affect
any right of the Corporation or a subsidiary, acting through their Boards of
Directors or otherwise, to terminate or otherwise affect the service of such
optionee.
8.5 No rights as Shareholders. Holders of Options under the Plan shall have no
rights as shareholders of the Corporation resulting therefrom unless and until
certificates for shares of Common Stock are registered in their names in
satisfaction of a duly exercised Option.
8.6 Adjustments. In the event that the outstanding shares of Common Stock of
the Corporation are changed in number, class or character by reason of any
split-up, change of par value, stock dividend, combination or reclassification
of shares, recapitalization, merger, consolidation or other corporate change,
or shall be changed in value by reason of any spin-off, dividend in partial
liquidation or other special distribution, the Board of Directors of the
Corporation may make any changes it may deem equitable and appropriate in
outstanding Options and/or in the number of shares of Common Stock reserved for
issuance under the Plan. For purposes of this Section 8.6, it is intended that,
absent reasons to the contrary, adjustments to Options be consistent with any
changes or lack of changes to other options on the Common Stock resulting from
the same cause.
8.7 Amendment or Termination of the Plan. The Board of Directors of the
Corporation may amend or terminate the Plan as it deems advisable; provided,
however, no such amendment or termination may (a) impair the rights of an
optionee under an Option previously granted, (b) effect a change to any part of
the formula setting the amount, price and timing of Option grants more often
than permitted under Rule 16b-3 (a change in the level of actual or projected
retainer amounts not being deemed a change to such formula for that purpose), or
(c) without the approval of the Corporation's shareholders, amend any other
provision of Sections IV or V of the Plan.
May 1999
5
<PAGE> 1
Exhibit 10.3
MELLON BANK CORPORATION
PHANTOM STOCK UNIT PLAN (1995)
I. Purpose
The purposes of this Phantom Stock Unit Plan (1995) ("Plan") are to promote the
growth and profitability of Mellon Bank Corporation ("Corporation") and its
subsidiaries by providing officers and other key executives of the Corporation
and its subsidiaries with an incentive to achieve long-term corporate objectives
and to increase the mutuality of interests between such officers and key
executives and the shareholders of the Corporation.
II. Definitions
The following terms shall have the meanings shown:
2.1 "Board" shall mean the Board of Directors of the Corporation.
2.2 "Change in Control Event" shall mean any of the following events:
(a) The occurrence with respect to the Corporation of a "control
transaction", as such term is defined in Section 2542 of the Pennsylvania
Business Corporation Law of 1988, as of August 15, 1989; or
(b) Approval by the stockholders of the Corporation of (i) any
consolidation or merger of the Corporation where either (x) the holders of
voting stock of the Corporation immediately before the merger or consolidation
will not own more than 50% of the voting shares of the continuing or surviving
corporation immediately after such merger or consolidation or (y) the Incumbent
Directors immediately before the merger or consolidation will not hold more than
50% (rounded to the next whole person) of the seats on the board of directors of
the continuing or surviving corporation, or (ii) any sale, lease or exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Corporation; or
(c) A change of 25% (rounded to the next whole person) in the
membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85% (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the 12-month period and (ii) was not as a result of an actual or
threatened election with respect to directors or any other actual or threatened
solicitation of proxies by or on behalf of any person other than the Board of
Directors. As used in this Section 2.2, the term "Incumbent Director" means as
of any time a director of the Corporation (x) who has been a
<PAGE> 2
member of the Board of Directors continuously for at least 12 months or (y)
whose election or nomination as a director within such period met the
requirements of clauses (i) and (ii) of the preceding sentence.
2.3 "Committee" shall mean the Human Resources Committee of the Board, or any
successor committee.
2.4 "Common Stock" shall mean Common Stock of the Corporation.
2.5 "Deferral Plan" shall mean the Mellon Bank Corporation Elective Deferred
Compensation Plan for Senior Officers or any similar or successor plan of the
Corporation or a subsidiary then in effect.
