10-Q 1 d407090d10q.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, 2012

or

[     ] Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Commission File No. 001-35651

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 (§232.405 of this chapter) 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

September 30, 2012

Common Stock, $0.01 par value       1,168,606,959


Table of Contents

THE BANK OF NEW YORK MELLON CORPORATION

Third Quarter 2012 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   

Subsequent events

     4   

Highlights of third quarter 2012 results

     4   

Fee and other revenue

     6   

Net interest revenue

     10   

Average balances and interest rates

     11   

Noninterest expense

     13   

Income taxes

     15   

Review of businesses

     15   

Critical accounting estimates

     26   

Consolidated balance sheet review

     26   

Liquidity and dividends

     38   

Capital

     42   

Trading activities and risk management

     45   

Foreign exchange and other trading

     46   

Asset/liability management

     47   

Off-balance sheet arrangements

     48   

Supplemental information – Explanation of Non-GAAP financial measures

     48   

Recent accounting and regulatory developments

     52   

Government monetary policies and competition

     61   

Website information

     61   

Item 1. Financial Statements:

  

Consolidated Income Statement (unaudited)

     63   

Consolidated Comprehensive Income Statement (unaudited)

     65   

Consolidated Balance Sheet (unaudited)

     66   

Consolidated Statement of Cash Flows (unaudited)

     67   

Consolidated Statement of Changes in Equity (unaudited)

     68   
     Page  

Notes to Consolidated Financial Statements:

  

Note 1 – Basis of presentation

     69   

Note 2 – Accounting changes and new accounting guidance

     69   

Note 3 – Acquisitions and dispositions

     70   

Note 4 – Securities

     71   

Note 5 – Loans and asset quality

     74   

Note 6 – Goodwill and intangible assets

     81   

Note 7 – Other assets

     83   

Note 8 – Net interest revenue

     84   

Note 9 – Employee benefit plans

     84   

Note 10 – Restructuring charges

     85   

Note 11 – Income taxes

     85   

Note 12 – Securitizations and variable interest entities

     86   

Note 13 – Preferred stock

     88   

Note 14 – Other comprehensive income

     89   

Note 15 – Fair value measurement

     90   

Note 16 – Fair value option

     104   

Note 17 – Derivative instruments

     104   

Note 18 – Commitments and contingent liabilities

     109   

Note 19 – Review of businesses

     114   

Note 20 – Supplemental information to the Consolidated Statement of Cash Flows

     117   

Item 4. Controls and Procedures

     118   

Forward-looking Statements

     119   

Part II – Other Information

  

Item 1. Legal Proceedings

     121   

Item 1A. Risk Factors

     121   

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

     122   

Item 6. Exhibits

     122   

Signature

     123   

Index to Exhibits

     124   
 


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 common share

amounts and unless otherwise noted)

   Sept. 30,
2012
    June 30,
2012
    Sept. 30,
2011
    Sept. 30,
2012
    Sept. 30,
2011
 

Results applicable to common shareholders of

          

The Bank of New York Mellon Corporation:

          

Net income

   $ 720      $ 466      $ 651      $ 1,805      $ 2,011   

Basic EPS

     0.61        0.39        0.53        1.51        1.61   

Diluted EPS

     0.61        0.39        0.53        1.51        1.61   

Fee and other revenue

   $ 2,879      $ 2,826      $ 2,887      $ 8,543      $ 8,781   

Income from consolidated investment management funds

     47        57        32        147        205   

Net interest revenue

     749        734        775        2,248        2,204   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 3,675      $ 3,617      $ 3,694      $ 10,938      $ 11,190   

Return on common equity (annualized) (a)

     8.3     5.5     7.6     7.1     8.0

Non-GAAP adjusted (a)

     9.2     8.9     9.0     9.0     9.4

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

     22.1     15.7     22.1     19.6     24.2

Non-GAAP adjusted (a)

     22.5     22.4     23.8     22.6     25.6

Return on average assets (annualized)

     0.90     0.61     0.83     0.78     0.95

Fee revenue as a percentage of total revenue excluding net securities gains
(losses)

     78     78     78     78     78

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

   $ 235      $ 233      $ 233      $ 233      $ 240   

Percentage of non-U.S. total revenue (b)

     37     37     39     37     38

Pre-tax operating margin (a)

     27     16     26     22     26

Non-GAAP adjusted (a)

     29     29     31     29     30

Net interest margin (FTE)

     1.20     1.25     1.30     1.25     1.39

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

   $ 1,359      $ 1,299      $ 1,198      $ 1,359      $ 1,198   

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

   $ 27.9      $ 27.1      $ 25.9      $ 27.9      $ 25.9   

Market value of cross-border assets at period end (in trillions)

   $ 10.1      $ 9.9      $ 9.6      $ 10.1      $ 9.6   

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

   $ 259      $ 275      $ 250      $ 259      $ 250   

Average common shares and equivalents outstanding (in thousands):

          

Basic

     1,169,674        1,181,350        1,214,126        1,181,614        1,226,132   

Diluted

     1,171,534        1,182,985        1,215,527        1,183,309        1,229,042   

Capital ratios (d):

          

Estimated Basel III Tier 1 common equity ratio – Non-GAAP (a)(e)

     9.3     8.7     N/A        9.3     N/A   

Basel I Tier 1 common equity to risk-weighted assets ratio –

          

Non-GAAP (a)

     13.3     13.2     12.5     13.3     12.5

Basel I Tier 1 capital ratio

     15.3     14.7     14.0     15.3     14.0

Basel I Total (Tier 1 plus Tier 2) capital ratio

     16.9     16.4     16.1     16.9     16.1

Basel I leverage capital ratio

     5.6     5.5     5.1     5.6     5.1

BNY Mellon shareholders’ equity to total assets ratio (a)

     10.7     10.5     10.5     10.7     10.5

BNY Mellon common shareholders’ equity to total assets ratio (a)

     10.3     10.3     10.5     10.3     10.5

Tangible BNY Mellon common shareholders’ equity to tangible assets of operations
ratio – Non-GAAP (a)

     6.3     6.1     5.9     6.3     5.9

 

2    BNY Mellon


Table of Contents

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited) (continued)

 

      Quarter ended     Nine months ended  

(dollar amounts in millions, except per common share

amounts and unless otherwise noted)

   Sept. 30,
2012
    June 30,
2012
    Sept. 30,
2011
    Sept. 30,
2012
    Sept. 30,
2011
 

Selected average balances:

          

Interest-earning assets

   $ 255,228      $ 239,755      $ 240,253      $ 243,814      $ 213,636   

Assets of operations

   $ 307,919      $ 293,718      $ 298,325      $ 297,219      $ 268,847   

Total assets

   $ 318,914      $ 305,002      $ 311,463      $ 308,459      $ 282,745   

Interest-bearing deposits

   $ 138,260      $ 130,482      $ 125,795      $ 131,418      $ 122,790   

Noninterest-bearing deposits

   $ 70,230      $ 62,860      $ 73,389      $ 66,581      $ 51,808   

Preferred stock

   $ 611      $ 60      $ -      $ 225      $ -   

Total The Bank of New York Mellon Corporation common shareholders’ equity

   $ 34,522      $ 34,123      $ 34,008      $ 34,123      $ 33,437   

Other information at period end:

          

