<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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
incorporation or organization) Identification No.)
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code -- (412) 234-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class June 30, 1997
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Common Stock, $.50 par value 251,598,950
<PAGE> 2
TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Financial Highlights 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2) 3
Financial Statements (Item 1):
Consolidated Balance Sheet 44
Consolidated Income Statement 45
Consolidated Income Statement - Five Quarter Trend 46
Consolidated Statement of Cash Flows 47
Consolidated Statement of Changes in Shareholders' Equity 48
Notes to Financial Statements (includes Item 3) 49
Selected Statistical Information:
Deposits 54
Selected Key Data 54
Part II - Other Information
Legal Proceedings (Item 1) 55
Submission of Matters to a Vote of Security Holders (Item 4) 55
Exhibits and Reports on Form 8-K (Item 6) 56
Signature 57
Corporate Information 58
Index to Exhibits 59
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Quarter ended Six months ended
FINANCIAL HIGHLIGHTS ------------------------------------ ---------------------
(dollar amounts in millions, JUNE 30, March 31, June 30, JUNE 30, June 30,
except per share amounts) 1997 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C>
PER COMMON SHARE
Net income-fully diluted $ .71 $ .69 $ .63 $ 1.40 $ 1.25
Dividends paid .33 .30 .30 .63 .575
Closing common stock price 45.125 36.375 28.50 45.125 28.50
Book value at period-end 13.42 13.60 12.81 13.42 12.81
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Net income $ 190 $ 191 $ 179 $ 381 $ 358
Net income applicable to common stock 186 182 169 368 338
Dividends paid on common stock 85 77 79 162 154
Average common shares and equivalents
outstanding-fully diluted (in thousands) 259,816 263,204 266,826 261,899 270,236
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KEY PERFORMANCE MEASURES
Return on average common
shareholders' equity (annualized) 21.9% 21.2% 20.4% 21.5% 20.0%
Return on average assets (annualized) 1.79 1.83 1.70 1.81 1.73
Fee revenue as a percentage
of total revenue (FTE) 59 59 56 59 57
Efficiency ratio (a) 62 62 64 62 64
Efficiency ratio excluding amortization
of intangibles and trust-preferred
securities expense 59 59 61 59 62
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TANGIBLE OPERATING RESULTS (b)
Tangible earnings per common
share-fully diluted $ .79 $ .77 $ .70 $ 1.56 $ 1.39
Tangible net income applicable
to common stock 206 203 187 409 375
Return on tangible common
shareholders' equity (annualized) 37.7% 36.3% 31.3% 37.0% 30.7%
Return on tangible assets (annualized) 2.04 2.09 1.92 2.07 1.96
Tangible book value per common share
at period-end $ 8.66 $ 8.88 $ 9.33 $ 8.66 $ 9.33
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</TABLE>
<TABLE>
<CAPTION>
JUNE 30, March 31, June 30,
1997 1997 1996
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<S> <C> <C> <C>
BALANCES
Loans $28,144 $27,525 $27,356
Total assets 43,712 42,068 42,769
Deposits 31,326 29,936 31,704
Common shareholders' equity 3,377 3,503 3,332
Market capitalization 11,353 9,372 7,414
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CAPITAL RATIOS
Common shareholders' equity to assets 7.72% 8.33% 7.79%
Tier I Capital 7.94 8.74 7.51
Total (Tier I plus Tier II) capital 13.24 13.65 11.89
Leverage capital 8.20 8.75 7.24
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</TABLE>
Note: Per common share amounts and average shares outstanding have been
restated to reflect the two-for-one common stock split distributed on
June 2, 1997.
(a) See page 23 for the definition of these ratios.
(b) See page 5 for the definition of these ratios.
NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS.
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT FINANCIAL EVENTS
Two-for-one common stock split
In April 1997, the Corporation authorized a two-for-one common stock split. The
two-for-one stock split was structured as a stock dividend of one additional
share of common stock paid on each outstanding share of common stock. The
additional shares resulting from the split were distributed on June 2, 1997, to
shareholders of record at the close of business on May 1, 1997. All earnings
and dividend per share figures have been restated to reflect the stock split.
Common dividend increase
In the second quarter of 1997, the Corporation increased its quarterly common
stock dividend by 10% to $.33 per common share. This was the sixth quarterly
common dividend increase that the Corporation announced since the beginning of
1994, resulting in a total common dividend per share increase of 161%.
Acquisition of 1st Business Corporation
On April 14, 1997, the Corporation announced that it had reached a definitive
agreement to acquire 1st Business Corporation and its principal subsidiary, 1st
Business Bank, a full-service commercial bank serving midsize business firms in
southern California. 1st Business Corporation is privately owned. With
approximately $1.1 billion in assets, including approximately $480 million in
loans, 1st Business Bank is a state-chartered bank with headquarters in Los
Angeles. 1st Business Bank serves approximately 1,700 business customers in the
manufacturing, wholesale trade and service industries. 1st Business Bank also
provides personal banking services to professionals, entrepreneurs, and owners
and officers of its business clients. The Corporation will purchase 1st
Business Corporation with stock. To the extent that common stock is issued in
this transaction, the Corporation has authorized the repurchase of an
equivalent number of common shares. Other terms of the agreement were not
disclosed. 1st Business Bank will operate as a separate entity under the name
Mellon 1st Business Bank. Having received all required regulatory approvals,
the transaction is expected to close in the fourth quarter of 1997, subject to
certain closing conditions.
Acquisition of Buck Consultants, Inc.
On July 1, 1997, the Corporation acquired Buck Consultants, Inc., a leading
global benefits consulting firm. Buck is headquartered in New York and has 63
offices in 16 countries. Buck provides a broad array of pension and health and
welfare actuarial services, employee benefit, compensation and human resources
consulting and administrative services, and total benefits outsourcing to
approximately 5,000 clients, ranging from large multinational corporations to
small businesses. Buck reported total revenues of approximately $240 million
for the fiscal year ended March 31, 1997. Including the full year impact of
revenues from a late 1996 acquisition, Buck's annual revenues would have
totaled approximately $270 million.
3
<PAGE> 5
OVERVIEW
The Corporation reported record second quarter 1997 fully diluted earnings per
common share of $.71, an increase of 13%, compared with $.63 in the second
quarter of 1996. Earnings per common share totaled $.69 in the first quarter of
1997. Net income applicable to common stock was $186 million in the second
quarter of 1997, compared with $169 million in the second quarter of 1996 and
$182 million in the first quarter of 1997.
Annualized return on common shareholders' equity and return on assets were
21.9% and 1.79%, respectively, in the second quarter of 1997, compared with
20.4% and 1.70%, respectively, in the second quarter of 1996 and 21.2% and
1.83%, respectively, in the first quarter of 1997.
Annualized return on tangible common shareholders' equity and return on
tangible assets were 37.7% and 2.04%, respectively, in the second quarter of
1997, compared with 31.3% and 1.92%, respectively, in the second quarter of
1996 and 36.3% and 2.09%, respectively, in the first quarter of 1997. Fully
diluted tangible earnings per common share in the second quarter of 1997 were
$.79, compared with $.70 in the second quarter of 1996 and $.77 in the first
quarter of 1997.
Net interest revenue was $370 million in the second quarter of 1997, nearly
unchanged compared with $372 million in the prior-year period and $370 million
in the first quarter of 1997. Fee revenue was $540 million in the second quarter
of 1997, up $66 million or 14% compared with $474 million in the second quarter
of 1996 and up $4 million compared with $536 million in the first quarter of
1997. The increase in fee revenue, compared with the prior-year period, was
primarily attributable to higher trust and investment fees which resulted from
new business, an increase in the market value of assets under management, higher
transaction volumes and an increase in securities lending revenue. The increase
in nearly every fee category compared with the first quarter of 1997 was
primarily offset by the seasonal decrease in the second quarter of 1997 of fees
from electronic filing of income tax returns.
Operating expense before net revenue from acquired property and trust-preferred
securities expense for the second quarter of 1997 was $571 million, up $30
million from $541 million in the second quarter of 1996 and up $6 million from
$565 million in the first quarter of 1997. These increases resulted primarily
from acquisitions and business growth.
Credit quality expense was $22 million in the second quarter of 1997, compared
with $24 million in the second quarter of 1996 and unchanged from the first
quarter of 1997. Net credit losses were $32 million in the second quarter of
1997, an increase of $6 million, compared with the prior-year period and
unchanged compared with the first quarter of 1997.
Nonperforming assets totaled $162 million at June 30, 1997, compared with $170
million at March 31, 1997, and $203 million at June 30, 1996. The Corporation's
ratio of nonperforming assets to total loans and net acquired property was .57%
at June 30, 1997, the lowest level in the Corporation's history. This ratio has
been less than 1% for twelve consecutive quarters.
The Corporation's ratio of common shareholders' equity to assets was 7.72% at
June 30, 1997. The Tier I, Total and Leverage capital ratios were 7.94%, 13.24%
and 8.20%, respectively, at June 30, 1997, well in excess of the ratios
required to maintain well-capitalized status.
For the first six months of 1997, the Corporation reported fully diluted
earnings per common share of $1.40 and net income applicable to common stock of
$368 million, compared with $1.25 per common share and $338 million for the
first six months of 1996. Annualized return on common shareholders' equity and
return on assets were 21.5% and 1.81%, respectively, in the first six months of
1997, compared with 20.0% and 1.73%, respectively, in the first six months of
1996.
4
<PAGE> 6
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.
<TABLE>
<CAPTION>
Quarter ended Six months ended
----------------------------------------- ---------------------
(dollar amounts in millions, JUNE 30, March 31, June 30, JUNE 30, June 30,
ratios annualized) 1997 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C>
Net income applicable to common stock $ 186 $ 182 $ 169 $ 368 $ 338
After tax impact of amortization of
intangibles from purchase acquisitions 20 21 18 41 37
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Tangible net income applicable to
common stock $ 206 $ 203 $ 187 $ 409 $ 375
Tangible earnings per common
share-fully diluted $ .79 $ .77 $ .70 $ 1.56 $ 1.39
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Average common equity $ 3,393 $ 3,490 $ 3,327 $ 3,441 $ 3,393
Average goodwill and other
identified intangibles 1,206 1,223 923 1,215 934
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Average tangible common equity $ 2,187 $ 2,267 $ 2,404 $ 2,226 $ 2,459
Return on tangible common equity 37.7% 36.3% 31.3% 37.0% 30.7%
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Average total assets $42,413 $42,187 $42,096 $42,301 $41,472
Average tangible assets $41,207 $40,964 $41,173 $41,086 $40,538
Return on tangible assets 2.04% 2.09% 1.92% 2.07% 1.96%
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</TABLE>
Note: Per common share amounts have been restated to reflect the
two-for-one common stock split distributed on June 2, 1997.
5
<PAGE> 7
BUSINESS SECTORS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
Consumer Corporate/Institutional
(dollar amounts in millions, Fee Services Banking Services Fee Services Banking Services
averages in billions) 1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $171 $163 $ 271 $ 280 $322 $277 $ 125 $ 101
Credit quality expense (revenue) -- 1 30 25 -- -- (2) (1)
Operating expense 125 119 164 169 229 212 55 38
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Income before taxes 46 43 77 86 93 65 72 64
Income taxes 18 18 26 31 37 25 26 22
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Net income $ 28 $ 25 $ 51 $ 55 $ 56 $ 40 $ 46 $ 42
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Tangible net income $ 29 $ 26 $ 60 $ 65 $ 62 $ 47 $ 50 $ 42
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Average assets $ 2.2 $1.9 $19.8 $21.5 $1.7 $1.6 $17.0 $14.5
Average common equity $ 0.3 $0.3 $ 1.0 $ 1.0 $0.6 $0.6 $ 1.5 $ 1.3
Average Tier I preferred equity $ -- $ -- $ 0.1 $ -- $0.1 $ -- $ 0.1 $ --
Return on common
shareholders' equity (a) 41% 37% 20% 21% 39% 29% 12% 13%
Return on assets (a) NM NM 1.02% 1.02% NM NM 1.08% 1.14%
Pretax operating margin 27% 26% 29% 31% 29% 23% 58% 63%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 28% 27% 34% 35% 31% 26% 64% 65%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 72% 73% 55% 56% 69% 74% 38% 36%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
FOR THE SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
Consumer Corporate/Institutional
(dollar amounts in millions, Fee Services Banking Services Fee Services Banking Services
averages in billions) 1997 1996 1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $337 $311 $ 570 $ 585 $617 $535 $ 250 $ 206
Credit quality expense (revenue) 1 1 58 48 -- -- (1) --
Operating expense 253 237 328 349 450 420 107 78
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Income before taxes 83 73 184 188 167 115 144 128
Income taxes 33 30 65 69 66 45 53 45
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Net income $ 50 $ 43 $ 119 $ 119 $101 $ 70 $ 91 $ 83
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Tangible net income $ 52 $ 45 $ 138 $ 139 $113 $ 83 $ 99 $ 85
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Average assets $2.1 $2.0 $20.1 $21.0 $1.6 $1.7 $16.7 $14.2
Average common equity $0.3 $0.3 $ 1.0 $ 1.1 $0.6 $0.5 $ 1.5 $ 1.2
Average Tier I preferred equity $ -- $ -- $ 0.1 $ -- $ -- $ -- $ 0.1 $ --
Return on common
shareholders' equity (a) 37% 33% 23% 23% 35% 26% 12% 13%
Return on assets (a) NM NM 1.19% 1.14% NM NM 1.11% 1.17%
Pretax operating margin 25% 23% 32% 32% 27% 21% 58% 62%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 26% 24% 37% 37% 30% 24% 63% 64%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 74% 76% 53% 55% 70% 76% 37% 36%
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</TABLE>
(a) Annualized.
NM - Not meaningful.
6
<PAGE> 8
<TABLE>
<CAPTION>
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
$ 889 $ 821 $ 6 $ 3 $ 20 $ 28 $ 915 $ 852
28 25 (6) (1) -- -- 22 24
573 538 1 2 16 1 590 541
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288 258 11 2 4 27 303 287
107 96 4 1 2 11 113 108
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$ 181 $ 162 $ 7 $ 1 $ 2 $ 16 $ 190 $ 179
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$ 201 $ 180 $ 7 $ 1 $ 2 $ 16 $ 210 $ 197
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$40.7 $39.5 $0.2 $0.3 $1.5 $2.3 $42.4 $42.1
$ 3.4 $ 3.2 $ -- $ -- $ -- $0.1 $ 3.4 $ 3.3
$ 0.3 $ -- $ -- $ -- $0.9 $0.4 $ 1.2 $ 0.4
21% 20% NM NM NM NM 22% 20%
1.77% 1.63% NM NM NM NM 1.79% 1.70%
32% 31% NM NM NM NM 33% 34%
36% 34% NM NM NM NM 38% 36%
61% 63% NM NM NM NM 59% 61%
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</TABLE>
<TABLE>
<CAPTION>
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
1997 1996 1997 1996 1997 1996 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
$1,774 $1,637 $ 14 $ 8 $ 40 $ 79 $1,828 $1,724
58 49 (9) (8) (5) -- 44 41
1,138 1,084 2 3 35 22 1,175 1,109
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578 504 21 13 10 57 609 574
217 189 7 5 4 22 228 216
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$ 361 $ 315 $ 14 $ 8 $ 6 $ 35 $ 381 $ 358
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$ 402 $ 352 $ 14 $ 8 $ 6 $ 35 $ 422 $ 395
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$ 40.5 $ 38.9 $0.2 $0.3 $1.6 $2.3 $ 42.3 $ 41.5
$ 3.4 $ 3.1 $ -- $ -- $ -- $0.3 $ 3.4 $ 3.4
$ 0.2 $ -- $ -- $ -- $1.0 $0.4 $ 1.2 $ 0.4
21% 20% NM NM NM NM 22% 20%
1.80% 1.63% NM NM NM NM 1.81% 1.73%
33% 31% NM NM NM NM 33% 33%
36% 34% NM NM NM NM 38% 36%
61% 63% NM NM NM NM 59% 62%
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</TABLE>
7
<PAGE> 9
BUSINESS SECTORS (CONTINUED)
Note: The tables on the previous pages 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 quarterly 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.
The business sector results for 1997 and 1996 have been restated to reflect a
refinement in methodology that better reflects the Corporation's current
organizational structure. The changes are as follows: The mortgage banking
business line has been moved from the Consumer Banking Services sector and
divided into two separate components. The residential business line, including
servicing, has been moved to the Consumer Fee Services sector while the
commercial mortgage servicing business line has been moved to the
Corporate/Institutional Fee Services sector. Also, the Network Services
business line has been moved from the Consumer Banking Services sector to the
Corporate/Institutional Fee Services sector. These changes did not
significantly impact the business sector results.
Income before taxes for the Corporation's core sectors was $288 million in the
second quarter of 1997, an increase of $30 million, or 13%, compared with the
prior-year quarter. This increase resulted from a $68 million increase in
revenue, partially offset by a $35 million increase in operating expense and a
$3 million increase in credit quality expense. Income before taxes for the core
sectors in the first half of 1997 totaled $578 million, an increase of $74
million, or 15%, compared with the prior-year period. This improvement resulted
from increased revenue, partially offset by higher operating expense and higher
credit quality expense. Return on common shareholders' equity for the core
sectors was 21% in both the second quarter and first half of 1997, compared
with 20% in both the second quarter and first half of 1996. Return on assets
was 1.77% and 1.80% in the second quarter and first half of 1997, compared with
1.63% in both the second quarter and first half of 1996.
Consumer Fee Services
Consumer Fee Services includes private asset management services, retail mutual
funds and residential mortgage loan origination and servicing. Income before
taxes for the Consumer Fee sector was $46 million in the second quarter of
1997, an increase of $3 million, or 9%, from the prior-year period. The
increase was a result of higher mortgage servicing fees, primarily relating to
servicing portfolio acquisitions, gains on the disposition of assets and higher
private asset management fee revenue. The increase in private asset management
revenue resulted from new business and an increase in the market value of
assets under management. Income before taxes for the first half of 1997 was $83
million, compared with $73 million in the first half of 1996. This increase
resulted from the same factors responsible for the second quarter increase.
This sector provided excellent returns, as the annualized return on common
shareholders' equity was 41% and 37% in the second quarter and first half of
1997, respectively, compared with 37% and 33% in the second quarter and first
half of 1996.
Consumer Banking Services
Consumer Banking Services includes consumer lending and deposit products,
business banking, branch banking, credit card and jumbo residential mortgage
lending. Income before taxes for this sector totaled $77 million in the second
quarter of 1997, compared with $86 million in the second quarter of 1996, a
decrease of 9%. Revenue decreased $9 million, compared with the prior-year
period, primarily as a result of a decrease in credit card net interest and fee
revenue reflecting the sale of the AAA credit card portfolio in November 1996
and lower fee revenue from the securitized credit card portfolio, due in part
to higher credit losses in this portfolio. Partially offsetting this decrease
was gains on the disposition of assets. The $5 million increase in credit
quality expense resulted from the higher level
8
<PAGE> 10
BUSINESS SECTORS (CONTINUED)
of credit card losses in 1997. Operating expense decreased $5 million primarily
as a result of the sale of the AAA credit card portfolio. Income before taxes
for the first six months of 1997 was $184 million, a decrease of $4 million
compared with the first six months of 1996. The decrease resulted primarily
from the same factors responsible for the second quarter decrease. Also
impacting year-to-date results was a $6 million increase in revenue resulting
from higher electronic tax return filing fees as well as a decrease in
operating expense due to $6 million of expense related to the reconfiguration
of the retail delivery system recorded in the first quarter of 1996. The
annualized return on common shareholders' equity for this sector was 20% and
23% in the second quarter and first half of 1997, compared with 21% and 23% in
the second quarter and first half of 1996.
