-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JISpST/knMqbCr1vAyS9z1uwQ6qJ8HWb0vQbwKYw8E1T8LWoXcTyJ5enH3JkamCN ajfsDVtpez1hRlXCxAIttA== 0000950128-97-000641.txt : 19970320 0000950128-97-000641.hdr.sgml : 19970320 ACCESSION NUMBER: 0000950128-97-000641 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MELLON BANK 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07410 FILM NUMBER: 97559045 BUSINESS ADDRESS: STREET 1: ONE MELLON BANK CENTER STREET 2: 500 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15258-0001 BUSINESS PHONE: 4122345000 FORMER COMPANY: FORMER CONFORMED NAME: MELLON NATIONAL CORP DATE OF NAME CHANGE: 19841014 10-K405 1 MELLON BANK 10-K405 1 - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------- FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 1-7410 MELLON BANK CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 25-1233834 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $0.50 Par Value New York Stock Exchange Preferred Stock, Series K, $1.00 Par Value New York Stock Exchange 7-1/4% Convertible Subordinated Capital Notes Due 1999 New York Stock Exchange Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 28, 1997, there were 129,397,642 shares outstanding of the registrant's voting common stock, $0.50 par value per share, of which 128,293,484 common shares having a market value of $10,311,588,777 were held by nonaffiliates. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the following parts of this Annual Report. Mellon Bank Corporation 1997 Proxy Statement-Part III Mellon Bank Corporation 1996 Annual Report to Shareholders-Parts I, II and IV - ------------------------------------------------------------------------------- 2 The Form 10-K filed with the Securities and Exchange Commission contains the Exhibits listed on the Index to Exhibits beginning on page 22, including the Financial Review and Statements and Notes; Principal Locations and Operating Entities; Directors and Senior Management Committee; and Corporate Information Sections of the Registrant's 1996 Annual Report to Shareholders. For a free copy of the Corporation's 1996 Annual Report to Shareholders, the Proxy Statement for its 1997 Annual Meeting, or a copy of the Corporation's Management Report on internal controls, as filed with the appropriate regulatory agencies, please send a written request to the Secretary of the Corporation, 1820 One Mellon Bank Center, Pittsburgh, PA 15258-0001. 3 MELLON BANK CORPORATION Form 10-K Index - -------------------------------------------------------------------------------
PART I PAGE Item 1. Business Description of Business 3 Supervision and Regulation 5 Competition 8 Employees 8 Statistical Disclosure by Bank Holding Companies 9 Item 2. Properties 14 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 16 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 PART III Item 10. Directors and Executive Officers of the Registrant 17 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 19 Item 13. Certain Relationships and Related Transactions 19 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
2 4 PART I ITEM 1. BUSINESS DESCRIPTION OF BUSINESS Mellon Bank Corporation (the "Corporation") is a multibank holding company incorporated under the laws of Pennsylvania in August 1971 and registered under the Federal Bank Holding Company Act of 1956, as amended. The Corporation provides a comprehensive range of financial products and services in domestic and selected international markets. The Corporation's banking subsidiaries are located in Pennsylvania, Massachusetts, Delaware, Maryland, and New Jersey. Other subsidiaries are located in key business centers throughout the United States and abroad. At December 31, 1996, the Corporation was the twenty-second largest bank holding company in the United States in terms of assets. The Corporation's principal direct subsidiaries are Mellon Bank, N.A. ("Mellon Bank"), The Boston Company, Inc. ("TBC"), Mellon Bank (DE) National Association, Mellon Bank (MD) National Association and a number of companies known as Mellon Financial Services Corporation. The Corporation also owns a federal savings bank headquartered in Pennsylvania, Mellon Bank, F.S.B. The Dreyfus Corporation ("Dreyfus"), one of the nation's largest mutual fund companies, is a wholly owned subsidiary of Mellon Bank. The Corporation's banking subsidiaries engage in retail financial services, commercial banking, trust and investment management services, residential real estate loan financing, mortgage servicing, equipment leasing, mutual fund activities and various securities-related activities. Mellon Bank, which has its executive offices in Pittsburgh, Pennsylvania, became a subsidiary of the Corporation in November 1972. With its predecessors, Mellon Bank has been in business since 1869. Mellon Bank is comprised of six operating regions throughout Pennsylvania and southern New Jersey. Dreyfus, headquartered in New York, New York, serves primarily as an investment adviser, manager and administrator of mutual funds. TBC, through Boston Safe Deposit and Trust Company ("BSDT") and other subsidiaries, engages in the business of institutional trust and custody, institutional asset management, private investment management and banking services. TBC is headquartered in Boston, Massachusetts. Mellon Bank (DE) National Association, headquartered in Wilmington, Delaware, serves consumer and small to midsize commercial markets throughout Delaware and provides nationwide cardholder processing services. Mellon Bank (MD) National Association is headquartered in Rockville, Maryland, and serves consumer and small to midsize commercial markets throughout the greater Washington, D.C. metropolitan area. Mellon Bank, F.S.B., headquartered in Pittsburgh, Pennsylvania, provides corporate trust and personal trust services and serves consumer and small to midsize commercial markets. The Corporation's banking subsidiaries operate 1,104 domestic retail banking locations, including 420 retail offices. The deposits of the national banking subsidiaries, BSDT and Mellon Bank, F.S.B., are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law. Other subsidiaries of the Corporation provide a broad range of bank-related services -- including equipment leasing, commercial loan financing, stock transfer services, cash management and numerous trust and investment management services. The types of financial products and services offered by the Corporation's subsidiaries are subject to change. For analytical purposes, management has focused the Corporation into four core business sectors: Consumer Investment Services, Consumer Banking Services, Corporate/Institutional Investment Services and Corporate/Institutional Banking Services. Further information regarding the Corporation's core business sectors, as well as certain non-core sectors such as Real Estate Workout, is presented in the Business Sectors section on pages 26 through 28 of the Corporation's 1996 Annual Report to Shareholders, which pages are incorporated herein by reference. A brief discussion of the business sectors is presented on the following page. There is considerable interrelationship among these sectors. 3 5 DESCRIPTION OF BUSINESS (continued) CONSUMER INVESTMENT SERVICES The Corporation provides a broad array of personal trust services, investment services and retail mutual funds to consumers. These products and services are offered principally through the private asset management trust group of Mellon Bank and BSDT, through Dreyfus and throughout the Corporation's retail banking network. CONSUMER BANKING SERVICES The Consumer Banking Services sector includes consumer lending and deposit products, business banking, branch banking, credit card, mortgage loan origination and servicing and jumbo residential mortgage lending. The consumer lending, branch banking and small business banking services primarily are offered through the Corporation's retail banking network which is comprised of 347 retail branches, 72 supermarket facilities, 684 ATM's, 8 loan sales offices and a telephone banking center. This network is primarily located in the Central Atlantic region of the United States. This banking network provides a full range of products to individuals including short- and long-term credit facilities, credit cards, mortgages, safe deposit facilities and access to ATM's. Jumbo residential mortgage lending is offered nationally through the private asset management representative offices. This sector also includes the core servicing function of the Corporation's mortgage banking operations located in Houston, Denver, Cleveland and Kansas City through which the Corporation originates and services residential and commercial mortgages for institutional investors and makes residential loans nationwide. CORPORATE/INSTITUTIONAL INVESTMENT SERVICES The Corporate/Institutional Investment Services sector serves the institutional markets (including employee benefit plans) by providing institutional asset and institutional mutual fund management and administration, institutional trust and custody, securities lending, foreign exchange, cash management, stock transfer and corporate trust. The Corporation's subsidiaries provide trust and investment management services while operating under the umbrella name "Mellon Trust"; in addition, the subsidiaries provide institutional mutual fund management through Dreyfus. The Corporation also owns a number of subsidiaries that provide a variety of active and passive equity and fixed income investment management services, including management of international securities. Through the Global Cash Management department, the Corporation offers a broad range of cash management services, including remittance processing, collections and disbursements, check processing and electronic services. The Corporation's subsidiaries also provide services relating primarily to defined contribution employee benefit plans under the umbrella name "Dreyfus Retirement Services." Stock transfer services are provided in the United States through its joint venture operating under the name of ChaseMellon Shareholder Services and in Canada through The R-M Trust Company. CORPORATE/INSTITUTIONAL BANKING SERVICES Corporate/Institutional Banking Services includes large corporate and middle market lending, asset-based lending, lease financing, commercial real estate lending, insurance premium financing, securities underwriting and trading and international banking. The Corporation provides lending and other institutional banking services to domestic and selected international markets through its Corporate Banking, Institutional Banking, Capital Markets and Leasing departments. These markets generally include large domestic commercial and industrial customers, U.S. operations of foreign companies, multinational corporations, state and local governments and various financial institutions (including banks, securities broker/dealers, insurance companies, finance companies and mutual funds). The Corporation also offers corporate finance and rate risk management products; syndicates, participates out and sells loans; offers a variety of capital markets products and services, including private placement and money market transactions; and provides equipment leasing, financing and lease advisory services. The Corporation maintains foreign offices in London, Tokyo, Hong Kong, Toronto, and Grand Cayman, British West Indies. Through these offices, the Corporation conducts trade finance activities, engages in correspondent banking and provides corporate banking and capital markets services. Included in this sector is a nationwide asset-based lending division which provides secured lending, principally through 4 6 DESCRIPTION OF BUSINESS (continued) accounts receivable and inventory financing. As part of this sector, Middle Market Banking serves companies with annual sales between $10 million and $250 million and the health care industry on a national basis. Real Estate lending consists of the Corporation's commercial real estate lending activities, through which it originates financing for residential, commercial, multi-family and other products. The Corporation provides property and casualty insurance premium financing to small, midsize and large companies in the United States through the AFCO Credit Corporation and in Canada through CAFO. The 1996 Annual Report to Shareholders summarizes principal locations and operating entities on pages 18 and 19, which pages are incorporated herein by reference. Exhibit 21.1 to this Annual Report on Form 10-K presents a list of the subsidiaries of the Corporation as of December 31, 1996. SUPERVISION AND REGULATION The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to the supervision of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Generally, the Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries, and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking and a proper incident thereto. Certain of the Corporation's subsidiaries are themselves bank holding companies under the Act. As a result of its Mellon Bank, F.S.B. subsidiary, the Corporation is also regulated under the Home Owners' Loan Act of 1933 as a savings and loan holding company. The Corporation's national banking subsidiaries are subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC"); BSDT is currently subject to supervision, regulation and examination by the FDIC and the Massachusetts Office of the Commissioner of Banks with the FDIC's bank supervisory role to be assumed by the Federal Reserve System in the second quarter of 1997; and Mellon Bank, F.S.B. is subject to supervision, regulation and examination by the Office of Thrift Supervision ("OTS"). Mellon Securities Trust Company, The Dreyfus Trust Company and Boston Safe Deposit and Trust Company of New York are New York trust companies and are supervised by the New York State Department of Banking. Boston Safe Deposit and Trust Company of California is a California trust company and is supervised by the State of California Banking Department. The Corporation's nonbank subsidiaries engaged in securities related activities are regulated by the Securities and Exchange Commission (the "SEC"). Dreyfus Investment Services Corporation, a subsidiary of the Corporation, conducts a brokerage operation, and Mellon Financial Markets, Inc., a subsidiary of the Corporation, engages in securities activities permitted to bank holding company subsidiaries under Section 20 of the Glass-Steagall Act. Dreyfus Service Corporation, a subsidiary of Dreyfus, acts as a broker/dealer for the sale of shares of mutual funds, including the Dreyfus family of mutual funds. Dreyfus Investment Services Corporation, Mellon Financial Markets, Inc. and Dreyfus Service Corporation are registered broker/dealers and members of the National Association of Securities Dealers, Inc., a securities industry self-regulatory organization. Certain subsidiaries of the Corporation are registered investment advisers under the Investment Advisers Act of 1940 and, as such, are supervised by the SEC. They are also subject to various federal and state laws and regulations and to the laws of any countries in which they do business. These laws and regulations are primarily intended to benefit clients and fund shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, the revocation of the registration as an investment adviser, censures and fines. Each investment company (as defined in the Investment Company Act of 1940) which is advised by a subsidiary of the Corporation, including the Dreyfus family of mutual funds, is registered with the SEC, and the shares of most are qualified for sale in all states in the 5 7 SUPERVISION AND REGULATION (continued) United States and the District of Columbia, except for investment companies that offer products only to residents of a particular state or of a foreign country and except for certain investment companies which are exempt from such registration or qualification. Certain of the Corporation's public finance activities are regulated by the Municipal Securities Rulemaking Board. Mellon Bank and certain of the Corporation's other subsidiaries are registered with the Commodity Futures Trading Commission (the "CFTC") as commodity pool operators or commodity trading advisors and, as such, are subject to CFTC regulation. The Corporation and its subsidiaries are subject to an extensive system of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Corporation's subsidiaries rather than holders of the Corporation's securities. These laws and regulations govern such areas as permissible activities, reserves, loans and investments, and rates of interest that can be charged on loans. The Corporation and its subsidiaries also are subject to general U.S. federal laws and regulations and to the laws and regulations of the states or countries in which they conduct their businesses. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and its subsidiaries. The references are not intended to be complete and are qualified in their entirety by reference to the statutes and regulations. Changes in applicable law or regulation may have a material effect on the business of the Corporation. On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was enacted into Federal law. Under the Interstate Act, commencing on September 29, 1995, bank holding companies are permitted to acquire banks located in any state regardless of the state law in effect at the time. The Interstate Act also provides for the nationwide interstate branching of banks. Under the Interstate Act, both national and state-chartered banks will be permitted to merge across state lines (and thereby create interstate branches) commencing June 1, 1997. States are permitted to "opt-out" of the interstate branching authority by taking action prior to the commencement date. States may also "opt-in" early (i.e., prior to June 1, 1997) to the interstate branching provisions. Pennsylvania chose to "opt-in" early, effective July 6, 1995, thereby enabling Pennsylvania banks, including national banks having their main office in Pennsylvania, to merge with out-of-state banks to create interstate branches inside or outside Pennsylvania. In addition, Pennsylvania has permitted de novo branching into and out of Pennsylvania as long as the law of the other state involved is reciprocal in this regard. There are certain restrictions on the ability of the Corporation and certain of its non-bank affiliates to borrow from, and engage in other transactions with, its banking subsidiaries and on the ability of such banking subsidiaries to pay dividends to the Corporation. These restrictions are discussed in note 21 of the Notes to Financial Statements on pages 86 and 87 of the Corporation's 1996 Annual Report to Shareholders. This note is incorporated herein by reference. The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity which, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting their businesses. The Federal Reserve Board has similar authority with respect to the Corporation and the Corporation's non-bank subsidiaries, including Mellon Securities Trust Company, a member of the Federal Reserve System. The FDIC has similar authority with respect to BSDT, and the OTS has similar authority with respect to Mellon Bank, F.S.B. The Federal Reserve System will assume such authority with respect to BSDT upon its conversion to a state member bank in the second quarter of 1997. Substantially all of the deposits of the banking subsidiaries are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit insurance assessments to maintain the BIF. The insurance assessments are based upon a matrix that takes into account a bank's capital level and supervisory rating. Effective January 1, 1996, the FDIC reduced the insurance premiums it charged on bank deposits insured by the BIF to the statutory minimum of $2,000.00 annually for "well capitalized" banks. Savings association deposits acquired by banks continued to be assessed at the rate of 23 cents to 31 cents per $100.00 of deposits. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA reduced the amount of FDIC insurance premiums for savings association deposits acquired by banks to the same levels assessed for deposits insured by BIF. 6 8 SUPERVISION AND REGULATION (continued) DIFA further provides for assessments to be imposed on all insured depository institutions with respect to deposits to pay for the cost of Financing Corporation funding. Based on December 31, 1996, deposit levels, the Corporation estimates that assessments will amount to approximately $4 million pre-tax in 1997. The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") contains a "cross-guarantee" provision that could result in any insured depository institution owned by the Corporation being assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other depository institution owned by the Corporation. Also, under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each of its banking subsidiaries and to commit resources to support each such bank in circumstances where such bank might not be in a financial position to support itself. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Among other things, federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA identifies the following capital tiers for financial institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Rules adopted by the federal banking agencies under FDICIA provide that an institution is deemed to be: "well capitalized" if the institution has a Total risk-based capital ratio of 10.0% or greater, a Tier I risk-based ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure; "adequately capitalized" if the institution has a Total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the institution is rated composite 1 in its most recent report of examination, subject to appropriate Federal banking agency guidelines), and the institution does not meet the definition of a well capitalized institution; "undercapitalized" if the institution has a Total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is rated composite 1 in its most recent report of examination, subject to appropriate Federal banking agency guidelines) and the institution does not meet the definition of a significantly undercapitalized or critically undercapitalized institution; "significantly undercapitalized" if the institution has a Total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0% and the institution does not meet the definition of a critically undercapitalized institution; and "critically undercapitalized" if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. At December 31, 1996, all of the Corporation's banking subsidiaries fell into the well capitalized category based on the ratios and guidelines noted above. A bank's capital category, however, is determined solely for the purpose of applying the prompt corrective action rules and may not constitute an accurate representation of the bank's overall financial condition or prospects. The appropriate Federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution. The statute provides that an institution may be reclassified if the appropriate Federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. 7 9 SUPERVISION AND REGULATION (continued) Legislation enacted in August 1993 provides that depositors and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution in the "liquidation or other resolution" of such an institution by any receiver. During recent years, regulatory guidelines have been adopted, and legislation has been proposed in Congress, to address concerns regarding retail sales by banks of various nondeposit investment products, including mutual funds. Legislative and regulatory attention to these matters is likely to continue, and may intensify, in the future. Although existing statutory and regulatory requirements in this regard have not had a significant effect on the Corporation's business, there can be no assurance that future requirements will not have such an effect. Various other legislative initiatives, including proposals to restructure the banking regulatory system and the separation of banking from certain securities and other commercial activities, are from time to time introduced in Congress. The Corporation cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon its financial condition or operations. COMPETITION The Corporation and its subsidiaries continue to be subject to intense competition in all aspects and areas of their businesses from banks; other domestic and foreign depository institutions, such as savings and loan associations, savings banks and credit unions; and other providers of financial services, such as finance, mortgage and leasing companies, brokerage firms, credit card companies, money market mutual funds, investment companies and insurance companies. The Corporation also competes with nonfinancial institutions, including retail stores and manufacturers of consumer products that maintain their own credit programs, as well as governmental agencies that make available loans to certain borrowers. Also, in the Corporate/Institutional Investment Services business sector, the Corporation competes with a wide range of technologically capable service providers, such as data processing and outsourcing firms. In terms of domestic deposits, Mellon Bank is the third largest commercial banking institution in Pennsylvania where it competes with approximately 215 commercial banks, 125 thrifts and numerous credit unions and consumer finance institutions. Mellon Bank competes with approximately 25 commercial banks and 40 thrifts in the six-county Pittsburgh area of Western Pennsylvania. Mellon Bank competes with approximately 30 commercial banks and 45 thrifts in the five-county Philadelphia area, one of the largest metropolitan areas in the United States. In most of the markets in which the Corporation's banking subsidiaries operate, they compete with large regional and other banking organizations in making commercial, industrial and consumer loans, and in providing products and services. Competition has continued to increase in recent years in many areas in which the Corporation and its subsidiaries operate, in substantial part because other types of financial institutions and other entities are increasingly engaging in activities traditionally engaged in by commercial banks. Commercial banks face significant competition in acquiring quality assets due to such factors as the increase in commercial paper and long-term debt issued by industrial companies, increased activities by finance companies, foreign banks and credit unions, and the increased lending powers granted to and employed by many types of thrift institutions and credit unions. Commercial banks also face competition in attracting deposits at reasonable prices due to the activities of money market funds; increased activities of non-bank deposit takers, including brokerage firms; alternatives presented by foreign banks; and the increased availability of demand deposit type accounts at thrift institutions and credit unions. Unlike the Corporation, many of these competitors, with the particular exception of thrift institutions, are not subject to regulation as extensive as that described under the "Supervision and Regulation" section and, as a result, they may have a competitive advantage over the Corporation in certain respects. EMPLOYEES The Corporation and its subsidiaries had an average of 24,700 full-time equivalent employees in the fourth quarter of 1996. 8 10 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES Exchange Act Industry Guide 3 requires that the following statistical disclosures be made in Annual Reports on Form 10-K filed by bank holding companies. I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Information required by this section of Securities Act Industry Guide 3, or Exchange Act Industry Guide 3, is presented in the Rate/Volume Variance Analysis below. Required information is also presented in the Financial Section of the Corporation's 1996 Annual Report to Shareholders in the Consolidated Balance Sheet -- Average Balances and Interest Yields/Rates on pages 102 and 103, and in Net Interest Revenue, on page 31, which is incorporated herein by reference. RATE/VOLUME VARIANCE ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1996 over (under) 1995 1995 over (under) 1994 Due to change in Net Due to change in Net (in millions) Rate Volume Change Rate Volume Change - ------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in interest revenue from interest-earning assets: Interest-bearing deposits with banks $ (6) $ 6 $ - $ 11 $ (9) $ 2 Federal funds sold and securities under resale agreements (2) (2) (4) 11 (7) 4 Other money market investments - 4 4 1 (4) (3) Trading account securities (3) (8) (11) 1 (6) (5) Securities: U.S. Treasury and agency securities - 87 87 38 (2) 36 Obligations of states and political subdivisions - (2) (2) 1 (4) (3) Other 1 (3) (2) 6 (9) (3) LOANS (INCLUDES LOAN FEES) (162) (9) (171) 315 182 497 - ------------------------------------------------------------------------------------------------------------------------------ Total (172) 73 (99) 384 141 525 Increase (decrease) in interest expense on interest-bearing liabilities: Deposits in domestic offices: Demand (2) (20) (22) 33 - 33 Money market and other savings accounts (39) 42 3 96 (7) 89 Retail savings certificates (11) (8) (19) 94 3 97 Other time deposits 2 82 84 (4) 1 (3) Deposits in foreign offices (25) (7) (32) 33 101 134 Federal funds purchased and securities under repurchase agreements (11) (20) (31) 32 17 49 Other short-term borrowings (4) (34) (38) 18 64 82 Notes and debentures (with original maturities over one year) - 26 26 14 (7) 7 - ------------------------------------------------------------------------------------------------------------------------------ Total (90) 61 (29) 316 172 488 - ------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in net interest revenue $ (82) $ 12 $ (70) $ 68 $(31) $ 37 - ------------------------------------------------------------------------------------------------------------------------------
Note: Amounts are calculated on a taxable equivalent basis where applicable, at tax rates approximating 35% and are before the effect of reserve requirements. Changes in interest revenue or interest expense arising from the combination of rate and volume variances are allocated proportionally to rate and volume based on their relative absolute magnitudes. 9 11 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) II. Securities Portfolio A. Carrying values of securities at year-end are as follows:
- ----------------------------------------------------------------------------------------------------------- INVESTMENT SECURITIES December 31, (in millions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- U.S. Treasury and agency securities $2,292 $2,408 $3,045 Obligations of states and political subdivisions - - 70 Other securities: Other mortgage-backed 29 39 48 Bonds, notes and debentures 16 30 29 Stock of Federal Reserve Bank 37 41 50 Other 1 1 2 - ----------------------------------------------------------------------------------------------------------- Total other securities 83 111 129 - ----------------------------------------------------------------------------------------------------------- Total investment securities $2,375 $2,519 $3,244 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE December 31, (in millions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- U.S. Treasury and agency securities $4,010 $2,769 $1,739 Obligations of states and political subdivisions 49 63 1 Other securities: Other mortgage-backed 4 7 9 Bonds, notes and debentures 12 12 12 Other 36 62 120 - ----------------------------------------------------------------------------------------------------------- Total other securities 52 81 141 - ----------------------------------------------------------------------------------------------------------- Total securities available for sale $4,111 $2,913 $1,881 - -----------------------------------------------------------------------------------------------------------
B. Maturity Distribution of Securities Information required by this section of Guide 3 is presented in the Corporation's 1996 Annual Report to Shareholders in note 3 of Notes to Financial Statements on Securities on pages 72 through 74, which note is incorporated herein by reference. 10 12 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) III. Loan Portfolio A. Types of Loans Information required by this section of Guide 3 is included in the Credit Risk section of the Corporation's 1996 Annual Report to Shareholders on pages 51 through 60, which portions are incorporated herein by reference. B. Maturities and Sensitivities of Loans to Changes in Interest Rates Maturity distribution of loans at December 31, 1996
- ---------------------------------------------------------------------------------------------------------- (in millions) Within 1 Year (a) 1-5 Years Over 5 Years Total - ---------------------------------------------------------------------------------------------------------- Domestic:(b) Commercial and financial $3,080 $5,195 $1,921 $10,196 Commercial real estate 445 716 373 1,534 - ---------------------------------------------------------------------------------------------------------- Total domestic 3,525 5,911 2,294 11,730 International 963 192 267 1,422 - ---------------------------------------------------------------------------------------------------------- Total $4,488 $6,103 $2,561 $13,152 - ----------------------------------------------------------------------------------------------------------
Note: Maturity distributions are based on remaining contractual maturities. (a) Includes demand loans and loans with no stated maturity. (b) Excludes consumer mortgages, credit card, other consumer credit and lease finance assets. Sensitivity of loans at December 31, 1996, to changes in interest rates
- --------------------------------------------------------------------------------------------------------- Domestic International (in millions) operations(a) operations Total - --------------------------------------------------------------------------------------------------------- Loans due in one year or less (b) $3 525 $ 963 $4,488 Loans due after one year: Variable rates 7,405 377 7,782 Fixed rates 800 82 882 - --------------------------------------------------------------------------------------------------------- Total loans $11,730 $1,422 $13,152 - ---------------------------------------------------------------------------------------------------------
Note: Maturity distributions are based on remaining contractual maturities. (a) Excludes consumer mortgages, credit card, other consumer credit and lease finance assets. (b) Includes demand loans and loans with no stated maturity. C. Risk Elements Information required by this section of Guide 3 is included in the Credit Risk section of the Corporation's 1996 Annual Report to Shareholders on pages 51 through 60, which portions are incorporated herein by reference. IV. Summary of Loan Loss Experience The Corporation employs various estimation techniques in developing the credit loss reserve. Management reviews the specific circumstances of individual loans subject to more than the customary potential for exposure to loss. In establishing the level of the reserve, management also identifies market concentrations, changing business trends, industry risks, and current and anticipated specific and general economic factors that may adversely affect collectibility. Other factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; historical loss experience; lending policies; new products; the status and amount of nonperforming and past-due loans and adequacy of collateral. The loss reserve methodology also provides for a portion of the reserve to act as an additional buffer against credit quality deterioration or risk of estimation error. Based on this evaluation, management believes that the credit loss reserve is adequate to absorb future losses inherent in the portfolio. 11 13 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) The reserve is not specifically associated with individual loans or portfolio segments. Thus, the reserve is available to absorb credit losses arising from any individual loan or portfolio segment. When losses on specific loans are identified, management charges off the portion deemed uncollectible. In view of the fungible nature of the reserve and management's practice of charging off known losses, the Corporation does not maintain truly specific reserves on any loan. However, management has developed a loan loss reserve methodology designed to provide procedural discipline in assessing the adequacy of the reserve. The allocation of the Corporation's reserve for credit losses presented below is based on this loan loss reserve methodology.
- -------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- Domestic reserve: Commercial and financial $117 $169 $195 $182 $170 Real estate: Commercial 98 92 157 189 212 Consumer 58 61 75 91 18 Consumer credit 198 135 141 102 83 Lease finance assets 43 6 17 15 4 - -------------------------------------------------------------------------------------------------------------- Total domestic reserve 514 463 585 579 487 International reserve 11 8 22 21 19 - -------------------------------------------------------------------------------------------------------------- Total reserve $525 $471 $607 $600 $506 - --------------------------------------------------------------------------------------------------------------
Further information on the Corporation's credit policies, the factors that influenced management's judgment in determining the level of the reserve for credit losses, and the analyses of the credit loss reserve for the years 1992-1996 are set forth in the Financial Section of the Corporation's 1996 Annual Report to Shareholders in the Credit Risk section on pages 51 and 52, the Reserve for Credit Losses and Review of Net Credit Losses section on pages 59 and 60, in note 1 of Notes to Financial Statements under Reserve for Credit Losses on page 69 and in note 5 on page 75, which portions are incorporated herein by reference. For each category above, the ratio of loans to consolidated total loans is as follows:
- -------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- Domestic loans: Commercial and financial 37.2% 39.6% 37.5% 37.2% 40.7% Real estate: Commercial 5.6 5.5 6.1 7.0 9.4 Consumer 28.4 32.4 32.5 33.4 21.4 Consumer credit 14.4 16.4 18.1 15.6 18.1 Lease finance assets 9.2 3.0 3.0 2.9 3.2 - -------------------------------------------------------------------------------------------------------------- Total domestic loans 94.8 96.9 97.2 96.1 92.8 International loans 5.2 3.1 2.8 3.9 7.2 - -------------------------------------------------------------------------------------------------------------- Total loans 100.0% 100.0% 100.0% 100.0% 100.0% - --------------------------------------------------------------------------------------------------------------
12 14 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) V. Deposits Maturity distribution of domestic time deposits at December 31, 1996
----------------------------------------------------------------------------------------------------------------------- Within 4-6 7-12 Over (in millions) 3 months months months 1 year Total ----------------------------------------------------------------------------------------------------------------------- Time certificates of deposit in denominations of $100,000 or greater $2,163 $ 828 $ 337 $ 167 $ 3,495 Time certificates of deposit in denominations of less than $100,000 1,444 1,342 1,294 1,781 5,861 ----------------------------------------------------------------------------------------------------------------------- Total time certificates of deposit 3,607 2,170 1,631 1,948 9,356 ----------------------------------------------------------------------------------------------------------------------- Other time deposits in denominations of $100,000 or greater 638 10 1 23 672 Other time deposits in denominations of less than $100,000 18 - - - 18 ----------------------------------------------------------------------------------------------------------------------- Total other time deposits 656 10 1 23 690 ----------------------------------------------------------------------------------------------------------------------- Total domestic time deposits $4,263 $2,180 $1,632 $1,971 $10,046 -----------------------------------------------------------------------------------------------------------------------
The majority of foreign deposits of approximately $2.7 billion at December 31, 1996, were in amounts in excess of $100,000. Additional information required by this section of Guide 3 is set forth in the Corporation's 1996 Annual Report to Shareholders in Consolidated Balance Sheet -- Average Balances and Interest Yields/Rates on pages 102 and 103, which pages are incorporated herein by reference. VI. Return on Equity and Assets
Year ended December 31, 1996 1995 1994 --------------------------------------------------------------------------------------------------------------- (1) Return on total assets(a), based on: Net income 1.74% 1.72% 1.14% Net income applicable to common stock 1.64 1.63 .95(b) (2) Return on common shareholders' equity (a), based on net income applicable to common stock 20.38 17.77 9.79(b) Return on total shareholders' equity, based on net income 19.23 16.84 10.13 (3) Dividend payout ratio of common stock, based on: Primary net income per share 44.96 44.18 54.66 Fully diluted net income per share 44.95 44.17 54.63 (4) Equity to total assets(a), based on: Common shareholders' equity 8.05 9.15 9.68 Total shareholders' equity 9.07 10.24 11.22 -------------------------------------------------------------------------------------------------------------
(a) Computed on a daily average basis. (b) Computed using net income applicable to common stock after adding back Series D preferred stock dividends. 13 15 STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (continued) VII. Short-Term Borrowings Federal funds purchased and securities sold under agreements to repurchase represent funds acquired for securities transactions and other funding requirements. Federal funds purchased mature on the business day after execution. Selected balances and rates are as follows:
--------------------------------------------------------------------------------- (dollar amounts in millions) 1996 1995 --------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase: Maximum month-end balance $2,159 $2,984 Average daily balance $1,765 $2,128 Average rate during the year 5.3% 5.9% Balance at December 31 $ 742 $1,591 Average rate at December 31 6.1% 5.3% ---------------------------------------------------------------------------------
ITEM 2. PROPERTIES PITTSBURGH PROPERTIES In 1983 Mellon Bank entered into a long-term lease of One Mellon Bank Center, a 54-story office building in Pittsburgh, Pennsylvania. At December 31, 1996, Mellon Bank occupied approximately 71% of the building's approximately 1,525,000 square feet of rentable space and subleased substantially all of the remaining space to third parties. During 1984 Mellon Bank entered into a sale/leaseback arrangement of the Union Trust Building in Pittsburgh, Pennsylvania, also known as Two Mellon Bank Center, while retaining title to the land thereunder. At December 31, 1996, Mellon Bank occupied approximately 73% of this building's approximately 595,000 square feet of rentable space and subleased substantially all of the remaining space to third parties. Mellon Bank owns the 41-story office building in Pittsburgh, Pennsylvania, known as Three Mellon Bank Center. At December 31, 1996, Mellon Bank occupied approximately 99% of the approximately 943,000 square feet of rentable space, with the remainder leased to third parties. PHILADELPHIA PROPERTIES Mellon Bank owns a building known as One Mellon Bank Center located at the corner of Broad and Chestnut Streets in the Center City area of Philadelphia, Pennsylvania. At December 31, 1996, Mellon Bank occupied all of One Mellon Bank Center's approximately 63,700 square feet of rentable space. Mellon Bank also leases a building in Philadelphia, Pennsylvania, known as Mellon Independence Center. At December 31, 1996, Mellon Bank occupied approximately 55% of Mellon Independence Center's approximately 881,700 square feet of rentable space, with the remainder of the space in the building subleased to third parties. In 1990 Mellon Bank entered into a 25-year lease for a portion of a 53-story office building known as Mellon Bank Center, at the corner of 18th and Market Streets in the Center City area of Philadelphia, Pennsylvania. At December 31, 1996, Mellon Bank leased approximately 19% of the building's approximately 1,245,000 square feet of rentable space. BOSTON PROPERTIES The Boston Company leases space in two downtown Boston office buildings: 41-story One Boston Place and 41-story Exchange Place. At December 31, 1996, The Boston Company leased approximately 34% of One Boston Place's approximately 769,150 square feet of rentable space and approximately 14% of Exchange Place's approximately 1,063,750 square feet of rentable space. The Boston Company subleases virtually all of its leased space at Exchange Place to third parties. 14 16 PROPERTIES (continued) At December 31, 1996, The Boston Company also occupied space in three office buildings in the Wellington Business Center located in Medford, Massachusetts. The Boston Company owns a substantial interest in and fully occupies the approximately 117,000 rentable square foot building known as Client Services Center II. At December 31, 1996, The Boston Company leased 100% of the approximately 319,600 rentable square foot building known as Client Services Center III and leased approximately 21,800 square feet of rentable space in the building known as Wellington I. NEW YORK PROPERTIES At December 31, 1996, Dreyfus Service Corporation leased approximately 270,429 square feet of rentable space at 200 Park Avenue in New York City. Other than 9,003 square feet of rentable space which is subleased to a third party, all of the space is currently occupied by Dreyfus. At December 31, 1996, Dreyfus Service Corporation leased approximately 161,000 square feet of rentable space in EAB Plaza in Uniondale, New York. This space is 100% occupied by Dreyfus. OTHER PROPERTIES Mellon Bank (DE) owns a three-story office building known as the Pike Creek Building in New Castle County, Delaware, and currently occupies the building's entire 81,207 square feet of available floor space. Mellon Bank (DE) also leases approximately 34,000 square feet of rentable space of an 18-story office building in Wilmington, Delaware, and approximately 42,000 square feet of rentable space in Pencader, Delaware, for a credit card operations center. Mellon Bank (MD) leases approximately 40,460 square feet of rentable space of an office building in Rockville, Maryland, which is used for its headquarters. Of the space leased by Mellon Bank (MD), approximately 7,100 square feet is subleased to third parties. The banking subsidiaries' retail offices are located in 43 counties in western, northwestern, central, northeastern and eastern Pennsylvania, all three of Delaware's counties, five counties in New Jersey and two Maryland counties in the northern suburbs of Washington, D.C. The Corporation also has one retail office in Boston, Massachusetts and one retail office in Medford, Massachusetts. At December 31, 1996, the Corporation owned 190 of the banking subsidiaries' retail offices and leased the remainder under leases expiring at various times through the year 2020. Other subsidiaries of the Corporation lease office space primarily for their operations at many of the locations listed on pages 18 and 19 of the Principal Locations and Operating Entities Section of the Corporation's 1996 Annual Report, which pages are incorporated herein by reference. For additional information on the Corporation's premises and equipment, see note 6 of Notes to Financial Statements on page 75 of the Corporation's 1996 Annual Report, which note is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS Various legal actions and proceedings are pending or are threatened against the Corporation and its subsidiaries, some of which seek relief or damages in amounts that are substantial. These actions and proceedings arise in the ordinary course of the Corporation's businesses and include suits relating to its lending, collections, servicing, investment, mutual fund, advisory, trust and other activities. Because of the complex nature of some of these actions and proceedings, it may be a number of years before such matters ultimately are resolved. After consultation with legal counsel, management believes that the aggregate liability, if any, resulting from such pending and threatened actions and proceedings will not have a material adverse effect on the Corporation's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to security holders for vote during the fourth quarter of 1996. 15 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is set forth in the Corporation's 1996 Annual Report to Shareholders in Liquidity and Dividends on pages 43 through 46, in Selected Quarterly Data on page 62, in note 21 of Notes to Financial Statements on pages 86 and 87 and in Corporate Information on page 104, which portions are incorporated herein by reference. On October 15, 1996, the board of directors voted to redeem each outstanding stock purchase right issued under the Shareholder Protection Rights Agreement, dated as of August 15, 1989 (each, an "Old Right"), at a redemption price of two-thirds of one cent per Old Right. In connection with the redemption of the Old Rights, the board of directors declared a dividend, paid October 31, 1996, of one right (a "Right") for each outstanding share of the Corporation's Common Stock (the "Common Stock"), issued pursuant to a new Shareholder Protection Rights Agreement, dated as of October 15, 1996 (the "Rights Agreement"). The Rights are currently represented by the certificates for, and trade only with, the Common Stock. The Rights would separate from the Common Stock and become exercisable only when a person or group acquires 15% or more of the Common Stock or ten days after a person or group commences a tender offer that would result in ownership of 15% or more of the Common Stock. At that time, each Right would entitle the holder to purchase for $225 (the "exercise price") one one-hundredth of a share of participating preferred stock, which is designed to have economic and voting rights generally equivalent to one share of common stock. Should a person or group actually acquire 15% or more of the Common Stock, each Right held by the acquiring person or group (or their transferees) would become void and each Right held by the Corporation's other shareholders would entitle those holders to purchase for the exercise price a number of shares of the Common Stock having a market value of twice the exercise price. Should the Corporation, at any time after a person or group has become a 15% beneficial owner and acquired control of the Corporation's board of directors, be involved in a merger or similar transaction with any person or group or sell assets to any person or group, each outstanding Right would then entitle its holder to purchase for the exercise price a number of shares of such other company having a market value of twice the exercise price. In addition, if any person or group acquires 15% or more of the Common Stock, the Corporation may, at its option and to the fullest extent permitted by law, exchange one share of Common Stock for each outstanding Right. The Rights are not exercisable until the above events occur and will expire on October 31, 2006, unless earlier exchanged or redeemed by the Corporation. The Corporation may redeem the Rights for $.01 per Right under certain circumstances. The foregoing description is not intended to be complete and is qualified in its entirety by reference to the Rights Agreement, a copy of which is an exhibit, which is incorporated by reference, to this report. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is set forth in the Corporation's 1996 Annual Report to Shareholders in the Financial Summary on page 23, in the Significant Financial Events in 1996 on pages 24 and 25, in the Overview of 1996 results on pages 29 and 30, in note 1 of Notes to Financial Statements on pages 67 through 72, and in the Consolidated Balance Sheet -- Average Balances and Interest Yields/Rates on pages 102 and 103, which portions are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required by this Item is set forth in the Corporation's 1996 Annual Report to Shareholders in the Financial Review on pages 23 through 62 and in note 21 of Notes to Financial Statements on pages 86 and 87, which portions are incorporated herein by reference. 16 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to Item 14 on pages 19 and 20 hereof for a detailed listing of the items under Financial Statements, Financial Statement Schedules, and Other Financial Data which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is included in the Corporation's proxy statement for its 1997 Annual Meeting of Shareholders (the "1997 Proxy Statement") in the Election of Directors-Biographical Summaries of Nominees and Continuing Directors section on pages 4 through 7 and in Section 16(a) Beneficial Ownership Reporting Compliance section on page 28, each of which sections is incorporated herein by reference, and in the following section "Executive Officers of the Registrant." EXECUTIVE OFFICERS OF THE REGISTRANT The name and age of, and the positions and offices held by, each executive officer of the Corporation as of February 18, 1997, together with the offices held by each such person during the last five years, are listed below. Mr. Cahouet has executed an employment contract with the Corporation. All other executive officers serve at the pleasure of their appointing authority. No executive officer has a family relationship to any other listed executive officer.
Age Position and Year Elected --- ------------------------- Frank V. Cahouet 64 Chairman, President and Chief Executive 1990 (1) Officer of Mellon Bank Corporation and Mellon Bank, N.A. Christopher M. Condron 49 President and Chief Executive Officer, The 1996 (2) Dreyfus Corporation Vice Chairman, Mellon Bank Corporation 1994 and Mellon Bank, N.A., Deputy Director Mellon Trust Steven G. Elliott 50 Vice Chairman and Chief Financial 1992 (3) Officer of Mellon Bank Corporation and Mellon Bank, N.A. Treasurer of Mellon Bank Corporation 1990
17 19 EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Jeffery L. Leininger 51 Vice Chairman, Specialized Commercial 1996 (4) Banking, Mellon Bank Corporation and Mellon Bank, N.A. David R. Lovejoy 48 Vice Chairman, Financial Markets and 1994 (5) Corporate Development, Mellon Bank Corporation and Mellon Bank, N.A. Martin G. McGuinn 54 Vice Chairman, Retail Financial Services, 1993 (6) Mellon Bank Corporation and Mellon Bank, N.A. Keith P. Russell 51 Vice Chairman, West Coast, Mellon Bank 1996 (7) Corporation and Mellon Bank, N.A. W. Keith Smith 62 Vice Chairman, Mellon Bank Corporation 1993 (8) and Mellon Bank, N.A., Director Mellon Trust Chairman and Chief Executive Officer, The 1993 Boston Company Chairman of the Board, The Dreyfus 1996 Corporation Jamie B. Stewart, Jr. 52 Vice Chairman, Wholesale Banking and 1996 (9) Cash Management, Mellon Bank Corporation and Mellon Bank, N.A. Michael K. Hughey 45 Senior Vice President and Controller of 1990 Mellon Bank Corporation and Senior Vice President, Director of Taxes and Controller, Mellon Bank, N.A.
(1) Mr. Cahouet has executed an employment contract with the Corporation which expires December 31, 1998. (2) From June 1989 to January 1994, Mr. Condron was President of Boston Safe Deposit and Trust Company and Executive Vice President of The Boston Company. In January 1994, he assumed the title of Vice Chairman, Mellon Bank Corporation and Mellon Bank, N.A., Deputy Director Mellon Trust. From October 1995 to August 1996, Mr. Condron was President and Chief Operating Officer, The Dreyfus Corporation. (3) From January 1990 to June 1992, Mr. Elliott was Executive Vice President, Chief Financial Officer and Treasurer of Mellon Bank Corporation and Executive Vice President and Chief Financial Officer of Mellon Bank, N.A. (4) From 1988 to February 1994, Mr. Leininger was Senior Vice President and Manager of the Middle Market Banking Department's western region. From February 1994 to February 1996, Mr. Leininger was Executive Vice President and Department Head of Middle Market Banking of Mellon Bank, N.A. 18 20 EXECUTIVE OFFICERS OF THE REGISTRANT (continued) (5) From January 1992 to December 1992, Mr. Lovejoy was Chairman and Chief Executive Officer of Western Energy Management. From January 1993 to October 1994, he was Executive Vice President of Strategic Planning of Mellon Bank, N.A. From November 1994 to February 1996, Mr. Lovejoy was Vice Chairman, Corporate Strategy and Development of Mellon Bank Corporation and Mellon Bank, N.A. (6) From November 1990 to October 1992, Mr. McGuinn was Vice Chairman, Real Estate Finance, General Counsel and Secretary of Mellon Bank Corporation and Vice Chairman, Real Estate Finance and General Counsel of Mellon Bank, N.A. From October 1992 to November 1993, Mr. McGuinn was Vice Chairman, Special Banking Services of Mellon Bank Corporation and Mellon Bank, N.A. (7) From November 1991 to June 1992, Mr. Russell was Executive Vice President, Credit Policy of Mellon Bank Corporation and of Mellon Bank, N.A. From June 1992 to June 1996, Mr. Russell was Vice Chairman, Chief Risk and Credit Officer, Mellon Bank Corporation and Mellon Bank, N.A. (8) From January 1990 to November 1993, Mr. Smith was Vice Chairman, Service Products of Mellon Bank Corporation and Mellon Bank, N.A. Mr. Smith was Chief Operating Officer of The Dreyfus Corporation from August 1994 to January 1995. (9) From December 1990 to January 1995, Mr. Stewart was Executive Vice President, Global Corporate Banking Department. In 1995, Mr. Stewart was Vice Chairman, Corporate Banking of Mellon Bank Corporation and Mellon Bank, N.A. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included in the 1997 Proxy Statement in the Directors' Compensation section on pages 9 and 10 and in the Executive Compensation section on pages 16 through 22, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included in the 1997 Proxy Statement in the Beneficial Ownership of Stock section on pages 14 and 15, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included in the 1997 Proxy Statement in the Business Relationships and Related Transactions and Certain Legal Proceedings sections on page 13, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The financial statements and schedules required for the Annual Report of the Corporation on Form 10-K are included, attached or incorporated by reference as indicated in the following index. Page numbers on the following page refer to pages of the Financial Section of the Corporation's 1996 Annual Report to Shareholders. 19 21 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued)
(i) Financial Statements Page No. -------------------- -------- Mellon Bank Corporation (and its subsidiaries): Consolidated Income Statement 63 Consolidated Balance Sheet 64 Consolidated Statement of Changes in Shareholders' Equity 65 Consolidated Statement of Cash Flows 66 and 67 Notes to Financial Statements 67 through 100 Report of Independent Auditors 101 (ii) Financial Statement Schedules ----------------------------- Financial Statement schedules are omitted either because they are not required or are not applicable, or because the required information is shown in the financial statements or notes thereto. (iii) Other Financial Data -------------------- Selected Quarterly Data 62
(b) Current Reports on Form 8-K during the fourth quarter of 1996: A report dated October 15, 1996, which included, under Item 7, the Corporation's press release regarding third quarter and year-to-date 1996 financial results and also included, under Items 5 and 7, the Corporation's press release regarding the adoption of a new Shareholder Protection Rights Agreement and the approval of the establishment of an employee stock benefit trust. A report dated October 15, 1996, which included, under Items 5 and 7, a description of the Shareholder Protection Rights Agreement and the text of the Agreement. A report dated October 29, 1996, which included, under Items 5 and 7, a press release announcing the December 16, 1996, redemption of the Series I preferred stock. A report dated December 3, 1996, which described under Item 5 and included under Item 7 certain exhibits pertaining to the issuance by Mellon Capital I of 500,000 of its 7.72% Capital Securities, Series A and related matters. A report dated December 20, 1996, which described under Item 5 and included under Item 7 certain exhibits pertaining to the issuance by Mellon Capital II of 500,000 of its 7.995% Capital Securities, Series B and related matters. A report dated December 30, 1996, which included, under Items 5 and 7, a press release announcing a letter of intent for the Corporation's acquisition of Buck Consultants, Inc. (c) Exhibits The exhibits listed on the Index to Exhibits on pages 22 through 27 hereof are incorporated by reference or filed herewith in response to this Item. 20 22 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. Mellon Bank Corporation By: FRANK V. CAHOUET ----------------------- Frank V. Cahouet Chairman, President and Chief Executive Officer DATED: March 19, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Corporation and in the capacities and on the date indicated. SIGNATURE CAPACITIES By: FRANK V. CAHOUET Director and Principal ----------------------- Executive Director Frank V. Cahouet By: STEVEN G. ELLIOTT Principal Financial Officer ----------------------- and Principal Accounting Steven G. Elliott Officer Dwight L. Allison, Jr.; Directors Burton C. Borgelt; Carol R. Brown; J. W. Connolly; Charles A. Corry; C. Frederick Fetterolf; Ira J. Gumberg; Pemberton Hutchinson; George W. Johnstone; Rotan E. Lee; Andrew W. Mathieson; Edward J. McAniff; Robert Mehrabian; Seward Prosser Mellon; David S. Shapira; W. Keith Smith; Joab L. Thomas; Wesley W. von Schack; and William J. Young By: CARL KRASIK DATED: March 19, 1997 ----------------------- Carl Krasik Attorney-in-fact 21 23 INDEX TO EXHIBITS
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 3.1 Restated Articles of Incorporation of Previously filed as Exhibit 3.1 to Mellon Bank Corporation, as amended the Quarterly Report on Form 10-Q and restated as of September 2, 1993. (File No. 1-7410) for the quarter ended September 30, 1993, and incorporated herein by reference. 3.2 Statement Affecting Series B Preferred Previously filed as Exhibit 3.2 to the Stock, $1.00 Par Value. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1993, and incorporated herein by reference. 3.3 Statement Affecting Series D Preferred Previously filed as Exhibit 3.3 to the Stock, $1.00 Par Value. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1994, and incorporated herein by reference. 3.4 Statement Affecting Series H Preferred Previously filed as Exhibit 3.1 to the Stock, $1.00 Par Value. Quarterly Report on Form 10-Q (File No. 1-7410) for the quarter ended March 31, 1995, and incorporated herein by reference. 3.5 Statement Affecting Series I Preferred Stock, Filed herewith. $1.00 Par Value. 3.6 Statement Affecting Series J Preferred Stock, Filed herewith. $1.00 Par Value. 3.7 By-Laws of Mellon Bank Corporation, Previously filed as Exhibit 3.2 to as amended, effective July 17, 1990. Annual Report on Form 10-K (File No. 1-7410) for the year ended December 31, 1990, and incorporated herein by reference. 4.1 Instruments defining the rights See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and of securities holders. 3.6 above. 4.2 Shareholder Protection Rights Agreement Previously filed as Exhibit 1 to Form between Mellon Bank Corporation and 8-A Registration Statement (File Mellon Bank, N.A., as Rights Agent, No. 1-7410) dated October 29, 1996, dated as of October 15, 1996. and incorporated herein by reference.
22 24 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 4.3 Junior Subordinated Indenture, dated as of Previously filed as Exhibit 4.1 December 3, 1996, between Mellon Bank to Current Report on Form 8-K Corporation and The Chase Manhattan Bank, (File No. 1-7410) dated December 3, as Debenture Trustee. 1996, and incorporated herein by reference. 4.4(a) Certificate representing the 7.72% Junior Previously filed as Exhibit 4.2 Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K Series A, of Mellon Bank Corporation. (File No. 1-7410) dated December 3, 1996, and incorporated herein by reference. 4.4(b) Certificate representing the 7.995% Junior Previously filed as Exhibit 4.2 Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K Series B, of Mellon Bank Corporation. (File No. 1-7410) dated December 20, 1996, and incorporated herein by reference. 4.5(a) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3 as of December 3, 1996, of Mellon Capital I, to Current Report on Form 8-K among Mellon Bank Corporation, as Depositor, (File No. 1-7410) dated December 3, The Chase Manhattan Bank, as Property Trustee, 1996, and incorporated herein by Chase Manhattan Bank Delaware, as Delaware reference. Trustee, and the Administrative Trustees named therein. 4.5(b) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3 as of December 20, 1996, of Mellon Capital II, to Current Report on Form 8-K among Mellon Bank Corporation, as Depositor, (File No. 1-7410) dated December 20, The Chase Manhattan Bank, as Property Trustee, 1996, and incorporated herein by Chase Manhattan Bank Delaware, as Delaware reference. Trustee, and the Administrative Trustees named therein. 4.6(a) Certificate representing the 7.72% Capital Previously filed as Exhibit 4.4 Securities, Series A, of Mellon Capital I. to Current Report on Form 8-K (File No. 1-7410) dated December 3, 1996, and incorporated herein by reference. 4.6(b) Certificate representing the 7.995% Capital Previously filed as Exhibit 4.4 Securities, Series B, of Mellon Capital II. to Current Report on Form 8-K (File No. 1-7410) dated December 20, 1996, and incorporated herein by reference.
23 25 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 4.7(a) Guarantee Agreement, dated as of December 3, Previously filed as Exhibit 4.5 1996, between Mellon Bank Corporation, as to Current Report on Form 8-K guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated December 3, Guarantee Trustee. 1996, and incorporated herein by reference. 4.7(b) Guarantee Agreement, dated as of December 20, Previously filed as Exhibit 4.5 1996, between Mellon Bank Corporation, as to Current Report on Form 8-K Guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated December 20, Guarantee Trustee. 1996, and incorporated herein by reference. 10.1 Purchase Agreement, dated as of Previously filed as Exhibit 10.1 July 25, 1988, among Mellon Bank to Quarterly Report on Form 10-Q Corporation (as Seller) and Warburg, (File No. 1-7410) for the quarter ended Pincus Capital Company, L.P. and September 30, 1988, and incorporated Warburg, Pincus Capital Partners, herein by reference. L.P. (as Purchasers) relating to the sale and purchase of Mellon Series D Junior Preferred Stock. 10.2 Purchase Agreement, dated as of Previously filed as Exhibit 10.2 July 25, 1988, between Mellon Bank to Quarterly Report on Form 10-Q Corporation (as Seller) and Drexel (File No. 1-7410) for the quarter ended Burnham Lambert Incorporated (as September 30, 1988, and incorporated Purchaser) relating to the sale herein by reference. and purchase of Mellon Series D Junior Preferred Stock. 10.3 Exchange Agreement dated as of Previously filed as Exhibit 10.4 March 30, 1990, between Warburg, to Annual Report on Form 10-K Pincus Capital Company, L. P., (File No. 1-7410) for the year ended Warburg, Pincus Capital Partners, December 31, 1990, and incorporated L. P. and Mellon relating to the herein by reference. exchange of Series D Preferred Stock for shares of Mellon's Common Stock. 10.4 Lease dated as of February 1, 1983, Previously filed as Exhibit 10.4 between 500 Grant Street Associates to Annual Report on Form 10-K Limited Partnership and Mellon (File No. 1-7410) for the year ended Bank, N.A. with respect to One Mellon December 31, 1992, and incorporated Bank Center. herein by reference.
24 26 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 10.5 First Amendment to Lease Agreement Previously filed as Exhibit 10.1 dated as of November 1, 1983, to Registration Statement on Form between 500 Grant Street S-15 (Registration No. 2-88266) Associates Limited Partnership and incorporated herein by and Mellon Bank, N.A. reference. 10.6* Mellon Bank Corporation Profit Previously filed as Exhibit 10.7 Bonus Plan, as amended. to Annual Report on Form 10-K (File No. l-7410) for the year ended December 31, 1990, and incorporated herein by reference. 10.7* Mellon Bank Corporation Long-Term Filed herewith. Profit Incentive Plan (1996), as amended effective January 17, 1997. 10.8* Mellon Bank Corporation Stock Previously filed as Exhibit 10.8 to Option Plan for Outside Directors Annual Report on Form 10-K (File (1989). No. 1-7410) for the year ended December 31, 1994, and incorporated herein by reference. 10.9* Mellon Bank Corporation 1990 Filed herewith. Elective Deferred Compensation Plan for Directors and Members of the Advisory Board, as amended and restated, effective January 1, 1997. 10.10* Mellon Bank Corporation Elective Filed herewith. Deferred Compensation Plan for Senior Officers, as amended and restated, effective January 1, 1997. 10.11* Mellon Bank IRC Section 401(a)(17) Previously filed as Exhibit 10.11 to Plan, as amended and restated, effective Annual Report on Form 10-K (File January 1, 1993. No. 1-7410) for the year ended December 31, 1992, and incorporated herein by reference. 10.12* Mellon Bank Optional Life Insurance Filed herewith. Plan, effective January 1, 1993, as amended effective November 19, 1996.
* Management contract or compensatory plan arrangement. 25 27 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 10.13* Mellon Bank Executive Life Insurance Filed herewith. Plan, effective January 1, 1993, as amended effective November 19, 1996. 10.14* Mellon Bank Senior Executive Life Filed herewith. Insurance Plan, effective January 1, 1993, as amended effective November 19, 1996. 10.15* Mellon Bank Corporation Retirement Plan Previously filed as Exhibit 10.1 to for Outside Directors, effective Quarterly Report on Form 10-Q (File January 1, 1994. No. 1-7410) for the quarter ended June 30, 1995, and incorporated herein by reference. 10.16* Mellon Bank Corporation Phantom Stock Filed herewith. Unit Plan (1995), as amended, effective October 15, 1996. 10.17* Employment Agreement between Mellon Previously filed as Exhibit 10.17 to Bank, N.A. and Frank V. Cahouet, Annual Report on Form 10-K effective as of July 25, 1993, and amended (File No. 1-7410) for the year ended and restated as of October 17, 1995. December 31, 1995, and incorporated herein by reference. 10.18* Employment Agreement between Mellon Previously filed as Exhibit 10.2 Bank, N.A. and W. Keith Smith, to Quarterly Report on Form 10-Q effective as of July 25, 1993, and amended (File No. 1-7410) for the quarter ended and restated as of August 1, 1995. September 30, 1995, and incorporated herein by reference. 10.19* Change in Control Severance Agreement Filed herewith. between Mellon Bank Corporation and Frank V. Cahouet, dated as of February 1, 1997. 10.20* Form of Change in Control Severance Agreement Filed herewith. between Mellon Bank Corporation and members of the Office of the Chairman. 10.23 Agreement and Plan of Merger dated Previously filed as Exhibit 10.19 as of December 5, 1993, by and among to the Annual Report on Form 10-K Mellon Bank Corporation, Mellon (File No. 1-7410) for the year ended Bank, N.A., XYZ Sub Corporation and December 31, 1993, and incorporated The Dreyfus Corporation. herein by reference.
* Management contract or compensatory plan arrangement. 26 28 INDEX TO EXHIBITS (continued)
Exhibit No. Description Method of Filing - ------- ----------- ---------------- 11.1 Computation of Primary and Fully Filed herewith. Diluted Net Income Per Common Share. 12.1 Computation of Ratio of Earnings Filed herewith. to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends--parent Corporation. 12.2 Computation of Ratio of Earnings Filed herewith. to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends--Mellon Bank Corporation and its subsidiaries. 13.1 All portions of the Mellon Bank Corporation Filed herewith. 1996 Annual Report to Shareholders that are incorporated herein by reference. 21.1 List of Subsidiaries of the Corporation. Filed herewith. 23.1 Consent of Independent Accountants. Filed herewith. 24.1 Powers of Attorney. Filed herewith. 27.1 Financial Data Schedule. Filed herewith.
