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, 2011

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ü    No         

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

 

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

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

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

 

Class   

Outstanding as of

March 31, 2011

Common Stock, $0.01 par value    1,241,723,885

 

 


Table of Contents

THE BANK OF NEW YORK MELLON CORPORATION

FIRST QUARTER 2011 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   

First quarter 2011 and subsequent events

     5   

Highlights of first quarter 2011 results

     5   

Fee and other revenue

     7   

Net interest revenue

     9   

Average balances and interest rates

     10   

Noninterest expense

     11   

Income taxes

     12   

Review of businesses

     12   

Critical accounting estimates

     23   

Consolidated balance sheet review

     24   

Liquidity and dividends

     34   

Capital

     38   

Trading activities and risk management

     40   

Foreign exchange and other trading

     41   

Asset/liability management

     41   

Off-balance-sheet arrangements

     42   

Supplemental information – Explanation of Non-GAAP financial measures

     42   

Recent accounting and regulatory developments

     45   

Government monetary policies and competition

     52   

Website information

     52   

Item 1. Financial Statements:

  

Consolidated Income Statement (unaudited)

     54   

Consolidated Balance Sheet (unaudited)

     56   

Consolidated Statement of Cash Flows (unaudited)

     57   

Consolidated Statement of Changes in Equity (unaudited)

     58   

Notes to Consolidated Financial Statements:

  

Note 1 – Basis of presentation

     59   

Note 2 – Accounting changes and new accounting guidance

     59   

Note 3 – Acquisitions

     60   

Note 4 – Discontinued operations

     61   

Note 5 – Securities

     61   

Note 6 – Loans and asset quality

     65   

Note 7 – Goodwill and intangible assets

     70   

Note 8 – Other assets

     72   

Note 9 – Net interest revenue

     72   

Note 10 – Employee benefit plans

     73   

Note 11 – Restructuring charges

     73   

Note 12 – Income taxes

     74   

Note 13 – Securitizations and variable interest entities

     74   

Note 14 – Fair value of financial instruments

     77   

Note 15 – Fair value measurement

     78   

Note 16 – Fair value option

     87   

Note 17 – Derivative instruments

     87   

Note 18 – Commitments and contingent liabilities

     91   

Note 19 – Review of businesses

     96   

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

     99   

Item 4. Controls and Procedures

     100   

Forward-looking Statements.

     101   

Part II – Other Information

  

Item 1. Legal Proceedings

     102   

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

     102   

Item 6. Exhibits

     102   

Signature

     103   

Index to Exhibits

     104   


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)

  

March 31,

2011

   

Dec. 31,

2010 (a)

   

March 31,

2010 (a)

 

Net income basis:

      

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

      

Net income

   $ 625      $ 679      $ 559   

Basic EPS

     0.50        0.55        0.46   

Diluted EPS

     0.50        0.54        0.46   

Return on common equity (annualized)

     7.7     8.3     7.6

Return on average assets (annualized)

     0.98     1.05     1.01

Continuing operations:

      

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

      

Income from continuing operations

   $ 625      $ 690      $ 601   

Basic EPS from continuing operations

     0.50        0.55        0.50   

Diluted EPS from continuing operations

     0.50        0.55        0.49   

Fee and other revenue

   $ 2,838      $ 2,972      $ 2,529   

Income of consolidated investment management funds

     110        59        65   

Net interest revenue

     698        720        765   
                        

Total revenue

   $ 3,646      $ 3,751      $ 3,359   

Return on common equity (annualized) (b)

     7.7     8.5     8.2

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

     24.3     27.5     25.8

Fee revenue as a percentage of total revenue excluding net securities gains

     78     79     75

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

   $ 238      $ 246      $ 242   

Percentage of non-U.S. total revenue

     37     38     35

Pre-tax operating margin (b)

     26     26     26

Non-GAAP adjusted (b)

     28     30     34

Net interest margin (FTE)

     1.49     1.54     1.89

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

   $ 1,229      $ 1,172      $ 1,105   

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

   $ 25.5      $ 25.0      $ 22.4   

Equity securities

     32     32     30

Fixed income securities

     68     68     70

Cross-border assets at period end (in trillions)

   $ 9.9      $ 9.2      $ 8.8   

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

   $ 278      $ 278      $ 253   

Average common shares and equivalents outstanding (in thousands):

      

Basic

     1,234,076        1,232,568        1,202,533   

Diluted

     1,238,284        1,235,670        1,206,286   

 

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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)

  

March 31,

2011

   

Dec. 31,

2010 (a)

   

March 31,

2010 (a)

 

Capital ratios:

      

Tier 1 capital ratio (d)

     14.0     13.4     13.3

Total (Tier 1 plus Tier 2) capital ratio (d)

     16.8     16.3     17.2

Common shareholders’ equity to total assets ratio (b)

     12.5     13.1     13.5

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

     5.9     5.8     6.1

Tier 1 common equity to risk-weighted assets ratio – Non-GAAP (b)(d)

     12.4     11.8     11.6

Selected average balances:

      

Interest-earning assets

   $ 190,185      $ 187,597      $ 163,429   

Assets of operations

   $ 243,356      $ 241,734      $ 212,685   

Total assets

   $ 257,698      $ 256,409      $ 225,415   

Interest-bearing deposits

   $ 116,515      $ 111,776      $ 101,034   

Noninterest-bearing deposits

   $ 38,616      $ 39,625      $ 33,330   

Total The Bank of New York Mellon Corporation shareholders’ equity

   $ 32,827      $ 32,379      $ 29,715   

Other information at period end:

      

Full-time employees

     48,400        48,000        42,300   

Cash dividends per common share

   $ 0.09      $ 0.09      $ 0.09   

Dividend yield (annualized)

     1.2     1.2     1.2

Closing common stock price per common share

   $ 29.87      $ 30.20      $ 30.88   

Market capitalization

   $ 37,090      $ 37,494      $ 37,456   

Book value per common share – GAAP (b)

   $ 26.78      $ 26.06      $ 24.47   

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

   $ 9.67      $ 8.91      $ 8.69   

Common shares outstanding (in thousands)

     1,241,724        1,241,530        1,212,941   

 

(a) Presented on a continuing operations basis.
(b) See Supplemental Information beginning on page 42 for a calculation of these ratios.
(c) Represents the total amount of securities on loan, both cash and non-cash, managed by the Investment Services business.
(d) Determined under Basel I regulatory guidelines. The quarters ended Dec. 31, 2010 and March 31, 2010 include discontinued operations.

 

BNY Mellon    3


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Part I – Financial Information

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

 

 

General

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

Certain business terms used in this document are defined in the glossary included in our 2010 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 discussion of discontinued operations, see Note 4 to the Notes to Consolidated Financial Statements.

Throughout this Form 10-Q, certain measures, which are noted, exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present certain amounts on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 42 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

In the first quarter of 2011, BNY Mellon realigned its internal reporting structure and business presentation to focus on its two principal businesses, Investment Management and Investment Services.

The realignment reflects management’s current approach to assessing performance and decisions regarding resource allocations. Investment Management includes the former Asset Management and Wealth Management businesses. Investment Services includes the former Asset Servicing, Issuer Services and Clearing Services businesses as well as the Cash Management business previously included in the Treasury Services business. The credit-related activities previously included in the Treasury Services business, are now included in the Other segment. The income statement has been changed to reflect this realignment as follows:

 

   

Investment management and performance fees consist of the former asset and wealth management fee revenue; and

   

Investment services fees consist of the former securities servicing fees, including asset servicing, issuer services, clearing services, as well as treasury services fee revenue.

All prior periods have been reclassified. The reclassifications did not affect the results of operations.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a leading manager and servicer of financial assets globally, operating in 36 countries and serving more than 100 markets. Our global client base consists of the world’s largest financial institutions, corporations, government agencies, high-net-worth individuals, families, endowments and foundations and related entities. At March 31, 2011, we had $25.5 trillion in assets under custody and administration and $1.23 trillion in assets under management, serviced $11.9 trillion in outstanding debt and, on average, processed $1.7 trillion of global payments per day.

BNY Mellon’s businesses benefit from the global growth in financial assets and from the globalization of the investment process. Over the long term, our financial goals are focused on deploying capital to

 

 

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accelerate the long-term growth of our businesses and achieving superior total returns to shareholders by generating first quartile earnings per share growth over time relative to a group of peer companies.

Key components of our strategy include: providing superior client service versus peers; strong investment performance relative to investment benchmarks; above-median revenue growth relative to peer companies; increasing the percentage of revenue and income derived from outside the U.S.; successful integration of acquisitions; competitive margins; and positive operating leverage. We have established Tier 1 capital as our principal capital measure and have established a targeted ratio of Tier 1 capital to risk-weighted assets of 10%. We expect to update our capital targets once Basel III guidelines are finalized.

First quarter 2011 and subsequent events

Dividend increase and share repurchase program

In March 2011, BNY Mellon received confirmation that the Federal Reserve did not object to its comprehensive capital plan which provides for capital actions, including a dividend increase and share repurchases. Accordingly, on March 22, 2011, the board of directors authorized a 44% increase in the quarterly common stock dividend to $0.13 per common share. This cash dividend is payable on May 10, 2011, to shareholders of record as of the close of business on April 29, 2011.

In addition, the board approved an increase of 13 million shares to the current share repurchase program authorization, which increased the total common shares available for repurchase to 46.8 million, representing approximately 4% of common shares outstanding. Our current capital plan anticipates the repurchase of up to $1.3 billion worth of outstanding common stock in 2011. During the first quarter of 2011, we repurchased 1.1 million shares. During April of 2011, we repurchased an additional 0.9 million shares.

