10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2008

or

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

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   13-2614959

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code — (212) 495-1784

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

Yes      ü        No              

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [ ü ]

   Accelerated filer [        ]
Non-accelerated filer  [     ] (Do not check if a smaller reporting company)    Smaller reporting company [        ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                   No      ü    

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

 

Class

 

Outstanding as of

June 30, 2008

Common Stock, $0.01 par value   1,146,070,295

 

 


Table of Contents

THE BANK OF NEW YORK MELLON CORPORATION

SECOND QUARTER 2008 FORM 10-Q

TABLE OF CONTENTS

 

 

 

     Page No.

Introduction

   2

Consolidated Financial Highlights (unaudited)

   3
Part I - Financial Information   

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and
Results of Operations; Quantitative and Qualitative Disclosures about Market Risk.

  

Overview

   5

Second quarter 2008 highlights

   7

Revenue overview

   8

Sector/segment overview

   9

Fee and other revenue

   10

Net interest revenue

   13

Average balances and interest rates

   15

Noninterest expense

   17

Income taxes

   19

Credit loss provision and net charge-offs

   19

Business segments review

   20

Critical accounting estimates

   39

Consolidated balance sheet review

   43

Capital support agreements

   52

Liquidity and dividends

   52

Capital

   55

Trading activities

   58

The Bank of New York Mellon Corporation foreign exchange and other trading – counterparty risk ratings profile

   60

Asset/liability management

   60

Off-balance-sheet financial instruments

   61

The Bank of New York historical earnings per share

   61

Supplemental information – Explanation of non-GAAP financial measures

   62

Recent accounting developments

   64

Government monetary policies and competition

   65

Website information

   65

Item 1. Financial Statements:

  

Consolidated Income Statement (unaudited)

   67

Consolidated Balance Sheet (unaudited)

   69

Consolidated Statement of Cash Flows (unaudited)

   70

Consolidated Statement of Changes in Shareholders’ Equity (unaudited)

   71

Notes to Consolidated Financial Statements

   72

Item 4. Controls and Procedures

   93

Forward-looking Statements and Risk Factors

   94
Part II - Other Information   
Item 1. Legal Proceedings    95

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   96

Item 4. Submission of Matters to a Vote of Security Holders

   97

Item 6. Exhibits

   98

Signature

   99

Index to Exhibits

   100


Table of Contents

Introduction

 

 

On July 1, 2007, The Bank of New York Company, Inc. (“The Bank of New York”) and Mellon Financial Corporation (“Mellon Financial”) merged into The Bank of New York Mellon Corporation, (together with its consolidated subsidiaries, the “Company”), with the Company being the surviving entity. For accounting and financial reporting purposes, the merger was accounted for as a purchase of Mellon Financial. Financial results for periods subsequent to July 1, 2007 reflect the combined companies’ results. Financial results prior to July 1, 2007 reflect legacy The Bank of New York only.

The merger transaction resulted in The Bank of New York shareholders receiving 0.9434 shares of the Company’s common stock for each share of The Bank of New York common stock outstanding on the closing date of the merger. All legacy The Bank of New York earnings per share and common share outstanding amounts in this Form 10-Q have been restated to reflect this exchange ratio. See page 61 for additional information.

In the second quarter of 2008, we revised our expected annual merger-related expense synergies, the targeted annual run rate for merger-related revenue synergies and expected merger and integration expenses. We now expect to realize annual merger-related expense synergies of $850 million by 2010 (previously $700 million) and our revised targeted run rate for merger-related revenue synergies is $325-425 million by 2011 (previously $250-400 million). Merger and integration expenses to combine the operations of The Bank of New York and Mellon Financial were approximately $146 million in the second quarter of 2008. Total merger and integration expenses are currently expected to be approximately $1.475 billion (previously $1.325 billion).

We are a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. We have $23.0 trillion in assets under custody and administration, more than $1.1 trillion in assets under management and service $12 trillion in outstanding debt.

Throughout this Form 10-Q, certain measures, which are noted, exclude certain items. We believe the presentation of this information enhances investors’ understanding of period-to-period results. In addition, these measures reflect the principal basis on which our

management monitors financial performance. See supplemental information – explanation of non-GAAP financial measures.

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” the “Company,” and similar terms for periods prior to July 1, 2007 refer to The Bank of New York and references to “our,” “we,” “us,” the “Company,” and similar terms for periods on or after July 1, 2007 refer to The Bank of New York Mellon Corporation.

Reorganization of subsidiary banks

Effective July 1, 2008, we completed the process of consolidating and renaming our principal U.S. bank and trust company subsidiaries into two principal banks. This consolidation effort was an essential part of our overall merger integration process.

The two principal banks resulting from the consolidation of the entities, which mainly were U.S. banks and trust companies, are:

 

 

The Bank of New York Mellon (the “Bank”), a New York state chartered bank, formerly named “The Bank of New York”, which houses our institutional businesses including Asset Servicing, Issuer Services, Treasury Services, Broker-Dealer and Advisor Services and the bank-advised business of Asset Management.

 

BNY Mellon, National Association (“BNY Mellon, N.A.”), a nationally-chartered bank, formerly named “Mellon Bank, N.A.”, which houses our Wealth Management business. Currently, this bank contains only the legacy Mellon Financial wealth management business. The wealth management business of the legacy The Bank of New York is expected to be added to BNY Mellon, N.A. in the first quarter of 2009.

As part of the consolidation, the number of our U.S. trust companies was reduced to two – The Bank of New York Mellon Trust Company, National Association and BNY Mellon Trust Company of Illinois. These companies house trust products and services across the U.S. Also concentrating on trust products and services will be BNY Mellon Trust of Delaware, a Delaware bank. Most asset management businesses, along with Pershing, will continue to be direct or indirect non-bank subsidiaries of The Bank of New York Mellon Corporation.


 

2    The Bank of New York Mellon Corporation


Table of Contents

Consolidated Financial Highlights (unaudited)

 

The Bank of New York Mellon Corporation

 

     Quarter ended     Six months ended  

(dollar amounts in millions, except per share

amounts and unless otherwise noted)

    
 
June 30,
2008
 
 
   
 
March 31,
2008
 
 
   
 
June 30,
2008
(a)
 
 
   
 
Sept. 30,
2007
 
 
   
 
June 30,
2008
(a)
 
 

Reported results

          

Net income

   $ 309     $ 746     $ 445     $ 1,055     $ 879  

Basic EPS (b)

     0.27       0.66       0.62       0.93       1.24  

Diluted EPS (b)

     0.27       0.65       0.62       0.92       1.22  

Continuing operations:

          

Fee and other revenue

   $ 2,986     $ 2,978     $ 1,580     $ 5,964     $ 3,055  

Net interest revenue

     411       767       452       1,178       879  
                                        

Total revenue

   $ 3,397     $ 3,745     $ 2,032     $ 7,142     $ 3,934  

Income from continuing operations

   $ 302     $ 749     $ 448     $ 1,051     $ 885  

EPS from continuing operations (b):

          

Basic

   $ 0.27     $ 0.66     $ 0.63     $ 0.93     $ 1.24  

Diluted

     0.26       0.65       0.62       0.92       1.23  

Diluted excluding merger and integration expenses (c) (d)

     0.34       0.72       0.66       1.06       1.28  

Diluted excluding merger and integration expenses and the SILO charge (c) (d)

     0.67       0.72       0.66       1.39       1.28  

Diluted excluding merger and integration expenses, intangible amortization and the SILO charge (c) (d)

     0.74       0.78       0.69       1.52       1.33  

Return on tangible common equity (annualized)

     26.7 %     49.1 %     37.3 %     38.8 %     38.2 %

Return on tangible common equity excluding merger and integration expenses and the SILO charge (annualized) (c) (d)

     59.7 %     53.6 %     39.8 %     56.4 %     39.9 %

Return on common equity (annualized)

     4.3 %     10.2 %     15.5 %     7.3 %     15.6 %

Return on common equity excluding merger and integration expenses, intangible amortization and the SILO charge (annualized) (c) (d)

     12.0 %     12.2 %     17.3 %     12.1 %     17.0 %

Fee and other revenue as a percentage of total revenue (FTE)

     88 % (e)     79 %     78 %     83 % (e)     78 %

Annualized fee and other revenue per employee (in thousands) (based on average headcount)

   $ 280     $ 281     $ 274     $ 281     $ 267  

Non-U.S. percent of revenue (excluding the SILO charge) (FTE)

     35 %     33 %     32 %     34 %     31 %

Pre-tax operating margin (FTE)

     18 %     30 %     32 %     24 %     33 %

Pre-tax operating margin (FTE) excluding merger and integration expenses, intangible amortization and the SILO charge (c) (d)

     34 %     36 %     36 %     35 %     36 %

Net interest revenue (FTE)

   $ 415     $ 773     $ 454     $ 1,188     $ 883  

Net interest margin (FTE)

     1.16 % (e)     2.14 %     2.01 %     1.65 % (e)     2.10 %

Assets under management (in billions)

   $ 1,113     $ 1,105     $ 153     $ 1,113     $ 153  

Assets under custody and administration (in trillions)

   $ 23.0     $ 23.1     $ 16.7  (f)   $ 23.0     $ 16.7  (f)

Equity securities

     25 %     30 %     32 %     25 %     32 %

Fixed income securities

     75 %     70 %     68 %     75 %     68 %

Cross-border assets (in trillions)

   $ 10.3     $ 10.0     $ 7.4  (f)   $ 10.3     $ 7.4  (f)

Market value of securities on loan (in billions)

   $ 588     $ 660     $ 397     $ 588     $ 397  

Average common shares and equivalents outstanding (in thousands) (b):

          

Basic

     1,135,153       1,134,280       713,187       1,134,710       711,675  

Diluted

     1,146,886       1,147,906       722,881       1,147,386       721,437  

 

The Bank of New York Mellon Corporation    3


Table of Contents

Consolidated Financial Highlights (unaudited) (continued)