Certain instruments, which define the rights of holders of long-term debt of the Corporation and its subsidiaries, are not filed herewith because the total amount of securities authorized under each of them does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation hereby agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 27 EX-3.5 2 MELLON BANK 10-K405 1 Exhibit 3.5 MELLON BANK CORPORATION STATEMENT AFFECTING 9.60% SERIES I PREFERRED STOCK $1.00 PAR VALUE DECREASING THE AUTHORIZED NUMBER OF SHARES OF SUCH SERIES PURSUANT TO THE REQUIREMENTS OF SECTION 1522 OF THE PENNSYLVANIA BUSINESS CORPORATION LAW The undersigned Corporation, desiring to decrease the authorized number of shares of its 9.60% Series I Preferred Stock, $1.00 par value (the "Series I Preferred Stock"), hereby certifies that: 1. The name of the Corporation is Mellon Bank Corporation. 2. The resolution of the Board of Directors of the Corporation establishing and designating the Series I Preferred Stock as the tenth series of Preferred Stock $1.00 par value, of the Corporation authorized to be issued by Article FIFTH of its Articles, as heretofore restated and amended, was filed with the Department of State in a Statement of Designation on August 7, 1991. 3. By resolutions dated February 20, 1996, (copy attached hereto), the Board of Directors, as part of the Corporation's Capital and Funding Plan for 1996, approved the concept of redeeming the Series I Preferred Stock, authorized the restoration of any shares redeemed to the status of authorized but unissued shares of preferred stock of the Corporation, and further appointed a special committee (the "Redemption Committee") to have and to exercise all authority of the Board with respect to the redemption of the Series I Preferred Stock. 4. By resolutions dated October 29, 1996, (copy attached), the Redemption Committee authorized the Corporation to redeem all outstanding shares of its Series I Preferred Stock and further established the terms and conditions of such redemption. 5. Accordingly, the number of shares of preferred stock previously designated as Series I Preferred Stock is hereby decreased from 6,000,000 shares to -0- shares. 6. Since the filing of the Corporation's Restated Articles of Incorporation on September 2, 1993, there have been no statements filed under the Pennsylvania Business Corporation Law pertaining to the Series I Preferred Stock. 2 7. This Statement shall be effective upon the filing thereof in the Department of State. IN TESTIMONY WHEREOF, THE UNDERSIGNED Corporation has caused this Statement to be signed by a duly authorized officer thereof this 16th day of December, 1996. MELLON BANK CORPORATION By: STEVEN G. ELLIOTT Steven G. Elliott Vice Chairman, Chief Financial Officer and Treasurer (SEAL) Attest: CARL KRASIK Carl Krasik Secretary 2 3 MELLON BANK CORPORATION BOARD OF DIRECTORS 2/20/96 RESOLUTIONS AUTHORIZING REDEMPTION OF 9.60% SERIES I PREFERRED STOCK WHEREAS, In connection with the Corporation's Capital and Funding Plan for 1996, the Executive Committee has recommended that the Board of Directors create a Redemption Committee to exercise all authority of this Board with respect to the redemption of the Corporation's 9.60% Series I Preferred Stock; and WHEREAS, The Corporation has issued 9.60% Series I Preferred Stock, $1.00 par value (the "Series I Preferred Stock") which by its terms, is redeemable at the option of the Corporation, in whole or from time to time in part, at any time on or after August 15, 1996, at the cash redemption price of $25.00 per share, plus accrued dividends, the election of the Corporation to so redeem the Series I Preferred Stock to be evidenced by a resolution of this Board; NOW, THEREFORE, BE IT RESOLVED, That a special committee (the "Redemption Committee") of this Board be, and it hereby is, appointed to have and to exercise all authority of this Board with respect to the redemption of the Series I Preferred Stock, including, without limitation, the designation of amounts, times and methods of redemption; and it is further RESOLVED, That the Redemption Committee shall consist of the following Directors: Frank V. Cahouet, W. Keith Smith and Andrew W. Mathieson, and that the Committee shall meet at such times and places as it may deem appropriate to exercise the authority granted to it by the foregoing resolution; and it is further RESOLVED, That a majority of the members at any meeting of the Redemption Committee shall constitute a quorum necessary and sufficient to transact business; however, if a quorum is not present, those Committee members who are present shall have the authority to appoint any member of the Board of Directors as alternate members of the Redemption Committee, and the Committee as then constituted shall exercise the powers granted by the foregoing resolutions; and it is further RESOLVED, That upon the instruction and authorization of the Redemption Committee, the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation, to implement the redemption of the Series I Preferred Stock, in whole or from time to time in part, in accordance with its terms and upon such further specific terms and conditions, consistent with the action of the Redemption Committee, as such officer shall approve, the approval of such officer and of this Board to be evidenced conclusively by the action of such officer; and it is further RESOLVED, That in accordance with the terms of the Series I Preferred Stock, any shares of such stock so redeemed, shall be restored to the status of authorized but unissued shares of preferred stock of the Corporation, without designation as to series, until such shares are once more designated as part of a particular series by this Board; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation to execute and deliver any and all agreements and other documents, make such filings and take any other such actions as such officer may deem necessary, appropriate or desirable to effectuate the purposes of the foregoing resolutions. 4 MELLON BANK CORPORATION REDEMPTION COMMITTEE OCTOBER 29, 1996 WHEREAS, The Corporation has issued and outstanding a series of preferred stock, par value $1.00 per share, designated as 9.60% Series I Preferred Stock (the "Series I Preferred Stock"); and WHEREAS, Under the terms pursuant to which the Series I Preferred Stock was issued, such stock is redeemable at the option of the Corporation, in whole or from time to time in part, at any time on or after August 15, 1996, at a price of $25.00 per share, plus accrued dividends; and WHEREAS, By action taken on February 20, 1996, the Board of Directors, as part of the Corporation's Capital and Funding Plan for 1996, approved the concept of redeeming the Series I Preferred Stock and granted to this Committee all authority of the Board with respect to such redemption, including, without limitation, the designation of amounts, times and methods of redemption; NOW, THEREFORE, BE IT RESOLVED, That the Corporation be, and it hereby is, authorized to redeem all the outstanding shares of its Series I Preferred Stock on December 16, 1996 (the "Redemption Date"), at a redemption price of $25.00 per share, plus all dividends accrued and unpaid on such shares to the Redemption Date, even though not yet declared, (collectively such funds to be referred to as the "Redemption Funds"); and it is further RESOLVED, That in accordance with the terms of the Series I Preferred Stock as set forth in the Statement of Designation of such series, the Secretary of the Corporation be, and he hereby is, authorized to send via first class mail to all holders of Series I Preferred Stock, at their respective addresses on the books of the Corporation, a notice in the form attached hereto as Annex A (the "Redemption Notice"), with such changes and modifications as the Chairman, the Chief Executive Officer, the President, any Vice Chairman, or the Secretary of the Corporation shall approve, the approval of such officer and of this Committee to be evidenced conclusively by the action of such officer; and it is further RESOLVED, That on or before the Redemption Date, such amount of money as is necessary for the redemption of all shares of the Series I Preferred Stock in accordance with its terms, be deposited in a separate account with Mellon Bank, N.A. to be held in trust for the account of the holders of the shares of Series I Preferred Stock called for redemption, with irrevocable instructions and authority to pay the Redemption Funds to the holders of such shares upon surrender of certificates therefor at any time on or after the Redemption Date; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman, the General Counsel, the Secretary or any other person so designated by any such officer, be, and each hereby is, authorized in the name and on behalf of the Corporation, to make all filings with regulatory authorities and to take any related actions as such officer or designee may approve as necessary, appropriate or desirable in connection with such authorities' consideration of the redemption of the Series I Preferred Stock, the filing or doing of any such related action by such person conclusively establishing that person's authority therefor from this Committee and the approval and ratification by this Committee of the actions so taken; and WHEREAS, In accordance with the terms of the Series I Preferred Stock, any shares of such stock so redeemed shall be restored to the status of authorized but unissued shares of preferred stock of the Corporation, without designation as to series, until such shares are once more designated as part of a particular series by the Board; NOW, THEREFORE, BE IT RESOLVED, That in connection with the redemption of the Series I Preferred Stock as authorized hereby and upon the issuance of the Redemption Notice, the deposit of the Redemption Funds and the occurrence of the Redemption Date, the Chairman, the Chief Executive Officer, the President, any Vice Chairman, or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation, under the corporate seal of the Corporation attested by its Secretary, to execute and to cause a Statement Affecting Series I Preferred Stock to be filed with the Department of State of the Commonwealth of Pennsylvania in accordance with Section 1522 of the Pennsylvania Business Corporation Law; and it is further RESOLVED, That any action relating to the redemption of the Series I Preferred Stock taken by any of the officers of the Corporation prior to the date of these resolutions that is otherwise within the authority conferred by these resolutions be, and it hereby is, ratified, confirmed and approved; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation to execute any and all agreements and other documents, make such filings and take any other such actions as such officer may deem necessary, appropriate or desirable to effectuate the purposes of the foregoing resolutions. EX-3.6 3 MELLON BANK 10-K405 1 Exhibit 3.6 MELLON BANK CORPORATION STATEMENT AFFECTING 8.50% SERIES J PREFERRED STOCK $1.00 PAR VALUE DECREASING THE AUTHORIZED NUMBER OF SHARES OF SUCH SERIES PURSUANT TO THE REQUIREMENTS OF SECTION 1522 OF THE PENNSYLVANIA BUSINESS CORPORATION LAW The undersigned Corporation, desiring to decrease the authorized number of shares of its 8.50% Series J Preferred Stock, $1.00 par value (the "Series J Preferred Stock"), hereby certifies that: 1. The name of the Corporation is Mellon Bank Corporation. 2. The resolution of the Board of Directors of the Corporation establishing and designating the Series J Preferred Stock as the eleventh series of Preferred Stock $1.00 par value, of the Corporation authorized to be issued by Article FIFTH of its Articles, as heretofore restated and amended, was filed with the Department of State in a Statement of Designation on January 17, 1992. 3. By resolutions dated February 20, 1996, (copy attached hereto), the Board of Directors, as part of the Corporation's Capital and Funding Plan for 1996, approved the concept of redeeming the Series J Preferred Stock, authorized the restoration of any shares redeemed to the status of authorized but unissued shares of preferred stock of the Corporation, and further appointed a special committee (the "Redemption Committee) to have and to exercise all authority of the Board with respect to the redemption of the Series J Preferred Stock. 4. By resolutions dated January 8, 1997, (copy attached), the Redemption Committee authorized the Corporation to redeem all outstanding shares of its Series J Preferred Stock and further established the terms and conditions of such redemption. 5. Accordingly, the number of shares of preferred stock previously designated as Series J Preferred Stock is hereby decreased from 4,000,000 shares to -0- shares. 6. Since the filing of the Corporation's Restated Articles of Incorporation on September 2, 1993, there have been no statements filed under the 2 Pennsylvania Business Corporation Law pertaining to the Series J Preferred Stock. 7. This Statement shall be effective upon the filing thereof in the Department of State. IN TESTIMONY WHEREOF, THE UNDERSIGNED Corporation has caused this Statement to be signed by a duly authorized officer thereof this 24th day of February, 1997. MELLON BANK CORPORATION By: STEVEN G. ELLIOTT Steven G. Elliott Vice Chairman, Chief Financial Officer and Treasurer (SEAL) Attest: CARL KRASIK Carl Krasik Secretary 2 3 MELLON BANK CORPORATION BOARD OF DIRECTORS FEBRUARY 20, 1996 RESOLUTIONS AUTHORIZING REDEMPTION OF 8.50% SERIES J PREFERRED STOCK WHEREAS, In connection with the Corporation's Capital and Funding Plan for 1996, the Executive Committee has recommended that the Board of Directors create a Redemption Committee to exercise all authority of this Board with respect to the redemption of the Corporation's 8.50% Series J Preferred Stock; and WHEREAS, The Corporation has issued 8.50% Series J Preferred Stock, $1.00 par value (the "Series J Preferred Stock") which by its terms, is redeemable at the option of the Corporation, in whole or from time to time in part, at any time on or after February 15, 1997, at the cash redemption price of $25.00 per share, plus accrued dividends, the election of the Corporation to so redeem the Series J Preferred Stock to be evidenced by a resolution of this Board; NOW, THEREFORE, BE IT RESOLVED, That a special committee (the "Redemption Committee") of this Board be, and it hereby is, appointed to have and to exercise all authority of this Board with respect to the redemption of the Series J Preferred Stock, including, without limitation, the designation of amounts, times and methods of redemption; and it is further RESOLVED, That the Redemption Committee shall consist of the following Directors: Frank V. Cahouet, W. Keith Smith and Andrew W. Mathieson, and that the Committee shall meet at such times and places as it may deem appropriate to exercise the authority granted to it by the foregoing resolution; and it is further RESOLVED, That a majority of the members at any meeting of the Redemption Committee shall constitute a quorum necessary and sufficient to transact business; however, if a quorum is not present, those Committee members who are present shall have the authority to appoint any member of the Board of Directors as alternate members of the Redemption Committee, and the Committee as then constituted shall exercise the powers granted by the foregoing resolutions; and it is further RESOLVED, That upon the instruction and authorization of the Redemption Committee, the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation, to implement the redemption of the Series I Preferred Stock, in whole or from time to time in part, in accordance with its terms and upon such further specific terms and conditions, consistent with the action of the Redemption Committee, as such officer shall approve, the approval of such officer and of this Board to be evidenced conclusively by the action of such officer; and it is further RESOLVED, That in accordance with the terms of the Series J Preferred Stock, any shares of such stock so redeemed, shall be restored to the status of authorized but unissued shares of preferred stock of the Corporation, without designation as to series, until such shares are once more designated as part of a particular series by this Board; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation to execute and deliver any and all agreements and other documents, make such filings and take any other such actions as such officer may deem necessary, appropriate or desirable to effectuate the purposes of the foregoing resolutions. 4 MELLON BANK CORPORATION SPECIAL REDEMPTION COMMITTEE OF THE BOARD OF DIRECTORS JANUARY 8, 1997 WHEREAS, The Corporation has issued and outstanding a series of preferred stock, par value $1.00 per share, designated as 8.50% Series J Preferred Stock (the "Series J Preferred Stock"); and WHEREAS, Under the terms pursuant to which the Series J Preferred Stock was issued, such stock is redeemable at the option of the Corporation, in whole or from time to time in part, at any time on or after February 15, 1997, at a price of $25.00 per share, plus accrued dividends; and WHEREAS, By action taken on February 20, 1996, the Board of Directors, as part of the Corporation's Capital and Funding Plan for 1996, approved the concept of redeeming the Series J Preferred Stock and granted to this Committee all authority of the Board with respect to such redemption, including, without limitation, the designation of amounts, times and methods of redemption; NOW, THEREFORE, BE IT RESOLVED, That the Corporation be, and it hereby is, authorized to redeem all the outstanding shares of its Series J Preferred Stock on February 18, 1997 (the "Redemption Date"), at a redemption price of $25.00 per share, plus all dividends accrued and unpaid on such shares to the Redemption Date, even though not yet declared, (collectively such funds to be referred to as the "Redemption Funds"); and it is further RESOLVED, That in accordance with the terms of the Series J Preferred Stock as set forth in the Statement of Designation of such series, the Secretary of the Corporation be, and he hereby is, authorized to send via first class mail to all holders of Series J Preferred Stock, at their respective addresses on the books of the Corporation, a notice in the form attached hereto as Annex A (the "Redemption Notice"), with such changes and modifications as the Chairman, the Chief Executive Officer, the President, any Vice Chairman, or the Secretary of the Corporation shall approve, the approval of such officer and of this Committee to be evidenced conclusively by the action of such officer; and it is further RESOLVED, That on or before the Redemption Date, such amount of money as is necessary for the redemption of all shares of the Series J Preferred Stock in accordance with its terms, be deposited in a separate account with Mellon Bank, N.A. to be held in trust for the account of the holders of the shares of Series J Preferred Stock called for redemption, with irrevocable instructions and authority to pay the Redemption Funds to the holders of such shares upon surrender of certificates therefor at any time on or after the Redemption Date; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman, the General Counsel, the Secretary or any other person so designated by any such officer, be, and each hereby is, authorized in the name and on behalf of the Corporation, to make all filings with regulatory authorities and to take any related actions as such officer or designee may approve as necessary, appropriate or desirable in connection with such authorities' consideration of the redemption of the Series J Preferred Stock, the filing or doing of any such related action by such person conclusively establishing that person's authority therefor from this Committee and the approval and ratification by this Committee of the actions so taken; and WHEREAS, In accordance with the terms of the Series J Preferred Stock, any shares of such stock so redeemed shall be restored to the status of authorized but unissued shares of preferred stock of the Corporation, without designation as to series, until such shares are once more designated as part of a particular series by the Board; NOW, THEREFORE, BE IT RESOLVED, That in connection with the redemption of the Series J Preferred Stock as authorized hereby and upon the issuance of the Redemption Notice, the deposit of the Redemption Funds and the occurrence of the Redemption Date, the Chairman, the Chief Executive Officer, the President, any Vice Chairman, or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation, under the corporate seal of the Corporation attested by its Secretary, to execute and to cause a Statement Affecting Series J Preferred Stock to be filed with the Department of State of the Commonwealth of Pennsylvania in accordance with Section 1522 of the Pennsylvania Business Corporation Law; and it is further RESOLVED, That any action relating to the redemption of the Series J Preferred Stock taken by any of the officers of the Corporation prior to the date of these resolutions that is otherwise within the authority conferred by these resolutions be, and it hereby is, ratified, confirmed and approved; and it is further RESOLVED, That the Chairman, the Chief Executive Officer, the President, any Vice Chairman or the Secretary of the Corporation be, and each hereby is, authorized in the name and on behalf of the Corporation to execute any and all agreements and other documents, make such filings and take any other such actions as such officer may deem necessary, appropriate or desirable to effectuate the purposes of the foregoing resolutions. EX-10.7 4 MELLON BANK 10-K405 1 Exhibit 10.7 MELLON BANK CORPORATION LONG-TERM PROFIT INCENTIVE PLAN (1996) I. Purposes The purposes of this Long-Term Profit Incentive Plan (1996), as amended and restated, are to promote the growth and profitability of Mellon Bank Corporation ("Corporation") and its Affiliates, to provide officers and other key executives of the Corporation and its Affiliates with the incentive to achieve long-term corporate objectives, to attract and retain officers and other key executives of outstanding competence, and to provide such officers and key executives with an equity interest in the Corporation. II. Definitions The following terms shall have the meanings shown: 2.1 "Affiliate" shall mean any corporation, limited partnership or other organization in which the Corporation owns, directly or indirectly, 50% or more of the voting power. 2.2 "Award" shall mean Options, SARs, Performance Units, Restricted Stock and Deferred Cash Incentive Awards, as defined in and granted under the Plan. 2.3 "Board of Directors" shall mean the Board of Directors of the Corporation. 2.4 "Change in Control Event" shall mean any of the following events: (a) The occurrence with respect to the Corporation of a "control transaction", as such term is defined in Section 2542 of the Pennsylvania Business Corporation Law of 1988, as of August 15, 1989; or (b) Approval by the stockholders of the Corporation of (i) any consolidation or merger of the Corporation in which the holders of voting stock of the Corporation immediately before the merger or consolidation will not own 50% or more of the voting shares of the continuing or surviving corporation immediately after such merger or consolidation, or (ii) any sale, lease or exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Corporation; or (c) A change of 25% (rounded to the next whole person) in the membership of the Board of Directors within a 12-month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of 85% (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the 12-month period. 2 2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute of similar import, and regulations thereunder, in each case as in effect from time to time. References to sections of the Code shall be construed also to refer to any successor sections. 2.6 "Committee" shall mean the Human Resources Committee of the Board of Directors, or any successor committee. 2.7 "Common Stock" shall mean Common Stock of the Corporation. 2.8 "Deferred Cash Incentive Award" shall mean an Award granted pursuant to Article VII of the Plan. 2.9 "Fair Market Value" shall mean the closing price of a share of Common Stock in the New York Stock Exchange Composite Transactions on the relevant date, or, if no sale shall have been made on such exchange on that date, the closing price in the New York Stock Exchange Composite Transactions on the last preceding day on which there was a sale. 2.10 "Incentive Stock Option" shall mean an option qualifying under Section 422 of the Code granted by the Corporation. 2.11 "Options" shall mean rights to purchase shares of Common Stock granted pursuant to Article IV of the Plan. 2.12 "Participant" shall mean an eligible employee who is granted an Award under the Plan. 2.13 "Performance Goals" shall mean goals established by the Committee in compliance with Section 162(m) of the Code covering a performance period set by the Committee and based on maintenance of or changes in one or more of the following objective business criteria: earnings or earnings per share; return on equity, assets or investment; revenues; expenses; stock price; market share; charge-offs; or non-performing assets. Performance Goals shall be established by the Committee in connection with the grant of Performance Units and Deferred Cash Incentive Awards and may be established in connection with the grant of Restricted Stock. Performance Goals may be applicable to a business unit or to the Corporation as a whole and need not be the same for each of the foregoing types of Awards or for each individual receiving the same type of Award. The Committee may retain the discretion to reduce (but not to increase) the portion of any Award which will be earned based on achieving Performance Goals. 2.14 "Performance Units" shall mean units granted pursuant to Article VI of the Plan. 2.15 "Plan" shall mean the Mellon Bank Corporation Long-Term Profit Incentive Plan (1996), as amended and restated. 2 3 2.16 "Reload Option Rights" and "Reload Options" shall have the meanings set forth in Article IV of the Plan. 2.17 "Restricted Stock" shall mean any share of Common Stock granted pursuant to Article VIII of the Plan. 2.18 "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended from time to time, or any successor rule. 2.19 "SAR" shall mean any stock appreciation right granted pursuant to Article V of the Plan. III General 3.1 Administration. (a) The Plan shall be administered by the Committee, each member of which shall at the time of any action under the Plan be (i) a "non-employee director" as then defined under Rule 16b-3 and (ii) an "outside director" as then defined under Section 162(m) of the Code. (b) The Committee shall have the authority in its sole discretion from time to time: (i) to designate the employees eligible to participate in the Plan; (ii) to grant Awards under the Plan; (iii) to prescribe such limitations, restrictions and conditions upon any such Award as the Committee shall deem appropriate; and (iv) to interpret the Plan, to adopt, amend and rescind rules and regulations relating to the Plan, and to make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. A majority of the Committee shall constitute a quorum, and the action of a majority of members of the Committee present at any meeting at which a quorum is present, or acts unanimously adopted in writing without the holding of a meeting, shall be the acts of the Committee. (c) All actions of the Committee shall be final, conclusive and binding upon the Participant. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any Award thereunder. 3.2 Eligibility. The Committee may grant Awards under the Plan to any full-time corporate officer, key executive, administrative or professional employee of the Corporation or any of its Affiliates. In granting such Awards and determining their form and amount, the Committee shall give consideration to the functions and responsibilities of the employee, his or her potential contributions to profitability and to the sound growth of the Corporation and such other factors as the Committee may deem relevant. 3 4 3.3 Effective and Expiration Dates of Plan. The amended and restated Plan shall become effective on the date (herein referred to as the "effective date") approved by the holders of a majority of the shares present or represented and entitled to vote at the 1996 Annual Meeting of Shareholders of the Corporation. No Award shall be granted after December 31, 2005, except that Reload Options may be granted pursuant to Reload Option Rights then outstanding. 3.4 Aggregate and Individual Limitations on Awards. (a) The aggregate number of shares of Common Stock reserved for issue under the Plan on and after its effective date shall not exceed 14,600,000 shares, subject to adjustments pursuant to Section 9.7. No more than 1,000,000 shares of Common Stock may be issued as Restricted Stock. Shares of Common Stock which may satisfy Awards granted under the Plan may be either authorized and unissued shares of Common Stock or authorized and issued shares of Common Stock held in the Corporation's treasury or issued and outstanding shares of Common Stock held by any employee stock benefit trust established by the Corporation. (b) For purposes of paragraph (a) of this Section 3.4, shares of Common Stock that are actually issued upon exercise of an Option shall be counted against the total number of shares reserved for issuance, except that when Options are exercised by the delivery of shares of Common Stock the charge against the shares reserved for issuance shall be limited to the net new shares of Common Stock issued. In addition to shares of Common Stock actually issued pursuant to the exercise of Options, there shall be deemed to have been issued under the Plan a number of shares of Common Stock equal to (i) the number of shares issued pursuant to SARs which shall have been exercised pursuant to the Plan, (ii) the number of Performance Units which shall have been paid in shares of Common Stock pursuant to the Plan and (iii) the number of shares of Restricted Stock which shall have been granted pursuant to the Plan. For purposes of paragraph (a) of this Section 3.4, the payment of a Deferred Cash Incentive Award shall not be deemed to result in the issuance of any shares of Common Stock in addition to those issued pursuant to the exercise of the related Option. (c) For purposes of paragraph (a) of this Section 3.4, any shares of Common Stock subject to an Option which for any reason either terminates unexercised, or expires except by reason of the exercise of a related SAR, and any shares of Restricted Stock granted under this Plan which are surrendered or forfeited to the Corporation, shall again be available for issuance under the Plan. (d) The maximum number of shares of Common Stock available for grants of Options or SARs to any one Participant under the Plan during a calendar year shall not exceed 1,000,000 shares. The limitation in the preceding sentence shall be interpreted and applied in a manner consistent with Section 162(m) of the Code. To the extent consistent with Section 162(m) of the Code, a Reload Option (A) shall be deemed to have 4 5 been granted at the same time as the original underlying Option grant and (B) shall not be deemed to increase the number of shares covered by the original underlying Option. IV. Options 4.1 Grant. The Committee may from time to time, subject to the provisions of the Plan, in its discretion grant Options to Participants to purchase for cash or shares of Common Stock the number of shares of Common Stock allotted by the Committee. In the discretion of the Committee, any Options or portions thereof granted pursuant to this Plan may be designated as Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Incentive Stock Option is granted) of Common Stock and any other stock of the Corporation or any parent, subsidiary or affiliate corporation with respect to which such Incentive Stock Options are exercisable for the first time by a Participant in any calendar year under all plans of the Corporation, its subsidiaries and affiliates shall not exceed $100,000 or such sum as may from time to time be permitted under Section 422 of the Code. The Committee shall also have the authority, in its discretion, to award reload option rights ("Reload Option Rights") in conjunction with the grant of Options with the effect described in Section 4.7. Reload Option Rights may be awarded either at the time an Option is granted or, except in the case of Incentive Stock Options, at any time thereafter during the term of the Option. 4.2 Option Agreements. The grant of any Option shall be evidenced by a written "Stock Option Agreement" executed by the Corporation and the Participant, stating the number of shares of Common Stock subject to the Option evidenced thereby and such other terms and conditions of the Option as the Committee may from time to time determine. 4.3 Option Price. The option price for the Common Stock covered by any Option granted under the Plan shall in no case be less than 100% of the Fair Market Value of said Common Stock on the date of grant. Except as otherwise provided in the Stock Option Agreement, the option price of an Option may be paid in whole or in part by delivery to the Corporation of a number of shares of Common Stock having a Fair Market Value on the date of exercise equal to the option price or portion thereof to be paid; provided, however, that no shares may be delivered in payment of the option price of an Option unless such shares, or an equivalent number of shares, shall have been held by the Participant (or other person entitled to exercise the Option) for at least six months prior to such delivery. 4.4 Term of Options. The terms of each Option granted under the Plan shall be for such period as the Committee shall determine, but for not more than 10 years from the date of grant thereof. Each Option shall be subject to earlier termination as provided in Sections 4.6 and 5.4 hereof. 4.5 Exercise of Options. Each Option granted under the Plan shall be exercisable on such date or dates during the term thereof and for such number of shares of Common Stock as may be provided in the Stock Option Agreement evidencing its grant. Pursuant 5 6 to the terms of the Stock Option Agreement or otherwise, the Committee may change the date on which an outstanding Option becomes exercisable; provided, however, that an exercise date designated in a Stock Option Agreement may not be changed to a later date without the consent of the holder of the Option. Notwithstanding any other provision of this Plan, unless expressly provided to the contrary in the applicable Stock Option Agreement, all Options granted under the Plan shall become fully exercisable immediately and automatically upon the occurrence of a Change in Control Event. 4.6 Termination of Employment. Except as otherwise provided in the Stock Option Agreement: (a) If termination of employment of a Participant is due to retirement after age 55 with the written consent of the Corporation or an Affiliate, the Participant shall have the right to exercise his or her Options within the period of two years after such retirement, to the extent such Options were exercisable at the time of retirement; provided, however, that such post-retirement exercise period may be extended by action of the Committee for up to the full term of such Options. (b) If a Participant shall die while employed by the Corporation or an Affiliate or within a period following termination of employment during which the Option remains exercisable under paragraphs (a), (c) or (d) of this Section 4.6, his or her Options may be exercised to the extent exercisable by the Participant at the time of his or her death within a period of two years from the date of death by the executor or administrator of the Participant's estate or by the person or persons to whom the Participant shall have transferred such right by will or by the laws of descent and distribution. (c) If termination of employment of a Participant is by reason of the total and permanent disability of the Participant covered by a disability plan of the Corporation or an Affiliate then in effect, the Participant shall have the right to exercise his or her Options within the period of two years after the date of termination of employment, to the extent such Options were exercisable at the time of termination of employment. (d) In the event the employment of a Participant is terminated by the Corporation or an Affiliate without cause within two years after the occurrence of a Change in Control Event, the Participant shall have the right to exercise his or her Options within one year after the date such termination occurred, to the extent such Options were exercisable at the time of such termination of employment. For purposes of this paragraph, "without cause" shall mean any termination of employment where it cannot be shown that the employee has (i) willfully failed to perform his or her employment duties for the Corporation or an Affiliate, (ii) willfully engaged in conduct that is materially injurious to the Corporation or an Affiliate, monetarily or otherwise, or (iii) committed acts that constitute a felony under applicable federal or state law or constitute common law fraud. For purposes of this paragraph, no act or failure to act on the Participant's part shall be considered "willful" unless done, or omitted to be done, by him or her not in good faith 6 7 and without reasonable belief that his or her action or omission was in the best interest of the Corporation or Affiliate. (e) In the event all employment of a Participant with the Corporation or an Affiliate is terminated for any reason other than as stated in the preceding paragraphs (a)-(d), his or her Options shall terminate upon such termination of employment. (f) Notwithstanding the foregoing, in no event shall an Option granted hereunder be exercisable after the expiration of its term. 4.7 Reload Option Rights. Reload Option Rights if awarded with respect to an Option shall entitle the original grantee of the Option (and unless otherwise determined by the Committee, in its discretion, only such original grantee), upon exercise of the Option or any portion thereof through delivery of shares of Common Stock, automatically to be granted on the date of such exercise an additional Option (a "Reload Option") (i) for that number of shares of Common Stock not greater than the number of shares delivered by the Participant in payment of the option price of the original Option and any withholding taxes related thereto, (ii) having an option price not less than 100% of the Fair Market Value of the Common Stock covered by the Reload Option on the date of grant of such Reload Option, (iii) having an expiration date not later than the expiration date of the original Option so exercised and (iv) otherwise having terms permissible for the grant of an Option under the Plan. Subject to the preceding sentence and the other provisions of the Plan, Reload Option Rights and Reload Options shall have such terms and be subject to such restrictions and conditions, if any, as shall be determined, in its discretion, by the Committee. In granting Reload Option Rights, the Committee, may, in its discretion, provide for successive Reload Option grants upon the exercise of Reload Options granted hereunder. Unless otherwise determined by the Committee, in its discretion, Reload Option Rights shall entitle the Participant to be granted Reload Options only if the underlying Option to which they relate is exercised by the Participant during employment with the Corporation or any of its Affiliates. Except as otherwise specifically provided herein or required by the context, the term Option as used in this Plan shall include Reload Options granted hereunder. V. SARs 5.1 Grant. SARs may be granted by the Committee as stand-alone SARs or in tandem with all or any part of any Option granted under the Plan. SARs which are granted in tandem with an Option may be granted either at the time of the grant of such Option or, except in the case of an Incentive Stock Option, at any time thereafter during the term of such Option. 5.2 SAR Agreements. The grant of any SAR shall be evidenced by the related Stock Option Agreement or by a written "Stock Appreciation Rights Agreement" executed by the Corporation and the Participant, stating the number of shares of Common Stock covered by the SAR, the base price of a stand-alone SAR and such other terms and 7 8 conditions of the SAR as the Committee may from time to time determine. The base price for stand-alone SARs (the "base price") shall be such price as the Committee, in its sole discretion, shall determine but shall not be less than 100% of the Fair Market Value per share of the Common Stock covered by the stand-alone SAR on the date of grant. 5.3 Payment. SARs shall entitle the Participant upon exercise to receive the amount by which the Fair Market Value of a share of Common Stock on the date of exercise exceeds the option price of any tandem Option or the base price of a stand-alone SAR, multiplied by the number of shares in respect of which the SAR shall have been exercised. In the sole discretion of the Committee, the Corporation may pay all or any part of its obligation arising out of a SAR exercise in (i) cash, (ii) shares of Common Stock or (iii) cash and shares of Common Stock. Payment shall be made by the Corporation as soon as practicable after the date of exercise. 5.4 Exercise of Tandem Award. If SARs are granted in tandem with an Option (i) the SARs shall be exercisable at such time or times and to such extent, but only to such extent, that the related Option shall be exercisable, (ii) the exercise of the related Option shall cause a share for share reduction in the number of SARs which were granted in tandem with the Option; and (iii) the payment of SARs shall cause a share for share reduction in the number of shares covered by such Option. 5.5 Termination of Employment. Except as otherwise provided in the Stock Appreciation Rights Agreement: (a) If termination of employment of a Participant is due to retirement after age 55 with the written consent of the Corporation or an Affiliate, the Participant shall have the right to exercise his or her stand-alone SARs within the period of two years after such retirement, to the extent such SARs were exercisable at the time of retirement; provided, however, that such post-retirement exercise period may be extended by action of the Committee for up to the full term of such SARs. (b) If a Participant shall die while employed by the Corporation or an Affiliate thereof or within a period following termination of employment during which the SARs remain exercisable under paragraphs (a), (c) or (d) of this Section 5.5, his or her stand-alone SARs may be exercised to the extent exercisable by the Participant at the time of his or her death within a period of two years from the date of death by the executor or administrator of the Participant's estate or by the person or persons to whom the Participant shall have transferred such right by will or by the laws of descent and distribution. (c) If termination of employment of a Participant is by reason of the total and permanent disability of the Participant covered by a disability plan of the Corporation or an Affiliate then in effect, the Participant shall have the right to exercise his or her stand-alone SARs within the period of two years after the date of termination of employment, to the extent such SARs were exercisable at the time of termination of employment. 8 9 (d) In the event all employment of a Participant with the Corporation or an Affiliate is terminated without cause within two years after the occurrence of a Change in Control Event, the Participant shall have the right to exercise his or her stand-alone SARs within one year after the date such termination occurred, to the extent such stand-alone SARs were exercisable at the time of such termination of employment. For purposes of this paragraph, "without cause" shall have the meaning provided in Section 4.6(d). (e) In the event all employment of a Participant with the Corporation or an Affiliate is terminated for any reason other than as stated in the preceding paragraphs (a)-(d), his or her stand-alone SARs shall terminate upon such termination of employment. (f) Notwithstanding the foregoing, in no event shall a stand-alone SAR granted hereunder be exercisable after the expiration of its term. VI. Performance Units 6.1 Grant. The Committee may from time to time grant one or more Performance Units to eligible employees. Performance Units shall represent the right of a Participant to receive shares of Common Stock or cash at a future date upon the achievement of Performance Goals which are established by the Committee. 6.2 Performance Unit Agreements. The grant of any Performance Unit shall be evidenced by a written "Performance Unit Agreement", executed by the Corporation and the Participant stating the amount of cash and/or number of shares of Common Stock covered by the Performance Unit and such other terms and conditions of the Performance Unit as the Committee may determine, including the performance period to be covered by the award and the Performance Goals to be achieved. 6.3 Payment. After the completion of a performance period, performance during such period shall be measured against the Performance Goals set by the Committee. If the Performance Goals are met or exceeded, the Committee shall certify that fact in writing in the Committee minutes or elsewhere and certify the amount to be paid to the Participant under the Performance Unit. In the sole discretion of the Committee, the Corporation may pay all or any part of its obligation under the Performance Unit in (i) cash, (ii) shares of Common Stock or (iii) cash and shares of Common Stock. Payment shall be made by the Corporation as soon as practicable after the certification of achievement of the Performance Goals. 6.4 Termination of Employment. To be entitled to receive payment under a Performance Unit, a Participant must remain in the employment of the Corporation or an Affiliate through the end of the applicable performance period; except that this limitation shall not apply where a Participant's employment is terminated by the Corporation or an Affiliate without cause (as defined in Section 4.6(d)) following the occurrence of a Change in Control Event. 9 10 6.5 Maximum Cash Payment. The maximum amount that may be paid in cash or in Fair Market Value of Common Stock (to be valued no later than three days after the date the Committee certifies the achievement of the Performance Goals) under all Performance Units paid to any one Participant during a calendar year shall in no event exceed $1,000,000. VII. Deferred Cash Incentive Awards 7.1 Granting of Deferred Cash Incentive Awards. Deferred Cash Incentive Awards, as hereafter described, may be granted in conjunction with all or any part of any Option (other than an Incentive Stock Option) granted under the Plan, either at the time of the grant of such Option or at any time thereafter during the term of such Option. 7.2 Deferred Cash Incentive Agreements. Deferred Cash Incentive Awards shall entitle the holder of an Option to receive from the Corporation an amount of cash equal to the aggregate exercise price of all Options exercised by such Participant in accordance with the terms of a written "Deferred Cash Incentive Agreement" executed by the Corporation and the Participant. Deferred Cash Incentive Agreements shall specify the conditions under which Deferred Cash Incentive Awards become payable, the conditions under which Deferred Cash Incentive Awards are forfeited and any other terms and conditions as the Committee may from time to time determine. Under no circumstances may a Deferred Cash Incentive Award be applied to any purpose other than the payment of the exercise price of a properly exercised related Option. 7.3 Preestablished Performance Goals. (a) Except in the event of death, total and permanent disability covered by a disability plan of the Corporation or an Affiliate then in effect or the occurrence of a Change in Control Event, any Deferred Cash Incentive Award shall only be earned and become payable if the Corporation achieves Performance Goals which are established for a calendar year or longer period by the Committee. After the completion of a performance period, performance during such period shall be measured against the Performance Goals set by the Committee. If the Performance Goals are met or exceeded, the Committee shall certify that fact in writing in the Committee minutes or elsewhere. (b) The amount payable to a Participant upon achieving the Performance Goals set by the Committee for the Deferred Cash Incentive Award shall be equal to the option price of the related Option, which shall be the Fair Market Value of the shares of Common Stock subject to the Option on the date the Option is granted. No individual may in any calendar year receive payment of Deferred Cash Incentive Awards with respect to Options for more than 750,000 shares of Common Stock. VIII. Restricted Stock 10 11 8.1 Award of Restricted Stock. The Committee may from time to time, subject to the provisions of the Plan and such other terms and conditions as it may prescribe, grant one or more shares of Restricted Stock to eligible employees. In the discretion of the Committee, shares of Restricted Stock may be granted alone, in addition to or in tandem with other Awards granted under the Plan and/or cash awards made outside of the Plan. 8.2 Restricted Stock Agreements. Each award of Restricted Stock under the Plan shall be evidenced by a written Restricted Stock Agreement executed by the Corporation and the Participant in such form as the Committee shall prescribe from time to time in accordance with the Plan. 8.3 Restrictions. Shares of Restricted Stock issued to a Participant may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine, beginning on the date on which the Award is granted (the "Restricted Period"). The Committee may also impose such other restrictions and conditions on the shares or the release of the restrictions thereon as it deems appropriate, including the achievement of Performance Goals established by the Committee. In determining the Restricted Period of an Award, the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on specified dates following the date of such Award or all at once. 8.4 Stock Certificate. As soon as practicable following the making of an award, the Restricted Stock shall be registered in the Participant's name in certificate or book-entry form. If a certificate is issued, it shall bear an appropriate legend referring to the restrictions and it shall be held by the Corporation on behalf of the Participant until the restrictions are satisfied. If the shares are registered in book-entry form, the restrictions shall be placed on the book-entry registration. Except for the transfer restrictions, the Participant shall have all other rights of a holder of shares of Common Stock, including the right to receive dividends paid with respect to the Restricted Stock and the right to vote such shares. As soon as is practicable following the date on which transfer restrictions on any shares lapse, the Corporation shall deliver to the Participant the certificates for such shares, provided that the Participant shall have complied with all conditions for delivery of such shares contained in the Restricted Stock Agreement or otherwise reasonably required by the Corporation. 8.5 Termination of Employment. (a) Unless expressly provided to the contrary in the applicable Restricted Stock Agreement, all restrictions placed upon Restricted Stock shall lapse immediately upon (i) termination of the Participant's employment with the Corporation or an Affiliate if, and only if, such termination is by reason of the Participant's death, total and permanent disability covered by a disability plan of the Corporation or an Affiliate then in effect or (except where Performance Goals have been set for the Award) retirement after age 55 with the written consent of the Corporation or an Affiliate or (ii) the occurrence of a 11 12 Change in Control Event. In addition, the Committee may in its discretion (except where Performance Goals have been set for the Award) allow restrictions on Restricted Stock to lapse prior to the date specified in a Restricted Stock Agreement. (b) Except as otherwise provided in the Restricted Stock Agreement, upon the effective date of a termination for any reason not specified in paragraph (a) of this Section 8.5, all shares then subject to restrictions immediately shall be forfeited to the Corporation without consideration or further action being required of the Corporation. For purposes of this paragraph (b), the effective date of a Participant's termination shall be the date upon which such Participant ceases to perform services as an employee of the Corporation or any of its Affiliates, without regard to accrued vacation, severance or other benefits or the characterization thereof on the payroll records of the Corporation or Affiliate. 8.6 Maximum Award. The compensation payable to a Participant upon achieving any Performance Goals set by the Committee for Restricted Stock shall be equal to the Fair Market Value of a share of Common Stock for each share of Restricted Stock that is granted. No individual Participant may in any one calendar year receive payment of a Restricted Stock Award (where Performance Goals have been set for the Award) covering more than 100,000 shares of Common Stock. IX. Miscellaneous 9.1 General Restriction. Each Award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that any listing or registration of the shares of Common Stock or any consent or approval of any governmental body, or any other agreement or consent is necessary or desirable as a condition of the granting of an Award or issuance of Common Stock or cash in satisfaction thereof, such Award may not be consummated unless such requirement is satisfied in a manner acceptable to the Committee. 9.2 Non-Assignability. No Award under the Plan shall be assignable or transferable by a Participant, except by will or by the laws of descent and distribution or by such other means as the Committee may approve from time to time. During the life of the Participant, such Award shall be exercisable only by such Participant or by such other persons as the Committee may approve from time to time. 9.3 Withholding Taxes. Whenever the Corporation proposes or is required to issue or transfer shares of Common Stock under the Plan, the Corporation shall have the right to require the Participant to remit to the Corporation an amount sufficient to satisfy any federal, state, local or other withholding tax requirements prior to the delivery of any certificate for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state, local or other withholding tax requirements. 12 13 9.4 No Right to Employment. Nothing in the Plan or in any agreement entered into pursuant to it shall confer upon any Participant the right to continue in the employment of the Corporation or an Affiliate or affect any right which the Corporation or an Affiliate may have to terminate the employment of such Participant. 9.5 Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation its determinations of the employees to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the establishment of performance goals and performance periods) need not be uniform and may be made by it selectively among employees who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. 9.6 No Rights as Shareholders. Participants as such shall have no rights as shareholders of the Corporation, except as provided in Section 8.4, unless and until shares of Common Stock are registered in their name. 9.7 Adjustments of Stock. If there is any change in the Common Stock by reason of any stock split, stock dividend, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, or any other similar transaction, the number and kind of shares available for grant under the Plan or subject to or granted pursuant to an Award and the price thereof, or other numeric limitations under the Plan, as applicable, shall be appropriately adjusted by the Committee or the Board. 9.8 Amendment or Termination of the Plan. The Committee or the Board may at any time terminate the Plan or any part thereof and may from time to time amend the Plan as it may deem advisable. Any such action of the Committee or the Board may be taken without the approval of the Corporation's shareholders, but only to the extent that such shareholder approval is not required by applicable law or regulation, including specifically Rule 16b-3, or the rules of any stock exchange on which the Common Stock is listed. The termination or amendment of the Plan shall not, without the consent of the Participant, adversely affect such Participant's rights under an Award previously granted. 9.9 Awards to Foreign Nationals and Employees Outside the United States. To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law or practice and to further the purpose of the Plan, the Committee may, without amending the Plan, (i) establish special rules applicable to Awards granted to Participants who are foreign nationals, are employed outside the United States, or both, including rules that differ from those set forth in this Plan, and (ii) grant Awards to such Participants in accordance with those rules. 9.10 Previously Granted Awards. Awards outstanding on the date of shareholder approval of this amended and restated Plan shall continue to be governed by and construed in accordance with the Plan as in effect prior to amendment and restatement; except that outstanding Deferred Cash Incentive Awards shall be subject to the limitations of new Section 7.3(a) and (b) of the Plan and, to the extent required by 13 14 Section 162(m) of the Code, a grant of a Reload Option shall be subject to the limitation of new Section 3.4(d) of the Plan. January 1997 14 EX-10.9 5 MELLON BANK 10-K405 1 Exhibit 10.9 MELLON BANK CORPORATION 1990 ELECTIVE DEFERRED COMPENSATION PLAN FOR DIRECTORS AND MEMBERS OF THE ADVISORY BOARD (AMENDED AND RESTATED AS OF JANUARY 1, 1997) 2 TABLE OF CONTENTS
PAGE PREAMBLE................................................................ 1 ARTICLE I............................................................... 1 DEFINITIONS......................................................... 1 1.1 Account.................................................. 1 1.2 Beneficiary.............................................. 2 1.3 Board.................................................... 2 1.4 Committee................................................ 2 1.5 Company.................................................. 2 1.6 Deferral Commitment...................................... 2 1.7 Deferral Election........................................ 2 1.8 Early Distribution Account............................... 2 1.9 Effective Date........................................... 2 1.10 Elective Deferred Compensation........................... 2 1.11 Financial Hardship....................................... 2 1.12 Normal Distribution Account.............................. 2 1.13 Participant.............................................. 2 1.14 Plan..................................................... 3 1.15 Plan Year................................................ 3 1.16 Prior Account............................................ 3 1.17 Prior Plan............................................... 3 1.18 Retirement............................................... 3 1.19 Service.................................................. 3 1.20 Special Distribution Account............................. 3 1.21 T-Note Rate.............................................. 3 1.22 Valuation Date........................................... 3 1.23 Window Period............................................ 3 ARTICLE II............................................................... 4 ADMINISTRATION........................................................ 4 2.1 Administrator............................................ 4 2.2 Powers and Duties........................................ 4 2.3 Procedures............................................... 5 2.4 Establishment of Rules................................... 5
(i) 3 2.5 Limitation of Liability................................... 5 2.6 Compensation and Insurance................................ 5 2.7 Removal and Resignation................................... 6 2.8 Claims Procedure.......................................... 6 ARTICLE III................................................................... 6 PARTICIPATION AND DEFERRAL COMMITMENTS................................ 6 3.1 Eligibility and Participation............................. 6 3.2 Duration of Deferral Commitment........................... 6 3.3 Basic Forms of Deferral................................... 7 3.4 Limitations on Deferrals.................................. 7 3.5 Modification of Deferral Commitments on Financial Hardship........................................ 8 3.6 Commencement of Deferral Commitment....................... 8 3.7 Roll-Over of Prior Accounts............................... 8 3.8 Termination of Prior Plan Deferral Commitments............ 8 ARTICLE IV.................................................................... 8 DEFERRED COMPENSATION ACCOUNTS........................................ 8 4.1 Accounts................................................. 8 4.2 Elective Deferred Compensation........................... 8 4.3 Crediting Rate........................................... 9 4.4 Valuation of Accounts.................................... 9 4.5 Vesting of Accounts...................................... 9 4.6 Statement of Accounts.................................... 9 ARTICLE V..................................................................... 10 PLAN BENEFITS......................................................... 10 5.1 Plan Benefit............................................. 10 5.2 Normal Distribution Account.............................. 11 5.3 Survivor Benefits........................................ 12 5.4 Early Distribution Account............................... 14 5.5 Hardship Distributions................................... 15 5.6 Valuation and Settlement................................. 15 5.7 Change in Control and Unscheduled Distributions.......... 15 5.8 Distributions from General Assets........................ 17
(ii) 4 5.9 Withholding and Payroll Taxes........................... 17 5.10 Payment to Guardian..................................... 17 5.11 Small Benefit........................................... 17 5.12 Protective Provisions................................... 17 5.13 Notices and Elections................................... 18 5.14 Special Distribution Accounts........................... 18 ARTICLE VI.................................................................. 18 DESIGNATION OF BENEFICIARY......................................... 18 6.1 Designation of Beneficiary.............................. 18 6.2 Failure to Designate Beneficiary........................ 18 ARTICLE VII................................................................. 19 FORFEITURES TO COMPANY............................................. 19 7.1 Distributions of Participants' Interests When Company is Unable to Locate Distributees........................ 19 ARTICLE VIII................................................................ 19 MAINTENANCE OF ACCOUNTS............................................. 19 ARTICLE IX.................................................................. 20 AMENDMENT AND TERMINATION OF THE PLAN.............................. 20 9.1 Amendment.................................................... 20 9.2 Company's Right to Terminate................................. 20 ARTICLE X................................................................... 21 SPENDTHRIFT PROVISIONS............................................ 21 ARTICLE XI.................................................................. 21 MISCELLANEOUS.................................................... 21 11.1 Right of Company to Replace Members of Board of Directors and Advisory Board; Obligations................... 21
(iii) 5 11.2 Title to and Ownership of Assets Held for Accounts.................................... 21 11.3 Nature of Liability to Participants.................. 21 11.4 Text of Plan to Control.............................. 22 11.5 Law Governing and Severability....................... 22 11.6 Name................................................. 22 11.7 Gender............................................... 22 11.8 Trust Fund........................................... 22
(iv) 6 MELLON BANK CORPORATION 1990 ELECTIVE DEFERRED COMPENSATION PLAN FOR DIRECTORS AND MEMBERS OF THE ADVISORY BOARD (Amended and Restated as of January 1, 1997) PREAMBLE The purpose of this 1990 Elective Deferred Compensation Plan for Directors and Members of the Advisory Board (the "Plan") is to offer each non-employee member of the Board of Directors and each member of the Advisory Board of Mellon Bank Corporation (the "Company") the opportunity to defer receipt of compensation to be earned for service in such capacity and to accumulate supplemental funds for retirement, special needs prior to retirement, or death. The Plan was originally effective as of January 1, 1990. This amended and restated Plan shall only apply to Participants who serve as non-employee members of the Board of Directors or the Advisory Board of the Company after January 1, 1997. The Plan as previously in effect shall apply to all Participants who terminated their service with the Board of Directors and the Advisory Board of the Company prior to January 1, 1997. The Mellon Bank Corporation Deferred Compensation Plan for Directors and Members of the Advisory Board which was originally adopted on July 14, 1980 (the "Prior Plan") will continue in effect, but a Participant in this Plan will not be eligible to make any new deferrals under the Prior Plan. A Participant may elect to transfer account balances under the Prior Plan to this Plan whenever the Committee which administers this Plan may permit. No Accounts held under this Plan may be transferred to the Prior Plan. The Corporate Benefits Committee ("Committee" or "CBC") of the Company shall be the "administrator" responsible for administering the Plan in accordance with its terms but such designation of the Committee shall not be construed, directly or indirectly, as evidencing any intent on the part of the Company that the Plan be governed by or enforceable under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); it being the intent of the Company that such Plan be governed by and enforceable under the laws of the Commonwealth of Pennsylvania. ARTICLE I DEFINITIONS When used herein, the following words shall have the following meanings unless the content clearly indicates otherwise: 1.1 Account. "Account" means the record-keeping device used by the Company to measure and determine the amounts to be paid to a Participant under the Plan. Separate Accounts will be established for each Participant and as may otherwise be required. 1 7 1.2 Beneficiary. "Beneficiary" means the person who under this Plan becomes entitled to receive a Participant's interest in the event of his death. 1.3 Board. "Board" means the Board of Directors of the Company or any committee thereof acting within the scope of its authority. 1.4 Committee. "Committee" means the Corporate Benefits Committee appointed to administer the Plan pursuant to Article II. 1.5 Company. "Company" means Mellon Bank Corporation, a Pennsylvania corporation, and any successor in interest. 1.6 Deferral Commitment. "Deferral Commitment" means a commitment made by a Participant pursuant to Article III for which a Deferral Election has been submitted by the Participant to the Committee. 1.7 Deferral Election. "Deferral Election" means the written agreement to defer receipt of compensation submitted by a Participant to the Committee or its delegates prior to the commencement of the period in which the deferred compensation is to be earned. 1.8 Early Distribution Account. "Early Distribution Account" means an account established pursuant to Section 5.4 which provides for distribution of a benefit prior to a Participant's Retirement. 1.9 Effective Date. "Effective Date" of this amended and restated Plan means January 1, 1997. The Plan originally became effective on January 1, 1990. 1.10 Elective Deferred Compensation. "Elective Deferred Compensation" means the amount of compensation that a Participant elects to defer pursuant to a Deferral Commitment. 1.11 Financial Hardship. "Financial Hardship" means an immediate and substantial financial need of the Participant or Beneficiary, determined by the Committee on the basis of written information supplied by the Participant in accordance with such standards as are, from time to time, established by the Committee. 1.12 Normal Distribution Account. "Normal Distribution Account" means an Account established pursuant to Section 5.2 which provides for distribution of a benefit following Retirement. 1.13 Participant. "Participant" means any individual who is participating in this Plan as provided in Article III. 2 8 1.14 Plan. "Plan" means this "1990 Elective Deferred Compensation Plan for Directors and Members of the Advisory Board" as set forth in this document and as the same may be amended, administered or interpreted from time to time. 1.15 Plan Year. "Plan Year" means each calendar year beginning on January 1 and ending on December 31. 1.16 Prior Account. "Prior Account" means an account originally established for a Participant under the Prior Plan which is transferred to this Plan. 1.17 Prior Plan. "Prior Plan" means the Mellon Bank Corporation Deferred Compensation Plan for Directors and Members of the Advisory Board which was originally adopted on July 14, 1980, as amended from time to time. 1.18 Retirement. "Retirement" means that a Participant no longer serves on either the Board of Directors or the Advisory Board of the Company, for any reason other than death. 1.19 Service. "Service" means service on the Board of Directors or Advisory Board of the Company. 1.20 Special Distribution Account. "Special Distribution Account" means an Account established for any Elective Deferred Compensation (plus earnings thereon) earned prior to January 1, 1997, which the Participant elected to have distributed while serving as a non-employee member of the Board of Directors or the Advisory Board; provided, however, such term shall not include amounts held for a Participant in a Prior Account. 1.21 T-Note Rate. "T-Note Rate" means for each Plan Year the interest rate which is equivalent to an effective annual yield equal to the 120 month rolling average rate of ten-year United States Treasury Notes as of the July 31 preceding the applicable Plan Year. This rate will be determined once each year by an outside source selected by the Company. 1.22 Valuation Date. "Valuation Date" means the last day of each month, or such other dates as the Committee may determine in its discretion, which may be either more or less frequent, for the valuation of Participants' Accounts. 1.23 Window Period. "Window Period" means a period of thirty calendar days which begins on the third business day following the date of release of annual or quarterly earnings of the Company, or such other period as the Committee may determine in its discretion. 3 9 ARTICLE II ADMINISTRATION 2.1 Administrator. Except as hereinafter provided, the Committee shall be the administrator of the Plan and shall be responsible for administering the Plan in accordance with its terms and for the administrative responsibilities hereinafter described with respect to the Plan. Whenever any action is required or permitted to be taken in the administration of the Plan, such action shall be taken by the Committee unless the Committee's power is expressly limited herein or by operation of law. The Committee may delegate its duties and responsibilities as it, in its sole discretion, deems necessary or appropriate to the execution of such duties and responsibilities. The Committee as a whole or any of its members may serve in more than one capacity with respect to the Plan. 2.2 Powers and Duties. The Committee, or its delegates, shall maintain and keep (or cause to be maintained and kept) such records as are necessary for the efficient operation of the Plan or as may be required by any applicable law, regulation, or ruling and shall provide for the preparation and filing of such forms, reports, information, and documents as may be required to be filed with any governmental agency or department and with the Plan's Participants and/or other Beneficiaries. Except to the extent expressly reserved to the Company or the Board, the Committee shall have all powers necessary to carry out the administrative provisions of the Plan and to satisfy the requirements of any applicable law or laws. These powers shall include, by way of illustration and not limitation, the exclusive powers and discretionary authority necessary to: (a) construe and interpret the Plan; decide all questions of eligibility; decide all questions of fact relating to claims for benefits; and determine the amount, time, manner, method, and mode of payment of any benefits hereunder; (b) direct the Company, and/or the trustee of any trust established at the discretion of the Company to provide for the payment of benefits under the Plan, concerning the amount, time, manner, method, and mode of payment of any benefits hereunder; (c) prescribe procedures to be followed and forms to be used by Participants and/or other persons in filing applications or elections; (d) prepare and distribute, in such manner as may be required by law or as the Committee deems appropriate, information explaining the Plan; provided, however, that no such explanation shall contravene the terms of this Plan or increase the rights of any Participant or Beneficiary or the liabilities of the Company; (e) require from the Company and Participants such information as shall be necessary for the proper administration of the Plan; 4 10 (f) appoint and retain individuals to assist in the administration and construction of the Plan, including such legal, clerical, accounting, and actuarial services as it may require or as may be required by any applicable law or laws; and (g) perform all other administrative functions which are not expressly reserved to the Company or the Board, including, but not limited to, those supplemental duties and responsibilities described in the "Mellon Bank Corporation Corporate Benefits Committee Charter and Summary of Operations" approved by the Board on September 17, 1991 (the "CBC Charter") which are not inconsistent with the Board's intent that the Plan not be construed as governed by or subject to ERISA. Without intending to limit the generality of the foregoing, the Committee shall have the power to amend the Plan, in whole or in part, in order to comply with applicable law; provided, however, that no such amendment may increase the duties and obligations of the Company without the consent of the Company. Except as provided in the preceding sentence or unless directed by the Board or the Human Resources Committee of the Board or otherwise required by law, the Committee shall have no power to adopt, amend, or terminate the Plan, said powers being exclusively reserved to the Board or the Human Resources Committee of the Board. 2.3 Procedures. The Committee shall be organized and conduct its business with respect to the Plan in accordance with the organizational and procedural rules set forth in the CBC Charter. 2.4 Establishment of Rules. The Committee shall have specific authority in its sole discretion to construe and interpret the terms of the Plan related to its powers and duties, and to the extent that the terms of the Plan are incomplete, the Committee shall have authority to establish such rules or regulations related to its powers and duties as it may deem necessary and proper to carry out the intent of the Company as to the purposes of the Plan. 2.5 Limitation of Liability. The Board, the members of the Committee, and any officer, employee, or agent of the Company shall not incur any liability individually or on behalf of any other individuals or on behalf of the Company for any act, or failure to act, made in good faith in relation to the Plan. 2.6 Compensation and Insurance. Members of the Committee shall serve without compensation for their services as such. Expenses incurred by members of the Committee in the performance of their duties as herein provided, and the compensation and expenses of persons retained or employed by the Committee for services rendered in connection with the Plan shall, upon approval by the Committee, be paid or reimbursed by the Company. 5 11 The Company shall indemnify and/or maintain and keep in force insurance in such form and amount as may be necessary in order to protect the members of the Committee, their delegates and appointees (other than persons who are independent of the Company and are rendering services to the Committee or to or with respect to the Plan) from any claim, loss, damage, liability, and expense (including costs and attorneys' fees) arising from their acts or failures to act with respect to the Plan, except where such actions or failures to act involve willful misconduct or gross negligence. 2.7 Removal and Resignation. Any member of the Committee may resign and the Company may remove any member of the Committee in accordance with the procedures established by the CBC Charter. The Committee shall remain fully operative pending the filling of any vacancies, the remaining Committee members shaving full authority to administer the Plan. 2.8 Claims Procedure. The right of any Participant or Beneficiary to receive a benefit hereunder and the amount of such benefit shall be determined in accordance with the procedures for determination of benefit claims established and maintained by the Committee; which separate procedures, entitled Procedures for Determination of Benefit Claims, are incorporated herein by this reference. ARTICLE III PARTICIPATION AND DEFERRAL COMMITMENTS 3.1 Eligibility and Participation. (a) Eligibility. Eligibility to make a Deferral Commitment shall be limited to non-employee members of the Board of Directors and members of the Advisory Board of the Company. (b) Participation. An eligible individual may elect to participate in the Plan by submitting a Deferral Election to the Committee or its delegates prior to such date, as the Committee may determine, preceding the period in which the deferred compensation is to be earned. The Deferral Election shall specify whether the deferred compensation shall be credited to a Normal Distribution Account or an Early Distribution Account for the Participant. 3.2 Duration of Deferral Commitment. (a) A Deferral Commitment for a Normal Distribution Account or Early Distribution Account shall continue in effect until the Participant files a subsequent Deferral Election changing the amount of or stopping such Deferral Commitment. 6 12 (b) A Deferral Commitment for an Early Distribution Account shall terminate at the end of the Plan Year preceding the Plan Year which the Participant has selected for distribution of such Account. (c) Except as provided in Sections 5.5 and 5.7 below, a subsequent Deferral Election shall become effective beginning with the next Plan Year following the date it is filed. A Subsequent Deferral Election shall not apply to any deferrals which represent payments for services performed prior to the beginning of the first Plan Year to which it applies, but otherwise shall apply to all future deferrals covered by the Deferral Commitment. (d) A Participant's Deferral Commitments shall terminate upon the Participant's Retirement or death. 3.3 Basic Forms of Deferral. A Participant may file a Deferral Election to defer any or all of the following forms of compensation: (a) Annual Retainer. A Participant may elect to defer a portion of the annual retainer paid for meetings of the Board of Directors or Advisory Board of the Company. The amount to be deferred shall be stated as a whole number percentage of annual retainer. (b) Board Meeting Fees. A Participant may elect to defer a portion of the meeting fees paid for meetings of the Board of Directors or Advisory Board of the Company. The amount to be deferred shall be stated as a whole number percentage of the fees paid for such meetings. (c) Committee Meeting Fees. A Participant may elect to defer a portion of the meeting fees paid for meetings of committees of the Board of Directors or Advisory Board of the Company. The amount to be deferred shall be stated as a whole number percentage of the fees paid for such committee meetings. (d) Special Deferrals. A Participant may elect any special Deferral Commitment which is authorized by the Committee in its discretion. 3.4 Limitations on Deferral. The following limitations on deferrals shall apply: (a) Minimum Deferrals. The minimum deferral amount for each of the basic forms of deferral in Section 3.3(a), (b) or (c) above is $2,000 for any Plan Year. (b) Maximum Deferrals. A Participant shall not defer for any Plan Year more than one hundred percent (100%) of the Participant's annual retainer and meeting fees for meetings of the Board of Directors or Advisory Board of the Company and their committees. 7 13 (c) Prior Plan. A Participant may not defer under this Plan any compensation which he elects to defer under the Prior Plan. In the event of any conflict between deferral elections under this Plan and the Prior Plan, the deferral election under this Plan shall take precedence and shall revoke any conflicting election under the Prior Plan. (d) Waiver; Committee Discretion. The Committee may further limit the minimum or maximum amount deferred by any Participant or group of Participants, or waive the foregoing minimum and maximum limits for any Participant or group of Participants, for any reason. 3.5 Modification of Deferral Commitments on Financial Hardship. The Committee may permit a Participant to reduce the amount to be deferred, or waive the remainder of the Deferral Commitment, upon a finding that the Participant has suffered a Financial Hardship. 3.6 Commencement of Deferral Commitment. A Deferral Commitment shall be deemed to commence as of the first day of the Plan Year covered by the Deferral Election for such Deferral Commitment. A Participant's Beneficiary will be entitled to receive pre-retirement survivor benefits pursuant to Section 5.3(a) with respect to the Deferral Commitment only in the event of the Participant's death on or after such date while in Service on the Board of Directors or Advisory Board of the Company. 3.7 Roll-Over of Prior Accounts. A Participant may elect to transfer Prior Accounts held under the Prior Plan to this Plan whenever the Committee may permit in its discretion. Prior Accounts which are transferred to this Plan shall be valued and credited with interest under this Plan commencing on the date which the Committee shall determine. Prior Accounts shall be distributed as provided in Section 5.14. 3.8 Termination of Plan Deferral Commitments. All Deferral Commitments established under the terms of the Plan prior to its amendment and restatement as of January 1, 1997, shall terminate on December 31, 1996. ARTICLE IV DEFERRED COMPENSATION ACCOUNTS 4.1 Accounts. For record-keeping purposes only, Normal Distribution, Early Distribution, Special Distribution and Prior Accounts shall be maintained as applicable for each Participant's Elective Deferred Compensation. 4.2 Elective Deferred Compensation. A Participant's Elective Deferred Compensation shall be credited to the Participant's Account as of the date when the corresponding non-deferred portion of the compensation is paid or would have been paid but for the Deferral Commitment. Prior Accounts which are transferred to this Plan shall be valued and credited with interest under this Plan commencing on the date determined by the 8 14 Committee. Any withholding of taxes or other amounts with respect to deferred compensation that is required by federal, state or local law shall be withheld from the Participant's non-deferred compensation to the maximum extent possible with any excess being withheld from the Participant's Deferral Commitment or Account(s). 4.3 Crediting Rate. Accounts shall be credited monthly with interest based on the rates specified below, compounded annually. Interest shall be credited as of each Valuation Date from the dates when deferred amounts are credited to accounts based on the balance of each Account. (a) Interest Rate During Participant's Lifetime. During a Participant's lifetime, the Participant's Accounts will be credited with interest on a monthly basis during each Plan Year at the T-Note Rate which is applicable for that Plan Year, subject to increase pursuant to Section 5.1. (b) Interest Rate After Participant's Death. Following a Participant's death, the Participant's Account will be credited with interest on a monthly basis during each Plan Year at one hundred percent (100%) of the T-Note Rate which is applicable for that Plan Year. 4.4 Valuation of Accounts. A Participant's Account(s) as of each Valuation Date shall consist of the balance of the Participant's Account(s) as of the immediately preceding Valuation Date, plus the Participant's Elective Deferred Compensation and interest credited to such Account(s) and minus any distributions made from such Account(s) since the immediately preceding Valuation Date. 4.5 Vesting of Accounts. Each Participant shall be one hundred percent (100%) vested at all times in the amounts credited to such Participant's Accounts. 4.6 Statement of Accounts. The Company shall submit to each Participant periodic statements setting forth the balance to the credit of the Accounts maintained for the Participant. 9 15 ARTICLE V PLAN BENEFITS 5.1 Plan Benefit. The Company shall pay a Plan benefit for the Participant's Normal Distribution, Early Distribution, Special Distribution and Prior Plan Accounts, as determined below: (a) Fully Enhanced Rate. Unpaid Account balances of Participants who terminate Service upon Retirement on or after age 68, death, or at any time after a Change in Control, shall be credited retroactively on the Valuation Date immediately preceding commencement of payment of benefits with respect to such Account balances with one hundred thirty-five percent (135%) of the T-Note Rate for each Plan Year. (b) Enhanced Rate. Unpaid Account balances of Participants who terminate service upon Retirement before age 68 and prior to a Change in Control, for reasons other than death, shall be credited retroactively on the Valuation Date immediately preceding commencement of payment of benefits with respect to such Account balances with a percentage of the T-Note Rate based on the Participant's completed years of Service, including years of Service before the Effective Date of this Plan, and completed years of participation in this Plan as follows: Completed Years of Completed Years of Continuous Service Plan Participation % of T-Note Rate ------------------ ------------------ ---------------- Less Than 3 -- 100% 3 or More -- 125% 5 or More and 2 or More 130% 7 or More and 4 or More 135% (c) Early Distribution, Special Distribution and Prior Plan Accounts. The enhanced rates set forth under Sections 5.1(a) and (b) above shall also be credited retroactively to Early Distribution, Special Distribution and Prior Plan Accounts on the basis of the Participant's Service and completed years of participation in the Plan on the Valuation Date preceding each payment of benefits with respect to such Accounts before Retirement. (d) Completed Years of Plan Participation. Completed years of participation in this Plan shall include all years for which the Participant had an Account balance with the Plan for the entire calendar year. (e) Duration. The interest rates provided under Sections 5.1(a) and (b) above shall be payable until the Participant's Accounts are distributed in full except in the event of the Participant's death. After the Participant's death, interest shall be credited pursuant to Section 4.3(b). 10 16 5.2 Normal Distribution Account. (a) Election of Retirement Benefit. A Participant may file a Deferral Election to defer compensation into a Normal Distribution Account and receive benefits from such Account following Retirement. A Participant may elect up to three (3) benefit payment options, each covering a ten percent (10%) multiple of his Normal Distribution Account balance at Retirement and specifying a date of commencement and duration of payments. A Participant's election of payment options shall be irrevocable, except as follows: (i) Subject to the approval of the Committee, a Participant shall be permitted to file one new payment election per year which will supersede his original election (A) at any time more than 12 months prior to his Retirement without penalty and (B) at any time during the 12 months preceding his Retirement subject to a penalty, which shall be forfeited to the Company, equal to six percent (6%) of the portion of his Account balance affected by the change. A new payment election which is made within the aforesaid time limits will become effective upon the Participant's Retirement. In the event that a Participant accelerates his or her Retirement thereby causing a previously filed payment election to have been made within 12 months preceding Retirement, the next preceding timely payment election filed by the Participant shall be followed unless the Participant elects to have the six percent (6%) penalty of Section 5.2(a)(i)(B) above apply. No penalty shall apply to the first such payment election made by a Participant who was participating in the Plan prior to its amendment and restatement as of January 1, 1997, and such initial election shall be given effect unless the Participant subsequently files a new election. (ii) A Participant who has elected payments in installments may request in writing a payment in a lump sum, at any time after Retirement, of the amount of his Account balance which is reasonably necessary to meet the Participant's requirements due to a Financial Hardship. (iii) A Participant may elect to receive a payment in a lump sum at any time, subject to penalty, as provided in Section 5.7(b). (b) Forms of Benefit Payment. The available forms of payment from a Participant's Normal Distribution Account after Retirement are as follows: (i) One lump sum payment. (ii) Monthly installment payments in substantially equal payments of principal and interest over a payment period of 60, 120 or 180 months, as elected by the Participant. The amount of the monthly installments shall be redetermined effective as of January 1 of each year based on the remaining Account balance and the remaining number of installment payments. 11 17 (c) Commencement of Retirement Benefit Payment. The available commencement dates for payment of benefits from a Participant's Normal Distribution Account are as follows: (i) Upon Retirement. (ii) Any January following Retirement; provided, however, that no payment may commence later than January of the year in which the Participant attains age 70 if Retirement is prior to age 70, and no later than the January following Retirement if Retirement is on or after age 70, (iii) The later of Retirement and the date the Participant attains age 60, 65 or 70. If a Participant does not elect a benefit payment option for his Normal Distribution Account, Plan benefits from such Account will be paid in monthly installments over 180 months, commencing in January of the year following Retirement. 5.3 Survivor Benefits. (a) Pre-Retirement Survivor Benefits. (i) Normal Distribution Accounts. If a Participant dies while in Service as a member of the Board of Directors or Advisory Board of the Company prior to receiving a complete distribution of his or her entire Normal Distribution Account balance, the amount payable as a survivor benefit for such Account shall be equal to its remaining unpaid balance, if any, plus an additional credit equal to the annual amount of the Deferral Commitment in effect at death for the Participant's Normal Distribution Account multiplied by the number of Plan Years until the year in which the Participant would have attained age 72; provided, however, that such multiplier shall be limited by a maximum of four (4) years. (ii) Early Distribution Accounts. If a Participant dies while in Service as a member of the Board of Directors or Advisory Board of the Company prior to receiving a complete distribution of his or her entire Early Distribution Account balance, the amount payable as a survivor benefit for such Account shall be equal to its remaining unpaid balance, if any, plus an additional credit equal to the annual amount of the Deferral Commitment in effect at death for the Participant's Early Distribution Account multiplied by the number of Plan Years remaining before commencement of payment of such Account; provided however, that such multiplier shall be limited by a maximum of four (4) years or the number of years until the year in which the Participant would have attained age 72. (iii) Covered Deferral Commitment. For purposes of Sections 5.3(a)(i) and (ii), a Participant's Deferral Commitment shall be determined based on projecting the 12 18 annual retainer and meeting fees for the Board of Directors and Advisory Board of the Company and their committees in effect at the time of the Participant's death and taking into account any reduction in such annual retainer and meeting fees which would normally occur for members of the Advisory Board. A Deferral Commitment shall be deemed to be in effect beginning on the first day of the Plan Year after the Participant files a Deferral Election for such Deferral Commitment. (iv) Special Distribution Accounts and Prior Accounts. If a Participant dies while in Service as a member of the Board of Directors or Advisory Board of the Company prior to receiving a complete distribution of his entire Special Distribution Account or Prior Account balance, if any, the amount payable as a survivor benefit for such Accounts shall be equal to its remaining unpaid balance, if any. (v) Commencement of Survivor Benefit. The pre-retirement survivor benefits for Normal and Early Distribution Accounts shall become effective beginning on the first day of the Plan Year after the Participant files a Deferral Election for a Normal or Early Distribution Account. A Participant's Beneficiary will be entitled to receive such pre-retirement survivor benefits only in the event of the Participant's death while in Service on or after such dates. The pre-retirement survivor benefits for all Special Distribution Accounts and Prior Accounts shall become effective as of January 1, 1997. (vi) Withdrawals. Whenever a Participant makes a withdrawal from any Account, the Account balance shall be reduced by the amounts withdrawn, including any penalty thereon. If a Participant dies while in Service after complete distribution of his entire Account balances, no survivor benefit will be payable to the Participant's Beneficiary. (vii) Commencement of Payments. The pre-retirement survivor benefits described above will be paid to the Participant's Beneficiary in ten (10) annual installments, commencing as soon as practicable after the Participant's death. (b) Post-Retirement Survivor Benefits. If a Participant dies after Retirement but before commencement of payment of retirement benefits with respect to his Normal Distribution Account balance, the Company will pay to the Participant's Beneficiary the installments of any such benefit that such Participant's Beneficiary would have received with respect to such Normal Distribution Account balance had the Participant commenced to receive retirement benefits on the day prior to such Participant's death. Payments will commence upon the Participant's death, irrespective of when retirement benefits would have commenced if the Participant had survived. Such payments shall be made in accordance with the method of payment which the Participant had elected for payment of his retirement benefits for his Normal Distribution Account. 13 19 If a Participant dies after the commencement of payment of retirement benefits with respect to his Account balance(s), the Company will pay to the Participant's Beneficiary the remaining installments of any such benefit that would have been paid to the Participant had the Participant survived. If a Participant dies after Retirement but before receiving full payment of benefits from his Early Distribution, Special Distribution or Prior Account, his Beneficiary shall receive the balance of such Accounts in one lump sum payment, as soon as practicable following his death. (c) Interest. If the Participant dies prior to Retirement, the amount payable with respect to each of the Participant's Accounts shall be determined by retroactively crediting interest at one hundred thirty-five percent (135%) of the T-Note Rate for each Plan Year through the date of the Participant's death. After the Participant's death, interest shall be credited for each Plan Year at one hundred percent (100%) of the T-Note Rate which is applicable for that Plan Year. 5.4 Early Distribution Account. A participant may file a Deferral Election to defer compensation into an Early Distribution Account and receive benefits from such Account prior to Retirement subject to the following restrictions: (a) Election of Early Distribution Benefit. A Deferral Election establishing an Early Distribution Account and specifying an early payment date and the form of payment must be filed prior to the commencement of the period in which the Elective Deferred Compensation is to be earned. No deferrals may be made into a Participant's Early Distribution Account during any Plan Year in which the Participant is receiving a distribution from such Account. (b) Amount of Early Distribution Benefit. The entire Early Distribution Account must be paid out at the time and in the form provided for in the related Deferral Election (c) Commencement and Form of Early Distribution Benefit. An Early Distribution Account shall not be paid out prior to the completion of two Plan Years following the start of deferrals into such Account. An Early Distribution Account shall be paid out in a lump sum or in four equal annual installments, as provided in the Participant's Deferral Election establishing such Account. In the year following the complete distribution of an Early Distribution Account, a Participant may make new deferrals into such Account. Amounts paid to a Participant pursuant to this Section 5.4 shall be treated as distributions from the Participant's Early Distribution Account. If the Participant terminates service upon Retirement before the date scheduled for payment of an Early Distribution Account, the Participant shall receive the balance of his Early Distribution Account in one lump sum payment or up to three (3) equal annual installments, at the Committee's discretion, as soon as practicable following such event. 14 20 5.5 Hardship Distributions. Upon a finding that a Participant or Beneficiary has suffered a Financial Hardship, the Committee may, in its sole discretion, make distributions from an Account prior to the time specified for payment of benefits under the Plan. The amount of such distribution shall be limited to the amount reasonably necessary to meet the Participant's or Beneficiary's requirements during the Financial Hardship. Applications for hardship distributions and determinations thereon by the Committee shall be in writing, and a Participant or Beneficiary may be required to furnish written proof of the Financial Hardship. A Participant's entire Account balance will be distributed whenever a hardship distribution would amount to more than seventy-five percent (75%) of any such Account balance. Following a complete distribution of an entire Account balance, a Participant and his Beneficiary will be entitled to no further benefits under the Plan with respect to that Account. Amounts paid to a Participant pursuant to this Section 5.5 shall be treated as distributions from the Participant's Account. Any Participant who receives a hardship distribution of any part of an Account balance shall not be allowed to make any deferrals under the Plan during the remainder of the Plan Year in which he receives such distribution or during the next Plan Year. 5.6 Valuation and Settlement. The date on which a lump sum is paid or the date on which installment payments commence shall be the "Settlement Date". The Settlement Date for an Account shall be no more than sixty (60) days after the end of the month in which the Participant or his Beneficiary becomes entitled to payments on account of Retirement or death, unless the Participant elects to defer commencement of payments following Retirement to a later date in the election form for designation of form of payment for the Account. The Settlement Date for an Early Distribution Account or delayed payments following Retirement shall be the date which the Participant elects for commencement of such payments in the election form for designation of form of payment for the Account. The Settlement Date for a Special Distribution or Prior Account shall be the date which the Participant elected for commencement of payments from such Account under the terms of the Prior Plan. The amount of a lump sum payment and the initial amount of installment payments shall be based on the value of the Participant's Account as of the Valuation Date at the end of the immediately preceding month before the Settlement Date. For example, the Valuation Date at the end of December shall be used to determine lump sum payments and the initial amount of installment payments which will be made in the following January. 