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Bank of New York Mellon Corporation 10-K 2010
Annual Report
Table of Contents

Exhibit 13.1

Financial Section

THE BANK OF NEW YORK MELLON CORPORATION

2009 ANNUAL REPORT

TABLE OF CONTENTS

 

 

 

         Page

Financial Summary

   6

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

  

Results of operations

   8

General

   8

Overview

   8

Impact of the current market environment on our business and regulatory events

   9

2009 and subsequent events

   10

Summary of financial results

   12

Fee and other revenue

   14

Net interest revenue

   17

Noninterest expense

   20

Income taxes

   21

Extraordinary loss – consolidation of commercial paper conduits

   22

Business segments review

   22

International operations

   35

Critical accounting estimates

   38

Consolidated balance sheet review

   45

Support agreements

   59

Liquidity and dividends

   59

Commitments and obligations

   62

Off-balance sheet arrangements

   63

Capital

   64

Risk management

   67

Trading activities and risk management

   70

Foreign exchange and other trading

   71

Asset/liability management

   71

Business continuity

   72

Supplemental information – Explanation of Non-GAAP financial measures (unaudited)

   74

Supplemental information – Rate/volume analysis (unaudited)

   78

Recent accounting and regulatory developments

   79

Selected quarterly data (unaudited)

   82

Forward-looking statements

   83

Glossary

   85

Report of management on internal control over financial reporting

   89

Report of independent registered public accounting firm

   90

Financial Statements and Notes:

 

Consolidated Income Statement

   91

Consolidated Balance Sheet

   93

Consolidated Statement of Cash Flows

   94

Consolidated Statement of Changes in Equity

   95

Notes to Consolidated Financial Statements

   97

Report of Independent Registered Public Accounting Firm

   156

Directors, Senior Management and Executive Committee

   157

Performance Graph

   158

Corporate Information

  Inside back cover

 


Table of Contents

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

 

Financial Summary

 

                                      

(dollar amounts in millions, except per common share

amounts and unless otherwise noted)

   2009      2008      2007 (a)      2006 (b)     2005 (b)  
Year ended Dec. 31                                  

Fee revenue

   $ 10,141       $ 12,342       $ 9,254       $ 5,337      $ 4,693   

Investment securities gains (losses)

     (5,369      (1,628      (201      2        22   

Net interest revenue

     2,915         2,859         2,245         1,499        1,340   

Total revenue

     7,687         13,573         11,298         6,838        6,055   

Provision for credit losses

     332         104         (11      (20     (7

Noninterest expense

     9,563         11,523         8,094         4,675        4,078   

Income (loss) from continuing operations before
income taxes

     (2,208      1,946         3,215         2,183        1,984   

Provision (benefit) for income taxes

     (1,395      491         987         694        635   

Income (loss) from continuing operations

     (813      1,455         2,228         1,489        1,349   

Income (loss) from discontinued operations, net of tax

     (270      14         10         1,371        228   

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

     -         (26      (180      -        -   

Net income (loss)

     (1,083      1,443         2,058         2,860        1,577   

Net (income) loss attributable to noncontrolling interests,
net of tax

     (1      (24      (19      (13     (6

Redemption charge and preferred dividends

     (283      (33      -         -        -   

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

   $ (1,367    $ 1,386       $ 2,039       $ 2,847      $ 1,571   

Earnings per diluted common share (c):

             

Income (loss) from continuing operations

   $ (0.93    $ 1.21       $ 2.35       $ 2.04      $ 1.84   

Income (loss) from discontinued operations, net of tax

     (0.23      0.01         0.01         1.91        0.31   

Extraordinary (loss), net of tax

     -         (0.02      (0.19      -        -   

Net income (loss) applicable to common stock

   $ (1.16    $ 1.20       $ 2.17       $ 3.93  (d)    $ 2.15   

At Dec. 31

             

Securities

   $ 56,049       $ 39,435       $ 48,698       $ 21,106      $ 27,218   

Loans

     36,689         43,394         50,931         37,793        32,927   

Total assets

     212,224         237,512         197,656         103,206        102,118   

Deposits

     135,050         159,673         118,125         62,146        49,787   

Long-term debt

     17,234         15,865         16,873         8,773        7,817   

Preferred (Series B) stock

     -         2,786         -         -        -   

Common shareholders’ equity

     28,977         25,264         29,403         11,429        9,876   
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(b) Results for 2006 and 2005 include legacy The Bank of New York Company, Inc. only. All legacy The Bank of New York Company, Inc. earnings per share and share-related data are presented in post merger share count terms.
(c) Diluted earnings per common share for the year ended Dec. 31, 2009 was calculated using average basic shares. Adding back the dilutive shares would result in anti-dilution.
(d) Does not foot due to rounding.

 

6     BNY Mellon


Table of Contents

Financial Summary (continued)

 

                                     

(dollar amounts in millions, except per common share

amounts and unless otherwise noted)

   2009     2008     2007 (a)      2006 (b)      2005 (b)  
Selected data                                 

Return on common equity (c)(d)

     N/M        5.0     11.0      27.6      16.6

Non-GAAP adjusted (c)(d)

     8.3     14.3        13.7         28.7         16.7   

Return on tangible common equity (c)(d)

     N/M        20.7        29.3         50.7         29.4   

Non-GAAP adjusted (c)(d)

     28.7        48.9        33.7         52.0         29.1   

Return on assets (d)

     N/M        0.67        1.49         2.67         1.55   
Continuing operations basis:                                 

Pre-tax operating margin (c)

     N/M        14        28         32         33   

Non-GAAP adjusted (c)

     31        39        36         35         33   

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

     62        79        80         78         78   

Non-GAAP adjusted (c)

     78        79        80         78         78   

Fee revenue per employee (based on average headcount) (in thousands)

   $ 242      $ 290      $ 291       $ 262       $ 240   

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

     32     33 (f)      32      30      30

Net interest margin (on fully taxable equivalent basis) (e)

     1.82        1.89  (f)      2.05         2.01         2.02   

Cash dividends per common share (b)

