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 March 31, 2009

or

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

of the Securities Exchange Act of 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   13-2614959

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification No.)

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
        Yes ü     No        

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).         Yes         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
March 31, 2009
Common Stock, $0.01 par value       1,153,449,620

 

 


Table of Contents

THE BANK OF NEW YORK MELLON CORPORATION

FIRST QUARTER 2009 FORM 10-Q

TABLE OF CONTENTS

 

 

 

     Page

Consolidated Financial Highlights (unaudited)

   2
Part I – Financial Information   

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

  

General

   4

Overview

   4

Impact of the current market environment on our business

   6

Fee and other revenue

   7

Net interest revenue

   10

Average balances and interest rates

   11

Noninterest expense

   12

Income taxes

   13

Business segments review

   13

Critical accounting estimates

   28

Consolidated balance sheet review

   33

Support agreements

   42

Liquidity and dividends

   43

Capital

   46

Trading activities and risk management

   50

Foreign exchange and other trading

   51

Asset/liability management

   52

Off-balance-sheet financial instruments

   52

Supplemental information – Explanation of non-GAAP financial measures

   53

Recent accounting developments

   53

Government monetary policies and competition

   54

Website information

   55

Item 1. Financial Statements:

  

Consolidated Income Statement (unaudited)

   56

Consolidated Balance Sheet (unaudited)

   58

Consolidated Statement of Cash Flows (unaudited)

   59

Consolidated Statement of Changes in Equity (unaudited)

   60

Notes to Consolidated Financial Statements

   61

Item 4. Controls and Procedures.

   88

Forward-looking Statements.

   89
Part II – Other Information   

Item 1. Legal Proceedings

   90

Item 1A. Risk Factors

   92

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

   92

Item 6. Exhibits

   93

Signature

   94

Index to Exhibits

   95


Table of Contents

The Bank of New York Mellon Corporation

 

Consolidated Financial Highlights (unaudited)       
   
     Quarter ended  

(dollar amounts in millions, except per share amounts and

unless otherwise noted; common shares in thousands)

    
 
March 31,
2009
 
 
   

 

Dec. 31,

2008

 

 

   
 
March 31,
2008
 
 
   
Reported results applicable to common shareholders of
    The Bank of New York Mellon Corporation:
      

Net income

   $ 322     $ 28     $ 746  

Basic EPS

     0.28       0.02       0.65  

Diluted EPS

     0.28       0.02       0.65  
Results from continuing operations applicable to common shareholders of
    The Bank of New York Mellon Corporation:
      

Income from continuing operations

   $ 322     $ 53     $ 749  

Basic EPS from continuing operations

     0.28       0.05       0.65  

Diluted EPS from continuing operations

     0.28       0.05       0.65  
Continuing operations:       

Fee and other revenue

   $ 2,138     $ 1,816     $ 2,980  

Net interest revenue

     792       1,070       767  
                        

Total revenue

   $ 2,930     $ 2,886     $ 3,747  

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

     26.1 %     6.7 %(a)     35.8 %

Return on common equity (annualized)

     5.2 %     0.8 %(a)     10.2 %

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

     73 %     63 %     79 %
Annualized fee revenue per
    employee (based on average headcount) (in thousands)
   $ 232     $ 282     $ 289  

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

     28 %     31 %     32 %

Pre-tax operating margin (FTE)

     18 %     (1 )%     30 %

Net interest margin (FTE)

     1.89 %     2.34 %     2.14 %

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

   $ 881     $ 928     $ 1,105  

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

   $ 19.5     $ 20.2     $ 23.1  

Equity securities

     25 %     25 %     30 %

Fixed income securities

     75 %     75 %     70 %

Cross-border assets at period end (in trillions)

   $ 7.3     $ 7.5     $ 10.0  

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

   $ 293     $ 326     $ 660  
Average common shares and equivalents outstanding:       

Basic

     1,146,070       1,144,839       1,134,280  

Diluted

     1,146,943       1,146,127       1,143,761  

 

2    The Bank of New York Mellon Corporation


Table of Contents

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited) (continued)

 
     Quarter ended

(dollar amounts in millions, except per share amounts and

unless otherwise noted; common shares in thousands)

    
 
March 31,
2009
 
 
   

 

Dec. 31,

2008

 

 

   
 
March 31,
2008
 
Capital ratios (b)       

Tier 1 capital ratio

     13.8 %     13.2 %     8.8% 

Tier 1 common to risk-weighted assets ratio – Non-GAAP

     10.0 %     9.4 %     7.4%

Total (Tier 1 plus Tier 2) capital ratio

     17.5 %     16.9 %     12.1% 

Tangible common equity to tangible assets ratio – Non-GAAP

     4.2 %     3.8 %     4.4% 

Return on average assets before extraordinary loss (annualized)

     0.59 %     0.09 %     1.50% 
Selected average balances       

Interest-earning assets

   $ 169,685     $ 183,876     $ 145,118    

Total assets

   $ 220,119     $ 243,962     $ 200,790    

Interest-bearing deposits

   $ 102,849     $ 96,575     $ 92,881    

Noninterest-bearing deposits

   $ 43,561     $ 52,274     $ 26,240    

Total shareholders’ equity

   $ 27,978     $ 28,771     $ 29,551    
Other       

Employees

     42,000       42,900       42,600    

Dividends per common share

   $ 0.24  (d)   $ 0.24     $ 0.24    

Dividend yield (annualized)

     3.4 (d)     3.4 %     2.3% 

Closing common stock price per common share

   $ 28.25     $ 28.33     $ 41.73    

Market capitalization

   $ 32,585     $ 32,536     $ 47,732    

Book value per common share

   $ 22.03     $ 22.00     $ 24.89    

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

   $ 5.48     $ 5.18     $ 7.03    

Period end common shares outstanding

     1,153,450       1,148,467       1,143,818    
 
(a) Before extraordinary loss.
(b) See Capital beginning on page 46 and Supplemental Information on page 53 for an explanation of these ratios.
(c) Represents the securities on loan, both cash and non-cash, managed by the Asset Servicing segment.
(d) Represents the quarterly dividend paid in the first quarter of 2009. The quarterly dividend was reduced to 9 cents per common share in the second quarter of 2009.

 

The Bank of New York Mellon Corporation    3


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Part I – Financial Information

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

 

 

 

 

General

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

Certain business terms used in this document are defined in the glossary included in our 2008 Annual Report on Form 10-K.

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

How we reported results

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

Throughout this Form 10-Q, certain measures, which are noted, exclude certain items. We believe the presentation of this information enhances investors’ understanding of period-to-period results. In addition, these measures reflect the principal basis on which our management monitors financial performance. See Supplemental information – Explanation of non-GAAP financial measures.

Certain amounts are presented on a fully taxable equivalent (FTE) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income.

In the first quarter of 2009, we adopted Financial Accounting Standards Board (“FASB”) Staff Position No. 115-2 and FASB 124-2 (“FAS 115-2”) “Recognition and Presentation of Other-Than-Temporary Impairments” and FASB Staff Position No. 157-4 (“FAS 157-4”), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are

Not Orderly”. The impact of adopting FAS 115-2 and FAS 157-4 is discussed in Critical Accounting Estimates and Notes 5 and 15 to the Notes to Consolidated Financial Statements.

Overview

The Bank of New York Mellon Corporation (NYSE symbol: BK) is a global leader in providing a comprehensive array of services that enable institutions and individuals to manage and service their financial assets in more than 100 markets worldwide. We strive to be the global provider of choice for asset and wealth management and institutional services and be recognized for our broad and deep capabilities, superior client service and consistent outperformance versus peers. Our global client base consists of financial institutions, corporations, government agencies, endowments and foundations and high-net-worth individuals. At March 31, 2009, we had $19.5 trillion in assets under custody and administration, $881 billion in assets under management, serviced more than $11 trillion in outstanding debt and on average, processed $1.8 trillion global payments per day.

The Company’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 (as measured through independent surveys); strong investment performance (relative to investment benchmarks); above median revenue growth (relative to peer companies for each of our businesses); 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 minimum ratio of Tier 1 capital to risk-weighted assets of 10%.


 

4    The Bank of New York Mellon Corporation


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Highlights of first quarter 2009 results

We reported net income applicable to the common shareholders of The Bank of New York Mellon Corporation of $322 million and diluted earnings per common share of $0.28. This compares to net income of $746 million, or diluted earnings per common share of $0.65, in the first quarter of 2008 and net income of $28 million, or diluted earnings per common share of $0.02 in the fourth quarter of 2008. Results in the fourth quarter of 2008 include an extraordinary after-tax loss of $26 million or $0.02 per common share.

Results for the first quarter of 2009 include:

 

   

Investment and goodwill write-downs resulted in a $0.21 decrease in continuing earnings per share. Investment write-downs of $347 million (pre-tax) primarily reflected the deterioration of credit quality of certain securities, the adverse impact of low interest rates on a structured tax investment and the write-down of an equity investment. (See Consolidated balance sheet review beginning on page 33). The goodwill impairment charge of $50 million (pre-tax) related to our Mellon United National Bank subsidiary in Miami, Florida. (See Noninterest expense on page 12); and

   

M&I expenses of $68 million (pre-tax), or $0.04 per common share. (See Noninterest expense on page 12).

Highlights for the first quarter of 2009 include:

 

   

Assets under custody and administration totaled $19.5 trillion at March 31, 2009 compared with $20.2 trillion at Dec. 31, 2008 and $23.1 trillion at March 31, 2008, as the benefit of new business conversions was more than offset by weaker market values and the impact of a stronger U.S. dollar. (See the Institutional Services sector beginning on page 21).

   

Assets under management totaled $881 billion at March 31, 2009 compared with $928 billion at Dec. 31, 2008 and $1.1 trillion at March 31, 2008, primarily due to the weakness in global market values and outflows in treasury/ government money market funds reflecting the historical low level of interest rates. (See the Asset and Wealth Management sector beginning on page 17).

   

Securities servicing revenue totaled $1.2 billion compared with $1.4 billion in the fourth quarter of 2008 and $1.5 billion in the first quarter of 2008. Continued strong new business wins in our asset servicing businesses were more than offset by the impact of lower volumes and spreads associated with securities lending in asset servicing, lower market values, a stronger U.S. dollar and lower levels of fixed income issuances globally. Securities lending fee revenue totaled $90 million in the first quarter of 2009 compared with $187 million in the fourth quarter of 2008 and $245 million in the first quarter of 2008. (See the Institutional Services sector beginning on page 21).

   

Asset and wealth management fees totaled $609 million in the first quarter of 2009 compared with $657 million in the fourth quarter of 2008 and $842 million in the first quarter of 2008. The decreases reflect the global weakness in market values and a stronger U.S. dollar which more than offset net new business. (See the Asset Management and Wealth Management segments beginning on page 18).

   

Foreign exchange and other trading activities revenue totaled $307 million in the first quarter of 2009 compared with $510 million in the fourth quarter of 2008 and $259 million in the first quarter of 2008. The increase compared with the first quarter of 2008 reflects the benefit from a higher volatility of key currencies, partially offset by lower client volumes. The decrease sequentially reflects the impact of both lower volatility and client volumes. (See Fee and other revenue beginning on page 7).

   

Net interest revenue totaled $792 million in the first quarter of 2009 compared with $1.070 billion in the fourth quarter of 2008 and $767 million in the first quarter of 2008. The increase compared with the first quarter of 2008 reflects a higher level of average interest-earning assets. The sequential decrease reflects a lower value of interest-free funds and narrower spreads. (See Net interest revenue beginning on page 10).

   

Noninterest expense totaled $2.3 billion in the first quarter of 2009 compared with $2.9 billion in the fourth quarter of 2008 and $2.6 billion in the first quarter of 2008. The decrease compared with both prior periods resulted from lower staff expense, including lower incentives, strong expense management and a stronger U.S. dollar. (See Noninterest expense beginning on page 12).

   

The unrealized net of tax loss on our available-for-sale securities portfolio was $4.5 billion at March 31, 2009. The unrealized net of tax loss was $4.1 billion at Dec. 31, 2008 and $1.8 billion


 

The Bank of New York Mellon Corporation    5


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at March 31, 2008. (See Consolidated balance sheet review beginning on page 33).