5.7 Change in Control and Unscheduled Distributions. (a) Subject to the provisions of Section 5.7(b) hereof, upon (i) dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more other entities as a result of which the Company is not the survivor, (iii) the sale of all or substantially all the assets of the Company, or (iv) any other event which constitutes a Change in Control as defined in Section 5.7(c), the 15 21 interests of all then remaining Participants shall continue, and provisions shall be made in connection with such transaction for the continuance of the Plan and the assumption of the obligations of the Company under the Plan by the Company's successor(s) in interest. (b) Notwithstanding any other provisions of the Plan, at any time during a Window Period before a Change in Control or at any time after a Change in Control, a Participant or a Beneficiary of a deceased Participant may elect to receive an immediate lump sum payment of up to the balance of his Account(s), reduced by a penalty, which shall be forfeited to the Company, equal to ten percent (10%) before a Change in Control or six percent (6%) after a Change in Control, applied against the portion of the Account balance withdrawn, in lieu of payments in accordance with the form previously elected by the Participant. However, the penalty shall not apply if the Committee determines, based on advice of counsel or a final determination by the Internal Revenue Service or any court of competent jurisdiction, that by reason of the foregoing provision, the Participant has recognized or will recognize gross income for federal income tax purposes under this Plan in advance of payment to him or his Beneficiary of Plan benefits. The minimum lump sum payment shall be $50,000 or the entire balance of any Account, whichever is less. A Participant who receives a lump sum payment under this Section 5.7(b) will be credited with interest on the Account balance at the rates established under Section 5.1(b) of the Plan based on the Participant's completed years of Service and years of participation in the Plan prior to the lump sum payment. Following a complete distribution of the entire balance for an Account, a Participant and his Beneficiary will be entitled to no further benefits under the Plan with respect to that Account. Whenever a Participant receives a lump sum payment under this Section 5.7(b) or Section 9.1, the Participant will be deemed to elect to revoke all Deferral Commitments and to discontinue all deferrals under the Plan effective as of the date of the lump sum payment. The Participant will be precluded from making any deferrals under the Plan for the remainder of the Plan Year in which he receives such distribution and for the next Plan Year. (c) A "Change in Control" shall mean: (i) The occurrence with respect to the Company of a "control transaction", as such term is defined in Section 2542 of the Pennsylvania Business Corporation Law of 1988, as of August 15, 1989; or (ii) Approval by the stockholders of the Company of (A) any merger or consolidation of the Company in which the holders of voting stock of the Company immediately before the merger or consolidation will not own 50% or more of the voting shares of the continuing or surviving corporation immediately after such merger or consolidation, or (B) any sale, lease, or exchange or other 16 22 transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company; or (iii) A change of twenty-five percent (25%) (rounded to the next whole person) in the membership of the Board of Directors of the Company within a 12-month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of 85% (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the 12-month period. (d) Notwithstanding any other provision of this Plan, without the written consent of the Participant (or Beneficiary of a deceased Participant) affected thereby, the Company may not amend or terminate this Plan: (i) For a period of twenty-four (24) months following a Change in Control; or (ii) At any time thereafter, in any manner which affects any Participant (or Beneficiary of a deceased Participant) who receives payments of benefits under this Plan or who terminates Service with the Company for any reason at any time during the period of twenty-four (24) months following the Change in Control. 5.8 Distributions from General Assets. The Company shall make any or all distributions pursuant to this Plan in cash out of its general assets. 5.9 Withholding and Payroll Taxes. The Company shall withhold from payments made hereunder any taxes required to be withheld from such payments under Federal, State or local law. 5.10 Payment to Guardian. If a benefit is payable to a minor or a person declared incompetent or to a person incapable of handling the disposition of his property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapacitated person. The Committee may require proof of minority, incompetence, incapacity or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Committee from all liability with respect to such benefit. 5.11 Small Benefit. Notwithstanding any election made by the Participant, the Committee, in its sole discretion, may direct payment of any benefit in the form of one lump sum payment to the Participant or any Beneficiary, if the lump sum amount of the Account balance which is payable to the Participant or Beneficiary when payments to such Participant or Beneficiary would otherwise commence is less than $50,000. 5.12 Protective Provisions. Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may 17 23 deem necessary and taking such other relevant action as may be requested by the Company. If a Participant refuses so to cooperate or makes any material misstatement of information or non-disclosure of medical history, then no benefits will be payable hereunder to such Participant or his Beneficiary; provided that, in the Company's sole discretion, benefits may be payable in an amount reduced to compensate the Company for any loss, cost, damage or expense suffered or incurred by the Company as a result in any way of any such action, misstatement or non-disclosure. 5.13 Notices and Elections. Any notice or election required or permitted to be given to the Company or the Committee under the Plan shall be sufficient if in writing on a form prescribed or accepted by the Committee and hand delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Human Resources Department of the Company. Such notice or election shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 5.14 Prior and Special Distribution Accounts. Prior Accounts and Special Distribution Accounts shall be distributed in accordance with a Participant's previously filed elections. Elections providing for payment prior to Retirement may not be amended by the Participant. ARTICLE VI DESIGNATION OF BENEFICIARY 6.1 Designation of Beneficiary. Each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive his interest in each of his Accounts upon his death. Such designation shall be made on a form prescribed by and delivered to the Company. The Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. 6.2 Failure to Designate Beneficiary. If a Participant shall fail to designate a Beneficiary before his demise, or if no designated Beneficiary survives the Participant, the Committee shall direct the Company to pay the balance in each of his Accounts in one lump sum to the executor or administrator for his estate; provided, however, if no executor or administrator shall have been appointed, and actual notice of said death was given to the Committee within sixty (60) days after his death, and if his Account balances do not exceed Ten Thousand Dollars ($10,000), the Committee may direct the Company to pay his Account balances to such person or persons as the Committee determines, and the Committee may require such proof of right and/or identity of such person or persons as the Committee may deem appropriate or necessary. 18 24 ARTICLE VII FORFEITURES TO COMPANY 7.1 Distribution of Participants' Interest When Company is Unable to Locate Distributees. In case the Company is unable within three (3) years after payment is due to a Participant, or within three (3) years after payment is due to the Beneficiary or the estate of a deceased Participant, to make such payment to him or his Beneficiary, executor or administrator because it cannot ascertain his whereabouts or the identity or whereabouts of his Beneficiary, executor or administrator by mailing to the last known address shown on the Company's records, and neither he, his Beneficiary, nor his executor or administrator has made written claim therefor before the expiration of the aforesaid time limit, then, in such case, the amount due shall be forfeited to the Company. ARTICLE VIII MAINTENANCE OF ACCOUNTS 8.1 The Company shall keep, or cause to be kept, all such books of account, records and other data as may be necessary or advisable in its judgment for the administration of this Plan, and properly to reflect the affairs thereof, and to determine the nature and amount of the interests of the respective Participants in each Account. The Company is not required to physically segregate any assets with respect to the Accounts under this Plan from any other assets of the Company and may commingle any such assets with any other moneys, securities and properties of any kind of the Company. Separate accounts or records for the respective Participants' interests shall be maintained for operational and accounting purposes, but no such account or record shall be considered as creating a lien of any nature whatsoever on or as segregating any of the assets with respect to the Accounts under this Plan from any other funds or property of the Company. 19 25 ARTICLE IX AMENDMENT AND TERMINATION OF THE PLAN 9.1 Amendment. The Board or Human Resources Committee of the Board may at any time amend the Plan in whole or in part, provided, however, that no amendment shall be effective to decrease or restrict the amount accrued (including earnings at the appropriate interest rate) in any Account to the date of such amendment. Notwithstanding anything in the preceding sentence to the contrary, the Committee shall have the power to amend the Plan to the extent authorized by Section 2.2. Upon a prospective amendment to reduce the formula for determining the future interest rate, 30 days' advance written notice shall be given to each Participant. Following such an amendment to reduce the formula for determining the future interest rate and the giving of notice to the Participant, the Participant may elect to (i) terminate an ongoing Deferral Commitment without penalty and/or (ii) receive an immediate lump sum payment of the balance of his Account(s), reduced by a penalty, which shall be forfeited to the Company, equal to six percent (6%) of the balance of such Account(s), in lieu of payments in accordance with the form previously elected by the Participant. However, the six percent (6%) penalty shall not apply if it would not have applied under Section 5.7(b). The Participant may make such an election by notifying the Committee in writing within sixty (60) days following receipt of notice of the amendment to reduce the interest rate. 9.2 Company's Right to Terminate. The Human Resources Committee of the Board may at any time partially or completely terminate the Plan if, in its judgment, the tax, accounting, or other effects of the continuance of the Plan or potential payments thereunder would not be in the best interests of the Company. (a) Partial Termination. The Board or Human Resources Committee of the Board may partially terminate the Plan by instructing the Committee not to accept any additional or ongoing Deferral Commitments. In the event of such a partial termination, the Plan shall continue to operate on the same terms and conditions and, unless the Board or Human Resources Committee of the Board instructs the Committee not to accept ongoing Deferral Commitments, shall be effective with regard to Deferral Commitments entered into prior to the effective date of such partial termination. (b) Complete Termination. The Board or Human Resources Committee of the Board may completely terminate the Plan. In the event of complete termination, the Plan shall cease to operate, and the Company shall pay out to each Participant (or the Beneficiary of a deceased Participant) his Accounts in either one lump sum payment or up to three (3) equal annual installments, at the Company's discretion, as if the Participant had terminated service as of the effective date of the complete termination. Interest shall continue to be paid on the balance in each Participant's Account(s) in accordance with Section 4.3. 20 26 ARTICLE X SPENDTHRIFT PROVISIONS 10.1 The Company shall, except as otherwise provided hereunder, pay all amounts payable hereunder only to the person or persons entitled thereto hereunder, and all such payments shall be made directly into the hands of each such person or persons and not into the hands of any other person or corporation whatsoever, so that said payments may not be liable for the debts, contracts or engagements of any such designated person or persons, or taken in execution by attachment or garnishment or by any other legal or equitable proceedings, nor shall any such designated person or persons have any right to alienate, arbitrate, execute, pledge, encumber, or assign any such payments or the benefits or proceeds thereof. If the person entitled to receive payment be a minor, or a person of unsound mind, whether or not adjudicated incompetent, the Company, upon direction of the Committee, may make such payments to such person or persons, corporation or corporations as may be, or be acting as, parent or legal or natural guardian of such infant or person of unsound mind. The signed receipt of such person or corporation shall be a full and complete discharge to the Company for any such payments. ARTICLE XI MISCELLANEOUS 11.1 Right of Company to Replace Members of Board of Directors and Advisory Board; Obligations. Neither the action of the Company in establishing this Plan, nor any provisions of this Plan, shall be construed as giving any member of the Board of Directors or Advisory Board of the Company the right to be retained in such capacity, or any right to payment whatsoever except to the extent of the benefits provided for by this Plan. The Company expressly reserves the right at any time to replace or fail to renominate any member of the Board of Directors or Advisory Board without any liability for any claim against the Company for any payment whatsoever except to the extent provided for in this Plan. The Company has no obligation to create any other or subsequent deferred compensation plan for members of the Board of Directors or Advisory Board. 11.2 Title to and Ownership of Assets Held for Accounts. Title to and ownership of all assets held for any Accounts shall be vested in the Company and shall constitute general assets of the Company. 11.3 Nature of Liability to Participants. Any and all payments required to be made by the Company to Participants in the Plan shall be general and unsecured liabilities of the Company. 21 27 11.4 Text of Plan to Control. The headings of the Articles and Sections are included solely for convenience of reference, and if there be any conflict between such headings and the text of this Plan, the text shall control. This Plan document sets forth the complete terms of the Plan. In the event of any discrepancies or conflicts between this Plan document and any summary or other information regarding the Plan, the terms of this Plan document shall apply and control. 11.5 Law Governing and Severability. This Plan shall be construed, regulated and administered under the laws of the Commonwealth of Pennsylvania. If any provisions of this Plan shall be held invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the remaining provisions of this Plan, and this Plan shall be deemed to be modified to the least extent possible to make it valid and enforceable in its entirety. 11.6 Name. This Plan may be referred to as the "Mellon Bank Corporation 1990 Elective Deferred Compensation Plan for Directors and Members of the Advisory Board". 11.7 Gender. The masculine gender shall include the feminine, and the singular shall include the plural, except when the context expressly dictates otherwise. 11.8 Trust Fund. The Company shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Company may establish one or more trusts, with such trustees as the Board or the Committee may approve, for the purpose of providing for the payment of such benefits. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Company's creditors. To the extent any benefits provided under the Plan are actually paid from any such trust, the Company shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by the Company. IN WITNESS WHEREOF, the Company has caused this amended and restated Plan to be executed this 15 day of October, 1996, effective as of January 1, 1997. ATTEST: MELLON BANK CORPORATION Carl Krasik D. Michael Roark - -------------------- ------------------------------ Carl Krasik D. Michael Roark Secretary Head of the Human Resources Department of Mellon Bank, N.A. 22 EX-10.10 6 MELLON BANK 10-K405 1 Exhibit 10.10 MELLON BANK CORPORATION ELECTIVE DEFERRED COMPENSATION PLAN FOR SENIOR OFFICERS (As Amended and Restated Effective January 1, 1997) 2 TABLE OF CONTENTS PREAMBLE ............................................................... 1 ARTICLE I .............................................................. 1 DEFINITIONS .......................................................... 1 1.1 Account ....................................................... 1 1.2 Beneficiary ................................................... 1 1.3 Board ......................................................... 2 1.4 Committee ..................................................... 2 1.5 Company ....................................................... 2 1.6 Continuous Service ............................................ 2 1.7 Deferral Commitment ........................................... 2 1.8 Deferral Election ............................................. 2 1.9 Disability .................................................... 2 1.10 Early Distribution Account ..................................... 2 1.11 Early Retirement ............................................... 2 1.12 Effective Date ................................................. 2 1.13 Elective Deferred Compensation ................................. 2 1.14 Employer ....................................................... 2 1.15 Financial Hardship ............................................. 2 1.16 Normal Distribution Account .................................... 2 1.17 Normal Retirement .............................................. 3 1.18 Participant .................................................... 3 1.19 Plan ........................................................... 3 1.20 Plan Year ...................................................... 3 1.21 Prior Plan ..................................................... 3 1.22 Retirement Plan ................................................ 3 1.23 Retirement Plan Make-up Account ................................ 3 1.24 Retirement Savings Plan ........................................ 3 1.25 Retirement Savings Plan Augmentation Account ................... 3 1.26 Special Distribution Account ................................... 3 1.27 Subsidiary ..................................................... 3 1.28 Termination of Employment ...................................... 3 1.29 T-Note Rate .................................................... 3 1.30 Valuation Date ................................................. 3 1.31 Window Period .................................................. 4 ARTICLE II .............................................................. 4 ADMINISTRATION ........................................................ 4 2.1 Administrator ................................................... 4 2.2 Powers and Duties ............................................... 4 2.3 Procedures ...................................................... 5 2.4 Establishment of Rules .......................................... 5 (i) 3 2.5 Limitation of Liability .......................................... 5 2.6 Compensation and Insurance ....................................... 5 2.7 Removal and Resignation .......................................... 6 2.8 Claims Procedure ................................................. 6 ARTICLE III .............................................................. 6 PARTICIPATION AND DEFERRAL COMMITMENTS ................................. 6 3.1 Eligibility and Participation .................................... 6 3.2 Duration of Deferral Commitment .................................. 6 3.3 Basic Forms of Deferral .......................................... 6 3.4 Limitations on Deferrals ......................................... 7 3.5 Modification of Deferral Commitments on Financial Hardship ....... 7 3.6 Commencement of Deferral Commitment .............................. 7 3.7 Termination of Prior Plan Deferral Commitments ................... 7 ARTICLE IV ............................................................... 8 DEFERRED COMPENSATION ACCOUNTS ......................................... 8 4.1 Accounts ......................................................... 8 4.2 Elective Deferred Compensation ................................... 8 4.3 Crediting Rate ................................................... 8 4.4 Valuation of Accounts ............................................ 8 4.5 Vesting of Accounts .............................................. 8 4.6 Statement of Accounts ............................................ 8 4.7 Retirement Plan Make-Up .......................................... 8 4.8 Retirement Savings Plan Make-Up .................................. 9 4.9 Retirement Plan and Retirement Savings Plan Offsets .............. 10 ARTICLE V ................................................................ 10 PLAN BENEFITS .......................................................... 10 5.1 Plan Benefit ..................................................... 10 5.2 Normal Distribution Account ...................................... 11 5.3 Form of Benefit Payment Upon Termination of Employment ........... 12 5.4 Survivor Benefits ................................................ 12 5.5 Early Distribution Account ....................................... 15 5.6 Hardship Distributions ........................................... 15 5.7 Disability ....................................................... 16 5.8 Valuation and Settlement ......................................... 16 5.9 Change in Control and Unscheduled Distributions .................. 16 5.10 Continuous Service ............................................... 17 5.11 Distributions from General Assets ................................ 18 5.12 Withholding and Payroll Taxes .................................... 18 (ii) 4 5.13 Payment to Guardian ............................................... 18 5.14 Small Benefit ..................................................... 18 5.15 Protective Provisions ............................................. 18 5.16 Notices and Elections ............................................. 18 5.17 Special Distribution Accounts ..................................... 19 ARTICLE VI ................................................................. 19 DESIGNATION OF BENEFICIARY ............................................... 19 6.1 Designation of Beneficiary ......................................... 19 6.2 Failure to Designate Beneficiary ................................... 19 ARTICLE VII ................................................................ 19 FORFEITURES TO COMPANY ................................................... 19 7.1 Distributions of Participants' Interests When Company is Unable to Locate Distributees ...................... 19 ARTICLE VIII ............................................................... MAINTENANCE OF ACCOUNTS .................................................. 19 ARTICLE IX ................................................................. 20 AMENDMENT AND TERMINATION OF THE PLAN .................................... 20 9.1 Amendment .......................................................... 20 9.2 Company's Right to Terminate ....................................... 20 ARTICLE X .................................................................. 20 SPENDTHRIFT PROVISIONS ................................................... 20 ARTICLE XI ................................................................. 21 MISCELLANEOUS ............................................................ 21 11.1 Right of Employers to Dismiss Employees; Obligations .............. 21 11.2 Title to and Ownership of Assets Held for Accounts ................ 21 11.3 Nature of Liability to Participants ............................... 21 11.4 Text of Plan to Control ........................................... 21 11.5 Law Governing and Severability .................................... 21 11.6 Name .............................................................. 21 11.7 Gender ............................................................ 21 11.8 Trust Fund ........................................................ 22 11.9 Ineligible Participant ............................................ 22 (iii) 5 MELLON BANK CORPORATION ELECTIVE DEFERRED COMPENSATION PLAN FOR SENIOR OFFICERS (Amended and Restated as of January 1, 1997) PREAMBLE The purpose of this Elective Deferred Compensation Plan For Senior Officers (the "Plan") is to provide opportunities for a select group of management or highly compensated employees of Mellon Bank Corporation (the "Company") and its Subsidiaries to accumulate supplemental funds for retirement, special needs prior to retirement, or death. The Plan was originally effective as of November 1, 1989. This amended and restated Plan shall only apply to Participants who are employed by the Company or its Subsidiaries after January 1, 1997. The Plan as previously in effect shall apply to all Participants who terminated employment with the Company or its Subsidiaries for any reason prior to such date. The Company hereby declares that its intention is to create an unfunded Plan primarily for the purpose of providing a select group of management or highly compensated employees of the Company and of its affiliated organizations with deferred compensation in accordance with their individual elections. It is also the intention of the Company that the Plan be an "employee pension benefit plan" as defined in Section 3(2) of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") and that the Plan be the type of plan described in Sections 201(2), 301(3) and 401(a)(1) of Title I of ERISA. The Corporate Benefits Committee ("Committee" or "CBC") shall be the administrator responsible for fulfilling the duties and responsibilities imposed upon "administrators" of plans subject to Parts 1 and 5 of Title 1 of ERISA. ARTICLE I DEFINITIONS When used herein, the following words shall have the following meanings unless the content clearly indicates otherwise: 1.1 Account. "Account" means the record-keeping device used by the Company to measure and determine the amounts to be paid to a Participant under the Plan. Separate Accounts will be established for each Participant and as may otherwise be required. 1.2 Beneficiary. "Beneficiary" means the person who under this Plan becomes entitled to receive a Participant's interest in the event of his death. 6 1.3 Board. "Board" means the Board of Directors of the Company or any committee thereof acting within the scope of its authority. 1.4 Committee. "Committee" means the Corporate Benefits Committee appointed to administer the Plan pursuant to Article II. 1.5 Company. "Company" means Mellon Bank Corporation, a Pennsylvania corporation, and any successor in interest. 1.6 Continuous Service. "Continuous Service" means the period of continuous employment of a Participant by an Employer determined in accordance with Section 5.10 and may, in the discretion of the Committee, include prior service with an entity acquired by the Company. 1.7 Deferral Commitment. "Deferral Commitment" means a commitment made by a Participant pursuant to Article III for which a Deferral Election has been submitted by the Participant to the Committee. 1.8 Deferral Election. "Deferral Election" means the written agreement to defer receipt of compensation submitted by a Participant to the Committee or its delegates prior to the commencement of the period in which the deferred compensation is to be earned. 1.9 Disability. "Disability" means total and permanent incapacity of a Participant to perform the usual duties of his employment with his Employer as determined by his Employer based upon competent medical evidence. If a Participant makes application for disability benefits under the Employer's group long term disability plan, as now in effect or as hereafter amended, and qualifies for such benefits, he shall be presumed to be totally disabled, subject to the Employer's determination that the disability is such that it may be regarded as total and permanent in nature. 1.10 Early Distribution Account. "Early Distribution Account" means an account established pursuant to Section 5.5 which provides for distribution of a benefit prior to a Participant's Termination of Employment. 1.11 Early Retirement. "Early Retirement" means Termination of Employment of a Participant, other than by reason of death, on or after the date on which the Participant has attained age fifty-five (55), but has not yet attained age sixty-five (65). 1.12 Effective Date. "Effective Date" of this amended and restated Plan means January 1, 1997. The Plan originally became effective on November 1, 1989. 1.13 Elective Deferred Compensation. "Elective Deferred Compensation" means the amount of compensation that a Participant elects to defer pursuant to a Deferral Commitment. 1.14 Employer. "Employer" means the Company or one of its Subsidiaries. 1.15 Financial Hardship. "Financial Hardship" means an immediate and substantial financial need of the Participant or Beneficiary, determined by the Committee on the basis of written information supplied by the Participant in accordance with such standards as are, from time to time, established by the Committee. 1.16 Normal Distribution Account. "Normal Distribution Account" means an Account established pursuant to Section 5.2 which provides for distribution of a benefit following Early Retirement or Normal Retirement. -2- 7 1.17 Normal Retirement. "Normal Retirement" means Termination of Employment of a Participant, other than by reason of death, on or after the date on which the Participant has attained age sixty-five (65). 1.18 Participant. "Participant" means any eligible individual who is participating in this Plan as provided in Article III. 1.19 Plan. "Plan" means this "Elective Deferred Compensation Plan for Senior Officers" as set forth in this document and as the same may be amended, administered or interpreted from time to time. 1.20 Plan Year. "Plan Year" means each calendar year beginning on January 1 and ending on December 31. 1.21 Prior Plan. "Prior Plan" means this Plan as it existed prior to the amendment and restatement which became effective as of January 1, 1997. 1.22 Retirement Plan. "Retirement Plan" means the Mellon Bank Retirement Plan, the Dreyfus Corporation Pension Plan and the Boston Company Retirement Income Plan, as presently constituted and as amended from time to time. 1.23 Retirement Plan Make-Up Account. "Retirement Plan Make-Up Account" means an account established pursuant to Section 4.7 to enable a Participant to receive benefits which are lost under the Retirement Plan as the result of deferrals under this Plan. 1.24 Retirement Savings Plan. "Retirement Savings Plan" means the Mellon 401(k) Retirement Savings Plan, as presently constituted and as amended from time to time. 1.25 Retirement Savings Plan Augmentation Account. "Retirement Savings Plan Augmentation Account" means an account established pursuant to Section 4.8 to enable a Participant to receive Employer matching contributions which are lost under the Retirement Savings Plan as a result of deferrals under this Plan. 1.26 Special Distribution Account. "Special Distribution Account" means an Account established for any Elective Deferred Compensation (plus earnings thereon) earned prior to January 1, 1997, which the Participant elected to have distributed while employed. 1.27 Subsidiary. "Subsidiary" means an entity controlled, directly or indirectly, by the Company. 1.28 Termination of Employment. "Termination of Employment" means termination of a Participant's employment with all Employers and the end of any contract and severance pay period. 1.29 T-Note Rate. "T-Note Rate" means for each Plan Year the interest rate which is equivalent to an effective annual yield equal to the 120 month rolling average of ten-year United States Treasury Notes rate as of the July 31 preceding the applicable Plan Year. This rate will be determined once each year by an outside source selected by the Company. 1.30 Valuation Date. "Valuation Date" means the last day of each month, or such other dates as the Committee may determine in its discretion, which may be either more or less frequent, for the valuation of Participants' Accounts. -3- 8 1.31 Window Period. "Window Period" means a period of thirty calendar days which begins on the third business day following the date of release of annual or quarterly earnings of the Company, or such other period as the Committee may determine in its discretion. ARTICLE II ADMINISTRATION 2.1 Administrator. Except as hereinafter provided, the Committee shall be responsible for the administrative responsibilities hereinafter described with respect to the Plan. Whenever any action is required or permitted to be taken in the administration of the Plan, such action shall be taken by the Committee unless the Committee's power is expressly limited herein or by operation of law. The Committee shall be the Plan "Administrator" (as such term is defined in Section 3(16)(A) of ERISA). The Committee may delegate its duties and responsibilities as it, in its sole discretion, deems necessary or appropriate to the execution of such duties and responsibilities. The Committee as a whole or any of its members may serve in more than one capacity with respect to the Plan. 2.2 Powers and Duties. The Committee, or its delegates, shall maintain and keep (or cause to be maintained and kept) such records as are necessary for the efficient operation of the Plan or as may be required by any applicable law, regulation, or ruling and shall provide for the preparation and filing of such forms, reports, information, and documents as may be required to be filed with any governmental agency or department and with the Plan's Participants and/or other Beneficiaries. Except to the extent expressly reserved to the Company, an Employer or the Board, the Committee shall have all powers necessary to carry out the administrative provisions of the Plan and to satisfy the requirements of any applicable law or laws. These powers shall include, by way of illustration and not limitation, the exclusive powers and discretionary authority necessary to: (a) construe and interpret the Plan; decide all questions of eligibility; decide all questions of fact relating to claims for benefits; and determine the amount, time, manner, method, and mode of payment of any benefits hereunder; (b) direct the Employer, and/or the trustee of any trust established at the discretion of the Company to provide for the payment of benefits under the Plan, concerning the amount, time, manner, method, and mode of payment of any benefits hereunder; (c) prescribe procedures to be followed and forms to be used by Participants and/or other persons in filing applications or elections; (d) prepare and distribute, in such manner as may be required by law or as the Committee deems appropriate, information explaining the Plan; provided, however, that no such explanation shall contravene the terms of this Plan or increase the rights of any Participant or Beneficiary or the liabilities of the Company or any Employer; (e) require from the Employer and Participants such information as shall be necessary for the proper administration of the Plan; (f) appoint and retain individuals to assist in the administration and construction of the Plan, including such legal, clerical, accounting, and actuarial services as it may require or as may be required by any applicable law or laws; and -4- 9 (g) perform all functions otherwise imposed upon a plan administrator by ERISA which are not expressly reserved to the Company, an Employer, or the Board, including, but not limited to, those supplemental duties and responsibilities described in the "Mellon Bank Corporation Corporate Benefits Committee Charter and Summary of Operations" approved by the Board on September 17, 1991 (the "CBC" Charter"). Without intending to limit the generality of the foregoing, the Committee shall have the power to amend the Plan, in whole or in part, in order to comply with applicable law; provided, however, that no such amendment may increase the duties and obligations of any Employer without the consent of the affected Employer(s). Except as provided in the preceding sentence or unless directed by the Human Resources Committee of the Board or otherwise required by law, the Committee shall have no power to adopt, amend, or terminate the Plan, said powers being exclusively reserved to the Human Resources Committee of the Board. 2.3 Procedures. The Committee shall be organized and conduct its business with respect to the Plan in accordance with the organizational and procedural rules set forth in the CBC Charter. Notwithstanding the foregoing, if any member of the Committee shall be a Participant hereunder, then in any matters affecting any member of the Committee in his individual capacity as a Participant hereunder, separate and apart from his status as a member of the group of Participants, such interested member shall have no authority to vote in the determination of such matters as a member of the Committee, but the Committee shall determine such matter as if said interested member were not a member of the Committee; provided, however, that this shall not be deemed to take from said interested member any of his rights hereunder as a Participant. If the remaining members of the Committee should be unable to agree on any matter so affecting an interested member because of an equal division of voting, the Human Resources Committee of the Board shall appoint a temporary member of the Committee in order to create an odd number of voting members. 2.4 Establishment of Rules. The Committee shall have specific authority in its sole discretion to construe and interpret the terms of the Plan related to its powers and duties, and to the extent that the terms of the Plan are incomplete, the Committee shall have authority to establish such rules or regulations related to its powers and duties as it may deem necessary and proper to carry out the intent of the Company as to the purposes of the Plan. 2.5 Limitation of Liability. The Board, the members of the Committee, and any officer, employee, or agent of the Company or any Employer shall not incur any liability individually or on behalf of any other individuals or on behalf of the Company or any Employer for any act, or failure to act, made in good faith in relation to the Plan. No bond or other security shall be required of any such individual solely on account of any such individual's power to direct the Employer to make the payments required hereunder. 2.6 Compensation and Insurance. Members of the Committee shall serve without compensation for their services as such. Expenses incurred by members of the Committee in the performance of their duties as herein provided, and the compensation and expenses of persons retained or employed by the Committee for services rendered in connection with the Plan shall, upon approval by the Committee, be paid or reimbursed by the Company. The Company shall indemnify and/or maintain and keep in force insurance in such form and amount as may be necessary in order to protect the members of the Committee, their delegates and appointees (other than persons who are independent of the Company and are rendering services to the Committee or to or with respect to the Plan) from any claim, loss, damage, liability, and expense (including costs and attorneys' fees) arising from their acts or failures to act -5- 10 with respect to the Plan, except where such actions or failures to act involve willful misconduct or gross negligence. 2.7 Removal and Resignation. Any member of the Committee may resign and the Company may remove any member of the Committee in accordance with the procedures established by the CBC Charter. The Committee shall remain fully operative pending the filling of any vacancies, the remaining Committee members having full authority to administer the Plan. 2.8 Claims Procedure. The right of any Participant or Beneficiary to receive a benefit hereunder and the amount of such benefit shall be determined in accordance with the procedures for determination of benefit claims established and maintained by the Committee in compliance with the requirements of Section 503 of ERISA; which separate procedures, entitled Procedures for Determination of Benefit Claims, are incorporated herein by this reference. ARTICLE III PARTICIPATION AND DEFERRAL COMMITMENTS 3.1 Eligibility and Participation. (a) Eligibility. Eligibility to make a Deferral Commitment shall be limited to senior officers of the Company or its Subsidiaries as determined by the Human Resources Committee of the Board. (b) Participation. An eligible individual may elect to participate in the Plan by submitting a Deferral Election to the Committee or its delegates prior to such date, as the Committee may determine, preceding the commencement of the period in which the deferred compensation is to be earned. The Deferral Election shall specify whether the deferred compensation shall be credited to a Normal Distribution Account or an Early Distribution Account for the Participant. 3.2 Duration of Deferral Commitment. (a) A Deferral Commitment for a Normal Distribution Account or an Early Distribution Account shall continue in effect until the Participant files a subsequent Deferral Election changing the amount of or stopping such Deferral Commitment. (b) A Deferral Commitment for an Early Distribution Account shall terminate at the end of the Plan Year preceding the Plan Year which the Participant has selected for distribution of such Account. (c) Except as provided in Sections 5.6 and 5.9 below, a subsequent Deferral Election shall become effective beginning with the next Plan Year following the date it is filed. A subsequent Deferral Election shall not apply to any deferrals which represent payments for services performed prior to the beginning of the first Plan Year to which it applies, but otherwise shall apply to all future deferrals covered by the Deferral Commitment. (d) A Participant's Deferral Commitments shall terminate upon the Participant's Termination of Employment. 3.3 Basic Forms of Deferral. A Participant may file a Deferral Election to defer any or all of the following forms of compensation: -6- 11 (a) Salary Deferrals. A Participant may elect to defer a portion of base salary. The amount to be deferred shall be stated as a whole number percentage or dollar amount of base salary. (b) Bonus Deferrals. A Participant may elect to defer annual cash bonus/incentive amounts to be paid by the Employer. The amount to be deferred shall be stated as a whole number percentage or dollar amount of such cash bonus. (c) Special Deferrals. A Participant may elect any special Deferral Commitment which is authorized by the Committee in its discretion. 3.4 Limitations on Deferrals. The following limitations on deferrals shall apply: (a) Minimum Deferrals. The minimum deferral amount for each of the basic forms of deferral in Section 3.3 (a), (b) or (c) above is $2,000 for any Plan Year. (b) Maximum Deferrals. A Participant may not defer during any Plan Year any amount of base salary which is below the contribution and benefit base under Section 230 of the Social Security Act, in effect on the first day of the Plan Year. (c) Waiver; Committee Discretion. The Committee may further limit the minimum or maximum amount deferred by any Participant or group of Participants, or waive the foregoing minimum and maximum limits for any Participant or group of Participants, for any reason. 3.5 Modification of Deferral Commitments on Financial Hardship. The Committee may permit a Participant to reduce the amount to be deferred, or waive the remainder of the Deferral Commitment, upon a finding that the Participant has suffered a Financial Hardship. 3.6 Commencement of Deferral Commitment. A Deferral Commitment shall be deemed to commence as of the first day of the Plan Year covered by the Deferral Election for such Deferral Commitment. A Participant's Beneficiary will be entitled to receive pre-retirement survivor benefits pursuant to Section 5.4(a) with respect to the Deferral Commitment only in the event of the Participant's death while in employment with an Employer on or after such date. 3.7 Termination of Prior Plan Deferral Commitments. All Deferral Commitments established under the Prior Plan shall terminate on December 31, 1996. -7- 12 ARTICLE IV DEFERRED COMPENSATION ACCOUNTS 4.1 Accounts. For record-keeping purposes only, Normal Distribution, Early Distribution and Special Distribution Accounts shall be maintained as applicable for each Participant's Elective Deferred Compensation. 4.2 Elective Deferred Compensation. A Participant's Elective Deferred Compensation shall be credited to the Participant's Account(s) as of the date when the corresponding non-deferred portion of the compensation is paid or would have been paid but for the Deferral Commitment. Any withholding of taxes or other amounts with respect to deferred compensation that is required by federal, state or local law shall be withheld from the Participant's non-deferred compensation to the maximum extent possible with any excess being withheld from the Participant's Deferral Commitment or Account(s). 4.3 Crediting Rate. Accounts shall be credited monthly with interest based on the rates specified below, compounded annually. Interest shall be credited as of each Valuation Date from the dates when deferred amounts are credited to Accounts based on the balance of each Account. (a) Interest Rate During Participant's Lifetime. During a Participant's lifetime, the Participant's Accounts will be credited with interest on a monthly basis during each Plan Year at the T-Note Rate which is applicable for that Plan Year, subject to increase pursuant to Section 5.1. (b) Interest Rate After Participant's Death. Following a Participant's death, the Participant's Account will be credited with interest on a monthly basis during each Plan Year at one hundred percent (100%) of the T-Note Rate which is applicable for that Plan Year. Notwithstanding the preceding sentence, no interest shall be credited on a Participant's Account following the Participant's death whenever the Participant's Beneficiary receives pursuant to Section 5.4(a) a pre-retirement survivor benefit greater than the Participant's Account balance annuitized over the Payout Period. 4.4 Valuation of Accounts. A Participant's Account as of each Valuation Date shall consist of the balance of the Participant's Account as of the immediately preceding Valuation Date, plus the Participant's Elective Deferred Compensation and interest credited to such Account and minus any distributions made from such Account since the immediately preceding Valuation Date. 4.5 Vesting of Accounts. Each Participant shall be one hundred percent (100%) vested at all times in the amounts credited to such Participant's Accounts. 4.6 Statement of Accounts. The Company shall submit to each Participant periodic statements setting forth the balance to the credit of the Accounts maintained for the Participant. 4.7 Retirement Plan Make-Up. If a Participant is entitled to receive a benefit under the Retirement Plan, a supplemental pension benefit shall be paid under this Plan as follows: (a) The supplemental pension benefit shall be an amount equal to: (i) The maximum life annuity to which the Participant would be entitled under the Retirement Plan if the Participant had not deferred amounts under this Plan (without regard to the application of the compensation limitation imposed by Section 401(a)(17) of the Internal Revenue Code or the benefit limitation imposed by Section 415 of the Internal Revenue Code); -8- 13 LESS: (ii) The maximum life annuity to which the Participant would then be entitled under the Retirement Plan (without regard to the application of the compensation limitation imposed by Section 401(a)(17) of the Internal Revenue Code or the benefit limitation imposed by Section 415 of the Internal Revenue Code). Notwithstanding the above, no payment shall be made under this Plan to the extent such benefits are payable by any other nonqualified defined benefit retirement plan or arrangement sponsored by the Employer. (b) The Employer shall pay the supplemental pension benefit to the Participant in a lump sum when the Participant's benefit commences under the Retirement Plan. Upon a Participant's Termination of Employment before Normal or Early Retirement, at the Committee's discretion the Employer may pay the supplemental pension benefit to the Participant in a lump sum as soon as practicable following such Termination of Employment. The lump sum amount shall be calculated using the actuarial equivalence factors in the Retirement Plan applicable to benefits accruing thereunder at the date of payment, or the factors in effect at the time of the Retirement Plan's termination if such termination occurs prior to the date of payment. (c) Notwithstanding Section 4.7(b) above, in lieu of a lump sum a Participant may elect to receive the supplemental pension benefit after Normal or Early Retirement in monthly installment payments over a payment period of 60, 120 or 180 months. An election to receive the supplemental pension benefit in monthly installment payments shall be made in the same manner and subject to the same restrictions and penalties as provided in Section 5.2; provided, however, that Section 5.2(b)(iii) shall not apply, and payments of the supplemental pension benefit shall commence when the Participant's retirement benefit commences under the Retirement Plan. If the Participant elects to receive the supplemental pension benefit in monthly installment payments, the Employer shall establish a Retirement Plan Make-Up Account when the Participant's retirement benefit commences under the Retirement Plan and shall credit to this Account the lump sum amount of the supplemental pension benefit which would otherwise have been paid to the Participant under Section 4.7(b) above. A participant shall be 100% vested in the amount credited to his Retirement Plan Make-Up Account. Interest will be credited on a Retirement Plan Make-Up Account at the same rate as other Accounts in accordance with Section 4.3 at such times and in such manner as the Committee may determine. If a Participant dies after the commencement of monthly installment payments of the supplemental pension benefit, the Employer will pay to the Participant's Beneficiary the remaining installments of any such benefit that would have been paid to the Participant had the Participant survived. After the Participant's death, interest shall be credited on the Retirement Plan Make-Up Account for each Plan Year at one hundred percent (100%) of the T-Note Rate which is applicable for that Plan Year. A Participant or Beneficiary who is receiving monthly installment payments of the supplemental pension benefit may request hardship distributions in accordance with Section 5.6 or may elect to receive a payment in a lump sum in accordance with and subject to a penalty as provided in Section 5.9(b). 4.8 Retirement Savings Plan Make-Up. For each Plan Year, the Employer shall credit to the Retirement Savings Plan Augmentation Account of any Participant an amount equal to the -9- 14 amount by which the Employer matching or discretionary contribution that would otherwise have been made by any Employer to the Retirement Savings Plan for such Participant for the Plan Year is reduced by reason of the reduction in the Participant's compensation for the Plan Year due to deferrals under this Plan. The Employer's contribution shall be credited to the Retirement Savings Plan Augmentation Account following the end of each Plan Year. A Participant's interest in any credit to his Retirement Savings Plan Augmentation Account and earnings thereon shall vest at the same rate and at the same time as would have been the case had such contribution been made to the Retirement Savings Plan. Interest will be credited on a Retirement Savings Plan Augmentation Account at the same rate as other Accounts in accordance with Section 4.3 at such times and in such manner as the Committee may determine. Upon Normal or Early Retirement, Disability, death or other Termination of Employment, the Employer shall pay to the Participant (or his Beneficiary in the event of the Participant's death) an amount equal to the value of the Participant's vested balance in his Retirement Savings Plan Augmentation Account in one lump sum payment. Participants who in any Plan Year are not entitled to receive an Employer contribution in the Retirement Savings Plan will not be entitled to receive an Employer contribution under this Plan to a Retirement Savings Plan Augmentation Account for such Plan Year. 4.9 Retirement Plan and Retirement Savings Plan Offsets. If a Participant receives a distribution of benefits under this Plan which results in an increase in either (i) the pension benefit which will be payable to the Participant under the Retirement Plan or any other qualified or non-qualified defined benefit plan or arrangement of an Employer or (ii) the Employer contributions which will be made on behalf of the Participant under the Retirement Savings Plan or any other qualified or non-qualified defined contribution plan or arrangement of an Employer, an adjustment will be made to reduce the Participant's Account balance(s) under this Plan in order to offset the increase in his benefits under such other plans and arrangements. The Participant's Account balance(s) under this Plan shall be reduced upon his Termination of Employment by a lump sum amount which is actuarially equivalent to the increased pension benefits which will be payable to the Participant under the Retirement Plan and any other qualified or non-qualified defined benefit plan or arrangement of an Employer on account of the distribution of benefits under this Plan. The lump sum amount shall be calculated using the actuarial equivalence factors in the Retirement Plan applicable to benefits accruing thereunder at the date of the Participant's Termination of Employment, or the factors in effect at the time of the Retirement Plan's termination if such termination occurs prior to the Participant's Termination of Employment. The Participant's Account balance(s) under this Plan shall also be reduced as of the end of each Plan Year by a lump sum amount which is equal to the increased Employer contributions which were made on behalf of the Participant for such Plan Year under the Retirement Savings Plan or any other qualified or non-qualified defined contribution plan or arrangement of an Employer on account of the distribution of benefits under this Plan. ARTICLE V PLAN BENEFITS 5.1 Plan Benefit. The Company shall pay a Plan benefit for the Participant's Normal, Early and Special Distribution Accounts, as determined below: (a) Fully Enhanced Rate. Unpaid Account balances of Participants who have a Termination of Employment upon Normal Retirement, death or at any time after a Change in Control shall -10- 15 be credited retroactively on the Valuation Date immediately preceding commencement of payment of benefits with respect to such Account balances with one hundred thirty-five percent (135%) of the T-Note Rate for each Plan Year. (b) Enhanced Rate. Unpaid Account balances of Participants who have a Termination of Employment before Normal Retirement and prior to a Change in Control, for reasons other than death, shall be credited retroactively on the Valuation Date immediately preceding commencement of payment of benefits with respect to such Account balances with a percentage of the T-Note Rate based on the Participant's completed years of Continuous Service from his date of hire, including years of Continuous Service before the Effective Date of this Plan, and completed years of participation in this Plan as follows:
Completed Years of Completed Years of Continuous Service Plan Participation % of T-Note Rate ------------------ ------------------- Less Than 3 -- 100% 3 or More -- 125% 5 or More and 2 or More 130% 7 or More and 4 or More 135%
(c) Early and Special Distribution Accounts. The enhanced rates set forth under Sections 5.1(a) and (b) above shall also be credited retroactively to Early and Special Distribution Accounts on the basis of the Participant's Continuous Service and completed years of participation in the Plan on the Valuation Date preceding each payment of benefits with respect to such Accounts before Termination of Employment. (d) Completed Years of Plan Participation. Completed years of participation in this Plan shall include all years for which the Participant had an Account balance with the Plan for the entire calendar year. (e) Duration. The interest rates provided under Sections 5.1 (a) and (b) above shall be payable until the Participant's Accounts are distributed in full except in the event of the Participant's death. After the Participant's death interest shall be credited pursuant to Section 4.3(b). 5.2 Normal Distribution Account. (a) Election of Retirement Benefit. A Participant may file a Deferral Election to defer compensation into a Normal Distribution Account and receive benefits from such Account following Termination of Employment upon Normal or Early Retirement. A Participant may elect up to three (3) benefit payment options, each covering a ten percent (10%) multiple of his Normal Distribution Account balance at retirement and specifying a date of commencement and duration of payments. A Participant's election of payment options shall be irrevocable, except as follows: (i) Subject to the approval of the Committee, a Participant shall be permitted to file one new payment election per year which will supersede his original election (A) at any time more than 12 months prior to his Normal or Early Retirement without penalty and (B) at any time during the 12 months preceding his Normal or Early Retirement subject to a penalty, which shall be forfeited to the Company, equal to six percent (6%) of the portion of the Account balance affected by the change. A new election which is made within the aforesaid time limits will become effective upon the Participant's Normal or Early Retirement. In the event that a Participant accelerates his Normal or Early Retirement 11 16 thereby causing a previously filed payment election to have been made within 12 months preceding Normal or Early Retirement, the next preceding timely payment election filed by the Participant shall be followed unless the Participant elects to have the six percent (6%) penalty of Section 5.2(a)(i)(B) above apply. No penalty shall apply to the first such payment election filed by a Participant who was participating in the Prior Plan and such initial election shall be given effect unless the Participant subsequently files a new payment election. (ii) A Participant who has elected payments in installments may request in writing a payment in a lump sum, at any time after Normal or Early Retirement, of the amount of his Account balance which is reasonably necessary to meet the Participant's requirements due to a Financial Hardship. (iii) A Participant may elect to receive a payment in a lump sum at any time, subject to a penalty, as provided in Section 5.9(b). (b) Forms of Retirement Benefit Payment. The available forms of payment from a Normal Distribution Account after Normal or Early Retirement are as follows: (i) One lump sum payment. (ii) Monthly installment payments in substantially equal payments of principal and interest over a payment period of 60, 120 or 180 months, as elected by the Participant. The amount of the monthly installments shall be redetermined effective as of January 1 of each year based on the remaining Account balance and the remaining number of installment payments. (c) Commencement of Retirement Benefit Payment. The available commencement dates for payment of benefits from a Participant's Normal Distribution Account are as follows: (i) Upon Normal or Early Retirement. (ii) Any January following Normal or Early Retirement; provided, however, that no payment may commence later than the January of the year in which the Participant attains age 70. (iii) The later of Normal or Early Retirement and the date the Participant attains age 60, 65 or 70. If a Participant does not elect a benefit payment option for his Normal Distribution Account, Plan benefits from such Account will be paid in monthly installments over 180 months, commencing in January of the year following Early Retirement. 5.3 Form of Benefit Payment Upon Termination of Employment. Benefits payable upon a Participant's Termination of Employment, for reasons other than Disability or death, before eligibility for Normal or Early Retirement shall be paid in a lump sum or up to three equal annual installments, at the Committee's discretion, following Termination of Employment. Interest will continue to be credited on unpaid Account balances following Termination of Employment at the applicable rate under Section 5.1(b). 5.4 Survivor Benefits. (a) Pre-Retirement Survivor Benefits. -12- 17 (i) Normal and Early Distribution Accounts. If a Participant dies while in employment with an Employer (or while suffering from a Disability prior to attaining age 55) prior to receiving a complete distribution of his entire Normal or Early Distribution Account balances, then commencing as soon as practicable following the Participant's death the Employer will pay to the Participant's Beneficiary a benefit equal to the sum of A plus B plus C where: A = Greater of: o 40% of the Participant's cumulative amount deferred (excluding interest credited thereon) on the date of death or at age 65 (if death occurs after age 65), paid annually until the Participant would have attained age 65 or for ten (10) years, whichever is longer (the "Payout Period"), or o Participant's Account balance annuitized over the Payout Period. B = Respectively: o Normal Distribution Account: If death occurs before age 65, 160% of the Participant's annual Deferral Commitment for such Account in effect at date of death, paid annually for the Payout Period. o Early Distribution Account: 40% times the number of deferral years remaining before commencement of payment of such Account (limited to the lesser of 4 years or the number of years until the Participant would have attained age 65) of the Participant's annual Deferral Commitment for such Account in effect at date of death, paid annually over the Payout Period. C = Participant's Account balance resulting from deferrals credited to his Account after age 65 paid over the Payout Period. (ii) Special Distribution Account. If a Participant dies while in employment with an Employer (or while suffering from a Disability prior to attaining age 55) prior to receiving a complete distribution of his entire Special Distribution Account, commencing as soon as practicable following the Participant's death the Employer will pay to the Participant's Beneficiary a benefit equal to the greater of (X) 40% of the cumulative amounts deferred into the Participant's Special Distribution Account on the date of death or at age 65 (if death occurs after age 65), paid annually for the Payout Period, or (Y) Participant's Special Distribution Account balance paid over the Payout Period. (iii) Greater Benefit. For purposes of Section 5.4(a)(i)(A), the Committee shall determine which benefit is greater on a present value basis using such discount rate as the Committee may determine, provided that such rate will not be greater than the T Note-Rate which is applicable for the Plan Year. (iv) Covered Deferral Commitment. For purposes of Section 5.4(a)(i)(B), the following provisions shall apply: A) If the Participant had elected to defer a percentage of Base Salary or Bonus, his Deferral Commitment shall be determined based on the Base Salary in effect or the Bonus most recently paid to the Participant at the time of his death. -13- 18 B) If the Participant had elected to defer a dollar amount of Base Salary or Bonus, his Deferral Commitment shall not exceed the Base Salary in effect or the Bonus most recently paid to the Participant at the time of his death. C) A Deferral Commitment shall be deemed to be in effect beginning on the first day of the Plan Year after the Participant files a Deferral Election for such Deferral Commitment. (v) Commencement of Survivor Benefit. The pre-retirement survivor benefit for a Participant's Accounts shall become effective beginning on the first day of the Plan Year after the Participant files a Deferral Election for a Normal or Early Distribution Account and shall be effective as of January 1, 1997 for all Special Distribution Accounts. A Participant's Beneficiary will be entitled to receive the pre-retirement survivor benefits described above with respect to the Participant's Account(s) only in the event of the Participant's death while in employment with an Employer on or after such dates. (vi) Withdrawals. Whenever a Participant makes a withdrawal from any Account, the cumulative amount deferred for purposes of Section 5.4(a)(i)(A) above shall be limited to the actual amounts deferred (less any amounts withdrawn, including any penalty thereon). The Committee, in its sole discretion, will make appropriate adjustments to reduce the annual amount of the pre-retirement survivor benefit where the Participant has received a partial distribution from any of his Account(s) prior to his death, including but not limited to installment payments from an Early Distribution Account pursuant to Section 5.5, distributions on account of Financial Hardship pursuant to Section 5.6 and distributions during a Window Period pursuant to Section 5.9. If a Participant dies while in employment with an Employer after complete distribution of his entire Account balances, no survivor benefit will be payable to the Participant's Beneficiary. (vii) Prior Plan Pre-Retirement Survivor Benefit. Beneficiaries of Participants who are age 62 or older on January 1, 1997 and who subsequently die while in employment with an Employer prior to receiving a complete distribution of their entire Normal, Early or Special Distribution Account(s), if any, shall be entitled to receive the greater of the pre-retirement survivor benefit calculated above and the pre-retirement survivor benefit calculated under the terms of the Prior Plan. (b) Post-Retirement Survivor Benefits. If a Participant dies after Normal or Early Retirement but before commencement of payment of retirement benefits with respect to his Normal Distribution Account balance, the Employer will pay to the Participant's Beneficiary the installments of any such benefit that such Participant's Beneficiary would have received with respect to such Normal Distribution Account balance had the Participant commenced to receive retirement benefits on the day prior to such Participant's death. Payments will commence upon the Participant's death, irrespective of when retirement benefits would have commenced if the Participant had survived. Such payments shall be made in accordance with the method of payment which the Participant had elected for payment of retirement benefits for his Normal Distribution Account. If a Participant dies after the commencement of payment of retirement benefits with respect to his Normal Distribution Account, the Employer will pay to the Participant's Beneficiary the remaining installments of any such benefit that would have been paid to the Participant had the Participant survived. If a Participant dies after Termination of Employment, but before receiving full payment of benefits from his Early or Special Distribution Account, his Beneficiary shall receive the -14- 19 balance of his Early or Special Distribution Account in one lump sum payment, at the discretion of the Committee, as soon as practicable following his death. (c) Interest. If the Participant dies during employment with an Employer, the amount payable with respect to each of the Participant's Accounts shall be determined by retroactively crediting interest at one hundred thirty-five percent (135%) of the T-Note Rate for each Plan Year through the date of the Participant's death. After the Participant's death interest shall be credited for each Plan Year at one hundred percent (100%) of the T-Note Rate which is applicable for that Plan Year. 5.5 Early Distribution Account. A Participant may file a Deferral Election to defer compensation into an Early Distribution Account and receive benefits from such Account prior to Termination of Employment subject to the following restrictions: (a) Election of Early Distribution Benefit. A Deferral Election establishing an Early Distribution Account and specifying an early payment date and the form of payment must be filed prior to the commencement of the period in which the Elective Deferred Compensation is to be earned. No deferrals may be made into a Participant's Early Distribution Account during any Plan Year in which the Participant is receiving a distribution from such Account. (b) Amount of Early Distribution Benefit. The entire Early Distribution Account must be paid out at the time and in the form provided for in the related Deferral Election. (c) Commencement and Form of Early Distribution Benefit. An Early Distribution Account shall not be paid out prior to the completion of two Plan Years following the start of deferrals into such Account. An Early Distribution Account shall be paid out in a lump sum or in four equal annual installments, as provided in the Participant's Deferral Election establishing such Account. Following the complete distribution of an Early Distribution Account, a Participant may make new deferrals into such Account. Amounts paid to a Participant pursuant to this Section 5.5 shall be treated as distributions from the Participant's Early Distribution Account. If Termination of Employment occurs due to any reason, other than death, before the date scheduled for payment of an Early Distribution Account, the Participant shall receive the balance of his Early Distribution Account in one lump sum payment or up to three (3) equal annual installments, at the Committee's discretion, as soon as practicable following such event. 5.6 Hardship Distributions. Upon finding that a Participant or Beneficiary has suffered a Financial Hardship, the Committee may, in its sole discretion, make distributions from an Account prior to the time specified for payment of benefits under the Plan. The amount of such distributions shall be limited to the amount reasonably necessary to meet the Participant's or Beneficiary's requirements during the Financial Hardship. Applications for hardship distributions and determinations thereon by the Committee shall be in writing, and a Participant or Beneficiary may be required to furnish written proof of the Financial Hardship. A Participant's entire Account balance will be distributed whenever a hardship distribution would amount to more than seventy-five percent (75%) of any such Account balance. Following a complete distribution of an entire Account balance, a Participant and his Beneficiary will be entitled to no further benefits under the Plan with respect to that Account. Amounts paid to a Participant pursuant to this Section 5.6 shall be treated as distributions from the Participant's Account. Any Participant who receives a hardship distribution of any part of an Account balance shall not be allowed to make any deferrals under the Plan during the remainder of the Plan Year in which he receives such distribution or during the next Plan Year. -15- 20 5.7 Disability. If a Participant suffers a Disability, the Participant's Deferral Commitments will cease except for any bonuses which may be payable thereafter. The Participant's Accounts under the Plan will continue, and the Participant will continue to receive credit for years of Continuous Service and years of participation in the Plan for purposes of Section 5.1(b). The Participant's Accounts will be distributed in accordance with the method of payment which the Participant has elected for payment of benefits with respect to such Account, assuming Termination of Employment on Early Retirement for purposes of his Normal Distribution Account. Notwithstanding the foregoing, such distribution may be delayed if the Committee determines that such distribution would result in a reduction of any disability benefits payable to the Participant under disability plans sponsored by the Employer. The Committee shall make appropriate adjustments on account of any delayed payments to ensure that the Participant receives payments which are actuarially equivalent to the payments which were otherwise due to him under this Plan. 5.8 Valuation and Settlement. The date on which a lump sum is paid or the date on which installment payments commence shall be the "Settlement Date." The Settlement Date for an Account shall be no more than sixty (60) days after the end of the month in which the Participant or his Beneficiary becomes entitled to payments on account of Normal or Early Retirement, other Termination of Employment or death, unless the Participant elects to defer commencement of payments following Normal or Early Retirement to a later date in the election form for designation of form of payment for the Account. The Settlement Date for an Early Distribution Account or delayed payments following Normal or Early Retirement shall be the date which the Participant elects for commencement of such payments in the Deferral Election designating the form of payment for the Account. The Settlement Date for a Special Distribution Account shall be the date which the Participant elected for commencement of payments from such Account under the terms of the Prior Plan. The amount of a lump sum payment and the initial amount of installment payments shall be based on the value of the Participant's Account as of the Valuation Date at the end of the immediately preceding month before the Settlement Date. For example, the Valuation Date at the end of December shall be used to determine lump sum payments and the initial amount of installment payments which will be made in the following January. 5.9 Change in Control and Unscheduled Distributions. (a) Subject to the provisions of Section 5.9(b) hereof, upon (i) dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more other entities as a result of which the Company is not the survivor, (iii) the sale of all or substantially all the assets of the Company, or (iv) any other event which constitutes a Change in Control as defined in Section 5.9(c), the interests of all then remaining Participants shall continue, and provisions shall be made in connection with such transaction for the continuance of the Plan and the assumption of the obligations of the Company under the Plan by the Company's successor(s) in interest. (b) Notwithstanding any other provisions of the Plan, at any time during a Window Period before a Change in Control or at any time after a Change in Control a Participant or a Beneficiary of a deceased Participant may elect to receive an immediate lump sum payment of up to the balance of his Account(s), reduced by a penalty, which shall be forfeited to the Company, equal to ten percent (10%) before a Change in Control or six percent (6%) after a Change in Control, applied against the portion of the Account balance withdrawn, in lieu of payments in accordance with the form previously elected by the Participant. However, the penalty shall not apply if the Committee determines, based on advice of counsel or a final determination by the Internal Revenue Service or any court of competent jurisdiction, that by reason of the foregoing provision the Participant has recognized or will recognize gross income for federal income tax purposes under this Plan in advance of payment to him or his -16- 21 Beneficiary of Plan benefits. The minimum lump sum payment shall be $50,000 or the entire balance of any Account, whichever is less. A Participant who receives a lump sum payment under this Section 5.9(b) will be credited with interest on the Account balance at the rates established under Section 5.1(b) of the Plan based on the Participant's completed years of Service and years of participation in the Plan prior to the lump sum payment. Following a complete distribution of the entire balance for an Account, a Participant and his Beneficiary will be entitled to no further benefits under the Plan with respect to that Account. Whenever a Participant receives a lump sum payment under this Section 5.9(b) or Section 9.1, the Participant will be deemed to elect to revoke all Deferral Commitments and to discontinue all deferrals under the Plan effective as of the date of the lump sum payment. The Participant will be precluded from making any new deferrals under the Plan for the remainder of the Plan Year in which he receives such distribution and for the next Plan Year. (c) A "Change in Control" shall mean: (i) The occurrence with respect to the Company of a "control transaction," as such term is defined in Section 2542 of the Pennsylvania Business Corporation Law of 1988, as of August 15, 1989; or (ii) Approval by the stockholders of the Company of (A) any merger or consolidation of the Company in which the holders of voting stock of the Company immediately before the merger or consolidation will not own 50% or more of the voting shares of the continuing or surviving corporation immediately after such merger or consolidation, or (B) any sale, lease, or exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company; or (iii) A change of 25% (rounded to the next whole person) in the membership of the Board of Directors of the Company within a 12-month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of 85% (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the 12-month period. (d) Notwithstanding any other provision of this Plan, without the written consent of the Participant (or Beneficiary of a deceased Participant) affected thereby, the Company may not amend or terminate this Plan: (i) For a period of twenty-four (24) months following a Change in Control; or (ii) At any time thereafter, in any manner which affects any Participant (or Beneficiary of a deceased Participant) who receives payments of benefits under this Plan or has a Termination of Employment for any reason at any time during the period of twenty-four (24) months following the Change in Control. 5.10 Continuous Service. Continuity of service shall be determined in accordance with the following rules: (a) A leave of absence not in excess of one year, granted by a Participant's Employer for any purpose, including but not limited to, sickness, accident or other casualty, shall not be considered a break in continuity of service. (b) Any Participant who has entered, or enters, the Armed Forces of the United States in a period of national emergency, declared by the President or Congress of the United States, -17- 22 shall be presumed to be on leave of absence, provided he returns to the employ of his Employer within ninety (90) days of the date on which he shall have the right to release from such service, or from the hospital in event of service caused disability without intervening employment elsewhere. (c) A Participant who transfers his employment from one Employer to any other Employer is not deemed to have caused a break in continuity of service. Any other dismissal or voluntary Termination of Employment shall be deemed a break in continuity of service. (d) Absence from work or interruption of employment not covered by the foregoing provisions of this Section shall be determined by the employing Employer to be, or not to be, a break in continuity of service at the time of return to work or re-employment. 5.11 Distributions from General Assets. The Employer shall make any or all distributions pursuant to this Plan in cash out of its general assets. 5.12 Withholding and Payroll Taxes. The Employer shall withhold from payments made hereunder any taxes required to be withheld from such payments under federal, state or local law. 5.13 Payment to Guardian. If a benefit is payable to a minor or a person declared incompetent or to a person incapable of handling the disposition of his property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapacitated person. The Committee may require proof of minority, incompetency, incapacity or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Committee from all liability with respect to such benefit. 5.14 Small Benefit. Notwithstanding any election made by the Participant, the Committee, in its sole discretion, may direct payment of any benefit in the form of a lump sum payment to the Participant or any Beneficiary, if the lump sum amount of the Account balance which is payable to the Participant or Beneficiary when payments to such Participant or Beneficiary would otherwise commence is less than $50,000. 5.15 Protective Provisions. Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may deem necessary and taking such other relevant action as may be requested by the Company. If a Participant refuses so to cooperate or makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder with respect to such Participant or his Beneficiary, provided that, in the Company's sole discretion, benefits may be payable in an amount reduced to compensate the Company for any loss, cost, damage or expense suffered or incurred by the Company as a result in any way of any such action, misstatement or nondisclosure. 5.16 Notices and Elections. Any notice or election required or permitted to be given to the Company or the Committee under the Plan shall be sufficient only if it is in writing on a form prescribed or accepted by the Committee and hand delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Human Resources Department of the Company. Such notice or election shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. -18- 23 5.17 Special Distribution Accounts. Special Distribution Accounts shall be distributed in accordance with a Participant's elections filed under the Prior Plan. Such elections may not be amended by the Participant. ARTICLE VI DESIGNATION OF BENEFICIARY 6.1 Designation of Beneficiary. Each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive his interest in each of his Accounts upon his death. Such designation shall be made on a form prescribed by and delivered to the Company. The Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. 6.2 Failure to Designate Beneficiary. If a Participant shall fail to designate a Beneficiary before his demise, or if no designated Beneficiary survives the Participant, the Committee shall direct the Company to pay the balance in each of his Accounts in a lump sum to the executor or administrator for his estate; provided, however, if no executor or administrator shall have been appointed, and actual notice of said death was given to the Committee within sixty (60) days after his death, and if his Account balances do not exceed Ten Thousand Dollars ($10,000), the Committee may direct the Company to pay his Account balances to such person or persons as the Committee determines, and the Committee may require such proof of right and/or identity of such person or persons as the Committee may deem appropriate or necessary. ARTICLE VII FORFEITURES TO COMPANY 7.1 Distribution of Participants' Interest When Company is Unable to Locate Distributees. In case the Company is unable within three (3) years after payment is due to a Participant, or within three (3) years after payment is due to the Beneficiary or estate of a deceased Participant, to make such payment to him or his Beneficiary, executor or administrator because it cannot ascertain his whereabouts or the identity or whereabouts of his Beneficiary, executor or administrator by mailing to the last known address shown on the Employer's or the Company's records, and neither he, his Beneficiary, nor his executor or administrator had made written claim therefor before the expiration of the aforesaid time limit, then in such case, the amount due shall be forfeited to the Company. ARTICLE VIII MAINTENANCE OF ACCOUNTS The Company shall keep, or cause to be kept, all such books of account, records and other data as may be necessary or advisable in its judgment for the administration of this Plan, and properly to reflect the affairs thereof, and to determine the nature and amount of the interests of the respective Participants in each Account. The Company is not required to physically segregate any assets with respect to the Accounts under this Plan from any other assets of the Company and may commingle any such assets with any other moneys, securities and properties of any kind of the Company. Separate accounts or records for the respective Participants' interests shall be maintained for operational and accounting purposes, but no such account or record shall be considered as creating a lien of any -19- 24 nature whatsoever on or as segregating any of the assets with respect to the Accounts under this Plan from any other funds or property of the Company. ARTICLE IX AMENDMENT AND TERMINATION OF THE PLAN 9.1 Amendment. The Human Resources Committee of the Board may at any time amend the Plan in whole or in part, provided, however, that no amendment shall be effective to decrease or restrict the amount accrued (including earnings at the appropriate interest rate) in any Account to the date of such amendment. Notwithstanding anything in the preceding sentence to the contrary, the Committee shall have the power to amend the Plan to the extent authorized by Section 2.2. Upon a prospective amendment to reduce the formula for determining the future interest rate, 30 days' advance written notice shall be given to each Participant. Following such an amendment to reduce the formula for determining the future interest rate and the giving of notice to the Participant, the Participant may elect to (i) terminate an ongoing Deferral Commitment without penalty and/or (ii) receive an immediate lump sum payment of the balance of his Account(s), reduced by a penalty, which shall be forfeited to the Employer, equal to six percent (6%) of the balance of such Account(s), in lieu of payments in accordance with the form previously elected by the Participant. However, the six percent (6%) penalty shall not apply if it would not have applied under Section 5.9(b). The Participant may make such an election by notifying the Committee in writing within sixty (60) days following receipt of notice of the amendment to reduce the interest rate. 9.2 Company's Right to Terminate. The Human Resources Committee of the Board may partially or completely terminate the Plan if, in its judgment, the tax, accounting, or other effects of the continuance of the Plan or potential payments thereunder would not be in the best interests of the Company. (a) Partial Termination. The Human Resources Committee of the Board may partially terminate the Plan by instructing the Committee not to accept any additional or ongoing Deferral Commitments. In the event of such partial termination, the Plan shall continue to operate on the same terms and conditions and, unless the Human Resources Committee of the Board instructs the Committee not to accept ongoing Deferral Commitments, shall be effective with regard to Deferral Commitments entered into prior to the effective date of such partial termination. (b) Complete Termination. The Human Resources Committee of the Board may completely terminate the Plan. In the event of complete termination, the Plan shall cease to operate, and the Employer shall pay out to each Participant (or the Beneficiary of a deceased Participant) his Accounts in either a lump sum payment or up to three equal annual installments, at the Employer's discretion, as if the Participant had terminated service as of the effective date of the complete termination. Interest shall continue to be paid on the balance in each Participant's Account(s) in accordance with Section 4.3. ARTICLE X SPENDTHRIFT PROVISIONS The Employer shall, except as otherwise provided hereunder, pay all amounts payable hereunder only to the person or persons entitled thereto hereunder, and all such payments shall be made directly into the hands of each such person or persons and not into the hands of any other person -20- 25 or corporation whatsoever, so that said payments may not be liable for the debts, contracts or engagements of any such designated person or persons, or taken in execution by attachment or garnishment or by any other legal or equitable proceedings, nor shall any such designated person or persons have any right to alienate, arbitrate, execute, pledge, encumber, or assign any such payments or the benefits or proceeds thereof. If the person entitled to receive payment be a minor, or a person of unsound mind, whether or not adjudicated incompetent, the Employer, upon direction of the Committee, may make such payments to such person or persons, corporation or corporations as may be, or be acting as, parent or legal or natural guardian of such infant or person of unsound mind. The signed receipt of such person or corporation shall be a full and complete discharge to the Employer for any such payments. ARTICLE XI MISCELLANEOUS 11.1 Right of Employers to Dismiss Employees; Obligations. Neither the action of the Company and the Employers in establishing this Plan, nor any provisions of this Plan, shall be construed as giving any employee the right to be retained in his Employer's employ, or any right to any payment whatsoever except to the extent of the benefits provided for by this Plan. The Employers expressly reserve their right at any time to dismiss any employee without any liability for any claim against the Employers, or any of them, for any payment whatsoever except to the extent provided for in this Plan. The Employers, or any of them, have no obligation to create any other or subsequent deferred compensation plan for any employees. 11.2 Title to and Ownership of Assets Held for Accounts. Title to and ownership of all assets held for any Accounts shall be vested in the Employer and shall constitute general assets of the Employer. 11.3 Nature of Liability to Participants. Any and all payments required to be made by the Employer to Participants in the Plan shall be general and unsecured liabilities of the Employer. 11.4 Text of Plan to Control. The headings of the Articles and Sections are included solely for convenience of reference, and if there be any conflict between such headings and the text of this Plan, the text shall control. This Plan document sets forth the complete terms of the Plan. In the event of any discrepancies or conflicts between this Plan document and any summary or other information regarding the Plan, the terms of this Plan document shall apply and control. 11.5 Law Governing and Severability. This Plan shall be construed, regulated and administered under the laws of the Commonwealth of Pennsylvania. If any provisions of this Plan shall be held invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the remaining provisions of this Plan, and this Plan shall be deemed to be modified to the least extent possible to make it valid and enforceable in its entirety. 11.6 Name. This Plan may be referred to as the "Mellon Bank Corporation Elective Deferred Compensation Plan for Senior Officers." 11.7 Gender. The masculine gender shall include the feminine, and the singular shall include the plural, except when the context expressly dictates otherwise. -21- 26 11.8 Trust Fund. The Employer shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Company may establish one or more trusts, with such trustees as the Board or the Committee may approve, for the purpose of providing for the payment of such benefits. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Company's creditors. To the extent any benefits provided under the Plan are actually paid from any such trust, the Employer shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Employer. 11.9 Ineligible Participant. Notwithstanding any other provisions of this Plan to the contrary, if any Participant is determined not to be a "management or highly compensated employee" within the meaning of ERISA or Regulations thereunder, such Participant will not be eligible to participate in this Plan and shall receive an immediate lump sum payment equal to the vested portion of the amounts standing credited to his Accounts. Upon such payment no survivor benefit or other benefit shall thereafter be payable under this Plan either to the Participant or any Beneficiary of the Participant. IN WITNESS WHEREOF, the Company has caused this amended and restated Plan to be executed this day of October, 1996, effective as of January 1, 1997. ATTEST: MELLON BANK CORPORATION CARL KRASIK By: D. MICHAEL ROARK Carl Krasik D. Michael Roark Secretary Head of the Human Resources Department of Mellon Bank, N.A. -22- EX-10.12 7 MELLON BANK 10-K405 1 Exhibit 10.12 MELLON BANK OPTIONAL LIFE INSURANCE PLAN Effective January 1, 1993 2 TABLE OF CONTENTS PAGE PREAMBLE 1 ARTICLE I 1 DEFINITIONS 1 1.1 Affiliates 1 1.2 Base Salary 1 1.3 Beneficiary 1 1.4 Board 1 1.5 Change in Control 2 1.6 Code 2 1.7 Committee 2 1.8 Company 2 1.9 Coverage Adjustment Date 2 1.10 Credited Interest 2 1.11 Disability 2 1.12 Economic Benefit 2 1.13 Effective Date 3 1.14 Eligible Employee 3 1.15 Employee 3 1.16 Human Resources Committee 3 1.17 Insurance Company 3 1.18 Net Cumulative Premiums 3 1.19 Participant 3 1.20 Participation Agreement 3 1.21 Plan 4 1.22 Plan Year 4 1.23 Policy 4 1.24 Retirement 4 1.25 Subsidiary 4 1.26 Years of Service 4 ARTICLE II 4 PARTICIPATION 4 2.1 Participation 4 2.2 Insurability 5 2.3 Commencement of Coverage 5 2.4 Increases in Coverage 5 2.5 Declining Coverage 6 2.6 Ceasing Participation 6 ARTICLE III 6 LIFE INSURANCE COVERAGE 6 3.1 Amount of Insurance 6 3.2 Disability 7 3.3 Insurance Contract 8 3.4 Interests in Cash Value 8 (i) 3 3.5 Policy Withdrawals and Loans 10 3.6 Surrender or Cancellation of Policy 11 3.7 Continuation of Split Dollar Policy or Release of Collateral Assignment after Retirement 11 3.8 Assignment 11 3.9 Payment of Premiums and Contributions 12 3.10 Form of Death Benefit 12 ARTICLE IV 13 OPTION TO RETAIN INSURANCE POLICY ON TERMINATION OF EMPLOYMENT 13 ARTICLE V 14 OPTION TO RETAIN INSURANCE POLICY IN CERTAIN EVENTS 14 5.1 Option to Retain Policy 14 5.2 Elimination of Coverage 14 5.3 Change in Control 14 ARTICLE VI 16 BENEFICIARY DESIGNATION 16 6.1 Designation of Beneficiary 16 6.2 Failure to Designate Beneficiary 16 ARTICLE VII 17 ADMINISTRATION 17 7.1 Administration 17 7.2 Powers and Duties 17 7.3 Procedures 19 7.4 Establishment of Rules 20 7.5 Limitation of Liability 20 7.6 Compensation and Insurance 20 7.7 Removal and Resignation 21 7.8 Claims Procedure 21 ARTICLE VIII 22 AMENDMENT AND TERMINATION OF PLAN 22 ARTICLE IX 22 MISCELLANEOUS 22 9.1 Restriction on Assignment 22 9.2 Tax Liability and Withholding 22 9.3 ERISA Plan 23 9.4 Employment Not Guaranteed 23 9.5 Protective Provisions 23 (ii) 4 9.6 Gender, Singular & Plural 24 9.7 Captions 24 9.8 Validity 24 9.9 Notices and Elections 24 9.10 Applicable Law 24 9.11 Waiver of Breach 25 9.12 Benefit 25