2.6 "Fair Market Value" shall mean the mean value between the bid and ask price
of the Common Stock as reported by the National Association of Securities
Dealers through their Automated Quotation System on the relevant date, or, if no
quotations shall have been made on such relevant date, on the next preceding day
on which there were quotations. Notwithstanding the foregoing, if the Common
Stock is listed on a stock exchange, "Fair Market Value" shall mean the closing
price of the Common Stock on the exchange on the relevant date, or, if no sale
shall have been made on such exchange on that date, the closing price on the
next preceding day on which there was a sale.
2.7 "Unit" shall mean a right granted by the Committee pursuant to Section 4.1
to receive the Fair Market Value of a share of Common Stock as of a specified
date or as of the date of occurrence of a specified event, which right may be
made conditional upon the occurrence or nonoccurrence of other specified events
as herein provided; provided, however, that the amount to be paid under any Unit
may be increased or decreased from Fair Market Value on the basis of terms and
conditions specified by the Committee at the time of grant.
III. General
3.1 Administration
(a) The Plan shall be administered by the Committee, each member of
which shall at the time of any action under the Plan be a "non-employee
director" as then defined under Rule 16b-3 under the Securities Exchange Act of
1934 ("Exchange Act") or any successor rule.
(b) The Committee shall have the authority in its sole discretion from
time to time: (i) to designate the employees eligible to participate in the
Plan; (ii) to award Units to eligible employees and to determine the amount of
any such award; (iii) to prescribe such terms, conditions, limitations and
restrictions, not inconsistent with the Plan, applicable to any such award as
the Committee shall deem appropriate; and (iv) to interpret the Plan, to adopt,
amend and rescind rules and regulations relating to the Plan, and to make all
other determinations and
2
<PAGE> 3
take all other action necessary or advisable for the implementation and
administration of the Plan. A majority of the Committee shall constitute a
quorum, and the action of a majority of the members of the Committee present at
any meeting at which a quorum is present, or acts unanimously adopted in writing
without the holding of a meeting, shall be the acts of the Committee.
(c) All such actions shall be final, conclusive and binding upon the
participating employee. No member of the Committee shall be liable for any
action taken or decision made in good faith relating to the Plan or any award
thereunder.
3.2 Eligibility. The Committee may award Units under the Plan to any full-time
corporate officer, key executive, administrative or professional employee of the
Corporation or any of its subsidiaries.
3.3 Aggregate Limitation on Awards. The aggregate number of Units which may be
awarded under the Plan shall not exceed 1,000,000 Units, subject to adjustments
pursuant to Sections 5.5 and 5.6. If any Unit is surrendered or forfeited to the
Corporation for any reason prior to payment thereof, such Unit shall again be
available for award under the Plan.
IV. Units
4.1 Award of Units. The Committee may from time to time, subject to the
provisions of the Plan, in its discretion award Units to eligible employees in
such amounts as the Committee shall determine to award.
4.2 Award Agreements. The award of any Units shall be evidenced by a written
agreement executed by the Corporation and the awardee, stating the number of
Units awarded and such other terms and conditions of the award as the Committee
may from time to time determine.
4.3 Optional Terms and Conditions of Units. To the extent not inconsistent with
the Plan, the Committee may prescribe such terms and conditions applicable to
any award of Units as it may in its discretion determine.
4.4 Standard Terms and Conditions of Units. Unless otherwise determined by the
Committee pursuant to Section 4.3, each award of Units shall be made on the
following terms and conditions, in addition to such other terms, conditions,
limitations and restrictions as the Committee, in its discretion, may determine
to prescribe:
(a) Payment Date. The date on which each Unit shall mature and become
payable ("Payment Date") shall be the earlier of:
(i) the third anniversary of the date of the award; or
3
<PAGE> 4
(ii) the date of termination of the awardee's employment with
the Corporation or a subsidiary if, and only if, such termination is by reason
of the awardee's death, disability (covered by a disability plan of the
Corporation or a subsidiary then in effect) or retirement with the consent of
the Corporation or a subsidiary; or
(iii) the date of termination of the awardee's employment with
the Corporation or a subsidiary if, and only if, such termination results solely
from a displacement, as determined in accordance with the Mellon Employee
Displacement Program or any successor practice of the Corporation; or
(iv) the date of any Change in Control Event, as determined by
the Committee.
