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 September 30, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

        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
Sept. 30, 2009

Common Stock, $0.01 par value

     1,204,243,958

 

 


Table of Contents

THE BANK OF NEW YORK MELLON CORPORATION

THIRD QUARTER 2009 FORM 10-Q

TABLE OF CONTENTS

 

 

 

     Page

Consolidated Financial Highlights (unaudited)

   2
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:

  

General

   4

Overview

   4

Third quarter 2009 and subsequent events

   5

Highlights of third quarter 2009 results

   5

Impact of the market environment on our business

   7

Fee and other revenue

   8

Net interest revenue

   11

Average balances and interest rates

   13

Noninterest expense

   15

Income taxes

   16

Business segments review

   16

Critical accounting estimates

   33

Consolidated balance sheet review

   33

Support agreements

   45

Liquidity and dividends

   45

Capital

   48

Trading activities and risk management

   50

Foreign exchange and other trading

   52

Asset/liability management

   52

Off-balance-sheet financial instruments

   53

Supplemental information – Explanation of Non-GAAP financial measures

   53

Recent accounting and regulatory developments

   57

Government monetary policies and competition

   60

Website information

   60

Item 1. Financial Statements:

  

Consolidated Income Statement (unaudited)

   62

Consolidated Balance Sheet (unaudited)

   64

Consolidated Statement of Cash Flows (unaudited)

   65

Consolidated Statement of Changes in Equity (unaudited)

   66

Notes to Consolidated Financial Statements

   67

Item 4. Controls and Procedures.

   104

Forward-looking Statements.

   105
Part II – Other Information   

Item 1. Legal Proceedings

   106

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

   106

Item 6. Exhibits

   106

Signature

   107

Index to Exhibits

   108


Table of Contents

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited)

 

     Quarter ended     Nine months ended  

(dollar amounts in millions, except per share

amounts and unless otherwise noted)

   Sept. 30,
2009
    June 30,
2009
    Sept. 30,
2008
    Sept. 30,
2009
    Sept. 30,
2008
 

Results applicable to common shareholders of The Bank of New York Mellon Corporation:

          

Net income

   $ (2,458   $ 176      $ 303      $ (1,960   $ 1,358   

Basic EPS

     (2.05     0.15        0.26        (1.67     1.18   

Diluted EPS (a)

     (2.05     0.15        0.26        (1.67     1.17   

Results from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation:

          

Income from continuing operations

   $ (2,439   $ 267      $ 303      $ (1,809   $ 1,348   

Basic EPS from continuing operations

     (2.04     0.23        0.26        (1.54     1.17   

Diluted EPS from continuing operations (a)

     (2.04     0.23        0.26        (1.54     1.16   

Continuing operations:

          

Fee and other revenue

   $ (2,216   $ 2,257      $ 2,926      $ 2,177      $ 8,897   

Net interest revenue

     716        700        681        2,191        1,812   
                                        

Total revenue

   $ (1,500   $ 2,957      $ 3,607      $ 4,368      $ 10,709   

Return on common equity (annualized) (b)

     N/M        4.0     4.3     N/M        6.3

Non-GAAP adjusted (c)

     10.1     6.4     14.2     9.0     13.4

Return on tangible common equity (annualized) – Non-GAAP (c)

     N/M        18.4     18.9     N/M        24.8

Non-GAAP adjusted (c)

     32.0     23.3     50.2     32.3     45.5

Fee and other revenue as a percent of total revenue

     N/M        76     81     50     83

Non-GAAP adjusted (c)

     79     78     80     78     80

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

   $ 248      $ 241      $ 287      $ 241      $ 292   

Percent of non-U.S. fee revenue and net interest revenue

     31     31     33 (d)      30     34 (d) 

Pre-tax operating margin

     N/M        17     7     N/M        19

Non-GAAP adjusted (c)

     32     31     39     32     38

Net interest margin (FTE) (e)

     1.85     1.80     1.92 (d)      1.84     1.71 (d) 

Assets under management (“AUM”) at period end (in billions)

   $ 966      $ 926      $ 1,067      $ 966      $ 1,067   

Assets under custody and administration (“AUC” ) at period end (in trillions)

   $ 22.1      $ 20.7      $ 22.4      $ 22.1      $ 22.4   

Equity securities

     29     27     28     29     28

Fixed income securities

     71     73     72     71     72

Cross-border assets at period end (in trillions)

   $ 8.6      $ 7.8      $ 8.9      $ 8.6      $ 8.9   

Market value of securities on loan at period end (in billions) (f)

   $ 299      $ 290      $ 470      $ 299      $ 470   

Average common shares and equivalents outstanding (in thousands):

          

Basic

     1,197,414        1,171,081        1,143,445        1,171,675        1,141,424   

Diluted (a)

     1,197,414        1,174,466        1,147,586        1,171,675        1,148,402   

Capital ratios (g):

          

Tier 1 capital ratio

     11.4     12.5     9.3     11.4     9.3

Tier 1 common to risk-weighted assets ratio (c)

     9.9     11.1     8.0     9.9     8.0

Total (Tier 1 plus Tier 2) capital ratio

     15.3     16.0     12.8     15.3     12.8

Common shareholders’ equity to assets ratio (c)

     13.3     13.4     10.3     13.3     10.3

Tangible common shareholders’ equity to tangible assets ratio – Non-GAAP (c)

     5.2     4.8     3.9     5.2     3.9

 

2    The Bank of New York Mellon Corporation


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The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited) (continued)

 

     Quarter ended     Nine months ended

(dollar amounts in millions, except per share

amounts and unless otherwise noted)

   Sept. 30,
2009
    June 30,
2009
    Sept. 30,
2008
    Sept. 30,
2009
    Sept. 30,
2008

Return on average assets (annualized) (b)

     N/M        0.52     0.61     N/M        0.92%

Selected average balances:

          

Interest-earning assets (h)

   $ 155,159      $ 157,265      $ 142,062      $ 159,916      $ 142,318   

Total assets

   $ 205,786      $ 208,533      $ 198,827      $ 211,427      $ 198,539   

Interest-bearing deposits (h)

   $ 93,632      $ 98,896      $ 86,016      $ 98,140      $ 90,634   

Noninterest-bearing deposits (h)

   $ 34,920      $ 32,852      $ 32,953      $ 36,915      $ 27,679   

Total shareholders’ equity

   $ 28,144      $ 28,934      $ 27,996      $ 28,352      $ 28,682   

Other information at period end:

          

Employees

     42,000        41,800        42,900        42,000        42,900   

Dividends per common share

   $ 0.09      $ 0.09      $ 0.24      $ 0.42      $ 0.72   

Dividend yield (annualized)

     1.2     1.2     2.9     1.9     2.9%

Closing common stock price per common share

   $ 28.99      $ 29.31      $ 32.58      $ 28.99      $ 32.58   

Market capitalization

   $ 34,911      $ 35,255      $ 37,388      $ 34,911      $ 37,388   

Book value per common share

   $ 23.50      $ 22.68      $ 23.97      $ 23.50      $ 23.97   

Tangible book value per common share – Non-GAAP (c)

   $ 7.54      $ 6.60      $ 6.65      $ 7.54      $ 6.65   

Period end common shares outstanding (in thousands)

     1,204,244        1,202,828        1,147,567        1,204,244        1,147,567   

 

(a)

Diluted earnings per share for the three and nine months ended Sept. 30, 2009 was calculated using average basic shares. Adding back the dilutive shares would result in anti-dilution.

(b)

Return on common equity on a net income basis was not meaningful for the third quarter of 2009, 2.7% for the second quarter of 2009, 4.3% for the third quarter of 2008, not meaningful for the first nine months of 2009 and 6.3% for the first nine months of 2008. Return on average assets on a net income basis was not meaningful for the third quarter of 2009, 0.34% for the second quarter of 2009, 0.61% for the third quarter of 2008, not meaningful for the first nine months of 2009 and 0.91% for the first nine months of 2008. Return on average assets was calculated on a continuing operations basis even though the prior period balance sheets, in accordance with GAAP, have not been restated for discontinued operations.

(c)

See Supplemental Information beginning on page 53 for a calculation of these ratios.

(d)

Excluding the SILO/LILO charges, the percent of non-U.S. fee and net interest revenue was 32% and 33% for the quarter and nine months ended Sept. 30, 2008, respectively, and the net interest margin was 2.24% and 2.17% for the third quarter and nine months ended Sept. 30, 2008, respectively.

