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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 1-7410
MELLON FINANCIAL CORPORATION
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(FORMERLY MELLON BANK CORPORATION)
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Mellon Center
Pittsburgh, Pennsylvania 15258-0001
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (412) 234-5000
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MELLON BANK CORPORATION
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.50 Par Value New York Stock Exchange
Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X ]
As of February 29, 2000, there were 494,620,243 shares outstanding of the
registrant's voting common stock, $0.50 par value per share, of which
489,351,253 common shares having a market value of $14,741,706,497 were held by
nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in the
following parts of this Annual Report:
Mellon Financial Corporation 2000 Proxy Statement-Part III
Mellon Financial Corporation 1999 Summary and Financial Annual Reports to
Shareholders-Parts I, II and IV
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The Form 10-K filed with the Securities and Exchange Commission contains the
Exhibits listed on the Index to Exhibits beginning on page 27, including the
Financial Review, Financial Statements and Notes, and Corporate Information
section from the Registrant's 1999 Financial Annual Report to Shareholders and;
Principal Operating Entities, and Directors and Senior Management Committee
sections from the Registrant's 1999 Summary Annual Report to Shareholders. For a
free copy of the Corporation's 1999 Summary Annual Report to Shareholders, the
1999 Financial Annual Report to Shareholders, the Proxy Statement for its 2000
Annual Meeting, or a copy of the Corporation's Management Report on Internal
Controls, as filed with the appropriate regulatory agencies, please send a
written request to the Secretary of the Corporation, 4826 One Mellon Center,
Pittsburgh, PA 15258-0001. The Corporation's 1999 Summary and Financial Annual
Reports to Shareholders are also available on the Corporation's Internet site at
www.mellon.com.
Cautionary Statement
This Annual Report on Form 10-K contains and incorporates by reference
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; credit loss reserve
appropriateness; simulation of changes in interest rates; litigation results;
and anticipated fees and earnings per share from a long-term contract with a
third party. 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; 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, trade and tax policies
and laws; monetary fluctuations; success in gaining regulatory approvals when
required; success in the timely development of new products and services;
interest rate fluctuations; consumer spending and saving habits; levels of third
parties' funds under management; as well as other risks and uncertainties
detailed elsewhere in this Annual Report on Form 10-K 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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MELLON FINANCIAL CORPORATION
Form 10-K Index
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PART I Page
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Item 1. Business
Description of Business 3
Supervision and Regulation 6
Competition 13
Employees 13
Statistical Disclosure by Bank Holding Companies 13
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 21
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
</TABLE>
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PART I
ITEM 1. BUSINESS
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Description of Business
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Mellon Financial Corporation (the "Corporation"), formerly Mellon Bank
Corporation, is a global multibank financial holding company incorporated under
the laws of Pennsylvania in August 1971 and registered under the Federal Bank
Holding Company Act of 1956, as amended. The Corporation provides a
comprehensive range of financial products and services in domestic and selected
international markets. The Corporation's principal direct subsidiaries are
Mellon Bank, N.A. ("Mellon Bank"), The Boston Company, Inc. ("TBC"), Buck
Consultants, Inc. ("Buck"), Newton Management Limited ("Newton"), and a number
of companies known as Mellon Financial Services Corporations. The Dreyfus
Corporation ("Dreyfus"), one of the nation's largest mutual fund management
companies, and Founders Asset Management, LLC ("Founders"), are subsidiaries of
Mellon Bank. Through its subsidiaries, the Corporation provides wealth
management and global investment 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. At Dec. 31, 1999, the Corporation was the
eighteenth largest bank holding company in the United States in terms of assets.
The Corporation's asset management companies, which include Newton, Dreyfus and
Founders, provide investment products in many asset classes and investment
styles. Newton is a leading U.K.-based investment manager that provides
investment management services to institutional, private and retail clients.
Dreyfus, headquartered in New York, New York, serves primarily as an investment
adviser and manager of mutual funds. Founders, headquartered in Denver,
Colorado, is a manager of growth-oriented equity mutual funds and other
investment portfolios. The Corporation is a global provider of custody,
retirement and benefits consulting services through Boston Safe Deposit and
Trust Company ("BSDT") which is headquartered in Boston, Massachusetts; Buck
which is headquartered in New York, New York; and other subsidiaries.
Mellon Bank, which has its executive offices in Pittsburgh, Pennsylvania, became
a subsidiary of the Corporation in November 1972. With its predecessors, Mellon
Bank has been in business since 1869. The Corporation's banking subsidiaries
engage in retail financial services, commercial banking, trust and custody,
investment management services, equipment leasing, insurance products and
various securities-related activities. Retail Financial Services is comprised of
six operating regions throughout Pennsylvania and southern New Jersey. The
deposits of the banking subsidiaries are insured by the Federal Deposit
Insurance Corporation ("FDIC") to the extent provided by law.
For analytical purposes, management has structured the Corporation into six
major business sectors: Wealth Management, Global Investment Management, Global
Investment Services, Regional Consumer Banking, Specialized Commercial Banking
and Large Corporate Banking. Further information regarding the Corporation's
"Core" business sectors, as well as certain "non-core" operations such as
Divestitures, is presented in the Business Sectors section found on pages 8
through 14 of the Corporation's 1999 Financial Annual Report to Shareholders,
which pages are incorporated herein by reference. A brief discussion of the
business sectors is presented on the following pages. There is considerable
interrelationship among these sectors.
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ITEM 1. BUSINESS (continued)
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Description of Business (continued)
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Wealth Management
Wealth Management includes private asset management services, private banking
and origination of jumbo residential mortgages. Private asset management
services and private banking are offered principally through the private asset
management group of Mellon Bank and BSDT, and throughout the Corporation's
retail banking network. Origination of jumbo residential mortgages is offered
nationally through the private asset management representative offices.
Global Investment Management
Global Investment Management includes mutual fund management, institutional
asset management and brokerage services. The Corporation's subsidiaries provide
trust and investment management services to individuals, businesses and
institutions. In addition to mutual fund management services provided through
Dreyfus, Founders and Newton, the Corporation's subsidiaries also provide a
variety of active and passive equity and fixed income investment management
services, including management of international securities. Brokerage services
are offered through Dreyfus Brokerage Services, Inc.
Global Investment Services
Global Investment Services includes institutional trust and custody, foreign
exchange, securities lending, shareholder services, benefits consulting and
administrative services for employee benefit plans and backoffice outsourcing
for investment managers. This sector also includes a majority of the joint
ventures, whose results are reported under the equity method of accounting.
Through Buck, the Corporation offers a broad array of services in the areas of
defined benefit and defined contribution plans, health and welfare plans,
communications and compensation consulting, and outsourcing and administration
of employee benefit programs. The Corporation's subsidiaries also provide
services relating primarily to defined contribution employee benefit plans under
the umbrella name "Dreyfus Retirement Services". Shareholder services are
provided in the United States through its joint venture operating under the name
ChaseMellon Shareholder Services and in Canada through its joint venture
operating under the name CIBC Mellon Trust Company.
Regional Consumer Banking
Regional Consumer Banking includes consumer lending and deposit products, direct
banking and sales of insurance products. These services are offered through the
Corporation's retail banking network which is primarily comprised of
approximately 410 retail outlets, including approximately 100 supermarket
locations, and approximately 705 ATMs. This network is primarily located in the
mid-Atlantic region of the United States.
Specialized Commercial Banking
Specialized Commercial Banking includes middle market lending, business banking,
lease financing, commercial real estate lending, insurance premium financing,
asset-based lending and venture capital. Included in this sector is a nationwide
asset-based lending division which provides secured lending, principally through
accounts receivable and inventory financing. Real Estate lending consists of the
Corporation's commercial real estate lending activities, through which it
originates financing for commercial, multi-family and other products. The
Corporation provides property and casualty insurance
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ITEM 1. BUSINESS (continued)
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Description of Business (continued)
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premium financing to small, midsize and large companies in the United States
through the AFCO Credit Corporation and in Canada through CAFO. The majority of
the Corporation's venture capital investments are managed through Mellon
Ventures, Inc., its venture capital group.
Large Corporate Banking
Large Corporate Banking includes cash management, large corporate and
mid-corporate relationship banking, corporate finance and derivative products,
securities underwriting and trading and international banking. This sector's
markets generally include large domestic commercial and industrial customers,
U.S. operations of foreign companies, multinational corporations, state and
local governments and various financial institutions (including banks,
securities broker/dealers, insurance companies, finance companies and mutual
funds). The Corporation also offers corporate finance and rate risk management
products; loan underwriting and syndications; a variety of capital markets
products and services, including private placement and money market
transactions. The Corporation maintains foreign offices in London, Tokyo, Hong
Kong, Toronto, and Grand Cayman, British West Indies. Through these offices, the
Corporation conducts trade finance activities, engages in correspondent banking
and provides corporate banking and capital markets services. Not all of these
services and activities are necessarily provided in all of the foreign offices.
Divestitures
For 1999, Divestitures includes residential and commercial mortgage loan
origination and servicing; credit card; network services transaction processing;
and the gain on the sale of seven Mellon Bank (MD) N.A. retail offices. For 1998
and 1997, results also include merchant card processing, including the $35
million gain on the sale of this business in 1998, 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 near the end of May 2000.
Principal Operating Entities
The 1999 Summary Annual Report to Shareholders summarizes principal operating
entities on pages 20 through 22, which pages are incorporated herein by
reference. Exhibit 21.1 to this Annual Report on Form 10-K presents a list of
the primary subsidiaries of the Corporation as of Dec. 31, 1999.
Year 2000 Project
For a discussion regarding the Corporation's year 2000 project, see page 25 of
the Corporation's 1999 Financial Annual Report to Shareholders, which discussion
is incorporated herein by reference.
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ITEM 1. BUSINESS (continued)
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Supervision and Regulation
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The Corporation and its bank subsidiaries are subject to an extensive system of
banking laws and regulations that are intended primarily for the protection of
the customers and depositors of the Corporation's bank subsidiaries rather than
holders of the Corporation's securities. These laws and regulations govern such
areas as permissible activities, reserves, loans and investments, and rates of
interest that can be charged on loans. Similarly, the Corporation's subsidiaries
engaged in investment advisory and other securities related activities are
subject to various U.S. federal and state laws and regulations that are intended
to benefit clients of investment advisors and shareholders in mutual funds
rather than holders of the Corporation's securities. In addition, the
Corporation and its subsidiaries are subject to general U.S. federal laws and
regulations and to the laws and regulations of the states or countries in which
they conduct their businesses. Described below are the material elements of
selected laws and regulations applicable to the Corporation and its
subsidiaries. The descriptions are not intended to be complete and are qualified
in their entirety by reference to the full text of the statutes and regulations
described. Changes in applicable law or regulation, and in their application by
regulatory agencies, cannot be predicted, but they may have a material effect on
the business and results of the Corporation and its subsidiaries.
Financial Modernization Legislation: The Gramm-Leach-Bliley Act
On Nov. 12, 1999, the President signed the Gramm-Leach-Bliley Act into law.
Effective as of March 11, 2000, the Gramm-Leach-Bliley Act: allows bank holding
companies meeting management, capital and CRA standards to engage in a
substantially broader range of nonbanking activities than was previously
permissible, including insurance underwriting and making merchant banking
investments in commercial and financial companies; allows insurers and other
financial services companies to acquire banks; removes various restrictions that
previously applied to bank holding company ownership of securities firms and
mutual fund advisory companies; and establishes the overall regulatory structure
applicable to bank holding companies that also engage in insurance and
securities operations.
In order for a bank holding company to engage in the broader range of activities
that are permitted by the Gramm-Leach-Bliley Act, (1) all of its depository
institutions must be well-capitalized and well-managed and (2) it must file a
declaration with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") that it elects to be a "financial holding company". In
addition, to commence any new activity permitted by the Gramm-Leach-Bliley Act
and to acquire any company engaged in any new activities permitted by the
Gramm-Leach-Bliley Act, each insured depository institution of the financial
holding company must have received at least a "satisfactory" rating in its most
recent examination under the Community Reinvestment Act. The Corporation
currently meets the requirements to engage in the activities that are permitted
by the Gramm-Leach-Bliley Act and has elected to become a "financial holding
company".
On Jan. 24, 2000 the Corporation filed a notice with the Federal Reserve Bank of
Cleveland that it elected to become a financial holding company ("FHC"). The
election became effective on March 13, 2000. This election enables the
Corporation to exercise expanded powers, including insurance underwriting,
liberalized securities underwriting and dealing and expanded merchant banking
and venture capital authority. In addition, FHCs may utilize an after-the-fact
notice procedure for new activities and acquisitions rather than the prior
notice and application procedure.
The Gramm-Leach-Bliley Act also modified laws related to financial privacy and
community reinvestment. The new financial privacy provisions generally prohibit
financial institutions, including the Corporation,
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ITEM 1. BUSINESS (continued)
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Supervision and Regulation (continued)
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from disclosing nonpublic personal financial information to third parties unless
customers have the opportunity to "opt out" of the disclosure.
Regulated Entities of the Corporation
As a bank holding company and a financial holding company, the Corporation is
regulated under the Bank Holding Company Act of 1956, as amended by the
Gramm-Leach-Bliley Act (the "BHC Act"), and is subject to the supervision of the
Federal Reserve Board. In general, the BHC Act limits the business of bank
holding companies that are financial holding companies to banking, managing or
controlling banks, performing certain servicing activities for subsidiaries, and
as a result of the Gramm-Leach-Bliley Act amendments to the BHC Act, engaging in
any activity, or acquiring and retaining the shares of any company engaged in
any activity, that is either (1) financial in nature or incidental to such
financial activity (as determined by the Federal Reserve Board in consultation
with the Office of the Comptroller of the Currency (the "OCC")) or (2)
complementary to a financial activity and does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally (as solely determined by the Federal Reserve Board). Activities that
are financial in nature include activities that the Federal Reserve Board had
determined, by order or regulation in effect prior to the enactment of the
Gramm-Leach-Bliley Act, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
The Corporation's national bank subsidiaries are subject to primary supervision,
regulation and examination by the OCC. BSDT, a Massachusetts chartered bank, is
subject to supervision, regulation and examination by the Federal Reserve Board
and the Commonwealth of Massachusetts Department of Banking. Mellon Securities
Trust Company, The Dreyfus Trust Company and Mellon Trust of New York are New
York trust companies and are supervised by the New York State Department of
Banking. Mellon Trust of California is a California trust company and is
supervised by the State of California Department of Financial Institutions.
Mellon 1st Business Bank is a California non-member bank and is subject to
supervision, regulation and examination by the FDIC and the State of California
Department of Financial Institutions.
The Corporation's non-bank subsidiaries engaged in securities related activities
are regulated by the Securities and Exchange Commission (the "SEC"). Dreyfus
Investment Services Corporation and Dreyfus Brokerage Services, Inc. conduct
brokerage operations, and Mellon Financial Markets, LLC engages in securities
underwriting and other broker-dealer activities. Dreyfus Service Corporation, a
subsidiary of The Dreyfus Corporation, acts as a broker-dealer for the sale of
shares of mutual funds, including the Dreyfus/Founders family of mutual funds.
Dreyfus Brokerage Services, Inc., a subsidiary of Mellon Bank, N.A., is a
self-clearing discount broker providing services to individual investors
nationwide. ChaseMellon Financial Services LLC, a joint venture with Chase
Manhattan Corporation, conducts stock transfer agency activities and also has an
affiliated broker-dealer. Buck Investment Services Inc., Founders Asset
Management, LLC, Dreyfus Investment Services Corporation, Dreyfus Financial
Services Corporation, ChaseMellon Financial Services LLC, Mellon Financial
Markets, LLC, Dreyfus Service Corporation and Dreyfus Brokerage Services, Inc.
are registered broker-dealers and members of the National Association of
Securities Dealers, Inc., a securities industry self-regulatory organization.
Certain subsidiaries of the Corporation are registered investment advisers under
the Investment Advisers Act of 1940 and, as such, are supervised by the SEC.
They are also subject to various U.S. federal and
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ITEM 1. BUSINESS (continued)
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Supervision and Regulation (continued)
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state laws and regulations and to the laws of any countries in which they
conduct business. These laws and regulations generally grant supervisory
agencies broad administrative powers, including the power to limit or restrict
the carrying on of business for failure to comply with such laws and
regulations. Each investment company (as defined in the Investment Company Act
of 1940) which is advised by a subsidiary of the Corporation, including the
Dreyfus/Founders family of mutual funds, is registered with the SEC, and the
shares of most are qualified for sale in all states in the United States and the
District of Columbia, except for investment companies that offer products only
to residents of a particular state or of a foreign country and except for
certain investment companies which are exempt from such registration or
qualification.
Certain of the Corporation's public finance activities are regulated by the
Municipal Securities Rulemaking Board. Mellon Bank and certain of the
Corporation's other subsidiaries are registered with the Commodity Futures
Trading Commission (the "CFTC") as commodity pool operators or commodity trading
advisors and, as such, are subject to CFTC regulation.
The types of activities in which the foreign branches of the Corporation's
banking subsidiaries and the international subsidiaries of the Corporation may
engage are subject to various restrictions imposed by the Federal Reserve Board.
Those foreign branches and international subsidiaries are also subject to the
laws and regulatory authorities of the countries in which they operate.
Dividend Restrictions
The Corporation is a legal entity separate and distinct from its bank and other
subsidiaries. Its principal source of funds to pay dividends on its common and
preferred (if any) stock and debt service on its debt is dividends from its
subsidiaries. Various federal and state statutes and regulations limit the
amount of dividends that may be paid to the Corporation by its bank subsidiaries
without regulatory approval. The Corporation's principal bank subsidiary, Mellon
Bank, N.A., is a national bank. A national bank must obtain the prior approval
of the OCC to pay a dividend if the total of all dividends declared by the bank
in any calendar year would exceed the bank's net income for that year combined
with its retained net income for the preceding two calendar years, less any
required transfers to surplus or to fund the retirement of any preferred stock.
In addition, a national bank may pay dividends only to the extent of its
undivided profits. The Corporation's state-chartered bank subsidiaries also are
subject to dividend restrictions under applicable state law. Under the foregoing
dividend restrictions, as of Dec. 31, 1999, the Corporation's national and state
member bank subsidiaries, without obtaining affirmative governmental approvals,
could pay aggregate dividends of $675 million to the Corporation during 2000. In
1999, the Corporation's bank and nonbank subsidiaries paid $876 million in
dividends to the Corporation.
If, in the opinion of the applicable federal regulatory agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
bank, could include the payment of dividends), the regulator may require, after
notice and hearing, that the bank cease and desist from such practice. The OCC
and the Federal Deposit Insurance Corporation (the "FDIC") have indicated that
the payment of dividends would constitute an unsafe and unsound practice if the
payment would deplete a depository institution's capital base to an inadequate
level. Moreover, under the Federal Deposit Insurance Act, as amended (the "FDI
Act"), an insured depository institution may not pay any dividend if the
institution is undercapitalized or if the payment of the dividend would cause
the institution to become undercapitalized. In addition, the federal bank
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ITEM 1. BUSINESS (continued)
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Supervision and Regulation (continued)
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regulatory agencies have issued policy statements which provide that
FDIC-insured depository institutions and their holding companies should
generally pay dividends only out of their current operating earnings.
The ability of the Corporation's bank subsidiaries to pay dividends to the
Corporation may also be affected by various minimum capital requirements for
banking organizations, as described below. In addition, the right of the
Corporation to participate in the assets or earnings of a subsidiary are subject
to the prior claims of creditors of the subsidiary.
Transactions with Affiliates
There are certain restrictions on the ability of the Corporation and certain of
its non-bank affiliates to borrow from, and engage in other transactions with,
its bank subsidiaries and on the ability of such bank subsidiaries to pay
dividends to the Corporation. In general, these restrictions require that any
extensions of credit must be secured by designated amounts of specified
collateral and are limited, as to any one of the Corporation or such non-bank
affiliates, to ten percent of the lending bank's capital stock and surplus, and,
as to the Corporation and all such non-bank affiliates in the aggregate, to 20%
of such lending bank's capital stock and surplus. As a result of the enactment
of the Gramm-Leach-Bliley Act, these restrictions, other than the ten percent of
capital limit on covered transactions with any one affiliate, are also applied
to transactions between national banks and their financial subsidiaries. In
addition, certain transactions with affiliates must be on terms and conditions,
including credit standards, that are substantially the same, or at least as
favorable to the institution, as those prevailing at the time for comparable
transactions involving other non-affiliated companies or, in the absence of
comparable transactions, on terms and conditions, including credit standards,
that in good faith would be offered to, or would apply to, non-affiliated
companies.
Unsafe and Unsound Practices
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Corporation, BSDT and the Corporation's non-bank subsidiaries, including Mellon
Securities Trust Company, a member of the Federal Reserve System. The FDIC has
similar authority with respect to Mellon 1st Business Bank.
Deposit Insurance
Substantially all of the deposits of the bank subsidiaries of the Corporation
are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the
FDIC and are subject to deposit insurance assessments to maintain the BIF. The
FDIC utilizes a risk-based assessment system which imposes insurance premiums
based upon a matrix that takes into account a bank's capital level and
supervisory rating. Such premiums now range from 0 cents for each $100 of
domestically-held deposits for the healthiest institutions to 27 cents for each
$100 of domestically-held deposits for the weakest institutions. In addition,
the Deposit Insurance Fund Act of 1996 authorizes the Financing Corporation
("FICO") to impose assessments on BIF assessable deposits in order to service
the interest on FICO's bond obligations. The FICO current annual assessment on
these deposits is approximately 2.12 cents for each $100 of domestically-held
deposits. The FDIC is authorized to raise insurance premiums in certain
circumstances.
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ITEM 1. BUSINESS (continued)
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Supervision and Regulation (continued)
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Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a bank's federal
regulatory agency.
Liability of Commonly Controlled Institutions
The FDI Act contains a "cross-guarantee" provision that could result in any
insured depository institution owned by the Corporation being assessed for
losses incurred by the FDIC in connection with assistance provided to, or the
failure of, any other insured depository institution owned by the Corporation.
Also, under the BHC Act and Federal Reserve Board policy, the Corporation is
expected to act as a source of financial and managerial strength to each of its
bank subsidiaries and to commit resources to support each such bank in
circumstances where such bank might not be in a financial position to support
itself.
Any capital loans by a bank holding company to any of its bank subsidiaries are
subordinate in right of payment to deposits and to certain other indebtedness of
such bank subsidiaries. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
In addition, under the National Bank Act, if the capital stock of a national
bank is impaired by losses or otherwise, the OCC is authorized to require
payment of the deficiency by assessment upon the bank's shareholders, pro rata,
and to the extent necessary, if any such assessment is not paid by any
shareholder after three months notice, to sell the stock of such shareholder to
make good the deficiency.
Regulatory Capital
The Federal Reserve Board, the OCC and FDIC have substantially similar
risk-based capital and leverage ratio guidelines for banking organizations. The
guidelines are intended to ensure that banking organizations have adequate
capital given the risk levels of their assets and off-balance sheet financial
instruments.
The risk-based capital ratio is determined by classifying assets and certain
off-balance sheet financial instruments into weighted categories, with higher
levels of capital being required for those categories perceived as representing
greater risk. Under the capital guidelines, a banking organization's total
capital is divided into tiers. "Tier I capital" consists of (1) common equity,
(2) qualifying noncumulative perpetual preferred stock, (3) a limited amount of
qualifying cumulative perpetual preferred stock and (4) minority interests in
the equity accounts of consolidated subsidiaries (including trust preferred
securities), less goodwill and certain other intangible assets. Not more than
25% of qualifying Tier I capital may consist of trust preferred securities.
"Tier II capital" consists of hybrid capital instruments, perpetual debt,
mandatory convertible debt securities, a limited amount of subordinated debt,
preferred stock that does not qualify as Tier I capital, a limited amount of the
allowance for loan and lease losses and a limited amount of unrealized holding
gains on equity securities. "Tier III capital" consists of qualifying unsecured
subordinated debt. The sum of Tier II and Tier III capital may not exceed the
amount of Tier I capital.
Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the required minimum ratio of "Total capital" (the sum of Tier I,
Tier II and Tier III capital) to risk-adjusted assets
10
<PAGE> 12
ITEM 1. BUSINESS (continued)
--------
Supervision and Regulation (continued)
- --------------------------
(including certain off-balance sheet items, such as standby letters of credit)
is currently 8%. The required minimum ratio of Tier I capital to risk-adjusted
assets is 4%. At Dec. 31, 1999, the Corporation's Total capital and Tier I
capital to risk-adjusted assets ratios were 10.76% and 6.60%, respectively.
The risk-based capital requirements identify concentration of credit risk and
certain risks arising from non-traditional activities, and the management of
those risks, as important factors to consider in assessing an institution's
overall capital adequacy. In addition, the risk-based capital rules incorporate
a measure for market risk in foreign exchange and commodity activities and in
the trading of debt and equity instruments. The market risk-based capital rules
require banking organizations with large trading activities to maintain capital
for market risk in an amount calculated by using the banking organizations' own
internal value-at-risk models, subject to parameters set by the regulators.
The Federal Reserve Board also requires bank holding companies to comply with
minimum leverage ratio guidelines. The Leverage ratio is the ratio of a bank
holding company's Tier I capital to its total consolidated quarterly average
assets (as defined for regulatory purposes), net of the loan loss reserve,
goodwill and certain other intangible assets. The guidelines require a minimum
Leverage ratio of 3% for bank holding companies that either have the highest
supervisory rating or have implemented the Federal Reserve Board's risk-adjusted
measure for market risk. All other bank holding companies are required to
maintain a minimum Leverage ratio of 4%. The Federal Reserve Board has not
advised the Corporation of any specific minimum Leverage ratio applicable to it.
At Dec. 31, 1999, the Corporation's Leverage ratio was 6.72%.
The Federal Reserve Board's capital guidelines provide that banking
organizations experiencing internal growth or making acquisitions are expected
to maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets. Also, the guidelines
indicate that the Federal Reserve Board will consider a "tangible Tier I
leverage ratio" in evaluating proposals for expansion or new activities. The
tangible Tier I leverage ratio is the ratio of a banking organization's Tier I
capital (excluding intangibles) to total assets (excluding intangibles).
The Corporation's bank subsidiaries are subject to similar risk-based and
leverage capital guidelines adopted by the OCC or the FDIC.
Prompt Corrective Action
The FDI Act requires federal banking regulators to take prompt corrective action
with respect to depository institutions that do not meet minimum capital
requirements. The FDI Act identifies the following capital tiers for financial
institutions: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
Rules adopted by the federal banking agencies provide that an institution is
deemed to be: "well capitalized" if the institution has a Total risk-based
capital ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or
greater, and a Leverage ratio of 5.0% or greater, and the institution is not
subject to an order, written agreement, capital directive, or prompt corrective
action directive to meet and maintain a specific level for any capital measure;
"adequately capitalized" if the institution has a Total risk-based capital ratio
of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater, and a
Leverage ratio of 4.0% or greater (or a Leverage ratio of 3.0% or greater if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate Federal banking agency
11
<PAGE> 13
ITEM 1. BUSINESS (continued)
--------
Supervision and Regulation (continued)
- --------------------------
guidelines), and the institution does not meet the definition of a well
capitalized institution; "undercapitalized" if the institution has a Total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a Leverage ratio that is less than 4.0% (or a
Leverage ratio that is less than 3.0% if the institution is rated composite 1 in
its most recent report of examination, subject to appropriate Federal banking
agency guidelines) and the institution does not meet the definition of a
significantly undercapitalized or critically undercapitalized institution;
"significantly undercapitalized" if the institution has a Total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is
less than 3.0%, or a Leverage ratio that is less than 3.0% and the institution
does not meet the definition of a critically undercapitalized institution; and
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets that is equal to or less than 2.0%. The FDI Act imposes
progressively more restrictive constraints on operations, management and capital
distributions, depending on the capital category in which an institution is
classified.
At Dec. 31, 1999, all of the Corporation's bank subsidiaries were well
capitalized based on the ratios and guidelines noted previously. A bank's
capital category, however, is determined solely for the purpose of applying the
prompt corrective action rules and may not constitute an accurate representation
of the bank's overall financial condition or prospects.
The appropriate federal banking agency may, under certain circumstances,
reclassify a well capitalized insured depository institution as adequately
capitalized. The appropriate agency is also permitted to require an adequately
capitalized or undercapitalized institution to comply with the supervisory
provisions as if the institution were in the next lower category (but not treat
a significantly undercapitalized institution as critically undercapitalized)
based on supervisory information other than the capital levels of the
institution. The FDI Act provides that an institution may be reclassified if the
appropriate federal banking agency determines (after notice and opportunity for
hearing) that the institution is in an unsafe or unsound condition or deems the
institution to be engaging in an unsafe or unsound practice.
Depositor Preference Statute
Under federal law, depositors and certain claims for administrative expenses and
employee compensation against an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, in the "liquidation
or other resolution" of such an institution by any receiver.
Community Reinvestment Act
The Community Reinvestment Act requires banks to help serve the credit needs in
their communities, including credit to low and moderate income individuals and
geographies. Should the Corporation or its bank subsidiaries fail to adequately
serve the community, there are penalties which might be imposed, including
denials to expand branches, relocate, add subsidiaries and affiliates, expand
into new financial activities and merge with or purchase other financial
institutions.
Legislative Initiatives
Various legislative initiatives are from time to time introduced in Congress.
The Corporation cannot determine the ultimate effect that any such potential
legislation, if enacted, would have upon its financial condition or operations.
12
<PAGE> 14
ITEM 1. BUSINESS (continued)
--------
Competition
- -----------
The Corporation and its subsidiaries continue to be subject to intense
competition in all aspects and areas of their businesses from bank holding
companies and banks; other domestic and foreign depository institutions, such as
savings and loan associations, savings banks and credit unions; and other
service providers, such as finance, leasing companies, brokerage firms, benefits
consultants, mutual funds, investment banking companies, investment management
firms and insurance companies. The Corporation also competes with nonfinancial
institutions, including retail stores and manufacturers of consumer products
that maintain their own credit programs, as well as governmental agencies that
make available loans to certain borrowers. Also, in the Global Investment
Services sector, the Corporation competes with a wide range of technologically
capable service providers, such as data processing and outsourcing firms. Many
of the Corporation's competitors, with the particular exception of bank holding
companies, banks and thrift institutions, are not subject to regulation as
extensive as that described under the "Supervision and Regulation" section and,
as a result, may have a competitive advantage over the Corporation in certain
respects.
Employees
- ---------
The Corporation and its subsidiaries had an average of approximately 25,800
full-time equivalent employees in the fourth quarter of 1999.
Statistical Disclosure by Bank Holding Companies
- ------------------------------------------------
The Securities Act of 1933 Industry Guide 3 and the Securities Exchange Act of
1934 Industry Guide 3 (together "Guide 3"), require that the following
statistical disclosures be made in Annual Reports on Form 10-K filed by bank
holding companies.
13
<PAGE> 15
ITEM 1. BUSINESS (continued)
--------
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential
Information required by this section of Guide 3 is presented in the Rate/Volume
Variance Analysis below. Required information is also presented in the
Corporation's 1999 Financial Annual Report to Shareholders in the Consolidated
Balance Sheet -- Average Balances and Interest Yields/Rates on pages 22 and 23,
and in Net Interest Revenue, on page 21, which are incorporated herein by
reference.
<TABLE>
<CAPTION>
RATE/VOLUME VARIANCE ANALYSIS
- ---------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
1999 over (under) 1998 1998 over (under) 1997
-------------------------------- ---------------------------
Due to change in Due to change in
---------------- Net ---------------- Net
(in millions) Rate Volume change Rate Volume change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest
revenue from interest-earning assets:
Interest-bearing deposits with banks $ (2) $ 8 $ 6 $ -- $ 7 $ 7
Federal funds sold and securities
under resale agreements (6) (2) (8) 6 13 19
Other money market investments (1) (2) (3) -- -- --
Trading account securities (3) 6 3 2 5 7
Securities:
U.S. Treasury and agency securities (15) 58 43 (4) 2 (2)
Obligations of states and political
subdivisions (1) 4 3 -- 1 1
Other 1 (2) (1) (1) 1 --
Loans (includes loan fees) (168) (7) (175) (63) 207 144
- ---------------------------------------------------------------------------------------------------------------------------
Total (195) 63 (132) (60) 236 176
Increase (decrease) in interest expense
on interest-bearing liabilities:
Deposits in domestic offices:
Demand 4 1 5 -- 3 3
Money market and other savings accounts (4) 37 33 (1) 39 38
Retail savings certificates (29) (42) (71) (3) 21 18
Other time deposits (9) (44) (53) (2) 18 16
Deposits in foreign offices (17) 14 (3) 1 6 7
Federal funds purchased and securities
under repurchase agreements (16) (5) (21) 1 45 46
Other short-term borrowings (9) 26 17 3 6 9
Notes and debentures (with original
maturities over one year) (8) 29 21 (4) 19 15
- ---------------------------------------------------------------------------------------------------------------------------
Total (88) 16 (72) (5) 157 152
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest revenue $(107) $ 47 $ (60) $ (55) $ 79 $ 24
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Amounts are calculated on a taxable equivalent basis where applicable, at
a tax rate approximating 35%. Amounts also exclude any adjustments to fair value
required by FAS No. 115. Changes in interest revenue or interest expense arising
from the combination of rate and volume variances are allocated proportionally
to rate and volume based on their relative absolute magnitudes.
14
<PAGE> 16
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
II. Securities Portfolio
A. Carrying values of securities at year-end are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE Dec. 31,
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. agency securities $4,807 $5,024 $2,552
U.S. Treasury securities 223 220 175
Obligations of states and political subdivisions 104 112 26
Other securities:
Bonds, notes and debentures 21 10 11
Other mortgage-backed 1 2 3
Other 3 5 --
- ---------------------------------------------------------------------------------------------------------------------------
Total other securities 25 17 14
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $5,159 $5,373 $2,767
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES Dec. 31,
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
U.S. agency securities $1,113 $1,468 $1,953
U.S. Treasury securities -- 50 41
Obligations of states and political subdivisions 16 16 --
Other securities:
Stock of Federal Reserve Bank 59 51 50
Other mortgage-backed 9 16 23
Bonds, notes and debentures -- -- 14
Other -- 1 1
- ---------------------------------------------------------------------------------------------------------------------------
Total other securities 68 68 88
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,197 $1,602 $2,082
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
B. Maturity Distribution of Securities
Information required by this section of Guide 3 is presented in the
Corporation's 1999 Financial Annual Report to Shareholders in note 3 of
Notes to Financial Statements on Securities on pages 62 through 64, which
note is incorporated herein by reference.
III. Loan Portfolio
A. Types of Loans
Information required by this section of Guide 3 is included in the
Corporate Risk section of the Corporation's 1999 Financial Annual Report to
Shareholders on pages 38 through 46, which portions are incorporated herein
by reference.
15
<PAGE> 17
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
III. Loan Portfolio (continued)
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
<TABLE>
<CAPTION>
Maturity distribution of loans at Dec. 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
(in millions) Within 1 year (a) 1-5 years Over 5 years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic (b):
Commercial and financial $3,350 $6,611 $1,388 $11,349
Commercial real estate 774 1,220 657 2,651
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic 4,124 7,831 2,045 14,000
International 909 165 232 1,306
- ---------------------------------------------------------------------------------------------------------------------------
Total $5,033 $7,996 $2,277 $15,306
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Maturity distributions are based on remaining contractual maturities.
(a) Includes demand loans and loans with no stated maturity.
(b) Excludes consumer mortgages, other consumer credit and lease finance
assets.
<TABLE>
<CAPTION>
Sensitivity of loans at Dec. 31, 1999, to changes in interest rates
- ---------------------------------------------------------------------------------------------------------------------------
Domestic International
(in millions) operations (a) operations Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans due in one year or less (b) $4,124 $ 909 $5,033
Loans due after one year:
Variable rates 8,209 239 8,448
Fixed rates 1,667 158 1,825
- ---------------------------------------------------------------------------------------------------------------------------
Total loans $14,000 $1,306 $15,306
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Maturity distributions are based on remaining contractual maturities.
(a) Excludes consumer mortgages, other consumer credit and lease finance
assets.
(b) Includes demand loans and loans with no stated maturity.
C. Risk Elements
Information required by this section of Guide 3 is included in the
Corporate Risk section of the Corporation's 1999 Financial Annual Report to
Shareholders on pages 38 through 46, which portions are incorporated herein
by reference.
IV. Summary of Loan Loss Experience
The Corporation maintains a credit loss reserve that, in management's
judgment, is appropriate to absorb losses embedded in the loan portfolio as
of the balance sheet date. Management reviews the appropriateness of the
reserve at least quarterly. The reserve determination methodology is
designed to provide procedural discipline in assessing the appropriateness
of the reserve. For analytical purposes, the reserve methodology estimates
inherent loss in both the commercial and consumer loan portfolios. This
methodology primarily uses an individual evaluation of problem credits and
a historical analysis of loss experience and criticized credit levels. In
addition, the status and amount of nonperforming and past-due loans are
considered. Qualitative factors considered include: industry risks, current
economic factors affecting collectability, trends in portfolio volume,
quality, maturity and composition and current interest rate levels and
economic conditions.
16
<PAGE> 18
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
IV. Summary of Loan Loss Experience (continued)
When losses on specific loans are identified, management charges off the portion
deemed uncollectible. The allocation of the Corporation's reserve for credit
losses is presented below as required by Guide 3.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Domestic reserve:
<S> <C> <C> <C> <C> <C>
Commercial and financial $231 $194 $162 $117 $169
Real estate:
Commercial 61 92 88 98 92
Consumer 51 56 51 58 61
Consumer credit 27 117 132 198 135
Lease finance assets 28 26 30 43 6
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic reserve 398 485 463 514 463
International reserve 5 11 12 11 8
- ---------------------------------------------------------------------------------------------------------------------------
Total reserve $403 $496 $475 $525 $471
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Further information on the Corporation's credit policies, the factors that
influenced management's judgment in determining the level of the reserve for
credit losses, and the analyses of the credit loss reserve for the years
1995-1999 are set forth in the Corporation's 1999 Financial Annual Report to
Shareholders in the Credit Risk section on pages 38 and 39, the Credit Quality
Expense, Reserve for Credit Losses and Review of Net Credit Losses section on
pages 45 and 46, in note 1 of Notes to Financial Statements under Reserve for
Credit Losses on page 58 and in note 6 on page 65 which portions are
incorporated herein by reference.
For each category above, the ratio of loans to consolidated total loans is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Dec. 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial and financial 38% 38% 37% 37% 40%
Real estate:
Commercial 9 7 6 6 6
Consumer 24 27 29 29 32
Consumer credit 15 14 14 14 16
Lease finance assets 10 9 9 9 3
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic loans 96 95 95 95 97
International loans 4 5 5 5 3
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 100% 100% 100% 100% 100%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
V. Deposits
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Maturity distribution of domestic time deposits at Dec. 31, 1999
Within 4-6 7-12 Over
(in millions) 3 months months months 1 year Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time certificates of deposit in denominations
of $100,000 or greater $2,304 $ 286 $ 377 $ 306 $3,273
Time certificates of deposit in denominations
of less than $100,000 782 770 1,472 2,076 5,100
- ---------------------------------------------------------------------------------------------------------------------------
Total time certificates of deposit 3,086 1,056 1,849 2,382 8,373
- ---------------------------------------------------------------------------------------------------------------------------
Other time deposits in denominations
of $100,000 or greater 242 -- -- 2 244
Other time deposits in denominations
of less than $100,000 5 -- -- -- 5
- ---------------------------------------------------------------------------------------------------------------------------
Total other time deposits 247 -- -- 2 249
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic time deposits $3,333 $1,056 $1,849 $2,384 $8,622
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The majority of foreign deposits of approximately $3.3 billion at Dec.
31, 1999, were in amounts in excess of $100,000. Additional information
required by this section of Guide 3 is set forth in the Corporation's
1999 Financial Annual Report to Shareholders in the Consolidated
Balance Sheet -- Average Balances and Interest Yields/Rates on pages 22
and 23, which pages are incorporated herein by reference.
VI. Return on Equity and Assets, on a reported basis
<TABLE>
<CAPTION>
Year ended Dec. 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(1) Return on total assets(a), based on:
Net income 1.96% 1.81% 1.80%
Net income applicable to common stock 1.96 1.79 1.75
(2) Return on common shareholders' equity (a),
based on net income applicable to common stock 22.35 20.67 21.47
Return on total shareholders' equity (a), based on net income 22.35 20.75 20.83
(3) Dividend payout ratio of common stock, based on
diluted net income per share 41.84 42.42 44.00
(4) Equity to total assets (a), based on:
Common shareholders' equity 8.76 8.67 8.14
Total shareholders' equity 8.76 8.72 8.62
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Computed on a daily average basis.
18
<PAGE> 20
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
VII. Short-Term Borrowings
Federal funds purchased and securities sold under agreements to
repurchase represent funds acquired for securities transactions and
other funding requirements. Federal funds purchased mature on the
business day after execution. Selected balances and rates are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold under agreements to
repurchase:
Maximum month-end balance $3,455 $3,594
Average daily balance $2,121 $2,207
Average rate during the year 4.79% 5.56%
Balance at Dec. 31 $1,095 $3,594
Average rate at Dec. 31 3.99% 4.07%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 2. PROPERTIES
----------
Pittsburgh properties
- ---------------------
In 1983, Mellon Bank entered into a long-term lease of One Mellon Center, a
54-story office building in Pittsburgh, Pennsylvania. The current term of this
lease is scheduled to expire in November of 2008. At Dec. 31, 1999, Mellon Bank
occupied approximately 79% of the building's approximately 1,525,000 square feet
of rentable space and subleased substantially all of the remaining space to
third parties.
In 1984, Mellon Bank entered into a sale/leaseback arrangement of the Union
Trust Building, also known as Two Mellon Center, in Pittsburgh, Pennsylvania,
while retaining title to the land thereunder. The term of this lease is
scheduled to expire in May of 2006. At Dec. 31, 1999, Mellon Bank occupied
approximately 87% of this building's approximately 595,000 square feet of
rentable space and subleased substantially all of the remaining space to third
parties.
Mellon Bank owns the 41-story office building in Pittsburgh, Pennsylvania, known
as Three Mellon Center. At Dec. 31, 1999, Mellon Bank occupied approximately 99%
of this building's approximately 943,000 square feet of rentable space, with the
remainder leased to third parties.
In September 1998, Mellon Bank broke ground for a 14-story, approximately
750,000 square foot Mellon Client Service Center (the "Center") in Pittsburgh,
Pennsylvania, which it will own. The Center is expected to be ready for
occupancy in January of 2001 with Mellon Bank occupying all of the space.
Philadelphia properties
- -----------------------
Mellon Bank leases a building in Philadelphia, Pennsylvania, known as Mellon
Independence Center. The term of this lease is scheduled to expire in December
2015. At Dec. 31, 1999, Mellon Bank occupied approximately 63% of Mellon
Independence Center's approximately 807,000 square feet of rentable space, with
the remainder of the space in the building subleased to third parties.
In 1990, Mellon Bank entered into a 25-year lease for a portion of a 53-story
office building known as Mellon Bank Center in Philadelphia, Pennsylvania. The
current term of this lease is scheduled to expire in September of 2015. At Dec.
31, 1999, Mellon leased approximately 19% of the building's approximately
1,245,000 square feet of rentable space.
19
<PAGE> 21
ITEM 2. PROPERTIES (continued)
----------
Boston properties
- -----------------
The Boston Company leases space in a 41-story downtown Boston, Massachusetts
office building known as One Boston Place. The term of this lease is scheduled
to expire at various times from July of 2003 through June of 2008 with respect
to different portions of the leased premises. At Dec. 31, 1999, The Boston
Company leased approximately 34% of One Boston Place's approximately 770,000
square feet of rentable space.
In 1997, BSDT entered into a 20-year lease of a three-story office building
located in Everett, Massachusetts. The current term of this lease is scheduled
to expire in April of 2019. Upon completion of a major renovation of this
building in early 1999, The Boston Company and BSDT relocated into this building
from formerly occupied space in the Wellington Business Center located in
Medford, Massachusetts. At Dec. 31, 1999, The Boston Company and BSDT occupied
100% of this building's approximately 384,000 square feet of rentable space.
New York properties
- -------------------
At Dec. 31, 1999, The Dreyfus Corporation leased approximately 307,000 square
feet of rentable space at 200 Park Avenue in New York City. The current term of
this lease is scheduled to expire in March of 2005. Other than approximately
14,000 square feet of rentable space which is subleased to a third party, all of
the space is currently occupied by Dreyfus. At Dec. 31, 1999, Dreyfus Service
Corporation leased approximately 170,000 square feet of rentable space in EAB
Plaza in Uniondale, New York. The term of this lease is scheduled to expire in
January of 2005. This space is 100% occupied by Dreyfus.
Other properties
- ----------------
The banking subsidiaries' retail offices are both owned and leased under leases
expiring at various times through the year 2023.
Other subsidiaries of the Corporation lease office space primarily for their
operations at many of the locations listed on pages 20 through 22 of the
Principal Operating Entities section of the Corporation's 1999 Summary Annual
Report to Shareholders, which pages are incorporated herein by reference. For
additional information on the Corporation's premises and equipment, see note 7
of Notes to Financial Statements on page 65 of the Corporation's 1999 Financial
Annual Report to Shareholders, which note is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust,
custody, benefits consulting and other activities. Because of the complex nature
of some of these actions and proceedings, it may be a number of years before
such matters ultimately are resolved. After consultation with legal counsel,
management believes that the aggregate liability, if any, resulting from such
pending and threatened actions and proceedings will not have a material adverse
effect on the Corporation's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to security holders for vote during the fourth quarter
of 1999.
20
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
-------
The information required by this Item is set forth in the Corporation's 1999
Financial Annual Report to Shareholders in Liquidity and Dividends on pages 30
through 32, in Selected Quarterly Data on pages 48 and 49, in note 21 of Notes
to Financial Statements on pages 80 and 81 and in Corporate Information on page
97, which portions are incorporated herein by reference.
In October 1996, the board of directors declared a dividend, paid Oct. 31, 1996,
of one right (a "Right") issued pursuant to the Shareholder Protection Rights
Agreement, dated as of Oct. 15, 1996 (the "Rights Agreement"), for each
outstanding share of the Corporation's Common Stock (the "Common Stock").
The Rights are not currently exercisable and trade only with the Common Stock
(and are currently evidenced only in connection with the Common Stock). The
Rights would separate from the Common Stock and become exercisable only when a
person or group acquires 15% or more of the Common Stock or ten days after a
person or group commences a tender offer that would result in ownership of 15%
or more of the Common Stock. At that time, each Right would entitle the holder
to purchase for $135 (the "exercise price") one one-hundredth of a share of
participating preferred stock, which is designed to have economic and voting
rights generally equivalent to one share of common stock. Should a person or
group actually acquire 15% or more of the Common Stock, each Right held by the
acquiring person or group (or their transferees) would become void and each
Right held by the Corporation's other shareholders would entitle those holders
to purchase for the exercise price a number of shares of the Common Stock having
a market value of twice the exercise price. Should the Corporation, at any time
after a person or group has become a 15% beneficial owner and acquired control
of the Corporation's board of directors, be involved in a merger or similar
transaction with any person or group or sell assets to any person or group, each
outstanding Right would then entitle its holder to purchase for the exercise
price a number of shares of such other company having a market value of twice
the exercise price. In addition, if any person or group acquires 15% or more of
the Common Stock, the Corporation may, at its option and to the fullest extent
permitted by law, exchange one share of Common Stock for each outstanding Right.
The Rights are not exercisable until the above events occur and will expire on
Oct. 31, 2006, unless earlier exchanged or redeemed by the Corporation. The
Corporation may redeem the Rights for one cent per Right under certain
circumstances.