 

The Bank of New York Mellon Corporation

 

 

     Quarter ended     Six months ended  

(dollar amounts in millions, except per share

amounts and unless otherwise noted)

   June 30,
2008
    March 31,
2008
    June 30,
2007
(a)
    June 30,
2008
    June 30,
2007
(a)
 
Capital ratios           

Tier I capital ratio

     9.33 %     8.76 %     8.09 %     9.33 %     8.09 %

Total (Tier I plus Tier II capital ratio)

     12.90 %     12.14 %     12.07 %     12.90 %     12.07 %

Tangible common equity to assets ratio (g)

     4.31 %     4.14 %     4.53 %     4.31 %     4.53 %

Adjusted for the DTL on tax deductible goodwill (h)

     4.62 %     4.42 %     4.90 %     4.62 %     4.90 %

Return on average assets (annualized)

     0.62 %     1.50 %     1.57 %     1.07 %     1.65 %
Selected average balances           

Interest-earning assets

   $ 144,255     $ 145,118     $ 90,557     $ 144,687     $ 84,847  

Total assets

   $ 195,997     $ 200,790     $ 114,323     $ 198,394     $ 108,218  

Interest-bearing deposits

   $ 94,785     $ 92,881     $ 53,610     $ 93,833     $ 48,763  

Noninterest-bearing deposits

   $ 24,822     $ 26,240     $ 15,334     $ 25,531     $ 15,120  

Shareholders’ equity

   $ 28,507     $ 29,551     $ 11,566     $ 29,029     $ 11,422  
Other           

Employees

     43,100       42,600       23,200       43,100       23,200  

Dividends per share (b)

   $ 0.24     $ 0.24     $ 0.23     $ 0.48     $ 0.47  

Dividend yield (annualized)

     2.5 %     2.3 %     2.1 %     2.5 %     2.1 %

Closing common stock price per share (b)

   $ 37.83     $ 41.73     $ 43.93     $ 37.83     $ 43.93  

Market capitalization

   $ 43,356     $ 47,732     $ 31,495     $ 43,356     $ 31,495  

Book value per common share (b)

   $ 24.93     $ 24.89     $ 16.50     $ 24.93     $ 16.50  

Tangible book value per common share (b)

     5.00       4.84       7.35       5.00       7.35  

Period-end shares outstanding (in thousands) (b)

     1,146,070       1,143,818       717,000       1,146,070       717,000  

 

(a) Legacy The Bank of New York only.
(b) Per share data prior to July 1, 2007 are presented in post-merger share count terms. See page 61 for additional information.
(c) Calculated excluding pre-tax merger and integration expenses of $149 million, $126 million, $47 million, $275 million and $62 million, respectively, pre-tax intangible amortization expense of $124 million, $122 million, $29 million, $246 million and $57 million, respectively, and the SILO charge of $377 million in the second quarter of 2008.
(d) See Supplemental information—Explanation of non-GAAP financial measures.
(e) Excluding the SILO charge, fee and other revenue as a percentage of total revenue was 79% in both the second quarter and first half of 2008 and the net interest margin was 2.21% and 2.17% in the second quarter and first half of 2008.
(f) Revised for Acquired Corporate Trust Business and harmonization adjustments.
(g) Adjusted for deferred tax liabilities of $1.96 billion, $1.99 billion, $149 million, $1.96 billion and $149 million, respectively, associated with tax deductible intangible assets.
(h) The Company’s major credit rating agencies have notified us that in their computation of our capital adequacy, they will give credit for deferred tax liabilities (“DTL”) associated with tax deductible goodwill. The regulators are also considering giving credit for DTL in their capital computations. The DTL associated with tax deductible goodwill totaled $548 million at June 30, 2008, $516 million at March 31, 2008 and $445 million at June 30, 2007.

 

4    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk.

 

 

Certain business terms used in this document are defined in the glossary included in our 2007 Annual Report on Form 10-K.

The following should be read in conjunction with the Consolidated Financial Statements included in this report. Investors should also read the section entitled “Forward-looking Statements and Risk Factors” on page 94.

Overview

Our businesses

The Bank of New York Mellon Corporation (NYSE: BK) is a global leader in providing a comprehensive array of services that enable institutions and individuals to manage and service their financial assets in more than 100 markets worldwide. We strive to be the global provider of choice for asset management and securities servicing and be recognized for our broad and deep capabilities, superior service and consistent outperformance versus peers. We have a long tradition of collaborating with clients to deliver innovative solutions through our core competencies: asset and wealth management, securities servicing and treasury services. Our extensive global client base includes a broad range of leading financial institutions, corporations, government entities, endowments/foundations and high-net-worth individuals.

The Company’s businesses benefit from the global growth in financial assets. Our success is based on continuing to provide superior client service, strong investment performance and the highest fiduciary standards. We seek to deploy capital effectively to our businesses, to accelerate their long-term growth and deliver top-tier returns to our shareholders. Our long-term financial goals are focused on achieving superior total returns to shareholders by generating first quartile earnings per share growth over time relative to a group of 12 peer companies. Key components of this strategy include: providing the best client service versus peers (as measured through independent surveys); strong investment performance (relative to investment benchmarks); above median revenue growth (relative to peer

companies for each of our businesses); competitive margins; and positive operating leverage.

Based on the growth opportunities in our businesses, we expect that an increasing percentage of our revenue and income will be derived outside the U.S.

As measurements of efficiency, over time we expect to increase both our level of fee revenue per employee and maintain competitive pre-tax margins.

We believe that our businesses are compatible with our strategy and goals for the following reasons:

 

   

Demand for our products and services is driven by market and demographic trends in the markets in which we compete. These trends include: growth in worldwide retirement and financial assets; the growth and concentration of the wealth segments; global growth in assets managed by financial institutions; and the globalization of the investment process.

   

Many of our products complement one another.

   

We are able to leverage sales, distribution and technology across our businesses, benefiting our clients and shareholders.

   

The revenue generated by our businesses is principally fee-based.

   

Our businesses generally do not require as much capital for growth as traditional banking.

We pursue our long-term financial goals by focusing on organic revenue growth, expense management, superior client service, successful integration of acquisitions and disciplined capital management.

We have established a Tier I capital target of 8% as our principal capital measure. We have also established a secondary target capital ratio of 5% for adjusted tangible common equity. The adjusted tangible common equity ratio reflects the impact of the merger with Mellon Financial and associated goodwill, intangibles and deferred tax liability. The goodwill and intangibles created in the merger have no economic impact but reduce tangible equity. For


 

The Bank of New York Mellon Corporation    5


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

a discussion of our capital ratios, see the Capital section of this Form 10-Q.

In addition to the merger with Mellon Financial, the following strategic actions had an impact on the second quarter and year-to-date financial results compared with prior periods:

In the second quarter of 2008:

 

We sold Mellon 1st Business Bank, National Association (“M1BB”) – based in Los Angeles, California. The sale reduced loan and deposit levels by $1.1 billion and $2.8 billion, respectively. There was no gain or loss recorded on this transaction. This transaction reflects our focus on reducing non-core activities. Net income for M1BB was $29 million for full year 2007 and was primarily comprised of net interest revenue.

In the first quarter of 2008:

 

We acquired ARX Capital Management (“ARX”), a leading independent asset management business headquartered in Rio de Janeiro, Brazil. ARX has more than $2.8 billion in assets under management.

 

 

We sold a portion of the assets of Estabrook Capital Management LLC. This sale reduced our assets under management by $2.4 billion.

 

 

We sold the B-Trade and G-Trade execution businesses to BNY ConvergEx Group, LLC on Feb. 1, 2008. The B-Trade and G-Trade execution businesses have historically contributed approximately $50-60 million of revenue and $10-15 million of pre-tax income on a quarterly basis. These businesses were sold at book value with the potential for an earnout to be realized in the first half of 2009.

In the fourth quarter of 2007:

 

We completed the acquisition of the remaining 50% interest in ABN AMRO Mellon Global Securities Services B.V. (now known as BNY Mellon Asset Servicing, B.V.), which provides global custody and related services to institutions outside North America. The acquisition of BNY Mellon Asset Servicing, B.V. added $1.0 billion of loans (overdrafts that

 

have been repaid), $3.5 billion of money market assets and $4.5 billion of deposits.

 

 

In December 2007, we consolidated the assets of our bank-sponsored conduit, Three Rivers Funding Corporation (“TRFC”).

In 2006:

 

We purchased the corporate trust business of JPMorgan Chase (“Acquired Corporate Trust Business”) from and sold our Retail Business to JPMorgan Chase on Oct. 1, 2006.

How we reported results

All information in this Quarterly Report on Form 10-Q is reported on a continuing operations basis, unless otherwise noted. For a description of discontinued operations, see Note 4 in the Notes to Consolidated Financial Statements.

Certain amounts are presented on a fully taxable equivalent (FTE) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. In addition, results for the second and first quarters of 2008 and year-to-date 2008 reflect the results of The Bank of New York and Mellon Financial combined. Results for the second quarter and year-to-date 2007 include legacy The Bank of New York only.

In the first quarter of 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157 Fair Value Measurements (“SFAS 157”) and SFAS No. 159 Fair Value Option (“SFAS 159”). For a discussion of SFAS 157 and SFAS 159, see Note 12 and Note 13 in the Notes to Consolidated Financial Statements.


 

6    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

Second quarter 2008 highlights

We reported net income of $309 million, or $0.27 per share, and income from continuing operations of $302 million, or $0.26 per share in the second quarter of 2008. This compares to net income of $445 million, or $0.62 per share, and income from continuing operations of $448 million, or $0.62 per share, in the second quarter of 2007. The second quarter of 2008 included a charge relating to certain structured lease transactions (“SILOs”) of $380 million, or $0.33 per share, as well as merger and integration expenses of $149 million (pre-tax), or $0.08 per share. The second quarter of 2007 included merger and integration expenses of $47 million (pre-tax) or $0.04 per share. Excluding these amounts, earnings per share from continuing operations were $0.67 in the second quarter of 2008, $0.66 in the second quarter of 2007 and $0.72 in the first quarter of 2008.