Agreement to sell Shareowner Services

On April 27, 2011, BNY Mellon announced a definitive agreement to sell its Shareowner Services business. The sales price of $550 million is expected to result in a pre-tax gain and a modest after-tax loss primarily due to the write-off of non-tax deductible goodwill associated with the business. This transaction reflects BNY Mellon’s strategic focus on growing globally our Investment

Management and Investment Servicing businesses. The transaction will further enhance BNY Mellon’s strong capital ratios, generating more than $200 million in additional capital. The transaction is anticipated to close in the third quarter of 2011, subject to regulatory approval.

Agreement to acquire Talon Asset Management

On April 28, 2011, BNY Mellon announced an agreement to acquire the wealth management operations of Chicago-based Talon Asset Management (“Talon”) which manages more than $800 million in assets for wealthy families and institutions. The acquisition of Talon represents BNY Mellon’s first wealth management office in Chicago, the third largest wealth management market in the U.S. At closing, Talon will be included in the Investment Management business. This transaction is expected to close in the second quarter of 2011.

Highlights of first quarter 2011 results

We reported net income applicable to common shareholders of BNY Mellon of $625 million, or $0.50 per diluted common share, in the first quarter of 2011 compared with net income from continuing operations of $601 million, or $0.49 per diluted common share, in the first quarter of 2010 and $690 million, or $0.55 per diluted common share, in the fourth quarter of 2010.

Net income applicable to common shareholders, totaled $625 million, or $0.50 per diluted common share, in the first quarter of 2011 compared with net income applicable to common shareholders, including discontinued operations, of $559 million, or $0.46 per diluted common share, in the first quarter of 2010 and $679 million, or $0.54 per diluted common share, in the fourth quarter of 2010.

Highlights for the first quarter of 2011 include:

 

   

Assets under custody and administration (“AUC”) totaled a record $25.5 trillion at March 31, 2011 compared with $22.4 trillion at March 31, 2010 and $25.0 trillion at Dec. 31, 2010. Both increases primarily reflect higher market values and net new business. The increase compared with March 31, 2010 also reflects the acquisitions of Global Investment Servicing (“GIS”) on July 1, 2010 and BHF Asset Servicing GmbH (“BAS”) on Aug. 2, 2010 (collectively, “the Acquisitions”). (See the Investment Services business on page 19).

   

Assets under management (“AUM”), excluding securities lending assets, totaled a record $1.23 trillion at March 31, 2011 compared with $1.11 trillion at March 31, 2010 and $1.17 trillion at Dec. 31, 2010. This represents an increase of 11% compared with the prior year and 5% sequentially. Both increases were primarily due to higher market values and net new business. (See the Investment management business on page 16).

   

Investment services fees totaled $1.7 billion in the first quarter of 2011 compared with $1.3 billion in the first quarter of 2010. The increase reflects the Acquisitions, new business and

 

 

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higher market values. (See the Investment Services business on page 19).

   

Investment management and performance fees, totaled $764 million in the first quarter of 2011 compared with $686 million in the first quarter of 2010. The increase reflects higher market values and net new business. (See the Investment Management business beginning on page 16).

   

Foreign exchange and other trading revenue totaled $198 million in the first quarter of 2011 compared with $262 million in the first quarter of 2010. In the first quarter of 2011, foreign exchange revenue totaled $173 million, a decrease of 1% compared with the first quarter of 2010, as increased volumes were more than offset by declines in volatility. Other trading revenue was $25 million in the first quarter of 2011, a decrease of $62 million compared with the first quarter of 2010 driven by lower fixed income and derivatives trading revenue. (See Fee and other revenue beginning on page 7).

   

Investment income and other revenue totaled $81 million in the first quarter of 2011 compared with $145 million in the first quarter of 2010. The decrease primarily reflects a reduction in foreign currency translation revenue and lower lease residual gains. (See Fee and other revenue beginning on page 7).

   

Net interest revenue totaled $698 million in the first quarter of 2011 compared with $765 million in the first quarter of 2010. The net interest margin (FTE) for the first quarter of 2011 was

 

1.49% compared with 1.89% in the first quarter of 2010. Both of the decreases reflect lower spreads resulting from the continued impact of the low interest rate environment. (See Net interest revenue beginning on page 9).

   

There was no provision for credit losses in the first quarter of 2011 compared with a charge of $35 million in the first quarter of 2010. (See Asset quality and allowance for credit losses beginning on page 29).

   

Noninterest expense totaled $2.7 billion in the first quarter of 2011 compared with $2.4 billion in the first quarter of 2010. The increase, reflects the impact of the Acquisitions, higher expenses associated with our revenue mix, litigation, pension and healthcare expenses, and continued investment in our franchise. (See Noninterest expense beginning on page 11).

   

Unrealized net of tax gains on our total investment securities portfolio were $279 million at March 31, 2011 compared with $150 million at Dec. 31, 2010. The improvement in the valuation of the investment securities portfolio was driven by narrowing credit spreads on non-agency residential mortgage-backed securities (“RMBS”). (See Consolidated balance sheet review beginning on page 24).

   

Our Tier 1 capital ratio was 14.0% at March 31, 2011 compared with 13.4% at Dec. 31, 2010. The increase primarily reflects earnings retention. (See Capital beginning on page 38).

 

 

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Fee and other revenue

 

Fee and other revenue                         1Q11 vs.  
(dollars in millions, unless otherwise noted)    1Q11     4Q10     1Q10     1Q10     4Q10  

Investment services fees:

          

Asset servicing

   $ 923      $ 914      $ 637        45     1

Issuer services

     351        409        333        5        (14

Clearing services

     292        278        230        27        5   

Treasury services

     128        129        131        (2     (1

Total investment services fees

     1,694        1,730        1,331        27        (2

Investment management and performance fees

     764        800        686        11        (5

Foreign exchange and other trading revenue

     198        258        262        (24     (23

Distribution and servicing

     53        55        48        10        (4

Financing-related fees

     43        48        50        (14     (10

Investment income

     67        64        108        (38     5   

Other

     14        16        37        (62     (13

Total fee revenue

   $ 2,833      $ 2,971      $ 2,522        12     (5 )% 

Net securities gains

     5        1        7        N/M        N/M   

Total fee and other revenue

   $ 2,838  (a)    $ 2,972  (a)    $ 2,529        12     (5 )% 

Fee revenue as a percent of total revenue excluding net securities gains

     78     79     75    

Market value of AUM at period end (in billions)

   $ 1,229      $ 1,172      $ 1,105        11     5

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

   $ 25.5      $ 25.0      $ 22.4        14     2

 

(a) Total fee revenue from the Acquisitions was $261 million in the first quarter of 2011 and $246 million in the fourth quarter of 2010.
N/M – Not meaningful.

 

Fee revenue

Fee revenue increased 12% year-over-year and decreased 5% (unannualized) sequentially. The year-over-year increase primarily reflects the impact of the Acquisitions, higher market values and net new business, partially offset by decreases in foreign exchange and other trading revenue, investment income and other fee revenue. The sequential decrease primarily reflects seasonally lower depositary receipts and performance fees, as well as lower foreign exchange volatility.

Investment services fees

Investment services fees were impacted by the following, compared with the first quarter of 2010 and fourth quarter of 2010:

 

   

Asset servicing fees – Year-over-year and sequential results were positively impacted by higher market values, new business and asset inflows from existing clients. The year-over-year increase was primarily driven by the impact of the Acquisitions.

   

Issuer services fees – The increase year-over-year resulted from higher depositary receipts revenue, reflecting higher corporate action and issuance and cancellation fees. The decrease

   

sequentially was driven by seasonally lower depositary receipts revenue.

   

Clearing services fees – The year-over-year and sequential increases reflect strong growth in mutual fund assets and positions, increased daily average revenue trades (“DARTs”), higher market values and new business. The year-over-year increase was also driven by the impact of the GIS acquisition.

   

Treasury services fees – The year-over-year and sequential decreases primarily resulted from lower global payment services revenue.

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

Investment management and performance fees

Investment management and performance fees totaled $764 million in the first quarter of 2011, an increase of 11% year-over-year and a decrease of 5% (unannualized) sequentially. Performance fees were $17 million in the first quarter of 2011 compared with $13 million in the first quarter of 2010 and $73 million in the fourth quarter of 2010. The sequential decrease in performance fees reflects seasonality. Excluding performance fees, investment management fees totaled $747 million, an increase of 11% compared with the prior year period and 3% (unannualized)

 

 

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sequentially. Both increases reflect higher market values and net new business.

Total AUM for the Investment Management business was $1.23 trillion at March 31, 2011 compared with $1.17 trillion at Dec. 31, 2010 and $1.11 trillion at March 31, 2010. The increases from both prior periods were primarily due to higher market values and net new business. The S&P 500 Index was 1326 at March 31, 2011 compared with 1258 at Dec. 31, 2010 (a 5% increase) and 1169 at March 31, 2010 (a 13% increase).

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

Foreign exchange and other trading revenue

 

Foreign exchange and other trading revenue  
     Quarter ended  
(in millions)    March 31,
2011
    Dec. 31,
2010
    March 31,
2010
 

Foreign exchange

   $ 173      $ 206      $ 175   

Fixed income

     17        39        80   

Credit derivatives

     (1     (3     (2

Other

     9        16        9   

Total

   $ 198      $ 258      $ 262   

Foreign exchange and other trading revenue was $198 million in the first quarter of 2011, a decrease of 24% compared with the first quarter of 2010, and 23% (unannualized) compared with the fourth quarter of 2010. In the first quarter of 2011, foreign exchange revenue totaled $173 million, a decrease of 1% year-over-year and 16% (unannualized) sequentially, as increased volumes were more than offset by declines in volatility. Other trading revenue was $25 million in the first quarter of 2011, a decrease of $62 million compared with the first quarter of 2010 and $27 million compared with the fourth quarter of 2010. Both decreases were driven by lower fixed income and derivatives trading revenue. Foreign exchange and other trading revenue is primarily reported in the Investment Services business. Other trading revenue is also reported in the Other segment.

