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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 1-7410
MELLON BANK CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1233834
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258-0001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (412) 234-5000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
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Common Stock, $0.50 Par Value New York Stock Exchange
7-1/4% Convertible Subordinated Capital Notes Due 1999 New York Stock Exchange
Stock Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 1999, there were 261,792,668 shares outstanding of the
registrant's voting common stock, $0.50 par value per share, of which
259,150,887 common shares having a market value of $17,525,078,733 were held by
nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in the
following parts of this Annual Report:
Mellon Bank Corporation 1999 Proxy Statement-Part III
Mellon Bank Corporation 1998 Annual Report to Shareholders-Parts I, II
and IV
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The Form 10-K filed with the Securities and Exchange Commission contains the
Exhibits listed on the Index to Exhibits beginning on page 25, including the
Financial Review and Financial Statements and Notes; Principal Locations and
Operating Entities; Directors and Senior Management Committee; and Corporate
Information Sections of the Registrant's 1998 Annual Report to Shareholders. For
a free copy of the Corporation's 1998 Annual Report to Shareholders, the Proxy
Statement for its 1999 Annual Meeting, or a copy of the Corporation's Management
Report on Internal Controls, as filed with the appropriate regulatory agencies,
please send a written request to the Secretary of the Corporation, 4826 One
Mellon Bank Center, Pittsburgh, PA 15258-0001. The Corporation's 1998 Annual
Report to Shareholders is also available on the Corporation's internet site at
www.mellon.com.
Cautionary Statement
This Annual Report on Form 10-K contains and incorporates by reference
statements relating to future results of the Corporation that are considered
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to, among other things,
the year 2000 project; the impact of the adoption of the euro; the proposed sale
of the mortgage business, credit card business and network services transaction
processing unit; credit loss reserve adequacy; simulation of changes in interest
rates; and litigation results. Actual results may differ materially from those
expressed or implied as a result of certain risks and uncertainties, including,
but not limited to, changes in political and economic conditions; interest rate
fluctuations; competitive product and pricing pressures within the Corporation's
markets; equity and fixed income market fluctuations; personal and corporate
customers' bankruptcies; inflation; acquisitions and integrations of acquired
businesses; technological change; changes in law; changes in fiscal, monetary,
regulatory and tax policies; monetary fluctuations; success in gaining
regulatory approvals when required; as well as other risks and uncertainties
detailed elsewhere in this Annual Report on Form 10-K or from time to time in
the filings of the Corporation with the Securities and Exchange Commission. Such
forward-looking statements speak only as of the date on which such statements
are made, and the Corporation undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
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MELLON BANK CORPORATION
Form 10-K Index
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PART I Page
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Item 1. Business
Description of Business 3
Supervision and Regulation 5
Competition 10
Employees 10
Statistical Disclosure by Bank Holding Companies 11
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22
</TABLE>
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PART I
ITEM 1. BUSINESS
Description of Business
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Mellon Bank Corporation (the "Corporation") is a multibank holding company
incorporated under the laws of Pennsylvania in August 1971 and registered under
the Federal Bank Holding Company Act of 1956, as amended. The Corporation
provides a comprehensive range of financial products and services in domestic
and selected international markets. The Corporation's banking subsidiaries are
located in Pennsylvania, Massachusetts, Delaware, Maryland, New Jersey,
California and Florida. Other subsidiaries are located in key business centers
throughout the United States and abroad. At December 31, 1998, the Corporation
was the eighteenth largest bank holding company in the United States in terms of
assets.
The Corporation's principal direct subsidiaries are Mellon Bank, N.A. ("Mellon
Bank"), The Boston Company, Inc. ("TBC"), Buck Consultants, Inc. ("Buck"),
Newton Management Limited ("Newton"), and a number of companies known as Mellon
Financial Services Corporation. The Dreyfus Corporation ("Dreyfus"), one of the
nation's largest mutual fund companies, and Founders Asset Management LLC
("Founders"), are wholly owned subsidiaries of Mellon Bank. The Corporation's
banking subsidiaries engage in retail financial services, commercial banking,
trust and investment management services, residential real estate loan
financing, equipment leasing, mutual fund activities and various
securities-related activities.
Mellon Bank, which has its executive offices in Pittsburgh, Pennsylvania, became
a subsidiary of the Corporation in November 1972. With its predecessors, Mellon
Bank has been in business since 1869. Mellon Bank is comprised of six operating
regions throughout Pennsylvania and southern New Jersey. Dreyfus, headquartered
in New York, New York, serves primarily as an investment adviser, manager and
administrator of mutual funds. Founders, headquartered in Denver, Colorado, is a
manager of growth-oriented equity mutual funds and other investment portfolios.
Newton is a leading U.K.-based investment manager that provides investment
management services to institutional, private and retail clients. TBC, through
Boston Safe Deposit and Trust Company ("BSDT") and other subsidiaries, engages
in the business of institutional trust and custody, institutional asset
management, private asset management, jumbo mortgage lending and other banking
services. TBC is headquartered in Boston, Massachusetts. Buck, headquartered in
New York, New York, is a global actuarial and human resources consulting firm
providing a broad array of services in the areas of defined benefit and defined
contribution plans, health and welfare plans, communications and compensation
consulting, and outsourcing and administration of employee benefit programs.
The Corporation's banking subsidiaries operate approximately 1,200 domestic
banking locations. The deposits of the banking subsidiaries are insured by the
Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law.
Other subsidiaries of the Corporation provide a broad range of bank-related
services -- including equipment leasing, commercial loan financing, stock
transfer services, cash management and numerous trust and investment management
services. The types of financial products and services offered by the
Corporation's subsidiaries are subject to change.
For analytical purposes, management has focused the Corporation into four major
business sectors: Consumer Fee Services, Consumer Banking, Business Fee Services
and Business Banking. Further information regarding the Corporation's "core"
business sectors, as well as certain "non-core" operations such as
Pending/Completed Divestitures, is presented in the Business Sectors section on
pages 28 through 31 of the Corporation's 1998 Annual Report to Shareholders,
which pages are incorporated herein by reference. A brief discussion of the
business sectors is presented on the following pages. There is considerable
interrelationship among these sectors.
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ITEM 1. BUSINESS (continued)
Description of Business (continued)
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Consumer Fee Services
Consumer Fee Services includes private asset management services, retail mutual
funds and discount brokerage services. These products and services are offered
principally through the private asset management group of Mellon Bank and BSDT,
as well as through Dreyfus, Founders, the discount brokerage operation of
Dreyfus Brokerage Services, Inc. and throughout the Corporation's retail banking
network.
Consumer Banking
Consumer Banking includes consumer lending and deposit products, business
banking and jumbo residential mortgage lending. The consumer lending, branch
banking and business banking services primarily are offered through the
Corporation's retail banking network which is primarily comprised of
approximately 440 retail outlets and approximately 740 ATMs. This network is
primarily located in the mid-Atlantic region of the United States and southern
Florida. Jumbo residential mortgage lending is offered nationally through the
private asset management representative offices.
Business Fee Services
The Business Fee Services sector serves the institutional markets by providing
institutional asset and institutional mutual fund management and administration,
institutional trust and custody, securities lending, foreign exchange, cash
management, stock transfer, benefits consulting and administrative services, and
services for defined contribution plans. The Corporation's subsidiaries provide
trust and investment management services while operating under the umbrella name
"Mellon Trust"; in addition, the subsidiaries provide institutional mutual fund
management through Dreyfus, Founders and Newton. The Corporation also owns a
number of subsidiaries that provide a variety of active and passive equity and
fixed income investment management services, including management of
international securities. Through Buck, the Corporation offers benefits
consulting and administrative services and services for defined contribution
plans. Through the Global Cash Management department, the Corporation offers a
broad range of cash management services, including remittance processing,
collections and disbursements, check processing and electronic services. The
Corporation's subsidiaries also provide services relating primarily to defined
contribution employee benefit plans under the umbrella name "Dreyfus Retirement
Services." Stock transfer services are provided in the United States through its
joint venture operating under the name of ChaseMellon Shareholder Services and
in Canada through the CIBC Mellon Trust Company.
Business Banking
Business Banking 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. This
sector's markets generally include large domestic commercial and industrial
customers, U.S. operations of foreign companies, multinational corporations,
state and local governments and various financial institutions (including banks,
securities broker/dealers, insurance companies, finance companies and mutual
funds). The Corporation also offers corporate finance and rate risk management
products; loan underwriting and syndications; offers a variety of capital
markets products and services, including private placement and money market
transactions; and provides equipment leasing, financing and lease advisory
services. The Corporation maintains foreign offices in London, Tokyo, Hong Kong,
Toronto, and Grand Cayman, British West Indies. Through these offices, the
Corporation conducts trade finance activities, engages in correspondent banking
and provides corporate banking and capital markets services. Included in this
sector is a nationwide asset-based lending division which provides secured
lending, principally through accounts receivable and inventory financing. Real
Estate lending consists of the
4
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ITEM 1. BUSINESS (continued)
Description of Business (continued)
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Corporation's commercial real estate lending activities, through which it
originates financing for commercial, multi-family and other products. The
Corporation provides property and casualty insurance premium financing to small,
midsize and large companies in the United States through the AFCO Credit
Corporation and in Canada through CAFO.
Pending/Completed Divestitures
Following the Corporation's decision to sell its mortgage business, credit card
business and network services transaction processing unit, the Corporation's
core business sectors were restated to exclude these businesses as well as the
results of the merchant card processing business that was sold in December 1998
and the corporate trust business that was sold in November 1997. These five
businesses' results are now reported as "Pending/Completed Divestitures." In
addition, the Real Estate Workout sector, that had previously been reported
separately, was combined with Other Corporate Activity. The Real Estate Workout
sector has diminished in significance as the level of nonperforming real estate
assets has significantly decreased. Pending/Completed Divestitures include:
residential mortgage loan origination and servicing that had previously been
reported in Consumer Fee Services; credit card and a portion of merchant card
processing that had previously been reported in Consumer Banking; and commercial
mortgage loan origination and servicing, network services transaction
processing, a portion of merchant card processing and corporate trust that had
previously been reported in Business Fee Services.
The 1998 Annual Report to Shareholders summarizes principal locations and
operating entities on pages 14 through 16, which pages are incorporated herein
by reference. Exhibit 21.1 to this Annual Report on Form 10-K presents a list of
the primary subsidiaries of the Corporation as of December 31, 1998.
Year 2000 Project
For a discussion regarding the Corporation's year 2000 project, see pages 41 and
42 of the Corporation's 1998 Annual Report to Shareholders, which discussion is
incorporated herein by reference.
Euro Project
For a discussion regarding the impact of the adoption of the euro, see page 43
of the Corporation's 1998 Annual Report to Shareholders, which discussion is
incorporated herein by reference.
Supervision and Regulation
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The Corporation and its subsidiaries are subject to an extensive system of
banking laws and regulations that are intended primarily for the protection of
the customers and depositors of the Corporation's subsidiaries rather than
holders of the Corporation's securities. These laws and regulations govern such
areas as permissible activities, reserves, loans and investments, and rates of
interest that can be charged on loans. Similarly, the Corporation's subsidiaries
engaged in investment advisory and other securities related activities are
subject to various U.S. federal and state laws and regulations that are intended
to benefit clients of investment advisors and shareholders in mutual funds
rather than holders of the Corporation's securities. Additionally, the
Corporation and its subsidiaries are subject to general U.S. federal laws and
regulations and to the laws and regulations of the states or countries in which
they conduct their businesses. Set forth below are brief descriptions of
selected laws and regulations applicable to the Corporation and its
subsidiaries. The descriptions are not intended to be complete and are qualified
in their entirety by reference to the statutes and regulations described.
Changes in applicable law or regulation may have a material effect on the
business of the Corporation.
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ITEM 1. BUSINESS (continued)
Supervision and Regulation (continued)
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The Corporation, as a bank holding company, is regulated under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is subject to the supervision
of the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). Generally, the Act limits the business of bank holding companies to
banking, managing or controlling banks, performing certain servicing activities
for subsidiaries, and engaging in such other activities as the Federal Reserve
Board may determine to be closely related to banking and a proper incident
thereto. Certain of the Corporation's subsidiaries are themselves bank holding
companies under the Act. As a result of its Mellon Bank, F.S.B. subsidiary, the
Corporation is also regulated under the Home Owners' Loan Act of 1933 as a
savings and loan holding company. In late February 1999, the Corporation applied
to the Office of Thrift Supervison ("OTS") for permission to dissolve Mellon
Bank, F.S.B.
The Corporation's national banking subsidiaries are subject to primary
supervision, regulation and examination by the Office of the Comptroller of the
Currency (the "OCC"); BSDT is subject to supervision, regulation and examination
by the Federal Reserve Board and the Commonwealth of Massachusetts Department of
Banking; and Mellon Bank, F.S.B. is subject to supervision, regulation and
examination by the OTS. Mellon Securities Trust Company, The Dreyfus Trust
Company and Mellon Trust of New York are New York trust companies and are
supervised by the New York State Department of Banking. Mellon Trust of
California is a California trust company and is supervised by the State of
California Department of Financial Institutions. Mellon 1st Business Bank is a
state non-member bank and is subject to supervision, regulation and examination
by the FDIC and the State of California Department of Financial Institutions.
The Corporation's nonbank subsidiaries engaged in securities related activities
are regulated by the Securities and Exchange Commission (the "SEC"). Dreyfus
Investment Services Corporation and Dreyfus Brokerage Services, Inc. conduct
brokerage operations, and Mellon Financial Markets, Inc. engages in securities
activities permitted to bank holding company subsidiaries under Section 20 of
the Glass-Steagall Act. Dreyfus Service Corporation, a subsidiary of Dreyfus,
acts as a broker/dealer for the sale of shares of mutual funds, including the
Dreyfus/Founders family of mutual funds. Dreyfus Brokerage Services, Inc., a
subsidiary of Mellon Bank, is a self-clearing deep discount broker providing
services to individual investors nationwide. Founders, Dreyfus Investment
Services Corporation, Mellon Financial Markets, Inc., Dreyfus Service
Corporation and Dreyfus Brokerage Services, Inc. are registered broker/dealers
and members of the National Association of Securities Dealers, Inc., a
securities industry self-regulatory organization.
Certain subsidiaries of the Corporation are registered investment advisers under
the Investment Advisers Act of 1940 and, as such, are supervised by the SEC.
They are also subject to various U.S. federal and state laws and regulations and
to the laws of any countries in which they do business. These laws and
regulations generally grant supervisory agencies broad administrative powers,
including the power to limit or restrict the carrying on of business for failure
to comply with such laws and regulations. The possible sanctions which may be
imposed for violations of these laws and regulations include the suspension of
individual employees, limitations on engaging in business for specific periods,
the revocation of the registration as an investment adviser, censures and fines.
Each investment company (as defined in the Investment Company Act of 1940) which
is advised by a subsidiary of the Corporation, including the Dreyfus/Founders
family of mutual funds, is registered with the SEC, and the shares of most are
qualified for sale in all states in the United States and the District of
Columbia, except for investment companies that offer products only to residents
of a particular state or of a foreign country and except for certain investment
companies which are exempt from such registration or qualification.
Certain of the Corporation's public finance activities are regulated by the
Municipal Securities Rulemaking Board. Mellon Bank and certain of the
Corporation's other subsidiaries are registered with the Commodity Futures
Trading Commission (the "CFTC") as commodity pool operators or commodity trading
advisors and, as such, are subject to CFTC regulation.
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ITEM 1. BUSINESS (continued)
Supervision and Regulation (continued)
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Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act"), which became effective on September 29, 1995, bank
holding companies are permitted to acquire banks located in any state regardless
of the state law in effect at the time. The Interstate Act also provides for the
nationwide interstate branching of banks. Under the Interstate Act, both
national and state-chartered banks are permitted to merge across state lines
(and thereby create interstate branches) commencing June 1, 1997. States were
permitted to "opt-out" of the interstate branching authority by taking action
prior to the commencement date. States could also "opt-in" early (i.e., prior to
June 1, 1997) to the interstate branching provisions. Pennsylvania chose to
"opt-in" early, effective July 6, 1995, thereby enabling Pennsylvania banks,
including national banks having their main office in Pennsylvania, to merge with
out-of-state banks to create interstate branches inside or outside Pennsylvania.
In addition, Pennsylvania has permitted de novo branching into and out of
Pennsylvania as long as the law of the other state involved is reciprocal in
this regard.
Dividend Restrictions
The Corporation is a legal entity separate and distinct from its banking and
other subsidiaries. Its principal source of funds to pay dividends on its common
and preferred stock and debt service on its debt is dividends from its
subsidiaries. Various federal and state statutes and regulations limit the
amount of dividends that may be paid to the Corporation by its banking
subsidiaries without regulatory approval. The Corporation's principal banking
subsidiary, Mellon Bank, N.A., is a national bank. A national bank must obtain
the prior approval of the OCC to pay a dividend if the total of all dividends
declared by the bank in any calendar year would exceed the bank's net income for
that year combined with its retained net income for the preceding two calendar
years, less any required transfers to surplus or to fund the retirement of any
preferred stock. The Corporation's state-chartered banking subsidiaries also are
subject to dividend restrictions under applicable state law.
If, in the opinion of the applicable federal regulatory agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
Bank, could include the payment of dividends), the regulator may require, after
notice and hearing, that such bank cease and desist from such practice. The OCC
has indicated that the payment of dividends would constitute an unsafe and
unsound practice if the payment would deplete a depository institution's capital
base to an inadequate level. Under the Federal Deposit Insurance Act (the "FDI
Act"), an insured depository institution may not pay any dividend if the
institution is undercapitalized or if the payment of the dividend would cause
the institution to become undercapitalized. In addition, the federal bank
regulatory agencies have issued policy statements which provide that depository
institutions and their holding companies should generally pay dividends only out
of current operating earnings.
The ability of the Corporation's banking subsidiaries to pay dividends to the
Corporation may also be affected by various minimum capital requirements for
banking organizations, as described below. In addition, the right of the
Corporation to participate in the assets or earnings of a subsidiary are subject
to the prior claims of creditors of the subsidiary.
Transactions with Affiliates
There are certain restrictions on the ability of the Corporation and certain of
its non-bank affiliates to borrow from, and engage in other transactions with,
its banking subsidiaries and on the ability of such banking subsidiaries to pay
7
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ITEM 1. BUSINESS (continued)
Supervision and Regulation (continued)
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dividends to the Corporation. These restrictions are discussed in note 22 of the
Notes to Financial Statements on pages 95 and 96 of the Corporation's 1998
Annual Report to Shareholders. This note is incorporated herein by reference.
Unsafe and Unsound Practices
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Corporation, BSDT and the Corporation's non-bank subsidiaries, including Mellon
Securities Trust Company, a member of the Federal Reserve System. The FDIC has
similar authority with respect to Mellon 1st Business Bank, and the OTS has
similar authority with respect to Mellon Bank, F.S.B.
Deposit Insurance
Substantially all of the deposits of the banking subsidiaries of the Corporation
are insured up to applicable limits by the Bank Insurance Fund ("BIF") of the
FDIC and are subject to deposit insurance assessments to maintain the BIF. The
FDIC utilizes a risk-based assessment system which imposes insurance premiums
based upon a matrix that takes into account a bank's capital level and
supervisory rating. Such premiums now range from 0 cents for each $100 of
domestic deposits for the healthiest institutions to 27 cents for each $100 of
domestic deposits for the weakest institutions. In addition, the Deposit
Insurance Fund Act of 1996 authorizes the Financing Corporation ("FICO") to
impose assessments on BIF assessable deposits in order to service the interest
on FICO's bond obligations. The FICO current annual assessment on these deposits
is approximately 1.2 cents for each $100 of domestic deposits.
Liability of Commonly Controlled Institutions
The FDI Act contains a "cross-guarantee" provision that could result in any
insured depository institution owned by the Corporation being assessed for
losses incurred by the FDIC in connection with assistance provided to, or the
failure of, any other depository institution owned by the Corporation. Also,
under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial and managerial strength to each of its banking subsidiaries
and to commit resources to support each such bank in circumstances where such
bank might not be in a financial position to support itself.
Regulatory Capital
The Federal Reserve Board, the OCC and FDIC have substantially similar
risk-based and leverage capital guidelines for banking organizations. The
guidelines are intended to ensure that banking organizations have adequate
capital given the risk levels of their assets and off-balance sheet financial
instruments.
The risk-based capital ratio is determined by classifying assets and certain
off-balance sheet financial instruments into weighted categories, with higher
levels of capital being required for those categories perceived as representing
greater risk. Under the capital guidelines, a banking organization's total
capital is divided into tiers. "Tier I capital" consists of common equity,
excluding unrealized gains or losses, net of tax, on assets classified as
available for sale; qualifying noncumulative perpetual preferred stock; a
limited amount of qualifying cumulative perpetual preferred stock; and minority
interests in the equity accounts of consolidated subsidiaries, less certain
items such as goodwill and certain other intangible assets. The remainder (Tier
II and Tier III capital) consists of hybrid capital instruments, perpetual debt,
mandatory convertible debt securities, a limited amount of subordinated debt,
preferred stock that does not qualify as Tier I capital, and a limited amount of
the allowance for credit losses.
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ITEM 1. BUSINESS (continued)
Supervision and Regulation (continued)
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Under the Federal Reserve Board's risk-based capital guidelines for bank holding
companies, the required minimum ratio of Total capital (the sum of Tier I, Tier
II and Tier III) to risk-adjusted assets (including certain off-balance sheet
items, such as stand-by letters of credit) is currently 8%. The required minimum
ratio of Tier I capital to risk-adjusted assets is 4%. At December 31, 1998, the
Corporation's Total capital and Tier I capital to risk adjusted assets ratios
were 10.80% and 6.53%, respectively.
The Federal Reserve Board also requires bank holding companies to comply with
minimum leverage ratio guidelines. The leverage ratio is the ratio of a bank
holding company's Tier I capital to its total consolidated quarterly average
assets (as defined for regulatory purposes), net of the loan loss reserve,
goodwill and certain other intangible assets. The guidelines require a minimum
leverage ratio of 3% for bank holding companies that meet certain specified
criteria, including having the highest supervisory rating. All other bank
holding companies are required to maintain a minimum leverage ratio of 4%. The
Federal Reserve Board has not advised the Corporation of any specific leverage
ratio applicable to it. At December 31, 1998, the Corporation's leverage ratio
was 6.73%.
The Federal Reserve Board's capital guidelines provide that banking
organizations experiencing internal growth or making acquisitions are expected
to maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets. Also, the guidelines
indicate that the Federal Reserve Board will consider a "tangible Tier I
leverage ratio" in evaluating proposals for expansion or new activities. The
tangible Tier I leverage ratio is the ratio of a banking organization's Tier I
capital (excluding intangibles) to total assets (excluding intangibles).
The Corporation's banking subsidiaries are subject to risk-based and leverage
capital guidelines substantially similar to those imposed by the Federal Reserve
Board on bank holding companies.
Prompt Corrective Action
The FDI Act requires federal banking regulators to take prompt corrective action
with respect to depository institutions that do not meet minimum capital
requirements. The FDI Act identifies the following capital tiers for financial
institutions: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
Rules adopted by the federal banking agencies provide that an institution is
deemed to be: "well capitalized" if the institution has a Total risk-based
capital ratio of 10.0% or greater, a Tier I risk-based ratio of 6.0% or greater,
and a leverage ratio of 5.0% or greater, and the institution is not subject to
an order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific level for any capital measure;
"adequately capitalized" if the institution has a Total risk-based capital ratio
of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater, and a
leverage ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate Federal banking agency guidelines), and the institution
does not meet the definition of a well capitalized institution;
"undercapitalized" if the institution has a Total risk-based capital ratio that
is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate Federal banking agency guidelines) and the
institution does not meet the definition of a significantly undercapitalized or
critically undercapitalized institution; "significantly undercapitalized" if the
institution has a Total risk-based capital ratio that is less than 6.0%, a Tier
I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is
less than 3.0% and the institution does not meet the definition of a critically
undercapitalized institution; and "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2.0%. The FDI Act imposes progressively more restrictive constraints
on operations, management and capital distributions, depending on the capital
category in which an institution is classified.
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ITEM 1. BUSINESS (continued)
Supervision and Regulation (continued)
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At December 31, 1998, all of the Corporation's banking subsidiaries were well
capitalized based on the ratios and guidelines noted previously. A bank's
capital category, however, is determined solely for the purpose of applying the
prompt corrective action rules and may not constitute an accurate representation
of the bank's overall financial condition or prospects.
The appropriate federal banking agency may, under certain circumstances,
reclassify a well capitalized insured depository institution as adequately
capitalized. The appropriate agency is also permitted to require an adequately
capitalized or undercapitalized institution to comply with the supervisory
provisions as if the institution were in the next lower category (but not treat
a significantly undercapitalized institution as critically undercapitalized)
based on supervisory information other than the capital levels of the
institution. The statute provides that an institution may be reclassified if the
appropriate federal banking agency determines (after notice and opportunity for
hearing) that the institution is in an unsafe or unsound condition or deems the
institution to be engaging in an unsafe or unsound practice.
Depositor Preference
Legislation enacted in August 1993 provides that depositors and certain claims
for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such an institution in the "liquidation or other resolution" of
such an institution by any receiver.
Legislative Initiatives
During recent years, regulatory guidelines have been adopted, and legislation
has been proposed in Congress, to address concerns regarding retail sales by
banks of various nondeposit investment products, including mutual funds.
Legislative and regulatory attention to these matters is likely to continue, and
may intensify, in the future. Although existing statutory and regulatory
requirements in this regard have not had a significant effect on the
Corporation's business, there can be no assurance that future requirements will
not have such an effect. Various other legislative initiatives, including
proposals to restructure the banking regulatory system and the separation of
banking from certain securities and other commercial activities, are from time
to time introduced in Congress. The Corporation cannot determine the ultimate
effect that any such potential legislation, if enacted, would have upon its
financial condition or operations.
Competition
- -----------
The Corporation and its subsidiaries continue to be subject to intense
competition in all aspects and areas of their businesses from bank holding
companies and banks; other domestic and foreign depository institutions, such as
savings and loan associations, savings banks and credit unions; and other
service providers, such as finance, mortgage and leasing companies, brokerage
firms, credit card companies, benefits consultants, mutual funds, investment
banking companies, investment management firms and insurance companies. The
Corporation also competes with nonfinancial institutions, including retail
stores and manufacturers of consumer products that maintain their own credit
programs, as well as governmental agencies that make available loans to certain
borrowers. Also, in the Business Fee Services sector, the Corporation competes
with a wide range of technologically capable service providers, such as data
processing and outsourcing firms. Many of the Corporation's competitors, with
the particular exception of bank holding companies, banks and thrift
institutions, are not subject to regulation as extensive as that described under
the "Supervision and Regulation" section and, as a result, may have a
competitive advantage over the Corporation in certain respects.
Employees
- ---------
The Corporation and its subsidiaries had an average of approximately 28,500
full-time equivalent employees in the fourth quarter of 1998.
10
<PAGE> 12
Statistical Disclosure by Bank Holding Companies
The Securities Act of 1933 Industry Guide 3 and the Securities Exchange Act of
1934 Industry Guide 3 ("Guide 3"), requires that the following statistical
disclosures be made in Annual Reports on Form 10-K filed by bank holding
companies.
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential
Information required by this section of Guide 3 is presented in the Rate/Volume
Variance Analysis below. Required information is also presented in the Financial
Section of the Corporation's 1998 Annual Report to Shareholders in the
Consolidated Balance Sheet -Average Balances and Interest Yields/Rates on pages
38 and 39, and in Net Interest Revenue, on page 37, which are incorporated
herein by reference.
<TABLE>
<CAPTION>
RATE/VOLUME VARIANCE ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
1998 over (under) 1997 1997 over (under) 1996
--------------------------------- --------------------------------
Due to change in Due to change in
----------------- Net ------------------ Net
(in millions) Rate Volume change Rate Volume change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest
revenue from interest-earning assets:
Federal funds sold and securities
under resale agreements $ 6 $ 13 $ 19 $ - $ - $ -
Interest-bearing deposits with banks - 7 7 (2) (8) (10)
Other money market investments - - - 1 (2) (1)
Trading account securities 2 5 7 - 1 1
Securities:
U.S. Treasury and agency securities (4) 2 (2) 13 (38) (25)
Obligations of states and political
subdivisions - 1 1 - - -
Other (1) 1 - (1) (3) (4)
Loans (includes loan fees) (63) 207 144 (32) 46 14
- -----------------------------------------------------------------------------------------------------------------------------
Total (60) 236 176 (21) (4) (25)
Increase (decrease) in interest
expense on interest-bearing liabilities:
Deposits in domestic offices:
Demand - 3 3 1 (12) (11)
Money market and other savings accounts (1) 39 38 (3) 9 6
Retail savings certificates (3) 21 18 8 32 40
Other time deposits (2) 18 16 4 1 5
Deposits in foreign offices 1 6 7 (9) (56) (65)
Federal funds purchased and securities
under repurchase agreements 1 45 46 3 (20) (17)
Other short-term borrowings 3 6 9 (5) (11) (16)
Notes and debentures (with original
maturities over one year) (4) 19 15 (1) 47 46
- -----------------------------------------------------------------------------------------------------------------------------
Total (5) 157 152 (2) (10) (12)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest revenue $(55) $ 79 $ 24 $ (19) $ 6 $(13)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Amounts are calculated on a taxable equivalent basis where applicable, at
a tax rate approximating 35% and are before the effect of reserve requirements.
Changes in interest revenue or interest expense arising from the combination of
rate and volume variances are allocated proportionally to rate and volume based
on their relative absolute magnitudes.
11
<PAGE> 13
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------------------
II. Securities Portfolio
A. Carrying values of securities at year-end are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE December 31,
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and agency securities $5,244 $2,727 $4,010
Obligations of states and political subdivisions 112 26 49
Other securities:
Other mortgage-backed 2 3 4
Bonds, notes and debentures 10 11 12
Other 5 - 36
- ----------------------------------------------------------------------------------------------------------------------------------
Total other securities 17 14 52
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $5,373 $2,767 $4,111
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES December 31,
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and agency securities $1,518 $1,994 $2,292
Other securities:
Other mortgage-backed 16 23 29
Bonds, notes and debentures 16 14 16
Stock of Federal Reserve Bank 51 50 37
Other 1 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total other securities 84 88 83
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,602 $2,082 $2,375
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B. Maturity Distribution of Securities
Information required by this section of Guide 3 is presented in the
Corporation's 1998 Annual Report to Shareholders in note 3 of Notes to
Financial Statements on Securities on pages 78 through 80, which note is
incorporated herein by reference.
12
<PAGE> 14
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
III. Loan Portfolio
A. Types of Loans
Information required by this section of Guide 3 is included in the
Corporate Risk section of the Corporation's 1998 Annual Report to
Shareholders on pages 55 through 65, which portions are incorporated herein
by reference.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
<TABLE>
<CAPTION>
Maturity distribution of loans at December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions) Within 1 year (a) 1-5 years Over 5 years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic:(b)
Commercial and financial $3,554 $6,770 $1,736 $12,060
Commercial real estate 572 1,175 538 2,285
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic 4,126 7,945 2,274 14,345
International 1,003 239 312 1,554
- ------------------------------------------------------------------------------------------------------------------------------------
Total $5,129 $8,184 $2,586 $15,899
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Maturity distributions are based on remaining contractual maturities.
(a) Includes demand loans and loans with no stated maturity.
(b) Excludes consumer mortgages, credit card, other consumer credit and lease
finance assets.
<TABLE>
<CAPTION>
Sensitivity of loans at December 31, 1998, to changes in interest rates
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic International
(in millions) operations (a) operations Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans due in one year or less (b) $4,126 $1,003 $5,129
Loans due after one year:
Variable rates 8,950 429 9,379
Fixed rates 1,269 122 1,391
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $14,345 $1,554 $15,899
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Maturity distributions are based on remaining contractual maturities.
(a) Excludes consumer mortgages, credit card, other consumer credit and lease
finance assets.
(b) Includes demand loans and loans with no stated maturity.
C. Risk Elements
Information required by this section of Guide 3 is included in the
Corporate Risk section of the Corporation's 1998 Annual Report to
Shareholders on pages 55 through 65, which portions are incorporated herein
by reference.
IV. Summary of Loan Loss Experience
The Corporation maintains a credit loss reserve that, in management's
judgment, is adequate to absorb losses embedded in the loan portfolio.
Management reviews the adequacy of the reserve at least quarterly. The
reserve determination methodology is designed to provide procedural
discipline in assessing the adequacy of the reserve. For analytical
purposes, the reserve methodology estimates loss potential in both the
commercial and consumer loan portfolios. This methodology primarily uses an
individual evaluation of problem credits and a historical analysis of loss
experience and criticized credit levels. In addition, the status and amount
of nonperforming and past-due loans are considered. Qualitative factors
considered include: industry risks, current economic factors affecting
collectibility, trends in portfolio volume, quality, maturity and
composition and current interest rate levels and economic conditions.
13
<PAGE> 15
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
IV. Summary of Loan Loss Experience (continued)
When losses on specific loans are identified, management charges off the portion
deemed uncollectible. The allocation of the Corporation's reserve for credit
losses is presented below as required by Guide 3.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic reserve:
Commercial and financial $194 $162 $117 $169 $195
Real estate:
Commercial 92 88 98 92 157
Consumer 56 51 58 61 75
Consumer credit 117 132 198 135 141
Lease finance assets 26 30 43 6 17
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic reserve 485 463 514 463 585
International reserve 11 12 11 8 22
- ------------------------------------------------------------------------------------------------------------------------------------
Total reserve $496 $475 $525 $471 $607
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Further information on the Corporation's credit policies, the factors that
influenced management's judgment in determining the level of the reserve for
credit losses, and the analyses of the credit loss reserve for the years
1994-1998 are set forth in the Financial Section of the Corporation's 1998
Annual Report to Shareholders in the Credit Risk section on pages 55 and 56, the
Credit Quality Expense, Reserve for Credit Losses and Review of Net Credit
Losses section on pages 64 and 65, in note 1 of Notes to Financial Statements
under Reserve for Credit Losses on page 75 and in note 6 on page 81 which
portions are incorporated herein by reference.
For each category above, the ratio of loans to consolidated total loans is as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial and financial 38% 37% 37% 40% 38%
Real estate:
Commercial 7 6 6 6 6
Consumer 27 29 29 32 32
Consumer credit 14 14 14 16 18
Lease finance assets 9 9 9 3 3
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 95 95 95 97 97
International loans 5 5 5 3 3
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 100% 100% 100% 100% 100%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
V. Deposits
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Maturity distribution of domestic time deposits at December 31, 1998
Within 4-6 7-12 Over
(in millions) 3 months months months 1 year Total
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time certificates of deposit in denominations
of $100,000 or greater $2,144 $ 509 $ 415 $ 154 $3,222
Time certificates of deposit in denominations
of less than $100,000 1,404 1,489 1,790 1,068 5,751
---------------------------------------------------------------------------------------------------------------------------
Total time certificates of deposit 3,548 1,998 2,205 1,222 8,973
---------------------------------------------------------------------------------------------------------------------------
Other time deposits in denominations
of $100,000 or greater 19 - - 1 20
Other time deposits in denominations
of less than $100,000 18 - - - 18
---------------------------------------------------------------------------------------------------------------------------
Total other time deposits 37 - - 1 38
---------------------------------------------------------------------------------------------------------------------------
Total domestic time deposits $3,585 $1,998 $2,205 $1,223 $9,011
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The majority of foreign deposits of approximately $3.1 billion at
December 31, 1998, were in amounts in excess of $100,000. Additional
information required by this section of Guide 3 is set forth in the
Corporation's 1998 Annual Report to Shareholders in Consolidated
Balance Sheet -- Average Balances and Interest Yields/Rates on pages 38
and 39, which pages are incorporated herein by reference.
VI. Return on Equity and Assets
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(1) Return on total assets(a), based on:
Net income 1.81% 1.80% 1.74%
Net income applicable to common stock 1.79 1.75 1.64
(2) Return on common shareholders' equity (a),
based on net income applicable to common stock 20.67 21.47 20.38
Return on total shareholders' equity (a), based on net income 20.75 20.83 19.23
(3) Dividend payout ratio of common stock, based on
diluted net income per share 42.42 44.00 44.95
(4) Equity to total assets (a), based on:
Common shareholders' equity 8.67 8.14 8.05
Total shareholders' equity 8.72 8.62 9.07
---------------------------------------------------------------------------------------------------------------------------
(a) Computed on a daily average basis.
</TABLE>
15
<PAGE> 17
Statistical Disclosure by Bank Holding Companies (continued)
- ------------------------------------------------
VII. Short-Term Borrowings
Federal funds purchased and securities sold under agreements to
repurchase represent funds acquired for securities transactions and
other funding requirements. Federal funds purchased mature on the
business day after execution. Selected balances and rates are as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1998 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold
under agreements to repurchase:
Maximum month-end balance $3,594 $2,063
Average daily balance $2,207 $1,390
Average rate during the year 5.56% 5.51%
Balance at December 31 $3,594 $1,997
Average rate at December 31 4.07% 5.84%
--------------------------------------------------------------------------------------------------
</TABLE>
ITEM 2. PROPERTIES
Pittsburgh properties
- ---------------------
In 1983, Mellon Bank entered into a long-term lease of One Mellon Bank Center, a
54-story office building in Pittsburgh, Pennsylvania. At December 31, 1998,
Mellon Bank occupied approximately 78% of the building's approximately 1,525,000
square feet of rentable space and subleased substantially all of the remaining
space to third parties.
During 1984, Mellon Bank entered into a sale/leaseback arrangement of the Union
Trust Building, also known as Two Mellon Bank Center, in Pittsburgh,
Pennsylvania, while retaining title to the land thereunder. At December 31,
1998, Mellon Bank occupied approximately 82% of this building's approximately
595,000 square feet of rentable space and subleased substantially all of the
remaining space to third parties.
Mellon Bank owns the 41-story office building in Pittsburgh, Pennsylvania, known
as Three Mellon Bank Center. At December 31, 1998, Mellon Bank occupied
approximately 99% of the approximately 943,000 square feet of rentable space,
with the remainder leased to third parties.
In September 1998, Mellon Bank broke ground for its 14-story, approximately
750,000 square foot Mellon Client Service Center (the "Center") in Pittsburgh,
Pennsylvania. The Center is expected to be ready for occupancy in the spring of
2001 with Mellon Bank occupying all of the space.
Philadelphia properties
- -----------------------
Mellon Bank leases a building in Philadelphia, Pennsylvania, known as Mellon
Independence Center. At December 31, 1998, Mellon Bank occupied approximately
50% of Mellon Independence Center's approximately 882,000 square feet of
rentable space, with the remainder of the space in the building subleased to
third parties.
In 1990, Mellon Bank entered into a 25-year lease for a portion of a 53-story
office building known as Mellon Bank Center, at the corner of 18th and Market
Streets in the Center City area of Philadelphia, Pennsylvania. At December 31,
1998, Mellon Bank leased approximately 19% of the building's approximately
1,245,000 square feet of rentable space.
Boston properties
- -----------------
The Boston Company leases space in a 41-story downtown Boston, Massachusetts
office building known as One Boston Place. At December 31, 1998, The Boston
Company leased approximately 34% of One Boston Place's approximately 770,000
square feet of rentable space.
16
<PAGE> 18
ITEM 2. PROPERTIES (continued)
At December 31, 1998, The Boston Company also occupied space in three office
buildings in the Wellington Business Center located in Medford, Massachusetts.
At December 31, 1998, The Boston Company leased 100% of the approximately
117,000 rentable square foot building known as Client Services Center II. At
December 31, 1998, The Boston Company leased 100% of the approximately 320,000
rentable square foot building known as Client Services Center III and leased
approximately 22,000 square feet of rentable space in the building known as
Client Services Center I.
In February 1999, Mellon announced the opening of a three-story, approximately
385,000 square foot office building in Everett, Massachusetts. It has entered
into a 20-year lease of the facility and will relocate from space in the three
office buildings in the Wellington Business Center located in Medford,
Massachusetts that it currently occupies and will occupy all of this new
building.
New York properties
- -------------------
At December 31, 1998, The Dreyfus Corporation leased approximately 277,000
square feet of rentable space at 200 Park Avenue in New York City. Other than
approximately 14,000 square feet of rentable space which is subleased to a third
party, all of the space is currently occupied by Dreyfus. At December 31, 1998,
Dreyfus Service Corporation leased approximately 160,000 square feet of rentable
space in EAB Plaza in Uniondale, New York. This space is 100% occupied by
Dreyfus.
Other properties
- ----------------
The banking subsidiaries' retail offices are both owned and leased under leases
expiring at various times through the year 2020.
Other subsidiaries of the Corporation lease office space primarily for their
operations at many of the locations listed on pages 14 through 16 of the
Principal Locations and Operating Entities Section of the Corporation's 1998
Annual Report, which pages are incorporated herein by reference. For additional
information on the Corporation's premises and equipment, see note 7 of Notes to
Financial Statements on page 82 of the Corporation's 1998 Annual Report, which
note is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions and proceedings are pending or are threatened against the
Corporation and its subsidiaries, some of which seek relief or damages in
amounts that are substantial. These actions and proceedings arise in the
ordinary course of the Corporation's businesses and include suits relating to
its lending, collections, servicing, investment, mutual fund, advisory, trust
and other activities. Because of the complex nature of some of these actions and
proceedings, it may be a number of years before such matters ultimately are
resolved. After consultation with legal counsel, management believes that the
aggregate liability, if any, resulting from such pending and threatened actions
and proceedings will not have a material adverse effect on the Corporation's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for vote during the fourth quarter
of 1998.
17
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is set forth in the Corporation's 1998
Annual Report to Shareholders in Liquidity and Dividends on pages 48 through 50,
in Selected Quarterly Data on page 67, in note 22 of Notes to Financial
Statements on pages 95 and 96 and in Corporate Information on page 111, which
portions are incorporated herein by reference.
In October 1996, the board of directors declared a dividend, paid October 31,
1996, of one right (a "Right") issued pursuant to the Shareholder Protection
Rights Agreement, dated as of October 15, 1996 (the "Rights Agreement"), for
each outstanding share of the Corporation's Common Stock (the "Common Stock").
The Rights are not currently exercisable and trade only with the Common Stock
(and are currently evidenced only in connection with the Common Stock). The
Rights would separate from the Common Stock and become exercisable only when a
person or group acquires 15% or more of the Common Stock or ten days after a
person or group commences a tender offer that would result in ownership of 15%
or more of the Common Stock. At that time, each Right would entitle the holder
to purchase for $112.50 (the "exercise price") one one-hundredth of a share of
participating preferred stock, which is designed to have economic and voting
rights generally equivalent to one share of common stock. Should a person or
group actually acquire 15% or more of the Common Stock, each Right held by the
acquiring person or group (or their transferees) would become void and each
Right held by the Corporation's other shareholders would entitle those holders
to purchase for the exercise price a number of shares of the Common Stock having
a market value of twice the exercise price. Should the Corporation, at any time
after a person or group has become a 15% beneficial owner and acquired control
of the Corporation's board of directors, be involved in a merger or similar
transaction with any person or group or sell assets to any person or group, each
outstanding Right would then entitle its holder to purchase for the exercise
price a number of shares of such other company having a market value of twice
the exercise price. In addition, if any person or group acquires 15% or more of
the Common Stock, the Corporation may, at its option and to the fullest extent
permitted by law, exchange one share of Common Stock for each outstanding Right.
The Rights are not exercisable until the above events occur and will expire on
October 31, 2006, unless earlier exchanged or redeemed by the Corporation. The
Corporation may redeem the Rights for one-half cent per Right under certain
circumstances.
The foregoing description is not intended to be complete and is qualified in its
entirety by reference to the Rights Agreement, which is an exhibit to this
Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the Corporation's 1998
Annual Report to Shareholders in the Financial Summary on page 21, in the
Significant Financial Events in 1998 on pages 22 through 24, in the Overview of
1998 results on pages 25 and 26, in the Consolidated Balance Sheet -- Average
Balances and Interest Yields/Rates on pages 38 and 39, and in note 1 of Notes to
Financial Statements on pages 72 through 78, which portions are incorporated
herein by reference.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is set forth in the Corporation's 1998
Annual Report to Shareholders in the Financial Review on pages 22 through 67 and
in note 22 of Notes to Financial Statements on pages 95 and 96, which portions
are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the Corporation's 1998
Annual Report to Shareholders in the Interest Rate Sensitivity Analysis on pages
50 through 55, in note 1 of Notes to Financial Statements under
Off-balance-sheet instruments used for risk management purposes and
Off-balance-sheet instruments used for trading activities on page 77 and in note
24 of Notes to Financial Statements on pages 96 through 103, which portions are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 14 on page 22 hereof for a detailed listing of the
items under Financial Statements, Financial Statement Schedules, and Other
Financial Data which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Corporation's proxy
statement for its 1999 Annual Meeting of Shareholders (the "1999 Proxy
Statement") in the Election of Directors-Biographical Summaries of Nominees and
Directors section on pages 2 through 7 and in the Section 16(a) Beneficial
Ownership Reporting Compliance section on page 28, each of which sections is
incorporated herein by reference, and in the following section "Executive
Officers of the Registrant."
EXECUTIVE OFFICERS OF THE REGISTRANT
The name and age of, and the positions and offices held by, each executive
officer of the Corporation as of March 1, 1999, together with the offices held
by each such person during the last five years, are listed on the following
pages. Messrs. McGuinn, Condron and Elliott have executed employment contracts
with the Corporation. All other executive officers serve at the pleasure of
their appointing authority. No executive officer has a family relationship to
any other listed executive officer.
19
<PAGE> 21
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Executive Officers of the Registrant (continued)
- ------------------------------------
<TABLE>
<CAPTION>
Age Position Year Elected
--- -------- ------------
<S> <C> <C> <C>
Martin G. McGuinn 56 Chairman and Chief Executive Officer, 1999 (1)
Mellon Bank Corporation and Mellon
Bank, N.A.
Christopher M. Condron 51 President and Chief Operating Officer, 1999 (2)
Mellon Bank Corporation and Mellon
Bank, N.A.
Chairman and Chief Executive Officer, 1996
The Dreyfus Corporation
Steven G. Elliott 52 Senior Vice Chairman and Chief 1999 (3)
Financial Officer, Mellon Bank
Corporation and Mellon Bank, N.A.
John T. Chesko 49 Vice Chairman and Chief Risk Officer, 1997 (4)
Mellon Bank Corporation and Mellon
Bank, N.A.
Jeffery L. Leininger 53 Vice Chairman, Mellon Bank Corporation 1996 (5)
and Mellon Bank, N.A.
Keith P. Russell 53 Vice Chairman, Mellon Bank Corporation 1996 (6)
and Mellon Bank, N.A.
Peter Rzasnicki 55 Vice Chairman, Mellon Bank Corporation 1998 (7)
and Mellon Bank, N.A.
William J. Stallkamp 59 Vice Chairman, Mellon Bank Corporation 1998 (8)
and Mellon Bank, N.A.
Chairman and Chief Executive Officer, 1996
Mellon PSFS
Allan P. Woods 52 Vice Chairman and Chief Information 1999 (9)
Officer, Mellon Bank Corporation and
Mellon Bank, N.A.
Michael A. Bryson 52 Executive Vice President and Treasurer, 1998 (10)
Mellon Bank Corporation
Michael K. Hughey 47 Senior Vice President and Controller of 1990
Mellon Bank Corporation and Senior
Vice President, Director of Taxes and
Controller, Mellon Bank, N.A.
</TABLE>
20
<PAGE> 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Executive Officers of the Registrant (continued)
- ------------------------------------
(1) From 1993 through February 1998, Mr. McGuinn served as Vice Chairman,
Retail Financial Services, Mellon Bank Corporation and Mellon Bank, N.A.
From March 1998 through December 1998, he was Chairman and Chief
Executive Officer, Mellon Bank, N.A. and Vice Chairman, Mellon Bank
Corporation.
(2) From 1989 to January 1994, Mr. Condron was President of Boston Safe
Deposit and Trust Company and Executive Vice President of The Boston
Company. In January 1994, he assumed the title of Vice Chairman of The
Boston Company. From November 1994 through February 1998, he was Vice
Chairman, Mellon Bank Corporation and Mellon Bank, N.A. From March 1998
through December 1998, Mr. Condron was President and Chief Operating
Officer, Mellon Bank, N.A. and Vice Chairman, Mellon Bank Corporation.
(3) From 1992 through February 1998, Mr. Elliott served as Vice Chairman and
Chief Financial Officer of Mellon Bank Corporation and Mellon Bank, N.A.
From March 1998 through December 1998, he was Senior Vice Chairman and
Chief Financial Officer of Mellon Bank, N.A. and Vice Chairman and Chief
Financial Officer of Mellon Bank Corporation. From 1990 through April
1998, Mr. Elliott was Treasurer of Mellon Bank Corporation.
(4) From 1991 to December 1994, Mr. Chesko was Senior Vice President and
Senior Credit Approval Officer of the Credit Policy Department of Mellon
Bank, N.A. From December 1994 to June 1997, he was Executive Vice
President, Risk Management, of Mellon Bank, N.A. and Chief Compliance
Officer of Mellon Bank Corporation and Mellon Bank, N.A. From April 1996
to December 1998, Mr. Chesko was Chief Credit Officer of Mellon Bank
Corporation and Mellon Bank, N.A.
(5) From 1988 to February 1994, Mr. Leininger was Senior Vice President of
the Middle Market Banking Department's western region. From February 1994
to February 1996, he was Executive Vice President and Department Head of
Middle Market Banking of Mellon Bank, N.A.
(6) From 1992 to June 1996, Mr. Russell was Vice Chairman, Chief Risk and
Credit Officer, Mellon Bank Corporation and Mellon Bank, N.A.
(7) From 1993 to 1995, Mr. Rzasnicki was Executive Vice President, Mortgage
Banking Department and AFCO/CAFO. From 1995 through March 1998, he was
Executive Vice President, Global Trust Services, Mellon Bank, N.A.
(8) From 1988 to March 1998, Mr. Stallkamp was Executive Vice President,
Mellon Bank, N.A.
(9) From 1993 through December 1998, Mr. Woods was Executive Vice President,
Mellon Information Services Department, Mellon Bank, N.A.
(10) From 1994 to April 1998, Mr. Bryson was Senior Vice President, Strategic
Planning, Mellon Bank, N.A.
21
<PAGE> 23
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 1999 Proxy Statement in
the Directors' Compensation section on pages 9 and 10 and in the Executive
Compensation section on pages 15 through 22, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the 1999 Proxy Statement in
the Beneficial Ownership of Stock section on pages 12 and 13, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the 1999 Proxy Statement in
the Business Relationships and Related Transactions and Certain Legal
Proceedings sections on page 11, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements and schedules required for the Annual Report of
the Corporation on Form 10-K are included, attached or incorporated by
reference as indicated in the following index. Page numbers refer to
pages of the Financial Section of the Corporation's 1998 Annual Report to
Shareholders.
<TABLE>
<CAPTION>
(i) Financial Statements Page No.
-------------------- --------
<S> <C>
Mellon Bank Corporation (and its subsidiaries):
Consolidated Income Statement 68
Consolidated Balance Sheet 69
Consolidated Statement of Changes in Shareholders' Equity 70
Consolidated Statement of Cash Flows 71 and 72
Notes to Financial Statements 72 through 109
Report of Independent Auditors 110
(ii) Financial Statement Schedules
-----------------------------
Financial Statement schedules are omitted either because they are not
required or are not applicable, or because the required information is
shown in the financial statements or notes thereto.
(iii) Other Financial Data
--------------------
Selected Quarterly Data 67
(b) Current Reports on Form 8-K during the fourth quarter of 1998:
(1) A report dated October 16, 1998, which included, under Items 5 and 7,
(i) the Corporation's press release, dated October 16, 1998,
announcing the completion of its acquisition of a majority interest
in Newton Management Limited and (ii) the Corporation's press
release, dated October 20, 1998, regarding third quarter 1998 and
first nine months 1998 results of operations.
</TABLE>
22
<PAGE> 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(continued)
(b) Current Reports on Form 8-K during the fourth quarter of 1998 (continued)
(2) A report dated November 9, 1998, which included, under Item 7,
certain exhibits incorporated by reference into Registration
Statement No. 33-62151 pertaining to certain debt securities of
Mellon Financial Company and related guarantees of the Registrant.
(c) Exhibits
The exhibits listed on the Index to Exhibits on pages 25 through 30
hereof are incorporated by reference or filed herewith in response to
this Item. In addition, the information required by Exhibit 11.1,
Computation of Basic and Diluted Net Income Per Common Share, is set
forth in the Corporation's 1998 Annual Report to Shareholders in note 19
of Notes to Financial Statements on pages 87 and 88, which portions are
incorporated herein by reference.
23
<PAGE> 25
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Mellon Bank Corporation
By: /s/ Martin G. McGuinn
----------------------------
Martin G. McGuinn
Chairman and Chief
Executive Officer
DATED: March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the date indicated.
Signature Capacities
- ------------------------------ -----------------------------
By: /s/ Martin G. McGuinn
--------------------------- Director and Principal
Martin G. McGuinn Executive Officer
By: /s/ Steven G. Elliott Principal Financial Officer
---------------------------
Steven G. Elliott
By: /s/ Michael K. Hughey Principal Accounting Officer
---------------------------
Michael K. Hughey
Dwight L. Allison, Jr.; Directors
Burton C. Borgelt; Carol R. Brown;
Frank V. Cahouet; Jared L. Cohon;
Christopher M. Condron; J. W. Connolly;
Charles A. Corry; C. Frederick Fetterolf;
Ira J. Gumberg; Pemberton Hutchinson;
George W. Johnstone; Rotan E. Lee;
Andrew W. Mathieson; Edward J. McAniff;
Robert Mehrabian; Seward Prosser Mellon;
Mark A. Nordenberg; David S. Shapira;
Joab L. Thomas; Wesley W. von Schack;
and William J. Young
By: /s/ Carl Krasik DATED: March 19, 1999
---------------------------
Carl Krasik
Attorney-in-fact
24
<PAGE> 26
Index to Exhibits
-----------------
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ------------------------------------- ----------------------------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Previously filed as Exhibit 3.1 to
Mellon Bank Corporation, as amended the Quarterly Report on Form 10-Q
and restated as of September 17, 1998. (File No. 1-7410) for the quarter ended
September 30, 1998, and incorporated
herein by reference.
3.2 By-Laws of Mellon Bank Corporation, as Previously filed as Exhibit 3.2 to
amended, effective November 5, 1998. the Quarterly Report on Form 10-Q
(File No. 1-7410) for the quarter ended
September 30, 1998, and incorporated
herein by reference.
4.1 Instruments defining the rights See Exhibits 3.1 and 3.2 above.
of securities holders.
4.2 Shareholder Protection Rights Agreement Previously filed as Exhibit 1 to Form
between Mellon Bank Corporation and 8-A Registration Statement (File
Mellon Bank, N.A., as Rights Agent, No. 1-7410) dated October 29, 1996,
dated as of October 15, 1996. and incorporated herein by reference.
4.3 Amendment No. 1, dated as of June 2, Previously filed as Exhibit 4.1 to the
1997, to Shareholder Protection Rights Quarterly Report on Form 10-Q (File
Agreement between Mellon Bank No. 1-7410) for the quarter ended
Corporation and Mellon Bank, N.A., as June 30, 1997, and incorporated herein
Rights Agent, dated as of October 15, 1996. by reference.
4.4 Junior Subordinated Indenture, dated as of Previously filed as Exhibit 4.1
December 3, 1996, between Mellon Bank to Current Report on Form 8-K
Corporation and The Chase Manhattan Bank, (File No. 1-7410) dated December 3,
as Debenture Trustee. 1996, and incorporated herein by
reference.
4.5(a) Certificate representing the 7.72% Junior Previously filed as Exhibit 4.2
Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K
Series A, of Mellon Bank Corporation. (File No. 1-7410) dated December 3,
1996, and incorporated herein by
reference.
4.5(b) Certificate representing the 7.995% Junior Previously filed as Exhibit 4.2
Subordinated Deferrable Interest Debentures, to Current Report on Form 8-K
Series B, of Mellon Bank Corporation. (File No. 1-7410) dated December 20,
1996, and incorporated herein by
reference.
</TABLE>
25
<PAGE> 27
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ------------------------------------- ----------------------------------------
<S> <C> <C>
4.6(a) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3
as of December 3, 1996, of Mellon Capital I, to Current Report on Form 8-K
among Mellon Bank Corporation, as Depositor, (File No. 1-7410) dated December 3,
The Chase Manhattan Bank, as Property Trustee, 1996, and incorporated herein by
Chase Manhattan Bank Delaware, as Delaware reference.
Trustee, and the Administrative Trustees named
therein.
4.6(b) Amended and Restated Trust Agreement, dated Previously filed as Exhibit 4.3
as of December 20, 1996, of Mellon Capital II, to Current Report on Form 8-K
among Mellon Bank Corporation, as Depositor, (File No. 1-7410) dated December 20,
The Chase Manhattan Bank, as Property Trustee, 1996, and incorporated herein by
Chase Manhattan Bank Delaware, as Delaware reference.
Trustee, and the Administrative Trustees named
therein.
4.7(a) Certificate representing the 7.72% Capital Previously filed as Exhibit 4.4
Securities, Series A, of Mellon Capital I. to Current Report on Form 8-K
(File No. 1-7410) dated December 3,
1996, and incorporated herein by
reference.
4.7(b) Certificate representing the 7.995% Capital Previously filed as Exhibit 4.4
Securities, Series B, of Mellon Capital II. to Current Report on Form 8-K
(File No. 1-7410) dated December 20,
1996, and incorporated herein by
reference.
4.8(a) Guarantee Agreement, dated as of December 3, Previously filed as Exhibit 4.5
1996, between Mellon Bank Corporation, as to Current Report on Form 8-K
guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated December 3,
Guarantee Trustee. 1996, and incorporated herein by
reference.
4.8(b) Guarantee Agreement, dated as of December 20, Previously filed as Exhibit 4.5
1996, between Mellon Bank Corporation, as to Current Report on Form 8-K
Guarantor, and The Chase Manhattan Bank, as (File No. 1-7410) dated December 20,
Guarantee Trustee. 1996, and incorporated herein by
reference.
</TABLE>
26
<PAGE> 28
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ------------------------------------- ----------------------------------------
<S> <C> <C>
10.1 Lease dated as of February 1, 1983, Previously filed as Exhibit 10.4
between 500 Grant Street Associates to Annual Report on Form 10-K
Limited Partnership and Mellon (File No. 1-7410) for the year ended
Bank, N.A. with respect to One Mellon December 31, 1992, and incorporated
Bank Center. herein by reference.
10.2 First Amendment to Lease Agreement Previously filed as Exhibit 10.1
dated as of November 1, 1983, to Registration Statement on Form
between 500 Grant Street S-15 (Registration No. 2-88266)
Associates Limited Partnership and incorporated herein by
and Mellon Bank, N.A. reference.
10.3* Mellon Bank Corporation Profit Previously filed as Exhibit 10.7
Bonus Plan, as amended. to Annual Report on Form 10-K
(File No. l-7410) for the year ended
December 31, 1990, and incorporated
herein by reference.
10.4* Mellon Bank Corporation Long-Term Filed herewith.
Profit Incentive Plan (1996), as
amended effective January 15, 1999.
10.5* Mellon Bank Corporation Stock Previously filed as Exhibit 10.1 to the
Option Plan for Outside Directors Quarterly Report on Form 10-Q (File
(1989), as amended effective March 17, 1998. No. 1-7410) for the quarter ended
March 31, 1998, and incorporated
herein by reference.
10.6* Mellon Bank Corporation 1990 Filed herewith.
Elective Deferred Compensation Plan
for Directors and Members of the
Advisory Board, as amended, effective January 15,
1999.
10.7* Mellon Bank Corporation Elective Filed herewith.
Deferred Compensation Plan for
Senior Officers, as amended, effective January 15,
1999.
10.8* Mellon Bank IRC Section 401(a)(17) Previously filed as Exhibit 10.2 to the
Plan, as amended, effective Quarterly Report on Form 10-Q (File
September 15, 1998. No. 1-7410) for the quarter ended
September 30, 1998, and incorporated
herein by reference.
</TABLE>
* Management contract or compensatory plan arrangement.
27
<PAGE> 29
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ------------------------------------- ----------------------------------------
<S> <C> <C>
10.9* Mellon Bank Optional Life Insurance Filed herewith.
Plan, as amended, effective
January 15, 1999.
10.10* Mellon Bank Executive Life Insurance Filed herewith.
Plan, as amended, effective
January 15, 1999.
10.11* Mellon Bank Senior Executive Life Filed herewith.
Insurance Plan, as amended, effective
January 15, 1999.
10.12* Mellon Bank Corporation Retirement Plan Previously filed as Exhibit 10.1 to
for Outside Directors, effective Quarterly Report on Form 10-Q (File
January 1, 1994. No. 1-7410) for the quarter ended
June 30, 1995, and incorporated
herein by reference.
10.13* Mellon Bank Corporation Phantom Stock Filed herewith.
Unit Plan (1995), as amended, effective
January 15, 1999.
10.14* Employment Agreement between Mellon Previously filed as Exhibit 10.17 to
Bank, N.A. and Frank V. Cahouet, Annual Report on Form 10-K
effective as of July 25, 1993, and amended (File No. 1-7410) for the year ended
and restated as of October 17, 1995. December 31, 1995, and incorporated
herein by reference.
10.15* Letter Agreement, dated February 20, 1998, Previously filed as Exhibit 10.17 to
between Mellon Bank Corporation and Annual Report on Form 10-K (File
Frank V. Cahouet. No. 1-7410) for the year ended
December 31, 1997, and
incorporated herein by reference.
10.16* Employment Agreement between Mellon Previously filed as Exhibit 10.2
Bank, N.A. and W. Keith Smith, to Quarterly Report on Form 10-Q
effective as of July 25, 1993, and amended (File No. 1-7410) for the quarter ended
and restated as of August 1, 1995. September 30, 1995, and incorporated
herein by reference.
10.17* Letter Agreement, dated February 20, 1998, Previously filed as Exhibit 10.19 to
between Mellon Bank Corporation and Annual Report on Form 10-K (File
W. Keith Smith. No. 1-7410) for the year ended
December 31, 1997, and incorporated
herein by reference.
</TABLE>
* Management contract or compensatory plan arrangement.
28
<PAGE> 30
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ------------------------------------- ----------------------------------------
<S> <C> <C>
10.18* Employment Agreement between Mellon Previously filed as Exhibit 10.3 to the
Bank Corporation and Martin G. McGuinn, Quarterly Report on Form 10-Q (File
effective as of February 1, 1998. No. 1-7410) for the quarter ended
September 30, 1998, and incorporated
herein by reference.
10.19* Employment Agreement between Mellon Previously filed as Exhibit 10.4 to the
Bank Corporation and Christopher M. Quarterly Report on Form 10-Q (File
Condron, effective as of February 1, 1998. No. 1-7410) for the quarter ended
September 30, 1998, and incorporated
herein by reference.
10.20* Employment Agreement between Mellon Previously filed as Exhibit 10.5 to the
Bank Corporation and Steven G. Elliott, Quarterly Report on Form 10-Q (File
effective as of February 1, 1998. No. 1-7410) for the quarter ended
September 30, 1998, and incorporated
herein by reference.
10.21* Form of Change in Control Severance Agreement Previously filed as Exhibit 10.5 to the
between Mellon Bank Corporation and members Quarterly Report on Form 10-Q (File
of the Executive Management Group. No. 1-7410) for the quarter ended
June 30, 1997, and incorporated
herein by reference.
10.22* Form of Change in Control Severance Agreement Filed herewith.
between Mellon Bank Corporation and
members of the Senior Management Committee.
12.1 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges
and Preferred Stock Dividends--parent
corporation.
12.2 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges and Ratio of
Earnings to Combined Fixed
Charges and Preferred Stock
Dividends--Mellon Bank Corporation
and its subsidiaries.
</TABLE>
* Management contract or compensatory plan arrangement.
29
<PAGE> 31
Index to Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --------- ----------------------------------------------- ---------------------------
<S> <C> <C>
13.1 All portions of the Mellon Bank Corporation Filed herewith.
1998 Annual Report to Shareholders that are
incorporated herein by reference.
21.1 List of Primary Subsidiaries of the Corporation. Filed herewith.
23.1 Consent of Independent Accountants. Filed herewith.
24.1 Power of Attorney. Filed herewith.
27.1 Financial Data Schedule. Submitted herewith.
</TABLE>
Certain instruments, which define the rights of holders of long-term debt of the
Corporation and its subsidiaries, are not filed herewith because the total
amount of securities authorized under each of them does not exceed 10% of the
total assets of the Corporation and its subsidiaries on a consolidated basis.
The Corporation hereby agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
30
<PAGE> 1
Exhibit 10.4
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 where either (x) the holders of
voting stock of the Corporation immediately before the merger or consolidation
will not own more than 50% of the voting shares of the continuing or surviving
corporation immediately after such merger or consolidation or (y) the Incumbent
Directors immediately before the merger or consolidation will not hold more than
50% (rounded to the next whole person) of the seats on the board of directors of
the continuing or surviving corporation, or (ii) any sale, lease or exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Corporation; or
<PAGE> 2
(c) A change of 25% (rounded to the next whole person) in the
membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85% (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the 12-month period and (ii) was not as a result of an actual or
threatened election with respect to directors or any other actual or threatened
solicitation of proxies by or on behalf of any person other than the Board of
Directors. As used in this Section 2.4, the term "Incumbent Director" means as
of any time a director of the Corporation (x) who has been a member of the Board
of Directors continuously for at least 12 months or (y) whose election or
nomination as a director within such period met the requirements of clauses (i)
and (ii) of the preceding sentence.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor statute of similar import, and regulations thereunder, in each case as
in effect from time to time. References to sections of the Code shall be
construed also to refer to any successor sections.
2.6 "Committee" shall mean the Human Resources Committee of the Board of
Directors, or any successor committee.
2.7 "Common Stock" shall mean Common Stock of the Corporation.
2.8 "Deferred Cash Incentive Award" shall mean an Award granted pursuant to
Article VII of the Plan.
2.9 "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
2
<PAGE> 3
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.
2.16 "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.
3
<PAGE> 4
(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.
3.3 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
4
<PAGE> 5
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 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.
5
<PAGE> 6
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 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,
6
<PAGE> 7
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 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.
7
<PAGE> 8
V. SARs
5.1 Grant. SARs may be granted by the Committee as stand-alone SARs or in tandem
with all or any part of any Option granted under the Plan. SARs which are
granted in tandem with an Option may be granted either at the time of the grant
of such Option or, except in the case of an Incentive Stock Option, at any time
thereafter during the term of such Option.
5.2 SAR Agreements. The grant of any SAR shall be evidenced by the related Stock
Option Agreement or by a written "Stock Appreciation Rights Agreement" executed
by the Corporation and the Participant, stating the number of shares of Common
Stock covered by the SAR, the base price of a stand-alone SAR and such other
terms and conditions of the SAR as the Committee may from time to time
determine. The base price for stand-alone SARs (the "base price") shall be such
price as the Committee, in its sole discretion, shall determine but shall not be
less than 100% of the Fair Market Value per share of the Common Stock covered by
the stand-alone SAR on the date of grant.
5.3 Payment. SARs shall entitle the Participant upon exercise to receive the
amount by which the Fair Market Value of a share of Common Stock on the date of
exercise exceeds the option price of any tandem Option or the base price of a
stand-alone SAR, multiplied by the number of shares in respect of which the SAR
shall have been exercised. In the sole discretion of the Committee, the
Corporation may pay all or any part of its obligation arising out of a SAR
exercise in (i) cash, (ii) shares of Common Stock or (iii) cash and shares of
Common Stock. Payment shall be made by the Corporation as soon as practicable
after the date of exercise.
5.4 Exercise of Tandem Award. If SARs are granted in tandem with an Option (i)
the SARs shall be exercisable at such time or times and to such extent, but only
to such extent, that the related Option shall be exercisable, (ii) the exercise
of the related Option shall cause a share for share reduction in the number of
SARs which were granted in tandem with the Option; and (iii) the payment of SARs
shall cause a share for share reduction in the number of shares covered by such
Option.
5.5 Termination of Employment. Except as otherwise provided in the Stock
Appreciation Rights Agreement:
(a) If termination of employment of a Participant is due to retirement
after age 55 with the written consent of the Corporation or an Affiliate, the
Participant shall have the right to exercise his or her stand-alone SARs within
the period of two years after such retirement, to the extent such SARs were
exercisable at the time of retirement; provided, however, that such
post-retirement exercise period may be extended by action of the Committee for
up to the full term of such SARs.
(b) If a Participant shall die while employed by the Corporation or an
Affiliate thereof or within a period following termination of employment during
which the SARs remain
8
<PAGE> 9
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.
(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
9
<PAGE> 10
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.
6.5 Maximum Cash Payment. The maximum amount that may be paid in cash or in Fair
Market Value of Common Stock (to be valued no later than three days after the
date the Committee certifies the achievement of the Performance Goals) under all
Performance Units paid to any one Participant during a calendar year shall in no
event exceed $1,000,000.
VII. Deferred Cash Incentive Awards
7.1 Granting of Deferred Cash Incentive Awards. Deferred Cash Incentive Awards,
as hereafter described, may be granted in conjunction with all or any part of
any Option (other than an Incentive Stock Option) granted under the Plan, either
at the time of the grant of such Option or at any time thereafter during the
term of such Option.
7.2 Deferred Cash Incentive Agreements. Deferred Cash Incentive Awards shall
entitle the holder of an Option to receive from the Corporation an amount of
cash equal to the aggregate exercise price of all Options exercised by such
Participant in accordance with the terms of a written "Deferred Cash Incentive
Agreement" executed by the Corporation and the Participant. Deferred Cash
Incentive Agreements shall specify the conditions under which Deferred Cash
Incentive Awards become payable, the conditions under which Deferred Cash
Incentive Awards are forfeited and any other terms and conditions as the
Committee may from time to time determine. Under no circumstances may a Deferred
Cash Incentive Award be applied to any purpose other than the payment of the
exercise price of a properly exercised related Option.
7.3 Pre-established Performance Goals.
(a) Except in the event of death, total and permanent disability
covered by a disability plan of the Corporation or an Affiliate then in effect
or the occurrence of a Change in Control Event, any Deferred Cash Incentive
Award shall only be earned and become payable if the Corporation achieves
Performance Goals which are established for a calendar year or longer period by
the Committee. After the completion of a performance period, performance during
such period shall be measured against the Performance Goals set by the
Committee. If the
10
<PAGE> 11
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
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
11
<PAGE> 12
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
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.
12
<PAGE> 13
9.2 Non-Assignability. No Award under the Plan shall be assignable or
transferable by a Participant, except by will or by the laws of descent and
distribution or by such other means as the Committee may approve from time to
time. During the life of the Participant, such Award shall be exercisable only
by such Participant or by such other persons as the Committee may approve from
time to time.
9.3 Withholding Taxes. Whenever the Corporation proposes or is required to issue
or transfer shares of Common Stock under the Plan, the Corporation shall have
the right to require the Participant to remit to the Corporation an amount
sufficient to satisfy any federal, state, local or other withholding tax
requirements prior to the delivery of any certificate for such shares. Whenever
under the Plan payments are to be made in cash, such payments shall be net of an
amount sufficient to satisfy any federal, state, local or other withholding tax
requirements.
