MELLON FINANCIAL CORP, 10-Q, 2000-11-09

MELLON FINANCIAL CORP
10-Q, 2000-11-09
NATIONAL COMMERCIAL BANKS

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MELLON FINANCIAL CORPORATION FORM 10-Q
FINANCIAL HIGHLIGHTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL STATEMENTS (ITEM 1)
	CONSOLIDATED INCOME STATEMENT
	CONSOLIDATED INCOME STATEMENT — Five Quarter Trend
	CONSOLIDATED BALANCE SHEET
	CONSOLIDATED STATEMENT OF CASH FLOWS
	CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
NOTES TO FINANCIAL STATEMENTS
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURE
CORPORATE INFORMATION
INDEX TO EXHIBITS
Computation of Ratio to Earning to Fixed Charges
Computation of Ratio to Earning to Fixed Charges
Financial Data Schedule

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-7410

MELLON FINANCIAL CORPORATION

(formerly Mellon Bank Corporation)

(Exact name of registrant as specified in its charter)


Pennsylvania		25-1233834
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Mellon Center

Pittsburgh, Pennsylvania 15258-0001

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code — (412) 234-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Outstanding as of
Class		September 30, 2000
Common Stock, $.50 par value		487,989,949

TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX


		Page No.
Part I — Financial Information
Financial Highlights			2




Management’s Discussion and Analysis of Financial Condition and Results of Operations (Items 2 and 3)			3




Financial Statements (Item 1):




	Consolidated Income Statement		48




	Consolidated Income Statement — Five Quarter Trend		50




	Consolidated Balance Sheet		51




	Consolidated Statement of Cash Flows		52




	Consolidated Statement of Changes in Shareholders’ Equity		54




Notes to Financial Statements			56




Part II — Other Information
Legal Proceedings (Item 1)			62




Changes in Securities and Use of Proceeds (Item 2)			62




Exhibits and Reports on Form 8-K (Item 6)			63




Signature			64




Corporate Information			65




Index to Exhibits			66

Cautionary Statement

This Quarterly Report on Form 10-Q contains statements relating to future results of the Corporation that are considered “forward-looking statements”. These statements relate to, among other things, simulation of changes in interest rates, litigation results and the adoption of new accounting standards. These forward-looking statements are based on assumptions that involve risks and uncertainties and that are subject to change based on various important factors (some of which are beyond the Corporation’s control). Actual results may differ materially from those expressed or implied as a result of these 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; the effects of the adoption of new accounting standards; personal and corporate customers’ bankruptcies; inflation; acquisitions and integration 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; as well as other risks and uncertainties detailed elsewhere in this Quarterly Report. 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.

Mellon Financial Corporation (and its subsidiaries)


FINANCIAL HIGHLIGHTS		Quarter ended									Nine months ended

(dollar amounts in millions, except per share		Sept. 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,
amounts or unless otherwise noted)		2000			2000			1999			2000			1999

Financial results




Diluted earnings per share:




	Operating (a)	$	.51		$	.50		$	.46		$	1.51		$	1.34




	Cash operating (a)(b)		.56			.56			.52			1.68			1.51




	Reported		.51			.50			.45			1.51			1.38




Net income:




	Operating (a)	$	252		$	247		$	236		$	752		$	703




	Cash operating (a)(b)		279			274			266			835			792




	Reported		252			247			231			752			723




Return on equity (annualized):




	Operating (a)		25.8	%		26.2	%		22.3	%		26.0	%		21.5	%




	Cash operating (a)(b)		48.8			51.4			43.7			50.6			41.7




	Reported		25.8			26.2			21.8			26.0			22.1




Return on assets (annualized):




	Operating (a)		2.18	%		2.12	%		1.92	%		2.15	%		1.89	%




	Cash operating (a)(b)		2.50			2.44			2.25			2.48			2.21




	Reported		2.18			2.12			1.87			2.15			1.94





Selected key data




Fee revenue as a percentage of net interest and fee revenue (FTE) (c)			69	%		69	%		69	%		69	%		69	%




Trust and investment fee revenue as a percentage of net interest and fee revenue (FTE)			49	%		50	%		46	%		50	%		44	%




Efficiency ratio excluding amortization of intangibles (d)			59	%		59	%		61	%		59	%		61	%




Assets under management at period end (in billions)		$	540		$	521		$	446




Assets under administration or custody at period end (in billions)			2,298			2,257			2,156




Dividends paid per common share		$	.22		$	.22		$	.20		$	.64		$	.58




Dividends paid on common stock			107			108			103			315			301




Closing common stock price per share at period end		$	46.38		$	36.44		$	33.63




Market capitalization at period end			22,631			17,788			17,103




Average common shares and equivalents outstanding — diluted (in thousands)			495,332			495,103			518,605			497,439			525,182





Capital ratios at period end




Shareholders’ equity to assets:




	Reported		8.89	%		8.39	%		9.00	%




	Tangible (b)		5.56			5.03			5.45




Tier I capital			7.21			6.72			7.12




Total (Tier I plus Tier II) capital			11.72			10.97			11.58




Leverage capital			7.18			6.69			6.82

(continued)

Mellon Financial Corporation (and its subsidiaries)


FINANCIAL HIGHLIGHTS (continued)	Quarter ended						Nine months ended

	Sept. 30,		June 30,		Sept. 30,		Sept. 30,		Sept. 30,
(dollar amounts in millions)	2000		2000		1999		2000		1999

Average balances for the period




Loans	$	27,430	$	27,943	$	30,177	$	28,216	$	30,711




Total interest-earning assets		35,927		36,497		38,407		36,605		39,072




Total assets		46,058		46,978		48,871		46,745		49,765




Total tangible assets (b)		44,357		45,257		47,012		45,010		47,876




Deposits		32,114		32,762		33,462		32,365		33,633




Notes and debentures		3,532		3,395		3,372		3,460		3,370




Trust-preferred securities		991		991		991		991		991




Total shareholders’ equity		3,893		3,793		4,212		3,863		4,365




Tangible shareholders’ equity (b)		2,269		2,147		2,417		2,204		2,538


(a)		Operating results equaled reported results in each quarter of 2000. Operating and cash operating results for the third quarter of 1999 exclude a $5 million after-tax net loss from divestitures. Also excluded from operating and cash operating results in the first nine months of 1999 are an $87 million after-tax net gain from divestitures, $36 million of nonrecurring expenses after taxes and a $26 million after-tax charge for the cumulative effect of a change in accounting principle.




(b)		See page 7 for a definition of amounts and ratios.




(c)		See page 20 for the definition of this ratio.




(d)		See page 30 for the definition of this ratio.

Note: All calculations are based on unrounded numbers. FTE denotes presentation on a fully taxable equivalent basis.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Third quarter 2000 diluted earnings per share totaled $.51, an increase of 11% compared with $.46 per share, on an operating basis, in the third quarter of 1999. The earnings per share increase was achieved despite the impact of the previously-disclosed May 2000 expiration of a long-term mutual fund administration contract with a third party. Core business sectors earnings per share contribution, which excludes the revenues and related expenses from this contract as well as the impact of divestitures, and real estate workout and other non-core activity from both periods, increased 22%.

Net income in the third quarter of 2000 was $252 million, an increase of 7%, compared with $236 million, on an operating basis, in the third quarter of 1999. Annualized return on equity and return on assets were 25.8% and 2.18%, respectively, for the third quarter of 2000, compared with 22.3% and 1.92%, respectively, on an operating basis, for the third quarter of 1999. The third quarter 1999 results included a $5 million after-tax net loss from divestitures. Including this item, third quarter 1999 diluted earnings per share totaled $.45, net income totaled $231 million, return on equity was 21.8% and return on assets was 1.87%. In the second quarter of 2000, diluted earnings per share totaled $.50 and net income was $247 million.

Diluted cash earnings per share totaled $.56 in the third quarter of 2000, an increase of 8%, compared with $.52 per share, on an operating basis, in the third quarter of 1999. Core business sectors cash

Overview (continued)

earnings per share contribution increased 17% over the same periods. Cash net income was $279 million, an increase of 5%, compared with $266 million, on an operating basis, in the third quarter of 1999. Annualized cash return on tangible equity and cash return on tangible assets were 48.8% and 2.50%, respectively, in the third quarter of 2000, compared with 43.7% and 2.25%, respectively, on an operating basis, in the third quarter of 1999. In the second quarter of 2000, diluted cash earnings per share totaled $.56 and cash net income was $274 million, on an operating basis.

Fee revenue totaled 69% of net interest and fee revenue, on a fully taxable equivalent basis, in both the third quarter of 2000 and the third quarter of 1999. Trust and investment fee revenue totaled 49% of net interest and fee revenue, on a fully taxable equivalent basis, in the third quarter of 2000 compared with 46% in the third quarter of 1999. Fee revenue of $773 million in the third quarter of 2000 was impacted by the third quarter 1999 mortgage banking divestitures and the previously-disclosed May 2000 expiration of the long-term mutual fund administration contract with a third party. Excluding these factors, fee revenue increased 12% in the third quarter of 2000 compared with the third quarter of 1999, primarily due to a 13% increase in trust and investment fee revenue. Excluding the effect of the expiration of the long-term mutual fund administration contract with a third party, fee revenue increased 2% in the third quarter of 2000 compared with the second quarter of 2000, primarily resulting from higher trust and investment fee revenue. At Sept. 30, 2000, assets under management totaled $540 billion, a 21% increase from Sept. 30, 1999, and assets under administration or custody totaled $2,298 billion, a 7% increase from Sept. 30, 1999. Assets managed by subsidiaries and affiliates outside the United States totaled $65 billion at Sept. 30, 2000.

Net interest revenue on a fully taxable equivalent basis for the third quarter of 2000 was $359 million, up $7 million, or 2%, compared with both the third quarter of 1999 and the second quarter of 2000. Excluding the net interest revenue generated by the mortgage banking businesses, net interest revenue increased 3% compared with the third quarter of 1999, reflecting improved spreads and the positive impact of interest-free funds in a higher rate environment, including compensating deposits held in lieu of customers paying cash management fees, partially offset by higher funding costs related to the repurchase of common stock and a $2.5 billion lower level of average interest-earning assets. The increase compared with the second quarter of 2000 primarily resulted from improved spreads and the positive impact of interest-free funds, offset in part by a $570 million reduction in average interest-earning assets.

Operating expense before trust-preferred securities expense and net expense (revenue) from acquired property for the third quarter of 2000 was $702 million, a decrease of $14 million compared with $716 million in the third quarter of 1999. Excluding the effect of the 1999 mortgage banking divestitures, operating expense before trust-preferred securities expense and net expense (revenue) from acquired property increased 8% compared with the third quarter of 1999, reflecting higher staff expense as well as other expenses in support of business growth. Operating expense before trust-preferred securities expense and net expense (revenue) from acquired property decreased $2 million in the third quarter of 2000 compared with the second quarter of 2000, primarily due to lower business development and other expenses, primarily offset by higher staff expense and professional and purchased services expense.

Credit quality expense was $12 million in the third quarter of 2000, compared with $5 million in the third quarter of 1999 and $11 million in the second quarter of 2000. The increase in credit quality expense in the third quarter of 2000 compared with the prior-year period resulted from lower gains on the sales of acquired property. Net credit losses were $11 million in the third quarter of 2000, compared with $10 million in the third quarter of 1999 and $11 million in the second quarter of 2000.

Overview (continued)

Nonperforming assets totaled $222 million at Sept. 30, 2000, compared with $228 million at June 30, 2000, $159 million at Dec. 31, 1999, and $169 million at Sept. 30, 1999. The higher level of nonperforming assets compared with Sept. 30, 1999, primarily resulted from the assignment of nonperforming status to commercial loans to a health care provider and its affiliated companies in the first quarter of 2000. The Corporation’s ratio of nonperforming assets to total loans and net acquired property was .81% at Sept. 30, 2000, compared with .82% at June 30, 2000, .53% at Dec. 31, 1999, and .58% at Sept. 30, 1999.

Year-to-date 2000 compared with year-to-date 1999

For the first nine months of 2000, diluted earnings per share totaled $1.51, an increase of 13% compared with $1.34 per share, on an operating basis, for the first nine months of 1999. Core business sector earnings per share contribution increased 25% over the same periods. Net income in the first nine months of 2000 was $752 million, an increase of 7%, compared with $703 million, on an operating basis, in the first nine months of 1999. Annualized return on equity and return on assets were 26.0% and 2.15%, respectively, for the first nine months of 2000, compared with 21.5% and 1.89%, respectively, on an operating basis, for the first nine months of 1999. Year-to-date 1999 results included an $82 million after-tax net gain from divestitures, $36 million of nonrecurring expenses after taxes, and a $26 million after-tax charge for the cumulative effect of a change in accounting principle. Including these items, year-to-date 1999 diluted earnings per share totaled $1.38, net income totaled $723 million, return on equity was 22.1% and return on assets was 1.94%.

Diluted cash earnings per share totaled $1.68 in the first nine months of 2000, an increase of 11%, compared with $1.51 per share, on an operating basis, in the first nine months of 1999. Core business sector cash earnings per share contribution increased 21% over the same periods. Cash net income was $835 million, an increase of 5%, compared with $792 million, on an operating basis, in the first nine months of 1999. Annualized cash return on tangible equity and cash return on tangible assets were 50.6% and 2.48%, respectively, in the first nine months of 2000, compared with 41.7% and 2.21%, respectively, on an operating basis in the first nine months of 1999.

The comparison of fee revenue in the first nine months of 2000 to the first nine months of 1999 was impacted by the 1999 credit card, network services transaction processing unit and mortgage banking divestitures, as well as the May 2000 expiration of the long-term mutual fund administration contract with a third party. Excluding the effect of these factors, fee revenue for the first nine months of 2000 increased 11% compared with the first nine months of 1999, due to a 14% increase in trust and investment fee revenue. Net interest revenue on a fully taxable equivalent basis in the first nine months of 2000 decreased $24 million compared with the prior-year period. Excluding the net interest revenue generated by the credit card and mortgage banking businesses, net interest revenue increased 1% compared with the first nine months of 1999. Interest-earning assets were $2.5 billion lower in the first nine months of 2000 compared with the prior-year period. Excluding the effect of divestitures and $56 million of nonrecurring expenses recorded in the second quarter of 1999, operating expense before trust-preferred securities expense and net expense (revenue) from acquired property increased 7% during the first nine months of 2000 compared with the prior-year period.

Significant financial events

Repurchase of common stock

During the third quarter of 2000, approximately 1.8 million shares of common stock were repurchased, bringing year-to-date repurchases to approximately 18.1 million shares at a purchase price of approximately $600 million for an average share price of $33.15 per share. Common shares outstanding at Sept. 30, 2000, were 6.8% lower than at Dec. 31, 1998, reflecting a 35.9 million reduction, net of shares reissued primarily for employee benefit plan purposes, due to stock repurchases totaling approximately $1.7 billion, at an average share price of $34.52 per share. There are an additional 21.7 million shares available for repurchase under the current 25 million share repurchase program authorized by the board of directors in May 2000.

The Corporation’s average level of treasury stock was approximately $800 million higher in the third quarter of 2000 compared with the third quarter of 1999. After giving effect to funding the higher level of treasury stock, valued at a short-term funding rate, the lower share count increased diluted earnings per share by approximately 3%.

Pending acquisition of remaining 25% of Newton Management Limited

In September 2000, the Corporation announced that it and the management of Newton Management Limited agreed that the Corporation would be permitted to accelerate its option to buy out all remaining shareholders of Newton in two tranches on July 1, 2001 and May 1, 2002. The Corporation acquired 75% of Newton in October 1998, with Newton management and staff retaining the remaining 25% interest in the company, either directly or through options. Newton is a leading U.K.-based investment manager that provides investment management services to institutional, private and retail clients. On a local currency basis, Newton has grown funds under management by nearly 90% since its acquisition by the Corporation. In terms of U.S. dollars, funds under management have grown by approximately 65%, from $20 billion since its acquisition by the Corporation to $32 billion, as of Sept. 30, 2000.

Pending acquisition of Chase’s interest in ChaseMellon Shareholder Services

In October 2000, the Corporation announced that it had signed a definitive agreement to purchase The Chase Manhattan Corporation’s interest in ChaseMellon Shareholder Services, currently a 50-50 joint venture between the Corporation and Chase. The transaction terms were not disclosed, and the purchase is expected to be completed during the fourth quarter of 2000, pending regulatory approvals. At closing, ChaseMellon Shareholder Services will be renamed Mellon Investor Services. ChaseMellon, which was formed in May 1995, is one of the nation’s leading providers of shareholder services and related securities services. During the first nine months of 2000, ChaseMellon generated approximately $180 million of gross revenue, of which approximately 81% was gross fee revenue. Mellon Investor Services will be part of the Corporation’s Global Investment Services businesses and will remain headquartered in New Jersey.

Acquisition of The Trust Company of Washington

On Nov. 8, 2000, the Corporation acquired The Trust Company of Washington. At closing, the company was renamed Mellon Trust of Washington. The transaction terms were not disclosed. The company was founded in 1993, and specializes in meeting the needs of high net worth individuals, families and not-for-profit organizations. Based in Seattle with offices in Bellevue and Tacoma, Mellon Trust of Washington added approximately $500 million in assets under management to Mellon Private Asset Management.

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.

Cash operating results


			Quarter ended									Nine months ended

(dollar amounts in millions, except			Sept. 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,
per share amounts; ratios annualized)			2000			2000			1999 (a)			2000			1999 (a)

Operating net income			$	252		$	247		$	236		$	752		$	703




After-tax impact of amortization of intangibles from
purchase acquisitions				27			27			30			83			89









	Cash operating net income		$	279		$	274		$	266		$	835		$	792




		Increase over prior-year period		5	%		3	%		8	%		5	%		10	%




	Cash operating earnings per share — diluted		$	.56		$	.56		$	.52		$	1.68		$	1.51




		Increase over prior-year period		8	%		12	%		11	%		11	%		11	%

Average common equity			$	3,893		$	3,793		$	4,212		$	3,863		$	4,365




Less: Average goodwill and other identified




intangibles, net of tax benefit (b)				(1,701	)		(1,721	)		(1,859	)		(1,735	)		(1,889	)




Plus: Average minority interest (c)				77			75			64			76			62





	Average tangible common equity (b)		$	2,269		$	2,147		$	2,417		$	2,204		$	2,538
	Cash return on tangible common equity (b)			48.8	%		51.4	%		43.7	%		50.6	%		41.7	%

Average total assets			$	46,058		$	46,978		$	48,871		$	46,745		$	49,765




Average total tangible assets (b)			$	44,357		$	45,257		$	47,012		$	45,010		$	47,876




Cash return on tangible assets (b)				2.50	%		2.44	%		2.25	%		2.48	%		2.21	%


(a)		Cash operating results for the third quarter of 1999 exclude a $5 million after-tax net loss from divestitures. Also excluded from cash operating results in the first nine months of 1999 are an $87 million after-tax net gain from divestitures, $36 million of nonrecurring expenses after taxes 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 $316 million, $320 million, $361 million, $325 million and $368 million, respectively, of average tax benefits related to tax deductible goodwill and other intangibles.