Adjusting for the impact of the SILO charge, merger and integration expenses and intangible amortization ($124 million pre-tax), diluted earnings per share for the second quarter of 2008 were $0.74, which compares to $0.69 a year ago and $0.78 sequentially. See the Supplemental information section - Explanation of non-GAAP financial measures.

The results for the second quarter of 2008 included net pre-tax costs associated with the write-down of certain investments in our securities portfolio of $152 million and a pre-tax charge of $22 million for credit monitoring related to lost tapes in our Issuer and Treasury Services segments. The impact of these items decreased earnings per share by approximately $0.09.

Performance highlights for the second quarter of 2008 included:

 

 

Assets under management totaled $1.1 trillion at June 30, 2008 compared with $153 billion at June 30, 2007. Assets under custody and administration totaled $23.0 trillion at June 30, 2008 compared with $16.7 trillion at June 30, 2007. Both increases primarily resulted from the merger with Mellon Financial.

 

Asset and wealth management fees totaled $844 million in the second quarter of 2008 compared with $168 million in the second quarter of 2007. The increase reflects the merger

 

with Mellon Financial as well as strength in money market flows and certain global equity strategies, partially offset by broad declines in the equity markets.

 

 

Asset servicing revenue was $868 million in the second quarter of 2008 compared with $427 million in the second quarter of 2007. The increase was primarily due to the merger with Mellon Financial, higher foreign exchange revenue, the benefit of higher spreads in securities lending, new business activity and the fourth quarter of 2007 acquisition of the remaining 50% interest in BNY Mellon Asset Servicing, B.V., our former joint venture with ABN AMRO.

 

Issuer services revenue was $444 million in the second quarter of 2008 compared with $367 million in the second quarter of 2007. The increase primarily reflects the merger with Mellon Financial as well as increases in Depositary Receipts and global corporate trust fees.

 

Clearing and execution services fees totaled $270 million compared with $291 million in the second quarter of 2007. The decrease primarily reflects the sale of the B-Trade and G-Trade execution businesses in the first quarter of 2008, partially offset by money market and mutual fund fees.

 

Revenue from foreign exchange and other trading activities was $308 million in the second quarter of 2008 compared with $117 million in the second quarter of 2007. The increase reflects the merger with Mellon Financial, the benefit of currency volatility and increased client volumes.

 

Securities losses totaled $152 million in the second quarter of 2008 compared to a loss of $2 million in the second quarter of 2007. The second quarter of 2008 includes a $72 million loss related to Alt-A securities, a $50 million loss related to asset-backed securities (“ABS”) collateralized debt obligations (“CDOs”), and a $30 million loss related to securities backed by home equity lines of credit (“HELOCs”) in the portfolio of TRFC.

 

In the second quarter of 2008 we recorded a $380 million charge related to sale-in, lease-out (SILO) transactions. This charge includes $237 million, in accordance with FAS 13-2, related to revising the cash flows associated with the


 

The Bank of New York Mellon Corporation    7


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

 

Company’s SILO transactions, as well as $143 million for establishing interest reserves on associated tax benefits. The charge was prompted by recent federal court decisions in BB&T Corp. v. United States and AWG Leasing Trust v. United States, where the tax benefits from certain SILO and LILO transactions were denied. In the third quarter of 2008, we expect to deposit funds with the IRS to offset the accrual of interest on the disputed SILO transactions. The cost of funding the deposit, as well as the recalculation of the cash flows associated with the SILO transactions will result in a decrease in earnings per share of approximately $0.02 per share in both the second half of 2008 and full year 2009. We continue to believe our tax treatment of the SILO transactions was proper under the tax law as it existed at the time the tax benefits were reported.

On Aug. 6, 2008, the IRS announced a settlement program for taxpayers with LILO and SILO transactions. Although the Company has not yet received the offer, it expects that it will in the near future. If the offer is received, the Company will promptly evaluate its terms and financial impact. At this time it is unknown whether the offer will be acceptable to the Company.

 

 

Net interest revenue was $411 million in the second quarter of 2008 compared with $452 million in the second quarter of 2007. The decrease was due to the SILO charge recorded in the second quarter of 2008, primarily offset by the merger with Mellon Financial.

 

Noninterest expense was $2.758 billion in the second quarter of 2008 compared with $1.389 billion in the second quarter of 2007. The increase resulted from the merger with Mellon Financial, the impact of the annual merit salary increases for employees which became effective April 1, 2008, expense for credit monitoring related to lost tapes ($22 million) and higher incentives, benefits and professional, legal and other purchased services, as well as increases in merger and integration expenses of $102 million and intangible amortization expense of $95 million, partially offset by $131 million of merger-related synergies generated in the second quarter of 2008.

 

Revenue overview

The vast majority of our revenue consists of fee and other revenue, given our mix of businesses, with net interest revenue comprising the balance.

Fee and other revenue represented 88% of total revenue (79% excluding the SILO charge) on an FTE basis in the second quarter of 2008, compared with 78% in the second quarter of 2007.

Since fee and other revenue constitute the majority of our total revenue, we discuss it in greater detail by type of fee in the fee and other revenue and the business segments sections. In these sections, we note the more specific drivers of such revenue and the factors that caused the various types of fee and other revenue to increase or decline in the second quarter of 2008 compared with the second quarter of 2007. The business segments discussion combines, for each business segment, all types of fee and other revenue generated directly by that segment as well as fee and other revenue transferred between segments under revenue transfer agreements, with net interest revenue generated directly by or allocated to that segment. The discussion of revenue by business segment is fundamental to an understanding of the Company’s results as it represents a principal measure by which management reviews the performance of our businesses compared with performance in prior periods, with our operating plan and with the performance of our competitors.

Net interest revenue comprised 12% of total revenue (21% excluding the SILO charge) on an FTE basis in the second quarter of 2008, compared with 22% in the second quarter of 2007. Net interest revenue is generated from a combination of loans, investment securities, interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements. For more information, see the section on net interest revenue.


 

8    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

Sector/segment overview

 

Sector/Segment    Primary types of revenue

Asset & Wealth Management sector

    Asset Management segment   

Asset and wealth management fees from:

Institutional clients

Mutual funds

Private clients

Performance fees

Distribution and servicing fees

    Wealth Management segment

  

Wealth management fees from high-net-worth individuals and families, family offices and business enterprises, charitable gift programs, and foundations and endowments

Institutional Services sector

    Asset Servicing segment

  

Asset servicing fees, including:

Institutional trust and custody fees

Broker-dealer services

Securities lending

Foreign exchange

    Issuer Services segment

  

Issuer services fees, including:

Corporate trust

Depositary receipts

Employee investment plan services

Shareowner services

    Clearing Services segment

  

Clearing and execution services fees, including:

Broker-dealer and Registered Investment Advisor services

    Treasury Services segment

  

Treasury services fees, including:

Global payment services

Working capital solutions

Financing-related fees

Other segment

  

Leasing operations

The activities of Mellon United National Bank

Corporate treasury activities

Business exits

Global markets and institutional banking services

Merger and integration expenses

 

The Bank of New York Mellon Corporation    9


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

Fee and other revenue

 

 

Fee and other revenue   2Q08     1Q08     2Q07 (a)     2Q08 vs.     Year-to-date     YTD08
vs.
YTD07
 
(dollars in millions unless otherwise noted)         1Q08     2Q07     2008     2007 (a)    

Securities servicing fees:

               

Asset servicing

  $ 868     $ 897     $ 427     (3 )%   103 %   $ 1,765     $ 820     115 %

Issuer services

    444       376       367     18     21       820       686     20  

Clearing and execution services

    270       267       291     1     (7 )     537       573     (6 )

Total securities servicing fees

    1,582       1,540       1,085     3     46       3,122       2,079     50  

Asset and wealth management fees

    844       842       168     -     402       1,686       319     429  

Performance fees

    16       20       21     (20 )   (24 )     36       35     3  

Foreign exchange and other trading activities

    308       259       117     19     163       567       244     132  

Treasury services

    130       124       55     5     136       254       105     142  

Distribution and servicing

    110       98       2     12     N/M       208       4     N/M  

Financing-related fees

    50       48       61     4     (18 )     98       113     (13 )

Investment income

    45       23       39     96     15       68       75     (9 )

Other

    53       97       34     (45 )   56       150       81     85  

Total fee revenue (non-FTE)

    3,138       3,051       1,582     3     98       6,189       3,055     103  

Securities gains (losses)

    (152 )     (73 )     (2 )   N/M     N/M       (225 )     -     N/M  

Total fee and other revenue (non-FTE)

  $ 2,986     $ 2,978     $ 1,580     - %   89 %   $ 5,964     $ 3,055     95 %

Fee and other revenue as a percentage of total revenue (FTE)

    88 (b)     79 %     78 %         83 (b)     78 %  

Market value of assets under management at period-end (in billions)

  $ 1,113     $ 1,105     $ 153     1 %   627 %   $ 1,113     $ 153     627 %

Market value of assets under custody or administration at period-end (in trillions)

  $ 23.0     $ 23.1     $ 16.7     - %   38 %   $ 23.0     $ 16.7     38 %
(a) Legacy The Bank of New York only.
(b) Excluding the $377 million SILO charge, fee and other revenue as a percentage of total revenue was 79% in both the second quarter and first half of 2008.

N/M – Not meaningful.

 

Fee and other revenue

The results of many of our businesses are influenced by client and market activities that vary by quarter. For instance, we experience seasonal increases in securities lending in the second quarter of the year, and depositary receipts reflecting global dividend distributions during the second and fourth quarters of the year.