Cash dividends per common share

   $ 0.13      $ 0.13      $ 0.13      $ 0.39      $ 0.35   

Common dividend payout ratio

     21     33     25     26     22

Common dividend yield (annualized)

     2.3     2.4     2.8     2.3     2.5

Closing common stock price per common share

   $ 22.62      $ 21.95      $ 18.59      $ 22.62      $ 18.59   

Market capitalization

   $ 26,434      $ 25,929      $ 22,543      $ 26,434      $ 22,543   

Book value per common share – GAAP (a)

   $ 30.11      $ 28.81      $ 27.79      $ 30.11      $ 27.79   

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

   $ 12.59      $ 11.47      $ 10.55      $ 12.59      $ 10.55   

Full-time employees

     48,700        48,200        49,600        48,700        49,600   

Common shares outstanding (in thousands)

     1,168,607        1,181,298        1,212,632        1,168,607        1,212,632   
(a) See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48 for a calculation of these ratios.
(b) Includes fee revenue, net interest revenue and income (loss) from consolidated investment management funds, net of net income (loss) attributable to noncontrolling interests.
(c) Represents the securities on loan managed by the Investment Services business.
(d) When in this Form 10-Q we refer to BNY Mellon’s or our bank subsidiary’s “Basel I” capital measures (e.g., Basel I Total capital or Basel I Tier 1 capital), we mean Total or Tier 1 capital, as applicable, as calculated under the Board of Governors of the Federal Reserve System’s (the “Federal Reserve”) risk-based capital guidelines that are based on the 1988 Basel Accord, which is often referred to as “Basel I”.
(e) The estimated Basel III Tier 1 common equity ratios at Sept. 30, 2012 and June 30, 2012 are based on the Notices of Proposed Rulemaking (“NPRs”) and final market risk rule initially released on June 7, 2012 and published in the Federal Register on Aug. 30, 2012 and calculated on an Advanced Approaches basis, as amended by Basel III. The estimated Basel III Tier 1 common equity ratio of 6.5% at Sept. 30, 2011 is based on prior Basel III guidance and the proposed market risk rule.

 

BNY Mellon    3


Table of Contents

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 and its consolidated subsidiaries. The term “Parent” refers to The Bank of New York Mellon Corporation but not its subsidiaries.

Certain business terms used in this document are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2011 (“2011 Annual Report”).

The following should be read in conjunction with the Consolidated Financial Statements included in this report. Investors should also read the section titled “Forward-looking Statements.”

How we reported results

Throughout this Form 10-Q, measures which are noted as “Non-GAAP” exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest margin 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. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48 for a reconciliation of financial measures presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) to adjusted Non-GAAP financial measures.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for

institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. At Sept. 30, 2012, we had $27.9 trillion in assets under custody and administration and $1.4 trillion in assets under management, serviced $11.6 trillion in outstanding debt and processed global payments averaging $1.4 trillion per day.

Subsequent events

Impact of Hurricane Sandy

Although several of our facilities in the northeastern U.S. were impacted by Hurricane Sandy, our business continuity plans have functioned well and have enabled us to continue to provide high-quality service to our clients. We expect some loss of revenue related to market closures on Oct. 29, 2012 and Oct. 30, 2012 and reduced business activity in the immediate aftermath of the storm. However, we are unable to estimate the loss of revenue and storm-related costs at this time.

Acquisition of remaining 50% interest in WestLB Mellon Asset Management joint venture

On Oct. 1, 2012, BNY Mellon acquired the remaining 50% interest in the WestLB Mellon Asset Management joint venture from Portigon (formerly known as WestLB AG) and consolidated our German Asset Management business. WestLB Mellon Asset Management was formed in early 2006 as a 50:50 joint venture between BNY Mellon and Portigon. At the date of the acquisition, the WestLB Mellon Asset Management joint venture had over 170 employees and more than $29 billion in assets under management.

Highlights of third quarter 2012 results

We reported net income applicable to common shareholders of BNY Mellon of $720 million, or $0.61 per diluted common share in the third quarter of 2012 compared with $651 million, or $0.53 per diluted common share, in the third quarter of 2011 and $466 million, or $0.39 per diluted common share, in the second quarter of 2012.

 

 

4    BNY Mellon


Table of Contents

Highlights for the third quarter of 2012 include:

 

   

Assets under custody and administration (“AUC”) totaled a record $27.9 trillion at Sept. 30, 2012 compared with $25.9 trillion at Sept. 30, 2011 and $27.1 trillion at June 30, 2012. This represents an increase of 8% compared with the prior year and 3% sequentially. Both increases were driven by higher market values and net new business. (See the “Review of businesses – Investment Services business” beginning on page 22).

   

Assets under management (“AUM”), excluding securities lending assets, totaled a record $1.4 trillion at Sept. 30, 2012, compared with $1.2 trillion at Sept. 30, 2011 and $1.3 trillion at June 30, 2012. This represents an increase of 13% compared with the prior year and 5% sequentially. Both increases resulted from higher market values and net inflows. (See the “Review of businesses – Investment Management business” beginning on page 19).

   

Investment services fees totaled $1.7 billion in the third quarter of 2012 compared with $1.8 billion in the third quarter of 2011. The decrease was primarily driven by lower Depositary Receipts revenue, the impact of the sale of the Shareowner Services business in the fourth quarter of 2011 and lower Corporate Trust fees, partially offset by higher asset servicing and securities lending revenue. (See the “Review of businesses – Investment Services business” beginning on page 22).

   

Investment management and performance fees totaled $779 million in the third quarter of 2012 compared with $729 million in the third quarter of 2011. The increase was primarily driven by higher market values and net new business. (See the “Review of businesses – Investment Management business” beginning on page 19).

   

Foreign exchange and other trading revenue totaled $182 million in the third quarter of 2012 compared with $200 million in the third quarter of 2011. In the third quarter of 2012, foreign exchange revenue totaled $121 million, a decrease of 45% year-over-year reflecting lower volatility and volumes. Other trading revenue was $61 million in the third quarter of 2012 compared with a loss of $21 million in the third quarter of 2011. The increase primarily reflects improved fixed income trading. (See “Fee and other revenue” beginning on page 6).

   

Investment and other income totaled $124 million in the third quarter of 2012 compared

   

with $83 million in the third quarter of 2011. The increase primarily resulted from higher seed capital gains. (See “Fee and other revenue” beginning on page 6).

   

Net interest revenue totaled $749 million in the third quarter of 2012 compared with $775 million in the third quarter of 2011. The decrease was primarily driven by lower accretion and the elimination of interest on European Central Bank deposits, partially offset by increased investment in high-quality investment securities. The net interest margin (FTE) for the third quarter of 2012 was 1.20% compared with 1.30% in the third quarter of 2011. The decrease primarily reflects lower reinvestment yields, the elimination of interest on European Central Bank deposits, lower accretion and growth in customer deposits. (See “Net interest revenue” on page 10).

   

The provision for credit losses was a credit of $5 million in the third quarter of 2012 primarily resulting from loan sales and repayments. The provision for credit losses in the third quarter of 2011 was a credit of $22 million. (See “Consolidated balance sheet review – Asset quality and allowance for credit losses” beginning on page 34).

   

Noninterest expense totaled $2.7 billion in the third quarter of 2012 compared with $2.8 billion in the third quarter of 2011. The decrease primarily reflects lower merger and integration (“M&I”), litigation and restructuring charges and the sale of the Shareowner Services business, partially offset by the cost of certain tax credits and the benefit of state investment tax credits recorded in the third quarter of 2011. (See “Noninterest expense” beginning on page 13).

