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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 SEPTEMBER 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 FINANCIAL CORPORATION
(formerly 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
MELLON BANK CORPORATION
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class September 30, 1999
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Common Stock, $.50 par value 508,650,024
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TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
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Page No.
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Part I - Financial Information
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Financial Highlights 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Items 2 and 3) 3
Financial Statements (Item 1):
Consolidated Income Statement 47
Consolidated Income Statement - Five Quarter Trend 49
Consolidated Balance Sheet 51
Consolidated Statement of Cash Flows 52
Consolidated Statement of Changes in Shareholders' Equity 54
Notes to Financial Statements 56
Part II - Other Information
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Legal Proceedings (Item 1) 63
Exhibits and Reports on Form 8-K (Item 6) 63
Signature 65
Corporate Information 66
Index to Exhibits 67
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; the
effects of 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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FINANCIAL HIGHLIGHTS Quarter ended Nine months ended
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SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
1999 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Diluted earnings per common share:
Operating $ .46 (a) $ .45 (a) $ .41 $1.34 (a) $1.20
Cash operating (b) .52 (a) .50 (a) .47 1.51 (a) 1.36
Reported .45 .45 .41 1.38 1.20
Net income applicable to common stock (in millions):
Operating $ 236 (a) $ 236 (a) $ 218 $ 703 (a) $ 639
Cash operating (b) 266 (a) 266 (a) 246 792 (a) 720
Reported 231 238 218 723 639
Return on common equity (annualized):
Operating 22.3% (a) 21.4% (a) 20.3% 21.5% (a) 20.9%
Cash operating (b) 43.7 (a) 41.1 (a) 40.2 41.7 (a) 41.2
Reported 21.8 21.6 20.3 22.1 20.9
Return on assets (annualized):
Operating 1.92% (a) 1.90% (a) 1.81% 1.89% (a) 1.83%
Cash operating (b) 2.25 (a) 2.23 (a) 2.11 2.21 (a) 2.13
Reported 1.87 1.92 1.81 1.94 1.83
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SELECTED KEY DATA
Fee revenue as a percentage of net interest
and fee revenue (FTE) 69% 69% 66% 69% 66%
Efficiency ratio excluding amortization of
intangibles (c) 61% 62% 62% 61% 63%
Assets under management (in billions) (d) $ 446 $ 465 $ 368
Assets under administration or
custody (in billions) (d) 2,156 2,061 1,642
Dividends paid per common share $ .20 $ .20 $ .18 $ .58 $ .53
Dividends paid on common stock (in millions) 103 104 94 301 271
Closing common stock price (d) $33.63 $ 36.38 $ 27.50
Market capitalization (in millions) (d) 17,103 18,704 14,363
Average common shares and equivalents
outstanding - diluted (in thousands) 518,605 525,712 531,548 525,182 529,884
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CAPITAL RATIOS AT PERIOD END
Shareholders' equity to assets:
Reported 9.00% 8.77% 9.03%
Tangible (b) 5.45 5.29 5.47
Tier I capital 7.12 6.87 6.78
Total (Tier I plus Tier II) capital 11.58 11.18 11.22
Leverage capital 6.82 6.70 7.06
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</TABLE>
(continued)
2
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<TABLE>
<CAPTION>
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FINANCIAL HIGHLIGHTS (CONTINUED) Quarter ended Nine months ended
---------------------------------------- ------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 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 $30,177 $30,504 $30,426 $30,711 $30,043
Total interest-earning assets 38,407 39,015 37,797 39,072 37,396
Total assets 48,871 49,766 47,937 49,765 47,384
Total tangible assets (b) 47,012 47,878 46,096 47,876 45,631
Deposits 33,462 33,358 33,399 33,633 33,227
Notes and debentures 3,372 3,387 3,003 3,370 2,935
Trust-preferred securities 991 991 991 991 991
Total shareholders' equity 4,212 4,417 4,265 4,365 4,123
Tangible common shareholders' equity (b) 2,417 2,591 2,424 2,538 2,337
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</TABLE>
(a) Operating and cash operating results for the third quarter of 1999 exclude a
$5 million after-tax net loss from divestitures. The second quarter of 1999
excludes a $38 million after-tax net gain from divestitures and $36 million
of nonrecurring expenses after taxes. Also excluded from the first nine
months of 1999 are 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 recorded in the first quarter of 1999.
(b) See page 7 for a definition of amounts and ratios.
(c) See page 26 for the definition of this ratio.
(d) Period-end amount.
Note: All calculations are based on unrounded numbers.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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Diluted earnings per common share and net income applicable to common stock, on
a reported basis, were $.45 and $231 million, respectively, for the third
quarter of 1999. Third quarter 1999 reported results included a $5 million
after-tax net loss from divestitures. The annualized return on common equity and
return on assets, on a reported basis, were 21.8% and 1.87%, respectively, for
the third quarter of 1999.
Excluding the net loss from divestitures, third quarter 1999 diluted operating
earnings per common share totaled $.46, an increase of 12% compared with $.41 in
the third quarter of 1998. Operating net income applicable to common stock in
the third quarter of 1999 was $236 million, an increase of 8% compared with $218
million in the third quarter of 1998. The annualized return on common equity and
return on assets, on an operating basis, were 22.3% and 1.92%, respectively, for
the third quarter of 1999, compared with 20.3% and 1.81%, respectively, for the
third quarter of 1998. In the second quarter of 1999, diluted operating earnings
per common share totaled $.45 and operating net income applicable to common
stock was $236 million.
Diluted cash operating earnings per common share totaled $.52 in the third
quarter of 1999, an increase of 11%, compared with $.47 in the third quarter of
1998. Cash operating net income applicable to common stock was $266 million, an
increase of 8% compared with $246 million in the third quarter of 1998. The
annualized cash return on tangible common equity and cash return on tangible
assets, on an operating basis, were 43.7% and
3
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OVERVIEW (CONTINUED)
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2.25%, respectively, in the third quarter of 1999, compared with 40.2% and
2.11%, respectively, in the third quarter of 1998. In the second quarter of
1999, diluted cash operating earnings per common share totaled $.50 and cash
operating net income applicable to common stock was $266 million.
Fee revenue for the third quarter of 1999 of $765 million was impacted by the
March 1999 sale of the credit card business, the June 1999 sale of the network
services transaction processing unit, the sale of the mortgage businesses that
was completed in the third quarter of 1999 and the October 1998 acquisition of
Newton Management Limited (Newton). Excluding the effect of acquisitions and
divestitures, fee revenue increased 9% compared with the third quarter of 1998,
primarily due to a 12% increase in trust and investment fee revenue. Excluding
the fee revenue generated by the mortgage businesses and the network services
transaction processing unit, fee revenue decreased 1% compared with the second
quarter of 1999, resulting from lower securities lending revenue, lower
brokerage fees and lower foreign currency and securities trading revenue. At
September 30, 1999, assets under management totaled $446 billion, a 21% increase
from September 30, 1998, and assets under administration or custody totaled
$2,156 billion, a 31% increase from September 30, 1998.
Net interest revenue on a fully taxable equivalent basis for the third quarter
of 1999 was $352 million, down $24 million compared with the prior-year period
and down $11 million from the second quarter of 1999. The decrease compared with
the third quarter of 1998 primarily resulted from the sale of the credit card
business. Excluding the net interest revenue generated by the credit card
business in the prior-year period, net interest revenue decreased $9 million
compared with the third quarter of 1998, reflecting lower loan fees and higher
funding costs related to the repurchase of common stock. The decrease compared
with the second quarter of 1999 resulted from higher funding costs related to
the repurchase of common stock as well as a lower level of interest-earning
assets.
Operating expense before trust-preferred securities expense and net revenue from
acquired property for the third quarter of 1999 was $716 million. Excluding the
effect of acquisitions and divestitures and $56 million of nonrecurring expenses
in the second quarter of 1999, operating expense was unchanged compared with the
third quarter of 1998 and decreased 2% compared with the second quarter of 1999,
reflecting the continuing focus on expense management and productivity.
Credit quality expense was $5 million in the third quarter of 1999, compared
with $12 million in the third quarter of 1998 and $5 million in the second
quarter of 1999. The lower expense in the third quarter of 1999 compared with
the prior-year period resulted from a lower provision for credit losses
following the sale of the credit card business, as well as higher net revenue
from acquired property. Net credit losses were $10 million in the third quarter
of 1999, compared with $15 million in the third quarter of 1998 and $11 million
in the second quarter of 1999.
Nonperforming assets totaled $169 million at September 30, 1999, compared with
$142 million at June 30, 1999, $161 million at March 31, 1999, and $140 million
at September 30, 1998. The Corporation's ratio of nonperforming assets to total
loans and net acquired property was .58% at September 30, 1999, compared with
.46% at June 30, 1999, .53% at March 31, 1999, and .45% at September 30, 1998.
Year-to-date 1999 compared with year-to-date 1998
For the first nine months of 1999, the Corporation reported diluted earnings per
common share of $1.38 and net income applicable to common stock of $723 million.
Year-to-date 1999 results included an $82 million after-tax net gain from
divestitures, or $.16 per common share, $36 million after-tax of nonrecurring
4
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OVERVIEW (CONTINUED)
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expenses, 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 22.1% and 1.94%, respectively, for the first nine months 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 $1.34, an increase of 12% compared with $1.20
in the first nine months of 1998. Operating net income applicable to common
stock in the first nine months of 1999 was $703 million, an increase of 10%
compared with $639 million in the first nine months of 1998. For the first nine
months of 1999, diluted cash operating earnings per common share totaled $1.51,
an increase of 11% compared with $1.36 in the first nine months of 1998. Cash
operating net income applicable to common stock totaled $792 million, an
increase of 10% compared with $720 million in the first nine months of 1998.
The comparison of fee revenue in the first nine months of 1999 to the first nine
months of 1998 was impacted by the credit card, network services and mortgage
banking divestitures, the Newton and Founders acquisitions and the elimination
of fees from the electronic filing of income tax returns, a service that was
discontinued at the end of 1998. Excluding these factors, fee revenue increased
12% compared with the first nine months of 1998, primarily due to a 13% increase
in trust and investment fee revenue. Net interest revenue decreased $31 million
in the first nine months of 1999 compared with the prior-year period. Excluding
the net interest revenue generated by the credit card business, net interest
revenue decreased $3 million compared with the first nine months of 1998,
reflecting lower loan fees and higher funding costs related to the repurchase of
common stock, partially offset by a higher level of interest-free funds.
Excluding the effect of the nonrecurring expenses, acquisitions and
divestitures, operating expense before trust-preferred securities expense and
net revenue from acquired property increased 2% in the first nine months of 1999
compared with the first nine months of 1998.
SIGNIFICANT FINANCIAL EVENTS
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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.
In June 1999, the Corporation completed the sale of the network services
transaction processing unit to U.S. Bancorp. In addition, the sale of the
commercial mortgage servicing business to GMAC Commercial Mortgage Corporation,
which began during the second quarter of 1999 on a portfolio-by-portfolio basis,
was completed by September 30, 1999. Finally, on September 30, 1999, the
Corporation sold its residential mortgage business to Chase Mortgage Company, a
subsidiary of The Chase Manhattan Corporation.
In the third quarter of 1999, the Corporation recorded an $8 million pre-tax net
loss from divestitures. The after-tax net loss from these transactions totaled
$5 million, or $.01 per common share. The net loss primarily resulted from an
adjustment to the previous write-downs recorded to reflect the net sales
proceeds received for the residential and commercial mortgage servicing
businesses. This loss was partially offset by an additional gain related to the
sale of the network services transaction processing unit as more customers
converted to the purchaser, as well as a gain on the sale of seven Mellon (MD)
retail offices in September 1999, as discussed further on the following page.
The Corporation expects a favorable impact on operating results in the future
following the sale of the mortgage businesses, which generated an after-tax
operating loss of approximately
5
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SIGNIFICANT FINANCIAL EVENTS (CONTINUED)
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$5 million, or approximately $.01 per common share, in the third quarter of
1999. Including the $142 million pre-tax net gain reported in the first six
months of 1999, the pre-tax net gain from divestitures totaled $134 million for
the first nine months of 1999. For an analysis of the financial impact of these
divestitures, see the "Divestitures" disclosure in the "Business sectors"
section on pages 8 through 17. Excluding the net gain on the sales, the future
impact of the credit card business, mortgage businesses and network services
transaction processing unit 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 and/or to
repurchase common stock.
Sale of Mellon (MD) Retail Offices
In September 1999, Mellon Bank (MD) National Association completed the sale of
its seven retail offices, including approximately $225 million of deposits and
$35 million of loans, to Sandy Spring National Bank of Maryland. The Corporation
will continue to have a significant presence in the Maryland market by
maintaining and expanding its commercial lending, private banking, jumbo
mortgage and consulting/operational businesses in the region.
Repurchase of common stock
In January 1999, the Corporation's board of directors approved an enhancement to
an existing common share repurchase authorization by increasing the number of
the Corporation's shares authorized for repurchase to 20 million shares. During
the third quarter of 1999, 6.6 million shares of common stock were repurchased,
completing the 20 million share repurchase program. In September 1999, the board
of directors authorized an additional repurchase of up to 25 million shares of
common stock to be used for general corporate purposes.
Corporate name change
On October 18, 1999, the Corporation's name was changed to Mellon Financial
Corporation to more clearly communicate its strategic focus. In addition, on the
same day Mellon Financial Company, the Corporation's financing entity, changed
its corporate name to Mellon Funding Corporation.
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 Nine months ended
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(dollar amounts in millions SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
except per share amounts) 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 $ 236 $ 218 $ 703 $ 639
After-tax impact of amortization
of intangibles from purchase acquisitions 30 30 28 89 81
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Cash operating net income applicable
to common stock $ 266 $ 266 $ 246 $ 792 $ 720
Increase over prior-year period 8% 9% 16% 10% 16%
Cash operating earnings per common
share - diluted $ .52 $ .50 $ .47 $ 1.51 $ 1.36
Increase over prior-year period 11% 11% 16% 11% 15%
Average common equity $ 4,212 $ 4,417 $ 4,265 $ 4,365 $ 4,089
Less: Average goodwill and other identified
intangibles, net of tax benefit (b) (1,859) (1,888) (1,841) (1,889) (1,752)
Plus: Average minority interest (c) 64 62 - 62 -
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Average tangible common equity (b) $ 2,417 $ 2,591 $ 2,424 $ 2,538 $ 2,337
Cash return on tangible common
equity (b)(d) 43.7% 41.1% 40.2% 41.7% 41.2%
Average total assets $48,871 $49,766 $47,937 $49,765 $47,384
Average total tangible assets (b) $47,012 $47,878 $46,096 $47,876 $45,631
Cash return on tangible assets (b)(d) 2.25% 2.23% 2.11% 2.21% 2.13%
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</TABLE>
(a) Cash operating results for the third quarter of 1999 exclude a $5 million
after-tax net loss from divestitures. The second quarter of 1999 excludes a
$38 million after-tax net gain from divestitures and $36 million after-tax
of nonrecurring expenses. Also excluded from the first nine months of 1999
are 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 recorded in the first quarter of 1999.
(b) The amount of goodwill and other identified intangibles subtracted from
common equity and total assets is net of $361 million, $368 million, $299
million, $368 million and $253 million, respectively, of average tax
benefits related to tax deductible goodwill and other intangibles.
(c) Following the fourth quarter 1998 acquisition of a majority interest in
Newton, the Corporation began to include minority interest in the
calculation of average tangible common equity. Minority interest at both
September 30, 1999, and June 30, 1999, totaled $64 million.
(d) Ratios are annualized.
7
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BUSINESS SECTORS
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FOR THE QUARTER ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
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) $ 37 $ 35 $ (3) $ (2) $ 15 $ 11 $ 122 $ 126 $ 104 $ 98
Fee revenue 78 68 249 195 222 209 39 47 34 25
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Total revenue 115 103 246 193 237 220 161 173 138 123
Credit quality expense (revenue) (3) (1) -- -- -- -- 3 2 1 1
Operating expense:
Intangible amortization 5 4 7 6 3 3 13 13 7 7
Trust-preferred securities -- -- -- -- -- -- 1 1 4 2
Other 59 54 156 116 182 172 92 99 53 52
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Total operating expense 64 58 163 122 185 175 106 113 64 61
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Income (loss) before taxes 54 46 83 71 52 45 52 58 73 61
Income taxes (benefits) 21 18 34 28 21 19 19 21 27 23
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Net income (loss) $ 33 $ 28 $ 49 $ 43 $ 31 $ 26 $ 33 $ 37 $ 46 $ 38
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Cash net income (loss) (a) $ 38 $ 32 $ 56 $ 48 $ 34 $ 29 $ 42 $ 46 $ 50 $ 43
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Average assets $ 6.3 $ 5.7 $ 2.0 $ 1.5 $ 1.6 $ 1.4 $13.9 $13.0 $12.4 $10.9
Average common equity $ 0.4 $ 0.4 $ 0.5 $ 0.4 $ 0.5 $ 0.4 $ 0.7 $ 0.6 $ 0.7 $ 0.7
Average Tier I preferred equity $ -- $ -- $ -- $ -- $ -- $ -- $ 0.1 $ 0.1 $ 0.1 $ 0.1
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Return on common equity (b) 35% 30% 37% 39% 24% 27% 19% 23% 24% 21%
Return on assets (b) 2.14% 1.87% NM NM NM NM 0.94% 1.14% 1.46% 1.34%
Pretax operating margin 47% 43% 34% 37% 22% 20% 32% 34% 53% 49%
Pretax operating margin (c) 52% 48% 37% 40% 23% 22% 41% 42% 61% 57%
Efficiency ratio (c) 51% 52% 63% 60% 77% 78% 58% 57% 38% 43%
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</TABLE>
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FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
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) $ 113 $ 102 $ (8) $ (2) $ 39 $ 33 $ 368 $ 377 $ 304 $ 279
Fee revenue 236 199 731 557 667 615 120 115 87 76
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Total revenue 349 301 723 555 706 648 488 492 391 355
Credit quality expense (revenue) (5) (2) -- -- -- -- 8 9 9 7
Operating expense:
Intangible amortization 15 13 22 14 9 9 37 37 22 21
Trust-preferred securities 1 -- -- -- -- -- 3 3 9 7
Other 179 154 458 334 538 515 289 292 163 157
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Total operating expense 195 167 480 348 547 524 329 332 194 185
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Income (loss) before taxes and
cumulative effect of
accounting change 159 136 243 207 159 124 151 151 188 163
Income taxes (benefits) 61 52 100 86 64 51 56 56 71 62
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Income (loss) before cumulative
effect of accounting change 98 84 143 121 95 73 95 95 117 101
Cumulative effect of
accounting change (d) -- -- -- -- -- -- -- -- -- --
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Net income (loss) $ 98 $ 84 $ 143 $ 121 $ 95 $ 73 $ 95 $ 95 $ 117 $ 101
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Cash net income (loss) (a) $ 112 $ 96 $ 160 $ 133 $ 104 $ 82 $ 122 $ 122 $ 134 $ 117
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Average assets $ 6.3 $ 5.5 $ 1.9 $ 1.4 $ 1.7 $ 1.3 $14.1 $12.8 $12.0 $10.4
Average common equity $ 0.4 $ 0.3 $ 0.5 $ 0.4 $ 0.5 $ 0.4 $ 0.7 $ 0.6 $ 0.7 $ 0.7
Average Tier I preferred equity $ -- $ -- $ -- $ -- $ -- $ -- $ 0.1 $ 0.1 $ 0.1 $ 0.1
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Return on common equity (b) 35% 32% 37% 38% 26% 25% 19% 20% 21% 21%
Return on assets (b) 2.11% 2.03% NM NM NM NM 0.90% 0.99% 1.30% 1.30%
Pretax operating margin 46% 45% 34% 37% 22% 19% 31% 31% 48% 46%
Pretax operating margin (c) 50% 49% 37% 40% 24% 20% 39% 39% 56% 54%
Efficiency ratio (c) 51% 51% 63% 60% 76% 80% 59% 59% 42% 44%
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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 $(8) million and $134 million, respectively, in pre-tax net gains
(losses) from divestitures for the three and nine month periods ended
September 30, 1999.
(f) Ratios exclude the impact of the net divestiture gains (losses) and
nonrecurring expenses.
NM - Not meaningful.