The increase in fee revenue versus the year-ago quarter primarily reflects the merger with Mellon Financial, as well as new business. Sequentially, fee revenue increased $87 million reflecting seasonal increases in the Depositary Receipts business and an increase in foreign exchange and other trading activities, partially offset by a decrease in other revenue, lower performance fees, and lower securities lending revenue (included in asset servicing). The sequential decline in securities lending revenue reflects the narrowing of spreads on government securities from historically high levels, partially

offset by seasonality. Other revenue in the first quarter of 2008 included a $42 million gain associated with the initial public offering by VISA.

Securities servicing fees

The increase in securities servicing fees over the second quarter of 2007 reflects the merger with Mellon Financial, higher securities lending revenue, strong new business activity and the BNY Mellon Asset Servicing B.V. acquisition in the fourth quarter of 2007. Securities servicing fees were up sequentially reflecting a seasonal increase in the Depositary Receipts business, partially offset by lower securities lending revenue. See the “Institutional Services Sector” in “Business segments review” for additional details.


 

10    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

Asset and wealth management fees

Asset and wealth management fees increased from the second quarter of 2007 primarily due to the merger with Mellon Financial as well as strength in money market flows and certain global equity strategies, partially offset by broad declines in the equity markets and the prior loss of business at one of our investment boutiques. Sequentially, asset and wealth management fees increased $2 million as strong money market flows offset lower equity market levels. See the “Asset and Wealth Management Sector” in “Business segments review” for additional details regarding the drivers of asset and wealth management fees.

Total assets under management for the Asset and Wealth Management sector were $1.113 trillion at June 30, 2008, compared with $153 billion at June 30, 2007 and $1.105 trillion at March 31, 2008. The increase compared with June 30, 2007 resulted from the merger with Mellon Financial and strong money market flows partially offset by broad declines in the equity markets. The increase compared with March 31, 2008 primarily resulted from strong money market flows, partially offset by long-term outflows and lower equity market values.

Approximately 40% of asset and wealth management fees are generated in the Asset Management segment from managed mutual funds. These fees are based on the daily average net assets of each fund and the basis point management fee paid by that fund. Managed mutual fund fee revenue was $340 million in the second quarter of 2008 compared with $4 million in the second quarter of 2007 and $323 million in the first quarter of 2008. The increase compared with the second quarter of 2007 primarily reflects the merger with Mellon Financial. The increase compared with both prior periods also reflects strong money market flows.

Performance fees

Performance fees, which are reported in the Asset Management segment, are generally calculated as a percentage of a portfolio’s performance in excess of a benchmark index or a peer group’s performance. There is an increase/decrease in incentive expense with a related change in performance fees. Performance fees decreased $5 million compared

with the second quarter of 2007 and $4 million compared with the first quarter of 2008. The decrease compared with the second quarter of 2007 was primarily due to a lower level of performance fees generated from certain equity and alternative strategies, partially offset by the merger with Mellon Financial.

Foreign exchange and other trading activities

Foreign exchange and other trading activities revenue, which is reported primarily in the Asset Servicing segment, increased by $191 million, or 163%, to $308 million compared with the second quarter of 2007, and increased 19% (unannualized) compared with the first quarter of 2008. The increase compared to the second quarter of 2007 was due to the merger with Mellon Financial and also reflected the benefit of increased volatility as well as higher client volumes. The increase compared with the first quarter of 2008 primarily reflects the benefit of increased volatility and higher client volumes, as well as the negative impact of the adoption of SFAS 157 on the valuation of the interest rate derivatives portfolio in the first quarter of 2008.

Treasury services

Treasury services fees, which are primarily reported in the Treasury Services segment, includes fees related to funds transfer, cash management and liquidity management. Treasury services fees increased $75 million from the second quarter of 2007 reflecting the merger with Mellon Financial, as well as higher global payments and cash management fees due primarily to higher client volumes.

Distribution and servicing fees

Distribution and servicing fees earned from mutual funds are primarily based on average assets in the funds and the sales of funds that we manage or administer and are primarily reported in the Asset Management segment. These fees, which include 12b-1 fees, fluctuate with the overall level of net sales, the relative mix of sales between share classes and the funds’ market values.


 

The Bank of New York Mellon Corporation    11


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

The $108 million increase in distribution and servicing fee revenue in the second quarter of 2008 compared with the second quarter of 2007 primarily reflects the merger with Mellon Financial. The $12 million increase compared with the first quarter of 2008 reflects strong money market flows, as well as redemptions in certain international funds. The impact of distribution and servicing fees on income in any one period can be more than offset by distribution and servicing expense paid to other financial intermediaries to cover their costs for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement.

Financing-related fees

Financing-related fees, which are primarily reported in the Treasury Services segment, include capital markets fees, loan commitment fees and credit-related trade fees. Financing-related fees decreased $11 million from the second quarter of 2007 and were relatively flat sequentially. The decrease from the second quarter of 2007 reflects a lower level of credit-related activities consistent with our strategic direction.

Investment income

Investment income, which is primarily reported in the Other and Asset Management segments, includes the gains and losses on private equity investments and seed capital investments, income from insurance contracts, and lease residual gains and losses. The increase in investment income from the second quarter of 2007 primarily resulted from the merger with Mellon Financial partially offset by lower

private equity investment income. The sequential increase reflects higher market value of seed capital investments. Seed capital revenue was $3 million in the second quarter of 2008 compared to a loss of $19 million in the first quarter of 2008. Private equity investment income was $3 million in the second quarter of 2008, down from $7 million in the first quarter of 2008 and $18 million in the second quarter of 2007.

Other revenue

Other revenue is comprised of asset-related gains, equity investment income, expense reimbursements from joint ventures, merchant card fees, net economic value payments and other transactions. Asset-related gains include loan, real estate dispositions and other assets. Equity investment income primarily reflects our proportionate share of the income from our investment in Wing Hang Bank Limited. Expense reimbursements from joint ventures relate to expenses incurred by the Company on behalf of joint ventures. Other transactions primarily include low income housing, other investments and various miscellaneous revenues.

Other revenue increased compared to the second quarter of 2007 reflecting higher asset related gains and expense reimbursements from joint ventures, partially offset by lower economic value payments related to the Acquired Corporate Trust Business. The decrease from the first quarter of 2008 reflects the $42 million gain associated with the initial public offering by VISA recorded in the first quarter of 2008. The breakdown of other revenue categories is shown in the following table:


 

Other revenue

(in millions)

   2Q08    1Q08    2Q07(a)    Year-to-date
            2008    2007 (a)

Asset-related gains

   $ 23    $ 46    $ 5    $ 69    $ 9

Equity investment income

     13      12      12      25      25

Expense reimbursements from joint ventures

     8      9      -      17      -

Merchant card fees

     3      6      -      9      -

Net economic value payments

     -      2      13      2      37

Other

     6      22      4      28      10

Total other revenue

   $ 53    $ 97    $ 34    $ 150    $ 81
(a) Legacy The Bank of New York only.

 

12    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

Securities gains (losses)

Securities losses totaled $152 million in the second quarter of 2008 compared to a loss of $2 million in the second quarter of 2007 and losses of $73 million in the first quarter of 2008. The losses in the second quarter of 2008 primarily reflected write-downs related to Alt-A securities ($72 million), ABS CDOs ($50 million) and our HELOC portfolio ($30 million). The losses in the first quarter of 2008 primarily reflected $24 million related to ABS CDOs, $22 million related to structured investment vehicles (“SIVs”) and $28 million in the HELOC portfolio. See the Consolidated balance sheet review for further information on the investment securities portfolio.

 

Year-to-date 2008 compared with year-to-date 2007

Fee revenue for the first six months of 2008 totaled $6.189 billion, an increase of 103% compared with the first six months of 2007. This increase primarily reflects the merger with Mellon Financial, higher securities servicing fees and foreign exchange and other trading activities. The increase in securities servicing fees reflects strong securities lending revenue and strong new business activity, partially offset by lower clearing and execution services revenue as a result of the sale of the B-Trade and G-Trade execution businesses. Foreign exchange and other trading activities increased primarily due to the merger with Mellon Financial, the benefit of significant increases in currency volatility as well as higher client volumes.


 

Net interest revenue

 

Net interest revenue

 

(dollar amounts in millions)

   2Q08     1Q08     2Q07 (a)     2008 vs.     Year-to-date     YTD08
vs.
YTD07
 
         1Q08     2Q07     2008     2007 (a)    

Net interest revenue (non-FTE)

   $ 411     $ 767     $ 452     (46 )%   (9 )%   $ 1,178     $ 879     34 %

Tax equivalent adjustment

     4       6       2     N/M     N/M       10       4     N/M  

    Net interest revenue (FTE)

     415       773       454     (46 )   (9 )     1,188       883     35  

SILO charge

     377       —         —       N/M     N/M       377       —       N/M  

Net interest revenue (FTE) - non-GAAP

   $ 792     $ 773     $ 454     2 %   74 %   $ 1,565     $ 883     77 %

Net interest margin (FTE)

     1.16 %     2.14 %     2.01 %   (98 ) bps   (85 ) bps     1.65 %     2.10 %   (45 ) bps

Net interest margin (FTE) - non-GAAP

     2.21       2.14       2.01     7     20       2.17       2.10     7  
(a) Legacy The Bank of New York only.

N/M - Not meaningful.

bps - basis points.

 

Net interest revenue on an FTE basis totaled $415 million in the second quarter of 2008, and included a $377 million charge related to SILOs. Net interest revenue on an FTE basis totaled $454 million in the second quarter of 2007 and $773 million in the first quarter of 2008. The net interest margin was 1.16% in the second quarter of 2008, compared with 2.01% in the second quarter of 2007 and 2.14% in the first quarter of 2008.

The decrease in net interest revenue compared with the second quarter of 2007 and first quarter of 2008 reflects the SILO charge recorded in the second quarter of 2008. Excluding the SILO charge, the increase compared with the prior year period reflects the merger with Mellon Financial, wider spreads on

investment securities and a higher level of average interest-earning assets driven by an increase in interest-bearing deposits resulting primarily from growth in the Securities Servicing businesses. The decrease in net interest revenue compared with the first quarter of 2008 primarily reflects the SILO charge. Excluding the SILO charge, the sequential increase reflects higher net interest revenue resulting from wider spreads on investment securities.

