<SEC-DOCUMENT>0000950128-99-001088-index.html : 19991111

<SEC-HEADER>0000950128-99-001088.hdr.sgml : 19991111

ACCESSION NUMBER:      0000950128-99-001088

CONFORMED SUBMISSION TYPE: 10-Q

PUBLIC DOCUMENT COUNT:     6

CONFORMED PERIOD OF REPORT:     19990930

FILED AS OF DATE:      19991110

 

FILER:

 

     COMPANY DATA:

         COMPANY CONFORMED NAME:             MELLON FINANCIAL CORP

         CENTRAL INDEX KEY:              0000064782

         STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021]

         IRS NUMBER:                251233834

         STATE OF INCORPORATION:             PA

         FISCAL YEAR END:           1231

 

     FILING VALUES:

         FORM TYPE:        10-Q

         SEC ACT:     

         SEC FILE NUMBER:  001-07410

         FILM NUMBER:      99745272

 

     BUSINESS ADDRESS:

         STREET 1:         ONE MELLON BANK CTR

         STREET 2:         500 GRANT ST

         CITY:             PITTSBURGH

         STATE:            PA

         ZIP:          15258-0001

         BUSINESS PHONE:        4122345000

 

     FORMER COMPANY:  

         FORMER CONFORMED NAME: MELLON BANK CORP

         DATE OF NAME CHANGE:   19920703

 

     FORMER COMPANY:  

         FORMER CONFORMED NAME: MELLON NATIONAL CORP

         DATE OF NAME CHANGE:   19841014

</SEC-HEADER>

<DOCUMENT>

<TYPE>10-Q

<SEQUENCE>1

<DESCRIPTION>MELLON FINANCIAL CORP.

<TEXT>

 

<PAGE>   1

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                                  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, 1999

 

                                       or

 

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

                     OF THE SECURITIES EXCHANGE ACT OF 1934

 

                           Commission File No. 1-7410

 

 

                          MELLON FINANCIAL CORPORATION

                       (formerly Mellon Bank Corporation)

             (Exact name of registrant as specified in its charter)

 

 

              Pennsylvania                               25-1233834

    (State or other jurisdiction of                   (I.R.S. Employer

     incorporation or organization)                  Identification No.)

 

                             One Mellon Bank Center

                       Pittsburgh, Pennsylvania 15258-0001

               (Address of principal executive offices)(Zip Code)

 

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

 

                             MELLON BANK CORPORATION

              (Former name, former address and former fiscal year,

                         if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during

the preceding 12 months (or for such shorter period that the registrant was

required to file such reports), and (2) has been subject to such filing

requirements for the past 90 days.

 

                                 Yes  X     No

                                    ----      ----

 

Indicate the number of shares outstanding of each of the issuer's classes of

common stock, as of the latest practicable date.

 

                                                   Outstanding as of

                Class                              September 30, 1999

                -----                              ------------------

 

      Common Stock, $.50 par value                    508,650,024

 

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<PAGE>   2

 

 

 

 

                TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX

 

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                                                                      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                                       47

    Consolidated Income Statement - Five Quarter Trend                  49

    Consolidated Balance Sheet                                          51

    Consolidated Statement of Cash Flows                                52

    Consolidated Statement of Changes in Shareholders' Equity           54

 

Notes to Financial Statements                                           56

 

 

Part II - Other Information

---------------------------

 

Legal Proceedings (Item 1)                                              63

 

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

 

Signature                                                               65

 

Corporate Information                                                   66

 

Index to Exhibits                                                       67

 

 

 

 

 

Cautionary Statement

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This Quarterly Report on Form 10-Q contains statements relating to future

results of the Corporation that are considered "forward-looking statements"

within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements relate to, among other things, the year 2000 project; the

effects of divestitures; simulation of changes in interest rates; and litigation

results. Actual results may differ materially from those expressed or implied as

a result of certain risks and uncertainties, including, but not limited to,

changes in political and economic conditions; interest rate fluctuations;

competitive product and pricing pressures within the Corporation's markets;

equity and fixed-income market fluctuations; personal and corporate customers'

bankruptcies; inflation; acquisitions and integrations of acquired businesses;

technological change; changes in law; changes in fiscal, monetary, regulatory

and tax policies; monetary fluctuations; success in gaining regulatory approvals

when required; as well as other risks and uncertainties detailed elsewhere in

this quarterly report or from time to time in the filings of the Corporation

with the Securities and Exchange Commission. Such forward-looking statements

speak only as of the date on which such statements are made, and the Corporation

undertakes no obligation to update any forward-looking statement to reflect

events or circumstances after the date on which such statement is made or to

reflect the occurrence of unanticipated events.

 

 

<PAGE>   3

 

 

<TABLE>

<CAPTION>

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FINANCIAL HIGHLIGHTS                                                  Quarter ended                          Nine months ended

                                                       ------------------------------------------         -------------------------

                                                       SEPT. 30,        June 30,       Sept. 30,          SEPT. 30,      Sept. 30,

                                                            1999            1999            1998               1999           1998

-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                    <C>              <C>            <C>               <C>             <C>

FINANCIAL RESULTS

 

Diluted earnings per common share:

  Operating                                             $    .46  (a)   $    .45  (a)      $ .41            $1.34  (a)      $1.20

  Cash operating (b)                                         .52  (a)        .50  (a)        .47             1.51  (a)       1.36

  Reported                                                   .45             .45             .41             1.38            1.20

Net income applicable to common stock (in millions):

  Operating                                             $    236  (a)   $    236  (a)      $ 218            $ 703  (a)      $ 639

  Cash operating (b)                                         266  (a)        266  (a)        246              792  (a)        720

  Reported                                                   231             238             218              723             639

Return on common equity (annualized):

  Operating                                                 22.3% (a)       21.4% (a)       20.3%            21.5% (a)       20.9%

  Cash operating (b)                                        43.7  (a)       41.1  (a)       40.2             41.7  (a)       41.2

  Reported                                                  21.8            21.6            20.3             22.1            20.9

Return on assets (annualized):

  Operating                                                 1.92% (a)       1.90% (a)       1.81%            1.89% (a)       1.83%

  Cash operating (b)                                        2.25  (a)       2.23  (a)       2.11             2.21  (a)       2.13

  Reported                                                  1.87            1.92            1.81             1.94            1.83

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SELECTED KEY DATA

 

Fee revenue as a percentage of net interest

  and fee revenue (FTE)                                       69%             69%             66%              69%             66%

Efficiency ratio excluding amortization of

  intangibles (c)                                             61%             62%             62%              61%             63%

 

Assets under management (in billions) (d)               $    446        $    465        $    368

Assets under administration or

  custody (in billions) (d)                                2,156           2,061           1,642

 

Dividends paid per common share                         $    .20        $    .20        $    .18         $    .58        $    .53

Dividends paid on common stock (in millions)                 103             104              94              301             271

 

Closing common stock price (d)                            $33.63        $  36.38        $  27.50

Market capitalization (in millions) (d)                   17,103          18,704          14,363

Average common shares and equivalents

  outstanding - diluted (in thousands)                   518,605         525,712         531,548          525,182         529,884

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CAPITAL RATIOS AT PERIOD END

 

Shareholders' equity to assets:

  Reported                                                  9.00%           8.77%           9.03%

  Tangible (b)                                              5.45            5.29            5.47

Tier I capital                                              7.12            6.87            6.78

Total (Tier I plus Tier II) capital                        11.58           11.18           11.22

Leverage capital                                            6.82            6.70            7.06

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</TABLE>

 

 

                                  (continued)

 

 

                                       2

<PAGE>   4

 

 

<TABLE>

<CAPTION>

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FINANCIAL HIGHLIGHTS (CONTINUED)                                  Quarter ended                              Nine months ended

                                                         ----------------------------------------         ------------------------

                                                         SEPT. 30,        June 30,      Sept. 30,         SEPT. 30,      Sept. 30,

(dollar amounts in millions)                                  1999            1999           1998              1999           1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>              <C>           <C>               <C>            <C>

AVERAGE BALANCES FOR THE PERIOD

 

Loans                                                      $30,177         $30,504        $30,426           $30,711        $30,043

Total interest-earning assets                               38,407          39,015         37,797            39,072         37,396

Total assets                                                48,871          49,766         47,937            49,765         47,384

Total tangible assets (b)                                   47,012          47,878         46,096            47,876         45,631

Deposits                                                    33,462          33,358         33,399            33,633         33,227

Notes and debentures                                         3,372           3,387          3,003             3,370          2,935

Trust-preferred securities                                     991             991            991               991            991

Total shareholders' equity                                   4,212           4,417          4,265             4,365          4,123

Tangible common shareholders' equity (b)                     2,417           2,591          2,424             2,538          2,337

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a) Operating and cash operating results for the third quarter of 1999 exclude a

    $5 million after-tax net loss from divestitures. The second quarter of 1999

    excludes a $38 million after-tax net gain from divestitures and $36 million

    of nonrecurring expenses after taxes. Also excluded from the first nine

    months of 1999 are a $49 million after-tax net gain from divestitures and a

    $26 million after-tax charge for the cumulative effect of a change in

    accounting principle recorded in the first quarter of 1999.

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

(c) See page 26 for the definition of this ratio.

(d) Period-end amount.

 

Note: All calculations are based on unrounded numbers.

 

 

MANAGEMENT'S DISCUSSION AND ANALYSIS

   OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

-------------------------------------------------------------------------------

 

Diluted earnings per common share and net income applicable to common stock, on

a reported basis, were $.45 and $231 million, respectively, for the third

quarter of 1999. Third quarter 1999 reported results included a $5 million

after-tax net loss from divestitures. The annualized return on common equity and

return on assets, on a reported basis, were 21.8% and 1.87%, respectively, for

the third quarter of 1999.

 

Excluding the net loss from divestitures, third quarter 1999 diluted operating

earnings per common share totaled $.46, an increase of 12% compared with $.41 in

the third quarter of 1998. Operating net income applicable to common stock in

the third quarter of 1999 was $236 million, an increase of 8% compared with $218

million in the third quarter of 1998. The annualized return on common equity and

return on assets, on an operating basis, were 22.3% and 1.92%, respectively, for

the third quarter of 1999, compared with 20.3% and 1.81%, respectively, for the

third quarter of 1998. In the second quarter of 1999, diluted operating earnings

per common share totaled $.45 and operating net income applicable to common

stock was $236 million.

 

Diluted cash operating earnings per common share totaled $.52 in the third

quarter of 1999, an increase of 11%, compared with $.47 in the third quarter of

1998. Cash operating net income applicable to common stock was $266 million, an

increase of 8% compared with $246 million in the third quarter of 1998. The

annualized cash return on tangible common equity and cash return on tangible

assets, on an operating basis, were 43.7% and

 

 

                                       3

<PAGE>   5

 

 

OVERVIEW (CONTINUED)

-------------------------------------------------------------------------------

 

2.25%, respectively, in the third quarter of 1999, compared with 40.2% and

2.11%, respectively, in the third quarter of 1998. In the second quarter of

1999, diluted cash operating earnings per common share totaled $.50 and cash

operating net income applicable to common stock was $266 million.

 

Fee revenue for the third quarter of 1999 of $765 million was impacted by the

March 1999 sale of the credit card business, the June 1999 sale of the network

services transaction processing unit, the sale of the mortgage businesses that

was completed in the third quarter of 1999 and the October 1998 acquisition of

Newton Management Limited (Newton). Excluding the effect of acquisitions and

divestitures, fee revenue increased 9% compared with the third quarter of 1998,

primarily due to a 12% increase in trust and investment fee revenue. Excluding

the fee revenue generated by the mortgage businesses and the network services

transaction processing unit, fee revenue decreased 1% compared with the second

quarter of 1999, resulting from lower securities lending revenue, lower

brokerage fees and lower foreign currency and securities trading revenue. At

September 30, 1999, assets under management totaled $446 billion, a 21% increase

from September 30, 1998, and assets under administration or custody totaled

$2,156 billion, a 31% increase from September 30, 1998.

 

Net interest revenue on a fully taxable equivalent basis for the third quarter

of 1999 was $352 million, down $24 million compared with the prior-year period

and down $11 million from the second quarter of 1999. The decrease compared with

the third quarter of 1998 primarily resulted from the sale of the credit card

business. Excluding the net interest revenue generated by the credit card

business in the prior-year period, net interest revenue decreased $9 million

compared with the third quarter of 1998, reflecting lower loan fees and higher

funding costs related to the repurchase of common stock. The decrease compared

with the second quarter of 1999 resulted from higher funding costs related to

the repurchase of common stock as well as a lower level of interest-earning

assets.

 

Operating expense before trust-preferred securities expense and net revenue from

acquired property for the third quarter of 1999 was $716 million. Excluding the

effect of acquisitions and divestitures and $56 million of nonrecurring expenses

in the second quarter of 1999, operating expense was unchanged compared with the

third quarter of 1998 and decreased 2% compared with the second quarter of 1999,

reflecting the continuing focus on expense management and productivity.

 

Credit quality expense was $5 million in the third quarter of 1999, compared

with $12 million in the third quarter of 1998 and $5 million in the second

quarter of 1999. The lower expense in the third quarter of 1999 compared with

the prior-year period resulted from a lower provision for credit losses

following the sale of the credit card business, as well as higher net revenue

from acquired property. Net credit losses were $10 million in the third quarter

of 1999, compared with $15 million in the third quarter of 1998 and $11 million

in the second quarter of 1999.

 

Nonperforming assets totaled $169 million at September 30, 1999, compared with

$142 million at June 30, 1999, $161 million at March 31, 1999, and $140 million

at September 30, 1998. The Corporation's ratio of nonperforming assets to total

loans and net acquired property was .58% at September 30, 1999, compared with

 .46% at June 30, 1999, .53% at March 31, 1999, and .45% at September 30, 1998.

 

Year-to-date 1999 compared with year-to-date 1998

 

For the first nine months of 1999, the Corporation reported diluted earnings per

common share of $1.38 and net income applicable to common stock of $723 million.

Year-to-date 1999 results included an $82 million after-tax net gain from

divestitures, or $.16 per common share, $36 million after-tax of nonrecurring

 

 

 

                                       4

<PAGE>   6

 

 

OVERVIEW (CONTINUED)

-------------------------------------------------------------------------------

 

 

expenses, or $.07 per common share, and a $26 million after-tax charge for the

cumulative effect of a change in accounting principle, or $.05 per common share.

The annualized return on common equity and return on assets, on a reported

basis, were 22.1% and 1.94%, respectively, for the first nine months of 1999.

 

Excluding the net gain from divestitures, the nonrecurring expenses and the

charge for a change in accounting principle, year-to-date 1999 diluted operating

earnings per common share totaled $1.34, an increase of 12% compared with $1.20

in the first nine months of 1998. Operating net income applicable to common

stock in the first nine months of 1999 was $703 million, an increase of 10%

compared with $639 million in the first nine months of 1998. For the first nine

months of 1999, diluted cash operating earnings per common share totaled $1.51,

an increase of 11% compared with $1.36 in the first nine months of 1998. Cash

operating net income applicable to common stock totaled $792 million, an

increase of 10% compared with $720 million in the first nine months of 1998.

 

The comparison of fee revenue in the first nine months of 1999 to the first nine

months of 1998 was impacted by the credit card, network services and mortgage

banking divestitures, the Newton and Founders acquisitions and the elimination

of fees from the electronic filing of income tax returns, a service that was

discontinued at the end of 1998. Excluding these factors, fee revenue increased

12% compared with the first nine months of 1998, primarily due to a 13% increase

in trust and investment fee revenue. Net interest revenue decreased $31 million

in the first nine months of 1999 compared with the prior-year period. Excluding

the net interest revenue generated by the credit card business, net interest

revenue decreased $3 million compared with the first nine months of 1998,

reflecting lower loan fees and higher funding costs related to the repurchase of

common stock, partially offset by a higher level of interest-free funds.

Excluding the effect of the nonrecurring expenses, acquisitions and

divestitures, operating expense before trust-preferred securities expense and

net revenue from acquired property increased 2% in the first nine months of 1999

compared with the first nine months of 1998.

 

 

SIGNIFICANT FINANCIAL EVENTS

-------------------------------------------------------------------------------

 

 

Divestitures

 

In January 1999, the Corporation announced its intentions to sell its credit

card business, mortgage businesses and network services transaction processing

unit as part of an initiative to sharpen its strategic focus on businesses with

the highest growth and return potential. In March 1999, the Corporation

completed the sale of the credit card business to Citibank, a unit of Citigroup.