9.4 No Right to Employment. Nothing in the Plan or in any agreement entered into
pursuant to it shall confer upon any Participant the right to continue in the
employment of the Corporation or an Affiliate or affect any right which the
Corporation or an Affiliate may have to terminate the employment of such
Participant.
9.5 Non-Uniform Determinations. The Committee's determinations under the Plan
(including without limitation its determinations of the employees to receive
Awards, the form, amount and timing of such Awards, the terms and provisions of
such Awards and the establishment of performance goals and performance periods)
need not be uniform and may be 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
13
<PAGE> 14
Plan shall not, without the consent of the Participant, adversely affect such
Participant's rights under an Award previously granted.
9.9 Awards to Foreign Nationals and Employees Outside the United States. To the
extent the Committee deems it necessary, appropriate or desirable to comply with
foreign law or practice and to further the purpose of the Plan, the Committee
may, without amending the Plan, (i) establish special rules applicable to Awards
granted to Participants who are foreign nationals, are employed outside the
United States, or both, including rules that differ from those set forth in this
Plan, and (ii) grant Awards to such Participants in accordance with those rules.
9.10 Previously Granted Awards. Awards outstanding on the date of shareholder
approval of this amended and restated Plan shall continue to be governed by and
construed in accordance with the Plan as in effect prior to amendment and
restatement; except that outstanding Deferred Cash Incentive Awards shall be
subject to the limitations of new Section 7.3(a) and (b) of the Plan and, to the
extent required by Section 162(m) of the Code, a grant of a Reload Option shall
be subject to the limitation of new Section 3.4(d) of the Plan.
January 1999
14
<PAGE> 1
Exhibit 10.6
MELLON BANK CORPORATION
-----------------------
1990 ELECTIVE DEFERRED COMPENSATION PLAN
----------------------------------------
FOR DIRECTORS AND MEMBERS OF THE ADVISORY BOARD
-----------------------------------------------
AMENDED AND RESTATED AS OF JANUARY 1, 1997
AMENDED AS OF JANUARY 15, 1999
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
PREAMBLE.................................................................................................. 1
ARTICLE I................................................................................................. 1
DEFINITIONS......................................................................................... 1
1.1 Account............................................................................... 1
1.2 Beneficiary........................................................................... 2
1.3 Board................................................................................. 2
1.4 Committee............................................................................. 2
1.5 Company............................................................................... 2
1.6 Deferral Commitment................................................................... 2
1.7 Deferral Election..................................................................... 2
1.8 Early Distribution Account............................................................ 2
1.9 Effective Date........................................................................ 2
1.10 Elective Deferred Compensation........................................................ 2
1.11 Financial Hardship.................................................................... 2
1.12 Normal Distribution Account........................................................... 2
1.13 Participant........................................................................... 2
1.14 Plan.................................................................................. 3
1.15 Plan Year............................................................................. 3
1.16 Prior Account......................................................................... 3
1.17 Prior Plan............................................................................ 3
1.18 Retirement ........................................................................... 3
1.19 Service............................................................................... 3
1.20 Special Distribution Account.......................................................... 3
1.29 T-Note Rate........................................................................... 3
1.30 Valuation Date........................................................................ 3
1.31 Window Period......................................................................... 3
ARTICLE II................................................................................................ 4
ADMINISTRATION...................................................................................... 4
2.1 Administrator......................................................................... 4
2.2 Powers and Duties..................................................................... 4
2.3 Procedures............................................................................ 5
2.4 Establishment of Rules................................................................ 5
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
2.5 Limitation of Liability............................................................... 5
2.6 Compensation and Insurance............................................................ 5
2.7 Removal and Resignation............................................................... 6
2.8 Claims Procedure...................................................................... 6
ARTICLE III............................................................................................... 6
PARTICIPATION AND DEFERRAL COMMITMENTS.............................................................. 6
3.1 Eligibility and Participation......................................................... 6
3.2 Duration of Deferral Commitment....................................................... 6
3.3 Basic Forms of Deferral............................................................... 7
3.4 Limitations on Deferrals.............................................................. 7
3.5 Modification of Deferral Commitments on Financial Hardship............................ 8
3.6 Commencement of Deferral Commitment................................................... 8
3.7 Roll-Over of Prior Accounts........................................................... 8
3.7 Termination of Prior Plan Deferral Commitments........................................ 8
ARTICLE IV................................................................................................ 8
DEFERRED COMPENSATION ACCOUNTS...................................................................... 8
4.1 Accounts.............................................................................. 8
4.2 Elective Deferred Compensation........................................................ 8
4.3 Crediting Rate........................................................................ 9
4.4 Valuation of Accounts................................................................. 9
4.5 Vesting of Accounts................................................................... 9
4.6 Statement of Accounts................................................................. 9
ARTICLE V.................................................................................................10
PLAN BENEFITS.......................................................................................10
5.1 Plan Benefit..........................................................................10
5.2 Normal Distribution Account...........................................................11
5.3 Survivor Benefits.....................................................................12
5.4 Early Distribution Account............................................................14
5.5 Hardship Distributions................................................................15
5.6 Valuation and Settlement..............................................................15
5.7 Change in Control and Unscheduled Distributions.......................................15
5.8 Distributions from General Assets.....................................................17
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
5.9 Withholding and Payroll Taxes...........................................................17
5.10 Payment to Guardian.....................................................................17
5.11 Small Benefit...........................................................................18
5.12 Protective Provisions...................................................................18
5.13 Notices and Elections...................................................................18
5.14 Prior and Special Distribution Accounts.................................................18
ARTICLE VI.................................................................................................18
DESIGNATION OF BENEFICIARY...........................................................................18
6.1 Designation of Beneficiary.............................................................18
6.2 Failure to Designate Beneficiary.......................................................18
ARTICLE VII................................................................................................19
FORFEITURES TO COMPANY...............................................................................19
7.1 Distributions of Participants' Interest When Company
is Unable to Locate Distributees.....................................................19
ARTICLE VIII...............................................................................................19
MAINTENANCE OF ACCOUNTS...........................................................................19
ARTICLE IX.................................................................................................20
AMENDMENT AND TERMINATION OF THE PLAN.............................................................20
9.1 Amendment..............................................................................20
9.2 Company's Right to Terminate...........................................................20
ARTICLE X..................................................................................................21
SPENDTHRIFT PROVISIONS...........................................................................21
ARTICLE XI.................................................................................................21
MISCELLANEOUS.....................................................................................21
11.1 Right of Company to Replace Members of Board of
Directors and Advisory Board; Obligations..........................................21
</TABLE>
(iii)
<PAGE> 5
<TABLE>
<S> <C>
11.2 Title to and Ownership of Assets Held for Accounts....................................21
11.3 Nature of Liability to Participants...................................................21
11.4 Text of Plan to Control...............................................................22
11.5 Law Governing and Severability........................................................22
11.6 Name..................................................................................22
11.7 Gender................................................................................22
11.8 Trust Fund............................................................................22
</TABLE>
(iv)
<PAGE> 6
MELLON BANK CORPORATION
1990 ELECTIVE DEFERRED COMPENSATION PLAN
FOR DIRECTORS AND MEMBERS OF THE ADVISORY BOARD
(Amended and Restated as of January 1, 1997)
PREAMBLE
The purpose of this 1990 Elective Deferred Compensation Plan for Directors and
Members of the Advisory Board (the "Plan") is to offer each non-employee member
of the Board of Directors and each member of the Advisory Board of Mellon Bank
Corporation (the "Company") the opportunity to defer receipt of compensation to
be earned for service in such capacity and to accumulate supplemental funds for
retirement, special needs prior to retirement, or death. The Plan was originally
effective as of January 1, 1990. This amended and restated Plan shall only apply
to Participants who serve as non-employee members of the Board of Directors or
the Advisory Board of the Company after January 1, 1997. The Plan as previously
in effect shall apply to all Participants who terminated their service with the
Board of Directors and the Advisory Board of the Company prior to January 1,
1997.
The Mellon Bank Corporation Deferred Compensation Plan for Directors and Members
of the Advisory Board which was originally adopted on July 14, 1980 (the "Prior
Plan") will continue in effect, but a Participant in this Plan will not be
eligible to make any new deferrals under the Prior Plan. A Participant may elect
to transfer account balances under the Prior Plan to this Plan whenever the
Committee which administers this Plan may permit. No Accounts held under this
Plan may be transferred to the Prior Plan.
The Corporate Benefits Committee ("Committee" or "CBC") of the Company shall be
the "administrator" responsible for administering the Plan in accordance with
its terms but such designation of the Committee shall not be construed, directly
or indirectly, as evidencing any intent on the part of the Company that the Plan
be governed by or enforceable under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"); it being the intent of the Company that such Plan
be governed by and enforceable under the laws of the Commonwealth of
Pennsylvania.
ARTICLE I
DEFINITIONS
-----------
When used herein, the following words shall have the following meanings unless
the content clearly indicates otherwise:
1.1 Account. "Account" means the record-keeping device used by the Company to
measure and determine the amounts to be paid to a Participant under the Plan.
Separate Accounts will be established for each Participant and as may otherwise
be required.
<PAGE> 7
1.2 Beneficiary. "Beneficiary" means the person who under this Plan becomes
entitled to receive a Participant's interest in the event of his death.
1.3 Board. "Board" means the Board of Directors of the Company or any committee
thereof acting within the scope of its authority.
1.4 Committee. "Committee" means the Corporate Benefits Committee appointed to
administer the Plan pursuant to Article II.
1.5 Company. "Company" means Mellon Bank Corporation, a Pennsylvania
corporation, and any successor in interest.
1.6 Deferral Commitment. "Deferral Commitment" means a commitment made by a
Participant pursuant to Article III for which a Deferral Election has been
submitted by the Participant to the Committee.
1.7 Deferral Election. "Deferral Election" means the written agreement to defer
receipt of compensation submitted by a Participant to the Committee or its
delegates prior to the commencement of the period in which the deferred
compensation is to be earned.
1.8 Early Distribution Account. "Early Distribution Account" means an account
established pursuant to Section 5.4 which provides for distribution of a benefit
prior to a Participant's Retirement.
1.9 Effective Date. "Effective Date" of this amended and restated Plan means
January 1, 1997. The Plan originally became effective on January 1, 1990.
1.10 Elective Deferred Compensation. "Elective Deferred Compensation" means the
amount of compensation that a Participant elects to defer pursuant to a Deferral
Commitment.
1.11 Financial Hardship. "Financial Hardship" means an immediate and substantial
financial need of the Participant or Beneficiary, determined by the Committee on
the basis of written information supplied by the Participant in accordance with
such standards as are, from time to time, established by the Committee.
1.12 Normal Distribution Account. "Normal Distribution Account" means an Account
established pursuant to Section 5.2 which provides for distribution of a benefit
following Retirement.
1.13 Participant. "Participant" means any individual who is participating in
this Plan as provided in Article III.
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<PAGE> 8
1.14 Plan. "Plan" means this "1990 Elective Deferred Compensation Plan for
Directors and Members of the Advisory Board" as set forth in this document and
as the same may be amended, administered or interpreted from time to time.
1.15 Plan Year. "Plan Year" means each calendar year beginning on January 1 and
ending on December 31.
1.16 Prior Account. "Prior Account" means an account originally established for
a Participant under the Prior Plan which is transferred to this Plan.
1.17 Prior Plan. "Prior Plan" means the Mellon Bank Corporation Deferred
Compensation Plan for Directors and Members of the Advisory Board which was
originally adopted on July 14, 1980, as amended from time to time.
1.18 Retirement. "Retirement" means that a Participant no longer serves on
either the Board of Directors or the Advisory Board of the Company, for any
reason other than death.
1.19 Service. "Service" means service on the Board of Directors or Advisory
Board of the Company.
1.20 Special Distribution Account. "Special Distribution Account" means an
Account established for any Elective Deferred Compensation (plus earnings
thereon) earned prior to January 1, 1997, which the Participant elected to have
distributed while serving as a non-employee member of the Board of Directors or
the Advisory Board; provided, however, such term shall not include amounts held
for a Participant in a Prior Account.
1.21 T-Note Rate. "T-Note Rate" means for each Plan Year the interest rate which
is equivalent to an effective annual yield equal to the 120 month rolling
average rate of ten-year United States Treasury Notes as of the July 31
preceding the applicable Plan Year. This rate will be determined once each year
by an outside source selected by the Company.
1.22 Valuation Date. "Valuation Date" means the last day of each month, or such
other dates as the Committee may determine in its discretion, which may be
either more or less frequent, for the valuation of Participants' Accounts.
1.23 Window Period. "Window Period" means a period of thirty calendar days which
begins on the third business day following the date of release of annual or
quarterly earnings of the Company, or such other period as the Committee may
determine in its discretion.
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<PAGE> 9
ARTICLE II
ADMINISTRATION
--------------
2.1 Administrator. Except as hereinafter provided, the Committee shall be the
administrator of the Plan and shall be responsible for administering the Plan in
accordance with its terms and for the administrative responsibilities
hereinafter described with respect to the Plan. Whenever any action is required
or permitted to be taken in the administration of the Plan, such action shall be
taken by the Committee unless the Committee's power is expressly limited herein
or by operation of law. The Committee may delegate its duties and
responsibilities as it, in its sole discretion, deems necessary or appropriate
to the execution of such duties and responsibilities. The Committee as a whole
or any of its members may serve in more than one capacity with respect to the
Plan.
2.2 Powers and Duties. The Committee, or its delegates, shall maintain and keep
(or cause to be maintained and kept) such records as are necessary for the
efficient operation of the Plan or as may be required by any applicable law,
regulation, or ruling and shall provide for the preparation and filing of such
forms, reports, information, and documents as may be required to be filed with
any governmental agency or department and with the Plan's Participants and/or
other Beneficiaries.
Except to the extent expressly reserved to the Company or the Board, the
Committee shall have all powers necessary to carry out the administrative
provisions of the Plan and to satisfy the requirements of any applicable law or
laws. These powers shall include, by way of illustration and not limitation, the
exclusive powers and discretionary authority necessary to:
(a) construe and interpret the Plan; decide all questions of eligibility;
decide all questions of fact relating to claims for benefits; and determine
the amount, time, manner, method, and mode of payment of any benefits
hereunder;
(b) direct the Company, and/or the trustee of any trust established at the
discretion of the Company to provide for the payment of benefits under the
Plan, concerning the amount, time, manner, method, and mode of payment of
any benefits hereunder;
(c) prescribe procedures to be followed and forms to be used by
Participants and/or other persons in filing applications or elections;
(d) prepare and distribute, in such manner as may be required by law or as
the Committee deems appropriate, information explaining the Plan; provided,
however, that no such explanation shall contravene the terms of this Plan
or increase the rights of any Participant or Beneficiary or the liabilities
of the Company;
(e) require from the Company and Participants such information as shall be
necessary for the proper administration of the Plan;
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<PAGE> 10
(f) appoint and retain individuals to assist in the administration and
construction of the Plan, including such legal, clerical, accounting, and
actuarial services as it may require or as may be required by any
applicable law or laws; and
(g) perform all other administrative functions which are not expressly
reserved to the Company or the Board, including, but not limited to, those
supplemental duties and responsibilities described in the "Mellon Bank
Corporation Corporate Benefits Committee Charter and Summary of Operations"
approved by the Board on September 17, 1991 (the "CBC Charter") which are
not inconsistent with the Board's intent that the Plan not be construed as
governed by or subject to ERISA.
Without intending to limit the generality of the foregoing, the Committee shall
have the power to amend the Plan, in whole or in part, in order to comply with
applicable law; provided, however, that no such amendment may increase the
duties and obligations of the Company without the consent of the Company. Except
as provided in the preceding sentence or unless directed by the Board or the
Human Resources Committee of the Board or otherwise required by law, the
Committee shall have no power to adopt, amend, or terminate the Plan, said
powers being exclusively reserved to the Board or the Human Resources Committee
of the Board.
2.3 Procedures. The Committee shall be organized and conduct its business with
respect to the Plan in accordance with the organizational and procedural rules
set forth in the CBC Charter.
2.4 Establishment of Rules. The Committee shall have specific authority in its
sole discretion to construe and interpret the terms of the Plan related to its
powers and duties, and to the extent that the terms of the Plan are incomplete,
the Committee shall have authority to establish such rules or regulations
related to its powers and duties as it may deem necessary and proper to carry
out the intent of the Company as to the purposes of the Plan.
2.5 Limitation of Liability. The Board, the members of the Committee, and any
officer, employee, or agent of the Company shall not incur any liability
individually or on behalf of any other individuals or on behalf of the Company
for any act, or failure to act, made in good faith in relation to the Plan.
2.6 Compensation and Insurance. Members of the Committee shall serve without
compensation for their services as such. Expenses incurred by members of the
Committee in the performance of their duties as herein provided, and the
compensation and expenses of persons retained or employed by the Committee for
services rendered in connection with the Plan shall, upon approval by the
Committee, be paid or reimbursed by the Company.
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<PAGE> 11
The Company shall indemnify and/or maintain and keep in force insurance in such
form and amount as may be necessary in order to protect the members of the
Committee, their delegates and appointees (other than persons who are
independent of the Company and are rendering services to the Committee or to or
with respect to the Plan) from any claim, loss, damage, liability, and expense
(including costs and attorneys' fees) arising from their acts or failures to act
with respect to the Plan, except where such actions or failures to act involve
willful misconduct or gross negligence.
2.7 Removal and Resignation. Any member of the Committee may resign and the
Company may remove any member of the Committee in accordance with the procedures
established by the CBC Charter. The Committee shall remain fully operative
pending the filling of any vacancies, the remaining Committee members shaving
full authority to administer the Plan.
2.8 Claims Procedure. The right of any Participant or Beneficiary to receive a
benefit hereunder and the amount of such benefit shall be determined in
accordance with the procedures for determination of benefit claims established
and maintained by the Committee; which separate procedures, entitled Procedures
for Determination of Benefit Claims, are incorporated herein by this reference.
ARTICLE III
PARTICIPATION AND DEFERRAL COMMITMENTS
--------------------------------------
3.1 Eligibility and Participation.
(a) Eligibility. Eligibility to make a Deferral Commitment shall be limited
to non-employee members of the Board of Directors and members of the
Advisory Board of the Company.
(b) Participation. An eligible individual may elect to participate in the
Plan by submitting a Deferral Election to the Committee or its delegates
prior to such date, as the Committee may determine, preceding the period in
which the deferred compensation is to be earned. The Deferral Election
shall specify whether the deferred compensation shall be credited to a
Normal Distribution Account or an Early Distribution Account for the
Participant.
3.2 Duration of Deferral Commitment.
(a) A Deferral Commitment for a Normal Distribution Account or Early
Distribution Account shall continue in effect until the Participant files a
subsequent Deferral Election changing the amount of or stopping such
Deferral Commitment.
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<PAGE> 12
(b) A Deferral Commitment for an Early Distribution Account shall terminate
at the end of the Plan Year preceding the Plan Year which the Participant
has selected for distribution of such Account.
(c) Except as provided in Sections 5.5 and 5.7 below, a subsequent Deferral
Election shall become effective beginning with the next Plan Year following
the date it is filed. A Subsequent Deferral Election shall not apply to any
deferrals which represent payments for services performed prior to the
beginning of the first Plan Year to which it applies, but otherwise shall
apply to all future deferrals covered by the Deferral Commitment.
(d) A Participant's Deferral Commitments shall terminate upon the
Participant's Retirement or death.
3.3 Basic Forms of Deferral. A Participant may file a Deferral Election to defer
any or all of the following forms of compensation:
(a) Annual Retainer. A Participant may elect to defer a portion of the
annual retainer paid for meetings of the Board of Directors or Advisory
Board of the Company. The amount to be deferred shall be stated as a whole
number percentage of annual retainer.
(b) Board Meeting Fees. A Participant may elect to defer a portion of the
meeting fees paid for meetings of the Board of Directors or Advisory Board
of the Company. The amount to be deferred shall be stated as a whole number
percentage of the fees paid for such meetings.
(c) Committee Meeting Fees. A Participant may elect to defer a portion of
the meeting fees paid for meetings of committees of the Board of Directors
or Advisory Board of the Company. The amount to be deferred shall be stated
as a whole number percentage of the fees paid for such committee meetings.
(d) Special Deferrals. A Participant may elect any special Deferral
Commitment which is authorized by the Committee in its discretion.
3.4 Limitations on Deferrals. The following limitations on deferrals shall
apply:
(a) Minimum Deferrals. The minimum deferral amount for each of the basic
forms of deferral in Section 3.3(a), (b) or (c) above is $2,000 for any
Plan Year.
(b) Maximum Deferrals. A Participant shall not defer for any Plan Year more
than one hundred percent (100%) of the Participant's annual retainer and
meeting fees for meetings of the Board of Directors or Advisory Board of
the Company and their committees.
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<PAGE> 13
(c) Prior Plan. A Participant may not defer under this Plan any
compensation which he elects to defer under the Prior Plan. In the event of
any conflict between deferral elections under this Plan and the Prior Plan,
the deferral election under this Plan shall take precedence and shall
revoke any conflicting election under the Prior Plan.
(d) Waiver; Committee Discretion. The Committee may further limit the
minimum or maximum amount deferred by any Participant or group of
Participants, or waive the foregoing minimum and maximum limits for any
Participant or group of Participants, for any reason.
3.5 Modification of Deferral Commitments on Financial Hardship. The Committee
may permit a Participant to reduce the amount to be deferred, or waive the
remainder of the Deferral Commitment, upon a finding that the Participant has
suffered a Financial Hardship.
3.6 Commencement of Deferral Commitment. A Deferral Commitment shall be deemed
to commence as of the first day of the Plan Year covered by the Deferral
Election for such Deferral Commitment. A Participant's Beneficiary will be
entitled to receive pre-retirement survivor benefits pursuant to Section 5.3(a)
with respect to the Deferral Commitment only in the event of the Participant's
death on or after such date while in Service on the Board of Directors or
Advisory Board of the Company.
3.7 Roll-Over of Prior Accounts. A Participant may elect to transfer Prior
Accounts held under the Prior Plan to this Plan whenever the Committee may
permit in its discretion. Prior Accounts which are transferred to this Plan
shall be valued and credited with interest under this Plan commencing on the
date which the Committee shall determine. Prior Accounts shall be distributed as
provided in Section 5.14.
3.8 Termination of Plan Deferral Commitments. All Deferral Commitments
established under the terms of the Plan prior to its amendment and restatement
as of January 1, 1997, shall terminate on December 31, 1996.
ARTICLE IV
DEFERRED COMPENSATION ACCOUNTS
------------------------------
4.1 Accounts. For record-keeping purposes only, Normal Distribution, Early
Distribution, Special Distribution and Prior Accounts shall be maintained as
applicable for each Participant's Elective Deferred Compensation.
4.2 Elective Deferred Compensation. A Participant's Elective Deferred
Compensation shall be credited to the Participant's Account as of the date when
the corresponding non-deferred portion of the compensation is paid or would have
been paid but for the Deferral Commitment. Prior Accounts which are transferred
to this Plan shall be valued and credited with interest under this Plan
commencing on the date determined by the
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<PAGE> 14
Committee. Any withholding of taxes or other amounts with respect to deferred
compensation that is required by federal, state or local law shall be withheld
from the Participant's non-deferred compensation to the maximum extent possible
with any excess being withheld from the Participant's Deferral Commitment or
Account(s).
4.3 Crediting Rate. Accounts shall be credited monthly with interest based on
the rates specified below, compounded annually. Interest shall be credited as of
each Valuation Date from the dates when deferred amounts are credited to
accounts based on the balance of each Account.
(a) Interest Rate During Participant's Lifetime. During a Participant's
lifetime, the Participant's Accounts will be credited with interest on a
monthly basis during each Plan Year at the T-Note Rate which is applicable
for that Plan Year, subject to increase pursuant to Section 5.1.
(b) Interest Rate After Participant's Death. Following a Participant's
death, the Participant's Account will be credited with interest on a
monthly basis during each Plan Year at one hundred percent (100%) of the
T-Note Rate which is applicable for that Plan Year.
4.4 Valuation of Accounts. A Participant's Account(s) as of each Valuation Date
shall consist of the balance of the Participant's Account(s) as of the
immediately preceding Valuation Date, plus the Participant's Elective Deferred
Compensation and interest credited to such Account(s) and minus any
distributions made from such Account(s) since the immediately preceding
Valuation Date.
4.5 Vesting of Accounts. Each Participant shall be one hundred percent (100%)
vested at all times in the amounts credited to such Participant's Accounts.
4.6 Statement of Accounts. The Company shall submit to each Participant periodic
statements setting forth the balance to the credit of the Accounts maintained
for the Participant.
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<PAGE> 15
ARTICLE V
PLAN BENEFITS
-------------
5.1 Plan Benefit. The Company shall pay a Plan benefit for the Participant's
Normal Distribution, Early Distribution, Special Distribution and Prior Plan
Accounts, as determined below:
(a) Fully Enhanced Rate. Unpaid Account balances of Participants who
terminate Service upon Retirement on or after age 68, death, or at any time
after a Change in Control, shall be credited retroactively on the Valuation
Date immediately preceding commencement of payment of benefits with respect
to such Account balances with one hundred thirty-five percent (135%) of the
T-Note Rate for each Plan Year.
(b) Enhanced Rate. Unpaid Account balances of Participants who terminate
service upon Retirement before age 68 and prior to a Change in Control, for
reasons other than death, shall be credited retroactively on the Valuation
Date immediately preceding commencement of payment of benefits with respect
to such Account balances with a percentage of the T-Note Rate based on the
Participant's completed years of Service, including years of Service before
the Effective Date of this Plan, and completed years of participation in
this Plan as follows:
<TABLE>
<CAPTION>
Completed Years of Completed Years of
Continuous Service Plan Participation % of T-Note Rate
------------------ ------------------ ----------------
<S> <C> <C>
Less Than 3 -- 100%
3 or More -- 125%
5 or More and 2 or More 130%
7 or More and 4 or More 135%
</TABLE>
(c) Early Distribution, Special Distribution and Prior Plan Accounts. The
enhanced rates set forth under Sections 5.1(a) and (b) above shall also be
credited retroactively to Early Distribution, Special Distribution and
Prior Plan Accounts on the basis of the Participant's Service and completed
years of participation in the Plan on the Valuation Date preceding each
payment of benefits with respect to such Accounts before Retirement.
(d) Completed Years of Plan Participation. Completed years of participation
in this Plan shall include all years for which the Participant had an
Account balance with the Plan for the entire calendar year.
(e) Duration. The interest rates provided under Sections 5.1 (a) and (b)
above shall be payable until the Participant's Accounts are distributed in
full except in the event of the Participant's death. After the
Participant's death, interest shall be credited pursuant to Section 4.3(b).
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<PAGE> 16
5.2 Normal Distribution Account.
(a) Election of Retirement Benefit. A Participant may file a Deferral
Election to defer compensation into a Normal Distribution Account and
receive benefits from such Account following Retirement. A Participant may
elect up to three (3) benefit payment options, each covering a ten percent
(10%) multiple of his Normal Distribution Account balance at Retirement and
specifying a date of commencement and duration of payments. A Participant's
election of payment options shall be irrevocable, except as follows:
(i) Subject to the approval of the Committee, a Participant shall be
permitted to file one new payment election per year which will
supersede his original election (A) at any time more than 12 months
prior to his Retirement without penalty and (B) at any time during the
12 months preceding his Retirement subject to a penalty, which shall be
forfeited to the Company, equal to six percent (6%) of the portion of
his Account balance affected by the change. A new payment election
which is made within the aforesaid time limits will become effective
upon the Participant's Retirement. In the event that a Participant
accelerates his or her Retirement thereby causing a previously filed
payment election to have been made within 12 months preceding
Retirement, the next preceding timely payment election filed by the
Participant shall be followed unless the Participant elects to have the
six percent (6%) penalty of Section 5.2(a)(i)(B) above apply. No
penalty shall apply to the first such payment election made by a
Participant who was participating in the Plan prior to its amendment
and restatement as of January 1, 1997, and such initial election shall
be given effect unless the Participant subsequently files a new
election.
(ii) A Participant who has elected payments in installments may request
in writing a payment in a lump sum, at any time after Retirement, of
the amount of his Account balance which is reasonably necessary to meet
the Participant's requirements due to a Financial Hardship.
(iii) A Participant may elect to receive a payment in a lump sum at any
time, subject to penalty, as provided in Section 5.7(b).
(b) Forms of Benefit Payment. The available forms of payment from a
Participant's Normal Distribution Account after Retirement are as follows:
(i) One lump sum payment.
(ii) Monthly installment payments in substantially equal payments of
principal and interest over a payment period of 60, 120 or 180 months,
as elected by the Participant. The amount of the monthly installments
shall be redetermined effective as of January 1 of each year based on
the remaining Account balance and the remaining number of installment
payments.
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<PAGE> 17
(c) Commencement of Retirement Benefit Payment. The available commencement
dates for payment of benefits from a Participant's Normal Distribution
Account are as follows:
(i) Upon Retirement.
(ii) Any January following Retirement; provided, however, that no
payment may commence later than January of the year in which the
Participant attains age 70 if Retirement is prior to age 70, and no
later than the January following Retirement if Retirement is on or
after age 70.
(iii) The later of Retirement and the date the Participant attains age
60, 65 or 70.
If a Participant does not elect a benefit payment option for his Normal
Distribution Account, Plan benefits from such Account will be paid in
monthly installments over 180 months, commencing in January of the year
following Retirement.
5.3 Survivor Benefits.
(a) Pre-Retirement Survivor Benefits.
(i) Normal Distribution Accounts. If a Participant dies while in
Service as a member of the Board of Directors or Advisory Board of the
Company prior to receiving a complete distribution of his or her entire
Normal Distribution Account balance, the amount payable as a survivor
benefit for such Account shall be equal to its remaining unpaid
balance, if any, plus an additional credit equal to the annual amount
of the Deferral Commitment in effect at death for the Participant's
Normal Distribution Account multiplied by the number of Plan Years
until the year in which the Participant would have attained age 72;
provided, however, that such multiplier shall be limited by a maximum
of four (4) years.
(ii) Early Distribution Accounts. If a Participant dies while in
Service as a member of the Board of Directors or Advisory Board of the
Company prior to receiving a complete distribution of his or her entire
Early Distribution Account balance, the amount payable as a survivor
benefit for such Account shall be equal to its remaining unpaid
balance, if any, plus an additional credit equal to the annual amount
of the Deferral Commitment in effect at death for the Participant's
Early Distribution Account multiplied by the number of Plan Years
remaining before commencement of payment of such Account; provided
however, that such multiplier shall be limited by a maximum of four (4)
years or the number of years until the year in which the Participant
would have attained age 72.
(iii) Covered Deferral Commitment. For purposes of Sections 5.3(a)(i)
and (ii), a Participant's Deferral Commitment shall be determined based
on projecting the
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<PAGE> 18
annual retainer and meeting fees for the Board of Directors and
Advisory Board of the Company and their committees in effect at the
time of the Participant's death and taking into account any reduction
in such annual retainer and meeting fees which would normally occur for
members of the Advisory Board. A Deferral Commitment shall be deemed to
be in effect beginning on the first day of the Plan Year after the
Participant files a Deferral Election for such Deferral Commitment.
(iv) Special Distribution Accounts and Prior Accounts. If a Participant
dies while in Service as a member of the Board of Directors or Advisory
Board of the Company prior to receiving a complete distribution of his
entire Special Distribution Account or Prior Account balance, if any,
the amount payable as a survivor benefit for such Accounts shall be
equal to its remaining unpaid balance, if any.
(v) Commencement of Survivor Benefit. The pre-retirement survivor
benefits for Normal and Early Distribution Accounts shall become
effective beginning on the first day of the Plan Year after the
Participant files a Deferral Election for a Normal or Early
Distribution Account. A Participant's Beneficiary will be entitled to
receive such pre-retirement survivor benefits only in the event of the
Participant's death while in Service on or after such dates. The
pre-retirement survivor benefits for all Special Distribution Accounts
and Prior Accounts shall become effective as of January 1, 1997.
(vi) Withdrawals. Whenever a Participant makes a withdrawal from any
Account, the Account balance shall be reduced by the amounts withdrawn,
including any penalty thereon. If a Participant dies while in Service
after complete distribution of his entire Account balances, no survivor
benefit will be payable to the Participant's Beneficiary.
(vii) Commencement of Payments. The pre-retirement survivor benefits
described above will be paid to the Participant's Beneficiary in ten
(10) annual installments, commencing as soon as practicable after the
Participant's death.
(b) Post-Retirement Survivor Benefits. If a Participant dies after
Retirement but before commencement of payment of retirement benefits with
respect to his Normal Distribution Account balance, the Company will pay to
the Participant's Beneficiary the installments of any such benefit that
such Participant's Beneficiary would have received with respect to such
Normal Distribution Account balance had the Participant commenced to
receive retirement benefits on the day prior to such Participant's death.
Payments will commence upon the Participant's death, irrespective of when
retirement benefits would have commenced if the Participant had survived.
Such payments shall be made in accordance with the method of payment which
the Participant had elected for payment of his retirement benefits for his
Normal Distribution Account.
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<PAGE> 19
If a Participant dies after the commencement of payment of retirement
benefits with respect to his Account balance(s), the Company will pay to
the Participant's Beneficiary the remaining installments of any such
benefit that would have been paid to the Participant had the Participant
survived.
If a Participant dies after Retirement but before receiving full payment of
benefits from his Early Distribution, Special Distribution or Prior
Account, his Beneficiary shall receive the balance of such Accounts in one
lump sum payment, as soon as practicable following his death.
(c) Interest. If the Participant dies prior to Retirement, the amount
payable with respect to each of the Participant's Accounts shall be
determined by retroactively crediting interest at one hundred thirty-five
percent (135%) of the T-Note Rate for each Plan Year through the date of
the Participant's death. After the Participant's death, interest shall be
credited for each Plan Year at one hundred percent (100%) of the T-Note
Rate which is applicable for that Plan Year.
5.4 Early Distribution Account. A participant may file a Deferral Election to
defer compensation into an Early Distribution Account and receive benefits from
such Account prior to Retirement subject to the following restrictions:
(a) Election of Early Distribution Benefit. A Deferral Election
establishing an Early Distribution Account and specifying an early payment
date and the form of payment must be filed prior to the commencement of the
period in which the Elective Deferred Compensation is to be earned. No
deferrals may be made into a Participant's Early Distribution Account
during any Plan Year in which the Participant is receiving a distribution
from such Account.
(b) Amount of Early Distribution Benefit. The entire Early Distribution
Account must be paid out at the time and in the form provided for in the
related Deferral Election.
(c) Commencement and Form of Early Distribution Benefit. An Early
Distribution Account shall not be paid out prior to the completion of two
Plan Years following the start of deferrals into such Account. An Early
Distribution Account shall be paid out in a lump sum or in four equal
annual installments, as provided in the Participant's Deferral Election
establishing such Account. In the year following the complete distribution
of an Early Distribution Account, a Participant may make new deferrals into
such Account. Amounts paid to a Participant pursuant to this Section 5.4
shall be treated as distributions from the Participant's Early Distribution
Account. If the Participant terminates service upon Retirement before the
date scheduled for payment of an Early Distribution Account, the
Participant shall receive the balance of his Early Distribution Account in
one lump sum payment or up to three (3) equal annual installments, at the
Committee's discretion, as soon as practicable following such event.
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<PAGE> 20
5.5 Hardship Distributions. Upon a finding that a Participant or Beneficiary has
suffered a Financial Hardship, the Committee may, in its sole discretion, make
distributions from an Account prior to the time specified for payment of
benefits under the Plan. The amount of such distribution shall be limited to the
amount reasonably necessary to meet the Participant's or Beneficiary's
requirements during the Financial Hardship. Applications for hardship
distributions and determinations thereon by the Committee shall be in writing,
and a Participant or Beneficiary may be required to furnish written proof of the
Financial Hardship.
A Participant's entire Account balance will be distributed whenever a hardship
distribution would amount to more than seventy-five percent (75%) of any such
Account balance. Following a complete distribution of an entire Account balance,
a Participant and his Beneficiary will be entitled to no further benefits under
the Plan with respect to that Account. Amounts paid to a Participant pursuant to
this Section 5.5 shall be treated as distributions from the Participant's
Account. Any Participant who receives a hardship distribution of any part of an
Account balance shall not be allowed to make any deferrals under the Plan during
the remainder of the Plan Year in which he receives such distribution or during
the next Plan Year.
5.6 Valuation and Settlement. The date on which a lump sum is paid or the date
on which installment payments commence shall be the "Settlement Date". The
Settlement Date for an Account shall be no more than sixty (60) days after the
end of the month in which the Participant or his Beneficiary becomes entitled to
payments on account of Retirement or death, unless the Participant elects to
defer commencement of payments following Retirement to a later date in the
election form for designation of form of payment for the Account. The Settlement
Date for an Early Distribution Account or delayed payments following Retirement
shall be the date which the Participant elects for commencement of such payments
in the election form for designation of form of payment for the Account. The
Settlement Date for a Special Distribution or Prior Account shall be the date
which the Participant elected for commencement of payments from such Account
under the terms of the Prior Plan. The amount of a lump sum payment and the
initial amount of installment payments shall be based on the value of the
Participant's Account as of the Valuation Date at the end of the immediately
preceding month before the Settlement Date. For example, the Valuation Date at
the end of December shall be used to determine lump sum payments and the initial
amount of installment payments which will be made in the following January.
5.7 Change in Control and Unscheduled Distributions.
(a) Subject to the provisions of Section 5.7(b) hereof, upon (i)
dissolution or liquidation of the Company, (ii) a reorganization, merger or
consolidation of the Company with one or more other entities as a result of
which the Company is not the survivor, (iii) the sale of all or
substantially all the assets of the Company, or (iv) any other event which
constitutes a Change in Control as defined in Section 5.7(c), the
15
<PAGE> 21
interests of all then remaining Participants shall continue, and provisions
shall be made in connection with such transaction for the continuance of
the Plan and the assumption of the obligations of the Company under the
Plan by the Company's successor(s) in interest.
(b) Notwithstanding any other provisions of the Plan, at any time during a
Window Period before a Change in Control or at any time after a Change in
Control, a Participant or a Beneficiary of a deceased Participant may elect
to receive an immediate lump sum payment of up to the balance of his
Account(s), reduced by a penalty, which shall be forfeited to the Company,
equal to ten percent (10%) before a Change in Control or six percent (6%)
after a Change in Control, applied against the portion of the Account
balance withdrawn, in lieu of payments in accordance with the form
previously elected by the Participant. However, the penalty shall not apply
if the Committee determines, based on advice of counsel or a final
determination by the Internal Revenue Service or any court of competent
jurisdiction, that by reason of the foregoing provision, the Participant
has recognized or will recognize gross income for federal income tax
purposes under this Plan in advance of payment to him or his Beneficiary of
Plan benefits. The minimum lump sum payment shall be $50,000 or the entire
balance of any Account, whichever is less.
A Participant who receives a lump sum payment under this Section 5.7(b)
will be credited with interest on the Account balance at the rates
established under Section 5.1(b) of the Plan based on the Participant's
completed years of Service and years of participation in the Plan prior to
the lump sum payment. Following a complete distribution of the entire
balance for an Account, a Participant and his Beneficiary will be entitled
to no further benefits under the Plan with respect to that Account.
Whenever a Participant receives a lump sum payment under this Section
5.7(b) or Section 9.1, the Participant will be deemed to elect to revoke
all Deferral Commitments and to discontinue all deferrals under the Plan
effective as of the date of the lump sum payment. The Participant will be
precluded from making any deferrals under the Plan for the remainder of the
Plan Year in which he receives such distribution and for the next Plan
Year.
(c) A "Change in Control" shall mean:
(i) The occurrence with respect to the 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
(ii) Approval by the stockholders of the Corporation of (a) any
consolidation or merger of the Corporation where either (1) the holders
of voting stock of the Corporation immediately before the merger or
consolidation will not own more than 50% of the voting shares of the
continuing or surviving corporation immediately after such merger or
consolidation or (2) the Incumbent Directors immediately before the
merger or consolidation will not hold more than 50%
16
<PAGE> 22
(rounded to the next whole person) of the seats on the board of
directors of the continuing or surviving corporation, or (b) any sale,
lease or exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of the
Corporation; or
(iii) 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 (a) 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 and
(b) was not as a result of an actual or threatened election with
respect to directors or any other actual or threatened solicitation of
proxies by or on behalf of any person other than the Board of
Directors. As used in this Section 5.7, the term "Incumbent Director"
means as of any time a director of the Corporation (x) who has been a
member of the Board of Directors continuously for at least 12 months or
(y) whose election or nomination as a director within such period met
the requirements of clauses (a) and (b) of the preceding sentence.
(d) Notwithstanding any other provision of this Plan, without the written
consent of the Participant (or Beneficiary of a deceased Participant)
affected thereby, the Company may not amend or terminate this Plan:
(i) For a period of twenty-four (24) months following a Change in
Control; or
(ii) At any time thereafter, in any manner which affects any
Participant (or Beneficiary of a deceased Participant) who receives
payments of benefits under this Plan or who terminates Service with the
Company for any reason at any time during the period of twenty-four
(24) months following the Change in Control.
5.8 Distributions from General Assets. The Company shall make any or all
distributions pursuant to this Plan in cash out of its general assets.
5.9 Withholding and Payroll Taxes. The Company shall withhold from payments made
hereunder any taxes required to be withheld from such payments under Federal,
State or local law.
5.10 Payment to Guardian. If a benefit is payable to a minor or a person
declared incompetent or to a person incapable of handling the disposition of his
property, the Committee may direct payment of such benefit to the guardian,
legal representative or person having the care and custody of such minor,
incompetent or incapacitated person. The Committee may require proof of
minority, incompetence, incapacity or guardianship as it may deem appropriate
prior to distribution of the benefit. Such distribution shall completely
discharge the Committee from all liability with respect to such benefit.
17
<PAGE> 23
5.11 Small Benefit. Notwithstanding any election made by the Participant, the
Committee, in its sole discretion, may direct payment of any benefit in the form
of one lump sum payment to the Participant or any Beneficiary, if the lump sum
amount of the Account balance which is payable to the Participant or Beneficiary
when payments to such Participant or Beneficiary would otherwise commence is
less than $50,000.
5.12 Protective Provisions. Each Participant shall cooperate with the Company by
furnishing any and all information requested by the Company in order to
facilitate the payment of benefits hereunder, taking such physical examinations
as the Company may deem necessary and taking such other relevant action as may
be requested by the Company. If a Participant refuses so to cooperate or makes
any material misstatement of information or non-disclosure of medical history,
then no benefits will be payable hereunder to such Participant or his
Beneficiary; provided that, in the Company's sole discretion, benefits may be
payable in an amount reduced to compensate the Company for any loss, cost,
damage or expense suffered or incurred by the Company as a result in any way of
any such action, misstatement or non-disclosure.
5.13 Notices and Elections. Any notice or election required or permitted to be
given to the Company or the Committee under the Plan shall be sufficient if in
writing on a form prescribed or accepted by the Committee and hand delivered, or
sent by registered or certified mail, to the principal office of the Company,
directed to the attention of the Human Resources Department of the Company. Such
notice or election shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the receipt
for registration or certification.
5.14 Prior and Special Distribution Accounts. Prior Accounts and Special
Distribution Accounts shall be distributed in accordance with a Participant's
previously filed elections. Elections providing for payment prior to Retirement
may not be amended by the Participant.
ARTICLE VI
DESIGNATION OF BENEFICIARY
--------------------------
6.1 Designation of Beneficiary. Each Participant shall have the right to
designate a Beneficiary or Beneficiaries to receive his interest in each of his
Accounts upon his death. Such designation shall be made on a form prescribed by
and delivered to the Company. The Participant shall have the right to change or
revoke any such designation from time to time by filing a new designation or
notice of revocation with the Company, and no notice to any Beneficiary nor
consent by any Beneficiary shall be required to effect any such change or
revocation.
6.2 Failure to Designate Beneficiary. If a Participant shall fail to designate a
Beneficiary before his demise, or if no designated Beneficiary survives the
Participant, the Committee shall direct the Company to pay the balance in each
of his Accounts in one lump sum to
18
<PAGE> 24
the executor or administrator for his estate; provided, however, if no executor
or administrator shall have been appointed, and actual notice of said death was
given to the Committee within sixty (60) days after his death, and if his
Account balances do not exceed Ten Thousand Dollars ($10,000), the Committee may
direct the Company to pay his Account balances to such person or persons as the
Committee determines, and the Committee may require such proof of right and/or
identity of such person or persons as the Committee may deem appropriate or
necessary.
ARTICLE VII
FORFEITURES TO COMPANY
----------------------
7.1 Distribution of Participants' Interest When Company is Unable to Locate
Distributees. In case the Company is unable within three (3) years after payment
is due to a Participant, or within three (3) years after payment is due to the
Beneficiary or the estate of a deceased Participant, to make such payment to him
or his Beneficiary, executor or administrator because it cannot ascertain his
whereabouts or the identity or whereabouts of his Beneficiary, executor or
administrator by mailing to the last known address shown on the Company's
records, and neither he, his Beneficiary, nor his executor or administrator has
made written claim therefor before the expiration of the aforesaid time limit,
then, in such case, the amount due shall be forfeited to the Company.
ARTICLE VIII
MAINTENANCE OF ACCOUNTS
-----------------------
8.1 The Company shall keep, or cause to be kept, all such books of account,
records and other data as may be necessary or advisable in its judgment for the
administration of this Plan, and properly to reflect the affairs thereof, and to
determine the nature and amount of the interests of the respective Participants
in each Account.
The Company is not required to physically segregate any assets with respect to
the Accounts under this Plan from any other assets of the Company and may
commingle any such assets with any other moneys, securities and properties of
any kind of the Company. Separate accounts or records for the respective
Participants' interests shall be maintained for operational and accounting
purposes, but no such account or record shall be considered as creating a lien
of any nature whatsoever on or as segregating any of the assets with respect to
the Accounts under this Plan from any other funds or property of the Company.
19
<PAGE> 25
ARTICLE IX
AMENDMENT AND TERMINATION OF THE PLAN
-------------------------------------
9.1 Amendment. The Board or Human Resources Committee of the Board may at any
time amend the Plan in whole or in part, provided, however, that no amendment
shall be effective to decrease or restrict the amount accrued (including
earnings at the appropriate interest rate) in any Account to the date of such
amendment. Notwithstanding anything in the preceding sentence to the contrary,
the Committee shall have the power to amend the Plan to the extent authorized by
Section 2.2.
Upon a prospective amendment to reduce the formula for determining the future
interest rate, 30 days' advance written notice shall be given to each
Participant. Following such an amendment to reduce the formula for determining
the future interest rate and the giving of notice to the Participant, the
Participant may elect to (i) terminate an ongoing Deferral Commitment without
penalty and/or (ii) receive an immediate lump sum payment of the balance of his
Account(s), reduced by a penalty, which shall be forfeited to the Company, equal
to six percent (6%) of the balance of such Account(s), in lieu of payments in
accordance with the form previously elected by the Participant. However, the six
percent (6%) penalty shall not apply if it would not have applied under Section
5.7(b). The Participant may make such an election by notifying the Committee in
writing within sixty (60) days following receipt of notice of the amendment to
reduce the interest rate.
9.2 Company's Right to Terminate. The Human Resources Committee of the Board may
at any time partially or completely terminate the Plan if, in its judgment, the
tax, accounting, or other effects of the continuance of the Plan or potential
payments thereunder would not be in the best interests of the Company.
(a) Partial Termination. The Board or Human Resources Committee of the
Board may partially terminate the Plan by instructing the Committee not to
accept any additional or ongoing Deferral Commitments. In the event of such
a partial termination, the Plan shall continue to operate on the same terms
and conditions and, unless the Board or Human Resources Committee of the
Board instructs the Committee not to accept ongoing Deferral Commitments,
shall be effective with regard to Deferral Commitments entered into prior
to the effective date of such partial termination.
(b) Complete Termination. The Board or Human Resources Committee of the
Board may completely terminate the Plan. In the event of complete
termination, the Plan shall cease to operate, and the Company shall pay out
to each Participant (or the Beneficiary of a deceased Participant) his
Accounts in either one lump sum payment or up to three (3) equal annual
installments, at the Company's discretion, as if the Participant had
terminated service as of the effective date of the complete termination.
Interest shall continue to be paid on the balance in each Participant's
Account(s) in accordance with Section 4.3.
20
<PAGE> 26
ARTICLE X
SPENDTHRIFT PROVISIONS
----------------------
10.1 The Company shall, except as otherwise provided hereunder, pay all amounts
payable hereunder only to the person or persons entitled thereto hereunder, and
all such payments shall be made directly into the hands of each such person or
persons and not into the hands of any other person or corporation whatsoever, so
that said payments may not be liable for the debts, contracts or engagements of
any such designated person or persons, or taken in execution by attachment or
garnishment or by any other legal or equitable proceedings, nor shall any such
designated person or persons have any right to alienate, arbitrate, execute,
pledge, encumber, or assign any such payments or the benefits or proceeds
thereof. If the person entitled to receive payment be a minor, or a person of
unsound mind, whether or not adjudicated incompetent, the Company, upon
direction of the Committee, may make such payments to such person or persons,
corporation or corporations as may be, or be acting as, parent or legal or
natural guardian of such infant or person of unsound mind. The signed receipt of
such person or corporation shall be a full and complete discharge to the Company
for any such payments.
ARTICLE XI
MISCELLANEOUS
-------------
11.1 Right of Company to Replace Members of Board of Directors and Advisory
Board; Obligations. Neither the action of the Company in establishing this Plan,
nor any provisions of this Plan, shall be construed as giving any member of the
Board of Directors or Advisory Board of the Company the right to be retained in
such capacity, or any right to payment whatsoever except to the extent of the
benefits provided for by this Plan. The Company expressly reserves the right at
any time to replace or fail to renominate any member of the Board of Directors
or Advisory Board without any liability for any claim against the Company for
any payment whatsoever except to the extent provided for in this Plan. The
Company has no obligation to create any other or subsequent deferred
compensation plan for members of the Board of Directors or Advisory Board.
11.2 Title to and Ownership of Assets Held for Accounts. Title to and ownership
of all assets held for any Accounts shall be vested in the Company and shall
constitute general assets of the Company.
11.3 Nature of Liability to Participants. Any and all payments required to be
made by the Company to Participants in the Plan shall be general and unsecured
liabilities of the Company.
21
<PAGE> 27
11.4 Text of Plan to Control. The headings of the Articles and Sections are
included solely for convenience of reference, and if there be any conflict
between such headings and the text of this Plan, the text shall control.
This Plan document sets forth the complete terms of the Plan. In the event of
any discrepancies or conflicts between this Plan document and any summary or
other information regarding the Plan, the terms of this Plan document shall
apply and control.
11.5 Law Governing and Severability. This Plan shall be construed, regulated and
administered under the laws of the Commonwealth of Pennsylvania.
If any provisions of this Plan shall be held invalid or unenforceable for any
reason, such invalidity or unenforceability shall not affect the remaining
provisions of this Plan, and this Plan shall be deemed to be modified to the
least extent possible to make it valid and enforceable in its entirety.
11.6 Name. This Plan may be referred to as the "Mellon Bank Corporation 1990
Elective Deferred Compensation Plan for Directors and Members of the Advisory
Board".
11.7 Gender. The masculine gender shall include the feminine, and the singular
shall include the plural, except when the context expressly dictates otherwise.
11.8 Trust Fund. The Company shall be responsible for the payment of all
benefits provided under the Plan. At its discretion, the Company may establish
one or more trusts, with such trustees as the Board or the Committee may
approve, for the purpose of providing for the payment of such benefits. Such
trust or trusts may be irrevocable, but the assets thereof shall be subject to
the claims of the Company's creditors. To the extent any benefits provided under
the Plan are actually paid from any such trust, the Company shall have no
further obligation with respect thereto, but to the extent not so paid, such
benefits shall remain the obligation of, and shall be paid by the Company.
IN WITNESS WHEREOF, the Company has caused this amended and restated Plan to be
executed this 15th day of March, 1999 effective as of January 15, 1999.
ATTEST: MELLON BANK CORPORATION
/s/ Carl Krasik By: /s/ D. Michael Roark
- --------------- --------------------
Carl Krasik D. Michael Roark
Secretary Head of the
Human Resources Department of
Mellon Bank, N.A.
22
<PAGE> 1
Exhibit 10.7
MELLON BANK CORPORATION
-----------------------
ELECTIVE DEFERRED COMPENSATION PLAN
-----------------------------------
FOR SENIOR OFFICERS
-------------------
Amended and Restated Effective January 1, 1997
Amended Effective September 15, 1998
Amended Effective January 15, 1999
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PREAMBLE........................................................................................................ 1
ARTICLE I....................................................................................................... 1
DEFINITIONS............................................................................................... 1
1.1 Account............................................................................ 1
1.2 Beneficiary........................................................................ 1
1.3 Board.............................................................................. 2
1.4 Committee.......................................................................... 2
1.5 Company............................................................................ 2
1.6 Continuous Service................................................................. 2
1.7 Deferral Commitment................................................................ 2
1.8 Deferral Election.................................................................. 2
1.9 Disability......................................................................... 2
1.10 Early Distribution Account......................................................... 2
1.11 Early Retirement................................................................... 2
1.12 Effective Date..................................................................... 2
1.13 Elective Deferred Compensation..................................................... 2
1.14 Employer........................................................................... 2
1.15 Financial Hardship................................................................. 2
1.16 Normal Distribution Account........................................................ 2
1.17 Normal Retirement.................................................................. 3
1.18 Participant........................................................................ 3
1.19 Plan............................................................................... 3
1.20 Plan Year.......................................................................... 3
1.21 Prior Plan......................................................................... 3
1.22 Retirement Plan.................................................................... 3
1.23 Retirement Plan Make-up Account.................................................... 3
1.24 Retirement Savings Plan............................................................ 3
1.25 Retirement Savings Plan Augmentation Account....................................... 3
1.26 Special Distribution Account....................................................... 3
1.27 Subsidiary......................................................................... 3
1.28 Termination of Employment.......................................................... 3
1.29 T-Note Rate........................................................................ 3
1.30 Valuation Date..................................................................... 3
1.31 Window Period...................................................................... 4
ARTICLE II...................................................................................................... 4
ADMINISTRATION............................................................................................ 4
2.1 Administrator...................................................................... 4
2.2 Powers and Duties.................................................................. 4
2.3 Procedures......................................................................... 5
2.4 Establishment of Rules............................................................. 5
2.5 Limitation of Liability............................................................ 5
2.6 Compensation and Insurance......................................................... 5
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
2.7 Removal and Resignation............................................................ 6
2.8 Claims Procedure................................................................... 6
ARTICLE III..................................................................................................... 6
PARTICIPATION AND DEFERRAL COMMITMENTS.................................................................... 6
3.1 Eligibility and Participation...................................................... 6
3.2 Duration of Deferral Commitment.................................................... 6
3.3 Basic Forms of Deferral............................................................ 6
3.4 Limitations on Deferrals........................................................... 7
3.5 Modification of Deferral Commitments on Financial Hardship......................... 7
3.6 Commencement of Deferral Commitment................................................ 7
3.7 Termination of Prior Plan Deferral Commitments..................................... 7
ARTICLE IV...................................................................................................... 8
DEFERRED COMPENSATION ACCOUNTS............................................................................ 8
4.1 Accounts........................................................................... 8
4.2 Elective Deferred Compensation..................................................... 8
4.3 Crediting Rate..................................................................... 8
4.4 Valuation of Accounts.............................................................. 8
4.5 Vesting of Accounts................................................................ 8
4.6 Statement of Accounts.............................................................. 8
4.7 Retirement Plan Make-Up............................................................ 8
4.8 Retirement Savings Plan Make-Up....................................................10
4.9 Retirement Plan and Retirement Savings Plan Offsets................................10
ARTICLE V.......................................................................................................11
PLAN BENEFITS.............................................................................................11
5.1 Plan Benefit.......................................................................11
5.2 Normal Distribution Account........................................................12
5.3 Form of Benefit Payment Upon Termination of Employment.............................13
5.4 Survivor Benefits..................................................................13
5.5 Early Distribution Account.........................................................15
5.6 Hardship Distributions.............................................................16
5.7 Disability.........................................................................16
5.8 Valuation and Settlement...........................................................16
5.9 Change in Control and Unscheduled Distributions....................................17
5.10 Continuous Service.................................................................18
5.11 Distributions from General Assets..................................................18
5.12 Withholding and Payroll Taxes......................................................19
5.13 Payment to Guardian................................................................19
5.14 Small Benefit......................................................................19
5.15 Protective Provisions..............................................................19
5.16 Notices and Elections..............................................................19
5.17 Special Distribution Accounts......................................................19
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
ARTICLE VI......................................................................................................19
DESIGNATION OF BENEFICIARY................................................................................19
6.1 Designation of Beneficiary.........................................................19
6.2 Failure to Designate Beneficiary...................................................20
ARTICLE VII.....................................................................................................20
FORFEITURES TO COMPANY....................................................................................20
7.1 Distributions of Participants' Interests
When Company is Unable to Locate Distributees......................................20
ARTICLE VIII....................................................................................................20
MAINTENANCE OF ACCOUNTS...................................................................................20
ARTICLE IX......................................................................................................20
AMENDMENT AND TERMINATION OF THE PLAN.....................................................................20
9.1 Amendment..........................................................................20
9.2 Company's Right to Terminate.......................................................21
ARTICLE X.......................................................................................................21
SPENDTHRIFT PROVISIONS....................................................................................21
ARTICLE XI......................................................................................................21
MISCELLANEOUS.............................................................................................21
11.1 Right of Employers to Dismiss Employees; Obligations...............................21
11.2 Title to and Ownership of Assets Held for Accounts.................................22
11.3 Nature of Liability to Participants................................................22
11.4 Text of Plan to Control............................................................22
11.5 Law Governing and Severability.....................................................22
11.6 Name...............................................................................22
11.7 Gender.............................................................................22
11.8 Trust Fund.........................................................................22
11.9 Ineligible Participant.............................................................23
</TABLE>
iii
<PAGE> 5
MELLON BANK CORPORATION
-----------------------
ELECTIVE DEFERRED COMPENSATION PLAN
-----------------------------------
FOR SENIOR OFFICERS
-------------------
(Amended and Restated as of January 1, 1997)
PREAMBLE
--------
The purpose of this Elective Deferred Compensation Plan For Senior Officers (the
"Plan") is to provide opportunities for a select group of management or highly
compensated employees of Mellon Bank Corporation (the "Company") and its
Subsidiaries to accumulate supplemental funds for retirement, special needs
prior to retirement, or death. The Plan was originally effective as of November
1, 1989. This amended and restated Plan shall only apply to Participants who are
employed by the Company or its Subsidiaries after January 1, 1997. The Plan as
previously in effect shall apply to all Participants who terminated employment
with the Company or its Subsidiaries for any reason prior to such date.
The Company hereby declares that its intention is to create an unfunded Plan
primarily for the purpose of providing a select group of management or highly
compensated employees of the Company and of its affiliated organizations with
deferred compensation in accordance with their individual elections. It is also
the intention of the Company that the Plan be an "employee pension benefit plan"
as defined in Section 3(2) of Title I of the Employee Retirement Income Security
Act of 1974 ("ERISA") and that the Plan be the type of plan described in
Sections 201(2), 301(a)(3) and 401(a)(1) of Title I of ERISA. The Corporate
Benefits Committee ("Committee" or "CBC") shall be the administrator responsible
for fulfilling the duties and responsibilities imposed upon "administrators" of
plans subject to Parts 1 and 5 of Title I of ERISA.
ARTICLE I
DEFINITIONS
-----------
When used herein, the following words shall have the following meanings unless
the content clearly indicates otherwise:
1.1 Account. "Account" means the record-keeping device used by the Company to
measure and determine the amounts to be paid to a Participant under the Plan.
Separate Accounts will be established for each Participant and as may otherwise
be required.
1.2 Beneficiary. "Beneficiary" means the person who under this Plan becomes
entitled to receive a Participant's interest in the event of his death.
<PAGE> 6
1.3 Board. "Board" means the Board of Directors of the Company or any committee
thereof acting within the scope of its authority.
1.4 Committee. "Committee" means the Corporate Benefits Committee appointed to
administer the Plan pursuant to Article II.
1.5 Company. "Company" means Mellon Bank Corporation, a Pennsylvania
corporation, and any successor in interest.
1.6 Continuous Service. "Continuous Service" means the period of continuous
employment of a Participant by an Employer determined in accordance with Section
5.10 and may, in the discretion of the Committee, include prior service with an
entity acquired by the Company.
1.7 Deferral Commitment. "Deferral Commitment" means a commitment made by a
Participant pursuant to Article III for which a Deferral Election has been
submitted by the Participant to the Committee.
1.8 Deferral Election. "Deferral Election" means the written agreement to defer
receipt of compensation submitted by a Participant to the Committee or its
delegates prior to the commencement of the period in which the deferred
compensation is to be earned.
1.9 Disability. "Disability" means total and permanent incapacity of a
Participant to perform the usual duties of his employment with his Employer as
determined by his Employer based upon competent medical evidence. If a
Participant makes application for disability benefits under the Employer's group
long term disability plan, as now in effect or as hereafter amended, and
qualifies for such benefits, he shall be presumed to be totally disabled,
subject to the Employer's determination that the disability is such that it may
be regarded as total and permanent in nature.
1.10 Early Distribution Account. "Early Distribution Account" means an account
established pursuant to Section 5.5 which provides for distribution of a benefit
prior to a Participant's Termination of Employment.
1.11 Early Retirement. "Early Retirement" means Termination of Employment of a
Participant, other than by reason of death, on or after the date on which the
Participant has attained age fifty-five (55), but has not yet attained age
sixty-five (65).
1.12 Effective Date. "Effective Date" of this amended and restated Plan means
January 1, 1997. The Plan originally became effective on November 1, 1989.
1.13 Elective Deferred Compensation. "Elective Deferred Compensation" means the
amount of compensation that a Participant elects to defer pursuant to a Deferral
Commitment.
1.14 Employer. "Employer" means the Company or one of its Subsidiaries.
1.15 Financial Hardship. "Financial Hardship" means an immediate and substantial
financial need of the Participant or Beneficiary, determined by the Committee on
the basis of written information supplied by the Participant in accordance with
such standards as are, from time to time, established by the Committee.
1.16 Normal Distribution Account. "Normal Distribution Account" means an Account
established pursuant to Section 5.2 which provides for distribution of a benefit
following Early Retirement or Normal Retirement.
- 2 -
<PAGE> 7
1.17 Normal Retirement. "Normal Retirement" means Termination of Employment of a
Participant, other than by reason of death, on or after the date on which the
Participant has attained age sixty-five (65).
1.18 Participant. "Participant" means any eligible individual who is
participating in this Plan as provided in Article III.
1.19 Plan. "Plan" means this "Elective Deferred Compensation Plan for Senior
Officers" as set forth in this document and as the same may be amended,
administered or interpreted from time to time.
1.20 Plan Year. "Plan Year" means each calendar year beginning on January 1 and
ending on December 31.
1.21 Prior Plan. "Prior Plan" means this Plan as it existed prior to the
amendment and restatement which became effective as of January 1, 1997.
1.22 Retirement Plan. "Retirement Plan" means the Mellon Bank Retirement Plan,
the Dreyfus Corporation Pension Plan and the Boston Company Retirement Income
Plan, as presently constituted and as amended from time to time.
1.23 Retirement Plan Make-Up Account. "Retirement Plan Make-Up Account" means an
account established pursuant to Section 4.7 to enable a Participant to receive
benefits which are lost under the Retirement Plan as the result of deferrals
under this Plan.
1.24 Retirement Savings Plan. "Retirement Savings Plan" means the Mellon 401(k)
Retirement Savings Plan, as presently constituted and as amended from time to
time.
1.25 Retirement Savings Plan Augmentation Account. "Retirement Savings Plan
Augmentation Account" means an account established pursuant to Section 4.8 to
enable a Participant to receive Employer matching contributions which are lost
under the Retirement Savings Plan as a result of deferrals under this Plan.
1.26 Special Distribution Account. "Special Distribution Account" means an
Account established for any Elective Deferred Compensation (plus earnings
thereon) earned prior to January 1, 1997, which the Participant elected to have
distributed while employed.
1.27 Subsidiary. "Subsidiary" means an entity controlled, directly or
indirectly, by the Company.
1.28 Termination of Employment. "Termination of Employment" means termination of
a Participant's employment with all Employers and the end of any contract and
severance pay period.
1.29 T-Note Rate. "T-Note Rate" means for each Plan Year the interest rate which
is equivalent to an effective annual yield equal to the 120 month rolling
average of ten-year United States Treasury Notes rate as of the July 31
preceding the applicable Plan Year. This rate will be determined once each year
by an outside source selected by the Company.
1.30 Valuation Date. "Valuation Date" means the last day of each month, or such
other dates as the Committee may determine in its discretion, which may be
either more or less frequent, for the valuation of Participants' Accounts.
- 3 -
<PAGE> 8
1.31 Window Period. "Window Period" means a period of thirty calendar days which
begins on the third business day following the date of release of annual or
quarterly earnings of the Company, or such other period as the Committee may
determine in its discretion.
ARTICLE II
ADMINISTRATION
--------------
2.1 Administrator. Except as hereinafter provided, the Committee shall be
responsible for the administrative responsibilities hereinafter described with
respect to the Plan. Whenever any action is required or permitted to be taken in
the administration of the Plan, such action shall be taken by the Committee
unless the Committee's power is expressly limited herein or by operation of law.
The Committee shall be the Plan "Administrator" (as such term is defined in
Section 3(16)(A) of ERISA). The Committee may delegate its duties and
responsibilities as it, in its sole discretion, deems necessary or appropriate
to the execution of such duties and responsibilities. The Committee as a whole
or any of its members may serve in more than one capacity with respect to the
Plan.
2.2 Powers and Duties. The Committee, or its delegates, shall maintain and keep
(or cause to be maintained and kept) such records as are necessary for the
efficient operation of the Plan or as may be required by any applicable law,
regulation, or ruling and shall provide for the preparation and filing of such
forms, reports, information, and documents as may be required to be filed with
any governmental agency or department and with the Plan's Participants and/or
other Beneficiaries.
Except to the extent expressly reserved to the Company, an Employer or the
Board, the Committee shall have all powers necessary to carry out the
administrative provisions of the Plan and to satisfy the requirements of any
applicable law or laws. These powers shall include, by way of illustration and
not limitation, the exclusive powers and discretionary authority necessary to:
(a) construe and interpret the Plan; decide all questions of eligibility;
decide all questions of fact relating to claims for benefits; and determine
the amount, time, manner, method, and mode of payment of any benefits
hereunder;
(b) direct the Employer, and/or the trustee of any trust established at the
discretion of the Company to provide for the payment of benefits under the
Plan, concerning the amount, time, manner, method, and mode of payment of
any benefits hereunder;
(c) prescribe procedures to be followed and forms to be used by
Participants and/or other persons in filing applications or elections;
(d) prepare and distribute, in such manner as may be required by law or as
the Committee deems appropriate, information explaining the Plan; provided,
however, that no such explanation shall contravene the terms of this Plan
or increase the rights of any Participant or Beneficiary or the liabilities
of the Company or any Employer;
(e) require from the Employer and Participants such information as shall be
necessary for the proper administration of the Plan;
(f) appoint and retain individuals to assist in the administration and
construction of the Plan, including such legal, clerical, accounting, and
actuarial services as it may require or as may be required by any
applicable law or laws; and
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<PAGE> 9
(g) perform all functions otherwise imposed upon a plan administrator by
ERISA which are not expressly reserved to the Company, an Employer, or the
Board, including, but not limited to, those supplemental duties and
responsibilities described in the "Mellon Bank Corporation Corporate
Benefits Committee Charter and Summary of Operations" approved by the Board
on September 17, 1991 (the "CBC" Charter").
Without intending to limit the generality of the foregoing, the Committee shall
have the power to amend the Plan, in whole or in part, in order to comply with
applicable law; provided, however, that no such amendment may increase the
duties and obligations of any Employer without the consent of the affected
Employer(s). Except as provided in the preceding sentence or unless directed by
the Human Resources Committee of the Board or otherwise required by law, the
Committee shall have no power to adopt, amend, or terminate the Plan, said
powers being exclusively reserved to the Human Resources Committee of the Board.
2.3 Procedures. The Committee shall be organized and conduct its business with
respect to the Plan in accordance with the organizational and procedural rules
set forth in the CBC Charter.
Notwithstanding the foregoing, if any member of the Committee shall be a
Participant hereunder, then in any matters affecting any member of the Committee
in his individual capacity as a Participant hereunder, separate and apart from
his status as a member of the group of Participants, such interested member
shall have no authority to vote in the determination of such matters as a member
of the Committee, but the Committee shall determine such matter as if said
interested member were not a member of the Committee; provided, however, that
this shall not be deemed to take from said interested member any of his rights
hereunder as a Participant. If the remaining members of the Committee should be
unable to agree on any matter so affecting an interested member because of an
equal division of voting, the Human Resources Committee of the Board shall
appoint a temporary member of the Committee in order to create an odd number of
voting members.
2.4 Establishment of Rules. The Committee shall have specific authority in its
sole discretion to construe and interpret the terms of the Plan related to its
powers and duties, and to the extent that the terms of the Plan are incomplete,
the Committee shall have authority to establish such rules or regulations
related to its powers and duties as it may deem necessary and proper to carry
out the intent of the Company as to the purposes of the Plan.
2.5 Limitation of Liability. The Board, the members of the Committee, and any
officer, employee, or agent of the Company or any Employer shall not incur any
liability individually or on behalf of any other individuals or on behalf of the
Company or any Employer for any act, or failure to act, made in good faith in
relation to the Plan. No bond or other security shall be required of any such
individual solely on account of any such individual's power to direct the
Employer to make the payments required hereunder.
2.6 Compensation and Insurance. Members of the Committee shall serve without
compensation for their services as such. Expenses incurred by members of the
Committee in the performance of their duties as herein provided, and the
compensation and expenses of persons retained or employed by the Committee for
services rendered in connection with the Plan shall, upon approval by the
Committee, be paid or reimbursed by the Company.
The Company shall indemnify and/or maintain and keep in force insurance in such
form and amount as may be necessary in order to protect the members of the
Committee, their delegates and appointees (other than persons who are
independent of the Company and are rendering services to the Committee or to or
with respect to the Plan) from any claim, loss, damage, liability, and expense
(including costs and attorneys' fees) arising from their acts or failures to act
- 5 -
<PAGE> 10
with respect to the Plan, except where such actions or failures to act involve
willful misconduct or gross negligence.
2.7 Removal and Resignation. Any member of the Committee may resign and the
Company may remove any member of the Committee in accordance with the procedures
established by the CBC Charter. The Committee shall remain fully operative
pending the filling of any vacancies, the remaining Committee members having
full authority to administer the Plan.
2.8 Claims Procedure. The right of any Participant or Beneficiary to receive a
benefit hereunder and the amount of such benefit shall be determined in
accordance with the procedures for determination of benefit claims established
and maintained by the Committee in compliance with the requirements of Section
503 of ERISA; which separate procedures, entitled Procedures for Determination
of Benefit Claims, are incorporated herein by this reference.
