Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

[ ü ] Quarterly Report Pursuant To Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2010

or

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

of the Securities Exchange Act of 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   13-2614959
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

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

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

Yes ü    No        

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

Yes ü    No        

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes          No  ü

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

 

Class   

Outstanding as of

June 30, 2010

Common Stock, $0.01 par value    1,214,041,681

 

 


Table of Contents

THE BANK OF NEW YORK MELLON CORPORATION

SECOND QUARTER 2010 FORM 10-Q

TABLE OF CONTENTS

 

 

 

     Page

Consolidated Financial Highlights (unaudited)

   2

Part I – Financial Information

  

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

  

General

   4

Overview

   4

Second quarter 2010 and subsequent events

   5

Highlights of second quarter 2010 results

   6

Fee and other revenue

   8

Operations of consolidated asset management funds

   11

Net interest revenue

   11

Average balances and interest rates

   12

Noninterest expense

   14

Income taxes

   15

Business segments review

   15

Critical accounting estimates

   33

Consolidated balance sheet review

   33

Support agreements

   42

Liquidity and dividends

   42

Capital

   45

Trading activities and risk management

   47

Foreign exchange and other trading

   48

Asset/liability management

   49

Off-balance-sheet financial instruments

   49

Supplemental information – Explanation of Non-GAAP financial measures

   50

Recent accounting and regulatory developments

   53

Government monetary policies and competition

   56

Website information

   57

Item 1. Financial Statements:

  

Consolidated Income Statement (unaudited)

   58

Consolidated Balance Sheet (unaudited)

   60

Consolidated Statement of Cash Flows (unaudited)

   61

Consolidated Statement of Changes in Equity (unaudited)

   62

Notes to Consolidated Financial Statements

   63

Item 4. Controls and Procedures.

   101

Forward-looking Statements.

   102

Part II – Other Information

  

Item 1. Legal Proceedings

   103

Item 1A. Risk Factors

   103

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

   104

Item 6. Exhibits

   104

Signature

   105

Index to Exhibits

   106

 

BNY Mellon    1


Table of Contents

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited)

      Quarter ended           Six months ended  

(dollar amounts in millions, except per share amounts

and unless otherwise noted)

   June 30,
2010
    March 31,
2010
   

June 30,

2009

          June 30,
2010
   

June 30,

2009

 

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

             

Net income

   $ 658      $ 559      $ 176         $ 1,217      $ 498   

Basic EPS

     0.54        0.46        0.15           1.00        0.43   

Diluted EPS

     0.54        0.46        0.15           1.00        0.43   

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

             

Income from continuing operations

   $ 668      $ 601      $ 267         $ 1,269      $ 630   

Basic EPS from continuing operations

     0.55        0.50        0.23           1.04        0.54   

Diluted EPS from continuing operations

     0.55        0.49        0.23           1.04        0.54   

Continuing operations:

             

Fee and other revenue

   $ 2,571      $ 2,549      $ 2,257         $ 5,120      $ 4,393   

Income of consolidated asset management funds

     65        65        -           130        -   

Net interest revenue

     722        765        700           1,487        1,475   
                                           

Total revenue

   $ 3,358      $ 3,379      $ 2,957         $ 6,737      $ 5,868   

Return on common equity (annualized) (a)(b)

     8.8     8.2     4.0        8.5     4.9

Non-GAAP adjusted (b)

     9.5     10.6     6.6        10.0     8.6

Return on tangible common equity (annualized)

             

Non-GAAP (b)

     25.8     25.8     18.4        25.7     23.2

Non-GAAP adjusted (b)

     25.5     30.2     24.0        27.7     33.3

Fee and other revenue as a percent of total revenue

     77     75     76        76     75

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

   $ 241      $ 244      $ 241         $ 243      $ 238   

Percent of non-U.S. fee and net interest revenue including noncontrolling interests related to consolidated asset management funds

     35     34     31        35     30

Pre-tax operating margin (b)

     30     26     17        28     18

Non-GAAP adjusted (b)

     32 %      34     31        33 %      32

Net interest margin (FTE)

     1.74     1.89     1.80        1.82     1.84 (c) 

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

   $ 1,047      $ 1,105      $ 926         $ 1,047      $ 926   

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

   $ 21.8      $ 22.4      $ 20.7         $ 21.8      $ 20.7   

Equity securities

     28     30     27        28     27

Fixed income securities

     72     70     73        72     73

Cross-border assets at period end (in trillions)

   $ 8.3      $ 8.8      $ 7.8         $ 8.3      $ 7.8   

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

   $ 248      $ 253      $ 290         $ 248      $ 290   

Average common shares and equivalents outstanding (in thousands):

             

Basic

     1,204,557        1,202,533        1,171,081           1,203,554        1,158,649   

Diluted

     1,208,830        1,206,286        1,174,466           1,207,578        1,160,620   

 

2    BNY Mellon


Table of Contents

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited) (continued)

 

      Quarter ended           Six months ended  

(dollar amounts in millions, except per share amounts

and unless otherwise noted)

   June 30,
2010
    March 31,
2010
   

June 30,

2009

          June 30,
2010
   

June 30,

2009

 

Capital ratios (e):

             

Tier 1 capital ratio

     13.5     13.3     12.5        13.5     12.5

Total (Tier 1 plus Tier 2) capital ratio

     17.2     17.2     16.0        17.2     16.0

Common shareholders’ equity to total assets ratio (b)

     12.9     13.5     13.4        12.9     13.4

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

     6.3     6.1     4.8        6.3     4.8

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

     11.9     11.6     11.1        11.9     11.1

Return on average assets (annualized) (a)

     1.17     1.09     0.52        1.13     0.60

Selected average balances:

             

Interest-earning assets

   $ 167,119      $ 163,429      $ 157,265         $ 165,285      $ 162,318  (f) 

Assets of operations

   $ 216,801      $ 212,685      $ 208,533         $ 214,755      $ 214,294   

Total assets

   $ 228,841      $ 225,415      $ 208,533         $ 227,138      $ 214,294   

Interest-bearing deposits

   $ 99,963      $ 101,034      $ 98,896         $ 100,496      $ 100,430  (f) 

Noninterest-bearing deposits

   $ 34,628      $ 33,330      $ 32,852         $ 33,983      $ 37,924  (f) 

Total The Bank of New York Mellon Corporation shareholders’ equity

   $ 30,434      $ 29,715      $ 28,934         $ 30,076      $ 28,458   

Other information at period end:

             

Employees

     42,700        42,300        41,800           42,700        41,800   

Cash dividends per common share

   $ 0.09      $ 0.09      $ 0.09         $ 0.18      $ 0.33   

Dividend yield (annualized)

     1.5     1.2     1.2        1.5     2.3

Closing common stock price per common share

   $ 24.69      $ 30.88      $ 29.31         $ 24.69      $ 29.31   

Market capitalization

   $ 29,975      $ 37,456      $ 35,255         $ 29,975      $ 35,255   

Book value per common share (b)

   $ 25.04      $ 24.47      $ 22.68         $ 25.04      $ 22.68   

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

   $ 9.33      $ 8.69      $ 6.60         $ 9.33      $ 6.60   

Common shares outstanding (in thousands)

     1,214,042        1,212,941        1,202,828             1,214,042        1,202,828   

 

(a) Return on common equity on a net income basis was 8.7% for the second quarter of 2010, 7.6% for the first quarter of 2010, 2.7% for the second quarter of 2009, 8.2% for the first six months of 2010 and 3.9% for the first six months of 2009. Return on average assets on a net income basis was 1.15% for the second quarter of 2010, 1.01% for the first quarter of 2010, 0.34% for the second quarter of 2009, 1.08% for the first six months of 2010 and 0.47% for the first six months of 2009. Return on average assets was calculated on a continuing operations basis even though the prior period balance sheets, in accordance with GAAP, have not been restated for discontinued operations.
(b) See Supplemental Information beginning on page 50 for a calculation of these ratios.
(c) Calculated on a continuing operations basis, even though the prior period balance sheet in accordance with GAAP has not been restated for discontinued operations.
(d) Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing segment.
(e) Includes discontinued operations.
(f) Excludes the impact of discontinued operations.

 

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Table of Contents

Part I – Financial Information

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

 

 

 

General

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

Certain business terms used in this document are defined in the glossary included in our 2009 Annual Report on

Form 10-K.

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

How we reported results

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

Throughout this Form 10-Q, certain measures, which are noted, exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, which relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present certain amounts on a fully taxable equivalent (“FTE”) basis. We believe that this presentation 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. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 50 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

In the first quarter of 2010, we adopted ASU 2009-16, “Accounting for Transfers of Financial Assets” and ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” For a discussion of ASU 2009-16 and ASU 2009-17, see Notes 2 and 13 in the Notes to Consolidated Financial Statements.

 

Overview

BNY Mellon is a global leader in providing a comprehensive array of services that enable institutions and individuals to manage and service their financial assets, operating in 36 countries and serving more than 100 markets worldwide. We strive to be the global provider of choice for asset and wealth management and institutional services and be recognized for our broad and deep capabilities, superior client service and consistent outperformance versus peers. Our global client base consists of financial institutions, corporations, government agencies, high-net-worth individuals, families, endowments and foundations and related entities. At June 30, 2010, we had $21.8 trillion in assets under custody and administration and $1.0 trillion in assets under management, serviced $11.6 trillion in outstanding debt and, on average, we process $1.5 trillion of global payments per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK).

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

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


 

4    BNY Mellon


Table of Contents

Second quarter 2010 and subsequent events

Equity offering and forward sale agreement

In June 2010, BNY Mellon priced 25.9 million common shares in an underwritten public offering, at $27.00 per common share, for a total of $700 million. 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. The Company will not receive any proceeds from the sale of its common stock until settlement of the forward sale agreement, which is expected to occur in the third quarter of 2010. The Company intends to use any proceeds that it receives upon settlement of the forward sale agreement to fund the acquisition of Global Investment Servicing, Inc. or for general corporate purposes.

Acquisition of Global Investment Servicing, Inc.

On July 1, 2010, BNY Mellon acquired Global Investment Servicing, Inc. (“GIS”) for cash of $2.31 billion. GIS provides a comprehensive suite of products which 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 will be included in the Institutional Services sector for reporting purposes. The transaction is expected to be accretive to earnings in 2010.

Approximately $3.9 billion of deposits related to GIS are expected to transition to BNY Mellon over the next eighteen months. Beginning in the third quarter of 2010 and until the transition is complete, we will receive net economic value payments for these deposits.

Acquisition of BHF Asset Servicing GmbH

On Aug. 2, 2010, BNY Mellon completed the acquisition of BHF Asset Servicing GmbH (“BAS”) for cash of EUR253 million (US$330 million). This

transaction included the purchase of Frankfurter Service Kapitalanlage – Gesellschaft mbH (“FSKAG”), a wholly-owned fund administration affiliate.

BAS and FSKAG will become part of BNY Mellon’s Asset Servicing segment. 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). The transaction is expected to be 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, will be owned by BNY Mellon (49%) and Western Securities (51%).

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

Agreement to acquire I(3) Advisors

On June 18, 2010, BNY Mellon announced an agreement to acquire I(3) Advisors of Toronto, an independent wealth advisory company with more than C$3.5 billion in assets under advisement. This will be BNY Mellon’s first wealth management acquisition in Canada, and is another step in the international expansion of our wealth management business. The combined business will offer clients broader global asset management opportunities, increased access to alternative investment opportunities, enhanced technology and reporting capabilities and expanded banking and wealth planning services. The transaction is expected to close in the third quarter of 2010, subject to regulatory approvals.

Asset Management license in Korea

In June 2010, BNY Mellon received approval from Korea’s Financial Services Commission for a


 

BNY Mellon    5


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Discretionary Investment Management (“DIM”) license. The DIM license allows BNY Mellon to contract for discretionary investment management services with local financial institutions and professional investors.

Creation of a Futures and Derivates Clearing Company

In June 2010, BNY Mellon Clearing, LLC (“BNY Mellon Clearing”), our wholly-owned subsidiary, became a futures commission merchant registered with the Commodity Futures Trading Commission and a member of the National Futures Association. BNY Mellon Clearing will clear futures and derivatives trades on behalf of institutional clients as well as BNY Mellon’s internal derivatives clearing activity. We anticipate that BNY Mellon Clearing will become a clearing member on major exchanges and central clearinghouses on a global basis to support clients’ trading activities.

Highlights of second quarter 2010 results

We reported income from continuing operations applicable to the common shareholders of BNY Mellon of $668 million, or $0.55 per diluted common share, in the second quarter of 2010 compared with $601 million, or $0.49 per diluted common share, in the first quarter of 2010 and $267 million, or $0.23 per diluted common share, in the second quarter of 2009.

Net income applicable to common shareholders, including discontinued operations, totaled $658 million, or $0.54 per diluted common share, in the second quarter of 2010, compared with $559 million, or $0.46 per diluted common share, in the first quarter of 2010 and $176 million, or $0.15 per diluted common share, in the second quarter of 2009.

Highlights for the second quarter of 2010 include:

 

 

Assets under custody and administration (“AUC”) totaled $21.8 trillion at June 30, 2010 compared with $20.7 trillion at June 30, 2009 and $22.4 trillion at March 31, 2010. The year-over-year increase reflects higher market values and net new business. The sequential decrease primarily reflects lower market value. (See the Institutional Services sector on page 25).

 

Assets under management (“AUM”), excluding securities lending assets, totaled $1.0 trillion at June 30, 2010 compared with $926 billion at

   

June 30, 2009 and $1.1 trillion at March 31, 2010. The year-over-year increase was primarily due to the acquisition of Insight Investment Management (“Insight”) in the fourth quarter of 2009. The sequential decrease primarily reflects lower market values. (See the Asset and Wealth Management sector on page 20).

 

Securities servicing revenue totaled $1.267 billion in the second quarter of 2010 compared with $1.293 billion in the second quarter of 2009. An increase in asset servicing revenue, excluding securities lending fee revenue, was partially offset by lower issuer and clearing services revenue, which were negatively impacted by lower money market distribution fees. (See the Institutional Services sector on page 25).

 

Securities lending fee revenue totaled $46 million in the second quarter of 2010 compared with $97 million in the prior year period. The decrease reflects narrower spreads and lower loan balances. Securities lending assets totaled $248 billion at June 30, 2010 compared with $253 billion at March 31, 2010 and $290 billion at June 30, 2009. (See the Institutional Services sector on page 25).

 

Asset and wealth management fees, including performance fees, totaled $676 million in the second quarter of 2010 compared with $637 million in the second quarter of 2009. The increase reflects improved market values, the Insight acquisition in the fourth quarter of 2009, and the impact of new business, partially offset by higher fee waivers and a reduction in fees due to money market outflows. (See the Asset Management and Wealth Management segments beginning on page 21).

 

Foreign exchange and other trading activities revenue totaled $220 million in the second quarter of 2010 compared with $237 million in the second quarter of 2009. The decrease primarily reflects credit valuation adjustments (“CVA”) on derivatives due to widening spreads and lower fixed income trading revenue, partially offset by improvement in the credit derivative portfolio which was impacted by tighter credit spreads in the second quarter of 2009 and increased volatility in the foreign currency markets. (See Fee and other revenue beginning on page 8).

 

Investment income and other revenue totaled $145 million in the second quarter of 2010 compared with $53 million in the second quarter of 2009. The increase reflects positive foreign currency translations and lease residual gains, partially offset by lower seed capital revenue. (See Fee and other revenue beginning on page 8).


 

6    BNY Mellon


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Net interest revenue totaled $722 million in the second quarter of 2010 compared with $700 million in the second quarter of 2009. The increase reflects a higher yield on the restructured investment securities portfolio and a higher level of average interest-earning assets, partially offset by narrowing spreads and a reduction in the duration of placements. The net interest margin (FTE) for the second quarter of 2010 was 1.74% compared with 1.80% in the second quarter of 2009. (See Net interest revenue beginning on page 11).

 

The provision for credit losses was $20 million in the second quarter of 2010 compared with $61 million in the second quarter of 2009. The decrease in the provision primarily reflects a decrease in higher risk-rated loans and nonperforming loans. (See Asset quality and allowance for credit losses beginning on page 38).

 

Noninterest expense totaled $2.3 billion in the second quarter of 2010 compared with $2.4 billion in the second quarter of 2009. The decrease was primarily driven by the FDIC special assessment recorded in the second

   

quarter of 2009 and lower merger and integration (“M&I”) expenses, partially offset by the impact of the Insight acquisition and higher incentive expenses. (See Noninterest expense beginning on page 14).

 

Unrealized net of tax gains on our total investment securities portfolio were $114 million at June 30, 2010 compared with an unrealized net of tax loss of $191 million at March 31, 2010. The improvement in the valuation of the investment securities portfolio was due to tightening credit spreads and a decline in interest rates. (See Consolidated balance sheet review beginning on page 33).

 

The Tier 1 capital ratio was 13.5% at June 30, 2010 compared with 13.3% at March 31, 2010. The increase reflects earnings retention, partially offset by higher risk-weighted assets. (See Capital beginning on page 45).

 

Nonperforming assets totaled $406 million at June 30, 2010, a decrease of $53 million, or 12%, compared with March 31, 2010, primarily due to repayments. (See Asset quality and allowance for credit losses beginning on page 38).


 

BNY Mellon    7


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Fee and other revenue

 

Fee and other revenue                         2Q10 vs.           Year-to-date     YTD10
vs.
YTD09
 
(dollars in millions, unless otherwise noted)    2Q10     1Q10     2Q09     2Q09     1Q10           2010     2009    

Securities servicing fees:

                   

Asset servicing

   $ 622      $ 608      $ 574      8   2      $ 1,230      $ 1,093      13

Securities lending revenue

     46        29        97      (53   59           75        187      (60

Issuer services

     354        333        372      (5   6           687        736      (7

Clearing services

     245        230        250      (2   7             475        503      (6

Total securities servicing fees

     1,267        1,200        1,293      (2   6           2,467        2,519      (2

Asset and wealth management fees

     676        678        637      6      -           1,354        1,253      8   

Foreign exchange and other trading activities

     220        262        237      (7   (16        482        544      (11

Treasury services

     125        131        132      (5   (5        256        257      -   

Distribution and servicing

     77        76        107      (28   1           153        218      (30

Financing-related fees

     48        50        54      (11   (4        98        102      (4

Investment income

     72        108        44      64      (33        180        27      N/M   

Other

     73        37        9      N/M      N/M             110        24      N/M   

Total fee revenue – GAAP

   $ 2,558      $ 2,542      $ 2,513      2   1      $ 5,100      $ 4,944      3

Income of consolidated asset management funds, net of noncontrolling interests

     32 (a)      41 (a)      -      N/M      (22          73 (a)      -      N/M   

Total fee revenue – Non-GAAP

   $ 2,590      $ 2,583      $ 2,513      3   -      $ 5,173      $ 4,944      5

Net securities gains (losses)

     13        7        (256   N/M      N/M             20        (551   N/M   

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

   $ 2,603      $ 2,590      $ 2,257      15   1        $ 5,193      $ 4,393      18

Fee and other revenue as a percent of total revenue

     77     75     76            76     75  

Market value of AUM at period end (in billions)

   $ 1,047      $ 1,105      $ 926      13   (5 )%       $ 1,047      $ 926      13

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

   $ 21.8      $ 22.4      $ 20.7      6   (2 )%         $ 21.8      $ 20.7      6

 

(a) As a result of adopting ASC 810 at March 31, 2010, we were required to segregate income from consolidated asset management funds of $65 million in the second quarter of 2010, $65 million in the first quarter of 2010 and $130 million in the first six months of 2010, and net income attributable to noncontrolling interests of $33 million, $24 million and $57 million, respectively, on the income statement. Prior to the adoption of ASC 810, the net of these income statement line items of $32 million in the second quarter of 2010, $41 million in the first quarter of 2010, and $73 million in the first six months of 2010, respectively, was included in asset and wealth management fees ($29 million, $25 million and $54 million, respectively) and investment income ($3 million, $16 million and $19 million, respectively).
(b) Total fee and other revenue on a GAAP basis was $2,571 million for the second quarter of 2010, $2,549 million for the first quarter of 2010, $2,257 million for the second quarter of 2009, $5,120 million for the first six months of 2010 and $4,393 million for the first six months of 2009.
N/M – Not meaningful.

 

Fee revenue

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

Fee revenue increased 2% versus the year-ago quarter primarily due to increases in asset servicing revenue, asset and wealth management fees and other revenue, partially offset by decreases in securities lending revenue and foreign exchange and other trading activities. Sequentially, fee revenue increased 1% (unannualized) reflecting higher securities servicing fees and other revenue partially offset by lower foreign exchange and other trading revenue and investment income.

 

Securities servicing fees

Securities servicing fees were impacted by the following, compared with the second quarter of 2009 and first quarter of 2010:

 

 

Asset servicing fees – Year-over-year results reflect higher market values and new business. The increase sequentially primarily reflects new business and higher transaction volumes.

 

Securities lending revenue – The decrease year-over-year reflects narrower spreads and lower loan balances while the sequential increase reflects seasonality.

 

Issuer services fees – The decrease year-over-year reflects lower Corporate Trust fee revenue resulting from decreased activity in the global debt markets and lower money market related


 

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distribution fees, partially offset by higher Depositary Receipts revenue reflecting higher issuance and service fees. The sequential increase resulted from seasonality in Depositary Receipts and Shareowner Services, partially offset by lower Corporate Trust fee revenue.

 

Clearing services fees – Year-over-year results reflect lower money market related distribution fees. The sequential increase reflects higher transaction fee volumes and higher money market fund fees.

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

Asset and wealth management fees

Asset and wealth management fees increased 6% year-over-year and were unchanged sequentially. Excluding performance fees and income from consolidated asset management funds, net of noncontrolling interests, asset and wealth management fees increased 12% compared with the second quarter of 2009 and decreased 1% (unannualized) sequentially. The year-over-year increase reflects improved market values, the Insight acquisition and the impact of new business, partially offset by higher fee waivers and a reduction in fees due to money market outflows. Sequentially, the impact of new business was more than offset by lower market values.

Total AUM for the Asset and Wealth Management sector were $1.0 trillion at June 30, 2010 compared with $1.1 trillion at March 31, 2010 and $926 billion at June 30, 2009. The increase compared with June 30, 2009 was primarily due to the Insight acquisition in the fourth quarter of 2009. The sequential decrease primarily reflects lower market values. The S&P 500 Index was 1031 at June 30, 2010 compared with 1169 at March 31, 2010 (a 12% decrease) and 919 at June 30, 2009 (a 12% increase).

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

Foreign exchange and other trading activities

Foreign exchange and other trading activities revenue, which is primarily reported in the Asset Servicing segment, was $220 million in the second quarter of 2010, a decrease of 7% compared with the second quarter of 2009, and a decrease of 16%

(unannualized) compared with the first quarter of 2010. In the second quarter of 2010, foreign exchange revenue totaled $244 million, an increase of 39% sequentially, driven by increased volatility. The negative other trading revenue of $24 million in the second quarter of 2010 primarily related to credit valuation adjustments (“CVA”) on derivatives due to widening spreads and lower fixed income trading revenue.

Treasury services

Treasury services fees, which are primarily reported in the Treasury Services segment, include fees related to funds transfer, cash management and liquidity management. Treasury services fees decreased $7 million compared with the second quarter of 2009 and $6 million compared with the first quarter of 2010. The decreases compared with both prior periods primarily resulted from lower volumes.

Distribution and servicing fees

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

Distribution and servicing fee revenue decreased $30 million compared with the second quarter of 2009 and increased $1 million compared with the first quarter of 2010. The year-over-year decrease primarily reflects lower money market related fees. The impact of distribution and servicing fees on income in any one period can be more than offset by distribution and servicing expense paid to other financial intermediaries to cover their cost for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement.

Financing-related fees

Financing-related fees, which are primarily reported in the Treasury Services segment, include capital markets fees, loan commitment fees and credit-related trade fees. Financing-related fees decreased $6 million compared with the second quarter of 2009 and $2 million sequentially. The decreases were driven by lower capital markets fees.


 

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Investment income

 

Investment income                            Year-to-date      
(in millions)    2Q10     1Q10    2Q09     2010     2009  

Corporate/bank-owned life insurance

   $ 37      $ 36    $ 31      $ 73      $ 72   

Lease residual gains

     14        52      (10     66        16   

Equity investment income (loss)

     20        12      13        32        (41

Private equity gains (losses)

     6        5      (9     11        (29

Seed capital gains (losses)

     (5     3      19        (2     9   

Total investment income

   $ 72      $ 108    $ 44      $ 180      $ 27   

Investment income, which is primarily reported in the Other and Asset Management segments, includes income from insurance contracts, lease residual gains and losses, gains and losses on seed capital investments and private equity investments, and equity investment income (loss). The increase, compared with the second quarter of 2009, primarily reflects higher lease residual and private equity investment gains partially offset by lower seed capital revenue. The decrease, compared to the first quarter of 2010, primarily reflects lower lease residual gains.

Other revenue

 

Other revenue                           Year-to-date      
(in millions)    2Q10    1Q10    2Q09     2010    2009  

Expense reimbursements from joint ventures

   $ 8    $ 10    $ 7      $ 18    $ 15   

Asset-related gains

     3      3      16        6      22   

Other income (loss)

     62      24      (14     86      (13

Total other revenue

   $ 73    $ 37    $ 9      $ 110    $ 24   

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

Total other revenue increased in the second quarter of 2010 compared with the second quarter of 2009 and the first quarter of 2010 primarily due to positive foreign currency translations.

Net investment securities gains (losses)

Net securities gains totaled $13 million in the second quarter of 2010, compared with net losses of $256

million in the second quarter of 2009 and net gains of $7 million in the first quarter of 2010.

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)                       Year-to-date      
(in millions)    2Q10     1Q10     2Q09     2010     2009  

Alt-A RMBS

   $ (6   $ (7   $ (114   $ (13   $ (239

Prime RMBS

     -        -        (9     -        (12

Home equity lines of credit

     -        -        (4     -        (22

European floating rate notes

     -        -        (66     -        (70

Credit cards

     -        -        (26     -        (28

Other

     19        14        (37     33        (180

Net securities gains (losses)

   $ 13      $ 7      $ (256   $ 20      $ (551

Year-to-date 2010 compared with year-to-date 2009

Fee and other revenue for the first six months of 2010 totaled $5.2 billion compared with $4.4 billion in the first six months of 2009. The increase primarily reflects net securities losses reported in 2009, as well as increased investment income, asset servicing fees, asset and wealth management fees and other revenue during the first six months of 2010 offset in part by lower securities lending revenue, distribution and servicing fees, foreign exchange and other trading revenue and issuer and clearing services fees during the first six months of 2010.

Net securities gains were $20 million for the first six months of 2010 compared with a net loss of $551 million for the first six months of 2009. The net securities losses in 2009 primarily resulted from deterioration in the credit quality of residential mortgage-backed securities. The increase in asset servicing fees reflects higher market values and net new business during the first six months of 2010. The increase in asset and wealth management fees in the first six months of 2010 reflects improved equity values, the Insight acquisition and the impact of long-term inflows, partially offset by a reduction in fees due to money market outflows and higher fee waivers. The decrease in securities lending revenue in the first six months of 2010 primarily reflects narrower spreads and lower loan balances. The decrease in foreign exchange and other trading revenue in the first six months of 2010 was driven by the CVA on derivatives due to widening credit spreads and lower fixed income trading revenue. The decrease in issuer and clearing services fees in the first six months of 2010 primarily reflects lower money market related distribution fees.


 

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Operations of consolidated asset management funds

On Jan. 1, 2010, we adopted ASC 810. See Notes 2 and 13 in the Notes to Consolidated Financial Statements for additional information. Adoption of this new standard resulted in an increase in consolidated total assets on our balance sheet at June 30, 2010 of $13.4 billion, or an increase of approximately 6% from Dec. 31, 2009.

We also separately disclosed the following on the income statement.

 

Income from consolidated asset management funds,
net of noncontrolling interests
       Year-to-date    
(in millions)    2Q10    1Q10    2Q09         2010    2009

Operations of consolidated asset management funds

   $ 65    $ 65    $ -      $ 130    $ -

Noncontrolling interest of consolidated asset management funds

     33      24      -          57      -

Income from consolidated asset management funds, net of noncontrolling interests

   $ 32    $ 41    $ -        $ 73    $ -

These line items were previously disclosed on the income statement as:

 

                                 Year-to-date    
(in millions)    2Q10    1Q10    2Q09         2010    2009

Asset and wealth management revenue

   $ 29    $ 25    $ -      $ 54    $ -

Investment income

     3      16      -          19      -

Total

   $ 32    $ 41    $ -        $ 73    $ -

 

Net interest revenue

 

Net interest revenue                         2Q10 vs.           Year-to-date     YTD10
vs.
YTD09
 
(dollars in millions)    2Q10     1Q10     2Q09     2Q09     1Q10          2010     2009    

Net interest revenue (non-FTE)

   $ 722      $ 765      $ 700      3   (6 )%         $ 1,487      $ 1,475      1

Tax equivalent adjustment

     5        5        4      N/M      N/M             10        8      N/M   

Net interest revenue (FTE) – Non-GAAP

   $ 727      $ 770      $ 704      3   (6 )%         $ 1,497      $ 1,483      1

Average interest-earning assets

   $ 167,119      $ 163,429      $ 157,265      6   2      $ 165,285      $ 162,318 (a)    2

Net interest margin (FTE)

     1.74     1.89     1.80   (6 )bps    (15 )bps           1.82     1.84 %(b)    (2 )bps 
(a) Excludes the impact of discontinued operations.
(b) Calculated on a continuing operations basis, even though the prior period balance sheet, in accordance with GAAP has not been restated for discontinued operations.
N/M - Not meaningful.
bps - basis points.

 

Net interest revenue on an FTE basis totaled $727 million in the second quarter of 2010 compared with $704 million in the second quarter of 2009 and $770 million in the first quarter of 2010.

The increase in net interest revenue compared with the second quarter of 2009 principally reflects a higher yield on the restructured investment securities portfolio and a higher level of average interest-earning assets, partially offset by narrowing spreads and a reduction in the duration of placements. The decrease in net interest revenue compared with the first quarter of 2010 primarily reflects our credit strategy to reduce targeted loan exposure, as well as reducing the duration of placements, partially offset by a higher level of average interest-earning assets.

The net interest margin was 1.74% in the second quarter of 2010 compared with 1.80% in the second

quarter of 2009 and 1.89% in the first quarter of 2010. The decrease compared with the second quarter of 2009 reflects a higher yield on the restructured investment securities portfolio which was more than offset by narrowing spreads and our credit strategy to reduce targeted loan exposure, as well as a reduction in the duration of placements. The sequential decrease reflects our credit strategy to reduce targeted loan exposure as well as reducing the duration of placements.

Year-to-date 2010 compared with year-to-date 2009

Net interest revenue on an FTE basis totaled $1.5 billion in the first six months of 2010, an increase of 1% compared with the first six months of 2009. The increase primarily reflects the higher yield on the restructured investment securities portfolio and higher hedging gains, partially offset by narrowing


 

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spreads and a reduction in the duration of placements. The net interest margin was 1.82% in the first six months of 2010, compared with 1.84% in the first six months of 2009. Lower

spreads more than offset the higher yield on the restructured investment securities portfolio.


 

Average balances and interest rates

 

Average balances and interest rates (a)    Quarter ended  
     June 30, 2010     March 31, 2010     June 30, 2009  
(dollar amounts in millions)    Average
balance
    Average
rates
    Average
balance
    Average
rates
    Average
balance
    Average
rates
 

Assets

            

Interest-earning assets:

            

Interest-bearing deposits with banks (primarily foreign banks)

   $ 50,741      1.01   $ 55,800      1.03   $ 56,917      1.18

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

     18,280      0.34        12,129      0.33        6,338      0.37   

Federal funds sold and securities under resale agreements

     4,652      0.66        3,859      0.71        2,899      1.29   

Margin loans

     5,786      1.49        5,241      1.49        4,134      1.62   

Non-margin loans:

            

Domestic offices

     20,750      2.89        19,510      3.12        20,740      3.18   

Foreign offices

     10,128      1.53        9,463      1.62        12,155      2.21   
                              

Total non-margin loans

     30,878      2.45        28,973      2.63        32,895      2.82   

Securities:

            

U.S. government obligations

     6,162      1.46        6,600      1.40        1,679      1.67   

U.S. government agency obligations

     19,629      3.48        19,429      3.58        14,748      3.74   

State and political subdivisions

     638      6.56        670      6.37        710      6.92   

Other securities

     27,601      4.14        28,653      4.20        34,766      2.85   

Trading securities

     2,752      2.62        2,075      2.49        2,179      2.50   
                              

Total securities

     56,782      3.58        57,427      3.63        54,082      3.10   
                              

Total interest-earning assets

     167,119      2.08     163,429      2.18     157,265      2.16

Allowance for loan losses

     (517       (502       (426  

Cash and due from banks

     3,673          3,514          3,412     

Other assets

     46,266          45,346          45,975     

Assets of discontinued operations

     260          898          2,307     

Assets of consolidated asset management funds

     12,040              12,730              -         

Total assets

   $ 228,841            $ 225,415            $ 208,533         

Liabilities and equity

            

Interest-bearing liabilities:

            

Money market rate accounts

   $ 24,279      0.10   $ 21,741      0.09   $ 19,037      0.10

Savings

     1,389      0.27        1,372      0.27        1,070      0.44   

Certificates of deposit of $100,000 & over

     332      0.16        648      0.25        942      1.00   

Other time deposits

     5,902      0.26        5,224      0.30        4,190      0.48   

Foreign offices

     68,061      0.19        72,049      0.16        73,657      0.14   
                              

Total interest-bearing deposits

     99,963      0.17        101,034      0.16        98,896      0.16   

Federal funds purchased and securities sold under repurchase agreements

     4,441      0.19        3,697      0.07        2,485      (0.46

Other borrowed funds

     4,223      2.08        2,805      1.97        2,756      1.04   

Payables to customers and broker-dealers

     6,596      0.09        6,372      0.08        4,901      0.13   

Long-term debt

     16,462      1.75        16,808      1.50        16,793      2.35   
                              

Total interest-bearing liabilities

     131,685      0.43     130,716      0.36     125,831      0.46

Total noninterest-bearing deposits

     34,628          33,330          32,852     

Other liabilities

     20,042          18,420          18,578     

Liabilities of discontinued operations

     260          898          2,307     

Liabilities and obligations of consolidated asset management funds

     11,046              11,540              -         

Total liabilities

     197,661          194,904          179,568     

Total BNY Mellon shareholders’ equity

     30,434          29,715          28,934     

Noncontrolling interest

     58          26          31     

Noncontrolling interests of consolidated asset management funds

     688              770              -         

Total equity

     31,180              30,511              28,965         

Total liabilities and equity

   $ 228,841            $ 225,415            $ 208,533         

Net interest margin – Taxable equivalent basis

           1.74           1.89           1.80
(a) Presented on a continuing operations basis even though the balance sheet is not restated for discontinued operations.
Note: Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.

 

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Average balances and interest rates (a)    Six months ended  
     June 30, 2010     June 30, 2009  
(dollar amounts in millions)    Average
balance
    Average
rates
    Average
balance
    Average
rates
 

Assets

        

Interest-earning assets:

        

Interest-bearing deposits with banks (primarily foreign banks)

   $ 53,256      1.02   $ 56,711      1.37

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

     15,222      0.33        14,719      0.37   

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

     -      -        631      3.15   

Federal funds sold and securities under resale agreements

     4,258      0.68        2,606      1.08   

Margin loans

     5,515      1.49        4,177      1.62   

Non-margin loans:

        

Domestic offices

     20,134      3.02        21,183      3.04   

Foreign offices

     9,797      1.58        12,629      2.39   
                    

Total non-margin loans

     29,931      2.54        33,812      2.80   

Securities:

        

U.S. government obligations

     6,380      1.43        1,236      1.93   

U.S. government agency obligations

     19,530      3.53        13,413      3.74   

State and political subdivisions

     654      6.49        738      6.81   

Other securities

     28,124      4.17        32,320      3.59   

Trading securities

     2,415      2.57        1,955      2.66   
                    

Total securities

     57,103      3.60        49,662      3.61   
                    

Total interest-earning assets

     165,285      2.13     162,318      2.27

Allowance for loan losses

     (509       (402  

Cash and due from banks

     3,594          4,114     

Other assets

     45,808          45,928     

Assets of discontinued operations

     577          2,336     

Assets of consolidated asset management funds

     12,383              -         

Total assets

   $ 227,138            $ 214,294         

Liabilities and equity

        

Interest-bearing liabilities:

        

Money market rate accounts

   $ 23,017      0.10   $ 18,802      0.10

Savings

     1,380      0.27        1,117      0.53   

Certificates of deposit of $100,000 & over

     489      0.22        1,208      1.07   

Other time deposits

     5,566      0.28        4,878      0.52   

Foreign offices

     70,044      0.18        74,425      0.23   
                    

Total interest-bearing deposits

     100,496      0.16        100,430      0.23   

Federal funds purchased and securities sold under repurchase agreements

     4,071      0.14        2,164      (0.23

Other borrowed funds

     3,518      2.03        3,268      1.34   

Borrowings from Federal Reserve related to asset-backed commercial paper

     -      -        631      2.25   

Payables to customers and broker-dealers

     6,485      0.08        4,352      0.16   

Long-term debt

     16,634      1.63        16,147      2.52   
                    

Total interest-bearing liabilities

     131,204      0.39     126,992      0.55

Total noninterest-bearing deposits

     33,983          37,924     

Other liabilities

     19,236          18,551     

Liabilities of discontinued operations

     577          2,336     

Liabilities and obligations of consolidated asset management funds

     11,291              -         

Total liabilities

     196,291          185,803     

Total BNY Mellon shareholders’ equity

     30,076          28,458     

Noncontrolling interest

     42          33     

Noncontrolling interests of consolidated asset management funds

     729              -         

Total equity

     30,847              28,491         

Total liabilities and equity

   $ 227,138            $ 214,294         

Net interest margin – Taxable equivalent basis

           1.82           1.84

 

(a) Presented on a continuing operations basis even though the balance sheet is not restated for discontinued operations.
Note: Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.

 

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Noninterest expense

 

Noninterest expense

(dollars in millions)

                        2Q10 vs.     Year-to-date     YTD10
vs.
YTD09
 
   2Q10     1Q10     2Q09     2Q09     1Q10     2010     2009    

Staff:

                                                          

Compensation

   $ 763      $ 753      $ 740      3   1   $ 1,516      $ 1,472      3

Incentives

     272        284        241      13      (4     556        488      14   

Employee benefits

     199        183        172      16      9        382        362      6   

Total staff

     1,234        1,220        1,153      7      1        2,454        2,322      6   

Professional, legal and other purchased services

     256        241        237      8      6        497        474      5   

Net occupancy

     143        137        142      1      4        280        281      -   

Distribution and servicing

     106        109        106      -      (3     215        213      1   

Software

     91        94        93      (2   (3     185        174      6   

Furniture and equipment

     71        75        76      (7   (5     146        153      (5

Sub-custodian

     65        52        60      8      25        117        99      18   

Business development

     68        52        49      39      31        120        93      29   

Other

     201        186        233      (14   8        387        435      (11

Subtotal

     2,235        2,166        2,149      4      3        4,401        4,244      4   

Special litigation reserves

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

FDIC special assessment

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

Amortization of intangible assets

     98        97        108      (9   1        195        215      (9

Restructuring charges

     (15     7        6      N/M      N/M        (8     16      N/M   

M&I expenses

     14        26        59      (76   (46     40        127      (69

Total noninterest expense

   $ 2,332      $ 2,460      $ 2,383      (2 )%    (5 )%    $ 4,792      $ 4,663      3

Total staff expense as a percent of total revenue

     37     36     39 (a)          36     40  

Employees at period end

     42,700        42,300        41,800      2   1     42,700        41,800      2

 

(a) Total staff expense as a percentage of total revenue excluding net securities gains (losses) was 36% in the second quarter of 2009.
N/A – Not applicable.
N/M – Not meaningful.

 

Total noninterest expense decreased $51 million compared with the second quarter of 2009 and $128 million compared with the first quarter of 2010. Results for the second quarter of 2009 include the FDIC special assessment. Results for the first quarter of 2010 include a charge for special litigation reserves. Excluding special litigation reserves, the FDIC special assessment, intangible amortization, restructuring charges and M&I expense, noninterest expense increased $86 million year-over-year and $69 million sequentially. The year-over-year increase was driven by the impact of the Insight acquisition, as well as higher incentive expense and business development activity. The sequential increase primarily reflects higher support agreement charges, the impact of the annual merit increase, the U.K. bonus tax and higher business development activity.

Staff expense

Given our mix of fee-based businesses, which are staffed with high quality professionals, staff expense comprised 55% of total noninterest expense, excluding special litigation reserves, FDIC special

assessment, amortization of intangible assets, restructuring charges and M&I expenses.

The increase in staff expense compared with the second quarter of 2009 reflects the impact of the Insight acquisition and higher incentives primarily in the Asset Management segment. The sequential increase in staff expense reflects the annual merit increase which was effective in the second quarter of 2010. Both increases also include the U.K. bonus tax that was recorded in the second quarter of 2010.

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, FDIC special assessment, amortization of intangible assets, restructuring charges and M&I expenses, totaled $1.0 billion in the second quarter of 2010 compared with $996 million in the second


 

14    BNY Mellon


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quarter of 2009 and $946 million in the first quarter of 2010. The increase compared with the second quarter of 2009 primarily reflects the impact of the Insight acquisition and higher business development activity, higher professional, legal and other purchased services, partially offset by lower other expense. The increase compared with the first quarter of 2010 reflects higher support agreement charges resulting from a quarterly change in the market value of Lehman securities, higher professional, legal and other purchased services and higher business development activity.

Given the severity of the economic downturn, the financial services industry has seen an increase in the level of legal activity. As a result, we anticipate litigation costs for the remainder of 2010 to exceed historic trend levels. For additional information on litigation matters, see Note 18 of the Notes to Consolidated Financial Statements.