In June 1999, the Corporation completed the sale of the network services

transaction processing unit to U.S. Bancorp. In addition, the sale of the

commercial mortgage servicing business to GMAC Commercial Mortgage Corporation,

which began during the second quarter of 1999 on a portfolio-by-portfolio basis,

was completed by September 30, 1999. Finally, on September 30, 1999, the

Corporation sold its residential mortgage business to Chase Mortgage Company, a

subsidiary of The Chase Manhattan Corporation.

 

In the third quarter of 1999, the Corporation recorded an $8 million pre-tax net

loss from divestitures. The after-tax net loss from these transactions totaled

$5 million, or $.01 per common share. The net loss primarily resulted from an

adjustment to the previous write-downs recorded to reflect the net sales

proceeds received for the residential and commercial mortgage servicing

businesses. This loss was partially offset by an additional gain related to the

sale of the network services transaction processing unit as more customers

converted to the purchaser, as well as a gain on the sale of seven Mellon (MD)

retail offices in September 1999, as discussed further on the following page.

The Corporation expects a favorable impact on operating results in the future

following the sale of the mortgage businesses, which generated an after-tax

operating loss of approximately

 

 

 

                                       5

<PAGE>   7

 

 

SIGNIFICANT FINANCIAL EVENTS (CONTINUED)

-------------------------------------------------------------------------------

 

 

$5 million, or approximately $.01 per common share, in the third quarter of

1999. Including the $142 million pre-tax net gain reported in the first six

months of 1999, the pre-tax net gain from divestitures totaled $134 million for

the first nine months of 1999. For an analysis of the financial impact of these

divestitures, see the "Divestitures" disclosure in the "Business sectors"

section on pages 8 through 17. Excluding the net gain on the sales, the future

impact of the credit card business, mortgage businesses and network services

transaction processing unit divestitures on the Corporation's earnings is not

expected to be material. Proceeds from these divestitures will be invested in

the Corporation's remaining businesses, used for acquisitions and/or to

repurchase common stock.

 

Sale of Mellon (MD) Retail Offices

 

In September 1999, Mellon Bank (MD) National Association completed the sale of

its seven retail offices, including approximately $225 million of deposits and

$35 million of loans, to Sandy Spring National Bank of Maryland. The Corporation

will continue to have a significant presence in the Maryland market by

maintaining and expanding its commercial lending, private banking, jumbo

mortgage and consulting/operational businesses in the region.

 

Repurchase of common stock

 

In January 1999, the Corporation's board of directors approved an enhancement to

an existing common share repurchase authorization by increasing the number of

the Corporation's shares authorized for repurchase to 20 million shares. During

the third quarter of 1999, 6.6 million shares of common stock were repurchased,

completing the 20 million share repurchase program. In September 1999, the board

of directors authorized an additional repurchase of up to 25 million shares of

common stock to be used for general corporate purposes.

 

Corporate name change

 

On October 18, 1999, the Corporation's name was changed to Mellon Financial

Corporation to more clearly communicate its strategic focus. In addition, on the

same day Mellon Financial Company, the Corporation's financing entity, changed

its corporate name to Mellon Funding Corporation.

 

 

 

 

                                       6

<PAGE>   8

 

 

CASH OPERATING RESULTS

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Except for the merger with Dreyfus in 1994, which was accounted for under the

"pooling of interests" method, the Corporation has been required to account for

business combinations under the "purchase" method of accounting. The purchase

method results in the recording of goodwill and other identified intangibles

that are amortized as noncash charges in future years into operating expense.

The pooling of interests method does not result in the recording of goodwill or

intangibles. Since goodwill and intangible amortization expense does not result

in a cash expense, the economic value accruing to shareholders under either

accounting method is the same assuming a given financing mix. Operating results,

excluding the impact of intangibles, are shown in the table below.

 

 

<TABLE>

<CAPTION>

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                                                               Quarter ended                                Nine months ended

                                                     -------------------------------------------       --------------------------

(dollar amounts in millions                          SEPT. 30,          June 30,      Sept. 30,        SEPT. 30,       Sept. 30,

 except per share amounts)                                1999  (a)         1999 (a)       1998             1999  (a)       1998

-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>               <C>             <C>             <C>             <C>

Operating net income applicable to

  common stock                                         $   236          $   236         $   218           $   703        $   639

After-tax impact of amortization

  of intangibles from purchase acquisitions                 30               30              28                89             81

---------------------------------------------------------------------------------------------------------------------------------

    Cash operating net income applicable

      to common stock                                  $   266          $   266         $   246           $   792        $   720

        Increase over prior-year period                      8%               9%             16%               10%            16%

    Cash operating earnings per common

      share - diluted                                  $   .52          $   .50         $   .47           $  1.51        $  1.36

        Increase over prior-year period                     11%              11%             16%               11%            15%

 

Average common equity                                  $ 4,212          $ 4,417         $ 4,265           $ 4,365        $ 4,089

Less:  Average goodwill and other identified

         intangibles, net of tax benefit (b)            (1,859)          (1,888)         (1,841)           (1,889)        (1,752)

Plus:  Average minority interest (c)                        64               62               -                62              -

---------------------------------------------------------------------------------------------------------------------------------

    Average tangible common equity (b)                 $ 2,417          $ 2,591         $ 2,424           $ 2,538        $ 2,337

    Cash return on tangible common

      equity (b)(d)                                       43.7%            41.1%           40.2%             41.7%          41.2%

 

Average total assets                                   $48,871          $49,766         $47,937           $49,765        $47,384

Average total tangible assets (b)                      $47,012          $47,878         $46,096           $47,876        $45,631

Cash return on tangible assets (b)(d)                     2.25%            2.23%           2.11%             2.21%          2.13%

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</TABLE>

 

(a)  Cash operating results for the third quarter of 1999 exclude a $5 million

     after-tax net loss from divestitures. The second quarter of 1999 excludes a

     $38 million after-tax net gain from divestitures and $36 million after-tax

     of nonrecurring expenses. Also excluded from the first nine months of 1999

     are a $49 million after-tax net gain from divestitures and a $26 million

     after-tax charge for the cumulative effect of a change in accounting

     principle recorded in the first quarter of 1999.

(b)  The amount of goodwill and other identified intangibles subtracted from

     common equity and total assets is net of $361 million, $368 million, $299

     million, $368 million and $253 million, respectively, of average tax

     benefits related to tax deductible goodwill and other intangibles.

(c)  Following the fourth quarter 1998 acquisition of a majority interest in

     Newton, the Corporation began to include minority interest in the

     calculation of average tangible common equity. Minority interest at both

     September 30, 1999, and June 30, 1999, totaled $64 million.

(d)  Ratios are annualized.

 

 

 

 

                                       7

<PAGE>   9

BUSINESS SECTORS

--------------------------------------------------------------------------------

FOR THE QUARTER ENDED SEPTEMBER 30,

 

 

<TABLE>

<CAPTION>

                                                          Global              Global           Regional         Specialized

                                      Wealth             Investment          Investment        Consumer          Commercial

                                     Management          Management           Services          Banking            Banking

(dollar amounts in millions,       ---------------     ---------------     ---------------   ----------------  ----------------

averages in billions)               1999      1998      1999      1998      1999     1998     1999     1998     1999     1998

-------------------------------------------------------------------------------------------------------------------------------

<S>                                <C>       <C>       <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>

Revenue:

  Net interest revenue (expense)   $  37     $  35     $  (3)    $  (2)    $  15    $  11    $ 122    $ 126    $ 104    $  98

  Fee revenue                         78        68       249       195       222      209       39       47       34       25

-------------------------------------------------------------------------------------------------------------------------------

    Total revenue                    115       103       246       193       237      220      161      173      138      123

Credit quality expense (revenue)      (3)       (1)       --        --        --       --        3        2        1        1

Operating expense:

  Intangible amortization              5         4         7         6         3        3       13       13        7        7

  Trust-preferred securities          --        --        --        --        --       --        1        1        4        2

  Other                               59        54       156       116       182      172       92       99       53       52

-------------------------------------------------------------------------------------------------------------------------------

    Total operating expense           64        58       163       122       185      175      106      113       64       61

-------------------------------------------------------------------------------------------------------------------------------

Income (loss) before taxes            54        46        83        71        52       45       52       58       73       61

Income taxes (benefits)               21        18        34        28        21       19       19       21       27       23

-------------------------------------------------------------------------------------------------------------------------------

  Net income (loss)                $  33     $  28     $  49     $  43     $  31    $  26    $  33    $  37    $  46    $  38

-------------------------------------------------------------------------------------------------------------------------------

Cash net income (loss) (a)         $  38     $  32     $  56     $  48     $  34    $  29    $  42    $  46    $  50    $  43

-------------------------------------------------------------------------------------------------------------------------------

Average assets                     $ 6.3     $ 5.7     $ 2.0     $ 1.5     $ 1.6    $ 1.4    $13.9    $13.0    $12.4    $10.9

Average common equity              $ 0.4     $ 0.4     $ 0.5     $ 0.4     $ 0.5    $ 0.4    $ 0.7    $ 0.6    $ 0.7    $ 0.7

Average Tier I preferred equity    $  --     $  --     $  --     $  --     $  --    $  --    $ 0.1    $ 0.1    $ 0.1    $ 0.1

-------------------------------------------------------------------------------------------------------------------------------

Return on common equity (b)           35%       30%       37%       39%       24%      27%      19%      23%      24%      21%

Return on assets (b)                2.14%     1.87%       NM        NM        NM       NM     0.94%    1.14%    1.46%    1.34%

Pretax operating margin               47%       43%       34%       37%       22%      20%      32%      34%      53%      49%

Pretax operating margin (c)           52%       48%       37%       40%       23%      22%      41%      42%      61%      57%

Efficiency ratio (c)                  51%       52%       63%       60%       77%      78%      58%      57%      38%      43%

-------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

-------------------------------------------------------------------------------

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

 

<TABLE>

<CAPTION>

                                                           Global              Global          Regional         Specialized

                                      Wealth             Investment          Investment        Consumer         Commercial

                                     Management          Management           Services          Banking           Banking

(dollar amounts in millions,       ---------------     ---------------    ----------------  ----------------  -----------------

averages in billions)               1999     1998       1999     1998       1999     1998     1999     1998     1999     1998

-------------------------------------------------------------------------------------------------------------------------------

<S>                                <C>       <C>       <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>

Revenue:

  Net interest revenue (expense)   $ 113     $ 102     $  (8)    $  (2)    $  39    $  33    $ 368    $ 377    $ 304    $ 279

  Fee revenue                        236       199       731       557       667      615      120      115       87       76

-------------------------------------------------------------------------------------------------------------------------------

    Total revenue                    349       301       723       555       706      648      488      492      391      355

Credit quality expense (revenue)      (5)       (2)       --        --        --       --        8        9        9        7

Operating expense:

  Intangible amortization             15        13        22        14         9        9       37       37       22       21

  Trust-preferred securities           1        --        --        --        --       --        3        3        9        7

  Other                              179       154       458       334       538      515      289      292      163      157

-------------------------------------------------------------------------------------------------------------------------------

    Total operating expense          195       167       480       348       547      524      329      332      194      185

-------------------------------------------------------------------------------------------------------------------------------

Income (loss) before taxes and

  cumulative effect of

  accounting change                  159       136       243       207       159      124      151      151      188      163

Income taxes (benefits)               61        52       100        86        64       51       56       56       71       62

-------------------------------------------------------------------------------------------------------------------------------

Income (loss) before cumulative

  effect of accounting change         98        84       143       121        95       73       95       95      117      101

Cumulative effect of

  accounting change (d)               --        --        --        --        --       --       --       --       --       --

-------------------------------------------------------------------------------------------------------------------------------

    Net income (loss)              $  98     $  84     $ 143     $ 121     $  95    $  73    $  95    $  95    $ 117    $ 101

-------------------------------------------------------------------------------------------------------------------------------

Cash net income (loss) (a)         $ 112     $  96     $ 160     $ 133     $ 104    $  82    $ 122    $ 122    $ 134    $ 117

-------------------------------------------------------------------------------------------------------------------------------

Average assets                     $ 6.3     $ 5.5     $ 1.9     $ 1.4     $ 1.7    $ 1.3    $14.1    $12.8    $12.0    $10.4

Average common equity              $ 0.4     $ 0.3     $ 0.5     $ 0.4     $ 0.5    $ 0.4    $ 0.7    $ 0.6    $ 0.7    $ 0.7

Average Tier I preferred equity    $  --     $  --     $  --     $  --     $  --    $  --    $ 0.1    $ 0.1    $ 0.1    $ 0.1

-------------------------------------------------------------------------------------------------------------------------------

Return on common equity (b)           35%       32%       37%       38%       26%      25%      19%      20%      21%      21%

Return on assets (b)                2.11%     2.03%       NM        NM        NM       NM     0.90%    0.99%    1.30%    1.30%

Pretax operating margin               46%       45%       34%       37%       22%      19%      31%      31%      48%      46%

Pretax operating margin (c)           50%       49%       37%       40%       24%      20%      39%      39%      56%      54%

Efficiency ratio (c)                  51%       51%       63%       60%       76%      80%      59%      59%      42%      44%

-------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Excludes the after-tax impact of the amortization of goodwill and other

     intangibles from purchase acquisitions.

(b)  Annualized.

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

     expense.

(d)  The cumulative effect of an accounting change has not been allocated to any

     of the Corporation's reportable sectors.

(e)  Includes $(8) million and $134 million, respectively, in pre-tax net gains

     (losses) from divestitures for the three and nine month periods ended

     September 30, 1999.

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

     nonrecurring expenses.

NM - Not meaningful.

 

                                       8

<PAGE>   10

 

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

               Large                                                                    Real Estate

             Corporate               Total Core                                        Workout/Other               Consolidated

              Banking                  Sectors                 Divestitures               Activity                    Results

           ----------------       -----------------           ---------------        -----------------           ------------------

            1999       1998         1999       1998           1999       1998          1999       1998             1999       1998

-----------------------------------------------------------------------------------------------------------------------------------

           <S>       <C>          <C>        <C>              <C>       <C>            <C>        <C>            <C>        <C>

           $  67     $   66       $  342     $  334           $  8      $  35          $  2       $  7           $  352     $  376

              65         57          687        601             70 (e)    112             6          5              763        718

-----------------------------------------------------------------------------------------------------------------------------------

             132        123        1,029        935             78        147             8         12            1,115      1,094

               7         --            8          2             --         13            (3)        (3)               5         12

 

              --         --           35         33              2          2            --         --               37         35

               6          6           11          9             --          1             9         10               20         20

              74         75          616        568             63        114            --         --              679        682

-----------------------------------------------------------------------------------------------------------------------------------

              80         81          662        610             65        117             9         10              736        737

-----------------------------------------------------------------------------------------------------------------------------------

              45         42          359        323             13         17             2          5              374        345

              16         15          138        124              6          7            (1)        (4)             143        127

-----------------------------------------------------------------------------------------------------------------------------------

           $  29     $   27       $  221     $  199           $  7      $  10          $  3       $  9           $  231     $  218

-----------------------------------------------------------------------------------------------------------------------------------

           $  29     $   27       $  249     $  225           $  9      $  12          $  3       $  9           $  261     $  246

-----------------------------------------------------------------------------------------------------------------------------------

           $ 9.2     $  9.9       $ 45.4     $ 42.4           $2.2      $ 4.4          $1.3       $1.1           $ 48.9     $ 47.9

           $ 1.0     $  1.0       $  3.8     $  3.5           $0.2      $ 0.3          $0.2       $0.5           $  4.2     $  4.3

           $ 0.3     $  0.3       $  0.5     $  0.5           $ --      $  --          $0.5       $0.5           $  1.0     $  1.0

-----------------------------------------------------------------------------------------------------------------------------------

             12%        11%          23%        22%             NM         NM            NM         NM              22%        20%

           1.22%      1.10%        1.93%      1.86%             NM         NM            NM         NM            1.87%      1.81%

             34%        35%          35%        35%             NM         NM            NM         NM              34% (f)    32%

             38%        39%          39%        39%             NM         NM            NM         NM              39% (f)    37%

             56%        61%          60%        61%             NM         NM            NM         NM              61% (f)    62%

-----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

 

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

               Large                                                                    Real Estate

             Corporate               Total Core                                        Workout/Other            Consolidated

              Banking                  Sectors                 Divestitures               Activity                 Results

           ----------------       ----------------           ---------------          -----------------      ----------------------

            1999       1998         1999       1998           1999       1998          1999       1998         1999         1998

-----------------------------------------------------------------------------------------------------------------------------------

          <S>       <C>          <C>        <C>              <C>       <C>            <C>        <C>         <C>        <C>

          $  202     $  195       $1,018     $  984           $ 51       $ 97          $ 17       $ 36       $1,086       $1,117

