EX-13.1 6 dex131.htm ALL PORTIONS OF 2010 ANNUAL REPORT TO SHAREHOLDERS All portions of 2010 Annual Report to Shareholders
Table of Contents

Exhibit 13.1

FINANCIAL SECTION

THE BANK OF NEW YORK MELLON CORPORATION

2010 ANNUAL REPORT

TABLE OF CONTENTS

 

 

 

     Page  

Financial Summary

     2   

Management’s Discussion and Analysis of Financial Condition and Results of Operations:

  

Results of Operations:

  

General

     4   

Overview

     4   

2010 events

     5   

Summary of financial results

     5   

Fee and other revenue

     8   

Operations of consolidated asset management funds

     10   

Net interest revenue

     11   

Noninterest expense

     14   

Support agreements

     15   

Income taxes

     16   

Review of businesses

     16   

International operations

     29   

Critical accounting estimates

     32   

Consolidated balance sheet review

     38   

Liquidity and dividends

     51   

Commitments and obligations

     54   

Off-balance sheet arrangements

     55   

Capital

     55   

Risk management

     58   

Trading activities and risk management

     62   

Foreign exchange and other trading

     62   

Asset/liability management

     63   

Business continuity

     64   

Supplemental Information:

  

Explanation of Non-GAAP financial measures (unaudited)

     66   

Rate/volume analysis (unaudited)

     71   

Recent Accounting and Regulatory Developments

     72   

Selected Quarterly Data (unaudited)

     79   

Forward-looking Statements

     80   

Glossary

     82   

Report of Management on Internal Control Over Financial Reporting

     86   

Report of Independent Registered Public Accounting Firm

     87   
     Page  

Financial Statements:

  

Consolidated Income Statement

     88   

Consolidated Balance Sheet

     90   

Consolidated Statement of Cash Flows

     91   

Consolidated Statement of Changes in Equity

     92   

Notes to Consolidated Financial Statements:

  

Note 1—Summary of significant accounting and reporting policies

     95   

Note 2—Accounting changes and new accounting guidance

     102   

Note 3—Acquisitions and dispositions

     104   

Note 4—Discontinued operations

     105   

Note 5—Securities

     106   

Note 6—Loans and asset quality

     110   

Note 7—Goodwill and intangible assets

     115   

Note 8—Other assets

     117   

Note 9—Deposits

     118   

Note 10—Net interest revenue

     118   

Note 11—Other noninterest expense

     118   

Note 12—Restructuring charges

     119   

Note 13—Income taxes

     120   

Note 14—Extraordinary (loss)—consolidation of commercial paper conduit

     121   

Note 15—Long-term debt

     122   

Note 16—Securitizations and variable interest entities

     122   

Note 17—Shareholders’ equity

     125   

Note 18—Comprehensive results

     126   

Note 19—Stock–based compensation

     127   

Note 20—Employee benefit plans

     129   

Note 21—Company financial information

     135   

Note 22—Fair value of financial instruments

     138   

Note 23—Fair value measurement

     140   

Note 24—Fair value option

     148   

Note 25—Commitments and contingent liabilities

     149   

Note 26—Derivative instruments

     154   

Note 27—Review of businesses

     158   

Note 28—International operations

     161   

Note 29—Supplemental information to the Consolidated Statement of Cash Flows

     162   

Report of Independent Registered Public Accounting Firm

     163   

Directors, Senior Management and Executive Officers

     164   

Performance Graph

     165   

Corporate Information

     Inside back cover   
 


Table of Contents

The Bank of New York Mellon Corporation (and its subsidiaries)

 

Financial Summary

 

                                     

(dollar amounts in millions, except per common share

amounts and unless otherwise noted)

   2010     2009     2008      2007 (a)      2006 (b)  
Year ended Dec. 31                                 

Fee revenue

   $ 10,697      $ 10,108      $ 12,342       $ 9,254       $ 5,337   

Income of consolidated asset management funds (c)

     226        -        -         -         -   

Net securities gains (losses)

     27        (5,369     (1,628      (201      2   

Net interest revenue

     2,925        2,915        2,859         2,245         1,499   

Total revenue

     13,875        7,654        13,573         11,298         6,838   

Provision for credit losses

     11        332        104         (11      (20

Noninterest expense

     10,170        9,530        11,523         8,094         4,675   

Income (loss) from continuing operations before
income taxes

     3,694        (2,208     1,946         3,215         2,183   

Provision (benefit) for income taxes

     1,047        (1,395     491         987         694   

Net income (loss) from continuing operations

     2,647        (813     1,455         2,228         1,489   

Net income (loss) from discontinued operations

     (66     (270     14         10         1,371   

Extraordinary (loss) on consolidation of commercial paper conduits, net of tax

     -        -        (26      (180      -   

Net income (loss)

     2,581        (1,083     1,443         2,058         2,860   

Net (income) loss attributable to noncontrolling interests (c)

     (63     (1     (24      (19      (13

Redemption charge and preferred dividends

     -        (283     (33      -         -   

Net income (loss) applicable to common shareholders of
The Bank of New York Mellon Corporation

   $ 2,518      $ (1,367   $ 1,386       $ 2,039       $ 2,847   

Earnings per diluted common share applicable to common shareholders of The Bank of New York Mellon Corporation:

            

Net income (loss) from continuing operations

   $ 2.11      $ (0.93   $ 1.21       $ 2.35       $ 2.04   

Net income (loss) from discontinued operations

     (0.05     (0.23     0.01         0.01         1.91   

Extraordinary (loss), net of tax

     -        -        (0.02      (0.19      -   

Net income (loss) applicable to common stock

   $ 2.05  (d)    $ (1.16 ) (e)    $ 1.20       $ 2.17       $ 3.93  (d) 

At Dec. 31

            

Interest-earning assets

   $ 180,541      $ 161,537      $ 184,591       $ 144,883       $ 77,462   

Assets of operations

     232,493        212,224        237,512         197,656         103,206   

Total assets (c)

     247,259        212,224        237,512         197,656         103,206   

Deposits

     145,339        135,050        159,673         118,125         62,146   

Long-term debt

     16,517        17,234        15,865         16,873         8,773   

Preferred (Series B) stock

     -        -        2,786         -         -   

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

     32,354        28,977        25,264         29,403         11,429   

At Dec. 31

            

Assets under management (“AUM”) (in billions)

   $ 1,172      $ 1,115      $ 928       $ 1,121       $ 142   

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

     25.0        22.3        20.2         23.1         15.5   

Cross-border assets (in trillions)

     9.2        8.8        7.5         10.0         6.3   

Market value of securities on loan (in billions) (f)

     278        247        326         633         399   
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(b) Results for 2006 include legacy The Bank of New York Company, Inc. only. All legacy The Bank of New York Company, Inc. earnings per share and share-related data are presented in post-merger share count terms.
(c) Includes the impact of adopting ASC 810. See Operations of consolidated asset management funds and Note 2 of the Notes to Consolidated Financial Statements for additional information.
(d) Does not foot due to rounding.
(e) Diluted earnings per common share for 2009 was calculated using average basic shares. Adding back the dilutive shares would result in anti-dilution.
(f) Represents the securities on loan, both cash and non-cash, managed by the Asset Servicing business.

 

2     BNY Mellon


Table of Contents

Financial Summary (continued)

 

                                   

(dollar amounts in millions, except per common share

amounts and unless otherwise noted)

   2010     2009     2008     2007 (a)     2006 (b)  

Net income basis:

          

Return on common equity (c)

     8.1     N/M        5.0     11.0     27.6

Return on tangible common equity (c)

     25.6        N/M        20.7        29.3        50.7   

Return on average assets (c)

     1.06        N/M        0.67        1.49        2.67   

Continuing operations basis:

          

Return on common equity (c)(d)

     8.3     N/M        5.0     10.9     14.3

Non-GAAP adjusted (c)(d)

     9.8        9.3     14.2        13.6        15.5   

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

     26.3        N/M        20.5        29.2        26.7   

Non-GAAP adjusted (c)(d)

     28.0        32.1        48.7        33.6        28.0   

Pre-tax operating margin (d)

     27        N/M        14        28        32   

Non-GAAP adjusted (d)

     32        31        39        36        35   

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

     78        78        79        80        78   

Fee revenue per employee (based on average

headcount) (in thousands)

   $ 241      $ 241      $ 290      $ 291      $ 262   

Percentage of non-U.S. fee, net interest revenue
and income of consolidated asset management
funds, net of noncontrolling interests

     36     32     33 (e)      32     30

Net interest margin (on fully taxable equivalent basis)

     1.70        1.82        1.89  (e)      2.05        2.01   

Cash dividends per common share

   $ 0.36      $ 0.51      $ 0.96      $ 0.95      $ 0.91   

Common dividend payout ratio

     17.6     N/M        80.0     43.6     23.1

Dividend yield

     1.2     1.8     3.4     1.9     2.2

Closing common stock price per common share

   $ 30.20      $ 27.97      $ 28.33      $ 48.76      $ 41.73   

Market capitalization (in billions)

     37.5        33.8        32.5        55.9        29.8   

Book value per common share – GAAP (d)

     26.06        23.99        22.00        25.66        16.03   

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

     8.91        7.90        5.18        8.00        7.73   

Full-time employees

     48,000        42,200        42,500        41,200        22,400   

Year-end common shares outstanding (in thousands)

     1,241,530        1,207,835        1,148,467        1,145,983        713,079   

Average total equity to average total assets

     13.1     13.4     13.7     13.6     9.7

Capital ratios at Dec. 31 (f)

          

Tier 1 capital ratio

     13.4     12.1     13.2     9.3     8.2

Total (Tier 1 plus Tier 2) capital ratio

     16.3        16.0        16.9        13.2        12.5   

Leverage capital ratio

     5.8        6.5        6.9        6.5        6.7   

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

     13.1        13.7        10.6        14.9        11.1   

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

     5.8        5.2        3.8        5.2        5.7   

Tier 1 common equity to risk-weighted assets ratio (d)

     11.8        10.5        9.4        7.6        6.7   
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(b) Results for 2006 include legacy The Bank of New York Company, Inc. only. All legacy The Bank of New York Company, Inc. earnings per share and share-related data are presented in post-merger share count terms.
(c) Calculated before the extraordinary losses in 2008 and 2007.
(d) See Supplemental Information beginning on page 66 for a calculation of these ratios.
(e) Excluding the SILO/LILO charge, the percentage of non-U.S. fee and net interest revenue was 32% and the net interest margin was 2.21% for the year ended Dec. 31, 2008.
(f) Includes discontinued operations.