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<TABLE>
<CAPTION>
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Large Real Estate
Corporate Total Core 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>
$ 67 $ 66 $ 342 $ 334 $ 8 $ 35 $ 2 $ 7 $ 352 $ 376
65 57 687 601 70 (e) 112 6 5 763 718
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132 123 1,029 935 78 147 8 12 1,115 1,094
7 -- 8 2 -- 13 (3) (3) 5 12
-- -- 35 33 2 2 -- -- 37 35
6 6 11 9 -- 1 9 10 20 20
74 75 616 568 63 114 -- -- 679 682
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80 81 662 610 65 117 9 10 736 737
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45 42 359 323 13 17 2 5 374 345
16 15 138 124 6 7 (1) (4) 143 127
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$ 29 $ 27 $ 221 $ 199 $ 7 $ 10 $ 3 $ 9 $ 231 $ 218
- -----------------------------------------------------------------------------------------------------------------------------------
$ 29 $ 27 $ 249 $ 225 $ 9 $ 12 $ 3 $ 9 $ 261 $ 246
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9.2 $ 9.9 $ 45.4 $ 42.4 $2.2 $ 4.4 $1.3 $1.1 $ 48.9 $ 47.9
$ 1.0 $ 1.0 $ 3.8 $ 3.5 $0.2 $ 0.3 $0.2 $0.5 $ 4.2 $ 4.3
$ 0.3 $ 0.3 $ 0.5 $ 0.5 $ -- $ -- $0.5 $0.5 $ 1.0 $ 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
12% 11% 23% 22% NM NM NM NM 22% 20%
1.22% 1.10% 1.93% 1.86% NM NM NM NM 1.87% 1.81%
34% 35% 35% 35% NM NM NM NM 34% (f) 32%
38% 39% 39% 39% NM NM NM NM 39% (f) 37%
56% 61% 60% 61% NM NM NM NM 61% (f) 62%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Large Real Estate
Corporate Total Core 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>
$ 202 $ 195 $1,018 $ 984 $ 51 $ 97 $ 17 $ 36 $1,086 $1,117
197 181 2,038 1,743 418 (e) 366 41 30 2,497 2,139
- -----------------------------------------------------------------------------------------------------------------------------------
399 376 3,056 2,727 469 463 58 66 3,583 3,256
13 -- 25 14 11 32 (11) (7) 25 39
1 1 106 95 5 5 -- -- 111 100
17 17 30 27 1 2 28 30 59 59
233 232 1,860 1,684 255 338 59 13 2,174 2,035
- -----------------------------------------------------------------------------------------------------------------------------------
251 250 1,996 1,806 261 345 87 43 2,344 2,194
- -----------------------------------------------------------------------------------------------------------------------------------
135 126 1,035 907 197 86 (18) 30 1,214 1,023
49 45 401 352 76 32 (12) (9) 465 375
- -----------------------------------------------------------------------------------------------------------------------------------
86 81 634 555 121 54 (6) 39 749 648
-- -- -- -- -- -- -- -- (26) --
- -----------------------------------------------------------------------------------------------------------------------------------
$ 86 $ 81 $ 634 $ 555 $121 $ 54 $ (6) $ 39 $ 723 $ 648
- -----------------------------------------------------------------------------------------------------------------------------------
$ 86 $ 81 $ 718 $ 631 $126 $ 59 $ (6) $ 39 $ 812 $ 729
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9.5 $ 10.2 $ 45.5 $ 41.6 $3.0 $4.4 $1.3 $1.4 $ 49.8 $ 47.4
$ 1.0 $ 1.0 $ 3.8 $ 3.4 $0.2 $0.3 $0.4 $0.4 $ 4.4 $ 4.1
$ 0.3 $ 0.3 $ 0.5 $ 0.5 $ -- $ -- $0.5 $0.5 $ 1.0 $ 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
12% 11% 23% 22% NM NM NM NM 22% 21%
1.21% 1.06% 1.86% 1.78% NM NM NM NM 1.94% 1.83%
34% 34% 34% 33% NM NM NM NM 32% (f) 31%
38% 38% 38% 38% NM NM NM NM 37% (f) 36%
58% 62% 61% 62% NM NM NM NM 61% (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 Divestitures has been displayed separately, as discussed
further on page 15. The 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 credit card business, mortgage businesses 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 a mutual fund administration
service provided under a long-term contract that expires at the end of May 2000;
the gain on the sale of the Mellon Bank (MD) N.A. retail offices that were sold
in September 1999; the results of the merchant card processing business that was
sold in December 1998; 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 "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 real estate assets has decreased.
Following is a discussion of the Corporation's business sectors. In the tables
that follow, the income statement amounts are presented in millions, the assets
under management, administration and custody are period-end market values and
are presented in billions, and the return on common equity is annualized.
Total Core Sectors
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Nine months ended -------------------
--------------------- ---------------------- 3Q 99 9 Mos 99
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, vs vs
1999 1998 1999 1998 3Q 98 9 Mos 98
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $1,029 $935 $3,056 $2,727 10% 12%
Total operating expense $ 662 $610 $1,996 $1,806 8% 10%
Income before taxes $ 359 $323 $1,035 $ 907 12% 14%
Return on common equity 23% 22% 23% 22%
Pretax operating margin (a) 39% 39% 38% 38%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities expense.
Income before taxes for the Corporation's core sectors was $359 million in the
third quarter of 1999, an increase of $36 million, or 12%, compared with the
prior-year period. This increase resulted from positive operating leverage as
revenues increased $94 million, or 10%, while operating expense increased $52
million, or 8%, and
10
<PAGE> 12
BUSINESS SECTORS (CONTINUED)
- -------------------------------------------------------------------------------
credit quality expense increased $6 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 $35 million of fee revenue.
Total operating expense increased primarily due to business growth as well as
acquisitions.
Income before taxes for the Corporation's core sectors was $1.035 billion in the
first nine months of 1999, an increase of $128 million, or 14%, compared with
the prior-year period, driven by a 12% increase in total revenue partially
offset by a 10% 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 Nine months ended --------------------
------------------------ ----------------------- 3Q 99 9 Mos 99
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, vs vs
1999 1998 1999 1998 3Q 98 9 Mos 98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $115 $103 $349 $301 13% 16%
Total operating expense $ 64 $ 58 $195 $167 10% 16%
Income before taxes $ 54 $ 46 $159 $136 24% 18%
Return on common equity 35% 30% 35% 32%
Pretax operating margin (a) 52% 48% 50% 49%
Assets under management $ 53 $ 42
Assets under administration/custody $ 34 $ 34
- -----------------------------------------------------------------------------------------------------------------------------------
</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 $54 million in the third quarter of 1999, up $8 million,
or 24%, from the prior-year period. Revenue increased $12 million, or 13%, due
to higher private asset management fee revenue. Assets under management
increased to $53 billion at September 30, 1999 from $42 billion at September 30,
1998, reflecting a higher level of private assets under management, due to new
business and market appreciation. Operating expense increased $6 million, or
10%, in support of business growth.
Income before taxes for this sector was $159 million in the first nine months of
1999, an increase of $23 million, or 18%, compared with the prior-year period.
Total revenue increased 16% over the prior-year period, primarily due to growth
in private asset management fees, while expenses also increased 16% 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 Nine months ended ----------------------
------------------------ ------------------------ 3Q 99 9 Mos 99
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, vs vs
1999 1998 1999 1998 3Q 98 9 Mos 98
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $246 $193 $723 $555 27% 30%
Total operating expense $163 $122 $480 $348 34% 38%
Income before taxes $ 83 $ 71 $243 $207 16% 17%
Return on common equity 37% 39% 37% 38%
Pretax operating margin (a) 37% 40% 37% 40%
Assets under management $362 $298
- -----------------------------------------------------------------------------------------------------------------------------------
</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 $83 million in the third quarter of 1999,
compared with $71 million in the third quarter of 1998, an increase of $12
million, or 16%. Revenue increased $53 million, or 27%, primarily due to higher
mutual fund and institutional asset management fees due to the Newton
acquisition and a higher level of managed assets. Mutual fund assets and
institutional assets managed increased 21% to $362 billion at September 30,
1999, from $298 billion at September 30, 1998, due to new business and market
appreciation, as well as the Newton acquisition. In addition, brokerage fees
increased by $2 million. Total operating expense increased $41 million, or 34%,
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 11% and total operating expense increased 5%,
resulting in a 20% increase in income before taxes.
Income before taxes for this sector was $243 million in the first nine months of
1999, an increase of $36 million, or 17%, compared with the prior-year period.
Total revenue increased 30% while expense increased 38%, resulting from the same
factors responsible for the third quarter of 1999 increases as compared to the
prior-year period. In addition, the full nine-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 7%, resulting in a 20% increase in income before taxes.
12
<PAGE> 14
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Global Investment Services
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Nine months ended ----------------------
------------------------ ------------------------ 3Q 99 9 Mos 99
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, vs vs
1999 1998 1999 1998 3Q 98 9 Mos 98
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 237 $ 220 $706 $648 8% 9%
Total operating expense $ 185 $ 175 $547 $524 6% 5%
Income before taxes $ 52 $ 45 $159 $124 17% 29%
Return on common equity 24% 27% 26% 25%
Pretax operating margin (a) 23% 22% 24% 20%
Assets under management $ 31 $ 28
Assets under administration/custody $2,122 $1,608
- -----------------------------------------------------------------------------------------------------------------------------------
</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 outsourcing
for investment managers. Income before taxes for the Global Investment Services
sector of $52 million increased $7 million, or 17%, compared with the prior-year
period. The increase was attributable to a $17 million, or 8%, increase in total
revenue resulting, in part, from higher institutional trust and mutual fund
administration/custody fees, higher foreign exchange fees and increased benefits
consulting and administration fees, compared with an increase of $10 million, or
6%, in total operating expenses. Assets under administration/custody exceeded $2
trillion at September 30, 1999, an increase of 32% from September 30, 1998.
Income before taxes for this sector was $159 million in the first nine months of
1999, an increase of $35 million, or 29%, compared with the prior-year period.
Revenue increased 9% primarily reflecting the same factors responsible for the
third quarter of 1999 increase while expenses increased 5%.
Regional Consumer Banking
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Nine months ended ----------------------
------------------------ ------------------------ 3Q 99 9 Mos 99
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, vs vs
1999 1998 1999 1998 3Q 98 9 Mos 98
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $161 $173 $488 $492 (7)% (1)%
Total operating expense $106 $113 $329 $332 (6)% (1)%
Income before taxes $ 52 $ 58 $151 $151 (12)% -%
Return on common equity 19% 23% 19% 20%
Pretax operating margin (a) 41% 42% 39% 39%
- ----------------------------------------------------------------------------------------------------------------------------------
</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 $52 million in the third quarter of 1999, a decrease of $6 million, or
12%, compared with the third quarter of 1998. Total revenue decreased $12
million, or 7%, compared with the prior-year period primarily due to lower fee
revenue while total operating expense decreased $7 million, or 6%, compared with
the prior-year period reflecting productivity improvements.
13
<PAGE> 15
BUSINESS SECTORS (CONTINUED)
- -------------------------------------------------------------------------------
Income before taxes for this sector was $151 million for the first nine months
of 1999, unchanged compared with the first nine months of 1998.
Specialized Commercial Banking
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Nine months ended ----------------------
------------------------ ------------------------ 3Q 99 9 Mos 99
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, vs vs
1999 1998 1999 1998 3Q 98 9 Mos 98
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $138 $123 $391 $355 12% 10%
Total operating expense $ 64 $ 61 $194 $185 1% 5%
Income before taxes $ 73 $ 61 $188 $163 23% 15%
Return on common equity 24% 21% 21% 21%
Pretax operating margin (a) 61% 57% 56% 54%
- ----------------------------------------------------------------------------------------------------------------------------------
</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 $73 million in the third quarter of 1999, up $12 million, or 23%, from
the third quarter of 1998. Revenue increased $15 million, or 12%, due to higher
net interest revenue resulting from loan growth as well as higher gains on
equity securities. Operating expense increased $3 million, or only 1%, from the
prior-year period.
Income before taxes for this sector was $188 million for the first nine months
of 1999, an increase of $25 million, or 15%, compared with the prior-year
period. Revenue increased $36 million, or 10%, due to increased net interest
revenue resulting from loan growth, the Mellon 1st Business Bank acquisition in
February 1998 and higher gains on equity securities. The $9 million, or 5%,
increase in operating expense is primarily due to the Mellon 1st Business Bank
acquisition and higher business volumes.
Large Corporate Banking
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Growth rates
Quarter ended Nine months ended ----------------------
------------------------ ------------------------ 3Q 99 9 Mos 99
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30, vs vs
1999 1998 1999 1998 3Q 98 9 Mos 98
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue $132 $123 $399 $376 7% 6%
Total operating expense $ 80 $ 81 $251 $250 (1)% -%
Income before taxes $ 45 $ 42 $135 $126 4% 7%
Return on common equity 12% 11% 12% 11%
Pretax operating margin (a) 38% 39% 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 $45
million for the third quarter of 1999, an increase of $3 million, or 4%, from
the third quarter of 1998. An increase in credit quality expense was more than
offset by revenue growth of 7%, while operating expenses decreased 1%. The
revenue growth was driven primarily by higher cash management fee revenue.
14
<PAGE> 16
BUSINESS SECTORS (CONTINUED)
- -------------------------------------------------------------------------------
Income before taxes for this sector was $135 million in the first nine months of
1999, an increase of $9 million, or 7%, compared with the prior-year period.
Revenue increased 6% while expenses were unchanged. The revenue growth was
driven primarily by higher cash management revenue and the favorable expense
trend primarily reflects improved productivity in the cash management line of
business.
Divestitures
Divestitures includes residential and commercial mortgage loan origination and
servicing; credit card; network services transaction processing; the gain on the
sale of the Mellon Bank (MD) N.A. retail offices that were sold in September
1999; and, 1998 results include merchant card processing, and the fee revenue
from the electronic filing of income tax returns service, which was discontinued
at the end of 1998. In addition, 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. Divestitures income before taxes was
$13 million in the third quarter of 1999 and $17 million in the third quarter of
1998. The third quarter and first nine months of 1999 include an $8 million
pretax net loss and a $134 million pretax net gain from divestitures,
respectively, 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 income for the third quarter of 1999 was $2 million,
compared with income of $5 million in the third 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 first nine months 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 recorded in the second quarter
of 1999. 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>
Global Global Regional Specialized
Wealth Investment Investment Consumer Commercial
Management Management Services Banking Banking
----------------- --------------- --------------- -------------- -----------------
(dollar amounts in millions, 3RD Q 2nd Q 3RD Q 2nd Q 3RD Q 2nd Q 3RD Q 2nd Q 3RD Q 2nd 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) $ 37 $ 39 $ (3) $ (2) $ 15 $ 12 $ 122 $ 122 $ 104 $ 101
Fee revenue 78 82 249 246 222 229 39 46 34 21
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue 115 121 246 244 237 241 161 168 138 122
Credit quality expense (revenue) (3) -- -- -- -- -- 3 2 1 4
Operating expense:
Intangible amortization 5 5 7 7 3 3 13 12 7 8
Trust-preferred securities -- 1 -- -- -- -- 1 1 4 2
Other 59 60 156 152 182 181 92 98 53 57
- -------------------------------------------------------------------------------------------------------------------------------
Total operating expense 64 66 163 159 185 184 106 111 64 67
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 54 55 83 85 52 57 52 55 73 51
Income taxes (benefits) 21 21 34 35 21 23 19 20 27 20
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 33 $ 34 $ 49 $ 50 $ 31 $ 34 $ 33 $ 35 $ 46 $ 31
- -------------------------------------------------------------------------------------------------------------------------------
Cash net income (loss) (a) $ 38 $ 39 $ 56 $ 55 $ 34 $ 37 $ 42 $ 44 $ 50 $ 38
- -------------------------------------------------------------------------------------------------------------------------------
Average assets $ 6.3 $ 6.3 $ 2.0 $ 2.0 $ 1.6 $ 1.7 $13.9 $14.2 $12.4 $ 12.0
Average common equity $ 0.4 $ 0.4 $ 0.5 $ 0.5 $ 0.5 $ 0.5 $ 0.7 $ 0.6 $ 0.7 $ 0.7
Average Tier I preferred equity $ -- $ -- $ -- $ -- $ -- $ -- $ 0.1 $ 0.1 $ 0.1 $ 0.1
- -------------------------------------------------------------------------------------------------------------------------------
Return on common equity (b) 35% 37% 37% 38% 24% 28% 19% 21% 24% 17%
Return on assets (b) 2.14% 2.16% NM NM NM NM 0.94% 0.98% 1.46% 1.05%
Pretax operating margin 47% 46% 34% 35% 22% 23% 32% 33% 53% 42%
Pretax operating margin (c) 52% 50% 37% 38% 23% 25% 41% 41% 61% 50%
Efficiency ratio (c) 51% 50% 63% 62% 77% 75% 58% 58% 38% 47%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the after-tax impact of amortization of goodwill and other
intangibles from purchase acquisitions.
(b) Annualized.
(c) Excludes amortization of intangibles and trust-preferred securities expense.
(d) Includes $(8) million and $59 million, respectively, in pre-tax net gains
(losses) from divestitures for the quarters ended September 30, 1999 and
June 30, 1999.
(e) Ratios exclude the impact of the net divestiture gains (losses) and
nonrecurring expenses.
NM - Not meaningful.
Income before taxes for the Corporation's core sectors increased $9 million, or
3%, or at an annualized rate of 12%, in the third quarter of 1999 compared to
the second quarter of 1999. Total revenue decreased $7 million, or 1%,
reflecting lower securities lending revenue, lower brokerage fees and lower
foreign currency and securities trading revenue, while net interest revenue was
unchanged. Operating expense decreased $12 million, or 2%, reflecting the focus
on expense management and productivity, while credit quality expense decreased
$4 million.
16
<PAGE> 18
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Large Real Estate
Corporate Total Core Workout/Other Consolidated
Banking Sectors Divestitures Activity Results
------------------ ----------------- ----------------- ----------------- -----------------
3RD Q 2nd Q 3RD Q 2nd Q 3RD Q 2nd Q 3RD Q 2nd Q 3RD Q 2nd Q
1999 1999 1999 1999 1999 1999 1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 67 $ 70 $ 342 $ 342 $ 8 $ 15 $ 2 $ 6 $ 352 $ 363
65 70 687 694 70 (d) 152 (d) 6 6 763 852
- -----------------------------------------------------------------------------------------------------------------------------------
132 140 1,029 1,036 78 167 8 12 1,115 1,215
7 6 8 12 - 1 (3) (8) 5 5
- 1 35 36 2 1 - - 37 37
6 5 11 9 - - 9 10 20 19
74 81 616 629 63 85 - 58 679 772
- -----------------------------------------------------------------------------------------------------------------------------------
80 87 662 674 65 86 9 68 736 828
- -----------------------------------------------------------------------------------------------------------------------------------
45 47 359 350 13 80 2 (48) 374 382
16 17 138 136 6 28 (1) (20) 143 144
- -----------------------------------------------------------------------------------------------------------------------------------
$ 29 $ 30 $ 221 $ 214 $ 7 $ 52 $ 3 $(28) $ 231 $ 238
- -----------------------------------------------------------------------------------------------------------------------------------
$ 29 $ 30 $ 249 $ 243 $ 9 $ 53 $ 3 $(28) $ 261 $ 268
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9.2 $ 9.6 $ 45.4 $ 45.8 $2.2 $2.7 $1.3 $1.3 $ 48.9 $ 49.8
$ 1.0 $ 1.0 $ 3.8 $ 3.7 $0.2 $0.2 $0.2 $0.5 $ 4.2 $ 4.4
$ 0.3 $ 0.3 $ 0.5 $ 0.5 $ - $ - $0.5 $0.5 $ 1.0 $ 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
12% 13% 23% 23% NM NM NM NM 22% 22%
1.22% 1.27% 1.93% 1.87% NM NM NM NM 1.87% 1.92%
34% 34% 35% 34% NM NM NM NM 34% (e) 33% (e)
38% 38% 39% 38% NM NM NM NM 39% (e) 38% (e)
56% 58% 60% 61% NM NM NM NM 61% (e) 62% (e)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
NONINTEREST REVENUE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended Nine months ended
------------------------------------------- -------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(dollar amounts in millions) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust and investment fee revenue:
Investment management $290 $284 $229 $ 852 $ 658
Administration and custody 140 147 134 426 403
Benefits consulting 66 61 58 183 164
Brokerage fees 13 16 11 44 32
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 509 508 432 1,505 1,257
Cash management and deposit transaction charges 70 70 66 206 192
Mortgage servicing fees 48 51 44 151 152
Foreign currency and securities trading revenue 42 45 39 130 118
Credit card fees - - 23 18 70
Other 96 113 108 331 333
- ----------------------------------------------------------------------------------------------------------------------------------
Total fee revenue 765 787 712 2,341 2,122
Net gain (loss) from divestitures (8) 59 - 134 -
Gains on the sale of securities - - - - 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue $757 $846 $712 $2,475 $2,123
- ----------------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of net interest and
fee revenue (FTE) 69% 69% 66% 69% 66%
Trust and investment fee revenue as a percentage
of net interest and fee revenue (FTE) 45% 44% 40% 44% 39%
- ----------------------------------------------------------------------------------------------------------------------------------
Memo:
Gross joint venture fee revenue (a) $122 $120 $ 70 $ 345 $ 217
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation accounts for its interest in joint ventures under the
equity method of accounting with the net results primarily recorded as
other fee revenue, as well as trust and investment fee revenue. The gross
joint venture fee revenue is not included in total fee revenue above.