The foregoing description is not intended to be complete and is qualified in its
entirety by reference to the Amended and Restated Shareholder Protection Rights
Agreement, which is an exhibit to this Report.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this Item is set forth in the Corporation's 1999
Financial Annual Report to Shareholders in the Financial Summary on pages 2 and
3, in the Significant Financial Events in 1999 on pages 4 and 5, in the Overview
of 1999 results on pages 6 and 7, in the Consolidated Balance Sheet -- Average
Balances and Interest Yields/Rates on pages 22 and 23, and in note 1 of Notes to
Financial Statements on pages 55 through 61, which portions are incorporated
herein by reference.
21
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by this Item is set forth in the Corporation's 1999
Financial Annual Report to Shareholders in the Financial Review on pages 4
through 49 and in note 21 of Notes to Financial Statements on pages 80 and 81,
which portions are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information required by this Item is set forth in the Corporation's 1999
Financial Annual Report to Shareholders in the Interest Rate Sensitivity
Analysis on pages 33 through 37, in note 1 of Notes to Financial Statements
under Off-balance-sheet instruments used for risk management purposes and
Off-balance-sheet instruments used for trading activities on pages 60 and 61 and
in note 23 of Notes to Financial Statements on pages 81 through 88, which
portions are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Reference is made to Item 14 on page 25 hereof for a detailed listing of the
items under Financial Statements, Financial Statement Schedules, and Other
Financial Data, which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is included in the Corporation's proxy
statement for its 2000 Annual Meeting of Shareholders (the "2000 Proxy
Statement") in the Election of Directors-Biographical Summaries of Nominees and
Directors section on pages 3 through 6, in the Executive Compensation -
Employment Agreements with Named Executive Officers section on pages 18 and 19
and in the Section 16(a) Beneficial Ownership Reporting Compliance section on
page 36, each of which sections is incorporated herein by reference, and in the
following section "Executive Officers of the Registrant."
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The name and age of, and the positions and offices held by, each executive
officer of the Corporation as of March 1, 2000, together with the offices held
by each such person during the last five years, are listed on the following
pages. Messrs. McGuinn, Condron and Elliott have executed employment contracts
with the Corporation. All other executive officers serve at the pleasure of
their appointing authority. No executive officer has a family relationship to
any other listed executive officer.
22
<PAGE> 24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
--------------------------------------------------
Executive Officers of the Registrant (continued)
- ------------------------------------
<TABLE>
<CAPTION>
Age Position Year Elected
--- -------- ------------
<S> <C> <C> <C>
Martin G. McGuinn 57 Chairman and Chief Executive Officer, Mellon 1999 (1)
Financial Corporation and Mellon Bank, N.A.
Christopher M. Condron 52 President and Chief Operating Officer, 1999 (2)
Mellon Financial Corporation and Mellon
Bank, N.A.
Chairman and Chief Executive Officer, 1996
The Dreyfus Corporation
Steven G. Elliott 53 Senior Vice Chairman and Chief 1999 (3)
Financial Officer, Mellon Financial
Corporation and Mellon Bank, N.A.
John T. Chesko 50 Vice Chairman and Chief Risk Officer, 1997 (4)
Mellon Financial Corporation and Mellon
Bank, N.A.
Jeffery L. Leininger 54 Vice Chairman, Mellon Financial Corporation 1996 (5)
and Mellon Bank, N.A.
Keith P. Russell 54 Vice Chairman, Mellon Financial Corporation 1996 (6)
and Mellon Bank, N.A.
Peter Rzasnicki 56 Vice Chairman, Mellon Financial Corporation 1998 (7)
and Mellon Bank, N.A.
Allan P. Woods 53 Vice Chairman and Chief Information 1999 (8)
Officer, Mellon Financial Corporation and
Mellon Bank, N.A.
Michael A. Bryson 53 Executive Vice President and Treasurer, 1998 (9)
Mellon Financial Corporation
Michael K. Hughey 48 Senior Vice President and Controller of 1990
Mellon Financial Corporation and Senior
Vice President, Director of Taxes and
Controller, Mellon Bank, N.A.
</TABLE>
23
<PAGE> 25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
--------------------------------------------------
Executive Officers of the Registrant (continued)
- ------------------------------------
(1) From 1993 through February 1998, Mr. McGuinn served as Vice Chairman,
Retail Financial Services, Mellon Financial Corporation and Mellon
Bank, N.A. From March 1998 through December 1998, he was Chairman and
Chief Executive Officer, Mellon Bank, N.A. and Vice Chairman, Mellon
Financial Corporation.
(2) In January 1994, Mr. Condron assumed the title of Vice Chairman of The
Boston Company. From November 1994 through February 1998, he was Vice
Chairman, Mellon Financial Corporation and Mellon Bank, N.A. From March
1998 through December 1998, Mr. Condron was President and Chief
Operating Officer, Mellon Bank, N.A. and Vice Chairman, Mellon
Financial Corporation.
(3) From 1992 through February 1998, Mr. Elliott served as Vice Chairman
and Chief Financial Officer of Mellon Financial Corporation and Mellon
Bank, N.A. From March 1998 through December 1998, he was Senior Vice
Chairman and Chief Financial Officer of Mellon Bank, N.A. and Vice
Chairman and Chief Financial Officer of Mellon Financial Corporation.
From 1990 through April 1998, Mr. Elliott was Treasurer of Mellon
Financial Corporation.
(4) From December 1994 to June 1997, Mr. Chesko was Executive Vice
President, Risk Management, of Mellon Bank, N.A. and Chief Compliance
Officer of Mellon Financial Corporation and Mellon Bank, N.A. From
April 1996 to December 1998, Mr. Chesko was Chief Credit Officer of
Mellon Financial Corporation and Mellon Bank, N.A.
(5) From February 1994 to February 1996, Mr. Leininger was Executive Vice
President and Department Head of Middle Market Banking of Mellon Bank,
N.A.
(6) From 1992 to June 1996, Mr. Russell was Vice Chairman, Chief Risk and
Credit Officer, Mellon Financial Corporation and Mellon Bank, N.A.
(7) From 1993 to 1995, Mr. Rzasnicki was Executive Vice President, Mortgage
Banking Department and AFCO/CAFO. From 1995 through March 1998, he was
Executive Vice President, Global Trust Services, Mellon Bank, N.A.
(8) From 1993 through December 1998, Mr. Woods was Executive Vice
President, Mellon Information Services Department, Mellon Bank, N.A.
(9) From 1994 to April 1998, Mr. Bryson was Senior Vice President,
Strategic Planning, Mellon Bank, N.A.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is included in the 2000 Proxy Statement in
the Directors' Compensation section on pages 8 and 9 and in the Executive
Compensation section on pages 13 through 20, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is included in the 2000 Proxy Statement in
the Beneficial Ownership of Stock section on pages 11 and 12, and is
incorporated herein by reference.
24
<PAGE> 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item is included in the 2000 Proxy Statement in
the Business Relationships and Related Transactions section on page 10, and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The financial statements and schedules required for the Annual Report of
the Corporation on Form 10-K are included, attached or incorporated by
reference as indicated in the following index. Page numbers refer to
pages of the Corporation's 1999 Financial Annual Report to Shareholders.
<TABLE>
<CAPTION>
(i) Financial Statements Page No.
-------------------- --------
<S> <C>
Mellon Financial Corporation (and its subsidiaries):
Consolidated Income Statement 50 and 51
Consolidated Balance Sheet 52
Consolidated Statement of Changes in Shareholders' Equity 53
Consolidated Statement of Cash Flows 54 and 55
Notes to Financial Statements 55 through 95
Report of Independent Auditors 96
(ii) Financial Statement Schedules
-----------------------------
Financial Statement schedules are omitted either because they are not
required or are not applicable, or because the required information is
shown in the financial statements or notes thereto.
(iii) Other Financial Data
--------------------
Selected Quarterly Data 48 and 49
(b) Current Reports on Form 8-K during the fourth quarter of 1999:
(1) A report dated Oct. 19, 1999, which included, under Items 5 and 7,
the Corporation's press release, dated Oct. 19, 1999, regarding third
quarter 1999 and first nine months of 1999 results of operations, and
announcing a corporate name change.
(c) Exhibits
The exhibits listed on the Index to Exhibits on pages 27 through 32
hereof are incorporated by reference or filed herewith in response to
this Item. In addition, the information required by Exhibit 11.1,
Computation of Basic and Diluted Net Income Per Common Share, is set
forth in the Corporation's 1999 Financial Annual Report to Shareholders
in note 18 of Notes to Financial Statements on page 72, which portions
are incorporated herein by reference.
</TABLE>
25
<PAGE> 27
SIGNATURE
- ---------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Mellon Financial Corporation
By: /s/ Martin G. McGuinn
---------------------------
Martin G. McGuinn
Chairman and Chief
Executive Officer
DATED: March 17, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacities
--------- ----------
<S> <C>
By: /s/ Martin G. McGuinn Director and Principal
------------------------------------ Executive Officer
Martin G. McGuinn
By: /s/ Steven G. Elliott Principal Financial Officer
------------------------------------
Steven G. Elliott
By: /s/ Michael K. Hughey Principal Accounting Officer
------------------------------------
Michael K. Hughey
Dwight L. Allison, Jr.; Directors
Burton C. Borgelt; Carol R. Brown;
Frank V. Cahouet; Jared L. Cohon;
Christopher M. Condron; J. W. Connolly;
Charles A. Corry; Ira J. Gumberg;
Pemberton Hutchinson; George W. Johnstone;
Rotan E. Lee; Edward J. McAniff;
Robert Mehrabian; Seward Prosser Mellon;
Mark A. Nordenberg; David S. Shapira;
Joab L. Thomas; and Wesley W. von Schack
By: /s/ Carl Krasik DATED: March 17, 2000
------------------------------------
Carl Krasik
Attorney-in-fact
</TABLE>
26
<PAGE> 28
Index to Exhibits
-----------------
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Previously filed as Exhibit 3.1 to
Mellon Financial Corporation, as amended Quarterly Report on Form 10-Q
and restated as of Sept. 17, 1998 and as (File No. 1-7410) for the quarter
amended Oct. 18, 1999. ended Sept. 30, 1999, and
incorporated herein by reference.
3.2 By-Laws of Mellon Financial Corporation, as Previously filed as Exhibit 3.2 to
amended, effective Oct. 19, 1999. Quarterly Report on Form 10-Q
(File No. 1-7410) for the quarter
ended Sept. 30, 1999, and
incorporated herein by reference.
4.1 Instruments defining the rights of securities See Exhibits 3.1 and 3.2 above.
holders.
4.2 Shareholder Protection Rights Agreement, Previously filed as Exhibit 1 to
dated as of Oct. 15, 1996, between Mellon Form 8-A/A Registration
Financial Corporation and Mellon Bank, N.A., Statement (File No. 1-7410)
as Rights Agent, and as amended and restated dated Oct. 19, 1999, and
as of Oct. 19, 1999. incorporated herein by
reference.
4.3 Junior Subordinated Indenture, dated as of Previously filed as Exhibit 4.1
Dec. 3, 1996, between Mellon Financial to Current Report on Form 8-K
Corporation and The Chase Manhattan Bank, (File No. 1-7410) dated
as Debenture Trustee. Dec. 3, 1996, and
incorporated herein by reference.
4.4(a) Certificate representing the 7.72% Junior Previously filed as Exhibit 4.2
Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K
Series A, of Mellon Financial Corporation. (File No. 1-7410) dated
Dec. 3, 1996, and
incorporated herein by reference.
4.4(b) Certificate representing the 7.995% Junior Previously filed as Exhibit 4.2
Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K
Series B, of Mellon Financial Corporation. (File No. 1-7410) dated Dec. 20, 1996,
and incorporated herein by reference.
</TABLE>
27
<PAGE> 29
Index to Exhibits (continued)
-----------------
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
4.5(a) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3
as of Dec. 3, 1996, of Mellon Capital I, to Current Report on Form 8-K
among Mellon Financial Corporation, as Depositor, (File No. 1-7410) dated
The Chase Manhattan Bank, as Property Trustee, Dec. 3, 1996, and
Chase Manhattan Bank Delaware, as Delaware incorporated herein by reference.
Trustee, and the Administrative Trustees named
therein.
4.5(b) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3
as of Dec. 20, 1996, of Mellon Capital II, to Current Report on Form 8-K
among Mellon Financial Corporation, as Depositor, (File No. 1-7410) dated
The Chase Manhattan Bank, as Property Trustee, Dec. 20, 1996, and
Chase Manhattan Bank Delaware, as Delaware incorporated herein by reference.
Trustee, and the Administrative Trustees named
therein.
4.6(a) Certificate representing the 7.72% Capital Previously filed as Exhibit 4.4
Securities, Series A, of Mellon Capital I. to Current Report on Form 8-K
(File No. 1-7410) dated
Dec. 3, 1996, and
incorporated herein by reference.
4.6(b) Certificate representing the 7.995% Capital Previously filed as Exhibit 4.4
Securities, Series B, of Mellon Capital II. to Current Report on Form 8-K
(File No. 1-7410) dated
Dec. 20, 1996, and
incorporated herein by reference.
4.7(a) Guarantee Agreement, dated as of Dec. 3, Previously filed as Exhibit 4.5
1996, between Mellon Financial Corporation, as to Current Report on Form 8-K
guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated
Guarantee Trustee. Dec. 3, 1996, and
incorporated herein by reference.
4.7(b) Guarantee Agreement, dated as of Dec. 20, Previously filed as Exhibit 4.5
1996, between Mellon Financial Corporation, as to Current Report on Form 8-K
Guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated
Guarantee Trustee. Dec. 20, 1996, and
incorporated herein by reference.
10.1 Lease dated as of Feb. 1, 1983, Previously filed as Exhibit 10.4
between 500 Grant Street Associates to Annual Report on Form 10-K
Limited Partnership and Mellon (File No. 1-7410) for the year
Bank, N.A. with respect to One Mellon ended Dec. 31, 1992, and
Center. incorporated herein by reference.
</TABLE>
28
<PAGE> 30
Index to Exhibits (continued)
-----------------
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.2 First Amendment to Lease Agreement Previously filed as Exhibit 10.1
dated as of Nov. 1, 1983, to Registration Statement on Form
between 500 Grant Street S-15 (Registration No. 2-88266)
Associates Limited Partnership and incorporated herein by
and Mellon Bank, N.A. reference.
10.3* Mellon Financial Corporation Profit Previously filed as Exhibit 10.7
Bonus Plan, as amended. to Annual Report on Form 10-K
(File No. l-7410) for the year
ended Dec. 31, 1990, and
incorporated herein by reference.
10.4* Mellon Financial Corporation Long-Term Filed herewith.
Profit Incentive Plan (1996), as
amended effective Dec. 21, 1999.
10.5* Mellon Financial Corporation Stock Filed herewith.
Option Plan for Outside Directors
(1989), as amended effective Feb. 15, 2000.
10.6* Mellon Financial Corporation 1990 Previously filed as Exhibit 10.6 to
Elective Deferred Compensation Plan Annual Report on Form 10-K
for Directors and Members of the (File No. 1-7410) for the year
Advisory Board, as amended, ended Dec. 31, 1998, and
effective Jan. 15, 1999. incorporated herein by reference.
10.7* Mellon Financial Corporation Elective Previously filed as Exhibit 10.7 to
Deferred Compensation Plan for Annual Report on Form 10-K
Senior Officers, as amended, (File No. 1-7410) for the year
effective Jan. 15, 1999. ended Dec. 31, 1998, and
incorporated herein by reference.
10.8* Mellon Bank IRC Section 401(a)(17) Previously filed as Exhibit 10.2 to
Plan, as amended, effective Quarterly Report on Form 10-Q
Sept. 15, 1998. (File No. 1-7410) for the quarter
ended Sept. 30, 1998, and
incorporated herein by reference.
10.9* Mellon Bank Optional Life Insurance Previously filed as Exhibit 10.9 to
Plan, as amended, effective Annual Report on Form 10-K
Jan. 15, 1999. (File No. 1-7410) for the year
ended Dec. 31, 1998, and
incorporated herein by reference.
</TABLE>
* Management contract or compensatory plan arrangement.
29
<PAGE> 31
Index to Exhibits (continued)
-----------------
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.10* Mellon Bank Executive Life Insurance Previously filed as Exhibit 10.10
Plan, as amended, effective to Annual Report on Form 10-K
Jan. 15, 1999. (File No. 1-7410) for the year
ended Dec. 31, 1998, and
incorporated herein by reference.
10.11* Mellon Bank Senior Executive Life Previously filed as Exhibit 10.11
Insurance Plan, as amended, effective to Annual Report on Form 10-K
Jan. 15, 1999. (File No. 1-7410) for the year
ended Dec. 31, 1998, and
incorporated herein by reference.
10.12* Mellon Financial Corporation Retirement Plan Filed herewith.
for Outside Directors, as amended, effective
Feb. 15, 2000.
10.13* Mellon Financial Corporation Phantom Stock Previously filed as Exhibit 10.3 to
Unit Plan (1995), as amended, effective Quarterly Report on Form 10-Q
May 18, 1999. (File No. 1-7410) for the quarter
ended June 30, 1999, and
incorporated herein by reference.
10.14* Employment Agreement between Mellon Previously filed as Exhibit 10.17
Bank, N.A. and Frank V. Cahouet, to Annual Report on Form 10-K
effective as of July 25, 1993, and amended (File No. 1-7410) for the year
and restated as of Oct. 17, 1995. ended Dec. 31, 1995, and
incorporated herein by reference.
10.15* Letter Agreement, dated Feb. 20, 1998, Previously filed as Exhibit 10.17
between Mellon Financial Corporation and to Annual Report on Form 10-K
Frank V. Cahouet. (File No. 1-7410) for the year
ended Dec. 31, 1997, and
incorporated herein by reference.
10.16* Employment Agreement between Mellon Previously filed as Exhibit 10.3 to
Financial Corporation and Martin G. McGuinn, Quarterly Report on Form 10-Q
effective as of Feb. 1, 1998. (File No. 1-7410) for the quarter
ended Sept. 30, 1998, and
incorporated herein by reference.
</TABLE>
* Management contract or compensatory plan arrangement.
30
<PAGE> 32
Index to Exhibits (continued)
-----------------
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.17* Employment Agreement between Mellon Previously filed as Exhibit 10.4 to
Financial Corporation and Christopher M. Quarterly Report on Form 10-Q
Condron, effective as of Feb. 1, 1998. (File No. 1-7410) for the quarter
ended Sept. 30, 1998, and
incorporated herein by reference.
10.18* Employment Agreement between Mellon Previously filed as Exhibit 10.5 to
Financial Corporation and Steven G. Elliott, Quarterly Report on Form 10-Q
effective as of Feb. 1, 1998. (File No. 1-7410) for the quarter
ended Sept. 30, 1998, and
incorporated herein by reference.
10.19* Form of Change in Control Severance Agreement Previously filed as Exhibit 10.5 to
between Mellon Financial Corporation and members Quarterly Report on Form 10-Q
of the Executive Management Group. (File No. 1-7410) for the quarter
ended June 30, 1997, and
incorporated herein by reference.
10.20* Form of Change in Control Severance Agreement Previously filed as Exhibit 10.22
between Mellon Financial Corporation and to Annual Report on Form 10-K
members of the Senior Management Committee. (File No. 1-7410) for the year
ended Dec. 31, 1998, and
incorporated herein by reference.
12.1 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges
and Preferred Stock Dividends--parent
corporation.
12.2 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges and Ratio of
Earnings to Combined Fixed
Charges and Preferred Stock
Dividends--Mellon Financial Corporation
and its subsidiaries.
13.1 All portions of the Mellon Financial Corporation Filed herewith.
1999 Summary and Financial Annual Reports to
Shareholders that are incorporated herein by
reference.
</TABLE>
* Management contract or compensatory plan arrangement.
31
<PAGE> 33
Index to Exhibits (continued)
-----------------
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
21.1 List of Primary Subsidiaries of the Corporation. Filed herewith.
23.1 Consent of Independent Accountants. Filed herewith.
24.1 Power of Attorney. Filed herewith.
27.1 Financial Data Schedule, which is submitted Submitted herewith.
electronically to the Securities and Exchange
Commission for information only and not filed.
</TABLE>
Certain instruments, which define the rights of holders of long-term debt of the
Corporation and its subsidiaries, are not filed herewith because the total
amount of securities authorized under each of them does not exceed 10% of the
total assets of the Corporation and its subsidiaries on a consolidated basis.
The Corporation hereby agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
32
<PAGE> 1
Exhibit 10.4
MELLON FINANCIAL CORPORATION
LONG-TERM PROFIT INCENTIVE PLAN (1996)
I. Purposes
The purposes of this Long-Term Profit Incentive Plan (1996), as amended and
restated, are to promote the growth and profitability of Mellon Financial
Corporation ("Corporation") and its Affiliates, to provide officers and other
key executives of the Corporation and its Affiliates with the incentive to
achieve long-term corporate objectives, to attract and retain officers and other
key executives of outstanding competence, and to provide such officers and key
executives with an equity interest in the Corporation.
II. Definitions
The following terms shall have the meanings shown:
2.1 "Affiliate" shall mean any corporation, limited partnership or other
organization in which the Corporation owns, directly or indirectly, 50% or more
of the voting power.
2.2 "Award" shall mean Options, SARs, Performance Units, Restricted Stock,
Deferred Share Awards and Deferred Cash Incentive Awards, as defined in and
granted under the Plan.
2.3 "Board of Directors" shall mean the Board of Directors of the Corporation.
2.4 "Change in Control Event" shall mean any of the following events:
(a) The occurrence with respect to the Corporation of a "control
transaction", as such term is defined in Section 2542 of the Pennsylvania
Business Corporation Law of 1988, as of August 15, 1989; or
(b) Approval by the stockholders of the Corporation of (i) any
consolidation or merger of the Corporation where either (x) the holders of
voting stock of the Corporation immediately before the merger or consolidation
will not own more than 50% of the voting shares of the continuing or surviving
corporation immediately after such merger or consolidation or (y) the Incumbent
Directors immediately before the merger or consolidation will not hold more than
50% (rounded to the next whole person) of the seats on the board of directors of
the continuing or surviving corporation, or (ii) any sale, lease or exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Corporation; or
(c) A change of 25% (rounded to the next whole person) in the
membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85%
<PAGE> 2
(rounded to the next whole person) of the directors then still in office who
were in office at the beginning of the 12-month period and (ii) was not as a
result of an actual or threatened election with respect to directors or any
other actual or threatened solicitation of proxies by or on behalf of any person
other than the Board of Directors. As used in this Section 2.4, the term
"Incumbent Director" means as of any time a director of the Corporation (x) who
has been a member of the Board of Directors continuously for at least 12 months
or (y) whose election or nomination as a director within such period met the
requirements of clauses (i) and (ii) of the preceding sentence.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor statute of similar import, and regulations thereunder, in each case as
in effect from time to time. References to sections of the Code shall be
construed also to refer to any successor sections.
2.6 "Committee" shall mean the Human Resources Committee of the Board of
Directors, or any successor committee.
2.7 "Common Stock" shall mean Common Stock of the Corporation.
2.8 "Deferred Cash Incentive Award" shall mean an Award granted pursuant to
Article VII of the Plan.
2.9 "Deferred Share Award" shall mean an Award granted pursuant to Article VIII,
Section 8.7, of the Plan.
2.10 "Fair Market Value" shall mean the closing price of a share of Common Stock
in the New York Stock Exchange Composite Transactions on the relevant date, or,
if no sale shall have been made on such exchange on that date, the closing price
in the New York Stock Exchange Composite Transactions on the last preceding day
on which there was a sale.
2.11 "Incentive Stock Option" shall mean an option qualifying under Section 422
of the Code granted by the Corporation.
2.12 "Options" shall mean rights to purchase shares of Common Stock granted
pursuant to Article IV of the Plan.
2.13 "Participant" shall mean an eligible employee who is granted an Award under
the Plan.
2.14 "Performance Goals" shall mean goals established by the Committee in
compliance with Section 162(m) of the Code covering a performance period set by
the Committee and based on maintenance of or changes in one or more of the
following objective business criteria: earnings or earnings per share; return on
equity, assets or investment; revenues; expenses; stock price; market share;
charge-offs; or non-performing assets. Performance Goals shall be established by
the Committee in connection with the grant of Performance Units and Deferred
Cash Incentive Awards and may be established in connection with the grant of
Restricted Stock. Performance
2
<PAGE> 3
Goals may be applicable to a business unit or to the Corporation as a whole and
need not be the same for each of the foregoing types of Awards or for each
individual receiving the same type of Award. The Committee may retain the
discretion to reduce (but not to increase) the portion of any Award which will
be earned based on achieving Performance Goals.
2.15 "Performance Units" shall mean units granted pursuant to Article VI of the
Plan.
2.16 "Plan" shall mean the Mellon Financial Corporation Long-Term Profit
Incentive Plan (1996), as amended and restated.
2.17 "Reload Option Rights" and "Reload Options" shall have the meanings set
forth in Article IV of the Plan.
2.18 "Restricted Stock" shall mean any share of Common Stock granted pursuant to
Article VIII of the Plan.
2.19 "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended from
time to time, or any successor rule.
2.20 "SAR" shall mean any stock appreciation right granted pursuant to Article V
of the Plan.
III General
3.1 Administration.
(a) The Plan shall be administered by the Committee, each member of
which shall at the time of any action under the Plan be (i) a "non-employee
director" as then defined under Rule 16b-3 and (ii) an "outside director" as
then defined under Section 162(m) of the Code.
(b) The Committee shall have the authority in its sole discretion from
time to time: (i) to designate the employees eligible to participate in the
Plan; (ii) to grant Awards under the Plan; (iii) to prescribe such limitations,
restrictions and conditions upon any such Award as the Committee shall deem
appropriate; and (iv) to interpret the Plan, to adopt, amend and rescind rules
and regulations relating to the Plan, and to make all other determinations and
take all other action necessary or advisable for the implementation and
administration of the Plan. A majority of the Committee shall constitute a
quorum, and the action of a majority of members of the Committee present at any
meeting at which a quorum is present, or acts unanimously adopted in writing
without the holding of a meeting, shall be the acts of the Committee.
(c) All actions of the Committee shall be final, conclusive and binding
upon the Participant. No member of the Committee shall be liable for any action
taken or decision made in good faith relating to the Plan or any Award
thereunder.
3
<PAGE> 4
3.2 Eligibility. The Committee may grant Awards under the Plan to any full-time
corporate officer, key executive, administrative or professional employee of the
Corporation or any of its Affiliates. In granting such Awards and determining
their form and amount, the Committee shall give consideration to the functions
and responsibilities of the employee, his or her potential contributions to
profitability and to the sound growth of the Corporation and such other factors
as the Committee may deem relevant.
3.3 Effective and Expiration Dates of Plan. The amended and restated Plan shall
become effective on the date (herein referred to as the "effective date")
approved by the holders of a majority of the shares present or represented and
entitled to vote at the 1996 Annual Meeting of Shareholders of the Corporation.
No Award shall be granted after December 31, 2005, except that Reload Options
may be granted pursuant to Reload Option Rights then outstanding.
3.4 Aggregate and Individual Limitations on Awards.
(a) The aggregate number of shares of Common Stock reserved for issue
under the Plan on and after its effective date shall not exceed 58,400,000
shares, subject to adjustments pursuant to Section 9.7. No more than 4,000,000
shares of Common Stock may be issued as Restricted Stock. Shares of Common Stock
which may satisfy Awards granted under the Plan may be either authorized and
unissued shares of Common Stock or authorized and issued shares of Common Stock
held in the Corporation's treasury or issued and outstanding shares of Common
Stock held by any employee stock benefit trust established by the Corporation.
(b) For purposes of paragraph (a) of this Section 3.4, shares of Common
Stock that are actually issued upon exercise of an Option shall be counted
against the total number of shares reserved for issuance, except that when
Options are exercised by the delivery of shares of Common Stock the charge
against the shares reserved for issuance shall be limited to the net new shares
of Common Stock issued. In addition to shares of Common Stock actually issued
pursuant to the exercise of Options, there shall be deemed to have been issued
under the Plan a number of shares of Common Stock equal to (i) the number of
shares issued pursuant to SARs which shall have been exercised pursuant to the
Plan, (ii) the number of Performance Units which shall have been paid in shares
of Common Stock pursuant to the Plan and (iii) the number of shares of
Restricted Stock which shall have been granted pursuant to the Plan. For
purposes of paragraph (a) of this Section 3.4, the payment of a Deferred Cash
Incentive Award shall not be deemed to result in the issuance of any shares of
Common Stock in addition to those issued pursuant to the exercise of the related
Option.
(c) For purposes of paragraph (a) of this Section 3.4, any shares of
Common Stock subject to an Option which for any reason either terminates
unexercised, or expires except by reason of the exercise of a related SAR, and
any shares of Restricted Stock granted under this Plan or any shares of Common
Stock covered by a Deferred Share Award which are surrendered or forfeited to
the Corporation, shall again be available for issuance under the Plan.
(d) The maximum number of shares of Common Stock available for grants
of Options or SARs to any one Participant under the Plan during a calendar year
shall not exceed
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4,000,000 shares. The limitation in the preceding sentence shall be interpreted
and applied in a manner consistent with Section 162(m) of the Code. To the
extent consistent with Section 162(m) of the Code, a Reload Option (A) shall be
deemed to have been granted at the same time as the original underlying Option
grant and (B) shall not be deemed to increase the number of shares covered by
the original underlying Option.
IV. Options
4.1 Grant. The Committee may from time to time, subject to the provisions of the
Plan, in its discretion grant Options to Participants to purchase for cash or
shares of Common Stock the number of shares of Common Stock allotted by the
Committee. In the discretion of the Committee, any Options or portions thereof
granted pursuant to this Plan may be designated as Incentive Stock Options. The
aggregate Fair Market Value (determined as of the time the Incentive Stock
Option is granted) of Common Stock and any other stock of the Corporation or any
parent, subsidiary or affiliate corporation with respect to which such Incentive
Stock Options are exercisable for the first time by a Participant in any
calendar year under all plans of the Corporation, its subsidiaries and
affiliates shall not exceed $100,000 or such sum as may from time to time be
permitted under Section 422 of the Code. The Committee shall also have the
authority, in its discretion, to award reload option rights ("Reload Option
Rights") in conjunction with the grant of Options with the effect described in
Section 4.7. Reload Option Rights may be awarded either at the time an Option is
granted or, except in the case of Incentive Stock Options, at any time
thereafter during the term of the Option.
4.2 Option Agreements. The grant of any Option shall be evidenced by a written
"Stock Option Agreement" executed by the Corporation and the Participant,
stating the number of shares of Common Stock subject to the Option evidenced
thereby and such other terms and conditions of the Option as the Committee may
from time to time determine.
4.3 Option Price. The option price for the Common Stock covered by any Option
granted under the Plan shall in no case be less than 100% of the Fair Market
Value of said Common Stock on the date of grant. Except as otherwise provided in
the Stock Option Agreement, the option price of an Option may be paid in whole
or in part by delivery to the Corporation of a number of shares of Common Stock
having a Fair Market Value on the date of exercise equal to the option price or
portion thereof to be paid; provided, however, that no shares may be delivered
in payment of the option price of an Option unless such shares, or an equivalent
number of shares, shall have been held by the Participant (or other person
entitled to exercise the Option) for at least six months prior to such delivery.
4.4 Term of Options. The terms of each Option granted under the Plan shall be
for such period as the Committee shall determine, but for not more than 10 years
from the date of grant thereof. Each Option shall be subject to earlier
termination as provided in Sections 4.6 and 5.4 hereof.
4.5 Exercise of Options. Each Option granted under the Plan shall be exercisable
on such date or dates during the term thereof and for such number of shares of
Common Stock as may be
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provided in the Stock Option Agreement evidencing its grant. Pursuant to the
terms of the Stock Option Agreement or otherwise, the Committee may change the
date on which an outstanding Option becomes exercisable; provided, however, that
an exercise date designated in a Stock Option Agreement may not be changed to a
later date without the consent of the holder of the Option. Notwithstanding any
other provision of this Plan, unless expressly provided to the contrary in the
applicable Stock Option Agreement, all Options granted under the Plan shall
become fully exercisable immediately and automatically upon the occurrence of a
Change in Control Event.
4.6 Termination of Employment. Except as otherwise provided in the Stock Option
Agreement:
(a) If termination of employment of a Participant is due to retirement
after age 55 with the written consent of the Corporation or an Affiliate, the
Participant shall have the right to exercise his or her Options within the
period of two years after such retirement, to the extent such Options were
exercisable at the time of retirement; provided, however, that such
post-retirement exercise period may be extended by action of the Committee for
up to the full term of such Options.
(b) If a Participant shall die while employed by the Corporation or an
Affiliate or within a period following termination of employment during which
the Option remains exercisable under paragraphs (a), (c) or (d) of this Section
4.6, his or her Options may be exercised to the extent exercisable by the
Participant at the time of his or her death within a period of two years from
the date of death by the executor or administrator of the Participant's estate
or by the person or persons to whom the Participant shall have transferred such
right by will or by the laws of descent and distribution.
(c) If termination of employment of a Participant is by reason of the
total and permanent disability of the Participant covered by a disability plan
of the Corporation or an Affiliate then in effect, the Participant shall have
the right to exercise his or her Options within the period of two years after
the date of termination of employment, to the extent such Options were
exercisable at the time of termination of employment.
(d) In the event the employment of a Participant is terminated by the
Corporation or an Affiliate without cause within two years after the occurrence
of a Change in Control Event, the Participant shall have the right to exercise
his or her Options within one year after the date such termination occurred, to
the extent such Options were exercisable at the time of such termination of
employment. For purposes of this paragraph, "without cause" shall mean any
termination of employment where it cannot be shown that the employee has (i)
willfully failed to perform his or her employment duties for the Corporation or
an Affiliate, (ii) willfully engaged in conduct that is materially injurious to
the Corporation or an Affiliate, monetarily or otherwise, or (iii) committed
acts that constitute a felony under applicable federal or state law or
constitute common law fraud. For purposes of this paragraph, no act or failure
to act on the Participant's part shall be considered "willful" unless done, or
omitted to be done, by him or her not in good
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faith and without reasonable belief that his or her action or omission was in
the best interest of the Corporation or Affiliate.
(e) In the event all employment of a Participant with the Corporation
or an Affiliate is terminated for any reason other than as stated in the
preceding paragraphs (a) - (d), his or her Options shall terminate upon such
termination of employment.
(f) Notwithstanding the foregoing, in no event shall an Option granted
hereunder be exercisable after the expiration of its term.
4.7 Reload Option Rights. Reload Option Rights if awarded with respect to an
Option shall entitle the original grantee of the Option (and unless otherwise
determined by the Committee, in its discretion, only such original grantee),
upon exercise of the Option or any portion thereof through delivery of shares of
Common Stock, automatically to be granted on the date of such exercise an
additional Option (a "Reload Option") (i) for that number of shares of Common
Stock not greater than the number of shares delivered by the Participant in
payment of the option price of the original Option and any withholding taxes
related thereto, (ii) having an option price not less than 100% of the Fair
Market Value of the Common Stock covered by the Reload Option on the date of
grant of such Reload Option, (iii) having an expiration date not later than the
expiration date of the original Option so exercised and (iv) otherwise having
terms permissible for the grant of an Option under the Plan. Subject to the
preceding sentence and the other provisions of the Plan, Reload Option Rights
and Reload Options shall have such terms and be subject to such restrictions and
conditions, if any, as shall be determined, in its discretion, by the Committee.
In granting Reload Option Rights, the Committee, may, in its discretion, provide
for successive Reload Option grants upon the exercise of Reload Options granted
hereunder. Unless otherwise determined by the Committee, in its discretion,
Reload Option Rights shall entitle the Participant to be granted Reload Options
only if the underlying Option to which they relate is exercised by the
Participant during employment with the Corporation or any of its Affiliates.
Except as otherwise specifically provided herein or required by the context, the
term Option as used in this Plan shall include Reload Options granted hereunder.
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V. SARs
5.1 Grant. SARs may be granted by the Committee as stand-alone SARs or in tandem
with all or any part of any Option granted under the Plan. SARs which are
granted in tandem with an Option may be granted either at the time of the grant
of such Option or, except in the case of an Incentive Stock Option, at any time
thereafter during the term of such Option.
5.2 SAR Agreements. The grant of any SAR shall be evidenced by the related Stock
Option Agreement or by a written "Stock Appreciation Rights Agreement" executed
by the Corporation and the Participant, stating the number of shares of Common
Stock covered by the SAR, the base price of a stand-alone SAR and such other
terms and conditions of the SAR as the Committee may from time to time
determine. The base price for stand-alone SARs (the "base price") shall be such
price as the Committee, in its sole discretion, shall determine but shall not be
less than 100% of the Fair Market Value per share of the Common Stock covered by
the stand-alone SAR on the date of grant.
5.3 Payment. SARs shall entitle the Participant upon exercise to receive the
amount by which the Fair Market Value of a share of Common Stock on the date of
exercise exceeds the option price of any tandem Option or the base price of a
stand-alone SAR, multiplied by the number of shares in respect of which the SAR
shall have been exercised. In the sole discretion of the Committee, the
Corporation may pay all or any part of its obligation arising out of a SAR
exercise in (i) cash, (ii) shares of Common Stock or (iii) cash and shares of
Common Stock. Payment shall be made by the Corporation as soon as practicable
after the date of exercise.
5.4 Exercise of Tandem Award. If SARs are granted in tandem with an Option (i)
the SARs shall be exercisable at such time or times and to such extent, but only
to such extent, that the related Option shall be exercisable, (ii) the exercise
of the related Option shall cause a share for share reduction in the number of
SARs which were granted in tandem with the Option; and (iii) the payment of SARs
shall cause a share for share reduction in the number of shares covered by such
Option.
5.5 Termination of Employment. Except as otherwise provided in the Stock
Appreciation Rights Agreement:
(a) If termination of employment of a Participant is due to retirement
after age 55 with the written consent of the Corporation or an Affiliate, the
Participant shall have the right to exercise his or her stand-alone SARs within
the period of two years after such retirement, to the extent such SARs were
exercisable at the time of retirement; provided, however, that such
post-retirement exercise period may be extended by action of the Committee for
up to the full term of such SARs.
(b) If a Participant shall die while employed by the Corporation or an
Affiliate thereof or within a period following termination of employment during
which the SARs remain exercisable under paragraphs (a), (c) or (d) of this
Section 5.5, his or her stand-alone SARs may be exercised to the extent
exercisable by the Participant at the time of his or her death within a
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period of two years from the date of death by the executor or administrator of
the Participant's estate or by the person or persons to whom the Participant
shall have transferred such right by will or by the laws of descent and
distribution.
(c) If termination of employment of a Participant is by reason of the
total and permanent disability of the Participant covered by a disability plan
of the Corporation or an Affiliate then in effect, the Participant shall have
the right to exercise his or her stand-alone SARs within the period of two years
after the date of termination of employment, to the extent such SARs were
exercisable at the time of termination of employment.
(d) In the event all employment of a Participant with the Corporation
or an Affiliate is terminated without cause within two years after the
occurrence of a Change in Control Event, the Participant shall have the right to
exercise his or her stand-alone SARs within one year after the date such
termination occurred, to the extent such stand-alone SARs were exercisable at
the time of such termination of employment. For purposes of this paragraph,
"without cause" shall have the meaning provided in Section 4.6(d).
(e) In the event all employment of a Participant with the Corporation
or an Affiliate is terminated for any reason other than as stated in the
preceding paragraphs (a) - (d), his or her stand-alone SARs shall terminate upon
such termination of employment.
(f) Notwithstanding the foregoing, in no event shall a stand-alone SAR
granted hereunder be exercisable after the expiration of its term.
VI. Performance Units
6.1 Grant. The Committee may from time to time grant one or more Performance
Units to eligible employees. Performance Units shall represent the right of a
Participant to receive shares of Common Stock or cash at a future date upon the
achievement of Performance Goals which are established by the Committee.
6.2 Performance Unit Agreements. The grant of any Performance Unit shall be
evidenced by a written "Performance Unit Agreement", executed by the Corporation
and the Participant stating the amount of cash and/or number of shares of Common
Stock covered by the Performance Unit and such other terms and conditions of the
Performance Unit as the Committee may determine, including the performance
period to be covered by the award and the Performance Goals to be achieved.
6.3 Payment. After the completion of a performance period, performance during
such period shall be measured against the Performance Goals set by the
Committee. If the Performance Goals are met or exceeded, the Committee shall
certify that fact in writing in the Committee minutes or elsewhere and certify
the amount to be paid to the Participant under the Performance Unit. In the sole
discretion of the Committee, the Corporation may pay all or any part of its
obligation under the Performance Unit in (i) cash, (ii) shares of Common Stock
or (iii) cash and
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shares of Common Stock. Payment shall be made by the Corporation as soon as
practicable after the certification of achievement of the Performance Goals.
6.4 Termination of Employment. To be entitled to receive payment under a
Performance Unit, a Participant must remain in the employment of the Corporation
or an Affiliate through the end of the applicable performance period; except
that this limitation shall not apply where a Participant's employment is
terminated by the Corporation or an Affiliate without cause (as defined in
Section 4.6(d)) following the occurrence of a Change in Control Event.
6.5 Maximum Cash Payment. The maximum amount that may be paid in cash or in Fair
Market Value of Common Stock (to be valued no later than three days after the
date the Committee certifies the achievement of the Performance Goals) under all
Performance Units paid to any one Participant during a calendar year shall in no
event exceed $1,000,000.
VII. Deferred Cash Incentive Awards
7.1 Granting of Deferred Cash Incentive Awards. Deferred Cash Incentive Awards,
as hereafter described, may be granted in conjunction with all or any part of
any Option (other than an Incentive Stock Option) granted under the Plan, either
at the time of the grant of such Option or at any time thereafter during the
term of such Option.
7.2 Deferred Cash Incentive Agreements. Deferred Cash Incentive Awards shall
entitle the holder of an Option to receive from the Corporation an amount of
cash equal to the aggregate exercise price of all Options exercised by such
Participant in accordance with the terms of a written "Deferred Cash Incentive
Agreement" executed by the Corporation and the Participant. Deferred Cash
Incentive Agreements shall specify the conditions under which Deferred Cash
Incentive Awards become payable, the conditions under which Deferred Cash
Incentive Awards are forfeited and any other terms and conditions as the
Committee may from time to time determine. Under no circumstances may a Deferred
Cash Incentive Award be applied to any purpose other than the payment of the
exercise price of a properly exercised related Option.
7.3 Pre-established Performance Goals.
(a) Except in the event of death, total and permanent disability
covered by a disability plan of the Corporation or an Affiliate then in effect
or the occurrence of a Change in Control Event, any Deferred Cash Incentive
Award shall only be earned and become payable if the Corporation achieves
Performance Goals which are established for a calendar year or longer period by
the Committee. After the completion of a performance period, performance during
such period shall be measured against the Performance Goals set by the
Committee. If the Performance Goals are met or exceeded, the Committee shall
certify that fact in writing in the Committee minutes or elsewhere.
(b) The amount payable to a Participant upon achieving the Performance
Goals set by the Committee for the Deferred Cash Incentive Award shall be equal
to the option price of the related Option, which shall be the Fair Market Value
of the shares of Common Stock subject to
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the Option on the date the Option is granted. No individual may in any calendar
year receive payment of Deferred Cash Incentive Awards with respect to Options
for more than 3,000,000 shares of Common Stock.
VIII. Restricted Stock
8.1 Award of Restricted Stock. The Committee may from time to time, subject to
the provisions of the Plan and such other terms and conditions as it may
prescribe, grant one or more shares of Restricted Stock to eligible employees.
In the discretion of the Committee, shares of Restricted Stock may be granted
alone, in addition to or in tandem with other Awards granted under the Plan
and/or cash awards made outside of the Plan.
8.2 Restricted Stock Agreements. Each award of Restricted Stock under the Plan
shall be evidenced by a written Restricted Stock Agreement executed by the
Corporation and the Participant in such form as the Committee shall prescribe
from time to time in accordance with the Plan.
8.3 Restrictions. Shares of Restricted Stock issued to a Participant may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, for such period as the
Committee shall determine, beginning on the date on which the Award is granted
(the "Restricted Period"). The Committee may also impose such other restrictions
and conditions on the shares or the release of the restrictions thereon as it
deems appropriate, including the achievement of Performance Goals established by
the Committee. In determining the Restricted Period of an Award, the Committee
may provide that the foregoing restrictions shall lapse with respect to
specified percentages of the awarded shares on specified dates following the
date of such Award or all at once.
8.4 Stock Certificate. As soon as practicable following the making of an award,
the Restricted Stock shall be registered in the Participant's name in
certificate or book-entry form. If a certificate is issued, it shall bear an
appropriate legend referring to the restrictions and it shall be held by the
Corporation on behalf of the Participant until the restrictions are satisfied.
If the shares are registered in book-entry form, the restrictions shall be
placed on the book-entry registration. Except for the transfer restrictions, and
subject to such other restrictions, if any, as determined by the Committee, the
Participant shall have all other rights of a holder of shares of Common Stock,
including the right to receive dividends paid with respect to the Restricted
Stock and the right to vote such shares. As soon as is practicable following the
date on which transfer restrictions on any shares lapse, the Corporation shall
deliver to the Participant the certificates for such shares, provided that the
Participant shall have complied with all conditions for delivery of such shares
contained in the Restricted Stock Agreement or otherwise reasonably required by
the Corporation.
8.5 Termination of Employment.
(a) Unless expressly provided to the contrary in the applicable
Restricted Stock Agreement, all restrictions placed upon Restricted Stock shall
lapse immediately upon (i)
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termination of the Participant's employment with the Corporation or an Affiliate
if, and only if, such termination is by reason of the Participant's death, total
and permanent disability covered by a disability plan of the Corporation or an
Affiliate then in effect or (except where Performance Goals have been set for
the Award) retirement after age 55 with the written consent of the Corporation
or an Affiliate or (ii) the occurrence of a Change in Control Event. In
addition, the Committee may in its discretion (except where Performance Goals
have been set for the Award) allow restrictions on Restricted Stock to lapse
prior to the date specified in a Restricted Stock Agreement.
(b) Except as otherwise provided in the Restricted Stock Agreement,
upon the effective date of a termination for any reason not specified in
paragraph (a) of this Section 8.5, all shares then subject to restrictions
immediately shall be forfeited to the Corporation without consideration or
further action being required of the Corporation. For purposes of this paragraph
(b), the effective date of a Participant's termination shall be the date upon
which such Participant ceases to perform services as an employee of the
Corporation or any of its Affiliates, without regard to accrued vacation,
severance or other benefits or the characterization thereof on the payroll
records of the Corporation or Affiliate.
8.6 Maximum Award. The compensation payable to a Participant upon achieving any
Performance Goals set by the Committee for Restricted Stock shall be equal to
the Fair Market Value of a share of Common Stock for each share of Restricted
Stock that is granted. No individual Participant may in any one calendar year
receive payment of a Restricted Stock Award (where Performance Goals have been
set for the Award) covering more than 400,000 shares of Common Stock.
8.7 Deferred Share Award.
(a) A Deferred Share Award shall entitle the Participant to receive
from the Corporation a number of shares of Common Stock on a deferred payment
date specified by the Participant. Participants shall be entitled to elect a
Deferred Share Award as permitted by the Committee (a "Deferred Share Award
Election").
(b) Except as otherwise provided by the Committee, a Deferred Share
Award Election (i) may be offered only with respect to a potential Restricted
Stock Award or an outstanding Restricted Stock Award with at least one year to
derestriction, (ii) shall have derestriction conditions identical as nearly as
practicable to those of the Restricted Stock Award, (iii) shall specify a
payment commencement date and form, which may occur no earlier than January 1 of
the year following termination of employment on or after age 55 with five
credited years of employment with the Corporation or an Affiliate and no later
than January 1 of the year following age 70, in one lump sum payment or in equal
annual payments over 5 or 10 years; provided, however, that payment following
derestriction of the Award upon a termination of employment prior to age 55 or
on or after age 55 with less than five years of credited employment with the
Corporation or an Affiliate shall be made in a lump sum payment no later than
March 1 of the year following such termination of employment.
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(c) Except as otherwise provided by the Committee, a Deferred Share
Award shall entitle the Participant to receive dividend equivalents payable no
earlier than the date payment is elected for the Deferred Share Award. Dividend
equivalents shall be calculated on the number of shares covered by the Deferred
Share Award as soon as practicable after the date dividends are payable on the
Common Stock.