 

BNY Mellon     3


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

 

 

General

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

BNY Mellon’s actual results of future operations may differ from those estimated or anticipated in certain forward-looking statements contained herein for reasons which are discussed below and under the heading “Forward-looking Statements.” When used in this Annual Report, words such as “estimate,” “forecast,” “project,” “anticipate,” “confident,” “target,” “expect,” “intend,” “continue,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “may,” “will,” “strategy,” “synergies,” “opportunities,” “trends,” and words of similar meaning, signify forward-looking statements in addition to statements specifically identified as forward-looking statements.

Certain business terms used in this document are defined in the Glossary.

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

How we reported results

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

Throughout this Annual Report, 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 allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. 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 66 for a reconciliation of financial measures presented in accordance with GAAP to adjusted non-GAAP financial measures.

On July 1, 2007, The Bank of New York Company, Inc. and Mellon Financial Corporation (“Mellon Financial”) merged into The Bank of New York Mellon Corporation (together with its consolidated subsidiaries, “BNY Mellon”), with BNY Mellon being the surviving entity. Results for 2007 reflect six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. Results prior to 2007 reflect legacy The Bank of New York Company, Inc. only.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a leading manager and servicer of global financial assets, operating in 36 countries and serving more than 100 markets. Our global client base consists of the world’s largest financial institutions, corporations, government agencies, high-net-worth individuals, families, endowments and foundations and related entities. At Dec. 31, 2010, we had $25.0 trillion in assets under custody and administration and $1.17 trillion in assets under management, serviced $12.0 trillion in outstanding debt and, on average, processed $1.6 trillion of global payments per day.

BNY Mellon’s businesses benefit from the global growth in financial assets and 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 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; increasing the percentage of revenue and income derived from outside the U.S.; successful integration of acquisitions; competitive margins; and positive operating leverage. We have established Tier 1 capital as our principal capital measure and have established a targeted ratio of Tier 1 capital to risk-weighted assets of 10%. We expect to update our capital targets once Basel III guidelines are finalized.

 

 

4     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

2010 events

Acquisition of Global Investment Servicing, Inc.

On July 1, 2010, BNY Mellon acquired Global Investment Servicing, Inc. (“GIS”) for cash of $2.3 billion. GIS provides a comprehensive suite of products that includes subaccounting, fund accounting/administration, custody, managed account services and alternative investment services. GIS is based in Wilmington, Delaware, and has approximately 4,500 employees in locations across the U.S. and Europe.

At June 30, 2010, GIS had approximately $719 billion in assets under administration, including $449 billion in assets under custody. GIS is included in the Institutional Services Group for reporting purposes.

At Dec. 31, 2010, approximately $6.8 billion of deposits related to GIS are expected to transition to BNY Mellon by the end of 2011. Until the transition is completed, we will receive net economic value payments for these deposits.

Acquisition of BHF Asset Servicing GmbH

On Aug. 2, 2010, BNY Mellon acquired BHF Asset Servicing GmbH (“BAS”) for cash of EUR281 million (US$370 million). This transaction included the purchase of Frankfurter Service Kapitalanlage – Gesellschaft mbH (“FSKAG”), a wholly owned fund administration affiliate.

BAS and FSKAG became part of BNY Mellon’s Asset Servicing business. The combined business offers a full range of tailored solutions for investment companies, financial institutions and institutional investors in Germany with EUR569 billion (US$744 billion) in assets under custody and administration and depotbanking volume of EUR122 billion (US$159 billion) at acquisition.

The aforementioned acquisitions were accretive to earnings in 2010.

Asset Management joint venture in Shanghai

In July 2010, the China Securities Regulatory Commission authorized BNY Mellon and Western Securities to establish a joint venture fund management company in China. The new company, BNY Mellon Western Fund Management Company Limited (“BNY Mellon Western Fund Management”), is owned by BNY Mellon (49%) and Western Securities (51%).

BNY Mellon Western Fund Management manages domestic Chinese securities in a range of local retail fund products. BNY Mellon Western Fund Management also focuses on leveraging distribution within the Chinese banking and securities sectors.

Acquisition of I3 Advisors

On Sept. 1, 2010, BNY Mellon acquired I3 Advisors of Toronto, an independent wealth advisory company with more than C$3.8 billion in assets under advisement at acquisition. This was BNY Mellon’s first wealth management acquisition in Canada.

Common stock offering

In June 2010, BNY Mellon priced 25.9 million common shares in an underwritten public offering, at $27.00 per common share. In connection with this offering, BNY Mellon entered into a forward sale agreement with a forward purchaser, who borrowed and sold to the public through the underwriters shares of the Company’s common stock. In September 2010, BNY Mellon settled the forward sale agreement. At settlement, BNY Mellon received net proceeds of approximately $677 million. The proceeds were primarily used to fund the acquisition of GIS.

Adoption of new accounting standards

On Jan. 1, 2010, we adopted ASC 810, Consolidation issued by the Financial Accounting Standards Board (“FASB”). This statement requires ongoing assessments to determine whether an entity is a variable interest entity (“VIE”) and whether an enterprise is the primary beneficiary of a VIE and, accordingly, must consolidate the VIE in the enterprise’s financial statements. Adoption of this new statement increased consolidated total assets on our balance sheet at Dec. 31, 2010 by $14.6 billion for the consolidation of certain asset management funds, seed capital investments and securitizations. See below and Notes 2 and 16 to the Notes to Consolidated Financial Statements for additional information.

Summary of financial results

We reported net income from continuing operations applicable to the common shareholders of BNY Mellon of $2.6 billion, or $2.11 per diluted common share in 2010. This compares with a net loss from continuing operations of $1.1 billion, or $0.93 per diluted common share in 2009 and net income from continuing operations of $1.4 billion, or diluted earnings per common share of $1.21, in 2008.

 

 

BNY Mellon     5


Table of Contents

Results of Operations (continued)

 

 

In 2010, the net income applicable to common shareholders, including discontinued operations, totaled $2.5 billion, or $2.05 per diluted common share, compared with a net loss of $1.4 billion, or $1.16 per diluted common share, in 2009 and net income of $1.4 billion, or $1.20 per diluted common share, in 2008.

Highlights of 2010 results

 

  ·  

Assets under custody and administration (“AUC”) totaled a record $25.0 trillion at Dec. 31, 2010 compared with $22.3 trillion at Dec. 31, 2009. This increase was primarily driven by the acquisitions of GIS and BAS (collectively, “the Acquisitions”), higher market values and net new business. (See “Institutional Services Group” beginning on page 22.)

  ·  

Assets under management (“AUM”) totaled a record $1.17 trillion at Dec. 31, 2010 compared with $1.12 trillion at Dec. 31, 2009. The increase was driven by higher market values and net new business. (See “Asset and Wealth Management Group” beginning on page 18.)

  ·  

Securities servicing fee revenue totaled $5.6 billion in 2010 compared with $5.0 billion in 2009. Asset servicing revenue increased as a result of the Acquisitions, higher market values and net new business. The increase in clearing services revenue was primarily driven by the GIS acquisition. Issuer services revenue was flat compared to 2009. (See “Institutional Services Group” beginning on page 22.)

  ·  

Asset and wealth management fees, including performance fees totaled $2.9 billion in 2010 compared with $2.7 billion in 2009. The increase reflects higher market values globally, the full year impact of the Insight acquisition and new business, partially offset by a reduction in money market fees due to higher fee waivers and outflows in money markets. (See “Asset Management business” and “Wealth Management business” beginning on page 20.)

  ·  

Foreign exchange and other trading revenue totaled $886 million in 2010 compared with $1.0 billion in 2009. The decrease primarily resulted from both lower fixed income and derivatives trading revenue and lower foreign exchange revenue. (See “Fee and other revenue” beginning on page 8.)

  ·  

Investment income and other revenue totaled $467 million in 2010 compared with $337 million in 2009. The increase primarily reflects positive foreign currency translations and higher equity investment income. (See “Fee and other revenue” beginning on page 8.)

  ·  

Net interest revenue totaled $2.9 billion in both 2010 and 2009 as a higher yield on the restructured investment securities portfolio and higher interest-earning assets in 2010 were offset by lower spreads. (See “Net interest revenue” beginning on page 11.)