   

BNY Mellon recorded an income tax provision of $225 million (23.1% effective tax rate) in the third quarter of 2012 compared with $281 million (29.7% effective tax rate) in the third quarter of 2011. The decrease in the effective tax rate in the third quarter of 2012 was primarily driven by the completion of state audits. (See “Income taxes” on page 15).

   

The unrealized pre-tax gain on our total investment securities portfolio was $2.5 billion at Sept. 30, 2012 compared with $1.4 billion at June 30, 2012. The increase in the valuation of the investment securities portfolio primarily reflects a decline in interest rates and improved credit spreads. (See “Consolidated balance sheet review – Investment securities” beginning on page 29).

 

 

BNY Mellon    5


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At Sept. 30, 2012, our estimated Basel III Tier 1 common equity ratio was 9.3% compared with 8.7% at June 30, 2012. The increase was primarily due to earnings retention and an increase in the value of the investment portfolio, partially offset by higher risk-weighted assets. (See “Capital” beginning on page 42).

   

We generated $780 million of gross Basel I Tier 1 common equity in the third quarter of 2012, primarily driven by earnings. Our Basel I Tier 1 capital ratio was 15.3% at Sept. 30, 2012 compared with 14.0% at Sept. 30, 2011. (See “Capital” beginning on page 42).

   

In the third quarter of 2012, we repurchased 13.4 million common shares in the open market at an average price of $21.47 per share for a total of $288 million. (See “Capital” beginning on page 42).

 

 

Fee and other revenue

 

Fee and other revenue (a)

 

                                                    YTD12
vs.
YTD11
 
                       3Q12 vs.     Year-to-date    
(dollars in millions, unless otherwise noted)    3Q12     2Q12     3Q11     3Q11     2Q12     2012     2011    

Investment services fees:

                

Asset servicing (b)

   $ 942      $ 950      $ 922        2     (1 )%    $ 2,835      $ 2,812        1

Issuer services

     311        275        442        (30     13        837        1,158        (28

Memo: Issuer services excluding

                

Shareowner Services

     311        275        400        (22     13        837        1,006        (17

Clearing services

     287        309        297        (3     (7     899        881        2   

Treasury services

     138        134        133        4        3        408        401        2   

Total investment services fees

     1,678        1,668        1,794        (6     1        4,979        5,252        (5

Investment management and performance fees

     779        797        729        7        (2     2,321        2,272        2   

Foreign exchange and other trading revenue

     182        180        200        (9     1        553        620        (11

Distribution and servicing

     48        46        43        12        4        140        145        (3

Financing-related fees

     46        37        40        15        24        127        132        (4

Investment and other income

     124        48        83        N/M        N/M        311        309        1   

Total fee revenue

     2,857        2,776        2,889        (1     3        8,431        8,730        (3

Net securities gains (losses)

     22        50        (2     N/M        N/M        112        51        N/M   

Total fee and other revenue – GAAP

     2,879        2,826        2,887               2        8,543        8,781        (3

Less: Fee and other revenue related to Shareowner Services (c)

            (3     44                        (3     160           

Total fee and other revenue excluding Shareowner Services – Non-GAAP

   $ 2,879      $ 2,829      $ 2,843        1     2   $ 8,546      $ 8,621        (1 )% 

Fee revenue as a percentage of total revenue excluding net securities gains (losses)

     78     78     78         78     78  

Market value of AUM at period end (in billions)

   $ 1,359      $ 1,299      $ 1,198        13     5   $ 1,359      $ 1,198        13

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

   $ 27.9      $ 27.1      $ 25.9        8     3   $ 27.9      $ 25.9        8

 

(a) See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48 for fee and other revenue excluding Shareowner Services – Non-GAAP.
(b) Asset servicing fees include securities lending revenue of $49 million in the third quarter of 2012, $59 million in the second quarter of 2012, $41 million in the third quarter of 2011, $157 million in the first nine months of 2012 and $140 million in the first nine months of 2011.
(c) The Shareowner Services business was sold on Dec. 31, 2011.
N/M – Not meaningful.

 

Fee and other revenue

Fee and other revenue was $2.9 billion in the third quarter of 2012, virtually unchanged compared with the third quarter of 2011 and an increase of 2% (unannualized) sequentially. Excluding the impact of the Shareowner Services business, fee and other revenue increased 1% year-over-year primarily

reflecting higher investment management and performance fees and investment and other income, partially offset by lower issuer services fee and foreign exchange and other trading revenue. Sequentially, fee and other revenue increased 2% (unannualized) primarily as a result of higher investment and other income and seasonally higher Depositary Receipts revenue, partially offset by lower net securities gains, clearing services revenue and performance fees.

 

 

6    BNY Mellon


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Investment services fees

Investment services fees were impacted by the following, compared with the third quarter of 2011 and the second quarter of 2012:

 

   

Asset servicing fees were $942 million, an increase of 2% year-over-year and a decrease of 1% (unannualized) sequentially. The year-over-year increase primarily reflects net new business and higher market values and securities lending revenue. The sequential decrease was primarily driven by a seasonal decrease in securities lending revenue, partially offset by net new business and higher market values.

   

Issuer services fees were $311 million, a decrease of 30% year-over-year and an increase of 13% (unannualized) sequentially. Excluding Shareowner Services, Issuer services decreased 22% year-over-year. The year-over-year decrease primarily resulted from lower Depositary Receipts revenue driven by lower volumes, and lower Corporate Trust fees reflecting the continued net run-off of structured debt securitizations. This run-off could reduce the Company’s total annual revenue by one-half to three-quarters of 1% if the structured debt markets do not recover. The sequential increase resulted from seasonally higher Depositary Receipts revenue, partially offset by lower Corporate Trust fees.

   

Clearing services fees were $287 million, a decrease of 3% year-over-year and 7% (unannualized) sequentially. Both decreases were primarily driven by lower DARTS volume.

See the “Investment Services business” in “Review of businesses” for additional details.

Investment management and performance fees

Investment management and performance fees were $779 million, an increase of 7% year-over-year and a decrease of 2% (unannualized) sequentially. Performance fees were $10 million in the third quarter of 2012, $11 million in the third quarter of 2011 and $54 million in the second quarter of 2012. Excluding performance fees, investment management fees increased 7% year-over-year and 3% (unannualized) sequentially. Both increases were driven by higher market values and net new business.

 

Total AUM for the Investment Management business was $1.4 trillion at Sept. 30, 2012, an increase of 13% compared with $1.2 trillion at Sept. 30, 2011 and an increase of 5% compared with $1.3 trillion at June 30, 2012. Both increases resulted from higher market values and net inflows.

See the “Investment Management business” in “Review of businesses” for additional details regarding the drivers of investment management and performance fees.

Foreign exchange and other trading revenue

 

Foreign exchange and other trading revenue

  

                
                         Year-to-date  
(in millions)    3Q12      2Q12      3Q11     2012      2011  

Foreign exchange

   $ 121       $ 157       $ 221      $ 414       $ 578   

Other trading revenue:

             

Fixed income

     54         16         (21     117         24   

Credit derivatives/other (a)

     7         7         -        22         18   

Total other trading revenue

     61         23         (21     139         42   

Total

   $ 182       $ 180       $ 200      $ 553       $ 620   

 

(a) Credit derivatives are used as economic hedges of loans.