             197        181        2,038      1,743            418 (e)    366            41         30        2,497        2,139

-----------------------------------------------------------------------------------------------------------------------------------

             399        376        3,056      2,727            469        463            58         66        3,583        3,256

              13         --           25         14             11         32           (11)        (7)          25           39

 

               1          1          106         95              5          5            --         --          111          100

              17         17           30         27              1          2            28         30           59           59

             233        232        1,860      1,684            255        338            59         13        2,174        2,035

-----------------------------------------------------------------------------------------------------------------------------------

             251        250        1,996      1,806            261        345            87         43        2,344        2,194

-----------------------------------------------------------------------------------------------------------------------------------

 

 

             135        126        1,035        907            197         86           (18)        30        1,214        1,023

              49         45          401        352             76         32           (12)        (9)         465          375

-----------------------------------------------------------------------------------------------------------------------------------

 

              86         81          634        555            121         54            (6)        39          749          648

 

              --         --           --         --             --         --            --         --          (26)         --

-----------------------------------------------------------------------------------------------------------------------------------

          $   86     $   81       $  634     $  555           $121       $ 54          $ (6)      $ 39       $  723       $  648

-----------------------------------------------------------------------------------------------------------------------------------

          $   86     $   81       $  718     $  631           $126       $ 59          $ (6)      $ 39       $  812       $  729

-----------------------------------------------------------------------------------------------------------------------------------

          $  9.5     $ 10.2       $ 45.5     $ 41.6           $3.0       $4.4          $1.3       $1.4       $ 49.8       $ 47.4

          $  1.0     $  1.0       $  3.8     $  3.4           $0.2       $0.3          $0.4       $0.4       $  4.4       $  4.1

          $  0.3     $  0.3       $  0.5     $  0.5           $ --       $ --          $0.5       $0.5       $  1.0       $  1.0

-----------------------------------------------------------------------------------------------------------------------------------

             12%        11%          23%        22%             NM         NM            NM         NM          22%          21%

           1.21%      1.06%        1.86%      1.78%             NM         NM            NM         NM        1.94%        1.83%

             34%        34%          34%        33%             NM         NM            NM         NM          32% (f)      31%

             38%        38%          38%        38%             NM         NM            NM         NM          37% (f)      36%

             58%        62%          61%        62%             NM         NM            NM         NM          61% (f)      63%

-----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

 

 

                                       9

<PAGE>   11

 

 

BUSINESS SECTORS (CONTINUED)

--------------------------------------------------------------------------------

 

In the second quarter of 1999, the Corporation realigned its business sectors to

better reflect the Corporation's organizational structure, the characteristics

of its products and services, and the customer segments to which those products

and services are delivered. Lines of business that offer similar or related

products and services to common or similar customer segments have been combined

into six major business sectors. All prior periods have been restated. In

addition, the effect of Divestitures has been displayed separately, as discussed

further on page 15. The results of the Corporation's major business sectors are

presented and analyzed on an internal management reporting basis. Net interest

revenue, fee revenue and income taxes differ from the amounts shown in the

Consolidated Income Statement because amounts presented in Business sectors are

on a taxable equivalent basis. There is no intercompany profit or loss on

intersector activity. In addition, the accounting policies of the business

sectors are the same as those described in note 1 of the 1998 Annual Report to

Shareholders. Capital is allocated quarterly using the federal regulatory

guidelines, where applicable, as a basis, coupled with management's judgment

regarding the risks inherent in the individual lines of business. The capital

allocations may not be representative of the capital levels that would be

required if these sectors were nonaffiliated business units.

 

Following the decision to sell the credit card business, mortgage businesses and

network services transaction processing unit, the Corporation's core business

sectors were restated to exclude these businesses. In addition, core business

sectors were restated to exclude: the results of a mutual fund administration

service provided under a long-term contract that expires at the end of May 2000;

the gain on the sale of the Mellon Bank (MD) N.A. retail offices that were sold

in September 1999; the results of the merchant card processing business that was

sold in December 1998; and fee revenue from the electronic filing of income tax

returns, which was discontinued at the end of 1998. These businesses' results

are now reported as "Divestitures." Furthermore, the Real Estate Workout sector,

which previously had been reported separately, was combined with Other Activity.

The Real Estate Workout sector has diminished in significance as the level of

nonperforming real estate assets has decreased.

 

Following is a discussion of the Corporation's business sectors. In the tables

that follow, the income statement amounts are presented in millions, the assets

under management, administration and custody are period-end market values and

are presented in billions, and the return on common equity is annualized.

 

Total Core Sectors

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------

                                                                                    Growth rates

                                 Quarter ended         Nine months ended         -------------------

                             ---------------------   ----------------------       3Q 99    9 Mos 99

                             SEPT. 30,   Sept. 30,   SEPT. 30,   Sept. 30,          vs        vs

                                  1999        1998        1999        1998        3Q 98    9 Mos 98

-----------------------------------------------------------------------------------------------------

<S>                          <C>         <C>          <C>        <C>             <C>         <C>

Total revenue                   $1,029        $935      $3,056      $2,727          10%         12%

Total operating expense         $  662        $610      $1,996      $1,806           8%         10%

Income before taxes             $  359        $323      $1,035      $  907          12%         14%

Return on common equity             23%         22%         23%         22%

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

-----------------------------------------------------------------------------------------------------

</TABLE>

 

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

 

 

Income before taxes for the Corporation's core sectors was $359 million in the

third quarter of 1999, an increase of $36 million, or 12%, compared with the

prior-year period. This increase resulted from positive operating leverage as

revenues increased $94 million, or 10%, while operating expense increased $52

million, or 8%, and

 

 

                                       10

 

<PAGE>   12

 

 

BUSINESS SECTORS (CONTINUED)

-------------------------------------------------------------------------------

 

 

credit quality expense increased $6 million. The increase in total revenue was

primarily due to higher fee revenue resulting from business growth as well as

the October 1998 Newton acquisition which added $35 million of fee revenue.

Total operating expense increased primarily due to business growth as well as

acquisitions.

 

Income before taxes for the Corporation's core sectors was $1.035 billion in the

first nine months of 1999, an increase of $128 million, or 14%, compared with

the prior-year period, driven by a 12% increase in total revenue partially

offset by a 10% increase in operating expense and higher credit quality expense.

This increase in revenue and expense resulted primarily from business growth,

the Newton acquisition and the April 1998 Founders acquisition.

 

Wealth Management

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                                   Growth rates

                                               Quarter ended                  Nine months ended               --------------------

                                          ------------------------          -----------------------           3Q 99       9 Mos 99

                                          SEPT. 30,      Sept. 30,         SEPT. 30,      Sept. 30,             vs           vs

                                               1999           1998              1999           1998           3Q 98       9 Mos 98

----------------------------------------------------------------------------------------------------------------------------------

<S>                                      <C>             <C>               <C>            <C>                 <C>         <C>

Total revenue                                  $115           $103              $349           $301             13%            16%

Total operating expense                        $ 64           $ 58              $195           $167             10%            16%

Income before taxes                            $ 54           $ 46              $159           $136             24%            18%

Return on common equity                          35%            30%               35%            32%

Pretax operating margin (a)                      52%            48%               50%            49%

Assets under management                        $ 53           $ 42

Assets under administration/custody            $ 34           $ 34

-----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

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

 

 

Wealth Management includes private asset management services, private banking

and jumbo residential mortgage lending. Income before taxes for the Wealth

Management sector was $54 million in the third quarter of 1999, up $8 million,

or 24%, from the prior-year period. Revenue increased $12 million, or 13%, due

to higher private asset management fee revenue. Assets under management

increased to $53 billion at September 30, 1999 from $42 billion at September 30,

1998, reflecting a higher level of private assets under management, due to new

business and market appreciation. Operating expense increased $6 million, or

10%, in support of business growth.

 

Income before taxes for this sector was $159 million in the first nine months of

1999, an increase of $23 million, or 18%, compared with the prior-year period.

Total revenue increased 16% over the prior-year period, primarily due to growth

in private asset management fees, while expenses also increased 16% over the

same period, reflecting investments in staff and information systems to support

business growth. It is currently anticipated that operating expenses may

increase at rates comparable to, or at times somewhat in excess of, revenue to

provide a platform for higher business growth.

 

 

 

 

 

                                       11

<PAGE>   13

 

 

BUSINESS SECTORS (CONTINUED)

--------------------------------------------------------------------------------

 

Global Investment Management

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Growth rates

                                               Quarter ended                 Nine months ended               ----------------------

                                          ------------------------         ------------------------           3Q 99       9 Mos 99

                                          SEPT. 30,      Sept. 30,         SEPT. 30,      Sept. 30,            vs            vs

                                               1999           1998              1999           1998           3Q 98       9 Mos 98

-----------------------------------------------------------------------------------------------------------------------------------

<S>                                     <C>              <C>               <C>            <C>                <C>          <C>

Total revenue                                  $246           $193              $723           $555             27%            30%

Total operating expense                        $163           $122              $480           $348             34%            38%

Income before taxes                            $ 83           $ 71              $243           $207             16%            17%

Return on common equity                          37%            39%               37%            38%

Pretax operating margin (a)                      37%            40%               37%            40%

Assets under management                        $362           $298

-----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

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

 

 

Global Investment Management includes mutual fund management, institutional

asset management and brokerage services. Income before taxes for the Global

Investment Management sector totaled $83 million in the third quarter of 1999,

compared with $71 million in the third quarter of 1998, an increase of $12

million, or 16%. Revenue increased $53 million, or 27%, primarily due to higher

mutual fund and institutional asset management fees due to the Newton

acquisition and a higher level of managed assets. Mutual fund assets and

institutional assets managed increased 21% to $362 billion at September 30,

1999, from $298 billion at September 30, 1998, due to new business and market

appreciation, as well as the Newton acquisition. In addition, brokerage fees

increased by $2 million. Total operating expense increased $41 million, or 34%,

due to the Newton acquisition and the amortization of the related goodwill, and

investments to support business growth. Excluding the impact of the Newton

acquisition, revenue increased 11% and total operating expense increased 5%,

resulting in a 20% increase in income before taxes.

 

Income before taxes for this sector was $243 million in the first nine months of

1999, an increase of $36 million, or 17%, compared with the prior-year period.

Total revenue increased 30% while expense increased 38%, resulting from the same

factors responsible for the third quarter of 1999 increases as compared to the

prior-year period. In addition, the full nine-month impact of the April 1998

Founders acquisition also contributed to these increases. Excluding the impact

of the Newton and Founders acquisitions, revenue increased 12% and expenses

increased 7%, resulting in a 20% increase in income before taxes.

 

 

 

 

                                       12

<PAGE>   14

 

 

BUSINESS SECTORS (CONTINUED)

--------------------------------------------------------------------------------

 

 

Global Investment Services

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Growth rates

                                               Quarter ended                 Nine months ended               ----------------------

                                          ------------------------         ------------------------           3Q 99       9 Mos 99

                                          SEPT. 30,      Sept. 30,         SEPT. 30,      Sept. 30,            vs            vs

                                               1999           1998              1999           1998           3Q 98       9 Mos 98

-----------------------------------------------------------------------------------------------------------------------------------

<S>                                      <C>             <C>               <C>            <C>                 <C>        <C>

Total revenue                                $  237         $  220              $706           $648              8%             9%

Total operating expense                      $  185         $  175              $547           $524              6%             5%

Income before taxes                          $   52         $   45              $159           $124             17%            29%

Return on common equity                          24%            27%               26%            25%

Pretax operating margin (a)                      23%            22%               24%            20%

Assets under management                      $   31         $   28

Assets under administration/custody          $2,122         $1,608

-----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

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

 

 

Global Investment Services includes institutional trust and custody, foreign

exchange, securities lending, shareholder services, benefits consulting and

administrative services for employee benefit plans and backoffice outsourcing

for investment managers. Income before taxes for the Global Investment Services

sector of $52 million increased $7 million, or 17%, compared with the prior-year

period. The increase was attributable to a $17 million, or 8%, increase in total

revenue resulting, in part, from higher institutional trust and mutual fund

administration/custody fees, higher foreign exchange fees and increased benefits

consulting and administration fees, compared with an increase of $10 million, or

6%, in total operating expenses. Assets under administration/custody exceeded $2

trillion at September 30, 1999, an increase of 32% from September 30, 1998.

 

Income before taxes for this sector was $159 million in the first nine months of

1999, an increase of $35 million, or 29%, compared with the prior-year period.

Revenue increased 9% primarily reflecting the same factors responsible for the

third quarter of 1999 increase while expenses increased 5%.

 

Regional Consumer Banking

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Growth rates

                                               Quarter ended                 Nine months ended               ----------------------

                                          ------------------------         ------------------------           3Q 99       9 Mos 99

                                          SEPT. 30,      Sept. 30,         SEPT. 30,      Sept. 30,            vs            vs

                                               1999           1998              1999           1998           3Q 98       9 Mos 98

-----------------------------------------------------------------------------------------------------------------------------------

<S>                                      <C>             <C>               <C>            <C>                 <C>        <C>

Total revenue                                  $161           $173              $488           $492            (7)%           (1)%

Total operating expense                        $106           $113              $329           $332            (6)%           (1)%

Income before taxes                            $ 52           $ 58              $151           $151           (12)%             -%

Return on common equity                          19%            23%               19%            20%

Pretax operating margin (a)                      41%            42%               39%            39%

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

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

 

 

Regional Consumer Banking includes consumer lending and deposit products, direct

banking and sales of insurance products. Income before taxes for this sector

totaled $52 million in the third quarter of 1999, a decrease of $6 million, or

12%, compared with the third quarter of 1998. Total revenue decreased $12

million, or 7%, compared with the prior-year period primarily due to lower fee

revenue while total operating expense decreased $7 million, or 6%, compared with

the prior-year period reflecting productivity improvements.

 

 

 

                                       13

<PAGE>   15

 

 

BUSINESS SECTORS (CONTINUED)

-------------------------------------------------------------------------------

 

Income before taxes for this sector was $151 million for the first nine months

of 1999, unchanged compared with the first nine months of 1998.

 

Specialized Commercial Banking

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Growth rates

                                               Quarter ended                 Nine months ended               ----------------------

                                          ------------------------         ------------------------           3Q 99       9 Mos 99

                                          SEPT. 30,      Sept. 30,         SEPT. 30,      Sept. 30,            vs            vs

                                               1999           1998              1999           1998           3Q 98       9 Mos 98

-----------------------------------------------------------------------------------------------------------------------------------

<S>                                      <C>             <C>               <C>            <C>                 <C>        <C>

Total revenue                                  $138           $123              $391           $355             12%            10%

Total operating expense                        $ 64           $ 61              $194           $185              1%             5%

Income before taxes                            $ 73           $ 61              $188           $163             23%            15%

Return on common equity                          24%            21%               21%            21%

Pretax operating margin (a)                      61%            57%               56%            54%

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

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

 

 

Specialized Commercial Banking includes middle market lending, business banking,

lease financing, commercial real estate lending, insurance premium financing,

asset-based lending and venture capital. Income before taxes for this sector

totaled $73 million in the third quarter of 1999, up $12 million, or 23%, from

the third quarter of 1998. Revenue increased $15 million, or 12%, due to higher

net interest revenue resulting from loan growth as well as higher gains on

equity securities. Operating expense increased $3 million, or only 1%, from the

prior-year period.

 

Income before taxes for this sector was $188 million for the first nine months

of 1999, an increase of $25 million, or 15%, compared with the prior-year

period. Revenue increased $36 million, or 10%, due to increased net interest

revenue resulting from loan growth, the Mellon 1st Business Bank acquisition in

February 1998 and higher gains on equity securities. The $9 million, or 5%,

increase in operating expense is primarily due to the Mellon 1st Business Bank

acquisition and higher business volumes.

 

Large Corporate Banking

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Growth rates

                                               Quarter ended                 Nine months ended               ----------------------

                                          ------------------------         ------------------------           3Q 99       9 Mos 99

                                          SEPT. 30,      Sept. 30,         SEPT. 30,      Sept. 30,            vs            vs

                                               1999           1998              1999           1998           3Q 98       9 Mos 98

-----------------------------------------------------------------------------------------------------------------------------------

<S>                                      <C>             <C>               <C>            <C>                 <C>        <C>

Total revenue                                  $132           $123              $399           $376              7%             6%

Total operating expense                        $ 80           $ 81              $251           $250            (1)%             -%

Income before taxes                            $ 45           $ 42              $135           $126              4%             7%

Return on common equity                          12%            11%               12%            11%

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

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

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

 

Large Corporate Banking includes cash management, large corporate and

institutional lending, corporate finance and derivative products, securities

underwriting and trading and international banking. Income before taxes was $45

million for the third quarter of 1999, an increase of $3 million, or 4%, from

the third quarter of 1998. An increase in credit quality expense was more than

offset by revenue growth of 7%, while operating expenses decreased 1%. The

revenue growth was driven primarily by higher cash management fee revenue.