(iii) 5 MELLON BANK OPTIONAL LIFE INSURANCE PLAN PREAMBLE The purpose of this Mellon Bank Optional Life Insurance Plan (the "Plan") is to provide optional life insurance coverage for eligible key executive employees of Mellon Bank, N.A. (the Company) and its Affiliates. The Plan will be effective as of January 1, 1993. ARTICLE I DEFINITIONS When used herein, the following words shall have the following meanings unless the content clearly indicates otherwise: 1.1 Affiliates. "Affiliates" means Mellon Bank Corporation and its Subsidiaries. 1.2 Base Salary. "Base Salary" means an active Employee's annual base salary as of the last Coverage Adjustment Date preceding his death. Annual base salary excludes all bonuses, incentive and supplemental compensation and other payments and benefits, except fixed base salary. 1.3 Beneficiary. "Beneficiary" means the person or persons designated as such in accordance with Article VI. 1.4 Board. "Board" means the Board of Directors of Mellon Bank Corporation or any committee thereof acting within the scope of its authority. 6 1.5 Change in Control. "Change in Control" shall have the meaning set forth in Section 5.3. 1.6 Code. "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. 1.7 Committee. "Committee" means the Corporate Benefits Committee of Mellon Bank Corporation appointed to administer the Plan pursuant to Article VII. 1.8 Company. "Company" means Mellon Bank, N.A. and, whenever applicable, its Affiliates. 1.9 Coverage Adjustment Date. "Coverage Adjustment Date" means the date during each year, selected by the Committee from time to time in its discretion, on which changes or increases in coverage will take effect. 1.10 Credited Interest. "Credited Interest" means interest on the Net Cumulative Premiums paid by the Company on a Policy at the annual rate credited from time to time on the Policy by the insurance company less one hundred (100) basis points, which shall be credited to the Company following the Participant's Retirement or termination of employment with the Company. 1.11 Disability. "Disability" means a condition that qualifies as a disability under the Mellon Bank Group Long-Term Disability Plan. 1.12 Economic Benefit. "Economic Benefit" means the value of the economic benefit of life insurance coverage under this Plan for income tax purposes, determined based on revenue rulings issued by the Internal Revenue Service and other applicable authorities. -2- 7 1.13 Effective Date. "Effective Date" means January 1, 1993. 1.14 Eligible Employee. "Eligible Employee" means an Employee who is a Senior Vice President or above and is designated by the Human Resources Committee to participate in the Plan. 1.15 Employee. "Employee" means any person employed by the Company or its Affiliates on a regular full-time salaried basis, including officers of the Company. 1.16 Human Resources Committee. "Human Resources Committee" means the Human Resources Committee of the Board. 1.17 Insurance Company. "Insurance Company" means an insurance company selected by the Company to provide coverage for Participants pursuant to the terms of the Plan. 1.18 Net Cumulative Premiums. "Net Cumulative Premiums" means premiums paid by the Company on a Policy net of (i) reimbursements or contributions to premiums on the Policy made by a Participant and (ii) any withdrawals or loans from cash value of the Policy made to the Company. 1.19 Participant. "Participant" means an Eligible Employee who has completed the underwriting requirements of the Insurance Company and who is notified by the Company that he is participating in the Plan in accordance with the provisions of Article II. 1.20 Participation Agreement. "Participation Agreement" means a written agreement between the Company and the Participant under which the Participant agrees to participate in the Plan pursuant to Section 2.1. -3- 8 1.21 Plan. "Plan" means this Optional Life Insurance Plan as set forth in this document and as the same may be amended, administered or interpreted from time to time. 1.12 Plan Year. "Plan Year" means the calendar year. 1.23 Policy. "Policy" means a life insurance policy providing coverage under the Plan. 1.24 Retirement. "Retirement" means termination of a Participant's employment with the Company or its affiliates for reasons other than death or Disability after the Participant has either (i) attained age fifty-five (55) and completed at least five (5) Years of Service or (ii) attained age sixty-five (65) and completed at least one (1) Year of Service. 1.25 Subsidiary. "Subsidiary" means a corporation the majority of the outstanding stock of which is owned directly or indirectly by Mellon Bank Corporation. 1.26 Years of Service. "Years of Service" means a Participant's actual years of service, unless otherwise determined by the Human Resources Committee. ARTICLE II PARTICIPATION 2.1 Participation. Any Eligible Employee may enroll in the Plan by completing a Participation Agreement, the underwriting requirements of the Insurance Company and any other enrollment steps required by the Company for coverage to begin. An Eligible Employee shall become a Participant in the Plan when he has been notified in writing that his participation is -4- 9 approved by the Company. During a leave of absence, coverage will remain in effect for a maximum of ninety (90) days. 2.2 Insurability. Eligible Employees are not automatically entitled to all insurance coverage offered under the Plan. Each Eligible Employee will be covered up to the amount of guarantee issue determined by the Insurance Company, but must satisfy the Insurance Company's requirements for obtaining additional insurance before he becomes covered for additional amounts under the Plan. 2.3 Commencement of Coverage. Subject to the limitations of Sections 2.1 and 2.2, (i) an Employee who is an Eligible Employee on January 1, 1993 will be covered under the Plan as of January 1, 1993, and (ii) any other Eligible Employee will be covered under the Plan when coverage is approved by the Insurance Company. 2.4 Increases in Coverage. When a Participant's Base Salary is increased, the amount of his life insurance coverage under this Plan will increase on the next Coverage Adjustment Date, except as provided in this Section 2.4. Any such increase in coverage or any increase in the level of optional coverage (one, two or three times Base Salary) will not take effect until such additional coverage is approved by the Insurance Company, and a Participant may be required to satisfy the Insurance Company's requirements for obtaining additional insurance before he becomes covered for an additional amount of life insurance coverage under the Plan. A Participant's coverage under the Plan will be limited to the coverage issued by the Insurance Company. -5- 10 2.5 Declining Coverage. An Eligible Employee may decline coverage under the Plan. However, any such Eligible Employee will be required to satisfy the insurance company's requirements for obtaining insurance before he may become covered under the Plan at a later date. 2.6 Ceasing Participation. A Participant who ceases participation in the Plan shall transfer ownership of his Policy to the Company, and the Company will pay to such Participant an amount equal to the Participant's interest in the cash value in the Policy (as determined under Section 3.4). ARTICLE III LIFE INSURANCE COVERAGE 3.1 Amount of Insurance. The amount of life insurance coverage which will be payable to the Beneficiary designated by the Participant will be determined based on the employment status of the Participant with the Company at the time of his death. The amounts of life insurance coverage under this Plan are as follows: (a) During Employment. While employed with the Company, a Participant may elect to maintain optional life insurance coverage equal to one (1), two (2) or three (3) times his Base Salary. The Participant must file an election for optional life insurance coverage in accordance with procedures and timing requirements established by the Committee. Any changes in the level of optional coverage will occur once a year on the Coverage Adjustment Date and will not take effect until -6- 11 coverage is approved by the insurance company. The Company will be entitled to the balance of the death benefit. (b) After Retirement. After Retirement from the Company, a Participant will have life insurance coverage equal to the death benefit payable under the Policy less an amount payable to the Company equal to (i) the Net Cumulative Premiums paid by the Company on the Policy plus (ii) Credited Interest thereon after the Participant's Retirement. (c) Limitation on Amount of Coverage. The amount of life insurance coverage under the Plan will be limited to the amount of coverage issued by the Insurance Company on the Participant under this Plan. 3.2 Disability. If a Participant suffers a Disability, the Participant's life insurance coverage may be continued by the Participant during the period of Disability until the Participant reaches age sixty-five (65) or begins to receive benefits under the Mellon Bank Retirement Plan, whichever is sooner. The Participant must continue to make contributions for this coverage in the same manner as an active employee. When a disabled Participant who continues coverage under the Plan reaches age sixty-five (65) or begins to receive benefits under the Mellon Bank Retirement Plan, whichever is sooner, the Participant will continue to have life insurance coverage as if he had retired from employment with the Company. A Participant who suffers a Disability before he is eligible for Retirement and elects not to continue his life insurance coverage will be subject to the provisions of this Plan which apply upon termination of employment. -7- 12 3.3 Insurance Contract. To provide the insurance coverage under the Plan, the Company shall acquire one or more insurance policies ("Policies") on the life of each Participant. Except as otherwise specifically provided, the Participant will be the owner and hold all the incidents of ownership in each Policy for which he is designated the owner pursuant to a split dollar life insurance agreement entered into by the Participant and the Company under this Plan. In consideration of the Company's payment of premiums on the Policy pursuant to Section 3.9 of this Plan, the Participant will assign rights in cash value and death benefits under the Policy to the Company as collateral under a form of collateral assignment consistent with the terms of the Plan. The Participant may specify in writing to the Company the Beneficiary or Beneficiaries for his life insurance coverage under this Plan. Upon receipt of a written request from the Participant, the Company will immediately take such action as shall be necessary to implement such Beneficiary designation. Any death benefits under Policies on the life of the Participant owned by the Company that exceed the amount payable to the Participant's Beneficiary under this Plan shall be payable to the Company. 3.4 Interests In Cash Value. The respective interests of the Company and the Participant in the cash value of Policies which are owned by the Participant shall be as follows: (a) During Employment. (i) Company's Interest In Cash Value During Employment. While the Participant is employed with the Company, -8- 13 the Company's interest in the cash value of any Policy shall be limited to the lesser of the cash value of the Policy or the Net Cumulative Premiums paid by the Company on the Policy. The Company shall also be entitled to increases in cash value in an amount equal to any mortality or other expenses incurred for the benefit of the Company which are charged against cash value of the Policy, and any such charges shall, in turn, be deducted from the Company's interest in cash value of the Policy. (ii) Participant's Interest In Cash Value During Employment. While the Participant is employed with the Company, the Participant's interest in the cash value of any Policy shall be the balance of the cash value of the Policy in excess of the Company's interest in cash value pursuant to Section 3.4(a) (i) above. The Participant shall at all times be 100% vested in the Participant's interest in cash value under a Policy. (b) After Retirement. (i) Company's Interest In Cash Value After Retirement. The Company's interest in the cash value of any Policy after a Participant's Retirement will be equal to the Net Cumulative Premiums paid by the Company on the Policy plus Credited Interest thereon after the Participant's Retirement. Any withdrawals of cash value from the Policy by the company will reduce the Company's interest in the cash value of the Policy. The Company shall also be entitled to increases in cash value in an amount equal to any mortality or other expenses incurred for the benefit of the Company which are charged against cash value of the Policy, and any such charges shall, in turn, be deducted from the Company's interest in cash value of the Policy. -9- 14 (ii) Participant's Interest In Cash Value after Retirement. After a Participant's Retirement, the Participant's interest in the cash value of any Policy shall be the balance of the cash value of the Policy in excess of the Company's interest in cash value pursuant to Section 3.4(b)(i) above. 3.5 Policy Withdrawals and Loans. (a) Policy Withdrawals and Loans by Company. The Company shall have the right to make withdrawals of cash value or prepaid premiums or obtain loans from any Policy which is owned by a Participant at any time up to the Net Cumulative Premiums paid by the Company on the Policy plus Credited Interest thereon after the Participant's Retirement, without the prior written consent of the Participant. The Company's death benefit under any Policy shall be reduced by withdrawals (and the unpaid principal and interest of any loans) under the Policy taken by the Company. (b) Policy Withdrawals and Loans by Participant. A Participant shall have no right to make withdrawals or obtain loans from any Policy before his Retirement. After his Retirement, if the Company releases its collateral assignment on the Policy, a Participant shall have the right to make withdrawals of his interest in the cash value of any Policy (or obtain loans from the Participant's interest in the cash value of any Policy, provided interest is paid on such loans on an annual basis). The Participant's death benefit under any Policy shall be reduced by withdrawals (and the unpaid principal and interest on any loans) under the Policy taken by the Participant. -10- 15 3.6 Surrender or Cancellation of Policy. In the event of the surrender or cancellation of a Policy which is owned by a Participant, the Participant shall be entitled to receive a portion of the cash surrender value equal to his interest in the cash value of the Policy, unless the Company substitutes another Policy which is satisfactory to the Participant. The balance of the cash surrender value, if any, shall belong to the Company. 3.7 Continuation of Split Dollar Policy or Release of Collateral Assignment after Retirement. At its option, the Company may (a) continue the life insurance coverage for the Participant after his Retirement in the same form and subject to the same terms and provisions of this Plan as if he remained employed with the Company, except that the total amount of coverage for the Participant will be the amount specified in Section 3.1(b), or (b) withdraw its Net Cumulative Premiums paid on the Policy (plus Credited Interest thereon after Retirement) at any time following the Participant's Retirement. In the event the Company elects the latter, the Company shall release its collateral assignment on the Policy. 3.8 Assignment. A Participant may assign, revocably or irrevocably, to one or more individuals or trustees all or any part of his right, title, claim, interest, benefit and all other incidents of ownership which he may have in any Policies providing his life insurance coverage under this Plan, provided that any such assignment shall be subject to Section 9.1 and the other terms of the Plan. Such assignee shall then have all rights and obligations which have been assigned and otherwise are the Participant's under this Plan. In the event that there has -11- 16 been such an assignment, the term Employee or Participant shall mean the Employee's or Participant's assignee (or any subsequent assignee) as the context requires, in connection with ownership, actions, elections, or other events concerning life insurance coverage on the Participant. 3.9 Payment of Premiums and Contributions. (a) During Employment. While a Participant is employed with the Company, the Participant will be required each year to pay for optional life insurance coverage at such rates as the Committee may establish from time to time. The cost for this coverage will depend on the Participant's age and amount of coverage and may depend on insurance rating. The Company will pay the balance of the premiums. (b) After Retirement. Any premiums for life insurance coverage under this Plan following a Participant's Retirement will be paid by the Participant. The Company will not be required to pay any premiums following a Participant's Retirement. 3.10 Form of Death Benefit. All death benefits payable on behalf of a Participant under this Plan will be in the form of a lump sum death benefit paid directly from the life insurance company to the Participant's Beneficiary under a collateral assignment split dollar life insurance program. -12- 17 ARTICLE IV OPTION TO RETAIN INSURANCE POLICY ON TERMINATION OF EMPLOYMENT If a Participant terminates employment with the Company before Retirement, the Participant may elect, in writing received by the Company not later than sixty (60) days after his termination of employment, to retain the Policy providing his life insurance coverage then in effect under this Plan and obtain release of the collateral assignment in favor of the Company by paying the Company an amount equal to the Net Cumulative Premiums paid by the Company on the Policy plus Credited Interest thereon after the Participant's termination of employment with the Company. Payment must be made in cash as a lump sum or by borrowing or withdrawing cash value from the Policy. A Participant's life insurance coverage under this Plan will remain in effect during this sixty (60) day period. A Participant who retains a Policy will cease to be covered under this Plan and will thereafter be required to pay all future premiums on the Policy. If the Participant does not elect to purchase the Company's interest in the Policy, all incidents of ownership of the Policy held by the Participant shall be transferred to the Company. In such event the Company will pay the Participant an amount equal to the Participant's interest in the cash value in the Policy. At the time the Participant purchases the Company's interests in the Policy, or the Participant's incidents of ownership are transferred to the Company, the Company shall have -13- 18 no further legal or equitable obligations of any kind to the Participant under this Plan. ARTICLE V OPTION TO RETAIN INSURANCE POLICY IN CERTAIN EVENTS 5.1 Option to Retain Policy. The Participant may elect, in writing received by the Company not later than sixty (60) days after the Participant receives written notice from the Company of an event described in Section 5.2, to retain the Policy providing his life insurance coverage then in effect under this Plan for an amount equal to the Net Cumulative Premiums paid by the Company on the Policy plus Credited Interest thereon after the Participant's Retirement. A Participant who purchases a Policy will cease to be covered under this Plan and will thereafter be required to pay all future premiums on the Policy. 5.2 Elimination of Coverage. Any Participant whose coverage is eliminated pursuant to Article VIII of this Plan (without being replaced with an equivalent amount of coverage under another plan of the Company) shall have the option pursuant to Section 5.1 to purchase the Policy providing his life insurance coverage in effect under this Plan immediately prior to the elimination of such coverage. 5.3 Change in Control. For purposes of this Plan the term "Change in Control" shall mean: (a) the occurrence with respect to Mellon Bank Corporation ("MBC") of a "control transaction," as such term is -14- 19 defined in Section 2542 of the Pennsylvania Business Corporation Law of 1988 as of August 15, 1989; or (b) approval by the stockholders of MBC of (i) any merger or consolidation of MBC in which the holders of voting stock of MBC immediately before the merger or consolidation will not own fifty percent (50%) or more of the voting shares of the continuing or surviving corporation immediately after such merger or consolidation, or (ii) any sale, lease or exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of MBC; or (c) a change of twenty-five percent (25%) (rounded to the next whole person) in the membership of the Board of Directors of MBC within a twelve (12) month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of eighty-five percent (85%) (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the twelve (12) month period. Notwithstanding any other provision of this Plan, without the written consent of the Participant (or Beneficiary of a deceased Participant) affected thereby, the Company may not amend or terminate this Plan, except to comply with legal requirements: (a) for a period of twenty-four (24) months following a Change in Control; or (b) at any time thereafter, in any manner which affects any Participant (or Beneficiary of a deceased Participant) who receives payments of benefits under this Plan or -15- 20 has a termination of employment for any reason at any time during the period of twenty-four (24) months following the Change in Control. ARTICLE VI BENEFICIARY DESIGNATION 6.1 Designation of Beneficiary. Each Participant (or his assignee in the case of an assignment of the Participant's life insurance coverage pursuant to Section 3.5 of this Plan) shall have the right to designate a Beneficiary or Beneficiaries to whom payment of the Participant's death benefit under this Plan shall be made in the event of the Participant's death. Such designation shall be made on a form prescribed by and delivered to the Company. Except where such designation is irrevocable, the Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. 6.2 Failure to Designate Beneficiary. If a Participant shall fail to designate a Beneficiary before his demise, or if no designated Beneficiary survives the Participant, the Committee shall direct the Company to make payment under this Plan to the executor or administrator for the Participant's estate. -16- 21 ARTICLE VII ADMINISTRATION 7.1 Administrator. Except as hereinafter provided, the Committee shall be responsible for the administrative responsibilities hereinafter described with respect to the Plan. Whenever any action is required or permitted to be taken in the administration of the Plan, such action shall be taken by the Committee unless the Committee's power is expressly limited herein or by operation of law. The Committee shall be the Plan "Administrator" (as such term is defined in Section 3(16)(A) of ERISA). The Committee may delegate its duties and responsibilities as it, in its sole discretion, deems necessary or appropriate to the execution of such duties and responsibilities. The Committee as a whole or any of its members may serve in more than one capacity with respect to the Plan. 7.2 Powers and Duties. The Committee, or its delegates, shall maintain and keep (or cause to be maintained and kept) such records as are necessary for the efficient operation of the Plan or as may be required by any applicable law, regulation, or ruling and shall provide for the preparation and filing of such forms, reports, information, and documents as may be required to be filed with any governmental agency or department and with the Plan's Participants and/or other Beneficiaries. Except to the extent expressly reserved to the Company or the Board, the Committee shall have all powers necessary to carry out the administrative provisions of the Plan and to -17- 22 satisfy the requirements of any applicable law or laws. These powers shall include, by way of illustration and not limitation, the exclusive powers and discretionary authority necessary to: (a) construe and interpret the Plan; decide all questions of eligibility; decide all questions of fact relating to claims for benefits; and determine the amount, time, manner, method, and mode of payment of any benefits hereunder; (b) direct the Company and/or the trustee of any trust established at the discretion of the Company to provide for the payment of benefits under the Plan, concerning the amount, time, manner, method, and mode of payment of any benefits hereunder; (c) prescribe procedures to be followed and forms to be used by Participants and/or other persons in filing applications or elections; (d) prepare and distribute, in such manner as may be required by law or as the Committee deems appropriate, information explaining the Plan; provided, however, that no such explanation shall contravene the terms of this Plan or increase the rights of any Participant or Beneficiary or the liabilities of the Company; (e) require from the Company and Participants such information as shall be necessary for the proper administration of the Plan; (f) appoint and retain individuals to assist in the administration and construction of the Plan, including such legal, clerical, accounting, and actuarial services as it may require or as may be required by any applicable law or laws; and -18- 23 (g) perform all functions otherwise imposed upon a plan administrator by ERISA which are not expressly reserved to the Company or the Board, including, but not limited to, those supplemental duties and responsibilities described in the "Mellon Bank Corporation Corporate Benefits Committee Charter and Summary of Operations" approved by the Board on September 17, 1991 (the "CBC" Charter"). Without intending to limit the generality of the foregoing, the Committee shall have the power to amend the Plan, in whole or in part, in order to comply with applicable law; provided, however, that no such amendment may increase the duties and obligations of the Company without its consent. Except as provided in the preceding sentence or unless directed by the Human Resources Committee of the Board or otherwise required by law, the Committee shall have no power to adopt, amend, or terminate the Plan, said powers being exclusively reserved to the Human Resources Committee of the Board. 7.3 Procedures. The Committee shall be organized and conduct its business with respect to the Plan in accordance with the organizational and procedural rules set forth in the CBC Charter. Notwithstanding the foregoing, if any member of the Committee shall be a Participant hereunder, then in any matters affecting any member of the Committee in his individual capacity as a Participant hereunder, separate and apart from his status as a member of the group of Participants, such interested member shall have no authority to vote in the determination of such matters as a member of the Committee, but the Committee shall -19- 24 determine such matter as if said interested member were not a member of the Committee; provided, however, that this shall not be deemed to take from said interested member any of his rights hereunder as a Participant. If the remaining members of the Committee should be unable to agree on any matter so affecting an interested member because of an equal division of voting, the Human Resources Committee of the Board shall appoint a temporary member of the Committee in order to create an odd number of voting members. 7.4 Establishment of Rules. The Committee shall have specific authority in its sole discretion to construe and interpret the terms of the Plan related to its powers and duties, and to the extent that the terms of the Plan are incomplete, the Committee shall have authority to establish such rules or regulations related to its powers and duties as it may deem necessary and proper to carry out the intent of the Company as to the purposes of the Plan. 7.5 Limitation of Liability. The Board, the members of the Committee, and any officer, employee, or agent of the Company shall not incur any liability individually or on behalf of any other individuals or on behalf of the Company for any act, or failure to act, made in good faith in relation to the Plan. No bond or other security shall be required of any such individual solely on account of any individual's power to direct the Company to make the payments required hereunder. 7.6 Compensation and Insurance. Members of the Committee shall serve without compensation for their services as such. Expenses incurred by members of the Committee in the -20- 25 performance of their duties as herein provided, and the compensation and expenses of persons retained or employed by the Committee for services rendered in connection with the Plan shall, upon approval by the Committee, be paid or reimbursed by the Company. The Company shall indemnify and/or maintain and keep in force insurance in such form and amount as may be necessary in order to protect the members of the Committee, their delegates and appointees (other than persons who are independent of the Company and are rendering services to the Committee or to or with respect to the Plan) from any claim, loss, damage, liability, and expense (including costs and attorneys' fees) arising from their acts or failures to act with respect to the Plan, except where such actions or failures to act involve willful misconduct or gross negligence. 7.7 Removal and Resignation. Any member of the Committee may resign and the Company may remove any member of the Committee in accordance with the procedures established by the CBC Charter. The Committee shall remain fully operative pending the filling of any vacancies, the remaining Committee members having full authority to administer the Plan. 7.8 Claims Procedure. The right of any, Participant or Beneficiary to receive a benefit hereunder and the amount of such benefit shall be determined in accordance with the procedures for determination of benefit claims established and maintained by the Committee in compliance with the requirements of Section 503 of ERISA; which separate procedures, entitled -21- 26 Procedures for Determination of Benefit Claims, are incorporated herein by this reference. ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN Subject to the limitations of Article V, the Human Resources Committee of the Board may at any time amend or terminate the Plan in whole or in part. Except as provided below or in Article V, the Company is not obligated to continue any benefit, any insurance or any insurance policy after such action. Written notice of any amendment or termination of the Plan shall be given to each affected Participant in the Plan. ARTICLE IX MISCELLANEOUS 9.1 Restriction on Assignment. The Participant may assign all or any part of his right, title, claim, interest, benefit and all other incidents of ownership which he may have in any life insurance coverage under this Plan, provided that any such assignment shall be subject to the terms of the Plan. 9.2 Tax Liability and Withholding. A Participant may have income for federal, state or local income tax purposes by reason of the Economic Benefit of his insurance coverage provided by the Company under this Plan, both while he is employed with the Company and after his Retirement or termination of employment. The Participant and any Beneficiary shall make -22- 27 appropriate arrangements with the Company for the satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employee tax requirements applicable to the provision of benefits under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. 9.3 ERISA Plan. This Plan is covered by Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") as a welfare benefit plan. The Company is the "named fiduciary" of the Plan for purposes of Section 402 (a) (2) of ERISA. 9.4 Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Employee any right to be retained in employment with the Company. 9.5 Protective Provisions. Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may deem necessary and taking such other relevant action as may be requested by the Company. If a Participant refuses so to cooperate, the Company shall have no further obligation to the Participant or his Beneficiary under the Plan. If a Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder to such Participant's Beneficiary, provided, that in the Company's sole discretion, benefits may be payable in an amount reduced to compensate the Company for any loss, cost, damage or expense -23- 28 suffered or incurred by the Company as a result in any way of any such action, misstatement or nondisclosure. 9.6 Gender, Singular & Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity or the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 9.7 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 9.8 Validity. In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provisions of this Plan, and this Plan shall be deemed to be modified to the least extent possible to make it valid and enforceable in its entirety. 9.9 Notices and Elections. Any notice or election required or permitted to be given to the Company or the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Human Resources Department of the Company. Such notice or election shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 9.10 Applicable Law. This Plan shall be construed, regulated and administered in accordance with the laws of the -24- 29 Commonwealth of Pennsylvania, except insofar as state law is preempted by ERISA. 9.11 Waiver of Breach. The waiver by the Company of any provision of this Plan shall not operate or be construed as a waiver of any subsequent breach by the Participant. 9.12 Benefit. The rights and obligations of the Company under this Plan shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. -25- EX-10.13 8 MELLON BANK 10-K405 1 Exhibit 10.13 MELLON BANK EXECUTIVE LIFE INSURANCE PLAN Effective January 1, 1993 2 TABLE OF CONTENTS PAGE PREAMBLE 1 ARTICLE I 1 DEFINITIONS 1 1.1 Affiliates 1 1.2 Base Salary 1 1.3 Beneficiary 1 1.4 Board 2 1.5 Change in Control 2 1.6 Code 2 1.7 Committee 2 1.8 Company 2 1.9 Coverage Adjustment Date 2 1.10 Disability 2 1.11 Economic Benefit 2 1.12 Effective Date 2 1.13 Eligible Employee 2 1.14 Employee 3 1.15 Human Resources Committee 3 1.16 Insurance Company 3 1.17 Lump Sum Payment Option 3 1.18 Net Cumulative Premiums 3 1.19 Participant 3 1.20 Participation Agreement 3 1.21 Plan 4 1.22 Plan Year 4 1.23 Policy 4 1.24 Retirement 4 1.25 Subsidiary 4 1.26 Survivor Income Option 4 1.27 Years of Service 4 ARTICLE II 4 PARTICIPATION 4 2.1 Participation 4 2.2 Insurability 5 2.3 Commencement of Coverage 5 2.4 Increases in Coverage 5 2.5 Declining Coverage 6 2.6 Relation to Other Plans 6 ARTICLE III 6 LIFE INSURANCE COVERAGE 6 3.1 Amount of Insurance 6 3.2 Disability 7 3.3 Insurance Contract 7 (i) 3 3.4 Continuation or Split of Policy after Retirement 8 3.5 Assignment 8 3.6 Payment of Premiums and Contributions 9 3.7 Forms of Death Benefit 10 3.8 Lump Sum Payment Option 11 3.9 Survivor Income Option 11 ARTICLE IV 13 OPTION TO PURCHASE INSURANCE POLICY ON TERMINATION OF EMPLOYMENT 13 ARTICLE V 14 OPTION TO PURCHASE INSURANCE POLICY IN CERTAIN EVENTS 14 5.1 Option to Purchase Policy 14 5.2 Elimination of Coverage 14 5.3 Change in Control 15 ARTICLE VI 16 BENEFICIARY DESIGNATION 16 6.1 Designation of Beneficiary 16 6.2 Failure to Designate Beneficiary 16 ARTICLE VII 17 ADMINISTRATION 17 7.1 Administrator 17 7.2 Powers and Duties 17 7.3 Procedures 19 7.4 Establishment of Rules 20 7.5 Limitation of Liability 20 7.6 Compensation and Insurance 21 7.7 Removal and Resignation 21 7.8 Claims Procedure 22 ARTICLE VIII 22 AMENDMENT AND TERMINATION OF PLAN 22 ARTICLE IX 23 MISCELLANEOUS 23 9.1 Restriction on Assignment 23 9.2 Unsecured General Creditor 23 9.3 Tax Liability and Withholding 24 9.4 ERISA Plan 24 9.5 Employment Not Guaranteed 25 9.6 Protective Provisions 25 (ii) 4 9.7 Gender, Singular & Plural 25 9.8 Captions 25 9.9 Validity 26 9.10 Notices and Elections 26 9.11 Notice to Insurance Company 26 9.12 Applicable Law 26 9.13 Waiver of Breach 27 9.14 Benefit 27 (iii) 5 MELLON BANK EXECUTIVE LIFE INSURANCE PLAN PREAMBLE The purpose of this Mellon Bank Executive Life Insurance Plan (the "Plan") is to provide life insurance coverage for eligible key executive employees of Mellon Bank, N.A. (the Company) and its Affiliates. The Plan will be effective as of January 1, 1993. ARTICLE I DEFINITIONS When used herein, the following words shall have the following meanings unless the content clearly indicates otherwise: 1.1 Affiliates. "Affiliates" means Mellon Bank Corporation and its Subsidiaries. 1.2 Base Salary. "Base Salary" means (i) an active Employee's annual base salary as of the last Coverage Adjustment Date preceding his death and (ii) a retired Employee's annual base salary immediately preceding his termination of employment with the Company or its Affiliates. Annual base salary excludes all bonuses, incentive and supplemental compensation and other payments and benefits, except fixed base salary. 1.3 Beneficiary. "Beneficiary" means the person or persons designated as such in accordance with Article VI. 6 1.4 Board. "Board" means the Board of Directors of Mellon Bank Corporation or any committee thereof acting within the scope of its authority. 1.5 Change in Control. "Change in Control" shall have the meaning set forth in Section 5.3. 1.6 Code. "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. 1.7 Committee. "Committee" means the Corporate Benefits Committee of Mellon Bank Corporation appointed to administer the Plan pursuant to Article VII. 1.8 Company. "Company" means Mellon Bank, N.A. and, whenever applicable, its Affiliates. 1.9 Coverage Adjustment Date. "Coverage Adjustment Date" means the date during each year, selected by the Committee from time to time in its discretion, on which changes or increases in coverage will take effect. 1.10 Disability. "Disability" means a condition that qualifies as a disability under the Mellon Bank Group Long-Term Disability Plan. 1.11 Economic Benefit. "Economic Benefit" means the value of the economic benefit of life insurance coverage under this Plan for income tax purposes, determined based on revenue rulings issued by the Internal Revenue Service and other applicable authorities. 1.12 Effective Date. "Effective Date" means January 1, 1993. 1.13 Eligible Employee. "Eligible Employee" means an Employee who is a Senior Vice President or above and is -2- 7 designated by the Human Resources Committee to participate in the Plan. 1.14 Employee. "Employee" means any person employed by the Company or its Affiliates on a regular full-time salaried basis, including officers of the Company. 1.15 Human Resources Committee. "Human Resources Committee" means the Human Resources Committee of the Board. 1.16 Insurance Company. "Insurance Company" means an insurance company selected by the Company to provide coverage for Participants pursuant to the terms of the Plan. 1.17 Lump Sum Payment Option. "Lump Sum Payment Option" means the lump sum payment option for death benefits under this Plan which is described in Section 3.8. 1.18 Net Cumulative Premiums. "Net Cumulative Premiums" means premiums paid by the Company on a Policy net of (i) reimbursements or contributions to premiums on the Policy made by a Participant and (ii) any withdrawals or loans from cash value of the Policy made to the Company. 1.19 Participant. "Participant" means an Eligible Employee who has completed the underwriting requirements of the Insurance Company and who is notified by the Company that he is participating in the Plan in accordance with the provisions of Article II. 1.20 Participation Agreement. "Participation Agreement" means a written agreement between the Company and the Participant under which the Participant agrees to participate in the Plan pursuant to Section 2.1. -3- 8 1.21 Plan. "Plan" means this Executive Life Insurance Plan as set forth in this document and as the same may be amended, administered or interpreted from time to time. 1.22 Plan Year. "Plan Year" means the calendar year. 1.23 Policy. "Policy" means a life insurance policy providing coverage under this Plan. 1.24 Retirement "Retirement" means termination of a Participant's employment with the Company or its Affiliates for reasons other than death or Disability after the Participant has either (i) attained age fifty-five (55) and completed at least five (5) Years of Service or (ii) attained age sixty-five (65) and completed at least one (1) Year of Service. 1.25 Subsidiary. "Subsidiary" means a corporation the majority of the outstanding stock of which is owned directly or indirectly by Mellon Bank Corporation. 1.26 Survivor Income Option. "Survivor Income Option" means the survivor income option for death benefits under this Plan which is described in Section 3.9. 1.27 Years of Service. "Years of Service" means a Participant's actual years of service, unless otherwise determined by the Human Resources Committee. ARTICLE II PARTICIPATION 2.1 Participation. Any Eligible Employee may enroll in the Plan by completing a Participation Agreement, the underwriting requirements of the Insurance Company and any other enrollment steps required by the Company for coverage to begin. -4- 9 An Eligible Employee shall become a Participant in the Plan when he is notified in writing that his participation has been approved by the Company. During a leave of absence, coverage will remain in effect for a maximum of ninety (90) days. 2.2 Insurability. Eligible Employees are not automatically entitled to all insurance coverage offered under the Plan. Each Eligible Employee will be covered up to the amount of guarantee issue determined by the Insurance Company, but must satisfy the Insurance Company's requirements for obtaining additional insurance before he becomes covered for additional amounts under the Plan. 2.3 Commencement of Coverage. Subject to the limitations of Sections 2.1 and 2.2, (i) an Employee who is an Eligible Employee on January 1, 1993 will be covered under the Plan as of January 1, 1993, and (ii) any other Eligible Employee will be covered under the Plan when coverage is approved by the Insurance Company. 2.4 Increases in Coverage. When a Participant's Base Salary is increased, the amount of his life insurance coverage under this Plan will increase on the next Coverage Adjustment Date, except as provided in this Section 2.4. Any increase in coverage will not take effect until such additional coverage is approved by the Insurance Company, and a Participant may be required to satisfy the Insurance Company's requirements for obtaining additional insurance before he becomes covered for an additional amount of life insurance coverage under the Plan. A Participant's coverage under the Plan will be limited to the coverage issued by the Insurance Company. -5- 10 2.5 Declining Coverage. An Eligible Employee may decline coverage under the Plan. However, any such Eligible Employee will be required to satisfy the insurance company's requirements for obtaining insurance before he may become covered under the Plan at a later date. 2.6 Relation to Other Plans. Eligible Employees shall be limited to non-contributory life insurance coverage of $50,000 under the Company's group term life insurance plan. ARTICLE III LIFE INSURANCE COVERAGE 3.1 Amount of Insurance. The amount of life insurance coverage which will be payable to the Beneficiary designated by the Participant will be determined based on the employment status of the Participant with the Company at the time of his death. In each case, there will be subtracted fifty thousand dollars ($50,000) which is payable under the group term life insurance plan covering the Participant maintained by the Company. Subject to the foregoing adjustment, the amounts of life insurance coverage under this Plan are as follows: (a) During Employment. While employed with the Company, a Participant will have life insurance coverage equal to two (2) times his Base Salary. (b) After Retirement. After Retirement from the Company, a Participant will have life insurance coverage equal to one (1) times his final Base Salary. -6- 11 (c) Limitation on Amount of Coverage. The amount of life insurance coverage under the Plan will be limited to the amount of coverage issued by the Insurance Company on the Participant under this Plan. 3.2 Disability. If a Participant suffers a Disability, the Participant's life insurance coverage will be continued by the Company during the period of Disability until the Participant reaches age sixty-five (65) or begins to receive benefits under the Mellon Bank Retirement Plan, whichever is sooner. All premiums for this coverage will be paid by the Company. When a disabled Participant reaches age sixty-five (65) or begins to receive benefits under the Mellon Bank Retirement Plan, whichever is sooner, the Participant will continue to have life insurance coverage equal to one (1) times his final Base Salary on the date of his Disability, as if he had retired from employment with the Company. 3.3 Insurance Contract. To provide the insurance coverage under the Plan, the Company shall acquire one or more insurance policies ("Policies") on the life of each Participant. Except as otherwise specifically provided, the Company will be the owner and hold all the incidents of ownership in these Policies, including the rights to borrow and make withdrawals from any Policies, and the entire interest in the cash value with respect to these Policies shall belong to the Company. The Company may withdraw cash value from a Policy up to the Net Cumulative Premiums paid by the Company on the Policy at or after a Participant's Retirement and may withdraw all cash value from a -7- 12 Policy if a Participant terminates employment with the Company before Retirement. The Participant may specify in writing to the Company the Beneficiary or Beneficiaries for his life insurance coverage under this Plan. Upon receipt of a written request from the Participant, the Company will immediately take such action as shall be necessary to implement such Beneficiary designation. Any death benefits under Policies on the life of the Participant owned by the Company that exceed the amount payable to the Participant's Beneficiary under this Plan shall be payable to the Company. 3.4 Continuation or Split of Policy after Retirement. At its option, the Company may (a) continue the life insurance coverage for the Participant after his Retirement in the same form and subject to the same terms and provisions of this Plan as if he remained employed with the Company, except that the total amount of coverage for the Participant shall not exceed the amount specified in Section 3.1(b), or (b) arrange to split the Policies insuring the Participant upon Retirement so that the Company and Participant receive one or more separate life insurance policies following the Participant's Retirement. In the event the Company elects the latter, the Participant shall receive a life insurance policy on his life with a death benefit equal to the amount specified in Section 3.1(b). 3.5 Assignment. A Participant may assign, revocably or irrevocably, to one or more individuals or trustees all or any part of his right, title, claim, interest, benefit and all other incidents of ownership which he may have in any Policies -8- 13 providing his life insurance coverage under this Plan, provided that any such assignment shall be subject to Section 9.1 and the other terms of the Plan and shall not apply to any rights to survivor income payments. Such assignee shall then have all rights and obligations which have been assigned and otherwise are the Participant's under this Plan. In the event that there has been such an assignment, the term Employee or Participant shall mean the Employee's or Participant's assignee (or any subsequent assignee) as the context requires, in connection with ownership, actions, elections, or other events concerning life insurance coverage on the Participant. 3.6 Payment of Premiums and Contributions. (a) During Employment. All premiums for life insurance coverage under this Plan while a Participant is employed with the Company will be paid by the Company. The Participant will be required each year to reimburse to the Company an amount equivalent to the Economic Benefit of this coverage if he elects the Lump Sum Payment Option for his death benefit. (b) After Retirement. All premiums for life insurance coverage under this Plan for eligible retired Participants will be paid by the Company. The Participant will be required each year to include in income for income tax purposes or to reimburse to the Company an amount equivalent to the Economic Benefit of this coverage if he elects the Lump Sum Payment Option for his death benefit, or otherwise will realize taxable income if the Company distributes a life insurance policy to him pursuant to Section 3.4(b). -9- 14 3.7 Forms of Death Benefit. During employment and at Retirement, a Participant may elect either a Lump Sum Payment Option (as described in Section 3.8) or Survivor Income Option (as described in Section 3.9) for payment of his life insurance coverage under this Plan. The Participant shall elect the Lump Sum Payment Option or Survivor Income Option for his pre-retirement coverage when he enrolls in the Plan, provided no election of the Survivor Income Option shall be effective to the extent the Participant has previously made an irrevocable, absolute assignment of all incidents of ownership in his pre-retirement life insurance coverage under the Plan. The Participant's initial election (or any subsequent election made pursuant to this Section) shall continue to be effective for all subsequent calendar years, unless the Participant files a further election prior to the beginning of any subsequent calendar year. Any new election shall become effective for the calendar year next following the calendar year in which the new election is filed with the Company. All elections of a Lump Sum Payment Option or Survivor Income Option for pre-retirement coverage shall terminate upon the Participant's Retirement. Unless the Company, at its option, determines to provide a Participant's life insurance coverage after Retirement by splitting the Policies on the Participant's life and distributing a life insurance policy to the Participant, as described in Section 3.4(b), the Participant shall elect the Lump Sum Payment Option or Survivor Income Option for his post-retirement coverage at any time prior to the date of his -10- 15 Retirement, provided no election of the Survivor Income Option shall be effective to the extent the Participant has previously made an irrevocable, absolute assignment of all incidents of ownership in his post-retirement life insurance coverage under the Plan. The Participant's election shall become irrevocable upon his Retirement and shall continue to be effective for all subsequent years. 3.8 Lump Sum Payment Option. If a Participant elects the Lump Sum Payment Option and dies while such election is in effect, the Company will provide all death benefit payable under Section 3.1 through a lump sum death benefit paid directly from the life insurance company to the Participant's Beneficiary under an endorsement split dollar life insurance program. The Company shall execute an endorsement to the Policy endorsing to the Participant that portion of the death benefit to which the Participant is entitled under Section 3.1. The Participant's interest in the Policy shall be subject to the terms and conditions of the Plan and the endorsement. 3.9 Survivor Income Option. If a Participant elects the Survivor Income Option and dies while such election is in effect, the Company will make taxable annual payments to the Participant's Beneficiary in accordance with this Section 3.9. In such event, no amount shall be payable to the Participant's Beneficiary from the proceeds of the Policies under the Lump Sum Payment Option. In lieu thereof, the Company shall make annual taxable payments to the Participant's Beneficiary designated in accordance with Article VI for ten (10) years. Such payments shall have a net present value, using a discount rate established -11- 16 by the Committee from time to time, equal to the applicable amount described in Section 3.1 as of the date of the Participant's death and shall be increased by the value of the Company's federal and state income tax benefit. The value of the Company's tax benefit shall be determined in such manner as the Committee may select, from time to time, in its complete and sole discretion. At its option, the Company may, upon the Participant's death or at any time thereafter, pay any remaining payments under the Survivor Income Option in a single taxable lump sum payment. At any time after a Change in Control which occurs after a Beneficiary has begun to receive payments, the Beneficiary may elect to receive an immediate taxable lump sum payment of the present value (as determined by the Committee) of his remaining payments under the Survivor Income Option, reduced by a penalty, which shall be forfeited to the Company, equal to six percent (6%) of such remaining payments, provided this penalty may be adjusted from time to time by the Committee in its discretion. An election of a Survivor Income Option will terminate all the Participant's and the Company's rights and obligations under the Lump Sum Payment Option, while such election remains in effect. -12- 17 ARTICLE IV OPTION TO PURCHASE INSURANCE POLICY ON TERMINATION OF EMPLOYMENT If a Participant terminates employment with the Company before Retirement, but after five (5) Years of Service, the Participant may elect, in writing received by the Company not later than sixty (60) days after his termination of employment, to purchase the Policy on his life (or portion thereof with an aggregate death benefit equal to all or part of the insurance coverage in effect for him under this Plan immediately prior to his termination of employment) for an amount equal to the greater of (i) the cash value of the insurance policy transferred to the Participant or (ii) the Net Cumulative Premiums incurred as a result of providing the Participant's coverage under the Plan. A Participant who purchases an insurance policy will thereafter be required to pay all future premiums on the insurance policy. A Participant's life insurance coverage under this Plan will remain in effect during this sixty (60) day period. If the Participant does not elect to purchase the Company's interest in the Policy, all incidents of ownership of the Policy (if any) held by the Participant shall be transferred to the Company. At the time the Participant purchases the Company's interests in the Policy, or the Participant's incidents of ownership are transferred to the Company, the Company shall have no further legal or equitable obligations of any kind to the Participant under this Plan. If a Participant's employment with the Company terminates before Retirement, and with less than five (5) Years -13- 18 of Service, the Participant's coverage under this Plan shall cease, and the Company shall have no further legal or equitable obligations of any kind to the Participant under this Plan. ARTICLE V OPTION TO PURCHASE INSURANCE POLICY IN CERTAIN EVENTS 5.1 Option to Purchase Policy. The Participant may elect, in writing received by the Company not later than sixty (60) days after the Participant receives written notice from the Company of an event described in Section 5.2, to purchase from the Company the Policy (or portion thereof) providing the amount of his life insurance coverage then in effect under this Plan for an amount equal to the greater of (i) the cash value of the insurance policy transferred to the Participant or (ii) the Company's Net Cumulative Premiums incurred as a result of providing the Participant's coverage under the Plan. A Participant who purchases an insurance policy will cease to be covered under this Plan and will thereafter be required to pay all future premiums on the insurance policy. 5.2 Elimination of Coverage. Any Participant whose coverage is eliminated pursuant to Article VIII of this Plan (without being replaced with an equivalent amount of coverage under another plan of the Company) shall have the option pursuant to Section 5.1 to purchase the Policy (or portion thereof) providing the amount of his life insurance coverage in effect under this Plan immediately prior to the elimination of such coverage. -14- 19 5.3 Change in Control. For purposes of this Plan the term "Change in Control" shall mean: (a) the occurrence with respect to Mellon Bank Corporation ("MBC") of a "control transaction," as such term is defined in Section 2542 of the Pennsylvania Business Corporation Law of 1988 as of August 15, 1989; or (b) approval by the stockholders of MBC of (i) any merger or consolidation of MBC in which the holders of voting stock of MBC immediately before the merger or consolidation will not own fifty percent (50%) or more of the voting shares of the continuing or surviving corporation immediately after such merger or consolidation, or (ii) any sale, lease or exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of MBC; or (c) a change of twenty-five percent (25%) (rounded to the next whole person) in the membership of the Board of Directors of MBC within a twelve (12) month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of eighty-five percent (85%) (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the twelve (12) month period. Notwithstanding any other provision of this Plan, without the written consent of the Participant (or Beneficiary of a deceased Participant) affected thereby, the Company may not amend or terminate this Plan, except to comply with legal requirements: -15- 20 (a) for a period of twenty-four (24) months following a Change in Control; or (b) at any time thereafter, in any manner which affects any Participant (or Beneficiary of a deceased Participant) who receives payments of benefits under this Plan or has a termination of employment for any reason at any time during the period of twenty-four (24) months following the Change in Control. ARTICLE VI BENEFICIARY DESIGNATION 6.1 Designation of Beneficiary. Each Participant (or his assignee in the case of an assignment of the Participant's life insurance coverage pursuant to Section 3.5 of this Plan) shall have the right to designate a Beneficiary or Beneficiaries to whom payment of the Participant's death benefit under this Plan shall be made in the event of the Participant's death. Such designation shall be made on a form prescribed by and delivered to the Company. Except where such designation is irrevocable, the Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. 6.2 Failure to Designate Beneficiary. If a Participant shall fail to designate a Beneficiary before his demise, or if no designated Beneficiary survives the Participant, -16- 21 the Committee shall direct the Company to make payment under this Plan to the executor or administrator for the Participant's estate. ARTICLE VII ADMINISTRATION 7.1 Administrator. Except as hereinafter provided, the Committee shall be responsible for the administrative responsibilities hereinafter described with respect to the Plan. Whenever any action is required or permitted to be taken in the administration of the Plan, such action shall be taken by the Committee unless the Committee's power is expressly limited herein or by operation of law. The Committee shall be the Plan "Administrator" (as such term is defined in Section 3(16)(A) of ERISA). The Committee may delegate its duties and responsibilities as it, in its sole discretion, deems necessary or appropriate to the execution of such duties and responsibilities. The Committee as a whole or any of its members may serve in more than one capacity with respect to the Plan. 7.2 Powers and Duties. The Committee, or its delegates, shall maintain and keep (or cause to be maintained and kept) such records as are necessary for the efficient operation of the Plan or as may be required by any applicable law, regulation, or ruling and shall provide for the preparation and filing of such forms, reports, information, and documents as may be required to be filed with any governmental agency or -17- 22 department and with the Plan's Participants and/or other Beneficiaries. Except to the extent expressly reserved to the Company or the Board, the Committee shall have all powers necessary to carry out the administrative provisions of the Plan and to satisfy the requirements of any applicable law or laws. These powers shall include, by way of illustration and not limitation, the exclusive powers and discretionary authority necessary to: (a) construe and interpret the Plan; decide all questions of eligibility; decide all questions of fact relating to claims for benefits; and determine the amount, time, manner, method, and mode of payment of any benefits hereunder; (b) direct the Company and/or the trustee of any trust established at the discretion of the Company to provide for the payment of benefits under the Plan, concerning the amount, time, manner, method, and mode of payment of any benefits hereunder; (c) prescribe procedures to be followed and forms to be used by Participants and/or other persons in filing applications or elections; (d) prepare and distribute, in such manner as may be required by law or as the Committee deems appropriate, information explaining the Plan; provided, however, that no such explanation shall contravene the terms of this Plan or increase the rights of any Participant or Beneficiary or the liabilities of the Company; -18- 23 (e) require from the Company and Participants such information as shall be necessary for the proper administration of the Plan; (f) appoint and retain individuals to assist in the administration and construction of the Plan, including such legal, clerical, accounting, and actuarial services as it may require or as may be required by any applicable law or laws; and (g) perform all functions otherwise imposed upon a plan administrator by ERISA which are not expressly reserved to the Company or the Board, including, but not limited to, those supplemental duties and responsibilities described in the "Mellon Bank Corporation Corporate Benefits Committee Charter and Summary of Operations" approved by the Board on September 17, 1991 (the "CBC" Charter"). Without intending to limit the generality of the foregoing, the Committee shall have the power to amend the Plan, in whole or in part, in order to comply with applicable law; provided, however, that no such amendment may increase the duties and obligations of the Company without its consent. Except as provided in the preceding sentence or unless directed by the Human Resources Committee of the Board or otherwise required by law, the Committee shall have no power to adopt, amend, or terminate the Plan, said powers being exclusively reserved to the Human Resources Committee of the Board. 7.3 Procedures. The Committee shall be organized and conduct its business with respect to the Plan in accordance with the organizational and procedural rules set forth in the CBC Charter. -19- 24 Notwithstanding the foregoing, if any member of the Committee shall be a Participant hereunder, then in any matters affecting any member of the Committee in his individual capacity as a Participant hereunder, separate and apart from his status as a member of the group of Participants, such interested member shall have no authority to vote in the determination of such matters as a member of the Committee, but the Committee shall determine such matter as if said interested member were not a member of the Committee; provided, however, that this shall not be deemed to take from said interested member any of his rights hereunder as a Participant. If the remaining members of the Committee should be unable to agree on any matter so affecting an interested member because of an equal division of voting, the Human Resources Committee of the Board shall appoint a temporary member of the Committee in order to create an odd number of voting members. 7.4 Establishment of Rules. The Committee shall have specific authority in its sole discretion to construe and interpret the terms of the Plan related to its powers and duties, and to the extent that the terms of the Plan are incomplete, the Committee shall have authority to establish such rules or regulations related to its powers and duties as it may deem necessary and proper to carry out the intent of the Company as to the purposes of the Plan. 7.5 Limitation of Liability. The Board, the members of the Committee, and any officer, employee, or agent of the Company shall not incur any liability individually or on behalf of any other individuals or on behalf of the Company for any act, -20- 25 or failure to act, made in good faith in relation to the Plan. No bond or other security shall be required of any such individual solely on account of any individual's power to direct the Company to make the payments required hereunder. 7.6 Compensation and Insurance. Members of the Committee shall serve without compensation for their services as such. Expenses incurred by members of the Committee in the performance of their duties as herein provided, and the compensation and expenses of persons retained or employed by the Committee for services rendered in connection with the Plan shall, upon approval by the Committee, be paid or reimbursed by the Company. The Company shall indemnify and/or maintain and keep in force insurance in such form and amount as may be necessary in order to protect the members of the Committee, their delegates and appointees (other than persons who are independent of the Company and are rendering services to the Committee or to or with respect to the Plan) from any claim, loss, damage, liability, and expense (including costs and attorneys' fees) arising from their acts or failures to act with respect to the Plan, except where such actions or failures to act involve willful misconduct or gross negligence. 7.7 Removal and Resignation. Any member of the Committee may resign and the Company may remove any member of the Committee in accordance with the procedures established by the CBC Charter. The Committee shall remain fully operative pending the filling of any vacancies, the remaining Committee members having full authority to administer the Plan. -21- 26 7.8 Claims Procedure. The right of any Participant or Beneficiary to receive a benefit hereunder and the amount of such benefit shall be determined in accordance with the procedures for determination of benefit claims established and maintained by the Committee in compliance with the requirements of Section 503 of ERISA; which separate procedures, entitled Procedures for Determination of Benefit Claims, are incorporated herein by this reference. ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN Subject to the limitations of Article V, the Human Resources Committee of the Board may at any time amend or terminate the Plan in whole or in part. Except as provided below or in Article V, the Company is not obligated to continue any benefit, any insurance or any insurance policy after such action. Written notice of any amendment or termination of the Plan shall be given to each affected Participant in the Plan. If this Plan is terminated by the Company after the commencement of any benefit payments to the Beneficiary of a deceased Participant, the Company shall be obligated to continue payments to such Beneficiary in accordance with the terms of this Plan as in existence immediately prior to termination of this Plan. -22- 27 ARTICLE IX MISCELLANEOUS 9.1 Restriction on Assignment. The Participant may assign all or any part of his right, title, claim, interest, benefit and all other incidents of ownership which he may have in any life insurance coverage under this Plan, provided that any such assignment shall be subject to the terms of the Plan. Neither the Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable pursuant to any election of a Survivor Income Option under Section 3.9 of this Plan, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable pursuant to an election of a Survivor Income Option shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other person, nor be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 9.2 Unsecured General Creditor. The provisions of this Section 9.2 shall apply to all benefits which are payable under the Survivor Income Option pursuant to Section 3.9 of this Plan. With respect to all benefits payable under the Survivor Income Option, the Participant and his Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interests, or claims in any property or assets of the Company, -23- 28 nor shall they be beneficiaries of, or have any rights, interests or claims in any life insurance policies, annuity contract, or the proceeds therefrom owned or which may be acquired by the Company ("Policies"). Such Policies or other assets of the Company shall not be held under any trust for the benefit of Participants, their Beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company's assets and Policies shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligation under the Survivor Income Option of this Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. 9.3 Tax Liability and Withholding. A Participant may have income for federal, state or local income tax purposes by reason of the Economic Benefit of his insurance coverage provided by the Company under this Plan, both while he is employed with the Company and after his Retirement or termination of employment. The Participant and any Beneficiary shall make appropriate arrangements with the Company for the satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employee tax requirements applicable to the provision of benefits under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. 9.4 ERISA Plan. This Plan is covered by Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") as -24- 29 a welfare benefit plan. The Company is the "named fiduciary" of the Plan for purposes of Section 402(a)(2) of ERISA. 9.5 Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Employee any right to be retained in employment with the Company. 9.6 Protective Provisions. Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may deem necessary and taking such other relevant action as may be requested by the Company. If a Participant refuses so to cooperate, the Company shall have no further obligation to the Participant or his Beneficiary under the Plan. If a Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder to such Participant's Beneficiary, provided, that in the Company's sole discretion, benefits may be payable in an amount reduced to compensate the Company for any loss, cost, damage or expense suffered or incurred by the Company as a result in any way of any such action, misstatement or nondisclosure. 9.7 Gender, Singular & Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity or the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 9.8 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall -25- 30 not control or affect the meaning or construction of any of its provisions. 9.9 Validity. In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provisions of this Plan, and this Plan shall be deemed to be modified to the least extent possible to make it valid and enforceable in its entirety. 9.10 Notices and Elections. Any notice or election required or permitted to be given to the Company or the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Human Resources Department of the Company. Such notice or election shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 9.11 Notice to Insurance Company. The Company shall be responsible for notifying the life insurance company which issues any Policy or Policies under this Plan of any changes in the ownership rights and interests of the Participant and the Company and of any changes in the Beneficiaries to receive death benefits under the Plan, and the life insurance company shall be entitled to rely upon such notification received from the Company. 9.12 Applicable Law. This Plan shall be construed, regulated and administered in accordance with the laws of the -26- 31 Commonwealth of Pennsylvania, except insofar as state law is preempted by ERISA. 9.13 Waiver of Breach. The waiver by the Company of any provision of this Plan shall not operate or be construed as a waiver of any subsequent breach by the Participant. 9.14 Benefit. The rights and obligations of the Company under this plan shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. -27- EX-10.14 9 MELLON BANK 10-K405 1 Exhibit 10.14 MELLON BANK SENIOR EXECUTIVE LIFE INSURANCE PLAN Effective January 1, 1993 2 TABLE OF CONTENTS PAGE PREAMBLE 1 ARTICLE I 1 DEFINITIONS 1 1.1 Affiliates 1 1.2 Base Salary 1 1.3 Beneficiary 1 1.4 Benefit Commencement Date 2 1.5 Board 2 1.6 Change in Control 2 1.7 Code 2 1.8 Committee 2 1.9 Company 2 1.10 Coverage Adjustment Date 2 1.11 Disability 2 1.12 Economic Benefit 3 1.13 Effective Date 3 1.14 Eligible Employee 3 1.15 Employee 3 1.16 Human Resources Committee 3 1.17 Insurance Company 3 1.18 Net Cumulative Premiums 3 1.19 Participant 3 1.20 Participation Agreement 4 1.21 Plan 4 1.22 Plan Year 4 1.23 Policy 4 1.24 Retirement 4 1.25 Subsidiary 4 1.26 Years of Service 4 ARTICLE II 5 PARTICIPATION 5 2.1 Participation 5 2.2 Insurability 5 2.3 Commencement of Coverage 5 2.4 Increases in Coverage 6 2.5 Declining Coverage 6 2.6 Relation to Other Plans 6 ARTICLE III 6 LIFE INSURANCE COVERAGE 6 3.1 Amount of Insurance 6 3.2 Disability 7 3.3 Insurance Contract 8 3.4 Interests in Cash Value 9 (i) 3 3.5 Policy Withdrawals and Loans 12 3.6 Surrender or Cancellation of Policy 12 3.7 Continuation of Policy after Retirement or Termination of Employment 13 3.8 No Assignment 13 3.9 Payment of Premiums and Contributions 14 3.10 Form of Death Benefit 14 ARTICLE IV 14 OPTION TO RETAIN INSURANCE POLICY ON TERMINATION OF EMPLOYMENT 14 ARTICLE V 15 OPTION TO RETAIN INSURANCE POLICY IN CERTAIN EVENTS 15 5.1 Option to Retain Policy 15 5.2 Elimination of Coverage 16 5.3 Change in Control 16 ARTICLE VI 17 BENEFICIARY DESIGNATION 17 6.1 Designation of Beneficiary 17 6.2 Failure to Designate Beneficiary 17 ARTICLE VII 18 ADMINISTRATION 18 7.1 Administrator 18 7.2 Powers and Duties 19 7.3 Procedures 21 7.4 Establishment of Rules 22 7.5 Limitation of Liability 22 7.6 Compensation and Insurance 22 7.7 Removal and Resignation 23 7.8 Claims Procedure 23 ARTICLE VIII 24 AMENDMENT AND TERMINATION OF PLAN 24 ARTICLE IX 24 MISCELLANEOUS 24 9.1 Restriction on Assignment 24 9.2 Tax Liability and Withholding 25 9.3 ERISA Plan 25 9.4 Employment Not Guaranteed 25 9.5 Protective Provisions 25 (ii) 4 9.6 Gender, Singular & Plural 26 9.7 Captions 26 9.8 Validity 26 9.9 Notices and Elections 26 9.10 Applicable Law 27 9.11 Waiver of Breach 27 9.12 Benefit 27 (iii) 5 MELLON BANK SENIOR EXECUTIVE LIFE INSURANCE PLAN PREAMBLE The purpose of this Mellon Bank Senior Executive Life Insurance Plan (the "Plan") is to provide life insurance coverage for eligible senior executive employees of Mellon Bank, N.A. (the Company) and its Affiliates. The Plan will be effective as of January 1, 1993. ARTICLE I DEFINITIONS When used herein, the following words shall have the following meanings unless the content clearly indicates otherwise : 1.1 Affiliates. "Affiliates" means Mellon Bank Corporation and its Subsidiaries. 1.2 Base Salary. "Base Salary" means (i) an active Employee's annual base salary as of the last Coverage Adjustment Date preceding his death and (ii) a retired Employee's annual base salary immediately preceding his termination of employment with the Company or its Affiliates. Annual base salary excludes all bonuses, incentive and supplemental compensation and other payments and benefits, except fixed base salary. 1.3 Beneficiary. "Beneficiary" means the person or persons designated as such in accordance with Article VI. 6 1.4 Benefit Commencement Date. "Benefit Commencement Date" means the date on which payment of a Participant's retirement benefits have commenced under all of the following plans or agreements of the Company which apply to the Participant: (i) Mellon Bank Retirement Plan, (ii) Mellon Bank IRC Section 401(a)(17) Plan, (iii) Mellon Bank Benefit Restoration Plan (which provides benefits in excess of the limits under Section 415 of the Code), (iv) employment agreement, and (v) any other non-qualified retirement benefit plans. 1.5 Board. "Board" means the Board of Directors of Mellon Bank Corporation or any committee thereof acting within the scope of its authority. 1.6 Change in Control. "Change in Control" shall have the meaning set forth in Section 5.3. 1.7 Code. "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. 1.8 Committee. "Committee" means the Corporate Benefits Committee of Mellon Bank Corporation appointed to administer the Plan pursuant to Article VII. 1.9 Company. "Company" means Mellon Bank, N.A. and, whenever applicable, its Affiliates. 1.10 Coverage Adjustment Date. "Coverage Adjustment Date" means the date during each year, selected by the Committee from time to time in its discretion, on which changes or increases in coverage will take effect. 1.11 Disability. "Disability" means a condition that qualifies as a disability under the Mellon Bank Group Long-Term Disability Plan. -2- 7 1.12 Economic Benefit. "Economic Benefit" means the value of the economic benefit of life insurance coverage under this Plan for income tax purposes, determined based on revenue rulings issued by the Internal Revenue Service and other applicable authorities. 1.13 Effective Date. "Effective Date" means January 1, 1993. 1.14 Eligible Employee. "Eligible Employee" means an Employee who is designated by the Human Resources Committee to participate in the Plan. 1.15 Employee. "Employee" means any person employed by the Company or its Affiliates on a regular full-time salaried basis, including officers of the Company. 1.16 Human Resources Committee. "Human Resources Committee" means the Human Resources Committee of the Board. 1.17 Insurance Company. "Insurance Company" means an insurance company selected by the Company to provide coverage for Participants pursuant to the terms of the Plan. 1.18 Net Cumulative Premiums. "Net Cumulative Premiums" means premiums paid by the Company on a Policy net of (i) reimbursements or contributions to premiums on the Policy made by a Participant and (ii) any withdrawals or loans from cash value of the Policy made to the Company with the written consent of the Participant. 1.19 Participant. "Participant" means an Eligible Employee who has completed the underwriting requirements of the Insurance Company and who is notified by the Company that he is -3- 8 participating in the Plan in accordance with the provisions of Article II. 1.20 Participation Agreement. "Participation Agreement" means a written agreement between the Company and the Participant under which the Participant agrees to participate in the Plan pursuant to section 2.1. 1.21 Plan. "Plan" means this Senior Executive Life Insurance Plan as set forth in this document and as the same may be amended, administered or interpreted from time to time. 1.22 Plan Year. "Plan Year" means the calendar year. 1.23 Policy. "Policy" means a life insurance policy providing coverage under this Plan. 1.24 Retirement. "Retirement" means termination of a Participant's employment with the Company or its Affiliates for reasons other than death or Disability after the Participant has either (i) attained age fifty-five (55) and completed at least five (5) Years of Service or (ii) attained age sixty-five (65) and completed at least one (1) Year of Service. 1.25 Subsidiary. "Subsidiary" means a corporation the majority of the outstanding stock of which is owned directly or indirectly by Mellon Bank Corporation. 1.26 Years of Service. "Years of Service" means a Participant's actual years of service, unless otherwise determined by the Human Resources Committee. -4- 9 ARTICLE II PARTICIPATION 2.1 Participation. Any Eligible Employee may enroll in the Plan by completing a Participation Agreement, the underwriting requirements of the Insurance Company and any other enrollment steps required by the Company for coverage to begin. An Eligible Employee shall become a Participant in the Plan when he has been notified in writing that his participation is approved by the Company and after he files an election under Section 83(b) of the Code with the Internal Revenue Service and a similar election with any appropriate state tax agency. Coverage under this Plan shall not commence, and no transfer of any Policy to the Participant shall be effective, until the Participant files such election. During a leave of absence, coverage will remain in effect for a maximum of ninety (90) days. 2.2 Insurability. Eligible Employees are not automatically entitled to all insurance coverage offered under the Plan. Each Eligible Employee will be covered up to the amount of guarantee issue determined by the Insurance Company, but must satisfy the Insurance Company's requirements for obtaining additional insurance before he becomes covered for additional amounts under the Plan. 2.3 Commencement of Coverage. Subject to the limitations of Sections 2.1 and 2.2, (i) an Employee who is an Eligible Employee on January 1, 1993 will be covered under the Plan as of January 1, 1993, and (ii) any other Eligible Employee -5- 10 will be covered under the Plan when coverage is approved by the Insurance Company. 2.4 Increases in Coverage. When a Participant's Base Salary is increased, the amount of his life insurance coverage under this Plan will increase on the next Coverage Adjustment Date, except as provided in this Section 2.4. Any increase in coverage will not take effect until such additional coverage is approved by the Insurance Company, and a Participant may be required to satisfy the Insurance Company's requirements for obtaining additional insurance before he becomes covered for an additional amount of life insurance coverage under the Plan. A Participant's coverage under the Plan will be limited to the coverage issued by the Insurance Company. 2.5 Declining Coverage. An Eligible Employee may decline coverage under the Plan. However, any such Eligible Employee will be required to satisfy the insurance company's requirements for obtaining insurance before he may become covered under the Plan at a later date. 2.6 Relation to Other Plans. Eligible Employees shall be limited to non-contributory life insurance coverage of $50,000 under the Company's group term life insurance plan. ARTICLE III LIFE INSURANCE COVERAGE 3.1 Amount of Insurance. The amount of life insurance coverage which will be payable to the Beneficiary designated by the Participant will be determined based on the -6- 11 employment status of the Participant with the Company at the time of his death. In each case, there will be subtracted fifty thousand dollars ($50,000) which is payable under the group term life insurance plan covering the Participant maintained by the Company. Subject to the foregoing adjustment, the amounts of life insurance coverage under this Plan are as follows: (a) During Employment. While employed with the Company, a Participant will have life insurance coverage equal to two (2) times his Base Salary. No additional death benefit will be payable on account of any interest of the Participant in the cash value of any Policy in the event of the Participant's death during employment with the Company. (b) After Retirement or Termination of Employment After Completing 5 Years of Service. After Retirement from the Company (or following termination of employment after completing five (5) Year of Service), a Participant will have life insurance coverage equal to (i) one (1) times his final Base Salary plus (ii) the Participant's remaining interest in cash value at the time of his death in Policies under this Plan (as determined under Section 3.4(b)(i) hereof.) (c) Limitation on Amount of Coverage. The amount of life insurance coverage under the Plan will be limited to the amount of coverage issued by the Insurance Company on the Participant under this Plan. 3.2 Disability. If a Participant suffers a Disability, the Participant's life insurance coverage will be continued by the Company during the period of Disability until the Participant reaches age sixty-five (65) or begins to receive -7- 12 benefits under the Mellon Bank Retirement Plan, whichever is sooner. All premiums for this coverage will be paid by the Company. When a disabled Participant reaches age sixty-five (65) or begins to receive benefits under the Mellon Bank Retirement Plan, whichever, is sooner, the Participant will continue to have life insurance coverage equal to one (1) times his final Base Salary on the date of his Disability, as if he had retired from employment with the Company. 3.3 Insurance Contract. To provide the insurance coverage under the Plan, the Company shall acquire one or more insurance policies ("Policies") on the life of each Participant and transfer ownership of such Policy or Policies to the Participant. Within thirty (30) days after the transfer of any such Policy, the Participant will file an election under Section 83(b) of the Code with the Internal Revenue Service and a similar election with any appropriate state tax agency. Except as otherwise specifically provided, the Participant will be the owner and hold all the incidents of ownership in each Policy for which he is designated the owner pursuant to a split dollar life insurance agreement entered into by the Participant and the Company under this Plan. In consideration of the Company's payment of premiums on the Policy pursuant to Section 3.9 of this Plan, the Participant will assign rights in cash value and death benefits under the Policy to the Company as collateral under a form of collateral assignment consistent with the terms of the Plan. The Participant may specify in writing to the Company the Beneficiary or Beneficiaries for his life insurance coverage -8- 13 under this Plan. Upon receipt of a written request from the Participant, the Company will immediately take such action as shall be necessary to implement such Beneficiary designation. Any death benefits under Policies on the life of the Participant owned by the Company that exceed the amount payable to the Participant's Beneficiary under this Plan shall be payable to the Company. 3.4 Interests In Cash Value. The respective interests of the Company and the Participant in the cash value of Policies which are owned by the Participant shall be as follows: (a) During Employment. (i) Company's Interest In Cash Value During Employment. While the Participant is employed with the Company, the Company's interest in the cash value of any Policy shall be limited to the lesser of the cash value of the Policy or the Net Cumulative Premiums paid by the Company on the Policy. The Company shall further be entitled to increases in cash value in an amount equal to any mortality or other expenses incurred for the benefit of the Company which are charged against cash value of the Policy, and any such charges shall, in turn, be deducted from the Company's interest in cash value of the Policy. The Company shall also be entitled to any interest in cash value of the Policy which is forfeited by the Participant, as provided below. (ii) Participant's Interest In Cash Value During Employment. While the Participant is employed with the Company, the Participant's interest in the cash value of any Policy shall be the balance of the cash value of the Policy in excess of the -9- 14 Company's interest in cash value pursuant to Section 3.4(a)(i) above. The Participant shall at all times be 100% vested in cash value under a Policy in an amount equal to his cumulative reimbursements to the Company for the Economic Benefit of his coverage. The Participant will become vested in the Participant's additional interest in cash value after completing five (5) Years of Service. (b) After Retirement or Termination of Employment After Completing 5 Years of Service. (i) Participant's Interest In Cash Value After Retirement or Termination of Employment After Completing 5 Years of Service. The Participant's interest in the cash value of any Policy will increase on a pro-rata basis following Retirement or termination of employment after completing five (5) Years of Service. After either of these events, all future net increases in cash value of the Policy during any year will be allocated between the Participant and the Company on a pro-rata basis in proportion to their respective interests in the cash value of the Policy during such year. Any withdrawals of cash value from the Policy by the Participant will reduce the Participant's interest in the cash value of the Policy. Net increases in cash value shall be determined after deducting mortality and other expenses which are charged against cash value of the Policy. (ii) Company's Interest In Cash Value after Retirement or Termination of Employment After Completing 5 Years of Service. After a Participant's Retirement or termination of employment after completing five (5) Years of Service, the -10- 15 Company's interest in the cash value of any Policy shall be the balance of the cash value of the Policy in excess of the Participant's interest in cash value pursuant to Section 3.4(b)(i) above, including the Company's portion of increases in cash value after the Participant's Retirement or termination of employment. The Company shall also be entitled to increases in cash value in an amount equal to any mortality or other expenses incurred for the benefit of the Company which are charged against cash value of the Policy, and any such charges shall, in turn, be deducted from the Company's interest in cash value of the Policy. (c) After Other Termination of Employment. (i) Participant's Interest in Cash Value after Other Termination of Employment. If the Participant terminates employment with the Company before Retirement and prior to completing five (5) Years of Service, the Participant shall forfeit his interest in the cash value of each Policy which is owned by the Participant except for an amount equal to his cumulative reimbursements to the Company for the Economic Benefit of his coverage. (ii) Company's Interest in Cash Value after Other Termination of Employment. If the Participant terminates employment with the Company before Retirement and prior to completing five (5) Years of Service, the Company's interest in the cash value of any Policy shall be the balance of the cash value of the Policy in excess of the Participant's interest in cash value pursuant to Section 3.4(c)(1) above, including the portion of the cash value of the Policy which is forfeited by the Participant. -11- 16 (d) Minimum Company Interest in Cash Value. Notwithstanding any other provision of this Plan to the contrary, at no time shall the Company's interest in the cash value of any Policy ever be less than the cash value of the Policy on the date when the Policy is transferred by the Company to the Participant. This is a restriction which by its terms will never lapse. 3.5 Policy Withdrawals and Loans. (a) Policy Withdrawals and Loans by Company. The Company shall have no right to make withdrawals of cash value or prepaid premiums or obtain loans from any Policy which is owned by a Participant at any time during the Participant's lifetime, without the prior written consent of the Participant. (b) Policy Withdrawals and Loans by Participant. A Participant shall have no right to make withdrawals or obtain loans from any Policy before his Benefit Commencement Date. After his Benefit Commencement Date a Participant shall have the right to make withdrawals of his interest in the cash value of any Policy (or obtain loans from the Participant's interest in the cash value of any Policy, provided interest is paid on such loans on an annual basis). The Participant's death benefit under any Policy shall be reduced by withdrawals (and the unpaid principal and interest on any loans) under the Policy taken by the Participant. 3.6 Surrender or Cancellation of Policy. In the event of the surrender or cancellation of a Policy which is owned by a Participant, the Participant shall be entitled to receive a portion of the cash surrender value equal to his vested interest in the cash value of the Policy based on his employment status -12- 17 with the Company at the time (as determined under Section 3.4 hereof), unless the Company substitutes another Policy which is satisfactory to the Participant. The balance of the cash surrender value, if any, shall belong to the Company. 3.7 Continuation or Split of Policy after Retirement or Termination of Employment. The Company shall continue the life insurance coverage for the Participant after his Retirement (or following termination of employment after completing five (5) Years of Service) in the same form and subject to the same terms and provisions of this Plan as if he remained employed with the Company, except that the total amount of coverage for the Participant shall not exceed the amount specified in Section 3.1(b). If a Participant's employment with the Company terminates before Retirement, and with less than five (5) Years of Service, the Participant's coverage under this Plan shall cease, and the Company shall have no further legal or equitable obligations of any kind to the Participant under this Plan. The Participant shall transfer all incidents of ownership in each Policy providing his coverage under this Plan to the Company, and the Company shall pay to the Participant an amount equal to the Participant's vested interest in the cash value of the Policy (as determined under Section 3.4(c)(i) hereof). 3.8 No Assignment. A Participant may not assign any part of his right, title, claim, interest, benefit or any other incidents of ownership which he may have in any Policies providing his life insurance coverage under this Plan. -13- 18 3.9 Payment of Premiums and Contributions. (a) During Employment. All premiums for life insurance coverage under this Plan while a Participant is employed with the Company will be paid by the Company. The Participant will be required each year to reimburse to the Company an amount equivalent to the Economic Benefit of this coverage . (b) After Retirement or Termination of Employment after Completing 5 Years of Service. The Company will not be required to pay any premiums for life insurance coverage under this Plan for Participants following Retirement or termination of employment after completing five (5) Years of Service. The Participant will be required each year to include in income for income tax purposes or to reimburse to the Company an amount equivalent to the Economic Benefit of this coverage, or otherwise may realizer taxable income if the Company distributes a policy to him pursuant to Section 3.7(b). 3.10 Form of Death Benefit. All death benefits payable under this Plan will be in the form of a lump sum death benefit paid directly from the life insurance company to the Participant's Beneficiary under a collateral assignment split dollar life insurance program. ARTICLE IV OPTION TO RETAIN INSURANCE POLICY ON TERMINATION OF EMPLOYMENT If a Participant terminates employment with the Company before Retirement and after completing five (5) Years of Service, -14- 19 the Participant may elect, in writing received by the Company not later than sixty (60) days after his termination of employment, to retain the Policy providing his life insurance coverage then in effect under this Plan and obtain a release of the collateral assignment in favor of the Company by paying the Company an amount equal to the Net Cumulative Premiums paid by the Company on the Policy. Payment must be made in cash as a lump sum or by borrowing or withdrawing cash value from the Policy. A Participant's life insurance coverage under this Plan will remain in effect during this sixty (60) day period. A Participant who retains a Policy will cease to be covered under this Plan and will thereafter be required to pay all future premiums on the Policy. The option to retain the Policy which is provided under this Article IV shall not apply to any Participant who terminates employment with the Company before completing five (5) Years of Service or after Retirement. ARTICLE V OPTION TO RETAIN INSURANCE POLICY IN CERTAIN EVENTS 5.1 Option to Retain Policy. The Participant may elect, in writing received by the Company not later than sixty (60) days after the Participant receives written notice from the Company of an event described in Section 5.2, to retain the Policy providing his life insurance coverage then in effect under this Plan and obtain release of the collateral assignment in favor of the Company by paying the Company an amount equal to the greater of (i) the excess of the cash value of the Policy -15- 20 transferred to the Participant over the Participant's vested interest in cash value of the Policy (as provided under Section 3.4) or (ii) the Net Cumulative Premiums paid by the Company on the Policy. A Participant who retains a Policy will cease to be covered under this Plan and will thereafter be required to pay all future premiums on the Policy, except that the Company will be obligated to continue to make up to seven scheduled premium payments for Participants while they remain active Employees. 5.2 Elimination of Coverage. Any Participant whose coverage is eliminated pursuant to Article VIII of this Plan (without being replaced with equivalent coverage under another plan of the Company) shall have the option pursuant to Section 5.1 to purchase the Policy providing his life insurance coverage in effect under this Plan immediately prior to the elimination of such coverage. 5.3 Change in Control. For purposes of this Plan the term "Change in Control" shall mean: (a) the occurrence with respect to Mellon Bank Corporation ("MBC") of a "control transaction," as such term is defined in Section 2542 of the Pennsylvania Business Corporation Law of 1988 as of August 15, 1989; or (b) approval by the stockholders of MBC of (i) any merger or consolidation of MBC in which the holders of voting stock of MBC immediately before the merger or consolidation will not own fifty percent (50%) or more of the voting shares of the continuing or surviving corporation immediately after such merger or consolidation, or (ii) any sale, lease or exchange or other -16- 21 transfer (in one transaction or a series of related transactions) of all or substantially all the assets of MBC; or (c) a change of twenty-five percent (25%) (rounded to the next whole person) in the membership of the Board of Directors of MBC within a twelve (12) month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of eighty-five percent (85%) (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the twelve (12) month period. Notwithstanding any other provision of this Plan, without the written consent of the Participant (or Beneficiary of a deceased Participant) affected thereby, the Company may not amend or terminate this Plan, except to comply with legal requirements: (a) for a period of twenty-four (24) months following a Change in Control; or (b) at any time thereafter, in any manner which affects any Participant (or Beneficiary of a deceased Participant) who receives payments of benefits under this Plan or has a termination of employment for any reason at any time during the period of twenty-four (24) months following the Change in Control. -17- 22 ARTICLE VI BENEFICIARY DESIGNATION 6.1 Designation of Beneficiary. Each Participant shall have the right to designate a Beneficiary or Beneficiaries to whom payment of the Participant's death benefit under this Plan shall be made in the event of the Participant's death. Such designation shall be made on a form prescribed by and delivered to the Company. The Participant shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice to any Beneficiary nor consent by any Beneficiary shall be required to effect any such change or revocation. 6.2 Failure to Designate Beneficiary. If a Participant shall fail to designate a Beneficiary before his demise, or if no designated Beneficiary survives the Participant, the Committee shall direct the Company to make payment under this Plan to the executor or administrator for the Participant's estate. ARTICLE VII ADMINISTRATION 7.1 Administrator. Except as hereinafter provided, the Committee shall be responsible for the administrative responsibilities hereinafter described with respect to the Plan. Whenever any action is required or permitted to be taken in the administration of the Plan, such action shall be taken by the -18- 23 Committee unless the Committee's power is expressly limited herein or by operation of law. The Committee shall be the Plan "Administrator" (as such term is defined in Section 3(16)(A) of ERISA) . The Committee may delegate its duties and responsibilities as it, in its sole discretion, deems necessary or appropriate to the execution of such duties and responsibilities. The Committee as a whole or any of its members may serve in more than one capacity with respect to the Plan. 7.2 Powers and Duties. The Committee, or its delegates, shall maintain and keep (or cause to be maintained and kept) such records as are necessary for the efficient operation of the Plan or as may be required by any applicable law, regulation, or ruling and shall provide for the preparation and filing of such forms, reports, information, and documents as may be required to be filed with any governmental agency or department and with the Plan's Participants and/or other Beneficiaries. Except to the extent expressly reserved to the Company or the Board, the Committee shall have all powers necessary to carry out the administrative provisions of the Plan and to satisfy the requirements of any applicable law or laws. These powers shall include, by way of illustration and not limitation, the exclusive powers and discretionary authority necessary to: (a) construe and interpret the Plan; decide all questions of eligibility; decide all questions of fact relating to claims for benefits; and determine the amount, time, manner, method, and mode of payment of any benefits hereunder; -19- 24 (b) direct the Company and/or the trustee of any trust established at the discretion of the Company to provide for the payment of benefits under the Plan, concerning the amount, time, manner, method, and mode of payment of any benefits hereunder; (c) prescribe procedures to be followed and forms to be used by Participants and/or other persons in filing applications or elections; (d) prepare and distribute, in such manner as may be required by law or as the Committee deems appropriate, information explaining the Plan; provided, however, that no such explanation shall contravene the terms of this Plan or increase the rights of any Participant or Beneficiary or the liabilities of the Company; (e) require from the Company and Participants such information as shall be necessary for the proper administration of the Plan; (f) appoint and retain individuals to assist in the administration and construction of the Plan, including such legal, clerical, accounting, and actuarial services as it may require or as may be required by any applicable law or laws; and (g) perform all functions otherwise imposed upon a plan administrator by ERISA which are not expressly reserved to the Company or the Board, including, but not limited to, those supplemental duties and responsibilities described in the "Mellon Bank Corporation Corporate Benefits Committee Charter and Summary of Operations" approved by the Board on September 17, 1991 (the "CBC" Charter"). -20- 25 Without intending to limit the generality of the foregoing, the Committee shall have the power to amend the Plan, in whole or in part, in order to comply with applicable law; provided, however, that no such amendment may increase the duties and obligations of the Company without its consent. Except as provided in the preceding sentence or unless directed by the Human Resources Committee of the Board or otherwise required by law, the Committee shall have no power to adopt, amend, or terminate the Plan, said powers being exclusively reserved to the Human Resources Committee of the Board. 7.3 Procedures. The Committee shall be organized and conduct its business with respect to the Plan in accordance with the organizational and procedural rules set forth in the CBC Charter. Notwithstanding the foregoing, if any member of the Committee shall be a Participant hereunder, then in any matters affecting any member of the Committee in his individual capacity as a Participant hereunder, separate and apart from his status as a member of the group of Participants, such interested member shall have no authority to vote in the determination of such matters as a member of the Committee, but the Committee shall determine such matter as if said interested member were not a member of the Committee; provided, however, that this shall not be deemed to take from said interested member any of his rights hereunder as a Participant. If the remaining members of the Committee should be unable to agree on any matter so affecting an interested member because of an equal division of voting, the Human Resources Committee of the Board shall appoint a temporary -21- 26 member of the Committee in order to create an odd number of voting members. 7.4 Establishment of Rules. The Committee shall have specific authority in its sole discretion to construe and interpret the terms of the Plan related to its powers and duties, and to the extent that the terms of the Plan are incomplete, the Committee shall have authority to establish such rules or regulations related to its powers and duties as it may deem necessary and proper to carry out the intent of the Company as to the purposes of the Plan. 7.5 Limitation of Liability. The Board, the members of the Committee, and any officer, employee, or agent of the Company shall not incur any liability individually or on behalf of any other individuals or on behalf of the Company for any act, or failure to act, made in good faith in relation to the Plan. No bond or other security shall be required of any such individual solely on account of any individual's power to direct the Company to make the payments required hereunder. 7.6 Compensation and Insurance. Members of the Committee shall serve without compensation for their services as such. Expenses incurred by members of the Committee in the performance of their duties as herein provided, and the compensation and expenses of persons retained or employed by the Committee for services rendered in connection with the Plan shall, upon approval by the Committee, be paid or reimbursed by the Company. The Company shall indemnify and/or maintain and keep in force insurance in such form and amount as may be necessary in -22- 27 order to protect the members of the Committee, their delegates and appointees (other than persons who are independent of the Company and are rendering services to the Committee or to or with respect to the Plan) from any claim, loss, damage, liability, and expense (including costs and attorneys' fees) arising from their acts or failures to act with respect to the Plan, except where such actions or failures to act involve willful misconduct or gross negligence. 7.7 Removal and Resignation. Any member of the Committee may resign and the Company may remove any member of the Committee in accordance with the procedures established by the CBC Charter. The Committee shall remain fully operative pending the filling of any vacancies, the remaining Committee members having full authority to administer the Plan. 7.8 Claims Procedure. The right of any Participant or Beneficiary to receive a benefit hereunder and the amount of such benefit shall be determined in accordance with the procedures for determination of benefit claims established and maintained by the Committee in compliance with the requirements of Section 503 of ERISA; which separate procedures, entitled Procedures for Determination of Benefit Claims, are incorporated herein by this reference. -23- 28 ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN Subject to the limitations of Article V, the Human Resources Committee of the Board may at any time amend or terminate the Plan in whole or in part. Except as provided below or in Article V, the Company is not obligated to continue any benefit, any insurance or any insurance policy after such action. Written notice of any amendment or termination of the Plan shall be given to each affected Participant in the Plan. ARTICLE IX MISCELLANEOUS 9.1 Restriction on Assignment. A Participant may not assign any part of his right, title, claim, interest, benefit or any other incidents of ownership which he may have in any life insurance coverage under this Plan. Neither the Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable pursuant to this Plan, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable pursuant to this Plan shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or any other -24- 29 person, nor be transferable by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 9.2 Tax Liability and Withholding. A Participant may have income for federal, state or local income tax purposes by reason of the Economic Benefit of his insurance coverage provided by the Company under this Plan, both while he is employed with the Company and after his Retirement or termination of employment. The Participant and any Beneficiary shall make appropriate arrangements with the Company for the satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employee tax requirements applicable to the provision of benefits under this Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. 9.3 ERISA Plan. This Plan is covered by Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") as a welfare benefit plan. The Company is the "named fiduciary" of the Plan for purposes of Section 402(a)(2) of ERISA. 9.4 Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Employee any right to be retained in employment with the Company. 9.5 Protective Provisions. Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may deem necessary and taking such other relevant action -25- 30 as may be requested by the Company. If a Participant refuses so to cooperate, the Company shall have no further obligation to the Participant or his Beneficiary under the Plan. If a Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable hereunder to such Participant's Beneficiary, provided, that in the Company's sole discretion, benefits may be payable in an amount reduced to compensate the Company for any loss, cost, damage or expense suffered or incurred by the Company as a result in any way of any such action, misstatement or nondisclosure. 9.6 Gender, Singular & Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity or the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 9.7 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 9.8 Validity. In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provisions of this Plan, and this Plan shall be deemed to be modified to the least extent possible to make it valid and enforceable in its entirety. 9.9 Notices and Elections. Any notice or election required or permitted to be given to the Company or the Committee under the Plan shall be sufficient if in writing and hand -26- 31 delivered, or sent by registered or certified mail, to the principal office of the Company, directed to the attention of the Human Resources Department of the Company. Such notice or election shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 9.10 Applicable Law. This Plan shall be construed, regulated and administered in accordance with the laws of the Commonwealth of Pennsylvania, except insofar as state law is preempted by ERISA. 9.11 Waiver of Breach. The waiver by the Company of any provision of this Plan shall not operate or be construed as a waiver of any subsequent breach by the Participant. 9.12 Benefit. The rights and obligations of the Company under this Plan shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. -27- EX-10.16 10 MELLON BANK 10-K405 1 Exhibit 10.16 MELLON BANK CORPORATION PHANTOM STOCK UNIT PLAN (1995) I. Purpose The purposes of this Phantom Stock Unit Plan (1995) ("Plan") are to promote the growth and profitability of Mellon Bank Corporation ("Corporation") and its subsidiaries by providing officers and other key executives of the Corporation and its subsidiaries with an incentive to achieve long-term corporate objectives and to increase the mutuality of interests between such officers and key executives and the shareholders of the Corporation. II. Definitions The following terms shall have the meanings shown: 2.1 "Board" shall mean the Board of Directors of the Corporation. 2.2 "Change in Control Event" shall mean any of the following events: (a) The occurrence with respect to the Corporation of a "control transaction", as such term is defined in Section 2542 of the Pennsylvania Business Corporation Law, as of August 15, 1989; or (b) Approval by the shareholders of the Corporation of (i) any consolidation or merger of the Corporation in which the holders of voting stock of the Corporation immediately before the merger or consolidation will not own 50% or more of the voting shares of the continuing or surviving corporation immediately after the merger or consolidation, or (ii) any sale, lease or exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Corporation; or (c) A change of 25% (rounded to the next whole person) in the membership of the Board within a 12-month period, unless the election or nomination of each new director within such period was approved by the vote of 85% (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the 12-month period. 2.3 "Committee" shall mean the Human Resources Committee of the Board, or any successor committee. 2.4 "Common Stock" shall mean Common Stock of the Corporation. 2 2.5 "Deferral Plan" shall mean the Mellon Bank Corporation Elective Deferred Compensation Plan for Senior Officers or any similar or successor plan of the Corporation or a subsidiary then in effect. 