ARTICLE III
PARTICIPATION AND DEFERRAL COMMITMENTS
--------------------------------------
3.1 Eligibility and Participation.
(a) Eligibility. Eligibility to make a Deferral Commitment shall be limited
to senior officers of the Company or its Subsidiaries as determined by the
Human Resources Committee of the Board.
(b) Participation. An eligible individual may elect to participate in the
Plan by submitting a Deferral Election to the Committee or its delegates
prior to such date, as the Committee may determine, preceding the
commencement of the period in which the deferred compensation is to be
earned. The Deferral Election shall specify whether the deferred
compensation shall be credited to a Normal Distribution Account or an Early
Distribution Account for the Participant.
3.2 Duration of Deferral Commitment.
(a) A Deferral Commitment for a Normal Distribution Account or an Early
Distribution Account shall continue in effect until the Participant files a
subsequent Deferral Election changing the amount of or stopping such
Deferral Commitment.
(b) A Deferral Commitment for an Early Distribution Account shall terminate
at the end of the Plan Year preceding the Plan Year which the Participant
has selected for distribution of such Account.
(c) Except as provided in Sections 5.6 and 5.9 below, a subsequent Deferral
Election shall become effective beginning with the next Plan Year following
the date it is filed. A subsequent Deferral Election shall not apply to any
deferrals which represent payments for services performed prior to the
beginning of the first Plan Year to which it applies, but otherwise shall
apply to all future deferrals covered by the Deferral Commitment.
(d) A Participant's Deferral Commitments shall terminate upon the
Participant's Termination of Employment.
3.3 Basic Forms of Deferral. A Participant may file a Deferral Election to defer
any or all of the following forms of compensation:
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<PAGE> 11
(a) Salary Deferrals. A Participant may elect to defer a portion of base
salary. The amount to be deferred shall be stated as a whole number
percentage or dollar amount of base salary.
(b) Bonus Deferrals. A Participant may elect to defer annual cash
bonus/incentive amounts to be paid by the Employer. The amount to be
deferred shall be stated as a whole number percentage or dollar amount of
such cash bonus.
(c) Special Deferrals. A Participant may elect any special Deferral
Commitment which is authorized by the Committee in its discretion.
3.4 Limitations on Deferrals. The following limitations on deferrals shall
apply:
(a) Minimum Deferrals. The minimum deferral amount for each of the basic
forms of deferral in Section 3.3 (a), (b) or (c) above is $2,000 for any
Plan Year.
(b) Maximum Deferrals. A Participant may not defer during any Plan Year any
amount of base salary which is below the contribution and benefit base
under Section 230 of the Social Security Act, in effect on the first day of
the Plan Year.
(c) Waiver; Committee Discretion. The Committee may further limit the
minimum or maximum amount deferred by any Participant or group of
Participants, or waive the foregoing minimum and maximum limits for any
Participant or group of Participants, for any reason.
3.5 Modification of Deferral Commitments on Financial Hardship. The Committee
may permit a Participant to reduce the amount to be deferred, or waive the
remainder of the Deferral Commitment, upon a finding that the Participant has
suffered a Financial Hardship.
3.6 Commencement of Deferral Commitment. A Deferral Commitment shall be deemed
to commence as of the first day of the Plan Year covered by the Deferral
Election for such Deferral Commitment. A Participant's Beneficiary will be
entitled to receive pre-retirement survivor benefits pursuant to Section 5.4(a)
with respect to the Deferral Commitment only in the event of the Participant's
death while in employment with an Employer on or after such date.
3.7 Termination of Prior Plan Deferral Commitments. All Deferral Commitments
established under the Prior Plan shall terminate on December 31, 1996.
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<PAGE> 12
ARTICLE IV
DEFERRED COMPENSATION ACCOUNTS
------------------------------
4.1 Accounts. For record-keeping purposes only, Normal Distribution, Early
Distribution and Special Distribution Accounts shall be maintained as applicable
for each Participant's Elective Deferred Compensation.
4.2 Elective Deferred Compensation. A Participant's Elective Deferred
Compensation shall be credited to the Participant's Account(s) as of the date
when the corresponding non-deferred portion of the compensation is paid or would
have been paid but for the Deferral Commitment. Any withholding of taxes or
other amounts with respect to deferred compensation that is required by federal,
state or local law shall be withheld from the Participant's non-deferred
compensation to the maximum extent possible with any excess being withheld from
the Participant's Deferral Commitment or Account(s).
4.3 Crediting Rate. Accounts shall be credited monthly with interest based on
the rates specified below, compounded annually. Interest shall be credited as of
each Valuation Date from the dates when deferred amounts are credited to
Accounts based on the balance of each Account.
(a) Interest Rate During Participant's Lifetime. During a Participant's
lifetime, the Participant's Accounts will be credited with interest on a
monthly basis during each Plan Year at the T-Note Rate which is applicable
for that Plan Year, subject to increase pursuant to Section 5.1.
(b) Interest Rate After Participant's Death. Following a Participant's
death, the Participant's Account will be credited with interest on a
monthly basis during each Plan Year at one hundred percent (100%) of the
T-Note Rate which is applicable for that Plan Year. Notwithstanding the
preceding sentence, no interest shall be credited on a Participant's
Account following the Participant's death whenever the Participant's
Beneficiary receives pursuant to Section 5.4(a) a pre-retirement survivor
benefit greater than the Participant's Account balance annuitized over the
Payout Period.
4.4 Valuation of Accounts. A Participant's Account as of each Valuation Date
shall consist of the balance of the Participant's Account as of the immediately
preceding Valuation Date, plus the Participant's Elective Deferred Compensation
and interest credited to such Account and minus any distributions made from such
Account since the immediately preceding Valuation Date.
4.5 Vesting of Accounts. Each Participant shall be one hundred percent (100%)
vested at all times in the amounts credited to such Participant's Accounts.
4.6 Statement of Accounts. The Company shall submit to each Participant periodic
statements setting forth the balance to the credit of the Accounts maintained
for the Participant.
4.7 Retirement Plan Make-Up. If a Participant is entitled to receive a benefit
under the Retirement Plan, a supplemental pension benefit shall be paid under
this Plan as follows:
(a) The supplemental pension benefit shall be an amount equal to:
(i) The maximum life annuity to which the Participant would be entitled
under the Retirement Plan if the Participant had not deferred amounts
under this Plan (without regard to the application of the compensation
limitation imposed by Section 401(a)(17) of the Internal Revenue Code
or the benefit limitation imposed by Section 415 of the Internal
Revenue Code);
- 8 -
<PAGE> 13
LESS:
(ii) The maximum life annuity to which the Participant would then be
entitled under the Retirement Plan (without regard to the application
of the compensation limitation imposed by Section 401(a)(17) of the
Internal Revenue Code or the benefit limitation imposed by Section 415
of the Internal Revenue Code).
Notwithstanding the above, no payment shall be made under this Plan to
the extent such benefits are payable by any other nonqualified defined
benefit retirement plan or arrangement sponsored by the Employer.
Some of the Participants under this Plan own interests in life
insurance policies (the "Policies") under the Mellon Bank Senior
Executive Life Insurance Plan. The Retirement Plan Make-Up benefit
payable under this Plan shall be reduced by the Participant's interest
in the cash value of the Policies, except to the extent otherwise
applied to reduce other benefits payable to the Participant. The
Participant's interest in the cash value of the Policies shall be
applied first to offset supplemental retirement benefits payable to a
Participant under an employment agreement, if any; next to offset any
Retirement Plan Make-Up benefit payable to the Participant under
Section 4.7 of this Plan; next to offset any benefits payable to the
Participant under the Mellon Bank IRC Section 401(a)(17) Plan; and then
to offset any benefits payable to the Participant under the Mellon Bank
Benefit Restoration Plan.
The Retirement Plan Make-Up benefit payable under this Plan shall be
reduced by the Participant's interest in the cash value of the Policies
(to the extent not applied to reduce other benefits) as follows: The
lump sum Retirement Plan Make-Up benefit which is payable under Section
4.7 of this Plan shall be reduced by subtracting the Participant's
interest in the cash value of the Policies (to the extent not applied
to reduce other benefits) as of the date when the Employer will either
pay the lump sum Retirement Plan Make-Up benefit pursuant to Section
4.7(b) below or credit such lump sum amount to a Retirement Plan
Make-Up Account pursuant to Section 4.7(c) below.
(b) The Employer shall pay the supplemental pension benefit to the
Participant in a lump sum when the Participant's benefit commences under
the Retirement Plan. Upon a Participant's Termination of Employment before
Normal or Early Retirement, at the Committee's discretion the Employer may
pay the supplemental pension benefit to the Participant in a lump sum as
soon as practicable following such Termination of Employment. The lump sum
amount shall be calculated using the actuarial equivalence factors in the
Retirement Plan applicable to benefits accruing thereunder at the date of
payment, or the factors in effect at the time of the Retirement Plan's
termination if such termination occurs prior to the date of payment.
(c) Notwithstanding Section 4.7(b) above, in lieu of a lump sum a
Participant may elect to receive the supplemental pension benefit after
Normal or Early Retirement in monthly installment payments over a payment
period of 60, 120 or 180 months. An election to receive the supplemental
pension benefit in monthly installment payments shall be made in the same
manner and subject to the same restrictions and penalties as provided in
Section 5.2; provided, however, that Section 5.2(b)(iii) shall not apply,
and payments of the supplemental pension benefit shall commence when the
Participant's retirement benefit commences under the Retirement Plan.
If the Participant elects to receive the supplemental pension benefit in
monthly installment payments, the Employer shall establish a Retirement
Plan Make-Up Account when the
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<PAGE> 14
Participant's retirement benefit commences under the Retirement Plan and
shall credit to this Account the lump sum amount of the supplemental
pension benefit which would otherwise have been paid to the Participant
under Section 4.7(b) above. A participant shall be 100% vested in the
amount credited to his Retirement Plan Make-Up Account. Interest will be
credited on a Retirement Plan Make-Up Account at the same rate as other
Accounts in accordance with Section 4.3 at such times and in such manner as
the Committee may determine.
If a Participant dies after the commencement of monthly installment
payments of the supplemental pension benefit, the Employer will pay to the
Participant's Beneficiary the remaining installments of any such benefit
that would have been paid to the Participant had the Participant survived.
After the Participant's death, interest shall be credited on the Retirement
Plan Make-Up Account for each Plan Year at one hundred percent (100%) of
the T-Note Rate which is applicable for that Plan Year.
A Participant or Beneficiary who is receiving monthly installment payments
of the supplemental pension benefit may request hardship distributions in
accordance with Section 5.6 or may elect to receive a payment in a lump sum
in accordance with and subject to a penalty as provided in Section 5.9(b).
4.8 Retirement Savings Plan Make-Up. For each Plan Year, the Employer shall
credit to the Retirement Savings Plan Augmentation Account of any Participant an
amount equal to the amount by which the Employer matching or discretionary
contribution that would otherwise have been made by any Employer to the
Retirement Savings Plan for such Participant for the Plan Year is reduced by
reason of the reduction in the Participant's compensation for the Plan Year due
to deferrals under this Plan. The Employer's contribution shall be credited to
the Retirement Savings Plan Augmentation Account following the end of each Plan
Year. A Participant's interest in any credit to his Retirement Savings Plan
Augmentation Account and earnings thereon shall vest at the same rate and at the
same time as would have been the case had such contribution been made to the
Retirement Savings Plan. Interest will be credited on a Retirement Savings Plan
Augmentation Account at the same rate as other Accounts in accordance with
Section 4.3 at such times and in such manner as the Committee may determine.
Upon Normal or Early Retirement, Disability, death or other Termination of
Employment, the Employer shall pay to the Participant (or his Beneficiary in the
event of the Participant's death) an amount equal to the value of the
Participant's vested balance in his Retirement Savings Plan Augmentation Account
in one lump sum payment.
Participants who in any Plan Year are not entitled to receive an Employer
contribution in the Retirement Savings Plan will not be entitled to receive an
Employer contribution under this Plan to a Retirement Savings Plan Augmentation
Account for such Plan Year.
4.9 Retirement Plan and Retirement Savings Plan Offsets. If a Participant
receives a distribution of benefits under this Plan which results in an increase
in either (i) the pension benefit which will be payable to the Participant under
the Retirement Plan or any other qualified or non-qualified defined benefit plan
or arrangement of an Employer or (ii) the Employer contributions which will be
made on behalf of the Participant under the Retirement Savings Plan or any other
qualified or non-qualified defined contribution plan or arrangement of an
Employer, an adjustment will be made to reduce the Participant's Account
balance(s) under this Plan in order to offset the increase in his benefits under
such other plans and arrangements.
The Participant's Account balance(s) under this Plan shall be reduced upon his
Termination of Employment by a lump sum amount which is actuarially equivalent
to the increased pension benefits which will be payable to the Participant under
the Retirement Plan and any other
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<PAGE> 15
qualified or non-qualified defined benefit plan or arrangement of an Employer on
account of the distribution of benefits under this Plan. The lump sum amount
shall be calculated using the actuarial equivalence factors in the Retirement
Plan applicable to benefits accruing thereunder at the date of the Participant's
Termination of Employment, or the factors in effect at the time of the
Retirement Plan's termination if such termination occurs prior to the
Participant's Termination of Employment.
The Participant's Account balance(s) under this Plan shall also be reduced as of
the end of each Plan Year by a lump sum amount which is equal to the increased
Employer contributions which were made on behalf of the Participant for such
Plan Year under the Retirement Savings Plan or any other qualified or
non-qualified defined contribution plan or arrangement of an Employer on account
of the distribution of benefits under this Plan.
ARTICLE V
PLAN BENEFITS
-------------
5.1 Plan Benefit. The Company shall pay a Plan benefit for the Participant's
Normal, Early and Special Distribution Accounts, as determined below:
(a) Fully Enhanced Rate. Unpaid Account balances of Participants who have a
Termination of Employment upon Normal Retirement, death or at any time
after a Change in Control shall be credited retroactively on the Valuation
Date immediately preceding commencement of payment of benefits with respect
to such Account balances with one hundred thirty-five percent (135%) of the
T-Note Rate for each Plan Year.
(b) Enhanced Rate. Unpaid Account balances of Participants who have a
Termination of Employment before Normal Retirement and prior to a Change in
Control, for reasons other than death, shall be credited retroactively on
the Valuation Date immediately preceding commencement of payment of
benefits with respect to such Account balances with a percentage of the
T-Note Rate based on the Participant's completed years of Continuous
Service from his date of hire, including years of Continuous Service before
the Effective Date of this Plan, and completed years of participation in
this Plan as follows:
<TABLE>
<CAPTION>
Completed Years of Completed Years of
Continuous Service Plan Participation % of T-Note Rate
------------------ ------------------ ----------------
<S> <C> <C>
Less Than 3 -- 100%
3 or More -- 125%
5 or More and 2 or More 130%
7 or More and 4 or More 135%
</TABLE>
(c) Early and Special Distribution Accounts. The enhanced rates set forth
under Sections 5.1(a) and (b) above shall also be credited retroactively to
Early and Special Distribution Accounts on the basis of the Participant's
Continuous Service and completed years of participation in the Plan on the
Valuation Date preceding each payment of benefits with respect to such
Accounts before Termination of Employment.
(d) Completed Years of Plan Participation. Completed years of participation
in this Plan shall include all years for which the Participant had an
Account balance with the Plan for the entire calendar year.
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<PAGE> 16
(e) Duration. The interest rates provided under Sections 5.1 (a) and (b)
above shall be payable until the Participant's Accounts are distributed in
full except in the event of the Participant's death. After the
Participant's death interest shall be credited pursuant to Section 4.3(b).
5.2 Normal Distribution Account.
(a) Election of Retirement Benefit. A Participant may file a Deferral
Election to defer compensation into a Normal Distribution Account and
receive benefits from such Account following Termination of Employment upon
Normal or Early Retirement. A Participant may elect up to three (3) benefit
payment options, each covering a ten percent (10%) multiple of his Normal
Distribution Account balance at retirement and specifying a date of
commencement and duration of payments. A Participant's election of payment
options shall be irrevocable, except as follows:
(i) Subject to the approval of the Committee, a Participant shall be
permitted to file one new payment election per year which will
supersede his original election (A) at any time more than 12 months
prior to his Normal or Early Retirement without penalty and (B) at any
time during the 12 months preceding his Normal or Early Retirement
subject to a penalty, which shall be forfeited to the Company, equal to
six percent (6%) of the portion of the Account balance affected by the
change. A new election which is made within the aforesaid time limits
will become effective upon the Participant's Normal or Early
Retirement. In the event that a Participant accelerates his Normal or
Early Retirement thereby causing a previously filed payment election to
have been made within 12 months preceding Normal or Early Retirement,
the next preceding timely payment election filed by the Participant
shall be followed unless the Participant elects to have the six percent
(6%) penalty of Section 5.2(a)(i)(B) above apply. No penalty shall
apply to the first such payment election filed by a Participant who was
participating in the Prior Plan and such initial election shall be
given effect unless the Participant subsequently files a new payment
election.
(ii) A Participant who has elected payments in installments may request
in writing a payment in a lump sum, at any time after Normal or Early
Retirement, of the amount of his Account balance which is reasonably
necessary to meet the Participant's requirements due to a Financial
Hardship.
(iii) A Participant may elect to receive a payment in a lump sum at any
time, subject to a penalty, as provided in Section 5.9(b).
(b) Forms of Retirement Benefit Payment. The available forms of payment
from a Normal Distribution Account after Normal or Early Retirement are as
follows:
(i) One lump sum payment.
(ii) Monthly installment payments in substantially equal payments of
principal and interest over a payment period of 60, 120 or 180 months,
as elected by the Participant. The amount of the monthly installments
shall be redetermined effective as of January 1 of each year based on
the remaining Account balance and the remaining number of installment
payments.
(c) Commencement of Retirement Benefit Payment. The available commencement
dates for payment of benefits from a Participant's Normal Distribution
Account are as follows:
(i) Upon Normal or Early Retirement.
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<PAGE> 17
(ii) Any January following Normal or Early Retirement; provided,
however, that no payment may commence later than the January of the
year in which the Participant attains age 70.
(iii) The later of Normal or Early Retirement and the date the
Participant attains age 60, 65 or 70.
If a Participant does not elect a benefit payment option for his Normal
Distribution Account, Plan benefits from such Account will be paid in monthly
installments over 180 months, commencing in January of the year following Early
Retirement.
5.3 Form of Benefit Payment Upon Termination of Employment. Benefits payable
upon a Participant's Termination of Employment, for reasons other than
Disability or death, before eligibility for Normal or Early Retirement shall be
paid in a lump sum or up to three equal annual installments, at the Committee's
discretion, following Termination of Employment. Interest will continue to be
credited on unpaid Account balances following Termination of Employment at the
applicable rate under Section 5.1(b).
5.4 Survivor Benefits.
(a) Pre-Retirement Survivor Benefits.
(i) Normal and Early Distribution Accounts. If a Participant dies while
in employment with an Employer (or while suffering from a Disability
prior to attaining age 55) prior to receiving a complete distribution
of his entire Normal or Early Distribution Account balances, then
commencing as soon as practicable following the Participant's death the
Employer will pay to the Participant's Beneficiary a benefit equal to
the sum of A plus B plus C where:
A = Greater of:
o 40% of the Participant's cumulative amount deferred (excluding
interest credited thereon) on the date of death or at age 65
(if death occurs after age 65), paid annually until the
Participant would have attained age 65 or for ten (10) years,
whichever is longer (the "Payout Period"), or
o Participant's Account balance annuitized over the Payout
Period.
B = Respectively:
o Normal Distribution Account: If death occurs before age 65,
160% of the Participant's annual Deferral Commitment for such
Account in effect at date of death, paid annually for the
Payout Period.
o Early Distribution Account: 40% times the number of deferral
years remaining before commencement of payment of such Account
(limited to the lesser of 4 years or the number of years until
the Participant would have attained age 65) of the
Participant's annual Deferral Commitment for such Account in
effect at date of death, paid annually over the Payout Period.
C = Participant's Account balance resulting from deferrals
credited to his Account after age 65 paid over the Payout Period.
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<PAGE> 18
(ii) Special Distribution Account. If a Participant dies while in
employment with an Employer (or while suffering from a Disability prior
to attaining age 55) prior to receiving a complete distribution of his
entire Special Distribution Account, commencing as soon as practicable
following the Participant's death the Employer will pay to the
Participant's Beneficiary a benefit equal to the greater of (X) 40% of
the cumulative amounts deferred into the Participant's Special
Distribution Account on the date of death or at age 65 (if death occurs
after age 65), paid annually for the Payout Period, or (Y)
Participant's Special Distribution Account balance paid over the Payout
Period.
(iii) Greater Benefit. For purposes of Section 5.4(a)(i)(A), the
Committee shall determine which benefit is greater on a present value
basis using such discount rate as the Committee may determine, provided
that such rate will not be greater than the T Note-Rate which is
applicable for the Plan Year.
(iv) Covered Deferral Commitment. For purposes of Section 5.4(a)(i)(B),
the following provisions shall apply:
A) If the Participant had elected to defer a percentage of Base
Salary or Bonus, his Deferral Commitment shall be determined
based on the Base Salary in effect or the Bonus most recently
paid to the Participant at the time of his death.
B) If the Participant had elected to defer a dollar amount of
Base Salary or Bonus, his Deferral Commitment shall not exceed
the Base Salary in effect or the Bonus most recently paid to
the Participant at the time of his death.
C) A Deferral Commitment shall be deemed to be in effect
beginning on the first day of the Plan Year after the
Participant files a Deferral Election for such Deferral
Commitment.
(v) Commencement of Survivor Benefit. The pre-retirement survivor
benefit for a Participant's Accounts shall become effective beginning
on the first day of the Plan Year after the Participant files a
Deferral Election for a Normal or Early Distribution Account and shall
be effective as of January 1, 1997 for all Special Distribution
Accounts. A Participant's Beneficiary will be entitled to receive the
pre-retirement survivor benefits described above with respect to the
Participant's Account(s) only in the event of the Participant's death
while in employment with an Employer on or after such dates.
(vi) Withdrawals. Whenever a Participant makes a withdrawal from any
Account, the cumulative amount deferred for purposes of Section
5.4(a)(i)(A) above shall be limited to the actual amounts deferred
(less any amounts withdrawn, including any penalty thereon). The
Committee, in its sole discretion, will make appropriate adjustments to
reduce the annual amount of the pre-retirement survivor benefit where
the Participant has received a partial distribution from any of his
Account(s) prior to his death, including but not limited to installment
payments from an Early Distribution Account pursuant to Section 5.5,
distributions on account of Financial Hardship pursuant to Section 5.6
and distributions during a Window Period pursuant to Section 5.9. If a
Participant dies while in employment with an Employer after complete
distribution of his entire Account balances, no survivor benefit will
be payable to the Participant's Beneficiary.
(vii) Prior Plan Pre-Retirement Survivor Benefit. Beneficiaries of
Participants who are age 62 or older on January 1, 1997 and who
subsequently die while in employment with an Employer prior to
receiving a complete distribution of their entire Normal, Early or
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<PAGE> 19
Special Distribution Account(s), if any, shall be entitled to receive
the greater of the pre-retirement survivor benefit calculated above and
the pre-retirement survivor benefit calculated under the terms of the
Prior Plan.
(b) Post-Retirement Survivor Benefits. If a Participant dies after Normal
or Early Retirement but before commencement of payment of retirement
benefits with respect to his Normal Distribution Account balance, the
Employer will pay to the Participant's Beneficiary the installments of any
such benefit that such Participant's Beneficiary would have received with
respect to such Normal Distribution Account balance had the Participant
commenced to receive retirement benefits on the day prior to such
Participant's death. Payments will commence upon the Participant's death,
irrespective of when retirement benefits would have commenced if the
Participant had survived. Such payments shall be made in accordance with
the method of payment which the Participant had elected for payment of
retirement benefits for his Normal Distribution Account.
If a Participant dies after the commencement of payment of retirement
benefits with respect to his Normal Distribution Account, the Employer will
pay to the Participant's Beneficiary the remaining installments of any such
benefit that would have been paid to the Participant had the Participant
survived.
If a Participant dies after Termination of Employment, but before receiving
full payment of benefits from his Early or Special Distribution Account,
his Beneficiary shall receive the balance of his Early or Special
Distribution Account in one lump sum payment, at the discretion of the
Committee, as soon as practicable following his death.
(c) Interest. If the Participant dies during employment with an Employer,
the amount payable with respect to each of the Participant's Accounts shall
be determined by retroactively crediting interest at one hundred
thirty-five percent (135%) of the T-Note Rate for each Plan Year through
the date of the Participant's death. After the Participant's death interest
shall be credited for each Plan Year at one hundred percent (100%) of the
T-Note Rate which is applicable for that Plan Year.
5.5 Early Distribution Account. A Participant may file a Deferral Election to
defer compensation into an Early Distribution Account and receive benefits from
such Account prior to Termination of Employment subject to the following
restrictions:
(a) Election of Early Distribution Benefit. A Deferral Election
establishing an Early Distribution Account and specifying an early payment
date and the form of payment must be filed prior to the commencement of the
period in which the Elective Deferred Compensation is to be earned. No
deferrals may be made into a Participant's Early Distribution Account
during any Plan Year in which the Participant is receiving a distribution
from such Account.
(b) Amount of Early Distribution Benefit. The entire Early Distribution
Account must be paid out at the time and in the form provided for in the
related Deferral Election.
(c) Commencement and Form of Early Distribution Benefit. An Early
Distribution Account shall not be paid out prior to the completion of two
Plan Years following the start of deferrals into such Account. An Early
Distribution Account shall be paid out in a lump sum or in four equal
annual installments, as provided in the Participant's Deferral Election
establishing such Account. Following the complete distribution of an Early
Distribution Account, a Participant may make new deferrals into such
Account. Amounts paid to a Participant pursuant to this Section 5.5 shall
be treated as distributions from the Participant's Early Distribution
Account. If Termination of Employment occurs due to any reason, other than
death, before the date scheduled for payment of an Early Distribution
Account, the Participant shall receive the
- 15 -
<PAGE> 20
balance of his Early Distribution Account in one lump sum payment or up to
three (3) equal annual installments, at the Committee's discretion, as soon
as practicable following such event.
5.6 Hardship Distributions. Upon finding that a Participant or Beneficiary has
suffered a Financial Hardship, the Committee may, in its sole discretion, make
distributions from an Account prior to the time specified for payment of
benefits under the Plan. The amount of such distributions shall be limited to
the amount reasonably necessary to meet the Participant's or Beneficiary's
requirements during the Financial Hardship. Applications for hardship
distributions and determinations thereon by the Committee shall be in writing,
and a Participant or Beneficiary may be required to furnish written proof of the
Financial Hardship.
A Participant's entire Account balance will be distributed whenever a hardship
distribution would amount to more than seventy-five percent (75%) of any such
Account balance. Following a complete distribution of an entire Account balance,
a Participant and his Beneficiary will be entitled to no further benefits under
the Plan with respect to that Account. Amounts paid to a Participant pursuant to
this Section 5.6 shall be treated as distributions from the Participant's
Account. Any Participant who receives a hardship distribution of any part of an
Account balance shall not be allowed to make any deferrals under the Plan during
the remainder of the Plan Year in which he receives such distribution or during
the next Plan Year.
5.7 Disability. If a Participant suffers a Disability, the Participant's
Deferral Commitments will cease except for any bonuses which may be payable
thereafter. The Participant's Accounts under the Plan will continue, and the
Participant will continue to receive credit for years of Continuous Service and
years of participation in the Plan for purposes of Section 5.1(b). The
Participant's Accounts will be distributed in accordance with the method of
payment which the Participant has elected for payment of benefits with respect
to such Account, assuming Termination of Employment on Early Retirement for
purposes of his Normal Distribution Account. Notwithstanding the foregoing, such
distribution may be delayed if the Committee determines that such distribution
would result in a reduction of any disability benefits payable to the
Participant under disability plans sponsored by the Employer. The Committee
shall make appropriate adjustments on account of any delayed payments to ensure
that the Participant receives payments which are actuarially equivalent to the
payments which were otherwise due to him under this Plan.
5.8 Valuation and Settlement. The date on which a lump sum is paid or the date
on which installment payments commence shall be the "Settlement Date." The
Settlement Date for an Account shall be no more than sixty (60) days after the
end of the month in which the Participant or his Beneficiary becomes entitled to
payments on account of Normal or Early Retirement, other Termination of
Employment or death, unless the Participant elects to defer commencement of
payments following Normal or Early Retirement to a later date in the election
form for designation of form of payment for the Account. The Settlement Date for
an Early Distribution Account or delayed payments following Normal or Early
Retirement shall be the date which the Participant elects for commencement of
such payments in the Deferral Election designating the form of payment for the
Account. The Settlement Date for a Special Distribution Account shall be the
date which the Participant elected for commencement of payments from such
Account under the terms of the Prior Plan. The amount of a lump sum payment and
the initial amount of installment payments shall be based on the value of the
Participant's Account as of the Valuation Date at the end of the immediately
preceding month before the Settlement Date. For example, the Valuation Date at
the end of December shall be used to determine lump sum payments and the initial
amount of installment payments which will be made in the following January.
- 16 -
<PAGE> 21
5.9 Change in Control and Unscheduled Distributions.
(a) Subject to the provisions of Section 5.9(b) hereof, upon (i)
dissolution or liquidation of the Company, (ii) a reorganization, merger or
consolidation of the Company with one or more other entities as a result of
which the Company is not the survivor, (iii) the sale of all or
substantially all the assets of the Company, or (iv) any other event which
constitutes a Change in Control as defined in Section 5.9(c), the interests
of all then remaining Participants shall continue, and provisions shall be
made in connection with such transaction for the continuance of the Plan
and the assumption of the obligations of the Company under the Plan by the
Company's successor(s) in interest.
(b) Notwithstanding any other provisions of the Plan, at any time during a
Window Period before a Change in Control or at any time after a Change in
Control a Participant or a Beneficiary of a deceased Participant may elect
to receive an immediate lump sum payment of up to the balance of his
Account(s), reduced by a penalty, which shall be forfeited to the Company,
equal to ten percent (10%) before a Change in Control or six percent (6%)
after a Change in Control, applied against the portion of the Account
balance withdrawn, in lieu of payments in accordance with the form
previously elected by the Participant. However, the penalty shall not apply
if the Committee determines, based on advice of counsel or a final
determination by the Internal Revenue Service or any court of competent
jurisdiction, that by reason of the foregoing provision the Participant has
recognized or will recognize gross income for federal income tax purposes
under this Plan in advance of payment to him or his Beneficiary of Plan
benefits. The minimum lump sum payment shall be $50,000 or the entire
balance of any Account, whichever is less.
A Participant who receives a lump sum payment under this Section 5.9(b)
will be credited with interest on the Account balance at the rates
established under Section 5.1(b) of the Plan based on the Participant's
completed years of Service and years of participation in the Plan prior to
the lump sum payment. Following a complete distribution of the entire
balance for an Account, a Participant and his Beneficiary will be entitled
to no further benefits under the Plan with respect to that Account.
Whenever a Participant receives a lump sum payment under this Section
5.9(b) or Section 9.1, the Participant will be deemed to elect to revoke
all Deferral Commitments and to discontinue all deferrals under the Plan
effective as of the date of the lump sum payment. The Participant will be
precluded from making any new deferrals under the Plan for the remainder of
the Plan Year in which he receives such distribution and for the next Plan
Year.
(c) A "Change in Control" shall mean:
(i) The occurrence with respect to the 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
(ii) Approval by the stockholders of the Corporation of (a) any
consolidation or merger of the Corporation where either (1) the holders
of voting stock of the Corporation immediately before the merger or
consolidation will not own more than 50% of the voting shares of the
continuing or surviving corporation immediately after such merger or
consolidation or (2) the Incumbent Directors immediately before the
merger or consolidation will not hold more than 50% (rounded to the
next whole person) of the seats on the board of directors of the
continuing or surviving corporation, or (b) any sale,
- 17 -
<PAGE> 22
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
(iii) 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 (a) 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 and
(b) was not as a result of an actual or threatened election with
respect to directors or any other actual or threatened solicitation of
proxies by or on behalf of any person other than the Board of
Directors. As used in this Section 5.9, the term "Incumbent Director"
means as of any time a director of the Corporation (x) who has been a
member of the Board of Directors continuously for at least 12 months or
(y) whose election or nomination as a director within such period met
the requirements of clauses (a) and (b) of the preceding sentence.
(d) Notwithstanding any other provision of this Plan, without the written
consent of the Participant (or Beneficiary of a deceased Participant)
affected thereby, the Company may not amend or terminate this Plan:
(i) For a period of twenty-four (24) months following a Change in
Control; or
(ii) At any time thereafter, in any manner which affects any
Participant (or Beneficiary of a deceased Participant) who receives
payments of benefits under this Plan or has a Termination of Employment
for any reason at any time during the period of twenty-four (24) months
following the Change in Control.
5.10 Continuous Service. Continuity of service shall be determined in accordance
with the following rules:
(a) A leave of absence not in excess of one year, granted by a
Participant's Employer for any purpose, including but not limited to,
sickness, accident or other casualty, shall not be considered a break in
continuity of service.
(b) Any Participant who has entered, or enters, the Armed Forces of the
United States in a period of national emergency, declared by the President
or Congress of the United States, shall be presumed to be on leave of
absence, provided he returns to the employ of his Employer within ninety
(90) days of the date on which he shall have the right to release from such
service, or from the hospital in event of service caused disability without
intervening employment elsewhere.
(c) A Participant who transfers his employment from one Employer to any
other Employer is not deemed to have caused a break in continuity of
service. Any other dismissal or voluntary Termination of Employment shall
be deemed a break in continuity of service.
(d) Absence from work or interruption of employment not covered by the
foregoing provisions of this Section shall be determined by the employing
Employer to be, or not to be, a break in continuity of service at the time
of return to work or re-employment.
5.11 Distributions from General Assets. The Employer shall make any or all
distributions pursuant to this Plan in cash out of its general assets.
- 18 -
<PAGE> 23
5.12 Withholding and Payroll Taxes. The Employer shall withhold from payments
made hereunder any taxes required to be withheld from such payments under
federal, state or local law.
5.13 Payment to Guardian. If a benefit is payable to a minor or a person
declared incompetent or to a person incapable of handling the disposition of his
property, the Committee may direct payment of such benefit to the guardian,
legal representative or person having the care and custody of such minor,
incompetent or incapacitated person. The Committee may require proof of
minority, incompetency, incapacity or guardianship as it may deem appropriate
prior to distribution of the benefit. Such distribution shall completely
discharge the Committee from all liability with respect to such benefit.
5.14 Small Benefit. Notwithstanding any election made by the Participant, the
Committee, in its sole discretion, may direct payment of any benefit in the form
of a lump sum payment to the Participant or any Beneficiary, if the lump sum
amount of the Account balance which is payable to the Participant or Beneficiary
when payments to such Participant or Beneficiary would otherwise commence is
less than $50,000.
5.15 Protective Provisions. Each Participant shall cooperate with the Company by
furnishing any and all information requested by the Company in order to
facilitate the payment of benefits hereunder, taking such physical examinations
as the Company may deem necessary and taking such other relevant action as may
be requested by the Company. If a Participant refuses so to cooperate or makes
any material misstatement of information or nondisclosure of medical history,
then no benefits will be payable hereunder with respect to such Participant or
his Beneficiary, provided that, in the Company's sole discretion, benefits may
be payable in an amount reduced to compensate the Company for any loss, cost,
damage or expense suffered or incurred by the Company as a result in any way of
any such action, misstatement or nondisclosure.
5.16 Notices and Elections. Any notice or election required or permitted to be
given to the Company or the Committee under the Plan shall be sufficient only if
it is in writing on a form prescribed or accepted by the Committee and hand
delivered, or sent by registered or certified mail, to the principal office of
the Company, directed to the attention of the Human Resources Department of the
Company. Such notice or election shall be deemed given as of the date of
delivery or, if delivery is made by mail, as of the date shown on the postmark
on the receipt for registration or certification.
5.17 Special Distribution Accounts. Special Distribution Accounts shall be
distributed in accordance with a Participant's elections filed under the Prior
Plan. Such elections may not be amended by the Participant.
ARTICLE VI
DESIGNATION OF BENEFICIARY
--------------------------
6.1 Designation of Beneficiary. Each Participant shall have the right to
designate a Beneficiary or Beneficiaries to receive his interest in each of his
Accounts upon his death. Such designation shall be made on a form prescribed by
and delivered to the Company. The Participant shall have the right to change or
revoke any such designation from time to time by filing a new designation or
notice of revocation with the Company, and no notice to any Beneficiary nor
consent by any Beneficiary shall be required to effect any such change or
revocation.
6.2 Failure to Designate Beneficiary. If a Participant shall fail to designate a
Beneficiary before his demise, or if no designated Beneficiary survives the
Participant, the Committee shall direct the Company to pay the balance in each
of his Accounts in a lump sum to the executor or
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<PAGE> 24
administrator for his estate; provided, however, if no executor or administrator
shall have been appointed, and actual notice of said death was given to the
Committee within sixty (60) days after his death, and if his Account balances do
not exceed Ten Thousand Dollars ($10,000), the Committee may direct the Company
to pay his Account balances to such person or persons as the Committee
determines, and the Committee may require such proof of right and/or identity of
such person or persons as the Committee may deem appropriate or necessary.
ARTICLE VII
FORFEITURES TO COMPANY
----------------------
7.1 Distribution of Participants' Interest When Company is Unable to Locate
Distributees. In case the Company is unable within three (3) years after payment
is due to a Participant, or within three (3) years after payment is due to the
Beneficiary or estate of a deceased Participant, to make such payment to him or
his Beneficiary, executor or administrator because it cannot ascertain his
whereabouts or the identity or whereabouts of his Beneficiary, executor or
administrator by mailing to the last known address shown on the Employer's or
the Company's records, and neither he, his Beneficiary, nor his executor or
administrator had made written claim therefor before the expiration of the
aforesaid time limit, then in such case, the amount due shall be forfeited to
the Company.
ARTICLE VIII
MAINTENANCE OF ACCOUNTS
-----------------------
The Company shall keep, or cause to be kept, all such books of account, records
and other data as may be necessary or advisable in its judgment for the
administration of this Plan, and properly to reflect the affairs thereof, and to
determine the nature and amount of the interests of the respective Participants
in each Account.
The Company is not required to physically segregate any assets with respect to
the Accounts under this Plan from any other assets of the Company and may
commingle any such assets with any other moneys, securities and properties of
any kind of the Company. Separate accounts or records for the respective
Participants' interests shall be maintained for operational and accounting
purposes, but no such account or record shall be considered as creating a lien
of any nature whatsoever on or as segregating any of the assets with respect to
the Accounts under this Plan from any other funds or property of the Company.
ARTICLE IX
AMENDMENT AND TERMINATION OF THE PLAN
-------------------------------------
9.1 Amendment. The Human Resources Committee of the Board may at any time amend
the Plan in whole or in part, provided, however, that no amendment shall be
effective to decrease or restrict the amount accrued (including earnings at the
appropriate interest rate) in any Account to the date of such amendment.
Notwithstanding anything in the preceding sentence to the contrary, the
Committee shall have the power to amend the Plan to the extent authorized by
Section 2.2.
Upon a prospective amendment to reduce the formula for determining the future
interest rate, 30 days' advance written notice shall be given to each
Participant. Following such an amendment to reduce the formula for determining
the future interest rate and the giving of notice to the Participant, the
Participant may elect to (i) terminate an ongoing Deferral Commitment without
penalty and/or (ii) receive an immediate lump sum payment of the balance of his
Account(s),
- 20 -
<PAGE> 25
reduced by a penalty, which shall be forfeited to the Employer, equal to six
percent (6%) of the balance of such Account(s), in lieu of payments in
accordance with the form previously elected by the Participant. However, the six
percent (6%) penalty shall not apply if it would not have applied under Section
5.9(b). The Participant may make such an election by notifying the Committee in
writing within sixty (60) days following receipt of notice of the amendment to
reduce the interest rate.
9.2 Company's Right to Terminate. The Human Resources Committee of the Board may
partially or completely terminate the Plan if, in its judgment, the tax,
accounting, or other effects of the continuance of the Plan or potential
payments thereunder would not be in the best interests of the Company.
(a) Partial Termination. The Human Resources Committee of the Board may
partially terminate the Plan by instructing the Committee not to accept any
additional or ongoing Deferral Commitments. In the event of such partial
termination, the Plan shall continue to operate on the same terms and
conditions and, unless the Human Resources Committee of the Board instructs
the Committee not to accept ongoing Deferral Commitments, shall be
effective with regard to Deferral Commitments entered into prior to the
effective date of such partial termination.
(b) Complete Termination. The Human Resources Committee of the Board may
completely terminate the Plan. In the event of complete termination, the
Plan shall cease to operate, and the Employer shall pay out to each
Participant (or the Beneficiary of a deceased Participant) his Accounts in
either a lump sum payment or up to three equal annual installments, at the
Employer's discretion, as if the Participant had terminated service as of
the effective date of the complete termination. Interest shall continue to
be paid on the balance in each Participant's Account(s) in accordance with
Section 4.3.
ARTICLE X
SPENDTHRIFT PROVISIONS
----------------------
The Employer shall, except as otherwise provided hereunder, pay all amounts
payable hereunder only to the person or persons entitled thereto hereunder, and
all such payments shall be made directly into the hands of each such person or
persons and not into the hands of any other person or corporation whatsoever, so
that said payments may not be liable for the debts, contracts or engagements of
any such designated person or persons, or taken in execution by attachment or
garnishment or by any other legal or equitable proceedings, nor shall any such
designated person or persons have any right to alienate, arbitrate, execute,
pledge, encumber, or assign any such payments or the benefits or proceeds
thereof. If the person entitled to receive payment be a minor, or a person of
unsound mind, whether or not adjudicated incompetent, the Employer, upon
direction of the Committee, may make such payments to such person or persons,
corporation or corporations as may be, or be acting as, parent or legal or
natural guardian of such infant or person of unsound mind. The signed receipt of
such person or corporation shall be a full and complete discharge to the
Employer for any such payments.
ARTICLE XI
MISCELLANEOUS
-------------
11.1 Right of Employers to Dismiss Employees; Obligations. Neither the action of
the Company and the Employers in establishing this Plan, nor any provisions of
this Plan, shall be construed as giving any employee the right to be retained in
his Employer's employ, or any right to any payment whatsoever except to the
extent of the benefits provided for by this Plan. The
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<PAGE> 26
Employers expressly reserve their right at any time to dismiss any employee
without any liability for any claim against the Employers, or any of them, for
any payment whatsoever except to the extent provided for in this Plan. The
Employers, or any of them, have no obligation to create any other or subsequent
deferred compensation plan for any employees.
11.2 Title to and Ownership of Assets Held for Accounts. Title to and ownership
of all assets held for any Accounts shall be vested in the Employer and shall
constitute general assets of the Employer.
11.3 Nature of Liability to Participants. Any and all payments required to be
made by the Employer to Participants in the Plan shall be general and unsecured
liabilities of the Employer.
11.4 Text of Plan to Control. The headings of the Articles and Sections are
included solely for convenience of reference, and if there be any conflict
between such headings and the text of this Plan, the text shall control.
This Plan document sets forth the complete terms of the Plan. In the event of
any discrepancies or conflicts between this Plan document and any summary or
other information regarding the Plan, the terms of this Plan document shall
apply and control.
11.5 Law Governing and Severability. This Plan shall be construed, regulated and
administered under the laws of the Commonwealth of Pennsylvania.
If any provisions of this Plan shall be held invalid or unenforceable for any
reason, such invalidity or unenforceability shall not affect the remaining
provisions of this Plan, and this Plan shall be deemed to be modified to the
least extent possible to make it valid and enforceable in its entirety.
11.6 Name. This Plan may be referred to as the "Mellon Bank Corporation Elective
Deferred Compensation Plan for Senior Officers."
11.7 Gender. The masculine gender shall include the feminine, and the singular
shall include the plural, except when the context expressly dictates otherwise.
11.8 Trust Fund. The Employer shall be responsible for the payment of all
benefits provided under the Plan. At its discretion, the Company may establish
one or more trusts, with such trustees as the Board or the Committee may
approve, for the purpose of providing for the payment of such benefits. Such
trust or trusts may be irrevocable, but the assets thereof shall be subject to
the claims of the Company's creditors. To the extent any benefits provided under
the Plan are actually paid from any such trust, the Employer shall have no
further obligation with respect thereto, but to the extent not so paid, such
benefits shall remain the obligation of, and shall be paid by, the Employer.
- 22 -
<PAGE> 27
11.9 Ineligible Participant. Notwithstanding any other provisions of this Plan
to the contrary, if any Participant is determined not to be a "management or
highly compensated employee" within the meaning of ERISA or Regulations
thereunder, such Participant will not be eligible to participate in this Plan
and shall receive an immediate lump sum payment equal to the vested portion of
the amounts standing credited to his Accounts. Upon such payment no survivor
benefit or other benefit shall thereafter be payable under this Plan either to
the Participant or any Beneficiary of the Participant.
IN WITNESS WHEREOF, the Company has caused this amended and restated Plan to be
executed this 15th day of March, 1999, effective as of January 15, 1999.
ATTEST: MELLON BANK CORPORATION
/s/Carl Krasik By: /s/ D. Michael Roark
- -------------- --------------------
Carl Krasik D. Michael Roark
Secretary Head of the
Human Resources Department of
Mellon Bank, N.A.
- 23 -
<PAGE> 1
EXHIBIT 10.9
MELLON BANK
OPTIONAL LIFE INSURANCE PLAN
EFFECTIVE JANUARY 1, 1993
AMENDED EFFECTIVE JANUARY 15, 1999
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Preamble 1
- --------
Article I 1
Definitions 1
-----------
1.1 Affiliates 1
1.2 Base Salary 1
1.3 Beneficiary 1
1.4 Board 1
1.5 Change in Control 1
1.6 Code 1
1.7 Committee 1
1.8 Company 1
1.9 Coverage Adjustment Date 2
1.10 Credited Interest 2
1.11 Disability 2
1.12 Economic Benefit 2
1.13 Effective Date 2
1.14 Eligible Employee 2
1.15 Employee 2
1.16 Human Resources Committee 2
1.17 Insurance Company 2
1.18 Net Cumulative Premiums 2
1.19 Participant 2
1.20 Participation Agreement 3
1.21 Plan 3
1.22 Plan Year 3
1.23 Policy 3
1.24 Retirement 3
1.25 Subsidiary 3
1.26 Years of Service 3
ARTICLE II 3
Participation 3
-------------
2.1 Participation 3
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
2.2 Insurability 3
2.3 Commencement of Coverage 3
2.4 Increases in Coverage 4
2.5 Declining Coverage 4
2.6 Ceasing Participation 4
ARTICLE III 5
Life Insurance Coverage 5
-----------------------
3.1 Amount of Insurance 5
3.2 Disability 5
3.3 Insurance Contract 5
3.4 Interests in Cash Value 6
3.5 Policy Withdrawals and Loans 7
3.6 Surrender or Cancellation of Policy 7
3.7 Continuation of Split Dollar Policy or Release of Collateral 7
Assignment after Retirement
3.8 Assignment 8
3.9 Payment of Premiums and Contributions 8
3.10 Form of Death Benefit 8
ARTICLE IV 8
Option to Retain Insurance Policy on Termination of Employment 8
--------------------------------------------------------------
ARTICLE V 9
Option to Retain Insurance Policy in Certain Events 9
---------------------------------------------------
5.1 Option to Retain Policy 9
5.2 Elimination of Coverage 9
5.3 Change in Control 9
ARTICLE VI 10
Beneficiary Designation 10
6.1 Designation of Beneficiary 10
6.2 Failure to Designate Beneficiary 10
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE VII 11
Administration 11
--------------
7.1 Administrator 11
7.2 Powers and Duties 11
7.3 Procedures 12
7.4 Establishment of Rules 12
7.5 Limitation of Liability 13
7.6 Compensation and Insurance 13
7.7 Removal and Resignation 13
7.8 Claims Procedure 13
ARTICLE VIII 13
Amendment and Termination of Plan 13
---------------------------------
ARTICLE IX 14
Miscellaneous 14
-------------
9.1 Restriction on Assignment 14
9.2 Tax Liability and Withholding 14
9.3 ERISA Plan 14
9.4 Employment Not Guaranteed 14
9.5 Protective Provisions 14
9.6 Gender, Singular & Plural 14
9.7 Captions 15
9.8 Validity 15
9.9 Notices and Elections 15
9.10 Applicable Law 15
9.11 Waiver of Breach 15
9.12 Benefit 15
</TABLE>
iii
<PAGE> 5
MELLON BANK
OPTIONAL LIFE INSURANCE PLAN
PREAMBLE
--------
The purpose of this Mellon Bank Optional Life Insurance Plan (the
"Plan") is to provide optional life insurance coverage for eligible key
executive employees of Mellon Bank, N.A. (the "Company") and its Affiliates.
The Plan will be effective as of January 1, 1993.
ARTICLE I
DEFINITIONS
-----------
When used herein, the following words shall have the following meanings
unless the content clearly indicates otherwise:
1.1 Affiliates. "Affiliates" means Mellon Bank Corporation and its
Subsidiaries.
1.2 Base Salary. "Base Salary" means an active Employee's annual base
salary as of the last Coverage Adjustment Date preceding his death. Annual base
salary excludes all bonuses, incentive and supplemental compensation and other
payments and benefits, except fixed base salary.
1.3 Beneficiary. "Beneficiary" means the person or persons designated
as such in accordance with Article VI.
1.4 Board. "Board" means the Board of Directors of Mellon Bank
Corporation or any committee thereof acting within the scope of its authority.
1.5 Change in Control. "Change in Control" shall have the meaning set
forth in Section 5.3.
1.6 Code. "Code" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
1.7 Committee. "Committee" means the Corporate Benefits Committee of
Mellon Bank Corporation appointed to administer the Plan pursuant to Article
VII.
1.8 Company. "Company" means Mellon Bank, N.A. and, whenever
applicable, its Affiliates.
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1.9 Coverage Adjustment Date. "Coverage Adjustment Date" means the date
during each year, selected by the Committee from time to time in its discretion,
on which changes or increases in coverage will take effect.
1.10 Credited Interest. "Credited Interest" means interest on the Net
Cumulative Premiums paid by the Company on a Policy at the annual rate credited
from time to time on the Policy by the insurance company less one hundred (100)
basis points, which shall be credited to the Company following the Participant's
Retirement or termination of employment with the Company.
1.11 Disability. "Disability" means a condition that qualifies as a
disability under the Mellon Bank Group Long-Term Disability Plan.
1.12 Economic Benefit. "Economic Benefit" means the value of the
economic benefit of life insurance coverage under this Plan for income tax
purposes, determined based on revenue rulings issued by the Internal Revenue
Service and other applicable authorities.
1.13 Effective Date. "Effective Date" means January 1, 1993.
1.14 Eligible Employee. "Eligible Employee" means an Employee who is a
Senior Vice President or above and is designated by the Human Resources
Committee to participate in the Plan.
1.15 Employee. "Employee" means any person employed by the Company or
its Affiliates on a regular full-time salaried basis, including officers of the
Company.
1.16 Human Resources Committee. "Human Resources Committee" means the
Human Resources Committee of the Board.
1.17 Insurance Company. "Insurance Company" means an insurance company
selected by the Company to provide coverage for Participants pursuant to the
terms of the Plan.
1.18 Net Cumulative Premiums. "Net Cumulative Premiums" means premiums
paid by the Company on a Policy net of (i) reimbursements or contributions to
premiums on the Policy made by a Participant and (ii) any withdrawals or loans
from cash value of the Policy made to the Company.
1.19 Participant. "Participant" means an Eligible Employee who has
completed the underwriting requirements of the Insurance Company and who is
notified by the Company that he is participating in the Plan in accordance with
the provisions of Article II.
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<PAGE> 7
1.20 Participation Agreement. "Participation Agreement" means a written
agreement between the Company and the Participant under which the Participant
agrees to participate in the Plan pursuant to Section 2.1.
1.21 Plan. "Plan" means this Optional Life Insurance Plan as set forth
in this document and as the same may be amended, administered or interpreted
from time to time.
1.22 Plan Year. "Plan Year" means the calendar year.
1.23 Policy. "Policy" means a life insurance policy providing coverage
under the Plan.
1.24 Retirement. "Retirement" means termination of a Participant's
employment with the Company or its affiliates for reasons other than death or
Disability after the Participant has either (i) attained age fifty-five (55) and
completed at least five (5) Years of Service or (ii) attained age sixty-five
(65) and completed at least one (1) Year of Service.
1.25 Subsidiary. "Subsidiary" means a corporation the majority of the
outstanding stock of which is owned directly or indirectly by Mellon Bank
Corporation.
1.26 Years of Service. "Years of Service" means a Participant's actual
years of service, unless otherwise determined by the Human Resources Committee.
ARTICLE II
PARTICIPATION
-------------
2.1 Participation. Any Eligible Employee may enroll in the plan by
completing a Participation Agreement, the underwriting requirements of the
Insurance Company and any other enrollment steps required by the Company for
coverage to begin. An Eligible Employee shall become a Participant in the Plan
when he has been notified in writing that his participation is approved by the
Company. During a leave of absence, coverage will remain in effect for a maximum
of ninety (90) days.
2.2 Insurability. Eligible Employees are not automatically entitled to
all insurance coverage offered under the Plan. Each Eligible Employee will be
covered up to the amount of guarantee issue determined by the Insurance Company,
but must satisfy the Insurance Company's requirements for obtaining additional
insurance before he becomes covered for additional amounts under the Plan.
2.3 Commencement of Coverage. Subject to the limitations of Sections
2.1 and 2.2, (i) an Employee who is an Eligible Employee on January 1, 1993 will
be covered under the Plan
3
<PAGE> 8
as of January 1, 1993, and (ii) any other Eligible Employee will be covered
under the Plan when coverage is approved by the Insurance Company.
2.4 Increases in Coverage. When a Participant's Base Salary is
increased, the amount of his life insurance coverage under this Plan will
increase on the next Coverage Adjustment Date, except as provided in this
Section 2.4. Any such increase in coverage or any increase in the level of
optional coverage (one, two or three times Base Salary) will not take effect
until such additional coverage is approved by the Insurance Company, and a
Participant may be required to satisfy the Insurance Company's requirements for
obtaining additional insurance before he becomes covered for an additional
amount of life insurance coverage under the Plan. A Participant's coverage under
the Plan will be limited to the coverage issued by the Insurance Company.
2.5 Declining Coverage. An Eligible Employee may decline coverage under
the Plan. However, any such Eligible Employee will be required to satisfy the
insurance company's requirements for obtaining insurance before he may become
covered under the Plan at a later date.
2.6 Ceasing Participation. If a Participant ceases participation in the
Plan, the Participant may elect, in writing received by the Company not later
than sixty (60) days after his ceasing participation in the Plan, to retain the
Policy providing his life insurance coverage then in effect under this Plan and
obtain release of the collateral assignment in favor of the Company by paying
the Company an amount equal to the Net Cumulative Premiums paid by the Company
on the Policy plus Credited Interest thereon, if any, after the Participant's
ceasing participation in the Plan. Payment must be made in cash as a lump sum or
by borrowing or withdrawing cash value from the policy. A Participant's life
insurance coverage under this Plan will remain in effect during this sixty (60)
day period. A Participant who retains a Policy will cease to be covered under
this Plan and will thereafter be required to pay all future premiums on the
Policy.
If the Participant does not elect to purchase the Company's interest in
the Policy, all incidents of ownership of the policy held by the Participant
shall be transferred to the Company. In such event the Company will pay the
Participant an amount equal to the Participant's interest in the cash value in
the Policy. At the time the Participant purchases the Company's interest in the
Policy, or the Participant's incidents of ownership are transferred to the
Company, the Company shall have no further legal or equitable obligations of any
kind to the Participant under this Plan.
4
<PAGE> 9
ARTICLE III
LIFE INSURANCE COVERAGE
-----------------------
3.1 Amount of Insurance. The amount of life insurance coverage which
will be payable to the Beneficiary designated by the Participant will be
determined based on the employment status of the Participant with the Company at
the time of his death. The amounts of life insurance coverage under this Plan
are as follows:
(a) During Employment. While employed with the Company, a
Participant may elect to maintain optional life insurance coverage equal to one
(1), two (2) or three (3) times his Base Salary. The Participant must file an
election for optional life insurance coverage in accordance with procedures and
timing requirements established by the Committee. Any changes in the level of
optional coverage will occur once a year on the Coverage Adjustment Date and
will not take effect until coverage is approved by the insurance company.
The Company will be entitled to the balance of the death benefit.
(b) After Retirement. After Retirement from the Company, a
Participant will have life insurance coverage equal to the death benefit payable
under the Policy less an amount payable to the Company equal to (i) the Net
Cumulative Premiums paid by the Company on the Policy plus (ii) Credited
Interest thereon after the Participant's Retirement.
(c) Limitation on Amount of Coverage. The amount of life
insurance coverage under the Plan will be limited to the amount of coverage
issued by the Insurance Company on the Participant under this Plan.
3.2 Disability. If a Participant suffers a Disability, the
Participant's life insurance coverage may be continued by the Participant during
the period of Disability until the Participant reaches age sixty-five (65) or
begins to receive benefits under the Mellon Bank Retirement Plan, whichever is
sooner. The Participant must continue to make contributions for this coverage in
the same manner as an active employee. When a disabled Participant who continues
coverage under the Plan reaches age sixty-five (65) or begins to receive
benefits under the Mellon Bank Retirement Plan, whichever is sooner, the
Participant will continue to have life insurance coverage as if he had retired
from employment with the Company. A Participant who suffers a Disability before
he is eligible for Retirement and elects not to continue his life insurance
coverage will be subject to the provisions of this Plan which apply upon
termination of employment.
3.3 Insurance Contract. To provide the insurance coverage under the
Plan, the Company shall acquire one or more insurance policies ("Policies") on
the life of each Participant. Except as otherwise specifically provided, the
Participant will be the owner and hold all the incidents of ownership in each
Policy for which he is designated the owner pursuant to a split dollar life
insurance agreement entered into by the Participant and the Company under this
Plan.
5
<PAGE> 10
In consideration of the Company's payment of premiums on the Policy
pursuant to Section 3.9 of this Plan, the Participant will assign rights in cash
value and death benefits under the Policy to the Company as collateral under a
form of collateral assignment consistent with the terms of the Plan.
The Participant may specify in writing to the Company the Beneficiary
or Beneficiaries for his life insurance coverage under this Plan. Upon receipt
of a written request from the Participant, the Company will immediately take
such action as shall be necessary to implement such Beneficiary designation. Any
death benefits under Policies on the life of the Participant owned by the
Company that exceed the amount payable to the Participant's Beneficiary under
this Plan shall be payable to the Company.
3.4 Interests in Cash Value. The respective interests of the Company
and the Participant in the cash value of Policies which are owned by the
Participant shall be as follows:
(a) During Employment.
(i) Company's Interest in Cash Value During
Employment. While the Participant is employed with the Company, the Company's
interest in the cash value of any Policy shall be limited to the lesser of the
cash value of the Policy or the Net Cumulative Premiums paid by the Company on
the Policy. The Company shall also be entitled to increases in cash value in an
amount equal to any mortality or other expenses incurred for the benefit of the
Company which are charged against cash value of the Policy, and any such charges
shall, in turn, be deducted from the Company's interest in cash value of the
Policy.
(ii) Participant's Interest in Cash Value During
Employment. While the Participant is employed with the Company, the
Participant's interest in the cash value of any Policy shall be the balance of
the cash value of the Policy in excess of the Company's interest in cash value
pursuant to Section 3.4(a)(i) above. The Participant shall at all times be 100%
vested in the Participant's interest in cash value under a Policy.
(b) After Retirement.
(i) Company's Interest in Cash Value After
Retirement. The Company's interest in the cash value of any Policy after a
Participant's Retirement will be equal to the Net Cumulative Premiums paid by
the Company on the Policy plus Credited Interest thereon after the Participant's
Retirement. Any withdrawals of cash value from the policy by the Company will
reduce the Company's interest in the cash value of the policy. The Company shall
also be entitled to increases in cash value in an amount equal to any mortality
or other expenses incurred for the benefit of the Company which are charged
against cash value of the Policy, and any such charges shall, in turn, be
deducted from the Company's interest in cash value of the Policy.
6
<PAGE> 11
(ii) Participant's Interest in Cash Value After
Retirement. After a Participant's Retirement, the Participant's interest in the
cash value of any Policy shall be the balance of the cash value of the Policy in
excess of the Company's interest in cash value pursuant to Section 3.4(b)(i)
above.
3.5 Policy Withdrawals and Loans.
(a) Policy Withdrawals and Loans by Company. The Company shall
have the right to make withdrawals of cash value or prepaid premiums or obtain
loans from any policy which is owned by a Participant at any time up to the Net
Cumulative Premiums paid by the Company on the Policy plus Credited Interest
thereon after the Participant's Retirement, without the prior written consent of
the Participant. The Company's death benefit under any Policy shall be reduced
by withdrawals (and the unpaid principal and interest of any loans) under the
Policy taken by the Company.
(b) Policy Withdrawals and Loans by Participant. A Participant
shall have no right to make withdrawals or obtain loans from any Policy before
his Retirement. After his Retirement, if the Company releases its collateral
assignment on the Policy, a Participant shall have the right to make withdrawals
of his interest in the cash value of any Policy (or obtain loans from the
Participant's interest in the cash value of any Policy, provided interest is
paid on such loans on an annual basis). The Participant's death benefit under
any Policy shall be reduced by withdrawals (and the unpaid principal and
interest on any loans) under the Policy taken by the Participant.
3.6 Surrender or Cancellation of Policy. In the event of the surrender
or cancellation of a Policy which is owned by a Participant, the Participant
shall be entitled to receive a portion of the cash surrender value equal to his
interest in the cash value of the Policy, unless the Company substitutes another
Policy which is satisfactory to the Participant. The balance of the cash
surrender value, if any, shall belong to the Company.
3.7 Continuation of Split Dollar Policy or Release of Collateral
Assignment After Retirement. At its option, the Company may (a) continue the
life insurance coverage for the Participant after his Retirement in the same
form and subject to the same terms and provisions of this Plan as if he remained
employed with the Company, except that the total amount of coverage for the
Participant will be the amount specified in Section 3.1(b), or (b) withdraw its
Net Cumulative Premiums paid on the Policy (plus Credited Interest thereon after
Retirement) at any time following the Participant's Retirement. In the event the
Company elects the latter, the Company shall release its collateral assignment
on the Policy.
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<PAGE> 12
3.8 Assignment. A Participant may assign, revocably or irrevocably, to
one or more individuals or trustees all or any part of his right, title, claim,
interest, benefit and all other incidents of ownership which he may have in any
Policies providing his life insurance coverage under this Plan, provided that
any such assignment shall be subject to Section 9.1 and the other terms of the
Plan. Such assignee shall then have all rights and obligations which have been
assigned and otherwise are the Participant's under this Plan. In the event that
there has been such an assignment, the term Employee or Participant shall mean
the Employee's or Participant's assignee (or any subsequent assignee) as the
context requires, in connection with ownership, actions, elections, or other
events concerning life insurance coverage on the Participant.
3.9 Payment of Premiums and Contributions.
(a) During Employment. While a Participant is employed with
the Company, the Participant will be required each year to pay for optional life
insurance coverage at such rates as the Committee may establish from time to
time. The cost for this coverage will depend on the Participant's age and amount
of coverage and may depend on insurance rating. The Company will pay the balance
of the premiums.
(b) After Retirement. Any premiums for life insurance coverage
under this Plan following a Participant's Retirement will be paid by the
Participant. The Company will not be required to pay any premiums following a
Participant's Retirement.
3.10 Form of Death Benefit. All death benefits payable on behalf of a
Participant under this Plan will be in the form of a lump sum death benefit paid
directly from the life insurance company to the Participant's Beneficiary under
a collateral assignment split dollar life insurance program.
ARTICLE IV
OPTION TO RETAIN INSURANCE POLICY ON TERMINATION OF EMPLOYMENT
--------------------------------------------------------------
If a Participant terminates employment with the Company before
Retirement, the Participant may elect, in writing received by the Company not
later than sixty (60) days after his termination of employment, to retain the
Policy providing his life insurance coverage then in effect under this Plan and
obtain release of the collateral assignment in favor of the Company by paying
the Company an amount equal to the Net Cumulative Premiums paid by the Company
on the Policy plus Credited Interest thereon after the Participant's termination
of employment with the Company. Payment must be made in cash as a lump sum or by
borrowing or withdrawing cash value from the Policy. A Participant's life
insurance coverage under this Plan will remain in effect during this sixty (60)
day period. A Participant who retains a Policy will cease to be covered under
this Plan and will thereafter be required to pay all future premiums on the
Policy.
8
<PAGE> 13
If the Participant does not elect to purchase the Company's interest in
the Policy, all incidents of ownership of the Policy held by the Participant
shall be transferred to the Company. In such event the Company will pay the
Participant an amount equal to the Participant's interest in the case value in
the Policy. At the time the Participant purchases the Company's interests in the
Policy, or the Participant's incidents of ownership are transferred to the
Company, the Company shall have no further legal or equitable obligations of any
kind to the Participant under this Plan.
ARTICLE V
OPTION TO RETAIN INSURANCE POLICY IN CERTAIN EVENTS
---------------------------------------------------
5.1 Option to Retain Policy. The Participant may elect, in writing
received by the Company not later than sixty (60) days after the Participant
receives written notice from the Company of an event described in Section 5.2,
to retain the Policy providing his life insurance coverage then in effect under
this Plan for an amount equal to the Net Cumulative Premiums paid by the Company
on the Policy plus Credited Interest thereon after the Participant's Retirement.
A Participant who purchases a Policy will cease to be covered under this Plan
and will thereafter be required to pay all future premiums on the Policy.
5.2 Elimination of Coverage. Any Participant whose coverage is
eliminated pursuant to Article VIII of this Plan (without being replaced with an
equivalent amount of coverage under another plan of the Company) shall have the
option pursuant to Section 5.1 to purchase the Policy providing his life
insurance coverage in effect under this Plan immediately prior to the
elimination of such coverage.
5.3 Change in Control. For purposes of this Plan the term "Change in
Control" shall mean:
(a) The occurrence with respect to the Corporation of a "control
transaction", as such term is defined in Section 2542 of the Pennsylvania
Business Corporation Law of 1988, as of August 15, 1989; or
(b) Approval by the stockholders of the Corporation of (i) any
consolidation or merger of the Corporation where either (x) the holders of
voting stock of the Corporation immediately before the merger or consolidation
will not own more than 50% of the voting shares of the continuing or surviving
corporation immediately after such merger or consolidation or (y) the Incumbent
Directors immediately before the merger or consolidation will not hold more than
50% (rounded to the next whole person) of the seats on the board of directors of
the continuing or surviving corporation, or (ii) any sale, lease or exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Corporation; or
9
<PAGE> 14
(c) A change of 25% (rounded to the next whole person) in the
membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85% (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the 12-month period and (ii) was not as a result of an actual or
threatened election with respect to directors or any other actual or threatened
solicitation of proxies by or on behalf of any person other than the Board of
Directors. As used in this Section 5.3, the term "Incumbent Director" means as
of any time a director of the Corporation (x) who has been a member of the Board
of Directors continuously for at least 12 months or (y) whose election or
nomination as a director within such period met the requirements of clauses (i)
and (ii) of the preceding sentence.
Notwithstanding any other provision of this Plan, without the written
consent of the Participant (or Beneficiary of a deceased Participant) affected
thereby, the Company may not amend or terminate this Plan, except to comply with
legal requirements:
(a) for a period of twenty-four (24) months following a Change
in Control; or
(b) at any time thereafter, in any manner which affects any
Participant (or Beneficiary of a deceased Participant) who receives payments of
benefits under this Plan or has a termination of employment for any reason at
any time during the period of twenty-four (24) months following the Change in
Control.
ARTICLE VI
BENEFICIARY DESIGNATION
-----------------------
6.1 Designation of Beneficiary. Each Participant (or his assignee in
the case of an assignment of the Participant's life insurance coverage pursuant
to Section 3.5 of this Plan) shall have the right to designate a Beneficiary or
Beneficiaries to whom payment of the Participant's death benefit under this Plan
shall be made in the event of the Participant's death. Such designation shall be
made on a form prescribed by and delivered to the Company. Except where such
designation is irrevocable, the Participant shall have the right to change or
revoke any such designation from time to time by filing a new designation or
notice of revocation with the Company, and no notice to any Beneficiary nor
consent by any Beneficiary shall be required to effect any such change or
revocation.
6.2 Failure to Designate Beneficiary. If a Participant shall fail to
designate a Beneficiary before his demise, or if no designated Beneficiary
survives the Participant, the Committee shall direct the Company to make payment
under this Plan to the executor or administrator for the Participant's estate.
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<PAGE> 15
ARTICLE VII
ADMINISTRATION
--------------
7.1 Administrator. Except as hereinafter provided, the Committee shall
be responsible for the administrative responsibilities hereinafter described
with respect to the Plan. Whenever any action is required or permitted to be
taken in the administration of the Plan, such action shall be taken by the
Committee unless the Committee's power is expressly limited herein or by
operation of law. The Committee shall be the Plan "Administrator" (as such term
is defined in Section 3(16)(A) of ERISA). The Committee may delegate its duties
and responsibilities as it, in its sole discretion, deems necessary or
appropriate to the execution of such duties and responsibilities. The Committee
as a whole or any of its members may serve in more than one capacity with
respect to the Plan.
7.2 Powers and Duties. The Committee, or its delegates, shall maintain
and keep (or cause to be maintained and kept) such records as are necessary for
the efficient operation of the Plan or as may be required by any applicable law,
regulation, or ruling and shall provide for the preparation and filing of such
forms, reports, information, and documents as may be required to be filed with
any governmental agency or department and with the Plan's Participants and/or
other Beneficiaries.
Except to the extent expressly reserved to the Company or the Board,
the Committee shall have all powers necessary to carry out the administrative
provisions of the Plan and to satisfy the requirements of any applicable law or
laws. These powers shall include, by way of illustration and not limitation, the
exclusive powers and discretionary authority necessary to:
(a) construe and interpret the Plan; decide all questions of
eligibility; decide all questions of fact relating to claims for benefits; and
determine the amount, time, manner, method, and mode of payment of any benefits
hereunder;
(b) direct the Company and/or the trustee of any trust
established at the discretion of the Company to provide for the payment of
benefits under the Plan, concerning the amount, time, manner, method, and mode
of payment of any benefits hereunder;
(c) prescribe procedures to be followed and forms to be used
by Participants and/or other persons in filing applications or elections;
(d) prepare and distribute, in such manner as may be required
by law or as the Committee deems appropriate, information explaining the Plan;
provided, however, that no such explanation shall contravene the terms of this
Plan or increase the rights of any Participant or Beneficiary or the liabilities
of the Company;
11
<PAGE> 16
(e) require from the Company and Participants such information
as shall be necessary for the proper administration of the Plan;
(f) appoint and retain individuals to assist in the
administration and construction of the Plan, including such legal, clerical,
accounting, and actuarial services as it may require or as may be required by
any applicable law or laws; and
(g) perform all functions otherwise imposed upon a plan
administrator by ERISA which are not expressly reserved to the Company or the
Board, including, but not limited to, those supplemental duties and
responsibilities described in the "Mellon Bank Corporation Corporate Benefits
Committee Charter and Summary of Operations" approved by the Board on September
17, 1991 (the "CBC" Charter).