 

 

 

                                       14

<PAGE>   16

 

 

BUSINESS SECTORS (CONTINUED)

-------------------------------------------------------------------------------

 

 

Income before taxes for this sector was $135 million in the first nine months of

1999, an increase of $9 million, or 7%, compared with the prior-year period.

Revenue increased 6% while expenses were unchanged. The revenue growth was

driven primarily by higher cash management revenue and the favorable expense

trend primarily reflects improved productivity in the cash management line of

business.

 

Divestitures

 

Divestitures includes residential and commercial mortgage loan origination and

servicing; credit card; network services transaction processing; the gain on the

sale of the Mellon Bank (MD) N.A. retail offices that were sold in September

1999; and, 1998 results include merchant card processing, and the fee revenue

from the electronic filing of income tax returns service, which was discontinued

at the end of 1998. In addition, Divestitures includes the results of a mutual

fund administration service provided under a long-term contract with a third

party that expires at the end of May 2000. Divestitures income before taxes was

$13 million in the third quarter of 1999 and $17 million in the third quarter of

1998. The third quarter and first nine months of 1999 include an $8 million

pretax net loss and a $134 million pretax net gain from divestitures,

respectively, as further discussed in "Significant financial events" on pages 5

and 6.

 

Real Estate Workout/Other Activity

 

Real Estate Workout/Other Activity primarily includes business activities that

are not separate lines of business or have not been allocated, for management

reporting purposes, to the lines of business. The Real Estate Workout/Other

Activity sector's pretax income for the third quarter of 1999 was $2 million,

compared with income of $5 million in the third quarter of 1998. Revenue

primarily reflects earnings on the use of proceeds from the trust-preferred

securities and earnings on capital above that required for the core sectors and

gains from the sale of assets. Operating expense includes trust-preferred

securities expense and various nonrecurring charges for items not attributable

to the operations of a business sector. The first nine months of 1999 includes

$56 million of nonrecurring expenses related to a $30 million charitable

contribution to the Mellon Bank Foundation and $26 million of expenses as part

of the Mellon Third Century strategic initiatives recorded in the second quarter

of 1999. Average assets primarily include assets of certain support areas not

identified with the major business sectors. Average common and Tier I preferred

equity represents capital in excess of that required for the core sectors.

 

 

 

                                       15

<PAGE>   17

 

 

BUSINESS SECTORS (CONTINUED)

-------------------------------------------------------------------------------

 

<TABLE>

<CAPTION>

                                                           Global            Global           Regional          Specialized

                                         Wealth          Investment         Investment        Consumer           Commercial

                                       Management        Management          Services          Banking            Banking

                                   -----------------   ---------------    ---------------   --------------    -----------------

(dollar amounts in millions,       3RD Q       2nd Q   3RD Q    2nd Q     3RD Q     2nd Q   3RD Q    2nd Q    3RD Q     2nd Q

 averages in billions)              1999        1999    1999     1999      1999     1999     1999     1999     1999      1999

-------------------------------------------------------------------------------------------------------------------------------

<S>                                <C>       <C>      <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>

Revenue:

  Net interest revenue (expense)   $  37     $  39    $  (3)    $  (2)    $  15    $  12    $ 122    $ 122    $ 104    $  101

  Fee revenue                         78        82      249       246       222      229       39       46       34        21

-------------------------------------------------------------------------------------------------------------------------------

    Total revenue                    115       121      246       244       237      241      161      168      138       122

Credit quality expense (revenue)      (3)       --       --        --        --       --        3        2        1         4

Operating expense:

  Intangible amortization              5         5        7         7         3        3       13       12        7         8

  Trust-preferred securities          --         1       --        --        --       --        1        1        4         2

  Other                               59        60      156       152       182      181       92       98       53        57

-------------------------------------------------------------------------------------------------------------------------------

    Total operating expense           64        66      163       159       185      184      106      111       64        67

-------------------------------------------------------------------------------------------------------------------------------

 

Income (loss) before taxes            54        55       83        85        52       57       52       55       73        51

Income taxes (benefits)               21        21       34        35        21       23       19       20       27        20

-------------------------------------------------------------------------------------------------------------------------------

Net income (loss)                  $  33     $  34    $  49     $  50     $  31    $  34    $  33    $  35    $  46    $   31

-------------------------------------------------------------------------------------------------------------------------------

Cash net income (loss) (a)         $  38     $  39    $  56     $  55     $  34    $  37    $  42    $  44    $  50    $   38

-------------------------------------------------------------------------------------------------------------------------------

Average assets                     $ 6.3     $ 6.3    $ 2.0     $ 2.0     $ 1.6    $ 1.7    $13.9    $14.2    $12.4    $ 12.0

Average common equity              $ 0.4     $ 0.4    $ 0.5     $ 0.5     $ 0.5    $ 0.5    $ 0.7    $ 0.6    $ 0.7    $  0.7

Average Tier I preferred equity    $  --     $  --    $  --     $  --     $  --    $  --    $ 0.1    $ 0.1    $ 0.1    $  0.1

-------------------------------------------------------------------------------------------------------------------------------

Return on common equity (b)           35%       37%      37%       38%       24%      28%      19%      21%      24%       17%

Return on assets (b)                2.14%     2.16%      NM        NM        NM       NM     0.94%    0.98%    1.46%     1.05%

Pretax operating margin               47%       46%      34%       35%       22%      23%      32%      33%      53%       42%

Pretax operating margin (c)           52%       50%      37%       38%       23%      25%      41%      41%      61%       50%

Efficiency ratio (c)                  51%       50%      63%       62%       77%      75%      58%      58%      38%       47%

-------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a) Excludes the after-tax impact of amortization of goodwill and other

    intangibles from purchase acquisitions.

(b) Annualized.

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

(d) Includes $(8) million and $59 million, respectively, in pre-tax net gains

    (losses) from divestitures for the quarters ended September 30, 1999 and

    June 30, 1999.

(e) Ratios exclude the impact of the net divestiture gains (losses) and

    nonrecurring expenses.

NM - Not meaningful.

 

 

Income before taxes for the Corporation's core sectors increased $9 million, or

3%, or at an annualized rate of 12%, in the third quarter of 1999 compared to

the second quarter of 1999. Total revenue decreased $7 million, or 1%,

reflecting lower securities lending revenue, lower brokerage fees and lower

foreign currency and securities trading revenue, while net interest revenue was

unchanged. Operating expense decreased $12 million, or 2%, reflecting the focus

on expense management and productivity, while credit quality expense decreased

$4 million.

 

 

 

                                       16

<PAGE>   18

 

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

             Large                                                                  Real Estate

           Corporate                  Total Core                                    Workout/Other              Consolidated

             Banking                   Sectors              Divestitures              Activity                     Results

        ------------------        -----------------      -----------------        -----------------          -----------------

         3RD Q      2nd Q          3RD Q      2nd Q      3RD Q      2nd Q         3RD Q      2nd Q            3RD Q      2nd Q

          1999       1999           1999       1999       1999       1999          1999       1999             1999       1999

-----------------------------------------------------------------------------------------------------------------------------------

<S>                <C>            <C>        <C>          <C>        <C>           <C>        <C>            <C>        <C>

        $   67     $   70         $  342     $  342       $  8       $ 15          $  2       $  6           $  352     $  363

            65         70            687        694         70 (d)    152 (d)         6          6              763        852

-----------------------------------------------------------------------------------------------------------------------------------

           132        140          1,029      1,036         78        167             8         12            1,115      1,215

             7          6              8         12          -          1            (3)        (8)               5          5

 

             -          1             35         36          2          1             -          -               37         37

             6          5             11          9          -          -             9         10               20         19

            74         81            616        629         63         85             -         58              679        772

-----------------------------------------------------------------------------------------------------------------------------------

            80         87            662        674         65         86             9         68              736        828

-----------------------------------------------------------------------------------------------------------------------------------

 

            45         47            359        350         13         80             2        (48)             374        382

            16         17            138        136          6         28            (1)       (20)             143        144

-----------------------------------------------------------------------------------------------------------------------------------

        $   29     $   30         $  221     $  214       $  7       $ 52          $  3       $(28)          $  231     $  238

-----------------------------------------------------------------------------------------------------------------------------------

        $   29     $   30         $  249     $  243       $  9       $ 53          $  3       $(28)          $  261     $  268

-----------------------------------------------------------------------------------------------------------------------------------

        $  9.2     $  9.6         $ 45.4     $ 45.8       $2.2       $2.7          $1.3       $1.3           $ 48.9     $ 49.8

        $  1.0     $  1.0         $  3.8     $  3.7       $0.2       $0.2          $0.2       $0.5           $  4.2     $  4.4

        $  0.3     $  0.3         $  0.5     $  0.5       $  -       $  -          $0.5       $0.5           $  1.0     $  1.0

-----------------------------------------------------------------------------------------------------------------------------------

           12%        13%            23%        23%         NM         NM            NM         NM              22%        22%

         1.22%      1.27%          1.93%      1.87%         NM         NM            NM         NM            1.87%      1.92%

           34%        34%            35%        34%         NM         NM            NM         NM              34% (e)    33%  (e)

           38%        38%            39%        38%         NM         NM            NM         NM              39% (e)    38%  (e)

           56%        58%            60%        61%         NM         NM            NM         NM              61% (e)    62%  (e)

-----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

 

                                       17

<PAGE>   19

 

 

NONINTEREST REVENUE

-------------------------------------------------------------------------------

 

<TABLE>

<CAPTION>

                                                                        Quarter ended                        Nine months ended

                                                         -------------------------------------------      -------------------------

                                                          SEPT. 30,         June 30,      Sept. 30,       SEPT. 30,      Sept. 30,

(dollar amounts in millions)                                   1999             1999           1998            1999           1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>               <C>           <C>             <C>            <C>

Trust and investment fee revenue:

   Investment management                                       $290             $284           $229          $  852         $  658

   Administration and custody                                   140              147            134             426            403

   Benefits consulting                                           66               61             58             183            164

   Brokerage fees                                                13               16             11              44             32

----------------------------------------------------------------------------------------------------------------------------------

       Total trust and investment fee revenue                   509              508            432           1,505          1,257

Cash management and deposit transaction charges                  70               70             66             206            192

Mortgage servicing fees                                          48               51             44             151            152

Foreign currency and securities trading revenue                  42               45             39             130            118

Credit card fees                                                  -                -             23              18             70

Other                                                            96              113            108             331            333

----------------------------------------------------------------------------------------------------------------------------------

       Total fee revenue                                        765              787            712           2,341          2,122

Net gain (loss) from divestitures                                (8)              59              -             134              -

Gains on the sale of securities                                   -                -              -               -              1

----------------------------------------------------------------------------------------------------------------------------------

       Total noninterest revenue                               $757             $846           $712          $2,475         $2,123

----------------------------------------------------------------------------------------------------------------------------------

 

Fee revenue as a percentage of net interest and

   fee revenue (FTE)                                             69%              69%            66%             69%            66%

Trust and investment fee revenue as a percentage

  of net interest and fee revenue (FTE)                          45%              44%            40%             44%            39%

----------------------------------------------------------------------------------------------------------------------------------

 

 

Memo:

 

Gross joint venture fee revenue (a)                            $122             $120           $ 70          $  345         $  217

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  The Corporation accounts for its interest in joint ventures under the

     equity method of accounting with the net results primarily recorded as

     other fee revenue, as well as trust and investment fee revenue. The gross

     joint venture fee revenue is not included in total fee revenue above.

 

 

Fee revenue

 

 

Fee revenue increased $53 million, or 7%, in the third quarter of 1999 compared

with the third quarter of 1998. Fee revenue in the third quarter of 1999 was

impacted by the March 1999 sale of the credit card business, the June 1999 sale

of the network services transaction processing unit, the sale of the mortgage

businesses that was completed in the third quarter of 1999 and the October 1998

acquisition of Newton. Excluding the effect of acquisitions and divestitures,

fee revenue increased 9% compared with the prior-year period, primarily due to a

12% increase in trust and investment fee revenue. Including the trust and

investment fee gross revenue generated by the Corporation's joint ventures,

trust and investment fee revenue increased 17% compared with the third quarter

of 1998.

 

 

 

 

                                       18

<PAGE>   20

 

 

NONINTEREST REVENUE (CONTINUED)

-------------------------------------------------------------------------------

 

<TABLE>

<CAPTION>

                                                         3rd Qtr. 1999               3rd Qtr. 1999         Nine Mo. 1999

                                                             over                        over                  over

                                                         3rd Qtr. 1998               2nd Qtr. 1999         Nine Mo. 1998

----------------------------------------------------------------------------------------------------------------------------------

 

<S>                                                      <C>                        <C>                    <C>

Trust and investment fee revenue growth (a)                    12%                           - %                13%

Total fee revenue growth (decline) (b)                          9%                          (1)%                12%

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Excluding the effect of acquisitions.

(b)  Excluding the effect of acquisitions and divestitures and fees from the

     electronic filing of income tax returns.

 

 

Investment management fee revenue

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

                                                                          Quarter ended                       Nine months ended

                                                           ----------------------------------------      --------------------------

                                                            SEPT. 30,       June 30,      Sept. 30,       SEPT. 30,      Sept. 30,

(in millions)                                                    1999           1999           1998            1999           1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                         <C>             <C>            <C>           <C>             <C>

Managed mutual fund fees (a):

   Equity funds                                                  $ 69           $ 65           $ 45            $195           $126

   Taxable money market funds:

     Institutional                                                 25             27             21              77             60

     Individuals                                                   11              9              8              29             24

   Tax-exempt bond funds                                           22             23             24              68             71

   Fixed-income funds                                              11             12             11              35             27

   Tax-exempt money market funds                                    7              7              7              22             21

   Nonproprietary                                                   7              6              6              19             13

----------------------------------------------------------------------------------------------------------------------------------

         Total managed mutual fund fees                           152            149            122             445            342

Private asset                                                      73             73             56             217            162

Institutional asset                                                65             62             51             190            154

----------------------------------------------------------------------------------------------------------------------------------

         Total investment management fee revenue                 $290           $284           $229            $852           $658

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Net of quarterly mutual fund fees waived and fund expense reimbursements of

     $7 million, $9 million and $10 million at September 30, 1999, June 30, 1999

     and September 30, 1998, respectively. Net of year-to-date fees waived and

     fund expense reimbursements of $24 million and $31 million at September 30,

     1999, and September 30, 1998, respectively.

 

 

Excluding the revenue from the Newton acquisition, investment management revenue

increased $28 million in the third quarter of 1999, compared with the prior-year

period. This increase resulted from a $15 million, or 12%, increase in mutual

fund management revenue, a $7 million, or 13%, increase in private asset

management revenue and a $6 million, or 11%, increase in institutional asset

management revenue. These increases resulted from net new business and an

increase in the market value of assets under management.

 

Mutual fund management fees are based upon the average net assets of each fund.

The average net assets of proprietary funds managed at Dreyfus/Founders/Newton

in the third quarter of 1999 were $124 billion, up $16 billion, or 15%, from

$108 billion in the third quarter of 1998 and down $2 billion from $126 billion

in the second quarter of 1999. The increase from the third quarter of 1998

primarily resulted from increases in average net assets of equity funds and

institutional taxable money market funds. Proprietary equity funds averaged $45

billion in the third quarter of 1999, compared with $32 billion in the third

quarter of 1998 and $44 billion in the second quarter of 1999.

 

 

 

                                       19

<PAGE>   21

 

 

NONINTEREST REVENUE (CONTINUED)

-------------------------------------------------------------------------------

 

As shown in the table below, the market value of trust assets under management

was $446 billion at September 30, 1999, a $19 billion, or 4%, decrease from $465

billion at June 30, 1999, and a $78 billion, or 21%, increase from $368 billion

at September 30, 1998. The decrease compared with June 30, 1999, resulted from a

general market decrease. At September 30, 1999, compared to June 30, 1999, the

Standard & Poor's 500 Index decreased 6.6% while the Lehman Brothers Long-Term

Government Bond Index decreased 0.2%.