  ·  

The provision for credit losses was $11 million in 2010 compared with $332 million in 2009. The decrease in the provision primarily reflects a 66% decline in criticized assets compared with Dec. 31, 2009. (See “Asset quality and allowance for credit losses” beginning on page 45.)

  ·  

Noninterest expense totaled $10.2 billion in 2010 compared with $9.5 billion in 2009. The increase reflects the impact of the Acquisitions, the full-year impact of the Insight acquisition and higher compensation expense. (See “Noninterest expense” beginning on page 14.)

  ·  

Merger and integration (“M&I”) expenses were $139 million (pre-tax), or $0.07 per diluted common share in 2010 compared with $233 million (pre-tax), or $0.12 per diluted common share in 2009. (See “Noninterest expense” beginning on page 14.)

  ·  

The unrealized net of tax gain on our total investment securities portfolio was $150 million at Dec. 31, 2010 compared with a net of tax loss of $705 million at Dec. 31, 2009. The improvement in the valuation of the investment securities portfolio was due to the decline in interest rates and the tightening of credit spreads. (See “Consolidated balance sheet review” beginning on page 38.)

  ·  

Our Tier 1 capital ratio was 13.4% at Dec. 31, 2010, compared with 12.1% at Dec. 31, 2009. The increase primarily reflects earnings retention, the third quarter 2010 common equity issuance of $677 million and lower risk-weighted assets, partially offset by the impact of the Acquisitions. (See “Capital” beginning on page 55.)

Results for 2009

We reported a net loss from continuing operations applicable to the common shareholders of BNY Mellon of $1.1 billion, or $0.93 per diluted common share in 2009 and a net loss applicable to common shareholders, including discontinued operations, of $1.4 billion, or $1.16 per diluted common share. These results were primarily driven by:

 

  ·  

Investment securities (pre-tax) net losses of $5.4 billion in 2009 reflecting the restructuring of the investment securities portfolio.

 

 

6     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

  ·  

A provision for credit losses of $332 million in 2009, reflecting a higher number of downgrades and deterioration in certain industry sectors.

  ·  

M&I expenses of $233 million (pre-tax).

  ·  

An after-tax redemption charge of $196.5 million related to the repurchase of the Series B preferred stock issued to the U.S. Treasury as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program and $86.5 million for dividends/accretion on the Series B preferred stock.

Results for 2009 also included lower securities servicing revenue, lower asset and wealth management fees and lower foreign exchange and other trading revenue.

Results for 2008

Results for 2008 were significantly impacted by the merger with Mellon Financial. The merger increased asset servicing revenue, asset and wealth management revenue, foreign exchange and other trading revenue, treasury services revenue, distribution and servicing revenue and had a lesser impact on issuer services revenue. Noninterest expense was also significantly impacted by the merger. Results for 2008 also included:

 

  ·  

Securities write-downs of $1.6 billion (pre-tax), primarily relating to negative market assumptions in the housing industry;

  ·  

Support agreements provided to clients which resulted in an $894 million (pre-tax) charge;

  ·  

A charge relating to certain SILOs/LILOs of $489 million (pre-tax) as well as the settlement of several audit cycles;

  ·  

M&I expenses of $483 million (pre-tax);

  ·  

A restructuring charge of $181 million (pre-tax) related to global workforce reduction initiatives; and

  ·  

The consolidation of the assets of our bank-sponsored commercial paper conduit, Old Slip Funding, LLC (“Old Slip”) which resulted in an extraordinary after-tax loss of $26 million.

 

 

BNY Mellon     7


Table of Contents

Results of Operations (continued)

 

 

Fee and other revenue

 

Fee and other revenue

(dollars in millions unless otherwise noted)

   2010     2009      2008      2010
vs.
2009
     2009
vs.
2008
 

Securities servicing fees:

             

Asset servicing

   $ 2,939      $ 2,314       $ 2,581         27      (10 )% 

Securities lending revenue

     150        259         789         (42      (67

Issuer services

     1,460        1,463         1,685         -         (13

Clearing services

     1,005        962         1,065         4         (10

Total securities servicing fees

     5,554        4,998         6,120         11         (18

Asset and wealth management fees

     2,868  (a)      2,677         3,218         7         (17

Foreign exchange and other trading revenue

     886        1,036         1,462         (14      (29

Treasury services

     517        519         514         -         1   

Distribution and servicing

     210        326         421         (36      (23

Financing-related fees

     195        215         186         (9      16   

Investment income

     308  (a)      226         207         36         9   

Other

     159        111         214         43         (48

Total fee revenue – GAAP

     10,697        10,108         12,342         6         (18

Income of consolidated asset management funds, net of noncontrolling interests

     167  (a)      -         -         N/M         N/M   

Total fee revenue – Non-GAAP

     10,864        10,108         12,342         7         (18

Net securities gains (losses)

     27        (5,369      (1,628      N/M         N/M   

Total fee and other revenue – Non-GAAP (b)

   $ 10,891      $ 4,739       $ 10,714         130      (56 )% 

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

     78     78      79      

Market value of AUM at period end (in billions)

   $ 1,172      $ 1,115       $ 928         5      20

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

   $ 25.0      $ 22.3       $ 20.2         12      10
(a) Asset and wealth management fees exclude $125 million and investment income excludes $42 million as a result of consolidating certain asset management funds. These fees, net of noncontrolling interests, are included in income of consolidated asset management funds. This change resulted from adopting ASC 810, see “Operations of consolidated asset management funds” beginning on page 10.
(b) Total fee and other revenue on a GAAP basis was $10,724 million in 2010, $4,739 million in 2009 and $10,714 million in 2008. Total fee revenue from the Acquisitions was $480 million in 2010.
(c) See “Supplemental Information” beginning on page 66 for a calculation of this ratio.

 

Fee revenue

Fee revenue increased 6% in 2010 compared with 2009, primarily reflecting the impact of the Acquisitions, the full-year impact of the Insight acquisition, improved market values and new business, partially offset by lower foreign exchange and other trading revenue, lower distribution and servicing fees and lower securities lending revenue.

Securities servicing fees

Securities servicing fees were impacted by the following compared to 2009:

 

 

Asset servicing fees increased 27%, reflecting the impact of the Acquisitions, higher market values, net new business and asset inflows from existing clients.

 

Securities lending revenue decreased 42% as a result of narrower spreads and lower loan balances. In 2010, securities lending loan balances stabilized and spreads normalized.

 

Issuer services fees were flat as higher Depositary Receipts revenue resulting from higher issuance, corporate action and service fees was offset by lower Corporate Trust fee revenue, reflecting continued weakness in the structured debt markets and lower money market related distribution fees, and lower Shareowner Services revenue, reflecting lower corporate action fees.

 

Clearing services fees increased 4%, primarily as a result of the impact of the GIS acquisition and growth in mutual fund assets, partially offset by lower money market related distribution fees.

See the “Institutional Services Group” in “Review of businesses” for additional details.

 

 

8     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

Asset and wealth management fees

Asset and wealth management fees totaled $2.9 billion in 2010, an increase of 7% compared with 2009. Adjusted for performance fees and income from consolidated asset management funds, net of noncontrolling interests, these fees increased 11%, compared with 2009. The increase reflects improved market values, the Insight acquisition and the impact of net new business.

Total AUM for the Asset and Wealth Management Group were a record $1.17 trillion at Dec. 31, 2010, compared with $1.12 trillion at Dec. 31, 2009. The increase was primarily due to higher market values and net new business. Long-term inflows in 2010 were $48 billion and benefited from strength in institutional fixed income and global equity products and positive retail flows. The S&P 500 index was 1258 at Dec. 31, 2010, compared with 1115 at Dec. 31, 2009, a 13% increase.

See the “Asset and Wealth Management businesses” in “Review of businesses” for additional details regarding the drivers of asset and wealth management fees.

Foreign exchange and other trading revenue

Foreign exchange and other trading revenue, which is primarily reported in the Asset Servicing business, decreased $150 million, or 14%, from $1,036 million in 2009. In 2010, foreign exchange revenue totaled $787 million, a decrease of 7% compared with 2009, driven by lower volatility. Other trading revenue totaled $99 million in 2010, a decrease of 47% compared with 2009, largely due to lower fixed income and derivatives trading revenue.

Treasury services

Treasury services fees, which are primarily reported in the Treasury Services business, include fees related to funds transfer, cash management and liquidity management. Treasury services fees were flat compared with 2009.

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 business. These fees, which include 12b-1 fees, fluctuate with the overall level of net sales, the relative mix of sales between share classes and the funds’ market values.

The $116 million decrease in distribution and servicing fee revenue in 2010 compared with 2009 primarily reflects lower money market assets under management and higher redemptions in 2009. The impact of distribution and servicing fees on income in any one period can be more than offset by distribution and servicing expense paid to other financial intermediaries to cover their costs for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement.

Financing-related fees

Financing-related fees, which are primarily reported in the Treasury Services business, include capital markets fees, loan commitment fees and credit-related trade fees. Financing-related fees decreased $20 million from 2009 primarily as a result of lower capital markets and credit related fees, primarily reflecting our strategy to reduce targeted risk exposure.

Investment income

 

Investment income

(in millions)

   2010      2009      2008  

Corporate/bank-owned life insurance

   $ 150       $ 151       $ 145   

Lease residual gains

     69         90         89   

Equity investment income (loss)

     51         (28      54   

Private equity gains (losses)

     29         (18      1   

Seed capital gains (losses)

     9         31         (82

Total investment income

   $ 308       $ 226       $ 207   

Investment income, which is primarily reported in the Other and Asset Management businesses, 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 2009, primarily reflects higher equity investment revenue, driven by the write-down of certain equity investments in 2009, and higher private equity gains, partially offset by lower lease residual gains and lower seed capital gains.