   

The Tier 1 capital ratio was 13.8%. at March 31, 2009 compared with 13.2% at Dec. 31, 2008 and 8.8% at March 31, 2008. The tangible common equity to tangible assets ratio was 4.2% at March 31, 2009 compared with 3.8% at Dec. 31, 2008 and 4.4% at March 31, 2008. The Tier 1 capital ratio increased year-over-year primarily reflecting the benefit we received from the $3 billion of Series B preferred stock and warrant issued to the U.S. Treasury in October 2008. (See Capital beginning on page 46).

Impact of the current market environment on our business

The following discusses the impact of the current market environment on the Company’s operations.

Regulatory stress test

On May 7, 2009, the regulators released the results of the stress test administered under The Supervisory Capital Assessment Program conducted during the first quarter of 2009. The results confirmed that the Company is not required to raise additional capital, and under the test’s adverse scenario our capital ratios strengthened further. Reflecting the favorable results, we plan to move forward to repay TARP upon approval of our regulators.

Impact on our business

Our Asset and Wealth Management businesses have been negatively impacted by global weakness in market values. The S&P 500 and the MSCI EAFE indices declined 40% and 48%, respectively, from March 31, 2008, resulting in lower performance fees, a decline in investment income related to seed capital investments as well as lower asset and wealth management fee revenue as lower market values offset the impact of new business wins.

FX revenues returned to more normalized levels in the first quarter of 2009 from the record levels experienced in the fourth quarter of 2008, reflecting lower volatility and lower customer volumes. While volatility was down from the fourth quarter of 2008, it continues to remain elevated.

Our securities lending business continues to be impacted by lower market valuations, volumes and spreads, as well as overall de-leveraging in the financial markets.

 

Market conditions continue to drive a lower volume of new fixed income securities issuances, which has impacted the level of new business in our Corporate Trust business.

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

Securities write-downs

The Company adopted FAS 115-2 and FAS 157-4 effective Jan. 1, 2009. Adopting these staff positions impacted both impairment charges and the unrealized loss on the securities portfolio. The ongoing disruption in the fixed income securities market has resulted in additional impairment charges, as well as an increase in unrealized securities losses. In the first quarter of 2009, we recorded write-downs of $200 million (pre-tax) reflecting a deterioration in the credit quality of certain securities and $95 million (pre-tax) from the impact of low interest rates on a structured tax investment. The unrealized loss on the securities portfolio was $4.5 billion at March 31, 2009, compared with $4.1 billion at Dec. 31, 2008. The unrealized loss continues to reflect deterioration in housing market indicators and the broader economy. See investment securities discussion in Consolidated balance sheet review for additional information.

FDIC Temporary Liquidity Guarantee Program

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

 

   

Guarantees certain types of senior unsecured debt issued by most U.S. bank holding companies, U.S. savings and loan holding companies and FDIC-insured depositary institutions between Oct. 14, 2008 and Oct. 31, 2009, including promissory notes, commercial paper and any unsecured portion of secured debt. Prepayment of debt not guaranteed by the FDIC and replacement with FDIC-guaranteed debt is not permitted. The amount of debt covered by the guarantee may not exceed 125% of the par value


 

6    The Bank of New York Mellon Corporation


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of the issuing entity’s senior unsecured debt, excluding debt extended to affiliates or institution-affiliated parties, outstanding as of Sept. 30, 2008, that is scheduled to mature before June 30, 2009 (this date may be extended). In the first quarter of 2009, the Company issued approximately $600 million of FDIC-guaranteed debt under this program, which was the maximum amount of the debt permissible for it under the TLGP. The Company is obligated to pay to the FDIC an assessment fee at a rate of 100 basis points per annum on the aggregate principal amount of its FDIC-guaranteed debt.

 

 

Provides full FDIC deposit insurance coverage for funds held by FDIC-insured banks in noninterest-bearing transaction deposit accounts at FDIC-insured depositary institutions until Dec. 31, 2009. For such accounts, a 10 basis point surcharge on the depositary institution’s current assessment rate will be applied to deposits not otherwise covered by the existing deposit insurance limit of $250,000. At March 31, 2009, $25 billion of deposits with us were covered by the FDIC’s TLGP.

Proposed FDIC Emergency Deposit Assessment

In the first quarter of 2009, the FDIC proposed a 10-20 basis point special emergency deposit assessment for all depository institutions which is expected to be recorded in the second quarter of 2009, if approved. Based on first quarter 2009 average assessable deposits and assuming a 10 basis point rate, the charge relating to this proposal would have been approximately $75 million.


 

Fee and other revenue

 

Fee and other revenue                         1Q09 vs.  
(dollars in millions unless otherwise noted)    1Q09     4Q08     1Q08     1Q08     4Q08  

Securities servicing fees:

          

Asset servicing (a)

   $ 609     $ 782     $ 899     (32 )%   (22 )%

Issuer services

     364       388       376     (3 )   (6 )

Clearing services (b)

     253       279       263     (4 )   (9 )

Total securities servicing fees

     1,226       1,449       1,538     (20 )   (15 )

Asset and wealth management fees

     609       657       842     (28 )   (7 )

Performance fees

     7       44       20     (65 )   (84 )

Foreign exchange and other trading activities

     307       510       259     19     (40 )

Treasury services

     126       134       124     2     (6 )

Distribution and servicing

     111       106       98     13     5  

Financing-related fees

     48       45       48     -     7  

Investment income (b)

     (17 )     45       40     N/M     N/M  

Other (b)

     16       67       84     (81 )   (76 )

Total fee revenue (non-FTE)

   $ 2,433     $ 3,057     $ 3,053     (20 )%   (20 )%

Net securities gains (losses)

     (295 )     (1,241 )     (73 )   N/M     N/M  

Total fee and other revenue (non-FTE)

   $ 2,138     $ 1,816     $ 2,980     (28 )%   18 %

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

     73 %     63 %     79 %    

Market value of AUM at period end (in billions)

   $ 881     $ 928     $ 1,105     (20 )%   (5 )%

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

   $ 19.5     $ 20.2     $ 23.1     (16 )%   (3 )%
(a) Includes securities lending revenue of $90 million in the first quarter of 2009, $187 million in the fourth quarter of 2008 and $245 million in the first quarter of 2008.
(b) In the first quarter of 2009, fee revenue associated with equity investments was reclassified from clearing services revenue and other revenue to investment income. Fee revenue associated with an equity investment previously recorded in clearing services revenue was a loss of $58 million in the first quarter of 2009, income of $9 million in the fourth quarter of 2008 and income of $4 million in the first quarter of 2008. Fee revenue associated with an equity investment previously recorded in other revenue was income of $4 million in the first quarter of 2009, a loss of $2 million in the fourth quarter of 2008 and income of $12 million in the first quarter of 2008. Prior periods have been reclassified.
(c) Excluding investment write-downs, fee and other revenue as a percentage of total revenue (FTE) was 76% in the first quarter of 2009, 74% in the fourth quarter of 2008 and 80% in the first quarter of 2008.

N/M – Not meaningful.

 

The Bank of New York Mellon Corporation    7


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Fee revenue

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

Fee revenue decreased 20% versus the year-ago quarter primarily due to decreases in asset servicing fees, asset and wealth management fees, investment income and other revenue, partially offset by an increase in foreign exchange and other trading activities. Sequentially, fee revenue decreased 20% reflecting lower securities servicing fees, foreign exchange and other trading activities, investment income and asset and wealth management fees.

Securities servicing fees

Securities servicing fees were impacted by the following, compared with the fourth quarter of 2008 and first quarter of 2008:

 

 

Asset servicing fees – Continued strong new business wins over the past year offset by lower securities lending revenue, lower market values and transaction volumes and a stronger U.S. dollar, impacted the year-over-year and sequential results.

 

Issuer services fees – Lower levels of fixed income issuances globally, partially offset by higher Depositary Receipts due to the timing of corporate actions, impacted the year-over-year results. The decrease sequentially reflects lower revenue from Depositary Receipts due to timing of corporate actions and lower revenue from Shareowner Services as a result of lower corporate action activity and the impact of lower equity values on stock option plan fees.

 

Clearing services fees – Year-over-year results were impacted by lower asset values and lower money market mutual fund related revenue. The linked quarter decline was driven by lower trading volumes in the first quarter of 2009, as compared to the record level of trading activity in the fourth quarter of 2008, and lower money market mutual fund related revenue.

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

Asset and wealth management fees

Asset and wealth management fees decreased from the first quarter of 2008, and sequentially, as new business was more

than offset by global weakness in market values and the impact of a stronger U.S. dollar.

Total AUM for the Asset and Wealth Management sector were $881 billion at March 31, 2009 compared with $928 billion at Dec. 31, 2008 and $1.1 trillion at March 31, 2008. The decrease compared with both prior periods resulted from market depreciation, the impact of a stronger U.S. dollar and long-term outflows. The S&P 500 Index was 798 at March 31, 2009 compared with 903 at Dec. 31, 2008 (a 12% decrease) and 1323 at March 31, 2008 (a 40% decrease). Sequentially, net outflows totaled $12 billion, primarily due to outflows in treasury/government money market funds reflecting the historically low level of interest rates.

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

Performance fees

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

Performance fees decreased $13 million compared with the first quarter of 2008 and decreased $37 million compared with the fourth quarter of 2008. The decreases were primarily due to a lower level of fees generated on certain equity and alternative strategies.

Foreign exchange and other trading activities

Foreign exchange and other trading activities revenue, which is primarily reported in the Asset Servicing segment, increased 19% compared with the first quarter of 2008, and decreased 40% (unannualized) compared with the fourth quarter of 2008. The increase compared with the first quarter of 2008 reflects the benefit from higher volatility of key currencies, partially offset by lower client volumes. The decrease from the fourth quarter of 2008 reflects the impact of both lower volatility and client volumes.


 

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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 increased $2 million compared with the first quarter of 2008 and decreased $8 million compared with the fourth quarter of 2008. The sequential decrease was driven by lower global payment volumes.

Distribution and servicing fees

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

Distribution and servicing fee revenue increased $13 million compared with the first quarter of 2008 and $5 million compared with the fourth quarter of 2008. These increases primarily reflect positive flows in prime money market mutual funds (shifting from treasury/government funds). The impact of these 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 were flat compared with the first quarter of 2008 and increased $3 million sequentially. The increase sequentially reflected higher capital markets fees.

 

Investment income

 

Investment income                      
(in millions)    1Q09     4Q08     1Q08  

Corporate/bank-owned life insurance

   $ 41     $ 34     $ 35  

Lease residual gains (losses)

     26       59       1  

Seed capital gains (losses)

     (10 )     (37 )     (19 )

Private equity gains (losses)

     (20 )     (18 )     7  

Equity investment income (loss)

     (54 )     7       16  

Total investment income

   $ (17 )   $ 45     $ 40  

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 revenue. The decrease for the first quarter of 2009 compared with the first and fourth quarters of 2008 resulted primarily from the write-down of certain equity investments, partially offset by the change in fair market value of seed capital investments associated with our Asset Management business and higher revenue from insurance contracts. The decrease from the first quarter of 2008 also reflects a loss on private equity investments of $20 million in the first quarter of 2009 compared with revenue of $7 million in the first quarter of 2008, partially offset by higher lease residual gains.

Other revenue

 

Other revenue                   
(in millions)    1Q09    4Q08     1Q08

Asset-related gains (losses)

   $ 7    $ (18 )   $ 42

Expense reimbursements from joint ventures

     8      8       4

Other

     1      77       38

Total other revenue

   $ 16    $ 67     $ 84

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

Other revenue decreased compared to the first quarter of 2008 reflecting a $42 million gain related to the initial public offering of VISA recorded in the first quarter of 2008.


 

The Bank of New York Mellon Corporation    9


Table of Contents

Net securities gains (losses)

Net securities portfolio losses totaled $295 million in the first quarter of 2009 compared to losses of $73 million in the first quarter of 2008 and losses of $1.241 billion in the fourth quarter of 2008.

The following table details securities write-downs by type of security. These write-downs primarily reflect deterioration in the housing market and the general economy. See Consolidated balance sheet review for further information on the investment portfolio.

As a result of adopting FAS 115-2, securities write-downs in the first quarter of 2009 primarily reflect credit related losses. Securities write-downs in the fourth quarter of 2008 and first quarter of 2008 reflect mark-to-market (both credit and non-credit) impairment write-downs.