(e)

Prior periods are calculated on a continuing operations basis, even though the prior period balance sheets, in accordance with GAAP have not been restated for discontinued operations.

(f)

Represents the securities on loan, both cash and non-cash, managed by the Asset Servicing segment.

(g)

Includes discontinued operations.

(h)

Excludes the impact of discontinued operations.

N/M – Not meaningful.

 

The Bank of New York Mellon Corporation    3


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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

 

 

 

 

General

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “BNY Mellon”, the “Company,” and similar terms refer to The Bank of New York Mellon Corporation.

Certain business terms used in this document are defined in the glossary included in our 2008 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.

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 to the Notes to Consolidated Financial Statements.

Throughout this Form 10-Q, certain measures, which are noted, exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons which relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present certain amounts on a fully taxable equivalent (FTE) basis. We believe that this presentation provides comparability 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. See the Supplemental information – Explanation of Non-GAAP financial measures beginning on page 53 for a reconciliation of amounts presented in accordance with GAAP to adjusted Non-GAAP amounts.

In the first quarter of 2009, we adopted new guidance from the Financial Accounting Standards Board (“FASB”) on the recognition and presentation of other-than-temporary-impairments that is included in Accounting Standard Codification (“ASC”) 320, Investments-Debt and Equity Securities. We also

adopted new guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The impact of adopting this guidance is discussed in Critical Accounting Estimates and Notes 5 and 16 to the Notes to Consolidated Financial Statements.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon 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 and wealth management and institutional services and be recognized for our broad and deep capabilities, superior client service and consistent outperformance versus peers. Our global client base consists of financial institutions, corporations, government agencies, endowments and foundations and high-net-worth individuals. At Sept. 30, 2009, we had $22.1 trillion in assets under custody and administration and $966 billion in assets under management, serviced $11.9 trillion in outstanding debt and, on average, processed $1.6 trillion of global payments per day.

BNY Mellon’s businesses benefit during periods of global growth in financial assets and concentration of wealth, and also benefit from the globalization of the investment process. Over the long term, our financial goals are focused on deploying capital to accelerate the long-term growth of our businesses and on achieving superior total returns to shareholders by generating first quartile earnings per share growth over time relative to a group of peer companies.

Key components of our strategy include: providing superior client service versus peers; strong investment performance (relative to investment benchmarks); above median revenue growth (relative to peer companies for each of our businesses); an increasing percentage of revenue and income derived from outside the U.S.; successful integration of


 

4    The Bank of New York Mellon Corporation


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acquisitions and competitive margins; and positive operating leverage. We have established Tier 1 capital as our principal capital measure and have established a targeted minimum ratio of Tier 1 capital to risk-weighted assets of 10%.

Third quarter 2009 and subsequent events

Investment securities portfolio restructuring

Consistent with our ongoing strategy to reduce balance sheet risk, and reflecting the recent improvement in the fixed income markets, we sold or are in the process of restructuring the watch list portion of our investment securities portfolio.

The sales and restructuring impact approximately $12.1 billion (pre-restructuring amortized cost) of investment securities. As a result of investment securities sales and restructuring in the third quarter of 2009, we recognized a charge of $4.8 billion (pre-tax). Subsequent to Sept. 30, 2009, approximately $2.1 billion (pre-restructuring amortized cost of $3.6 billion) of the lowest quality securities were sold at fair value. The majority of the restructured securities are expected to be retained on BNY Mellon’s balance sheet.

The charge for restructuring the securities portfolio had a minimal impact on the tangible capital ratio, as approximately 90% of the charge had previously been reflected in tangible capital.

After giving effect to the securities sales and restructuring described above, the net unrealized loss on the investment securities portfolio was $1.4 billion (pre-tax) at Sept. 30, 2009, an improvement of $6.3 billion compared with June 30, 2009.

As a result of the restructuring, we expect net interest revenue to be positively impacted by approximately $125-175 million in 2010.

Repurchased warrant related to TARP

On Aug. 5, 2009, BNY Mellon repurchased, for $136 million, the warrant issued to the U.S. Treasury in connection with the Troubled Asset Relief Program (“TARP”) Capital Purchase Program.

 

Settlement with the Russian Federal Customs Service

In October 2009, the Federal Customs Service of the Russian Federation (the “Customs Service”) and The Bank of New York Mellon (the “Bank”), a subsidiary of BNY Mellon, settled the litigation filed by the Customs Service in the Arbitrazh Court of the City of Moscow.

Under the terms of the agreement, the Customs Service agreed to withdraw its $22.5 billion lawsuit, the proceedings were terminated by the Arbitrazh Court, and the Customs Service and the Bank exchanged mutual releases. Without any admission of liability, the Bank agreed to pay $14 million, which was previously accrued, in trial costs and expenses to the Customs Service in consideration for the settlement.

Acquisition of Insight Investment Management

In November 2009, we acquired Insight Investment Management Limited (“Insight Investment”) from Lloyds Banking Group plc for £235 million ($377 million of cash and stock). Based in London, Insight Investment specializes in liability-driven investment solutions, active fixed income and alternative investments. Its clients include some of the UK’s largest pension schemes, corporates, insurance companies and local authorities, along with a growing number of non-UK clients and some of the best-known financial services and intermediary companies. Insight Investment has approximately £83 billion ($133 billion) in assets under management.

Insight Investment will join the other investment boutiques at BNY Mellon Asset Management.

Siguler Guff & Company, LLC investment

In November 2009, BNY Mellon acquired a 20% minority interest in Siguler Guff & Company, LLC (and certain related entities), a multi-strategy private equity firm with approximately $8 billion in assets under management and committed capital.

Highlights of third quarter 2009 results

We reported a loss from continuing operations applicable to the common shareholders of BNY Mellon of $2.4 billion or $2.04 per diluted common share in the third quarter of 2009. This compares


 

The Bank of New York Mellon Corporation    5


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with net income of $303 million, or diluted earnings per common share of $0.26, in the third quarter of 2008 and $267 million, or diluted earnings per common share of $0.23, in the second quarter of 2009.

Net loss applicable to common shareholders, including discontinued operations, totaled $2.5 billion, or $2.05 per diluted common share, in the third quarter of 2009, compared with net income of $303 million, or $0.26 per diluted earnings per common share, in the third quarter of 2008 and $176 million, or $0.15 per diluted earnings per common share, in the second quarter of 2009.

Results for the third quarter of 2009 include the following:

 

   

The investment securities portfolio restructuring charge of $4.8 billion (pre-tax), or $2.54 per diluted common share described above under “Investment securities portfolio restructuring.” (See Consolidated balance sheet review beginning on page 33); and

   

Merger and integration (“M&I”) expenses of $54 million (pre-tax), or $0.03 per diluted common share. (See Noninterest expense beginning on page 15).

Highlights for the third quarter of 2009 include:

 

   

Assets under custody and administration (“AUC”) totaled $22.1 trillion at Sept. 30, 2009 compared with $22.4 trillion at Sept. 30, 2008 and $20.7 trillion at June 30, 2009. The year-over-year decrease reflects continued new business wins, which were more than offset by lower market values, while the sequential increase primarily reflects higher market values and new business. (See the Institutional Services sector on page 25).

   

Assets under management (“AUM”) totaled $966 billion at Sept. 30, 2009 compared with $1.1 trillion at Sept. 30, 2008 and $926 billion at June 30, 2009. The year-over-year decrease reflects lower market values and long-term outflows, while the sequential increase primarily reflects market appreciation offset in part by money market outflows. (See the Asset and Wealth Management sector on page 21).

   

Securities servicing revenue totaled $1.2 billion in the third quarter of 2009 compared with $1.5 billion in the third quarter of 2008. Continued

   

new business wins were more than offset by lower securities lending revenue, lower money market related distribution fees and lower market values. (See the Institutional Services sector on page 25).

   

Securities lending fee revenue totaled $43 million in the third quarter of 2009 compared with $155 million in the third quarter of 2008. The decrease reflects lower loan balances due to de-leveraging in the financial markets and narrower spreads. Securities lending assets totaled $299 billion at Sept. 30, 2009 compared with $470 billion at Sept. 30, 2008 and $290 billion at June 30, 2009. (See the Institutional Services sector on page 25).