 

 

BNY Mellon     9


Table of Contents

Results of Operations (continued)

 

 

Other revenue

 

Other revenue

(in millions)

   2010      2009      2008  

Asset-related gains

   $ 22       $ 76       $ 45   

Expense reimbursements from joint ventures

     37         31         29   

Economic value payments

     7         -         -   

Other income (loss)

     93         4         140   

Total other revenue

   $ 159       $ 111       $ 214   

Other revenue includes asset-related gains, expense reimbursements from joint ventures, economic value payments 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. Economic value payments relate to deposits from the GIS acquisition that have not yet transferred to BNY Mellon. Other income (loss) primarily includes foreign currency translation, other investments and various miscellaneous revenues.

Total other revenue increased compared with 2009, primarily reflecting higher foreign currency translations partially offset by lower asset-related gains. The decrease in asset-related gains compared with 2009 primarily reflects a gain on the sale of the VISA shares recorded in 2009.

Net investment securities gains (losses)

Net investment securities gains totaled $27 million in 2010 compared with losses totaling $5.4 billion in 2009. The loss in 2009 primarily resulted from a charge related to restructuring the investment securities portfolio.

The following table details investment securities gains (losses) by type of security. See “Consolidated balance sheet review” for further information on the investment securities portfolio.

 

Net securities gains (losses)                  

(in millions)

   2010      2009      2008  

Alt-A RMBS

   $ (13    $ (3,113    $ (1,236

Prime RMBS

     -         (1,008      (12

Subprime RMBS

     (4      (322      (12

European floating rate notes

     (3      (269      -   

Home equity lines of credit

     -         (205      (104

Commercial MBS

     -         (89      -   

Grantor Trust

     -         (39      -   

Credit cards

     -         (26      -   

ABS CDOs

     -         (23      (122

Other

     47         (275      (142

Total net securities gains (losses)

   $ 27       $ (5,369    $ (1,628

2009 compared with 2008

Fee and other revenue decreased in 2009 compared with 2008, primarily reflecting net securities losses recorded in 2009. Net securities losses totaled $5.4 billion in 2009 compared with losses of $1.6 billion in 2008. The loss in 2009 primarily resulted from a charge related to restructuring the investment securities portfolio.

Fee and other revenue was also impacted by the following:

 

 

Asset servicing revenue decreased, primarily due to lower average market values in 2009, lower client activity and a stronger U. S. dollar, partially offset by new business;

 

Securities lending revenue decreased, primarily as a result of lower spreads and lower loan balances;

 

Issuer services revenue decreased as a result of lower Depositary Receipts revenue, lower Corporate Trust fees and lower Shareowner Services revenue;

 

Asset and wealth management revenue decreased due to lower average global market values in 2009, lower money market related fees due to increased fee waivers and short-term outflows, and a stronger U. S. dollar;

 

Foreign exchange and other trading revenue decreased primarily as a result of lower foreign exchange revenue driven by lower volumes and a lower valuation of credit default swaps;

 

Other revenue decreased primarily reflecting a lower level of foreign currency translation.

Operations of consolidated asset management funds

On Jan. 1, 2010, we adopted ASC 810. See Notes 2 and 16 in the Notes to Consolidated Financial Statements for additional information. Adoption of this standard resulted in an increase in consolidated total assets on our balance sheet at Dec. 31, 2010, of $14.6 billion, or an increase of approximately 7% from Dec. 31, 2009.

We also separately disclosed the following on the income statement.

 

 

10     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

Income from consolidated asset management funds,
net of noncontrolling interests

         

(in millions)

   2010      2009      2008  

Operations of consolidated asset management funds

   $ 226       $ -       $ -   

Noncontrolling interest of consolidated asset management funds

     59         -         -   

Income from consolidated asset management funds, net of noncontrolling interests

   $ 167       $ -       $ -   

Prior to the adoption of ASC 810 on Jan. 1, 2010, income from consolidated asset management funds, net of noncontrolling interests would have been disclosed on the income statement as follows.

 

(in millions)    2010      2009      2008  

Asset and wealth management revenue

   $ 125       $ -       $ -   

Investment income

     42         -         -   

Total

   $ 167       $ -       $ -   
 

 

Net interest revenue

 

Net interest revenue

(dollars in millions)

   2010      2009      2008      2010
vs.
2009
    2009
vs.
2008
 

Net interest revenue (non-FTE)

   $ 2,925       $ 2,915       $ 2,859         -     2

Tax equivalent adjustment

     19         18         21         N/M        N/M   

Net interest revenue (FTE) – Non-GAAP

     2,944         2,933         2,880         -     2

SILO/LILO charges

     -         -         489         N/M        N/M   

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

   $ 2,944       $ 2,933       $ 3,369         -     (13 )% 

Average interest-earning assets

   $ 172,793       $ 160,955       $ 152,201         7     6

Net interest margin (FTE)

     1.70      1.82      1.89      (12 )bps      (7 )bps 

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

     1.70      1.82      2.21      (12 )bps      (39 )bps 

 

Net interest revenue totaled $2.9 billion in 2010, essentially unchanged compared with 2009. Net interest revenue in 2010 reflects a higher yield on the restructured investment securities portfolio, net of lost interest on the securities sold and higher average interest-earning assets, primarily offset by narrower spreads.

The net interest margin was 1.70% in 2010 compared with 1.82% in 2009. The lower net interest margin in 2010 was driven by lower spreads and higher interest-earning assets in a lower-rate environment, which more than offset the higher yield on the restructured investment securities portfolio.

Average interest-earning assets were $172.8 billion in 2010, compared with $161.0 billion in 2009. The increase in 2010 from 2009 was driven by higher client deposit levels in 2010. Average total securities increased to $60.9 billion in 2010, up from $53.2 billion in 2009, reflecting our strategy to invest in high-quality, government-guaranteed securities.

2009 compared with 2008

Net interest revenue was $2.9 billion in 2009, essentially unchanged from 2008, which included a $489 million charge related to SILO/LILOs. Excluding the SILO/LILO charges, net interest revenue decreased compared with 2008 as low interest rates resulted in a decline in the value of interest-free balances and lower spreads, offset in part by an increase in average interest-earning assets driven by client deposits.

The net interest margin was 1.82% in 2009 compared with 1.89% in 2008, which was negatively impacted by the SILO/LILO charges. The net interest margin, excluding the SILO/LILO charges, was 2.21% in 2008. In 2009, net interest revenue and the related margin were impacted by persistently low interest rates globally.

 

 

BNY Mellon     11


Table of Contents

Results of Operations (continued)

 

 

   
Average balances and interest rates    2010  
(dollar amounts in millions, presented on an FTE basis)    Average balance     Interest     Average rates  

Assets

      

Interest-earning assets:

      

Interest-bearing deposits with banks (primarily foreign banks)

   $ 56,679      $ 554        0.98

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

     14,253        49        0.34   

Federal funds sold and securities under resale agreements

     4,660        64        1.37   

Margin loans

     5,900        88        1.50   

Non-margin loans:

      

Domestic offices:

      

Consumer

     5,485        231        4.21   

Commercial

     15,305        356        2.33   

Foreign offices

     9,615        151        1.57   

Total non-margin loans

     30,405        738  (a)      2.43   

Securities:

      

U.S. government obligations

     7,857        119        1.50   

U.S. government agency obligations

     20,140        674        3.34   

State and political subdivisions

     627        41        6.48   

Other securities:

      

Domestic offices

     14,683        981        6.68   

Foreign offices

     14,906        173        1.16   

Total other securities

     29,589        1,154        3.90   

Trading securities:

      

Domestic offices

     2,568        71        2.79   

Foreign offices

     115        -        0.26   

Total trading securities

     2,683        71        2.68   

Total securities

     60,896        2,059        3.38   

Total interest-earning assets

   $ 172,793      $ 3,552  (b)      2.06

Allowance for loan losses

     (522    

Cash and due from banks

     3,832       

Other assets

     47,978       

Assets of discontinued operations

     404  (c)     

Assets of consolidated asset management funds

     13,355                   

Total assets

   $ 237,840                   

Liabilities and equity

      

Interest-bearing deposits:

      

Domestic offices:

      

Money market rate accounts

   $ 25,490      $ 26        0.10

Savings

     1,396        4        0.26   

Certificates of deposits of $100,000 & over

     368        -        0.17   

Other time deposits

     5,622        16        0.27   

Total domestic

     32,876        46        0.14   

Foreign offices:

      

Banks

     5,364        18        0.33   

Government and official institutions

     1,423        1        0.05   

Other

     64,567        129        0.20   

Total foreign

     71,354        148        0.21   

Total interest-bearing deposits

     104,230        194        0.19   

Federal funds purchased and securities sold under repurchase agreements

     5,356        43        0.80   

Trading liabilities

     1,630        21        1.32   

Other borrowed funds:

      

Domestic offices

     1,386        41        2.97   

Foreign offices

     677        3        0.39   

Total other borrowed funds

     2,063        44        2.12   

Payables to customers and broker-dealers

     6,439        6        0.09   

Long-term debt

     16,673        300        1.80   

Total interest-bearing liabilities

   $ 136,391      $ 608        0.45

Total noninterest-bearing deposits

     35,208       

Other liabilities

     21,767       

Liabilities of discontinued operations

     404  (c)     

Liabilities of consolidated asset management funds

     12,218                   

Total liabilities

     205,988       

Noncontrolling interests

     752       

The Bank of New York Mellon Corporation shareholders’ equity

     31,100                   

Total liabilities, temporary equity and permanent equity

   $ 237,840                   

Net interest margin – taxable equivalent basis

         1.70

Percentage of assets attributable to foreign offices (d)

     43    

Percentage of liabilities attributable to foreign offices

     36                   
(a) Includes fees of $46 million in 2010. Non-accrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest.
(b) The tax equivalent adjustment was $19 million in 2010, and is based on the federal statutory tax rate (35%) and applicable state and local taxes.
(c) Average balances and rates are impacted by allocations made to match assets of discontinued operations with liabilities of discontinued operations.
(d) Includes the Cayman Islands branch office.