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

Distribution and servicing fee revenue increased $5 million compared with the first quarter of 2010 and decreased $2 million compared with the fourth quarter of 2010. The year-over-year increase primarily reflects new business inflows. The sequential decrease primarily reflects lower redemptions. The impact of distribution and servicing fees on income in any one period can be more than offset by distribution and servicing expense paid to other financial intermediaries to cover their cost for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement.

Financing-related fees

Financing-related fees, which are primarily reported in the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees decreased $7 million compared with the first quarter of 2010 and $5 million sequentially. Both decreases were primarily driven by lower credit related fees, primarily reflecting our strategy to reduce targeted risk exposure.

Investment income

 

Investment income                        
(in millions)    1Q11      4Q10      1Q10  

Corporate/bank-owned life insurance

   $ 37       $ 38       $ 36   

Lease residual gains

     13         2         52   

Equity investment income

     5         10         12   

Private equity gains

     10         10         5   

Seed capital gains

     2         4         3   

Total investment income

   $ 67       $ 64       $ 108   

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

 

 

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Other revenue

 

Other revenue                      
(in millions)    1Q11     4Q10     1Q10  

Expense reimbursements from joint ventures

   $ 9      $ 9      $ 10   

Asset-related gains

     14        5        3   

Other income (loss)

     (11     (2     24   

Economic value payments

     2        4        -   

Total other revenue

   $ 14      $ 16      $ 37   

Other revenue includes asset-related gains, expense reimbursements from joint ventures, economic value payments and other income (loss). Asset-related gains include loan, real estate and other asset dispositions. Expense reimbursements from joint ventures relate to expenses incurred by BNY Mellon on behalf of joint ventures. Economic value payments relate to deposits from the GIS acquisition that have not yet transferred to BNY Mellon. Other income (loss) primarily includes foreign currency translation, other investments and various miscellaneous revenues.

Total other revenue decreased in the first quarter of 2011 compared with both the first quarter of 2010 and the fourth quarter of 2010 primarily due to lower foreign currency translation revenue partially offset

 

by a $13 million net gain recorded in the first quarter of 2011 related to loan sales and valuation changes on loans from Mellon United National Bank, our former national bank subsidiary located in Florida, (“MUNB”). For additional information on discontinued operations, see Note 4 of the Notes to Consolidated Financial Statements.

Net securities gains

Net securities gains totaled $5 million in the first quarter of 2011, compared with $7 million in the first quarter of 2010 and $1 million in the fourth quarter of 2010. In the first quarter of 2011, $228 million of non-agency RMBS were sold at a gain of $10 million partially offset by impairment charges of $5 million on European floating rate notes and Alt-A RMBS.

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

 

Net securities gains                      
(in millions)    1Q11     4Q10     1Q10  

Alt-A RMBS

   $ 5      $ -      $ (7

Prime RMBS

     9        -        -   

Subprime RMBS

     (6     (4     -   

European floating rate notes

     (3     -        -   

Other

     -        5        14   

Net securities gains

   $ 5      $ 1      $ 7   
 

 

Net interest revenue

 

Net interest revenue                            1Q11 vs.  
(dollars in millions)    1Q11      4Q10      1Q10      1Q10     4Q10  

Net interest revenue (non-FTE)

   $ 698       $ 720       $ 765         (9 )%      (3 )% 

Tax equivalent adjustment

     4         4         5         N/M        N/M   

Net interest revenue (FTE) – Non-GAAP

   $ 702       $ 724       $ 770         (9 )%      (3 )% 

Average interest-earning assets

   $ 190,185       $ 187,597       $ 163,429         16     1

Net interest margin (FTE)

     1.49      1.54      1.89      (40 )bps      (5 )bps 

N/M – Not meaningful.

bps – basis points.

 

Net interest revenue totaled $698 million in the first quarter of 2011 compared with $765 million in the first quarter of 2010 and $720 million in the fourth quarter of 2010. Both the year-over-year and sequential declines reflect lower spreads resulting from the continued impact of the low interest rate environment and lower discount accretion, partially offset by higher average assets. The sequential decline also reflects a lower day count. Net interest revenue in the first quarter of 2011 includes $10

million related to both timing differences on hedges and an interest payment on a deposit for a bankruptcy matter.

The net interest margin was 1.49% in the first quarter of 2011 compared with 1.89% in the first quarter of 2010 and 1.54% in the fourth quarter of 2010. The declines primarily reflect the factors mentioned above.

 

 

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Average balances and interest rates

 

Average balances and interest rates    Quarter ended  
     March 31, 2011     Dec. 31, 2010     March 31, 2010  
(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)

   $ 57,637        1.03   $ 59,660        0.96   $ 55,800        1.03

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

     20,373        0.32        16,787        0.32        12,129        0.33   

Federal funds sold and securities purchased under resale agreements

     4,514        0.50        5,553        3.15        3,859        0.71   

Margin loans

     6,984        1.48        6,289        1.55        5,241        1.49   

Non-margin loans:

            

Domestic offices

     22,391        2.52        21,780        2.55        19,510        3.12   

Foreign offices

     9,191        1.44        9,460        1.53        9,463        1.62   
                              

Total non-margin loans

     31,582        2.21        31,240        2.24        28,973        2.63   

Securities:

            

U.S. government obligations

     12,849        1.61        11,390        1.51        6,600        1.40   

U.S. government agency obligations

     20,221        2.98        21,406        2.95        19,429        3.58   

State and political subdivisions

     557        6.37        587        6.53        670        6.37   

Other securities

     31,770        3.43        31,987        3.55        28,653        4.20   

Trading securities

     3,698        2.44        2,698        3.02        2,075        2.49   
                              

Total securities

     69,095        2.93        68,068        3.02        57,427        3.63   
                              

Total interest-earning assets

     190,185        1.85     187,597        1.95     163,429        2.18

Allowance for loan losses

     (494       (530       (502  

Cash and due from banks

     4,088          4,224          3,514     

Other assets

     49,577          50,220          45,346     

Assets of discontinued operations

     -          223          898     

Assets of consolidated investment management funds

     14,342                14,675                12,730           

Total assets

   $ 257,698              $ 256,409              $ 225,415           

Liabilities

            

Interest-bearing liabilities:

            

Money market rate accounts

   $ 31,844        0.09   $ 30,149        0.10   $ 21,741        0.09

Savings

     1,600        0.16        1,433        0.22        1,372        0.27   

Certificates of deposit of $100,000 & over

     296        0.06        285        0.08        648        0.25   

Other time deposits

     5,396        0.35        5,149        0.31        5,224        0.30   

Foreign offices

     77,379        0.29        74,760        0.26        72,049        0.16   
                              

Total interest-bearing deposits

     116,515        0.23        111,776        0.22        101,034        0.16   

Federal funds purchased and securities sold under repurchase agreements

     5,172        0.07        7,256        2.13        3,697        0.07   

Trading liabilities

     2,764        1.14        1,704        1.06        1,178        1.07   

Other borrowed funds

     1,821        2.69        1,999        1.65        1,627        2.62   

Payables to customers and broker-dealers

     6,701        0.10        5,878        0.11        6,372        0.08   

Long-term debt

     17,014        1.87        16,624        1.87        16,808        1.50   
                              

Total interest-bearing liabilities

     149,987        0.45     145,237        0.53     130,716        0.36

Total noninterest-bearing deposits

     38,616          39,625          33,330     

Other liabilities

     22,350          24,740          18,420     

Liabilities of discontinued operations

     -          223          898     

Liabilities and obligations of consolidated investment management funds

     13,114                13,481                11,540           

Total liabilities

     224,067          223,306          194,904     

Temporary equity:

            

Redeemable noncontrolling interests

     76          22          -     

Permanent equity:

            

Total BNY Mellon shareholders’ equity

     32,827          32,379          29,715     

Noncontrolling interest

     8          8          26     

Noncontrolling interests of consolidated investment management funds

     720                694                770           

Total permanent equity

     33,555                33,081                30,511           

Total liabilities, temporary equity and permanent equity

   $ 257,698              $ 256,409              $ 225,415           

Net interest margin – Taxable equivalent basis

             1.49             1.54             1.89
Note: Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.

 

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Noninterest expense

 

Noninterest expense

(dollars in millions)

                        1Q11 vs.  
   1Q11     4Q10     1Q10     1Q10     4Q10  

Staff:

          

Compensation

   $ 876      $ 871      $ 753        16     1

Incentives

     325        348        284        14        (7

Employee benefits

     223        198        183        22        13   

Total staff

     1,424        1,417        1,220        17        -   

Professional, legal and other purchased services

     283        320        241        17        (12

Net occupancy

     153        158        137        12        (3

Software

     122        117        94        30        4   

Distribution and servicing

     111        104        89        25        7   

Furniture and equipment

     84        90        75        12        (7

Sub-custodian

     68        70        52        31        (3

Business development

     56        88        52        8        (36

Other

     277        260        186        49        7   

Subtotal

     2,578  (a)      2,624  (a)      2,146        20        (2

Amortization of intangible assets

     108        115        97        11        (6

Restructuring charges

     (6     21        7        N/M        N/M   

M&I expenses

     17        43        26        (35     (60

Special litigation reserves

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

Total noninterest expense

   $ 2,697      $ 2,803      $ 2,440        11     (4 )% 

Total staff expense as a percent of total revenue

     39     38     36    

Employees at period end

     48,400        48,000        42,300        14     1

 

(a) Noninterest expense from the Acquisitions was $203 million in the first quarter of 2011 and $196 million in the fourth quarter of 2010.

N/A – Not applicable.