Corporate/Institutional Fee Services
Corporate/Institutional Fee Services includes institutional asset and
institutional mutual fund management and administration, institutional trust and
custody, securities lending, foreign exchange, cash management, stock transfer,
commercial mortgage loan origination and servicing, corporate trust, network
services and services for defined contribution plans. Income before taxes for
this sector was $93 million in the second quarter of 1997, an increase of $28
million, or 45%, compared with the second quarter of 1996. Revenue increased $45
million primarily due to higher institutional asset management fees, increased
institutional trust fees, including an increase in securities lending revenue
and related foreign exchange fees as well as higher mutual fund management and
administration fees and higher cash management fees. Operating expense increased
$17 million in support of higher transaction volumes and technology investments,
partially offset by lower expenses in the global custody business line as a
result of reengineering efforts. Income before taxes for the first six months of
1997 was $167 million, an increase of $52 million compared with the first six
months of 1996. The increase resulted primarily from the same factors
responsible for the second quarter increase. This sector provided excellent
returns as annualized return on common shareholders' equity for this sector was
39% and 35% in the second quarter and first half of 1997, compared with 29% and
26% in the second quarter and first half of 1996.
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 $72 million for the second quarter of 1997, an
increase of $8 million, or 12%, from the second quarter of 1996. Revenue
increased $24 million primarily as a result of higher net interest revenue
resulting from the lease financing acquisitions and higher syndication fees.
Operating expense increased $17 million primarily as a result of the lease
financing acquisitions. Income before taxes in the first half of 1997 was $144
million, an increase of $16 million, compared with the first six months of
1996, primarily reflecting the same factors responsible for the second quarter
increase. The annualized return on common shareholders' equity for this sector
was 12% in both the second quarter and first half of 1997, compared with 13% in
both the second quarter and first half of 1996.
Real Estate Workout
Real Estate Workout includes commercial real estate recovery and mortgage
banking recovery operations. Income before taxes for Real Estate Workout was
$11 million and $21 million in the second quarter and first half of 1997,
compared with $2 million and $13 million in the second quarter and first half
of 1996. The results in both periods reflect net revenue from acquired
property and the improved credit quality of the Real Estate Workout portfolio.
9
<PAGE> 11
BUSINESS SECTORS (CONTINUED)
Other
The Other sector's pretax income for the second quarter and first half of 1997
was $4 million and $10 million, compared with $27 million and $57 million in
the second quarter and first half of 1996. Revenue for the second quarter and
first half of 1997 reflects earnings on the use of proceeds from the
trust-preferred securities and earnings on preferred capital above that
required for the core sectors. Revenue for the second quarter of 1996 reflects
earnings on excess capital and a $13 million gain on the partial sale of an
equity interest. Revenue for the first half of 1996 also includes the $28
million gain on the securitization of home equity loans. Credit quality revenue
for 1997 represents loan recoveries from loans to lesser developed countries.
Operating expense for the second quarter and first half of 1997 includes $13
million and $31 million of trust-preferred securities expense, respectively,
while the first half of 1996 includes the $18 million charge resulting from the
retirement enhancement plan.
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.
<TABLE>
<CAPTION>
Customers serviced
-----------------------------------------
Total
Total Corporate/
FOR THE THREE MONTHS ENDED JUNE 30, Consumer Institutional
(dollar amounts in millions) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $79 $80 $102 $82
Return on average common
shareholders' equity (a) 24% 24% 19% 18%
- ---------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
Net income $169 $162 $192 $153
Return on average common
shareholders' equity (a) 26% 25% 18% 17%
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
<TABLE>
<CAPTION>
Services provided
-----------------------------------------
Total Total
FOR THE THREE MONTHS ENDED JUNE 30, Fee Banking
(dollar amounts in millions) 1997 1996 1997 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $84 $ 65 $97 $97
Return on average common
shareholders' equity (a) 39% 32% 15% 16%
- ---------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
Net income $151 $113 $210 $202
Return on average common
shareholders' equity (a) 35% 28% 17% 18%
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
10
<PAGE> 12
BUSINESS SECTORS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
Consumer Corporate/Institutional
Fee Services Banking Services Fee Services Banking Services
(dollar amounts in millions, JUNE 30, March 31, JUNE 30, March 31, JUNE 30, March 31, JUNE 30, March 31,
averages in billions) 1997 1997 1997 1997 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $171 $166 $ 271 $ 299 $322 $295 $ 125 $ 125
Credit quality expense (revenue) -- 1 30 28 -- -- (2) 1
Operating expense 125 128 164 164 229 221 55 52
- --------------------------------------------------------------------------------------------------------------------------
Income before taxes 46 37 77 107 93 74 72 72
Income taxes 18 15 26 39 37 29 26 27
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 28 $ 22 $ 51 $ 68 $ 56 $ 45 $ 46 $ 45
- --------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 29 $ 23 $ 60 $ 78 $ 62 $ 51 $ 50 $ 49
- --------------------------------------------------------------------------------------------------------------------------
Average assets $2.2 $2.0 $19.8 $20.5 $1.7 $1.5 $17.0 $16.3
Average common equity $0.3 $0.3 $ 1.0 $ 1.0 $0.6 $0.6 $ 1.5 $ 1.6
Average Tier I preferred equity $ -- $ -- $ 0.1 $ -- $0.1 $ -- $ 0.1 $ 0.1
Return on common
shareholders' equity (a) 41% 33% 20% 27% 39% 31% 12% 12%
Return on assets (a) NM NM 1.02% 1.35% NM NM 1.08% 1.13%
Pretax operating margin 27% 23% 29% 36% 29% 25% 58% 58%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 28% 23% 34% 40% 31% 28% 64% 62%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 72% 76% 55% 50% 69% 72% 38% 37%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total Real Estate Other Total All
Core Sectors Workout Corporate Activity Sectors
JUNE 30, March 31, JUNE 30, March 31, JUNE 30, March 31, JUNE 30, March 31,
1997 1997 1997 1997 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 889 $ 885 $ 6 $ 8 $ 20 $ 20 $ 915 $ 913
Credit quality expense (revenue) 28 30 (6) (3) -- (5) 22 22
Operating expense 573 565 1 1 16 19 590 585
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes 288 290 11 10 4 6 303 306
Income taxes 107 110 4 3 2 2 113 115
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 181 $ 180 $ 7 $ 7 $ 2 $ 4 $ 190 $ 191
- ------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 201 $ 201 $ 7 $ 7 $ 2 $ 4 $ 210 $ 212
- ------------------------------------------------------------------------------------------------------------------------------
Average assets $40.7 $40.3 $0.2 $0.2 $1.5 $1.7 $42.4 $42.2
Average common equity $ 3.4 $ 3.5 $ -- $ -- $ -- $ -- $ 3.4 $ 3.5
Average Tier I preferred equity $ 0.3 $ 0.1 $ -- $ -- $0.9 $1.1 $ 1.2 $ 1.2
Return on common
shareholders' equity (a) 21% 21% NM NM NM NM 22% 21%
Return on assets (a) 1.77% 1.82% NM NM NM NM 1.79% 1.83%
Pretax operating margin 32% 33% NM NM NM NM 33% 33%
Pretax operating margin
excluding amortization of
intangibles and trust-preferred
securities expense 36% 36% NM NM NM NM 38% 39%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities
expense 61% 61% NM NM NM NM 59% 59%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
NM - Not meaningful.
11
<PAGE> 13
BUSINESS SECTORS (CONTINUED)
<TABLE>
<CAPTION>
Customers serviced
--------------------------------------------------
Total
Total Corporate/
Consumer Institutional
FOR THE THREE MONTHS ENDED JUNE 30, March 31, JUNE 30, March 31,
(dollar amounts in millions) 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $79 $90 $102 $90
Return on average common
shareholders' equity (a) 24% 28% 19% 17%
- --------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
<TABLE>
<CAPTION>
Services provided
----------------------------------------------------
Total Total
Fee Banking
FOR THE THREE MONTHS ENDED JUNE 30, March 31, JUNE 30, March 31,
(dollar amounts in millions) 1997 1997 1997 1997
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $84 $67 $97 $113
Return on average common
shareholders' equity (a) 39% 31% 15% 18%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
Income before taxes for the total core sectors was $288 million in the second
quarter of 1997 compared with $290 million in the first quarter of 1997. This
decrease resulted from a $19 million decrease in the second quarter of 1997 of
fees from electronic filing of income tax returns. Substantially all of this
revenue is recognized in the first quarter of each year. This decline was
largely offset by revenue growth in the fee services sectors.
Income before taxes in the Consumer Fee Services sector increased $9 million in
the second quarter of 1997 compared with the first quarter of 1997, due
primarily to improved profitability in residential mortgage loan origination
and servicing.
The $30 million decrease in income before taxes in the Consumer Banking
Services sector primarily resulted from the lower income tax electronic filing
fee revenue.
Corporate/Institutional Fee Services income before taxes in the second quarter
of 1997 compared with the first quarter of 1997 increased $19 million primarily
due to higher institutional trust asset management and
administration/custody/securities lending fee revenue.
12
<PAGE> 14
NET INTEREST REVENUE
Net interest revenue, on a taxable equivalent basis, for the second quarter of
1997 totaled $371 million, compared with $374 million in the second quarter of
1996 and $373 million in the first quarter of 1997. The net interest margin was
4.29% in the second quarter of 1997, compared with 4.30% in the second quarter
of 1996 and 4.37% in the first quarter of 1997.
The $3 million decrease in net interest revenue in the second quarter of 1997,
compared with the second quarter of 1996, resulted from the effect of the
November 1996 sale of a $770 million American Automobile Association (AAA)
credit card portfolio, the funding costs related to the repurchase of common
stock, the December 1996 $500 million insurance premium finance securitization
and lower loan fees. Primarily offsetting these factors was $1.6 billion of
leases acquired in the Mellon US Leasing and Mellon First United Leasing
acquisitions in 1996, the use of the proceeds from the $1 billion of
trust-preferred securities issued in December 1996 and loan growth. The cost of
the trust-preferred securities is reported in operating expense. Net interest
revenue was virtually unchanged compared with the first quarter of 1997.
Excluding the effect of the loan securitizations and the equity repurchases,
net interest revenue and the net interest margin for the second quarter and
first half of 1997 would have been approximately $426 million and 4.64% and
$851 million and 4.67%, respectively, compared with approximately $415 million
and 4.55% and $815 million and 4.59% in the second quarter and first half of
1996.
Average loans increased approximately $1 billion in the second quarter of 1997,
compared with the prior-year period. Excluding the effect of the lease
financing acquisitions, the AAA credit card sale and loan securitization, the
Corporation experienced loan growth of approximately $685 million, or 3%, in
the second quarter of 1997, compared with the prior-year period, due to higher
corporate banking, middle market and institutional lending.
Net interest revenue and the net interest margin, on a taxable equivalent
basis, were $744 million and 4.33% in the first half of 1997, compared with
$740 million and 4.32% in the first half of 1996. The increase in net interest
revenue in the first six months of 1997, compared with the prior-year period,
principally resulted from the lease financing acquisitions, the use of the
proceeds from the $1 billion of trust-preferred securities, a higher level of
noninterest-bearing deposits and loan growth. Primarily offsetting these
factors was the sale of the AAA credit card portfolio, the insurance premium
finance securitization, funding costs related to the repurchase of common stock
and lower loan fees.
13
<PAGE> 15
NET INTEREST REVENUE (CONTINUED)
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
<TABLE>
<CAPTION>
Six months ended
--------------------------------------------------
JUNE 30, 1997 June 30, 1996
AVERAGE AVERAGE Average Average
(dollar amounts in millions) BALANCE YIELDS/RATES balance yields/rates
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets Interest-earning assets:
Interest-bearing deposits with banks $ 554 4.99% $ 729 5.23%
Federal funds sold and securities under
resale agreements 422 5.31 481 5.46
Other money market investments 80 4.82 128 4.82
Trading account securities 186 5.64 160 5.67
Securities:
U.S. Treasury and agency securities (a) 5,662 6.78 5,778 6.57
Obligations of states and political
subdivisions (a) 49 7.81 55 8.40
Other (a) 110 6.89 164 5.89
Loans, net of unearned discount (a) 27,607 8.24 26,949 8.36
------- -------
Total interest-earning assets 34,670 7.89 34,444 7.92
Cash and due from banks 2,736 2,779
Premises and equipment 577 558
Customers' acceptance liability 257 258
Net acquired property 74 71
Other assets (a) 4,518 3,846
Reserve for credit losses (521) (473)
-------------------------------------------------------------------------------------------------------
Total assets $42,311 $41,483
- -------------------------------------------------------------------------------------------------------------------------
Liabilities, Interest-bearing liabilities:
trust-preferred Deposits in domestic offices:
securities and Demand $ 228 1.45% $ 1,424 2.38%
shareholders' Money market and other savings accounts 10,109 2.82 9,646 2.83
equity Retail savings certificates 6,903 4.93 6,410 4.90
Other time deposits 1,994 5.54 822 5.58
Deposits in foreign offices 2,775 4.86 3,958 5.20
------- -------
Total interest-bearing deposits 22,009 3.97 22,260 3.92
Federal funds purchased and securities under
repurchase agreements 1,438 5.40 1,997 5.37
Term federal funds purchased 598 5.58 644 5.62
U.S. Treasury tax and loan demand notes 502 5.28 286 5.18
Commercial paper 74 5.33 238 5.42
Short-term bank notes 73 5.70 700 5.89
Other funds borrowed 348 8.29 276 9.96
Notes and debentures (with original
maturities over one year) 2,617 7.05 1,763 7.08
------- -------
Total interest-bearing liabilities 27,659 4.46 28,164 4.39
Total noninterest-bearing deposits 8,187 7,852
Acceptances outstanding 257 258
Other liabilities (a) 1,551 1,370
-------------------------------------------------------------------------------------------------------
Total liabilities 37,654 37,644
-------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
deferrable interest debentures 990 --
-------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 3,667 3,839
-------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred
securities and shareholders' equity $42,311 $41,483
- -------------------------------------------------------------------------------------------------------------------------
Rates Yield on total interest-earning assets 7.89 % 7.92%
Cost of funds supporting interest-earning assets 3.56 3.60
- -------------------------------------------------------------------------------------------------------------------------
Net interest Taxable equivalent basis 4.33% 4.32%
margin Without taxable equivalent increments 4.30 4.29
--------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts and yields exclude adjustments to fair value
required by FAS No. 115.
Note: Average rates are annualized and calculated on a
taxable equivalent basis, at tax rates
14
<PAGE> 16
<TABLE>
<CAPTION>
Three months ended
- --------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1997 March 31, 1997 Dec. 31, 1996 Sept. 30, 1996 June 30, 1996
AVERAGE AVERAGE Average Average Average Average Average Average Average Average
BALANCE YIELDS/RATES balance yields/rates balance yields/rates balance yields/rates balance yields/rates
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 547 4.89% $ 562 5.09% $ 609 5.53% $ 646 5.28% $ 765 5.11%
438 5.28 407 5.34 517 5.32 762 5.42 490 5.52
96 5.36 63 4.00 146 3.19 165 6.88 132 4.65
210 5.69 161 5.58 96 6.19 169 4.65 181 6.05
5,470 6.84 5,855 6.72 6,033 6.50 6,406 6.52 6,478 6.48
47 7.68 51 7.93 22 8.80 23 8.85 48 8.61
107 7.45 113 6.36 141 12.29 143 7.18 157 5.74
27,810 8.27 27,403 8.21 27,907 8.28 27,190 8.20 26,819 8.27
------- ------- ------- ------- -------
34,725 7.93 34,615 7.85 35,471 7.88 35,504 7.75 35,070 7.81
2,798 2,674 2,721 2,852 2,802
581 573 566 557 561
255 260 231 260 271
72 75 77 74 75
4,523 4,513 4,048 3,714 3,817
(517) (526) (476) (465) (469)
- --------------------------------------------------------------------------------------------------------------------------
$42,437 $42,184 $42,638 $42,496 $42,127
- --------------------------------------------------------------------------------------------------------------------------
$ 228 1.49% $ 227 1.42% $ 226 2.20% $ 260 1.97% $ 1,241 1.60%
10,010 2.87 10,209 2.77 10,190 2.75 10,252 2.70 9,746 2.83
7,081 4.98 6,723 4.88 6,716 4.89 6,575 4.81 6,413 4.83
1,767 5.71 2,223 5.41 3,188 5.36 2,211 5.38 1,091 5.35
2,737 4.90 2,814 4.83 3,365 5.05 3,786 5.09 4,038 5.12
------- ------- ------- ------- -------
21,823 4.02 22,196 3.92 23,685 4.03 23,084 3.94 22,529 3.86
1,457 5.62 1,417 5.16 1,452 5.36 1,619 5.18 1,959 5.31
724 5.67 471 5.46 668 5.25 744 5.80 655 5.43
596 5.39 408 5.11 220 5.20 352 5.14 269 5.14
67 5.38 82 5.28 180 5.42 214 5.42 227 5.33
69 5.81 76 5.61 197 5.57 417 5.79 439 5.93
378 8.28 318 8.30 289 10.25 274 9.37 293 9.61
2,716 7.01 2,517 7.10 2,519 7.01 2,102 7.02 1,971 7.03
------- ------- ------- ------- -------
27,830 4.54 27,485 4.38 29,210 4.47 28,806 4.39 28,342 4.34
8,290 8,084 7,884 8,458 8,420
255 260 231 259 271
1,470 1,632 1,362 1,176 1,301
- --------------------------------------------------------------------------------------------------------------------------
37,845 37,461 38,687 38,699 38,334
- --------------------------------------------------------------------------------------------------------------------------
990 990 129 -- --
- --------------------------------------------------------------------------------------------------------------------------
3,602 3,733 3,822 3,797 3,793
- --------------------------------------------------------------------------------------------------------------------------
$42,437 $42,184 $42,638 $42,496 $42,127
- --------------------------------------------------------------------------------------------------------------------------
7.93% 7.85% 7.88% 7.75% 7.81%
3.64 3.48 3.68 3.55 3.51
- --------------------------------------------------------------------------------------------------------------------------
4.29% 4.37% 4.20% 4.20% 4.30%
4.27 4.34 4.17 4.17 4.27
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
approximating 35%, using dollar amounts in thousands and actual number of days
in the periods and are before the effect of reserve requirements. Loan fees, as
well as nonaccrual loans and their related income effect, have been included in
the calculation of average interest yields/rates.
15
<PAGE> 17
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Quarter ended Six months ended
-------------------------------------- -----------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1997 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for credit losses $25 $25 $25 $50 $50
Net revenue from acquired property (3) (3) (1) (6) (9)
- ------------------------------------------------------------------------------------------------------------
Credit quality expense $22 $22 $24 $44 $41
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Credit quality expense, defined as the provision for credit losses less the net
revenue from acquired property, decreased $2 million in the second quarter of
1997, compared with the second quarter of 1996, as a result of a $2 million
increase in net revenue from acquired property.
A summary of the Corporation's net credit losses is presented on the following
page. The $6 million increase in net credit losses, compared with the second
quarter of 1996, primarily resulted from a $3 million increase in credit card
net credit losses, and a $2 million increase in other consumer credit. Net
credit losses were unchanged compared with the first quarter of 1997, reflecting
lower domestic commercial losses and lower credit card net credit losses offset
by lower international recoveries. The decrease in credit card net credit losses
resulted from lower losses in the CornerStone(SM) portfolio. At June 30, 1997,
the CornerStone(SM) credit card portfolio had total outstandings of $539
million, compared with $574 million at March 31, 1997, and $631 million at
December 31, 1996.