   

Asset and wealth management fees, including performance fees, totaled $650 million in the third quarter of 2009 compared with $795 million in the third quarter of 2008. The decrease reflects global weakness in market values, partially offset by new business. (See the Asset Management and Wealth Management segments beginning on page 22).

   

Foreign exchange and other trading activities revenue totaled $246 million in the third quarter of 2009 compared with $385 million in the third quarter of 2008. The decrease reflects lower foreign exchange revenue, driven by lower volumes and volatility, as well as a lower valuation of credit swaps used to economically hedge the loan portfolio. (See Fee and other revenue beginning on page 8).

   

Investment income and other revenue totaled $205 million in the third quarter of 2009, increasing $121 million year-over-year and $152 million sequentially, primarily as a result of leasing gains and a gain on the sale of VISA shares. (See Fee and other revenue beginning on page 8).

   

Net interest revenue totaled $716 million in the third quarter of 2009 compared with $681 million in the third quarter of 2008. The increase reflects the SILO/LILO charge recorded in the third quarter of 2008. (See Net interest revenue beginning on page 11).

   

The provision for credit losses was $147 million in the third quarter of 2009 compared with $23 million in the third quarter of 2008. The increase primarily relates to downgrades in the insurance and media portfolios. (See Asset quality and allowance for credit losses beginning on page 41).


 

6    The Bank of New York Mellon Corporation


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Notes to Consolidated Financial Statements   (continued)

 

   

Noninterest expense totaled $2.3 billion in the third quarter of 2009 compared with $3.3 billion in the third quarter of 2008. The decrease primarily reflects lower support agreement charges and lower staff expense. (See Noninterest expense beginning on page 15).

   

The unrealized net of tax losses on our total investment securities portfolio was $1.0 billion at Sept. 30, 2009 compared with $4.8 billion at June 30, 2009 and $2.8 billion at Sept. 30, 2008. The sequential improvement reflects $3.0 billion related to the restructuring of the investment securities portfolio and $0.8 billion resulting from the improvement in the fixed income markets. (See Consolidated balance sheet review beginning on page 33).

   

The Tier 1 capital ratio was 11.4% at Sept. 30, 2009 compared with 12.5% at June 30, 2009 and 9.3% at Sept. 30, 2008. The increase in the Tier 1 capital ratio year-over-year primarily reflects common stock issuances in 2009, lower risk-weighted assets and earnings retention offset by the charge related to restructuring of the investment securities portfolio. The decrease sequentially primarily reflects the charge related to the restructuring of the investment securities portfolio. (See Capital beginning on page 48).

Impact of the market environment on our business

The following section discusses the impact of the current market environment on BNY Mellon’s operations.

Impact on our business

Our Asset and Wealth Management businesses have been negatively impacted by global weakness in market values. The average S&P 500 and the average FTSE indices declined 21% and 12%, respectively, from the third quarter of 2008, resulting in lower asset and wealth management fee revenue, and impacting performance fees.

Foreign exchange (“FX”) revenues returned to more normalized levels in 2009 from the record levels experienced in the fourth quarter of 2008, reflecting lower customer volumes and volatility.

Results in our securities lending business continue to be impacted by lower market valuations and narrower spreads, as well as overall de-leveraging in the financial markets compared with 2008. In the

third quarter of 2009, spreads continued to narrow and are returning to more historic levels.

Market conditions continue to drive a lower volume of fixed income securities issuances globally, which has adversely impacted our Corporate Trust business.

The current low interest rate environment continues to adversely impact our net interest revenue and corresponding net interest margin, as well as money market mutual fund related fees.

The market environment has also resulted in new opportunities for BNY Mellon, primarily through our Global Corporate Trust and Asset Servicing businesses. Among other things, these businesses continue to play a role in supporting governments’ stabilization efforts in North America and Europe to bring liquidity back to the financial markets.

FDIC Temporary Liquidity Guarantee Program

In October 2008, the Federal Deposit Insurance Corporation (“FDIC”) announced the Temporary Liquidity Guarantee Program (“TLGP”). This program, as amended by interim rules adopted in February, March and September 2009:

 

   

Guarantees certain types of senior unsecured debt issued by participating U.S. bank holding companies, U.S. savings and loan holding companies and FDIC-insured depositary institutions between Oct. 14, 2008 and Oct. 31, 2009, including promissory notes, commercial paper and any unsecured portion of senior debt. Prepayment of debt not guaranteed by the FDIC and replacement with FDIC-guaranteed debt is not permitted. In the first quarter of 2009, BNY Mellon issued approximately $600 million of FDIC-guaranteed debt maturing June 29, 2012 under this program, which was the maximum amount of the debt permissible for it under the TLGP. BNY Mellon is obligated to pay to the FDIC an assessment fee at a rate of 100 basis points per annum on the aggregate principal amount of its FDIC-guaranteed debt under this program. At Sept. 30, 2009, $2 billion of FDIC-guaranteed debt is included in the investment securities portfolio.

   

Provides full FDIC deposit insurance coverage for funds held by participating FDIC-insured depository institutions (“IDI”) in noninterest-


 

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bearing transaction deposit accounts until Dec. 31, 2009, extended until June 30, 2010 as discussed below. For such accounts, a 10 basis point surcharge on the depository institution’s current assessment rate will be applied to deposits not otherwise covered by the existing deposit insurance limit of $250,000. In the fourth quarter of 2009, the FDIC extended the expiration of this program until

   

June 30, 2010. On Nov. 2, 2009, BNY Mellon elected to opt-out of the six month extension of this program. Our participation in the current program will continue until Dec. 31, 2009. IDIs that continue to participate in the program would be subject to increased fees (from 15-25 basis points, depending on the risk category applicable to the IDI versus the current 10 basis points). At Sept. 30, 2009, $26 billion of deposits with us were covered by the FDIC’s TLGP.


 

Fee and other revenue

 

 

Fee and other revenue                      3Q09 vs.     Year-to-date     YTD09
vs.
 
(dollars in millions unless otherwise noted)    3Q09     2Q09     3Q08     3Q08     2Q09     2009     2008     YTD08  

Securities servicing fees:

                

Asset servicing

   $ 600      $ 574      $ 653  (a)    (8 )%    5   $ 1,693      $ 1,982  (a)    (15 )% 

Securities lending revenue (b)

     43        97        155      (72   (56     230        602      (62

Issuer services

     359        372        477      (25   (3     1,095        1,297      (16

Clearing services

     236        250        259      (9   (6     739        786      (6

Total securities servicing fees

     1,238        1,293        1,544      (20   (4     3,757        4,667      (19

Asset and wealth management fees

     650        637        795      (18   2        1,903        2,517      (24

Foreign exchange and other trading activities

     246        237        385      (36   4        790        952      (17

Treasury services

     128        132        129      (1   (3     385        382      1   

Distribution and servicing

     94        107        107      (12   (12     312        315      (1

Financing-related fees

     56        54        44      27      4        158        142      11   

Investment income

     121        44        47      N/M      N/M        148        162      (9

Other

     84        9        37      N/M      N/M        108        147      (27

Total fee revenue

   $ 2,617      $ 2,513      $ 3,088      (15 )%    4   $ 7,561      $ 9,284      (19 )% 

Net securities (losses)

     (4,833     (256     (162   N/M      N/M        (5,384     (387   N/M   

Total fee and other revenue

   $ (2,216   $ 2,257      $ 2,926      N/M      N/M      $ 2,177      $ 8,897      (76 )% 

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

     N/M        76     81         50     83  

Market value of AUM at period end (in billions)

   $ 966      $ 926      $ 1,067      (9 )%    4   $ 966      $ 1,067      (9 )% 

Market value of AUC or administration at period end (in trillions)

   $ 22.1      $ 20.7      $ 22.4      (1 )%    7   $ 22.1      $ 22.4      (1 )% 

 

(a)

In the second quarter of 2009, global sub-custodian out-of-pocket expense related to client reimbursement was reclassified from sub-custodian expense to asset servicing revenue. This reclassification totaled $4 million in the third quarter of 2008 and $18 million in the first nine months of 2008.

(b)

Included in asset servicing revenue on the income statement.