   $ 0.51      $ 0.96      $ 0.95       $ 0.91       $ 0.87   

Common dividend payout ratio

     N/M        80.00     43.58      23.10      40.28

Dividend yield

     1.8     3.4        1.9         2.2         2.6   

Closing common stock price per common share (b)

   $ 27.97      $ 28.33      $ 48.76       $ 41.73       $ 33.76   

Market capitalization (in billions)

     33.8        32.5        55.9         29.8         24.6   

Book value per common share (b)(c)

     23.99        22.00        25.66         16.03         13.57   

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

     7.90        5.18        8.00         7.73         7.90   

Employees (continuing operations)

     42,200        42,500        41,200         22,400         19,900   

Year-end common shares outstanding (in thousands) (b)

     1,207,835        1,148,467        1,145,983         713,079         727,483   

Average common equity to average assets

     12.8     13.4     13.6      9.7      9.3
At Dec. 31                                 

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

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

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

     22.3        20.2        23.1         15.5         11.4   

Cross-border assets (in trillions)

     8.8        7.5        10.0         6.3         3.4   

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

     247        326        633         399         311   
Capital ratios at Dec. 31 (h)                                 

Tier 1 capital ratio

     12.1     13.2     9.3      8.2      8.4

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

     10.5        9.4        7.6         6.7         6.9   

Total (Tier 1 plus Tier 2) capital ratio

     16.0        16.9        13.2         12.5         12.5   

Leverage capital ratio

     6.5        6.9        6.5         6.7         6.6   

Common shareholders’ equity to assets (c)

     13.7        10.6        14.9         11.1         9.7   

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

     5.2        3.8        5.2         5.7         5.9   
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(b) Results for 2006 and 2005 include legacy The Bank of New York Company, Inc. only. All legacy The Bank of New York Company, Inc. earnings per share and share-related data are presented in post merger share count terms.
(c) See Supplemental Information beginning on page 74 for a calculation of these ratios.
(d) Calculated before the extraordinary losses in 2008 and 2007.
(e) Prior periods are calculated on a continuing operations basis, even though the prior period balance sheets, in accordance with GAAP, have not been restated for discontinued operations.
(f) Excluding the SILO/LILO charges, the percentage of non-U.S. fee and net interest revenue was 32% and the net interest margin was 2.21% for the year ended Dec. 31, 2008.
(g) Represents the securities on loan, both cash and non-cash, managed by the Asset Servicing segment.
(h) Includes discontinued operations.

 

BNY Mellon     7


Table of Contents

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

Results of Operations

 

 

General

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

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

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

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

How we reported results

On July 1, 2007, The Bank of New York Company, Inc. and Mellon Financial Corporation (“Mellon Financial”) merged into The Bank of New York Mellon Corporation (together with its consolidated subsidiaries, “BNY Mellon”), with BNY Mellon being the surviving entity.

The merger transaction resulted in The Bank of New York Company, Inc. shareholders receiving 0.9434 shares of BNY Mellon’s common stock for each share of The Bank of New York Company, Inc. common stock outstanding at the closing date of the merger. All legacy The Bank of New York Company, Inc. earnings per share and common stock outstanding amounts in this Annual Report have been restated to reflect this exchange ratio. For accounting and financial reporting purposes the merger was accounted for as a purchase of Mellon Financial by The Bank of New York Company, Inc.

 

Results for 2007 reflect six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. Results prior to 2007 reflect legacy The Bank of New York Company, Inc. only.

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

Throughout this Annual Report, certain measures, which are noted, exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, which relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present certain amounts on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to a FTE basis has no impact on net income. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 74 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a global leader in providing a comprehensive array of services that enable institutions and individuals to manage and service their financial assets in more than 100 markets worldwide. We strive to be the global provider of choice for asset and wealth management and institutional services and be recognized for our broad and deep capabilities, superior client service and consistent outperformance versus peers. Our global client base consists of financial institutions, corporations, government agencies, high-net-worth individuals, families, endowments and foundations and related entities. At Dec. 31, 2009, we had $22.3 trillion in assets under custody and administration and $1.1 trillion in assets under management, serviced $12.0 trillion in outstanding debt and, on average, processed $1.6 trillion of global payments per day.

BNY Mellon’s businesses benefit during periods of global growth in financial assets and concentration of


 

8     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

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

Key components of our strategy include: providing superior client service versus peers; strong investment performance (relative to investment benchmarks); above median revenue growth (relative to peer companies for each of our businesses); an increasing percentage of revenue and income derived from outside the U.S.; successful integration of acquisitions; competitive margins; and positive operating leverage. We have established Tier 1 capital as our principal capital measure and have established a targeted minimum ratio of Tier 1 capital to risk-weighted assets of 10%.

Impact of the current market environment on our business and regulatory events

In 2009, market related factors continued to impact the results in our core businesses. Total revenue was impacted by: a low interest rate environment, which resulted in lower net interest and fee revenue; lower foreign exchange (“FX”) volumes; and lower average equity markets as reflected by a 22% decrease in the daily average S&P 500 Index and a 15% decrease in the daily average FTSE 100 Index.

Our Asset and Wealth Management businesses were negatively impacted by global weakness in market values as a result of a decline in the daily averages of the S&P 500 and the FTSE 100 indices compared with 2008. Our asset and wealth management fee revenue was also negatively impacted by outflows in the alternative asset class as investors reduced their risk profiles and higher money market fee waivers as a result of low interest rates.

FX revenues returned to more normalized levels in 2009 from the record levels of 2008, reflecting lower volatility and spreads.

Results in our securities lending business continue to be impacted by narrower spreads and lower market valuations, as well as overall de-leveraging in the financial markets compared with 2008. Spreads continued to narrow throughout 2009 and by the end of 2009 returned to more historic levels.

 

Market conditions in 2009 resulted in a reduction in the volume of global fixed income securities issuances which impacted the level of new business in our Corporate Trust business.