For additional information on restructuring charges, see Note 11 of the Notes to Consolidated Financial Statements.

In the second quarter of 2010, we incurred $14 million of M&I expenses primarily related to the mergers with Mellon Financial Corporation and the integration of Global Investment Servicing.

Year-to-date 2010 compared with year-to-date 2009

Noninterest expense in the first six months of 2010 increased $129 million, or 3%, compared with the first six months of 2009. The increase primarily reflects the special litigation reserves, the impact of the Insight acquisition, higher incentives, professional, legal and other purchased services and business development activity, partially offset by the FDIC special assessment in the second quarter of 2009, as well as lower M&I expenses and a recovery of restructuring charges.

Income taxes

The effective tax rate on a continuing operations basis for the second quarter of 2010 was 30.2%, compared with 2.2% in the second quarter of 2009 and 29.1% in the first quarter of 2010. Excluding the impact of tax benefits, the FDIC special assessment, M&I expenses and net securities losses, the effective tax rate was 32.4% in the second quarter of 2009. Excluding the impact of special litigation reserves, restructuring charges and M&I

expenses, the effective tax rate was 31.0% in the first quarter of 2010.

We expect the effective tax rate to be approximately 30-31% for the third quarter of 2010.

Business segments review

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

Business segments accounting principles

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

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

The accounting policies of the business segments are the same as those described in Note 1 to the Consolidated Financial Statements in BNY Mellon’s 2009 Annual Report on Form 10-K. In addition, client deposits serve as the primary funding source for our investment securities portfolio and we typically allocate all interest revenue to the businesses generating the deposits. Accordingly, the higher yield related to the restructured investment securities portfolio has been included in the segment results.

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

For additional information on the primary types of revenue by business segment and how our business segments are presented and analyzed, see the Business segments review and Note 28 in BNY Mellon’s 2009 Annual Report on Form 10-K.


 

BNY Mellon    15


Table of Contents

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

Our business segments continued to face a challenging operating environment in the second quarter of 2010. Year-over-year higher market values and new business benefited the Asset and Wealth management segments, while a continued low level of debt issuances in the global markets and a lower level of corporate actions negatively impacted results in Issuer Services. Results in Asset Servicing benefited from 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. On a sequential basis, new business, higher transaction volumes and seasonally higher Depositary Receipts were primarily offset by

lower market values. Compared with the second quarter of 2009, net interest revenue increased in nearly all segments driven by the higher yield related to the restructured investment securities portfolio and a higher level of interest-earning assets. Sequentially, net interest revenue decreased in the Institutional Services sector reflecting our credit strategy to reduce targeted loan exposure, as well as lower spreads.

Net securities gains (losses) are recorded in the Other segment. Noninterest expense increased in nearly every segment compared with both the second quarter of 2009 and the first quarter of 2010 primarily due to the impact of the annual merit increase which was effective in the second quarter of 2010 and higher business development activity. In addition, year-over-year results in the Asset Management segment were impacted by the Insight acquisition. Year-over-year and sequential results in the Asset Servicing segment were impacted by increases in support agreement charges due to a decrease in the market value of Lehman securities.


 

 

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

 

Market indices                                  2Q10 vs.     Year-to-date    YTD10
vs.
YTD09
 
      2Q09    3Q09    4Q09    1Q10    2Q10    2Q09     1Q10     2010    2009   

S&P 500 Index (a)

   919    1057    1115    1169    1031    12   (12 )%    1031    919    12

S&P 500 Index – daily average

   891    995    1088    1123    1135    27      1      1129    851    33   

FTSE 100 Index (a)

   4249    5134    5413    5680    4917    16      (13   4917    4249    16   

FTSE 100 Index – daily average

   4258    4708    5235    5431    5361    26      (1   5394    4149    30   

NASDAQ Composite Index (a)

   1835    2122    2269    2398    2109    15      (12   2109    1835    15   

Lehman Brothers Aggregate Bondsm Index (a)

   280    304    301    300    299    7      -      299    280    7   

MSCI EAFE® Index (a)

   1307    1553    1581    1584    1348    3      (15   1348    1307    3   

NYSE Share Volume (in billions)

   151    126    112    103    140    (7   36      243    312    (22

NASDAQ Share Volume (in billions)

   152    144    131    143    159    5      11      302    288    5   

 

(a) Period end.

 

Average daily U.S. fixed-income trading volume was up 2% sequentially and 7% year-over-year. Total debt issuances were down 36% sequentially and 32% year-over-year.

The period end S&P 500 Index decreased 12% sequentially and increased 12% year-over-year. The period end FTSE 100 Index decreased 13% sequentially and increased 16% year-over-year. On a daily average basis, the S&P 500 Index increased 1% sequentially and 27% year-over-year and the FTSE 100 Index decreased 1% sequentially and increased 26% year-over-year. The period end NASDAQ Composite Index decreased 12% sequentially and increased 15% year-over-year.

 

The changes in the value of market indices impact fee revenue in the Asset and Wealth Management segments and our securities servicing businesses.

At June 30, 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 1-2% and fully diluted earnings per common share on a continuing operations basis by $0.06-$0.07.

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


 

16    BNY Mellon


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For the quarter ended

June 30, 2010

(dollar amounts in millions)

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

Fee and other revenue

  $ 637 (a)    $ 147      $ 784      $ 906      $ 380      $ 276      $ 196      $ 1,758      $ 61      $ 2,603 (a) 

Net interest revenue

    1        56        57        216        216        93        161        686        (21     722   

Total revenue

    638        203        841        1,122        596        369        357        2,444        40        3,325   

Provision for credit losses

    -        -        -        -        -        -        -        -        20        20   

Noninterest expense

    517        154        671        786        339        277        193        1,595        66        2,332   

Income before taxes

  $ 121 (a)    $ 49      $ 170      $ 336      $ 257      $ 92      $ 164      $ 849      $ (46   $ 973 (a) 

Pre-tax operating margin (b)

    19     24     20     30     43     25     46     35     N/M        29

Average assets

  $ 24,895      $ 10,399      $ 35,294      $ 62,940      $ 48,938      $ 21,550      $ 26,485      $ 159,913      $ 33,374      $ 228,581 (c) 

Excluding intangible amortization:

                   

Noninterest expense

  $ 467      $ 145      $ 612      $ 781      $ 318      $ 270      $ 188      $ 1,557      $ 65      $ 2,234   

Income before taxes

    171        58        229        341        278        99        169        887        (45     1,071   

Pre-tax operating margin (b)

    27     28     27     30     47     27     47     36     N/M        32

 

(a) Total fee and other revenue and income before taxes for the second quarter of 2010 includes income from consolidated asset management funds of $65 million net of income attributable to noncontrolling interests of $33 million. The net of these income statement line items of $32 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 $260 million for the second quarter of 2010, consolidated average assets were $228,841 million.
N/M - Not meaningful.

 

For the quarter ended

March 31, 2010

(dollar amounts in millions)

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

Fee and other revenue

  $ 649 (a)    $ 146      $ 795      $ 798      $ 358      $ 271      $ 225      $ 1,652      $ 143      $ 2,590 (a) 

Net interest revenue

    -        55        55        210        252        95        176        733        (23     765   

Total revenue

    649        201        850        1,008        610        366        401        2,385        120        3,355   

Provision for credit losses

    -        -        -        -        -        -        -        -        35        35   

Noninterest expense

    503        145        648        723        324        261        188        1,496        316        2,460   

Income before taxes

  $ 146 (a)    $ 56      $ 202      $ 285      $ 286      $ 105      $ 213      $ 889      $ (231   $ 860 (a) 

Pre-tax operating margin (b)

    23     28     24     28     47     29     53     37     N/M        26

Average assets

  $ 25,187      $ 9,722      $ 34,909      $ 59,704      $ 52,838      $ 20,338      $ 26,716      $ 159,596      $ 30,012      $ 224,517 (c) 

Excluding intangible amortization:

                   

Noninterest expense

  $ 453      $ 136      $ 589      $ 717      $ 304      $ 255      $ 182      $ 1,458      $ 316      $ 2,363   

Income before taxes

    196        65        261        291        306        111        219        927        (231     957   

Pre-tax operating margin (b)

    30     32     31     29     50     30     55     39     N/M        29

 

(a) Total fee and other revenue and income before taxes for the first quarter of 2010 includes income from consolidated asset management funds of $65 million net of income attributable to noncontrolling interests of $24 million. The net of these income statement line items of $41 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 $898 million for the first quarter of 2010, consolidated average assets were $225,415 million.
N/M - Not meaningful.

 

BNY Mellon    17


Table of Contents
For the quarter ended Dec. 31, 2009     Total Asset
and Wealth
Management
Sector
                                Total
Institutional
Services
Sector
               
(dollar amounts in millions)    Asset
Management
    Wealth
Management
      Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
      Other
Segment
    Total
continuing
operations
 

Fee and other revenue

   $ 680      $ 151      $ 831      $ 816      $ 410      $ 264      $ 222      $ 1,712      $ 52      $ 2,595   

Net interest revenue

     3        46        49        205        203        90        148        646        29        724   

Total revenue

     683        197        880        1,021        613        354        370        2,358        81        3,319   

Provision for credit losses

     -        1        1        -        -        -        -        -        64        65   

Noninterest expense

     521        149        670        789        338        248        193        1,568        344        2,582   

Income before taxes

   $ 162      $ 47      $ 209      $ 232      $ 275      $ 106      $ 177      $ 790      $ (327   $ 672   

Pre-tax operating margin (a)

     24     24     24     23     45     30     48     34     N/M        20

Average assets

   $ 12,859      $ 9,246      $ 22,105      $ 59,980      $ 52,028      $ 20,365      $ 26,275      $ 158,648      $ 31,459      $ 212,212  (b) 

Excluding intangible amortization:

                    

Noninterest expense

   $ 465      $ 138      $ 603      $ 783      $ 318      $ 241      $ 187      $ 1,529      $ 343      $ 2,475   

Income before taxes

     218        58        276        238        295        113        183        829        (326     779   

Pre-tax operating margin (a)

     32     29     31     23     48     32     50     35     N/M        23

 

(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $1,993 million for the fourth quarter of 2009, consolidated average assets were $214,205 million.
N/M – Not meaningful.

 

For the quarter ended Sept. 30, 2009     Total Asset
and Wealth
Management
Sector
                                Total
Institutional
Services
Sector
               
(dollar amounts in millions)    Asset
Management
    Wealth
Management
      Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
      Other
Segment
    Total
continuing
operations
 

Fee and other revenue

   $ 592      $ 146      $ 738      $ 845      $ 389      $ 291      $ 206      $ 1,731      $ (4,685   $ (2,216

Net interest revenue

     7        49        56        229        180        81        149        639        21        716   

Total revenue

     599        195        794        1,074        569        372        355        2,370        (4,664     (1,500

Provision for credit losses

     -        -        -        -        -        -        -        -        147        147   

Noninterest expense

     500        147        647        735        324        251        186        1,496        175        2,318   

Income before taxes

   $ 99      $ 48      $ 147      $ 339      $ 245      $ 121      $ 169      $ 874      $ (4,986   $ (3,965

Pre-tax operating margin (a)

     16     25     19     32     43     33     48     37     N/M        N/M   

Average assets

   $ 12,424      $ 9,122      $ 21,546      $ 59,914      $ 47,975      $ 17,827      $ 24,223      $ 149,939      $ 32,224      $ 203,709  (b) 

Excluding intangible amortization:

                    

Noninterest expense

   $ 447      $ 135      $ 582      $ 729      $ 304      $ 245      $ 180      $ 1,458      $ 174      $ 2,214   

Income before taxes

     152        60        212        345        265        127        175        912        (4,985     (3,861

Pre-tax operating margin (a)

     25     31     27     32     47     34     49     38     N/M        N/M   

 

(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $2,077 million for the third quarter of 2009, consolidated average assets were $205,786 million.
N/M – Not meaningful.

 

18    BNY Mellon


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For the quarter ended

June 30, 2009

           Total Asset
and Wealth
Management
Sector
                                Total
Institutional
Services
Sector
               

(dollar amounts

in millions)

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

Fee and other revenue

   $ 529      $ 140      $ 669      $ 904      $ 413      $ 314      $ 180      $ 1,811      $ (223   $ 2,257   

Net interest revenue

     7        49        56        211        185        87        157        640        4        700   

Total revenue

     536        189        725        1,115        598        401        337        2,451        (219     2,957   

Provision for credit losses

     -        -        -        -        -        -        -        -        61        61   

Noninterest expense

     474        147        621        715        325        263        198        1,501        261        2,383   

Income before taxes

   $ 62      $ 42      $ 104      $ 400      $ 273      $ 138      $ 139      $ 950      $ (541   $ 513   

Pre-tax operating margin (a)

     12     22     14     36     46     34     41     39     N/M        17

Average assets

   $ 12,404      $ 9,131      $ 21,535      $ 58,339      $ 52,161      $ 17,014      $ 24,764      $ 152,278      $ 32,413      $ 206,226  (b) 

Excluding intangible amortization:

                    

Noninterest expense

   $ 419      $ 136      $ 555      $ 706      $ 305      $ 256      $ 191      $ 1,458      $ 262      $ 2,275   

Income before taxes

     117        53        170        409        293        145        146        993        (542     621   

Pre-tax operating margin (a)

     22     28     23     37     49     36     43     41     N/M        21

 

(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $2,307 million for the second quarter of 2009, consolidated average assets were $208,533 million.
N/M – Not meaningful.

 

For the six months ended

June 30, 2010

           Total Asset
and Wealth
Management
Sector
                                Total
Institutional
Services
Sector
               

(dollar amounts

in millions)

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

Fee and other revenue

  $ 1,286  (a)    $ 293      $ 1,579      $ 1,704      $ 738      $ 547      $ 421      $ 3,410      $ 204      $ 5,193  (a) 

Net interest revenue

    1        111        112        426        468        188        337        1,419        (44     1,487   

Total revenue

    1,287        404        1,691        2,130        1,206        735        758        4,829        160        6,680   

Provision for credit losses

    -        -        -        -        -        -        -        -        55        55   

Noninterest expense

    1,020        299        1,319        1,509        663        538        381        3,091        382        4,792   

Income before taxes

  $ 267  (a)    $ 105      $ 372      $ 621      $ 543      $ 197      $ 377      $ 1,738      $ (277   $ 1,833  (a) 

Pre-tax operating margin (b)

    21     26     22     29     45     27     50     36     N/M        27

Average assets

  $ 25,040      $ 10,063      $ 35,103      $ 61,331      $ 50,877      $ 20,947      $ 26,600      $ 159,755      $ 31,703      $ 226,561  (c) 

Excluding intangible amortization:

                   

Noninterest expense

  $ 920      $ 281      $ 1,201      $ 1,498      $ 622      $ 525      $ 370      $ 3,015      $ 381      $ 4,597   

Income before taxes

    367        123        490        632        584        210        388        1,814        (276     2,028   

Pre-tax operating margin (b)

    28     30     29     30     48     29     51     38     N/M        30

 

(a) Total fee and other revenue and income before taxes for the first six months of 2010 includes income from consolidated asset management funds of $130 million net of income attributable to noncontrolling interests of $57 million. The net of these income statement line items of $73 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 $577 million for the six months ended June 30, 2010, consolidated average assets were $227,138 million.
N/M – Not meaningful.

 

BNY Mellon    19


Table of Contents
For the six months ended June 30, 2009     Total                                                   

(dollar amounts

in millions)

   Asset
Management
    Wealth
Management
    Asset and
Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
   

Total

Institutional
Services
Sector

    Other
Segment
    Total
continuing
operations
 

Fee and other revenue

   $ 1,008      $ 281      $ 1,289      $ 1,745      $ 818      $ 635      $ 407      $ 3,605      $ (501   $ 4,393   

Net interest revenue

     22        99        121        460        385        169        316        1,330        24        1,475   

Total revenue

     1,030        380        1,410        2,205        1,203        804        723        4,935        (477     5,868   

Provision for credit losses

     -        -        -        -        -        -        -        -        120        120   

Noninterest expense

     927        287        1,214        1,432        643        522        393        2,990        459        4,663   

Income before taxes

   $ 103      $ 93      $ 196      $ 773      $ 560      $ 282      $ 330      $ 1,945      $ (1,056   $ 1,085   

Pre-tax operating margin (a)

     10     24     14     35     47     35     46     39     N/M        18

Average assets

   $ 12,533      $ 9,370      $ 21,903      $ 61,752      $ 51,516      $ 17,803      $ 26,704      $ 157,775      $ 32,280      $ 211,958  (b) 

Excluding intangible amortization:

                    

Noninterest expense

   $ 817      $ 265      $ 1,082      $ 1,416      $ 602      $ 508      $ 380      $ 2,906      $ 460      $ 4,448   

Income before taxes

     213        115        328        789        601        296        343        2,029        (1,057     1,300   

Pre-tax operating margin (a)

     21     30     23     36     50     37     47     41     N/M        22

 

(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $2,336 million for the six months ended June 30, 2009, consolidated average assets were $214,294 million.
N/M – Not meaningful.

 

Asset and Wealth Management Sector

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 $1.0 trillion at June 30, 2010, compared with $1.1 trillion at March 31, 2010 and $926 billion at June 30, 2009.

The increase compared with June 30, 2009 primarily reflects the acquisition of Insight Investment Management (“Insight”) in the fourth quarter of 2009. The sequential decrease primarily reflects lower market values.

Net asset outflows in the second quarter of 2010 totaled $5 billion, reflecting $17 billion of money market outflows, partially offset by $12 billion of long-term inflows.


 

AUM at period end, by product type

(in billions)

   June 30,
2009
   Sept. 30,
2009
   Dec. 31
2009
   March 31,
2010
   June 30,
2010

Equity securities

   $ 289    $ 328    $ 339    $ 346    $ 309

Money market

     393      376      360      335      317

Fixed income securities

     159      169      235      234      239

Alternative investments and overlay

     85      93      181      190      182

Total AUM

   $ 926    $ 966    $ 1,115    $ 1,105    $ 1,047
              

AUM at period end, by client type

(in billions)

   June 30,
2009
   Sept. 30,
2009
   Dec. 31
2009
   March 31,
2010
   June 30,
2010

Institutional

   $ 425    $ 461    $ 611    $ 620    $ 595

Mutual funds

     421      421      416      396      370

Private client

     80      84      88      89      82

Total AUM

   $ 926    $ 966    $ 1,115    $ 1,105    $ 1,047

 

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Changes in market value of AUM from March 31, 2010 to June 30, 2010 – by business segment                      
(in billions)    Asset
Management
    Wealth
Management
    Total  

Market value of AUM at March 31, 2010:

   $ 1,029      $ 76      $ 1,105   

Net inflows (outflows):

      

Long-term

     13        (1     12   

Money market

     (17     -        (17

Total net inflows (outflows)

     (4     (1     (5

Net market/currency impact

     (49     (4     (53

Market value of AUM at June 30, 2010

   $ 976 (a)    $ 71 (b)    $ 1,047   

 

(a) Excludes $4 billion subadvised for the Wealth Management segment.
(b) Excludes private client assets managed in the Asset Management segment.

Asset Management segment

 

(dollar amounts in millions,

unless otherwise noted)

                                      2Q10 vs.     Year-to-date     YTD10
vs.
YTD09
 
   2Q09     3Q09     4Q09     1Q10     2Q10     2Q09     1Q10     2010     2009    

Revenue:

                                                                          

Asset and wealth management:

                    

Mutual funds

   $ 266      $ 274      $ 266      $ 242      $ 242      (9 )%    -   $ 484      $ 529      (9 )% 

Institutional clients

     175        197        227        264        264      51      -        528        356      48   

Private clients

     31        34        38        38        37      19      (3     75        63      19   

Performance fees

     26        1        59        13        19      (27   46        32        33      (3

Total asset and wealth management revenue

     498        506        590        557        562      13      1        1,119        981      14   

Distribution and servicing

     90        84        84        75        75      (17   -        150        182      (18

Other

     (59     2        6        17        -      N/M      N/M        17        (155   N/M   

Total fee and other revenue (a)

     529        592        680        649        637      20      (2     1,286        1,008      28   

Net interest revenue

     7        7        3        -        1      N/M      N/M        1        22      N/M   

Total revenue (b)

     536        599        683        649        638      19      (2     1,287        1,030      25   

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

     419        415        465        453        474      13      5        927        831      12   

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

     117        184        218        196        164      40      (16     360        199      81   

Amortization of intangible assets

     55        53        56        50        50      (9   -        100        110      (9

Support agreement charges

     -        32        -        -        (7   N/M      N/M        (7     (14   N/M   

Income before taxes

   $ 62      $ 99      $ 162      $ 146      $ 121      95   (17 )%    $ 267      $ 103      159

Memo: Income before taxes (ex. intangible amortization)

   $ 117      $ 152      $ 218      $ 196      $ 171      46   (13 )%    $ 367      $ 213      72

Pre-tax operating margin

     12     16     24     23     19         21     10  

Pre-tax operating margin (ex. intangible amortization) (c)

     22     25     32     30     27         28     21  

AUM (in billions) (d)

   $ 860      $ 897      $ 1,045      $ 1,034      $ 980      14   (5 )%    $ 980      $ 860      14

AUM net inflows (outflows):

                    

Long-term (in billions)

   $ (18   $ (2   $ 13      $ 15      $ 13          $ 28      $ (20  

Money-market (in billions)

   $ (2   $ (14   $ (22   $ (25   $ (17               $ (42   $ (13      

 

(a) Total fee and other revenue for the first and second quarters and year-to-date 2010 includes income from consolidated asset management funds of $65 million, $65 million and $130 million, respectively, and income attributable to noncontrolling interests of $24 million, $33 million and $57 million, respectively. The net of these income statement line items for the first and second quarters and year-to-date 2010 of $41 million, $32 million and $73 million, respectively, is included above in institutional client revenue of $25 million, $29 million and $54 million, respectively, and other revenue of $16 million, $3 million and $19 million, respectively.
(b) Investment securities gains (losses) were $(45) million in 2Q09, $- million in 3Q09, $1 million in 4Q09, $- million in 1Q10 and $1 million in 2Q10. Excluding investment securities gains (losses), the total revenue growth rate 2Q10 vs. 2Q09 was 10%.
(c) The pre-tax operating margin, excluding intangible amortization, support agreement charges and investment securities gains (losses) was 28% for 2Q09, 31% for 3Q09, 32% for 4Q09, 30% for 1Q10, 26% for 2Q10, 28% for the first six months of 2010 and 25% for the first six months of 2009.
(d) Includes $3 billion, $5 billion, $5 billion, $5 billion and $4 billion subadvised for the Wealth Management segment, respectively.
N/M – Not meaningful.

 

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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.

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, will be owned by BNY Mellon (49%) and Western Securities (51%). BNY Mellon Western Fund Management will initially manage domestic Chinese securities in a range of local retail fund products. Over time, the venture expects to develop further products using the scale and expertise of the broader BNY Mellon group. BNY Mellon Western Fund Management will also focus on leveraging distribution within the Chinese banking and securities sectors, building awareness of the new company in the region.

The results of the Asset Management segment 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 segment are also impacted by sales of fee-based products such as fixed and variable annuities and separately managed accounts. In addition, performance fees may be generated when the investment performance exceeds various benchmarks and satisfies other criteria. Expenses in this segment are mainly driven by staffing costs, incentives, distribution and servicing expense, and product distribution costs.

In November 2009, we acquired Insight which specializes in liability-driven investment solutions, active fixed income and alternative investments. At

acquisition, Insight had approximately $138 billion in assets under management.

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

Review of financial results

In the second quarter of 2010, Asset Management had pre-tax income of $121 million compared with $62 million in the second quarter of 2009 and $146 million in the first quarter of 2010. Excluding amortization of intangible assets, pre-tax income was $171 million in the second quarter of 2010 compared with $117 million in the second quarter of 2009 and $196 million in the first quarter of 2010.

The Asset Management segment generated 600 basis points of positive operating leverage compared with the second quarter of 2009, excluding intangible amortization and support agreement charges.

Asset and wealth management revenue in the Asset Management segment was $562 million in the second quarter of 2010 compared with $498 million in the second quarter of 2009 and $557 million in the first quarter of 2010. Excluding performance fees, asset and wealth management fee revenue increased 15% compared with the prior year period and was unchanged sequentially. The increase year-over-year reflects improved equity values, the impact of the Insight acquisition and new business, partially offset by a reduction in fees due to money market outflows and higher fee waivers. Sequentially, the impact of new business was more than offset by lower market values. Performance fees were $19 million in the second quarter of 2010 compared with $26 million in the second quarter of 2009 and $13 million in the first quarter of 2010.

In the second quarter of 2010, net long-term inflows of $13 billion were more than offset by $17 billion of money market outflows. Long-term inflows benefited from strength in institutional fixed income and global equity products and the fifth consecutive quarter of positive flows in retail funds.

In the second quarter of 2010, 43% of Asset and Wealth Management fees in the Asset Management segment were generated from managed mutual fund fees. These fees are based on the daily average net


 

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assets of each fund and the basis point management fee paid by that fund. Managed mutual fund fee revenue was $242 million in the second quarter of 2010 compared with $266 million in the second quarter of 2009 and $242 million in the first quarter of 2010. The year-over-year decrease reflects outflows in money market funds and higher fee waivers.

Distribution and servicing fees were $75 million in the second quarter of 2010 compared with $90 million in the second quarter of 2009 and $75 million in the first quarter of 2010. The year-over-year decrease primarily reflects lower money market inflows.

There was no other fee revenue in the second quarter of 2010 compared with a loss of $59 million in the second quarter of 2009 and gains of $17 million in the first quarter of 2010. The comparison with the second quarter of 2009 primarily reflects investment write-downs in the second quarter of 2009.

Revenue generated in the Asset Management segment includes 49% from non-U.S. sources in the second quarter of 2010 compared with 50% in the first quarter of 2010. Excluding investment securities losses in the second quarter of 2009, revenue includes 40% generated from non U.S. sources.

Noninterest expense (excluding amortization of intangible assets and support agreement charges) was $474 million in the second quarter of 2010 compared with $419 million in the second quarter of 2009 and $453 million in the first quarter of 2010. The year-over-year increase primarily reflects the Insight acquisition and higher incentive expense. The sequential increase reflects higher incentive expense and the impact of the annual merit increase.

Year-to-date 2010 compared with year-to-date 2009

Income before taxes totaled $267 million in the first six months of 2010 compared with $103 million in the first six months of 2009. Income before taxes (excluding intangible amortization) was $367 million in the first six months of 2010 compared with $213 million in the first six months of 2009. Fee and other revenue increased $278 million, primarily due to improved global market values, the impact of the Insight acquisition, the impact of long-term inflows and investment write-downs in the first half of 2009. Noninterest expense (excluding intangible amortization and support agreement charges) increased $96 million in the first six months of 2010 compared with the first six months of 2009, primarily due to the Insight acquisition and higher incentive expense.


 

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Wealth Management segment

 

(dollar amounts in millions, unless otherwise noted)                                       2Q10 vs.     Year-to-date     YTD10
vs.
YTD09
 
   2Q09     3Q09     4Q09     1Q10     2Q10     2Q09     1Q10     2010     2009    

Revenue:

                                                                          

Asset and wealth management

   $ 128      $ 133      $ 136      $ 136      $ 134      5   (1 )%    $ 270      $ 250      8

Other

     12        13        15        10        13      8      30        23        31      (26

Total fee and other revenue

     140        146        151        146        147      5      1        293        281      4   

Net interest revenue

     49        49        46        55        56      14      2        111        99      12   

Total revenue

     189        195        197        201        203      7      1        404        380      6   

Provision for credit losses

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

Noninterest expense (ex. intangible amortization)

     136        135        138        136        145      7      7        281        265      6   

Income before taxes (ex. intangible amortization)

     53        60        58        65        58      9      (11     123        115      7   

Amortization of intangible assets

     11        12        11        9        9      (18   -        18        22      (18

Income before taxes

   $ 42      $ 48      $ 47      $ 56      $ 49      17   (13 )%    $ 105      $ 93      13

Pre-tax operating margin

     22     25     24     28     24         26     24  

Pre-tax operating margin (ex. intangible amortization)

     28     31     29     32     28         30     30  

Average loans

   $ 5,684      $ 6,010      $ 6,191      $ 6,302      $ 6,350      12   1   $ 6,326      $ 5,536      14 % 

Average assets

     9,131        9,122        9,246        9,722        10,399      14      7        10,063        9,370      7   

Average deposits

     6,628        6,602        6,804        7,310        7,991      21      9        7,652        6,842      12   

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

   $ 142      $ 151      $ 154      $ 157      $ 150      6   (4 )%    $ 150      $ 142      6
N/M – Not meaningful.

 

Business description

In the Wealth Management segment, 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, families, endowments and foundations and related entities. BNY Mellon Wealth Management is a top 10 U.S. wealth manager with $150 billion in client assets. We serve our clients through an expansive network of office sites in 17 states and 3 countries, including 16 of the top 25 domestic wealth markets.

The results of the Wealth Management segment are driven by the level and mix of assets managed and under custody, and the level of activity in client accounts. Net interest revenue is determined by the level of interest rate spread between loans and deposits. Expenses of this segment are driven mainly by staff expense in the investment management, sales, service and support groups.

Review of financial results

Income before taxes was $49 million in the second quarter of 2010, compared with $42 million in the

second quarter of 2009 and $56 million in the first quarter of 2010. Income before taxes, excluding intangible amortization, was $58 million in the second quarter of 2010, compared with $53 million in the second quarter of 2009 and $65 million in the first quarter of 2010.

Total fee and other revenue was $147 million in the second quarter of 2010, compared with $140 million in the second quarter of 2009 and $146 million in the first quarter of 2010. The increase compared with the second quarter of 2009 reflects organic growth, the impact of higher equity markets and increased capital markets fees. Fee and other revenue increased sequentially due to organic growth and higher capital markets fees, partially offset by lower equity markets.

Client assets under management and custody were $150 billion at June 30, 2010, compared with $142 billion at June 30, 2009 and $157 billion at March 31, 2010. The decrease compared with March 31, 2010 reflects market depreciation.

Net interest revenue increased $7 million year-over-year and $1 million sequentially. The year-over-year increase was primarily due to high quality loan


 

24    BNY Mellon


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growth, higher loan spreads, and the higher yield related to the restructured investment securities portfolio. The sequential increase reflects higher deposit levels and higher deposit margins. Average loans increased 12% year-over-year and 1% (unannualized) sequentially. Average deposit levels increased 21% year-over-year and 9% (unannualized) sequentially.

Noninterest expense (excluding amortization of intangible assets) increased $9 million compared with both the second quarter of 2009 and first quarter of 2010. The year-over-year increase primarily reflects higher legal and FDIC expenses, the impact of the annual merit increase and production-related incentives, partially offset by workforce reductions and expense control. The sequential increase reflects the timing of business development expenses and the annual merit increase.

Year-to-date 2010 compared with year-to-date 2009

Income before taxes totaled $105 million in the first six months of 2010 compared with $93 million in the first six months of 2009. Excluding intangible amortization, income before taxes increased $8 million. Fee and other revenue increased $12 million reflecting organic growth and the impact of higher equity markets. The $12 million increase in net interest revenue was primarily due to high quality loan growth and higher loan spreads, and the higher yield related to the restructured investment securities portfolio, partially offset by lower deposit margins. Noninterest expense (excluding intangible amortization) increased $16 million primarily due to higher production-related incentive compensation for employees and FDIC expenses, partially offset by workforce reductions and expense control.

 

Institutional Services Sector

At June 30, 2010, our assets under custody and administration totaled $21.8 trillion, a decrease of 2% from $22.4 trillion at March 31, 2010 and a 6% increase from $20.7 trillion at June 30, 2009. The sequential decrease primarily reflects lower market values. The year-over-year increase reflects higher market values and net new business. Equity securities constituted 28% and fixed-income securities constituted 72% of the assets under custody and administration at June 30, 2010, compared with 30% equity securities and 70% fixed income securities at March 31, 2010 and 27% equity securities and 73% fixed income securities at June 30, 2009. Assets under custody and administration at June 30, 2010 consisted of assets related to custody, mutual funds, and corporate trust businesses of $17.3 trillion, broker-dealer service assets of $3.0 trillion, and all other assets of $1.5 trillion.

The market value of securities on loan at June 30, 2010 decreased to $248 billion compared with $253 billion at March 31, 2010. The market value of securities on loan was $290 billion at June 30, 2009. The year-over-year decline primarily reflects a high level of U.S. Treasury securities issuances.

On July 1, 2010, we completed the acquisition of Global Investment Servicing, Inc. and on August 2, 2010, we completed the acquisition of BHF Asset Servicing GmbH. See the “Second quarter 2010 and subsequent events” section for additional information.


 

Assets under custody and administration trend                  
      June 30,
2009
   Sept. 30,
2009
   Dec. 31,
2009
   March 31,
2010
   June 30,
2010

Market value of assets under custody and administration (in trillions) (a)

   $ 20.7    $ 22.1    $ 22.3    $ 22.4    $ 21.8

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

   $ 290    $ 299    $ 247    $ 253    $ 248
(a) Includes the assets under custody or administration of CIBC Mellon Global Securities Services Company, a joint venture with Canadian Imperial Bank of Commerce, of $810 billion at June 30, 2009, $943 billion at Sept. 30, 2009, $905 billion at Dec. 31, 2009, $964 billion at March 31, 2010 and $903 billion at June 30, 2010.
(b) Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing segment.

 

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Asset Servicing segment

 

(dollar amounts in millions, unless otherwise noted)                                       2Q10 vs.           Year-to-date     YTD10
vs.
YTD09
 
   2Q09     3Q09     4Q09     1Q10     2Q10     2Q09     1Q10          2010     2009    

Revenue:

                                                                               

Securities servicing fees – asset servicing

   $ 557      $ 573      $ 581      $ 569      $ 586      5   3      $ 1,155      $ 1,061      9

Securities lending revenue

     85        32        25        24        30      (65   25           54        164      (67

Foreign exchange and other trading activities

     216        190        177        170        207      (4   22           377        426      (12 ) 

Other

     46        50        33        35        83      80      137             118        94      26   

Total fee and other revenue

     904        845        816        798        906      -      14           1,704        1,745      (2

Net interest revenue

     211        229        205        210        216      2      3             426        460      (7

Total revenue

     1,115        1,074        1,021        1,008        1,122      1      11           2,130        2,205      (3

Noninterest expense (ex. Intangible amortization and support agreement charges)

     721        748        788        740        765      6      3             1,505        1,425      6   

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

     394        326        233        268        357      (9   33           625        780      (20

Support agreement charges

     (15     (19     (5     (23     16      N/M      N/M           (7     (9   N/M   

Amortization of intangible assets

     9        6        6        6        5      (44   (17          11        16      (31

Income before taxes

   $ 400      $ 339      $ 232      $ 285      $ 336      (16 )%    18        $ 621      $ 773      (20 )% 

Memo: Income before taxes (ex. intangible amortization)

   $ 409      $ 345      $ 238      $ 291      $ 341      (17 )%    17      $ 632      $ 789      (20 )% 

Pre-tax operating margin

     36     32     23     28     30            29     35  

Pre-tax operating margin (ex. intangible amortization)

     37     32     23     29     30            30     36  

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

   $ 290      $ 299      $ 247      $ 253      $ 248      (14 )%    (2 )%       $ 248      $ 290      (14 )% 

Average assets

   $ 58,339      $ 59,914      $ 59,980      $ 59,704      $ 62,940      8   5      $ 61,331      $ 61,752      (1 )% 

Average deposits

   $ 50,583      $ 52,271      $ 51,755      $ 52,183      $ 55,343      9   6        $ 53,772      $ 53,816      -

N/M - Not meaningful.

 

Business description

The Asset Servicing segment includes global custody, global fund services, securities lending, global liquidity services, outsourcing, alternative investment services, government securities clearance, collateral management and credit-related services and other linked revenues, principally foreign exchange. Clients include corporate and public retirement funds, foundations and endowments and global financial institutions including banks, broker-dealers, investment managers, insurance companies and mutual funds.

The results of the Asset Servicing segment are driven by a number of factors which include the level of transaction activity, the extent of services provided, including custody, accounting, fund administration, daily valuations, performance measurement and risk analytics, securities lending, investment manager backoffice outsourcing and the market value of assets under administration and custody. Market interest rates impact both securities lending revenue and the earnings on client deposit balances. Broker-dealer fees depend on the level of

activity in the fixed income and equity markets and the financing needs of customers, which are typically higher when the equity and fixed income markets are active. Also, tri-party repo arrangements continue to remain a key revenue driver in broker-dealer services. Foreign exchange trading revenues are influenced by the volume of client transactions and the spread realized on these transactions, market volatility in major currencies, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by corporate and institutional clients. Segment expenses are principally driven by staffing levels and technology investments.

We are one of the leading global securities servicing providers with a total of $21.8 trillion of assets under custody and administration at June 30, 2010. We continue to maintain our number one ranking in two major global custody surveys. We are one of the largest providers of fund services in the world, servicing $4.9 trillion in assets. We also service 48% of the funds in the U.S. exchange-traded funds marketplace. We are the largest custodian for U.S.


 

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corporate and public pension plans. BNY Mellon Asset Servicing services 44% of the top 50 endowments.

We are a leading custodian in the U.K. and service 30% of U.K. pensions. European asset servicing continues to grow across all products, reflecting significant cross-border investment and capital flow. In our alternative investment services business, we are a top 10 service provider to single manager hedge funds, funds of hedge funds and private equity. In securities lending, we are one of the largest lenders of U.S. Treasury securities and depositary receipts and service a lending pool of $2.4 trillion in 31 markets around the world. We are one of the largest global providers of performance and risk analytics with $8.9 trillion in assets under measurement.

Our broker-dealer service business is a leader in global clearance, clearing equity and fixed income transactions in more than 100 markets. We are a leading clearing agent for U.S. government securities, handling a majority of transactions cleared through the Federal Reserve Bank of New York and clearing for 13 of the 18 primary dealers. We are a leading collateral management agent with $1.5 trillion in tri-party balances worldwide at June 30, 2010.

Review of financial results

Income before taxes was $336 million in the second quarter of 2010 compared with $400 million in the second quarter of 2009, and $285 million in the first quarter of 2010. Income before taxes, excluding intangible amortization and support agreement charges, was $357 million in the second quarter of 2010 compared with $394 million in the second quarter of 2009 and $268 million in the first quarter of 2010. The Asset Servicing segment generated 800 basis points of positive operating leverage compared with the first quarter of 2010, excluding support agreement charges and intangible amortization.

Revenue generated in the Asset Servicing segment includes 40% from non-U.S. sources in the second quarter of 2010, 35% in the second quarter of 2009 and 43% in the first quarter of 2010.

Securities servicing fees, excluding securities lending revenue, increased $29 million, or 5%, compared with the second quarter of 2009 and $17 million, or 3% (unannualized) sequentially. The

year-over-year increase reflects higher market values and new business. The sequential increase reflects new business and higher transaction volumes.

Securities lending revenue decreased $55 million compared to the second quarter of 2009 and increased $6 million sequentially. The year-over-year decrease reflects narrower spreads and lower loan balances while the sequential increase reflects seasonality. Spreads decreased 49% compared with the second quarter of 2009 and increased 60% sequentially. Volumes decreased 9% compared with the second quarter of 2009 and increased 4% (unannualized) sequentially.

Foreign exchange and other trading decreased 4% compared with the second quarter of 2009 and increased 22% (unannualized) sequentially. Both fluctuations primarily resulted from changes in volatility.

Other revenue increased year-over-year and sequentially as a result of higher foreign exchange translation gains.

Net interest revenue increased 2% year-over-year and 3% (unannualized) sequentially. The increase compared with the second quarter of 2009 resulted from the higher yield related to the restructured investment securities portfolio, primarily offset by lower spreads on deposits. The increase sequentially reflects higher deposit levels and spreads.

Noninterest expense (excluding amortization of intangible assets and support agreement charges) increased $44 million compared with the second quarter of 2009 and $25 million sequentially. The year-over-year increase reflects higher subcustodian fees resulting from higher asset values and transaction volumes, as well as higher professional, legal and other purchased services and higher business development expense. The sequential increase was primarily driven by higher subcustodian fees and higher business development activity.

Year-to-date 2010 compared with year-to-date 2009

Income before taxes totaled $621 million in the first six months of 2010 compared with $773 million in the first six months of 2009. Excluding intangible amortization and support agreement charges, income before taxes decreased $155 million. Fee and other revenue decreased $41 million primarily due to lower securities lending revenue, reflecting narrower spreads and lower loan balances. Net interest revenue decreased $34 million primarily driven by


 

BNY Mellon    27


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lower spreads on deposits. Noninterest expense (excluding intangible amortization and support agreement charges) increased $80 million primarily due to higher sub-custodial fees resulting from

higher asset values and transaction volume, as well as higher professional, legal and other purchased services and higher business development activity.


 

Issuer Services segment

 

                                         2Q10 vs.           Year-to-date     YTD10
vs.
YTD09
 
(dollars in millions)    2Q09     3Q09     4Q09     1Q10     2Q10     2Q09     1Q10          2010     2009    

Revenue:

                                                                               

Securities servicing fees – issuer services

   $ 373      $ 359      $ 367      $ 333      $ 353      (5 )%    6      $ 686      $ 736      (7 )% 

Other

     40        30        43        25        27      (33   8             52        82      (37

Total fee and other revenue

     413        389        410        358        380      (8   6           738        818      (10

Net interest revenue

     185        180        203        252        216      17      (14          468        385      22   

Total revenue

     598        569        613        610        596      -      (2        1,206        1,203      -   

Noninterest expense (ex. intangible amortization)

     305        304        318        304        318      4      5             622        602      3   

Income before taxes (ex. intangible amortization)

     293        265        295        306        278      (5   (9        584        601      (3

Amortization of intangible assets

     20        20        20        20        21      5      5           41        41      -   

Income before taxes

   $ 273      $ 245      $ 275      $ 286      $ 257      (6 )%    (10 )%         $ 543      $ 560      (3 )% 

Pre-tax operating margin

     46     43     45     47     43            45     47  

Pre-tax operating margin (ex. intangible amortization)

     49     47     48     50     47            48     50  

Average assets

   $ 52,161      $ 47,975      $ 52,028      $ 52,838      $ 48,938      (6 )%    (7 )%       $ 50,877      $ 51,516      (1 )% 

Average deposits

   $ 47,293      $ 43,183      $ 47,320      $ 48,470      $ 44,560      (6 )%    (8 )%       $ 46,504      $ 46,631      -

Number of depositary receipt programs

     1,320        1,322        1,330        1,336        1,345      2   1          1,345        1,320      2

 

Business description

The Issuer Services segment provides a diverse array of products and services to global fixed income and equity issuers.