Average interest-earning assets were $144 billion in the second quarter of 2008 compared with $145 billion sequentially and $91 billion in the second quarter of 2007. The increase in interest-earning assets compared with the second quarter of 2007 reflects the merger with Mellon Financial as well as


 

The Bank of New York Mellon Corporation    13


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

the impact of a higher level of interest-bearing deposits driven by higher client activity primarily in our Securities Servicing businesses.

The net interest margin decreased 85 basis points year-over-year and 98 basis points sequentially. Both decreases principally reflect the SILO charge. Excluding the SILO charge, the net interest margin increased 20 basis points compared with the second quarter of 2007 and 7 basis points compared with the first quarter of 2008. Both increases primarily reflect the benefit of wider spreads on investment securities.

 

Year-to-date 2008 compared with year-to-date 2007

Net interest revenue on an FTE basis totaled $1.188 billion in the first six months of 2008, an increase of 35% compared with $883 million in the first six months of 2007. The net interest margin was 1.65% in the first half of 2008 and 2.10% in the first half of 2007. The decrease in the first six months of 2008 compared with the first six months of 2007 was primarily due to the merger with Mellon Financial as well as wider spreads on the investment securities portfolio, partially offset by the SILO charge. Excluding the SILO charge, net interest revenue (FTE) was $1.565 billion, an increase of 77% compared with the first six months of 2007 and the net interest margin was 2.17%, an increase of 7 basis points.


 

14    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

AVERAGE BALANCES AND INTEREST RATES

 

     Quarter ended  
     June 30, 2008     March 31, 2008     June 30, 2007 (a)  
(dollar amounts in millions)   

Average

balance

   

Average

rates

   

Average

balance

   

Average

rates

   

Average

balance

   

Average

rates

 

Assets

            

Interest-earning assets:

            

Interest-bearing deposits with banks (primarily foreign)

   $ 43,361     3.82 %   $ 38,658     4.28 %   $ 20,558     4.54 %

Federal funds sold and securities under resale agreements

     6,744     2.21       8,199     3.15       5,846     5.25  

Margin loans

     5,802     3.36       5,258     4.47       5,563     6.31  

Non-margin loans:

            

Domestic offices

     28,068     (1.56 (b)     29,357     4.49       19,170     5.04  

Foreign offices

     13,281     3.97       13,881     4.55       12,584     5.70  
                              

Total non-margin loans

     41,349     0.22  (b)     43,238     4.51       31,754     5.30  

Securities:

            

U.S. government obligations

     552     3.05       430     3.48       87     4.90  

U.S. government agency obligations

     11,098     4.27       11,333     4.74       2,775     5.20  

Obligations of states and political subdivisions

     676     5.74       703     7.58       77     8.65  

Other securities

     32,755     5.22       35,840     5.26       22,572     5.22  

Trading securities

     1,918     3.74       1,459     5.36       1,325     4.27  
                              

Total securities

     46,999     4.92       49,765     5.16       26,836     5.17  
                              

Total interest-earning assets

     144,255     3.05  (b)     145,118     4.59       90,557     5.15  

Allowance for credit losses

     (310 )       (311 )       (290 )  

Cash and due from banks

     5,399         5,831         2,631    

Other assets

     46,653         50,152         21,425    

Total assets

   $ 195,997           $ 200,790           $ 114,323        

Liabilities and shareholders’ equity

            

Interest-bearing liabilities:

            

Money market rate accounts

   $ 13,590     0.96 %   $ 13,296     1.63 %   $ 6,406     2.87 %

Savings

     980     1.74       913     2.33       423     1.92  

Certificates of deposit of $100,000 & over

     2,116     2.71       2,313     4.09       2,679     5.23  

Other time deposits

     6,458     1.86       8,445     2.42       684     5.36  

Foreign offices

     71,641     2.22       67,914     2.85       43,418     3.64  
                              

Total interest-bearing deposits

     94,785     2.02       92,881     2.66       53,610     3.64  

Federal funds purchased and securities under repurchase agreements

     4,338     1.05       4,750     2.18       1,377     4.79  

Other borrowed funds

     2,840     3.21       3,343     3.50       2,321     4.22  

Payables to customers and broker-dealers

     5,550     1.32       4,942     1.94       5,154     3.63  

Long-term debt

     16,841     3.58       17,125     4.51       10,042     5.38  
                              

Total interest-bearing liabilities

     124,354     2.20       123,041     2.90       72,504     3.92  

Total noninterest-bearing deposits

     24,822         26,240         15,334    

Other liabilities

     18,314         21,958         14,919    
                              

Total liabilities

     167,490         171,239         102,757    

Shareholders’ equity

     28,507         29,551         11,566    

Total liabilities and shareholders’ equity

   $ 195,997           $ 200,790           $ 114,323        

Net interest margin - Taxable equivalent basis

           1.16 (b)           2.14 %           2.01 %
(a) Legacy The Bank of New York only.
(b) Second quarter of 2008 includes the impact of the SILO charge. Excluding this charge, the domestic offices’ non-margin loan rate would have been 3.82%, the total non-margin loan rate would have been 3.87%, the interest-earning assets rate would have been 4.10% and the net interest margin would have been 2.21% for the second quarter of 2008.

Note: Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.

 

The Bank of New York Mellon Corporation    15


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

AVERAGE BALANCES AND INTEREST RATES

 

      Year-to-date  
      2008     2007 (a)  
(dollar amounts in millions)   

Average

balance

   

Average

rates

   

Average

balance

   

Average

rates

 
        

Assets

                            

Interest-earning assets:

        

Interest-bearing deposits with banks (primarily foreign)

   $ 41,010     4.04 %   $ 17,072     4.47 %

Federal funds sold and securities under resale agreements

     7,471     2.73       5,144     5.24  

Margin loans

     5,529     3.89       5,482     6.32  

Non-margin loans:

        

Domestic offices

     29,064     1.56  (b)     19,200     5.09  

Foreign offices

     13,230     4.28       11,955     5.77  
                    

Total non-margin loans

     42,294     2.41  (b)     31,155     5.35  

Securities

        

U.S. government obligations

     491     3.24       87     4.92  

U.S. government agency obligations

     11,216     4.51       2,840     5.14  

Obligations of states and political subdivisions

     689     6.68       81     8.43  

Other securities

     34,298     5.24       20,951     5.25  

Trading securities

     1,689     4.44       2,035     4.75  
                    

Total securities

     48,383     5.05       25,994     5.21  
                    

Total interest-earning assets

     144,687     3.83  (b)     84,847     5.20  

Allowance for credit losses

     (311 )       (288 )  

Cash and due from banks

     5,615         2,528    

Other assets

     48,403         21,131    

Total assets

   $ 198,394           $ 108,218        

Liabilities and shareholders’ equity

        

Interest-bearing liabilities:

        

Money market rate accounts

   $ 13,443     1.29 %   $ 6,288     2.92 %

Savings

     947     2.02       420     1.89  

Certificates of deposit of $100,000 & over

     2,215     3.43       2,905     5.34  

Other time deposits

     7,452     2.18       634     5.28  

Foreign offices

     69,776     2.53       38,516     3.66  
                    

Total interest-bearing deposits

     93,833     2.34       48,763     3.67  

Federal funds purchased and securities under repurchase agreements

     4,544     1.64       1,451     4.89  

Other funds borrowed

     3,091     3.36       2,098     3.63  

Payables to customers and broker-dealers

     5,247     1.61       4,952     3.61  

Long-term debt

     16,983     4.08       9,468     5.41  
                    

Total interest-bearing liabilities

     123,698     2.54       66,732     3.95  

Total noninterest-bearing deposits

     25,531         15,120    

Other liabilities

     20,136         14,944    
                    

Total liabilities

     169,365         96,796    

Shareholders’ equity

     29,029             11,422        

Total liabilities and shareholders’ equity

   $ 198,394           $ 108,218        

Net interest margin - Taxable equivalent basis

           1.65 (b)           2.10 %
(a) Legacy The Bank of New York only.
(b) Year-to-date 2008 includes the impact of the SILO charge. Excluding this charge, the domestic offices’ non-margin loan rate would have been 4.16%, the total non-margin loan rate would have been 4.19%, the interest-earning assets rate would have been 4.35% and the net interest margin would have been 2.17% for the first half of 2008.

Note: Interest and average rates 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.

 

16    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

Noninterest expense

 

 

Noninterest expense

 

                     2Q08 vs.     Year-to-date    

YTD08

vs.
YTD07

 
(dollar amounts in millions)    2Q08     1Q08     2Q07 (a)     1Q08     2Q07     2008     2007 (a)    

Staff:

                

Compensation

   $ 804     $ 795     $ 472     1 %   70 %   $ 1,599     $ 931     72 %

Incentives

     386       366       171     5     126       752       318     136  

Employee benefits

     201       191       109     5     84       392       223     76  

Total staff

     1,391       1,352       752     3     85       2,743       1,472     86  

Professional, legal and other purchased services

     280       252       132     11     112       532       262     103  

Net occupancy

     139       129       81     8     72       268       160     68  

Distribution and servicing

     131       130       4     1     N/M       261       8     N/M  

Software

     88       79       57     11     54       167       111     50  

Furniture and equipment

     79       79       54     —       46       158       104     52  

Business development

     75       66       37     14     103       141       67     110  

Sub-custodian

     62       61       42     2     48       123       76     62  

Communications

     33       32       23     3     43       65       42     55  

Clearing and execution

     21       9       44     N/M     (52 )     30       81     (63 )

Other

     186       182       87     2     114       368       159     131  

Subtotal

     2,485       2,371       1,313     5     89       4,856       2,542     91  

Amortization of intangible assets

     124       122       29     2     N/M       246       57     N/M  

Merger and integration expenses:

                

The Bank of New York Mellon Corporation

     146       121       35     21     N/M       267       39     N/M  

Acquired Corporate Trust Business

     3       5       12     (40 )   (75 )     8       23     (65 )

Total noninterest expense

   $ 2,758     $ 2,619     $ 1,389     5 %   99 %   $ 5,377     $ 2,661     102 %

Total staff expense as a percent of total revenue (FTE)

     41 %     36 %     37 %         38 %     37 %  

Employees at period-end

     43,100       42,600       23,200     1 %   86 %     43,100       23,200     86 %
(a) Legacy The Bank of New York only.