The weakness in the equity markets in 2009 resulted in a lower level of corporate actions which impacted our Depositary Receipts and Shareowner Services businesses.

The current low interest rate environment continues to adversely impact our net interest revenue and corresponding net interest margin, as well as money market mutual fund and money market fund related distribution fees. At Dec. 31, 2009, we estimate that an immediate 100 basis point increase in overnight interest rates from those currently in effect would increase annual pre-tax income by approximately $500 million. The increase to pre-tax income would benefit both fee revenue and net interest revenue.

Evolving regulatory environment

The current economic and political environment has led to legislative and regulatory initiatives that address the financial services industry’s monitoring of risk, capital requirements and executive compensation policies. The Obama Administration, Congress and U.S. and foreign regulators are currently considering a variety of proposals that would modify the regulation of the financial services industry and increase costs. The initiatives that would have the greatest impact on our business are described below.

The Federal Deposit Insurance Corporation (“FDIC”) adopted a final rule requiring insured depository institutions to prepay their estimated quarterly regular risk-based assessments for the fourth quarter of 2009 and for all 2010, 2011 and 2012. On Dec. 30, 2009, The Bank of New York Mellon and BNY Mellon, N.A., our two principal banks, prepaid an aggregate of $295 million for their estimated quarterly risk-based assessments for these periods.

Also, in 2009, BNY Mellon recorded a payment of a special emergency deposit assessment of 5 basis points on each FDIC-insured depository institution’s total assets, minus its Tier 1 capital, as of June 30, 2009, subject to a cap of 10 basis points of average assessable domestic deposits for the second quarter of 2009. The special assessment resulted in a pre-tax charge of $61 million, which was recorded as other expense.


 

BNY Mellon     9


Table of Contents

Results of Operations (continued)

 

 

In January 2010, President Obama proposed a “Financial Crisis Responsibility Fee” which would apply to banks, thrifts, insurance companies and broker-dealers with more than $50 billion in consolidated assets. The fee is intended to recoup the cost of the Troubled Asset Relief Program (“TARP”) to the U.S. Government. As currently proposed, the fee would go into effect on June 30, 2010 and would remain in force for 10 years or longer. The fee would be calculated on total assets excluding Tier 1 capital and assessed deposits. Based on the amount of assets on our balance sheet at Dec. 31, 2009, we estimate that we would be responsible for paying approximately $200 million annually under this proposal, if enacted as currently proposed.

Financial regulatory reform continues to be a top priority for the Obama Administration. The U.S. House of Representatives (the “House”) passed the “Wall Street Reform and Consumer Protection Act” on Dec. 11, 2009. The U.S. Senate has not yet passed legislation in this area. The Senate Banking Committee draft bill, “Restoring American Financial Stability Act of 2009,” is still in draft form and currently under discussion. Both legislative products focus on measures to improve financial stability, provide for more effective bank supervision, enhance the regulation of consumer financial products and services through the establishment of a Consumer Financial Protection Agency and allow for better coordination between regulatory agencies. The House’s bill would establish a Systemic Dissolution Fund to help wind down financial institutions when necessary. The fund would be pre-funded by FDIC assessments on large financial companies with assets exceeding $50 billion, to pay for the resolution of a bank holding company, a systemically important financial company, an insurance company or any other financial company. The Senate Banking Committee’s draft proposal has a similar resolution mechanism and sets the threshold at $10 billion or more.

2009 and subsequent events

Investment securities portfolio restructuring

Consistent with our ongoing strategy to reduce balance sheet risk, and reflecting the improvement in the fixed income markets in the second half of 2009, we sold or restructured a significant portion of our watch list investment securities portfolio. The watch list includes those securities we view as having a higher risk of impairment charge.

 

The sales and restructuring impacted approximately $13.5 billion (pre-restructuring amortized cost) of investment securities. The investment securities sales and restructuring resulted in a net charge of approximately $4.8 billion (pre-tax) in 2009. The majority of the restructured securities were retained on our balance sheet in a certificate issued by a Grantor Trust.

The charge for restructuring the securities portfolio had a minimal impact on our tangible capital ratio, as approximately 90% of the charge had previously been reflected in tangible capital.

As a result of the restructuring, we expect net interest revenue to be positively impacted by approximately $200 million in 2010.

Settlement with the Russian Federal Customs Service

In October 2009, the Federal Customs Service of the Russian Federation (the “Customs Service”) and The Bank of New York Mellon, a subsidiary of BNY Mellon, settled the litigation filed by the Customs Service in the Arbitrazh Court of the City of Moscow.

Under the terms of the settlement agreement, the Customs Service agreed to withdraw its $22.5 billion lawsuit, the proceedings were terminated by the Arbitrazh Court, and the Customs Service and The Bank of New York Mellon exchanged mutual releases. Without any admission of liability, The Bank of New York Mellon agreed to pay $14 million in trial costs and expenses to the Customs Service in consideration for the settlement.

Acquisition of Insight Investment Management

In November 2009, we acquired Insight Investment Management Limited (“Insight”) for £235 million (approximately $377 million of cash and stock). Based in London, Insight specializes in liability-driven investment solutions, active fixed income and alternative investments. Its clients include some of the UK’s largest pension schemes, corporates, insurance companies and local authorities, along with a growing number of non-UK clients and some of the best-known financial services and intermediary companies. At acquisition, Insight had approximately $138 billion in assets under management. Insight is included in the Asset Management segment.


 

10     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

Siguler Guff & Company, LLC investment

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

Agreement to acquire Global Investment Servicing, Inc.

In February 2010, BNY Mellon announced a definitive agreement to acquire Global Investment Servicing, Inc. (“GIS”) from PNC for cash of $2.31 billion. GIS provides a comprehensive suite of products which includes subaccounting, fund accounting/administration, custody, managed account services and alternative investment services. GIS is based in Wilmington, Delaware and has approximately 4,500 employees in locations across the U.S. and Europe.