BNY Mellon is the number one provider of corporate trust services for all major debt categories across conventional, structured finance and specialty debt. We service $11.6 trillion in outstanding debt from 61 locations in 20 countries. We serve as depositary for 1,345 sponsored American and global depositary receipt programs, acting in partnership with leading companies from 67 countries. In addition to top-ranked stock transfer agency services, BNY Mellon Shareowner Services offers a comprehensive suite of equity solutions, including record-keeping and corporate actions processing, demutualizations, direct investment, dividend reinvestment, proxy solicitation and employee stock plan administration.

Fee revenue in the Issuer Services segment depends on:

 

 

the volume of issuance of fixed income securities;

 

depositary receipts issuance and cancellation volume;

 

corporate actions impacting depositary receipts; and

 

stock transfer, corporate actions and equity trading volumes.

Expenses in the Issuer Services segment are driven by staff, equipment and space required to support the services provided by the segment.

Review of financial results

Income before taxes was $257 million in the second quarter of 2010, compared with $273 million in the second quarter of 2009 and $286 million in the first quarter of 2010. Income before taxes, excluding intangible amortization, was $278 million in the second quarter of 2010, compared with $293 million in the second quarter of 2009 and $306 million in the first quarter of 2010.

Total fee and other revenue decreased 8% year-over-year and increased 6% sequentially.

 

   

Corporate Trust – Fee and other revenue decreased year-over-year and sequentially. The


 

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year-over-year decline reflects weakness in the global debt markets and lower money market related fees. The sequential decline reflects continued low debt issuances in the global markets.

 

Depositary Receipts – Fee and other revenue increased year-over-year and sequentially primarily due to higher transaction and servicing fees. The sequential increase was also impacted by seasonality. Depositary Receipt issuances have exceeded cancellations for five consecutive quarters.

 

Shareowner Services – Fee and other revenue decreased year-over-year and increased sequentially. The year-over-year decrease reflects lower corporate action fees and lower employee stock option plan fees. The sequential increase reflects higher seasonal shareholder services revenue, partially offset by lower corporate action fees.

Net interest revenue increased $31 million, or 17%, compared with the second quarter of 2009, and decreased $36 million, or 14% (unannualized), compared with the first quarter of 2010. The year-over-year increase was driven by the higher yield related to the restructured investment securities

portfolio and higher deposit spreads. The sequential decline reflects lower client deposits.

Noninterest expense (excluding intangible amortization) increased $13 million, or 4%, compared with the second quarter of 2009 and $14 million, or 5% (unannualized) sequentially. The year-over-year increase reflects higher legal and FDIC expenses. The sequential increase resulted from higher legal expense and timing of business development activity. Staff expense decreased year-over-year and was unchanged sequentially.

Year-to-date 2010 compared with year-to-date 2009

Income before taxes totaled $543 million in the first six months of 2010 compared with $560 million in the first six months of 2009. Excluding intangible amortization, income before taxes decreased $17 million. Fee and other revenue decreased $80 million primarily reflecting weakness in the global debt markets and lower money market related fees. Net interest revenue increased $83 million driven by the higher yield related to the restructured investment securities portfolio. Noninterest expense (excluding intangible amortization) increased $20 million primarily driven by higher legal and FDIC expenses.


 

Clearing Services segment

 

(dollar amounts in millions, unless otherwise noted)                                       2Q10 vs.           Year-to-date     YTD10
vs.
YTD09
 
   2Q09     3Q09     4Q09     1Q10     2Q10     2Q09     1Q10          2010     2009    

Revenue:

                                                                               

Securities servicing fees – clearing services

   $ 248      $ 232      $ 219      $ 227      $ 240      (3 )%    6      $ 467      $ 497      (6 )% 

Other

     66        59        45        44        36      (45   (18          80        138      (42

Total fee and other revenue

     314        291        264        271        276      (12   2           547        635      (14

Net interest revenue

     87        81        90        95        93      7      (2          188        169      11   

Total revenue

     401        372        354        366        369      (8   1           735        804      (9

Noninterest expense (ex. intangible amortization)

     256        245        241        255        270      5      6             525        508      3   

Income before taxes (ex. intangible amortization)

     145        127        113        111        99      (32   (11        210        296      (29

Amortization of intangible assets

     7        6        7        6        7      N/M      N/M           13        14      N/M   

Income before taxes

   $ 138      $ 121      $ 106      $ 105      $ 92      (33 )%    (12 )%         $ 197      $ 282      (30 )% 

Pre-tax operating margin

     34     33     30     29     25            27     35  

Pre-tax operating margin (ex. intangible amortization)

     36     34     32     30     27            29     37  

Average active accounts (in thousands)

     4,999        4,771        4,758        4,811        4,896      (2 )%    2        4,854        5,224      (7 )% 

Average assets

   $ 17,014      $ 17,827      $ 20,365      $ 20,338      $ 21,550      27   6      $ 20,947      $ 17,803      18

Average margin loans

   $ 4,121      $ 4,322      $ 4,651      $ 5,229      $ 5,775      40   10      $ 5,504      $ 4,164      32

Average payables to customers and broker-dealers

   $ 4,901      $ 5,845      $ 6,476      $ 6,495      $ 6,593      35   2        $ 6,544      $ 4,352      50

N/M – Not meaningful.

 

BNY Mellon    29


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Business description

Our Clearing Services segment consists of Pershing’s global clearing and execution business in over 60 markets. Located in 20 offices worldwide, Pershing provides operational support, trading services, flexible technology, an expansive array of investment solutions including managed accounts, mutual funds and cash management, practice management support and service excellence. Pershing takes a consultative approach, working behind the scenes for its more than 1,150 customers who represent approximately five million individual and institutional investors. Pershing serves a broad array of customers including financial intermediaries, broker-dealers, independent registered investment advisors and hedge fund managers.

Pershing is the enterprise name for Pershing, Pershing Advisor Solutions, Pershing Prime Services, iNautix USA, the Lockwood companies, and its international affiliates in Canada, Ireland, the U.K. and Singapore.

Revenue in this segment includes fees and commissions from broker-dealer services, registered investment advisor services, prime brokerage services and electronic trading services, which are primarily driven by trading volumes, particularly those related to retail customers and overall market levels.

A substantial amount of revenue in this segment is generated from non-transactional activities, such as asset gathering; providing services to mutual funds, money market funds and retirement programs; and administration and other services.

Segment expenses are driven by staff, equipment and space required to support the services provided by the segment and the cost of execution and clearance of trades.

Review of financial results

Income before taxes was $92 million in the second quarter of 2010, $138 million in the second quarter of 2009 and $105 million in the first quarter of 2010.

Total fee and other revenue decreased $38 million, or 12%, compared with the second quarter of 2009 and increased $5 million, or 2% (unannualized) compared with the first quarter of 2010. The year-over-year decrease was primarily due to lower money market related distribution fees and lower trading volumes, partially offset by higher mutual fund fee revenue driven by improved asset values. The sequential increase was primarily due to higher transaction fee volumes and higher money market fund fees, partially offset by lower trading revenue.

Net interest revenue increased $6 million compared with the second quarter of 2009 and decreased $2 million compared with the first quarter of 2010. Both variances were impacted by the fluctuation in accretion related to the restructured investment securities portfolio. The sequential comparison was also impacted by a higher level of interest-earning assets partially offset by lower spreads.

Noninterest expense (excluding intangible amortization) increased $14 million, or 5%, compared to the second quarter of 2009 and $15 million, or 6% (unannualized) compared with the first quarter of 2010. Both increases primarily reflect higher expenses in support of future client conversions and higher professional, legal and other purchased services expenses. The sequential increase also reflects higher clearing expense driven by increased volumes.

Year-to-date 2010 compared with year-to-date 2009

Income before taxes totaled $197 million in the first six months of 2010 compared with $282 million in the first six months of 2009. Fee and other revenue decreased $88 million primarily reflecting lower money market related distribution fees and lower trading volumes. Net interest revenue increased $19 million compared with the second quarter of 2009, primarily reflecting the higher yield related to the restructured investment securities portfolio. Noninterest expense (excluding intangible amortization) increased $17 million primarily reflecting higher expenses in support of future client conversions and higher professional legal and other purchased services expense.


 

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Treasury Services segment

 

                                         2Q10 vs.           Year-to-date     YTD10
vs.
YTD09
 
(dollar amounts in millions)    2Q09     3Q09     4Q09     1Q10     2Q10     2Q09     1Q10          2010     2009    

Revenue:

                                                                               

Treasury services

   $ 128      $ 124      $ 130      $ 127      $ 121      (5 )%    (5 )%       $ 248      $ 249      -

Other

     52        82        92        98        75      44      (23          173        158      9   

Total fee and other revenue

     180        206        222        225        196      9      (13        421        407      3   

Net interest revenue

     157        149        148        176        161      3      (9          337        316      7   

Total revenue

     337        355        370        401        357      6      (11        758        723      5   

Noninterest expense (ex. intangible amortization)

     191        180        187        182        188      (2   3             370        380      (3

Income before taxes (ex. intangible amortization)

     146        175        183        219        169      16      (23        388        343      13   

Amortization of intangible assets

     7        6        6        6        5      (29   (17        11        13      (15

Income before taxes

   $ 139      $ 169      $ 177      $ 213      $ 164      18   (23 )%         $ 377      $ 330      14

Pre-tax operating margin

     41     48     48     53     46            50     46  

Pre-tax operating margin (ex. intangible amortization)

     43     49     50     55     47            51     47  

Average loans

   $ 13,228      $ 11,648      $ 10,982      $ 10,436      $ 10,290      (22 )%    (1 )%       $ 10,363      $ 13,573      (24 )% 

Average assets

   $ 24,764      $ 24,223      $ 26,275      $ 26,716      $ 26,485      7   (1 )%       $ 26,600      $ 26,704      -

Average deposits

   $ 20,321      $ 19,989      $ 22,138      $ 22,257      $ 22,209      9   -        $ 22,233      $ 22,582      (2 )% 

 

Business description

The Treasury Services segment includes cash management solutions, trade finance services, international payment services and global markets, capital markets and liquidity services.

Treasury services revenue is directly influenced by the volume of transactions and payments processed, loan levels, types of service provided, net interest revenue earned from deposit balances generated by activity across our business operations and the value of the credit derivatives portfolio. Treasury services revenue is indirectly influenced by other factors including market volatility in major currencies and the level and nature of underlying cross-border investments, as well as other transactions undertaken by corporate and institutional clients.

Segment expenses are driven by staff, equipment and space required to support the services provided, as well as operating services in support of volume increases.

Treasury Services offers leading-edge technology, innovative products, and industry expertise to help its clients optimize cash flow, manage liquidity and make payments around the world in more than 100 different countries. We maintain a global network of branches, representative offices and correspondent banks to provide comprehensive payment services including funds transfer, cash management, foreign exchange, trade services and

liquidity management. We are the fourth largest Fedwire and CHIPS payment processor, processing about 160 thousand or an average of about $1.5 trillion, global payments daily.

Our corporate lending strategy is to focus on those clients and industries that are major users of securities servicing and treasury services. Revenue from our lending activities is primarily driven by loan levels and spreads over funding costs.

Review of financial results

Income before taxes was $164 million in the second quarter of 2010 compared with $139 million in the second quarter of 2009, and $213 million in the first quarter of 2010.

Total fee and other revenue increased $16 million compared with the second quarter of 2009 and decreased $29 million compared with the first quarter of 2010. The year-over-year increase resulted from an improvement in the mark-to-market adjustments on credit default swaps, partially offset by lower trading revenue, lower financing-related fees and lower global payment fees. The sequential decrease was due primarily to lower trading revenue, global payment fees and financing-related fees.

Net interest revenue increased $4 million compared to the second quarter of 2009 and decreased $15 million sequentially. The year-over-year increase primarily resulted from the higher yield related to


 

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the restructured investment securities portfolio, partially offset by lower average loan balances reflecting our credit strategy to reduce targeted risk exposure. The sequential decrease reflects lower spreads.

Noninterest expense (excluding intangible amortization) decreased $3 million compared with the second quarter of 2009 and increased $6 million sequentially. The year-over-year decrease reflects overall expense control and lower FDIC expense. The sequential increase primarily reflects seasonally lower expenses in the first quarter of 2010.

 

Year-to-date 2010 compared with year-to-date 2009

Income before taxes totaled $377 million in the first six months of 2010 compared with $330 million in the first six months of 2009. Fee and other revenue increased $14 million primarily reflecting an improvement in the mark-to-market adjustments on credit default swaps, partially offset by lower financing-related fees. Net interest revenue increased $21 million primarily due to the higher yield related to the restructured investment securities portfolio partially offset by lower average loan balances reflecting our credit strategy to reduce targeted risk exposure. Noninterest expense (excluding intangible amortization) decreased $10 million primarily reflecting ongoing expense management.


 

Other Segment

 

                                         Year-to-date  
(dollars in millions)    2Q09     3Q09     4Q09     1Q10     2Q10     2010     2009  

Revenue:

              

Fee and other revenue

   $ (223   $ (4,685   $ 52      $ 143      $ 61      $ 204      $ (501

Net interest revenue (expense)

     4        21        29        (23     (21     (44     24   

Total revenue

     (219     (4,664     81        120        40        160        (477

Provision for credit losses

     61        147        64        35        20        55        120   

Noninterest expense (ex. special litigation reserves, FDIC special assessment, intangible amortization, M&I expenses and restructuring charges)

     136        125        152        119        66        185        256   

Income (loss) before taxes (ex. special litigation reserves, FDIC special assessment, intangible amortization, M&I expenses and restructuring charges)

     (416     (4,936     (135     (34     (46     (80     (853

Special litigation reserves

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

FDIC special assessment

     61        -        -        -        -        -        61   

Amortization of intangible assets

     (1     1        1        -        1        1        (1

M&I expenses

     59        54        52        26        14        40        127   

Restructuring charges

     6        (5     139        7        (15     (8     16   

Income (loss) before taxes

   $ (541   $ (4,986   $ (327   $ (231   $ (46   $ (277   $ (1,056

Average assets

   $ 32,413      $ 32,224      $ 31,459      $ 30,012      $ 33,374      $ 31,703      $ 32,280   

Average deposits

     6,923        6,507        5,378        4,144        4,457        4,293        8,470   

N/A – Not applicable.

 

Business description

On Jan. 15, 2010, we completed the sale of Mellon United National Bank (“MUNB”), our national bank located in Florida. We applied discontinued operations accounting to this business. All prior period results have been restated.

The Other segment primarily includes:

 

 

the results of the leasing portfolio;

 

corporate treasury activities, including our investment securities portfolio;

 

33.2% equity interest in BNY ConvergEx; and

 

business exits and corporate overhead.

 

Revenue primarily reflects:

 

 

net interest revenue from the leasing portfolio;

 

interest income remaining after transfer pricing allocations;

 

fee and other revenue from corporate and bank-owned life insurance; and

 

gains (losses) associated with the valuation of investment securities and other assets.

Noninterest expense includes:

 

 

M&I expenses;

 

restructuring charges;


 

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direct expenses supporting leasing, investing and funding activities; and

 

certain corporate overhead not directly attributable to the operations of other segments.

Review of financial results

Income before taxes was a loss of $46 million for the second quarter of 2010, compared with losses of $541 million in the second quarter of 2009 and $231 million in the first quarter of 2010.

The Other segment includes the following activity:

In the second quarter of 2010:

 

 

a CVA and debit valuation adjustment (“DVA”) of $43 million;

 

a provision for credit losses of $20 million; and

 

lease residual gains of $15 million.

In the first quarter of 2010:

 

 

a $164 million charge related to special litigation reserves;

 

a provision for credit losses of $35 million; and

 

lease residual gains of $52 million.

In the second quarter of 2009:

 

 

a $208 million (pre-tax) securities loss associated with other-than-temporary impairment (“OTTI”) recorded in total fee and other revenue;

 

a $61 million (pre-tax) FDIC special assessment; and

 

lease residual losses of $ 10 million.

Year-to-date 2010 compared with year-to-date 2009

Income before taxes in the Other segment was a loss of $277 million in the first six months of 2010 compared with a loss of $1.1 billion in the first six months of 2009. Total revenue increased $637 million primarily reflecting the OTTI charges recorded in the first half of 2009. Non-interest expenses (excluding special litigation reserves, FDIC special assessment, intangible amortization, M&I expenses and restructuring charges) decreased $71 million reflecting lower expense for litigation and government assessments.

 

Critical accounting estimates

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements contained in BNY Mellon’s 2009 Annual Report on Form 10-K. Our more critical accounting estimates are those related to goodwill and other intangibles, the allowance for loan losses and allowance for lending related commitments, fair value of financial instruments and derivatives, OTTI and pension accounting as referenced below.

 

Critical policy   Reference
Pension accounting   BNY Mellon’s 2009 Annual Report, pages 43 through 45.
Goodwill and other intangibles   BNY Mellon’s 2009 Annual Report, pages 42 and 43.
Allowance for loan losses and allowance for lending-related commitments   BNY Mellon’s 2009 Annual Report, page 39. See page 40 of this Form 10-Q for the impact of estimates on the allowance for credit losses.
Fair value of financial instruments   BNY Mellon’s 2009 Annual Report, pages 39 through 41.
OTTI   BNY Mellon’s 2009 Annual Report, pages 41 and 42. See page 35 of this Form 10-Q for the impact of market assumptions on portions of our securities portfolio.

Consolidated balance sheet review

At June 30, 2010, total assets were $235.7 billion compared with $212.2 billion at Dec. 31, 2009. Deposits totaled $143.7 billion at June 30, 2010 and $135.1 billion at Dec. 31, 2009. The increase in consolidated total assets resulted from the addition of $13.4 billion for the adoption of SFAS No. 167, “Amendments to FASB interpretation No. 46 (R)” (Topic 810, Consolidation) as well as a higher level of noninterest-bearing deposits. Total assets averaged $228.8 billion in the second quarter of 2010, compared with $225.4 billion in the first quarter of 2010 and $208.5 billion in the second quarter of 2009. Total deposits averaged $134.6 billion in the second quarter of 2010, $134.4 billion in the first quarter of 2010 and $131.7 billion in the second quarter of 2009.

At June 30, 2010, we had approximately $57.9 billion of liquid funds and $25.1 billion of cash (including approximately $21.6 billion on deposit with the Federal Reserve and other central banks) for a total of approximately $83.0 billion of available funds. This compares with available funds of $70.9 billion at Dec. 31, 2009. Our interest-bearing


 

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deposits with banks are all placed with large highly-rated global financial institutions. The average life of the interest-bearing deposits is approximately 45 days.

Investment securities were $53.6 billion or 23% of total assets at June 30, 2010, compared with $56.0 or 26% of total assets at Dec. 31, 2009.

Loans were $37.1 billion or 16% of total assets at June 30, 2010, compared with $36.7 billion or 17% of total assets at Dec. 31, 2009. The increase in loan levels was primarily due to higher margin loans.

Total shareholders’ equity applicable to BNY Mellon was $30.4 billion at June 30, 2010 and $29.0 billion at Dec. 31, 2009. The increase in total

shareholders’ equity primarily reflects retained earnings in the first six months of 2010 and improved credit spreads in our investment securities portfolio.

Investment securities

In the discussion of our investment securities portfolio, we have included certain credit ratings information because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications for our investment portfolio could result in increased risk for us.

The following table shows the distribution of our total investment securities portfolio:


 

Investment securities portfolio                                                                            
     March 31,
2010
   2Q10
change in
unrealized
gain/(loss)
    June 30, 2010     Fair value
as a % of
amortized
cost (a)
    Unrealized
gain/(loss)
    Ratings  
(dollar amounts
in millions)
   Fair
value
     Amortized
cost
   Fair
value
        AAA/
AA-
    A+/
A-
    BBB+/
BBB-
    BB+ and
lower
    Not
rated
 

Watch list: (b)

                                                                          

European floating rate notes (c)

   $ 5,032    $ 18      $ 4,962    $ 4,527      91   $ (435   94   6   -   -   -

Commercial MBS

     2,360      23        2,338      2,357      101        19      92      5      2      1      -   

Prime RMBS

     1,613      69        1,685      1,568      92        (117   51      14      9      26      -   

Alt-A RMBS

     756      34        781      729      72        (52   28      8      1      63      -   

Subprime RMBS

     486      31        757      501      66        (256   70      12      8      10      -   

Credit cards

     588      3        541      543      98        2      2      97      1      -      -   

Other

     376      (8     352      361      52        9      3      1      22      42      32   

Total Watch list (b)

     11,211      170        11,416      10,586      88        (830   74      12      3      10      1   

Agency RMBS

     18,349      238        18,480      19,039      103        559      100      -      -      -      -   

Sovereign debt/ sovereign guaranteed

     7,710      (6     7,047      7,126      101        79      100      -      -      -      -   

U.S. Treasury securities

     7,083      48        5,853      5,948      102        95      100      -      -      -      -   

Grantor Trust (d):

                        

Alt-A RMBS

     2,605      38        2,355      2,536      62        181      3      4      4      89      -   

Prime RMBS

     2,024      42        1,831      1,969      73        138      2      3      3      92      -   

Subprime RMBS

     146      2        127      148      65        21      13      5      -      82      -   

FDIC-insured debt

     2,586      6        2,485      2,546      102        61      100      -      -      -      -   

U.S. Government agency debt

     1,157      (6     1,133      1,146      101        13      100      -      -      -      -   

Other

     2,650      7        2,500      2,475      99        (25   75      10      6      -      9   

Total investment Securities

   $ 55,521    $ 539      $ 53,227    $ 53,519 (e)    95   $ 292 (e)    85   3   1   10   1

 

(a) Amortized cost before impairments.
(b) The “Watch list” includes those securities we view as having a higher risk of impairment charges.
(c) Includes RMBS, commercial MBS, and other securities.
(d) The Grantor Trust RMBS were marked to market in the fourth quarter of 2009. We believe these RMBS would receive higher credit ratings if these ratings incorporated, as additional credit enhancement, the difference between the written-down amortized cost and the current face amount of each of these securities.
(e) Includes a $13 million unrealized loss on derivatives hedging available for sale securities.

 

The fair value of our investment securities portfolio was $53.5 billion at June 30, 2010, compared with $55.5 billion at March 31, 2010 and $55.9 billion at Dec. 31, 2009. The decrease in the securities portfolio at June 30, 2010 compared with March 31,

2010 primarily reflects maturities, sales, paydowns and foreign exchange partially offset by purchases.

At June 30, 2010, the total investment securities portfolio had an unrealized pre-tax gain of $292


 

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million compared with an unrealized pre-tax loss of $247 million at March 31, 2010. The unrealized net of tax gain on our investment securities available for sale portfolio included in other comprehensive income was $162 million at June 30, 2010. The unrealized net of tax loss on our investment securities available for sale portfolio at March 31, 2010 was $180 million. The improvement in the valuation of the investment securities portfolio was due to tightening spreads and a decline in interest rates.

At June 30, 2010, 85% of the securities in our portfolio were rated AAA/AA-, unchanged from March 31, 2010.

We routinely test our investment securities for OTTI. (See “Critical accounting estimates” for additional disclosure regarding OTTI.)

At June 30, 2010, we had $1.5 billion of accretable discount related to the restructuring of the investment securities portfolio. The discount related to these transactions had a remaining average life of approximately 4.1 years. The accretion of discount related to these securities increased net interest revenue and is recorded on a level yield basis. The discount accretion totaled $104 million in the second quarter of 2010, $137 million in the first quarter of 2010 and $10 million in the second quarter of 2009.

Also, at June 30, 2010, we had $487 million of net amortizable purchase premium relating to investment securities with a remaining average life of approximately 2.6 years. For these securities, the amortization of net premium decreased net interest revenue and is recorded on a level yield basis. We recorded net premium amortization of $43 million in the second quarter of 2010, $67 million in the first quarter of 2010 and $9 million in the second quarter of 2009. For these securities, the amortization of net premium decreased net interest revenue and is recorded on a level yield basis.

Net securities gains in the second quarter of 2010 were $13 million. The following table provides pre-tax securities gains (losses) by type.

 

                           Year-to-date  

Net securities gains (losses)

(in millions)

   2Q10     1Q10     2Q09     2010     2009  

Alt-A RMBS

   $ (6   $ (7   $ (114   $ (13   $ (239

Prime RMBS

     -        -        (9     -        (12

Home equity lines of credit

     -        -        (4     -        (22

European floating rate notes

     -        -        (66     -        (70

Credit cards

     -        -        (26     -        (28

Other

     19        14        (37     33        (180

Net securities gains (losses)

   $ 13      $ 7      $ (256   $ 20      $ (551

 

On a quarterly basis, we perform our impairment analysis using several factors including projected loss severities and default rates. In the second quarter of 2010, this analysis resulted in a $1 million credit loss on Alt-A RMBS. If we were to increase or decrease each of our projected loss severities and default rates by 100 basis points on each of the positions in our Alt-A, subprime and prime RMBS portfolios and the securities portfolio held by the Grantor Trust, credit-related impairment charges on these securities would have increased to $2.5 million (pre-tax) or decreased to $0.3 million (pre-tax) in the second quarter of 2010. See Note 5 to the Notes to Consolidated Financial Statements for the projected weighted average default rates and loss severities.

The following table shows the fair value of the European floating rate notes by geographical location at June 30, 2010.

 

European floating rate notes at June 30, 2010 (a)    Total
fair
value
(in millions)    United
Kingdom
   Netherlands    Other   

RMBS

   $ 2,173    $ 904    $ 847    $ 3,924

Other

     262      72      269      603

Total

   $ 2,435    $ 976    $ 1,116    $ 4,527

 

(a) 94% of these securities are in the AAA to AA- ratings category.

Included in our investment securities portfolio are the following securities that have credit enhancement provided through a guarantee by a monoline insurer:

 

Investment securities guaranteed
by monoline insurers

(in millions)

   June 30,
2010
    Dec. 31,
2009
 

State and political subdivisions

   $ 621      $ 610   

Mortgage-backed securities

     133        137   

Total fair value

   $ 754 (a)    $ 747   

Amortized cost less securities losses

   $ 793      $ 761   

Mark-to-market unrealized (loss) (pre-tax)

   $ (39   $ (14

 

(a) The par value guaranteed by the monoline insurers was $854 million.

At June 30, 2010, securities guaranteed by monoline insurers were rated 43% AAA to AA-, 21% A+ to A-, 13% BBB+ to BBB- and 23% BB+ and lower. The increase in fair value from Dec. 31, 2009 primarily reflects purchases of municipal securities partially offset by maturities, calls and paydowns of mortgage-backed securities. When purchasing securities, we review the credit quality of the underlying securities, as well as the insurer.

See Note 15 to the Notes to Consolidated Financial Statements for the detail of securities by level in the fair value hierarchy.


 

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Loans

 

Total exposure – consolidated    June 30, 2010    Dec. 31, 2009
(in billions)    Loans    Unfunded
commitments
   Total
exposure
   Loans    Unfunded
commitments
   Total
exposure

Non-margin loans:

                 

Financial institutions

   $ 9.2    $ 16.9    $ 26.1    $ 9.0    $ 18.5    $ 27.5

Commercial

     2.4      20.7      23.1      3.0      22.5      25.5

Subtotal institutional

     11.6      37.6      49.2      12.0      41.0      53.0

Wealth management loans and mortgages

     6.2      1.9      8.1      6.2      1.8      8.0

Commercial real estate

     2.0      1.5      3.5      2.0      1.7      3.7

Lease financing

     3.3      0.1      3.4      3.5      0.1      3.6

Other residential mortgages

     2.2      -      2.2      2.2      -      2.2

Overdrafts

     5.9      -      5.9      6.1      -      6.1

Other

     0.3      0.1      0.4      -      -      -

Subtotal non-margin loans

     31.5      41.2      72.7      32.0      44.6      76.6

Margin loans

     5.6      -      5.6      4.7      -      4.7

Total

   $ 37.1    $ 41.2    $ 78.3    $ 36.7    $ 44.6    $ 81.3

 

At June 30, 2010, total exposures were $78.3 billion, a decrease of 4% from $81.3 billion at Dec. 31, 2009, primarily reflecting a decrease in institutional exposure.

Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios make up 63% of our total lending exposure.

 

Our total exposure to Portugal and Greece was $4 million at June 30, 2010.

Financial institutions

The diversity of the financial institutions portfolio is shown in the following table:


 

Financial institutions

portfolio exposure

(dollar amounts in billions)

   June 30, 2010     Dec. 31, 2009
   Loans    Unfunded
commitments
   Total
exposure
   % Inv
grade
    % due
<1 yr
    Loans    Unfunded
commitments
   Total
exposure

Banks

   $ 4.1    $ 2.5    $ 6.6    67   92   $ 3.3    $ 2.9    $ 6.2

Securities industry

     3.7      2.5      6.2    92      97        3.6      2.1      5.7

Insurance

     0.2      5.0      5.2    88      44        0.4      6.0      6.4

Asset managers

     0.9      2.7      3.6    95      85        1.0      2.8      3.8

Government

     0.1      2.2      2.3    97      52        0.1      2.9      3.0

Other

     0.2      2.0      2.2    92      48        0.6      1.8      2.4

Total

   $ 9.2    $ 16.9    $ 26.1    86   76   $ 9.0    $ 18.5    $ 27.5

 

The financial institutions portfolio exposure was $26.1 billion at June 30, 2010, compared to $27.5 billion at Dec. 31, 2009. The decrease from Dec. 31, 2009 primarily reflects decreases in insurance and government exposure. Financial institution exposures are high quality with 86% meeting the investment grade equivalent criteria of our rating system at June 30, 2010. These exposures are generally short-term, with 76% expiring within one year and are frequently secured by securities that we hold in custody on behalf of those financial institutions. For example, securities industry and asset managers often borrow against marketable securities held in custody.

As a conservative measure, our internal credit rating classification for international counterparties caps

the rating based upon the sovereign rating of the country where the counterparty resides regardless of the credit rating of the counterparty or the underlying collateral.

Our exposure to banks is predominately to investment grade counterparties in developed countries. Non-investment grade bank exposures are short-term in nature supporting our global trade finance and U.S. dollar clearing businesses in developing countries.

The asset manager portfolio exposures are high quality with 95% meeting our investment grade equivalent ratings criteria as of June 30, 2010. These exposures are generally short-term liquidity


 

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facilities with the vast majority to regulated mutual funds.

 

Commercial

The diversity of the commercial portfolio is shown in the following table:


 

Commercial portfolio exposure    June 30, 2010     Dec. 31, 2009
(dollar amounts in billions)    Loans    Unfunded
commitments
   Total
exposure
   % Inv
grade
    % due
<1 yr
    Loans    Unfunded
commitments
   Total
exposure

Services and other

   $ 0.8    $ 6.8    $ 7.6    84   38   $ 1.0    $ 7.7    $ 8.7

Manufacturing

     0.7      6.1      6.8    83      23        0.9      6.4      7.3

Energy and utilities

     0.5      5.9      6.4    82      22        0.6      6.3      6.9

Media and telecom

     0.4      1.9      2.3    58      28        0.5      2.1      2.6

Total

   $ 2.4    $ 20.7    $ 23.1    80   28   $ 3.0    $ 22.5    $ 25.5

 

The commercial portfolio exposure decreased 9% to $23.1 billion at June 30, 2010, from $25.5 billion at Dec. 31, 2009, reflecting decreased exposures in all categories. Our goal is to migrate towards a predominantly investment grade portfolio.

We continue to actively monitor automotive industry exposure given ongoing weakness in the domestic automotive industry. At both June 30, 2010 and

Dec. 31, 2009, total exposures in our automotive portfolio included $109 million of secured exposure to one of the big three U.S. automotive manufacturers. We also had $61 million of exposure to four automotive suppliers at June 30, 2010.

The table below summarizes the percent of the financial institutions and commercial exposures that are investment grade.


 

Percent of the portfolios that are investment grade    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    March 31,
2010
    June 30,
2010
 

Financial institutions

   90   84   85   85   86

Commercial

   80   80   80   80   80

 

Wealth Management loans and mortgages

Wealth Management loans and mortgages are primarily composed of loans to high-net-worth individuals, which are secured by marketable securities and/or residential property. Wealth management mortgages are primarily interest-only adjustable rate mortgages with an average loan to value ratio of 61% at origination. In the wealth management portfolio, 1% of the mortgages were past due at June 30, 2010.

At June 30, 2010, the private wealth mortgage portfolio was comprised of the following geographic concentrations: New York—22%; Massachusetts—17%; California—17%; Florida—9%; and other 35%.

Commercial real estate

Our commercial real estate credit facilities are focused on experienced owners and are structured with moderate leverage based on existing cash flows. Our commercial real estate lending activities

include both construction facilities and medium-term loans. Our client base consists of experienced developers and long-term holders of real estate assets. Loans are approved on the basis of existing or projected cash flow, and supported by appraisals and knowledge of local market conditions. Development loans are structured with moderate leverage, and in most instances, involve some level of recourse to the developer. Our commercial real estate exposure totaled $3.5 billion at June 30, 2010 and $3.7 billion at Dec. 31, 2009.

At June 30, 2010, approximately 72% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type with approximately 53% secured by residential buildings, 30% secured by office buildings, 8% secured by retail properties and 9% by other categories. Approximately 95% of the unsecured portfolio is allocated to real estate investment trusts (“REITs”) under revolving credit agreements.

At June 30, 2010, our commercial real estate portfolio was comprised of the following


 

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concentrations: New York metro – 51%; investment grade REITs – 26%; and other – 23%.

Lease financings

The leasing portfolio consisted of non-airline exposures of $3.2 billion and $226 million of airline exposures at June 30, 2010. Approximately 91% of the leasing exposure is investment grade, or investment grade equivalent.

At June 30, 2010, our $226 million of exposure to the airline industry consisted of a $16 million real estate lease exposure, as well as the airline-leasing portfolio which included $74 million to major U.S. carriers, $122 million to foreign airlines and $14 million to U.S. regional airlines.

During the second quarter of 2010, the U.S. domestic airline industry continued to be in a weak financial condition due to high debt levels. Combined with their high cost operation models, the domestic airlines remain vulnerable. As such, we continue to maintain a sizable allowance for loan losses against these exposures and to closely monitor the portfolio.

Other residential mortgages

The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $2.2 billion at June 30, 2010. Included in this portfolio is approximately $900 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007 that are predominantly prime mortgage loans, with a small portion of Alt-A loans. As of June 30, 2010, the remaining prime and Alt-A mortgage loans in this portfolio had a weighted-average original loan-to-value ratio of 75% and approximately 26% of these loans were at least 60 days delinquent. The properties securing the prime and Alt-A mortgage loans were located (in order of concentration) in California, Florida, Virginia, the tri-state area (New York, New Jersey and Connecticut) and Maryland.

To determine the projected loss on the prime and Alt-A mortgage portfolio, we calculate the total estimated

defaults of these mortgages and multiply that amount by an estimate of realizable value upon sale in the marketplace (severity).

At June 30, 2010, we had less than $15 million in subprime mortgages included in our other residential mortgage portfolio. The subprime loans were issued to support our Community Reinvestment Act requirements.

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients. Overdrafts occur on a daily basis in the custody and securities clearance business and are generally repaid within two business days.

Asset quality and allowance for credit losses

Over the past several years, we have improved our risk profile through greater focus on clients who are active users of our non-credit services, de-emphasizing broad-based loan growth. Our primary exposure to the credit risk of a customer consists of funded loans, unfunded formal contractual commitments to lend, standby letters of credit and overdrafts associated with our custody and securities clearance businesses.

The role of credit has shifted to one that complements our other services instead of as a lead product. Credit solidifies customer relationships and, through a disciplined allocation of capital, can earn acceptable rates of return as part of an overall relationship.

We have implemented a credit strategy to reduce exposures that no longer meet risk/return criteria, including an assessment of overall relationship profitability. In addition, we make use of credit derivatives and other risk mitigants as economic hedges of portions of the credit risk in our portfolio. The effect of these transactions is to transfer credit risk to creditworthy, independent third parties.


 

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Allowance for credit losses
activity

(dollar amounts in millions)

   June 30,
2010
    March 31,
2010
    Dec. 31,
2009
    June 30,
2009
 

Margin loans

   $ 5,602      $ 4,863      $ 4,657      $ 3,922   

Non-margin loans

     31,545        29,024        32,032        34,312   

Total loans

   $ 37,147      $ 33,887      $ 36,689      $ 38,234   

Quarterly activity

        

Allowance for credit losses:

        

Beginning balance

   $ 638      $ 628      $ 596      $ 559   

Transferred to discontinued operations

     -        -        -        (40

Provision for credit losses

     20        35        65        61   

Net (charge-off) recoveries:

        

Commercial

     -        12        (14     (25

Commercial real estate

     (1     (5     (2     (13

Other residential mortgages

     (10     (12     (17     (16

Financial institutions

     (1     (20     -        -   

Wealth Management

     (1     -        -        -   

Net (charge-offs)

     (13     (25     (33     (54

Total allowance for credit losses

   $ 645      $ 638      $ 628      $ 526   

Allowance for loan losses

   $ 542      $ 520      $ 503      $ 434   

Allowance for unfunded commitments

     103        118        125        92   

Allowance for loan losses as a percent of total loans

     1.46     1.53     1.37     1.14

Allowance for loan losses as a percent of non-margin loans

     1.72     1.79     1.57     1.27

Total allowance for credit losses as a percent of total loans

     1.74     1.88     1.71     1.38

Total allowance for credit losses as a percent of non-margin loans

     2.04     2.20     1.96     1.53

Net charge-offs were $13 million in the second quarter of 2010, $25 million in the first quarter of 2010, $33 million in the fourth quarter of 2009 and $54 million in the second quarter of 2009. Net charge-offs in the second quarter of 2010 included $10 million in residential mortgages. Net charge-offs in the first quarter of 2010 included $15 million to a mortgage company and $12 million in residential mortgages, partially offset by $12 million of recoveries from the media portfolio. Net charge-offs in the fourth quarter of 2009 included $17 million in residential mortgages and $9 million to finance and lease companies. Net charge-offs in the second quarter of 2009 included $16 million in residential mortgages, $13 million in commercial real estate, $10 million from the media portfolio and $8 million from an automotive supply manufacturer.

The provision for credit losses was $20 million in the second quarter of 2010 compared with $35 million in the first quarter of 2010, $65 million in the fourth quarter of 2009 and $61 million in the second quarter of 2009. The decrease in the provision for credit losses primarily reflects a

decrease in higher risk-rated loans and nonperforming loans.

The total allowance for credit losses was $645 million at June 30, 2010, $638 million at March 31, 2010, $628 million at Dec. 31, 2009 and $526 million at June 30, 2009. The increase in the allowance for credit losses compared with March 31, 2010 resulted from a provision for credit losses of $20 million, partially offset by net charge-offs of $13 million. The ratio of the total allowance for credit losses to non-margin loans was 2.04% at June 30, 2010, 2.20% at March 31, 2010, 1.96% at Dec. 31, 2009 and 1.53% at June 30, 2009. The ratio of the allowance for loan losses to non-margin loans was 1.72% at June 30, 2010, 1.79% at March 31, 2010, 1.57% at Dec. 31, 2009 and 1.27% at June 30, 2009. The decrease in these ratios at June 30, 2010 compared with March 31, 2010 resulted from a higher level of overdrafts and broker-dealer loans.

We had $5.6 billion of secured margin loans on our balance sheet at June 30, 2010 compared with $4.9 billion at March 31, 2010, $4.7 billion at Dec. 31, 2009 and $3.9 billion at June 30, 2009. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to them. As a result, we believe that the ratio of total allowance for credit losses to non-margin loans is a more appropriate metric to measure the adequacy of the reserve.

The allowance for loan losses and the allowance for unfunded commitments consist of three elements:

 

   

an allowance for impaired credits (nonaccrual loans over $1 million);

   

an allowance for higher risk rated credits and pass rated credits; and

   

an unallocated allowance based on general economic conditions and risk factors in our individual markets.

Our lending is primarily to institutional customers. As a result, our loans are generally larger than $1 million. Therefore, the first element, impaired credits, is based on individual analysis of all nonperforming loans over $1 million. The allowance is measured by the difference between the recorded value of impaired loans and their impaired value. Impaired value is either the present value of the expected future cash flows from the borrower, the market value of the loan, or the fair value of the collateral.


 

 

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The second element, higher risk-rated credits and pass rated credits, is based on our expected loss model. Borrowers are assigned to pools based on their credit ratings. The expected loss for each loan in a pool incorporates the borrower’s credit rating, loss given default rating and maturity. The loss given default incorporates a recovery expectation. The borrower’s probability of default is derived from the associated credit rating. Borrower ratings are reviewed at least annually and are periodically mapped to third party databases, including rating agency and default and recovery databases, to ensure ongoing consistency and validity. Higher risk-rated credits are reviewed quarterly. Commercial loans over $1 million are individually analyzed before being assigned a credit rating. We also apply this technique to our leasing and wealth management portfolios.

The third element, the unallocated allowance, is based on management’s judgment regarding the following factors:

 

 

Economic conditions including duration of the current cycle;

 

Collateral values;

 

Specific credits and industry conditions;

 

Results of bank regulatory and internal credit exams;

 

Geopolitical issues and their impact on the economy; and

 

Volatility and model risk.