N/M - Not meaningful.

 

Total noninterest expense increased compared with both the second quarter of 2007 and first quarter of 2008. Noninterest expense in the second quarter of 2008 included $25 million related to the April 1, 2008 annual merit salary increase for employees and $22 million related to a credit monitoring charge for lost tapes. The increase compared with the second quarter of 2007 resulted primarily from the merger with Mellon Financial, the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing B.V., the previously mentioned merit increase and the credit monitoring charge, partially offset by the sale of the B-Trade and G-Trade execution businesses to BNY ConvergEx.

The sequential quarter increase reflects:

 

   

the April 1, 2008 merit increase;

   

the credit monitoring charge associated with the lost tapes;

   

expense rebates received in the first quarter of 2008;

   

software impairment costs; and

   

higher business development costs, incentives, benefits and professional, legal and other purchased services expense.

The increase in merger and integration expense and intangible amortization expense compared to the second quarter of 2007 resulted from the merger with Mellon Financial.

Staff expense

Given our mix of fee-based businesses, which are staffed with high quality professionals, staff expense comprised approximately 56% of total noninterest expense, excluding merger and integration and intangible amortization expense, in the second quarter of 2008.

Staff expense is comprised of:

 

   

compensation expense, which includes:

   

base salary expense, primarily driven by headcount;


 

The Bank of New York Mellon Corporation    17


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

   

the cost of temporary help and overtime; and

   

severance expense;

   

incentive expense, which includes:

   

additional compensation earned under a wide range of sales commission and incentive plans designed to reward a combination of individual, business unit and corporate performance goals; as well as

   

stock-based compensation expense; and

   

employee benefit expense, primarily medical benefits, payroll taxes, pension and other retirement benefits.

The increase in staff expense compared with the second quarter of 2007 reflects a net increase in headcount associated with the Mellon Financial merger, the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing B.V., the April 1, 2008 merit increase, as well as higher incentives and benefits expense, partially offset by the sale of the B-Trade and G-Trade execution businesses. The increase in benefits expense includes higher pension costs primarily due to the accrual of additional benefits for employees past normal retirement age.

Non-staff expense

Non-staff expense includes certain expenses that vary with the levels of business activity and levels of expensed business investments, fixed infrastructure costs and expenses associated with corporate activities related to technology, compliance, productivity initiatives and corporate development.

Non-staff expense excluding merger and integration expenses and intangible amortization expense totaled $1.094 billion in the second quarter of 2008 compared with $1.019 billion in the first quarter of 2008 and $561 million in the second quarter of 2007. Non-staff expenses were impacted by the merger with Mellon Financial as well as the following activities:

 

 

A $127 million increase in distribution and servicing expense compared with the second quarter of 2007. Distribution and servicing expense represents amounts paid to other financial intermediaries to cover their costs for

 

distribution (marketing support, administration and record keeping) and servicing of mutual funds. Generally, increases in distribution and servicing expense reflect higher net sales. Distribution and servicing expense in any one year is not expected to be fully recovered by higher distribution and servicing revenue; rather it contributes to future growth in mutual fund management revenue reflecting the growth in mutual fund assets generated through certain distribution channels.

 

The second quarter of 2008 versus the second quarter of 2007 increase in professional, legal and other purchased services, net occupancy, sub-custodian, business development, furniture and equipment, software and communications expense reflect business growth, strategic initiatives, and software impairment costs incurred in the second quarter of 2008.

 

The sequential increase in clearing and execution expense reflects expense rebates received in the first quarter of 2008.

 

The increase in other expense compared with both prior periods reflects organic business growth, and also includes a $22 million expense associated with a credit monitoring charge for lost tapes in the second quarter of 2008. The first quarter of 2008 included a $25 million write-down of seed capital investments related to a formerly affiliated hedge fund manager. Further analysis is currently being performed on the lost tapes which may result in additional expenses in the third quarter of 2008.

In the second quarter of 2008, we incurred $146 million of merger and integration expenses related to the merger with Mellon Financial, comprised of the following:

 

 

Integration/conversion costs—including consulting, system conversions and staff ($94 million);

 

Personnel related costs—includes severance, retention, relocation expenses, accelerated vesting of stock options and restricted stock expense ($45 million); and

 

One-time costs—includes facilities related costs, asset write-offs, vendor contract modifications, rebranding and net gain (loss) on disposals ($7 million).


 

18    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

We also incurred $3 million of merger and integration expense associated with the Acquired Corporate Trust Business in the second quarter of 2008.

Amortization of intangible assets was $124 million in the second quarter of 2008 compared with $122 million in the first quarter of 2008 and $29 million in the second quarter of 2007. The increase compared with the second quarter of 2007 primarily reflects the merger with Mellon Financial.

Year-to-date 2008 compared with year-to-date 2007

Noninterest expense in the first six months of 2008 increased $2.716 billion, or 102%, compared with the first six months of 2007. The increase primarily resulted from the merger with Mellon Financial, the acquisition of the remaining 50% interest in the joint venture with ABN AMRO, the April 1, 2008 merit increase, and the credit monitoring charge for lost tapes, partially offset by the sale of the B-Trade and G-Trade execution businesses.

 

Income taxes

On a continuing operations basis, the effective tax rate for the second quarter of 2008 was 50.8%, compared with 31.9% in the second quarter of 2007 and 32.5% in the first quarter of 2008. The higher effective tax rate in the second quarter of 2008 compared with the first quarter of 2008 reflects the SILO charge. For additional information regarding the SILO charge, see Note 15, Commitments and contingent liabilities. Excluding the SILO charge and merger and integration expense, the effective tax rate was 32.4% in the second quarter of 2008 compared with 31.9% in the second quarter of 2007 and 33.3% in the first quarter of 2008.

The effective tax rate in the third quarter of 2008 is expected to be approximately 33%.


 

Credit loss provision and net charge-offs

 

 

Credit loss provision and net charge-offs    Quarter ended     Six months ended  
     June 30,     March 31,     June 30,     June 30,     June 30,  
(in millions)    2008     2008     2007 (a)     2008     2007 (a)  

Provision for credit losses

   $ 25     $ 16     $ (15 )   $ 41     $ (30 )

Net (charge-offs) recoveries:

          

Commercial

   $ (12 )   $ (6 )   $ -     $ (18 )   $ (5 )

Leasing

     1       -       5       1       13  

Foreign

     -       (5 )     -       (5 )     -  

Other

     (2 )     (2 )     -       (4 )     -  

Total net (charge-offs) recoveries

   $ (13 )   $ (13 )   $ 5     $ (26 )   $ 8  
(a) Legacy The Bank of New York only.

 

The provision for credit losses was $25 million in the second quarter of 2008, compared with $16 million in the first quarter of 2008 and a credit of $15 million in the second quarter of 2007. The increase in allowance for credit losses in the second quarter of 2008 compared with the second quarter of 2007 primarily reflects the increase in

nonperforming loans. We recorded a net charge-off of $13 million in the second quarter of 2008, compared with a net charge-off of $13 million in the first quarter of 2008 and a net recovery of $5 million in the second quarter of 2007. Net charge-offs in the second quarter of 2008 primarily reflect commercial real estate charge-offs.


 

The Bank of New York Mellon Corporation    19


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

Business segments review

We have an internal information system that produces performance data for our seven business segments along product and service lines.

Business segments accounting principles

Our segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the segments will track their economic performance.

The accounting policies of the business segments are the same as those described in Note 1 to the Consolidated Financial Statements contained in the Company’s 2007 Annual Report on Form 10-K except other fee revenue and net interest revenue differ from the amounts shown in the Consolidated Income Statement because amounts presented in Business segments are on an FTE basis. Segment results are subject to reclassification whenever improvements are made in the measurement principles or when organizational changes are made.

In the second quarter of 2008, we moved the financial results of M1BB and Mellon United National Bank (“MUNB”) to the Other segment from the Wealth Management segment. This change reflects the sale of MIBB in June 2008, as well as our focus on reducing non-core activities. Historical segment results for Wealth Management and Other have been restated to reflect these changes.

The operations of acquired businesses are integrated with the existing business segments soon after most acquisitions are completed. As a result of the integration of staff support functions, management of customer relationships, operating processes and the financial impact of funding acquisitions, we cannot precisely determine the impact of acquisitions on income before taxes and therefore do not report it.

We provide segment data for seven segments with certain segments combined into sectors groupings as shown below:

   

Asset and Wealth Management sector

   

Asset Management segment

   

Wealth Management segment

   

Institutional Services sector

   

Asset Servicing segment

   

Issuer Services segment

   

Clearing Services segment

   

Treasury Services segment

   

Other segment

Business segment information is reported on a continuing operations basis for all periods presented. See Note 4 in the Notes to the Consolidated Financial Statements for a discussion of discontinued operations.

The results of our business segments are presented and analyzed on an internal management reporting basis:

 

   

Revenue amounts reflect fee and other revenue generated by each segment, as well as fee and other revenue transferred between segments under revenue transfer agreements.

   

Revenues and expenses associated with specific client bases are included in those segments. For example, foreign exchange activity associated with clients using custody products is allocated to the Asset Servicing segment.

   

Balance sheet assets and liabilities and their related income or expense are specifically assigned to each segment. Segments with a net liability position have also been allocated assets from the securities portfolio.