(c)		Primarily relates to Newton.

Business sectors

For the quarter ended Sept. 30,


									Global						Global						Regional						Specialized
			Wealth						Investment						Investment						Consumer						Commercial
			Management						Management						Services						Banking						Banking
(dollar amounts in millions,
averages in billions)			2000			1999			2000			1999			2000			1999			2000			1999			2000			1999

Revenue:
	Net interest revenue (expense)		$	32		$	26		$	4		$	(1	)	$	25		$	17		$	126		$	125		$	107		$	106




	Fee and other revenue			83			75			282			246			244			221			39			37			30			32

		Total revenue		115			101			286			245			269			238			165			162			137			138




Credit quality expense (revenue)				1			(2	)		—			—			—			—			3			3			6			—




Operating expense:




	Intangible amortization			4			4			6			7			4			4			8			13			7			7




	Trust-preferred securities			1			—			—			—			—			—			1			1			3			3




	Other			60			53			170			155			203			183			93			93			58			54

		Total operating expense		65			57			176			162			207			187			102			107			68			64

Income (loss) before taxes				49			46			110			83			62			51			60			52			63			74




Income taxes (benefits)				19			18			44			34			23			21			22			19			24			28

	Net income (loss)		$	30		$	28		$	66		$	49		$	39		$	30		$	38		$	33		$	39		$	46

Average assets			$	3.0		$	2.7		$	2.5		$	2.0		$	1.8		$	1.7		$	14.2		$	13.9		$	13.5		$	12.4




Average common equity			$	0.2		$	0.2		$	0.6		$	0.5		$	0.5		$	0.5		$	0.6		$	0.7		$	0.9		$	0.7




Average Tier I preferred equity			$	0.1		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	0.2		$	0.2

Cash net income (loss) (a)			$	34		$	32		$	71		$	55		$	42		$	33		$	44		$	42		$	45		$	51

Return on common equity (b)				50	%		55	%		45	%		36	%		31	%		24	%		23	%		20	%		18	%		24	%




Return on assets (b)				NM			NM			NM			NM			NM			NM			1.05	%		0.94	%		1.16	%		1.46	%




Pretax operating margin				43	%		45	%		38	%		34	%		23	%		22	%		36	%		32	%		46	%		53	%




Pretax operating margin (c)				47	%		50	%		41	%		37	%		24	%		23	%		41	%		40	%		54	%		61	%




Efficiency ratio (c)				53	%		53	%		59	%		63	%		76	%		77	%		56	%		58	%		42	%		39	%

For the nine months ended Sept. 30,


									Global						Global						Regional						Specialized
			Wealth						Investment						Investment						Consumer						Commercial
			Management						Management						Services						Banking						Banking
(dollar amounts in millions,
averages in billions)			2000			1999			2000			1999			2000			1999			2000			1999			2000			1999

Revenue:




	Net interest revenue (expense)		$	94		$	71		$	8		$	(2	)	$	63		$	45		$	380		$	379		$	316		$	311




	Fee and other revenue			237			220			854			725			739			662			111			114			98			81

		Total revenue		331			291			862			723			802			707			491			493			414			392




Credit quality expense (revenue)				1			(2	)		—			—			—			—			10			10			13			12




Operating expense:




	Intangible amortization			12			12			21			22			10			10			29			37			22			22




	Trust-preferred securities			2			1			—			—			—			—			3			3			9			9




	Other			175			162			528			459			596			540			282			292			174			165

		Total operating expense		189			175			549			481			606			550			314			332			205			196

Income (loss) before taxes and cumulative effect of accounting change				141			118			313			242			196			157			167			151			196			184




Income taxes (benefits)				54			46			126			101			74			64			62			56			75			70

Income (loss) before cumulative effect of accounting change				87			72			187			141			122			93			105			95			121			114




Cumulative effect of accounting change (d)				—			—			—			—			—			—			—			—			—			—

	Net income (loss)		$	87		$	72		$	187		$	141		$	122		$	93		$	105		$	95		$	121		$	114

Average assets			$	2.9		$	2.5		$	2.6		$	2.0		$	1.9		$	1.7		$	14.4		$	14.1		$	13.3		$	12.0




Average common equity			$	0.2		$	0.2		$	0.6		$	0.5		$	0.5		$	0.5		$	0.7		$	0.7		$	0.8		$	0.7




Average Tier I preferred equity			$	—		$	—		$	—		$	—		$	—		$	—		$	0.1		$	0.1		$	0.2		$	0.1

Cash net income (loss) (a)			$	98		$	84		$	203		$	158		$	132		$	102		$	127		$	122		$	139		$	131

Return on common equity (b)				51	%		52	%		44	%		37	%		33	%		26	%		22	%		19	%		19	%		21	%




Return on assets (b)				NM			NM			NM			NM			NM			NM			0.97	%		0.90	%		1.22	%		1.26	%




Pretax operating margin				43	%		41	%		36	%		33	%		24	%		22	%		34	%		31	%		47	%		47	%




Pretax operating margin (c)				47	%		45	%		39	%		37	%		26	%		24	%		41	%		39	%		55	%		55	%




Efficiency ratio (c)				53	%		56	%		61	%		63	%		74	%		76	%		57	%		59	%		42	%		42	%


(a)	Excludes the after-tax impact of the amortization of goodwill and other intangibles from purchase acquisitions.




(b)	Ratios are annualized.




(c)	Excludes amortization of intangibles and trust-preferred securities expense.




(d)	The cumulative effect of an accounting change has not been allocated to any of the Corporation’s reportable sectors.




(e)	Includes $(8) million and $134 million, respectively, of pre-tax net gains (losses) from divestitures for the three and nine month periods ended Sept. 30, 1999.




(f)	Ratios exclude the impact of net divestiture gains (losses) and nonrecurring expenses.




NM	— Not meaningful



Large																	Real Estate
Corporate						Total Core											Workout/Other						Consolidated
Banking						Business Sectors						Divestitures					Activity						Results

2000			1999			2000			1999			2000		1999			2000			1999			2000			1999


$	74		$	70		$	368		$	343		$	12	$	23		$	(21	)	$	(14	)	$	359		$	352
	75			63			753			674			5		54	(e)		24			35			782			763

	149			133			1,121			1,017			17		77			3			21			1,141			1,115
	4			8			14			9			—		—			(2	)		(4	)		12			5

	1			—			30			35			2		2			—			—			32			37
	4			6			9			10			—		1			11			9			20			20
	87			75			671			613			8		53			(9	)		13			670			679

	92			81			710			658			10		56			2			22			722			736

	53			44			397			350			7		21			3			3			407			374
	19			16			151			136			4		6			—			1			155			143

$	34		$	28		$	246		$	214		$	3	$	15		$	3		$	2		$	252		$	231

$	6.9		$	9.2		$	41.9		$	41.9		$	3.4	$	5.7		$	0.8		$	1.3		$	46.1		$	48.9
$	0.8		$	1.0		$	3.6		$	3.6		$	0.2	$	0.4		$	0.1		$	0.2		$	3.9		$	4.2
$	0.2		$	0.3		$	0.5		$	0.5		$	—	$	—		$	0.5		$	0.5		$	1.0		$	1.0

$	34		$	29		$	270		$	242		$	6	$	17		$	3		$	2		$	279		$	261

	17	%		12	%		27	%		24	%		NM		NM			NM			NM			26	%		22	%
	1.99	%		1.23	%		2.33	%		2.03	%		NM		NM			NM			NM			2.18	%		1.87	%
	35	%		34	%		35	%		34	%		NM		NM			NM			NM			36	%		34	%(f)
	39	%		38	%		39	%		39	%		NM		NM			NM			NM			40	%		39	%(f)
	58	%		56	%		60	%		60	%		NM		NM			NM			NM			59	%		61	%(f)



Large																		Real Estate
Corporate						Total Core												Workout/Other						Consolidated
Banking						Business Sectors						Divestitures						Activity						Results

2000			1999			2000			1999			2000			1999			2000			1999			2000			1999


$	221		$	211		$	1,082		$	1,015		$	36		$	103		$	(56	)	$	(32	)	$	1,062		$	1,086
	212			191			2,251			1,993			48			432	(e)		70			72			2,369			2,497

	433			402			3,333			3,008			84			535			14			40			3,431			3,583
	24			8			48			28			(1	)		10			(15	)		(13	)		32			25

	1			1			95			104			6			6			1			1			102			111
	14			17			28			30			—			1			31			28			59			59
	250			236			2,005			1,854			23			279			(5	)		41			2,023			2,174

	265			254			2,128			1,988			29			286			27			70			2,184			2,344


	144			140			1,157			992			56			239			2			(17	)		1,215			1,214
	51			50			442			387			22			94			(1	)		(16	)		463			465


	93			90			715			605			34			145			3			(1	)		752			749
	—			—			—			—			—			—			—			—			—			(26	)

$	93		$	90		$	715		$	605		$	34		$	145		$	3		$	(1	)	$	752		$	723

$	7.4		$	9.5		$	42.5		$	41.8		$	3.7		$	6.7		$	0.5		$	1.3		$	46.7		$	49.8
$	0.8		$	1.0		$	3.6		$	3.6		$	0.2		$	0.4		$	0.1		$	0.4		$	3.9		$	4.4
$	0.2		$	0.3		$	0.5		$	0.5		$	—		$	—		$	0.5		$	0.5		$	1.0		$	1.0

$	93		$	91		$	792		$	688		$	40		$	151		$	3		$	(1	)	$	835		$	812

	15	%		13	%		26	%		23	%		NM			NM			NM			NM			26	%		22	%
	1.69	%		1.28	%		2.25	%		1.94	%		NM			NM			NM			NM			2.15	%		1.94	%
	33	%		35	%		35	%		33	%		NM			NM			NM			NM			35	%		32	%(f)
	37	%		39	%		38	%		37	%		NM			NM			NM			NM			40	%		37	%(f)
	58	%		59	%		60	%		62	%		NM			NM			NM			NM			59	%		61	%(f)

Business sectors (continued)

The Corporation’s business sectors 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 core business sectors. In addition, the effect of Divestitures has been displayed separately, as discussed further on page 17. The results of the Corporation’s core business sectors are presented and analyzed on an internal management reporting basis. Net interest revenue, fee revenue and income taxes differ from the amounts shown in the Consolidated Income Statement because amounts presented in Business sectors are on a taxable equivalent basis. There is no intercompany profit or loss on intersector activity. In addition, the accounting policies of the business sectors are the same as those described in note 1 of the 1999 Financial Annual Report to Shareholders. Capital is allocated quarterly using the federal regulatory guidelines, where applicable, as a basis, coupled with management’s judgment regarding the risks inherent in the individual lines of business. The capital allocations may not be representative of the capital levels that would be required if these sectors were nonaffiliated business units. In the second quarter of 2000, the Corporation realigned its jumbo residential mortgage origination business to focus primarily on existing private client relationships. The jumbo mortgage lending results, previously a part of Wealth Management, were moved to Divestitures, a non-Core Business Sector. Prior period results have been restated.


							% of Core												% of Core
	% of Core						Sector Income						% of Core						Sector Income
Summary	Sector Revenue						Before Taxes						Sector Revenue						Before Taxes

	3Q00			3Q99			3Q00			3Q99			YTD00			YTD99			YTD00			YTD99

Growth Sectors		60	%		57	%		56	%		51	%		60	%		57	%		56	%		52	%




Return Sectors		40	%		43	%		44	%		49	%		40	%		43	%		44	%		48	%

Total Core Business Sectors		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%




Earnings Per Share Contribution From Total Core Business Sectors
(in millions, except per share amounts)	3Q00		3Q99		Growth			YTD00		YTD99		Growth

Net Income	$	246	$	214		15	%	$	715	$	605		18	%




Average Shares and Equivalents — diluted		495.3		518.6		(4	)%		497.4		525.2		(5	)%




EPS Contribution	$	.50	$	.41		22	%	$	1.44	$	1.15		25	%




Earnings Per Share Contribution From Total Core Business Sectors - Five Quarter Trend
(in millions, except per share amounts)	3Q00		2Q00		1Q00		4Q99		3Q99

Net Income	$	246	$	237	$	232	$	219	$	214




Average Shares and Equivalents — diluted		495.3		495.1		502.1		512.5		518.6




EPS Contribution	$	.50	$	.48	$	.46	$	.43	$	.41

Business sectors (continued)

The Corporation manages its business sectors utilizing growth and return strategies. The sectors managed for growth include businesses which are predominantly fee-based in nature. The Corporation invests in these businesses for future growth. The sectors managed for return include the more slowly growing, traditional banking businesses. These sectors are managed to drive profitability and higher returns on equity, primarily focusing on improving productivity through re-engineering and effective capital management.

Following is a discussion of the Corporation’s business sectors. In the tables that follow, the income statement amounts and average allocated equity are presented in millions, the assets under management, administration or custody are period-end market values and are presented in billions, and the return on common equity is annualized.

Sectors Managed for Growth


		Total Revenue			Operating Expense			Income Before
3Q 2000 vs. 3Q 1999		Growth			Growth			Taxes Growth


Wealth Management			14	%		12	%		8	%




Global Investment Management			17	%		9	%		32	%




Global Investment Services			13	%		11	%		21	%




	Total Growth Sectors		15	%		11	%		23	%


		Total Revenue			Operating Expense			Income Before
YTD 2000 vs. YTD 1999		Growth			Growth			Taxes Growth


Wealth Management			14	%		8	%		19	%




Global Investment Management			19	%		14	%		29	%




Global Investment Services			14	%		10	%		25	%




	Total Growth Sectors		16	%		12	%		26	%

The Corporation’s growth sectors continued to show strong growth in revenue and income before taxes for the third quarter and first nine months of 2000. Revenue for the growth sectors grew 15% and 16%, respectively, for the third quarter and first nine months of 2000, while income before taxes grew 23% and 26% for the same periods.

Business sectors (continued)

Wealth Management



									Growth rates
	Quarter ended				Nine months ended
									3Q 00			9 Mos 00
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,		vs			vs
	2000		1999		2000		1999		3Q 99			9 Mos 99


Total revenue		$115		$101		$331		$291		14	%		14	%
Total operating expense		$65		$57		$189		$175		12	%		8	%
Income before taxes		$49		$46		$141		$118		8	%		19	%
Return on common equity		50%		55%		51%		52%
Pretax operating margin (a)		47%		50%		47%		45%
Assets under management		$57		$51						11	%
Assets under administration or custody		$34		$34						—	%


(a)	Excludes amortization of intangibles and trust-preferred securities expense.

Wealth Management includes private asset management services and private banking. Income before taxes increased 8% in the third quarter and 19% in the first nine months of 2000 compared with the prior-year periods. These increases resulted from positive operating leverage as revenue increased 14% in both periods, with expense growth of 12% and 8%, respectively. The 8% quarter to quarter growth rate for income before taxes was impacted by a credit recovery in the third quarter of 1999. Excluding this credit recovery, income before taxes increased 15% in the third quarter of 2000 compared to the prior year period.

Global Investment Management



									Growth rates
	Quarter ended				Nine months ended
									3Q 00			9 Mos 00
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,		vs			vs
	2000		1999		2000		1999		3Q 99			9 Mos 99


Total revenue		$286		$245		$862		$723		17	%		19	%
Total operating expense		$176		$162		$549		$481		9	%		14	%
Income before taxes		$110		$83		$313		$242		32	%		29	%
Return on common equity		45%		36%		44%		37%
Pretax operating margin (a)		41%		37%		39%		37%
Assets under management		$443		$364						22	%


(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 increased 32% in the third quarter of 2000, compared with the third quarter of 1999 and increased 29% in the first nine months of 2000, compared with the prior-year period. These increases resulted from higher mutual fund, institutional asset management and brokerage fees, offset in part by higher staff and other expenses in support of current business growth, as well as investments for growth initiatives including those outside the United States. The year-to-date 19% increase in total revenue was impacted by a $17 million higher level of investment management performance fees, primarily recorded in the first quarter. Assets under management for this sector increased 22% to $443 billion at Sept. 30, 2000, from $364 billion at Sept. 30, 1999, primarily due to net new business, as well as market appreciation. Average proprietary equity mutual funds increased $14 billion, or 29%, in the third quarter of 2000 compared to the third quarter of 1999.

Business sectors (continued)

Global Investment Services


														Growth rates

	Quarter ended						Nine months ended
														3Q 00			9 Mos 00
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,				vs			vs
	2000			1999			2000			1999				3Q 99			9 Mos 99

Total revenue	$	269		$	238		$	802			$	707			13	%		14	%




Total operating expense	$	207		$	187		$	606			$	550			11	%		10	%




Income before taxes	$	62		$	51		$	196			$	157			21	%		25	%




Return on common equity		31	%		24	%		33	%			26	%




Pretax operating margin (a)		24	%		23	%		26	%			24	%




Assets under management	$	40		$	31										28	%




Assets under administration or custody	$	2,264		$	2,122										7	%

(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 back office outsourcing for investment managers. This sector also includes substantially all of the Corporation’s joint ventures. The results of joint ventures are reported 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. As shown in the table on page 25, gross fee revenue generated by all of the Corporation’s joint ventures remained approximately the same in the third quarter of 2000 compared with the third quarter of 1999 and increased $55 million, or 19%, in the first nine months of 2000, compared to the prior-year period. Income before taxes increased 21% in the third quarter of 2000, compared with the third quarter of 1999, and increased 25% in the year over year comparison. These increases primarily resulted from higher institutional trust and custody revenue resulting from net new business, including higher securities lending revenue. Assets under administration or custody exceeded $2.2 trillion at Sept. 30, 2000, an increase of 7% from Sept. 30, 1999.

Sectors Managed for Return


		Pretax Operating						Return on						Average
		Margin (a)						Common Equity						Allocated Equity

(dollar amounts in millions)		3Q00			3Q99			3Q00			3Q99			3Q00		3Q99

Regional Consumer Banking			41	%		40	%		23	%		20	%	$	688	$	719




Specialized Commercial Banking			54	%		61	%		18	%		24	%	$	1,020	$	894




Large Corporate Banking			39	%		38	%		17	%		12	%	$	1,040	$	1,224

	Total Return Sectors		44	%		46	%		19	%		18	%	$	2,748	$	2,837


(a)	Excludes amortization of intangibles and trust-preferred securities expense.


		Pretax Operating						Return on						Average
		Margin (a)						Common Equity						Allocated Equity

(dollar amounts in millions)		YTD00			YTD99			YTD00			YTD99			YTD00		YTD99

Regional Consumer Banking			41	%		39	%		22	%		19	%	$	693	$	715




Specialized Commercial Banking			55	%		55	%		19	%		21	%	$	987	$	876




Large Corporate Banking			37	%		39	%		15	%		13	%	$	1,075	$	1,248

	Total Return Sectors		44	%		44	%		18	%		17	%	$	2,755	$	2,839


(a)	Excludes amortization of intangibles and trust-preferred securities expense.