2.6 "Fair Market Value" shall mean the mean value between the bid and ask price of the Common Stock as reported by the National Association of Securities Dealers through their Automated Quotation System on the relevant date, or, if no quotations shall have been made on such relevant date, on the next preceding day on which there were quotations. Notwithstanding the foregoing, if the Common Stock is listed on a stock exchange, "Fair Market Value" shall mean the closing price of the Common Stock on the exchange on the relevant date, or, if no sale shall have been made on such exchange on that date, the closing price on the next preceding day on which there was a sale. 2.7 "Unit" shall mean a right granted by the Committee pursuant to Section 4.1 to receive the Fair Market Value of a share of Common Stock as of a specified date or as of the date of occurrence of a specified event, which right may be made conditional upon the occurrence or nonoccurrence of other specified events as herein provided; provided, however, that the amount to be paid under any Unit may be increased or decreased from Fair Market Value on the basis of terms and conditions specified by the Committee at the time of grant. III. General 3.1 Administration (a) The Plan shall be administered by the Committee, each member of which shall at the time of any action under the Plan be a "non-employee director" as then defined under Rule 16b-3 under the Securities Exchange Act of 1934 ("Exchange Act") or any successor rule. (b) The Committee shall have the authority in its sole discretion from time to time: (i) to designate the employees eligible to participate in the Plan; (ii) to award Units to eligible employees and to determine the amount of any such award; (iii) to prescribe such terms, conditions, limitations and restrictions, not inconsistent with the Plan, applicable to any such award as the Committee shall deem appropriate; and (iv) to interpret the Plan, to adopt, amend and rescind rules and regulations relating to the Plan, and to make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. A majority of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at any meeting at which a quorum is present, or acts unanimously adopted in writing without the holding of a meeting, shall be the acts of the Committee. 2 3 (c) All such actions shall be final, conclusive and binding upon the participating employee. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 3.2 Eligibility. The Committee may award Units under the Plan to any full-time corporate officer, key executive, administrative or professional employee of the Corporation or any of its subsidiaries. 3.3 Aggregate Limitation on Awards. The aggregate number of Units which may be awarded under the Plan shall not exceed 250,000 Units, subject to adjustments pursuant to Sections 5.5 and 5.6. If any Unit is surrendered or forfeited to the Corporation for any reason prior to payment thereof, such Unit shall again be available for award under the Plan. IV. Units 4.1 Award of Units. The Committee may from time to time, subject to the provisions of the Plan, in its discretion award Units to eligible employees in such amounts as the Committee shall determine to award. 4.2 Award Agreements. The award of any Units shall be evidenced by a written agreement executed by the Corporation and the awardee, stating the number of Units awarded and such other terms and conditions of the award as the Committee may from time to time determine. 4.3 Optional Terms and Conditions of Units. To the extent not inconsistent with the Plan, the Committee may prescribe such terms and conditions applicable to any award of Units as it may in its discretion determine. 4.4 Standard Terms and Conditions of Units. Unless otherwise determined by the Committee pursuant to Section 4.3, each award of Units shall be made on the following terms and conditions, in addition to such other terms, conditions, limitations and restrictions as the Committee, in its discretion, may determine to prescribe: (a) Payment Date. The date on which each Unit shall mature and become payable ("Payment Date") shall be the earlier of: (i) the third anniversary of the date of the award; or (ii) the date of termination of the awardee's employment with the Corporation or a subsidiary if, and only if, such termination is by reason of the awardee's death, disability (covered by a disability plan of the Corporation or a subsidiary then in effect) or retirement with the consent of the Corporation or a subsidiary; or 3 4 (iii) the date of termination of the awardee's employment with the Corporation or a subsidiary if, and only if, such termination results solely from a displacement, as determined in accordance with the Mellon Employee Displacement Program or any successor practice of the Corporation; or (iv) the date of any Change in Control Event, as determined by the Committee. As promptly as practicable after the Payment Date, the Corporation or a subsidiary shall either (A) pay to the awardee or his estate in cash an amount equal to the number of Units maturing on that date multiplied by the Fair Market Value on the Payment Date of a share of Common Stock or (B) if so elected by an awardee prior to the time of the award or so determined by the Committee, cause such amount to be credited to the awardee's account under a Deferral Plan. (b) Forfeiture of Units. Upon the effective date of a termination of the awardee's employment with the Corporation or a subsidiary for any reason not specified in Section 4.4(a)(ii) or Section 4.4(a)(iii), all Units for which the Payment Date has not occurred shall immediately be forfeited to the Corporation without consideration or further action being required of the Corporation. For purposes of the immediately preceding sentence, the effective date of the awardee's termination shall be the date on which the awardee ceases to perform services as an employee of the Corporation or any of its subsidiaries, without regard to accrued vacation, severance or other benefits or the characterization thereof on the payroll records of the Corporation or any of its subsidiaries. (c) Dividend Equivalents. If an award of Units is outstanding as of the record date for determination of the shareholders of the Corporation entitled to receive a cash dividend on its outstanding shares of Common Stock, the Corporation or a subsidiary shall pay to the awardee on or as promptly as practical following the payment date thereof, an amount in cash equal to the per share amount of such dividend multiplied by the number of Units held by the awardee. 4.5 Transfer Restriction. No Unit shall be assignable or transferable by an awardee other than by will, or if the awardee dies intestate, by the laws of descent and distribution of the state of domicile of the awardee at the time of death. All Units shall be payable during the lifetime of the awardee only to the awardee or to the awardee's account under a Deferral Plan. V. Miscellaneous 5.1 Withholding Taxes. Any payments made to an awardee may be net of an amount sufficient to satisfy any federal, state, local or other withholding tax requirements. 4 5 5.2 No Right to Employment. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any awardee the right to continue in the employment of the Corporation or a subsidiary or affect any right which the Corporation or a subsidiary may have to terminate the employment of such awardee. 5.3 Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation its determinations of the persons to receive awards, the amount and timing of such awards and the terms and provisions of such awards) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 5.4 No Rights as Shareholders. Recipients of awards under the Plan shall have no rights as shareholders of the Corporation with respect thereto. 5.5 Adjustments of Stock. In the event of any change or changes in the outstanding Common Stock aggregating at least 5%, the Committee may in its discretion appropriately adjust the number of Units which may be awarded under the Plan, the number of Units subject to awards outstanding under the Plan and any and all other matters deemed appropriate by the Committee. 5.6 Reorganization. In the event that the outstanding Common Stock shall be changed in number, class or character by reason of any split-up, change of par value, stock dividend, combination or reclassification of shares, merger, consolidation or other corporate change, or shall be changed in value by reason of any spin-off, dividend in partial liquidation or other special distribution, the Committee shall make such changes as it may deem equitable in outstanding Units awarded pursuant to the Plan and the number and character of Units available for future awards. 5.7 Amendment or Termination of the Plan. The Committee or the Board may at any time terminate the Plan and may from time to time amend the Plan as it may deem advisable. The termination or amendment of the Plan shall not, without the consent of the awardee, affect such awardee's rights under an award previously granted. October 1996 5 EX-10.19 11 MELLON BANK 10-K405 1 Exhibit 10.19 THIS AGREEMENT is entered into as of the 1st day of February, 1997 by and between Mellon Bank Corporation (the "Company"), a Pennsylvania corporation, and Frank V. Cahouet ("Executive"). W I T N E S S E T H WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and WHEREAS, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may arise and that such possibility may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and WHEREAS, the Human Resources Committee (the "Committee") of the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to secure Executive's continued services and to ensure Executive's continued and undivided dedication to his duties in the event of any threat or occurrence of a Change in Control (as defined in Section 1) of the Company; and WHEREAS, the Committee has authorized the Company to enter into this Agreement. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Company and Executive hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "Bonus Amount" means the highest annual incentive bonus earned by Executive from the Company (or its affiliates) during the last three (3) completed fiscal years of the Company immediately preceding Executive's Date of Termination (annualized in the event Executive was not employed by the Company (or its affiliates) for the whole of any such fiscal year). (b) "Cause" means (i) the willful and continued failure of Executive to perform substantially his duties with the Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness or any such failure subsequent to Executive being delivered a Notice of Termination without Cause by the Company or delivering a Notice of Termination for Good Reason to the Company) after a written demand for substantial 2 performance is delivered to Executive by the Board which specifically identifies the manner in which the Board believes that Executive has not substantially performed Executive's duties, (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is demonstrably and materially injurious to the Company or its affiliates, or (iii) the conviction of Executive of, or a plea by Executive of nolo contendere to, a felony. For purpose of this paragraph (b), no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive's action or omission was in the best interests of the Company or its affiliates. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, based upon the advice of counsel for the Company or upon the instructions of the Company's chief executive officer or another senior officer of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Cause shall not exist unless and until the Company has delivered to Executive a copy of a resolution duly adopted by three-fourths (3/4) of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth in clauses (i) or (ii) has occurred and specifying the particulars thereof in detail. The Company must notify Executive of any event constituting Cause within ninety (90) days following the Company's knowledge of its existence or such event shall not constitute Cause under this Agreement. (c) "Change in Control" means the occurrence of any one of the following events: (i) individuals who, on January 17, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 17, 1997, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection by such Incumbent Directors to such nomination) shall be deemed to be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (ii) any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of the 2 3 combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit plan sponsored or maintained by the Company or any Subsidiary, or by any employee stock benefit trust created by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)), (E) pursuant to any acquisition by Executive or any group of persons including Executive (or any entity controlled by Executive or any group of persons including Executive); or (F) a transaction (other than one described in (iii) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition pursuant to this clause (F) does not constitute a Change in Control under this paragraph (ii); (iii) the consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from the consummation of such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation or any employee stock benefit trust created by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 15% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business 3 4 Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 15% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. (d) "Date of Termination" means (1) the effective date on which Executive's employment by the Company terminates as specified in a prior written notice by the Company or Executive, as the case may be, to the other, delivered pursuant to Section 10 or (2) if Executive's employment by the Company terminates by reason of death, the date of death of Executive. (e) "Disability" means termination of Executive's employment by the Company due to Executive's absence from Executive's duties with the Company on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness. (f) "Good Reason" means, without Executive's express written consent, the occurrence of any of the following events after a Change in Control: (i) (A) any change in the duties or responsibilities (including reporting responsibilities) of Executive that is inconsistent in any material and adverse respect with Executive's position(s), duties, responsibilities or status with the Company immediately prior to such Change in Control (including any material and adverse diminution of such duties or responsibilities) or (B) a material and adverse change in Executive's titles or offices (including, if applicable, membership on the Board) with the Company as in effect immediately prior to such Change in Control; (ii) (A) a reduction by the Company in Executive's rate of annual base salary as in effect immediately prior to such Change in Control or as the same may be increased from time to time thereafter, or (B) the failure by the Company to pay Executive an annual bonus in respect of the year in which such Change in 4 5 Control occurs or any subsequent year in an amount less than the annual bonus earned for the year prior to the year in which such Change in Control occurs; (iii) any requirement of the Company that Executive (A) be based anywhere more than fifty (50) miles from the office where Executive is located at the time of the Change in Control or (B) travel on Company business to an extent substantially greater than the travel obligations of Executive immediately prior to such Change in Control; (iv) the failure of the Company to (A) continue in effect any employee benefit plan, compensation plan, welfare benefit plan or material fringe benefit plan in which Executive is participating immediately prior to such Change in Control or the taking of any action by the Company which would adversely affect Executive's participation in or reduce Executive's benefits under any such plan, unless Executive is permitted to participate in other plans providing Executive with substantially equivalent benefits in the aggregate (at substantially equivalent cost with respect to welfare benefit plans), or (B) provide Executive with paid vacation in accordance with the most favorable vacation policies of the Company and its affiliated companies as in effect for Executive immediately prior to such Change in Control, including the crediting of all service for which Executive had been credited under such vacation policies prior to the Change in Control; or (v) the failure of the Company to obtain the assumption (and, if applicable, guarantee) agreement from any successor (and Parent Corporation) as contemplated in Section 9(b). Notwithstanding anything herein to the contrary, termination of employment by Executive for any reason during the 30-day period commencing one (1) year after the date of a Change in Control shall constitute Good Reason. An isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company within ten (10) days after receipt of notice thereof given by Executive shall not constitute Good Reason. Executive's right to terminate employment for Good Reason shall not be affected by Executive's incapacities due to mental or physical illness and Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason; provided, however, that Executive must provide notice of termination of employment within one-hundred eighty (180) days following Executive's knowledge of an event constituting Good Reason or such event shall not constitute Good Reason under this Agreement. (g) "Qualifying Termination" means a termination of Executive's employment (i) by the Company other than for Cause or (ii) by Executive for Good Reason. Termination of 5 6 Executive's employment on account of death, Disability or Retirement shall not be treated as a Qualifying Termination. (h) "Retirement" means the termination of Executive's employment on or after the first of the month coincident with or following Executive's attainment of age 65, or such later date as may be provided in a written agreement between the Company and the Executive. (i) "Subsidiary" means any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities or interests of such corporation or other entity entitled to vote generally in the election of directors or in which the Company has the right to receive 50% or more of the distribution of profits or 50% of the assets upon liquidation or dissolution. (j) "Termination Period" means the period of time beginning with a Change in Control and ending three (3) years following such Change in Control. Notwithstanding anything in this Agreement to the contrary, if (i) Executive's employment is terminated prior to a Change in Control for reasons that would have constituted a Qualifying Termination if they had occurred following a Change in Control; (ii) Executive reasonably demonstrates that such termination (or Good Reason event) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change in Control; and (iii) a Change in Control involving such third party (or a party competing with such third party to effectuate a Change in Control) does occur, then for purposes of this Agreement, the date immediately prior to the date of such termination of employment or event constituting Good Reason shall be treated as a Change in Control. For purposes of determining the timing of payments and benefits to Executive under Section 4, the date of the actual Change in Control shall be treated as Executive's Date of Termination under Section 1(d). 2. Obligation of Executive. In the event of a tender or exchange offer, proxy contest, or the execution of any agreement which, if consummated, would constitute a Change in Control, Executive agrees not to voluntarily leave the employ of the Company, other than as a result of Disability, Retirement or an event which would constitute Good Reason if a Change in Control had occurred, until the Change in Control occurs or, if earlier, such tender or exchange offer, proxy contest, or agreement is terminated or abandoned. 3. Term of Agreement. This Agreement shall be effective on the date hereof and shall continue in effect until the Company shall have given three (3) years' written notice of cancellation; provided, that, notwithstanding the delivery of any such notice, this Agreement shall continue in effect for a period of three (3) years after a Change in Control, if such Change in Control shall have occurred during the term of this Agreement. Notwithstanding anything in this Section to the contrary, this Agreement shall terminate if Executive or the Company terminates Executive's employment prior to a Change in Control except as provided in Section 1(j). 6 7 4. Payments Upon Termination of Employment. (a) Qualifying Termination -- Cash Payment. If during the Termination Period the employment of Executive shall terminate pursuant to a Qualifying Termination, then the Company shall provide to Executive, subject to the provisions of Section 11 hereunder: (i) within twenty (20) days following the Date of Termination a lump-sum cash amount equal to the sum of (A) Executive's base salary through the Date of Termination and any bonus amounts which have become payable, to the extent not theretofore paid or deferred, (B) a pro rata portion of Executive's annual bonus for the fiscal year in which Executive's Date of Termination occurs in an amount at least equal to (1) Executive's Bonus Amount, multiplied by (2) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is three hundred sixty-five (365), and reduced by (3) any amounts paid from the Company's annual incentive plan for the fiscal year in which Executive's Date of Termination occurs and (C) any accrued vacation pay, to the extent not theretofore paid; plus (ii) within twenty (20) days following the Date of Termination, a lump-sum cash amount equal to the sum of (i) three (3) times Executive's highest annual rate of base salary during the 12-month period immediately prior to Executive's Date of Termination, plus (ii) three (3) times Executive's Bonus Amount; provided, however, that if Executive's Date of Termination is within three (3) years of the earliest date on which termination by the Executive could otherwise be considered a Retirement ("Retirement Date"), such sum shall be multiplied by a fraction ("Adjustment Fraction"), the numerator of which is equal to the number of full months from the Date of Termination to the Retirement Date, and the denominator of which is equal to 36. (b) Qualifying Termination -- Continued Coverage. If during the Termination Period the employment of Executive shall terminate pursuant to a Qualifying Termination, the Company shall continue to provide, for a period of three (3) years following Executive's Date of Termination, Executive (and Executive's dependents, if applicable) with the same level of medical, dental, accident, disability and life insurance benefits upon substantially the same terms and conditions (including contributions required by Executive for such benefits) as existed immediately prior to Executive's Date of Termination (or, if more favorable to Executive, as such benefits and terms and conditions existed immediately prior to the Change in Control); provided, however, that if Executive's Date of Termination is within three (3) years of Executive's Retirement Date, the number of years of continued benefits coverage (as described in this Section 4(b)) shall be equal to the product of (x) three, and (y) the Adjustment Fraction; provided, further, if Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on the same after-tax basis as if 7 8 continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes reemployed with another employer and becomes eligible to receive welfare benefits from such employer, the welfare benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. The Executive's accrued benefits as of the Date of Termination under the Company's employee benefit plans shall be paid to Executive in accordance with the terms of such plans. (c) Qualifying Termination -- SERP Accrual. If during the Termination Period the employment of Executive shall terminate pursuant to a Qualifying Termination, the Company shall provide Executive with three (3) additional years of service credit under all non-qualified retirement plans and excess benefit plans in which the Executive participated as of his Date of Termination; provided, however, that if Executive's Date of Termination is within three (3) years of Executive's Retirement Date, the number of years of additional service credit (as described in this Section 4(c)) shall be equal to the product of (x) three, and (y) the Adjustment Fraction. (d) Other than Qualifying Termination. If during the Termination Period the employment of Executive shall terminate other than by reason of a Qualifying Termination, then the Company shall pay to Executive within thirty (30) days following the Date of Termination, a lump-sum cash amount equal to the sum of (1) Executive's base salary through the Date of Termination and any bonus amounts which have become payable, to the extent not theretofore paid or deferred, and (2) any accrued vacation pay, to the extent not theretofore paid. The Company may make such additional payments, and provide such additional benefits, to Executive as the Company and Executive may agree in writing. The Executive's accrued benefits as of the Date of Termination under the Company's employee benefit plans shall be paid to Executive in accordance with the terms of such plans. 5. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a Change in Control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to Executive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, Executive retains 8 9 an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-up Payment in Executive's adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) have otherwise allowable deductions for federal income tax purposes at least equal to the Gross-up Payment. Notwithstanding the foregoing provisions of this Section 5(a), if it shall be determined that Executive is entitled to a Gross-Up Payment, but that the Payments would not be subject to the Excise Tax if the Payments were reduced by an amount that is less than 5% of the portion of the Payments that would be treated as "parachute payments" under Section 280G of the Code, then the amounts payable to Executive under this Agreement shall be reduced (but not below zero) to the maximum amount that could be paid to Executive without giving rise to the Excise Tax (the "Safe Harbor Cap"), and no Gross-Up Payment shall be made to Executive. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing first the payments under Section 4(a)(ii), unless an alternative method of reduction is elected by Executive. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amounts payable hereunder would not result in a reduction of the Payments to the Safe Harbor Cap, no amounts payable under this Agreement shall be reduced pursuant to this provision. (b) Subject to the provisions of Section 5(a), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, the reduction of the Payments to the Safe Harbor Cap and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from the Company or the Executive that there has been a Payment, or such earlier time as is requested by the Company (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Executive may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-up Payment under this Section 5 with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion to such effect, and to the effect that 9 10 failure to report the Excise Tax, if any, on Executive's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. In the event the Accounting Firm determines that the Payments shall be reduced to the Safe Harbor Cap, it shall furnish Executive with a written opinion to such effect. The Determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") or Gross-up Payments are made by the Company which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that the Executive thereafter is required to make payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of Executive. In the event the amount of the Gross-up Payment exceeds the amount necessary to reimburse the Executive for his Excise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by Executive (to the extent he has received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Company. Executive shall cooperate, to the extent his expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. 6. Withholding Taxes. The Company may withhold from all payments due to Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company is required to withhold therefrom. 7. Reimbursement of Expenses. If any contest or dispute shall arise under this Agreement involving termination of Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse Executive, on a current basis, for all reasonable legal fees and expenses, if any, incurred by Executive in connection with such contest or dispute (regardless of the result thereof), together with interest in an amount equal to the prime rate of Mellon Bank, N.A. (or, if such prime rate is not available from Mellon Bank, N.A., the prime rate of Citibank, N.A.) from time to time in effect, but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives Executive's statement for such fees and expenses through the date of payment thereof, regardless of whether or not Executive's claim is upheld by an arbitration panel. 8. Scope of Agreement. Nothing in this Agreement shall be deemed to entitle Executive to continued employment with the Company or its Subsidiaries, and if Executive's employment with the Company shall terminate prior to a Change in Control, Executive shall have no further rights under this Agreement (except as otherwise provided hereunder); provided, 10 11 however, that any termination of Executive's employment during the Termination Period shall be subject to all of the provisions of this Agreement. 9. Successors; Binding Agreement. (a) This Agreement shall not be terminated by any Business Combination. In the event of any Business Combination, the provisions of this Agreement shall be binding upon the Surviving Corporation, and such Surviving Corporation shall be treated as the Company hereunder. (b) The Company agrees that in connection with any Business Combination, it will cause any successor entity to the Company unconditionally to assume (and for any Parent Corporation in such Business Combination to guarantee), by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption and guarantee prior to the effectiveness of any such Business Combination that constitutes a Change in Control shall be a breach of this Agreement and shall constitute Good Reason hereunder and shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive's employment were terminated following a Change in Control by reason of a Qualifying Termination. For purposes of implementing the foregoing, the date on which any such Business Combination becomes effective shall be deemed the date Good Reason occurs, and shall be the Date of Termination if requested by Executive. (c) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate. 10. Notice. (a) For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the address set forth below the signatory. 11 12 If to the Company: Mellon Bank Corporation One Mellon Bank Center Pittsburgh, PA 15258 Attn: Corporate Secretary or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) A written notice of Executive's Date of Termination by the Company or Executive, as the case may be, to the other, shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) specify the Date of Termination (which date shall be not less than fifteen (15) (thirty (30), if termination is by the Company for Disability) nor more than sixty (60) days after the giving of such notice). The failure by Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. 11. Full Settlement; Resolution of Disputes. The Company's obligation to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall be in lieu and in full settlement of all other severance payments to Executive under any other severance or employment agreement between Executive and the Company, and any severance plan of the Company; provided, however, that obligations to Executive under the Employment Agreement between Mellon Bank, N.A. and Executive, effective July 25, 1993, as amended and restated October 17, 1995 (the "Prior Agreement") shall remain in full force and effect; provided, further, that the amount of payments required to be made under Section 4(a) of this Agreement shall be reduced (but not below zero) by the amount of severance payments made pursuant to the Prior Agreement. The Company's obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and, except as provided in Section 4(b), such amounts shall not be reduced whether or not Executive obtains other employment. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Pittsburgh, Pennsylvania, by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section. 12 13 12. Employment with Subsidiaries. Employment with the Company for purposes of this Agreement shall include employment with any Subsidiary. 13. Survival. The respective obligations and benefits afforded to the Company and Executive as provided in Sections 4 (to the extent that payments or benefits are owed as a result of a termination of employment that occurs during the term of this Agreement), 5 (to the extent that Payments are made to Executive as a result of a Change in Control that occurs during the term of this Agreement), 6, 7, 9(c) and 11 shall survive the termination of this Agreement. 14. GOVERNING LAW; VALIDITY. THE INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO THE PRINCIPLE OF CONFLICTS OF LAWS. THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER PROVISIONS SHALL REMAIN IN FULL FORCE AND EFFECT. 15. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 16. Miscellaneous. No provision of this Agreement may be modified or waived unless such modification or waiver is agreed to in writing and signed by Executive and by a duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Except as set forth in Sections 1(b) and 1(f), the failure by Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. Except as otherwise specifically provided herein, the rights of, and benefits payable to, Executive, his estate or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of the Company. 13 14 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and Executive has executed this Agreement as of the day and year first above written. MELLON BANK CORPORATION A.W. MATHIESON ------------------------ By: Andrew W. Mathieson Title: Chairman, Human Resources Committee EXECUTIVE FRANK V. CAHOUET ------------------------ Frank V. Cahouet 14 EX-10.20 12 MELLON BANK 10-K405 1 Exhibit 10.20 THIS AGREEMENT is entered into as of the ___ day of __________, 1997 by and between Mellon Bank Corporation (the "Company"), a Pennsylvania corporation, and ______________ ("Executive"). W I T N E S S E T H WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and WHEREAS, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may arise and that such possibility may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and WHEREAS, the Human Resources Committee (the "Committee") of the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to secure Executive's continued services and to ensure Executive's continued and undivided dedication to his duties in the event of any threat or occurrence of a Change in Control (as defined in Section 1) of the Company; and WHEREAS, the Committee has authorized the Company to enter into this Agreement. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Company and Executive hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "Bonus Amount" means the highest annual incentive bonus earned by Executive from the Company (or its affiliates) during the last three (3) completed fiscal years of the Company immediately preceding Executive's Date of Termination (annualized in the event Executive was not employed by the Company (or its affiliates) for the whole of any such fiscal year). (b) "Cause" means (i) the willful and continued failure of Executive to perform substantially his duties with the Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness or any such failure subsequent to Executive being delivered a Notice of Termination without Cause by the Company or delivering a Notice of Termination for Good Reason to the Company) after a written demand for substantial 2 performance is delivered to Executive by the Board which specifically identifies the manner in which the Board believes that Executive has not substantially performed Executive's duties, (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is demonstrably and materially injurious to the Company or its affiliates, or (iii) the conviction of Executive of, or a plea by Executive of nolo contendere to, a felony. For purpose of this paragraph (b), no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive's action or omission was in the best interests of the Company or its affiliates. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, based upon the advice of counsel for the Company or upon the instructions of the Company's chief executive officer or another senior officer of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Cause shall not exist unless and until the Company has delivered to Executive a copy of a resolution duly adopted by three-fourths (3/4) of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth in clauses (i) or (ii) has occurred and specifying the particulars thereof in detail. The Company must notify Executive of any event constituting Cause within ninety (90) days following the Company's knowledge of its existence or such event shall not constitute Cause under this Agreement. (c) "Change in Control" means the occurrence of any one of the following events: (i) individuals who, on January 17, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 17, 1997, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection by such Incumbent Directors to such nomination) shall be deemed to be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (ii) any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of the 2 3 combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit plan sponsored or maintained by the Company or any Subsidiary, or by any employee stock benefit trust created by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)), (E) pursuant to any acquisition by Executive or any group of persons including Executive (or any entity controlled by Executive or any group of persons including Executive); or (F) a transaction (other than one described in (iii) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition pursuant to this clause (F) does not constitute a Change in Control under this paragraph (ii); (iii) the consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from the consummation of such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation or any employee stock benefit trust created by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 15% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business 3 4 Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 15% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. (d) "Date of Termination" means (1) the effective date on which Executive's employment by the Company terminates as specified in a prior written notice by the Company or Executive, as the case may be, to the other, delivered pursuant to Section 10 or (2) if Executive's employment by the Company terminates by reason of death, the date of death of Executive. (e) "Disability" means termination of Executive's employment by the Company due to Executive's absence from Executive's duties with the Company on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness. (f) "Good Reason" means, without Executive's express written consent, the occurrence of any of the following events after a Change in Control: (i) (A) any change in the duties or responsibilities (including reporting responsibilities) of Executive that is inconsistent in any material and adverse respect with Executive's position(s), duties, responsibilities or status with the Company immediately prior to such Change in Control (including any material and adverse diminution of such duties or responsibilities) or (B) a material and adverse change in Executive's titles or offices (including, if applicable, membership on the Board) with the Company as in effect immediately prior to such Change in Control; (ii) (A) a reduction by the Company in Executive's rate of annual base salary as in effect immediately prior to such Change in Control or as the same may be increased from time to time thereafter, or (B) the failure by the Company to pay Executive an annual bonus in respect of the year in which such Change in 4 5 Control occurs or any subsequent year in an amount less than the annual bonus earned for the year prior to the year in which such Change in Control occurs; (iii) any requirement of the Company that Executive (A) be based anywhere more than fifty (50) miles from the office where Executive is located at the time of the Change in Control or (B) travel on Company business to an extent substantially greater than the travel obligations of Executive immediately prior to such Change in Control; (iv) the failure of the Company to (A) continue in effect any employee benefit plan, compensation plan, welfare benefit plan or material fringe benefit plan in which Executive is participating immediately prior to such Change in Control or the taking of any action by the Company which would adversely affect Executive's participation in or reduce Executive's benefits under any such plan, unless Executive is permitted to participate in other plans providing Executive with substantially equivalent benefits in the aggregate (at substantially equivalent cost with respect to welfare benefit plans), or (B) provide Executive with paid vacation in accordance with the most favorable vacation policies of the Company and its affiliated companies as in effect for Executive immediately prior to such Change in Control, including the crediting of all service for which Executive had been credited under such vacation policies prior to the Change in Control; or (v) the failure of the Company to obtain the assumption (and, if applicable, guarantee) agreement from any successor (and Parent Corporation) as contemplated in Section 9(b). Notwithstanding anything herein to the contrary, termination of employment by Executive for any reason during the 30-day period commencing one (1) year after the date of a Change in Control shall constitute Good Reason. An isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company within ten (10) days after receipt of notice thereof given by Executive shall not constitute Good Reason. Executive's right to terminate employment for Good Reason shall not be affected by Executive's incapacities due to mental or physical illness and Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason; provided, however, that Executive must provide notice of termination of employment within one-hundred eighty (180) days following Executive's knowledge of an event constituting Good Reason or such event shall not constitute Good Reason under this Agreement. (g) "Qualifying Termination" means a termination of Executive's employment (i) by the Company other than for Cause or (ii) by Executive for Good Reason. Termination of 5 6 Executive's employment on account of death, Disability or Retirement shall not be treated as a Qualifying Termination. (h) "Retirement" means the termination of Executive's employment on or after the first of the month coincident with or following Executive's attainment of age 65, or such later date as may be provided in a written agreement between the Company and the Executive. (i) "Subsidiary" means any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities or interests of such corporation or other entity entitled to vote generally in the election of directors or in which the Company has the right to receive 50% or more of the distribution of profits or 50% of the assets upon liquidation or dissolution. (j) "Termination Period" means the period of time beginning with a Change in Control and ending three (3) years following such Change in Control. Notwithstanding anything in this Agreement to the contrary, if (i) Executive's employment is terminated prior to a Change in Control for reasons that would have constituted a Qualifying Termination if they had occurred following a Change in Control; (ii) Executive reasonably demonstrates that such termination (or Good Reason event) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change in Control; and (iii) a Change in Control involving such third party (or a party competing with such third party to effectuate a Change in Control) does occur, then for purposes of this Agreement, the date immediately prior to the date of such termination of employment or event constituting Good Reason shall be treated as a Change in Control. For purposes of determining the timing of payments and benefits to Executive under Section 4, the date of the actual Change in Control shall be treated as Executive's Date of Termination under Section 1(d). 2. Obligation of Executive. In the event of a tender or exchange offer, proxy contest, or the execution of any agreement which, if consummated, would constitute a Change in Control, Executive agrees not to voluntarily leave the employ of the Company, other than as a result of Disability, Retirement or an event which would constitute Good Reason if a Change in Control had occurred, until the Change in Control occurs or, if earlier, such tender or exchange offer, proxy contest, or agreement is terminated or abandoned. 3. Term of Agreement. This Agreement shall be effective on the date hereof and shall continue in effect until the Company shall have given three (3) years' written notice of cancellation; provided, that, notwithstanding the delivery of any such notice, this Agreement shall continue in effect for a period of three (3) years after a Change in Control, if such Change in Control shall have occurred during the term of this Agreement. Notwithstanding anything in this Section to the contrary, this Agreement shall terminate if Executive or the Company terminates Executive's employment prior to a Change in Control except as provided in Section 1(j). 6 7 4. Payments Upon Termination of Employment. (a) Qualifying Termination -- Cash Payment. If during the Termination Period the employment of Executive shall terminate pursuant to a Qualifying Termination, then the Company shall provide to Executive, subject to the provisions of Section 11 hereunder: (i) within twenty (20) days following the Date of Termination a lump-sum cash amount equal to the sum of (A) Executive's base salary through the Date of Termination and any bonus amounts which have become payable, to the extent not theretofore paid or deferred, (B) a pro rata portion of Executive's annual bonus for the fiscal year in which Executive's Date of Termination occurs in an amount at least equal to (1) Executive's Bonus Amount, multiplied by (2) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is three hundred sixty-five (365), and reduced by (3) any amounts paid from the Company's annual incentive plan for the fiscal year in which Executive's Date of Termination occurs and (C) any accrued vacation pay, to the extent not theretofore paid; plus (ii) within twenty (20) days following the Date of Termination, a lump-sum cash amount equal to the sum of (i) three (3) times Executive's highest annual rate of base salary during the 12-month period immediately prior to Executive's Date of Termination, plus (ii) three (3) times Executive's Bonus Amount; provided, however, that if Executive's Date of Termination is within three (3) years of the earliest date on which termination by the Executive could otherwise be considered a Retirement ("Retirement Date"), such sum shall be multiplied by a fraction ("Adjustment Fraction"), the numerator of which is equal to the number of full months from the Date of Termination to the Retirement Date, and the denominator of which is equal to 36. (b) Qualifying Termination -- Continued Coverage. If during the Termination Period the employment of Executive shall terminate pursuant to a Qualifying Termination, the Company shall continue to provide, for a period of three (3) years following Executive's Date of Termination, Executive (and Executive's dependents, if applicable) with the same level of medical, dental, accident, disability and life insurance benefits upon substantially the same terms and conditions (including contributions required by Executive for such benefits) as existed immediately prior to Executive's Date of Termination (or, if more favorable to Executive, as such benefits and terms and conditions existed immediately prior to the Change in Control); provided, however, that if Executive's Date of Termination is within three (3) years of Executive's Retirement Date, the number of years of continued benefits coverage (as described in this Section 4(b)) shall be equal to the product of (x) three, and (y) the Adjustment Fraction; provided, further, if Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on the same after-tax basis as if 7 8 continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes reemployed with another employer and becomes eligible to receive welfare benefits from such employer, the welfare benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. The Executive's accrued benefits as of the Date of Termination under the Company's employee benefit plans shall be paid to Executive in accordance with the terms of such plans. (c) Qualifying Termination -- SERP Accrual. If during the Termination Period the employment of Executive shall terminate pursuant to a Qualifying Termination, the Company shall provide Executive with three (3) additional years of service credit under all non-qualified retirement plans and excess benefit plans in which the Executive participated as of his Date of Termination; provided, however, that if Executive's Date of Termination is within three (3) years of Executive's Retirement Date, the number of years of additional service credit (as described in this Section 4(c)) shall be equal to the product of (x) three, and (y) the Adjustment Fraction. (d) Other than Qualifying Termination. If during the Termination Period the employment of Executive shall terminate other than by reason of a Qualifying Termination, then the Company shall pay to Executive within thirty (30) days following the Date of Termination, a lump-sum cash amount equal to the sum of (1) Executive's base salary through the Date of Termination and any bonus amounts which have become payable, to the extent not theretofore paid or deferred, and (2) any accrued vacation pay, to the extent not theretofore paid. The Company may make such additional payments, and provide such additional benefits, to Executive as the Company and Executive may agree in writing. The Executive's accrued benefits as of the Date of Termination under the Company's employee benefit plans shall be paid to Executive in accordance with the terms of such plans. 5. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a Change in Control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to Executive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, Executive retains 8 9 an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-up Payment in Executive's adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) have otherwise allowable deductions for federal income tax purposes at least equal to the Gross-up Payment. Notwithstanding the foregoing provisions of this Section 5(a), if it shall be determined that Executive is entitled to a Gross-Up Payment, but that the Payments would not be subject to the Excise Tax if the Payments were reduced by an amount that is less than 5% of the portion of the Payments that would be treated as "parachute payments" under Section 280G of the Code, then the amounts payable to Executive under this Agreement shall be reduced (but not below zero) to the maximum amount that could be paid to Executive without giving rise to the Excise Tax (the "Safe Harbor Cap"), and no Gross-Up Payment shall be made to Executive. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing first the payments under Section 4(a)(ii), unless an alternative method of reduction is elected by Executive. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amounts payable hereunder would not result in a reduction of the Payments to the Safe Harbor Cap, no amounts payable under this Agreement shall be reduced pursuant to this provision. (b) Subject to the provisions of Section 5(a), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, the reduction of the Payments to the Safe Harbor Cap and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from the Company or the Executive that there has been a Payment, or such earlier time as is requested by the Company (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Executive may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-up Payment under this Section 5 with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion to such effect, and to the effect that 9 10 failure to report the Excise Tax, if any, on Executive's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. In the event the Accounting Firm determines that the Payments shall be reduced to the Safe Harbor Cap, it shall furnish Executive with a written opinion to such effect. The Determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") or Gross-up Payments are made by the Company which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that the Executive thereafter is required to make payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of Executive. In the event the amount of the Gross-up Payment exceeds the amount necessary to reimburse the Executive for his Excise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by Executive (to the extent he has received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Company. Executive shall cooperate, to the extent his expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. 6. Withholding Taxes. The Company may withhold from all payments due to Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company is required to withhold therefrom. 7. Reimbursement of Expenses. If any contest or dispute shall arise under this Agreement involving termination of Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse Executive, on a current basis, for all reasonable legal fees and expenses, if any, incurred by Executive in connection with such contest or dispute (regardless of the result thereof), together with interest in an amount equal to the prime rate of Mellon Bank, N.A. (or, if such prime rate is not available from Mellon Bank, N.A., the prime rate of Citibank, N.A.) from time to time in effect, but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives Executive's statement for such fees and expenses through the date of payment thereof, regardless of whether or not Executive's claim is upheld by an arbitration panel. 8. Scope of Agreement. Nothing in this Agreement shall be deemed to entitle Executive to continued employment with the Company or its Subsidiaries, and if Executive's employment with the Company shall terminate prior to a Change in Control, Executive shall have no further rights under this Agreement (except as otherwise provided hereunder); provided, 10 11 however, that any termination of Executive's employment during the Termination Period shall be subject to all of the provisions of this Agreement. 9. Successors; Binding Agreement. (a) This Agreement shall not be terminated by any Business Combination. In the event of any Business Combination, the provisions of this Agreement shall be binding upon the Surviving Corporation, and such Surviving Corporation shall be treated as the Company hereunder. (b) The Company agrees that in connection with any Business Combination, it will cause any successor entity to the Company unconditionally to assume (and for any Parent Corporation in such Business Combination to guarantee), by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption and guarantee prior to the effectiveness of any such Business Combination that constitutes a Change in Control shall be a breach of this Agreement and shall constitute Good Reason hereunder and shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive's employment were terminated following a Change in Control by reason of a Qualifying Termination. For purposes of implementing the foregoing, the date on which any such Business Combination becomes effective shall be deemed the date Good Reason occurs, and shall be the Date of Termination if requested by Executive. (c) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate. 10. Notice. (a) For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the address set forth below the signatory. 11 12 If to the Company: Mellon Bank Corporation One Mellon Bank Center Pittsburgh, PA 15258 Attn: Corporate Secretary or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) A written notice of Executive's Date of Termination by the Company or Executive, as the case may be, to the other, shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) specify the Date of Termination (which date shall be not less than fifteen (15) (thirty (30), if termination is by the Company for Disability) nor more than sixty (60) days after the giving of such notice). The failure by Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. 11. Full Settlement; Resolution of Disputes. The Company's obligation to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall be in lieu and in full settlement of all other severance payments to Executive under any other severance or employment agreement between Executive and the Company, and any severance plan of the Company. The Company's obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and, except as provided in Section 4(b), such amounts shall not be reduced whether or not Executive obtains other employment. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Pittsburgh, Pennsylvania, by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section. 12. Employment with Subsidiaries. Employment with the Company for purposes of this Agreement shall include employment with any Subsidiary. 13. Survival. The respective obligations and benefits afforded to the Company and Executive as provided in Sections 4 (to the extent that payments or benefits are owed as a result 12 13 of a termination of employment that occurs during the term of this Agreement), 5 (to the extent that Payments are made to Executive as a result of a Change in Control that occurs during the term of this Agreement), 6, 7, 9(c) and 11 shall survive the termination of this Agreement. 14. GOVERNING LAW; VALIDITY. THE INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO THE PRINCIPLE OF CONFLICTS OF LAWS. THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER PROVISIONS SHALL REMAIN IN FULL FORCE AND EFFECT. 15. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 16. Miscellaneous. No provision of this Agreement may be modified or waived unless such modification or waiver is agreed to in writing and signed by Executive and by a duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Except as set forth in Sections 1(b) and 1(f), the failure by Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. Except as otherwise specifically provided herein, the rights of, and benefits payable to, Executive, his estate or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of the Company. 13 14 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and Executive has executed this Agreement as of the day and year first above written. MELLON BANK CORPORATION ------------------------------------ By: Title: EXECUTIVE ------------------------------------ 14 EX-11.1 13 MELLON BANK 10-K405 1 Ex- 11.1 COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME PER COMMON SHARE Mellon Bank Corporation (and its subsidiaries)
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ PRIMARY NET INCOME PER COMMON SHARE Net income applicable to common stock $688,974,000 $652,234,000 $361,221,000 (a) - ------------------------------------------------------------------------------------------------------------------------------ Stock and stock equivalents (average shares): Common shares outstanding 131,205,611 143,428,078 145,036,812 Common shares issuable upon conversion of Series D preferred stock - - 1,692,263 Other common stock equivalents, net of shares assumed to be repurchased under the treasury stock method: Stock options 1,988,974 1,377,077 1,886,912 Warrants - 268,510 451,978 Series D preferred stock subscription rights - - 817 - ------------------------------------------------------------------------------------------------------------------------------ Total stock and stock equivalents 133,194,585 145,073,665 149,068,782 - ------------------------------------------------------------------------------------------------------------------------------ Net income per common share $5.17 $4.50 $2.42 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ FULLY DILUTED NET INCOME PER COMMON SHARE Net income applicable to common stock $688,974,000 $652,234,000 $361,221,000 (a) - ------------------------------------------------------------------------------------------------------------------------------ The after-tax benefit of interest expense on the assumed conversion of 7-1/4% Convertible Subordinated Capital Notes 151,000 206,000 204,000 - ------------------------------------------------------------------------------------------------------------------------------ Adjusted net income applicable to common stock $689,125,000 $652,440,000 $361,425,000 - ------------------------------------------------------------------------------------------------------------------------------ Stock, stock equivalents and potentially dilutive items (average shares): Common shares outstanding 131,205,611 143,428,078 145,036,812 Common shares issuable upon conversion of Series D preferred stock - - 1,692,263 Other common stock equivalents, net of shares assumed to be repurchased under the treasury stock method: Stock options 2,605,859 2,186,923 1,914,398 Warrants - 440,834 451,978 Series D preferred stock subscription rights - - 817 Common shares issuable upon conversion of 7-1/4% Subordinated Capital Notes 101,011 126,593 133,492 - ------------------------------------------------------------------------------------------------------------------------------ Total 133,912,481 146,182,428 149,229,760 - ------------------------------------------------------------------------------------------------------------------------------ Net income per common share $5.15 $4.46 $2.42 - ------------------------------------------------------------------------------------------------------------------------------
(a) Includes $3 million of Series D preferred stock dividends. Series D preferred stock was considered a common stock equivalent. EX-12.1 14 MELLON BANK 10-K405 1 Ex- 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Mellon Bank Corporation (parent Corporation)(a)
- ----------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------- 1. Income before income taxes and equity in undistributed net income (loss) of subsidiaries $349,900 $473,554 $434,035 $224,869 $137,594 2. Fixed charges: interest expense, one-third of rental expense net of income from subleases, and amortization of debt issuance costs 101,010 96,971 95,193 110,739 79,709 - ----------------------------------------------------------------------------------------------------------------------------- 3. Income before income taxes and equity in undistributed net income (loss) of subsidiaries, plus fixed charges (line 1 + line 2) $450,910 $570,525 $529,228 $335,608 $217,303 - ----------------------------------------------------------------------------------------------------------------------------- 4. Preferred stock dividend requirements(b) $ 68,503 $ 62,035 $124,260 $103,792 $ 61,197 - ----------------------------------------------------------------------------------------------------------------------------- 5. Ratio of earnings (as defined) to fixed charges (line 3 divided by line 2) 4.46 5.88 5.56 3.03 2.73 6. Ratio of earnings (as defined) to combined fixed charges and preferred stock dividends [line 3 divided by (line 2 + line 4)] 2.66 3.59 2.41 1.56 1.54 - -----------------------------------------------------------------------------------------------------------------------------
(a) The parent Corporation ratios include the accounts of Mellon Bank Corporation (the "Corporation"), Mellon Financial Company, a wholly owned subsidiary of the Corporation that functions as a financing entity for the Corporation and its subsidiaries by issuing commercial paper and other debt guaranteed by the Corporation, and Mellon Capital I and Mellon Capital II, special purpose business trusts formed by the Corporation, that exist solely to issue Capital Securities. For purposes of computing these ratios, earnings represent parent Corporation income before taxes and equity in undistributed net income (loss) of subsidiaries, plus the fixed charges of the parent Corporation. Fixed charges represent interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, and amortization of debt issuance costs. Because the ratio excludes from earnings the equity in undistributed net income (loss) of subsidiaries, the ratio varies with the payment of dividends by such subsidiaries. (b) Preferred stock dividend requirements for all years presented represent the pretax amount required to cover preferred stock dividends. EX-12.2 15 MELLON BANK 10-K405 1 Ex- 12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Mellon Bank Corporation and its subsidiaries(a)
- --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in thousands) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- 1. Income $ 732,580 $ 691,534 $ 433,365 $ 460,213 $ 527,955 2. Provision for income taxes 418,264 400,058 278,040 298,034 104,099 - --------------------------------------------------------------------------------------------------------------------------------- 3. Income before provision for income taxes (line 1 + line 2) $1,150,844 $1,091,592 $ 711,405 $ 758,247 $ 632,054 - --------------------------------------------------------------------------------------------------------------------------------- 4. Fixed charges: a. Interest expense (excluding interest on deposits) $ 358,367 $ 401,700 $ 263,054 $ 200,915 $ 211,998 b. One-third of rental expense (net of income from subleases) and amortization of debt issuance costs 44,553 44,303 40,140 38,190 29,446 - --------------------------------------------------------------------------------------------------------------------------------- c. Total fixed charges (excluding interest on deposits) (line 4a + line 4b) 402,920 446,003 303,194 239,105 241,444 d. Interest on deposits 902,726 888,580 538,715 454,458 636,719 - --------------------------------------------------------------------------------------------------------------------------------- e. Total fixed charges (line 4c + line 4d) $1,305,646 $1,334,583 $ 841,909 $ 693,563 $ 878,163 - --------------------------------------------------------------------------------------------------------------------------------- 5. Preferred stock dividend requirements (b) $ 68,503 $ 62,035 $ 124,260 $ 103,792 $ 61,197 - --------------------------------------------------------------------------------------------------------------------------------- 6. Income before provision for income taxes, plus total fixed charges: a. Excluding interest on deposits (line 3 + line 4c) $1,553,764 $1,537,595 $1,014,599 $ 997,352 $ 873,498 - --------------------------------------------------------------------------------------------------------------------------------- b. Including interest on deposits (line 3 + line 4e) $2,456,490 $2,426,175 $1,553,314 $1,451,810 $1,510,217 - --------------------------------------------------------------------------------------------------------------------------------- 7. Ratio of earnings (as defined) to fixed charges: a. Excluding interest on deposits (line 6a divided by line 4c) 3.86 3.45 3.35 4.17 3.62 b. Including interest on deposits (line 6b divided by line 4e) 1.88 1.82 1.84 2.09 1.72 8. Ratio of earnings (as defined) to combined fixed charges and preferred stock dividends: a. Excluding interest on deposits [line 6a divided by (line 4c + line 5)] 3.30 3.03 2.37 2.91 2.89 b. Including interest on deposits [line 6b divided by (line 4e + line 5)] 1.79 1.74 1.61 1.82 1.61 - ---------------------------------------------------------------------------------------------------------------------------------
2 Ex- 12.2 (continued) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (a) For purposes of computing these ratios, earnings represent consolidated income, before income taxes plus consolidated fixed charges. Fixed charges, excluding interest on deposits, include interest expense (other than on deposits), one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, and amortization of debt issuance costs. Fixed charges, including interest on deposits, include all interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense net of income from subleases, and amortization of debt issuance costs. (b) Preferred stock dividend requirements for all years presented represent the pretax amount required to cover preferred stock dividends. EX-13.1 16 MELLON BANK 10-K405 1 Exhibit 13.1 PRINCIPAL LOCATIONS AND OPERATING ENTITIES RETAIL SUBSIDIARIES AND REGIONS - MELLON BANK-WESTERN REGION serves OTHER DOMESTIC AND consumer and small to midsize commercial INTERNATIONAL ENTITIES Mellon Bank Corporation operates the markets in western Pennsylvania. following retail subsidiaries in the Headquarters: Pittsburgh, Pennsylvania AFCO CREDIT CORPORATION, with its United States: Mellon Bank, N.A., Mellon (412) 234-5000 Canadian affiliate, CAFO, Inc., is the Bank (DE) National Association and nation's largest insurance premium Mellon Bank (MD) National Association. - MELLON PSFS*, the brand name Mellon financing company, with offices in the Bank, N.A. uses in the Philadelphia United States and Canada. (212) 612-3500 MELLON BANK, N.A. comprises six regions. area, serves consumer and small to Headquarters: Pittsburgh, Pennsylvania midsize commercial markets in THE BOSTON COMPANY ASSET MANAGEMENT, (412) 234-5000 southeastern Pennsylvania and southern Inc. provides institutional investment New Jersey. management services. (617) 722-7029 - - MELLON BANK-CENTRAL REGION serves Headquarters: Philadelphia, Pennsylvania consumer and small to midsize commercial (215) 553-3000 BOSTON SAFE ADVISORS provides investment markets in central Pennsylvania. management services for individuals and Headquarters: State College, MELLON BANK (DE) NATIONAL ASSOCIATION corporations through brokerage firms Pennsylvania (814) 234-6392 serves consumer and small to midsize throughout the United States. commercial markets throughout Delaware (617) 722-7809 - - MELLON BANK-COMMONWEALTH REGION serves and provides nationwide cardholder consumer and small to midsize commercial processing services. BOSTON SAFE DEPOSIT AND TRUST COMPANY markets in southcentral Pennsylvania. Headquarters: Wilmington, Delaware provides trust and custody Headquarters: Harrisburg, Pennsylvania 1 800 323-7105 administration for institutional and 1 800 222-9034 private clients, private asset MELLON BANK (MD) NATIONAL ASSOCIATION management and personal and jumbo - - MELLON BANK-NORTHEASTERN REGION serves serves consumer and commercial markets mortgage lending. (617) 722-7000 consumer and small to midsize commercial throughout the greater Washington, D.C., markets in northeastern Pennsylvania. metropolitan area. CCF-MELLON PARTNERS, a joint venture Headquarters: Wilkes-Barre, Pennsylvania Headquarters: Rockville, Maryland with Credit Commercial de France, 1 800 222-1992 (301) 217-0600 markets investment management services in Europe and North America. - - MELLON BANK-NORTHERN REGION serves MELLON BANK, F.S.B. provides corporate (412) 234-3678 consumer and small to midsize commercial trust and personal trust services. markets in northwestern Pennsylvania. Headquarters: Pittsburgh, Pennsylvania CERTUS ASSET ADVISORS is a stable-value Headquarters: Erie, Pennsylvania (412) 234-0661 market specialist providing investment (814) 453-7400 management services to defined-contribution plan sponsors. (415) 399-4450 CHASEMELLON SHAREHOLDER SERVICES, a joint venture with The Chase Manhattan Corporation, provides securities transfer and shareholder services throughout the United States. 1 800 313-9450 CORPORATE BANKING markets credit and related services to large corporate customers, exclusive of financial institutions. (412) 234-8808 THE CORPORATE TRUST GROUP provides bond trustee, registrar, paying agent, custodian, escrow agent and investment management for municipal and corporate clients. (412) 234-2472
* Mellon PSFS is a service mark of Mellon Bank, N.A. 18 2 THE DREYFUS CORPORATION is one of the MELLON BANK COMMUNITY DEVELOPMENT MELLON SECURITIES TRUST COMPANY provides nation's leading mutual fund companies. CORPORATION, one of the first holding securities processing and custody Dreyfus manages or administers more than company CDCs regulated by the Federal services. (212) 374-1970 $80 billion in assets in more than 150 Reserve Board, invests in projects that mutual fund portfolios. (212) 922-6000 are important to modest-income segments MELLON TRUST COMPANY OF ILLINOIS of Delaware, Maryland, New Jersey and provides custody services, primarily for DREYFUS INVESTMENT SERVICES CORPORATION Pennsylvania. (412) 234-4580 Illinois insurance companies. provides a full range of securities (312) 357-3425 brokerage services for individuals and MELLON BOND ASSOCIATES provides institutional clients. 1 800 243-7549 structured management of bond portfolios MELLON VENTURES, INC. or its affiliates for institutional clients. invest in the equity of middle market DREYFUS RETIREMENT SERVICES provides a (412) 234-3839 operating companies experiencing rapid full array of investment products, growth or change in ownership. participant education and administrative MELLON BUSINESS CREDIT markets a broad (412) 236-3594 services to defined-contribution plans range of commercial finance products and nationwide. 1 800 401-4636 banking services nationwide to MIDDLE MARKET BANKING markets a full corporations. (215) 553-2161 range of financial and banking services FRANKLIN PORTFOLIO ASSOCIATES provides to commercial customers with annual investment management services for MELLON CAPITAL MANAGEMENT CORPORATION sales between $10 million and $250 employee benefit funds and institutional provides portfolio and investment million. Mellon's Middle Market group clients. (617) 790-6400 management services. (415) 546-6056 also specializes in providing services to all segments of the health care GLOBAL CASH MANAGEMENT provides cash MELLON EQUITY ASSOCIATES provides industry nationwide. (412) 236-1197 management services to corporations and specialized equity and balanced financial institutions as well as investment management services to THE NETWORK SERVICES DIVISION provides nonprofit organizations and government pension, nonprofit and public fund electronic funds transfer services, agencies. 1 800 424-3004 markets. (412) 234-6268 including automated teller machine processing and full-service merchant INSTITUTIONAL BANKING markets credit and MELLON EUROPE-LONDON provides credit, payment systems, to financial other banking services to cash management, foreign exchange and institutions and corporations. broker/dealers, insurance companies, treasury services to domestic and 1 800 343-7064 domestic commercial banks, mutual funds international customers. and investment managers. (412) 234-4494 011-44-171-626-9828 PARETO PARTNERS, a partnership in which Mellon holds a 30 percent interest, INTERNATIONAL BANKING provides MELLON FINANCIAL MARKETS, INC., the provides investment management services international trade and correspondent Corporation's Section 20 underwriting for employee benefit funds and banking services. (412) 234-6787 subsidiary, conducts securities institutional and high net worth business, providing fixed-income clients. (212) 527-1800 LAUREL CAPITAL ADVISORS provides underwriting, trading and sales services investment management services for to clients and investors throughout the PREMIER ADMINISTRATION is a leading individuals and corporations through United States. (412) 234-0424 servicer of unit trusts, the equivalent brokerage firms throughout the United of mutual funds in the United Kingdom States. 1 800 626-6721 MELLON LEASING CORPORATION markets a and Ireland. broad range of leasing and lease-related 011-44-1277-277-3000 (Shenfield) MELLON BANK CANADA is a chartered services to corporations throughout the 011-35-31-790-5000 (Dublin) Canadian bank providing credit, cash United States through its three management, treasury, custody, asset divisions: Large Corporate Leasing; The R-M TRUST COMPANY provides stock management, insurance premium financing Middle Market-Mellon US Leasing; and transfer, trustee and related services and shareholder services to the Retail/Vendor-Mellon First United to Canadian and international companies. corporate market throughout Canada. Leasing. (412) 234-5061 (416) 813-4500 (416) 860-0777 MELLON MORTGAGE COMPANY focuses on the REAL ESTATE FINANCE provides short- and origination and servicing of both intermediate-term financing to real residential and commercial mortgage estate developers and investors located loans through more than 100 locations in the East, Southeast, Midwest and nationwide. 1 800 366-1230 Texas. (412) 234-7560
19 3 DIRECTORS AND SENIOR MANAGEMENT COMMITTEE DIRECTORS George W. Johnstone CHAIRMEN EMERITI President and Chief Executive Officer MELLON BANK CORPORATION American Water Works Company, Inc. J. David Barnes AND MELLON BANK, N.A. Water services William B. Eagleson Jr. James H. Higgins Dwight L. Allison Jr. Rotan E. Lee(5)(6) Nathan W. Pearson Retired Chairman, President Partner and Chief Executive Officer Sherr, Joffe & Zuckerman, P.C. ADVISORY BOARD The Boston Company Full-service law firm Howard O. Beaver Jr. Burton C. Borgelt(5)(6) Andrew W. Mathieson(1)(3)(4) Retired Chairman and Chief Executive Retired Chairman and Chief Executive Executive Vice President Officer Officer Richard K. Mellon and Sons Carpenter Technology Corporation Dentsply International, Inc. Investments Manufacturer of artificial teeth and Vice Chairman H. Bryce Jordan consumable dental products Richard King Mellon Foundation President Emeritus Philanthropy The Pennsylvania State University Carol R. Brown(2)(6) President Edward J. McAniff(5)(6) John C. Marous The Pittsburgh Cultural Trust Partner Retired Chairman and Chief Executive Cultural and economic growth O'Melveny & Myers Officer organization Full-service law firm Westinghouse Electric Corporation Frank V. Cahouet(1) Robert Mehrabian(1)(2)(7) Masaaki Morita Chairman, President and President Chairman Chief Executive Officer Carnegie Mellon University Sony USA Foundation Mellon Bank Corporation and Mellon Private co-educational research Bank, N.A. institution Nathan W. Pearson Financial Advisor J. W. Connolly(1)(2)(4) Seward Prosser Mellon Paul Mellon Family Interests Retired Senior Vice President President and Chief Executive H. J. Heinz Company Officer H. Robert Sharbaugh Food manufacturer Richard K. Mellon and Sons Retired Chairman Investments Sun Company, Inc. Charles A. Corry(1)(2)(3)(4) Richard King Mellon Foundation Retired Chairman and Chief Executive Philanthropy Richard M. Smith Officer Retired Vice Chairman USX Corporation David S. Shapira(1)(2)(5)(7) Bethlehem Steel Corporation Energy and steel Chairman and Chief Executive Officer REGIONAL BOARDS C. Frederick Fetterolf(1)(2)(5)(6) Giant Eagle, Inc. Retired President and Chief Operating Retail grocery chain MELLON BANK-CENTRAL REGION Officer Galen E. Dreibelbis Aluminum Company of America W. Keith Smith(1) John Lloyd Hanson Aluminum and chemicals Vice Chairman Bruce K. Heim Mellon Bank Corporation and Carol Herrmann Ira J. Gumberg(1)(2)(5) Mellon Bank, N.A. Daniel B. Hoover President and Chief Executive Michael M. Kranich Sr. Officer Joab L. Thomas(4)(7) Edwin E. Lash J. J. Gumberg Co. President Emeritus Robert W. Neff Real estate management and development The Pennsylvania State University Ralph J. Papa Major public research university Nicholas Pelick Pemberton Hutchinson(3)(5)(6) Graham C. Showalter Retired Chief Executive Officer Wesley W. von Schack(1)(3)(4)(6)(7) Alvin L. Snowiss Westmoreland Coal Company Chairman, President and Jamie B. Stewart Jr. Coal mining Chief Executive Officer Robert M. Welham New York State Electric & Gas Corporation MELLON BANK-COMMONWEALTH REGION (1) Executive Committee Energy services Glenn R. Aldinger (2) Audit Committee Paul S. Beideman (3) Nominating Committee William J. Young(4)(5)(6) Burton C. Borgelt (4) Human Resources Committee Retired President Stephen R. Burke (5) Trust and Investment Committee Portland Cement Association James E. Grandon Jr. (6) Community Responsibility Committee Trade association for the Portland Ruth Leventhal (7) Technology Committee cement industry Henry E. L. Luhrs Gregory L. Sutliff Listing as of January 31, 1997
20 4 MELLON BANK-NORTHERN REGION MELLON BANK (DE) NATIONAL ASSOCIATION SENIOR MANAGEMENT COMMITTEE James D. Berry III John S. Barry Thomas B. Black Robert C. Cole Jr. OFFICE OF THE CHAIRMAN John T. Chesko Donna M. Coughey Frank V. Cahouet Robert H. Cox Audrey K. Doberstein Chairman, President Eugene Cross Arden B. Engebretson and Chief Executive Officer William S. DeArment Norman D. Griffiths Robert G. Liptak Jr. Garrett B. Lyons Vice Chairmen: Gary W. Lyons Martin G. McGuinn Christopher M. Condron Charles J. Myron W. Charles Paradee Jr. Steven G. Elliott Ruthanne Nerlich Bruce M. Stargatt Jeffery L. Leininger John S. Patton David R. Lovejoy Paul D. Shafer Jr. MELLON BANK (MD) NATIONAL ASSOCIATION Martin G. McGuinn Cyrus R. Wellman Frederick K. Beard Keith P. Russell Michael A. Besche W. Keith Smith MELLON BANK-NORTHEASTERN REGION Lawrence Brown Jr. Jamie B. Stewart Jr. David T. Andes Albert R. Hinton Frank J. Dracos David R. Lovejoy EXECUTIVE MANAGERS Peter B. Eglin Martin G. McGuinn Paul S. Beideman Alan J. Finlay Michael A. Smilow John T. Chesko Thomas M. Jacobs J. David Officer Joseph E. Kluger D. Michael Roark Jeffery L. Leininger THE BOSTON COMPANY, INC. Peter Rzasnicki Joseph R. Nardone AND BOSTON SAFE DEPOSIT William J. Stallkamp Joseph F. Palchak Jr. AND TRUST COMPANY Allan P. Woods Joseph L. Persico Dwight L. Allison Jr. Arthur K. Ridley Christopher M. Condron SENIOR MANAGERS Rhea P. Simms James E. Conway* Frederick K. Beard Charles C. Cunningham Jr. Richard B. Berner MELLON PSFS Hans H. Estin Michael E. Bleier Paul C. Brucker Avram J. Goldberg Paul A. Briggs Frank J. Coyne Lawrence S. Kash Michael A. Bryson Thomas F. Donovan Daniel M. Kilcullen Lawrence F. Clyde Lon R. Greenberg Robert P. Mastrovita Paul H. Dimmick Pemberton Hutchinson J. David Officer Kenneth R. Dubuque George W. Johnstone George Putnam Richard L. Holl Rotan E. Lee Charles W. Schmidt Paul Holmes Roland Morris W. Keith Smith Lawrence S. Kash William J. Stallkamp Jamie B. Stewart Jr. Daniel M. Kilcullen Francis R. Strawbridge III C. Vincent Vappi Allan C. Kirkman Stephen A. Van Dyck Benaree Pratt Wiley David F. Lamere William J. Young Dirk B. Landis THE DREYFUS CORPORATION Martin J. Lippert SUBSIDIARY BOARDS Mandell L. Berman Peter A. Lofquist Burton C. Borgelt Robert G. Loughrey MELLON BANK CANADA Frank V. Cahouet Sandra J. McLaughlin Frederick K. Beard Stephen E. Canter John P. O'Driscoll Peter A. Crossgrove Christopher M. Condron Robert M. Parkinson Keith G. Dalglish Lawrence S. Kash Robert W. Stasik Fraser M. Fell W. Keith Smith Sherman White Thomas C. MacMillan James A. Riley MELLON BANK, F.S.B. CORPORATE CONTROLLER Peter Rzasnicki Bruno A. Bonacchi Michael K. Hughey Allan P. Woods Christopher Flanagan Frank L. Reis Jr. CORPORATE SECRETARY Donald W. Titzel Carl Krasik Daryl J. Zupan
*Director of The Boston Company, Inc. only 21 5 MELLON BANK CORPORATION (and its subsidiaries)
- ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY (dollar amounts in millions, except per share amounts) 1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 Net interest revenue $ 1,478 $ 1,548 $ 1,508 $ 1,329 $ 1,182 $ 1,012 Provision for credit losses 155 105 70 125 185 250 Fee revenue 2,019 1,670 1,652 1,538 1,154 1,007 Gains (losses) on sale of securities 4 6 (5) 100 129 81 Operating expense 2,195 2,027 2,374 2,084 1,648 1,440 Provision for income taxes 418 401 278 298 104 62 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 733 $ 691 $ 433 $ 460 $ 528 $ 348 Net income applicable to common stock 689 652 358 397 477 299 - ---------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Primary net income $ 5.17 $ 4.50 $ 2.42 $ 2.73 $ 3.56 $ 2.39 Fully diluted net income 5.15 4.46 2.42 2.73 3.53 2.37 Dividends paid 2.35 2.00 1.57 1.01 .93 .93 Book value at year-end 26.86 26.17 25.06 24.28 21.37 18.44 Average common shares and equivalents outstanding-fully diluted (in thousands) 133,912 146,182 149,230 147,293 137,338 127,658 - ---------------------------------------------------------------------------------------------------------------------------------- KEY RATIOS (based on balance sheet averages) Return on common shareholders' equity 20.4% 17.8% 9.8% 12.1% 18.5% 13.8% Return on assets 1.74 1.72 1.14 1.29 1.72 1.16 Net interest margin on a taxable equivalent basis 4.26 4.62 4.71 4.39 4.46 3.99 Efficiency ratio 64 63 65 64 65 68 Efficiency ratio excluding amortization of intangibles (a) 61 60 62 61 63 66 - ---------------------------------------------------------------------------------------------------------------------------------- TANGIBLE OPERATING RESULTS (b) Fully diluted tangible earnings per common share $5.71 $4.96 $2.93 $3.14 $3.80 $2.62 Tangible net income applicable to common stock 765 725 434 458 513 331 Return on tangible common shareholders' equity 32.2% 27.1% 16.5% 18.9% 23.9% 19.1% Return on tangible assets 1.97 1.96 1.37 1.50 1.86 1.29 - ---------------------------------------------------------------------------------------------------------------------------------- RESULTS EXCLUDING CERTAIN ITEMS (c) Net income applicable to common stock $ 689 $ 652 $ 593 $ 456 $ 347 $ 210 Fully diluted net income per common share 5.15 4.46 4.00 3.13 2.59 1.67 Return on common shareholders' equity 20.4% 17.8% 16.0% 13.7% 13.1% 9.0% Return on tangible common shareholders' equity 32.2 27.1 25.3 21.3 17.3 12.7 Return on assets 1.74 1.72 1.71 1.46 1.29 .87 Return on tangible assets 1.97 1.96 1.97 1.67 1.43 .99 - ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Money market investments $ 1,381 $ 1,222 $ 1,656 $ 3,821 $ 1,905 $ 1,566 Securities 6,184 4,922 5,149 4,804 6,500 5,778 Loans 27,233 27,321 25,097 21,763 18,235 18,514 Interest-earning assets 34,944 33,761 32,282 30,657 26,948 26,167 Total assets 42,013 40,097 38,106 35,635 30,758 29,878 Deposits 30,838 27,951 27,248 26,541 22,684 21,438 Notes and debentures 2,038 1,670 1,768 1,991 1,365 1,448 Trust-preferred securities 32 - - - - - Redeemable preferred stock - - - - - 51 Common shareholders' equity 3,381 3,671 3,691 3,323 2,603 2,190 Total shareholders' equity 3,810 4,106 4,277 3,964 3,112 2,614 - ---------------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS Common shareholders' equity to assets 8.11% 8.83% 9.54% 9.57% 8.85% 7.91% Tier I capital ratio 8.38 8.14 9.48 9.70 10.20 9.05 Total (Tier I plus Tier II) capital ratio 13.58 11.29 12.90 13.22 13.83 13.16 Leverage capital ratio 8.31 7.80 8.67 9.00 9.45 8.62 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Excludes amortization of goodwill and other intangible assets recorded in connection with purchase acquisitions. (b) See page 30 for the definition of these results. (c) Results for 1994 exclude a $130 million after tax securities lending charge, $79 million after tax of Dreyfus merger-related expense, $10 million after tax of losses on the disposition of securities available for sale previously owned by Dreyfus and $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. Results for 1993 exclude $112 million after tax of merger expense and $53 million after tax of gains on the sale of securities related to the acquisition of The Boston Company. Results for periods prior to 1993 were calculated by applying a normalized effective tax rate of approximately 38% to pretax income. The unrecorded tax benefit that existed at the beginning of the periods, prior to 1993, was included in the determination of the return on average common shareholders' equity. NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS. 23 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIGNIFICANT FINANCIAL EVENTS IN 1996 - ------------------------------------------------------------------------------ Retirement enhancement plan In January 1996, the Corporation offered a Retirement Enhancement Plan to employees participating in the Mellon and The Boston Company retirement plans. This voluntary program provided certain employees age 55 or older, who had 10 or more years of service, the opportunity to choose early retirement with enhanced pensions and health insurance. This program concluded on March 31, 1996, with 495 employees electing early retirement. The Corporation recorded an $18 million charge in the first quarter in connection with this program. Repurchase of common stock In February 1996, the board of directors of the Corporation authorized the repurchase of up to 3.5 million shares of common stock to be used to meet current and near-term requirements for its stock-based benefit plans and dividend reinvestment plan. This program was completed during the second quarter of 1996. In May 1996, the board of directors authorized the repurchase of up to an additional 5 million shares of common stock. At December 31, 1996, the Corporation had repurchased 2.7 million shares under the 5 million share repurchase program. Since the beginning of 1995, the Corporation has repurchased 23.6 million common shares, prior to any reissuances, as well as warrants for 4.5 million shares of common stock. Securitization of home equity loans and insurance premium finance loans On March 29, 1996, the Corporation securitized $650 million of its home equity revolving credit line loans. These loans generally are secured by first and/or second mortgages on one-to-four family residential properties. A $28 million gain was recorded on the home equity securitization, and is included in other fee revenue. On December 19, 1996, the Corporation securitized $500 million of insurance premium finance loans. These loans are typically installment loans made to commercial insurance buyers, the proceeds of which pay premiums that are due to an insurance company. No gain was recorded on the insurance premium finance securitization. Common dividend increase In the second quarter of 1996, the Corporation increased its quarterly common stock dividend by 9% to $.60 per common share. This was the fifth quarterly common dividend increase that the Corporation has announced since the beginning of 1994, resulting in a total common dividend per share increase of 137%. Acquisitions of Business Equipment Financing Unit of USL Capital Corporation and First United Leasing Corporation On September 30, 1996, the Corporation completed its acquisition of the Business Equipment Financing unit of USL Capital Corporation (USL), a subsidiary of Ford Motor Company. This unit, which operates under the name Mellon-US Leasing, is headquartered in San Francisco and is a leading middle market leasing and financing provider of business and commercial equipment to more than 2,500 middle market companies. This acquisition allows the Corporation's leasing operations, which prior to the acquisition specialized in large transactions, to also focus on the middle market sector. The transaction increased the Corporation's total loan portfolio by more than $1.4 billion and had a purchase price of approximately $1.7 billion. On October 1, 1996, the Corporation acquired First United Leasing Corporation (FUL). FUL, based in Chicago, was a privately held vendor leasing company with approximately $150 million in assets that provides short- to medium-term leases on office, medical and light industrial equipment to users of small-ticket equipment throughout the United States. This unit operates under the name Mellon-First United Leasing. These acquisitions made the Corporation's Leasing Group the sixth largest bank-owned leasing company in the United States with a total lease portfolio of approximately $2.5 billion. 24 7 SIGNIFICANT FINANCIAL EVENTS IN 1996 (CONTINUED) - ------------------------------------------------------------------------------ Sale of American Automobile Association Credit Card Portfolio In early November 1996, the Corporation sold more than 1.3 million American Automobile Association (AAA) credit card accounts with outstanding balances of approximately $770 million. The Corporation recognized a net gain of $57 million on the sale. Letter of intent to acquire Buck Consultants, Inc. In December 1996, the Corporation signed a letter of intent to acquire Buck Consultants, Inc. (Buck), a leading global benefits consulting firm. Buck, which is headquartered in New York, provides a broad array of pension and health and welfare actuarial services, employee benefits, compensation and human resources consulting and administrative services to approximately 5,000 clients, ranging from large multinational corporations to small businesses. Buck is a privately owned firm with 65 offices in 16 countries. Buck reported total revenues of approximately $200 million for the fiscal year ended March 31, 1996. Including revenues from a recent acquisition, Buck's annual revenues would have totaled approximately $250 million. 25 8
BUSINESS SECTORS - ---------------------------------------------------------------------------------------------------------------------------------- (dollar amounts in Consumer Corporate/Institutional millions, averages Investment Services Banking Services Investment Services Banking Services in billions) 1996 1995 1996 1995 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Revenue $424 $380 $1,508 $1,383 $1,015 $916 $ 447 $ 413 Credit quality expense (revenue) - - 154 211 - - 1 (8) Operating expense 281 261 930 863 798 742 164 157 - ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes 143 119 424 309 217 174 282 264 Income taxes 58 49 155 118 88 71 100 95 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 85 $ 70 $ 269 $ 191 $ 129 $103 $ 182 $ 169 - ---------------------------------------------------------------------------------------------------------------------------------- Tangible net income $ 88 $ 73 $ 310 $ 233 $ 153 $126 $ 190 $ 174 - ---------------------------------------------------------------------------------------------------------------------------------- Average assets $0.3 $0.3 $ 22.8 $ 22.1 $ 1.5 $1.7 $14.9 $13.4 Average common shareholders' equity 0.2 0.2 1.2 1.1 0.5 0.5 1.3 1.1 Return on average common shareholders' equity 49% 41% 23% 17% 24% 23% 14% 15% Return on average assets NM NM 1.18 .86 NM NM 1.22 1.26 Pretax operating margin 34 31 28 22 21 19 63 64 Pretax operating margin excluding amortization of intangibles 34 32 32 26 24 22 66 66 Efficiency ratio excluding amortization of intangibles 66 68 58 58 76 78 34 36 - ----------------------------------------------------------------------------------------------------------------------------------
NM--Not meaningful. NOTE: THE TABLE ABOVE AND DISCUSSION THAT FOLLOWS PRESENT THE OPERATING RESULTS OF THE CORPORATION'S MAJOR BUSINESS SECTORS, ANALYZED ON AN INTERNAL MANAGEMENT REPORTING BASIS. AMOUNTS ARE PRESENTED ON A TAXABLE EQUIVALENT BASIS. CAPITAL IS ALLOCATED USING THE FEDERAL REGULATORY GUIDELINES AS A BASIS, COUPLED WITH MANAGEMENT'S JUDGMENT REGARDING THE OPERATIONAL RISKS INHERENT IN THE BUSINESSES. THE CAPITAL ALLOCATIONS MAY NOT BE REPRESENTATIVE OF THE CAPITAL LEVELS THAT WOULD BE REQUIRED IF THESE SECTORS WERE NONAFFILIATED BUSINESS UNITS. Income before taxes for the Corporation's core sectors was $1,066 million in 1996, an increase of $200 million, or 24%, compared with $866 million in 1995. This increase resulted from a 10% increase in revenue and a 24% decrease in credit quality expense, partially offset by a 7% increase in operating expense. Return on average common shareholders' equity for the core sectors was 21% in 1996, compared with 19% in 1995. Return on average assets was 1.69% in 1996, compared with 1.42% in 1995. Consumer Investment Services Consumer Investment Services includes private asset management services and retail mutual funds. Income before taxes for the Consumer Investment sector was $143 million in 1996, an increase of $24 million, or 20%, from 1995. This increase resulted from higher mutual fund management revenue, generated by a higher level of assets managed and increased private asset management trust fees. This sector provided excellent returns, as return on average common shareholders' equity was 49% in 1996, up from 41% in 1995. Consumer Banking Services Consumer Banking Services includes consumer lending and deposit products, business banking, branch banking, credit card, mortgage loan origination and servicing and jumbo residential mortgage lending. Income before taxes for this sector totaled $424 million in 1996, a $115 million, or 38%, increase compared with $309 million in 1995. Revenue increased $125 million compared with the prior year, primarily as a result of: higher mortgage servicing fees, primarily relating to acquisitions; a $57 million gain on the sale of the AAA credit card portfolio; gains on the disposition of selected branches related to the continued reconfiguration of the retail delivery system; higher electronic tax return filing fees; and higher net interest revenue. Partially offsetting these increases were decreases in credit card revenue and revenue from home equity loans as a result of the fourth quarter 1995 credit card securitization and the first quarter 1996 home equity loan 26 9
- ---------------------------------------------------------------------------------------------------------------------------------- Total Real Estate Other Total All Core Sectors Workout Corporate Activity Sectors 1996 1995 1996 1995 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- $3,394 $3,092 $ 20 $ 14 $109 $139 $3,523 $3,245 155 203 (13) (118) - - 142 85 2,173 2,023 7 6 28 18 2,208 2,047 - ---------------------------------------------------------------------------------------------------------------------------------- 1,066 866 26 126 81 121 1,173 1,113 401 333 9 46 30 43 440 422 - ---------------------------------------------------------------------------------------------------------------------------------- $ 665 $ 533 $ 17 $ 80 $ 51 $ 78 $ 733 $ 691 - ---------------------------------------------------------------------------------------------------------------------------------- $ 741 $ 606 $ 17 $ 80 $ 51 $ 78 $ 809 $ 764 - ---------------------------------------------------------------------------------------------------------------------------------- $ 39.5 $ 37.5 $ 0.3 $0.2 $2.2 $2.4 $42.0 $ 40.1 3.2 2.9 - - 0.2 0.8 3.4 3.7 21% 19% NM NM NM NM 20% 18% 1.69 1.42 NM NM NM NM 1.74 1.72 31 28 NM NM NM NM 33 34 34 31 NM NM NM NM 35 37 61 62 NM NM NM NM 61 60 - ----------------------------------------------------------------------------------------------------------------------------------
securitization. Credit quality expense totaled $154 million in 1996, approximately half of which was recorded in the fourth quarter of 1996, reflecting continued concern about the credit quality of the credit card portfolio. More than 90% of the Corporation's net credit losses in 1996 were from the credit card portfolio. Credit quality expense totaled $211 million in 1995 reflecting a high level of credit card losses, including the losses recorded in connection with the accelerated resolution portfolio. The $67 million increase in operating expense reflected higher expenses in support of mortgage servicing acquisitions, including a $39 million increase in the amortization of mortgage servicing rights and expenses related to the reconfiguration of the retail delivery system. Partially offsetting the higher operating expense was a reduction in FDIC insurance premiums in 1996. The return on average common shareholders' equity for this sector was 23% in 1996, compared with 17% in 1995. Corporate/Institutional Investment Services Corporate/Institutional Investment Services includes institutional asset and institutional mutual fund management and administration, institutional trust and custody, securities lending, foreign exchange, cash management, stock transfer, corporate trust and services for defined contribution plans. Income before taxes for this sector was $217 million in 1996, an increase of $43 million, or 26%, compared with 1995. Revenue increased $99 million due to a higher level of institutional mutual fund assets managed, higher cash management revenue, an increase in securities lending revenue, the full year impact of the fourth quarter 1995 acquisition of two corporate trust businesses and increased fees from services provided for corporate defined contribution plans, partially offset by lower foreign exchange fees. Operating expense increased $56 million in support of higher transaction volumes and investments, as well as the corporate trust acquisitions. The return on average common shareholders' equity for this sector was 24% in 1996, up from 23% in 1995. Corporate/Institutional Banking Services Corporate/Institutional Banking Services includes large corporate and middle market lending, asset-based lending, lease financing, commercial real estate lending, insurance premium financing, securities underwriting and trading and international banking. Income before taxes for the Corporate/Institutional Banking Services sector was $282 million in 1996, an increase of $18 million, or 7%, from $264 million in 1995. Revenue increased $34 million primarily as a result of higher net interest revenue on higher loan levels, including the impact of the USL and FUL acquisitions, and increased 27 10 BUSINESS SECTORS (CONTINUED) - ------------------------------------------------------------------------------ securities trading revenue. The $9 million increase in credit quality expense was primarily due to lower credit recoveries in 1996. The $7 million increase in operating expense primarily resulted from the USL and FUL acquisitions. The return on average common shareholders' equity for this sector was 14% in 1996, compared with 15% in 1995. Real Estate Workout Real Estate Workout includes commercial real estate recovery and mortgage banking recovery operations. Income before taxes for Real Estate Workout was $26 million in 1996, compared with $126 million in 1995. The results in both periods reflect lower levels of required loan loss and OREO reserves given the improvement in the loss experience of the portfolio. The Corporation also experienced a lower level of credit loss recoveries in 1996 compared with 1995. Other The Other sector's pretax income of $81 million in 1996 principally reflected earnings on capital above that required in the core sectors. The results for 1996 also reflect the $28 million gain on the securitization of home equity loans and a $13 million gain on the partial sale of an equity interest in an institutional investment management firm. Operating expense in 1996 includes the $18 million charge resulting from the retirement enhancement plan. Results for 1995 principally reflected earnings on capital above that required in the core sectors. The following tables distribute net income and return on average common shareholders' equity for the Corporation's core sectors between customers serviced and products offered.