Based on an evaluation of these three elements, including individual credits, historical credit losses, and global economic factors, we have allocated our allowance for credit losses on a continuing operations basis as follows:

 

Allocation of allowance                             
   June 30,
2010
    March 31,
2010
    Dec. 31,
2009
    June 30,
2009
 

Commercial

   35   37   41   50

Other residential mortgages

   28      27      25      18   

Financial institutions

   6      9      13      17   

Commercial real estate

   6      6      7      2   

Wealth management (a)

   5      5      9      7   

Foreign

   1      1      1      1   

Unallocated

   19      15      4      5   

Total

   100   100   100   100
(a) Includes the allowance for wealth management mortgages.

 

The allocation of allowance for credit losses is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the loss.

The unallocated allowance reflects various factors in the current credit environment and is also available to, among other things, absorb further deterioration across all of our portfolios resulting from the current economic environment. The unallocated allowance for credit losses was 19% at June 30, 2010, up from 15% at March 31, 2010, 4% at Dec. 31, 2009 and 5% at June 30, 2009. The increase in the unallocated allowance reflects improved credit quality and a lower level of nonperforming assets compared with prior periods. At June 30, 2010, if the unallocated allowance, as a percentage of the total allowance, was 5% higher or lower, the allowance would have increased by approximately $43 million or decreased by approximately $38 million, respectively.

The credit rating assigned to each credit is another significant variable in determining the allowance. If each credit were rated one grade better on our internal rating system, the allowance for credit losses would have decreased by $119 million, while if each credit were rated one grade worse on our internal rating system, the allowance for credit losses would have increased by $162 million. Similarly, if the loss given default were one rating worse, the allowance for credit losses would have increased by $54 million, while if the loss given default were one rating better, the allowance for credit losses would have decreased by $77 million. For impaired credits, if the fair value of the loans was 10% higher or lower, the allowance for credit losses would have increased or decreased by $2 million, respectively.


 

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Nonperforming assets

The following table shows the distribution of non-performing assets.

 

Nonperforming assets

(dollar amounts in millions)

   June 30,
2010
    March 31,
2010
    Dec. 31,
2009
 

Loans:

      

Other residential mortgages

   $ 229      $ 204      $ 190   

Wealth management

     62        58        58   

Commercial real estate

     49        50        61   

Commercial

     40        40        65   

Financial institutions

     20        102        172   

Total nonperforming loans

   $ 400      $ 454      $ 546   

Other assets owned

     6        5        4   

Total nonperforming assets

   $ 406  (a)    $ 459  (a)    $ 550   

Nonperforming assets ratio

     1.1     1.4     1.5

Allowance for loan losses/ nonperforming loans

     135.5        114.5        92.1   

Allowance for loan losses/ nonperforming assets

     133.5        113.3        91.5   

Total allowance for credit losses/nonperforming loans

     161.3        140.5        115.0   

Total allowance for credit losses/nonperforming assets

     158.9        139.0        114.2   
(a) The adoption of ASC 810 resulted in BNY Mellon consolidating loans of consolidated asset management funds of $12.1 billion at June 30, 2010 and $11.3 billion at March 31, 2010. Included in these loans are $131 million and $150 million of nonperforming loans, respectively. These loans are not part of BNY Mellon’s loan portfolio. These loans are recorded at fair value and therefore do not impact the provision for credit losses and allowance for loan losses and accordingly are excluded from the nonperforming assets table above.

The decrease in nonperforming assets compared with March 31, 2010 primarily resulted from an $87 million repayment in the financial institution portfolio, partially offset by additions of $25 million of nonperforming residential mortgages. The ratio of allowance for loan losses to nonperforming assets was 133.5% at June 30, 2010 compared with 113.3% at March 31, 2010. The increase primarily reflects the lower level of nonperforming loans.

Commercial loans are placed on nonaccrual status when principal or interest is past due 90 days or more, or when there is reasonable doubt that interest or principal will be collected. Residential mortgage loans are generally placed on nonaccrual status, when, in our judgment, collection is in doubt or the loans are 90 days or more delinquent, subject to an impairment test. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed against current period interest revenue. Interest receipts on nonaccrual and impaired loans are recognized as interest revenue or are applied to principal when we

believe the ultimate collectability of principal is in doubt. Nonaccrual loans generally are restored to an accrual basis when principal and interest become current.

The allowance for credit losses is reduced by the charge-off of loans and other credit extensions. Loans, or portions thereof, and other forms of credit extensions will be charged off at the time they are deemed to be uncollectible or as otherwise required by applicable regulations or direction from regulatory agencies. BNY Mellon’s practice is to record charge-offs at the end of each quarter.

 

Nonperforming assets quarterly activity

(in millions)

   June 30,
2010
    March 31,
2010
    Dec. 31,
2009
 

Balance at beginning of period

   $ 459      $ 550      $ 560   

Additions

     44        17        25   

Net charge-offs

     (3     (25     (12

Paydowns/sales

     (95     (84     (22

Other

     1        1        (1

Balance at end of period

   $ 406      $ 459      $ 550   

Loans past due 90 days and still accruing interest totaled $390 million at June 30, 2010 compared with $397 million at March 31, 2010. Past due loans at both June 30, 2010 and March 31, 2010 include loans to an asset manager that has filed for bankruptcy (see Legal proceedings). These loans are well secured, largely by cash and high grade fixed income securities, and are in the process of collection. The remainder of past due loans at June 30, 2010 primarily include $77 million of other residential mortgages.

Interest income would have increased by $7.1 million and $4.1 million for the second quarters of 2010 and 2009, respectively, if loans of $400 million on nonaccrual status at June 30, 2010 and $372 million at June 30, 2009 had been performing for the entire period. On a year-to-date basis, interest income would have increased by $13.9 million and $7.9 million for the six months ended 2010 and 2009, respectively, had loans on nonaccrual status been performing for the entire period.

Impaired loans

The following table sets forth information about our impaired loans greater than $1 million. We use the discounted cash flow, collateral value, or market price methods for valuing our impaired loans. Impaired commercial loans in amounts less than $1 million at June 30, 2010 were $3.8 million and had an allowance for loan losses


 

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associated with them of $0.5 million. The allowance for loan losses for impaired loans less than $1 million was measured using our expected loss model described on page 40.

 

Impaired loans

(in millions)

   June 30,
2010
   March 31,
2010
   Dec. 31,
2009
   June 30,
2009

Impaired loans with an allowance

   $ 142    $ 224    $ 303    $ 200

Impaired loans without an allowance (a)

     22      20      42      1

Total impaired loans

   $ 164    $ 244    $ 345    $ 201

Allowance for impaired loans (b)

   $ 25    $ 28    $ 51    $ 41

Average balance of impaired loans during quarter

   $ 211    $ 304    $ 216    $ 124
(a) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.
(b) The allowance for impaired loans is included in the allowance for loan losses.

Deposits

Total deposits were $143.7 billion at June 30, 2010, compared with $135.1 billion at Dec. 31, 2009. The increase in deposits reflects higher noninterest-bearing domestic deposits.

Noninterest-bearing deposits were $42.2 billion at June 30, 2010, compared with $33.5 billion at Dec. 31, 2009. Interest-bearing deposits were $101.5 billion at June 30, 2010, compared with $101.6 billion at Dec. 31, 2009.

Support agreements

In 2008, we voluntarily 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 are designed to enable these funds to continue to operate at a stable net asset value. In the second quarter of 2010, we recorded support agreement charges of $9 million (pre-tax). This charge primarily reflects a decrease in the market value of Lehman securities. At June 30, 2010, the value of Lehman securities decreased to 19.50% from 23.00% at March 31, 2010.

At June 30, 2010, our potential maximum exposure to support agreements was approximately $116 million, after deducting the reserve at June 30, 2010.

Potential maximum exposure is based on 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 ($90 million) as well as other client agreements ($26 million).

Liquidity and dividends

BNY Mellon defines liquidity as the ability of the Company and its subsidiaries to access funding or convert assets to cash quickly and inexpensively, especially during periods of market stress. Appropriate consideration in managing the balance sheet is given to balancing the competing needs to maintain adequate levels of liquidity while maintaining profitability. Liquidity risk is the potential for loss resulting from an inability to satisfy contractual and contingent funding requirements, both on- and off-balance sheet, at an acceptable cost.

Our liquidity policy is based on several core principles. BNY Mellon seeks to maintain an adequate liquidity cushion in both normal and stressed environments and seeks to diversify funding sources by customer, market segment and maturity. Liquidity is managed on a subsidiary basis, a consolidated basis and at The Bank of New York Mellon Corporation parent company (“Parent”) level.

Primary uses of liquidity include withdrawals of customer deposits and client drawdowns on unfunded credit or liquidity facilities. We actively monitor unfunded loan commitments, thereby reducing unanticipated funding requirements.

At June 30, 2010, we had approximately $57.9 billion of liquid funds and $25.1 billion of cash (including approximately $21.6 billion on deposit with the Federal Reserve and other central banks) for a total of approximately $83.0 billion of available funds. This compares with available funds of $70.9 billion at Dec. 31, 2009. Our liquid assets to total assets were 35% at June 30, 2010 compared with 33% at Dec. 31, 2009.

On an average basis for the first six months of 2010 and 2009, non-core sources of funds such as money market rate accounts, certificates of deposits greater than $100,000, federal funds purchased and other borrowings were $31.1 billion and $25.4 billion, respectively. The increase year-over-year primarily


 

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reflects higher levels of money market rate accounts and federal funds purchased, partially offset by lower levels of certificates of deposits greater than $100,000. Average foreign deposits, primarily from our European-based securities servicing business, were $70.0 billion and $74.4 billion for the first six months of 2010 and 2009, respectively. Domestic savings and other time deposits averaged $6.9 billion for the first six months of 2010, compared with $6.0 billion for the first six months of 2009.

Average payables to customers and broker-dealers were $6.5 billion for the first six months of 2010 and $4.4 billion for the first six months of 2009. Long-term debt averaged $16.6 billion in the first six months of 2010 and $16.1 billion in the first six months of 2009. Average noninterest-bearing deposits decreased to $34.0 billion in the first six months of 2010 from $37.9 billion in the first six months of 2009. A significant reduction in our securities servicing businesses would reduce our access to deposits.

The Parent has five major sources of liquidity:

 

 

cash on hand;

 

dividends from its subsidiaries;

 

access to the commercial paper market;

 

a revolving credit agreement with third party financial institutions; and

 

access to the long-term debt and equity markets.

As a result of charges recorded in 2009 related to the restructuring of the investment securities portfolios, The Bank of New York Mellon and BNY Mellon, N.A. are required to obtain consent from our regulators prior to paying a dividend. Despite this limitation, management estimates that liquidity at the Parent will continue to be sufficient to meet BNY Mellon’s ongoing quarterly dividends at the current level of $0.09 per share. Based on projections, we currently expect this restriction to be lifted in the fourth quarter of 2010.

At June 30, 2010, our other bank subsidiaries had the ability to pay dividends of approximately $212 million to the Parent without the need for a regulatory waiver. In addition, at June 30, 2010, nonbank subsidiaries of the Parent had liquid assets of approximately $1.1 billion.

Any increase in BNY Mellon’s ongoing quarterly dividends would require consultation with the Federal Reserve and, until the settlement of the

equity forward contract executed in June 2010, may trigger an early valuation event under such forward contract.

Restrictions on our ability to obtain funds from our subsidiaries are discussed in more detail in Note 22 to the Notes to Consolidated Financial Statements contained in BNY Mellon’s 2009 Annual Report on Form 10-K.

For the quarter ended June 30, 2010, the Parent’s quarterly average commercial paper borrowings were $11 million compared with $263 million for the quarter ended June 30, 2009. The Parent had cash of $3.0 billion at June 30, 2010 compared with $4.4 billion at Dec. 31, 2009. The Parent issues commercial paper, on an overnight basis, to certain custody clients with excess demand deposit balances. Overnight commercial paper outstanding issued by the Parent was $7 million at June 30, 2010 and $12 million at Dec. 31, 2009. Net of commercial paper outstanding, the Parent’s cash position at June 30, 2010 decreased by $1.4 billion compared with Dec. 31, 2009 reflecting maturity of long-term debt. The Parent’s liquidity target is to have sufficient cash on hand to meet its obligations over the next 18 months without the need to receive dividends from its bank subsidiaries or issue debt. As of June 30, 2010, the Parent met its liquidity target.

In July 2010, the Parent launched a new commercial paper program, which is in addition to the program discussed above, under which it may issue commercial paper to certain institutional accredited investors in transactions exempt from the registration requirements of the Securities Act of 1933, as amended. Commercial paper notes issued under this program will have a maturity not exceeding 397 days from the date of issuance.

We currently have a $226 million credit agreement with 10 financial institutions that matures in October 2011. The fee on this facility depends on our credit rating and at June 30, 2010 was 6 basis points. The credit agreement requires us to maintain:

 

 

shareholders’ equity of $5 billion;

 

a ratio of Tier 1 capital plus the allowance for credit losses to nonperforming assets of at least 2.5;

 

a double leverage ratio less than 130% and

 

adequate capitalization of all our bank subsidiaries for regulatory purposes.


 

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We are currently in compliance with these covenants. There were no borrowings under this facility at June 30, 2010.

We also have the ability to access the capital markets. In June 2010, we filed shelf registration statements on Form S-3 with the Securities and Exchange Commission (“SEC”) covering the issuance of certain securities, including an unlimited amount of debt, common stock, preferred stock and trust preferred securities, as well as common stock issued under the Direct Stock Purchase and Dividend Reinvestment Plans.

Our ability to access capital markets on favorable terms, or at all, is partially dependent on our credit ratings, which, as of June 30, 2010 were as follows:

 

Debt ratings at June 30, 2010                 
      Moody’s    Standard
& Poor’s
   Fitch   DBRS

Parent:

          

Long-term senior debt

   Aa2    AA-    AA-   AA (low)

Subordinated debt

   Aa3    A+    A+   A (high)

The Bank of New York Mellon:

       

Long-term senior debt

   Aaa    AA    AA-   AA

Long-term deposits

   Aaa    AA    AA   AA

BNY Mellon, N.A.:

          

Long-term senior debt

   Aaa    AA   

AA- (a)

  AA

Long-term deposits

   Aaa    AA    AA   AA

Outlook

   Stable    Stable    Stable   Stable
                   (long-term)

 

(a) Represents senior debt issuer default rating.

In April 2010, one of the rating agencies announced that regulatory changes proposed by the Senate Regulatory Reform Bill, which has since been signed into law as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), could result in lower debt and deposit ratings for U.S. banks and other financial institutions whose ratings currently benefit from assumed government support. The rating agency anticipates that once implementing regulations clarify the final form of regulatory reform, the potentially affected ratings would be placed under review. The rating agency further indicated it would consider the pace over which any benefits resulting from regulatory reform would accrue versus the likely pace over which systemic support would be curtailed. Currently, the ratings for the Parent benefit from one notch of “lift” and The Bank of New York Mellon and BNY Mellon, N.A. benefit two notches of “lift” as a result of the rating agency’s government support

assumptions. Other institutions benefit between one and five notches of “lift”. If these rating changes occur as proposed, the Parent, The Bank of New York Mellon and BNY Mellon, N.A. would remain at the highest level for all U.S. bank holding companies and U.S. banks.

The Parent’s major uses of funds are payment of dividends, principal and interest on its borrowings, acquisitions, and additional investments in its subsidiaries.

In the second quarter of 2010, we issued $650 million of senior long-term debt and $500 million of senior long-term debt matured. The Parent has $100 million of long-term debt that will mature in the remainder of 2010. The Parent has the option to call $1.1 billion of subordinated debt in the remainder of 2010, which it may call and refinance if market conditions are favorable.

We have $850 million of trust-preferred securities that are freely callable in 2010. These securities currently qualify as Tier 1 capital. Any decision to call these securities will be based on interest rates, the availability of cash and capital, and regulatory conditions, as well as the implementation of the Dodd-Frank Act, which eliminates these trust-preferred securities from the Tier 1 capital of large bank holding companies, including BNY Mellon, over a three year period beginning Jan. 1, 2013.

The double leverage ratio is the ratio of investment in subsidiaries divided by our consolidated equity plus trust preferred securities. Our double leverage ratios at June 30, 2010 and 2009 were 104.15% and 103.48%, respectively. Our target double leverage ratio is a maximum of 120%. The double leverage ratio is monitored by regulators and rating agencies and is an important constraint on our ability to invest in our subsidiaries and expand our businesses.

Pershing LLC, an indirect subsidiary of BNY Mellon, has committed and uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. The committed line of credit of $935 million extended by 14 financial institutions matures in March 2011. In the second quarter of 2010, the average borrowing against these lines of credit was $176 million. Additionally, Pershing has another committed line of credit for $125 million extended by one financial institution that matures in September 2010. The average borrowing against this line of credit was $2 million during the second quarter of 2010. Pershing LLC


 

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has five separate uncommitted lines of credit amounting to $1 billion in aggregate. Average daily borrowing under these lines was $572 million, in aggregate, during the second quarter of 2010.

The committed line of credit maintained by Pershing LLC requires the Parent to maintain:

 

 

shareholders’ equity of $5 billion;

 

a ratio of Tier 1 capital plus the allowance for credit losses to nonperforming assets of at least 2.5; and

 

a double leverage ratio less than 130%.

We are currently in compliance with these covenants.

Pershing Limited, an indirect U.K.-based subsidiary of BNY Mellon, has committed and uncommitted lines of credit in place for liquidity purposes, which are guaranteed by the Parent. The committed line of credit of $233 million extended by five financial institutions matures in March 2011. In the second quarter of 2010, there were no borrowings against these lines of credit. Pershing Limited has three separate uncommitted lines of credit amounting to $250 million in aggregate. Average daily borrowing under these lines was $5 million, in aggregate, during the second quarter of 2010.

Statement of cash flows

Cash used for operating activities was $0.1 billion for the six months ended June 30, 2010, compared with $0.3 billion provided by operating activities for

the six months ended June 30, 2009. In the first six months of 2010, changes in trading activities partially offset by earnings and depreciation and amortization were a significant use of funds. In the first six months of 2009, earnings, partially offset by changes in trading activities, accruals and other balances were a significant source of funds.

In the first six months of 2010, cash used for investing activities was $14.3 billion compared with $30.8 billion provided by investing activities in the first six months of 2009. In the first six months of 2010, an increase in interest-bearing deposits with the Federal Reserve and other central banks, margin loans and federal funds sold and securities purchased under resale agreements were a significant use of funds partially offset by a decrease in securities available for sale. In the first six months of 2009, a decrease in interest-bearing deposits with banks and the Federal Reserve and other central banks was a significant source of funds, partially offset by purchases of securities available for sale.

Through June 30, 2010, cash provided by financing activities was $14.3 billion, compared to $32.2 billion used for financing activities in the first six months of 2009. In the first six months of 2010, changes in deposits and other funds borrowed were a significant source of funds, partially offset by repayments of long-term debt. In the first six months of 2009, changes in deposits, other borrowed funds and the repurchase of the Series B preferred stock were significant uses of funds, partially offset by proceeds from issuances of long-term debt and common stock.


 

Capital

 

Capital data                             

(dollar amounts in millions except per share amounts;

common shares in thousands)

   June 30,
2010
    March 31,
2010
    Dec. 31,
2009
    June 30,
2009
 

Average total BNY Mellon shareholders’ equity to average total assets

     13.3     13.2     13.5     13.9

At period end:

        

Common shareholders’ equity to total assets ratio

     12.9     13.5     13.7     13.4

Total The Bank of New York Corporation shareholders’ equity

   $ 30,396      $ 29,683      $ 28,977      $ 27,276   

Tangible common shareholders’ equity – Non-GAAP (a)

   $ 11,331      $ 10,537      $ 9,540      $ 7,945   

Book value per common share

   $ 25.04      $ 24.47      $ 23.99      $ 22.68   

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

   $ 9.33      $ 8.69      $ 7.90      $ 6.60   

Dividends per common share

   $ 0.09      $ 0.09      $ 0.09      $ 0.09   

Dividend yield

     1.5     1.2     1.3     1.2

Closing common stock price per share

   $ 24.69      $ 30.88      $ 27.97      $ 29.31   

Market capitalization

   $ 29,975      $ 37,456      $ 33,783      $ 35,255   

Common shares outstanding

     1,214,042        1,212,941        1,207,835        1,202,828   

 

(a) See supplemental information beginning on page 50 for the reconciliation of GAAP to non-GAAP.

 

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Total The Bank of New York Mellon Corporation shareholders’ equity increased compared with Dec. 31, 2009. The increase primarily reflects retained earnings in the first six months of 2010 and an unrealized gain in the investment securities portfolio resulting from improved credit spreads.

The unrealized net of tax gain on our available-for-sale securities portfolio recorded in other comprehensive income was $162 million at June 30, 2010 compared with an unrealized net of tax loss of $180 million at March 31, 2010. The improvement primarily reflects tightening credit spreads and a decline in interest rates.

In June 2010, BNY Mellon priced 25.9 million common shares in an underwritten public offering, at $27.00 per common share, for a total of $700 million. In connection with this offering, BNY Mellon has 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. The Company will not receive any proceeds from the sale of its common stock until settlement of the forward sale agreement, which is expected to occur in the third quarter of 2010.

 

In July 2010, we declared a quarterly common stock dividend of $0.09 per common share that will be paid on Aug. 10, 2010, to shareholders of record as of the close of business on July 30, 2010.

Capital adequacy

Regulators establish certain levels of capital for bank holding companies and banks, including BNY Mellon and our bank subsidiaries, in accordance with established quantitative measurements. For the Parent to maintain its status as a financial holding company, our bank subsidiaries must, among other things, qualify as well capitalized. In addition, major bank holding companies such as the Parent are expected by the regulators to be well capitalized.

As of June 30, 2010, the Parent and our bank subsidiaries were considered well capitalized on the basis of the ratios (defined by regulation) of Total and Tier 1 capital to risk-weighted assets and leverage (Tier 1 capital to average assets).

Our consolidated and largest bank subsidiary, The Bank of New York Mellon, capital ratios are shown below.


 

Consolidated and largest bank

subsidiary capital ratios

                                          
      Well
capitalized
    Adequately
capitalized
    June 30,
2010
    March 31,
2010
    Dec. 31,
2009
    June 30,
2009
 

Consolidated capital ratios:

            

Tier 1 capital

   6   4   13.5   13.3   12.1   12.5

Total capital

   10      8      17.2      17.2      16.0      16.0   

Leverage

   5      3      6.6      6.5      6.5      7.6   

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

       6.3   6.1   5.2   4.8

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

       11.9      11.6      10.5      11.1   

The Bank of New York Mellon capital ratios:

            

Tier 1 capital

   6   4   12.5   12.3   11.2   11.8

Total capital

   10      8      16.5      16.3      15.0      15.1   

Leverage

   5      3      6.6      6.6      6.3      7.6   

 

(a) See Supplemental information beginning on page 50 for a calculation of this ratio.

 

The Tier 1 capital ratio varies depending on the size of the balance sheet at quarter-end and the level and types of investments. The balance sheet size fluctuates from quarter to quarter based on levels of customer and market activity. In general, when servicing clients are more actively trading securities, deposit balances and the balance sheet as a whole are higher.

Our Tier 1 capital ratio was 13.5% at June 30, 2010, compared with 13.3% at March 31, 2010, 12.1% at Dec. 31, 2009 and

12.5% at June 30, 2009. The increase from March 31, 2010 primarily reflects earnings retention, partially offset by higher risk-weighted assets.

In January 2010, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision issued a final rule requiring banks to hold capital for assets consolidated under ASU 2009-16 and ASU


 

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2009-17. The final rule allows for (1) opting for a two-quarter delay through June 30, 2010, of recognition of the effect on risk-weighted assets and allowance for loan losses includable in Tier 2 capital that results from implementation of this standard and (2) a phase-in of 50% of those effects for the quarters ending Sept. 30, 2010 and Dec. 31, 2010 with full phase-in for the quarter ending March 31, 2011. BNY Mellon elected to defer the implementation of ASC 810 for capital purposes. At June 30, 2010, had we fully phased-in the implementation of ASC 810, our Tier 1 capital ratio would have been negatively impacted by approximately 136 basis points, assuming we had taken no mitigating actions.

A billion dollar change in risk-weighted assets changes the Tier 1 capital ratio by approximately 13 basis points while a

$100 million change in common equity changes the Tier 1 capital ratio by approximately 10 basis points.

Our tangible common equity to tangible assets ratio was 6.3% at June 30, 2010, up from 6.1% at March 31, 2010, 5.2% at Dec. 31, 2009 and 4.8% at June 30, 2009. The increase compared with March 31, 2010 was due to earnings retention and the improvement in the unrealized gain on our available-for-sale securities portfolio, partially offset by a larger balance sheet at June 30, 2010.

At June 30, 2010, we had approximately $1.7 billion of trust preferred securities outstanding, net of issuance costs, all of which currently qualifies as Tier 1 capital.


 

The following table presents the components of our risk-based capital at June 30, 2010, March 31, 2010, Dec. 31, 2009 and June 30, 2009, respectively.

 

Components of Tier 1 and total risk-based capital (a)

(in millions)

   June 30,
2010
    March 31,
2010
    Dec. 31,
2009
    June 30,
2009
 

Tier 1 capital:

        

Common shareholders’ equity

   $ 30,396      $ 29,683      $ 28,977      $ 27,276   

Trust-preferred securities

     1,663        1,667        1,686        1,691   

Adjustments for:

        

Goodwill and other intangibles (b)

     (19,064     (19,145     (19,437     (19,331

Pensions

     1,045        1,062        1,070        1,085   

Securities valuation allowance

     (162     180        619        4,352   

Merchant banking investments

     (21     (21     (32     (29

Total Tier 1 capital

     13,857        13,426        12,883        15,044   

Tier 2 capital:

        

Qualifying unrealized gains on equity securities

     3        4        3        1   

Qualifying subordinate debt

     3,191        3,330        3,429        3,611   

Qualifying allowance for credit losses

     645        639        665        617   

Total Tier 2 capital

     3,839        3,973        4,097        4,229   

Total risk-based capital

   $ 17,696      $ 17,399      $ 16,980      $ 19,273   

Total risk-weighted assets

   $ 102,807      $ 101,197      $ 106,328      $ 120,566   

 

(a) On a regulatory basis and including discontinued operations.
(b) Reduced by deferred tax liabilities of $2.4 billion at June 30, 2010, March 31, 2010, Dec. 31, 2009 and June 30, 2009 associated with non-tax deductible identifiable intangible assets and tax deductible goodwill.

 

Trading activities and risk management

Our trading activities are focused on acting as a market maker for our customers. The risk from these market making activities and from our own positions is managed by our traders and limited in total exposure through a system of position limits, a value-at-risk (“VAR”) methodology based on a Monte Carlo simulation, stop loss advisory triggers, and other market sensitivity measures. See Note 17 of the Notes to Consolidated Financial Statements for additional information on the VAR methodology.

 

The following tables indicate the calculated VAR amounts for the trading portfolio for the periods indicated:

 

VAR (a)

(in millions)

   2nd Quarter 2010    June  30,
2010
 
   Average     Minimum    Maximum   

Interest rate

   $ 5.1      $ 3.4    $ 8.9    $ 4.5   

Foreign exchange

     2.8        1.7      5.0      1.8   

Equity

     3.0        1.6      5.0      4.2   

Credit

     0.8        0.5      1.3      1.1   

Diversification

     (5.5     N/M      N/M      (5.0

Overall portfolio

     6.2        3.5      10.1      6.6   

 

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VAR (a)    1st Quarter 2010  
(in millions)    Average     Minimum    Maximum    2010  

Interest rate

   $ 7.6      $ 4.8    $ 10.9    $ 8.4   

Foreign exchange

     2.3        0.9      4.3      3.5   

Equity

     2.5        1.3      3.9      3.1   

Credit

     0.7        0.5      0.8      0.6   

Diversification

     (4.9     N/M      N/M      (4.7

Overall portfolio

     8.2        5.5      11.4      10.9   

 

VAR (a)    2nd Quarter 2009    June 30,
2009
 
(in millions)    Average     Minimum    Maximum   

Interest rate

   $ 4.8      $ 2.8    $ 8.0    $ 4.5   

Foreign exchange

     2.7        1.2      4.6      2.2   

Equity

     2.3        1.7      3.0      1.7   

Credit

     3.8        2.4      6.0      2.7   

Diversification

     (6.1     N/M      N/M      (6.6

Overall portfolio

     7.5        4.5      12.6      4.5   

 

VAR (a)    Year-to-date 2010
(in millions)    Average     Minimum    Maximum

Interest rate

   $ 6.4      $ 3.4    $ 10.9

Foreign exchange

     2.6        0.9      5.0

Equity

     2.7        1.3      5.0

Credit

     0.7        0.5      1.3

Diversification

     (5.2     N/M      N/M

Overall portfolio

     7.2        3.5      11.4

 

VAR (a)    Year-to-date 2009
(in millions)    Average     Minimum    Maximum

Interest rate

   $ 4.9      $ 2.8    $ 8.0

Foreign exchange

     2.5        1.2      5.6

Equity

     2.9        1.6      8.1

Credit

     4.1        2.4      7.5

Diversification

     (6.5     N/M      N/M

Overall portfolio

     7.9        4.5      13.2

 

(a) VAR figures do not reflect the impact of the credit valuation adjustment guidance in ASC 820. This is consistent with the Regulatory treatment.
N/M - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a portfolio diversification effect.

During the second quarter of 2010, interest rate risk generated 43% of average VAR, equity risk generated 26% of average VAR, foreign exchange risk generated 24% of average VAR and credit risk generated 7% of average VAR. During the second quarter of 2010, our daily trading loss did not exceed our calculated VAR amount on any given day.

BNY Mellon monitors a volatility index of global currency using a basket of 30 major currencies. In the second quarter of 2010, the volatility of this index increased approximately 36 basis points from the first quarter of 2010.

The following table of total daily revenue or loss illustrates the number of trading days in which our revenue or loss fell within particular ranges during the past year.

 

Distribution of trading revenues (losses) (a)
     Quarter ended

(dollar amounts

in millions)

   June 30,
2009
   Sept. 30,
2009
   Dec. 31,
2009
   March 31,
2010
   June 30,
2010

Revenue range:

   Number of days

Less than $(2.5)

   2    -    1    -    1

$(2.5) - $0

   2    5    5    3    2

$0 - $2.5

   11    16    13    15    18

$2.5 - $5.0

   23    24    22    22    21

More than $5.0

   26    19    21    21    22

 

(a) Distribution of trading revenues (losses) does not reflect the impact of the credit valuation adjustment guidance in ASC 820. This is consistent with the Regulatory treatment.

Foreign exchange and other trading

Under our mark to market methodology for derivative contracts, an initial “risk-neutral” valuation is performed on each position assuming time-discounting based on an AA credit curve. In addition, we consider credit risk in arriving at the fair value of our derivatives.

As required by ASC 820 - Fair Value Measurements and Disclosures, we reflect external credit ratings as well as observable credit default swap spreads for both ourselves as well as our counterparties when measuring the fair value of our derivative positions.

Accordingly, the valuation of our derivative positions is sensitive to the current changes in our own credit spreads, as well as those of our counterparties. In addition, in cases where a counterparty is deemed impaired, further analyses are performed to value such positions.

At June 30, 2010, our over-the-counter (“OTC”) derivative assets of $5.2 billion included a credit valuation adjustment (“CVA”) deduction of $131 million, including $65 million related to the credit quality of certain CDO counterparties and Lehman. Our OTC derivative liabilities of $6.0 billion included $20 million of debit valuation adjustments (“DVA”) related to our own credit spread.

Adjustments to the CVA and DVA decreased foreign exchange and other trading activities revenue by $43 million in the second quarter of 2010. Adjustments related to exposure that we applied our own credit spread to decreased foreign exchange and other trading activities revenue by $5 million in the second quarter of 2010.


 

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The table below summarizes the risk ratings for our foreign exchange, interest rate and equity derivative counterparty credit exposure.

 

Foreign exchange and other trading  
counterparty risk rating profile (a)  
     Quarter ended  
      June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    March 31,
2010
    June 30,
2010
 

Rating:

          

AAA to AA-

   57   58   56   54   52

A+ to A-

   20      17      22      23      19   

BBB+ to BBB-

   14      16      15      16      22   

Noninvestment grade (BB+ and lower)

   9      9      7      7      7   

Total

   100   100   100   100   100

 

(a) Represents credit rating agency equivalent of internal credit ratings.

Asset/liability management

Our diversified business activities include processing securities, accepting deposits, investing in securities, lending, raising money as needed to fund assets, and other transactions. The market risks from these activities are interest rate risk and foreign exchange risk. Our primary market risk is exposure to movements in U.S. dollar interest rates and certain foreign currency interest rates. We actively manage interest rate sensitivity and use earnings simulation and discounted cash flow models to identify interest rate exposures.

An earnings simulation model is the primary tool used to assess changes in pre-tax net interest revenue. The model incorporates management’s assumptions regarding interest rates, balance changes on core deposits, market spreads, changes in the prepayment behavior of loans and securities and the impact of derivative financial instruments used for interest rate risk management purposes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior and are inherently uncertain. As a result, the earnings simulation model cannot precisely estimate net interest revenue or the impact of higher or lower interest rates on net interest revenue. Actual results may differ from projected results due to timing, magnitude and frequency of interest rate changes, and changes in market conditions and management’s strategies, among other factors.

We evaluate the effect on earnings by running various interest rate ramp scenarios from a baseline scenario. These scenarios

are reviewed to examine the impact of large interest rate movements. Interest rate sensitivity is quantified by calculating the change in pre-tax net interest revenue between the scenarios over a 12-month measurement period.

The following table shows net interest revenue sensitivity for BNY Mellon:

 

Estimated changes in net interest revenue

at June 30, 2010

   Sensitivity  
(dollar amounts in millions)    $    %  

up 200 bps vs. baseline

   $ 364    12.6

up 100 bps vs. baseline

     236    8.1   

 

bps - basis points.

The baseline scenario’s Fed Funds rate in the June 30, 2010 analysis was 0.25%. The 100 basis point ramp scenario assumes short-term rates increase 25 basis points in each of the next four quarters and the 200 basis point ramp scenario assumes a 50 basis point per quarter increase. Both the up 200 basis point and the up 100 basis point June 30, 2010 scenarios assume 10-year rates rise 250 and 150 basis points, respectively.

These scenarios do not reflect strategies that management could employ to limit the impact as interest rate expectations change. The previous table relies on certain critical assumptions regarding the balance sheet and depositors’ behavior related to interest rate fluctuations and the prepayment and extension risk in certain of our assets. To the extent that actual behavior is different from that assumed in the models, there could be a change in interest rate sensitivity.

Off-balance-sheet financial instruments

Off-balance sheet arrangements discussed in this section are limited to guarantees, retained or contingent interests, support agreements and certain derivative instruments related to our common stock. For BNY Mellon, these items include certain credit guarantees and securitizations. Guarantees include: lending-related guarantees issued as part of our corporate banking business; securities lending indemnifications issued as part of our servicing and fiduciary businesses and support agreements issued to customers in our asset servicing and asset management businesses.

See the Support agreements section and Note 18 of the Notes to Consolidated Financial Statements for a further discussion of our off-balance sheet arrangements.


 

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Supplemental information – Explanation of Non-GAAP financial measures

BNY Mellon has included in this Form 10-Q certain Non-GAAP financial measures based upon tangible common shareholders’ equity. BNY Mellon believes that the ratio of tangible common shareholders’ equity to tangible total assets of operations is a measure of capital strength that adds additional useful information to investors, supplementing the Tier 1 capital ratio which is utilized by regulatory authorities. Unlike the Tier 1 capital ratio, the tangible common shareholders’ equity ratio fully incorporates those changes in investment securities valuations which are reflected in shareholders’ equity. In addition, this ratio is expressed as a percentage of the actual book value of assets, as opposed to a percentage of a risk-based reduced value established in accordance with regulatory requirements, although BNY Mellon in its calculation has excluded certain assets which are given a zero percent risk-weighting for regulatory purposes. This ratio is also informative to investors in BNY Mellon’s common stock because, unlike the Tier 1 capital ratio, it excludes trust preferred securities issued by BNY Mellon. Further, BNY Mellon believes that the return on tangible common equity measure, which excludes goodwill and intangible assets net of deferred tax liabilities, is a useful additional measure for investors because it presents a measure of BNY Mellon’s performance in reference to those assets which are productive in generating income.

BNY Mellon has provided a measure of tangible book value per share which it believes provides additional useful information as to the level of such assets in relation to shares of common stock outstanding. BNY Mellon has presented revenue measures which exclude the effect of net securities gains (losses) and noncontrolling interests related to consolidated asset management funds; and expense measures which exclude special litigation reserves taken in the first quarter of 2010, the FDIC special assessment, restructuring charges, M&I expenses and intangible amortization expenses, and measures which utilize net income excluding tax items such as benefit of tax settlements. Return on equity measures and operating margin measures which exclude some or all of these items are also presented. BNY Mellon believes that these measures are useful to investors because they permit a focus on period to period comparisons which relate to the ability of BNY Mellon to enhance revenues and limit expenses in circumstances where such matters are

within BNY Mellon’s control. The excluded items in general relate to situations where accounting rules require certain ongoing charges as a result of prior transactions, or where valuation or other accounting/regulatory requirements require charges unrelated to operational initiatives. M&I expenses primarily relate to the merger with Mellon Financial Corporation in 2007. M&I expenses generally continue for approximately three years after the transaction, and can vary on a year-to-year basis depending on the stage of the integration. BNY Mellon believes that the exclusion of M&I expenses provides investors with a focus on BNY Mellon’s business as it would appear on a consolidated going-forward basis, after such M&I expenses have ceased, typically after approximately three years. Future periods will not reflect such M&I expenses, and thus may be more easily compared to our current results if M&I expenses are excluded. With regards to the exclusion of net securities gains (losses), BNY Mellon’s primary businesses are Asset and Wealth Management and Institutional Services. The management of these sectors is evaluated on the basis of the ability of these businesses to generate fee and net interest revenue and to control expenses, and not on the results of BNY Mellon’s investment securities portfolio. Management of the investment securities portfolio is a shared service contained in the Other segment. The primary objective of the investment securities portfolio is to generate net interest revenue from the liquidity generated by BNY Mellon’s processing businesses. BNY Mellon does not generally originate or trade the securities in the investment securities portfolio. With regards to higher yields related to the restructured investment securities portfolio, client deposits serve as the primary funding source for our investment securities portfolio and we typically allocate all interest revenue to the businesses generating the deposits. Accordingly, the higher yield related to the restructured investment securities portfolio has been included in the segment results. Restructuring charges relate to migrating positions to global growth centers and the elimination of certain positions.

Excluding the benefit of tax settlements permits investors to calculate the tax impact of BNY Mellon’s primary businesses. The presentation of financial measures excluding special litigation reserves in the first quarter of 2010 provides investors with the ability to view performance metrics on the basis that management views results. The presentation of income of consolidated asset management funds, net of noncontrolling interests


 

50    BNY Mellon


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related to the consolidation of certain asset management funds, permits investors to view revenue on a basis consistent with prior periods. BNY Mellon believes that these presentations, as a supplement to GAAP information, gives investors a clearer picture of the results of its primary businesses.

In this Form 10-Q, certain amounts are presented on an FTE basis. We believe that this presentation provides comparability

of amounts arising from both taxable and tax-exempt sources, and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income.

Each of these measures as described above is used by management to monitor financial performance, both on a company-wide and on a business segment basis.


 

Reconciliation of income (loss) from continuing operations before income taxes – pre-tax operating margin                              
(dollars in millions)    2Q10     1Q10     2Q09     YTD10     YTD09  

Income (loss) from continuing operations before income taxes – GAAP

   $ 1,006      $ 884      $ 513      $ 1,890      $ 1,085   

Less:    Net securities gains (losses)

     13        7        (256     20        (551

Noncontrolling interests of consolidated asset management funds

     33        24        -        57        -   

Add:    Special litigation reserves

     N/A        164        N/A        164        N/A   

FDIC special assessment

     -        -        61        -        61   

M&I expenses

     14        26        59        40        127   

Restructuring charges

     (15     7        6        (8     16   

Intangible amortization

     98        97        108        195        215   

Income (loss) from continuing operations before income taxes excluding net securities gains (losses), noncontrolling interests of consolidated asset management funds, special litigation reserves, FDIC special assessment, M&I expenses, restructuring charges and intangible amortization – Non-GAAP

   $ 1,057      $ 1,147      $ 1,003      $ 2,204      $ 2,055   

Fee and other revenue – GAAP

   $ 2,571      $ 2,549      $ 2,257      $ 5,120      $ 4,393   

Income of consolidated asset management funds – GAAP

     65        65        -        130        -   

Net interest revenue – GAAP

     722        765        700        1,487        1,475   

Total revenue – GAAP

     3,358        3,379        2,957        6,737        5,868   

Less:    Net securities gains (losses)

     13        7        (256     20        (551

Noncontrolling interests of consolidated asset management funds

     33        24        -        57        -   

Total revenue excluding net securities gains (losses) and noncontrolling interests of consolidated asset management funds – Non-GAAP

   $ 3,312      $ 3,348      $ 3,213      $ 6,660      $ 6,419   

Pre-tax operating margin (a)

     30     26     17     28     18

Pre-tax operating margin excluding net securities gains (losses), noncontrolling interests of consolidated asset management funds, special litigation reserves, FDIC special assessment, M&I expenses, restructuring charges and intangible amortization – Non-GAAP (a)

     32     34     31     33     32
(a) Income (loss) before taxes divided by total revenue.
N/A – Not applicable.