Without intending to limit the generality of the foregoing, the
Committee shall have the power to amend the Plan, in whole or in part, in order
to comply with applicable law; provided, however, that no such amendment may
increase the duties and obligations of the Company without its consent. Except
as provided in the preceding sentence or unless directed by the Human Resources
Committee of the Board or otherwise required by law, the Committee shall have no
power to adopt, amend, or terminate the Plan, said powers being exclusively
reserved to the Human Resources Committee of the Board.
7.3 Procedures. The Committee shall be organized and conduct its
business with respect to the Plan in accordance with the organizational and
procedural rules set forth in the CBC Charter.
Notwithstanding the foregoing, if any member of the Committee shall be
a Participant hereunder, then in any matters affecting any member of the
Committee in his individual capacity as a Participant hereunder, separate and
apart from his status as a member of the group of Participants, such interested
member shall have no authority to vote in the determination of such matters as a
member of the Committee, but the Committee shall determine such matter as if
said interested member were not a member of the Committee; provided, however,
that this shall not be deemed to take from said interested member any of his
rights hereunder as a Participant. If the remaining members of the Committee
should be unable to agree on any matter so affecting an interested member
because of an equal division of voting, the Human Resources Committee of the
Board shall appoint a temporary member of the Committee in order to create an
odd number of voting members.
7.4 Establishment of Rules. The Committee shall have specific authority
in its sole discretion to construe and interpret the terms of the Plan related
to its powers and duties, and to the extent that the terms of the Plan are
incomplete, the Committee shall have authority to establish such rules or
regulations related to its powers and duties as it may deem necessary and proper
to carry out the intent of the Company as to the purposes of the Plan.
12
<PAGE> 17
7.5 Limitation of Liability. The Board, the members of the Committee,
and any officer, employee, or agent of the Company shall not incur any liability
individually or on behalf of any other individuals or on behalf of the Company
for any act, or failure to act, made in good faith in relation to the Plan. No
bond or other security shall be required of any such individual solely on
account of any individual's power to direct the Company to make the payments
required hereunder.
7.6 Compensation and Insurance. Members of the Committee shall serve
without compensation for their services as such. Expenses incurred by members of
the Committee in the performance of their duties as herein provided, and the
compensation and expenses of persons retained or employed by the Committee for
services rendered in connection with the Plan shall, upon approval by the
Committee, be paid or reimbursed by the Company.
The Company shall indemnify and/or maintain and keep in force insurance
in such form and amount as may be necessary in order to protect the members of
the Committee, their delegates and appointees (other than persons who are
independent of the Company and are rendering services to the Committee or to or
with respect to the Plan) from any claim, loss, damage, liability, and expense
(including costs and attorneys' fees) arising from their acts or failures to act
with respect to the Plan, except where such actions or failures to act involve
willful misconduct or gross negligence.
7.7 Removal and Resignation. Any member of the Committee may resign and
the Company may remove any member of the Committee in accordance with the
procedures established by the CBC Charter. The Committee shall remain fully
operative pending the filling of any vacancies, the remaining committee members
having full authority to administer the Plan.
7.8 Claims Procedure. The right of any Participant or Beneficiary to
receive a benefit hereunder and the amount of such benefit shall be determined
in accordance with the procedures for determination of benefit claims
established and maintained by the Committee in compliance with the requirements
of Section 503 of ERISA; which separate procedures, entitled Procedures for
Determination of Benefit Claims, are incorporated herein by this reference.
ARTICLE VIII
Amendment and Termination of Plan
---------------------------------
Subject to the limitations of Article V, the Human Resources Committee
of the Board may at any time amend or terminate the Plan in whole or in part.
Except as provided below or in Article V, the Company is not obligated to
continue any benefit, any insurance or any insurance policy after such action.
Written notice of any amendment or termination of the Plan shall be given to
each affected Participant in the Plan.
13
<PAGE> 18
ARTICLE IX
Miscellaneous
-------------
9.1 Restriction on Assignment. The Participant may assign all or any
part of his right, title, claim, interest, benefit and all other incidents of
ownership which he may have in any life insurance coverage under this Plan,
provided that any such assignment shall be subject to the terms of the Plan.
9.2 Tax Liability and Withholding. A Participant may have income for
federal, state or local income tax purposes by reason of the Economic Benefit of
his insurance coverage provided by the Company under this Plan, both while he is
employed with the Company and after his Retirement or termination of employment.
The Participant and any Beneficiary shall make appropriate arrangements with the
Company for the satisfaction of any federal, state or local income tax
withholding requirements and Social Security or other employee tax requirements
applicable to the provision of benefits under this Plan. If no other
arrangements are made, the Company may provide, at its discretion, for such
withholding and tax payments as may be required.
9.3 ERISA Plan. This Plan is covered by Title I of the Employee
Retirement Income Security Act of 1974 ("ERISA") as a welfare benefit plan. The
Company is the "named fiduciary" of the Plan for purposes of Section 402(a)(2)
of ERISA.
9.4 Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Employee any right to be retained in employment with the Company.
9.5 Protective Provisions. Each Participant shall cooperate with the
Company by furnishing any and all information requested by the Company in order
to facilitate the payment of benefits hereunder, taking such physical
examinations as the Company may deem necessary and taking such other relevant
action as may be requested by the Company. If a Participant refuses so to
cooperate, the Company shall have no further obligation to the Participant or
his Beneficiary under the Plan. If a Participant makes any material misstatement
of information or nondisclosure of medical history, then no benefits will be
payable hereunder to such Participant's Beneficiary, provided, that in the
Company's sole discretion, benefits may be payable in an amount reduced to
compensate the Company for any loss, cost, damage or expense suffered or
incurred by the Company as a result in any way of any such action, misstatement
or nondisclosure.
9.6 Gender, Singular & Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the identity
or the person or persons
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<PAGE> 19
may require. As the context may require, the singular may be read as the plural
and the plural as the singular.
9.7 Captions. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
9.8 Validity. In the event any provision of this Plan is held invalid,
void or unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provisions of this Plan, and this Plan shall be deemed to
be modified to the least extent possible to make it valid and enforceable in its
entirety.
9.9 Notices and Elections. Any notice or election required or permitted
to be given to the Company or the Committee under the Plan shall be sufficient
if in writing and hand delivered, or sent by registered or certified mail, to
the principal office of the Company, directed to the attention of the Human
Resources Department of the Company. Such notice or election shall be deemed
given as of the date of delivery or, if delivery is made by mail, as of the date
shown on the postmark on the receipt for registration or certification.
9.10 Applicable Law. This Plan shall be construed, regulated and
administered in accordance with the laws of the Commonwealth of Pennsylvania,
except insofar as state law is preempted by ERISA.
9.11 Waiver of Breach. The waiver by the Company of any provision of
this Plan shall not operate or be construed as a waiver of any subsequent breach
by the Participant.
9.12 Benefit. The rights and obligations of the Company under this Plan
shall inure to the benefit of, and shall be binding upon, the successors and
assigns of the Company.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed
this 15th day of March, 1999, effective as of January 15, 1999.
ATTEST: MELLON BANK, N.A.
/s/ Carl Krasik By: /s/ D. Michael Roark
- --------------- --------------------
Carl Krasik D. Michael Roark
Assistant Secretary Head of the Human Resources
Department
15
<PAGE> 1
Exhibit 10.10
MELLON BANK
EXECUTIVE LIFE INSURANCE PLAN
Effective January 1, 1993
Amended Effective November 16, 1996
Amended Effective January 15, 1999
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PREAMBLE 1
ARTICLE I 1
DEFINITIONS 1
1.1 Affiliates 1
1.2 Base Salary 1
1.3 Beneficiary 1
1.4 Board 1
1.5 Change in Control 1
1.6 Code 1
1.7 Committee 2
1.8 Company 2
1.9 Coverage Adjustment Date 2
1.10 Disability 2
1.11 Economic Benefit 2
1.12 Effective Date 2
1.13 Eligible Employee 2
1.14 Employee 2
1.15 Human Resources Committee 2
1.16 Insurance Company 2
1.17 Lump Sum Payment Option 2
1.18 Net Cumulative Premiums 2
1.19 Participant 3
1.20 Participation Agreement 3
1.21 Plan 3
1.22 Plan Year 3
1.23 Policy 3
1.24 Retirement 3
1.25 Subsidiary 3
1.26 Survivor Income Option 3
1.27 Years of Service 3
ARTICLE II 3
PARTICIPATION 3
2.1 Participation 3
2.2 Insurability 4
2.3 Commencement of Coverage 4
2.4 Increases in Coverage 4
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.5 Declining Coverage 4
2.6 Relation to Other Plans 4
ARTICLE III 5
LIFE INSURANCE COVERAGE 5
3.1 Amount of Insurance 5
3.2 Disability 5
3.3 Insurance Contract 5
3.4 Continuation or Split of Policy after Retirement 6
3.5 Assignment 6
3.6 Payment of Premiums and Contributions 7
3.7 Forms of Death Benefit 7
3.8 Lump Sum Payment Option 8
3.9 Survivor Income Option 8
ARTICLE IV 9
OPTION TO PURCHASE INSURANCE POLICY ON TERMINATION OF
EMPLOYMENT 9
ARTICLE V 10
OPTION TO PURCHASE INSURANCE POLICY IN CERTAIN EVENTS 10
5.1 Option to Purchase Policy 10
5.2 Elimination of Coverage 10
5.3 Change in Control 10
ARTICLE VI 12
BENEFICIARY DESIGNATION 12
6.1 Designation of Beneficiary 12
6.2 Failure to Designate Beneficiary 12
ARTICLE VII 12
ADMINISTRATION 12
7.1 Administrator 12
7.2 Powers and Duties 13
7.3 Procedures 14
7.4 Establishment of Rules 15
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
7.5 Limitation of Liability 15
7.6 Compensation and Insurance 15
7.7 Removal and Resignation 16
7.8 Claims Procedure 16
ARTICLE VIII 16
AMENDMENT AND TERMINATION OF PLAN 16
ARTICLE IX 16
MISCELLANEOUS 16
9.1 Restriction on Assignment 16
9.2 Unsecured General Creditor 17
9.3 Tax Liability and Withholding 17
9.4 ERISA Plan 18
9.5 Employment Not Guaranteed 18
9 6 Protective Provisions 18
9.7 Gender, Singular & Plural 18
9.8 Captions 18
9.9 Validity 19
9.10 Notices and Elections 19
9.11 Notice to Insurance Company 19
9.12 Applicable Law 19
9.13 Waiver of Breach 19
9 14 Benefit 20
</TABLE>
iii
<PAGE> 5
MELLON BANK
EXECUTIVE LIFE INSURANCE PLAN
PREAMBLE
The purpose of this Mellon Bank Executive Life Insurance Plan (the
"Plan") is to provide life insurance coverage for eligible key executive
employees of Mellon Bank, N.A. (the Company) and its Affiliates. The Plan will
be effective as of January 1, 1993.
ARTICLE I
DEFINITIONS
When used herein, the following words shall have the following meanings
unless the content clearly indicates otherwise:
1.1 Affiliates. "Affiliates" means Mellon Bank Corporation and its
Subsidiaries.
1.2 Base Salary. "Base Salary" means (i) an active Employee's annual
base salary as of the last Coverage Adjustment Date preceding his death and (ii)
a retired Employee's annual base salary immediately preceding his termination of
employment with the Company or its Affiliates. Annual base salary excludes all
bonuses, incentive and supplemental compensation and other payments and
benefits, except fixed base salary.
1.3 Beneficiary. "Beneficiary" means the person or persons designated
as such in accordance with Article VI.
1.4 Board. "Board" means the Board of Directors of Mellon Bank
Corporation or any committee thereof acting within the scope of its authority.
1.5 Change in Control. "Change in Control" shall have the meaning set
forth in Section 5.3.
1.6 Code. "Code" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
<PAGE> 6
1.7 Committee. "Committee" means the Corporate Benefits Committee of
Mellon Bank Corporation appointed to administer the Plan pursuant to Article
VII.
1.8 Company. "Company" means Mellon Bank, N.A. and, whenever
applicable, its Affiliates.
1.9 Coverage Adjustment Date. "Coverage Adjustment Date" means the date
during each year, selected by the Committee from time to time in its discretion,
on which changes or increases in coverage will take effect.
1.10 Disability. "Disability" means a condition that qualifies as a
disability under the Mellon Bank Group Long-Term Disability Plan.
1.11 Economic Benefit. "Economic Benefit" means the value of the
economic benefit of life insurance coverage under this Plan for income tax
purposes, determined based on revenue rulings issued by the Internal Revenue
Service and other applicable authorities.
1.12 Effective Date. "Effective Date" means January 1, 1993.
1.13 Eligible Employee. "Eligible Employee" means an Employee who is a
Senior Vice President or above and is designated by the Human Resources
Committee to participate in the Plan
1.14 Employee. "Employee" means any person employed by the Company or
its Affiliates on a regular full-time salaried basis, including officers of the
Company.
1.15 Human Resources Committee. "Human Resources Committee" means the
Human Resources Committee of the Board.
1.16 Insurance Company. "Insurance Company" means an insurance company
selected by the Company to provide coverage for Participants pursuant to the
terms of the Plan.
1.17 Lump Sum Payment Option. "Lump Sum Payment Option" means the lump
sum payment option for death benefits under this Plan which is described in
Section 3.8.
1.18 Net Cumulative Premiums. "Net Cumulative Premiums" means premiums
paid by the Company on a Policy net of (i) reimbursements or contributions to
premiums on the
2
<PAGE> 7
Policy made by a Participant and (ii) any withdrawals or loans from cash value
of the Policy made to the Company.
1.19 Participant. "Participant" means an Eligible Employee who has
completed the underwriting requirements of the Insurance Company and who is
notified by the Company that he is participating in the Plan in accordance with
the provisions of Article II.
1.20 Participation Agreement. "Participation Agreement" means a written
agreement between the Company and the Participant under which the Participant
agrees to participate in the Plan pursuant to Section 2.1.
1.21 Plan. "Plan" means this Executive Life Insurance Plan as set forth
in this document and as the same may be amended, administered or interpreted
from time to time.
1.22 Plan Year. "Plan Year" means the calendar year.
1.23 Policy. "Policy" means a life insurance policy providing coverage
under this Plan.
1.24 Retirement. "Retirement" means termination of a Participant's
employment with the Company or its Affiliates for reasons other than death or
Disability after the Participant has either (i) attained age fifty-five (55) and
completed at least five (5) Years of Service or (ii) attained age sixty-five
(65) and completed at least one (1) Year of Service.
1.25 Subsidiary. "Subsidiary" means a corporation the majority of the
outstanding stock of which is owned directly or indirectly by Mellon Bank
Corporation.
1.26 Survivor Income Option. "Survivor Income Option" means the
survivor income option for death benefits under this Plan which is described in
Section 3.9.
1.27 Years of Service. "Years of Service" means a Participant's actual
years of service, unless otherwise determined by the Human Resources Committee
ARTICLE II
PARTICIPATION
2.1 Participation. Any Eligible Employee may enroll in the Plan by
completing a Participation Agreement, the underwriting requirements of the
Insurance Company and any other
3
<PAGE> 8
enrollment steps required by the Company for coverage to begin. An Eligible
Employee shall become a Participant in the Plan when he is notified in writing
that his participation has been approved by the Company. During a leave of
absence, coverage will remain in effect for a maximum of ninety (90) days.
2.2 Insurability. Eligible Employees are not automatically entitled to
all insurance coverage offered under the Plan. Each Eligible Employee will be
covered up to the amount of guarantee issue determined by the Insurance Company,
but must satisfy the Insurance Company's requirements for obtaining additional
insurance before he becomes covered for additional amounts under the Plan.
2.3 Commencement of Coverage. Subject to the limitations of Sections
2.1 and 2.2, (i) an Employee who is an Eligible Employee on January 1, 1993 will
be covered under the Plan as of January 1, 1993, and (ii) any other Eligible
Employee will be covered under the Plan when coverage is approved by the
Insurance Company.
2.4 Increases in Coverage. When a Participant's Base Salary is
increased, the amount of his life insurance coverage under this Plan will
increase on the next Coverage Adjustment Date, except as provided in this
Section 2.4. Any increase in coverage will not take effect until such additional
coverage is approved by the Insurance Company, and a Participant may be required
to satisfy the Insurance Company's requirements for obtaining additional
insurance before he becomes covered for an additional amount of life insurance
coverage under the Plan. A Participant's coverage under the Plan will be limited
to the coverage issued by the Insurance Company.
2.5 Declining Coverage. An Eligible Employee may decline coverage under
the Plan. However, any such Eligible Employee will be required to satisfy the
Insurance Company's requirements for obtaining insurance before he may become
covered under the Plan at a later date.
2.6 Relation to Other Plans. Eligible Employees shall be limited to
non-contributory life insurance coverage of $50,000 under the Company's group
term life insurance plan.
4
<PAGE> 9
ARTICLE III
LIFE INSURANCE COVERAGE
3.1 Amount of Insurance. The amount of life insurance coverage which
will be payable to the Beneficiary designated by the Participant will be
determined based on the employment status of the Participant with the Company at
the time of his death. In each case, there will be subtracted fifty thousand
dollars ($50,000) which is payable under the group term life insurance plan
covering the Participant maintained by the Company. Subject to the foregoing
adjustment, the amounts of life insurance coverage under this Plan are as
follows:
(a) During Employment. While employed with the Company, a
Participant will have life insurance coverage equal to two (2) times his Base
Salary.
(b) After Retirement. After Retirement from the Company, a
Participant will have life insurance coverage equal to one (1) times his final
Base Salary.
(c) Limitation on Amount of Coverage. The amount of life
insurance coverage under the Plan will be limited to the amount of coverage
issued by the Insurance Company on the Participant under this Plan.
3.2 Disability. If a Participant suffers a Disability, the
Participant's life insurance coverage will be continued by the Company during
the period of Disability until the Participant reaches age sixty-five (65) or
begins to receive benefits under the Mellon Bank Retirement Plan, whichever is
sooner. All premiums for this coverage will be paid by the Company. When a
disabled Participant reaches age sixty-five (65) or begins to receive benefits
under the Mellon Bank Retirement Plan, whichever is sooner, the Participant will
continue to have life insurance coverage equal to one (1) times his final Base
Salary on the date of his Disability, as if he had retired from employment with
the Company.
3.3 Insurance Contract. To provide the insurance coverage under the
Plan, the Company shall acquire one or more insurance policies ("Policies") on
the life of each Participant. Except as otherwise specifically provided, the
Company will be the owner and hold all the incidents of ownership in these
Policies, including the rights to borrow and make withdrawals
5
<PAGE> 10
from any Policies, and the entire interest in the cash value with respect to
these Policies shall belong to the Company. The Company may withdraw cash value
from a Policy up to the Net Cumulative Premiums paid by the Company on the
Policy at or after a Participant's Retirement and may withdraw all cash value
from a Policy if a Participant terminates employment with the Company before
Retirement.
The Participant may specify in writing to the Company the Beneficiary
or Beneficiaries for his life insurance coverage under this Plan. Upon receipt
of a written request from the Participant, the Company will immediately take
such action as shall be necessary to implement such Beneficiary designation. Any
death benefits under Policies on the life of the Participant owned by the
Company that exceed the amount payable to the Participant's Beneficiary under
this Plan shall be payable to the Company.
3.4 Continuation or Split of Policy after Retirement. At its option,
the Company may (a) continue the life insurance coverage for the Participant
after his Retirement in the same form and subject to the same terms and
provisions of this Plan as if he remained employed with the Company, except that
the total amount of coverage for the Participant shall not exceed the amount
specified in Section 3.1(b), or (b) arrange to split the Policies insuring the
Participant upon Retirement so that the Company and Participant receive one or
more separate life insurance policies following the Participant's Retirement. In
the event the Company elects the latter, the Participant shall receive a life
insurance policy on his life with a death benefit equal to the amount specified
in Section 3.1(b).
3.5 Assignment. A Participant may assign, revocably or irrevocably, to
one or more individuals or trustees all or any part of his right, title, claim,
interest, benefit and all other incidents of ownership which he may have in any
Policies providing his life insurance coverage under this Plan, provided that
any such assignment shall be subject to Section 9.1 and the other terms of the
Plan and shall not apply to any rights to survivor income payments. Such
assignee shall then have all rights and obligations which have been assigned and
otherwise are the Participant's under this Plan. In the event that there has
been such an assignment, the term
6
<PAGE> 11
Employee or Participant shall mean the Employee's or Participant's assignee (or
any subsequent assignee) as the context requires, in connection with ownership,
actions, elections, or other events concerning life insurance coverage on the
Participant.
3.6 Payment of Premiums and Contributions.
(a) During Employment. All premiums for life insurance
coverage under this Plan while a Participant is employed with the Company will
be paid by the Company. The Participant will be required each year to reimburse
to the Company an amount equivalent to the Economic Benefit of this coverage if
he elects the Lump Sum Payment Option for his death benefit.
(b) After Retirement. All premiums for life insurance coverage
under this Plan for eligible retired Participants will be paid by the Company.
The Participant will be required each year to include in income for income tax
purposes or to reimburse to the Company an amount equivalent to the Economic
Benefit of this coverage if he elects the Lump Sum Payment Option for his death
benefit, or otherwise will realize taxable income if the Company distributes a
life insurance policy to him pursuant to Section 3.4(b).
3.7 Forms of Death Benefit. During employment and at Retirement, a
Participant may elect either a Lump Sum Payment Option (as described in Section
3.8) or Survivor Income Option (as described in Section 3.9) for payment of his
life insurance coverage under this Plan.
The Participant shall elect the Lump Sum Payment Option or Survivor
Income Option for his pre-retirement coverage when he enrolls in the Plan,
provided no election of the Survivor Income Option shall be effective to the
extent the Participant has previously made an irrevocable, absolute assignment
of all incidents of ownership in his pre-retirement life insurance coverage
under the Plan. The Participant's initial election (or any subsequent election
made pursuant to this Section) shall continue to be effective for all subsequent
calendar years, unless the Participant files a further election prior to the
beginning of any subsequent calendar year. Any new election shall become
effective for the calendar year next following the calendar year in which the
new election is filed with the Company. All elections of a Lump Sum Payment
Option
7
<PAGE> 12
or Survivor Income Option for pre-retirement coverage shall terminate upon the
Participant's Retirement.
Unless the Company, at its option, determines to provide a
Participant's life insurance coverage after Retirement by splitting the Policies
on the Participant's life and distributing a life insurance policy to the
Participant, as described in Section 3.4(b), the Participant shall elect the
Lump Sum Payment Option or Survivor Income Option for his post-retirement
coverage at any time prior to the date of his Retirement, provided no election
of the Survivor Income Option shall be effective to the extent the Participant
has previously made an irrevocable, absolute assignment of all incidents of
ownership in his post-retirement life insurance coverage under the Plan. The
Participant's election shall become irrevocable upon his Retirement and shall
continue to be effective for all subsequent years.
3.8 Lump Sum Payment Option. If a Participant elects the Lump Sum
Payment Option and dies while such election is in effect, the Company will
provide all death benefit payable under Section 3.1 through a lump sum death
benefit paid directly from the life insurance company to the Participant's
Beneficiary under an endorsement split dollar life insurance program.
The Company shall execute an endorsement to the Policy endorsing to the
Participant that portion of the death benefit to which the Participant is
entitled under Section 3.1. The Participant's interest in the Policy shall be
subject to the terms and conditions of the Plan and the endorsement.
3.9 Survivor Income Option. If a Participant elects the Survivor Income
Option and dies while such election is in effect, the Company will make taxable
annual payments to the Participant's Beneficiary in accordance with this Section
3.9. In such event, no amount shall be payable to the Participant's Beneficiary
from the proceeds of the Policies under the Lump Sum Payment Option. In lieu
thereof, the Company shall make annual taxable payments to the Participant's
Beneficiary designated in accordance with Article VI for ten (10) years. Such
payments shall have a net present value, using a discount rate established by
the Committee from
8
<PAGE> 13
time to time, equal to the applicable amount described in Section 3.1 as of the
date of the Participant's death and shall be increased by the value of the
Company's federal and state income tax benefit. The value of the Company's tax
benefit shall be determined in such manner as the Committee may select, from
time to time, in its complete and sole discretion. At its option, the Company
may, upon the Participant's death or at any time thereafter, pay any remaining
payments under the Survivor Income Option in a single taxable lump sum payment.
At any time after a Change in Control which occurs after a Beneficiary
has begun to receive payments, the Beneficiary may elect to receive an immediate
taxable lump sum payment of the present value (as determined by the Committee)
of his remaining payments under the Survivor Income Option, reduced by a
penalty, which shall be forfeited to the Company, equal to six percent (6%) of
such remaining payments, provided this penalty may be adjusted from time to time
by the Committee in its discretion.
An election of a Survivor Income Option will terminate all the
Participant's and the Company's rights and obligations under the Lump Sum
Payment Option, while such election remains in effect.
ARTICLE IV
OPTION TO PURCHASE INSURANCE POLICY ON TERMINATION OF EMPLOYMENT
If a Participant terminates employment with the Company before
Retirement, but after five (5) Years of Service, the Participant may elect, in
writing received by the Company not later than sixty (60) days after his
termination of employment, to purchase the Policy on his life (or portion
thereof with an aggregate death benefit equal to all or part of the insurance
coverage in effect for him under this Plan immediately prior to his termination
of employment) for an amount equal to the greater of (i) the cash value of the
insurance policy transferred to the Participant or (ii) the Net Cumulative
Premiums incurred as a result of providing the Participant's coverage under the
Plan. A Participant who purchases an insurance policy will thereafter be
required to pay all future premiums on the insurance policy. A Participant's
life insurance coverage under this Plan will remain in effect during this sixty
(60) day period.
9
<PAGE> 14
If the Participant does not elect to purchase the Company's interest in
the Policy, all incidents of ownership of the Policy (if any) held by the
Participant shall be transferred to the Company. At the time the Participant
purchases the Company's interests in the Policy, or the Participant's incidents
of ownership are transferred to the Company, the Company shall have no further
legal or equitable obligations of any kind to the Participant under this Plan.
If a Participant's employment with the Company terminates before
Retirement, and with less than five (5) Years of Service, the Participant's
coverage under this Plan shall cease, and the Company shall have no further
legal or equitable obligations of any kind to the Participant under this Plan.
ARTICLE V
OPTION TO PURCHASE INSURANCE POLICY IN CERTAIN EVENTS
5.1 Option to Purchase Policy. The Participant may elect, in writing
received by the Company not later than sixty (60) days after the Participant
receives written notice from the Company of an event described in Section 5.2,
to purchase from the Company the Policy (or portion thereof) providing the
amount of his life insurance coverage then in effect under this Plan for an
amount equal to the greater of (i) the cash value of the insurance policy
transferred to the Participant or (ii) the Company's Net Cumulative Premiums
incurred as a result of providing the Participant's coverage under the Plan. A
Participant who purchases an insurance policy will cease to be covered under
this Plan and will thereafter be required to pay all future premiums on the
insurance policy.
5.2 Elimination of Coverage. Any Participant whose coverage is
eliminated pursuant to Article VIII of this Plan (without being replaced with an
equivalent amount of coverage under another plan of the Company) shall have the
option pursuant to Section 5.1 to purchase the Policy (or portion thereof)
providing the amount of his life insurance coverage in effect under this Plan
immediately prior to the elimination of such coverage.
5.3 Change in Control. For purposes of this Plan the term "Change in
Control" shall mean:
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<PAGE> 15
(a) The occurrence with respect to the Corporation of a
"control transaction", as such term is defined in Section 2542 of the
Pennsylvania Business Corporation Law of 1988, as of August 15, 1989; or
(b) Approval by the stockholders of the Corporation of (i) any
consolidation or merger of the Corporation where either (x) the holders of
voting stock of the Corporation immediately before the merger or consolidation
will not own more than 50% of the voting shares of the continuing or surviving
corporation immediately after such merger or consolidation or (y) the Incumbent
Directors immediately before the merger or consolidation will not hold more than
50% (rounded to the next whole person) of the seats on the board of directors of
the continuing or surviving corporation, or (ii) any sale, lease or exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Corporation; or
(c) A change of 25% (rounded to the next whole person) in the
membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85% (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the 12-month period and (ii) was not as a result of an actual or
threatened election with respect to directors or any other actual or threatened
solicitation of proxies by or on behalf of any person other than the Board of
Directors. As used in this Section 5.3, the term "Incumbent Director" means as
of any time a director of the Corporation (x) who has been a member of the Board
of Directors continuously for at least 12 months or (y) whose election or
nomination as a director within such period met the requirements of clauses (i)
and (ii) of the preceding sentence.
Notwithstanding any other provision of this Plan, without the written
consent of the Participant (or Beneficiary of a deceased Participant) affected
thereby, the Company may not amend or terminate this Plan, except to comply with
legal requirements:
11
<PAGE> 16
(a) for a period of twenty-four (24) months following a
Change in Control; or
(b) at any time thereafter, in any manner which affects any
Participant (or Beneficiary of a deceased Participant) who receives payments of
benefits under this Plan or has a termination of employment for any reason at
any time during the period of twenty-four (24) months following the Change in
Control.
ARTICLE VI
BENEFICIARY DESIGNATION
6.1 Designation of Beneficiary. Each Participant (or his assignee in
the case of an assignment of the Participant's life insurance coverage pursuant
to Section 3.5 of this Plan) shall have the right to designate a Beneficiary or
Beneficiaries to whom payment of the Participant's death benefit under this Plan
shall be made in the event of the Participant's death. Such designation shall be
made on a form prescribed by and delivered to the Company. Except where such
designation is irrevocable, the Participant shall have the right to change or
revoke any such designation from time to time by filing a new designation or
notice of revocation with the Company, and no notice to any Beneficiary nor
consent by any Beneficiary shall be required to effect any such change or
revocation.
6.2 Failure to Designate Beneficiary. If a Participant shall fail to
designate a Beneficiary before his demise, or if no designated Beneficiary
survives the Participant, the Committee shall direct the Company to make payment
under this Plan to the executor or administrator for the Participant's estate.
ARTICLE VII
ADMINISTRATION
7.1 Administrator. Except as hereinafter provided, the Committee shall
be responsible for the administrative responsibilities hereinafter described
with respect to the Plan. Whenever any action is required or permitted to be
taken in the administration of the Plan, such action shall be taken by the
Committee unless the Committee's power is expressly limited herein
12
<PAGE> 17
or by operation of law. The Committee shall be the Plan "Administrator" (as such
term is defined in Section 3(16)(A) of ERISA). The Committee may delegate its
duties and responsibilities as it, in its sole discretion, deems necessary or
appropriate to the execution of such duties and responsibilities. The Committee
as a whole or any of its members may serve in more than one capacity with
respect to the Plan.
7.2 Powers and Duties. The Committee, or its delegates, shall maintain
and keep (or cause to be maintained and kept) such records as are necessary for
the efficient operation of the Plan or as may be required by any applicable law,
regulation, or ruling and shall provide for the preparation and filing of such
forms, reports, information, and documents as may be required to be filed with
any governmental agency or department and with the Plan's Participants and/or
other Beneficiaries.
Except to the extent expressly reserved to the Company or the Board,
the Committee shall have all powers necessary to carry out the administrative
provisions of the Plan and to satisfy the requirements of any applicable law or
laws. These powers shall include, by way of illustration and not limitation, the
exclusive powers and discretionary authority necessary to:
(a) construe and interpret the Plan; decide all questions of
eligibility; decide all questions of fact relating to claims for benefits; and
determine the amount, time, manner, method, and mode of payment of any benefits
hereunder;
(b) direct the Company and/or the trustee of any trust
established at the discretion of the Company to provide for the payment of
benefits under the Plan, concerning the amount, time, manner, method, and mode
of payment of any benefits hereunder:
(c) prescribe procedures to be followed and forms to be used
by Participants and/or other persons in filing applications or elections;
(d) prepare and distribute, in such manner as may be required
by law or as the Committee deems appropriate, information explaining the Plan;
provided, however, that no such explanation shall contravene the terms of this
Plan or increase the rights of any Participant or Beneficiary or the liabilities
of the Company;
13
<PAGE> 18
(e) require from the Company and Participants such information
as shall be necessary for the proper administration of the Plan;
(f) appoint and retain individuals to assist in the
administration and construction of the Plan, including such legal, clerical,
accounting, and actuarial services as it may require or as may be required by
any applicable law or laws; and
(g) perform all functions otherwise imposed upon a plan
administrator by ERISA which are not expressly reserved to the Company or the
Board, including, but not limited to, those supplemental duties and
responsibilities described in the "Mellon Bank Corporation Corporate Benefits
Committee Charter and Summary of Operations" approved by the Board on September
17, 1991 (the "CBC Charter").
Without intending to limit the generality of the foregoing, the
Committee shall have the power to amend the Plan, in whole or in part, in order
to comply with applicable law; provided, however, that no such amendment may
increase the duties and obligations of the Company without its consent. Except
as provided in the preceding sentence or unless directed by the Human Resources
Committee of the Board or otherwise required by law, the Committee shall have no
power to adopt, amend, or terminate the Plan, said powers being exclusively
reserved to the Human Resources Committee of the Board.
7.3 Procedures. The Committee shall be organized and conduct its
business with respect to the Plan in accordance with the organizational and
procedural rules set forth in the CBC Charter.
Notwithstanding the foregoing, if any member of the Committee shall be
a Participant hereunder, then in any matters affecting any member of the
Committee in his individual capacity as a Participant hereunder, separate and
apart from his status as a member of the group of Participants, such interested
member shall have no authority to vote in the determination of such matters as a
member of the Committee, but the Committee shall determine such matter as if
said interested member were not a member of the Committee; provided, however,
that this shall not be deemed to take from said interested member any of his
rights hereunder as a Participant. If
14
<PAGE> 19
the remaining members of the Committee should be unable to agree on any matter
so affecting an interested member because of an equal division of voting, the
Human Resources Committee of the Board shall appoint a temporary member of the
Committee in order to create an odd number of voting members.
7.4 Establishment of Rules. The Committee shall have specific authority
in its sole discretion to construe and interpret the terms of the Plan related
to its powers and duties, and to the extent that the terms of the Plan are
incomplete, the Committee shall have authority to establish such rules or
regulations related to its powers and duties as it may deem necessary and proper
to carry out the intent of the Company as to the purposes of the Plan.
7.5 Limitation of Liability. The Board, the members of the Committee,
and any officer, employee, or agent of the Company shall not incur any liability
individually or on behalf of any other individuals or on behalf of the Company
for any act, or failure to act, made in good faith in relation to the Plan. No
bond or other security shall be required of any such individual solely on
account of any individual's power to direct the Company to make the payments
required hereunder.
7.6 Compensation and Insurance. Members of the Committee shall serve
without compensation for their services as such. Expenses incurred by members of
the Committee in the performance of their duties as herein provided, and the
compensation and expenses of persons retained or employed by the Committee for
services rendered in connection with the Plan shall, upon approval by the
Committee, be paid or reimbursed by the Company.
The Company shall indemnify and/or maintain and keep in force insurance
in such form and amount as may be necessary in order to protect the members of
the Committee, their delegates and appointees (other than persons who are
independent of the Company and are rendering services to the Committee or to or
with respect to the Plan) from any claim, loss, damage, liability, and expense
(including costs and attorneys' fees) arising from their acts or failures to act
with respect to the Plan, except where such actions or failures to act involve
willful misconduct or gross negligence.
15
<PAGE> 20
7.7 Removal and Resignation. Any member of the Committee may resign and
the Company may remove any member of the Committee in accordance with the
procedures established by the CBC Charter. The Committee shall remain fully
operative pending the filling of any vacancies, the remaining Committee members
having full authority to administer the Plan.
7.8 Claims Procedure. The right of any Participant or Beneficiary to
receive a benefit hereunder and the amount of such benefit shall be determined
in accordance with the procedures for determination of benefit claims
established and maintained by the Committee in compliance with the requirements
of Section 503 of ERISA; which separate procedures, entitled Procedures for
Determination of Benefit Claims, are incorporated herein by this reference.
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
Subject to the limitations of Article V, the Human Resources Committee
of the Board may at any time amend or terminate the Plan in whole or in part.
Except as provided below or in Article V, the Company is not obligated to
continue any benefit, any insurance or any insurance policy after such action.
Written notice of any amendment or termination of the Plan shall be given to
each affected Participant in the Plan. If this Plan is terminated by the Company
after the commencement of any benefit payments to the Beneficiary of a deceased
Participant, the Company shall be obligated to continue payments to such
Beneficiary in accordance with the terms of this Plan as in existence
immediately prior to termination of this Plan.
ARTICLE IX
MISCELLANEOUS
9.1 Restriction on Assignment. The Participant may assign all or any
part of his right, title, claim, interest, benefit and all other incidents of
ownership which he may have in any life insurance coverage under this Plan,
provided that any such assignment shall be subject to the terms of the Plan.
Neither the Participant nor any other person shall have any right to commute,
sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
transfer, hypothecate or convey in advance of actual receipt the amounts, if
any, payable pursuant to any election of a
16
<PAGE> 21
Survivor Income Option under Section 3.9 of this Plan, which are, and all rights
to which are, expressly declared to be unassignable and non-transferable. No
part of the amounts payable pursuant to an election of a Survivor Income Option
shall, prior to actual payment, be subject to seizure or sequestration for the
payment of any debts, judgments, alimony or separate maintenance owed by the
Participant or any other person, nor be transferable by operation of law in the
event of the Participant's or any other person's bankruptcy or insolvency.
9.2 Unsecured General Creditor. The provisions of this Section 9.2
shall apply to all benefits which are payable under the Survivor Income Option
pursuant to Section 3.9 of this Plan. With respect to all benefits payable under
the Survivor Income Option, the Participant and his Beneficiaries, heirs,
successors, and assigns shall have no legal or equitable rights, interests, or
claims in any property or assets of the Company, nor shall they be beneficiaries
of, or have any rights, interests or claims in any life insurance policies,
annuity contract, or the proceeds therefrom owned or which may be acquired by
the Company ("Policies"). Such Policies or other assets of the Company shall not
be held under any trust for the benefit of Participants, their Beneficiaries,
heirs, successors, or assigns, or held in any way as collateral security for the
fulfilling of the obligations of the Company under this Plan. Any and all of the
Company's assets and Policies shall be, and remain, the general, unpledged,
unrestricted assets of the Company. The Company's obligation under the Survivor
Income Option of this Plan shall be merely that of an unfunded and unsecured
promise of the Company to pay money in the future.
9.3 Tax Liability and Withholding. A Participant may have income for
federal, state or local income tax purposes by reason of the Economic Benefit of
his insurance coverage provided by the Company under this Plan, both while he is
employed with the Company and after his Retirement or termination of employment.
The Participant and any Beneficiary shall make appropriate arrangements with the
Company for the satisfaction of any federal, state or local income tax
withholding requirements and Social Security or other employee tax requirements
applicable to the provision of benefits under this Plan. If no other
arrangements are made, the Company may provide, at its discretion, for such
withholding and tax payments as may be required.
17
<PAGE> 22
9.4 ERISA Plan. This Plan is covered by Title I of the Employee
Retirement Income Security Act of 1974 ("ERISA") as a welfare benefit plan. The
Company is the "named fiduciary" of the Plan for purposes of Section 402(a)(2)
of ERISA.
9.5 Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Employee any right to be retained in employment with the Company.
9.6 Protective Provisions. Each Participant shall cooperate with the
Company by furnishing any and all information requested by the Company in order
to facilitate the payment of benefits hereunder, taking such physical
examinations as the Company may deem necessary and taking such other relevant
action as may be requested by the Company. If a Participant refuses so to
cooperate, the Company shall have no further obligation to the Participant or
his Beneficiary under the Plan. If a Participant makes any material misstatement
of information or nondisclosure of medical history, then no benefits will be
payable hereunder to such Participant's Beneficiary, provided, that in the
Company's sole discretion, benefits may be payable in an amount reduced to
compensate the Company for any loss, cost, damage or expense suffered or
incurred by the Company as a result in any way of any such action, misstatement
or nondisclosure.
9.7 Gender, Singular & Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the identity
or the person or persons may require. As the context may require, the singular
may be read as the plural and the plural as the singular.
9.8 Captions. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
18
<PAGE> 23
9.9 Validity. In the event any provision of this Plan is held invalid,
void or unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provisions of this Plan, and this Plan shall be deemed to
be modified to the least extent possible to make it valid and enforceable in its
entirety.
9.10 Notices and Elections. Any notice or election required or
permitted to be given to the Company or the Committee under the Plan shall be
sufficient if in writing and hand delivered, or sent by registered or certified
mail, to the principal office of the Company, directed to the attention of the
Human Resources Department of the Company. Such notice or election shall be
deemed given as of the date of delivery or, if delivery is made by mail, as of
the date shown on the postmark on the receipt for registration or certification.
9.11 Notice to Insurance Company. The Company shall be responsible for
notifying the life insurance company which issues any Policy or Policies under
this Plan of any changes in the ownership rights and interests of the
Participant and the Company and of any changes in the Beneficiaries to receive
death benefits under the Plan, and the life insurance company shall be entitled
to rely upon such notification received from the Company.
9.12 Applicable Law. This Plan shall be construed, regulated and
administered in accordance with the laws of the Commonwealth of Pennsylvania,
except insofar as state law is preempted by ERISA.
9.13 Waiver of Breach. The waiver by the Company of any provision of
this Plan shall not operate or be construed as a waiver of any subsequent breach
by the Participant.
19
<PAGE> 24
9.14 Benefit. The rights and obligations of the Company under this Plan
shall inure to the benefit of, and shall be binding upon, the successors and
assigns of the Company.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed
this 15th day of March, 1999, effective as of January 15, 1999.
ATTEST: MELLON BANK, N.A.
/s/ Carl Krasik By: /s/ D. Michael Roark
- --------------- --------------------
Carl Krasik D. Michael Roark
Assistant Secretary Head Of The Human Resources Department
20
<PAGE> 1
Exhibit 10.11
MELLON BANK
SENIOR EXECUTIVE LIFE INSURANCE PLAN
Effective January 1, 1993
Amended Effective November 16, 1996
Amended Effective January 15, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PREAMBLE 1
ARTICLE I 1
DEFINITIONS 1
1.1 Affiliates 1
1.2 Base Salary 1
1.3 Beneficiary 1
1.4 Benefit Commencement Date 1
1.5 Board 2
1.6 Change in Control 2
1.7 Code 2
1.8 Committee 2
1.9 Company 2
1.10 Coverage Adjustment Date 2
1.11 Disability 2
1.12 Economic Benefit 2
1.13 Effective Date 2
1.14 Eligible Employee 2
1.15 Employee 3
1.16 Human Resources Committee 3
1.17 Insurance Company 3
1.18 Net Cumulative Premiums 3
1.19 Participant 3
1.20 Participation Agreement 3
1.21 Plan 3
1.22 Plan Year 3
1.23 Policy 3
1.24 Retirement 3
1.25 Subsidiary 4
1.26 Years of Service 4
ARTICLE II 4
PARTICIPATION 4
2.1 Participation 4
2.2 Insurability 4
2.3 Commencement of Coverage 5
2.4 Increases in Coverage 5
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
2.5 Declining Coverage 5
2.6 Relation to Other Plans 5
ARTICLE III 5
LIFE INSURANCE COVERAGE 5
3.1 Amount of Insurance 5
3.2 Disability 6
3.3 Insurance Contract 7
3.4 Interests in Cash Value 7
3.5 Policy Withdrawals and Loans 10
3.6 Surrender or Cancellation of Policy 11
3.7 Continuation of Policy after Retirement or
Termination of Employment 11
3.8 No Assignment 11
3.9 Payment of Premiums and Contributions 11
3.10 Form of Death Benefit 12
ARTICLE IV 12
OPTION TO RETAIN INSURANCE POLICY ON TERMINATION OF EMPLOYMENT 12
ARTICLE V 13
OPTION TO RETAIN INSURANCE POLICY IN CERTAIN EVENTS 13
5.1 Option to Retain Policy 13
5.2 Elimination of Coverage 13
5.3 Change in Control 14
ARTICLE VI 15
BENEFICIARY DESIGNATION 15
6.1 Designation of Beneficiary 15
6.2 Failure to Designate Beneficiary 16
ARTICLE VII 16
ADMINISTRATION 16
7.1 Administrator 16
7.2 Powers and Duties 16
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
7.3 Procedures 18
7.4 Establishment of Rules 19
7.5 Limitation of Liability 19
7.6 Compensation and Insurance 19
7.7 Removal and Resignation 20
7.8 Claims Procedure 20
ARTICLE VIII 20
AMENDMENT AND TERMINATION OF PLAN 20
ARTICLE IX 20
MISCELLANEOUS 20
9.1 Restriction on Assignment 20
9.2 Tax Liability and Withholding 21
9.3 ERISA Plan 21
9.4 Employment Not Guaranteed 21
9.5 Protective Provisions 21
9.6 Gender, Singular & Plural 22
9.7 Captions 22
9.8 Validity 22
9.9 Notices and Elections 22
9.10 Applicable Law 23
9.11 Waiver of Breach 23
9.12 Benefit 23
</TABLE>
iii
<PAGE> 5
MELLON BANK
SENIOR EXECUTIVE LIFE INSURANCE PLAN
PREAMBLE
The purpose of this Mellon Bank Senior Executive Life Insurance Plan
(the "Plan") is to provide life insurance coverage for eligible senior executive
employees of Mellon Bank, N.A. (the Company) and its Affiliates. The Plan will
be effective as of January 1, 1993.
ARTICLE I
DEFINITIONS
When used herein, the following words shall have the following meanings unless
the content clearly indicates otherwise:
1.1 Affiliates. "Affiliates" means Mellon Bank Corporation and its
Subsidiaries.
1.2 Base Salary. "Base Salary" means (i) an active Employee's annual
base salary as of the last Coverage Adjustment Date preceding his death and (ii)
a retired Employee's annual base salary immediately preceding his termination of
employment with the Company or its Affiliates. Annual base salary excludes all
bonuses, incentive and supplemental compensation and other payments and
benefits, except fixed base salary.
1.3 Beneficiary. "Beneficiary" means the person or persons designated
as such in accordance with Article VI.
1.4 Benefit Commencement Date. "Benefit Commencement Date" means the
date on which payment of a Participant's retirement benefits have commenced
under all of the following plans or agreements of the Company which apply to the
Participant: (i) Mellon Bank Retirement Plan, (ii) Mellon Bank IRC Section
401(a)(17) Plan, (iii) Mellon Bank Benefit Restoration Plan
<PAGE> 6
(which provides benefits in excess of the limits under Section 415 of the Code),
(iv) employment agreement, and (v) any other non-qualified retirement benefit
plans.
1.5 Board. "Board" means the Board of Directors of Mellon Bank
Corporation or any committee thereof acting within the scope of its authority.
1.6 Change in Control. "Change in Control" shall have the meaning set
forth in Section 5.3.
1.7 Code. "Code" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
1.8 Committee. "Committee" means the Corporate Benefits Committee of
Mellon Bank Corporation appointed to administer the Plan pursuant to Article
VII.
1.9 Company. "Company" means Mellon Bank, N.A. and, whenever
applicable, its Affiliates.
1.10 Coverage Adjustment Date. "Coverage Adjustment Date" means the
date during each year, selected by the Committee from time to time in its
discretion, on which changes or increases in coverage will take effect.
1.11 Disability. "Disability" means a condition that qualifies as a
disability under the Mellon Bank Group Long-Term Disability Plan.
1.12 Economic Benefit. "Economic Benefit" means the value of the
economic benefit of life insurance coverage under this Plan for income tax
purposes, determined based on revenue rulings issued by the Internal Revenue
Service and other applicable authorities.
1.13 Effective Date. "Effective Date" means January 1, 1993.
1.14 Eligible Employee. "Eligible Employee" means an Employee who is
designated by the Human Resources Committee to participate in the Plan.
2
<PAGE> 7
1.15 Employee. "Employee" means any person employed by the Company or
its Affiliates on a regular full-time salaried basis, including officers of the
Company.
1.16 Human Resources Committee. "Human Resources Committee" means the
Human Resources Committee of the Board.
1.17 Insurance Company. "Insurance Company" means an insurance company
selected by the Company to provide coverage for Participants pursuant to the
terms of the Plan.
1.18 Net Cumulative Premiums. "Net Cumulative Premiums" means premiums
paid by the Company on a Policy net of (i) reimbursements or contributions to
premiums on the Policy made by a Participant and (ii) any withdrawals or loans
from cash value of the Policy made to the Company with the written consent of
the Participant.
1.19 Participant. "Participant" means an Eligible Employee who has
completed the underwriting requirements of the Insurance Company and who is
notified by the Company that he is participating in the Plan in accordance with
the provisions of Article II.
1.20 Participation Agreement. "Participation Agreement" means a written
agreement between the Company and the Participant under which the Participant
agrees to participate in the Plan pursuant to section 2.1.
1.21 Plan. "Plan" means this Senior Executive Life Insurance Plan as
set forth in this document and as the same may be amended, administered or
interpreted from time to time.
1.22 Plan Year. "Plan Year" means the calendar year.
1.23 Policy. "Policy" means a life insurance policy providing coverage
under this Plan.
1.24 Retirement. "Retirement" means termination of a Participant's
employment with the Company or its Affiliates for reasons other than death or
Disability after the Participant has
3
<PAGE> 8
either (i) attained age fifty-five (55) and completed at least five (5) Years of
Service or (ii) attained age sixty-five (65) and completed at least one (1) Year
of Service.
1.25 Subsidiary. "Subsidiary" means a corporation the majority of the
outstanding stock of which is owned directly or indirectly by Mellon Bank
Corporation.
1.26 Years of Service. "Years of Service" means a Participant's actual
years of service, unless otherwise determined by the Human Resources Committee.
ARTICLE II
PARTICIPATION
2.1 Participation. Any Eligible Employee may enroll in the Plan by
completing a Participation Agreement, the underwriting requirements of the
Insurance Company and any other enrollment steps required by the Company for
coverage to begin. An Eligible Employee shall become a Participant in the Plan
when he has been notified in writing that his participation is approved by the
Company and after he files an election under Section 83(b) of the Code with the
Internal Revenue Service and a similar election with any appropriate state tax
agency. Coverage under this Plan shall not commence, and no transfer of any
Policy to the Participant shall be effective, until the Participant files such
election. During a leave of absence, coverage will remain in effect for a
maximum of ninety (90) days.
2.2 Insurability. Eligible Employees are not automatically entitled to
all insurance coverage offered under the Plan. Each Eligible Employee will be
covered up to the amount of guarantee issue determined by the Insurance Company,
but must satisfy the Insurance Company's requirements for obtaining additional
insurance before he becomes covered for additional amounts under the Plan.
4
<PAGE> 9
2.3 Commencement of Coverage. Subject to the limitations of Sections
2.1 and 2.2, (i) an Employee who is an Eligible Employee on January 1, 1993 will
be covered under the Plan as of January 1, 1993, and (ii) any other Eligible
Employee will be covered under the Plan when coverage is approved by the
Insurance Company.
2.4 Increases in Coverage. When a Participant's Base Salary is
increased, the amount of his life insurance coverage under this Plan will
increase on the next Coverage Adjustment Date, except as provided in this
Section 2.4. Any increase in coverage will not take effect until such additional
coverage is approved by the Insurance Company, and a Participant may be required
to satisfy the Insurance Company's requirements for obtaining additional
insurance before he becomes covered for an additional amount of life insurance
coverage under the Plan. A Participant's coverage under the Plan will be limited
to the coverage issued by the Insurance Company.
2.5 Declining Coverage. An Eligible Employee may decline coverage under
the Plan. However, any such Eligible Employee will be required to satisfy the
Insurance Company's requirements for obtaining insurance before he may become
covered under the Plan at a later date.
2.6 Relation to Other Plans. Eligible Employees shall be limited to
non-contributory life insurance coverage of $50,000 under the Company's group
term life insurance plan.
ARTICLE III
LIFE INSURANCE COVERAGE
3.1 Amount of Insurance. The amount of life insurance coverage which
will be payable to the Beneficiary designated by the Participant will be
determined based on the employment status of the Participant with the Company at
the time of his death. In each case,
5
<PAGE> 10
there will be subtracted fifty thousand dollars ($50,000) which is payable under
the group term life insurance plan covering the Participant maintained by the
Company. Subject to the foregoing adjustment, the amounts of life insurance
coverage under this Plan are as follows:
(a) During Employment. While employed with the Company, a
Participant will have life insurance coverage equal to two (2) times his Base
Salary. No additional death benefit will be payable on account of any interest
of the Participant in the cash value of any Policy in the event of the
Participant's death during employment with the Company.
(b) After Retirement or Termination of Employment After
Completing 5 Years of Service. After Retirement from the Company (or following
termination of employment after completing five (5) Years of Service), a
Participant will have life insurance coverage equal to (i) one (1) times his
final Base Salary plus (ii) the Participant's remaining interest in cash value
at the time of his death in Policies under this Plan (as determined under
Section 3.4(b)(i) hereof).
(c) Limitation on Amount of Coverage. The amount of life
insurance coverage under the Plan will be limited to the amount of coverage
issued by the Insurance Company on the Participant under this Plan.
3.2 Disability. If a Participant suffers a Disability, the
Participant's life insurance coverage will be continued by the Company during
the period of Disability until the Participant reaches age sixty-five (65) or
begins to receive benefits under the Mellon Bank Retirement Plan, whichever is
sooner. All premiums for this coverage will be paid by the Company. When a
disabled Participant reaches age sixty-five (65) or begins to receive benefits
under the Mellon Bank Retirement Plan, whichever is sooner, the Participant
will continue to have life insurance coverage equal to one (1) times his final
Base Salary on the date of his Disability, as if he had retired from employment
with the Company.
6
<PAGE> 11
3.3 Insurance Contract. To provide the insurance coverage under the
Plan, the Company shall acquire one or more insurance policies ("Policies") on
the life of each Participant and transfer ownership of such Policy or Policies
to the Participant. Within thirty (30) days after the transfer of any such
Policy, the Participant will file an election under Section 83(b) of the Code
with the Internal Revenue Service and a similar election with any appropriate
state tax agency.
Except as otherwise specifically provided, the Participant will be the
owner and hold all the incidents of ownership in each Policy for which he is
designated the owner pursuant to a split dollar life insurance agreement entered
into by the Participant and the Company under this Plan. In consideration of the
Company's payment of premiums on the Policy pursuant to Section 3.9 of this
Plan, the Participant will assign rights in cash value and death benefits under
the Policy to the Company as collateral under a form of collateral assignment
consistent with the terms of the Plan.
The Participant may specify in writing to the Company the Beneficiary
or Beneficiaries for his life insurance coverage under this Plan. Upon receipt
of a written request from the Participant, the Company will immediately take
such action as shall be necessary to implement such Beneficiary designation. Any
death benefits under Policies on the life of the Participant owned by the
Company that exceed the amount payable to the Participant's Beneficiary under
this Plan shall be payable to the Company.
3.4 Interests In Cash Value. The respective interests of the Company
and the Participant in the cash value of Policies which are owned by the
Participant shall be as follows:
(a) During Employment.
7
<PAGE> 12
(i) Company's Interest In Cash Value During
Employment. While the Participant is employed with the Company, the Company's
interest in the cash value of any Policy shall be limited to the lesser of the
cash value of the Policy or the Net Cumulative Premiums paid by the Company on
the Policy. The Company shall further be entitled to increases in cash value in
an amount equal to any mortality or other expenses incurred for the benefit of
the Company which are charged against cash value of the Policy, and any such
charges shall, in turn, be deducted from the Company's interest in cash value of
the Policy. The Company shall also be entitled to any interest in cash value of
the Policy which is forfeited by the Participant, as provided below.
(ii) Participant's Interest In Cash Value During
Employment. While the Participant is employed with the Company, the
Participant's interest in the cash value of any Policy shall be the balance of
the cash value of the Policy in excess of the Company's interest in cash value
pursuant to Section 3.4(a)(i) above.
The Participant shall at all times be 100% vested in cash value under a
Policy in an amount equal to his cumulative reimbursements to the Company for
the Economic Benefit of his coverage. The Participant will become vested in the
Participant's additional interest in cash value after completing five (5) Years
of Service.
(b) After Retirement or Termination of Employment After
Completing 5 Years of Service.
(i) Participant's Interest In Cash Value After
Retirement or Termination of Employment After Completing 5 Years of Service. The
Participant's interest in the cash value of any Policy will increase on a
pro-rata basis following Retirement or termination of employment after
completing five (5) Years of Service. After either of these events, all future
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<PAGE> 13
net increases in cash value of the Policy during any year will be allocated
between the Participant and the Company on a pro-rata basis in proportion to
their respective interests in the cash value of the Policy during such year. Any
withdrawals of cash value from the Policy by the Participant will reduce the
Participant's interest in the cash value of the Policy. Net increases in cash
value shall be determined after deducting mortality and other expenses which are
charged against cash value of the Policy.
(ii) Company's Interest In Cash Value after
Retirement or Termination of Employment After Completing 5 Years of Service.
After a Participant's Retirement or termination of employment after completing
five (5) Years of Service, the Company's interest in the cash value of any
Policy shall be the balance of the cash value of the Policy in excess of the
Participant's interest in cash value pursuant to Section 3.4(b)(i) above,
including the Company's portion of increases in cash value after the
Participant's Retirement or termination of employment. The Company shall also be
entitled to increases in cash value in an amount equal to any mortality or other
expenses incurred for the benefit of the Company which are charged against cash
value of the Policy, and any such charges shall, in turn, be deducted from the
Company's interest in cash value of the Policy.
(c) After Other Termination of Employment.
(i) Participant's Interest in Cash Value after Other
Termination of Employment. If the Participant terminates employment with the
Company before Retirement and prior to completing five (5) Years of Service, the
Participant shall forfeit his interest in the cash value of each Policy which is
owned by the Participant except for an amount equal to his cumulative
reimbursements to the Company for the Economic Benefit of his coverage.
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(ii) Company's Interest in Cash Value after Other
Termination of Employment. If the Participant terminates employment with the
Company before Retirement and prior to completing five (5) Years of Service, the
Company's interest in the cash value of any Policy shall be the balance of the
cash value of the Policy in excess of the Participant's interest in cash value
pursuant to Section 3.4(c)(i) above, including the portion of the cash value of
the Policy which is forfeited by the Participant.
(d) Minimum Company Interest in Cash Value. Notwithstanding
any other provision of this Plan to the contrary, at no time shall the Company's
interest in the cash value of any Policy ever be less than the cash value of the
Policy on the date when the Policy is transferred by the Company to the
Participant. This is a restriction which by its terms will never lapse.
3.5 Policy Withdrawals and Loans.
(a) Policy Withdrawals and Loans by Company. The Company shall
have no right to make withdrawals of cash value or prepaid premiums or obtain
loans from any Policy which is owned by a Participant at any time during the
Participant's lifetime, without the prior written consent of the Participant.
(b) Policy Withdrawals and Loans by Participant. A Participant
shall have no right to make withdrawals or obtain loans from any Policy before
his Benefit Commencement Date. After his Benefit Commencement Date a Participant
shall have the right to make withdrawals of his interest in the cash value of
any Policy (or obtain loans from the Participant's interest in the cash value of
any Policy, provided interest is paid on such loans on an annual basis). The
Participant's death benefit under any Policy shall be reduced by withdrawals
(and the unpaid principal and interest on any loans) under the Policy taken by
the Participant.
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3.6 Surrender or Cancellation of Policy. In the event of the surrender
or cancellation of a Policy which is owned by a Participant, the Participant
shall be entitled to receive a portion of the cash surrender value equal to his
vested interest in the cash value of the Policy based on his employment status
with the Company at the time (as determined under Section 3.4 hereof), unless
the Company substitutes another Policy which is satisfactory to the Participant.
The balance of the cash surrender value, if any, shall belong to the Company.
3.7 Continuation or Split of Policy after Retirement or Termination of
Employment. The Company shall continue the life insurance coverage for the
Participant after his Retirement (or following termination of employment after
completing five (5) Years of Service) in the same form and subject to the same
terms and provisions of this Plan as if he remained employed with the Company,
except that the total amount of coverage for the Participant shall not exceed
the amount specified in Section 3.1(b).
If a Participant's employment with the Company terminates before
Retirement, and with less than five (5) Years of Service, the Participant's
coverage under this Plan shall cease, and the Company shall have no further
legal or equitable obligations of any kind to the Participant under this Plan.
The Participant shall transfer all incidents of ownership in each Policy
providing his coverage under this Plan to the Company, and the Company shall pay
to the Participant an amount equal to the Participant's vested interest in the
cash value of the Policy (as determined under Section 3.4(c)(i) hereof).
3.8 No Assignment. A Participant may not assign any part of his right,
title, claim, interest, benefit or any other incidents of ownership which he may
have in any Policies providing his life insurance coverage under this Plan.
3.9 Payment of Premiums and Contributions.
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(a) During Employment. All premiums for life insurance
coverage under this Plan while a Participant is employed with the Company will
be paid by the Company. The Participant will be required each year to reimburse
to the Company an amount equivalent to the Economic Benefit of this coverage.
(b) After Retirement or Termination of Employment after
Completing 5 Years of Service. The Company will not be required to pay any
premiums for life insurance coverage under this Plan for Participants following
Retirement or termination of employment after completing five (5) Years of
Service. The Participant will be required each year to include in income for
income tax purposes or to reimburse to the Company an amount equivalent to the
Economic Benefit of this coverage, or otherwise may realize taxable income if
the Company distributes a policy to him pursuant to Section 3.7(b).
3.10 Form of Death Benefit. All death benefits payable under this Plan
will be in the form of a lump sum death benefit paid directly from the life
insurance company to the Participant's Beneficiary under a collateral assignment
split dollar life insurance program.
ARTICLE IV
OPTION TO RETAIN INSURANCE POLICY ON TERMINATION OF EMPLOYMENT
If a Participant terminates employment with the Company before
Retirement and after completing five (5) Years of Service, the Participant may
elect, in writing received by the Company not later than sixty (60) days after
his termination of employment, to retain the Policy providing his life insurance
coverage then in effect under this Plan and obtain a release of the collateral
assignment in favor of the Company by paying the Company an amount equal to the
Net Cumulative Premiums paid by the Company on the Policy. Payment must be made
in cash as a lump sum or by borrowing or withdrawing cash value from the Policy.
A Participant's life
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insurance coverage under this Plan will remain in effect during this sixty (60)
day period. A Participant who retains a Policy will cease to be covered under
this Plan and will thereafter be required to pay all future premiums on the
Policy.
The option to retain the Policy which is provided under this Article IV
shall not apply to any Participant who terminates employment with the Company
before completing five (5) Years of Service or after Retirement.
ARTICLE V
OPTION TO RETAIN INSURANCE POLICY IN CERTAIN EVENTS
5.1 Option to Retain Policy. The Participant may elect, in writing
received by the Company not later than sixty (60) days after the Participant
receives written notice from the Company of an event described in Section 5.2,
to retain the Policy providing his life insurance coverage then in effect under
this Plan and obtain release of the collateral assignment in favor of the
Company by paying the Company an amount equal to the greater of (i) the excess
of the cash value of the Policy transferred to the Participant over the
Participant's vested interest in cash value of the Policy (as provided under
Section 3.4) or (ii) the Net Cumulative Premiums paid by the Company on the
Policy. A Participant who retains a Policy will cease to be covered under this
Plan and will thereafter be required to pay all future premiums on the Policy,
except that the Company will be obligated to continue to make up to seven
scheduled premium payments for Participants while they remain active Employees.
5.2 Elimination of Coverage. Any Participant whose coverage is
eliminated pursuant to Article VIII of this Plan (without being replaced with
equivalent coverage under another plan of the Company) shall have the option
pursuant to Section 5.1 to purchase the Policy providing
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<PAGE> 18
his life insurance coverage in effect under this Plan immediately prior to the
elimination of such coverage.
5.3 Change in Control. For purposes of this Plan the term "Change in
Control" shall mean:
(a) The occurrence with respect to the Corporation of a
"control transaction", as such term is defined in Section 2542 of the
Pennsylvania Business Corporation Law of 1988, as of August 15, 1989; or
(b) Approval by the stockholders of the Corporation of (i) any
consolidation or merger of the Corporation where either (x) the holders of
voting stock of the Corporation immediately before the merger or consolidation
will not own more than 50% of the voting shares of the continuing or surviving
corporation immediately after such merger or consolidation or (y) the Incumbent
Directors immediately before the merger or consolidation will not hold more than
50% (rounded to the next whole person) of the seats on the board of directors of
the continuing or surviving corporation, or (ii) any sale, lease or exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Corporation; or
(c) A change of 25% (rounded to the next whole person) in the
membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85% (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the 12-month period and (ii) was not as a result of an actual or
threatened election with respect to directors or any other actual or threatened
solicitation of proxies by or on behalf of any person other than the Board of
Directors. As used in this
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Section 5.3, the term "Incumbent Director" means as of any time a director of
the Corporation (x) who has been a member of the Board of Directors continuously
for at least 12 months or (y) whose election or nomination as a director within
such period met the requirements of clauses (i) and (ii) of the preceding
sentence.
Notwithstanding any other provision of this Plan, without the written
consent of the Participant (or Beneficiary of a deceased Participant) affected
thereby, the Company may not amend or terminate this Plan, except to comply with
legal requirements:
(a) for a period of twenty-four (24) months following a Change
in Control; or
(b) at any time thereafter, in any manner which affects any
Participant (or Beneficiary of a deceased Participant) who receives payments of
benefits under this Plan or has a termination of employment for any reason at
any time during the period of twenty-four (24) months following the Change in
Control.
ARTICLE VI
BENEFICIARY DESIGNATION
6.1 Designation of Beneficiary. Each Participant shall have the right
to designate a Beneficiary or Beneficiaries to whom payment of the Participant's
death benefit under this Plan shall be made in the event of the Participant's
death. Such designation shall be made on a form prescribed by and delivered to
the Company. The Participant shall have the right to change or revoke any such
designation from time to time by filing a new designation or notice of
revocation with the Company, and no notice to any Beneficiary nor consent by any
Beneficiary shall be required to effect any such change or revocation.
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6.2 Failure to Designate Beneficiary. If a Participant shall fail to
designate a Beneficiary before his demise, or if no designated Beneficiary
survives the Participant, the Committee shall direct the Company to make payment
under this Plan to the executor or administrator for the Participant's estate.
ARTICLE VII
ADMINISTRATION
7.1 Administrator. Except as hereinafter provided, the Committee shall
be responsible for the administrative responsibilities hereinafter described
with respect to the Plan. Whenever any action is required or permitted to be
taken in the administration of the Plan, such action shall be taken by the
Committee unless the Committee's power is expressly limited herein or by
operation of law. The Committee shall be the Plan "Administrator" (as such term
is defined in Section 3(16)(A) of ERISA). The Committee may delegate its duties
and responsibilities as it, in its sole discretion, deems necessary or
appropriate to the execution of such duties and responsibilities. The Committee
as a whole or any of its members may serve in more than one capacity with
respect to the Plan.
7.2 Powers and Duties. The Committee, or its delegates, shall maintain
and keep (or cause to be maintained and kept) such records as are necessary for
the efficient operation of the Plan or as may be required by any applicable law,
regulation, or ruling and shall provide for the preparation and filing of such
forms, reports, information, and documents as may be required to be filed with
any governmental agency or department and with the Plan's Participants and/or
other Beneficiaries.
Except to the extent expressly reserved to the Company or the Board,
the Committee shall have all powers necessary to carry out the administrative
provisions of the Plan and to
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<PAGE> 21
satisfy the requirements of any applicable law or laws. These powers shall
include, by way of illustration and not limitation, the exclusive powers and
discretionary authority necessary to:
(a) construe and interpret the Plan; decide all questions of
eligibility; decide all questions of fact relating to claims for benefits; and
determine the amount, time, manner, method, and mode of payment of any benefits
hereunder;
(b) direct the Company and/or the trustee of any trust
established at the discretion of the Company to provide for the payment of
benefits under the Plan, concerning the amount, time, manner, method, and mode
of payment of any benefits hereunder;
(c) prescribe procedures to be followed and forms to be used
by Participants and/or other persons in filing applications or elections;
(d) prepare and distribute, in such manner as may be required
by law or as the Committee deems appropriate, information explaining the Plan;
provided, however, that no such explanation shall contravene the terms of this
Plan or increase the rights of any Participant or Beneficiary or the liabilities
of the Company;
(e) require from the Company and Participants such information
as shall be necessary for the proper administration of the Plan;
(f) appoint and retain individuals to assist in the
administration and construction of the Plan, including such legal, clerical,
accounting, and actuarial services as it may require or as may be required by
any applicable law or laws; and
(g) perform all functions otherwise imposed upon a plan
administrator by ERISA which are not expressly reserved to the Company or the
Board, including, but not limited to, those supplemental duties and
responsibilities described in the "Mellon Bank Corporation Corporate
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Benefits Committee Charter and Summary of Operations" approved by the Board on
September 17, 1991 (the "CBC Charter").
Without intending to limit the generality of the foregoing, the
Committee shall have the power to amend the Plan, in whole or in part, in order
to comply with applicable law; provided, however, that no such amendment may
increase the duties and obligations of the Company without its consent. Except
as provided in the preceding sentence or unless directed by the Human Resources
Committee of the Board or otherwise required by law, the Committee shall have no
power to adopt, amend, or terminate the Plan, said powers being exclusively
reserved to the Human Resources Committee of the Board.
7.3 Procedures. The Committee shall be organized and conduct its
business with respect to the Plan in accordance with the organizational and
procedural rules set forth in the CBC Charter.
Notwithstanding the foregoing, if any member of the Committee shall be
a Participant hereunder, then in any matters affecting any member of the
Committee in his individual capacity as a Participant hereunder, separate and
apart from his status as a member of the group of Participants, such interested
member shall have no authority to vote in the determination of such matters as a
member of the Committee, but the Committee shall determine such matter as if
said interested member were not a member of the Committee; provided, however,
that this shall not be deemed to take from said interested member any of his
rights hereunder as a Participant. If the remaining members of the Committee
should be unable to agree on any matter so affecting an interested member
because of an equal division of voting, the Human Resources Committee of the
Board shall appoint a temporary member of the Committee in order to create an
odd number of voting members.
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7.4 Establishment of Rules. The Committee shall have specific authority
in its sole discretion to construe and interpret the terms of the Plan related
to its powers and duties, and to the extent that the terms of the Plan are
incomplete, the Committee shall have authority to establish such rules or
regulations related to its powers and duties as it may deem necessary and proper
to carry out the intent of the Company as to the purposes of the Plan.
7.5 Limitation of Liability. The Board, the members of the Committee,
and any officer, employee, or agent of the Company shall not incur any liability
individually or on behalf of any other individuals or on behalf of the Company
for any act, or failure to act, made in good faith in relation to the Plan. No
bond or other security shall be required of any such individual solely on
account of any individual's power to direct the Company to make the payments
required hereunder.
7.6 Compensation and Insurance. Members of the Committee shall serve
without compensation for their services as such. Expenses incurred by members of
the Committee in the performance of their duties as herein provided, and the
compensation and expenses of persons retained or employed by the Committee for
services rendered in connection with the Plan shall, upon approval by the
Committee, be paid or reimbursed by the Company.