Fee revenue
Fee revenue increased $53 million, or 7%, in the third quarter of 1999 compared
with the third quarter of 1998. Fee revenue in the third quarter of 1999 was
impacted by the March 1999 sale of the credit card business, the June 1999 sale
of the network services transaction processing unit, the sale of the mortgage
businesses that was completed in the third quarter of 1999 and the October 1998
acquisition of Newton. Excluding the effect of acquisitions and divestitures,
fee revenue increased 9% compared with the prior-year period, primarily due to a
12% increase in trust and investment fee revenue. Including the trust and
investment fee gross revenue generated by the Corporation's joint ventures,
trust and investment fee revenue increased 17% compared with the third quarter
of 1998.
18
<PAGE> 20
NONINTEREST REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3rd Qtr. 1999 3rd Qtr. 1999 Nine Mo. 1999
over over over
3rd Qtr. 1998 2nd Qtr. 1999 Nine Mo. 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust and investment fee revenue growth (a) 12% - % 13%
Total fee revenue growth (decline) (b) 9% (1)% 12%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding the effect of acquisitions.
(b) Excluding the effect of acquisitions and divestitures and fees from the
electronic filing of income tax returns.
Investment management fee revenue
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
---------------------------------------- --------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed mutual fund fees (a):
Equity funds $ 69 $ 65 $ 45 $195 $126
Taxable money market funds:
Institutional 25 27 21 77 60
Individuals 11 9 8 29 24
Tax-exempt bond funds 22 23 24 68 71
Fixed-income funds 11 12 11 35 27
Tax-exempt money market funds 7 7 7 22 21
Nonproprietary 7 6 6 19 13
- ----------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund fees 152 149 122 445 342
Private asset 73 73 56 217 162
Institutional asset 65 62 51 190 154
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment management fee revenue $290 $284 $229 $852 $658
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of quarterly mutual fund fees waived and fund expense reimbursements of
$7 million, $9 million and $10 million at September 30, 1999, June 30, 1999
and September 30, 1998, respectively. Net of year-to-date fees waived and
fund expense reimbursements of $24 million and $31 million at September 30,
1999, and September 30, 1998, respectively.
Excluding the revenue from the Newton acquisition, investment management revenue
increased $28 million in the third quarter of 1999, compared with the prior-year
period. This increase resulted from a $15 million, or 12%, increase in mutual
fund management revenue, a $7 million, or 13%, increase in private asset
management revenue and a $6 million, or 11%, increase in institutional asset
management revenue. These increases resulted from net new business and an
increase in the market value of assets under management.
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 third quarter of 1999 were $124 billion, up $16 billion, or 15%, from
$108 billion in the third quarter of 1998 and down $2 billion from $126 billion
in the second quarter of 1999. The increase from the third quarter of 1998
primarily resulted from increases in average net assets of equity funds and
institutional taxable money market funds. Proprietary equity funds averaged $45
billion in the third quarter of 1999, compared with $32 billion in the third
quarter of 1998 and $44 billion in the second quarter of 1999.
19
<PAGE> 21
NONINTEREST REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
As shown in the table below, the market value of trust assets under management
was $446 billion at September 30, 1999, a $19 billion, or 4%, decrease from $465
billion at June 30, 1999, and a $78 billion, or 21%, increase from $368 billion
at September 30, 1998. The decrease compared with June 30, 1999, resulted from a
general market decrease. At September 30, 1999, compared to June 30, 1999, the
Standard & Poor's 500 Index decreased 6.6% while the Lehman Brothers Long-Term
Government Bond Index decreased 0.2%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in billions) 1999 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mutual fund assets managed:
Equity funds $ 45 $ 46 $ 43 $ 40 $ 30
Taxable money market funds:
Institutional 38 39 40 40 38
Individuals 10 9 9 9 9
Tax-exempt bond funds 15 16 16 16 17
Fixed-income funds 7 7 8 7 7
Tax-exempt money market funds 7 8 8 8 8
Nonproprietary 26 26 23 21 16
- ----------------------------------------------------------------------------------------------------------------------------------
Total mutual fund assets managed 148 151 147 141 125
Private asset 53 55 50 47 37
Institutional asset (a)(b) 245 259 250 237 206
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $446 $465 $447 $425 $368
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes assets managed at Pareto Partners of $28 billion at September 30,
1999; $28 billion at June 30, 1999; $28 billion at March 31, 1999; $24
billion at December 31, 1998; and $24 billion at September 30, 1998. The
Corporation has a 30% equity interest in Pareto Partners.
(b) Beginning at September 30, 1999, securities lending cash collateral is
included in institutional assets managed. Prior periods have been restated.
At September 30, 1999, the combined market values of $26 billion of
nonproprietary mutual funds and $245 billion of institutional assets managed, by
asset type, were as follows: equities, $94 billion; balanced, $43 billion; fixed
income, $64 billion; money market, $42 billion; and $28 billion at Pareto
Partners, primarily in currency overlay and global fixed-income products, for a
total of $271 billion.
Administration and custody fee revenue
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
--------------------------------------- --------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust $ 96 $104 $ 95 $300 $288
Mutual fund 39 38 34 111 101
Private asset 5 5 5 15 14
- ----------------------------------------------------------------------------------------------------------------------------------
Total administration and custody fee revenue $140 $147 $134 $426 $403
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 22
NONINTEREST REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
As shown in the table on the prior page, administration and custody fee revenue
increased $6 million, or 4%, in the third quarter of 1999 compared with the
third quarter of 1998, primarily resulting from a $5 million, or 18%, increase
in mutual fund administration revenue.
The reported growth within institutional trust and custody revenue was tempered
primarily by the contribution of pre-existing business to the Russell/Mellon
Analytical Services Inc. and the CIBC Mellon Global Securities Services joint
ventures. The results of joint ventures are accounted for under the equity
method of accounting, which reports the Corporation's share of 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 such services. Including the institutional trust and
custody gross revenue generated by these joint ventures, institutional trust and
custody revenue increased $21 million, or 21%, compared with the third quarter
of 1998 but decreased $5 million, or 4%, compared with the second quarter of
1999. The decrease compared with the second quarter of 1999 resulted from lower
administration revenue at Buck Consultants, Inc. and lower securities lending
revenue.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
INSTITUTIONAL TRUST AND --------------------------------------------- ------------------------
CUSTODY FEE REVENUE SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1999 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total institutional trust and custody fee
revenue - as reported $ 96 $104 $ 95 $300 $288
Adjustment to reflect joint venture revenue 31 28 11 90 32
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted institutional trust and custody fee revenue $127 $132 $106 $390 $320
- ----------------------------------------------------------------------------------------------------------------------------------
</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 third quarter of 1999.
The market value of assets under administration/custody, shown in the table
below, was $2,156 billion at September 30, 1999, an increase of $95 billion
compared with $2,061 billion at June 30, 1999, and an increase of $514 billion
compared with $1,642 billion at September 30, 1998. The increase compared with
June 30, 1999, resulted from net new business.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in billions) 1999 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust (a) $2,046 $1,954 $1,826 $1,803 $1,556
Mutual fund 76 73 69 62 52
Private asset 34 34 33 38 34
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $2,156 $2,061 $1,928 $1,903 $1,642
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $350 billion of assets at September 30, 1999; $327 billion of
assets at June 30, 1999; $218 billion of assets at March 31, 1999; $244
billion of assets at December 31, 1998; and $265 billion of assets at
September 30, 1998, administered by CIBC Mellon Global Securities Services,
a joint venture.
21
<PAGE> 23
NONINTEREST REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
Benefits consulting and brokerage fees
Benefits consulting fees generated by Buck Consultants, Inc. increased $8
million, or 15%, in the third quarter of 1999, compared with the prior-year
period, primarily resulting from net new business and increased project activity
with existing clients. The $2 million, or 23%, increase in brokerage fees in the
third quarter of 1999 compared to the prior-year period primarily resulted from
higher trading volumes. Dreyfus Brokerage Services, Inc. averaged approximately
8,500 trades per day in the third quarter of 1999, compared with approximately
9,800 trades per day in the second quarter of 1999 and approximately 6,900
trades per day in the third quarter of 1998.
Cash management and deposit transaction charges
The $4 million, or 6%, increase in cash management fees and deposit transaction
charges in the third quarter of 1999, compared with the prior-year period,
primarily resulted from higher volumes in the electronics business.
Mortgage servicing fees
Mortgage servicing fees increased $4 million, or 8%, in the third quarter of
1999, compared with the third quarter of 1998. This increase primarily resulted
from a lower level of mortgage prepayments. By September 30, 1999, the
Corporation completed the sales of the residential and commercial mortgage
servicing businesses.
Foreign currency and securities trading revenue
The $3 million, or 9%, increase in foreign currency and securities trading
revenue in the third quarter of 1999, compared with the third quarter of 1998,
was primarily related to growth in the number of foreign exchange customers and
favorable market conditions.
Credit card fees
The absence of credit card fees in the third and second quarters of 1999
resulted from the March 1999 divestiture of the credit card business.
Other fee revenue
Other fee revenue of $96 million in the third quarter of 1999 decreased $12
million, or 12%, compared with the third quarter of 1998, primarily resulting
from the June 1999 sale of the network services transaction processing unit.
This business generated $14 million and $11 million of fee revenue in the second
quarter of 1999 and the third quarter of 1998, respectively.
Net gain (loss) from divestitures
In the third quarter of 1999, the Corporation recorded an $8 million pre-tax net
loss from divestitures. Including the $142 million pre-tax net gain reported in
first six months of 1999, the pre-tax net gain from divestitures totaled $134
million for the first nine months of 1999. For further analysis of the net gain
(loss) from divestitures, see the "Divestitures" disclosure in the "Significant
financial events" section on pages 5 and 6.
22
<PAGE> 24
NONINTEREST REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
Third quarter 1999 compared with second quarter 1999
Excluding the fee revenue generated by the mortgage businesses and the network
services transaction processing unit, fee revenue decreased 1% compared with the
second quarter of 1999, resulting from lower securities lending revenue, lower
brokerage fees and lower foreign currency and securities trading revenue.
Year-to-date 1999 compared with year-to-date 1998
Fee revenue in the first nine months of 1999 totaled $2.341 billion. The
comparison to the first nine months of 1998 was impacted by the credit card,
network services and mortgage banking divestitures, the Newton and Founders
acquisitions and the elimination of fees from the electronic filing of income
tax returns, a service that was discontinued at the end of 1998. Excluding these
factors, fee revenue increased 12% compared with the first nine months of 1998,
primarily due to a 13% increase in trust and investment fee revenue.
NET INTEREST REVENUE
- -------------------------------------------------------------------------------
Net interest revenue on a fully taxable equivalent basis for the third quarter
of 1999 totaled $352 million, compared with $376 million in the third quarter of
1998 and $363 million in the second quarter of 1999. The net interest margin was
3.63% in the third quarter of 1999, compared with 3.95% in the third quarter of
1998 and 3.74% in the second quarter of 1999. The $24 million decrease in net
interest revenue on a fully taxable equivalent basis in the third quarter of
1999, compared with the prior-year period, primarily resulted from the sale of
the credit card business. Excluding the net interest revenue generated by the
credit card business in the prior-year period, net interest revenue decreased $9
million compared with the third quarter of 1998, reflecting lower loan fees and
higher funding costs related to the repurchase of common stock.
The Corporation sold its credit card business on March 31, 1999, and completed
the sale of its residential mortgage servicing business on September 30, 1999,
as discussed further in the "Significant financial events" section on pages 5
and 6. The balance sheet levels of 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 was sold as part of the September
30, 1999, divestiture of the residential mortgage servicing business totaled
approximately $700 million at June 30, 1999.
Third quarter 1999 compared with second quarter 1999
Net interest revenue decreased $11 million in the third quarter of 1999 compared
with the second quarter of 1999. This decrease resulted from higher funding
costs related to the repurchase of common stock as well as a lower level of
interest-earning assets.
Year-to-date 1999 compared with year-to-date 1998
Net interest revenue and the net interest margin, on a taxable equivalent basis,
were $1.086 billion and 3.71%, respectively, in the first nine months of 1999,
compared with $1.117 billion and 3.99%, respectively, in the first nine months
of 1998. Excluding the net interest revenue generated by the credit card
business, net interest revenue decreased $3 million compared with the first nine
months of 1998, reflecting lower loan fees and higher funding costs related to
the repurchase of common stock, partially offset by a higher level of
interest-free funds.
23
<PAGE> 25
NET INTEREST REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- -----------------------------------------------------------------------------------------------------------------------------------
Nine months ended
----------------------------------------------------
SEPT. 30, 1999 Sept. 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 $ 755 4.80% $ 599 5.15%
Federal funds sold and securities under resale agreements 586 5.20 828 5.96
Other money market investments 57 4.34 125 5.45
Trading account securities 370 5.12 249 6.22
Securities:
U.S. Treasury and agency securities (a) 6,414 6.41 5,336 6.76
Obligations of states and political subdivisions (a) 117 6.39 43 7.59
Other (a) 92 7.52 127 6.94
Loans, net of unearned discount (a) 30,710 7.37 30,027 8.03
------- -------
Total interest-earning assets 39,101 7.10 37,334 7.73
Cash and due from banks 3,065 3,205
Premises and equipment 565 562
Customers' acceptance liability 121 107
Net acquired property 28 59
Other assets (a) 7,354 6,548
Reserve for credit losses (442) (498)
------------------------------------------------------------------------------------------------------------------
Total assets $49,792 $47,317
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, Interest-bearing liabilities:
trust-preferred Deposits in domestic offices:
securities and Demand $ 372 2.34% $ 337 2.24%
shareholders' Money market and other savings accounts 12,387 2.80 10,982 2.93
equity Retail savings certificates 6,725 4.53 7,658 5.01
Other time deposits 1,402 5.11 1,957 5.59
Deposits in foreign offices 3,033 4.36 2,714 5.01
------- -------
Total interest-bearing deposits 23,919 3.61 23,648 4.05
Federal funds purchased and securities under
repurchase agreements 2,320 4.74 2,134 5.61
Short-term bank notes 734 5.14 294 5.71
U.S. Treasury tax and loan demand notes 583 4.64 578 5.35
Term federal funds purchased 449 5.12 401 5.73
Commercial paper 136 5.37 200 5.57
Other funds borrowed 420 8.12 349 9.06
Notes and debentures (with original maturities over
one year) 3,370 6.60 2,935 6.90
------- -------
Total interest-bearing liabilities 31,931 4.15 30,539 4.57
Total noninterest-bearing deposits 9,714 9,579
Acceptances outstanding 121 107
Other liabilities (a) 2,652 2,022
------------------------------------------------------------------------------------------------------------------
Total liabilities 44,418 42,247
------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991 991
------------------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 4,383 4,079
------------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $49,792 $47,317
- ------------------------------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.10% 7.73%
Cost of funds supporting interest-earning assets 3.39 3.74
------------------------------------------------------------------------------------------------------------------
Net interest margin:
Taxable equivalent basis 3.71% 3.99%
Without taxable equivalent increments 3.69 3.97
------------------------------------------------------------------------------------------------------------------
</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
24
<PAGE> 26
<TABLE>
<CAPTION>
Quarter ended
- -----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, 1999 June 30, 1999 March 31, 1999 Dec. 31, 1998 Sept. 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>
$ 740 4.85% $ 750 4.71% $ 776 4.85% $ 797 5.27% $ 575 5.27%
655 5.20 635 5.47 465 4.84 663 4.97 665 7.06
68 4.26 60 4.22 45 4.63 65 4.73 111 5.17
403 5.27 414 4.87 291 5.25 258 6.31 266 6.64
6,297 6.33 6,442 6.40 6,505 6.52 5,878 6.44 5,543 6.61
121 5.84 118 6.44 112 6.94 86 6.88 53 7.26
86 8.12 93 7.38 97 7.11 101 6.70 106 6.99
30,179 7.31 30,501 7.30 31,465 7.50 31,503 7.75 30,421 8.05
------- ------- ------- ------- -------
38,549 7.04 39,013 7.05 39,756 7.24 39,351 7.44 37,740 7.76
2,970 3,078 3,148 3,165 3,115
552 570 574 573 562
132 116 114 160 106
13 36 36 39 60
7,211 7,365 7,488 7,244 6,794
(414) (416) (498) (501) (501)
- ----------------------------------------------------------------------------------------------------------------------------------
$49,013 $49,762 $50,618 $50,031 $47,876
- ----------------------------------------------------------------------------------------------------------------------------------
$ 380 3.33% $ 369 2.07% $ 367 1.57% $ 365 1.13% $ 354 2.18%
12,674 2.85 12,477 2.79 12,002 2.75 11,646 2.84 11,073 2.96
6,612 4.50 6,644 4.47 6,923 4.63 7,374 4.78 7,699 4.99
1,106 5.26 1,244 4.90 1,864 5.17 2,558 5.48 2,071 5.64
3,111 4.40 2,722 4.29 3,268 4.38 2,898 4.71 2,847 5.18
------- ------- ------- ------- -------
23,883 3.63 23,456 3.54 24,424 3.67 24,841 3.88 24,044 4.09
1,791 4.92 2,279 4.70 2,901 4.67 2,423 4.84 2,373 5.94
821 5.33 846 4.98 531 5.07 296 5.45 275 5.69
592 4.73 584 4.58 571 4.60 679 4.65 630 5.37
362 5.34 508 5.04 479 5.04 258 5.48 271 5.74
119 5.51 157 5.35 133 5.25 336 5.21 164 5.57
409 8.88 417 7.23 435 8.26 409 9.14 344 9.18
3,372 6.57 3,387 6.55 3,351 6.67 3,164 6.70 3,003 6.81
------- ------- ------- ------- -------
31,349 4.18 31,634 4.08 32,825 4.19 32,406 4.35 31,104 4.62
9,579 9,902 9,663 9,651 9,355
132 116 114 160 106
2,658 2,705 2,594 2,484 2,095
- ----------------------------------------------------------------------------------------------------------------------------------
43,718 44,357 45,196 44,701 42,660
- ----------------------------------------------------------------------------------------------------------------------------------
991 991 991 991 991
- ----------------------------------------------------------------------------------------------------------------------------------
4,304 4,414 4,431 4,339 4,225
- ----------------------------------------------------------------------------------------------------------------------------------
$49,013 $49,762 $50,618 $50,031 $47,876
7.04% 7.05% 7.24% 7.44% 7.76%
3.41 3.31 3.46 3.58 3.81
- ----------------------------------------------------------------------------------------------------------------------------------
3.63% 3.74% 3.78% 3.86% 3.95%
3.60 3.71 3.76 3.84 3.93
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
25
<PAGE> 27
<TABLE>
<CAPTION>
OPERATING EXPENSE
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
--------------------------------------- ------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(dollar amounts in millions) 1999 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Staff expense $ 387 $ 397 $ 358 $ 1,175 $ 1,070
Professional, legal and other purchased services 63 73 72 207 200
Net occupancy expense 61 64 59 186 174
Equipment expense 40 63 42 144 122
Amortization of mortgage servicing assets and
purchased credit card relationships 33 37 43 112 132
Amortization of goodwill and other intangible assets 37 37 35 111 100
Communications expense 26 30 27 85 79
Business development 32 64 33 129 111
Other expense 37 44 48 136 147
- --------------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-preferred
securities expense and net revenue from
acquired property 716 809 717 2,285 2,135
Trust-preferred securities expense 20 19 20 59 59
Net revenue from acquired property (5) (5) (3) (10) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expense $ 731 $ 823 $ 734 $ 2,334 $ 2,188
- --------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 28,300 28,700 28,400 28,700 28,300
- --------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 64% 65% 66% 66% 66%
Efficiency ratio excluding amortization of
goodwill and other intangible assets 61% 62% 62% 61% 63%
- ----------------------------------------------------------------------------------------------------------------------------------
</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 (loss) on divestitures and the sale of securities.