The $10 million increase in net credit losses in the first half of 1997,
compared with the first half of 1996, resulted from an increase in credit card
net credit losses, partially offset by lower commercial real estate net credit
losses and an increase in international loan recoveries. The increase in credit
card net credit losses resulted from the return to a more normal level of
delinquencies in the CornerStone(SM) portfolio following the creation of the
accelerated resolution portfolio in December 1995. The net carrying value of
the accelerated resolution portfolio at June 30, 1997, was $9 million, compared
with $19 million at March 31, 1997, and $30 million at December 31, 1996.
The Corporation maintains a credit loss reserve that, in management's judgment,
is adequate to absorb future losses inherent in the loan portfolio. Management
establishes the credit loss reserve using a documented loan loss assessment
process that estimates loss potential in the portfolio as a whole. For further
information regarding the methodology used in determining the adequacy of the
reserve, see the "Reserve for credit losses and review of net credit losses"
discussion in the Corporation's 1996 Annual Report on Form 10-K. The reserve
for credit losses totaled $511 million at June 30, 1997, compared with $525
million at December 31, 1996, and $467 million at June 30, 1996. The $44
million increase in the reserve for credit losses from June 30, 1996, reflects
the additional fourth quarter 1996 credit loss provision related to the credit
card portfolio and $23 million of reserves acquired in the lease financing
acquisitions.
The ratio of the loan loss reserve to nonperforming loans at June 30, 1997, was
570%, compared with 556% at year-end 1996 and 361% at June 30, 1996. 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 loan portfolio mix. The increase in this ratio
from June 30, 1996, primarily resulted from a decrease in the level of
nonperforming loans.
16
<PAGE> 18
CREDIT QUALITY EXPENSE AND RESERVE FOR CREDIT LOSSES (CONTINUED)
<TABLE>
<CAPTION>
Quarter ended Six months ended
---------------------------------------- ----------------------
CREDIT LOSS RESERVE ACTIVITY (a) JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1997 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of period $ 518 $ 525 $ 468 $ 525 $ 471
Credit losses:
Domestic:
Commercial and financial 1 9 8 10 15
Commercial real estate -- 1 -- 1 8
Consumer credit:
Credit cards 33 33 31 66 50
Consumer mortgage 1 -- 1 1 4
Other consumer credit 6 6 5 12 10
Lease finance assets 2 -- -- 2 --
- -------------------------------------------------------------------------------------------------------------------------
Total domestic credit losses 43 49 45 92 87
- -------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial (2) (4) (10) (6) (12)
Commercial real estate (2) (3) (2) (5) (7)
Consumer credit:
Credit cards (3) (2) (4) (5) (7)
Consumer mortgage (1) -- (1) (1) (2)
Other consumer credit (1) (3) (2) (4) (4)
Lease finance assets (2) -- -- (2) --
- -------------------------------------------------------------------------------------------------------------------------
Total domestic (11) (12) (19) (23) (32)
International -- (5) -- (5) (1)
- -------------------------------------------------------------------------------------------------------------------------
Total recoveries (11) (17) (19) (28) (33)
- -------------------------------------------------------------------------------------------------------------------------
Net credit losses (recoveries):
Domestic:
Commercial and financial (1) 5 (2) 4 3
Commercial real estate (2) (2) (2) (4) 1
Consumer credit:
Credit cards 30 31 27 61 43
Consumer mortgage -- -- -- -- 2
Other consumer credit 5 3 3 8 6
Lease finance assets -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Total domestic 32 37 26 69 55
International -- (5) -- (5) (1)
- -------------------------------------------------------------------------------------------------------------------------
Total net credit losses 32 32 26 64 54
Provision for credit losses 25 25 25 50 50
- -------------------------------------------------------------------------------------------------------------------------
Reserve at end of period $ 511 $ 518 $ 467 $ 511 $ 467
- -------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.82% 1.88% 1.71% 1.82% 1.71%
- -------------------------------------------------------------------------------------------------------------------------
Annualized net credit losses
to average loans .46% .48% .40% .47% .41%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the reserve and net credit losses on segregated assets.
17
<PAGE> 19
NONINTEREST REVENUE
<TABLE>
<CAPTION>
Quarter ended Six months ended
----------------------------------- ---------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1997 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fee revenue:
Trust and investment revenue:
Investment management:
Mutual fund $ 90 $ 87 $ 84 $ 177 $167
Private asset 42 42 38 84 73
Institutional asset 41 37 35 78 69
- ------------------------------------------------------------------------------------------------------------------------
Total investment management revenue 173 166 157 339 309
Administration/Custody:
Mutual fund 33 30 26 63 53
Private asset 4 4 3 8 6
Institutional trust 73 66 62 139 121
- ------------------------------------------------------------------------------------------------------------------------
Total administration/custody revenue 110 100 91 210 180
- ------------------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 283 266 248 549 489
Cash management and deposit transaction charges 59 56 52 115 101
Mortgage servicing fees 53 51 44 104 85
Foreign currency and securities trading revenue 25 25 20 50 41
Credit card fees 25 24 30 49 63
Information services fees 13 13 11 26 20
Other 82 101 69 183 178
- ------------------------------------------------------------------------------------------------------------------------
Total fee revenue 540 536 474 1,076 977
Gains on sale of securities -- -- -- -- 1
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue $540 $536 $474 $1,076 $978
- ------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of total revenue (FTE) 59% 59% 56% 59% 57%
Trust and investment fee revenue
as a percentage of total revenue (FTE) 31% 29% 29% 30% 28%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fee revenue increased $66 million, or 14%, in the second quarter of 1997,
compared with the prior-year period. The increase in fee revenue resulted
primarily from a $35 million increase in trust and investment fees, a $9
million increase in mortgage servicing fees and a $7 million increase in cash
management and deposit transaction charges.
Total trust and investment fee revenue
The $35 million, or 14%, increase in trust and investment fee revenue in the
second quarter of 1997, compared with the prior-year period, resulted from a
$16 million, or 10%, increase in investment management revenue and a $19
million, or 19%, increase in administration/custody revenue.
The increase in investment management revenue resulted from a $6 million, or
19%, increase in institutional asset management revenue, a $6 million, or 7%,
increase in mutual fund management revenue and a $4 million, or 12%, increase
in private asset management revenue. The increases in institutional asset and
private asset management revenue resulted primarily 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
mutual fund assets managed at Dreyfus. Mutual fund management fees are
discussed further on the following pages.
Buck Consultants, Inc.
The Buck Consultants, Inc. (Buck) acquisition will impact trust and investment
fee revenue in the second half of 1997. Buck reported total revenues of
approximately $240 million for its fiscal year ended March 31, 1997. Including
the
18
<PAGE> 20
NONINTEREST REVENUE (CONTINUED)
full year impact of revenues from a late 1996 acquisition, Buck's annual
revenues would have totaled approximately $270 million.
The increase in administration/custody fee revenue resulted from an $11
million, or 17%, increase in institutional trust fees and a $7 million, or 23%,
increase in mutual fund administration/custody revenue. These increases
resulted primarily from new business and higher transaction volumes, as well as
a $6 million increase in securities lending revenue, which is included in
institutional trust fees.
In April 1997, the Corporation announced its intention to sell its Corporate
Trust business. On July 30, 1997, the Corporation signed a definitive agreement
to sell this business to Chase Manhattan Bank. This business generated $26
million of revenue in 1996 including approximately $16 million of fee revenue.
The sale is not expected to materially affect the Corporation's earnings and
will not affect the Corporation's other trust businesses. It is anticipated
that this transaction will be completed in the fourth quarter of 1997.
As shown in the table below, the market value of trust assets under management
was $286 billion at June 30, 1997, a $27 billion increase from $259 billion at
March 31, 1997. This increase resulted from a general market increase and new
business. The equity and fixed income markets both recorded strong performances
during the second quarter. At June 30, 1997, compared to March 31, 1997, the
S&P 500 index increased 16.9% while the Lehman Brothers Long-Term Government
Bond Index increased 5.5%.
MARKET VALUE OF ASSETS UNDER MANAGEMENT IN WHOLLY OWNED AND AFFILIATED
COMPANIES
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in billions) 1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mutual funds managed-proprietary:
Taxable money market funds:
Institutions $ 30 $ 27 $ 27 $ 26 $ 25
Individuals 9 10 9 10 9
Equity funds 19 16 15 14 14
Tax-exempt bond funds 17 16 17 17 18
Tax-exempt money market funds 7 8 7 7 7
Fixed-income funds 4 4 5 5 5
- --------------------------------------------------------------------------------------------------------
Total proprietary mutual funds managed 86 81 80 79 78
Mutual funds managed-nonproprietary 8 7 7 6 5
- --------------------------------------------------------------------------------------------------------
Total managed mutual fund assets $ 94 $ 88 $ 87 $ 85 $ 83
Private asset 33 28 28 26 26
Institutional asset (a) 159 143 141 133 127
- --------------------------------------------------------------------------------------------------------
Total market value of assets
under management $286 $259 $256 $244 $236
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes assets managed at Pareto Partners of $23 billion at June 30, 1997,
$21 billion at March 31, 1997, $20 billion at December 31, $18 billion at
September 30, and $16 billion at June 30, 1996. Prior to March 31, 1997,
these assets were not included in the prior disclosures of the Corporation's
total assets under management following the sale of a portion of the
Corporation's ownership of Pareto Partners in the second quarter of 1996.
The Corporation has had a 30% equity interest in Pareto Partners since the
second quarter of 1996.
The market value of assets under administration/custody, shown in the table on
the following page, was $1,306 billion at June 30, 1997, an increase of $245
billion compared with $1,061 billion at March 31, 1997. This increase resulted
19
<PAGE> 21
NONINTEREST REVENUE (CONTINUED)
from $150 billion of assets acquired from Canada Trust on June 30, 1997, by
CIBC Mellon, a joint venture in which the Corporation has a 50% equity
ownership interest, as well as a general market increase and new business.
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY IN WHOLLY OWNED AND
AFFILIATED COMPANIES
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in billions) 1997 1997 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional trust $1,213 (a) $ 976 $ 962 $819 $794
Mutual fund 63 58 57 60 57
Private asset 30 27 27 26 25
- ---------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $1,306 $1,061 $1,046 $905 $876
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the $150 billion of assets acquired from Canada Trust on
June 30, 1997.
Mutual fund management fees
Mutual fund management fees are based upon the average net assets of each fund.
Average proprietary funds managed at Dreyfus in the second quarter of 1997 were
$85 billion, unchanged from the first quarter of 1997 and up $6 billion from
$79 billion in the second quarter of 1996. The increase from the prior-year
period resulted primarily from a $4 billion average increase in equity funds.
Average proprietary funds managed at Dreyfus, compared with the first quarter
of 1997, reflect a $1 billion increase in equity funds, offset by decreases in
other mutual funds, principally money market funds. Equity funds averaged $17
billion for the second quarter of 1997 and totaled $19 billion at June 30,
1997.
MANAGED MUTUAL FUND FEE REVENUE
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------------------ ---------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1997 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managed mutual fund fees $99 $98 $93 $197 $185
Less: Fees waived and fund expense
reimbursements 9 11 9 20 18
- ---------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $90 $87 $84 $177 $167
- ---------------------------------------------------------------------------------------------------------
Net managed mutual fund fees by
fund category:
Proprietary funds:
Taxable money market funds:
Institutions $16 $15 $14 $ 31 $ 28
Individuals 9 9 10 18 20
Equity funds 26 24 21 50 39
Tax-exempt bond funds 24 24 24 48 50
Tax-exempt money market funds 7 7 7 14 14
Fixed income funds 6 5 6 11 12
- ---------------------------------------------------------------------------------------------------------
Total proprietary fund fees 88 84 82 172 163
Nonproprietary fund management fees 2 3 2 5 4
- ---------------------------------------------------------------------------------------------------------
Net managed mutual fund fees $90 $87 $84 $177 $167
- ---------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 22
NONINTEREST REVENUE (CONTINUED)
Cash management and deposit transaction charges
The $7 million, or 12%, increase in cash management and deposit transaction
charges resulted primarily from higher volumes of business in customer
receivables, payables and treasury management products.
Mortgage servicing fees
The $9 million, or 19%, increase in mortgage servicing fees in the second
quarter of 1997, compared with the prior-year period, resulted from a higher
level of mortgage servicing rights acquired through portfolio acquisitions. At
June 30, 1997, the Corporation's total servicing portfolio was $75 billion,
comprised of $65 billion of residential and $10 billion of commercial
servicing. At June 30, 1996, the total servicing portfolio was $55 billion,
comprised of $46 billion of residential and $9 billion of commercial servicing.
On July 14, 1997, the Corporation acquired the servicing rights to $7.9 billion
of commercial securitized transactions and certain other special transactions.
As a result of this acquisition, the Corporation became the second largest
servicer of commercial mortgages in the nation.
Foreign currency and securities trading revenue
The $5 million, or 24%, increase in foreign currency and securities trading
revenue in the second quarter of 1997, compared with the prior-year period, was
attributable to higher foreign exchange fees earned as a result of higher
levels of market volatility and customer activity.
Credit card fees
The $5 million, or 17%, decrease in credit card fee revenue in the second
quarter of 1997, compared with the second quarter of 1996, resulted from the
sale of the AAA credit card portfolio in November 1996 and lower fee revenue
from the securitized credit card portfolio, due in part to higher credit losses
in this portfolio. Additional information on the effect of the credit card
securitization is presented in the table on the following page.
Information services fees
The $2 million, or 15%, increase in information services fee revenue, compared
with the second quarter of 1996, resulted from a higher volume of third party
ATM transactions processed for network services clients. On July 8, 1997, the
Corporation sold 50% of its interest in the R-M Trust Company to the Canadian
Imperial Bank of Commerce. The R-M Trust Company offers transfer agency,
trustee and related services to Canadian and international organizations. As a
result of this transaction, the R-M Trust Company will be renamed CIBC Mellon
Trust Company. The Corporation will account for its interest in CIBC Mellon
Trust Company under the equity method of accounting. The net results of this
joint venture will be recorded as information services fee revenue. The R-M
Trust Company reported information services fee revenue of approximately $7
million in the second quarter of 1997. It is expected that this transaction
will not have a significant impact on the Corporation's financial results.
Other fee revenue
Other fee revenue was $82 million in the second quarter of 1997, an increase of
$13 million compared with the second quarter of 1996. This increase resulted
from a $7 million increase in servicing fee revenue from the insurance premium
finance loan securitization and a net $6 million increase resulting from the
realization of lease residuals, the sale of equity securities and other assets,
and higher syndication fees. Additional information on the effect of the loan
securitization is presented in the table on page 23.
21
<PAGE> 23
NONINTEREST REVENUE (CONTINUED)
Second quarter 1997 compared with first quarter 1997
Fee revenue increased $4 million in the second quarter of 1997, compared with
the first quarter of 1997. Trust and investment fee revenue increased $17
million, or 6%. This increase resulted from higher transaction volumes, new
business and higher market values of assets managed. Other fee revenue
decreased $19 million due to the seasonal decrease in the second quarter of
1997 of fees from electronic filing of income tax returns. Substantially all of
this revenue is recognized in the first quarter of each year.
Year-to-date 1997 compared with year-to-date 1996
Fee revenue totaled $1,076 million in the first six months of 1997, a $99
million increase compared with the prior-year period, primarily resulting from
the same factors responsible for the second quarter 1997 increase as compared
to the prior-year period. Partially offsetting this increase was the $28
million gain on the home equity loan securitization that was recorded in other
fee revenue during the first quarter of 1996.
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 is shown below.
SECURITIZED CREDIT CARD RECEIVABLES
<TABLE>
<CAPTION>
Quarter ended Six months ended
---------------------------------- --------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1997 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lower net interest revenue $ 22 $ 23 $ 22 $ 45 $ 46
Lower net credit losses 15 14 12 29 22
Higher fee revenue 6 9 10 15 23
Lower loans-average 950 950 950 950 950
- ----------------------------------------------------------------------------------------------
</TABLE>
SECURITIZED HOME EQUITY LOANS
<TABLE>
<CAPTION>
Quarter ended Six months ended
---------------------------------- --------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1997 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lower net interest revenue $ 6 $ 6 $ 6 $ 12 $ 6
Higher fee revenue 3 4 3 7 3
Lower loans-average 650 650 650 650 336
- ----------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 24
LOAN SECURITIZATIONS (CONTINUED)
<TABLE>
<CAPTION>
SECURITIZED INSURANCE PREMIUM Quarter ended Six months ended
FINANCE LOANS ------------------------------------- ---------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(in millions) 1997 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lower net interest revenue $ 7 $ 7 $ - $ 14 $ -
Higher fee revenue 7 7 - 14 -
Lower loans-average 500 500 - 500 -
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
OPERATING EXPENSE
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------------- -------------------
JUNE 30, March 31, June 30, JUNE 30, June 30,
(dollar amounts in millions) 1997 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Staff expense $276 $268 $255 $ 544 $ 532
Net occupancy expense 54 52 50 106 106
Professional, legal and other purchased services 46 46 50 92 97
Business development 38 37 35 75 68
Equipment expense 36 36 36 72 71
Amortization of mortgage servicing assets
and purchased credit card relationships 28 28 27 56 55
Amortization of goodwill and
other intangible assets 27 27 24 54 49
Communications expense 25 26 24 51 47
Other expense 41 45 40 86 84
- -----------------------------------------------------------------------------------------------------------
Operating expense before net
revenue from acquired property and
trust-preferred securities expense 571 565 541 1,136 1,109
Trust-preferred securities expense 19 20 -- 39 --
Net revenue from acquired property (3) (3) (1) (6) (9)
- ------------------------------------------------------------------------------------------------------------
Total operating expense $587 $582 $540 $1,169 $1,100
- -----------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 25,500 25,200 24,600 25,400 24,600
- -----------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 62% 62% 64% 62% 64%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 59% 59% 61% 59% 62%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before net revenue from acquired property and
trust-preferred securities expense, as a percentage of revenue, computed on
a taxable equivalent basis, excluding gains on the sale of securities.
Operating expense before net revenue from acquired property and trust-preferred
securities expense increased $30 million, or 5%, in the second quarter of 1997,
compared with the prior-year period.
Staff expense increased $21 million, compared with the second quarter of 1996,
primarily from higher salaries expense, due in part to the leasing
acquisitions, an increase in incentive expense and higher expense of temporary
help and contract programmers.
The $3 million increase in the amortization of goodwill and other intangibles,
compared with the second quarter of 1996, resulted from the 1996 leasing
acquisitions. The increase in other expenses, including net occupancy and
business development resulted from expenses in support of revenue growth and
acquisitions.
23
<PAGE> 25
OPERATING EXPENSE (CONTINUED)
The $19 million of trust-preferred securities expense resulted from the
issuance of $1 billion of these securities in December 1996. The proceeds from
these securities were used to fund interest-earning assets. See note 13 in the
Corporation's 1996 Annual Report on Form 10-K for a further discussion of these
securities.
Operating expense before net revenue from acquired property and trust-preferred
securities expense increased $6 million in the second quarter of 1997, compared
with the first quarter of 1997. This increase primarily resulted from an $8
million increase in staff expense, partially offset by a $4 million decrease in
other expense. The increase in staff expense primarily reflects higher
incentive expense and higher expense of temporary help and contract
programmers.
The Corporation sold 50% of its interest in the R-M Trust Company on July 8,
1997. As a result of this transaction, the Corporation will account for its
remaining interest under the equity method of accounting. The net results from
this joint venture will be recorded as information services fee revenue. The
R-M Trust Company recorded operating expense of approximately $6 million in the
second quarter of 1997, primarily in staff expense.
The $27 million increase in operating expense before net revenue from acquired
property and trust-preferred securities expense in the first half of 1997,
compared with the first half of 1996, primarily resulted from the same factors
responsible for the second quarter 1997 increase as compared to the prior-year
period. Also impacting this comparison were charges recorded in the first
quarter of 1996 of $18 million for the Corporation's retirement enhancement
program and $6 million related to the reconfiguration of the retail delivery
system.