The Company shall indemnify and/or maintain and keep in force insurance
in such form and amount as may be necessary in order to protect the members of
the Committee, their delegates and appointees (other than persons who are
independent of the Company and are rendering services to the Committee or to or
with respect to the Plan) from any claim, loss, damage, liability, and expense
(including costs and attorneys' fees) arising from their acts or failures to act
with respect to the Plan, except where such actions or failures to act involve
willful misconduct or gross negligence.
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7.7 Removal and Resignation. Any member of the Committee may resign and
the Company may remove any member of the Committee in accordance with the
procedures established by the CBC Charter. The Committee shall remain fully
operative pending the filling of any vacancies, the remaining Committee members
having full authority to administer the Plan.
7.8 Claims Procedure. The right of any Participant or Beneficiary to
receive a benefit hereunder and the amount of such benefit shall be determined
in accordance with the procedures for determination of benefit claims
established and maintained by the Committee in compliance with the requirements
of Section 503 of ERISA; which separate procedures, entitled Procedures for
Determination of Benefit Claims, are incorporated herein by this reference.
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
Subject to the limitations of Article V, the Human Resources Committee
of the Board may at any time amend or terminate the Plan in whole or in part.
Except as provided below or in Article V, the Company is not obligated to
continue any benefit, any insurance or any insurance policy after such action.
Written notice of any amendment or termination of the Plan shall be given to
each affected Participant in the Plan.
ARTICLE IX
MISCELLANEOUS
9.1 Restriction on Assignment. A Participant may not assign any part of
his right, title, claim, interest, benefit or any other incidents of ownership
which he may have in any life insurance coverage under this Plan. Neither the
Participant nor any other person shall have any right to commute, sell, assign,
transfer, pledge, anticipate, mortgage or otherwise encumber, transfer,
hypothecate or convey in advance of actual receipt the amounts, if any, payable
pursuant
20
<PAGE> 25
to this Plan, which are, and all rights to which are, expressly declared to be
unassignable and non-transferable. No part of the amounts payable pursuant to
this Plan shall, prior to actual payment, be subject to seizure or sequestration
for the payment of any debts, judgments, alimony or separate maintenance owed by
the Participant or any other person, nor be transferable by operation of law in
the event of the Participant's or any other person's bankruptcy or insolvency.
9.2 Tax Liability and Withholding. A Participant may have income for
federal, state or local income tax purposes by reason of the Economic Benefit of
his insurance coverage provided by the Company under this Plan, both while he is
employed with the Company and after his Retirement or termination of employment.
The Participant and any Beneficiary shall make appropriate arrangements with the
Company for the satisfaction of any federal, state or local income tax
withholding requirements and Social Security or other employee tax requirements
applicable to the provision of benefits under this Plan. If no other
arrangements are made, the Company may provide, at its discretion, for such
withholding and tax payments as may be required.
9.3 ERISA Plan. This Plan is covered by Title I of the Employee
Retirement Income Security Act of 1974 ("ERISA") as a welfare benefit plan. The
Company is the "named fiduciary" of the Plan for purposes of Section 402(a)(2)
of ERISA.
9.4 Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Employee any right to be retained in employment with the Company.
9.5 Protective Provisions. Each Participant shall cooperate with the
Company by furnishing any and all information requested by the Company in order
to facilitate the payment of benefits hereunder, taking such physical
examinations as the Company may deem necessary
21
<PAGE> 26
and taking such other relevant action as may be requested by the Company. If a
Participant refuses so to cooperate, the Company shall have no further
obligation to the Participant or his Beneficiary under the Plan. If a
Participant makes any material misstatement of information or nondisclosure of
medical history, then no benefits will be payable hereunder to such
Participant's Beneficiary, provided, that in the Company's sole discretion,
benefits may be payable in an amount reduced to compensate the Company for any
loss, cost, damage or expense suffered or incurred by the Company as a result in
any way of any such action, misstatement or nondisclosure.
9.6 Gender Singular & Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the identity
or the person or persons may require. As the context may require, the singular
may be read as the plural and the plural as the singular.
9.7 Captions. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
9.8 Validity. In the event any provision of this Plan is held invalid,
void or unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provisions of this Plan, and this Plan shall be deemed to
be modified to the least extent possible to make it valid and enforceable in its
entirety.
9.9 Notices and Elections. Any notice or election required or permitted
to be given to the Company or the Committee under the Plan shall be sufficient
if in writing and hand delivered, or sent by registered or certified mail, to
the principal office of the Company, directed to the attention of the Human
Resources Department of the Company. Such notice or election
22
<PAGE> 27
shall be deemed given as of the date of delivery or, if delivery is made by
mail, as of the date shown on the postmark on the receipt for registration or
certification.
9.10 Applicable Law. This Plan shall be construed, regulated and
administered in accordance with the laws of the Commonwealth of Pennsylvania,
except insofar as state law is preempted by ERISA.
9.11 Waiver of Breach. The waiver by the Company of any provision of
this Plan shall not operate or be construed as a waiver of any subsequent breach
by the Participant.
9.12 Benefit. The rights and obligations of the Company under this Plan
shall inure to the benefit of, and shall be binding upon, the successors and
assigns of the Company.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed
this 15th day of March, 1999, effective as of January 15, 1999.
ATTEST: MELLON BANK, N.A.
/s/ Carl Krasik BY: /s/ D. Michael Roark
- -------------------------- --------------------------------------
Carl Krasik D. Michael Roark
Assistant Secretary Head of the Human Resources Department
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<PAGE> 1
Exhibit 10.13
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 of 1988, as of August 15, 1989; or
(b) Approval by the stockholders of the Corporation of (i) any
consolidation or merger of the Corporation where either (x) the holders of
voting stock of the Corporation immediately before the merger or consolidation
will not own more than 50% of the voting shares of the continuing or surviving
corporation immediately after such merger or consolidation or (y) the Incumbent
Directors immediately before the merger or consolidation will not hold more than
50% (rounded to the next whole person) of the seats on the board of directors of
the continuing or surviving corporation, or (ii) any sale, lease or exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Corporation; or
(c) A change of 25% (rounded to the next whole person) in the
membership of the Board of Directors within a 12-month period, unless the
election or nomination for election by stockholders of each new director within
such period (i) was approved by the vote of 85% (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the 12-month period and (ii) was not as a result of an actual or
threatened election with respect to directors or any other actual or threatened
solicitation of proxies by or on behalf of any person other than the Board of
Directors. As used in this Section 2.2, the term "Incumbent Director" means as
of any time a director of the Corporation (x) who has been a
<PAGE> 2
member of the Board of Directors continuously for at least 12 months or (y)
whose election or nomination as a director within such period met the
requirements of clauses (i) and (ii) of the preceding sentence.
2.3 "Committee" shall mean the Human Resources Committee of the Board, or any
successor committee.
2.4 "Common Stock" shall mean Common Stock of the Corporation.
2.5 "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
2
<PAGE> 3
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.
(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
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(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
(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.
January 1999
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Exhibit 10.22
THIS AGREEMENT is entered into as of the [ ] 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
performance is delivered to Executive by the Board which specifically identifies
the manner in
<PAGE> 2
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 combined voting power of the
Company's then outstanding securities eligible to
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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 Control occurs or any subsequent year in an
amount greater than or equal to the
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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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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)
two (2) times Executive's highest annual rate of base salary
during the 12-month period immediately prior to Executive's
Date of Termination, plus (ii) two (2) times Executive's Bonus
Amount; provided, however, that if Executive's Date of
Termination is within two (2) 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 24.
(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
two (2) 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 two (2) 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) two, 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 continued
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<PAGE> 8
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 two (2)
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 two (2) 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) two, and (y) the Adjustment Fraction.
(d) Qualifying Termination -- Voluntary Reduction of Payments.
If during the Termination Period the employment of Executive shall terminate
pursuant to a Qualifying Termination, Executive shall have the right to direct
that the Company reduce the amounts which it is otherwise required to pay to
Executive under Section 4 of this Agreement to the Safe Harbor Cap (as defined
in Section 5(a) of this Agreement).
(e) 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
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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 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
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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 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.
10
<PAGE> 11
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, 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:
11
<PAGE> 12
If to the Executive:
At the address set forth below the signatory.
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
<PAGE> 13
12. Employment with Subsidiaries. Employment with the Company for
purposes of this Agreement shall include employment with any Subsidiary.
13. Survival. The respective obligations and benefits afforded to the
Company and Executive as provided in Sections 4 (to the extent that payments or
benefits are owed as a result of a termination of employment that occurs during
the term of this Agreement), 5 (to the extent that Payments are made to
Executive as a result of a Change in Control that occurs during the term of this
Agreement), 6, 7, 9(c) and 11 shall survive the termination of this Agreement.
14. GOVERNING LAW; VALIDITY. THE INTERPRETATION, CONSTRUCTION AND
PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT
REGARD TO THE PRINCIPLE OF CONFLICTS OF LAWS. THE INVALIDITY OR UNENFORCEABILITY
OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR
ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER PROVISIONS
SHALL REMAIN IN FULL FORCE AND EFFECT.
15. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
13
<PAGE> 14
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.
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
____________________________________
[Name]
[Home Address]
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>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(dollar amounts in millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Income before income taxes and
equity in undistributed net
income of subsidiaries $ 253 $ 352 $ 351 $ 473 $434
2. Fixed charges: interest expense,
one-third of rental expense net
of income from subleases,
trust-preferred securities expense
and amortization of debt issuance costs 205 175 101 97 95
- ------------------------------------------------------------------------------------------------------------------------------------
3. Income before income taxes
and equity in undistributed
net income of subsidiaries,
plus fixed charges (line 1 + line 2) $ 458 $ 527 $ 452 $ 570 $529
- ------------------------------------------------------------------------------------------------------------------------------------
4. Preferred stock dividend
requirements(b) $ 13 $ 32 $ 69 $ 62 $124
- ------------------------------------------------------------------------------------------------------------------------------------
5. Ratio of earnings (as defined)
to fixed charges (line 3 divided by line 2) 2.24 3.01 4.46 5.88 5.56
6. Ratio of earnings (as defined)
to combined fixed charges and
preferred stock dividends
[line 3 divided by (line 2 + line 4)] 2.10 2.55 2.66 3.59 2.41
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The parent corporation ratios include the accounts of Mellon Bank
Corporation (the "Corporation"), Mellon Financial Company, a wholly owned
subsidiary of the Corporation that functions as a financing entity for
the Corporation and its subsidiaries by issuing commercial paper and
other debt guaranteed by the Corporation, and Mellon Capital I and Mellon
Capital II, special purpose business trusts formed by the Corporation,
that exist solely to issue Capital Securities. Because these ratios
exclude from earnings the equity in undistributed net income (loss) of
subsidiaries, these ratios vary with the payment of dividends by such
subsidiaries.
(b) Preferred stock dividend requirements for all years presented represent
the pretax amounts required to cover preferred stock dividends.
<PAGE> 1
Exhibit - 12.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO
OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Mellon Bank Corporation
and its subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(dollar amounts in millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Income $ 870 $ 771 $ 733 $ 691 $ 433
2. Provision for income taxes 470 398 418 401 278
- ------------------------------------------------------------------------------------------------------------------------------------
3. Income before provision
for income taxes (line 1 + line 2) $ 1,340 $1,169 $1,151 $1,092 $ 711
- ------------------------------------------------------------------------------------------------------------------------------------
4. Fixed charges:
a. Interest expense (excluding
interest on deposits) $ 441 $ 371 $ 358 $ 401 $ 263
b. One-third of rental expense
(net of income from
subleases), trust-preferred
securities expense and
amortization of debt issuance costs 134 127 45 44 40
- ------------------------------------------------------------------------------------------------------------------------------------
c. Total fixed charges
(excluding interest on
deposits) (line 4a + line 4b) 575 498 403 445 303
d. Interest on deposits 960 878 903 889 539
- ------------------------------------------------------------------------------------------------------------------------------------
e. Total fixed charges
(line 4c + line 4d) $ 1,535 $1,376 $1,306 $1,334 $ 842
- ------------------------------------------------------------------------------------------------------------------------------------
5. Preferred stock dividend
requirements (a) $ 13 $ 32 $ 69 $ 62 $ 124
- ------------------------------------------------------------------------------------------------------------------------------------
6. Income before provision
for income taxes, plus total
fixed charges:
a. Excluding interest on
deposits (line 3 + line 4c) $ 1,915 $1,667 $1,554 $1,537 $1,014
- ------------------------------------------------------------------------------------------------------------------------------------
b. Including interest on
deposits (line 3 + line 4e) $ 2,875 $2,545 $2,457 $2,426 $1,553
- ------------------------------------------------------------------------------------------------------------------------------------
7. Ratio of earnings (as defined) to fixed charges:
a. Excluding interest on deposits
(line 6a divided by line 4c) 3.33 3.35 3.86 3.45 3.35
b. Including interest on deposits
(line 6b divided by line 4e) 1.87 1.85 1.88 1.82 1.84
8. Ratio of earnings (as defined) to
combined fixed charges and
preferred stock dividends:
a. Excluding interest on deposits
[line 6a divided by (line 4c + line 5)] 3.25 3.15 3.30 3.03 2.37
b. Including interest on deposits
[line 6b divided by (line 4e + line 5)] 1.86 1.81 1.79 1.74 1.61
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Preferred stock dividend requirements for all years presented represent
the pretax amounts required to cover preferred stock dividends.
<PAGE> 1
Exhibit 13.1
CHASEMELLON SHAREHOLDER SERVICES, WITH APPROXIMATELY 2,000 CORPORATE CUSTOMERS,
IS THE LARGEST COMPANY IN THE UNITED STATES DEVOTED EXCLUSIVELY TO STOCK
TRANSFER AND RELATED SERVICES, SUCH AS ADMINISTRATION OF DIRECT PURCHASE AND
DIVIDEND REINVESTMENT PLANS, EMPLOYEE STOCK PURCHASE AND OPTION PLANS, CORPORATE
REORGANIZATIONS AND STOCKWATCH. CHASEMELLON ALSO WAS RATED THE NO. 1 PROXY
SOLICITOR IN A 1998 INDUSTRY SURVEY.
MIAMI-BASED MELLON UNITED NATIONAL BANK REFERRED $145 MILLION IN NEW ASSETS
UNDER MANAGEMENT TO MELLON PRIVATE ASSET MANAGEMENT, UNDERSCORING MELLON'S
EXPANSION INTO ATTRACTIVE DEMOGRAPHIC REGIONS.
IN 1998, MELLON REINFORCED ITS COMMITMENT TO CONVENIENCE BY OPENING ITS 110TH
SUPERMARKET BANKING LOCATION. CUSTOMERS ALSO OPTED FOR THE CONVENIENCE OF
BANKING BY PHONE, INCREASING TELEPHONE SALES BY ABOUT 50 PERCENT.
VIDEO BANKER TECHNOLOGY PROVED INCREASINGLY POPULAR IN DELIVERING FACE-TO-FACE
FINANCIAL EXPERTISE TO CUSTOMERS ON DEMAND AT REMOTE LOCATIONS THROUGHOUT
MELLON'S RETAIL OFFICE NETWORK. MORE THAN 100,000 ACCOUNTS WERE OPENED IN 1998
VIA VIDEO BANKER.
Principal Locations and
Operating Entities
CONSUMER FEE SERVICES
BOSTON SAFE DEPOSIT AND TRUST COMPANY provides trust and custody administration
for institutional and private clients, private asset management, cash
management, and personal and jumbo mortgage lending.
(617) 722-7000
DREYFUS BROKERAGE SERVICES, INC. provides services to individual investors
nationwide, a significant portion of which are conducted via the Internet.
www.edreyfus.com
(310) 276-0200
THE DREYFUS CORPORATION, one of the nation's leading mutual fund companies,
manages or administers approximately $110 billion in assets in more than 150
mutual fund portfolios.
www.dreyfus.com
(212) 922-6000
DREYFUS INVESTMENT SERVICES CORPORATION provides a full range of securities
brokerage services for individuals and institutional clients of Mellon Bank
Corporation.
www.disc.mellon.com
1 800 243-7549
FOUNDERS ASSET MANAGEMENT, LLC is a manager of growth-oriented equity mutual
funds and other investment portfolios.
www.founders.com
1 800 525-2440
MELLON PRIVATE ASSET MANAGEMENT provides investment and wealth management
services for individuals, families, family offices, endowments and foundations.
1 800 582-9423
NEWTON MANAGEMENT LIMITED provides active international investment management to
institutional, private and retail clients of Mellon Bank Corporation.
www.newton.co.uk
(011-44-171) 332-9000
CONSUMER BANKING
MELLON BANK CORPORATION operates the following retail subsidiaries in the United
States: Mellon Bank, N.A., Mellon Bank (DE) National Association, Mellon Bank
(MD) National Association and Mellon United National Bank.
MELLON BANK, N.A. comprises six regions serving consumer and small to midsize
commercial markets throughout Pennsylvania and southern New Jersey.
Headquarters: Pittsburgh, Pennsylvania
(412) 234-5000
MELLON BANK-CENTRAL REGION serves central Pennsylvania.
Headquarters: State College, Pennsylvania
(814) 234-6392
MELLON BANK-COMMONWEALTH REGION serves southcentral Pennsylvania.
Headquarters: Harrisburg, Pennsylvania
(717) 231-7465
MELLON BANK-NORTHEASTERN REGION serves northeastern Pennsylvania.
Headquarters: Wilkes-Barre, Pennsylvania
1 800 222-1992
14
<PAGE> 2
BUCK CONSULTANTS IS A LEADER IN THE FIELDS OF BENEFITS, ACTUARIAL AND HUMAN
RESOURCES CONSULTING AND EMPLOYEE BENEFITS OUTSOURCING. ON A REVENUE-RANKING
BASIS, BUCK IS NO. 7 -- BOTH NATIONALLY AND WORLDWIDE.
MELLON BANK-NORTHERN REGION serves northwestern Pennsylvania.
Headquarters: Erie, Pennsylvania
(814) 453-7400
MELLON BANK-WESTERN REGION serves western Pennsylvania.
Headquarters: Pittsburgh, Pennsylvania
(412) 234-5000
MELLON PSFS* serves southeastern Pennsylvania and southern New Jersey.
Headquarters: Philadelphia, Pennsylvania
(215) 553-3000
* Mellon PSFS is a service mark of Mellon Bank, N.A.
MELLON BANK (DE) NATIONAL ASSOCIATION serves consumer and commercial markets
throughout Delaware.
Headquarters: Wilmington, Delaware
(215) 553-3000
MELLON BANK (MD) NATIONAL ASSOCIATION serves consumer and commercial markets
throughout Maryland, Virginia and Washington, D.C.
Headquarters: Rockville, Maryland
(301) 217-0600
MELLON BANK COMMUNITY DEVELOPMENT CORPORATION,
one of the first holding company CDCs regulated by the Federal Reserve Board,
invests in projects significant to modest-income segments of Delaware, Maryland,
New Jersey and Pennsylvania.
(412) 234-4580
MELLON UNITED NATIONAL BANK, a full-service commercial bank, serves south
Florida.
Headquarters: Miami, Florida
(305) 358-4333
BUSINESS FEE SERVICES
THE BOSTON COMPANY ASSET MANAGEMENT, LLC provides institutional investment
management services.
(617) 722-7029
BOSTON SAFE ADVISORS provides investment management services for individuals and
corporations through brokerage firms throughout
the United States.
1 800 992-5560
BUCK CONSULTANTS, INC., a leading global actuarial and human resources
consulting firm, provides a broad array of services in the areas of defined
benefit and defined contribution plans, health and welfare plans, communications
and compensation consulting, and outsourcing and administration of employee
benefit programs.
www.buckconsultants.com
(212) 330-1000
CCF--MELLON PARTNERS, a joint venture with Credit Commercial de France, markets
investment management services in Europe and North America.
(412) 234-3678
CERTUS ASSET ADVISORS is a stable-value market specialist providing investment
management services to defined contribution plan sponsors.
(415) 399-4450
CHASEMELLON SHAREHOLDER SERVICES, a joint venture with The Chase Manhattan
Corporation, provides securities transfer and shareholder services throughout
the United States.
www.chasemellon.com
1 800 777-3694
CIBC MELLON GLOBAL SECURITIES SERVICES COMPANY, the institutional trust and
custody joint venture with Canadian Imperial Bank of Commerce, provides
Canadian-based pension and institutional investors with domestic and global
custody, multicurrency accounting, performance measurement, investment analytics
and information delivery.
(416) 643-5000
CIBC MELLON TRUST COMPANY provides stock transfer, trustee and related services
to Canadian-based companies.
(416) 643-5000
DREYFUS RETIREMENT SERVICES provides a full array of investment products,
participant education and administration services to defined contribution plans
nationwide.
drs.dreyfus.com
1 800 358-0910
FRANKLIN PORTFOLIO ASSOCIATES, LLC, provides investment management services for
employee benefit funds and institutional clients.
(617) 790-6400
LAUREL CAPITAL ADVISORS provides investment management services for individuals
and corporations through brokerage firms throughout the United States.
1 800 626-6721
MELLON BOND ASSOCIATES provides structured management of fixed-income portfolios
for institutional clients.
(412) 234-3839
MELLON CAPITAL MANAGEMENT CORPORATION is a global quantitative asset manager for
institutional clients.
(415) 546-6056
MELLON EQUITY ASSOCIATES provides specialized equity and balanced investment
management services to pension plans, and nonprofit and public fund markets.
(412) 234-7500
MELLON FUND ADMINISTRATION is a leading servicer of unit trust funds, the
equivalent of mutual funds, in the United Kingdom and to the offshore market in
Dublin.
(011-44-127) 722-7300 (Brentwood)
(011-353-1) 790-5000 (Dublin)
15
<PAGE> 3
MELLON GLOBAL CASH MANAGEMENT(SM) designs solutions through comprehensive cash
management services to meet the specialized treasury needs of middle market to
large, multinational corporations, government agencies, nonprofit organizations
and financial institutions.
1 800 424-3004
MELLON SECURITIES TRUST COMPANY provides securities processing and custody
services.
(212) 374-1970
MELLON TRUST COMPANY OF ILLINOIS provides custody services, primarily for
Illinois insurance companies.
(312) 357-3425
NEWTON MANAGEMENT LIMITED provides active international investment management to
institutional, private and retail clients of Mellon Bank Corporation.
www.newton.co.uk
(011-44-171) 323-9000
PARETO PARTNERS, a partnership in which Mellon holds a 30 percent interest,
provides investment management services for employee benefit funds and
institutional and high net worth clients.
(212) 527-1800
BUSINESS BANKING
AFCO CREDIT CORPORATION, with its Canadian affiliate, CAFO, Inc., provides
insurance premium financing with offices in the United States and Canada.
(201) 876-6600
CORPORATE BANKING markets a full range of financial and operating solutions to
corporations and institutions with annual sales of more than $500 million. It
also has groups that specialize in providing these solutions to the automotive,
basic industries, media and communications, energy services, commercial banks,
insurance, health care, broker/dealer and mutual fund/investment manager
markets.
(412) 234-8808
INTERNATIONAL BANKING provides international trade and correspondent banking
services and markets trade finance and logistics management services for clients
selling products in foreign markets.
(412) 234-0350
INTERNATIONAL REPRESENTATIVE office serves as a liaison between the
Corporation's banking subsidiaries and overseas customers.
(011-81-03) 3216-5861 (Tokyo)
MELLON 1ST BUSINESS BANK provides full commercial banking services to midsize
business firms, professionals, entrepreneurs and business owners through its
headquarters office and five regional offices in southern California.
(213) 489-1000
MELLON BANK CANADA is a chartered Canadian bank providing credit, cash
management, treasury, custody, asset management, insurance premium financing and
shareholder services to the corporate market throughout Canada.
(416) 860-0777
MELLON BUSINESS CREDIT markets a broad range of commercial finance products and
banking services nationwide to corporations.
(215) 553-2161
MELLON EUROPE-LONDON provides global custody, securities lending, treasury,
foreign exchange, credit and cash management services to domestic and
international customers.
(011-44-171) 623-0800
MELLON FINANCIAL MARKETS, INC., the Corporation's Section 20 underwriting
subsidiary, conducts securities business, providing fixed-income and equity
underwriting, trading and sales services to clients and investors throughout the
United States.
(412) 234-6633
MELLON LEASING CORPORATION markets a broad range of lease and lease-related
services from small-ticket vendor leasing to large highly structured
transactions to a wide range of businesses throughout the United States and
Canada through its three divisions: Leasing/Large Corporate, Mellon US Leasing
and Mellon Vendor Leasing and Bank Services.
(412) 234-5061
MELLON VENTURES, INC. or its affiliates invest in the equity of midsize
operating companies experiencing rapid growth or change in ownership.
(412) 236-3594
MIDDLE MARKET BANKING markets a full range of financial and banking services to
commercial customers with annual sales between $20 million and $500 million.
Mellon's Middle Market group also specializes in providing services to segments
of coal and government services industries.
(412) 236-1197
REAL ESTATE FINANCE provides short- and intermediate-term financing to real
estate developers and investors located in the East, mid-Atlantic, Southeast,
Midwest, Texas and southern California.
(412) 234-7560
MELLON VENTURES, INC. INCREASED ITS PORTFOLIO OF DIRECT EQUITY INVESTMENTS AND
FUND INVESTMENTS TO APPROXIMATELY $250 MILLION. FORMED IN 1995, MELLON VENTURES
HAS EQUITY POSITIONS IN COMPANIES IN VARYING INDUSTRIES ACROSS THE NATION,
FUELING ENTREPRENEURIAL GROWTH WHILE PRODUCING SUPERIOR RETURNS FOR THE
CORPORATION. CONTINUING ITS ONGOING GROWTH IN 1998, MELLON VENTURES ESTABLISHED
AN OFFICE IN ATLANTA, ITS FOURTH NATIONWIDE AND A KEY REGIONAL PRESENCE FOR
SERVING THE RAPIDLY EXPANDING SOUTHEASTERN U.S. MARKET.
16
<PAGE> 4
Directors and Senior
Management Committee
EXECUTIVE MANAGEMENT GROUP
MARTIN G. MCGUINN
Chairman and Chief Executive Officer
CHRISTOPHER M. CONDRON
President and Chief Operating Officer
STEVEN G. ELLIOTT
Senior Vice Chairman and Chief Financial Officer
JOHN T. CHESKO
Vice Chairman and Chief Risk Officer
JEFFERY L. LEININGER
Vice Chairman
KEITH P. RUSSELL
Vice Chairman
PETER RZASNICKI
Vice Chairman
WILLIAM J. STALLKAMP
Vice Chairman
ALLAN P. WOODS
Vice Chairman and Chief Information Officer
Seated (l. to r.) Steven G. Elliott, Martin G. McGuinn, Christopher M. Condron;
standing (l. to r.) Peter Rzasnicki, William J. Stallkamp, Keith P. Russell,
John T. Chesko, Jeffery L. Leininger, Allan P. Woods.
[PHOTO]
DIRECTORS
MELLON BANK CORPORATION
AND MELLON BANK, N.A.
Dwight L. Allison Jr.(5)(6)
Retired Chairman, President and Chief Executive Officer
The Boston Company
Burton C. Borgelt(5)(6)
Retired Chairman and Chief Executive Officer
Dentsply International, Inc.
Manufacturer of dental products
Carol R. Brown(2)(6)
President
The Pittsburgh Cultural Trust
Cultural and economic growth organization
Frank V. Cahouet(5)(7)
Retired Chairman, President and Chief Executive Officer
Mellon Bank Corporation
Jared L. Cohon
President
Carnegie Mellon University
Private coeducational research institution
Christopher M. Condron(1)
President and Chief Operating Officer
Mellon Bank Corporation
J. W. Connolly(1)(2)(4)
Retired Senior Vice President
H.J. Heinz Company
Food manufacturer
Charles A. Corry(1)(2)(3)(4)
Retired Chairman and Chief Executive Officer
USX Corporation
Energy and steel
C. Frederick Fetterolf(1)(2)(5)(6)
Retired President and Chief Operating Officer
Aluminum Company of America
Aluminum and chemicals
Ira J. Gumberg(1)(2)(5)
President and Chief Executive Officer
J.J. Gumberg Co.
Real estate investment and development
Pemberton Hutchinson(3)(5)(6)
Retired Chief Executive Officer
Westmoreland Coal Company
Coal mining
George W. Johnstone(2)(5)
Retired President and Chief Executive Officer
American Water Works Company, Inc.
Water services
Rotan E. Lee(5)(6)
Vice President and General Counsel
Scheur Management Group
Health care consulting
17
<PAGE> 5
Andrew W. Mathieson(1)(3)(4)
Retired Executive Vice President
Richard K. Mellon and Sons
Investments
Edward J. McAniff(5)(6)
Of Counsel
O'Melveny & Myers
Full-service law firm
Martin G. McGuinn(1)
Chairman and
Chief Executive Officer
Mellon Bank Corporation
Robert Mehrabian(1)(2)(7)
Executive Vice President and
Segment Executive
Aerospace, Electronics and Industrial
Allegheny Teledyne Incorporated
Specialty metals and diversified businesses
Seward Prosser Mellon
President and Chief Executive Officer
Richard K. Mellon and Sons
Investments
Richard King Mellon Foundation
Philanthropy
Mark A. Nordenberg
Chancellor
University of Pittsburgh
Major public research university
David S. Shapira(1)(2)(5)(7)
Chairman and Chief Executive Officer
Giant Eagle, Inc.
Retail grocery store chain
Joab L. Thomas(4)(7)
President Emeritus
The Pennsylvania State University
Major public research university
Wesley W. von Schack(1)(3)(4)(6)(7)
Chairman, President and
Chief Executive Officer
Energy East Corporation
Energy services
William J. Young(4)(5)(6)
Retired President
Portland Cement Association
Trade association for the Portland
cement industry
CHAIRMEN EMERITI
J. David Barnes
Frank V. Cahouet
William B. Eagleson Jr.
Nathan W. Pearson
ADVISORY BOARD
Masaaki Morita
Chairman
Sony USA Foundation
Nathan W. Pearson
Financial Advisor
Paul Mellon Family Interests
H. Robert Sharbaugh
Retired Chairman
Sun Company, Inc.
REGIONAL BOARDS
MELLON BANK-CENTRAL REGION
Galen E. Dreibelbis
John Lloyd Hanson
Bruce K. Heim
Carol Herrmann
Daniel B. Hoover
Michael M. Kranich Sr.
Edwin E. Lash
Robert W. Neff
Ralph J. Papa
Nicholas Pelick
Graham C. Showalter
Alvin L. Snowiss
MELLON BANK-COMMONWEALTH REGION
Paul S. Beideman
Susan C. Blue
Burton C. Borgelt
Stephen R. Burke
James E. Grandon Jr.
Ruth Leventhal
Henry E.L. Luhrs
James M. Mead
Ralph J. Papa
Gregory L. Sutliff
Marlin Thomas
MELLON BANK-NORTHEASTERN REGION
David T. Andes
Thomas B. Black
Alan J. Finlay
Joseph E. Kluger
Jeffery L. Leininger
Joseph R. Nardone
Joseph L. Persico
Arthur K. Ridley
Rhea P. Simms
MELLON BANK-NORTHERN REGION
James D. Berry III
John T. Chesko
Robert H. Cox
Eugene Cross
William S. DeArment
Robert G. Liptak Jr.
Gary W. Lyons
Ruthanne Nerlich
John S. Patton
J. Michael Puleo
Paul D. Shafer Jr.
Cyrus R. Wellman
MELLON PSFS
Paul C. Brucker
Thomas F. Donovan
Lon R. Greenberg
Pemberton Hutchinson
George W. Johnstone
Rotan E. Lee
Roland Morris
Pedro A. Ramos
William J. Stallkamp
Francis R. Strawbridge III
Stephen A. Van Dyck
SUBSIDIARY BOARDS
THE BOSTON COMPANY, INC. AND
BOSTON SAFE DEPOSIT AND TRUST
COMPANY
Christopher M. Condron
David F. Lamere
J. David Officer
Ronald P. O'Hanley
James P. Palermo
Frank L. Reis Jr.
H. Vernon Winters
BUCK CONSULTANTS, INC.
Christopher M. Condron
William Daniels
Merril S. Delon
Stephen D. Diamond
Edward I. Farb
Steven J. Ferruggia
Mary Garneau
Richard Koski
Joseph A. LoCicero
J. Robinson Lynch
Ronald P. O'Hanley
Fredrick W. Rumack
Raymond E. Sharp
Barry S. Sutton
John W. Thompson
Vincent M. Tobin
Gregory J. Wiber
18
<PAGE> 6
THE DREYFUS CORPORATION
Mandell L. Berman
Burton C. Borgelt
Stephen E. Canter
Christopher M. Condron
Thomas F. Eggers
Steven G. Elliott
Lawrence S. Kash
Martin G. McGuinn
J. David Officer
Richard W. Sabo
Richard F. Syron
FOUNDERS ASSET MANAGEMENT, LLC
Stephen E. Canter
Christopher M. Condron
Gregory P. Contillo
Lawrence S. Kash
Richard W. Sabo
MELLON 1ST BUSINESS BANK
William S. Anderson
W. Peter Bohn
Robert W. Kummer Jr.
Keith P. Russell
Joseph P. Sanford
Thomas F. Savage
MELLON BANK CANADA
Frederick K. Beard
Peter A. Crossgrove
Keith G. Dalglish
Fraser M. Fell
Thomas C. MacMillan
James A. Riley
Peter Rzasnicki
MELLON BANK (DE) NATIONAL ASSOCIATION
John S. Barry
Robert C. Cole Jr.
Donna M. Coughey
Audrey K. Doberstein
Arden B. Engebretson
Norman D. Griffiths
Garrett B. Lyons
W. Charles Paradee Jr.
Bruce M. Stargatt
MELLON BANK (MD) NATIONAL ASSOCIATION
Frederick K. Beard
Michael A. Besche
Lawrence Brown Jr.
Steven G. Elliott
Timothy E. Hall
Albert R. Hinton
MELLON FINANCIAL GROUP-WEST COAST
John E. Anderson
John C. Argue
Frank V. Cahouet
Albert Carnasale
Richard M. Ferry
Ernest J. Friedman
Robert M. Kommerstad
Robert W. Kummer Jr.
Bill LeVine
Edward J. McAniff
Charles D. Miller
Peter W. Mullin
Keith P. Russell
Joseph P. Sanford
Roland Seidler Jr.
MELLON UNITED NATIONAL BANK
Paul S. Beideman
Joel Friedland
Herschel V. Green
Gerald Katcher
David F. Lamere
David Lawrence Jr.
J. David Officer
Aaron S. Podhurst
Howard Scharlin
Sherwood M. Weiser
NEWTON MANAGEMENT LIMITED
Francis D. Antin
Stephen E. Canter
Colin R. Harris
David F. Lamere
Stewart W. Newton
Ronald P. O'Hanley
Charles B. Richardson
SENIOR MANAGEMENT
COMMITTEE
EXECUTIVE MANAGEMENT GROUP
Martin G. McGuinn
Chairman and Chief Executive Officer
Christopher M. Condron
President and Chief Operating Officer
Steven G. Elliott
Senior Vice Chairman and Chief Financial Officer
John T. Chesko
Jeffery L. Leininger
Keith P. Russell
Peter Rzasnicki
William J. Stallkamp
Allan P. Woods
SENIOR MANAGERS
Paul S. Beideman
Michael E. Bleier
Paul A. Briggs
Michael A. Bryson
Stephen E. Canter
Larry F. Clyde
Paul H. Dimmick
Thomas F. Eggers
David F. Lamere
Joseph A. LoCicero
Peter A. Lofquist
Sandra J. McLaughlin
John P. O'Driscoll
J. David Officer
Ronald P. O'Hanley
James P. Palermo
Robert M. Parkinson
D. Michael Roark
Robert W. Stasik
Daniel J. Tuccillo
Patricia M. Waldinger
James S. Wolf
CORPORATE CONTROLLER
Michael K. Hughey
CORPORATE SECRETARY
Carl Krasik
(1) Executive Committee
(2) Audit Committee
(3) Nominating Committee
(4) Human Resources Committee
(5) Trust and Investment Committee
(6) Community Responsibility Committee
(7) Technology Committee
Listing as of Feb. 12, 1999
19
<PAGE> 7
<TABLE>
<CAPTION>
MELLON BANK CORPORATION (and its subsidiaries)
FINANCIAL SUMMARY
(dollar amounts in millions, except per share amounts) 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31
Net interest revenue $ 1,491 $ 1,467 $ 1,478 $ 1,548 $ 1,508 $ 1,329
Provision for credit losses 60 148 155 105 70 125
Fee revenue 2,921 2,418 2,019 1,670 1,652 1,538
Gains (losses) on sale of securities 1 - 4 6 (5) 100
Operating expense 3,013 2,568 2,195 2,027 2,374 2,084
Provision for income taxes 470 398 418 401 278 298
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 870 $ 771 $ 733 $ 691 $ 433 $ 460
Net income applicable to common stock 861 750 689 652 358 397
Tangible net income applicable to common stock (a) 972 832 765 725 434 458
- ----------------------------------------------------------------------------------------------------------------------------------
REPORTED AND TANGIBLE OPERATING RESULTS (a)
Earnings per common share - diluted:
Reported $ 3.25 $ 2.88 $ 2.58 $ 2.25 $ 1.21 $ 1.36
Tangible 3.66 3.19 2.87 2.50 1.47 1.57
Return on common shareholders' equity:
Reported 20.7% 21.5% 20.4% 17.8% 9.8% 12.1%
Tangible 40.8 34.0 30.1 25.6 15.4 17.5
Return on assets:
Reported 1.81% 1.80% 1.74% 1.72% 1.14% 1.29%
Tangible 2.12 2.03 1.96 1.95 1.37 1.49
Book value per common share at year end (b):
Reported $ 17.26 $ 14.39 $ 13.43 $ 13.09 $ 12.53 $ 12.14
Tangible 10.08 9.60 9.52 10.15 9.57 9.20
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS EXCLUDING CERTAIN ITEMS IN 1994 AND 1993 (c)
Net income applicable to common stock $ 861 $ 750 $ 689 $ 652 $ 593 $ 456
Earnings per common share - diluted 3.25 2.88 2.58 2.25 2.00 1.57
Return on common shareholders' equity:
Reported 20.7% 21.5% 20.4% 17.8% 16.0% 13.7%
Tangible (a) 40.8 34.0 30.1 25.6 23.7 19.8
Return on assets:
Reported 1.81% 1.80% 1.74% 1.72% 1.71% 1.46%
Tangible (a) 2.12 2.03 1.96 1.95 1.96 1.66
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED KEY DATA
Fee revenue as a percentage of total revenue (FTE) 66% 62% 58% 52% 52% 52%
Efficiency ratio excluding amortization of intangibles (d) 63 62 60 60 62 61
Dividends paid per common share $ 1.41 $ 1.29 $ 1.18 $ 1.00 $ .79 $ .51
Dividends paid on common stock $ 365 $ 330 $ 310 $ 288 $ 194 $ 121
Closing common stock price per share $ 68.75 $ 60.63 $ 35.50 $ 26.88 $ 15.31 $ 17.69
Market capitalization $ 18,007 $ 15,386 $ 9,134 $ 7,374 $ 4,507 $ 5,070
Average common shares and equivalents
outstanding - diluted (in thousands) 265,207 260,829 266,591 290,401 298,405 294,437
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $ 30,411 $ 27,823 $ 27,233 $ 27,321 $ 25,097 $ 21,763
Interest-earning assets 37,907 34,777 34,944 33,761 32,282 30,657
Total assets 48,071 42,942 42,013 40,097 38,106 35,635
Total tangible assets (a) 46,267 41,891 41,177 39,263 37,234 34,933
Deposits 33,546 30,459 30,838 27,951 27,248 26,541
Notes and debentures 2,992 2,712 2,038 1,670 1,768 1,991
Trust-preferred securities 991 990 32 - - -
Common shareholders' equity 4,165 3,494 3,381 3,671 3,691 3,323
Tangible common shareholders' equity (a) 2,382 2,443 2,545 2,837 2,819 2,621
Total shareholders' equity 4,190 3,700 3,810 4,106 4,277 3,964
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT YEAR END
Common shareholders' equity to assets:
Reported 8.90% 8.13% 8.11% 8.83% 9.54% 9.57%
Tangible (b) 5.41 5.58 5.89 6.99 7.46 7.30
Tier I capital 6.53 7.77 8.38 8.14 9.48 9.70
Total (Tier I plus Tier II) capital 10.80 12.73 13.58 11.29 12.90 13.22
Leverage capital 6.73 8.02 8.31 7.80 8.67 9.00
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) See page 27 for the definition of tangible operating results.
(b) See page 43 for the definition of this ratio.
(c) Results for 1994 exclude a $130 million after-tax securities lending
charge, $79 million after tax of Dreyfus merger-related expense, $10
million after tax of losses on the disposition of securities available for
sale previously owned by Dreyfus and $16 million of preferred stock
dividends recorded in connection with the redemption of the Series H
preferred stock. Results for 1993 exclude $112 million after tax of
merger-related expense and $53 million after tax of gains on the sale of
securities related to the acquisition of The Boston Company.
(d) See page 40 for the definition of this ratio.
NOTE: THROUGHOUT THIS REPORT, RATIOS ARE BASED ON UNROUNDED NUMBERS.
21
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT FINANCIAL EVENTS IN 1998
- --------------------------------------------------------------------------------
ACQUISITIONS
- ------------
Acquisition of United Bankshares, Inc.
In February 1998, the Corporation acquired United Bankshares, Inc. and its
principal subsidiary, United National Bank, a full-service commercial bank
serving south Florida. United National Bank, renamed Mellon United National
Bank, is a nationally chartered bank with headquarters in Miami and 12 regional
banking offices in Dade, Broward and Palm Beach counties. Mellon United services
small and midsize businesses, lawyers, accountants, real estate developers and
other professionals. In addition, it also provides both private banking services
and trade financing. At the time of acquisition, it had approximately $850
million in assets, including approximately $425 million in loans and lease
finance assets. The Corporation acquired Mellon United National Bank with a
combination of approximately 5 million shares of common stock, reissued from
treasury stock acquired in 1997, and cash.
Acquisition of 1st Business Corporation
In February 1998, the Corporation acquired 1st Business Corporation and its
principal subsidiary, 1st Business Bank, a full-service commercial bank serving
midsize business firms in southern California. 1st Business Bank, renamed Mellon
1st Business Bank, is a state-chartered bank headquartered in Los Angeles. It
serves business customers in the manufacturing, wholesale trade and service
industries. It also provides personal banking services to professionals,
entrepreneurs, and owners and officers of its business clients. At the time of
acquisition, it had approximately $1.2 billion in assets, including
approximately $550 million in loans and lease finance assets. The Corporation
purchased privately owned 1st Business Corporation with cash.
Acquisition of Founders Asset Management, LLC
In April 1998, the Corporation acquired Founders Asset Management, LLC
(Founders), a manager of growth-oriented no-load equity mutual funds and other
investment portfolios. Founders offers 11 no-load mutual funds, including nine
equity funds. At the time of acquisition, Founders had approximately $7 billion
of assets under management. Founders was purchased with cash and is operating as
a separate subsidiary, headquartered in Denver.
Acquisition of Clair Odell Group
In June 1998, the Corporation acquired Clair Odell Group, a full-service
property and casualty insurance agency headquartered in Flourtown, Pa. With
approximately $70 million in annual premiums placed, Clair Odell was one of the
largest independent agencies in eastern Pennsylvania and the 75th largest
privately owned agency in the United States based on revenues. In addition to
property and casualty lines, Clair Odell provides life and health, employee
benefits, surety, commercial, bonding and risk management insurance services.
Clair Odell is operating as a separate subsidiary of the Corporation.
Purchase of majority interest in Newton Management Limited
In October 1998, the Corporation acquired 75% of Newton Management Limited
(Newton), with Newton management and staff retaining the remaining 25% interest
in the company, either directly or through options. Newton is a leading
U.K.-based investment manager that provides investment management services to
institutional, private and retail clients. At the time of acquisition, Newton
had approximately $20 billion of assets under management. The Corporation
purchased its majority interest in Newton with cash and loan notes.
22
<PAGE> 9
SIGNIFICANT FINANCIAL EVENTS IN 1998 (CONTINUED)
- --------------------------------------------------------------------------------
STRATEGIC ALLIANCES AND OTHER INVESTMENTS
- -----------------------------------------
Strategic alliance with Brascan Brazil
In February 1998, the Corporation and Brascan Brazil entered into a strategic
alliance through which the Corporation acquired 40% of Banco Brascan, a Rio de
Janeiro-based investment bank. In addition, the Corporation and Banco Brascan
formed Dreyfus Brascan Asset Management (DBAM), an investment management joint
venture. An affiliate of Brascan Brazil, Banco Brascan provides corporate and
institutional financial services including corporate finance, capital markets,
foreign exchange, merger and acquisition financing and advisory, and securities
trading and brokerage. DBAM is providing Brazilian and U.S. equity and
fixed-income products and asset management services to the Brazilian market.
Purchase of minority interest in Prime Advisors, Inc.
In June 1998, the Corporation purchased a minority interest in Prime Advisors,
Inc. (Prime). Prime, headquartered in Kirkland, Wash., is a market leader in the
specialized property/casualty insurance asset management industry. Prime's
principal focus has been on developing proprietary investment capabilities for
property and casualty insurance companies.
Strategic alliance with UOB Asset Management Ltd.
In August 1998, the Corporation announced a strategic alliance with UOB Asset
Management Ltd., a subsidiary of United Overseas Bank Group, a leading financial
institution in southeast Asia. The alliance will provide investment products and
services to Singapore's asset management marketplace and is based on a preferred
relationship, with each party acting as the other's preferred partner in the
development, marketing, management and distribution of asset management products
in Singapore and southeast Asia, as well as in the United States.
Joint marketing and servicing alliance with ABN AMRO Bank N.V.
In November 1998, the Corporation announced that it had reached an agreement to
form a joint marketing and servicing alliance with ABN AMRO Bank N.V. (ABN
AMRO). ABN AMRO is headquartered in Amsterdam, the Netherlands, and at the time
of the announcement had total assets under custody of more than $550 billion
which it services via an international network of 1,900 offices in 71 countries.
Under the name ABN AMRO Mellon Global Securities Services, the new alliance will
focus initially on financial institutions seeking both global custody and
value-added products and services, such as compliance monitoring, investment
accounting, performance measurement and analytics. These services will be
marketed worldwide with the exception of the United States and the markets where
the Corporation has existing alliances with other parties.
Frank Russell Company joint venture
In December 1998, the Corporation and Frank Russell Company of Tacoma, Wash.,
formed the Russell/Mellon Analytical Services Inc. joint venture. This joint
venture provides performance measurement and portfolio analysis on a global
basis.
OTHER
- -----
Common dividend increased 9%
In the second quarter of 1998, the Corporation increased its quarterly common
dividend by 9% to $.36 per common share. This was the seventh quarterly common
dividend increase since the beginning of 1994, resulting in a total common
dividend per share increase of 184%.
23
<PAGE> 10
SIGNIFICANT FINANCIAL EVENTS IN 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Sale of merchant card processing business
In December 1998, the Corporation sold its merchant card processing business to
Paymentech, Inc. The Corporation and Paymentech also agreed to an exclusive
marketing and referral agreement under which the parties will market
Paymentech's processing services to the Corporation's merchant customers through
the Corporation's network of nearly 450 retail offices and cash management and
corporate banking groups. A gain of $35 million was recorded on the sale.
Pending sale of mortgage, credit card and network services businesses
Enhancement of common stock repurchase program
In January 1999, the Corporation announced that it plans to sell its mortgage
business, credit card business and network services transaction processing unit
as part of an initiative to sharpen its strategic focus on businesses with the
highest return potential. These businesses employ approximately 2,300 staff and
generated approximately $470 million of fee and net interest revenue in 1998.
The combined impact of the divestitures is expected to reduce the Corporation's
balance sheet by more than $4 billion, of which approximately $3.5 billion are
loans and mortgage servicing rights. The divestitures will have a favorable
impact on the Corporation's capital ratios as a result of the lower asset
levels. For an analysis of the financial impact of these divestitures, see the
"Pending/Completed Divestitures" disclosure in the "Business sectors" section on
pages 28 through 31. The Corporation will retain its jumbo mortgage loan
business conducted nationwide through The Boston Company. Excluding any gains or
divestiture charges on the sales, the future impact of the sales on the
Corporation's earnings and results of operations is not expected to be material.
Subject to any necessary regulatory approvals, the transactions are expected to
be completed by the end of the third quarter of 1999.
Proceeds from the three sales will be invested in the Corporation's remaining
businesses, used for acquisitions or to repurchase common stock. In a related
action, the Corporation's board of directors approved an enhancement to an
existing common share repurchase authorization by increasing the number of
shares available for repurchase to 10 million shares of the Corporation's common
stock. Any such repurchases will be used for general corporate purposes.
24
<PAGE> 11
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW OF 1998 RESULTS
- --------------------------------------------------------------------------------
The Corporation reported record diluted earnings per common share of $3.25 in
1998, an increase of 13%, compared with diluted earnings per common share of
$2.88 in 1997. Net income applicable to common stock was $861 million in 1998,
an increase of 15%, compared with $750 million in 1997. Diluted tangible
earnings per common share in 1998 were $3.66, an increase of 15%, compared with
$3.19 in 1997. Tangible net income applicable to common stock was $972 million
in 1998, an increase of 17%, compared with $832 million in 1997.
Return on common shareholders' equity and return on assets were 20.7% and 1.81%,
respectively, in 1998, compared with 21.5% and 1.80%, respectively, in 1997.
Return on tangible common shareholders' equity and return on tangible assets
were 40.8% and 2.12%, respectively, in 1998, compared with 34.0% and 2.03%,
respectively, in 1997.
The Corporation's 1998 results reflected continued business growth, the
favorable impact of acquisitions and a significant reduction in credit quality
expense, compared with 1997.
Fee revenue was 66% of total revenue, on a fully taxable equivalent basis, in
1998 compared with 62% in 1997. Fee revenue increased to $2,921 million, up $503
million from $2,418 million in 1997. Excluding the impact from acquisitions and
one-time gains from the sales of the merchant card processing business in 1998
and the corporate trust business in 1997, total fee revenue increased 12% in
1998 compared with 1997. This increase was primarily attributable to higher
trust and investment fees, foreign exchange revenue and other fee revenue. Trust
and investment fees increased 13% in 1998 compared with 1997, excluding the
impact of acquisitions.
Net interest revenue, on a fully taxable equivalent basis, was $1,499 million,
up $24 million from $1,475 million in 1997. This increase primarily resulted
from the favorable impact of acquisitions, net of funding costs, as well as a
higher level of interest-earning assets. Partially offsetting these increases
were the impacts of the December 1997 transfer of $231 million of
CornerStone(sm) credit card loans into an accelerated resolution portfolio and
the February 1998 Series K preferred stock redemption.
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $2,940 million in 1998, up $431 million from $2,509
million in 1997. This increase primarily resulted from the impact of
acquisitions, business growth and higher amortization of mortgage servicing
assets. Excluding the effect of acquisitions and the increase in the
amortization of mortgage servicing assets and purchased credit card
relationships, operating expense before trust-preferred securities expense and
net revenue from acquired property increased approximately 3% compared with
1997.
Credit quality expense was $54 million in 1998, a decrease of $75 million
compared with $129 million in 1997. This decrease primarily resulted from lower
credit card net credit losses. Net credit losses were $63 million in 1998, down
$138 million compared with 1997, reflecting a $132 million decrease in credit
card net credit losses. The Corporation's effective tax rate was 35.1% in 1998
compared with 34.1% in 1997.
Nonperforming assets totaled $140 million at December 31, 1998, a decrease of
$41 million from $181 million at December 31, 1997. This decrease primarily
resulted from lower nonperforming commercial real estate loans offset, in part,
by a higher level of nonperforming commercial loans. The Corporation's ratio of
nonperforming assets to total loans and net acquired property was .44% at
December 31, 1998, the lowest quarter-end ratio in the Corporation's history,
compared with .62% at December 31, 1997. This ratio has been lower than 1% for
18 consecutive quarters.
The Corporation's ratio of common shareholders' equity to assets was 8.90% at
December 31, 1998. The Tier I, Total and Leverage capital ratios were 6.53%,
10.80% and 6.73%, respectively, at December 31, 1998, in excess of the ratios
required to maintain well-capitalized status.
25
<PAGE> 12
OVERVIEW OF 1998 RESULTS (CONTINUED)
- --------------------------------------------------------------------------------
1997 compared with 1996
The Corporation reported 1997 diluted earnings per common share of $2.88, an
increase of 12%, compared with diluted earnings per common share of $2.58 in
1996. Net income applicable to common stock was $750 million in 1997, an
increase of 9%, compared with $689 million in 1996. Diluted tangible earnings
per common share in 1997 were $3.19, an increase of 11%, compared with $2.87 in
1996. Tangible net income applicable to common stock was $832 million for 1997,
an increase of 9%, compared with $765 million in 1996.
Fee revenue increased to $2,418 million, up $399 million from $2,019 million in
1996. This increase was primarily attributable to higher trust and investment
fees resulting, in part, from the Buck Consultants, Inc. (Buck) acquisition, new
business and an increase in the market value of assets under management. Net
interest revenue, on a fully taxable equivalent basis, totaled $1,475 million,
down $13 million from $1,488 million in 1996. This reduction primarily resulted
from the sale of the AAA credit card portfolio in 1996, funding costs related to
the repurchase of common stock, the insurance premium finance securitization and
lower loan fees. This decrease was primarily offset by the full-year impact of
the lease financing acquisitions and the use of proceeds from the $1 billion of
trust-preferred securities.
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $2,509 million in 1997, up $304 million from $2,205
million in 1996. The increase primarily resulted from the Buck and lease
financing acquisitions as well as business growth. Credit quality expense was
$129 million in 1997, compared with $142 million in 1996. The decrease resulted
from a lower provision for credit losses and higher gains on the sale of other
real estate owned (OREO). Net credit losses were $201 million in 1997, up $77
million compared with 1996. The higher level of credit losses primarily resulted
from $65 million of credit losses recorded on the transfer of CornerStone(sm)
credit card loans to an accelerated resolution portfolio in December 1997. The
Corporation's effective tax rate was 34.1% in 1997 compared with 36.3% in 1996.
The lower rate resulted from a fourth quarter 1997 realignment of corporate
entities.
26
<PAGE> 13
TANGIBLE OPERATING RESULTS
- --------------------------------------------------------------------------------
Except for the merger with Dreyfus in 1994, which was accounted for under the
"pooling of interests" method, the Corporation has been required to account for
business combinations under the "purchase" method of accounting. The purchase
method results in the recording of goodwill and other identified intangibles
that are amortized as noncash charges in future years into operating expense.
The pooling of interests method does not result in the recording of goodwill or
intangibles. Since goodwill and intangible amortization expense does not result
in a cash expense, the economic value to shareholders under either accounting
method is essentially the same. Results, excluding the impact of intangibles,
are shown in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions
except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock $ 861 $ 750 $ 689
After-tax impact of amortization
of intangibles from purchase acquisitions 111 82 76
- ----------------------------------------------------------------------------------------------------------------------------------
Tangible net income applicable to common stock $ 972 $ 832 $ 765
Increase over prior year 17% 9% 6%
Tangible earnings per common share - diluted $ 3.66 $ 3.19 $ 2.87
Increase over prior year 15% 11% 15%
Average common equity $ 4,165 $ 3,494 $ 3,381
Less: Average goodwill and other identified intangibles,
net of tax benefit (a) (1,804) (1,051) (836)
Plus: Average minority interest (b) 21 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Average tangible common equity (a) $ 2,382 $ 2,443 $ 2,545
Return on tangible common equity (a) 40.8% 34.0% 30.1%
Average total assets $48,071 $42,942 $42,013
Average total tangible assets (a) $46,267 $41,891 $41,177
Return on tangible assets (a) 2.12% 2.03% 1.96%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Certain goodwill and other intangibles amortization is tax deductible.
Beginning at December 31, 1998, the amount of goodwill and other identified
intangibles subtracted from common equity and total assets is net of the
tax deductible portion. Prior period amounts and ratios were restated using
this methodology.
(b) Following the fourth quarter 1998 acquisition of a majority interest in
Newton Management Limited, the Corporation began to include minority
interest in the calculation of average tangible common equity. Minority
interest at December 31, 1998, totaled $60 million.
27
<PAGE> 14
BUSINESS SECTORS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consumer (a) Business (b)
(dollar amounts in millions, Fee Services Banking Fee Services Banking
averages in billions) 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net interest revenue $ 24 $ 21 $ 25 $ 787 $ 722 $ 720 $ 91 $ 104 $ 97 $ 413 $ 411 $ 381
Fee revenue 555 446 399 227 202 170 1,594 1,222 892 127 112 66
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 579 467 424 1,014 924 890 1,685 1,326 989 540 523 447
Credit quality expense
(revenue) - - - 7 5 (2) - - - 17 2 1
Operating expense:
Mortgage servicing
and credit card
amortization - - - - - - - - - - - -
Intangible amortization 13 3 3 72 51 52 28 25 30 22 21 11
Trust-preferred securities 2 - - 7 7 - - - - 31 30 -
Other 367 310 278 557 512 500 1,203 949 750 178 190 153
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating
expense 382 313 281 636 570 552 1,231 974 780 231 241 164
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 197 154 143 371 349 340 454 352 209 292 280 282
Income taxes 74 55 58 133 123 125 167 126 85 107 98 100
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $123 $ 99 $ 85 $ 238 $ 226 $ 215 $ 287 $ 226 $124 $ 185 $ 182 $ 182
- --------------------------------------------------------------------------------------------------------------------------- -------
Tangible net income (c) $134 $101 $ 88 $ 296 $ 263 $ 254 $ 313 $ 251 $149 $ 200 $ 197 $ 190
- -----------------------------------------------------------------------------------------------------------------------------------
Average assets $0.7 $0.4 $0.3 $ 21.7 $18.7 $18.9 $ 2.4 $ 1.6 $1.4 $17.7 $16.8 $14.9
Average common equity $0.2 $0.2 $0.2 $ 1.1 $ 0.9 $ 0.9 $ 0.8 $ 0.6 $0.5 $ 1.5 $ 1.3 $ 1.3
Average Tier I preferred
equity $ - $ - $ - $ 0.1 $ 0.1 $ - $ - $ - $ - $ 0.4 $ 0.4 $ -
Return on common
shareholders' equity 56% 53% 49% 22% 25% 23% 37% 37% 24% 13% 14% 14%
Return on assets NM NM NM 1.10% 1.21% 1.14% NM NM NM 1.04% 1.08% 1.22%
Pretax operating margin 34% 33% 34% 37% 38% 38% 27% 27% 21% 54% 54% 63%
Pretax operating margin
excluding amortization
of intangibles and trust-
preferred securities
expense 36% 33% 34% 44% 44% 44% 29% 28% 24% 64% 63% 66%
Efficiency ratio excluding
amortization of intangibles
and trust-preferred
securities expense 63% 66% 66% 55% 55% 56% 71% 72% 76% 33% 36% 34%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The return on common shareholders' equity for the Total Consumer sector was
28%, 30% and 27% for 1998, 1997 and 1996, respectively.
(b) The return on common shareholders' equity for the Total Business sector was
21%, 21% and 17% for 1998, 1997 and 1996, respectively.
(c) See page 27 for the definition of tangible operating results.
NM--Not meaningful.
Various lines of business that offer different products and services but share
similar basic and economic characteristics, have been combined into the four
major business sectors shown in the table above. The Corporation's "core"
business sectors are first identified by the nature of the service provided--fee
based services and banking services. These service groupings are further divided
by type of customer--consumer and business. In addition, the effect of
Pending/Completed Divestitures has been displayed separately, as discussed
further below. The table above and discussion that follows present the operating
results of the Corporation's major business sectors, analyzed on an internal
management reporting basis. Net interest revenue, fee revenue and income taxes
differ from the amounts shown in the Consolidated Income Statement because
amounts are presented on a taxable equivalent basis. The accounting policies of
the business sectors are the same as those described in note 1 of Notes to
Financial Statements. There is no intercompany profit or loss on intersector
activity. Capital is allocated quarterly using the federal regulatory guidelines
28
<PAGE> 15
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate
Total Pending/Completed Workout/Other Consolidated
Core Sectors Divestitures Corporate Activity Results
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,315 $1,258 $1,223 $ 129 $ 147 $ 203 $ 55 $ 70 $ 62 $1,499 $1,475 $1,488
2,503 1,982 1,527 371 391 441 70 60 67 2,944 2,433 2,035
- ------------------------------------------------------------------------------------------------------------------------------------
3,818 3,240 2,750 500 538 644 125 130 129 4,443 3,908 3,523
24 7 (1) 37 149 156 (7) (27) (13) 54 129 142
-- -- -- 179 118 107 -- -- -- 179 118 107
135 100 96 2 5 4 -- -- -- 137 105 100
40 37 -- -- -- -- 39 41 3 79 78 3
2,305 1,961 1,681 271 280 285 48 45 32 2,624 2,286 1,998
- ------------------------------------------------------------------------------------------------------------------------------------
2,480 2,098 1,777 452 403 396 87 86 35 3,019 2,587 2,208
- ------------------------------------------------------------------------------------------------------------------------------------
1,314 1,135 974 11 (14) 92 45 71 107 1,370 1,192 1,173
481 402 368 4 (6) 33 15 25 39 500 421 440
- ------------------------------------------------------------------------------------------------------------------------------------
$ 833 $ 733 $ 606 $ 7 $ (8) $ 59 $ 30 $ 46 $ 68 $ 870 $ 771 $ 733
- ------------------------------------------------------------------------------------------------------------------------------------
$ 943 $ 812 $ 681 $ 8 $ (5) $ 60 $ 30 $ 46 $ 68 $ 981 $ 853 $ 809
- ------------------------------------------------------------------------------------------------------------------------------------
$ 42.5 $ 37.5 $ 35.5 $ 4.2 $ 3.6 $ 4.0 $ 1.4 $ 1.8 $ 2.5 $ 48.1 $ 42.9 $ 42.0
$ 3.6 $ 3.0 $ 2.9 $ 0.3 $ 0.3 $ 0.3 $ 0.3 $ 0.2 $ 0.2 $ 4.2 $ 3.5 $ 3.4
$ 0.5 $ 0.5 $ -- $ -- $ -- $ -- $ 0.5 $ 0.7 $ 0.4 $ 1.0 $ 1.2 $ 0.4
24% 24% 21% NM NM NM NM NM NM 21% 22% 20%
1.96% 1.95% 1.70% NM NM NM NM NM NM 1.81% 1.80% 1.74%
34% 35% 35% NM NM NM NM NM NM 31% 31% 33%
39% 39% 39% NM NM NM NM NM NM 36% 35% 35%
60% 61% 61% NM NM NM NM NM NM 63% 62% 60%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
as a basis, coupled with management's judgment regarding the risks inherent in
the individual lines of business. The capital allocations may not be
representative of the capital levels that would be required if these sectors
were nonaffiliated business units.
Following the decision to sell the mortgage business, credit card business and
network services transaction processing unit, the Corporation's core business
sectors were restated to exclude these businesses. The results of the merchant
card processing business that was sold in December 1998 and the corporate trust
business that was sold in November 1997 were also removed from the core business
sectors. These five businesses' results are now reported as "Pending/Completed
Divestitures." In addition, the Real Estate Workout sector, which had previously
been reported separately, was combined with Other Corporate Activity. The Real
Estate Workout sector has diminished in significance as the level of
nonperforming assets has decreased. All prior periods' results have been
restated reflecting these actions.
Income before taxes for the Corporation's core sectors was $1,314 million in
1998, an increase of $179 million, or 16%, compared with $1,135 million in 1997.
This increase resulted from a $578 million increase in revenue, partially offset
by a $382 million increase in operating expense. Both increases were primarily
due to acquisitions and internal
29
<PAGE> 16
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
growth. In addition, credit quality expense increased $17 million in 1998,
primarily in the Business Banking sector. Return on common shareholders' equity
for the core sectors was 24% in both 1998 and 1997. Return on average assets was
1.96% in 1998, compared with 1.95% in 1997.
Consumer Fee Services
Consumer Fee Services includes private asset management services, retail mutual
funds and brokerage services. Income before taxes for the Consumer Fee Services
sector was $197 million in 1998, an increase of $43 million, or 28%, from 1997.
This increase was due to higher profits in private asset management and at
Dreyfus, due to business growth and the Dreyfus Brokerage Services, Inc. and
Founders acquisitions. This sector provided very strong returns, as the return
on common shareholders' equity was 56% in 1998, compared with 53% in 1997.
Consumer Banking
Consumer Banking includes consumer lending and deposit products, business
banking and jumbo residential mortgage lending. Income before taxes for 1998 was
$371 million, an increase of $22 million, or 6%, compared with 1997. Revenue
increased $90 million, compared with 1997, primarily as a result of the
favorable impact of the Mellon United National Bank and Mellon 1st Business Bank
acquisitions in February 1998. Operating expense increased $66 million, compared
with 1997, primarily due to the impact of the acquisitions. The return on common
shareholders' equity for this sector was 22% in 1998, compared with 25% in 1997.
Business Fee Services
Business Fee Services includes institutional asset and institutional mutual fund
management and administration, institutional trust and custody, securities
lending, foreign exchange, cash management, stock transfer, benefits consulting
and administrative services and services for defined contribution plans. Income
before taxes for this sector was $454 million in 1998, an increase of $102
million, or 29%, compared with 1997. Revenue increased $359 million primarily as
a result of higher mutual fund and institutional asset management fee revenue,
due in part to the Founders and Newton acquisitions, higher benefits consulting
revenue resulting from the full-year impact of the Buck acquisition, increased
foreign exchange revenue, increased institutional trust fees and increased cash
management revenue. Operating expense increased $257 million due to the
full-year impact of the Buck acquisition, the Founders and Newton acquisitions,
higher transaction volumes and technology investments. This sector provided
excellent returns as the return on common shareholders' equity for this sector
was 37% in both 1998 and 1997.
Business Banking
Business Banking 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 Business Banking sector was $292 million for 1998,
an increase of $12 million, or 4%, from 1997. Revenue increased $17 million,
primarily due to gains on the sale of equity securities, higher revenue from the
lease financing businesses and higher securities trading revenue. Credit quality
expense increased $15 million in 1998 primarily due to loan growth. Operating
expense decreased $10 million reflecting the impact of efficiency initiatives.
The return on common shareholders' equity for this sector was 13% in 1998,
compared with 14% in 1997.
Pending/Completed Divestitures
Pending/Completed Divestitures include: residential mortgage loan origination
and servicing that had previously been reported in Consumer Fee Services; credit
card and a portion of merchant card processing that had previously been reported
in Consumer Banking; and commercial mortgage loan origination and servicing,
network services transaction processing, a portion of merchant card processing
and corporate trust that had previously been reported in Business Fee Services.
Income before taxes was $11 million in 1998, an increase of $25 million compared
with 1997. This increase was primarily due to a $112 million decrease in credit
quality expense primarily due to lower credit card net credit
30
<PAGE> 17
BUSINESS SECTORS (CONTINUED)
- --------------------------------------------------------------------------------
losses. Partially offsetting this improvement was a $38 million decrease in
revenue and a $49 million increase in operating expense due in large part to
lower mortgage servicing fees and higher amortization of mortgage servicing
assets due to a higher level of mortgage prepayments in 1998.
Real Estate Workout/Other Corporate Activity
Real Estate Workout/Other Corporate Activity primarily includes business
activities that are not separate lines of business or have not been allocated,
for management reporting purposes, to the lines of business. The Real Estate
Workout/Other Corporate Activity pretax income was $45 million for 1998 and $71
million for 1997. Revenue for 1998 and 1997 primarily reflects earnings on the
use of proceeds from the trust-preferred securities and earnings on capital
above that required for the core sectors. Revenue in 1998 also includes the $35
million gain on the sale of the merchant card processing business and gains on
the sale of assets. Revenue in 1997 also includes the $43 million gain on the
sale of the corporate trust business. Credit quality revenue for 1998 and 1997
primarily includes gains on the sale of acquired real estate, which was lower in
1998. Credit quality revenue for 1997 also included $5 million of loan
recoveries from loans to lesser developed countries (LDCs). Operating expense
for 1998 and 1997 includes trust-preferred securities expense and various
nonrecurring charges for items not attributable to the operations of a business
sector. Average assets primarily include assets of certain support areas not
allocated to the major business sectors. Average common and Tier I preferred
equity represents capital in excess of that required for the core sectors.
1997 compared with 1996
Income before taxes for the Corporation's core sectors was $1,135 million in
1997, an increase of $161 million, or 16%, compared with $974 million in 1996.
This increase resulted from a $490 million increase in revenue due, in part, to
fee revenue from Buck, partially offset by a $321 million increase in operating
expense, primarily due to acquisitions. Return on common shareholders' equity
for the core sectors was 24% in 1997 and 21% in 1996. Return on average assets
was 1.95% in 1997, compared with 1.70% in 1996.
Income before taxes in Pending/Completed Divestitures was a loss of $14 million
in 1997 compared with pretax income of $92 million in 1996. This decrease was
due to a $106 million decrease in 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 card losses in the
portfolio. In addition, 1996 results include the $57 million gain on the sale of
the AAA portfolio.
Real Estate Workout/Other Corporate Activity pretax income was $71 million for
1997 and $107 million in 1996. Revenue for 1997 primarily reflects earnings on
the use of proceeds from the trust-preferred securities and earnings on capital
above that required for the core sectors, and the $43 million gain on the sale
of the corporate trust business. Revenue for 1996 reflects earnings on excess
capital not required in the lines of business, the $28 million gain on the
securitization of home equity loans and a $13 million gain on the partial sale
of an equity interest. Credit quality revenue in both years primarily reflects
gains on the sale of acquired real estate. Operating expense for 1997 includes
$41 million of trust-preferred securities expense and the expense related to the
upgrade of computer hardware. Operating expense for 1996 includes the $18
million charge resulting from the retirement enhancement program.
Geographic Information
Revenue from foreign domiciled customers was less than 7% of total revenue in
1998, less than 6% of total revenue in 1997, and less than 5% of total revenue
in 1996.
31
<PAGE> 18
<TABLE>
<CAPTION>
FEE REVENUE
- ----------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust and investment fee revenue:
Investment management fee revenue $ 915 $ 727 $ 627
Administration and custody fee revenue 540 476 367
Benefits consulting 223 108 -
Brokerage fees (a) 44 12 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and investment fee revenue 1,722 1,323 999
Cash management and deposit transaction charges 262 242 211
Mortgage servicing fees 200 213 180
Foreign currency and securities trading revenue 165 118 80
Credit card fees 92 97 120
Information services fees 44 42 50
Gain on sale of merchant card processing business 35 - -
Gain on sale of corporate trust business - 43 -
Gain on sale of credit card portfolio - - 57
Other (a) 401 340 322
- ----------------------------------------------------------------------------------------------------------------------------------
Total fee revenue $2,921 $2,418 $2,019
- ----------------------------------------------------------------------------------------------------------------------------------
Fee revenue as a percentage of
total revenue (FTE) 66% 62% 58%
Trust and investment fee revenue
as a percentage of total revenue (FTE) (a) 39% 34% 28%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Brokerage fees were previously reported in other fee revenue. Prior years
have been reclassified and related percentages have been recalculated.
Fee revenue increased $503 million, or 21%, in 1998, compared with 1997.