GIS has approximately $855 billion in assets under administration, including $460 billion in assets under custody. BNY Mellon plans to raise between $700-800 million in equity as part of the transaction. The transaction is expected to close in the third quarter of 2010, subject to necessary regulatory approvals. At closing, GIS will be included in the Institutional Services sector.

Repurchased preferred stock and warrant related to TARP

In June 2009, BNY Mellon repurchased the 3 million shares of its Series B preferred stock issued to the U.S. Treasury in October 2008 as part of the TARP Capital Purchase Program. BNY Mellon paid the U.S. Treasury $3.0 billion, which reflects the liquidation value of the preferred stock.

Related to this repurchase, we recorded an after-tax redemption charge of $196.5 million in 2009, representing the difference between the amortized cost of the preferred stock and the repurchase price. BNY Mellon paid the U.S. Treasury an aggregate of approximately $95 million in dividends on the Series B preferred shares from Oct. 28, 2008 through the repurchase date.

On Aug. 5, 2009, BNY Mellon repurchased the warrant issued to the U.S. Treasury in connection with the TARP Capital Purchase Program. The warrant was

for 14,516,129 shares of our common stock. The repurchase price was $136 million.

Common stock and debt offerings

In 2009, BNY Mellon issued 48 million shares of common stock in a public offering, at a weighted-average price of $28.75 per common share, for a total of $1.4 billion. In addition to the common stock offering, during 2009 BNY Mellon issued $2.75 billion of non-guaranteed senior debt in public offerings comprised of $1.75 billion of 5-year notes and $1 billion of 10-year notes. The proceeds from the equity and debt offerings were used for general corporate purposes, which included funding the repurchase of the preferred stock related to TARP. BNY Mellon also issued approximately $600 million of FDIC-guaranteed debt, as described in “FDIC Temporary Liquidity Guarantee Program,” below.

Regulatory stress test

On May 7, 2009, the regulators released the results of the stress test administered under the Supervisory Capital Assessment Program conducted during the first quarter of 2009. The results concluded that BNY Mellon was not required to raise additional capital, and under the test’s adverse scenario our capital ratios strengthened further.

Discontinued operations

In July 2009, we announced an agreement to sell Mellon United National Bank (“MUNB”) located in Florida. As a result, we adopted discontinued operations accounting for MUNB. It was determined that this business no longer fit our strategic focus on our asset management and securities servicing businesses. MUNB was sold on Jan. 15, 2010. The business was formerly included in the Other segment. In 2009, we recorded an after-tax loss on discontinued operations of $270 million primarily reflecting loan write-downs and the elimination of $82 million of goodwill.

The income statements for all periods in this Annual Report have been restated to reflect the discontinued operations treatment of MUNB. The restatement resulted in a reduction to previously reported levels of net interest revenue and the net interest margin; a slight reduction in both treasury services and other fee revenue; a reduction in the provision for credit losses; a reduction in noninterest expense; and a change in continuing earnings per share.


 

BNY Mellon     11


Table of Contents

Results of Operations (continued)

 

 

FDIC Temporary Liquidity Guarantee Program

In October 2008, the FDIC announced the Temporary Liquidity Guarantee Program (“TLGP”). This program:

 

  ·  

Guarantees certain types of senior unsecured debt issued by participating U.S. bank holding companies, U.S. savings and loan holding companies and FDIC-insured depository institutions between Oct. 14, 2008 and Oct. 31, 2009, including promissory notes, commercial paper and any unsecured portion of senior debt. In 2009, BNY Mellon issued approximately $600 million of FDIC-guaranteed debt maturing June 29, 2012 under this program, which was the maximum amount of the debt permissible for it under the TLGP; and

  ·  

Provides full FDIC deposit insurance coverage for funds held by participating FDIC-insured depository institutions in noninterest-bearing transaction deposit accounts until Dec. 31, 2009, extended until June 30, 2010. On Nov. 2, 2009, BNY Mellon elected to opt out of the six month extension of this program. Our participation in the program ended on Dec. 31, 2009.

Summary of financial results

We reported a net loss from continuing operations applicable to the common shareholders of BNY Mellon of $1.1 billion, or $0.93 per diluted common share in 2009. This compares with net income of $1.4 billion, or diluted earnings per common share of $1.21 in 2008 and $2.2 billion, or diluted earnings per common share of $2.35, in 2007.

In 2009, the net loss applicable to common shareholders, including discontinued operations, totaled $1.4 billion, or $1.16 per diluted common share, compared with net income of $1.4 billion, or $1.20 per diluted common share, in 2008 and $2.0 billion, or $2.17 per diluted common share, in 2007.

Highlights of 2009 results

 

  ·  

Assets under custody and administration (“AUC”) totaled $22.3 trillion at Dec. 31, 2009 compared with $20.2 trillion at Dec. 31, 2008 reflecting higher market values and new business wins. (See the Institutional Services sector on page 28.)

  ·  

Assets under management (“AUM”) totaled $1.115 trillion at Dec. 31, 2009 compared with $928 billion at Dec. 31, 2008. The impact of acquisitions and higher market values were partially offset by money market outflows. (See the Asset and Wealth Management sector on page 24.)

  ·  

Securities servicing revenue totaled $5.0 billion in 2009 compared with $6.1 billion in 2008. Continued new business wins were more than offset by lower securities lending revenue, lower money market related distribution fees, lower market values throughout most of 2009 and a lower level of fixed income issuances globally. See the Institutional Services sector on page 28.)

  ·  

Securities lending fee revenue totaled $259 million in 2009 compared with $789 million in 2008. The decrease reflects narrower spreads and lower loan balances due to de-leveraging in the financial markets. Securities lending assets totaled $247 billion at Dec. 31, 2009 compared with $326 billion at Dec. 31, 2008. (See the Institutional Services sector on page 28.)

  ·  

Asset and wealth management fees, including performance fees totaled $2.6 billion in 2009 compared with $3.2 billion in 2008. The decrease reflects global weakness in market values throughout most of 2009, a reduction in money market related fees due to outflows in money market products and higher fee waivers, partially offset by new business and the acquisition of Insight. (See the Asset Management and Wealth Management segments beginning on page 26.)