INCOME TAXES
The provision for income taxes totaled $216 million in the first half of 1997,
compared with $205 million in the first half of 1996. The Corporation's
effective income tax rate for the first half of 1997 was 36.3%, compared with
36.5% for the first half of 1996. It is currently anticipated that the
effective income tax rate will remain at approximately 36.3% for the remainder
of 1997.
24
<PAGE> 26
ASSET/LIABILITY MANAGEMENT
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------
JUNE 30, March 31, June 30,
(average balances in millions) 1997 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,081 $ 1,032 $ 1,387
Trading account securities 210 161 181
Securities 5,600 6,018 6,658
Loans 27,806 27,404 26,798
- ----------------------------------------------------------------------------------------
Total interest-earning assets 34,697 34,615 35,024
Noninterest-earning assets 8,233 8,098 7,541
Reserve for credit losses (517) (526) (469)
- ----------------------------------------------------------------------------------------
Total assets $42,413 $42,187 $42,096
- ---------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $33,965 $33,758 $32,058
Wholesale and purchased funds 8,448 8,429 10,038
- ---------------------------------------------------------------------------------------
Funds supporting total assets $42,413 $42,187 $42,096
- ---------------------------------------------------------------------------------------
</TABLE>
The decrease in the Corporation's average interest-earning assets in the second
quarter of 1997, compared with the second quarter of 1996, reflects a $1,058
million decrease in average securities and a $306 million decrease in average
money market investments, partially offset by a $1,008 million increase in
loans. The decrease in average securities reflects a reduction in deposits with
pledging requirements in the second quarter of 1997, compared with the
prior-year period. Average loans increased as a result of the lease financing
acquisitions and loan growth, partially offset by the AAA credit card sale and
the insurance premium finance loan securitization. Excluding the effects of the
lease financing acquisitions, the AAA credit card sale and loan securitization,
average loans increased approximately $685 million, compared with the
prior-year period, primarily as a result of increases in corporate banking,
middle market and institutional lending.
Core funds, which are considered to be the most stable sources of funding, are
defined principally as money market and other savings deposits, savings
certificates, demand deposits, 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 $1,652 million in the
second quarter of 1997 from the prior-year period, reflecting higher loan
levels and a higher level of noninterest-earning assets. The increase in
noninterest-earning assets primarily reflects a higher level of goodwill
resulting from the lease financing acquisitions and a higher level of mortgage
servicing assets. Average core funds increased $1,907 million in the second
quarter of 1997 from the prior-year period, primarily reflecting the issuance
of the trust-preferred securities in December 1996 and a higher level of notes
and debentures. Core funds averaged 96% of core assets in the second quarter of
1997, down from 97% in the first quarter of 1997 and up from 95% in the second
quarter of 1996.
Wholesale and purchased funds are defined as deposits in foreign offices,
negotiable certificates of deposit, federal funds purchased and securities
under repurchase agreements, U.S. Treasury tax and loan demand notes, other
time deposits, short-term bank notes, commercial paper and other funds
borrowed. Average wholesale and purchased funds decreased $1,590 million
compared with the prior-year period, primarily reflecting a decrease in
deposits in foreign offices, federal funds purchased and securities under
repurchase agreements and short-term bank notes, partially offset by an
increase in U.S. Treasury tax and loan demand notes and negotiable certificates
of deposit. As a percentage of total average assets, average wholesale and
purchased funds were 20% in the second quarter of 1997 and the first quarter of
1997, and 24% in the second quarter of 1996.
25
<PAGE> 27
COMPOSITION OF LOAN PORTFOLIO
The loan portfolio increased $788 million at June 30, 1997, compared with June
30, 1996, as a result of the $1.6 billion of leases acquired in the Mellon US
Leasing and Mellon First United Leasing acquisitions. This increase was
partially offset by the November 1996 sale of $770 million AAA credit card
loans and the December 1996 $500 million insurance premium finance
securitization. At June 30, 1997, the composition of the loan portfolio was 59%
commercial and 41% consumer.
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $10,796 (a) $10,518 $10,196 $10,747 $11,014
Commercial real estate 1,671 (b) 1,598 1,534 1,564 1,624
Consumer credit:
Consumer mortgage 7,870 7,672 7,772 7,629 7,891
Credit card 1,161 1,197 1,296 2,071 2,120
Other consumer credit 2,590 2,756 2,640 2,668 2,598
- --------------------------------------------------------------------------------------------------------------
Total consumer credit 11,621 11,625 11,708 12,368 12,609
Lease finance assets 2,512 2,477 2,533 2,285 938
- --------------------------------------------------------------------------------------------------------------
Total domestic loans 26,600 26,218 25,971 26,964 26,185
INTERNATIONAL LOANS 1,544 1,307 1,422 1,265 1,171
- --------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned discount (c) $28,144 $27,525 $27,393 $28,229 $27,356
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $7 million of loans subject to the FDIC loss-sharing arrangement.
(b) Includes $52 million of loans subject to the FDIC loss-sharing arrangement.
(c) Excludes segregated assets.
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. Total domestic commercial and financial loans decreased
by $218 million, or 2%, at June 30, 1997, compared to June 30, 1996, primarily
as a result of a decrease in money market loans and the $500 million insurance
premium finance securitization. These decreases were partially offset by
increases in corporate and institutional banking, as well as middle market
lending and business banking. Commercial and financial loans represented 38% of
the total loan portfolio at June 30, 1997, and 40% at June 30, 1996. At June
30, 1997, nonperforming domestic commercial and financial loans were .12% of
total domestic commercial and financial loans, compared with .24% at June 30,
1996. This ratio has been less than 1% for 17 consecutive quarters.
Commercial real estate
The Corporation's $1,671 million domestic commercial real estate loan portfolio
consists of commercial mortgages, which generally are secured by nonresidential
and multifamily residential properties and commercial construction loans
generally with maturities of 60 months or less. Also included in this portfolio
are $283 million of loans that are secured by owner-occupied real estate, but
made for purposes other than the construction or purchase of investment type
real estate. The commercial real estate loan portfolio includes $52 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. Domestic
commercial real estate loans increased by $47 million, or 3%, at June 30, 1997,
compared with June 30, 1996. The increase resulted primarily from new loan
originations partially offset by paydowns. Domestic commercial real estate
loans were 6% of total loans at June 30, 1997, unchanged from June 30, 1996.
Nonperforming commercial real estate loans were .55% of total domestic
commercial real estate loans at June 30, 1997, compared with 2.48% at June 30,
1996.
26
<PAGE> 28
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
<TABLE>
<CAPTION>
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS Percent of
June 30, total loans
(in millions) 1997 outstanding
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial mortgage and construction loans $1,336 5%
Owner-occupied loans 283 1
FDIC loss share loans 52 --
- ------------------------------------------------------------------------------------------
Total $1,671 6%
- ------------------------------------------------------------------------------------------
</TABLE>
Consumer mortgage
The consumer mortgage portfolio includes jumbo residential mortgages,
traditional one- to four-family residential mortgages, fixed-term home equity
loans and home equity revolving credit line loans. At June 30, 1997, this
portfolio totaled $7,870 million, a $21 million decrease from June 30, 1996.
This decrease resulted from the sale of jumbo mortgages, primarily offset by
growth in fixed-term home equity loans and an increase in the one- to
four-family residential mortgage warehouse portfolio.
Jumbo mortgages are variable rate residential mortgages that range from
$250,000 to $3 million. These loans totaled $3.4 billion at June 30, 1997, a
decrease of approximately $265 million from June 30, 1996, primarily as a
result of loan sales.
Loans secured by one- to four-family residential mortgages increased
approximately $50 million to $2.0 billion and fixed-term home equity loans
increased approximately $160 million to $1.9 billion. Home equity revolving
credit line loans were $619 million at June 30, 1997, an increase of
approximately $30 million from June 30, 1996. Nonperforming consumer mortgages
were .68% and .73% of total consumer mortgages at June 30, 1997, and June 30,
1996, respectively.
Credit card
At June 30, 1997, credit card loans totaled $1,161 million, a $959 million, or
45%, decrease from June 30, 1996. This decrease primarily resulted from the
November 1996 AAA credit card sale and a reduction in the CornerStone(SM)
portfolio. 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 2.04% at June 30, 1997, compared with 2.25% at March 31, 1997, and 1.64% at
June 30, 1996. The past-due ratios at June 30, 1997, and March 31, 1997, reflect
the change in the mix of the portfolio following the AAA sale. The
CornerStone(SM) credit card portfolio was 47% of total credit cards at June 30,
1997, compared with 34% at June 30, 1996. 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 June 30,
1997, the CornerStone(SM) portfolio totaled $539 million, compared with $574
million at March 31, 1997, and $718 million at June 30, 1996.
Other consumer credit
Other consumer credit, which principally consists of student loans, installment
loans and unsecured personal credit lines, was $2,590 million at June 30, 1997,
a decrease of $8 million from June 30, 1996. Other consumer credit loans are
both secured and unsecured and, in the case of student loans, are government
guaranteed. Student loans comprised approximately 60% of this portfolio at
June 30, 1997.
27
<PAGE> 29
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
Lease finance assets
Lease finance assets totaled $2,512 million at June 30, 1997, an increase of
$1,574 million compared with June 30, 1996, resulting from the lease financing
acquisitions. Lease finance assets represented 9% of the total loan portfolio
at June 30, 1997, up from 3% at June 30, 1996. Nonperforming leases were .37%
of total leases at June 30, 1997, compared with .38% at June 30, 1996.
International loans
Loans to international borrowers totaled $1,544 million at June 30, 1997, up
32% from $1,171 million at June 30, 1996, primarily due to increased activity
with large corporate customers and foreign banks. There were no nonperforming
international loans at June 30, 1997.
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. Interest and principal receipts, fees and loan loss
recoveries on loans in this portfolio are applied to reduce the carrying value
of this portfolio, which totaled $9 million at June 30, 1997, compared with $19
million at March 31, 1997, and $52 million at June 30, 1996. 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.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT
AMOUNTS THAT REPRESENT CREDIT RISK
<TABLE>
<CAPTION>
June 30,
(in millions) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $27,259 (a) $24,384
Standby letters of credit and foreign guarantees 3,881 (b) 3,270
Commercial letters of credit 104 88
Residential mortgage loans serviced with recourse 112 137
Custodian securities lent with indemnification
against broker default of return of securities 28,077 19,896
- -----------------------------------------------------------------------------
</TABLE>
(a) Approximately 23% of these commitments are scheduled to expire within
one year, and approximately 86% are scheduled to expire within five
years.
(b) Net of participations and cash collateral totaling $419 million.
28
<PAGE> 30
CAPITAL
<TABLE>
<CAPTION>
SELECTED CAPITAL DATA
(dollar amounts in millions, JUNE 30, March 31, Dec. 31, June 30,
except per share amounts) 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shareholders' equity $3,377 $3,503 $3,456 $3,332
Common shareholders' equity to assets ratio 7.72% 8.33% 8.11% 7.79%
Tangible common shareholders' equity $2,180 $2,289 $2,218 $2,426
Tangible common equity to assets ratio (a) 5.13% 5.60% 5.36% 5.79%
Total shareholders' equity $3,570 $3,696 $3,746 $3,767
Total shareholders' equity to assets ratio 8.17% 8.79% 8.79% 8.81%
Tier I capital ratio 7.94 8.74 8.38 7.51
Total (Tier I plus Tier II) capital ratio 13.24 13.65 13.58 11.89
Leverage capital ratio 8.20 8.75 8.31 7.24
Book value per common share (b) $13.42 $13.60 $13.43 $12.81
Tangible book value per common share (b) 8.66 8.88 8.62 9.33
Closing common stock price (b) 45.125 36.375 35.50 28.50
Market capitalization 11,353 9,372 9,134 7,414
Common shares outstanding (000) (b) 251,599 257,662 257,294 260,138
- ------------------------------------------------------------------------------------------------------
</TABLE>
(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.
(b) Prior period amounts have been restated to reflect the two-for-one common
stock split distributed on June 2, 1997.
On April 15, 1997, the Corporation authorized a two-for-one split of the
Corporation's common stock. The two-for-one stock split was structured as a
stock dividend of one additional share of common stock paid on each outstanding
share of common stock. The additional shares resulting from the split were
distributed on June 2, 1997, to shareholders of record at the close of business
on May 1, 1997.
Common and total shareholders' equity at June 30, 1997, compared with March 31,
1997, and June 30, 1996, reflects earnings retention offset by net common stock
repurchases. The decrease in total shareholders' equity from June 30, 1996,
resulted from the December 1996 redemption of the $150 million Series I
preferred stock and the February 1997 redemption of the $100 million Series J
preferred stock. The reduction in the Corporation's capital ratios at June 30,
1997, compared with prior periods, also reflects the impact of balance sheet
growth.
Earnings per common share in the second quarter of 1997 reflects the impact of
the repurchase of common shares during 1996 and the first half of 1997. The
Corporation's average level of treasury stock was approximately $325 million
higher in the second quarter of 1997, compared with the second quarter of 1996.
After giving effect to funding the higher level of treasury stock, valued at a
short-term funding rate, the lower share count increased earnings per share 1%
while ongoing business growth increased earnings per share 12%.
COMMON SHARES OUTSTANDING
<TABLE>
<CAPTION>
SECOND QUARTER YEAR TO DATE Full Year
(in millions) 1997 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning shares outstanding 257.7 257.3 274.4
Net shares issued for stock-based benefit plans and
dividend reinvestment plan 1.0 2.9 4.5
Shares repurchased (7.1) (8.6) (21.6)
- --------------------------------------------------------------------------------------------------
Ending shares outstanding 251.6 251.6 257.3
- -------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 31
CAPITAL (CONTINUED)
During the second quarter of 1997, the Corporation repurchased approximately 3
million shares of common stock, completing the 10 million share repurchase
program authorized by the board of directors in May 1996. In addition, during
the second quarter of 1997, the Corporation repurchased approximately 3.5
million shares of common stock that were issued in connection with the Buck
Consultants, Inc. acquisition on July 1, 1997. Since the beginning of 1995, the
Corporation has repurchased approximately 56 million common shares, prior to
any reissuances, as well as warrants for 9 million shares of common stock.
The Corporation also announced that its board of directors has authorized the
repurchase of up to 6 million additional shares of common stock. In addition,
the Corporation has authorized the repurchase of an equivalent number of common
shares that will be issued in connection with the acquisition of 1st Business
Corporation.
<TABLE>
<CAPTION>
RISK-BASED AND LEVERAGE CAPITAL RATIOS June 30,
(dollar amounts in millions) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier I capital:
Common shareholders' equity (a) $ 3,375 $ 3,362
Qualifying preferred stock 193 435
Trust-preferred securities (b) 932 --
Other items (7) (9)
Goodwill and certain other intangibles (1,119) (808)
- ---------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 3,374 2,980
Tier II capital 2,250 1,740
- --------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $ 5,624 $ 4,720
- --------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets:
On-balance-sheet $28,863 $27,710
Off-balance-sheet 13,611 11,973
- --------------------------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $42,474 $39,683
Average assets-leverage capital basis $41,161 $41,175
- --------------------------------------------------------------------------------------------------------------------------
Tier I capital ratio (c) 7.94% 7.51%
Total capital ratio (c) 13.24 11.89
Leverage capital ratio (c) 8.20 7.24
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) In accordance with regulatory guidelines, $2 million of unrealized gains
and $30 million of unrealized losses, net of tax, on assets classified as
available for sale at June 30, 1997 and 1996, 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, while the ratios required to maintain well-capitalized
status are 6%, 10% and 5%, respectively.
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.
Federal regulators use a capital-based supervisory system for all insured
financial institutions. If a financial institution's capital ratios decline
below predetermined levels, it would become subject to a series of increasingly
restrictive regulatory actions. The system categorizes a financial
institution's capital position into one of five categories ranging from
well-capitalized to critically undercapitalized. For an institution to qualify
as well-capitalized, its Tier I, Total and Leverage capital ratios must be at
least 6%, 10% and 5%, respectively. All of the Corporation's banking
30
<PAGE> 32
CAPITAL (CONTINUED)
subsidiaries qualified as well-capitalized at June 30, 1997. The Corporation
intends to maintain the ratios of its banking subsidiaries above the
well-capitalized levels. By maintaining ratios above the regulatory
well-capitalized guidelines, the Corporation's banking subsidiaries receive the
benefit of lower FDIC deposit insurance assessments.
The increase in the Corporation's regulatory capital ratios, compared with
June 30, 1996, reflects 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 trust-preferred securities are not
included as a component of total shareholders' equity on the Corporation's
balance sheet.
In 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 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 assets and purchased credit card relationships.
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1997 1997 1996 1996
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $1,089 $1,097 $1,110 $757
- -------------------------------------------------------------------
</TABLE>
The $332 million increase in goodwill at June 30, 1997, compared with June 30,
1996, resulted from a $296 million increase related to the Mellon US Leasing
acquisition and an $84 million increase related to the Mellon First United
Leasing acquisition, partially offset by $65 million of amortization. Based
upon the current level and amortization schedule, the annual amortization of
goodwill over the next 12 months is expected to be approximately $69 million.
The annual amortization of goodwill for the full years 1998 through 2002 is
expected to be approximately $69 million, $69 million, $68 million, $66 million
and $64 million, respectively. The after-tax impact of the annual amortization
of goodwill for the full years 1998 through 2002 is expected to be
approximately $58 million, $57 million, $57 million, $55 million and $53
million, respectively. The levels of goodwill and purchased core deposit
intangibles are expected to increase by approximately $330 million following
the acquisitions of Buck and 1st Business Corporation.
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1997 1997 1996 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchased core deposit intangibles $ 76 $ 82 $ 88 $ 99
Covenants not to compete -- 2 6 14
Other identified intangibles 32 33 34 36
- --------------------------------------------------------------------------------------------
Total purchased core deposit
and other identified intangibles $108 $117 $128 $149
- --------------------------------------------------------------------------------------------
</TABLE>
The decrease in purchased core deposit and other identified intangibles from
June 30, 1996, resulted from amortization. Based upon the current level and
amortization schedule, the amortization of purchased core deposit and other
identified intangibles over the next 12 months will be approximately $26
million. The annual amortization of purchased core deposit and other identified
intangibles for the full years 1998 through 2002 is expected to be
approximately $26 million, $26 million, $14 million, $8 million and $6 million,
respectively. The after-tax impact of
31
<PAGE> 33
CAPITAL (CONTINUED)
the annual amortization of these items for the full years 1998 through 2002 is
anticipated to be approximately $17 million, $17 million, $9 million, $5
million and $4 million, respectively.
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage servicing assets $960 $822 $745 $650
Purchased credit card relationships 26 27 29 84
- ------------------------------------------------------------------------------------------------
Total mortgage servicing assets and
purchased credit card relationships $986 $849 $774 $734
- ------------------------------------------------------------------------------------------------
</TABLE>
The Corporation capitalized $175 million and $65 million in the second quarters
of 1997 and 1996, respectively, of servicing assets in connection with both
mortgage servicing portfolio purchases and loan originations. Mortgage
servicing assets are amortized in proportion to estimated net servicing income
over the estimated life of the servicing portfolio. Amortization expense
totaled $27 million and $24 million in the second quarters of 1997 and 1996,
respectively. The estimated fair value of capitalized mortgage servicing
assets was $1.1 billion at June 30, 1997. The $58 million decrease in purchased
credit card relationships from June 30, 1996, resulted from the AAA credit card
sale in November 1996 and amortization.
On January 1, 1997, FAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," became effective. 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." The adoption of FAS No. 125 was immaterial to the
Corporation's financial position and results of operations.