 

Asset servicing revenue

(in millions)

   2Q10    1Q10    2Q09

Asset servicing revenue

   $ 668    $ 637    $ 671

Less: Securities lending fee revenue

     46      29      97

Asset servicing revenue excluding securities lending fee revenue

   $ 622    $ 608    $ 574

 

Asset and wealth management fee revenue                      2Q10 vs.  
(dollars in millions)    2Q10    1Q10    2Q09    1Q10     2Q09  

Asset and wealth management fee revenue

   $ 676    $ 678    $ 637    -   6

Less: Performance fees

     19      13      26     

Add: Revenue from consolidated asset management funds, net of noncontrolling interests

     29      25      -             

Asset and wealth management fee revenue excluding performance fees

   $ 686    $ 690    $ 611    (1 )%    12

 

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Return on common equity and tangible common equity – continuing operations                                    
(dollars in millions)    2Q10     1Q10     2Q09     YTD10     YTD09  

Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP

   $ 658      $ 559      $ 176      $ 1,217      $ 498   

Less: Loss from discontinued operations, net of tax

     (10     (42     (91     (52     (132

Net income from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation

     668        601        267        1,269        630   

Add:    Intangible amortization

     60        62        67        122        133   

Net income from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation excluding intangible amortization – Non-GAAP

     728        663        334        1,391        763   

Less:    Net securities gains (losses)

     8        5        (161     13        (344

Add:    Special litigation reserves

     N/A        98        N/A        98        N/A   

FDIC special assessment

     -        -        36        -        36   

M&I expenses

     9        16        36        25        77   

Restructuring charges

     (9     5        4        (4     11   

Benefit of tax settlements

     -        -        (134     -        (134

Net income from continuing operations excluding net securities gains (losses), special litigation reserves, FDIC special assessment, M&I expenses, restructuring charges, benefit of tax settlements and intangible amortization– Non-GAAP

   $ 720      $ 777      $ 437      $ 1,497      $ 1,097   

Average common shareholders’ equity

   $ 30,434      $ 29,715      $ 26,566      $ 30,076      $ 25,881   

Less:    Average goodwill

     16,073        16,143        15,989        16,108        15,913   

Average intangible assets

     5,421        5,513        5,673        5,466        5,713   

Add:    Deferred tax liability – tax deductible goodwill

     746        720        643        746        643   

Deferred tax liability – non-tax deductible intangible assets

     1,649        1,660        1,743        1,649        1,743   

Average tangible common shareholders’ equity – Non-GAAP

   $ 11,335      $ 10,439      $ 7,290      $ 10,897      $ 6,641   

Return on common equity– GAAP (a)

     8.8     8.2     4.0     8.5     4.9

Return on common equity excluding net securities gains (losses), special litigation reserves, FDIC special assessment, M&I expenses, restructuring charges, benefit of tax settlements and intangible amortization – Non-GAAP (a)

     9.5     10.6     6.6     10.0     8.6

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

     25.8     25.8     18.4     25.7     23.2

Return on tangible common equity excluding net securities gains (losses), special litigation reserves, FDIC special assessment, M&I expenses, restructuring charges and benefit of tax settlements – Non-GAAP (a)

     25.5     30.2     24.0     27.7     33.3
(a) Annualized.

N/A – Not applicable.

 

Calculation of Tier 1 common equity to risk-weighted assets ratio (a)

(dollars in millions)

   June 30,
2010
    March 31,
2010
    June 30,
2009
 

Total Tier 1 capital

   $ 13,857      $ 13,426      $ 15,044   

Less:    Trust preferred securities

     1,663        1,667        1,691   

Total Tier 1 common equity

   $ 12,194      $ 11,759      $ 13,353   

Total risk-weighted assets

   $ 102,807      $ 101,197      $ 120,566   

Tier 1 common equity to risk-weighted assets ratio

     11.9     11.6     11.1
(a) On a regulatory basis.

 

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Equity to assets and book value per common share

(dollars in millions, unless otherwise noted)

   June 30,
2010
    March 31,
2010
   

June 30,

2009

 

Common shareholders’ equity at period end – GAAP

   $ 30,396      $ 29,683      $ 27,276   

Less:    Goodwill

     16,106        16,077        16,040   

Intangible assets

     5,354        5,449        5,677   

Add:    Deferred tax liability – tax deductible goodwill

     746        720        643   

Deferred tax liability – non-tax deductible intangible assets

     1,649        1,660        1,743   

Tangible common shareholders’ equity at period end – Non-GAAP

   $ 11,331      $ 10,537      $ 7,945   

Total assets at period end – GAAP

   $ 235,693      $ 220,551      $ 203,012   

Less:    Assets of consolidated asset management funds

     13,260        12,568        -   

Total assets of operations – Non-GAAP

     222,433        207,983        203,012   

Less:    Goodwill

     16,106        16,077        16,040   

Intangible assets

     5,354        5,449        5,677   

Cash on deposit with the Federal Reserve and other central banks (a)

     21,548        14,709        16,458   

Tangible total assets of operations at period end – Non-GAAP

   $ 179,425      $ 171,748      $ 164,837   

Common shareholders’ equity to total assets – GAAP

     12.9     13.5     13.4

Tangible common shareholders’ equity to tangible total assets of operations – Non-GAAP

     6.3     6.1     4.8

Period end common shares outstanding (in thousands)

     1,214,042        1,212,941        1,202,828   

Book value per common share

   $ 25.04      $ 24.47      $ 22.68   

Tangible book value per common share – Non-GAAP

   $ 9.33      $ 8.69      $ 6.60   
(a) Assigned a zero percent risk weighting by the regulators.

 

Recent accounting and regulatory developments

ASU 2010-11 – Scope Exception Related to Embedded Credit Derivatives

In March 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.” This ASU amends Subtopic 815-15 to clarify the scope of the exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. It addresses how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting. This ASU was effective July 1, 2010. The impact of this ASU is not expected to be material to our results of operations.

ASU 2010-18 – Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset

In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification when the Loan is Part of a Pool that is Accounted for as a Single Asset.” This ASU provides guidance that would maintain the integrity of the pool as a single unit of account and exempt these loans from troubled debt

restructuring reporting. Modified purchased credit impaired loans accounted for in a pool would remain in the pool subject to ASC 310-30 regardless of whether the modification is a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This ASU does not contain any additional disclosure requirements. This ASU was effective July 1, 2010. The impact of this ASU is not expected to be material to our results of operations.

ASU 2010-20 – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU requires additional disclosures about the allowance for credit losses and the credit quality of financing receivables. This ASU defines two levels of disaggregation – portfolio segment and class of financing receivable. Existing disclosures are amended to require: rollforward schedule of allowance for credit losses, with the ending balance further disaggregated on the basis of impairment method; related recorded investment in each ending balance noted above; nonaccrual status by class of financing receivable; and impaired financing receivables by class of financing receivables. This ASU requires the following additional disclosures:


 

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credit quality indicators by class of financing receivable; aging of past due financing receivables by class; nature and extent of troubled debt restructuring by class of financing receivable and their effect on allowance for credit losses; nature and extent of financing receivables modified as troubled debt restructurings by class and their effect on the allowance for credit losses; and significant purchases and sales by portfolio segment. These disclosures are required for interim and annual financial statements and are effective Dec. 31, 2010.

Proposed ASU – Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities

In May 2010, the FASB issued Proposed ASU, “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities.” Under this proposed ASU, most financial instruments would be measured at fair value in the balance sheet. However, information about the amortized cost of certain financial instruments would also be presented when an entity’s business strategy involves holding the financial instrument for collection or payment of contractual cash flows. At inception, all financial instruments would be classified as either: (1) fair value, with changes in fair value recognized in net income (default category); (2) fair value, with qualifying changes in fair value recognized in OCI (elective for qualifying debt instruments); or (3) amortized cost (elective for qualifying liabilities and short-term payables and receivables). Comments on this proposed ASU are due Sept. 30, 2010. The effective date will be determined by the FASB when it issues the final ASU.

Proposed ASU – Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

In June 2010, the FASB issued Proposed ASU, “Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This proposed ASU is the result of a joint project of the FASB and International Accounting Standards Board (“IASB”) to converge fair value measurement guidance in U.S. GAAP and International Financial Reporting Standards (“IFRS”). This proposed ASU would change the wording used to describe many of the principles and requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value

measurements, and would change how the fair value measurement guidance in ASC 820 is applied. This proposed ASU would also require several new disclosures: (a) measurement uncertainty disclosures, (b) reasons if an entity’s use of an asset is different from its highest and best use, and (c) fair value hierarchy disclosures for financial institutions not measured at fair value. Comments on this proposed ASU are due on Sept. 7, 2010. The effective date will be determined after the FASB considers the feedback on this proposed ASU.

Proposed ASU – Revenue from Contracts with Customers

In June 2010, the FASB issued Proposed ASU, “Revenue from Contracts with Customers.” This proposed ASU is the result of a joint project of the FASB and IASB to clarify the principles for recognizing revenue and develop a common standard for U.S. GAAP and IFRS. This proposed ASU would establish a broad principle that would require an entity to identify the contract with a customer, identify the separate performance obligations in the contract, determine the transaction price, allocate the transaction price to the separate performance obligations, and recognize revenue when each separate performance obligation is satisfied. Comments on this proposed ASU are due on Oct. 22, 2010. The effective date will be determined after the FASB considers the feedback on this proposed ASU.

Proposed ASU – Disclosure of Certain Loss Contingencies

In July 2010, the FASB issued Proposed ASU, “Disclosure of Certain Loss Contingencies.” This proposed ASU would require an entity to disclose qualitative and quantitative information about loss contingencies to enable financial statement users to understand the nature of loss contingencies, their potential magnitude and their potential timing (if known). Available information may be limited during the early stages of a loss contingency’s life cycle and therefore, disclosure may be less extensive in early stages of a loss contingency. In subsequent reporting periods, disclosure may be more extensive as additional information about a potentially


 

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unfavorable outcome becomes available. Additionally, an entity may aggregate disclosures about similar contingencies so that the disclosures are understandable and not too detailed. An entity would also then disclose the basis for aggregation. Comments on this proposed FASB are due on Aug. 20, 2010. The proposed FASB would be effective Dec. 31, 2010.

Adoption of new accounting standards

For a discussion of the adoption of new accounting standards, see Note 2 to the Notes to Consolidated Financial Statements.

Regulatory developments

We are currently assessing the following regulatory developments, which may have an impact on BNY Mellon’s business.

Regulatory reform

In July 2010, Congress enacted regulatory reform legislation known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, which the President signed into law on July 21, 2010. This new law broadly affects the financial services industry by establishing a framework for systemic risk oversight, creating a resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and containing numerous other provisions aimed at strengthening the sound operation of the financial services sector and will fundamentally change the system of oversight described under “Business – Supervision and Regulation” in Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2009. Many aspects of the law are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact to BNY Mellon or across the industry.

Proposed FDIC assessments

On April 13, 2010, the FDIC issued a notice of proposed rulemaking (“NPR”) which would revise the risk-based assessment system for all large insured depository institutions; and alter the initial and total base assessment rates for all insured depository institutions. The NPR would: eliminate risk categories and the use of long-term debt issuer ratings in calculating risk-based assessments for large institutions; use two scorecards – one for most large institutions and another for

large institutions that are structurally and operationally complex or that pose unique challenges and risks in the event of failure (highly complex institutions) – to calculate the assessment rates for all large institutions; allow the FDIC to take additional information into account to make limited adjustments to the scores; and use the scorecard to determine the assessment rate for each institution.

The NPR would also alter assessment rates applicable to all insured depository institutions to ensure that the revenue collected under the new assessment system would approximately equal that collected under the existing assessment system and ensure that the lowest rate applicable to small and large institutions would be the same. The proposed changes would be effective Jan. 1, 2011.

The Dodd-Frank Act also changes the deposit insurance assessment framework, primarily by basing assessments on an institution’s total assets less tangible equity (subject to further adjustment for custodial banks) rather than domestic deposits, which is expected to shift to a greater portion of the aggregate assessments to large banks.

Proposed Financial Crisis Responsibility Fee

In January 2010, President Obama proposed a “Financial Crisis Responsibility Fee” which would apply to banks, thrifts, insurance companies and broker-dealers with more than $50 billion in consolidated assets. The fee is intended to recoup the cost of the Troubled Asset Relief Program (“TARP”) to the U.S. Government. As proposed, the fee would be calculated on total assets excluding Tier 1 capital and assessed deposits and would remain in force for 10 years or longer. Based on the amount of assets on our balance sheet at June 30, 2010, we estimate that we would be responsible for paying approximately $200 million annually under this proposal, if enacted as currently proposed.

Basel Committee – Proposed capital and liquidity reforms

On Dec. 17, 2009, the Basel Committee issued two consultative documents proposing reforms to bank capital and liquidity regulation. The documents were titled “Strengthening the Resilience of the Banking Sector”, which proposed reforms to bank capital, and “International Framework for Liquidity Risk Management, Standards and Monitoring.” On July 26, 2010, the Committee announced that it had


 

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reached a broad agreement on the overall design of the capital and liquidity requirements that were proposed in the consultative documents.

IFRS

International Financial Reporting Standards (“IFRS”) are a set of standards and interpretations adopted by the International Accounting Standards Board. The SEC is currently considering a potential IFRS adoption process in the U.S., which would, in the near term, provide domestic issuers with an alternative accounting method and ultimately could replace U.S. GAAP reporting requirements with IFRS reporting requirements. The intention of this adoption would be to provide the capital markets community with a single set of high-quality, globally accepted accounting standards. The adoption of IFRS for U.S. companies with global operations would allow for streamlined reporting, allow for easier access to foreign capital markets and investments, and facilitate cross-border acquisitions, ventures or spin-offs.

In November 2008, the SEC proposed a “roadmap” for phasing in mandatory IFRS filings by U.S. public companies. The roadmap is conditional on progress towards milestones that would demonstrate improvements in both the infrastructure of international standard setting and the preparation of the U.S. financial reporting community. The SEC will monitor progress of these milestones between now and 2011, when the SEC plans to consider requiring U.S. public companies to adopt IFRS.

In February 2010, the SEC issued a statement confirming their position that they continue to believe that a single set of high quality, globally accepted accounting standards would benefit U.S. investors. The SEC continues to support the dual goals of improving financial reporting in the U.S. and reducing country-by-country disparities in financial reporting. The SEC is developing a work plan to aid in its evaluation of the impact of IFRS on the U.S. securities market. If the SEC determines in 2011 to incorporate IFRS into the U.S. financial reporting system, and the work plan validates the four-to-five year timeline for implementation, the first time that U.S. companies would report under IFRS would be no earlier than 2015.

While the SEC decides whether IFRS will be required to be used in the preparation of our consolidated financial statements, a number of countries have mandated the use of IFRS by BNY Mellon’s subsidiaries in their statutory reports. Such countries include the Netherlands, Australia and Hong Kong. Other countries which have established an IFRS conversion time frame which will affect our statutory reporting include Belgium (2010), Brazil (2010), Canada (2011), South Korea (2011), the United Kingdom (2012) and Ireland (2012).

 

Government monetary policies and competition

Government monetary policies

The Federal Reserve Board has the primary responsibility for U.S. monetary policy. Its actions have an important influence on the demand for credit and investments and the level of interest rates, and thus on the earnings of BNY Mellon.

Competition

BNY Mellon is subject to intense competition in all aspects and areas of our business. Our Asset Management and Wealth Management business segments experience competition from asset management firms; hedge funds; investment banking companies; bank and financial holding companies; banks, including trust banks; brokerage firms; and insurance companies. These firms and companies may be domiciled domestically or internationally. Our Asset Servicing, Clearing Services and Treasury Services business segments compete with domestic and foreign banks that offer institutional trust, custody and cash management products as well as a wide range of technologically capable service providers, such as data processing and shareholder service firms and other firms that rely on automated data transfer services for institutional and retail customers.

Many of our competitors, with the particular exception of bank and financial holding companies, banks and trust companies, are not subject to regulation as extensive as BNY Mellon, and, as a result, may have a competitive advantage over us and our subsidiaries in certain respects.

As a result of current conditions in the global financial markets and the economy in general, competition could intensify and consolidation of financial service companies could increase.

As part of our business strategy, we seek to distinguish ourselves from competitors by the level of service we deliver to clients. We also believe that technological innovation is an important competitive


 

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factor, and, for this reason, have made and continue to make substantial investments in this area. The ability to recover quickly from unexpected events is a competitive factor, and we have devoted significant resources to this. See Item  1, “Business – Competition” in our 2009 Annual Report on Form 10-K.

Website information

Our website is www.bnymellon.com. We currently make available the following information on our website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

 

 

All of our SEC filings, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, SEC Forms 3, 4 and 5 and any proxy statement mailed in connection with the solicitation of proxies;

 

Financial statements and footnotes prepared using Extensible Business Reporting Language (“XBRL”);

 

Our earnings releases and selected management conference calls and presentations; and

 

Our Corporate Governance Guidelines and the charters of the Audit, Corporate Governance and Nominating, Human Resources and Compensation, Risk and Corporate Social Responsibility Committees of our Board of Directors.

The contents of the website listed above are not incorporated into this Quarterly Report on Form 10-Q.

The SEC reports, the Corporate Governance Guidelines and committee charters are available in print to any shareholder who requests them. Requests should be sent by email to corpsecretary@bnymellon.com or by mail to the Secretary of The Bank of New York Mellon Corporation, One Wall Street, 9th Floor, New York, NY 10286.


 

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Item 1. Financial Statements

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

 

Consolidated Income Statement (unaudited)                                    
     Quarter ended     Six months ended  
(in millions)    June 30,
2010
    March 31,
2010
    June 30,
2009
    June 30,
2010
    June 30,
2009
 

Fee and other revenue

          

Securities servicing fees:

          

Asset servicing

   $ 668      $ 637      $ 671      $ 1,305      $ 1,280   

Issuer services

     354        333        372        687        736   

Clearing services

     245        230        250        475        503   

Total securities servicing fees

     1,267        1,200        1,293        2,467        2,519   

Asset and wealth management fees

     676        678        637        1,354        1,253   

Foreign exchange and other trading activities

     220        262        237        482        544   

Treasury services

     125        131        132        256        257   

Distribution and servicing

     77        76        107        153        218   

Financing-related fees

     48        50        54        98        102   

Investment income

     72        108        44        180        27   

Other

     73        37        9        110        24   

Total fee revenue

     2,558        2,542        2,513        5,100        4,944   

Securities gains (losses) – other-than-temporary-impairment

     9        (20     (680     (11     (2,265

Noncredit-related (losses) on securities not expected to be sold (recognized in OCI)

     (4     (27     (424     (31     (1,714

Net securities gains (losses)

     13        7        (256     20        (551

Total fee and other revenue

     2,571        2,549        2,257        5,120        4,393   

Operations of consolidated asset management funds

          

Investment income

     188        155        -        343        -   

Interest of asset management fund note holders

     123        90        -        213        -   

Income of consolidated asset management funds

     65        65        -        130        -   

Net interest revenue

          

Interest revenue

     862        883        845        1,745        1,824   

Interest expense

     140        118        145        258        349   

Net interest revenue

     722        765        700        1,487        1,475   

Provision for credit losses

     20        35        61        55        120   

Net interest revenue after provision for credit losses

     702        730        639        1,432        1,355   

Noninterest expense

          

Staff

     1,234        1,220        1,153        2,454        2,322   

Professional, legal and other purchased services

     256        241        237        497        474   

Net occupancy

     143        137        142        280        281   

Distribution and servicing

     106        109        106        215        213   

Software

     91        94        93        185        174   

Furniture and equipment

     71        75        76        146        153   

Business development

     68        52        49        120        93   

Sub-custodian

     65        52        60        117        99   

Other

     201        350        294        551        496   

Subtotal

     2,235        2,330        2,210        4,565        4,305   

Amortization of intangible assets

     98        97        108        195        215   

Restructuring charges

     (15     7        6        (8     16   

Merger and integration expenses

     14        26        59        40        127   

Total noninterest expense

     2,332        2,460        2,383        4,792        4,663   

Income

          

Income from continuing operations before income taxes

     1,006        884        513        1,890        1,085   

Provision for income taxes

     304        258        12        562        173   

Income from continuing operations

     702        626        501        1,328        912   

Discontinued operations:

          

Loss from discontinued operations

     (16     (70     (144     (86     (209

Benefit for income taxes

     (6     (28     (53     (34     (77

Loss from discontinued operations, net of tax

     (10     (42     (91     (52     (132

Net income

     692        584        410        1,276        780   

Net (income) loss attributable to noncontrolling interests ($33 for quarter ended June 30, 2010, $24 for quarter ended March 31, 2010 and $57 for six months ended June 30, 2010 related to asset management funds)

     (34     (25     2        (59     1   

Redemption charge and preferred dividends

     -        -        (236     -        (283

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

   $ 658      $ 559      $ 176      $ 1,217      $ 498   

 

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

Consolidated Income Statement (unaudited) – continued

 

Earnings per share applicable to the common shareholders
of The Bank of New York Mellon Corporation (a)

(in dollars)

                                        
   Quarter ended     Six months ended  
   June 30,     March 31,     June 30,     June 30,     June 30,  
   2010     2010     2009     2010     2009  

Basic:

          

Net income from continuing operations

   $ 0.55      $ 0.50      $ 0.23      $ 1.04      $ 0.54   

Loss from discontinued operations

     (0.01     (0.04     (0.08     (0.04     (0.11

Net income applicable to common stock

   $ 0.54      $ 0.46      $ 0.15      $ 1.00      $ 0.43   

Diluted (b):

          

Net income from continuing operations

   $ 0.55      $ 0.49      $ 0.23      $ 1.04      $ 0.54   

Loss from discontinued operations

     (0.01     (0.03     (0.08     (0.04     (0.11

Net income applicable to common stock

   $ 0.54      $ 0.46      $ 0.15      $ 1.00      $ 0.43   
                                          

Average common shares and equivalents outstanding of The Bank of New York Mellon Corporation

(in thousands)

          
   Quarter ended     Six months ended  
   June 30,     March 31,     June 30,     June 30,     June 30,  
   2010     2010     2009     2010     2009  

Basic

     1,204,557        1,202,533        1,171,081        1,203,554        1,158,649   

Common stock equivalents

     10,314        10,042        9,636        10,175        7,718   

Participating securities

     (6,041     (6,289     (6,251     (6,151     (5,747

Diluted

     1,208,830        1,206,286        1,174,466        1,207,578        1,160,620   

Anti-dilutive securities (c)

     93,012        83,019        102,593        88,026        102,808   
                                          

Reconciliation of net income from continuing operations applicable to the common shareholders of The Bank of New York Mellon Corporation

(in millions)

          
   Quarter ended     Six months ended  
   June 30,     March 31,     June 30,     June 30,     June 30,  
   2010     2010     2009     2010     2009  

Net income from continuing operations

   $ 702      $ 626      $ 501      $ 1,328      $ 912   

Net (income) loss attributable to noncontrolling interests

     (34     (25     2        (59     1   

Redemption charge and preferred dividends

     -        -        (236     -        (283

Net income from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation

     668        601        267        1,269        630   

Loss from discontinued operations

     (10     (42     (91     (52     (132

Net income applicable to the common shareholders of the Bank of New York Mellon Corporation

   $ 658      $ 559      $ 176      $ 1,217      $ 498   

 

(a) Basic and diluted earnings per share under the two-class method were calculated after deducting earnings allocated to participating securities of $7 million in the second quarter of 2010, $5 million in the first quarter of 2010, $2 million in the second quarter of 2009, $12 million in the first six months of 2010 and $5 million in the first six months of 2009.
(b) Prior to the issuance of our common stock, which will occur at the settlement of the forward sale agreement, the forward sale agreement was reflected in our diluted earnings per share calculations using the treasury stock method.
(c) Represents stock options, restricted stock, restricted stock units, participating securities and warrants outstanding but not included in the computation of diluted average common shares because their effect would be anti-dilutive.

See accompanying Notes to Consolidated Financial Statements.

 

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

Consolidated Balance Sheet (unaudited)

 

(dollar amounts in millions, except per share amounts)    June 30,
2010
    Dec. 31,
2009
 

Assets

    

Cash and due from:

    

Banks

   $ 3,569      $ 3,732   

Interest-bearing deposits with the Federal Reserve and other central banks

     21,579        7,362   

Interest-bearing deposits with banks

     53,396        56,302   

Federal funds sold and securities purchased under resale agreements

     4,453        3,535   

Securities:

    

Held-to-maturity (fair value of $3,698 and $4,240)

     3,742        4,417   

Available-for-sale (June 30, 2010 includes $580 previously securitized)

     49,834        51,632   

Total securities

     53,576        56,049   

Trading assets

     7,393        6,001   

Loans

     37,147        36,689   

Allowance for loan losses

     (542     (503

Net loans

     36,605        36,186   

Premises and equipment

     1,548        1,602   

Accrued interest receivable

     524        639   

Goodwill

     16,106        16,249   

Intangible assets

     5,354        5,588   

Other assets (includes $1,119 and $863, at fair value)

     17,988        16,737   

Assets of discontinued operations

     342        2,242   

Subtotal assets of operations

     222,433        212,224   

Assets of consolidated asset management funds, at fair value:

    

Trading assets

     543        -   

Loans

     12,070        -   

Other assets

     647        -   

Subtotal assets of consolidated asset management funds

     13,260        -   

Total assets

   $ 235,693      $ 212,224   

Liabilities

    

Deposits:

    

Noninterest-bearing (principally domestic offices)

   $ 42,185      $ 33,477   

Interest-bearing deposits in domestic offices

     32,994        32,944   

Interest-bearing deposits in foreign offices

     68,488        68,629   

Total deposits

     143,667        135,050   

Federal funds purchased and securities sold under repurchase agreements

     2,712        3,348   

Trading liabilities

     8,323        6,396   

Payables to customers and broker-dealers

     10,200        10,721   

Commercial paper

     7        12   

Other borrowed funds

     2,013        477   

Accrued taxes and other expenses

     4,645        4,484   

Other liabilities (including allowance for lending related commitments of $103 and $125, also includes $281 and $610, at fair value)

     3,995        3,891   

Long-term debt (June 30, 2010 includes $276 at fair value)

     16,754        17,234   

Liabilities of discontinued operations

     -        1,608   

Subtotal liabilities of operations

     192,316        183,221   

Liabilities and obligations of consolidated asset management funds, at fair value

     12,272        -   

Total liabilities

     204,588        183,221   

Equity

    

Common stock-par value $0.01 per common share; authorized 3,500,000,000 common shares; issued 1,215,948,532 and 1,208,861,641 common shares

     12        12   

Additional paid-in capital

     22,073        21,917   

Retained earnings

     9,875        8,912   

Accumulated other comprehensive loss, net of tax

     (1,509     (1,835

Less: Treasury stock of 1,906,851 and 1,026,927 common shares, at cost

     (55     (29

Total The Bank of New York Mellon Corporation shareholders’ equity

     30,396        28,977   

Noncontrolling interests

     43        26   

Noncontrolling interests of consolidated asset management funds

     666        -   

Total equity

     31,105        29,003   

Total liabilities and equity

   $ 235,693      $ 212,224   

See accompanying Notes to Consolidated Financial Statements.

 

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

Consolidated Statement of Cash Flows (unaudited)

      Six months ended
June 30
 
(in millions)    2010     2009  

Operating activities

    

Net income

   $ 1,276      $ 780   

Net income (loss) attributable to noncontrolling interests, net of tax

     (59     1   

Loss from discontinued operations, net of tax

     (52     (132

Income from continuing operations attributable to The Bank of New York Mellon Corporation

     1,269        913   

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

    

Provision for credit losses

     55        120   

Depreciation and amortization

     257        327   

Deferred tax benefit

     (39     (452

Securities (gains) losses and venture capital income

     (31     580   

Change in trading activities

     (1,785     (594

Change in accruals and other, net

     132        (485

Net effect of discontinued operations

     -        (96

Net cash provided by (used for) operating activities

     (142     313   

Investing activities

    

Change in interest-bearing deposits with banks

     (720     2,586   

Change in interest-bearing deposits with Federal Reserve and other central banks

     (14,217     36,772   

Change in margin loans

     (944     54   

Purchases of securities held-to-maturity

     (13     (108

Paydowns of securities held-to-maturity

     135        346   

Maturities of securities held-to-maturity

     124        196   

Purchases of securities available-for-sale

     (5,460     (15,428

Sales of securities available-for-sale

     3,495        184   

Paydowns of securities available-for-sale

     3,496        3,284   

Maturities of securities available-for-sale

     1,124        931   

Net principal received from loans to customers

     15        3,130   

Sales of loans and other real estate

     366        485   

Change in federal funds sold and securities purchased under resale agreements

     (918     (1,697

Change in seed capital investments

     (193     6   

Purchases of premises and equipment/capitalized software

     (82     (187

Acquisitions, net cash

     (115     (11

Dispositions, net cash

     133        -   

Proceeds from the sale of premises and equipment

     6        2   

Other, net

     (577     116   

Net effect of discontinued operations

     -        183   

Net cash provided by (used for) investing activities

     (14,345     30,844   

Financing activities

    

Change in deposits

     14,420        (28,529

Change in federal funds purchased and securities sold under repurchase agreements

     (636     958   

Change in payables to customers and broker-dealers

     (521     (782

Change in other funds borrowed

     2,411        (3,306

Change in commercial paper

     (5     134   

Net proceeds from the issuance of long-term debt

     650        2,100   

Repayments of long-term debt

     (1,764     (540

Proceeds from the exercise of stock options

     23        4   

Issuance of common stock

     10        1,360   

Treasury stock acquired

     (24     (23

Common cash dividends paid

     (219     (378

Preferred dividends paid

     -        (74

Repurchase of Series B preferred stock

     -        (3,000

Net effect of discontinued operations

     -        (119

Net cash provided by (used for) financing activities

     14,345        (32,195

Effect of exchange rate changes on cash

     (21     (60

Change in cash and due from banks:

    

Change in cash and due from banks

     (163     (1,098

Cash and due from banks at beginning of period

     3,732        4,881   

Cash and due from banks at end of period

   $ 3,569      $ 3,783   

Supplemental disclosures

    

Interest paid

   $ 229      $ 407   

Income taxes paid

     246        2,136   

Income taxes refunded

     188        43   

See accompanying Notes to Consolidated Financial Statements.

 

BNY Mellon    61


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

Consolidated Statement of Changes in Equity (unaudited)

Six months ended June 30, 2010                                                        
     The Bank of New York Mellon Corporation shareholders              
(in millions)    Common
stock
   Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income (loss),
net of tax
    Treasury
stock
    Non-
controlling
interest
    Non-
controlling
interest of
consolidated
asset manage-
ment funds
    Total
equity
 

Balance at Dec. 31, 2009

   $ 12    $ 21,917      $ 8,912      $ (1,835   $ (29   $ 26      $ -      $ 29,003   

Adjustment for the cumulative effect of applying ASC 810, net of tax

     -      -        52        24        -        -        -        76   

Adjustment for the cumulative effect of applying ASC 825, net of tax

     -      -        (73     -        -        -        -        (73

Adjusted balance at Jan. 1, 2010

     12      21,917        8,891        (1,811     (29     26        -        29,006   

Purchase of subsidiary shares from noncontrolling interest

     -      (18     -        -        -        (6     -        (24

Distributions paid to noncontrolling interests

     -      -        -        -        -        (4     (38     (42

Other net changes in noncontrolling interests

     -      -        -        -        -        26        -        26   

Consolidation of asset management funds

     -      -        -        -        -        -        745        745   

Deconsolidation of asset management funds

     -      -        -        -        -        -        (7     (7

Comprehensive income:

                 

Net income

     -      -        1,217        -        -        2        57        1,276   

Other comprehensive income:

                 

Unrealized gain (loss) on securities available for sale

     -      -        -        737        -        -        -        737   

Employee benefit plans:

                 

Pensions

     -      -        -        21        -        -        -        21   

Other post-retirement benefits

     -      -        -        2        -        -        -        2   

Foreign currency translation adjustments

     -      -        -        (471     -        (1     (91     (563

Net unrealized gain (loss) on cash flow hedges

     -      -        -        12        -        -        -        12   

Reclassification adjustment/other (a)

     -      -        (14     1        -        -        -        (13

Total comprehensive income

     -      -        1,203        302        -        1        (34     1,472  (b) 

Dividends on common stock at $0.18 per share

     -      -        (219     -        -        -        -        (219

Repurchase of common stock

     -      -        -        -        (24     -        -        (24

Common stock issued under employee benefit plans

     -      18        -        -        -        -        -        18   

Common stock issued under direct stock purchase and dividend reinvestment plan

     -      8        -        -        -        -        -        8   

Stock awards and options exercised

     -      148        -        -        (2     -        -        146   

Balance at June 30, 2010

   $ 12    $ 22,073      $ 9,875      $ (1,509   $ (55   $ 43      $ 666      $ 31,105   

 

(a) Includes $(12) million (after-tax) related to OTTI, and a $14 million reclassification to retained earnings from other comprehensive income.
(b) Comprehensive income attributable to The Bank of New York Mellon Corporation shareholders for the six months ended June 30, 2010 and 2009 was $1,505 million and $1,275 million, respectively.

See accompanying Notes to Consolidated Financial Statements.

 

62    BNY Mellon


Table of Contents

Notes to Consolidated Financial Statements

 

Note 1 – Basis of presentation

Basis of presentation

 

The accounting and financial reporting policies of BNY Mellon, a global financial services company, conform to U.S. generally accepted accounting principles (“GAAP”) and prevailing industry practices.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates based upon assumptions about future economic and market conditions which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Amounts subject to significant estimates are items such as the allowance for loan losses and lending-related commitments, goodwill and intangible assets, pension accounting, the fair value of financial instruments and other-than-temporary impairments. Among other effects, such changes could result in future impairments of investment securities, goodwill and intangible assets and establishment of allowances for loan losses and lending-related commitments as well as increased pension and post-retirement expense.

The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. Certain other immaterial reclassifications in addition to discontinued operations (see Note 4 of the Notes to Consolidated Financial Statements) have been made to prior periods to place them on a basis comparable with current period presentation.

Note 2 – Accounting changes and new accounting guidance

ASU 2009-16 - Accounting for Transfers of Financial Assets

In December 2009, the FASB issued ASU 2009-16 “Accounting for Transfers of Financial Assets.” This formally codified SFAS No. 166, “Accounting

for Transfers of Financial Assets, an Amendment to FASB Statement No. 140.” This ASU removed (1) the concept of a qualifying special purpose entity (“QSPE”) from SFAS No. 140 (ASC 860—Transfers and Servicing) and (2) the exceptions from applying FASB Interpretation No. (“FIN”) 46 (R) (ASC 810—Consolidation) to QSPEs. This ASU revised the de-recognition requirements for transfers of financial assets and the initial measurement of beneficial interests that are received as proceeds by a transferor in connection with transfers of financial assets. This ASU also required additional disclosure about transfers of financial assets and a transferor’s continuing involvement with such transferred financial assets. This ASU was effective Jan. 1, 2010, at which time any QSPEs were evaluated for consolidation in accordance with SFAS No. 167, which amended FIN 46 (R) (ASC 810). Accordingly, the Grantor Trust into which we securitized certain of our investment securities no longer qualifies as a QSPE, resulting in $97 million being included in both our investment securities portfolio and liabilities at June 30, 2010.

ASU 2009-17 - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

In December 2009, the FASB issued ASU 2009-17 “Improvements to Financial Reporting by Entities Involved with Variable Interest Entities.” This formally codified SFAS No. 167, “Amendments to FASB Interpretation No. 46 (R).” This ASU amended FIN 46 (R) (ASC 810) to require ongoing assessments to determine whether an entity is a variable interest entity (“VIE”) and whether an enterprise is the primary beneficiary of a VIE. This ASU also amended the guidance for determining which enterprise, if any, is the primary beneficiary of a VIE by requiring the enterprise to initially perform a qualitative analysis to determine if the enterprise’s variable interest or interests give it a controlling financial interest. Consolidation is based on a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. If a company has control and the right to receive benefits or the obligation to absorb losses which could potentially be significant to the VIE, then consolidation is required. This ASU was effective Jan. 1, 2010 and primarily impacts our asset management businesses.

This ASU does not change the economic risk related to these businesses and therefore, BNY Mellon’s


 

BNY Mellon    63


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Notes to Consolidated Financial Statements   (continued)

 

computation of economic capital required by our businesses will not change.

This statement also requires additional disclosures about an enterprise’s involvement in a VIE, including the requirement for sponsors of a VIE to disclose information even if they do not hold a significant variable interest in the VIE. At June 30, 2010, our consolidated balance sheet included $13.840 billion of assets of VIEs that would not have been included in our consolidated balance sheet prior to effectiveness of the statement. Those assets included seed capital investments in mutual funds sponsored by our affiliates and securitizations, including residential mortgage-backed securities held by a grantor trust established in December 2009 when we restructured our investment securities portfolio. Adoption of this new statement accounted for an increase in consolidated total assets on our balance sheet at June 30, 2010 of $13.402 billion, or approximately 6% from year end.

In February 2010, the FASB issued ASU 2010-10, “Amendments for Certain Investment Funds” which deferred the requirements of ASU 2009-17 for asset managers’ interests in entities that apply the specialized accounting guidance for investment companies or that have the attributes of investment companies and asset managers’ interests in money market funds. This amendment was effective Jan. 1, 2010.

In January 2010, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision issued a final rule requiring banks to hold capital for assets consolidated under SFAS No. 166 (ASU 2009-16) and SFAS No. 167 (ASU 2009-17). The final rule allows for (1) opting for a two-quarter delay through June 30, 2010, of recognition of the effect on risk-weighted assets and allowance for loan losses includable in Tier 2 capital that results from implementation of this standard and (2) a phase-in of 50% of those effects for the quarters ending Sept. 30, 2010 and Dec. 31, 2010 and will be fully phased-in for the quarter ending March 31, 2011. BNY Mellon elected to defer the implementation of SFAS No. 167 for capital purposes. At June 30, 2010, had we fully phased-in the implementation of SFAS No. 167, our Tier 1 capital ratio would have been negatively impacted by approximately 136 basis points, assuming we had taken no mitigating actions.

 

As a result of adopting this guidance, we recorded a cumulative effect adjustment of $76 million to retained earnings in the first quarter of 2010. Also, we elected the fair value option for these assets and liabilities, and as a result, recorded a $73 million charge to retained earnings in the first quarter of 2010.

ASU 2010-6 – Improving Disclosures About Fair Value Measurements

In January 2010, the FASB issued ASU 2010-6, “Improving Disclosures about Fair Value Measurements.” This amends ASC 820 to clarify existing requirements regarding disclosures of inputs and valuation techniques and levels of disaggregation. This ASU also requires the following new disclosures: (1) significant transfers in and out of Levels 1 and 2 and the reasons that such transfers were made; and (2) additional disclosures in the reconciliation of Level 3 activity, including information on a gross basis for purchases, sales, issuances and settlements. This ASU is required in interim and annual financial statements and was effective March 31, 2010. See Note 15 of the Notes to Consolidated Financial Statements for these disclosures. Additional disclosures about Level 3 purchases, sales, issuances and settlements in the rollforward activity for fair value measurements will be effective March 31, 2011.

Note 3 – Acquisitions and dispositions

We acquired a Canadian trust company for C$29 million in the second quarter of 2010. On Jan. 15, 2010, we completed the sale of MUNB. See Note 4 of the Notes to Consolidated Financial Statements for additional information.

We sometimes structure our acquisitions with both an initial payment and later contingent payments tied to post-closing revenue or income growth. For acquisitions completed prior to Jan. 1, 2009, we record the fair value of contingent payments as an additional cost of the entity acquired in the period that the payment becomes probable. For acquisitions completed after Jan. 1, 2009, subsequent changes in the fair value of a contingent consideration liability will be recorded through the income statement. Contingent payments totaled $88 million in the second quarter of 2010.

At June 30, 2010, we were potentially obligated to pay additional consideration which, using reasonable assumptions for the performance of the acquired


 

64    BNY Mellon


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

companies and joint ventures based on contractual agreements, could range from approximately $12 million to $25 million over the next four years.

Acquisition in 2009

In November 2009, we acquired Insight Investment Management Limited (“Insight”) for £235 million ($377 million of cash and stock). Insight specializes in liability-driven investment solutions, active fixed income and alternative investments. Insight had $138 billion in assets under management at acquisition. Goodwill related to this acquisition is non-tax deductible and totaled $202 million. Intangible assets (primarily customer contracts) related to the transaction, with a life up to 11 years, totaled $111 million. The impact of this acquisition is not expected to be material to earnings per share in 2010.

 

Note 4 – Discontinued operations

On Jan. 15, 2010, BNY Mellon sold MUNB, its national bank subsidiary located in Florida. We have applied discontinued operations accounting to this business. The income statements for all periods in this Form 10-Q are presented on a continuing operations basis. This business, which was previously reported in the Other segment, no longer fit our strategic focus on our asset management and securities servicing businesses. In the second quarter of 2010, we recorded an after-tax loss on discontinued operations of $10 million primarily reflecting the lower of cost or market write-downs on the retained loans held for sale.

Summarized financial information for discontinued operations is as follows:


 

Discontinued operations    Quarter ended     Six months ended  
(in millions)    June 30,
2010
    March 31,
2010
    June 30,
2009
    June 30,
2010
    June 30,
2009
 

Fee and other revenue

   $ -      $ -      $ 1      $ -      $ 3   

Net interest revenue

     2        3        16        5        33   

Provision for loan losses

     -        -        62        -        83   

Net interest revenue after provision for loan losses

     2        3        (46     5        (50

Noninterest expense:

          

Staff

     -        2        6        2        12   

Professional, legal and other purchased services

     1        1        1        2        2   

Net occupancy

     -        -        2        -        3   

Other

     1        1        5        2        10   

Goodwill impairment

     -        -        -        -        50   

Total noninterest expense

     2        4        14        6        77   

Loss from operations

     -        (1     (59     (1     (124

Loss on assets held for sale

     (16     (68     (85     (84     (85

Loss on sale of MUNB

     -        (1     -        (1     -   

Benefit for income taxes

     (6     (28     (53     (34     (77

Loss from discontinued operations, net of tax

   $ (10   $ (42   $ (91   $ (52   $ (132

 

Discontinued operations assets and liabilities            
(in millions)    June 30,
2010
   Dec 31,
2009

Cash and due from banks

   $ -    $ 446

Securities

     -      488

Loans, net of allowance for loan losses

     253      1,225

Premises and equipment

     -      12

Other assets

     89      71

Assets of discontinued operations

   $ 342    $ 2,242

Deposits:

     

Noninterest-bearing

   $ -    $ 539

Interest-bearing

     -      958

Total deposits

     -      1,497

Other liabilities

     -      111

Liabilities of discontinued operations

   $ -    $ 1,608

All information in these Financial Statements and Notes reflects continuing operations, unless otherwise noted.