Excluding the fee revenue resulting from the full-year impact in 1998 of the
acquisitions of Buck in July 1997 and Dreyfus Brokerage Services in November
1997, the acquisitions of Founders in April 1998 and Newton in October 1998, and
the gains from the sales of the merchant card processing business in December
1998, and the corporate trust business in November 1997, fee revenue increased
12% compared with 1997. This increase was primarily attributable to higher trust
and investment fees, foreign exchange revenue and other fee revenue.
Total trust and investment fee revenue
The $399 million, or 30%, increase in trust and investment fee revenue in 1998,
compared with 1997, reflects a $188 million increase in investment management
revenue, a $64 million increase in administration and custody revenue and a $147
million increase in benefits consulting and brokerage fees. These increases
resulted from the acquisitions as well as new business, higher transaction
volumes and an increase in the market value of assets under management.
Excluding the impact of acquisitions, trust and investment fees increased 13%
compared with 1997.
32
<PAGE> 19
FEE REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Investment management fee revenue
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Managed mutual fund fees: (a)
Equity funds $180 $111 $ 83
Taxable money market funds:
Institutions 83 68 60
Individuals 35 35 37
Tax-exempt bond funds 95 96 100
Fixed-income funds 39 24 23
Tax-exempt money market funds 29 28 27
Nonproprietary 17 12 10
- ----------------------------------------------------------------------------------------------------------------------------------
Total managed mutual fund fees 478 374 340
Private asset 225 182 150
Institutional asset 212 171 137
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment management revenue $915 $727 $627
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of mutual fund fees waived and fund expense reimbursements of $40
million, $39 million and $37 million for 1998, 1997 and 1996, respectively.
The $188 million increase in investment management revenue resulted from a $104
million, or 28%, increase in mutual fund management revenue, a $43 million, or
24%, increase in private asset management revenue and a $41 million, or 24%,
increase in institutional asset management revenue. These increases primarily
resulted from new business, an increase in the market value of assets under
management and acquisitions.
Mutual fund management fees are based upon the average net assets of each fund.
Average net assets of proprietary funds managed at Dreyfus/Founders/Newton in
1998 were $108 billion, up $19 billion from $89 billion in 1997. This increase
primarily resulted from higher levels of average net assets of equity funds,
institutional taxable money market funds and fixed-income funds. Proprietary
equity funds averaged $31 billion in 1998, compared with $19 billion in 1997,
and had a period-end total of $40 billion at December 31, 1998. The
Corporation's average level of funds managed in 1998 was impacted by the April
1998 acquisition of Founders and the October 1998 acquisition of Newton.
Founders funds totaled approximately $7 billion at year-end 1998 and the Newton
unit trust funds totaled approximately $4 billion at year-end 1998.
Substantially all of the assets managed in these funds are equities. The
combined impact on average funds managed in 1998 from these acquisitions was
approximately $6 billion.
As shown in the table on the following page, the market value of assets under
management was $389 billion at December 31, 1998, an $84 billion increase from
$305 billion at December 31, 1997. This increase resulted from a general market
increase, net new business and the Newton and Founders acquisitions. The S&P 500
Index increased 26.7% in 1998 and the Lehman Brothers Long-Term Government Bond
Index increased 13.5%. At December 31, 1998, Newton managed approximately $22
billion of assets, consisting of $14 billion of institutional assets, $4 billion
of private assets and $4 billion of unit trusts discussed above.
33
<PAGE> 20
FEE REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER MANAGEMENT - DREYFUS (a)
December 31,
(in billions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mutual fund assets managed:
Equity funds $ 40 $ 22 $ 15
Taxable money market funds:
Institutions 40 33 27
Individuals 9 9 9
Tax-exempt bond funds 16 17 17
Fixed-income funds 7 5 5
Tax-exempt money market funds 8 7 7
Nonproprietary 21 11 7
- ----------------------------------------------------------------------------------------------------------------------------------
Total mutual fund assets managed 141 104 87
Private assets 47 36 28
Institutional assets (b) 201 165 141
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets
under management $389 $305 $256
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) "Dreyfus," as defined for purposes of this table, consists of five business
units: Dreyfus Funds, the retail mutual funds and unit trust funds area of
the Corporation which includes The Dreyfus Corporation, Founders Asset
Management, LLC and Newton Management Limited; Dreyfus Brokerage, which
includes Dreyfus Investment Services Corporation and Dreyfus Brokerage
Services; Dreyfus Retirement Services, the defined contribution business of
the Corporation; Dreyfus Institutional Investors, the investment management
business of the Corporation which includes The Boston Company Asset
Management, Mellon Capital Management, Mellon Equity Associates, Mellon
Bond Associates, Certus Asset Advisors, Franklin Portfolio Associates,
Pareto Partners, Prime Advisors, Inc. and Newton Management Limited; and
Mellon Private Asset Management, the high net worth personal trust and
custody business of the Corporation.
(b) Includes assets managed at Pareto Partners of $24 billion at December 31,
1998; $21 billion at December 31, 1997; and $20 billion at December 31,
1996. The Corporation has a 30% equity interest in Pareto Partners.
At December 31, 1998, the combined market values of $21 billion of
nonproprietary mutual funds and $201 billion of institutional assets managed, by
asset type, were as follows: equities, $93 billion; balanced, $39 billion; fixed
income, $37 billion; money market, $29 billion; and $24 billion at Pareto
Partners, primarily in currency overlay and global fixed-income products, for a
total of $222 billion.
Administration and custody fee revenue
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Administration and custody:
Institutional trust $388 $327 $247
Mutual fund 133 133 108
Private asset 19 16 12
- ----------------------------------------------------------------------------------------------------------------------------------
Total administration and
custody revenue $540 $476 $367
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 21
FEE REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Administration and custody fee revenue increased $64 million, or 13%, in 1998,
compared with 1997. This increase primarily resulted from higher institutional
trust fees resulting from the Buck acquisition, new business and higher
transaction volumes offset, in part, by the impact of the sale of the corporate
trust business in November 1997. Securities lending revenue, which is included
in institutional trust fees, increased $7 million in 1998 compared with the
prior year. Excluding the effects of the Buck acquisition and the sale of the
corporate trust business, institutional trust fees increased 7% compared with
1997.
The market value of assets under administration/custody, shown in the table
below, was $1,903 billion at December 31, 1998, an increase of $371 billion
compared with $1,532 billion at December 31, 1997. This increase resulted from a
general market increase and net new business.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE OF ASSETS UNDER ADMINISTRATION/CUSTODY
December 31,
(in billions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional trust $1,803 (a) $1,440 (a) $ 962
Mutual fund 62 60 57
Private asset 38 32 27
- ----------------------------------------------------------------------------------------------------------------------------------
Total market value of assets under
administration/custody $1,903 $1,532 $1,046
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $244 billion of assets at December 31, 1998, and $246 billion of
assets at December 31, 1997, administered by CIBC Mellon Global Securities
Services, a 50% owned joint venture.
Benefits consulting and brokerage fees
Benefits consulting fees increased $115 million in 1998, compared with 1997,
primarily resulting from the full-year impact of the Buck acquisition, as well
as new business and increased project activity with existing clients. The $32
million increase in brokerage fees primarily resulted from the full-year impact
of the acquisition of Dreyfus Brokerage Services.
Cash management and deposit transaction charges
The Corporation is a major national provider of a number of cash management
services, including remittance processing, collections and disbursements, check
processing and electronic services to assist corporate clients in the management
of their accounts receivable, accounts payable and treasury management
functions. The $20 million, or 8%, increase in cash management and deposit
transaction charges in 1998, compared with 1997, primarily resulted from higher
volumes of business in customer receivables, payables and treasury management
products.
Mortgage servicing fees
Mortgage servicing fees totaled $200 million in 1998, a decrease of $13 million,
or 6%, compared with 1997. This decrease primarily resulted from a higher level
of mortgage prepayments as well as from the sale of certain mortgage servicing
rights.
Foreign currency and securities trading revenue
The $47 million, or 39%, increase in foreign currency and securities trading
revenue in 1998, compared with 1997, was attributable to higher foreign exchange
revenue earned as a result of increased levels of customer activity, primarily
in the Corporation's global custody business, and market volatility. The
Corporation expects a potential reduction in the number of foreign exchange
transactions in 1999 as a result of the adoption by eleven member states of the
European Union of a common currency, the "euro," which replaces their sovereign
currencies. The impact of the euro is not expected to materially impact the
Corporation's results of operations.
35
<PAGE> 22
FEE REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
Credit card fees and gain on sale of merchant card processing business
Credit card fee revenue, which principally consists of interchange, cardholder
fees and servicing revenue from the securitized credit card receivables, totaled
$92 million in 1998, a decrease of $5 million compared to 1997. In mid-December
1998, the Corporation sold its merchant card processing business to Paymentech,
Inc. This business generated approximately $31 million of fee and net interest
revenue in 1998. The Corporation recorded a gain of $35 million on the sale.
Information services fees
Information services fees totaled $44 million in 1998, an increase of $2
million, or 4%, compared with 1997. This increase primarily resulted from higher
fee revenue related to third-party ATM transactions processed for network
services clients. The Corporation has entered into several joint ventures, the
most significant being ChaseMellon Shareholder Services and CIBC Mellon Trust
Company. Both are 50/50 stock transfer and shareholder services joint ventures.
The Corporation's joint ventures generated approximately $300 million of gross
fee revenue in 1998. The Corporation accounts for its interest in joint ventures
under the equity method of accounting with the net results primarily recorded as
information services fee revenue, rather than reporting the gross revenues and
expenses of each company.
Other fee revenue
Other fee revenue was $401 million in 1998, an increase of $61 million compared
with 1997. This increase primarily resulted from higher gains from the sale of
assets and equity securities as well as higher fees from many fee-based
services. Included in other fee revenue was approximately $25 million in both
1998 and 1997 of fees from the electronic filing of income tax returns. The
Corporation will no longer earn fee revenue from this service in 1999, as the
contract with a major income tax return preparer expired at the end of 1998.
Pending sale of mortgage, credit card and network services businesses
In January 1999, the Corporation announced plans to sell its mortgage business,
credit card business and network services transaction processing unit, discussed
further in the "Significant Financial Events in 1998" section on page 24. These
three units generated approximately $350 million of fee revenue in 1998, which
is included in mortgage servicing fees, credit card fees, information services
fees and other fee revenue discussed above. For an analysis of the financial
impact of these divestitures, see the "Pending/Completed Divestitures"
disclosure in the "Business sectors" section on pages 28 through 31.
1997 compared with 1996
Fee revenue increased to $2,418 million in 1997, up $399 million from $2,019
million in 1996. This increase was primarily attributable to higher trust and
investment fees resulting, in part, from the Buck acquisition, new business and
an increase in the market value of assets under management. In addition, foreign
currency and securities trading revenue, mortgage servicing fees, and cash
management and deposit transaction charges increased in 1997 compared with 1996,
partially offset by lower credit card and information services fees.
36
<PAGE> 23
NET INTEREST REVENUE
- --------------------------------------------------------------------------------
Net interest revenue includes the interest spread on interest-earning assets,
loan fees, cash receipts and interest reversals on nonperforming loans, and
revenue or expense on off-balance-sheet instruments used for interest rate risk
management purposes. Net interest revenue on a fully taxable equivalent basis
totaled $1,499 million in 1998, up $24 million from $1,475 million in the prior
year. The net interest margin was 3.96% in 1998, down 28 basis points compared
with 4.24% in 1997.
The increase in net interest revenue in 1998, compared with the prior year,
principally resulted from the favorable impacts of the acquisitions of Mellon
United National Bank, Mellon 1st Business Bank and Dreyfus Brokerage Services,
net of funding costs, as well as a higher level of interest-earning assets.
Partially offsetting these factors were the effects of the December 1997
transfer of $231 million of CornerStone(sm) credit card loans into an
accelerated resolution portfolio and the February 1998 Series K preferred stock
redemption. The decrease in the net interest margin primarily resulted from a
greater level of lower-yielding assets, the transfer of higher-yielding
CornerStone(sm) credit card loans into an accelerated resolution portfolio and
the Series K preferred stock redemption.
In January 1999, the Corporation announced plans to sell its mortgage business
and credit card business, discussed further in the "Significant financial events
in 1998" section on page 24. Loans outstanding at December 31, 1998, in these
businesses totaled approximately $2.4 billion. For an analysis of the financial
impact of these divestitures, see the "Pending/Completed Divestitures"
disclosure in the "Business sectors" section on pages 28 through 31.
1997 compared with 1996
Net interest revenue on a fully taxable equivalent basis totaled $1,475 million
in 1997, a decrease of $13 million from $1,488 million in 1996, while the net
interest margin decreased by 2 basis points to 4.24% in 1997. The reduction in
net interest revenue primarily resulted from the sale of the AAA credit card
portfolio in late 1996, funding costs related to the repurchase of common stock,
the insurance premium finance securitization in late 1996 and lower loan fees.
These factors were partially offset by the full-year impact of the lease
financing acquisitions and the use of proceeds from the $1 billion of
trust-preferred securities issued in late 1996.
37
<PAGE> 24
NET INTEREST REVENUE (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST YIELDS/RATES
- ------------------------------------------------------------------------------------------------------------------------------------
1998
AVERAGE
AVERAGE YIELDS/
(dollar amounts in millions) BALANCE INTEREST RATES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS Interest-earning assets:
Federal funds sold and securities under resale
agreements $ 786 $ 49 6.22%
Interest-bearing deposits with banks 649 33 5.19
Other money market investments 109 6 5.35
Trading account securities 251 16 6.24
Securities:
U.S. Treasury and agency securities (a) 5,473 365 6.67
Obligations of states and political subdivisions (a) 54 4 7.31
Other (a) 120 8 6.89
Loans, net of unearned discount (a) 30,399 2,419 7.96
------- ------
Total interest-earning assets 37,841 $2,900 7.67
Cash and due from banks 3,195
Premises and equipment 565
Customers' acceptance liability 120
Net acquired property 54
Other assets (a) 6,724
Reserve for credit losses (498)
---------------------------------------------------------------------------------------------------------
Total assets $48,001
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES, Interest-bearing liabilities:
TRUST-PREFERRED Deposits in domestic offices:
SECURITIES AND Demand $ 344 $ 7 1.95%
SHAREHOLDERS' Money market and other savings accounts 11,149 324 2.91
EQUITY Retail savings certificates 7,587 376 4.96
Other time deposits 2,109 117 5.56
Deposits in foreign offices 2,760 136 4.93
------- ------
Total interest-bearing deposits 23,949 960 4.01
Federal funds purchased and securities under
repurchase agreements 2,207 123 5.56
U.S. Treasury tax and loan demand notes 604 31 5.15
Term federal funds purchased 365 21 5.69
Short-term bank notes 295 16 5.64
Commercial paper 234 13 5.44
Other funds borrowed 363 33 9.08
Notes and debentures (with original maturities over one year) 2,992 204 6.84
------- ------
Total interest-bearing liabilities 31,009 $1,401 4.52
Total noninterest-bearing deposits 9,597
Acceptances outstanding 120
Other liabilities (a) 2,139
---------------------------------------------------------------------------------------------------------
Total liabilities 42,865
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991
---------------------------------------------------------------------------------------------------------
Shareholders' equity (a) 4,145
---------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and
shareholders' equity $48,001
- ------------------------------------------------------------------------------------------------------------------------------------
RATES Yield on total interest-earning assets 7.67%
Cost of funds supporting interest-earning assets 3.71
---------------------------------------------------------------------------------------------------------
Net interest income/margin:
Taxable equivalent basis $1,499 3.96%
Without taxable equivalent increments 1,491 3.94
---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts and yields exclude adjustments to fair
value required by FAS No. 115. Note: Interest and
yields were calculated on a taxable equivalent basis,
at tax rates approximating 35%, using dollar amounts
in thousands and actual number of days in the years,
and are before the effect of reserve requirements.
Loan fees, as well as nonaccrual loans and their
related income effect, have been included in the
calculation of average interest yields/rates.
38
<PAGE> 25
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
Average Average Average Average
Average yields/ Average yields/ Average yields/ Average yields/
balance Interest rates balance Interest rates balance Interest rates balance Interest rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 560 $ 30 5.29% $ 561 $ 30 5.41% $ 598 $ 34 5.64% $ 762 $ 30 3.98%
518 26 5.06 678 36 5.31 567 36 6.27 756 34 4.52
108 6 5.41 142 7 5.00 57 3 5.02 138 6 4.29
175 9 5.54 146 8 5.46 296 19 6.59 380 24 6.27
5,440 367 6.75 5,999 392 6.54 4,671 305 6.52 4,713 269 5.71
38 3 7.77 39 3 8.53 64 5 7.73 110 8 7.14
108 8 6.87 153 12 7.67 203 14 7.09 352 17 4.80
27,816 2,275 8.18 27,250 2,261 8.30 27,360 2,432 8.89 25,107 1,935 7.71
------ ----- ------- ------ ------- ------ ------- ------
34,763 $2,724 7.83 34,968 $2,749 7.86 33,816 $2,848 8.44 32,318 $2,323 7.19
2,844 2,782 2,337 2,337
587 560 555 537
271 252 229 165
68 73 80 113
4,905 3,865 3,703 3,273
(512) (472) (591) (613)
- ------------------------------------------------------------------------------------------------------------------------------------
$42,926 $42,028 $40,129 $38,130
- ------------------------------------------------------------------------------------------------------------------------------------
$ 232 $ 4 1.90% $ 830 $ 15 1.80% $ 1,916 $ 37 1.94% $ 2,143 $ 4 .21%
10,046 286 2.84 9,935 280 2.82 8,736 277 3.16 9,439 188 1.99
7,166 358 5.00 6,529 318 4.88 6,683 337 5.05 6,597 240 3.64
1,787 101 5.65 1,766 96 5.42 263 12 4.70 246 15 6.05
2,641 129 4.88 3,766 194 5.14 3,898 226 5.79 2,053 92 4.46
------- ----- ------- ----- ------- ------ ------- ------
21,872 878 4.02 22,826 903 3.95 21,496 889 4.13 20,478 539 2.63
1,390 77 5.51 1,765 94 5.32 2,128 125 5.87 1,777 76 4.29
468 25 5.33 286 15 5.17 400 23 5.69 564 22 3.93
599 34 5.71 675 38 5.58 644 39 5.98 176 8 4.58
144 8 5.83 502 29 5.84 815 50 6.20 29 2 5.68
69 4 5.41 217 12 5.42 226 13 5.87 155 7 4.33
423 34 8.09 279 27 9.89 395 34 8.68 494 38 7.80
2,712 189 6.97 2,038 143 7.04 1,670 117 7.04 1,768 110 6.20
------- ------ ------- ------ ------ ------ ------- ------
27,677 $1,249 4.51 28,588 $1,261 4.41 27,774 $1,290 4.65 25,441 $ 802 3.15
8,587 8,012 6,455 6,770
271 252 229 165
1,711 1,319 1,533 1,453
- -----------------------------------------------------------------------------------------------------------------------------------
38,246 38,171 35,991 33,829
990 32 - -
- ------------------------------------------------------------------------------------------------------------------------------------
3,690 3,825 4,138 4,301
- ------------------------------------------------------------------------------------------------------------------------------------
$42,926 $42,028 $40,129 $38,130
- ------------------------------------------------------------------------------------------------------------------------------------
7.83% 7.86% 8.44% 7.19%
3.59 3.60 3.82 2.48
- ------------------------------------------------------------------------------------------------------------------------------------
$1,475 4.24% $1,488 4.26% $1,558 4.62% $1,521 4.71%
1,467 4.22 1,478 4.23 1,548 4.58 1,508 4.67
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 26
OPERATING EXPENSE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Staff expense $1,456 $1,242 $1,055
Professional, legal and other purchased services 297 219 195
Net occupancy expense 237 225 205
Equipment expense 181 175 145
Amortization of mortgage servicing assets and
purchased credit card relationships 179 118 107
Business development 149 148 137
Amortization of goodwill and other intangible assets 137 105 100
Communications expense 107 102 96
Other expense 197 175 165
- ---------------------------------------------------------------------------------------------------------------------------------
Operating expense before trust-preferred securities
expense and net revenue from acquired property 2,940 2,509 2,205
Trust-preferred securities expense 79 78 3
Net revenue from acquired property (6) (19) (13)
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expense $3,013 $2,568 $2,195
- ---------------------------------------------------------------------------------------------------------------------------------
Average full-time equivalent staff 28,300 26,400 24,600
- ---------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio (a) 66% 64% 63%
Efficiency ratio excluding amortization of
goodwill and other intangible assets 63 62 60
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating expense before trust-preferred securities expense and net revenue
from acquired property, as a percentage of revenue, computed on a taxable
equivalent basis, excluding gains on the sale of securities.
Operating expense before trust-preferred securities expense and net revenue from
acquired property totaled $2,940 million in 1998, an increase of $431 million,
or 17%, compared with 1997. The increase primarily resulted from acquisitions
including a full-year impact of the 1997 Buck and Dreyfus Brokerage Services
acquisitions, higher amortization of mortgage servicing assets, higher
consulting expense and business growth. Excluding the effect of acquisitions and
the increase in the amortization of mortgage servicing assets and purchased
credit card relationships, operating expense before trust-preferred securities
expense and net revenue from acquired property increased approximately 3%.
Staff expense totaled $1,456 million in 1998, an increase of $214 million
compared with 1997. The increase primarily resulted from the acquisitions as
well as an increase in incentive expense. The higher level of incentive expense
primarily resulted from higher revenue in the fee-based businesses, as well as
higher incentive expense for plans that are linked to the Corporation's common
share price, which increased 13% in 1998.
Professional, legal and other purchased services totaled $297 million in 1998,
an increase of $78 million compared with 1997. This increase resulted from the
acquisitions and higher consulting expense related to strategic business and
reengineering initiatives.
The amortization of mortgage servicing assets and purchased credit card
relationships increased $61 million compared with 1997, primarily resulting from
an acceleration of amortization due to a higher level of mortgage prepayments.
Future declines in interest rates can potentially result in prepayments of the
mortgage loans underlying mortgage servicing rights (MSRs), which can
potentially decrease future net servicing revenue. Decreases in expected future
net servicing revenue can potentially result in accelerated amortization and
potential impairment of MSRs. The Corporation has entered into various
off-balance-sheet instruments to hedge the prepayment risk associated with its
mortgage servicing portfolio. See pages 53 and 54 for a further discussion of
these instruments.
40
<PAGE> 27
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
The sale of the Corporation's mortgage business, credit card business and
network services transaction processing unit will impact all expense categories,
particularly staff expense and amortization of mortgage servicing assets and
purchased credit card relationships. These businesses employ approximately 2,300
staff. For an analysis of the financial impact of these divestitures, see the
"Pending/Completed Divestitures" disclosure in the "Business sectors" section on
pages 28 through 31.
1997 compared with 1996
Operating expense before trust-preferred securities expense and net revenue from
acquired property was $2,509 million in 1997, an increase of $304 million, or
14%, compared with 1996. The increase primarily resulted from the Buck
acquisition as well as a full-year impact of the 1996 lease financing
acquisitions, business growth, reengineering initiatives and higher equipment
expense.
Year 2000 Project
In early 1996, the Corporation formed a year 2000 project team to identify
information technology and non-information technology systems that require
modification for the year 2000. A project plan has been developed with goals and
target dates. The Corporation's year 2000 project plan includes inventory,
assessment, remediation, system testing, enterprise testing, contingency
planning and internal certification. The Corporation's business areas are in
various stages of this project plan. The Corporation has completed approximately
90% of the remediation and system testing for internal mission critical
information technology systems. In late 1998, the Corporation began significant
enterprise testing (i.e., testing with customers, integration testing between
systems and testing with third-party vendors) of mission critical information
technology systems, which testing is expected to be completed by June 30, 1999.
The Corporation currently expects to have completed remediation and planned
testing of mission critical non-information technology systems by June 30, 1999.
The Corporation also currently expects to have substantially completed
remediation and planned testing of both information technology and
non-information technology systems that the Corporation has determined are of
high business value and priority (although not mission critical) by June 30,
1999.
The Corporation incurred expenses throughout 1996, 1997 and 1998 related to this
project and will continue to incur expenses in 1999. The Corporation currently
estimates that the costs related to inventory, assessment, remediation, system
testing, enterprise testing, contingency planning and internal certification
will be approximately $95 million. Approximately 15% of these costs were
incurred in 1996 and 1997, approximately 45% were incurred in 1998 and
approximately 40% are expected to be incurred in 1999. Expenditures in 1999 are
expected to relate primarily to enterprise testing, contingency planning and
internal certification. A significant portion of total year 2000 project
expenses is represented by existing staff that has been redeployed to this
project. The Corporation does not believe that the redeployment of existing
staff will have a material adverse effect on its business, results of operations
or financial position. Incremental expenses related to the year 2000 project are
not expected to materially impact operating results in any one period.
The impact of year 2000 issues on the Corporation will depend not only on
corrective actions that the Corporation takes, but also on the way in which year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from, the
Corporation, or whose financial condition or operational capability is important
to the Corporation. To reduce this exposure, the Corporation has identified, and
has an on-going process of contacting mission critical third-party vendors and
other significant third parties to determine their year 2000 plans and target
dates. Risks associated with third parties located outside the United States may
be higher insofar as it is generally believed that non-U.S. businesses may not
be addressing their year 2000 issues on as timely a basis as U.S. businesses.
Notwithstanding the Corporation's efforts, there can be no assurance that
mission critical third-party vendors or other significant third parties will
adequately address their year 2000 issues.
The Corporation is developing contingency plans to address risks associated with
year 2000 issues. These activities include remediation contingency plans, year
2000 business resumption contingency plans, and event management plans.
41
<PAGE> 28
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
Remediation contingency plans address the actions that may be taken if the
current approach to remediating a mission critical technology system is falling
behind schedule or may not be completed when required. Such plans principally
involve internal remediation or identifying alternate vendors. The Corporation
has substantially implemented its remediation contingency plans. Year 2000
business resumption contingency plans address year 2000 problems that occur,
notwithstanding the remediation efforts of the Corporation and third parties. As
a part of its year 2000 business resumption contingency planning, the
Corporation is enhancing its existing business resumption plans to reflect year
2000 issues and is developing plans designed to coordinate the efforts of its
personnel and resources in addressing any mission critical year 2000 problems
that become evident. In this regard, all existing business resumption plans
involving mission critical processes have been reviewed, and options for
addressing potential year 2000 problems have been identified. The Corporation
expects to continue reviewing, enhancing and validating such plans through
mid-1999. Event planning is intended to address year 2000 risks by actively
monitoring operations during the period of time around the turn of the century
with a view to identifying any year 2000 problems that occur and taking action
to manage and resolve such problems. These actions may include implementing
previously developed business resumption contingency plans. Event planning is in
progress and will continue throughout 1999 and the first quarter of 2000. There
can be no assurance that any contingency plans will fully mitigate any year 2000
failures, problems or disruptions. Furthermore, there may be certain mission
critical third parties, such as utilities, communication companies,
transportation companies or governmental entities, where alternative
arrangements or sources are unavailable or severely limited.
The Corporation's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address year 2000 issues. As a result, there
may be increases in the Corporation's problem loans and credit losses in future
years. In addition, the Corporation may be subject to increased risks as a
fiduciary to the extent that issuers of assets it manages or administers fail to
adequately address year 2000 issues and to increased liquidity risks to the
extent of deposit withdrawals or to the extent its lenders are unable to provide
the Corporation with funds due to year 2000 problems. It is not, however,
possible to quantify the potential impact of any such risks or losses at this
time.
Until the year 2000 event actually occurs and for a period of time thereafter,
there can be no assurance that there will be no problems related to year 2000.
The year 2000 technology challenge is an unprecedented event. If year 2000
issues are not adequately addressed by the Corporation and third parties, the
Corporation could face, among other things, business disruptions, operational
problems, financial losses, legal liability and similar risks, and the
Corporation's business, results of operations and financial position could be
materially adversely affected.
The foregoing year 2000 discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including, without limitation, anticipated costs, the dates by which
the Corporation expects to complete remediation and testing of systems and
contingency planning, and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third-party vendors and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to: the availability and cost of personnel trained in this area; the
ability to identify and convert all relevant systems; results of year 2000
testing; adequate resolution of year 2000 issues by governmental agencies,
businesses or other third parties that are service providers, suppliers,
borrowers or customers of the Corporation; unanticipated system costs; the need
to replace hardware; the adequacy of and ability to implement contingency plans;
and similar uncertainties. The forward-looking statements made in the foregoing
year 2000 discussion speak only as of the date on which such statements are
made, and the Corporation undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
The foregoing year 2000 discussion constitutes a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
42
<PAGE> 29
OPERATING EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
Euro Project
On January 1, 1999, eleven member states of the European Union adopted a common
currency, the "euro," with each state's national currency having a fixed
conversion rate with the euro. The adoption of the euro required the Corporation
to modify certain information technology and other systems and to redenominate
securities to accommodate euro-denominated transactions. Such modifications were
of particular importance to the Corporation's global custody, foreign exchange,
asset management, funds administration, global securities lending and cash
management businesses.
The Corporation completed all systems modifications and testing by year-end 1998
and successfully transitioned to the new monetary system. A majority of the euro
project expenses in 1998 were represented by existing staff that was redeployed
to this project. Incremental expenses were not material. The Corporation
currently expects a potential reduction in the number of foreign exchange
transactions as a result of the euro's replacement of the sovereign currencies.
INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes totaled $470 million in 1998, compared with $398
million in 1997 and $418 million in 1996. The Corporation's effective tax rate
for 1998 was 35.1% compared with 34.1% for 1997 and 36.3% for 1996. It is
currently anticipated that the effective tax rate will be approximately 37% in
1999.
CAPITAL
- --------------------------------------------------------------------------------
SELECTED CAPITAL DATA
<TABLE>
<CAPTION>
December 31,
(dollar amounts in millions, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shareholders' equity $ 4,521 $ 3,652 $ 3,456
Common shareholders' equity to assets ratio 8.90% 8.13% 8.11%
Tangible common shareholders' equity $ 2,641(a) $ 2,436 $ 2,450
Tangible common shareholders' equity to assets ratio (b) 5.41% 5.58% 5.89%
Total shareholders' equity $ 4,521 $ 3,845 $ 3,746
Total shareholders' equity to assets ratio 8.90% 8.56% 8.79%
Tier I capital ratio 6.53% 7.77% 8.38%
Total (Tier I plus Tier II) capital ratio 10.80% 12.73% 13.58%
Leverage capital ratio 6.73% 8.02% 8.31%
Book value per common share $ 17.26 $ 14.39 $ 13.43
Tangible book value per common share (c) $ 10.08 $ 9.60 $ 9.52
Closing common stock price $ 68.75 $ 60.63 $ 35.50
Market capitalization $ 18,007 $ 15,386 $ 9,134
Common shares outstanding (000) 261,923 253,786 257,294
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $60 million of minority interest, primarily related to Newton.
(b) Common shareholders' equity plus minority interest and less goodwill and
other intangibles recorded in connection with purchase acquisitions divided
by total assets less goodwill and other intangibles recorded in connection
with purchase acquisitions. Beginning at December 31, 1998, the amount of
goodwill and other intangibles subtracted from common shareholders' equity
and total assets is net of any tax deductible portion. Prior period amounts
and ratios were restated.
(c) Beginning at December 31, 1998, goodwill and other intangibles, net of any
tax deductible portion, is subtracted from common shareholders' equity.
Prior period amounts were restated.
43
<PAGE> 30
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation's capital management objectives are to maintain a strong capital
base--in excess of all regulatory guidelines--while also maximizing shareholder
value. The increase in shareholders' equity at December 31, 1998, compared with
December 31, 1997, primarily reflects earnings retention and the 5.1 million
common shares issued in the Mellon United National Bank acquisition in February
1998. These shares were reissued from treasury stock acquired in 1997. Partially
offsetting the increase in total shareholders' equity was the February 1998
redemption of the $200 million Series K preferred stock.
The Corporation repurchased approximately 500 thousand shares of its common
stock in 1998. Since the beginning of 1995, the Corporation has repurchased
nearly 60 million common shares prior to any reissuances, as well as warrants
for 9 million shares of common stock. At December 31, 1998, approximately 4.3
million shares remained available for repurchase under a 6 million share
repurchase program announced in July 1997. In January 1999, the board of
directors approved an enhancement to this repurchase authorization by increasing
the number of shares available for repurchase to 10 million shares of the
Corporation's common stock. Any such repurchases will be used for general
corporate purposes.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning shares outstanding 253.8 257.3
Shares issued for stock-based benefit plans and dividend reinvestment plan 3.5 5.1
Shares issued for Mellon United National Bank acquisition 5.1 -
Shares issued for Buck acquisition - 3.5
Shares repurchased (0.5)(a) (12.1)(b)
- -------------------------------------------------------------------------------------------------------------------------------
Ending shares outstanding 261.9 253.8
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase price of $27 million for an average share price of $53.53 per
share.
(b) Purchase price of $534 million for an average share price of $44.01 per
share.
In April 1998, the Corporation's shareholders approved an amendment to the
Corporation's Restated Articles of Incorporation to increase the authorized
number of shares of common stock from 400 million to 800 million shares.
Regulatory capital
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial results. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of the Corporation's and its
banking subsidiaries' assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification also are subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
For a banking institution to qualify as well capitalized, its Tier I, Total and
Leverage capital ratios must be at least 6%, 10% and 5%, respectively. All of
the Corporation's banking subsidiaries qualified as well capitalized at December
31, 1998 and 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.
44
<PAGE> 31
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS December 31,
(dollar amounts in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier I capital:
Common shareholders' equity (a) $ 4,475 $ 3,619
Qualifying preferred stock - 193
Trust-preferred securities 991 991
Minority interest 60 4
Goodwill and certain other intangibles (2,301) (1,366)
Other (2) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 3,223 3,441
Tier II capital 2,108 2,197
- ---------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $ 5,331 $ 5,638
- ---------------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets:
On-balance-sheet $34,229 $29,772
Off-balance-sheet 15,123 14,515
- ---------------------------------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $49,352 $44,287
- ---------------------------------------------------------------------------------------------------------------------------------
Average assets - leverage capital basis $47,917 $42,926
- ---------------------------------------------------------------------------------------------------------------------------------
Tier I capital ratio (b) 6.53% 7.77%
Total capital ratio (b) 10.80 12.73
Leverage capital ratio (b)(c) 6.73 8.02
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) In accordance with regulatory guidelines, the $46 million and $33 million
of unrealized gains, net of tax, on assets classified as available for sale
at December 31, 1998 and 1997, respectively, have been excluded.
(b) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8%
and 3+%, respectively.
(c) Tier I capital to average total assets (as defined for regulatory
purposes), net of the loan loss reserve, goodwill and certain other
intangibles.
Effective January 1, 1998, the regulatory agencies began to incorporate market
risk into the risk-based capital guidelines. Any bank or bank holding company
whose trading activity exceeds either: (1) 10% or more of its total assets, or
(2) $1 billion or greater, must measure its exposure to market risk using its
own internal value-at-risk model and hold capital in support of that exposure.
This requirement had minimal impact on the Corporation's risk-based capital
ratios.
The decrease in the Corporation's regulatory capital ratios, compared with
year-end 1997, reflects an increase in goodwill and other intangibles and a
higher level of risk-adjusted assets, resulting from acquisitions, as well as
the Series K preferred stock redemption. The Corporation's capital ratios will
be favorably impacted by the planned sale of the mortgage business and credit
card business and resultant $4 billion reduction in assets.
45
<PAGE> 32
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
RISK-BASED AND LEVERAGE CAPITAL RATIOS FOR LARGEST BANKING SUBSIDIARIES
Mellon Boston Safe
Bank, N.A. Deposit and Trust
Minimum Well- ----------------------- ----------------------
capital capitalized December 31, December 31,
(dollar amounts in millions) ratios (a) ratios (a) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amount:
Tier I capital $ 2,955 $ 2,646 $ 256 $ 355
Total qualifying capital 4,515 4,228 286 381
Risk-adjusted assets 42,482 39,319 2,395 2,093
Average assets-leverage
capital basis 40,435 37,555 4,632 4,266
Ratios:
Tier I capital ratio 4% 6% 6.96% 6.73% 10.70% 16.95%
Total capital ratio 8 10 10.63 10.75 11.96 18.20
Leverage capital ratio 3+ 5 7.31 7.05 5.53 8.31
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) As defined by the Federal Reserve Board, the FDIC and the Comptroller of
the Currency.
Acquisition-related intangibles
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>
- ----------------------------------------------------------------------------------------------------------------------------------
ACQUISITION-RELATED INTANGIBLES December 31,
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $2,221 $1,341 $1,110
Purchased core deposit intangibles 75 65 88
Other identified intangibles 17 19 40
- ----------------------------------------------------------------------------------------------------------------------------------
Total acquisition-related intangibles $2,313 $1,425 $1,238
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $880 million increase in goodwill from December 31, 1997, resulted from an
approximately $990 million increase related to acquisitions, partially offset by
amortization expense. Based upon the current level of acquisition-related
intangibles and the amortization schedule, the annual amortization for the years
1999 through 2003 is expected to be approximately $146 million, $134 million,
$126 million, $122 million and $118 million, respectively. For the full-year
1999, using common shares and equivalents outstanding at December 31, 1998, the
after-tax impact of the annual amortization is expected to be $119 million, or
approximately $.45 per share. The after-tax impact of the annual amortization
for the years 2000 through 2003 is expected to be approximately $111 million,
$105 million, $102 million and $99 million, respectively. At year-end 1998,
approximately $13 million of goodwill remained from acquisitions made by the
mortgage business in prior years. This goodwill, which is being amortized at a
rate of approximately $1 million annually, will be eliminated upon the sale of
the mortgage business.
46
<PAGE> 33
CAPITAL (CONTINUED)
- --------------------------------------------------------------------------------
Mortgage servicing assets and purchased credit card relationships
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSETS AND PURCHASED CREDIT CARD RELATIONSHIPS December 31,
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing assets:
Residential $1,046 $ 978 $704
Commercial 69 74 41
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets 1,115 1,052 745
Purchased credit card relationships 17 23 29
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing assets and
purchased credit card relationships $1,132 $1,075 $774
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation capitalized $436 million and $433 million in 1998 and 1997,
respectively, of servicing assets in connection with both mortgage servicing
portfolio purchases and loan originations. These capitalized mortgage servicing
assets were partially offset by deferred hedge results and amortization.
Mortgage servicing assets are amortized in proportion to estimated net servicing
income over the estimated life of the servicing portfolio. Net amortization
expense totaled $173 million, $112 million and $96 million in 1998, 1997 and
1996, respectively. The estimated fair value of capitalized mortgage servicing
assets was $1.2 billion at both December 31, 1998 and 1997. See note 1 of Notes
to Financial Statements for a further discussion of the Corporation's accounting
policy for mortgage servicing assets.
At December 31, 1998, the Corporation's total mortgage servicing portfolio was
$79 billion, composed of $64 billion of residential and $15 billion of
commercial servicing. At December 31, 1997, the total mortgage servicing
portfolio was $83 billion, composed of $66 billion of residential and $17
billion of commercial servicing.
The mortgage servicing assets and purchased credit card relationships discussed
above are expected to be sold as part of the planned sale of the Corporation's
mortgage business, including the mortgage servicing portfolio, and credit card
business. See the "Significant financial events in 1998" section on page 24 for
a further discussion of the planned sales.
CORPORATE RISK
- --------------------------------------------------------------------------------
RISK OVERVIEW
- --------------------------------------------------------------------------------
Risk identification and management are essential elements for the successful
management of the Corporation. The four primary risk exposures are liquidity
risk; market risk, which includes interest rate and currency risk; credit risk;
and fiduciary risk. Liquidity risk is the possibility that the Corporation will
not be able to fund present and future financial obligations. Market risk is the
possibility of lower net interest revenue or lower market values of assets and
liabilities as interest rates or exchange rates fluctuate. Credit risk is the
possibility of loss from a counterparty's failure to perform according to the
terms of a transaction. Fiduciary risk is the possibility of loss from actions
taken on behalf of clients. In addition, the Corporation is subject to other
risks, particularly in its fee-generating businesses, that are transaction
oriented. The Corporation controls and monitors these risks with policies,
procedures and various levels of managerial oversight. Because of the nature of
its businesses, external factors beyond the Corporation's control may, at times,
result in losses to the Corporation or its customers.
The Corporation is involved with various financial instruments that potentially
create risk. These instruments are both on and off the balance sheet.
On-balance-sheet instruments include securities, loans, mortgage servicing
rights, deposits and borrowings. Off-balance-sheet instruments include loan
commitments, standby letters of credit, interest rate floors, interest rate
swaps, foreign exchange contracts and interest rate futures and forwards.
47
<PAGE> 34
LIQUIDITY AND DIVIDENDS
- --------------------------------------------------------------------------------
The Finance Committee of the Corporation is responsible for liquidity
management. This committee of senior managers has a Liquidity Policy that covers
all assets and liabilities, as well as off-balance-sheet items that are
potential sources or uses of liquidity. The Corporation's liquidity management
objective is to maintain the ability to meet commitments to fund loans and to
purchase securities, as well as to repay deposits and other liabilities in
accordance with their terms, including during periods of market or financial
stress. The Corporation's overall approach to liquidity management is to ensure
that sources of liquidity are sufficient in amount and diversity to accommodate
changes in loan demand and core funding routinely without a material adverse
impact on net income. The Corporation uses several key primary and secondary
measures to assess the adequacy of the Corporation's liquidity position. The
balance sheet is managed to ensure that these measures are maintained within
approved limits. Each of these measures is monitored on a periodic basis giving
consideration to the Corporation's expected requirements for funds and
anticipated market conditions.
The Corporation's liquidity position is managed by maintaining adequate levels
of liquid assets, such as money market assets and securities available for sale.
Additional liquidity is available through the Corporation's ability to
participate or sell commercial loans and to securitize selected loan portfolios.
The parent Corporation also has a $300 million revolving credit agreement, with
approximately one and a half 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. The revolving credit facility
contains Tier I ratio, double leverage ratio and nonperforming asset covenants,
as discussed in note 11 of Notes to Financial Statements.
As shown in the consolidated statement of cash flows, cash and due from banks
decreased by $724 million during 1998 to $2,926 million at December 31, 1998.
The decrease resulted from $3,834 million used in investing activities,
primarily offset by $2,428 million provided by financing activities and $621
million provided by operating activities. Net cash used in investing activities
principally reflected an increase in securities available for sale and loan
growth. Net cash provided by financing activities primarily reflected an
increase in deposits, short-term borrowings and long-term borrowings.
In February 1998, the Corporation issued $350 million of subordinated debentures
at an interest rate of 6.375%, maturing in 2010, and $200 million of senior
notes at an interest rate of 6%, maturing in 2004. In November 1998, the
Corporation issued an additional $300 million of senior notes at an interest
rate of 5.75%, maturing in 2003. Prior to issuance, the Corporation hedged the
cost of the $350 million of subordinated debentures with interest rate
instruments that were terminated upon issuance of the debt. The effective
interest rate on the $350 million of corporate debt, including the effect of the
interest rate instruments, was 6.72%. The proceeds from these issuances were
used for general corporate purposes.
At December 31, 1998, the Corporation had a debt shelf registration statement on
file with the Securities and Exchange Commission on which up to $400 million of
debt may be issued. The issuance of any debt securities from this debt shelf
registration will depend on future market conditions, funding requirements and
other factors.
Mellon Bank, N.A. has an existing offering circular, under which it can issue up
to $6 billion of bank notes. Up to $3 billion of these notes, outstanding at any
one time, can have maturities of 7 to 270 days and up to $3 billion, in the
aggregate, can have maturities of more than 270 days to 15 years. At December
31, 1998, the bank had $499 million of notes with original maturities greater
than one year and $266 million of short-term notes outstanding under this
program. Proceeds from these notes are used for general funding purposes of the
bank.
Contractual maturities of the Corporation's long-term debt totaled $118 million
during 1998 and included $12 million of parent term debt. The remaining $106
million consisted primarily of medium-term bank notes. Contractual maturities of
long-term debt will total approximately $366 million in 1999, including $201
million related to parent term debt. The Corporation's and Mellon Bank, N.A.'s
senior and subordinated debt ratings are presented in the following table.
48
<PAGE> 35
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SENIOR AND SUBORDINATED DEBT RATINGS
AT DECEMBER 31, 1998 Standard & Poor's Moody's Duff & Phelps Fitch/IBCA
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mellon Bank Corporation:
Senior debt A+ A2 A+ A+
Subordinated debt A A3 A A
Mellon Bank, N.A.:
Senior debt AA- A1 AA- AA-
Subordinated debt A+ A2 A+ A+
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation increased its annual common stock dividend to $1.44 per common
share in the second quarter of 1998, an increase of 9% from the previous annual
rate. The Corporation has increased its common stock dividend seven times over
the last five years, resulting in a 184% increase during that period. Common
dividends of $365 million were paid on the outstanding shares of common stock
during 1998. The common dividend payout ratio was 42% in 1998 and 44% in 1997.
On a tangible earnings per common share basis, the dividend payout ratio was 38%
in 1998 and 40% in 1997. In addition, the Corporation paid $2 million in
preferred stock dividends in 1998 and recorded approximately $7 million of issue
costs as preferred stock dividends in connection with the February 1998
redemption of the $200 million, 8.20% Series K preferred stock, at a redemption
price of $25 per share plus accrued dividends.
Based upon shares outstanding at December 31, 1998, and the current quarterly
common stock dividend rate of $.36 per share, the annual dividend requirement in
1999 is expected to be approximately $380 million. The Corporation has reduced
its annual preferred stock and common stock dividend requirements by
approximately $86 million through the redemption of its preferred stocks and the
repurchase of common stock since 1994, net of issuances.
The parent Corporation's principal sources of cash are interest and dividends
from its subsidiaries. The ability of national and state member bank
subsidiaries to pay dividends to the parent Corporation is subject to certain
regulatory limitations, as discussed in note 22 of Notes to Financial
Statements. Under the more restrictive limitation, the Corporation's national
and state member bank subsidiaries can, without prior regulatory approval,
declare dividends subsequent to December 31, 1998, of approximately $810
million, less any dividends declared and plus or minus net profits or losses, as
defined, between January 1, 1999, and the date of any such dividend declaration.
To comply with regulatory guidelines, the Corporation and its subsidiary banks
continually evaluate the level of cash dividends in relation to their respective
operating income, capital needs, asset quality and overall financial condition.
<TABLE>
<CAPTION>
Balance sheet analysis
- ---------------------------------------------------------------------------------------------------------------------------------
(average balances in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Money market investments $ 1,544 $ 1,186 $ 1,381
Trading account securities 251 175 146
Securities 5,701 5,593 6,184
Loans 30,411 27,823 27,233
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 37,907 34,777 34,944
Noninterest-earning assets 10,662 8,677 7,541
Reserve for credit losses (498) (512) (472)
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $48,071 $42,942 $42,013
- ---------------------------------------------------------------------------------------------------------------------------------
FUNDS SUPPORTING TOTAL ASSETS:
Core funds $38,417 $34,618 $32,068
Wholesale and purchased funds 9,654 8,324 9,945
- ---------------------------------------------------------------------------------------------------------------------------------
Funds supporting total assets $48,071 $42,942 $42,013
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 36
LIQUIDITY AND DIVIDENDS (CONTINUED)
- --------------------------------------------------------------------------------
The $3.1 billion increase in the Corporation's average interest-earning assets
in 1998, compared with 1997, reflects a $2.6 billion increase in average loans
and a $358 million increase in average money market investments. Excluding the
effect of acquisitions, average loans in 1998 grew by approximately $1.4
billion, compared with 1997, primarily in wholesale lending and the residential
mortgage warehouse portfolio.
Core funds, which are considered to be the most stable sources of funding, are
defined principally as individual money market and other savings deposits,
savings certificates, demand deposits, shareholders' equity, notes and
debentures with original maturities over one year, 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
$4.6 billion in 1998 from the prior year, primarily reflecting higher levels of
loans and noninterest-earning assets. The increase in noninterest-earning assets
includes a higher level of goodwill resulting from acquisitions and higher
levels of cash and due from banks, receivables and mortgage servicing assets.
Average core funds increased $3.8 billion in 1998 compared with 1997, primarily
reflecting higher levels of deposits, due in part to the acquisitions. Core
funds averaged 95% of core assets in 1998, compared with 96% in 1997 and 93% in
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, short-term bank
notes, commercial paper, other time deposits and other funds borrowed. Average
wholesale and purchased funds increased $1.3 billion compared with 1997,
primarily reflecting an increase in federal funds purchased and securities under
repurchase agreements, and negotiable certificates of deposits. As a percentage
of total average assets, average wholesale and purchased funds were 20% in 1998,
compared with 19% in 1997 and 24% in 1996.
Upon completion of the planned sale of the mortgage business, credit card
business and network services transaction processing unit, it is anticipated
that the ratio of core funds to core assets will increase with a related
reduction in wholesale and purchased funds.
INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------------------------------------
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest revenue and on the net present
value of the Corporation's assets, liabilities and off-balance-sheet
instruments. Interest rate risk is measured using net interest margin simulation
and asset/liability net present value sensitivity analyses. Simulation tools
serve as the primary means to gauge interest rate exposure. The net present
value sensitivity analysis is the means by which the Corporation's long-term
interest rate exposure is evaluated. These analyses provide an understanding of
the range of potential impacts on net interest revenue and portfolio equity
caused by interest rate movements.
Modeling techniques are used to estimate the impact of changes in interest rates
on the net interest margin. Assumptions regarding the replacement of maturing
assets and liabilities are made to simulate the impact of future changes in
rates and/or changes in balance sheet composition. The effect of changes in
future interest rates on the mix of assets and liabilities may cause actual
results to differ from simulated results. In addition, certain financial
instruments provide customers a certain degree of choice. For instance,
customers may migrate from lower-interest deposit products to higher-interest
products. Also, customers may choose to refinance fixed-rate loans when interest
rates decrease. While the Corporation's simulation analysis considers these
factors, the extent to which customers utilize the ability to exercise their
financial decisions may cause actual results to differ significantly from the
simulation.
The Corporation has established the following guidelines for assuming interest
rate risk:
Net interest margin simulation--Given a +/- 200 basis point parallel shift in
interest rates, the estimated net interest revenue may not change by more
than 5% for a one-year period.
50
<PAGE> 37
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
Portfolio equity simulation--Portfolio equity is the net present value of the
Corporation's existing assets, liabilities and off-balance-sheet
instruments. Given a +/- 200 basis point parallel shift in interest rates,
portfolio equity may not change by more than 20% of total shareholders'
equity.
The measurement of interest rate risk is meaningful only when all related on-
and off-balance-sheet items are aggregated and the net positions are identified.
Financial instruments that the Corporation uses to manage interest rate
sensitivity include: money market assets, U.S. government and federal agency
securities, municipal securities, mortgage-backed securities, corporate bonds,
asset-backed securities, fixed-rate wholesale term funding, interest rate swaps,
caps and floors, financial futures and financial options. The table below
illustrates the simulation analysis of the impact of a 50 and 100 basis point
parallel shift upward or downward in interest rates on net interest revenue,
earnings per share and return on common shareholders' equity. Given the low
interest rate environment that existed in 1998, the impact of a 200 basis point
shift upward or downward in interest rates is not shown in the simulation
sensitivity analysis below. However, the impact of a +/- 200 basis point
interest rate movement would not exceed the guidelines discussed above. This
analysis was prepared using the levels of all interest-earning assets and
off-balance-sheet instruments used for interest rate risk management at December
31, 1998, assuming that the level of loan fees remains unchanged and excludes
the impact of interest receipts on nonperforming loans. The impact of the rate
movements was developed by simulating the effect of rates changing in a parallel
fashion over a six-month period from the December 31, 1998, levels and remaining
at those levels thereafter. This analysis excludes the effect that rate
movements can have on the value of mortgage servicing rights, discussed on pages
53 and 54.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
Movements in interest rates from December 31, 1998 rates
- ----------------------------------------------------------------------------------------------------------------------------------
Simulated impact in the next 12 months Increase Decrease
compared with December 31, 1998: ----------------------- -------------------------
+50 bp +100 bp -50 bp -100bp
----------------------- -------------------------
<S> <C> <C> <C> <C>
Net interest revenue increase (decrease) .2% .1% (.3)% (.7)%
Earnings per share increase (decrease) $.01 $.01 $(.01) $(.03)
Return on common equity increase (decrease) 3 bp 3 bp (7) bp (15) bp
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The anticipated impact on net interest revenue under the 50 and 100 basis point
increase/decrease scenarios showed a change of approximately 1% or less under
all scenarios at both December 31, 1998, as shown in the table above, and
December 31, 1997. The simulation analysis for both periods reflects the
Corporation's efforts to balance the repricing characteristics of its
interest-earning assets and supporting funds.
Managing interest rate risk with off-balance-sheet instruments
By policy, the Corporation will not implement any new off-balance-sheet activity
that, when aggregated into the total corporate interest rate exposure, would
cause the Corporation to exceed its established interest rate risk limits.
Interest rate swaps--including index amortizing swaps and callable swaps--caps
and floors, financial futures and financial options have been approved by the
board of directors for managing the overall corporate interest rate exposure.
The use of financial futures and option contracts is permitted provided that:
the transactions occur in a market with a size that ensures sufficient
liquidity; the contract is traded on an approved exchange or, in the case of
over-the-counter option contracts, is transacted with a credit-approved
counterparty; and the types of contracts have been authorized for use by the
board of directors and the Finance Committee. Usage of off-balance-sheet
instruments for speculative purposes is not permitted outside of those areas
designated as trading and controlled with specific authorizations and limits.
These instruments provide the Corporation flexibility in adjusting its interest
rate risk position without exposure to principal risk and funding requirements.
By using off-balance-sheet instruments to manage interest rate risk, the effect
is a smaller, more efficient balance sheet, with a lower wholesale funding
requirement and a higher return on assets and net interest margin with a
comparable level of net interest revenue and return on common shareholders'
51
<PAGE> 38
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
equity. The off-balance-sheet instruments used to manage the Corporation's
interest rate risk are shown in the table below. Additional information
regarding these contracts is presented in note 24 of Notes to Financial
Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO MANAGE INTEREST RATE RISK
Total at
Dec. 31,
(notional amounts in millions) 1999 2000 2001 2002 2003 2004+ 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating
generic swaps: (a)
Notional amount $ 20 $ - $ - $ - $ 450 $ 550 $1,020
Weighted average rate:
Receive 5.01% - - - 5.65% 6.67% 6.18%
Pay 5.56% - - - 5.32% 5.56% 5.45%
Receive fixed/pay floating
indexed amortizing swaps:
Notional value $1,497 $ 26 $ - $ - $ - $ - $1,523
Weighted average rate:
Receive 5.69% 6.60% - - - - 5.71%
Pay 5.31% 5.25% - - - - 5.30%
Receive fixed/pay floating
callable swaps: (b)
Notional value $ 500 $ 750 $ - $ - $ - $ - $1,250
Weighted average rate:
Receive 6.80% 5.59% - - - - 6.07%
Pay 5.33% 5.27% - - - - 5.29%
Pay fixed/receive floating
generic swaps: (a)
Notional amount $ 220 $ - $ - $ 5 $ - $ 10 $ 235
Weighted average rate:
Receive 5.27% - - 5.12% - 5.25% 5.27%
Pay 6.18% - - 6.59% - 6.64% 6.21%
Futures contracts (c) $1,860 $ - $ - $ - $ - $ - $1,860
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $4,097 $ 776 $ - $ 5 $ 450 $ 560 $5,888
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Generic swaps' notional amounts and lives are not based upon interest rate
indices.
(b) Callable swaps are generic swaps with a call option at the option of the
counterparty. Call options will be exercised or not exercised on the basis
of market interest rates. Expected maturity dates, based upon interest
rates at December 31, 1998, are shown in this table.
(c) Average rates are not meaningful for these products.
The table on the following page presents the gross notional amounts of
off-balance-sheet instruments used to manage interest rate risk, identified by
the underlying interest rate-sensitive instruments.
52
<PAGE> 39
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Instruments associated with deposits $3,435 $3,143
Instruments associated with other liabilities 971 705
Instruments associated with loans 1,482 1,602
- -----------------------------------------------------------------------------------------------------------------------------------
Total notional amount $5,888 $5,450
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation entered into these off-balance-sheet products to alter the
natural interest rate risk embedded in its assets and liabilities. The interest
received and interest paid are recorded on an accrual basis in interest revenue
and interest expense associated with the underlying assets and liabilities. The
net differential resulted in interest revenue of $20 million in 1998 and $23
million in 1997.
In 1998, the Corporation terminated interest rate swap contracts that were used
to lock in the cost of debt issued during 1998 as well as contracts used to
manage interest rate risk. These terminations resulted in a net deferred
unamortized loss of approximately $7 million. This net unamortized deferred
loss, combined with net unaccreted deferred gains from terminations in prior
years, resulted in a net unaccreted deferred gain of approximately $2 million,
carried as other liabilities, at December 31, 1998. The Corporation accreted
approximately $3 million and $4 million of these net deferred gains into net
interest revenue in 1998 and 1997, respectively.
The Corporation also has entered into off-balance-sheet contracts to manage the
prepayment risk associated with its residential mortgage servicing portfolio.
Mortgage servicing rights (MSRs) are interest rate sensitive due to the mortgage
borrower's option to prepay the mortgage loan. If mortgage interest rates
decrease, borrowers may prepay mortgage loans. Since mortgage loans underlie
MSRs, a decrease in interest rates and an actual (or probable) increase in
mortgage prepayments can shorten the expected life of the MSR and reduce its
value. Conversely, an increase in interest rates and an actual (or probable)
decrease in mortgage prepayments typically can lengthen the expected life of the
MSR and increase its value. As discussed in the "Significant financial events in
1998" section on page 24, the Corporation has announced plans to sell its
mortgage banking business in 1999. Therefore, the need to maintain hedges on
MSRs would be eliminated upon the completion of any sale.
To mitigate the potential prepayment risk of decreasing long-term interest
rates, higher-than-expected mortgage prepayments and a potential impairment to
MSRs, the Corporation primarily uses interest rate floor and interest rate swap
contracts. At December 31, 1998, the Corporation had approximately $10.2 billion
notional amount of interest rate floor agreements outstanding and $900 million
notional amount of interest rate swap agreements outstanding. In addition, the
Corporation had a $250 million notional amount interest rate spread lock
outstanding at December 31, 1998. These instruments are collectively structured
to gain value as interest rates decrease, therefore offsetting the potential
impairment of MSRs. Conversely, the value of these instruments will decrease as
interest rates or spreads increase. These instruments do not entirely eliminate
risk. Mortgage prepayment rates may not occur as expected. At December 31, 1997,
the Corporation had entered into approximately $3.1 billion notional amount of
primarily interest rate floor and interest rate swap agreements to manage
potential impairment of MSRs. The fair value of these instruments at year-end
1997 was $74 million, compared with $260 million at year-end 1998. The
significant increase in the level of these instruments in 1998 compared to 1997
reflects actions taken in 1998 to offset impairment in a declining interest rate
environment.
Gains/losses and cash settlements on these instruments are recorded as
adjustments to the carrying value of the MSRs. As of December 31, 1998, the
Corporation had approximately $169 million of cash received from gains on
terminations of hedges on MSRs and payments on existing hedges. This balance is
amortized over the estimated lives of the underlying mortgage servicing assets.
The table on the following page presents the gross notional amounts of
off-balance-sheet instruments used to manage prepayment risk associated with
MSRs.
53
<PAGE> 40
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF OFF-BALANCE-SHEET INSTRUMENTS USED TO
MANAGE PREPAYMENT RISK OF MSRS Total at
Dec. 31
(dollar amounts in millions) 1999 2000 2001 2002 2003 2004+ 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate floors (notional) $ - $ - $ - $ 700 $9,516 $ - $10,216
Weighted average strike rates - - - 5.49% 5.48% - 5.48%
Fair value $ 216
Receive fixed/pay floating interest
rate swaps (notional) $ - $ - $ - $ - $ - $ 900 $ 900
Weighted average rates:
Receive - - - - - 5.96% 5.96%
Pay - - - - - 5.44% 5.44%
Fair value $ 43
Interest rate spread lock (notional) $250 $ - $ - $ - $ - $ - $ 250
Fair value $ 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total notional amount $250 $ - $ - $ 700 $9,516 $ 900 $11,366
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the risk management instruments previously discussed, the
Corporation utilizes total return swaps to minimize the risk related to the
investment in start-up mutual funds. The Corporation had $147 million and $139
million notional amount of these swaps at December 31, 1998 and 1997,
respectively, with unrealized fair values of $8 million and $6 million,
respectively. The Corporation has also entered into contracts to hedge
anticipated transactions. The Corporation has entered into $365 million notional
amount of interest rate futures to lock in the value of certain loans that are
anticipated to be sold and/or securitized. There was a decrease in fair value of
approximately $4 million related to these anticipated transactions at December
31, 1998.
The estimated unrealized fair value of the Corporation's risk management
off-balance-sheet products at December 31, 1998, was a positive $322 million,
compared to a positive $111 million at December 31, 1997. This increase
primarily resulted from an increase in the fair value of interest rate floors
and swaps used to hedge MSRs, which resulted from a decrease in interest rates
during 1998. These values should be viewed in the context of the overall
financial structure of the Corporation, including the aggregate net position of
all on- and off-balance-sheet instruments. As more fully discussed in note 24 of
Notes to Financial Statements, credit risk associated with off-balance-sheet
instrument positions represents the aggregate replacement cost of contracts in a
gain position. At December 31, 1998 and 1997, the amount of credit exposure
associated with risk management instruments was $330 million and $114 million,
respectively.
Off-balance-sheet instruments used for trading activities
The Corporation offers off-balance-sheet financial instruments, primarily
foreign exchange contracts, currency and interest rate option contracts,
interest rate swaps, interest rate caps and floors, and interest rate forward
contracts, 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 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. Total credit
risk of contracts used for trading activities was $547 million at December 31,
1998, and $533 million at December 31, 1997. See note 24 of Notes to Financial
Statements on pages 99 through 101 for a description and table of
off-balance-sheet instruments used for trading activities.
54
<PAGE> 41
INTEREST RATE SENSITIVITY ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation has established trading limits and related monitoring procedures
to control trading risk. These limits are approved by the Executive Management
Group and reviewed by the Executive Committee of the board of directors. All
limits are monitored for compliance by departmental compliance staff and by the
Corporation's Internal Audit department. Exceptions to limits are reported to
the Executive Management Group.
The financial risk associated with trading positions is managed by assigning
position limits and stop loss guidance amounts to individual activities. The
Corporation uses a value-at-risk methodology to estimate the potential daily
amount that could be lost from adverse market movements. Value at risk measures
the volatility of the value of equity, which is the present value of future
expected cash flows of assets, liabilities and off-balance-sheet instruments.
Position limits are assigned to each family of financial instruments eligible
for trading such that the aggregate value at risk in these activities at any
point in time will not exceed a specified limit given a significant market
movement. The extent of market movement deemed to be significant is based upon
an analysis of the historical volatility of individual instruments that would
cover 95% of likely daily market movements. The loss analysis includes the
off-balance-sheet instruments used for trading activities as well as the
financial assets and liabilities that are classified as trading positions on the
balance sheet. Using the Corporation's methodology, which considers such factors
as changes in interest rates, spreads and options volatility, the aggregate
value at risk for trading activities, primarily related to foreign currency
contracts, was approximately $2 million at December 31, 1998, compared with
approximately $1 million at December 31, 1997. The average daily value at risk
for trading activities in 1998 was approximately $2 million.
Trading activities are generally limited to products and markets in which
liquidity is sufficient to allow positions to be closed quickly and without
adversely affecting market prices, which limits loss potential below that
assumed for a full-day adverse movement. Loss potential is further constrained
in that it is highly unusual for all trading areas to be exposed to maximum
limits at the same time and extremely rare for significant adverse market
movements to occur in all markets simultaneously. Stop loss guidance is used
when a certain threshold of loss is sustained. If stop loss guidance amounts are
approached, open positions may be liquidated to avoid further risk to earnings.
The use of stop loss guidance in tandem with position limits reduces the
likelihood that potential trading losses would reach imprudent levels in
relation to earnings capability.
Recently issued accounting standard
In June 1998, the Financial Accounting Standard Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." FAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
This statement is effective January 1, 2000, and need not be applied
retroactively to financial statements of prior periods. The statement may be
adopted early, as of the beginning of any quarter. The Corporation intends to
adopt this statement on January 1, 2000. The Corporation is currently evaluating
the impact that this statement will have on its financial position and results
of operations, but it is not expected to be material.
CREDIT RISK
- --------------------------------------------------------------------------------
Credit risk exists in financial instruments that are both on and off the balance
sheet. Financial instruments such as loans and leases are on the balance sheet.
Off-balance-sheet credit exposures include loan commitments, standby letters of
credit and the credit risk associated with financial instruments used for risk
management and trading activities.
The objective of the credit risk management process is to reduce the risk of
loss if a customer fails to perform according to the terms of a transaction.
Essential to this process are stringent underwriting of new loan commitments,
active monitoring of all loan portfolios and the early identification of
potential problems and their prompt resolution.
55
<PAGE> 42
CREDIT RISK (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation establishes internal ownership, responsibility and
accountability for all aspects of asset quality. Notwithstanding this process,
however, asset quality is dependent in large part upon local, national,
international and industry segment economic conditions that are beyond the
Corporation's control.
Management maintains a comprehensive centralized process through which the
Corporation establishes exposure limits, extends new loans, monitors credit
quality, actively manages problem credits and disposes of nonperforming assets.
The Corporation's board of directors is kept informed of credit activity through
a series of monthly and quarterly reports. To help ensure adherence to the
Corporation's credit policies, department credit officers report to both the
Corporation's chief risk and credit officer and the head of each respective
lending department. The responsibilities of these credit officers include all
aspects of the credit process except credit review, credit recovery and
aggregate portfolio management, which are centralized at the corporate level.
The Corporation manages both on- and off-balance-sheet credit risk by
maintaining a well-diversified credit portfolio and by adhering to its written
credit policies, which specify general underwriting criteria as well as
underwriting standards for specific industries and control credit exposure by
borrower, counterparty, degree of risk, industry and country. These measures are
adopted by the Corporate Risk Committee and are regularly updated to reflect the
committee's evaluation of developments in economic, political and operating
environments that could affect lending risks. The Corporation may adjust credit
exposure to individual industries or customers through loan sales, syndications,
participations and the use of master netting agreements when the Corporation has
more than one transaction outstanding with the same customer.
Except for certain well-defined loans made by the Consumer Banking sector,
primarily to consumers and small businesses, all credit extensions are approved
jointly by officers of the Credit Policy department and officers of the lending
departments. The number and level of officer approvals required are determined
by the dollar amount and risk characteristics of the credit extension. The
amount of collateral, if any, obtained by the Corporation upon the extension of
credit is based on industry practice as well as the credit assessment of the
customer. The type and amount of collateral vary, but the form generally
includes: accounts receivable; inventory; property, plant and equipment; other
assets; and/or income-producing commercial properties with appraised values that
exceed the contractual amount of the credit facilities by pre-approved ratios.
The Corporation continually assesses the quality of its consumer and commercial
credit facilities, and assigns a numerical quality rating to substantially all
extensions of credit in its commercial, real estate and international
portfolios. Lending officers have the primary responsibility for monitoring
their portfolios, identifying emerging problem loans and recommending changes in
quality ratings. To anticipate or detect problems that may result from economic
downturns or deteriorating conditions in certain markets, lending units and
credit management use processes designed to identify potential credit problems,
both for specific customers and for industries that could be affected by adverse
market or economic conditions. When signs of credit deterioration are detected,
credit recovery or other specialists become involved to minimize the
Corporation's exposure to potential future credit losses. The Credit Review
division provides an independent assessment of credit ratings, credit quality
and the credit management process.
For a further discussion of the credit risk associated with off-balance-sheet
financial instruments, see the discussions of the various financial instruments
in note 24 of Notes to Financial Statements.
56
<PAGE> 43
COMPOSITION OF LOAN PORTFOLIO
- --------------------------------------------------------------------------------
The loan portfolio increased $2,951 million in 1998, compared with 1997,
reflecting the Mellon 1st Business Bank and Mellon United National Bank
acquisitions as well as increases in middle market lending, other consumer
credit and business banking. At December 31, 1998, the composition of the loan
portfolio was 58% commercial and 42% consumer.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO December 31,
(in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial and financial $12,060 $10,826 $10,196 $10,969 $10,015
Commercial real estate 2,285 1,509 1,534 1,532 1,624
Consumer credit:
Consumer mortgage 8,871 8,505 7,772 8,960 8,680
Credit card 804 931 1,296 1,924 2,381
Other consumer credit 3,700 3,166 2,640 2,612 2,455
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer credit 13,375 12,602 11,708 13,496 13,516
Lease finance assets 2,819 2,639 2,533 830 815
- --------------------------------------------------------------------------------------------------------------------------------
Total domestic loans 30,539 27,576 25,971 26,827 25,970
INTERNATIONAL LOANS 1,554 1,566 1,422 863 763
- --------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned discount $32,093 $29,142 $27,393 $27,690 $26,733
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note:There were no concentrations of loans to borrowers engaged in similar
activities, other than those shown in this table, that exceeded 10% of
total loans at year end.
Commercial and financial
The domestic commercial and financial loan portfolio primarily consists of loans
to corporate borrowers in the manufacturing, service, energy, communications,
wholesale and retail trade, public utilities and financial services industries.
Numerous risk factors impact this portfolio, including industry-specific risks
such as the economy, new technology, labor rates and cyclicality, as well as
customer-specific factors such as cash flow, financial structure, operating
controls and asset quality. The Corporation diversifies risk within this
portfolio by closely monitoring industry concentrations and portfolios to ensure
that they do not exceed established lending guidelines. Diversification is
intended to limit the risk of loss from any single unexpected economic event or
trend. Total domestic commercial and financial loans increased by $1,234
million, or 11%, at December 31, 1998, compared to December 31, 1997, primarily
as a result of an increase in middle market lending and business banking as well
as the Mellon 1st Business Bank and Mellon United National Bank acquisitions.
Commercial and financial loans represented 38% of the total loan portfolio at
December 31, 1998, and 37% at December 31, 1997.
Commercial real estate
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC COMMERCIAL REAL ESTATE LOANS
December 31,
(in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial mortgage and construction loans $1,554 $ 942 $1,107 $1,085 $ 924
Owner-occupied and other loans 731 541 352 338 560
FDIC loss share loans - 26 75 109 140
- --------------------------------------------------------------------------------------------------------------------------------
Total $2,285 $1,509 $1,534 $1,532 $1,624
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation's $2,285 million domestic commercial real estate loan portfolio
consists of $1,554 million 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
57
<PAGE> 44
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
$731 million of owner-occupied and other loans. Owner-occupied and other loans
are loans that are secured by real estate; however, the commercial property is
not being relied upon as the primary source of repayment. Commercial real estate
loans carry many of the same customer and industry risks as the commercial and
financial portfolio, as well as contractor/subcontractor performance risk in the
case of commercial construction loans and cash flow risk based on project
economics. Domestic commercial real estate loans increased by $776 million, or
51%, at December 31, 1998, compared with December 31, 1997. This increase
primarily resulted from the Mellon United National Bank and Mellon 1st Business
Bank acquisitions as well as loan growth. Domestic commercial real estate loans
were 7% of total loans at December 31, 1998, up from 5% at December 31, 1997.