  ·  

Foreign exchange and other trading activities revenue totaled $1.0 billion in 2009 compared with a record $1.5 billion in 2008. The decrease primarily resulted from lower foreign exchange revenue driven by a 21% decline in volumes. (See Fee and other revenue beginning on page 14.)

  ·  

Investment securities (pre-tax) net losses of $5.4 billion in 2009 were primarily driven by the investment securities portfolio restructuring described above. (See Consolidated balance sheet review beginning on page 45.)

  ·  

Net interest revenue totaled $2.9 billion in 2009 essentially unchanged compared with 2008. Results in 2009 reflect historically low interest rates and our strategy to reinvest in high quality, relatively short duration assets, while results in 2008 were impacted by $489 million of sale-in-lease out (“SILO”)/lease-in-lease out


 

12     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

   

(“LILO”) charges. (See Net interest revenue beginning on page 17.)

  ·  

The provision for credit losses was $332 million in 2009 compared with $104 million in 2008. The increase primarily relates to a higher number of downgrades in 2009 and deterioration in certain industry sectors. (See Asset quality and allowance for credit losses beginning on page 54.)

  ·  

Noninterest expense totaled $9.6 billion in 2009 compared with $11.5 billion in 2008. The decrease reflects lower support agreement charges, lower compensation and incentive expense, lower M&I charges as well as the benefit of merger-related expense synergies. (See Noninterest expense beginning on page 20.)

  ·  

Merger and integration (“M&I”) expenses were $233 million (pre-tax), or $0.12 per diluted common share in 2009. (See Noninterest expense beginning on page 20.)

  ·  

We recorded an after-tax redemption charge of $196.5 million related to the repurchase of the Series B preferred stock issued to the U.S. Treasury as part of the TARP Capital Purchase Program and $86.5 million for dividends/accretion on the Series B preferred stock. These items decreased earnings per share by $0.24 per diluted common share in 2009.

  ·  

The unrealized net of tax loss on our investment securities portfolio was $619 million at Dec. 31, 2009 compared with $4.0 billion at Dec. 31, 2008. The decrease primarily resulted from the sale and restructuring of a portion of the watchlist investment securities portfolio and general improvements in the fixed income markets. (See Consolidated balance sheet review beginning on page 45.)

  ·  

The Tier 1 capital ratio at Dec. 31, 2009 was 12.1% compared with 13.2% at Dec. 31, 2008. The decrease in the Tier 1 capital ratio primarily reflects the charge related to the restructuring of the investment securities portfolio and the repayment of the Series B preferred stock, partially offset by the common stock issuances in 2009 and lower risk-weighted assets.

 

Results for 2008

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

 

  ·  

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

  ·  

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

  ·  

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

  ·  

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

  ·  

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

  ·  

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

Results for 2007

Results for 2007 were primarily impacted by the merger with Mellon Financial in July 2007. The merger increased asset servicing revenue, asset and wealth management fees, foreign exchange and other trading activities, net interest revenue and noninterest expense. Issuer services revenue increased, primarily as a result of the acquisition of the corporate trust business of J. P. Morgan Chase.

Results for 2007 also included the consolidation of the assets of our bank-sponsored commercial paper conduit, Three Rivers Funding Corporation (“TRFC”) which resulted in an extraordinary after-tax loss of $180 million.


 

BNY Mellon     13


Table of Contents

Results of Operations (continued)

 

 

Fee and other revenue

 

Fee and other revenue

(dollars in millions unless otherwise noted)

   2009      2008     2007 (a)     2009
vs.
2008
    2008
vs.
2007
 

Securities servicing fees:

           

Asset servicing

   $ 2,314       $ 2,581  (b)    $ 2,010  (b)    (10 )%    28

Securities lending revenue (c)

     259         789        366      (67   116   

Issuer services

     1,463         1,685        1,560      (13   8   

Clearing services

     962         1,065  (d)      1,187  (d)    (10   (10

Total securities servicing fees

     4,998         6,120        5,123      (18   19   

Asset and wealth management fees

     2,639         3,218        2,153      (18   49   

Foreign exchange and other trading activities

     1,036         1,462        786      (29   86   

Treasury services

     519         514        346      1      49   

Distribution and servicing

     397         421        212      (6   99   

Financing-related fees

     215         186        216      16      (14

Investment income

     226         207  (d)      207  (d)    9      -   

Other

     111         214  (d)      211  (d)    (48   1   

Total fee revenue

     10,141         12,342        9,254      (18   33   

Net securities (losses)

     (5,369      (1,628     (201   N/M      N/M   

Total fee and other revenue

   $ 4,772       $ 10,714      $ 9,053      (55 )%    18

Fee and other revenue as a percentage of total revenue – GAAP

     62      79     80    

Fee and other revenue as a percentage of total revenue – Non-GAAP (e)

     78      79     80    

Market value of AUM at period-end (in billions)

   $ 1,115       $ 928      $ 1,121      20   (17 )% 

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

   $ 22.3         20.2      $ 23.1      10   (13 )% 
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(b) In 2009, global sub-custodian out-of-pocket expense related to client reimbursements was reclassified from sub-custodian expense to asset servicing revenue. This reclassification totaled $22 million in 2008 and $23 million in 2007.
(c) Included in asset servicing revenue on the income statement.
(d) In 2009, fee revenue associated with equity investments was reclassified from clearing services revenue and other revenue to investment income. Fee revenue associated with an equity investment previously recorded in clearing services revenue was $22 million in 2008 and $5 million in 2007. Fee revenue associated with an equity investment previously recorded in other revenue was $32 million in 2008 and $53 million in 2007. Prior periods have been reclassified.
(e) See Supplemental information beginning on page 74 for a calculation of these ratios.

 

Fee revenue

Fee revenue decreased 18% in 2009 compared with 2008 as our securities servicing and asset and wealth management businesses were significantly impacted by lower equity market levels throughout most of 2009, as well as lower customer activity in the equity and fixed income markets. Lower spreads and volatility and the impact of a stronger U.S. dollar during 2009 also significantly impacted our businesses in 2009.