Business sectors (continued)

The results in the third quarter and first nine months of 2000 for the return sectors continue to demonstrate the Corporation’s strategy of driving profitability and higher returns on equity, primarily focusing on improving productivity through re-engineering and effective capital management. The Corporation aggressively manages capital levels in the return sectors. Average allocated equity decreased $89 million in the third quarter of 2000, and the return on common equity increased to 19%, up from 18% in the third quarter of 1999. The pretax operating margin in the third quarter of 2000 was 44%, down from 46% in the third quarter of 1999, primarily reflecting higher credit quality and other expenses in the Specialized Commercial Banking sector. The pretax operating margin for the return sectors for the first nine months of 2000 was 44%, unchanged from the prior year period. Return on common equity was 18% for the first nine months of 2000, compared with 17% in the first nine months of 1999. Average allocated equity decreased $84 million in the first nine months of 1999, compared to the prior-year period.

Regional Consumer Banking



									Growth rates
	Quarter ended				Nine months ended
									3Q 00			9 Mos 00
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,		vs			vs
	2000		1999		2000		1999		3Q 99			9 Mos 99


Total revenue	$	165	$	162	$	491	$	493		2	%		(1	)%
Total operating expense	$	102	$	107	$	314	$	332		(5	)%		(6	)%
Income before taxes	$	60	$	52	$	167	$	151		14	%		11	%
Return on common equity		23%		20%		22%		19%
Pretax operating margin (a)		41%		40%		41%		39%

(a) Excludes amortization of intangibles and trust-preferred securities expense.

Regional Consumer Banking includes consumer lending and deposit products, direct banking and sales of insurance products. Income before taxes increased 14% in the third quarter of 2000, compared with the third quarter of 1999, and increased 11% in the year over year comparison. These increases reflect the benefits of productivity improvements as operating expense decreased 5% in the third quarter of 2000, compared with the third quarter of 1999, and decreased 6% in the year over year comparison. Return on common equity improved to 23% for the third quarter of 2000 and to 22% for the first nine months of 2000. The pretax operating margin improved to 41% in the third quarter of 2000, compared with 40% in the third quarter of 1999, and to 41% from 39% year over year.

Business sectors (continued)

Specialized Commercial Banking



									Growth rates
	Quarter ended				Nine months ended
									3Q 00		9 Mos 00
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,		vs		vs
	2000		1999		2000		1999		3Q 99		9 Mos 99


Total revenue	$	137	$	138	$	414	$	392		(1)%		6%
Total operating expense	$	68	$	64	$	205	$	196		7%		5%
Income before taxes	$	63	$	74	$	196	$	184		(14)%		7%
Return on common equity		18%		24%		19%		21%
Pretax operating margin (a)		54%		61%		55%		55%

(a) Excludes amortization of intangibles and trust-preferred securities expense.

Specialized Commercial Banking includes middle market lending, business banking, lease financing, commercial real estate lending, insurance premium financing, asset-based lending and venture capital. Income before taxes decreased 14% in the third quarter of 2000, compared with the third quarter of 1999, but increased 7% in the year over year comparison. The decrease in the third quarter of 2000, primarily resulted from a $6 million increase in credit quality expense, and a $4 million increase in other expenses. Mellon Ventures, Inc., the Corporation’s venture capital group, recorded a pre-tax loss of $2 million in the third quarter of 2000 compared with income before taxes of $8 million in the prior-year period, and income before taxes of $11 million for the first nine months of 2000 compared with $9 million in the prior-year period. The return on common equity was 18% in the third quarter of 2000, down from 24% in the prior year while the pretax operating margin was 54% in the third quarter of 2000, down from 61% in the prior year.

Large Corporate Banking



									Growth rates
	Quarter ended				Nine months ended
									3Q 00			9 Mos 00
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,		vs			vs
	2000		1999		2000		1999		3Q 99			9 Mos 99


Total revenue	$	149	$	133	$	433	$	402		13	%		8%
Total operating expense	$	92	$	81	$	265	$	254		14	%		4%
Income before taxes	$	53	$	44	$	144	$	140		18	%		2%




Return on common equity		17%		12%		15%		13%
Pretax operating margin (a)		39%		38%		37%		39%

(a) Excludes amortization of intangibles and trust-preferred securities expense.

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 increased 18% in the third quarter of 2000, compared with the third quarter of 1999, and 2% in the year over year comparison. Credit quality expense was lower in the third quarter of 2000 compared to the third quarter of 1999, but was higher in the first nine months of 2000 compared to the first nine months of 1999. The driver of revenue and income before taxes growth was the continued strong results of the Corporation’s cash management business line. The cash management business line’s revenue improved by $15 million, or 19%, in the third quarter of 2000 compared to the third quarter of 1999, and by $39 million, or 17%, in the first nine months of 2000 compared with the first nine months of 1999. Income before taxes for the cash management business line improved by $7 million, or 34%, in the

Business sectors (continued)

third quarter of 2000 compared to the third quarter of 1999, and by $26 million, or 52% in the first nine months of 2000 compared with the first nine months of 1999.

Total Core Business Sectors


									Growth rates
	Quarter ended				Nine months ended
									3Q 00			9 Mos 00
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,		vs			vs
	2000		1999		2000		1999		3Q 99			9 Mos 99

Total revenue	$	1,121	$	1,017	$	3,333	$	3,008		10	%		11	%




Total operating expense	$	710	$	658	$	2,128	$	1,988		8	%		7	%




Income before taxes	$	397	$	350	$	1,157	$	992		13	%		17	%




Return on common equity		27%		24%		26%		23%




Pretax operating margin (a)		39%		39%		38%		37%

(a) Excludes amortization of intangibles and trust-preferred securities expense.

Income before taxes for the Total Core Business Sectors increased 13% in the third quarter of 2000, compared with the third quarter of 1999, and increased 17% in the year over year comparison. The Total Core Business Sectors contribution to earnings per share increased 22% and 25% in the third quarter of 2000 and first nine months of 2000, respectively, over the prior-year periods.

Business sectors (continued)

Divestitures

Divestitures includes the jumbo residential mortgage origination business and the results of the mutual fund administration service provided under a long-term contract with a third party that expired in May 2000. Results in 1999 also include residential and commercial mortgage loan origination and servicing, credit card, network services transaction processing and the gain on the sale of the seven Mellon Bank (MD) N.A. retail offices that were sold in September 1999. The third quarter of 1999 includes an $8 million pre-tax net loss from divestitures. The first nine months of 1999 includes a $134 million pre-tax net gain from divestitures.

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 core business sectors. During the third quarter of 2000, the Corporation changed the process by which it allocates the net impact of certain corporate level activity to the core business sectors. This change in process resulted in a restatement of prior period revenue and other expense amounts, but had no impact on income (loss) before taxes for any sector. Revenue of Real Estate Workout/Other Activity now reflects amounts not attributable to the operations of a particular business sector, and the net interest expense incurred to support the carrying value of premises, equipment and other assets. Previously, these amounts were allocated directly to net interest revenue, and fee and other revenue, in the core business sectors. Now, these amounts are offset in the Real Estate Workout/Other Activity income statement by a credit to other operating expense, as noted below. Credit quality revenue in 2000 primarily reflects loan recoveries from loans to lesser developed countries while 1999 revenue is primarily gains from the sales of acquired property. Other operating expense includes various direct expenses for items not attributable to the operations of a business sector, and a net credit for net corporate level (income) expense amounts allocated from Real Estate Workout/Other Activity to the core business sectors, as noted above. The Real Estate Workout/Other Activity sector’s income before taxes for both the third quarter of 2000 and third quarter of 1999 was $3 million. This sector’s income before taxes was $2 million in the first nine months of 2000, compared with a pretax loss of $17 million in the first nine months of 1999. The year to date 1999 operating expenses include $56 million of nonrecurring expenses recorded in the second quarter of 1999, 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. 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.

Business sectors (continued)


									Global						Global						Regional						Specialized
			Wealth						Investment						Investment						Consumer						Commercial
			Management						Management						Services						Banking						Banking
(dollar amounts in millions,
averages in billions)			3Q00			2Q00			3Q00			2Q00			3Q00			2Q00			3Q00			2Q00			3Q00			2Q00

Revenue:




	Net interest revenue (expense)		$	32		$	34		$	4		$	2		$	25		$	19		$	126		$	128		$	107		$	104




	Fee and other revenue			83			78			282			271			244			254			39			39			30			30

		Total revenue		115			112			286			273			269			273			165			167			137			134




Credit quality expense (revenue)				1			—			—			—			—			—			3			4			6			—




Operating expense:




	Intangible amortization			4			4			6			8			4			3			8			9			7			7




	Trust-preferred securities			1			—			—			—			—			—			1			1			3			3




	Other			60			59			170			176			203			197			93			95			58			59

		Total operating expense		65			63			176			184			207			200			102			105			68			69

Income (loss) before taxes				49			49			110			89			62			73			60			58			63			65




Income taxes (benefits)				19			19			44			36			23			27			22			22			24			25

	Net income (loss)		$	30		$	30		$	66		$	53		$	39		$	46		$	38		$	36		$	39		$	40

Average assets			$	3.0		$	2.8		$	2.5		$	2.7		$	1.8		$	2.1		$	14.2		$	14.3		$	13.5		$	13.3




Average common equity			$	0.2		$	0.2		$	0.6		$	0.6		$	0.5		$	0.5		$	0.6		$	0.7		$	0.9		$	0.8




Average Tier I preferred equity			$	0.1		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	0.2		$	0.2

Cash net income (loss) (a)			$	34		$	34		$	71		$	58		$	42		$	49		$	44		$	43		$	45		$	46

Return on common equity (b)				50	%		53	%		45	%		38	%		31	%		37	%		23	%		23	%		18	%		19	%




Return on assets (b)				NM			NM			NM			NM			NM			NM			1.05	%		1.03	%		1.16	%		1.21	%




Pretax operating margin				43	%		44	%		38	%		33	%		23	%		27	%		36	%		35	%		46	%		48	%




Pretax operating margin (c)				47	%		48	%		41	%		35	%		24	%		28	%		41	%		41	%		54	%		56	%




Efficiency ratio (c)				53	%		52	%		59	%		65	%		76	%		72	%		56	%		57	%		42	%		44	%

(a) Excludes the after-tax impact of the amortization of goodwill and other intangibles from purchase acquisitions.
(b) Ratios are annualized.
(c) Excludes amortization of intangibles and trust-preferred securities expense.
NM — Not meaningful

Income before taxes for the Corporation’s Total Core Business Sectors totaled $397 million in the third quarter of 2000, an increase of $14 million, or 15% on an annualized basis, from the second quarter of 2000. Total revenue increased $15 million, including $10 million of higher fee revenue, primarily resulting from higher trust and investment fee revenue, while operating expense decreased $1 million. Credit quality expense increased $2 million.




Large																	Real Estate
Corporate						Total Core											Workout/Other						Consolidated
Banking						Business Sectors						Divestitures					Activity						Results

3Q00			2Q00			3Q00			2Q00			3Q00		2Q00			3Q00			2Q00			3Q00			2Q00


$	74		$	76		$	368		$	363		$	12	$	11		$	(21	)	$	(22	)	$	359		$	352




	75			71			753			743			5		18			24			20			782			781

	149			147			1,121			1,106			17		29			3			(2	)		1,141			1,133




	4			8			14			12			—		(1	)		(2	)		—			12			11

	1			—			30			31			2		2			—			—			32			33




	4			5			9			9			—		—			11			10			20			19




	87			85			671			671			8		7			(9	)		(7	)		670			671

	92			90			710			711			10		9			2			3			722			723

	53			49			397			383			7		21			3			(5	)		407			399




	19			17			151			146			4		7			—			(1	)		155			152

$	34		$	32		$	246		$	237		$	3	$	14		$	3		$	(4	)	$	252		$	247

$	6.9		$	7.3		$	41.9		$	42.5		$	3.4	$	3.9		$	0.8		$	0.6		$	46.1		$	47.0




$	0.8		$	0.8		$	3.6		$	3.6		$	0.2	$	0.2		$	0.1		$	—		$	3.9		$	3.8




$	0.2		$	0.3		$	0.5		$	0.5		$	—	$	—		$	0.5		$	0.5		$	1.0		$	1.0

$	34		$	32		$	270		$	262		$	6	$	16		$	3		$	(4	)	$	279		$	274

	17	%		15	%		27	%		27	%		NM		NM			NM			NM			26	%		26	%




	1.99	%		1.75	%		2.33	%		2.24	%		NM		NM			NM			NM			2.18	%		2.12	%




	35	%		34	%		35	%		35	%		NM		NM			NM			NM			36	%		35	%




	39	%		37	%		39	%		38	%		NM		NM			NM			NM			40	%		40	%




	58	%		57	%		60	%		61	%		NM		NM			NM			NM			59	%		59	%

Noninterest revenue


			Quarter ended									Nine months ended

(dollar amounts in millions,			Sept. 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,
unless otherwise noted)			2000			2000			1999			2000			1999

Trust and investment fee revenue:




	Investment management		$	329		$	310		$	290		$	963		$	852




	Administration and custody			150			173			148			496			449




	Benefits consulting			66			63			66			185			183




	Brokerage fees			16			19			13			60			44

		Total trust and investment fee revenue		561			565			517			1,704			1,528




Cash management and deposit transaction charges				83			83			78			240			228




Foreign currency and securities trading revenue				42			42			42			135			130




Financing-related revenue				44			43			39			126			137




Equity investment revenue				20			17			17			73			47




Mortgage servicing fees				3			2			48			7			151




Other				20			21			24			59			120

		Total fee and other revenue		773			773			765			2,344			2,341




Net gain (loss) from divestitures				—			—			(8	)		—			134




Gains on the sales of securities				—			—			—			—			—

		Total noninterest revenue	$	773		$	773		$	757		$	2,344		$	2,475

Fee revenue as a percentage of net interest and fee revenue (FTE)				69	%		69	%		69	%		69	%		69	%




Trust and investment fee revenue as a percentage of net interest and fee revenue (FTE)				49	%		50	%		46	%		50	%		44	%

Assets under management at period end (in billions)			$	540		$	521		$	446




Assets under administration or custody at period end (in billions)			$	2,298		$	2,257		$	2,156

Note: In the first quarter of 2000, various items previously reported in other fee revenue were reclassified to mutual fund administration and custody revenue in trust and investment fee revenue; cash management and deposit transaction charges; financing-related revenue and equity investment revenue. Third quarter 1999 and nine months ended Sept. 30, 1999, have been restated and the percentages of trust and investment fee revenue to net interest and fee revenue have been recalculated. For analytical purposes, the term “fee revenue,” as utilized throughout this Report on Form 10-Q, is defined as total noninterest revenue less gains on the sales of securities and the net gain (loss) from divestitures.

Fee revenue

Fee revenue of $773 million in the third quarter of 2000 was impacted by the third quarter 1999 mortgage banking divestitures and the previously-disclosed May 2000 expiration of a long-term mutual fund administration contract with a third party. Excluding these factors, fee revenue increased 12% in the third quarter of 2000 compared with the prior-year period, primarily due to a 13% increase in trust and investment fee revenue.


	3rd Qtr. 2000			3rd Qtr. 2000			Nine Mo. 2000
	over			over			over
Fee revenue growth (a)	3rd Qtr. 1999			2nd Qtr. 2000			Nine Mo. 1999

Trust and investment fee revenue growth		13	%		2	%		14	%




Total fee revenue growth		12	%		2	%		11	%

(a) Excludes the effect of divestitures and the expiration of the long-term mutual fund administration contract with a third party.

Noninterest revenue (continued)

Investment management fee revenue


				Quarter ended						Nine months ended

				Sept. 30,		June 30,		Sept. 30,		Sept. 30,		Sept. 30,
(in millions)				2000		2000		1999		2000		1999

Managed mutual funds (a):




	Equity funds			$	91	$	83	$	69	$	257	$	195




	Taxable money market funds:




		Institutional			29		27		25		83		77




		Individuals			9		9		11		28		29




	Tax-exempt bond funds				20		20		22		60		68




	Fixed-income funds				10		10		11		31		35




	Tax-exempt money market funds				7		8		7		22		22




	Nonproprietary				10		10		7		28		19









			Total managed mutual funds		176		167		152		509		445




Private clients					78		77		73		231		217




Institutional					75		66		65		223		190









			Total investment management fee revenue	$	329	$	310	$	290	$	963	$	852

(a) Net of quarterly mutual fund fees waived and fund expense reimbursements of $9 million, $8 million and $7 million at Sept. 30, 2000, June 30, 2000, and Sept. 30, 1999, respectively. Net of year-to-date fees waived and fund expense reimbursements of $26 million and $24 million at Sept. 30, 2000, and Sept. 30, 1999, respectively.

Investment management fee revenue increased $39 million, or 13%, in the third quarter of 2000, compared with the prior-year period, and increased $111 million, or 13%, in the first nine months of 2000, compared with the first nine months of 1999. The increase in the third quarter of 2000 compared to the third quarter of 1999 resulted from a $24 million, or 16%, increase in mutual fund management revenue; a $10 million, or a 15%, increase in institutional asset management revenue; and a $5 million, or 6%, increase in private client asset management revenue. These increases resulted primarily from net new business, as well as an increase in the market value of assets under management.

Noninterest revenue (continued)

Mutual fund management fees are based upon the average net assets of each fund. The average assets of proprietary mutual funds managed in the third quarter of 2000 were $142 billion, up $18 billion, or 14%, from $124 billion in the third quarter of 1999, and up $6 billion, or 4% unannualized, from $136 billion in the second quarter of 2000. The increases resulted primarily from increases in average net assets of equity funds. Proprietary equity funds averaged $59 billion in the third quarter of 2000, an increase of $14 billion, or 29%, compared with $45 billion in the third quarter of 1999.

As shown in the table below, the market value of assets under management was $540 billion at Sept. 30, 2000, a $19 billion, or 4% unannualized, increase from $521 billion at June 30, 2000, and a $94 billion, or 21%, increase from $446 billion at Sept. 30, 1999. The increase at Sept. 30, 2000, compared to June 30, 2000, was primarily due to net new business. A key bond market benchmark, the Lehman Brothers Long-Term Government Bond Index, increased 2.7% in the third quarter of 2000, while the equity market, as measured by the Standard and Poor’s 500 Index, decreased 1.2% in the third quarter of 2000. At Sept. 30, 2000, the market values of these assets managed by the Corporation were comprised as follows: approximately 50% equities; approximately 15% fixed income; approximately 20% money market; approximately 5% securities lending cash collateral; and approximately 10% overlay and global fixed-income products.

Market value of assets under management


				Sept. 30,		June 30,		March 31,		Dec. 31,		Sept. 30,
(in billions)				2000		2000		2000		1999		1999

Mutual funds managed:




	Equity funds			$	60	$	59	$	59	$	54	$	45




	Taxable money market funds:




		Institutional			47		41		41		42		38




		Individuals			9		10		11		9		10




	Tax-exempt bond funds				14		14		14		14		15




	Fixed-income funds				7		7		7		7		7




	Tax-exempt money market funds				8		7		8		8		7




	Nonproprietary				32		31		31		30		26

			Total mutual funds managed		177		169		171		164		148




Private clients					54		54		54		55		53




Institutional (a)					309		298		286		269		245

			Total market value of assets under management	$	540	$	521	$	511	$	488	$	446

(a) Includes assets managed at Pareto Partners of $29 billion at Sept. 30, 2000; $30 billion at June 30, 2000; $32 billion at March 31, 2000; $32 billion at Dec. 31, 1999; and $28 billion at Sept. 30, 1999. The Corporation has a 30% equity interest in Pareto Partners.