Foreign exchange and other trading revenue totaled $182 million in the third quarter of 2012, $200 million in the third quarter of 2011 and $180 million in the second quarter of 2012. In the third quarter of 2012, foreign exchange revenue totaled $121 million, a decrease of 45% year-over-year and 23% (unannualized) sequentially. Both decreases reflect lower volatility and volumes. Additionally, foreign exchange revenue continues to be impacted by increasingly competitive market pressures. Other trading revenue was $61 million in the third quarter of 2012 compared with a loss of $21 million in the third quarter of 2011 and revenue of $23 million in the second quarter of 2012. The increases compared with both prior periods reflect improved fixed income trading. Foreign exchange revenue is primarily reported in the Investment Services business. Other trading revenue is primarily reported in the Other segment.

The foreign exchange trading engaged in by the Company generates revenues, which are influenced by the volume of client transactions and the spread realized on these transactions. The level of volume and spreads is affected by market volatility, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by

 

 

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corporate and institutional clients. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute. A substantial majority of our foreign exchange trades is undertaken for our custody clients in transactions where BNY Mellon acts as principal, and not as an agent or broker. As a principal, we earn a profit, if any, based on our ability to risk manage the aggregate foreign currency positions that we buy and sell on a daily basis. Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction program, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client’s investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. Such transactions may be initiated by (i) contacting one of our sales desks to negotiate the rate for specific transactions, (ii) using electronic trading platforms, or (iii) electing other methods such as those pursuant to a benchmarking arrangement, in which pricing is determined by an objective market rate plus a pre-negotiated spread. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction program, including a standing instruction program option called the Defined Spread Offering, which the Company introduced to clients in the first quarter of 2012, provides custody clients and their investment managers with an end-to-end solution that allows them to shift to BNY Mellon the cost, management and execution risk, often in small transactions not otherwise eligible for a more favorable rate or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. In response to competitive market pressures and client requests, we are continuing to develop standing instruction program products and services and making these new products and services available to our clients. Our custody clients choose to use third-party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar-equivalent volume foreign exchange transactions.

We typically price negotiated trades for our custody clients at a spread over either our estimation of the current market rate for a particular currency or an agreed upon third-party benchmark. With respect to our standing instruction program, we typically assign a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than $1 million) executed between global financial institutions, known as the “interbank range.” Using the interbank range for the given day, we typically price purchases of currencies at or near the low end of this range and sales of currencies at or near the high end of this range. The standing instruction program Defined Spread Offering prices transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread to an objective market source for developed and certain emerging market currencies or to a reference rate computed by BNY Mellon for other emerging market currencies. A shift by custody clients from the standing instruction program to other trading options combined with the increasing competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. For the quarter ended Sept. 30, 2012, our total revenue for all types of foreign exchange trading transactions was $121 million, or approximately 3% of our total revenue. Approximately 41% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction program.

Distribution and servicing fees

Distribution and servicing fee revenue was $48 million in the third quarter of 2012 compared with $43 million in the third quarter of 2011 and $46 million in the second quarter of 2012. The increases primarily reflect higher market values and lower fee waivers.

Financing-related fees

Financing-related fees, which are primarily reported in the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees were $46 million in the third quarter of 2012, $40 million in the third quarter of 2011 and $37 million in the second quarter of 2012. Both increases reflect higher capital markets fees. The sequential increase also includes higher credit-related fees.

 

 

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Investment and other income

 

Investment and other income                         Year-to-date  
(in millions)    3Q12     2Q12     3Q11     2012      2011  

Corporate/bank-owned life insurance

   $ 41      $ 32      $ 40      $ 107       $ 119   

Seed capital gains (losses)

     28               (8     52         (3

Lease residual gains

            3        14        37         22   

Expense reimbursements from joint ventures

     10        9        11        29         28   

Equity investment revenue (loss)

     16        (5     12        17         36   

Asset-related gains

     17               28        15         108   

Private equity gains (losses)

     (1     1        (7     4         15   

Other income (loss)

     13        8        (7     50         (16

Total

   $ 124      $ 48      $ 83      $ 311       $ 309   

Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes income from insurance contracts, gains and losses on seed capital investments, lease residual gains, expense reimbursements from joint ventures, equity investment revenue or loss, asset-related gains, gains and losses on private equity investments, 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 fees from transitional service agreements, foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income increased $41 million compared with the third quarter of 2011 and $76 million compared with the second quarter of 2012. The year-over-year increase primarily resulted from higher seed capital gains. Sequentially, the increase primarily resulted from seed capital gains, higher equity investment revenue and higher asset-related gains.

Net securities gains (losses)

Net securities gains totaled $22 million in the third quarter of 2012 compared with net losses of $2 million in the third quarter of 2011 and net gains of $50 million in the second quarter of 2012.

Year-to-date 2012 compared with year-to-date 2011

Fee and other revenue for the first nine months of 2012 totaled $8.5 billion compared with $8.8 billion in the first nine months of 2011. The decrease primarily reflects the impact of the sale of the Shareowner Services business. Excluding the impact of the Shareowner Services business, fee and other revenue decreased 1% primarily reflecting lower issuer services fees and foreign exchange and other trading revenue, offset in part by higher investment management and performance fees and net securities gains.

The decrease in issuer services fees primarily reflects lower Depositary Receipts revenue, as well as lower Corporate Trust fees reflecting the continued net run-off of structured debt securitizations. The decrease in foreign exchange and other trading revenue was driven by lower foreign exchange volatility and volumes, partially offset by higher fixed income revenue. The increase in investment management and performance fees primarily reflects higher performance fees, higher market values and net new business. Net securities gains increased $61 million in the first nine months of 2012 compared with the first nine months of 2011.

 

 

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Net interest revenue

 

 

 

Net interest revenue (a)                                              YTD12  
                       3Q12 vs.     Year-to-date     vs.  
(dollars in millions)    3Q12     2Q12     3Q11     3Q11     2Q12     2012     2011     YTD11  

Net interest revenue (non-FTE)

   $ 749      $ 734      $ 775        (3 )%      2   $ 2,248      $ 2,204        2

Tax equivalent adjustment

     16        13        7        N/M        N/M        40        17        N/M   

Net interest revenue (FTE) – Non-GAAP

   $ 765      $ 747      $ 782        (2 )%      2   $ 2,288      $ 2,221        3

Average interest-earning assets

   $ 255,228      $ 239,755      $ 240,253        6     6   $ 243,814      $ 213,636        14

Net interest margin (FTE)

     1.20     1.25     1.30     (10 ) bps      (5 ) bps      1.25     1.39     (14 ) bps 

bps—basis points.

FTE – fully taxable equivalent.

N/M – Not meaningful.

 

Net interest revenue totaled $749 million in the third quarter of 2012, a decrease of $26 million compared with the third quarter of 2011 and an increase of $15 million sequentially. The year-over-year decrease in net interest revenue was primarily driven by lower accretion and the elimination of interest on European Central Bank deposits, partially offset by increased investment in high-quality investment securities. The increase compared with the second quarter of 2012 primarily reflects higher interest-earning assets driven by higher deposit levels, partially offset by the elimination of interest on European Central Bank deposits.