 

Securities portfolio losses                   
(in millions)    1Q09     4Q08 (a)    1Q08

Alt-A securities

   $ 125  (b)   $ 1,135    $ -

Home equity lines of credit

     18  (b)     36      28

European floating rate notes

     4       -      -

ABS CDOs

     3       6      24

Prime MBS

     3       -      -

Credit cards

     2       -      -

SIV securities

     -       44      21

Trust-preferred securities

     -       1      -

Other

     140  (c)     19      -

Total securities

   $ 295     $ 1,241    $ 73
(a) Excludes $45 million related to Old Slip Funding, LLC, which was consolidated in December 2008, that was recorded, net of tax, as an extraordinary loss in 4Q08.
(b) Includes $42 million previously recorded in the fourth quarter of 2008 and required to be written down again by FAS 115-2. See the credit loss roll-forward table on page 68.
(c) Includes $95 million resulting from the adverse impact of low interest rates on a structured tax investment and $37 million of seed capital write-downs.

 

Net interest revenue

 

Net interest revenue                         1Q09 vs.  
(dollar amounts in millions)    1Q09     4Q08     1Q08     1Q08     4Q08  

Net interest revenue (non-FTE)

   $ 792     $ 1,070     $ 767     3 %   (26 )%

Tax equivalent adjustment

     4       7       6     N/M     N/M  

Net interest revenue (FTE)

   $ 796     $ 1,077     $ 773     3 %   (26 )%

Average interest-earning assets

   $ 169,685     $ 183,876     $ 145,118     17 %   (8 )%

Net interest margin (FTE)

     1.89 %     2.34 %     2.14 %   (25 ) bps   (45 ) bps

N/M – Not meaningful.

bps – basis points.

 

Net interest revenue on an FTE basis totaled $796 million in the first quarter of 2009 compared with $773 million in the first quarter of 2008 and $1.077 billion in the fourth quarter of 2008. The net interest margin was 1.89% in the first quarter of 2009, compared with 2.14% in the first quarter of 2008 and 2.34% in the fourth quarter of 2008. Net interest revenue and the related margin continued to be influenced by the level of client deposits, historically low interest rates and our conservative investment strategy in an uncertain market environment.

The increase in net interest revenue compared with the first quarter of 2008 principally reflects a higher level of average interest-earning assets, driven by a 66% increase in noninterest-bearing deposits, partially offset by the lower value of interest-free funds. The decrease in net interest revenue compared with the fourth quarter of 2008 primarily reflects record low interest rates resulting in a lower value of interest-free funds and narrower spreads. Also contributing to the sequential decline

was a lower level of average interest-earning assets resulting from the anticipated decline in the size of the balance sheet as short-term credit markets eased.

Average interest-earning assets were $170 billion in the first quarter of 2009 compared with $145 billion in the first quarter of 2008 and $184 billion in the fourth quarter of 2008. The increase compared with the first quarter of 2008 primarily resulted from growth in deposits from Institutional Services clients as the client base responded to the volatile market environment by increasing their deposits with us. The decrease from the fourth quarter of 2008 reflects a decline in noninterest-bearing deposits as short-term credit markets eased.

The net interest margin decreased 25 basis points year-over-year and decreased 45 basis points sequentially. Both decreases primarily reflect the impact of lower interest rates on the value of noninterest-bearing deposits and our decision to move to a more conservative investment strategy,


 

10    The Bank of New York Mellon Corporation


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which was demonstrated by the increase in the proportion of average interest-earning assets invested in short-term liquid investments rising from 32% to 49% year-over-year. Average cash and interbank investments comprised 49% of average interest-earning assets in the first quarter of 2009, 50% in the fourth quarter of 2008 and 32% in the first quarter of 2008.

 

Subsequent to March 31, 2009, we have begun to reinvest in high quality earning assets with a duration of approximately 2-4 years.


 

Average balances and interest rates

 

Average balances and interest rates    Quarter ended  
        
     March 31, 2009     Dec. 31, 2008     March 31, 2008  
(dollar amounts in millions)    Average
balance
    Average
rates
    Average
balance
    Average
rates
    Average
balance
    Average
rates
 

Assets

            

Interest-earning assets:

            

Interest-bearing deposits with banks (primarily foreign banks)

   $ 60,345     1.52 %   $ 59,756     3.31 %   $ 38,658     4.28 %

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

     19,359     0.25       18,924     0.56       -     -  

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

     1,269     3.15       8,388     3.04       -     -  

Federal funds sold and securities under resale agreements

     2,319     0.81       4,060     1.31       8,199     3.15  

Margin loans

     4,219     1.63       4,885     2.35       5,258     4.47  

Non-margin loans:

            

Domestic offices

     23,223     2.96       29,796     2.82       29,357     4.49  

Foreign offices

     13,109     2.56       15,208     3.73       13,881     4.55  
                              

Total non-margin loans

     36,332     2.82       45,004     3.13       43,238     4.51  

Securities:

            

U.S. government obligations

     787     2.50       762     2.73       430     3.48  

U.S. government agency obligations

     12,691     3.65       12,071     4.27       11,333     4.74  

Obligations of states and political subdivisions

     788     6.68       962     7.69       703     7.58  

Other securities

     29,848     4.47       26,916     5.95       35,840     5.26  

Trading securities

     1,728     2.86       2,148     3.96       1,459     5.36  
                              

Total securities

     45,842     4.20       42,859     5.35       49,765     5.16  
                              

Total interest-earning assets

     169,685     2.38 %     183,876     3.38 %     145,118     4.59 %

Allowance for loan losses

     (411 )       (363 )       (311 )  

Cash and due from banks

     4,850         5,834         5,831    

Other assets

     45,995             54,615             50,152        

Total assets

   $ 220,119           $ 243,962           $ 200,790        

Liabilities and equity

            

Interest-bearing liabilities:

            

Money market rate accounts

   $ 19,315     0.11 %   $ 19,003     0.52 %   $ 13,296     1.63 %

Savings

     1,166     0.69       999     0.76       913     2.33  

Certificates of deposit of $100,000 & over

     1,479     1.18       1,812     2.57       2,313     4.09  

Other time deposits

     5,687     0.55       5,186     1.31       8,445     2.42  

Foreign offices

     75,202     0.31       69,575     1.12       67,914     2.85  
                              

Total interest-bearing deposits

     102,849     0.30       96,575     1.04       92,881     2.66  

Federal funds purchased and securities sold under repurchase agreements

     2,119     0.12       6,127     0.28       4,750     2.18  

Other borrowed funds

     3,785     1.57       3,548     2.13       3,343     3.50  

Borrowings from Federal Reserve related to ABCP

     1,269     2.25       8,388     2.25       -     -  

Payables to customers and broker-dealers

     3,797     0.20       5,569     0.62       4,942     1.94  

Long-term debt

     15,493     2.72       15,467     3.79       17,125     4.51  
                              

Total interest-bearing liabilities

     129,312     0.64 %     135,674     1.40 %     123,041     2.90 %

Total noninterest-bearing deposits

     43,561         52,274         26,240    

Other liabilities

     19,233             27,171             21,821        

Total liabilities

     192,106         215,119         171,102    

Total shareholders’ equity

     27,978         28,771         29,551    

Noncontrolling interest

     35             72             137        

Total equity

     28,013             28,843             29,688        

Total liabilities and equity

   $ 220,119           $ 243,962           $ 200,790        

Net interest margin – Taxable equivalent basis

           1.89 %           2.34 %           2.14 %
Note: Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.

 

The Bank of New York Mellon Corporation    11


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Noninterest expense

 

Noninterest expense                         1Q09 vs.  
(dollar amounts in millions)    1Q09     4Q08     1Q08     1Q08     4Q08  

Staff:

          

Compensation

   $ 712     $ 758     $ 795     (10 )%   (6 )%

Incentives

     248       256       366     (32 )   (3 )

Employee benefits

     191       140       191     -     36  

Total staff

     1,151       1,154       1,352     (15 )   -  

Professional, legal and other purchased services

     262       307       252     4     (15 )

Net occupancy

     140       143       129     9     (2 )

Distribution and servicing

     107       123       130     (18 )   (13 )

Software

     81       86       79     3     (6 )

Furniture and equipment

     77       86       79     (3 )   (10 )

Sub-custodian and clearing

     66       80       70     (6 )   (18 )

Business development

     44       76       66     (33 )   (42 )

Other

     186       258       193     (4 )   (28 )

Subtotal

     2,114       2,313       2,350     (10 )   (9 )

Goodwill impairment

     50       -       -     N/M     N/M  

Support agreement charges

     (8 )     163       14     N/M     N/M  

Restructuring charges

     10       181       -     N/M     N/M  

Amortization of intangible assets

     108       116       122     (11 )   (7 )

Merger and integration expenses:

          

The Bank of New York Mellon Corporation

     68       97       121     (44 )   (30 )

Acquired Corporate Trust Business

     -       -       5     N/M     N/M  

Total noninterest expense

   $ 2,342     $ 2,870     $ 2,612     (10 )%   (18 )%

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

     39 %     40 %     36 %    

Employees at period end

     42,000       42,900       42,600     (1 )%   (2 )%

(a) Total staff expense as a percent of total revenue (FTE) excluding investment write-downs was 35% in 1Q09, 28% in 4Q08 and 35% in 1Q08.

N/M – Not meaningful.

 

Total noninterest expense decreased $270 million compared with the first quarter of 2008 and $528 million compared with the fourth quarter of 2008. Both decreases reflect strong expense management in response to the operating environment and the continued impact of merger-related synergies. The year-over-year decrease was driven by declines in staff expense, distribution and servicing expense, business development expense and a stronger U.S. dollar, partially offset by higher net occupancy and professional, legal and other purchased services. The sequential quarter decrease primarily reflects lower restructuring and support agreement charges, as well as declines in nearly all expense categories.

Staff expense

Given our mix of fee-based businesses, which are staffed with high quality professionals, staff expense comprised approximately 54% of total noninterest expense, excluding goodwill impairment, support agreement charges, restructuring charges, intangible amortization and M&I expenses.

 

Staff expense is comprised of:

 

 

compensation expense, which includes:

   

base salary expense, primarily driven by headcount;

   

the cost of temporary help and overtime; and

   

severance expense;

 

incentive expense, which includes:

   

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

   

stock-based compensation expense; and

 

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

The decrease in staff expense compared with the first quarter of 2008 was driven by lower compensation and incentives and the continuing effect of merger-related synergies. The decrease sequentially resulted from lower compensation and incentive expense, primarily offset by higher employee benefits expense. The increase in employee benefits


 

12    The Bank of New York Mellon Corporation


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expense includes higher payroll taxes and pension expense.

Non-staff expense

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

Non-staff expense excluding goodwill impairment, support agreement charges, restructuring charges, intangible amortization and M&I expenses totaled $963 million in the first quarter of 2009 compared with $998 million in the first quarter of 2008 and $1.2 billion in the fourth quarter of 2008.

The decrease in non-staff expense compared with the first quarter of 2008 primarily reflects decreases in distribution and servicing and business development expenses, partially offset by higher net occupancy and professional, legal and other purchased services. The decrease in non-staff expense sequentially reflects strong expense management which resulted in decreases in all expense categories.

The goodwill impairment charge in the first quarter of 2009 relates to our Mellon United National Bank subsidiary in Miami, Florida. The restructuring charges in the first quarter of 2009 and the fourth quarter of 2008 relate to our global workforce reduction program announced in the fourth quarter of 2008. The decrease in support agreement charges primarily reflects improvement in the price of Lehman securities. See Support agreements for further information.

In the first quarter of 2009, we incurred $68 million of M&I expenses related to the merger with Mellon Financial Corporation, comprised of the following:

 

 

Integration/conversion costs—including consulting, system conversions and staff ($43 million);

 

Personnel related—including severance, retention, relocation expenses, accelerated vesting of stock options and restricted stock expense ($16 million); and

 

One-time costs—including facilities related costs, asset write-offs, vendor contract modifications, rebranding and net gain (loss) on disposals ($9 million).

 

Income taxes

The effective tax rate for the first quarter of 2009 was 27.2% compared with 32.3% on a continuing basis in the first quarter of 2008. Results for the fourth quarter of 2008 included an income tax benefit of $135 million. Excluding the impact of investment write-downs, restructuring charges, support agreement charges, goodwill impairment and M&I expenses, the effective tax rate was 32.6% in the first quarter of 2009, 33.5% in the first quarter of 2008 and 32.5% in the fourth quarter of 2008.