As promptly as practicable after the Payment Date, the Corporation or a
subsidiary shall either (A) pay to the awardee or his estate in cash an amount
equal to the number of Units maturing on that date multiplied by the Fair Market
Value on the Payment Date of a share of Common Stock or (B) if so elected by an
awardee prior to the time of the award or so determined by the Committee, cause
such amount to be credited to the awardee's account under a Deferral Plan.
(b) Forfeiture of Units. Upon the effective date of a termination of
the awardee's employment with the Corporation or a subsidiary for any reason not
specified in Section 4.4(a)(ii) or Section 4.4(a)(iii), all Units for which the
Payment Date has not occurred shall immediately be forfeited to the Corporation
without consideration or further action being required of the Corporation. For
purposes of the immediately preceding sentence, the effective date of the
awardee's termination shall be the date on which the awardee ceases to perform
services as an employee of the Corporation or any of its subsidiaries, without
regard to accrued vacation, severance or other benefits or the characterization
thereof on the payroll records of the Corporation or any of its subsidiaries.
(c) Dividend Equivalents. If an award of Units is outstanding as of the
record date for determination of the shareholders of the Corporation entitled to
receive a cash dividend on its outstanding shares of Common Stock, the
Corporation or a subsidiary shall pay to the awardee on or as promptly as
practical following the payment date thereof, an amount in cash equal to the per
share amount of such dividend multiplied by the number of Units held by the
awardee.
4.5 Transfer Restriction. No Unit shall be assignable or transferable by an
awardee other than by will, or if the awardee dies intestate, by the laws of
descent and distribution of the state of domicile of the awardee at the time of
death. All Units shall be payable during the lifetime of the awardee only to the
awardee or to the awardee's account under a Deferral Plan.
V. Miscellaneous
5.1 Withholding Taxes. Any payments made to an awardee may be net of an amount
sufficient to satisfy any federal, state, local or other withholding tax
requirements.
4
<PAGE> 5
5.2 No Right to Employment. Nothing in the Plan or in any agreement entered into
pursuant to the Plan shall confer upon any awardee the right to continue in the
employment of the Corporation or a subsidiary or affect any right which the
Corporation or a subsidiary may have to terminate the employment of such
awardee.
5.3 Non-Uniform Determinations. The Committee's determinations under the Plan
(including without limitation its determinations of the persons to receive
awards, the amount and timing of such awards and the terms and provisions of
such awards) need not be uniform and may be made by it selectively among persons
who receive, or are eligible to receive, awards under the Plan, whether or not
such persons are similarly situated.
5.4 No Rights as Shareholders. Recipients of awards under the Plan shall have no
rights as shareholders of the Corporation with respect thereto.
5.5 Adjustments of Stock. In the event of any change or changes in the
outstanding Common Stock aggregating at least 5%, the Committee may in its
discretion appropriately adjust the number of Units which may be awarded under
the Plan, the number of Units subject to awards outstanding under the Plan and
any and all other matters deemed appropriate by the Committee.
5.6 Reorganization. In the event that the outstanding Common Stock shall be
changed in number, class or character by reason of any split-up, change of par
value, stock dividend, combination or reclassification of shares, merger,
consolidation or other corporate change, or shall be changed in value by reason
of any spin-off, dividend in partial liquidation or other special distribution,
the Committee shall make such changes as it may deem equitable in outstanding
Units awarded pursuant to the Plan and the number and character of Units
available for future awards.