The net interest margin (FTE) was 1.20% in the third quarter of 2012 compared with 1.30% in the third quarter of 2011 and 1.25% in the second quarter of 2012. The decreases in net interest margin (FTE) compared with both prior periods primarily reflect

lower reinvestment yields, the elimination of interest on European Central Bank deposits, lower accretion and growth in customer deposits.

Year-to-date 2012 compared with year-to-date 2011

Net interest revenue totaled $2.2 billion in the first nine months of 2012, an increase of 2% compared with the first nine months of 2011. The increase primarily reflects higher average client deposits, increased investment in higher quality investment securities and higher loan levels, partially offset by narrower spreads and lower accretion. The net interest margin (FTE) was 1.25% in the first nine months of 2012, compared with 1.39% in the first nine months of 2011. The decline was primarily driven by lower accretion, lower reinvestment yields and increased client deposits which were invested in lower-yielding assets.

 

 

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Average balances and interest rates

 

Average balances and interest rates    Quarter ended  
     Sept. 30, 2012     June 30, 2012     Sept. 30, 2011  
(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)

   $ 41,201        0.96   $ 38,474        0.98   $ 60,412        1.00

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

     61,849        0.21        57,904        0.27        61,115        0.31   

Federal funds sold and securities purchased under resale agreements

     5,315        0.64        5,493        0.62        4,865        0.71   

Margin loans

     13,033        1.30        13,331        1.27        9,379        1.34   

Non-margin loans:

            

Domestic offices

     18,821        2.63        19,663        2.52        21,583        2.43   

Foreign offices

     10,574        1.61        9,998        1.86        9,527        1.52   
  

 

 

     

 

 

     

 

 

   

Total non-margin loans

     29,395        2.26        29,661        2.30        31,110        2.15   

Securities:

            

U.S. government obligations

     18,917        1.38        15,387        1.65        14,079        1.57   

U.S. government agency obligations

     41,430        1.94        39,070        2.23        20,998        2.93   

State and political subdivisions – tax exempt

     5,933        2.57        4,777        2.65        1,611        4.13   

Other securities

     33,724        2.51        32,625        2.51        34,175        3.30   

Trading securities

     4,431        2.40        3,033        2.57        2,509        2.62   
  

 

 

     

 

 

     

 

 

   

Total securities

     104,435        2.06        94,892        2.26        73,372        2.86   
  

 

 

     

 

 

     

 

 

   

Total interest-earning assets

   $ 255,228        1.40   $ 239,755        1.48   $ 240,253        1.55

Allowance for loan losses

     (361       (382       (437  

Cash and due from banks

     4,276          4,412          5,204     

Other assets

     48,776          49,933          53,305     

Assets of consolidated investment management funds

     10,995                11,284                13,138           

Total assets

   $ 318,914              $ 305,002              $ 311,463           

Liabilities

            

Interest-bearing liabilities:

            

Interest-bearing deposits:

            

Money market rate and demand deposit accounts

   $ 9,724        0.23   $ 8,421        0.24   $ 4,611        0.35

Savings

     730        0.17        702        0.13        1,613        0.12   

Time deposits

     34,193        0.07        33,180        0.11        35,991        0.07   

Foreign offices

     93,613        0.10        88,179        0.13        83,580        0.26   
  

 

 

     

 

 

     

 

 

   

Total interest-bearing deposits

     138,260        0.10        130,482        0.13        125,795        0.21   

Federal funds purchased and securities sold under repurchase agreements

     10,092        (0.06     11,254        0.01        10,164        0.03   

Trading liabilities

     1,397        1.87        1,256        1.87        1,911        1.25   

Other borrowed funds

     887        1.31        1,114        1.88        1,956        0.87   

Commercial paper

     968        0.12        1,436        0.29        300        0.08   

Payables to customers and broker-dealers

     8,141        0.10        7,895        0.10        7,692        0.10   

Long-term debt

     19,535        1.66        20,084        1.67        18,256        1.60   
  

 

 

     

 

 

     

 

 

   

Total interest-bearing liabilities

   $ 179,280        0.28   $ 173,521        0.32   $ 166,074        0.37

Total noninterest-bearing deposits

     70,230          62,860          73,389     

Other liabilities

     23,712          23,588          25,462     

Liabilities and obligations of consolidated investment management funds

     9,686                10,072                11,728           

Total liabilities

     282,908          270,041          276,653     

Temporary equity

            

Redeemable noncontrolling interests

     134          78          61     

Permanent equity

            

Total BNY Mellon shareholders’ equity

     35,133          34,183          34,008     

Noncontrolling interests

     739                700                741           

Total permanent equity

     35,872                34,883                34,749           

Total liabilities, temporary equity and permanent equity

   $ 318,914              $ 305,002              $ 311,463           

Net interest margin (FTE)

             1.20             1.25             1.30
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    Nine months ended  
     Sept. 30, 2012        Sept. 30, 2011   
(dollar amounts in millions)     
 
Average
balance
  
  
   
 
Average
rates
  
  
   
 
Average
balance
  
  
   
 
Average
rates
  
  

Assets

        

Interest-earning assets:

        

Interest-bearing deposits with banks (primarily foreign banks)

   $ 38,267        1.07   $ 59,124        0.96

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

     61,096        0.25        38,666        0.31   

Federal funds sold and securities purchased under resale agreements

     5,327        0.66        4,653        0.56   

Margin loans

     13,089        1.29        8,798        1.38   

Non-margin loans:

        

Domestic offices

     19,534        2.54        21,509        2.51   

Foreign offices

     10,252        1.74        9,495        1.50   
  

 

 

     

 

 

   

Total non-margin loans

     29,786        2.26        31,004        2.20   

Securities:

        

U.S. government obligations

     17,197        1.52        13,759        1.60   

U.S. government agency obligations

     37,630        2.18        20,564        3.01   

State and political subdivisions – tax exempt

     4,693        2.69        1,038        4.88   

Other securities

     33,397        2.62        33,006        3.34   

Trading securities

     3,332        2.55        3,024        2.49   
  

 

 

     

 

 

   

Total securities

     96,249        2.26        71,391        2.89   
  

 

 

     

 

 

   

Total interest-earning assets

   $ 243,814        1.48   $ 213,636        1.68

Allowance for loan losses

     (378       (465  

Cash and due from banks

     4,320          4,548     

Other assets

     49,463          51,128     

Assets of consolidated investment management funds

     11,240                13,898           

Total assets

   $ 308,459              $ 282,745           

Liabilities

        

Interest-bearing liabilities:

        

Interest-bearing deposits:

        

Money market rate and demand deposit accounts

   $ 7,557        0.24   $ 4,738        0.38

Savings

     693        0.14        1,564        0.12   

Time deposits

     33,666        0.09        34,336        0.09   

Foreign offices

     89,502        0.13        82,152        0.24   
  

 

 

     

 

 

   

Total interest-bearing deposits

     131,418        0.13        122,790        0.20   

Federal funds purchased and securities sold under repurchase agreements

     9,977        (0.02     8,762        0.05   

Trading liabilities

     1,269        1.77        2,063        1.79   

Other borrowed funds

     1,502        1.17        1,872        1.16   

Commercial paper

     824        0.22        114        0.09   

Payables to customers and broker-dealers

     7,865        0.10        7,082        0.10   

Long-term debt

     20,051        1.71        17,555        1.70   
  

 

 

     

 

 

   