 

12     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

     
Average balances and interest rates (continued)    2009     2008  
(dollar amounts in millions, presented on an FTE basis)    Average
balance
    Interest     Average
rates
    Average
balance
    Interest     Average
rates
 

Assets

            

Interest-earning assets:

            

Interest-bearing deposits with banks (primarily foreign banks)

   $ 55,797      $ 683        1.22   $ 46,473      $ 1,753        3.77

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

     11,938        43        0.36        4,754        27        0.56   

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

     317        9        2.95        2,348        71        3.03   

Federal funds sold and securities under resale agreements

     3,238        31        0.97        6,494        149        2.30   

Margin loans

     4,340        69        1.59        5,427        183        3.37   

Non-margin loans:

            

Domestic offices:

            

Consumer

     5,417        262        4.83        6,081        307        5.05   

Commercial

     15,061        362        2.41        20,926        157        0.75  (a) 

Foreign offices

     11,606        250        2.15        14,172        563        3.97   

Total non-margin loans

     32,084        874  (b)      2.72        41,179        1,027  (b)      2.49  (a) 

Securities:

            

U.S. Government obligations

     3,218        50        1.54        596        18        3.03   

U.S. Government agency obligations

     16,019        592        3.70        10,846        479        4.42   

State and political subdivisions

     680        47        6.92        744        55        7.20   

Other securities:

            

Domestic offices

     20,444        832        4.07        23,124        1,249        5.41   

Foreign offices

     10,887        244        2.24        8,386        463        5.52   

Total other securities

     31,331        1,076        3.43        31,510        1,712        5.44   

Trading securities

            

Domestic offices

     1,934        50        2.57        1,696        66        3.92   

Foreign offices

     59        1        1.40        134        5        3.44   

Total trading securities

     1,993        51        2.54        1,830        71        3.88   

Total securities

     53,241        1,816        3.41        45,526        2,335        5.13   

Total interest-earning assets

   $ 160,955      $ 3,525  (c)      2.19   $ 152,201      $ 5,545  (c)      3.64 (a) 

Allowance for loan losses

     (420         (314    

Cash due from banks

     3,638            6,190       

Other assets

     45,766            49,439       

Assets of discontinued operations

     2,188  (d)                      2,441  (d)                 

Total assets

   $ 212,127                      $ 209,957                   

Liabilities and equity

            

Interest-bearing deposits:

            

Domestic offices:

            

Money market rate accounts

   $ 18,619      $ 18        0.09   $ 13,882      $ 134        0.96

Savings

     1,136        5        0.47        966        12        1.22   

Certificates of deposit of $100,000 & over

     961        8        0.85        2,041        58        2.83   

Other time deposits

     4,922        23        0.47        6,264        124        1.98   

Total domestic

     25,638        54        0.21        23,153        328        1.42   

Foreign offices:

            

Banks

     5,182        13        0.25        11,801        184        1.56   

Government and official institutions

     866        1        0.09        1,420        25        1.75   

Other

     66,520        103        0.15        55,539        1,228        2.21   

Total foreign

     72,568        117        0.16        68,760        1,437        2.09   

Total interest-bearing deposits

     98,206        171        0.17        91,913        1,765        1.92   

Federal funds purchased and securities under repurchase agreements

     2,695        -        -        4,624        46        1.00   

Trading liabilities

     1,283        11        0.88        585        4        0.77   

Other borrowed funds:

            

Domestic offices

     980        26        2.68        1,704        57        3.32   

Foreign offices

     592        5        0.85        970        29        3.00   

Total other borrowed funds

     1,572        31        1.99        2,674        86        3.21   

Borrowings from the Federal Reserve related to ABCP

     317        7        2.25        2,348        53        2.25   

Payables to customers and broker-dealers

     5,262        6        0.12        5,495        69        1.25   

Long-term debt

     16,893        366        2.17        16,353        642        3.93   

Total interest-bearing liabilities

   $ 126,228      $ 592        0.47   $ 123,992      $ 2,665        2.15

Total noninterest-bearing deposits

     36,446            33,724       

Other liabilities

     18,760            20,979       

Liabilities of discontinued operations

     2,188  (d)                      2,441  (d)                 

Total liabilities

     183,622            181,136       

Total equity

     28,505                        28,821                   

Total liabilities and equity

   $ 212,127                      $ 209,957                   

Net interest margin – taxable equivalent basis

         1.82         1.89 (a) 

Percentage of assets attributable to foreign offices (e)

     37         35    

Percentage of liabilities attributable to foreign offices

     34                        36                   
(a) Includes the impact of the SILO/LILO charge in 2008. Excluding this charge, the domestic offices’ non-margin commercial loan rate would have been 3.09%, the total non-margin loan rate would have been 3.68%, the interest-earning assets rate would have been 3.96% and the net interest margin would have been 2.21%.
(b) Includes fees of $43 million in 2009 and $35 million in 2008. Non-accrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest.
(c) The tax equivalent adjustments were $18 million in 2009 and $21 million in 2008, and are based on the federal statutory tax rate (35%) and applicable state and local taxes.
(d) Average balances and rates are impacted by allocations made to match assets of discontinued operations with liabilities of discontinued operations.
(e) Includes the Cayman Islands branch office.

 

BNY Mellon     13


Table of Contents

Results of Operations (continued)

 

 

Noninterest expense

 

Noninterest expense    2010      2009      2008     

2010

vs.
2009

    

2009

vs.
2008

 
(dollars in millions)               

Staff:

              

Compensation

   $ 3,237       $ 2,985       $ 3,242         8      (8 )% 

Incentives

     1,193         996         1,247         20         (20

Employee benefits

     785         719         700         9         3   

Total staff

     5,215         4,700         5,189         11         (9

Professional, legal and other purchased services

     1,099         1,017         1,021         8         -   

Net occupancy

     588         564         570         4         (1

Software

     410         367         331         12         11   

Distribution and servicing

     377         393         517         (4      (24

Furniture and equipment

     315         309         323         2         (4

Business development

     271         214         278         27         (23

Subcustodian

     247         203         255         22         (20

Other

     903         908         1,008         (1      (10

Subtotal

     9,425  (a)       8,675         9,492         9         (9

Special litigation reserves

     164         N/A         N/A         N/M         N/M   

Support agreement charges

     (7      (15      894         N/M         N/M   

FDIC special assessment

     -         61         -         N/M         N/M   

Amortization of intangible assets

     421         426         473         (1      (10

Restructuring charges

     28         150         181         (81      (17

Merger and integration expenses

     139         233         483         (40      (52

Total noninterest expense

   $ 10,170       $ 9,530       $ 11,523         7      (17 )% 

Total staff expense as a percentage of total revenue (b)

     38      61      38      

Full-time employees at period end

     48,000         42,200         42,500         14      (1 )% 
(a) Noninterest expense from the Acquisitions was $381 million in 2010.
(b) Excluding investment securities gains (losses) and the 2008 SILO/LILO charge, total staff expense as a percentage of total revenue (Non-GAAP) was 38% in 2010, 36% in 2009 and 33% in 2008.

 

Total noninterest expense increased $640 million, or 7%, compared with 2009, reflecting the impact of the Acquisitions and the full-year impact of the Insight acquisition, which impacted virtually all expense categories, higher incentive, litigation, business development and software expenses.

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised approximately 55% of total noninterest expense in 2010, excluding special litigation reserves, support agreement charges, amortization of intangible assets, restructuring charges 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

  ·  

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

The increase in staff expense compared with 2009 reflects the impact of the Acquisitions and the full-year impact of the Insight acquisition, higher incentive expense primarily in the Asset Management business and the annual merit increase, which was effective in the second quarter of 2010. The higher incentive expense primarily resulted from increased earnings, reflecting higher market levels, increased performance fees and the impact of adjusting compensation to market levels.

 

 

14     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

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 special litigation reserves, support agreement charges, FDIC special assessment, amortization of intangible assets, restructuring charges and M&I expense totaled $4.2 billion in 2010 compared with $4.0 billion in 2009. The increase primarily reflects the impact of the Acquisitions and the full-year impact of the Insight acquisition. Also impacting noninterest expense in 2010 compared with 2009 were higher professional, legal and other purchased services, higher software expense, higher business development expense in support of new business growth, higher volume driven subcustodian expense and higher litigation expense.

Given the severity of the economic downturn, the financial services industry has seen a continuing increase in the level of litigation activity. As a result, we anticipate litigation costs to continue to exceed historic trend levels. For additional information on litigation matters, see Note 25 of the Notes to Consolidated Financial Statements.

For additional information on support agreements, see the “Support agreements” section.