N/M – Not meaningful.

 

Total noninterest expense increased $257 million compared with the first quarter of 2010 and decreased $106 million compared with the fourth quarter of 2010. Excluding amortization of intangible assets, restructuring charges, merger and integration expenses (“M&I”) and special litigation reserves, noninterest expense increased $432 million year-over-year and decreased $46 million sequentially. The year-over-year increase reflects the impact of the Acquisitions, higher expenses associated with our revenue mix, $47 million of litigation expense in the first quarter of 2011, higher pension and healthcare expenses, and continued investment in our franchise. The sequential decrease reflects seasonality, as well as higher expenses in the fourth quarter of 2010 primarily related to the full-year impact of adjusting compensation to market levels and the write-off of equipment, partially offset by higher litigation and pension and healthcare expenses.

Staff expense

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

The increase in staff expense compared with the first quarter of 2010 primarily reflects the impact of the Acquisitions, higher pension and healthcare expenses and the impact of adjusting compensation to market levels in the fourth quarter of 2010. The increase in staff expense compared with the fourth quarter of 2010 primarily reflects higher pension and healthcare expenses, partially offset by the full-year impact of adjusting compensation to market levels in the fourth quarter of 2010.

Non-staff expense

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

Non-staff expense, excluding amortization of intangible assets, restructuring charges, M&I expenses and special litigation reserves, totaled $1,154 million in the first quarter of 2011 compared with $926 million in the first quarter of 2010 and

 

 

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$1,207 million in the fourth quarter of 2010. The increase compared with the first quarter of 2010 primarily reflects the impact of the Acquisitions, higher litigation expense and continued investment in our franchise. The decrease in non-staff expense compared with the fourth quarter of 2010 primarily reflects seasonally higher expenses in the fourth quarter of 2010 related to the write-off of equipment, partially offset by higher litigation expense in the first quarter of 2011.

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

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

In the first quarter of 2011, we incurred $17 million of M&I expenses primarily related to the integration of the Acquisitions.

Income taxes

The effective tax rate for the first quarter of 2011 was 29.3% compared with 29.1% on a continuing operations basis in the first quarter of 2010 and 27.3% on a continuing operations basis in the fourth quarter of 2010.

We expect the effective tax rate to be approximately 30% for the full year of 2011.

Review of businesses

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

Organization of our business

In the first quarter of 2011, BNY Mellon realigned its internal reporting structure and business presentation to focus on its two principal businesses, Investment Management and Investment Services. The realignment reflects management’s current approach to assessing performance and decisions regarding resource allocations. Investment Management includes the

former Asset Management and Wealth Management businesses; Investment Services includes the former Asset Servicing, Issuer Services and Clearing Services businesses as well as the Cash Management business previously included in the Treasury Services business. The Other segment includes credit-related activities previously included in the Treasury Services business, the lease financing portfolio, corporate treasury activities, including our investment securities portfolio, our investment in BNY ConvergEx Group, business exits and corporate overhead. All prior periods presented in this Form 10-Q are presented accordingly.

Also in the first quarter of 2011, we revised the net interest revenue for our businesses to reflect a new approach which adjusts our transfer pricing methodology to better reflect the value of certain domestic deposits. All prior period business results have been restated to reflect this revision. This revision did not impact the consolidated results.

Business accounting principles

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

For additional information on the accounting principles of our businesses, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 19 to the Notes to Consolidated Financial Statements. In addition, client deposits serve as the primary funding source for our investment securities portfolio and we typically allocate all interest revenue to the businesses generating the deposits. Accordingly, the higher yield related to the restructured investment securities portfolio has been included in the results of the businesses.

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

Information on our businesses is reported on a continuing operations basis for all periods in 2010.

 

 

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See Note 4 to the Notes to Consolidated Financial Statements for a discussion of discontinued operations.

The results of our businesses in the first quarter of 2011 reflect higher market values and the impact of new business that benefited both the Investment Management and Investment Services businesses. Year-over-year results in the Investment Services business were impacted by the Acquisitions, higher depositary receipts revenue and higher clearing revenue, partially offset by lower foreign exchange volatility. Sequentially, results in the Investment Services business reflect lower depositary receipts revenue, lower foreign exchange volatility and persistent weakness in the structured debt markets, partially offset by higher clearing revenue. Money market fee waivers also continue to suppress results in both the Investment Services and Investment Management businesses.

Net interest revenue continues to be impacted by low spreads resulting from the lower interest rate environment, partially offset by higher interest-earning assets.

Noninterest expense increased year-over-year reflecting the Acquisitions and new business. In the Investment Management business, expenses decreased sequentially reflecting lower incentive expense. Sequentially, expenses were flat in the Investment Services business, as lower incentives were offset by higher litigation expense.

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

 

 

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

 

Market indices                                            1Q11 vs  
   1Q10      2Q10      3Q10      4Q10      1Q11      1Q10     4Q10  

S&P 500 Index (a)

     1169         1031         1141         1258         1326         13     5

S&P 500 Index – daily average

     1123         1135         1095         1204         1302         16        8   

FTSE 100 Index (a)

     5680         4917         5549         5900         5909         4        -   

FTSE 100 Index – daily average

     5431         5361         5312         5760         5945         9        3   

Barclay’s Capital Aggregate Bondsm Index (a)

     300         299         329         323         328         9        2   

MSCI EAFE® Index (a)

     1584         1348         1561         1658         1703         8        3   

NYSE and NASDAQ Share Volume (in billions)

     246         299         233         219         225         (9     3   

 

(a) Period end.

 

The period end S&P 500 Index increased 5% sequentially and 13% year-over-year. The period end FTSE 100 Index was unchanged sequentially and increased 4% year-over-year. On a daily average basis, the S&P 500 Index increased 8% sequentially and 16% year-over-year while the FTSE 100 Index increased 3% sequentially and 9% year-over-year.

The changes in the value of market indices primarily impact fee revenue in Investment Management and to a lesser extent Investment Services.

At March 31, 2011, using the S&P 500 Index as a proxy for global equity markets, we estimate that a 100 point change in the value of the S&P 500 Index, sustained for one year, would impact fee revenue by approximately 1 to 2% and fully diluted earnings

per common share on a continuing operations basis by $0.06-$0.07. If the global equity markets over or under perform the S&P 500 Index, the impact to fee revenue and earnings per share could be different.

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

 

 

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For the quarter ended March 31, 2011

 

(dollar amounts

in millions)

   Investment
Management
    Investment
Services
    Other     Consolidated  

Fee and other revenue

   $ 870  (a)    $ 1,950      $ 84      $ 2,904  (a) 

Net interest revenue

     53        639        6        698   

Total revenue

     923        2,589        90        3,602   

Provision for credit losses

     -        -        -        -   

Noninterest expense

     685        1,816        196        2,697   

Income (loss) before taxes

   $  238  (a)    $ 773      $ (106   $ 905  (a) 

Pre-tax operating margin (b)

     26     30     N/M        25

Average assets

   $ 37,318      $ 178,718      $ 41,662      $ 257,698   

Excluding intangible amortization:

        

Noninterest expense

   $ 630      $ 1,763      $ 196      $ 2,589   

Income before taxes

     293        826        (106     1,013   

Pre-tax operating margin (b)

     32     32     N/M        28

 

(a) Total fee and other revenue and income before taxes for the first quarter of 2011 include $66 million of income from consolidated investment management funds, net of noncontrolling interests. See Supplemental information beginning on page 42.
(b) Income before taxes divided by total revenue.

N/M – Not meaningful.

 

For the quarter ended Dec. 31, 2010

 

(dollar amounts
in millions)

   Investment
Management
    Investment
Services
    Other     Total
continuing
operations
 

Fee and other revenue

   $ 899  (a)    $ 2,010      $ 108      $ 3,017  (a) 

Net interest revenue

     50        598        72        720   

Total revenue

     949        2,608        180        3,737   

Provision for credit losses

     2        -        (24     (22

Noninterest expense

     728        1,812        263        2,803   

Income (loss) before taxes

   $ 219  (a)    $ 796      $ (59   $ 956  (a) 

Pre-tax operating margin (b)

     23     31     N/M        26

Average assets

   $ 37,648      $ 174,815      $ 43,723      $ 256,186  (c) 

Excluding intangible amortization:

        

Noninterest expense

   $ 667      $ 1,759      $ 262      $ 2,688   

Income before taxes

     280        849        (58     1,071   

Pre-tax operating margin (b)

     29     33     N/M        29

 

(a) Total fee and other revenue and income before taxes for the fourth quarter of 2010 include $45 million of income from consolidated investment management funds, net of noncontrolling interests. See Supplemental information beginning on page 42.
(b) Income before taxes divided by total revenue.
(c) Including average assets of discontinued operations of $223 million for the fourth quarter of 2010, consolidated average assets were $256,409 million.

N/M – Not meaningful.

 

For the quarter ended Sept. 30, 2010

 

(dollar amounts
in millions)

   Investment
Management
    Investment
Services
    Other     Total
continuing
operations
 

Fee and other revenue

   $ 793  (a)    $ 1,865      $ 59      $ 2,717  (a) 

Net interest revenue

     50        589        79        718   

Total revenue

     843        2,454        138        3,435   

Provision for credit losses

     -        -        (22     (22

Noninterest expense

     683        1,682        246        2,611   

Income (loss) before taxes

   $ 160  (a)    $ 772      $ (86   $ 846  (a) 

Pre-tax operating margin (b)

     19     31     N/M        25

Average assets

   $ 36,197      $ 158,837      $ 45,044      $ 240,078  (c) 

Excluding intangible amortization:

        

Noninterest expense

   $ 624      $ 1,630      $ 246      $ 2,500   

Income before taxes

     219        824        (86     957   

Pre-tax operating margin (b)

     26     34     N/M        28

 

(a) Total fee and other revenue and income before taxes for the third quarter of 2010 include $49 million of income from consolidated investment management funds, net of noncontrolling interests. See Supplemental information beginning on page 42.
(b) Income before taxes divided by total revenue.
(c) Including average assets of discontinued operations of $247 million for the third quarter of 2010, consolidated average assets were $240,325 million.