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

MARKET VALUE OF ASSETS UNDER MANAGEMENT

                                                            SEPT. 30,       June 30,      March 31,        Dec. 31,      Sept. 30,

(in billions)                                                    1999           1999           1999            1998           1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                         <C>             <C>           <C>              <C>            <C>

Mutual fund assets managed:

    Equity funds                                                 $ 45           $ 46           $ 43            $ 40           $ 30

    Taxable money market funds:

        Institutional                                              38             39             40              40             38

        Individuals                                                10              9              9               9              9

    Tax-exempt bond funds                                          15             16             16              16             17

    Fixed-income funds                                              7              7              8               7              7

    Tax-exempt money market funds                                   7              8              8               8              8

    Nonproprietary                                                 26             26             23              21             16

----------------------------------------------------------------------------------------------------------------------------------

          Total mutual fund assets managed                        148            151            147             141            125

Private asset                                                      53             55             50              47             37

Institutional asset (a)(b)                                        245            259            250             237            206

----------------------------------------------------------------------------------------------------------------------------------

          Total market value of assets

            under management                                     $446           $465           $447            $425           $368

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Includes assets managed at Pareto Partners of $28 billion at September 30,

     1999; $28 billion at June 30, 1999; $28 billion at March 31, 1999; $24

     billion at December 31, 1998; and $24 billion at September 30, 1998. The

     Corporation has a 30% equity interest in Pareto Partners.

(b)  Beginning at September 30, 1999, securities lending cash collateral is

     included in institutional assets managed. Prior periods have been restated.

 

At September 30, 1999, the combined market values of $26 billion of

nonproprietary mutual funds and $245 billion of institutional assets managed, by

asset type, were as follows: equities, $94 billion; balanced, $43 billion; fixed

income, $64 billion; money market, $42 billion; and $28 billion at Pareto

Partners, primarily in currency overlay and global fixed-income products, for a

total of $271 billion.

 

Administration and custody fee revenue

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

                                                                        Quarter ended                         Nine months ended

                                                            ---------------------------------------       --------------------------

                                                            SEPT. 30,       June 30,      Sept. 30,       SEPT. 30,      Sept. 30,

(in millions)                                                    1999           1999           1998            1999           1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                         <C>             <C>           <C>              <C>           <C>

Institutional trust                                              $ 96           $104           $ 95            $300           $288

Mutual fund                                                        39             38             34             111            101

Private asset                                                       5              5              5              15             14

----------------------------------------------------------------------------------------------------------------------------------

   Total administration and custody fee revenue                  $140           $147           $134            $426           $403

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

 

                                       20

<PAGE>   22

 

 

NONINTEREST REVENUE (CONTINUED)

-------------------------------------------------------------------------------

 

 

As shown in the table on the prior page, administration and custody fee revenue

increased $6 million, or 4%, in the third quarter of 1999 compared with the

third quarter of 1998, primarily resulting from a $5 million, or 18%, increase

in mutual fund administration revenue.

 

The reported growth within institutional trust and custody revenue was tempered

primarily by the contribution of pre-existing business to the Russell/Mellon

Analytical Services Inc. and the CIBC Mellon Global Securities Services joint

ventures. The results of joint ventures are accounted for under the equity

method of accounting, which reports the Corporation's share of the results of

the joint ventures on a net basis, rather than reporting the revenues and

expenses separately. The table below shows institutional trust and custody fee

revenue including the gross revenue generated by the Corporation's joint

ventures that provide such services. Including the institutional trust and

custody gross revenue generated by these joint ventures, institutional trust and

custody revenue increased $21 million, or 21%, compared with the third quarter

of 1998 but decreased $5 million, or 4%, compared with the second quarter of

1999. The decrease compared with the second quarter of 1999 resulted from lower

administration revenue at Buck Consultants, Inc. and lower securities lending

revenue.

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

                                                                          Quarter ended                       Nine months ended

INSTITUTIONAL TRUST AND                                  ---------------------------------------------    ------------------------

  CUSTODY FEE REVENUE                                       SEPT. 30,       June 30,      Sept. 30,       SEPT. 30,      Sept. 30,

(in millions)                                                    1999           1999           1998            1999           1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>              <C>            <C>              <C>           <C>

Total institutional trust and custody fee

  revenue - as reported                                          $ 96           $104           $ 95            $300           $288

Adjustment to reflect joint venture revenue                        31             28             11              90             32

----------------------------------------------------------------------------------------------------------------------------------

Adjusted institutional trust and custody fee revenue             $127           $132           $106            $390           $320

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

Mutual fund administration and custody fees are expected to be impacted

beginning in the second quarter of 2000 as a long-term contract with a third

party expires at the end of May 2000. Fees from this contract totaled

approximately $22 million in the third quarter of 1999.

 

The market value of assets under administration/custody, shown in the table

below, was $2,156 billion at September 30, 1999, an increase of $95 billion

compared with $2,061 billion at June 30, 1999, and an increase of $514 billion

compared with $1,642 billion at September 30, 1998. The increase compared with

June 30, 1999, resulted from net new business.

 

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY

                                                   SEPT. 30,         June 30,         March 31,         Dec. 31,         Sept. 30,

(in billions)                                           1999             1999              1999             1998              1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                <C>               <C>              <C>               <C>               <C>

Institutional trust (a)                               $2,046           $1,954            $1,826           $1,803            $1,556

Mutual fund                                               76               73                69               62                52

Private asset                                             34               34                33               38                34

----------------------------------------------------------------------------------------------------------------------------------

    Total market value of assets under

      administration/custody                          $2,156           $2,061            $1,928           $1,903            $1,642

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Includes $350 billion of assets at September 30, 1999; $327 billion of

     assets at June 30, 1999; $218 billion of assets at March 31, 1999; $244

     billion of assets at December 31, 1998; and $265 billion of assets at

     September 30, 1998, administered by CIBC Mellon Global Securities Services,

     a joint venture.

 

 

 

 

                                       21

<PAGE>   23

 

NONINTEREST REVENUE (CONTINUED)

-------------------------------------------------------------------------------

 

 

Benefits consulting and brokerage fees

 

Benefits consulting fees generated by Buck Consultants, Inc. increased $8

million, or 15%, in the third quarter of 1999, compared with the prior-year

period, primarily resulting from net new business and increased project activity

with existing clients. The $2 million, or 23%, increase in brokerage fees in the

third quarter of 1999 compared to the prior-year period primarily resulted from

higher trading volumes. Dreyfus Brokerage Services, Inc. averaged approximately

8,500 trades per day in the third quarter of 1999, compared with approximately

9,800 trades per day in the second quarter of 1999 and approximately 6,900

trades per day in the third quarter of 1998.

 

Cash management and deposit transaction charges

 

The $4 million, or 6%, increase in cash management fees and deposit transaction

charges in the third quarter of 1999, compared with the prior-year period,

primarily resulted from higher volumes in the electronics business.

 

Mortgage servicing fees

 

Mortgage servicing fees increased $4 million, or 8%, in the third quarter of

1999, compared with the third quarter of 1998. This increase primarily resulted

from a lower level of mortgage prepayments. By September 30, 1999, the

Corporation completed the sales of the residential and commercial mortgage

servicing businesses.

 

Foreign currency and securities trading revenue

 

The $3 million, or 9%, increase in foreign currency and securities trading

revenue in the third quarter of 1999, compared with the third quarter of 1998,

was primarily related to growth in the number of foreign exchange customers and

favorable market conditions.

 

Credit card fees

 

The absence of credit card fees in the third and second quarters of 1999

resulted from the March 1999 divestiture of the credit card business.

 

Other fee revenue

 

Other fee revenue of $96 million in the third quarter of 1999 decreased $12

million, or 12%, compared with the third quarter of 1998, primarily resulting

from the June 1999 sale of the network services transaction processing unit.

This business generated $14 million and $11 million of fee revenue in the second

quarter of 1999 and the third quarter of 1998, respectively.

 

Net gain (loss) from divestitures

 

In the third quarter of 1999, the Corporation recorded an $8 million pre-tax net

loss from divestitures. Including the $142 million pre-tax net gain reported in

first six months of 1999, the pre-tax net gain from divestitures totaled $134

million for the first nine months of 1999. For further analysis of the net gain

(loss) from divestitures, see the "Divestitures" disclosure in the "Significant

financial events" section on pages 5 and 6.

 

 

 

                                       22

<PAGE>   24

 

NONINTEREST REVENUE (CONTINUED)

-------------------------------------------------------------------------------

 

 

Third quarter 1999 compared with second quarter 1999

 

Excluding the fee revenue generated by the mortgage businesses and the network

services transaction processing unit, fee revenue decreased 1% compared with the

second quarter of 1999, resulting from lower securities lending revenue, lower

brokerage fees and lower foreign currency and securities trading revenue.

 

Year-to-date 1999 compared with year-to-date 1998

 

Fee revenue in the first nine months of 1999 totaled $2.341 billion. The

comparison to the first nine months of 1998 was impacted by the credit card,

network services and mortgage banking divestitures, the Newton and Founders

acquisitions and the elimination of fees from the electronic filing of income

tax returns, a service that was discontinued at the end of 1998. Excluding these

factors, fee revenue increased 12% compared with the first nine months of 1998,

primarily due to a 13% increase in trust and investment fee revenue.

 

 

NET INTEREST REVENUE

-------------------------------------------------------------------------------

 

Net interest revenue on a fully taxable equivalent basis for the third quarter

of 1999 totaled $352 million, compared with $376 million in the third quarter of

1998 and $363 million in the second quarter of 1999. The net interest margin was

3.63% in the third quarter of 1999, compared with 3.95% in the third quarter of

1998 and 3.74% in the second quarter of 1999. The $24 million decrease in net

interest revenue on a fully taxable equivalent basis in the third quarter of

1999, compared with the prior-year period, primarily resulted from the sale of

the credit card business. Excluding the net interest revenue generated by the

credit card business in the prior-year period, net interest revenue decreased $9

million compared with the third quarter of 1998, reflecting lower loan fees and

higher funding costs related to the repurchase of common stock.

 

The Corporation sold its credit card business on March 31, 1999, and completed

the sale of its residential mortgage servicing business on September 30, 1999,

as discussed further in the "Significant financial events" section on pages 5

and 6. The balance sheet levels of credit card loans sold in the first quarter

of 1999 totaled approximately $800 million at year-end 1998, while the

residential mortgage warehouse portfolio that was sold as part of the September

30, 1999, divestiture of the residential mortgage servicing business totaled

approximately $700 million at June 30, 1999.

 

Third quarter 1999 compared with second quarter 1999

 

Net interest revenue decreased $11 million in the third quarter of 1999 compared

with the second quarter of 1999. This decrease resulted from higher funding

costs related to the repurchase of common stock as well as a lower level of

interest-earning assets.

 

Year-to-date 1999 compared with year-to-date 1998

 

Net interest revenue and the net interest margin, on a taxable equivalent basis,

were $1.086 billion and 3.71%, respectively, in the first nine months of 1999,

compared with $1.117 billion and 3.99%, respectively, in the first nine months

of 1998. Excluding the net interest revenue generated by the credit card

business, net interest revenue decreased $3 million compared with the first nine

months of 1998, reflecting lower loan fees and higher funding costs related to

the repurchase of common stock, partially offset by a higher level of

interest-free funds.

 

 

 

                                       23

<PAGE>   25

 

 

NET INTEREST REVENUE (CONTINUED)

-------------------------------------------------------------------------------

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES

-----------------------------------------------------------------------------------------------------------------------------------

                                                                                                 Nine months ended

                                                                               ----------------------------------------------------

                                                                                    SEPT. 30, 1999              Sept. 30, 1998

                                                                                 AVERAGE        AVERAGE       Average     Average

(dollar amounts in millions)                                                     BALANCE     YIELDS/RATES     balance  yields/rates

-----------------------------------------------------------------------------------------------------------------------------------

<S>               <C>                                                           <C>          <C>            <C>           <C>

Assets            Interest-earning assets:

                    Interest-bearing deposits with banks                         $   755          4.80%       $   599          5.15%

                    Federal funds sold and securities under resale agreements        586          5.20            828          5.96

                    Other money market investments                                    57          4.34            125          5.45

                    Trading account securities                                       370          5.12            249          6.22

                    Securities:

                      U.S. Treasury and agency securities (a)                      6,414          6.41          5,336          6.76

                      Obligations of states and political subdivisions (a)           117          6.39             43          7.59

                      Other (a)                                                       92          7.52            127          6.94

                    Loans, net of unearned discount (a)                           30,710          7.37         30,027          8.03

                                                                                 -------                      -------

                         Total interest-earning assets                            39,101          7.10         37,334          7.73

                  Cash and due from banks                                          3,065                        3,205

                  Premises and equipment                                             565                          562

                  Customers' acceptance liability                                    121                          107

                  Net acquired property                                               28                           59

                  Other assets (a)                                                 7,354                        6,548

                  Reserve for credit losses                                         (442)                        (498)

                  ------------------------------------------------------------------------------------------------------------------

                         Total assets                                            $49,792                      $47,317

------------------------------------------------------------------------------------------------------------------------------------

Liabilities,      Interest-bearing liabilities:

trust-preferred     Deposits in domestic offices:

securities and        Demand                                                     $   372          2.34%       $   337          2.24%

shareholders'         Money market and other savings accounts                     12,387          2.80         10,982          2.93

equity                Retail savings certificates                                  6,725          4.53          7,658          5.01

                      Other time deposits                                          1,402          5.11          1,957          5.59

                    Deposits in foreign offices                                    3,033          4.36          2,714          5.01

                                                                                 -------                      -------

                         Total interest-bearing deposits                          23,919          3.61         23,648          4.05

                    Federal funds purchased and securities under

                     repurchase agreements                                         2,320          4.74          2,134          5.61

                    Short-term bank notes                                            734          5.14            294          5.71

                    U.S. Treasury tax and loan demand notes                          583          4.64            578          5.35

                    Term federal funds purchased                                     449          5.12            401          5.73

                    Commercial paper                                                 136          5.37            200          5.57

                    Other funds borrowed                                             420          8.12            349          9.06

                    Notes and debentures (with original maturities over

                      one year)                                                    3,370          6.60          2,935          6.90

                                                                                 -------                      -------

                         Total interest-bearing liabilities                       31,931          4.15         30,539          4.57

                  Total noninterest-bearing deposits                               9,714                        9,579

                  Acceptances outstanding                                            121                          107

                  Other liabilities (a)                                            2,652                        2,022

                  ------------------------------------------------------------------------------------------------------------------

                         Total liabilities                                        44,418                       42,247

                  ------------------------------------------------------------------------------------------------------------------

                  Guaranteed preferred beneficial interests in Corporation's

                    junior subordinated deferrable interest debentures               991                          991

                  ------------------------------------------------------------------------------------------------------------------

                  Shareholders' equity (a)                                         4,383                        4,079

                  ------------------------------------------------------------------------------------------------------------------

                         Total liabilities, trust-preferred securities and

                           shareholders' equity                                  $49,792                      $47,317

 

------------------------------------------------------------------------------------------------------------------------------------

Rates             Yield on total interest-earning assets                                          7.10%                        7.73%

                  Cost of funds supporting interest-earning assets                                3.39                         3.74

                  ------------------------------------------------------------------------------------------------------------------

                  Net interest margin:

                    Taxable equivalent basis                                                      3.71%                        3.99%

                    Without taxable equivalent increments                                         3.69                         3.97

                  ------------------------------------------------------------------------------------------------------------------

</TABLE>

                  (a)    Amounts and yields exclude adjustments to fair value

                         required by FAS No. 115.