Operating expense before trust-preferred securities expense and net revenue from
acquired property totaled $716 million, a decrease of $1 million compared with
the third quarter of 1998. Third quarter 1999 expenses were impacted by the sale
of the credit card business, the sale of the network services transaction
processing unit, the sale of the mortgage businesses and the Newton acquisition.
Excluding the effect of acquisitions and divestitures, operating expense before
trust-preferred securities expense and net revenue from acquired property was
unchanged compared with the third quarter of 1998, reflecting the continuing
focus on expense management and productivity.
<TABLE>
<CAPTION>
3rd Qtr. 1999 3rd Qtr. 1999 Nine Mos. 1999
over over over
3rd Qtr. 1998 2nd Qtr. 1999 Nine Mos. 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense (reduction) growth (a) -% (2)% 2%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before trust-preferred securities expense and net revenue
from acquired property excluding second quarter 1999 nonrecurring expenses
and the effect of acquisitions and divestitures.
26
<PAGE> 28
OPERATING EXPENSE (CONTINUED)
- -------------------------------------------------------------------------------
Third quarter 1999 compared with second quarter 1999
Operating expense before trust-preferred securities expense and net revenue from
acquired property decreased $93 million compared with the second quarter of
1999. This decrease primarily resulted from $56 million of nonrecurring expenses
recorded in the second quarter of 1999 as well as the sale of the network
services transaction processing unit and the sale of the mortgage businesses.
The nonrecurring expenses in the second quarter of 1999 consisted of a $30
million 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 these expenses and the impact of divestitures, operating expense
before trust-preferred securities expense and net revenue from acquired property
decreased 2% compared with the second quarter of 1999.
Year-to-date 1999 compared with year-to-date 1998
Operating expense before trust-preferred securities expense and net revenue from
acquired property totaled $2.285 billion, an increase of $150 million in the
first nine months of 1999 compared with the prior-year period. Excluding the
effect of the nonrecurring expenses, acquisitions and divestitures, operating
expense before trust-preferred securities expense and net revenue from acquired
property increased 2% in the first nine months of 1999 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 was 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 is essentially completed. 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:
The Corporation has 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.
27
<PAGE> 29
OPERATING EXPENSE (CONTINUED)
- -------------------------------------------------------------------------------
Any new technology implemented through year end 1999 is subject to the same year
2000 readiness process as was technology that was previously in place.
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 with approximately 35% being expended 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 had an ongoing 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 has developed 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 has substantially completed
the process of 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 plans have been
developed and will be implemented 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. There can be no assurance that any contingency plans will fully mitigate
any year 2000 failures, problems or disruptions.
28
<PAGE> 30
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
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
periods. 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 $1.8 billion of short-term funds have
been replaced with floating and fixed-rate funds with maturities that extend
beyond the end 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.
29
<PAGE> 31
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes totaled $436 million, at an effective rate of
36.8%, in the first nine months of 1999, compared with $353 million, at an
effective rate of 35.3%, in the first nine months of 1998. The Corporation's
effective tax rate, excluding the effect of the net gain from divestitures and
nonrecurring expenses, for the first nine months 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 and nonrecurring expenses, will be
approximately 36.5% for the remainder of 1999.
<TABLE>
<CAPTION>
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------------------------------------------------------
Quarter ended
---------------------------------------------
SEPT. 30, June 30, Sept. 30,
(average balances in millions) 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,463 $ 1,445 $ 1,351
Trading account securities 403 414 266
Securities 6,364 6,652 5,754
Loans 30,177 30,504 30,426
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 38,407 39,015 37,797
Noninterest-earning assets 10,878 11,167 10,641
Reserve for credit losses (414) (416) (501)
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $48,871 $49,766 $47,937
- --------------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $39,518 $40,123 $38,477
Wholesale and purchased funds 9,353 9,643 9,460
- --------------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $48,871 $49,766 $47,937
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $610 million increase in the Corporation's average interest-earning assets
in the third quarter of 1999, compared with the third quarter of 1998, primarily
reflects an 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 $75 million in the third quarter of 1999 from the prior-year
period. Average core funds increased $1.0 billion in the third quarter of 1999
from the prior-year period, primarily reflecting an increase in money market and
other savings accounts and notes and debentures offset, in part, by decreases in
demand deposits and retail savings certificates. Core funds averaged 97% of core
assets in the third quarter of 1999, compared with 97% in the second quarter of
1999 and 95% in the third quarter of 1998.
Wholesale and purchased funds are defined as deposits in foreign offices,
negotiable certificates of deposit, federal funds purchased and securities under
repurchase agreements, short-term bank notes, U.S. Treasury tax and loan demand
notes, other time deposits, commercial paper and other funds borrowed. As a
percentage of total average assets, average wholesale and purchased funds were
19% in the third quarter of 1999, compared with 19% in the second quarter of
1999 and 20% in the third quarter of 1998. It is anticipated that the level of
wholesale and purchased funds will decrease as a result of the sale of the
residential mortgage business.
30
<PAGE> 32
COMPOSITION OF LOAN PORTFOLIO
- -------------------------------------------------------------------------------
The loan portfolio decreased $2.937 billion and $1.896 billion, respectively at
September 30, 1999, compared with December 31, 1998, and September 30, 1998,
reflecting the sale of the residential mortgage business in September 1999, the
sale of the credit card business in March 1999 and a lower level of wholesale
loans. The decreases were partially offset by increases in business banking,
middle market lending and lease finance assets. At September 30, 1999, the
composition of the loan portfolio was 63% commercial and 37% consumer.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1999 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial and financial $11,296 $12,383 $11,683 $12,060 $11,330
Commercial real estate 2,594 2,534 2,504 2,285 2,257
Consumer credit:
Consumer mortgage 6,813 7,446 8,169 8,871 8,701
Credit card - - - 804 788
Other consumer credit 4,070 3,800 3,950 3,700 3,745
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 10,883 11,246 12,119 13,375 13,234
Lease finance assets 3,021 2,888 2,836 2,819 2,590
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 27,794 29,051 29,142 30,539 29,411
International loans 1,362 1,493 1,412 1,554 1,641
- --------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $29,156 $30,544 $30,554 $32,093 $31,052
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial and financial
At September 30, 1999, total domestic commercial and financial loans decreased
by $764 million, or 6%, compared with December 31, 1998, and by $34 million, or
less than 1%, compared with September 30, 1998, primarily as a result of a
decrease in large wholesale lending. These decreases were partially offset by
increases in business banking and middle market lending. Commercial and
financial loans represented 39% of the total loan portfolio at September 30,
1999, compared with 38% at December 31, 1998, and 37% at September 30, 1998.
Commercial real estate
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1999 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial mortgage and construction loans $1,740 $1,687 $1,649 $1,554 $1,509
Owner-occupied and other loans (a) 854 847 855 731 748
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic commercial real estate loans $2,594 $2,534 $2,504 $2,285 $2,257
- --------------------------------------------------------------------------------------------------------------------------------
</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 September 30, 1999, domestic commercial real estate loans increased by $309
million, or 14%, compared with December 31, 1998, and by $337 million, or 15%,
compared with September 30, 1998, reflecting steady loan growth. Domestic
commercial real estate loans were 9% of total loans at September 30, 1999, up
from 7% at both year-end 1998 and September 30, 1998.
31
<PAGE> 33
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
Consumer mortgage
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC CONSUMER MORTGAGE LOANS
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions) 1999 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jumbo residential mortgages $3,435 $3,367 $3,640 $3,821 $3,835
One- to four-family residential mortgages:
Warehouse - 670 1,102 1,588 1,622
Portfolio 621 654 654 858 690
Fixed-term home equity loans 1,871 1,908 1,975 1,801 1,781
Home equity revolving credit line loans 886 847 798 803 773
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic consumer mortgage loans $6,813 $7,446 $8,169 $8,871 $8,701
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999, the domestic consumer mortgage portfolio totaled $6.813
billion, a $2.058 billion, or 23%, decrease from year-end 1998 and a $1.888
billion, or 22%, decrease from September 30, 1998. These decreases resulted
primarily from the sale of the one- to four-family residential mortgages in the
residential warehouse portfolio as part of the 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 reported 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 $4.070 billion at
September 30, 1999, an increase of $370 million, or 10%, from December 31, 1998,
and $325 million, or 9%, from September 30, 1998. The increases were primarily
due to higher levels of secured margin loans at Dreyfus Brokerage Services, Inc.
Other consumer credit loans are both secured and unsecured and, in the case of
student loans, are government guaranteed. Student loans totaled $1.778 billion,
or 44% of this portfolio, at September 30, 1999 compared with $1.765 billion at
December 31, 1998 and $1.732 billion at September 30, 1998.
Lease finance assets
Lease finance assets totaled $3.021 billion at September 30, 1999, an increase
of $202 million, or 7%, compared with December 31, 1998, and $431 million, or
17%, compared with September 30, 1998. Lease finance assets represented 10% of
the total loan portfolio at September 30, 1999, compared with 9% at year-end
1998 and 8% at September 30, 1998.
International loans
Loans to international borrowers totaled $1.362 billion at September 30, 1999,
down $192 million, or 12%, from year-end 1998 and down $279 million, or 17%,
from September 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.
32
<PAGE> 34
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK (a)
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit:
Expire within one year $15,368 $14,287 $14,356 $14,462
Expire within one to five years 16,835 17,111 17,440 18,276
Expire over five years 1,066 1,047 1,636 1,592
- ----------------------------------------------------------------------------------------------------------------------------------
Total 33,269 32,445 33,432 34,330
Standby letters of credit and foreign and other guarantees 4,229 (b) 3,578 3,830 4,004
Commercial letters of credit 99 139 86 85
Residential mortgage loans serviced with recourse - 109 97 85
Custodian securities lent with indemnification
against broker default of return of securities 30,217 33,994 31,802 30,279
- ----------------------------------------------------------------------------------------------------------------------------------
</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 $362 million.
<TABLE>
<CAPTION>
CAPITAL
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA SEPT. 30, June 30, Dec. 31, Sept. 30,
(dollar amounts in millions, except per share amounts) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total shareholders' equity $ 4,219 $ 4,303 $ 4,521 $ 4,358
Total shareholders' equity to assets ratio 9.00% 8.77% 8.90% 9.03%
Tangible shareholders' equity (a) $ 2,454 $ 2,498 $ 2,641 $ 2,540
Tangible shareholders' equity to assets ratio (b) 5.45% 5.29% 5.41% 5.47%
Tier I capital ratio (c) 7.12% 6.87% 6.53% 6.78%
Total (Tier I plus Tier II) capital ratio (c) 11.58% 11.18% 10.80% 11.22%
Leverage capital ratio (c) 6.82% 6.70% 6.73% 7.06%
Total Tier I capital $ 3,208 $ 3,199 $ 3,223 $ 3,245
Total (Tier I plus Tier II) capital $ 5,217 $ 5,209 $ 5,331 $ 5,367
Total risk-adjusted assets $ 45,032 $ 46,572 $ 49,352 $ 47,852
Average assets - leverage capital basis $ 47,003 $ 47,727 $ 47,917 $ 45,979
Book value per common share $ 8.29 $ 8.37 $ 8.63 $ 8.35
Tangible book value per common share $ 4.83 $ 4.86 $ 5.04 $ 4.87
Closing common stock price $ 33.63 $ 36.38 $ 34.38 $ 27.50
Market capitalization $ 17,103 $ 18,704 $ 18,007 $ 14,363
Common shares outstanding (000) 508,650 514,211 523,846 522,280
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $64 million, $64 million, $60 million and $- million,
respectively, of minority interest, primarily related to Newton. In
addition, includes $353 million, $368 million, $373 million and $297
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.
33
<PAGE> 35
CAPITAL (CONTINUED)
- -------------------------------------------------------------------------------
The decrease in shareholders' equity at September 30, 1999, compared with the
prior periods, primarily reflects common stock repurchases partially offset by
earnings retention.
During the third quarter of 1999, 6.6 million shares of common stock were
repurchased, bringing year-to-date repurchases to 20 million shares and
completing the 20 million share repurchase program authorized by the board of
directors in January 1999. In September 1999, the board of directors authorized
an additional repurchase of up to 25 million shares of common stock to be used
for general corporate purposes. The Corporation began to repurchase common stock
under this program in late October 1999.
<TABLE>
<CAPTION>
COMMON SHARES OUTSTANDING
- -----------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER YEAR TO DATE Full Year
(in millions) 1999 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning shares outstanding 514.2 523.8 507.6
Shares issued for stock-based benefit plans and
dividend reinvestment plan 1.1 4.9 7.0
Shares issued for Mellon United National Bank acquisition - - 10.2
Shares repurchased (6.6) (a) (20.0) (b) (1.0) (c)
- -----------------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 508.7 508.7 523.8
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of $225 million for an average share price of $33.97 per
share.
(b) Purchase price of $694 million for an average share price of $34.68 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
September 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 continued improvement in the Corporation's capital ratios in 1999 resulted
from earnings retention and the net gain and lower asset levels following the
divestitures, partially offset by the repurchase of common stock.
34
<PAGE> 36
CAPITAL (CONTINUED)
- -------------------------------------------------------------------------------
Acquisition-related intangibles
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
ACQUISITION-RELATED INTANGIBLES SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $2,111 $2,159 $2,221 $2,016
Purchased core deposit intangibles 55 62 75 81
Other identified intangibles 16 16 17 18
- ----------------------------------------------------------------------------------------------------------------------------------
Total acquisition-related intangibles $2,182 (a) $2,237 $2,313 $2,115
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Acquisition-related intangibles at September 30, 1999, are composed of
$1.014 billion of tax deductible intangibles and $1.168 billion of non-tax
deductible intangibles.
The $95 million increase in goodwill from September 30, 1998, resulted from the
Newton acquisition, partially offset by amortization expense. For the full-year
1999, using common shares and equivalents outstanding at September 30, 1999, the
after-tax impact of the annual amortization is expected to be approximately $117
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
$132 million, $124 million, $120 million, $116 million and $115 million,
respectively. The after-tax impact of the annual amortization for the years 2000
through 2004 is expected to be approximately $109 million, $103 million, $100
million, $97 million and $96 million, respectively.
Mortgage servicing assets and purchased credit card relationships
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSETS AND PURCHASED
CREDIT CARD RELATIONSHIPS SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage servicing assets:
Residential $17 $1,038 $1,046 $ 942
Commercial - 31 69 71
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets 17 1,069 1,115 1,013
Purchased credit card relationships - - 17 18
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets and
purchased credit card relationships $17 $1,069 $1,132 $1,031
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in total mortgage servicing assets at September 30, 1999 resulted
from the sales of the residential and commercial mortgage servicing businesses.
See the "Significant financial events" section on pages 5 and 6 for a further
discussion of these divestitures. The remaining $17 million of residential
mortgage servicing assets at September 30, 1999 relates to retained servicing
rights on jumbo residential mortgages that were not part of the sale.
The Corporation capitalized $3 million of jumbo residential mortgage servicing
assets in the third quarter of 1999, compared with $126 million in the third
quarter of 1998 on both the portfolio that was sold and on the jumbo mortgage
portfolio, in connection with both mortgage servicing portfolio purchases and
loan originations. These capitalized mortgage servicing assets were partially
offset by amortization. Mortgage servicing assets are amortized in proportion to
estimated net servicing income over the estimated life of the servicing
portfolio. Net amortization expense totaled $33 million in the third quarter of
1999, including $1 million from the jumbo
35
<PAGE> 37
CAPITAL (CONTINUED)
- -------------------------------------------------------------------------------
mortgage portfolio, compared with $41 million in the third quarter of 1998. The
estimated fair value of capitalized mortgage servicing assets was approximately
$19 million at September 30, 1999. 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.
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 10 months remaining until maturity. An additional $25 million
backup line of credit that the Corporation previously maintained to provide
support facilities for its commercial paper borrowings and for general corporate
purposes was cancelled during the third quarter of 1999.
As shown in the consolidated statement of cash flows, cash and due from banks
increased by $414 million during the first nine months of 1999 to $3.340
billion. The increase resulted from $1.992 billion of net cash provided by
operating activities and $2.654 billion of net cash provided by investing
activities, primarily offset by $4.287 billion of net cash used in financing
activities. Net cash provided by investing activities primarily reflected
proceeds from the sales of the credit card business, network services
transaction processing unit and mortgage businesses 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
and transaction and savings deposits.
In September 1999, the Corporation issued $400 million of floating rate senior
notes maturing in 2002. The proceeds from this issuance were used for general
corporate purposes. This was the final issuance under an existing debt shelf
registration statement on file with the Securities and Exchange Commission. In
February 1999, the board of directors authorized the filing of a new $600
million debt shelf registration statement. The Corporation currently intends to
file this new debt shelf registration statement in early 2000.
Contractual maturities of the Corporation's long-term debt totaled $6 million
during the third quarter of 1999, including $1 million related to parent term
debt. Contractual maturities of long-term debt will total approximately $260
million in the remainder of 1999, including $200 million related to parent term
debt. Contractual maturities of long-term debt will total approximately $210
million in 2000, including $205 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 third quarter of 1999 or for the past 15 months.
36
<PAGE> 38
LIQUIDITY AND DIVIDENDS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SENIOR AND SUBORDINATED DEBT RATINGS
AT SEPTEMBER 30, 1999 Standard & Poor's Moody's Duff & Phelps Fitch/IBCA
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mellon Financial 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 $301 million in common stock dividends in the first nine
months of 1999, compared with $271 million in the prior-year period. The common
dividend payout ratio was 44% in the third quarter of 1999, compared with 43% in
the third quarter of 1998. On a cash earnings per common share basis, the common
dividend payout ratio was 39% in the third quarter of 1999, compared with 38% in
the third quarter of 1998. Based upon shares outstanding at September 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 September 30,
1999, of approximately $950 million, less any dividends declared and plus or
minus net profits or losses, as defined, between October 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.
37
<PAGE> 39
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 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 September 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 September 30, 1999, levels and remaining at
those levels thereafter.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from September 30, 1999 rates
- --------------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
compared with September 30, 1999: ------------------ ------------------
+50bp +100bp -50bp -100bp
------------------ ------------------
<S> <C> <C> <C> <C>
Net interest revenue (decrease) increase (.2)% (.6)% .1% .3%
Earnings per share (decrease) $ - $(.01) $ - $ -
Return on common equity (decrease) increase (5) bp (12) bp 3 bp 6 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 1% under all
scenarios at September 30, 1999, June 30, 1999, and September 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 equity. The
off-balance-sheet instruments used to manage the Corporation's interest rate
risk are shown in the table on the following page. Additional information
regarding these contracts is presented in note 24 in the Corporation's 1998
Annual Report to Shareholders.
38
<PAGE> 40
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
Sept. 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 $ - $ 235 $ - $ - $ 450 $ 550 $1,235
Weighted average rate:
Receive - 5.29% - - 5.65% 6.67% 6.03%
Pay - 5.35% - - 5.36% 5.54% 5.44%
Receive fixed/pay floating
callable swaps (b):
Notional value $ 100 $ - $ - $ - $ 750 $ 100 $ 950
Weighted average rate:
Receive 6.54% - - - 5.59% 6.38% 5.77%
Pay 5.31% - - - 5.33% 5.48% 5.35%
Pay fixed/receive floating
generic swaps (a):
Notional amount $ 1 $ 2 $ 27 $ 351 $ 93 $ 14 $ 488
Weighted average rate:
Receive 5.05% 5.14% 5.48% 5.52% 5.68% 5.41% 5.54%
Pay 6.70% 5.49% 6.14% 6.42% 6.57% 6.39% 6.43%
Receive floating/pay floating
basis swaps (a):
Notional value $ - $ 205 $ - $ - $ - $ - $ 205
Weighted average rate:
Receive - 5.38% - - - - 5.38%
Pay - 5.78% - - - - 5.78%
Other products (c) $ 5 $ 15 $ 11 $ 21 $ - $ - $ 52
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $ 106 $ 457 $ 38 $ 372 $1,293 $ 664 $2,930
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic and basis 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 September 30, 1999, are shown in this table.