(d) A Deferred Share Award shall be evidenced by a written Deferred
Share Award Agreement executed by the Corporation and the Participant in such
form as the Committee shall prescribe from time to time in accordance with the
Plan.
(e) Deferred Share Awards shall be subject to the same aggregate and
individual limitations set under the Plan for Restricted Stock Awards and shall
be subject to adjustment as provided in Section 9.7.
IX. Miscellaneous
9.1 General Restriction. Each Award under the Plan shall be subject to the
requirement that, if at any time the Committee shall determine that any listing
or registration of the shares of Common Stock or any consent or approval of any
governmental body, or any other agreement or consent is necessary or desirable
as a condition of the granting of an Award or issuance of Common Stock or cash
in satisfaction thereof, such Award may not be consummated unless such
requirement is satisfied in a manner acceptable to the Committee.
9.2 Non-Assignability. No Award under the Plan shall be assignable or
transferable by a Participant, except by will or by the laws of descent and
distribution or by such other means as the Committee may approve from time to
time. During the life of the Participant, such Award shall be exercisable only
by such Participant or by such other persons as the Committee may approve from
time to time.
9.3 Withholding Taxes. Whenever the Corporation proposes or is required to issue
or transfer shares of Common Stock under the Plan, the Corporation shall have
the right to require the Participant to remit to the Corporation an amount
sufficient to satisfy any federal, state, local or other withholding tax
requirements prior to the delivery of any certificate for such shares. Whenever
under the Plan payments are to be made in cash, such payments shall be net of an
amount sufficient to satisfy any federal, state, local or other withholding tax
requirements.
9.4 No Right to Employment. Nothing in the Plan or in any agreement entered into
pursuant to it shall confer upon any Participant the right to continue in the
employment of the Corporation or an Affiliate or affect any right which the
Corporation or an Affiliate may have to terminate the employment of such
Participant.
9.5 Non-Uniform Determinations. The Committee's determinations under the Plan
(including without limitation its determinations of the employees to receive
Awards, the form, amount and timing of such Awards, the terms and provisions of
such Awards and the establishment of performance goals and performance periods)
need not be uniform and may be
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made by it selectively among employees who receive, or are eligible to receive,
Awards under the Plan, whether or not such persons are similarly situated.
9.6 No Rights as Shareholders. Participants as such shall have no rights as
shareholders of the Corporation, except as provided in Section 8.4, unless and
until shares of Common Stock are registered in their name.
9.7 Adjustments of Stock. If there is any change in the Common Stock by reason
of any stock split, stock dividend, spin-off, split-up, spin-out,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares, or any other similar transaction, the number and kind of shares
available for grant under the Plan or subject to or granted pursuant to an Award
and the price thereof, or other numeric limitations under the Plan, as
applicable, shall be appropriately adjusted by the Committee or the Board.
9.8 Amendment or Termination of the Plan. The Committee or the Board may at any
time terminate the Plan or any part thereof and may from time to time amend the
Plan as it may deem advisable. Any such action of the Committee or the Board may
be taken without the approval of the Corporation's shareholders, but only to the
extent that such shareholder approval is not required by applicable law or
regulation, including specifically Rule 16b-3, or the rules of any stock
exchange on which the Common Stock is listed. The termination or amendment of
the Plan shall not, without the consent of the Participant, adversely affect
such Participant's rights under an Award previously granted.
9.9 Awards to Foreign Nationals and Employees Outside the United States. To the
extent the Committee deems it necessary, appropriate or desirable to comply with
foreign law or practice and to further the purpose of the Plan, the Committee
may, without amending the Plan, (i) establish special rules applicable to Awards
granted to Participants who are foreign nationals, are employed outside the
United States, or both, including rules that differ from those set forth in this
Plan, and (ii) grant Awards to such Participants in accordance with those rules.
9.10 Previously Granted Awards. Awards outstanding on the date of shareholder
approval of this amended and restated Plan shall continue to be governed by and
construed in accordance with the Plan as in effect prior to amendment and
restatement; except that outstanding Deferred Cash Incentive Awards shall be
subject to the limitations of new Section 7.3(a) and (b) of the Plan and, to the
extent required by Section 162(m) of the Code, a grant of a Reload Option shall
be subject to the limitation of new Section 3.4(d) of the Plan.
December 1999
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Exhibit 10.5
MELLON BANK CORPORATION
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (1989)
I. Purpose
The purposes of this Stock Option Plan for Outside Directors (1989) are to align
the interests of the outside directors of Mellon Bank Corporation (the
"Corporation") more closely with the interests of the Corporation's
shareholders, to provide such directors with an additional inducement to remain
in the service of the Corporation with an increased incentive to work for its
long-term success, and to establish an effective element of a reasonable
directors' compensation package.
II. Definitions
The following terms shall have the meanings indicated below:
2.1 "Common Stock" shall mean the common stock, par value $.50 per share, of the
Corporation.
2.2 "Corporation" shall mean Mellon Bank Corporation.
2.3 "Business Day" shall mean any day on which the market used to determine the
Fair Market Value of the Common Stock is open for trading.
2.4 "Fair Market Value" shall mean the closing price of the Common Stock on the
New York Stock Exchange on the relevant date. If on the relevant date the Common
Stock is not listed on the New York Stock Exchange, "Fair Market Value" shall
mean the closing price of the Common Stock on the relevant date on the principal
stock exchange on which the Common Stock is listed. If the Common Stock is not
listed on any stock exchange on the relevant date, "Fair Market Value" shall
mean the mean between the bid and asked price of the Common Stock as reported on
the National Association of Securities Dealers Automated Quotation System on the
relevant date.
2.5 "Outside Director" shall mean any individual who on the relevant date is a
member of the Board of Directors of the Corporation but is not an employee of
the Corporation.
2.6 "Plan" shall mean the Mellon Bank Corporation Stock Option Plan for Outside
Directors (1989).
<PAGE> 2
2.7 "Service Year" shall mean the period beginning on the third Business Day
after the Corporation's annual meeting of shareholders at which directors are
elected and ending on the date of such annual meeting in the following year.
2.8 "HR Head" shall mean the head of the Human Resources Department of Mellon
Bank, N.A.
2.9 "Option" shall mean an option granted to an Outside Director pursuant to the
Plan.
2.10 "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended from
time to time, or any successor rule.
III. Administration
3.1 Self-Operative Plan. The Plan is intended to be self-operative to the
maximum extent consistent with prudent business practice. Under no circumstances
shall any individual or group of individuals exercise discretion with respect to
designating the recipient of an Option, the number of shares of Common Stock
that are subject to an Option, the date of grant for an Option or the exercise
price for an Option. Any action of the Nominating Committee of the Board of
Directors to set or recommend retainers or fees shall not be deemed to be such
an exercise of discretion, regardless of such action's effect on the number of
shares that become subject to Options pursuant to the formula in Section 5.4
hereof.
3.2 Certain Administrative Duties. Within the parameters set forth in Section
3.1 hereof, the HR Head shall administer the Plan. The HR Head's actions and
interpretations under the Plan shall be final, conclusive and binding, the HR
Head shall not be liable for any action taken or decisions made in good faith
relating to the Plan or any Option thereunder.
3.3 Source of Shares. The shares of Common Stock that may be issued upon the
exercise of Options under the Plan may be either authorized but unissued shares
or authorized and issued shares held in the Corporation's treasury. The
aggregate number of shares of Common Stock which may be issued under the Plan
shall not exceed 2,400,000 shares, subject to adjustment pursuant to Section 8.6
hereof.
IV. Grantings of Options
4.1 Timing. Except for individuals who become Outside Directors during the
Service Year (as described in Section 4.3 hereof), Options will be granted once
per Service Year on the third Business Day following the Corporation's annual
meeting of shareholders at which directors are elected.
2
<PAGE> 3
4.2. Recipients. Options will be awarded in equal amounts to all individuals who
are Outside Directors on the date of grant.
4.3 Mid-Service Year Elections. A director who is elected by the Board of
Directors after the start of a Service Year will be granted an Option having
terms (including term, exercise dates, and exercise price) identical to the
Options granted to Outside Directors at the start of that Service Year, except
that the number of shares of Common Stock subject to such Option shall be the
number of shares that are subject to each Option granted at the start of such
Service Year multiplied by a fraction the numerator of which is the number of
days during such Service Year that the recipient of such Option will serve as a
director and the denominator of which is the number of days in the Service Year
(with fractional shares being rounded upward to the nearest whole share).
4.4 Stock Option Agreements. The grant of any Option shall be evidenced by a
written "Stock Option Agreement" executed by the Corporation and the optionee.
The Stock Option Agreement shall contain the number of shares of Common Stock
that are subject to the Option evidenced thereby, the other essential terms of
the Option determined in accordance with Section V hereof, and other terms that
are not inconsistent with the requirements of this Plan.
V. Terms of Options
5.1 Terms of Options. All Options, other than Options granted to an Outside
Director upon his or her election during a Service Year, shall have a term of
ten years from the date of grant, subject to earlier termination pursuant to
Section 5.5 hereof.
5.2 Exercise of Options. All Options, other than Options granted to an outside
Director upon his or her election during a Service Year, shall become
exercisable on the first anniversary of their grant date.
5.3 Exercise Price. The exercise price for all Options, other than Options
granted to an Outside Director upon his or her election during a Service Year,
shall be the Fair Market Value of the Common Stock on the date the Option is
granted.
5.4 Number of Shares. The number of shares of Common Stock that may be purchased
upon exercise of an Option granted for a given Service Year shall be 3,300. The
number of shares subject to an Option shall be subject to adjustment in
accordance with Section 8.6 hereof.
5.5 Forfeiture. Options that have not become exercisable on the date the
optionee ceases to serve as a director of the Corporation for any reason other
than the optionee's death, disability or completion of the Service Year shall be
forfeited and terminated immediately upon such termination of service. Options
that have become exercisable shall remain exercisable, and shall no longer be
subject to forfeiture, throughout their ten-year terms, regardless of whether
the optionee is a director of the Corporation at the time the Option is
exercised.
3
<PAGE> 4
VI. Exercise of Options
6.1 Notice of Exercise. An Option shall be exercised by delivery to the H.R.
Head of a written notice of exercise in the form prescribed by the H.R. Head for
use from time to time. Such notice of exercise shall indicate the number of
shares as to which the Option is exercised and shall be accompanied by the full
exercise price for the Options exercised.
6.2 Form of Payment. The exercise price may be paid in cash or, in whole or in
part, by surrender of shares of Common Stock, which shall be credited against
the exercise price at their Fair Market Value on the date the Option is
exercised.
VII. Advisory Board Members
Members of the Corporation's Advisory Board shall be granted options under this
Plan in the same amounts and on the same terms as options granted to Outside
Directors; provided, however, no option shall be granted to an individual upon
his or her election to the Advisory Board after the start of the Service Year.
VIII. Miscellaneous
8.1 General Restriction. Each Option under the Plan shall be subject to the
requirement that, if at any time the H.R. Head shall determine that any listing
or registration of the shares of Common Stock, any consent or approval of any
governmental body, or any other agreement, consent or action is necessary or
desirable as a condition of the granting of an Option or issuance of Common
Stock in satisfaction thereof, such grant or issuance may not be consummated
unless such requirement is satisfied in a manner acceptable to the H.R. Head.
8.2 Non-Assignability. No Option under the Plan shall be assignable or
transferable by the optionee, except by will or pursuant to applicable laws of
descent and distribution. During the life of an optionee, an Option shall be
exercisable only by such optionee.
8.3 Withholding Taxes. Whenever the Corporation issues or transfers shares of
Common Stock under the Plan, the Corporation shall have the right to require the
optionee to remit to the Corporation an amount sufficient to satisfy any
federal, state, and local withholding tax requirements prior to the delivery of
any certificate for such shares.
8.4 No Right to Continued Service. Nothing in the Plan or in any agreement
entered into pursuant to the Plan shall confer upon any optionee any right to
continued service as a director of the Corporation or any subsidiary or affect
any right of the Corporation or a subsidiary, acting through their Boards of
Directors or otherwise, to terminate or otherwise affect the service of such
optionee.
4
<PAGE> 5
8.5 No rights as Shareholders. Holders of Options under the Plan shall have no
rights as shareholders of the Corporation resulting therefrom unless and until
certificates for shares of Common Stock are registered in their names in
satisfaction of a duly exercised Option.
8.6 Adjustments. In the event that the outstanding shares of Common Stock of the
Corporation are changed in number, class or character by reason of any split-up,
change of par value, stock dividend, combination or reclassification of shares,
recapitalization, merger, consolidation or other corporate change, or shall be
changed in value by reason of any spin-off, dividend in partial liquidation or
other special distribution, the Board of Directors of the Corporation may make
any changes it may deem equitable and appropriate in outstanding Options and/or
in the number of shares of Common Stock reserved for issuance under the Plan.
For purposes of this Section 8.6, it is intended that, absent reasons to the
contrary, adjustments to Options be consistent with any changes or lack of
changes to other options on the Common Stock resulting from the same cause.
8.7 Amendment or Termination of the Plan. The Board of Directors of the
Corporation may amend or terminate the Plan as it deems advisable; provided,
however, no such amendment or termination may (a) impair the rights of an
optionee under an Option previously granted, (b) effect a change to any part of
the formula setting the amount, price and timing of Option grants more often
than permitted under Rule 16b-3 (a change in the level of actual or projected
retainer amounts not being deemed a change to such formula for that purpose), or
(c) without the approval of the Corporation's shareholders, amend any other
provision of Sections IV or V of the Plan.
February 2000
5
<PAGE> 1
Exhibit 10.12
MELLON FINANCIAL CORPORATION
RETIREMENT PLAN FOR OUTSIDE DIRECTORS
Effective January 1, 1994
Amended Effective February 15, 2000
<PAGE> 2
1. Purpose
-------
The purpose of the Mellon Financial Corporation ("Corporation")
Retirement Plan for Outside Directors ("Plan") is to provide eligible
non-employee members of the Board of Directors of the Corporation
("Board") and the Advisory Board of the Corporation ("Advisory Board")
with retirement benefits based on their length of service on the Board.
The Corporate Benefits Committee ("Committee") of the Corporation shall
be the "administrator" responsible for administering the Plan in
accordance with its terms but such designation of the Committee shall
not be construed, directly or indirectly, as evidencing any intent on
the part of the Corporation that the Plan be governed by or enforceable
under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"); it being the intent of the Corporation that such Plan be
governed by and enforceable under the laws of the Commonwealth of
Pennsylvania.
No persons not otherwise participating in the Plan in accordance with
its terms or as a result of the operation of section 1 of Appendix A
shall be entitled to participate in the Plan after February 15, 2000.
Effective as of April 30, 2000, benefits accruing under the Plan with
respect to Participants who had not incurred a Termination of Service
from the Board prior to February 15, 2000, shall be frozen and shall be
determined in accordance with Appendix A to the Plan.
2. Eligibility
-----------
The "Non Employee Members" of the Board and Advisory Board described in
subparagraphs (a) and (b) below shall be eligible to become
participants in the Plan upon their satisfaction of the service
requirements described in paragraph 3:
a. Board Members. All individuals who are or become members of the
Board on or after January 1, 1994 and who are not also serving as
salaried employees of the Corporation or one of its subsidiaries.
b. Advisory Board Members. All individuals who are active members of
the Advisory Board on or after January 1, 1994, who were active members
of the Board prior to January 1, 1994 and who are not also serving as
salaried employees of the Corporation or one of its subsidiaries.
3. Participation
-------------
a. Immediate Participation. Those Non Employee Members described in
paragraph 2 who are credited with sixty (60) or more months of Board
Service as of January 1, 1994, shall become "Participants" entitled to
receive a benefit under this Plan as of January 1, 1994.
2
<PAGE> 3
b. Future Participation. Those Non Employee Members described in
paragraph 2 who are not credited with sixty (60) or more months of
Board Service as of January 1, 1994, shall become "Participants"
entitled to receive a benefit under this Plan upon their completion of
sixty (60) months of Board Service.
c. Board Service. For purposes of this Plan, "Board Service" shall mean
the Non Employee Member's months of service as an active member of the
Board of Directors. Months of service as a member of the Advisory Board
or as a member of the board of any wholly or partially owned subsidiary
of the Corporation, regardless of the method by which the subsidiary
was established or acquired, shall not constitute Board Service.
Without intending to limit the generality of the preceding sentence, a
Non Employee Member's months of service as a member of the board of
directors of any company merged with and into the Corporation shall not
constitute "Board Service" for any purpose under this Plan unless and
until the Nominating Committee of the Board takes action to provide
otherwise.
4. Benefits
--------
a. Amount. The monthly benefit payable under this Plan with respect to
any Participant shall be determined as of the effective date of the
Participant's termination of active membership on the Board and shall
be a fixed dollar amount equal to one-twelfth (1/12th) of the annual
Retainer then being paid to active Non Employee Members of the Board.
b. Duration. The amount determined in subparagraph (a) with respect to
any Participant shall be paid for that number of months equal to the
lesser of: the Participant's months of Board Service (as defined in
subparagraph 3(c) above); or one hundred twenty (120) months.
c. Definitions. The following words shall have the meanings ascribed to
them:
(1) "Retainer" means the base annual cash remuneration
established by the Nominating Committee and the Board and paid to an
active Non Employee Member of the Board as the retainer for his or her
services as an active member of the Board; determined without regard to
any additional cash remuneration paid as a retainer to any committee
chairmanship positions, any noncash remuneration or benefits, any
meeting or per diem fees paid for attendance or any allowances or
reimbursements for meals, travel, lodging, or other expenses
attributable to attendance at Board meetings.
(2) "Termination of Service from the Board" means:
(a) with respect to Participants who are not
appointed to the Advisory Board following the termination of
their active membership on the Board, the Participant's
termination of active membership from the Board; and
3
<PAGE> 4
(b) with respect to Participants who are appointed to
the Advisory Board following the termination of their active
membership on the Board, the Participant's termination of
active membership from the Advisory Board,
in either event with such termination of active membership being
permitted to occur at any age as a result of retirement, resignation or
any other reason.
5. Payment of Benefits
-------------------
Upon a Participant's Termination of Service from the Board, the
Corporation shall pay to or on behalf of the Participant a Plan benefit
as determined below:
a. Upon Termination of Service from the Board for Reason Other than
Death. Except as otherwise provided in the case of death, the monthly
benefit determined in paragraph 4 shall be paid to the Participant or
his Assignee at the same time as are made monthly installments of the
Retainer paid on behalf of active Non Employee Members of the Board.
b. Assignments. Any Participant may from time to time direct the
Corporation to pay all or any portion of his or her benefits hereunder
directly to any person or persons (natural or otherwise, including a
trust or an estate) as the Participant's Assignee or Assignees.
Assignments shall be completely discretionary on the part of the
Participant and may, at the Participant's election, be either revocable
by the Participant without prior notice to the Assignee(s) or
irrevocable. Unless otherwise provided in the instrument effecting the
assignment, revocable assignments shall become null and void upon the
Participant's death. Assignments shall be made in writing in the manner
prescribed by the Committee (or its delegate) and will be effective
only when filed with the Committee (or its delegate) during the
Participant's lifetime.
c. Upon Death
(1) Prior to Termination of Service from the Board. In the
event that the Participant dies prior to his Termination of Service
from the Board, the Corporation shall pay to the Participant's
Beneficiary (or his Assignee(s), if applicable) an amount equal to
fifty percent (50%) of the Present Value of the benefit the Participant
would have received, if any, had the Participant had a Termination of
Service from the Board for a reason other than death on the day before
his or her death. Such then Present Value shall be paid in a single sum
as soon as administratively possible after the date of death.
4
<PAGE> 5
(2) After Termination of Service from the Board. In the event
that the Participant dies after his Termination of Service from the
Board and prior to his (or his Assignee(s), if applicable) receiving
all of the benefits to which he or she is entitled under this Plan, the
Corporation shall pay to the Participant's Beneficiary (or his
Assignee(s), if applicable) an amount equal to the then Present Value
of the unpaid portion of the Participant's benefit. Such then Present
Value shall be paid in a single sum as soon as administratively
possible after the date of death.
(3) Present Value. For purposes of this subparagraph (c), the
then Present Value shall be computed using an interest equal to the
lesser of: ten percent (.10); or one percentage point (.01) over the
rate charged by Mellon Bank, N.A., or its successor, to its best
commercial customers determined as of the date of death.
d. Tax Withholding. The amounts payable in accordance with
subparagraphs (a) or (b) shall be subject to all applicable Federal,
state and local income and employment taxes and withholding
requirements.
6. Designation of Beneficiary
--------------------------
Subject to any irrevocable assignments made pursuant to subparagraph
5(b), each Participant may from time to time designate any person or
persons (natural or otherwise, including a trust or an estate) as the
Participant's Beneficiary or Beneficiaries to whom distribution is to
be made in the event the Participant dies before distribution of his or
her entire benefit under this Plan. Each Beneficiary designation shall
be in a manner prescribed by the Committee (or its delegate) and will
be effective only when filed with the Committee (or its delegate)
during the Participant's lifetime. Each Beneficiary designation filed
with the Committee (or its delegate) will cancel all Beneficiary
designations previously filed with the Committee (or its delegate). If
a Participant fails to designate a Beneficiary in the manner provided
above, or if no designated Beneficiary survives the Participant, then
the Corporation shall distribute the Participant's benefits (or the
balance thereof) to the estate of such Participant.
7. Forfeiture of Benefits
----------------------
Notwithstanding any other provision of this Plan to the contrary, a
Participant shall forfeit his or her right to receive any and all
benefits scheduled to be paid on and after the date that the highest
court with jurisdiction over the matter finally determines that the
Participant has failed to act in accordance with the fiduciary standard
of care established by Section 1712 of the Pennsylvania Business
Corporation Law of 1988, as amended, or its successor Section(s), with
respect to a matter involving the interests of the Corporation or one
of its subsidiaries.
5
<PAGE> 6
8. Funding
-------
a. Participant Contributions. Participant contributions are neither
permitted nor required.
b. Corporation Contributions. Except as otherwise provided in (d), the
Corporation is neither permitted nor required to make contributions to
any funding vehicle associated with this Plan.
c. Benefits Paid from General Assets. The Corporation shall be
responsible for the payment of all benefits provided under this Plan;
which benefits are to be paid from the general assets of the
Corporation.
d. Trust Fund; Insurance Contracts. The Corporation may, solely for its
own convenience, purchase insurance contracts and/or establish one or
more trusts, with such trustees as the Board or the Committee may
approve; which contracts and/or trust assets may, but need not, be used
to provide for the payment of the benefits provided hereunder. Such
trust or trusts may be irrevocable, but the assets thereof shall be
subject to the claims of the Corporation's creditors. To the extent any
benefits provided under the Plan are actually paid from any such
insurance contract and/or trust assets, the Corporation shall have no
further obligation with respect thereto, but to the extent not so paid,
such benefits shall remain the obligation of, and shall be paid by, the
Corporation.
9. Administration
--------------
Except as otherwise provided in the provisions of Article II,
Administration, of the Mellon Financial Corporation 1990 Elective
Deferred Compensation Plan for Directors and Members of the Advisory
Board (amended and restated as of July 21, 1992), which provisions are
incorporated herein, mutatis mutandis, by this reference, the Committee
shall be responsible for administering the Plan in accordance with its
terms and for the referenced administrative responsibilities with
respect to the Plan.
10. Amendment
---------
The Board or the Nominating Committee of the Board shall have the
right, at any time and without the consent of any Participant, former
Participant or Beneficiary, to amend or modify the Plan in any respect
or to terminate or repeal the Plan in its entirety. Notwithstanding
anything in the preceding sentence to the contrary, the Committee shall
have the power to amend the Plan to the extent authorized by paragraph
9.
6
<PAGE> 7
11. General Provisions
------------------
a. Spendthrift Provisions. The Corporation shall, except as otherwise
provided in the Plan, pay all amounts payable hereunder only to the
person or persons entitled thereto hereunder, and all such payments
shall be made directly into the hands of each such person or persons
and not into the hands of any other person whatsoever, so that said
payments may not be liable for the debts, contracts or engagements of
any such designated person or persons, or taken in execution by
attachment or garnishment or by any other legal or equitable
proceedings, nor shall any such designated person or persons have any
right to alienate, arbitrate, execute, pledge, encumber, or assign any
such payments or the benefits thereof. If the person entitled to
receive payment be a minor, or a person of unsound mind, whether or not
adjudicated incompetent, the Corporation, upon the direction of the
Committee, may make such payments to such person or persons as may be,
or be acting as, parent or legal or natural guardian of such infant or
person of unsound mind. The signed receipt of such person shall be a
full and complete discharge to the Corporation for any such payments.
b. Participant Rights. No Participant, former Participant, person
claiming under or through any Participant or any other person shall
have any right or interest, whether vested or otherwise, in the Plan or
its continuance, or in or to the payment or the continuance of any
payments under the Plan, except with respect to payments actually
received by the Participant or former Participant in accordance with
the terms, conditions and provisions of the Plan in effect at the time
any such payments were received. Any and all payments required to be
made to Participants in accordance with the terms of the Plan shall be
general and unsecured liabilities of the Corporation.
c. Right of Corporation to Replace Members of the Board and Advisory
Board; Obligations. Neither the action of the Corporation in
establishing this Plan, nor any provisions of this Plan, shall be
construed as giving any member of the Board or Advisory Board the right
to be retained in such capacity and the Board or the Nominating
Committee shall have the right at any time to replace or fail to
renominate any member of the Board or Advisory Board without any
liability for any claim against the Corporation for any payment
whatsoever except to the extent provided for in this Plan. The
Corporation has no obligation to create any other or subsequent
retirement, deferred compensation or similar plan for members of the
Board or Advisory Board.
d. Independence of Benefits. The benefits payable under this Plan shall
be independent of and in addition to any other benefits or
compensation, whether by Retainer, salary, bonus or otherwise, payable
under any other agreement or pension, welfare or fringe benefit plan,
fund or program that now exists or may hereafter be established by the
Corporation on behalf of the Participant or for its other Non Employee
Members.
7
<PAGE> 8
e. Text of Plan to Control. The headings of the paragraphs and
subparagraphs are included solely for convenience of reference, and if
there be any conflict between such headings and the text of this Plan,
the text shall control. This Plan document sets forth the complete
terms of the Plan. In the event of any discrepancies or conflicts
between this Plan document and any summary or other information
regarding the Plan, the terms of this Plan document shall apply and
control.
f. Corporate Successors. This Plan shall be binding upon the
Corporation, its successors and assigns and the Participant and his or
her heirs, executors, administrators and legal representatives.
g. Applicable Law; Severability. This Plan shall be governed by and
construed in accordance with the laws of the Commonwealth of
Pennsylvania. If any provisions of this Plan shall be held invalid or
unenforceable for any reason, such invalidity or unenforceability shall
not affect the remaining provisions of this Plan, and this Plan shall
be deemed to be modified to the least extent possible to make it valid
and enforceable in its entirety.
8
<PAGE> 9
APPENDIX A
Effective as of April 30, 2000, all benefits under the Plan shall be determined
in accordance with the following provisions:
1. Participation. Notwithstanding anything in the Plan to the contrary, any
individual who is a Non-Employee Member of the Board as of February 15, 2000,
shall be deemed to be a Participant in the Plan on and after February 15, 2000,
regardless of the amount of Board Service credited to such individual as of such
date. No persons not otherwise participating in the Plan in accordance with its
terms or as a result of the preceding sentence of this Appendix A shall be
entitled to participate in the Plan after February 15, 2000.
2. Retired Participants. Any Participant in the Plan who had a Termination of
Service from the Board prior to February 15, 2000 (any "Retired Participant"),
shall continue to receive a benefit in accordance with the provisions of the
Plan in effect on the date of his Termination of Service from the Board.
3. Current Participants. Any Participant in the Plan who did not have a
Termination of Service from the Board prior to February 15, 2000 (a "Current
Participant"), shall receive a benefit under the Plan, as follows:
a. Effective as of April 30, 2000, the lump sum present value of the
benefit accrued as of April 30, 2000, by a Current Participant who also
is a participant in the Mellon Financial Corporation 1990 Elective
Deferred Compensation Plan for Directors and Members of the Advisory
Board (the "Deferred Compensation Plan") as of such date, shall be
transferred in cash to the Deferred Compensation Plan for the benefit
of such Current Participant.
b. As soon as administratively feasible after April 30, 2000, the lump
sum present value of the benefit accrued as of April 30, 2000, by a
Current Participant who is not a participant in the Deferred
Compensation Plan as of such date (less all applicable Federal, state
and local income and employment taxes), shall be distributed in cash to
such Current Participant.
c. The amount of the monthly benefit accrued with respect to any
Current Participant shall be determined in accordance with Section 4 of
the Plan; provided, by way of clarification, however, that the annual
Retainer being paid to active Non-Employee Members of the Board who
have not incurred a termination of active membership from the Board
prior to February 15, 2000, shall be deemed to be $30,000. The lump sum
present value of each Current Participant's benefit shall be determined
by first assuming that monthly payments commenced as of May 21, 2000,
regardless of the Current Participant's age and/or the occurrence of a
Termination of Service from the Board, and then by discounting all
monthly payments at a rate of 7.5% per year (the FAS 87 discount rate
for 2000).
9
<PAGE> 1
Exhibit - 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Mellon Financial Corporation
(parent corporation)(a)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(dollar amounts in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Income before income taxes and
equity in undistributed net
income of subsidiaries $707 $253 $352 $351 $473
2. Fixed charges: interest expense,
one-third of rental expense net
of income from subleases,
trust-preferred securities expense
and amortization of debt issuance costs 224 205 175 101 97
- ---------------------------------------------------------------------------------------------------------------------------
3. Income before income taxes
and equity in undistributed
net income of subsidiaries,
plus fixed charges (line 1 + line 2) $931 $458 $527 $452 $570
- ---------------------------------------------------------------------------------------------------------------------------
4. Preferred stock dividend
requirements(b) $ - $ 13 $ 32 $ 69 $ 62
- ---------------------------------------------------------------------------------------------------------------------------
5. Ratio of earnings (as defined)
to fixed charges (line 3 divided by line 2) 4.15 2.24 3.01 4.46 5.88
6. Ratio of earnings (as defined)
to combined fixed charges and
preferred stock dividends
[line 3 divided by (line 2 + line 4)] 4.15 2.10 2.55 2.66 3.59
- ---------------------------------------------------------------------------------------------------------------------------
</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 for all years presented represent the
pretax amounts required to cover preferred stock dividends.
<PAGE> 1
Exhibit - 12.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Mellon Financial Corporation
and its subsidiaries
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(dollar amounts in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Income before impact of accounting change $ 948 (a) $ 870 $ 771 $ 733 $ 691
2. Provision for income taxes 544 470 398 418 401
- ---------------------------------------------------------------------------------------------------------------------------
3. Income before provision for income taxes and
impact of accounting change (line 1 + line 2) $1,492 $1,340 $1,169 $1,151 $1,092
- ---------------------------------------------------------------------------------------------------------------------------
4. Fixed charges:
a. Interest expense (excluding interest on deposits) $ 458 $ 441 $ 371 $ 358 $ 401
b. One-third of rental expense net of income
from subleases, trust-preferred securities
expense and amortization of debt issuance costs 132 134 127 45 44
- ---------------------------------------------------------------------------------------------------------------------------
c. Total fixed charges (excluding interest on
deposits) (line 4a + line 4b) 590 575 498 403 445
d. Interest on deposits 871 960 878 903 889
- ---------------------------------------------------------------------------------------------------------------------------
e. Total fixed charges (line 4c + line 4d) $1,461 $1,535 $1,376 $1,306 $1,334
- ---------------------------------------------------------------------------------------------------------------------------
5. Preferred stock dividend requirements (b) $ -- $ 13 $ 32 $ 69 $ 62
- ---------------------------------------------------------------------------------------------------------------------------
6. Income before provision for income taxes and
impact of accounting change, plus total fixed charges:
a. Excluding interest on deposits (line 3 + line 4c) $2,082 $1,915 $1,667 $1,554 $1,537
- ---------------------------------------------------------------------------------------------------------------------------
b. Including interest on deposits (line 3 + line 4e) $2,953 $2,875 $2,545 $2,457 $2,426
- ---------------------------------------------------------------------------------------------------------------------------
7. Ratio of earnings (as defined) to fixed charges:
a. Excluding interest on deposits
(line 6a divided by line 4c) 3.53 (a) 3.33 3.35 3.86 3.45
b. Including interest on deposits
(line 6b divided by line 4e) 2.02 (a) 1.87 1.85 1.88 1.82
8. Ratio of earnings (as defined) to
combined fixed charges and
preferred stock dividends:
a. Excluding interest on deposits
[line 6a divided by (line 4c + line 5)] 3.53 (a) 3.25 3.15 3.30 3.03
b. Including interest on deposits
[line 6b divided by (line 4e + line 5)] 2.02 (a) 1.86 1.81 1.79 1.74
- ---------------------------------------------------------------------------------------------------------------------------
</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 1999 exclude from earnings (as defined) a $127 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 would have been 3.65 excluding interest on
deposits and 2.07 including interest on deposits.
(b) Preferred stock dividend requirements for all years presented represent the
pretax amounts required to cover preferred stock dividends.
<PAGE> 1
Exhibit 13.1
PRINCIPAL OPERATING ENTITIES
TO COMPLEMENT ITS INTERNATIONAL PRESENCE AND CAPITALIZE on significant growth
opportunities, Mellon has formed alliances with several high-quality financial
institutions overseas,including:
o ABN AMRO BANK N.V.--AMSTERDAM, global custody strategic alliance.
o BANCO BRASCAN--BRAZIL, 40 percent stake in the investment bank as well as an
investment management joint venture.
o BANK OF TOKYO-MITSUBISHI--JAPAN, investment management alliance.
o BICECORP--CHILE, three investment management joint ventures.
o CANADIAN IMPERIAL BANK OF COMMERCE, institutional trust and custody joint
venture.
o HAMON INVESTMENT GROUP--HONG KONG, minority stake in the asset management
firm.
o UNITED OVERSEAS BANK GROUP--SINGAPORE, investment management alliance.
WEALTH MANAGEMENT
MELLON PRIVATE ASSET MANAGEMENT provides investment and wealth management
services for individuals, families, family offices, endowments and foundations.
1 800 582-9423
MELLON PRIVATE BANKING provides a full range of banking services and customized
credit products to high net-worth individuals and families.
(412) 234-5346
THE BOSTON COMPANY JUMBO MORTGAGE GROUP provides custom-tailored residential
mortgage loans of $250,000 to $3 million or more.
1 800 480-7356
MELLON UNITED NATIONAL BANK serves small and midsize businesses as well as
attorneys, accountants, real estate developers and other professionals in south
Florida through its 14 regional banking offices.
(305) 358-4333
GLOBAL INVESTMENT MANAGEMENT
THE BOSTON COMPANY ASSET MANAGEMENT, LLC provides institutional investment
management services.
(617) 722-7029
CERTUS ASSET ADVISORS is a stable-value market specialist providing investment
management services to defined contribution plan sponsors.
(415) 399-4450
DREYFUS BROKERAGE SERVICES, INC. provides discount brokerage services to
individual investors nationwide, a significant portion of which are conducted
via the Internet.
www.edreyfus.com
(310) 276-0200
THE DREYFUS CORPORATION, one of the nation's leading mutual fund companies,
manages approximately $130 billion in assets in more than 180 mutual fund
portfolios.
www.dreyfus.com
(212) 922-6000
DREYFUS INVESTMENT SERVICES CORPORATION provides a wide range of securities
brokerage services for individuals and institutional clients.
www.disc.mellon.com
1 800 243-7549
FOUNDERS ASSET MANAGEMENT, LLC is a manager of growth-oriented equity mutual
funds and other investment portfolios.
www.founders.com
1 800 525-2440
FRANKLIN PORTFOLIO ASSOCIATES, LLC provides investment management services for
employee benefit funds and institutional clients.
(617) 790-6400
LAUREL CAPITAL ADVISORS provides investment management services for individuals
and corporations via brokerage firms throughout the United States.
1 800 626-6721
MELLON BOND ASSOCIATES provides structured management of fixed-income portfolios
for institutional clients.
(412) 234-3839
MELLON CAPITAL MANAGEMENT CORPORATION is a global quantitative asset manager for
institutional clients.
(415) 546-6056
MELLON EQUITY ASSOCIATES provides specialized equity and balanced investment
management services to pension plans, nonprofit and public fund markets.
(412) 234-7500
NEWTON MANAGEMENT LIMITED provides active international investment management
to institutional, private and retail clients.
www.newton.co.uk
(011-44-171) 332-9000
PARETO PARTNERS, a partnership in which Mellon holds a 30 percent interest,
provides investment management services for employee benefit funds and
institutional and high net-worth clients.
(212) 527-1800
PRIME ADVISORS INC., in which Mellon holds a minority interest, provides asset
management services to the specialized insurance industry.
(425) 202-2000
NOTE: Certain entities have activities that extend
beyond one business sector.
20 MELLON
<PAGE> 2
GLOBAL INVESTMENT SERVICES
BOSTON SAFE DEPOSIT AND TRUST COMPANY provides trust and custody administration
for institutional and private clients, private asset management and cash
management services.
(617) 722-7000
BUCK CONSULTANTS, INC., a leading global actuarial and human resources
consulting firm, provides a broad array of services in the areas of defined
benefit and defined contribution plans, health and welfare plans, communications
and compensation consulting, and outsourcing and administration of employee
benefit programs.
www.buckconsultants.com
(212) 330-1000
CHASEMELLON SHAREHOLDER SERVICES, a joint venture with The Chase Manhattan
Corporation, provides securities transfer and shareholder services throughout
the United States.
www.chasemellon.com
1 800 777-3694
CIBC MELLON GLOBAL SECURITIES SERVICES COMPANY, an institutional trust and
custody joint venture with Canadian Imperial Bank of Commerce, provides
Canadian-based pension and institutional investors with domestic and global
custody, multicurrency accounting, performance measurement, investment analytics
and information delivery.
(416) 643-5000
CIBC Mellon Trust Company provides stock transfer, trustee and related services
to Canadian-based companies.
(416) 643-5000
DREYFUS RETIREMENT SERVICES provides a full array of investment products,
participant education and administration services to defined contribution plans
nationwide.
www.drs.dreyfus.com
1 800 358-0910
MELLON EUROPE-LONDON provides global custody, securities lending, treasury,
foreign exchange, credit and cash management services to domestic and
international customers.
(011-44-171) 623-0800
MELLON FUND ADMINISTRATION is a leading servicer of unit trusts, the equivalent
of mutual funds, in the United Kingdom and the offshore market in Dublin.
(011-44-127) 722-7300 (Brentwood)
(011-353-1) 790-5000 (Dublin)
MELLON SECURITIES TRUST COMPANY provides securities processing and custody
services.
(212) 374-1970
MELLON TRUST COMPANY OF ILLINOIS provides custody services, primarily for
Illinois insurance companies.
(312) 357-3425
RUSSELL/MELLON ANALYTICAL SERVICES, a joint venture with the Frank Russell
Company, provides sophisticated investment analysis tools for global money
managers and institutional investors.
www.russellmellon.com
(412) 234-9605
REGIONAL CONSUMER BANKING
CLAIR ODELL GROUP provides property and casualty insurance solutions to
commercial and high net-worth individual customers throughout the United States
and internationally.
(610) 825-8100
MELLON BANK, N.A.comprises six regions serving consumer and small to midsize
commercial markets throughout Pennsylvania and southern New Jersey.
Headquarters: Pittsburgh, Pennsylvania
(412) 234-5000
Mellon Bank-Central Region serves central Pennsylvania.
Headquarters: State College, Pennsylvania
(814) 234-6392
Mellon Bank-Commonwealth Region serves southcentral Pennsylvania.
Headquarters: Harrisburg, Pennsylvania
(717) 231-7465
Mellon Bank-Northeastern Region serves northeastern Pennsylvania.
Headquarters: Wilkes-Barre, Pennsylvania
1 800 222-1992
Mellon Bank-Northern Region serves northwestern Pennsylvania.
Headquarters: Erie, Pennsylvania
(814) 453-7400
Mellon Bank-Western Region serves western Pennsylvania.
Headquarters: Pittsburgh, Pennsylvania
(412) 234-5000
Mellon PSFS,serves southeastern Pennsylvania and southern New Jersey.
Headquarters: Philadelphia, Pennsylvania
(215) 553-3000
IN DECEMBER 1999, THE FINAL STEEL BEAM WAS PUT INTO PLACE FOR THE NEW MELLON
CLIENT SERVICE CENTER, a 14-story, 750,000-square-foot facility in downtown
Pittsburgh that will give Mellon room for further growth, primarily in our
Global Cash Management business. Completion is scheduled for the first quarter
of 2001.
Also in 1999, Mellon opened a new 385,000-square-foot office building
in Everett, Mass., for its growing Global Securities Services division.
MELLON 21
<PAGE> 3
MELLON'S BUSINESSES CONTINUE TO THRIVE in the western United States, a
high-growth region that was responsible for about one-eighth of the
Corporation's earnings in 1999, up from about 10 percent a year earlier. Mellon
West consists of 30 business lines employing more than 2,000 people.
MELLON VENTURES, INC. HAS EQUITY POSITIONS IN 60 COMPANIES and 27 private equity
funds representing many of the highest growth sectors of the U.S. economy. With
offices in Atlanta, Los Angeles, Philadelphia and Pittsburgh, Mellon Ventures
fosters entrepreneurial growth while producing superior returns for the
Corporation. In 1999, five of Mellon Ventures' companies completed successful
IPOs, and three others announced mergers into public companies, bringing the
number of companies that have been sold, merged or taken public since 1996
to 12.
MELLON BANK (DE) NATIONAL ASSOCIATION serves consumer and commercial markets
throughout Delaware.
Headquarters: Wilmington, Delaware
(215) 553-3000
MELLON BANK (MD) NATIONAL ASSOCIATION serves commercial markets throughout
Maryland, Virginia and Washington, D.C.
Headquarters: Rockville, Maryland
(301) 217-0600
MELLON BANK COMMUNITY DEVELOPMENT CORPORATION, one of the first holding company
CDCs regulated by the Federal Reserve Board, invests in projects significant to
modest-income segments of Delaware, Maryland, New Jersey and Pennsylvania.
(412) 234-4580
SPECIALIZED COMMERCIAL BANKING
AFCO CREDIT CORPORATION, with its Canadian affiliate, CAFO, Inc., provides
insurance premium financing with offices in the United States and Canada.
(212) 401-4400
MELLON 1(ST) BUSINESS BANK provides full commercial banking services to midsize
business firms, professionals, entrepreneurs and business owners through its
headquarters office and five regional offices in southern California.
(213) 489-1000
MELLON BUSINESS CREDIT markets a broad range of commercial finance products and
banking services to corporations nationwide.
(215) 553-2161
MELLON LEASING CORPORATION markets a broad range of lease and lease-related
services from small-ticket vendor leasing to large, highly structured
transactions to businesses throughout the United States and Canada through its
three divisions: Mellon Leasing Manufacturer & Dealer Services, Leasing/Large
Corporate and Mellon US Leasing.
(412) 234-5061
MELLON UNITED NATIONAL BANK serves small and midsize businesses as well as
attorneys, accountants, real estate developers and other professionals in south
Florida through its 14 regional banking offices.
(305) 358-4333
MELLON VENTURES, INC. or its affiliates invest in the equity of U.S.-operating
companies experiencing rapid growth or change in ownership.
(412) 236-3594
MELLON MIDDLE MARKET BANKING markets a full range of financial and banking
services to commercial customers with annual sales between $20 million and $500
million. Mellon's Middle Market group also specializes in providing services to
segments of the government services industry.
(412) 236-1197
MELLON REAL ESTATE FINANCE provides short- and intermediate-term financing to
real estate developers and investors located in the East, mid-Atlantic,
Southeast, Midwest, Texas and Southern California.
(412) 234-7560
LARGE CORPORATE BANKING
MELLON CAPITAL MARKETS provides foreign exchange and risk management derivatives
services to corporate and institutional clients and serves as underwriting agent
for syndicated loan transactions.
1 888 484-6004
MELLON CORPORATE BANKING provides the full range of Mellon's financial,
investment and operating solutions to U.S. and multinational corporations and
institutions that have annual sales of more than $500 million. In addition to
specific geographic markets, Mellon relationship managers focus on specific
industries including the automotive, banking, broker/dealer and investment
manager, chemicals, energy services, health care, high-tech, insurance, leasing
and finance, media and communications, and metals markets.
(412) 234-8808
MELLON INTERNATIONAL BANKING provides international trade and correspondent
banking services, and markets trade finance and logistics management services
for clients selling products in foreign markets.
(412) 234-0350
MELLON BANK CANADA is a chartered Canadian bank providing credit, cash
management, treasury, custody, asset management, insurance premium financing and
shareholder services to the corporate market throughout Canada.
(416) 860-0777
MELLON GLOBAL CASH MANAGEMENT designs solutions through comprehensive cash
management services to meet the specialized treasury needs of middle market to
large, multinational corporations, government agencies, nonprofit organizations
and financial institutions.
1 800 424-3004
MELLON FINANCIAL MARKETS, LLC is a registered broker/dealer providing
fixed-income and equity underwriting and private placement distributions with
trading and sales services to clients and investors throughout the United
States.
(412) 234-6633
22 MELLON
<PAGE> 4
DIRECTORS & SENIOR MANAGEMENT COMMITTEE
<TABLE>
<CAPTION>
DIRECTORS
<S> <C> <C>
MELLON FINANCIAL CORPORATION Ira J. Gumberg(1)(2)(5) Mark A. Nordenberg(6)
AND MELLON BANK, N.A. President and Chief Executive Officer Chancellor
J.J. Gumberg Co. University of Pittsburgh
Dwight L. Allison Jr.(5)(6) Real estate investment and development Major public research university
Retired Chairman, President and
Chief Executive Officer Pemberton Hutchinson(3)(5)(6) David S. Shapira(1)(2)(5)(7)
The Boston Company Retired Chief Executive Officer Chairman and Chief Executive Officer
Westmoreland Coal Company Giant Eagle, Inc.
Burton C. Borgelt(5)(6) Coal Mining Retail grocery store chain
Retired Chairman and
Chief Executive Officer George W. Johnstone(2)(5) Joab L. Thomas(4)(7)
Dentsply International, Inc. Retired President and President Emeritus
Manufacturer of dental products Chief Executive Officer The Pennsylvania State University
American Water Works Company, Inc. Major public research university
Carol R. Brown(4)(6) Water services
President Wesley W. von Schack(1)(3)(4)(6)(7)
The Pittsburgh Cultural Trust Rotan E. Lee(5)(6) Chairman, President and
Cultural and economic growth Chief Executive Officer Chief Executive Officer
organization Total Health Care Plan, Inc. Energy East Corporation
Medicaid managed health care Energy services
Frank V. Cahouet(5)(7) organization
Retired Chairman, President
and Chief Executive Officer Edward J. McAniff(5)(6) CHAIRMEN EMERITI
Mellon Financial Corporation Of Counsel
O'Melveny & Myers J. David Barnes
Jared L. Cohon(2) Full-service law firm Frank V. Cahouet
President William B. Eagleson Jr.
Carnegie Mellon University Martin G. McGuinn(1) Nathan W. Pearson
Private coeducational Chairman and
research university Chief Executive Officer
Mellon Financial Corporation ADVISORY BOARD
Christopher M. Condron(1)
President and Robert Mehrabian(1)(2)(7) Andrew W. Mathieson
Chief Operating Officer President and Retired Executive Vice President
Mellon Financial Corporation Chief Executive Officer Richard K. Mellon and Sons
Teledyne Technologies Inc.