LIQUIDITY AND DIVIDENDS
The Corporation's liquidity management objective is to maintain the ability to
meet commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms, including during
periods of market or financial stress. The Corporation's overall approach to
liquidity management is to ensure that sources of liquidity are sufficient in
amount and diversity to accommodate changes in loan demand and core funding
routinely without a material adverse impact on net income. The Corporation's
liquidity position is managed by maintaining adequate levels of liquid assets,
such as money market assets and securities available for sale. Additional
liquidity is available through the Corporation's ability to participate or sell
commercial loans and to securitize selected loan portfolios. The Corporation
also has a $300 million revolving credit agreement, with three years remaining
until maturity, and a $25 million backup line of credit to provide support
facilities for its commercial paper borrowings and for general corporate
purposes.
As shown in the Consolidated Statement of Cash Flows, cash and due from banks
increased by $601 million during the first half of 1997 to $3,447 million at
June 30, 1997. The increase reflected $548 million of net cash provided by
financing activities, $39 million of net cash provided by investing activities
and $3 million of net cash provided by operating activities. Net cash provided
by financing activities primarily reflected an increase in short-term
borrowings and the issuance of longer term debt, partially offset by the
repurchase of common stock. Net cash provided by investing activities
principally reflected a decrease in securities available for sale and proceeds
from the sale of loan portfolios, partially offset by loan growth.
32
<PAGE> 34
LIQUIDITY AND DIVIDENDS (CONTINUED)
In May 1997, Mellon Bank, N.A., the Corporation's principal banking subsidiary,
issued $300 million of subordinated debt at a fixed rate of 7.375%, maturing in
2007. This subordinated debt qualifies as Tier II capital for the Corporation's
risk-based capital calculation. The remaining increase in long-term debt in the
second quarter of 1997 primarily related to medium-term notes. The proceeds
from these issues were used for general corporate purposes. There were no
contractual maturities of the Corporation's long-term debt during the second
quarter of 1997. Contractual maturities of parent term debt will total $200
million in the remainder of 1997, all of which is due in December 1997. At June
30, 1997, the Corporation's senior debt and Mellon Bank, N.A.'s subordinated
debt were rated "A2" by Moody's and "A" by Standard & Poor's. On August 1,
1997, Standard & Poor's revised its ratings outlook on the Corporation and its
affiliates to positive from stable.
On April 15, 1997, the Corporation announced a 10% increase in the quarterly
common stock dividend to $.33 per common share. The increased common dividend
was paid on May 15, 1997, to shareholders of record at the close of business on
April 30, 1997. This is the sixth quarterly common dividend increase that the
Corporation has announced since the beginning of 1994, resulting in a total
common dividend per share increase of 161%. The Corporation paid $162 million
in common stock dividends in the first half of 1997, compared with $154 million
in the prior-year period. In addition, the Corporation paid $10 million in
preferred stock dividends during the first half of 1997 and recorded $3 million
of issue costs as preferred stock dividends in connection with the redemption
of the Series J preferred stock. The common dividend payout ratio was 46% in
the second quarter of 1997, compared with 47% in the second quarter of 1996. On
a tangible earnings per common share basis, the common dividend payout ratio
was 41% in the second quarter of 1997 and 42% in the second quarter of 1996.
Based upon shares outstanding at June 30, 1997, and the current quarterly
common dividend rate of $.33 per share, annualized dividend requirements for
the common and preferred stock are expected to be approximately $350 million.
The parent Corporation's principal sources of cash are interest and dividends
from its subsidiaries. There are, however, certain limitations on the payment
of dividends to the parent Corporation by its bank subsidiaries. For a
discussion of these limitations, see note 21 in the Corporation's 1996 Annual
Report on Form 10-K. Under the more restrictive limitation, the Corporation's
national and state member bank subsidiaries can, without prior regulatory
approval, declare dividends subsequent to June 30, 1997, of approximately $670
million, less any dividends declared and plus or minus net profits or losses,
as defined, between July 1, 1997, and the date of any such dividend
declaration. The national bank subsidiaries declared dividends to the parent
Corporation of $100 million in the first half of 1997, $400 million in 1996 and
$501 million in 1995. Dividends paid to the parent Corporation by nonbank
subsidiaries totaled $15 million in the first half of 1997, $21 million in 1996
and $30 million in 1995. In addition, Mellon Bank, N.A. and The Boston Company
returned $200 million and $150 million, respectively, of capital to the parent
Corporation in 1996.
INTEREST RATE SENSITIVITY ANALYSIS
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest revenue and on the net present
value of the Corporation's assets, liabilities and off-balance-sheet
instruments. Interest rate risk is measured using net interest margin
simulation and asset/liability net present value sensitivity analyses.
Simulation tools serve as the primary means to gauge interest rate exposure.
The net present value sensitivity analysis is the means by which the
Corporation's long-term interest rate exposure is evaluated. These analyses
provide 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
33
<PAGE> 35
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
shown on page 35. 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. Guidelines used
by the Corporation for assuming interest rate risk are presented in the
"Interest rate sensitivity analysis" section on page 46 of the 1996 Annual
Report on Form 10-K.
The table below illustrates the simulation analysis of the impact of a 50, 100
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 June 30,
1997, 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 June 30, 1997, levels and remaining at those
levels thereafter.
<TABLE>
<CAPTION>
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from June 30, 1997 rates
- --------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
compared with June 30, 1997: -------------------------------- -----------------------------
+50bp +100bp +200bp -50bp -100bp -200bp
------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest revenue increase/(decrease) (.4)% (1.0)% (2.2)% .3% .6% .6%
Return on common equity increase/(decrease) (12) bp (26) bp (61) bp 10 bp 18 bp 16 bp
Earnings per share increase/(decrease) $(.02) $(.03) $(.08) $.01 $.02 $.02
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The anticipated impact on net interest revenue under the 50, 100 and 200 basis
point increase scenarios and the increase in net interest revenue under the 50,
100 and 200 basis point decrease scenarios are consistent with the
Corporation's cumulative liability sensitive gap position at the one-year
repricing period as shown in the interest rate sensitivity gap table on page
35.
The interest rate sensitivity gap table shows the repricing characteristics of
the Corporation's interest-earning assets and supporting funds at June 30,
1997. The data are based on contractual repricing or maturities and, where
applicable, management's assumptions as to the estimated repricing
characteristics of certain assets and supporting funds. At June 30, 1997, the
Corporation had a liability sensitive interest rate risk position at the
one-year repricing period. Generally, a liability sensitive gap indicates that
rising interest rates could negatively affect net interest revenue, and falling
rates could positively 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 $3.7 billion,
or 8.5% of total assets, at June 30, 1997. However, because the Corporation did
not want to accept the level of interest rate risk presented by its naturally
asset-sensitive balance
34
<PAGE> 36
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
sheet, it entered into interest rate swaps and other off-balance-sheet
instruments that resulted in a net reduction of $4.2 billion in this cumulative
asset sensitive position. These instruments reduced the cumulative gap at the
one-year repricing period to a liability-sensitive amount of $.5 billion, or
1.2% of total assets. Alternatively, the Corporation could have acquired
additional fixed-rate investment securities or other fixed-rate
interest-earning assets of $4.2 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.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAP AT JUNE 30, 1997
Repricing period
--------------------------------------------------------
0-30 31-90 91-180 181-365 Over 1
(dollar amounts in millions) days days days days year Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets $ 9,987 $ 8,874 $3,032 $2,692 $10,513 $35,098
Funds supporting
interest-earning assets $ 7,174 $ 8,290 $2,700 $2,716 $14,218 $35,098
- ---------------------------------------------------------------------------------------------------------
Subtotal $ 2,813 $ 584 $ 332 $ (24) $(3,705) $ --
Off-balance-sheet instruments $(1,620) $(2,665) $ 180 $ (116) $ 4,221 $ --
- ---------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 1,193 $(2,081) $ 512 $ (140) $ 516 $ --
- ---------------------------------------------------------------------------------------------------------
Cumulative gap $ 1,193 $ (888) $ (376) $ (516) $ -- $ --
- ---------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage
of total assets 2.7% (2.0)% (.9)% (1.2)%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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.
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.
35
<PAGE> 37
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
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. Interest rate swaps,
caps and floors, financial futures and financial options have been approved by
the Corporation for managing the overall corporate interest rate exposure.
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, callable 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. Indexed amortizing swaps involve
the exchange of fixed and variable interest rates; however, their notional
amount and maturities vary based on certain underlying indices. Generally, as
rates fall, the notional amounts decline more rapidly and, as rates increase,
notional amounts decline more slowly. Callable swaps are generic swaps with a
call option at the option of the counterparty. Callable swaps notional amounts
are not based on interest rate indices. The callable swaps entered into by the
Corporation are subject to call options in August 1998, November 1998 and
February 1999, at the option of the counterparty. If after a specified time
period the call options are not exercised, the swaps will remain outstanding
until their contractual maturity date. The Corporation's off-balance-sheet
instruments used to manage its interest rate risk are shown in the table on the
following page. Additional information regarding these contracts is presented
in note 23 in the Corporation's 1996 Annual Report on Form 10-K.
36
<PAGE> 38
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
<TABLE>
<CAPTION>
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
June 30,
(notional amounts in millions) 1997 1998 1999 2000 2001 2002+ 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps: (a)
Notional amount $142 $ 30 $ -- $ -- $ -- $ 700 $ 872
Weighted average rate:
Receive 6.10% 4.63% -- -- -- 6.62% 6.47%
Pay 5.72% 4.64% -- -- -- 5.81% 5.76%
Receive fixed/pay floating
indexed amortizing swaps:
Notional value $ 21 $206 $1,818 $ 253 $211 $ 491 $3,000
Weighted average rate:
Receive 7.14% 6.33% 5.71% 6.31% 6.36% 7.06% 6.08%
Pay 5.85% 5.83% 5.82% 5.83% 5.83% 5.84% 5.82%
Receive fixed/pay floating
callable swaps: (b)
Notional value $ -- $ -- $ 850 $ -- $ -- $ 200 $1,050
Weighted average rate:
Receive -- -- 6.91% -- -- 6.79% 6.88%
Pay -- -- 5.82% -- -- 5.82% 5.82%
Pay fixed/receive floating
generic swaps: (a)
Notional amount $101 $416 $ 203 $ -- $ -- $ 15 $ 735
Weighted average rate:
Receive 5.69% 5.66% 5.83% -- -- 5.86% 5.72%
Pay 6.27% 6.05% 6.20% -- -- 6.63% 6.13%
Other products (c) $351 $-- $ -- $ 40 $ -- $ -- $ 391
- ------------------------------------------------------------------------------------------------------------------------
Total notional amount $615 $652 $2,871 $293 $211 $1,406 $6,048
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic swaps' notional amounts and lives are not based on interest
rate indices.
(b) Expected maturity dates, based upon interest rates at
June 30, 1997, are shown in the table above.
(c) Average rates are not meaningful for these products.
The gross notional amount of off-balance-sheet products used to manage the
Corporation's interest rate risk was $6.0 billion at June 30, 1997, an increase
of $.4 billion from $5.6 billion at March 31, 1997. 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 to assess its
impact on the net interest margin. As discussed on pages 34 and 35, 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 $3.7 billion, before the utilization of
these instruments, to a cumulative one-year liability-sensitive position of $.5
billion at June 30, 1997.
37
<PAGE> 39
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
The following table presents the gross notional amounts of off-balance-sheet
instruments used to manage interest rate risk, identified by the underlying
rate-sensitive instruments.
<TABLE>
<CAPTION>
June 30,
(in millions) 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Instruments associated with deposits $3,400 $3,786
Instruments associated with other liabilities 722 422
Instruments associated with loans 1,926 573
- -------------------------------------------------------------------------
Total notional amount $6,048 $4,781
- -------------------------------------------------------------------------
</TABLE>
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 net interest revenue of $7 million and $13 million
in the second quarter and first half of 1997, compared with interest revenue of
$8 million and $13 million in the second quarter and first half of 1996.
In response to tactical asset/liability management considerations, the
Corporation terminated $200 million of pay fixed-rate generic interest rate
swaps in the first quarter of 1997. These terminations resulted in a net
deferred loss of less than $1 million. This loss will be amortized over the two
years remaining on the original hedge. The Corporation amortized $1 million and
$2 million of termination gains into net interest revenue in the second quarter
and first half of 1997, resulting from terminations in the first quarter of
1997 and full year 1996. No contracts were terminated during the second quarter
of 1997.
The estimated unrealized fair value of the Corporation's interest rate
management off-balance-sheet instruments at June 30, 1997, was a negative $46
million, compared with a negative $118 million at March 31, 1997. This increase
in market value was consistent with the decrease in interest rates during the
second quarter of 1997, which had the corresponding effect of decreasing 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.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR INTEREST
RATE RISK MANAGEMENT PURPOSES (a)
June 30,
(notional amounts in millions) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Interest rate agreements:
Interest rate swaps $5,657 $4,689
Options, caps and floors purchased (b) 40 84
Futures contracts 337 8
Forward rate agreements 14 --
Other products 137 89
- ------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited
to the cost of replacing a contract in a gain position, on which a
counterparty may default. Credit risk associated with interest rate
agreements was $15 million at June 30, 1997, and $4 million at June 30,
1996.
(b) At June 30, 1997 and 1996, there were no options, caps or floors written.
38
<PAGE> 40
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
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 the second quarter and first half of 1997, the Corporation recorded $24
million and $47 million of fee revenue from these activities, primarily from
foreign exchange contracts entered into on behalf of customers, compared with
$19 million and $39 million in the second quarter and first half of 1996. The
total notional values of these contracts were $39 billion at both June 30,
1997, and June 30, 1996, and are included on the off-balance-sheet instruments
used for trading activities table below.
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 would be
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 $2 million at June 30, 1997.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (a)
June 30,
(notional amounts in millions) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency contracts:
Commitments to purchase $12,457 $11,690
Commitments to sell 12,579 11,718
Foreign currency and other option contracts written 606 359
Foreign currency and other option contracts purchased 661 418
Interest rate agreements:
Interest rate swaps 5,499 6,624
Options, caps and floors purchased 1,966 3,295
Options, caps and floors written 1,975 3,422
Futures and forward contracts 3,131 988
- ---------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract in a gain position, on which a counterparty
may default. Credit risk associated with these instruments was $358 million
at June 30, 1997, and $297 million at June 30, 1996.
39
<PAGE> 41
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $ 90 $ 95 $ 94 $131 $130
Acquired property, net of the OREO reserve 72 75 80 78 73
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets (a) $162 $170 $174 $209 $203
- --------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .32% .35% .35% .46% .47%
Total nonperforming assets as a percentage of
total loans and net acquired property .57% .62% .63% .74% .74%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 other real
estate owned (OREO) acquired in connection with the collection effort on loans.
Nonperforming assets do not include the $4 million of segregated assets, net of
reserves, 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 the "Nonperforming assets" discussion and in
note 1 in the Corporation's 1996 Annual Report on Form 10-K.
At June 30, 1997, nonperforming assets totaled $162 million, a decrease of $8
million from March 31, 1997, primarily as a result of the repayment of
commercial loans and a $3 million decrease in acquired property. Nonperforming
assets decreased $41 million, or 20%, compared with June 30, 1996, primarily as
a result of the repayment of commercial real estate loans as well as other
repayments, returns to accrual status and credit losses. The ratio of
nonperforming assets to total loans and net acquired property was .57% at June
30, 1997, the lowest level in the Corporation's history, compared with .62% at
March 31, 1997, and .74% at June 30, 1996. This ratio, which can be expected to
vary over time with changes in the economy, has been lower than 1% for 12
consecutive quarters.
40
<PAGE> 42
NONPERFORMING ASSETS (CONTINUED)
<TABLE>
<CAPTION>
NONPERFORMING ASSETS (a) JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1997 1997 1996 1996 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic nonaccrual loans:
Commercial and financial $ 11 $ 18 $ 21 $ 30 $ 27
Commercial real estate 9 14 16 34 39
Consumer credit:
Consumer mortgage 54 52 50 52 58
Other consumer credit 5 5 1 1 1
Lease finance assets 9 6 6 14 4
- -------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 88 95 94 131 129
Restructured loans 2 - - - 1
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (b) 90 95 94 131 130
- -------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 77 80 86 88 84
Reserve for real estate acquired (9) (9) (10) (10) (11)
- --------------------------------------------------------------------------------------------------------------------
Net real estate acquired 68 71 76 78 73
Other assets acquired 4 4 4 - -
- -------------------------------------------------------------------------------------------------------------------
Total acquired property 72 75 80 78 73
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $162 $170 $174 $209 $203
- -------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective
loan portfolio segments:
Domestic commercial and financial loans .12% .17% .21% .28% .24%
Domestic commercial real estate loans .55 .87 1.03 2.15 2.48
Domestic consumer mortgage loans .68 .68 .65 .68 .73
Domestic lease finance assets .37 .27 .23 .62 .38
Total loans .32 .35 .35 .46 .47
Nonperforming assets as a percentage of
total loans and net acquired property .57 .62 .63 .74 .74
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes $10 million, $17 million, $13 million, $49 million and $51 million,
respectively, of loans with both principal and interest less than 90 days
past due but placed on nonaccrual status by management discretion.
<TABLE>
<CAPTION>
CHANGE IN NONPERFORMING LOANS FOR THE THREE MONTHS ENDED JUNE 30 (a)
Domestic
-------------------------------------------------------------
Lease Total
Commercial Commercial Consumer Finance -----------------
(in millions) & Financial Real Estate Credit Assets 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of period $18 $14 $57 $ 6 $95 $177
Additions 3 1 11 7 22 24
Payments (b) (6) (5) (5) (3) (19) (47)
Return to accrual status -- (1) (3) -- (4) (6)
Credit losses (2) -- (1) (1) (4) (8)
Transfers to acquired property -- -- -- -- -- (10)
- ---------------------------------------------------------------------------------------------------------------------
Nonperforming loans at June 30 $13 $ 9 $59 $ 9 $90 $130
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes interest applied to principal and sales.
41
<PAGE> 43
NONPERFORMING ASSETS (CONTINUED)
<TABLE>
<CAPTION>
CHANGE IN NONPERFORMING LOANS FOR THE SIX MONTHS ENDED JUNE 30 (a)
Domestic
------------------------------------------------
Lease Total
Commercial Commercial Consumer Finance -------------
(in millions) & Financial Real Estate Credit Assets 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of period $21 $16 $51 $ 6 $94 $167
Additions 51 4 24 9 88 77
Payments (b) (48) (6) (8) (3) (65) (58)
Return to accrual status -- (4) (5) (2) (11) (17)
Credit losses (11) (1) (1) (1) (14) (26)
Transfers to acquired property -- -- (2) -- (2) (13)
- ------------------------------------------------------------------------------------------------------
Nonperforming loans at June 30 $13 $ 9 $59 $ 9 $90 $130
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
(b) Includes interest applied to principal and sales.
<TABLE>
<CAPTION>
ADDITIONAL NONPERFORMING LOAN DATA (a) June 30,
(dollar amounts in millions) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Book balance $ 90 $130
Contractual balance 105 172
Book balance as a percentage of contractual balance 85% 75%
Interest receipts applied to reduce principal:
Second quarter $ -- $ 2
Year-to-date -- 3
Interest receipts recognized in interest revenue:
Second quarter 2 3
Year-to-date 5 6
- ---------------------------------------------------------------------------
</TABLE>
(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 is presented in
note 1 in the Corporation's 1996 Annual Report on Form 10-K.
IMPAIRED LOANS
<TABLE>
<CAPTION>
Three months ended
June 30,
(dollar amounts in millions) 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Impaired loans (a) $22 $67
Average impaired loans 28 84
Interest revenue recognized on impaired loans (b) 2 3
</TABLE>
- ---------------------
(a) Includes $7 million and $13 million of impaired loans with a related
impairment reserve of $1 million and $2 million at June 30, 1997, and
June 30, 1996, respectively.