(c) Balance represents index amortizing swaps with expected maturities from
1999 through 2002 and weighted average receive and pay rates of 7.10% and
5.31%, respectively.
39
<PAGE> 41
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 $302 million
higher at September 30, 1999, compared with June 30, 1999, and approximately
$1.2 billion lower compared with September 30, 1998. The decrease compared to
September 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>
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Instruments associated with deposits $ 181 $ 159 $3,435 $2,557
Instruments associated with interest bearing liabilities 1,305 1,105 971 705
Instruments associated with loans 1,444 1,364 1,482 889
- ----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $2,930 $2,628 $5,888 $4,151
- ----------------------------------------------------------------------------------------------------------------------------------
</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 the interest
revenue and interest expense accounts associated with the underlying assets and
liabilities. The net differential resulted in interest revenue of $2 million and
$8 million in the third quarter and first nine months of 1999, compared with $5
million and $16 million in the third quarter and first nine months of 1998.
Unaccreted deferred gains from off-balance-sheet instrument terminations totaled
approximately $13 million while unamortized deferred losses totaled
approximately $12 million at September 30, 1999. The Corporation recorded less
than $1 million of these deferred net gains and losses into net interest revenue
in both the third quarter and first nine months of 1999.
As of September 30, 1999, the Corporation no longer held off-balance-sheet
contracts to manage the prepayment risk associated with residential mortgage
servicing rights (MSRs) as a result of the sale of the residential mortgage
business on September 30, 1999. At June 30, 1999, and September 30, 1998, the
Corporation had entered into approximately $10.6 billion and $9.9 billion
notional amount, respectively, primarily of interest rate floor and interest
rate swap agreements to manage potential impairment of MSRs. The fair value of
these instruments was $44 million at June 30, 1999, and $301 million at
September 30, 1998.
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
$138 million at September 30, 1999, $146 million at June 30, 1999, and $179
million at September 30, 1998, with negative fair values of $9 million and $13
million and a positive fair value of $1 million, respectively. The Corporation
also has entered into contracts to hedge anticipated transactions. The
Corporation has entered into $410 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 September 30, 1999.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at September 30, 1999, was a negative $35 million,
compared to a positive $5 million at June 30, 1999 and a positive $377 million
at September 30, 1998. The decrease compared with the third quarter of 1998
primarily resulted from the elimination of off-balance-sheet instruments used to
hedge MSRs as well as a decrease in the fair value of interest rate swaps used
to hedge interest rate risk. The decrease compared with the second quarter of
40
<PAGE> 42
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
1999 primarily resulted from the elimination of off-balance-sheet instruments
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.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (a)
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(notional amounts in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management instruments (b):
Interest rate swaps $2,930 $ 2,593 $ 4,028 $4,144
Options, caps and floors purchased (c) - 35 - -
Futures and forward contracts - - 1,860 7
Mortgage servicing rights risk management instruments:
Interest rate floors - 10,050 10,216 8,641
Interest rate swaps - - 900 1,200
Principal only swaps - - - 67
Interest rate and spread locks - 500 250 -
Other products:
Total return swaps 138 146 147 179
Interest rate swaps, futures contracts and foreign
currency contracts hedging anticipated transactions 410 205 365 1,019
- ----------------------------------------------------------------------------------------------------------------------------------
</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
$7 million at September 30, 1999, $45 million at June 30, 1999, $330
million at December 31, 1998, and $401 million at September 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,
41
<PAGE> 43
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
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 September
30, 1999, unchanged from both June 30,1999, and September 30, 1998.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(notional amounts in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $15,331 $16,146 $17,538 $18,569
Commitments to sell 15,407 16,247 17,773 18,552
Foreign currency and other option contracts purchased 297 494 608 772
Foreign currency and other option contracts written 298 480 574 731
Interest rate agreements (b):
Interest rate swaps 19,619 18,491 11,236 11,465
Options, caps and floors purchased 559 730 753 965
Options, caps and floors written 1,226 954 929 945
Futures and forward contracts 8,441 6,114 7,469 7,640
Other products 120 31 32 2
- ----------------------------------------------------------------------------------------------------------------------------------
</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 $475 million at September 30,
1999, $530 million at June 30, 1999, $547 million at December 31, 1998 and
$759 million at September 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 Nine months ended
---------------------------------------- ------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(in millions) 1999 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for credit losses $10 $10 $15 $35 $45
Net revenue from acquired property (5) (5) (3) (10) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
Credit quality expense $ 5 $ 5 $12 $25 $39
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 44
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT
LOSSES (CONTINUED)
- -------------------------------------------------------------------------------
The decrease in credit quality expense in the third quarter of 1999 compared
with the third quarter of 1998 resulted from a lower provision for credit losses
following the sale of the credit card business as well as higher net revenue
from acquired property.
The $93 million decrease in the reserve for credit losses at September 30, 1999,
compared with September 30, 1998, as shown in the table below, was primarily due
to the sale of the credit card business in March 1999. In conjunction with this
sale, $84 million that had been associated with the credit card portfolio was
removed from the reserve for credit losses. In addition, during the third
quarter of 1999, $4 million that had been associated with the residential
mortgage portfolio was removed from the reserve for credit losses in conjunction
with the sale of the mortgage business.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY Quarter ended Nine months ended
---------------------------------------- -------------------------
SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
(dollar amounts in millions) 1999 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of period $ 409 $ 410 $ 498 $ 496 $ 475
Net change in reserve from
divestitures/acquisitions (4) - - (88) 24
Credit losses:
Commercial and financial (10) (14) (2) (27) (6)
Commercial real estate (1) - - (1) (5)
Consumer credit:
Credit cards - - (11) (11) (33)
Other consumer credit (4) (5) (6) (15) (16)
Lease finance assets - (1) (2) (3) (8)
- -----------------------------------------------------------------------------------------------------------------------------------
Total credit losses (15) (20) (21) (57) (68)
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and financial 2 8 1 11 6
Commercial real estate 1 - 2 1 3
Consumer credit:
Credit cards - - 1 1 4
Other consumer credit 2 1 2 5 8
Lease finance assets - - - 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 5 9 6 19 22
- ----------------------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Commercial and financial (8) (6) (1) (16) -
Commercial real estate - - 2 - (2)
Consumer credit:
Credit cards - - (10) (10) (29)
Other consumer credit (2) (4) (4) (10) (8)
Lease finance assets - (1) (2) (2) (7)
- -----------------------------------------------------------------------------------------------------------------------------------
Total net credit losses (10) (11) (15) (38) (46)
Provision for credit losses 10 10 15 35 45
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve at end of period $ 405 $ 409 $ 498 $ 405 $ 498
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.39% 1.34% 1.60% 1.39% 1.60%
Reserve as a percentage of nonperforming loans 263% 338% 487% 263% 487%
Annualized net credit losses to average loans .14% .13% .19% .17% .20%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 45
NONPERFORMING ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(dollar amounts in millions) 1999 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $154 $121 $127 $103 $103
Acquired property, net of the OREO reserve 15 21 34 37 37
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $169 $142 $161 $140 $140
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .53% .40% .41% .32% .33%
Total nonperforming assets as a percentage of
total loans and net acquired property .58% .46% .53% .44% .45%
- --------------------------------------------------------------------------------------------------------------------------------
</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 September 30, 1999, nonperforming assets totaled $169 million, an increase of
$27 million compared with June 30, 1999, $8 million compared with March 31,
1999, and $29 million compared with September 30, 1998. The higher level of
nonperforming loans primarily resulted from the addition of two commercial
loans, one each during the first quarter and third quarter of 1999. This
increase was partially offset by continued sales of acquired property. The ratio
of nonperforming assets to total loans and net acquired property was .58% at
September 30, 1999. This ratio has been lower than 1% for more than five years,
reflecting the effectiveness of the Corporation's loan underwriting,
administration and workout procedures, as well as a strong economy.
44
<PAGE> 46
NONPERFORMING ASSETS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(dollar amounts in millions) 1999 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial and financial $ 89 $ 61 $ 66 $ 42 $ 34
Commercial real estate 6 6 6 6 8
Consumer credit:
Consumer mortgage 47 43 44 44 53
Other consumer credit - 1 1 1 1
Lease finance assets 12 10 10 10 7
- --------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 154 121 127 103 103
Restructured loans - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (a) 154 121 127 103 103
- --------------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 15 24 37 40 40
Reserve for real estate acquired (3) (4) (5) (5) (5)
- --------------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 12 20 32 35 35
Other acquired assets 3 1 2 2 2
- --------------------------------------------------------------------------------------------------------------------------------
Total acquired property 15 21 34 37 37
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $169 $142 $161 $140 $140
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective
loan portfolio segments:
Commercial and financial loans .79% .50% .56% .34% .30%
Commercial real estate loans .23 .24 .25 .28 .35
Consumer mortgage loans .68 .58 .55 .50 .61
Lease finance assets .38 .33 .36 .37 .26
Total loans .53 .40 .41 .32 .33
Nonperforming assets as a percentage of
total loans and net acquired property .58 .46 .53 .44 .45
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $58 million, $15 million, $48 million, $19 million and $21
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 SEPTEMBER 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 $ 61 $ 6 $44 $10 $121 $107
Additions 45 1 13 3 62 38
Payments (a) (4) (1) (8) - (13) (28)
Return to accrual status - - (1) - (1) (7)
Credit losses (10) - - (1) (11) (5)
Transfers to acquired property (3) - (1) - (4) (2)
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at September 30 $ 89 $ 6 $47 $12 $154 $103
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest applied to principal and sales.
A loan is considered impaired, as defined by FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," when based upon current information and
events, it is probable that the Corporation will be unable to collect all
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.
45
<PAGE> 47
NONPERFORMING ASSETS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS Quarter ended
--------------------------------------------
SEPT. 30, June 30, Sept. 30,
(dollar amounts in millions) 1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans - period end (a) $95 $67 $49
Average impaired loans 88 76 50
Interest revenue recognized on impaired loans (b) 1 - 1
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $43 million, $48 million and $24 million of impaired loans with a
related impairment reserve of $10 million, $10 million, and $6 million at
September 30, 1999, June 30, 1999, and September 30, 1998, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Quarter ended Nine months ended
September 30, September 30,
(in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OREO at beginning of period, net of the OREO reserve $ 20 $ 60 $ 35 $ 43
Reclassification from segregated assets - - - 2
Foreclosures 5 5 9 44
Sales (15) (35) (41) (62)
Additional investments, write-downs, losses, OREO
provision and other 2 5 9 8
- --------------------------------------------------------------------------------------------------------------------------------
OREO at end of period, net of the OREO reserve 12 35 12 35
Other acquired assets 3 2 3 2
- --------------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve $ 15 $ 37 $ 15 $ 37
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming. All
loans in this table are well-secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(dollar amounts in millions) 1999 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 26 $ 34 $ 28 $ 31 $ 37
Ratio .39% .46% .35% .34% .43%
Credit card (a) - - - $ 8 $ 8
Ratio - - - 1.05% 1.06%
Student - government guaranteed $ 54 $ 47 $ 49 $ 52 $ 48
Ratio 3.02% 2.77% 2.74% 2.95% 2.77%
Other consumer $ 3 $ 3 $ 2 $ 2 $ 2
Ratio .13% .14% .11% .12% .08%
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer $ 83 $ 84 $ 79 $ 93 $ 95
Ratio .76% .75% .65% .70% .72%
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial (b) $ 13 $ 27 $ 9 $ 11 $ 9
- ----------------------------------------------------------------------------------------------------------------------------------
Total past-due loans $ 96 $ 111 $ 88 $ 104 $ 104
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
46
<PAGE> 48
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Nine months ended
------------------------
SEPT. 30, Sept. 30,
(in millions, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest revenue Interest and fees on loans (loan fees of $45 and $55) $1,688 $1,799
Interest-bearing deposits with banks 27 23
Federal funds sold and securities under resale agreements 23 37
Other money market investments 2 5
Trading account securities 14 11
Securities 316 278
--------------------------------------------------------------------------------------------------------------
Total interest revenue 2,070 2,153
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 547 615
Deposits in foreign offices 99 102
Federal funds purchased and securities under repurchase agreements 82 89
Other short-term borrowings 97 85
Notes and debentures 166 151
--------------------------------------------------------------------------------------------------------------
Total interest expense 991 1,042
- --------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 1,079 1,111
revenue Provision for credit losses 35 45
--------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 1,044 1,066
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fee revenue 1,505 1,257
revenue Cash management and deposit transaction charges 206 192
Mortgage servicing fees 151 152
Foreign currency and securities trading revenue 130 118
Credit card fees 18 70
Other 331 333
--------------------------------------------------------------------------------------------------------------
Total fee revenue 2,341 2,122
Net gain (loss) from divestitures 134 -
Gains on sales of securities - 1
--------------------------------------------------------------------------------------------------------------
Total noninterest revenue 2,475 2,123
- --------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 1,175 1,070
expense Professional, legal and other purchased services 207 200
Net occupancy expense 186 174
Equipment expense 144 122
Amortization of mortgage servicing assets and purchased credit card relationships 112 132
Amortization of goodwill and other intangible assets 111 100
Communications expense 85 79
Business development 129 111
Other expense 136 147
Trust-preferred securities expense 59 59
Net revenue from acquired property (10) (6)
--------------------------------------------------------------------------------------------------------------
Total operating expense 2,334 2,188
- --------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes and cumulative effect of accounting change 1,185 1,001
Provision for income taxes 436 353
--------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 749 648
Cumulative effect of accounting change (26) -
--------------------------------------------------------------------------------------------------------------
Net income 723 648
Dividends on preferred stock - 9
--------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 723 $ 639
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
47
<PAGE> 49
CONSOLIDATED INCOME STATEMENT (CONTINUED)
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Nine months ended
------------------------
SEPT. 30, Sept. 30,
(in millions, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per common Basic net income per common share:
share
Income before cumulative effect of accounting change $1.45 $1.23
Cumulative effect of accounting change (.05) -
--------------------------------------------------------------------------------------------------------------
Net income $1.40 $1.23
--------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income before cumulative effect of accounting change $1.43 $1.20
Cumulative effect of accounting change (.05) -
--------------------------------------------------------------------------------------------------------------
Net income $1.38 $1.20
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
48
<PAGE> 50
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions, except per share amounts) 1999 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees
of $14, $15, $16, $18, and $21) $ 553 $ 555 $580 $614 $616
Interest-bearing deposits with banks 9 9 9 10 8
Federal funds sold and securities under
resale agreements 9 5 9 12 12
Other money market investments 1 - 1 1 1
Trading account securities 5 5 4 4 4
Securities 102 106 108 98 95
--------------------------------------------------------------------------------------------------------------
Total interest revenue 679 680 711 739 736
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 184 177 186 209 211
Deposits in foreign offices 34 30 35 34 37
Federal funds purchased and securities
under repurchase agreements 22 23 37 34 35
Other short-term borrowings 34 34 29 29 27
Notes and debentures 56 55 55 53 51
--------------------------------------------------------------------------------------------------------------
Total interest expense 330 319 342 359 361
- --------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 349 361 369 380 375
revenue Provision for credit losses 10 10 15 15 15
--------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit
losses 339 351 354 365 360
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fee revenue 509 508 488 465 432
revenue Cash management and deposit transaction charges 70 70 66 70 66
Mortgage servicing fees 48 51 52 48 44
Foreign currency and securities trading revenue 42 45 43 47 39
Credit card fees - - 18 22 23
Other 96 113 122 147 108
--------------------------------------------------------------------------------------------------------------
Total fee revenue 765 787 789 799 712
Net gain (loss) from divestitures (8) 59 83 - -
Gains on sales of securities - - - - -
--------------------------------------------------------------------------------------------------------------
Total noninterest revenue 757 846 872 799 712
- --------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 387 397 391 386 358
expense Professional, legal and other purchased services 63 73 71 97 72
Net occupancy expense 61 64 61 63 59
Equipment expense 40 63 41 59 42
Amortization of mortgage servicing assets
and purchased credit card relationships 33 37 42 47 43
Amortization of goodwill and other intangible assets 37 37 37 37 35
Communications expense 26 30 29 28 27
Business development 32 64 33 38 33
Other expense 37 44 55 50 48
Trust-preferred securities expense 20 19 20 20 20
Net revenue from acquired property (5) (5) - - (3)
--------------------------------------------------------------------------------------------------------------
Total operating expense 731 823 780 825 734
- --------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes and cumulative
effect of accounting change 365 374 446 339 338
Provision for income taxes 134 136 166 117 120
--------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 231 238 280 222 218
Cumulative effect of accounting change - - (26) - -
--------------------------------------------------------------------------------------------------------------
Net income 231 238 254 222 218
Dividends on preferred stock - - - - -
--------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 231 $ 238 $254 $222 $218
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
49
<PAGE> 51
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND (CONTINUED)
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, March 31, Dec. 31, Sept. 30,
(in millions, except per share amounts) 1999 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per common Basic net income per common share:
share
Income before cumulative effect of accounting change $ .46 $ .45 $ .54 $ .42 $ .42
Cumulative effect of accounting change - - (.05) - -
--------------------------------------------------------------------------------------------------------------
Net income $ .46 $ .45 $ .49 $ .42 $ .42
--------------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income before cumulative effect of accounting change $ .45 $ .45 $ .53 $ .42 $ .41
Cumulative effect of accounting change - - (.05) - -
--------------------------------------------------------------------------------------------------------------
Net income $ .45 $ .45 $ .48 $ .42 $ .41
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
50
<PAGE> 52
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(dollar amounts in millions) 1999 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets Cash and due from banks $ 3,340 $ 3,140 $ 2,926 $ 2,839
Federal funds sold and securities under resale agreements 698 359 186 106
Interest-bearing deposits with banks 487 657 566 796
Other money market investments 67 59 46 86
Trading account securities 288 318 193 178
Securities available for sale 5,209 5,241 5,373 4,190
Investment securities (approximate fair value of $1,246,
$1,332, $1,634 and $1,787) 1,251 1,330 1,602 1,743
Loans, net of unearned discount of $77, $70, $54 and $65 29,156 30,544 32,093 31,052
Reserve for credit losses (405) (409) (496) (498)
------- ------- ------- -------
Net loans 28,751 30,135 31,597 30,554
Customers' acceptance liability 87 117 166 122
Premises and equipment 537 552 569 562
Goodwill and other intangibles 2,182 2,237 2,313 2,115
Mortgage servicing assets and purchased credit card
relationships 17 1,069 1,132 1,031
Acquired property, net of reserves of $3, $4, $5 and $5 15 21 37 37
Other assets 3,932 3,853 4,071 3,884
----------------------------------------------------------------------------------------------------------------
Total assets $46,861 $49,088 $50,777 $48,243
----------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 8,193 $ 8,960 $ 9,976 $ 8,334
Interest-bearing deposits in domestic offices 20,735 20,614 21,293 21,325
Interest-bearing deposits in foreign offices 3,101 3,401 3,114 3,294
----------------------------------------------------------------------------------------------------------------
Total deposits 32,029 32,975 34,383 32,953
Short-term bank notes 1,055 656 266 275
Federal funds purchased and securities under
repurchase agreements 1,023 2,394 3,594 2,846
U.S. Treasury tax and loan demand notes 658 857 290 654
Term federal funds purchased 361 332 208 243
Commercial paper 97 135 116 156
Other funds borrowed 376 391 468 309
Acceptances outstanding 87 117 166 122
Other liabilities 2,267 2,634 2,471 2,332
Notes and debentures (with original maturities over
one year) 3,698 3,303 3,303 3,004
----------------------------------------------------------------------------------------------------------------
Total liabilities 41,651 43,794 45,265 42,894
- --------------------------------------------------------------------------------------------------------------------------------
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; 588,661,920 (a); 294,330,960; and
294,330,960 shares 294 294 147 147
Additional paid-in capital 1,773 1,765 1,887 1,867
Retained earnings 3,698 3,587 3,353 3,244
Accumulated unrealized (losses) gains, net of tax (105) (90) 25 29
Treasury stock of 80,011,896; 74,450,718 (a); 32,407,960;
and 33,191,388 shares, at cost (1,441) (1,253) (891) (929)
-----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,219 4,303 4,521 4,358
----------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $46,861 $49,088 $50,777 $48,243
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the two-for-one common stock split distributed on
May 17, 1999.