J. W. Connolly (1)(2)(3)(4) Advanced industrial technologies
Retired Senior Vice President
H.J. Heinz Company Seward Prosser Mellon
Food manufacturer President and Chief Executive Officer
Richard K. Mellon and Sons
Charles A. Corry(1)(2)(3)(4) Investments
Retired Chairman and Richard King Mellon Foundation
Chief Executive Officer Philanthropy
USX Corporation
Energy and Steel
(1) Executive Committee
(2) Audit Committee
(3) Nominating Committee
(4) Human Resources Committee
(5) Trust and Investment Committee
(6) Community Responsibility Committee
(7) Technology Committee
</TABLE>
MELLON 23
<PAGE> 5
Executive
Management
Group
<TABLE>
<S> <C> <C> <C>
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
MARTIN G. McGUINN CHRISTOPHER M. CONDRON STEVEN G. ELLIOTT JOHN T. CHESKO
Chairman and President and Senior Vice Chairman and Vice Chairman and
Chief Executive Officer Chief Operating Officer Chief Financial Officer Chief Risk Officer
REGIONAL BOARDS Ruthanne Nerlich Raymond E. Sharp
John S. Patton Barry S. Sutton
MELLON BANK--CENTRAL PA. REGION J. Michael Puleo John W. Thompson
Galen E. Dreibelbis Cyrus R. Wellman Gregory J. Wiber
Bruce K. Heim
Carol Herrmann MELLON PSFS THE DREYFUS CORPORATION
Daniel B. Hoover Paul S. Beideman Mandell L. Berman
Michael M. Kranich Sr. Paul C. Brucker Burton C. Borgelt
Edwin E. Lash Thomas F. Donovan Stephen E. Canter
Robert W. Neff Lon R. Greenberg Christopher M. Condron
Ralph J. Papa George W. Johnstone Thomas F. Eggers
Nicholas Pelick Rotan E. Lee Steven G. Elliott
Graham C. Showalter Roland Morris Martin G. McGuinn
Pedro A. Ramos J. David Officer
MELLON BANK-COMMONWEALTH Dianne L. Semingson Richard W. Sabo
PA. REGION William J. Stallkamp Richard F. Syron
Susan C. Blue Francis R. Strawbridge III
Burton C. Borgelt Stephen A. Van Dyck FOUNDERS ASSET MANAGEMENT, LLC
Stephen R. Burke Stephen E. Canter
James E. Grandon Jr. Scott A. Chapman
Ruth Leventhal SUBSIDIARY BOARDS Christopher M. Condron
James M. Mead Gregory P. Contillo
Ralph J. Papa THE BOSTON COMPANY, INC. Thomas F. Eggers
Gregory L. Sutliff AND BOSTON SAFE DEPOSIT AND Richard W. Sabo
Marlin Thomas TRUST COMPANY
Christopher M. Condron MELLON 1ST BUSINESS BANK
MELLON BANK-NORTHEASTERN David F. Lamere William S. Anderson
PA. REGION J. David Officer W. Peter Bohn
David T. Andes Ronald P. O'Hanley Robert W. Kummer Jr.
Thomas B. Black James P. Palermo Keith N. Kuhn
Robert G. Finlay Frank L. Reis Jr. Keith P. Russell
Joseph E. Kluger H. Vernon Winters Joseph P. Sanford
Joseph R. Nardone Thomas F. Savage
Joseph L. Persico BUCK CONSULTANTS, INC. Klaus M. Schilling
Arthur K. Ridley William Daniels R. Daniel Woerner
Rhea P. Simms Merril S. Delon
Stephen D. Diamond MELLON BANK CANADA
MELLON BANK-NORTHERN Edward I. Farb Frederick K. Beard
PA. REGION Steven J. Ferruggia Peter A. Crossgrove
James D. Berry III Mary Garneau Keith G. Dalglish
Robert H. Cox Richard Koski Fraser M. Fell
Eugene Cross Joseph A. LoCicero Thomas C. MacMillan
William S. DeArment J. Robinson Lynch James A. Riley
Robert G. Liptak Jr. Ronald P. O'Hanley Peter Rzasnicki
Gary W. Lyons Fredrick W. Rumack
Peter Rzasnicki
</TABLE>
24 MELLON
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
JEFFERY L.LEININGER KEITH P.RUSSELL PETER RZASNICKI ALLAN P.WOODS
Vice Chairman Vice Chairman Vice Chairman Vice Chairman and
Chief Information Officer
MELLON BANK (DE) David Lawrence Jr. John P. O'Driscoll
NATIONAL ASSOCIATION J. David Officer J. David Officer
John S. Barry Aaron S. Podhurst Ronald P. O'Hanley
Robert C. Cole Jr. Howard R. Scharlin James P. Palermo
Donna M. Coughey Sherwood M. Weiser Robert M. Parkinson
Audrey K. Doberstein Janey A. Place
Arden E. Engebretson NEWTON MANAGEMENT LIMITED Charles A. Singleton
Norman D. Griffiths Francis D. Antin Robert W. Stasik
Garrett B. Lyons Stephen E. Canter Daniel J. Tuccillo
W. Charles Paradee Jr. Colin R. Harris Patricia M. Waldinger
David F. Lamere James S. Wolf
MELLON BANK (MD) Stewart W. Newton
NATIONAL ASSOCIATION Ronald P. O'Hanley CORPORATE CONTROLLER
Frederick K. Beard Charles B. Richardson Michael K. Hughey
Michael A. Besche
Lawrence Brown Jr. CORPORATE SECRETARY
Timothy E. Hall SENIOR MANAGEMENT Carl Krasik
Albert R. Hinton COMMITTEE
MELLON WEST EXECUTIVE MANAGEMENT GROUP
John E. Anderson Martin G. McGuinn Listing as of Jan. 19, 2000
John C. Argue Christopher M. Condron
Frank V. Cahouet Steven G. Elliott
Albert Carnasale John T. Chesko
Richard M. Ferry Jeffery L. Leininger CAUTIONARY STATEMENT
Ernest J. Friedman Keith P. Russell
Robert M. Kommerstad Peter Rzasnicki This Summary Annual Report
Robert W. Kummer Jr. Allan P. Woods contains "forward-looking
Bill LeVine statements" within the meaning
Edward J. McAniff SENIOR MANAGERS of the Private Securities
Charles D. Miller Paul S. Beideman Litigation Reform Act of 1995.
Peter W. Mullin Lisa B. Binder These statements relate to,
Keith P. Russell Michael E. Bleier among other things, future
Joseph P. Sanford Paul A. Briggs financial targets for the
Roland Seidler Jr. Michael A. Bryson Corporation.Reference is made
Stephen E. Canter to the Corporation's filings
MELLON UNITED NATIONAL BANK Larry F. Clyde on Forms 10-K and 10-Q with
Paul S. Beideman Paul H. Dimmick the Securities and Exchange
Joel Friedland Thomas F. Eggers Commission for factors that
Herschel V. Green John L. Klinck Jr. could cause actual results to
Pedro Jose Greer Jr. David F. Lamere differ materially from those
Gerald Katcher Joseph A. LoCicero anticipated, including without
David F. Lamere Peter A. Lofquist limitation changes in economic
Sandra J. McLaughlin conditions and equity and
fixed-income market
fluctuations.
</TABLE>
MELLON 25
<PAGE> 7
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page No.
--------
FINANCIAL REVIEW
Financial Summary 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Significant Financial Events in 1999 4
Results of Operations 6
Corporate Risk 30
Fourth Quarter Review 47
Selected Quarterly Data 48
FINANCIAL STATEMENTS AND NOTES
Mellon Financial Corporation (and its subsidiaries):
Consolidated Income Statement 50
Consolidated Balance Sheet 52
Consolidated Statement of Changes in Shareholders' Equity 53
Consolidated Statement of Cash Flows 54
Notes to Financial Statements 55
Report of Independent Auditors 96
Corporate Information Inside Back Cover
CAUTIONARY STATEMENT
- --------------------------------------------------------------------------------
This Financial Annual Report 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; credit loss reserve appropriateness; simulation of changes in
interest rates; litigation results; and anticipated fees and earnings per share
from a long-term contract with a third party. 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; 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, trade and tax policies and laws; monetary fluctuations; success in
gaining regulatory approvals when required; success in the timely development of
new products and services; interest rate fluctuations; consumer spending and
saving habits; levels of third parties' funds under management; as well as other
risks and uncertainties detailed elsewhere in this Financial Annual 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.
1
<PAGE> 8
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY
(dollar amounts in millions, except per share
amounts or unless otherwise noted) 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DEC. 31
Net interest revenue $ 1,430 $ 1,491 $ 1,467 $ 1,478 $ 1,548 $ 1,508
Provision for credit losses 45 60 148 155 105 70
Total fee revenue 3,100 2,921 2,418 2,019 1,670 1,652
Net gain from divestitures 127 -- -- -- -- --
Gains (losses) on sales of securities -- 1 -- 4 6 (5)
Total operating expense 3,049 3,013 2,568 2,195 2,027 2,374
Provision for income taxes 574 470 398 418 401 278
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change $ 989 $ 870 $ 771 $ 733 $ 691 $ 433
Cumulative effect of accounting change (26) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 963 $ 870 $ 771 $ 733 $ 691 $ 433
Net income applicable to common stock 963 861 750 689 652 358
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RESULTS
Diluted earnings per common share:
Operating (a) $ 1.82 $ 1.62 $ 1.44 $ 1.29 $ 1.13 $ 1.00
Cash operating (a)(b) 2.04 1.83 1.60 1.44 1.25 1.13
Reported 1.85 1.62 1.44 1.29 1.13 .61
Net income applicable to common stock:
Operating (a) $ 948 $ 861 $ 750 $ 689 $ 652 $ 593
Cash operating (a)(b) 1,066 972 832 765 725 669
Reported 963 861 750 689 652 358
Return on common shareholders' equity:
Operating (a) 22.0% 20.7% 21.5% 20.4% 17.8% 16.0%
Cash operating (a)(b) 42.6 40.8 34.0 30.1 25.6 23.7
Reported 22.4 20.7 21.5 20.4 17.8 9.8
Return on assets:
Operating (a) 1.93% 1.81% 1.80% 1.74% 1.72% 1.71%
Cash operating (a)(b) 2.25 2.12 2.03 1.96 1.95 1.96
Reported 1.96 1.81 1.80 1.74 1.72 1.14
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED KEY DATA
Fee revenue as a percentage of net interest
and fee revenue (FTE) 69% 66% 62% 58% 52% 52%
Efficiency ratio excluding amortization of
intangibles (c) 61 63 62 60 60 62
Assets under management at year end
(in billions) $ 488 $ 425 $ 338 $ 286 $ 259 $ 217
Assets under administration or custody at
year end (in billions) $ 2,198 $ 1,903 $ 1,532 $ 1,046 $ 786 $ 657
Dividends paid per common share $ .78 $ .705 $ .645 $ .59 $ .50 $ .395
Dividends paid on common stock $ 403 $ 365 $ 330 $ 310 $ 288 $ 194
Closing common stock price per share $ 34.06 $ 34.38 $ 30.32 $ 17.75 $ 13.44 $ 7.66
Market capitalization $ 17,052 $ 18,007 $ 15,386 $ 9,134 $ 7,374 $ 4,507
Average common shares and equivalents
outstanding - diluted (in thousands) 521,986 530,414 521,658 533,182 580,802 596,810
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
2
<PAGE> 9
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY (CONTINUED)
(dollar amounts in millions, except per share
amounts or unless otherwise noted) 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL RATIOS AT YEAR END
Common shareholders' equity to assets:
Reported 8.38% 8.90% 8.13% 8.11% 8.83% 9.54%
Tangible (d) 4.96 5.41 5.58 5.89 6.99 7.46
Tier I capital 6.60 6.53 7.77 8.38 8.14 9.48
Total (Tier I plus Tier II) capital 10.76 10.80 12.73 13.58 11.29 12.90
Leverage capital 6.72 6.73 8.02 8.31 7.80 8.67
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $30,320 $30,411 $27,823 $27,233 $27,321 $25,097
Interest-earning assets 38,821 37,907 34,777 34,944 33,761 32,282
Total assets 49,184 48,071 42,942 42,013 40,097 38,106
Total tangible assets (b) 47,314 46,267 41,891 41,177 39,263 37,234
Deposits 33,358 33,546 30,459 30,838 27,951 27,248
Notes and debentures 3,424 2,992 2,712 2,038 1,670 1,768
Trust-preferred securities 991 991 990 32 -- --
Common shareholders' equity 4,309 4,165 3,494 3,381 3,671 3,691
Total shareholders' equity 4,309 4,190 3,700 3,810 4,106 4,277
Tangible common shareholders' equity (b) 2,503 2,382 2,443 2,545 2,837 2,819
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating and cash operating results for 1999 exclude a $77 million
after-tax net gain from divestitures, $36 million after-tax of nonrecurring
expenses and a $26 million after-tax charge for the cumulative effect of a
change in accounting principle. Results for 1994 exclude a $130 million
after-tax securities lending charge, $79 million after-tax of Dreyfus
merger-related expense, $10 million after-tax of losses on the disposition
of securities available for sale previously owned by Dreyfus and $16
million of preferred stock dividends recorded in connection with the
redemption of the Series H preferred stock.
(b) See page 15 for the definition of amounts and ratios.
(c) See page 24 for the definition of this ratio.
(d) See page 26 for the definition of this ratio.
NOTE: THROUGHOUT THIS REPORT, ALL CALCULATIONS ARE BASED ON UNROUNDED NUMBERS.
IN ADDITION, PER COMMON SHARE AMOUNTS AND AVERAGE SHARES AND EQUIVALENTS
OUTSTANDING HAVE BEEN RESTATED TO REFLECT THE TWO-FOR-ONE COMMON STOCK SPLIT
DISTRIBUTED ON MAY 17, 1999.
3
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT FINANCIAL EVENTS IN 1999
- --------------------------------------------------------------------------------
DIVESTITURES
Divestitures of credit card, mortgage and network services businesses
Sale of Mellon (MD) retail offices
In January 1999, the Corporation announced its intention 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 divestiture of the credit card business to Citibank, a unit of Citigroup. In
June 1999, the Corporation completed the divestiture of the network services
transaction processing unit to U.S. Bancorp. The divestiture 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 Sept. 30, 1999. In addition, on Sept. 30, 1999, the Corporation
completed the divestiture of its residential mortgage business to Chase Mortgage
Company, a subsidiary of The Chase Manhattan Corporation. The Corporation
retained its jumbo mortgage loan business conducted nationwide through The
Boston Company. The divested businesses employed approximately 2,300 staff and
generated approximately $470 million of fee and net interest revenue in 1998.
The combined impact of these divestitures reduced the Corporation's balance
sheet by approximately $3 billion, primarily related to lower levels of loans
and mortgage servicing rights. These divestitures lowered the Corporation's risk
profile as the lower levels of loans and mortgage servicing rights reduced the
Corporation's credit and prepayment risk. In addition, these divestitures
resulted in lower operational risk, as these businesses were transaction
oriented.
In September 1999, Mellon Bank (MD) National Association sold seven retail
offices, including approximately $225 million of deposits and $35 million of
loans, to Sandy Spring National Bank of Maryland. The Corporation continues 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 that region.
The Corporation recorded a $127 million pre-tax net gain from the divestitures
and sales in 1999. The after-tax net gain from these transactions totaled $77
million, or $.15 per common share. The net gain primarily resulted from gains on
the divestitures of the credit card business and the network services
transaction processing unit, as well as a gain on the sale of seven Mellon (MD)
retail offices. These gains were partially offset by losses on the divestitures
of the residential and commercial mortgage servicing businesses. Aside from the
net gain recorded on the divestitures, the future impact on the Corporation's
earnings is not expected to be material. Proceeds from these divestitures have
been invested in the Corporation's remaining businesses and used to repurchase
common stock. For an analysis of the financial impact of these divestitures, see
the "Divestitures" disclosure in the "Business sectors" section on pages 8
through 14.
4
<PAGE> 11
SIGNIFICANT FINANCIAL EVENTS IN 1999 (CONTINUED)
- --------------------------------------------------------------------------------
OTHER
Repurchase of common stock
In January 1999, in conjunction with the announcement of plans to divest its
credit card, mortgage and network services businesses, 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. 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. During 1999, 30.2 million shares of
common stock were repurchased for $1.068 billion, completing the 20 million
share repurchase program and leaving 14.8 million additional shares available
for repurchase under the September 1999 authorization.
Two-for-one common stock split
In April 1999, the Corporation announced a two-for-one split of the
Corporation's common stock. The two-for-one stock split was structured as a
stock dividend of one additional share of common stock paid on each issued share
of common stock. The additional shares resulting from the split were distributed
on May 17, 1999, to shareholders of record at the close of business on May 3,
1999. All prior years' per common share amounts and average shares and
equivalents outstanding have been restated to reflect the stock split.
Common dividend increase
In the second quarter of 1999, the Corporation increased its quarterly common
stock dividend by 11% to $.20 per common share. This was the ninth quarterly
common dividend increase since the beginning of 1993, resulting in a total
common dividend per share increase of approximately 240%.
Corporate name change
In October 1999, the Corporation's name was changed to Mellon Financial
Corporation to more clearly communicate its strategic focus. In addition, on the
same day in October 1999, Mellon Financial Company, the Corporation's financing
entity, changed its corporate name to Mellon Funding Corporation.
Cumulative effect of a change in accounting principle
In January 1999, the Corporation adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position (SOP) No. 98-5
on reporting 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 common 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 had no impact on a
cash-flow basis in 1999 since the underwriting fees were paid in the first half
of 1998.
5
<PAGE> 12
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW OF 1999 RESULTS
- --------------------------------------------------------------------------------
The Corporation announced record diluted earnings per common share, on a
reported basis, of $1.85 in 1999, an increase of 14%, compared with diluted
earnings per common share of $1.62 in 1998. Net income applicable to common
stock, on a reported basis, was $963 million in 1999, an increase of 12%
compared with $861 million in 1998. The 1999 results included a $77 million
after-tax net gain from divestitures, $36 million after-tax of nonrecurring
expenses, and a $26 million after-tax charge for the cumulative effect of a
change in accounting principle. The return on common shareholders' equity and
return on assets, on a reported basis, were 22.4% and 1.96%, respectively, in
1999, compared with 20.7% and 1.81%, respectively, in 1998.
Excluding the net gain from divestitures, the nonrecurring expenses and the
cumulative effect of a change in accounting principle, 1999 diluted operating
earnings per common share totaled $1.82, an increase of 12% compared with $1.62
in 1998. Operating net income applicable to common stock in 1999 was $948
million, an increase of 10% compared with $861 million in 1998. The return on
common shareholders' equity and return on assets, on an operating basis, were
22.0% and 1.93% respectively for 1999, compared with 20.7% and 1.81%
respectively for 1998.
The increases in earnings per share and net income in 1999 primarily reflect
trust and investment management business growth, effective expense management
and lower credit quality expense.
Diluted cash operating earnings per common share totaled $2.04 in 1999, an
increase of 11% compared with $1.83 in 1998. Cash operating net income
applicable to common stock was $1.066 billion, an increase of 10% compared with
$972 million in 1998. The return on tangible common shareholders' equity and
cash return on tangible assets, on an operating basis, were 42.6% and 2.25%
respectively in 1999, compared with 40.8% and 2.12% respectively in 1998.
Fee revenue was 69% of net interest and fee revenue, on a fully taxable
equivalent basis, in 1999 compared with 66% in 1998. Fee revenue in 1999 totaled
$3.100 billion, up $179 million from $2.921 billion in 1998. The comparison to
1998 was impacted by the 1999 credit card, network services, and mortgage
banking divestitures, the 1998 sale of merchant card processing, the 1998 Newton
Management Limited and Founders Asset Management 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 1998, primarily due to a 15% increase in trust and
investment fee revenue. At Dec. 31, 1999, assets under management totaled $488
billion, a 15% increase from Dec. 31, 1998, and assets under administration or
custody totaled $2,198 billion, a 16% increase from Dec. 31, 1998.
Net interest revenue, on a fully taxable equivalent basis, was $1.439 billion in
1999, a decrease of $60 million compared with $1.499 billion in 1998. Excluding
the effect of the divestitures of the credit card and mortgage businesses, net
interest revenue increased 1% compared with 1998. This increase resulted from a
higher level of interest-earning assets and a higher level of compensating
deposit balances held in lieu of customers paying cash management fees,
partially offset by higher funding costs related to the repurchase of $1.068
billion of common stock.
Operating expense before trust-preferred securities expense and net revenue from
acquired property totaled $2.984 billion in 1999, up $44 million from $2.940
billion in 1998. Excluding the effect of divestitures and acquisitions and $56
million of nonrecurring expenses recorded in the second quarter of 1999,
operating expense before trust-preferred securities expense and net revenue from
acquired property increased 3% compared with 1998. The effective tax rate,
excluding the effect of the net gain on divestitures and nonrecurring expenses,
was 36.5% for 1999, compared with 35.1% in 1998.
6
<PAGE> 13
OVERVIEW OF 1999 RESULTS (CONTINUED)
- --------------------------------------------------------------------------------
Credit quality expense was $31 million in 1999, down $23 million from $54
million in 1998. The lower expense in 1999 resulted from a lower provision for
credit losses following the divestiture of the credit card business as well as
higher gains on the sale of other real estate owned (OREO). Net credit losses
were $50 million in 1999, down $13 million compared with 1998, primarily
resulting from lower credit card net credit losses partially offset by higher
commercial and financial net credit losses.
Nonperforming assets totaled $159 million at Dec. 31, 1999, an increase of $19
million from $140 million at Dec. 31, 1998. This increase primarily resulted
from the addition of two commercial loans, one each during the first and third
quarters of 1999. This increase was partially offset by sales of OREO. The
Corporation's ratio of nonperforming assets to total loans and net acquired
property was .53% at Dec. 31, 1999, compared with .44% at Dec. 31, 1998. This
ratio has been lower than 1% for more than 5 years.
The Corporation's ratio of common shareholders' equity to assets was 8.38% at
Dec. 31, 1999. The Tier I, Total and Leverage capital ratios were 6.60%, 10.76%
and 6.72%, respectively, at Dec. 31, 1999. The Corporation repurchased 30.2
million shares of its common stock in 1999, prior to any reissuances, or nearly
6% of its common shares outstanding at the beginning of the year.
1998 compared with 1997
The Corporation reported 1998 diluted earnings per common share of $1.62, an
increase of 13% compared with diluted earnings per common share of $1.44 in
1997. Net income applicable to common stock was $861 million in 1998, an
increase of 15% compared with $750 million in 1997. Diluted cash operating
earnings per common share in 1998 were $1.83, an increase of 15% compared with
$1.60 in 1997. Cash operating net income applicable to common stock was $972
million for 1998, an increase of 17% compared with $832 million in 1997.
Fee revenue increased to $2.921 billion, up $503 million from $2.418 billion in
1997. Excluding the impact from acquisitions and one-time gains from the sales
of the merchant card processing business in 1998 and the corporate trust
business in 1997, total fee revenue increased 12% in 1998 compared with 1997.
This increase was primarily attributable to higher trust and investment fees,
foreign exchange revenue and other fee revenue. Net interest revenue, on a fully
taxable equivalent basis, totaled $1.499 billion, up $24 million from $1.475
billion in 1997. This increase primarily resulted from the favorable impact of
acquisitions, net of funding costs, as well as a higher level of
interest-earnings assets. Partially offsetting these increases were the impacts
of the December 1997 transfer of $231 million of CornerStone(sm) credit card
loans into an accelerated resolution portfolio and the February 1998 Series K
preferred stock redemption.
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $2.940 billion in 1998, up $431 million from $2.509
billion in 1997. The increase primarily resulted from the impact of
acquisitions, business growth and higher amortization of mortgage servicing
assets. Excluding the effect of acquisitions and the increase in the
amortization of mortgage servicing assets and purchased credit card
relationships, operating expense before trust-preferred securities expense and
net revenue from acquired property increased approximately 3% compared with
1997. Credit quality expense was $54 million in 1998, compared with $129 million
in 1997. The decrease primarily resulted from lower credit card net credit
losses. Net credit losses were $63 million in 1998, down $138 million compared
with 1997, reflecting a $132 million decrease in credit card net credit losses.
The Corporation's effective tax rate was 35.1% in 1998 compared with 34.1% in
1997.
7
<PAGE> 14
<TABLE>
<CAPTION>
BUSINESS SECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
Global Global Regional Specialized
Wealth Investment Investment Consumer Commercial
(dollar amounts in Management Management Services Banking Banking
millions, averages ------------------ ------------------- ------------------ ---------------------- -------------------
in billions) 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net interest
revenue
(expense) $118 $103 $ 68 $ (10) $ (5) $ 5 $ 82 $ 68 $ 74 $ 496 $ 515 $ 511 $ 409 $ 380 $338
Fee revenue 315 267 217 1,008 779 597 895 833 600 157 158 145 132 106 84
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 433 370 285 998 774 602 977 901 674 653 673 656 541 486 422
Credit quality
expense (revenue) (1) 1 1 -- -- -- -- -- -- 3 9 5 13 13 4
Operating expense:
Intangible
amortization 16 15 3 30 19 4 13 13 10 51 51 51 30 29 20
Trust-preferred
securities 2 1 1 1 1 -- -- -- -- 4 4 4 11 10 9
Other 237 210 172 628 482 376 738 696 532 385 394 394 218 207 189
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating
expense 255 226 176 659 502 380 751 709 542 440 449 449 259 246 218
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss)
before taxes and
cumulative effect
of accounting
change 179 143 108 339 272 222 226 192 132 210 215 202 269 227 200
Income taxes
(benefits) 69 56 40 141 113 91 90 77 53 78 80 76 102 87 74
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
cumulative effect
of accounting
change 110 87 68 198 159 131 136 115 79 132 135 126 167 140 126
Cumulative effect
of accounting
change(a) -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $110 $ 87 $ 68 $ 198 $159 $131 $136 $115 $ 79 $ 132 $ 135 $ 126 $ 167 $ 140 $ 126
- ------------------------------------------------------------------------------------------------------------------------------------
Average assets $4.2 $3.5 $2.2 $ 2.0 $1.5 $0.5 $4.1 $3.4 $3.0 $13.9 $13.1 $12.6 $12.2 $10.6 $ 8.9
Average common
equity $0.3 $0.2 $0.2 $ 0.5 $0.4 $0.3 $0.6 $0.5 $0.4 $ 0.7 $ 0.7 $ 0.6 $ 0.7 $ 0.7 $ 0.5
Average Tier I
preferred equity $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 0.1 $ 0.1 $ -- $ 0.1 $ 0.1 $ 0.1
- ------------------------------------------------------------------------------------------------------------------------------------
Cash net income
(loss)(b) $125 $102 $ 71 $ 220 $175 $135 $149 $128 $ 89 $ 171 $ 173 $ 165 $ 190 $ 163 $ 140
- ------------------------------------------------------------------------------------------------------------------------------------
Return on common
equity 42% 36% 45% 38% 37% 40% 23% 24% 20% 19% 21% 20% 23% 21% 24%
Return on assets 2.64% 2.50% 3.12% NM NM NM NM NM NM 0.95% 1.03% 1.00% 1.37% 1.32% 1.42%
Pretax operating
margin 41% 39% 38% 34% 35% 37% 23% 21% 20% 32% 32% 31% 50% 47% 47%
Pretax operating
margin(c) 45% 43% 39% 37% 38% 38% 24% 23% 21% 41% 40% 39% 57% 55% 54%
Efficiency ratio(c) 55% 57% 61% 63% 62% 62% 76% 77% 79% 59% 59% 60% 40% 43% 45%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cumulative effect of an accounting change has not been allocated to any
of the Corporation's reportable sectors.
(b) Excludes the after-tax impact of the amortization of goodwill and other
intangibles from purchase acquisitions.
(c) Excludes amortization of intangibles and trust-preferred securities
expense.
(d) Includes $127 million in pre-tax net gains from divestitures for 1999.
(e) Ratios exclude the impact of the net divestiture gains and nonrecurring
expenses.
NM--Not meaningful.
During 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 13.
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 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
8
<PAGE> 15
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Large Real Estate
Corporate Total Core Workout/Other Consolidated
Banking Sectors Divestitures Activity Results
--------------------- ---------------------- -------------------- ------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 272 $ 264 $ 274 $1,367 $1,325 $1,270 $ 51 $130 $146 $ 21 $ 44 $ 59 $1,439 $1,499 $1,475
265 251 240 2,772 2,394 1,883 440(d) 514 494 44 36 56 3,256 2,944 2,433
- --------------------------------------------------------------------------------------------------------------------------------
537 515 514 4,139 3,719 3,153 491 644 640 65 80 115 4,695 4,443 3,908
23 (1) - 38 22 10 11 39 147 (18) (7) (28) 31 54 129
1 2 1 141 129 89 6 7 15 1 1 1 148 137 105
22 22 22 40 38 36 1 2 1 38 39 41 79 79 78
312 308 304 2,518 2,297 1,967 256 460 408 62 46 29 2,836 2,803 2,404
- --------------------------------------------------------------------------------------------------------------------------------
335 332 327 2,699 2,464 2,092 263 469 424 101 86 71 3,063 3,019 2,587
- --------------------------------------------------------------------------------------------------------------------------------
179 184 187 1,402 1,233 1,051 217 136 69 (18) 1 72 1,601 1,370 1,192
65 66 66 545 479 400 83 50 27 (16) (29) (6) 612 500 421
- --------------------------------------------------------------------------------------------------------------------------------
114 118 121 857 754 651 134 86 42 (2) 30 78 989 870 771
- - - - - - - - - - - - (26) - -
- --------------------------------------------------------------------------------------------------------------------------------
$ 114 $ 118 $ 121 $ 857 $ 754 $ 651 $134 $ 86 $ 42 $ (2) $ 30 $ 78 $ 963 $ 870 $ 771
- -------------------------------------------------------------------------------------------------------------------------------
$ 9.1 $10.3 $10.2 $ 45.5 $ 42.4 $ 37.4 $2.3 $4.4 $3.6 $1.4 $1.3 $1.9 $ 49.2 $ 48.1 $ 42.9
$ 1.0 $ 1.0 $ 1.0 $ 3.8 $ 3.5 $ 3.0 $0.2 $0.3 $0.3 $0.3 $0.4 $0.2 $ 4.3 $ 4.2 $ 3.5
$ 0.3 $ 0.3 $ 0.3 $ 0.5 $ 0.5 $ 0.4 $ - $ - $ - $0.5 $0.5 $0.8 $ 1.0 $ 1.0 $ 1.2
- --------------------------------------------------------------------------------------------------------------------------------
$ 115 $ 118 $ 121 $ 970 $ 859 $ 721 $139 $ 92 $ 54 $ (2) $ 30 $ 78 $1,081 $ 981 $ 853
- --------------------------------------------------------------------------------------------------------------------------------
12% 12% 12% 23% 22% 22% NM NM NM NM NM NM 22% 21% 22%
1.25% 1.15% 1.18% 1.89% 1.78% 1.74% NM NM NM NM NM NM 1.96% 1.81% 1.80%
33% 36% 36% 34% 33% 33% NM NM NM NM NM NM 34%(e) 31% 31%
38% 40% 41% 38% 38% 37% NM NM NM NM NM NM 39%(e) 36% 35%
58% 60% 59% 61% 62% 62% NM NM NM NM NM NM 61%(e) 63% 62%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
are the same as those described in note 1 of the Notes to Financial Statements.
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 near the end of May
2000; the gain on the sale of the seven Mellon Bank (MD) N.A. retail offices;
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
9
<PAGE> 16
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
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 and the
assets under management, administration and custody are period-end market values
and are presented in billions.
Total Core Sectors
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Growth rates
---------------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $4,139 $3,719 $3,153 11% 18%
Total operating expense $2,699 $2,464 $2,092 10% 18%
Income before taxes $1,402 $1,233 $1,051 14% 17%
Return on common equity 23% 22% 22%
Pretax operating margin (a) 38% 38% 37%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Income before taxes for the Corporation's core sectors was $1.402 billion in
1999, an increase of $169 million, or 14%, compared with 1998. This increase
resulted from positive operating leverage as revenues increased $420 million, or
11%, while operating expense increased $235 million, or 10%, and credit quality
expense increased $16 million. The increase in total revenue was primarily due
to higher fee revenue resulting from business growth as well as the full-year
impact of both the April 1998 Founders and October 1998 Newton acquisitions in
1999. Total operating expense increased primarily due to business growth as well
as acquisitions.
Wealth Management
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Growth rates
---------------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $433 $370 $285 17% 30%
Total operating expense $255 $226 $176 13% 29%
Income before taxes $179 $143 $108 24% 32%
Return on common equity 42% 36% 45%
Pretax operating margin (a) 45% 43% 39%
Assets under management $ 56 $ 49 $ 39 15% 25%
Assets under administration or custody $ 37 $ 38 $ 32 (1)% 16%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes amortization of intangibles and trust-preferred securities
expense.
Wealth Management includes private asset management services, private banking
and origination of jumbo residential mortgages. Income before taxes for the
Wealth Management sector was $179 million in 1999, up $36 million, or 24%, from
1998. Revenue increased $63 million, or 17%, due to higher private asset
management fee revenue. Assets under management increased to $56 billion at Dec.
31, 1999, up 15%, from $49 billion at Dec. 31, 1998, reflecting a higher level
of private assets under management, due to net new business and market
appreciation. Operating expense increased $29 million, or 13%, reflecting
investments in staff and information systems to support business growth.
10
<PAGE> 17
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Global Investment Management
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Growth rates
---------------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $998 $774 $602 29% 29%
Total operating expense $659 $502 $380 31% 32%
Income before taxes $339 $272 $222 24% 22%
Return on common equity 38% 37% 40%
Pretax operating margin (a) 37% 38% 38%
Assets under management $399 $345 $271 16% 27%
- -----------------------------------------------------------------------------------------------------------------------------
</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 $339 million in 1999, compared with $272
million in 1998, an increase of $67 million, or 24%. Revenue increased $224
million, or 29%, primarily due to higher mutual fund and institutional asset
management fees due to the full-year impact of the Newton and Founders
acquisitions and a higher level of managed assets. In addition, brokerage fees
increased by $18 million. Assets under management increased to $399 billion at
Dec. 31, 1999, up 16%, from $345 billion at Dec. 31, 1998, due to net new
business and market appreciation. Total operating expense increased $157
million, or 31% due to acquisitions and the amortization of the related
goodwill, and investments to support business growth. Excluding the impact of
the Newton and Founders acquisitions, revenue increased 13% and total operating
expense increased 7%, resulting in a 22% increase in income before taxes.
Global Investment Services
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Growth rates
---------------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $ 977 $ 901 $ 674 8% 34%
Total operating expense $ 751 $ 709 $ 542 6% 31%
Income before taxes $ 226 $ 192 $ 132 18% 45%
Return on common equity 23% 24% 20%
Pretax operating margin (a) 24% 23% 21%
Assets under management $ 33 $ 31 $ 28 5% 13%
Assets under administration or custody $2,161 $1,865 $1,500 16% 24%
- -----------------------------------------------------------------------------------------------------------------------------
</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. This sector also includes the Corporation's joint
ventures, whose results are reported under the equity method of accounting.
Income before taxes for the Global Investment Services sector totaled $226
million in 1999, compared with $192 million in 1998, an increase of $34 million,
or 18%. The increase was attributable to a $76 million, or 8%, increase in total
revenue resulting, in part, from higher institutional trust and mutual fund
administration or custody fees, increased benefits consulting and administration
fees, and higher foreign exchange fees. Partially offsetting this increase was a
$42 million, or 6% increase in total operating expenses. Assets under
administration or custody exceeded $2.1 trillion at Dec. 31, 1999, an increase
of 16% from Dec. 31, 1998.
11
<PAGE> 18
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
Regional Consumer Banking
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Growth rates
---------------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $653 $673 $656 (3)% 3%
Total operating expense $440 $449 $449 (2)% -%
Income before taxes $210 $215 $202 (2)% 6%
Return on common equity 19% 21% 20%
Pretax operating margin (a) 41% 40% 39%
- -----------------------------------------------------------------------------------------------------------------------------
(a) Excludes amortization of intangibles and trust-preferred securities expense.
</TABLE>
Regional Consumer Banking includes consumer lending and deposit products, direct
banking and sales of insurance products. Income before taxes for this sector
totaled $210 million in 1999, a decrease of $5 million, or 2%, compared with
1998. Total revenue decreased $20 million, or 3%, compared with 1998, primarily
due to lower net interest revenue while total operating expense decreased $9
million, or 2%, compared with 1998 reflecting productivity improvements. In
addition, credit quality expense decreased $6 million in 1999.
Specialized Commercial Banking
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Growth rates
---------------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $541 $486 $422 11% 15%
Total operating expense $259 $246 $218 6% 12%
Income before taxes $269 $227 $200 18% 14%
Return on common equity 23% 21% 24%
Pretax operating margin (a) 57% 55% 54%
- -----------------------------------------------------------------------------------------------------------------------------
(a) Excludes amortization of intangibles and trust-preferred securities expense.
</TABLE>
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 $269 million in 1999, an increase of $42 million, or 18%, compared with
1998. Total revenue increased $55 million, or 11%, due to higher net interest
revenue resulting from loan growth and higher gains on equity securities.
Operating expense increased $13 million, or 6%, from 1998 to support business
growth.
12
<PAGE> 19
BUSINESS SECTORS (CONTINUED)
- -------------------------------------------------------------------------------
Large Corporate Banking
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Growth rates
---------------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $537 $515 $514 4% -%
Total operating expense $335 $332 $327 1% 1%
Income before taxes $179 $184 $187 (2)% (2)%
Return on common equity 12% 12% 12%
Pretax operating margin (a) 38% 40% 41%
- -----------------------------------------------------------------------------------------------------------------------------
(a) Excludes amortization of intangibles and trust-preferred securities expense.
</TABLE>
Large Corporate Banking includes cash management, large corporate and
mid-corporate relationship banking, corporate finance and derivative products,
securities underwriting and trading and international banking. Income before
taxes was $179 million in 1999, a decrease of $5 million, or 2%, from 1998.
Revenue growth of $22 million, or 4%, was offset by a $24 million increase in
credit quality expense and operating expense growth of only 1%. The revenue
growth was primarily driven by higher cash management revenue, and the favorable
expense trend 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 seven Mellon Bank (MD) N.A. retail offices; and, 1998 and 1997
results include merchant card processing, including the $35 million gain on the
sale of this business in 1998, 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 near
the end of May 2000. Divestitures' income before taxes was $217 million in 1999
and $136 million in 1998. Fee revenue for 1999 includes a $127 million pre-tax
net gain from divestitures, as further discussed in "Significant financial
events" on page 4.
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 pre-tax loss for 1999 was $18 million, compared with income of
$1 million in 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. Credit quality revenue
for 1999 and 1998 primarily includes gains on the sale of OREO. Operating
expense includes trust-preferred securities expense and various nonrecurring
charges for items not attributable to the operations of a business sector. Other
operating expense for 1999 includes $56 million of nonrecurring expenses related
to a $30 million charitable contribution to the Mellon Financial Corporation
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.
13
<PAGE> 20
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
1998 compared to 1997
Income before taxes for the Corporation's core sectors was $1.233 billion in
1998, an increase of $182 million, or 17%, compared with $1.051 billion in 1997.
This increase resulted from a $566 million, or 18%, increase in total revenue
partially offset by a $372 million, or 18%, increase in total operating expense.
Both increases were primarily due to internal growth and acquisitions. Return on
common shareholders' equity for the core sectors was 22% in both 1998 and 1997.
Income before taxes for Divestitures was $136 million in 1998 compared with $69
million in 1997. This increase was primarily due to a $108 million decrease in
credit quality expense resulting from lower credit card net credit losses.
Partially offsetting this improvement was a $45 million increase in total
operating expense due in large part to higher amortization of mortgage servicing
assets due to a higher level of mortgage prepayments in 1998. Revenue in 1998
included the $35 million gain on the sale of the merchant card processing
business. Revenue in 1997 included the $43 million gain on the sale of the
corporate trust business.
Real Estate Workout/Other Activity pre-tax income was $1 million for 1998 and
$72 million for 1997. Revenue for both 1998 and 1997 primarily reflects earnings
on the use of proceeds from trust-preferred securities and earnings on capital
above that required for core sectors. Credit quality revenue for 1998 and 1997
primarily includes gains on the sale of OREO, which was lower in 1998. Credit
quality revenue for 1997 also included $5 million of loan recoveries from loans
to lesser developed countries (LDCs). Operating expense for 1998 and 1997
includes trust-preferred securities expense and various nonrecurring charges for
items not attributable to the operation of a business sector. Average assets
primarily include assets of certain support areas not allocated to the major
business sectors. Average common and Tier I preferred equity represents capital
in excess of that required for the core sectors.
Geographic Information
Revenue from foreign domiciled customers was approximately 8% of total revenue
in 1999, less than 7% of total revenue in 1998, and less than 6% of total
revenue in 1997.
14
<PAGE> 21
CASH OPERATING RESULTS
- --------------------------------------------------------------------------------
Except for the merger with Dreyfus in 1994, which was accounted for under the
"pooling of interests" method, the Corporation has been required to account for
business combinations under the "purchase" method of accounting. The purchase
method results in the recording of goodwill and other identified intangibles
that are amortized as noncash charges in future years into operating expense.
The pooling of interests method does not result in the recording of goodwill or
intangibles. Since goodwill and intangible amortization expense does not result
in a cash expense, the economic value to shareholders under either accounting
method is the same assuming a given financing mix. Operating results, excluding
the impact of intangibles, are shown in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(dollar amounts in millions, except per share amounts) 1999 (a) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating net income applicable to common stock $ 948 $ 861 $ 750
After-tax impact of amortization
of intangibles from purchase acquisitions 118 111 82
- ---------------------------------------------------------------------------------------------------------------
Cash operating net income applicable to common stock $ 1,066 $ 972 $ 832
Increase over prior year 10% 17% 9%
Cash operating earnings per common share - diluted $ 2.04 $ 1.83 $ 1.60
Increase over prior year 11% 15% 11%
Average common equity $ 4,309 $ 4,165 $ 3,494
Less: Average goodwill and other identified intangibles,
net of tax benefit (b) (1,870) (1,804) (1,051)
Plus: Average minority interest (c) 64 21 --
- ---------------------------------------------------------------------------------------------------------------
Average tangible common equity $ 2,503 $ 2,382 $ 2,443
Cash return on tangible common equity 42.6% 40.8% 34.0%
Average total assets $49,184 $48,071 $42,942
Average total tangible assets (b) $47,314 $46,267 $41,891
Cash return on tangible assets 2.25% 2.12% 2.03%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Cash operating results for 1999 exclude a $77 million after-tax net gain
from divestitures, $36 million after-tax of nonrecurring expenses and a $26
million after-tax charge for the cumulative effect of a change in
accounting principle.
(b) The amount of goodwill and other identified intangibles subtracted from
common equity and total assets is net of $363 million, $274 million and
$224 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 average minority interest in the
calculation of average tangible common equity. Minority interest at Dec.
31, 1999, and Dec. 31, 1998, totaled $67 million and $60 million,
respectively.
15
<PAGE> 22
<TABLE>
<CAPTION>
NONINTEREST REVENUE
- -----------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust and investment fee revenue:
Investment management $1,165 $ 915 $ 727
Administration and custody 567 540 476
Benefits consulting 250 223 108
Brokerage fees 62 44 12
- -----------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 2,044 1,722 1,323
Cash management and deposit transaction charges 274 262 242
Foreign currency and securities trading revenue 173 165 118
Mortgage servicing fees 153 200 213
Credit card fees 18 92 97
Other 438 480 425
- -----------------------------------------------------------------------------------------------------------------
Total fee revenue $3,100 $2,921 $2,418
Net gain from divestitures 127 - -
Gains on the sales of securities - 1 -
- -----------------------------------------------------------------------------------------------------------------
Total noninterest revenue $3,227 $2,922 $2,418
- -----------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of net interest and fee
revenue (FTE) 69% 66% 62%
Trust and investment fee revenue as a percentage of net
interest and fee revenue (FTE) 45% 39% 34%
- -----------------------------------------------------------------------------------------------------------------
Memo:
Gross joint venture fee revenue (a) $ 431 $ 256 $ 152
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation accounts for its interest in joint ventures under the
equity method of accounting with the net results primarily recorded either
as other fee revenue or trust and investment fee revenue. The gross joint
venture fee revenue is not included in total noninterest revenue above.
Total fee revenue
Fee revenue totaled $3.100 billion in 1999, up $179 million compared with $2.921
billion in 1998. The comparison to 1998 was impacted by the 1999 credit card,
network services and mortgage banking divestitures, the 1998 sale of merchant
card processing, the 1998 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 1998, primarily due to a 15% increase in trust and investment
fees. Including the trust and investment fee gross revenue generated by the
Corporation's joint ventures, trust and investment fee revenue increased 20%
compared with 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1999 1998 1997
over over over
Fee revenue growth 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust and investment fee revenue growth (a) 15% 13% 16%
Total fee revenue growth (a) 12% (b) 12% 13%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding the effect of acquisitions and divestitures.
(b) Also excludes fees in 1998 from the discontinued service of electronic
filing of income tax returns.
16
<PAGE> 23
<TABLE>
<CAPTION>
NONINTEREST REVENUE (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
Investment management fee revenue
- -----------------------------------------------------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed mutual fund fees(a):
Equity funds $ 268 $180 $111
Taxable money market funds:
Institutional 103 83 68
Individuals 38 35 35
Tax-exempt bond funds 89 95 96
Fixed-income funds 47 39 24
Tax-exempt money market funds 29 29 28
Nonproprietary 28 17 12
- -----------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund fees 602 478 374
Private asset 292 225 182
Institutional asset 271 212 171
- -----------------------------------------------------------------------------------------------------------------------------
Total investment management fee revenue $1,165 $915 $727
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of mutual fund fees waived and fund expense reimbursements of $33
million, $40 million and $39 million for 1999, 1998 and 1997, respectively.
Investment management revenue increased $250 million, or 27%, in 1999, compared
with 1998. Excluding the impact of acquisitions, investment management revenue
increased $144 million, or 17%, in 1999, compared with 1998. This increase
resulted from a $77 million, or 18%, increase in mutual fund management revenue,
a $42 million, or 19%, increase in private asset management revenue and a $25
million, or 12%, increase in institutional asset management revenue. These
increases primarily resulted from net new business, as well as 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 in 1999 were $126 billion,
up $18 billion, or 17%, from $108 billion in 1998. This increase primarily
resulted from increases in average net assets of equity funds and institutional
taxable money market funds. Proprietary equity funds averaged $46 billion in
1999, compared with $31 billion in 1998.
As shown in the table on the following page, the market value of assets under
management was $488 billion at Dec. 31, 1999, a $63 billion, or 15%, increase
from $425 billion at Dec. 31, 1998. In addition to net new business, the market
value of assets under management were influenced by a favorable equity market in
1999. A key equity market benchmark, the Standard and Poor's 500 Index,
increased 19.5% in 1999. However, the bond market, as measured by the Lehman
Brothers Long-Term Government Bond Index, decreased 8.8%. At Dec. 31, 1999, the
market values of these assets managed by the Corporation were comprised as
follows: approximately 50% equities; approximately 25% fixed income;
approximately 15% money market; approximately 5% securities lending cash
collateral; and approximately 5% currency overlay and global fixed-income
products.
17
<PAGE> 24
NONINTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT AT YEAR END
(in billions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mutual fund assets managed:
Equity funds $ 54 $ 40 $ 22
Taxable money market funds:
Institutional 42 40 33
Individuals 9 9 9
Tax-exempt bond funds 14 16 17
Fixed-income funds 7 7 5
Tax-exempt money market funds 8 8 7
Nonproprietary 30 21 11
- ---------------------------------------------------------------------------------------------------------
Total mutual fund assets managed 164 141 104
Private assets 55 47 36
Institutional assets (a)(b) 269 237 198
- ---------------------------------------------------------------------------------------------------------
Total market value of assets under management $488 $425 $338
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes assets managed at Pareto Partners of $32 billion at Dec. 31, 1999;
$24 billion at Dec. 31, 1998; and $21 billion at Dec. 31, 1997. The
Corporation has a 30% equity interest in Pareto Partners.
(b) Beginning in 1999, securities lending cash collateral is included in
institutional assets managed. Prior years have been restated.