(c)

Excluding investment securities losses and the second and third quarter 2008 SILO/LILO charges, fee and other revenue as a percentage of total revenue was 79% in the third quarter of 2009, 78% in the second quarter of 2009, 80% in the third quarter of 2008, 78% in the first nine months of 2009 and 80% in the first nine months of 2008.

N/M – Not meaningful.

Fee revenue

 

The results of many of our businesses are influenced by client and market activities that vary by quarter.

Fee revenue decreased 15% versus the year-ago quarter primarily due to decreases in asset and wealth management fees, foreign exchange and other trading activities, issuer services revenue and securities lending revenue, partially offset by increases in investment income and other revenue. Sequentially, fee revenue increased 4% (unannualized) reflecting higher investment income, other revenue, asset

servicing revenue, asset and wealth management fees, and foreign exchange and other trading activities, partially offset by a decrease in securities lending revenue.

Securities servicing fees

Securities servicing fees were impacted by the following, compared with the third quarter of 2008 and second quarter of 2009:


 

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Asset servicing fees – Year-over-year results reflect the continued impact of new business wins which were more than offset by lower market values and lower client activity. Sequential results primarily reflect new business wins and higher market values.

 

Securities lending revenue – The year-over-year results reflect lower loan balances due to de-leveraging in the market, lower market values and narrower spreads. The sequential decline was due to a narrowing of spreads which are returning to more historical levels, and seasonality.

 

Issuer services fees – The decrease compared with the third quarter of 2008 reflects lower Depositary Receipts revenue due primarily to a decline in transaction fees and lower Corporate Trust fees due to a lower level of fixed income issuances globally and lower money market related distribution fees. The decrease sequentially primarily reflects lower money market related distribution fees, a lower level of fixed income issuances globally and seasonally lower activity in shareowner services.

 

Clearing services fees –Year-over-year and sequential results reflect lower money market related distribution fees and lower trading volumes. The sequential decline also reflects normal third quarter seasonality.

See the Institutional Services sector in Business segments review for additional details.

Asset and wealth management fees

Asset and wealth management fees, including performance fees, decreased from the third quarter of 2008, reflecting global weakness in market values, partially offset by new business. The sequential increase was primarily driven by improved market values and new business. Comparisons with both prior periods were also impacted by lower money market related fees due to increased fee waivers.

Total AUM for the Asset and Wealth Management sector were $966 billion at Sept. 30, 2009 compared with $1.1 trillion at Sept. 30, 2008 and $926 billion at June 30, 2009. The decrease compared with Sept. 30, 2008 resulted from lower market values and long-term outflows. The increase compared with June 30, 2009 resulted from market appreciation offset in part by money market outflows. The S&P 500 Index was 1057 at Sept. 30, 2009 compared with 919 at June 30, 2009 (a 15% increase) and 1166 at Sept. 30, 2008 (a 9% decrease).

 

See the Asset and Wealth Management sector in Business segments review for additional details regarding the drivers of asset and wealth management fees.

Foreign exchange and other trading activities

Foreign exchange and other trading activities revenue, which is primarily reported in the Asset Servicing segment, decreased 36% compared with the third quarter of 2008, and increased 4% (unannualized) compared with the second quarter of 2009. The decrease year-over-year reflects lower foreign exchange revenue driven by lower volumes and volatility, as well as a lower valuation of the credit default swaps used to economically hedge the loan portfolio. The sequential increase reflects higher fixed income derivatives revenue and a lower level of mark-to-market losses on credit default swaps, partially offset by lower foreign exchange revenue resulting from lower volatility and seasonality.

Treasury services

Treasury services fees, which are primarily reported in the Treasury Services segment, include fees related to funds transfer, cash management and liquidity management. Treasury services fees decreased $1 million compared with the third quarter of 2008 and $4 million compared with the second quarter of 2009. The decreases were driven by lower global payment 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.

Distribution and servicing fee revenue decreased $13 million compared with both the third quarter of 2008 and second quarter of 2009. These decreases primarily reflect lower money market related fees. 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


 

The Bank of New York Mellon Corporation    9


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intermediaries to cover their cost 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 increased $12 million compared with the third quarter of 2008 and $2 million sequentially. The increase year-over-year reflected higher fees on capital market products.

Investment income

 

Investment income                        Year-to-date  
(in millions)    3Q09    2Q09     3Q08     2009     2008  

Corporate/bank-owned life insurance

   $ 42    $ 31      $ 37      $ 114      $ 111   

Lease residual gains (losses)

     55      (10     17        71        30   

Seed capital gains (losses)

     15      19        (29     24        (45

Private equity gains (losses)

     8      (9     8        (21     19   

Equity investment income (loss)

     1      13        14        (40     47   

Total investment income

   $ 121    $ 44      $ 47      $ 148      $ 162   

Investment income, which is primarily reported in the Other and Asset Management segments, includes income from insurance contracts, lease residual gains and losses, gains and losses on seed capital investments and private equity investments, and equity investment income (loss). The increase, compared with the third quarter of 2008, primarily reflects lease residual gains of $55 million in the third quarter of 2009 compared with $17 million in the third quarter of 2008 and gains from seed capital investments of $15 million in the third quarter of 2009 compared to losses of $29 million in the third quarter of 2008. The increase, compared to the second quarter of 2009, primarily related to higher lease residual and private equity gains, and income from corporate-owned life insurance partially offset by lower equity investments income.

Other revenue

 

Other revenue                       Year-to-date
(in millions)    3Q09    2Q09     3Q08    2009    2008

Asset-related gains

   $ 54    $ 16      $ 8    $ 76    $ 67

Expense reimbursements from joint ventures

     9      7        9      24      21

Other income (loss)

     21      (14     20      8      59

Total other revenue

   $ 84    $ 9      $ 37    $ 108    $ 147

 

Other revenue includes asset-related gains, expense reimbursements from joint ventures and other income (loss). Asset-related gains include loan, real estate and other asset dispositions. Expense reimbursements from joint ventures relate to expenses incurred by BNY Mellon on behalf of joint ventures. Other income (loss) primarily includes foreign currency translation, other investments and various miscellaneous revenues.

Total other revenue increased in the third quarter of 2009 compared with the third quarter of 2008 and the second quarter of 2009 primarily due to a gain on the sale of VISA shares.

Net investment securities gains (losses)

Net securities losses totaled $4.8 billion in the third quarter of 2009, compared with $162 million in the third quarter of 2008 and $256 million in the second quarter of 2009.

The following table details investment securities losses by type of security. The loss in the third quarter of 2009 primarily resulted from our intent to sell investment securities and the restructuring of a significant portion of the watch list investment securities portfolio. See Consolidated balance sheet review for further information on the investment securities portfolio, including the restructuring of the portfolio.

As a result of adopting ASC 320, investment securities losses in the first half of 2009 primarily reflected credit related losses. In the third quarter of 2009, we recognized both credit and non-credit related losses on our securities for which we declared our intent to sell. Investment securities losses in the third quarter of 2008 reflect mark-to-market (both credit and non-credit) impairment losses.

 

Net investment securities losses          Year-to-date
(in millions)    3Q09    2Q09    3Q08    2009    2008

Alt-A RMBS

   $ 2,857    $ 114    $ 29    $ 3,096    $ 101

Prime RMBS

     999      9      12      1,011      12

Subprime RMBS

     321      1      12      322      12

Home equity lines of credit

     234      4      10      256      68

European floating rate notes

     234      66      -      304      -

Credit cards

     -      26      -      28      -

Commercial MBS

     89      -      -      89      -

Other

     99      36      99      278      194

Total net investment securities losses

   $ 4,833    $ 256    $ 162    $ 5,384    $ 387

 

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Year-to-date 2009 compared with year-to-date 2008

Fee and other revenue for the first nine months of 2009 totaled $2.2 billion compared with $8.9 billion in the first nine months of 2008. The decrease primarily reflects investment securities losses, as well as lower asset and wealth management fees, securities lending revenue, asset servicing fees issuer services fees and foreign exchange and other trading revenue.

Investment securities losses were $5.4 billion for the first nine months of 2009 compared to $387 million for the first nine months of 2008. The increase primarily resulted from losses recognized due to our intent to sell investment securities and

restructure a significant portion of the watch list investment securities in the third quarter of 2009. The decrease in asset and wealth management fees reflects global weakness in market values. The decrease in securities lending revenue primarily reflects overall de-leveraging in the financial markets and narrower spreads. The decrease in asset servicing fees reflects lower market values. The decrease in issuer services fees reflects lower Depositary Receipt revenue due to lower transaction fees and lower corporate trust fees due to lower levels of fixed income issuances. The decrease in foreign exchange and other trading revenue is driven by lower volumes and volatility.