For additional information on restructuring charges, see Note 12 of the Notes to Consolidated Financial Statements.

In 2010, we incurred $139 million of M&I expenses related to the Acquisitions and the merger with Mellon Financial.

The Financial Services Compensation Scheme (“FSCS”) is the UK’s compensation fund of last resort for customers of authorized financial services firms. It covers business conducted by firms authorized by the Financial Services Authority (“FSA”) in the UK. Due to the insolvency of a UK investment firm in 2009, BNY Mellon and other financial institutions doing business in the UK expect to incur an additional FSCS levy in 2011. BNY Mellon expects the FSCS levy to slightly increase noninterest expense in 2011.

2009 compared with 2008

Total noninterest expense was $9.5 billion in 2009, a decrease of $2.0 billion or 17% compared with 2008. The decrease primarily reflects lower support agreement charges, strong expense control, merger-related synergies and a stronger U.S. dollar in 2009. Noninterest expense in 2009 also included the following activity:

 

  ·  

A pre-tax restructuring charge of $139 million related to our global location strategy and $11 million associated with our workforce reduction program announced in 2008.

  ·  

M&I expenses of $233 million related to the merger with Mellon Financial comprised of the following: integration/conversion costs ($160 million); personnel related costs ($57 million); and one-time costs ($16 million).

  ·  

A special assessment of $61 million paid to the FDIC.

Support agreements

In 2008, we voluntarily entered into agreements under which we committed to provided support to clients invested in money market mutual funds, cash sweep funds and similar collective funds, managed by our affiliates, as well as clients invested in funds within our securities lending business. These support agreements were designed to enable these funds to continue to operate at a stable net asset value.

In 2010, we recorded a credit to support agreement charges of $7 million (pre-tax). This credit was driven by a reduction in the support agreement reserve primarily due to improved pricing of Lehman securities, partially offset by a decision to support five Dreyfus money market funds primarily for a realized loss which arose from the financial crisis. At Dec. 31, 2010, the value of Lehman securities increased to approximately 23.0% from 19.5% at Dec. 31, 2009.

At Dec. 31, 2010, our additional potential maximum exposure to support agreements was approximately $116 million, after deducting the reserve, assuming the securities subject to these agreements being valued at zero and the NAV of the related funds declining below established thresholds. This exposure includes agreements covering Lehman securities ($103 million), as well as other client support agreements ($13 million).

 

 

BNY Mellon     15


Table of Contents

Results of Operations (continued)

 

 

Income taxes

BNY Mellon recorded an income tax provision, on a continuing operations basis, of $1.0 billion (28.3% effective tax rate) in 2010 compared with an income tax benefit of $1.4 billion (63.2% effective tax rate) in 2009 and an income tax provision of $491 million (25.2% effective tax rate) in 2008. The 2010 effective tax rate on our continuing operations reflects a higher proportion of income earned in lower-taxed foreign jurisdictions. The 2009 effective tax rate on our loss from continuing operations was higher than the 35% federal statutory rate because of additional tax benefits from a tax loss on mortgages, the final SILO/LILO tax settlement, investment securities losses and a higher proportion of lower-taxed foreign earnings. Excluding the impact of restructuring charges, M&I expenses and special litigation reserves, the effective tax rate was 29.0% in 2010. Excluding the impact of investment securities losses, M&I expenses, FDIC special assessment, restructuring charges and benefits from discrete tax items, the effective tax rate for 2009 was 29.8%. Excluding the impact of investment securities losses, M&I expenses, restructuring charges, support agreement charges and the SILO/LILO/tax settlement, the effective tax rate for 2008 was 32.8%.

We expect the effective tax rate to be approximately 30-31% in 2011.

Review of businesses

The results of our businesses are presented and analyzed as follows:

 

  ·  

Asset Management

  ·  

Wealth Management

  ·  

Asset Servicing

  ·  

Issuer Services

  ·  

Clearing Services

  ·  

Treasury Services

  ·  

Other

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

For information on the accounting principles of our businesses, the primary types of revenue generated by each business and how our businesses are presented and analyzed, see Note 27 of the Notes to Consolidated Financial Statements.

Information on our businesses 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.

The results of our businesses in 2010 were driven by the following factors. Higher market values and new business benefited the Asset and Wealth management businesses, while increases in the Issuer Services business from higher customer deposit balances and Depositary Receipts revenue were offset by the continued weakness in the structured debt markets. Results in Asset Servicing benefited from the Acquisitions, higher market values and new business but were negatively impacted by lower foreign currency volatility, as well as narrower spreads and lower loan balances in securities lending. Money market fee waivers also continue to suppress results in Asset Management, Issuer and Clearing Services, while lower New York Stock Exchange (“NYSE”) share volumes, down 19% in 2010, continued to impact results in Clearing Services. Compared with 2009, net interest revenue increased in several businesses, driven by the higher yield related to the restructured investment securities portfolio and a higher level of interest-earning assets, partially offset by low spreads resulting from the lower interest rate environment.

Noninterest expense increased compared with 2009 in Asset Servicing and Clearing Services primarily as a result of the Acquisitions. Noninterest expense also increased compared with 2009 in Asset Management, reflecting higher incentive expense resulting from increased performance fees and the full-year impact of the Insight acquisition.

Net securities gains (losses) and restructuring charges are recorded in the Other business. In addition, M&I expenses are a corporate level item and are therefore recorded in the Other business.

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

 

 

16     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

Market indices                                  Increase/(Decrease)  
      2010        2009        2008        2010 vs. 2009      2009 vs. 2008  

S&P 500 Index (a)

     1258           1115           903           13      23

S&P 500 Index – daily average

     1140           948           1221           20         (22

FTSE 100 Index (a)

     5900           5413           4434           9         22   

FTSE 100 Index – daily average

     5468           4568           5368           20         (15

NASDAQ Composite Index (a)

     2653           2269           1577           17         44   

Lehman Brothers Aggregate Bondsm Index (a)

     323           301           275           7         9   

MSCI EAFE® Index (a)

     1658           1581           1237           5         28   

NYSE Share Volume (in billions)

     445           549           660           (19      (17

NASDAQ Share Volume (in billions)

     552           564           577           (2      (2
(a) Period end.

 

On a daily average basis, the S&P 500 Index and the FTSE 100 Index increased 20% in 2010 versus 2009. The period end S&P 500 Index increased 13% at Dec. 31, 2010, versus Dec. 31, 2009. The period end FTSE 100 Index increased 9% at Dec. 31, 2010, versus Dec. 31, 2009. The period end NASDAQ Composite Index increased 17% at Dec. 31, 2010, versus Dec. 31, 2009. NYSE and NASDAQ share volumes decreased 19% and 2% respectively in 2010 compared with 2009.

The changes in the value of market indices primarily impact fee revenue in the Asset and Wealth Management businesses and to a lesser extent our securities servicing businesses.

At Dec. 31, 2010, 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 to 2% and fully diluted earnings per

common share on a continuing operations basis by $0.06-$0.07. 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 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 and money market fund related distribution fees. At Dec. 31, 2010, we estimate that an immediate 100 basis point increase in overnight interest rates from current rates would increase annual pre-tax income by approximately $450 million. Both fee revenue and net interest revenue would benefit from this increase.

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

 

 

 

For the year ended

Dec. 31, 2010
(dollar amounts

in millions)

  Asset
Management
    Wealth
Management
    Total Asset
and Wealth
Management
Group
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Group
    Other     Total
Continuing
Operations
 

Fee and other revenue

  $ 2,644  (a)    $ 590      $ 3,234      $ 3,809      $ 1,576      $ 1,152      $ 841      $ 7,378      $ 279      $ 10,891  (a) 

Net interest revenue

    (1     227        226        864        903        368        632        2,767        (68     2,925   

Total revenue

    2,643        817        3,460        4,673        2,479        1,520        1,473        10,145        211        13,816   

Provision for credit losses

    -        2        2        -        -        -        -        -        9        11   

Noninterest expense

    2,082        611        2,693        3,399        1,354        1,138        769        6,660        817        10,170   

Income before taxes

  $ 561  (a)    $ 204      $ 765      $ 1,274      $ 1,125      $ 382      $ 704      $ 3,485      $ (615   $ 3,635  (a) 

Pre-tax operating margin (b)

    21     25     22     27     45     25     48     34     N/M        26

Average assets

  $ 26,307      $ 10,618      $ 36,925      $ 66,678      $ 51,623      $ 21,361      $ 26,519      $ 166,181      $ 34,330      $ 237,436  (c) 

Excluding amortization of intangible assets:

                   

Noninterest expense

  $ 1,881      $ 575      $ 2,456      $ 3,352      $ 1,271      $ 1,109      $ 746      $ 6,478      $ 815      $ 9,749   

Income before taxes

    762        240        1,002        1,321        1,208        411        727        3,667        (613     4,056   

Pre-tax operating margin (b)

    29     29     29     28     49     27     49     36     N/M        29
(a) Total fee and other revenue and income before taxes for 2010 includes income from consolidated asset management funds of $226 million net of income attributable to noncontrolling interests of $59 million. The net of these income statement line items of $167 million is included above in fee and other revenue.
(b) Income before taxes divided by total revenue.
(c) Including average assets of discontinued operations of $404 million for 2010, consolidated average assets were $237,840 million.