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 contained in the Company’s 2008 Annual Report on Form 10-K, except that other fee revenue and net interest revenue differ from the amounts shown in the Consolidated Income Statement because amounts presented in Business segments are on an FTE basis.

In the first quarter of 2009, we moved the financial results of the execution businesses to the Other segment from the Clearing Services segment. This change reflects our focus on reducing non-core activities. Historical segment results for Clearing Services and Other have been restated to reflect this change.

The operations of acquired businesses are integrated with the existing business segments soon after most acquisitions are completed. As a result of the integration of staff support functions, management of


 

The Bank of New York Mellon Corporation    13


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customer relationships, operating processes and the financial impact of funding acquisitions, we cannot precisely determine the impact of acquisitions on income before taxes and therefore do not report it.

We provide segment data for seven segments, with certain segments combined into sector groupings as shown below.

 

Sector/Segment   Primary types of revenue

Asset and Wealth Management sector

   

Asset Management segment

 

•       Asset and wealth management fees from:

Institutional clients

Mutual funds

Private clients

•       Performance fees

•       Distribution and servicing fees

Wealth Management segment

 

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

Institutional Services sector

   

Asset Servicing segment

 

•       Asset servicing fees, including:

Institutional trust and custody fees

Broker-dealer services

Securities lending

•       Foreign exchange

Issuer Services segment

 

•       Issuer services fees, including:

Corporate trust

Depositary receipts

Employee investment plan services

Shareowner services

Clearing Services segment

 

•       Clearing services fees, including broker-dealer and registered investment advisor services

Treasury Services segment

 

•       Treasury services fees, including:

Global payment services

Working capital solutions

•       Financing-related fees

Other segment

 

•       Leasing operations

•       The activities of Mellon United National Bank

•       Corporate treasury activities

•       Global markets and institutional banking services

•       Business exits

•       M&I expenses

 

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.

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

 

 

Revenue amounts reflect fee and other revenue generated by each segment. Fee and other revenue transferred

 

between segments under revenue transfer agreements is included within other revenue in each segment.

 

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

 

Net interest revenue is allocated to segments based on the yields on the assets and liabilities


 

14    The Bank of New York Mellon Corporation


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

   

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

   

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

   

Support agreement charges are recorded in the segment in which the charges occurred.

   

Restructuring charges are a result of corporate initiatives and therefore are recorded in the Other segment.

   

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

   

Goodwill and intangible assets are reflected within individual business segments.

The difficult market environment continued to impact our business segments in the first quarter of 2009 compared with the first and fourth quarters of 2008. Broad declines in the equity markets compared with both the first and fourth quarters of 2008 affected revenue in the Asset and Wealth Management segments and the Asset Servicing segment. Net interest revenue decreased in every segment except other compared with the fourth quarter of 2008 as record deposit levels in the fourth quarter of 2008 began to normalize and interest rates remained at historically low levels, resulting in a lower value of interest-free funds and narrower spreads. Strong expense control, and the impact of merger-related synergies resulted in lower noninterest expense in nearly every segment compared with both the first and fourth quarters of 2008.


 

 

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

 

   
Market indices                                      
                              1Q09 vs.  
     1Q08    2Q08    3Q08    4Q08    1Q09    1Q08     4Q08  
   

S&P 500 Index (a)

   1323    1280    1166    903    798    (40 )%   (12 )%

S&P 500 Index-daily average

   1353    1371    1252    916    809    (40 )   (12 )

FTSE 100 Index (a)

   5702    5626    4902    4434    3926    (31 )   (11 )

FTSE 100 Index-daily average

   5891    5979    5359    4270    4040    (31 )   (5 )

NASDAQ Composite Index (a)

   2279    2293    2092    1577    1529    (33 )   (3 )

Lehman Brothers Aggregate Bondsm Index (a)

   281    270    256    275    262    (7 )   (5 )

MSCI EAFE® Index (a)

   2039    1967    1553    1237    1056    (48 )   (15 )

NYSE Share Volume (in billions)

   158    141    180    181    161    2     (11 )

NASDAQ Share Volume (in billions)

   149    135    145    148    136    (9 )   (8 )
   
(a) Period-end.

 

Non-program equity trading volume was down 7% sequentially and up 14% year-over-year. In addition, average daily U.S. fixed-income trading volume was down 5% sequentially and 33% year-over-year. Total debt issuances increased 114% sequentially and 37% year-over-year.

The period end S&P 500 Index decreased 12% sequentially and 40% year-over-year. The period end FTSE 100 Index decreased 11% sequentially and 31% year-over-year. On a daily average basis, the S&P 500 Index decreased 12% sequentially and 40% year-over-year and the FTSE 100 Index decreased 5% sequentially and 31% year-over-year. The period end NASDAQ

Composite Index decreased 3% sequentially and 33% year-over-year.

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


 

The Bank of New York Mellon Corporation    15


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

 

   

For the quarter ended
March 31, 2009

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

  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

  $ 480     $ 141     $ 621     $ 830     $ 404     $ 321     $ 239     $ 1,794     $ (269 )   $ 2,146  

Net interest revenue

    16       50       66       249       200       82       158       689       41       796  
   

Total revenue

    496       191       687       1,079       604       403       397       2,483       (228 )     2,942 (a)

Provision for credit losses

    -       -       -       -       -       -       -       -       80       80  

Noninterest expense

    453       139       592       712       318       259       201       1,490       260       2,342  
   

Income before taxes

  $ 43     $ 52     $ 95     $ 367     $ 286     $ 144     $ 196     $ 993     $ (568 )   $ 520  
   

Pre-tax operating margin (b)

    9 %     27 %     14 %     34 %     47 %     36 %     49 %     40 %     N/M       18 %

Average assets

  $ 12,636     $ 9,611     $ 22,247     $ 65,153     $ 50,855     $ 18,600     $ 28,764     $ 163,372     $ 34,500     $ 220,119  
   

Excluding intangible amortization:

                   

Noninterest expense

  $ 398     $ 128     $ 526     $ 705     $ 297     $ 252     $ 195     $ 1,449     $ 259     $ 2,234  

Income before taxes

    98       63       161       374       307       151       202       1,034       (567 )     628  

Pre-tax operating margin (b)

    20 %     33 %     23 %     35 %     51 %     37 %     51 %     42 %     N/M       21 %
   
   

For the quarter ended
Dec. 31, 2008

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

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

Fee and other revenue

  $ 562     $ 134     $ 696     $ 1,133     $ 436     $ 349     $ 231     $ 2,149     $ (1,020 )   $ 1,825  

Net interest revenue

    43       56       99       411       211       96       233       951       27       1,077  
   

Total revenue

    605       190       795       1,544       647       445       464       3,100       (993 )     2,902 (a)

Provision for credit losses

    -       -       -       -       -       -       -       -       60       60  

Noninterest expense

    541       155       696       996       338       274       211       1,819       355       2,870  
   

Income before taxes

  $ 64     $ 35     $ 99     $ 548     $ 309     $ 171     $ 253     $ 1,281     $ (1,408 )   $ (28 )
   

Pre-tax operating margin (b)

    11 %     18 %     12 %     35 %     48 %     38 %     55 %     41 %     N/M       (1 )%

Average assets

  $ 13,135     $ 9,632     $ 22,767     $ 71,455     $ 38,987     $ 21,128     $ 34,585     $ 166,155     $ 55,040     $ 243,962  
   

Excluding intangible
amortization:

                   

Noninterest expense

  $ 480     $ 141     $ 621     $ 990     $ 318     $ 268     $ 204     $ 1,780     $ 353     $ 2,754  

Income before taxes

    125       49       174       554       329       177       260       1,320       (1,406 )     88  

Pre-tax operating margin (b)

    21 %     26 %     22 %     36 %     51 %     40 %     56 %     43 %     N/M       3 %
   
   

For the quarter ended
Sept. 30, 2008

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

  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

  $ 687     $ 163     $ 850     $ 1,077     $ 529     $ 317     $ 262     $ 2,185     $ (101 )   $ 2,934  

Net interest revenue

    10       50       60       240       170       75       158       643       5       708  
   

Total revenue

    697       213       910       1,317       699       392       420       2,828       (96 )     3,642 (a)

Provision for credit losses

    -       1       1       -       -       -       -       -       29       30  

Noninterest expense

    881       169       1,050       1,208       370       290       208       2,076       202       3,328  
   

Income before taxes

  $ (184 )   $ 43     $ (141 )   $ 109     $ 329     $ 102     $ 212     $ 752     $ (327 )   $ 284  
   

Pre-tax operating margin (b)

    (26 )%     20 %     (15 )%     8 %     47 %     26 %     50 %     27 %     N/M       8 %

Average assets

  $ 13,286     $ 9,801     $ 23,087     $ 57,795     $ 34,264     $ 18,471     $ 22,384     $ 132,914     $ 42,826     $ 198,827  
   

Excluding intangible
amortization:

                   

Noninterest expense

  $ 817     $ 155     $ 972     $ 1,202     $ 349     $ 282     $ 202     $ 2,035     $ 201     $ 3,208  

Income before taxes

    (120 )     57       (63 )     115       350       110       218       793       (326 )     404  

Pre-tax operating margin (b)

    (17 )%     27 %     (7 )%     9 %     50 %     28 %     52 %     28 %     N/M       11 %
   

 

16    The Bank of New York Mellon Corporation


Table of Contents

 

For the quarter ended

June 30, 2008

(dollar amounts in

millions, presented on an
FTE basis)

   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

   $ 796     $ 161     $ 957     $ 1,081     $ 479     $ 323     $ 255     $ 2,138     $ (102 )   $ 2,993  

Net interest revenue

     11       48       59       213       176       75       153       617       (261 )     415  
   

Total revenue

     807       209       1,016       1,294       655       398       408       2,755       (363 )     3,408 (a)

Provision for credit losses

     -       (1 )     (1 )     -       -       -       -       -       26       25  

Noninterest expense

     601       155       756       803       367       297       210       1,677       315       2,748  
   

Income before taxes

   $ 206     $ 55     $ 261     $ 491     $ 288     $ 101     $ 198     $ 1,078     $ (704 )   $ 635  
   

Pre-tax operating margin (b)

     26 %     26 %     26 %     38 %     44 %     25 %     49 %     39 %     N/M       19 %

Average assets

   $ 13,410     $ 10,254     $ 23,664     $ 54,763     $ 35,167     $ 17,395     $ 21,227     $ 128,552     $ 43,781     $ 195,997  
   

Excluding intangible amortization:

                    

Noninterest expense

   $ 533     $ 142     $ 675     $ 798     $ 347     $ 291     $ 203     $ 1,639     $ 310     $ 2,624  

Income before taxes

     274       68       342       496       308       107       205       1,116       (699 )     759  

Pre-tax operating margin (b)

     34 %     33 %     34 %     38 %     47 %     27 %     50 %     41 %     N/M       22 %
   
   

For the quarter ended
March 31, 2008

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

   Asset
Management
    Wealth
Management
   

Total

Asset 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

   $ 752     $ 166     $ 918     $ 1,103     $ 407     $ 303     $ 227     $ 2,040     $ 31     $ 2,989  

Net interest revenue

     15       46       61       222       153       75       182       632       80       773  
   

Total revenue

     767       212       979       1,325       560       378       409       2,672       111       3,762 (a)

Provision for credit losses

     -       -       -       -       -       -       -       -       16       16  

Noninterest expense

     619       155       774       754       338       269       212       1,573       265       2,612  
   

Income before taxes

   $ 148     $ 57     $ 205     $ 571     $ 222     $ 109     $ 197     $ 1,099     $ (170 )   $ 1,134  
   

Pre-tax operating margin (b)

     19 %     27 %     21 %     43 %     40 %     29 %     48 %     41 %     N/M       30 %

Average assets

   $ 13,238     $ 10,496     $ 23,734     $ 52,468     $ 32,227     $ 16,408     $ 24,153     $ 125,256     $ 51,800     $ 200,790  
   

Excluding intangible amortization:

                    

Noninterest expense

   $ 557     $ 142     $ 699     $ 747     $ 318     $ 263     $ 205     $ 1,533     $ 258     $ 2,490  

Income before taxes

     210       70       280       578       242       115       204       1,139       (163 )     1,256  

Pre-tax operating margin (b)

     27 %     33 %     29 %     44 %     43 %     30 %     50 %     43 %     N/M       33 %
   
(a) Consolidated results include FTE impact of $12 million in the first quarter of 2009, $16 million in the fourth quarter of 2008, $16 million in the third quarter of 2008, $15 million in the second quarter of 2008 and $15 million in the first quarter of 2008.
(b) Income before taxes divided by total revenue.