 

BNY Mellon    65


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Notes to Consolidated Financial Statements   (continued)

 

 

Note 5 – Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of securities at June 30, 2010 and Dec. 31, 2009.

 

Securities at June 30, 2010    Amortized
cost
   Gross unrealized   

Fair

value

 
(in millions)       Gains    Losses   

Available-for-sale:

           

U.S. Treasury

   $ 5,850    $ 102    $ -    $ 5,952   

U.S. Government agencies

     1,133      13      -      1,146   

State and political Subdivisions

     610      6      54      562   

Agency MBS

     18,025      530      10      18,545   

Alt-A RMBS

     529      21      52      498   

Prime RMBS

     1,515      10      121      1,404   

Subprime RMBS

     729      -      253      476   

Other RMBS

     1,649      1      289      1,361   

Commercial MBS

     2,753      85      132      2,706   

Asset-backed CLOs

     242      -      17      225   

Other asset-backed securities

     584      9      5      588   

Other debt securities

     10,168      184      26      10,326 (a) 

Equity securities

     1,385      8      1      1,392   

Grantor Trust:

           

Alt-A RMBS

     2,355      210      29      2,536   

Prime RMBS

     1,831      150      12      1,969   

Subprime RMBS

     127      21      -      148   

Total securities available-for-sale

     49,485      1,350      1,001      49,834   

Held-to-maturity:

           

State and political subdivisions

     139      3      -      142   

Agency MBS

     455      39      -      494   

Alt-A RMBS

     252      3      24      231   

Prime RMBS

     170      -      6      164   

Subprime RMBS

     28      -      3      25   

Other RMBS

     2,660      55      108      2,607   

Commercial MBS

     32      -      3      29   

Other debt securities

     1      -      -      1   

Other securities

     5      -      -      5   

Total securities held-to-maturity

     3,742      100      144      3,698   

Total securities

   $ 53,227    $ 1,450    $ 1,145    $ 53,532   

 

(a) Includes $9.7 billion, at fair value, of government-sponsored and guaranteed entities, and sovereign debt.

 

Securities at Dec. 31, 2009    Amortized
cost
   Gross unrealized    Fair
value
 
(in millions)       Gains    Losses   

Available-for-sale:

           

U.S. Treasury

   $ 6,358    $ 30    $ 10    $ 6,378   

U.S. Government agencies

     1,235      25      -      1,260   

State and political subdivisions

     538      6      24      520   

Agency MBS

     18,247      303      95      18,455   

Alt-A RMBS

     588      12      63      537   

Prime RMBS

     1,743      3      234      1,512   

Subprime RMBS

     758      -      311      447   

Other RMBS

     2,199      1      430      1,770   

Commercial MBS

     2,762      31      203      2,590   

Asset-backed CLOs

     424      15      50      389   

Other asset-backed securities

     869      5      38      836   

Other debt securities

     11,419      86      48      11,457 (a) 

Equity securities

     1,314      8      1      1,321   

Grantor Trust Class B certificates (b)

     4,049      111      -      4,160   

Total securities available-for-sale

     52,503      636      1,507      51,632   

Held-to-maturity:

           

State and political subdivisions

     150      3      -      153   

Agency MBS

     531      30      -      561   

Alt-A RMBS

     304      -      62      242   

Prime RMBS

     189      -      17      172   

Subprime RMBS

     30      -      7      23   

Other RMBS

     3,195      39      162      3,072   

Commercial MBS

     11      -      1      10   

Other debt securities

     3      -      -      3   

Other securities

     4      -      -      4   

Total securities held-to-maturity

     4,417      72      249      4,240   

Total securities

   $ 56,920    $ 708    $ 1,756    $ 55,872   

 

(a) Includes $10.8 billion, at fair value, of government-sponsored and guaranteed entities, and sovereign debt.
(b) The Grantor Trust contains Alt-A, prime and subprime RMBS.

The amortized cost and fair value of securities at June 30, 2010, by contractual maturity, are as follows:

 

Securities by contractual maturity at June 30, 2010    Available-for-sale    Held-to-maturity
(in millions)    Amortized
cost
   Fair
value
   Amortized
cost
   Fair
value

Due in one year or less

   $ 4,568    $ 4,601    $ 3    $ 3

Due after one year through five years

     11,964      12,211      2      2

Due after five years through ten years

     493      510      22      23

Due after ten years

     736      664      116      118

Mortgage-backed securities

     29,513      29,643      3,597      3,550

Asset-backed securities

     826      813      -      -

Equity

     1,385      1,392      2      2

Total securities

   $ 49,485    $ 49,834    $ 3,742    $ 3,698

 

66    BNY Mellon


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Net securities gains (losses)                                    
(in millions)    2Q10     1Q10     2Q09     YTD10     YTD09  

Realized gross gains

   $ 19      $ 14      $ 40      $ 33      $ 43   

Realized gross losses

     (5     -        (6     (5     (6

Recognized gross impairments

     (1     (7     (290     (8     (588

Total net securities gains (losses)

   $ 13      $ 7      $ (256   $ 20      $ (551

 

Temporarily impaired securities

At June 30, 2010, substantially all of the unrealized losses on the investment securities portfolio were attributable to credit spreads widening since purchase and interest rate movements. We do not intend to sell these securities and it is not more likely than not that we will have to sell.

The following tables show the aggregate related fair value of investments with a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for greater than 12 months.


 

Temporarily impaired securities    Less than 12 months    12 months or more    Total  
(in millions)    Fair
value
   Unrealized
losses
   Fair
value
   Unrealized
losses
   Fair
value
   Unrealized
losses
 

June 30, 2010:

                 

Available-for-sale:

                 

U.S. Treasury

   $ 101    $ -    $ 1    $ -    $ 102    $ -   

State and political subdivisions

     144      35      135      19      279      54   

Agency MBS

     696      5      522      5      1,218      10   

Alt-A RMBS

     100      8      107      44      207      52   

Prime RMBS

     74      1      892      120      966      121   

Subprime RMBS

     3      -      473      253      476      253   

Other RMBS

     46      -      1,308      289      1,354      289   

Commercial MBS

     46      2      714      130      760      132   

Asset-backed CLOs

     -      -      225      17      225      17   

Other asset-backed securities

     3      2      117      3      120      5   

Other debt securities

     43      -      93      26      136      26   

Equity securities

     -      -      11      1      11      1   

Grantor Trust Alt-A RMBS

     731      29      -      -      731      29   

Grantor Trust Prime RMBS

     391      12      -      -      391      12   

Total securities available-for-sale

   $ 2,378    $ 94    $ 4,598    $ 907    $ 6,976    $ 1,001   

Held-to-maturity:

                 

State and political subdivisions

   $ 10    $ -    $ 2    $ -    $ 12    $ -   

Alt-A RMBS

     34      1      155      23      189      24   

Prime RMBS

     -      -      148      6      148      6   

Subprime RMBS

     -      -      25      3      25      3   

Other RMBS

     406      6      788      102      1,194      108   

Commercial MBS

     21      1      7      2      28      3   

Total securities held-to-maturity

   $ 471    $ 8    $ 1,125    $ 136    $ 1,596    $ 144   

Total temporarily impaired securities

   $ 2,849    $ 102    $ 5,723    $ 1,043    $ 8,572    $ 1,145 (a) 

 

(a) Includes other-than-temporarily impaired securities in which portions of the other-than-temporary impairment loss remains in OCI.

 

BNY Mellon    67


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Notes to Consolidated Financial Statements   (continued)

 

 

Temporarily impaired securities    Less than 12 months    12 months or more    Total  
(in millions)    Fair
value
   Unrealized
losses
   Fair
value
   Unrealized
losses
   Fair
value
   Unrealized
losses
 

Dec. 31, 2009:

                 

Available-for-sale:

                 

U.S. Treasury

   $ 1,226    $ 9    $ 176    $ 1    $ 1,402    $ 10   

State and political subdivisions

     50      13      171      11      221      24   

Agency MBS

     7,297      76      2,061      19      9,358      95   

Alt-A RMBS

     -      -      311      63      311      63   

Prime RMBS

     5      1      1,480      233      1,485      234   

Subprime RMBS

     1      2      446      309      447      311   

Other RMBS

     -      -      1,764      430      1,764      430   

Commercial MBS

     -      -      1,290      203      1,290      203   

Asset-backed CLOs

     18      6      274      44      292      50   

Other asset-backed securities

     -      -      706      38      706      38   

Other debt securities

     33      -      8,804      48      8,837      48   

Equity securities

     16      -      3      1      19      1   

Total securities available-for-sale

   $ 8,646    $ 107    $ 17,486    $ 1,400    $ 26,132    $ 1,507   

Held-to-maturity:

                 

Alt-A RMBS

   $ 2    $ 1    $ 221    $ 61    $ 223    $ 62   

Prime RMBS

     -      -      172      17      172      17   

Subprime RMBS

     -      -      23      7      23      7   

Other RMBS

     -      -      3,072      162      3,072      162   

Commercial MBS

     -      -      10      1      10      1   

Total securities held-to-maturity

   $ 2    $ 1    $ 3,498    $ 248    $ 3,500    $ 249   

Total temporarily impaired securities

   $ 8,648    $ 108    $ 20,984    $ 1,648    $ 29,632    $ 1,756 (a) 

 

(a) Includes other-than-temporarily impaired securities in which portions of the other-than-temporary impairment loss remains in OCI.

 

Other-than-temporary impairment

For certain debt securities which have no debt rating at acquisition and are beneficial interests in securitized financial assets under ASC 325, OTTI occurs when we determine that there has been an adverse change in cash flows and the present value of those remaining cash flows is less than the present value of the remaining cash flows estimated at the security’s acquisition date (or last estimated cash flow revision date).

We routinely conduct periodic reviews to identify and evaluate each investment security to determine whether OTTI has occurred. Economic models are used to determine whether an OTTI has occurred on these securities. While all securities are considered, the securities primarily impacted by OTTI testing are non-agency RMBS. For each non-agency RMBS in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if an OTTI has occurred. Various inputs to the economic models are used to determine if an unrealized loss on non-agency RMBS is other-than-temporary. The most significant inputs are:

 

 

Default rate – the number of mortgage loans expected to go into default over the life of the transaction, which is driven by the roll rate of loans in each performance bucket that will ultimately migrate to default; and

 

Severity – the loss expected to be realized when a loan defaults

To determine if the unrealized loss for non-agency RMBS is other-than-temporary, we project total estimated defaults of the underlying assets (mortgages) and multiply that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. We also evaluate the current credit enhancement underlying the bond to determine the impact on cash flows. If we determine that a given RMBS position will be subject to a write-down or loss, we record the expected credit loss as a charge to earnings.

In addition, we have estimated the expected loss by taking into account observed performance of the underlying securities, industry studies, market forecasts, as well as our view of the economic outlook affecting collateral.

The table below shows the projected weighted-average default rates and loss severities for the 2007,


 

68    BNY Mellon


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

2006 and 2005 non-agency RMBS and the Grantor Trust portfolios at June 30, 2010 and Dec. 31, 2009.

 

Projected weighted-average default rates and severities  
     June 30, 2010     Dec. 31, 2009  
     Default Rate     Severity     Default Rate     Severity  

Alt-A

   41   49   43   50

Subprime

   69   65   74   69

Prime

   20   42   19   44

The following table provides pre-tax securities gains (losses) by type.

 

Net securities gains (losses)     Year-to-date  
(in millions)    2Q10     1Q10     2Q09     2010     2009  

Alt-A RMBS

   $ (6   $ (7   $ (114   $ (13   $ (239

Prime RMBS

     -        -        (9     -        (12

Home equity lines of credit

     -        -        (4     -        (22

European floating rate notes

     -        -        (66     -        (70

Credit cards

     -        -        (26     -        (28

Other

     19        14        (37     33        (180

Net securities gains (losses)

   $ 13      $ 7      $ (256   $ 20      $ (551

The following table reflects investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. The additions represent the first time a debt security was credit impaired or when subsequent credit

impairments have occurred. The deductions represent credit losses on securities that have been sold, are required to be sold or it is our intention to sell.

 

Debt securities credit loss roll forward

(in millions)

   2Q10    2Q09

Beginning balance as of March 31

   $ 208    $ 735

Add:    Initial OTTI credit losses

     -      185

Subsequent OTTI credit losses

     1      105

Less:    Realized losses for securities sold / consolidated

     -      -

Ending balance as of June 30

   $ 209    $ 1,025

 

Debt securities credit loss roll forward    Year-to-date
(in millions)    2010    2009

Beginning balance as of Dec. 31

   $ 271    $ 535

Add:    Initial OTTI credit losses

     6      343

Subsequent OTTI credit losses

     2      147

Less:    Realized losses for securities sold / consolidated

     70      -

Ending balance as of June 30

   $ 209    $ 1,025

Note 6 – Goodwill and intangible assets

Goodwill

The level of goodwill decreased in 2010 primarily due to foreign exchange translation on non-U.S. dollar denominated goodwill partially offset by contingent payments related to previous acquisitions. Goodwill impairment testing is performed at least annually at the business segment level. The table below provides a breakdown of goodwill by business segment.


 

Goodwill by segment  
(in millions)    Asset
Management
    Wealth
Management
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
   Other     Total  

Balance at Dec. 31, 2009

   $ 7,609      $ 1,703      $ 3,397      $ 2,488      $ 918      $ 127    $ 7      $ 16,249   

Acquisitions

     -        -        -        13        -        -      -        13   

Foreign exchange translation

     (121     -        (86     (7     (12     -      (1     (227

Other (a)

     86        (2     (5     (2     -        -      (6     71   

Balance at June 30, 2010

   $ 7,574      $ 1,701      $ 3,306      $ 2,492      $ 906      $ 127    $ -      $ 16,106   

 

(a) Other changes in goodwill include purchase price adjustments and certain other reclassifications.

 

Goodwill by segment  
(in millions)    Asset
Management
  

Wealth

Management

  

Asset

Servicing

  

Issuer

Services

  

Clearing

Services

  

Treasury

Services

   Other     Total  

Balance at Dec. 31, 2008

   $ 7,218    $ 1,694    $ 3,360    $ 2,463    $ 902    $ 123    $ 138      $ 15,898   

Foreign exchange translation

     184      -      32      7      18      -      -        241   

Transferred to discontinued operations

     -      -      -      -      -      -      (128 (a)      (128

Other (b)

     15      -      -      14      -      -      -        29   

Balance at June 30, 2009

   $ 7,417    $ 1,694    $ 3,392    $ 2,484    $ 920    $ 123    $ 10      $ 16,040   
(a) Includes $50 million of goodwill impairment recorded in the first quarter of 2009.
(b) Other changes in goodwill include purchase price adjustments and certain other reclassifications.

 

BNY Mellon    69


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Intangible assets

Intangible assets not subject to amortization are tested annually for impairment or more often if events or circumstances indicate they may be impaired. The decrease in intangible assets at June 30, 2010 compared with Dec. 31, 2009 resulted from intangible amortization and foreign exchange translation on non-U.S. dollar denominated

intangible assets. Intangible amortization expense was $98 million in the second quarter of 2010, $108 million in the second quarter of 2009 and $97 million in the first quarter of 2010. The table below provides a breakdown of intangible assets by business segment.


 

Intangible assets – net carrying amount by segment                                                         
(in millions)    Asset
Management
    Wealth
Management
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Other     Total  

Balance at Dec. 31, 2009

   $ 2,530      $ 295      $ 281      $ 753      $ 674      $ 203      $ 852      $ 5,588   

Acquisitions

     -        -        -        13        -        -        -        13   

Amortization

     (100     (18     (11     (41     (13     (11     (1     (195

Foreign exchange translation

     (36     -        (7     (3     (1     (1     -        (48

Other (a)

     -        -        (4     -        -        -        -        (4

Balance at June 30, 2010

   $ 2,394      $ 277      $ 259      $ 722      $ 660      $ 191      $ 851      $ 5,354   

 

(a) Other changes in intangible assets include purchase price adjustments and certain other reclassifications.

 

Intangible assets – net carrying amount by segment                                                         
(in millions)    Asset
Management
    Wealth
Management
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    Other     Total  

Balance at Dec. 31, 2008

   $ 2,595      $ 340      $ 302      $ 834      $ 699      $ 229      $ 857      $ 5,856   

Amortization

     (110     (22     (16     (41     (14     (13     1        (215

Foreign exchange translation

     45        -        -        1        2        -        -        48   

Transfer to discontinued operations

     -        -        -        -        -        -        (4     (4

Other (a)

     -        -        6        (14     -        -        -        (8

Balance at June 30, 2009

   $ 2,530      $ 318      $ 292      $ 780      $ 687      $ 216      $ 854      $ 5,677   

 

(a) Other changes in intangible assets include purchase price adjustments and certain other reclassifications.

 

Intangible assets    June 30, 2010    Dec. 31, 2009
(in millions)    Gross
carrying
amount
   Accumulated
amortization
    Net
carrying
amount
   Remaining
weighted-
average
amortization
period
  

Net

carrying
amount

Subject to amortization:

             

Customer relationships-Asset and Wealth Management

   $ 2,042    $ (841   $ 1,201    12 yrs.    $ 1,336

Customer contracts-Institutional services

     2,028      (635     1,393    14      1,478

Deposit premiums

     49      (43     6    2      8

Other

     97      (35     62    7      68

Total subject to amortization

   $ 4,216    $ (1,554   $ 2,662    13 yrs.    $ 2,890

Not subject to amortization: (a)

             

Trade name

   $ 1,373      N/A      $ 1,373    N/A    $ 1,368

Customer relationships

     1,309      N/A        1,309    N/A      1,320

Other

     10      N/A        10    N/A      10

Total not subject to amortization

   $ 2,692      N/A      $ 2,692    N/A    $ 2,698

Total intangible assets

   $ 6,908    $ (1,554   $ 5,354    N/A    $ 5,588

 

(a) Intangible assets not subject to amortization have an indefinite life.

N/A—Not applicable

 

70    BNY Mellon


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Estimated annual amortization expense for current intangibles for the next five years is as follows:

 

For the year ended

      Dec. 31,

   Estimated amortization
expense (in millions)

2010

   $ 390

2011

     363

2012

     339

2013

     293

2014

     261

Note 7 – Allowance for credit losses

The allowance for credit losses is maintained at a level that, in management’s judgment, is adequate to absorb probable losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the credit portfolio at the balance sheet date.

We conduct a quarterly portfolio review to determine the adequacy of our allowance for credit losses. Following this review, senior management analyzes the results and determines the allowance for credit losses. The Risk Committee of our Board of Directors reviews the allowance as of the end of each quarter.

Transactions in the allowance for credit losses are summarized as follows:

 

For the quarter ended

June 30, 2010

 

(in millions)

   Allowance
for loan
losses
    Allowance
for lending-
related
commitments
    Allowance
for credit
losses
 

Balance at March 31, 2010

   $ 520      $ 118      $ 638   

Charge-offs:

      

Commercial

     (1     -        (1

Wealth Management

     (1     -        (1

Financial institutions

     (1     -        (1

Other residential mortgages

     (10     -        (10

Commercial real estate

     (1     -        (1

Total charge-offs

     (14     -        (14

Recoveries – Commercial

     1        -        1   

Net charge-offs

     (13     -        (13

Provision

     35        (15     20   

Balance at June 30, 2010

   $ 542      $ 103      $ 645   

 

For the quarter ended

June 30, 2009

 

(in millions)

   Allowance
for loan
losses
    Allowance
for lending-
related
commitments
    Allowance
for credit
losses
 

Balance at March 31, 2009

   $ 470      $ 89      $ 559   

Transferred to discontinued operations

     (38     (2     (40

Charge-offs:

      

Commercial

     (25     -        (25

Commercial real estate

     (13     -        (13

Other residential mortgages

     (16     -        (16

Total charge-offs

     (54     -        (54

Recoveries

     -        -        -   

Net charge-offs

     (54     -        (54

Provision

     56        5        61   

Balance at June 30, 2009

   $ 434      $ 92      $ 526   

 

For the six months ended

June 30, 2010

 

(in millions)

   Allowance
for loan
losses
    Allowance
for lending-
related
commitments
    Allowance
for credit
losses
 

Balance at Dec. 31, 2009

   $ 503      $ 125      $ 628   

Charge-offs:

      

Commercial

     (1     -        (1

Wealth Management

     (1     -        (1

Financial institutions

     (21     -        (21

Other residential mortgages

     (22     -        (22

Commercial real estate

     (6     -        (6

Total charge-offs

     (51     -        (51

Recoveries – Commercial

     13        -        13   

Net charge-offs

     (38     -        (38

Provision

     77        (22     55   

Balance at June 30, 2010

   $ 542      $ 103      $ 645   

 

For the six months ended

June 30, 2009

 

(in millions)

   Allowance
for loan
losses
    Allowance
for lending-
related
commitments
    Allowance
for credit
losses
 

Balance at Dec. 31, 2008

   $ 415      $ 114      $ 529   

Transferred to discontinued operations

     (17     (2     (19

Charge-offs:

      

Commercial

     (37     -        (37

Financial institutions

     (10     -        (10

Commercial real estate

     (30     -        (30

Other residential mortgages

     (28     -        (28

Total charge-offs

     (105     -        (105

Recoveries – Leasing

     1        -        1   

Net charge-offs

     (104     -        (104

Provision

     140        (20     120   

Balance at June 30, 2009

   $ 434      $ 92      $ 526   

 

BNY Mellon    71


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Note 8 – Other assets

 

Other assets

(in millions)

   June 30,
2010
   Dec. 31,
2009

Corporate/bank owned life insurance

   $ 3,946    $ 3,900

Accounts receivable

     3,643      3,528

Equity in joint ventures and other investments (a)

     2,734      2,816

Income taxes receivable

     1,841      1,867

Fails to deliver

     1,541      911

Margin deposits

     1,180      459

Prepaid expenses

     882      1,089

Prepaid pension assets

     742      714

Software

     720      595

Due from customers on acceptances

     355      502

Other

     404      356

Total other assets

   $ 17,988    $ 16,737
(a) Includes Federal Reserve Bank stock of $399 million and $397 million, respectively, at cost.

 

Seed capital and private equity investments valued using net asset value per share

In our Asset Management segment, we manage investment assets, including equities, fixed income, money market and alternative investment funds for institutions and other investors; as part of that activity we make seed capital investments in certain funds. Seed capital is included in trading assets, securities available-for-sale and other assets depending on the nature of the investment. BNY Mellon also holds private equity investments which consist of investments in private equity funds, mezzanine financings and direct equity investments. Private equity investments are included in other assets. Consistent with our policy to focus on our core activities, we continue to reduce our exposure to private equity investments.

The fair value of these investments has been estimated using the net asset value (“NAV”) per share of BNY Mellon’s ownership interest in the funds. The table below presents information about BNY Mellon’s investments in seed capital and private equity investments.


 

 

Seed capital and private equity investments valued using NAV – June 30, 2010

(dollar amounts in millions)    Fair value    Unfunded commitments    Redemption frequency    Redemption notice period  

Hedge funds (a)

   $ 34    $ -    Monthly-quarterly    3-45 days   

Private equity funds (b)

     133      38    N/A    N/A   

Other funds (c)

     56      -    Monthly-yearly    (c ) 

Total

   $ 223    $ 38            
(a) Hedge funds include multi-strategy funds that utilize a variety of investment strategies and equity long-short hedge funds that include various funds that invest over both long-term investment and short-term investment horizons.
(b) Private equity funds primarily include numerous venture capital funds that invest in various sectors of the economy. Private equity funds do not have redemption rights. Distributions from such funds will be received as the underlying investments in the funds are liquidated.
(c) Other funds include various market neutral, leveraged loans, real estate and structured credit funds.

 

72    BNY Mellon


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Note 9 – Net interest revenue

 

Net interest revenue    Quarter ended     Six months ended  
(in millions)    June 30,
2010
   March 31,
2010
   June 30,
2009
    June 30,
2010
   June 30,
2009
 

Interest revenue

             

Non-margin loans

   $ 189    $ 189    $ 232      $ 378    $ 471   

Margin loans

     22      19      17        41      34   

Securities:

             

Taxable

     478      497      393        975      843   

Exempt from federal income taxes

     7      6      8        13      16   

Total securities

     485      503      401        988      859   

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

     -      -      -        -      10   

Deposits in banks

     127      142      166        269      383   

Deposits with the Federal Reserve and other central banks

     15      10      7        25      28   

Federal funds sold and securities purchased under resale agreements

     7      7      9        14      14   

Trading assets

     17      13      13        30      25   

Total interest revenue

     862      883      845        1,745      1,824   

Interest expense

             

Deposits

     43      39      40        82      116   

Borrowings from Federal Reserve related to ABCP

     -      -      -        -      7   

Federal funds purchased and securities sold under repurchase agreements

     2      1      (3     3      (3

Other borrowed funds

     21      14      8        35      22   

Customer payables

     2      1      1        3      3   

Long-term debt

     72      63      99        135      204   

Total interest expense

     140      118      145        258      349   

Net interest revenue

   $ 722    $ 765    $ 700      $ 1,487    $ 1,475   

Note 10 – Employee benefit plans

The components of net periodic benefit cost (credit) are as follows:

 

Net periodic benefit cost (credit)    Quarter ended  
     June 30, 2010     March 31, 2010     June 30, 2009  
(in millions)    Domestic
pension
benefits
    Foreign
pension
benefits
    Health
care
benefits
    Domestic
pension
benefits
    Foreign
pension
benefits
    Health
care
benefits
    Domestic
pension
benefits
    Foreign
pension
benefits
    Health
care
benefits
 

Service cost

   $ 22      $ 7      $ 1      $ 23      $ 7      $ 1      $ 24      $ 4      $ 1   

Interest cost

     43        8        4        43        7        3        39        5        4   

Expected return on assets

     (76     (9     (2     (76     (9     (2     (72     (7     (2

Other

     14        2        2        14        3        2        4        1        2   

Net periodic benefit cost (credit)

   $ 3      $ 8      $ 5      $ 4      $ 8      $ 4      $ (5   $ 3      $ 5   

 

Net periodic benefit cost (credit)    Six months ended  
     June 30, 2010     June 30, 2009  
(in millions)    Domestic
pension
benefits
    Foreign
pension
benefits
    Health
care
benefits
    Domestic
pension
benefits
    Foreign
pension
benefits
    Health
care
benefits
 

Service cost

   $ 45      $ 14      $ 2      $ 48      $ 9      $ 2   

Interest cost

     86        15        7        78        10        8   

Expected return on assets

     (152     (18     (4     (144     (14     (4

Other

     28        5        4        7        2        4   

Net periodic benefit cost (credit)

   $ 7      $ 16      $ 9      $ (11   $ 7      $ 10   

 

BNY Mellon    73


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Note 11 – Restructuring charges

Global location strategy

As part of an ongoing effort to improve efficiency and develop a global operating model that provides the highest quality of service to our clients, BNY Mellon continues to execute its global location strategy. This strategy includes migrating positions to our global growth centers and is expected to result in moving or eliminating over 2,300 positions in 2010. In the fourth quarter of 2009, we recorded a pre-tax restructuring charge of $139 million. We recorded a recovery of $11 million and a recovery of $4 million in the second quarter of 2010 and the first six months of 2010, respectively, associated with the global location strategy. The recovery was primarily due to changes made to severance plans in 2009 and attrition.

As of June 30, 2010, we have moved or eliminated approximately 500 positions. Severance payments related to these positions are primarily paid over the salary continuance period in accordance with the separation plan.

 

Workforce reduction program

In the fourth quarter of 2008, we announced that, due to weakness in the global economy, we would reduce our workforce by an estimated 1,800 positions, and as a result, recorded a pre-tax restructuring charge of $181 million. In the second quarter and first six months of 2010, we recorded a recovery of $4 million associated with the workforce reduction program.

As of June 30, 2010, we reduced our workforce by approximately 1,700 positions, substantially completing the program. Severance payments related to these positions are primarily paid over the salary continuance period in accordance with the separation plan.

The restructuring charges are recorded as a separate line item on the income statement. The following tables present the activity in the restructuring reserves through June 30, 2010.


 

Global location strategy 2009 – restructuring charge reserve activity

(in millions)

   Severance     Asset
write-offs/other
    Total  

Original restructuring charge

   $ 102      $ 37      $ 139   

Additional charges

     7        -        7   

Utilization

     (6     (24     (30

Balance at March 31, 2010

   $ 103      $ 13      $ 116   

Additional charges/(recovery)

     (14     3        (11

Utilization

     (14     -        (14

Balance at June 30, 2010

   $ 75      $ 16      $ 91   

 

Workforce reduction program 2008 –

restructuring charge reserve activity

(in millions)

   Severance     Stock-based
incentive
acceleration
    Other
compensation
costs
    Other
non-personnel
expenses
    Total  

Original restructuring charge

   $ 166      $ 9      $ 5      $ 1      $ 181   

Additional charges/(recovery)

     4        (2     (1     10        11   

Utilization

     (124     (7     (4     (11     (146

Balance at March 31, 2010

   $ 46      $ -      $ -      $ -      $ 46   

Additional charges/(recovery)

     (4     -        -        -        (4

Utilization

     (12     -        -        -        (12

Balance at June 30, 2010

   $ 30      $ -      $ -      $ -      $ 30   

 

The restructuring charges are presented below by business segment. The charges were recorded in the Other segment as these restructurings were corporate initiatives and not directly related to the operating performance of these segments.

 

Global location strategy 2009 –

restructuring charge by segment

 

(in millions)

   2Q10     1Q10     4Q09    Total
charges
since
inception

Asset management

   $ (5   $ 5      $ 32    $ 32

Asset servicing

     3        3        34      40

Issuer services

     (6     -        18      12

Wealth management

     1        1        8      10

Treasury services

     2        (1     8      9

Clearing services

     (4     (1     8      3

Other (including shared services)

     (2     -        31      29

Total restructuring charges

   $ (11   $ 7      $ 139    $ 135

 

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Notes to Consolidated Financial Statements   (continued)

 

 

Workforce reduction program 2008 – restructuring charge by segment

 

(in millions)    2Q10     1Q10    4Q09     Total charges
since inception

Asset management

   $ (4   $ -    $ 2      $ 69

Asset servicing

     -        -      (3     30

Issuer services

     -        -      (4     13

Wealth management

     -        -      (2     13

Treasury services

     -        -      (1     10

Clearing services

     -        -      -        6

Other (including shared services)

     -        -      8        47

Total restructuring charges

   $ (4   $ -    $ -      $ 188

Note 12 – Income taxes

The statutory federal income tax rate is reconciled to our effective income tax rate below:

 

Effective tax rate    Six months ended  
      June 30,
2010
    June 30,
2009
 

Federal rate

   35.0   35.0

State and local income taxes, net of federal income tax benefit

   4.0      4.4   

Credit for low-income housing investments

   (1.8   (2.6

Tax-exempt income

   (2.8   (3.0

Foreign operations

   (4.5   (7.5

Tax settlements

   -      (11.0

Other – net

   (0.2   0.7   

Effective rate

   29.7   16.0

Our total uncertain tax positions as of June 30, 2010 were $345 million compared with $342 million at March 31, 2010. If these uncertain tax positions were unnecessary, $345 million would affect the effective tax rate in future periods. We recognize accrued interest and penalties, if applicable, related to income taxes in income tax expense. Included in the balance sheet as of June 30, 2010 is accrued interest of $88 million. The additional tax expense related to interest for the three and six months ended June 30, 2010 was $4 million and $8 million, respectively. It is reasonably possible that the total uncertain tax positions could decrease during the next 12 months by up to $14 million due to completion of tax authority examinations.

Our federal consolidated income tax returns are closed to examination through 2002. Our New York State and New York City return examinations have been completed through 2004. Our United Kingdom income tax returns are closed through 2007.

 

Note 13 – Securitizations and variable interest entities

Variable Interest Entities

Accounting guidance on the consolidation of Variable Interest Entities (“VIEs”), is included in ASC 810, Consolidation, and ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, an Amendment of the FASB Accounting Standards Codification.”

Effective Jan. 1, 2010, the FASB approved ASU 2010-10 “Amendments for Certain Investment Funds” which defers the requirements of ASU 2009-17 for asset managers’ interests in entities that apply the specialized accounting guidance for investment companies or that have the attributes of investment companies and for interests in money market funds.

Accounting guidance on the consolidation of VIEs applies to certain entities in which the equity investors:

 

 

do not have sufficient equity at risk for the entity to finance its activities without additional financial support,

 

 

lack one or more of the following characteristics of a controlling financial interest:

 

  - The power through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance (ASU 2009-17 model).

 

  - The direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights (ASC 810 model).

 

  - The obligation to absorb the expected losses of the entity.

 

  - The right to receive the expected residual returns of the entity.

BNY Mellon’s VIEs generally include retail, institutional and alternative investment funds offered to its retail and institutional customers in which it acts as the fund’s investment manager. BNY Mellon earns management fees on these funds as well as performance fees in certain funds. It may also provide start-up capital in its new funds. These VIEs are included in the scope of ASU 2010-10 and are reviewed for consolidation based on the guidance in ASC 810.


 

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BNY Mellon applies ASC 810 to its mutual funds, hedge funds, private equity funds, collective investment funds and real estate investment trusts. If these entities are determined to be VIEs, primary beneficiary calculations are prepared in accordance with ASC 810 to determine whether or not BNY Mellon is the primary beneficiary and required to consolidate the VIE. The primary beneficiary of a VIE is the party that absorbs a majority of the variable interests’ expected losses, receives a majority of its expected residual returns or both.

The primary beneficiary calculations include estimates of ranges and probabilities of losses and returns from the funds. The calculated expected gains and expected losses are allocated to the variable interest holders of the funds, which are generally the fund’s investors and which may include BNY Mellon, in order to determine which entity is required to consolidate the VIE, if any.

BNY Mellon has other VIEs, including securitization trusts, which are no longer considered QSPEs, and special investment vehicles (“SIVs”), in which BNY Mellon serves as the investment manager and may hold a subordinated interest in the SIVs. In addition, we provide trust and custody services for a fee to entities sponsored by other corporations in which we have no other interest. These VIEs are evaluated under the guidance included in ASU 2009-17.

BNY Mellon has three securitizations, including a grantor trust, and several SIVs, which are assessed for consolidation in accordance with ASU 2009-17.

The primary beneficiary of these VIEs is the entity whose variable interests provide it with a controlling financial interest, which includes the power to direct the activities that most

significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE.

In order to determine if it has a controlling financial interest in these VIEs, BNY Mellon assesses the VIE’s purpose and design along with the risks it was designed to create and pass through to its variable interest holders. We also assess our involvement in the VIE and the involvement of any other variable interest holders in the VIE.

Generally, as the sponsor and the manager of its VIEs, BNY Mellon has the power to control the activities that significantly impact the VIE’s economic performance. Both a qualitative and quantitative analysis of BNY Mellon’s variable interests are performed to determine if BNY Mellon has the obligation to absorb losses of the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The analyses included assessments related to the expected performance of the VIEs and its related impact on BNY Mellon’s seed capital, management fees or residual interests in the VIEs. We also assess any potential impact the VIE’s expected performance has on our performance fees.

The following table presents the incremental assets and liabilities included in BNY Mellon’s consolidated financial statements, after applying intercompany eliminations, as of June 30, 2010 based on the assessments performed in accordance with ASC 810 and ASU 2009-17. The net assets of any consolidated VIE are solely available to settle the liabilities of the VIE and to settle any investors’ ownership liquidation requests, including any seed capital invested in the VIE by BNY Mellon.


 

Investments consolidated under ASC 810 at June 30, 2010

 

(in millions)

   Asset
Management
funds
   Securitizations    Total
consolidated
investments

Available for sale

   $ -    $ 580    $ 580

Trading

     543      -      543

Loans

     12,070      -      12,070

Other assets

     647      -      647

Total assets

   $ 13,260    $ 580    $ 13,840

Total liabilities

   $ 12,272    $ 489    $ 12,761

Noncontrolling interests

   $ 666    $ -    $ 666

 

BNY Mellon voluntarily provided capital support agreements to certain VIEs. With the exception of these agreements, we are not contractually required to provide financial or any other support to any of our VIEs. Additionally, creditors of any consolidated VIEs do not have any recourse to the general credit of BNY Mellon.

 

Non-consolidated VIEs

As of June 30, 2010, the following assets related to the VIEs, where BNY Mellon is not the primary beneficiary, are included in its consolidated financial statements.


 

 

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Non-consolidated VIEs at June 30, 2010
(in millions)    Assets    Liabilities    Maximum
loss
exposure

Available-for-sale

   $ 20    $ -    $ 20

Trading

     27      -      27

Other

     21      -      21

Total

   $ 68    $ -    $ 68

The maximum loss exposure indicated in the above table relates solely to BNY Mellon’s seed capital or residual interests invested in the VIEs.

Credit supported VIEs

BNY Mellon voluntarily provided limited credit support to certain money market, collective, commingled and separate account funds (the “Funds”). Entering into such support agreements represents an event under ASC 810, and is subject to its interpretations.

In analyzing the Funds for which credit support was provided, it was determined that interest rate risk and credit risk are the two main risks that the Funds are designed to create and pass through to their investors. Accordingly, interest rate and credit risk were analyzed to determine if BNY Mellon was the primary beneficiary of each of the Funds.

Credit risk variability quantification includes any potential future credit risk in a Fund and is evaluated using credit ratings and default rates. The full marks on any sensitive securities on watch are also included. Interest rate variability quantification includes the expected Fund yield. Standard deviations are used along with the Fund’s market value to quantify the interest rate risk expected in the Fund.

BNY Mellon’s analysis of the credit risk variability and interest rate risk variability associated with the supported Funds resulted in BNY Mellon not being the primary beneficiary and therefore the Funds were not consolidated.

The table below shows the financial statement items related to non-consolidated VIEs to which we have provided credit support agreements at June 30, 2010 and Dec. 31, 2009.

 

Credit supported VIEs at June 30, 2010
(in millions)    Assets    Liabilities    Maximum
loss
exposure

Other

   $ -    $ -    $ 26

 

Credit supported VIEs at Dec. 31, 2009
(in millions)    Assets    Liabilities    Maximum
loss
exposure

Other

   $ -    $ 14    $ 40

Consolidated credit supported VIEs

Certain funds have been created solely with securities that are subject to credit support agreements where we have agreed to absorb the majority of loss. Accordingly, these funds have been consolidated into BNY Mellon and have affected the following financial statement items at June 30, 2010 and Dec. 31, 2009.

 

Consolidated credit supported VIEs at June 30, 2010
(in millions)    Assets    Liabilities    Maximum
loss
exposure

Available-for-sale

   $ 46    $ -    $ 46

Other

     -      137      44

Total

   $ 46    $ 137    $ 90

 

Consolidated credit supported VIEs at Dec. 31, 2009
(in millions)    Assets    Liabilities    Maximum
loss
exposure

Available-for-sale

   $ 47    $ -    $ 47

Other

     -      190      46

Total

   $ 47    $ 190    $ 93

The maximum loss exposure shown above for the credit support agreements provided to BNY Mellon’s VIEs primarily reflects a complete loss on the Lehman Brothers Holdings Inc. securities for BNY Mellon’s clients that accepted our offer of support. As of June 30, 2010, BNY Mellon recorded $137 million in liabilities related to its VIEs for which credit support agreements were provided.


 

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Note 14 – Fair value of financial instruments

The carrying amounts of our financial instruments (i.e., monetary assets and liabilities) are determined under different accounting methods—see Note 1 to the Consolidated Financial Statements contained in BNY Mellon’s 2009 Annual Report on Form 10-K. The following disclosure discusses these instruments on a uniform fair value basis. However, active markets do not exist for a significant portion of these instruments, principally loans and commitments. As a result, fair value determinations require significant subjective judgments regarding future cash flows. Other judgments would result in different fair values. Among the assumptions we used are discount rates ranging principally from 0.17% to 6.01% at June 30, 2010 and 0.05% to 6.27% at Dec. 31, 2009. The fair value information supplements the basic financial statements and other traditional financial data presented throughout this report.

Note 15, “Fair value measurement” presents assets and liabilities measured at fair value by the three level valuation hierarchy established under ASC 820, as well as a roll forward schedule of fair value measurements using significant unobservable inputs.

A summary of the practices used for determining fair value is as follows.

Interest-bearing deposits with banks

The fair value of interest-bearing deposits with banks is based on discounted cash flows.

 

Securities, trading activities, and derivatives used for ALM

The fair value of securities and trading assets and liabilities is based on quoted market prices, dealer quotes, or pricing models. Fair value amounts for derivative instruments, such as options, futures and forward rate contracts, commitments to purchase and sell foreign exchange, and foreign currency swaps, are similarly determined. The fair value of over-the-counter interest rate swaps is the discounted value of projected future cash flows, adjusted for other factors including, but not limited to and if applicable, optionality and implied volatilities, as well as counterparty credit.

Loans and commitments

For residential mortgage loans, fair value is estimated using discounted cash flow analyses, adjusting where appropriate for prepayment estimates, using interest rates currently being offered for loans with similar terms and maturities to borrowers. To determine the fair value of other types of loans, BNY Mellon uses discounted cash flows using current market rates. The fair value of commitments to extend credit, standby letters of credit, and commercial letters of credit is based upon the cost to settle the commitment.

Other financial assets

Fair value is assumed to equal carrying value for these assets due to their short maturity.

Deposits, borrowings and long-term debt

The fair value of noninterest-bearing deposits and payables to customers and broker-dealers is assumed to be their carrying amount. The fair value of interest-bearing deposits, borrowings, and long-term debt is based upon current rates for instruments of the same remaining maturity or quoted market prices for the same or similar issues.