Total interest-bearing liabilities

     172,906        0.32     160,238        0.38

Total noninterest-bearing deposits

     66,581          51,808     

Other liabilities

     23,850          23,848     

Liabilities and obligations of consolidated investment management funds

     9,971                12,598           

Total liabilities

     273,308          248,492     

Temporary equity

        

Redeemable noncontrolling interests

     94          67     

Permanent equity

        

Total BNY Mellon shareholders’ equity

     34,348          33,437     

Noncontrolling interests

     709                749           

Total permanent equity

     35,057                34,186           

Total liabilities, temporary equity and permanent equity

   $ 308,459              $ 282,745           

Net interest margin (FTE)

             1.25             1.39
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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Noninterest expense

 

Noninterest expense                         3Q12 vs.     Year-to-date     YTD12 vs.  
(dollars in millions)    3Q12     2Q12     3Q11     3Q11     2Q12     2012     2011     YTD11  

Staff:

                

Compensation

   $ 893      $ 866      $ 903        (1 )%      3   $ 2,620      $ 2,682        (2 )% 

Incentives

     306        311        328        (7     (2     969        981        (1

Employee benefits

     237        238        226        5        —          715        681        5   

Total staff

     1,436        1,415        1,457        (1     1        4,304        4,344        (1

Professional, legal and other purchased services

     292        309        311        (6     (6     900        895        1   

Net occupancy

     149        141        151        (1     6        437        465        (6

Software

     127        127        113        12        —          373        356        5   

Distribution and servicing

     109        103        100        9        6        313        320        (2

Furniture and equipment

     81        82        80        1        (1     249        246        1   

Sub-custodian

     65        70        80        (19     (7     205        236        (13

Business development

     60        71        57        5        (15     187        186        1   

Other

     265        254        224        18        4        739        700        6   

Amortization of intangible assets

     95        97        106        (10     (2     288        322        (11

M&I, litigation and restructuring charges

     26        378        92        N/M        N/M        513        214        N/M   

Total noninterest expense – GAAP

   $ 2,705      $ 3,047      $ 2,771        (2 )%      (11 )%    $ 8,508      $ 8,284        3

Total staff expense as a percent of total revenue

     39     39     39         39     39  

Full-time employees at period end

     48,700        48,200        49,600        (2 )%      1     48,700        49,600        (2 )% 

N/M—Not meaningful.

 

                
Noninterest expense excluding Shareowner Services                         3Q12 vs.     Year-to-date     YTD12 vs.  
(dollars in millions)    3Q12     2Q12     3Q11     3Q11     2Q12     2012     2011     YTD11  

Staff:

                

Compensation

   $ 893      $ 866      $ 889        —       3   $ 2,620      $ 2,639        (1 )% 

Incentives

     306        311        327        (6     (2     969        977        (1

Employee benefits

     237        238        222        7        —          715        670        7   

Total staff

     1,436        1,415        1,438        —          1        4,304        4,286        —     

Professional, legal and other purchased services

     292        309        300        (3     (6     900        861        5   

Net occupancy

     149        141        149        —          6        437        457        (4

Software

     127        127        110        15        —          373        348        7   

Distribution and servicing

     109        103        100        9        6        313        320        (2

Furniture and equipment

     81        82        79        3        (1     249        244        2   

Sub-custodian

     65        70        80        (19     (7     205        236        (13

Business development

     60        71        57        5        (15     187        185        1   

Other

     265        254        223        19        4        739        681        9   

Subtotal

     2,584        2,572        2,536        2        —          7,707        7,618        1   

Amortization of intangible assets

     95        97        103        (8     (2     288        312        (8

M&I, litigation and restructuring charges

     26        378        92        N/M        N/M        513        214        N/M   

Total noninterest expense – Non-GAAP

   $ 2,705      $ 3,047      $ 2,731        (1 )%      (11 )%    $ 8,508      $ 8,144        4

Total staff expense as a percent of total revenue

     39     39     39         39     39  

Full-time employees at period end

     48,700        48,200        48,700        —       1     48,700        48,700        —  

N/M—Not meaningful.

 

Total noninterest expense decreased 2% compared with the third quarter of 2011 and 11% (unannualized) compared with the second quarter of 2012. Both decreases primarily reflect lower litigation charges. Excluding amortization of intangible assets, M&I, litigation and restructuring charges and the direct expenses related to Shareowner Services, noninterest expense increased 2% year-over-year and was flat sequentially. The year-over-year increase reflects the cost of

generating certain tax credits in the third quarter of 2012 and the benefit of state investment tax credits recorded in the third quarter of 2011. Sequentially, decreases in professional, legal and other purchased services and business development expenses were offset by the annual employee merit increase and support agreement charges.

 

 

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Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 56% of total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges in the third quarter of 2012, 57% in the third quarter of 2011 and 55% in the second quarter of 2012.

Staff expense totaled $1.4 billion in the third quarter of 2012, a decrease of 1% compared with the third quarter of 2011 and an increase of 1% (unannualized) compared with the second quarter of 2012. The year-over-year decrease in staff expense primarily reflects the impact of the sale of the Shareowner Services business. The sequential increase was driven by the annual employee merit increase given in the third quarter.

Non-staff expense

Non-staff expense, excluding amortization of intangible assets and M&I, litigation and restructuring charges totaled $1.1 billion in the third quarter of 2012, an increase of 3% compared with the third quarter of 2011 and a decrease of 1% (unannualized) compared with the second quarter of 2012. The increase in non-staff expense year-over-year primarily reflects the cost of generating certain tax credits in the third quarter of 2012 and the benefit of state investment tax credits recorded in the third quarter of 2011, partially offset by the impact of the sale of the Shareowner Services business. The sequential decrease was driven by lower professional, legal and other purchased services and

business development expenses, partially offset by support agreement charges.

On July 5, 2012, BNY Mellon, N.A. and The Bank of New York Mellon entered into a settlement agreement related to a previously disclosed class action lawsuit pending in federal court in Oklahoma and initiated by CompSource Oklahoma concerning losses in connection with the investment of securities lending collateral in Sigma Finance Inc. (“Sigma”). The company recorded a pre-tax charge in the second quarter of 2012 of approximately $350 million primarily related to claims involving Sigma investments.

The financial services industry has seen a continuing increase in the level of litigation activity. As a result, we anticipate our legal and litigation costs to continue at elevated levels. For additional information on litigation matters, see Note 18 of the Notes to Consolidated Financial Statements.

Year-to-date 2012 compared with year-to-date 2011

Noninterest expense in the first nine months of 2012 increased 3% compared with the first nine months of 2011. The increase primarily reflects higher litigation charges, higher professional, legal and other professional services, the cost of generating certain tax credits in the first nine months of 2012, the benefit of state investment tax credits recorded in the third quarter of 2011 and higher software expenses, partially offset by the sale of the Shareowner Services business and lower volume-driven expenses and lower compensation expense.

 

 

Operational excellence initiatives update

 

Expense initiatives (pre-tax)    Program savings     

Annualized
targeted savings

by the end of 2012

 
(dollar amounts in millions)    1Q12      2Q12      3Q12      through 3Q12     

Business operations

   $ 45       $ 55       $ 63       $ 163       $  225 - $ 240   

Technology

     16         21         21         58       $ 75 - $ 85   

Corporate services

     14         18         21         53       $ 60 - $ 65   

Gross savings (a)

     75         94         105         274       $ 360 - $ 390   

Less: Incremental program costs (b)

     5         23         23         51       $ 120 - $ 130   

Net savings (c)

   $ 70       $ 71       $ 82       $ 223       $ 240 - $ 260   
(a) Represents the estimated pre-tax run rate expense savings since program inception in 2011. Total Company actual operating expense may increase or decrease due to other factors.
(b) Represents incremental program costs incurred to implement the operational excellence initiatives. These costs will fluctuate by quarter.
(c) Net savings cannot be annualized due to the variability of program costs.