N/M - Not meaningful.

Asset and Wealth Management Sector

 

Asset and Wealth Management fee revenue is dependent on the overall level and mix of AUM and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. Assets under management were $881 billion at March 31, 2009, compared with

$928 billion at Dec. 31, 2008, and $1.1 trillion at March 31, 2008. Net asset outflows in the first quarter of 2009 totaled $12 billion, primarily due to outflows in treasury/government money market funds reflecting the historically low level of interest rates.


 

AUM at period end, by product type

(in billions)

   March 31,
2008
   June 30,
2008
   Sept. 30,
2008
   Dec. 31,
2008
  March 31,
2009

Equity securities

   $ 439    $ 428    $ 384    $ 270   $ 242

Money market

     321      344      364      402     393

Fixed income securities

     200      199      213      168     167

Alternative investments and overlay

     145      142      106      88     79
 

Total AUM

   $ 1,105    $ 1,113    $ 1,067    $ 928   $ 881
 

 

The Bank of New York Mellon Corporation    17


Table of Contents

 

 

AUM at period end, by client type

(in billions)

   March 31,
2008
   June 30,
2008
   Sept. 30,
2008
   Dec. 31,
2008
   March 31,
2009
 

Institutional

   $ 636    $ 625    $ 585    $ 445    $ 394

Mutual funds

     373      393      384      400      413

Private client

     96      95      98      83      74
 

Total AUM

   $ 1,105    $ 1,113    $ 1,067    $ 928    $ 881

 

 

   

Changes in market value of AUM from Dec. 31, 2008

to March 31, 2009 – by business segment

(in billions)

   Asset
Management
    Wealth
Management
    Total  
   

Market value of AUM at Dec. 31, 2008:

   $ 859     $ 69     $ 928  

Net inflows (outflows):

      

Long-term

     (2 )     1       (1 )

Money market

     (11 )     -       (11 )
   

Total net inflows (outflows)

     (13 )     1       (12 )

Net market depreciation (a)

     (31 )     (4 )     (35 )
   

Market value of AUM at March 31, 2009

   $ 815 (b)   $ 66 (c)   $ 881  
   
(a) Includes the effect of changes in foreign exchange rates.
(b) Excludes $3 billion subadvised for the Wealth Management segment.
(c) Excludes private client assets managed in the Asset Management segment.

Asset Management segment

 

   
                                   1Q09 vs.  

(dollars in millions)

     1Q08       2Q08       3Q08       4Q08       1Q09     1Q08     4Q08  
   

Revenue:

              

Asset and wealth management:

              

Mutual funds

   $ 323     $ 340     $ 328     $ 297     $ 263     (19 )%   (11 )%

Institutional clients

     304       290       265       193       181     (40 )   (6 )

Private clients

     45       47       43       35       32     (29 )   (9 )
   

Total asset and wealth management revenue

     672       677       636       525       476     (29 )   (9 )

Performance fees

     20       16       3       44       7     (65 )   (84 )

Distribution and servicing

     86       99       93       93       92     7     (1 )

Other

     (26 )     4       (45 )     (100 )     (95 )   N/M     5  
   

Total fee and other revenue

     752       796       687       562       480     (36 )   (15 )

Net interest revenue

     15       11       10       43       16     7     (63 )
   

Total revenue

     767       807       697       605       496     (35 )   (18 )

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

     557       528       489       478       412     (26 )   (14 )
   

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

     210       279       208       127       84     (60 )   (34 )

Support agreement charges

     -       5       328       2       (14 )   N/M     N/M  

Amortization of intangible assets

     62       68       64       61       55     (11 )   (10 )
   

Income before taxes

   $ 148     $ 206     $ (184 )   $ 64     $ 43     (71 )%   (33 )%
   

Memo: Income before taxes (ex. intangible amortization)

   $ 210     $ 274     $ (120 )   $ 125     $ 98     (53 )%   (22 )%

Pre-tax operating margin (ex. intangible amortization)

     27 %     34 %     (17 )%     21 %     20 %    

Average assets

   $ 13,238     $ 13,410     $ 13,286     $ 13,135     $ 12,636     (5 )%   (4 )%
   

N/M – Not meaningful.

 

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.


 

18    The Bank of New York Mellon Corporation


Table of Contents

We are one of the world’s largest asset managers with a top 10 position in both the U.S. and Europe and top 5 in tax-exempt institutional U.S. asset management.

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.

Review of financial results

In the first quarter of 2009, Asset Management had pre-tax income of $43 million compared with $148 million in the first quarter of 2008 and $64 million in the fourth quarter of 2008. Excluding amortization of intangible assets, pre-tax income was $98 million in the first quarter of 2009 compared with $210 million in the first quarter of 2008 and $125 million in the fourth quarter of 2008. Results for the first quarter of 2009 continue to be impacted by the challenging market environment, which was partially offset by solid expense control and the benefit of stronger investment performance resulting in market share gains domestically and internationally.

Asset and wealth management revenue in the Asset Management segment was $476 million in the first quarter of 2009 compared with $672 million in the first quarter of 2008 and $525 million in the fourth quarter of 2008. The decrease compared with both prior periods reflects the weakness in global market values, the impact of historically low interest rates on money market fees and net outflows of alternative products, partially offset by new business in certain fixed income and equity products and positive flows into prime money market mutual funds reflecting the shift from treasury/government funds. Despite the challenging market environment, the investment boutiques have had stronger investment performance resulting in market share gains domestically and internationally.

 

In the first quarter of 2009, 55% 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 assets of each fund and the basis point management fee paid by that fund. Managed mutual fund fee revenue was $263 million in the first quarter of 2009 compared with $323 million in the first quarter of 2008 and $297 million in the fourth quarter of 2008. The decrease compared with both prior quarters was primarily due to lower market values and outflows in treasury/government money market funds reflecting the low levels of interest rates.

Performance fees were $7 million in the first quarter of 2009 compared with $20 million in the first quarter of 2008 and $44 million in the fourth quarter of 2008. The decreases were primarily due to a lower level of fees generated from certain equity and alternative strategies.

Distribution and servicing fees were $92 million in the first quarter of 2009 compared with $86 million in the first quarter of 2008 and $93 million in the fourth quarter of 2008. The increase compared with the first quarter of 2008 reflects a higher level of inflows.

Other fee revenue was a loss of $95 million in the first quarter of 2009 compared with a loss of $26 million in the first quarter of 2008 and a loss of $100 million in the fourth quarter of 2008. The year-over-year decrease was primarily due to higher revenue sharing costs resulting from higher distribution volumes with the Issuer/Clearing Services segments related to the distribution of Dreyfus products and investment write-downs.

Noninterest expense (excluding amortization of intangible assets and support agreement charges) was $412 million in the first quarter of 2009 compared with $557 million in the first quarter of 2008 and $478 million in the fourth quarter of 2008. Ongoing expense management in response to the operating environment resulted in noninterest expense declining 26% year-over-year, and 14% (unannualized) sequentially. The decline from both prior periods reflects staff reductions, consolidation of investment processes and continued fund mergers. Compared with the first quarter of 2008, compen-sation expense declined 29%.


 

The Bank of New York Mellon Corporation    19


Table of Contents

Wealth Management segment

 

   

(dollars in millions, unless otherwise noted;

presented on an FTE basis)

                                 1Q09 vs.  
   1Q08     2Q08     3Q08     4Q08     1Q09     1Q08     4Q08  
   

Revenue:

              

Asset and wealth management

   $ 153     $ 150     $ 141     $ 119     $ 122     (20 )%   3 %

Other

     13       11       22       15       19     46     27  
   

Total fee and other revenue

     166       161       163       134       141     (15 )   5  

Net interest revenue

     46       48       50       56       50     9     (11 )
   

Total revenue

     212       209       213       190       191     (10 )   1  

Provision for credit losses

     -       (1 )     1       -       -     -     -  

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

     142       142       140       141       128     (10 )   (9 )
   

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

     70       68       72       49       63     (10 )   29  

Support agreement charges

     -       -       15       -       -     -     -  

Amortization of intangible assets

     13       13       14       14       11     (15 )   (21 )
   

Income before taxes

   $ 57     $ 55     $ 43     $ 35     $ 52     (9 )%   49 %
   

Memo: Income before taxes (ex. intangible amortization)

   $ 70     $ 68     $ 57     $ 49     $ 63     (10 )%   29 %

Pre-tax operating margin (ex. intangible amortization)

     33 %     33 %     27 %(a)     26 %     33 %    

Average loans

   $ 4,390     $ 4,816     $ 5,231     $ 5,309     $ 5,388     23 %   1 %

Average assets

     10,496       10,254       9,801       9,632       9,611     (8 )   -  

Average deposits

     7,993       7,782       7,318       7,131       7,058     (12 )   (1 )

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

   $ 164     $ 162     $ 158     $ 139     $ 132     (20 )%   (5 )%
   
(a) The pre-tax operating margin, excluding support agreement charges and intangible amortization, was 34% in the third quarter of 2008.

 

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 and families, family offices and business enterprises, charitable gift programs, and endowments and foundations. BNY Mellon Wealth Management is a top ten U.S. wealth manager with $132 billion in client assets. We serve our clients through an expansive network of offices in 16 states and 3 countries.

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 $52 million in the first quarter of 2009, compared with $57 million in the first quarter of 2008 and $35 million in the fourth quarter of 2008. Income before taxes, excluding amortization, was $63 million in the first quarter of 2009, compared with $70 million in the first quarter of 2008 and $49 million in the fourth quarter of 2008. Results in the first quarter of 2009 reflect the benefit of strong organic growth, as $13 billion in net inflows over the past 12 months, including $2 billion in the first quarter of 2009, and strong expense controls more than offset continued declines in the equity markets. Wealth Management continued to gain market share, driven by 13 consecutive quarters of positive net client flows.

Total fee and other revenue was $141 million in the first quarter of 2009, compared with $166 million in the first quarter of 2008 and $134 million in the fourth quarter of 2008. The decrease compared with the first quarter of 2008 reflects lower equity values which more than offset organic growth. The sequential increase was driven by organic growth and higher capital market fees, which more than offset lower equity values.


 

20    The Bank of New York Mellon Corporation


Table of Contents

Net interest revenue increased $4 million compared with the first quarter of 2008 and decreased $6 million compared with the fourth quarter of 2008. The year-over-year increase was due primarily to increased loan levels and loan spreads. The linked quarter decrease reflects lower deposit spreads, partially offset by a record level of jumbo mortgage originations which resulted in higher average loan levels. Average loan levels were up $998 million, or 23%, over the prior year period and $79 million, or 1% (unannualized) sequentially.

Noninterest expense (excluding amortization of intangible assets) decreased $14 million compared with the first quarter of 2008 and decreased $13 million compared with the fourth quarter of 2008. Both the year-over-year and sequential decreases reflect the impact of merger-related synergies and overall expense control. Strong expense management resulted in flat operating leverage year-over-year and 1,000 basis points of positive operating leverage sequentially.

Client assets under management and custody were $132 billion at March 31, 2009, compared with $164 billion at March 31, 2008 and $139 billion at Dec. 31, 2008. The decreases resulted from lower market values, partially offset by new business.

 

Institutional Services Sector

At March 31, 2009, our assets under custody and administration were $19.5 trillion, a 3% decrease from $20.2 trillion at Dec. 31, 2008 and a 16% decrease from $23.1 trillion at March 31, 2008. The decrease compared with both prior periods reflects weaker market values and the impact of a stronger U.S. dollar which more than offset the benefit of new business conversions. Equity securities constituted 25% and fixed-income securities constituted 75% of the assets under custody and administration at both March 31, 2009 and Dec. 31, 2008. Assets under custody and administration at March 31, 2009 consisted of assets related to custody, mutual fund, and corporate trust businesses of $15.5 trillion, broker-dealer service assets of $2.8 trillion, and all other assets of $1.2 trillion.