 

Net interest revenue

 

Net interest revenue                      3Q09 vs.     Year-to-date     YTD09
vs.
 
(dollars in millions)    3Q09     2Q09     3Q08     3Q08     2Q09     2009     2008     YTD08  

Net interest revenue (non-FTE)

   $ 716      $ 700      $ 681      5   2   $ 2,191      $ 1,812      21

Tax equivalent adjustment

     5        4        5      N/M      N/M        13        15      N/M   

Net interest revenue (FTE)

     721        704        686      5      2        2,204        1,827      21

SILO/LILO charges

     -        -        112      N/M      N/M        -        489      N/M   

Net interest revenue excluding SILO/LILO charges (FTE) – Non-GAAP

   $ 721      $ 704      $ 798      (10 )%    2   $ 2,204      $ 2,316      (5 )% 

Average interest earning assets

   $ 155,159      $ 157,265      $ 142,062      9   (1 )%    $ 159,916      $ 142,318      12

Net interest margin (FTE)

     1.85     1.80     1.92   (7 ) bps    5 bps        1.84     1.71   13   bps 

Net interest margin excluding SILO/LILO charges (FTE) – Non-GAAP

     1.85     1.80     2.24   (39 ) bps    5 bps        1.84     2.17   (33 ) bps 
N/M – Not meaningful.
bps – basis points.

 

Net interest revenue on an FTE basis totaled $721 million in the third quarter of 2009 compared with $686 million in the third quarter of 2008, which included a $112 million charge related to SILO/LILOs, and $704 million in the second quarter of 2009. The net interest margin was 1.85% in the third quarter of 2009, compared with 1.92% in the third quarter of 2008, which was negatively impacted by the SILO/LILO charge, and 1.80% in the second quarter of 2009. Net interest revenue and the related margin continued to be impacted by historically low interest rates, and our strategy to reinvest in high quality, relatively short duration assets.

The increase in net interest revenue compared with the third quarter of 2008 principally reflects the SILO/LILO charges recorded in the third quarter of 2008. Excluding the

SILO/LILO charges, the decrease compared with the third quarter of 2008 reflects a decline in the value of interest-free balances, offset in part by an increase in interest-earning assets driven by client deposits. The increase in net interest revenue compared with the second quarter of 2009 primarily reflects the impact of hedging gains, partially offset by a decline in average interest-earning assets and a decrease in the value of interest-free funds.

Average interest-earning assets were $155 billion in the third quarter of 2009 compared with $142 billion in the third quarter of 2008 and $157 billion in the second quarter of 2009. The increase compared with the third quarter of 2008 was primarily driven by client deposits.


 

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The decrease from the second quarter of 2009 reflects the continued roll-off of deposits taken in during the credit crisis.

The net interest margin decreased 7 basis points in the third quarter of 2009 compared with the third quarter of 2008. Excluding the SILO/LILO charges, the net interest margin in the third quarter of 2008 was 2.24%. The decrease of 39 basis points compared with the third quarter of 2008, excluding the SILO/LILO charges, was primarily due to a decline in the value of interest free balances and tighter spreads, partially offset by a higher level of interest-earning assets. Sequentially, the net interest margin remained stable, reflecting the impact of hedging gains and our ongoing strategy to reduce cash held at central banks and invest in securities issued by government-sponsored and guaranteed entities.

The investment securities portfolio restructuring is expected to positively impact net interest revenue by approximately $125-$175 million in 2010.

 

Year-to-date 2009 compared with year-to-date 2008

Net interest revenue on an FTE basis totaled $2.2 billion in the first nine months of 2009, an increase of 21% compared with $1.8 billion in the first nine months of 2008. The increase primarily related to the second and third quarter 2008 SILO/LILO charges. Excluding the SILO/LILO charges, net interest revenue decreased 5% in the first nine months of 2009 compared with the first nine months of 2008. The net interest margin was 1.84% in the first nine months of 2009 and 1.71% in the first nine months of 2008. Excluding the SILO/LILO charges, the net interest margin was 2.17% in the first nine months of 2008. The decreases in net interest revenue and the net interest margin compared with the first nine months of 2008, excluding the SILO/LILO charges, were primarily due to the factors mentioned above.


 

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Average balances and interest rates

 

Average balances and interest rates (a)    Quarter ended  
        
     Sept. 30, 2009     June 30, 2009     Sept. 30, 2008  
(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 banks)

   $ 54,343      1.08   $ 56,917      1.18   $ 43,999      3.90

Interest-bearing deposits held at the Federal Reserve and other central banks

     6,976      0.32        6,338      0.37        -      -   

Other short-term investments – U.S. government-backed commercial paper

     -      -        -      -        954      2.95   

Federal funds sold and securities under resale agreements

     3,443      1.19        2,899      1.29        7,019      1.97   

Margin loans

     4,335      1.55        4,134      1.62        5,764      3.27   

Non-margin loans:

            

Domestic offices

     19,412      3.22        20,740      3.18        25,932      1.60  (b) 

Foreign offices

     10,788      1.99        12,155      2.21        13,739      3.71   
                              

Total non-margin loans

     30,200      2.78        32,895      2.82        39,671      2.33  (b) 

Securities:

            

U.S. government obligations

     4,605      1.45        1,679      1.67        679      3.03   

U.S. government agency obligations

     17,635      3.79        14,748      3.74        10,894      4.33   

Obligations of states and political subdivisions

     639      7.30        710      6.92        701      7.44   

Other securities

     31,010      3.04        34,766      2.85        30,590      5.42   

Trading securities

     1,973      2.30        2,179      2.50        1,791      2.76   
                              

Total securities

     55,862      3.16        54,082      3.10        44,655      5.04   
                              

Total interest-earning assets

     155,159      2.14        157,265      2.16        142,062      3.69  (b) 

Allowance for loan losses

     (425       (426       (329  

Cash and due from banks

     3,247          3,412          7,796     

Other assets

     45,728          45,975          46,937     

Assets of discontinued operations

     2,077              2,307              2,361         

Total assets

   $ 205,786            $ 208,533            $ 198,827         

Liabilities and equity

            

Interest-bearing liabilities:

            

Money market rate accounts

   $ 16,817      0.09   $ 19,037      0.10   $ 11,785      0.88

Savings

     1,115      0.32        1,070      0.44        979      0.93   

Certificates of deposit of $100,000 & over

     847      0.62        942      1.00        1,928      2.19   

Other time deposits

     5,058      0.40        4,190      0.48        5,393      1.99   

Foreign offices

     69,795      0.08        73,657      0.14        65,931      2.19   
                              

Total interest-bearing deposits

     93,632      0.11        98,896      0.16        86,016      1.99   

Federal funds purchased and securities sold under repurchase agreements

     3,075      0.20        2,485      (0.46     4,816      1.18   

Other borrowed funds

     2,286      1.49        2,756      1.04        3,303      2.31   

Borrowings from Federal Reserve related to ABCP

     -      -        -      -        954      2.25   

Payables to customers and broker-dealers

     5,844      0.10        4,901      0.13        5,910      1.19   

Long-term debt

     17,393      1.74        16,793      2.35        15,993      3.62   
                              

Total interest-bearing liabilities

     122,230      0.37        125,831      0.46        116,992      2.15   

Total noninterest-bearing deposits

     34,920          32,852          32,953     

Other liabilities

     18,386          18,578          18,396     

Liabilities of discontinued operations

     2,077              2,307              2,361         

Total liabilities

     177,613          179,568          170,702     

Total shareholders’ equity

     28,144          28,934          27,996     

Noncontrolling interest

     29              31              129         

Total equity

     28,173              28,965              28,125         

Total liabilities and equity

   $ 205,786            $ 208,533            $ 198,827         

Net interest margin – Taxable equivalent basis

           1.85           1.80           1.92 (b) 

 

(a)

Presented on a continuing operations basis even though the balance sheet is not restated for discontinued operations.

(b)

Third quarter of 2008 includes the impact of the SILO/LILO charges. Excluding this charge, the domestic offices’ non-margin loan rate would have been 3.33%, the total non-margin loan rate would have been 3.46%, the interest-earning assets rate would have been 4.01% and the net interest margin would have been 2.24% for the third 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.