   

Net interest revenue is allocated to segments based on the yields on the assets and liabilities generated by each segment. We employ a funds transfer pricing system that matches funds with the specific assets and liabilities of each segment based on their interest sensitivity and maturity characteristics.

   

The measure of revenues and profit or loss by a segment has been adjusted to present segment data on an FTE basis.

   

Support and other indirect expenses are allocated to segments based on internally-developed methodologies.

   

Goodwill and intangible assets are reflected within individual business segments.


 

20    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

   

The operations of Mellon Financial are included only from July 1, 2007, the effective date of the merger.

The merger with Mellon Financial in July 2007 had a considerable impact on the business segment results in the second quarter of 2008 compared with the second quarter of 2007. The merger with Mellon Financial significantly impacted the Asset Management, Wealth Management and Asset Servicing segments and, to a lesser extent, the Issuer Services, Treasury Services and Other segments. The volatile market environment continued to impact our business segments in the second quarter of 2008 compared with the second quarter of 2007 as reflected by higher foreign exchange and other trading activities and securities lending revenue. Also, broad declines in the equity markets from the second quarter of 2007 influenced revenue in the Asset and Wealth Management segments during that period.

Non-program equity trading volumes were down 11% sequentially and up 36% year-over-year. In addition, average daily U.S. fixed-income trading volume was down 16% sequentially and up 1% year-over-year. Total debt issuances increased 31% sequentially and decreased 20% year-over-year. The issuance of global collateralized debt obligations was down 90% versus the second quarter of 2007.

 

The period end S&P 500 Index decreased 3% sequentially and 15% year-over-year. The period end FTSE 100 Index decreased 1% sequentially and 15% year-over-year. On a daily average basis, both the S&P 500 Index and FTSE 100 Index increased 1% sequentially and decreased 8% year-over-year. The period end NASDAQ Composite Index increased 1% sequentially and decreased 12% year-over-year.

The changes in the value of market indices impact fee revenue in the Asset and Wealth Management segments and our securities servicing businesses. Using the S&P 500 as a proxy for the equity markets, we estimate that a 100 point change in the value of the S&P 500, sustained for one year, would impact fee revenue by approximately 1% and fully diluted EPS on a continuing operations basis by $0.05 per share.

The table below presents the value of certain market indices at period end, as well as on a quarterly and year-to-date average basis.


 

 

Market indices                             2Q08 vs.     Year-to-date    YTD08
vs.
 
      2Q07    3Q07    4Q07    1Q08    2Q08    1Q08     2Q07     2008    2007    YTD07  

S&P 500 Index (a)

   1503    1527    1468    1323    1280    (3 )%   (15 )%   1280    1503    (15 )%

S&P 500 Index-daily average

   1496    1490    1496    1353    1371    1     (8 )   1362    1461    (7 )

FTSE 100 Index (a)

   6608    6467    6457    5702    5626    (1 )   (15 )   5626    6608    (15 )

FTSE 100 Index-daily average

   6534    6366    6455    5891    5979    1     (8 )   5937    6397    (7 )

NASDAQ Composite Index (a)

   2603    2702    2652    2279    2293    1     (12 )   2293    2603    (12 )

Lehman Brothers Aggregate Bondsm Index (a)

   227.9    246.2    257.5    281.2    270.1    (4 )   19     270.1    227.9    19  

MSCI EAFE® Index (a)

   2262.2    2300.3    2253.4    2038.6    1967.2    (4 )   (13 )   1967.2    2262.2    (13 )

NYSE Volume (in billions)

   127.7    145.5    135.0    158.5    140.7    (11 )   10     299.2    251.5    19  

NASDAQ Volume (in billions)

   134.0    137.0    137.4    148.9    134.5    (10 )   -     283.4    265.4    7  
(a) Period end.

 

The Bank of New York Mellon Corporation    21


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

The following consolidating schedules show the contribution of our segments to our overall profitability.

 

For the quarter ended June 30, 2008

(dollar amounts in millions, presented on

an FTE basis)

 

Asset

Management

   

Wealth

Management

   

Total

Asset &

Wealth

Management

Sector

    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
Continuing
Operations
 

Fee and other revenue

  $ 796     $ 161     $ 957     $ 1,085     $ 479     $ 330     $ 255     $ 2,149     $ (109 )   $ 2,997  

Net interest revenue

    11       48       59       213       176       74       153       616       (260 )     415  

Total revenue

    807       209       1,016       1,298       655       404       408       2,765       (369 )     3,412 (a)

Provision for credit losses

    —         (1 )     (1 )     —         —         —         —         —         26       25  

Noninterest expense

    604       155       759       808       367       297       210       1,682       317       2,758  

Income before taxes

  $ 203     $ 55     $ 258     $ 490     $ 288     $ 107     $ 198     $ 1,083     $ (712 )   $ 629  

Pre-tax operating margin(b)

    25 %     26 %     25 %     38 %     44 %     26 %     49 %     39 %     N/M       18 %

Average assets

  $ 13,000     $ 10,247     $ 23,247     $ 54,407     $ 35,119     $ 17,289     $ 20,715     $ 127,530     $ 45,220     $ 195,997  

Excluding intangible amortization:

                   

Noninterest expense

  $ 536     $ 142     $ 678     $ 803     $ 347     $ 291     $ 203     $ 1,644     $ 312     $ 2,634  

Income before taxes

    271       68       339       495       308       113       205       1,121       (707 )     753  

Pre-tax operating margin (b)

    34 %     33 %     33 %     38 %     47 %     28 %     50 %     41 %     N/M       22 %
                                                                                 

For the quarter ended

March 31, 2008

(dollar amounts in

millions, presented on

an FTE basis)

  Asset
Management
    Wealth
Management
    Total Asset &
Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
Continuing
Operations
 

Fee and other revenue

  $ 752     $ 166     $ 918     $ 1,101     $ 407     $ 319     $ 227     $ 2,054     $ 15     $ 2,987  

Net interest revenue

    15       46       61       221       153       74       183       631       81       773  

Total revenue

    767       212       979       1,322       560       393       410       2,685       96       3,760 (a)

Provision for credit losses

    —         —         —         —         —         —         —         —         16       16  

Noninterest expense

    624       155       779       752       337       280       212       1,581       259       2,619  

Income before taxes

  $ 143     $ 57     $ 200     $ 570     $ 223     $ 113     $ 198     $ 1,104     $ (179 )   $ 1,125  

Pre-tax operating margin(b)

    19 %     27 %     20 %     43 %     40 %     29 %     48 %     41 %     N/M       30 %

Average assets

  $ 12,976     $ 10,489     $ 23,465     $ 52,170     $ 32,182     $ 16,574     $ 23,620     $ 124,546     $ 52,779     $ 200,790  

Excluding intangible amortization:

                   

Noninterest expense

  $ 562     $ 142     $ 704     $ 745     $ 317     $ 274     $ 205     $ 1,541     $ 252     $ 2,497  

Income before taxes

    205       70       275       577       243       119       205       1,144       (172 )     1,247  

Pre-tax operating margin (b)

    27 %     33 %     28 %     44 %     43 %     30 %     50 %     43 %     N/M       33 %
                                                                                 

For the quarter ended

Dec. 31, 2007

(dollar amounts in millions, presented on an FTE
basis)

  Asset
Management
    Wealth
Management
    Total Asset &
Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
Continuing
Operations
 

Fee and other revenue

  $ 888     $ 167     $ 1,055     $ 1,033     $ 457     $ 357     $ 243     $ 2,090     $ (90 )   $ 3,055  

Net interest revenue

    18       42       60       224       175       78       162       639       58       757  

Total revenue

    906       209       1,115       1,257       632       435       405       2,729       (32 )     3,812 (a)

Provision for credit losses

    —         —         —         —         —         —         —         —         20       20  

Noninterest expense

    629       156       785       813       345       311       208       1,677       287       2,749  

Income before taxes

  $ 277     $ 53     $ 330     $ 444     $ 287     $ 124     $ 197     $ 1,052     $ (339 )   $ 1,043  

Pre-tax operating margin(b)

    31 %     25 %     30 %     35 %     45 %     29 %     49 %     39 %     N/M       27 %

Average assets

  $ 13,079     $ 9,854     $ 22,933     $ 48,353     $ 32,708     $ 16,698     $ 21,803     $ 119,562     $ 50,492     $ 192,987  

Excluding intangible amortization:

                   

Noninterest expense

  $ 559     $ 142     $ 701     $ 807     $ 324     $ 305     $ 201     $ 1,637     $ 280     $ 2,618  

Income before taxes

    347       67       414       450       308       130       204       1,092       (332 )     1,174  

Pre-tax operating margin (b)

    38 %     32 %     37 %     36 %     49 %     30 %     50 %     40 %     N/M       31 %

 

22    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

For the quarter ended

Sept. 30, 2007

(dollar amounts in

millions, presented on

an FTE basis)

  Asset
Management
    Wealth
Management
   

Total

Asset &
Wealth
Management
Sector

    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
Continuing
Operations
 

Fee and other revenue

  $ 745     $ 156     $ 901     $ 906     $ 460     $ 372     $ 224     $ 1,962     $ 77     $ 2,940  

Net interest revenue

    (4 )     41       37       195       159       77       140       571       66       674  

Total revenue

    741       197       938       1,101       619       449       364       2,533       143       3,614 (a)

Provision for credit losses

    -       -       -       -       -       -       -       -       -       -  

Noninterest expense

    608       153       761       759       311       322       203       1,595       350       2,706  

Income before taxes

  $ 133     $ 44     $ 177     $ 342     $ 308     $ 127     $ 161     $ 938     $ (207 )   $ 908  

Pre-tax operating margin(b)

    18 %     22 %     19 %     31 %     50 %     28 %     44 %     37 %     N/M       25 %

Average assets

  $ 13,021     $ 9,960     $ 22,981     $ 43,948     $ 30,738     $ 15,854     $ 21,070     $ 111,610     $ 49,237     $ 183,828  