Securities servicing fees

Securities servicing fees were impacted by the following compared to 2008:

 

 

New business wins in asset servicing were more than offset by lower average market values in 2009, lower client activity and a stronger U.S. dollar;

 

Securities lending revenue reflects lower spreads and lower loan balances due to de-leveraging in the market;

 

Issuer services fees reflect lower Depositary Receipts revenue due to lower transaction fees and lower Corporate Trust fees due to lower levels of fixed income issuances globally and lower money market related distribution fees and lower Shareowner Services revenue; and

 

Clearing services fees reflect lower money market related distribution fees and lower trading volumes.

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

Asset and wealth management fees

Asset and wealth management fees, including performance fees, decreased compared with 2008, reflecting lower average global market values in 2009,


 

14     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

lower money market related fees due to increased fee waivers and short-term outflows, and a stronger U.S. dollar, partially offset by new business. See the “Asset and Wealth Management sector” in “Business segments review” for additional details regarding the drivers of asset and wealth management fees.

Total AUM for the Asset and Wealth Management sector were $1.1 trillion at Dec. 31, 2009, compared with $928 billion at Dec. 31, 2008. The increase resulted from the Insight acquisition and market appreciation, offset in part by $49 billion of net money market outflows and $6 billion of net long-term outflows. Long-term outflows in 2009 reflect $20 billion of outflows through September, primarily offset by $14 billion of inflows in the fourth quarter. The S&P 500 index was 1115 at Dec. 31, 2009 compared with 903 at Dec. 31, 2008, a 23% increase.

Foreign exchange and other trading activities

Foreign exchange and other trading activities revenue, which is primarily reported in the Asset Servicing segment, decreased $426 million, or 29%, from a record $1.5 billion in 2008. The decrease primarily resulted from lower foreign exchange revenue driven by lower volumes and a lower valuation of the credit default swaps used to economically hedge the loan portfolio. Foreign exchange volumes were down in 2009, decreasing approximately 21% from the elevated levels experienced during the credit crisis in 2008.

Treasury services

Treasury services, which are primarily reported in the Treasury Services segment, include fees related to funds transfer, cash management, and liquidity management. Treasury services fees increased $5 million from 2008 resulting from higher global payment volumes.

Distribution and servicing fees

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

The $24 million decrease in distribution and servicing fee revenue in 2009 compared with 2008 primarily

reflects lower money market related fees. The impact of distribution and servicing fees on income in any one period can be more than offset by distribution and servicing expense paid to other financial intermediaries to cover their costs for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement.

Financing-related fees

Financing-related fees, which are primarily reported in the Treasury Services segment, include capital markets fees, loan commitment fees and credit-related trade fees. Financing-related fees increased $29 million from 2008. The increase primarily reflects higher fees on capital market products.

Investment income

 

Investment income

(in millions)

   2009      2008      2007 (a)  

Corporate/bank-owned life insurance

   $ 151       $ 145       $ 111   

Lease residual gains

     90         89         -   

Seed capital gains (losses)

     31         (82      (35

Private equity gains (losses)

     (18      1         67   

Equity investment income (loss)

     (28      54         64   

Total investment income

   $ 226       $ 207       $ 207   
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.

Investment income, which is primarily reported in the Other and Asset Management segments, includes income from insurance contracts, lease residual gains and losses, gains and losses on seed capital investments and private equity investments, and equity investment income (loss). The increase compared to 2008 reflects higher seed capital gains and income from corporate/bank-owned life insurance, partially offset by the write-down of certain equity investments and losses on private equity investments.

Other revenue

 

Other revenue

(in millions)

   2009    2008    2007 (a)

Asset-related gains

   $ 76    $ 45    $ 9

Expense reimbursements from joint ventures

     31      29      58

Other income (loss)

     4      140      144

Total other revenue

   $ 111    $ 214    $ 211
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.

 

BNY Mellon     15


Table of Contents

Results of Operations (continued)

 

 

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

Total other revenue decreased compared with 2008 primarily reflecting a lower level of foreign currency translation, partially offset by a gain on the sale of VISA shares recorded in 2009.

Net investment securities losses

Net investment securities losses totaled $5.4 billion in 2009 and $1.6 billion in 2008.

As a result of adopting ASC 320, investment securities losses in the first half of 2009 primarily reflected credit related losses. In the third quarter of 2009, we recognized both credit and non-credit related losses on our securities for which we declared our intent to sell. Investment securities losses in 2008 and 2007 reflect mark-to-market (both credit and non-credit) impairment losses.

The following table details investment securities losses by type of security. The loss in 2009 primarily resulted from the sale and restructuring of a significant portion of the watchlist investment securities portfolio. See “Consolidated balance sheet review” for further information on the investment securities portfolio.

 

Net investment securities losses

(in millions)

   2009     2008    2007 (a)

Alt-A RMBS

   $ 3,113      $ 1,236    $ -

Prime RMBS

     1,008        12      -

Subprime RMBS

     322        12      -

European floating rate notes

     269        -      -

Home equity lines of credit

     205        104      -

Commercial MBS

     89        -      -

Grantor Trust

     39  (b)      -      -

Credit cards

     26        -      -

ABS CDOs

     23        122      201

Other

     275        142      -

Total net investment securities losses

   $ 5,369  (c)    $ 1,628    $ 201
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(b) Includes $47 million of mark-to-market write-downs on the Alt-A, prime and subprime RMBS from Oct. 1, 2009 through the date of sale to the Grantor Trust.
(c) Includes $930 million originally recorded in 2008 and recorded again in 2009 under ASC 320 and as part of the impairment charge related to the restructuring of the securities portfolio.

2008 compared with 2007

Fee and other revenue increased in 2008 compared with 2007. The merger with Mellon Financial significantly increased asset servicing revenue, securities lending revenue, asset and wealth management revenue, foreign exchange and other trading activities, treasury services revenue and distribution and servicing, and had a lesser impact on issuer services revenue.