Customers serviced ---------------------------------------------------------- Total Total Corporate/ Consumer Institutional (dollar amounts in millions) 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $354 $261 $311 $272 Return on average common shareholders' equity 26% 20% 17% 17% - ----------------------------------------------------------------------------------------------------------------------------------
Products offered --------------------------------------------------------- Total Total Investment Banking (dollar amounts in millions) 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $214 $173 $451 $360 Return on average common shareholders' equity 30% 28% 18% 16% - ----------------------------------------------------------------------------------------------------------------------------------
28 11 RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ OVERVIEW OF 1996 RESULTS - ------------------------------------------------------------------------------ The Corporation reported record 1996 fully diluted earnings per common share of $5.15, an increase of 15%, compared with earnings per common share of $4.46 in 1995. Net income applicable to common stock was $689 million in 1996, compared with $652 million in 1995. Return on common shareholders' equity and return on assets were 20.4% and 1.74%, respectively, in 1996, compared with 17.8% and 1.72%, respectively, in 1995. Fully diluted tangible earnings per common share in 1996 were $5.71, an increase of 15%, compared with $4.96 in 1995. Return on tangible common shareholders' equity and return on tangible assets were 32.2% and 1.97%, respectively, in 1996, compared with 27.1% and 1.96%, respectively, in 1995. Earnings per common share in 1996 reflects the 1995 and 1996 repurchases of 23.6 million common shares, prior to any reissuances, as well as the repurchase of warrants for 4.5 million common shares. The Corporation's average level of treasury stock was approximately $640 million higher in 1996, compared with 1995. After giving effect to funding the higher level of treasury stock, valued at the short-term funding rate, the lower share count increased earnings per share 6%, while ongoing business growth increased earnings per share 9%. The Corporation's results in 1996 reflect its successful efforts to broaden and strengthen products and services, maintain fee and interest revenue balance, and generate high returns. Compared with 1995, the Corporation's 1996 results reflected an increase in fee revenue, partially offset by higher operating expense, higher credit quality expense and lower net interest revenue. Net interest revenue totaled $1,478 million, down $70 million from $1,548 million in 1995. This reduction primarily resulted from the decrease in interest revenue related to the credit card and home equity loan securitizations and the funding costs related to the repurchase of common shares, partially offset by a higher level of noninterest-bearing deposits and loan growth. Fee revenue increased to $2,019 million, up from $1,670 million in 1995. The increase in fee revenue was attributable to higher institutional trust fees and mutual fund management revenue, the gain on the sale of the AAA credit card portfolio, higher mortgage servicing fees and increased credit card fee revenue. The increase in credit card fee revenue was due to the November 1995 credit card securitization. Operating expense before the net revenue from acquired property was $2,208 million in 1996, up $161 million from $2,047 million in 1995. The increase primarily resulted from higher staff expense, due in part to higher incentive expense and the early retirement enhancement program, as well as higher amortization expense of purchased mortgage servicing rights. These increases were offset, in part, by lower FDIC deposit insurance assessment expense in 1996. The provision for credit losses was $155 million in 1996, compared with $105 million in 1995. The increase primarily resulted from an increase in the provision for credit losses related to the credit card portfolio. Net credit losses totaled $124 million in 1996, a decrease of $125 million from $249 million in 1995. The higher level of credit losses in 1995 primarily resulted from $106 million of credit losses recorded on $193 million of CornerStone(sm) credit card loans that were transferred to an accelerated resolution portfolio in the fourth quarter of 1995. Nonperforming assets totaled $174 million at December 31, 1996, a decrease of $62 million from $236 million at December 31, 1995. The Corporation's ratio of nonperforming assets to total loans and net acquired property was .63% at December 31, 1996, the lowest level in the Corporation's recent history, compared with .85% at December 31, 1995. This ratio has been less than 1% for 10 consecutive quarters. The Corporation's ratio of common shareholders' equity to assets was 8.11% at December 31, 1996. The Tier I, Total and Leverage capital ratios were 8.38%, 13.58% and 8.31%, respectively, at December 31, 1996, well in excess of the required risk-based capital ratios. 29 12 OVERVIEW OF 1996 RESULTS (CONTINUED) - ------------------------------------------------------------------------------ 1995 compared with 1994 The Corporation reported net income applicable to common stock of $652 million, or $4.46 per common share on a fully diluted basis, in 1995, compared with $358 million, or $2.42 per common share, in 1994. Results in 1994 included a $130 million after tax securities lending charge, $89 million after tax of Dreyfus merger-related charges and $16 million of additional preferred stock dividends recorded in connection with the redemption of the Corporation's Series H preferred stock. Net interest revenue was $1,548 million in 1995, an increase of $40 million compared with 1994, principally resulting from a higher level of average loans. Fee revenue was $1,670 million in 1995, an increase of $18 million from 1994, reflecting higher mortgage servicing fees, credit card fees and foreign currency and securities trading revenue, partially offset by lower trust and investment management fees and the effect of divestitures. Operating expense before the net revenue of acquired property was $2,047 million in 1995, a decrease of $28 million from 1994, excluding the securities lending charge and merger expense. The decrease in operating expense resulted from lower FDIC deposit insurance assessment expense, lower marketing expense related to the CornerStone(sm) credit card and a decrease in professional, legal and other purchased services expense. Partially offsetting the decreases were increases in the amortization of purchased mortgage servicing rights and higher equipment expense. The provision for credit losses was $105 million in 1995, compared with $70 million in 1994. Net credit losses totaled $249 million in 1995, up from $67 million in 1994, principally reflecting higher losses on the CornerStone(sm) credit card product, including the $106 million of credit losses on the CornerStone(sm) accounts transferred to the accelerated resolution portfolio in the fourth quarter of 1995. TANGIBLE OPERATING RESULTS - ------------------------------------------------------------------------------ Except for the merger with Dreyfus, which was accounted for under the "pooling of interests" method, the Corporation has been required to account for business combinations under the "purchase" method of accounting. The purchase method results in the recording of goodwill and other identified intangibles that are amortized as noncash charges in future years into operating expense. The pooling of interests method does not result in the recording of goodwill or intangibles. Since goodwill and intangible amortization expense does not result in a cash expense, the economic value to shareholders under either accounting method is essentially the same. Results, excluding the impact of intangibles, are shown in the table below.
- ---------------------------------------------------------------------------------------------------------------------------------- (dollar amounts in millions) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock (a) $ 689 $ 652 $ 593 After tax impact of amortization of intangibles from purchase acquisitions 76 73 76 - ---------------------------------------------------------------------------------------------------------------------------------- Tangible net income applicable to common stock $ 765 $ 725 $ 669 Tangible earnings per common share-fully diluted $ 5.71 $ 4.96 $ 4.51 - ---------------------------------------------------------------------------------------------------------------------------------- Average common equity $ 3,381 $ 3,671 $ 3,691 Average goodwill and other intangibles 1,003 993 1,044 - ---------------------------------------------------------------------------------------------------------------------------------- Average tangible common equity $ 2,378 $ 2,678 $ 2,647 Return on tangible common equity 32.2% 27.1% 25.3% - ---------------------------------------------------------------------------------------------------------------------------------- Average total assets $42,013 $40,097 $38,106 Average tangible assets $41,010 $39,104 $37,062 Return on tangible assets 1.97% 1.96% 1.97% - ----------------------------------------------------------------------------------------------------------------------------------
(a) Results for 1994 exclude the $130 million after tax securities lending charge, $89 million after tax of Dreyfus merger-related charges and the additional $16 million of preferred stock dividends recorded in connection with the redemption of the Series H preferred stock. 30 13 NET INTEREST REVENUE
- ----------------------------------------------------------------------------------------------------------------------------------- (taxable equivalent basis, average balances in millions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Money market investments $ 1,381 $ 1,222 $ 1,656 Trading account securities 146 296 380 Securities 6,184 4,922 5,149 Loans 27,233 27,321 25,097 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $34,944 $33,761 $32,282 - ----------------------------------------------------------------------------------------------------------------------------------- Financed by: Interest-bearing liabilities $28,588 $27,774 $25,441 Noninterest-bearing liabilities 6,356 5,987 6,841 - ----------------------------------------------------------------------------------------------------------------------------------- Total $34,944 $33,761 $32,282 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 1,488 $ 1,558 $ 1,521 Net interest margin 4.26% 4.62% 4.71% - -----------------------------------------------------------------------------------------------------------------------------------
Net interest revenue includes the interest spread on interest-earning assets, as well as loan fees, cash receipts and interest reversals on nonperforming loans and revenue or expense on off-balance-sheet instruments used for interest rate risk management purposes. Net interest revenue on a taxable equivalent basis totaled $1,488 million in 1996, down $70 million, or 5%, compared with the prior year. The net interest margin was 4.26% in 1996, down 36 basis points compared with 4.62% in 1995. The decrease in net interest revenue and the net interest margin in 1996, compared with the prior year, resulted from the effect of the November 1995 $950 million credit card securitization, the March 1996 $650 million home equity loan securitization and funding costs related to the repurchase of common stock, partially offset by a higher level of noninterest-bearing deposits, loan growth and higher loan fees. Excluding the effects of the loan securitizations and equity repurchases, the net interest revenue and net interest margin for 1996 would have been approximately $1,649 million and 4.53%, compared with approximately $1,582 million and 4.67% in 1995. The foregone net interest revenue from the loan securitizations is substantially offset by higher servicing fee revenue and lower net credit losses. Average loans decreased $88 million in 1996, compared with 1995, primarily as a result of the loan securitizations and sales, partially offset by loan growth and the lease financing acquisitions. Excluding the loan securitizations and sales and the leasing acquisitions, loans increased approximately $1.0 billion, compared with the prior year, primarily as a result of increases in wholesale loans. 1995 compared with 1994 Net interest revenue on a taxable equivalent basis in 1995 increased by $37 million compared with 1994, while the net interest margin decreased by 9 basis points. The improvement in net interest revenue primarily resulted from higher average loan levels partially offset by the migration of retail customers from lower cost core deposit products to higher cost deposit products. The decrease in the net interest margin primarily reflected the movement of customers from lower cost deposit products to higher cost products. Also affecting the net interest margin compared with 1994 was a high level of prepayments on adjustable rate mortgages. CREDIT QUALITY EXPENSE
- --------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Provision for credit losses $155 $105 $ 70 Net revenue from acquired property (13) (20) (28) - ---------------------------------------------------------------------------------------------------------------------------------- Credit quality expense $142 $ 85 $ 42 - ---------------------------------------------------------------------------------------------------------------------------------
Credit quality expense, defined as the provision for credit losses less the net revenue from acquired property, increased $57 million in 1996 compared with 1995, primarily as a result of a $50 million increase in the provision for credit losses. This increase was primarily a result of a higher provision for credit losses relating to the credit card portfolio. The net revenue from acquired property was $13 million in 1996, a $7 million decrease compared with 1995. The decrease was due, in part, to a lower amount of reserve reversals and lower net gains on the sale of acquired property in 1996. 31 14 NONINTEREST REVENUE
- --------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Fee revenue: Trust and investment management: Mutual fund: Management $ 340 $ 309 $ 294 Administration/Custody 108 115 159 Institutional trust 247 206 223 Institutional asset management 137 135 143 Private asset management 162 141 134 - --------------------------------------------------------------------------------------------------------------------------------- Total trust and investment management fees 994 906 953 Cash management and deposit transaction charges 211 191 197 Mortgage servicing fees 180 122 78 Credit card fees 120 90 72 Foreign currency and securities trading revenue 80 91 76 Information services fees 50 48 78 Gain on sale of credit card portfolio 57 - - Other 327 222 198 - --------------------------------------------------------------------------------------------------------------------------------- Total fee revenue 2,019 1,670 1,652 Gains (losses) on sale of securities 4 6 (5) - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue $2,023 $1,676 $1,647 - ---------------------------------------------------------------------------------------------------------------------------------
Fee revenue represented 58% of the Corporation's total revenue in 1996, up from 52% in 1995. This increase resulted from growth in virtually every fee category, as well as higher fee revenue from the credit card and home equity loan securitizations. Excluding the gain on the sale of the AAA credit card portfolio, fee revenue represented 57% of the Corporation's total revenue in 1996. Fee revenue totaled $2,019 million in 1996, a $349 million, or 21%, increase compared with 1995, primarily resulting from higher trust and investment management fee revenue, mortgage servicing fees, the gain on the sale of the AAA credit card portfolio and higher credit card fees. Excluding the gain on the sale of the AAA credit card portfolio, fee revenue increased 17%. Total trust and investment management fees The Corporation's trust and investment management fee revenue represented 49% of the Corporation's total fee revenue in 1996. The $88 million, or 10%, increase in trust and investment management fees in 1996 compared with 1995 resulted from a $41 million, or 20%, increase in institutional trust fees, a $31 million, or 10%, increase in mutual fund management revenue and a $21 million, or 15%, increase in private asset management revenue. The increase in institutional trust revenue resulted from new business, including the 1995 acquisition of two corporate trust businesses and a $17 million increase in securities lending revenue. The increase in securities lending revenue resulted primarily from improved margins, as well as a higher volume of securities lent in 1996. The higher revenue from the management of mutual funds resulted from a higher average level of mutual fund assets managed and lower fee waivers at Dreyfus. Mutual fund management fees are discussed further on page 34. The increase in private asset management revenue resulted primarily from new business and an increase in the market value of assets under management. The equity markets enjoyed another strong year in 1996. The Dow Jones Industrial Average increased 26.01% and the S&P 500 Index increased 20.26%. As shown in the table on the following page, the market value of assets under management was $236 billion at December 31, 1996, an increase of $3 billion from December 31, 1995. New business and a general market increase, more than offset a $15 billion decrease resulting from the partial sale of an equity interest in an institutional investment management firm. The market value of assets under administration/custody was $1,046 billion at December 31, 1996, an increase of $260 billion compared with $786 billion at December 31, 1995. This increase also resulted from new business, as well as the general market increase. In the first quarter of 1996, the Corporation was awarded the global custody services contract for $68 billion of assets for Prudential Portfolio Managers, U.K. 32 15 NONINTEREST REVENUE (CONTINUED) - -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE OF ASSETS UNDER MANAGEMENT AND ADMINISTRATION/CUSTODY December 31, (in billions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Institutional trust: Administration/Custody $ 962 $708 $568 Mutual fund: Management (a) 87 81 73 Administration/Custody 57 60 76 Institutional asset management: Management 121 128 96 Private asset management: Management 28 24 21 Administration/Custody 27 18 13 - ----------------------------------------------------------------------------------------------------------------------------------- Total: Management $ 236 $233 $190 Administration/Custody $1,046 $786 $657 - -----------------------------------------------------------------------------------------------------------------------------------
(a) See table below for components of managed mutual fund assets.
- ----------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE OF MANAGED MUTUAL FUND ASSETS BY FUND CATEGORY December 31, (in billions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Proprietary funds: Taxable money market funds: Institutions $27 $24 $18 Individuals 9 10 10 Tax-exempt bond funds 17 19 18 Equity funds 15 11 9 Tax-exempt money market funds 7 8 7 Fixed income funds 5 5 4 - ----------------------------------------------------------------------------------------------------------------------------------- Total proprietary funds 80 77 66 Nonproprietary funds managed 7 4 7 - ----------------------------------------------------------------------------------------------------------------------------------- Total managed mutual fund assets $87 $81 $73 - -----------------------------------------------------------------------------------------------------------------------------------
33 16 NONINTEREST REVENUE (CONTINUED) - -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- MUTUAL FUND MANAGEMENT FEE REVENUE (in millions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Managed mutual fund fees $377 $352 $348 Less: Fees waived 30 35 44 Less: Fund expense reimbursements 7 8 10 - ----------------------------------------------------------------------------------------------------------------------------------- Net managed mutual fund fees $340 $309 $294 - ----------------------------------------------------------------------------------------------------------------------------------- Net managed mutual fund fees by fund category: Proprietary funds: Taxable money market funds: Institutions $ 60 $ 48 $ 43 Individuals 37 39 39 Tax-exempt bond funds 100 100 102 Equity funds 83 64 56 Tax-exempt money market funds 27 24 21 Fixed income funds 23 23 20 - ----------------------------------------------------------------------------------------------------------------------------------- Total proprietary fund fees 330 298 281 Nonproprietary fund management fees 10 11 13 - ----------------------------------------------------------------------------------------------------------------------------------- Net mutual fund management fees $340 $309 $294 - -----------------------------------------------------------------------------------------------------------------------------------
Mutual fund management fees Mutual fund management fees are based on the average net assets of each fund. Average proprietary funds managed at Dreyfus were $82 billion in the fourth quarter of 1996, and averaged $80 billion for the year, compared with $74 billion in 1995. This increase resulted primarily from a $3 billion average increase in equity funds and a $5 billion increase in taxable institutional money market funds. The Corporation will periodically waive certain mutual fund management fees and/or reimburse certain mutual fund expenses, to increase the rate of return to investors. Lower fee waivers and fund expense reimbursements contributed $6 million to the increase in mutual fund management revenue in 1996, compared with 1995. Cash management and deposit transaction charges The Corporation provides a number of cash management services, including remittance processing, collections and disbursements, check processing and electronic services to assist corporate customers in the management of their accounts receivable, accounts payable and treasury management functions. At December 31, 1996, the Corporation's cash management services ranked 6th nationally in market share. Cash management and deposit transaction charges totaled $211 million in 1996, an increase of $20 million, or 10%, from 1995. This increase resulted primarily from higher volumes of business in customer receivable, payable and treasury management products. Mortgage servicing fees Mortgage servicing fees were $180 million in 1996, an increase of $58 million, or 48%, compared with 1995, resulting primarily from mortgage servicing rights acquired through acquisitions, including the full year impact of the August 1995 Metmor acquisition, compared with a partial year impact in 1995. In addition, portfolio growth from loan originations contributed to the increase in fees. At December 31, 1996, the Corporation's total servicing portfolio was $69 billion, comprised of $58 billion of residential and $11 billion of commercial servicing. At December 31, 1995, the total servicing portfolio was $53 billion, comprised of $46 billion of residential and $7 billion of commercial servicing. At December 31, 1996, the Corporation had the 9th largest residential mortgage servicing portfolio and the 6th largest commercial mortgage servicing portfolio in the United States. 34 17 NONINTEREST REVENUE (CONTINUED) - ------------------------------------------------------------------------------- Credit card fees Credit card fee revenue, which principally consists of interchange, cardholder fees and servicing revenue from the securitized credit card receivables, increased by $30 million, or 34%, in 1996. This increase primarily resulted from servicing fee revenue from securitized credit card receivables. Credit card fee revenue, as well as certain related expenses, will decrease in 1997 as a result of the sale of the AAA credit card portfolio in November 1996. Foreign currency and securities trading revenue Foreign currency and securities trading fees were $80 million in 1996, a 12% decrease from $91 million earned in 1995. The decrease was primarily attributable to lower foreign exchange fees earned, primarily as a result of lower levels of market volatility and customer activity, partially offset by higher securities trading fee revenue. Information services fees Information services fees were $50 million in 1996, a 6% increase from 1995. The increase resulted from higher ATM fees. Gain on sale of credit card portfolio The sale of the credit card portfolio of 50 AAA clubs, with outstanding balances of $770 million, netted a gain of $57 million in 1996. Other fee revenue Other fee revenue increased $105 million in 1996 from $222 million in 1995. This increase primarily resulted from the $28 million gain on the home equity loan securitization, a $16 million increase in gains on disposition of assets and sales of equity securities, a $13 million gain on the partial sale of an equity interest in an institutional investment management firm, $11 million of servicing fee revenue from the securitized home equity revolving credit line loans and an $8 million increase in fees relating to the electronic filing of income tax returns. Buck Consultants, Inc. Fee revenue will be impacted in 1997 upon completion of the acquisition of Buck Consultants Inc. (Buck). Buck provides a broad array of pension and health and welfare actuarial services, employee benefits, compensation and human resources consulting and administrative services to approximately 5,000 clients, ranging from large multinational corporations to small businesses. Buck generated total revenues of approximately $200 million for its fiscal year ended March 31, 1996. Including revenues from a recent acquisition, Buck's annual revenues would have totaled approximately $250 million. Gains on sale of securities The Corporation recorded $4 million in net gains on the sale of securities available for sale in 1996, compared with $6 million in net gains in 1995. 1995 compared with 1994 Compared with 1994, fee revenue increased by $18 million, or 1%, in 1995, primarily resulting from higher mortgage servicing fees, credit card fees and foreign currency and securities trading revenue, partially offset by lower trust and investment management fee revenue and lower information services fees. The Corporation recorded $5 million in net losses on the sale of securities available for sale in 1994, resulting from the loss of $15 million, or $10 million after tax, related to the disposition of securities held by Dreyfus prior to its merger with the Corporation, that did not meet the investment objectives, interest rate or credit risk characteristics required by the Corporation. 35 18 LOAN SECURITIZATIONS - ------------------------------------------------------------------------------- The Corporation securitized $950 million of credit card receivables in November 1995, $650 million of home equity loans in March 1996, and $500 million of insurance premium finance loans in December 1996. Securitizations are an effective way to diversify funding sources and manage the size of the balance sheet. The Corporation no longer recognizes net interest revenue on the securitized portfolios, however, the decrease in net interest revenue is substantially offset by increased servicing fee revenue and lower net credit losses. The Corporation continues to service the securitized loans. For analytical purposes, the impact of the securitizations on 1996 and 1995 results are shown below.
- ----------------------------------------------------------------------------------------------------------------------------------- SECURITIZED CREDIT CARD RECEIVABLES (in millions) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Lower net interest revenue $ 89 $ 10 Lower net credit losses 47 5 Higher fee revenue 41 5 Lower loans - year-end 950 950 Lower loans - average 950 107 - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- SECURITIZED HOME EQUITY LOANS (in millions) 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Lower net interest revenue $ 18 Net credit losses - Higher fee revenue 11 Lower loans - year-end 650 Lower loans - average 494 - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- SECURITIZED INSURANCE PREMIUM FINANCE LOANS (in millions) 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Lower net interest revenue $ 1 Net credit losses - Higher fee revenue 1 Lower loans - year-end 500 Lower loans - average 18 - -----------------------------------------------------------------------------------------------------------------------------------
36 19 OPERATING EXPENSE - -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- (dollar amounts in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Staff expense $1,055 $ 957 $ 956 Net occupancy expense 205 205 206 Professional, legal and other purchased services 195 186 210 Equipment expense 145 143 132 Business development 137 136 161 Amortization of mortgage servicing rights and purchased credit card relationships 107 68 40 Amortization of goodwill and other intangible assets 100 96 98 Communications expense 96 86 84 Forms and supplies 42 42 40 FDIC assessment and regulatory examination fees 6 31 63 Other expense 120 97 85 - --------------------------------------------------------------------------------------------------------------------------------- Operating expense before net revenue from acquired property, securities lending charge and merger expense 2,208 2,047 2,075 Net revenue from acquired property (13) (20) (28) Securities lending charge - - 223 Merger expense - - 104 - --------------------------------------------------------------------------------------------------------------------------------- Total operating expense $2,195 $2,027 $2,374 - --------------------------------------------------------------------------------------------------------------------------------- Average full-time equivalent staff 24,600 24,300 24,300 - --------------------------------------------------------------------------------------------------------------------------------- Efficiency ratio (a) 64% 63% 65% Efficiency ratio excluding amortization of goodwill and other intangible assets 61 60 62 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Operating expense before net revenue from acquired property, securities lending charge and merger expense, excluding trust-preferred securities expense, as a percentage of revenue, computed on a taxable equivalent basis, excluding gains (losses) on the sale of securities and the gain on the sale of the AAA credit card portfolio. Operating expense before net revenue from acquired property, securities lending charge and merger expense totaled $2,208 million in 1996, an increase of $161 million, or 8%, compared with 1995. The increase primarily resulted from increases in staff expense and the amortization of mortgage servicing rights. These increases were partially offset by lower FDIC deposit insurance assessment expense. Staff expense totaled $1,055 million in 1996, an increase of $98 million compared with 1995. The increase in staff expense resulted from increases in incentive and commission expense and base salaries, as well as an $18 million charge for the Corporation's retirement enhancement plan and severance accruals. The retirement enhancement plan, which was offered during the first quarter and concluded on March 31, 1996, enhanced the pensions and health insurance of 495 eligible associates electing early retirement, effective April 1, 1996. The amortization of mortgage servicing rights and purchased credit card relationships totaled $107 million in 1996, a $39 million increase from 1995 and reflects the $16 billion, or 29% increase in the mortgage servicing portfolio from December 31, 1995. The increases in communications expense, professional, legal and other purchased services and other expense reflect business growth, efforts to reengineer lines of business and improve customer service, and to a lesser degree the impact of acquisitions. FDIC assessment and regulatory examination fees decreased $25 million in 1996 as a result of the suspension of the FDIC deposit insurance premium in 1996 for healthy institutions. In the third quarter of 1996, the Deposit Insurance Funds Act of 1996 (DIFA) was enacted. DIFA imposed a special one-time assessment on Savings Association Insurance Fund (SAIF) deposits held by banks, in order to recapitalize the SAIF. The Corporation's one-time assessment was minimal. Also included as part of this legislation was an increase in FDIC insurance premiums for 1997 to ensure the repayment of the FICO bonds issued during the S&L crisis. Prior to this legislation, banks' FDIC insurance premiums in 1996 were 37 20 OPERATING EXPENSE (CONTINUED) - ------------------------------------------------------------------------------- $2 thousand annually for well-capitalized institutions. Based on current deposit levels, the Corporation expects its FDIC assessment to be approximately $4 million in 1997, for the redemption of the FICO bonds. The FDIC semiannually reviews the adequacy of the bank insurance fund. There will be no assessment in the first half of 1997 for well-capitalized banks, aside from the FICO bond assessment. In December 1996, trusts created by the Corporation issued $1 billion of trust-preferred securities. The securities are not recorded in interest-bearing liabilities on the Corporation's balance sheet and, as such, the expense of these securities is recorded in other operating expense. This expense totaled $3 million in 1996 and is expected to total $79 million in 1997. See note 13 of Notes to the Financial Statements for a further discussion of these securities. Operating expense will be impacted in 1997 upon completion of the acquisition of Buck Consultants, Inc. 1995 compared with 1994 Operating expense before net revenue from acquired property, securities lending charge and merger expense was $2,047 million in 1995, a decrease of $28 million, or 1%, compared with 1994. The decrease primarily resulted from a lower FDIC assessment charge, lower marketing expense related to the CornerStone(sm) credit card product and a reduction in professional, legal and other purchased services. These decreases were partially offset by increases in the amortization of mortgage servicing rights and equipment expense. In 1994, the Corporation recorded a one-time charge of $223 million or $130 million after tax, as a result of actions taken to reduce the interest rate sensitivity of certain securities lending clients' portfolios. Merger expense of $104 million pretax, or $79 million after tax, was recorded in 1994 to reflect expense associated with the Dreyfus merger. All expenditures and asset adjustments related to this merger have been recorded. INCOME TAXES - ------------------------------------------------------------------------------- The provision for income taxes totaled $418 million in 1996, compared with $401 million in 1995 and $278 million in 1994. The Corporation's effective tax rate for 1996 and 1995 was 36.3% and 36.7%, respectively. Excluding the impact of the Dreyfus merger-related expense, the losses on the disposition of Dreyfus securities and the securities lending charge, the Corporation's effective tax rate for 1994 was 38%. It is currently anticipated that the effective tax rate in 1997 will be approximately the same as the 1996 rate. 38 21 CAPITAL - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- SELECTED CAPITAL DATA (dollar amounts in millions, December 31, except per share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Common shareholders' equity $3,456 $3,590 $ 3,687 Common shareholders' equity to assets ratio 8.11% 8.83% 9.54% Tangible common shareholders' equity $2,218 $2,632 $ 2,651 Tangible common equity to assets ratio (a) 5.36% 6.63% 7.05% Total shareholders' equity $3,746 $4,025 $ 4,122 Total shareholders' equity to assets ratio 8.79% 9.90% 10.67% Tier I capital ratio 8.38 8.14 9.48 Total (Tier I plus Tier II) capital ratio 13.58 11.29 12.90 Leverage capital ratio 8.31 7.80 8.67 Book value per common share $26.86 $26.17 $ 25.06 Tangible book value per common share $17.24 $19.19 $ 18.01 Closing common stock price $71.00 $53.75 $30.625 Market capitalization $9,134 $7,374 $ 4,507 Common shares outstanding (000) 128,647 137,187 147,165 - -------------------------------------------------------------------------------------------------------------------------------
(a) Common shareholders' equity less goodwill and other intangibles recorded in connection with purchase acquisitions divided by total assets less goodwill and other intangibles recorded in connection with purchase acquisitions. The Corporation's capital management objectives are to maintain a strong capital base--in excess of all regulatory guidelines--while also maximizing shareholder value. During 1996, the Corporation continued to enhance shareholder value by returning excess capital to shareholders through the repurchase of common stock and increased dividends. The decrease in the Corporation's common and total shareholders' equity at December 31, 1996, compared with December 31, 1995, resulted from common stock repurchases, offset in part by earnings retention. Also impacting total shareholders' equity was the December 1996 redemption of the Series I preferred stock. The Corporation returned $596 million to shareholders in 1996, prior to any reissuances, by repurchasing 10.8 million shares of common stock, or 8% of common shares outstanding at the beginning of the year. Since the beginning of 1995, the Corporation has repurchased 23.6 million common shares, or 16% of the common shares outstanding at the beginning of 1995, prior to any reissuances, as well as warrants for 4.5 million shares of common stock. At December 31, 1996, approximately 2.3 million shares remain available for repurchase under a 5 million share repurchase program authorized by the board of directors in May 1996. The Corporation expects to complete this authorization in 1997. Average common stock and stock equivalents used in the computation of fully diluted earnings per share totaled 133.9 million shares in 1996, compared with 146.2 million shares in 1995, an 8% decrease. At December 31, 1996, common stock and stock equivalents totaled 131.2 million shares.
COMMON SHARES OUTSTANDING - --------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Beginning shares outstanding 137.2 147.2 Shares issued for stock-based benefit plans and dividend reinvestment plan 2.2 2.8 Shares repurchased (10.8) (12.8) - ---------------------------------------------------------------------------------------------------------------------------------- Ending shares outstanding 128.6 137.2 - ---------------------------------------------------------------------------------------------------------------------------------
39 22 CAPITAL (CONTINUED) - ------------------------------------------------------------------------------- On October 15, 1996, the Corporation's board of directors adopted a new Shareholder Protection Rights Agreement. Under the new Agreement, rights would become exercisable if a person or a group acquired 15% or more of the Corporation's voting stock. The exercise price for the rights is $225. In connection with the new Agreement, the Corporation approved the redemption of rights issued under the 1989 Rights Agreement. The board also approved the establishment of an employee stock benefit trust which is authorized to purchase 9 million shares of common stock from the Corporation to prefund obligations under the Corporation's stock-related benefit plans, including its stock option and 401(k) plans. Holders of stock options would vote the shares held in the trust with each active plan participant having an equal vote. Regulatory capital The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Corporation's and its banking subsidiaries' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Tier I and Total capital are expressed as a percentage of risk-adjusted assets, which include various credit risk-weighted percentages of on-balance-sheet assets, as well as off-balance-sheet exposures. The Leverage capital ratio evaluates capital adequacy on the basis of the ratio of Tier I capital to quarterly average total assets as reported on the Corporation's regulatory financial statements, net of the loan loss reserve, goodwill and certain other intangibles. To be well-capitalized, the Corporation's banking subsidiaries must maintain minimum Tier I, Total and Leverage capital ratios of 6%, 10% and 5%, respectively. All of the banking subsidiaries qualified as well-capitalized at December 31, 1996 and 1995. The Corporation intends to maintain the ratios of its banking subsidiaries at 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. 40 23 CAPITAL (CONTINUED) - -------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- RISK-BASED AND LEVERAGE CAPITAL RATIOS December 31, (dollar amounts in millions) 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Tier I capital: Common shareholders' equity (a) $ 3,457 $ 3,572 Trust-preferred securities (b) 863 - Qualifying preferred stock 290 435 Other items (12) (14) Goodwill and certain other intangibles (1,150) (849) - ---------------------------------------------------------------------------------------------------------------------------------- Total Tier I capital 3,448 3,144 Tier II capital 2,140 1,216 - --------------------------------------------------------------------------------------------------------------------------------- Total qualifying capital $ 5,588 $ 4,360 - --------------------------------------------------------------------------------------------------------------------------------- Risk-adjusted assets: On-balance-sheet $27,717 $27,459 Off-balance-sheet 13,436 11,152 - --------------------------------------------------------------------------------------------------------------------------------- Total risk-adjusted assets $41,153 $38,611 - --------------------------------------------------------------------------------------------------------------------------------- Average assets--leverage capital basis $41,498 $40,301 - --------------------------------------------------------------------------------------------------------------------------------- Tier I capital ratio (c) 8.38% 8.14% Total capital ratio (c) 13.58 11.29 Leverage capital ratio (c) 8.31 7.80 - ---------------------------------------------------------------------------------------------------------------------------------
(a) In accordance with regulatory guidelines, the $1 million of unrealized loss and $18 million of unrealized gains, net of tax, on assets classified as available for sale at December 31, 1996 and 1995, respectively, have been excluded. (b) The amount of trust-preferred securities that qualifies as Tier I capital is subject to the same regulatory limit of 25% of total Tier I capital that is applied to cumulative perpetual preferred stocks. (c) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8% and 3%, respectively. The increase in the Corporation's regulatory capital ratios resulted from the issuance of $1 billion of trust-preferred securities in December 1996 following the decision by the Federal Reserve that accorded these securities Tier I capital status. The ability to apply Tier I capital treatment, as well as to deduct the expense for income tax purposes, provided the Corporation with a cost-effective way to raise capital for regulatory purposes. The trust-preferred securities are not included as a component of total shareholders' equity on the Corporation's balance sheet.
- ----------------------------------------------------------------------------------------------------------------------------------- RISK-BASED AND LEVERAGE CAPITAL RATIOS FOR SIGNIFICANT BANKING SUBSIDIARIES Mellon Boston Safe Capital Well- Bank, N.A. Deposit and Trust adequacy capitalized December 31, December 31, (dollar amounts in millions) guidelines guidelines 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Amount: Tier I capital $ 2,419 $ 2,714 $ 426 $ 528 Total qualifying capital 3,712 3,425 460 571 Risk-adjusted assets 36,614 33,258 2,743 3,441 Average assets-leverage capital basis 36,811 35,318 4,157 4,441 Ratios: Tier I capital ratio 4% 6% 6.61% 8.16% 15.52% 15.34% Total capital ratio 8 10 10.14 10.30 16.78 16.59 Leverage capital ratio 3 5 6.57 7.68 10.24 11.89 - -----------------------------------------------------------------------------------------------------------------------------------
During the third quarter of 1996, the regulatory agencies adopted a proposal to incorporate market risk into the risk-based capital guidelines. This amendment requires any bank or bank holding company whose trading activity is the lesser of 10% or more of its total assets, or $1 billion or greater, to measure its exposure to market risk using its own internal value-at-risk 41 24 CAPITAL (CONTINUED) - ------------------------------------------------------------------------------- model and to hold capital in support of that exposure. This amendment was effective January 1, 1997, with mandatory compliance by January 1, 1998. The Corporation anticipates that this requirement will have a minimal impact on its risk-based capital ratios. When computing Tier I capital, the Corporation deducts all goodwill and certain other identified intangibles acquired subsequent to February 19, 1992, except mortgage servicing rights and purchased credit card relationships. Goodwill and other intangibles
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Goodwill $1,110 $788 $824 - -----------------------------------------------------------------------------------------------------------------------------------
The $322 million increase in goodwill at December 31, 1996, compared with December 31, 1995, resulted from a $296 million increase related to the USL acquisition and an $84 million increase related to the FUL acquisition, partially offset by $58 million of amortization. Based upon the current level and amortization schedule, the annual amortization of goodwill for the years 1997 through 2000 is expected to be approximately $68 million and decrease to approximately $65 million in 2001. The after-tax impact of the annual amortization of goodwill for the years 1997 through 2000 is expected to be approximately $57 million and decrease to approximately $54 million in 2001.
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Purchased core deposit intangibles $ 88 $110 $133 Covenants not to compete 6 22 38 Other identified intangibles 34 38 41 - ----------------------------------------------------------------------------------------------------------------------------------- Total purchased core deposit and other identified intangibles $128 $170 $212 - -----------------------------------------------------------------------------------------------------------------------------------
The amortization expense of purchased core deposit and other identified intangibles was $42 million in 1996. Based upon the current level and amortization schedule, the annual amortization of purchased core deposit and other identified intangibles for the full years 1997 through 2001 is anticipated to be approximately $31 million, $26 million, $26 million, $14 million and $8 million, respectively. The after-tax impact of the amortization of these items for the years 1997 through 2001 is anticipated to be approximately $20 million, $17 million, $17 million, $9 million and $5 million, respectively. Mortgage servicing rights and purchased credit card relationships
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Mortgage servicing rights $745 $592 $292 Purchased credit card relationships 29 90 60 - ----------------------------------------------------------------------------------------------------------------------------------- Total mortgage servicing rights and purchased credit card relationships $774 $682 $352 - -----------------------------------------------------------------------------------------------------------------------------------
In 1996 and 1995, the Corporation capitalized $285 million and $376 million, respectively, of servicing rights in connection with both mortgage servicing portfolio purchases and loan originations. Mortgage servicing rights are amortized in proportion to estimated net servicing income over the estimated life of the servicing portfolio. Amortization expense totaled $96 million, $57 million and $33 million in 1996, 1995 and 1994, respectively. The estimated fair value of capitalized mortgage servicing rights was $869 million at December 31, 1996. See note 1 of Notes to Financial Statements for a further discussion of the Corporation's accounting policy for mortgage servicing rights. The $61 million decrease in purchased credit card relationships in 1996 primarily resulted from the AAA credit card sale in the fourth quarter of 1996 and amortization. 42 25 CAPITAL (CONTINUED) - ------------------------------------------------------------------------------- Recently issued accounting standards In June 1996, the Financial Accounting Standards Board issued FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FAS No. 125 establishes the criteria for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. FAS No. 125 supersedes several accounting standards including FAS No. 122, "Accounting for Mortgage Servicing Rights." This standard is effective for transactions that occur after December 31, 1996. Earlier implementation is not permitted. The Corporation is currently evaluating the impact that this statement will have on its financial position and results of operations, but it is not expected to be material. On January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS No. 121 established guidelines for recognition of impairment losses related to long-lived assets and certain intangibles and related goodwill for both assets to be held and used as well as assets held for disposition. This statement excludes financial instruments, long-term customer relationships of financial institutions, mortgage and other servicing rights, and deferred tax assets. Adoption of this statement was immaterial to the Corporation's financial position and results of operations. CORPORATE RISK - ------------------------------------------------------------------------------- RISK OVERVIEW - ------------------------------------------------------------------------------- Risk identification and management are essential elements for the successful management of the Corporation. The four primary risk exposures are liquidity risk; market risk, which includes interest rate and currency risk; credit risk; and fiduciary risk. Liquidity risk is the possibility that the Corporation will not be able to fund present and future financial obligations. Market risk is the possibility of lower net interest revenue or lower market values of assets and liabilities as interest rates or exchange rates fluctuate. Credit risk is the possibility of loss from a counterparty's failure to perform according to the terms of a transaction. Fiduciary risk is the possibility of loss from actions taken on behalf of clients. In addition, the Corporation is subject to other risks, particularly in its fee-generating businesses, that are transaction oriented. The Corporation controls and monitors these risks with policies, procedures and various levels of managerial oversight. Because of the nature of its businesses, external factors beyond the Corporation's control may, at times, result in losses to the Corporation or its customers. The Corporation is involved with various financial instruments that potentially create risk. These instruments are both on and off the balance sheet. On-balance-sheet instruments include securities, loans, deposits and borrowings. Off-balance-sheet instruments include loan commitments, standby letters of credit, interest rate swaps, foreign exchange contracts and interest rate futures and forwards. LIQUIDITY AND DIVIDENDS - ------------------------------------------------------------------------------- The Finance Committee of the Corporation is responsible for liquidity management. This committee of senior managers has a Liquidity Policy that covers all assets and liabilities, as well as off-balance-sheet items that are potential sources or uses of liquidity. The Corporation's liquidity management objective is to maintain the ability to meet commitments to fund loans and to purchase securities, as well as to repay deposits and other liabilities in accordance with their terms, including during periods of market or financial stress. The Corporation's overall approach to liquidity management is to ensure that sources of liquidity are sufficient in amount and diversity to accommodate changes in loan demand and core funding routinely without a material adverse impact on net income. The Corporation uses several key primary and secondary measures to assess the adequacy of the Corporation's liquidity position. The balance sheet is managed to ensure that these measures are maintained within approved limits. Each of these measures is monitored on a periodic basis giving consideration to the Corporation's expected requirements for funds and anticipated market conditions. The Corporation's liquidity position is managed by maintaining adequate levels of liquid assets, such as money market assets and securities available for sale. Additional liquidity is available through the Corporation's ability to participate or sell commercial loans and to securitize selected loan portfolios. The Corporation also has a four-year $300 million 43 26 LIQUIDITY AND DIVIDENDS (CONTINUED) - ------------------------------------------------------------------------------- revolving credit agreement and a $25 million backup line of credit to provide support facilities for its commercial paper borrowings and for general corporate purposes. The revolving credit facility contains Tier I ratio, double leverage ratio and nonperforming asset covenants, as discussed in note 11 of Notes to Financial Statements. As shown in the consolidated statement of cash flows, cash and due from banks increased by $504 million during 1996 to $2,846 million at December 31, 1996. The increase primarily reflected $1,164 million of net cash provided by operating activities and $1,066 million of net cash provided by financing activities, offset in part by $1,741 million of net cash used in investing activities. Net cash provided by financing activities primarily reflected increases in customer deposits, long-term borrowings and the issuance of the trust-preferred securities, partially offset by a decrease in short-term borrowings and common stock repurchases. Net cash used in investing activities principally reflected the USL and FUL acquisitions, and an increase in securities available for sale, partially offset by the home equity and insurance premium finance securitizations. In March 1996, the Corporation issued $250 million of debt at a fixed rate of 6.70% maturing in the year 2008 and Mellon Bank, N.A., the Corporation's principal banking subsidiary, issued $300 million of debt at a fixed rate of 7% maturing in 2006. In September 1996, Mellon Bank, N.A. issued an additional $250 million of debt at a fixed rate of $7.625% maturing in 2007. Prior to issuance, the Corporation hedged the cost of all of these transactions with interest rate agreements that were terminated upon issuance of the debt. The effective interest rates on the $250 million of Corporate debt and $300 million and $250 million of the Mellon Bank, N.A. debt, including the effect of the interest rate agreements are 6.91%, 6.43% and 7.34%, respectively. The proceeds from these issuances were used for general corporate purposes, including the use of $200 million of the proceeds from the March 1996 Mellon Bank, N.A. issue for a distribution of paid-in capital surplus to the parent Corporation. Contractual maturities of the Corporation's term debt were $20 million in 1996. Contractual maturities of parent term debt will total $205 million in 1997, primarily resulting from $200 million due in December 1997. At December 31, 1996, the Corporation had a debt shelf registration statement on file with the Securities and Exchange Commission on which up to $1.25 billion of debt may be issued. The issuance of any debt securities from this debt shelf registration will depend on future market conditions, funding needs and other factors. Mellon Bank, N.A. has an existing offering circular, under which it can issue up to $4 billion of bank notes. Up to $3 billion of these notes, outstanding at any one time, can have maturities of 30 to 270 days and up to $1 billion, in the aggregate, can have maturities of more than 270 days to 15 years. At December 31, 1996, the bank had $338 million of notes with original maturities greater than 1 year and $135 million of short-term notes outstanding under this program. Proceeds from these notes are used for general funding purposes. At December 31, 1996, the Corporation's senior debt and Mellon Bank, N.A.'s subordinated debt were rated "A2" by Moody's and "A" by Standard and Poors. These ratings have not changed since the third quarter of 1994. During the fourth quarter of 1996, the Federal Reserve accorded Tier I capital status to trust-preferred securities. Following this decision, trusts created by the Corporation issued $500 million of these securities, on December 10, 1996, at a fixed rate of 7.72% and on December 30, 1996, issued an additional $500 million at a fixed rate of 7.995%. The payments on these securities can be deducted for income tax purposes, therefore, these securities will have an after-tax cost to the Corporation of approximately 5.0% and 5.2%, respectively. The proceeds from these securities are being used for general corporate purposes, including the December 16, 1996, redemption of the $150 million Series I Preferred Stock and will be used to redeem the $100 million Series J Preferred Stock on February 18, 1997. The Series I and Series J preferred stocks had dividend rates of 9.60% and 8.50%, respectively. The redemption of the Series I and Series J preferred stocks will reduce annual preferred dividend requirements by $23 million. 44 27 LIQUIDITY AND DIVIDENDS (CONTINUED) - ------------------------------------------------------------------------------- The Corporation increased its annual common stock dividend to $2.40 per common share in the second quarter of 1996, an increase of 9% from the previous annual rate of $2.20. The Corporation has increased its common stock dividend five times over the last three years, resulting in a 137% increase during that period. Common dividends of $310 million were paid on the outstanding shares of common stock during 1996. The Corporation is currently targeting a dividend payout ratio of 40%-45%. The dividend payout ratio was 45% in 1996 and 44% in 1995. On a tangible earnings per common share basis, the dividend payout ratio was 40% in 1996 and 1995. In addition, the Corporation paid $39 million in preferred stock dividends in 1996 and recorded $5 million of issue costs as preferred stock dividends in connection with the redemption of the Series I preferred stock. The Series J preferred stock redemption will result in $3 million of issue costs being recorded as preferred stock dividends in the first quarter of 1997. Using the current common stock dividend rate and shares outstanding at December 31, 1996, and excluding the Series I and J preferred stocks, the annual dividend requirements in 1997 for the common and preferred stock is expected to be approximately $325 million. The Corporation has reduced its annual common stock dividend requirement, by approximately $45 million, through the repurchase of common shares in 1995 and 1996, net of reissuances. The parent Corporation's principal sources of cash are interest and dividends from its subsidiaries. The ability of national bank subsidiaries to pay dividends to the parent Corporation is subject to certain limitations, as discussed in note 21 of Notes to Financial Statements. Under the more restrictive limitations, the Corporation's national bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to December 31, 1996, of approximately $310 million, less any dividends declared and plus or minus net profits or losses, as defined, between January 1, 1997, and the date of any such dividend declaration. The national bank subsidiaries declared dividends to the parent Corporation totaling $400 million in 1996, $501 million in 1995 and $366 million in 1994. Dividends paid to the parent Corporation by nonbank subsidiaries totaled $21 million in 1996, $30 million in 1995 and $122 million in 1994. In addition, Mellon Bank, N.A. returned $200 million and $300 million of capital to the parent Corporation in 1996 and 1995, respectively, and The Boston Company returned $150 million and $100 million of capital to the parent Corporation in 1996 and 1994, respectively. To comply with regulatory guidelines, the Corporation and its subsidiary banks continually evaluate the level of cash dividends in relation to their respective operating income, capital needs, asset quality and overall financial condition.
Balance sheet analysis - --------------------------------------------------------------------------------------------------------------------------------- (average balances in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS: Money market investments $ 1,381 $ 1,222 $ 1,656 Trading account securities 146 296 380 Securities 6,184 4,922 5,149 Loans 27,233 27,321 25,097 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 34,944 33,761 32,282 Noninterest-earning assets 7,541 6,927 6,437 Reserve for credit losses (472) (591) (613) - --------------------------------------------------------------------------------------------------------------------------------- Total assets $42,013 $40,097 $38,106 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- FUNDS SUPPORTING TOTAL ASSETS: Core funds $32,068 $30,986 $32,101 Wholesale and purchased funds 9,945 9,111 6,005 - --------------------------------------------------------------------------------------------------------------------------------- Funds supporting total assets $42,013 $40,097 $38,106 - ---------------------------------------------------------------------------------------------------------------------------------
The increase in the Corporation's average interest-earning assets in 1996, compared with 1995, reflects a $1,262 million increase in average securities. This increase resulted from the utilization of a higher level of deposits with pledging requirements in 1996, compared with the prior year. Average loans decreased $88 million as a result of the loan securitizations and sales, primarily offset by loan growth and the lease financing acquisitions. Excluding the loan securitizations and sales and the leasing acquisitions, average loans increased approximately $1.0 billion, compared with the prior year, primarily as a result of increases in wholesale loans. 45 28 LIQUIDITY AND DIVIDENDS (CONTINUED) - ------------------------------------------------------------------------------- Core funds, which are considered to be the most stable sources of funding, are defined principally as money market and other savings deposits, demand deposits, savings certificates, shareholders' equity, notes and debentures with original maturities over one year and trust-preferred securities. Core funds primarily support core assets, which consist of loans, net of the reserve and noninterest-earning assets. Average core assets increased $645 million in 1996 from the prior year, reflecting a higher level of noninterest-earning assets. The increase in noninterest-earning assets resulted primarily from higher levels of cash and due from banks. Average core funds increased $1,082 million in 1996 compared with 1995, primarily reflecting a higher average level of demand, money market and savings deposits and notes and debentures, partially offset by a decrease in shareholders' equity. Core funds averaged 93% of core assets in 1996, up from 92% in 1995 and down from 104% in 1994. 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, other time deposits, U.S. Treasury tax and loan demand notes, commercial paper and other funds borrowed. Average wholesale and purchased funds increased $834 million compared with 1995, primarily reflecting an increase in negotiable certificates of deposit and other time deposits, partially offset by a decrease in federal funds purchased and securities under repurchase agreements and short-term bank notes. As a percentage of average total assets, average wholesale and purchased funds increased to 24% in 1996, from 23% in 1995 and 16% in 1994. 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. The Corporation's Finance Committee is responsible for managing interest rate risk and employing risk management policies that monitor and limit exposure to interest rate risk. 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 a full understanding of the range of potential impacts on net interest revenue and portfolio equity caused by interest rate movements. Modeling techniques that are used to estimate the impact of changes in interest rates on the net interest margin are a more relevant method of measuring interest rate risk than the less sophisticated interest rate sensitivity gap table shown on page 48. 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 "optionality." For instance, customers have migrated from lower cost deposit products to higher cost 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 options may cause actual results to differ from the simulation. The Corporation has established the following guidelines for assuming interest rate risk: Net interest margin simulation--Given a +/- 200 basis point parallel shift in interest rates, the estimated net interest margin may not change by more than 5% for a one-year period. Portfolio equity simulation--Portfolio equity is the net present value of the Corporation's existing assets, liabilities and off-balance-sheet instruments. Given a +/- 200 basis point change in interest rates, portfolio equity may not change by more than 20% of total shareholders' equity. The table on the following page illustrates the simulation analysis of the impact of a 100 basis point or 200 basis point upward or downward movement in interest rates on net interest revenue, return on common shareholders' equity and earnings per share. This analysis was done assuming that interest-earning asset levels at December 31, 1996, remained constant, 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 over a six-month period from the December 31, 1996, levels and includes the interest sensitive impact of the securitizations included in other fee revenue. 46 29 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SIMULATION SENSITIVITY ANALYSIS Movements in interest rates from December 31, 1996, rates - ------------------------------------------------------------------------------------------------------------------------------ Simulated impact in the next 12 months Increase Decrease compared with December 31, 1996: ------------------------- ------------------------ +100 bp +200 bp -100 bp -200 bp --------------------------------------------------------------------- Net interest revenue increase/(decrease) .2% .2% (.4)% (1.6)% Return on common equity increase/(decrease) 6 bp 6 bp (13)bp (46)bp Earnings per share increase/(decrease) $.02 $.02 $(.03) $(.12) - ------------------------------------------------------------------------------------------------------------------------------
The anticipated impact on net interest revenue under the 100 and 200 basis points increase scenarios and the decrease in net interest revenue under the 100 and 200 basis point decrease scenarios are consistent with the Corporation's asset sensitive gap position at the one-year repricing period as shown in the interest rate sensitivity gap table on the following page. The interest rate sensitivity gap table shows the repricing characteristics of the Corporation's interest-earning assets and supporting funds at December 31, 1996. The data are based upon contractual repricing or maturities and, where applicable, management's assumptions as to the estimated repricing characteristics of certain assets and supporting funds. At December 31, 1996, the Corporation had an asset-sensitive interest rate risk position at the one-year repricing period. Generally, an asset sensitive gap indicates that rising interest rates could positively affect net interest revenue, and falling rates could negatively affect net interest revenue. Assets and liabilities with similar contractual repricing characteristics, however, may not reprice to the same degree. As a result, the Corporation's static interest rate sensitivity gap position does not necessarily predict the impact of changes in general levels of interest rates on net interest revenue. 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: U.S. government and federal agency securities, municipal securities, mortgage-backed securities, fixed rate wholesale term funding, interest rate swaps, caps and floors, financial futures and financial options. The cumulative gap at the one-year repricing period, before the utilization of off-balance-sheet instruments, was asset sensitive in the amount of $4.0 billion, or 9.4% of total assets, at December 31, 1996. However, because the Corporation did not want to accept the level of interest rate risk presented by its naturally asset sensitive balance sheet, it entered into interest rate swaps and other off-balance-sheet instruments that resulted in a net reduction of $2.6 billion in this cumulative asset-sensitive position. These instruments reduced the cumulative gap at the one-year repricing period to an asset-sensitive amount of $1.4 billion, or 3.4% of total assets. Alternatively, the Corporation could have acquired additional fixed-rate investment securities or other fixed-rate interest-earning assets of approximately $2.6 billion to accomplish this objective. Correspondingly, the Corporation also would have had to acquire a comparable amount of wholesale funds to fund these additional interest-earning assets. By using off-balance-sheet instruments to manage interest rate risk, the effect is a smaller, more efficient balance sheet, with a lower wholesale funding requirement and a higher return on assets and net interest margin with a comparable level of net interest revenue and return on common shareholders' equity. 47 30 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY GAP AT DECEMBER 31, 1996 Repricing period ----------------------------------------------------------- 0-30 31-90 91-180 181-365 Over 1 (dollar amounts in millions) days days days days year Total - ----------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets $10,461 $ 8,834 $ 3,746 $ 1,667 $10,247 $34,955 Funds supporting interest- earning assets $ 5,866 $ 9,406 $ 2,734 $ 2,710 $14,239 $34,955 - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal $ 4,595 $ (572) $ 1,012 $(1,043) $(3,992) $ - Off-balance-sheet instruments $(1,492) $ (1,249) $ 106 $ 88 $ 2,547 $ - - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $ 3,103 $ (1,821) $ 1,118 $ (955) $(1,445) $ - - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative gap $ 3,103 $ 1,282 $ 2,400 $ 1,445 $ - $ - - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative gap as a percentage of total assets 7.3% 3.0% 5.6% 3.4% - - -----------------------------------------------------------------------------------------------------------------------------------
Note: Repricing periods are based upon contractual maturities, where applicable, as well as the Corporation's historical experience of the impact of interest rate fluctuations on the prepayment, repricing and withdrawal patterns of certain assets and liabilities. Managing interest rate risk with off-balance-sheet instruments The Corporation uses off-balance-sheet instruments, primarily interest rate swaps, in managing its overall interest rate exposure. 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 the interest rate risk limits outlined on page 46. The following off-balance-sheet instruments have been approved by the Corporation for managing the overall corporate interest rate exposure: interest rate swaps; caps and floors; financial futures; and financial options. Their usage 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. The Corporation primarily uses non-leveraged generic and index amortizing swaps to accomplish its objectives. Generic swaps involve the exchange of fixed and variable interest rates based on underlying contractual notional amounts. Index amortizing swaps involve the exchange of fixed and variable interest rates; however, their notional amount and maturities vary based on certain underlying indices. The use of financial futures 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 that the types of contracts have been authorized for use by the Board of Directors and the Finance Committee. The Corporation's off-balance-sheet instruments used to manage its interest rate risk are shown in the table on the following page. For a further discussion of these contracts, see note 23 of Notes to Financial Statements. 48 31 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK Total at Dec. 31, (notional amounts in millions) 1997 1998 1999 2000 2001 2002+ 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Receive fixed/pay floating generic swaps: (a) Notional amount $225 $ 15 $ - $ - $ - $400 $ 640 Weighted average rate: Receive 6.18% 5.22% - - - 6.32% 6.24% Pay 5.40% 5.50% - - - 5.76% 5.63% Receive fixed/pay floating indexed amortizing swaps: (b) Notional value $244 $ 594 $1,788 $114 $101 $372 $3,213 Weighted average rate: Receive 6.78% 6.06% 5.72% 7.14% 7.14% 7.14% 6.12% Pay 5.53% 5.55% 5.53% 5.53% 5.53% 5.53% 5.53% Pay fixed/receive floating generic swaps: (a) Notional amount $103 $416 $ 402 $ - $ - $ 15 $ 936 Weighted average rate: Receive 5.66% 5.38% 5.56% - - 5.60% 5.49% Pay 6.29% 6.05% 6.25% - - 6.63% 6.17% Other products (c) $ 33 $ - $ - $ 48 $ 15 $ - $ 96 - ----------------------------------------------------------------------------------------------------------------------------------- Total notional amount $605 $1,025 $2,190 $162 $116 $787 $4,885 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Generic swaps' notional amounts and lives are not based upon interest rate indices. (b) Amortizing swaps' notional amounts and lives change based upon certain interest rate indices. Generally, as rates fall, the notional amounts decline more rapidly and, as rates increase, notional amounts decline more slowly. (c) Average rates are not meaningful for these products. The gross notional amount of off-balance-sheet instruments used to manage the Corporation's interest rate risk was $4.9 billion at December 31, 1996, a decrease of $3.8 billion from December 31, 1995. The reduction in these instruments resulted from terminations and maturities, partially offset by an increase in interest rate swaps entered into in connection with the acquisition of capital leases. The interest rate swap terminations are discussed on the following page. This gross notional amount, which is presented in the table above, must be viewed in the context of the Corporation's overall interest rate risk management activities in order to assess its impact on the net interest margin. As discussed on page 47, these off-balance-sheet instruments modified the Corporation's asset-sensitive position, including the modification of the cumulative asset-sensitive position at the one-year repricing period, of $4.0 billion, before the utilization of these instruments, to a cumulative one-year asset-sensitive position of $1.4 billion at December 31, 1996. The table on the following page presents the gross notional amounts of off-balance-sheet instruments used to manage interest rate risk, identified by the underlying interest rate sensitive instruments. 49 32 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Instruments associated with deposits $3,888 $6,500 Instruments associated with other liabilities 415 670 Instruments associated with loans 582 1,532 - ----------------------------------------------------------------------------------------------------------------------------------- Total notional amount $4,885 $8,702 - -----------------------------------------------------------------------------------------------------------------------------------
The Corporation entered into these off-balance-sheet instruments to reduce the natural interest rate risk embedded in its assets and liabilities. The interest received and interest paid are recorded on an accrual basis in interest revenue and interest expense associated with the underlying assets and liabilities. The net differential resulted in interest revenue of $24 million in 1996, compared with interest expense of $2 million in 1995 and interest revenue of $117 million in 1994. The higher net interest revenue impact in 1996, compared with 1995, resulted from the effect of lower average interest rates in 1996. The Corporation's analysis using interest rates at December 31, 1996, indicates that off-balance-sheet instruments will have a positive impact of approximately $12 million on the net interest margin in 1997. During 1996, the Corporation terminated $800 million of interest rate agreements that were used to lock in the cost of debt issuances in 1996. These terminations resulted in net unrealized deferred gains of $13 million. These net deferred gains are being amortized to interest expense over the terms of the corresponding debt instruments. The Corporation amortized $1 million of these net gains into net interest revenue in 1996. In response to tactical asset/liability management considerations, the Corporation terminated $4.6 billion of interest rate swaps in 1996. Both pay and receive fixed-rate generic swaps were terminated. The terminated swaps included $3.2 billion that were associated with deposits, specifically money market accounts and CWI accounts, and $1.4 billion that were associated with loans. These terminations resulted in net deferred gains of $12 million. These net gains are being amortized over the remaining periods of the original hedges, which are between one and three years. The Corporation amortized $7 million of these net gains into net interest revenue in 1996. The Corporation did not terminate any interest rate agreements used for interest rate risk management purposes in 1995. The estimated unrealized fair value of the Corporation's interest rate management off-balance-sheet instruments at December 31, 1996, was a negative $64 million, compared to a positive $30 million at December 31, 1995. This decrease was consistent with higher interest rates at December 31, 1996, compared with the prior year-end, which had the corresponding effect of increasing the fair value of on-balance-sheet core deposits. These values should be viewed in the context of the overall financial structure of the Corporation, including the aggregate net position of all on- and off-balance-sheet instruments. As more fully discussed in note 23 of Notes to Financial Statements, credit risk associated with off-balance-sheet instrument positions represents the aggregate replacement cost of contracts in a gain position. At December 31, 1996 and 1995, the amount of credit exposure associated with interest rate risk management instruments was $7 million and $55 million, respectively. Off-balance-sheet instruments used for trading activities The Corporation offers off-balance-sheet financial instruments, primarily foreign exchange contracts, currency and interest rate option contracts, interest rate swaps and interest rate caps and floors, to enable customers to meet their financing objectives and to manage their interest- and currency-rate risk. Supplying these instruments provides the Corporation with fee revenue. The Corporation also uses such instruments, as well as futures and forward contracts, in connection with its proprietary trading account activities. All of these instruments are carried at market value with realized and unrealized gains and losses included in foreign currency and securities trading revenue. In 1996, the Corporation recorded $76 million of fee revenue from these activities, primarily from foreign exchange contracts entered into on behalf of customers, compared with $87 million in 1995. The total notional values of these contracts were $36 billion at December 31, 1996 and $33 billion at December 31, 1995, and are included in the off-balance-sheet instruments used for trading activities table on page 90 in note 23 of Notes to Financial Statements. Total credit risk of contracts used for trading activities was $345 million at December 31, 1996 and $389 million at December 31, 1995. 50 33 INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED) - ------------------------------------------------------------------------------- The Corporation has established trading limits and related monitoring procedures to control trading risk. These limits are approved by the Office of The Chairman and reviewed by the Executive Committee of the board of directors. All limits are monitored for compliance by departmental compliance staff and by the Corporation's Internal Audit Department. Exceptions to limits are reported to the Office of The Chairman and, in certain instances, to the Audit Committee of the board of directors. The financial risk associated with trading positions is managed by assigning position limits and stop loss guidance amounts to individual activities. Position limits are assigned to each family of financial instruments eligible for trading such that the aggregate value at risk in these activities at any point in time will not exceed a specified limit given a significant market movement. The extent of market movement deemed to be significant is based upon an analysis of the historical volatility of individual instruments that would cover 95% of likely daily market movements. Using the Corporation's methodology, which considers such factors as changes in interest rates, spreads and options volatility, the aggregate value at risk for trading activities was less than $1 million at December 31, 1996. Trading activities are generally limited to products and markets in which liquidity is sufficient to allow positions to be closed quickly and without adversely affecting market prices, which limits loss potential below that assumed for a full-day adverse movement. Loss potential is further constrained in that it is highly unusual for all trading areas to be exposed to maximum limits at the same time and extremely rare for significant adverse market movements to occur in all markets simultaneously. Stop loss guidance is used when a certain threshold of loss is sustained. If stop loss guidance amounts are approached, open positions are liquidated to avoid further risk to earnings. The use of both stop loss guidance and position limits reduces the likelihood that potential trading losses would reach imprudent levels in relation to earnings capability. CREDIT RISK - ------------------------------------------------------------------------------- Credit risk exists in financial instruments that are both on and off the balance sheet. Financial instruments such as loans and leases are on the balance sheet. Off-balance-sheet credit exposures include loan commitments, standby letters of credit and the credit risk associated with financial instruments used to manage interest rate risk and used for trading activities. The objective of the credit risk management process is to reduce the risk of loss if a customer fails to perform according to the terms of a transaction. Essential to this process are stringent underwriting of new loan commitments, active monitoring of all loan portfolios and the early identification of potential problems and their prompt resolution. The Corporation establishes internal ownership, responsibility and accountability for all aspects of asset quality. Notwithstanding this process, however, asset quality is dependent in large part upon local, national, international and industry segment economic conditions that are beyond the Corporation's control. Management maintains a comprehensive centralized process through which the Corporation establishes exposure limits, extends new loans, monitors credit quality, actively manages problem credits and disposes of nonperforming assets. To help ensure adherence to the Corporation's credit policies, department credit officers report to both the Corporation's chief risk and credit officer and the head of each respective lending department. The responsibilities of these credit officers include all aspects of the credit process except credit review, credit recovery and aggregate portfolio management, which are centralized at the corporate level. The Corporation manages credit risk by maintaining a well-diversified credit portfolio and by adhering to its written credit policies, which specify general underwriting criteria as well as underwriting standards for specific industries and control credit exposure by borrower, degree of risk, industry and country. These measures are adopted by the Credit Policy Committee and are regularly updated to reflect the committee's evaluation of developments in economic, political and operating environments that could affect lending risks. The Corporation may adjust credit exposure to individual industries or customers through loan sales, syndications, participations and the use of master netting agreements when the Corporation has more than one transaction outstanding with the same customer. 51 34 CREDIT RISK (CONTINUED) - ------------------------------------------------------------------------------- Except for certain well-defined loans made by the Consumer Banking Services sector, primarily to consumers and small businesses, all credit extensions are approved jointly by officers of the Credit Policy Department and officers of the lending departments. The number and level of officer approvals required are determined by the dollar amount and risk characteristics of the credit extension. The amount of collateral, if any, obtained by the Corporation upon the extension of credit is based on industry practice as well as the credit assessment of the customer. The type and amount of collateral vary, but the form generally includes: accounts receivable; inventory; property, plant and equipment; other assets; and/or income-producing commercial properties with appraised values that exceed the contractual amount of the credit facilities by pre-approved ratios. The Corporation continually assesses the quality of its consumer and commercial credit facilities, and assigns a numerical quality rating to substantially all extensions of credit in its commercial, real estate and international portfolios. Lending officers have the primary responsibility for monitoring their portfolios, identifying emerging problem loans and recommending changes in quality ratings. To anticipate or detect problems that may result from economic downturns or deteriorating conditions in certain markets, lending units and credit management use processes designed to identify potential credit problems, both for specific customers and for industries that could be affected by adverse market or economic conditions. When signs of credit deterioration are detected, credit recovery or other specialists become involved to minimize the Corporation's exposure to potential future credit losses. The Credit Review Division provides an independent assessment of credit ratings, credit quality and the credit management process. For a further discussion of the credit risk associated with off-balance-sheet financial instruments, see the discussions of the various financial instruments in note 23 of Notes to Financial Statements. COMPOSITION OF LOAN PORTFOLIO AT YEAR-END - ------------------------------------------------------------------------------- The loan portfolio decreased $297 million in 1996, reflecting a number of significant actions over the last 12 months. In September and October 1996, the Corporation acquired approximately $1.6 billion of leases in the USL and FUL acquisitions. These increases were offset by the following transactions: the March 1996 securitization of $650 million of home equity revolving credit line loans; the November 1996 sale of $770 million AAA credit card loans; and the December 1996 $500 million insurance premium finance securitization. Excluding the lease acquisitions and the securitizations and sales, loans were essentially unchanged compared with December 31, 1995. At December 31, 1996, the composition of the loan portfolio was 57% commercial and 43% consumer.
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- DOMESTIC LOANS Commercial and financial $10,196 (a) $10,969 $10,015 $ 9,091 $ 8,115 Commercial real estate 1,534 (b) 1,532 1,624 1,721 1,861 Consumer credit: Consumer mortgage 7,772 8,960 8,680 8,191 4,282 Credit card 1,296 1,924 2,381 1,441 1,361 Other consumer credit 2,640 2,612 2,455 2,372 2,258 - ----------------------------------------------------------------------------------------------------------------------------------- Total consumer credit 11,708 13,496 13,516 12,004 7,901 Lease finance assets 2,533 830 815 718 650 - ----------------------------------------------------------------------------------------------------------------------------------- Total domestic loans 25,971 26,827 25,970 23,534 18,527 INTERNATIONAL LOANS 1,422 863 763 950 1,434 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned discount (c) $27,393 $27,690 $26,733 $24,484 $19,961 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes $15 million of loans subject to the FDIC loss sharing arrangement. (b) Includes $75 million of loans subject to the FDIC loss sharing arrangement. (c) Excludes segregated assets. Note: There were no concentrations of loans to borrowers engaged in similar activities, other than those shown in this table, that exceeded 10% of total loans at year-end. 52 35 COMPOSITION OF LOAN PORTFOLIO AT YEAR-END (CONTINUED) - ------------------------------------------------------------------------------- Commercial and financial The domestic commercial and financial loan portfolio primarily consists of loans to corporate borrowers in the manufacturing, service, energy, communications, wholesale and retail trade, public utilities and financial services industries. Numerous risk factors impact this portfolio, including industry specific risks such as the economy, new technology, labor rates and cyclicality, as well as customer specific factors such as cash flow, financial structure, operating controls and asset quality. The Corporation diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines. Diversification is intended to limit the risk of loss from any single unexpected economic event or trend. Total domestic commercial and financial loans decreased by $773 million, or 7%, during 1996, primarily as a result of a decrease in money market loans and the $500 million insurance premium financing securitization. These decreases were partially offset by increases in corporate banking, middle market and business banking. Commercial and financial loans represented 37% of the total loan portfolio at December 31, 1996 and 40% at December 31,1995. At year-end 1996, nonperforming domestic commercial and financial loans were .21% of total domestic commercial and financial loans, compared with .59% at December 31, 1995. This ratio has been less than 1% for 15 consecutive quarters. Securitization of insurance premium finance loans On December 19, 1996, the Corporation securitized $500 million of insurance premium finance loans. These loans are typically installment loans made to commercial insurance buyers, the proceeds of which pay premiums that are due to an insurance company. The Corporation continues to service these loans. The effect of the securitization is shown in the table on page 36. Commercial real estate The Corporation's $1,534 million domestic commercial real estate loan portfolio consists of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties, and commercial construction loans generally with maturities of 60 months or less. Also included in this portfolio are $352 million of loans that are secured by owner-occupied real estate, but made for purposes other than the construction or purchase of real estate. The commercial real estate loan portfolio includes $75 million of loans acquired in the December 1992 Meritor retail office acquisition that are subject to a five-year 95% loss sharing arrangement with the FDIC. Commercial real estate loans carry many of the same customer and industry risks as the commercial and financial portfolio, as well as contractor/subcontractor performance risk in the case of commercial construction loans and cash flow risk based on project economics. Domestic commercial real estate loans were essentially unchanged compared with December 31, 1995, as new loan originations were offset by paydowns and transfers to OREO. Domestic commercial real estate loans were 6% of total loans at December 31, 1996 and 1995. Nonperforming commercial real estate loans were 1.03% of total domestic commercial real estate loans at December 31, 1996, compared with 2.55% at December 31, 1995. This ratio has reached its lowest level in more than 10 years.