N/M – Not meaningful.

 

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For the quarter ended June 30, 2010

 

(dollar amounts
in millions)

   Investment
Management
    Investment
Services
    Other     Total
continuing
operations
 

Fee and other revenue

   $ 767  (a)    $ 1,714      $ 106      $ 2,587  (a) 

Net interest revenue

     53        608        61        722   

Total revenue

     820        2,322        167        3,309   

Provision for credit losses

     1        -        19        20   

Noninterest expense

     655        1,560        101        2,316   

Income before taxes

   $ 164  (a)    $ 762      $ 47      $ 973  (a) 

Pre-tax operating margin (b)

     20     33     28     29

Average assets

   $ 33,944      $ 153,836      $ 40,801      $ 228,581  (c) 

Excluding intangible amortization:

        

Noninterest expense

   $ 596      $ 1,521      $ 101      $ 2,218   

Income before taxes

     223        801        47        1,071   

Pre-tax operating margin (b)

     27     34     28     32

 

(a) Total fee and other revenue and income before taxes for the second quarter of 2010 include $32 million of income from consolidated investment management funds, net of noncontrolling interests. See Supplemental information beginning on page 42.
(b) Income before taxes divided by total revenue.
(c) Including average assets of discontinued operations of $260 million for the second quarter of 2010, consolidated average assets were $228,841 million.

N/M – Not meaningful.

 

For the quarter ended March 31, 2010

 

(dollar amounts
in millions)

   Investment
Management
    Investment
Services
    Other     Total
continuing
operations
 

Fee and other revenue

   $ 775  (a)    $ 1,590      $ 205      $ 2,570  (a) 

Net interest revenue

     52        653        60        765   

Total revenue

     827        2,243        265        3,335   

Provision for credit losses

     -        -        35        35   

Noninterest expense

     627        1,457        356        2,440   

Income (loss) before taxes

   $ 200  (a)    $ 786      $ (126   $ 860  (a) 

Pre-tax operating margin (b)

     24     35     N/M        26

Average assets

   $ 33,805      $ 153,666      $ 37,046      $ 224,517  (c) 

Excluding intangible amortization:

        

Noninterest expense

   $ 569      $ 1,419      $ 355      $ 2,343   

Income before taxes

     258        824        (125     957   

Pre-tax operating margin (b)

     31     37     N/M        29

 

(a) Total fee and other revenue and income before taxes for the first quarter of 2010 include $41 million of income from consolidated investment management funds, net of noncontrolling interests. See Supplemental information beginning on page 42.
(b) Income before taxes divided by total revenue.
(c) Including average assets of discontinued operations of $898 million for the first quarter of 2010, consolidated average assets were $225,415 million.

N/M – Not meaningful.

 

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Investment Management business

 

(dollar amounts in millions,
unless otherwise noted)
                                      1Q11 vs.  
   1Q10     2Q10     3Q10     4Q10     1Q11     1Q10     4Q10  

Revenue:

              

Investment management and performance fees:

              

Mutual funds

   $ 249      $ 254      $ 270      $ 293      $ 283        14     (3 )% 

Institutional clients

     265        262        264        283        302        14        7   

Wealth management

     174        170        172        174        181        4        4   

Performance fees

     13        19        16        75        17        31        N/M   

Total investment management and performance fees

     701        705        722        825        783        12        (5

Distribution and servicing

     47        49        53        52        51        9        (2

Other (a)

     27        13        18        22        36        33        64   

Total fee and other revenue (a)

     775        767        793        899        870        12        (3

Net interest revenue

     52        53        50        50        53        2        6   

Total revenue

     827        820        843        949        923        12        (3

Provision for credit losses

     -        1        -        2        -        N/M        N/M   

Noninterest expense (ex. amortization of intangible assets)

     569        596        624        667        630        11        (6

Income before taxes (ex. amortization of intangible assets)

     258        223        219        280        293        14        5   

Amortization of intangible assets

     58        59        59        61        55        (5     (10

Income before taxes

   $ 200      $ 164      $ 160      $ 219      $ 238        19     9

Pre-tax operating margin

     24     20     19     23     26    

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

     31     27     26     29     32    

Metrics:

              

Changes in market value of AUM (in billions) (b):

              

Beginning balance

   $ 1,115      $ 1,105      $ 1,047      $ 1,141      $ 1,172       

Net inflows (outflows):

              

Long-term

     16        12        11        9        31       

Money market

     (25     (17     18        6        (5                

Total net inflows (outflows)

     (9     (5     29        15        26       

Net market/currency impact

     (1     (53     65        16        31                   

Ending balance

   $ 1,105      $ 1,047      $ 1,141      $ 1,172      $ 1,229        11     5

AUM at period end, by client type (in billions) (b):

              

Institutional

   $ 620      $ 595      $ 639      $ 639      $ 701       

Mutual funds

     396        370        418        454        451       

Private client

     89        82        84        79        77                   

Total AUM

   $ 1,105      $ 1,047      $ 1,141      $ 1,172      $ 1,229        11     5

Composition of AUM at period end, by product type (in billions) (b):

              

Equity securities

   $ 342      $ 307      $ 352      $ 379      $ 417        22     10

Fixed income securities

     313        317        348        342        362        16        6   

Money market

     332        314        329        332        337        2        2   

Alternative investments and overlay

     118        109        112        119        113        (4     (5

Total AUM

   $ 1,105      $ 1,047      $ 1,141      $ 1,172      $ 1,229        11     5

Wealth management:

              

Average loans

   $ 6,302      $ 6,350      $ 6,520      $ 6,668      $ 6,825        8     2

Average deposits

   $ 7,325      $ 8,018      $ 8,455      $ 9,140      $ 9,272        27     1

 

(a) Total fee and other revenue includes the impact of the consolidated investment management funds. See Supplemental information beginning on page 42. Additionally, other revenue includes asset servicing, clearing services and treasury services revenue.
(b) Excludes securities lending cash management assets.

N/M – Not meaningful.

 

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Business description

Investment management is comprised of our affiliated investment management boutiques and wealth management.

Our investment management business is responsible, through various subsidiaries, for U.S. and non-U.S. retail, intermediary and institutional investment management, distribution 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, this business includes BNY Mellon Asset Management International, which is responsible for the investment management and distribution of products internationally, and the Dreyfus Corporation and its affiliates, which are responsible for U.S. investment management and distribution of retail mutual funds, and separate accounts and annuities. We are one of the world’s largest asset managers with a top-10 position in both the U.S. and Europe and 11th position globally.

Through BNY Mellon Wealth Management, we offer a full array of investment management, wealth and estate planning and private banking solutions to help clients protect, grow and transfer their wealth. Clients include high-net-worth individuals and families, charitable gift programs, endowments and foundations and related entities. At Dec. 31, 2010, BNY Mellon Wealth Management was ranked as the nation’s 8th largest wealth manager and 3rd largest private bank.

The results of the Investment Management business are driven by the period end and average level and mix of assets managed and under custody, the level of activity in client accounts and private banking volumes. Results for this business are also impacted by sales of fee-based products. In addition, performance fees may be generated when the investment performance exceeds various benchmarks and satisfies other criteria. Net interest revenue is determined by loan and deposit volumes and the interest rate spread between customer rates and internal funds transfer rates on loans and deposits. Expenses in this business are mainly driven by staffing costs, incentives, distribution and servicing expense and product distribution costs.

Review of financial results

In the first quarter of 2011, Investment Management had pre-tax income of $238 million compared with $200 million in the first quarter of 2010 and $219 million in the fourth quarter

of 2010. Excluding amortization of intangible assets, pre-tax income was $293 million in the first quarter of 2011 compared with $258 million in the first quarter of 2010 and $280 million in the fourth quarter of 2010. Investment Management results compared with both prior periods reflect the benefit of new business in the investment management boutiques and wealth management platform, higher equity values and improved investment performance. The sequential comparison was also impacted by seasonality.

The Investment Management business generated 300 basis points and 100 basis points of positive operating leverage sequentially and year-over-year, excluding amortization of intangible assets.

Investment management and performance fees in the Investment Management business were $783 million in the first quarter of 2011 compared with $701 million in the first quarter of 2010 and $825 million in the fourth quarter of 2010. The year-over-year increase reflects net new business, higher market values and improved investment performance. The sequential decrease reflects seasonally lower performance fees, partially offset by higher market values and net new business. Performance fees were $17 million in the first quarter of 2011 compared with $13 million in the first quarter of 2010 and $75 million in the fourth quarter of 2010. Excluding performance fees, these fees increased 11% year-over-year and 2% (unannualized) sequentially.

Investment management and performance fees are dependent on the overall level and mix of AUM and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. Assets under management were a record $1.23 trillion at March 31, 2011, compared with $1.17 trillion at Dec. 31, 2010 and $1.10 trillion at March 31, 2010. Both increases primarily reflect higher market values and net new business.

Net long-term inflows were $31 billion and net short-term outflows were $5 billion in the first quarter of 2011. Long-term inflows benefited from strength in fixed income and equity indexed products and the eighth consecutive quarter of positive flows in retail funds.

 

 

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In the first quarter of 2011, 36% of Investment management and performance fees in the Investment Management business were generated from managed mutual fund fees. These fees are based on the daily average net assets of each fund and the management fee paid by that fund. Managed mutual fund fee revenue was $283 million in the first quarter of 2011 compared with $249 million in the first quarter of 2010 and $293 million in the fourth quarter of 2010. The year-over-year increase reflects higher equity markets and positive net new business. The sequential decrease reflects a lower day count in the first quarter of 2011.