Fee and other revenue was also impacted by the following:

 

 

Asset servicing revenue increased primarily due to strong new business activity and the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing B.V. in the fourth quarter of 2007;

 

Securities lending revenue increased primarily reflecting favorable spreads in the short-term credit markets;

 

Growth in issuer services revenue was driven by higher Depositary Receipts, Corporate Trust and Shareowner Services fees;

 

Asset and wealth management revenue increased primarily due to strong money market flows and net new business, offset by significant declines in global market values and long-term outflows;

 

Foreign exchange and other trading activities increased primarily due to higher volatility in all major currencies and a rise in client volumes, as well as the higher value of the credit default swaps;


 

16     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

 

Treasury services revenue increased primarily resulting from higher processing volumes in global payment and cash management services; and

 

Distribution and servicing fees increased primarily reflecting strong money market inflows.


Net interest revenue

 

Net interest revenue

(dollars in millions)

   2009     2008     2007 (a)     2009
vs.
2008
    2008
vs.
2007
 

Net interest revenue (non-FTE)

   $ 2,915      $ 2,859      $ 2,245      2   27

Tax equivalent adjustment

     18        21        12      N/M      N/M   

Net interest revenue (FTE)

     2,933        2,880        2,257      2   28

SILO/LILO charges

     -        489        -      N/M      N/M   

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

   $ 2,933      $ 3,369      $ 2,257      (13 )%    49

Average interest-earning assets

   $ 160,955      $ 152,201  (b)    $ 110,034  (b)    6   38

Net interest margin (FTE)

     1.82     1.89     2.05   (7 )bps    (16 )bps 

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

     1.82     2.21     2.05   (39 )bps    16 bps 
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(b) Excludes discontinued operations.

 

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

The net interest margin was 1.82% in 2009 compared with 1.89% in 2008, which was negatively impacted by the SILO/LILO charges. The net interest margin, excluding the SILO/LILO charges, was 2.21% in 2008. In 2009, net interest revenue and the related margin were impacted by persistently low interest rates globally, and our strategy to reinvest in high quality, relatively short-duration assets.

Average interest-earning assets were $161 billion in 2009, compared with $152 billion in 2008 and $110 billion in 2007. The increase in 2009 from 2008 was driven by higher levels of client deposits. Reflecting our strategy to invest in high quality relatively short-duration assets, average interest-earning cash on deposit with the Federal Reserve and other central banks and interbank investments increased to $71.3

billion in 2009, from $60.1 billion in 2008 and $32.2 billion in 2007. Average securities also increased to $53.2 billion in 2009, up from $45.5 billion in 2008 and $37.0 billion in 2007. Average loans decreased to $36.4 billion in 2009, compared with $46.6 billion in 2008 and $40.8 billion in 2007.

The restructuring of the investment securities portfolio in 2009 is expected to positively impact net interest revenue by approximately $200 million in 2010.

2008 compared with 2007

The increase in net interest revenue in 2008 compared to 2007 primarily resulted from the merger with Mellon Financial, a higher level of noninterest-bearing deposits which resulted in a higher level of interest-earning assets, wider spreads and the accretion of unrealized losses on investment securities. This growth was partially offset by the SILO/LILO charges recorded in 2008.

The net interest margin was 1.89% in 2008 compared with 2.05% in 2007. The decrease primarily reflects the SILO/LILO charges recorded in 2008. Excluding the SILO/LILO charges, the net interest margin increased 16 basis points compared with 2007, primarily reflecting wider spreads.


 

BNY Mellon     17


Table of Contents

Results of Operations (continued)

 

 

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

Assets

        

Interest-earning assets:

        

Interest-bearing deposits with banks (primarily foreign banks)

   $ 55,797       $ 683       1.22

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

     11,938         43       0.36   

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

     317         9       2.95   

Federal funds sold and securities under resale agreements

     3,238         31       0.97   

Margin loans

     4,340         69       1.59   

Non-margin loans:

        

Domestic offices:

        

Consumer

     5,417         262       4.83   

Commercial

     15,061         362       2.41   

Foreign offices

     11,606         250       2.15   

Total non-margin loans

     32,084         874  (a)     2.72   

Securities:

        

U.S. government obligations

     3,218         50       1.54   

U.S. government agency obligations

     16,019         592       3.70   

State and political subdivisions

     680         47       6.92   

Other securities:

        

Domestic offices

     20,444         832       4.07   

Foreign offices

     10,887         244       2.24   

Total other securities

     31,331         1,076       3.43   

Trading securities:

        

Domestic offices

     1,934         50       2.57   

Foreign offices

     59         1       1.40   

Total trading securities

     1,993         51       2.54   

Total securities

     53,241         1,816       3.41   

Total interest-earning assets

   $ 160,955       $ 3,525  (b)     2.19

Allowance for loan losses

     (420      

Cash and due from banks

     3,638         

Other assets

     45,766         

Assets of discontinued operations

     2,188                   

Total assets

   $ 212,127                   

Liabilities and equity

        

Interest-bearing deposits:

        

Domestic offices:

        

Money market rate accounts

   $ 18,619       $ 18       0.09

Savings

     1,136         5       0.47   

Certificates of deposits of $100,000 & over

     961         8       0.85   

Other time deposits

     4,922         23       0.47   

Total domestic

     25,638         54       0.21   

Foreign offices:

        

Banks

     5,182         13       0.25   

Government and official institutions

     866         1       0.09   

Other

     66,520         103       0.15   

Total foreign

     72,568         117       0.16   

Total interest-bearing deposits

     98,206         171       0.17   

Federal funds purchased and securities sold under repurchase agreements

     2,695         -       -   

Other borrowed funds:

        