At Dec. 31, 1999, the combined market values of $30 billion of nonproprietary
mutual funds and $269 billion of institutional assets managed, by asset type,
were as follows: equities, $115 billion; balanced, $43 billion; fixed income,
$62 billion; money market, $47 billion; and $32 billion at Pareto Partners,
primarily in currency overlay and global fixed-income products, for a total of
$299 billion.
Administration and custody fee revenue
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional trust $396 $388 $327
Mutual fund 152 133 133
Private asset 19 19 16
- ---------------------------------------------------------------------------------------------------------------
Total administration and custody revenue $567 $540 $476
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Administration and custody fee revenue increased $27 million, or 5%, in 1999,
compared with 1998. This increase primarily resulted from an 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 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 on the following page 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 $91 million,
or 21%, compared with 1998.
18
<PAGE> 25
NONINTEREST REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL TRUST AND CUSTODY FEE REVENUE
(in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total institutional trust and custody fee
revenue - as reported $396 $388 $327
Adjustment to reflect joint venture revenue 125 42 19
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted institutional trust and custody fee revenue $521 $430 $346
- ----------------------------------------------------------------------------------------------------------------------------
</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 near the end of May 2000. Fees and earnings per common share from
this contract totaled approximately $87 million pre-tax, or approximately $.11
per common share, in 1999. Fees and earnings per common share from this contract
are expected to total approximately $34 million pre-tax, or approximately $.045
per common share, through May 2000, when the contract expires.
The market value of assets under administration or custody, shown in the table
below, was $2,198 billion at Dec. 31, 1999, an increase of $295 billion, or 16%,
compared with $1,903 billion at Dec. 31, 1998. This increase resulted from a
general market increase and net new business.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION OR CUSTODY AT YEAR END
(in billions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional trust (a) $2,074 $1,803 $1,440
Mutual fund 87 62 60
Private asset 37 38 32
- ----------------------------------------------------------------------------------------------------------------------------
Total market value of assets under administration or custody $2,198 $1,903 $1,532
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $324 billion of assets at Dec. 31, 1999, $244 billion of assets at
Dec. 31, 1998, and $246 billion of assets at Dec. 31, 1997, administered by
CIBC Mellon Global Securities Services, a joint venture.
Benefits consulting
Benefits consulting fees generated by Buck Consultants, Inc. increased $27
million, or 12%, in 1999, compared with 1998, resulting from expansion of
services to existing clients, cross-selling initiatives and net new business.
Brokerage fees
The $18 million, or 41%, increase in brokerage fees in 1999 compared with 1998
primarily resulted from higher trading volumes in the active equities market in
1999. Dreyfus Brokerage Services, Inc. averaged approximately 10,000 trades per
day in 1999, compared with approximately 6,700 trades per day in 1998.
Cash management and deposit transaction charges
The Corporation is a major national provider of a number of cash management
services, including remittance processing, collections and disbursements, check
processing and electronic services to assist corporate clients in the management
of their accounts receivable, accounts payable and treasury management
functions. The $12 million, or 5%, increase in cash management and deposit
transaction charges in 1999, compared with 1998, primarily resulted from higher
volumes of business, particularly in electronic services. This increase was
partially offset by customers holding higher compensating balances on deposits,
which is recognized in net interest revenue, in lieu of paying fees.
19
<PAGE> 26
NONINTEREST REVENUE (CONTINUED)
- -------------------------------------------------------------------------------
Foreign currency and securities trading revenue
The $8 million, or 5%, increase in foreign currency and securities trading
revenue in 1999, compared with 1998, was primarily related to an increase in
foreign exchange customers and favorable market conditions.
Mortgage servicing fees
Mortgage servicing fees totaled $153 million in 1999, a decrease of $47 million,
or 24%, compared with 1998. This decrease resulted from the divestitures of the
residential and commercial mortgage servicing businesses that were completed by
Sept. 30, 1999.
Credit card fees
Credit card fees were $18 million in 1999 compared with $92 million in 1998. The
decrease resulted from the March 1999 divestiture of the credit card business.
Other fee revenue
Other fee revenue was $438 million in 1999, a decrease of $42 million compared
with 1998. This decrease primarily related to the inclusion in 1998 of a $35
million gain on the sale of the merchant card processing business, the June 1999
divestiture of the network services transaction processing unit and the
elimination of the fees from the electronic filing of income tax returns, a
service that was discontinued at the end of 1998. The network services
transaction processing unit generated approximately $30 million of fee revenue
in 1999 compared with $46 million in 1998. The electronic filing of income tax
returns service generated approximately $25 million of fee revenue in 1998.
These decreases were partially offset by higher revenue from equity investments,
as well as other factors, none of which was individually significant.
Net gain from divestitures
In 1999, the Corporation recorded a $127 million pre-tax net gain from the
divestitures. For further analysis of the net gain from divestitures, see the
"Divestitures" disclosure in the "Significant financial events" section on page
4.
1998 compared with 1997
Fee revenue increased to $2.921 billion in 1998, up $503 million from $2.418
billion in 1997. Excluding the impact from acquisitions and one-time gains from
the sales of the merchant card processing business in 1998 and the corporate
trust business in 1997, total fee revenue increased 12% in 1998 compared with
1997. This increase was primarily attributable to higher trust and investment
fees, foreign exchange revenue and other fee revenue.
20
<PAGE> 27
NET INTEREST REVENUE
- --------------------------------------------------------------------------------
Net interest revenue includes the interest spread on interest-earning assets,
loan fees, cash receipts and interest reversals on nonperforming loans, and
revenue or expense on off-balance-sheet instruments used for interest rate risk
management purposes. Net interest revenue, on a fully taxable equivalent basis,
totaled $1.439 billion in 1999, down $60 million from $1.499 billion in the
prior year. The net interest margin was 3.70% in 1999, down 26 basis points
compared with 3.96% in 1998.
The decrease in net interest revenue in 1999, compared with the prior year,
principally resulted from the divestitures of the credit card and mortgage
businesses. Credit card loans totaled approximately $800 million at year-end
1998, while the residential mortgage warehouse portfolio totaled approximately
$1.6 billion at year-end 1998. Excluding the impact of net interest revenue
generated by these businesses, net interest revenue increased 1% compared with
1998. This increase reflected a higher level of interest-earning assets and a
higher level of compensating deposit balances held in lieu of customers paying
cash management fees partially offset by higher funding costs related to the
repurchase of $1.068 billion of common stock. The decrease in the net interest
margin in 1999 was due, in part, to a lower-yielding loan portfolio following
the divestiture of the higher-yielding credit card business.
1998 compared with 1997
Net interest revenue on a fully taxable equivalent basis totaled $1.499 billion
in 1998, an increase of $24 million from $1.475 billion in 1997, while the net
interest margin decreased by 28 basis points to 3.96% in 1998. The increase in
net interest revenue in 1998, compared with the prior year, principally resulted
from the favorable impacts of the acquisitions of Mellon United National Bank,
Mellon 1st Business Bank and Dreyfus Brokerage Services, net of funding costs,
as well as a higher level of interest-earning assets. Partially offsetting these
factors were the effects of the December 1997 transfer of $231 million of
CornerStone(sm) credit card loans into an accelerated resolution portfolio and
the February 1998 Series K preferred stock redemption. The decrease in the net
interest margin primarily resulted from a higher level of lower-yielding assets,
the transfer of higher-yielding CornerStone(sm) credit card loans into an
accelerated resolution portfolio and the Series K preferred stock redemption.
21
<PAGE> 28
NET INTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- ------------------------------------------------------------------------------------------------------------------------------
1999
AVERAGE
AVERAGE YIELDS/
(dollar amounts in millions) BALANCE INTEREST RATES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Interest-earning assets:
Interest-bearing deposits with banks $ 803 $ 39 4.81%
Federal funds sold and securities under resale
agreements 754 41 5.39
Other money market investments 61 3 4.47
Trading account securities 370 19 5.29
Securities (a):
U.S. Treasury and agency securities 6,361 408 6.41
Obligations of states and political subdivisions 117 7 6.24
Other 90 7 7.75
Loans, net of unearned discount (a) 30,319 2,244 7.40
------- ------
Total interest-earning assets 38,875 $2,768 7.12
Cash and due from banks 3,051
Premises and equipment 561
Customers' acceptance liability 123
Net acquired property 26
Other assets (a) 7,034
Reserve for credit losses (434)
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $49,236
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES, Interest-bearing liabilities:
TRUST-PREFERRED Deposits in domestic offices:
SECURITIES AND Demand $ 428 $ 12 2.92%
SHAREHOLDERS' Money market and other savings accounts 12,471 357 2.86
EQUITY Retail savings certificates 6,690 305 4.56
Other time deposits 1,263 64 5.10
Deposits in foreign offices 3,052 133 4.35
------- ------
Total interest-bearing deposits 23,904 871 3.64
Federal funds purchased and securities under
repurchase agreements 2,121 102 4.79
Short-term bank notes 815 44 5.34
U.S. Treasury tax and loan demand notes 511 24 4.74
Term federal funds purchased 427 22 5.24
Commercial paper 128 7 5.39
Other funds borrowed 422 34 7.97
Notes and debentures (with original maturities over one
year) 3,424 225 6.59
------- ------
Total interest-bearing liabilities 31,752 $1,329 4.19
Total noninterest-bearing deposits 9,454
Acceptances outstanding 123
Other liabilities (a) 2,573
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 43,902
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 4,343
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $49,236
- ------------------------------------------------------------------------------------------------------------------------------
RATES Yield on total interest-earning assets 7.12%
Cost of funds supporting interest-earning assets 3.42
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin:
Taxable equivalent basis $1,439 3.70%
Without taxable equivalent increments 1,430 3.68
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts and yields exclude adjustments to fair value required
by FAS No. 115.
Note: Interest and average yields/rates were calculated on a
taxable equivalent basis, at tax rates approximating 35%, using
dollar amounts in thousands and actual number of days in the
years, 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
yields/rates.
22
<PAGE> 29
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
Average Average Average Average
Average yields/ Average yields/ Average yields/ Average yields/
balance Interest rates balance Interest rates balance Interest rates balance Interest rates
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 649 $ 33 5.19% $ 518 $ 26 5.06% $ 678 $ 36 5.31% $ 567 $ 36 6.27%
786 49 6.22 560 30 5.29 561 30 5.41 598 34 5.64
109 6 5.35 108 6 5.41 142 7 5.00 57 3 5.02
251 16 6.24 175 9 5.54 146 8 5.46 296 19 6.59
5,473 365 6.67 5,440 367 6.75 5,999 392 6.54 4,671 305 6.52
54 4 7.31 38 3 7.77 39 3 8.53 64 5 7.73
120 8 6.89 108 8 6.87 153 12 7.67 203 14 7.09
30,399 2,419 7.96 27,816 2,275 8.18 27,250 2,261 8.30 27,360 2,432 8.89
------- ------ ------- ------ ------- ------ ------- ------
37,841 $2,900 7.67 34,763 $2,724 7.83 34,968 $2,749 7.86 33,816 $2,848 8.44
3,195 2,844 2,782 2,337
565 587 560 555
120 271 252 229
54 68 73 80
6,724 4,905 3,865 3,703
(498) (512) (472) (591)
- ------------------------------------------------------------------------------------------------------------------------------
$48,001 $42,926 $42,028 $40,129
- ------------------------------------------------------------------------------------------------------------------------------
$ 344 $ 7 1.95% $ 232 $ 4 1.90% $ 830 $ 15 1.80% $ 1,916 $ 37 1.94%
11,149 324 2.91 10,046 286 2.84 9,935 280 2.82 8,736 277 3.16
7,587 376 4.96 7,166 358 5.00 6,529 318 4.88 6,683 337 5.05
2,109 117 5.56 1,787 101 5.65 1,766 96 5.42 263 12 4.70
2,760 136 4.93 2,641 129 4.88 3,766 194 5.14 3,898 226 5.79
------- ------ ------- ------ ------- ------ ------- ------
23,949 960 4.01 21,872 878 4.02 22,826 903 3.95 21,496 889 4.13
2,207 123 5.56 1,390 77 5.51 1,765 94 5.32 2,128 125 5.87
295 16 5.64 144 8 5.83 502 29 5.84 815 50 6.20
604 31 5.15 468 25 5.33 286 15 5.17 400 23 5.69
365 21 5.69 599 34 5.71 675 38 5.58 644 39 5.98
234 13 5.44 69 4 5.41 217 12 5.42 226 13 5.87
363 33 9.08 423 34 8.09 279 27 9.89 395 34 8.68
2,992 204 6.84 2,712 189 6.97 2,038 143 7.04 1,670 117 7.04
------- ------ ------- ------ ------- ------ ------- ------
31,009 $1,401 4.52 27,677 $1,249 4.51 28,588 $1,261 4.41 27,774 $1,290 4.65
9,597 8,587 8,012 6,455
120 271 252 229
2,139 1,711 1,319 1,533
- ------------------------------------------------------------------------------------------------------------------------------
42,865 38,246 38,171 35,991
991 990 32 -
- ------------------------------------------------------------------------------------------------------------------------------
4,145 3,690 3,825 4,138
- ------------------------------------------------------------------------------------------------------------------------------
$48,001 $42,926 $42,028 $40,129
- ------------------------------------------------------------------------------------------------------------------------------
7.67% 7.83% 7.86% 8.44%
3.71 3.59 3.60 3.82
- ------------------------------------------------------------------------------------------------------------------------------
$1,499 3.96% $1,475 4.24% $1,488 4.26% $1,558 4.62%
1,491 3.94 1,467 4.22 1,478 4.23 1,548 4.58
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 30
OPERATING EXPENSE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Staff expense $ 1,559 $ 1,456 $ 1,242
Professional, legal and other purchased services 280 297 219
Net occupancy expense 243 237 225
Equipment expense 186 181 175
Business development 161 149 148
Amortization of goodwill and other intangible assets 148 137 105
Amortization of mortgage servicing assets and purchased
credit card relationships 113 179 118
Communications expense 112 107 102
Other expense 182 197 175
- ---------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-preferred securities
expense and net revenue from acquired property 2,984 2,940 2,509
Trust-preferred securities expense 79 79 78
Net revenue from acquired property (14) (6) (19)
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expense $ 3,049 $ 3,013 $ 2,568
- ---------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 28,000 (a) 28,300 26,400
- ---------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (b) 64% 66% 64%
Efficiency ratio excluding amortization of goodwill
and other intangible assets 61 63 62
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Full-time equivalent staff averaged 25,800 in the fourth quarter of 1999.
(b) Operating expense before trust-preferred securities expense, net revenue
from acquired property and second quarter 1999 nonrecurring expenses, as a
percentage of revenue, computed on a taxable equivalent basis, excluding
the net gain on divestitures and gains on the sales of securities.
Operating expense before trust-preferred securities expense and net revenue from
acquired property totaled $2.984 billion in 1999, an increase of $44 million
compared with $2.940 billion in 1998. Expenses for 1999 were impacted by the
1999 credit card, network services and mortgage banking divestitures, $56
million of nonrecurring expenses recorded in the second quarter of 1999, the
1998 sale of the merchant card processing business and the full-year effect of
the 1998 Newton and Founders acquisitions. The nonrecurring expenses in the
second quarter of 1999 included a $30 million charitable contribution to the
Mellon Financial Corporation Foundation. This expense was classified as business
development expense in the table above. In addition, the Corporation recorded
$26 million of expenses in connection with replacing obsolete computer equipment
and closing facilities as part of Mellon's Third Century initiatives, a
strategic planning process designed to drive long-term growth while continuing
to produce high returns on capital. The Third Century expenses were recorded as
$21 million of equipment expense and $5 million of net occupancy expense.
Excluding the effect of divestitures and acquisitions and the nonrecurring
expenses, operating expense before trust-preferred securities expense and net
revenue from acquired property increased 3% in 1999 compared with 1998,
primarily due to higher staff expense. The increase in staff expense resulted,
in part, from higher incentive expense in business lines with strong revenue
growth.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1999 1998 1997
over over over
Operating expense growth 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expense growth (a) 3% 3% (b) 7%
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before trust-preferred securities expense and net revenue
from acquired property excluding the effect of acquisitions and
divestitures and excluding second quarter 1999 nonrecurring expenses.
(b) Also excludes the increase in the amortization of mortgage servicing assets
and purchased credit card relationships.
24
<PAGE> 31
OPERATING EXPENSE (CONTINUED)
- -------------------------------------------------------------------------------
1998 compared with 1997
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $2.940 billion in 1998, an increase of $431 million
compared with 1997. The increase primarily resulted from acquisitions, including
a full-year impact of the 1997 Buck and Dreyfus Brokerage Services acquisitions,
higher amortization of mortgage servicing assets, higher consulting expense and
business growth. Excluding the effect of acquisitions and the increase in the
amortization of mortgage servicing assets and purchased credit card
relationships, operating expense before trust-preferred securities expense and
net revenue from acquired property increased approximately 3%.
Year 2000 Project
In early 1996, the Corporation formed a year 2000 project team to identify
information technology and non-information technology systems that required
modification for the year 2000. A project plan (that included inventory,
assessment, remediation, system testing, enterprise testing, contingency
planning and internal certification) was developed and implemented. The
Corporation experienced no significant disruptions as a result of the year end
date change. The Corporation intends to monitor other critical dates in the
future, including Leap Year Day (Feb. 29, 2000).
The Corporation incurred expenses throughout 1996, 1997, 1998 and 1999 related
to the year 2000 project. The costs related to inventory, assessment,
remediation, system testing, enterprise testing, contingency planning and
internal certification were approximately $95 million. Approximately 65% of
these costs were incurred prior to 1999, and approximately 35% were incurred in
1999. Expenditures in 1999 related primarily to enterprise testing, contingency
planning and internal certification. A significant portion of total year 2000
project expenses was represented by existing staff that was redeployed to this
project. Incremental expenses related to the year 2000 project did not
materially impact operating results in any one period.
The impact of year 2000 issues on the Corporation will continue to depend not
only on corrective actions the Corporation has taken and takes, but also on the
way in which year 2000 issues have been and continue to be addressed by
governmental agencies, businesses and other third parties that provide services
or data to, or receive services or data from the Corporation, that borrow from
the Corporation, that issue assets managed by the Corporation as a fiduciary or
whose financial condition or operational capability is otherwise important to
the Corporation. Although to date the Corporation has not been adversely
impacted to any significant extent by any failure of third parties to adequately
address year 2000 issues, there can be no assurance that third parties will
continue to adequately address all of their year 2000 issues.
The Corporation has developed contingency plans to address risks associated with
year 2000 issues that may arise. There can be no assurance that any such
contingency plans will fully mitigate any year 2000 failures, problems or
disruptions, should any arise.
The foregoing year 2000 discussion constitutes a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
25
<PAGE> 32
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes totaled $574 million in 1999, compared with $470
million in 1998 and $398 million in 1997. The Corporation's effective tax rate
for 1999 was 36.7%, compared with 35.1% for 1998 and 34.1% for 1997. The
effective tax rate, excluding the effect of the net gain from divestitures and
nonrecurring expenses, was 36.5% in 1999. It is currently anticipated that the
effective tax rate will be approximately the same in 2000.
<TABLE>
<CAPTION>
CAPITAL
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED CAPITAL DATA AT YEAR END
(dollar amounts in millions, except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shareholders' equity $ 4,016 $ 4,521 $ 3,652
Common shareholders' equity to assets ratio 8.38% 8.90% 8.13%
Tangible common shareholders' equity (a) $ 2,288 $ 2,641 $ 2,436
Tangible common shareholders' equity to assets ratio (b) 4.96% 5.41% 5.58%
Total shareholders' equity $ 4,016 $ 4,521 $ 3,845
Total shareholders' equity to assets ratio 8.38% 8.90% 8.56%
Tier I capital ratio 6.60% 6.53% 7.77%
Total (Tier I plus Tier II) capital ratio 10.76% 10.80% 12.73%
Leverage capital ratio 6.72% 6.73% 8.02%
Book value per common share $ 8.02 $ 8.63 $ 7.20
Tangible book value per common share $ 4.57 $ 5.04 $ 4.80
Closing common stock price $ 34.06 $ 34.38 $ 30.32
Market capitalization $ 17,052 $ 18,007 $ 15,386
Common shares outstanding (000) 500,623 523,846 507,572
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $67 million and $60 million of minority interest at Dec. 31, 1999
and Dec. 31, 1998, respectively, primarily related to Newton. In addition,
includes $345 million, $373 million and $209 million, respectively, of tax
benefits related to tax deductible goodwill and other intangibles.
(b) Common shareholders' equity plus minority interest and less goodwill and
other intangibles recorded in connection with purchase acquisitions divided
by total assets less goodwill and other intangibles recorded in connection
with purchase acquisitions. The amount of goodwill and other intangibles
subtracted from common shareholders' equity and total assets is net of any
tax benefit.
The Corporation's capital management objectives are to maintain a strong capital
base--in excess of all regulatory guidelines--while also maximizing shareholder
value. The decrease in shareholders' equity at Dec. 31, 1999, compared with Dec.
31, 1998, primarily reflects the impact of common stock repurchases partially
offset by earnings retention, including the net gain on divestitures. The
Corporation's capital ratios at Dec. 31, 1999, were favorably impacted by the
reduction in assets following the credit card and mortgage banking divestitures.
However, the Corporation estimates that the balance sheet at year-end 1999
included approximately $1 billion of customer-driven liquidity in excess of
typical levels. This excess liquidity negatively impacted the common
shareholders' equity to assets ratio at Dec. 31, 1999, by approximately 15 basis
points and the tangible common shareholders' equity to assets ratio by
approximately 10 basis points. The negative impact on the Tier I and Total
capital ratios was only 3 to 5 basis points because the risk-weighted effect of
the excess liquidity was far less than $1 billion.
26
<PAGE> 33
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation repurchased 30.2 million shares of its common stock in 1999,
prior to any reissuances, or nearly 6% of its common shares outstanding at the
beginning of the year. The repurchase of 20 million of those shares was related
to a share repurchase program authorized by the board of directors in January
1999. The remaining 10.2 million shares were repurchased under a 25 million
share repurchase program authorized by the board of directors in September 1999,
with 14.8 million additional shares remaining available for repurchase. Any such
repurchases will be used for general corporate purposes. Since the beginning of
1995, the Corporation has repurchased nearly 150 million common shares prior to
any reissuances, as well as warrants for 18 million shares of common stock.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning shares outstanding 523.8 507.6
Shares issued for stock-based benefit plans and dividend reinvestment plan 7.0 7.0
Shares issued for Mellon United National Bank acquisition - 10.2
Shares repurchased (30.2) (a) (1.0) (b)
- ---------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 500.6 523.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of $1.068 billion for an average share price of $35.33 per
share.
(b) Purchase price of $27 million for an average share price of $26.77 per
share.
Regulatory capital
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial results. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of the Corporation's and its
banking subsidiaries' assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification also are subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
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 Dec. 31,
1999 and 1998. The Corporation intends to maintain the ratios of its banking
subsidiaries above the well-capitalized levels. By maintaining ratios above the
regulatory well-capitalized guidelines, the Corporation's banking subsidiaries
receive the benefit of lower FDIC deposit insurance assessments.
27
<PAGE> 34
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS AT YEAR END
(dollar amounts in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier I capital:
Common shareholders' equity (a) $ 4,135 $ 4,475
Trust-preferred securities 991 991
Minority interest 67 60
Goodwill and certain other intangibles (2,116) (2,301)
Other (3) (2)
- --------------------------------------------------------------------------------------------------------
Total Tier I capital 3,074 3,223
Tier II capital 1,939 2,108
- --------------------------------------------------------------------------------------------------------
Total qualifying capital $ 5,013 $ 5,331
- --------------------------------------------------------------------------------------------------------
Risk-adjusted assets:
On-balance-sheet $32,306 $34,229
Off-balance-sheet 14,266 15,123
- --------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $46,572 $49,352
- --------------------------------------------------------------------------------------------------------
Average assets - leverage capital basis $45,730 $47,917
- --------------------------------------------------------------------------------------------------------
Tier I capital ratio (b) 6.60% 6.53%
Total capital ratio (b) 10.76 10.80
Leverage capital ratio (b)(c) 6.72 6.73
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) In accordance with regulatory guidelines, the $119 million of unrealized
losses and the $46 million of unrealized gains, net of tax, on assets
classified as available for sale at Dec. 31, 1999 and 1998, respectively,
have been excluded.
(b) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3%, respectively.
(c) Tier I capital to average total assets (as defined for regulatory
purposes), net of the loan loss reserve, goodwill and certain other
intangibles.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS FOR LARGEST BANKING SUBSIDIARIES AT YEAR END
Mellon Boston Safe
Minimum Well- Bank, N.A. Deposit and Trust
capital capitalized ----------------------- ----------------------
(dollar amounts in millions) ratios (a) ratios (a) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amount:
Tier I capital $ 2,957 $ 2,955 $ 276 $ 256
Total qualifying capital 4,486 4,515 308 286
Risk-adjusted assets 40,087 42,482 2,821 2,395
Average assets-leverage
capital basis 38,542 40,435 4,682 4,632
Ratios:
Tier I capital ratio 4% 6% 7.38% 6.96% 9.77% 10.70%
Total capital ratio 8 10 11.19 10.63 10.91 11.96
Leverage capital ratio 3 5 7.67 7.31 5.89 5.53
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) As defined by the Federal Reserve Board and the Comptroller of the
Currency.
28
<PAGE> 35
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
Acquisition-related intangibles
When computing Tier I capital, the Corporation deducts all goodwill and certain
other identified intangibles acquired subsequent to Feb. 19, 1992, except
mortgage servicing assets and purchased credit card relationships.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ACQUISITION-RELATED INTANGIBLES AT YEAR END
(in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $2,077 $2,221 $1,341
Purchased core deposit intangibles 48 75 65
Other identified intangibles 15 17 19
- -----------------------------------------------------------------------------------------------------------------------------
Total acquisition-related intangibles $2,140 (a) $2,313 $1,425
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At Dec. 31, 1999, $963 million is tax deductible and $1.177 billion is
non-tax deductible.
The $173 million decrease in acquisition-related intangibles from Dec. 31, 1998,
resulted from recording amortization expense of $148 million, as well as a $25
million net reduction resulting from the divestitures. 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. For the year 2000, using common shares and equivalents
outstanding at Dec. 31, 1999, the after-tax impact of the annual amortization is
expected to be $110 million, or approximately $.22 per share. The after-tax
impact of the annual amortization for the years 2001 through 2004 is expected to
be approximately $104 million, $101 million, $98 million and $97 million,
respectively.
Mortgage servicing assets and purchased credit card relationships
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSETS AND PURCHASED CREDIT CARD RELATIONSHIPS AT YEAR END
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing assets:
Residential $16 $1,046 $ 978
Commercial - 69 74
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets 16 1,115 1,052
Purchased credit card relationships - 17 23
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets and purchased
credit card relationships $16 $1,132 $1,075
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in total mortgage servicing assets and purchased credit card
relationships at Dec. 31, 1999, resulted from the divestitures of the mortgage
servicing businesses and the credit card business. See the "Significant
financial events" section on page 4 for a further discussion of these
divestitures. The remaining $16 million of residential mortgage servicing assets
at Dec. 31, 1999, relate to the retained servicing rights on jumbo residential
mortgages that were not part of the divestiture.
The Corporation capitalized $8 million of jumbo residential mortgage servicing
assets in 1999 compared with $436 million in 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 $112
million in 1999, compared with $173 million and $112 million in 1998 and 1997,
respectively. The
29
<PAGE> 36
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
estimated fair value of capitalized mortgage servicing assets was $17 million
and $1.2 billion at Dec. 31, 1999, and Dec. 31, 1998, respectively. See note 1
of Notes to Financial Statements for a further discussion of the Corporation's
accounting policy for mortgage servicing assets.
CORPORATE RISK
- --------------------------------------------------------------------------------
RISK OVERVIEW
- --------------------------------------------------------------------------------
Risk identification and management are essential elements for the successful
management of the Corporation. The four primary risk exposures are liquidity
risk; market risk, which includes interest rate and currency risk; credit risk;
and fiduciary risk. Liquidity risk is the possibility that the Corporation will
not be able to fund present and future financial obligations. Market risk is the
possibility of lower net interest revenue or lower market values of assets and
liabilities as interest rates or exchange rates fluctuate. Credit risk is the
possibility of loss from a counterparty's failure to perform according to the
terms of a transaction. Fiduciary risk is the possibility of loss from actions
taken on behalf of clients. In addition, the Corporation is subject to other
risks, particularly in its fee-generating businesses, that are transaction
oriented. The Corporation controls and monitors these risks with policies,
procedures and various levels of managerial oversight. Because of the nature of
its businesses, external factors beyond the Corporation's control may, at times,
result in losses to the Corporation or its customers.
The Corporation is involved with various financial instruments that potentially
create risk. These instruments are both on and off the balance sheet.
On-balance-sheet instruments include securities, loans, deposits and borrowings.
Off-balance-sheet instruments include loan commitments, standby letters of
credit, interest rate floors, interest rate swaps, foreign exchange contracts
and interest rate futures and forwards.
LIQUIDITY AND DIVIDENDS
- --------------------------------------------------------------------------------
The Finance Committee of the Corporation is responsible for liquidity
management. This committee of senior managers has a Liquidity Policy that covers
all assets and liabilities, as well as off-balance-sheet items that are
potential sources or uses of liquidity. 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 uses several key primary and secondary
measures to assess the adequacy of the Corporation's liquidity position. The
balance sheet is managed to ensure that these measures are maintained within
approved limits. Each of these measures is monitored on a periodic basis giving
consideration to the Corporation's expected requirements for funds and
anticipated market conditions.
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 seven months remaining until maturity. The revolving credit
facility contains Tier I ratio, double leverage ratio and nonperforming asset
covenants, as discussed in note 10 of Notes to Financial Statements.
30
<PAGE> 37
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
As shown in the consolidated statement of cash flows, cash and due from banks
increased by $484 million during 1999 to $3.410 billion at Dec. 31, 1999. The
increase resulted from $2.593 billion provided by operating activities and
$1.338 billion provided by investing activities, partially offset by $3.519
billion used in financing activities. Net cash provided by investing activities
principally reflected proceeds from the divestitures of the credit card,
mortgage and network services businesses as well as the sales and
securitizations of loans, partially offset by loan growth and an increase in
federal funds sold and securities under resale agreements. Net cash used in
financing activities primarily reflected decreases in federal funds purchased
and securities under repurchase agreements and repurchases of common stock.
The Corporation's ability to access the capital markets was demonstrated in 1999
through the issuance of senior notes by the parent company and bank notes by
Mellon Bank, N.A. 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. The Corporation currently intends to file a new $1.5
billion debt shelf registration statement in the first quarter of 2000.
Mellon Bank, N.A. has an existing offering circular, under which it can issue up
to $6 billion of bank notes. Up to $3 billion of these notes, outstanding at any
one time, can have maturities of 7 to 270 days and up to $3 billion, in the
aggregate, can have maturities of more than 270 days to 15 years. At Dec. 31,
1999, the bank had $433 million of notes with original maturities greater than
one year and $1.055 billion of short-term notes outstanding under this program.
The level of short-term bank notes outstanding at year-end 1999 was impacted by
the Corporation's preparation and planning for possible year 2000 technology
event issues. Approximately $1.8 billion of short-term funds were replaced with
floating and fixed-rate funds with maturities that extend well into 2000.
Contractual maturities of the Corporation's long-term debt totaled $366 million
during 1999 and included $201 million related to parent term debt. The remaining
$165 million consisted primarily of medium-term bank notes. Contractual
maturities of long-term debt will total approximately $310 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 following
table. There have been no changes in these ratings since mid-1998.
<TABLE>
<CAPTION>
SENIOR AND SUBORDINATED DEBT RATINGS
AT DEC. 31, 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 increased its annual common stock dividend to $.80 per common
share in the second quarter of 1999, an increase of 11% from the previous annual
rate. The Corporation has increased its common stock dividend nine times since
the beginning of 1993, resulting in a 240% increase during that period. Common
dividends of $403 million were paid on the outstanding shares of common stock
during 1999. The common dividend payout ratio was 42% in both 1999 and 1998. On
a cash operating earnings per common share basis, the dividend payout ratio was
38% in both 1999 and 1998. Based upon shares outstanding at Dec. 31, 1999, and
the current quarterly common stock dividend rate of $.20 per share, the annual
dividend requirement in 2000 is expected to be approximately $400 million.
31
<PAGE> 38
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
The parent Corporation's principal sources of cash are interest and dividends
from its subsidiaries. The ability of national and state member bank
subsidiaries to pay dividends to the parent Corporation is subject to certain
regulatory limitations, as discussed in note 21 of Notes to Financial
Statements. Under the more restrictive limitation, the Corporation's national
and state member bank subsidiaries can, without prior regulatory approval,
declare dividends subsequent to Dec. 31, 1999, of approximately $675 million,
less any dividends declared and plus or minus net profits or losses, as defined,
between Jan. 1, 2000, and the date of any such dividend declaration. To comply
with regulatory guidelines, the Corporation and its subsidiary banks continually
evaluate the level of cash dividends in relation to their respective operating
income, capital needs, asset quality and overall financial condition.
<TABLE>
<CAPTION>
Asset/liability management
- ---------------------------------------------------------------------------------------------------------------------------
(average balances in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,618 $ 1,544 $ 1,186
Trading account securities 370 251 175
Securities 6,513 5,701 5,593
Loans 30,320 30,411 27,823
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 38,821 37,907 34,777
Noninterest-earning assets 10,797 10,662 8,677
Reserve for credit losses (434) (498) (512)
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $49,184 $48,071 $42,942
- ---------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $39,514 $38,417 $34,618
Wholesale and purchased funds 9,670 9,654 8,324
- ---------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $49,184 $48,071 $42,942
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 $108 million in 1999 from the prior year, primarily reflecting
a higher level of noninterest-earning assets. Average core funds increased $1.1
billion in 1999 compared with 1998, primarily reflecting higher levels of money
market and other savings accounts and notes and debentures partially offset by a
decrease in retail savings certificates. Core funds averaged 97% of core assets
in 1999, compared with 95% in 1998 and 96% in 1997.
Wholesale and purchased funds are defined as deposits in foreign offices,
federal funds purchased and securities under repurchase agreements, negotiable
certificates of deposit, 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
totaled 20% in 1999 and 1998 and 19% in 1997.
32
<PAGE> 39
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 for a full
understanding of the range of potential impacts on net interest revenue and
portfolio equity caused by interest rate movements.
Modeling techniques are used to estimate the impact of changes in interest rates
on the net interest margin. Assumptions regarding the replacement of maturing
assets and liabilities are made to simulate the impact of future changes in
rates and/or changes in balance sheet composition. The effect of changes in
future interest rates on the mix of assets and liabilities may cause actual
results to differ from simulated results. In addition, certain financial
instruments provide customers a certain degree of 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.
The Corporation has established the following guidelines for assuming interest
rate risk:
Net interest margin simulation--Given a +/- 200 basis point parallel shift in
interest rates, the estimated net interest revenue may not change by more
than 5% for a one-year period.
Portfolio equity simulation--Portfolio equity is the net present value of the
Corporation's existing assets, liabilities and off-balance-sheet
instruments. Given a +/- 200 basis point parallel shift in interest rates,
portfolio equity may not change by more than 20% of total shareholders'
equity.
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, 100 and 200
basis point parallel shift upward or downward in interest rates on net interest
revenue, earnings per share and return on common equity. This analysis was
prepared using the levels of all interest-earning assets and off-balance-sheet
instruments used for interest rate risk management at Dec. 31, 1999, assuming
that the level of loan fees remains unchanged and excludes the impact of
interest receipts on nonperforming loans. The impact of the rate movements was
developed by simulating the effect of rates changing in a parallel fashion over
a six-month period from the Dec. 31, 1999, levels and remaining at those levels
thereafter.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from Dec. 31, 1999 rates
- --------------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
compared with Dec. 31, 1999: ---------------------------- ------------------------------
+50 bp +100 bp +200 bp -50 bp -100 bp -200 bp
---------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest revenue (decrease) increase (.2)% (.4)% (1.1)% .2% .3% .2%
Earnings per share (decrease) increase $ - $(.01) $(.02) $ - $.01 $ -
Return on common equity (decrease) increase (5) bp (9) bp (24) bp 3 bp 6 bp 5 bp
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 40
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
The anticipated impact on net interest revenue under the 50, 100 and 200 basis
point increase (decrease) scenarios showed an impact of 1.1% or less under all
scenarios at both Dec. 31, 1999, as shown in the table on page 33, and at Dec.
31, 1998. The simulation analysis 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
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 23 of Notes to Financial Statements.
34
<PAGE> 41
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
Dec. 31,
(notional amounts in millions) 2000 2001 2002 2003 2004 2005+ 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps (a):
Notional amount $ 235 $ - $ - $ 550 $ - $ 550 $1,335
Weighted average rate:
Receive 5.29% - - 5.81% - 6.67% 6.07%
Pay 6.16% - - 6.08% - 5.88% 6.01%
Receive fixed/pay floating
callable swaps (b):
Notional amount $ - $ - $ - $ 750 $ 100 $ - $ 850
Weighted average rate:
Receive - - - 5.59% 6.38% - 5.68%
Pay - - - 6.15% 6.10% - 6.15%
Pay fixed/receive floating
generic swaps (a):
Notional amount $ 2 $ 27 $ 362 $ 167 $ 25 $ 12 $ 595
Weighted average rate:
Receive 5.38% 6.12% 6.12% 6.03% 5.97% 6.08% 6.08%
Pay 5.49% 6.14% 6.42% 6.56% 6.56% 6.49% 6.45%
Receive floating/pay floating
basis swaps (a):
Notional amount $ 205 $ - $ - $ - $ - $ - $ 205
Weighted average rate:
Receive 6.15% - - - - - 6.15%
Pay 4.31% - - - - - 4.31%
Other products (c) $ 62 $ 7 $ 31 $ - $ - $ - $ 100
- ---------------------------------------------------------------------------------------------------------------------------
Total notional amount $ 504 $ 34 $ 393 $1,467 $ 125 $562 $3,085
- ---------------------------------------------------------------------------------------------------------------------------
</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 Dec. 31, 1999, are shown in this table.
(c) Includes $48 million of index amortizing swaps with expected maturities
from 2000 through 2002 and weighted average receive and pay rates of 7.10%
and 6.20%, respectively.
The table on the following page presents the gross notional amounts of
off-balance-sheet instruments used to manage interest rate risk, identified by
the underlying interest rate-sensitive instruments. The gross notional amount of
off-balance-sheet instruments used to manage interest rate risk was $2.8 billion
lower at Dec. 31, 1999, compared with Dec. 31, 1998. The decrease compared with
Dec. 31, 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 on the following page 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.
35
<PAGE> 42
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Instruments associated with deposits $ 176 $3,435
Instruments associated with interest bearing liabilities 1,305 971
Instruments associated with loans 1,604 1,482
- --------------------------------------------------------------------------------------------------------
Total notional amount $3,085 $5,888
- --------------------------------------------------------------------------------------------------------
</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 $8 million in
1999, compared with $20 million in 1998 and $23 million in 1997.
Unaccreted deferred gains from off-balance-sheet instrument terminations totaled
approximately $12 million while unamortized deferred losses totaled
approximately $11 million at Dec. 31, 1999. Net interest revenue in 1999
included $1 million of amortized deferred net losses.
As a result of the divestiture of the residential mortgage business on Sept. 30,
1999, the Corporation no longer holds off-balance-sheet contracts to manage the
prepayment risk associated with residential mortgage servicing rights (MSRs). At
Dec. 31, 1998 the Corporation had entered into approximately $11.4 billion
notional amount, primarily of interest rate floor and interest rate swap
agreements to manage potential impairment of MSRs. The fair value of these
instruments was $260 million at Dec. 31, 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
$148 million and $147 million at Dec. 31, 1999 and 1998, respectively, with a
negative fair value of $12 million and a positive fair value of $8 million,
respectively. Deferred realized losses on terminated swaps totaled $7 million at
Dec. 31, 1999. The Corporation has also entered into contracts to hedge
anticipated transactions. The Corporation has entered into $475 million notional
amount of interest rate futures to lock in the value of certain loans that are
anticipated to be sold and/or securitized. The positive fair value of the
contracts related to these anticipated transactions was approximately $3 million
at Dec. 31, 1999. Deferred realized gains on terminated futures contracts
totaled $4 million at Dec. 31, 1999.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at Dec. 31, 1999, was a negative $72 million,
compared with a positive $327 million at Dec. 31, 1998. The decrease compared
with Dec. 31, 1998, primarily resulted from the disposition 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. 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. As more fully discussed in note 23 of Notes to Financial
Statements, credit risk associated with off-balance-sheet instrument positions
represents the aggregate replacement cost of contracts in a gain position. At
Dec. 31, 1999 and 1998, the amount of credit exposure associated with risk
management instruments was $7 million and $331 million, respectively.
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, interest rate forward
contracts, and equity derivatives to enable customers to meet their financing
and investing 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 activities. All
36
<PAGE> 43
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- -------------------------------------------------------------------------------
of these instruments are carried at market value with realized and unrealized
gains and losses included in foreign currency and securities trading revenue.
Total credit risk of contracts used for trading activities was $454 million at
Dec. 31, 1999 and $547 million at Dec. 31, 1998. See note 23 of Notes to
Financial Statements on pages 84 through 86 for a description and table of
off-balance-sheet instruments used for trading activities.
The Corporation has established trading limits and related monitoring procedures
to control trading risk. These limits are approved by the Executive Management
Group and reviewed by the Executive Committee of the board of directors. All
limits are monitored for compliance by departmental compliance staff and by the
Corporation's Audit and Risk Review department. Exceptions to limits are
reported to the Executive Management Group.
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 potential gain or loss in a portfolio of trading positions that is
associated with a price movement of given probability over a specified time
frame. Position limits are assigned to each family of financial instruments
eligible for trading such that the aggregate value-at-risk in these activities
at any point in time will not exceed a specified limit given a significant
market movement. The extent of market movement deemed to be significant is based
upon an analysis of the historical volatility of individual instruments that
would cover 95% of likely daily market movements. The loss analysis includes the
off-balance-sheet instruments used for trading activities as well as the
financial assets and liabilities that are classified as trading positions on the
balance sheet. Using the Corporation's methodology, which considers such factors
as changes in currency exchange rates, interest rates, spreads and related
volatility, the aggregate value-at-risk for trading activities, primarily
related to foreign currency contracts, was approximately $2 million at Dec. 31,
1999, unchanged compared with Dec. 31, 1998. The average daily value at risk for
trading activities in 1999 was approximately $2 million.
Trading activities are generally limited to products and markets in which
liquidity is sufficient to allow positions to be closed quickly and without
adversely affecting market prices, which limits loss potential below that
assumed for a full-day adverse movement. Loss potential is further constrained
in that it is highly unusual for all trading areas to be exposed to maximum
limits at the same time and extremely rare for significant adverse market
movements to occur in all markets simultaneously. Stop-loss guidance is used
when a certain threshold of loss is sustained. If stop-loss guidance amounts are
approached, open positions may be liquidated to avoid further risk to earnings.
The use of stop-loss guidance in tandem with position limits reduces the
likelihood that potential trading losses would reach imprudent levels in
relation to earnings capability.
New accounting standard
In June 1998, the Financial Accounting Standard Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." FAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The adoption of this statement may cause volatility in both the income statement
and the equity section of the balance sheet. The effective date of this
statement has been delayed to Jan. 1, 2001, and need not be applied
retroactively to financial statements of prior periods. The Corporation intends
to adopt this statement on Jan. 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.
37
<PAGE> 44
CREDIT RISK
- --------------------------------------------------------------------------------
Credit risk exists in financial instruments both on and off the balance sheet.
Financial instruments such as loans and leases are on the balance sheet.
Off-balance-sheet credit exposures include loan commitments, standby letters of
credit and the credit risk associated with financial instruments used for risk
management and trading activities.
The objective of the credit risk management process is to reduce the risk of
loss if a customer fails to perform according to the terms of a transaction.
Essential to this process are stringent underwriting of new loan commitments,
active monitoring of all loan portfolios and the early identification of
potential problems and their prompt resolution.
The Corporation establishes internal ownership, responsibility and
accountability for all aspects of asset quality. Notwithstanding this process,
however, asset quality is dependent in large part upon local, national,
international and industry segment economic conditions that are beyond the
Corporation's control.
Management maintains a comprehensive centralized process through which the
Corporation establishes exposure limits, extends new loans, monitors credit
quality, actively manages problem credits and disposes of nonperforming assets.
The Corporation's board of directors is kept informed of credit activity through
a series of monthly and quarterly reports. To help ensure adherence to the
Corporation's credit policies, department credit officers report to both the
Corporation's chief risk officer and the head of each respective lending
department. The responsibilities of these credit officers include all aspects of
the credit process except credit review, credit recovery and aggregate portfolio
management, which are centralized at the corporate level.
The Corporation manages both on- and off-balance-sheet credit risk by
maintaining a well-diversified credit portfolio and by adhering to its written
credit policies, which specify general underwriting criteria as well as
underwriting standards for specific industries and control credit exposure by
borrower, counterparty, degree of risk, industry and country. These measures are
adopted by the Corporate Risk Committee and are regularly updated to reflect the
committee's evaluation of developments in economic, political and operating
environments that could affect lending risks. The Corporation may adjust credit
exposure to individual industries or customers through loan sales, syndications,
participations and the use of master netting agreements when the Corporation has
more than one transaction outstanding with the same customer.
Except for certain well-defined loans made by the Regional Consumer Banking
sector, primarily to consumers and small businesses, all credit extensions are
approved jointly by officers of the Credit Policy department and officers of the
lending departments. The number and level of officer approvals required are
determined by the dollar amount and risk characteristics of the credit
extension. The amount of collateral, if any, obtained by the Corporation upon
the extension of credit is based on industry practice as well as the credit
assessment of the customer. The type and amount of collateral vary, but the form
generally includes: accounts receivable; inventory; property, plant and
equipment; other assets; and/or income-producing commercial properties with
appraised values that exceed the contractual amount of the credit facilities by
pre-approved ratios.
The Corporation continually assesses the risk of its consumer and commercial
credit facilities, and assigns a numerical risk rating to substantially all
extensions of credit in its commercial, real estate and international
portfolios. Lending officers have the primary responsibility for monitoring
their portfolios, identifying emerging problem loans and recommending changes in
risk ratings. To anticipate or detect problems that may result from economic
downturns or deteriorating conditions in certain markets, lending units and
credit management use processes designed to identify potential credit problems,
both for specific customers and for industries that could be affected by adverse
market or economic conditions. When signs of credit deterioration
38
<PAGE> 45
CREDIT RISK (CONTINUED)
- --------------------------------------------------------------------------------
are detected, credit recovery or other specialists become involved to minimize
the Corporation's exposure to potential future credit losses. The Credit Review
division of the Audit and Risk Review department provides an independent
assessment of credit ratings, credit quality and the credit management process.
For a further discussion of the credit risk associated with off-balance-sheet
financial instruments, see the discussions of the various financial instruments
in note 23 of Notes to Financial Statements.
COMPOSITION OF LOAN PORTFOLIO
- --------------------------------------------------------------------------------
The loan portfolio decreased $1.845 billion in 1999, compared with 1998,
reflecting the divestitures of the residential mortgage businesses and the
credit card business and a lower level of wholesale loans. The decreases were
partially offset by increases in business banking and margin loans. At Dec. 31,
1999, the composition of the loan portfolio was 61% commercial and 39% consumer.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO AT YEAR END
(in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $11,349 $12,060 $10,826 $10,196 $10,969
Commercial real estate 2,651 2,285 1,509 1,534 1,532
Consumer credit:
Consumer mortgage 7,122 8,871 8,505 7,772 8,960
Credit card - 804 931 1,296 1,924
Other consumer credit 4,693 3,700 3,166 2,640 2,612
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer credit 11,815 13,375 12,602 11,708 13,496
Lease finance assets 3,127 2,819 2,639 2,533 830
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic loans 28,942 30,539 27,576 25,971 26,827
INTERNATIONAL LOANS 1,306 1,554 1,566 1,422 863
- ---------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $30,248 $32,093 $29,142 $27,393 $27,690
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: There were no concentrations of loans to borrowers engaged in similar
activities, other than those shown in this table, that exceeded 10% of
total loans at year end.