                  Note:  Average rates are annualized and calculated on a

                         taxable equivalent basis, at tax rates approximating

                         35%, using

 

 

 

                                       24

<PAGE>   26

 

 

 

<TABLE>

<CAPTION>

                                                            Quarter ended

-----------------------------------------------------------------------------------------------------------------------------------

       SEPT. 30, 1999             June 30, 1999            March 31, 1999               Dec. 31, 1998         Sept. 30, 1998

  AVERAGE       AVERAGE      Average      Average      Average      Average      Average       Average      Average      Average

  BALANCE  YIELDS/RATES      balance  yields/rates     balance  yields/rates     balance  yields/rates      balance  yields/rates

-----------------------------------------------------------------------------------------------------------------------------------

<S>              <C>         <C>       <C>             <C>            <C>        <C>        <C>             <C>       <C>

  $   740          4.85%     $   750          4.71%    $   776          4.85%    $   797          5.27%     $   575          5.27%

      655          5.20          635          5.47         465          4.84         663          4.97          665          7.06

       68          4.26           60          4.22          45          4.63          65          4.73          111          5.17

      403          5.27          414          4.87         291          5.25         258          6.31          266          6.64

 

    6,297          6.33        6,442          6.40       6,505          6.52       5,878          6.44        5,543          6.61

      121          5.84          118          6.44         112          6.94          86          6.88           53          7.26

       86          8.12           93          7.38          97          7.11         101          6.70          106          6.99

   30,179          7.31       30,501          7.30      31,465          7.50      31,503          7.75       30,421          8.05

  -------                    -------                   -------                   -------                    -------

   38,549          7.04       39,013          7.05      39,756          7.24      39,351          7.44       37,740          7.76

    2,970                      3,078                     3,148                     3,165                      3,115

      552                        570                       574                       573                        562

      132                        116                       114                       160                        106

       13                         36                        36                        39                         60

    7,211                      7,365                     7,488                     7,244                      6,794

     (414)                      (416)                     (498)                     (501)                      (501)

----------------------------------------------------------------------------------------------------------------------------------

  $49,013                    $49,762                   $50,618                   $50,031                    $47,876

----------------------------------------------------------------------------------------------------------------------------------

 

 

  $   380          3.33%     $   369          2.07%    $   367          1.57%    $   365          1.13%     $   354          2.18%

   12,674          2.85       12,477          2.79      12,002          2.75      11,646          2.84       11,073          2.96

    6,612          4.50        6,644          4.47       6,923          4.63       7,374          4.78        7,699          4.99

    1,106          5.26        1,244          4.90       1,864          5.17       2,558          5.48        2,071          5.64

    3,111          4.40        2,722          4.29       3,268          4.38       2,898          4.71        2,847          5.18

  -------                    -------                   -------                   -------                    -------

   23,883          3.63       23,456          3.54      24,424          3.67      24,841          3.88       24,044          4.09

 

    1,791          4.92        2,279          4.70       2,901          4.67       2,423          4.84        2,373          5.94

      821          5.33          846          4.98         531          5.07         296          5.45          275          5.69

      592          4.73          584          4.58         571          4.60         679          4.65          630          5.37

      362          5.34          508          5.04         479          5.04         258          5.48          271          5.74

      119          5.51          157          5.35         133          5.25         336          5.21          164          5.57

      409          8.88          417          7.23         435          8.26         409          9.14          344          9.18

    3,372          6.57        3,387          6.55       3,351          6.67       3,164          6.70        3,003          6.81

  -------                    -------                   -------                   -------                    -------

   31,349          4.18       31,634          4.08      32,825          4.19      32,406          4.35       31,104          4.62

    9,579                      9,902                     9,663                     9,651                      9,355

      132                        116                       114                       160                        106

    2,658                      2,705                     2,594                     2,484                      2,095

----------------------------------------------------------------------------------------------------------------------------------

   43,718                     44,357                    45,196                    44,701                     42,660

----------------------------------------------------------------------------------------------------------------------------------

 

      991                        991                       991                       991                        991

----------------------------------------------------------------------------------------------------------------------------------

    4,304                      4,414                     4,431                     4,339                      4,225

----------------------------------------------------------------------------------------------------------------------------------

 

  $49,013                    $49,762                   $50,618                   $50,031                    $47,876

 

                   7.04%                      7.05%                     7.24%                     7.44%                      7.76%

                   3.41                       3.31                      3.46                      3.58                       3.81

----------------------------------------------------------------------------------------------------------------------------------

 

                   3.63%                      3.74%                     3.78%                     3.86%                      3.95%

                   3.60                       3.71                      3.76                      3.84                       3.93

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

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

before the effect of reserve requirements. Loan fees, as well as nonaccrual

loans and their related income effect, have been included in the calculation of

average interest yields/rates.

 

 

 

                                       25

<PAGE>   27

 

 

<TABLE>

<CAPTION>

OPERATING EXPENSE

---------------------------------------------------------------------------------------------------------------------------------

                                                                    Quarter ended                           Nine months ended

                                                          ---------------------------------------       ------------------------

                                                          SEPT. 30,       June 30,      Sept. 30,       SEPT. 30,      Sept. 30,

(dollar amounts in millions)                                   1999           1999           1998            1999           1998

--------------------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>             <C>           <C>             <C>            <C>

Staff expense                                               $   387        $   397        $   358         $ 1,175        $ 1,070

Professional, legal and other purchased services                 63             73             72             207            200

Net occupancy expense                                            61             64             59             186            174

Equipment expense                                                40             63             42             144            122

Amortization of mortgage servicing assets and

 purchased credit card relationships                             33             37             43             112            132

Amortization of goodwill and other intangible assets             37             37             35             111            100

Communications expense                                           26             30             27              85             79

Business development                                             32             64             33             129            111

Other expense                                                    37             44             48             136            147

--------------------------------------------------------------------------------------------------------------------------------

     Operating expense before trust-preferred

       securities expense and net revenue from

       acquired property                                        716            809            717           2,285          2,135

Trust-preferred securities expense                               20             19             20              59             59

Net revenue from acquired property                               (5)            (5)            (3)            (10)            (6)

---------------------------------------------------------------------------------------------------------------------------------

     Total operating expense                                $   731        $   823        $   734         $ 2,334        $ 2,188

--------------------------------------------------------------------------------------------------------------------------------

 

Average full-time equivalent staff                           28,300         28,700         28,400          28,700         28,300

--------------------------------------------------------------------------------------------------------------------------------

 

Efficiency ratio (a)                                             64%            65%            66%             66%            66%

Efficiency ratio excluding amortization of

 goodwill and other intangible assets                            61%            62%            62%             61%            63%

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Operating expense before trust-preferred securities expense, net revenue

     from acquired property and second quarter 1999 nonrecurring expenses, as a

     percentage of revenue, computed on a taxable equivalent basis, excluding

     the net gain (loss) on divestitures and the sale of securities.

 

 

Operating expense before trust-preferred securities expense and net revenue from

acquired property totaled $716 million, a decrease of $1 million compared with

the third quarter of 1998. Third quarter 1999 expenses were impacted by the sale

of the credit card business, the sale of the network services transaction

processing unit, the sale of the mortgage businesses and the Newton acquisition.

Excluding the effect of acquisitions and divestitures, operating expense before

trust-preferred securities expense and net revenue from acquired property was

unchanged compared with the third quarter of 1998, reflecting the continuing

focus on expense management and productivity.

 

 

<TABLE>

<CAPTION>

                                                            3rd Qtr. 1999               3rd Qtr. 1999               Nine Mos. 1999

                                                                over                        over                         over

                                                            3rd Qtr. 1998               2nd Qtr. 1999               Nine Mos. 1998

----------------------------------------------------------------------------------------------------------------------------------

 

<S>                                                         <C>                         <C>                          <C>

Operating expense (reduction) growth (a)                         -%                         (2)%                          2%

 

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Operating expense before trust-preferred securities expense and net revenue

     from acquired property excluding second quarter 1999 nonrecurring expenses

     and the effect of acquisitions and divestitures.

 

 

 

 

                                       26

<PAGE>   28

 

 

OPERATING EXPENSE (CONTINUED)

-------------------------------------------------------------------------------

 

 

Third quarter 1999 compared with second quarter 1999

 

Operating expense before trust-preferred securities expense and net revenue from

acquired property decreased $93 million compared with the second quarter of

1999. This decrease primarily resulted from $56 million of nonrecurring expenses

recorded in the second quarter of 1999 as well as the sale of the network

services transaction processing unit and the sale of the mortgage businesses.

The nonrecurring expenses in the second quarter of 1999 consisted of a $30

million charitable contribution to the Mellon Bank Foundation as well as $26

million of expenses primarily related to replacing obsolete computer equipment

and closing facilities as part of Mellon's Third Century strategic initiatives.

Excluding these expenses and the impact of divestitures, operating expense

before trust-preferred securities expense and net revenue from acquired property

decreased 2% compared with the second quarter of 1999.

 

Year-to-date 1999 compared with year-to-date 1998

 

Operating expense before trust-preferred securities expense and net revenue from

acquired property totaled $2.285 billion, an increase of $150 million in the

first nine months of 1999 compared with the prior-year period. Excluding the

effect of the nonrecurring expenses, acquisitions and divestitures, operating

expense before trust-preferred securities expense and net revenue from acquired

property increased 2% in the first nine months of 1999 compared with the

prior-year period.

 

Year 2000 Project

 

In early 1996, the Corporation formed a year 2000 project team to identify

information technology and non-information technology systems that require

modification for the year 2000. A project plan was developed with goals and

target dates. The Corporation's year 2000 project plan includes inventory,

assessment, remediation, system testing, enterprise testing, contingency

planning and internal certification. Within the classifications of information

technology systems and non-information technology systems, the Corporation has

prioritized its systems. The two highest categories are systems that are mission

critical and those that are of high business value and priority (although not

mission critical).

 

Information technology systems:

 

   The Corporation has completed 100% of the remediation and system testing for

   internal mission critical information technology systems. In late 1998, the

   Corporation began significant enterprise testing (e.g., testing with

   representative customers, integration testing between systems and testing

   with third-party vendors) of mission critical information technology systems,

   which is essentially completed. In addition, the Corporation has completed

   remediation and system testing, and has essentially completed enterprise

   testing, of information technology systems that the Corporation has

   determined are of high business value and priority.

   Additional enterprise testing will continue throughout 1999.

 

Non-information technology systems:

 

   The Corporation has completed planned testing of, and mitigation of

   identified problems involving, non-information technology systems that the

   Corporation has determined are mission critical or of high business value and

   priority. These mission critical and high business value non-information

   technology systems have been determined to be year 2000 compliant based upon

   testing of such systems by the Corporation, information supplied by

   manufacturers, or validated alternative operational methods.

 

 

 

                                       27

<PAGE>   29

 

 

OPERATING EXPENSE (CONTINUED)

-------------------------------------------------------------------------------

 

Any new technology implemented through year end 1999 is subject to the same year

2000 readiness process as was technology that was previously in place.

 

The Corporation incurred expenses throughout 1996, 1997 and 1998 related to this

project and will continue to incur expenses throughout 1999. The Corporation

currently estimates that the costs related to inventory, assessment,

remediation, system testing, enterprise testing, contingency planning and

internal certification will be approximately $95 million. Approximately 15% of

these costs were incurred in 1996 and 1997, approximately 50% were incurred in

1998 with approximately 35% being expended in 1999. Expenditures in 1999 relate

primarily to enterprise testing, contingency planning and internal

certification. A significant portion of total year 2000 project expenses is

represented by existing staff that has been redeployed to this project. The

Corporation does not believe the redeployment of existing staff will have a

material adverse effect on its business, results of operations or financial

position. Incremental expenses related to the year 2000 project are not expected

to materially impact operating results in any one period.

 

The impact of year 2000 issues on the Corporation will depend not only on

corrective actions the Corporation takes, but also on the way in which year 2000

issues are addressed by governmental agencies, businesses and other third

parties that provide services or data to, or receive services or data from, the

Corporation, or whose financial condition or operational capability is important

to the Corporation. To reduce this exposure, the Corporation has identified and

has had an ongoing process of contacting mission critical third-party vendors

and other significant third parties to determine their year 2000 plans and

target dates. As part of such process, the Corporation has replaced certain

third-party software vendors where the Corporation had significant doubts

regarding the year 2000 compliance of their products. Risks associated with

third parties located outside the United States may be higher insofar as it is

generally believed that non-U.S. businesses may not be addressing their year

2000 issues on as timely a basis as U.S. businesses. The Corporation is

monitoring its non-U.S. subcustodians and has developed contingency plans with

respect to non-U.S. subcustodians. Notwithstanding the Corporation's efforts,

there can be no assurance that mission critical third-party vendors or other

significant third parties will adequately address their year 2000 issues.

 

The Corporation has developed contingency plans to address risks associated with

year 2000 issues. These activities include remediation contingency plans, year

2000 business resumption contingency plans and event management plans.

Remediation contingency plans addressed the actions that would be taken if the

approach to remediating a mission critical technology system was falling behind

schedule or would not be completed when required. Such plans principally

involved internal remediation or identifying alternate vendors. The Corporation

has completed the implementation of its remediation contingency plans. Year 2000

business resumption contingency plans address year 2000 problems that occur,

notwithstanding the remediation efforts of the Corporation and third parties. As

part of its year 2000 business resumption contingency planning, the Corporation

has enhanced its existing business recovery plans to reflect year 2000 issues

and has developed plans designed to coordinate the efforts of its personnel and

resources in addressing any mission critical year 2000 problems that become

evident. In this regard, all existing business recovery plans involving mission

critical processes have been reviewed, and options for addressing potential year

2000 problems have been identified. The Corporation has substantially completed

the process of validating such plans. Event planning is intended to address year

2000 risks by actively monitoring operations during the period of time around

the end of 1999 and the beginning of 2000 with a view to identifying any year

2000 problems that occur and taking action to manage and resolve such problems.

These actions may include implementing previously developed year 2000 business

resumption contingency plans or business recovery plans. Event plans have been

developed and will be implemented throughout 1999 and the first quarter of 2000.

As part of its Event Plan, the Corporation has announced that key retail bank

locations will be open for business on Saturday and Sunday, January 1 and 2,

2000. There can be no assurance that any contingency plans will fully mitigate

any year 2000 failures, problems or disruptions.

 

 

                                       28

<PAGE>   30

 

 

OPERATING EXPENSE (CONTINUED)

--------------------------------------------------------------------------------

 

Furthermore, there may be certain mission critical third parties, such as

utilities, communication companies, transportation companies or governmental

entities, where alternative arrangements or sources are unavailable or severely

limited.

 

The Corporation's credit risk associated with borrowers may increase to the

extent borrowers fail to adequately address year 2000 issues. As a result, there

may be increases in the Corporation's problem loans and credit losses in future

periods. In addition, the Corporation may be subject to increased risks as a

fiduciary to the extent that issuers of assets it manages or administers fail to

adequately address year 2000 issues and to increased liquidity risks to the

extent of deposit withdrawals or fund redemptions or to the extent its lenders

are unable due to year 2000 problems to provide the Corporation with funds. It

is not possible, however, to quantify the potential impact of any such risks or

losses at this time. As part of the Corporation's preparation and planning for

possible year 2000 issues, approximately $1.8 billion of short-term funds have

been replaced with floating and fixed-rate funds with maturities that extend

beyond the end of 1999.

 

Until the year 2000 event actually occurs and for a period of time thereafter,

there can be no assurance that there will be no problems related to year 2000.

The year 2000 technology challenge, and possible public reaction, is an

unprecedented event. If year 2000 issues are not addressed adequately by the

Corporation and third parties, the Corporation could face, among other things,

business disruptions, operational problems, financial losses, legal liability

and similar risks, and the Corporation's business, results of operations and

financial position could be materially adversely affected.

 

The foregoing year 2000 discussion contains "forward-looking statements" within

the meaning of the Private Securities Litigation Reform Act of 1995. Such

statements, including, without limitation, anticipated costs, the Corporation's

plans with respect to testing of systems and contingency planning, and the

impact of the redeployment of existing staff, are based on management's best

current estimates, which were derived utilizing numerous assumptions about

future events, including the continued availability of certain resources,

representations received from third-party vendors and other factors. However,

there can be no guarantee that these estimates will be achieved, and actual

results could differ materially from those anticipated. Specific factors that

might cause such material differences include, but are not limited to: the

availability and cost of personnel trained in this area; the ability to identify

and convert all relevant systems; results of year 2000 testing; adequate

resolution of year 2000 issues by governmental agencies, businesses or other

third parties that are service providers, suppliers, borrowers or customers of

the Corporation; unanticipated system costs; the need to replace hardware; the

adequacy of and ability to implement contingency plans; and similar

uncertainties. The forward-looking statements made in the foregoing year 2000

discussion speak only as of the date on which such statements are made, and the

Corporation undertakes no obligation to update any forward-looking statement to

reflect events or circumstances after the date on which such statement is made

or to reflect the occurrence of unanticipated events.

 

The foregoing year 2000 discussion constitutes a Year 2000 Readiness Disclosure

within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.

 

 

 

 

                                       29

<PAGE>   31

 

 

INCOME TAXES

--------------------------------------------------------------------------------

 

 

The provision for income taxes totaled $436 million, at an effective rate of

36.8%, in the first nine months of 1999, compared with $353 million, at an

effective rate of 35.3%, in the first nine months of 1998. The Corporation's

effective tax rate, excluding the effect of the net gain from divestitures and

nonrecurring expenses, for the first nine months of 1999 was 36.5%. It is

currently anticipated that the effective tax rate, excluding the effect of any

net gain or loss from divestitures and nonrecurring expenses, will be

approximately 36.5% for the remainder of 1999.