The market value of securities on loan at March 31, 2009 decreased to $293 billion from $326 billion at Dec. 31, 2008 and $660 billion at March 31, 2008. The decrease reflects overall de-leveraging in the financial markets and lower market valuations resulting from large declines in the equity markets.


 

 
Assets under custody and administration trend    March 31,    June 30,    Sept. 30,    Dec. 31,    March 31,
     2008    2008    2008    2008    2009
 

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

   $ 23.1    $ 23.0    $ 22.4    $ 20.2    $ 19.5

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

   $ 660    $ 588    $ 470    $ 326    $ 293
 
(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 $930 billion at March 31, 2008, $915 billion at June 30, 2008, $811 billion at Sept. 30, 2008, $697 billion at Dec. 31, 2008 and $690 billion at March 31, 2009.
(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

 

   

(dollars in millions, unless otherwise noted;

presented on an FTE basis)

                                 1Q09 vs.  
   1Q08     2Q08     3Q08     4Q08     1Q09     1Q08     4Q08  
   

Revenue:

              

Securities servicing fees—asset servicing

   $ 859     $ 821     $ 769     $ 742     $ 583     (32 )%   (21 )%

Foreign exchange and other trading activities

     200       224       261       366       199     (1 )   (46 )

Other

     44       36       47       25       48     9     92  
   

Total fee and other revenue

     1,103       1,081       1,077       1,133       830     (25 )   (27 )

Net interest revenue

     222       213       240       411       249     12     (39 )
   

Total revenue

     1,325       1,294       1,317       1,544       1,079     (19 )   (30 )

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

     733       812       821       830       699     (5 )   (16 )
   

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

     592       482       496       714       380     (36 )   (47 )

Support agreement charges

     14       (14 )     381       160       6     (57 )   N/M  

Amortization of intangible assets

     7       5       6       6       7     -     17  
   

Income before taxes

   $ 571     $ 491     $ 109     $ 548     $ 367     (36 )%   (33 )%
   

Memo: Income before taxes (ex. intangible amortization)

   $ 578     $ 496     $ 115     $ 554     $ 374     (35 )%   (32 )%

Pre-tax operating margin (ex. intangible amortization)

     44 %     38 %     9 % (a)     36 % (a)     35 % (a)    

Securities lending revenue

   $ 245     $ 202     $ 155     $ 187     $ 90     (63 )%   (52 )%

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

     660       588       470       326       293     (56 )   (10 )

Average assets

     52,468       54,763       57,795       71,455       65,153     24     (9 )

Average deposits

     46,092       48,436       51,492       64,500       57,084     24     (11 )
   
(a) The pre-tax operating margin, excluding support agreement charges and intangible amortization, was 38% in the third quarter of 2008, 46% in the fourth quarter of 2008 and 35% in the first quarter of 2009.

N/M - Not meaningful.

 

Business description

The Asset Servicing segment includes global custody, global fund services, securities lending, global liquidity services, outsourcing, 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 transactional activity, the extent of services provided, including custody, accounting, fund administration, daily valuations, performance measurement and risk analytics, securities lending and 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 cash 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, the use of tri-party repo arrangements continues 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 necessary to process transaction volumes. Fees paid to sub-custodians are driven by market values of global assets and related transaction volumes.

We are one of the leading global securities servicing providers with a total of $19.5 trillion of assets under custody and administration at March 31, 2009. We continue to maintain our number one ranking in the three major global custody surveys. We are one of the largest providers of fund services in the world, servicing $4.7 trillion in assets. We also service 49% of the funds in the U.S. exchange-traded funds


 

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marketplace. We are the largest custodian for U.S. public pension plans. BNY Mellon Asset Servicing services 46% 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 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 30 markets around the world. We are one of the largest global providers of performance and risk analytics with $8.2 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 clear over 50% of U.S. Government securities transactions. We are a leading collateral management agent with $1.8 trillion in tri-party balances worldwide at both March 31, 2009 and Dec. 31, 2008.

Review of financial results

Income before taxes was $367 million in the first quarter of 2009 compared with $571 million in the first quarter of 2008, and $548 million in the fourth quarter of 2008. Income before taxes, excluding amortization and support agreement charges, was $380 million in the first quarter of 2009 compared with $592 million in the first quarter of 2008 and $714 million in the fourth quarter of 2008. The decrease in income before taxes compared with both periods primarily resulted from lower securities lending fees, the impact of weaker market values and historically low interest rates, partially offset by new business of $1.9 trillion over the last 12 months as well as strong expense controls.

 

Asset servicing fees decreased $276 million, or 32%, compared with the first quarter of 2008 and $159 million, or 21% (unannualized) sequentially. The decrease compared with both prior periods primarily reflects lower securities lending fees, lower market levels and transaction volumes and a stronger U.S. dollar, partially offset by new business.

Securities lending revenue decreased $155 million compared to the first quarter of 2008 and $97 million sequentially. Both decreases resulted from lower spreads, lower market valuations and overall de-leveraging in the financial markets.

Foreign exchange and other trading activities was flat compared with the first quarter of 2008 and decreased $167 million sequentially. The year-over-year results reflect lower volumes largely offset by increased volatility while the sequential decline reflects both lower volatility and volumes.

Net interest revenue increased $27 million compared with the first quarter of 2008 and decreased $162 million compared with the fourth quarter of 2008. The year-over-year increase was driven by increased deposit levels. The sequential decrease reflects lower deposit levels, down from historical highs in the fourth quarter of 2008, and lower spreads.

Noninterest expense (excluding amortization of intangible assets and support agreement charges) decreased $34 million compared with the first quarter of 2008 and $131 million compared with the fourth quarter of 2008. Both decreases reflect strong expense control as well as the continued impact of merger-related synergies. The declines over both periods were driven by declines in nearly all expense categories, including compensation expense, which decreased 9% year-over-year and approximately 12% (unannualized) on a linked quarter basis.


 

The Bank of New York Mellon Corporation    23


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Issuer Services segment

 

   

(dollars in millions,

presented on an FTE basis)

                                 1Q09 vs.  
   1Q08     2Q08     3Q08     4Q08     1Q09     1Q08     4Q08  
   

Revenue:

              

Securities servicing fees – issuer services

   $ 374     $ 443     $ 475     $ 392     $ 363     (3 )%   (7 )%

Other

     33       36       54       44       41     24     (7 )
   

Total fee and other revenue

     407       479       529       436       404     (1 )   (7 )

Net interest revenue

     153       176       170       211       200     31     (5 )
   

Total revenue

     560       655       699       647       604     8     (7 )

Noninterest expense (ex. intangible amortization)

     318       347       349       318       297     (7 )   (7 )
   

Income before taxes (ex. intangible amortization)

     242       308       350       329       307     27     (7 )

Amortization of intangible assets

     20       20       21       20       21     5     5  
   

Income before taxes

   $ 222     $ 288     $ 329     $ 309     $ 286     29 %   (7 )%
   

Pre-tax operating margin (ex. intangible amortization)

     43 %     47 %     50 %     51 %     51 %    

Average assets

   $ 32,227     $ 35,167     $ 34,264     $ 38,987     $ 50,855     58 %   30 %

Average deposits

     27,632       30,557       29,546       34,294       45,963     66     34  

Number of depositary receipt programs

     1,315       1,322       1,354       1,338       1,330     1 %   (1 )%
   

 

Business description

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

As the world’s leading provider of corporate trust and agency services, the Company services more than $11 trillion in outstanding debt from 57 locations in 19 countries. Along with our subsidiaries and affiliates, we are the number one overall provider of corporate trust services for all major debt categories, including conventional, structured, and specialty debt. We serve as depositary for 1,330 sponsored American and Global Depositary Receipt programs, with a 64% market share, providing services to companies from 63 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 $286 million in the first quarter of 2009, compared with $222 million in the first quarter of 2008 and $309 million in the fourth quarter of 2008. Issuer Services results, compared with prior periods, continued to be favorably impacted by higher customer deposit balances and the benefit of new business, partially offset by the challenging operating environment in the domestic Corporate Trust businesses as well as lower overall corporate action activity and lower equity markets.

Total fee and other revenue was $404 million in the first quarter of 2009, a decrease of 1% compared with the first quarter of 2008 and a decrease of 7% (unannualized) compared with the fourth quarter of 2008. Fee and other revenue was down slightly year-over-year as new business in Corporate Trust, primarily the Corporate businesses, more than offset lower revenue in the Structured and Municipal businesses. Depositary Receipts revenue also increased, reflecting the timing of corporate actions and new business. The linked quarter decrease in fee and other revenue primarily resulted from the timing of corporate actions in Depositary Receipts. Shareowner Services revenue decreased both year-over-year and sequentially as a result of lower corporate action activity and the impact of lower equity values on employee stock option plan fees.


 

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Net interest revenue increased $47 million, or 31%, compared with the first quarter of 2008, and decreased $11 million, or 5%, compared with the fourth quarter of 2008. The year-over-year increase reflects higher customer deposit balances, primarily in Corporate Trust. The sequential decrease resulted from lower spreads.

Noninterest expense (excluding amortization of intangible assets) decreased $21 million, or 7%, compared with both the first and fourth quarters of 2008. Both decreases in expense were driven by a 17% and 8% (unannualized) decline in total compensation expense compared with the first quarter of 2008 and fourth quarter of 2008, respectively. Compared to the first quarter of 2008, the decrease in noninterest expense contributed to approximately 1,500 basis points of positive operating leverage.

Clearing Services segment

 

   

(dollars in millions, unless otherwise noted;

presented on an FTE basis) (a)

                                 1Q09 vs.  
   1Q08     2Q08     3Q08     4Q08     1Q09     1Q08     4Q08  
   

Revenue:

              

Securities servicing fees – clearing services

   $ 250     $ 259     $ 254     $ 277     $ 249     - %   (10 )%

Other

     53       64       63       72       72     36     -  
   

Total fee and other revenue

     303       323       317       349       321     6     (8 )

Net interest revenue

     75       75       75       96       82     9     (15 )
   

Total revenue

     378       398       392       445       403     7     (9 )

Noninterest expense (ex. intangible amortization)

     263       291       282       268       252     (4 )   (6 )
   

Income before taxes (ex. intangible amortization)

     115       107       110       177       151     31     (15 )

Amortization of intangible assets

     6       6       8       6       7     17     17  
   

Income before taxes

   $ 109     $ 101     $ 102     $ 171     $ 144     32 %   (16 )%
   

Pre-tax operating margin (ex. intangible amortization)

     30 %     27 %     28 %     40 %     37 %    

Average assets

   $ 16,408     $ 17,395     $ 18,471     $ 21,128     $ 18,600     13 %   (12 )%

Average active accounts (in thousands)

     5,170       5,280       5,442       5,472       5,452     5 %   - %

Average margin loans

   $ 5,245     $ 5,791     $ 5,754     $ 4,871     $ 4,207     (20 )%   (14 )%

Average payables to customers and broker-dealers

   $ 4,942     $ 5,550     $ 5,910     $ 5,570     $ 3,797     (23 )%   (32 )%
   
(a) In the first quarter of 2009, the financial results of the execution businesses were reclassified from the Clearing Services segment to the Other segment. This change reflects our focus on reducing non-core activities. All prior periods have been reclassified.

 

Business description

Our Clearing Services segment consists of the Pershing clearing business. Our Pershing LLC and Pershing Advisor Solutions LLC subsidiaries provide financial institutions and independent registered investment advisors with operational support, trading services, flexible technology, an expansive array of investment solutions, practice management support and service excellence. Pershing services more than 1,150 retail and institutional financial organizations and independent registered investment advisors who collectively represent more than five million investors.

Pershing Prime Services delivers an integrated suite of prime brokerage solutions, including expansive access to securities lending, dedicated client service, leading-edge technology and reporting tools, robust cash management products, global execution and order management capabilities, and additional integrated solutions of the Company’s other business segments.

 

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;

   

overall market levels; and

   

the amount of assets under administration.

A substantial amount of revenue in this segment is generated from non-transactional activities, such as asset gathering, mutual funds, money market funds and retirement programs, 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 clearing trades.


 

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Review of financial results

Income before taxes increased $35 million, or 32%, compared with the first quarter of 2008, and decreased $27 million, or 16% (unannualized), compared with the fourth quarter of 2008. The increase compared with the first quarter of 2008 reflects higher trading revenue and the benefit of strong expense control. The sequential decrease primarily relates to lower trading revenue.