Distribution and servicing fees were $51 million in the first quarter of 2011 compared with $47 million in the first quarter of 2010 and $52 million in the fourth quarter of 2010. The year-over-year increase primarily reflects net new business inflows.

Other fee revenue total $36 million in the first quarter of 2011 compared with $27 million in the first quarter of 2010 and $22 million in the fourth quarter of 2010. The year-over-year increase primarily reflects higher income from consolidated investment management funds.

Net interest revenue was $53 million in the first quarter of 2011, compared with $52 million in the first quarter of 2010 and $50 million in the fourth quarter of 2010. Both increases resulted from record levels of loans and deposits reached in wealth management in the first quarter of 2011 due to organic growth. Average loans increased 8% year-over-year and 2% (unannualized) sequentially; Average deposits increased 27% year-over-year and 1% (unannualized) sequentially.

Revenue generated in the Investment Management business includes 41% from non-U.S. sources in the first quarter of 2011 compared with 39% in the first quarter of 2010 and 42% in the fourth quarter of 2010.

Noninterest expense (excluding amortization of intangible assets) was $630 million in the first quarter of 2011 compared with $569 million in the first quarter of 2010 and $667 million in the fourth quarter of 2010. The year-over-year increase primarily resulted from higher incentive expense driven by new business, and higher distribution and servicing expense. The sequential decrease primarily resulted from lower incentive expense driven primarily by a seasonal decrease in performance fees.

 

 

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Investment Services business

 

                                         1Q11 vs.  
(dollar amounts in millions, unless otherwise noted)    1Q10     2Q10     3Q10     4Q10     1Q11     1Q10     4Q10  

Revenue:

              

Investment services fees:

              

Asset servicing

   $ 607      $ 627      $ 845      $ 888      $ 897        48     1

Issuer services

     333        354        364        409        351        5        (14

Clearing services

     227        240        250        276        290        28        5   

Treasury services

     130        124        131        128        127        (2     (1

Total investment services fees

     1,297        1,345        1,590        1,701        1,665        28        (2

Foreign exchange and other trading revenue

     221        249        185        227        208        (6     (8

Other (a)

     72        120        90        82        77        7        (6

Total fee and other revenue (a)

     1,590        1,714        1,865        2,010        1,950        23        (3

Net interest revenue

     653        608        589        598        639        (2     7   

Total revenue (b)

     2,243        2,322        2,454        2,608        2,589        15        (1

Noninterest expense (ex. amortization of intangible assets) (c)

     1,419        1,521        1,630        1,759        1,763        24        -   

Income before taxes (ex. amortization of intangible assets)

     824        801        824        849        826        -        (3

Amortization of intangible assets

     38        39        52        53        53        39        -   

Income before taxes

   $ 786      $ 762      $ 772      $ 796      $ 773        (2 )%      (3 )% 

Pre-tax operating margin

     35     33     31     31     30    

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

     37     34     34     33     32    

Investment services fees as a percentage of noninterest expense (ex. amortization of intangible assets)

     91     88     98     97     94    

Metrics:

              

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

   $ 22.4      $ 21.8      $ 24.4      $ 25.0      $ 25.5        14     2

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

   $ 253      $ 248      $ 279      $ 278      $ 278        10     -

Securities lending revenue

   $ 24      $ 30      $ 26      $ 27      $ 27        13     -

Average assets

   $ 153,666      $ 153,836      $ 158,837      $ 174,815      $ 178,718        16     2

Average loans

   $ 14,273      $ 17,053      $ 17,941      $ 19,053      $ 20,554        44     8

Average deposits

   $ 122,350      $ 121,468      $ 123,212      $ 136,060      $ 141,115        15     4

Asset servicing:

              

New business wins (in billions)

   $ 205      $ 419      $ 480      $ 350      $ 496       

Corporate Trust:

              

Total debt serviced (in trillions)

   $ 11.8      $ 11.6      $ 12.0      $ 12.0      $ 11.9        1     (1 )% 

Number of deals administered

     141,904        140,551        135,613        138,067        133,416        (6 )%      (3 )% 

Depositary Receipts:

              

Number of sponsored programs

     1,336        1,345        1,353        1,363        1,368        2     -

Total depositary receipts outstanding (in billions)

     28.3        29.9        30.0        30.4        31.0        10     2

Clearing services:

              

DARTS volume (in thousands)

     188.0        198.4        161.4        185.5        207.2        10     12

Average active clearing accounts (in thousands)

     4,811        4,896        4,929        4,967        5,443        13     10

Average mutual fund assets (U.S. platform) (in millions)

   $ 224,219      $ 229,714      $ 243,573      $ 264,076      $ 287,682        28     9

Average margin loans (in millions)

   $ 5,229      $ 5,775      $ 6,261      $ 6,281      $ 6,978        33     11

Broker-Dealer:

              

Average tri-party repo collateral (in billions)

   $ 1,540      $ 1,565      $ 1,631      $ 1,793      $ 1,805        17     1

Treasury services:

              

Global payments transaction volume (in thousands)

     10,166        10,678        10,847        11,042        10,587        4     (4 )% 

 

(a) Total fee and other revenue includes investment management fees and distribution and servicing revenue.
(b) Total revenue from the Acquisitions was $237 million in the third quarter of 2010, $253 million in the fourth quarter of 2010 and $270 million in the first quarter of 2011.
(c) Noninterest expense from the Acquisitions was $185 million in the third quarter of 2010, $196 million in the fourth quarter of 2010 and $203 million in the first quarter of 2011.
(d) Includes the assets under custody or administration of CIBC Mellon Global Securities Services Company, a joint venture with Canadian Imperial Bank of Commerce, of $964 billion at March 31, 2010, $903 billion at June 30, 2010, $960 billion at Sept. 30, 2010, $1,056 billion at Dec. 31, 2010 and $1,118 billion at March 31, 2011.
(e) Represents the total amount of securities on loan, both cash and non-cash, managed by the Investment Services business.

 

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Business description

Investment Services provides global custody and related services, broker-dealer services, alternative investment services, corporate trust, depositary receipt and shareowner services, as well as clearing services and global payment/working capital solutions to global financial institutions. Our comprehensive suite of financial solutions include: global custody, global fund services, securities lending, investment manager outsourcing, performance and risk analytics, alternative investment services, securities clearance, collateral management, corporate trust, American and global depositary receipt programs, cash management solutions, international payment services, liquidity services and other linked revenues, principally foreign exchange, global clearing and execution, managed account services and global prime brokerage solutions. Our clients include corporations, public funds and government agencies, foundations and endowments; global financial institutions including banks, broker-dealers, asset managers, insurance companies and central banks; financial intermediaries and independent registered investment, and hedge fund managers.

The results of this business are driven by a number of factors which include: the level of transaction activity; the range of services provided, including custody, accounting, fund administration, daily valuations, performance measurement and risk analytics, securities lending, and investment manager back-office outsourcing; and the market value of assets under administration and custody. Market interest rates impact both securities lending revenue and the earnings on client deposit balances. Business expenses are driven by staff, technology investment, equipment and space required to support the services provided by the business and the cost of execution and clearance and custody of securities.

Our Investment Services business also generates foreign exchange trading revenues, which 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. As part of our foreign exchange business, we offer a standing instruction program that provides a cost-effective and efficient option to our clients for handling a high volume of small transactions or difficult to execute transactions in restricted and emerging markets currencies. This program provides custody clients and their investment managers an end-to-end solution

that transfers to BNY Mellon much of the burden, risk and infrastructure cost associated with such foreign exchange transactions. Custody clients and their investment managers have the option of executing their foreign exchange transactions pursuant to the standing instruction program or through other foreign exchange trading options, including negotiated trading, made available by BNY Mellon or with a foreign exchange provider other than BNY Mellon. Our custody clients choose to use an external foreign exchange provider other than BNY Mellon for a substantial majority of their U.S. dollar volume foreign exchange transactions.

We are one of the leading global securities servicing providers with a total of $25.5 trillion of assets under custody and administration at March, 31, 2011. We continue to maintain our number one ranking in two major global custody surveys. We are the largest custodian for U.S. corporate and public pension plans and we service 44% of the top 50 endowments. We are a leading custodian in the UK and service 25% of UK pensions. European asset servicing continues to grow across all products, reflecting significant cross-border investment and capital flows.

We are one of the largest providers of fund services in the world, servicing $5.7 trillion in assets. We are the second largest fund administrator in the alternative investment services industry and service 43% of the funds in the U.S. exchange-traded funds marketplace.

BNY Mellon is a leader in both global securities and U.S. Government securities clearance. We clear and settle equity and fixed income transactions in over 100 markets and handle most of the transactions cleared through the Federal Reserve Bank of New York for 16 of the 20 primary dealers. We are an industry leader in collateral management, servicing $1.8 trillion in tri-party balances worldwide at March 31, 2011.

In securities lending, we are one of the largest lenders of U.S. Treasury securities and depositary receipts and service a lending pool of more than $2.6 trillion in 31 markets. We are one of the largest global providers of performance and risk analytics, with $9.7 trillion in assets under measurement.

BNY Mellon is the leading provider of corporate trust services for all major conventional and structured finance debt categories, and a leading provider of specialty services. We service $11.9 trillion in outstanding debt from 61 locations in 20 countries.

 

 

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We serve as depositary for 1,368 sponsored American and global depositary receipt programs at March 31, 2011, acting in partnership with leading companies from 63 countries – a 62% global market share. Our transfer agency services are top-ranked and our corporate equity solutions serve over 2,600 institutional clients representing 30 million shareowner accounts worldwide and more than 2 million optionees and employee stock plans participants.