 

 

<TABLE>

<CAPTION>

ASSET/LIABILITY MANAGEMENT

--------------------------------------------------------------------------------------------------------------------------------

                                                                                                   Quarter ended

                                                                                   ---------------------------------------------

                                                                                   SEPT. 30,          June 30,         Sept. 30,

(average balances in millions)                                                          1999              1999              1998

--------------------------------------------------------------------------------------------------------------------------------

<S>                                                                                <C>                <C>               <C>

ASSETS:

Money market investments                                                             $ 1,463           $ 1,445           $ 1,351

Trading account securities                                                               403               414               266

Securities                                                                             6,364             6,652             5,754

Loans                                                                                 30,177            30,504            30,426

--------------------------------------------------------------------------------------------------------------------------------

       Total interest-earning assets                                                  38,407            39,015            37,797

Noninterest-earning assets                                                            10,878            11,167            10,641

Reserve for credit losses                                                               (414)             (416)             (501)

--------------------------------------------------------------------------------------------------------------------------------

       Total assets                                                                  $48,871           $49,766           $47,937

--------------------------------------------------------------------------------------------------------------------------------

 

FUNDS SUPPORTING TOTAL ASSETS:

Core funds                                                                           $39,518           $40,123           $38,477

Wholesale and purchased funds                                                          9,353             9,643             9,460

--------------------------------------------------------------------------------------------------------------------------------

       Funds supporting total assets                                                 $48,871           $49,766           $47,937

--------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

The $610 million increase in the Corporation's average interest-earning assets

in the third quarter of 1999, compared with the third quarter of 1998, primarily

reflects an increase in average securities.

 

Core funds, which are considered to be the most stable sources of funding, are

defined principally as individual money market and other savings deposits,

savings certificates, demand deposits, shareholders' equity, notes and

debentures with original maturities over one year, trust-preferred securities,

and other liabilities. Core funds primarily support core assets, which consist

of loans, net of the reserve, and noninterest-earning assets. Average core

assets increased $75 million in the third quarter of 1999 from the prior-year

period. Average core funds increased $1.0 billion in the third quarter of 1999

from the prior-year period, primarily reflecting an increase in money market and

other savings accounts and notes and debentures offset, in part, by decreases in

demand deposits and retail savings certificates. Core funds averaged 97% of core

assets in the third quarter of 1999, compared with 97% in the second quarter of

1999 and 95% in the third quarter of 1998.

 

Wholesale and purchased funds are defined as deposits in foreign offices,

negotiable certificates of deposit, federal funds purchased and securities under

repurchase agreements, short-term bank notes, U.S. Treasury tax and loan demand

notes, other time deposits, commercial paper and other funds borrowed. As a

percentage of total average assets, average wholesale and purchased funds were

19% in the third quarter of 1999, compared with 19% in the second quarter of

1999 and 20% in the third quarter of 1998. It is anticipated that the level of

wholesale and purchased funds will decrease as a result of the sale of the

residential mortgage business.

 

 

 

                                       30

<PAGE>   32

 

 

COMPOSITION OF LOAN PORTFOLIO

-------------------------------------------------------------------------------

 

 

The loan portfolio decreased $2.937 billion and $1.896 billion, respectively at

September 30, 1999, compared with December 31, 1998, and September 30, 1998,

reflecting the sale of the residential mortgage business in September 1999, the

sale of the credit card business in March 1999 and a lower level of wholesale

loans. The decreases were partially offset by increases in business banking,

middle market lending and lease finance assets. At September 30, 1999, the

composition of the loan portfolio was 63% commercial and 37% consumer.

 

 

<TABLE>

<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------

COMPOSITION OF LOAN PORTFOLIO                       SEPT. 30,        June 30,         March 31,       Dec. 31,         Sept. 30,

(in millions)                                            1999            1999              1999           1998              1998

--------------------------------------------------------------------------------------------------------------------------------

<S>                                                 <C>              <C>              <C>             <C>              <C>

Domestic loans:

   Commercial and financial                           $11,296         $12,383           $11,683        $12,060           $11,330

   Commercial real estate                               2,594           2,534             2,504          2,285             2,257

   Consumer credit:

     Consumer mortgage                                  6,813           7,446             8,169          8,871             8,701

     Credit card                                            -               -                 -            804               788

     Other consumer credit                              4,070           3,800             3,950          3,700             3,745

--------------------------------------------------------------------------------------------------------------------------------

         Total consumer credit                         10,883          11,246            12,119         13,375            13,234

   Lease finance assets                                 3,021           2,888             2,836          2,819             2,590

--------------------------------------------------------------------------------------------------------------------------------

         Total domestic loans                          27,794          29,051            29,142         30,539            29,411

International loans                                     1,362           1,493             1,412          1,554             1,641

--------------------------------------------------------------------------------------------------------------------------------

         Total loans, net of unearned discount        $29,156         $30,544           $30,554        $32,093           $31,052

--------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

Commercial and financial

 

At September 30, 1999, total domestic commercial and financial loans decreased

by $764 million, or 6%, compared with December 31, 1998, and by $34 million, or

less than 1%, compared with September 30, 1998, primarily as a result of a

decrease in large wholesale lending. These decreases were partially offset by

increases in business banking and middle market lending. Commercial and

financial loans represented 39% of the total loan portfolio at September 30,

1999, compared with 38% at December 31, 1998, and 37% at September 30, 1998.

 

Commercial real estate

 

<TABLE>

<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------

DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS

                                                   SEPT. 30,         June 30,         March 31,       Dec. 31,         Sept. 30,

(in millions)                                           1999             1999              1999           1998              1998

--------------------------------------------------------------------------------------------------------------------------------

<S>                                                <C>               <C>              <C>             <C>               <C>

Commercial mortgage and construction loans            $1,740           $1,687            $1,649         $1,554            $1,509

Owner-occupied and other loans (a)                       854              847               855            731               748

--------------------------------------------------------------------------------------------------------------------------------

   Total domestic commercial real estate loans        $2,594           $2,534            $2,504         $2,285            $2,257

--------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a) Owner-occupied and other loans are loans that are secured by real estate;

    however, the commercial property is not being relied upon as the primary

    source of repayment.

 

 

At September 30, 1999, domestic commercial real estate loans increased by $309

million, or 14%, compared with December 31, 1998, and by $337 million, or 15%,

compared with September 30, 1998, reflecting steady loan growth. Domestic

commercial real estate loans were 9% of total loans at September 30, 1999, up

from 7% at both year-end 1998 and September 30, 1998.

 

 

 

                                       31

<PAGE>   33

 

COMPOSITION OF LOAN PORTFOLIO (CONTINUED)

-------------------------------------------------------------------------------

 

Consumer mortgage

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

DISTRIBUTION OF DOMESTIC CONSUMER MORTGAGE LOANS

                                                   SEPT. 30,         June 30,         March 31,         Dec. 31,         Sept. 30,

(in millions)                                           1999             1999              1999             1998              1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                <C>               <C>              <C>               <C>               <C>

Jumbo residential mortgages                           $3,435           $3,367            $3,640           $3,821            $3,835

One- to four-family residential mortgages:

  Warehouse                                                -              670             1,102            1,588             1,622

  Portfolio                                              621              654               654              858               690

Fixed-term home equity loans                           1,871            1,908             1,975            1,801             1,781

Home equity revolving credit line loans                  886              847               798              803               773

----------------------------------------------------------------------------------------------------------------------------------

    Total domestic consumer mortgage loans            $6,813           $7,446            $8,169           $8,871            $8,701

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

At September 30, 1999, the domestic consumer mortgage portfolio totaled $6.813

billion, a $2.058 billion, or 23%, decrease from year-end 1998 and a $1.888

billion, or 22%, decrease from September 30, 1998. These decreases resulted

primarily from the sale of the one- to four-family residential mortgages in the

residential warehouse portfolio as part of the divestiture of the residential

mortgage servicing business.

 

Credit card

 

The credit card business was sold on March 31, 1999, as discussed further in the

"Significant financial events" section on pages 5 and 6. The CornerStone(sm)

credit card accelerated resolution portfolio was included in the sale. This

portfolio had been reported in "Other Assets" on the balance sheet.

 

Other consumer credit

 

Other consumer credit, which principally consists of student loans, installment

loans, unsecured personal credit lines and margin loans, was $4.070 billion at

September 30, 1999, an increase of $370 million, or 10%, from December 31, 1998,

and $325 million, or 9%, from September 30, 1998. The increases were primarily

due to higher levels of secured margin loans at Dreyfus Brokerage Services, Inc.

Other consumer credit loans are both secured and unsecured and, in the case of

student loans, are government guaranteed. Student loans totaled $1.778 billion,

or 44% of this portfolio, at September 30, 1999 compared with $1.765 billion at

December 31, 1998 and $1.732 billion at September 30, 1998.

 

Lease finance assets

 

Lease finance assets totaled $3.021 billion at September 30, 1999, an increase

of $202 million, or 7%, compared with December 31, 1998, and $431 million, or

17%, compared with September 30, 1998. Lease finance assets represented 10% of

the total loan portfolio at September 30, 1999, compared with 9% at year-end

1998 and 8% at September 30, 1998.

 

International loans

 

Loans to international borrowers totaled $1.362 billion at September 30, 1999,

down $192 million, or 12%, from year-end 1998 and down $279 million, or 17%,

from September 30, 1998, primarily due to decreased activity with large

corporate customers and foreign banks. There were no nonperforming international

loans in any of the periods presented.

 

 

 

                                       32

<PAGE>   34

 

 

COMPOSITION OF LOAN PORTFOLIO (CONTINUED)

-------------------------------------------------------------------------------

 

 

<TABLE>

<CAPTION>

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK (a)

----------------------------------------------------------------------------------------------------------------------------------

                                                                    SEPT. 30,          June 30,         Dec. 31,         Sept. 30,

(in millions)                                                            1999              1999             1998              1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>                <C>              <C>              <C>

Commitments to extend credit:

  Expire within one year                                              $15,368           $14,287          $14,356           $14,462

  Expire within one to five years                                      16,835            17,111           17,440            18,276

  Expire over five years                                                1,066             1,047            1,636             1,592

----------------------------------------------------------------------------------------------------------------------------------

    Total                                                              33,269            32,445           33,432            34,330

Standby letters of credit and foreign and other guarantees              4,229 (b)         3,578            3,830             4,004

Commercial letters of credit                                               99               139               86                85

Residential mortgage loans serviced with recourse                           -               109               97                85

Custodian securities lent with indemnification

  against broker default of return of securities                       30,217            33,994           31,802            30,279

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)    For a discussion of off-balance-sheet financial instruments with contract

       amounts that represent credit risk, see pages 97 and 98 of the 1998

       Annual Report to Shareholders.

(b)    Net of participations and cash collateral totaling $362 million.

 

<TABLE>

<CAPTION>

CAPITAL

----------------------------------------------------------------------------------------------------------------------------------

SELECTED CAPITAL DATA                                               SEPT. 30,          June 30,         Dec. 31,        Sept. 30,

(dollar amounts in millions, except per share amounts)                   1999              1999             1998             1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                                  <C>               <C>              <C>              <C>

Total shareholders' equity                                           $  4,219          $  4,303         $  4,521         $  4,358

Total shareholders' equity to assets ratio                               9.00%             8.77%            8.90%            9.03%

 

Tangible shareholders' equity (a)                                    $  2,454          $  2,498         $  2,641         $  2,540

Tangible shareholders' equity to assets ratio (b)                        5.45%             5.29%            5.41%            5.47%

 

Tier I capital ratio (c)                                                 7.12%             6.87%            6.53%            6.78%

Total (Tier I plus Tier II) capital ratio (c)                           11.58%            11.18%           10.80%           11.22%

Leverage capital ratio (c)                                               6.82%             6.70%            6.73%            7.06%

Total Tier I capital                                                 $  3,208          $  3,199         $  3,223         $  3,245

Total (Tier I plus Tier II) capital                                  $  5,217          $  5,209         $  5,331         $  5,367

Total risk-adjusted assets                                           $ 45,032          $ 46,572         $ 49,352         $ 47,852

Average assets - leverage capital basis                              $ 47,003          $ 47,727         $ 47,917         $ 45,979

 

Book value per common share                                          $   8.29          $   8.37         $   8.63         $   8.35

Tangible book value per common share                                 $   4.83          $   4.86         $   5.04         $   4.87

 

Closing common stock price                                           $  33.63          $  36.38         $  34.38         $  27.50

Market capitalization                                                $ 17,103          $ 18,704         $ 18,007         $ 14,363

Common shares outstanding (000)                                       508,650           514,211          523,846          522,280

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Includes $64 million, $64 million, $60 million and $- million,

     respectively, of minority interest, primarily related to Newton. In

     addition, includes $353 million, $368 million, $373 million and $297

     million, respectively, of tax benefits related to tax deductible goodwill

     and other intangibles.

(b)  Shareholders' equity plus minority interest less goodwill and other

     intangibles recorded in connection with purchase acquisitions divided by

     total assets less goodwill and other intangibles. The amount of goodwill

     and other intangibles subtracted from shareholders' equity and total assets

     is net of any tax benefit.

(c)  The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%

     and 3%, respectively.

 

 

                                       33

<PAGE>   35

 

 

CAPITAL (CONTINUED)

-------------------------------------------------------------------------------

 

 

The decrease in shareholders' equity at September 30, 1999, compared with the

prior periods, primarily reflects common stock repurchases partially offset by

earnings retention.

 

During the third quarter of 1999, 6.6 million shares of common stock were

repurchased, bringing year-to-date repurchases to 20 million shares and

completing the 20 million share repurchase program authorized by the board of

directors in January 1999. In September 1999, the board of directors authorized

an additional repurchase of up to 25 million shares of common stock to be used

for general corporate purposes. The Corporation began to repurchase common stock

under this program in late October 1999.

 

<TABLE>

<CAPTION>

COMMON SHARES OUTSTANDING

-----------------------------------------------------------------------------------------------------------------------------

                                                                     THIRD QUARTER        YEAR TO DATE         Full Year

(in millions)                                                                 1999                1999              1998

-----------------------------------------------------------------------------------------------------------------------------

<S>                                                                  <C>                   <C>                 <C>

Beginning shares outstanding                                               514.2                 523.8             507.6

Shares issued for stock-based benefit plans and

  dividend reinvestment plan                                                 1.1                   4.9               7.0

Shares issued for Mellon United National Bank acquisition                      -                     -              10.2

Shares repurchased                                                          (6.6) (a)            (20.0) (b)         (1.0) (c)

-----------------------------------------------------------------------------------------------------------------------------

       Ending shares outstanding                                           508.7                 508.7             523.8

-----------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Purchase price of $225 million for an average share price of $33.97 per

     share.

(b)  Purchase price of $694 million for an average share price of $34.68 per

     share.

(c)  Purchase price of $27 million for an average share price of $26.77 per

     share.

 

 

Regulatory capital

 

For a banking institution to qualify as well capitalized, its Tier I, Total and

Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of

the Corporation's banking subsidiaries qualified as well capitalized at

September 30, 1999. The Corporation intends to maintain the ratios of its

banking subsidiaries above the well-capitalized levels. By maintaining ratios

above the regulatory well-capitalized guidelines, the Corporation's banking

subsidiaries receive the benefit of lower FDIC deposit insurance assessments.

The continued improvement in the Corporation's capital ratios in 1999 resulted

from earnings retention and the net gain and lower asset levels following the

divestitures, partially offset by the repurchase of common stock.

 

 

 

                                       34

<PAGE>   36

 

 

CAPITAL (CONTINUED)

-------------------------------------------------------------------------------

 

 

Acquisition-related intangibles

 

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

ACQUISITION-RELATED INTANGIBLES                                     SEPT. 30,          June 30,         Dec. 31,         Sept. 30,

(in millions)                                                            1999              1999             1998              1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>                <C>              <C>               <C>

Goodwill                                                               $2,111            $2,159           $2,221            $2,016

Purchased core deposit intangibles                                         55                62               75                81

Other identified intangibles                                               16                16               17                18

----------------------------------------------------------------------------------------------------------------------------------

     Total acquisition-related intangibles                             $2,182 (a)        $2,237           $2,313            $2,115

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a) Acquisition-related intangibles at September 30, 1999, are composed of

    $1.014 billion of tax deductible intangibles and $1.168 billion of non-tax

    deductible intangibles.

 

 

The $95 million increase in goodwill from September 30, 1998, resulted from the

Newton acquisition, partially offset by amortization expense. For the full-year

1999, using common shares and equivalents outstanding at September 30, 1999, the

after-tax impact of the annual amortization is expected to be approximately $117

million, or approximately $.23 per share. Based upon the current level of

acquisition-related intangibles and the amortization schedule, the annual

amortization for the years 2000 through 2004 is expected to be approximately

$132 million, $124 million, $120 million, $116 million and $115 million,

respectively. The after-tax impact of the annual amortization for the years 2000

through 2004 is expected to be approximately $109 million, $103 million, $100

million, $97 million and $96 million, respectively.