At Sept. 30, 2000, the combined market values of $32 billion of nonproprietary mutual funds and $309 billion of institutional assets managed, by asset type, were as follows: equities, $124 billion; balanced, $43 billion; fixed income, $46 billion; money market, $87 billion; and $41 billion in overlay and global fixed-income products, primarily at Pareto Partners, for a total of $341 billion.

Noninterest revenue (continued)

Administration and custody fee revenue


		Quarter ended								Nine months ended

		Sept. 30,			June 30,			Sept. 30,		Sept. 30,			Sept. 30,
(in millions)		2000			2000			1999		2000			1999

Institutional trust			$	122		$	134	$	96		$	377		$	300




Mutual funds				22			35		47			105			134




Private clients				6			4		5			14			15





	Total administration and custody fee revenue		$	150		$	173	$	148		$	496		$	449

As shown in the table above, administration and custody fee revenue increased $2 million, or 2%, in the third quarter of 2000 compared with the third quarter of 1999, and increased $47 million, or 11%, in the first nine months of 2000 compared to the first nine months of 1999.

Institutional trust and custody revenue increased $26 million, or 28%, in the third quarter of 2000 compared to the third quarter of 1999, primarily resulting from net new business, including an $8 million increase in securities lending revenue. The $12 million, or 10%, decrease in institutional trust and custody revenue compared with the second quarter of 2000 primarily resulted from lower equity income from joint ventures and lower securities lending revenue. The equity income from joint ventures in the second quarter of 2000 was positively impacted by earnings from large one-time projects for clients.

The results of joint ventures are accounted for under the equity method of accounting, which reports the Corporation’s share of the results of the joint ventures on a net basis, rather than reporting the revenues and expenses separately. The table below shows institutional trust and custody fee revenue including the gross revenue generated by the Corporation’s joint ventures that provide such services. Including the institutional trust and custody gross revenue generated by joint ventures, institutional trust and custody revenue increased $23 million, or 13%, compared with the third quarter of 1999.



	Quarter ended								Nine months ended

Institutional trust and custody fee revenue	Sept. 30,			June 30,			Sept. 30,		Sept. 30,			Sept. 30,
(in millions)	2000			2000			1999		2000			1999

Total institutional trust and custody fee revenue — as reported		$	122		$	134	$	96		$	377		$	300




Adjustment to reflect joint venture revenue			72			85		75			256			217





Adjusted institutional trust and custody fee revenue		$	194		$	219	$	171		$	633		$	517

The $25 million, or 52%, decrease in mutual fund administration and custody fee revenue in the third quarter of 2000 compared with the third quarter of 1999 was due to the May 2000 expiration of the long-term mutual fund administration contract with a third party. Fees from this contract totaled approximately $22 million pre-tax, or $.03 per common share, in the third quarter of 1999. Fees from this contract totaled approximately $13 million pre-tax, or $.015 per common share, in the second quarter through May 2000, when the contract expired.

Noninterest revenue (continued)

The market value of assets under administration or custody, shown in the table below, was $2,298 billion at Sept. 30, 2000, an increase of $41 billion, or 2% unannualized, compared with $2,257 billion at June 30, 2000, and an increase of $142 billion, or 7%, compared with $2,156 billion at Sept. 30, 1999.



Market value of assets under administration or custody		Sept. 30,		June 30,		March 31,		Dec. 31,		Sept. 30,
(in billions)		2000		2000		2000		1999		1999

Institutional trust (a)(b)		$	2,153	$	2,122	$	2,131	$	2,074	$	2,046




Mutual funds			111		100		93		87		76




Private clients			34		35		37		37		34

	Total market value of assets under administration or custody	$	2,298	$	2,257	$	2,261	$	2,198	$	2,156

(a) Includes $330 billion of assets at Sept. 30, 2000; $320 billion of assets at June 30, 2000; $325 billion of assets at March 31, 2000; $324 billion of assets at Dec. 31, 1999; and $350 billion of assets at Sept. 30, 1999, administered by CIBC Mellon Global Securities Services, a joint venture.

(b) Assets administered by the Corporation under ABN AMRO Mellon, a strategic alliance of the Corporation and ABN AMRO, were $84 billion at Sept. 30, 2000; $64 billion at June 30, 2000; $60 billion at March 31, 2000; $58 billion at Dec. 31, 1999; and $32 billion at Sept. 30, 1999.

Benefits consulting / brokerage fees

Benefits consulting fees generated by Buck Consultants remained unchanged in the third quarter of 2000, compared with the third quarter of 1999. The $3 million, or 21%, increase in brokerage fees in the third quarter of 2000 compared to the third quarter of 1999 primarily resulted from higher trading volumes in the active equities market. Dreyfus Brokerage Services, Inc. averaged approximately 11,000 trades per day in the third quarter of 2000, compared with approximately 13,200 trades per day in the second quarter of 2000 and approximately 8,500 trades per day in the third quarter of 1999.

Cash management fees and deposit transaction charges / foreign currency and securities trading revenue

Cash management fees and deposit transaction charges increased $5 million, or 7%, in the third quarter of 2000, compared with the third quarter of 1999, primarily resulting from higher volumes of business in cash management, especially in electronic payment services. Cash management fees do not include revenue from customers holding compensating balances on deposits in lieu of paying cash fees. The earnings on the compensating balances are recognized in net interest revenue. Foreign currency and securities trading revenue remained unchanged in the third quarter of 2000, compared with the prior-year period.

Financing-related and equity investment revenue

Financing-related and equity investment revenue totaled $64 million in the third quarter of 2000 compared with $60 million in the second quarter of 2000, and $56 million in the third quarter of 1999. Financing-related revenue, which primarily includes loan commitment fees; letters of credit and acceptance fees; loan securitization revenue; gains or losses on loan securitizations and sales; and gains or losses on lease residuals, increased $5 million in the third quarter of 2000 compared with the third quarter of 1999. Equity investment revenue, which includes gains and losses on venture capital investments, increased $3 million in the third quarter of 2000 compared with the third quarter of 1999.

Noninterest revenue (continued)

Mortgage servicing fees

The $3 million of mortgage servicing fees in the third quarter of 2000 relates to the servicing of jumbo mortgages retained by the Corporation following the 1999 divestiture of the mortgage businesses.

Other revenue

Other revenue decreased $4 million in the third quarter of 2000 compared with the third quarter of 1999. The decrease primarily related to lower gains on the sales of assets.

Fee and other revenue including gross joint venture fee revenue

As previously discussed, the Corporation accounts for its interests in joint ventures under the equity method of accounting, with net results recorded primarily as trust and investment fee revenue. The gross joint venture fee revenue is not included in the reported fee revenue. Approximately 45% of the trust and investment gross joint venture fee revenue presented in the table below is attributable to ChaseMellon Shareholder Services. This gross revenue will be included in reported fee revenue following the purchase of the other venture partner’s interest in the joint venture. See “Significant financial events” on page 6 for a further discussion of this pending acquisition. The table below presents the components of total fee and other revenue, including gross joint venture fee revenue.



			Quarter ended									Nine months ended

			Sept. 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,
(in millions)			2000			2000			1999			2000			1999

Trust and investment fee revenue			$	657		$	675		$	618		$	2,034		$	1,815




Foreign currency and securities trading revenue				48			48			45			154			137




Non-impacted components of fee and other revenue				170			166			206			505			683

	Total fee and other revenue including gross joint venture fee revenue			875			889			869			2,693			2,635

Less: Trust and investment gross joint venture fee revenue				(96	)		(110	)		(101	)		(330	)		(287	)




	Foreign currency and securities trading gross joint venture fee revenue			(6	)		(6	)		(3	)		(19	)		(7	)

		Total gross joint venture fee revenue (a)		(102	)		(116	)		(104	)		(349	)		(294	)

		Total fee and other revenue as reported	$	773		$	773		$	765		$	2,344		$	2,341

(a) The gross joint venture fee revenue presented above is shown net of the equity income earned from the joint ventures.

Noninterest revenue (continued)

Net gain (loss) from divestitures

In the third quarter of 1999, the Corporation recorded an $8 million pre-tax net loss from divestitures. The after-tax impact totaled $5 million or $.01 per common share. The net loss primarily resulted from an adjustment to previous write-downs recorded to reflect the net sales proceeds received for the residential and commercial mortgage servicing businesses. This loss was partially offset by an additional gain related to the divestiture of the network services transaction processing unit as more customers converted to the purchaser, as well as a gain on the sale of seven Mellon Bank (MD) N.A. retail offices in September 1999. Including the $142 million pre-tax net gain from divestitures recorded in the first six months of 1999, the pre-tax net gain from divestitures for the nine months ended Sept. 30, 1999, totaled $134 million.

Third quarter 2000 compared with second quarter 2000

Excluding the effect of the expiration of the long-term mutual fund administration contract with a third party, fee revenue increased 2% unannualized in the third quarter of 2000 compared with the second quarter of 2000, primarily resulting from higher trust and investment fee revenue.

Year-to-date 2000 compared with year-to-date 1999

Fee revenue totaled $2.344 billion in the first nine months of 2000, a $3 million increase compared with $2.341 billion in the first nine months of 1999. Fee revenue for the first nine months of 2000 was impacted by the divestitures of the credit card business, network services transaction processing unit and the mortgage banking businesses, as well as the expiration of the long-term mutual fund administration contract with a third party. Excluding the effect of these factors, fee revenue for the first nine months of 2000 increased 11% compared with the first nine months of 1999, due to a 14% increase in trust and investment fee revenue.

Net interest revenue

Third quarter 2000 compared with the third quarter of 1999 and the second quarter of 2000

Net interest revenue on a fully taxable equivalent basis for the third quarter of 2000 totaled $359 million, compared with $352 million in both the third quarter of 1999 and the second quarter of 2000. The net interest margin was 3.95% in the third quarter of 2000, compared with 3.63% in the third quarter of 1999 and 3.86% in the second quarter of 2000. Net interest revenue increased $7 million, or 2%, compared with the third quarter of 1999. Excluding the net interest revenue generated by the mortgage banking businesses, net interest revenue increased 3% compared with the third quarter of 1999, reflecting improved spreads and the positive impact of interest-free funds in a higher rate environment, including compensating deposits held in lieu of customers paying cash management fees, partially offset by higher funding costs related to the repurchase of common stock and a $2.5 billion lower level of average interest-earning assets. The decrease in interest-earning assets was due to a $2.75 billion reduction in average loans in the third quarter of 2000 compared to the third quarter of 1999, reflecting a lower level of wholesale loans, and the divestiture of the residential mortgage business in September 1999. Average loans in the third quarter of 1999 included approximately $540 million of subsequently divested residential mortgages.

Net interest revenue on a fully taxable equivalent basis in the third quarter of 2000 increased $7 million, or 2% unannualized, compared with the second quarter of 2000. This increase primarily resulted from improved spreads and the positive impact of interest-free funds, offset in part by a $570 million reduction in average interest-earnings assets.

Year-to-date 2000 compared with year-to-date 1999

Net interest revenue and the net interest margin on a fully taxable equivalent basis were $1.062 billion and 3.85%, respectively, in the first nine months of 2000, compared with $1.086 billion and 3.71%, respectively, in the first nine months of 1999. The $24 million decrease in net interest revenue primarily resulted from the divestitures of the credit card and mortgage banking businesses, as well as higher funding costs related to the repurchase of common stock, partially offset by the positive impact of interest-free funds including the impact of compensating deposits held in lieu of customers paying cash management fees. Interest-earning assets were $2.5 billion lower in the first nine months of 2000 compared with the prior-year period. Excluding the net interest revenue generated by the divested businesses, net interest revenue increased 1% compared with the first nine months of 1999.

Net interest revenue (continued)

CONSOLIDATED BALANCE SHEET — AVERAGE BALANCES AND INTEREST YIELDS/RATES

Nine months ended

Sept. 30, 2000

Sept. 30, 1999

Average

(dollar amounts in millions)

balance

yields/rates

balance

yields/rates

Assets

Interest-earning assets:

Interest-bearing deposits with banks

$ 1,014

5.57

$ 755

4.80

Federal funds sold and securities under resale agreements

880

6.33

586

5.20

Other money market investments

5.03

4.34

Trading account securities

262

6.73

370

5.12

Securities:

U.S. Treasury and agency securities (a)

6,124

6.55

6,414

6.41

Obligations of states and political subdivisions (a)

140

6.19

117

6.39

Other (a)

8.14

7.52

Loans, net of unearned discount (a)

28,215

8.09

30,710

7.37

Total interest-earning assets

36,811

7.70

39,101

7.10

Cash and due from banks

3,183

3,065

Premises and equipment

575

565

Customers’ acceptance liability

121

Net acquired property

Other assets (a)

6,664

7,354

Reserve for credit losses

(406)

(442)

Total assets

$46,942

$49,792

Liabilities,

Interest-bearing liabilities:

trust-preferred

Deposits in domestic offices:

securities and

Demand

$ 454

4.74

$ 372

2.34

shareholders’

Money market and other savings accounts

12,585

3.33

12,387

2.80

equity

Retail savings certificates

6,565

5.06

6,725

4.53

Other time deposits

978

5.60

1,402

5.11

Deposits in foreign offices

2,985

4.82

3,033

4.36

Total interest-bearing deposits

23,567

4.12

23,919

3.61

Federal funds purchased and securities under repurchase agreements

1,663

6.02

2,320

4.74

Short-term bank notes

516

6.23

734

5.14

U.S. Treasury tax and loan demand notes

372

5.95

583

4.64

Term federal funds purchased

167

6.07

449

5.12

Commercial paper

134

6.30

136

5.37

Other funds borrowed

507

6.91

420

8.12

Notes and debentures (with original maturities over one year)

3,460

6.81

3,370

6.60

Total interest-bearing liabilities

30,386

4.65

31,931

4.15

Total noninterest-bearing deposits

8,798

9,714

Acceptances outstanding

121

Other liabilities (a)

2,679

2,652

Total liabilities

41,959

44,418

Guaranteed preferred beneficial interests in Corporation’s junior subordinated deferrable interest debentures

991

991

Shareholders’ equity (a)

3,992

4,383

Total liabilities, trust-preferred securities and shareholders’ equity

$46,942

$49,792

Rates

Yield on total interest-earning assets

7.70

7.10

Cost of funds supporting interest-earning assets

3.85

3.39

Net interest margin:

Taxable equivalent basis

3.85

3.71

Without taxable equivalent increments

3.83

3.69

(a) Amounts and yields exclude adjustments to fair value required by FAS No. 115.

Note: Average rates are annualized and calculated on a taxable equivalent basis, at tax rates approximating 35%, using

dollar amounts in thousands and actual number of days in the periods, and are before the effect of reserve



												Quarter ended

Sept. 30, 2000						June 30, 2000						March 31, 2000						Dec. 31, 1999						Sept. 30, 1999




Average			Average			Average			Average			Average			Average			Average			Average			Average			Average
balance			yields/rates			balance			yields/rates			balance			yields/rates			balance			yields/rates			balance			yields/rates

$	1,220			5.47	%	$	1,065			5.68	%	$	757			5.58	%	$	944			4.81	%	$	740			4.85	%




	691			6.84			1,062			6.34			888			5.94			1,254			5.64			655			5.20




	98			5.05			92			4.80			68			5.30			69			4.80			68			4.26




	322			6.54			214			7.21			248			6.56			372			5.79			403			5.27









	6,112			6.52			6,117			6.62			6,145			6.52			6,204			6.40			6,297			6.33




	148			6.25			139			6.17			131			6.15			118			5.82			121			5.84




	77			9.70			93			6.32			101			8.61			84			8.49			86			8.12




	27,430			8.36			27,943			8.13			29,280			7.78			29,158			7.50			30,179			7.31

	36,098			7.89			36,725			7.73			37,618			7.47			38,203			7.17			38,549			7.04




	3,075						3,493						2,982						3,010						2,970




	586						572						566						548						552




	81						86						122						130						132




	19						21						16						17						13




	6,770						6,709						6,513						6,076						7,211




	(405	)					(405	)					(407	)					(408	)					(414	)

$	46,224					$	47,201					$	47,410					$	47,576					$	49,013



$	376			5.42	%	$	480			4.68	%	$	506			4.29	%	$	593			4.00	%	$	380			3.33	%




	12,608			3.44			12,577			3.31			12,569			3.23			12,721			3.05			12,674			2.85




	6,510			5.25			6,640			5.06			6,545			4.86			6,588			4.63			6,612			4.50




	870			5.72			1,140			5.60			927			5.50			849			5.06			1,106			5.26




	2,988			4.91			2,916			4.94			3,051			4.61			3,108			4.30			3,111			4.40

	23,352			4.25			23,753			4.14			23,598			3.97			23,859			3.74			23,883			3.63




	1,662			6.47			1,621			6.16			1,705			5.45			1,533			5.00			1,791			4.92




	196			6.77			453			6.37			903			6.05			1,055			5.77			821			5.33




	365			6.38			301			6.26			450			5.39			300			5.32			592			4.73




	16			6.62			140			6.26			347			5.97			359			5.67			362			5.34




	116			6.45			189			6.40			98			5.93			104			5.46			119			5.51




	507			6.21			524			7.69			491			6.79			426			7.52			409			8.88




	3,532			6.92			3,395			6.76			3,453			6.74			3,585			6.57			3,372			6.57

	29,746			4.78			30,376			4.68			31,045			4.51			31,221			4.29			31,349			4.18




	8,762						9,009						8,622						8,681						9,579




	81						86						122						130						132




	2,643						2,801						2,592						2,338						2,658

	41,232						42,272						42,381						42,370						43,718

	991						991						991						991						991

	4,001						3,938						4,038						4,215						4,304

$	46,224					$	47,201					$	47,410					$	47,576					$	49,013

				7.89	%					7.73	%					7.47	%					7.17	%					7.04	%




				3.94						3.87						3.72						3.51						3.41

				3.95	%					3.86	%					3.75	%					3.66	%					3.63	%




				3.93						3.84						3.72						3.64						3.60

requirements. Loan fees, as well as nonaccrual loans and their related income effect, have been included in the calculation of average interest yields/rates.