Total fee and other revenue increased $18 million, or 6%, compared with the first quarter of 2008 due primarily to higher trading revenue, partially offset by lower asset values and lower money market related fees.

Compared with the fourth quarter of 2008, fee and other revenue decreased 8% (unannualized) primarily due to both lower average daily trading volumes and lower money market related fees.

 

Net interest revenue increased $7 million, or 9%, compared with the first quarter of 2008, driven by higher customer balances partially offset by narrower spreads. Net interest revenue decreased $14 million, or 15% (unannualized), sequentially due to lower customer balances and narrower spreads.

Strong expense control resulted in year-over-year and linked quarter declines in noninterest expense. Compared to the first quarter of 2008, noninterest expense declined $11 million, or 4%, contributing to 1,100 basis points of positive operating leverage. Noninterest expense decreased $16 million, or 6% (unannualized), sequentially. The declines from both prior periods were driven by lower compensation expense, which decreased 13% and 12% (unannualized), compared to first quarter of 2008 and fourth quarter of 2008, respectively.


 

Treasury Services segment

 

   
                                   1Q09 vs.  
(dollars in millions, presented on an FTE basis)    1Q08     2Q08     3Q08     4Q08     1Q09     1Q08     4Q08  
   

Revenue:

              

Treasury services

   $ 121     $ 125     $ 125     $ 130     $ 121     - %   (7 )%

Other

     106       130       137       101       118     11     17  
   

Total fee and other revenue

     227       255       262       231       239     5     3  

Net interest revenue

     182       153       158       233       158     (13 )   (32 )
   

Total revenue

     409       408       420       464       397     (3 )   (14 )

Noninterest expense (ex. intangible amortization)

     205       203       202       204       195     (5 )   (4 )
   

Income before taxes (ex. intangible amortization)

     204       205       218       260       202     (1 )   (22 )

Amortization of intangible assets

     7       7       6       7       6     (14 )   (14 )
   

Income before taxes

   $ 197     $ 198     $ 212     $ 253     $ 196     (1 )%   (23 )%
   

Pre-tax operating margin (ex. intangible amortization)

     50 %     50 %     52 %     56 %     51 %    

Average loans

   $ 15,344     $ 15,606     $ 14,671     $ 16,040     $ 13,612     (11 )%   (15 )%

Average assets

     24,153       21,227       22,384       34,585       28,764     19     (17 )

Average deposits

     20,056       17,316       18,397       30,052       24,867     24     (17 )
   

 

Business description

The Treasury Services segment includes cash management solutions, trade finance services, international payment services, 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 variable expenses such as temporary staffing and operating services in support of volume increases.


 

26    The Bank of New York Mellon Corporation


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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, trade services and liquidity management. We are the third largest USD payment processor, processing 170,000, or an average of $1.8 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 $196 million in the first quarter of 2009 compared with $197 million in the first quarter of 2008,

and $253 million in the fourth quarter of 2008. Results compared with both prior periods reflect strong expense controls more than offset by lower net interest revenue.

Total fee and other revenue increased $12 million, compared with the first quarter of 2008 and $8 million compared with the fourth quarter of 2008. The increase compared with both prior periods reflects new business and higher capital markets related fees, partially offset by lower global payment volumes.

Net interest revenue declined $24 million compared to the first quarter of 2008 and $75 million sequentially. The year-over-year decline was primarily due to lower spreads and loan volumes, while the sequential decline was driven by lower deposit and loan levels, and lower spreads.

Noninterest expense (excluding amortization of intangible assets) decreased $10 million compared with the first quarter of 2008 and $9 million sequentially, reflecting overall expense controls.


 

Other Segment

 

   
(dollars in millions, presented on an FTE basis) (a)    1Q08     2Q08     3Q08     4Q08     1Q09  

Revenue:

          

Fee and other revenue

   $ 31     $ (102 )   $ (101 )   $ (1,020 )   $ (269 )

Net interest revenue (expense)

     80       (261 )     5       27       41  
   

Total revenue

     111       (363 )     (96 )     (993 )     (228 )

Provision for credit losses

     16       26       29       60       80  

Noninterest expense (ex. goodwill impairment, intangible amortization, restructuring charges and M&I expenses)

     132       161       90       75       131  
   

Income (loss) before taxes (ex. goodwill impairment, intangible amortization, restructuring charges and M&I expenses)

     (37 )     (550 )     (215 )     (1,128 )     (439 )

Goodwill impairment

     —         —         —         —         50  

Amortization of intangible assets

     7       5       1       2       1  

Restructuring charges

     —         —         —         181       10  

M&I expenses:

          

The Bank of New York Mellon Corporation

     121       146       107       97       68  

Acquired Corporate Trust Business

     5       3       4       —         —    
   

Total M&I expenses

     126       149       111       97       68  
   

Income (loss) before taxes

   $ (170 )   $ (704 )   $ (327 )   $ (1,408 )   $ (568 )
   

Average assets

   $ 51,800     $ 43,781     $ 42,826     $ 55,040     $ 34,500  

Average deposits

     17,348       15,516       13,562       12,875       15,644  
   
(a) In the first quarter of 2009, the financial results of the execution businesses were reclassified from the Clearing Services segment to the Other segment. This change reflects our focus on reducing non-core activities. All prior periods have been reclassified.

 

The Bank of New York Mellon Corporation    27


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Business description

The Other segment primarily includes:

 

   

the results of the leasing portfolio;

   

corporate treasury activities;

   

the results of Mellon United National Bank (“MUNB”);

   

BNY ConvergEx 33.7% equity interest; and

   

business exits and corporate overhead.

Revenue primarily reflects:

 

   

net interest revenue from the MUNB and leasing portfolio;

   

any residual interest income resulting from transfer pricing algorithms relative to actual results;

   

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

   

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

Noninterest expense includes:

 

   

M&I expenses;

   

restructuring charges;

   

direct expenses supporting MUNB, 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 $568 million for the first quarter of 2009, compared with a loss of $170 million in the first quarter of 2008, and a loss of $1.4 billion in the fourth quarter of 2008.

The Other segment includes the following activity:

In the first quarter of 2009:

 

   

a $264 million (pre-tax) securities loss associated with other-than-temporary impairment (“OTTI”).

   

a loss of $58 million related to our equity investment in BNY ConvergEx;

   

Goodwill impairment of $50 million related to our Mellon United National Bank subsidiary; and

   

a $10 million restructuring charge related to our global workforce reduction program announced in the fourth quarter of 2008. For further information, see Note 12 to Notes to Consolidated Financial Statements.

 

In the fourth quarter of 2008:

 

   

a $1.176 billion (pre-tax) securities loss associated with OTTI; and

   

a $181 million restructuring charge related to our global workforce reduction program. For further information, see Note 12 to the Notes to Consolidated Financial Statements.

In the first quarter of 2008:

 

   

a $51 million (pre-tax) securities loss associated with OTTI.

Critical accounting estimates

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements contained in the Company’s 2008 Annual Report on Form 10-K. Our more critical accounting estimates are those related to goodwill and other intangibles, the allowance for credit losses, fair value of financial instruments and derivatives, OTTI and pension accounting as referenced or described below.

 

Critical policy   Reference

Pension accounting

  The Company’s 2008 Annual Report, pages 46 and 47.

Goodwill and other intangibles

We record all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair value as required by SFAS Nos. 141(R) and 142, “Business Combinations.” Goodwill ($15.8 billion at March 31, 2009 and indefinite-lived intangible assets ($2.7 billion at March 31, 2009) are not amortized but are subject to annual tests for impairment or more often if events or circumstances indicate they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.

The initial recording of goodwill, indefinite-lived intangibles, and other intangibles requires subjective judgments concerning estimates of the fair value of the acquired assets and liabilities. The goodwill impairment test is performed in two phases. The first step compares the estimated fair value of the reporting unit with its carrying amount, including


 

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goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit exceeds its estimated fair value, an additional procedure would be performed. That additional procedure would compare the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

The carrying value of goodwill in each of the Company’s business segments, which are our reporting units under SFAS 142, was tested for possible impairment in 2008 and 2009 in accordance with SFAS 142, using market and income methods including observable market data to estimate fair values. In addition, material events and circumstances that might be indicators of possible impairment were assessed during interim periods. These included the changing business climate, regulatory and legal factors, the recoverability of long-lived assets, changes in our competitors, and the earnings outlook for the Company’s segments. Further, the Company’s market capitalization exceeded its net book value at the end of each quarter of 2008 and the first quarter of 2009. Goodwill impairment was recorded on MUNB as discussed on page 68. Our tangible common equity and regulatory capital was not impacted by this impairment. Our goodwill and intangible assets could be subject to impairment in future periods if economic conditions that impact our segments continue to worsen. Impairment is a non-cash charge.

Indefinite-lived intangible assets are evaluated for impairment at least annually by comparing their fair value to their carrying value. Other intangible assets ($3.0 billion at March 31, 2009) are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is initially based on undiscounted cash flow projections.

Fair value may be determined using: market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other determinants. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in

revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. Other key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles which require amortization. See Note 6 of the Notes to Consolidated Financial Statements for additional information regarding intangible assets. At March 31, 2009, we had $21.5 billion of goodwill, indefinite-lived intangibles, and other intangible assets.

Allowance for loan losses and allowance for lending-related commitments

The allowance for credit losses and allowance for lending related commitments consist of three elements: (1) an allowance for impaired credits; (2) an allowance for higher risk rated loans and exposures and pass rated loans and exposures; and (3) an unallocated allowance based on general economic conditions and certain risk factors in our individual portfolio and markets. Further discussion of the three elements can be found under Asset quality and allowance for credit losses in Consolidated balance sheet review.

The allowance for credit losses represents management’s estimate of probable losses inherent in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. Probability of default ratings are assigned after analyzing the credit quality of each borrower/ counterparty and our internal ratings are generally consistent with external ratings agencies default databases. Loss given default ratings are driven by the collateral, structure, and seniority of each individual asset and are consistent with external loss given default/recovery databases. The portion of the allowance related to impaired credits is based on the present value of expected future cash flows; however, as a practical expedient, it may be based on the credit’s observable market price. Additionally, it may be based on the fair value of collateral if the credit is collateral dependent. Changes in the estimates of probability of default, risk ratings, loss given default/recovery rates, and cash flows could have a direct impact on the allocated allowance for loan losses.

To the extent actual results differ from forecasts or management’s judgment, the allowance for credit losses may be greater or less than future charge-offs.


 

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It is difficult to quantify the impact of changes in forecasts on our allowance for credit losses. Nevertheless, we believe the following discussion may enable investors to better understand the variables that drive the allowance for credit losses.

A key variable in determining the allowance is management’s judgment in determining the size of the unallocated allowance. At March 31, 2009, the unallocated allowance was $20 million, or 4% of the total allowance. At March 31, 2009, if the unallocated allowance, as a percentage of the total allowance, was 5% higher, the allowance would have increased by approximately $31 million.

The credit rating assigned to each credit is another significant variable in determining the allowance. If each credit were rated one grade better, the allowance would have decreased by $119 million, while if each credit were rated one grade worse, the allowance would have increased by $185 million. Similarly, if the loss given default were one rating worse, the allowance would have increased by $68 million, while if the loss given default were one rating better, the allowance would have decreased by $64 million. For impaired credits, if the fair value of the loans was 10% higher or lower, the allowance would have decreased or increased by $7 million, respectively.

Fair value of financial instruments

On Jan. 1, 2008, we adopted SFAS 157 and SFAS 159.

SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. The standard also established 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.

Effective Jan. 1, 2009, we adopted FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are not Orderly”. FAS 157-4 provides guidance on how to determine the fair value when the volume and level of activity for the asset or liability have significantly decreased and reemphasizes that the objective of a fair value measurement remains an exit price notion. In those circumstances, further analysis of transactions or quoted prices is needed, and an adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS 157. It also requires additional disclosures for

instruments within the scope of SFAS 157 to include inputs and valuation techniques used, change in valuation techniques and related inputs, if any, and more disaggregated information relating to debt and equity securities.

The amended 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.