 

BNY Mellon     17


Table of Contents

Results of Operations (continued)

 

 

For the year ended Dec. 31, 2009

                                                                

 

(dollar amounts in millions)

  Asset
Management
    Wealth
Management
    Total Asset
and Wealth
Management
Group
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Group
    Other     Total
Continuing
Operations
 

Fee and other revenue

  $ 2,247      $ 578      $ 2,825      $ 3,406      $ 1,617      $ 1,190      $ 835      $ 7,048      $ (5,134   $ 4,739   

Net interest revenue

    32        194        226        894        768        340        613        2,615        74        2,915   

Total revenue

    2,279        772        3,051        4,300        2,385        1,530        1,448        9,663        (5,060     7,654   

Provision for credit losses

    -        1        1        -        -        -        -        -        331        332   

Noninterest expense

    1,915        583        2,498        2,956        1,305        1,021        772        6,054        978        9,530   

Income before taxes

  $ 364      $ 188      $ 552      $ 1,344      $ 1,080      $ 509      $ 676      $ 3,609      $ (6,369   $ (2,208

Pre-tax operating margin (a)

    16     24     18     31     45     33     47     37     N/M        N/M   

Average assets

  $ 12,564      $ 9,276      $ 21,840      $ 60,842      $ 50,752      $ 18,455      $ 25,971      $ 156,020      $ 32,079      $ 209,939  (b) 

Excluding amortization of intangible assets:

                   

Noninterest expense

  $ 1,696      $ 538      $ 2,234      $ 2,928      $ 1,224      $ 994      $ 747      $ 5,893      $ 977      $ 9,104   

Income before taxes

    583        233        816        1,372        1,161        536        701        3,770        (6,368     (1,782

Pre-tax operating margin (a)

    26     30     27     32     49     35     49     39     N/M        N/M   
(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $2,188 million in 2009, consolidated average assets were $212,127 million.

 

For the year ended Dec. 31, 2008

                                                                

 

(dollar amounts in millions)

  Asset
Management
    Wealth
Management
    Total Asset
and Wealth
Management
Group
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Total
Institutional
Services
Group
    Other     Total
Continuing
Operations
 

Fee and other revenue

  $ 2,794      $ 624      $ 3,418      $ 4,429      $ 1,859      $ 1,292      $ 956      $ 8,536      $ (1,240   $ 10,714   

Net interest revenue

    75        200        275        1,086        710        321        730        2,847        (263     2,859   

Total revenue

    2,869        824        3,693        5,515        2,569        1,613        1,686        11,383        (1,503     13,573   

Provision for credit losses

    -        -        -        -        -        -        -        -        104        104   

Noninterest expense

    2,641        639        3,280        3,784        1,416        1,130        831        7,161        1,082        11,523   

Income before taxes

  $ 228      $ 185      $ 413      $ 1,731      $ 1,153      $ 483      $ 855      $ 4,222      $ (2,689   $ 1,946   

Pre-tax operating margin (a)

    8     23     11     31     45     30     51     37     N/M        14

Average assets

  $ 13,267      $ 10,044      $ 23,311      $ 59,150      $ 35,169      $ 18,358      $ 25,603      $ 138,280      $ 45,925      $ 207,516  (b) 

Excluding amortization of intangible assets:

                   

Noninterest expense

  $ 2,386      $ 585      $ 2,971      $ 3,760      $ 1,335      $ 1,104      $ 804      $ 7,003      $ 1,076      $ 11,050   

Income before taxes

    483        239        722        1,755        1,234        509        882        4,380        (2,683     2,419   

Pre-tax operating margin (a)

    17     29     20     32     48     32     52     38     N/M        18
(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $2,441 million in 2008, consolidated average assets were $209,957 million in 2008.

 

Asset and Wealth Management Group

Asset and Wealth Management fee revenue is dependent on the overall level and mix of AUM and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. Assets under management were a record $1.17 trillion at Dec. 31, 2010, an increase of 5% compared with $1.12 trillion at Dec. 31, 2009. The increase primarily reflects higher market values and new business, offset in part by money market net outflows.

The overall level of AUM for a given period is determined by:

 

  ·  

the beginning level of AUM;

  ·  

the net flows of new assets during the period resulting from new business wins and existing client enrichments reduced by the loss of clients and withdrawals; and

  ·  

the impact of market price appreciation or depreciation, the impact of any acquisitions or divestitures and foreign exchange rates.

 

 

18     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

These components are shown in the changes in market value of AUM table below. The mix of AUM is determined principally by client asset

allocation decisions among equities, fixed income, alternative investments and overlay, and money market products. The trend of this mix is shown in the AUM at period end, by product type, table below.

Managed equity assets typically generate higher percentage fees than money market and fixed-income assets. Also, actively managed assets typically generate higher management fees than indexed or passively managed assets of the same type.

Management fees are typically subject to fee schedules based on the overall level of assets managed for a single client or by individual asset class and

style. This is most prevalent for institutional assets where amounts we manage for individual clients are typically large.

A key driver of organic growth in asset and wealth management fees is the amount of net new AUM flows. Overall market conditions are also key drivers, with a significant long-term economic driver being the growth of global financial assets.

Performance fees, included in asset and wealth management fee revenue on the income statement, are earned in the Asset and Wealth Management Group. These fees are generally calculated as a percentage of a portfolio’s performance in excess of a benchmark index or a peer group’s performance.

 

 

AUM at period end, by product type                                              
(in billions)    2010        2009        2008        2007      2006 (a)  

Equity securities

   $ 368         $ 339         $ 270         $ 460       $ 39   

Money market

     341           360           402           296         38   

Fixed income securities

     249           235           168           218         21   

Alternative investments and overlay

     214           181           88           147         44   

Total AUM

   $ 1,172         $ 1,115         $ 928         $ 1,121       $ 142   
(a) Results for 2006 include legacy The Bank of New York Company, Inc. only.

 

AUM at period end, by client type

(in billions)

   2010        2009        2008        2007      2006 (a)  

Institutional

   $ 639         $ 611         $ 445         $ 671       $ 105   

Mutual funds

     454           416           400           349         15   

Private client

     79           88           83           101         22   

Total AUM

   $ 1,172         $ 1,115         $ 928         $ 1,121       $ 142   
(a) Results for 2006 include legacy The Bank of New York Company, Inc. only.

 

Changes in market value of AUM in the Asset and Wealth Management Group

(in billions)

   2010      2009      2008  

Beginning balance market value of AUM

   $ 1,115       $ 928       $ 1,121   

Net inflows (outflows):

        

Long-term

     48         (6      (43

Money market

     (18      (49      92   

Total net inflows (outflows)

     30         (55      49   

Net market/currency impact

     27         95         (235

Acquisitions/divestitures

     -         147         (7

Ending balance market value of AUM

   $ 1,172       $ 1,115       $ 928   

 

BNY Mellon     19


Table of Contents

Results of Operations (continued)

 

 

Asset Management business

 

(dollar amounts in millions,

unless otherwise noted)

   2010     2009     2010
vs.
2009
 

Revenue:

      

Asset and wealth management:

      

Mutual funds

   $ 1,066      $ 1,098        (3 )% 

Institutional clients

     1,074        789        36   

Private clients

     151        135        12   

Performance fees

     123        93        32   

Total asset and wealth management revenue

     2,414        2,115        14   

Distribution and servicing

     201        279        (28

Other

     29        (147     N/M   

Total fee and other revenue

     2,644        2,247        18   

Net interest revenue (expense)

     (1     32        N/M   

Total revenue

     2,643        2,279        16   

Noninterest expense (ex. amortization of intangible assets and support agreement charges)

     1,862        1,678        11   

Income before taxes (ex. amortization of intangible assets and support agreement charges)

     781        601        30   

Amortization of intangible assets

     201        219        (8

Support agreement charges

     19        18        6   

Income before taxes

   $ 561      $ 364        54

Memo: Income before taxes (ex. amortization of intangible assets)

   $ 762      $ 583        31

Pre-tax operating margin

     21     16  

Pre-tax operating margin (ex. amortization of intangible assets) (a)

     29     26  

AUM (in billions)

   $ 1,107      $ 1,045        6

AUM inflows (outflows) (in billions):

      

Long-term (in billions)

   $ 48      $ (9  

Money market (in billions)

   $ (18   $ (49        
(a) The pre-tax operating margin, excluding amortization of intangible assets, support agreement charges and investment securities gains (losses) was 29% for both 2010 and 2009.

Business description

BNY Mellon Asset Management is the umbrella organization for our affiliated investment management boutiques and is responsible, through various subsidiaries, for U.S. and non-U.S. retail, intermediary and institutional distribution of investment management and related services. The investment management boutiques offer a broad range of equity, fixed income, cash and alternative/overlay products. In addition to the investment subsidiaries, BNY Mellon Asset Management includes BNY Mellon Asset Management International, which is responsible for the distribution of investment management products internationally, and the Dreyfus Corporation and its affiliates, which are responsible for U.S. distribution of retail mutual funds, separate accounts

and annuities. We are one of the world’s largest asset managers with a top-10 position in both the U.S. and Europe and 11th position globally.

The results of the Asset Management business are mainly driven by the period end and average levels of assets managed as well as the mix of those assets, as previously shown. Results for this business are also impacted by sales of fee-based products. In addition, performance fees may be generated when the investment performance exceeds various benchmarks and satisfies other criteria. Expenses in this business are mainly driven by staffing costs, incentives, distribution and servicing expense, and product distribution costs.