 

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Average balances and interest rates (a)    Year-to-date  
        
     2009     2008  
(dollar amounts in millions)    Average
balance
    Average
rates
    Average
balance
    Average
rates
 

Assets

        

Interest-earning assets:

        

Interest-bearing deposits with banks (primarily foreign banks)

   $ 55,913      1.27   $ 42,014      3.99

Interest-bearing deposits held at the Federal Reserve and other central banks

     12,109      0.37        -      -   

Other short-term investments – U.S. government-backed commercial paper

     419      3.15        320      2.95   

Federal funds sold and securities under resale agreements

     2,888      1.12        7,314      2.48   

Margin loans

     4,230      1.60        5,608      3.67   

Non-margin loans:

        

Domestic offices

     20,597      3.10        26,596      1.37  (b) 

Foreign offices

     12,008      2.27        13,824      4.06   
                    

Total non-margin loans

     32,605      2.79        40,420      2.29  (b) 

Securities:

        

U.S. government obligations

     2,371      1.62        540      3.17   

U.S. government agency obligations

     14,836      3.76        10,646      4.46   

Obligations of states and political subdivisions

     705      6.96        679      6.96   

Other securities

     31,879      3.41        33,054      5.30   

Trading securities

     1,961      2.54        1,723      3.85   
                    

Total securities

     51,752      3.45        46,642      5.05   
                    

Total interest-earning assets

     159,916      2.23        142,318      3.76  (b) 

Allowance for loan losses

     (410       (307  

Cash and due from banks

     3,823          6,320     

Other assets

     45,860          47,737     

Assets of discontinued operations

     2,238              2,471         

Total assets

   $ 211,427            $ 198,539         

Liabilities and equity

        

Interest-bearing liabilities:

        

Money market rate accounts

   $ 18,133      0.10   $ 12,408      1.18

Savings

     1,116      0.46        951      1.42   

Certificates of deposit of $100,000 & over

     1,087      0.95        2,118      2.95   

Other time deposits

     4,939      0.48        6,671      2.15   

Foreign offices

     72,865      0.18        68,486      2.42   
                    

Total interest-bearing deposits

     98,140      0.19        90,634      2.23   

Federal funds purchased and securities sold under repurchase agreements

     2,471      (0.05     4,251      1.44   

Other borrowed funds

     2,937      1.38        3,163      2.99   

Borrowings from Federal Reserve related to ABCP

     419      2.25        320      2.25   

Payables to customers and broker-dealers

     4,854      0.14        5,469      1.46   

Long-term debt

     16,567      2.25        16,651      3.95   
                    

Total interest-bearing liabilities

     125,388      0.49        120,488      2.42   

Total noninterest-bearing deposits

     36,915          27,679     

Other liabilities

     18,503          19,087     

Liabilities of discontinued operations

     2,238              2,471         

Total liabilities

     183,044          169,725     

Total shareholders’ equity

     28,352          28,682     

Noncontrolling interest

     31              132         

Total equity

     28,383              28,814         

Total liabilities and equity

   $ 211,427            $ 198,539         

Net interest margin – taxable equivalent basis

           1.84           1.71 (b) 

 

(a)

Presented on a continuing operations basis even though the balance sheet is not restated for discontinued operations.

(b)

Year-to-date 2008 includes the impact of the SILO/LILO charges. Excluding this charge, the domestic offices’ non-margin loan rate would have been 3.82%, the total non-margin loan rate would have been 3.91%, the interest-earning assets rate would have been 4.22% and the net interest margin would have been 2.17% for the first nine months 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.

 

14    The Bank of New York Mellon Corporation


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Noninterest expense

 

                                                      YTD09  
Noninterest expense                     3Q09 vs.     Year-to-date     vs.  
(dollars in millions)    3Q09    2Q09     3Q08     3Q08     2Q09     2009     2008     YTD08  

Staff:

                 

Compensation

   $ 747    $ 740      $ 836      (11 )%    1   $ 2,219      $ 2,457      (10 )% 

Incentives

     242      241        241      -      -        730        991      (26

Employee benefits

     168      172        171      (2   (2     530        561      (6

Total staff

     1,157      1,153        1,248  (a)    (7   -        3,479        4,009  (a)    (13

Professional, legal and other purchased services

     265      237        251 (a)    6      12        739        748 (a)    (1

Net occupancy

     142      142        163      (13   -        423        429      (1

Distribution and servicing

     104      106        133      (22   (2     317        394      (20

Software

     95      93        78      22      2        269        245      10   

Sub-custodian and clearing

     80      91        84 (b)    (5   (12     237        251 (b)    (6

Furniture and equipment

     76      76        80      (5   -        229        237      (3

Business development

     45      49        62      (27   (8     138        202      (32

Other

     183      223        265      (31   (18     599        672      (11

Subtotal

     2,147      2,170        2,364      (9   (1     6,430        7,187      (11

Support agreement charges

     13      (15     726      N/M      N/M        (10     731      N/M   

FDIC special assessment

     -      61        -      -      N/M        61        -      N/M   

Amortization of intangible assets

     104      108        118      (12   (4     319        360      (11

Merger and integration expenses:

                 

The Bank of New York Mellon Corporation

     54      59        107      (50   (8     181        374      (52

Acquired Corporate Trust Business

     -      -        4      N/M      -        -        12      N/M   

Total noninterest expense

   $ 2,318    $ 2,383      $ 3,319      (30 )%    (3 )%    $ 6,981      $ 8,664      (19 )% 

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

     N/M      39     35         N/M        37  

Employees at period end

     42,000      41,800        42,900      (2 )%    -     42,000        42,900      (2 )% 
(a)

In the second quarter of 2009, certain temporary/consulting expenses were reclassified from professional, legal and other purchased services to staff expense. This reclassification totaled $35 million in the third quarter of 2008 and $67 million in the first nine months of 2008.

(b)

In the second quarter of 2009, global sub-custodian out-of-pocket expense related to client reimbursements was reclassified from sub-custodian expense to asset servicing revenue. This reclassification totaled $4 million in the third quarter of 2008 and $18 million in the first nine months of 2008.

(c)

Excluding investment securities losses and SILO/LILO charges, total staff expense as a percentage of total revenue (Non-GAAP) was 35% in the third quarter of 2009, 36% in the second quarter of 2009, 32% in the third quarter of 2008, 36% in the first nine months of 2009 and 35% in the first nine months of 2008.

N/M—Not meaningful.

 

Total noninterest expense decreased $1.0 billion compared with the third quarter of 2008 and decreased $65 million compared with the second quarter of 2009. The year-over-year decrease reflects lower support agreement charges and strong overall expense control and lower M&I expenses. The sequential decrease reflects the FDIC special assessment and lower other expense related to a reserve for the remediation of withholding tax documentation both recorded in the second quarter of 2009 and lower state shares tax in the third quarter of 2009.

Staff expense

Given our mix of fee-based businesses, which are staffed with high quality professionals, staff expense comprised 54% of total noninterest expense, excluding support agreement

charges, the FDIC special assessment, intangible amortization and M&I expenses.

Staff expense is comprised of:

 

 

compensation expense, which includes:

   

base salary expense, primarily driven by headcount;

   

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


 

The Bank of New York Mellon Corporation    15


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

The decrease in staff expense compared with the third quarter of 2008 reflects lower compensation expense driven by a reduction in headcount. Staff expense was relatively unchanged sequentially as higher compensation expense was primarily offset by lower employee benefits expense.

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 support agreement charges, the FDIC special assessment, intangible amortization and M&I expenses totaled $990 million in the third quarter of 2009 compared with $1.1 billion in the third quarter of 2008 and $1.0 billion in the second quarter of 2009. The decrease in non-staff expense compared with the third quarter of 2008 primarily reflects lower distribution and servicing, net occupancy and other expenses. The decrease in net occupancy expenses resulted from level lease adjustments recorded in the third quarter of 2008, while the decrease in other expense reflects operational errors recorded in the third quarter of 2008. The decrease in non-staff expense sequentially reflects a reserve for the remediation of withholding tax documentation recorded in the second quarter of 2009 and lower state shares tax in the third quarter of 2009.