 

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Summary of financial instruments
     June 30, 2010    Dec. 31, 2009
(in millions)    Carrying
amount
   Estimated
fair value
   Carrying
amount
   Estimated
fair value

Assets:

           

Interest-bearing deposits with banks

   $ 53,396    $ 53,433    $ 56,302    $ 56,374

Securities

     57,869      58,104      60,461      60,544

Trading assets

     7,393      7,393      6,001      6,001

Loans and commitments

     33,271      33,377      32,673      32,712

Derivatives used for ALM

     765      765      422      422

Other financial assets

     33,355      33,355      18,793      18,793

Total financial assets

     186,049      186,427    $ 174,652    $ 174,846

Assets of discontinued operations

     342      342      2,242      2,242

Assets of consolidated asset management funds

     13,260      13,260      -      -

Non-financial assets

     36,042             35,330       

Total assets

   $ 235,693           $ 212,224       

Liabilities:

           

Noninterest-bearing deposits

   $ 42,185    $ 42,185    $ 33,477    $ 33,477

Interest-bearing deposits

     101,482      101,460      101,573      101,570

Payables to customers and broker-dealers

     10,200      10,200      10,721      10,721

Borrowings

     4,885      4,885      3,922      3,922

Long-term debt

     16,754      17,416      17,234      17,110

Trading liabilities

     8,323      8,323      6,396      6,396

Derivatives used for ALM

     33      33      71      71

Total financial liabilities

   $ 183,862    $ 184,502    $ 173,394    $ 173,267

Liabilities of discontinued operations

     -      -      1,608      1,608

Liabilities of con- solidated asset management funds

     12,272      12,272      -      -

Non-financial liabilities

     8,454             8,219       

Total liabilities

   $ 204,588           $ 183,221       

The table below summarizes the carrying amount of the hedged financial instruments and the related notional amount of the hedge and estimated fair value (unrealized gain/(loss)) of the derivatives that were linked to these items:

 

 

Hedged financial instruments
     Carrying
amount
   Notional
amount
   Unrealized  
(in millions)          Gain    (Loss)  

At June 30, 2010:

           

Loans

   $ 1    $ 1    $ -    $ -   

Securities held-for-sale

     514      508      -      (13

Deposits

     27      25      2      -   

Long-term debt

     13,391      12,183      763      (20

At Dec. 31, 2009:

           

Loans

   $ 1    $ 1    $ -    $ -   

Securities held-for-sale

     216      211      -      (12

Deposits

     26      25      -      (4

Long-term debt

     12,378      11,599      422      (55

Note 15 – Fair value measurement

The guidance related to “Fair Value Measurement”, included in ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date and establishes a framework for measuring fair value. It establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and expands the disclosures about instruments measured at fair value. ASC 820 requires consideration of a company’s own creditworthiness when valuing liabilities.

The standard provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The objective is to determine from weighted indicators of fair value a reasonable point within the range that is most representative of fair value under current market conditions.


 

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Determination of fair value

Following is a description of our valuation methodologies for assets and liabilities measured at fair value. We have established processes for determining fair values. Fair value is based upon quoted market prices, where available. For financial instruments where quotes from recent exchange transactions are not available, we determine fair value based on discounted cash flow analysis, comparison to similar instruments, and the use of financial models. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Model-based pricing uses inputs of observable prices for interest rates, foreign exchange rates, option volatilities and other factors. Models are benchmarked and validated by an independent internal risk management function. Our valuation process takes into consideration factors such as counterparty credit quality, liquidity, concentration concerns, observability of model parameters and the results of stress tests. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.

Most derivative contracts are valued using internally developed models which are calibrated to observable market data and employ standard market pricing theory for their valuations. An initial “risk-neutral” valuation is performed on each position assuming time-discounting based on an AA credit curve. Then, to arrive at a fair value that incorporates counterparty credit risk, a credit adjustment is made to these results by discounting each trade’s expected exposures to the counterparty using the counterparty’s credit spreads, as implied by the credit default swap market. We also adjust expected liabilities to the counterparty using BNY Mellon’s own credit spreads, also implied by the credit default swap market. Accordingly, the valuation of our derivative position is sensitive to the current changes in our own credit spreads as well as those of our counterparties.

In certain cases, we may face additional costs to exit large risk positions or recent prices may not be observable for instruments that trade in inactive or less active markets. The costs to exit large risk positions are based on evaluating the negative change in the market during the time it would take for us to bring those positions to normal market levels for those instruments. Upon evaluating the uncertainty in valuing financial instruments subject to liquidity issues, we make an adjustment to their value. The determination of the liquidity adjustment includes the availability of external quotes, the time since the latest available quote and the price volatility of the instrument.

 

Certain parameters in some financial models are not directly observable and, therefore, are based on managements’ estimates and judgments. These financial instruments are normally traded less actively. Examples include certain credit products where parameters such as correlation and recovery rates are unobservable. We apply valuation adjustments to mitigate the possibility of error and revision in the model based estimate value.

The methods described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.

Valuation hierarchy

ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are described below.

Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 assets and liabilities include debt and equity securities and derivative financial instruments actively traded on exchanges and U.S. Treasury securities and U.S. Government securities that are actively traded in highly liquid over the counter markets.

Level 2: Observable inputs other than Level 1 prices, for example, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 assets and liabilities include debt instruments that are traded less frequently than exchange traded securities and derivative instruments whose model inputs are observable in the market or can be corroborated by market observable data. Examples in this category are


 

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certain variable and fixed rate agency and non-agency securities, corporate debt securities and derivative contracts.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Examples in this category include interests in certain securitized financial assets, certain private equity investments, and derivative contracts that are highly structured or long-dated.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Loans and unfunded lending-related commitments

Where quoted market prices are not available, we generally base the fair value of loans and unfunded lending-related commitments on observable market prices of similar instruments, including bonds, credit derivatives and loans with similar characteristics. If observable market prices are not available, we base the fair value on estimated cash flows adjusted for credit risk which are discounted using an interest rate appropriate for the maturity of the applicable loans or the unfunded commitments.

Unrealized gains and losses on unfunded lending commitments carried at fair value are classified in Other assets and Other liabilities, respectively. Loans and unfunded lending commitments carried at fair value are generally classified within Level 2 of the valuation hierarchy.

Securities

Where quoted prices are available in an active market, we classify the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities.

If quoted market prices are not available, we estimate fair values using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of

such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain agency and non-agency mortgage-backed securities, commercial mortgage-backed securities and European floating rate notes.

For securities where quotes from recent transactions are not available for identical securities, we determine fair value primarily based on pricing sources with reasonable levels of price transparency that employ financial models or obtain comparison to similar instruments to arrive at “consensus” prices.

Specifically, the pricing sources obtain recent transactions for similar types of securities (e.g., vintage, position in the securitization structure) and ascertain variables such as discount rate and speed of prepayment for the types of transaction and apply such variables to similar types of bonds. We view these as observable transactions in the current market place and classify such securities as Level 2. Pricing sources discontinue pricing any specific security whenever they determine there is insufficient observable data to provide a good faith opinion on price.

In addition, we have significant investments in more actively traded agency RMBS and the pricing sources derive the prices for these securities largely from quotes they obtain from three major inter-dealer brokers. The pricing sources receive their daily observed trade price and other information feeds from the interdealer brokers.

For securities with bond insurance, the financial strength of the insurance provider is analyzed and that information is included in the fair value assessment for such securities.

In certain cases where there is limited activity or less transparency around inputs to the valuation, we classify those securities in Level 3 of the valuation hierarchy. Securities classified within Level 3 primarily include other retained interests in securitizations, securities of state and political subdivisions and other debt securities.

At June 30, 2010, approximately 99% of our securities were valued by pricing sources with reasonable levels of price transparency. Less than 1% of our securities were priced based on economic models and non-binding dealer quotes, and are included in Level 3 of the ASC 820 hierarchy.


 

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Consolidated collateralized loan obligations

BNY Mellon values assets in consolidated CLOs using observable market prices observed from the secondary loan market. The returns to the note holders are solely dependent on the assets and accordingly equal the value of those assets. Based on the structure of the CLOs, the valuation of the assets is attributable to the senior note holders. Changes in the values of assets and liabilities are reflected in the income statement as investment income and interest of asset management fund note holders, respectively.

Derivatives

We classify exchange-traded derivatives valued using quoted prices in Level 1 of the valuation hierarchy. Examples include exchanged-traded equity and foreign exchange options. Since few other classes of derivative contracts are listed on an exchange, most of our derivative positions are valued using internally developed models that use as their basis readily observable market parameters and we classify them in Level 2 of the valuation hierarchy. Such derivatives include basic interest rate swaps and options and credit default swaps. Derivatives valued using models with significant unobservable market parameters and that are traded less actively or in markets that lack two way flow, are classified in Level 3 of the valuation hierarchy. Examples include long-dated interest rate or currency swaps, where swap rates may be unobservable for longer maturities; and certain credit products, where correlation and recovery rates are unobservable. Certain interest rate swaps with counterparties that are highly structured entities require significant judgment and analysis to adjust the value determined by standard pricing models. The fair value of these interest rate swaps compose less than 1% of our derivative financial instruments. Additional disclosures of derivative instruments are provided in Note 17 of Notes to Consolidated Financial Statements.

Seed capital

In our Asset Management segment we manage investment assets, including equities, fixed income, money market and alternative investment funds for institutions and other investors; as part of that activity we make seed capital investments in certain funds. Seed capital is included in trading assets, securities available-for-sale and other assets, depending on the nature of the investment. When applicable, we value seed capital based on the published net asset value

(“NAV”) of the fund. We include funds in which ownership interests in the fund are publicly-traded in an active market and institutional funds in which investors trade in and out daily in Level 1 of the valuation hierarchy. We include open-end funds where investors are allowed to sell their ownership interest back to the fund less frequently than daily and where our interest in the fund contains no other rights or obligations in Level 2 of the valuation hierarchy. However, we generally include investments in funds which allow investors to sell their ownership interest back to the fund less frequently than monthly in Level 3, unless actual redemption prices are observable.

For other types of investments in funds, we consider all of the rights and obligations inherent in our ownership interest, including the reported NAV as well as other factors that affect the fair value of our interest in the fund. To the extent the NAV measurements reported for the investments are based on unobservable inputs or include other rights and obligations (e.g., obligation to meet cash calls), we generally classify them in Level 3 of the valuation hierarchy.

Certain interests in securitizations

For certain interests in securitizations which are classified in securities available-for-sale and other assets, we use discounted cash flow models which generally include assumptions of projected finance charges related to the securitized assets, estimated net credit losses, prepayment assumptions and estimates of payments to third-party investors. When available, we compare our fair value estimates and assumptions to market activity and to the actual results of the securitized portfolio. Changes in these assumptions may significantly impact our estimate of fair value of the interests in securitizations; accordingly, we generally classify them in Level 3 of the valuation hierarchy.

Private equity investments

Our Other segment includes holdings of nonpublic private equity investment through funds managed by third party investment managers and, to a lesser extent, direct investment in private equities. Nonpublic private equity investments generally lack quoted market prices, are less liquid and may be long term; accordingly, we must apply significant judgment in determining their fair value. We value private equity investments initially based upon the


 

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Notes to Consolidated Financial Statements   (continued)

 

transaction price which we subsequently adjust to reflect expected exit values as evidenced by financing and sale transactions with third parties or through ongoing reviews by the investment managers.

The investment managers consider a number of factors in changes in valuation including current operating performance and future expectations of the particular investment, industry valuations of comparable public companies, changes in market outlook and the financing environment. Nonpublic private equity investments are included in Level 3 of the valuation hierarchy.

Private equity investments also include publicly held equity investments, generally obtained through the initial public offering of privately held equity investments. These equity

investments are often held in a partnership structure. Publicly held investments are marked-to-market at the quoted public value less adjustments for regulatory or contractual sales restrictions or adjustments to reflect the difficulty in selling a partnership interest.

Discounts for restrictions are quantified by analyzing the length of the restriction period and the volatility of the equity security. Publicly held investments are primarily classified in Level 2 of the valuation hierarchy.

The following tables present the financial instruments carried at fair value at June 30, 2010 and Dec. 31, 2009, by caption on the consolidated balance sheet and by ASC 820 valuation hierarchy (as described above). For the six months ended June 30, 2010, there were no transfers between Level 1 and Level 2.


 

BNY Mellon    83


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Assets and liabilities measured at fair value on a recurring basis at June 30, 2010                   Total carrying
value
(dollar amounts in millions)    Level 1     Level 2     Level 3     Netting (a)    

Available-for-sale securities:

          

U.S. Treasury

   $ 5,952      $ -      $ -      $ -      $ 5,952

U.S. government agencies

     -        1,146        -        -        1,146

State and political subdivisions

     -        553        9        -        562

Agency RMBS

     -        18,545        -        -        18,545

Alt-A RMBS

     -        498        -        -        498

Prime RMBS

     -        1,404        -        -        1,404

Subprime RMBS

     -        476        -        -        476

Other RMBS

     -        1,361        -        -        1,361

Commercial MBS

     -        2,706        -        -        2,706

Asset-backed CLOs

     -        225        -        -        225

Other asset-backed securities

     -        588        -        -        588

Equity securities (b)

     489        903        -        -        1,392

Other debt securities (b)

     94        3,057        49        -        3,200

Sovereign debt

     -        7,126        -        -        7,126

Grantor Trust – Alt-A RMBS

     -        2,536        -        -        2,536

Grantor Trust – Prime RMBS

     -        1,969        -        -        1,969

Grantor Trust – Subprime RMBS

     -        148        -        -        148

Total available-for-sale

     6,535        43,241        58        -        49,834

Trading assets:

          

Debt and equity instruments (c)

     1,739        933        20        -        2,692

Derivative assets:

          

Interest rate

     -        16,841        83        N/A     

Foreign exchange

     4,174        155        -        N/A     

Equity

     374        331        3        N/A     

Other

     -        3        -        N/A         

Total derivative assets

     4,548        17,330        86        (17,263 (f)      4,701

Total trading assets

     6,287        18,263        106        (17,263     7,393

Loans

     -        15        8        -        23

Other assets (d)

     104        906        109        -        1,119

Subtotal assets of operations at fair value

   $ 12,926      $ 62,425      $ 281      $ (17,263   $ 58,369

Percent of assets prior to netting

     17.1     82.5     0.4              

Assets of consolidated asset management funds:

          

Trading assets

     543        -        -        -        543

Loans

     -        12,070        -        -        12,070

Other assets

     463        184        -        -        647

Total assets of consolidated asset management funds

     1,006        12,254        -        -        13,260

Total assets

   $ 13,932      $ 74,679      $ 281      $ (17,263   $ 71,629

Percent of assets prior to netting

     15.7     84.0     0.3              

Trading liabilities:

          

Debt and equity instruments

   $ 1,749      $ 562      $ -      $ -      $ 2,311

Derivative liabilities:

          

Interest rate

     -        17,626        124        N/A     

Foreign exchange

     4,203        149        -        N/A     

Equity

     59        220        50        N/A     

Other

     -        1        -        N/A         

Total derivative liabilities

     4,262        17,996        174        (16,420 (f)      6,012

Total trading liabilities

     6,011        18,558        174        (16,420     8,323

Long-term debt

     -        276        -        -        276

Other liabilities (e)

     -        279        2        -        281

Subtotal liabilities at fair value

   $ 6,011      $ 19,113      $ 176      $ (16,420   $ 8,880

Percent of liabilities prior to netting

     23.8     75.5     0.7              

Liabilities and obligations of consolidated asset management funds

     3        12,269        -        -        12,272

Total liabilities

   $ 6,014      $ 31,382      $ 176      $ (16,420   $ 21,152

Percent of liabilities prior to netting

     16.0     83.5     0.5              

 

(a) ASC 815 permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral.
(b) Includes seed capital and certain interests in securitizations.
(c) Includes loans classified as trading assets and certain interests in securitizations.
(d) Includes private equity investments, seed capital and derivatives in designated hedging relationships.
(e) Includes the fair value adjustment for certain unfunded lending-related commitments and derivatives in designated hedging relationships and support agreements.
(f) Netting cannot be disaggregated by product.

 

84    BNY Mellon


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Details of certain items measured at fair value on a recurring basis

at June 30, 2010

(dollar amounts in millions)

   Total
carrying
value  (a)
   Ratings  
      AAA/
AA-
    A+/
A-
    BBB+/
BBB-
    BB+ and
lower
 

Alt-A RMBS:

           

2007

   $ 1    -   -   -   100

2006

     199    -      -      -      100   

2005

     220    -      8      -      92   

2004 and earlier

     78    71      25      4      -   

Total Alt-A RMBS

   $ 498    11   7   1   81

Prime RMBS:

           

2007

   $ 304    49   27   8   16

2006

     182    -      40      -      60   

2005

     358    35      -      22      43   

2004 and earlier

     560    80      11      7      2   

Total prime RMBS

   $ 1,404    52   15   10   23

Subprime RMBS:

           

2007

   $ 7    9   -   91   -

2005

     81    45      12      22      21   

2004 and earlier

     388    74      13      4      9   

Total subprime RMBS

   $ 476    68   13   9   10

Commercial MBS - Domestic:

           

2007

   $ 674    84   8   8   -

2006

     630    88      8      -      4   

2005

     490    100      -      -      -   

2004 and earlier

     571    100      -      -      -   

Total commercial MBS - Domestic

   $ 2,365    92   5   2   1

European Floating Rate Notes:

           

United Kingdom

   $ 816    99   1   -   -

Netherlands

     134    79      21      -      -   

Other

     941    77      23      -      -   

Total European Floating Rate Notes

   $ 1,891    87   13   -   -

Sovereign debt:

           

Germany

   $ 2,827    100   -   -   -

Netherlands

     412    100      -      -      -   

France

     1,742    100      -      -      -   

United Kingdom

     2,100    100      -      -      -   

Other

     45    95      5      -      -   

Total sovereign debt

   $ 7,126    100   -   -   -

Grantor Trust:

           

Alt-A RMBS:

           

2007

   $ 767    -   -   -   100

2006

     677    -      -      -      100   

2005

     844    2      -      7      91   

2004 and earlier

     248    22      45      20      13   

Total Grantor Trust-Alt-A RMBS

   $ 2,536    3   4   4   89

Prime RMBS:

           

2007

   $ 726    -   -   -   100

2006

     462    -      -      3      97   

2005

     734    1      5      7      87   

2004 and earlier

     47    51      46      -      3   

Total Grantor Trust-Prime RMBS

   $ 1,969    2   3   3   92

Subprime RMBS:

           

2007

   $ 12    -   -   -   100

2006

     83    -      9      -      91   

2005

     12    -      -      -      100   

2004 and earlier

     41    49      -      -      51   

Total Grantor Trust-Subprime RMBS

   $ 148    13   5   -   82

 

(a) All assets are considered Level 2 assets in the valuation hierarchy at June 30, 2010.

 

BNY Mellon    85


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2009

(dollar amounts in millions)

   Level 1     Level 2     Level 3     Netting (a)     Total carrying
value

Available-for-sale securities:

          

U.S. Treasury

   $ 6,378      $ -      $ -      $ -      $ 6,378

U.S. government agencies

     -        1,260        -        -        1,260

State and political subdivisions

     -        520        -        -        520

Agency RMBS

     -        18,455        -        -        18,455

Alt-A RMBS

     -        537        -        -        537

Prime RMBS

     -        1,512        -        -        1,512

Subprime RMBS

     -        447        -        -        447

Other RMBS

     -        1,770        -        -        1,770

Commercial MBS

     -        2,590        -        -        2,590

Asset-backed CLOs

     -        383        6        -        389

Other asset-backed securities

     -        836        -        -        836

Equity securities (b)

     461        860        -        -        1,321

Other debt securities (b)

     76        11,331        50        -        11,457

Grantor Trust Class B certificates

     -        4,160        -        -        4,160

Total available-for-sale

     6,915        44,661        56        -        51,632

Trading assets:

          

Debt and equity instruments (c)

     524        745        170        -        1,439

Derivative assets

     2,779        14,317        146        (12,680     4,562

Total trading assets

     3,303        15,062        316        (12,680     6,001

Loans

     2        12        25        -        39

Other assets (d)

     14        685        164        -        863

Total assets at fair value

   $ 10,234      $ 60,420      $ 561      $ (12,680   $ 58,535

Percent of assets prior to netting

     14.4     84.8     0.8              

Trading liabilities:

          

Debt and equity instruments

   $ 442      $ 752      $ -      $ -      $ 1,194

Derivative liabilities

     2,850        14,671        92        (12,411     5,202

Total trading liabilities

     3,292        15,423        92        (12,411     6,396

Other liabilities (e)

     2        605        3        -        610

Total liabilities at fair value

   $ 3,294      $ 16,028      $ 95      $ (12,411   $ 7,006

Percent of liabilities prior to netting

     17.0     82.5     0.5              

 

(a) ASC 815 permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral.
(b) Includes seed capital and certain interests in securitizations.
(c) Includes loans classified as trading assets and certain interests in securitizations.
(d) Includes private equity investments, seed capital and derivatives in designated hedging relationships.
(e) Includes the fair value adjustment for certain unfunded lending-related commitments and derivatives in designated hedging relationships and support agreements.

 

Changes in Level 3 fair value measurements

The tables below include a roll forward of the balance sheet amounts for the three and six month periods ended June 30, 2010 and 2009 (including the change in fair value), for financial instruments classified in Level 3 of the valuation hierarchy.

Our classification of a financial instrument in Level 3 of the valuation hierarchy is based on the significance of the unobservable factors to the overall fair value measurement. However, these instruments generally include other observable components that are actively quoted or validated to third party sources; accordingly, the gains and losses in the table below include changes in fair value due to observable parameters as well as the unobservable parameters in our valuation

methodologies. We also frequently manage the risks of Level 3 financial instruments using securities and derivatives positions that are Level 1 or 2 instruments which are not included in the table; accordingly, the gains or losses below do not reflect the effect of our risk management activities related to the Level 3 instruments.

In accordance with ASC 820, BNY Mellon adjusts the discount rate on securities to reflect what they would sell for in an orderly market (model price) and compares the model prices to prices provided by pricing sources. If the difference between the model price and the prices provided by pricing sources is outside of established thresholds, the securities are included in Level 3.


 

86    BNY Mellon


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Fair value measurements using significant unobservable

inputs three months ended June 30, 2010

         

Purchases,
issuances and
settlements,
net

   

Transfers
in/(out)
of Level 3

   

Fair value
June 30,
2010

    Change in
unrealized gains and
(losses) related to
instruments held at
June 30, 2010
 
     Fair value
March 31,
2010
    Total realized/unrealized
gains/(losses) recorded in
        
(in millions)      Income     Comprehensive
income
        

Available-for-sale securities:

                                                       

State and political subdivisions

   $ 10      $ -      $ -    $ -      $ (1   $ 9      $ -   

Other debt securities

     58        -        -      -        (9     49        -   

Total available-for-sale

     68        - (a)      -      -        (10     58        -   

Trading assets:

               

Debt and equity instruments

     24        (3 )(b)      -      (1     -        20        -   

Derivative assets:

               

Interest rate

     95        (13     -      -        1        83        (14

Equity

     2        1        -      -        -        3        1   

Total derivative assets

     97        (12 )(b)      -      -        1        86        (13

Total trading assets

     121        (15     -      (1     1        106        (13

Loans

     12        1 (c)      -      (4     (1     8        -   

Other assets

     129        2 (c)      -      (12     (10     109        -   

Total assets

   $ 330      $ (12   $ -    $ (17   $ (20 (d)    $ 281      $ (13

Derivative liabilities:

               

Interest rate

   $ (59   $ (65   $ -    $ -      $ -      $ (124   $ (64

Equity

     (50     -        -      -        -        (50     -   

Total derivative liabilities

     (109     (65 )(b)      -      -        -        (174     (64

Other liabilities

     (2     - (c)      -      -        -        (2     -   

Total liabilities

   $ (111   $ (65   $ -    $ -      $ -      $ (176   $ (64

 

Fair value measurements using significant unobservable

inputs three months ended June 30, 2009

                  Purchases,
issuances and
settlements,
net
    Transfers
in/(out)
of Level 3
    Fair value
June 30,
2009
    Change in
unrealized gains and
(losses) related to
instruments held at
June 30, 2009
 
     Fair Value
March 31,
2009
    Total realized/unrealized
gains/(losses) recorded in
         
(in millions)      Income     Comprehensive
income
         

Available-for-sale securities:

                                                        

Alt-A RMBS

   $ 370      $ (2   $ (14   $ (22   $ (241   $ 91      $ (1

Prime RMBS

     1,595        (2     (65     (113     (825     590        (7

Subprime RMBS

     608        -        (41     (22     (76     469        -   

Commercial MBS

     572        -        (20     5        (79     478        -   

Asset-backed CDO

     10        (45     41        -        -        6        60   

Other asset-backed securities

     13        -        5        -        (8     10        -   

Equity securities

     14        -        1        1        -        16        -   

Other debt securities

     258        -        -        (16     (90     152        -   

Total available-for-sale

     3,440        (49 )(a)      (93     (167     (1,319     1,812        52   

Trading assets:

              

Debt and equity instruments

     60        13 (b)      -        -        148        221        -   

Derivative assets

     104        34 (b)      1        6        -        145        -   

Other assets

     177        (14 )(c)      -        6        (7     162        -   

Total assets

   $ 3,781      $ (16   $ (92   $ (155   $ (1,178   $ 2,340      $ 52   

Trading liabilities:

              

Derivative liabilities

   $ (122   $ 31 (b)    $ -      $ 1      $ -      $ (90     -   

Other liabilities

     (6     -        -        -        3        (3     -   

Total liabilities

   $ (128   $ 31      $ -      $ 1      $ 3      $ (93   $ -   

 

(a) Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive loss except for other than temporary impairment losses which are recorded in securities gains (losses).
(b) Reported in foreign exchange and other trading activities.
(c) Reported in foreign exchange and other trading activities, except for derivatives in designated hedging relationships which are recorded in interest revenue and interest expense.
(d) Primarily relates to investments consolidated in accordance with SFAS No. 167.

 

BNY Mellon    87


Table of Contents
Notes to Consolidated Financial Statements   (continued)

 

 

Fair value measurements using significant unobservable

inputs six months ended June 30, 2010

          Purchases,
issuances and
settlements,
net
    Transfers
in/(out)
of Level 3
    Fair value
June 30,
2010
    Change in
unrealized gains and
(losses) related to
instruments held at
June 30, 2010
 
     Fair value
Dec. 31,
2009
    Total realized/unrealized
gains/(losses) recorded in
        
(in millions)      Income     Comprehensive
income
        

Available-for-sale securities:

                                                       

State and political subdivisions

   $ -      $ -      $ -    $ -      $ 9      $ 9      $ -   

Asset-backed CLOs

     6        -        -      -        (6     -        -   

Other debt securities

     50        -        -      8        (9     49        -   

Total available-for-sale

     56        - (a)      -      8        (6     58        -   

Trading assets:

               

Debt and equity instruments

     170        (1 )(b)      -      4        (153     20        -   

Derivative assets:

               

Interest rate

     121        (39     -      -        1        83        (41

Equity

     25        (22     -      -        -        3        (23

Total derivative assets

     146        (61 )(b)      -      -        1        86        (64

Total trading assets

     316        (62     -      4        (152     106        (64

Loans

     25        2 (c)      -      (18     (1     8        -   

Other assets

     164        5 (c)      -      (1     (59     109        -   

Total assets

   $ 561      $ (55   $ -    $ (7   $ (218 (d)    $ 281      $ (64

Derivative liabilities:

               

Interest rate

   $ (54   $ (70   $ -    $ -      $ -      $ (124   $ (69

Equity

     (38     (12     -      -        -        (50     (2

Total derivative liabilities

     (92     (82 )(b)      -      -        -        (174     (71

Other liabilities

     (3     1 (c)      -      -        -        (2     -   

Total liabilities

   $ (95   $ (81   $ -    $ -      $ -      $ (176   $ (71

 

Fair value measurements using significant unobservable

inputs six months ended June 30, 2009

                  Purchases,
issuances and
settlements,
net
    Transfers
in/(out)
of Level 3
    Fair value
June 30,
2009
    Change in
unrealized gains and
(losses) related to
instruments held at
June 30, 2009
 
     Fair Value
Dec. 31,
2008
    Total realized/unrealized
gains/(losses) recorded in
         
(in millions)      Income     Comprehensive
income
         

Available-for-sale securities:

                                                        

Alt-A RMBS

   $ -      $ (1   $ (15   $ (22   $ 129      $ 91      $ 12   

Prime RMBS

     -        (2     (65     (113     770        590        48   

Subprime RMBS

     -        -        (41     (22     532        469        30   

Commercial MBS

     -        -        (19     4        493        478        35   

Asset-backed CDO

     22        (76     60        -        -        6        60   

Other asset-backed securities

     17        -        1        -        (8     10        (1

Equity securities

     13        -        2        1        -        16        1   

Other debt securities

     357        (99     (7     (18     (81     152        -   

Total available-for-sale

     409        (178 )(a)      (84     (170     1,835        1,812        185   

Trading assets:

              

Debt and equity instruments

     20        13 (b)      (1     -        189        221        (2

Derivative assets

     83        35 (b)      7        3        17        145        (1

Other assets

     200        (43 )(c)      -        7        (2     162        -   

Total assets

   $ 712      $ (173   $ (78   $ (160   $ 2,039      $ 2,340      $ 182   

Trading liabilities:

              

Derivative liabilities

   $ (149   $ 53 (b)    $ 2      $ -      $ 4      $ (90   $ -   

Other liabilities

     -        (8 )(c)      -        -        5        (3     -   

Total liabilities

   $ (149   $ 45      $ 2      $ -      $ 9      $ (93   $ -   

 

(a) Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive loss except for other than temporary impairment losses which are recorded in securities gains (losses).
(b) Reported in foreign exchange and other trading activities.
(c) Reported in foreign exchange and other trading activities, except for derivatives in designated hedging relationships which are recorded in interest revenue and interest expense.
(d) Primarily relates to investments consolidated in accordance with SFAS No. 167.

 

Assets and liabilities measured at fair value on a nonrecurring basis

Under certain circumstances we make adjustments to fair value for our assets, liabilities and unfunded lending-related commitments although they are not measured at fair value on an

ongoing basis. An example would be the recording of an impairment of an asset. The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at June 30, 2010 and Dec. 31, 2009, for


 

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Notes to Consolidated Financial Statements   (continued)

 

 

which a nonrecurring change in fair value has been recorded during the quarters ended June 30, 2010 and Dec. 31, 2009.

 


 

Assets measured at fair value on a nonrecurring basis at June 30, 2010

(in millions)

   Level 1    Level 2    Level 3    Total
carrying value

Loans (a)

   $ -    $ 115    $ 66    $ 181

Other assets (b)

     -      6      -      6

Total assets at fair value on a nonrecurring basis

   $ -    $ 121    $ 66    $ 187

 

Assets measured at fair value on a nonrecurring basis at Dec. 31, 2009

(in millions)

   Level 1    Level 2    Level 3    Total
carrying value

Loans (a)

   $ -    $ 298    $ 91    $ 389

Other assets (b)

     -      4      -      4

Total assets at fair value on a nonrecurring basis

   $ -    $ 302    $ 91    $ 393

 

(a) During the quarters ended June 30, 2010 and December 31, 2009, the fair value of these loans was reduced $10 million and $18 million, based on the fair value of the underlying collateral as allowed by ASC 310, Accounting by Creditors for Impairment of a Loan, with an offset to the allowance for credit losses.
(b) The fair value of Other assets received in satisfaction of debt was increased by $2 million in the second quarter of 2010 and was reduced by less than $1 million in the fourth quarter of 2009, based on the fair value of the underlying collateral with an offset in other revenue.

 

Note 16 – Fair value option

ASC 825 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value.

On Jan. 1, 2010, we adopted SFAS No. 167, “Amendments to FASB interpretation No. 46(R)” (Topic 810) issued by the Financial Accounting Standards Board (“FASB”). In accordance with the guidance included in ASC 810, we consolidated assets of consolidated asset management funds. The following table presents the assets and liabilities, by type, of consolidated asset management funds. We elected the fair value option to value these assets and liabilities.

 

Assets and liabilities of consolidated asset
management funds, at fair value

(in millions)

   June 30,
2010
   Dec. 31,
2009

Trading assets

   $ 543    $ -

Loans

     12,070      -

Other assets

     647      -

Total assets of consolidated asset management funds

   $ 13,260    $ -

Liabilities and obligations of consolidated asset management funds

   $ 12,272    $ -

Noncontrolling interests of consolidated asset management funds

   $ 666    $ -

 

BNY Mellon values assets in consolidated CLOs using observable market prices observed from the secondary loan market. The returns to the note holders are solely dependent on the assets and accordingly equal the value of those assets. Based on the structure of the CLOs, the valuation of the assets is attributable to the senior note holders. Accordingly, the fair value option best reflects the limited interest BNY Mellon has in the economic performance of the consolidated CLOs. Changes in the values of assets and liabilities are reflected in the income statement as investment income of consolidated asset management funds.

We have elected the fair value option on $240 million of long-term debt in connection with ASC 810. At June 30, 2010, the fair value of this long-term debt was $276 million. We have also elected the fair value option on approximately $120 million of unfunded lending related commitments. The following table presents the changes in fair value of these unfunded lending related commitments and long-term debt included in foreign exchange and other trading activities in the consolidated income statement for the three and six months ended June 30, 2010 and 2009.


 

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Notes to Consolidated Financial Statements   (continued)

 

 

Foreign exchange and other

trading activities

                     
     Quarter ended    Six months ended  
(in millions)    June 30,
2010
    June 30,
2009
   June 30,
2010
    June 30,
2009
 

Loans

   $ -      $ 1    $ -      $ 2   

Long-term debt (a)

     (29     -      (36     -   

Other liabilities

     (1     1      (1     (1

 

(a) The change in fair value of the long-term debt is approximately offset by an economic hedge included in trading.

The long-term debt is valued using observable market inputs and is included in Level 2 of the ASC 820 hierarchy. Unfunded loan commitments are valued using quotes from dealers in the loan markets, and are included in Level 3 of the ASC 820 hierarchy. The fair market value of unfunded lending-related commitments for which the fair value option was elected was a liability of $1 million at June 30, 2010 and less than $1 million at Dec. 31, 2009 and is included in other liabilities.

Note 17 – Derivative instruments

We use derivatives to manage exposure to market risk, interest rate risk, credit risk, foreign currency risk, to generate profits from proprietary trading and to assist customers with their risk management objectives.

The notional amounts for derivative financial instruments express the dollar volume of the transactions; however, credit risk is much smaller. We perform credit reviews and enter into netting agreements to minimize the credit risk of foreign currency and interest rate risk management products. We enter into offsetting positions to reduce exposure to foreign exchange and interest rate risk.

Use of derivative financial instruments involves reliance on counterparties. Failure of a counterparty to honor its obligation under a derivative contract is a risk we assume whenever we engage in a derivative contract. Counterparty default losses were $4 million in the second quarter of 2010. There were no counterparty default losses in the second quarter of 2009.

Hedging derivatives

We utilize interest rate swap agreements to manage our exposure to interest rate fluctuations. For hedges of fixed-rate loans, investment securities held for sale, deposits and long-term debt, the hedge documentation specifies the terms of the hedged items and the interest rate swaps and indicates that the

derivative is hedging a fixed-rate item and is a fair value hedge, that the hedge exposure is to the changes in the fair value of the hedged item due to changes in benchmark interest rates, and that the strategy is to eliminate fair value variability by converting fixed-rate interest payments to LIBOR.

The fixed rate loans hedged generally have an original maturity of 11 years and are not callable. These loans are hedged with “pay fixed rate, receive variable rate” swaps with similar notional amounts, maturities, and fixed rate coupons. The swaps are not callable. At June 30, 2010, $1 million of loans were hedged with interest rate swaps, which had notional values of $1 million.

The securities hedged consist of asset-backed securities and U.S. Treasury bonds that generally have a weighted average life of 10 years or less. The asset-backed securities are callable six months prior to maturity. The swaps on the asset-backed securities are callable six months prior to maturity. The swaps on the U.S. Treasury bonds are not callable. All of these securities are hedged with “pay fixed rate, receive variable rate” swaps of the same maturity, repricing and fixed rate coupon. At June 30, 2010, $499 million of securities were hedged with interest rate swaps that had notional values of $508 million.

The fixed rate deposits hedged generally have original maturities of 5 to 11 years and are not callable. These deposits are hedged with receive fixed rate, pay variable rate swaps of similar maturity, repricing and fixed rate coupon. The swaps are not callable. At June 30, 2010, $25 million of deposits were hedged with interest rate swaps that had notional values of $25 million.

The fixed rate long-term debt hedged generally has an original maturity of 5 to 30 years. We issue both callable and non-callable debt. The non-callable debt is hedged with simple interest rate swaps similar to those described for deposits. Callable debt is hedged with callable swaps where the call dates of the swaps exactly match the call dates of the debt. At June 30, 2010, $12.6 billion of debt was hedged with interest rate swaps that had notional values of $12.2 billion.

In addition, we enter into foreign exchange hedges. We use forward foreign exchange contracts with maturities of 12 months or less to hedge our Sterling, Euro and Indian Rupee foreign exchange exposure with respect to forecasted revenue and


 

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expense transactions in non-U.S. entities that have the U.S. dollar as their functional currency. As of June 30, 2010, the hedged forecasted foreign currency transactions and linked FX forward hedges were $123 million (notional), with $11 million of pre-tax gains recorded in other comprehensive income. These gains will be reclassified to income over the next nine months.

We also use forward foreign exchange contracts with original maturities of 12 months or less to hedge our Euro, Japanese Yen and Indian Rupee foreign exchange exposure with respect to forecasted foreign currency net revenue where we cannot elect hedge accounting. At June 30, 2010, these economic hedges had a U.S. dollar equivalent notional value of $125 million, with $2 million of pre-tax losses from those FX forward hedges recorded in foreign exchange and other trading activities.

Forward foreign exchange contracts are also used to hedge the value of our net investments in foreign subsidiaries. These forward contracts usually have maturities of less than two years. The derivatives employed are designated as net investments hedges of changes in value of our foreign investments due to exchange rates, such that changes in value of the forward exchange contracts offset the changes in value of the foreign investments due to changes in foreign exchange rates. The change in fair market value of these contracts is deferred and reported within accumulated translation

adjustments in shareholders’ equity, net of tax effects. At June 30, 2010, foreign exchange contracts, with notional amounts totaling $4.1 billion, were designated as hedges.

In addition to forward foreign exchange contracts, we also designate non-derivative financial instruments as hedges of our net investments in foreign subsidiaries. Those non-derivative financial instruments designated as hedges of our net investments in foreign subsidiaries were all long-term liabilities of BNY Mellon in various currencies, and, at June 30, 2010, had a combined U.S. dollar equivalent value of $809 million.

Ineffectiveness related to derivatives and hedging relationships was recorded in income as follows:

 

Ineffectiveness    Six months ended  
(in millions)    June 30,
2010
    June 30,
2009
 

Fair value hedge of loans

   $ (0.1   $ (0.1

Fair value hedge of securities

     (0.1     (0.1

Fair value hedge of deposits and long-term debt

     11.6        2.0   

Cash flow hedges

     -        (0.1

Other (a)

     -        0.2   

Total

   $ 11.4      $ 1.9   

 

(a) Includes ineffectiveness recorded on foreign exchange hedges.

The following table summarizes the notional amount and credit exposure of our total derivative portfolio at June 30, 2010 and Dec. 31, 2009.


 

Impact of derivative instruments on the balance sheet    Notional Value    Asset Derivatives
Fair Value (a)
    Liability Derivatives
Fair Value (a)
 
(in millions)    June 30,
2010
  

Dec. 30,

2009

   June 30,
2010
    Dec. 31,
2009
    June 30,
2010
    Dec. 31,
2009
 

Derivatives designated as hedging instruments (b):

              

Interest rate contracts

   $ 12,717    $ 11,836    $ 765      $ 408      $ 33      $ 106   

Foreign exchange contracts

     4,180      3,645      111        -        3        97   

Total derivatives designated as hedging instruments

                 $ 876      $ 408      $ 36      $ 203   

Derivatives not designated as hedging instruments (c):

              

Interest rate contracts

   $ 1,120,752    $ 1,030,847    $ 16,924      $ 13,620      $ 17,750      $ 14,084   

Equity contracts

     7,789      7,710      708        483        329        570   

Credit contracts

     776      806      3        3        1        6   

Foreign exchange contracts

     338,356      259,402      4,329        3,136        4,352        2,953   

Total derivatives not designated as hedging instruments

                 $ 21,964      $ 17,242      $ 22,432      $ 17,613   

Total derivatives fair value (d)

         $ 22,840      $ 17,650      $ 22,468      $ 17,816   

Effect of master netting agreements

                   (17,263     (12,680     (16,420     (12,411

Fair value after effect of master netting agreements

                 $ 5,577      $ 4,970      $ 6,048      $ 5,405   

 

(a) Derivative financial instruments are reported net of cash collateral received and paid of $1,005 million and $162 million, respectively at June 30, 2010 and $429 million and $160 million, respectively at Dec. 31, 2009.
(b) The fair value of asset derivatives and liability derivatives designated as hedging instruments is recorded as other assets and other liabilities, respectively, on the balance sheet.
(c) The fair value of asset derivatives and liability derivatives not designated as hedging instruments is recorded as trading assets and trading liabilities, respectively, on the balance sheet.
(d) Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815.

 

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Notes to Consolidated Financial Statements   (continued)

 

 

At June 30, 2010, approximately $498 billion (notional) of interest rate contracts will mature within one year, $407 billion between one and five years, and $228 billion after five years. At June 30, 2010, approximately $330 billion

(notional) of foreign exchange contracts will mature within one year, $7 billion between one and five years, and $6 billion after five years.