See accompanying Notes to Financial Statements.
51
<PAGE> 53
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net income $ 723 $ 648
operating activities Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change 26 -
Net gain from divestitures (134) -
Amortization of goodwill and other intangible assets 111 100
Amortization of mortgage servicing assets and
purchased credit card relationships 112 132
Depreciation and other amortization 75 77
Deferred income tax expense 210 31
Provision for credit losses 35 45
Net gains on dispositions of acquired property (13) (5)
Net decrease in accrued interest receivable 36 8
Net increase in trading account securities (87) (95)
Net (decrease) increase in accrued interest payable,
net of amounts prepaid (17) 20
Net decrease (increase) in residential mortgages held for sale 1,290 (246)
Net increase in other operating activities (375) (353)
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,992 362
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from Net decrease (increase) in term deposits and other money
investing activities market investments 54 (257)
Net (increase) decrease in federal funds sold and securities
under resale agreements (512) 489
Purchases of securities available for sale (1,678) (2,820)
Proceeds from sales of securities available for sale 404 950
Proceeds from maturities of securities available for sale 1,252 1,166
Purchases of investment securities (15) (13)
Proceeds from maturities of investment securities 316 351
Net decrease in credit card receivables to date of sale 85 115
Proceeds from sale of credit card business 1,186 -
Proceeds from sale of network services 135 -
Proceeds from sale of mortgage businesses 1,210 -
Net principal disbursed on loans to customers (1,485) (2,539)
Loan portfolio purchases (41) (220)
Proceeds from the sales and securitizations of loan portfolios 2,142 1,905
Purchases of premises and equipment (119) (100)
Proceeds from sales of acquired property 55 68
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 (86) (88)
Net increase in other investing activities (249) (212)
-----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,654 (1,638)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
52
<PAGE> 54
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net decrease in transaction and savings deposits (1,441) (703)
financing activities Net (decrease) increase in customer term deposits (913) 648
Net (decrease) increase in federal funds purchased and
securities under repurchase agreements (2,571) 632
Net increase (decrease) in short-term bank notes 789 (55)
Net increase (decrease) in term federal funds purchased 153 (382)
Net increase in U.S. Treasury tax and loan demand notes 368 207
Net (decrease) increase in commercial paper (19) 89
Repayments of longer-term debt (115) (123)
Net proceeds from issuance of longer-term debt 506 573
Dividends paid on common and preferred stock (301) (282)
Proceeds from issuance of common stock 38 36
Repurchase of common stock (694) (27)
Redemption of preferred stock - (193)
Net (decrease) increase in other financing activities (87) 3
-----------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (4,287) 423
Effect of foreign currency exchange rates 55 42
- --------------------------------------------------------------------------------------------------------------------------------
Change in cash and Net increase (decrease) in cash and due from banks 414 (811)
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 $ 3,340 $2,839
-----------------------------------------------------------------------------------------------------
Supplemental Interest paid $ 1,008 $1,022
disclosures Net income taxes paid 277 277
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
53
<PAGE> 55
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
QUARTER ENDED Additional unrealized Total
SEPTEMBER 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 June 30, 1999 $ - $294 $1,765 $3,587 $ (90) $(1,253) $4,303
Comprehensive results:
Net income 231 231
Other comprehensive results,
net of tax (15) (15)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 231 (15) 216
Dividends on common stock
at $.20 per share (103) (103)
Common stock issued under
dividend reinvestment and
common stock purchase plan 1 5 6
Exercise of stock options 7 (14) 22 15
Repurchase of common stock (225) (225)
Other (3) 10 7
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ - $294 $1,773 $3,698 $(105) $(1,441) $4,219
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Quarter ended Additional unrealized Total
September 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 June 30, 1998 $ - $147 $1,879 $3,124 $19 $(935) $4,234
Comprehensive results:
Net income 218 218
Other comprehensive results,
net of tax 10 10
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 218 10 228
Dividends on common stock
at $.18 per share (94) (94)
Common stock issued under
dividend reinvestment and
common stock purchase plan 2 3 5
Exercise of stock options (20) (4) 26 2
Repurchase of common stock (27) (27)
Other 6 4 10
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ - $147 $1,867 $3,244 $29 $(929) $4,358
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
(continued)
54
<PAGE> 56
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
NINE MONTHS ENDED Additional unrealized Total
SEPTEMBER 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 723 723
Other comprehensive results,
net of tax (130) (130)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 723 (130) 593
Dividends on common stock
at $.58 per share (301) (301)
Common stock issued under
dividend reinvestment and
common stock purchase plan 1 14 15
Exercise of stock options 32 (74) 102 60
Repurchase of common stock (694) (694)
Additional common stock issued
for stock split 147 (147) -
Other (3) 28 25
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ - $294 $1,773 $3,698 $(105) $(1,441) $4,219
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Nine months ended Additional unrealized Total
September 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 648 648
Other comprehensive results,
net of tax 8 8
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 648 8 656
Dividends on common stock
at $.53 per share (271) (271)
Dividends on preferred stock (9) (9)
Common stock issued under
dividend reinvestment and
common stock purchase plan 8 7 15
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 (12) (8) 65 45
Repurchase of common stock (27) (27)
Other 31 11 42
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ - $147 $1,867 $3,244 $ 29 $ (929) $4,358
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
55
<PAGE> 57
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.
56
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Note 3 -- Securities
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- ----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 September 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 $ 218 $ - $ 1 $ 217 $ 212 $ 1 $ - $ 213
U.S. agency mortgage-backed 4,994 9 123 4,880 3,414 90 - 3,504
Other U.S. agency 5 - - 5 384 - - 384
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 5,217 9 124 5,102 4,010 91 - 4,101
Obligations of states and
political subdivisions 101 - 7 94 70 1 - 71
Other mortgage-backed 1 - - 1 2 - - 2
Other securities 12 - - 12 17 - 1 16
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $5,331 $ 9 $131 $5,209 $4,099 $92 $ 1 $4,190
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Gross realized gains were less than $1 million in the first nine months of
1999 and were $1 million in the first nine months of 1998. There were no gross
realized losses in the first nine months of 1999 or 1998.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 September 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 $ - $ - $ - $ - $ 49 $13 $ - $ 62
U.S. agency mortgage-backed 1,162 2 7 1,157 1,608 34 3 1,639
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 1,162 2 7 1,157 1,657 47 3 1,701
Obligations of states and
political subdivisions 16 - - 16 16 - - 16
Other mortgage-backed 10 - - 10 17 - - 17
Other securities 63 - - 63 53 - - 53
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,251 $ 2 $ 7 $1,246 $1,743 $47 $ 3 $1,787
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
57
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------------
Note 4 -- Other assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 30,
(in millions) 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid expense:
Pension $ 531 $ 509 $ 468 $ 449
Other 157 88 132 130
Accounts and fees receivable 596 605 591 531
Interest receivable 223 236 262 233
Mortgage servicing advances - 134 214 202
Receivables related to off-balance-sheet instruments 485 526 552 764
Assets held for accelerated resolution - - 67 86
Other 1,940 1,755 1,785 1,489
- ----------------------------------------------------------------------------------------------------------------------------------
Total other assets $3,932 $3,853 $4,071 $3,884
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5 -- Deposits
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Dec. 31, Sept. 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 $13,056 $12,952 $12,323 $11,540
Retail savings certificates 6,595 6,536 7,039 7,603
Other time deposits 1,084 1,126 1,931 2,182
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 20,735 20,614 21,293 21,325
Noninterest-bearing 8,193 8,960 9,976 8,334
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 28,928 29,574 31,269 29,659
Deposits in foreign offices 3,101 3,401 3,114 3,294
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits $32,029 $32,975 $34,383 $32,953
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 6 -- Preferred stock
The Corporation has authorized 50 million shares of preferred stock, none of
which was issued at September 30, 1999. In February 1998, the 8 million
authorized and issued shares of the 8.20% Series K preferred stock were 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.
58
<PAGE> 60
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
- ---------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Sept. 30,
(in millions) 1999 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $(19) $(24) $(15)
Quarterly change 1 5 (6)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $(18) $(19) $(21)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized gains (losses) on
assets available for sale, net of tax
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Sept. 30,
(in millions) 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $(71) $ 9 $34
Quarterly change (16) (80) 16
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $(87) $(71) $50
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total accumulated unrealized gains (losses), net of tax
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, June 30, Sept. 30,
(in millions) 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ (90) $(15) $19
Quarterly change (15) (75) 10
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $(105) $(90) $29
- --------------------------------------------------------------------------------------------------------------------------------
</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
- ---------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, Sept. 30,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $(21) $(12)
Year-to-date change 3 (9)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance $(18) $(21)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized gains (losses) on
assets available for sale, net of tax
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, Sept. 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 46 $33
Year-to-date change (133) 17
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $ (87) $50
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total accumulated unrealized gains (losses), net of tax
- --------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, Sept. 30,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 25 $21
Year-to-date change (130) 8
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $ (105) $29
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE> 61
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 Nine months ended
September 30, September 30,
(in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts $40 $38 $122 $111
Debt instruments 3 (5) 11 (5)
Interest rate agreements (1) 6 (3) 12
- --------------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $42 $39 $130 $118
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) There was no unrealized gain or loss at September 30, 1999, related to
securities held in the trading portfolio. The Corporation recorded an
unrealized loss of $3 million at September 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 back-office
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 Divestitures and Real Estate
Workout/Other Activity paragraphs in the Business Sectors presentation on pages
8 through 17. The table and information in those paragraphs are incorporated by
reference into these Notes to Financial Statements.
60
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Note 10 -- Computation of earnings per common share (a)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
dollar amounts in millions, except per SEPT. 30, June 30, Sept. 30, SEPT. 30, Sept. 30,
share amounts; common shares in thousands) 1999 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE
<S> <C> <C> <C> <C> <C>
Income before cumulative effect of
accounting change $ 231 $ 238 $ 218 $ 749 $ 648
Cumulative effect of accounting change -- -- -- (26) --
- -------------------------------------------------------------------------------------------------------------------------
Net income 231 238 218 723 648
Dividends on preferred stock -- -- -- -- 9
- -------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 231 $ 238 $ 218 $ 723 $ 639
- -------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 511,777 518,273 522,156 517,790 519,550
Basic earnings per common share:
Income before cumulative effect of
accounting change $ .46 $ .45 $ .42 $ 1.45 $ 1.23
Cumulative effect of accounting change -- -- -- (.05) --
- -------------------------------------------------------------------------------------------------------------------------
Net income $ .46 $ .45 $ .42 $ 1.40 $ 1.23
- -------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Income before cumulative effect of
accounting change $ 231 $ 238 $ 218 $ 749 $ 648
Cumulative effect of accounting change -- -- -- (26) --
- -------------------------------------------------------------------------------------------------------------------------
Net income 231 238 218 723 648
Dividends on preferred stock -- -- -- -- 9
- -------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock (b) $ 231 $ 238 $ 218 $ 723 $ 639
- -------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 511,777 518,273 522,156 517,790 519,550
Common stock equivalents:
Stock options 6,788 7,356 9,260 7,318 10,188
Common shares issuable upon conversion of
7 1/4% Convertible Subordinated Capital Notes 40 83 132 74 146
- -------------------------------------------------------------------------------------------------------------------------
Total 518,605 525,712 531,548 525,182 529,884
- -------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Income before cumulative effect of
accounting change $ .45 $ .45 $ .41 $ 1.43 $ 1.20
Cumulative effect of accounting change -- -- -- (.05) --
- -------------------------------------------------------------------------------------------------------------------------
Net income $ .45 $ .45 $ .41 $ 1.38 $ 1.20
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Calculated based on unrounded numbers.
(b) The after-tax benefit of interest expense on the assumed conversion of the
7 1/4% Convertible Subordinated Capital Notes was less than $1 million for
all periods presented.
61
<PAGE> 63
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>
- ----------------------------------------------------------------------------
Nine months ended
September 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 10 44
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.
62
<PAGE> 64
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 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
3.1 Restated Articles of Incorporation of Mellon Financial
Corporation, as amended and restated as of September 17, 1998,
and as amended October 18, 1999.
3.2 By-Laws of Mellon Financial Corporation, as amended, effective
October 19, 1999.
4.1 Amended and Restated Shareholder Protection Rights Agreement,
dated as of October 15, 1996, between Mellon Financial
Corporation and Mellon Bank, N.A., as Rights Agent, as amended
and restated as of October 19, 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 Financial 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 third quarter of 1999, the Corporation filed the following
Current Reports on Form 8-K:
(1) 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.
(2) A report dated July 20, 1999, which included, under Items 5 and
7, (i) the Corporation's press release, dated July 20, 1999,
regarding second quarter and first six months of 1999 results of
operations and (ii) the Corporation's press release, dated July
21, 1999, announcing that Mellon Bank (MD) National Association
entered into an agreement with Sandy Spring National Bank of
Maryland, a subsidiary of Sandy Spring Bancorp, Inc., providing
for the sale by Mellon Bank (MD) of seven retail offices located
in Montgomery and Anne Arundel Counties, Maryland and Northern
Virginia.
63
<PAGE> 65
PART II - OTHER INFORMATION (CONTINUED)
- -------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K. (continued)
---------------------------------
(b) Reports on Form 8-K (continued)
(3) A report dated August 3, 1999, which included, under Item 5, a
statement that the Corporation and Chase Mortgage Company, a
subsidiary of The Chase Manhattan Corporation, had entered into
an agreement providing for the sale of the residential mortgage
business of Mellon Bank, N.A.
(4) A report dated September 9, 1999, which included, under Items 5
and 7, the Corporation's press release announcing that it will
be changing its Corporate name to Mellon Financial Corporation
and that it had completed its current repurchase program of 20
million shares of Mellon common stock and will ask its board of
directors to authorize a new repurchase program covering 25
million shares of Mellon common stock.
(5) A report dated September 21, 1999, which included, under Items 5
and 7, the Corporation's press release announcing that its board
of directors authorized a new repurchase program covering 25
million shares of the Corporation's common stock.
(6) A report dated September 24, 1999, which included, under Item 5,
(i) a statement that on September 24, 1999, Mellon Bank (MD)
National Association had completed the previously announced sale
to Sandy Spring National Bank of Maryland, a subsidiary of Sandy
Spring Bancorp, Inc., of seven retail offices located in
Montgomery and Anne Arundel Counties, Maryland and Northern
Virginia and (ii) a statement that on September 30, 1999, the
Corporation had completed the previously announced sale to Chase
Mortgage Company, a subsidiary of The Chase Manhattan
Corporation, of the residential mortgage business of Mellon
Bank, N.A.
64
<PAGE> 66
- --------------------------------------------------------------------------------
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 FINANCIAL CORPORATION
(Registrant)
Date: November 10, 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)
65
<PAGE> 67
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
Business Mellon Financial Corporation is a multibank holding company
of the providing a comprehensive range of financial products and
Corporation services in domestic and selected international markets.
Through its six business sectors (Wealth Management, Global
Investment Management, Global Investment Services, Regional
Consumer Banking, Specialized Commercial Banking and Large
Corporate Banking), the Corporation provides wealth management
and global asset management for individual and institutional
investors, global investment services for businesses and
institutions and a variety of banking services for individuals
and small, midsize and large businesses and institutions. The
Corporation's 12 asset management companies, which include The
Dreyfus Corporation in the United States and Newton Management
Limited in the United Kingdom, provide investment products in
many asset classes and investment styles. Mellon is a global
provider of custody, retirement and benefits consulting
services through its Mellon Trust and Buck Consultants, Inc.
affiliates. 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 1 800 842-7629.
<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 and Exchange Commission on Form 10-K, 10-Q
and 8-K may be obtained by sending a written request to the
Secretary of the Corporation at One Mellon Bank Center, Room
4826, Pittsburgh, PA 15258-0001.
<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>
66
<PAGE> 68
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ---------------------------------------------------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Mellon Filed herewith.
Financial Corporation, as amended and restated
as of September 17, 1998 and as amended
October 18, 1999.
3.2 By-Laws of Mellon Financial Corporation, as Filed herewith.
amended, effective October 19, 1999.
4.1 Amended and Restated Shareholder Protection Previously filed as Exhibit 1 to
Rights Agreement, dated as of October 15, 1996, Form 8-A/A Registration Statement
between Mellon Financial Corporation and (File No. 1-7410) dated
Mellon Bank, N.A., as Rights Agent, as amended October 19, 1999, and
and restated as of October 19, 1999 incorporated herein by reference.
12.1 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
(parent corporation).
12.2 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
(Mellon Financial 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>
67
<PAGE> 1
EXHIBIT 3.1
MELLON FINANCIAL CORPORATION
RESTATED ARTICLES OF INCORPORATION
FIRST: The name of the Corporation is Mellon Financial Corporation.
SECOND: The location and post office address of its registered office in
this Commonwealth is One Mellon Bank Center, 500 Grant Street, City of
Pittsburgh, County of Allegheny, Pennsylvania 15258.
THIRD: The Corporation is organized under the provisions of the
Pennsylvania Business Corporation Law (the "Business Corporation Law"), and
shall have unlimited power to engage in and to do any lawful act concerning any
or all lawful business for which corporations may be incorporated under the
Business Corporation Law.
FOURTH: The term of its existence is perpetual.
FIFTH: The aggregate number of shares which the Corporation shall have
authority to issue is 850,000,000 of which 50,000,000 shares shall be Preferred
Stock, par value $1.00 per share, issuable in one or more series, and
800,000,000 shares shall be Common Stock, par value $0.50 per share.
A description of each such class of shares and a statement of the authority
hereby vested in the Board of Directors of the Corporation to fix and determine
the designations, preferences, qualifications, limitations, restrictions and
special or relative rights and preferences granted to or imposed upon the shares
of each class and series are as follows:
Section I. PREFERRED STOCK. The Preferred Stock may be divided into
and issued in series. The Board of Directors is hereby expressly
authorized, at any time or from time to time, to divide any or all of the
shares of the Preferred Stock into series, and in the resolution or
resolutions establishing a particular series, before issuance of any of the
shares thereof, to fix and determine the designation and the relative
rights and preferences of the series so established, to the fullest extent
now or hereafter permitted by the laws of the Commonwealth of Pennsylvania,
including, but not limited to, variations between different series in the
following respects:
(a) the distinctive serial designation of such series;
(b) the annual dividend rate for such series, and the date or dates from
which dividends shall commence to accrue;
(c) the redemption price or prices, if any, for shares for such series and
the terms and conditions on which such shares may be redeemed;
(d) the sinking fund provisions, if any, for the redemption or purchase of
shares of such series;
(e) the preferential amount or amounts payable upon shares of such series
in the event of the voluntary liquidation of the Corporation;
(f) the voting rights of shares of such series;
(g) the terms and conditions, if any, upon which shares of such series may
be converted and the class or classes or series of shares of the
Corporation into which such shares may be converted;
(h) the relative seniority, parity or junior rank of such series with
respect to other series of Preferred Stock then or thereafter to be issued;
and
(i) such other terms, qualifications, privileges, limitations, options,
restrictions, and special or relative rights and preferences, if any, of
shares of such series as the Board of Directors may, at the time of such
resolutions, lawfully fix and determine under the laws of the Commonwealth
of Pennsylvania.
<PAGE> 2
The designations, numbers of shares and the voting rights, preferences,
limitations and special rights, if any, as determined by the Board of Directors,
of the shares of each series of the Preferred Stock outstanding from time to
time are as stated in Appendix A attached hereto and incorporated herein by
reference and in any amendment to Appendix A or to these Restated Articles of
Incorporation (hereinafter, the "Articles") authorized by Section 1522(b) of the
Business Corporation Law and hereafter filed with the Pennsylvania Department of
State pursuant to Section 1522(c) or 1914(c)(5) of the Business Corporation Law
or any successor statutory provisions.
Section II. COMMON STOCK. Except for and subject to those rights
expressly granted to holders of the Preferred Stock by resolution or
resolutions adopted by the Board of Directors pursuant to Section I of this
Article Fifth and except as may be provided by the laws of the Commonwealth
of Pennsylvania, holders of the Common Stock shall have exclusively all
other rights of shareholders. All or part of the shares of Common Stock of
the Corporation may be uncertificated shares to the extent determined by
the Board of Directors of the Corporation (or by any officer or other
person as the Board of Directors may designate) from time to time; however,
in no event shall shares of Common Stock represented by a certificate be
deemed uncertificated until the certificate is surrendered to the
Corporation.
Section III. PREEMPTIVE RIGHTS; CUMULATIVE VOTING.