Operating expense


		Quarter ended									Nine months ended

		Sept. 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,
(dollar amounts in millions)		2000			2000			1999			2000			1999

Staff expense			$399			$390			$387			$1,186			$1,175




Professional, legal and other purchased services			77			70			63			214			207




Net occupancy expense			57			58			61			179			186




Equipment expense			35			38			40			110			144




Amortization of goodwill and other intangible assets			32			33			37			102			111




Business development			32			38			32			107			129




Communications expense			21			23			26			68			85




Amortization of mortgage servicing assets and purchased credit card relationships			2			1			33			4			112




Other expense			47			53			37			155			136

	Operating expense before trust-preferred securities expense and net expense (revenue) from acquired property		702			704			716			2,125			2,285




Trust-preferred securities expense			20			19			20			59			59




Net expense (revenue) from acquired property			2			1			(5	)		2			(10	)

	Total operating expense		$724			$724			$731			$2,186			$2,334





Average full-time equivalent staff			25,800			26,000			28,300			25,900			28,700





Efficiency ratio (a)			62	%		62	%		64	%		62	%		66	%




Efficiency ratio excluding amortization of goodwill and other intangible assets			59	%		59	%		61	%		59	%		61	%

(a)

Operating expense before trust-preferred securities expense, net expense (revenue) from acquired property and second quarter 1999 nonrecurring expenses, as a percentage of revenue, computed on a taxable equivalent basis, excluding the net gain (loss) on divestitures and gains on the sales of securities.

Operating expense before trust-preferred securities expense and net expense (revenue) from acquired property totaled $702 million in the third quarter of 2000, a decrease of $14 million compared with the third quarter of 1999, primarily resulting from the divestiture of the mortgage banking businesses. Excluding the effect of this divestiture, operating expense before trust-preferred securities expense and net expense (revenue) from acquired property increased 8% compared with the third quarter of 1999, reflecting higher staff expense as well as other expenses in support of business growth.

3rd Qtr. 2000

Nine Mo. 2000

over

Operating expense growth

3rd Qtr. 1999

2nd Qtr. 2000

Nine Mo. 1999

Operating expense growth

(a)

—

(a)(b)

(a)		Excludes the effect of divestitures.
(b)		Excludes the effect of second quarter 1999 nonrecurring expenses.

Operating expense (continued)

Third quarter 2000 compared with second quarter 2000

Operating expense before trust-preferred securities expense and net expense (revenue) from acquired property decreased $2 million in the third quarter of 2000 compared with the second quarter of 2000, primarily due to lower business development and other expenses, primarily offset by higher staff expense and professional and purchased services expense.

Year-to-date 2000 compared with year-to-date 1999

Operating expense before trust-preferred securities expense and net expense (revenue) from acquired property totaled $2.125 billion in the first nine months of 2000, a decrease of $160 million, compared with $2.285 billion in the first nine months of 1999. The decrease primarily resulted from the 1999 divestitures of the credit card, network services transaction processing unit and the mortgage banking businesses, as well as $56 million of nonrecurring expenses recorded in the second quarter of 1999. The nonrecurring expenses included a $30 million charitable contribution to the Mellon Financial Corporation Foundation, classified as business development expense in the table on the prior page, and $26 million of expenses in connection with replacing obsolete computer equipment and closing facilities as part of Mellon’s Third Century strategic initiatives. The Third Century expenses were recorded as $21 million of equipment expense and $5 million of net occupancy expense in the table on the prior page. Excluding the effect of the divestitures and nonrecurring expenses, operating expense before trust-preferred securities expense and net expense (revenue) from acquired property increased 7% during the first nine months of 2000 compared with the prior-year period.

Income taxes

The provision for income taxes totaled $431 million in the first nine months of 2000 compared with $436 million in the first nine months of 1999. The Corporation’s effective tax rate for the first nine months of 2000 was 36.4%, substantially unchanged from the first nine months of 1999 excluding the effect of the net gain from divestitures and nonrecurring expenses. It is currently anticipated that the effective tax rate will be approximately the same for the remainder of 2000.

Asset/liability management


		Quarter ended

		Sept. 30,			June 30,			Sept. 30,
(average balances in millions)		2000			2000			1999

Assets:




Money market investments		$	2,009		$	2,219		$	1,463




Trading account securities			322			214			403




Securities			6,166			6,121			6,364




Loans			27,430			27,943			30,177


	Total interest-earning assets		35,927			36,497			38,407




Noninterest-earning assets			10,536			10,886			10,878




Reserve for credit losses			(405	)		(405	)		(414	)


	Total assets	$	46,058		$	46,978		$	48,871



Funds supporting total assets:




Core funds		$	38,515		$	38,883		$	39,518




Wholesale and purchased funds			7,543			8,095			9,353


	Funds supporting total assets	$	46,058		$	46,978		$	48,871

The Corporation’s average interest-earning assets decreased $2.5 billion in the third quarter of 2000, compared with the third quarter of 1999, primarily resulting from a lower level of average loans. Average loans decreased $2.75 billion in the third quarter of 2000 compared to the third quarter of 1999, reflecting a lower level of wholesale loans, and the divestiture of the residential mortgage business in September 1999. Average loans in the third quarter of 1999 included approximately $540 million of subsequently divested residential mortgages.

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 decreased $3.1 billion in the third quarter of 2000 from the prior-year period, primarily reflecting the lower level of loans. Average core funds decreased $1.0 billion in the third quarter of 2000 from the prior-year period, primarily due to a lower level of noninterest-earning money market deposit accounts, and a decrease in shareholders’ equity, resulting from common share repurchases. Core funds averaged 103% of core assets in the third quarter of 2000, compared with 101% in the second quarter of 2000 and 97% in the third quarter of 1999.

Wholesale and purchased funds are defined as deposits in foreign offices, negotiable certificates of deposit, federal funds purchased and securities under repurchase agreements, short-term bank notes, U.S. Treasury tax and loan demand notes, commercial paper, other time deposits and other funds borrowed. Wholesale and purchased funds decreased $1.8 billion in the third quarter of 2000 from the prior-year period, primarily due to a decrease in short-term bank notes and negotiable certificates of deposit. As a percentage of total average assets, average wholesale and purchased funds were 16% in the third quarter of 2000, compared with 17% in the second quarter of 2000, and 19% in the third quarter of 1999.

Composition of loan portfolio

The loan portfolio decreased $2.827 billion and $1.735 billion, respectively at Sept. 30, 2000, compared with Dec. 31, 1999, and Sept. 30, 1999. The decrease from Dec. 31, 1999, primarily resulted from a lower level of commercial wholesale loans and consumer mortgages. The decrease from Sept. 30, 1999, also reflects a lower level of commercial wholesale loans and consumer mortgages partially offset by increases in business banking and margin loans. At Sept. 30, 2000, the composition of the loan portfolio was 61% commercial and 39% consumer.



Composition of loan portfolio				Sept. 30,		June 30,		Dec. 31,		Sept. 30,
(in millions)				2000		2000		1999		1999

Domestic loans:




	Commercial and financial			$	9,748	$	9,634	$	11,349	$	11,296




	Commercial real estate				2,967		2,856		2,651		2,594




	Consumer credit:




		Consumer mortgage			6,155		6,632		7,122		6,813




		Other consumer credit			4,575		4,437		4,693		4,070

			Total consumer credit		10,730		11,069		11,815		10,883




	Lease finance assets				2,923		2,955		3,127		3,021

			Total domestic loans		26,368		26,514		28,942		27,794

International loans					1,053		1,153		1,306		1,362

			Total loans, net of unearned discount	$	27,421	$	27,667	$	30,248	$	29,156

Commercial and financial

At Sept. 30, 2000, total domestic commercial and financial loans decreased by $1.601 billion, or 14%, compared with Dec. 31, 1999, and by $1.548 billion, or 14%, compared with Sept. 30, 1999, primarily as a result of a lower level of wholesale lending, partially offset by an increase in business banking. Commercial and financial loans represented 36% of the total loan portfolio at Sept. 30, 2000, compared with 38% at Dec. 31, 1999, and 39% at Sept. 30, 1999.

Commercial real estate

Distribution of domestic commercial real estate loans Sept. 30, June 30, Dec. 31, Sept. 30,

(in millions) 2000 2000 1999 1999

Commercial mortgage and construction loans $ 2,024 $ 1,960 $ 1,788 $ 1,740

Owner-occupied and other loans (a) 943 896 863 854

Total domestic commercial real estate loans $ 2,967 $ 2,856 $ 2,651 $ 2,594

(a)

Owner-occupied and other loans are loans that are secured by real estate, but the commercial property is not being relied upon as the primary source of repayment.

At Sept. 30, 2000, domestic commercial real estate loans increased by $316 million, or 12%, compared with Dec. 31, 1999, and by $373 million, or 14%, compared with Sept. 30, 1999. Domestic commercial real estate loans represented 11% of total loans at Sept. 30, 2000, up from 9% at both Dec. 31, 1999, and Sept. 30, 1999.

Composition of loan portfolio (continued)

Consumer mortgage



Distribution of domestic consumer mortgage loans		Sept. 30,		June 30,		Dec. 31,		Sept. 30,
(in millions)		2000		2000		1999		1999

Jumbo residential mortgages		$	2,885	$	3,275	$	3,733	$	3,435




One- to four-family residential mortgage portfolio			691		694		620		621




Fixed-term home equity loans			1,656		1,739		1,835		1,871




Home equity revolving credit line loans			923		924		934		886

	Total domestic consumer mortgage loans	$	6,155	$	6,632	$	7,122	$	6,813

At Sept. 30, 2000, the domestic consumer mortgage portfolio totaled $6.155 billion, a $967 million, or 14%, decrease from Dec. 31, 1999, and an $658 million, or 10%, decrease from Sept. 30, 1999. The decrease from both periods resulted from a lower level of jumbo residential mortgages. In the second quarter of 2000, the Corporation began to realign its jumbo residential mortgage origination business to focus primarily on existing private client relationships. As a result of this realignment, the level of jumbo residential mortgages will be reduced over time through prepayments, sales, securitizations and a lower level of originations. Domestic consumer mortgages represented 22% of the total loan portfolio at Sept. 30, 2000, 24% at Dec. 31, 1999, and 23% at Sept. 30, 1999.

Other consumer credit

Other consumer credit, which principally consists of student loans, installment loans, unsecured personal credit lines and margin loans, was $4.575 billion at Sept. 30, 2000, a decrease of $118 million, or 3%, from Dec. 31, 1999, and an increase of $505 million, or 12%, from Sept. 30, 1999. The increase compared to Sept. 30, 1999, 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 39% of this portfolio, at Sept. 30, 2000, compared with $1.777 billion at Dec. 31, 1999, and $1.778 billion at Sept. 30, 1999.

Lease finance assets

Lease finance assets totaled $2.923 billion at Sept. 30, 2000, a decrease of $204 million, or 7%, compared with Dec. 31, 1999, and a decrease of $98 million, or 3%, compared with Sept. 30, 1999. The decrease compared to Dec. 31, 1999, was primarily due to a lower level of assets in the middle market leasing sector. Lease finance assets represented 11% of the total loan portfolio at Sept. 30, 2000, compared with 10% at both Dec. 31, 1999, and Sept. 30, 1999.

International loans

Loans to international borrowers totaled $1.053 billion at Sept. 30, 2000, down $253 million, or 19%, from Dec. 31, 1999, and down $309 million, or 23%, from Sept. 30, 1999, primarily due to decreased activity with large corporate customers and foreign banks. International loans represented 4% of the total loan portfolio at Sept. 30, 2000, compared with 4% at Dec. 31, 1999,and 5% at Sept. 30, 1999.

Off-balance-sheet financial instruments with contract amounts that represent credit risk (a)


			Sept. 30,			June 30,		Dec. 31,		Sept. 30,
(in millions)			2000			2000		1999		1999

Commitments to extend credit:




	Expire within one year		$	19,041		$	19,412	$	17,505	$	15,368




	Expire within one to five years			13,631			14,506		16,054		16,835




	Expire over five years			619			770		1,071		1,066





		Total		33,291			34,688		34,630		33,269




Standby letters of credit and foreign and other guarantees				4,604	(b)		5,161		4,256		4,229




Commercial letters of credit				88	(c)		110		96		99




Custodian securities lent with indemnification against broker default of return of securities				40,359			41,878		32,532		30,217


(a)	For a discussion of off-balance-sheet financial instruments with contract amounts that represent credit risk, see pages 82 through 84 of the 1999 Financial Annual Report to Shareholders.

(b)	Net of participations and cash collateral totaling $391 million.


(c)	Net of participations and cash collateral totaling $11 million.

Commitments to extend credit expiring over one year decreased $3,651 million, or 20%, at Sept. 30, 2000, compared with Sept. 30, 1999, and decreased $2,875 million, or 17%, compared with Dec. 31, 1999.

Capital


Selected capital data	Sept. 30,			June 30,			Dec. 31,			Sept. 30,
(dollar amounts in millions, except per share amounts)	2000			2000			1999			1999

Total shareholders’ equity	$	4,032		$	3,864		$	4,016		$	4,219




Total shareholders’ equity to assets ratio		8.89	%		8.39	%		8.38	%		9.00	%

Tangible shareholders’ equity (a)	$	2,425		$	2,228		$	2,288		$	2,454




Tangible shareholders’ equity to assets ratio (b)		5.56	%		5.03	%		4.96	%		5.45	%

Tier I capital ratio (c)		7.21	%		6.72	%		6.60	%		7.12	%




Total (Tier I plus Tier II) capital ratio (c)		11.72	%		10.97	%		10.76	%		11.58	%




Leverage capital ratio (c)		7.18	%		6.69	%		6.72	%		6.82	%




Total Tier I capital	$	3,188		$	3,039		$	3,074		$	3,208




Total (Tier I plus Tier II) capital	$	5,182		$	4,959		$	5,013		$	5,217




Total risk-adjusted assets	$	44,207		$	45,217		$	46,572		$	45,032




Average assets — leverage capital basis	$	44,425		$	45,433		$	45,730		$	47,003

Book value per common share	$	8.26		$	7.91		$	8.02		$	8.29




Tangible book value per common share	$	4.97		$	4.56		$	4.57		$	4.83

Closing common stock price	$	46.38		$	36.44		$	34.06		$	33.63




Market capitalization	$	22,631		$	17,788		$	17,052		$	17,103




Common shares outstanding (000)		487,990			488,171			500,623			508,650


(a)	Includes $81 million, $77 million, $67 million and $64 million, respectively, of minority interest, primarily related to Newton. In addition, includes $313 million, $319 million, $345 million and $353 million, respectively, of tax benefits related to tax deductible goodwill and other intangibles.

(b)	Shareholders’ equity plus minority interest less goodwill and other intangibles recorded in connection with purchase acquisitions divided by total assets less goodwill and other intangibles. The amount of goodwill and other intangibles subtracted from shareholders’ equity and total assets is net of any tax benefit.



(c)	The required minimum Tier I, Total and Leverage capital ratios for a bank holding company are 4%, 8% and 3%, respectively.

Capital (continued)

The Corporation’s capital ratios continued to improve in the third quarter of 2000, reflecting earnings retention as well as a decrease in asset levels partially offset by common stock repurchases. During the third quarter of 2000, approximately 1.8 million shares of common stock were repurchased, bringing year-to-date repurchases to approximately 18.1 million shares. Common shares outstanding at Sept. 30, 2000, were 6.8% lower than at Dec. 31, 1998, reflecting a 35.9 million reduction, net of shares reissued primarily for employee benefit plan purposes, due to stock repurchases totaling approximately $1.7 billion, at an average share price of $34.52 per share. There are an additional 21.7 million shares available for repurchase under the current 25 million share repurchase program that was authorized by the board of directors in May 2000.

Common shares outstanding

Third Quarter

Year-to-date

Full Year

(in millions)

2000

1999

Beginning shares outstanding

488.2

500.6

523.8

Shares issued primarily for stock-based benefit plans and dividend reinvestment plan

1.6

5.5

7.0

Shares repurchased

(1.8

)(a)

(18.1

)(b)

(30.2

)(c)

Ending shares outstanding

488.0

500.6

(a)		Purchase price of $77 million for an average share price of $42.57 per share.

(b)		Purchase price of $600 million for an average share price of $33.15 per share.

(c)		Purchase price of $1.068 billion for an average share price of $35.33 per share.

Regulatory capital

For a banking institution to qualify as well capitalized, its Tier I, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of the Corporation’s banking subsidiaries qualified as well capitalized at Sept. 30, 2000. 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.


Acquisition-related intangibles


Acquisition-related intangibles		Sept. 30,			June 30,		Dec. 31,		Sept. 30,
(in millions)		2000			2000		1999		1999

Goodwill		$	1,951		$	1,979	$	2,077	$	2,111




Purchased core deposit intangibles			36			38		48		55




Other identified intangibles			14			15		15		16





	Total acquisition-related intangibles	$	2,001	(a)	$	2,032	$	2,140	$	2,182

(a)

At Sept. 30, 2000, $869 million is tax deductible and $1.132 billion is non-tax deductible.

The $181 million decrease in acquisition-related intangibles from Sept. 30, 1999, primarily resulted from recording amortization expense. For the full-year 2000, using common shares and equivalents outstanding at Sept. 30, 2000, the after-tax impact of the annual amortization is expected to be approximately $109 million, or approximately $.22 per share. Based upon the current level of acquisition-related intangibles and the amortization schedule, the annual amortization for the years 2000 through 2005 is expected to be approximately $132 million, $122 million, $118 million, $114 million, $113 million and $112 million, respectively. The after-tax impact of the annual amortization for the years 2001 through 2005 is expected to be approximately $103 million, $99 million, $97 million, $95 million and $94 million, respectively.

Capital (continued)

Mortgage servicing assets

Mortgage servicing assets of $25 million at Sept. 30, 2000, relate to the retained servicing rights on jumbo residential mortgages that were not part of the mortgage banking divestitures. The Corporation capitalized $5 million of jumbo residential mortgage servicing assets in the third quarter of 2000, compared with $3 million in the third quarter of 1999. 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 $2 million in the third quarter of 2000, compared with $33 million in the third quarter of 1999. The estimated fair value of capitalized mortgage servicing assets was approximately $33 million at Sept. 30, 2000.

Liquidity and dividends

The Corporation’s liquidity management objective is to maintain the ability to meet commitments to fund loans and to purchase securities, as well as to repay deposits and other liabilities in accordance with their terms, including during periods of market or financial stress. The Corporation’s overall approach to liquidity management is to ensure that sources of liquidity are sufficient in amount and diversity to accommodate changes in loan demand and core funding routinely without a material adverse impact on net income. The Corporation’s liquidity position is managed by maintaining adequate levels of liquid assets, such as money market assets and securities available for sale. Additional liquidity is available through the Corporation’s ability to participate or sell commercial loans and to securitize selected loan portfolios. The parent Corporation also has a $300 million revolving credit agreement with approximately nine months remaining until maturity.

As shown in the consolidated statement of cash flows, cash and due from banks decreased by $522 million during the first nine months of 2000 to $2.888 billion. The decrease resulted from $3.765 billion of net cash used in financing activities, partially offset by $2.593 billion of net cash provided by investing activities and $587 million of net cash provided by operating activities. Net cash used in financing activities primarily reflected decreases in customer deposits and short term borrowings as well as the repurchase of common stock. Net cash provided by investing activities primarily reflected lower levels of loans and federal funds sold, partially offset by an increase in term deposits and other money market investments.