In the third quarter of 2009, we incurred $54 million of M&I expenses related to the merger with Mellon Financial Corporation, comprised of the following:

 

 

Integration/conversion costs—including consulting, system conversions and staff ($39 million);

 

Personnel-related—including severance, retention, relocation expenses, accelerated vesting of stock options and restricted stock expense ($14 million); and

 

One-time costs—including facilities related costs, asset write-offs, vendor contract modifications, rebranding and net gains and losses on disposals ($1 million).

 

Year-to-date 2009 compared with year-to-date 2008

Noninterest expense in the first nine months of 2009 decreased $1.7 billion, or 19%, compared with the first nine months of 2008. The decrease primarily reflects lower support agreement charges and declines in staff expense, M&I expenses, distribution and servicing and business development expenses and strong overall expense control, partially offset by higher software expense.

Income taxes

BNY Mellon recorded an income tax benefit, on a continuing operations basis, of $1.5 billion in the third quarter of 2009 and $42 million in the third quarter of 2008, and a tax provision of $12 million in the second quarter of 2009. Excluding the impact of the investment securities losses and M&I expenses, the effective tax rate was 31.8% in the third quarter of 2009. The tax benefit in the third quarter of 2008 reflects support agreement charges, investment securities losses and the final SILO/LILO/tax settlement. Excluding these items, as well as M&I expenses, the effective tax rate was 32.3% in the third quarter of 2008. The effective tax rate in the second quarter of 2009 was 2.2%. Excluding the impact of a tax benefit primarily related to the final SILO/LILO/tax settlement, FDIC special assessment, M&I expenses and investment write-downs, the effective tax rate was 32.4% in the second quarter of 2009.

We expect the tax rate to be approximately 32%, on an operating basis, for the fourth quarter of 2009.

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.


 

16    The Bank of New York Mellon Corporation


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Segment results are subject to reclassification whenever improvements are made in the measurement principles or when organizational changes are made.

The accounting policies of the business segments are the same as those described in Note 1 to the Consolidated Financial Statements in BNY Mellon’s 2008 Annual Report on Form 10-K.

The operations of acquired businesses are integrated with the existing business segments soon after 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.

For additional information on the primary types of revenue by business segment and how our business segments are presented and analyzed, see the Business segments review in BNY Mellon’s second quarter 2009 Quarterly Report on Form 10-Q.

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

Our business segments continued to face a difficult operating environment in the third quarter of 2009. Equity markets, corporate actions and fixed income issuances were down significantly year-over-year, partially offset by new business. On a sequential basis, improved equity markets and new business contributed to improved fee revenue. Lower money market related distribution fees impacted revenue on both a year-over-year and linked quarter basis. Compared with the second quarter of 2009, net interest revenue decreased in the Issuer, Clearing and Treasury segments, partially driven by lower levels of interest-earning assets offset by higher spreads in the Asset Servicing segment. Compared with the third quarter of 2008, increases in net interest revenue in the Issuer and Clearing segments were more than offset by decreases in Asset Servicing and Treasury Services.

Investment securities losses in the third quarter of 2009 were recorded in the Other segment. Net interest revenue in the third quarter of 2008 includes SILO/LILO charges of $112 million which were also recorded in the Other segment. Strong expense control and the impact of merger-related synergies resulted in lower noninterest expense in nearly every segment compared with both the third quarter of 2008 and second quarter of 2009.

The table below presents the value of certain market indices at period end and on an average basis.


 

Market indices                                                                
                              3Q09 vs.     Year-to-date    YTD09
vs.
 
      3Q08    4Q08    1Q09    2Q09    3Q09    3Q08     2Q09     2009    2008    YTD08  

S&P 500 Index (a)

   1166    903    798    919    1057    (9 )%    15   1057    1166    (9 )% 

S&P 500 Index-daily average

   1252    916    809    891    995    (21   12      900    1325    (32

FTSE 100 Index (a)

   4902    4434    3926    4249    5134    5      21      5134    4902    5   

FTSE 100 Index-daily average

   5359    4270    4040    4258    4708    (12   11      4342    5739    (24

NASDAQ Composite Index (a)

   2092    1577    1529    1835    2122    1      16      2122    2092    1   

Lehman Brothers Aggregate Bondsm Index (a)

   256    275    262    280    304    19      9      304    256    19   

MSCI EAFE® Index (a)

   1553    1237    1056    1307    1553    -      19      1553    1553    -   

NYSE Share Volume (in billions)

   180    181    161    151    126    (30   (17   438    479    (9

NASDAQ Share Volume (in billions)

   145    148    136    152    144    (1   (5   432    428    1   

 

(a)

Period end.

 

Average daily U.S. fixed-income trading volume was down 3% sequentially and 24% year-over-year. Total debt issuances were down 23% sequentially and up 73% year-over-year.

The period end S&P 500 Index increased 15% sequentially and decreased 9% year-over-year. The period end FTSE 100

Index increased 21% sequentially and 5% year-over-year. On a daily average basis, the S&P 500 Index increased 12% sequentially and decreased 21% year-over-year and the FTSE 100 Index increased 11% sequentially and decreased 12% year-over-year. The period end


 

The Bank of New York Mellon Corporation    17


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NASDAQ Composite Index increased 16% sequentially and 1% 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 Index as a proxy for the equity markets, we estimate that a 100 point

change in the value of the S&P 500 Index, sustained for one year, would impact fee revenue by approximately 1% and fully diluted earnings per common share on a continuing operations basis by $0.05.

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


 

For the quarter ended

Sept. 30, 2009

(dollar amounts

in millions)

 

Asset

Management

   

Wealth

Management

   

Total Asset

and Wealth

Management

Sector

   

Asset

Servicing

    Issuer
Services
   

Clearing

Services

   

Treasury

Services

   

Total

Institutional

Services

Sector

    Other
Segment
   

Total

continuing

operations

 

Fee and other revenue

  $ 592      $ 145      $ 737      $ 835      $ 389      $ 291      $ 216      $ 1,731      $ (4,684   $ (2,216

Net interest revenue

    6        49        55        228        180        81        151        640        21        716   

Total revenue

    598        194        792        1,063        569        372        367        2,371        (4,663     (1,500

Provision for credit losses

    -        -        -        -        -        -        -        -        147        147   

Noninterest expense

    500        145        645        731        323        251        191        1,496        177        2,318   

Income before taxes

  $ 98      $ 49      $ 147      $ 332      $ 246      $ 121      $ 176      $ 875      $ (4,987   $ (3,965

Pre-tax operating margin (a)

    16     26     19     31     43     33     48     37     N/M        N/M   

Average assets

  $ 12,396      $ 9,122      $ 21,518      $ 59,864      $ 47,966      $ 17,827      $ 24,319      $ 149,976      $ 32,215      $ 203,709  (b) 

Excluding intangible amortization (Non-GAAP):

                   

Noninterest expense

  $ 447      $ 133      $ 580      $ 725      $ 303      $ 245      $ 185      $ 1,458      $ 176      $ 2,214   

Income before taxes

    151        61        212        338        266        127        182        913        (4,986     (3,861

Pre-tax operating margin (a)

    25     32     27     32     47     34     50     39     N/M        N/M   

For the quarter ended

June 30, 2009

(dollar amounts

in millions)

 

Asset

Management

   

Wealth

Management

    Total Asset
and Wealth
Management
Sector
   

Asset

Servicing

   

Issuer

Services

   

Clearing

Services

   

Treasury

Services

   

Total

Institutional

Services

Sector

   

Other

Segment

   

Total

continuing

operations

 

Fee and other revenue

  $ 529      $ 140      $ 669      $ 893      $ 410      $ 314      $ 195      $ 1,812      $ (224   $ 2,257   

Net interest revenue

    8        49        57        211        185        87        156        639        4        700   

Total revenue

    537        189        726        1,104        595        401        351        2,451        (220     2,957   

Provision for credit losses

    -        -        -        -        -        -        -        -        61        61   

Noninterest expense

    474        146        620        710        323        263        206        1,502        261        2,383   

Income before taxes

  $ 63      $ 43      $ 106      $ 394      $ 272      $ 138      $ 145      $ 949      $ (542   $ 513   

Pre-tax operating margin (a)

    12     23     15     36     46     34     41     39     N/M        17

Average assets

  $ 12,377      $ 9,131      $ 21,508      $ 58,289      $ 52,152      $ 17,014      $ 24,861      $ 152,316      $ 32,402      $ 206,226  (b) 