Excluding intangible
amortization:

                   

Noninterest expense

  $ 538     $ 139     $ 677     $ 753     $ 291     $ 316     $ 196     $ 1,556     $ 342     $ 2,575  

Income before taxes

    203       58       261       348       328       133       168       977       (199 )     1,039  

Pre-tax operating margin(b)

    27 %     29 %     28 %     32 %     53 %     30 %     46 %     39 %     N/M       29 %
         
    Legacy The Bank of New York only  

For the quarter ended

June 30, 2007

(dollar amounts in

millions, presented on

an FTE basis)

  Asset
Management
    Wealth
Management
   

Total

Asset &
Wealth
Management
Sector

    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
Continuing
Operations
 

Fee and other revenue

  $ 127     $ 50     $ 177     $ 520     $ 390     $ 321     $ 143     $ 1,374     $ 29     $ 1,580  

Net interest revenue

    (2 )     14       12       148       131       75       102       456       (14 )     454  

Total revenue

    125       64       189       668       521       396       245       1,830       15       2,034 (a)

Provision for credit losses

    -       -       -       -       -       -       -       -       (15 )     (15 )

Noninterest expense

    76       53       129       466       257       300       127       1,150       110       1,389  

Income before taxes

  $ 49     $ 11     $ 60     $ 202     $ 264     $ 96     $ 118     $ 680     $ (80 )   $ 660  

Pre-tax operating margin(b)

    39 %     17 %     32 %     30 %     51 %     24 %     48 %     37 %     N/M       32 %

Average assets

  $ 1,557     $ 1,427     $ 2,984     $ 30,819     $ 23,189     $ 14,392     $ 15,803     $ 84,203     $ 27,136     $ 114,323  

Excluding intangible
amortization:

                   

Noninterest expense

  $ 72     $ 53     $ 125     $ 464     $ 240     $ 294     $ 127     $ 1,125     $ 110     $ 1,360  

Income before taxes

    53       11       64       204       281       102       118       705       (80 )     689  

Pre-tax operating margin(b)

    42 %     17 %     34 %     31 %     54 %     26 %     48 %     39 %     N/M       34 %
         

For the six months ended

June 30, 2008

(dollar amounts in

millions, presented on

an FTE basis)

  Asset
Management
    Wealth
Management
   

Total

Asset &
Wealth
Management
Sector

    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
Continuing
Operations
 

Fee and other revenue

  $ 1,548     $ 327     $ 1,875     $ 2,186     $ 886     $ 649     $ 482     $ 4,203     $ (94 )   $ 5,984  

Net interest revenue

    26       94       120       434       329       148       336       1,247       (179 )     1,188  

Total revenue

    1,574       421       1,995       2,620       1,215       797       818       5,450       (273 )     7,172 (a)

Provision for credit losses

    -       (1 )     (1 )     -       -       -       -       -       42       41  

Noninterest expense

    1,228       310       1,538       1,560       704       577       422       3,263       576       5,377  

Income before taxes

  $ 346     $ 112     $ 458     $ 1,060     $ 511     $ 220     $ 396     $ 2,187     $ (891 )   $ 1,754  

Pre-tax operating margin(b)

    22 %     27 %     23 %     40 %     42 %     28 %     48 %     40 %     N/M       24 %

Average assets

  $ 12,988     $ 10,368     $ 23,356     $ 53,288     $ 33,651     $ 16,932     $ 22,168     $ 126,039     $ 48,999     $ 198,394  

Excluding intangible
amortization:

                   

Noninterest expense

  $ 1,098     $ 284     $ 1,382     $ 1,548     $ 664     $ 565     $ 408     $ 3,185     $ 564     $ 5,131  

Income before taxes

    476       138       614       1,072       551       232       410       2,265       (879 )     2,000  

Pre-tax operating margin(b)

    30 %     33 %     31 %     41 %     45 %     29 %     50 %     42 %     N/M       28 %

 

The Bank of New York Mellon Corporation    23


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

     Legacy The Bank of New York only  

For the six months ended

June 30, 2007

(dollar amounts in

millions, presented on

an FTE basis)

  Asset
Management
    Wealth
Management
   

Total

Asset &
Wealth
Management
Sector

    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
Continuing
Operations
 

Fee and other revenue

  $ 233     $ 100     $ 333     $ 992     $ 743     $ 631     $ 280     $ 2,646     $ 76     $ 3,055  

Net interest revenue

    5       28       33       273       233       149       211       866       (16 )     883  

Total revenue

    238       128       366       1,265       976       780       491       3,512       60       3,938 (a)

Provision for credit losses

    -       -       -       -       -       -       -       -       (30 )     (30 )

Noninterest expense

    146       104       250       899       503       583       246       2,231       180       2,661  

Income before taxes

  $ 92     $ 24     $ 116     $ 366     $ 473     $ 197     $ 245     $ 1,281     $ (90 )   $ 1,307  

Pre-tax operating margin (b)

    39 %     19 %     32 %     29 %     48 %     25 %     50 %     36 %     N/M       33 %

Average assets

  $ 1,687     $ 1,423     $ 3,110     $ 29,643     $ 19,466     $ 14,687     $ 15,409     $ 79,205     $ 25,903     $ 108,218  

Excluding intangible amortization:

                   

Noninterest expense

  $ 138     $ 104     $ 242     $ 896     $ 469     $ 571     $ 246     $ 2,182     $ 180     $ 2,604  

Income before taxes

    100       24       124       369       507       209       245       1,330       (90 )     1,364  

Pre-tax operating margin (b)

    42 %     19 %     34 %     29 %     52 %     27 %     50 %     38 %     N/M       35 %
(a) Consolidated results include FTE impact of $15 million in the second quarter of 2008, $15 million in the first quarter of 2008, $16 million in the fourth quarter of 2007, $14 million in the third quarter of 2007, $2 million in the second quarter of 2007, $30 million in the first six months of 2008 and $4 million in the first six months of 2007.
(b) Income before taxes divided by total revenue.

N/M – Not meaningful.

 

Asset and Wealth Management Sector

Asset and Wealth Management fee revenue is dependent on the overall level and mix of assets under management (“AUM”) and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. AUM were $1.113 trillion at June 30, 2008, compared

with $153 billion at June 30, 2007, and $1.105 trillion at March 31, 2008. The year-over-year increase in AUM reflects the merger with Mellon Financial and strong money market flows, partially offset by broad declines in equity market levels. The increase from March 31, 2008 reflects strong money market flows, partially offset by long-term outflows and lower equity markets.


 

Assets under management at period-end, by product type

(in billions)

   June 30,
2007 (a)
   Sept. 30,
2007
   Dec. 31,
2007
   March 31,
2008
   June 30,
2008

Equity securities

   $ 43    $ 456    $ 460    $ 424    $ 412

Money market

     41      275      296      320      343

Fixed income securities

     22      215      218      219      218

Alternative investments and overlay

     47      160      147      142      140

Total assets under management

   $ 153    $ 1,106    $ 1,121    $ 1,105    $ 1,113

(a)    Legacy The Bank of New York only.

 

              

Assets under management at period-end, by client type

(in billions)

   June 30,
2007 (a)
   Sept. 30,
2007
   Dec. 31,
2007
   March 31,
2008
   June 30,
2008

Institutional

   $ 113    $ 682    $ 671    $ 636    $ 625

Mutual funds

     18      323      349      373      393

Private client

     22      101      101      96      95

Total assets under management

   $ 153    $ 1,106    $ 1,121    $ 1,105    $ 1,113
(a) Legacy The Bank of New York only.

 

24    The Bank of New York Mellon Corporation


Table of Contents

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

 

 

Changes in market value of assets under management from March 31, 2008 to June 30, 2008 – by business segment   
(in billions)   

Asset

Management

   

Wealth

Management

    Total  

Market value of assets under management at March 31, 2008:

   $ 1,021     $ 84     $ 1,105  

Net inflows (outflows):

      

Long-term

     (8 )     —         (8 )

Money market

     21       —         21  
                        

Total net inflows

     13       —         13  

Net market depreciation (a)

     (3 )     (3 )     (6 )

Other

     1       —         1  

Market value of assets under management at June 30, 2008

   $ 1,032 (b)   $ 81 (c)   $ 1,113  

 

(a) Includes the effect of changes in foreign exchange rates.
(b) Excludes $8 billion subadvised for other segments.
(c) Excludes private client assets managed in the Asset Management segment.
Changes in market value of assets under management from June 30, 2007 to June 30, 2008 – by business segment   
(in billions)    Asset
Management
    Wealth
Management
    Total  

Market value of assets under management at June 30, 2007:

      

The Bank of New York

   $ 129     $ 24     $ 153  

Mellon Financial

     868       61       929  

Net inflows (outflows):

      

Long-term

     (36 )     4       (32 )

Money market

     116       -       116  
                        

Total net inflows

     80       4       84  

Net market depreciation (a)

     (46 )     (8 )     (54 )

Other

     1       -       1  

Market value of assets under management at June 30, 2008

   $ 1,032 (b)   $ 81 (c)   $ 1,113  

 

(a) Includes the effect of changes in foreign exchange rates.
(b) Excludes $8 billion subadvised for other segments.
(c) Excludes private client assets managed in the Asset Management segment.

 

Asset Management segment

 

(dollar amounts in millions, presented on FTE basis)                                  2Q08 vs.     Year-to-date     YTD08
vs.
YTD07
 
   2Q07 (a)     3Q07     4Q07     1Q08     2Q08     1Q08     2Q07     2008     2007 (a)    

Revenue:

                    

Asset and wealth management:

                    

Mutual funds

   $ 4     $ 307     $ 323     $ 323     $ 340     5 %   N/M     $ 663     $ 7     N/M  

Institutional clients

     80       331       342       304       290     (5 )   263 %     594       148     301 %

Private clients