Commercial and financial
The domestic commercial and financial loan portfolio primarily consists of loans
to corporate borrowers in the manufacturing, service, energy, communications,
wholesale and retail trade, public utilities and financial services industries.
Numerous risk factors impact this portfolio, including industry-specific risks
such as the economy, new technology, labor rates and cyclicality, as well as
customer-specific factors such as cash flow, financial structure, operating
controls and asset quality. The Corporation diversifies risk within this
portfolio by closely monitoring industry concentrations and portfolios to ensure
that they do not exceed established lending guidelines. Diversification is
intended to limit the risk of loss from any single unexpected economic event or
trend. Total domestic commercial and financial loans decreased by $711 million,
or 6%, at Dec. 31, 1999, compared to Dec. 31, 1998, primarily as a result of a
decrease in wholesale lending offset in part by an increase in business banking.
Commercial and financial loans represented 38% of the total loan portfolio at
both Dec. 31, 1999, and Dec. 31, 1998.
39
<PAGE> 46
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
Commercial real estate
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS AT YEAR END
(in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial mortgage and construction loans $1,788 $1,554 $ 942 $1,107 $1,085
Owner-occupied and other loans 863 731 541 352 338
FDIC loss share loans - - 26 75 109
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic commercial real estate loans $2,651 $2,285 $1,509 $1,534 $1,532
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation's $2.651 billion domestic commercial real estate loan portfolio
consists of $1.788 billion of commercial mortgages, which generally are secured
by nonresidential and multifamily residential properties, and commercial
construction loans generally with maturities of 60 months or less. Also included
in this portfolio are $863 million of owner-occupied and other loans.
Owner-occupied and other loans are loans that are secured by real estate;
however, the commercial property is not being relied upon as the primary source
of repayment. Commercial real estate loans carry many of the same customer and
industry risks as the commercial and financial portfolio, as well as
contractor/subcontractor performance risk in the case of commercial construction
loans and cash flow risk based on project economics. Domestic commercial real
estate loans increased by $366 million, or 16%, at Dec. 31, 1999, compared with
Dec. 31, 1998, reflecting steady loan growth. Domestic commercial real estate
loans were 9% of the total loan portfolio at Dec. 31, 1999, up from 7% at Dec.
31, 1998.
Consumer mortgage
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC CONSUMER MORTGAGE LOANS AT YEAR END
(in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jumbo residential mortgages $3,733 $3,821 $3,613 $3,641 $3,869
One- to four-family residential mortgages:
Warehouse - 1,588 1,307 453 834
Portfolio 620 858 1,207 1,315 1,425
Fixed-term home equity loans 1,835 1,801 1,742 1,749 1,574
Home equity revolving credit line loans 934 803 636 614 1,258
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic consumer mortgage loans $7,122 $8,871 $8,505 $7,772 $8,960
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At Dec. 31, 1999, the domestic consumer mortgage portfolio totaled $7.122
billion, a $1.749 billion, or 20%, decrease from Dec. 31, 1998. This decrease
primarily resulted 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 business. Jumbo mortgages are primarily variable-rate
residential mortgages that generally range from $250,000 to $3 million. Risks
involved in holding jumbo mortgages include less liquidity than a traditional
one- to four-family residential mortgage portfolio and increased exposure on an
individual loan basis. The Corporation attempts to control these risks by
requiring more stringent loan-to-value ratios and higher liquidity and cash flow
requirements for each borrower. At Dec. 31, 1999, the geographic distribution of
the jumbo mortgages was as follows: 29% in the mid-Atlantic region; 23% in New
England; 24% in California; and 24% in other domestic regions. Fixed-term home
equity loans and home equity revolving credit line loans increased $165 million
in 1999 compared with the prior-year end. Risks in these two portfolios are
primarily limited to payment and collateral risk, primarily driven by regional
economic factors. Domestic consumer mortgages were 24% of the total loan
portfolio at Dec. 31, 1999, and 28% at Dec. 31, 1998.
40
<PAGE> 47
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
Credit card
The credit card business was divested on March 31, 1999, as discussed further in
the "Significant financial events" section on page 4. The CornerStone(sm) credit
card accelerated resolution portfolio was included in the sale. This portfolio
had previously 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 $4.693 billion at
Dec. 31, 1999, an increase of $993 million, or 27%, from Dec. 31, 1998. The
increase was 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 $1.777 billion, or 38% of this portfolio, at Dec. 31, 1999,
compared with $1.765 billion at Dec. 31, 1998.
Lease finance assets
Lease finance assets totaled $3.127 billion at Dec. 31, 1999, an increase of
$308 million, or 11%, compared with Dec. 31, 1998. The increase was primarily
due to growth in the middle market leasing sector. Lease finance assets
represented 10% of the total loan portfolio at Dec. 31, 1999, and 9% at year-end
1998.
International loans
Loans to international borrowers totaled $1.306 billion at Dec. 31, 1999, a
decrease of $248 million, or 16%, from $1.554 billion at Dec. 31, 1998. There
were no nonperforming international loans in any of the periods presented. The
Corporation's international lending strategy centers around establishing
relationships with large foreign firms that are multinational in nature but also
carry a significant U.S. presence.
41
<PAGE> 48
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
Nonperforming assets is a term used to describe assets on which revenue
recognition has been discontinued or is restricted. Nonperforming assets include
both nonperforming loans and acquired property, primarily other real estate
owned (OREO), acquired in connection with the collection effort on loans.
Nonperforming loans include both nonaccrual and "troubled debt" restructured
loans. Past-due commercial loans are those that are contractually past due 90
days or more but are not on nonaccrual status because they are well secured and
in the process of collection. Past-due consumer loans, excluding consumer
mortgages, are generally not classified as nonaccrual but are charged off on a
formula basis upon reaching various stages of delinquency. Additional
information regarding the Corporation's practices for placing assets on
nonaccrual status is presented in note 1 of Notes to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AT YEAR END
(dollar amounts in millions) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial and financial $ 85 $ 42 $ 17 $ 21 $ 65
Commercial real estate 6 6 49 16 29
Consumer credit:
Consumer mortgage 40 44 52 50 61
Other consumer credit 1 1 5 1 2
Lease finance assets 10 10 10 6 --
- -----------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 142 103 133 94 157
Restructured loans -- -- -- -- 10
- -----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (a) 142 103 133 94 167
- -----------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 15 40 52 86 87
Reserve for real estate acquired (1) (5) (9) (10) (18)
- -----------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 14 35 43 76 69
Other assets acquired 3 2 5 4 --
- -----------------------------------------------------------------------------------------------------------------------------
Total acquired property 17 37 48 80 69
- -----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $159 $140 $ 181 $ 174 $ 236
- -----------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective loan
portfolio segments:
Commercial and financial loans .75% .34% .16% .21% .59%
Commercial real estate loans .24 .28 3.25 1.03 2.55
Consumer mortgage loans .57 .50 .62 .65 .68
Lease finance assets .32 .37 .38 .23 --
Total loans .47 .32 .46 .35 .60
Nonperforming assets as a percentage of
total loans and net acquired property .53 .44 .62 .63 .85
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $43 million, $19 million, $44 million, $13 million and $81
million, respectively, of loans with both principal and interest less than
90 days past due but placed on nonaccrual status by management discretion.
42
<PAGE> 49
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
At Dec. 31, 1999, nonperforming assets totaled $159 million, an increase of $19
million from Dec. 31, 1998, resulting from a $39 million increase in
nonperforming loans partially offset by a $20 million decrease in acquired
property. The increase in nonperforming loans was primarily due to the addition
of two commercial loans, one each during the first quarter and third quarters of
1999. This increase was partially offset by sales of OREO. The ratio of
nonperforming assets to total loans and net acquired property was .53% at Dec.
31, 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS
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 year $ 42 $ 6 $ 45 $10 $103 $133
Acquired from Mellon United
National Bank and Mellon 1st
Business Bank -- -- -- -- -- 6
Reclassification from segregated assets -- -- -- -- -- 10
Additions 108 7 33 12 160 115
Payments (a) (24) (4) (21) (5) (54) (62)
Returned to accrual status -- (1) (11) (1) (13) (36)
Credit losses (38) (1) -- (6) (45) (23)
Transfers to acquired property (3) (1) (5) -- (9) (40)
- --------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at end of year $ 85 $ 6 $ 41 $10 $142 $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 of Notes to Financial Statements.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans at year end (a) $91 $53 $82
Average impaired loans for the year 79 60 47
Interest revenue recognized on impaired loans (b) 3 4 8
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $36 million, $29 million and $19 million of impaired loans with a
related impairment reserve of $10 million, $3 million and $2 million at
Dec. 31, 1999, Dec. 31, 1998, and Dec. 31, 1997, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY Dec. 31,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OREO at beginning of year, net of the OREO reserve $ 35 $ 43
Reclassification from segregated assets - 2
Foreclosures 13 48
Sales (44) (66)
Additional investments, write-downs, losses, OREO provision and other 10 8
- --------------------------------------------------------------------------------------------------------------------------
OREO at end of year, net of the OREO reserve 14 35
Other acquired assets 3 2
- --------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve $ 17 $ 37
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 50
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FOREGONE INTEREST ON NONPERFORMING LOANS Year ended Dec. 31,
(in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contractual interest due $12 $7 $15 $9 $15
Interest revenue recognized 4 3 10 3 5
- ---------------------------------------------------------------------------------------------------------------------------
Interest revenue foregone $ 8 $4 $ 5 $6 $10
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: This table includes interest revenue foregone during the year on loans
that were nonperforming at the end of each year. Interest receipts that the
Corporation applied, for accounting purposes, to reduce principal balances of
nonaccrual loans are included in contractual interest due but not in interest
revenue recognized.
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 AT YEAR END
(dollar amounts in millions) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 21 $ 31 $ 38 $ 35 $ 34
Ratio .30% .34% .44% .45% .38%
Credit card (a) -- 8 8 29 13
Ratio -- 1.05% .84% 2.24% .66%
Student - government guaranteed 63 52 44 47 44
Ratio 3.53% 2.95% 2.69% 3.01% 3.11%
Other consumer 4 2 1 2 1
Ratio .12% .12% .09% .18% .09%
- -------------------------------------------------------------------------------------------------
Total consumer $ 88 $ 93 $ 91 $ 113 $ 92
Ratio .74% .70% .72% .97% .68%
- -------------------------------------------------------------------------------------------------
Commercial (b) 11 11 13 10 6
- -------------------------------------------------------------------------------------------------
Total past-due loans $ 99 $ 104 $ 104 $ 123 $ 98
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) The credit card business was divested on March 31, 1999.
(b) Includes lease finance assets.
Note: Ratios are loans 90 days or more past due as a percentage of year-end loan
balances.
44
<PAGE> 51
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT
LOSSES
- --------------------------------------------------------------------------------
Credit quality expense
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY EXPENSE
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $ 45 $60 $148
Net revenue from acquired property (14) (6) (19)
- ---------------------------------------------------------------------------------------------------------------------------
Credit quality expense $ 31 $54 $129
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $23 million decrease in credit quality expense in 1999 compared with 1998
resulted from a lower provision for credit losses following the March 1999
divestiture of the credit card business as well as higher gains on the sale of
OREO.
Reserve for credit losses and review of net credit losses
The reserve for credit losses was $403 million at Dec. 31, 1999, or 1.33% of
total loans, compared with $496 million, or 1.54% of total loans, at Dec. 31,
1998. The $93 million decrease in the reserve for credit losses from Dec. 31,
1998, primarily resulted from the divestiture of the credit card and mortgage
businesses. In conjunction with these divestitures, $88 million that had been
associated with the credit card and residential mortgage portfolio was released
from the reserve for credit losses. The provision for credit losses was $45
million in 1999, while net credit losses totaled $50 million for the year.
The Corporation maintains a credit loss reserve that, in management's judgment,
is appropriate to absorb losses embedded in the loan portfolio as of the balance
sheet date. Management reviews the appropriateness of the reserve at least
quarterly. The reserve determination methodology is designed to provide
procedural discipline in assessing the appropriateness of the reserve. For
analytical purposes, the reserve methodology estimates loss potential in both
the commercial and consumer loan portfolios. This methodology primarily uses an
individual evaluation of problem credits and a historical analysis of loss
experience and criticized credit levels. In addition, the status and amount of
nonperforming and past-due loans are considered. Qualitative factors considered
include: industry risks, current economic factors affecting collectability,
trends in portfolio volume, quality, maturity and composition and current
interest rate levels and economic conditions.
Net credit losses totaled $50 million in 1999, a decrease of $13 million from
1998, primarily due to a $30 million decrease in credit card net credit losses
following the divestiture, as well as a $5 million decrease in net credit losses
related to commercial real estate loans. This decrease was partially offset by a
$24 million increase in net credit losses related to commercial and financial
loans. The level of credit losses and recoveries relative to outstanding loans
can vary from period to period as a result of the size and number of individual
credits that may require charge-off and the effects of changing economic
conditions.
The ratio of the loan loss reserve to nonperforming loans at Dec. 31, 1999, was
284%, compared with 479% at Dec. 31, 1998. This ratio is not the result of a
target or objective, but rather is an outcome of two interrelated but separate
processes: the establishment of an appropriate loan loss reserve level for the
portfolio as a whole, including but not limited to the nonperforming component
in the portfolio; and the classification of certain assets as nonperforming in
accordance with established accounting, regulatory and management policies. The
ratio can vary significantly over time as the credit quality characteristics of
the entire loan portfolio change. This ratio also can vary with shifts in
portfolio mix. The decrease in this ratio from Dec. 31, 1998, resulted from an
increase in the level of nonperforming loans as well as the reduction in reserve
in conjunction with the credit card and mortgage businesses divestitures.
45
<PAGE> 52
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT
LOSSES (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY
(dollar amounts in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of year $ 496 $ 475 $ 525 $ 471 $ 607
Net change in reserve from (divestitures)/acquisitions (88) 24 3 23 8
Credit losses:
Domestic:
Commercial and financial (38) (10) (16) (19) (14)
Commercial real estate (1) (6) (24) (12) (8)
Consumer credit:
Credit cards (11) (45) (116)(a) (127) (167)(a)
Other consumer credit (20) (23) (25) (27) (25)
Lease finance assets (6) (8) (6) (5) (16)
- ---------------------------------------------------------------------------------------------------------------------------------
Total domestic (76) (92) (187) (190) (230)
International -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total credit losses (76) (92) (187) (190) (230)
- ---------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial 12 8 11 25 27
Commercial real estate 3 3 14 14 30
Consumer credit:
Credit cards 1 5 9 13 14
Other consumer credit 8 11 9 12 11
Lease finance assets 2 2 3 1 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total domestic 26 29 46 65 82
International -- -- 5 1 5
- ---------------------------------------------------------------------------------------------------------------------------------
Total recoveries 26 29 51 66 87
- ---------------------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Domestic:
Commercial and financial (26) (2) (5) 6 13
Commercial real estate 2 (3) (10) 2 22
Consumer credit:
Credit cards (10) (40) (107) (114) (153)
Other consumer credit (12) (12) (16) (15) (14)
Lease finance assets (4) (6) (3) (4) (16)
- ---------------------------------------------------------------------------------------------------------------------------------
Total domestic (50) (63) (141) (125) (148)
International -- -- 5 1 5
- ---------------------------------------------------------------------------------------------------------------------------------
Net credit losses (50) (63) (136) (124) (143)
Credit losses on credit card assets held for
accelerated resolution -- -- (65) -- (106)
- ---------------------------------------------------------------------------------------------------------------------------------
Total net credit losses (50) (63) (201) (124) (249)
Provision for credit losses 45 60 148 155 105
- ---------------------------------------------------------------------------------------------------------------------------------
Reserve at end of year $ 403 $ 496 $ 475 $ 525 $ 471
- ---------------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.33% 1.54% 1.63% 1.92% 1.70%
Reserve as a percentage of nonperforming loans 284% 479% 356% 556% 282%
Net credit losses to average loans .17% .21% .72%(b) .46% .91%(b)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes $65 million in 1997 and $106 million in 1995 of credit losses
related to loans transferred to an accelerated resolution portfolio.
(b) The ratio of net credit losses, excluding credit losses on assets held for
accelerated resolution, to average loans was .49% in 1997 and .53% in 1995.
46
<PAGE> 53
FOURTH QUARTER REVIEW
- --------------------------------------------------------------------------------
Fourth quarter 1999 diluted earnings per common share, on a reported basis,
totaled $.47, an increase of 12% compared with $.42 in the fourth quarter of
1998. Net income applicable to common stock, on a reported basis, totaled $240
million in the fourth quarter of 1999, an increase of 8% compared with $222
million in the fourth quarter of 1998. The annualized return on common
shareholders' equity and return on assets, on a reported basis, were 23.1% and
2.01%, respectively, for the fourth quarter of 1999, compared with 20.1% and
1.76%, respectively, in the fourth quarter of 1998.
Excluding a net loss from divestitures, fourth quarter 1999 diluted operating
earnings per common share totaled $.48, an increase of 14% compared with $.42
per common share in the fourth quarter of 1998. Operating net income applicable
to common stock totaled $245 million in the fourth quarter of 1999, an increase
of 10% compared with $222 million in the fourth quarter of 1998. Operating
return on common shareholders' equity and return on assets were 23.5% and 2.05%,
respectively, for the fourth quarter of 1999, compared with 20.1% and 1.76%,
respectively, for the fourth quarter of 1998.
Fourth quarter 1999 diluted cash operating earnings per common share totaled
$.53, an increase of 13% compared with $.47 in the fourth quarter of 1998. Cash
operating net income applicable to common stock totaled $274 million in the
fourth quarter of 1999, an increase of 9% compared with $252 million in the
fourth quarter of 1998. The annualized cash return on common shareholders'
equity and cash return on tangible assets, on an operating basis, were 45.6% and
2.38%, respectively, for the fourth quarter of 1999, compared with 40.2% and
2.07%, respectively, in the fourth quarter of 1998.
Fee revenue of $759 million in the fourth quarter of 1999, a decrease of $40
million from the prior-year period, was impacted by the 1999 divestitures of the
credit card, network services and mortgage businesses as well as the sale of the
merchant card processing business in December 1998. Excluding these factors, fee
revenue increased 13% in the fourth quarter of 1999, primarily due to an 18%
increase in trust and investment fee revenue. At Dec. 31, 1999, assets under
management totaled $488 billion, a 15% increase from Dec. 31, 1998, and assets
under administration or custody totaled $2,198 billion, a 16% increase from Dec.
31, 1998.
Net interest revenue on a fully taxable equivalent basis for the fourth quarter
of 1999, was $353 million, down $29 million compared with $382 million in the
fourth quarter of 1998. Excluding the effect of the divestitures of the credit
card and mortgage businesses, net interest revenue was unchanged compared with
the fourth quarter of 1998, as higher funding costs related to the repurchase of
common stock were offset by a higher level of compensating deposit balances held
in lieu of customers paying cash management fees, and higher loan fees.
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $699 million in the fourth quarter of 1999, a decrease of
$106 million compared with $805 million in the fourth quarter of 1998. Excluding
the effect of divestitures, operating expense before trust-preferred securities
expense and net revenue from acquired property increased only 1% compared with
the fourth quarter of 1998.
Credit quality expense was $6 million in the fourth quarter of 1999, compared
with $15 million in the fourth quarter of 1998. The lower expense in the fourth
quarter of 1999 compared with the prior-year period primarily resulted from the
divestiture of the credit card business as well as higher net revenue from
acquired property.
47
<PAGE> 54
SELECTED QUARTERLY DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended
1999 1998
------------------------------------------ -------------------------------------
(dollar amounts in millions, DEC. SEPT. JUNE MARCH Dec. Sept. June March
except per share amounts) 31 30 30 31 31 30 30 31
- ---------------------------------------------------------------------------------------------------------------------------------
QUARTERLY CONSOLIDATED INCOME STATEMENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest revenue $ 351 $ 349 $ 361 $ 369 $ 380 $ 375 $ 371 $ 365
Provision for credit losses 10 10 10 15 15 15 15 15
Fee revenue 759 765 787 789 799 712 712 698
Net gain (loss) from divestitures (7) (8) 59 83 -- -- -- --
Gains on sales of securities -- -- -- -- -- -- 1 --
Operating expense 715 731 823 780 825 734 738 716
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes
and cumulative effect of
accounting change 378 365 374 446 339 338 331 332
Provision for income taxes 138 134 136 166 117 120 116 117
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change 240 231 238 280 222 218 215 215
Cumulative effect of
accounting change -- -- -- (26) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 240 $ 231 $ 238 $ 254 $ 222 $ 218 $ 215 $ 215
- ---------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock:
Operating (a) $ 245 $ 236 $ 236 $ 231 $ 222 $ 218 $ 215 $ 206
Cash operating (a)(b) 274 266 266 260 252 246 243 231
Reported 240 231 238 254 222 218 215 206
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING, CASH OPERATING AND REPORTED RESULTS (ratios are annualized)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Operating (a) $ .48 $ .46 $ .45 $ .43 $ .42 $ .41 $ .40 $ .39
Cash operating (a)(b) .53 .52 .50 .49 .47 .47 .45 .44
Reported .47 .45 .45 .48(C) .42 .41 .40 .39
Reported - basic .47 .46 .45 .49(C) .42 .42 .41 .40
Return on common
equity:
Operating (a) 23.5% 22.3% 21.4% 20.9% 20.1% 20.3% 20.8% 21.6%
Cash operating (a)(b) 45.6 43.7 41.1 40.4 40.2 40.2 44.1 39.5
Reported 23.1 21.8 21.6 23.1 20.1 20.3 20.8 21.6
Return on assets:
Operating (a) 2.05% 1.92% 1.90% 1.84% 1.76% 1.81% 1.79% 1.89%
Cash operating (a)(b) 2.38 2.25 2.23 2.16 2.07 2.11 2.12 2.17
Reported 2.01 1.87 1.92 2.03 1.76 1.81 1.79 1.89
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-continued-
48
<PAGE> 55
SELECTED QUARTERLY DATA (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended
1999 1998
------------------------------------------ -------------------------------------
(dollar amounts in millions, DEC. SEPT. JUNE MARCH Dec. Sept. June March
except per share amounts) 31 30 30 31 31 30 30 31
- ---------------------------------------------------------------------------------------------------------------------------------
QUARTERLY AVERAGE BALANCES
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money market investments $ 2,267 $ 1,463 $ 1,445 $ 1,286 $ 1,525 $ 1,351 $ 1,597 $ 1,712
Trading account securities 372 403 414 291 258 266 239 242
Securities 6,275 6,364 6,652 6,767 6,141 5,754 5,596 5,301
Loans 29,159 30,177 30,504 31,467 31,503 30,426 30,302 29,389
Total interest-earning assets 38,073 38,407 39,015 39,811 39,427 37,797 37,734 36,644
Total assets 47,451 48,871 49,766 50,677 50,110 47,937 47,965 46,229
Total tangible assets (b) 45,640 47,012 47,878 48,755 48,153 46,096 46,057 44,726
Deposits 32,540 33,462 33,358 34,087 34,492 33,399 33,548 32,725
Notes and debentures 3,585 3,372 3,387 3,351 3,164 3,003 3,003 2,797
Trust-preferred securities 991 991 991 991 991 991 991 991
Common shareholders' equity 4,133 4,212 4,417 4,469 4,391 4,265 4,126 3,873
Tangible common
shareholders equity (b) 2,388 2,417 2,591 2,608 2,487 2,424 2,218 2,370
Total shareholders' equity 4,133 4,212 4,417 4,469 4,391 4,265 4,126 3,974
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin (FTE) 3.66% 3.63% 3.74% 3.78% 3.86% 3.95% 3.97% 4.06%
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA (d)
- ---------------------------------------------------------------------------------------------------------------------------------
Market price per share range:
High $ 40.19 $ 37.00 $ 36.88 $ 36.88 $ 34.66 $ 37.34 $ 40.19 $ 33.19
Low 31.00 31.31 33.44 33.59 22.50 25.38 31.31 28.06
Average 35.34 34.26 34.74 35.23 30.83 31.48 34.78 30.93
Close 34.06 33.63 36.38 35.19 34.38 27.50 34.84 31.75
Dividends per share .20 .20 .20 .18 .18 .18 .18 .165
Market capitalization 17,052 17,103 18,704 18,335 18,007 14,363 18,168 16,523
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating and cash operating results exclude $5 million after-tax of net
losses from divestitures for both the fourth and third quarters of 1999.
The second quarter of 1999 excludes a $38 million after-tax net gain from
divestitures and $36 million of nonrecurring expenses after taxes. The
first quarter of 1999 excludes a $49 million after-tax net gain from
divestitures and a $26 million after-tax charge for the cumulative effect
of a change in accounting principle.
(b) See page 15 for the definition of cash operating results and tangible
amounts.
(c) Basic and diluted income per common share before the cumulative effect of
an accounting change for the quarter ended March 31, 1999, was $.54 and
$.53, respectively.
(d) At Dec. 31, 1999, there were 25,247 shareholders registered with the
Corporation's stock transfer agent, compared with 25,197 at year-end 1998
and 23,948 at year-end 1997. In addition, there were approximately 16,919,
16,540 and 16,049 Mellon employees at Dec. 31, 1999, 1998 and 1997,
respectively, who participated in the Corporation's 401(k) Retirement
Savings Plan. All shares of Mellon Financial Corporation common stock held
by the plans for their participants are registered in the name of Mellon
Bank, N.A. as trustee.
NOTE: PRIOR PERIOD PER COMMON SHARE AMOUNTS, MARKET PRICE RANGE AND DIVIDENDS
PER SHARE HAVE BEEN RESTATED TO REFLECT THE TWO-FOR-ONE COMMON STOCK
SPLIT DISTRIBUTED ON MAY 17, 1999.
49
<PAGE> 56
CONSOLIDATED INCOME STATEMENT
MELLON FINANCIAL CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions, except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE Interest and fees on loans (loan fees of $59, $73 and $81) $2,238 $2,413 $2,268
Federal funds sold and securities under resale agreements 41 49 30
Interest-bearing deposits with banks 39 33 26
Other money market investments 3 6 6
Trading account securities 19 15 9
Securities 419 376 377
----------------------------------------------------------------------------------------------
Total interest revenue 2,759 2,892 2,716
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE Deposits in domestic offices 738 824 749
Deposits in foreign offices 133 136 129
Federal funds purchased and securities under
repurchase agreements 102 123 77
Other short-term borrowings 131 114 105
Notes and debentures 225 204 189
----------------------------------------------------------------------------------------------
Total interest expense 1,329 1,401 1,249
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE Net interest revenue 1,430 1,491 1,467
Provision for credit losses 45 60 148
----------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 1,385 1,431 1,319
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE Trust and investment fee revenue 2,044 1,722 1,323
Cash management and deposit transaction charges 274 262 242
Foreign currency and securities trading revenue 173 165 118
Mortgage servicing fees 153 200 213
Credit card fees 18 92 97
Other 438 480 425
----------------------------------------------------------------------------------------------
Total fee revenue 3,100 2,921 2,418
Net gain from divestitures 127 -- --
Gains on sales of securities -- 1 --
----------------------------------------------------------------------------------------------
Total noninterest revenue 3,227 2,922 2,418
- -------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE Staff expense 1,559 1,456 1,242
Professional, legal and other purchased services 280 297 219
Net occupancy expense 243 237 225
Equipment expense 186 181 175
Business development 161 149 148
Amortization of goodwill and other intangible assets 148 137 105
Amortization of mortgage servicing assets and
purchased credit card relationships 113 179 118
Communications expense 112 107 102
Other expense 182 197 175
Trust-preferred securities expense 79 79 78
Net revenue from acquired property (14) (6) (19)
----------------------------------------------------------------------------------------------
Total operating expense 3,049 3,013 2,568
- -------------------------------------------------------------------------------------------------------------------------
INCOME Income before income taxes and cumulative effect of
accounting change 1,563 1,340 1,169
Provision for income taxes 574 470 398
----------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 989 870 771
Cumulative effect of accounting change, net of tax (26) -- --
----------------------------------------------------------------------------------------------
Net income 963 870 771
Dividends on preferred stock -- 9 21
----------------------------------------------------------------------------------------------
Net income applicable to common stock $ 963 $ 861 $ 750
----------------------------------------------------------------------------------------------
</TABLE>
(continued)
50
<PAGE> 57
CONSOLIDATED INCOME STATEMENT (CONTINUED)
MELLON FINANCIAL CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions, except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER COMMON SHARE (a) Basic net income per common share:
Income before cumulative effect of accounting change $1.92 $1.65 $1.47
Cumulative effect of accounting change (.05) -- --
------------------------------------------------------------------------------------------------
Net income $1.87 $1.65 $1.47
------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income before cumulative effect of accounting change $1.90 $1.62 $1.44
Cumulative effect of accounting change (.05) -- --
------------------------------------------------------------------------------------------------
Net income $1.85 $1.62 $1.44
------------------------------------------------------------------------------------------------
</TABLE>
(a) 1998 and 1997 per common share amounts have been restated to reflect the
two-for-one common stock split distributed on May 17, 1999.
See accompanying Notes to Financial Statements.
51
<PAGE> 58
CONSOLIDATED BALANCE SHEET
MELLON FINANCIAL CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 31,
(dollar amounts in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 3,410 $ 2,926
Federal funds sold and securities under resale agreements 1,001 186
Interest-bearing deposits with banks 286 566
Other money market investments 71 46
Trading account securities 144 193
Securities available for sale 5,159 5,373
Investment securities (approximate fair value of $1,183 and $1,634) 1,197 1,602
Loans, net of unearned discount of $79 and $54 30,248 32,093
Reserve for credit losses (403) (496)
------- -------
Net loans 29,845 31,597
Customers' acceptance liability 164 166
Premises and equipment 562 569
Goodwill and other intangibles 2,140 2,313
Mortgage servicing assets
and purchased credit card relationships 16 1,132
Other assets 3,951 4,108
-----------------------------------------------------------------------------------------------------
Total assets $47,946 $50,777
-----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES Noninterest-bearing deposits in domestic offices $ 9,588 $ 9,976
Interest-bearing deposits in domestic offices 20,540 21,293
Interest-bearing deposits in foreign offices 3,293 3,114
-----------------------------------------------------------------------------------------------------
Total deposits 33,421 34,383
Federal funds purchased and securities under
repurchase agreements 1,095 3,594
Short-term bank notes 1,055 266
U.S. Treasury tax and loan demand notes 606 290
Term federal funds purchased 358 208
Commercial paper 88 116
Other funds borrowed 448 468
Acceptances outstanding 164 166
Other liabilities 2,266 2,471
Notes and debentures (with original maturities over one year) 3,438 3,303
-----------------------------------------------------------------------------------------------------
Total liabilities 42,939 45,265
- --------------------------------------------------------------------------------------------------------------------------------
TRUST-PREFERRED Guaranteed preferred beneficial interests in Corporation's
SECURITIES junior subordinated deferrable interest debentures 991 991
- --------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' Common stock--$.50 par value
EQUITY Authorized--800,000,000 shares
Issued--588,661,920 (a) and 294,330,960 shares 294 147
Additional paid-in capital 1,788 1,887
Retained earnings 3,808 3,353
Accumulated unrealized (losses) gains, net of tax (135) 25
Treasury stock of 88,038,848 (a) and 32,407,960 shares, at cost (1,739) (891)
-----------------------------------------------------------------------------------------------------
Total shareholders' equity 4,016 4,521
-----------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and shareholders' equity $47,946 $50,777
-----------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the two-for-one common stock split distributed on May 17, 1999.
See accompanying Notes to Financial Statements.
52
<PAGE> 59
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MELLON FINANCIAL CORPORATION (and its subsidiaries)
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Additional unrealized share-
Preferred Common paid-in Retained (losses) gains, Treasury holders'
(in millions) stock stock capital earnings net of tax stock equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1996 $290 $ 74 $1,866 $2,486 $ (7) $ (963) $ 3,746
Comprehensive results:
Net income 771 771
Other comprehensive results, net of tax 28 28
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 771 28 799
Dividends on common stock
at $0.645 per share (330) (330)
Dividends on preferred stock (21) (21)
Common stock issued under Direct Stock
Purchase and Dividend Reinvestment Plan 8 14 22
Common stock issued in connection with
the Buck acquisition 143 143
Series J preferred stock redemption (97) (97)
Exercise of stock options 20 (22) 97 95
Repurchase of common stock (534) (534)
Additional common stock issued
for stock split 73 (73) --
Other (3) 25 22
- ----------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $193 $147 $1,818 $2,884 $ 21 $(1,218) $ 3,845
- ----------------------------------------------------------------------------------------------------------------------------
Comprehensive results:
Net income 870 870
Other comprehensive results, net of tax 11 11
Reclassification adjustment (7) (7)
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 870 4 874
Dividends on common stock
at $0.705 per share (365) (365)
Dividends on preferred stock (9) (9)
Common stock issued under Direct Stock
Purchase and Dividend Reinvestment Plan 10 10 20
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 1 (26) 98 73
Repurchase of common stock (27) (27)
Other 36 (1) 13 48
- ----------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 $ -- $147 $1,887 $3,353 $ 25 $ (891) $ 4,521
- ----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE RESULTS:
NET INCOME 963 963
OTHER COMPREHENSIVE RESULTS, NET OF TAX (159) (159)
RECLASSIFICATION ADJUSTMENT (1) (1)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE RESULTS 963 (160) 803
DIVIDENDS ON COMMON STOCK
AT $0.78 PER SHARE (403) (403)
COMMON STOCK ISSUED UNDER DIRECT STOCK
PURCHASE AND DIVIDEND REINVESTMENT PLAN 1 19 20
EXERCISE OF STOCK OPTIONS 47 (102) 158 103
REPURCHASE OF COMMON STOCK (1,068) (1,068)
ADDITIONAL COMMON STOCK ISSUED FOR
STOCK SPLIT 147 (147) --
OTHER (3) 43 40
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1999 $ -- $294 $1,788 $3,808 $(135) $(1,739) $ 4,016
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
53
<PAGE> 60
CONSOLIDATED STATEMENT OF CASH FLOWS
MELLON FINANCIAL CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM Net income $ 963 $ 870 $ 771
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change 26 -- --
Net gain from divestitures (127) -- --
Amortization of goodwill and other intangible assets 148 137 105
Amortization of mortgage servicing assets
and purchased credit card relationships 113 179 118
Depreciation and other amortization 98 105 108
Deferred income tax expense (benefit) 167 (31) 42
Provision for credit losses 45 60 148
Net gains on dispositions of acquired property (18) (7) (21)
Net decrease (increase) in accrued interest receivable 40 (8) (7)
Net decrease (increase) in trading account securities 60 (108) 19
Net increase (decrease) in accrued interest payable 36 29 (27)
Net decrease (increase) in residential mortgages held for sale 1,290 (278) (929)
Net (increase) decrease in other operating activities (248) (327) 190
--------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,593 621 517
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Net decrease (increase) in term deposits and other money
INVESTING ACTIVITIES market investments 252 19 (93)
Net (increase) decrease in federal funds sold and securities
under resale agreements (815) 409 249
Purchases of securities available for sale (1,992) (4,566) (6,373)
Proceeds from sales of securities available for sale 546 1,098 2,790
Proceeds from maturities of securities available for sale 1,416 1,557 4,980
Purchases of investment securities (15) (14) (26)
Proceeds from maturities of investment securities 369 491 317
Net decrease in credit card receivables to date of sale 85 90 27
Proceeds from sale of credit card business 1,186 -- --
Proceeds from sale of network services business 135 -- --
Proceeds from sale of mortgage businesses 1,210 -- --
Net principal disbursed on loans to customers (2,656) (4,417) (1,914)
Loan portfolio purchases (71) (319) (55)
Proceeds from sales and securitizations of loan portfolios 2,220 2,885 1,091
Purchases of premises and equipment (171) (132) (111)
Proceeds from sales of acquired property 62 73 69
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, LLC -- (267) --
Net cash disbursed in purchase of Newton Management Limited -- (108) --
Net cash disbursed in purchase of Buck Consultants, Inc. -- -- (42)
Net cash disbursed in purchase of Dreyfus Brokerage Services -- -- (137)
Increase in mortgage servicing assets and purchased credit
card relationships (86) (236) (323)
Net increase in other investing activities (337) (231) (261)
---------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,338 (3,834) 188
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-continued-
54
<PAGE> 61
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
MELLON FINANCIAL CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM Net (decrease) increase in transaction and savings deposits (732) 2,329 1,298
FINANCING ACTIVITIES Net decrease in customer term deposits (230) (954) (1,848)
Net (decrease) increase in federal funds purchased and
securities under repurchase agreements (2,499) 1,380 1,255
Net increase (decrease) in short-term bank notes 789 (64) 195
Net increase (decrease) in U.S. Treasury tax and loan
demand notes 316 (157) (27)
Net increase (decrease) in term federal funds purchased 150 (417) 144
Net (decrease) increase in commercial paper (28) 49 (55)
Repayments of longer-term debt (385) (124) (412)
Net proceeds from issuance of longer-term debt 507 873 465
Dividends paid on common and preferred stock (403) (376) (352)
Proceeds from issuance of common stock 70 52 75
Repurchase of common stock (1,068) (27) (534)
Redemption of preferred stock -- (193) (97)
Net (decrease) increase in other financing activities (6) 57 (37)
---------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (3,519) 2,428 70
Effect of foreign currency exchange rates 72 61 29
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND Net increase (decrease) in cash and due from banks 484 (724) 804
DUE FROM BANKS Cash and due from banks at beginning of year 2,926 3,650 2,846
---------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 3,410 $ 2,926 $ 3,650
---------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL Interest paid $ 1,293 $1,372 $ 1,276
DISCLOSURES Net income taxes paid 345 428 364
---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
Basis of presentation
The accounting and financial reporting policies of Mellon Financial Corporation
(the Corporation), formerly Mellon Bank Corporation, a global multibank holding
company, conform to generally accepted accounting principles (GAAP) and
prevailing industry practices. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and the disclosure of contingent assets and
liabilities and the reported amounts of related revenue and expense. Actual
results could differ from these estimates.
The consolidated financial statements of the Corporation include the accounts of
the Corporation and its majority-owned subsidiaries. Investments in companies
20% to 50% owned are carried on the equity basis. Investments in companies less
than 20% owned are carried at cost. Intracorporate balances and transactions are
not reflected in the consolidated financial statements. The income statement
includes results of acquired subsidiaries and businesses accounted for under the
purchase method of accounting from the dates of acquisition. Securities and
other property held in a fiduciary or agency capacity are not included in the
balance sheet since these are not assets or liabilities of the Corporation. All
per common share amounts, average shares and equivalents outstanding and
associated ratios were restated to reflect the two-for-one common stock split
distributed on May 17, 1999.
55
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
The parent corporation financial statements in note 25 include the accounts of
the Corporation, those of a wholly owned financing subsidiary that functions as
a financing entity for the Corporation and its subsidiaries by issuing
commercial paper and other debt guaranteed by the Corporation, and those of the
business trusts discussed in note 12. Financial data for the Corporation, the
financing subsidiary and the business trusts are combined for financial
reporting because of the limited function of the financing subsidiary and the
business trusts, and the unconditional guarantee by the Corporation of their
obligations.
Nature of operations
The Corporation is a global multibank holding company incorporated under the
laws of Pennsylvania in August 1971 and registered under the Federal Bank
Holding Company Act of 1956, as amended. Its principal direct subsidiaries are
Mellon Bank, N.A.; The Boston Company, Inc.; Buck Consultants, Inc.; Newton
Management Limited; and a number of companies known as the Mellon Financial
Services Corporations. The Dreyfus Corporation, one of the nation's largest
mutual fund management companies, and Founders Asset Management, LLC, are
subsidiaries of Mellon Bank, N.A. Mellon's banking subsidiaries primarily engage
in retail financial services, commercial banking, trust and investment
management services, residential real estate loan financing, mutual fund
activities, equipment leasing, insurance products and various securities-related
activities. Buck Consultants, a leading global actuarial and human resources
consulting firm, provides a broad array of services in the areas of defined
benefit and defined contribution plans, health and welfare plans, communications
and compensation consulting, and outsourcing and administration of employee
benefit programs. The Mellon Financial Services Corporations, through their
subsidiaries and joint ventures, provide a broad range of bank-related services
including equipment leasing, commercial loan financing, stock transfer services,
cash management and numerous trust and investment management services. While the
Corporation's major subsidiaries primarily are headquartered in the Northeast
and mid-Atlantic regions, most of its products and services are offered
nationwide and many are offered globally. The Corporation's customer base is
well diversified and primarily domestic.
Trading account securities, securities available for sale and investment
securities
When purchased, securities are classified in the trading account securities
portfolio, the securities available for sale portfolio or the investment
securities portfolio. Securities are classified as trading account securities
when the intent is profit maximization through market appreciation and resale.
Securities are classified as available for sale when management intends to hold
the securities for an indefinite period of time or when the securities may be
used for tactical asset/liability purposes and may be sold from time to time to
effectively manage interest rate exposure, prepayment risk and liquidity needs.
Securities are classified as investment securities when management intends to
hold these securities until maturity.
Trading account securities, including off-balance-sheet instruments, are stated
at fair value. Trading revenue includes both realized and unrealized gains and
losses. The liability incurred on short-sale transactions, representing the
obligation to deliver securities, is included in other funds borrowed at fair
value.
Securities available for sale are stated at fair value. Unrealized gains or
losses on assets classified as available for sale, net of tax, are recorded as
an addition to or deduction from other comprehensive results in shareholders'
equity. Investment securities are stated at cost, adjusted for amortization of
premium and accretion of discount on a level yield basis. Gains and losses on
sales of securities available for sale are reported in the income statement. The
cost of securities sold is determined on a specific identification basis.
56
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Venture capital investments
Venture capital investments are reported at estimated fair values, in the
absence of readily ascertainable market values. Changes in fair value and gains
and losses from sales are recognized in other revenue. The values assigned to
the investments where no market quotation exists are based upon available
information and may not necessarily represent amounts that will ultimately be
realized. Such estimated amounts depend on future circumstances. These estimated
amounts will not be realized until the individual investments are liquidated.
The valuation procedures applied include consideration of economic and market
conditions, current and projected financial performance of the investee company,
and the investee company's management team. Management believes that the cost of
an investment is initially considered the best indication of estimated fair
value unless there have been significant subsequent positive or negative
developments that justify an adjustment in the fair value estimate. Venture
capital investments are included in "Other Assets" on the Corporation's balance
sheet.
Loans
Loans are reported net of any unearned discount. Interest revenue on
nondiscounted loans is recognized based on the principal amount outstanding.
Interest revenue on discounted loans is recognized based on methods that
approximate a level yield. Loan origination and commitment fees, as well as
certain direct loan origination and commitment costs, are deferred and amortized
as a yield adjustment over the lives of the related loans. Deferred fees and
costs are netted against outstanding loan balances.
Unearned revenue on direct financing leases is accreted over the lives of the
leases in decreasing amounts to provide a constant rate of return on the net
investment in the leases. Revenue on leveraged leases is recognized on a basis
to achieve a constant yield on the outstanding investment in the lease, net of
the related deferred tax liability, in the years in which the net investment is
positive. Gains on sales of lease residuals are recognized in other revenue.
Commercial loans, including commercial leases, generally are placed on
nonaccrual status when either principal or interest is past due 90 days or more,
unless the loan is well secured and in the process of collection. Management
also places commercial loans on nonaccrual status when the collection of
principal or interest becomes doubtful. Residential mortgage loans generally are
placed on nonaccrual status when, in management's judgment, collection is in
doubt or the loans have outstanding balances of $250,000 or greater and are 90
days or more delinquent, or have balances of less than $250,000 and are
delinquent 12 months or more. Consumer loans, other than residential mortgages,
and certain secured commercial loans are charged off upon reaching various
stages of delinquency depending upon the loan type. When a loan is placed on
nonaccrual status, previously accrued and uncollected interest is reversed
against current period interest revenue. Interest receipts on nonaccrual and
impaired loans are recognized as interest revenue or are applied to principal
when management believes the ultimate collectability of principal is in doubt.
Nonaccrual loans generally are restored to an accrual basis when principal and
interest payments become current or when the loan becomes well secured and is in
the process of collection.
A loan is considered to be impaired, as defined by FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," when 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. The Corporation performs impairment
tests on all loans of $1 million or greater covered under FAS No. 114, where
there is a significant credit concern. Consumer credit nonaccrual loans are not
tested for impairment because they are included in large groups of
smaller-balance homogeneous loans that, by definition along with leases, are
excluded from the scope of FAS No. 114.
57
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Impaired loans are required to be measured based upon the present value of
expected future cash flows, discounted at the loan's initial effective interest
rate, or at the loan's market price or fair value of the collateral if the loan
is collateral dependent. If the loan valuation is less than the recorded value
of the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on the
appropriateness of the reserve for credit losses. Impairment reserves are not
needed when the recorded investment in an impaired loan is less than the loan
valuation.
Loan securitizations
The amount of interest and fee revenue in excess of both interest paid to
certificate holders and credit losses is recognized monthly as servicing
revenue. The servicing revenue from the home equity and insurance premium
finance receivables is recognized in other revenue.
Reserve for credit losses
The reserve for credit losses is maintained to absorb losses embedded in the
credit portfolio as of the balance sheet date based on management's judgment.
The reserve determination methodology is designed to provide procedural
discipline in assessing the appropriateness of the reserve. This methodology
primarily uses an individual evaluation of problem credits and a historical
analysis of loss experience and criticized credit levels. In addition, the
status and amount of nonperforming and past-due loans are considered.
Qualitative factors considered included: industry risks, current economic
factors affecting collectability, trends in portfolio volume, quality, maturity
and composition and current interest rate levels and economic conditions. Credit
losses are charged against the reserve. Recoveries are added to the reserve.
Acquired property
Property acquired in connection with loan settlements, including real estate
acquired, is stated at the lower of estimated fair value less estimated costs to
sell or the carrying amount of the loan. A reserve for real estate acquired is
maintained on a property-by-property basis to recognize estimated potential
declines in value that might occur between appraisal dates. Provisions for the
estimated potential decrease in fair value between annual appraisals, net gains
on the sale of real estate acquired and net direct operating expense
attributable to these assets are included in net revenue from acquired property.
Acquired property is reported in "Other Assets" on the Corporation's balance
sheet.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated over the estimated
useful lives of the assets, limited in the case of leasehold improvements to the
lease term, using the straight-line method.
Goodwill, other identified intangibles, mortgage servicing assets and purchased
credit card relationships
Intangible assets are amortized using straight-line and accelerated methods over
the remaining estimated benefit periods which approximated, on a
weighted-average basis at Dec. 31, 1999, 20 years for goodwill, five years for
core deposit intangibles and 11 years for all other intangible assets except
mortgage servicing assets. Intangible assets are reviewed for possible
impairment when events or changed circumstances may affect the underlying basis
of the asset.
58
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
The divestitures of the mortgage and credit card businesses in 1999 resulted in
an insignificant level of mortgage servicing rights (MSRs) remaining at Dec. 31,
1999, related to the jumbo mortgage loan business that was retained. The
discussion that follows, in large part, relates to MSR accounting and valuation
practices followed in the first three quarters of 1999 and in prior years.
Originated mortgage servicing rights are recorded by allocating total costs
incurred between the loan and servicing rights based on their relative fair
values. Purchased MSRs are recorded at cost. MSRs are amortized in proportion to
the estimated servicing income over the estimated life of the servicing
portfolio. In 1999, the Corporation capitalized $8 million of jumbo residential
MSRs. In 1998, $436 million of MSRs were capitalized on both the portfolio that
was sold and on the jumbo mortgage portfolio, in connection with both mortgage
servicing portfolio purchases and loan originations. The carrying value of MSRs
was $16 million at Dec. 31, 1999, with an estimated fair value of $17 million.