Excluding intangible amortization (Non-GAAP):

                   

Noninterest expense

  $ 419      $ 135      $ 554      $ 701      $ 303      $ 256      $ 199      $ 1,459      $ 262      $ 2,275   

Income before taxes

    118        54        172        403        292        145        152        992        (543     621   

Pre-tax operating margin (a)

    22     29     24     37     49     36     43     40     N/M        21

 

18    The Bank of New York Mellon Corporation


Table of Contents

For the quarter ended

March 31, 2009

(dollar amounts in millions)

   Asset
Management
    Wealth
Management
    Total Asset
and Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
continuing
operations
 

Fee and other revenue

   $ 479      $ 141      $ 620      $ 830      $ 404      $ 321      $ 239      $ 1,794      $ (278   $ 2,136   

Net interest revenue

     14        50        64        249        200        82        160        691        20        775   

Total revenue

     493        191        684        1,079        604        403        399        2,485        (258     2,911   

Provision for credit losses

     -        -        -        -        -        -        -        -        59        59   

Noninterest expense

     453        139        592        712        318        259        201        1,490        198        2,280   

Income before taxes

   $ 40      $ 52      $ 92      $ 367      $ 286      $ 144      $ 198      $ 995      $ (515   $ 572   

Pre-tax operating margin (a)

     8     27     13     34     47     36     50     40     N/M        20

Average assets

   $ 12,636      $ 9,611      $ 22,247      $ 65,153      $ 50,855      $ 18,600      $ 28,761      $ 163,369      $ 32,137      $ 217,753  (b) 

Excluding intangible amortization (Non-GAAP):

                    

Noninterest expense

   $ 398      $ 128      $ 526      $ 705      $ 297      $ 252      $ 195      $ 1,449      $ 198      $ 2,173   

Income before taxes

     95        63        158        374        307        151        204        1,036        (515     679   

Pre-tax operating margin (a)

     19     33     23     35     51     37     51     42     N/M        23
   

For the quarter ended

Dec. 31, 2008
(dollar amounts in millions)

   Asset
Management
    Wealth
Management
    Total Asset
and Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
continuing
operations
 

Fee and other revenue

   $ 562      $ 134      $ 696      $ 1,137      $ 436      $ 349      $ 230      $ 2,152      $ (1,031   $ 1,817   

Net interest revenue

     45        56        101        411        211        96        231        949        (3     1,047   

Total revenue

     607        190        797        1,548        647        445        461        3,101        (1,034     2,864   

Provision for credit losses

     -        -        -        -        -        -        -        -        54        54   

Noninterest expense

     541        155        696        1,000        338        274        211        1,823        340        2,859   

Income before taxes

   $ 66      $ 35      $ 101      $ 548      $ 309      $ 171      $ 250      $ 1,278      $ (1,428   $ (49

Pre-tax operating margin (a)

     11     18     13     35     48     38     54     41     N/M        (2 )% 

Average assets

   $ 13,135      $ 9,632      $ 22,767      $ 71,455      $ 38,987      $ 21,128      $ 34,585      $ 166,155      $ 52,688      $ 241,610  (b) 

Excluding intangible amortization (Non-GAAP):

                    

Noninterest expense

   $ 480      $ 141      $ 621      $ 994      $ 318      $ 268      $ 204      $ 1,784      $ 341      $ 2,746   

Income before taxes

     127        49        176        554        329        177        257        1,317        (1,429     64   

Pre-tax operating margin (a)

     21     25     22     36     51     40     56     42     N/M        2
   

For the quarter ended

Sept. 30, 2008

(dollar amounts in millions)

   Asset
Management
    Wealth
Management
    Total Asset
and Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
continuing
operations
 

Fee and other revenue

   $ 685      $ 163      $ 848      $ 1,082      $ 529      $ 317      $ 263      $ 2,191      $ (113   $ 2,926   

Net interest revenue

     9        50        59        240        170        75        159        644        (22     681   

Total revenue

     694        213        907        1,322        699        392        422        2,835        (135     3,607   

Provision for credit losses

     -        1        1        -        -        -        -        -        22        23   

Noninterest expense

     880        170        1,050        1,213        370        290        207        2,080        189        3,319   

Income before taxes

   $ (186   $ 42      $ (144   $ 109      $ 329      $ 102      $ 215      $ 755      $ (346   $ 265   

Pre-tax operating margin (a)

     (27 )%      20     (16 )%      8     47     26     51     27     N/M        7

Average assets

   $ 13,286      $ 9,801      $ 23,087      $ 57,795      $ 34,264      $ 18,471      $ 22,384      $ 132,914      $ 40,465      $ 196,466  (b) 

Excluding intangible amortization (Non-GAAP):

                    

Noninterest expense

   $ 816      $ 156      $ 972      $ 1,207      $ 349      $ 282      $ 201      $ 2,039      $ 190      $ 3,201   

Income before taxes

     (122     56        (66     115        350        110        221        796        (347     383   

Pre-tax operating margin (a)

     (18 )%      27     (7 )%      9     50     28     52     28     N/M        11

 

The Bank of New York Mellon Corporation    19


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For the nine months ended
Sept. 30, 2009

(dollar amounts in millions)

  Asset
Management
    Wealth
Management
    Total Asset
and Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
continuing
operations
 

Fee and other revenue

  $ 1,600      $ 426      $ 2,026      $ 2,558      $ 1,203      $ 926      $ 650      $ 5,337      $ (5,186   $ 2,177   

Net interest revenue

    28        148        176        688        565        250        467        1,970        45        2,191   

Total revenue

    1,628        574        2,202        3,246        1,768        1,176        1,117        7,307        (5,141     4,368   

Provision for credit losses

    -        -        -        -        -        -        -        -        267        267   

Noninterest expense

    1,427        430        1,857        2,153        964        773        598        4,488        636        6,981   

Income before taxes

  $ 201      $ 144      $ 345      $ 1,093      $ 804      $ 403      $ 519      $ 2,819      $ (6,044   $ (2,880

Pre-tax operating margin (a)

    12     25     16     34     45     34     46     39     N/M        N/M   

Average assets

  $ 12,469      $ 9,286      $ 21,755      $ 61,083      $ 50,314      $ 17,811      $ 25,964      $ 155,172      $ 32,262      $ 209,189 (b) 

Excluding intangible amortization (Non-GAAP):

                   

Noninterest expense

  $ 1,264      $ 396      $ 1,660      $ 2,131      $ 903      $ 753      $ 579      $ 4,366      $ 636      $ 6,662   

Income before taxes

    364        178        542        1,115        865        423        538        2,941        (6,044     (2,561

Pre-tax operating margin (a)

    22     31     25     34     49     36     48     40     N/M        N/M   
                                                                        

For the nine months ended
Sept. 30, 2008

(dollar amounts in millions)

  Asset
Management
    Wealth
Management
    Total Asset
and Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Sector
    Other
Segment
    Total
continuing
operations
 

Fee and other revenue

  $ 2,232      $ 490      $ 2,722      $ 3,279      $ 1,415      $ 943      $ 747      $ 6,384      $ (209   $ 8,897   

Net interest revenue

    30        144        174        675        499        225        499        1,898        (260     1,812   

Total revenue

    2,262        634        2,896        3,954        1,914        1,168        1,246        8,282        (469     10,709   

Provision for credit losses

    -        -        -        -        -        -        -        -        50        50   

Noninterest expense

    2,100        479        2,579        2,783        1,075        856        629        5,343        742        8,664   

Income before taxes

  $ 162      $ 155      $ 317      $ 1,171      $ 839      $ 312      $ 617      $ 2,939      $ (1,261   $ 1,995   

Pre-tax operating margin (a)

    7     25     11     30     44     27     50     35     N/M        19

Average assets

  $ 13,311      $ 10,182      $ 23,493      $ 55,019      $ 33,887      $ 17,428      $ 22,587      $ 128,921      $ 43,654      $ 196,068 (b) 

Excluding intangible amortization (Non-GAAP):

                   

Noninterest expense

  $ 1,906      $ 439      $ 2,345      $ 2,765      $ 1,014      $ 836      $ 609      $ 5,224      $ 735      $ 8,304   

Income before taxes

    356        195        551        1,189        900        332        637        3,058        (1,254     2,355   

Pre-tax operating marg