 

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As a result of our operational excellence initiatives, we are currently on track to achieve our anticipated pre-tax savings of $240-$260 million in 2012 on an annualized pre-tax basis.

Through Sept. 30, 2012, we accomplished the following operational excellence initiatives:

Business Operations

 

   

Consolidated Treasury Services functions (e.g., check processing and lockbox operations) in our Pittsburgh Service Center.

   

Continued global footprint positions migration. Lowered operating costs as we began to ramp up the Eastern European Global Delivery Center.

   

Reengineered Dreyfus and Global Fund Accounting operations to reduce headcount.

   

Realized synergies in custody operations and clearing related to the Global Investment Servicing (“GIS”) acquisition.

   

Completed client conversions related to our BHF Asset Servicing GmbH acquisition.

Technology

 

   

Migrated GIS systems to BNY Mellon platforms—over 95% of the production applications have been successfully migrated as of Sept. 30, 2012.

   

Insourced software engineers to Global Delivery Centers.

   

Standardized infrastructure through server elimination and software rationalization.

Corporate Services

 

   

Consolidated offices in Los Angeles, New York and the EMEA region.

   

Benefited from the enhanced global procurement program.

Income taxes

The effective tax rate was 23.1% in the third quarter of 2012. The lower than expected effective tax rate primarily reflects the benefit of completing state audits. The effective tax rate was 29.7% in the third quarter of 2011 and 15.8% in the second quarter of 2012. The effective tax rate in the second quarter of 2012 included the benefit of certain tax credits.

We expect the tax rate to be approximately 27%-28% in the fourth quarter of 2012.

Under U.S. tax law, income from certain non-U.S. subsidiaries has not been subject to U.S. income tax as result of a deferral provision applicable to income that is derived in active conduct of a banking and

financing business. This active financing deferral provision for these foreign subsidiaries expired for tax years beginning on Jan. 1, 2012. We do not anticipate a material impact to our 2012 financial statements if the law is not extended and will monitor the financial statement impact for subsequent years.

Review of businesses

We have an internal information system that produces performance data along product and service lines for our two principal businesses and the Other segment.

Organization of our business

On Dec. 31, 2011, BNY Mellon sold its Shareowner Services business. In the first quarter of 2012, we reclassified the results of the Shareowner Services business from the Investment Services business to the Other segment. The reclassification did not impact the consolidated results. All prior periods have been restated.

Business accounting principles

Our business 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 businesses will track their economic performance.

For additional information on the accounting principles of our businesses, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 19 of the Notes to Consolidated Financial Statements.

The results of our businesses may be influenced by client activities that vary by quarter. In the second quarter, we typically experience an increase in securities lending fees due to an increase in demand to borrow securities outside of the United States. In the third quarter, depositary receipts revenue is typically higher due to an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client activity. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth quarter represents the end of the measurement period for many of the performance fee-eligible relationships.

 

 

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

 

Market indices                                            3Q12 vs.     Year-to-date      YTD12 vs.
YTD11
 
      3Q11      4Q11      1Q12      2Q12      3Q12      3Q11     2Q12     2012      2011     

S&P 500 Index (a)

     1131         1258         1408         1362         1441         27     6     1441         1131         27

S&P 500 Index – daily average

     1227         1224         1347         1351         1400         14        4        1366         1282         7   

FTSE 100 Index (a)

     5128         5572         5768         5571         5742         12        3        5742         5128         12   

FTSE 100 Index – daily average

     5470         5424         5818         5555         5742         5        3        5708         5767         (1

MSCI World Index (a)

     1104         1183         1312         1236         1312         19        6        1312         1104         19   

MSCI World Index – daily average

     1217         1169         1268         1235         1273         5        3        1258         1289         (2

Barclays Capital Aggregate BondSM Index (a)

     346         347         351         353         368         6        4        368         346         6   

NYSE and NASDAQ share volume (in billions)

     250         206         186         192         173         (31     (10     550         688         (20

JPMorgan G7 Volatility Index – daily average (b)

     12.60         12.95         10.39         10.30         8.70         (31     (16     9.80         11.64         (16
(a) Period end.
(b) The JPMorgan G7 Volatility Index is based on the implied volatility in 3-month currency options.

 

Fee revenue in Investment Management, and to a lesser extent Investment Services, is impacted by the value of market indices. At Sept. 30, 2012, using the S&P 500 Index as a proxy for the global 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 diluted earnings per common share by $0.03 to $0.05. If global equity markets over- or under-perform the S&P 500 Index, the impact to fee revenue and earnings per share could be different.

 

 

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

 

For the quarter ended Sept. 30, 2012

(dollar amounts
in millions)

   Investment
Management
    Investment
Services
    Other     Consolidated  
                               

Fee and other revenue

   $  872 (a)    $ 1,879      $ 150      $  2,901 (a) 

Net interest revenue

     52        608        89        749   

Total revenue

     924        2,487        239        3,650   

Provision for credit losses

     —          (4     (1     (5

Noninterest expense

     692        1,782        231        2,705   

Income (loss) before taxes

   $  232 (a)    $ 709      $ 9      $ 950 (a) 

Pre-tax operating margin (b)

     25     29     N/M        26

Average assets

   $ 35,775      $ 224,289      $ 58,850      $ 318,914   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 644      $ 1,735      $ 231      $ 2,610   

Income (loss) before taxes

     280 (a)      756        9        1,045 (a) 

Pre-tax operating margin (b)

     30     30     N/M        29
(a) Total fee and other revenue includes income from consolidated investment management funds of $47 million, net of noncontrolling interests of $25 million, for a net impact of $22 million. Income before taxes includes noncontrolling interests of $25 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

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For the quarter ended June 30, 2012

 

 

(dollar amounts
in millions)
   Investment
Management
    Investment
Services
    Other     Consolidated  

Fee and other revenue

   $  861 (a)    $ 1,881      $ 112      $  2,854 (a) 

Net interest revenue

     52        607        75        734   

Total revenue

     913        2,488        187        3,588   

Provision for credit losses

     -        (14     (5     (19

Noninterest expense

     690        2,146        211        3,047   

Income (loss) before taxes

   $  223 (a)    $ 356      $ (19   $ 560 (a) 

Pre-tax operating margin (b)

     24     14     N/M        16

Average assets

   $ 35,970      $ 209,454      $ 59,578      $ 305,002   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 642      $ 2,097      $ 211      $ 2,950   

Income (loss) before taxes

     271 (a)      405        (19     657 (a) 

Pre-tax operating margin (b)

     30     16     N/M        18
(a) Total fee and other revenue includes income from consolidated investment management funds of $57 million, net of noncontrolling interests of $29 million, for a net impact of $28 million. Income before taxes includes noncontrolling interests of $29 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

For the quarter ended Sept. 30, 2011

 

                            
(dollar amounts
in millions)
   Investment
Management
    Investment
Services
    Other     Consolidated  