Contractual maturities of the Corporation’s long-term debt totaled $5 million during the third quarter of 2000. Contractual maturities of long-term debt will total approximately $5 million in the remainder of 2000, all of which is related to parent term debt. Contractual maturities of long-term debt will total approximately $205 million in 2001, all of which is related to parent term debt. The Corporation’s and Mellon Bank, N.A.’s senior and subordinated debt ratings are presented in the table on the following page. Mellon Bank, N.A. currently has double-A long-term deposit ratings from all major credit rating agencies.

Liquidity and dividends (continued)

Senior and subordinated debt ratings

Thompson Financial

at Sept. 30, 2000

Standard & Poor’s

Moody’s

Bankwatch

Fitch

Mellon Financial Corporation:

Issuer rating

—

A/B

—

Senior debt

–

Subordinated debt

—

Mellon Bank, N.A.:

Long-term deposits

–

Aa3

—

–

Subordinated debt

–

The Corporation paid $315 million in common stock dividends in the first nine months of 2000, compared with $301 million in the prior-year period. The common dividend payout ratio was 42% in the third quarter of 2000, compared with 44% in the third quarter of 1999. On a cash earnings per share basis, the common dividend payout ratio was 38% in the third quarter of 2000, compared with 39% in the third quarter of 1999, on an operating basis. Based upon shares outstanding at Sept. 30, 2000, and the current quarterly common dividend rate of $.22 per share, the annualized common stock dividend cash requirement is expected to be approximately $430 million.

The parent Corporation’s principal sources of cash are interest and dividends from its subsidiaries. There are, however, certain limitations on the payment of dividends to the parent Corporation by its national and state member bank subsidiaries. For a discussion of these limitations, see note 21 in the Corporation’s 1999 Financial Annual Report to Shareholders. Under the more restrictive limitation, the Corporation’s national and state member bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to Sept. 30, 2000, of approximately $475 million, less any dividends declared and plus or minus net profits or losses, as defined, between Oct. 1, 2000, and the date of any such dividend declaration.

Interest rate sensitivity analysis

The objective of interest rate risk management is to control the effects that interest rate fluctuations have on net interest revenue and on the net present value of the Corporation’s assets, liabilities and off-balance-sheet instruments. Interest rate risk is measured using net interest margin simulation and asset/liability net present value sensitivity analyses. Simulation tools serve as the primary means to gauge interest rate exposure. The net present value sensitivity analysis is the means by which the Corporation’s long-term interest rate exposure is evaluated. These analyses provide an understanding of the range of potential impacts on net interest revenue and portfolio equity caused by interest rate movements.

Modeling techniques are used to estimate the impact of changes in interest rates on the net interest margin. Assumptions regarding the replacement of maturing assets and liabilities are made to simulate the impact of future changes in rates and/or changes in balance sheet composition. The effect of changes in future interest rates on the mix of assets and liabilities may cause actual results to differ from simulated results. In addition, certain financial instruments provide customers a certain degree of choice. For instance, customers may migrate from lower-interest deposit products to higher-interest products. Also, customers may choose to refinance fixed-rate loans when interest rates decrease. While the Corporation’s simulation analysis considers these factors, the extent to which customers utilize the ability to exercise their financial

Interest rate sensitivity analysis (continued)

decisions may cause actual results to differ significantly from the simulation. Guidelines used by the Corporation for assuming interest rate risk are presented in the “Interest rate sensitivity analysis” section on page 33 of the 1999 Financial Annual Report to Shareholders.

The measurement of interest rate risk is meaningful only when all related on- and off-balance-sheet items are aggregated and the net positions are identified. Financial instruments that the Corporation uses to manage interest rate sensitivity include: money market assets, U.S. government and federal agency securities, municipal securities, mortgage-backed securities, corporate bonds, asset-backed securities, fixed-rate wholesale term funding, interest rate swaps, caps and floors, financial futures and 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 equity. This analysis was prepared using the levels of all interest-earning assets, supporting funds and off-balance-sheet instruments used for interest rate risk management at Sept. 30, 2000, assuming that the level of loan fees remains unchanged, and excluding 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 Sept. 30, 2000, levels and remaining at those levels thereafter.


Interest rate simulation sensitivity analysis
	Movements in interest rates from June 30, 2000 rates


	Increase									Decrease

Simulated impact in the next 12 months
compared with Sept. 30, 2000:	+50bp			+100bp			+200bp			-50bp			-100bp				-200bp

Net interest revenue (decrease) increase		(.5	)%		(1.0	)%		(2.1	)%		.4	%		9	%		1.6	%
Earnings per share (decrease) increase	$	(.01	)	$	(.02	)	$	(.03	)	$	.01		$	.01		$	.03




Return on equity (decrease) increase		(9	)bp		(19	)bp		(41	)bp		9	bp		18	bp		32	bp

The anticipated impact on net interest revenue under the 50, 100 and 200 basis point increase (decrease) scenarios did not exceed the Corporation’s guidelines for assuming interest rate risk under all scenarios at Sept. 30, 2000, as shown in the table above, and at Sept. 30, 1999. 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. 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, but with a comparable level of net interest revenue and return on equity. Use of off-balance-sheet instruments for

Interest rate sensitivity analysis (continued)

speculative purposes is not permitted outside of those areas designated as trading and is controlled with specific authorizations and limits. The off-balance-sheet instruments used to manage the Corporation’s interest rate risk are shown in the table below. Additional information regarding these contracts is presented in note 23 on pages 81 through 88 in the Corporation’s 1999 Financial Annual Report to Shareholders.




Maturities of off-balance-sheet instruments used to manage interest rate risk
																						Total at
																						Sept. 30,
(notional amounts in millions)				2000			2001			2002			2003			2004			2005+				2000

Receive fixed/pay floating generic swaps (a):




	Notional amount			$	—		$	—		$	—		$	1,400		$	—		$	871		$	2,271




	Weighted average rate:




		Receive			—			—			—			5.82	%		—			6.72	%		6.17	%




		Pay			—			—			—			6.74	%		—			6.73	%		6.74	%




Receive fixed/pay floating callable swaps (b):




	Notional amount			$	15		$	137		$	294		$	—		$	100		$	—		$	546




	Weighted average rate:




		Receive			7.97	%		7.78	%		7.73	%		—			6.38	%		—			7.51	%




		Pay			6.69	%		6.69	%		6.71	%		—			6.69	%		—			6.70	%




Pay fixed/receive floating generic swaps (a):




	Notional amount			$	1		$	3		$	379		$	36		$	3		$	25		$	447




	Weighted average rate:




		Receive			6.02	%		6.16	%		6.64	%		6.63	%		6.19	%		6.64	%		6.63	%




		Pay			5.68	%		5.95	%		6.80	%		7.22	%		6.06	%		6.80	%		6.82	%




Other products (c)				$	3		$	11		$	26		$	—		$	—		$	—		$	40





			Total notional amount	$	19		$	151		$	699		$	1,436		$	103		$	896		$	3,304

(a) Generic swaps’ notional amounts and lives are not based upon interest rate indices.

(b) Callable swaps are generic swaps with a call option at the option of the counterparty. Call options will be exercised or not exercised on the basis of market interest rates. Expected maturity dates, based upon interest rates at Sept. 30, 2000, are shown in this table.

(c) Represents index amortizing swaps with weighted average receive and pay rates of 7.10% and 6.72%, 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 notional amounts shown in the table above 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.


Interest rate sensitivity analysis (continued)


		Sept. 30,		June 30,		Dec. 31,		Sept. 30,
(in millions)		2000		2000		1999		1999

Instruments associated with deposits		$	586	$	584	$	176	$	181




Instruments associated with interest bearing liabilities			1,321		1,327		1,305		1,305




Instruments associated with loans			1,397		1,342		1,604		1,444





	Total notional amount	$	3,304	$	3,253	$	3,085	$	2,930

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 expense of $4 million and $8 million in the third quarter and first nine months of 2000, compared with interest revenue of $2 million and $8 million in the third quarter and first nine months of 1999.

In addition to the risk management instruments previously discussed, the Corporation also entered into contracts to hedge anticipated transactions. The Corporation has entered into $51 million notional amount of interest rate futures to lock in the value of certain loans that are anticipated to be sold and/or securitized. The negative fair value of the contracts related to these anticipated transactions was less than $1 million at Sept. 30, 2000.

The estimated unrealized fair value of the Corporation’s risk management off-balance-sheet products at Sept. 30, 2000, was a negative $16 million, compared to a negative $74 million at June 30, 2000, a negative $72 million at Dec. 31, 1999 and a negative $35 million at Sept. 30, 1999. The improvement compared with the prior periods, primarily resulted from an increase 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.


Off-balance-sheet instruments used for risk management purposes (a)


		Sept. 30,		June 30,		Dec. 31,		Sept. 30,
(notional amounts in millions)		2000		2000		1999		1999

Interest rate risk management instruments (b):




	Interest rate swaps	$	3,304	$	3,253	$	3,033	$	2,930




	Futures and forward contracts		—		—		52		—




Other products:




	Total return swaps		—		125		148		138




	Interest rate swaps and futures contracts hedging anticipated transactions		51		212		475		410




Foreign currency contracts			—		—		40		—

(a) The amount of credit risk associated with these instruments is limited to the cost of replacing a contract in a gain position, on which a counterparty may default. Credit risk associated with these instruments was $17 million at Sept. 30, 2000, $3 million at June 30, 2000, $7 million at Dec. 31, 1999, and $7 million at Sept. 30, 1999.

(b) The credit risk associated with interest rate agreements is calculated after considering master netting agreements.

Interest rate sensitivity analysis (continued)

Off-balance-sheet instruments used for trading activities

The Corporation offers various off-balance-sheet financial instruments 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 of these instruments are carried at market value with realized and unrealized gains and losses included in foreign currency and securities trading revenue.

The financial risk associated with trading positions is managed by assigning position limits and stop loss guidance amounts to individual activities. The Corporation uses a value-at-risk methodology to estimate the potential daily amount that could be lost from adverse market movements. Value-at-risk measures the 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 was approximately $4 million at Sept. 30, 2000, approximately $3 million at June 30, 2000, and approximately $2 million at both Dec. 31,1999, and Sept. 30, 1999.


Off-balance-sheet instruments used for trading activities (a)


		Sept. 30,		June 30,		Dec. 31,		Sept. 30,
(notional amounts in millions)		2000		2000		1999		1999

Foreign currency contracts:




	Commitments to purchase	$	13,426	$	15,644	$	12,604	$	15,331




	Commitments to sell		13,781		16,011		12,778		15,407




Foreign currency and other option contracts purchased			747		621		213		297




Foreign currency and other option contracts written			752		640		232		298




Interest rate agreements (b):




	Interest rate swaps		14,447		15,629		17,280		19,619




	Options, caps and floors purchased		1,669		1,230		617		559




	Options, caps and floors written		1,631		1,668		990		1,226




	Futures and forward contracts		4,832		5,879		5,978		8,441




Other products			817		542		578		120

(a) The amount of credit risk associated with these instruments is limited to the cost of replacing a contract in a gain position, on which a counterparty may default. Credit risk associated with these instruments, primarily foreign exchange contracts, was $683 million at Sept. 30, 2000, $587 million at June 30, 2000, $454 million at Dec. 31, 1999, and $475 million at Sept. 30, 1999.

(b) The credit risk associated with interest rate agreements is calculated after considering master netting agreements.

Interest rate sensitivity analysis (continued)

New accounting statements

Statement of Financial Accounting Standards (FAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” and FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” an amendment of FAS 133 were issued in June of 1998 and June of 2000, respectively. The standards established accounting and reporting requirements for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. Under these standards, the Corporation must recognize all derivative instruments in the balance sheet at fair value as either assets or liabilities. If certain criteria are met, the Corporation may elect to designate the derivative instruments as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting gain or loss on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income and subsequently reclassified into earnings when the original hedged transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the unrealized gain or loss on the derivative is recognized in earnings in the current period. The adoption of these standards may cause volatility in both the income statement and the equity section of the balance sheet.

The Corporation intends to adopt the standards on Jan. 1, 2001. If the standards had been adopted at Sept. 30, 2000, the impact on the Corporation’s financial position and results of operations would have been immaterial. However, the financial impact upon adoption at Jan. 1, 2001 will be affected by changes in interest rates between Oct. 1, 2000 and Jan. 1, 2001, any changes in hedging strategy and any other change in market conditions during that period.


Credit quality expense, reserve for credit losses and review of net credit losses


Credit quality expense

		Quarter ended							Nine months ended

Credit quality expense		Sept. 30,		June 30,		Sept. 30,			Sept. 30,		Sept. 30,
(in millions)		2000		2000		1999			2000		1999

Provision for credit losses		$	10	$	10	$	10			$30		$35




Net expense (revenue) from acquired property			2		1		(5	)		2		(10)





	Credit quality expense	$	12	$	11		$5			$32		$25

The increase in credit quality expense in the third quarter of 2000, compared with the third quarter of 1999, resulted from lower gains on the sales of acquired property.


Credit quality expense, reserve for credit losses and review of net credit losses (continued)


Reserve for credit losses and review of net credit losses



				Quarter ended									Nine months ended

Credit loss reserve activity				Sept. 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,
(dollar amounts in millions)				2000			2000			1999			2000			1999

Reserve at beginning of period				$	401		$	402		$	409		$	403		$	496




Net change in reserve from divestitures					—			—			(4	)		—			(88	)




Credit losses:




	Domestic:




		Commercial and financial			(6	)		(9	)		(10	)		(34	)		(27	)




		Commercial real estate			(1	)		—			(1	)		(1	)		(1	)




		Consumer credit:




			Credit cards		—			—			—			—			(11	)




			Other consumer credit		(4	)		(4	)		(4	)		(13	)		(15	)




		Lease finance assets			(3	)		(1	)		—			(6	)		(3	)

		Total domestic			(14	)		(14	)		(15	)		(54	)		(57	)




	International				—			—			—			—			—

		Total credit losses			(14	)		(14	)		(15	)		(54	)		(57	)

Recoveries:




	Domestic:




		Commercial and financial			—			2			2			3			11




		Commercial real estate			—			—			1			—			1




		Consumer credit:




			Credit cards		—			—			—			—			1




			Other consumer credit		2			1			2			5			5




		Lease finance assets			1			—			—			1			1

		Total domestic			3			3			5			9			19




	International				—			—			—			12			—

		Total recoveries			3			3			5			21			19

Net credit (losses) recoveries:




	Domestic:




		Commercial and financial			(6	)		(7	)		(8	)		(31	)		(16	)




		Commercial real estate			(1	)		—			—			(1	)		—




		Consumer credit:




			Credit cards		—			—			—			—			(10	)




			Other consumer credit		(2	)		(3	)		(2	)		(8	)		(10	)




		Lease finance assets			(2	)		(1	)		—			(5	)		(2	)

		Total domestic			(11	)		(11	)		(10	)		(45	)		(38	)




	International				—			—			—			12			—

		Total net credit losses			(11	)		(11	)		(10	)		(33	)		(38	)




Provision for credit losses					10			10			10			30			35

Reserve at end of period				$	400		$	401		$	405		$	400		$	405

Reserve as a percentage of total loans					1.46	%		1.45	%		1.39	%		1.46	%		1.39	%




Reserve as a percentage of nonperforming loans					196	%		194	%		263	%		196	%		263	%




Annualized net credit losses to average loans					.16	%		.15	%		.14	%		.16	%		.17	%(a)

(a)

Annualized net credit losses to average loans, excluding credit card net credit losses, was .12%.

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. Additional information regarding the Corporation’s practices for placing assets on nonaccrual status is presented in the “Nonperforming assets” discussion and in note 1 in the Corporation’s 1999 Financial Annual Report to Shareholders.

At Sept. 30, 2000, nonperforming assets totaled $222 million, a decrease of $6 million compared with June 30, 2000, and an increase of $53 million compared with Sept. 30, 1999. The higher level of nonperforming assets, compared with Sept. 30, 1999, primarily resulted from the assignment of nonperforming status to commercial loans to a health care provider and its affiliated companies in the first quarter of 2000.

On Oct. 5, 2000, a borrower in the building materials manufacturing industry voluntarily filed for Chapter 11 bankruptcy protection as the result of the financial burden caused by asbestos liability litigation claims. At Sept. 30, 2000, loans outstanding to this borrower totaled $34 million, which is not included in the table below, with an additional $6 million of exposure in letters of credit.




Nonperforming assets				Sept. 30,			June 30,			Dec. 31,			Sept. 30,
(dollar amounts in millions)				2000			2000			1999			1999

Nonaccrual loans:




	Commercial and financial				$162			$156			$85		$	89




	Commercial real estate				7			8			6			6




	Consumer credit:




		Consumer mortgage			21			32			40			47




		Other consumer credit			—			—			1			—




	Lease finance assets				14			11			10			12

			Total nonaccrual loans		204			207			142			154




Restructured loans					—			—			—			—

			Total nonperforming loans (a)		204			207			142			154

Acquired property:




	Real estate acquired				12			13			15			15




	Reserve for real estate acquired				—			(1	)		(1	)		(3	)

			Net real estate acquired		12			12			14			12




	Other acquired assets				6			9			3			3

			Total acquired property		18			21			17			15

			Total nonperforming assets		$222			$228		$	159		$	169

Nonperforming loans as a percentage of respective loan portfolio segments:




		Commercial and financial loans			1.50	%		1.47	%		.75	%		.79	%




		Commercial real estate loans			.23			.29			.24			.23




		Consumer mortgage loans			.35			.48			.57			.68




		Lease finance assets			.46			.37			.32			.38




			Total loans		.74			.75			.47			.53




Nonperforming assets as a percentage of total loans and net acquired property					.81			.82			.53			.58

(a) Includes $67 million, $66 million, $43 million, and $58 million, respectively, of loans with both principal and interest less than 90 days past due but placed on nonaccrual status by management discretion.

Nonperforming assets (continued)


Change in nonperforming loans for the quarter ended Sept. 30,
														Lease			Total
			Commercial			Commercial				Consumer			finance
(in millions)		& financial				real estate			credit				assets			2000				1999

Nonperforming loans at beginning of period			$	156			$8				$32		$	11			$	207			$121




	Additions			21			1				4			8				34			62




	Payments (a)			(9	)		(1	)			(10	)		(2	)			(22	)		(13	)




	Return to accrual status			—			—				(3	)		(1	)			(4	)		(1	)




	Credit losses			(6	)		(1	)			—			(2	)			(9	)		(11	)




	Transfers to acquired property			—			—				(2	)		—				(2	)		(4	)

Nonperforming loans at Sept. 30			$	162			$7				$21		$	14			$	204			$154

(a) Includes interest applied to principal and sales.

A loan is considered impaired, as defined by FAS No. 114, “Accounting by Creditors for Impairment of a Loan,” when based upon current information and events, it is probable that the Corporation will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Additional information regarding impairment is presented in note 1 in the Corporation’s 1999 Financial Annual Report to Shareholders.