(a) The Corporation may issue shares, option rights, securities having
conversion or option rights and any other securities of any class without
first offering them to shareholders of any class or classes.
(b) The shareholders shall not have any right of cumulative voting.
SIXTH: The following are provisions for the regulation of the internal
affairs and business of the Corporation:
(a) By-Laws. The Board of Directors of the Corporation shall have the power
to make, alter, amend and repeal such By-Laws as it may deem necessary and
convenient for the regulation and management of the Corporation not inconsistent
with law or the Articles.
(b) Indemnification of Directors, Officers and Others.
Section I. RIGHT TO INDEMNIFICATION. Except as prohibited by law,
every Director and officer of the Corporation shall be entitled as of right
to be indemnified by the Corporation against expenses and any liability
paid or incurred by such person in connection with any actual or threatened
claim, action, suit or proceeding, civil, criminal, administrative,
investigative or other, whether brought by or in the right of the
Corporation or otherwise, in which he or she may be involved, as a party or
otherwise, by reason of such person being or having been a Director or
officer of the Corporation or by reason of the fact that such person is or
was serving at the request of the Corporation as a director, officer,
employee, fiduciary or other representative of another corporation,
partnership, joint venture, trust, employee benefit plan or other entity
(such claim, action, suit or proceeding hereinafter being referred to as
"Action"); provided, that no such right of indemnification shall exist with
respect to an Action brought by an indemnitee (as hereinafter defined)
against the Corporation except as provided in the last sentence of this
Section I. Persons who are not directors or officers of the Corporation may
be similarly indemnified in respect of service to the Corporation or to
another such entity at the request of the Corporation to the extent the
Board of Directors at any time denominates any of such persons as entitled
to the benefits of this Article Sixth(b). As used in this Article Sixth(b),
"indemnitee" shall include each Director and officer of the Corporation and
each other person denominated by the Board of Directors as entitled to the
benefits of this Article Sixth(b), "expenses" shall include fees and
expenses of counsel selected by any such indemnitee and "liability" shall
include amounts of judgments, excise taxes, fines, penalties and amounts
paid in settlement. An indemnitee shall be entitled to be indemnified
pursuant to this Section I for expenses incurred in connection with any
Action brought by an indemnitee against the Corporation only if (i) the
Action is a claim for indemnity or expenses under Section III of this
Article Sixth(b) or otherwise, (ii) the indemnitee is successful in whole
or in part in the Action for which expenses are claimed or (iii) the
indemnification for expenses is included in a settlement of the Action or
is awarded by a court.
Section II. RIGHT TO ADVANCEMENT OF EXPENSES. Every indemnitee shall
be entitled as of right to have his or her expenses in any Action (other
than an Action brought by such indemnitee against the
<PAGE> 3
Corporation) paid in advance by the Corporation prior to final disposition
of such Action, subject to any obligation which may be imposed by law or by
provision in the Articles, By-Laws, agreement or otherwise to reimburse the
Corporation in certain events.
Section III. RIGHT OF INDEMNITEE TO INITIATE ACTION. If a written
claim under Section I or Section II of this Article Sixth(b) is not paid in
full by the Corporation within thirty days after such claim has been
received by the Corporation, the indemnitee may at any time thereafter
initiate an Action against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the indemnitee shall also
be entitled to be paid the expense of prosecuting such Action. It shall be
a defense to any Action to recover a claim under Section I that the
indemnitee's conduct was such that under Pennsylvania law the Corporation
is prohibited from indemnifying the indemnitee for the amount claimed, but
the burden of proving such defense shall be on the Corporation. Neither the
failure of the Corporation (including its Board of Directors, independent
legal counsel and its shareholders) to have made a determination prior to
the commencement of such action that indemnification of the indemnitee is
proper in the circumstances, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel or its
shareholders) that the indemnitee's conduct was such that indemnification
is prohibited by law, shall be a defense to such Action or create a
presumption that the indemnitee's conduct was such that indemnification is
prohibited by law. The only defense to any such Action to receive payment
of expenses in advance under Section II of this Section shall be failure to
make an undertaking to reimburse if such an undertaking is required by law
or by provision in the Articles, By-Laws, agreement or otherwise.
Section IV. INSURANCE AND FUNDING. The Corporation may purchase and
maintain insurance to protect itself and any person eligible to be
indemnified hereunder against any liability or expense asserted or incurred
by such person in connection with any Action, whether or not the
Corporation would have the power to indemnify such person against such
liability or expense by law or under the provisions of this Article
Sixth(b). The Corporation may create a trust fund, grant a security
interest, cause a letter of credit to be issued or use other means (whether
or not similar to the foregoing) to ensure the payment of such sums, as may
become necessary to effect indemnification as provided herein.
Section V. NON-EXCLUSIVITY; NATURE AND EXTENT OF RIGHTS. The rights of
indemnification and advancement of expenses provided for in this Article
Sixth(b) (i) shall not be deemed exclusive of any other rights, whether now
existing or hereafter created, to which any indemnitee may be entitled
under any agreement or by-law, charter provision, vote of shareholders or
directors or otherwise, (ii) shall be deemed to create contractual rights
in favor of each indemnitee, (iii) shall continue as to each person who has
ceased to have the status pursuant to which he or she was entitled or was
denominated as entitled to indemnification hereunder and shall inure to the
benefit of the heirs and legal representatives of each indemnitee and (iv)
shall be applicable to Actions commenced after the adoption hereof, whether
arising from acts or omissions occurring before or after the adoption
hereof. The rights of indemnification provided for in this Article Sixth(b)
may not be amended or repealed so as to limit in any way the
indemnification or the right to advancement of expenses provided for herein
with respect to any acts or omissions occurring prior to the adoption of
any such amendment or repeal.
Section VI. EFFECTIVE DATE. This Article Sixth(b) shall apply to every
Action other than an Action filed prior to January 27, 1987, except that it
shall not apply to the extent that Pennsylvania law prohibits its
application to any breach of performance of duty or any failure of
performance of duty by an indemnitee occurring prior to January 27, 1987.
(c) Reserved Power. The Corporation shall be deemed for all purposes to
have reserved the right to alter, change or repeal any provision contained in
its Articles or By-Laws to the extent now or hereafter permitted or prescribed
by law, and all rights herein conferred upon shareholders and others are granted
subject to such reservation.
SEVENTH: To the fullest extent that the laws of the Commonwealth of
Pennsylvania, as in effect on January 27, 1987 or as thereafter amended, permit
elimination or limitation of the liability of directors, no Director of the
Corporation shall be personally liable for monetary damages as such for any
action taken, or any failure to take any action, as a Director.
<PAGE> 4
This Article Seventh shall not apply to any actions filed prior to January
27, 1987, nor to any breach of performance of duty or any failure of performance
of duty by any Director of the Corporation occurring prior to January 27, 1987.
The provisions of this Article shall be deemed to be a contract with each
Director of the Corporation who serves as such at any time while this Section is
in effect and each such Director shall be deemed to be doing so in reliance on
the provisions of this Article. Any amendment or repeal of this Article or
adoption of any other provision of the Articles or By-Laws of the Corporation
which has the effect of increasing Director liability shall operate
prospectively only and shall not affect any action taken, or any failure to act,
prior to the adoption of such amendment, repeal or other provision.
Effective, September 17, 1998.
Amended effective, October 18, 1999.
<PAGE> 5
APPENDIX A
PERTINENT PORTIONS OF SERIES DESIGNATIONS
FOR
MELLON FINANCIAL CORPORATION
PREFERRED STOCK
SERIES A PREFERRED STOCK
[As of the date of these Restated Articles of Incorporation, no shares of
the Corporation's Series A Preferred Stock remain outstanding. The Series
Designation and subsequent Statements Affecting Series Designation for such
shares have been intentionally omitted from this Appendix.]
SERIES B PREFERRED STOCK
[In accordance with its terms, all outstanding shares of Series B Preferred
Stock were redeemed on December 1, 1993. The Series Designation and subsequent
Statements Affecting Series Designation for such shares have been intentionally
omitted from this Appendix.]
SERIES C-1 PREFERRED STOCK
[As of the date of these Restated Articles of Incorporation, no shares of
the Corporation's Series C-1 Preferred Stock remain outstanding. The Series
Designation and subsequent Statement Affecting Series Designation for such
shares have been intentionally omitted from this Appendix.]
SERIES C-2 PREFERRED STOCK
[As of the date of these Restated Articles of Incorporation, no shares of
the Corporation's Series C-2 Preferred Stock remain outstanding. The Series
Designation and subsequent Statement Affecting Series Designation for such
shares have been intentionally omitted from this Appendix.]
SERIES D PREFERRED STOCK
[In accordance with its terms, all outstanding shares of Series D Preferred
Stock were converted into shares of Common Stock on August 31, 1994. The Series
Designation and subsequent Statements Affecting Series Designation for such
shares have been intentionally omitted from this Appendix.]
SERIES E PREFERRED STOCK
[As of the date of these Restated Articles of Incorporation, no shares of
the Corporation's Series E Preferred Stock remain outstanding. The Series
Designation and subsequent Statement Affecting Series Designation for such
shares have been intentionally omitted from this Appendix.]
SERIES F PREFERRED STOCK
[As of the date of these Restated Articles of Incorporation, no shares of
the Corporation's Series F Preferred Stock remain outstanding. The Series
Designation and subsequent Statement Affecting Series Designation for such
shares have been intentionally omitted from this Appendix.]
<PAGE> 6
SERIES G PREFERRED STOCK
[As of the date of these Restated Articles of Incorporation, no shares of
the Corporation's Series G Preferred Stock remain outstanding. The Series
Designation and subsequent Statement Affecting Series Designation for such
shares have been intentionally omitted from this Appendix.]
SERIES H PREFERRED STOCK
[In accordance with its terms, all outstanding shares of Series H Preferred
Stock were redeemed on March 1, 1995. The Series Designation and subsequent
Statement Affecting Series Designation for such shares have been intentionally
omitted from this Appendix.]
SERIES I PREFERRED STOCK
[In accordance with its terms, all outstanding shares of Series I Preferred
Stock were redeemed on December 16, 1996. The Series Designation and subsequent
Statement Affecting Series Designation for such shares have been intentionally
omitted from this Appendix.]
SERIES J PREFERRED STOCK
[In accordance with its terms, all outstanding shares of Series J Preferred
Stock were redeemed on February 18, 1997. The Series Designation and subsequent
Statement Affecting Series Designation for such shares have been intentionally
omitted from this Appendix.]
SERIES K PREFERRED STOCK
[In accordance with its terms, all outstanding shares of Series K Preferred
Stock were redeemed on February 17, 1998. The Series Designation and subsequent
Statement Affecting Series Designation for such shares have been intentionally
omitted from this Appendix.]
<PAGE> 1
Exhibit 3.2
MELLON FINANCIAL CORPORATION
BY-LAWS
ARTICLE ONE
Meetings of Shareholders
Section 1. ANNUAL MEETINGS. The annual meeting of the shareholders of
the Corporation for the election of Directors and the transaction of all other
business that may properly come before the meeting shall be held on the third
Tuesday of April in each year, or if that day is a legal holiday, then on the
next business day following. The annual meeting shall be held at such time and
place, and upon such notice as the Board of Directors shall determine.
Section 2. SPECIAL MEETINGS. Special meetings of the shareholders may
be called for any purpose by the Board of Directors, the Chief Executive
Officer, the Chairman or the President, and any such special meeting shall be
held at the place, day and time upon such notice as the Board of Directors or
such person shall determine.
Section 3. ORGANIZATION. The Chief Executive Officer or, in the event
of his absence or disability, the Chairman, the President or any other officer
of the Corporation designated by the Board of Directors shall preside at all
meetings of the shareholders. All meetings shall be conducted in accordance
<PAGE> 2
with such regulations as the Board of Directors may from time to time prescribe
or as the presiding officer may establish.
Section 4. VOTING. Shareholders may vote at any meeting in person or
by proxies duly authorized in writing. The Board of Directors may fix a record
date for determining those shareholders entitled to vote at any such meeting.
Section 5. QUORUM; SHAREHOLDER ACTION. The presence, in person or by
proxy, of shareholders entitled to cast at least a majority of the votes that
all shareholders are entitled to cast shall constitute a quorum for the
transaction of business at any meeting of shareholders. Unless otherwise
provided by law, any action of the shareholders may be taken by a majority of
the votes cast at any duly convened shareholders' meeting.
Section 6. NOTICE OF BUSINESS TO BE PRESENTED AT SHAREHOLDER MEETINGS.
(a) Annual Meetings of Shareholders. The proposal of business to be
considered by the shareholders at an annual meeting of shareholders may be made
(i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction
of the Board of Directors or (iii) by any shareholder of the Corporation who was
a shareholder of record at the time of giving of notice provided for in this
Section, who is entitled to vote at the meeting and who has complied with the
notice procedures set forth in this Section. For business to be properly brought
before an annual meeting by a shareholder pursuant to clause (iii) of the
preceding sentence, such business must be a proper matter for shareholder
action, the shareholder must have given timely notice thereof in writing to
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the Secretary of the Corporation and such notice must comply with the following
requirements:
(1) To be timely, a shareholder's notice given pursuant to
this Section must be received at the principal executive offices of the
Corporation, addressed to the Secretary, not less than 90 calendar days
before the anniversary date of the Corporation's proxy statement
released to shareholders in connection with the previous year's annual
meeting or, if none, its most recent previous annual meeting.
Notwithstanding the preceding sentence, (A) for business to be
presented at the 1999 annual meeting of shareholders, a shareholder's
notice shall be considered timely if so received by the Corporation on
or before December 15, 1998 and (B) after 1999, if the date of the
annual meeting at which such business is to be presented has been
changed by more than 30 days from the date of the most recent previous
annual meeting, a shareholder's notice shall be considered timely if so
received by the Corporation (i) on or before the later of (x) 120
calendar days before the date of the annual meeting at which such
business is to be presented or (y) 30 days following the first public
announcement by the Corporation of the date of such annual meeting and
(ii) not later than 15 calendar days prior to the scheduled mailing
date of the Corporation's proxy materials for such annual meeting. In
no event shall the public announcement of an adjournment of an annual
meeting commence a new time period for the giving of a shareholder's
notice as described above.
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(2) A shareholder's notice given pursuant to this Section
shall set forth (A) the name and address of the shareholder who intends
to make the proposal and the classes and numbers of shares of the
Corporation's stock beneficially owned by such shareholder; (B) a
representation that the shareholder is and will at the time of the
annual meeting be a holder of record of stock of the Corporation
entitled to vote at such meeting on the proposal(s) specified in the
notice and intends to appear in person or by proxy at the meeting to
present such proposal(s), (C) a description of the business the
shareholder intends to bring before the meeting, including the text of
any proposal or proposals to be presented for action by the
shareholders, (D) the name and address of any beneficial owner(s) of
the Corporation's stock on whose behalf such business is to be
presented and the class and number of shares beneficially owned by each
such beneficial owner and (E) the reasons for conducting such business
at the meeting and any material interest in such business of such
shareholder or any such beneficial owner.
(b) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting.
(c) General. (i) Only such business shall be conducted at a meeting of
shareholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section. The Chairman of the meeting shall have
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the power and the duty to determine whether any business proposed to be brought
before a meeting was proposed in accordance with the procedures set forth in
this Section and, if any business is not in compliance with this Section, to
declare that such defective proposal shall be disregarded.
(ii) For purposes of this Section, (A) "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and (B)
"beneficial ownership" shall be determined in accordance with Rule 13d-3 under
the Exchange Act or any successor rule.
(iii) Notwithstanding the foregoing provisions of this Section, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section. Nothing in this Section shall be deemed to affect any
rights of a shareholder to request inclusion of a proposal in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act, or any successor
rule, or to present for action at an annual meeting any proposal so included.
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<PAGE> 6
ARTICLE TWO
Directors
Section 1. BOARD OF DIRECTORS. The Board of Directors shall manage and
administer the business and affairs of the Corporation. Except as expressly
limited by law, all corporate powers of the Corporation shall be vested in and
may be exercised by the Board of Directors.
Section 2. NUMBER. The Board of Directors shall consist of such number
of Directors as shall be fixed from time to time by a majority vote of the full
Board of Directors.
Section 3. ELECTION; TERM OF OFFICE. Commencing with the Board of
Directors to be elected at the Annual Meeting of Shareholders held in 1988, the
Directors shall be classified with respect to the time for which they severally
hold office, into three classes as nearly equal in number as possible. At such
meeting one class of directors shall be elected to hold office for an initial
term expiring at the 1989 Annual Meeting of Shareholders, another class of
directors shall be elected to hold office for an initial term expiring at the
1990 Annual Meeting of Shareholders and the third class of directors shall be
elected to hold office for an initial term expiring at the 1991 Annual Meeting
of Shareholders, with the members of each class of directors to hold office
until their successors have been duly elected and qualified. Thereafter at each
Annual Meeting of Shareholders, the successors to the class of
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<PAGE> 7
directors whose term expires at that meeting shall be elected to hold office for
a term expiring at the Annual Meeting of Shareholders held in the third year
following the year of their election and until their successors have been duly
elected and qualified.
Section 4. NOMINATION. Nominations for the election of directors may be
made by the Board of Directors, a committee thereof or any officer of the
Corporation to whom the Board of Directors or such committee shall have
delegated such authority. Upon proper notice given to the Corporation,
nominations may also be made by any shareholder entitled to vote in the election
of directors. Written notice of a shareholders's intent to make a nomination or
nominations for director must be given to the Corporation either by United
States mail or personal delivery to the Secretary of the Corporation not later
than 90 days prior to the anniversary date of the previous year's Annual Meeting
of Shareholders. The notice must include: (i) name and address of the
shareholder who intends to make the nomination and a representation that the
shareholder is a holder of record of common stock entitled to vote at the
upcoming Annual Meeting and that the shareholder intends to appear at the Annual
Meeting to make the nomination or nominations set forth in the notice; (ii) the
name and address of the person or persons to be nominated for election as
director and such other information regarding the proposed nominee or nominees
as would be required to be included in a proxy statement filed pursuant to the
rules and regulations of the Securities and Exchange Commission; (iii) a
description of all arrangements or undertakings between the
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<PAGE> 8
shareholder and each proposed nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholder; and (iv) a consent signed by each of the proposed
nominees agreeing to serve as a director if so elected. The Board of Directors
will be under no obligation to recommend a proposed nominee, even though the
notice as set forth above has been given.
Section 5. VACANCIES. Any vacancy on the Board of Directors resulting
from death, retirement, resignation, disqualification or removal from office or
other cause, as well as any vacancy resulting from an increase in the number of
directors which occurs between Annual Meetings of the Shareholders at which
directors are elected, shall be filled only by a majority of the vote of the
remaining Directors then in office, though less than a quorum, except that those
vacancies resulting from removal from office by a vote of the shareholders may
be filled by a vote of the shareholders at the same meeting at which such
removal occurs. The Directors chosen to fill vacancies shall hold office for a
term expiring at the end of the next Annual Meeting of Shareholders at which the
term of the class to which they have been elected expires. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent Director.
Section 6. REMOVAL. Any Director, any class of directors, or the entire
Board of Directors may be removed from office by a vote of the shareholders at
any time without assigning any cause, but only if shareholders entitled to cast
at least 75 percent of the votes which all shareholders of the
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<PAGE> 9
then outstanding shares of capital stock of the Corporation would be entitled to
cast in an annual election of directors, or of such class of directors, voting
together as a single class, shall vote in favor of such removal.
Section 7. EXCEPTIONS FOR PREFERENCE DIRECTORS. The provisions of
Section 2 through 6 of this Article Two shall not apply to any Director of the
Corporation who may be elected under specified circumstances by holders of any
class or series of stock having a preference over the common stock as to
dividends or upon liquidation.
Section 8. ORGANIZATION MEETING. A meeting of the Board of Directors
for the purpose of organizing the new Board, appointing the officers of the
Corporation for the ensuing year and transacting other business shall be held
without notice immediately following the annual election of directors or as soon
thereafter as is practicable at such time and place as the Secretary may
designate.
Section 9. REGULAR MEETINGS. Unless the Board otherwise directs,
regular meetings of the Board of Directors shall be held without notice at such
times and places as the Board of Directors shall determine in its Board Policies
adopted at its Organization Meeting each year.