In July 2010, the China Securities Regulatory Commission (“CSRC”) authorized BNY Mellon and Western Securities to establish a joint venture fund management company in China. The new company, BNY Mellon Western Fund Management Company Limited, is owned by BNY Mellon (49%) and Western Securities (51%). BNY Mellon Western Fund Management manages domestic Chinese securities in a range of local retail fund products. BNY Mellon Western Fund Management also focuses on leveraging distribution within the Chinese banking and securities sectors.

In November 2009, we acquired Insight, which specializes in liability-driven investment solutions, active fixed income and alternative investments. The acquisition of Insight impacted fee revenue and noninterest expense in 2010 compared with 2009.

Review of financial results

In 2010, Asset Management had pre-tax income of $561 million compared with $364 million in 2009. Excluding amortization of intangible assets and support agreement charges, pre-tax income was $781 million in 2010 compared with $601 million in 2009. Results for 2010 reflect improved market values, the full-year impact of the Insight acquisition and net new business, partially offset by higher incentive expenses.

Asset and wealth management revenue in the Asset Management business was $2.4 billion in 2010 compared with $2.1 billion in 2009. The increase reflects improved market values, the full-year impact of the Insight acquisition, higher performance fees and net new business, partially offset by a reduction in money market fees due to higher fee waivers and money market outflows.

 

 

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Results of Operations (continued)

 

 

The Asset Management business generated 500 basis points of positive operating leverage in 2010 compared with 2009, excluding intangible amortization and support agreement charges.

In 2010, 44% of asset and wealth management fees in the Asset Management business were generated from managed mutual fund fees. These fees are based on the daily average net assets of each fund and the basis point management fee paid by that fund. Managed mutual fund fee revenue was $1.1 billion in both 2010 and 2009.

Distribution and servicing fees were $201 million in 2010 compared with $279 million in 2009. The decrease resulted from lower money market assets under management and higher redemption fees in prior periods.

Other fee revenue was $29 million in 2010 compared with a loss of $147 million in 2009 and includes $9 million of securities gains in 2010 and $78 million of securities losses in 2009. The improvement also includes a higher value of seed capital investments in 2010.

Revenue generated in the Asset Management business includes 51% from non-U.S. sources in 2010 and 42% in 2009. The increase is primarily due to the full-year impact of the Insight acquisition.

Noninterest expense (excluding amortization of intangible assets and support agreement charges) was $1.9 billion in 2010 compared with $1.7 billion in 2009. The increase primarily resulted from higher incentives expense resulting from an increase in performance fees, as well as the impact of adjusting compensation to market levels, and the full-year impact of the Insight acquisition.

Support agreement charges in 2010 primarily reflect a decision to support five Dreyfus money market funds primarily for a realized loss which arose from the financial crisis. The support agreement charges in 2009 related to the final charge for four Dreyfus money market funds support agreements entered into in 2008.

2009 compared with 2008

Income before taxes was $364 million in 2009, compared with $228 million in 2008. Income before taxes (excluding amortization of intangible assets and support agreement charges) was $601 million in 2009 compared with $818 million in 2008. Fee and other revenue decreased $547 million, primarily due to the

weakness in global equity market values for most of 2009, outflows of money market investments, higher fee waivers, a stronger U.S. dollar and the divestiture of three small investment boutiques in 2009. The decrease was partially offset by the impact of the Insight acquisition in the fourth quarter of 2009 and changes in the market value of seed capital investments. Noninterest expense (excluding amortization of intangible assets and support agreement charges) decreased $373 million in 2009 compared with 2008 primarily due to staff reductions, expense management, the consolidation of investment processes and a stronger U.S. dollar.

Wealth Management business

 

(dollar amounts in millions, unless
otherwise noted)
   2010     2009     2010
vs.
2009
 

Revenue:

      

Asset and wealth management

   $ 540      $ 519        4

Other

     50        59        (15

Total fee and other revenue

     590        578        2   

Net interest revenue

     227        194        17   

Total revenue

     817        772        6   

Provision for credit losses

     2        1        N/M   

Noninterest expense (ex. amortization of intangible assets)

     575        538        7   

Income before taxes (ex. amortization of intangible assets)

     240        233        3   

Amortization of intangible assets

     36        45        (20

Income before taxes

   $ 204      $ 188        9

Pre-tax operating margin

     25     24  

Pre-tax operating margin (ex. amortization of intangible assets)

     29     30  

Average loans

   $ 6,451      $ 5,821        11

Average assets

     10,618        9,276        14

Average deposits

     8,208        6,772        21

Market value of total client assets under management and custody at period end (in billions)

   $ 166      $ 154        8

Business description

In the Wealth Management business, we offer a full array of investment management, wealth and estate planning and private banking solutions to help clients protect, grow and transfer their wealth. Clients include high-net-worth individuals and families, charitable gift programs, endowments and foundations and related entities. Client assets reached $166 billion at year-end, and BNY Mellon Wealth Management was ranked as the nation’s 8th largest wealth manager and 3rd largest private banker. We serve our clients through an expansive network of office sites in 17 states and 4 countries, including 16 of the top 25 domestic wealth markets.

 

 

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Results of Operations (continued)

 

 

The results of the Wealth Management business are driven by the level and mix of assets managed and under custody, the level of activity in client accounts and private banking volumes. Net interest revenue is determined by loan and deposit volumes and the interest rate spread between customer rates and internal funds transfer rates on loans and deposits. Expenses of this business are driven by staff expense in the investment management, sales, service and support groups.

On Sept. 1, 2010, we acquired I3 Advisors of Toronto, an independent wealth advisory company with more than C$3.8 billion under advisement at acquisition.

Review of financial results

Income before taxes was $204 million in 2010 compared with $188 million in 2009. Income before taxes (excluding amortization of intangible assets) was $240 million in 2010 compared with $233 million in 2009. Results compared with 2009 reflect growth in fee revenue and net interest revenue, partially offset by higher noninterest expense.

Total fee and other revenue was $590 million in 2010 compared with $578 million in 2009. The increase was driven by higher equity market levels and the acquisition of I3 Wealth Advisors.

Client assets under management and custody were $166 billion at Dec. 31, 2010, an increase of $12 billion, or 8%, compared with $154 billion at Dec. 31, 2009. The increase was driven by higher equity market levels and the acquisition of I3 Wealth Advisors.

Net interest revenue increased $33 million in 2010 compared with 2009, primarily due to higher deposit levels, growth in high-quality loans and the higher yield on the restructured investment securities portfolio, partially offset by spread compression on deposits. Average deposit balances increased $1.4 billion, or 21%, while average loan balances increased $630 million, or 11%.

Noninterest expense (excluding amortization of intangible assets) increased $37 million compared with 2009, due to higher compensation, marketing, litigation and FDIC expenses and the acquisition of I3 Wealth Advisors.

2009 compared with 2008

Income before taxes was $188 million in 2009 compared with $185 million in 2008. Income before taxes (excluding amortization of intangible assets and support agreement charges), decreased $21 million. Fee and other revenue decreased $46 million due to lower average equity market levels and lower capital market fees, partially offset by organic growth. Net interest revenue decreased $6 million as a result of deposit spread tightening. Noninterest expense (excluding amortization of intangible assets and support agreement charges) decreased $32 million due to workforce reductions, strong expense control and the impact of merger-related synergies.

Institutional Services Group

We are one of the leading global securities servicing providers, with assets under custody and administration at Dec. 31, 2010 of $25.0 trillion, an increase of 12% from $22.3 trillion at Dec. 31, 2009, primarily reflecting the Acquisitions, as well as higher market values and new business. Equity securities constituted 32% and fixed-income securities constituted 68% of the assets under custody and administration at Dec. 31, 2010, compared with 29% equity securities and 71% fixed income securities at Dec. 31, 2009. The shift in composition was due primarily to an increase in equity market valuations. Assets under custody and administration at Dec. 31, 2010, consisted of assets related to custody, mutual funds, and corporate trust businesses of $20.1 trillion, broker-dealer services assets of $3.2 trillion and all other assets of $1.7 trillion.

Market value of securities on loan at Dec. 31, 2010, increased to $278 billion from $247 billion at Dec. 31, 2009. The increase reflects higher asset valuations and the GIS acquisition, partially offset by lower government volumes.

 

 

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Results of Operations (continued)

 

 

On July 1, 2010, we completed the acquisition of GIS and on Aug. 2, 2010, we completed the acquisition of BAS. See the “2010 events” section for additional information. These acquisitions were integrated into the Institutional Services businesses.

 

Assets under custody and administration trend                                        
      2010      2009      2008      2007      2006 (a)  

Market value of assets under custody and administration at

period end (in trillions) (b)

   $ 25.0       $ 22.3       $ 20.2       $ 23.1       $ 15.5   

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

   $ 278       $ 247       $ 326       $ 633       $ 399   
(a) Results for 2006 include legacy The Bank of New York Company, Inc. only.
(b) Includes the assets under custody or administration of CIBC Mellon Global Securities Services Company, a joint venture with the Canadian Imperial Bank of Commerce, of $1.1 trillion at Dec. 31, 2010, $905 billion at Dec. 31, 2009, $697 billion at Dec. 31, 2008, and $989 billion at Dec. 31, 2007.
(c) Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing business.

 

Asset Servicing business

 

(dollar amounts in millions,
unless otherwise noted)
   2010     2009     2010
vs.
2009
 

Revenue:

      

Securities servicing fees-asset servicing

   $ 2,804      $ 2,215        27

Securities lending revenue

     106        221        (52

Foreign exchange and other trading revenue

     693        793        (13

Other

     206        177        16   

Total fee and other revenue