Consumer mortgage
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF DOMESTIC CONSUMER MORTGAGE LOANS
December 31,
(in millions) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jumbo residential mortgages $3,821 $3,613 $3,641 $3,869 $4,220
One- to four-family residential mortgages 2,446 2,514 1,768 2,259 1,914
Fixed-term home equity loans 1,801 1,742 1,749 1,574 1,417
Home equity revolving credit line loans 803 636 614 1,258 1,129
- ----------------------------------------------------------------------------------------------------------------------------------
Total $8,871 $8,505 $7,772 $8,960 $8,680
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the domestic consumer mortgage portfolio totaled $8,871
million, a $366 million, or 4%, increase from December 31, 1997. This increase
primarily resulted from an increase in the jumbo residential mortgage portfolio,
fueled by low interest rates in 1998. Jumbo mortgages are variable-rate
residential mortgages that generally range from $250,000 to $3 million. Risks
involved in holding jumbo mortgages include less liquidity than a traditional
one- to four-family residential mortgage portfolio and increased exposure on an
individual loan basis. The Corporation attempts to control these risks by
requiring more stringent loan-to-value ratios and higher liquidity and cash flow
requirements for each borrower. At December 31, 1998, the geographic
distribution of the jumbo mortgages was as follows: 29% in the mid-Atlantic
region; 26% in New England; 24% in California; and 21% in other domestic
regions.
One- to four-family residential mortgages decreased slightly at December 31,
1998, compared with the prior-year end. Included in the $2,446 million one- to
four-family residential mortgages at year-end 1998 were approximately $1,600
million of residential warehouse loans. Residential warehouse loans, that exist
at the time of the sale, are expected to be sold as part of the planned sale of
the mortgage business. Fixed-term and revolving credit line home equity loans
increased $226 million in 1998 compared with the prior-year end. Risks in these
three portfolios are limited to payment and collateral risk, primarily driven by
regional economic factors.
Credit card
At December 31, 1998, credit card loans totaled $804 million, a $127 million, or
14%, decrease from December 31, 1997. This decrease resulted from repayments and
credit losses. Credit card loans represented 3% of total loans at December 31,
1998, unchanged from year-end 1997. The primary risk associated with credit card
loans is that these loans are unsecured and are solely dependent upon the
credit-worthiness of the borrower. The Corporation monitors this risk using both
internal and external statistical models. In addition, the Corporation monitors
lending policies and economic conditions. Underwriting standards are continually
evaluated and modified based upon these factors. Credit card loans are charged
off after becoming 180 days delinquent and as such are not placed on
nonperforming status prior to charge-off. The CornerStone(sm) credit card
portfolio totaled $252 million, or 31% of total credit cards at December 31,
1998, compared with $266 million, or 29%, at December 31, 1997. The Corporation
intends to sell the credit card business in 1999.
58
<PAGE> 45
COMPOSITION OF LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
Other consumer credit
Other consumer credit, which principally consists of student loans, installment
loans, unsecured personal credit lines and margin loans, was $3,700 million at
December 31, 1998, an increase of $534 million, or 17%, from December 31, 1997.
The increase was primarily due to a higher level of automobile loans related to
the acquisition of Mellon 1st Business Bank as well as loan growth. Other
consumer credit loans are both secured and unsecured and, in the case of student
loans, are government guaranteed. Student loans totaled $1,765 million, or 48%
of this portfolio, at December 31, 1998.
Lease finance assets
Lease finance assets totaled $2,819 million at December 31, 1998, an increase of
$180 million compared with December 31, 1997. Lease finance assets represented
9% of the total loan portfolio at December 31, 1998, unchanged from year-end
1997.
International loans
Loans to international borrowers totaled $1,554 million at December 31, 1998,
nearly unchanged from $1,566 million at December 31, 1997. There were no
nonperforming international loans at December 31, 1998. The Corporation's
international lending strategy centers around establishing relationships with
large foreign firms that are multinational in nature but also carry a
significant U.S. presence.
Assets held for accelerated resolution
In December 1997, the Corporation transferred $231 million of CornerStone(sm)
credit card loans into an accelerated resolution portfolio. In connection with
this transfer, the Corporation evaluated the carrying value of these loans and
recorded a credit loss of $65 million to reflect an estimated net realizable
value of $166 million. Interest and principal receipts, fees and loan loss
recoveries on loans in this portfolio are applied to reduce the carrying value
of the portfolio. The net carrying value of the accelerated resolution portfolio
was $67 million at December 31, 1998, a reduction of $90 million, compared with
$157 million at December 31, 1997. This portfolio is in Other Assets on the
Corporation's balance sheet.
Pending sale of mortgage business and credit card business
In January 1999, the Corporation announced plans to sell its mortgage business
and credit card business as discussed further in the "Significant financial
events in 1998" section on page 24.
59
<PAGE> 46
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
(dollar amounts in millions) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans $103 $133 $ 94 $167 $151
Acquired property, net of the OREO reserve 37 48 80 69 88
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $140 $181 $174 $236 $239
- -----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .32% .46% .35% .60% .56%
Total nonperforming assets as a percentage of total loans
and net acquired property .44% .62% .63% .85% .89%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming assets is a term used to describe assets on which revenue
recognition has been discontinued or is restricted. Nonperforming assets include
both nonperforming loans and acquired property, primarily OREO acquired in
connection with the collection effort on loans. Nonperforming loans include both
nonaccrual and "troubled debt" restructured loans. Past-due commercial loans are
those that are contractually past due 90 days or more but are not on nonaccrual
status because they are well secured and in the process of collection. Past-due
consumer loans, excluding consumer mortgages, are generally not classified as
nonaccrual but are charged off on a formula basis upon reaching various stages
of delinquency. Additional information regarding the Corporation's practices for
placing assets on nonaccrual status is presented in note 1 of Notes to Financial
Statements.
Prior to 1998, nonperforming commercial real estate and other commercial loans
acquired in the December 1992 Meritor retail office acquisition were subject to
a loss-sharing arrangement with the FDIC. As such, these assets previously were
not classified as nonaccrual loans or OREO, but were reported as "segregated
assets" in Other Assets on the balance sheet. The loss-sharing arrangement ended
on January 1, 1998. Beginning in 1998, $10 million of commercial real estate
loans were reclassified from segregated assets to nonperforming status and $2
million of segregated assets were reclassified as OREO.
At December 31, 1998, nonperforming assets totaled $140 million, a decrease of
$41 million from December 31, 1997, resulting from a $30 million decrease in
nonperforming loans and an $11 million decrease in acquired property. The
decrease in nonperforming loans was primarily due to a lower level of
nonperforming commercial real estate loans offset, in part, by an increase in
nonperforming commercial loans. The decrease in nonperforming commercial real
estate loans was primarily due to the foreclosure on a commercial property and
its transfer to OREO in the second quarter of 1998. The property was then sold
in the third quarter of 1998. The ratio of nonperforming assets to total loans
and net acquired property was .44% at December 31, 1998, the lowest quarter-end
ratio in the Corporation's history. This ratio has been lower than 1% for 18
consecutive quarters, reflecting a strong economy and the effectiveness of the
Corporation's loan underwriting, administration and workout procedures.
60
<PAGE> 47
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS December 31,
(dollar amounts in millions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic nonaccrual loans:
Commercial and financial $ 42 $ 17 $ 21 $ 65 $ 60
Commercial real estate 6 49 16 29 25
Consumer credit:
Consumer mortgage 44 52 50 61 56
Other consumer credit 1 5 1 2 -
Lease finance assets 10 10 6 - 1
- ---------------------------------------------------------------------------------------------------------------------------------
Total domestic nonaccrual loans 103 133 94 157 142
International nonaccrual loans - - - - 1
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 103 133 94 157 143
- ---------------------------------------------------------------------------------------------------------------------------------
Domestic restructured loans:
Commercial and financial - - - - 5
Commercial real estate - - - 10 3
- ---------------------------------------------------------------------------------------------------------------------------------
Total restructured loans - - - 10 8
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans:
Domestic 103 133 94 167 150
International - - - - 1
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans (a) 103 133 94 167 151
- ---------------------------------------------------------------------------------------------------------------------------------
Acquired property:
Real estate acquired 40 52 86 87 116
Reserve for real estate acquired (5) (9) (10) (18) (29)
- ----------------------------------------------------------------------------------------------------------------------------------
Net real estate acquired 35 43 76 69 87
Other assets acquired 2 5 4 - 1
- ---------------------------------------------------------------------------------------------------------------------------------
Total acquired property 37 48 80 69 88
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $140 $181 $174 $236 $239
- ---------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of respective loan
portfolio segments:
Domestic commercial and financial loans .34% .16% .21% .59% .65%
Domestic commercial real estate loans .28 3.25 1.03 2.55 1.73
Domestic consumer mortgage loans .50 .62 .65 .68 .64
Domestic lease finance assets .37 .38 .23 - .11
Total loans .32 .46 .35 .60 .56
Nonperforming assets as a percentage of
total loans and net acquired property .44 .62 .63 .85 .89
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $19 million, $44 million, $13 million, $81 million and $58
million, respectively, of loans with both principal and interest less than
90 days past due but placed on nonaccrual status by management discretion.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NONPERFORMING LOANS Domestic
----------------------------------------------------------
Lease Total
Commercial Commercial Consumer Finance -------------------
(in millions) & Financial Real Estate Credit Assets 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans at
beginning of year $ 17 $ 49 $ 57 $10 $133 $ 94
Acquired from Mellon United
National Bank and Mellon 1st
Business Bank 1 5 - - 6 -
Reclassification from
segregated assets - 10 - - 10 -
Additions 54 7 35 19 115 201
Payments (a) (14) (20) (19) (9) (62) (85)
Returned to accrual status (6) (4) (23) (3) (36) (19)
Credit losses (10) (6) (2) (5) (23) (50)
Transfers to acquired property - (35) (3) (2) (40) (8)
- ----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans at end of year $ 42 $ 6 $ 45 $10 $103 $133
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes interest applied to principal and sales.
61
<PAGE> 48
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
A loan is considered impaired when, based upon current information and events,
it is probable that the Corporation will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
Additional information regarding impairment determination is presented in note 1
of Notes to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
IMPAIRED LOANS
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans at year end (a) $53 $82 $56
Average impaired loans for the year 60 47 86
Interest revenue recognized on impaired loans (b) 4 8 11
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $29 million, $19 million and $13 million of impaired loans with a
related impairment reserve of $3 million, $2 million and $3 million at
December 31, 1998, December 31, 1997, and December 31, 1996, respectively.
(b) All income was recognized using the cash basis method of income
recognition.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN ACQUIRED PROPERTY December 31,
(in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OREO at beginning of year, net of the OREO reserve $ 43 $ 76
Reclassification from segregated assets 2 -
Foreclosures 48 12
Sales (66) (47)
Additional investments, write-downs, losses, OREO provision and other 8 2
- ---------------------------------------------------------------------------------------------------------------------------------
OREO at end of year, net of the OREO reserve 35 43
Other acquired assets 2 5
- ---------------------------------------------------------------------------------------------------------------------------------
Total acquired property, net of the OREO reserve $ 37 $ 48
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation recognizes any estimated potential decline in the value of OREO
between appraisal dates on a property-by-property basis through periodic
additions to the OREO reserve. Write-downs charged against this reserve are
taken when OREO is sold at a loss or upon the receipt of appraisals which
indicate a deterioration in the fair value of the property. Activity in the
Corporation's OREO reserve is presented in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN RESERVE FOR REAL ESTATE ACQUIRED (OREO RESERVE)
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 9 $10 $18
Write-downs on real estate acquired (1) (1) (4)
Provision (3) - (4)
- ----------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 5 $ 9 $10
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FOREGONE INTEREST ON NONPERFORMING LOANS Year ended December 31,
(in millions) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contractual interest due $7 $15 $9 $15 $15
Interest revenue recognized 3 10 3 5 3
- -----------------------------------------------------------------------------------------------------------------------------------
Interest revenue foregone $4 $ 5 $6 $10 $12
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: This table includes interest revenue foregone during the year on loans
that were nonperforming at the end of each year. Interest receipts that the
Corporation applied, for accounting purposes, to reduce principal balances of
nonaccrual loans are included in contractual interest due but not in interest
revenue recognized.
62
<PAGE> 49
NONPERFORMING ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
The following table presents the amount of loans that were 90 days or more past
due as to principal or interest that are not classified as nonperforming. All
loans in this table are well secured and in the process of collection or are
consumer loans that are not classified as nonaccrual because they are
automatically charged off upon reaching 180 days past due.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS December 31,
(dollar amounts in millions) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer:
Mortgages $ 31 $ 38 $ 35 $ 34 $ 27
Ratio .34% .44% .45% .38% .31%
Credit card 8(a) 8(a) 29(a) 13(a) 32
Ratio 1.05% .84% 2.24% .66% 1.35%
Student - government guaranteed 52 44 47 44 36
Ratio 2.95% 2.69% 3.01% 3.11% 2.71%
Other consumer 2 1 2 1 1
Ratio .12% .09% .18% .09% .07%
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer $ 93 $ 91 $ 113 $ 92 $ 96
Ratio .70% .72% .97% .68% .71%
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial (b) 11 13 10 6 10
- ----------------------------------------------------------------------------------------------------------------------------------
Total past-due loans $ 104 $ 104 $ 123 $ 98 $ 106
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes past-due CornerStone(sm) credit card loans included in the
accelerated resolution portfolio.
(b) Includes lease finance assets.
Note: Ratios are loans 90 days or more past due as a percentage of year-end
loan balances.
63
<PAGE> 50
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT
LOSSES
- --------------------------------------------------------------------------------
Credit quality expense
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY EXPENSE
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses $60 $148 $155
Net revenue from acquired property (6) (19) (13)
- --------------------------------------------------------------------------------------------------------------------------------
Credit quality expense $54 $129 $142
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for credit losses decreased $88 million in 1998 compared to 1997,
resulting from lower credit card net credit losses. The year 1997 included a
significant provision for credit losses related to the credit card portfolio.
The decrease in net revenue from acquired property in 1998, compared to 1997,
was due to lower gains on the sale of OREO properties.
Reserve for credit losses and review of net credit losses
The reserve for credit losses was $496 million at December 31, 1998, or 1.54% of
total loans, compared with $475 million, or 1.63% of total loans, at December
31, 1997. The $21 million increase in the reserve for credit losses from
December 31, 1997, primarily resulted from the addition of $24 million of
reserves related to the Mellon United National Bank and Mellon 1st Business Bank
acquisitions. The provision for credit losses was $60 million in 1998, while net
credit losses totaled $63 million for the year.
The Corporation maintains a credit loss reserve that, in management's judgment,
is adequate to absorb losses embedded in the loan portfolio. Management reviews
the adequacy of the reserve at least quarterly. The reserve determination
methodology is designed to provide procedural discipline in assessing the
adequacy of the reserve. For analytical purposes, the reserve methodology
estimates loss potential in both the commercial and consumer loan portfolios.
This methodology primarily uses an individual evaluation of problem credits and
a historical analysis of loss experience and criticized credit levels. In
addition, the status and amount of nonperforming and past-due loans are
considered. Qualitative factors considered include: industry risks, current
economic factors affecting collectability, trends in portfolio volume, quality,
maturity and composition and current interest rate levels and economic
conditions.
Net credit losses totaled $63 million in 1998, a decrease of $138 million from
1997, due to a $132 million decrease in credit card net credit losses. The lower
credit card losses in 1998 followed the December 1997 transfer of $231 million
of CornerStone(sm) credit card loans into an accelerated resolution portfolio.
However, of the $63 million of net credit losses in 1998, $40 million, or nearly
two thirds of the total, were from the credit card portfolio. As discussed in
the "Significant financial events in 1998" section on page 24, the Corporation
intends to sell the credit card business in 1999. The level of credit losses and
recoveries relative to outstanding loans can vary from period to period as a
result of the size and number of individual credits that may require charge-off
and the effects of changing economic conditions.
The ratio of the loan loss reserve to nonperforming loans at December 31, 1998,
was 479%, compared with 356% at December 31, 1997. This ratio is not the result
of a target or objective, but rather is an outcome of two interrelated but
separate processes: the establishment of an appropriate loan loss reserve level
for the portfolio as a whole, including but not limited to the nonperforming
component in the portfolio; and the classification of certain assets as
nonperforming in accordance with established accounting, regulatory and
management policies. The ratio can vary significantly over time as the credit
quality characteristics of the entire loan portfolio change. This ratio also can
vary with shifts in portfolio mix. The increase in this ratio from December 31,
1997, primarily resulted from a decrease in the level of nonperforming loans.
64
<PAGE> 51
CREDIT QUALITY EXPENSE, RESERVE FOR CREDIT LOSSES AND REVIEW OF NET CREDIT
LOSSES (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSS RESERVE ACTIVITY
(in millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve at beginning of year $ 475 $ 525 $ 471 $ 607 $ 600
Net change in reserve primarily
from acquisitions 24 3 23 8 4
Credit losses:
Domestic:
Commercial and financial (10) (16) (19) (14) (42)
Commercial real estate (6) (24) (12) (8) (16)
Consumer credit:
Credit cards (45) (116)(a) (127) (167)(a) (61)
Other consumer credit (23) (25) (27) (25) (28)
Lease finance assets (8) (6) (5) (16) -
- -------------------------------------------------------------------------------------------------------------------------------
Total domestic (92) (187) (190) (230) (147)
International - - - - (4)
- -------------------------------------------------------------------------------------------------------------------------------
Total credit losses (92) (187) (190) (230) (151)
- -------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and financial 8 11 25 27 41
Commercial real estate 3 14 14 30 14
Consumer credit:
Credit cards 5 9 13 14 9
Other consumer credit 11 9 12 11 17
Lease finance assets 2 3 1 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total domestic 29 46 65 82 81
International - 5 1 5 3
- -------------------------------------------------------------------------------------------------------------------------------
Total recoveries 29 51 66 87 84
- -------------------------------------------------------------------------------------------------------------------------------
Net credit (losses) recoveries:
Domestic:
Commercial and financial (2) (5) 6 13 (1)
Commercial real estate (3) (10) 2 22 (2)
Consumer credit:
Credit cards (40) (107) (114) (153) (52)
Other consumer credit (12) (16) (15) (14) (11)
Lease finance assets (6) (3) (4) (16) -
- -------------------------------------------------------------------------------------------------------------------------------
Total domestic (63) (141) (125) (148) (66)
International -- 5 1 5 (1)
- -------------------------------------------------------------------------------------------------------------------------------
Net credit losses (63) (136) (124) (143) (67)
Credit losses on credit card assets held for accelerated resolution - (65) - (106) -
- -------------------------------------------------------------------------------------------------------------------------------
Total net credit losses (63) (201) (124) (249) (67)
Provision for credit losses 60 148 155 105 70
- -------------------------------------------------------------------------------------------------------------------------------
Reserve at end of year $ 496 $ 475 $ 525 $ 471 $ 607
- -------------------------------------------------------------------------------------------------------------------------------
Reserve as a percentage of total loans 1.54% 1.63% 1.92% 1.70% 2.27%
Net credit losses to average loans .21% .72%(b) .46% .91%(b) .27%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes $65 million in 1997 and $106 million in 1995 of credit losses
related to loans transferred to an accelerated resolution portfolio.
(b) The ratio of net credit losses, excluding credit losses on assets held for
accelerated resolution, to average loans was .49% in 1997 and .53% in 1995.
65
<PAGE> 52
FOURTH QUARTER REVIEW
- --------------------------------------------------------------------------------
Fourth quarter 1998 diluted earnings per common share was $.84, an increase of
12% compared with $.75 in the fourth quarter of 1997. Net income applicable to
common stock totaled $222 million in the fourth quarter of 1998, an increase of
16% compared with $191 million in the fourth quarter of 1997. Fourth quarter
1998 diluted tangible earnings per common share was $.94, an increase of 14%
compared with $.83 in the fourth quarter of 1997. Tangible net income applicable
to common stock totaled $252 million in the fourth quarter of 1998, an increase
of 19% compared with $212 million in the fourth quarter of 1997.
Annualized return on common shareholders' equity and return on assets were 20.1%
and 1.76%, respectively, in the fourth quarter of 1998, compared with 21.2% and
1.75%, respectively, in the fourth quarter of 1997. Annualized return on
tangible common shareholders' equity and return on tangible assets were 40.2%
and 2.07%, respectively, in the fourth quarter of 1998, compared with 34.9% and
1.99%, respectively, in the fourth quarter of 1997.
Fee revenue was $799 million in the fourth quarter of 1998, up $92 million
compared with $707 million in the fourth quarter of 1997. Excluding the impact
on fee revenue from acquisitions and one-time gains from the sales of the
merchant card processing business in the fourth quarter of 1998 and corporate
trust business in the fourth quarter of 1997, fee revenue increased 9% in the
fourth quarter of 1998 compared with the fourth quarter of 1997. This increase
was primarily attributable to higher trust and investment fees, foreign exchange
revenue and other fee revenue.
Net interest revenue, on a fully taxable equivalent basis, totaled $382 million
in the fourth quarter of 1998, up $20 million compared with $362 million in the
fourth quarter of 1997. This increase was primarily due to the favorable impacts
of acquisitions, net of funding costs, as well as a higher level of
interest-earning assets. The net interest margin on a taxable equivalent basis
was 3.86% in the fourth quarter of 1998, a decrease of 21 basis points from
4.07% in the fourth quarter of 1997. This decrease primarily resulted from a
greater level of lower-yielding assets, the transfer of higher-yielding
CornerStone(sm) credit card loans into an accelerated resolution portfolio and
the Series K preferred stock redemption.
Operating expense before trust-preferred securities expense and net revenue from
acquired property for the fourth quarter of 1998 was $805 million, up $83
million from $722 million in the fourth quarter of 1997. This increase primarily
resulted from the impact of acquisitions, higher consulting expense, business
growth and higher amortization of mortgage servicing assets. Excluding the
effect of acquisitions and higher amortization of mortgage servicing assets and
purchased credit card relationships, operating expense before trust-preferred
securities expense and net revenue from acquired property increased
approximately 2%.
Credit quality expense was $15 million in the fourth quarter of 1998, a decrease
of $46 million compared with the prior-year period. This decrease reflected a
$58 million decrease in the provision for credit losses partially offset by a
$12 million decrease in the net revenue from acquired property. The fourth
quarter of 1997 included a significant loan loss provision related to the credit
card portfolio. Net credit losses were $17 million in the fourth quarter of
1998, compared with $106 million in the fourth quarter of 1997. The decrease
primarily resulted from lower credit card net credit losses in 1998 following
the transfer of CornerStone(sm) credit card loans into an accelerated resolution
portfolio.
66
<PAGE> 53
<TABLE>
<CAPTION>
SELECTED QUARTERLY DATA (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter ended,
1998 1997
------------------------------------------- ------------------------------------------
(dollar amounts in millions, DEC. SEPT. JUNE MARCH Dec. Sept. June March
except per share amounts) 31 30 30 31 31 30 30 31
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest revenue $ 380 $ 375 $ 371 $ 365 $ 361 $ 366 $ 370 $ 370
Provision for credit losses 15 15 15 15 73 25 25 25
Fee revenue 799 712 712 698 707 635 540 536
Gains on sale of securities - - 1 - - - - -
Operating expense 825 734 738 716 729 670 587 582
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 339 338 331 332 266 306 298 299
Provision for income taxes 117 120 116 117 71 111 108 108
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 222 218 215 215 195 195 190 191
Dividends on preferred stock - - - 9 4 4 4 9
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stock:
Reported $ 222 $ 218 $ 215 $ 206 $ 191 $ 191 $ 186 $ 182
Tangible (a) 252 246 243 231 212 211 206 203
- -----------------------------------------------------------------------------------------------------------------------------------
REPORTED AND TANGIBLE RESULTS (A)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Reported - basic $ .85 $ .84 $ .82 $ .80 $ .76 $ .75 $ .73 $ .70
Reported - diluted .84 .82 .81 .78 .75 .73 .71 .69
Tangible - diluted .94 .93 .91 .88 .83 .80 .79 .77
Annualized return on common
shareholders' equity:
Reported 20.1% 20.3% 20.8% 21.6% 21.2% 21.6% 21.9% 21.2%
Tangible 40.2 40.2 44.1 39.5 34.9 34.2 34.2 33.0
Annualized return on assets:
Reported 1.76% 1.81% 1.79% 1.89% 1.75% 1.81% 1.79% 1.83%
Tangible 2.07 2.11 2.12 2.17 1.99 2.04 2.03 2.08
- -----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY AVERAGE BALANCES
- -----------------------------------------------------------------------------------------------------------------------------------
Money market investments $ 1,525 $ 1,351 $ 1,597 $ 1,712 $ 1,397 $ 1,231 $ 1,081 $ 1,032
Trading account securities 258 266 239 242 159 171 210 161
Securities 6,141 5,754 5,596 5,301 5,293 5,469 5,600 6,018
Loans 31,503 30,426 30,302 29,389 28,476 27,596 27,806 27,404
Total interest-earning assets 39,427 37,797 37,734 36,644 35,325 34,467 34,697 34,615
Total assets 50,110 47,937 47,965 46,229 44,266 42,879 42,413 42,187
Total tangible assets (a) 48,153 46,096 46,057 44,726 43,103 41,812 41,434 41,193
Deposits 34,492 33,399 33,548 32,725 31,085 30,349 30,113 30,280
Notes and debentures 3,164 3,003 3,003 2,797 2,781 2,832 2,716 2,517
Trust-preferred securities 991 991 991 991 990 990 990 990
Common shareholders' equity 4,391 4,265 4,126 3,873 3,573 3,520 3,393 3,490
Tangible common shareholders equity (a) 2,487 2,424 2,218 2,370 2,411 2,453 2,414 2,496
Total shareholders' equity 4,391 4,265 4,126 3,974 3,766 3,713 3,586 3,735
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin (FTE) 3.86% 3.95% 3.97% 4.06% 4.07% 4.24% 4.29% 4.37%
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA (dollars per share) (b)
- -----------------------------------------------------------------------------------------------------------------------------------
Market price range:
High $69 5/16 $74 11/16 $ 80 3/8 $66 3/8 $64 13/16 $57 3/4 $47 1/4 $ 43 1/8
Low 45 50 3/4 62 5/8 56 1/8 47 1/8 44 7/8 35 3/4 34 1/2
Average 61.66 62.96 69.55 61.86 55.70 50.12 41.95 38.81
Close 68 3/4 55 69 11/16 63 1/2 60 5/8 54 3/4 45 1/8 36 3/8
Dividends .36 .36 .36 .33 .33 .33 .33 .30
Market capitalization 18,007 14,363 18,168 16,523 15,386 13,938 11,353 9,372
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) See page 27 for the definition of tangible operating results.
(b) At December 31, 1998, there were 25,197 shareholders registered with the
Corporation's stock transfer agent, compared with 23,948 at year-end 1997
and 23,856 at year-end 1996. In addition, there were approximately 16,540,
16,049 and 15,271 Mellon employees at December 31, 1998, 1997 and 1996,
respectively, who participated in the Corporation's 401(k) Retirement
Savings Plan. All shares of Mellon Bank Corporation common stock held by
the plans for its participants are registered in the name of Mellon Bank,
N.A. as trustee.
67
<PAGE> 54
CONSOLIDATED INCOME STATEMENT
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions, except per share amounts) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE Interest and fees on loans (loan fees of $73, $81 and $96) $2,413 $2,268 $2,253
Federal funds sold and securities under resale agreements 49 30 30
Interest-bearing deposits with banks 33 26 36
Other money market investments 6 6 7
Trading account securities 15 9 7
Securities 376 377 406
------------------------------------------------------------------------------------------------------
Total interest revenue 2,892 2,716 2,739
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE Deposits in domestic offices 824 749 709
Deposits in foreign offices 136 129 194
Federal funds purchased and securities under repurchase
agreements 123 77 94
Other short-term borrowings 114 105 121
Notes and debentures 204 189 143
------------------------------------------------------------------------------------------------------
Total interest expense 1,401 1,249 1,261
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE Net interest revenue 1,491 1,467 1,478
Provision for credit losses 60 148 155
------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 1,431 1,319 1,323
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE Trust and investment fee revenue 1,722 1,323 999
Cash management and deposit transaction charges 262 242 211
Mortgage servicing fees 200 213 180
Foreign currency and securities trading revenue 165 118 80
Credit card fees 92 97 120
Information services fees 44 42 50
Gain on sale of merchant card processing business 35 - -
Gain on sale of corporate trust business - 43 -
Gain on sale of credit card portfolio - - 57
Other income 401 340 322
------------------------------------------------------------------------------------------------------
Total fee revenue 2,921 2,418 2,019
Gains on sales of securities 1 - 4
------------------------------------------------------------------------------------------------------
Total noninterest revenue 2,922 2,418 2,023
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE Staff expense 1,456 1,242 1,055
Professional, legal and other purchased services 297 219 195
Net occupancy expense 237 225 205
Equipment expense 181 175 145
Amortization of mortgage servicing assets and
purchased credit card relationships 179 118 107
Business development 149 148 137
Amortization of goodwill and other intangible assets 137 105 100
Communications expense 107 102 96
Other expense 197 175 165
Trust-preferred securities expense 79 78 3
Net revenue from acquired property (6) (19) (13)
------------------------------------------------------------------------------------------------------
Total operating expense 3,013 2,568 2,195
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME Income before income taxes 1,340 1,169 1,151
Provision for income taxes 470 398 418
------------------------------------------------------------------------------------------------------
NET INCOME 870 771 733
Dividends on preferred stock 9 21 44
------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 861 $ 750 $ 689
- ---------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE Basic net income $ 3.31 $ 2.94 $ 2.63
Diluted net income $ 3.25 $ 2.88 $ 2.58
------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
68
<PAGE> 55
CONSOLIDATED BALANCE SHEET
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31,
(dollar amounts in millions) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 2,926 $ 3,650
Interest-bearing deposits with banks 566 553
Federal funds sold and securities under resale agreements 186 383
Other money market investments 46 72
Trading account securities 193 75
Securities available for sale 5,373 2,767
Investment securities (approximate fair value of $1,634 and $2,118) 1,602 2,082
Loans, net of unearned discount of $54 and $48 32,093 29,142
Reserve for credit losses (496) (475)
------- -------
Net loans 31,597 28,667
Customers' acceptance liability 166 182
Premises and equipment 569 573
Goodwill and other intangibles 2,313 1,425
Mortgage servicing assets
and purchased credit card relationships 1,132 1,075
Acquired property, net of reserves of $5 and $9 37 48
Other assets 4,071 3,340
------------------------------------------------------------------------------------------------------
Total assets $50,777 $44,892
------------------------------------------------------------------------------------------------------
LIABILITIES Noninterest-bearing deposits in domestic offices $ 9,976 $ 7,975
Interest-bearing deposits in domestic offices 21,293 19,954
Interest-bearing deposits in foreign offices 3,114 3,376
------------------------------------------------------------------------------------------------------
Total deposits 34,383 31,305
Federal funds purchased and securities under
repurchase agreements 3,594 1,997
U.S. Treasury tax and loan demand notes 290 447
Short-term bank notes 266 330
Term federal funds purchased 208 625
Commercial paper 116 67
Other funds borrowed 468 278
Acceptances outstanding 166 182
Other liabilities 2,471 2,252
Notes and debentures (with original maturities over one year) 3,303 2,573
------------------------------------------------------------------------------------------------------
Total liabilities 45,265 40,056
- ---------------------------------------------------------------------------------------------------------------------------------
TRUST-PREFERRED Guaranteed preferred beneficial interests in Corporation's
SECURITIES junior subordinated deferrable interest debentures 991 991
- ---------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' Preferred stock - 193
EQUITY Common shareholders' equity:
Common stock--$.50 par value
Authorized--800,000,000 shares
Issued--294,330,960 shares 147 147
Additional paid-in capital 1,887 1,818
Retained earnings 3,353 2,884
Accumulated unrealized gains, net of tax 25 21
Treasury stock of 32,407,960 and 40,545,114 shares at cost (891) (1,218)
-------------------------------------------------------------------------------------------------------
Total common shareholders' equity 4,521 3,652
------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,521 3,845
------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and shareholders' equity $50,777 $44,892
------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
69
<PAGE> 56
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Additional unrealized gains share-
Preferred Common paid-in Retained (losses), net Treasury holders'
(in millions) stock stock capital earnings of tax stock equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $435 $ 74 $1,850 $2,124 $12 $ (470) $4,025
Comprehensive results:
Net income 733 733
Other comprehensive results, net of tax (19) (19)
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 733 (19) 714
Dividends on common stock
at $1.18 per share (310) (310)
Dividends on preferred stock (44) (44)
Common stock issued under dividend
reinvestment and common stock
purchase plan 4 14 18
Series I preferred stock redemption (145) (145)
Exercise of stock options 10 (17) 70 63
Repurchase of common stock (596) (596)
Other 2 19 21
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $290 $ 74 $1,866 $2,486 $(7) $ (963) $3,746
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive results:
Net income 771 771
Other comprehensive results, net of tax 28 28
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive results 771 28 799
Dividends on common stock
at $1.29 per share (330) (330)
Dividends on preferred stock (21) (21)
Common stock issued under dividend
reinvestment and common stock
purchase plan 8 14 22
Common stock issued in connection with
the Buck acquisition 143 143
Series J preferred stock redemption (97) (97)
Exercise of stock options 20 (22) 97 95
Repurchase of common stock (534) (534)
Additional common stock issued
for stock split 73 (73) -
Other (3) 25 22
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $193 $147 $1,818 $2,884 $21 $(1,218) $3,845
- --------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE RESULTS:
NET INCOME 870 870
OTHER COMPREHENSIVE RESULTS, NET OF TAX 11 11
RECLASSIFICATION ADJUSTMENT (7) (7)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE RESULTS 870 4 874
DIVIDENDS ON COMMON STOCK
AT $1.41 PER SHARE (365) (365)
DIVIDENDS ON PREFERRED STOCK (9) (9)
COMMON STOCK ISSUED UNDER DIVIDEND
REINVESTMENT AND COMMON STOCK
PURCHASE PLAN 10 10 20
COMMON STOCK ISSUED IN CONNECTION WITH THE
MELLON UNITED NATIONAL BANK ACQUISITION 22 233 255
SERIES K PREFERRED STOCK REDEMPTION (193) (193)
EXERCISE OF STOCK OPTIONS 1 (26) 98 73
REPURCHASE OF COMMON STOCK (27) (27)
OTHER 36 (1) 13 48
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ - $147 $1,887 $3,353 $25 $ (891) $4,521
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
70
<PAGE> 57
CONSOLIDATED STATEMENT OF CASH FLOWS
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM Net income $ 870 $ 771 $ 733
OPERATING ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill and other intangible assets 137 105 100
Amortization of mortgage servicing assets
and purchased credit card relationships 179 118 107
Depreciation and other amortization 105 108 105
Deferred income tax (benefit) expense (31) 42 95
Provision for credit losses 60 148 155
Net gains on dispositions of acquired property (7) (21) (11)
Net (increase) decrease in accrued interest receivable (8) (7) 9
Net (increase) decrease in trading account securities (108) 19 (15)
Net increase (decrease) in accrued interest payable,
net of amounts prepaid 29 (27) 15
Net (increase) decrease in residential mortgages held for sale (278) (929) 340
Net (increase) decrease in other operating activities (327) 190 (270)
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 621 517 1,363
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM Net decrease (increase) in term deposits and other money
INVESTING ACTIVITIES market investments 19 (93) 103
Net decrease (increase) in federal funds sold and securities
under resale agreements 409 249 (235)
Purchases of securities available for sale (4,566) (6,373) (14,768)
Proceeds from sales of securities available for sale 1,098 2,790 1,453
Proceeds from maturities of securities available for sale 1,557 4,980 12,176
Purchases of investment securities (14) (26) (219)
Proceeds from maturities of investment securities 491 317 360
Net decrease (increase) in credit card receivables 90 27 (387)
Sale of credit card portfolio - - 886
Net principal disbursed on loans to customers (4,417) (1,914) (884)
Loan portfolio purchases (319) (55) (254)
Proceeds from sales and securitizations of loans 2,885 1,091 2,057
Purchases of premises and equipment (132) (111) (125)
Proceeds from sales of acquired property 73 69 31
Net cash disbursed in purchase of Mellon United National Bank (94) - -
Net cash disbursed in purchase of Mellon 1st Business Bank (72) - -
Net cash disbursed in purchase of Founders Asset Management, LLC (267) - -
Net cash disbursed in purchase of Newton Management Limited (108) - -
Net cash disbursed in purchase of Buck Consultants, Inc. - (42) -
Net cash disbursed in purchase of Dreyfus Brokerage Services, Inc. - (137) -
Net cash disbursed in purchase of USL - - (1,688)
Net cash disbursed in purchase of FUL - - (136)
Increase in mortgage servicing assets and purchased credit
card relationships (236) (323) (199)
Net increase in other investing activities (231) (261) (111)
------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (3,834) 188 (1,940)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-continued-
71
<PAGE> 58
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
MELLON BANK CORPORATION (and its subsidiaries)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM Net increase (decrease) in transaction and savings deposits 2,329 1,298 (695)
FINANCING ACTIVITIES Net (decrease) increase in customer term deposits (954) (1,848) 2,808
Net increase (decrease) in federal funds purchased and
securities under repurchase agreements 1,380 1,255 (849)
Net (decrease) increase in short-term bank notes (64) 195 (922)
Net (decrease) increase in term federal funds purchased (417) 144 (424)
Net (decrease) increase in U.S. Treasury tax and loan demand notes (157) (27) 184
Net increase (decrease) in commercial paper 49 (55) (162)
Net proceeds from issuance of Guaranteed preferred
beneficial interests in Corporation's junior subordinated
deferrable interest debentures - - 990
Repayments of longer-term debt (124) (412) (24)
Net proceeds from issuance of longer-term debt 873 465 1,099
Proceeds from issuance of common stock 52 75 55
Dividends paid on common and preferred stock (376) (352) (354)
Repurchase of common stock (27) (534) (596)
Redemption of preferred stock (193) (97) (145)
Net increase (decrease) in other financing activities 57 (37) 101
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,428 70 1,066
Effect of foreign currency exchange rates 61 29 15
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND Net (decrease) increase in cash and due from banks (724) 804 504
DUE FROM BANKS Cash and due from banks at beginning of year 3,650 2,846 2,342
------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $2,926 $ 3,650 $2,846
------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL Interest paid $1,372 $ 1,276 $1,246
DISCLOSURES Net income taxes paid 428 364 283
------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
Basis of presentation
The accounting and financial reporting policies of Mellon Bank Corporation (the
Corporation), a multibank holding company, conform to generally accepted
accounting principles (GAAP) and prevailing industry practices. The preparation
of financial statements requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and the
disclosure of contingent assets and liabilities and the reported amounts of
related revenue and expense. Actual results could differ from these estimates.
The consolidated financial statements of the Corporation include the accounts of
the Corporation and its majority-owned subsidiaries. Investments in companies
20% to 50% owned are carried on the equity basis. Investments in companies less
than 20% owned are carried at cost. Intracorporate balances and transactions are
not reflected in the consolidated financial statements. The income statement
includes results of acquired subsidiaries and businesses accounted for under the
purchase method of accounting from the dates of acquisition. Securities and
other property
72
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
held in a fiduciary or agency capacity are not included in the balance sheet
since these are not assets or liabilities of the Corporation.
The parent corporation financial statements in note 27 include the accounts of
the Corporation, those of a wholly owned financing subsidiary that functions as
a financing entity for the Corporation and its subsidiaries by issuing
commercial paper and other debt guaranteed by the Corporation and those of the
business trusts discussed in note 13. Financial data for the Corporation, the
financing subsidiary and the business trusts are combined for financial
reporting because of the limited function of the financing subsidiary and the
business trusts, and the unconditional guarantee by the Corporation of their
obligations.
Nature of operations
Mellon Bank Corporation is a multibank holding company whose principal wholly
owned subsidiaries are Mellon Bank, N.A., The Boston Company, Inc., Buck
Consultants, Inc. and Newton Management Limited. The Dreyfus Corporation, one of
the nation's largest mutual fund management companies, and Founders Asset
Management LLC are wholly owned subsidiaries of Mellon Bank, N.A. Mellon's seven
banking subsidiaries primarily engage in retail financial services, commercial
banking, trust and investment management services, residential real estate loan
financing, mortgage servicing, equipment leasing, mutual fund activities,
insurance products and various securities-related activities. Buck Consultants,
Inc., a leading global actuarial and human resources consulting firm, provides a
broad array of services in the areas of defined benefit and defined contribution
plans, health and welfare plans, communications and compensation consulting, and
outsourcing and administration of employee benefit programs. The Mellon
Financial Services Corporations, through their subsidiaries and joint ventures,
provide a broad range of bank-related services including equipment leasing,
commercial loan financing, stock transfer services, cash management and numerous
trust and investment management services. While the Corporation's major
subsidiaries primarily are headquartered in the northeast and mid-Atlantic
regions, most of its products and services are offered nationwide and many are
offered globally. The Corporation's customer base is well diversified and
primarily domestic.
Trading account securities, securities available for sale and investment
securities
When purchased, securities are classified in the trading account securities
portfolio, the securities available for sale portfolio or the investment
securities portfolio. Securities are classified as trading account securities
when the intent is profit maximization through market appreciation and resale.
Securities are classified as available for sale when management intends to hold
the securities for an indefinite period of time or when the securities may be
used for tactical asset/liability purposes and may be sold from time to time to
effectively manage interest rate exposure, prepayment risk and liquidity needs.
Securities are classified as investment securities when management intends to
hold these securities until maturity.
Trading account securities, including off-balance-sheet instruments, are stated
at fair value. Trading revenue includes both realized and unrealized gains and
losses. The liability incurred on short-sale transactions, representing the
obligation to deliver securities, is included in other funds borrowed at fair
value.
Securities available for sale are stated at fair value. Unrealized gains or
losses on assets classified as available for sale, net of tax, are recorded as
an addition to or deduction from shareholders' equity in the form of other
comprehensive results. Investment securities are stated at cost, adjusted for
amortization of premium and accretion of discount on a level yield basis. Gains
(losses) on sales of securities available for sale are reported in the income
statement. The cost of securities sold is determined on a specific
identification basis.
73
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Loans
Loans are reported net of any unearned discount. Interest revenue on
nondiscounted loans is recognized based on the principal amount outstanding.
Interest revenue on discounted loans is recognized based on methods that
approximate a level yield. Loan origination and commitment fees, as well as
certain direct loan origination and commitment costs, are deferred and amortized
as a yield adjustment over the lives of the related loans. Deferred fees and
costs are netted against outstanding loan balances.
Unearned revenue on direct financing leases is accreted over the lives of the
leases in decreasing amounts to provide a constant rate of return on the net
investment in the leases. Revenue on leveraged leases is recognized on a basis
to achieve a constant yield on the outstanding investment in the lease, net of
the related deferred tax liability, in the years in which the net investment is
positive. Gains on sales of lease residuals are included in other fee revenue.
Certain loans, primarily residential mortgages in the warehouse portfolio, are
held for sale. Such loans are carried at the lower of aggregate cost or market
value. Losses, if any, are recorded in other fee revenue.
Commercial loans, including commercial leases, generally are placed on
nonaccrual status when either principal or interest is past due 90 days or more,
unless the loan is well secured and in the process of collection. Management
also places commercial loans on nonaccrual status when the collection of
principal or interest becomes doubtful. Residential mortgage loans generally are
placed on nonaccrual status when, in management's judgment, collection is in
doubt or the loans have outstanding balances of $250,000 or greater and are 90
days or more delinquent, or have balances of less than $250,000 and are
delinquent 12 months or more. Consumer loans, other than residential mortgages,
and certain secured commercial loans are charged off upon reaching various
stages of delinquency depending upon the loan type. When a loan is placed on
nonaccrual status, previously accrued and uncollected interest is reversed
against current period interest revenue. Interest receipts on nonaccrual and
impaired loans are recognized as interest revenue or are applied to principal
when management believes the ultimate collectability of principal is in doubt.
Nonaccrual loans generally are restored to an accrual basis when principal and
interest payments become current or when the loan becomes well secured and is in
the process of collection.
A loan is considered to be impaired, as defined by FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," when it is probable that the Corporation
will be unable to collect all principal and interest amounts due according to
the contractual terms of the loan agreement. The Corporation tests loans covered
under FAS No. 114 for impairment if they are on nonaccrual status or have been
restructured. Consumer credit nonaccrual loans are not tested for impairment
because they are included in large groups of smaller-balance homogeneous loans
that, by definition along with leases, are excluded from the scope of FAS No.
114. Impaired loans are required to be measured based upon the present value of
expected future cash flows, discounted at the loan's initial effective interest
rate, or at the loan's market price or fair value of the collateral if the loan
is collateral dependent. If the loan valuation is less than the recorded value
of the loan, an impairment reserve must be established for the difference. The
impairment reserve is established by either an allocation of the reserve for
credit losses or by a provision for credit losses, depending on the adequacy of
the reserve for credit losses. Impairment reserves are not needed when interest
payments have been applied to reduce principal, or when credit losses have been
recorded so that the recorded investment in an impaired loan is less than the
loan valuation.
Loan securitizations
The amount of interest and fee revenue in excess of both interest paid to
certificate holders and credit losses is recognized monthly as servicing
revenue. The servicing revenue from the home equity and insurance premium
finance receivables is reported as "other fee revenue." The servicing revenue
from the credit card securitization is reported in "credit card fee revenue."
74
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Reserve for credit losses
The reserve for credit losses is maintained to absorb losses embedded in the
credit portfolio based on management's judgment. The reserve determination
methodology is designed to provide procedural discipline in assessing the
adequacy of the reserve. This methodology primarily uses an individual
evaluation of problem credits and a historical analysis of loss experience and
criticized credit levels. In addition, the status and amount of nonperforming
and past-due loans are considered. Qualitative factors considered included:
industry risks, current economic factors affecting collectability, trends in
portfolio volume, quality, maturity and composition and current interest rate
levels and economic conditions. Credit losses are charged against the reserve.
Recoveries are added to the reserve.
Acquired property
Property acquired in connection with loan settlements, including real estate
acquired, is stated at the lower of estimated fair value less estimated costs to
sell or the carrying amount of the loan. A reserve for real estate acquired is
maintained on a property-by-property basis to recognize estimated potential
declines in value that might occur between appraisal dates. Provisions for the
estimated potential decrease in fair value between annual appraisals, net gains
on the sale of real estate acquired and net direct operating expense
attributable to these assets are included in net revenue from acquired property.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated over the estimated
useful lives of the assets, limited in the case of leasehold improvements to the
lease term, using the straight-line method.
Goodwill, other identified intangibles, mortgage servicing assets and purchased
credit card relationships
Intangible assets are amortized using straight-line and accelerated methods over
the remaining estimated benefit periods which approximated, on a
weighted-average basis at December 31, 1998, 21 years for goodwill, 5 years for
core deposit intangibles, 4 years for credit card relationships and 12 years for
all other intangible assets except mortgage servicing assets. Intangible assets
are reviewed for possible impairment when events or changed circumstances may
affect the underlying basis of the asset.
Originated mortgage servicing rights (MSRs) are recorded by allocating total
costs incurred between the loan and servicing rights based on their relative
fair values. Purchased MSRs are recorded at cost. MSRs are amortized in
proportion to the estimated servicing income over the estimated life of the
servicing portfolio. In 1998 and 1997, $436 million and $433 million,
respectively, of MSRs were capitalized in connection with both mortgage
servicing portfolio purchases and loan originations. The carrying value of MSRs
and related hedges was $1.1 billion at December 31, 1998, with an estimated fair
value of $1.2 billion, compared with a carrying value and an estimated fair
value of $1.1 billion and $1.2 billion, respectively, at December 31, 1997.
Deferred gains/losses and cash settlements on hedge instruments associated with
MSRs are included in the carrying value of the MSRs. The carrying value of MSRs
is measured for impairment each quarter based on the fair value of the MSRs.
Quoted market prices are used, whenever available, as the basis for measuring
the fair value of servicing rights. When quoted market prices are not available,
fair values are based upon the present value of estimated expected future cash
flows using a discount rate commensurate with the risks involved. For impairment
measurement purposes, all mortgage servicing rights are first stratified by loan
type and then by interest rates within the loan type. If the carrying value of
an individual stratum were to exceed its fair value, a valuation allowance would
be established. No valuation allowances were recorded at
75
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
December 31, 1998 and 1997, as the carrying values of the various
stratifications were less than their respective fair values. On a
weighted-average basis at December 31, 1998, the serviced mortgage loan
portfolio had an interest rate of approximately 7.75%.
Assets held for accelerated resolution
During the fourth quarters of 1995 and 1997, the Corporation segregated certain
loans from the CornerStone(sm) credit card portfolio into an accelerated
resolution portfolio. The excess of the carrying value of these loans over the
estimated net realizable value was recorded as a credit loss. Interest and
principal receipts, fees and loan loss recoveries on loans in this portfolio are
applied to reduce the net carrying value. This portfolio is reported in Other
Assets in the balance sheet.
Income taxes
The Corporation files a consolidated U.S. income tax return. Deferred taxes are
recognized for the expected future tax consequences of existing differences
between the financial reporting and tax reporting bases of assets and
liabilities using enacted tax laws and rates.
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars at the rate of exchange on the balance sheet date. Revenue and expense
accounts are translated monthly at month-end rates of exchange. Net foreign
currency positions are valued at rates of exchange--spot or future, as
appropriate--prevailing at the end of the period, and resulting gains or losses
are included in the income statement. Translation gains and losses on
investments in foreign entities with functional currencies that are not the U.S.
dollar are included in shareholders' equity in other comprehensive results.
Fee revenue
Trust and investment fees are reported net of fees waived and expense
reimbursements to certain mutual funds. Fees on standby letters of credit are
recognized over the commitment term in fee revenue, while fees on commercial
letters of credit, because of their short-term nature, are recognized when
received in fee revenue. Fees for banking and other services generally are
recognized over the periods in which the related services are provided.
Closed-end mutual fund
On January 1, 1999, the Corporation adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position (SOP) No. 98-5
on reporting on the costs of start-up activities. This SOP requires that costs
of start-up activities be expensed as incurred. Initial application of the SOP
is to be reported as a cumulative effect of a change in accounting principle.
In the second quarter of 1998, the Corporation introduced a $920 million Dreyfus
closed-end mutual fund, on which management fees are being earned. The
Corporation paid the underwriting fees during the initial public offering of the
fund. In September 1998, the Financial Accounting Standards Board staff
concluded that fees paid by advisors of closed-end funds should be expensed as
incurred and that any fees capitalized prior to July 24, 1998, should be written
off upon the adoption of SOP 98-5 and reported as a cumulative effect of a
change in accounting principle. As a result, the unamortized pre-tax cost of
approximately $43 million, or $26 million after tax, was recognized as a
cumulative effect of a change in accounting principle as of January 1, 1999,
instead of being amortized over future years. This accounting change will have
no impact on a cash-flow basis in 1999 or future periods since the underwriting
fees were paid in the first half of 1998.
76
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Off-balance-sheet instruments used for risk management purposes
The Corporation enters into interest rate swaps, interest rate caps and floors,
financial futures and financial options primarily to manage its sensitivity to
interest rate risk. This is accomplished by using these instruments to offset
the inherent price or interest rate risk of specific on-balance-sheet assets or
liabilities. The Corporation uses interest rate floor contracts and interest
rate swap contracts to hedge against value impairment of its MSRs resulting from
a decrease in interest rates. The Corporation also uses total return swaps to
offset the inherent market value risk of investments in start-up mutual funds.
All of these instruments are designated as hedges on the trade date and are
highly correlated with the financial instrument being hedged. High correlation
is achieved if the following conditions hold 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 in which the original anticipated transaction
was to be reported.
Interest revenue or interest expense on hedge transactions is accrued over the
term of the agreement as an adjustment to the yield or cost of the related asset
or liability. Transaction fees are deferred and amortized to interest revenue or
interest expense over the term of the agreement. Realized gains and losses are
deferred and amortized over the life of the hedged transaction as interest
revenue or interest expense, and any unamortized amounts are recognized as
income or loss at the time of disposition of the assets or liabilities being
hedged. Amounts payable to or receivable from counterparties are included in
other liabilities or other assets. The fair values of interest rate swaps, caps
and floors, financial futures and financial options used for risk management
purposes are not recognized in the financial statements. Realized gains/losses
and cash settlements on instruments associated with MSRs are deferred and
included as an adjustment to the carrying value of the MSRs. These amounts are
amortized over the same period as the MSRs. Changes in fair value of total
return swaps are recognized in net unrealized gains and losses on assets
available for sale within shareholders' equity in other comprehensive results.
Off-balance-sheet instruments used for trading activities
The Corporation enters into foreign exchange contracts, futures and forward
contracts, currency and interest rate option contracts, interest rate swaps, and
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.
77
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
Statement of cash flows
For the purpose of reporting cash flows, the Corporation has defined cash and
cash equivalents as cash and due from banks. Cash flows from assets and
liabilities that have an original maturity date of three months or less
generally are reported on a net basis. Cash flows from assets and liabilities
that have an original maturity date greater than three months generally are
reported on a gross basis. Cash flows from hedging activities are classified in
the same category as the items hedged.
2. CASH AND DUE FROM BANKS
Cash and due from banks includes reserve balances that the Corporation's
subsidiary banks are required to maintain with a Federal Reserve bank. These
required reserves are based primarily on deposits outstanding and were $472
million at December 31, 1998, and $405 million at December 31, 1997. These
balances averaged $457 million in 1998 and $336 million in 1997.
3. SECURITIES
Gross realized gains on the sale of securities available for sale were $1
million, $2 million and $4 million in 1998, 1997 and 1996, respectively. Gross
realized losses on the sale of securities available for sale were less than $1
million, $2 million and less than $1 million in 1998, 1997 and 1996,
respectively. After-tax net gains on the sale of securities were less than $1
million in 1998 and 1997 and $3 million in 1996. Proceeds from the sale of
securities available for sale were $1.1 billion, $2.8 billion and $1.5 billion
in 1998, 1997 and 1996, respectively. There were no sales of investment
securities in 1998, 1997 and 1996.
Securities available for sale, investment securities, trading account securities
and loans with book values of $4.2 billion at December 31, 1998, and $3.2
billion at December 31, 1997, were required to be pledged to secure public and
trust deposits, repurchase agreements and for other purposes.
78
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 December 31, 1997
--------------------------------------------- --------------------------------------------
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 $ 219 $ 1 $ - $ 220 $ 175 $ - $ - $ 175
U.S. agency mortgage-backed 4,700 66 1 4,765 2,001 41 - 2,042
Other U.S. agency 259 - - 259 509 1 - 510
- ------------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and
agency securities 5,178 67 1 5,244 2,685 42 - 2,727
Obligations of states and
political subdivisions 112 1 1 112 26 - - 26
Other mortgage-backed 2 - - 2 3 - - 3
Other securities 15 - - 15 11 - - 11
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $5,307 $68 $ 2 $5,373 $2,725 $42 $ - $2,767
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------------------------------
Contractual maturities at December 31, 1998
Obligations Total
U.S. agency Total of states Other securities
(dollar amounts U.S. mortgage- Other U.S. Treasury and political mortgage- Other available
in millions) Treasury backed U.S. agency and agency subdivisions backed securities for sale
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within one year
Amortized cost $181 $ - $259 $ 440 $ 11 $ - $ - $ 451
Fair value 182 - 259 441 11 - - 452
Yield 4.60% - 5.93% 5.38% 6.91% - - 5.42%
1 to 5 years
Amortized cost 29 - - 29 3 - 7 39
Fair value 29 - - 29 3 - 7 39
Yield 6.28% - - 6.28% 7.76% - 6.27% 6.41%
5 to 10 years
Amortized cost 9 - - 9 7 - 3 19
Fair value 9 - - 9 7 - 3 19
Yield 5.84% - - 5.84% 7.53% - 6.40% 6.58%
Over 10 years
Amortized cost - - - - 91 - 5 96
Fair value - - - - 91 - 5 96
Yield - - - - 7.07% - 7.57% 7.10%
Mortgage-backed
securities
Amortized cost - 4,700 - 4,700 - 2 - 4,702
Fair value - 4,765 - 4,765 - 2 - 4,767
Yield - 6.68% - 6.68% - 6.48% - 6.68%
- ------------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $219 $4,700 $259 $5,178 $112 $2 $15 $5,307
Total fair value 220 4,765 259 5,244 112 2 15 5,373
Total yield 4.87% 6.68% 5.93% 6.56% 7.11% 6.48% 6.68% 6.58%
Weighted average
contractual years to
maturity .93 - (a) .28 .58 (b) 10.45 - (a) 3.86
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The average expected lives of "U.S. agency mortgage-backed" and "Other
mortgage-backed" securities were approximately 4.1 years and 2.0 years,
respectively, at December 31, 1998.
(b) Excludes maturities of "U.S. agency mortgage-backed" securities.
Note: Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Rates are calculated on a taxable equivalent basis
using a 35% federal income tax rate.
79
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 December 31, 1997
------------------------------------------------------------------------------------------
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 $ 50 $11 $- $ 61 $ 41 $ 7 $- $ 48
U.S. agency mortgage-backed 1,468 24 3 1,489 1,953 30 1 1,982
- ------------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and
agency securities 1,518 35 3 1,550 1,994 37 1 2,030
Other mortgage-backed 16 - - 16 23 - - 23
Other securities 68 - - 68 65 - - 65
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,602 $35 $3 $1,634 $2,082 $37 $1 $2,118
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Contractual maturities at December 31, 1998
U.S. agency Total Other Total
U.S. mortgage- U.S. Treasury mortgage- Other investment
(dollar amounts in millions) Treasury backed and agency backed securities securities
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Within one year
Amortized cost $ 4 $ - $ 4 $ - $ - $ 4
Fair value 4 - 4 - - 4
Yield 5.87% - 5.87% - - 5.87%
1 to 5 years
Amortized cost - - - - - -
Fair value - - - - - -
Yield - - - - - -
5 to 10 years
Amortized cost - - - - 16 16
Fair value - - - - 16 16
Yield - - - - 9.32% 9.32%
Over 10 years
Amortized cost 46 - 46 - 52 (a) 98
Fair value 57 - 57 - 52 (a) 109
Yield 6.82% - 6.82% - 5.98% 6.37%
Mortgage-backed
securities
Amortized cost - 1,468 1,468 16 - 1,484
Fair value - 1,489 1,489 16 - 1,505
Yield - 7.29% 7.29% 7.13% - 7.29%
- ------------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $50 $1,468 $1,518 $16 $68 $1,602
Total fair value 61 1,489 1,550 16 68 1,634
Total yield 6.74% 7.29% 7.27% 7.13% 6.77% 7.25%
Weighted average
contractual years to
maturity 14.50 - (b) 14.50 (c) - (b) 1.65
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes Federal Reserve Bank stock of $51 million with a yield of 6.0% and
no stated maturity.
(b) The average expected lives of "U.S. agency mortgage-backed" and "Other
mortgage-backed" securities were approximately 3.2 years and 2.3 years,
respectively, at December 31, 1998.
(c) Excludes maturities of "U.S. agency mortgage-backed" securities.
Note: Expected maturities may differ from the contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Rates are calculated on a taxable equivalent basis
using a 35% federal income tax rate.
80
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BUSINESS SECTORS
On January 1, 1998, the Corporation adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which superseded FAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
establishes standards for reporting information about business sectors in the
footnotes to annual financial statements and also requires selected sector
information in interim reports. The statement requires disclosure on a business
sector basis, as defined by the Corporation, to include a description of
products and services, profit or loss as measured by the Corporation's
management in assessing sector performance and geographic information on assets
and revenue, if material.
Various lines of business that offer different products and services but that
share similar basic and economic characteristics have been combined into four
major business sectors: Consumer Fee Services, Consumer Banking, Business Fee
Services and Business Banking. Consumer Fee Services includes private asset
management services, retail mutual funds and brokerage services. Consumer
Banking includes consumer lending and deposit products, business banking and
jumbo residential mortgage lending. Business Fee Services includes institutional
asset and institutional mutual fund management and administration, institutional
trust and custody, securities lending, foreign exchange, cash management, stock
transfer, benefits consulting and administrative services, and services for
defined contribution plans. Business Banking 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.
For details of business sectors, see the table and the first and second
paragraphs following the table, and the Real Estate Workout/Other Corporate
Activity and Geographic Information paragraphs in the Business Sectors
presentation on pages 28 through 31. The table and information in those
paragraphs are incorporated by reference into these Notes to Financial
Statements.
5. LOANS
For details of the loans outstanding at December 31, 1998 and 1997, see the 1998
and 1997 columns of the "Composition of loan portfolio" table on page 57. The
information in those columns is incorporated by reference into these Notes to
Financial Statements.
For details of the nonperforming and past-due loans at December 31, 1998 and
1997, see the amounts in the 1998 and 1997 columns of the "Nonperforming assets"
and "Past-due loans" tables on pages 61 and 63, respectively. The information in
those columns is incorporated by reference into these Notes to Financial
Statements. For details on impaired loans at December 31, 1998 and 1997, see the
amounts in the 1998 and 1997 columns of the "Impaired loans" table on page 62.
The information in those columns is incorporated by reference into these Notes
to Financial Statements. There was no foregone interest on restructured loans in
both 1998 and 1997. Foregone interest on restructured loans was less than $1
million in 1996.
6. RESERVE FOR CREDIT LOSSES
For details of the reserve for credit losses for 1998, 1997 and 1996, see the
1998, 1997 and 1996 columns of the "Credit loss reserve activity" table on page
65. The information in those columns is incorporated by reference into these
Notes to Financial Statements.
81
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 38 $ 27
Buildings 279 279
Equipment 783 794
Leasehold improvements 246 204
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 1,346 1,304
Accumulated depreciation and amortization (777) (731)
- ---------------------------------------------------------------------------------------------------------------------------------
Total premises and equipment $ 569 $ 573
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no capital leases for premises and equipment at December 31, 1998,
and less than $1 million at December 31, 1997.
Rental expense was $162 million, $137 million and $124 million, respectively,
net of related sublease revenue of $20 million, $23 million and $25 million, in
1998, 1997 and 1996 respectively. Depreciation and amortization expense totaled
$105 million, $108 million and $105 million in 1998, 1997 and 1996,
respectively. Maintenance, repairs and utilities expenses totaled $102 million,
$98 million and $93 million in 1998, 1997 and 1996, respectively.
As of December 31, 1998, the Corporation and its subsidiaries are obligated
under noncancelable leases (principally for banking premises) with expiration
dates through 2020. A summary of the future minimum rental payments under
noncancelable leases, net of related sublease revenue totaling $67 million, is
as follows: 1999--$173 million; 2000--$162 million; 2001--$154 million;
2002--$142 million; 2003--$135 million and 2004 through 2023--$760 million.
8. RESERVE FOR REAL ESTATE ACQUIRED
An analysis of the reserve for real estate acquired for 1998, 1997 and 1996 is
presented in the "Change in reserve for real estate acquired" table on page 62
and is incorporated by reference into these Notes to Financial Statements.
9. OTHER ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Prepaid expense:
Pension $ 468 $ 391
Other 132 80
Accounts and fees receivable 591 508
Interest receivable 262 241
Mortgage servicing advances 214 223
Receivables related to off-balance-sheet instruments 552 553
Assets held for accelerated resolution 67 157
Other 1,785 1,187
- ------------------------------------------------------------------------------------------------------------------------------------
Total other assets $4,071 $3,340
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10. DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or greater
was approximately $3.7 billion at December 31, 1998, and $3.9 billion at
December 31, 1997.
At December 31, 1998, the scheduled maturity of time deposits for the years 1999
through 2003, and 2004 and thereafter are as follows: $8,265 million, $684
million, $277 million, $83 million, $71 million and $108 million, respectively.
82
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. REVOLVING CREDIT AGREEMENT
During 1996, the Corporation signed a four-year $300 million revolving credit
agreement with several financial institutions that serves as a support facility
for commercial paper and for general corporate purposes. This revolving credit
facility has several restrictions, including a minimum 6% Tier I ratio, a 1.30
maximum double leverage limitation and a minimum nonperforming asset coverage
ratio of 3 to 1. The nonperforming asset coverage ratio is Tier I capital plus
the reserve for credit losses as a multiple of nonperforming assets. At December
31, 1998, the Corporation was in compliance with all of the restrictions. The
revolving credit facility is supplemented by a $25 million backup line of
credit, bringing total commercial paper support facilities to $325 million.
There were no other lines of credit to subsidiaries of the Corporation at
December 31, 1998 or 1997. No borrowings were made under any facility in 1998 or
1997. Commitment fees totaled less than $1 million in each of the years 1996
through 1998.
12. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Corporation:
6.375% Subordinated Debentures due 2010 $ 348 $ -
5.75% Senior Notes due 2003 300 -
6.70% Subordinated Debentures due 2008 249 249
6.30% Senior Notes due 2000 200 200
7-5/8% Senior Notes due 1999 200 200
6.00% Senior Notes due 2004 199 -
6-7/8% Subordinated Debentures due 2003 150 150
9-1/4% Subordinated Debentures due 2001 100 100
9-3/4% Subordinated Debentures due 2001 100 100
Medium-Term Notes, Series A, due 2000-2001 (10.30% to 10.50% at December 31, 1998,
and 10.10% to 10.50% at December 31, 1997) 10 22
7-1/4% Convertible Subordinated Capital Notes due 1999 1 2
Subsidiaries:
7-3/8% Subordinated Notes due 2007 300 298
7% Subordinated Notes due 2006 300 300
7-5/8% Subordinated Notes due 2007 249 249
6-1/2% Subordinated Notes due 2005 249 249
6-3/4% Subordinated Notes due 2003 149 149
Medium-Term Bank Notes due 1999-2007 (4.52% to 8.55% at December 31, 1998, and
5.64% to 8.55% at December 31, 1997) 199 303
Various notes due 1998 (5.03% to 10.50% at December 31, 1997) - 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total unsecured notes and debentures (with original maturities over one year) $3,303 $2,573
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In February 1998, the Corporation issued $350 million of subordinated debentures
at an interest rate of 6.375%, maturing in 2010, and $200 million of senior
notes at an interest rate of 6%, maturing in 2004. In November 1998, the
Corporation issued an additional $300 million of senior notes at an interest
rate of 5.75%, maturing in 2003. Prior to issuance, the Corporation hedged the
cost of the $350 million of subordinated debentures with interest rate
instruments that were terminated upon issuance of the debt. The effective
interest rate on the $350 million of corporate debt, including the effect of the
interest rate instruments, was 6.72%. The proceeds from these issuances were
used for general corporate purposes.
The subordinated notes and medium-term bank notes shown in the table above were
issued by Mellon Bank, N.A. These notes are subordinated to obligations to
depositors and other creditors of Mellon Bank, N.A.
83
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
12. NOTES AND DEBENTURES (WITH ORIGINAL MATURITIES OVER ONE YEAR) (CONTINUED)
The aggregate amounts of notes and debentures that mature during the five years
1999 through 2003 for the Corporation are as follows: $366 million, $210
million, $205 million, $9 million and $602 million, respectively. The aggregate
amounts of notes and debentures that mature during the five years 1999 through
2003 for Mellon Bank Corporation (parent corporation) are as follows: $201
million, $205 million, $205 million, none and $450 million, respectively.
13. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES (TRUST-PREFERRED SECURITIES)
In the fourth quarter of 1996, the Corporation formed two statutory business
trusts, Mellon Capital I and Mellon Capital II. All of the common securities of
these special-purpose trusts are owned by the Corporation; the trusts exist
solely to issue capital securities. For financial reporting purposes, the trusts
are treated as subsidiaries and are consolidated into the financial statements
of the Corporation. The capital securities are presented as a separate line item
on the consolidated balance sheet as guaranteed preferred beneficial interests
in Corporation's junior subordinated deferrable interest debentures
(trust-preferred securities). The trust-preferred securities qualify as Tier I
capital. The trusts have issued the trust-preferred securities and invested the
net proceeds in junior subordinated deferrable interest debentures (subordinated
debentures) issued to the trusts by the Corporation. The subordinated debentures
are the sole assets of the trusts. The Corporation has the right to defer
payment of interest on the subordinated debentures at any time, or from time to
time, for periods not exceeding five years. If interest payments on the
subordinated debentures are deferred, the distributions on the trust-preferred
securities also are deferred. Interest on the subordinated debentures and
distributions on the trust-preferred securities is cumulative. The Corporation,
through guarantees and agreements, has fully and unconditionally guaranteed all
of the trusts' obligations under the trust-preferred securities.
For purposes of the table below and discussion that follows, the terms and
conditions of the trust-preferred securities are treated as identical to the
underlying subordinated debentures.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Liquidation Balances at
(dollar amounts in millions, Stated preference December 31,
except per security amounts) maturity Payable per security 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7.72% Series A 12/01/26 semiannual $1,000.00 $495 $495
7.995% Series B 1/15/27 semiannual $1,000.00 496 496
---- ----
Total $991 $991
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The securities were each issued for a face value of $500 million and are
reported net of issuance costs in the table above. The securities are unsecured
and subordinate to all senior debt (as defined) of the Corporation. The Series A
and Series B securities are redeemable, in whole or in part, at the option of
the Corporation on or after December 1, 2006, and January 15, 2007,
respectively, or prior to those dates, in whole, within 90 days following
receipt of a legal opinion that, due to a change in the tax laws or an
administrative or judicial decision, there is a substantial risk that the tax
deductibility of the interest could be disallowed ("tax event") or the
Corporation's reasonable determination that, due to a change in law or
administrative or judicial decision, there is a substantial risk that Tier I
capital treatment could be disallowed ("capital treatment event"). The Series A
and Series B securities are redeemable at 103.86% and 103.9975%, respectively,
of the liquidation amounts, plus accrued distributions, during the 12-month
periods beginning December 1, 2006, and January 15, 2007, respectively (the call
dates). The redemption prices decline for the Series A and Series B securities
by approximately 39 basis points and approximately 40 basis points,
respectively, during each of the following 12-month periods, until a final
redemption price of 100% of the liquidation amount is set for December 1, 2016,
and January 15, 2017, respectively, and thereafter. If the securities are
redeemed following a tax event or capital treatment event, the greater of 100%
of the principal amount or the sum of the present value of the first redemption
price plus the present value of interest payments from the redemption date to
the call dates will be paid.
84
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. PREFERRED STOCK
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1998 Dividends
(dollar amounts in millions, Shares Sharea --------------------------- -----------------------
except per share amounts) authorized issued 1998 1997 1996 Per share Aggregate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
8.20% preferred stock (Series K) - - $ - $193 $193 $ .26 $2 (a)
8.50% preferred stock (Series J) - - - - 97 - -
--- ---- ----
Total preferred stock $ - $193 $290
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) As a result of the redemption of the Series K preferred stock, the
Corporation recorded an additional $7 million of preferred stock dividends
in 1998, as a reduction of net income applicable to common stock,
reflecting the write-off of issue costs. Including the additional amount,
the total reduction of net income applicable to common stock related to
Series K preferred stock was $9 million in 1998.
The Corporation has authorized 50 million shares of preferred stock. Each series
of preferred stock had a par value $1.00 per share and a liquidation preference
of $25 per share. The Corporation redeemed the Series K preferred stock on
February 17, 1998, at a price of $25 per share plus accrued dividends.