Pershing, our clearing service, takes a consultative approach, working with more than 1,500 financial organizations and 100,000 investment professionals who collectively represent more than five million individual and institutional investors by delivering dependable operational support; robust trading services; flexible technology; an expansive array of investment solutions, including managed accounts, mutual funds and cash management; practice management support and service excellence.

With a network of more than 2,000 correspondent financial institutions, we help clients in their efforts to optimize cash flow, manage liquidity and make payments more efficiently around the world in more than 100 currencies. We are the fourth largest Fedwire and CHIPS payment processor, processing about 162,000 global payments daily totaling an average of $1.7 trillion.

Agreement to sell Shareowner Services

On April 27, 2011, BNY Mellon announced a definitive agreement to sell its Shareowner Services business. The sales price of $550 million is expected to result in a pre-tax gain and a modest after-tax loss primarily due to the write-off of non-tax deductible goodwill associated with the business. The transaction is anticipated to close in the third quarter of 2011, subject to regulatory approval.

Role of BNY Mellon, as a trustee, for mortgage-backed securitizations

BNY Mellon acts as trustee and document custodian for certain mortgage-backed security (“MBS”) securitization trusts. The role of trustee for MBS securitizations is limited. Our primary role as trustee is to calculate and distribute monthly bond payments to bondholders. As a document custodian, we are required to notify the mortgage service providers and the seller of the loan whether the files contain the mortgage note and other required documents. BNY Mellon, either as document custodian or trustee, does not receive mortgage underwriting files (the files that contain information related to the credit worthiness of the borrower). As trustee or custodian, we have no responsibility or liability for the quality of the portfolio; we are liable only for performance of the limited duties as described above and in the trust document.

Review of financial results

Assets under custody and administration at March 31, 2011 were a record $25.5 trillion, an increase of 2% from $25.0 trillion at Dec. 31, 2010 and 14% from $22.4 trillion at March 31, 2010. Both increases primarily reflect higher market values and new business. The increase compared with March 31, 2010 also reflects the impact of the Acquisitions. Equity securities constituted 32% and fixed-income securities constituted 68% of the assets under custody and administration at March 31, 2011, compared with 32% equity securities and 68% fixed income securities at Dec. 31, 2010 and 30% equity securities and 70% fixed income securities at March 31, 2010. Assets under custody and administration at March 31, 2011 consisted of assets related to custody, mutual funds, and corporate trust businesses of $20.4 trillion, broker-dealer service assets of $3.2 trillion, and all other assets of $1.9 trillion.

Income before taxes was $773 million in the first quarter of 2011 compared with $786 million in the first quarter of 2010, and $796 million in the fourth quarter of 2010. Income before taxes, excluding amortization of intangible assets, was $826 million in the first quarter of 2011 compared with $824 million in the first quarter of 2010 and $849 million in the fourth quarter of 2010. Investment Services results reflect the impact of the Acquisitions (year-over-year), new business, improved market values, seasonality (sequentially) and declines in foreign currency volatility.

Revenue generated in the Investment Services business includes 36% from non-U.S. sources in the first quarter of 2011, 36% in the first quarter of 2010 and 39% in the fourth quarter of 2010.

Investment services fees increased $368 million, or 28%, compared with the first quarter of 2010 and decreased $36 million, or 2% (unannualized), sequentially.

 

   

Asset servicing revenue (global custody, broker-dealer services and alternative investment services) was $897 million in the first quarter of 2011 compared with $888 million in the fourth quarter of 2010 and $607 million in the first quarter of 2010. Year-over-year and sequential results were positively impacted by higher market values, new business and asset inflows from existing clients. The year-over-year increase was primarily driven by the impact of the Acquisitions.

 

 

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Issuer services revenue (corporate trust, depositary receipts and shareowner services) was $351 million in the first quarter of 2011 compared with $409 million in the fourth quarter of 2010 and $333 million in the first quarter of 2010. The year-over-year increase was primarily driven by higher depositary receipts revenue, reflecting higher corporate action and issuance and cancellation fees. The decrease sequentially resulted from seasonally lower depositary receipts revenue.

   

Clearing services revenue (Pershing) was $290 million in the first quarter of 2011 compared with $276 million in the fourth quarter of 2010 and $227 million in the first quarter of 2010. The year-over-year and sequential increases reflect strong growth in mutual fund assets and positions, increased revenue from DARTs, higher market values and new business. The year-over-year increase also includes the impact of the GIS acquisition.

Foreign exchange and other trading revenue decreased 6% compared with the first quarter of 2010 and 8% (unannualized) sequentially, as increased foreign exchange volumes were more than offset by declines in volatility.

Net interest revenue was $639 million in the first quarter of 2011 compared with $598 million in the fourth quarter of 2010 and $653 million in the first quarter of 2010. The sequential increase reflects higher deposit balances partially offset by narrower spreads.

Noninterest expense (excluding amortization of intangible assets) increased 24% compared with the first quarter of 2010 and was flat sequentially. The year-over-year increase reflects the impact of the Acquisitions, higher litigation expenses and expenses in support of business growth. Sequentially, lower incentive expense was offset by higher litigation expense.

 

 

Other segment

 

(dollar amounts in millions)    1Q10     2Q10     3Q10     4Q10     1Q11  

Revenue:

          

Fee and other revenue

   $ 205      $ 106      $ 59      $ 108      $ 84   

Net interest revenue

     60        61        79        72        6   

Total revenue

     265        167        138        180        90   

Provision for credit losses

     35        19        (22     (24     -   

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

     158        102        175        198        185   

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

     72        46        (15     6        (95

Amortization of intangible assets

     1        -        -        1        -   

Restructuring charges

     7        (15     15        21        (6

M&I expenses

     26        14        56        43        17   

Special litigation reserves

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

Income (loss) before taxes

   $ (126   $ 47      $ (86   $ (59   $ (106

Average loans and leases

   $ 13,639      $ 13,261      $ 12,308      $ 11,808      $ 11,187   

Average deposits

   $ 4,689      $ 5,105      $ 5,564      $ 6,201      $ 4,744   

N/A – Not applicable.

 

Business description

The Other segment primarily includes:

 

   

credit-related services;

   

the leasing portfolio;

   

corporate treasury activities, including our investment securities portfolio;

   

a 33.2% equity interest in BNY ConvergEx; and

   

business exits and corporate overhead.

Revenue primarily reflects:

 

   

net interest revenue from the credit services and lease financing portfolios;

   

interest income remaining after transfer pricing allocations;

   

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

   

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

 

 

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Expenses include:

 

   

M&I expenses;

   

restructuring charges;

   

direct expenses supporting credit-related services, leasing, investing and funding activities; and

   

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

Review of financial results

Income before taxes was a loss of $106 million in the first quarter of 2011, compared with losses of $126 million in the first quarter of 2010 and $59 million in the fourth quarter of 2010.

Total fee and other revenue decreased $121 million compared to the first quarter of 2010 and $24 million compared to the fourth quarter of 2010. Both decreases reflect lower fixed income and derivative trading revenue. The year-over-year decrease also reflects a reduction in foreign currency translation revenue and lower lease residual gains.

The year-over-year and sequential declines in net interest revenue reflect a reduction in the net interest margin resulting from the continued impact of the low interest rate environment. The year-over-year decline also reflects lower average loan and lease balances resulting from our credit strategy to reduce targeted risk exposure.

Noninterest expense (excluding amortization of intangible assets, restructuring charges, M&I expenses and special litigation reserves) increased $27 million compared to the first quarter of 2010 and decreased $13 million sequentially. The year-over-year increase reflects higher pension and healthcare expenses. The decrease sequentially primarily reflects the write-off of equipment in the fourth quarter of 2010 and a seasonal decrease in marketing and donations.

The Other segment also includes the following activity:

In the first quarter of 2011:

 

   

net securities gains of $5 million.

In the fourth quarter of 2010:

 

   

net securities losses of $2 million; and

   

a credit to the provision for credit losses of $24 million.

In the first quarter of 2010:

 

   

net securities gains of $7 million;

   

a $164 million charge related to special litigation reserves; and

   

a provision for credit losses of $35 million.

Critical accounting estimates

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements contained in BNY Mellon’s 2010 Annual Report on Form 10-K. Our more critical accounting estimates are those related to goodwill and other intangibles, the allowance for loan losses and allowance for lending-related commitments, fair value of financial instruments and derivatives, other-than-temporary impairment (“OTTI”) and pension accounting as referenced below.

 

Critical policy   Reference
Pension accounting   BNY Mellon’s 2010 Annual Report, pages 36 through 37.
Goodwill and other intangibles   BNY Mellon’s 2010 Annual Report, page 36.
Allowance for loan losses and allowance for lending-related commitments   BNY Mellon’s 2010 Annual Report, page 33. See page 31 of this Form 10-Q for the impact of estimates on the allowance for credit losses.
Fair value of financial instruments and derivatives   BNY Mellon’s 2010 Annual Report, pages 33 through 35.
OTTI   BNY Mellon’s 2010 Annual Report, pages 35 and 36. See page 26 of this Form 10-Q for the impact of market assumptions on portions of our securities portfolio.
 

 

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Consolidated balance sheet review

At March 31, 2011, total assets were $266.4 billion compared with $247.3 billion at Dec. 31, 2010. The increase in consolidated total assets resulted from a higher level of both interest-bearing and noninterest-bearing deposits. Deposits totaled $162.5 billion at March 31, 2011 and $145.3 billion at Dec. 31, 2010. Total assets averaged $257.7 billion in the first quarter of 2011, compared with $225.4 billion in the first quarter of 2010 and $256.4 billion in the fourth quarter of 2010. At March 31, 2011, total deposits were 61% of total interest-earning assets. The increase in average assets compared with the first quarter of 2010 primarily reflects higher deposit levels and the impact of the Acquisitions. Total deposits averaged $155.1 billion in the first quarter of 2011, $151.4 billion in the fourth quarter of 2010 and $134.4 billion in the first quarter of 2010.