(b) All income was recognized using the cash basis method of income recognition.
Acquired property totaled $72 million at June 30, 1997, $75 million at March
31, 1997, and $73 million at June 30, 1996.
42
<PAGE> 44
NONPERFORMING ASSETS (CONTINUED)
<TABLE>
<CAPTION>
CHANGE IN ACQUIRED PROPERTY Three months ended Six months ended
June 30, June 30,
(in millions) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OREO at beginning of period, net of the OREO reserve $71 $73 $76 $69
Foreclosures 2 11 5 15
Sales (5) (7) (13) (11)
Write-downs, losses, OREO provision and other -- (4) -- --
- ------------------------------------------------------------------------------------------------------------------
OREO at end of period, net of the OREO reserve 68 73 68 73
Other acquired assets 4 -- 4 --
- ------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve (a) $72 $73 $72 $73
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes segregated assets.
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 that
indicate a deterioration in the fair value of the property. Activity in the
Corporation's OREO reserve is presented in the table below.
<TABLE>
<CAPTION>
CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE) Three months ended Six months ended
June 30, June 30,
(in millions) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $9 $13 $10 $18
Write-downs on real estate acquired -- (2) -- (3)
Provision -- -- (1) (4)
- ----------------------------------------------------------------------------------------------------------------
Ending balance $9 $11 $ 9 $11
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming. All
loans in this table are well secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
PAST-DUE LOANS JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(dollar amounts in millions) 1997 1997 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 38 $ 37 $ 35 $ 35 $ 35
Ratio (a) .48% .48% .45% .45% .44%
Credit card (b) 24 27 29 38 35
Ratio (a) 2.04% 2.25% 2.24% 1.84% 1.64%
Student - government guaranteed 38 40 47 50 30
Ratio (a) 2.46% 2.52% 3.01% 3.23% 2.00%
Other consumer 2 1 2 1 1
Ratio (a) .15% .13% .18% .13% .13%
- -----------------------------------------------------------------------------------------------------------
Total consumer 102 105 113 124 101
Ratio (a) .88% .91% .97% 1.00% .80%
- -----------------------------------------------------------------------------------------------------------
Commercial (c) 9 12 10 8 7
- -----------------------------------------------------------------------------------------------------------
Total past-due loans $111 $ 117 $123 $132 $ 108
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) 90 days or more past due as a percentage of quarter-end loan balances.
(b) Excludes past due CornerStone(sm) credit card loans included in the
accelerated resolution portfolio.
(c) Includes lease finance assets.
43
<PAGE> 45
CONSOLIDATED BALANCE SHEET
Mellon Bank Corporation (and its subsidiaries)
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, June 30,
(dollar amounts in millions) 1997 1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets Cash and due from banks $ 3,447 $ 2,915 $ 2,846 $ 2,765
Federal funds sold and securities under resale agreements 674 197 460 291
Interest-bearing deposits with banks 466 614 419 810
Other money market investments 120 48 113 157
Trading account securities 112 110 84 112
Securities available for sale 3,333 3,376 4,111 4,450
Investment securities (approximate fair value
of $2,257, $2,274, $2,365 and $2,481) 2,249 2,306 2,375 2,515
Loans, net of unearned discount of $48, $50, $57 and $59 28,144 27,525 27,393 27,356
Reserve for credit losses (511) (518) (525) (467)
--------- --------- ---------- -------
Net loans 27,633 27,007 26,868 26,889
Customers' acceptance liability 300 265 238 251
Premises and equipment 581 572 569 556
Goodwill and other intangibles 1,197 1,214 1,238 906
Mortgage servicing assets and purchased
credit card relationships 986 849 774 734
Acquired property, net of reserves of $9, $9, $10 and $11 72 75 80 73
Other assets 2,542 2,520 2,421 2,260
----------------------------------------------------------------------------------------------------------------
Total assets $43,712 $42,068 $42,596 $42,769
----------------------------------------------------------------------------------------------------------------
Liabilities Noninterest-bearing deposits in domestic offices $ 9,483 $ 8,371 $ 8,692 $ 8,506
Interest-bearing deposits in domestic offices 19,431 18,887 19,965 18,752
Interest-bearing deposits in foreign offices 2,412 2,678 2,717 4,446
----------------------------------------------------------------------------------------------------------------
Total deposits 31,326 29,936 31,374 31,704
U.S. Treasury tax and loan demand notes 908 730 474 604
Term federal funds purchased 829 580 481 560
Federal funds purchased and securities under
repurchase agreements 790 1,368 742 1,801
Short-term bank notes 63 35 135 330
Commercial paper 58 50 122 187
Other funds borrowed 351 367 293 279
Acceptances outstanding 300 265 238 251
Other liabilities 1,568 1,539 1,483 1,315
Notes and debentures (with original
maturities over one year) 2,959 2,512 2,518 1,971
----------------------------------------------------------------------------------------------------------------
Total liabilities 39,152 37,382 37,860 39,002
- --------------------------------------------------------------------------------------------------------------------------------
Trust- Guaranteed preferred beneficial interests
preferred in Corporation's junior subordinated
securities deferrable interest debentures 990 990 990 --
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Preferred stock 193 193 290 435
equity Common shareholders' equity:
Common stock - $.50 par value
Authorized - 400,000,000 shares
Issued - 294,330,960 (a); 147,165,480; 147,165,480 and
147,165,480 shares 147 74 74 74
Additional paid-in capital 1,812 1,875 1,866 1,855
Retained earnings 2,664 2,569 2,480 2,297
Net unrealized gain (loss) on assets available
for sale, net of tax 2 (38) (1) (30)
Treasury stock of 42,732,010 (a); 18,334,060;
18,518,290; and 17,096,369 shares, at cost (1,248) (977) (963) (864)
-----------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 3,377 3,503 3,456 3,332
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,570 3,696 3,746 3,767
----------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities
and shareholders' equity $43,712 $42,068 $42,596 $42,769
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects the two-for-one stock split distributed on
June 2, 1997.
See accompanying Notes to Financial Statements.
44
<PAGE> 46
CONSOLIDATED INCOME STATEMENT
Mellon Bank Corporation (and its subsidiaries)
<TABLE>
<CAPTION>
Six months ended
JUNE 30, June 30,
(in millions, except per share amounts) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees of $36 and $48) $1,124 $1,116
Interest-bearing deposits with banks 14 19
Federal funds sold and securities under resale agreements 11 13
Other money market investments 2 3
Trading account securities 5 4
Securities 195 195
-----------------------------------------------------------------------------------------------------------
Total interest revenue 1,351 1,350
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 367 332
Deposits in foreign offices 67 102
Federal funds purchased and securities under repurchase agreements 38 53
Other short-term borrowings 48 66
Notes and debentures 91 62
-----------------------------------------------------------------------------------------------------------
Total interest expense 611 615
- -------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 740 735
revenue Provision for credit losses 50 50
-----------------------------------------------------------------------------------------------------------
Net interest revenue after provision for losses 690 685
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fees 549 489
revenue Cash management and deposit transaction charges 115 101
Mortgage servicing fees 104 85
Foreign currency and securities trading 50 41
Credit card fees 49 63
Information services fees 26 20
Other income 183 178
-----------------------------------------------------------------------------------------------------------
Total fee revenue 1,076 977
Gains on sales of securities -- 1
-----------------------------------------------------------------------------------------------------------
Total noninterest revenue 1,076 978
- -------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 544 532
expense Net occupancy expense 106 106
Professional, legal and other purchased services 92 97
Business development 75 68
Equipment expense 72 71
Amortization of mortgage servicing assets and purchased credit card relationships 56 55
Amortization of goodwill and other intangible assets 54 49
Communications expense 51 47
Other expense 86 84
Trust-preferred securities expense 39 --
Net revenue from acquired property (6) (9)
------------------------------------------------------------------------------------------------------------
Total operating expense 1,169 1,100
- -------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes 597 563
Provision for income taxes 216 205
-----------------------------------------------------------------------------------------------------------
Net income 381 358
Dividends on preferred stock 13 20
-----------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 368 $ 338
- -------------------------------------------------------------------------------------------------------------------------------
Per common Primary net income $ 1.41 $ 1.25
share (a) Fully diluted net income $ 1.40 $ 1.25
-----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior period per common share amounts have been
restated to reflect the two-for-one common stock split
distributed on June 2, 1997.
See accompanying Notes to Financial Statements.
45
<PAGE> 47
CONSOLIDATED INCOME STATEMENT - FIVE QUARTER TREND
<TABLE>
<CAPTION>
Mellon Bank Corporation (and its subsidiaries)
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions, except per share amounts) 1997 1997 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue Interest and fees on loans (loan fees
of $19, $17, $24, $24 and $24) $571 $553 $579 $558 $550
Interest-bearing deposits with banks 7 7 8 9 10
Federal funds sold and securities under
resale agreements 6 5 7 10 7
Other money market investments 1 1 1 3 1
Trading account securities 3 2 1 2 2
Securities 96 99 103 108 107
------------------------------------------------------------------------------------------------------------
Total interest revenue 684 667 699 690 677
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense Deposits in domestic offices 186 181 197 180 165
Deposits in foreign offices 33 34 43 49 51
Federal funds purchased and securities
under repurchase agreements 20 18 20 21 26
Other short-term borrowings 28 20 24 31 29
Notes and debentures 47 44 44 37 34
------------------------------------------------------------------------------------------------------------
Total interest expense 314 297 328 318 305
- ------------------------------------------------------------------------------------------------------------------------------
Net interest Net interest revenue 370 370 371 372 372
revenue Provision for credit losses 25 25 80 25 25
------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for losses 345 345 291 347 347
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest Trust and investment fees 283 266 259 246 248
revenue Cash management and deposit transaction charges 59 56 56 54 52
Mortgage servicing fees 53 51 49 46 44
Foreign currency and securities trading 25 25 19 20 20
Credit card fees 25 24 28 29 30
Information services fees 13 13 16 14 11
Gain on sale of credit card portfolio - - 57 - -
Other income 82 101 82 67 69
------------------------------------------------------------------------------------------------------------
Total fee revenue 540 536 566 476 474
Gains on sales of securities - - 3 - -
------------------------------------------------------------------------------------------------------------
Total noninterest revenue 540 536 569 476 474
- ------------------------------------------------------------------------------------------------------------------------------
Operating Staff expense 276 268 267 256 255
expense Net occupancy expense 54 52 49 50 50
Professional, legal and other purchased services 46 46 50 48 50
Business development 38 37 34 35 35
Equipment expense 36 36 39 35 36
Amortization of mortgage servicing assets
and purchased credit card relationships 28 28 25 27 27
Amortization of goodwill and other intangible assets 27 27 27 24 24
Communications expense 25 26 25 24 24
Other expense 41 45 43 38 40
Trust-preferred securities expense 19 20 3 -- --
Net revenue from acquired property (3) (3) (3) (1) (1)
-------------------------------------------------------------------------------------------------------------
Total operating expense 587 582 559 536 540
- ------------------------------------------------------------------------------------------------------------------------------
Income Income before income taxes 298 299 301 287 281
Provision for income taxes 108 108 107 106 102
------------------------------------------------------------------------------------------------------------
Net income 190 191 194 181 179
Dividends on preferred stock 4 9 15 9 10
------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $186 $182 $179 $172 $169
- ------------------------------------------------------------------------------------------------------------------------------
Per common Primary net income $.72 $.69 $.68 $.66 $.63
share (a) Fully diluted net income $.71 $.69 $.67 $.66 $.63
------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior-period per common share amounts have been restated
to reflect the two-for-one common stock split distributed
on June 2, 1997.
See accompanying Notes to Financial Statements.
46
<PAGE> 48
CONSOLIDATED STATEMENT OF CASH FLOWS
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
Six months ended
June 30,
(in millions) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net income $381 $358
operating activities Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill and other intangible assets 54 49
Amortization of mortgage servicing assets and
purchased credit card relationships 56 55
Depreciation and other amortization 53 51
Deferred income tax expense 45 30
Provision for credit losses 50 50
Provision for real estate acquired and other losses 2 (4)
Net gains on dispositions of acquired property (6) (5)
Net increase in accrued interest receivable (7) (5)
Net increase in trading account securities (23) (47)
Net decrease in accrued interest payable,
net of amounts prepaid (14) (5)
Net (increase) decrease in residential mortgages held for sale (315) 160
Increase in mortgage servicing assets and purchased credit
card relationships (268) (107)
Net increase in other operating activities (5) (42)
-------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3 538
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in term deposits and other money
investing activities market investments (54) (332)
Net increase in federal funds sold and securities
under resale agreements (214) (66)
Funds invested in securities available for sale (3,522) (5,167)
Proceeds from sales of securities available for sale 1,114 378
Proceeds from maturities of securities available for sale 3,197 3,262
Funds invested in investment securities (20) (213)
Proceeds from maturities of investment securities 145 214
Net decrease (increase) in credit card receivables 75 (256)
Home equity lines of credit securitized -- 650
Net principal disbursed on loans to customers (1,332) (707)
Loan portfolio purchases (4) (186)
Proceeds from the sales of loan portfolios 783 601
Purchases of premises and equipment (63) (60)
Proceeds from sales of acquired property 19 16
Net increase in other investing activities (85) (80)
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 39 (1,946)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
47
<PAGE> 49
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
Six months ended
June 30,
(in millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from Net increase in transaction and savings deposits 1,775 113
financing activities Net (decrease) increase in customer term deposits (1,823) 2,330
Net increase in federal funds purchased and
securities under repurchase agreements 48 210
Net decrease in short-term bank notes (72) (727)
Net increase (decrease) in term federal funds purchased 348 (345)
Net increase in U.S. Treasury tax and loan demand notes 434 314
Net decrease in commercial paper (64) (97)
Repurchase and repayments of longer-term debt (9) (21)
Net proceeds from issuance of longer-term debt 450 549
Proceeds from issuance of common stock 37 24
Dividends paid on common and preferred stock (176) (174)
Repurchase of common stock for employee benefit purposes -- (192)
Repurchase of common stock-other (358) (249)
Redemption of preferred stock (97) --
Net increase in other financing activities 55 89
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 548 1,824
Effect of foreign currency exchange rates 11 7
- --------------------------------------------------------------------------------------------------------------------------------
Change in cash and Net increase in cash and due from banks 601 423
due from banks Cash and due from banks at beginning of period 2,846 2,342
-----------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $3,447 $2,765
-----------------------------------------------------------------------------------------------------
Supplemental Interest paid $ 625 $ 620
disclosures Net income taxes paid 159 161
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Mellon Bank Corporation (and its subsidiaries)
<TABLE>
<CAPTION>
Six months ended
June 30,
(dollar amounts in millions, except per share amounts) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholders' equity Balance at beginning of period $3,746 $4,025
Net income 381 358
Dividends on common stock at $.63 per share in 1997
and $.575 per share in 1996 (162) (154)
Dividends on preferred stock:
Series I -- (7)
Series J (4) (4)
Series K (9) (9)
Common stock issued under dividend reinvestment and
common stock purchase plan 11 8
Series J preferred stock redemption (97) --
Exercise of stock options 49 29
Repurchase of common stock for employee benefit purposes and
the dividend reinvestment and common stock purchase plan -- (192)
Repurchase of common stock-other (358) (249)
Net unrealized gain (loss) on assets available for sale, net of tax 3 (48)
Other 10 10
----------------------------------------------------------------------------------------------------
Balance at end of period $3,570 $3,767
----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
48
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Basis of presentation
The unaudited consolidated financial statements of the Corporation are prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements should be read in conjunction with
the Corporation's 1996 Annual Report on Form 10-K. In the opinion of
management, all normal recurring adjustments necessary for a fair presentation
of the financial position and results of operations for the periods have been
included.
All per common share and average common share information has been restated for
the two-for-one common stock split that was distributed on June 2, 1997.
Note 2 -- Adoption of Financial Accounting Standards
On January 1, 1997, FAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," became effective. 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." The adoption of FAS No. 125 was immaterial to the
Corporation's financial position and results of operations.
In February 1997, the Financial Accounting Standards Board issued FAS No. 128,
"Earnings per Share." This statement simplifies the computation of earnings per
share (EPS) and makes the U.S. standard for computing EPS more comparable with
the EPS standards of other countries. The Corporation currently presents EPS as
computed under APB Opinion No. 15. Opinion No. 15 requires entities with
complex capital structures to present both primary and fully diluted EPS.
Primary EPS is based on common shares outstanding and securities that are
common stock equivalents. Fully diluted EPS is based on common shares
outstanding and all potential issuances of common stock that would reduce EPS.
FAS No. 128 supersedes Opinion No. 15 and requires that basic EPS and diluted
EPS be presented. Basic EPS will be based on only the weighted average number
of common shares outstanding during the period, without considering any
dilutive items. Diluted EPS under FAS No. 128 will be essentially the same as
fully diluted EPS under Opinion No. 15, with some minor computational
differences. Under FAS No. 128, basic and diluted earnings per share would
have been $1.43 and $1.41, respectively, for the six months ended June 30,
1997, and $1.27 and $1.25, respectively, for the six months ended June 30,
1996. Actual primary and fully diluted earnings per share amounts for the six
months ended June 30, 1997, were $1.41 and $1.40, respectively, compared with
$1.25 and $1.25, respectively, for the six months ended June 30, 1996. This
statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
In February 1997, the Financial Accounting Standards Board issued FAS No. 129,
"Disclosure of Information about Capital Structure." FAS No. 129 summarizes
previously issued disclosure guidance contained within APB Opinions No. 10 and
15, as well as FAS No. 47. There will be no changes to the Corporation's
disclosures pursuant to the adoption of FAS No. 129. This statement is
effective for financial statements for periods ending after December 15, 1997.
On January 28, 1997, the Securities and Exchange Commission adopted rules to
clarify and expand existing disclosure requirements about derivatives and other
financial instruments as well as derivative commodity instruments. These rules
require enhanced disclosure of accounting policies for derivative financial
instruments and derivative commodity instruments. These rules also expand
existing disclosure requirements to include quantitative and qualitative
information about market risk inherent in market risk sensitive instruments.
Accounting policy disclosures are required in the first quarterly report filed
for a period ended after June 15, 1997. Following are the Corporation's
derivative accounting policy disclosures.
49
<PAGE> 51
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 2 -- Adoption of Financial Accounting Standards (continued)
Off-balance-sheet instruments used for interest rate risk management
The Corporation enters into interest rate swaps, interest rate caps and floors,
financial futures and financial options to manage its sensitivity to interest
rate risk. This is accomplished by using these instruments to offset the
inherent price or interest rate risk of specific on-balance-sheet assets or
liabilities. The Corporation also uses total return swaps to offset the
inherent market value risk of investments in start-up mutual funds. These
instruments are designated as hedges on the trade date and are highly
correlated with the financial instrument being hedged. High correlation is
achieved if one of the following conditions holds true: The hedge instrument
and the financial instrument being hedged are both of the same currency and
fixed rate; the hedge instrument is structurally similar to the instrument
being hedged; or a mathematical correlation analysis is performed and
correlation has been found to be high. Hedge correlation of interest rate or
market value risk management positions is reviewed periodically. If a hedged
instrument is sold or matures, or correlation criteria are no longer met, the
risk management position is no longer accounted for as a hedge. Under these
circumstances, the accumulated change in market value of the hedge is
recognized in current income to the extent that the hedge results have not been
offset by the effects of interest rate or price changes of the hedged item.
Tactical asset/liability management considerations require the Corporation to
periodically terminate hedge instruments. Any deferred gain or loss resulting
from the termination is amortized to income/expense of the corresponding hedged
instrument over the remaining period of the original hedge or hedged
instrument.
The Corporation also enters into off-balance-sheet contracts to hedge
anticipated transactions. If it is determined that an anticipated transaction
that has been hedged will not occur, the results of the hedge will be
recognized currently in the income category where the original anticipated
transaction was to be reported.