Fair value – Securities

Level 1 –- Securities

Recent quoted prices from exchange transactions are used for debt and equity securities that are actively traded on exchanges and for U.S. Treasury securities and U.S. Government securities that are actively traded in highly liquid over the counter markets. We include these securities in Level 1 of the SFAS 157 hierarchy.

Level 2 – Securities

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 comparisons 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 type of transaction and apply such variables to similar types of bonds. We view these as


 

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observable transactions in the current market place and classify such securities as Level 2. They discontinue pricing any specific security whenever they determine there is insufficient observable data to provide a good faith opinion on price.

Securities included in this category that are affected by the lack of market liquidity include our Alt-A residential mortgage-backed securities (“RMBS”), prime RMBS, subprime RMBS and commercial mortgage-backed securities.

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 guaranteed by monoline insurers, the financial strength of the insurance provider is analyzed and that information is included in the fair value assessment for such securities.

The pricing sources did not discontinue pricing for any securities in our investment securities portfolio at March 31, 2009.

The prices provided by pricing sources are subject to review and challenges by industry participants, including ourselves.

Level 3 – Securities

In the first quarter of 2009, we changed our valuation technique for determining the fair value of certain securities when there has been a significant decline in volume and market activity. Recent transactions in non-agency RMBS and commercial mortgage-backed securities may not reflect orderly transactions in the marketplace. In adopting the guidance of FAS 157-4, for these securities, we adjust the discount rate to reflect “an orderly transaction” in the current marketplace. We used a discount rate that was determined based on our assessment of the credit quality of the non-agency RMBS and commercial mortgage-backed securities. The discount rate was derived based on input from market participants as to the appropriate discount rate for hypothetical bond issuances that exhibit credit features similar to the bonds we hold.

To further reflect current market conditions we weighted our internally modeled price with prices derived from pricing sources to calculate the fair market value in an orderly transaction.

Approximately 93% of our securities are valued by pricing sources with reasonable levels of price transparency. Approximately 7% of our securities are priced based on economic models and non-binding dealer quotes, and are included in Level 3 of the SFAS 157 hierarchy.

See Note 15 to the Notes to Consolidated Financial Statements for details of our securities by FAS 157 hierarchy level.

Fair value – Derivative financial instruments

Level 1– Derivative financial instruments

We include derivative financial instruments that are actively traded on exchanges, principally foreign exchange futures and forward contracts, in Level 1 of the FAS 157 hierarchy.

Level 2 – Derivative financial instruments

The majority of our derivative financial instruments are priced using the Company’s internal models which use observable inputs for interest rates, pay-downs (both actual and expected), foreign exchange rates, option volatilities and other factors. The valuation process takes into consideration factors such as counterparty credit quality, liquidity, concentration concerns, and results of stress tests.

Substantially all of our model-priced derivative financial instruments are included in Level 2 of the SFAS 157 hierarchy.

Level 3 – Derivative financial instruments

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. These interest rate swaps are included in Level 3 of the SFAS 157 hierarchy and compose less than 1% of our derivative financial instruments.

In order to test the appropriateness of the valuations, we subject the models to review and approval by an independent internal risk management function, benchmark the models against similar instruments and validate model estimates to actual cash transactions. In addition, we perform detailed


 

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reviews and analyses of profit and loss. Valuation adjustments are determined and controlled by a function independent of the area initiating the risk position. As markets and products develop and the pricing for certain products becomes more transparent, we refine our valuation methods. Any changes to the valuation models are reviewed by management to ensure the changes are justified.

To confirm that our valuation policies are consistent with exit price as prescribed by SFAS 157, we reviewed our derivative valuations using recent transactions in the marketplace, pricing services and the results of similar types of transactions. As a result of maximizing observable inputs as required by SFAS 157, in 2008 we began to 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.

For details of our derivative financial instruments by SFAS 157 hierarchy level, see Note 15 to the Notes to Consolidated Financial Statements.

Fair value option

SFAS 159 provides the option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments. Under SFAS 159, fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in income. At March 31, 2009, we applied the fair value option to $110 million of unfunded loan commitments. These unfunded loan commitments are valued using quotes from dealers in the loan markets, and we include these in Level 3 of the SFAS 157 hierarchy. See Note 16 to the Notes to Consolidated Financial Statements for additional disclosure regarding SFAS 159.

Also in 2008, we elected fair value accounting for other short-term investments – U.S. government-backed commercial paper ($5.6 billion at Dec. 31, 2008) and borrowings from Federal Reserve related to asset-backed commercial paper ($5.6 billion). There were no balances outstanding for these instruments at March 31, 2009.

 

Fair value – Judgments

In times of illiquid markets and financial stress, actual prices and valuations may significantly diverge from results predicted by models. In addition, other factors can affect our estimate of fair value, including market dislocations, incorrect model assumptions, and unexpected correlations.

These valuation methods could expose us to materially different results should the models used or underlying assumptions be inaccurate. See Basis of Presentation in Note 1 to the Notes to Consolidated Financial Statements.

Other-than-temporary impairment

In April 2009, the FASB issued FAS 115-2 which modifies the OTTI model for investments in debt securities. Under this guidance, a debt security is considered impaired if its fair value is less than its amortized cost basis. An OTTI is triggered if (1) the intent is to sell the security, (2) the security will more likely than not have to be sold before the impairment is recovered, or (3) the amortized cost basis is not expected to be recovered. When an entity does not intend to sell the security before recovery of its cost basis, it will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income.

We routinely conduct periodic reviews to identify and evaluate each investment security that has an unrealized loss to determine whether OTTI has occurred. If contractual cash flows are not expected to be paid, we record the expected credit loss as a charge to earnings.

For each non-agency RMBS in the investment portfolio whose fair value is less than its amortized cost basis, an extensive, regular review is conducted to determine if an OTTI has occurred. To determine if the unrealized loss for non-agency RMBS is other-than-temporary, we project total estimated defaults (roll rates) of the underlying assets (mortgages) and compare the calculated amount to an estimate of realizable value upon sale in the marketplace (severity). As a result of inconsistent underwriting standards in the industry over the past several years, we have adjusted our projections of default based on the year the underlying mortgage was originated. We also evaluate current credit enhancement in the bond to determine the impact on cash flows.


 

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Since the end of the fourth quarter, the housing market indicators and the broader economy have continued to deteriorate. To reflect the declining value of homes in the current environment, we adjusted our non-agency RMBS loss severity assumptions to decrease the amount we expect to receive to cover the value of the original loan. See Note 5 of Notes to Consolidated Financial Statements for the key factors in determining the loss on Alt-A securities. If actual delinquencies, default rates and loss severity assumptions worsen, we would expect additional impairment losses to be recorded in future periods.

The HELOC portfolio holdings are regularly evaluated for potential OTTI. The HELOC securities credit enhancement is provided by a combination of excess spread, over-collateralization, subordination, and a note insurance policy provided by a monoline insurer. For the HELOC holdings, the rating is highly dependent upon the rating of the monoline insurance provider. At March 31, 2009, HELOCs with a face value of approximately $671 million and a fair market value of approximately $232 million are guaranteed by various monoline insurers.

If a monoline insurer experiences a credit rating downgrade and it is determined that the monoline insurer may not be able to meet its obligations, the HELOC holdings guaranteed by that insurer are further evaluated based on the deal collateral and structure without the insurer guarantee. Potential losses are compared to the available total coverage provided by excess spread, over-collateralization and subordination for each bond to determine OTTI.

In addition, we assess OTTI for an appropriate subset of our investment securities subject to EITF 99-20 and as amended by FASB Staff Position EITF 99-20-1 “Amendments to the Impairment Guidance of EITF Issue No. 99-20” by testing for an adverse change in cash flows. Any unrealized loss on a security identified as other than temporarily impaired under EITF 99-20 analysis is charged to earnings.

Consolidated balance sheet review

At March 31, 2009, total assets were $203.5 billion compared with $237.5 billion at Dec. 31, 2008 and $204.9 billion at March 31, 2008. Deposits totaled $133.6 billion at March 31, 2009, $159.7 billion at Dec. 31, 2008 and $127.2 billion at

March 31, 2008. The decrease in total assets and deposits from Dec. 31, 2008 reflects a decline in the size of the balance sheet, which had been anticipated, as short-term credit markets eased and noninterest-bearing deposits decreased. Total assets averaged $220.1 billion in the first quarter of 2009, compared with $244.0 billion in the fourth quarter of 2008 and $200.8 billion in the first quarter of 2008. Total deposits averaged $146.4 billion in the first quarter of 2009, $148.8 billion in the fourth quarter of 2008 and $119.1 billion in the first quarter of 2008.

At March 31, 2009, we had available funds of approximately $78 billion compared with $105 billion at Dec. 31, 2008 and $57 billion at March 31, 2008. Our percentage of liquid assets to total assets was 38% at March 31, 2009 compared with 44% at Dec. 31, 2008 and 28% at March 31, 2008. These high levels of liquid assets reflect our conservative investment strategy in an uncertain market environment, demonstrated by the increase in the proportion of average interest-earning assets invested in short-term liquid investments rising to 49% in the first quarter of 2009 and 50% in the fourth quarter of 2008, from 32% in the first quarter of 2008.

Investment securities were $37.4 billion or 18% of total assets at March 31, 2009, compared with $39.4 billion or 17% of total assets at Dec. 31, 2008. The decrease in investment securities primarily relates to paydowns in the mortgage-backed securities portfolio and higher unrealized losses.

Loans were $41.5 billion or 20% of total assets at March 31, 2009, compared with $43.4 billion or 18% of total assets at Dec. 31, 2008. The decrease in loan levels was primarily due to lower overdrafts and our institutional credit strategy to reduce targeted exposure.

Trading assets were $8.8 billion at March 31, 2009 compared with $11.1 billion at Dec. 31, 2008. Trading liabilities were $6.7 billion at March 31, 2009 compared with $8.1 billion at Dec. 31, 2008. The decrease in both trading assets and trading liabilities reflects a decline in the volatility in the currency markets from the extreme levels in the fourth quarter of 2008.

Total shareholders’ equity applicable to The Bank of New York Mellon Corporation was $28.2 billion at March 31, 2009 and $28.1 billion at Dec. 31, 2008.


 

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Investment securities

The following table shows the distribution of our total securities portfolio at fair value:

 

 
Investment securities (at fair value)          
     March 31,    Dec. 31,
(in millions)    2009    2008
 

Fixed income securities:

     

Mortgage and asset-backed securities

   $ 30,856    $ 32,081

Corporate debt

     1,519      1,678

Short-term money market instruments

     152      106

U.S. government obligations

     789      781

U.S. government agencies

     1,286      1,299

State and political subdivisions

     915      1,076

Other foreign debt

     117      10
 

Subtotal fixed income securities

     35,634      37,031
 

Equity securities:

     

Money market or fixed income funds

     977      1,325

Other

     33      41
 

Subtotal equity securities

     1,010      1,366
 

Total investment securities – fair value

   $ 36,644    $ 38,397

Total investment securities – carrying value

   $ 37,363    $ 39,435
 

 

At March 31, 2009, the carrying value of our investment securities portfolio was $37.4 billion compared with $39.4 billion at Dec. 31, 2008. Average investment securities were $44.1 billion in the first quarter of 2009, compared with $40.7 billion in the fourth quarter of 2008.


 

The following table provides the detail of our total securities portfolio.

 

<
   

Securities portfolio

March 31, 2009

 

(dollar amounts in millions)

  

Amortized

  

Fair

  

Fair Value
as % of
Amortized

   

Portfolio
Aggregate
Unrealized
Gain/

    Quarter
to-date
Change in
Unrealized
Gain/
   

Life-to-
date/
Impairment
Charge

   Ratings  
   Cost (a)    Value    Cost (b)     (Loss) (c)     (Loss)     (a)(d)    AAA     AA     A     Other  
   

Watch list:

                       

Alt-A RMBS

   $ 8,235    $ 4,697    54 %   $ (3,538 )   $ (774 )   $ 468    19 %   3 %   3 %   75 %

Prime/Other RMBS

     6,329      4,874    77       (1,455 )     326       6    59     11     10     20  

Subprime RMBS

     1,556      990    61       (566 )     25       55    11     52     15     22  

Commercial MBS

     2,812      2,299    81       (513 )     196       22    97     1     1     1  

ABS CDOs

     42      10    6       (32 )     (16 )     129    -     -     34     66  

Credit cards

     686      448    62