The carrying value of MSRs and any related hedges was $1.1 billion at Dec. 31,
1998, with an estimated fair value of $1.2 billion. Deferred gains/losses and
cash settlements on hedge instruments associated with MSRs were included in the
carrying value of the MSRs. The carrying value of MSRs is measured for
impairment each quarter based on the fair value of the MSRs. Quoted market
prices are used, whenever available, as the basis for measuring the fair value
of servicing rights. When quoted market prices are not available, fair values
are based upon the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved. For impairment measurement
purposes, all mortgage servicing rights are first stratified by loan type and
then by interest rates within the loan type. If the carrying value of an
individual stratum were to exceed its fair value, a valuation allowance would be
established. No valuation allowances were recorded at Dec. 31, 1999 and 1998. On
a weighted-average basis at Dec. 31, 1999, the serviced jumbo mortgage loan
portfolio had an interest rate of approximately 7.10%.
Income taxes
The Corporation files a consolidated U.S. income tax return. Deferred taxes are
recognized for the expected future tax consequences of existing differences
between the financial reporting and tax reporting bases of assets and
liabilities using enacted tax laws and rates.
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars at the rate of exchange on the balance sheet date. Revenue and expense
accounts are translated monthly at month-end rates of exchange. Net foreign
currency positions are valued at rates of exchange--spot or future, as
appropriate--prevailing at the end of the period, and resulting gains or losses
are included in the income statement. Translation gains and losses on
investments in foreign entities with functional currencies that are not the U.S.
dollar are included in shareholders' equity in other comprehensive results.
Fee revenue
Trust and investment fees are reported net of fees waived and expense
reimbursements to certain mutual funds. Fees on standby letters of credit are
recognized over the commitment term in fee revenue, while fees on commercial
letters of credit, because of their short-term nature, are recognized when
received in fee revenue. Fees for banking and other services generally are
recognized over the periods in which the related services are provided.
59
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Closed-end mutual fund
On Jan. 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.
In the second quarter of 1998, the Corporation introduced a $920 million Dreyfus
closed-end mutual fund, on which management fees are being earned. The
Corporation paid the underwriting fees during the initial public offering of the
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. As a result, the unamortized pre-tax cost of
approximately $43 million, or $26 million after tax, was recognized as a
cumulative effect of a change in accounting principle as of Jan. 1, 1999,
instead of being amortized over future years. This accounting change had no
impact on a cash-flow basis in 1999 since the underwriting fees were paid in the
first half of 1998.
Accounting for the costs of computer software
On Jan. 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 expensed such costs. The adoption of SOP No. 98-1 was
immaterial to the Corporation's financial position and results of operations.
Off-balance-sheet instruments used for risk management purposes
The Corporation enters into interest rate swaps, interest rate caps and floors,
financial futures and financial options primarily to manage its sensitivity to
interest rate risk. This is accomplished by using these instruments to offset
the inherent price or interest rate risk of specific on-balance-sheet assets or
liabilities. The Corporation uses total return swaps to offset the inherent
market value risk of investments in start-up mutual funds. Prior to the third
quarter 1999 sale of the mortgage business, the Corporation also used interest
rate floor contracts, interest rate swap contracts, treasury lock contracts and
spread lock contracts to hedge against value impairment of its MSRs resulting
from a decrease in interest rates. All of these instruments are designated as
hedges on the trade date and are highly correlated with the financial instrument
being hedged. High correlation is achieved if the hedge instrument and the
financial instrument being hedged are denominated in the same currency and (i)
are both fixed rate instruments with similar maturities, (ii) are structurally
comparable and based upon similar floating rate indices or (iii) have been
subjected to a mathematical correlation analysis and found to be highly
correlated. Hedge correlation of interest rate or market value risk management
positions is reviewed periodically. If a hedged instrument is sold or matures,
or correlation criteria are no longer met, the risk management position is no
longer accounted for as a hedge. Under these circumstances, the accumulated
change in market value of the hedge is recognized in current income to the
extent that the hedge results have not been offset by the effects of interest
rate or price changes of the hedged item.
Tactical asset/liability management considerations require the Corporation to
periodically terminate hedge instruments. Any deferred gain or loss resulting
from the termination is amortized to income/expense of the corresponding hedged
item over the remaining period of the original hedge or hedged item.
60
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
The Corporation also enters into off-balance-sheet contracts to hedge
anticipated transactions. If it is determined that an anticipated transaction
that has been hedged will not occur, the results of the hedge will be recognized
currently in the income category in which the original anticipated transaction
was to be reported.
Interest revenue or interest expense on hedge transactions is accrued over the
term of the agreement as an adjustment to the yield or cost of the related asset
or liability. Transaction fees are deferred and amortized to interest revenue or
interest expense over the term of the agreement. Realized gains and losses are
deferred and amortized over the life of the hedged transaction as interest
revenue or interest expense, and any unamortized amounts are recognized as
income or loss at the time of disposition of the assets or liabilities being
hedged. Amounts payable to or receivable from counterparties are included in
other liabilities or other assets. The fair values of interest rate swaps, caps
and floors, financial futures and financial options used for risk management
purposes are not recognized in the financial statements. Prior to the third
quarter 1999 sale of the mortgage business, realized gains/losses and cash
settlements on instruments associated with MSRs were deferred and included as an
adjustment to the carrying value of the MSRs. These amounts were amortized over
the same period as the MSRs. Changes in fair value of total return swaps are
recognized in net unrealized gains and losses on assets available for sale
within shareholders' equity in other comprehensive results.
Off-balance-sheet instruments used for trading activities
The Corporation enters into foreign exchange contracts, futures and forward
contracts, currency and interest rate option contracts, interest rate swaps, and
other over the counter derivative contracts to accommodate customers and for its
proprietary trading activities. Realized and unrealized changes in the fair
value of these instruments are recognized in the income statement in foreign
currency and securities trading revenue in the period in which the changes
occur. Interest revenue and expense on instruments held for trading activities
are included in the income statement as part of net interest revenue. The fair
value of contracts with a given customer in gain positions is reported on the
balance sheet in other assets and the fair value of contracts in loss positions
is reported in other liabilities.
Statement of cash flows
For the purpose of reporting cash flows, the Corporation has defined cash and
cash equivalents as cash and due from banks. Cash flows from assets and
liabilities that have an original maturity date of three months or less
generally are reported on a net basis. Cash flows from assets and liabilities
that have an original maturity date greater than three months generally are
reported on a gross basis. Cash flows from hedging activities are classified in
the same category as the items hedged.
2. CASH AND DUE FROM BANKS
Cash and due from banks includes reserve balances that the Corporation's
subsidiary banks are required to maintain with a Federal Reserve bank. These
required reserves are based primarily on deposits outstanding and were $452
million at Dec. 31, 1999, and $472 million at Dec. 31, 1998. These balances
averaged $454 million in 1999 and $457 million in 1998.
61
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. SECURITIES
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- ---------------------------------------------------------------------------------------------------------------------------
DEC. 31, 1999 Dec. 31, 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 $ 224 $- $ 1 $ 223 $ 219 $ 1 $- $ 220
U.S. agency mortgage-backed 4,973 4 175 4,802 4,700 66 1 4,765
Other U.S. agency 5 - -- 5 259 -- - 259
- ---------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and
agency securities 5,202 4 176 5,030 5,178 67 1 5,244
Obligations of states and
political subdivisions 113 - 9 104 112 1 1 112
Other mortgage-backed 1 - -- 1 2 -- - 2
Other securities 24 - -- 24 15 -- - 15
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $5,340 $4 $185 $5,159 $5,307 $68 $2 $5,373
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE
- -----------------------------------------------------------------------------------------------------------------------------------
Contractual maturities at Dec. 31, 1999
Obligations Total
U.S. agency Total of states Other securities
(dollar amounts U.S. mortgage- Other U.S. Treasury and political mortgage- Other available
in millions) Treasury backed U.S. agency and agency subdivisions backed securities for sale
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within one year
Amortized cost $ 208 $ -- $ -- $ 208 $ 1 $ -- $ 4 $ 213
Fair value 208 -- -- 208 1 -- 4 213
Yield 5.44% -- -- 5.44% 11.56% -- 5.46% 5.47%
1 to 5 years
Amortized cost 8 -- -- 8 3 -- 11 22
Fair value 8 -- -- 8 3 -- 11 22
Yield 6.17% -- -- 6.17% 7.81% -- 6.30% 6.44%
5 to 10 years
Amortized cost 8 -- 5 13 16 -- 2 31
Fair value 7 -- 5 12 15 -- 2 29
Yield 5.82% -- 6.49% 6.08% 6.95% -- 6.40% 6.57%
Over 10 years
Amortized cost -- -- -- -- 93 -- 7 100
Fair value -- -- -- -- 85 -- 7 92
Yield -- -- -- -- 7.24% -- 5.54% 7.13%
Mortgage-backed
securities
Amortized cost -- 4,973 -- 4,973 -- 1 -- 4,974
Fair value -- 4,802 -- 4,802 -- 1 -- 4,803
Yield -- 6.48 % -- 6.48% -- 6.48% -- 6.48%
- -----------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $ 224 $4,973 $ 5 $5,202 $ 113 $ 1 $ 24 $5,340
Total fair value 223 4,802 5 5,030 104 1 24 5,159
Total yield 5.48% 6.48 % 6.49% 6.43% 7.24% 6.48% 5.97% 6.45%
Weighted average
contractual years
to maturity .75 --(a) 7.78 .92(b) 12.10 --(a) 5.72
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The average expected lives of "U.S. agency mortgage-backed" and "Other
mortgage-backed" securities were approximately 5.8 years and 3.3 years,
respectively, at Dec. 31, 1999.
(b) Excludes maturities of "U.S. agency mortgage-backed" securities.
Note: Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Rates are calculated on a taxable equivalent basis
using a 35% federal income tax rate.
62
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
DEC. 31, 1999 Dec. 31, 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 $ -- $-- $-- $ -- $ 50 $11 $-- $ 61
U.S. agency mortgage-backed 1,113 1 15 1,099 1,468 24 3 1,489
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and
agency securities 1,113 1 15 1,099 1,518 35 3 1,550
Obligations of states and political
subdivisions 16 -- -- 16 16 -- -- 16
Other mortgage-backed 9 -- -- 9 16 -- -- 16
Other securities 59 -- -- 59 52 -- -- 52
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,197 $1 $15 $1,183 $1,602 $35 $ 3 $1,634
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------------
Contractual maturities at Dec. 31, 1999
Obligations
U.S. agency Total of states Other Total
(dollar amounts mortgage- U.S. Treasury and political mortgage- Other investment
in millions) backed and agency subdivisions backed securities securities
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 to 5 years
Amortized cost $ -- $ -- $ 7 $ -- $ -- $ 7
Fair value -- -- 7 -- -- 7
Yield -- -- 8.99% -- -- 8.99%
5 to 10 years
Amortized cost -- -- 9 -- -- 9
Fair value -- -- 9 -- -- 9
Yield -- -- 8.99% -- -- 8.99%
Over 10 years
Amortized cost -- -- -- -- 59(a) 59
Fair value -- -- -- -- 59(a) 59
Yield -- -- -- -- 6.00% 6.00%
Mortgage-backed
securities
Amortized cost 1,113 1,113 -- 9 -- 1,122
Fair value 1,099 1,099 -- 9 -- 1,108
Yield 6.97% 6.97% -- 7.02% -- 6.97%
- --------------------------------------------------------------------------------------------------------------------
Total amortized cost $1,113 $1,113 $ 16 $ 9 $ 59 $1,197
Total fair value 1,099 1,099 16 9 59 1,183
Total yield 6.97% 6.97% 8.99% 7.02% 6.00% 6.95%
Weighted average
contractual years to
maturity --(b) --(b) 5.94 --(b) --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Federal Reserve Bank stock with no stated maturity.
(b) The average expected lives of "U.S. agency mortgage-backed" and "Other
mortgage-backed" securities were approximately 6.3 years and 2.1 years,
respectively, at Dec. 31, 1999.
Note: Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Rates are calculated on a taxable equivalent basis
using a 35% federal income tax rate.
63
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. SECURITIES (CONTINUED)
Gross realized gains and losses on the sale of securities available for sale
were each $1 million or less in 1999 and 1998 and were $2 million each in 1997.
After-tax net gains on the sale of securities were less than $1 million in 1999,
1998 and 1997. Proceeds from the sale of securities available for sale were $546
million, $1.1 billion and $2.8 billion in 1999, 1998 and 1997, respectively. In
the first quarter of 1999, as part of the divestiture 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 match fund the long-term interest rebate obligation
associated with the CornerStone(sm) credit card product and were no longer
required following the divestiture 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. There were no sales of investment securities in 1998 and
1997.
Securities available for sale, investment securities, trading account securities
and loans with book values of $5.8 billion at Dec. 31, 1999, and $4.2 billion at
Dec. 31, 1998, were required to be pledged to secure public and trust deposits,
repurchase agreements and for other purposes.
4. BUSINESS SECTORS
On Jan. 1, 1998, the Corporation adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which superseded FAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
establishes standards for reporting information about business sectors in the
footnotes to annual financial statements and also requires selected sector
information in interim reports. The statement requires disclosure on a business
sector basis, as defined by the Corporation, to include a description of
products and services, profit or loss as measured by the Corporation's
management in assessing sector performance and geographic information on assets
and revenue, if material.
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. All prior periods have been restated. 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 origination of jumbo residential mortgages. Global Investment
Management includes mutual fund management, institutional asset management and
brokerage services. Global Investment Services includes institutional trust and
custody, foreign exchange, securities lending, shareholder services, benefits
consulting and administrative services for employee benefit plans and backoffice
outsourcing for investment managers. This sector also includes the Corporation's
joint ventures, whose results are reported under the equity method of
accounting. 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 mid-corporate relationship banking, 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 on pages 8 through 10, as well as the
Divestitures, the Real Estate Workout/Other Activity and Geographic Information
paragraphs in the Business Sectors presentation on pages 13 and 14. The table,
through "Average Tier I preferred equity", and information in those paragraphs
are incorporated by reference into these Notes to Financial Statements.
64
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. LOANS
For details of the loans outstanding at Dec. 31, 1999 and 1998, see the 1999 and
1998 columns of the "Composition of loan portfolio at year end" table on page
39. The information in those columns is incorporated by reference into these
Notes to Financial Statements.
For details of the nonperforming and past-due loans at Dec. 31, 1999 and 1998,
see the amounts in the 1999 and 1998 columns of the "Nonperforming assets at
year end" and "Past-due loans at year end" tables on pages 42 and 44,
respectively. The information in those columns is incorporated by reference into
these Notes to Financial Statements. For details on impaired loans at Dec. 31,
1999, 1998 and 1997, see the amounts in the "Impaired loans" table on page 43.
The information in that table is incorporated by reference into these Notes to
Financial Statements. There was no foregone interest on restructured loans in
1999, 1998 and 1997.
6. RESERVE FOR CREDIT LOSSES
For details of the reserve for credit losses for 1999, 1998 and 1997, see the
1999, 1998 and 1997 columns of the "Credit loss reserve activity" table on page
46. The information in those columns is incorporated by reference into these
Notes to Financial Statements.
7. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 34 $ 38
Buildings 303 279
Equipment 456 783
Leasehold improvements 235 246
- --------------------------------------------------------------------------------------------------------------------------
Subtotal 1,028 1,346
Accumulated depreciation and amortization (466) (777)
- --------------------------------------------------------------------------------------------------------------------------
Total premises and equipment $ 562 $ 569
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the table above at Dec. 31, 1999, is $86 million of expenditures
related to the Mellon Client Service Center (the Center), which is under
construction. These costs represent approximately 43% of the Center's expected
total cost with substantially all of the remainder expected to be expended in
2000.
The table above includes capital leases for premises and equipment at a net book
value of $1 million at Dec. 31, 1999. There were no capital leases for premises
and equipment at Dec. 31, 1998.
Rental expense was $156 million, $162 million and $137 million, respectively,
net of related sublease revenue of $20 million, $20 million and $23 million, in
1999, 1998 and 1997 respectively. Depreciation and amortization expense totaled
$98 million, $105 million and $108 million in 1999, 1998 and 1997, respectively.
Maintenance, repairs and utilities expenses totaled $108 million, $102 million
and $98 million in 1999, 1998 and 1997, respectively.
As of Dec. 31, 1999, the Corporation and its subsidiaries are obligated under
noncancelable leases (principally for banking premises) with expiration dates
through 2023. A summary of the future minimum rental payments under
noncancelable leases, net of related sublease revenue totaling $71 million, is
as follows: 2000--$158 million; 2001--$154 million; 2002--$148 million;
2003--$146 million; 2004--$143 million and 2005 through 2023--$641 million.
65
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
8. OTHER ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Prepaid expense:
Pension $ 554 $ 468
Other 172 132
Accounts and fees receivable 582 591
Receivables related to off-balance-sheet instruments 451 552
Interest receivable 219 262
Mortgage servicing advances 2 214
Other 1,971 1,889
- ---------------------------------------------------------------------------------------------------------------------------
Total other assets $3,951 $4,108
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
9. DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or greater
was approximately $4.3 billion at Dec. 31, 1999, and $3.7 billion at Dec. 31,
1998.
At Dec. 31, 1999, the scheduled maturity of time deposits for the years 2000
through 2004, and 2005 and thereafter are as follows: $7.050 billion, $1.606
billion, $385 million, $71 million, $237 million and $85 million, respectively.
10. REVOLVING CREDIT AGREEMENT
In 1996, the Corporation signed a four-year $300 million revolving credit
agreement with several financial institutions that serves as a support facility
for commercial paper and for general corporate purposes. This facility expires
in August 2000. The credit facility has several restrictions, including a
minimum 6% Tier I ratio, a 1.30 maximum double leverage limitation and a minimum
nonperforming asset coverage ratio of 3 to 1. The nonperforming asset coverage
ratio is Tier I capital plus the reserve for credit losses as a multiple of
nonperforming assets. At Dec. 31, 1999, the Corporation was in compliance with
all of the restrictions. There were no other credit facilities issued to
subsidiaries of the Corporation at Dec. 31, 1999 or 1998. No borrowings were
made under any facility in 1999 or 1998. Commitment fees totaled less than $1
million in each of the years 1997 through 1999.
66
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
11. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR)
- ---------------------------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Corporation:
Floating Rate Senior Notes due 2002 (6.44% at Dec. 31, 1999) $ 400 $ --
6.375% Subordinated Debentures due 2010 348 348
5.75% Senior Notes due 2003 300 300
6.70% Subordinated Debentures due 2008 249 249
6.30% Senior Notes due 2000 200 200
6.00% Senior Notes due 2004 200 199
6-7/8% Subordinated Debentures due 2003 150 150
9-1/4% Subordinated Debentures due 2001 100 100
9-3/4% Subordinated Debentures due 2001 100 100
7-5/8% Senior Notes due 1999 -- 200
Medium-Term Notes, Series A, due 2000-2001 (10.30% to 10.50% at
Dec. 31, 1999, and 1998) 10 10
7-1/4% Convertible Subordinated Capital Notes due 1999 -- 1
Subsidiaries:
7-3/8% Subordinated Notes due 2007 300 300
7% Subordinated Notes due 2006 300 300
6-1/2% Subordinated Notes due 2005 250 249
7-5/8% Subordinated Notes due 2007 249 249
6-3/4% Subordinated Notes due 2003 149 149
Medium-Term Bank Notes due 2000-2007 (5.85% to 8.55% at Dec. 31, 1999,
and 4.52% to 8.55% at Dec. 31, 1998) 133 199
- ---------------------------------------------------------------------------------------------------------------------------
Total unsecured notes and debentures (with original maturities over one year) $3,438 $3,303
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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. The
Corporation currently intends to file a new $1.5 billion debt shelf registration
statement in the first quarter of 2000.
The subordinated notes and any subordinated medium-term bank notes shown in the
table above were issued by Mellon Bank, N.A. These notes are subordinated to
obligations to depositors and other creditors of Mellon Bank, N.A. Any senior
medium-term bank notes are subordinated to depositors and are on a par with
other creditors of Mellon Bank, N.A.
The aggregate amounts of notes and debentures that mature during the five years
2000 through 2004 for the Corporation are as follows: $310 million, $205
million, $409 million, $602 million and $205 million, respectively. The
aggregate amounts of notes and debentures that mature during the five years 2000
through 2004 for Mellon Financial Corporation (parent corporation) are as
follows: $205 million, $205 million, $400 million, $450 million and $200
million, respectively.
67
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
12. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES (TRUST-PREFERRED SECURITIES)
The Corporation has two statutory business trusts, Mellon Capital I and Mellon
Capital II, of which the Corporation owns all of the common stock. These trusts
exist solely to issue capital securities. For financial reporting purposes, the
trusts are treated as subsidiaries and are consolidated into the financial
statements of the Corporation. The capital securities are presented as a
separate line item on the consolidated balance sheet as guaranteed preferred
beneficial interests in Corporation's junior subordinated deferrable interest
debentures (trust-preferred securities). The trust-preferred securities qualify
as Tier I capital. The trusts have issued the trust-preferred securities and
invested the net proceeds in junior subordinated deferrable interest debentures
(subordinated debentures) issued to the trusts by the Corporation. The
subordinated debentures are the sole assets of the trusts. The Corporation has
the right to defer payment of interest on the subordinated debentures at any
time, or from time to time, for periods not exceeding five years. If interest
payments on the subordinated debentures are deferred, the distributions on the
trust-preferred securities also are deferred. Interest on the subordinated
debentures and distributions on the trust-preferred securities is cumulative.
The Corporation, through guarantees and agreements, has fully and
unconditionally guaranteed all of the trusts' obligations under the
trust-preferred securities.
For purposes of the table below and discussion that follows, the terms and
conditions of the trust-preferred securities are treated as identical to the
underlying subordinated debentures.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Liquidation Balances at
(dollar amounts in millions, Stated preference Dec. 31,
except per security amounts) maturity Payable per security 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7.72% Series A 12/01/26 semiannual $1,000.00 $495 $495
7.995% Series B 1/15/27 semiannual $1,000.00 496 496
---- ----
Total $991 $991
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The securities were each issued for a face value of $500 million and are
reported net of issuance costs in the table above. The securities are unsecured
and subordinate to all senior debt (as defined) of the Corporation. The Series A
and Series B securities are redeemable, in whole or in part, at the option of
the Corporation on or after Dec. 1, 2006, and Jan. 15, 2007, respectively, or
prior to those dates, in whole, within 90 days following receipt of a legal
opinion that, due to a change in the tax laws or an administrative or judicial
decision, there is a substantial risk that the tax deductibility of the interest
could be disallowed ("tax event") or the Corporation's reasonable determination
that, due to a change in law or administrative or judicial decision, there is a
substantial risk that Tier I capital treatment could be disallowed ("capital
treatment event"). The Series A and Series B securities are redeemable at
103.86% and 103.9975%, respectively, of the liquidation amounts, plus accrued
distributions, during the 12-month periods beginning Dec. 1, 2006, and Jan. 15,
2007, respectively (the call dates). The redemption prices decline for the
Series A and Series B securities by approximately 39 basis points and
approximately 40 basis points, respectively, during each of the following
12-month periods, until a final redemption price of 100% of the liquidation
amount is set for Dec. 1, 2016, and Jan. 15, 2017, respectively, and thereafter.
If the securities are redeemed following a tax event or capital treatment event,
the greater of 100% of the principal amount or the sum of the present value of
the first redemption price plus the present value of interest payments from the
redemption date to the call dates will be paid.
68
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
13. PREFERRED STOCK
- ---------------------------------------------------------------------------------------------------------------------------
Balances at
Dec. 31,
------------------------------
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8.20% preferred stock (Series K) $-- $-- $193
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation has authorized 50 million shares of preferred stock, none of
which was issued at Dec. 31, 1999 or 1998. The Series K preferred stock had a
par value of $1.00 per share and a liquidation preference of $25 per share. The
Corporation redeemed the Series K preferred stock on Feb. 17, 1998, at a 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 dividends.
14. REGULATORY CAPITAL REQUIREMENTS
A discussion about the Corporation's regulatory capital requirements for 1999
and 1998 is presented in the "Regulatory capital" section on pages 27 and 28 and
is incorporated by reference into these Notes to Financial Statements.
15. NONINTEREST REVENUE
The components of noninterest revenue for the three years ended Dec. 31, 1999,
are presented in the "Noninterest revenue" table on page 16. That table,
including through the "Total noninterest revenue" line, is incorporated by
reference into these Notes to Financial Statements.
16. FOREIGN CURRENCY AND SECURITIES TRADING REVENUE
The Corporation's trading activities involve a variety of financial instruments,
including U.S. government securities, municipal securities and money market
securities, as well as off-balance-sheet instruments. A significant portion of
the Corporation's trading revenue is earned by structuring and executing
off-balance-sheet instruments for customers. The resulting risks are limited by
entering into generally matching or offsetting positions. The Corporation also
enters into positions in interest rate, foreign exchange, futures contracts and
debt instruments based upon expectations of future market conditions. Unmatched
positions are monitored through established limits. To maximize net trading
revenues, the market-making and proprietary positions are managed together by
product.
The results of the Corporation's foreign currency and securities trading
activities are presented, by class of financial instrument, in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange contracts $162 $155 $108
Debt instruments 12 -- 3
Interest rate contracts (1) 10 7
- --------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $173 $165 $118
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recorded an unrealized gain of less than $1 million at Dec.
31, 1999, an unrealized loss of $3 million at Dec. 31, 1998, and an
unrealized loss of less than $1 million at Dec. 31, 1997, related to
securities held in the trading portfolio.
69
<PAGE> 76
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
17. INCOME TAXES
Income tax expense applicable to income before income taxes and the cumulative
effect of a change in accounting principle consists of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes:
Federal $348 $454 $321
State and local 45 40 24
Foreign 14 7 11
- ---------------------------------------------------------------------------------------------------------------------------
Total current tax expense 407 501 356
- ---------------------------------------------------------------------------------------------------------------------------
Deferred taxes:
Federal 150 (42) 31
State and local 17 10 11
Foreign -- 1 --
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax expense/(benefit) 167 (31) 42
- ---------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $574 $470 $398
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to amounts applicable to income before taxes, the following income
tax (benefit) amounts were recorded in shareholders' equity:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation expense for tax purposes in excess
of amounts recognized for financial statement purposes $ (50) $(55) $(40)
Other comprehensive results (98) 6 19
- ---------------------------------------------------------------------------------------------------------------------------
Total tax (benefit) $(148) $(49) $(21)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes was different from the amounts computed by
applying the statutory federal income tax rate to income before income taxes and
the cumulative effect of a change in accounting principle due to the items
listed in the following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35% 35% 35%
Tax expense computed at statutory rate $ 547 $ 469 $ 409
Increase (decrease) resulting from:
State and local income taxes, net of federal tax benefit 40 33 23
Amortization of goodwill 24 23 14
Tax exempt income (25) (44) (39)
Other, net (12) (11) (9)
- --------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 574 $ 470 $ 398
- --------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 36.7% 35.1% 34.1%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE> 77
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
17. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Provision for credit losses and
write-downs on real estate acquired $153 $224 $223
Accrued expense not deductible until paid 147 70 58
Occupancy expense 72 75 73
Unrealized loss on securities available for sale 65 -- --
Hedges on mortgage servicing rights -- 83 6
Other 37 18 9
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 474 470 369
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Lease financing revenue 596 523 451
Other 44 61 58
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 640 584 509
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $166 $114 $140
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation determined that it was not required to establish a valuation
allowance for deferred tax assets because it is management's assertion that the
deferred tax assets are likely to be realized through carryback to taxable
income in prior years, future reversals of existing taxable temporary
differences and, to a lesser extent, future taxable income.
71
<PAGE> 78
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
18. EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is computed by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding during the period, without considering any dilutive items. Diluted
EPS is computed by dividing net income applicable to common stock by the
weighted average number of common shares and common stock equivalents for items
that are dilutive, net of shares assumed to be repurchased using the treasury
stock method. Common stock equivalents arise from the assumed conversion of
outstanding stock options and convertible capital notes.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(dollar amounts in millions, except per Year ended Dec. 31,
share amounts; common shares in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Income before cumulative effect of accounting change $ 989 $ 870 $ 771
Cumulative effect of accounting change (26) -- --
- ------------------------------------------------------------------------------------------------------------
Net income 963 870 771
Dividends on preferred stock -- 9 21
- ------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 963 $ 861 $ 750
- ------------------------------------------------------------------------------------------------------------
Average common shares outstanding 514,791 520,440 510,712
Basic earnings per common share:
Income before cumulative effect of accounting change $ 1.92 $ 1.65 $ 1.47
Cumulative effect of accounting change (.05) -- --
- ------------------------------------------------------------------------------------------------------------
Net income $ 1.87 $ 1.65 $ 1.47
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (a) $ 963 $ 861 $ 750
- ------------------------------------------------------------------------------------------------------------
Average common shares outstanding 514,791 520,440 510,712
Common stock equivalents:
Stock options (b) 7,139 9,836 10,720
Common shares issuable upon conversion of
71/4% Convertible Subordinated Capital Notes 56 138 226
- ------------------------------------------------------------------------------------------------------------
Total 521,986 530,414 521,658
- ------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Income before cumulative effect of accounting change $ 1.90 $ 1.62 $ 1.44
Cumulative effect of accounting change (.05) -- --
- ------------------------------------------------------------------------------------------------------------
Net income $ 1.85 $ 1.62 $ 1.44
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 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.
(b) Options to purchase 3,504, 3,414, and 3,010 shares of common stock were not
included in the computation of diluted earnings per common share because
the options' exercise prices were greater than the average market prices of
the common shares for 1999, 1998 and 1997, respectively.
72
<PAGE> 79
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
19. COMPREHENSIVE RESULTS
Comprehensive results are defined as net income, as currently reported, as well
as unrealized gains and losses on assets available for sale, foreign currency
translation adjustments and certain other items not currently included in the
income statement.
<TABLE>
<CAPTION>
ACCUMULATED UNREALIZED (LOSSES) GAINS, NET OF TAX
- --------------------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN CURRENCY TRANSLATION ADJUSTMENT, NET OF TAX
Beginning balance $ (21) $(12) $ (6)
Current-period change 5 (9) (6)
- --------------------------------------------------------------------------------------------------------------------
Ending balance $ (16) $(21) $ (12)
- --------------------------------------------------------------------------------------------------------------------
UNREALIZED (LOSSES) GAINS ON ASSETS AVAILABLE FOR SALE, NET OF TAX
Beginning balance $ 46 $ 33 $ (1)
Current-period change (165) 13 34
- --------------------------------------------------------------------------------------------------------------------
Ending balance $(119) $ 46 $ 33
- --------------------------------------------------------------------------------------------------------------------
ACCUMULATED UNREALIZED (LOSSES) GAINS, NET OF TAX
Beginning balance $ 25 $ 21 $ (7)
Current-period change (160) 4 28
- --------------------------------------------------------------------------------------------------------------------
Ending balance $(135) $ 25 $ 21
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TAX EFFECTS ALLOCATED TO EACH COMPONENT OF COMPREHENSIVE RESULTS
- --------------------------------------------------------------------------------------------------------------------
Before tax Tax (expense)/ After tax
(in millions) amount benefit amount
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended Dec. 31, 1997:
Foreign currency translation adjustment $ (6) $ -- $ (6)
Unrealized gains (losses) on assets available for sale 53 (19) 34
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive results $ 47 $(19) $ 28
- --------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31, 1998:
Foreign currency translation adjustment $ (9) $ -- $ (9)
Unrealized (losses) gains on assets available for sale:
Unrealized gains (losses) during the year 30 (10) 20
Less: Reclassification adjustments (11) 4 (7)
- --------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) 19 (6) 13
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive results $ 10 $ (6) $ 4
- --------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31, 1999:
Foreign currency translation adjustment $ (4) $ 9 $ 5
Unrealized (losses) gains on assets available for sale:
Unrealized (losses) gains during the year (253) 89 (164)
Less: Reclassification adjustments (1) -- (1)
- --------------------------------------------------------------------------------------------------------------------
Unrealized (losses) gains (254) 89 (165)
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive results $(258) $ 98 $(160)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE> 80
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. EMPLOYEE BENEFITS
Pension plans
The Corporation's largest subsidiaries sponsor trusteed, noncontributory,
defined benefit pension plans. Together, these plans cover substantially all
salaried employees of the Corporation. The plans provide benefits that are based
on the employees' years of service and compensation. In addition, several
unfunded plans exist for certain employees or for purposes that are not
addressed by the funded plans.
The tables below report the combined data of the funded and unfunded plans. The
accumulated benefit obligation for the unfunded plans was $103 million and $93
million as of Dec. 31, 1999, and Dec. 31, 1998, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998
(in millions) FUNDED UNFUNDED Funded Unfunded
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 716 $ 105 $ 630 $ 90
Service cost 34 3 29 4
Interest cost 47 8 42 7
Actuarial (gain)/loss (84) 7 36 5
Acquisitions -- -- -- 4
Benefits paid (22) (8) (21) (5)
Foreign currency exchange rate change (1) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 690 $ 115 $ 716 $ 105
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 1,609 $ -- $ 1,405 $ --
Return on plan assets 161 -- 220 --
Employer contributions 4 -- 5 --
Benefits paid (22) -- (21) --
Foreign currency exchange rate change (1) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year (a) $ 1,751 $ -- $ 1,609 $ --
- ----------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF FUNDED STATUS WITH FINANCIAL STATEMENTS
Funded status at Dec. 31 $ 1,061 $(115) $ 893 $(105)
Unrecognized net transition (asset)/obligation (9) -- (12) --
Unrecognized prior service cost 6 17 8 6
Unrecognized net actuarial (gain)/loss (504) 3 (421) 13
- ----------------------------------------------------------------------------------------------------------------------------
Net amount recognized at Dec. 31 $ 554 $ (95) $ 468 $ (86)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes 3 million shares of Mellon Financial Corporation common stock at
Dec. 31, 1999 and Dec. 31, 1998. The Mellon Bank, N.A. retirement plan
received approximately $2 million of dividends from Mellon Financial
Corporation's common stock in both 1999 and 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
(dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded Funded Unfunded
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DEC. 31
Discount rate 7.5% 7.5% 6.5% 6.5% 6.75% 6.75%
Expected return on assets 10.0 -- 10.0 -- 10.0 --
Rate of compensation increase 3.5 3.5 3.0 3.0 3.0 3.0
- ------------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 34 $ 3 $ 29 $ 4 $ 23 $ 3
Interest cost 47 8 42 7 35 5
Expected return on plan assets (141) -- (121) -- (84) --
Amortization of transition asset (2) -- (2) -- (2) --
Amortization of prior service cost 2 5 2 1 2 2
Recognized net actuarial (gain)/loss (23) 1 (20) 8 (4) 2
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (83) $ 17 $ (70) $20 $ (30) $ 12
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE> 81
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. EMPLOYEE BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1999 1998
(in millions) FUNDED UNFUNDED Funded Unfunded
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF:
Prepaid benefit cost $554 $ -- $468 $ --
Benefit liability -- (103) -- (93)
Adjustment required to recognize minimum liability -- 8 -- 7
- -----------------------------------------------------------------------------------------------------------------------
Net amount recognized at Dec. 31 $554 $ (95) $468 $(86)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Long-Term Profit Incentive Plan
The Corporation has a Long-Term Profit Incentive Plan (1996) which provides for
the issuance of stock options, stock appreciation rights, performance units,
deferred cash incentive awards, shares of restricted stock and deferred share
awards to officers and other key employees of the Corporation and its
subsidiaries as approved by the Human Resources Committee of the board of
directors. Stock options may be granted at prices not less than the fair market
value of the common stock on the date of grant. Options may be exercised during
fixed periods of time from one year to 10 years from the date of grant. In the
event of a change in control of the Corporation, as defined in the plan, these
options will become immediately exercisable, unless otherwise provided in the
option agreement. Total outstanding grants as of Dec. 31, 1999, 1998 and 1997
were 22,379,349; 24,917,534; and 25,884,830 shares, respectively. During 1999,
1998 and 1997, options for 4,146,445; 6,099,414; and 3,330,672 shares,
respectively, were granted and options for 5,748,027; 6,507,698; and 6,933,054
shares, respectively, were exercised. At Dec. 31, 1999, 14,550,094 shares were
available for grant.
Included in the Dec. 31, 1999, 1998 and 1997, outstanding grants were options
for 1,171,782; 2,347,196; and 2,376,936 shares, respectively, that become
exercisable in full near the end of their 10-year terms, but the exercise dates
may be accelerated to an earlier date by the Human Resources Committee of the
board of directors, based on the optionee's and the Corporation's performance.
If so accelerated, compensation will be paid in the form of deferred cash
incentive awards to reimburse the exercise price of these options if exercised
prior to the original vesting date. The Corporation recognized $16 million of
compensation expense for the acceleration of these options in 1999, $6 million
in 1998 and $13 million in 1997.
Stock Option Plans for Outside Directors
The Corporation's stock option plans for outside directors provide for the
granting of options for shares of common stock to outside directors, regional
directors and advisory board members of the Corporation. The timing, amounts,
recipients and other terms of the option grants are determined by the provisions
of, or formulas in, the directors' option plans. The exercise price of the
options is equal to the fair market value of the common stock on the grant date.
All options have a term of 10 years from the date of grant and become
exercisable one year from the grant date. Directors elected during the service
year are granted options on a pro rata basis to those granted to the directors
at the start of the service year. Total outstanding grants as of Dec. 31, 1999,
1998 and 1997, were 1,304,123; 1,502,112; and 1,602,304 shares, respectively.
During 1999, 1998 and 1997, options for 104,163; 73,152; and 221,988 shares,
respectively, were granted and options for 293,152; 173,344; and 279,372 shares,
respectively, were exercised. At Dec. 31, 1999, options for 228,385 shares were
available for grant.
75
<PAGE> 82
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. EMPLOYEE BENEFITS (CONTINUED)
Dreyfus Stock Option Plan
A stock option plan at Dreyfus prior to the August 1994 merger with the
Corporation provided for the issuance of stock options to key employees and key
consultants who rendered services at Dreyfus, at a price of not less than 95% of
the price of Dreyfus' common stock on the New York Stock Exchange on the day the
option was granted. Options were not exercisable within two years nor more than
10 years from the date of grant. Options for Dreyfus stock were automatically
converted into options for the Corporation's common stock on the merger date.
Total outstanding grants as of Dec. 31, 1999, 1998 and 1997, were 336,508;
421,176; and 1,070,144 shares, respectively. No options were granted in 1999,
1998 and 1997. No further options will be granted under this plan. Options for
84,668; 632,344; and 887,104 shares were exercised in 1999, 1998 and 1997,
respectively.
The table below summarizes stock option activity for the Long-Term Profit
Incentive Plan, the Stock Option Plans for Outside Directors and the Dreyfus
Plan. Requirements for stock option shares can be met from either unissued or
treasury shares. All shares issued in 1999, 1998 and 1997 were from treasury
shares.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Shares subject Average exercise
STOCK OPTION ACTIVITY (a) to option price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at Dec. 31, 1996 35,382,192 10.08
Granted 3,552,660(b) 23.60
Exercised (8,099,530) 8.52
Forfeited (2,278,044) 10.94
- -----------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 28,557,278 12.13
Granted 6,172,566(b) 32.32
Exercised (7,313,386) 9.91
Forfeited (575,636) 17.16
- -----------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 26,840,822 17.16
Granted 4,250,608(b) 35.00
Exercised (6,125,847) 13.65
Forfeited (945,603) 26.61
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1999 24,019,980 $ 20.84
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Restated to reflect the two-for-one common stock split distributed on May
17, 1999.
(b) Using the Black-Scholes option pricing model, the weighted-average fair
value of options granted in 1999, 1998 and 1997 was estimated at $8.45,
$6.49 and $4.58 per share, respectively.
76
<PAGE> 83
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes the characteristics of stock options outstanding
under the Long-Term Profit Incentive Plan, the Stock Option Plans for Outside
Directors and the Dreyfus Plan at Dec. 31, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING AT DEC. 31, 1999
Outstanding Exercisable (b)
--------------------------------------------- ---------------------------
Average Average
Average exercise exercise
Exercise price range Shares life (a) price Shares price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.23 - $9.13 2,374,113 2.6 $ 7.24 2,373,393 $ 7.24
$9.23 - $10.22 5,438,947 5.0 9.79 5,382,035 9.80
$11.25 - $13.88 3,640,643 6.5 13.24 3,545,843 13.23
$15.69 - $21.88 1,110,242 7.0 17.16 663,718 17.39
$23.88 - $28.94 2,330,156 7.6 24.35 1,463,344 24.19
$29.00 - $33.69 3,071,246 8.7 30.54 522,446 30.90
$33.75 - $34.63 2,550,693 8.6 34.36 754,042 34.41
$35.00 - $40.00 3,503,940 9.5 35.55 69,712 37.44
- ---------------------------------------------------------------------------------------------------------------------------
24,019,980 6.8 $20.84 14,774,533 $14.11
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Average contractual life remaining in years.
(b) At Dec. 31, 1998, 15,443,220 options were exercisable at an average
exercise price of $11.02. At Dec. 31, 1997, 16,406,354 options were
exercisable at an average share price of $9.31.
Broad-Based Employee Stock Options
In June 1999, the Corporation adopted its ShareSuccess Plan, a broad-based
employee stock option plan covering full- and part-time benefited employees who
are not participants in the Long-Term Profit Incentive Plan discussed
previously. Effective June 15, 1999, each full-time employee was granted an
option to purchase 150 shares and each part-time employee was granted an option
to purchase 75 shares of the Corporation's common stock. The exercise price was
equal to the stock price on the grant date. The options become exercisable after
seven years, or at any time after one year from the grant date if the
Corporation's common stock market price equals or exceeds a predetermined price
for a minimum period. In the event of a change in control of the Corporation, as
defined in the plan, these options become immediately exercisable, subject to
certain conditions. All outstanding options expire 10 years after the grant
date. It is expected that grants will be made under this plan on June 15, 2000
and June 15, 2001. The following table presents the activity in the ShareSuccess
Plan during 1999. At Dec. 31, 1999, 7,218,150 shares were available for grant.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Shares subject Average
BROAD-BASED OPTIONS to option exercise price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at Dec. 31, 1998 -- --
Granted 3,197,625 $33.67
Exercised -- --
Forfeited (290,775) 33.64
- -----------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1999 (a) 2,906,850 $33.67
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) The exercise price for all options outstanding ranged from $33.63 to
$34.38, and at Dec. 31, 1999, none were exercisable. The average remaining
contractual life was 9.5 years for all options outstanding. Using the
Black-Scholes option pricing model, the average fair value of these options
was estimated at $7.20 per share.
77
<PAGE> 84
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. EMPLOYEE BENEFITS (CONTINUED)
The Black-Scholes option pricing model requires the use of subjective
assumptions which can materially affect fair value estimates. Therefore, this
model does not necessarily provide a reliable single measure of the fair value
of the Corporation's stock options. The fair value of each stock option granted
was estimated on the date of the grant using the following weighted-average
assumptions for grants in 1999, 1998 and 1997: (1) expected dividend yields
ranging from 2.4% to 3.3%; (2) risk-free interest rates ranging from 4.4% to
6.2%; (3) expected volatility of 25% to 26%; and (4) expected lives of options
ranging from 3.2 to 3.7 years.
The Corporation accounts for its stock-based compensation plans under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Corporation utilizes the intrinsic-value-based method, on which APB No. 25
is based. In accordance with FAS No. 123, "Accounting for Stock-Based
Compensation," the Corporation adopted the disclosure-only option and continued
to apply the provisions of APB No. 25 for financial statement purposes.
Had the compensation cost for the Corporation's stock-based compensation plans
been determined in accordance with the fair value accounting provisions of FAS
No. 123, net income applicable to common stock, basic net income per common
share and diluted net income per common share for the years ended Dec. 31, 1999,
1998 and 1997, would have been as follows:
<TABLE>
<CAPTION>
(in millions except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock:
As reported $ 963 $ 861 $ 750
Pro forma $ 943 $ 847 $ 740
Basic net income per common share (a):
As reported $1.87 $1.65 $1.47
Pro forma $1.83 $1.63 $1.45
Diluted net income per common share (a):
As reported $1.85 $1.62 $1.44
Pro forma $1.81 $1.59 $1.42
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Restated to reflect the two-for-one common stock split distributed on May
17, 1999.
401(k) Retirement Savings Plan
Employees' payroll deductions into retirement savings accounts are matched by
the Corporation's contribution of common stock, at the rate of $.50 on the
dollar, up to 6% of the employee's annual base salary, with an annual maximum
Corporate contribution of $3,000 per employee. In 1999, 1998 and 1997, the
Corporation recognized $14 million, $12 million and $11 million, respectively,
of expense related to this plan and contributed 383,425; 380,604; and 492,272
shares, respectively. All shares contributed in 1999, 1998 and 1997 were issued
from treasury stock. The plan held 12,659,340; 12,864,156; and 13,327,212 shares
of the Corporation's common stock at Dec. 31, 1999, 1998 and 1997, respectively.
Buck has a separate retirement savings plan in which employees' payroll
deductions are matched at a rate of between 75% and 100%. The match is up to 6%
of the employees' annual base salary with an annual maximum contribution of
$10,000 per employee. Expense related to this plan was $6 million in 1999 and $6
million in 1998 and $3 million in 1997.
78
<PAGE> 85
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. EMPLOYEE BENEFITS (CONTINUED)
Profit Bonus Plan and Restricted Stock Awards
Performance-based awards are made to key employees at the discretion of the
Human Resources Committee of the board of directors. The granting of these
awards is based upon the performance of the key employees and on the
Corporation's overall performance (or particular business line performance) in
achieving its objectives. At the Committee's election, awards may be paid in a
lump sum or may be deferred and paid over a period of up to 15 years. Payouts
were $33 million, $32 million and $29 million for 1999, 1998 and 1997,
respectively, and can be in the form of cash, common stock, restricted stock or
deferred share awards equivalent to restricted stock. The employee is generally
prevented from selling or transferring restricted stock or deferred share awards
for a three-year period, and the shares or units are forfeited if employment is
terminated during that period. Restricted stock totaling 121,900; 118,100; and
146,300 shares, with a weighted-average market value on the date of grant of
$31.56, $34.73, and $31.32 per share, was awarded for 1999, 1998 and 1997
performance, respectively. In addition to the restricted stock awarded under the
Profit Bonus Plan in 1999, 1998 and 1997 there were 788,021; 316,248; and
698,800 restricted shares awarded, respectively, to senior officers and various
key employees with a weighted-average grant-date market value of $34.11; $33.27;
and $24.09, respectively. Vesting of these shares is primarily related to
performance and occurs over and up to a three-year period. The total
compensation expense recognized for these restricted shares was $8 million, $29
million and $3 million in 1999, 1998 and 1997, respectively. Total outstanding
shares of restricted stock and deferred share awards as of Dec. 31, 1999, 1998
and 1997 were 2,177,969; 1,547,204 and 1,665,280, respectively.
Employee Stock Ownership Plan
In 1989, an Employee Stock Ownership Plan was formed to hold certain shares of
Mellon Financial Corporation common stock previously held in other defined
contribution plans sponsored by the Corporation and its subsidiaries. At Dec.
31, 1999, 1998 and 1997, this plan held 287,090; 312,582; and 309,782 shares,
respectively, of the Corporation's common stock. The Corporation may make
contributions to this plan from time to time. No contributions were made in
1999, 1998 or 1997.
Postretirement benefits other than pensions
The Corporation shares in the cost of providing managed care, Medicare
supplement and/or major medical programs for employees who retired prior to Jan.
1, 1991. Employees who retire subsequent to Jan. 1, 1991, who were between the
ages of 55 and 65 on Jan. 1, 1991, and who had at least 15 years of service are
provided with a defined dollar supplement to assist them in purchasing health
insurance. When these employees reach age 65, they are responsible for their own
supplemental coverage. The cost of providing these benefits amounted to $5
million in 1999, $6 million in 1998 and $7 million in 1997. Early retirees who
do not meet these age and service requirements are eligible to purchase health
coverage at their own expense under the standard plans that are offered to
active employees through COBRA. These benefits are provided through various
insurance carriers whose premiums are based on claims paid during the year.