At March 31, 2011, we had approximately $63.5 billion of liquid funds and $28.7 billion of cash (including approximately $24.6 billion of overnight deposits with the Federal Reserve and other central banks) for a total of approximately $92.2 billion of available funds. This compares with available funds of $77.6 billion at Dec. 31, 2010. Our percentage of liquid assets to total assets was 35% at March 31, 2011, compared with 31% at Dec. 31, 2010. Our interest-bearing deposits with banks are all placed with large highly-rated global financial institutions. The average life of the interest-bearing deposits is approximately 51 days.

Investment securities were $66.3 billion at both March 31, 2011 and Dec. 31, 2010, representing 25% of total assets at March 31, 2011 and 27% at Dec. 31, 2010.

Loans were $40.0 billion or 15% of total assets at March 31, 2011, compared with $37.8 billion or 15% of total assets at Dec. 31, 2010. The increase in loan levels was primarily due to secured term loans to broker-dealers.

Total shareholders’ equity applicable to BNY Mellon was $33.3 billion at March 31, 2011 and $32.4 billion at Dec. 31, 2010. The increase in total shareholders’ equity primarily reflects earnings retention and narrower credit spreads in our investment securities portfolio.

BNY Mellon, through its involvement in the Government Securities Clearing Corporation (“GSCC”) settles government securities transactions on a net basis for payment and delivery through the Fed wire system. As a result, at March 31, 2011, the assets and liabilities of BNY Mellon were reduced by $463 million for the netting of repurchase agreements and reverse repurchase agreement transactions executed with the same counterparty under standardized Master Repurchase Agreements. This netting is performed in accordance with FASB Interpretation No. 41 (ASC 210-20) “Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements”.

Investment securities

In the discussion of our investment securities portfolio, we have included certain credit ratings information because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications for our investment portfolio could indicate increased credit risk for us and could be accompanied by a reduction in the fair value of our investment securities portfolio.

 

 

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

 

Investment securities portfolio  
     Dec. 31,
2010
   

1Q11
change in
unrealized
gain/

(loss)

    March 31, 2011    

Fair value
as a % of
amortized
cost (a)

   

Unrealized
gain/(loss)

    Ratings  

(dollar amounts

in millions)

  

Fair

value

      Amortized
cost
    

Fair

value

        AAA/
AA-
    A+/
A-
    BBB+/
BBB-
    BB+ and
lower
    Not
rated
 

Watch list: (b)

                                                                                         

European floating rate notes (c)

   $ 4,636      $ 39      $ 5,020       $ 4,628        91   $ (392     86     11     3     -     -

Commercial MBS

     2,281        2        2,073         2,131        103        58        92        5        3        -        -   

Non-agency RMBS

     2,577        67        2,652         2,428        84        (224     30        7        12        51        -   

Credit cards

     517        -        437         442        99        5        2        96        2        -        -   

Other

     331        13        305         341        50        36        6        1        24        16        53   

Total Watch list (b)

     10,342        121        10,487         9,970        89        (517     67        12        6        13        2   

Agency RMBS

     20,157        (44     18,894         19,227        102        333        100        -        -        -        -   

Sovereign debt/ sovereign guaranteed

     8,585        (27     9,661         9,683        100        22        100        -        -        -        -   

U.S. Treasury securities

     12,635        (50     13,683         13,618        100        (65     100        -        -        -        -   

Non-agency RMBS (d)

     4,496        245        3,560         4,383        75        823        2        1        3        94        -   

Foreign covered bonds

     2,868        (19     3,122         3,087        99        (35     97        3        -        -        -   

FDIC-insured debt

     2,474        (9     2,460         2,497        101        37        100        -        -        -        -   

U.S. Government agency debt

     1,005        (4     1,023         1,017        99        (6     100        -        -        -        -   

Other

     3,807        3        2,942         2,919        99        (23     72        11        4        1        12   

Total investment securities

   $ 66,369  (e)    $ 216      $ 65,832       $ 66,401  (e)      97   $ 569        87     3     1     8     1

 

(a) Amortized cost before impairments.
(b) The “Watch list” includes those securities we view as having a higher risk of impairment charges.
(c) Includes RMBS, commercial MBS, and other securities.
(d) These RMBS were included in the former Grantor Trust and were marked-to-market in 2009. We believe these RMBS would receive higher credit ratings if these ratings incorporated, as additional credit enhancement, the difference between the written-down amortized cost and the current face amount of each of these securities.
(e) Includes net unrealized gains on derivatives hedging securities available-for-sale of $60 million at Dec. 31, 2010 and $92 million at March 31, 2011.

 

The fair value of our investment securities portfolio was $66.4 billion at both March 31, 2011 and Dec. 31, 2010. At March 31, 2011, the total investment securities portfolio had an unrealized pre-tax gain of $569 million compared with $353 million at Dec. 31, 2010. The unrealized net of tax gain on our investment securities available-for-sale portfolio included in other comprehensive income was $280 million at March 31, 2011 compared with $151 million at Dec. 31, 2010. The improvement in the valuation of the investment securities portfolio was primarily driven by narrowing credit spreads on non-agency RMBS.

In 2009, we established a Grantor Trust in connection with the restructuring of our investment securities portfolio. The Grantor Trust has been dissolved. The securities held in the former Grantor Trust are included in our investment securities portfolio and were marked down to approximately 60% of face value in 2009. At March 31, 2011, these securities were trading above adjusted amortized cost with a total unrealized pre-tax gain of $823 million compared with an unrealized pre-tax gain of $578 million at Dec. 31, 2010.

At March 31, 2011, 87% of the securities in our portfolio were rated AAA/AA-, unchanged compared with Dec. 31, 2010.

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

At March 31, 2011, we had $1.5 billion of accretable discount related to the restructuring of the investment securities portfolio. The discount related to these transactions had a remaining average life of approximately 4.0 years. The accretion of discount related to these securities increases net interest revenue and is recorded on a level yield basis. The discount accretion totaled $102 million in the first quarter of 2011, $105 million in the fourth quarter of 2010 and $137 million in the first quarter of 2010.

Also, at March 31, 2011, we had $734 million of net amortizable purchase premium relating to investment securities with a remaining average life of approximately 3.4 years. For these securities, the amortization of net premium decreased net interest revenue and is recorded on a level yield basis. We

 

 

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recorded net premium amortization of $71 million in the first quarter of 2011, $71 million in the fourth quarter of 2010 and $67 million in the first quarter of 2010.

In the first quarter of 2011, $228 million of non-agency RMBS were sold at a net gain of $10 million. These gains were partially offset by impairment charges of $5 million on European floating rate notes and Alt-A RMBS. Net securities gains in the first quarter of 2011 were $5 million. The following table provides pre-tax net securities gains by type.

 

Net securities gains                      
(in millions)    1Q11     4Q10     1Q10  

Alt-A RMBS

   $ 5      $ -      $ (7

Prime RMBS

     9        -        -   

Subprime RMBS

     (6     (4     -   

European floating rate notes

     (3     -        -   

Other

     -        5        14   

Net securities gains

   $ 5      $ 1      $ 7   

On a quarterly basis, we perform our impairment analysis using several factors including projected loss severities and default rates. In the first quarter of 2011, this analysis resulted in a $5 million credit loss on European floating rate notes and Alt-A RMBS. If we were to increase or decrease each of our projected loss severities and default rates by 100 basis points on each of the positions in our non-agency RMBS portfolios, credit-related impairment charges on these securities would have increased less than $1 million (pre-tax) or decreased less than $1 million (pre-tax) in the first quarter of 2011. See Note 5 to the Notes to Consolidated Financial Statements for the projected weighted average default rates and loss severities.

At March 31, 2011, the investment securities portfolio includes $62 million of assets not accruing interest, primarily related to securities issued by Lehman Brothers Holdings, Inc. or its affiliates. These securities are held at market value.

The following table shows the fair value of the European floating rate notes by geographical location at March 31, 2011. The unrealized loss on these securities was $392 million at March 31, 2011, an improvement of 9% compared with $431 million at Dec. 31, 2010.

 

European floating rate notes at March 31, 2011 (a)          
(in millions)    United
Kingdom
     Netherlands      Other      Total
fair
value
 

RMBS

   $ 2,160       $ 926       $ 857       $ 3,943   

Other

     284         89         312         685   

Total

   $ 2,444       $ 1,015       $ 1,169       $ 4,628   

 

(a) 86% of these securities are in the AAA to AA- ratings category.

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

 

Investment securities guaranteed

by monoline insurers

(in millions)

   March 31,
2011
    Dec. 31,
2010
 

State and political subdivisions

   $ 547      $ 539   

Mortgage-backed securities

     115        109   

Total fair value

   $ 662  (a)    $ 648   

Amortized cost less securities losses

   $ 688      $ 685   

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

   $ (26   $ (37

 

(a) The par value guaranteed by the monoline insurers was $742 million.

At March 31, 2011, securities guaranteed by monoline insurers were rated 49% AAA to AA-, 16% A+ to A-, 13% BBB+ to BBB- and 22% BB+ and lower. The increase in the fair value of these securities from Dec. 31, 2010 primarily reflects purchases of municipal securities partially offset by maturities, calls and paydowns. When purchasing securities, we review the credit quality of the underlying securities, as well as the insurer.

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

 

 

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Loans

 

Total exposure – consolidated    March 31, 2011      Dec. 31, 2010  
(in billions)    Loans      Unfunded
commitments
     Total
exposure
     Loans      Unfunded
commitments