15. REGULATORY CAPITAL REQUIREMENTS
A discussion about the Corporation's regulatory capital requirements for 1998
and 1997 is presented in the "Regulatory capital" section on pages 44 through 46
and is incorporated by reference into these Notes to Financial Statements.
16. FEE REVENUE
The components of fee revenue for the three years ended December 31, 1998, are
presented in the "Fee revenue" table on page 32. That table is incorporated by
reference into these Notes to Financial Statements.
17. FOREIGN CURRENCY AND SECURITIES TRADING REVENUE
The Corporation's trading activities involve a variety of financial instruments,
including U.S. government securities, municipal securities and money market
securities, as well as off-balance-sheet instruments. A significant portion of
the Corporation's trading revenue is earned by structuring and executing
off-balance-sheet instruments for customers. The resulting risks are limited by
entering into generally matching or offsetting positions. The Corporation also
enters into positions in interest rate, foreign exchange, futures contracts and
debt instruments based upon expectations of future market conditions. Unmatched
positions are monitored through established limits. To maximize net trading
revenues, the market-making and proprietary positions are managed together by
product.
The results of the Corporation's foreign currency and securities trading
activities are presented, by class of financial instrument, in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange contracts $155 $108 $72
Debt instruments - 3 4
Interest rate contracts 24 14 2
Futures contracts (14) (7) 2
- ----------------------------------------------------------------------------------------------------------------------------
Total foreign currency and securities trading revenue (a) $165 $118 $80
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Corporation recorded an unrealized loss of $3 million at December 31,
1998, and an unrealized loss of less than $1 million at December 31, 1997
and 1996, related to securities held in the trading portfolio.
85
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
18. INCOME TAXES
Income tax expense applicable to income before taxes consists of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes:
Federal $454 $321 $289
State and local 40 24 25
Foreign 7 11 9
- -----------------------------------------------------------------------------------------------------------------------------------
Total current tax expense 501 356 323
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred taxes:
Federal (42) 31 89
State and local 10 11 6
Foreign 1 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total deferred tax expense/(benefit) (31) 42 95
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $470 $398 $418
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to amounts applicable to income before taxes, the following income
tax expense (benefit) amounts were recorded in shareholders' equity:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation expense for tax purposes in excess
of amounts recognized for financial statement purposes $(55) $(40) $(17)
Other comprehensive results 6 19 (10)
- -----------------------------------------------------------------------------------------------------------------------------------
Total tax expense (benefit) $(49) $(21) $(27)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes was different from the amounts computed by
applying the statutory federal income tax rate to income before income taxes due
to the items listed in the following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35% 35% 35%
Tax expense computed at statutory rate $469 $409 $403
Increase (decrease) resulting from:
State and local income taxes, net of federal tax benefit 33 23 20
Amortization of goodwill 23 14 12
Tax exempt income (44) (39) (12)
Other, net (11) (9) (5)
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $470 $398 $418
- -----------------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 35.1% 34.1% 36.3%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
18. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Provision for credit losses and
write-downs on real estate acquired $ 224 $ 223 $205
Hedges on mortgage servicing rights 83 6 -
Occupancy expense 75 73 72
Accrued expense not deductible until paid 70 58 44
Other 18 9 21
- ---------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 470 369 342
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Lease financing revenue 523 451 359
Other 61 58 49
- ---------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 584 509 408
- ---------------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(114) $(140) $(66)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation determined that it was not required to establish a valuation
allowance for deferred tax assets because it is management's assertion that the
deferred tax assets are likely to be realized through carryback to taxable
income in prior years, future reversals of existing taxable temporary
differences and, to a lesser extent, future taxable income.
19. EARNINGS PER COMMON SHARE
Effective December 31, 1997, the Corporation adopted FAS No. 128, "Earnings per
Share." This statement established standards for computing and presenting basic
and diluted earnings per common share (EPS). It superseded Accounting Principles
Board (APB) Opinion No. 15 that required the presentation of both primary and
fully diluted EPS.
Basic EPS is computed by dividing net income applicable to common stock by the
weighted average number of common shares outstanding during the period, without
considering any dilutive items. Diluted EPS is computed by dividing net income
applicable to common stock by the weighted average number of common shares and
common stock equivalents for items that are dilutive, net of shares assumed to
be repurchased using the treasury stock method. Common stock equivalents arise
from the assumed conversion of outstanding stock options and convertible capital
notes. The computation of basic and diluted EPS is shown in the table on the
following page.
87
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
19. EARNINGS PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in millions, except per Year ended December 31,
shares amounts; common shares in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Net income applicable to common stock $861 $750 $689
- ----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 260,220 255,356 262,411
Basic earnings per common share $3.31 $2.94 $2.63
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Net income applicable to common stock (a) $861 $750 $689
- ----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 260,220 255,356 262,411
Common stock equivalents:
Stock options (b) 4,918 5,360 3,978
Common shares issuable upon conversion of
7 1/4% Convertible Subordinated Capital Notes 69 113 202
- ----------------------------------------------------------------------------------------------------------------------------------
Total 265,207 260,829 266,591
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $3.25 $2.88 $2.58
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The after-tax benefit of interest expense on the assumed conversion of the
7 1/4% Convertible Subordinated Capital Notes was less than $1 million for
all periods presented.
(b) Options to purchase 1,707; 1,505; and 1,453 shares of common stock were not
included in the computation of diluted earnings per common share because
the options' exercise prices were greater than the average market prices of
the common shares for 1998, 1997 and 1996, respectively.
20. COMPREHENSIVE RESULTS
During 1998, the Corporation adopted FAS No. 130, "Reporting Comprehensive
Income." FAS No. 130 established standards for the reporting and display of
comprehensive income and its components in financial statements. FAS No. 130
defines comprehensive income as net income, as currently reported, as well as
unrealized gains and losses on assets available for sale, foreign currency
translation adjustments and certain other items not currently included in the
income statement. In complying with the reporting requirements of this
statement, the Corporation retitled the line item in the Consolidated Balance
Sheet and the Statement of Changes in Shareholders' Equity from "Net unrealized
gain (loss) on assets available for sale, net of tax" to "Accumulated unrealized
gains (losses), net of tax." In addition, it was necessary to reclassify the
"Foreign currency translation adjustment" from "Retained earnings" to
"Accumulated unrealized gains (losses), net of tax." Amounts reclassified from
retained earnings at December 31, 1997, and December 31, 1996, were $(12)
million and $(6) million, respectively.
88
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
20. COMPREHENSIVE RESULTS (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED UNREALIZED GAINS (LOSSES), NET OF TAX
- --------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Beginning balance $(12) $ (6) $ (6)
Current-period change (9) (6) -
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $(21) $(12) $ (6)
- --------------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAINS (LOSSES) ON ASSETS AVAILABLE
FOR SALE, NET OF TAX
Beginning balance $ 33 $ (1) $ 18
Current-period change 13 34 (19)
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 46 $ 33 $ (1)
- --------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED UNREALIZED GAINS (LOSSES),
NET OF TAX
Beginning balance $ 21 $ (7) $ 12
Current-period change 4 28 (19)
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 25 $ 21 $ (7)
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX EFFECTS ALLOCATED TO EACH COMPONENT OF COMPREHENSIVE RESULTS
- --------------------------------------------------------------------------------------------------------------------------------
Before tax Tax (expense)/ After tax
(in millions) amount benefit amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1996:
Foreign currency translation adjustment $ - $ - $ -
Unrealized gains (losses) on assets
available for sale (29) 10 (19)
- --------------------------------------------------------------------------------------------------------------------------------
Other comprehensive results $(29) $ 10 $(19)
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,1997:
Foreign currency translation adjustment $ (6) $ - $ (6)
Unrealized gains (losses) on assets
available for sale 53 (19) 34
- --------------------------------------------------------------------------------------------------------------------------------
Other comprehensive results $ 47 $(19) $ 28
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Foreign currency translation adjustment $ (9) $ - $ (9)
Unrealized gains (losses) on assets
available for sale:
Unrealized gains (losses) during the year 30 (10) 20
Less: Reclassification adjustments (11) 4 (7)
- --------------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) 19 (6) 13
- --------------------------------------------------------------------------------------------------------------------------------
Other comprehensive results $ 10 $ (6) $ 4
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21. EMPLOYEE BENEFITS
Pension plans
The Corporation's largest subsidiaries sponsor trusteed, noncontributory,
defined benefit pension plans. Together, these plans cover substantially all
salaried employees of the Corporation. The plans provide benefits that are based
on
89
<PAGE> 76
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
21. EMPLOYEE BENEFITS (CONTINUED)
the employees' years of service and compensation. All of the domestic funded
plans are overfunded to varying degrees on a plan termination basis. In
addition, several unfunded plans exist for certain employees or for purposes
that are not addressed by the funded plans.
The tables below report the combined data of the funded and unfunded plans. The
impact of acquisitions shown below primarily result from Mellon 1st Business
Bank in 1998 and Buck Consultants in 1997. The accumulated benefit obligation
for the unfunded plans was $93 million and $82 million as of December 31, 1998,
and December 31, 1997, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997
(in millions) FUNDED UNFUNDED Funded Unfunded
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 630 $ 90 $ 452 $ 57
Service cost 29 4 23 3
Interest cost 42 7 35 5
Actuarial (gain)/loss 36 5 28 5
Acquisitions - 4 112 24
Benefits paid (21) (5) (19) (4)
Foreign currency exchange rate change - - (1) -
- --------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 716 $ 105 $ 630 $ 90
- --------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $1,405 - $1,006 -
Return on plan assets 220 - 257 -
Acquisition - - 151 -
Employer contributions 5 - 11 -
Benefits paid (21) - (19) -
Foreign currency exchange rate change - - (1) -
- --------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year (a) $1,609 $ - $1,405 $ -
- --------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF FUNDED STATUS WITH FINANCIAL STATEMENTS
Funded status at December 31 $ 893 $(105) $ 775 $(90)
Unrecognized net transition (asset)/obligation (12) - (14) 1
Unrecognized prior service cost 8 6 9 7
Unrecognized net actuarial (gain)/loss (421) 13 (379) 13
- --------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at December 31 $ 468 $ (86) $ 391 $(69)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes 1.5 million shares of Mellon Bank Corporation common stock at
December 31, 1998 and December 31, 1997. The Mellon Bank, N.A. retirement
plan received approximately $2 million of dividends from Mellon Bank
Corporation's common stock in both 1998 and 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
(dollar amounts in millions) FUNDED UNFUNDED Funded Unfunded Funded Unfunded
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.5% 6.5% 6.75% 6.75% 7.0% 7.0%
Expected return on assets 10.0 - 10.0 - 10.0 -
Rate of compensation increase 3.0 3.0 3.0 3.0 3.0 3.0
- -----------------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 29 $ 4 $ 23 $ 3 $ 20 $ 2
Interest cost 42 7 35 5 27 3
Expected return on plan assets (121) - (84) - (67) -
Amortization of transition asset (2) - (2) - (2) -
Amortization of prior service cost 2 1 2 2 2 2
Recognized net actuarial (gain)/loss (20) 8 (4) 2 (2) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost before special
termination benefits $ (70) $ 20 $ (30) $12 $ (22) $ 7
Special termination benefits (a) - - - - 15 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost after special
termination benefits $ (70) $ 20 $ (30) $12 $ (7) $ 7
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents an early retirement program offered to certain employees,
which increased 1996 pension expense by $15 million.
90
<PAGE> 77
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
21. EMPLOYEE BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
( in millions) FUNDED UNFUNDED Funded Unfunded
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF:
<S> <C> <C> <C> <C>
Prepaid benefit cost $468 $ - $391 $ -
Benefit liability - (93) - (82)
Adjustment required to recognize minimum liability - 7 - 13
- -----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized at December 31 $468 $(86) $391 $(69)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Long-Term Profit Incentive Plan
The Corporation has a Long-Term Profit Incentive Plan (1996) which provides for
the issuance of stock options, stock appreciation rights, performance units,
deferred cash incentive awards and shares of restricted stock to officers and
other key employees of the Corporation and its subsidiaries as approved by the
Human Resources Committee of the board of directors. Stock options may be
granted at prices not less than the fair market value of the common stock on the
date of grant. Options may be exercised during fixed periods of time from one
year to 10 years from the date of grant. In the event of a change in control of
the Corporation, as defined in the plan, these options will become immediately
exercisable, unless otherwise provided in the option agreement. Total
outstanding grants as of December 31, 1998, 1997 and 1996 were 12,458,767;
12,942,415; and 15,882,628 shares, respectively. During 1998, 1997 and 1996,
options for 3,049,707; 1,665,336; and 4,126,046 shares, respectively, were
granted and options for 3,253,849; 3,466,527; and 2,706,816 shares,
respectively, were exercised. At December 31, 1998, 8,917,878 shares were
available for grant.
Included in the December 31, 1998, 1997 and 1996, outstanding grants were
options for 1,173,598; 1,188,468; and 1,700,332 shares, respectively, that
become exercisable in full near the end of their 10-year terms, but the exercise
dates may be accelerated to an earlier date by the Human Resources Committee of
the board of directors, based on the optionee's and the Corporation's
performance. If so accelerated, compensation will be paid in the form of
deferred cash incentive awards to reimburse the exercise price of these options
if exercised prior to the original vesting date. The Corporation recognized $6
million of compensation expense for the acceleration of these options in 1998,
$13 million in 1997 and $8 million in 1996.
Stock Option Plans for Outside Directors
The Corporation's stock option plans for outside directors provide for the
granting of options for shares of common stock to outside directors, regional
directors and advisory board members of the Corporation. The timing, amounts,
recipients and other terms of the option grants are determined by the provisions
of, or formulas in, the directors' option plans. The exercise price of the
options is equal to the fair market value of the common stock on the grant date.
All options have a term of 10 years from the date of grant and become
exercisable one year from the grant date. Directors elected during the service
year are granted options on a pro rata basis to those granted to the directors
at the start of the service year. Total outstanding grants as of December 31,
1998, 1997 and 1996, were 751,056; 801,152; and 829,844 shares, respectively.
During 1998, 1997 and 1996, options for 36,576; 110,994; and 97,928 shares,
respectively, were granted and options for 86,672; 139,686; and 20,100 shares,
respectively, were exercised. At December 31, 1998, options for 165,826 shares
were available for grant.
Dreyfus Stock Option Plan
A stock option plan at Dreyfus prior to the August 1994 merger with the
Corporation provided for the issuance of stock options to key employees and key
consultants who rendered services at Dreyfus, at a price of not less than 95% of
the price of Dreyfus' common stock on the New York Stock Exchange on the day the
option was granted. Options were not exercisable within two years nor more than
10 years from the date of grant. Options for Dreyfus stock were automatically
converted into options for the Corporation's common stock on the merger date.
Total outstanding grants
91
<PAGE> 78
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
21. EMPLOYEE BENEFITS (CONTINUED)
as of December 31, 1998, 1997 and 1996, were 210,588; 535,072; and 978,624
shares, respectively. No options were granted in 1998, 1997 and 1996. No further
options will be granted under this plan. Options for 316,172; 443,552; and
630,972 shares were exercised in 1998, 1997 and 1996, respectively.
The table below summarizes stock option activity for the Long-Term Profit
Incentive Plan, the stock option plans for outside directors and the Dreyfus
Plan. Requirements for stock option shares can be met from either unissued or
treasury shares. All shares issued in 1998, 1997 and 1996 were from treasury
shares.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Shares subject Average exercise
STOCK OPTION ACTIVITY to option price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 17,308,756 $17.19
Granted 4,223,974 (a) 28.24
Exercised (3,357,888) 15.38
Forfeited (483,746) 17.95
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 17,691,096 20.15
Granted 1,776,330 (a) 47.20
Exercised (4,049,765) 17.04
Forfeited (1,139,022) 21.88
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 14,278,639 24.26
Granted 3,086,283 (a) 64.64
Exercised (3,656,693) 19.82
Forfeited (287,818) 34.32
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 13,420,411 $34.31
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Using the Black-Scholes option pricing model, the weighted-average fair
value of options granted in 1998, 1997 and 1996 was estimated at $12.97,
$9.15 and $5.40 per share, respectively.
The following table summarizes the characteristics of stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1998
Outstanding Exercisable (b)
-------------------------------------------- -------------------------
Average Average
Average exercise exercise
Exercise price range Shares life (a) price Shares price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.58 - $18.21 1,239,832 2.9 $12.46 1,205,266 $12.34
$18.25 - $20.44 4,337,869 5.5 19.36 4,186,643 19.39
$22.25 - $27.75 2,239,905 7.4 26.47 1,485,999 26.47
$31.38 - $43.75 1,234,275 7.9 33.09 419,593 33.83
$47.75 - $57.88 1,354,651 8.6 48.70 424,109 48.70
$58.00 - $67.38 1,566,621 9.7 60.29 - -
$68.81 - $75.00 1,447,258 9.5 69.38 - -
- -----------------------------------------------------------------------------------------------------------------------------------
13,420,411 7.0 $34.31 7,721,610 $22.03
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Average contractual life remaining in years.
(b) At December 31, 1997, 8,203,177 options were exercisable at an average
exercise price of $18.61. At December 31, 1996, 8,734,446 options were
exercisable at an average share price of $16.52.
The Black-Scholes option pricing model requires the use of subjective
assumptions which can materially affect fair value estimates. Therefore, this
model does not necessarily provide a reliable single measure of the fair value
of the Corporation's stock options. The fair value of each stock option granted
was estimated on the date of the grant using
92
<PAGE> 79
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
21. EMPLOYEE BENEFITS (CONTINUED)
the following weighted-average assumptions for grants in 1998, 1997 and 1996:
(1) expected dividend yields ranged from 2.6% to 4.5%; (2) risk-free interest
rates of approximately 5.5%; (3) expected volatility of 25%; and (4) expected
lives of options ranged from three to four years.
The Corporation accounts for its stock-based compensation plans under the
provision of APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
Corporation utilizes the intrinsic-value-based method, on which APB No. 25 is
based. In accordance with FAS No. 123, "Accounting for Stock-Based
Compensation," the Corporation adopted the disclosure-only option and continued
to apply the provisions of APB No. 25 for financial statement purposes.
Had the compensation cost for the Corporation's stock-based compensation plans
been determined in accordance with the fair-value accounting provisions of FAS
No. 123, net income applicable to common stock, basic net income per common
share and diluted net income per common share for the years ended December 31,
1998, 1997 and 1996, would have been as follows:
<TABLE>
<CAPTION>
(in millions except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock:
As reported $ 861 $ 750 $ 689
Pro forma $ 847 $ 740 $ 684
Basic net income per common share:
As reported $3.31 $2.94 $2.63
Pro forma $3.26 $2.90 $2.61
Diluted net income per common share:
As reported $3.25 $2.88 $2.58
Pro forma $3.19 $2.84 $2.57
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Retirement Savings Plan
Employees' payroll deductions into retirement savings accounts are matched by
the Corporation's contribution of common stock, at the rate of $.50 on the
dollar, up to 6% of the employee's annual base salary, with an annual maximum
Corporate contribution of $3,000 per employee. In 1998, 1997 and 1996, the
Corporation recognized $12 million, $11 million and $11 million, respectively,
of expense related to this plan and contributed 190,302; 246,136; and 378,024
shares, respectively. All shares contributed in 1998, 1997 and 1996 were issued
from treasury stock. The plan held 6,432,078; 6,663,606; and 7,696,672 shares of
the Corporation's common stock at December 31, 1998, 1997 and 1996,
respectively. On September 1, 1996, The Dreyfus Corporation's profit sharing
plan was merged into the Corporation's retirement savings plan. The Dreyfus plan
held 4,034,790 shares of the Corporation's common stock when the plans were
merged. Expense related to this plan was $8 million in 1996.
Buck has a separate retirement savings plan in which employees' payroll
deductions are matched at a rate of between 75% and 100%. The match is up to 6%
of the employees' annual base salary with an annual maximum contribution of
$10,000 per employee. Expense related to this plan was $6 million in 1998 and $3
million in 1997.
Profit Bonus Plan and Restricted Stock Awards
Performance-based awards are made to key employees at the discretion of the
Human Resources Committee of the board of directors. The granting of these
awards is based upon the performance of the key employees and on the
Corporation's overall performance in achieving its objectives. At the
committee's election, awards may be paid in a lump sum or may be deferred and
paid over a period of up to 15 years. Payouts were $32 million, $29 million and
$24 million for 1998, 1997 and 1996, respectively, and can be in the form of
cash, common stock, restricted stock or
93
<PAGE> 80
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
21. EMPLOYEE BENEFITS (CONTINUED)
phantom stock units equivalent to restricted stock. The employee is generally
prevented from selling or transferring restricted stock or phantom stock units
for a three-year period, and the shares or units are forfeited if employment is
terminated during that period. Restricted stock totaling 59,050; 73,150; and
79,800 shares, with a weighted-average market value on the date of grant of
$69.46, $62.63 and $37.35 per share, was awarded for 1998, 1997 and 1996
performance, respectively. In addition to the restricted stock awarded for 1998,
related to the Profit Bonus Plan, 158,124 shares of restricted stock, with a
weighted-average market value on the date of grants of $66.53 per share, or $11
million, were granted in 1998 to various key employees. Vesting of these shares
is primarily related to performance and occurs over a two- to three-year period.
In 1997, there was an additional 349,400 shares of performance-based restricted
stock granted to senior officers. Vesting occurs over a two- to three-year
period. The performance objectives for these shares were met in 1998. The market
value of these restricted shares on December 31, 1998, was $68.75 per share, or
$24 million. All restricted stock and phantom stock units were granted at the
market value of the shares on the grant date. At December 31, 1998, 773,602
shares of restricted stock and phantom stock units were outstanding.
Employee Stock Ownership Plan
In 1989, an Employee Stock Ownership Plan was formed to hold certain shares of
Mellon Bank Corporation common stock previously held in other defined
contribution plans sponsored by the Corporation and its subsidiaries. At
December 31, 1998, 1997 and 1996, this plan held 156,291; 154,891; and 155,574
shares, respectively, of the Corporation's common stock. The Corporation may
make contributions to this plan from time to time. No contributions were made in
1998, 1997 or 1996.
Postretirement benefits other than pensions
The Corporation shares in the cost of providing managed care, Medicare
supplement and/or major medical programs for employees who retired prior to
January 1, 1991. Employees who retire subsequent to January 1, 1991, who were
between the ages of 55 and 65 on January 1, 1991, and who had at least 15 years
of service are provided with a defined dollar supplement to assist them in
purchasing health insurance. Early retirees who do not meet these age and
service requirements are eligible to purchase health coverage at their own
expense under the standard plans that are offered to active employees. In
addition, the Corporation provides a small subsidy toward health care coverage
for other active employees when they retire. These benefits are provided through
various insurance carriers whose premiums are based on claims paid during the
year. The cost of providing these benefits amounted to $6 million in 1998, $7
million in 1997 and $9 million in 1996, including $3 million of early retirement
charges.
94
<PAGE> 81
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
21. EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the components of the costs and liability of the
Corporation's postretirement health care and life insurance benefits programs
for current and future retirees.
<TABLE>
<CAPTION>
Accumulated
Accrued postretirement postretirement Unrecognized
benefit cost benefit obligation transition obligation
---------------------------- -------------------------- ------------------------
(in millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1 $(50) $(33) $(26) $(55) $(46) $(55) $28 $30 $32
- ---------------------------------------------------------------------------------------------------------------------------------
Recognition of components of
net periodic postretirement
benefit costs:
Service cost (2) (2) (1) (2) (2) (1) - - -
Interest cost (4) (3) (3) (4) (3) (3) - - -
Retirement enhancement
program - - (3) - - (6) - - -
Amortization of:
Transition obligation (2) (2) (2) - - - (2) (2) (2)
Gains/(losses) 2 - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
(6) (7) (9) (6) (5) (10) (2) (2) (2)
Adjustment due to
acquisition of Buck - (13) - - (13) - - - -
Actuarial gains/(losses)
including a change in the
discount rate - - - 5 5 15 - - -
Benefit payments 2 3 2 2 4 4 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $(54) $(50) $(33) $(54) $(55) $(46) $26 $28 $30
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Discount rates of 6.75% and 7.0% were used to estimate the 1998 and 1997 net
periodic benefit costs, and rates of 6.5% and 6.75% were used to value the
accumulated postretirement benefit obligations at year-end 1998 and 1997,
respectively. A health care cost trend rate was used to recognize the effect of
expected changes in future health care costs due to medical inflation,
utilization changes, technological changes, regulatory requirements and Medicare
cost shifting. The future annual increase assumed in the cost of health care
benefits was 5.75% for 1999 and was decreased gradually to 4.25% for 2002 and
thereafter. The health care cost trend rate assumption may have a significant
impact on the amounts reported. Increasing the assumed health care cost trend by
one percentage point in each year would increase the accumulated postretirement
benefit obligation by approximately $5 million and the aggregate of the service
and interest cost components of net periodic postretirement health care benefit
cost by less than $1 million. Decreasing the assumed health care cost trend by
one percentage point each year would decrease the accumulated postretirement
benefit obligation by approximately $4 million and the aggregate of the service
and interest cost components of net periodic postretirement health care benefit
cost by less than $1 million.
22. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS
The prior approval of the Office of the Comptroller of the Currency (OCC) or the
Federal Reserve Board, as applicable, is required if the total of all dividends
declared by a national or state member bank subsidiary in any calendar year
exceeds the bank subsidiary's net profits, as defined, for that year, combined
with its retained net profits for the preceding two calendar years.
Additionally, such bank subsidiaries may not declare dividends in excess of net
profits on hand, as defined, after deducting the amount by which the principal
amount of all loans on which interest is past due for a period of six months or
more exceeds the reserve for credit losses.
95
<PAGE> 82
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
22. RESTRICTIONS ON DIVIDENDS AND REGULATORY LIMITATIONS (CONTINUED)
Under the first and currently more restrictive of the foregoing federal dividend
limitations, the Corporation's national and state member bank subsidiaries can,
without prior regulatory approval, declare dividends subsequent to December 31,
1998, of up to approximately $810 million of their retained earnings of $3.199
billion at December 31, 1998, less any dividends declared and plus or minus net
profits or losses, as defined, between January 1, 1999, and the date of any such
dividend declaration.
The payment of dividends also is limited by minimum capital requirements imposed
on all bank subsidiaries. The Corporation's bank subsidiaries exceed these
minimum requirements. The ability of state member and nonmember banks to pay
dividends also is limited by state banking regulations. The bank subsidiaries
declared dividends to the parent Corporation of $380 million in 1998, $450
million in 1997 and $400 million in 1996. The Federal Reserve Board and the OCC
have issued additional guidelines that require bank holding companies and
national banks to continually evaluate the level of cash dividends in relation
to their respective operating income, capital needs, asset quality and overall
financial condition.
The Federal Reserve Act limits extensions of credit by the Corporation's bank
subsidiaries to the Corporation and to certain other affiliates of the
Corporation, and requires such extensions to be collateralized and limits the
amount of investments by the banks in these entities. At December 31, 1998, such
extensions of credit and investments were limited to $562 million to the
Corporation or any other affiliate and to $1,123 million in total to the
Corporation and all of its other affiliates. Outstanding extensions of credit
totaled $366 million at December 31, 1998.
23. 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.
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
Off-balance-sheet risk
In the normal course of business, the Corporation becomes a party to various
financial transactions that generally do not involve funding. Because these
transactions generally are not funded, they are not reflected on the balance
sheet and are referred to as financial instruments with off-balance-sheet risk.
The Corporation offers off-balance-sheet financial instruments to enable its
customers to meet their financing objectives and manage their interest- and
currency-rate risk. Supplying these instruments provides the Corporation with an
ongoing source of fee revenue. The Corporation also enters into these
transactions to manage its own risks arising from movements in interest and
currency rates, to manage prepayment risk associated with its residential
mortgage servicing portfolio 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
96
<PAGE> 83
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
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 generally entering into matching or
offsetting positions and by establishing and monitoring limits on unmatched
positions.
Position limits are set by the Finance Committee and approved by the Executive
Management Group and the Executive Committee of the board of directors.
Portfolio outstandings are monitored against such limits by senior managers and
compliance staff independent of line areas.
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS THAT REPRESENT CREDIT RISK
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $33,432 $30,964
Standby letters of credit and foreign guarantees 3,830 3,897
Commercial letters of credit 86 105
Residential mortgage loans serviced with recourse 97 112
Custodian securities lent with indemnification
against broker default of return of securities 31,802 29,830
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments to extend credit
The Corporation enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specific rates and for
specific purposes. Substantially all of the Corporation's commitments to extend
credit are contingent upon customers maintaining specific credit standards at
the time of loan funding. The majority of the Corporation's commitments to
extend credit include material adverse change clauses within the commitment
contracts. These clauses allow the Corporation to deny funding a loan commitment
if the borrower's financial condition deteriorates during the commitment, such
that the customer no longer meets the Corporation's credit standards. The
Corporation's exposure to credit loss in the event of nonperformance by the
customer is represented by the contractual amount of the commitment to extend
credit. Accordingly, the credit policies utilized in committing to extend credit
and in the extension of loans are the same. Market risk arises on fixed rate
commitments if interest rates have moved adversely subsequent to the extension
of the commitment. The Corporation believes the market risk associated with
commitments is minimal. Since many of the commitments are expected to expire
without being drawn upon, the total contractual amounts do not necessarily
represent future cash requirements. The amount and type of collateral obtained
by the Corporation are based upon industry practice, as well as its credit
assessment of the customer. Of the $33 billion of contractual commitments for
which the Corporation has received a commitment fee or which were otherwise
legally binding--excluding credit card plans--approximately 35% of the
commitments are scheduled to expire within one year, and approximately 87% are
scheduled to expire within five years.
Letters of credit and foreign guarantees
There are two major types of letters of credit--standby and commercial letters
of credit. The off-balance-sheet credit risk involved in issuing standby and
commercial letters of credit is represented by their contractual amounts and is
essentially the same as the credit risk involved in commitments to extend
credit. The Corporation minimizes this risk by adhering to its written credit
policies and by requiring security and debt covenants similar to those contained
in loan agreements. The Corporation believes the market risk associated with
letters of credit and foreign guarantees is minimal.
97
<PAGE> 84
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Standby letters of credit and foreign guarantees obligate the Corporation to
disburse funds to a third-party beneficiary if the Corporation's customer fails
to perform under the terms of an agreement with the beneficiary. Standby letters
of credit and foreign guarantees are used by the customer as a credit
enhancement and typically expire without being drawn upon.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES Weighted-average
years to maturity
December 31, at December 31,
(in millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper and other debt $ 420 $ 400 1.0 1.4
Tax-exempt securities 856 972 2.2 2.1
Bid- or performance-related 1,681 1,747 .6 .6
Other 873 778 .8 .8
------- -------
Total standby letters of credit and foreign guarantees (a) $3,830 $3,897 1.0 1.1
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of participations and cash collateral totaling $301 million and
$306 million at December 31, 1998 and 1997, respectively.
A commercial letter of credit is normally a short-term instrument used to
finance a commercial contract for the shipment of goods from a seller to a
buyer. This type of letter of credit ensures prompt payment to the seller in
accordance with the terms of the contract. Although the commercial letter of
credit is contingent upon the satisfaction of specified conditions, it
represents a credit exposure if the buyer defaults on the underlying
transaction. Normally, reimbursement from the buyer is coincidental with payment
to the seller under commercial letter of credit drawings. As a result, the total
contractual amounts do not necessarily represent future cash requirements.
Residential mortgage loans serviced with recourse
Certain residential mortgages have been sold with servicing retained in which
the Corporation is subject to limited recourse provisions. The loans are
collateralized by real estate mortgages and in certain instances are supported
by either government-sponsored or private mortgage insurance.
Securities lending
A securities lending transaction is a fully collateralized transaction in which
the owner of a security agrees to lend the security through an agent (the
Corporation) to a borrower, usually a broker/dealer or bank, on an open,
overnight or term basis, under the terms of a prearranged contract. The borrower
will collateralize the loan at all times, generally with cash or U.S. government
securities, exceeding 100% of the market value of the loan, plus any accrued
interest on debt obligations.
The Corporation currently enters into two types of agency securities lending
arrangements--lending with and without indemnification. In securities lending
transactions without indemnification, the Corporation bears no contractual risk
of loss. For transactions in which the Corporation provides an indemnification,
risk of credit loss occurs if the borrower defaults on returning the securities
and the value of the collateral declines. Because the Corporation generally
indemnifies the owner of the securities against borrower default only, which is
indemnification for the difference between the market value of the securities
lent and any collateral deficiency, the total contractual amount does not
necessarily represent future cash requirements. Additional market risk
associated with securities lending transactions arises from interest rate
movements that affect the spread between the rate paid to the securities
borrower on the borrower's collateral and the rate the Corporation earns on that
collateral. This risk is controlled through policies that limit the level of
such risk that can be undertaken.
98
<PAGE> 85
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR TRADING ACTIVITIES (A)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
-------------------- ---------------------
NOTIONAL CREDIT Notional Credit
(in millions) AMOUNT RISK Amount Risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency contracts:
Commitments to purchase $17,538 (b) $14,808 (b)
Commitments to sell 17,773 (b) 14,882 (b)
Foreign currency and other option contracts purchased 608 17 796 13
Foreign currency and other option contracts written 574 - 789 -
Interest rate agreements: (c)
Interest rate swaps 11,236 74 5,077 33
Options, caps and floors purchased 753 20 403 -
Options, caps and floors written 929 - 567 -
Futures and forward contracts 7,469 - 7,985 -
Other products 32 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract in a gain position, on which a
counterparty may default.
(b) The combined credit risk on foreign currency contract commitments to
purchase and sell was $436 million at December 31, 1998, and
$487 million at December 31, 1997.
(c) The credit risk associated with interest rate agreements is calculated
after considering master netting agreements.
Foreign currency contracts
Commitments to purchase and sell foreign currency facilitate the management of
market risk by ensuring that, at some future date, the Corporation or a customer
will have a specified currency at a specified rate. The Corporation enters into
foreign currency contracts to assist customers in managing their currency risk
and as part of its proprietary trading activities. The notional amount of these
contracts at December 31, 1998, was $17.5 billion of contracts to purchase and
$17.8 billion of contracts to sell. The notional amount does not represent the
actual market or credit risk associated with this product. Market risk arises
from changes in the market value of contractual positions caused by movements in
currency rates. The Corporation limits its exposure to market risk by generally
entering into matching or offsetting positions and by establishing and
monitoring limits on unmatched positions. Credit risk relates to the ability of
the Corporation's counterparty to meet its obligations under the contract and
includes the estimated aggregate replacement cost of those foreign currency
contracts in a gain position. Replacement cost totaled approximately $436
million and $487 million at December 31, 1998 and 1997, respectively, and is
recorded on the balance sheet. There were no settlement or counterparty default
losses on foreign currency contracts in 1998, 1997 or 1996. The Corporation
manages credit risk by dealing only with approved counterparties under specific
credit limits and by monitoring the amount of outstanding contracts by customer
and in the aggregate against such limits. The future cash requirements, if any,
related to foreign currency contracts are represented by the net contractual
settlement between the Corporation and its counterparties.
Foreign currency and other option contracts written and purchased
Foreign currency and other option contracts grant the contract purchaser the
right, but not the obligation, to purchase or sell a specified amount of a
foreign currency or other financial instrument during a specified period at a
predetermined price. The Corporation acts as both a purchaser and seller of
foreign currency and other option contracts. Market risk arises from changes in
the value of contractual positions caused by fluctuations in currency rates,
interest rates and security values underlying the option contracts. Market risk
is managed by generally entering into matching or offsetting positions and by
establishing and monitoring limits on unmatched positions. Credit risk and
future cash requirements are similar to those of foreign currency contracts. The
estimated aggregate replacement cost of purchased foreign currency and other
option contracts in gain positions was $17 million at December 31, 1998, and
99
<PAGE> 86
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
$13 million at December 31, 1997, and is recorded on the balance sheet. There
were no settlement or counterparty default losses on foreign currency and other
option contracts in 1998, 1997 or 1996.
Interest rate swaps
Interest rate swaps obligate two parties to exchange one or more payments
generally calculated with reference to fixed or periodically reset rates of
interest applied to a specified notional principal amount. Notional principal is
the amount upon which interest rates are applied to determine the payment
streams under interest rate swaps. Such notional principal amounts often are
used to express the volume of these transactions but are not actually exchanged
between the counterparties.
The credit risk associated with interest rate swaps is limited to the estimated
aggregate replacement cost of those agreements in a gain position. Replacement
cost totaled $74 million and $33 million at December 31, 1998 and 1997,
respectively, and is recorded on the balance sheet. Credit risk is managed
through credit approval procedures that establish specific lines for individual
counterparties and limits credit exposure to various portfolio segments.
Counterparty and portfolio outstandings are monitored against such limits on an
ongoing basis. Credit risk is further mitigated by contractual arrangements with
the Corporation's counterparties that provide for netting replacement cost gains
and losses on multiple transactions with the same counterparty. The Corporation
has entered into collateral agreements with certain counterparties to interest
rate swaps to further secure amounts due. The collateral is generally cash, U.S.
government securities or mortgage pass-through securities guaranteed by the
Government National Mortgage Association (GNMA). There were no counterparty
default losses on interest rate swaps in 1998, 1997 or 1996. Market risk arises
from changes in the market value of contractual positions caused by movements in
interest rates. The Corporation limits its exposure to market risk by generally
entering into matching or offsetting positions and by establishing and
monitoring limits on unmatched positions. The future cash requirements of
interest rate swaps are limited to the net amounts payable under these swaps. At
December 31, 1998, 84% of the notional principal amount of interest rate swaps
were scheduled to mature in less than five years.
Options, caps and floors
An interest rate option is a contract that grants the purchaser the right to
either purchase or sell a financial instrument at a specified price within a
specified period of time. An interest rate cap is a contract that protects the
holder from a rise in interest rates beyond a certain point. An interest rate
floor is a contract that protects the holder against a decline in interest rates
below a certain point. The credit risk associated with options, caps and floors
purchased was $20 million at year-end 1998 and less than $1 million at year-end
1997 and is recorded on the balance sheet. Options, caps and floors written do
not expose the Corporation to credit risk. Market risk arises from changes in
the market value of contractual positions caused by movements in interest rates.
The Corporation limits its exposure to market risk by generally entering into
matching or offsetting positions and by establishing and monitoring limits on
unmatched positions.
Futures and forward contracts
Futures and forward contracts on loans, securities or money market instruments
represent future commitments to purchase or sell a specified instrument at a
specified price and date. Futures contracts are standardized and are traded on
organized exchanges, while forward contracts are traded in over-the-counter
markets and generally do not have standardized terms. The Corporation uses
futures and forward contracts in connection with its proprietary trading
activities.
For instruments that are traded on an organized exchange, the exchange assumes
the credit risk that a counterparty will not settle and generally requires a
margin deposit of cash or securities as collateral to minimize potential credit
risk.
100
<PAGE> 87
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
The Corporation has established policies governing which exchanges and exchange
members can be used to conduct these activities, as well as the number of
contracts permitted with each member and the total dollar amount of outstanding
contracts. Credit risk associated with futures and forward contracts is limited
to the estimated aggregate replacement cost of those futures and forward
contracts in a gain position and was less than $1 million at December 31, 1998,
and December 31, 1997. Credit risk related to futures contracts is substantially
mitigated by daily cash settlements with the exchanges for the net change in the
value of the futures contract. There were no settlement or counterparty default
losses on futures and forward contracts in 1998, 1997 or 1996. Market risk is
similar to the market risk associated with foreign currency and other option
contracts. The future cash requirements, if any, related to futures and forward
contracts are represented by the net contractual settlement between the
Corporation and its counterparties.
<TABLE>
<CAPTION>
OFF-BALANCE-SHEET INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES (A)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
------------------------ ------------------------
NOTIONAL CREDIT Notional Credit
(in millions) AMOUNT RISK Amount Risk
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management instruments: (b)
Interest rate swaps $ 4,028 $ 60 $5,410 $34
Futures contracts 1,860 - - -
Options, caps and floors purchased (c) - - 40 -
Mortgage servicing rights risk management instruments:
Interest rate floors 10,216 216 1,850 35
Interest rate swaps 900 43 1,000 26
Principal only swaps - - 273 13
Interest rate spread lock 250 1 - -
Other products:
Total return swaps 147 10 139 6
Interest rate swaps and futures contracts
hedging anticipated transactions 365 - 579 -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount of credit risk associated with these instruments is limited to
the cost of replacing a contract in a gain position, on which a
counterparty may default.
(b) The credit risk associated with interest rate agreements is calculated after
considering master netting agreements.
(c) At December 31, 1998 and 1997, there were no options, caps and floors
written.
Interest rate swaps
The Corporation enters into interest rate swaps as part of its interest rate
risk management strategy primarily to alter the interest rate sensitivity of its
deposit liabilities, loans and certain other liabilities. At December 31, 1998,
the Corporation used $4,028 million notional amount of interest rate swaps for
interest rate risk management purposes, compared with $5,410 million notional
amount at December 31, 1997. The credit and market risk associated with these
instruments is explained on page 100 under "Interest rate swaps." The
replacement cost of swap agreements in a gain position was $60 million and $34
million at December 31, 1998 and 1997, respectively. Net interest revenue in
1998 and 1997 included $3 million and $4 million, respectively, of accreted net
deferred gains from terminated interest rate swaps.
Futures and forward contracts
The Corporation used $1,860 million notional amount of futures contracts as part
of its interest rate risk management strategy at December 31, 1998. The credit
and market risk associated with these instruments is explained on pages 100 and
101 under "Futures and forward contracts."
101
<PAGE> 88
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Options, caps and floors
Other interest rate products--primarily options, interest rate caps and interest
rate floors--also are used by the Corporation as part of its interest rate risk
management strategy. The Corporation had no transactions outstanding at December
31, 1998, and $40 million notional amount of these instruments outstanding at
December 31, 1997. The credit and market risk associated with these instruments
is explained on page 100 under "Options, caps and floors."
Mortgage servicing rights risk management instruments
The value of the Corporation's residential mortgage servicing portfolio may be
adversely impacted if mortgage interest rates decrease and actual (or probable)
prepayments of loans serviced increase. To mitigate this risk and the potential
resultant impairment to MSRs, the Corporation holds interest rate contracts
including interest rate floors, interest rate swaps, a spread lock and principal
only swaps. In an interest rate floor agreement, cash interest payments are
received only if current interest rates fall below a predetermined interest
rate. The notional amount of these instruments at December 31, 1998 and 1997,
was $11,366 million and $3,123 million, respectively. The replacement cost of
these instruments in a gain position at December 31, 1998 and 1997, was $260
million and $74 million, respectively.
Total return swaps
The Corporation had $147 million and $139 million notional amount of total
return swaps at December 31, 1998 and 1997, respectively. Total return swaps are
used by the Corporation to minimize the risk related to the Corporation's
investment in start-up mutual funds that are based on specific market indices.
Credit risk associated with these products was $10 million at year-end 1998 and
$6 million at year-end 1997.
Anticipated transactions
At December 31, 1998, the Corporation has entered into $365 million notional
amount of interest rate futures to lock in the value of certain loans that are
anticipated to be sold and/or securitized. At December 31, 1997, $579 million
notional amount of interest rate swaps and futures contracts were outstanding in
anticipation of a debt issuance and the sale and/or securitization of loans.
There was a decrease in fair value of approximately $4 million and less than $1
million related to these anticipated transactions at December 31, 1998 and 1997,
respectively.
Concentrations of credit risk
The Corporation manages both on- and off-balance-sheet credit risk by
maintaining a well-diversified credit portfolio and by adhering to its written
credit policies, which specify general underwriting criteria as well as
underwriting standards for specific industries and control credit exposure by
borrower, counterparty, degree of risk, industry and country. These measures are
regularly updated to reflect the Corporation's evaluation of developments in
economic, political and operating environments that could affect lending risks.
The Corporation may adjust credit exposure to individual industries or customers
through loan sales, syndications, participations and the use of master netting
agreements when it has more than one transaction outstanding with the same
customer. The amount of collateral, if any, obtained by the Corporation upon the
extension of credit is based on industry practice as well as the credit
assessment of the customer. The type and amount of collateral vary, but the form
generally includes: accounts receivable; inventory; property, plant and
equipment; other assets; and/or income-producing commercial properties with
appraised values that exceed the contractual amount of the credit facilities by
preapproved ratios. The maximum risk of accounting loss from on- and
off-balance-sheet financial instruments with these counterparties is represented
by their respective balance sheet amounts and the contractual or replacement
cost of the off-balance-sheet financial instruments. The only significant credit
concentrations for the Corporation were consumers and the U.S. government.
102
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK (CONTINUED)
Consumer credit exposure consisted principally of loans and the related interest
receivable on the balance sheet and off-balance-sheet loan commitments and
letters of credit. Consumers to which the Corporation has credit exposure
primarily are located within the mid-Atlantic region and are affected by
economic conditions within that region.
The Corporation has credit exposure to the U.S. government, including its
corporations and agencies. Substantially all of this exposure consisted of
investment securities, securities available for sale and the related interest
receivable and balances due from the Federal Reserve. There were no other
significant concentrations of credit risk at December 31, 1998 and 1997,
respectively.
25. FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the estimated fair value of on- and off-balance-sheet
financial instruments. A financial instrument is defined by FAS No. 107 as cash,
evidence of an ownership interest in an entity or a contract that creates a
contractual obligation or right to deliver to or receive cash or another
financial instrument from a second entity on potentially favorable terms.
Fair value estimates are made at a point in time, based on relevant market data
and information about the financial instrument. FAS No. 107 specifies that fair
values should be calculated based on the value of one trading unit without
regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. Because no readily available market exists for a
significant portion of the Corporation's financial instruments, fair value
estimates for these instruments are based on judgments regarding current
economic conditions, currency and interest rate risk characteristics, loss
experience and other factors. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
Therefore, the calculated fair value estimates cannot always be substantiated by
comparison to independent markets and, in many cases, may not be realizable in a
current sale of the instrument. Changes in assumptions could significantly
affect the estimates.
Fair value estimates do not include anticipated future business or the value of
assets, liabilities and customer relationships that are not considered financial
instruments. For example, the Corporation's fee-generating businesses--which
contributed 66% of revenue in 1998--are not incorporated into the fair value
estimates. Other significant assets and liabilities that are not considered
financial instruments include lease finance assets, deferred tax assets, lease
contracts, premises and equipment, and intangible assets. Accordingly, the
estimated fair value amounts of financial instruments do not represent the
entire value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
the fair value of its financial instruments at December 31, 1998 and 1997.
Short-term financial instruments
The carrying amounts reported on the Corporation's balance sheet generally
approximate fair value for financial instruments that reprice or mature in 90
days or less, with no significant change in credit risk. The carrying amounts
approximate fair value for cash and due from banks; money market investments;
acceptances; demand deposits; money market and other savings accounts; federal
funds purchased and securities under repurchase agreements; U.S. Treasury tax
and loan demand notes; commercial paper; and certain other assets and
liabilities.
103
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Trading account securities, securities available for sale and investment
securities
Trading account securities and securities available for sale are recorded at
market value on the Corporation's balance sheet, including amounts for
off-balance-sheet instruments held for trading activities. Market values of
trading account securities, securities available for sale and investment
securities generally are based on quoted market prices or dealer quotes, if
available. If a quoted market price is not available, market value is estimated
using quoted market prices for securities with similar credit, maturity and
interest rate characteristics. The tables in note 3 present in greater detail
the carrying value and market value of securities available for sale and
investment securities at December 31, 1998 and 1997.
Loans
The estimated fair value of performing commercial loans and certain consumer
loans that reprice or mature in 90 days or less approximates their respective
carrying amounts adjusted for a credit risk factor based upon the Corporation's
historical credit loss experience. The estimated fair value of performing loans,
except for consumer mortgage loans and credit card loans, that reprice or mature
in more than 90 days is estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality and for similar maturities.
Fair value of consumer mortgage loans is estimated using market quotes or
discounting contractual cash flows, adjusted for prepayment estimates. Discount
rates were obtained from secondary market sources, adjusted to reflect
differences in servicing, credit and other characteristics.
The estimated fair value of credit card loans is developed using estimated cash
flows and maturities based on contractual interest rates and historical
experience. Estimated cash flows are discounted using market rates adjusted for
differences in servicing, credit and other costs. This estimate does not include
the value that relates to new loans that will be generated from existing
cardholders over the remaining life of the portfolio, a value that is typically
reflected in market prices realized in credit card portfolio sales.
The estimated fair value for nonperforming commercial real estate loans is the
"as is" appraised value of the underlying collateral. For other nonperforming
loans, the estimated fair value represents carrying value less a credit risk
adjustment based upon the Corporation's historical credit loss experience.
Deposit liabilities
FAS No. 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits and money market and other savings
accounts, to be the amount payable on demand. Although market premiums paid for
depository institutions reflect an additional value for these low-cost deposits,
FAS No. 107 prohibits adjusting fair value for any value expected to be derived
from retaining those deposits for a future period of time or from the benefit
that results from the ability to fund interest-earning assets with these deposit
liabilities. The fair value of fixed-maturity deposits which reprice or mature
in more than 90 days is estimated using the rates currently offered for deposits
of similar remaining maturities.
Notes and debentures
The fair value of the Corporation's notes and debentures is estimated using
quoted market yields for the same or similar issues or the current yields
offered by the Corporation for debt with the same remaining maturities.
104
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The table below includes financial instruments, as defined by FAS No. 107, whose
estimated fair value is not represented by the carrying value as reported on the
Corporation's balance sheet. Management has made estimates of fair value
discount rates that it believes to be reasonable considering expected prepayment
rates, rates offered in the geographic areas in which the Corporation competes,
credit risk and liquidity risk. However, because there is no active market for
many of these financial instruments, management has no basis to verify whether
the resulting fair value estimates would be indicative of the value negotiated
in an actual sale.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Carrying amount Estimated fair value
------------------------- ----------------------
December 31, December 31,
(in millions) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale (a) $5,373 $ 2,767 $ 5,373 $ 2,767
Investment securities (a) 1,602 2,082 1,634 2,118
Loans (b):
Commercial and financial 13,614 12,392 13,570 12,368
Commercial real estate 2,285 1,509 2,266 1,492
Consumer mortgage 8,871 8,505 8,823 8,465
Other consumer credit 4,504 4,097 4,541 4,151
------- -------
Total loans 29,274 26,503
Reserve for credit losses (b) (470) (445) - -
------- ------- ------ -------
Net loans 28,804 26,058 29,200 26,476
Other assets (c) 2,645 2,074 2,647 2,099
Fixed-maturity deposits (d):
Retail savings certificates 7,039 7,421 7,099 7,464
Negotiable certificates of deposit and other time deposits 2,449 2,659 2,449 2,657
Other funds borrowed (c) 799 1,095 801 1,095
Notes and debentures (a) 3,303 2,573 3,507 2,665
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Market or dealer quotes were used to estimate the fair value of these
financial instruments.
(b) More than 80% of total performing loans, excluding consumer mortgages and
credit card receivables, reprice or mature within 90 days at December 31,
1998 and 1997, respectively. Excludes lease finance assets of $2,819
million and $2,639 million, as well as the related reserve for credit
losses of $26 million and $30 million at December 31, 1998 and 1997,
respectively. Lease finance assets are not considered financial instruments
as defined by FAS No. 107.
(c) Excludes non-financial instruments.
(d) FAS No. 107 defines the estimated fair value of deposits with no stated
maturity, which includes demand deposits and money market and other savings
accounts, to be equal to the amount payable on demand. Therefore, the
positive effect of the Corporation's $24,895 million and $21,225 million of
such deposits at December 31, 1998 and 1997, respectively, is not included
in this table.
Commitments to extend credit, and standby letters of credit and
foreign guarantees
These financial instruments generally are not sold or traded, and estimated fair
values are not readily available. However, the fair value of commitments to
extend credit, and standby letters of credit and foreign guarantees is
represented by the remaining contractual fees receivable over the term of the
commitments.
Other off-balance-sheet financial instruments
The estimated fair value of off-balance-sheet instruments used for trading
activities--which includes foreign exchange contracts, interest rate swaps,
option contracts, interest rate caps and floors, and futures and forward
contracts--is equal
105
<PAGE> 92
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
to the on-balance-sheet carrying amount of these instruments. The estimated fair
value of off-balance-sheet instruments used for risk management purposes--which
primarily includes interest rate swaps, interest rate caps and floors, and
futures contracts--is estimated by obtaining quotes from brokers. These values
represent the estimated amount the Corporation would receive or pay to terminate
the agreements, considering current interest and currency rates, as well as the
current credit-worthiness of the counterparties. Off-balance-sheet financial
instruments are further discussed in note 24, "Financial instruments with
off-balance-sheet risk and concentrations of credit risk."
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF COMMITMENTS TO EXTEND CREDIT, AND STANDBY LETTERS OF CREDIT AND FOREIGN GUARANTEES
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 December 31, 1997
---------------------------------------------- ---------------------------------------
ASSET Asset
---------------------------- -------------------------
CONTRACT CARRYING ESTIMATED Contract Carrying Estimated
(in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a) fair value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit $33,432 $5 $96 $30,964 $4 $102
Standby letters of credit and
foreign guarantees 3,830 1 17 3,897 1 19
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the on-balance-sheet receivables or deferred income arising from
these financial instruments.
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR TRADING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 December 31, 1997
------------------------------------------ ------------------------------------------
ASSET (LIABILITY) Asset (Liability)
NOTIONAL --------------------------- Notional -------------------------
PRINCIPAL ESTIMATED AVERAGE principal Estimated Average
(in millions) AMOUNT FAIR VALUE (a) FAIR VALUE amount fair value (a) fair value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency contracts $35,311 $ 9 $ 1 $29,690 $ 3 $ 14
Foreign currency and other
option contracts:
Options purchased 608 17 19 796 13 14
Options written 574 (11) (14) 789 (12) (13)
Interest rate swaps 11,236 24 21 5,077 13 7
Options, caps and floors 1,682 (1) (1) 970 - -
Futures and forward contracts 7,469 (3) (9) 7,985 (11) (10)
Other products 32 - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Recorded at fair value on the Corporation's balance sheet.
106
<PAGE> 93
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS USED FOR RISK MANAGEMENT PURPOSES
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 December 31, 1997
---------------------------------------- --------------------------------------
ASSET (LIABILITY) Asset (Liability)
NOTIONAL ------------------------- Notional ------------------------
PRINCIPAL CARRYING ESTIMATED principal Carrying Estimated
(in millions) AMOUNT AMOUNT (a) FAIR VALUE amount amount (a) fair value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management instruments:
Interest rate swaps $ 4,028 $10 $58 $5,410 $22 $32
Futures contracts 1,860 - - - - -
Options, caps and floors - - - 40 1 -
Mortgage servicing rights risk
management instruments:
Interest rate floors 10,216 3 216 1,850 23 35
Interest rate swaps 900 10 43 1,000 6 26
Principal only swaps - - - 273 (1) 13
Interest rate spread lock 250 - 1 - - -
Other products:
Total return swaps 147 - 8 139 - 6
Interest rate swaps and futures
contracts hedging anticipated transactions 365 (4) (4) 579 - (1)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the on-balance-sheet receivables/payables, unamortized
premiums or deferred income arising from these financial instruments.
26. SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
Noncash investing and financing transactions that, appropriately, are not
reflected in the Consolidated Statement of Cash Flows are listed below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reclassification of segregated assets to loans and
real estate acquired $ 12 $ - $ -
Net transfers to real estate acquired 47 12 23
Net transfers to segregated assets - 12 12
Purchase acquisitions (a):
Fair value of noncash assets acquired 2,995 1,057 1,954
Liabilities assumed (2,199) (720) (120)
Common stock issued, from treasury, and notes payable (255) (158) (10)
-------- ------- ------
Net cash disbursed 541 179 1,824
Transfer of CornerStone(sm) credit card loans to
accelerated resolution portfolio - 231 -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Purchase acquisitions include: Mellon United National Bank, Mellon 1st
Business Bank, Founders Asset Management, LLC and Newton Asset Management
in 1998; Buck Consultants, Inc. and Dreyfus Brokerage Services, Inc. in
1997; and the Business Equipment Finance Unit of USL Capital Corporation
and First United Leasing Corporation in 1996.
107
<PAGE> 94
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
27. MELLON BANK CORPORATION (PARENT CORPORATION)
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENT
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from bank subsidiaries $380 $450 $400
Dividends from nonbank subsidiaries 71 34 21
Interest revenue from bank subsidiaries 24 39 25
Interest revenue from nonbank subsidiaries 40 25 25
Other revenue 6 6 12
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 521 554 483
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense on commercial paper 13 4 12
Interest expense on notes and debentures 109 89 88
Other expense 67 31 29
Trust-preferred securities expense 79 78 3
- ---------------------------------------------------------------------------------------------------------------------------------
Total expense 268 202 132
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 253 352 351
Provision (benefit) for income taxes (66) (38) (21)
Equity in undistributed net income:
Bank subsidiaries 403 189 228
Nonbank subsidiaries 148 192 133
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 870 771 733
Dividends on preferred stock 9 21 44
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $861 $750 $689
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Cash and money market investments with bank subsidiary $ 456 $ 337
Loans and other receivables due from nonbank subsidiaries 781 566
Investment in bank subsidiaries 5,584 4,452
Investment in nonbank subsidiaries 566 515
Subordinated debt and other receivables due from bank subsidiaries 80 78
Other assets 205 147
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $7,672 $6,095
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial paper $ 116 $ 67
Other liabilities 187 169
Notes and debentures (with original maturities over one year) 1,857 1,023
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,160 1,259
- ---------------------------------------------------------------------------------------------------------------------------------
TRUST-PREFERRED SECURITIES:
Guaranteed preferred beneficial interests in Corporation's
junior subordinated deferrable interest debentures 991 991
- ---------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - 193
Common shareholders' equity 4,521 3,652
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,521 3,845
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities, trust-preferred securities and shareholders' equity $7,672 $6,095
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
108
<PAGE> 95
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
27. MELLON BANK CORPORATION (PARENT CORPORATION) (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 870 $ 771 $ 733
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 8 12 21
Equity in undistributed net income of subsidiaries (554) (399) (361)
Net (increase) decrease in accrued interest receivable (11) (1) 1
Deferred income tax benefit (9) (1) (3)
Net increase in other operating activities 84 39 10
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 388 421 401
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in short-term deposits with affiliated banks (110) 581 (602)
Purchases of securities available for sale - (605) (200)
Proceeds from maturities of securities available for sale - 807 -
Loans made to subsidiaries (316) (250) (298)
Principal collected on loans to subsidiaries 112 191 342
Principal collected on loans to joint venture - 14 1
Net capital returned from subsidiaries 101 16 350
Cash paid in purchase of Mellon 1st Business Bank (288) - -
Cash paid in purchase of Mellon United National Bank (140) - -
Net increase in other investing activities (54) (52) (20)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (695) 702 (427)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in commercial paper 49 (55) (162)
Repayments of long-term debt (12) (205) (20)
Net proceeds from issuance of long-term debt 842 - 247
Proceeds from issuance of common stock 52 75 55
Redemption of preferred stock (193) (97) (145)
Net proceeds from issuance of guaranteed preferred beneficial interests
in Corporation's junior subordinated deferrable interest debentures - - 990
Repurchase of common stock (27) (534) (596)
Dividends paid on common and preferred stock (376) (352) (354)
Net (decrease) increase in other financing activities (17) 46 11
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 318 (1,122) 26
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND DUE FROM BANKS:
Net change in cash and due from banks 11 1 -
Cash and due from banks at beginning of year 2 1 1
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 13 $ 2 $ 1
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
- ---------------------------------------------------------------------------------------------------------------------------------
Interest paid $110 $ 97 $ 95
Net income taxes refunded 83 27 3
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
109
<PAGE> 96
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MELLON BANK CORPORATION:
We have audited the accompanying consolidated balance sheets of Mellon Bank
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mellon Bank
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
January 14, 1999
110
<PAGE> 97
CORPORATE INFORMATION
<TABLE>
<S> <C>
ANNUAL MEETING The Annual Meeting of Shareholders will be held on the 10th floor of the Union Trust
Building, 501 Grant St., Pittsburgh, PA, at 10 a.m. EST on Tuesday, April 20, 1999.
FORM 10-K AND SHAREHOLDER For a free copy of the Corporation's Annual Report on Form 10-K or the quarterly
PUBLICATIONS earnings news release on Form 8-K, as filed with the Securities and Exchange
Commission, please send a written request to the Secretary of the Corporation, One
Mellon Bank Center, Room 4826, Pittsburgh, PA 15258-0001.
Quarterly earnings and other news releases also can be obtained by fax by calling
Company News on Call at 1 800 758-5804 and entering a six-digit code (552187).
EXCHANGE LISTING Mellon's common stock is traded on the New York Stock Exchange under the trading
symbol MEL. Our transfer agent and registrar is ChaseMellon Shareholder Services,
P.O. Box 590, Ridgefield Park, NJ 07660-0590. For more information, please call 1 800
205-7699.
STOCK PRICES Current prices for Mellon's common stock can be obtained from any Touch-Tone
telephone by dialing (412) 236-0834 (in Pittsburgh) or 1 800 648-9496 (outside
Pittsburgh). When prompted to "enter I.D.," press MEL# (635#). This service is
available free of charge, 24 hours a day, seven days a week, from anywhere in the
continental United States.
DIVIDEND PAYMENTS Subject to approval of the board of directors, dividends are paid on Mellon's common
stock on or about the 15th day of February, May, August and November.
DIRECT STOCK PURCHASE AND The Direct Stock Purchase and Dividend Reinvestment Plan provides a way to purchase
DIVIDEND REINVESTMENT PLAN shares of common stock directly from the Corporation at the market value for such
shares. Nonshareholders may purchase their first shares of the Corporation's common
stock through the plan, and shareholders may increase their shareholding by
reinvesting cash dividends and through optional cash investments. Plan details are in
a prospectus, which may be obtained from ChaseMellon Shareholder Services by calling
1 800 842-7629.
ELECTRONIC DEPOSIT OF Registered shareholders may have quarterly dividends paid on Mellon's common stock
DIVIDENDS deposited electronically to their checking or savings account, free of charge. To
have your dividends deposited electronically, please write to ChaseMellon Shareholder
Services, P.O. Box 590, Ridgefield Park, NJ 07660-0590. For more information, please
call 1 800 205-7699.
PHONE CONTACTS Corporate Communications/ (412) 236-1264 Media inquiries
Media Relations
Direct Stock Purchase and 1 800 842-7629 Plan prospectus and enrollment materials
Dividend Reinvestment Plan
Publication Requests 1 800 205-7699 Requests for the Annual Report or
quarterly information
Securities Transfer Agent 1 800 205-7699 Questions regarding stock holdings,
certificate replacement/transfer, dividends
and address changes
Investor Relations (412) 234-5601 Questions regarding the Corporation's
financial performance
INTERNET ACCESS Mellon: www.mellon.com
Buck: www.buckconsultants.com
ChaseMellon Shareholder Services: www.chasemellon.com
Dreyfus: www.dreyfus.com
Dreyfus Brokerage Services: www.edreyfus.com
Dreyfus Investment Services Corporation: www.disc.mellon.com
Dreyfus Retirement Services: drs.dreyfus.com
Founders: www.founders.com
Newton: www.newton.co.uk
ELIMINATION OF DUPLICATE To eliminate duplicate mailings, please submit a written request, with your full name
MAILINGS and address the way it appears on your account, to ChaseMellon Shareholder Services,
P.O. Box 590, Ridgefield Park, NJ 07660-0590. For more information, please call 1 800
205-7699.
CHARITABLE CONTRIBUTIONS A report on Mellon's comprehensive community involvement, including charitable
contributions, is available by calling (412) 234-8680.
MELLON ENTITIES ARE EQUAL EMPLOYMENT OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYERS.
Mellon is committed to providing equal employment opportunities to every employee and
every applicant for employment, regardless of, but not limited to, such factors as
race, color, religion, sex, national origin, age, familial or marital status,
ancestry, citizenship, sexual orientation, veteran status or being a qualified
individual with a disability.
</TABLE>
<PAGE> 1
Exhibit - 21.1
MELLON BANK CORPORATION
PRIMARY SUBSIDIARIES OF THE CORPORATION (a)
DECEMBER 31, 1998
Boston Group Holdings, Inc.
State of Incorporation: Delaware
o The Boston Company, Inc.
State of Incorporation: Massachusetts
oo Boston Safe Deposit and Trust Company
State of Incorporation: Massachusetts
Buck Consultants, Inc.
State of Incorporation: New York
Mellon Bank, N.A.
Incorporation: United States
o Cornice Holding Company, Inc.
State of Incorporation: Colorado
oo Founders Asset Management, LLC (90% ownership)
State of Organization: Colorado
o Mellon Leasing Corporation
State of Incorporation: Pennsylvania
o Mellon Mortgage Company
State of Incorporation: Colorado
o Dreyfus Brokerage Services, Inc.
State of Incorporation: California
o The Dreyfus Corporation
State of Incorporation: New York
Mellon Bank (DE) National Association
Incorporation: United States
Mellon Bank (MD) National Association
Incorporation: United States
Mellon 1st Business Corporation
State of Incorporation: California
(a) This listing includes all significant subsidiaries as defined in Rule
1-02(w) of Regulation S-X, as well as other selected subsidiaries.
<PAGE> 2
Exhibit - 21.1
(continued)
MELLON BANK CORPORATION
PRIMARY SUBSIDIARIES OF THE CORPORATION
DECEMBER 31, 1998
Mellon United National Bank
Incorporation: United States
MBC Investments Corporation
State of Incorporation: Delaware
o Neptune, LLC
State of Organization: Delaware
oo Newton Asset Management Limited (75% ownership)
Incorporation: Great Britain
-2-
<PAGE> 1
Exhibit 23.1
The Board of Directors
of Mellon Bank Corporation:
We consent to incorporation by reference in Registration Statement Nos.
33-16658 (Form S-3), 33-21838 (Form S-8), 33-23635 (Form S-8), 33-34430 (Form
S-8), 33-41796 (Form S-8), 33-65824 (Form S-8), 33-65826 (Form S-8), 33-54671
(Form S-8), 33-62151 (Form S-3), 333-16743 (Form S-8), 33-16745 (Form S-8),
333-38213 (Form S-3), and 333-65275 (Form S-8) of Mellon Bank Corporation of
our report dated January 14, 1999, relating to the consolidated balance sheets
of Mellon Bank Corporation and its subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, which report is incorporated by reference in
the December 31, 1998, annual report on Form 10-K of Mellon Bank Corporation.
KPMG LLP
Pittsburgh, Pennsylvania
March 19, 1999
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
MELLON BANK CORPORATION
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them,
such person's true and lawful attorney-in-fact and agent, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities, to sign one or more Annual Reports on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, for Mellon Bank Corporation for the year ended December 31, 1998, and
any and all amendments thereto, and to file same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission and with the New York Stock Exchange, Inc., granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and each of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This power of attorney shall be effective as of February 16, 1999 and shall
continue in full force and effect until revoked by the undersigned in a writing
filed with the Secretary of the Corporation.
<TABLE>
<CAPTION>
<S> <C>
/s/ Martin G. McGuinn /s/ George W. Johnstone
- --------------------------------- --------------------------------
Martin G. McGuinn, Director and George W. Johnstone, Director
Principal Executive Officer
/s/ Dwight L. Allison, Jr. /s/ Rotan E. Lee
- --------------------------------- --------------------------------
Dwight L. Allison, Jr., Director Rotan E. Lee, Director
/s/ Burton C. Borgelt /s/ A. W. Mathieson
- --------------------------------- --------------------------------
Burton C. Borgelt, Director Andrew W. Mathieson, Director
/s/ Carol R. Brown /s/ E. J. McAniff
- --------------------------------- --------------------------------
Carol R. Brown, Director Edward J. McAniff, Director
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C>
/s/ Frank V. Cahouet /s/ Robert Mehrabian
- --------------------------------- --------------------------------
Frank V. Cahouet, Director Robert Mehrabian, Director
/s/ Jared L. Cohon /s/ Seward Prosser Mellon
- --------------------------------- --------------------------------
Jared L. Cohon, Director Seward Prosser Mellon, Director
/s/ Christopher M. Condron /s/ Mark A. Nordenberg
- --------------------------------- --------------------------------
Christopher M. Condron, Director Mark A. Nordenberg, Director
/s/ J. W. Connolly /s/ David S. Shapira
- --------------------------------- --------------------------------
J. W. Connolly, Director David S. Shapira, Director
/s/ C. A. Corry /s/ Joab L. Thomas
- --------------------------------- --------------------------------
Charles A. Corry, Director Joab L. Thomas, Director
/s/ C. Frederick Fetterolf /s/ Wesley W. von Schack
- --------------------------------- --------------------------------
C. Frederick Fetterolf, Director Wesley W. von Schack, Director
/s/ Ira J. Gumberg /s/ William J. Young
- --------------------------------- --------------------------------
Ira J. Gumberg, Director William J. Young, Director
- ----------------------------------
Pemberton Hutchinson, Director
</TABLE>
- 2 -
<PAGE> 3
POWER OF ATTORNEY
MELLON BANK CORPORATION
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Steven G. Elliott and Carl Krasik, and each of them,
such person's true and lawful attorney-in-fact and agent, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities, to sign one or more Annual Reports on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, for Mellon Bank Corporation for the year ended December 31, 1998, and
any and all amendments thereto, and to file same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission and with the New York Stock Exchange, Inc., granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and each of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This power of attorney shall be effective as of March 8, 1999 and shall continue
in full force and effect until revoked by the undersigned in a writing filed
with the Secretary of the Corporation.
/s/ Pemberton Hutchinson
- ---------------------------------
Pemberton Hutchinson, Director
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000064782
<NAME> MELLON BANK CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,926
<INT-BEARING-DEPOSITS> 566
<FED-FUNDS-SOLD> 186
<TRADING-ASSETS> 193
<INVESTMENTS-HELD-FOR-SALE> 5,373
<INVESTMENTS-CARRYING> 1,602
<INVESTMENTS-MARKET> 1,634
<LOANS> 32,093
<ALLOWANCE> 496
<TOTAL-ASSETS> 50,777
<DEPOSITS> 34,383
<SHORT-TERM> 4,942
<LIABILITIES-OTHER> 2,637
<LONG-TERM> 3,303
991<F1>
0
<COMMON> 147
<OTHER-SE> 4,374
<TOTAL-LIABILITIES-AND-EQUITY> 50,777<F1>
<INTEREST-LOAN> 2,413
<INTEREST-INVEST> 376
<INTEREST-OTHER> 88
<INTEREST-TOTAL> 2,892
<INTEREST-DEPOSIT> 960
<INTEREST-EXPENSE> 1,401
<INTEREST-INCOME-NET> 1,491
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 3,013
<INCOME-PRETAX> 1,340
<INCOME-PRE-EXTRAORDINARY> 1,340
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 870
<EPS-PRIMARY> 3.31
<EPS-DILUTED> 3.25
<YIELD-ACTUAL> 3.96
<LOANS-NON> 103
<LOANS-PAST> 104
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 475
<CHARGE-OFFS> 92
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 496
<ALLOWANCE-DOMESTIC> 485
<ALLOWANCE-FOREIGN> 11
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes $991 million of guaranteed preferred beneficial interests in the
Corporation's junior subordinated deferrable interest debentures.
</FN>
</TABLE>