Quarter ended

Impaired loans

Sept. 30,

June 31,

Sept. 30,

(dollar amounts in millions)

2000

1999

Impaired loans — period end (a)

169

164

$95

Average impaired loans for the quarter

170

161

Interest revenue recognized on impaired loans (b)

(a) Includes $72 million, $154 million and $43 million of impaired loans with a related impairment reserve of $25 million, $26 million and $10 million at Sept. 30, 2000, June 30, 2000 and Sept. 30, 1999, respectively.

(b) All income was recognized using the cash basis method of income recognition.


											Nine months
											ended
		Quarter ended										Sept. 30,

Change in acquired property		Sept. 30,			June 30,			Sept.30,
(in millions)		2000			2000			1999				2000			1999

OREO at beginning of period, net of the OREO reserve		$	12		$	13		$	20			$	14		$	35




Foreclosures			2			2			5				6			9




Sales			(3	)		(3	)		(15	)			(9	)		(41	)




Additional investments, write-downs, losses, OREO provision and other			1			—			2				1			9

OREO at end of period, net of the OREO reserve			12			12			12				12			12




Other acquired assets			6			9			3				6			3

	Total acquired property, net of the OREO reserve	$	18		$	21		$	15			$	18		$	15

Nonperforming assets (continued)

The following table presents the amount of loans that were 90 days or more past due as to principal or interest that are not classified as nonperforming. All loans in this table are well-secured and in the process of collection or are consumer loans that are not classified as nonaccrual because they are automatically charged off upon reaching 180 days past due.



Past-due loans				Sept. 30,			June 30,			Dec. 31,			Sept. 30,
(dollar amounts in millions)				2000			2000			1999			1999

Consumer:




	Mortgages				$ 20			$ 17			$ 21			$ 26




			Ratio		.32	%		.26	%		.30	%		.39	%




	Student — government guaranteed				$ 63			$ 63			$ 63			$ 54




			Ratio		3.52	%		3.54	%		3.53	%		3.02	%




	Other consumer				$ 1			$ 4			$ 4			$ 3




			Ratio		.04	%		.15	%		.12	%		.13	%

		Total consumer			$ 84			$ 84			$ 88			$ 83




			Ratio		.78	%		.76	%		.74	%		.76	%

Commercial (a)					$ 25			$ 28			$ 11			$ 13

		Total past-due loans			$ 109			$ 112			$ 99			$ 96

(a) Includes lease finance assets.
Note: Ratios are loans 90 days or more past due as a percentage of quarter-end loan balances.

FINANCIAL STATEMENTS (ITEM 1)

CONSOLIDATED INCOME STATEMENT

Mellon Financial Corporation (and its subsidiaries)


		Nine months ended

		Sept. 30,		Sept. 30,
(in millions, except per share amounts)		2000		1999

Interest revenue	Interest and fees on loans (loan fees of $44 and $45)	$	1,703	$	1,688




	Federal funds sold and securities under resale agreements		42		23




	Interest-bearing deposits with banks		42		27




	Other money market investments		3		2




	Trading account securities		13		14




	Securities		310		316

	Total interest revenue		2,113		2,070

Interest expense	Deposits in domestic offices		619		547




	Deposits in foreign offices		108		99




	Federal funds purchased and securities under repurchase agreements		75		82




	Other short-term borrowings		81		97




	Notes and debentures		175		166

	Total interest expense		1,058		991

Net interest revenue	Net interest revenue		1,055		1,079




	Provision for credit losses		30		35

	Net interest revenue after provision for credit losses		1,025		1,044

Noninterest revenue	Trust and investment fee revenue		1,704		1,528




	Cash management and deposit transaction charges		240		228




	Foreign currency and securities trading revenue		135		130




	Financing-related revenue		126		137




	Equity investment revenue		73		47




	Mortgage servicing fees		7		151




	Other		59		120

	Total fee and other revenue		2,344		2,341




	Net gain from divestitures		—		134




	Gains on sales of securities		—		—

	Total noninterest revenue		2,344		2,475

Operating expense	Staff expense		1,186		1,175
	Professional, legal and other purchased services		214		207




	Net occupancy expense		179		186




	Equipment expense		110		144




	Business development		107		129




	Amortization of goodwill and other intangible assets		102		111




	Communications expense		68		85




	Amortization of mortgage servicing assets and purchased credit card




	relationships		4		112




	Other expense		155		136




	Trust-preferred securities expense		59		59




	Net expense (revenue) from acquired property		2		(10	)

	Total operating expense		2,186		2,334

Income	Income before income taxes and cumulative effect of accounting




	change		1,183		1,185




	Provision for income taxes		431		436

	Income before cumulative effect of accounting change		752		749




	Cumulative effect of accounting change		—		(26	)

	Net income		$752		$723

(continued)

CONSOLIDATED INCOME STATEMENT (continued)

Mellon Financial Corporation (and its subsidiaries)


		Nine months ended

		Sept. 30,	Sept. 30,
(in millions, except per share amounts)		2000	1999

Earnings per share	Basic net income per share:




	Income before cumulative effect of accounting change	$1.53	$	1.45




	Cumulative effect of accounting change	—		(.05	)

	Net income	$1.53	$	1.40

	Diluted net income per share:




	Income before cumulative effect of accounting change	$1.51	$	1.43




	Cumulative effect of accounting change	—		(.05	)

	Net income	$1.51	$	1.38

	See accompanying Notes to Financial Statements.

CONSOLIDATED INCOME STATEMENT — Five Quarter Trend

Mellon Financial Corporation (and its subsidiaries)


		Sept. 30,		June 30,		March 31,			Dec. 31,			Sept. 30,
(in millions, except share amounts)		2000		2000		2000			1999			1999

Interest revenue	Interest and fees on loans (loan fees of $15, $15, $14, $14, and $14)	$	575	$	563	$	565		$	550		$	553
	Federal funds sold and securities under resale agreements		12		17		13			18			9
	Interest-bearing deposits with banks		17		15		10			12			9
	Other money market investments		1		1		1			1			1
	Trading account securities		5		4		4			5			5
	Securities		103		104		103			103			102

	Total interest revenue		713		704		696			689			679

Interest expense	Deposits in domestic offices		213		208		198			191			184
	Deposits in foreign offices		37		36		35			34			34
	Federal funds purchased and securities under repurchase agreements		27		25		23			20			22
	Other short-term borrowings		20		27		34			34			34
	Notes and debentures		60		57		58			59			56

	Total interest expense		357		353		348			338			330

Net interest revenue	Net interest revenue		356		351		348			351			349
	Provision for credit losses		10		10		10			10			10

	Net interest revenue after provision for credit losses		346		341		338			341			339

Noninterest revenue	Trust and investment fee revenue		561		565		578			546			517
	Cash management and deposit transaction charges		83		83		74			76			78
	Foreign currency and securities trading revenue		42		42		51			43			42
	Financing-related revenue		44		43		39			56			39
	Equity investment revenue		20		17		36			16			17
	Mortgage servicing fees		3		2		2			2			48
	Other		20		21		18			20			24

	Total fee and other revenue		773		773		798			759			765
	Net loss from divestitures		—		—		—			(7	)		(8	)
	Gains on sales of securities		—		—		—			—			—

	Total noninterest revenue		773		773		798			752			757

Operating expense	Staff expense		399		390		397			384			387
	Professional, legal and other purchased services		77		70		67			73			63
	Net occupancy expense		57		58		64			57			61
	Equipment expense		35		38		37			42			40
	Amortization of goodwill and other intangible assets		32		33		37			37			37
	Business development		32		38		37			32			32
	Communications expense		21		23		24			27			26
	Amortization of mortgage servicing assets		2		1		1			1			33
	Other expense		47		53		55			46			37
	Trust-preferred securities expense		20		19		20			20			20
	Net expense (revenue) from acquired property		2		1		(1	)		(4	)		(5	)

	Total operating expense		724		724		738			715			731

Income	Income before income taxes		395		390		398			378			365
	Provision for income taxes		143		143		145			138			134

	Net income	$	252	$	247	$	253		$	240		$	231

Earnings per share	Basic Net income	$	.52	$	.50	$	.51		$	.47		$	.46
	Diluted Net income	$	.51	$	.50	$	.50		$	.47		$	.45

	See accompanying Notes to Financial Statements.

CONSOLIDATED BALANCE SHEET

Mellon Financial Corporation (and its subsidiaries)


(dollar amounts in millions)		Sept. 30,		June 30,		Dec. 31,			Sept. 30,
		2000		2000		1999			1999

Assets	Cash and due from banks	$2,888		$3,580			$3,410			$3,340




	Interest-bearing deposits with banks	854		1,022			286			487




	Federal funds sold and securities under




	resale agreements	258		290			1,001			698




	Other money market investments	102		123			71			67




	Trading account securities	371		151			144			288




	Securities available for sale	5,323		5,160			5,159			5,209




	Investment securities (approximate fair value




	of $1,058, $1,094, $1,183, and $1,246)	1,063		1,110			1,197			1,251




	Loans, net of unearned discount of $74, $73,




	$79 and $77	27,421		27,667			30,248			29,156




	Reserve for credit losses	(400	)	(401	)		(403	)		(405	)

	Net loans	27,021		27,266			29,845			28,751




	Customers’ acceptance liability	86		95			164			87




	Premises and equipment	598		572			562			537




	Goodwill and other intangibles	2,001		2,032			2,140			2,182




	Mortgage servicing assets	25		22			16			17




	Other assets	4,747		4,606			3,951			3,947

	Total assets	$45,337		$46,029			$47,946		$	46,861






Liabilities	Noninterest-bearing deposits in domestic offices	$8,647		$8,854			$9,588			$8,193




	Interest-bearing deposits in domestic offices	19,987		20,772			20,540			20,735




	Interest-bearing deposits in foreign offices	3,111		2,992			3,293			3,101

	Total deposits	31,745		32,618			33,421			32,029




	Federal funds purchased and securities under




	repurchase agreements	1,298		1,080			1,095			1,023




	U.S. Treasury tax and loan demand notes	506		330			606			658




	Commercial paper	126		150			88			97




	Term federal funds purchased	16		17			358			361




	Short-term bank notes	—		400			1,055			1,055




	Other funds borrowed	360		479			448			376




	Acceptances outstanding	86		95			164			87




	Other liabilities	2,646		2,468			2,266			2,267




	Notes and debentures (with original maturities




	over one year)	3,531		3,537			3,438			3,698

	Total liabilities	40,314		41,174			42,939			41,651

Trust-	Guaranteed preferred beneficial interests in




preferred	Corporation’s junior subordinated deferrable




securities	interest debentures	991		991			991			991

Shareholders’	Common stock — $.50 par value




equity	Authorized — 800,000,000 shares




	Issued – 588,661,920 shares	294		294			294			294




	Additional paid-in capital	1,821		1,806			1,788			1,773




	Retained earnings	4,155		4,043			3,808			3,698




	Accumulated unrealized (loss), net of tax	(87	)	(146	)		(135	)		(105	)




	Treasury stock of 100,671,971; 100,490,756;




	88,038,848; and 80,011,896 shares, at cost	(2,151	)	(2,133	)		(1,739	)		(1,441	)

	Total shareholders’ equity	4,032		3,864			4,016			4,219

	Total liabilities, trust-preferred securities




	and shareholders’ equity	$45,337		$46,029			$47,946			$46,861

	See accompanying Notes to Financial Statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

Mellon Financial Corporation (and its subsidiaries)



		Nine months ended
		Sept. 30,
(in millions)		2000			1999


Cash flows from operating activities	Net income	$	752		$	723
	Adjustments to reconcile net income to net cash provided by operating activities:
	Cumulative effect of accounting change		—			26
	Net gain from divestitures		—			(134	)
	Amortization of goodwill and other intangible assets		102			111
	Amortization of mortgage servicing assets and purchased credit card relationships		4			112
	Depreciation and other amortization		67			75
	Deferred income tax expense		65			210
	Provision for credit losses		30			35
	Net gains on dispositions of acquired property		(1	)		(13	)
	Net (increase) decrease in accrued interest receivable		(14	)		36
	Net increase in trading account securities		(216	)		(87	)
	Net decrease in accrued interest payable, net of amounts prepaid		(54	)		(17	)
	Net decrease in residential mortgages held for sale		—			1,290
	Net decrease from other operating activities		(148	)		(375	)

	Net cash provided by operating activities		587			1,992

Cash flows from investing activities	Net (increase) decrease in term deposits and other money market investments		(599	)		54
	Net decrease (increase) in federal funds sold and securities under resale agreements		743			(512	)
	Purchases of securities available for sale		(813	)		(1,678	)
	Proceeds from sales of securities available for sale		407			404
	Proceeds from maturities of securities available for sale		311			1,252
	Purchases of investment securities		(5	)		(15	)
	Proceeds from maturities of investment securities		138			316
	Proceeds from the divestiture of network services business		—			135
	Net decrease in credit card receivables to date of divestiture		—			85
	Proceeds from divestiture of credit card business		—			1,186
	Proceeds from the divestiture of mortgage businesses		—			1,210
	Net principal repayments of (disbursed on) loans to customers		878			(1,485	)
	Loan portfolio purchases		(64	)		(41	)
	Proceeds from the sales and securitizations of loan portfolios		1,983			2,142
	Purchases of premises and equipment		(109	)		(119	)
	Proceeds from sales of acquired property		11			55
	Increase in mortgage servicing assets and purchased credit card relationships		(13	)		(86	)
	Net decrease from other investing activities		(275	)		(249	)

	Net cash provided by investing activities		2,593			2,654

(continued)

CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

Mellon Financial Corporation (and its subsidiaries)



		Nine months ended
		Sept. 30,
(in millions)		2000		1999

Cash flows from	Net decrease in transaction and savings deposits	(1,263	)	(1,441	)
financing activities	Net decrease in customer term deposits	(413	)	(913	)
	Net increase (decrease) in federal funds purchased and securities under repurchase agreements	203		(2,571	)
	Net (decrease) increase in short-term bank notes	(1,055	)	789
	Net (decrease) increase in term federal funds purchased	(342	)	153
	Net (decrease) increase in U.S. Treasury tax and loan demand notes	(100	)	368
	Net increase (decrease) in commercial paper	38		(19	)
	Repayments of longer-term debt	(316	)	(115	)
	Net proceeds from issuance of longer-term debt	404		506
	Dividends paid on common stock	(315	)	(301	)
	Proceeds from issuance of common stock	50		38
	Repurchase of common stock	(600	)	(694	)
	Net decrease from other financing activities	(56	)	(87	)

	Net cash used in financing activities	(3,765	)	(4,287	)
	Effect of foreign currency exchange rates	63		55

Change in cash and	Net (decrease) increase in cash and due from banks	(522	)	414
due from banks	Cash and due from banks at beginning of period	3,410		2,926

	Cash and due from banks at end of period	$2,888		$3,340






Supplemental	Interest paid	$1,112		$1,008
disclosures	Net income taxes paid	288		277

	See accompanying Notes to Financial Statements.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Mellon Financial Corporation (and its subsidiaries)


									Accumulated
Quarter ended				Additional					unrealized						Total
Sept. 30, 2000		Common		paid-in		Retained			(loss) gain,			Treasury			shareholders’
(in millions)		stock		capital		earnings			net of tax			stock			equity

Balance at June 30, 2000		$	294	$	1,806	$	4,043		$	(146	)	$	(2,133	)	$	3,864




Comprehensive results:




	Net income						252									252




	Other comprehensive results, net of tax									59						59

Total comprehensive results							252			59						311




Dividends on common stock at $.22 per share							(107	)								(107	)




Common stock issued under Direct Stock Purchase and Dividend Reinvestment Plan					1								4			5




Exercise of stock options					14		(33	)					47			28




Repurchase of common stock													(77	)		(77	)




Other													8			8

Balance at Sept. 30, 2000		$	294	$	1,821	$	4,155		$	(87	)	$	(2,151	)	$	4,032

Mellon Financial Corporation (and its subsidiaries)


									Accumulated
Quarter ended				Additional					unrealized						Total
Sept. 30, 1999		Common		paid-in		Retained			(loss) gain,			Treasury			shareholders’
(in millions)		stock		capital		earnings			net of tax			stock			equity

Balance at June 30, 1999		$	294	$	1,765	$	3,587		$	(90	)	$	(1,253	)	$	4,303




Comprehensive results:




	Net income						231									231




	Other comprehensive results, net of tax									(15	)					(15	)

Total comprehensive results							231			(15	)					216




Dividends on common stock at $.20 per share							(103	)								(103	)




Common stock issued under Direct Stock Purchase and Dividend Reinvestment Plan					1								5			6




Exercise of stock options					7		(14	)					22			15




Repurchase of common stock													(225	)		(225	)




Other							(3	)					10			7

Balance at Sept. 30, 1999		$	294	$	1,773	$	3,698		$	(105	)	$	(1,441	)	$	4,219

See accompanying Notes to Financial Statements.

(continued)

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)

Mellon Financial Corporation (and its subsidiaries)


									Accumulated
Nine months ended				Additional					unrealized						Total
Sept. 30, 2000		Common		paid-in		Retained			(loss) gain,			Treasury			shareholders’
(in millions)		stock		capital		earnings			net of tax			stock			equity

Balance at Dec. 31, 1999		$	294	$	1,788	$	3,808		$	(135	)	$	(1,739	)	$	4,016




Comprehensive results:




	Net income						752									752




	Other comprehensive results, net of tax									48						48

Total comprehensive results							752			48						800




Dividends on common stock at $.64 per
share							(315	)								(315	)
Common stock issued under Direct Stock Purchase and Dividend Reinvestment Plan					1		(1	)					14			14




Exercise of stock options					29		(79	)					123			73




Repurchase of common stock													(600	)		(600	)




Other					3		(10	)					51			44

Balance at Sept. 30, 2000		$	294	$	1,821	$	4,155		$	(87	)	$	(2,151	)	$	4,032

Mellon Financial Corporation (and its subsidiaries)


										Accumulated
Nine months ended				Additional						unrealized						Total
Sept. 30, 1999		Common		paid-in			Retained			(loss) gain,			Treasury			shareholders’
(in millions)		stock		capital			earnings			net of tax			stock			equity





Balance at Dec 31, 1998		$	147	$	1,887		$	3,353		$	25		$	(891	)	$	4,521




Comprehensive results:




	Net income							723									723




	Other comprehensive results, net of tax										(130	)					(130	)

Total comprehensive results								723			(130	)					593




Dividends on common stock at $.58 per
share								(301	)								(301	)




Common stock issued under Direct Stock Purchase and Dividend Reinvestment Plan					1									14			15




Exercise of stock options					32			(74	)					102			60




Repurchase of common stock														(694	)		(694	)




Additional common stock issued
for stock split			147		(147	)											—




Other								(3	)					28			25

Balance at Sept. 30, 1999		$	294	$	1,773		$	3,698		$	(105	)	$	(1,441	)	$	4,219

See accompanying Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS

Note 1 — Basis of presentation

The unaudited consolidated financial statements of the Corporation are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements should be read in conjunction with the Corporation’s 1999 Annual Report on Form 10-K. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods have been included.

Note 2 — Adoption of new accounting principle

Cumulative effect of a change in accounting principle

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 was reported as a cumulative effect of a change in accounting principle.