Interest revenue or interest expense on hedge transactions is accrued over the
term of the agreement as an adjustment to the yield or cost of the related
asset or liability. Transaction fees are deferred and amortized to interest
revenue or interest expense over the term of the agreement. Realized gains and
losses are deferred and amortized over the life of the hedged transaction as
interest revenue or interest expense, and any unamortized amounts are
recognized as income or loss at the time of disposition of the assets or
liabilities being hedged. Amounts payable to or receivable from counterparties
are included in other liabilities or other assets. The fair values of interest
rate swaps, caps and floors, financial futures and financial options used for
interest rate risk management are not recognized in the financial statements.
Changes in fair value of total return swaps are recognized in net unrealized
gain/loss on assets available for sale within shareholders' equity.
Off-balance-sheet instruments used for trading activities
The Corporation enters into foreign exchange contracts, futures and forward
contracts, currency and interest rate option contracts, interest rate swaps and
interest rate caps and floors to accommodate customers and for its proprietary
trading activities. Realized and unrealized changes in the fair value of these
instruments are recognized in the Income Statement in foreign currency and
securities trading revenue in the period in which the changes occur. Interest
revenue and expense on instruments held for trading activities are included in
the Income Statement as part of net interest revenue. The fair value of
contracts 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.
50
<PAGE> 52
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 3 -- 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.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in millions) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts $23 $19 $45 $38
Debt instruments 1 1 3 2
Interest rate contracts 1 -- 2 --
Futures contracts -- -- -- 1
- ----------------------------------------------------------------------------------------------------
Total foreign currency and securities
trading revenue (a) $25 $20 $50 $41
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recognized an unrealized loss of less than $1 million at
June 30, 1997, and an unrealized gain of less than $1 million at June
30, 1996, related to securities held in the trading portfolio.
Note 4 -- Legal proceedings
A discussion of legal actions and proceedings against the Corporation and its
subsidiaries is presented in Part II, Item 1, of this Form 10-Q.
51
<PAGE> 53
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 5 -- Securities
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
JUNE 30, 1997 June 30, 1996
------------------------------------------- --------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 177 $-- $-- $ 177 $ 285 $-- $-- $ 285
U.S. agency mortgage-backed 2,229 18 15 2,232 2,027 7 43 1,991
Other U.S. agency 860 1 1 860 2,068 3 -- 2,071
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 3,266 19 16 3,269 4,380 10 43 4,347
Obligations of states and
political subdivisions 44 -- -- 44 23 -- -- 23
Other mortgage-backed 3 -- -- 3 6 -- -- 6
Other securities 17 -- -- 17 63 11 -- 74
- ------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $3,330 $19 $16 $3,333 $4,472 $21 $43 $4,450
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: There were no gross realized gains in the first half of 1997. Gross
realized gains were $1 million in the first half of 1996. There were no gross
realized losses in the first half of 1997. Gross realized losses were less
than $1 million in the first half of 1996. Proceeds from the sale of
securities available for sale totaled $1,114 million and $378 million in the
first half of 1997 and 1996, respectively.
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
JUNE 30, 1997 June 30, 1996
----------------------------------------- ------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR Amortized Gross unrealized Fair
(in millions) COST GAINS LOSSES VALUE cost Gains Losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 34 $ 2 $1 $ 35 $ 25 $1 $ 1 $ 25
U.S. agency mortgage-backed 2,124 12 5 2,131 2,404 3 38 2,369
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury
and agency securities 2,158 14 6 2,166 2,429 4 39 2,394
Other mortgage-backed 26 -- -- 26 33 1 -- 34
Other securities 65 -- -- 65 53 -- -- 53
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $2,249 $14 $6 $2,257 $2,515 $5 $39 $2,481
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 6 -- Other assets
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, June 30,
(in millions) 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid expense:
Pension $ 327 $ 317 $ 307 $ 288
Other 62 67 67 64
Interest receivable 242 232 235 249
Accounts receivable 221 227 283 284
Receivables related to
off-balance-sheet instruments 365 475 329 299
Assets held for accelerated resolution 9 19 30 52
Segregated assets, net of reserve (a) 4 4 10 22
Other 1,312 1,179 1,160 1,002
- ------------------------------------------------------------------------------------------------------
Total other assets $2,542 $2,520 $2,421 $2,260
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Additional information regarding segregated assets is presented in
note 8 in the Corporation's 1996 Annual Report on Form 10-K.
52
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 7 -- Preferred stock
The following table summarizes the Corporation's preferred stock outstanding.
Each series of preferred stock has a par value of $1.00 per share and
liquidation preference of $25 per share. The Corporation has authorized 50
million shares of preferred stock. A detailed description of the Corporation's
outstanding preferred stock is provided in note 14 in the Corporation's 1996
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Balances at
Shares Shares JUNE 30, March 31, Dec. 31, June 30,
(dollar amounts in millions) authorized issued 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
8.20% preferred stock (Series K) 8,000,000 8,000,000 $193 $193 $193 $193
8.50% preferred stock (Series J) -- -- -- -- 97 97
9.60% preferred stock (Series I) -- -- -- -- -- 145
- ----------------------------------------------------------------------------------------------------------------------------
Total preferred stock $193 $193 $290 $435
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 8 -- Computation of primary and fully diluted net
income per common share (a)(b)
<TABLE>
<CAPTION>
Quarter ended Six months ended
------------------------------------ -----------------------
(dollar amounts in millions, except per JUNE 30, March 31, June 30, JUNE 30, June 30,
share amounts; common shares in thousands) 1997 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRIMARY NET INCOME PER COMMON SHARE
Net income applicable to common stock $186 $182 $169 $368 $338
- ----------------------------------------------------------------------------------------------------------------------------------
Stock and stock equivalents (average shares):
Common shares outstanding 254,508 258,010 262,700 256,243 266,020
Stock options 4,863 5,030 3,758 4,975 3,718
- ----------------------------------------------------------------------------------------------------------------------------------
Total stock and stock equivalents 259,371 263,040 266,458 261,218 269,738
- ----------------------------------------------------------------------------------------------------------------------------------
Primary net income per common share $.72 $.69 $.63 $1.41 $1.25
- ----------------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED NET INCOME PER COMMON SHARE
Net income applicable to common stock (c) $186 $182 $169 $368 $338
- ----------------------------------------------------------------------------------------------------------------------------------
Stock, stock equivalents and potentially
dilutive items (average shares):
Common shares outstanding 254,508 258,010 262,700 256,243 266,020
Stock options 5,204 5,030 3,924 5,522 4,004
Common shares issuable upon conversion of
7-1/4% Convertible Subordinated Capital Notes 104 164 202 134 212
- ----------------------------------------------------------------------------------------------------------------------------------
Total 259,816 263,204 266,826 261,899 270,236
- ----------------------------------------------------------------------------------------------------------------------------------
Fully diluted net income per common share $.71 $.69 $.63 $1.40 $1.25
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior period amounts have been restated to reflect the two-for-one
common stock split distributed on June 2, 1997.
(b) Calculated based on unrounded numbers.
(c) The after-tax benefit of interest expense on assumed conversion of
the 7-1/4% Convertible Subordinated Capital Notes was less than
$1 million for all periods shown.
53
<PAGE> 55
SELECTED STATISTICAL INFORMATION
DEPOSITS
Mellon Bank Corporation (and its subsidiaries)
<TABLE>
<CAPTION>
JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions) 1997 1997 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deposits in domestic offices:
Interest-bearing:
Demand, money market and
other savings accounts $10,385 $10,605 $10,605 $10,414 $10,755
Retail savings certificates 7,253 6,742 6,660 6,637 6,507
Other time deposits 1,793 1,540 2,700 3,118 1,490
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 19,431 18,887 19,965 20,169 18,752
Noninterest-bearing 9,483 8,371 8,692 9,337 8,506
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits in domestic offices 28,914 27,258 28,657 29,506 27,258
Deposits in foreign offices 2,412 2,678 2,717 3,049 4,446
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits $31,326 $29,936 $31,374 $32,555 $31,704
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SELECTED KEY DATA
<TABLE>
<CAPTION>
Quarter ended
(dollar amounts in millions, -----------------------------------------------------------------------------
except per share amounts, JUNE 30, March 31, Dec. 31, Sept. 30, June 30,
common shares in thousands) 1997 1997 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income per common share (a) $ .71 $ .69 $ .67 $ .66 $ .63
Tangible net income per
common share (a)(b) $ .79 $ .77 $ .75 $ .72 $ .70
Net income applicable to
common stock $ 186 $ 182 $ 179 $ 172 $ 169
Tangible net income applicable
to common stock (b) $ 206 $ 203 $ 200 $ 190 $ 187
Return on common shareholders'
equity (c) 21.9% 21.2% 20.9% 20.6% 20.4%
Return on tangible common
shareholders' equity (b)(c) 37.7% 36.3% 36.6% 31.2% 31.3%
Return on assets (c) 1.79% 1.83% 1.80% 1.71% 1.70%
Return on tangible assets (b)(c) 2.04% 2.09% 2.06% 1.92% 1.92%
Common equity to assets 7.72% 8.33% 8.11% 7.78% 7.79%
Tangible common equity to assets (b) 5.13% 5.60% 5.36% 5.22% 5.79%
Fee revenue as a percentage of
total revenue (FTE) 59% 59% 58% (d) 56% 56%
Efficiency ratio excluding
amortization of intangibles and
trust-preferred securities expense 59% 59% 60% (d) 60% 61%
Average common shares and
equivalents outstanding (a) 259,816 263,204 263,412 263,834 266,826
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Fully diluted.
(b) Excludes the after-tax impact of the amortization of goodwill and other
identified intangibles resulting from accounting for business combinations
under the purchase method of accounting.
(c) Annualized. All amounts are based on unrounded numbers.
(d) Excludes the gain on the sale of the AAA credit card portfolio.
Note: Prior period per common share amounts and average shares
outstanding have been restated to reflect the two-for-one common
stock split distributed on June 2, 1997.
54
<PAGE> 56
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust
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.
At the Corporation's annual meeting of shareholders held on April 15, 1997, for
which proxies were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), the following matters were
voted upon by shareholders. The number of votes shown below are on a pre-split
basis.
1. The election of seven directors for a term expiring in 2000:
<TABLE>
<CAPTION>
Name of Director Votes For Votes Withheld
---------------- --------- --------------
<S> <C> <C>
Burton C. Borgelt 115,478,622 507,825
Carol R. Brown 115,472,587 513,860
Frank V. Cahouet 115,382,622 603,785
C. Frederick Fetterolf 115,425,607 560,840
George W. Johnstone 115,436,256 550,191
Andrew W. Mathieson 115,393,228 593,219
Seward Prosser Mellon 115,435,294 551,153
</TABLE>
2. Approval of the proposal to amend the Corporation's Restated
Articles of Incorporation to increase the authorized number of
shares of common stock:
<TABLE>
<S> <C>
For: 108,992,201
Against: 6,506,354
Abstain: 487,907
</TABLE>
3. Ratification of KPMG Peat Marwick LLP as independent public
accountants of the Corporation for the year 1997:
<TABLE>
<S> <C>
For: 115,415,035
Against: 294,963
Abstain: 276,464
</TABLE>
Abstentions are not counted for voting purposes under Pennsylvania law, the
jurisdiction of the Corporation's incorporation.
55
<PAGE> 57
PART II - OTHER INFORMATION (CONTINUED)
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
3.1 Restated Articles of Incorporation of Mellon Bank
Corporation, as amended and restated as of September 2, 1993.
3.2 Statement Affecting Series B Preferred Stock, $1.00 Par Value.
3.3 Statement Affecting Series D Preferred Stock, $1.00 Par Value.
3.4 Statement Affecting Series H Preferred Stock, $1.00 Par Value.
3.5 Statement Affecting Series I Preferred Stock, $1.00 Par Value.
3.6 Statement Affecting Series J Preferred Stock, $1.00 Par Value.
3.7 Amendment, dated April 16, 1997, to Restated Articles
of Incorporation of Mellon Bank Corporation, as amended and
restated as of September 2, 1993.
3.8 By-Laws of Mellon Bank Corporation, as amended effective July 17, 1990.
4.1 Amendment No. 1, dated as of June 2, 1997, to
Shareholder Protection Rights Agreement between Mellon
Bank Corporation and Mellon Bank, N.A., as Rights
Agent, dated as of October 15, 1996.
10.1* Mellon Bank Corporation Long-Term Profit Incentive
Plan (1996), as amended effective July 15, 1997.
10.2* Mellon Bank Corporation Stock Option Plan for Outside
Directors (1989), as amended effective May 1, 1997.
10.3* Mellon Bank Corporation Phantom Stock Unit Plan
(1995), as amended effective May 1, 1997.
10.4* Change in Control Severance Agreement between Mellon
Bank Corporation and Frank V. Cahouet, dated as of
February 1, 1997, and amended effective July 7, 1997.
10.5* Form of Change in Control Severance Agreement between
Mellon Bank Corporation and members of the Office of
The Chairman.
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends (parent Corporation).
12.2 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends (Mellon Bank Corporation and its subsidiaries).
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed.
* Management contract or compensatory plan arrangement.
</TABLE>
56
<PAGE> 58
PART II - OTHER INFORMATION (CONTINUED)
(b) Reports on Form 8-K
During the second quarter of 1997, the Corporation filed the following
Current Report on Form 8-K:
(1) A report dated April 14, 1997, which included, under Items
5 and 7, the Corporation's (i) press release, dated April
14, 1997, announcing the signing of a definitive agreement
under which the Corporation will acquire 1st Business
Corporation; (ii) press release, dated April 15, 1997,
regarding first quarter 1997 results of operations, an
increase in the Corporation's common stock dividend and a
two-for-one stock split of the Corporation's common stock
and; (iii) press release, dated April 15, 1997, announcing
shareholder approval of an amendment to its Articles of
Incorporation increasing the authorized number of shares of
common stock from 200 million to 400 million.
=============================================================================
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MELLON BANK CORPORATION
(Registrant)
Date: August 11, 1997 By: STEVEN G. ELLIOTT
-----------------------------
Steven G. Elliott
Vice Chairman,
Chief Financial Officer
and Treasurer
(Duly Authorized Officer
and Principal Financial
Officer of the Registrant)
57
<PAGE> 59
CORPORATE INFORMATION
<TABLE>
<S> <C>
Business Mellon Bank Corporation is a multibank holding company incorporated under the laws
of the of Pennsylvania in August 1971 and registered under the Federal Bank Holding
Corporation Company Act of 1956, as amended. Its principal direct subsidiaries are Mellon
Bank, N.A., The Boston Company, Inc., 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, one of
the nation's largest mutual fund companies, is a wholly owned subsidiary of Mellon
Bank, N.A. 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. The Mellon
Financial Services Corporations, through their subsidiaries and joint ventures,
provide a broad range of bank-related services including equipment leasing,
commercial loan financing, stock transfer services, cash management and numerous
trust and investment management services. The Corporation's principal executive
office is located at One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA
15258-0001 (Telephone: (412) 234-5000).
Exchange Mellon Bank Corporation's common and Series K preferred stocks are traded on the
listing 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.
Dividend Subject to approval of the board of directors, dividends are paid on Mellon
payments Bank Corporation's common and preferred stocks on or about the 15th day of
February, May, August and November.
Dividend Under the Dividend Reinvestment and Common Stock Purchase Plan, registered holders
Reinvestment of Mellon Bank Corporation's common stock may purchase additional common shares at
and Common the market value for such shares through reinvestment of common dividends and/or
Stock Pur- optional cash payments. Purchases of shares through optional cash payments are
chase Plan subject to limitations. Plan details are in a Prospectus, which may be obtained
from ChaseMellon Shareholder Services, L.L.C.
Phone Corporate Communications/
contacts 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
Shareholder For a free copy of the Corporation's quarterly earnings news release on Form 8-K,
Publications 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).
</TABLE>
58
<PAGE> 60
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- --------------------------- --------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Mellon Previously filed as Exhibit 3.1 to
Bank Corporation, as amended and restated the Quarterly Report on Form 10-Q
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
Stock, $1.00 Par Value. the 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
Stock, $1.00 Par Value. the 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
Stock, $1.00 Par Value. the 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 Previously filed as Exhibit 3.5 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1996, and
incorporated herein by reference.
3.6 Statement Affecting Series J Preferred Previously filed as Exhibit 3.6 to
Stock, $1.00 Par Value. the Annual Report on Form 10-K
(File No. 1-7410) for the year
ended December 31, 1996, and
incorporated herein by reference.
3.7 Amendment, dated April 16, 1997, to Filed herewith.
Restated Articles of Incorporation of Mellon
Bank Corporation, as amended and restated
as of September 2, 1993.
</TABLE>
59
<PAGE> 61
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- --------------------------- --------------------
<S> <C> <C>
3.8 By-Laws of Mellon Bank Corporation, as Previously filed as Exhibit 3.2 to
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 Amendment No. 1, dated as of June 2, 1997, Filed herewith.
to Shareholder Protection Rights Agreement
between Mellon Bank Corporation and
Mellon Bank, N.A., as Rights Agent, dated as of
October 15, 1996.
10.1* Mellon Bank Corporation Long-Term Profit Filed herewith.
Incentive Plan (1996), as amended effective
July 15, 1997.
10.2* Mellon Bank Corporation Stock Option Plan Filed herewith.
for Outside Directors (1989), as amended
effective May 1, 1997.
10.3* Mellon Bank Corporation Phantom Stock Unit Filed herewith.
Plan (1995), as amended effective May 1, 1997.
10.4* Change in Control Severance Agreement Filed herewith.
between Mellon Bank Corporation and
Frank V. Cahouet, dated as of February 1, 1997, and
amended effective July 7, 1997.
10.5* Form of Change in Control Severance Agreement Filed herewith.
between Mellon Bank Corporation and members
of the Office of The Chairman.
12.1 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
(parent Corporation).
</TABLE>
* Management contract or compensatory plan arrangement.
60
<PAGE> 62
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- --------------------------- --------------------
<S> <C> <C>
12.2 Computation of Ratio of Earnings to Fixed Filed herewith.
Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
(Mellon Bank Corporation and its subsidiaries).
27.1 Financial Data Schedule, which is submitted Submitted herewith.
electronically to the Securities and Exchange
Commission for information only and not filed.
</TABLE>
61
<PAGE> 1
Exhibit 3.7
Microfilm Number 9730-123 Filed with the Department of State on April 16, 1997
Entity Number 227630 Yvette Kane
-----------------------------------------------
Secretary of the Commonwealth
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
In compliance with the requirements of 15 Pa.C.S. ss.1915 (relating to articles
of Amendment), the undersigned business corporation, desiring to amend its
Articles, hereby states that:
1. The name of the corporation is: Mellon Bank Corporation
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA
15258-0001, Allegheny County
(b) c/o: _____________________________________________________________
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office
provider, the county in which the corporation is located for venue and
official publication purposes.
3. The statute by or under which it was incorporated is: Act of May 5, 1933,
P.L. 364, as amended
4. The date of its incorporation is: August 23, 1971
5. (Check, and if appropriate complete, one of the following):
___X___ The amendment shall be effective upon filing these Articles of
Amendment in the Department of State.
_____ The amendment shall be effective on: _____________ at ____________
Date Hour
6. (Check one of the following):
___X___ The amendment was adopted by the shareholders (or members) pursuant
to 15 Pa.C.S. Section 1914(a) and (b).
<PAGE> 2
_____ The amendment was adopted by the board of directors pursuant to
15 Pa.C.S. Section 1914(c).
7. (Check, and if appropriate complete, one of the following):
_____ The amendment adopted by the corporation, set forth in full, is as
follows:
__X__ The amendment adopted by the corporation as set forth in full in
Exhibit A attached hereto and made a part hereof.