- ----------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS Balance at Percent of December 31, total loans (in millions) 1996 outstanding - ----------------------------------------------------------------------------------------------------------------------------------- Commercial mortgage and construction loans $1,107 4% Owner-occupied loans 352 2 FDIC loss share loans 75 - - ----------------------------------------------------------------------------------------------------------------------------------- Total $1,534 6% - -----------------------------------------------------------------------------------------------------------------------------------
Consumer mortgage The consumer mortgage portfolio primarily includes jumbo residential mortgages, traditional one-to-four family residential mortgages, fixed-term home equity loans and home equity revolving credit line loans. At December 31, 1996, this portfolio 53 36 COMPOSITION OF LOAN PORTFOLIO AT YEAR-END (CONTINUED) - ------------------------------------------------------------------------------- totaled $7,772 million, down 13%, from $8,960 million at the prior year-end. The $1,188 million decrease in this portfolio from year-end 1995 primarily resulted from the $650 million home equity loan securitization and the sale of one-to-four family and jumbo residential mortgages, partially offset by an increase in jumbo residential mortgage originations. Jumbo mortgages, which totaled $3.6 billion at year-end 1996, are variable rate residential mortgages that range from $250,000 to $3 million. These loans decreased approximately $250 million from December 31, 1995, as a result of loan sales, partially offset by new loan originations. Risks involved in holding jumbo mortgages include less liquidity than a traditional one-to-four family residential mortgage portfolio and increased exposure on an individual loan basis. The Corporation attempts to control these risks by requiring more stringent loan-to-value ratios and higher liquidity and cash flow requirements for each borrower. At December 31, 1996, the geographic distribution of the jumbo mortgages was as follows: 29% in the mid-Atlantic region; 28% in New England; 24% in California; and 19% in other areas. The Corporation's one-to-four family residential mortgages decreased approximately $500 million, to $1.8 billion at December 31, 1996, from the prior year-end. This decrease primarily resulted from a decrease in the loans held in the residential warehouse portfolio. Fixed-term home equity loans increased approximately $175 million to $1.8 billion. Home equity revolving credit line loans decreased approximately $650 million to $.6 billion at December 31, 1996, as a result of the securitization of home equity revolving credit line loans. Risks on these three portfolios are limited to payment and collateral risk, and are primarily driven by regional economic factors. Nonperforming consumer mortgages were .65% of total consumer mortgages at December 31, 1996, compared with .68% at December 31, 1995. Securitization of home equity loans The Corporation securitized $650 million of its home equity revolving credit line loans on March 29, 1996. These loans generally are secured by first and/or second mortgages on one-to-four family residential properties. The Corporation continues to service these loans. The effect of the securitization is shown in the table on page 36. Credit card At December 31, 1996, credit card loans totaled $1,296 million, a $628 million, or 33%, decrease from December 31, 1995. The decrease resulted from the AAA credit card sale and credit losses, partially offset by growth. The primary risk associated with credit card loans is that these loans are unsecured and are solely dependent upon the credit-worthiness of the borrower. The Corporation monitors this risk using both internal and external statistical models. In addition to these models, the Corporation monitors factors such as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. Credit card loans are charged off after reaching 180 days delinquent and as such are not placed on nonperforming status prior to charge-off. The ratio of credit card loans 90 days or more past-due to total credit card loans was 2.24% at December 31, 1996, compared with .66% at December 31, 1995. The creation of the accelerated resolution portfolio in December 1995, caused a significant reduction in this ratio at year-end 1995. In addition, the past-due ratio at December 31, 1996, reflects the change in the mix of the portfolio following the AAA sale. The CornerStone(sm) credit card portfolio was 49% of total credit cards at year-end 1996, compared with 36% at year-end 1995. The CornerStone(sm) credit card product has historically experienced a higher past-due ratio and a higher level of credit losses than the Corporation's other credit card loans. At December 31, 1996, the CornerStone(sm) portfolio totaled $631 million, compared with $690 million at December 31, 1995. Other consumer credit Other consumer credit, which principally consists of student loans, installment loans and unsecured personal credit lines, was $2,640 million at December 31, 1996, an increase of $28 million from year-end 1995. This increase primarily reflected growth in the student loan portfolio. Other consumer credit loans are both secured and unsecured and, in the case of student loans, are government guaranteed. Approximately 60% of this portfolio at December 31, 1996, consisted of student loans. 54 37 COMPOSITION OF LOAN PORTFOLIO AT YEAR-END (CONTINUED) - ------------------------------------------------------------------------------- Lease finance assets Lease finance assets totaled $2,533 million at December 31, 1996, an increase of $1,703 million compared with year-end 1995, resulting from the USL and FUL acquisitions. These acquisitions enabled the Corporation to establish market presence with middle market companies through the USL transaction and to the users of small-ticket equipment throughout the United States through FUL. Lease finance assets represented 9% of the total loan portfolio at December 31, 1996, up from 3% at December 31, 1995. Nonperforming leases were .23% of total leases at December 31, 1996. International loans Loans to international borrowers totaled $1,422 million at December 31, 1996, up 65% from $863 at year-end 1995, primarily due to increased activity with large corporate customers and foreign banks. The Corporation's international lending strategy centers around establishing relationships with large foreign firms that are multinational in nature but also carry a significant U.S. presence. Assets held for accelerated resolution In December 1995, the Corporation segregated $193 million of CornerStone(sm) credit card loans, which had a history of delinquency, into an accelerated resolution portfolio. In connection with this transfer, the Corporation evaluated the carrying value of these loans and recorded a credit loss of $106 million to reflect an estimated net realizable value of $87 million. Interest and principal receipts, fees and loan loss recoveries on loans in this portfolio are applied to reduce the carrying value of the portfolio, which totaled $30 million at December 31, 1996, compared with $82 million at December 31, 1995. No revenue will be recorded on this portfolio until the net carrying value is recovered. This portfolio is in other assets on the Corporation's balance sheet. NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (dollar amounts in millions) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans $ 94 $167 $151 $202 $334 Acquired property, net of the OREO reserve 80 69 88 139 261 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets (a) $174 $236 $239 $341 $595 - ----------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a percentage of total loans .35% .60% .56% .83% 1.67% Total nonperforming assets as a percentage of total loans and net acquired property .63% .85% .89% 1.39% 2.94% - -----------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. Nonperforming assets is a term used to describe assets on which revenue recognition has been discontinued or is restricted. Nonperforming assets include both nonperforming loans and acquired property, primarily OREO acquired in connection with the collection effort on loans. Nonperforming assets do not include the segregated assets acquired in the December 1992 Meritor retail office acquisition. Nonperforming loans include both nonaccrual and "troubled debt" restructured loans. Past-due commercial loans are those that are contractually past due 90 days or more but are not on nonaccrual status because they are well-secured and in the process of collection. Past-due consumer loans, excluding consumer mortgages, are generally not classified as nonaccrual, but are charged off on a formula basis upon reaching various stages of delinquency. Additional information regarding the Corporation's practices for placing assets on nonaccrual status is presented in note 1 of Notes to Financial Statements. Nonperforming assets have decreased for five consecutive years and have reached their lowest level in more than 15 years. This trend is the result of a strong economy and the effectiveness of the Corporation's loan administration and workout procedures. As shown on the table on the following page, at December 31, 1996, nonperforming assets totaled $174 55 38 NONPERFORMING ASSETS (CONTINUED) - ------------------------------------------------------------------------------- million, a $62 million decrease from 1995, primarily reflecting decreases in commercial and financial and commercial real estate loans. The decrease in commercial real estate loans primarily resulted from repayments, returns to accrual status and credit losses. The decrease in commercial and financial loans primarily resulted from the sale, repayment and resolution of loans to an engineering/construction company, as well as other repayments and sales, and credit losses. The increase in nonperforming leases resulted from the USL acquisition. The ratio of nonperforming assets to total loans and net acquired property was .63% at December 31, 1996, the lowest level in the Corporation's recent history, compared with .85% at year-end 1995. This ratio, which can be expected to vary over time with changes in the economy, has been lower than 1% for 10 consecutive quarters.
- --------------------------------------------------------------------------------------------------------------------------------- NONPERFORMING ASSETS (A) December 31, (dollar amounts in millions) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- Domestic nonaccrual loans: Commercial and financial $ 21 $ 65 $ 60 $ 35 $103 Commercial real estate 16 29 25 75 172 Consumer credit: Consumer mortgage 50 61 56 61 29 Other consumer credit 1 2 - 4 1 Lease finance assets 6 - 1 2 6 - --------------------------------------------------------------------------------------------------------------------------------- Total domestic nonaccrual loans 94 157 142 177 311 International nonaccrual loans - - 1 7 8 - --------------------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 94 157 143 184 319 - --------------------------------------------------------------------------------------------------------------------------------- Domestic restructured loans: Commercial and financial - - 5 4 - Commercial real estate - 10 3 14 15 - --------------------------------------------------------------------------------------------------------------------------------- Total domestic restructured loans - 10 8 18 15 - --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans: Domestic 94 167 150 195 326 International - - 1 7 8 - --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans(b) 94 167 151 202 334 - --------------------------------------------------------------------------------------------------------------------------------- Acquired property: Real estate acquired 86 87 116 175 250 Reserve for real estate acquired (10) (18) (29) (37) (10) - --------------------------------------------------------------------------------------------------------------------------------- Net real estate acquired 76 69 87 138 240 Other assets acquired 4 - 1 1 21 - --------------------------------------------------------------------------------------------------------------------------------- Total acquired property 80 69 88 139 261 - --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $174 $236 $239 $341 $595 - --------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans as a percentage of respective loan portfolio segments: Domestic commercial and financial loans .21% .59% .65% .43% 1.27% Domestic commercial real estate loans 1.03 2.55 1.73 5.17 10.03 Domestic consumer mortgage loans .65 .68 .64 .75 .68 Domestic lease finance assets .23 - .11 .21 .98 Total loans .35 .60 .56 .83 1.67 Nonperforming assets as a percentage of total loans and net acquired property .63 .85 .89 1.39 2.94 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. (b) Includes $13 million, $81 million, $58 million, $74 million and $187 million, respectively, of loans with both principal and interest less than 90 days past due but placed on nonaccrual status by management discretion. 56 39 NONPERFORMING ASSETS (CONTINUED) - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- CHANGE IN NONPERFORMING LOANS (A) Domestic ---------------------------------------------------------- Total Commercial Commercial Consumer Lease -------------------- (in millions) & Financial Real Estate Credit Finance Assets 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans at beginning of year $65 $39 $63 $ - $ 167 $151 Acquired from USL/FUL - - - 5 5 - Additions 34 64 34 5 137 186 Payments (b) (49) (53) (23) - (125) (84) Returned to accrual status (10) (15) (8) - (33) (46) Credit losses (19) (12) (6) - (37) (26) Transfers to acquired property - (7) (9) (4) (20) (14) - --------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans at end of year $21 $16 $51 $ 6 $ 94 $167 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. (b) Includes interest applied to principal and sales.
- ----------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL NONPERFORMING LOAN DATA (a) December 31, (dollars in millions) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Book balance $ 94 $167 Contractual balance of nonperforming loans 115 202 Book balance as a percentage of contractual balance 82% 83% Full-year interest receipts applied to reduce principal $ 1 $ 2 Full-year interest receipts recognized in interest revenue 11 13 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. A loan is considered impaired, as defined by FAS No. 114, "Accounting by Creditors for Impairment of a Loan," when based upon current information and events, it is probable that the Corporation will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Additional information regarding impairment determination is presented in note 1 of Notes to Financial Statements.
- ----------------------------------------------------------------------------------------------------------------------------------- IMPAIRED LOANS (dollar amounts in millions) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Impaired loans at year-end (a) $ 37 $104 Average impaired loans for the year 77 114 Interest revenue recognized on impaired loans (b) 11 13 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes $13 million and $59 million of impaired loans with a related impairment reserve of $3 million and $22 million at December 31, 1996 and December 31, 1995, respectively. (b) All income was recognized using the cash basis method of income recognition. Acquired property consists of OREO and other assets acquired in connection with loan settlements. Acquired property totaled $80 million at December 31, 1996, an increase of $11 million compared with year-end 1995.
- --------------------------------------------------------------------------------------------------------------------------------- CHANGE IN ACQUIRED PROPERTY December 31, (in millions) 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- OREO at beginning of year, net of the OREO reserve $ 69 $ 87 Foreclosures 23 22 Sales (20) (36) Write-downs, losses, OREO provision and other 4 (4) - --------------------------------------------------------------------------------------------------------------------------------- OREO at end of year, net of the OREO reserve 76 69 Other acquired assets 4 - - --------------------------------------------------------------------------------------------------------------------------------- Total acquired property, net of the OREO reserve (a) $ 80 $ 69 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Excludes segregated assets. 57 40 NONPERFORMING ASSETS (CONTINUED) - ------------------------------------------------------------------------------- The Corporation recognizes any estimated potential decline in the value of OREO between appraisal dates on a property-by-property basis through periodic additions to the OREO reserve. Write-downs charged against this reserve are taken when OREO is sold at a loss or upon the receipt of appraisals which indicate a deterioration in the fair value of the property. Activity in the Corporation's OREO reserve for 1996, 1995 and 1994 is presented in the table below.
- --------------------------------------------------------------------------------------------------------------------------------- CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Beginning balance $18 $29 $37 Write-downs on real estate acquired (4) (3) (8) Provision (4) (8) - - --------------------------------------------------------------------------------------------------------------------------------- Ending balance $10 $18 $29 - ---------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- FOREGONE INTEREST ON NONPERFORMING LOANS Year ended December 31, (in millions) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Contractual interest due $9 $15 $15 $21 $32 Interest revenue recognized 3 5 3 7 13 - ----------------------------------------------------------------------------------------------------------------------------------- Interest revenue foregone $6 $10 $12 $14 $19 - -----------------------------------------------------------------------------------------------------------------------------------
Note: This table includes interest revenue foregone on loans that were nonperforming at the end of each year. Interest receipts that the Corporation applied, for accounting purposes, to reduce principal balances of nonaccrual loans are included in contractual interest due, but not in interest revenue recognized. The following table presents the amount of loans that were 90 days or more past due as to principal or interest, but are not classified as nonperforming. All loans in this table are well secured and in the process of collection or are consumer loans that are not classified as nonaccrual because they are automatically charged-off upon reaching 180 days past due.
- -------------------------------------------------------------------------------------------------------------------------------- PAST-DUE LOANS December 31, (dollar amounts in millions) 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Consumer: Mortgages $ 35 $ 34 $ 27 $ 25 Ratio (a) .45% .38% .31% .30% Credit card 29 (b) 13 (b) 32 15 Ratio (a) 2.24% .66% 1.35% 1.04% Student - government guaranteed 47 44 36 37 Ratio (a) 3.01% 3.11% 2.71% 3.26% Other consumer 2 1 1 1 Ratio (a) .18% .09% .07% .09% - -------------------------------------------------------------------------------------------------------------------------------- Total Consumer $113 $ 92 $ 96 $ 78 Ratio (a) .97% .68% .71% .65% Commercial (c) 10 6 10 6 - -------------------------------------------------------------------------------------------------------------------------------- Total past-due loans 123 98 106 84 - --------------------------------------------------------------------------------------------------------------------------------
Note: At December 31, 1992, total past-due loans were $97 million, which included $96 million of consumer loans and $1 million of commercial loans. Further category breakdowns for 1992 are not available. (a) 90 days past-due as a percentage of year-end loan balances. (b) 1996 and 1995 exclude past-due CornerStone(sm) credit cards loans included in the accelerated resolution portfolio. (c) Includes lease finance assets. 58 41 RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES - -------------------------------------------------------------------------------
(dollar amounts in millions) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Reserve for credit losses at year-end (a) $525 $471 $607 $600 $506 Reserve as a percentage of: Total loans 1.92% 1.70% 2.27% 2.45% 2.54% Nonperforming loans 556 282 403 297 152 Net credit losses as a percentage of average loans .46 .91 (b) .27 .64 1.52 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Excludes reserve for segregated assets. (b) The ratio of net credit losses, excluding credit losses on assets held for accelerated resolution, to average loans was .53% in 1995. The reserve for credit losses was $525 million at December 31, 1996, or 1.92% of total loans, compared with $471 million, or 1.70% of total loans at December 31, 1995. The $54 million increase in the reserve for credit losses from December 31, 1995, reflects the continued concern about the credit quality of the credit card portfolio and $23 million of reserves acquired in the lease financing acquisitions. The Corporation maintains a credit loss reserve that, in management's judgment, is adequate to absorb future losses inherent in the loan portfolio. Management reviews the adequacy of the reserve at least quarterly. For analytical purposes, the reserve methodology estimates loss potential in both the commercial and consumer loan portfolios. This methodology includes an evaluation of loss potential on individual problem credits, as well as a portfolio review of market concentrations, changing business trends, industry risks, and current and anticipated specific and general economic factors that may adversely affect collectability. Other factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; historical loss experience; lending policies; new products; the status and amount of nonperforming and past-due loans; and adequacy of collateral. In addition, management assesses volatile factors such as interest rates and real estate market conditions that may significantly alter loss potential. The loss reserve methodology also provides for a portion of the reserve to act as an additional buffer against credit quality deterioration or risk of estimation error. Although the determination of the adequacy of the reserve is based upon these factors, the reserve is not specifically associated with individual loans or portfolio segments. The ratio of the loan loss reserve to nonperforming loans at December 31, 1996, was 556%, compared with 282% at December 31, 1995. This ratio is not the result of a target or objective, but rather is an outcome of two interrelated but separate processes: the establishment of an appropriate loan loss reserve level for the portfolio as a whole, including but not limited to the nonperforming component in the portfolio; and the classification of certain assets as nonperforming in accordance with established accounting, regulatory and management policies. The ratio can vary significantly over time as the credit quality characteristics of the entire loan portfolio change. This ratio also can vary with shifts in portfolio mix. The increase in this ratio from December 31, 1995, primarily resulted from a decrease in the level of nonperforming loans. Net credit losses totaled $124 million in 1996, a decrease of $125 million from 1995. The decrease was primarily due to the $106 million of credit losses recorded in December 1995, relating to the transfer of $193 million of CornerStone(sm) credit card loans, which had a history of delinquency, into an accelerated resolution portfolio. The fourth quarter 1995 credit card securitization and the AAA credit card sale in late 1996 also contributed to a lower level of credit card net credit losses in 1996. Partially offsetting the decrease in net credit card losses were lower commercial real estate recoveries in 1996. Of the $124 million of net credit losses in 1996, $114 million, or 92%, were from the credit card portfolio. The unprecedented levels of personal bankruptcies and an apparent change in consumer attitudes toward debt and responsibility remain an industry-wide concern. Despite the lower level of credit card outstandings, the Corporation does not anticipate a significant decrease in credit card net credit losses in 1997. In addition, commercial lending has experienced net credit recoveries over the last 2 years. This trend, while desirable, cannot always be anticipated or expected to continue. The level of credit losses and recoveries relative to outstanding loans can vary from period to period as a result of the size and number of individual credits that may require charge off, and the effects of changing economic conditions. 59 42 RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT LOSSES (CONTINUED) - -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- CREDIT LOSS RESERVE ACTIVITY (in millions) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- Reserve at beginning of year $471 $607 $600 $506 $596 Net change in reserves from acquisitions and divestitures 23 8 4 108 2 Credit losses: Domestic: Commercial and financial (19) (14) (42) (54) (70) Commercial real estate (12) (8) (16) (74) (161) Consumer credit: Credit cards (127) (167) (a) (61) (46) (49) Consumer mortgage (6) (6) (11) (13) (7) Other consumer credit (21) (19) (17) (22) (24) Lease finance assets (5) (16) - (1) (1) - --------------------------------------------------------------------------------------------------------------------------------- Total domestic (190) (230) (147) (210) (312) International - - (4) (6) (19) - --------------------------------------------------------------------------------------------------------------------------------- Total credit losses (190) (230) (a) (151) (216) (331) - --------------------------------------------------------------------------------------------------------------------------------- Recoveries: Domestic: Commercial and financial 25 27 41 40 25 Commercial real estate 14 30 14 13 6 Consumer credit: Credit cards 13 14 9 7 6 Consumer mortgage 4 3 4 2 1 Other consumer credit 8 8 13 10 10 Lease finance assets 1 - - - - - --------------------------------------------------------------------------------------------------------------------------------- Total domestic 65 82 81 72 48 International 1 5 3 5 6 - --------------------------------------------------------------------------------------------------------------------------------- Total recoveries 66 87 84 77 54 - --------------------------------------------------------------------------------------------------------------------------------- Net credit (losses) recoveries: Domestic: Commercial and financial 6 13 (1) (14) (45) Commercial real estate 2 22 (2) (61) (155) Consumer credit: Credit cards (114) (153) (a) (52) (39) (43) Consumer mortgage (2) (3) (7) (11) (6) Other consumer credit (13) (11) (4) (12) (14) Lease finance assets (4) (16) - (1) (1) - --------------------------------------------------------------------------------------------------------------------------------- Total domestic (125) (148) (66) (138) (264) International 1 5 (1) (1) (13) - --------------------------------------------------------------------------------------------------------------------------------- Total net credit losses (124) (143) (a) (67) (139) (277) Provision for credit losses 155 105 70 125 185 Credit losses on assets held for accelerated resolution - (106) - - - - --------------------------------------------------------------------------------------------------------------------------------- Reserve at end of year (b) $525 $471 $607 $600 $506 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Excludes $106 million related to loans transferred to the accelerated resolution portfolio. (b) Excludes the reserve for segregated assets. 60 43 FOURTH QUARTER REVIEW - ------------------------------------------------------------------------------ The Corporation reported net income applicable to common stock of $179 million and fully diluted earnings per common share of $1.34 in the fourth quarter of 1996. These results compare with fourth quarter 1995 net income applicable to common stock of $164 million and fully diluted earnings per common share of $1.16. Annualized return on common shareholders' equity and return on assets were 20.9% and 1.80%, respectively, in the fourth quarter of 1996. Annualized return on common shareholders' equity and return on assets were 18.1% and 1.68%, respectively, in the fourth quarter of 1995. Annualized return on tangible common shareholders' equity and return on tangible assets were 36.6% and 2.06%, respectively, in the fourth quarter of 1996, compared with 27.3% and 1.90%, respectively, in the fourth quarter of 1995. Fully diluted tangible earnings per common share in the fourth quarter of 1996 were $1.49, a 16% increase, compared with $1.29 in 1995. Compared with the fourth quarter of 1995, the Corporation's fourth quarter 1996 results reflected higher fee revenue, offset in part by higher credit quality expense, higher operating expense and lower net interest revenue. The quarter's earnings per share also included an additional $5 million charge, or $.04 per share, for issue costs recorded as preferred stock dividends in connection with the redemption of the Series I preferred stock. Net interest revenue totaled $371 million in the fourth quarter of 1996, down from $382 million in the fourth quarter of 1995. The net interest margin on a taxable equivalent basis was 4.20% in the fourth quarter of 1996, a decrease of 23 basis points from 4.43% in the fourth quarter of 1995. The decreases primarily resulted from the loan securitizations, the funding costs related to the repurchase of common shares and the sale of the AAA credit card portfolio, partially offset by increased revenue from lease financing acquisitions, a higher level of noninterest-bearing deposits and loan growth. Excluding the effect of the loan securitizations and the common equity repurchases, the net interest revenue and net interest margin for the fourth quarter of 1996 would have been approximately $419 million and 4.49%, compared with approximately $401 million and 4.57% in the fourth quarter of 1995. Credit quality expense was $77 million in the fourth quarter of 1996, an increase of $47 million compared with the prior-year period. This increase resulted from a $45 million increase in the provision for credit losses relating to the credit card portfolio. Net credit losses were $36 million in the fourth quarter of 1996, compared with $138 million in the fourth quarter of 1995. The decrease resulted from the $106 million of credit losses recorded in December 1995 on the accelerated resolution credit card portfolio. Fee revenue was $566 million in the fourth quarter of 1996, an increase of $122 million compared with the fourth quarter of 1995. The increase primarily resulted from the $57 million gain on the sale of the AAA credit card portfolio, higher institutional trust and private asset management fees, higher mutual fund management revenue, and higher mortgage servicing and cash management fee revenue. The increase in institutional trust revenue resulted from a $7 million increase in securities lending revenue and new business, including the fourth quarter 1995 acquisition of two corporate trust businesses. The increase in private asset management revenue resulted from new business and an increase in the market value of assets under management. The higher revenue from the management of mutual funds resulted from a higher average level of equity funds managed at Dreyfus. The increase in mortgage servicing revenue primarily resulted from acquisitions while the increase in cash management fees and deposit transaction charges primarily resulted from higher volumes of business in customer receivable, payable and treasury management products. Operating expense before net revenue from acquired property for the fourth quarter of 1996 was $562 million, compared with $531 million in the prior-year period. This increase primarily resulted from a $19 million increase in staff expense due to incentive and commission expense, as well as higher base salaries, due in part to the leasing acquisitions. Other expense increased $13 million primarily in support of revenue growth. 61 44
SELECTED QUARTERLY DATA (UNAUDITED) - --------------------------------------------------------------------------------------------------------------------------------- Quarter ended, 1996 1995 -------------------------------------- ------------------------------------ (dollar amounts in millions, DEC. SEPT. JUNE MARCH Dec. Sept. June March except per share amounts) 31 30 30 31 31 30 30 31 - --------------------------------------------------------------------------------------------------------------------------------- QUARTERLY CONSOLIDATED INCOME STATEMENT - --------------------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 371 $ 372 $ 372 $ 363 $ 382 $ 392 $ 385 $ 389 Provision for credit losses 80 25 25 25 35 30 20 20 Fee revenue 566 476 474 503 444 422 405 399 Gains (losses) on sale of securities 3 - - 1 6 - 1 (1) Operating expense 559 536 540 560 526 506 500 495 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 301 287 281 282 271 278 271 272 Provision for income taxes 107 106 102 103 97 103 99 102 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME 194 181 179 179 174 175 172 170 Dividends on preferred stock 15 9 10 10 10 9 10 10 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME APPLICABLE TO COMMON STOCK $ 179 $ 172 $ 169 $ 169 $ 164 $ 166 $ 162 $ 160 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE: PRIMARY $ 1.36 $ 1.31 $ 1.26 $ 1.24 $ 1.18 $ 1.15 $ 1.09 $ 1.08 FULLY DILUTED $ 1.34 $ 1.31 $ 1.26 $ 1.24 $ 1.16 $ 1.14 $ 1.09 $ 1.07 Annualized return on common shareholders' equity 20.9% 20.6% 20.4% 19.7% 18.1% 18.0% 17.5% 17.6% Annualized return on assets 1.80 1.71 1.70 1.76 1.68 1.70 1.75 1.77 - --------------------------------------------------------------------------------------------------------------------------------- QUARTERLY AVERAGE BALANCES - --------------------------------------------------------------------------------------------------------------------------------- Money market investments $ 1,272 $ 1,573 $ 1,387 $ 1,290 $ 1,206 $ 1,286 $ 1,165 $ 1,230 Trading account securities 96 169 181 138 283 363 220 316 Securities 6,198 6,538 6,658 5,339 5,178 4,938 4,681 4,890 Loans 27,900 27,170 26,798 27,058 27,747 27,774 27,076 26,670 Total interest-earning assets 35,466 35,450 35,024 33,825 34,414 34,361 33,142 33,106 Total assets 42,636 42,461 42,096 40,848 41,141 40,955 39,370 38,886 Deposits 31,569 31,542 30,949 29,274 28,946 28,417 27,100 27,318 Notes and debentures 2,519 2,102 1,971 1,554 1,646 1,809 1,643 1,582 Trust-preferred securities 129 - - - - - - - Common shareholders' equity 3,410 3,327 3,327 3,459 3,610 3,648 3,726 3,700 Total shareholders' equity 3,820 3,762 3,762 3,894 4,045 4,083 4,161 4,135 - --------------------------------------------------------------------------------------------------------------------------------- Net interest margin (FTE) 4.20% 4.20% 4.30% 4.35% 4.43% 4.56% 4.69% 4.80% - --------------------------------------------------------------------------------------------------------------------------------- TANGIBLE OPERATING RESULTS (a) - --------------------------------------------------------------------------------------------------------------------------------- Fully diluted tangible earnings per common share $ 1.49 $ 1.45 $ 1.40 $ 1.37 $ 1.29 $ 1.26 $ 1.22 $ 1.19 Tangible net income applicable to common stock 200 190 187 188 182 184 181 178 Annualized return on tangible common shareholders' equity 36.6% 31.2% 31.3% 30.1% 27.3% 27.4% 26.6% 27.1% Annualized return on tangible assets 2.06 1.92 1.92 1.99 1.90 1.92 1.99 2.02 - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK DATA (dollars per share) (b) - --------------------------------------------------------------------------------------------------------------------------------- Market price range: High $ 74 3/4 $ 60 3/4 $ 60 1/8 $ 58 1/2 $ 56 1/2 $ 47 3/4 $ 44 3/4 $ 41 3/4 Low 59 7/8 50 1/2 51 5/8 48 1/4 44 5/8 39 5/8 37 3/4 30 5/8 Average 67.13 55.77 55.53 53.53 51.82 43.18 41.66 36.66 Close 71 59 1/4 57 55 1/4 53 3/4 44 3/4 41 5/8 40 3/4 Dividends .60 .60 .60 .55 .55 .50 .50 .45 Market capitalization $ 9,134 $ 7,668 $ 7,414 $ 7,317 $ 7,374 $ 6,324 $ 5,925 $ 5,969 - ---------------------------------------------------------------------------------------------------------------------------------
(a) See page 30 for the definition of these results. (b) At December 31, 1996, there were 23,856 shareholders registered with the Corporation's stock transfer agent, compared with 23,755 at year-end 1995 and 23,092 at year-end 1994. In addition, there were approximately 16,977, 15,651, and approximately 15,000 Mellon employees at December 31, 1996, 1995 and 1994, respectively, who participated in the Corporation's 401(k) Retirement Savings Plan and the Dreyfus retirement savings plan. All shares of Mellon Bank Corporation common stock held by the plans for its participants are registered in the name of Mellon Bank, N.A., as trustee. 62 45
CONSOLIDATED INCOME STATEMENT MELLON BANK CORPORATION (AND ITS SUBSIDIARIES) - --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (dollar amounts in millions, except per share amounts) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST REVENUE Interest and fees on loans (loan fees of $96, $79 and $87) $2,253 $2,425 $1,926 Interest-bearing deposits with banks 36 36 34 Federal funds sold and securities under resale agreements 30 34 30 Other money market investments 7 2 6 Trading account securities 7 19 24 Securities: U.S. Treasury and agency securities 392 305 269 Obligation of states and political subdivisions 2 3 5 Other 12 14 16 ------------------------------------------------------------------------------------------------------ Total interest revenue 2,739 2,838 2,310 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits in domestic offices 709 663 447 Deposits in foreign offices 194 226 92 Federal funds purchased and securities under repurchase agreements 94 125 76 Short-term bank notes 29 50 2 Other short-term borrowings 92 109 75 Notes and debentures 143 117 110 ------------------------------------------------------------------------------------------------------ Total interest expense 1,261 1,290 802 - --------------------------------------------------------------------------------------------------------------------------------- NET INTEREST REVENUE Net interest revenue 1,478 1,548 1,508 Provision for credit losses 155 105 70 ------------------------------------------------------------------------------------------------------ Net interest revenue after provision for losses 1,323 1,443 1,438 - --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Trust and investment management fees 994 906 953 Cash management and deposit transaction charges 211 191 197 Mortgage servicing fees 180 122 78 Credit card fees 120 90 72 Foreign currency and securities trading 80 91 76 Information services fees 50 48 78 Gain on sale of credit card portfolio 57 - - Other income 327 222 198 ------------------------------------------------------------------------------------------------------ Total fee revenue 2,019 1,670 1,652 Gains (losses) on sales of securities 4 6 (5) ------------------------------------------------------------------------------------------------------ Total noninterest revenue 2,023 1,676 1,647 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSE Staff expense 1,055 957 956 Net occupancy expense 205 205 206 Professional, legal and other purchased services 195 186 210 Equipment expense 145 143 132 Business development 137 136 161 Amortization of mortgage servicing rights and purchased credit card relationships 107 68 40 Amortization of goodwill and other intangible assets 100 96 98 Communications expense 96 86 84 Forms and supplies 42 42 40 FDIC assessment and regulatory examination fees 6 31 63 Other expense 120 97 85 Net revenue from acquired property (13) (20) (28) Securities lending charge - - 223 Merger expense - - 104 ------------------------------------------------------------------------------------------------------ Total operating expense 2,195 2,027 2,374 - --------------------------------------------------------------------------------------------------------------------------------- INCOME Income before income taxes 1,151 1,092 711 Provision for income taxes 418 401 278 ------------------------------------------------------------------------------------------------------ NET INCOME 733 691 433 Dividends on preferred stock 44 39 75 ------------------------------------------------------------------------------------------------------ NET INCOME APPLICABLE TO COMMON STOCK $ 689 $ 652 $ 358 - --------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Primary net income $ 5.17 $ 4.50 $ 2.42 Fully diluted net income $ 5.15 $ 4.46 $ 2.42 ------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 63 46
CONSOLIDATED BALANCE SHEET MELLON BANK CORPORATION (AND ITS SUBSIDIARIES) - --------------------------------------------------------------------------------------------------------------------------------- December 31, (dollar amounts in millions) 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,846 $ 2,342 Federal funds sold and securities under resale agreements 460 225 Interest-bearing deposits with banks 419 553 Other money market investments 113 82 Trading account securities 84 62 Securities available for sale 4,111 2,913 Investment securities (approximate fair value of $2,365 and $2,554) 2,375 2,519 Loans, net of unearned discount of $57 and $44 27,393 27,690 Reserve for credit losses (525) (471) ------- ------- Net loans 26,868 27,219 Customers' acceptance liability 238 263 Premises and equipment 569 556 Goodwill and other intangibles 1,238 958 Mortgage servicing rights and purchased credit card relationships 774 682 Acquired property, net of reserves of $10 and $18 80 69 Other assets 2,421 2,203 ------------------------------------------------------------------------------------------------------ Total assets $42,596 $40,646 ------------------------------------------------------------------------------------------------------ - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits in domestic offices $ 8,692 $ 6,458 Interest-bearing deposits in domestic offices 19,965 18,412 Interest-bearing deposits in foreign offices 2,717 4,391 ------------------------------------------------------------------------------------------------------ Total deposits 31,374 29,261 Federal funds purchased and securities under repurchase agreements 742 1,591 Term federal funds purchased 481 905 U.S. Treasury tax and loan demand notes 474 290 Short-term bank notes 135 1,057 Commercial paper 122 284 Other funds borrowed 293 190 Acceptances outstanding 238 263 Other liabilities 1,483 1,337 Notes and debentures (with original maturities over one year) 2,518 1,443 ------------------------------------------------------------------------------------------------------ Total liabilities 37,860 36,621 - --------------------------------------------------------------------------------------------------------------------------------- TRUST-PREFERRED Guaranteed preferred beneficial interests in Corporation's SECURITIES junior subordinated deferrable interest debentures 990 - - --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' Preferred stock 290 435 EQUITY Common shareholders' equity: Common stock--$.50 par value Authorized--200,000,000 shares Issued--147,165,480 shares 74 74 Additional paid-in capital 1,866 1,850 Retained earnings 2,480 2,118 Net unrealized gain (loss) on assets available for sale, net of tax (1) 18 Treasury stock of 18,518,290 and 9,978,407 shares at cost (963) (470) ------------------------------------------------------------------------------------------------------- Total common shareholders' equity 3,456 3,590 ------------------------------------------------------------------------------------------------------ Total shareholders' equity 3,746 4,025 ------------------------------------------------------------------------------------------------------ Total liabilities, trust-preferred securities and shareholders' equity $42,596 $40,646 ------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. 64 47
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY MELLON BANK CORPORATION (CONSOLIDATED AND PARENT CORPORATION) - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gain Total Additional (loss) on assets share- Preferred Common paid-in Retained available for sale Treasury holders' (in millions) stock stock capital earnings Warrants (net of tax) stock equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 $592 $52 $2,038 $1,629 $37 $ - $(210) $4,138 Net income 433 433 Dividends on common stock at $1.57 per share (a) (194) (194) Dividends on preferred stock (75) (75) Common stock issued under dividend reinvestment and common stock purchase plan 9 2 11 Series H preferred stock redemption (155) (155) Conversion of Series D preferred stock to common stock (2) 1 1 - Exercise of stock options 6 (6) 10 10 Net unrealized loss on assets available for sale, net of tax (55) (55) Additional common stock issued for stock split 24 (24) - Retirement of Dreyfus treasury stock (3) (187) 190 - Other 8 (7) 8 9 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 $435 $74 $1,851 $1,780 $37 $(55) $ - $4,122 Net income 691 691 Dividends on common stock at $2.00 per share (288) (288) Dividends on preferred stock (39) (39) Common stock issued under dividend reinvestment and common stock purchase plan 1 13 14 Repurchase of common stock - related to the 1993 TBC acquisition (159) (159) Repurchase of warrants (17) (37) (54) Repurchase of common stock for employee benefit purposes (235) (235) Exercise of stock options 12 (28) 78 62 Repurchase of common stock - other (184) (184) Net unrealized gain on assets available for sale, net of tax 73 73 Other 3 2 17 22 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $435 $74 $1,850 $2,118 $ - $18 $ (470) $4,025 NET INCOME 733 733 DIVIDENDS ON COMMON STOCK AT $2.35 PER SHARE (310) (310) DIVIDENDS ON PREFERRED STOCK (44) (44) COMMON STOCK ISSUED UNDER DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN 4 14 18 SERIES I PREFERRED STOCK REDEMPTION (145) (145) REPURCHASE OF COMMON STOCK FOR EMPLOYEE BENEFIT PURPOSES (192) (192) EXERCISE OF STOCK OPTIONS 10 (17) 70 63 REPURCHASE OF COMMON STOCK - OTHER (404) (404) NET UNREALIZED LOSS ON ASSETS AVAILABLE FOR SALE, NET OF TAX (19) (19) OTHER 2 19 21 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $290 $74 $1,866 $2,480 $ - $(1) $(963) $3,746 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Dividends per share have not been restated to reflect the Dreyfus merger. See accompanying Notes to Financial Statements. 65 48
CONSOLIDATED STATEMENT OF CASH FLOWS MELLON BANK CORPORATION (and its subsidiaries) - --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net income $ 733 $ 691 $ 433 OPERATING ACTIVITIES Adjustments to reconcile net income to net cash provided by operating activities: Amortization of goodwill and other intangible assets 100 96 98 Amortization of mortgage servicing rights and purchased credit card relationships 107 68 40 Depreciation and other amortization 105 107 95 Deferred income tax expense (benefit) 95 167 (14) Provision for credit losses 155 105 70 Net gains on dispositions of acquired property (11) (12) (30) Net (increase) decrease in accrued interest receivable 9 (45) (42) Net (increase) decrease in trading account securities (15) 12 52 Net increase in accrued interest payable 15 35 34 Net (increase) decrease in residential mortgages held for sale 340 (367) 217 Securities lending charge - - 223 Merger expense - - 104 Net decrease in other operating activities (469) (602) (331) ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,164 255 949 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net (increase) decrease in term deposits and other money INVESTING ACTIVITIES market investments 103 (158) 715 Net (increase) decrease in federal funds sold and securities under resale agreements (235) 158 191 Funds invested in securities available for sale (14,768) (5,070) (11,526) Proceeds from sales of securities available for sale 1,453 1,845 3,808 Proceeds from maturities of securities available for sale 12,176 2,898 8,927 Funds invested in investment securities (219) (175) (1,458) Proceeds from maturities of investment securities 360 307 488 Net increase in credit card receivables (387) (600) (870) Sale of credit card portfolio 886 - - Net principal disbursed on loans to customers (884) (1,662) (1,544) Home equity credit line loans securitized 650 - - Insurance premium finance loans securitized 500 - - Loan portfolio purchases (254) (302) (216) Proceeds from sales of loan portfolios 907 815 286 Purchases of premises and equipment (125) (101) (133) Proceeds from sales of acquired property 31 49 93 Cash paid in purchase of USL (1,688) - - Cash paid in purchase of FUL (136) - - Cash paid in purchase of Metmor Financial, Inc., including warehouse loans purchased of $166 million, net of cash received and escrow deposits - (130) - Credit card receivables securitized - 950 - Cash paid in purchase of U.S. Bancorp Mortgage Company, including warehouse loans purchased of $81 million, net of escrow deposits - - (98) Cash paid in purchase of Glendale Bancorporation, net of cash received - - (13) Net (increase) decrease in other investing activities (111) (137) 75 ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (1,741) (1,313) (1,275) - ---------------------------------------------------------------------------------------------------------------------------------
-continued- 66 49
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) MELLON BANK CORPORATION (and its subsidiaries) - -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM Net increase (decrease) in transaction and savings deposits (695) 955 (1,070) FINANCING ACTIVITIES Net increase in customer term deposits 2,808 500 807 Net increase (decrease) in federal funds purchased and securities under repurchase agreements (849) (432) 1,045 Net increase (decrease) in U.S. Treasury tax and loan demand notes 184 (277) (144) Net increase (decrease) in short-term bank notes (922) 857 200 Net increase (decrease) in term federal funds purchased (424) 572 325 Net increase (decrease) in commercial paper (162) 106 44 Net proceeds from issuance of Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 990 - - Repurchase and repayments of longer-term debt (24) (354) (425) Net proceeds from issuance of longer-term debt 1,099 227 1 Redemption of preferred stock (145) (155) - Net proceeds from issuance of common stock 55 58 18 Dividends paid on common and preferred stock (354) (346) (254) Repurchase of common stock for employee benefit purposes (192) (235) - Repurchase of common stock - other (404) (184) - Repurchase of common stock and warrants related to the 1993 acquisition of The Boston Company - (213) - Net increase (decrease) in other financing activities 101 17 (127) ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 1,066 1,096 420 Effect of foreign currency exchange rates 15 19 20 - --------------------------------------------------------------------------------------------------------------------------------- CHANGE IN CASH AND Net increase in cash and due from banks 504 57 114 DUE FROM BANKS Cash and due from banks at beginning of year 2,342 2,285 2,171 ------------------------------------------------------------------------------------------------------ Cash and due from banks at end of year $ 2,846 $ 2,342 $ 2,285 ------------------------------------------------------------------------------------------------------ - --------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Interest paid $ 1,246 $ 1,255 $ 768 DISCLOSURES Net income taxes paid 283 182 284 ------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES Basis of presentation The accounting and financial reporting policies of Mellon Bank Corporation (the Corporation), a multibank holding company, conform to generally accepted accounting principles (GAAP) and prevailing industry practices. The consolidated financial statements of the Corporation include the accounts of the Corporation and its majority-owned subsidiaries. Investments in companies 20-50% owned are carried on the equity basis. Investments in companies less than 20% owned are carried at cost. Intracorporate balances and transactions are not reflected in the consolidated financial statements. The income statement includes results of acquired subsidiaries and businesses accounted for under the purchase method of accounting from the dates of acquisition. Securities and other property held in a fiduciary or agency capacity are not included in the balance sheet since these are not assets or liabilities of the Corporation. The parent Corporation financial statements in note 27 include the accounts of the Corporation, those of a wholly owned financing subsidiary that functions as a financing entity for the Corporation and its subsidiaries by issuing commercial 67 50 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) paper and other debt guaranteed by the Corporation and those of the business trusts discussed in note 13 on page 78. Financial data for the Corporation, the financing subsidiary, and the business trusts are combined for financial reporting because of the limited function of the financing subsidiary and the business trusts, and the unconditional guarantee by the Corporation of their obligations. Nature of operations and use of estimates in the preparation of financial statements Mellon Bank Corporation is a multibank holding company whose principal wholly owned subsidiaries are Mellon Bank, N.A., The Boston Company, Inc. and Mellon Bank (DE) National Association. The Dreyfus Corporation, one of the nation's largest mutual fund companies, is a wholly owned subsidiary of Mellon Bank, N.A. The Corporation's banking subsidiaries primarily engage in retail financial services, commercial banking, mortgage banking, trust and investment management services, lease financing and mutual funds activities. While the Corporation's major subsidiaries are headquartered in the Northeast and Central Atlantic regions, most of its products and services are offered nationwide and many are offered globally. The Corporation's customer base is diversified and primarily domestic. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenue and expense during the reporting period. Actual results could differ from those estimates. Trading account securities, securities available for sale and investment securities When purchased, securities are classified in either the trading account securities portfolio, the securities available for sale portfolio or the investment securities portfolio. Securities are classified as trading account securities when the intent is profit maximization through market appreciation and resale. Securities are classified as available for sale when management intends to hold the securities for an indefinite period of time or when the securities may be used for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure, prepayment risk and liquidity needs. Securities are classified as investment securities when management intends to hold these securities until maturity. Trading account securities, including interest rate agreements, are stated at fair value. Trading revenue includes both realized and unrealized gains and losses. The liability incurred on short-sale transactions, representing the obligation to deliver securities, is included in other funds borrowed at fair value. Securities available for sale are stated at fair value. Unrealized gains or losses on assets classified as available for sale, net of tax, are recorded as an addition to or deduction from shareholders' equity. Investment securities are stated at cost, adjusted for amortization of premium and accretion of discount on a level yield basis. Gains (losses) on sales of securities available for sale are reported in the income statement. The cost of securities sold is determined on a specific identification basis. Loans Loans are reported net of any unearned discount. Interest revenue on nondiscounted loans is recognized based on the principal amount outstanding. Interest revenue on discounted loans is recognized based on methods that approximate a level yield. Loan origination and commitment fees, as well as certain direct loan origination and commitment costs, are deferred and amortized as a yield adjustment over the lives of the related loans. Deferred fees and costs are netted against outstanding loan balances. 68 51 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) Unearned revenue on direct financing leases is accreted over the lives of the leases in decreasing amounts to provide a constant rate of return on the net investment in the leases. Revenue on leveraged leases is recognized on a basis to achieve a constant yield on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Gains on sales of lease residuals are included in other noninterest revenue. Commercial loans, including commercial leases, generally are placed on nonaccrual status when either principal or interest is past due 90 days or more, unless the loan is well-secured and in the process of collection. Management also places commercial loans on nonaccrual status when the collection of principal or interest becomes doubtful. Residential mortgage loans generally are placed on nonaccrual status when, in management's judgment, collection is in doubt or the loans have outstanding balances of $250,000 or greater and are 90 days or more delinquent, or have balances of less than $250,000 and are delinquent 12 months or more. Consumer loans, other than residential mortgages, and certain secured commercial loans of less than $5,000 are charged off upon reaching various stages of delinquency depending upon the loan type. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed against current period interest revenue. Interest receipts on nonaccrual loans are recognized as interest revenue or are applied to principal when management believes the ultimate collectability of principal is in doubt. Nonaccrual loans generally are restored to an accrual basis when principal and interest payments become current or when the loan becomes well-secured and is in the process of collection. A loan is considered to be impaired, as defined by FAS No. 114, "Accounting by Creditors for Impairment of a Loan," when it is probable that the Corporation will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. The Corporation tests loans covered under FAS No. 114 for impairment if they are on nonaccrual status or have been restructured. Consumer credit nonaccrual loans are not tested for impairment because they are included in large groups of smaller-balance homogeneous loans that, by definition along with leases, are excluded from the scope of FAS No. 114. Impaired loans are required to be measured based upon the present value of expected future cash flows, discounted at the loan's initial effective interest rate, or at the loan's market price or fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for credit losses or by a provision for credit losses, depending on the adequacy of the reserve for credit losses. Impairment reserves are not needed when interest payments have been applied to reduce principal, or when credit losses have been recorded so that the recorded investment in an impaired loan is less than the loan valuation. Loan securitizations The Corporation securitized $650 million of home equity credit line loan outstandings in March 1996, $500 million of insurance premium finance receivables in December 1996 and $950 million of credit card receivables in November 1995. The amount of interest and fee revenue in excess of both interest paid to certificate holders and credit losses is recognized monthly as servicing revenue. The servicing revenue from the home equity lines of credit and insurance premium finance receivables is reported as "other fee revenue". The servicing revenue from the credit card securitization is reported in "credit card fee revenue". Reserve for credit losses The reserve for credit losses is maintained to absorb future losses inherent in the credit portfolio based on management's judgment. Factors considered in determining the level of the reserve include: trends in portfolio volume, quality, maturity and composition; industry concentrations; lending policies; new products; adequacy of collateral; historical loss experience; the status and amount of nonperforming and past-due loans; specific known risks; and current, as well as anticipated, specific and general economic factors that may affect certain borrowers. Credit losses are charged against the reserve; recoveries are added to the reserve. 69 52 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) Acquired property Property acquired in connection with loan settlements, including real estate acquired, is stated at the lower of estimated fair value less estimated costs to sell, or the carrying amount of the loan. A reserve for real estate acquired is maintained on a property-by-property basis to recognize estimated potential declines in value that might occur between appraisal dates. Provisions for the estimated potential decrease in fair value between annual appraisals, net gains on the sale of real estate acquired and net direct operating expense attributable to these assets are included in net revenue from acquired property. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated over the estimated useful lives of the assets, limited in the case of leasehold improvements to the lease term, using the straight-line method. Goodwill, other identified intangibles, mortgage servicing rights and purchased credit card relationships Intangible assets are amortized using straight-line and accelerated methods over the remaining estimated benefit periods which approximated, on a weighted-average basis at December 31, 1996, 18 years for goodwill, four years for core deposit intangibles, 6 years for credit card relationships and 11 years for all other intangible assets except mortgage servicing rights. Intangible assets are reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Originated mortgage servicing rights (MSRs) are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. Purchased MSRs are recorded at cost. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. In 1996 and 1995, $285 million and $376 million, respectively, of MSR's were capitalized in connection with both mortgage servicing portfolio purchases and loan originations. The carrying amount of MSRs was $745 million at December 31, 1996, with an estimated fair value of $869 million. The carrying amount of MSRs is measured for impairment each quarter based on the fair value of the MSRs. Quoted market prices are used, whenever available, as the basis for measuring the fair value of servicing rights. When quoted market prices are not available, fair values are based upon the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. For impairment measurement purposes, servicing rights acquired after April 1, 1995, are first stratified by loan type and then by interest rates within the loan type. If the carrying value of an individual stratum were to exceed its fair value, a valuation allowance would be established. No valuation allowances were recorded at December 31, 1996 and 1995, as the carrying values of the various stratifications were less than their respective fair value. MSRs acquired prior to April 1, 1995, are stratified by acquisition and evaluated for possible impairment using fair market values. On a weighted-average basis at December 31, 1996, the serviced mortgage loan portfolio had an interest rate of approximately 7.95%. On January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS No. 121 established guidelines for recognition of impairment losses related to long-lived assets and certain intangibles and related goodwill for both assets to be held and used as well as assets held for disposition. This statement excludes financial instruments, long-term customer relationships of financial institutions, mortgage and other servicing rights and deferred tax assets. Adoption of this statement was immaterial to the Corporation's financial position and results of operations. Assets held for accelerated resolution During the fourth quarter of 1995, the Corporation segregated certain loans from the CornerStone(sm) credit card portfolio into an accelerated resolution portfolio. The excess of the carrying value of these loans, which had a history of delinquency, 70 53 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 1. ACCOUNTING POLICIES (CONTINUED) over the estimated net realizable value was recorded as a credit loss. Interest and principal receipts, fees and loan loss recoveries on loans in this portfolio are applied to reduce the net carrying value. No revenue will be recorded on this portfolio until the net carrying value is recovered. This portfolio is reported in other assets in the balance sheet. Income Taxes The Corporation files a consolidated U.S. income tax return. Deferred taxes are recognized for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities using enacted tax laws and rates. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated to U.S. dollars at the rate of exchange on the balance sheet date. Revenue and expense accounts are translated monthly at month-end rates of exchange. Net foreign currency positions are valued at rates of exchange--spot or future, as appropriate--prevailing at the end of the period, and resulting gains or losses are included in the income statement. Translation gains and losses on investments in foreign entities with functional currencies that are not the U.S. dollar are included in shareholders' equity. Fee revenue Trust and investment management fees are reported net of fees waived and expense reimbursements to certain mutual funds. Fees on standby letters of credit are recognized over the commitment term, while fees on commercial letters of credit, because of their short-term nature, are recognized when received. Fees on standby and commercial letters of credit are recorded in fee revenue. Fees for banking and other services generally are recognized over the periods the related services are provided. Off-balance-sheet instruments used for interest rate risk management The Corporation enters into interest rate swaps, futures and forward contracts and interest rate caps and floors to manage its sensitivity to interest rate risk. These instruments are designated as a hedge on the trade date and are highly correlated with the financial instrument being hedged. An example of a highly correlated hedge is the hedging of three-month Eurodollar deposits with three-month Eurodollar futures contracts. Interest revenue or interest expense on such transactions is accrued over the term of the agreement as an adjustment to the yield or cost of the related asset or liability. Transaction fees are deferred and amortized to interest revenue or interest expense over the term of the agreement. Realized gains and losses are deferred and amortized over the life of the hedged transaction as interest revenue or interest expense, and any unamortized amounts are recognized as income or loss at the time of disposition of the assets or liabilities being hedged. Amounts payable to or receivable from counterparties are included in other liabilities or other assets. The fair values of interest rate swaps, futures and forward contracts, and interest rate caps and floors used for interest rate risk management are not recognized in the financial statements. Hedge correlation of interest rate risk management positions is reviewed periodically. If correlation criteria are not met, the interest rate risk management position is no longer accounted for as a hedge. Under these circumstances, the accumulated change in market value of the hedge is recognized in current income to the extent that the hedge results have not been offset by the effects of interest rate or price changes of the hedged item. Off-balance-sheet instruments used for trading activities The Corporation enters into foreign exchange contracts, futures and forward contracts, interest rate swaps, option contracts and interest rate agreements to accommodate customers and for its proprietary trading activities. Realized and unrealized changes in the fair value of these instruments are recognized in the income statement in foreign currency and securities trading revenue in the period in which the changes occur. Interest revenue and expense on instruments held for trading 71 54 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------------------------------------------- 1. ACCOUNTING POLICIES (CONTINUED) activities are included in the income statement as part of net interest revenue. The fair value of contracts in gain positions is reported on the balance sheet in other assets and the fair value of contracts in loss positions is reported in other liabilities. Statement of Cash Flows For the purpose of reporting cash flows, the Corporation has defined cash and cash equivalents as cash and due from banks. Cash flows from assets and liabilities that have an original maturity date of three months or less generally are reported on a net basis. Cash flows from assets and liabilities that have an original maturity date greater than three months generally are reported on a gross basis. Cash flows from hedging activities are classified in the same category as the items hedged. Net income per common share Net income per common share is computed using the "if-converted" method by dividing net income applicable to common stock by the average number of shares of common stock and common stock equivalents outstanding, net of shares assumed to be repurchased using the treasury stock method. Common stock equivalents arise from the assumed conversion of outstanding stock options, warrants and subscription rights. The Series D preferred stock was converted to common stock in August 1994. If the inclusion of the Series D preferred stock as common stock equivalents was dilutive, dividends on the Series D preferred stock were added back to net income for the purpose of calculating net income per common share. The average number of shares of common stock and equivalents used to compute primary net income per common share in 1996, 1995 and 1994 was 133.2 million, 145.1 million and 149.1 million, respectively. Fully diluted net income per common share is computed by dividing net income applicable to common stock by the average number of shares of common stock and common stock equivalents outstanding for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method. These shares are increased by the assumed conversion of convertible items, if dilutive. The average number of shares of common stock and equivalents used to compute fully diluted net income per common share in 1996, 1995 and 1994 was 133.9 million, 146.2 million and 149.2 million, respectively. 2. CASH AND DUE FROM BANKS Cash and due from banks includes reserve balances that the Corporation's subsidiary banks are required to maintain with a Federal Reserve bank. These required reserves are based primarily on deposits outstanding and were $347 million at December 31, 1996, and $630 million at December 31, 1995. These balances averaged $485 million in 1996 and $569 million in 1995. 3. SECURITIES Gross realized gains on the sale of securities available for sale were $4 million, $7 million and $16 million in 1996, 1995 and 1994, respectively. Gross realized losses on the sale of securities available for sale were less than $1 million, $1 million and $21 million in 1996, 1995 and 1994, respectively. After tax net gains on the sale of securities were $3 million and $4 million in 1996 and 1995, respectively. After tax net losses on the sale of securities were $3 million in 1994. Proceeds from the sale of securities available for sale were $1.5 billion, $1.8 billion and $3.8 billion in 1996, 1995 and 1994, respectively. There were no sales of investment securities in 1996, 1995 and 1994. Securities available for sale, investment securities, trading account securities and loans, with book values of $4.5 billion at December 31, 1996, and $3.1 billion at December 31, 1995, were required to be pledged to secure public and trust deposits, repurchase agreements and for other purposes. 72 55
NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------------------------------------------------------------------------------------------------- 3. SECURITIES (CONTINUED) SECURITIES AVAILABLE FOR SALE - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 December 31, 1995 --------------------------------------------- ------------------------------------------ AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair (in millions) COST GAINS LOSSES VALUE cost Gains Losses value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 395 $ - $ - $ 395 $ 209 $ 1 $ - $ 210 U.S. agency mortgage-backed 1,945 16 24 1,937 1,572 38 4 1,606 Other U.S. agency 1,676 2 - 1,678 951 2 - 953 - ----------------------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury and agency securities 4,016 18 24 4,010 2,732 41 4 2,769 Obligations of states and political subdivisions 49 - - 49 62 1 - 63 Other mortgage-backed 4 - - 4 7 - - 7 Other securities 42 6 - 48 68 7 1 74 - ----------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $4,111 $24 $24 $4,111 $2,869 $49 $ 5 $2,913 - -----------------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE - ------------------------------------------------------------------------------------------------------------------------------- Contractual maturities at December 31, 1996 Obligations Total U.S. agency Total of states Other securities (dollar amounts U.S. mortgage- Other U.S. Treasury and political mortgage- Other available in millions) Treasury backed U.S. agency and agency subdivisions backed securities for sale - ------------------------------------------------------------------------------------------------------------------------------- Within one year Amortized cost $358 $ - $881 $1,239 $25 $ - $ 7 $1,271 Fair value 358 - 881 1,239 25 - 7 1,271 Yield 5.00% - 5.32% 5.23% 7.10% - 6.47% 5.27% 1 to 5 years Amortized cost 37 - 795 832 18 - 5 855 Fair value 37 - 797 834 18 - 5 857 Yield 6.13% - 5.81% 5.83% 7.01% - 6.72% 5.86% 5 to 10 years Amortized cost - - - - 1 - - 1 Fair value - - - - 1 - - 1 Yield - - - - 9.83% - - 9.83% Over 10 years Amortized cost - - - - 5 - 30 35 Fair value - - - - 5 - 36 41 Yield - - - - 9.10% - 7.36%(c) 7.98%(c) Mortgage-backed securities Amortized cost - 1,945 - 1,945 - 4 - 1,949 Fair value - 1,937 - 1,937 - 4 - 1,941 Yield - 7.30% - 7.30% - 6.28% - 7.30% - ------------------------------------------------------------------------------------------------------------------------------- Total amortized cost $395 $1,945 $1,676 $4,016 $49 $ 4 $42 $4,111 Total fair value 395 1,937 1,678 4,010 49 4 48 4,111 Total yield 5.10% 7.30% 5.55% 6.35% 7.31% 6.28% 6.92%(c) 6.37%(c) Weighted average contractual years to maturity .65 - (a) 1.00 .93 (b) 3.19 - (a) 1.63 (c)
(a) The average expected lives of "U.S. agency mortgage-backed" and "Other mortgage-backed" securities were approximately 8.2 years and 3.0 years, respectively, at December 31, 1996. (b) Excludes maturities of "U.S. agency mortgage-backed" securities. (c) Yield excludes equity securities and other investments which have no stated yield. Note: Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Rates are calculated on a taxable equivalent basis using a 35% federal income tax rate. 73 56
NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------------------------------------------------------------------------------------------------- 3. SECURITIES (CONTINUED) INVESTMENT SECURITIES - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 December 31, 1995 ------------------------------------------- ----------------------------------------- AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair (in millions) COST GAINS LOSSES VALUE cost Gains Losses value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 30 $ 2 $ 1 $ 31 $ 33 $ 4 $ - $ 37 U.S. agency mortgage-backed 2,262 5 17 2,250 2,375 34 4 2,405 - ----------------------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury and agency securities 2,292 7 18 2,281 2,408 38 4 2,442 Other mortgage-backed 29 1 - 30 39 1 - 40 Other securities 54 - - 54 72 - - 72 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities $2,375 $ 8 $18 $2,365 $2,519 $39 $ 4 $2,554 - -----------------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES - ---------------------------------------------------------------------------------------------------------------------------------- Contractual maturities at December 31, 1996 U.S. agency Total Other Total (dollar amounts U.S. mortgage- U.S. Treasury mortgage- Other investment in millions) Treasury backed and agency backed securities securities - ---------------------------------------------------------------------------------------------------------------------------------- Within one year Amortized cost $ - $ - $ - $ - $ 5 $ 5 Fair value - - - - 5 5 Yield - - - - 5.69% 5.69% 1 to 5 years Amortized cost 4 - 4 - - 4 Fair value 4 - 4 - - 4 Yield 5.76% - 5.76% - - 5.76% 5 to 10 years Amortized cost - - - - 10 10 Fair value - - - - 10 10 Yield - - - - 9.26% 9.26% Over 10 years Amortized cost 26 - 26 - 39 (a) 65 Fair value 27 - 27 - 39 (a) 66 Yield 7.27% - 7.27% - 5.82% 6.39% Mortgage-backed securities Amortized cost - 2,262 2,262 29 - 2,291 Fair value - 2,250 2,250 30 - 2,280 Yield - 7.09% 7.09% 7.26% - 7.09% - ---------------------------------------------------------------------------------------------------------------------------------- Total amortized cost $30 $2,262 $2,292 29 $54 $2,375 Total fair value 31 2,250 2,281 30 54 2,365 Total yield 7.08% 7.09% 7.09% 7.26% 6.44% 7.07% Weighted average contractual years to maturity 15.45 - (b) 15.45 (c) - (b) 1.96 - - ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes Federal Reserve Bank stock of $37 million with a yield of 6.00% and no stated maturity. (b) The average expected lives of "U.S. agency mortgage-backed" and "Other mortgage-backed" securities were approximately 7.4 years and 4.9 years, respectively, at December 31, 1996. (c) Excludes maturities of "U.S. agency mortgage-backed" securities. Note: Expected maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Rates are calculated on a taxable equivalent basis using a 35% federal income tax rate. 74 57 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 4. LOANS For details of the loans outstanding at December 31, 1996 and 1995, see the 1996 and 1995 columns of the "Composition of loan portfolio at year-end" table on page 52. The information in those columns is incorporated by reference into these Notes to Financial Statements. For details of the nonperforming and past-due loans at December 31, 1996 and 1995, see the amounts in the 1996 and 1995 columns of the "Nonperforming assets" and "Past-due loans" tables on pages 56 and 58. The information in those columns is incorporated by reference into these Notes to Financial Statements. For details on impaired loans at December 31, 1996 and 1995, see the "Impaired loans" table on page 57. The information in this table is incorporated by reference into these Notes to Financial Statements. Foregone interest on restructured loans was less than $1 million in 1996 and 1995 and approximately $1 million in 1994. 5. RESERVE FOR CREDIT LOSSES For details of the reserve for credit losses for 1996, 1995 and 1994, see the 1996, 1995 and 1994 columns of the "Credit loss reserve activity" table on page 60. The information in those columns is incorporated by reference into these Notes to Financial Statements. 6. PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Land $ 29 $ 29 Buildings 281 278 Equipment 744 648 Leasehold improvements 174 179 - --------------------------------------------------------------------------------------------------------------------------------- Subtotal 1,228 1,134 Accumulated depreciation and amortization (659) (578) - --------------------------------------------------------------------------------------------------------------------------------- Total premises and equipment $ 569 $ 556 - ---------------------------------------------------------------------------------------------------------------------------------
The table above includes capital leases for premises and equipment at a net book value of $2 million at both December 31, 1996 and 1995. Rental expense was $124 million, $121 million and $117 million, respectively, net of related sublease revenue of $25 million, $25 million and $33 million, in 1996, 1995 and 1994, respectively. Depreciation and amortization expense totaled $105 million, $107 million and $95 million in 1996, 1995 and 1994, respectively. Maintenance, repairs and utilities expenses totaled $93 million, $90 million and $89 million in 1996, 1995 and 1994, respectively. As of December 31, 1996, the Corporation and its subsidiaries are obligated under noncancelable leases (principally for banking premises) with expiration dates through 2020. A summary of the future minimum rental payments under noncancelable leases, net of related sublease revenue totaling $75 million, is as follows: 1997--$115 million; 1998--$113 million; 1999--$116 million; 2000--$108 million; 2001--$103 million and 2002 through 2020--$871 million. 7. RESERVE FOR REAL ESTATE ACQUIRED An analysis of the reserve for real estate acquired for 1996, 1995 and 1994 is presented in the "Change in reserve for real estate acquired" table on page 58 and is incorporated by reference into these Notes to Financial Statements. 75 58 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 8. SEGREGATED ASSETS Segregated assets represent commercial real estate and other commercial loans acquired in the December 1992 Meritor retail office acquisition that are on nonaccrual status or are foreclosed properties, and are subject to a loss sharing arrangement with the FDIC. These delinquent assets, net of reserve, are reported in other assets in the balance sheet. The reserve for segregated assets is not included in the reserve for credit losses. Segregated assets totaled $10 million at December 31, 1996, including gross segregated assets of $14 million and a $4 million reserve for credit losses. At December 31, 1995, segregated assets totaled $24 million, including gross segregated assets of $28 million and a $4 million reserve for credit losses. As a result of the loss sharing arrangement with the FDIC, any of the performing commercial loans or performing commercial real estate loans acquired in the Meritor retail office acquisition that become nonaccrual before December 31, 1997, will be reclassified to segregated assets. The loss sharing provisions of the arrangement stipulate that, during the first five years, the FDIC will pay to Mellon Bank, N.A. 80% of the net credit losses on acquired commercial real estate and other commercial loans. During the sixth and seventh years of the arrangement, Mellon Bank, N.A. will pay to the FDIC 80% of any recoveries of charge-offs on such acquired loans that had occurred during the first five years of the arrangement. At the end of the seventh year, the FDIC will pay to Mellon Bank, N.A. an additional 15% of the sum of net charge-offs on the acquired loans that occurred during the first five years, less the recoveries during the sixth and seventh years of the arrangement in excess of $60 million. The $60 million credit loss threshold was reached in the first quarter of 1993. The FDIC will also reimburse Mellon Bank, N.A. for expenses incurred to recover amounts owed and net expenses incurred with respect to foreclosed properties derived from the acquired commercial real estate or commercial loans. Expenses are reimbursed by the FDIC in the same proportion as the reimbursement of net loan losses. In addition, the FDIC will reimburse Mellon Bank, N.A. for up to 90 days of delinquent interest on the assets covered by the loss sharing arrangement. Mellon Bank, N.A. is required to administer assets entitled to loss sharing protection in the same manner as assets held by Mellon Bank, N.A. for which no loss sharing exists. 9. OTHER ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Prepaid expense: Pension $ 307 $ 290 Other 67 65 Interest receivable 235 244 Accounts receivable 283 196 Receivables related to off-balance-sheet instruments 329 388 Assets held for accelerated resolution 30 82 Other 1,170 938 - ----------------------------------------------------------------------------------------------------------------------------------- Total other assets $2,421 $2,203 - -----------------------------------------------------------------------------------------------------------------------------------
10. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or greater was approximately $6.0 billion and $3.3 billion at December 31, 1996 and 1995, respectively. At December 31, 1996, the scheduled maturity of time deposits for the years 1997 through 2001 and thereafter are as follows: $9,956 million, $1,152 million, $336 million, $182 million and $301 million, respectively. 76 59 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 11. REVOLVING CREDIT AGREEMENT During 1996, the Corporation signed a four-year $300 million revolving credit agreement with several financial institutions that serves as a support facility for commercial paper and for general Corporate purposes. This revolving credit facility has several restrictions, including a minimum 6% Tier 1 ratio, a 1.30 maximum double leverage limitation and a minimum nonperforming asset coverage ratio of 3 to 1. The nonperforming asset coverage ratio is Tier I capital plus the reserve for credit losses as a multiple of nonperforming assets. At December 31, 1996, the Corporation's double leverage ratio was 1.21 and the nonperforming asset coverage ratio was 18 to 1. The revolving credit facility is supplemented by a $25 million backup line of credit, bringing total commercial paper support facilities to $325 million. There were no other lines of credit to subsidiaries of the Corporation at December 31, 1996 or 1995. No borrowings were made under any facility in 1996 or 1995. Commitment fees totaled less than $1 million in each of the years 1994 through 1996. 12. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR)
- ------------------------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Parent Corporation: 6.70% Subordinated Debentures due 2008 $ 249 $ - 6.30% Senior Notes due 2000 200 200 7-5/8% Senior Notes due 1999 200 200 6-1/2% Senior Notes due 1997 200 200 6-7/8% Subordinated Debentures due 2003 150 150 9-1/4% Subordinated Debentures due 2001 100 100 9-3/4% Subordinated Debentures due 2001 100 99 Medium Term Notes, Series A, due 1997-2001 (10.00% to 10.50% at December 31, 1996, and 9.75% to 10.50% at December 31, 1995) 27 47 7-1/4% Convertible Subordinated Capital Notes due 1999 3 4 Subsidiaries: 7% Subordinated Notes due 2006 300 - 7-5/8% Subordinated Notes due 2007 249 - 6-1/2% Subordinated Notes due 2005 249 249 6-3/4% Subordinated Notes due 2003 149 149 Medium Term Bank Notes due 1997-2007 (6.10% to 8.55% at December 31, 1996, and 6.57% to 8.55% at December 31, 1995) 338 38 Various notes and obligations under capital leases due 1997-2001 (3.92% to 10.50% at December 31, 1996 and December 31, 1995) 4 7 - ------------------------------------------------------------------------------------------------------------------------------- Total unsecured notes and debentures (with original maturities over one year) $2,518 $1,443 - -------------------------------------------------------------------------------------------------------------------------------
In March 1996, Mellon Bank, N.A., the Corporation's principal banking subsidiary, issued the 7% fixed rate notes due 2006 and in September 1996, issued the 7 5/8% fixed rate notes due 2007. In March 1996, the Corporation issued the 6.70% fixed rate notes due 2008. Prior to issuance, Mellon Bank, N.A. and the Corporation hedged the cost of these debt issues with interest rate agreements. The interest rate agreements were terminated upon issuance of the debt. The effective interest rates of these debt issues, including the effect of the interest rate agreements, are 6.43% and 7.34%, respectively, for the instruments issued by Mellon Bank, N.A. and 6.91% for the debt issued by the Corporation. The 7%, 7-5/8%, 6-1/2% and 6-3/4% Subordinated Notes due 2006, 2007, 2005 and 2003, and the fixed-rate Medium Term Bank Notes due 1997 through 2007, are subordinated to obligations to depositors and other creditors of Mellon Bank, N.A. The aggregate amounts of notes and debentures that mature during the five years 1997 through 2001, for the Corporation, are as follows: $407 million, $119 million, $208 million, $205 million and $205 million, respectively. The aggregate amounts of notes and debentures that mature during the five years 1997 through 2001, for Mellon Bank Corporation (Parent Corporation), are as follows: $205 million, $12 million, $203 million, $205 million and $205 million, respectively. 77 60 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 13. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES (TRUST-PREFERRED SECURITIES) In the fourth quarter of 1996, the Corporation formed two statutory business trusts, Mellon Capital I and Mellon Capital II. All of the common securities of these special purpose trusts are owned by the Corporation; the trusts exist solely to issue Capital Securities. For financial reporting purposes, the trusts are treated as subsidiaries and are consolidated into the financial statements of the Corporation. The Capital Securities are presented as a separate line item on the consolidated balance sheet as Guaranteed preferred beneficial interests in the Corporation's junior subordinated deferrable interest debentures (Trust-preferred securities). The trusts have issued the Trust-preferred securities and invested the net proceeds in junior subordinated deferrable interest debentures (Subordinated Debentures) issued to the trusts by the Corporation. The Subordinated Debentures are the sole assets of the trusts. The Corporation has the right to defer payment of interest on the Subordinated Debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on the Subordinated Debentures are deferred, the distributions on the Trust-preferred securities also are deferred. Interest on the Subordinated Debentures is cumulative. The Corporation, through guarantees and agreements, has fully and unconditionally guaranteed all of the trusts' obligations under the Trust-preferred securities. The Federal Reserve Bank has accorded the Trust-preferred securities Tier I capital status. The ability to apply Tier I capital treatment, as well as to deduct the expense of the Subordinated Debentures for income tax purposes, provided the Corporation with a cost-effective way to raise regulatory capital. The Trust-preferred securities are not included as a component of total shareholders' equity on the consolidated balance sheet. The table below summarizes the Corporation's Trust-preferred securities outstanding at December 31, 1996. For purposes of the table and discussion that follows, the terms and conditions of the Trust-preferred securities are treated as identical to the underlying Subordinated Debentures.
- ------------------------------------------------------------------------------------------------------------------- Liquidation Balances at (dollar amounts in millions, preference December 31, except per security amounts) per security 1996 1995 - ------------------------------------------------------------------------------------------------------------------- 7.72% Series A $1,000.00 $494 $ - 7.995% Series B $1,000.00 496 - ----- ------ Total $990 $ - - -------------------------------------------------------------------------------------------------------------------
The Series A and Series B Trust-preferred securities pay cash distributions semiannually at the rate of 7.72% and 7.995% of the liquidation preference, respectively, per annum. Any unpaid distribution is cumulative. The Corporation recorded $3 million of expense on these securities in 1996. The securities were each issued for a face value of $500 million and reported net of issuance costs in the table above. The securities are unsecured and subordinate to all senior debt (as defined) of the Corporation. The Series A and Series B securities mature on December 1, 2026, and January 15, 2027, respectively. The Series A and Series B securities are redeemable, in whole or in part, at the option of the Corporation on or after December 1, 2006, and January 15, 2007, respectively, or prior to those dates, in whole, within 90 days following receipt of a legal opinion that, due to a change in the tax laws or an administrative or judicial decision, there is a substantial risk that the tax deductibility of the interest could be disallowed (tax event) or the Corporation's reasonable determination that, due to a change in law or administrative or judicial decision, there is a substantial risk that Tier I capital treatment could be disallowed (capital treatment event). The Series A and Series B securities are redeemable at 103.86% and 103.9975%, respectively, of the liquidation amounts, plus accrued distributions, during the 12-month periods beginning December 1, 2006, and January 15, 2007, respectively (the call dates). The redemption prices decline for the Series A and Series B securities by approximately 39 basis points and approximately 40 basis points, respectively, during each of the following 12-month periods, until a final redemption price of 100% of the liquidation amount is set for December 1, 2016, and January 15, 2017, respectively, and thereafter. If the securities are redeemed following a "tax event" or "capital treatment event," the greater of 100% of the principal amount or the sum of the present value of the first redemption price plus the present value of interest payments from the redemption date to the call dates will be paid. 78 61 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 14. PREFERRED STOCK
- ------------------------------------------------------------------------------------------------------------------------------- Liquidation Balances at 1996 Dividends (dollar amounts in millions, preference Shares Shares December 31, --------------------- except per share amounts) per share authorized issued 1996 1995 1994 Per share Aggregate - ------------------------------------------------------------------------------------------------------------------------------- 8.50% preferred stock (Series J) $25.00 4,000,000 4,000,000 $ 97 $ 97 $ 97 $2.13 $ 9 8.20% preferred stock (Series K) 25.00 8,000,000 8,000,000 193 193 193 2.05 16 9.60% preferred stock (Series I) 25.00 - - - 145 145 2.30 14 (a) ----- ---- ---- Total preferred stock $290 $435 $435 - -------------------------------------------------------------------------------------------------------------------------------
(a) As a result of the redemption of the Series I preferred stock, the Corporation recorded an additional $5 million of preferred stock dividends in 1996. These additional dividends reflect the write-off of issue costs. Including the additional dividends, total Series I preferred stock dividends were $19 million in 1996. The Corporation has authorized 50,000,000 shares of Series preferred stock, par value $1.00 per share, at December 31, 1996. The table above summarizes the Corporation's preferred stock outstanding at December 31, 1996, 1995 and 1994. The Corporation redeemed the Series I preferred stock on December 16, 1996, and announced on January 8, 1997, that it will redeem the Series J preferred stock on February 18, 1997. The Series I preferred stock was redeemed and the Series J preferred stock will be redeemed at a price of $25 per share plus accrued dividends. The Series K preferred stock is redeemable, in whole or in part, at the option of the Corporation at $25 per share plus accrued dividends at any time on or after February 15, 1998. In the event of liquidation or dissolution of the Corporation, the rights of the Series K preferred stock are senior to the common stock with respect to dividends and distributions. If the equivalent of six quarterly dividends, whether or not consecutive, payable on the Series K preferred stock, are unpaid and not set aside for payment, the number of directors of the Corporation will be increased by two. The holders of the Series K preferred stock will be entitled to elect two additional directors to serve until all dividends in arrears have been paid or declared and set aside for payment. 15. EQUITY PURCHASE OPTIONS (WARRANTS) In connection with the 1993 acquisition of The Boston Company, the Corporation issued 4.5 million 10-year equity purchase options (warrants), each exercisable for one share of common stock. The warrants were exercisable at $33.33 per share at any time until their expiration on May 21, 2003. In 1995, the Corporation repurchased all of these warrants as part of a privately negotiated transaction with American Express Travel Related Services Company, Inc., a subsidiary of American Express Company. 16. REGULATORY CAPITAL REQUIREMENTS A discussion about the Corporation's regulatory capital requirements for 1996 and 1995 is presented in the "Regulatory capital" section on pages 40 to 42 and is incorporated by reference into these Notes to Financial Statements. 17. NONINTEREST REVENUE The components of noninterest revenue for the three years ended December 31, 1996, are presented in the "Noninterest revenue" table on page 32. This table is incorporated by reference into these Notes to Financial Statements. 79 62 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 18. FOREIGN CURRENCY AND SECURITIES TRADING REVENUE The Corporation's trading activities involve a variety of financial instruments, including U.S. government securities, municipal securities and money market securities, as well as off-balance-sheet instruments. The majority of the Corporation's trading revenue is earned by structuring and executing off-balance-sheet instruments for customers. The resulting risks are limited by entering into generally matching or offsetting positions. The Corporation also enters into positions in interest rate, foreign exchange and debt instruments based upon expectations of future market conditions. Unmatched positions are monitored through established limits. To maximize net trading revenues, the market-making and proprietary positions are managed together by product. The results of the Corporation's foreign currency and securities trading activities are presented, by class of financial instrument, in the table below.
- -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Foreign exchange contracts $72 $88 $69 Debt instruments 4 4 4 Interest rate contracts 2 - 3 Futures contracts 2 (1) - - -------------------------------------------------------------------------------------------------------------------------------- Total foreign currency and securities trading revenue (a) $80 $91 $76 - --------------------------------------------------------------------------------------------------------------------------------
(a) The Corporation recognized an unrealized loss of less than $1 million at December 31, 1996 and 1995 and an unrealized gain of less than $1 million at December 31, 1994, related to securities held in the trading portfolio. 19. INCOME TAXES Income tax expense applicable to income before taxes consists of:
- -------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Current taxes: Federal $289 $213 $264 State and local 25 17 26 Foreign 9 4 2 - -------------------------------------------------------------------------------------------------------------------------------- Total current tax expense 323 234 292 - -------------------------------------------------------------------------------------------------------------------------------- Deferred taxes: Federal 89 138 (4) State and local 6 28 (11) Foreign - 1 1 - -------------------------------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit) 95 167 (14) - -------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes $418 $401 $278 - --------------------------------------------------------------------------------------------------------------------------------
In addition to amounts applicable to income before taxes, the following income tax expense (benefit) amounts were recorded in shareholders' equity:
- --------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Compensation expense for tax purposes in excess of amounts recognized for financial statement purposes $(17) $(15) $ (3) Change in net unrealized gain (loss) on assets available for sale (10) 39 (30) - --------------------------------------------------------------------------------------------------------------------------------- Total tax expense (benefit) $(27) $ 24 $(33) - ---------------------------------------------------------------------------------------------------------------------------------
80 63 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 19. INCOME TAXES (CONTINUED) Components of deferred tax expense are as follows:
- --------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Deferred tax expense (benefit), excluding the effect of other components listed below $95 $160 $ (7) Reduction of deferred tax valuation allowance - - (7) Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates - 7 - - --------------------------------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit) $95 $167 $(14) - ---------------------------------------------------------------------------------------------------------------------------------
The provision for income taxes was different from the amounts computed by applying the statutory federal income tax rate to income before income taxes due to the items listed in the following table.