 

Impact of derivative instruments on the income statement

(in millions)

                               

Derivatives in

fair value

hedging

relationships

   Location of gain or (loss)
recognized in income on
derivatives
   Amount of gain or
(loss) recognized

in income on derivatives
Quarter ended
    Location of gain or (loss)
recognized in income on
hedged item
   Amount of gain or
(loss) recognized

in hedged item
Quarter ended
      June 30,
2010
   June 30,
2009
       June 30,
2010
    June 30,
2009

Interest rate contracts

   Net interest revenue    $ 242.9    $ (358.2   Net interest revenue    $ (238.8   $ 358.6

 

Derivatives

in cash

flow hedging

relationships

   Amount of gain or
(loss) recognized

in OCI on
derivative

(effective portion)
Quarter ended
    Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
   Amount of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
Quarter ended
   Location of gain or
(loss) recognized in
income on
derivative
(ineffective portion
and amount
excluded from
effectiveness
testing)
   Amount of gain or (loss)
recognized in income on
derivative (ineffectiveness
portion and amount
excluded from
effectiveness testing)
Quarter ended
   June 30,
2010
   June 30,
2009
       June 30,
2010
   June 30,
2009
      June 30,
2010
   June 30,
2009

Interest rate contracts

   $ -    $ -      Net interest revenue    $ -    $ 24.9    Net interest revenue    $ -    $ -

FX contracts

     8.2      (3.9   Other revenue      1.9      3.8    Other revenue      -      -

Total

   $ 8.2    $ (3.9        $ 1.9    $ 28.7         $ -    $ -

 

Derivatives in

net investment

hedging

relationships

   Amount of gain or
(loss) recognized

in OCI on
derivative

(effective portion)
Quarter ended
    Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
   Amount of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
Quarter ended
   Location of gain or
(loss) recognized
in income on
derivative
(ineffective portion
and amount
excluded from
effectiveness
testing)
   Amount of gain or (loss)
recognized in income on
derivative (ineffectiveness
portion and amount
excluded from
effectiveness testing)
Quarter ended
 
   June 30,
2010
   June 30,
2009
       June 30,
2010
   June 30,
2009
      June 30,
2010
   June 30,
2009
 

FX contracts

   $ 67.7    $ (250.7   Net interest revenue    $ -    $ -    Other revenue    $ -    $ (0.1

 

Impact of derivative instruments on the income statement

(in millions)

                               

Derivatives in

fair value

hedging

relationships

   Location of gain or (loss)
recognized in income on
derivatives
   Amount of gain or
(loss) recognized

in income on derivatives
Six months ended
    Location of gain or (loss)
recognized in income on
hedged item
   Amount of gain or
(loss) recognized in
hedged item Six
months ended
      June 30,
2010
   June 30,
2009
       June 30,
2010
    June 30,
2009

Interest rate contracts

   Net interest revenue    $ 409.6    $ (356.9   Net interest revenue    $ (398.2   $ 358.8

 

Derivatives in

cash flow

hedging

relationships

   Amount of gain or
(loss) recognized
in OCI on
derivative

(effective portion)
Six months ended
   Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
   Amount of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
Six months ended
   Location of gain or
(loss) recognized in
income on
derivative
(ineffective portion
and amount
excluded from
effectiveness
testing)
   Amount of gain or (loss)
recognized in income on
derivative (ineffectiveness
portion and amount
excluded from
effectiveness testing)
Six months ended
 
   June 30,
2010
   June 30,
2009
      June 30,
2010
   June 30,
2009
      June 30,
2010
   June 30,
2009
 

Interest rate contracts

   $ -    $ -    Net interest revenue    $ -    $ 25.9    Net interest revenue    $ -    $ (0.1

FX contracts

     12.7      0.1    Other revenue      2.0      8.9    Other revenue      -      -   

Total

   $ 12.7    $ 0.1         $ 2.0    $ 34.8         $ -    $ (0.1

 

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Derivatives in

net investment

hedging

relationships

   Amount of gain or
(loss) recognized

in OCI on
derivative
(effective portion)
Six months ended
    Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
   Amount of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
Six months ended
   Location of gain or
(loss) recognized
in income on
derivative
(ineffective portion
and amount
excluded from
effectiveness
testing)
   Amount of gain or (loss)
recognized in income on
derivative (ineffectiveness
portion and amount
excluded from
effectiveness testing)
Six months ended
   June 30,
2010
   June 30,
2009
       June 30,
2010
   June 30,
2009
      June 30,
2010
   June 30,
2009

FX contracts

   $ 137.2    $ (205.7   Net interest revenue    $ -    $ -    Other revenue    $ -    $ 0.1

 

Trading activities (including trading derivatives)

Our trading activities are focused on acting as a market maker for our customers. The risk from these market-making activities and from our own positions is managed by our traders and limited in total exposure as described below.

We manage trading risk through a system of position limits, a VAR methodology based on Monte Carlo simulations, stop loss advisory triggers, and other market sensitivity measures. Risk is monitored and reported to senior management by a separate unit on a daily basis. Based on certain assumptions, the VAR methodology is designed to capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period for most instruments, utilizes a 99% confidence level, and incorporates the non-linear characteristics of options. The VAR model is one of several statistical models used to develop economic capital results, which is allocated to lines of business for computing risk-adjusted performance.

As the VAR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and management’s assessment of market conditions. Additional stress scenarios based upon historic market events are also performed. Stress tests, by their design, incorporate the impact of reduced liquidity and the breakdown of observed correlations. The results of these stress tests are reviewed weekly with senior management.

Revenue from foreign exchange and other trading activities included the following:

 

Foreign exchange and other trading activities  
                       Year-to-date  
(in millions)    2Q10     1Q10     2Q09     2010    2009  

Foreign exchange

   $ 244      $ 175      $ 240      $ 419    $ 459   

Fixed income

     (32     80        37        48      112   

Credit derivatives (a)

     4        (2     (45     2      (46

Other

     4        9        5        13      19   

Total

   $ 220      $ 262      $ 237      $ 482    $ 544   

 

(a) Used as economic hedges of loans.

Foreign exchange includes income from purchasing and selling foreign currencies and currency forwards, futures, and options. Fixed income reflects results from futures and forward contracts, interest rate swaps, foreign currency swaps, options, and fixed income securities. Credit derivatives include revenue from credit default swaps. Other primarily includes income from equity securities and equity derivatives.

Counterparty credit risk and collateral

We assess credit risk of our counterparties through regular periodic examination of their financial statements, confidential communication with the management of those counterparties and regular monitoring of publicly available credit rating information. This and other information is used to develop proprietary credit rating metrics used to assess credit quality.

Collateral requirements are determined after a comprehensive review of the credit quality of each counterparty. Collateral is generally held in the form of cash or highly liquid government securities. Collateral requirements are monitored and adjusted daily.

Additional disclosures concerning derivative financial instruments are provided in Note 15 of the Notes to Consolidated Financial Statements.


 

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Disclosure of Contingent Features in Over-the-Counter (“OTC”) Derivative Instruments

Certain of BNY Mellon’s OTC derivative contracts and/or collateral agreements contain provisions that would require us to take certain actions if our public debt rating fell to a certain level. Early termination provisions, or “close-out” agreements, in those contracts could trigger immediate payment of outstanding contracts that are in net liability positions. Certain collateral agreements would require us to immediately post additional collateral to cover some or all of BNY Mellon’s liabilities to a counterparty.

The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions as of June 30, 2010 for three key ratings triggers.

 

If the BNY Mellon’s rating

was changed to:

   Potential close-out
exposures (fair value)

A3/A-

   $ 597 million

Baa2/BBB

   $ 864 million

Bal/BB+

   $ 1,773 million

Additionally, if BNY Mellon’s debt rating had fallen below investment grade on June 30, 2010, existing collateral arrangements would have required us to post an additional $760 million of collateral.

Note 18 – Commitments and contingent liabilities

In the normal course of business, various commitments and contingent liabilities are outstanding which are not reflected in the accompanying consolidated balance sheets.

Our significant trading and off-balance sheet risks are securities, foreign currency and interest rate risk management products, commercial lending commitments, letters of credit, securities lending indemnifications and support agreements. We assume these risks to reduce interest rate and foreign currency risks, to provide customers with the ability to meet credit and liquidity needs, to hedge foreign currency and interest rate risks, and to trade for our own account. These items involve, to varying degrees, credit, foreign exchange, and interest rate risk not recognized in the balance sheet. Our off-balance sheet risks are managed and monitored in manners similar to those used for on-balance sheet risks. Significant industry concentrations related to credit exposure at June 30, 2010 are disclosed in the

Financial institutions portfolio exposure table and the Commercial portfolio exposure table below.

 

Financial institutions

portfolio exposure

(in billions)

   June 30, 2010
   Loans    Unfunded
commitments
   Total
exposure

Banks

   $ 4.1    $ 2.5    $ 6.6

Securities industry

     3.7      2.5      6.2

Insurance

     0.2      5.0      5.2

Asset managers

     0.9      2.7      3.6

Government

     0.1      2.2      2.3

Other

     0.2      2.0      2.2

Total

   $ 9.2    $ 16.9    $ 26.1

 

Commercial

portfolio exposure

(in billions)

   June 30, 2010
   Loans    Unfunded
commitments
   Total
exposure

Services and other

   $ 0.8    $ 6.8    $ 7.6

Manufacturing

     0.7      6.1      6.8

Energy and utilities

     0.5      5.9      6.4

Media and telecom

     0.4      1.9      2.3

Total

   $ 2.4    $ 20.7    $ 23.1

Major concentrations in securities lending are primarily to broker-dealers and are generally collateralized with cash. Securities lending transactions are discussed below.

A summary of our off-balance sheet credit risks, net of participations, at June 30, 2010 and Dec. 31, 2009 follows:

 

Off-balance sheet credit risks

(in millions)

   June 30,
2010
   Dec 31,
2009

Lending commitments (a)

   $ 30,415    $ 32,454

Standby letters of credit (b)

     9,912      11,359

Commercial letters of credit

     854      789

Securities lending indemnifications

     248,336      247,560

Support agreements

     116      86

 

(a) Net of participations totaling $358 million at June 30, 2010 and $541 million at Dec. 31, 2009.
(b) Net of participations totaling $2.1 billion at June 30, 2010 and $2.2 billion at Dec. 31, 2009.

Included in lending commitments are facilities which provide liquidity, primarily for variable rate tax exempt securities wrapped by monoline insurers. The credit approval for these facilities is based on an assessment of the underlying tax-exempt issuer and considers factors other than the financial strength of the monoline insurer.

The total potential loss on undrawn lending commitments, standby and commercial letters of credit, and securities lending indemnifications is


 

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Notes to Consolidated Financial Statements   (continued)

 

equal to the total notional amount if drawn upon, which does not consider the value of any collateral.

Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. A summary of lending commitment maturities is as follows: $11.9 billion less than one year; $18.2 billion in one to five years, and $0.3 billion over five years.

Standby letters of credit (“SBLC”) principally support corporate obligations. As shown in the off-balance sheet credit risks table, the maximum potential exposure of SBLCs was $9.9 billion at June 30, 2010 and $11.4 billion at Dec. 31, 2009 and includes $980 million and $1.0 billion that were collateralized with cash and securities at June 30, 2010 and Dec. 31, 2009, respectively. At June 30, 2010, approximately $7.2 billion of the SBLCs will expire within one year and the remaining $2.7 billion will expire within one to five years.

The estimated liability for losses related to these commitments and SBLCs, if any, is included in the allowance for unfunded commitments. The allowance for lending related commitments was $103 million at June 30, 2010 and $125 million at Dec. 31, 2009.

Payment/performance risk of SBLCs is monitored using both historical performance and internal ratings criteria. BNY Mellon’s historical experience is that SBLCs typically expire without being funded. SBLCs below investment grade are monitored closely for payment/performance risk. The table below shows SBLCs by investment grade:

 

Standby letters of credit    June 30,
2010
    Dec 31,
2009
 

Investment grade

   87   83

Noninvestment grade

   13   17

A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security (typically through an agent, in our case, The Bank of New York Mellon), to a borrower, usually a broker-dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract, which generally matures in less than 90 days. We generally lend securities with indemnification against broker default.

 

We generally require the borrower to provide 102% cash collateral which is monitored on a daily basis, thus reducing credit risk. Security lending transactions are generally entered into only with highly-rated counterparties. Securities lending indemnifications were secured by collateral of $255 billion at June 30, 2010 and $254 billion at Dec. 31, 2009.

Our potential exposure to support agreements was approximately $116 million at June 30, 2010 compared with $86 million at Dec. 31, 2009. Potential support agreement exposure is determined based on 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, as well as other client support agreements.

Other

We have provided standard representations for underwriting agreements, acquisition and divestiture agreements, sales of loans and commitments, and other similar types of arrangements and customary indemnification for claims and legal proceedings related to providing financial services. Insurance has been purchased to mitigate certain of these risks. We are a minority equity investor in, and member of, several industry clearing or settlement exchanges through which foreign exchange, securities, or other transactions settle. Certain of these industry clearing or settlement exchanges require their members to guarantee their obligations and liabilities or to provide financial support in the event other partners do not honor their obligations. It is not possible to estimate a maximum potential amount of payments that could be required with such agreements.

Legal proceedings

In the ordinary course of business, BNY Mellon and its subsidiaries are routinely defendants in or parties to a number of pending and potential legal actions, including actions brought on behalf of various classes of claimants, and regulatory matters. Claims for significant monetary damages are asserted in certain of these actions and proceedings. In regulatory enforcement matters, claims for disgorgement and the imposition of penalties and/or other remedial sanctions are possible. Due to the inherent difficulty of predicting the outcome of such matters, BNY Mellon cannot ascertain what the eventual outcome of these matters will be; however, on the basis of current knowledge and after


 

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Notes to Consolidated Financial Statements   (continued)

 

consultation with legal counsel, we do not believe that judgments or settlements, if any, arising from pending or potential legal actions or regulatory matters, either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage, will have a material adverse effect on the consolidated financial position or liquidity of BNY Mellon, although they could have a material effect on net income in a given period. BNY Mellon intends to defend itself vigorously against all of the claims asserted in these legal actions.

In view of the inherent unpredictability of litigation and regulatory matters, particularly where the damages sought are substantial or indeterminate, the investigations or proceedings are in the early stages, or the matters involve novel legal theories or a large number of parties, there is considerable uncertainty surrounding the timing or ultimate resolution of litigations and regulatory matters or the eventual loss, fines, penalties or business impact, if any, associated with each pending matter. In accordance with ASC 450 (formerly SFAS 5), BNY Mellon establishes reserves for litigation and regulatory matters when those matters present loss contingencies that both are probable and can be reasonably estimated as is the case in certain of the legal matters described. For these matters and others which are disclosed because an unfavorable outcome is reasonably possible but not probable, there may be a range of possible losses which either cannot be estimated or, to the extent a range could possibly be determined, the range would be so imprecise, uncertain or wide as to not be meaningful. BNY Mellon believes that its accruals for legal proceedings are appropriate and in the aggregate are not material to the consolidated financial position of BNY Mellon, although future accruals could have a material effect on net income in a given period.

As previously disclosed, The Bank of New York Mellon filed a proof of claim on Jan. 18, 2008, in the Chapter 11 bankruptcy of Sentinel Management Group, Inc. (“Sentinel”), seeking to recover approximately $312 million loaned to Sentinel and secured by securities and cash in an account maintained by Sentinel at The Bank of New York Mellon. Pursuant to a Plan of Reorganization confirmed by the Bankruptcy Court on Dec. 8, 2008, $370 million of cash has been set aside as a reserve in the bankruptcy, to be used by The Bank of New York Mellon if its proof of claim is allowed in the bankruptcy.

On March 3, 2008, the bankruptcy trustee filed an adversary complaint against The Bank of New York Mellon seeking to

disallow The Bank of New York Mellon’s claim and seeking damages against The Bank of New York Mellon for allegedly aiding and abetting Sentinel insiders in misappropriating customer assets and improperly using them as collateral for the loan. A bench trial of the bankruptcy trustee’s claims concluded on May 26, 2010.

As previously disclosed, the Commodities Futures Trading Commission (“CFTC”) has been investigating The Bank of New York Mellon in connection with its relationship to Sentinel and the Division of Enforcement (the “Division”) of the CFTC has indicated that the Division is considering a recommendation to the Commission that it file a civil enforcement action against The Bank of New York Mellon for possible violations of the Commodity Exchange Act and CFTC regulations. The Bank of New York Mellon responded to the CFTC on Jan. 29, 2010 explaining why it believes an enforcement action is unwarranted.

As previously disclosed, BNY Mellon is required to file information and withholding tax returns with the IRS for its various business lines. In 2007, we discovered certain inconsistencies in supporting documentation and records for BNY Mellon’s corporate trust business and other business lines, and initiated an extensive company-wide review. We disclosed this matter to the IRS on a voluntary basis and we continue to cooperate with the IRS in its review of this matter.

As previously disclosed, in 2001 we entered into a transaction that involved the payment of U.K. corporate income taxes that were credited against our U.S. corporate income tax liability. On Aug. 17, 2009, we received a Statutory Notice of Deficiency disallowing tax benefits for the 2001 and 2002 tax years related to this transaction. The total exposure on this transaction for all years (2001-2006) is approximately $900 million, including interest. On Nov. 10, 2009, BNY Mellon filed a petition with the U.S. Tax Court contesting the disallowance of the benefits. A final decision is not expected before 2011.

BNY Mellon believes the tax benefits associated with the transaction were consistent with statutory and judicial authority existing at the time the transaction was entered into. In the event BNY Mellon is unsuccessful in defending its position, the IRS has agreed not to assess underpayment penalties.


 

96    BNY Mellon


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Notes to Consolidated Financial Statements   (continued)

 

 

As previously disclosed, BNY Mellon self-disclosed to the SEC, in April 2008, that Mellon Financial Markets LLC (“MFM”) placed orders on behalf of issuers to purchase their own Auction Rate Securities (“ARS”). The SEC and certain state authorities, including the Texas State Securities Board, Florida Office of Financial Regulation, and the New York State Attorney General are investigating these transactions. MFM is cooperating fully with the investigations.

As previously disclosed, BNY Mellon Capital Markets LLC entered into a letter of Acceptance, Waiver and Consent with the Financial Industry Regulatory Authority, Inc. (“FINRA”) relating to the sale of ARS in April 2009. Two institutional customers not included in the FINRA settlement filed lawsuits in February and April 2009 and one such customer filed an arbitration proceeding against BNY Mellon Capital Markets LLC in December 2008, alleging misrepresentations and omissions in the sale of ARS to them.

As previously disclosed, BNY Mellon became aware of circumstances suggesting that employees of Mellon Securities LLC (“Mellon Securities”), which executed orders to purchase and sell securities on behalf of Mellon Investor Services LLC, failed to comply with certain best execution and regulatory requirements in connection with agency cross trades. BNY Mellon self-disclosed this matter to FINRA and the SEC on a voluntary basis. In June 2009, the SEC obtained a formal order of investigation. Mellon Securities is cooperating fully with the investigation. We are currently in discussions with the SEC staff concerning a resolution to this matter. There can be no assurance we will be able to reach an agreement.

As previously disclosed, a number of participants in the securities lending program, which is associated with BNY Mellon’s asset servicing business, have filed or threatened lawsuits against BNY Mellon or its affiliates. The lawsuits were filed on various dates from 2008 to 2010. The participants allege that they have incurred losses, including losses related to investments in Sigma Finance Inc. and Lehman Brothers Holdings, Inc., and seek damages as to those losses. One such pending case seeks to proceed as a class action. The participants assert contractual, statutory, and common law claims, including claims for negligence and breach of fiduciary duty.

As previously disclosed, Bernard L. Madoff has pleaded guilty to engaging in a massive investment fraud through his

company, Bernard L. Madoff Investment Securities LLC (“Madoff”). Ivy Asset Management LLC (“Ivy”), a subsidiary of BNY Mellon that primarily manages funds-of-hedge-funds and is in the process of winding down, has not had any funds-of-funds investments with Madoff since 2000. Several investment managers contracted with Ivy as a sub-advisor and one pension fund contracted with Ivy as investment manager; a portion of these funds were invested with Madoff and likely suffered losses as a result of the Madoff fraud.

The New York State Attorney General investigated these relationships and commenced a civil lawsuit against Ivy on May 11, 2010. The lawsuit alleges that Ivy and its two principals purportedly did not disclose certain material facts about Madoff.

Ivy or its affiliates have been named in a number of civil lawsuits filed from 2008 to 2010 relating to certain investment funds that invested with Madoff. Ivy acted as a sub-advisor to the managers of some of those funds. Plaintiffs allege that the funds suffered losses in connection with the Madoff investments. Plaintiffs assert various causes of action including securities and common-law fraud. Certain of the cases seek to proceed as class actions and/or to assert derivative claims on behalf of the funds.

As previously disclosed, The Bank of New York Mellon has been named as a defendant in a number of putative class actions and non-class actions brought by numerous plaintiffs, in connection with its role as indenture trustee for debt issued by affiliates of Medical Capital Corporation (“Medical Capital”). The actions, filed in late 2009, allege that The Bank of New York Mellon breached its fiduciary and contractual obligations to the holders of the underlying securities, and seek unspecified damages. In a separate action, the SEC has alleged that Medical Capital, along with certain of its affiliates and principals, engaged in securities fraud. The court ordered the appointment of a permanent receiver over Medical Capital. The Bank of New York Mellon is not a party to the SEC action.

As previously disclosed, beginning in December 2009, certain governmental authorities requested information or served subpoenas on BNY Mellon, seeking information relating to foreign exchange trades executed in connection with custody services BNY Mellon provides to certain governmental


 

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Notes to Consolidated Financial Statements   (continued)

 

 

entities and public pension plans. BNY Mellon is cooperating with these inquiries.

As previously disclosed, BNY Mellon subsidiary Pershing LLC (“Pershing”) has been named as a defendant in more than 80 lawsuits filed in Germany. The plaintiffs are investors who maintained accounts at German broker-dealers. The plaintiffs allege that Pershing, which had a contractual relationship with the broker-dealers through which the broker-dealers executed options transactions on behalf of the broker-dealers’ clients, should be held liable for the tortious acts of the broker-dealers. On March 9, 2010, the German Federal Supreme Court ruled in the plaintiff’s favor in one of these cases, and held Pershing liable for a German broker-dealer’s tortious acts. Pershing has appealed to the German Constitutional Court.

Note 19 – Business segments

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

 

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

The accounting policies of the business segments are the same as those described in Note 1 to the Consolidated Financial Statements in BNY Mellon’s 2009 Annual Report on Form 10-K. In addition, client deposits serve as the primary funding source for our investment securities portfolio and we typically allocate all interest revenue to the businesses generating the deposits. Accordingly, the higher yield related to the restructured investment securities portfolio has been included in the segment results.

For additional information on our business segments, see Note 28 to the Consolidated Financial Statements in BNY Mellon’s 2009 Annual Report on Form 10-K.

The following consolidating schedules show the contribution of our segments to our overall profitability. Business segments are reported on a continuing operations basis for all periods presented.


 

For the quarter ended June 30, 2010  

(dollar amounts

in millions)

   Asset
Management
    Wealth
Management
   

Total

Asset and
Wealth
Management
Sector

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

Fee and other revenue

   $  637  (a)    $ 147      $ 784      $ 906      $ 380      $ 276      $ 196      $ 1,758      $ 61      $ 2,603  (a) 

Net interest revenue

     1        56        57        216        216        93        161        686        (21     722   

Total revenue

     638        203        841        1,122        596        369        357        2,444        40        3,325   

Provision for credit losses

     -        -        -        -        -        -        -        -        20        20   

Noninterest expense

     517        154        671        786        339        277        193        1,595        66        2,332   

Income before taxes

   $  121  (a)    $ 49      $ 170      $ 336      $ 257      $ 92      $ 164      $ 849      $ (46   $ 973  (a) 

Pre-tax operating
margin
(b)

     19     24     20     30     43     25     46     35     N/M        29

Average assets

   $ 24,895      $ 10,399      $ 35,294      $ 62,940      $ 48,938      $ 21,550      $ 26,485      $ 159,913      $ 33,374      $  228,581  (c) 

 

 

(a) Total fee and other revenue and income before taxes for the second quarter of 2010 includes income from consolidated asset management funds of $65 million and net of income attributable to noncontrolling interests of $33 million. The net of these income statement line items of $32 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 $260 million for the second quarter of 2010, consolidated average assets were $228,841 million.

N/M - Not meaningful.

 

98    BNY Mellon


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Notes to Consolidated Financial Statements   (continued)

 

 

For the quarter ended March 31, 2010  
(dollar amounts
in millions)
   Asset
Management
    Wealth
Management
   

Total

Asset and
Wealth
Management
Sector

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

Fee and other revenue

   $  649  (a)    $ 146      $ 795      $ 798      $ 358      $ 271      $ 225      $ 1,652      $ 143      $  2,590  (a) 

Net interest revenue

     -        55        55        210        252        95        176        733        (23     765   

Total revenue

     649        201        850        1,008        610        366        401        2,385        120        3,355   

Provision for credit losses

     -        -        -        -        -        -        -        -        35        35   

Noninterest expense

     503        145        648        723        324        261        188        1,496        316        2,460   

Income before taxes

   $  146  (a)    $ 56      $ 202      $ 285      $ 286      $ 105      $ 213      $ 889      $ (231   $ 860  (a) 

Pre-tax operating
margin
(b)

     23     28     24     28     47     29     53     37     N/M        26

Average assets

   $ 25,187      $ 9,722      $ 34,909      $ 59,704      $ 52,838      $ 20,338      $ 26,716      $ 159,596      $ 30,012      $ 224,517  (c) 

 

 

(a) Total fee and other revenue and income before taxes for the first quarter of 2010 includes income from consolidated asset management funds of $65 million net of income attributable to noncontrolling interests of $24 million. The net of these income statement line items of $41 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 $898 million for the first quarter of 2010, consolidated average assets were $225,415 million.

N/M - Not meaningful.

 

For the quarter ended June 30, 2009  
(dollar amounts
in millions)
   Asset
Management
    Wealth
Management
   

Total

Asset and
Wealth
Management
Sector

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

Fee and other revenue

   $ 529      $ 140      $ 669      $ 904      $ 413      $ 314      $ 180      $ 1,811      $ (223   $ 2,257   

Net interest revenue

     7        49        56        211        185        87        157        640        4        700   

Total revenue

     536        189        725        1,115        598        401        337        2,451        (219     2,957   

Provision for credit losses

     -        -        -        -        -        -        -        -        61        61   

Noninterest expense

     474        147        621        715        325        263        198        1,501        261        2,383   

Income before taxes

   $ 62      $ 42      $ 104      $ 400      $ 273      $ 138      $ 139      $ 950      $ (541   $ 513   

Pre-tax operating
margin (a)

     12     22     14     36     46     34     41     39     N/M        17

Average assets

   $ 12,404      $ 9,131      $ 21,535      $ 58,339      $ 52,161      $ 17,014      $ 24,764      $ 152,278      $ 32,413      $ 206,226  (b) 

 

 

(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $2,307 million for the second quarter of 2009, consolidated average assets were $208,533 million.

N/M - Not meaningful.

 

For the six months ended June 30, 2010  
(dollar amounts
in millions)
   Asset
Management
    Wealth
Management
   

Total

Asset and
Wealth
Management
Sector

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

Fee and other revenue

   $  1,286  (a)    $ 293      $ 1,579      $ 1,704      $ 738      $ 547      $ 421      $ 3,410      $ 204      $  5,193  (a) 

Net interest revenue

     1        111        112        426        468        188        337        1,419        (44     1,487   

Total revenue

     1,287        404        1,691        2,130        1,206        735        758        4,829        160        6,680   

Provision for credit losses

     -        -        -        -        -        -        -        -        55        55   

Noninterest expense

     1,020        299        1,319        1,509        663        538        381        3,091        382        4,792   

Income before taxes

   $  267  (a)    $ 105      $ 372      $ 621      $ 543      $ 197      $ 377      $ 1,738      $ (277   $  1,833  (a) 

Pre-tax operating
margin
(b)

     21     26     22     29     45     27     50     36     N/M        27

Average assets

   $ 25,040      $ 10,063      $ 35,103      $ 61,331      $ 50,877      $ 20,947      $ 26,600      $ 159,755      $ 31,703      $ 226,561  (c) 

 

 

(a) Total fee and other revenue and income before taxes for the first six months of 2010 includes income from consolidated asset management funds of $130 million and net of income attributable to noncontrolling interests of $57 million. The net of these income statement line items of $73 million is included above in asset management fees and other revenue.
(b) Income before taxes divided by total revenue.
(c) Including average assets of discontinued operations of $577 million for the six months ended June 30, 2010, consolidated average assets were $227,138 million.

N/M - Not meaningful.

 

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Notes to Consolidated Financial Statements   (continued)

 

 

For the six months ended June 30, 2009  

(dollar amounts

in millions)

   Asset
Management
    Wealth
Management
   

Total

Asset and
Wealth
Management
Sector

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

Fee and other revenue

   $ 1,008      $ 281      $ 1,289      $ 1,745      $ 818      $ 635      $ 407      $ 3,605      $ (501   $ 4,393   

Net interest revenue

     22        99        121        460        385        169        316        1,330        24        1,475   

Total revenue

     1,030        380        1,410        2,205        1,203        804        723        4,935        (477     5,868   

Provision for credit losses

     -        -        -        -        -        -        -        -        120        120   

Noninterest expense

     927        287        1,214        1,432        643        522        393        2,990        459        4,663   

Income before taxes

   $ 103      $ 93      $ 196      $ 773      $ 560      $ 282      $ 330      $ 1,945      $ (1,056   $ 1,085   

Pre-tax operating
margin (a)

     10     24     14     35     47     35     46     39     N/M        18

Average assets

   $ 12,533      $ 9,370      $ 21,903      $ 61,752      $ 51,516      $ 17,803      $ 26,704      $ 157,775      $ 32,280      $ 211,958  (b) 

 

 

(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $2,336 million for the six months ended June 30, 2009, consolidated average assets were $214,294 million.

N/M - Not meaningful.

 

100    BNY Mellon


Table of Contents

Item 4. Controls and Procedures

 

 

Disclosure controls and procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, with participation by the members of the Disclosure Committee, has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining, and evaluating disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our SEC reports is timely recorded, processed, summarized and reported and that information required to be disclosed by BNY Mellon is accumulated and communicated to BNY Mellon’s management to allow timely decisions regarding the required disclosure. In addition, our ethics hotline can also be used by employees and others for the anonymous communication of concerns about financial controls or reporting matters. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

In the ordinary course of business, we may routinely modify, upgrade or enhance our internal controls and procedures for financial reporting. There have not been any changes in our internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act during the second quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


 

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Forward-looking Statements

 

 

Some statements in this document are forward-looking. These include all statements about the future results of BNY Mellon; areas of our business expected to be impacted by the current market environment; the impact of changes in the value of market indices; factors affecting the performance of our segments; management’s judgment in determining the size of unallocated allowances and the effect of credit ratings on allowances, estimates and cash flow models. In addition, these forward-looking statements relate to: the timing of the settlement of our forward contract and the use of proceeds from such settlement; expectations with respect to our acquisitions, including the timing, the impact on earnings, anticipated segment reporting, amount of acquired deposits and associated payments, business focuses, and statements with respect to future plans for BNYMellon Clearing; expectations with respect to the implementation of the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision’s final rule on capital requirements for assets consolidated under ASC 860 and ASC 810 and the impact on our Tier 1 capital ratio; expectations with respect to our anticipated third quarter of 2010 tax rate; our goal of increasing the percentage of revenue and income from outside the U.S.; targeted capital ratios; expectations with respect to BNY Mellon’s investment securities portfolio, including the credit rating of securities in the Grantor Trust assumptions with respect to residential mortgage-backed securities; statements on our institutional credit strategies; goals with respect to our commercial portfolio; descriptions of our allowance for credit losses and loan losses; assumptions in amounts of interest income for loans on nonaccrual status; descriptions of our exposure to support agreements; statements with respect to our liquidity targets, including the effect of reductions in securities servicing; access to capital markets and our shelf registration statements; implications of credit rating downgrades on The Bank of New York Mellon, BNY Mellon, N.A. and the Parent Company; expectations with respect to capital, including anticipated repayment and call of outstanding debt and issuance of replacement securities; our target double leverage ratio; assumptions with respect to the effects of changes in risk-weighted assets on capital ratios; estimations in net interest rate sensitivities; timing and impact of adoption of recent accounting guidance; the timing and effects of pending and proposed legislation and regulation, including the Dodd-Frank Act, proposed FDIC assessments, the proposed Financial Crisis Responsibility Fee, the Restoring American Financial Stability Act of 2009 proposed bill and the implementation of IFRS; the materiality of acquisitions; amount of dividends bank subsidiaries can pay without regulatory

waiver; BNY Mellon’s anticipated actions with respect to legal or regulatory proceedings; future litigation costs, the expected outcome and impact of judgments and settlements, if any, arising from pending or potential legal or regulatory proceedings and BNY Mellon’s expectations with respect to litigation accruals.

In this report, any other report, any press release or any written or oral statement that BNY Mellon or its executives may make, words, such as “estimate,” “forecast,” “project,” “anticipate,” “confident” “target,” “expect,” “intend,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “may,” “will,” “strategy,” “opportunities,” “trends” and words of similar meaning, signify forward-looking statements.

Factors that could cause BNY Mellon’s results to differ materially from those described in the forward-looking statements, as well as other uncertainties affecting future results and the value of BNY Mellon’s stock and factors which represents risk associated with the business and operations of BNY Mellon, can be found in Risk Factors in the Form 10-K for the year ended Dec. 31, 2009 and in this Form 10-Q, and any subsequent reports filed with the Securities and Exchange Commission (the “Commission”) by BNY Mellon pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements, including discussions and projections of future results of operations and discussions of future plans contained in the MD&A, are based on management’s current expectations and assumptions that involve risk and uncertainties and that are subject to change based on various important factors (some of which are beyond BNY Mellon’s control), including adverse changes in market conditions, and the timing of such changes, and the actions that management could take in response to these changes. Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties and the risks and uncertainties described in the documents referred to in the preceding paragraph. The Risk Factors discussed in the Form 10-K for the year ended Dec. 31, 2009 and in this Form 10-Q could cause or contribute to such differences. Investors should consider all risks mentioned elsewhere in this document and in subsequent reports filed by BNY Mellon with the Commission pursuant to the Exchange Act, as well as other uncertainties affecting future results and the value of BNY Mellon’s stock.

All forward-looking statements speak only as of the date on which such statements are made, and BNY Mellon undertakes no obligation to update any statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.


 

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Item 1. Legal Proceedings

In the ordinary course of business, BNY Mellon and its subsidiaries are routinely defendants in or parties to a number of pending and potential legal actions, including actions brought on behalf of various classes of claimants, and regulatory matters. Claims for significant monetary damages are asserted in certain of these actions and proceedings. In regulatory enforcement matters, claims for disgorgement and the imposition of penalties and/or other remedial sanctions are possible. Due to the inherent difficulty of predicting the outcome of such matters, BNY Mellon cannot ascertain what the eventual outcome of these matters will be; however, on the basis of current knowledge and after consultation with legal counsel, we do not believe that judgments or settlements, if any, arising from pending or potential legal actions or regulatory matters, either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage, will have a material adverse effect on the consolidated financial position or liquidity of BNY Mellon, although they could have a material effect on net income in a given period. BNY Mellon intends to defend itself vigorously against all of the claims asserted in these legal actions.

In view of the inherent unpredictability of litigation and regulatory matters, particularly where the damages sought are substantial or indeterminate, the investigations or proceedings are in the early stages, or the matters involve novel legal theories or a large number of parties, there is considerable uncertainty surrounding the timing or ultimate resolution of litigations and regulatory matters or the eventual loss, fines, penalties or business impact, if any, associated with each pending matter. In accordance with ASC 450 (formerly SFAS 5), BNY Mellon establishes reserves for litigation and regulatory matters when those matters present loss contingencies that both are probable and can be reasonably estimated as is the case in certain of the legal matters described. For these matters and others which are disclosed because an unfavorable outcome is reasonably possible but not probable, there may be a range of possible losses which either cannot be estimated or, to the extent a range could possibly be determined, the range would be so imprecise, uncertain or wide as to not be meaningful. BNY Mellon believes that its accruals for legal proceedings are appropriate and in the aggregate are not material to the consolidated financial position of BNY Mellon, although future accruals could have a material effect on net income in a given period.

 

See the “Legal proceedings” section in Note 18 to the Notes to Consolidated Financial Statements, which portion is incorporated by reference in response to this item.

Item 1A. Risk Factors

Recent legislative actions may have a significant adverse effect on the Company’s operations.

In July 2010, President Obama signed into law the regulatory reform legislation known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. This new law broadly affects the financial services industry, particularly those entities considered to be “systemically important”, such as bank holding companies with assets of over $50 billion, including BNY Mellon, by establishing a framework for systemic risk oversight, creating a liquidation authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and numerous other provisions aimed at strengthening the sound operation of the financial services sector.

Among numerous other provisions of the law that could have an effect on BNY Mellon are:

 

 

A change in the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible equity. Unless special rules are adopted to mitigate the disproportionate burden on custody banks, this change likely will result in significantly higher deposit insurance assessments for banks with substantial international operations, including The Bank of New York Mellon.

 

The exclusion over a three year period, beginning on Jan. 1, 2013, of trust preferred securities from our Tier 1 capital.

 

The potential designation of BNY Mellon as a “financial market utility” (defined to include persons that manage or operate a multilateral system for the purpose of transferring, clearing or settling payments, securities or other transactions among financial institutions, including repurchase agreements) may subject us to increased regulation and supervision. The definition of these terms, and the relevant requirements, are subject to future rulemaking.

Although we cannot predict how regulatory implementation of the law will occur, the related findings of various regulatory and commission studies, the interpretations issued as part of the rulemaking process and the final regulations that are issued with respect to various elements of the new law may cause changes that impact the profitability of our business activities and require that we change certain of our business practices, and could expose us to additional costs (including increased compliance costs). These changes may also require


 

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Part II – Other Information (continued)

 

 

us to invest significant management attention and resources to make any necessary changes.

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

 

(c) The following table discloses repurchases of our common stock made in the second quarter of 2010.

Issuer purchases of equity securities

 

Share repurchases during second quarter 2010

(common shares

in thousands)

   Total
shares
repurchased
   Average
price
per
share
   Total shares
repurchased
as part of
a publicly
announced
plan

April 2010

   83    $ 30.95    -

May 2010

   12    $ 31.35    -

June 2010

   40    $ 26.57    -

Second quarter 2010

   135    $ 29.69    -

 

(a) These shares were purchased at a purchase price of approximately $24 million from employees, primarily in connection with the employees’ payment of taxes upon the vesting of restricted stock.

On Dec. 18, 2007, the Board of Directors of BNY Mellon authorized the repurchase of up to 35 million shares of common stock. There were no shares repurchased under this program in the second quarter of 2010.

 

At June 30, 2010, 33.8 million shares were available for repurchase under the December 2007 program. There is no expiration date on this repurchase program.

Item 6. Exhibits

Pursuant to the rules and regulations of the Securities and Exchange Commission, BNY Mellon has filed certain agreements as exhibits to this Quarterly Report on Form 10-Q. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in our public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof and should not be relied upon.

The list of exhibits required to be filed as exhibits to this report are listed on page 106 hereof, under “Index to Exhibits”, which is incorporated herein by reference.


 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

       

THE BANK OF NEW YORK MELLON CORPORATION

(Registrant)

Date: August 6, 2010     By:  

/s/ John A. Park

     

John A. Park

Corporate Controller

(Duly Authorized Officer and

Principal Accounting Officer of

the Registrant)

 

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Index to Exhibits

 

Exhibit

    No.    

  

Description

  

Method of Filing

1.1

   Underwriting Agreement dated June 3, 2010 among The Bank of New York Mellon Corporation, Goldman, Sachs & Co., as forward purchaser, and Goldman, Sachs & Co. and Citigroup Global Markets Inc., as representatives of the underwriters listed therein.    Previously filed as Exhibit 1.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on June 7, 2010 and incorporated herein by reference.

2.1

   Amended and Restated Agreement and Plan of Merger, dated as of December 3, 2006, as amended and restated as of February 23, 2007, and as further amended and restated as of March 30, 2007, between The Bank of New York Company, Inc., Mellon Financial Corporation and The Bank of New York Mellon Corporation (the “Company”).    Previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference.

2.2

   Stock Purchase Agreement, dated as of February 1, 2010, by and between The PNC Financial Services Group, Inc. and The Bank of New York Mellon Corporation.    Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on February 3, 2010, and incorporated herein by reference.

3.1

   Restated Certificate of Incorporation of The Bank of New York Mellon Corporation.    Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference.

3.2

   Amended and Restated By-Laws of The Bank of New York Mellon Corporation, as amended February 9, 2010, effective as of July 2, 2010.    Filed herewith.

4.1

   None of the instruments defining the rights of holders of long-term debt of the Company, the creation of which was disclosed in this Quarterly Report on Form 10-Q, represented long-term debt in excess of 10% of the total assets of the company as of June 30, 2010. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument.    N/A

10.1

   Confirmation of Forward Sale Transaction dated as of June 3, 2010 between The Bank of New York Mellon Corporation and Goldman, Sachs & Co.    Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No 000-52710) as filed with the Commission on June 7, 2010 and incorporated herein by reference.

12.1

   Computation of Ratio of Earnings to Fixed Charges.    Filed herewith.

31.1

   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    Filed herewith.

31.2

   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    Filed herewith.

32.1

   Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    Furnished herewith.

32.2

   Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    Furnished herewith.

 

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Index to Exhibits (continued)

 

Exhibit

    No.    

  

Description

  

Method of Filing

101.INS

   XBRL Instance Document.    Furnished herewith.

101.SCH

   XBRL Taxonomy Extension Schema Document.    Furnished herewith.

101.CAL

   XBRL Taxonomy Extension Calculation Linkbase Document.    Furnished herewith.

101.DEF

   XBRL Taxonomy Extension Definition Linkbase Document.    Furnished herewith.

101.LAB

   XBRL Taxonomy Extension Label Linkbase Document.    Furnished herewith.

101.PRE

   XBRL Taxonomy Extension Presentation Linkbase Document.    Furnished herewith.

 

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