Section 10. SPECIAL MEETINGS. The Chief Executive Officer, the Chairman
or the President may call a special meeting of the Board of Directors at any
time. Any such officer or the Secretary shall call a special meeting of the
Board upon the written request of any three members of the Board. A special
meeting shall be held at such time and place as may be
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<PAGE> 10
designated by the person or persons calling the meeting. The person or persons
calling the meeting shall cause such notice of the meeting and of its purpose to
be given as he may deem appropriate, and such notice may be given orally or in
writing, in person or by telephone, mail or telegram.
Section 11. QUORUM; BOARD ACTION. A majority of the Directors then in
office shall constitute a quorum for the transaction of business at any meeting.
Unless otherwise provided by law, any action of the Board may be taken upon the
affirmative vote of a majority of the Directors present at a duly convened
meeting or upon the unanimous written consent of all Directors.
Section 12. PARTICIPATION OTHER THAN BY ATTENDANCE. To the full extent
permitted by law, any Director may participate in any regular or special meeting
of the Board of Directors or of any committee of the Board of Directors by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting are able to hear each other.
Section 13. COMPENSATION. Each Director who does not receive a salary
from the Corporation or any affiliate thereof shall be entitled to such
compensation as the Board shall determine for his service upon the Board of
Directors and any of its committees, for his attendance at meetings of the Board
and any of its committees and for his expenses incident thereto. Directors shall
also be entitled to such compensation as the Board shall determine for services
rendered to the Corporation in any capacity other than as Directors.
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<PAGE> 11
Section 14. RESIGNATION. Any Director may resign by submitting his
resignation to the Chief Executive Officer, the Chairman, the President or the
Secretary of the Corporation. Such resignation shall become effective upon its
submission or at any later time specified.
Section 15. PERSONAL LIABILITY FOR MONETARY DAMAGES. (a) To the fullest
extent that the laws of the Commonwealth of Pennsylvania, as in effect on
January 27, 1987 or as thereafter amended, permit elimination or limitation of
the liability of directors, no Director of the Corporation shall be personally
liable for monetary damages as such for any action taken, or any failure to take
any action, as a Director. (b) This Section 15 shall not apply to any actions
filed prior to January 27, 1987, nor to any breach of performance of duty or any
failure of performance of duty by any Director of the Corporation occurring
prior to January 27, 1987. The provisions of this Section shall be deemed to be
a contract with each Director of the Corporation who serves as such at any time
while this Section is in effect and each such Director shall be deemed to be
doing so in reliance on the provisions of this Section. In addition to any
requirement of law and any other provision contained in these By-Laws, the
affirmative vote of the holders of a majority of the shares of the Corporation's
Common Stock then outstanding shall be required to amend or repeal any provision
of this Section. Any amendment or repeal of this Section or adoption of any
other provision of the By-Laws or the Articles of the Corporation which has the
effect of increasing Director liability shall operate prospectively only and
shall not affect
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any action taken, or any failure to act, prior to the adoption of such
amendment, repeal or other provision.
Section 16. AMENDMENT, REPEAL, ETC. Notwithstanding any provision of
the Articles of the Corporation, any other provision of these By-Laws, including
Section 1 of Article Eight hereto, and notwithstanding the fact that a lesser
percentage may be specified by Pennsylvania law, unless such action has been
approved by a majority vote of the full Board of Directors, the affirmative vote
of the shareholders of at least 75 percent of the votes which all shareholders
of the then outstanding shares of capital stock of the Corporation would be
entitled to cast thereon, voting together as a single class, shall be required
to amend or repeal or adopt any provision inconsistent with Sections 2, 3, 4, 5,
6, 7 or 16 of this Article Two. In the event such action has been previously
approved by a majority vote of the full Board of Directors, a majority of the
votes which all shareholders present and voting are entitled to cast thereon
shall be sufficient to amend, repeal or adopt any provisions inconsistent with
the provisions of any of such Sections.
ARTICLE THREE
Committees of the Board
Section 1. APPOINTMENT; POWERS. The Board may appoint one or more
standing or temporary committees consisting of two
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or more Directors. The Board may invest such committees with such powers and
authority, subject to such conditions, as it may see fit.
Section 2. EXECUTIVE COMMITTEE. The Board shall appoint from among its
members an Executive Committee which, so far as may be permitted by law and
except as specifically limited by the Board pursuant to Section 1 hereof, shall
have all the powers and may exercise all the authority of the Board during the
intervals between the meetings thereof. All acts done and powers conferred by
the Executive Committee shall be deemed to be, and may be certified as being,
done or conferred under authority of the Board.
Section 3. TERM; VACANCIES; ALTERNATES. All committee members appointed
by the Board shall serve at the pleasure of the Board. The Board may fill any
committee vacancy and may designate one or more eligible Directors as alternate
members of any committee to take the place of any absent or disqualified member
at any meeting. In the absence or disqualification of a member and alternate
member or members of a committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another director to act at the meeting in the
place of the absent or disqualified member.
Section 4. ORGANIZATION. All committees shall determine their own
organization, procedures and times and places of meeting, unless otherwise
directed by the Board and except as otherwise provided in these By-Laws.
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ARTICLE FOUR
Officers
Section 1. CHIEF EXECUTIVE OFFICER. The Board of Directors shall
appoint one of its members to be Chief Executive Officer. The Chief Executive
Officer shall preside at all meetings of the shareholders and of the Board of
Directors. He shall be the chief executive officer of the Corporation and shall
have general executive powers concerning all the operations and business of the
Corporation. The Chief Executive Officer shall have and exercise such further
powers and duties as may be conferred upon, or assigned to, him by the Board of
Directors, and he may delegate to any other officer such executive and other
powers and duties as he deems advisable. In the event of the absence or
disability of the Chief Executive Officer, any other officer of the Corporation
designated by the Board of Directors shall preside at all meetings of the
shareholders and of the Board of Directors and shall exercise all other powers
and authority of the Chief Executive Officer.
Section 2. CHAIRMAN. The Board of Directors shall appoint one of its
members to be Chairman. The Chairman shall have general executive powers, and he
shall have and exercise such further powers and duties as may be conferred upon,
or assigned to, him by the Board of Directors or the Chief Executive Officer.
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Section 3. PRESIDENT. The Board of Directors shall appoint one of its
members to be President. The President shall have general executive powers, and
he shall have and exercise such further powers and duties as may be conferred
upon, or assigned to, him by the Board of Directors or the Chief Executive
Officer.
Section 4. SENIOR OFFICERS. The Board of Directors may appoint, or the
Chief Executive Officer may appoint, subject to confirmation by the Board of
Directors, one or more senior officers of the Corporation, any of whom may be
designated as Vice Chairmen or as executive, senior, group or administrative
vice presidents or given any other descriptive titles. Each senior officer shall
have and exercise such powers and duties as may be conferred upon, or assigned
to, him by the Board of Directors or the Chief Executive Officer.
Section 5. SECRETARY; ASSISTANT SECRETARIES. The Board of Directors
shall appoint a Secretary. The Secretary shall act as secretary of all meetings
of the shareholders, of the Board and of the Executive Committee, and he shall
keep minutes of all such meetings. He shall give such notice of the meetings as
is required by law or these By-Laws. He shall be the custodian of the minute
book, stock record and transfer books and all other general corporate records.
He shall be the custodian of the corporate seal and shall have the power to
affix and attest the same, and he may delegate such power to one or more
officers, employees or agents of the Corporation. He shall have and exercise
such further powers and duties as may be conferred upon, or assigned to, him by
the Board of Directors or
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the Chief Executive Officer. The Board or the Chief Executive Officer may
appoint one or more Assistant Secretaries who shall assist the Secretary in the
performance of his duties. At the direction of the Secretary or in the event of
his absence or disability, an Assistant Secretary shall perform the duties of
the Secretary. Each Assistant Secretary shall have and exercise such further
powers and duties as may be conferred upon, or assigned to, him by the Board,
the Chief Executive Officer or the Secretary.
Section 6. TREASURER; ASSISTANT TREASURERS. The Board of Directors
shall appoint a Treasurer. The Treasurer shall have and exercise such powers and
duties as may be conferred upon, or assigned to, him by the Board of Directors
or the Chief Executive Officer. The Board or the Chief Executive Officer may
appoint one or more Assistant Treasurers who shall assist the Treasurer in the
performance of his duties. At the direction of the Treasurer or in the event of
his absence or disability, an Assistant Treasurer shall perform the duties of
the Treasurer. Each Assistant Treasurer shall have and exercise such further
powers and duties as may be conferred upon, or assigned to, him by the Board,
the Chief Executive Officer or the Treasurer.
Section 7. CHIEF AUDITOR. The Board of Directors shall appoint a Chief
Auditor who shall be the chief auditing officer of the Corporation. He shall
continuously examine the affairs of the Corporation under the general
supervision and direction of the Board, and he shall report to the Board. He
shall have and exercise such further powers and duties as may be
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conferred upon, or assigned to, him by the Board of Directors. The Board of
Directors may also appoint other officers who shall perform such auditing duties
as may be assigned to them by the Board or the Chief Auditor of the Corporation.
Section 8. OTHER OFFICERS. The Board of Directors, the Chief Executive
Officer or the delegate of either of them may appoint or hire such additional
officers of the Corporation, who may be designated as vice presidents, assistant
vice presidents, officers, assistant officers, or given any other descriptive
titles, and may hire such additional employees, as it or he may deem necessary
or desirable to transact the business of the Corporation, and the Board, the
Chief Executive Officer or such delegate may establish the conditions of
employment of any of the persons mentioned above and may fix their compensation
and dismiss them. Such persons may have such descriptive titles as may be
appropriate, and they shall, respectively, have and exercise such powers and
duties as pertain to their several offices or as may be conferred upon, or
assigned to, them by the appropriate appointing authority.
Section 9. TENURE OF OFFICE. The Chief Executive Officer, the Chairman
and the President shall each hold office for the year for which the Board was
elected and until the appointment and qualification of his successor or until
his earlier death, resignation, disqualification or removal. All other officers
and employees shall hold office at the pleasure of the appropriate appointing
authority.
Section 10. COMPENSATION. The Board of Directors shall fix the
compensation of those officers appointed pursuant
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to Section 1, 2, 3 and 4 of this Article Four and of any officers of any
subsidiary of the Corporation that the Board shall deem appropriate, and it may
award additional compensation to any officer or employee of the Corporation or
of any subsidiary for any year or years based upon the performance of that
person during any such period, the success of the operations of the Corporation
or any subsidiary thereof during any such period or any other reason deemed
appropriate. Unless the Board of Directors shall otherwise direct, the Chief
Executive Officer or his delegate shall fix the compensation of all other
officers or employees of the Corporation or any subsidiary thereof.
ARTICLE FIVE
Stock, Stock Certificates and Holders of Record
Section 1. STOCK CERTIFICATES. Shares of stock of the Corporation shall
be represented by certificates or, to the extent provided in Article Five,
Sections 5 and 6 of these By-laws or as otherwise permitted or required by law,
shall be uncertificated. Stock certificates shall be in such form as the Board
of Directors may from time to time prescribe in accordance with law and the
requirements of any exchange upon which such shares are listed. Such
certificates shall be signed by the Chief Executive Officer, countersigned by
the Secretary or any other officer so authorized by the Board of Directors and
sealed with the seal of the Corporation, and such signatures and seal
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may be facsimile or otherwise as permitted by law. In case any officer,
registrar or transfer agent who has signed, or whose facsimile signature has
been placed upon, any stock certificate shall have ceased to be such officer,
registrar or transfer agent, as the case may be, before the certificate is
issued, as a result of death, resignation or otherwise, the certificate may be
issued by the Corporation with the same effect as if the officer, registrar or
transfer agent, as the case may be, had not ceased to be such at the date of the
certificate's issue.
Section 2. TRANSFER OF STOCK. Except as otherwise provided by law,
transfers of shares of stock of the Corporation shall be made only upon the
books of the Corporation. Transfers of shares shall be made on the books of the
Corporation in accordance with the provisions of the Pennsylvania Uniform
Commercial Code, as the same may be amended or supplemented from time to time,
applicable commercial practices, and the other provisions of these By-Laws.
Section 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The holder of any
certificate representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, theft or destruction of such certificates.
New certificates for shares of stock may be issued to replace such certificates
upon satisfactory proof of the loss, theft or destruction and upon such other
terms and conditions as the Board of Directors, the Chief Executive Officer or
any person designated by either of them may from time to time determine.
Section 4. HOLDERS OF RECORD. The Corporation shall be entitled to
treat any person in whose name shares of stock of
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the Corporation stand on its books as the holder and owner in fact thereof for
all purposes, and it shall not be bound to recognize any equitable or other
claims to or interest in such shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise expressly
provided by law.
Section 5. UNCERTIFICATED SECURITIES. All or part of the shares of
Common Stock of the Corporation may be uncertificated shares to the extent
determined by the Board of Directors of the Corporation (or by any officer or
other person as the Board of Directors may designate) from time to time;
however, in no event shall shares of Common Stock represented by a certificate
be deemed uncertificated until the certificate is surrendered to the
Corporation.
Section 6. DETERMINATIONS AS TO ISSUANCE, TRANSFER AND REGISTRATION.
The Board of Directors of the Corporation (or any officer or other person as the
Board of Directors may designate) from time to time may make such rules,
policies and procedures as it, he or she may deem appropriate concerning the
issue, transfer and registration of shares of stock of the Corporation, whether
certificated or uncertificated.
ARTICLE SIX
Signing Authority and Corporate Transactions
Section 1. SIGNING AUTHORITY. The Chief Executive Officer, the
Chairman, the President, any senior officer or any
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Vice President of the Corporation shall have full power and authority, in the
name and on behalf of the Corporation, under seal of the Corporation or
otherwise, to execute, acknowledge and deliver any and all agreements,
instruments or other documents relating to property or rights of all kinds held
or owned by the Corporation or to the operation of the Corporation, all as may
be incidental to the operation of the Corporation and subject to such
limitations as the Board of Directors or the Chief Executive Officer may impose.
Any such agreement, instrument or document may also be executed, acknowledged
and delivered in the name and on behalf of the Corporation, under seal of the
Corporation or otherwise, by such other officers, employees or agents of the
Corporation as the Board of Directors, the Chief Executive Officer or the
delegate of either of them may from time to time authorize. In each such case,
the authority so conferred shall be subject to such limitations as the Board of
Directors, the Chief Executive Officer or the delegate may impose. Any officer,
employee or agent authorized hereunder to execute, acknowledge and deliver any
such agreement, instrument or document is also authorized to cause the
Secretary, any Assistant Secretary or any other authorized person to affix the
seal of the Corporation thereto and to attest it.
Section 2. VOTING AND ACTING WITH RESPECT TO STOCK AND OTHER SECURITIES
OWNED BY THE CORPORATION. The Chief Executive Officer, the Chairman, the
President, any senior officer or any Vice President shall have the power and
authority to vote and act with respect to all stock and other securities in any
other
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corporation owned by this Corporation, subject to such limitations as the Board
of Directors or the Chief Executive Officer may impose. Such power and authority
may be conferred upon any other officer, employee or agent by the Board, the
Chief Executive Officer or the delegate of either of them, and such authority
may be general or may be limited to specific instances. Any person so authorized
shall have the power to appoint an attorney or attorneys, with general power of
substitution, as proxies for the Corporation with full power to vote and act on
behalf of the Corporation with respect to such stock and other securities.
ARTICLE SEVEN
General Provisions
Section 1. FISCAL YEAR. The Fiscal year of the Corporation shall be the
calendar year.
Section 2. RECORDS. The Articles of Incorporation, By-Laws and the
proceedings of all meetings of the shareholders, the Board of Directors, the
Executive Committee, and any other committee of the Board shall be recorded in
appropriate minute books provided for this purpose. The minutes of each meeting
shall be signed by the Secretary or other person acting as secretary of the
meeting.
Section 3. SEAL. The Board of Directors shall from time to time
prescribe the form of a suitable corporate seal.
-22-
<PAGE> 23
Section 4. GENDER AND NUMBER. Any reference in these By-Laws to one
gender, whether masculine, feminine or neuter, includes the other two, and the
singular includes the plural and vice versa unless the context indicates
otherwise.
ARTICLE EIGHT
By-Laws
Section 1. AMENDMENTS. These By-Laws may be amended, altered and
repealed, and new By-Laws may be adopted, either by action of the shareholders
or (except as otherwise provided by law) by action of the Board of Directors.
Section 2. INSPECTION. A copy of the By-Laws, with all amendments
thereto, shall at all times be kept in a convenient place at the principal
office of the Corporation and shall be open for inspection to all shareholders
during normal business hours.
ARTICLE NINE
Applicability of Pennsylvania's Anti-Takeover Act
(Act 1990-36, Senate Bill 1310)
Section 1. OPTING OUT OF CONTROL-SHARE ACQUISITION PROVISION.
Subchapter G. -- Control-share Acquisitions of Chapter 25 of the Business
Corporation Law of 1988 shall not be applicable to the Corporation.
-23-
<PAGE> 24
Section 2. OPTING OUT OF PROFIT DISGORGEMENT PROVISION.
Subchapter H. -- Disgorgement by Certain Controlling Shareholders Following
Attempts to Acquire Control of Chapter 25 of the Business Corporation Law of
1988 shall not be applicable to the Corporation.
As amended, effective October 19, 1999.
-24-
<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 Financial Corporation (parent corporation) (a)
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
September 30, September 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 $ 193 $ 68 $ 542 $ 250
Fixed charges: interest expense, one-third of
rental expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 56 50 165 149
- ---------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $ 249 $ 118 $ 707 $ 399
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ - $ - $ - $ 13
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 4.44 2.33 4.28 2.67
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends 4.44 2.33 4.28 2.45
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The parent Corporation ratios include the accounts of Mellon Financial
Corporation (the "Corporation") and Mellon Funding Corporation, 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.
68
<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 Financial Corporation (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
September 30, September 30,
(dollar amounts in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes and impact of accounting change $ 373 (a) $ 338 $1,107 (b) $1,001
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 145 146 445 424
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined), excluding
interest on deposits 518 484 1,552 1,425
Interest on deposits 218 248 646 717
- ----------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $ 736 $ 732 $2,198 $2,142
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (c) $ - $ - $ - $ 13
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.57 (a) 3.29 3.49 (b) 3.35
Including interest on deposits 2.03 (a) 1.85 2.01 (b) 1.88
Ratio of earnings (as defined) to combined
fixed charges and preferred stock dividends:
Excluding interest on deposits 3.57 (a) 3.29 3.49 (b) 3.25
Including interest on deposits 2.03 (a) 1.85 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 September 30, 1999, exclude from earnings
(as defined) an $8 million pre-tax net loss from divestitures. Had these
computations included the net loss from divestitures, 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
3.52 excluding interest on deposits and 2.00 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 nine months ended September 30, 1999, exclude from
earnings (as defined) a $134 million pre-tax net gain from 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 3.66 excluding interest on deposits and 2.09 including
interest on deposits.
(c) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
69
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON FINANCIAL CORPORATION (formerly Mellon Bank Corporation)
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,340
<INT-BEARING-DEPOSITS> 487
<FED-FUNDS-SOLD> 698
<TRADING-ASSETS> 288
<INVESTMENTS-HELD-FOR-SALE> 5,209
<INVESTMENTS-CARRYING> 1,251
<INVESTMENTS-MARKET> 1,246
<LOANS> 29,156
<ALLOWANCE> 405
<TOTAL-ASSETS> 46,861
<DEPOSITS> 32,029
<SHORT-TERM> 3,570
<LIABILITIES-OTHER> 2,354
<LONG-TERM> 3,698
991<F1>
0
<COMMON> 294
<OTHER-SE> 3,925
<TOTAL-LIABILITIES-AND-EQUITY> 46,861<F1>
<INTEREST-LOAN> 1,688
<INTEREST-INVEST> 316
<INTEREST-OTHER> 52
<INTEREST-TOTAL> 2,070
<INTEREST-DEPOSIT> 646
<INTEREST-EXPENSE> 991
<INTEREST-INCOME-NET> 1,079
<LOAN-LOSSES> 35
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,334
<INCOME-PRETAX> 1,185
<INCOME-PRE-EXTRAORDINARY> 749
<EXTRAORDINARY> 0
<CHANGES> (26)
<NET-INCOME> 723
<EPS-BASIC> 1.40<F2>
<EPS-DILUTED> 1.38<F2>
<YIELD-ACTUAL> 3.69
<LOANS-NON> 154
<LOANS-PAST> 96
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 496
<CHARGE-OFFS> 57
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 405
<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>