- --------------------------------------------------------------------------------------------------------------------------------- (dollar amounts in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Federal statutory tax rate 35% 35% 35% Tax expense computed at statutory rate $403 $382 $249 Increase (decrease) resulting from: State and local income taxes, net of federal tax benefit 20 29 10 Amortization of goodwill 12 13 15 Other, net (17) (23) 4 - --------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes $418 $401 $278 - --------------------------------------------------------------------------------------------------------------------------------- Effective income tax rate 36.3% 36.7% 39.1% - ---------------------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
- --------------------------------------------------------------------------------------------------------------------------------- (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Provision for credit losses and write-downs on real estate acquired $205 $230 $254 Accrued expense not deductible until paid 44 31 125 Occupancy expense 72 73 74 Other 21 28 77 - --------------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 342 362 530 - --------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Lease financing revenue 359 282 250 Salaries and employee benefits 27 21 16 Other 22 33 38 - --------------------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 408 336 304 - --------------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset (liability) $(66) $ 26 $226 - ---------------------------------------------------------------------------------------------------------------------------------
The Corporation determined that it was not required to establish a valuation allowance for deferred tax assets because it is management's assertion that the deferred tax assets are likely to be realized through carryback to taxable income in prior years, future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income. 81 64 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 20. EMPLOYEE BENEFITS Pension plans The Corporation's largest subsidiaries--Mellon Bank, N.A., The Boston Company and Dreyfus--sponsor trusteed, noncontributory, defined benefit pension plans. Together, the plans cover substantially all salaried employees of the Corporation. The plans provide benefits that are based on employees' years of service and compensation. In addition, several unfunded plans exist for certain employees or for purposes that are not addressed by the funded plans. The Mellon Bank, N.A. plan is significantly overfunded, The Boston Company plan is moderately overfunded and the fair market value of plan assets of the Dreyfus plan are approximately equal to its accumulated benefit obligation. The Corporation amortizes all actuarial gains and losses and prior service costs over a 10-year period. The tables below report the combined data of these plans.
- ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 (dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded Funded Unfunded - ----------------------------------------------------------------------------------------------------------------------------------- Assumptions used in the accounting: Rates used for expense at January 1: Rate on obligation 7.0% 7.0% 7.5% 7.5% 6.0% 6.0% Rate of return on assets 10.0 - 10.0 - 10.0 - Actuarial salary scale 3.0 3.0 3.5 3.5 3.0 3.0 - ------------------------------------------------------------------------------------------------------------------------------------ Components of pension expense (credit): Service cost $ 20 $ 2 $ 18 $ 1 $ 21 $ 2 Interest cost on projected benefit obligation 27 3 24 3 22 2 Return on plan assets (143) - (201) - (1) - Net amortization and deferral 74 2 140 1 (47) 1 Special termination benefits 15 - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Total pension expense (credit) $ (7) $ 7 $(19) $ 5 $ (5) $ 5 - -----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- 1996 1995 (dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded - ---------------------------------------------------------------------------------------------------------------------------------- Assumptions used for obligation at December 31: Rate on obligation 7.0% 7.0% 6.0% 6.0% Actuarial salary scale 3.0 3.0 3.0 3.0 - ---------------------------------------------------------------------------------------------------------------------------------- Present value of benefit obligation at December 31: Vested $ 372 $ 54 $363 $ 43 Nonvested 30 1 31 1 - ---------------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation 402 55 394 44 - ---------------------------------------------------------------------------------------------------------------------------------- Effect of projected future compensation levels 50 2 61 4 - ---------------------------------------------------------------------------------------------------------------------------------- Present value of projected benefit obligation $ 452 $ 57 $455 $ 48 - ---------------------------------------------------------------------------------------------------------------------------------- Plan assets at fair market value at December 31: Cash and U.S. Treasury securities $ 228 $ - $173 $ - Corporate debt obligations 64 - 64 - Mellon Bank Corporation common stock (a) 53 - 40 - Other common stock and investments 661 - 588 - - ---------------------------------------------------------------------------------------------------------------------------------- Total plan assets at fair market value $1,006 $ - $865 $ - - ---------------------------------------------------------------------------------------------------------------------------------- Reconciliation of funded status with financial statements: Funded status at December 31 $ 554 $ (57) $410 $(48) Unamortized net transition (asset) obligation (14) 1 (18) 1 Unrecognized prior service cost 10 11 14 3 Net deferred actuarial (gain) loss (243) 8 (116) 11 Adjustment required to recognize minimum liability - (18) - (11) - ---------------------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) expense at December 31 $ 307 $(55) $290 $(44) - ----------------------------------------------------------------------------------------------------------------------------------
(a) Represents 750,000 shares at December 31, 1996 and December 31, 1995. The Mellon Bank, N.A. retirement plan received approximately $2 million of dividends from Mellon Bank Corporation's common stock in both 1996 and 1995. 82 65 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 20. EMPLOYEE BENEFITS (CONTINUED) Long-Term Profit Incentive Plan The Corporation has a Long-Term Profit Incentive Plan (1996) which provides for the issuance of stock options, stock appreciation rights, performance units, deferred cash incentive awards and shares of restricted stock to officers and other key employees of the Corporation and its subsidiaries as approved by the Human Resources Committee of the board of directors. Stock options may be granted at prices not less than the fair market value of the common stock on the date of grant. Options may be exercised during fixed periods of time from 1 year to 10 years from the date of grant. In the event of a change in control of the Corporation, as defined in the plan, these options will become immediately exercisable, unless otherwise provided in the option agreement. Total outstanding grants as of December 31, 1996, 1995 and 1994 were 7,941,314; 7,464,163; and 7,240,864 shares, respectively. During 1996, 1995 and 1994 options for 2,063,023; 1,777,625; and 3,067,206 shares were granted and options for 1,353,408; 1,382,327; and 612,536 shares, respectively, were exercised. During 1996, the Corporation added 6,200,000 shares to the number of shares of common stock reserved for future issuance. At December 31, 1996, 5,725,601 shares were available for grant. Included in the December 31, 1996, 1995 and 1994 outstanding grants were options for 850,166; 860,856; and 1,044,428 shares, respectively, that become exercisable in full near the end of their 10 year terms, but the exercise dates may be accelerated to an earlier date by the Human Resources Committee of the board of directors, based on the optionee's and the Corporation's performance. If so accelerated, compensation will be paid in the form of deferred cash incentive awards to reimburse the exercise price of these options if exercised prior to the original vesting date. The Corporation recognized $8 million of compensation expense for the acceleration of these options in 1996, $9 million in 1995 and $8 million in 1994. Stock Option Plan for Outside Directors The Corporation's Stock Option Plan for Outside Directors provides for the granting of options for shares of common stock to outside directors and advisory board members of the Corporation. The timing, amounts, recipients and other terms of the option grants are determined by the provisions of, or formulas in, the Directors' Option Plan. The exercise price of the options is equal to the fair market value of the common stock on the grant date. All options have a term of 10 years from the date of grant and become exercisable one year from the grant date. Directors elected during the service year are granted options on a pro rata basis to those granted to the directors at the start of the service year. Total outstanding grants as of December 31, 1996, 1995 and 1994, were 414,922; 376,008; and 349,862 shares, respectively. During 1996, 1995 and 1994, options for 48,964; 48,600; and 52,563 shares, respectively, were granted and options for 10,050; 20,429; and 4,298 shares, respectively, were exercised. At December 31, 1996, options for 109,673 shares were available for grant. Dreyfus Stock Option Plan A stock option plan at Dreyfus prior to the August 1994 merger provided for the issuance of stock options to key employees and key consultants who rendered services at Dreyfus, at a price of not less than 95% of the price of Dreyfus' common stock on The New York Stock Exchange on the day the option was granted. Options were not exercisable within two years nor more than 10 years from the date of grant. Options for Dreyfus stock were automatically converted into options for the Corporation's common stock on the merger date. Total outstanding grants as of December 31, 1996, 1995 and 1994, were 489,312; 814,207; and 1,728,709 shares, respectively. No options were granted in 1996, 1995 and 1994. No further options will be granted under this plan. Options for 315,486; 906,339; and 26,900 shares were exercised in 1996, 1995 and 1994, respectively. The table on the following page summarizes stock option activity for the Long-Term Profit Incentive Plan, the Stock Option Plan for Outside Directors, and the Dreyfus Plan. Requirements for stock option shares can be met from either unissued or treasury shares or shares held by the employee stock benefit trust whose establishment has been authorized. All shares issued in 1996 were from treasury shares. 83 66 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 20. EMPLOYEE BENEFITS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------- Shares subject Average exercise STOCK OPTION ACTIVITY to option price - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 7,273,888 $27.44 Granted 3,119,769 37.53 Exercised (643,734) 23.73 Forfeited (430,488) 31.49 - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 9,319,435 30.89 Granted 1,826,225 41.56 Exercised (2,309,095) 25.99 Forfeited (182,187) 34.24 - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 8,654,378 34.38 Granted 2,111,987 (a) 56.48 Exercised (1,678,944) 30.75 Forfeited (241,873) 35.89 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 8,845,548 $40.30 - --------------------------------------------------------------------------------------------------------------------------------
(a) Using a Black-Scholes option pricing model, the weighted-average fair value of options granted in 1996 was estimated at $10.80 per share. The Corporation has adopted the disclosure-only option under FAS No. 123, "Accounting for Stock-Based Compensation." If the fair-value accounting provisions of FAS No. 123 had been adopted as of January 1, 1996, the pro forma effect on 1996 results would have been immaterial. Based on current and anticipated use of stock options, it is expected that the pro forma impact on earnings per share in future periods would be immaterial. The following table summarizes the characteristics of stock options outstanding at December 31, 1996:
- ----------------------------------------------------------------------------------------------------------------------------- STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1996 Outstanding Exercisable (b) ----------------------------------------- ---------------------- Average Average Average exercise exercise Exercise price range Shares life (a) price Shares price - ----------------------------------------------------------------------------------------------------------------------------- $13.17 - $29.67 1,624,311 4.5 $24.23 1,489,893 $23.75 $31.53 - $39.00 3,665,606 7.2 37.32 2,444,209 37.26 $40.12 - $49.87 1,310,645 8.6 41.20 422,631 40.92 $50.13 - $67.50 2,244,986 9.6 56.27 10,490 52.95 - ----------------------------------------------------------------------------------------------------------------------------- 8,845,548 7.5 40.30 4,367,223 33.04 - -----------------------------------------------------------------------------------------------------------------------------
(a) Average contractual life remaining in years. (b) At December 31, 1995, 3,351,055 options were exercisable at an average exercise price of $28.55. At December 31, 1994, 4,097,461 options were exercisable at an average exercise price of $25.18. Retirement Savings Plan Since April 1988, employees' payroll deductions into retirement savings accounts have been matched by the Corporation's contribution of common stock, at the rate of $.50 on the dollar, up to 6% of the employee's annual base salary, with an annual maximum Corporate contribution of $3,000 per employee. In 1996, 1995, and 1994, the Corporation recognized $11 million, $10 million and $10 million, respectively, of expense related to this plan and contributed 189,012; 239,071; and 276,535 shares, respectively. All shares contributed in 1996 and a portion of the shares contributed in 1995 and 1994 were issued from treasury stock. The plan held 3,848,336; 1,752,409; and 1,672,200 shares of the Corporation's common stock at December 31, 1996, 1995 and 1994, respectively. On September 1, 1996, The Dreyfus Corporation's profit 84 67 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 20. EMPLOYEE BENEFITS (CONTINUED) sharing plan was merged into the Corporation's retirement savings plan. The Dreyfus plan held 2,017,395 shares of the Corporation's common stock when the plans were merged. Amounts expensed under the Dreyfus plan were $8 million, $11 million and $10 million for 1996, 1995 and 1994, respectively. Profit Bonus Plan Performance-based awards are made to key employees at the discretion of the Human Resources Committee of the board of directors. The granting of these awards is based upon the performance of the key employees and on the Corporation's overall performance in achieving its objectives. At the committee's election, awards may be paid in a lump sum or may be deferred and paid over a period of up to 15 years. Payouts under this plan were $24 million, $20 million and $18 million for 1996, 1995 and 1994, respectively, and can be in the form of cash, common stock, restricted stock or phantom stock units equivalent to restricted stock. The employee is generally prevented from selling or transferring restricted stock or phantom stock units for a three-year period and the shares are forfeited if employment is terminated during that period. Restricted stock totaling 39,900 shares, with a weighted-average fair value on the date of grant of $74.70 per share, was awarded for 1996 performance resulting in 113,250 shares of restricted stock and phantom stock units outstanding. The restricted stock and phantom stock units were granted at the market value of the shares on the grant date. Employee Stock Ownership Plan In 1989, an Employee Stock Ownership Plan was formed to hold certain shares of Mellon Bank Corporation common stock previously held in other defined contribution plans sponsored by the Corporation and its subsidiaries. At December 31, 1996, 1995 and 1994, this plan held 77,787; 96,055; and 95,709 shares, respectively, of the Corporation's common stock. The Corporation may make contributions to this plan from time to time. No contributions were made in 1996, 1995 or 1994. Postretirement benefits other than pensions The Corporation shares in the cost of providing managed care, Medicare supplement and/or major medical programs for employees that retired prior to January 1, 1991. Employees who retire subsequent to January 1, 1991, who were between the ages of 55 and 65 on January 1, 1991, and had at least 15 years of service, are provided with a defined dollar supplement to assist them in purchasing health insurance. Early retirees who do not meet these age and service requirements are eligible to purchase health coverage at their own expense under the standard plans that are offered to active employees. In addition, the Corporation provides a small subsidy toward health care coverage for other active employees when they retire. These benefits are provided through various insurance carriers whose premiums are based on claims paid during the year. The cost of providing these benefits amounted to $9 million in 1996, including $3 million of early retirement charges, $10 million in 1995 and $10 million in 1994. The following table sets forth the components of the costs and liability of the Corporation's postretirement health care and life insurance benefits programs for current and future retirees. 85 68 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 20. EMPLOYEE BENEFITS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION Accumulated Accrued postretirement postretirement Unrecognized benefit cost benefit obligation transition obligation -------------------------- -------------------------- ----------------------- (in millions) 1996 1995 1994 1996 1995 1994 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Balance at January 1 $(26) $(19) $(12) $(55) $(70) $(83) $32 $53 $56 - --------------------------------------------------------------------------------------------------------------------------------- Recognition of components of net periodic postretirement benefit costs: Service cost (1) (1) (1) (1) (1) (1) - - - Interest cost (3) (6) (6) (3) (6) (6) - - - Retirement enhancement program (3) - - (6) - - - - - Amortization of transition obligation (2) (3) (3) - - - (2) (3) (3) - --------------------------------------------------------------------------------------------------------------------------------- (9) (10) (10) (10) (7) (7) (2) (3) (3) Change in APBO actuarial assumptions including a change in the discount rate - - - 15 (1) 15 - - - Benefit payments 2 3 3 4 5 5 - - - Plan changes - - - - 18 - - (18) - - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 $(33) $(26) $(19) $(46) $(55) $(70) $30 $32 $53 - ---------------------------------------------------------------------------------------------------------------------------------
A weighted average discount rate of 7% was used to estimate the net periodic benefit cost, and a 7% rate was used to value the accumulated postretirement benefit obligation at year-end 1996. A health care cost trend rate was used to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. The future annual increase assumed in the cost of health care benefits was 7% for 1997 and was decreased gradually to 4.5% for 2002 and thereafter. The health care cost trend rate assumption may have a significant impact on the amounts reported. Increasing the assumed health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation by approximately $3 million and the aggregate of the service and interest cost components of net periodic postretirement health care benefit cost by less than $1 million. During 1995, the transition obligation was reduced by $18 million due to a change in the benefit program that requires current and future retirees to enroll in a managed care program. Previously, retirees were permitted to use any health care provider. 21. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS The prior approval of the Office of the Comptroller of the Currency (OCC) is required if the total of all dividends declared by a national bank subsidiary in any calendar year exceeds the bank subsidiary's net profits, as defined by the OCC, for that year, combined with its retained net profits for the preceding two calendar years. Additionally, national bank subsidiaries may not declare dividends in excess of net profits on hand, as defined, after deducting the amount by which the principal amount of all loans on which interest is past due for a period of six months or more exceeds the reserve for credit losses. Under the first and currently more restrictive of the foregoing dividend limitations, the Corporation's national bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to December 31, 1996, of up to approximately $310 million of their retained earnings of $2.312 billion at December 31, 1996, less any dividends declared and plus or minus net profits or losses, as defined, between January 1, 1997, and the date of any such dividend declaration. The payment of dividends is also limited by minimum capital requirements imposed on all national bank subsidiaries by the 86 69 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 21. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS (CONTINUED) OCC. The Corporation's national bank subsidiaries exceed these minimum requirements. The national bank subsidiaries declared dividends to the parent Corporation of $400 million in 1996, $501 million in 1995 and $366 million in 1994. The Federal Reserve Board and the OCC have issued additional guidelines that require bank holding companies and national banks to continually evaluate the level of cash dividends in relation to their respective operating income, capital needs, asset quality and overall financial condition. The Federal Reserve Act limits extensions of credit by the Corporation's bank subsidiaries to the Corporation and to certain other affiliates of the Corporation, and requires such extensions to be collateralized and limits the amount of investments by the banks in these entities. At December 31, 1996, such extensions of credit and investments were limited to $478 million to the Corporation or any other affiliate and to $957 million in total to the Corporation and all of its other affiliates. Outstanding extensions of credit totaled $181 million at December 31, 1996. 22. LEGAL PROCEEDINGS Various legal actions and proceedings are pending or are threatened against the Corporation and its subsidiaries, some of which seek relief or damages in amounts that are substantial. These actions and proceedings arise in the ordinary course of the Corporation's businesses and include suits relating to its lending, collections, servicing, investment, mutual fund, advisory, trust and other activities. Because of the complex nature of some of these actions and proceedings, it may be a number of years before such matters ultimately are resolved. After consultation with legal counsel, management believes that the aggregate liability, if any, resulting from such pending and threatened actions and proceedings will not have a material adverse effect on the Corporation's financial condition. 23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK Off-balance-sheet risk In the normal course of business, the Corporation becomes a party to various financial transactions that generally do not involve funding. Because these transactions generally are not funded, they are not reflected on the balance sheet and are referred to as financial instruments with off-balance-sheet risk. The Corporation offers off-balance-sheet financial instruments to enable its customers to meet their financing objectives and manage their interest- and currency-rate risk. Supplying these instruments provides the Corporation with an ongoing source of fee revenue. The Corporation also enters into these transactions to manage its own risks arising from movements in interest and currency rates and as part of its proprietary trading and funding activities. These off-balance-sheet instruments are subject to credit and market risk. Credit risk is limited to the estimated aggregate replacement cost of contracts in a gain position, should counterparties fail to perform under the terms of those contracts and any underlying collateral proves to be of no value. The Corporation manages credit risk by dealing only with approved counterparties under specific credit limits and by monitoring the amount of outstanding contracts by customer and in the aggregate against such limits. Counterparty limits are monitored on an ongoing basis. Credit risk is often further mitigated by contractual agreements to net replacement cost gains and losses on multiple transactions with the same counterparty through the use of master netting agreements. Market risk arises from changes in the market value of contracts as a result of the fluctuations in interest and currency rates. The Corporation limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Position limits are set by the Finance Committee and approved by the Office of The Chairman and the Executive Committee of the Board of Directors. Portfolio outstandings are monitored against such limits by senior managers and compliance staff independent of line areas. 87 70 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK - -------------------------------------------------------------------------------------------------------------------------------- December 31, (notional amounts in millions) 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit $26,777 $21,264 Standby letters of credit and foreign guarantees 3,705 3,446 Commercial letters of credit 92 98 Residential mortgage loans serviced with recourse 120 156 Custodian securities lent with indemnification against broker default of return of securities 21,626 18,157 - --------------------------------------------------------------------------------------------------------------------------------
Commitments to extend credit The Corporation enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specific rates and for specific purposes. Substantially all of the Corporation's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The majority of the Corporation's commitments to extend credit include material adverse change clauses within the commitment contracts. These clauses allow the Corporation to deny funding a loan commitment if the borrower's financial condition deteriorates during the commitment, such that the customer no longer meets the Corporation's credit standards. The Corporation's exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of the commitment to extend credit. Accordingly, the credit policies utilized in committing to extend credit and in the extension of loans are the same. Market risk arises on fixed rate commitments if interest rates have moved adversely subsequent to the extension of the commitment. The Corporation believes the market risk associated with commitments is minimal. Since many of the commitments are expected to expire without being drawn upon, the total contractual amounts do not necessarily represent future cash requirements. The amount and type of collateral obtained by the Corporation is based upon industry practice, as well as its credit assessment of the customer. Of the $27 billion of contractual commitments for which the Corporation has received a commitment fee or which were otherwise legally binding--excluding credit card plans--approximately 25% of the commitments are scheduled to expire within one year, and an additional 62% are scheduled to expire within five years. Letters of credit and foreign guarantees There are two major types of letters of credit--standby and commercial letters of credit. The off-balance-sheet credit risk involved in issuing standby and commercial letters of credit is represented by their contractual amounts and is essentially the same as the credit risk involved in commitments to extend credit. The Corporation minimizes this risk by adhering to its written credit policies and by requiring security and debt covenants similar to those contained in loan agreements. The Corporation believes the market risk associated with letters of credit and foreign guarantees is minimal. Standby letters of credit and foreign guarantees obligate the Corporation to disburse funds to a third-party beneficiary if the Corporation's customer fails to perform under the terms of an agreement with the beneficiary. Standby letters of credit and foreign guarantees are used by the customer as a credit enhancement and typically expire without being drawn upon. 88 71 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------- STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES Weighted-average years to maturity December 31, at December 31, (dollar amounts in millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Commercial paper and other debt $ 447 $ 374 2.0 1.5 Tax-exempt securities 765 759 1.8 1.9 Bid- or performance-related 1,186 1,061 .8 1.0 Other 1,307 1,252 .5 .6 ----- ----- Total standby letters of credit and foreign guarantees (a) $3,705 $3,446 1.0 1.1 - -------------------------------------------------------------------------------------------------------------------------------
(a) Net of participations and cash collateral totaling $391 million and $230 million at December 31, 1996 and 1995, respectively. A commercial letter of credit is normally a short-term instrument used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller in accordance with the terms of the contract. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction. Normally, reimbursement from the buyer is coincidental with payment to the seller under commercial letter of credit drawings. As a result, the total contractual amounts do not necessarily represent future cash requirements. Residential mortgage loans serviced with recourse Certain residential mortgages were sold with servicing retained where the Corporation is subject to limited recourse provisions. The loans are collateralized by real estate mortgages and in certain instances are supported by either government sponsored or private mortgage insurance. Securities lending A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security through an agent (the Corporation) to a borrower, usually a broker/dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract. The borrower will collateralize the loan at all times, generally with cash or U.S. government securities, exceeding 100% of the market value of the loan, plus any accrued interest on debt obligations. The Corporation currently enters into two types of securities lending arrangements, lending with and without indemnification. In securities lending transactions without indemnification, the Corporation bears no contractual risk of loss. For transactions in which the Corporation provides an indemnification, risk of loss occurs if the borrower defaults on returning the securities and the value of the collateral declines. Because the Corporation generally indemnifies the owner of the securities only for the difference between the par value of the securities and any collateral deficiency, the total contractual amount does not necessarily represent future cash requirements. Additional market risk associated with securities lending transactions arises from interest rate movements that affect the spread between the rate paid to the securities borrower on the borrower's collateral and the rate the Corporation earns on that collateral. This risk is controlled through policies that limit the level of such risk that can be undertaken. 89 72 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (A) - ------------------------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 -------------------- --------------------- NOTIONAL CREDIT Notional Credit (in millions) AMOUNT RISK Amount Risk - ------------------------------------------------------------------------------------------------------------------------------- Foreign currency contracts: Commitments to purchase $11,473 (b) $10,771 (b) Commitments to sell 11,562 (b) 10,868 (b) Foreign currency and other option contracts written 450 - 461 - Foreign currency and other option contracts purchased 438 14 417 - Interest rate agreements: Interest rate swaps 6,665 25 5,531 52 Options, caps and floors purchased 2,047 1 2,043 3 Options, caps and floors written 2,107 - 1,871 - Futures and forward contracts 1,421 2 1,421 - - -------------------------------------------------------------------------------------------------------------------------------
(a) The amount of credit risk associated with these instruments is limited to the cost of replacing a contract in a gain position, on which a counterparty has defaulted. (b) The combined credit risk on foreign currency contract commitments to purchase and sell was $303 million at December 31, 1996, and $334 million at December 31, 1995. Foreign currency contracts Commitments to purchase and sell foreign currency facilitate the management of market risk by ensuring that, at some future date, the Corporation or a customer will have a specified currency at a specified rate. The Corporation enters into foreign currency contracts to assist customers in managing their currency risk and as part of its proprietary trading activities. The notional amount of these contracts at December 31, 1996, was $11.5 billion of contracts to purchase and $11.6 billion of contracts to sell. This notional amount does not represent the actual market or credit risk associated with this product. Market risk arises from changes in the market value of contractual positions caused by movements in currency rates. The Corporation limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk relates to the ability of the Corporation's counterparty to meet its obligations under the contract and includes the estimated aggregate replacement cost of those foreign currency contracts in a gain position. Replacement cost totaled approximately $303 million and $334 million at December 31, 1996 and 1995, respectively, and is recorded on the balance sheet. There were no settlement or counterparty default losses on foreign currency contracts in 1996, 1995 or 1994. The Corporation manages credit risk by dealing only with approved counterparties under specific credit limits and by monitoring the amount of outstanding contracts by customer and in the aggregate against such limits. The future cash requirements, if any, related to foreign currency contracts are represented by the contractual settlement between the Corporation and its counterparties. Foreign currency and other option contracts written and purchased Foreign currency and other option contracts grant the contract purchaser the right, but not the obligation, to purchase or sell a specified amount of a foreign currency or other financial instrument during a specified period at a predetermined price. The Corporation acts as both a purchaser and seller of foreign currency and other option contracts. Market risk arises from changes in the value of contractual positions caused by fluctuations in currency rates, interest rates and security values underlying the option contracts. Market risk is managed by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk and future cash requirements are similar to those of foreign currency contracts. The estimated aggregate replacement cost of purchased foreign currency and other option contracts in gain positions was $14 million at December 31, 1996 and less than $1 million at December 31, 1995, and is recorded on the balance sheet. There were no settlement or counterparty default losses on foreign currency and other option contracts in 1996, 1995 or 1994. 90 73 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Interest rate swaps Interest rate swaps obligate two parties to exchange one or more payments generally calculated with reference to fixed or periodically reset rates of interest applied to a specified notional principal amount. Notional principal is the amount upon which interest rates are applied to determine the payment streams under interest rate swaps. Such notional principal amounts often are used to express the volume of these transactions but are not actually exchanged between the counterparties. The credit risk associated with interest rate swaps is limited to the estimated aggregate replacement cost of those agreements in a gain position. Replacement cost totaled $25 million and $52 million at December 31, 1996 and 1995, respectively, and is recorded on the balance sheet. Credit risk is managed through credit approval procedures that establish specific lines for individual counterparties and limits of credit exposure to various portfolio segments. Counterparty and portfolio outstandings are monitored against such limits on an ongoing basis. Credit risk is further mitigated by contractual arrangements with the Corporation's counterparties that provide for netting replacement cost gains and losses on multiple transactions with the same counterparty. The Corporation has entered into collateral agreements with certain counterparties to interest rate swaps to further secure amounts due. The collateral is generally cash, U.S. government securities and mortgage pass-through securities guaranteed by the Government National Mortgage Association. There were no counterparty default losses on interest rate swaps in 1996, 1995 or 1994. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Corporation limits its exposure to market risk by generally entering into matching or offsetting positions and by establishing and monitoring limits on unmatched positions. The future cash requirements of interest rate swaps are limited to the net amounts payable under these swaps. At December 31, 1996, 94% of the notional principal amount of these interest rate swaps are scheduled to mature in less than five years. Options, caps and floors An interest rate option is a contract that grants the purchaser the right to either purchase or sell a financial instrument at a specified price within a specified period of time. An interest rate cap is a contract that protects the holder from a rise in interest rates beyond a certain point. An interest rate floor is a contract that protects the holder against a decline in interest rates below a certain point. The credit risk associated with options, caps and floors purchased was $1 million at year-end 1996 and $3 million at year-end 1995 and is recorded on the balance sheet. Options, caps and floors written do not expose the Corporation to credit risk. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Corporation limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Futures and forward contracts Futures and forward contracts on loans, securities or money market instruments represent future commitments to purchase or sell a specified instrument at a specified price and date. Futures contracts are standardized and are traded on organized exchanges, while forward contracts are traded in over-the-counter markets and generally do not have standardized terms. The Corporation uses futures and forward contracts in connection with its proprietary trading activities. For instruments that are traded on an organized exchange, the exchange assumes the credit risk that a counterparty will not settle and generally requires a margin deposit of cash or securities as collateral to minimize potential credit risk. The Corporation has established policies governing which exchanges and exchange members can be used to conduct these activities, as well as the number of contracts permitted with each member and the total dollar amount of outstanding contracts. Credit risk associated with futures and forward contracts is limited to the estimated aggregate replacement cost of those futures and forward contracts in a gain position and was $2 million at December 31, 1996 and less than $1 million at December 31, 1995. Credit risk related to futures contracts is substantially mitigated by daily cash settlements with the 91 74 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) exchanges for the net change in futures contract value. There were no settlement or counterparty default losses on futures and forward contracts in 1996, 1995 or 1994. Market risk is similar to the market risk associated with foreign currency and other option contracts. The future cash requirements, if any, related to futures and forward contracts, are represented by the net contractual settlement between the Corporation and its counterparties.
OFF-BALANCE-SHEET INSTRUMENTS USED FOR INTEREST RATE RISK MANAGEMENT PURPOSES (a) - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 ------------------------ --------------------- NOTIONAL CREDIT Notional Credit (in millions) AMOUNT RISK Amount Risk - ----------------------------------------------------------------------------------------------------------------------------- Interest rate agreements: Interest rate swaps $4,789 $3 $7,967 $51 Options, caps and floors purchased (b) 63 - 464 4 Futures contracts 33 - 6 - Forward rate agreements - - 265 - Other products 118 4 108 - - -----------------------------------------------------------------------------------------------------------------------------
(a) The amount of credit risk associated with these instruments is limited to the cost of replacing a contract in a gain position, on which a counterparty has defaulted. (b) At December 31, 1996 and 1995, there were no options, caps and floors written. Interest rate swaps The Corporation enters into interest rate swaps as part of its interest rate risk management strategy primarily to alter the interest rate sensitivity of its deposit liabilities. At December 31, 1996, the Corporation used $4,789 million of interest rate swaps for interest rate risk management purposes compared with $7,967 million at December 31, 1995. The credit and market risk associated with these instruments is explained on page 91 under "Interest rate swaps." The replacement cost of swap agreements in a gain position was $3 million and $51 million at December 31, 1996 and 1995, respectively. Net interest revenue in 1996 and 1995 included $8 million and less than $1 million, respectively, of amortized deferred gains from terminated interest rate swaps. Options, caps, floors, futures contracts and forward rate agreements Other interest rate products--primarily options, interest rate caps, interest rate floors, futures contracts and forward rate agreements--also are used by the Corporation as part of its interest rate risk management strategy. The Corporation had $96 million and $735 million notional amounts of these instruments outstanding at December 31, 1996 and 1995, respectively. The credit and market risk associated with these instruments is explained on page 91 under "Options, caps, floors" and "Futures and forward contracts." The replacement cost of those instruments in a gain position was less than $1 million and $4 million at December 31, 1996 and 1995, respectively. The Corporation periodically issues notes and debentures for general corporate purposes, including the funding of debt maturities. At December 31, 1996, there were no open hedges of anticipated transactions. At December 31, 1995, a $250 million forward rate agreement was carried by the Corporation to lock in the cost of an anticipated debt issuance. This contract was terminated in the first quarter of 1996, upon the issuance of the 6.70% fixed rate notes. 92 75 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 23. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) Other products Other products consist of forward foreign exchange contracts and total return swaps. The Corporation had $118 million and $73 million of total return swaps at December 31, 1996 and 1995, respectively. These swaps are used by the Corporation to minimize the risk related to the Corporation's investment in start-up mutual funds that are based on specific market indices. Credit risk associated with these products was $4 million at year-end 1996. The Corporation had $35 million of forward foreign exchange contracts at December 31, 1995. These contracts are used to minimize the net income and capital impact of foreign currency translation gains or losses created by investments in foreign branches and subsidiaries. Concentrations of credit risk In its normal course of business, the Corporation engages in activities with a significant number of domestic and international counterparties. The maximum risk of accounting loss from on- and off-balance-sheet financial instruments with these counterparties is represented by their respective balance sheet amounts and the contractual or replacement cost of the off-balance-sheet financial instruments. Approximately 27% of the Corporation's total on- and off-balance-sheet financial instruments with credit risk at December 31, 1996, were with consumers and consumer-related industries, compared with approximately 33% at December 31, 1995. This credit exposure consisted principally of loans and the related interest receivable on the balance sheet and off-balance-sheet loan commitments and letters of credit. Consumers to which the Corporation has credit exposure primarily are located within the Central Atlantic region and are affected by economic conditions within that region. Financial institutions--which include finance-related companies, domestic and international banks and depository institutions, securities and commodities brokers, and insurance companies--accounted for approximately 20% of the Corporation's total on- and off-balance-sheet financial instruments with credit risk at December 31, 1996, compared with approximately 17% at December 31, 1995. The Corporation's on-balance-sheet credit exposure to financial institutions included short-term liquid assets consisting of due from banks and money market investments, loans and the related interest receivable and investment securities. In addition, the Corporation had off-balance-sheet credit exposure to financial institutions consisting of commitments to extend credit and letters of credit. The Corporation had credit exposure to the U.S. government, including its corporations and agencies, totaling approximately 10% of its on- and off-balance-sheet financial instruments with credit risk at December 31, 1996 and 9% at December 31, 1995. Substantially all of this exposure consisted of investment securities, securities available for sale and the related interest receivable and balances due from the Federal Reserve. No other concentration of credit risk exceeded 10% of the Corporation's total credit risk arising from on- and off-balance-sheet financial instruments at December 31, 1996 and 1995, respectively. 24. FAIR VALUE OF FINANCIAL INSTRUMENTS FAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of the estimated fair value of on- and off-balance-sheet financial instruments. A financial instrument is defined by FAS No. 107 as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable terms. Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. FAS No. 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial 93 76 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 24. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) instruments. Because no readily available market exists for a significant portion of the Corporation's financial instruments, fair value estimates for these instruments are based on judgments regarding current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates cannot always be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. Fair value estimates do not include anticipated future business or the value of assets, liabilities and customer relationships that are not considered financial instruments. For example, the Corporation's fee-generating businesses--which contributed 58% of revenue in 1996--are not incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include lease finance assets, deferred tax assets, lease contracts, premises and equipment and intangible assets. Accordingly, the estimated fair value amounts of financial instruments do not represent the entire value of the Corporation. The following methods and assumptions were used by the Corporation in estimating the fair value of its financial instruments at December 31, 1996 and 1995: Short-term financial instruments The carrying amounts reported on the Corporation's balance sheet generally approximate fair value for financial instruments that reprice or mature in 90 days or less, with no significant change in credit risk. The carrying amounts approximate fair value for cash and due from banks; money market investments; acceptances; demand deposits; money market and other savings accounts; federal funds purchased and securities under repurchase agreements; U.S. Treasury tax and loan demand notes; commercial paper; and certain other assets and liabilities. Trading account securities, securities available for sale and investment securities Trading account securities are recorded at market value on the Corporation's balance sheet, including amounts for off-balance-sheet instruments held for trading activities. Market values of trading account securities, securities available for sale and investment securities generally are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, market value is estimated using quoted market prices for securities with similar credit, maturity and interest rate characteristics. The tables in note 3 present in greater detail the carrying value and market value of securities available for sale and investment securities at December 31, 1996 and 1995. Loans The estimated fair value of performing commercial loans and certain consumer loans that reprice or mature in 90 days or less approximates their respective carrying amounts adjusted for a credit risk factor based upon the Corporation's historical credit loss experience. The estimated fair value of performing loans, except for consumer mortgage loans and credit card loans, that reprice or mature in more than 90 days is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and for similar maturities. Fair value of consumer mortgage loans is estimated using market quotes or discounting contractual cash flows, adjusted for prepayment estimates. Discount rates were obtained from secondary market sources, adjusted to reflect differences in servicing, credit and other characteristics. 94 77 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 24. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair value of credit card loans is developed using estimated cash flows and maturities based on contractual interest rates and historical experience. Estimated cash flows are discounted using market rates adjusted for differences in servicing, credit and other costs. This estimate does not include the value that relates to new loans that will be generated from existing cardholders over the remaining life of the portfolio, a value that is typically reflected in market prices realized in credit card portfolio sales. The estimated fair value for nonperforming commercial real estate loans is the "as is" appraised value of the underlying collateral. For other nonperforming loans, the estimated fair value represents carrying value less a credit risk adjustment based upon the Corporation's historical credit loss experience. Deposit liabilities FAS No. 107 defines the estimated fair value of deposits with no stated maturity, which includes demand deposits and money market and other savings accounts, to be the amount payable on demand. Although market premiums paid for depository institutions reflect an additional value for these low-cost deposits, FAS No. 107 prohibits adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities. The fair value of fixed-maturity deposits which reprice or mature in more than 90 days is estimated using the rates currently offered for deposits of similar remaining maturities. Notes and debentures The fair value of the Corporation's notes and debentures is estimated using quoted market yields for the same or similar issues or the current yields offered by the Corporation for debt with the same remaining maturities. The table on the following page includes financial instruments, as defined by FAS No. 107, whose estimated fair value is not represented by the carrying value as reported on the Corporation's balance sheet. Management has made estimates of fair value discount rates that it believes to be reasonable considering expected prepayment rates, rates offered in the geographic areas in which the Corporation competes, credit risk and liquidity risk. However, because there is no active market for many of these financial instruments, management has no basis to verify whether the resulting fair value estimates would be indicative of the value negotiated in an actual sale. 95 78 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 24. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------- Carrying amount Estimated fair value --------------- -------------------- December 31, December 31, (dollars in millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Securities available for sale(a) $ 4,111 $ 2,913 $ 4,111 $ 2,913 Investment securities(a) 2,375 2,519 2,365 2,554 Loans(b): Commercial and financial 11,618 11,832 11,553 11,782 Commercial real estate 1,534 1,532 1,486 1,469 Consumer mortgage 7,772 8,960 7,661 8,960 Other consumer credit 3,936 4,536 3,924 4,719 ------- ------- Total loans 24,860 26,860 Reserve for credit losses(b) (482) (465) - - ------- ------- ------- ------- Net loans 24,378 26,395 24,624 26,930 Other assets(c) 1,500 1,281 1,503 1,306 Fixed-maturity deposits(d): Retail savings certificates 6,660 6,450 6,639 6,473 Negotiable certificates of deposit 2,710 656 2,708 655 Other time deposits 2,557 2,014 2,554 2,016 Other funds borrowed(c) 784 2,033 783 2,044 Notes and debentures(a) 2,518 1,443 2,555 1,529 - -------------------------------------------------------------------------------------------------------------------------------
(a) Market or dealer quotes were used to value the reported balance of these financial instruments. (b) Approximately 81% and 77% of total performing loans, excluding consumer mortgages and credit card receivables, reprice or mature within 90 days at December 31, 1996 and 1995, respectively. Excludes lease finance assets of $2,533 million and $830 million as well as the related reserve for credit losses of $43 million and $6 million at December 31, 1996 and 1995, respectively. Lease finance assets are not considered financial instruments as defined by FAS No. 107. (c) Excludes non-financial instruments. (d) FAS No. 107 defines the estimated fair value of deposits with no stated maturity, which includes demand deposits and money market and other savings accounts, to be equal to the amount payable on demand. Therefore, the positive effect of the Corporation's $19,447 million and $20,141 million of such deposits at December 31, 1996 and 1995, respectively, are not included in this table. Commitments to extend credit, standby letters of credit and foreign guarantees These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit and foreign guarantees is estimated by discounting the remaining contractual fees over the term of the commitment using the fees currently charged to enter into similar agreements and the present credit-worthiness of the counterparties. Other off-balance-sheet financial instruments The estimated fair value of off-balance-sheet instruments used for trading activities--which includes foreign exchange contracts, interest rate swaps, option contracts, interest rate caps and floors and futures and forward contracts--is equal to the on-balance-sheet carrying amount of these instruments. The estimated fair value of off-balance-sheet instruments used for interest rate risk management purposes--which primarily includes interest rate swaps, interest rate caps and floors and futures contracts--is estimated by obtaining quotes from brokers. These values represent the estimated amount the Corporation would receive or pay to terminate the agreements, considering current interest and currency rates, as well as the current credit-worthiness of the counterparties. Off-balance-sheet financial instruments are further discussed in note 23, "Financial instruments with off-balance-sheet risk and concentrations of credit risk." 96 79 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 24. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
ESTIMATED FAIR VALUE OF COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 December 31, 1995 ---------------------------------------------- ------------------------------------- ASSET Asset ---------------------------- ----------------------- CONTRACT CARRYING ESTIMATED Contract Carrying Estimated (in millions) AMOUNT AMOUNT(a) FAIR VALUE amount amount (a)fair value - ---------------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit $26,777 $5 $91 $21,264 $ 5 $86 Standby letters of credit and foreign guarantees 3,705 2 18 3,446 2 20 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Represents the on-balance-sheet receivables or deferred income arising from these financial instruments.
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR TRADING ACTIVITIES - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 December 31, 1995 ------------------------------------------- ------------------------------------------ ASSET (LIABILITY) Asset (Liability) NOTIONAL --------------------------- Notional -------------------------- PRINCIPAL ESTIMATED AVERAGE principal Estimated Average (in millions) AMOUNT FAIR VALUE (a) FAIR VALUE amount fair value (a) fair value - ---------------------------------------------------------------------------------------------------------------------------------- Foreign currency contracts $23,035 $ 5 $ 5 $21,639 $ 27 $ 25 Options purchased 438 14 7 417 (11) (7) Options written 450 12 7 461 13 8 Interest rate swaps 6,665 6 4 5,531 5 8 Options, caps and floors 4,154 - - 3,914 1 - Futures and forward contracts 1,421 2 2 1,421 (6) (3) - ----------------------------------------------------------------------------------------------------------------------------------
(a) Recorded at fair value on the Corporation's balance sheet.
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR INTEREST RATE RISK MANAGEMENT PURPOSES - -------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 December 31, 1995 ---------------------------------------- -------------------------------------- ASSET (LIABILITY) Asset (Liability) NOTIONAL -------------------------- Notional ------------------------ PRINCIPAL CARRYING ESTIMATED principal Carrying Estimated (in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a) fair value - --------------------------------------------------------------------------------------------------------------------------------- Interest rate swaps $4,789 $5 $(67) $7,967 $(1) $39 Options, caps, floors and forward rate agreements 63 - 1 729 (1) (8) Futures contracts 33 - - 6 - - Other products 118 - 2 108 - (1) - ---------------------------------------------------------------------------------------------------------------------------------
(a) Represents the on-balance-sheet receivables/payables or deferred income arising from these financial instruments. 97 80 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 25. SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS Noncash investing and financing transactions that, appropriately, are not reflected in the Consolidated Statement of Cash Flows are listed below.
- --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Net transfers to real estate acquired $ 23 $ 22 $ 14 Net transfers to segregated assets 12 10 12 Purchase acquisitions(a): Fair value of noncash assets acquired 1,954 385 390 Liabilities and escrow deposits assumed 120 255 279 Stock issued and notes payable 10 - - ------- ------ ------ Net cash paid (1,824) (130) (111) Transfer of CornerStone(sm) credit card loans to accelerated resolution portfolio - 193 - Series H preferred stock redemption - - 155 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Purchase acquisitions include: The business equipment finance unit of USL and FUL, in 1996; Metmor Financial, Inc. in 1995; U.S. Bancorp Mortgage Company and Glendale Bancorporation in 1994. In late 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers." This guide permitted a one-time reassessment of the appropriateness of the classifications of securities as available for sale or held for investment. In 1995, the Corporation elected to redesignate $530 million of GNMA fixed-rate pass-through securities with an unrealized gain of $22 million and $56 million of municipal securities with an unrealized gain of less than $1 million, from the investment securities category to the securities available for sale category. 26. MERGER WITH THE DREYFUS CORPORATION On August 24, 1994, the Corporation merged with The Dreyfus Corporation, a mutual fund company headquartered in New York City. The Corporation issued 48.3 million shares of common stock for all of the outstanding common stock of Dreyfus. The merger was accounted for under the pooling of interests method of accounting. The Corporation's financial statements were restated for all periods prior to the merger to include the reported results of Dreyfus. For the period ended June 30, 1994, prior to restatement, the combined total revenue and net income of the Corporation and Dreyfus was $1,589 million and $314 million, respectively, including $191 million of total revenue and $49 million of net income at Dreyfus. 98 81 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------ 27. MELLON BANK CORPORATION (PARENT CORPORATION)
CONDENSED INCOME STATEMENT - ------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, (in millions) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Dividends from bank subsidiaries $400 $501 $366 Dividends from nonbank subsidiaries 21 30 122 Interest revenue from bank subsidiaries 25 37 38 Interest revenue from nonbank subsidiaries 25 27 21 Other revenue 12 3 4 - ------------------------------------------------------------------------------------------------------------------------------ Total revenue 483 598 551 - ------------------------------------------------------------------------------------------------------------------------------ Interest expense on commercial paper 12 13 7 Interest expense on notes and debentures 88 83 87 Operating expense 32 29 23 - ------------------------------------------------------------------------------------------------------------------------------ Total expense 132 125 117 - ------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARIES 351 473 434 Provision (benefit) for income taxes (21) (17) (18) Equity in undistributed net income (loss): Bank subsidiaries 228 111 69 Nonbank subsidiaries 133 90 (88) - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME 733 691 433 Dividends on preferred stock 44 39 75 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME APPLICABLE TO COMMON STOCK $689 $652 $358 - ------------------------------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEET - ------------------------------------------------------------------------------------------------------------------------------ December 31, (in millions) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- ASSETS: Cash and money market investments with bank subsidiary $ 917 $ 315 Securities available for sale 200 - Loans and other receivables due from nonbank subsidiaries 347 386 Investment in bank subsidiaries 4,185 4,285 Investment in nonbank subsidiaries 362 261 Subordinated debt and other receivables due from bank subsidiaries 108 79 Other assets 108 96 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $6,227 $5,422 - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Commercial paper $ 122 $ 284 Other liabilities 140 113 Notes and debentures (with original maturities over one year) 1,229 1,000 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,491 1,397 - ------------------------------------------------------------------------------------------------------------------------------- TRUST-PREFERRED SECURITIES: Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 990 - - ------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock 290 435 Common shareholders' equity 3,456 3,590 - ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 3,746 4,025 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities, trust-preferred securities and shareholders' equity $6,227 $5,422 - -------------------------------------------------------------------------------------------------------------------------------
99 82 NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ----------------------------------------------------------------------------- 27. MELLON BANK CORPORATION (PARENT CORPORATION) (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, (in millions) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 733 $ 691 $ 433 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 21 21 20 Equity in undistributed net income of subsidiaries (361) (201) 19 Net (increase) decrease in accrued interest receivable 1 3 (1) Deferred income tax benefit (3) - (4) Net increase in other operating activities 10 42 6 - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 401 556 473 - ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in short-term deposits with affiliated banks (602) 32 (125) Funds invested in securities available for sale (200) - (200) Proceeds from maturities of securities available for sale - - 460 Loans made to subsidiaries (298) (284) (711) Principal collected on loans to subsidiaries 342 581 771 Loans collected (made) to joint venture 1 (15) - Capital returned from (contributions to) subsidiaries 350 241 (15) Cash paid in purchase of Glendale Bancorporation - - (28) Net increase in other investing activities (20) (14) (20) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) in investing activities (427) 541 132 - ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in commercial paper (162) 106 44 Repayments of long-term debt (20) (326) (413) Net proceeds from issuance of long-term debt 247 199 - Net proceeds from issuance of common stock 55 58 18 Redemption of preferred stock (145) (155) - Net proceeds from issuance of Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 990 - - Repurchase of common stock (596) (578) - Repurchase of warrants - (54) - Dividends paid on common and preferred stock (354) (346) (254) Net increase (decrease) in other financing activities 11 - (5) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) in financing activities 26 (1,096) (610) - ------------------------------------------------------------------------------------------------------------------------------- CHANGE IN CASH AND DUE FROM BANKS: Net change in cash and due from banks - 1 (5) Cash and due from banks at beginning of year 1 - 5 - ------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks at end of year $ 1 $ 1 $ - - ------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES - ------------------------------------------------------------------------------------------------------------------------------ Interest paid $ 95 $ 99 $ 98 Net income taxes refunded (3) (42) (20) - ------------------------------------------------------------------------------------------------------------------------------ NONCASH INVESTING AND FINANCING TRANSACTIONS - ------------------------------------------------------------------------------------------------------------------------------ Series H preferred stock redemption $ - $ - $ 155 - ------------------------------------------------------------------------------------------------------------------------------
100 83 REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MELLON BANK CORPORATION: We have audited the accompanying consolidated balance sheets of Mellon Bank Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mellon Bank Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 16, 1997 101 84 CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
MELLON BANK CORPORATION (and its subsidiaries) - ------------------------------------------------------------------------------------------------------------------------------ 1996 AVERAGE AVERAGE YIELDS/ (dollar amounts in millions) BALANCE INTEREST RATES - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-bearing deposits with banks $ 678 $ 36 5.31% Federal funds sold and securities under resale agreements 561 30 5.41 Other money market investments 142 7 5.00 Trading account securities 146 8 5.46 Securities: U.S. Treasury and agency securities (a) 5,999 392 6.54 Obligations of states and political subdivisions (a) 39 3 8.53 Other (a) 153 12 7.67 Loans, net of unearned discount (a) 27,250 2,261 8.30 ------ ----- Total interest-earning assets 34,968 $2,749 7.86 Cash and due from banks 2,782 Customers' acceptance liability 252 Premises and equipment 560 Net acquired property 73 Other assets (a) 3,865 Reserve for credit losses (472) ------------------------------------------------------------------------------------------------------- Total assets $42,028 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES, Deposits in domestic offices: TRUST-PREFERRED Demand $ 830 $ 15 1.80% SECURITIES AND Money market and other savings accounts 9,935 280 2.82 SHAREHOLDERS' Retail savings certificates 6,529 318 4.88 EQUITY Other time deposits 1,766 96 5.42 Deposits in foreign offices 3,766 194 5.14 ------- ----- Total interest-bearing deposits 22,826 903 3.95 Federal funds purchased and securities under repurchase agreements 1,765 94 5.32 Short-term bank notes 502 29 5.84 Term federal funds purchased 675 38 5.58 U.S. Treasury tax and loan demand notes 286 15 5.17 Commercial paper 217 12 5.42 Other funds borrowed 279 27 9.89 Notes and debentures (with original maturities over one year) 2,038 143 7.04 ------- ------ Total interest-bearing liabilities 28,588 $1,261 4.41 Total noninterest-bearing deposits 8,012 Acceptances outstanding 252 Other liabilities 1,319 ------------------------------------------------------------------------------------------------------- Total liabilities 38,171 ------------------------------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 32 ------------------------------------------------------------------------------------------------------- Shareholders' equity (a) 3,825 ------------------------------------------------------------------------------------------------------- Total liabilities, trust-preferred securities and shareholders' equity $42,028 - ------------------------------------------------------------------------------------------------------------------------------ RATES YIELD ON TOTAL INTEREST-EARNING ASSETS 7.86% COST OF FUNDS SUPPORTING INTEREST-EARNING ASSETS 3.60 ------------------------------------------------------------------------------------------------------- NET INTEREST MARGIN: TAXABLE EQUIVALENT BASIS 4.26% WITHOUT TAXABLE EQUIVALENT INCREMENTS 4.23 - ------------------------------------------------------------------------------------------------------------------------------
(a) Amounts and yields in 1996, 1995 and 1994 exclude adjustments to fair value required by FAS No. 115. Note: Interest and yields were calculated on a taxable equivalent basis at tax rates approximating 35% in 1996, 1995, 1994 and 1993 and 34% in 1992, using dollar amounts in thousands and actual number of days in the years, and are before the effect of reserve requirements. Loan fees, as well as nonaccrual loans and their related income effect, have been included in the calculation of average interest yields/rates. 102 85
- ---------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 Average Average Average Average Average yields/ Average yields/ Average yields/ Average yields/ balance Interest rates balance Interest rates balance Interest rates balance Interest rates - ---------------------------------------------------------------------------------------------------------------------------------- $ 567 $ 36 6.27% $ 756 $ 34 4.52% $ 1,592 $ 58 3.62% $ 839 $ 35 4.20% 598 34 5.64 762 30 3.98 1,801 54 3.03 789 27 3.47 57 3 5.02 138 6 4.29 428 16 3.73 277 17 6.02 296 19 6.59 380 24 6.27 269 15 5.71 308 21 6.74 4,671 305 6.52 4,713 269 5.71 4,120 226 5.49 5,595 423 7.55 64 5 7.73 110 8 7.14 166 11 6.85 147 11 7.77 203 14 7.09 352 17 4.80 518 24 4.49 758 44 5.94 27,360 2,432 8.89 25,107 1,935 7.71 21,763 1,597 7.34 18,235 1,474 8.07 ------- ------ ------- ------ ------- ------ ------- ------ 33,816 $2,848 8.44 32,318 $2,323 7.19 30,657 $2,001 6.53 26,948 $2,052 7.61 2,337 2,337 2,170 1,975 229 165 133 115 555 537 518 490 80 113 198 371 3,703 3,273 2,524 1,448 (591) (613) (565) (589) - ---------------------------------------------------------------------------------------------------------------------------------- $40,129 $38,130 $35,635 $30,758 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- $ 1,916 $ 37 1.94% $ 2,143 $ 4 .21% $ 2,034 $ 2 .11% $ 1,728 $ 40 2.31% 8,736 277 3.16 9,439 188 1.99 8,768 146 1.66 6,364 193 3.03 6,683 337 5.05 6,597 240 3.64 7,556 241 3.19 7,581 324 4.27 263 12 4.70 246 15 6.05 422 26 6.00 453 31 6.87 3,898 226 5.79 2,053 92 4.46 1,024 40 3.89 922 49 5.36 ------- ----- ------- ----- -------- ------- ------- ------- 21,496 889 4.13 20,478 539 2.63 19,804 455 2.29 17,048 637 3.73 2,128 125 5.87 1,777 76 4.29 1,096 33 3.01 1,623 56 3.46 815 50 6.20 29 2 5.68 81 3 3.98 71 3 4.33 644 39 5.98 176 8 4.58 61 2 3.79 12 1 4.61 400 23 5.69 564 22 3.93 224 6 2.85 664 23 3.42 226 13 5.87 155 7 4.33 198 6 3.22 173 6 3.70 395 34 8.68 494 38 7.80 401 29 7.13 359 29 8.20 1,670 117 7.04 1,768 110 6.20 1,991 121 6.08 1,365 94 6.88 ------- ------ ------- ------ ------- ------- ------- ------- 27,774 $1,290 4.65 25,441 $ 802 3.15 23,856 $ 655 2.75 21,315 $ 849 3.98 6,455 6,770 6,737 5,636 229 165 134 115 1,533 1,453 944 580 - ---------------------------------------------------------------------------------------------------------------------------------- 35,991 33,829 31,671 27,646 - ---------------------------------------------------------------------------------------------------------------------------------- - - - - - ---------------------------------------------------------------------------------------------------------------------------------- 4,138 4,301 3,964 3,112 - ---------------------------------------------------------------------------------------------------------------------------------- $40,129 $38,130 $35,635 $30,758 - ---------------------------------------------------------------------------------------------------------------------------------- 8.44% 7.19% 6.53% 7.61% 3.82 2.48 2.14 3.15 - ----------------------------------------------------------------------------------------------------------------------------------- 4.62% 4.71% 4.39% 4.46% 4.58 4.67 4.34 4.39 - -----------------------------------------------------------------------------------------------------------------------------------
103 86 CORPORATE INFORMATION Annual Meeting The Annual Meeting of Shareholders will be held on the 10th floor of the Union Trust Building, 501 Grant St., Pittsburgh, PA, at 10 a.m. on Tuesday, April 15, 1997. Form 10-K and For a free copy of the Corporation's Annual Report on Shareholder Form 10-K or the quarterly earnings news release on Publications Form 8-K, as filed with the Securities and Exchange Commission, please send a written request to the Secretary of the Corporation, 1820 One Mellon Bank Center, Pittsburgh, PA 15258-0001. Quarterly earnings and other news releases also can be obtained by fax by calling Company News on Call at 1 800 758-5804 and entering a six-digit code (552187). Exchange Listing Mellon Bank Corporation's common and Series K preferred stocks are traded on the New York Stock Exchange. The trading symbols are MEL (common stock) and MEL Pr K. The Transfer Agent and Registrar is ChaseMellon Shareholder Services, L.L.C., P.O. Box 590, Ridgefield Park, NJ 07660-9940. For more information, please call 1 800 205-7699. Stock Prices Current prices for Mellon Bank Corporation's common and preferred stocks can be obtained from any Touch-Tone telephone by dialing (412) 236-0834 (in Pittsburgh) or 1 800 648-9496 (outside Pittsburgh). When prompted to "enter I.D.," press MEL# (635#). This service is available free of charge, 24 hours a day, seven days a week, from anywhere in the continental United States. Dividend Payments Subject to approval of the board of directors, dividends are paid on Mellon Bank Corporation's common and preferred stocks on or about the 15th day of February, May, August and November. Dividend Reinvestment Under the Dividend Reinvestment and Common Stock and Common Stock Purchase Plan, registered holders of Mellon Bank Purchase Plan Corporation's common stock may purchase additional common shares at the market value for such shares through reinvestment of common dividends and/or optional cash payments. Purchases of shares through optional cash payments are subject to limitations. Plan details are in a Prospectus, which may be obtained from ChaseMellon Shareholder Services. Electronic Deposit Registered shareholders may have quarterly dividends of Dividends paid on Mellon Bank Corporation's common and preferred stocks electronically deposited to their checking or savings account, free of charge. If you wish to have your dividends electronically deposited, please write to ChaseMellon Shareholder Services, L.L.C., P.O. Box 590, Ridgefield Park, NJ 07660-9940. For more information, please call 1 800 205-7699. Phone Contacts Corporate Communications/ Media Relations (412) 236-1264 Media inquiries Securities Transfer Agent 1 800 205-7699 Questions regarding stock holdings, certificate replacement/transfer, dividends and address changes Dividend Reinvestment Plan 1 800 205-7699 Enrollment/Prospectus for Dividend Reinvestment Publication Requests 1 800 205-7699 Requests for the Annual Report or quarterly information Investor Relations (412) 234-5601 Questions regarding the Corporation's financial performance
Internet Mellon: http://www.mellon.com Dreyfus: http://www.dreyfus.com Elimination of To eliminate duplicate mailings, please submit a Duplicate Mailings written request, with your full name and address the way it appears on your account, to ChaseMellon Shareholder Services, L.L.C., P.O. Box 590, Ridgefield Park, NJ 07660-9940. For more information, please call 1 800 205-7699. Charitable A report on Mellon's comprehensive community Contributions involvement, including charitable contributions, is available by calling (412) 234-8680. MELLON ENTITIES ARE EQUAL EMPLOYMENT OPPORTUNITY/ AFFIRMATIVE ACTION EMPLOYERS. Mellon is committed to providing equal employment opportunities to every employee and every applicant for employment, regardless of, but not limited to, such factors as race, color, religion, sex, national origin, age, familial or marital status, ancestry, citizenship, sexual orientation, veteran status or being a qualified individual with a disability. EX-21.1 17 MELLON BANK 10-K405 1 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996* Central Counties Corporation State of Incorporation: Pennsylvania Certus Asset Advisors Corporation State of Incorporation: Delaware Collection Services Corporation State of Incorporation: Pennsylvania Dreyfus Investment Services Corporation State of Incorporation: Delaware Girard Corporation State of Incorporation: Pennsylvania Mellon Accounting Services, Inc. State of Incorporation: Delaware Mellon Asia Limited Incorporation: Hong Kong Mellon Bank Community Development Corporation State of Incorporation: Pennsylvania Mellon Bank, N.A. Incorporation: United States o Access Capital Strategies Corp. State of Incorporation: Massachusetts o AFCO Credit Corporation State of Incorporation: New York oo AFCO Acceptance Corporation State of Incorporation: California oo AFCO Service, Inc. State of Incorporation: California o A P Beaumeade, Inc. State of Incorporation: Delaware * Certain subsidiaries have been omitted from this list. These subsidiaries, when considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary as defined in Rule 1-02(w) of Regulation S-X. 2 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -2- o A P Colorado, Inc. State of Incorporation: Colorado o A P Colorado, Inc. #2 State of Incorporation: Colorado o APD Chimney Lakes, Inc. State of Incorporation: Florida o APD Cross Creek, Inc. State of Incorporation: Florida o APD Cypress Springs, Inc. State of Incorporation: Florida o A P East, Inc. State of Incorporation: Delaware o A P Management, Inc. State of Incorporation: Pennsylvania o A P Properties, Inc. State of Incorporation: New Jersey o AP Properties Minnesota, Inc. State of Incorporation: Minnesota o AP Residential Realty, Inc. State of Incorporation: Pennsylvania o A P Rural Land, Inc. State of Incorporation: Pennsylvania o AP Wheels, Inc. State of Incorporation: Michigan o APME Company, Inc. State of Incorporation: Wisconsin o APU Chimney Lakes, Inc. State of Incorporation: Florida 3 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -3- o APU Cross Creek, Inc. State of Incorporation: Florida o APU Cypress Springs, Inc. State of Incorporation: Florida o Citmelex Corporation State of Incorporation: Delaware o Commonwealth National Mortgage Company State of Incorporation: Pennsylvania o Dreyfus Financial Services Corporation State of Incorporation: Delaware o East Properties Inc. State of Incorporation: Delaware o Mellon Bank Canada Incorporation: Canada oo CAFO, Inc. Incorporation: Canada oo CIBC Mellon Global Securities Services Company (50% ownership) Incorporation: Canada oo Mellon Asset Management, Limited Incorporation: Ontario oo Mellon Bank Canada Leasing Inc. Incorporation: Canada oo The R-M Trust Company Incorporation: Canada o Mellon Bond Associates State of Organization: Pennsylvania 4 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -4- o Mellon Consumer Leasing Corporation State of Incorporation: Pennsylvania o Mellon Equity Associates State of Organization: Pennsylvania o Mellon Insurance Agency, Inc. State of Incorporation: Pennsylvania o Mellon Leasing Corporation State of Incorporation: Pennsylvania oo Mellon International Leasing Company State of Incorporation: Delaware oo Pontus, Inc. State of Incorporation: Delaware o Mellon Mortgage Company State of Incorporation: Colorado oo MetFirst Insurance Agency, Inc. State of Incorporation: Delaware o Mellon Overseas Investment Corporation Incorporation: United States oo B.I.E. Corporation Incorporation: British West Indies oo Dreyfus International (Ireland) Limited Incorporation: Ireland oo Mellon Bank Representacoes, Ltda. Incorporation: Brazil oo Mellon International Investment Corporation Incorporation: British West Indies 5 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -5- oo Mellon Securities Limited State of Incorporation: Pennsylvania o Mellon Trust Company of Illinois State of Incorporation: Illinois o Mellon Ventures, Inc. State of Incorporation: Pennsylvania o Mellon Ventures, L.P. State of Organization: Delaware oo Five Star Acquisition Company (48.5% ownership) State of Incorporation: Georgia o Melnamor Corporation State of Incorporation: Pennsylvania oo A P Colorado, Inc. #3 State of Incorporation: Colorado oo A P Meritor, Inc. State of Incorporation: Minnesota oo Baldorioty de Castro Development Corporation Incorporation: Puerto Rico oo Cacalaba, Inc. State of Incorporation: New Mexico oo Casals Development Corporation Incorporation: Puerto Rico oo CEBC, Inc. Incorporation: Puerto Rico oo Costamar Development Corporation Incorporation: Puerto Rico oo Festival, Inc. State of Incorporation: Virginia 6 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -6- oo FSFC, Inc. State of Incorporation: Pennsylvania oo Holiday Properties, Inc. State of Incorporation: Alabama oo Laplace Land Company, Inc. State of Incorporation: Louisiana oo Promenade, Inc. State of Incorporation: California oo SKAP #7, Inc. State of Incorporation: Texas oo Texas AP, Inc. State of Incorporation: Texas oo Trilem, Inc. State of Incorporation: Pennsylvania oo Vacation Properties, Inc. State of Incorporation: North Carolina o Meritor Mortgage Corporation - East State of Incorporation: Pennsylvania oo Central Valley Management Co., Inc. State of Incorporation: Pennsylvania o MMIP, Inc. State of Incorporation: Delaware o RECR, Inc. State of Incorporation: Pennsylvania o The Dreyfus Corporation State of Incorporation: New York oo Dreyfus Investment Advisors, Inc. State of Incorporation: New York 7 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -7- oo Dreyfus - Lincoln, Inc. State of Incorporation: Delaware oo Dreyfus Personal Management, Inc. State of Incorporation: New York oo Dreyfus Precious Metals, Inc. State of Incorporation: Delaware oo Dreyfus Service Corporation State of Incorporation: New York oo Dreyfus Transfer, Inc. State of Incorporation: Maryland oo Seven Six Seven Agency, Inc. State of Incorporation: New York oo The Dreyfus Consumer Credit Corporation State of Incorporation: Delaware o UPCON, Inc. State of Incorporation: Pennsylvania Boston Group Holdings, Inc. State of Incorporation: Delaware o Shearson Venture Capital, Inc. State of Incorporation: Delaware oo Shearson Summit Euromanagement, Inc. State of Incorporation: Delaware oo Shearson Summit Europartners, Inc. State of Incorporation: Delaware oo Shearson Summit Management, Inc. State of Incorporation: Delaware oo Shearson Summit Partners, Inc. State of Incorporation: Delaware 8 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -8- o The Boston Company, Inc. State of Incorporation: Massachusetts oo Boston Safe Deposit and Trust Company State of Incorporation: Massachusetts ooo Boston Safe (Nominees) Limited Incorporation: England ooo Bridgewater Land Company, Inc. State of Incorporation: Massachusetts oooo Mellon Preferred Capital Corporation State of Incorporation: Massachusetts ooo Reco, Inc. State of Incorporation: Massachusetts oooo Mitlock Limited Partnership State of Incorporation: Massachusetts oooo Tuckahoe Limited Partnership State of Incorporation: Massachusetts ooo TBC Securities Co., Inc. State of Incorporation: Massachusetts ooo The Boston Company Financial Services, Inc. State of Incorporation: Massachusetts ooo Wellington-Medford II Associates LP State of Incorporation: Massachusetts oo Boston Safe Advisors, Inc. State of Incorporation: Massachusetts oo Boston Safe Deposit and Trust Company of California State of Incorporation: California oo Boston Safe Deposit and Trust Company of New York State of Incorporation: New York 9 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -9- oo Premier Administration Limited Incorporation: England oo The Boston Company Advisors, Inc. State of Incorporation: Delaware oo The Boston Company Asset Management, Inc. State of Incorporation: Massachusetts oo The Boston Company Energy Advisors, Inc. State of Incorporation: Massachusetts oo The Boston Company Financial Strategies Group, Inc. State of Incorporation: Massachusetts oo The Boston Company Financial Strategies, Inc. State of Incorporation: Massachusetts oo Wellington-Medford II Properties, Inc. State of Incorporation: Massachusetts Mellon Bank (DE) National Association Incorporation: United States o Dreyfus Service Organization, Inc. State of Incorporation: Delaware o MBC Insurance Agency, Inc. State of Incorporation: Delaware o The Shelter Group, Inc. State of Incorporation: Delaware o Wilprop, Inc. State of Incorporation: Delaware Mellon Capital I* State of Organization: Delaware - ----------------- * Trust created for the sole purpose of issuing trust-preferred securities. 10 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -10- Mellon Capital II* State of Organization: Delaware Mellon EFT Services Corporation State of Incorporation: Pennsylvania Mellon Financial Company State of Incorporation: Pennsylvania Mellon Financial Corporation (MD) State of Incorporation: Maryland o Mellon Bank (MD) National Association State of Incorporation: Maryland oo Baltimore Realty Corporation State of Incorporation: Maryland Mellon Financial Markets, Inc. State of Incorporation: Delaware MBC Investments Corporation State of Incorporation: Delaware o Dreyfus Management GMBH Incorporation: Germany o Dreyfus Partnership Management, Inc. State of Incorporation: New York o Dreyfus Trust Company State of Incorporation: New York o Franklin Portfolio Associates Trust State of Organization: Massachusetts o Laurel Capital Advisors State of Incorporation: Pennsylvania - ----------------- * Trust created for the sole purpose of issuing trust-preferred securities. 11 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -11- o Mellon Bank, F.S.B. Incorporation: United States o Mellon Capital Management Corporation State of Incorporation: Delaware o Mellon Financial Services Corporation #1 State of Incorporation: Delaware oo Allomon Corporation State of Incorporation: Pennsylvania ooo APT Holdings Corporation State of Incorporation: Delaware ooo Lucien Land Company, Inc. State of Incorporation: Florida oooo APD Crossings, Inc. State of Incorporation: Florida oo Mellon Escrow Company State of Incorporation: Delaware oo Mellon Financial Services Corporation #2 State of Incorporation: Delaware oo Mellon Financial Services Corporation #4 State of Incorporation: Pennsylvania ooo Beaver Valley Leasing Corporation State of Incorporation: Pennsylvania ooo Katrena Corporation (80% ownership) State of Incorporation: Delaware ooo Mellon Financial Services Corporation #13 State of Incorporation: Alabama ooo MFS Leasing Corp. State of Incorporation: Delaware 12 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -12- oo Mellon Financial Services Corporation #5 State of Incorporation: Louisiana ooo Mellon Financial Services Corporation #10 State of Incorporation: Louisiana oo Mellon Properties Company State of Incorporation: Louisiana o Mellon-France Corporation State of Incorporation: Pennsylvania oo CCF-Mellon Partners (50% ownership) State of Incorporation: Pennsylvania o Mellon Global Investing Corp. State of Incorporation: New York oo Pareto Partners - New York (30% ownership) State of Incorporation: New York o Mellon Life Insurance Company State of Incorporation: Delaware o MGIC-UK Ltd. Incorporation: England oo Pareto Partners - U.K. (30% ownership) Incorporation: England o Premier Administration (Dublin) Limited Incorporation: Ireland o The Truepenny Corporation State of Incorporation: New York oo The Trotwood Corporation State of Incorporation: New York ooo The Trotwood Hunters Corporation State of Incorporation: New York 13 Ex- 21.1 MELLON BANK CORPORATION LIST OF SUBSIDIARIES OF THE CORPORATION DECEMBER 31, 1996 -13- ooo The Trotwood Hunters Site A Corporation State of Incorporation: New York Mellon Financial Services Corporation #17 (Mellon Securities Transfer Services) State of Incorporation: Delaware o ChaseMellon Shareholder Services, L.L.C. (50% ownership) State of Organization: New Jersey Mellon Securities Trust Company State of Incorporation: New York EX-23.1 18 MELLON BANK 10-K405 1 EXHIBIT 23.1 The Board of Directors of Mellon Bank Corporation: We consent to incorporation by reference in Registration Statement Nos. 2-98357 (Form S-8), 33-16658 (Form S-3), 33-21838 (Form S-8), 33-23635 (Form S-8), 33-34430 (Form S-8), 33-41796 (Form S-8), 33-48486 (Form S-3), 33-65824 (Form S-8), 33-65826 (Form S-8), 33-54671 (Form S-8), 33-59709 (Form S-3), 33-62151 (Form S-3), 333-16743 (Form S-8) and 333-16745 (Form S-8) of Mellon Bank Corporation of our report dated January 16, 1997, relating to the consolidated balance sheets of Mellon Bank Corporation and its subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report is incorporated by reference in the December 31, 1996 annual report on Form 10-K of Mellon Bank Corporation. KPMG PEAT MARWICK LLP - ----------------------- KPMG Peat Marwick LLP Pittsburgh, Pennsylvania March 19, 1997 EX-24.1 19 MELLON BANK 10-K405 1 EXHIBIT 24.1 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1996, and any and all amendments thereto, and to file same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney shall be effective as of February 18, 1997 and shall continue in full force and effect until revoked by the undersigned in a writing filed with the Secretary of the Corporation. FRANK V. CAHOUET ROTAN E. LEE - ------------------------------ -------------------------- Frank V. Cahouet, Director and Rotan E. Lee, Director Principal Executive Officer DWIGHT L. ALLISON, JR. ANDREW W. MATHIESON - ------------------------------ -------------------------- Dwight L. Allison, Jr., Andrew W. Mathieson, Director Director BURTON C. BORGELT EDWARD J. McANIFF - ------------------------------ -------------------------- Burton C. Borgelt, Edward J. McAniff, Director Director CAROL R. BROWN ROBERT MEHRABIAN - ------------------------------ -------------------------- Carol R. Brown, Robert Mehrabian, Director Director 2 SEWARD PROSSER MELLON - ------------------------------ -------------------------- J. W. Connolly, Director Seward Prosser Mellon, Director CHARLES A. CORRY DAVID S. SHAPIRA - ------------------------------ -------------------------- Charles A. Corry, Director David S. Shapira, Director W. KEITH SMITH - ------------------------------ -------------------------- C. Frederick Fetterolf, W. Keith Smith, Director Director IRA J. GUMBERG JOAB L. THOMAS - ------------------------------ -------------------------- Ira J. Gumberg, Director Joab L. Thomas, Director WESLEY V. von SCHACK - ------------------------------ -------------------------- Pemberton Hutchinson, Director Wesley V. von Schack, Director GEORGE W. JOHNSTONE WILLIAM J. YOUNG - ------------------------------ -------------------------- George W. Johnstone, Director William J. Young, Director -2- 3 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1996, and any and all amendments thereto, and to file same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney shall be effective as of February 21, 1997 and shall continue in full force and effect until revoked by the undersigned in a writing filed with the Secretary of the Corporation. C. FREDRICK FETTEROLF - ------------------------------ C. Fredrick Fetterolf, Director 4 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1996, and any and all amendments thereto, and to file same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney shall be effective as of February 25, 1997 and shall continue in full force and effect until revoked by the undersigned in a writing filed with the Secretary of the Corporation. PEMBERTON HUTCHINSON - ------------------------------ Pemberton Hutchinson, Director 5 POWER OF ATTORNEY MELLON BANK CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for Mellon Bank Corporation for the year ended December 31, 1996, and any and all amendments thereto, and to file same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney shall be effective as of March 10, 1997 and shall continue in full force and effect until revoked by the undersigned in a writing filed with the Secretary of the Corporation. J. W. CONNOLLY - ------------------------------ J. W. Connolly, Director EX-27.1 20 MELLON BANK 10-K405
9 0000064782 MELLON BANK CORP. 1,000,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 2,846 419 460 84 4,111 2,375 2,365 27,393 (525) 42,596 31,374 2,247 1,721 2,518 990 290 74 3,382 42,596 2,253 406 73 2,739 903 1,261 1,478 155 4 2,195 1,151 1,151 0 0 733 5.17 5.15 4.26 94 123 0 0 471 190 66 525 514 11 0 This tag includes $990 million of preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures.
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