79
<PAGE> 86
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the components of the costs and liability of the
Corporation's postretirement health care and life insurance benefits programs
for current and future retirees.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Accumulated
Accrued postretirement postretirement Unrecognized
benefit cost benefit obligation transition obligation
------------------------- ------------------------- ------------------------
(in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Jan. 1 $(54) $(50) $(33) $(54) $(55) $(46) $ 26 $ 28 $ 30
- -------------------------------------------------------------------------------------------------------------------------
Recognition of components
of net periodic postretirement
benefit costs:
Service cost (2) (2) (2) (2) (2) (2) -- -- --
Interest cost (3) (4) (3) (3) (4) (3) -- -- --
Amortization of:
Transition obligation (2) (2) (2) -- -- -- (2) (2) (2)
Gains/(losses) 2 2 -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
(5) (6) (7) (5) (6) (5) (2) (2) (2)
Adjustment due to
acquisition of Buck -- -- (13) -- -- (13) -- -- --
Actuarial gains/(losses)
including a change in the
discount rate -- -- -- 5 5 5 -- -- --
Benefit payments 2 2 3 3 2 4 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31 $(57) $(54) $(50) $(51) $(54) $(55) $ 24 $ 26 $ 28
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Discount rates of 6.5% and 6.75% were used to estimate the 1999 and 1998 net
periodic benefit costs, and rates of 7.5% and 6.5% were used to value the
accumulated postretirement benefit obligations at year-end 1999 and 1998,
respectively. A health care cost trend rate was used to recognize the effect of
expected changes in future health care costs due to medical inflation,
utilization changes, technological changes, regulatory requirements and Medicare
cost shifting. The future annual increase assumed in the cost of health care
benefits was 5.75% for 2000 and was decreased gradually to 4.25% for 2003 and
thereafter. The health care cost trend rate assumption may have a significant
impact on the amounts reported. Increasing or decreasing the assumed health care
cost trend by one percentage point in each year would increase or decrease,
respectively, the accumulated postretirement benefit obligation by approximately
$4 million and the aggregate of the service and interest cost components of net
periodic postretirement health care benefit cost by less than $1 million.
21. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS
The prior approval of the Office of the Comptroller of the Currency (OCC) or the
Federal Reserve Board, as applicable, is required if the total of all dividends
declared by a national or state member bank subsidiary in any calendar year
exceeds the bank subsidiary's net profits, as defined, for that year, combined
with its retained net profits for the preceding two calendar years.
Additionally, such bank subsidiaries may not declare dividends in excess of net
profits on hand, as defined, after deducting the amount by which the principal
amount of all loans on which interest is past due for a period of six months or
more exceeds the reserve for credit losses.
Under the first and currently more restrictive of the foregoing federal dividend
limitations, the Corporation's national and state member bank subsidiaries can,
without prior regulatory approval, declare dividends
80
<PAGE> 87
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
21. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS (CONTINUED)
subsequent to Dec. 31, 1999, of up to approximately $675 million of their
retained earnings of $3.241 billion at Dec. 31, 1999, less any dividends
declared and plus or minus net profits or losses, as defined, between Jan. 1,
2000, and the date of any such dividend declaration.
The payment of dividends also is limited by minimum capital requirements imposed
on all bank subsidiaries. The Corporation's bank subsidiaries exceed these
minimum requirements. The ability of state member and nonmember banks to pay
dividends also is limited by state banking regulations. The bank subsidiaries
declared dividends to the parent Corporation of $784 million in 1999, $380
million in 1998 and $450 million in 1997. The Federal Reserve Board and the OCC
have issued additional guidelines that require bank holding companies and
national banks to continually evaluate the level of cash dividends in relation
to their respective operating income, capital needs, asset quality and overall
financial condition.
The Federal Reserve Act limits extensions of credit by the Corporation's bank
subsidiaries to the Corporation and to certain other affiliates of the
Corporation, and requires such extensions to be collateralized and limits the
amount of investments by the banks in these entities. At Dec. 31, 1999, such
extensions of credit and investments were limited to $525 million to the
Corporation or any other affiliate and to $1.050 billion in total to the
Corporation and all of its other affiliates. Outstanding extensions of credit
totaled $329 million at Dec. 31, 1999.
22. 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.
23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
Off-balance-sheet risk
In the normal course of business, the Corporation becomes a party to various
financial transactions that generally do not involve funding. Because these
transactions generally are not funded, they are not reflected on the balance
sheet and are referred to as financial instruments with off-balance-sheet risk.
The Corporation offers off-balance-sheet financial instruments to enable its
customers to meet their financing objectives and manage their currency and
interest-rate risk. Supplying these instruments provides the Corporation with an
ongoing source of fee revenue. The Corporation also enters into these
transactions to manage its own risks arising from movements in interest and
currency rates and as part of its proprietary trading and funding activities.
These off-balance-sheet instruments are subject to credit and market risk.
Credit risk is limited to the estimated aggregate replacement cost of contracts
in a gain position, should counterparties fail to perform under the terms of
those contracts and any underlying collateral proves to be of no value. The
Corporation manages credit risk by dealing only with approved counterparties
under specific credit limits and by monitoring the amount of outstanding
contracts by customer and in the aggregate against such limits. Counterparty
limits are monitored on an ongoing basis. Credit risk is often further mitigated
by contractual agreements to net replacement cost gains and losses on multiple
transactions with the same counterparty through the use of master netting
agreements. Market risk arises from changes in the market value of contracts
81
<PAGE> 88
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
as a result of the fluctuations in interest and currency rates. The Corporation
limits its exposure to market risk by generally entering into matching or
offsetting positions and by establishing and monitoring limits on unmatched
positions.
Position limits are set by the Finance Committee and approved by the Executive
Management Group and the Executive Committee of the board of directors.
Portfolio outstandings are monitored against such limits by senior managers and
compliance staff independent of line areas.
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK
- ---------------------------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit:
Expire within one year $17,505 $14,356
Expire within one to five years 16,054 17,440
Expire over five years 1,071 1,636
- ---------------------------------------------------------------------------------------------------------------------------
Total 34,630 33,432
Standby letters of credit and foreign and other guarantees 4,256 3,830
Commercial letters of credit 96 86
Residential mortgage loans serviced with recourse -- 97
Custodian securities lent with indemnification
against broker default of return of securities 32,532 31,802
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments to extend credit
The Corporation enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specific rates and for
specific purposes. Substantially all of the Corporation's commitments to extend
credit are contingent upon customers maintaining specific credit standards at
the time of loan funding. The majority of the Corporation's commitments to
extend credit include material adverse change clauses within the commitment
contracts. These clauses allow the Corporation to deny funding a loan commitment
if the borrower's financial condition deteriorates during the commitment, such
that the customer no longer meets the Corporation's credit standards. The
Corporation's exposure to credit loss in the event of nonperformance by the
customer is represented by the contractual amount of the commitment to extend
credit. Accordingly, the credit policies utilized in committing to extend credit
and in the extension of loans are the same. Market risk arises on fixed rate
commitments if interest rates have moved adversely subsequent to the extension
of the commitment. The Corporation believes the market risk associated with
commitments is minimal. Since many of the commitments are expected to expire
without being drawn upon, the total contractual amounts do not necessarily
represent future cash requirements. The amount and type of collateral obtained
by the Corporation are based upon industry practice, as well as its credit
assessment of the customer. Of the $34.6 billion of contractual commitments for
which the Corporation has received a commitment fee or which were otherwise
legally binding, approximately 51% of the commitments are scheduled to expire
within one year, and approximately 97% are scheduled to expire within five
years.
Letters of credit and foreign and other guarantees
There are two major types of letters of credit--standby and commercial letters
of credit. The off-balance-sheet credit risk involved in issuing standby and
commercial letters of credit is represented by their contractual amounts and is
essentially the same as the credit risk involved in commitments to extend
credit. The
82
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Corporation minimizes this risk by adhering to its written credit policies and
by requiring security and debt covenants similar to those contained in loan
agreements. The Corporation believes the market risk associated with letters of
credit and foreign guarantees is minimal.
Standby letters of credit and foreign and other guarantees obligate the
Corporation to disburse funds to a third-party beneficiary if the Corporation's
customer fails to perform under the terms of an agreement with the beneficiary.
Standby letters of credit and foreign and other guarantees are used by the
customer as a credit enhancement and typically expire without being drawn upon.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
STANDBY LETTERS OF CREDIT AND FOREIGN AND OTHER GUARANTEES Weighted-average
years to maturity
Dec. 31, at Dec. 31,
(in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper and other debt $ 401 $ 420 1.5 1.0
Tax-exempt securities 568 856 1.7 2.2
Bid- or performance-related 2,389 1,681 .4 .6
Other 898 873 .8 .8
------ ------
Total standby letters of credit and foreign and other guarantees (a) $4,256 $3,830 .8 1.0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of participations and cash collateral totaling $333 million and $301
million at Dec. 31, 1999 and 1998, respectively.
A commercial letter of credit is normally a short-term instrument used to
finance a commercial contract for the shipment of goods from a seller to a
buyer. This type of letter of credit ensures prompt payment to the seller in
accordance with the terms of the contract. Although the commercial letter of
credit is contingent upon the satisfaction of specified conditions, it
represents a credit exposure if the buyer defaults on the underlying
transaction. Normally, reimbursement from the buyer is coincidental with payment
to the seller under commercial letter of credit drawings. As a result, the total
contractual amounts do not necessarily represent future cash requirements.
Residential mortgage loans serviced with recourse
Prior to the September 1999 divestiture of the mortgage businesses, certain
residential mortgages were sold with servicing retained in which the Corporation
was subject to limited recourse provisions. The loans were collateralized by
real estate mortgages and in certain instances were supported by either
government-sponsored or private mortgage insurance.
Securities lending
A securities lending transaction is a fully collateralized transaction in which
the owner of a security agrees to lend the security through an agent (the
Corporation) to a borrower, usually a broker/dealer or bank, on an open,
overnight or term basis, under the terms of a prearranged contract. The borrower
will collateralize the loan at all times, generally with cash or U.S. government
securities, exceeding 100% of the market value of the loan, plus any accrued
interest on debt obligations.
The Corporation currently enters into two types of agency securities lending
arrangements--lending with and without indemnification. In securities lending
transactions without indemnification, the Corporation bears no contractual risk
of loss. For transactions in which the Corporation provides an indemnification,
risk of credit loss occurs if the borrower defaults on returning the securities
and the value of the collateral declines. Because the Corporation generally
indemnifies the owner of the securities against borrower default only, which is
83
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
indemnification for the difference between the market value of the securities
lent and any collateral deficiency, the total contractual amount does not
necessarily represent future cash requirements. Additional market risk
associated with securities lending transactions arises from interest rate
movements that affect the spread between the rate paid to the securities
borrower on the borrower's collateral and the rate the Corporation earns on that
collateral. This risk is controlled through policies that limit the level of
such risk that can be undertaken.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
- ----------------------------------------------------------------------------------------------------------------
Dec. 31,
1999 1998
--------------------- ---------------------
NOTIONAL CREDIT Notional Credit
(in millions) AMOUNT RISK amount risk
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $12,604 (b) $17,538 (b)
Commitments to sell 12,778 (b) 17,773 (b)
Foreign currency and other option contracts purchased 213 6 608 17
Foreign currency and other option contracts written 232 -- 574 --
Interest rate agreements (c):
Interest rate swaps 17,280 74 11,236 74
Options, caps and floors purchased 617 1 753 20
Options, caps and floors written 990 -- 929 --
Futures and forward contracts 5,978 1 7,469 --
Other products 578 7 32 --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract in a gain position, on which a
counterparty may default.
(b) The combined credit risk on foreign currency contract commitments to
purchase and sell was $365 million at Dec. 31, 1999, and $436 million at
Dec. 31, 1998.
(c) The credit risk associated with interest rate agreements is calculated
after considering master netting agreements.
Foreign currency contracts
Commitments to purchase and sell foreign currency facilitate the management of
market risk by ensuring that, at some future date, the Corporation or a customer
will have a specified currency at a specified rate. The Corporation enters into
foreign currency contracts to assist customers in managing their currency risk
and as part of its proprietary trading activities. The notional amount of these
contracts at Dec. 31, 1999, was $12.6 billion of contracts to purchase and $12.8
billion of contracts to sell. The notional amount does not represent the actual
market or credit risk associated with this product. Market risk arises from
changes in the market value of contractual positions caused by movements in
currency rates. The Corporation limits its exposure to market risk by generally
entering into matching or offsetting positions and by establishing and
monitoring limits on unmatched positions. Credit risk relates to the ability of
the Corporation's counterparty to meet its obligations under the contract and
includes the estimated aggregate replacement cost of those foreign currency
contracts in a gain position. Replacement cost totaled approximately $365
million and $436 million at Dec. 31, 1999 and 1998, respectively, and is
recorded on the balance sheet. There were no settlement or counterparty default
losses on foreign currency contracts in 1999, 1998 or 1997. The Corporation
manages credit risk by dealing only with approved counterparties under specific
credit limits and by monitoring outstanding contracts by customer and in the
aggregate against such limits. The future cash requirements, if any, related to
foreign currency contracts are represented by the net contractual settlement
between the Corporation and its counterparties.
84
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Foreign currency and other option contracts purchased and written
Foreign currency and other option contracts grant the contract purchaser the
right, but not the obligation, to purchase or sell a specified amount of a
foreign currency or other financial instrument during a specified period at a
predetermined price. The Corporation acts as both a purchaser and seller of
foreign currency and other option contracts. Market risk arises from changes in
the value of contractual positions caused by actual and anticipated fluctuations
in currency rates, interest rates and security values underlying the option
contracts. Market risk is managed by generally entering into matching or
offsetting positions and by establishing and monitoring limits on unmatched
positions. Credit risk and future cash requirements are similar to those of
foreign currency contracts. The estimated aggregate replacement cost of
purchased foreign currency and other option contracts in gain positions was $6
million at Dec. 31, 1999, and $17 million at Dec. 31, 1998, and is recorded on
the balance sheet. There were no settlement or counterparty default losses on
foreign currency and other option contracts in 1999, 1998 or 1997.
Interest rate swaps
Interest rate swaps obligate two parties to exchange one or more payments
generally calculated with reference to fixed or periodically reset rates of
interest applied to a specified notional principal amount. Notional principal is
the amount upon which interest rates are applied to determine the payment
streams under interest rate swaps. Such notional principal amounts often are
used to express the volume of these transactions but are not actually exchanged
between the counterparties.
The credit risk associated with interest rate swaps is limited to the estimated
aggregate replacement cost of those agreements in a gain position. Replacement
costs totaled $74 million at both Dec. 31, 1999 and 1998, respectively, and is
recorded on the balance sheet. Credit risk is managed through credit approval
procedures that establish specific lines for individual counterparties and
limits credit exposure to various portfolio segments. Counterparty and portfolio
outstandings are monitored against such limits on an ongoing basis. Credit risk
is further mitigated by contractual arrangements with the Corporation's
counterparties that provide for netting replacement cost gains and losses on
multiple transactions with the same counterparty. The Corporation has entered
into collateral agreements with certain counterparties to interest rate swaps to
further secure amounts due. The collateral is generally cash, U.S. government
securities or mortgage pass-through securities guaranteed by the Government
National Mortgage Association (GNMA). There were no counterparty default losses
on interest rate swaps in 1999, 1998 or 1997. Market risk arises from changes in
the market value of contractual positions caused by movements in interest rates.
The Corporation limits its exposure to market risk by generally entering into
matching or offsetting positions and by establishing and monitoring limits on
unmatched positions. The future cash requirements of interest rate swaps are
limited to the net amounts payable under these swaps. At Dec. 31, 1999, 89% of
the notional principal amount of interest rate swaps were scheduled to mature in
less than five years.
Options, caps and floors
An interest rate option is a contract that grants the purchaser the right to
either purchase or sell a financial instrument at a specified price within a
specified period of time. An interest rate cap is a contract that protects the
holder from a rise in interest rates beyond a certain point. An interest rate
floor is a contract that protects the holder against a decline in interest rates
below a certain point. The credit risk associated with options, caps and floors
purchased was $1 million at year-end 1999 and $20 million at year-end 1998 and
is recorded on the balance sheet. Options, caps and floors written do not expose
the Corporation to credit risk.
85
<PAGE> 92
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Market risk arises from changes in the market value of contractual positions
caused by movements in interest rates. The Corporation limits its exposure to
market risk by generally entering into matching or offsetting positions and by
establishing and monitoring limits on unmatched positions.
Futures and forward contracts
Futures and forward contracts on loans, securities or money market instruments
represent future commitments to purchase or sell a specified instrument at a
specified price and date. Futures contracts are standardized and are traded on
organized exchanges, while forward contracts are traded in over-the-counter
markets and generally do not have standardized terms. The Corporation uses
futures and forward contracts in connection with its proprietary trading
activities.
For instruments that are traded on an organized exchange, the exchange assumes
the credit risk that a counterparty will not settle and generally requires a
margin deposit of cash or securities as collateral to minimize potential credit
risk. The Corporation has established policies governing which exchanges and
exchange members can be used to conduct these activities, as well as the number
of contracts permitted with each member and the total dollar amount of
outstanding contracts. Credit risk associated with futures and forward contracts
is limited to the estimated aggregate replacement cost of those futures and
forward contracts in a gain position and was $1 million and less than $1 million
at Dec. 31, 1999, and Dec. 31, 1998, respectively. Credit risk related to
futures contracts is substantially mitigated by daily cash settlements with the
exchanges for the net change in the value of the futures contract. There were no
settlement or counterparty default losses on futures and forward contracts in
1999, 1998 or 1997. Market risk is similar to the market risk associated with
foreign currency and other option contracts. The future cash requirements, if
any, related to futures and forward contracts are represented by the net
contractual settlement between the Corporation and its counterparties.
Other products
Other products included $578 million and $32 million notional amount of equity
options at Dec. 31, 1999 and Dec. 31, 1998, respectively. The Corporation enters
into equity options to assist customers in managing market risk associated with
large equity positions that they hold. Market risk arises from changes in the
market value of contractual positions caused by movements in the equity markets.
The Corporation limits its exposure to market risk by generally entering into
matching or offsetting positions and by establishing and monitoring limits on
unmatched positions. Credit risk is limited to the estimated aggregate
replacement cost of options in a gain position. Credit risk is managed by
setting specific credit limits and by monitoring outstandings by customer and in
the aggregate against such limits. The replacement cost of these products
totaled $7 million at Dec. 31, 1999. At Dec. 31, 1998, there was no replacement
cost related to these products.
86
<PAGE> 93
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (a)
- -------------------------------------------------------------------------------------------------------------------------
Dec. 31,
1999 1998
--------------------- ----------------------
NOTIONAL CREDIT Notional Credit
(in millions) AMOUNT RISK amount risk
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management instruments (b):
Interest rate swaps $3,033 $ 4 $ 4,028 $ 60
Futures and forward contracts 52 -- 1,860 --
Mortgage servicing rights risk management instruments:
Interest rate floors -- -- 10,216 216
Interest rate swaps -- -- 900 43
Interest rate and spread locks -- -- 250 1
Other products:
Interest futures contracts hedging anticipated transactions 475 3 365 1
Total return swaps 148 -- 147 10
Commitments to purchase foreign currency contracts 40 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
</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.
(b) The credit risk associated with interest rate agreements is calculated
after considering master netting agreements.
Interest rate swaps
The Corporation enters into interest rate swaps as part of its interest rate
risk management strategy primarily to alter the interest rate sensitivity of its
deposit liabilities, loans and certain other interest bearing liabilities. At
Dec. 31, 1999, the Corporation used $3.033 billion notional amount of interest
rate swaps for interest rate risk management purposes, compared with $4.028
billion notional amount at Dec. 31, 1998. The credit and market risk associated
with these instruments is explained on page 85 under "Interest rate swaps." The
replacement cost of swap agreements in a gain position was $4 million and $60
million at Dec. 31, 1999 and 1998, respectively. Net interest revenue in 1999
included $1 million of amortized deferred net losses and 1998 included $3
million of accreted deferred net gains from terminated interest rate swaps.
Futures and forward contracts
The Corporation had $52 million notional amount of these contracts outstanding
at Dec. 31, 1999 and $1.860 billion notional amount of these contracts
outstanding at Dec. 31, 1998. The credit and market risk associated with these
instruments is explained on page 86 under "Futures and forward contracts."
Mortgage servicing rights risk management instruments
As a result of the divestiture of the residential mortgage business on Sept. 30,
1999, the Corporation no longer holds off-balance-sheet contracts to manage the
prepayment risk associated with residential mortgage servicing rights (MSRs).
The notional amount of these instruments at Dec. 31, 1998, was $11.366 billion.
The replacement cost of these instruments in a gain position at Dec. 31, 1998,
was $260 million.
87
<PAGE> 94
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Anticipated transactions
At Dec. 31, 1999, the Corporation had entered into $475 million notional amount
of interest rate futures to lock in the value of certain loans that are
anticipated to be sold and/or securitized. At Dec. 31, 1998, $365 million
notional amount of interest rate futures contracts were outstanding in
anticipation of the sale and/or securitization of loans. Credit risk associated
with these products was $3 million at Dec. 31, 1999 and $1 million at Dec. 31,
1998.
Total return swaps
The Corporation had $148 million and $147 million notional amount of total
return swaps at Dec. 31, 1999 and 1998, respectively. Total return swaps are
used by the Corporation to minimize the risk related to the Corporation's
investment in start-up mutual funds that are based on specific market indices.
There was no credit risk associated with these products at year-end 1999. Credit
risk associated with these products was $10 million at year-end 1998.
Foreign currency contracts
The Corporation held $40 million notional amount of commitments to purchase
foreign currency contracts at Dec. 31, 1999. The credit and market risk
associated with these instruments is explained on page 84 under "Foreign
currency contracts." There was no credit risk associated with these products at
Dec. 31, 1999.
Concentrations of credit risk
The Corporation manages both on- and off-balance-sheet credit risk by
maintaining a well-diversified credit portfolio and by adhering to its written
credit policies, which specify general underwriting criteria as well as
underwriting standards for specific industries and control credit exposure by
borrower, counterparty, degree of risk, industry and country. These measures are
regularly updated to reflect the Corporation's evaluation of developments in
economic, political and operating environments that could affect lending risks.
The Corporation may adjust credit exposure to individual industries or customers
through loan sales, syndications, participations and the use of master netting
agreements when it has more than one transaction outstanding with the same
customer. The amount of collateral, if any, obtained by the Corporation upon the
extension of credit is based on industry practice as well as the credit
assessment of the customer. The type and amount of collateral vary, but the form
generally includes: accounts receivable; inventory; property, plant and
equipment; other assets; and/or income-producing commercial properties with
appraised values that exceed the contractual amount of the credit facilities by
preapproved ratios. The maximum risk of accounting loss from on- and
off-balance-sheet financial instruments with these counterparties is represented
by their respective balance sheet amounts and the contractual or replacement
cost of the off-balance-sheet financial instruments. The only significant credit
concentrations for the Corporation were consumers and the U.S. government at
Dec. 31, 1999, and 1998.
Consumer credit exposure consisted principally of loans and the related interest
receivable on the balance sheet and off-balance-sheet loan commitments and
letters of credit. Consumers to which the Corporation has credit exposure
primarily are located within the mid-Atlantic region and are affected by
economic conditions within that region.
The Corporation has credit exposure to the U.S. government, including its
corporations and agencies. Substantially all of this exposure consisted of
investment securities, securities available for sale and the related interest
receivable and balances due from the Federal Reserve.
88
<PAGE> 95
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the estimated fair value of on- and off-balance-sheet
financial instruments. A financial instrument is defined by FAS No. 107 as cash,
evidence of an ownership interest in an entity or a contract that creates a
contractual obligation or right to deliver to or receive cash or another
financial instrument from a second entity on potentially favorable terms.
Fair value estimates are made at a point in time, based on relevant market data
and information about the financial instrument. FAS No. 107 specifies that fair
values should be calculated based on the value of one trading unit without
regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. Because no readily available market exists for a
significant portion of the Corporation's financial instruments, fair value
estimates for these instruments are based on judgments regarding current
economic conditions, currency and interest rate risk characteristics, loss
experience and other factors. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
Therefore, the calculated fair value estimates cannot always be substantiated by
comparison to independent markets and, in many cases, may not be realizable in a
current sale of the instrument. Changes in assumptions could significantly
affect the estimates.
Fair value estimates do not include anticipated future business or the value of
assets, liabilities and customer relationships that are not considered financial
instruments. For example, the Corporation's fee-generating businesses are not
incorporated into the fair value estimates. Other significant assets and
liabilities that are not considered financial instruments include lease finance
assets, deferred tax assets, lease contracts, premises and equipment, and
intangible assets. Accordingly, the estimated fair value amounts of financial
instruments do not represent the entire value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
the fair value of its financial instruments at Dec. 31, 1999 and 1998.
Short-term financial instruments
The carrying amounts reported on the Corporation's balance sheet generally
approximate fair value for financial instruments that reprice or mature in 90
days or less, with no significant change in credit risk. The carrying amounts
approximate fair value for cash and due from banks; money market investments;
acceptances; demand deposits; money market and other savings accounts; federal
funds purchased and securities under repurchase agreements; U.S. Treasury tax
and loan demand notes; commercial paper; and certain other assets and
liabilities.
Trading account securities, securities available for sale and investment
securities
Trading account securities and securities available for sale are recorded at
market value on the Corporation's balance sheet, including amounts for
off-balance-sheet instruments held for trading activities. Market values of
trading account securities, securities available for sale and investment
securities generally are based on quoted market prices or dealer quotes, if
available. If a quoted market price is not available, market value is estimated
using quoted market prices for securities with similar credit, maturity and
interest rate characteristics. The tables in note 3 present in greater detail
the carrying value and market value of securities available for sale and
investment securities at Dec. 31, 1999 and 1998.
89
<PAGE> 96
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loans
The estimated fair value of performing commercial loans and certain consumer
loans that reprice or mature in 90 days or less approximates their respective
carrying amounts. The estimated fair value of loans that reprice or mature in
more than 90 days is estimated using discounted cash flow analyses, adjusting
where appropriate for prepayment estimates, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality and
for similar maturities.
Deposit liabilities
FAS No. 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits and money market and other savings
accounts, to be the amount payable on demand. Although market premiums paid for
depository institutions reflect an additional value for these low-cost deposits,
FAS No. 107 prohibits adjusting fair value for any value expected to be derived
from retaining those deposits for a future period of time or from the benefit
that results from the ability to fund interest-earning assets with these deposit
liabilities. The fair value of fixed-maturity deposits which reprice or mature
in more than 90 days is estimated using current rates.
Notes and debentures
The fair value of the Corporation's notes and debentures is estimated using
quoted market yields for the same or similar issues or the current yields
offered by the Corporation for debt with the same remaining maturities.
The table on the following page includes financial instruments, as defined by
FAS No. 107, whose estimated fair value is not represented by the carrying value
as reported on the Corporation's balance sheet. Management has made estimates of
fair value discount rates that it believes to be reasonable considering expected
prepayment rates, credit risk and liquidity risk. However, because there is no
active market for many of these financial instruments, management has no basis
to verify whether the resulting fair value estimates would be indicative of the
value negotiated in an actual sale.
90
<PAGE> 97
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Carrying amount Estimated fair value
--------------- --------------------
Dec. 31, Dec. 31,
(in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities (a) $ 1,197 $ 1,602 $ 1,183 $ 1,634
Loans (b) 27,121 29,274 27,047 29,200
Reserve for credit losses (b) (375) (470) -- --
------- ------- ------- -------
Net loans 26,746 28,804 27,047 29,200
Other assets (c) 2,495 2,645 2,495 2,647
Fixed-maturity deposits (d):
Retail savings certificates 6,482 7,039 6,354 7,099
Negotiable certificates of deposit and other time deposits 2,952 2,449 2,952 2,449
Other funds borrowed (c) 1,722 799 1,718 801
Notes and debentures (a) 3,438 3,303 3,382 3,507
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Market or dealer quotes were used to estimate the fair value of these
financial instruments.
(b) Excludes lease finance assets of $3.127 billion and $2.819 billion, as well
as the related reserve for credit losses of $28 million and $26 million at
Dec. 31, 1999 and 1998, respectively. Lease finance assets are not
considered financial instruments as defined by FAS No. 107.
(c) Excludes non-financial instruments.
(d) FAS No. 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits and money market and other savings
accounts, to be equal to the amount payable on demand. Therefore, the
positive effect of the Corporation's $23.987 billion and $24.895 billion of
such deposits at Dec. 31, 1999 and 1998, respectively, is not included in
this table.
Commitments to extend credit, and standby letters of credit and foreign and
other guarantees
These financial instruments generally are not sold or traded, and estimated fair
values are not readily available. However, the fair value of commitments to
extend credit, and standby letters of credit and foreign and other guarantees is
represented by the remaining contractual fees receivable over the term of the
commitments.
Other off-balance-sheet financial instruments
The estimated fair value of off-balance-sheet instruments used for trading
activities--which includes foreign exchange contracts, interest rate swaps,
option contracts, interest rate caps and floors, and futures and forward
contracts--is equal to the on-balance-sheet carrying amount of these
instruments. The estimated fair value of off-balance-sheet instruments used for
risk management purposes--which primarily includes interest rate swaps --
represents the estimated amount the Corporation would receive or pay to
terminate the agreements, considering current interest and currency rates, as
well as the current credit-worthiness of the counterparties. Off-balance-sheet
financial instruments are further discussed in note 23, "Financial instruments
with off-balance-sheet risk and concentrations of credit risk."
91
<PAGE> 98
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
24. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF COMMITMENTS TO EXTEND CREDIT, AND STANDBY LETTERS OF CREDIT AND FOREIGN AND OTHER GUARANTEES
- ---------------------------------------------------------------------------------------------------------------------------
DEC. 31, 1999 Dec. 31, 1998
-------------------------------------- --------------------------------------
ASSET Asset
------------------------- -------------------------
CONTRACT CARRYING ESTIMATED Contract Carrying Estimated
(in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a) fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit $34,630 $4 $66 $33,432 $5 $96
Standby letters of credit and
foreign and other guarantees 4,256 2 18 3,830 1 17
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the on-balance-sheet receivables or deferred income arising from
these financial instruments.
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR TRADING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------------
DEC. 31, 1999 Dec. 31, 1998
---------------------------------------- ----------------------------------------
ASSET (LIABILITY) Asset (Liability)
NOTIONAL --------------------------- Notional ---------------------------
PRINCIPAL ESTIMATED AVERAGE principal Estimated Average
(in millions) AMOUNT FAIR VALUE (a) FAIR VALUE amount fair value (a) fair value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency contracts $25,382 $ 14 $ 15 $35,311 $ 9 $ 1
Foreign currency and other
option contracts:
Options purchased 213 6 7 608 17 19
Options written 232 (6) (8) 574 (11) (14)
Interest rate swaps 17,280 (6) (4) 11,236 24 21
Options, caps and floors 1,607 (4) (3) 1,682 (1) (1)
Futures and forward contracts 5,978 (1) 1 7,469 (3) (9)
Other products 578 -- -- 32 -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Recorded at fair value on the Corporation's balance sheet.
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES
- ----------------------------------------------------------------------------------------------------------------------------------
DEC. 31, 1999 Dec. 31, 1998
--------------------------------------- ---------------------------------------
ASSET (LIABILITY) Asset (Liability)
NOTIONAL ------------------------- Notional -------------------------
PRINCIPAL CARRYING ESTIMATED principal Carrying Estimated
(in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a) fair value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management
instruments:
Interest rate swaps $3,033 $-- $(63) $ 4,028 $10 $ 58
Futures and forward contracts 52 -- -- 1,860 -- --
Mortgage servicing rights risk
management instruments:
Interest rate floors -- -- -- 10,216 3 216
Interest rate swaps -- -- -- 900 10 43
Interest rate and spread locks -- -- -- 250 -- 1
Other products:
Interest futures contracts
hedging anticipated transactions 475 -- 3 365 -- 1
Total return swaps 148 -- (12) 147 -- 8
Commitments to purchase
foreign currency contracts 40 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the on-balance-sheet receivables/payables, unamortized premiums
or deferred income arising from these financial instruments.
92
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
25. MELLON FINANCIAL CORPORATION (PARENT CORPORATION)
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENT
- ------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from bank subsidiaries $ 784 $ 380 $ 450
Dividends from nonbank subsidiaries 92 71 34
Interest revenue from bank subsidiaries 22 24 39
Interest revenue from nonbank subsidiaries 52 40 25
Other revenue 9 6 6
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 959 521 554
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense on commercial paper 7 13 4
Interest expense on notes and debentures 134 109 89
Other expense 32 67 31
Trust-preferred securities expense 79 79 78
- ------------------------------------------------------------------------------------------------------------------------------
Total expense 252 268 202
- ------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 707 253 352
Provision (benefit) for income taxes (56) (66) (38)
Equity in undistributed net income:
Bank subsidiaries 47 403 189
Nonbank subsidiaries 153 148 192
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME 963 870 771
Dividends on preferred stock -- 9 21
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 963 $ 861 $ 750
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------
Dec. 31,
(in millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and money market investments with bank subsidiary $ 496 $ 456
Loans and other receivables due from nonbank subsidiaries 1,021 781
Investment in bank subsidiaries 5,083 5,584
Investment in nonbank subsidiaries 470 566
Subordinated debt and other receivables due from bank subsidiaries 3 80
Other assets 237 205
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 7,310 $ 7,672
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Commercial paper $ 88 $ 116
Other liabilities 158 187
Notes and debentures (with original maturities over one year) 2,057 1,857
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,303 2,160
- ------------------------------------------------------------------------------------------------------------------------------
TRUST-PREFERRED SECURITIES:
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991 991
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 4,016 4,521
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and shareholders' equity $ 7,310 $ 7,672
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE> 100
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
25. MELLON FINANCIAL CORPORATION (PARENT CORPORATION) (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 963 $ 870 $ 771
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 8 8 12
Equity in undistributed net income of subsidiaries (207) (554) (399)
Net increase in accrued interest receivable (2) (11) (1)
Deferred income tax expense (benefit) 3 (9) (1)
Net (decrease) increase in other operating activities (7) 84 39
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 758 388 421
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in short-term deposits with affiliated banks (51) (110) 581
Purchases of securities available for sale -- -- (605)
Proceeds from maturities of securities available for sale -- -- 807
Loans made to subsidiaries (471) (316) (250)
Principal collected on loans to subsidiaries 308 112 191
Principal collected on loans to joint venture -- -- 14
Net capital returned from subsidiaries 679 101 16
Cash paid in purchase of Mellon 1st Business Bank -- (288) --
Cash paid in purchase of Mellon United National Bank -- (140) --
Net increase in other investing activities (69) (54) (52)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 396 (695) 702
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in commercial paper (28) 49 (55)
Repayments of long-term debt (200) (12) (205)
Net proceeds from issuance of long-term debt 398 842 --
Proceeds from issuance of common stock 70 52 75
Redemption of preferred stock -- (193) (97)
Repurchase of common stock (1,068) (27) (534)
Dividends paid on common and preferred stock (403) (376) (352)
Net increase (decrease) in other financing activities 66 (17) 46
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,165) 318 (1,122)
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND DUE FROM BANKS:
Net change in cash and due from banks (11) 11 1
Cash and due from banks at beginning of year 13 2 1
- -----------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 2 $ 13 $ 2
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
- -----------------------------------------------------------------------------------------------------------------------
Interest paid $ 141 $ 110 $ 97
Net income taxes refunded 3 83 27
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
94
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
26. SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
Noncash investing and financing transactions that, appropriately, are not
reflected in the Consolidated Statement of Cash Flows are listed below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year ended Dec. 31,
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reclassification of segregated assets to loans and
real estate acquired $-- $ 12 $ --
Net transfers to real estate acquired 13 47 12
Net transfers to segregated assets -- -- 12
Purchase acquisitions (a):
Fair value of noncash assets acquired -- 2,995 1,057
Liabilities assumed -- (2,199) (720)
Common stock issued, from treasury, and notes payable -- (255) (158)
--- ------- -------
Net cash disbursed -- 541 179
Transfer of CornerStone(sm) credit card loans to
accelerated resolution portfolio -- -- 231
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase acquisitions include: Mellon United National Bank, Mellon 1st
Business Bank, Founders Asset Management, LLC and Newton Asset Management
in 1998 and Buck Consultants, Inc. and Dreyfus Brokerage Services, Inc. in
1997.
95
<PAGE> 102
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MELLON FINANCIAL CORPORATION:
We have audited the accompanying consolidated balance sheets of Mellon Financial
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mellon Financial
Corporation and subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
January 18, 2000
96
<PAGE> 103
CORPORATE INFORMATION
<TABLE>
<S> <C> <C> <C>
ANNUAL MEETING The Annual Meeting of Shareholders will be held on the 10th floor of the Union Trust Building,
501 Grant Street, Pittsburgh, PA, at 10 a.m. on Tuesday, April 18, 2000.
ANNUAL REPORT The 1999 Annual Report is comprised of the 1999 Summary Annual Report and the 1999 Financial
Annual Report.
FORM 10-K AND For a free copy of the Corporation's Annual Report on Form 10-K or the quarterly earnings news
SHAREHOLDER release on Form 8-K, as filed with the Securities and Exchange Commission, please send a written
PUBLICATIONS request to the Secretary of the Corporation, One Mellon Center, Room 4826, Pittsburgh, PA 15258-0001.
Quarterly earnings and other news releases also can be obtained by fax by calling Company News on
Call at 1 800 758-5804 and entering a six-digit code (552187).
EXCHANGE LISTING Mellon's common stock is traded on the New York Stock Exchange 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.
STOCK PRICES Current prices for Mellon's common stock can be obtained from any Touch-Tone telephone by dialing
(412) 236-0834 (in Pittsburgh) or 1 800 648-9496 (outside Pittsburgh). When prompted to "enter I.D.,"
press MEL# (or 635#). This service is available free of charge, 24 hours a day, seven days a week,
from anywhere in the continental United States.
DIVIDEND PAYMENTS Subject to approval of the board of directors, dividends are paid on Mellon's common stock on or about
the 15th day of February, May, August and November.
DIRECT STOCK PURCHASE The Direct Stock Purchase and Dividend Reinvestment Plan provides a way to purchase shares of
AND DIVIDEND common stock directly from the Corporation at the market value for such shares. Nonshareholders may
REINVESTMENT PLAN purchase their first shares of the 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.
ELECTRONIC DEPOSIT OF Registered shareholders may have quarterly dividends paid on Mellon's common stock deposited
DIVIDENDS electronically to their checking or savings account, free of charge. To have your dividends deposited
electronically, please write to ChaseMellon Shareholder Services, P.O. Box 590, Ridgefield Park, NJ
07660-0590. For more information, please call 1 800 205-7699.
PHONE CONTACTS Corporate Communications/ (412) 236-1264 Media inquiries
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
INTERNET ACCESS Mellon: www.mellon.com
Buck: www.buckconsultants.com
ChaseMellon Shareholders Services: www.chasemellon.com
Dreyfus: www.dreyfus.com
Dreyfus Brokerage Services: www.edreyfus.com
Dreyfus Investment Services Corporation: www.disc.mellon.com
Dreyfus Retirement Services: www.drs.dreyfus.com
Founders: www.founders.com
Newton: www.newton.co.uk
Russell/Mellon Analytical Services: www.russellmellon.com
ELIMINATION OF To eliminate duplicate mailings, please submit a written request, with your full name and
DUPLICATE address the way it appears on your account, to ChaseMellon Shareholder Services, P.O. Box 590,
MAILINGS Ridgefield Park, NJ 07660-0590. For more information, please call 1 800 205-7699.
CHARITABLE A report on Mellon's comprehensive community involvement, including charitable
CONTRIBUTIONS contributions, is available by calling (412) 234-8680.
MELLON ENTITIES ARE EQUAL EMPLOYMENT OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYERS.
Mellon is committed to providing equal employment opportunities to every employee and every applicant
for employment, regardless of, but not limited to, such factors as race, color, religion, sex, national
origin, age, familial or marital status, ancestry, citizenship, sexual orientation, veteran status or
being a qualified individual with a disability.
</TABLE>
<PAGE> 1
Exhibit - 21.1
MELLON FINANCIAL CORPORATION
PRIMARY SUBSIDIARIES OF THE CORPORATION (a)
DEC. 31, 1999
The Boston Company, Inc.
State of Incorporation: Massachusetts
o Boston Safe Deposit and Trust Company
State of Incorporation: Massachusetts
Buck Consultants, Inc.
State of Incorporation: New York
Mellon Bank, N.A.
Incorporation: United States
o Cornice Holding Company, Inc.
State of Incorporation: Colorado
oo Founders Asset Management, LLC
State of Organization: Colorado
o Mellon Leasing Corporation
State of Incorporation: Pennsylvania
o Dreyfus Brokerage Services, Inc.
State of Incorporation: California
o The Dreyfus Corporation
State of Incorporation: New York
Mellon Bank (DE) National Association
Incorporation: United States
Mellon 1st Business Corporation
State of Incorporation: California
Mellon United National Bank
Incorporation: United States
(a) This listing includes all significant subsidiaries as defined in Rule
1-02(w) of Regulation S-X, as well as other selected subsidiaries.
<PAGE> 2
Exhibit - 21.1
(continued)
MELLON FINANCIAL CORPORATION
PRIMARY SUBSIDIARIES OF THE CORPORATION
DEC. 31, 1999
-2-
MBC Investments Corporation
State of Incorporation: Delaware
o Neptune, LLC
State of Organization: Delaware
oo Newton Asset Management Limited
Incorporation: Great Britain
<PAGE> 1
Exhibit 23.1
KPMG LOGO
One Mellon Bank Center Telephone 412 391 9710
Pittsburgh, PA 15219 Fax 412 391 8963
The Board of Directors
of Mellon Financial Corporation:
We consent to incorporation by reference in Registration Statement
Nos. 33-21838 (Form S-8), 33-34430 (Form S-8), 33-41796 (Form S-8),
33-65824 (Form S-8), 33-65826 (Form S-8), 33-54671 (Form S-8),
333-16743 (Form S-8), 333-16745 (Form S-8), 333-38213 (Form S-3),
333-65275 (Form S-8), 333-75601 (Form S-8), 333-75605 (Form S-8) and
333-87961 (Form S-8) of Mellon Financial Corporation of our report dated
January 18, 2000, relating to the consolidated balance sheets of Mellon
Financial Corporation and its subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1999, which report is incorporated by reference in the December 31, 1999, annual
report on Form 10-K of Mellon Financial Corporation.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 17, 2000
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
MELLON FINANCIAL CORPORATION
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them,
such person's true and lawful attorney-in-fact and agent, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities, to sign one or more Annual Reports on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, for Mellon Financial Corporation for the year ended December 31, 1999,
and any and all amendments thereto, and to file same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission and with the New York Stock Exchange, Inc., granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and each of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This power of attorney shall be effective as of February 15, 2000 and shall
continue in full force and effect until revoked by the undersigned in a writing
filed with the Secretary of the Corporation.
/s/ Martin G. McGuinn
- --------------------------------- -------------------------------
Martin G. McGuinn, Director and Pemberton Hutchinson, Director
Principal Executive Officer
/s/ Dwight L. Allison, Jr. /s/ George W. Johnstone
- --------------------------------- -------------------------------
Dwight L. Allison, Jr., Director George W. Johnstone, Director
/s/ Burton C. Borgelt /s/ Rotan E. Lee
- --------------------------------- -------------------------------
Burton C. Borgelt, Director Rotan E. Lee, Director
/s/ Carol R. Brown /s/ E. J. McAniff
- --------------------------------- -------------------------------
Carol R. Brown, Director Edward J. McAniff, Director
<PAGE> 2
/s/ Frank V. Cahouet /s/ Robert Mehrabian
- --------------------------------- -------------------------------
Frank V. Cahouet, Director Robert Mehrabian, Director
/s/ Seward Prosser Mellon
- --------------------------------- -------------------------------
Jared L. Cohon, Director Seward Prosser Mellon, Director
/s/ Christopher M. Condron
- --------------------------------- -------------------------------
Christopher M. Condron, Director Mark A. Nordenberg, Director
/s/ J. W. Connolly /s/ David S. Shapira
- --------------------------------- -------------------------------
J. W. Connolly, Director David S. Shapira, Director
/s/ C. A. Corry /s/ Joab L. Thomas
- --------------------------------- -------------------------------
Charles A. Corry, Director Joab L. Thomas, Director
/s/ Ira J. Gumberg /s/ Wesley W. von Schack
- --------------------------------- -------------------------------
Ira J. Gumberg, Director Wesley W. von Schack, Director
2
<PAGE> 3
POWER OF ATTORNEY
MELLON FINANCIAL CORPORATION
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them,
such person's true and lawful attorney-in-fact and agent, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities, to sign one or more Annual Reports on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, for Mellon Financial Corporation for the year ended December 31, 1999,
and any and all amendments thereto, and to file same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission and with the New York Stock Exchange, Inc., granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and each of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This power of attorney shall be effective as of February 24, 2000 and shall
continue in full force and effect until revoked by the undersigned in a writing
filed with the Secretary of the Corporation.
/s/ Jared L. Cohon
- -----------------------------
Jared L. Cohon, Director
<PAGE> 4
POWER OF ATTORNEY
MELLON FINANCIAL CORPORATION
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them,
such person's true and lawful attorney-in-fact and agent, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities, to sign one or more Annual Reports on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, for Mellon Financial Corporation for the year ended December 31, 1999,
and any and all amendments thereto, and to file same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission and with the New York Stock Exchange, Inc., granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and each of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This power of attorney shall be effective as of March 3, 2000 and shall continue
in full force and effect until revoked by the undersigned in a writing filed
with the Secretary of the Corporation.
/s/ Pemberton Hutchinson
- --------------------------------
Pemberton Hutchinson, Director
<PAGE> 5
POWER OF ATTORNEY
MELLON FINANCIAL CORPORATION
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them,
such person's true and lawful attorney-in-fact and agent, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities, to sign one or more Annual Reports on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, for Mellon Financial Corporation for the year ended December 31, 1999,
and any and all amendments thereto, and to file same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission and with the New York Stock Exchange, Inc., granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and each of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This power of attorney shall be effective as of February 21, 2000 and shall
continue in full force and effect until revoked by the undersigned in a writing
filed with the Secretary of the Corporation.
/s/ Mark A. Nordenberg
- -----------------------------------
Mark A. Nordenberg, Director
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,410
<INT-BEARING-DEPOSITS> 286
<FED-FUNDS-SOLD> 1,001
<TRADING-ASSETS> 144
<INVESTMENTS-HELD-FOR-SALE> 5,159
<INVESTMENTS-CARRYING> 1,197
<INVESTMENTS-MARKET> 1,183
<LOANS> 30,248
<ALLOWANCE> 403
<TOTAL-ASSETS> 47,946
<DEPOSITS> 33,421
<SHORT-TERM> 3,650
<LIABILITIES-OTHER> 2,430
<LONG-TERM> 3,438
991<F1>
0
<COMMON> 294
<OTHER-SE> 3,722
<TOTAL-LIABILITIES-AND-EQUITY> 47,946<F1>
<INTEREST-LOAN> 2,238
<INTEREST-INVEST> 419
<INTEREST-OTHER> 83
<INTEREST-TOTAL> 2,759
<INTEREST-DEPOSIT> 871
<INTEREST-EXPENSE> 1,329
<INTEREST-INCOME-NET> 1,430
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,049
<INCOME-PRETAX> 1,563
<INCOME-PRE-EXTRAORDINARY> 989
<EXTRAORDINARY> 0
<CHANGES> (26)
<NET-INCOME> 963
<EPS-BASIC> 1.87<F2>
<EPS-DILUTED> 1.85<F2>
<YIELD-ACTUAL> 3.68
<LOANS-NON> 142
<LOANS-PAST> 99
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 496
<CHARGE-OFFS> 76
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 403
<ALLOWANCE-DOMESTIC> 398
<ALLOWANCE-FOREIGN> 5
<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>