5.7 Amendment or Termination of the Plan. The Committee or the Board may at any
time terminate the Plan and may from time to time amend the Plan as it may deem
advisable. The termination or amendment of the Plan shall not, without the
consent of the awardee, affect such awardee's rights under an award previously
granted.
May 1999
<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 Six months ended
June 30, June 30,
(dollar amounts in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes and equity in undistributed
net income (loss) of subsidiaries $276 $ 94 $349 $182
Fixed charges: interest expense, one-third of
rental expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 55 52 109 99
- ---------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $331 $ 146 $458 $281
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ -- $ -- $ -- $ 13
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 6.02 2.82 4.19 2.84
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends 6.02 2.82 4.19 2.50
- ---------------------------------------------------------------------------------------------------------------------------------
</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.
72
<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 Six months ended
June 30, June 30,
(dollar amounts in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes and impact of accounting change $371 (a) $331 $ 734 (b) $ 663
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 145 146 300 278
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined), excluding
interest on deposits 516 477 1,034 941
Interest on deposits 207 240 428 469
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $723 $717 $1,462 $1,410
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (c) $ -- $ -- $ -- $ 13
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.56 (a) 3.27 3.45 (b) 3.38
Including interest on deposits 2.05 (a) 1.86 2.01 (b) 1.89
Ratio of earnings (as defined) to combined fixed charges
and preferred stock dividends:
Excluding interest on deposits 3.56 (a) 3.27 3.45 (b) 3.23
Including interest on deposits 2.05 (a) 1.86 2.01 (b) 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 June 30, 1999, exclude from earnings (as
defined) a $59 million pre-tax net gain from completed and pending
divestitures and $56 million pre-tax of nonrecurring expenses. Had these
computations included the net gain from divestitures and nonrecurring
expenses, 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 3.57 excluding interest on deposits and 2.06
including interest on deposits.
(b) 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 six months ended June 30, 1999, exclude from earnings (as
defined) a $142 million pre-tax net gain from completed and pending
divestitures and $56 million pre-tax of nonrecurring expenses. Had these
computations included the net gain from divestitures and nonrecurring
expenses, 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 3.73 excluding interest on deposits and 2.13
including interest on deposits.
(c) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
73
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,140
<INT-BEARING-DEPOSITS> 657
<FED-FUNDS-SOLD> 359
<TRADING-ASSETS> 318
<INVESTMENTS-HELD-FOR-SALE> 5,241
<INVESTMENTS-CARRYING> 1,330
<INVESTMENTS-MARKET> 1,332
<LOANS> 30,544
<ALLOWANCE> 409
<TOTAL-ASSETS> 49,088
<DEPOSITS> 32,975
<SHORT-TERM> 4,765
<LIABILITIES-OTHER> 2,751
<LONG-TERM> 3,303
991<F1>
0
<COMMON> 294
<OTHER-SE> 4,009
<TOTAL-LIABILITIES-AND-EQUITY> 49,088<F1>
<INTEREST-LOAN> 1,135
<INTEREST-INVEST> 214
<INTEREST-OTHER> 33
<INTEREST-TOTAL> 1,391
<INTEREST-DEPOSIT> 428
<INTEREST-EXPENSE> 661
<INTEREST-INCOME-NET> 730
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,603
<INCOME-PRETAX> 820
<INCOME-PRE-EXTRAORDINARY> 518
<EXTRAORDINARY> 0
<CHANGES> (26)
<NET-INCOME> 492
<EPS-BASIC> 0.94<F2>
<EPS-DILUTED> 0.93<F2>
<YIELD-ACTUAL> 3.74
<LOANS-NON> 121
<LOANS-PAST> 111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 496
<CHARGE-OFFS> 42
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 409
<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.
<F2>Reflects a two-for-one common stock split distributed to shareholders of record
on May 17, 1999. Prior Financial Data Schedules have not been restated for this
recapitalization.
</FN>
</TABLE>