Due to this change in accounting principle, the Corporation recognized a one-time after-tax charge of $26 million (pre-tax cost of $43 million), or $.05 per share, in the first quarter of 1999. The charge was related to underwriting fees paid by the Corporation during the successful initial public offering in the second quarter of 1998 of a $920 million Dreyfus closed-end mutual fund. In September 1998, the Financial Accounting Standards Board staff concluded that fees paid by advisors of closed-end funds should be expensed as incurred and that any fees capitalized prior to July 24, 1998, should be written off upon the adoption of SOP 98-5 and reported as a cumulative effect of a change in accounting principle. This accounting change had no impact on a cash-flow basis in 1999 since the underwriting fees were paid in the first half of 1998.

NOTES TO FINANCIAL STATEMENTS (continued)

Note 3 — Securities

Securities available for sale



		Sept. 30, 2000								Dec. 31, 1999

				Gross								Gross
				unrealized								unrealized
		Amortized						Fair		Amortized						Fair
(in millions)		cost		Gains		Losses		value		cost		Gains		Losses		value

U.S. Treasury		$	208	$	—	$	—	$	208	$	224	$	—	$	1	$	223




U.S. agency mortgage-backed			4,925		9		118		4,816		4,973		4		175		4,802




Other U.S. agency			146		—		—		146		5		—		—		5

	Total U.S. Treasury and agency securities		5,279		9		118		5,170		5,202		4		176		5,030




Obligations of states and political subdivisions			137		—		7		130		113		—		9		104




Other mortgage-backed			1		—		—		1		1		—		—		1




Other securities			21		1		—		22		24		—		—		24

	Total securities available for sale	$	5,438	$	10	$	125	$	5,323	$	5,340	$	4	$	185	$	5,159

Note: Both gross realized gains and gross realized losses were less than $1 million in the first nine months of 2000 and the full year 1999.

Investment securities



		Sept. 30, 2000								Dec. 31, 1999

				Gross								Gross
				unrealized								unrealized
		Amortized						Fair		Amortized						Fair
(in millions)		cost		Gains		Losses		value		cost		Gains		Losses		value

U.S. Treasury		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—




U.S. agency mortgage-backed			989		2		7		984		1,113		1		15		1,099

	Total U.S. Treasury and agency securities		989		2		7		984		1,113		1		15		1,099




Obligations of states and political subdivisions			16		—		—		16		16		—		—		16




Other mortgage-backed			6		—		—		6		9		—		—		9




Other securities			52		—		—		52		59		—		—		59

	Total investment securities	$	1,063	$	2	$	7	$	1,058	$	1,197	$	1	$	15	$	1,183

NOTES TO FINANCIAL STATEMENTS (continued)

Note 4 — Other assets


			Sept. 30,		June 30,		Dec. 31,		Sept. 30,
(in millions)			2000		2000		1999		1999

Accounts and fees receivable			$	594	$	642	$	582	$	596




Interest receivable				233		223		219		223




Prepaid expense:




	Pension			645		614		554		531




	Other			177		189		172		157




Receivables related to off-balance-sheet instruments				676		499		451		485




Equity and equity fund investments				1,053		921		582		503




Other				1,369		1,518		1,391		1,452

		Total other assets	$	4,747	$	4,606	$	3,951	$	3,947

Note 5 — Deposits


				Sept. 30,		June 30,		Dec. 31,		Sept. 30,
(in millions)				2000		2000		1999		1999

Deposits in domestic offices:




	Interest-bearing:




		Demand, money market and other savings accounts		$	12,728	$	13,197	$	13,276	$	13,056




		Retail savings certificates			6,446		6,583		6,482		6,595




		Other time deposits			813		992		782		1,084

			Total interest-bearing		19,987		20,772		20,540		20,735




	Noninterest-bearing				8,647		8,854		9,588		8,193

			Total deposits in domestic offices		28,634		29,626		30,128		28,928




Deposits in foreign offices					3,111		2,992		3,293		3,101

			Total deposits	$	31,745	$	32,618	$	33,421	$	32,029

Note 6 — Preferred stock

The Corporation has authorized 50 million shares of preferred stock, none of which was issued at Sept. 30, 2000 or Sept. 30, 1999.

NOTES TO FINANCIAL STATEMENTS (continued)

Note 7 — Accumulated unrealized (loss) gain, net of tax

These tables include the quarterly changes in the balances of both the accumulated unrealized (loss) gain, net of tax and its individual components.

Foreign currency translation adjustment, net of tax


	Sept. 30,			June 30,			Dec. 31,			Sept. 30,
(in millions)	2000			2000			1999			1999

Beginning balance	$	(18	)	$	(10	)	$	(18	)	$	(19	)




Quarterly change		3			(8	)		2			1

Ending balance	$	(15	)	$	(18	)	$	(16	)	$	(18	)

Unrealized (loss) gain on assets available for sale, net of tax


	Sept. 30,			June 30,			Dec. 31,			Sept. 30,
(in millions)	2000			2000			1999			1999

Beginning balance	$	(128	)	$	(141	)	$	(87	)	$	(71	)




Quarterly change		56			13			(32	)		(16	)

Ending balance	$	(72	)	$	(128	)	$	(119	)	$	(87	)

Total accumulated unrealized (loss) gain, net of tax


	Sept. 30,			June 30,			Dec. 31,			Sept. 30,
(in millions)	2000			2000			1999			1999

Beginning balance	$	(146	)	$	(151	)	$	(105	)	$	(90	)




Quarterly change		59			5			(30	)		(15	)

Ending balance	$	(87	)	$	(146	)	$	(135	)	$	(105	)

These tables include the year-to-date changes in the balances of both the accumulated unrealized (loss) gain, net of tax and its individual components.

Foreign currency translation adjustment, net of tax


	Sept. 30,			Sept. 30,
(in millions)	2000			1999





Beginning balance	$	(16	)	$	(21	)




Year-to-date change		1			3

Ending balance	$	(15	)	$	(18	)

Unrealized (loss) gain on assets available for sale, net of tax


	Sept. 30,			Sept. 30,
(in millions)	2000			1999

Beginning balance	$	(119	)	$	46




Year-to-date change		47			(133	)

Ending balance	$	(72	)	$	(87	)

Total accumulated unrealized (loss) gain, net of tax


	Sept. 30,			Sept. 30,
(in millions)	2000			1999

Beginning balance	$	(135	)	$	25




Year-to-date change		48			(130	)

Ending balance	$	(87	)	$	(105	)

NOTES TO FINANCIAL STATEMENTS (continued)

Note 8 — Foreign currency and securities trading revenue

The results of the Corporation’s foreign currency and securities trading activities are presented, by class of financial instrument, in the table below.




		Quarter ended								Nine months ended

		Sept. 30,		June 30,			Sept. 30,			Sept. 30,		Sept. 30,
(in millions)		2000		2000			1999			2000		1999

Foreign exchange contracts			$37		$40			$40			$125		$122




Debt instruments			4		3			3			7		11




Interest rate agreements			1		(1	)		(1	)		3		(3	)

	Total foreign currency and securities trading revenue(a)		$42		$42			$42			$135		$130

(a) The Corporation recorded an unrealized gain of less than $1 million at both Sept. 30, 2000 and June 30, 2000, related to securities held in the trading portfolio. There was no unrealized gain or loss recorded at Sept. 30, 1999, related to securities held in the trading portfolio.

Note 9 — Business sectors

Lines of business that offer similar or related products and services to common or similar customer segments have been combined into six core 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 and private banking. 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 substantially all of the 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 tables on pages 8 and 9 and the first paragraph on page 10, as well as the Divestitures and Real Estate Workout/ Other Activity paragraphs on page 17. The tables, through “Average Tier I preferred equity”, and information in those paragraphs are incorporated by reference into these Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS (continued)

Note 10 — Earnings per share (a)




				Quarter ended								Nine months ended

(dollar amounts in millions, except per				Sept. 30,		June 30,		Sept. 30,				Sept. 30,		Sept. 30,
share amounts; common shares in thousands)				2000		2000		1999				2000		1999

Basic earnings per share




Income before cumulative effect of accounting change					$252		$247		$231				$752		$749




Cumulative effect of accounting change					—		—		—				—		(26	)

Net income					$252		$247		$231				$752		$723

Average common shares outstanding					488,188		489,480		511,777				491,458		517,790
Basic earnings per share:




Income before cumulative effect of accounting change					$.52		$.50		$.46				$1.53		$1.45




Cumulative effect of accounting change					—		—		—				—		(.05	)

		Net income			$.52		$.50		$.46				$1.53		$1.40

Diluted earnings per share




			Net income		$252		$247		$231	(b	)		$752		$723	(b)

Average common shares outstanding					488,188		489,480		511,777				491,458		517,790




Common stock equivalents:




	Stock options				7,144		5,623		6,788				5,981		7,318




	Common shares issuable upon conversion of
	7 1/4% Convertible Subordinated Capital Notes				—		—		40				—		74

			Total		495,332		495,103		518,605				497,439		525,182

Diluted earnings per share:




Income before cumulative effect of accounting change					$.51		$.50		$.45				$1.51		$1.43
Cumulative effect of accounting change					—		—		—				—		(.05	)

		Net income			$.51		$.50		$.45				$1.51		$1.38

(a) Calculated based on unrounded numbers.

(b) The after-tax benefit of interest expense on the assumed conversion of the 7 1/4% Convertible Subordinated Capital Notes was less than $1 million for the quarter and nine months ended Sept. 30, 1999.

NOTES TO FINANCIAL STATEMENTS (continued)

Note 11 — Supplemental information to the Consolidated Statement of Cash Flows

Noncash investing and financing transactions that, appropriately, are not reflected in the Consolidated Statement of Cash Flows are listed in the following table.



	Nine months ended
	Sept. 30,

(in millions)	2000		1999

Net transfers to real estate acquired		$6		$9

Note 12 — Legal proceedings

A discussion of legal actions and proceedings against the Corporation and its subsidiaries is presented in Part II, Item 1, of this Form 10-Q.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Various legal actions and proceedings are pending or are threatened against the Corporation and its subsidiaries, some of which seek relief or damages in amounts that are substantial. These actions and proceedings arise in the ordinary course of the Corporation’s businesses and include suits relating to its lending, collections, servicing, investment, mutual fund, advisory, trust, custody, benefits consulting and other activities. Because of the complex nature of some of these actions and proceedings, it may be a number of years before such matters ultimately are resolved. After consultation with legal counsel, management believes that the aggregate liability, if any, resulting from such pending and threatened actions and proceedings will not have a material adverse effect on the Corporation’s financial condition.

Item 2. Changes in Securities and Use of Proceeds.

(c) On July 21, 2000, the Corporation issued 109,000 shares of common stock to Wachovia Bank, N.A., as Trustee of the Mellon Financial Corporation Deferred Share Award Trust. In consideration for the issuance of the shares, Wachovia Bank, as Trustee assumed the obligation of the Corporation under its Long-Term Profit Incentive Plan (1996) to deliver shares to individuals who received Deferred Share Awards under such Plan. The issuance of shares was exempt from the registration requirements of the Securities Act of 1933 under section 4(2) as a transaction not involving any public offering.

PART II — OTHER INFORMATION (continued)

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits


	3.1			Restated Articles of Incorporation of Mellon Financial Corporation, as amended and restated as of Sept. 17, 1998, and as amended Oct. 18, 1999.

	3.2			By-Laws of Mellon Financial Corporation, as amended, effective Oct. 19, 1999.

	4.1			Shareholder Protection Rights Agreement, dated as of Oct. 15, 1996, between Mellon Financial Corporation and Mellon Bank, N.A., as Rights Agent, as amended and restated as of Oct. 19, 1999.

	12.1			Computation of Ratio of Earnings to Fixed Charges (parent corporation).

	12.2			Computation of Ratio of Earnings to Fixed Charges (Mellon Financial Corporation and its subsidiaries).

	27.1			Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed.

(b) Reports on Form 8-K

During the third quarter of 2000, the Corporation filed the following Current Reports on Form 8-K:


	(1)			A report dated July 18, 2000, which included, under Items 5 and 7, the Corporation’s press release regarding second quarter 2000 results of operations.

	(2)			A report dated July 21, 2000, which included, under Items 5 and 7, as an exhibit incorporated by reference into Registration Statement Nos. 333-33248 and 333-33248-01, a subordinated indenture, dated as of June 12, 2000, among Mellon Funding Corporation as Issuer, Mellon Financial Corporation as Guarantor, and Bank One Trust Company, N.A. as Trustee.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MELLON FINANCIAL CORPORATION

(Registrant)

Date: November 9, 2000

By: /s/ Steven G. Elliott

       Steven G. Elliott

       Senior Vice Chairman and

       Chief Financial Officer

       (Duly Authorized Officer and

       Principal Financial Officer of

       the Registrant)

CORPORATE INFORMATION


Business of the Corporation		Mellon Financial Corporation is a global financial services company providing a comprehensive range of financial products and services in domestic and selected international markets. Through its six business sectors (Wealth Management, Global Investment Management, Global Investment Services, Regional Consumer Banking, Specialized Commercial Banking and Large Corporate Banking), the Corporation provides wealth management and global 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 in selected geographies. The Corporation’s asset management companies, which include The Dreyfus Corporation in the United States and Newton Management Limited in the United Kingdom, provide investment products in many asset classes and investment styles. Mellon is a global provider of custody, retirement and benefits consulting services through its Mellon Trust and Buck Consultants affiliates. Mellon’s principal executive office is located at One Mellon Center, 500 Grant Street, Pittsburgh, PA 15258-0001 (Telephone: (412) 234-5000).

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.

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 and Dividend Reinvestment Plan		The Direct Stock Purchase and Dividend Reinvestment Plan provides a way to purchase shares of common stock directly from the Corporation at the market value for such shares. Nonshareholders may 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.


Phone Contacts	Corporate Communications/ Media Relations	(412) 236-1264	Media inquiries
	Direct Stock Purchase and Dividend Reinvestment Plan	1 800 842-7629	Plan prospectus and enrollment materials
	Publication Requests	1 800 205-7699	Requests for the Annual Report or quarterly information
	Securities Transfer Agent	1 800 205-7699	Questions regarding stock holdings, certificate replacement/transfer, dividends and address changes
	Investor Relations	(412) 234-5601	Questions regarding the Corporation’s financial performance


Shareholder Publications		Quarterly earnings and other news releases can be obtained by fax by calling Company News on Call at 1 800 758-5804 and entering a six-digit code (552187). Copies of Mellon’s filings with the Securities and Exchange Commission on Form 10-K, 10-Q and 8-K may be obtained by sending a written request to the Secretary of the Corporation at One Mellon Center, Room 4826, Pittsburgh, PA 15258-0001.

Internet Access		Mellon: www.mellon.com Buck: www.buckconsultants.com ChaseMellon Shareholder 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

Index to Exhibits


Exhibit No.		Description	Method of Filing

	3.1	Restated Articles of Incorporation of Mellon Financial Corporation, as amended and restated as of Sept. 17, 1998, and as amended Oct. 18, 1999.	Previously filed as Exhibit 3.1 to Quarterly Report on Form 10-Q (File No. 1-7410) for the quarter ended Sept. 30, 1999, and incorporated herein by reference.

	3.2	By-Laws of Mellon Financial Corporation, as amended, effective Oct. 19, 1999.	Previously filed as Exhibit 3.2 to Quarterly Report on Form 10-Q (File No. 1-7410) for the quarter ended Sept. 30, 1999, and incorporated herein by reference.

	4.1	Shareholder Protection Rights Agreement, dated as of Oct. 15, 1996, between Mellon Financial Corporation and Mellon Bank, N.A., as Rights Agent, as amended and restated as of Oct. 19, 1999.	Previously filed as Exhibit 1 to Form 8-A/ A Registration Statement (File No. 1-7410) dated Oct. 19, 1999, and incorporated herein by reference.

	12.1	Computation of Ratio of Earnings to Fixed Charges (parent corporation).	Filed herewith.

	12.2	Computation of Ratio of Earnings to Fixed Charges (Mellon Financial Corporation and its subsidiaries).	Filed herewith.

	27.1	Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed.	Submitted herewith.

(a)		Includes $330 billion of assets at Sept. 30, 2000; $320 billion of assets at June 30, 2000; $325 billion of assets at March 31, 2000; $324 billion of assets at Dec. 31, 1999; and $350 billion of assets at Sept. 30, 1999, administered by CIBC Mellon Global Securities Services, a joint venture.




(b)		Assets administered by the Corporation under ABN AMRO Mellon, a strategic alliance of the Corporation and ABN AMRO, were $84 billion at Sept. 30, 2000; $64 billion at June 30, 2000; $60 billion at March 31, 2000; $58 billion at Dec. 31, 1999; and $32 billion at Sept. 30, 1999.



Distribution of domestic commercial real estate loans		Sept. 30,		June 30,		Dec. 31,		Sept. 30,
(in millions)		2000		2000		1999		1999

Commercial mortgage and construction loans		$	2,024	$	1,960	$	1,788	$	1,740




Owner-occupied and other loans (a)			943		896		863		854

	Total domestic commercial real estate loans	$	2,967	$	2,856	$	2,651	$	2,594

(a)		Generic swaps’ notional amounts and lives are not based upon interest rate indices.

(b)		Callable swaps are generic swaps with a call option at the option of the counterparty. Call options will be exercised or not exercised on the basis of market interest rates. Expected maturity dates, based upon interest rates at Sept. 30, 2000, are shown in this table.

(c)		Represents index amortizing swaps with weighted average receive and pay rates of 7.10% and 6.72%, respectively.

(a)		The amount of credit risk associated with these instruments is limited to the cost of replacing a contract in a gain position, on which a counterparty may default. Credit risk associated with these instruments was $17 million at Sept. 30, 2000, $3 million at June 30, 2000, $7 million at Dec. 31, 1999, and $7 million at Sept. 30, 1999.

(b)		The credit risk associated with interest rate agreements is calculated after considering master netting agreements.


(a)	Includes $67 million, $66 million, $43 million, and $58 million, respectively, of loans with both principal and interest less than 90 days past due but placed on nonaccrual status by management discretion.


(a)	Includes $72 million, $154 million and $43 million of impaired loans with a related impairment reserve of $25 million, $26 million and $10 million at Sept. 30, 2000, June 30, 2000 and Sept. 30, 1999, respectively.
(b)	All income was recognized using the cash basis method of income recognition.


(a)	The Corporation recorded an unrealized gain of less than $1 million at both Sept. 30, 2000 and June 30, 2000, related to securities held in the trading portfolio. There was no unrealized gain or loss recorded at Sept. 30, 1999, related to securities held in the trading portfolio.


(a)	Calculated based on unrounded numbers.

(b)	The after-tax benefit of interest expense on the assumed conversion of the 7 1/4% Convertible Subordinated Capital Notes was less than $1 million for the quarter and nine months ended Sept. 30, 1999.



	Steven G. Elliott
	Senior Vice Chairman and
	Chief Financial Officer
	(Duly Authorized Officer and
	Principal Financial Officer of
	the Registrant)