 

Mortgage servicing assets and purchased credit card relationships

 

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

MORTGAGE SERVICING ASSETS AND PURCHASED

CREDIT CARD RELATIONSHIPS                                           SEPT. 30,          June 30,         Dec. 31,         Sept. 30,

(in millions)                                                            1999              1999             1998              1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>                <C>              <C>              <C>

Mortgage servicing assets:

  Residential                                                             $17            $1,038           $1,046            $  942

  Commercial                                                                -                31               69                71

----------------------------------------------------------------------------------------------------------------------------------

     Total mortgage servicing assets                                       17             1,069            1,115             1,013

Purchased credit card relationships                                         -                 -               17                18

----------------------------------------------------------------------------------------------------------------------------------

     Total mortgage servicing assets and

       purchased credit card relationships                                $17            $1,069           $1,132            $1,031

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

The decrease in total mortgage servicing assets at September 30, 1999 resulted

from the sales of the residential and commercial mortgage servicing businesses.

See the "Significant financial events" section on pages 5 and 6 for a further

discussion of these divestitures. The remaining $17 million of residential

mortgage servicing assets at September 30, 1999 relates to retained servicing

rights on jumbo residential mortgages that were not part of the sale.

 

The Corporation capitalized $3 million of jumbo residential mortgage servicing

assets in the third quarter of 1999, compared with $126 million in the third

quarter of 1998 on both the portfolio that was sold and on the jumbo mortgage

portfolio, in connection with both mortgage servicing portfolio purchases and

loan originations. These capitalized mortgage servicing assets were partially

offset by amortization. Mortgage servicing assets are amortized in proportion to

estimated net servicing income over the estimated life of the servicing

portfolio. Net amortization expense totaled $33 million in the third quarter of

1999, including $1 million from the jumbo

 

 

                                       35

<PAGE>   37

 

 

CAPITAL (CONTINUED)

-------------------------------------------------------------------------------

 

 

mortgage portfolio, compared with $41 million in the third quarter of 1998. The

estimated fair value of capitalized mortgage servicing assets was approximately

$19 million at September 30, 1999. The purchased credit card relationships shown

in the table on the prior page were sold on March 31, 1999, as part of the sale

of the Corporation's credit card business.

 

 

LIQUIDITY AND DIVIDENDS

-------------------------------------------------------------------------------

 

 

The Corporation's liquidity management objective is to maintain the ability to

meet commitments to fund loans and to purchase securities, as well as to repay

deposits and other liabilities in accordance with their terms, including during

periods of market or financial stress. The Corporation's overall approach to

liquidity management is to ensure that sources of liquidity are sufficient in

amount and diversity to accommodate changes in loan demand and core funding

routinely without a material adverse impact on net income. The Corporation's

liquidity position is managed by maintaining adequate levels of liquid assets,

such as money market assets and securities available for sale. Additional

liquidity is available through the Corporation's ability to participate or sell

commercial loans and to securitize selected loan portfolios. The parent

Corporation also has a $300 million revolving credit agreement, with

approximately 10 months remaining until maturity. An additional $25 million

backup line of credit that the Corporation previously maintained to provide

support facilities for its commercial paper borrowings and for general corporate

purposes was cancelled during the third quarter of 1999.

 

As shown in the consolidated statement of cash flows, cash and due from banks

increased by $414 million during the first nine months of 1999 to $3.340

billion. The increase resulted from $1.992 billion of net cash provided by

operating activities and $2.654 billion of net cash provided by investing

activities, primarily offset by $4.287 billion of net cash used in financing

activities. Net cash provided by investing activities primarily reflected

proceeds from the sales of the credit card business, network services

transaction processing unit and mortgage businesses as well as the sales and

securitizations of loans, partially offset by loan growth and an increase in

federal funds sold. Net cash used in financing activities primarily reflected

decreases in federal funds purchased and securities under repurchase agreements

and transaction and savings deposits.

 

In September 1999, the Corporation issued $400 million of floating rate senior

notes maturing in 2002. The proceeds from this issuance were used for general

corporate purposes. This was the final issuance under an existing debt shelf

registration statement on file with the Securities and Exchange Commission. In

February 1999, the board of directors authorized the filing of a new $600

million debt shelf registration statement. The Corporation currently intends to

file this new debt shelf registration statement in early 2000.

 

Contractual maturities of the Corporation's long-term debt totaled $6 million

during the third quarter of 1999, including $1 million related to parent term

debt. Contractual maturities of long-term debt will total approximately $260

million in the remainder of 1999, including $200 million related to parent term

debt. Contractual maturities of long-term debt will total approximately $210

million in 2000, including $205 million related to parent term debt. The

Corporation's and Mellon Bank, N.A.'s senior and subordinated debt ratings are

presented in the table on the following page. There were no changes to these

ratings during the third quarter of 1999 or for the past 15 months.

 

 

 

                                       36

<PAGE>   38

 

 

LIQUIDITY AND DIVIDENDS (CONTINUED)

-------------------------------------------------------------------------------

 

 

<TABLE>

<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------

SENIOR AND SUBORDINATED DEBT RATINGS

  AT SEPTEMBER 30, 1999                      Standard & Poor's           Moody's            Duff & Phelps            Fitch/IBCA

-----------------------------------------------------------------------------------------------------------------------------------

<S>                                              <C>                     <C>                <C>                      <C>

Mellon Financial Corporation:

  Senior debt                                      A+                      A2                    A+                      A+

  Subordinated debt                                A                       A3                    A                       A

Mellon Bank, N.A.:

  Senior debt                                      AA-                     A1                    AA-                     AA-

  Subordinated debt                                A+                      A2                    A+                      A+

-----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

The Corporation paid $301 million in common stock dividends in the first nine

months of 1999, compared with $271 million in the prior-year period. The common

dividend payout ratio was 44% in the third quarter of 1999, compared with 43% in

the third quarter of 1998. On a cash earnings per common share basis, the common

dividend payout ratio was 39% in the third quarter of 1999, compared with 38% in

the third quarter of 1998. Based upon shares outstanding at September 30, 1999,

and the current quarterly common dividend rate of $.20 per share, the annualized

common stock dividend cash requirement is expected to be approximately $410

million.

 

The parent Corporation's principal sources of cash are interest and dividends

from its subsidiaries. There are, however, certain limitations on the payment of

dividends to the parent Corporation by its national and state member bank

subsidiaries. For a discussion of these limitations, see note 22 in the

Corporation's 1998 Annual Report to Shareholders. Under the more restrictive

limitation, the Corporation's national and state member bank subsidiaries can,

without prior regulatory approval, declare dividends subsequent to September 30,

1999, of approximately $950 million, less any dividends declared and plus or

minus net profits or losses, as defined, between October 1, 1999, and the date

of any such dividend declaration.

 

 

INTEREST RATE SENSITIVITY ANALYSIS

-------------------------------------------------------------------------------

 

The objective of interest rate risk management is to control the effects that

interest rate fluctuations have on net interest revenue and on the net present

value of the Corporation's assets, liabilities and off-balance-sheet

instruments. Interest rate risk is measured using net interest margin simulation

and asset/liability net present value sensitivity analyses. Simulation tools

serve as the primary means to gauge interest rate exposure. The net present

value sensitivity analysis is the means by which the Corporation's long-term

interest rate exposure is evaluated. These analyses provide an understanding of

the range of potential impacts on net interest revenue and portfolio equity

caused by interest rate movements.

 

Modeling techniques are used to estimate the impact of changes in interest rates

on the net interest margin. Assumptions regarding the replacement of maturing

assets and liabilities are made to simulate the impact of future changes in

rates and/or changes in balance sheet composition. The effect of changes in

future interest rates on the mix of assets and liabilities may cause actual

results to differ from simulated results. In addition, certain financial

instruments provide customers a certain degree of choice. For instance,

customers may migrate from lower-interest deposit products to higher-interest

products. Also, customers may choose to refinance fixed-rate loans when interest

rates decrease. While the Corporation's simulation analysis considers these

factors, the extent to which customers utilize the ability to exercise their

financial decisions may cause actual results to differ significantly from the

simulation. Guidelines used by the Corporation for assuming interest rate risk

are presented in the "Interest rate sensitivity analysis" section on pages 50

and 51 of the 1998 Annual Report to Shareholders.

 

 

 

                                       37

<PAGE>   39

 

 

INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)

-------------------------------------------------------------------------------

 

 

The measurement of interest rate risk is meaningful only when all related on-

and off-balance-sheet items are aggregated and the net positions are identified.

Financial instruments that the Corporation uses to manage interest rate

sensitivity include: money market assets, U.S. government and federal agency

securities, municipal securities, mortgage-backed securities, corporate bonds,

asset-backed securities, fixed-rate wholesale term funding, interest rate swaps,

caps and floors, financial futures and forwards and financial options. The table

below illustrates the simulation analysis of the impact of a 50 and 100 basis

point parallel shift upward or downward in interest rates on net interest

revenue, earnings per share and return on common equity. Given the low interest

rate environment that currently exists, the impact of a 200 basis point shift

upward or downward in interest rates is not shown in the simulation sensitivity

analysis below. However, the impact of a +/- 200 basis point interest rate

movement would not exceed the Corporation's guidelines. This analysis was

prepared using the levels of all interest-earning assets and off-balance-sheet

instruments used for interest rate risk management at September 30, 1999,

assuming that the level of loan fees remains unchanged, and excludes the impact

of interest receipts on nonperforming loans. The impact of the rate movements

was developed by simulating the effect of rates changing in a parallel fashion

over a six-month period from the September 30, 1999, levels and remaining at

those levels thereafter.

 

<TABLE>

<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------

INTEREST RATE SIMULATION SENSITIVITY ANALYSIS

                                                                     Movements in interest rates from September 30, 1999 rates

--------------------------------------------------------------------------------------------------------------------------------

Simulated impact in the next 12 months                                   Increase                                 Decrease

  compared with September 30, 1999:                                  ------------------                      ------------------

                                                                     +50bp       +100bp                      -50bp       -100bp

                                                                     ------------------                      ------------------

<S>                                                                  <C>          <C>                        <C>          <C>

  Net interest revenue (decrease) increase                           (.2)%        (.6)%                        .1%          .3%

  Earnings per share (decrease)                                      $ -        $(.01)                        $ -          $ -

  Return on common equity (decrease) increase                         (5) bp      (12) bp                       3 bp         6 bp

--------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

The anticipated impact on net interest revenue under the 50 and 100 basis point

increase (decrease) scenarios showed an impact of less than 1% under all

scenarios at September 30, 1999, June 30, 1999, and September 30, 1998. The

simulation analysis for these periods reflects the Corporation's efforts to

balance the repricing characteristics of its interest-earning assets and

supporting funds.

 

Managing interest rate risk with off-balance-sheet instruments

 

By policy, the Corporation will not implement any new off-balance-sheet activity

that, when aggregated into the total corporate interest rate exposure, would

cause the Corporation to exceed its established interest rate risk limits.

Interest rate swaps--including callable and basis swaps--caps and floors,

financial futures and forwards and financial options have been approved by the

board of directors for managing the overall corporate interest rate exposure.

The use of financial futures, forwards and option contracts is permitted

provided that: the transactions occur in a market with a size that ensures

sufficient liquidity; the contract is traded on an approved exchange or, in the

case of over-the-counter option contracts, is transacted with a credit-approved

counterparty; and the types of contracts have been authorized for use by the

board of directors and the Finance Committee. Use of off-balance-sheet

instruments for speculative purposes is not permitted outside of those areas

designated as trading and controlled with specific authorizations and limits.

These instruments provide the Corporation flexibility in adjusting its interest

rate risk position without exposure to principal risk and funding requirements.

By using off-balance-sheet instruments to manage interest rate risk, the effect

is a smaller, more efficient balance sheet, with a lower wholesale funding

requirement and a higher return on assets and net interest margin with a

comparable level of net interest revenue and return on common equity. The

off-balance-sheet instruments used to manage the Corporation's interest rate

risk are shown in the table on the following page. Additional information

regarding these contracts is presented in note 24 in the Corporation's 1998

Annual Report to Shareholders.

 

 

 

                                       38

<PAGE>   40

 

 

INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)

-------------------------------------------------------------------------------

 

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK

                                                                                                                          Total at

                                                                                                                         Sept. 30,

(notional amounts in millions)               1999         2000          2001         2002          2003        2004+         1999

----------------------------------------------------------------------------------------------------------------------------------

<S>                                         <C>          <C>          <C>          <C>          <C>           <C>         <C>

Receive fixed/pay floating

 generic swaps (a):

    Notional amount                          $   -        $ 235        $    -       $   -        $  450        $ 550       $1,235

    Weighted average rate:

      Receive                                    -         5.29%            -           -          5.65%        6.67%        6.03%

      Pay                                        -         5.35%            -           -          5.36%        5.54%        5.44%

 

Receive fixed/pay floating

 callable swaps (b):

    Notional value                           $ 100        $   -        $   -        $   -        $  750        $ 100       $  950

    Weighted average rate:

      Receive                                 6.54%           -            -            -          5.59%        6.38%        5.77%

      Pay                                     5.31%           -            -            -          5.33%        5.48%        5.35%

 

Pay fixed/receive floating

 generic swaps (a):

    Notional amount                          $   1        $   2        $  27        $ 351        $   93        $  14       $  488

    Weighted average rate:

      Receive                                 5.05%        5.14%        5.48%        5.52%         5.68%        5.41%        5.54%

      Pay                                     6.70%        5.49%        6.14%        6.42%         6.57%        6.39%        6.43%

 

Receive floating/pay floating

 basis swaps (a):

    Notional value                           $   -        $ 205        $   -        $   -        $    -        $   -       $  205

    Weighted average rate:

      Receive                                    -         5.38%           -            -             -            -        5.38%

      Pay                                        -         5.78%           -            -             -            -        5.78%

 

Other products (c)                           $   5        $  15        $  11        $  21        $    -        $   -       $   52

----------------------------------------------------------------------------------------------------------------------------------

 

       Total notional amount                 $ 106        $ 457        $  38        $ 372        $1,293        $ 664       $2,930

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

(a)  Generic and basis swaps' notional amounts and lives are not based upon

     interest rate indices.

(b)  Callable swaps are generic swaps with a call option at the option of the

     counterparty. Call options will be exercised or not exercised on the basis

     of market interest rates. Expected maturity dates, based upon interest

     rates at September 30, 1999, are shown in this table.

(c)  Balance represents index amortizing swaps with expected maturities from

     1999 through 2002 and weighted average receive and pay rates of 7.10% and

     5.31%, respectively.

 

 

                                       39

<PAGE>   41

 

 

INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)

-------------------------------------------------------------------------------

 

 

The table below presents the gross notional amounts of off-balance-sheet

instruments used to manage interest rate risk, identified by the underlying

interest rate-sensitive instruments. The gross notional amount of

off-balance-sheet instruments used to manage interest rate risk was $302 million

higher at September 30, 1999, compared with June 30, 1999, and approximately

$1.2 billion lower compared with September 30, 1998. The decrease compared to

September 30, 1998, was due to a change in the interest rate risk profile of the

Corporation's on-balance-sheet instruments. The notional amounts shown in the

prior table and the table below should be viewed in the context of the

Corporation's overall interest rate risk management activities to assess the

impact on the net interest margin.

 

 

<TABLE>

<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------

                                                                    SEPT. 30,          June 30,         Dec. 31,         Sept. 30,

(in millions)                                                            1999              1999             1998              1998

----------------------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>                <C>              <C>               <C>

Instruments associated with deposits                                   $  181            $  159           $3,435            $2,557

Instruments associated with interest bearing liabilities                1,305             1,105              971               705

Instruments associated with loans                                       1,444             1,364            1,482               889

----------------------------------------------------------------------------------------------------------------------------------

     Total notional amount                                             $2,930            $2,628           $5,888            $4,151

----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

 

 

The Corporation entered into these off-balance-sheet products to alter the

natural interest rate risk embedded in its assets and liabilities. The interest

received and interest paid are recorded on an accrual basis in the interest

revenue and interest expense accounts associated with the underlying assets and

liabilities. The net differential resulted in interest revenue of $2 million and

$8 million in the third quarter and first nine months of 1999, compared with $5

million and $16 million in the third quarter and first nine months of 1998.

 

Unaccreted deferred gains from off-balance-sheet instrument terminations totaled