8. (Check if the amendment restates the Articles):
_____ The restated Articles of Incorporation supersede the original
Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these
Articles of Amendment to be signed by a duly authorized officer thereof this
15th day of April, 1997.
MELLON BANK CORPORATION
-------------------------------
(Name of Corporation)
By: Carl Krasik
----------------------------
(Signature)
Title: Associate General Counsel and
Secretary
<PAGE> 3
EXHIBIT A TO ARTICLES OF AMENDMENT
OF
MELLON BANK CORPORATION
The first paragraph of Article Fifth of the Corporation's Restated Articles of
Incorporation, as amended, shall read as follows:
Fifth: The aggregate number of shares which the Corporation
shall have authority to issue is 450,000,000 of which
50,000,000 shares shall be Preferred Stock, par value $1.00
per share, issuable in one or more series, and 400,000,000
shares shall be Common Stock, par value $0.50 per share.
<PAGE> 1
Exhibit 4.1
AMENDMENT NO. 1
dated as of June 2, 1997
to
SHAREHOLDER PROTECTION RIGHTS AGREEMENT
dated as of October 15, 1996
between
MELLON BANK CORPORATION
and
MELLON BANK, N.A.,
as Rights Agent
<PAGE> 2
AMENDMENT NO. 1, dated as of June 2, 1997 (this "Amendment") to SHAREHOLDER
PROTECTION RIGHTS AGREEMENT, dated as of October 15, 1996 (the "Original
Agreement"; the Original Agreement as amended hereby and as further amended from
time to time, this "Agreement"), between Mellon Bank Corporation, a Pennsylvania
corporation (the "Company"), and Mellon Bank, N.A., a national banking
association, as Rights Agent (the "Rights Agent", which term shall include any
successor Rights Agent hereunder).
WITNESSETH:
WHEREAS, the Corporation has approved a two-for-one split of its common
stock, par value $.50 per share ("Common Stock"), such split to be effected in
the form of a stock dividend (the "Stock Dividend") of one additional share of
Common Stock paid on June 2, 1997 on each issued share of Common Stock to the
holders of record at the close of business on May 1, 1997;
WHEREAS, pursuant to Section 2.4(a) of the Original Agreement, the Exercise
Price (as defined in the Original Agreement) in effect after payment of the
Stock Dividend is equal to the Exercise Price in effect immediately prior to
such adjustment dividend by the Expansion Factor (as defined in the Original
Agreement);
NOW, THEREFORE, in consideration of the premises and the respective
agreements set forth herein and intending to be legally bound hereby, the
parties hereby agree as follows:
SECTION 1. Effective as of the payment date of the Stock Dividend, the
definition of "Exercise Price" in the Original Agreement is amended so as to
read in its entirety as follows:
"Exercise Price" shall mean, as of any date, the price at which a
holder may purchase the securities issuable upon exercise of one whole
Right. Until further adjustment thereof in accordance with the terms
hereof, the Exercise Price shall equal $112.50.
SECTION 2. Except as amended by this Amendment, the Original Agreement
shall remain in full force and effect.
SECTION 3. This Amendment shall be deemed to be a contract made under the
laws of the Commonwealth of Pennsylvania and for all purposes shall be governed
by and construed in accordance with the laws of such state applicable to
contracts to be made and performed entirely within such state.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
MELLON BANK CORPORATION
By: FRANK V. CAHOUET
----------------------------
Frank V. Cahouet
Chairman, President and Chief
Executive Officer
MELLON BANK, N.A.
By: DARYL J. ZUPAN
----------------------------
Daryl J. Zupan
Senior Vice President
2
<PAGE> 1
Exhibit 10.1
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.
<PAGE> 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
<PAGE> 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
<PAGE> 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 29,200,000
shares, subject to adjustments pursuant to Section 9.7. No more than 2,000,000
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 2,000,000 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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 1,500,000 shares of
Common Stock.
VIII. Restricted Stock
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8.1 Award of Restricted Stock. The Committee may from time to time, subject to
the provisions of the Plan and such other terms and conditions as it may
prescribe, grant one or more shares of Restricted Stock to eligible employees.
In the discretion of the Committee, shares of Restricted Stock may be granted
alone, in addition to or in tandem with other Awards granted under the Plan
and/or cash awards made outside of the Plan.
8.2 Restricted Stock Agreements. Each award of Restricted Stock under the Plan
shall be evidenced by a written Restricted Stock Agreement executed by the
Corporation and the Participant in such form as the Committee shall prescribe
from time to time in accordance with the Plan.
8.3 Restrictions. Shares of Restricted Stock issued to a Participant may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, for such period as the
Committee shall determine, beginning on the date on which the Award is granted
(the "Restricted Period"). The Committee may also impose such other
restrictions and conditions on the shares or the release of the restrictions
thereon as it deems appropriate, including the achievement of Performance Goals
established by the Committee. In determining the Restricted Period of an Award,
the Committee may provide that the foregoing restrictions shall lapse with
respect to specified percentages of the awarded shares on specified dates
following the date of such Award or all at once.
8.4 Stock Certificate. As soon as practicable following the making of an award,
the Restricted Stock shall be registered in the Participant's name in
certificate or book-entry form. If a certificate is issued, it shall bear an
appropriate legend referring to the restrictions and it shall be held by the
Corporation on behalf of the Participant until the restrictions are satisfied.
If the shares are registered in book-entry form, the restrictions shall be
placed on the book-entry registration. Except for the transfer restrictions,
and subject to such other restrictions, if any, as determined by the Committee,
the Participant shall have all other rights of a holder of shares of Common
Stock, including the right to receive dividends paid with respect to the
Restricted Stock and the right to vote such shares. As soon as is practicable
following the date on which transfer restrictions on any shares lapse, the
Corporation shall deliver to the Participant the certificates for such shares,
provided that the Participant shall have complied with all conditions for
delivery of such shares contained in the Restricted Stock Agreement or
otherwise reasonably required by the Corporation.
8.5 Termination of Employment.
(a) Unless expressly provided to the contrary in the applicable Restricted
Stock Agreement, all restrictions placed upon Restricted Stock shall lapse
immediately upon (i) 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
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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 200,000 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.
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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
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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.
July 1997
14
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EX - 10.2
MELLON BANK CORPORATION
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (1989)
I. Purpose
The purposes of this Stock Option Plan for Outside Directors (1989) are to
align the interests of the outside directors of Mellon Bank Corporation (the
"Corporation") more closely with the interests of the Corporation's
shareholders, to provide such directors with an additional inducement to remain
in the service of the Corporation with an increased incentive to work for its
long-term success, and to establish an effective element of a reasonable
directors' compensation package.
II. Definitions
The following terms shall have the meanings indicated below:
2.1 "Common Stock" shall mean the common stock, par value $.50 per share, of
the Corporation.
2.2 "Corporation" shall mean Mellon Bank Corporation.
2.3 "Business Day" shall mean any day on which the market used to determine
the Fair Market Value of the Common Stock is open for trading.
2.4 "Fair Market Value" shall mean the closing price of the Common Stock on the
New York Stock Exchange on the relevant date. If on the relevant date the
Common Stock is not listed on the New York Stock Exchange, "Fair Market Value"
shall mean the closing price of the Common Stock on the relevant date on the
principal stock exchange on which the Common Stock is listed. If the Common
Stock is not listed on any stock exchange on the relevant date, "Fair Market
Value" shall mean the mean between the bid and asked price of the Common Stock
as reported on the National Association of Securities Dealers Automated
Quotation System on the relevant date.
2.5 "Outside Director" shall mean any individual who on the relevant date is a
member of the Board of Directors of the Corporation but is not an employee of
the Corporation.
2.6 "Plan" shall mean the Mellon Bank Corporation Stock Option Plan for
Outside Directors (1989).
2.7 "Service Year" shall mean the period beginning on the third Business Day
after the Corporation's annual meeting of shareholders at which directors are
elected and ending on the date of such annual meeting in the immediately
following year.
2.8 "HR Head" shall mean the head of the Human Resources Department of Mellon
Bank, N.A.
2.9 "Option" shall mean an option granted to an Outside Director pursuant to
the Plan.
2.10 "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended from
time to time, or any successor rule.
III. Administration
3.1 Self-Operative Plan. The Plan is intended to be self-operative to the
maximum extent consistent with prudent business practice. Under no
circumstances shall any individual or group of individuals exercise discretion
with respect to designating the recipient of an Option, the number of shares of
Common Stock that are subject to an Option, the date of grant for an Option or
the exercise price for an Option. Any action of the Nominating Committee of the
Board of Directors to set or recommend retainers or fees shall not be deemed to
be such an exercise of discretion, regardless of such action's effect on the
number of shares that become subject to Options pursuant to the formula in
Section 5.4 hereof.
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3.2 Certain Administrative Duties. Within the parameters set forth in Section
3.1 hereof, the HR Head shall administer the Plan. The HR Head's actions and
interpretations under the Plan shall be final, conclusive and binding, and the
HR Head shall not be liable for any action taken or decisions made in good
faith relating to the Plan or any Option thereunder.
3.3 Source of Shares. The shares of Common Stock that may be issued upon the
exercise of Options under the Plan may be either authorized but unissued shares
or authorized and issued shares held in the Corporation's treasury. The
aggregate number of shares of Common Stock which may be issued under the Plan
shall not exceed 1,200,000 shares, subject to adjustment pursuant to Section 8.6
hereof.
IV. Grantings of Options
4.1 Timing. Except for individuals who become Outside Directors during the
Service Year (as described in Section 4.3 hereof), Options will be granted once
per Service Year on the third Business Day following the Corporation's annual
meeting of shareholders at which directors are elected.
4.2 Recipients. Options will be awarded in equal amounts to all individuals who
are Outside Directors on the date of grant.
4.3 Mid-Service Year Elections. A director who is elected by the Board of
Directors after the start of a Service Year will be granted an Option having
terms (including term, exercise dates, and exercise price) identical to the
Options granted to Outside Directors at the start of that Service Year, except
that the number of shares of Common Stock subject to such Option shall be the
number of shares that are subject to each Option granted at the start of such
Service Year multiplied by a fraction the numerator of which is the number of
days during such Service Year that the recipient of such Option will serve as a
director and the denominator of which is the number of days in the Service Year
(with fractional shares being rounded upward to the nearest whole share).
4.4 Stock Option Agreements. The grant of any Option shall be evidenced by a
written "Stock Option Agreement" executed by the Corporation and the optionee.
The Stock Option Agreement shall contain the number of shares of Common Stock
that are subject to the Option evidenced thereby, the other essential terms of
the Option determined in accordance with Section V hereof, and other terms that
are not inconsistent with the requirements of this Plan.
V. Terms of Options
5.1 Terms of Options. All Options, other than Options granted to an Outside
Director upon his or her election during a Service Year, shall have a term of
ten years from the date of grant, subject to earlier termination pursuant to
Section 5.5 hereof.
5.2 Exercise of Options. All Options, other than Options granted to an Outside
Director upon his or her election during a Service Year, shall become
exercisable on the first anniversary of their grant date.
5.3 Exercise Price. The exercise price for all Options, other than Options
granted to an Outside Director upon his or her election during a Service Year,
shall be the Fair Market Value of the Common Stock on the date the Option is
granted.
5.4 Number of Shares. The number of shares of Common Stock that may be
purchased upon exercise of an Option granted for a given Service Year shall be
determined by the following formula:
(Number of dollars in projected annual retainer for Service Year) X 16.2% =
Number of shares.
Fractional shares resulting from the formula shall be rounded upward to the
nearest whole share. The number of shares subject to an Option shall be
subject to adjustment in accordance with Section 8.6 hereof.
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5.5 Forfeiture. Options that have not become exercisable on the date the
optionee ceases to serve as a director of the Corporation for any reason other
than the optionee's death, disability or completion of the Service Year shall
be forfeited and terminated immediately upon such termination of service.
Options that have become exercisable shall remain exercisable, and shall no
longer be subject to forfeiture, throughout their ten-year terms, regardless of
whether the optionee is a director of the Corporation at the time the Option is
exercised.
VI. Exercise of Options
6.1 Notice of Exercise. An Option shall be exercised by delivery to the H.R.
Head of a written notice of exercise in the form prescribed by the H.R. Head
for use from time to time. Such notice of exercise shall indicate the number of
shares as to which the Option is exercised and shall be accompanied by the full
exercise price for the Options exercised.
6.2 Form of Payment. The exercise price may be paid in cash or, in whole or in
part, by surrender of shares of Common Stock, which shall be credited against
the exercise price at their Fair Market Value on the date the Option is
exercised.
VII. Advisory Board Members
Members of the Corporation's Advisory Board shall be granted options under
this Plan in the same amounts and on the same terms as options granted to
Outside Directors; provided, however, no option shall be granted to an
individual upon his or her election to the Advisory Board after the start of
the Service Year.
VIII. Miscellaneous
8.1 General Restriction. Each Option under the Plan shall be subject to the
requirement that, if at any time the H.R. Head shall determine that any listing
or registration of the shares of Common Stock, any consent or approval of any
governmental body, or any other agreement, consent or action is necessary or
desirable as a condition of the granting of an Option or issuance of Common
Stock in satisfaction thereof, such grant or issuance may not be consummated
unless such requirement is satisfied in a manner acceptable to the H.R. Head.
8.2 Non-Assignability. No Option under the Plan shall be assignable or
transferable by the optionee, except by will or pursuant to applicable laws of
descent and distribution. During the life of an optionee, an Option shall be
exercisable only by such optionee.
8.3 Withholding Taxes. Whenever the Corporation issues or transfers shares of
Common Stock under the Plan, the Corporation shall have the right to require
the optionee to remit to the Corporation an amount sufficient to satisfy any
federal, state, and local withholding tax requirements prior to the delivery of
any certificate for such shares.
8.4 No Right to Continued Service. Nothing in the Plan or in any agreement
entered into pursuant to the Plan shall confer upon any optionee any right to
continued service as a director of the Corporation or any subsidiary or affect
any right of the Corporation or a subsidiary, acting through their Boards of
Directors or otherwise, to terminate or otherwise affect the service of such
optionee.
8.5 No Rights as Shareholders. Holders of Options under the Plan shall have no
rights as shareholders of the Corporation resulting therefrom unless and until
certificates for shares of Common Stock are registered in their names in
satisfaction of a duly exercised Option.
8.6 Adjustments. In the event that the outstanding shares of Common Stock of
the Corporation are changed in number, class or character by reason of any
split-up, change of par value, stock dividend, combination or reclassification
of shares, recapitalization, merger, consolidation or other corporate change,
or shall be changed in value by reason of any spin-off, dividend in partial
liquidation or other special distribution, the Board of Directors of the
Corporation may make any changes it may deem
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equitable and appropriate in outstanding Options and/or in the number of shares
of Common Stock reserved for issuance under the Plan. For purposes of this
Section 8.6, it is intended that, absent reasons to the contrary, adjustments
to Options be consistent with any changes or lack of changes to other options
on the Common Stock resulting from the same cause.
8.7 Amendment or Termination of Plan. The Board of Directors of the Corporation
may amend or terminate the Plan as it deems advisable; provided, however, no
such amendment or termination may (a) impair the rights of an optionee under an
Option previously granted, (b) effect a change to any part of the formula
setting the amount, price and timing of Option grants more often than permitted
under Rule 16b-3 (a change in the level of actual or projected retainer amounts
not being deemed a change to such formula for that purpose), or (c) without the
approval of the Corporation's shareholders, amend any other provision of
Sections IV or V of the Plan.
May 1997
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Exhibit 10.3
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.
<PAGE> 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.
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<PAGE> 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 500,000 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
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(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.
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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.
May 1997
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Exhibit 10.4
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
<PAGE> 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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 5
Control occurs or any subsequent year in an amount greater than or equal to
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
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<PAGE> 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).
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<PAGE> 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
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<PAGE> 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
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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
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<PAGE> 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,
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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.
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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.
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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.
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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
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<PAGE> 1
Exhibit 10.5
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
<PAGE> 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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 5
Control occurs or any subsequent year in an amount greater than or equal
to 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
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<PAGE> 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).
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<PAGE> 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
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<PAGE> 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
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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
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<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Mellon Bank Corporation (parent Corporation) (a)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes and equity in
undistributed net income (loss) of subsidiaries $21,490 $ 86,324 $ 51,528 $179,539
Fixed charges: interest expense, one-third of
rental expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 43,631 26,055 87,434 49,550
- --------------------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $65,121 $112,379 $138,962 $229,089
- --------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (b) $ 6,431 $ 15,471 $ 19,849 $ 30,943
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges 1.49 4.31 1.59 4.62
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends 1.30 2.71 1.30 2.85
</TABLE>
(a) The parent Corporation ratios include the accounts of Mellon Bank
Corporation (the "Corporation") and 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. Because these ratios
exclude from earnings the equity in undistributed net income (loss) of
subsidiaries, these ratios vary with the payment of dividends by such
subsidiaries.
(b) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
62
<PAGE> 1
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Mellon Bank Corporation (and its subsidiaries)
Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes $297,424 $280,918 $ 596,414 $ 562,911
Fixed charges: interest expense (excluding
interest on deposits), one-third of rental
expense net of income from subleases,
trust-preferred securities expense and
amortization of debt issuance costs 126,499 100,074 239,585 203,370
- -----------------------------------------------------------------------------------------------------------------------
Total earnings (as defined), excluding
interest on deposits 423,923 380,992 835,999 766,281
Interest on deposits 218,827 216,442 433,543 433,922
- -----------------------------------------------------------------------------------------------------------------------
Total earnings (as defined) $642,750 $597,434 $1,269,542 $1,200,203
- -----------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements (a) $ 6,431 $ 15,471 $ 19,849 $ 30,943
- -----------------------------------------------------------------------------------------------------------------------
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits 3.35 3.81 3.49 3.77
Including interest on deposits 1.86 1.89 1.89 1.88
Ratio of earnings (as defined) to combined fixed
charges and preferred stock dividends:
Excluding interest on deposits 3.19 3.30 3.22 3.27
Including interest on deposits 1.83 1.80 1.83 1.80
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Preferred stock dividend requirements represent the pretax amounts required
to cover preferred stock dividends.
63
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,447
<INT-BEARING-DEPOSITS> 466
<FED-FUNDS-SOLD> 674
<TRADING-ASSETS> 112
<INVESTMENTS-HELD-FOR-SALE> 3,333
<INVESTMENTS-CARRYING> 2,249
<INVESTMENTS-MARKET> 2,257
<LOANS> 28,144
<ALLOWANCE> 511
<TOTAL-ASSETS> 43,712
<DEPOSITS> 31,326
<SHORT-TERM> 2,999
<LIABILITIES-OTHER> 1,868
<LONG-TERM> 2,959
990<F1>
193
<COMMON> 147
<OTHER-SE> 3,230
<TOTAL-LIABILITIES-AND-EQUITY> 43,712<F1>
<INTEREST-LOAN> 1,124
<INTEREST-INVEST> 195
<INTEREST-OTHER> 27
<INTEREST-TOTAL> 1,351
<INTEREST-DEPOSIT> 434
<INTEREST-EXPENSE> 611
<INTEREST-INCOME-NET> 740
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,169
<INCOME-PRETAX> 597
<INCOME-PRE-EXTRAORDINARY> 597
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 381
<EPS-PRIMARY> 1.41<F2>
<EPS-DILUTED> 1.40<F2>
<YIELD-ACTUAL> 4.33
<LOANS-NON> 88
<LOANS-PAST> 111
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 525
<CHARGE-OFFS> 43
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 511
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>*This tag includes $990 million of Guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable interest debentures.
<F2>+A two-for-one common stock split was distributed to shareholders of record on
June 2, 1997. Prior Financial Data Schedules have not been restated for this
recapitalization.
</FN>
</TABLE>