Fee and other revenue

   $  757 (a)    $ 2,028      $ 121      $  2,906 (a) 

Net interest revenue

     51        661        63        775   

Total revenue

     808        2,689        184        3,681   

Provision for credit losses

     -        -        (22     (22

Noninterest expense

     675        1,898        198        2,771   

Income (loss) before taxes

   $  133 (a)    $ 791      $ 8      $ 932 (a) 

Pre-tax operating margin (b)

     16     29     N/M        25

Average assets

   $ 36,949      $ 220,930      $ 53,584      $ 311,463   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 622      $ 1,849      $ 194      $ 2,665   

Income (loss) before taxes

     186 (a)      840        12        1,038 (a) 

Pre-tax operating margin (b)

     23     31     N/M        28
(a) Total fee and other revenue includes income from consolidated investment management funds of $32 million, net of noncontrolling interests of $13 million, for a net impact of $19 million. Income before taxes includes noncontrolling interests of $13 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

For the nine months ended Sept. 30, 2012

 

                            
(dollar amounts
in millions)
   Investment
Management
    Investment
Services
    Other     Consolidated  

Fee and other revenue

   $  2,585 (a)    $ 5,612      $ 428      $  8,625 (a) 

Net interest revenue

     159        1,857        232        2,248   

Total revenue

     2,744        7,469        660        10,873   

Provision for credit losses

     -        (2     (17     (19

Noninterest expense

     2,049        5,755        704        8,508   

Income (loss) before taxes

   $  695 (a)    $ 1,716      $ (27   $  2,384 (a) 

Pre-tax operating margin (b)

     25     23     N/M        22

Average assets

   $ 36,071      $ 215,991      $ 56,397      $ 308,459   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 1,905      $ 5,611      $ 704      $ 8,220   

Income (loss) before taxes

     839 (a)      1,860        (27     2,672 (a) 

Pre-tax operating margin (b)

     31     25     N/M        25

 

(a) Total fee and other revenue includes income from consolidated investment management funds of $147 million, net of noncontrolling interests of $65 million, for a net impact of $82 million. Income before taxes includes noncontrolling interests of $65 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

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For the nine months ended Sept. 30, 2011

 

(dollar amounts

in millions)

   Investment
Management
    Investment
Services
    Other     Consolidated  

Fee and other revenue

   $  2,487  (a)    $ 5,884      $ 537      $  8,908  (a) 

Net interest revenue

     151        1,931        122        2,204   

Total revenue

     2,638        7,815        659        11,112   

Provision for credit losses

     1        -        (23     (22

Noninterest expense

     2,051        5,477        756        8,284   

Income (loss) before taxes

   $  586  (a)    $ 2,338      $ (74   $  2,850  (a) 

Pre-tax operating margin (b)

     22     30     N/M        26

Average assets

   $ 37,000      $ 196,447      $ 49,298      $ 282,745   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 1,890      $ 5,328      $ 744      $ 7,962   

Income (loss) before taxes

     747 (a)      2,487        (62     3,172 (a) 

Pre-tax operating margin (b)

     28     32     N/M        29
(a) Total fee and other revenue includes income from consolidated investment management funds of $205 million, net of noncontrolling interests of $78 million, for a net impact of $127 million. Income before taxes includes noncontrolling interests of $78 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

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Investment Management business

 

                                                                         
                                   3Q12 vs.     Year-to-date    

YTD12

vs.
YTD11

 
(dollar amounts in millions,
unless otherwise noted)
   3Q11     4Q11     1Q12     2Q12     3Q12     3Q11     2Q12     2012     2011    

Revenue:

                    

Investment management fees:

                    

Mutual funds

   $ 263      $ 237      $ 260      $ 270      $ 283        8     5   $ 813      $ 836        (3 )% 

Institutional clients

     311        299        322        321        334        7        4        977        949        3   

Wealth management

     157        154        157        158        158        1        -        473        484        (2

Investment management fees

     731        690        739        749        775        6        3        2,263        2,269        -   

Performance fees

     11        47        16        54        10        (9     (81     80        46        74   

Distribution and servicing

     41        41        45        45        47        15        4        137        140        (2

Other (a)

     (26     (11     52        13        40        N/M        N/M        105        32        N/M   

Total fee and other revenue (a)

     757        767        852        861        872        15        1        2,585        2,487        4   

Net interest revenue

     51        55        55        52        52        2        -        159        151        5   

Total revenue

     808        822        907        913        924        14        1        2,744        2,638        4   

Provision for credit losses

     -        -        -        -        -        -        -        -        1        N/M   

Noninterest expense (ex. amortization ofintangible assets)

     622        632        619        642        644        4        -        1,905        1,890        1   

Income before taxes (ex.amortization of intangible assets)

     186        190        288        271        280        51        3        839        747        12   

Amortization of intangible assets

     53        53        48        48        48        (9     -        144        161        (11

Income before taxes

   $ 133      $ 137      $ 240      $ 223      $ 232        74     4   $ 695      $ 586        19

Pre-tax operating margin

     16     17     26     24     25         25     22  

Pre-tax operating margin (ex. amortization of intangible assets and net of distribution and servicing expense) (b)

     26     26     36     34     34         34     32  

Wealth management:

                    

Average loans

   $ 6,958      $ 7,209      $ 7,430      $ 7,763      $ 8,122        17     5   $ 7,773      $ 6,890        13

Average deposits

   $ 10,392      $ 11,761      $ 11,491      $ 11,259      $ 11,372        9     1   $ 11,374      $ 9,558        19
(a) Total fee and other revenue includes the impact of the consolidated investment management funds. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48. Additionally, other revenue includes asset servicing and treasury services revenue.
(b) Distribution and servicing expense is netted with the distribution and servicing revenue for the purpose of this calculation of pre-tax operating margin. Distribution and servicing expense totaled $99 million, $95 million, $100 million, $102 million, $107 million, $309 million and $317 million, respectively.
N/M – Not meaningful.

 

AUM trends (a)                                         3Q12 vs.  
(dollar amounts in billions)    3Q11     4Q11      1Q12     2Q12     3Q12      3Q11     2Q12  

AUM at period end, by product type:

                

Equity securities

   $ 354      $ 390       $ 429      $ 417      $ 446         26     7

Fixed income securities

     419        437         451        480        506         21        5   

Money market

     321        328         319        299        307         (4     3   

Alternative investments and overlay

     104        105         109        103        100         (4     (3

Total AUM

   $ 1,198      $ 1,260       $ 1,308      $ 1,299      $ 1,359         13     5

AUM at period end, by client type:

                

Institutional

   $ 719      $ 757       $ 829      $ 835      $ 883         23     6

Mutual funds

     406        427         404        388        398         (2     3   

Private client

     73        76         75        76        78         7        3   

Total AUM

   $ 1,198      $ 1,260       $ 1,308      $ 1,299      $ 1,359         13     5

Changes in market value of AUM:

                

Beginning balance

   $ 1,274      $ 1,198       $ 1,260      $ 1,308      $ 1,299        

Net inflows (outflows):

                

Long-term

     4        16         7        26        9        

Money market

     (15     7         (9     (14     9                    

Total net inflows (outflows)

     (11     23         (2     12        18        

Net market/currency impact

     (65     39         50        (21     42                    

Ending balance

   $ 1,198      $ 1,260       $ 1,308      $ 1,299      $ 1,359         13