Domestic offices

     2,263         37       1.66   

Foreign offices

     592         5       0.85   

Total other borrowed funds

     2,855         42       1.49   

Borrowings from Federal Reserve related to asset-backed commercial paper

     317         7       2.25   

Payables to customers and broker-dealers

     5,262         6       0.12   

Long-term debt

     16,893         366       2.17   

Total interest-bearing liabilities

   $ 126,228       $ 592       0.47

Total noninterest-bearing deposits

     36,446         

Other liabilities

     18,760         

Liabilities of discontinued operations

     2,188                   

Total liabilities

     183,622         

Total shareholders’ equity

     28,476         

Noncontrolling interest

     29                   

Total equity

     28,505                   

Total liabilities and equity

   $ 212,127                   

Net interest margin – taxable equivalent basis

         1.82

Percentage of assets attributable to foreign offices (c)

     37      

Percentage of liabilities attributable to foreign offices

     34                   
(a) Includes fees of $43 million in 2009. Nonaccrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest.
(b) The tax equivalent adjustment was $18 million in 2009 and is based on the federal statutory tax rate (35%) and applicable state and local taxes.
(c) Includes the Cayman Islands branch office.

 

18     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

     
Average balances and interest rates (a) (continued)    2008     2007 (b)  
(dollar amounts in millions, presented on an FTE basis)   

Average

balance

    Interest    

Average

rates

   

Average

balance

    Interest    

Average

rates

 

Assets

            

Interest-earning assets:

            

Interest-bearing deposits with banks (primarily foreign banks)

   $ 46,473      $ 1,753      3.77   $ 26,505      $ 1,242      4.68

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

     4,754        27      0.56        -        -      -   

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

     2,348        71      3.03        -        -      -   

Federal funds sold and securities under resale agreements

     6,494        149      2.30        5,722        289      5.06   

Margin loans

     5,427        183      3.37        5,392        332      6.16   

Non-margin loans:

            

Domestic offices:

            

Consumer

     6,081        307      5.05        4,585        268      5.85   

Commercial

     20,926        157      0.75  (c)      18,212        865      4.74   

Foreign offices

     14,172        563      3.97        12,595        693      5.50   

Total non-margin loans

     41,179        1,027  (d)    2.49  (c)      35,392        1,826  (d)    5.16   

Securities:

            

U.S. government obligations

     596        18      3.03        238        11      4.49   

U.S. government agency obligations

     10,846        479      4.42        6,953        369      5.32   

State and political subdivisions

     744        55      7.20        397        27      6.85   

Other securities:

            

Domestic offices

     23,124        1,249      5.41        19,832        1,125      5.67   

Foreign offices

     8,386        463      5.52        7,529        363      4.81   

Total other securities

     31,510        1,712      5.44        27,361        1,488      5.44   

Trading securities

            

Domestic offices

     1,696        66      3.92        1,121        47      4.19   

Foreign offices

     134        5      3.44        953        51      5.39   

Total trading securities

     1,830        71      3.88        2,074        98      4.74   

Total securities

     45,526        2,335      5.13        37,023        1,993      5.38   

Total interest-earning assets

   $ 152,201      $ 5,545  (e)    3.64 %(c)      110,034      $ 5,682  (e)    5.16

Allowance for loan losses

     (314         (296    

Cash due from banks

     6,190            3,925       

Other assets

     49,439            33,584       

Assets of discontinued operations

     2,441                      1,395                 

Total assets

   $ 209,957                    $ 148,642                 

Liabilities and equity

            

Interest-bearing deposits:

            

Domestic offices:

            

Money market rate accounts

   $ 13,882      $ 134      0.96   $ 11,180      $ 341      3.05

Savings

     966        12      1.22        602        16      2.59   

Certificates of deposit of $100,000 & over

     2,041        58      2.83        2,827        150      5.30   

Other time deposits

     6,264        124      1.98        958        59      6.21   

Total domestic

     23,153        328      1.42        15,567        566      3.61   

Foreign offices:

            

Banks

     11,801        184      1.56        9,720        358      3.69   

Government and official institutions

     1,420        25      1.75        1,108        45      4.03   

Other

     55,539        1,228      2.21        39,492        1,409      3.57   

Total foreign

     68,760        1,437      2.09        50,320        1,812      3.60   

Total interest-bearing deposits

     91,913        1,765      1.92        65,887        2,378      3.63   

Federal funds purchased and securities under repurchase agreements

     4,624        46      1.00        2,555        110      4.33   

Other borrowed funds:

            

Domestic offices

     2,289        61      2.67        1,762        76      4.28   

Foreign offices

     970        29      3.00        761        15      2.02   

Total other borrowed funds

     3,259        90      2.77        2,523        91      3.59   

Borrowings from the Federal Reserve related to ABCP

     2,348        53      2.25        -        -      -   

Payables to customers and broker-dealers

     5,495        69      1.25        5,113        177      3.47   

Long-term debt

     16,353        642      3.93        12,327        669      5.43   

Total interest-bearing liabilities

   $ 123,992      $ 2,665      2.15   $ 88,405      $ 3,425      3.87

Total noninterest-bearing deposits

     33,724            21,400       

Other liabilities

     20,979            17,079       

Liabilities of discontinued operations

     2,441                      1,395                 

Total liabilities

     181,136            128,279       

Total shareholders’ equity

     28,704            20,234       

Noncontrolling interest

     117                      129                 

Total equity

     28,821                      20,363                 

Total liabilities and equity

   $ 209,957                    $ 148,642                 

Net interest margin – taxable equivalent basis

       1.89 %(c)        2.05

Percentage of assets attributable to foreign offices (f)

     35         37    

Percentage of liabilities attributable to foreign offices

     36                      37                 
(a) Presented on a continuing operations basis even though the balance sheet is not restated for discontinued operations. Average balances and rates are impacted by allocations made to match assets of discontinued operations with liabilities of discontinued operations.
(b) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(c) Includes the impact of the SILO/LILO charge in 2008. Excluding these charges, the domestic offices’ non-margin commercial loan rate would have been 3.09%, the total non-margin loan rate would have been 3.68%, the interest-earning assets rate would have been 3.96% and the net interest margin would have been 2.21%.
(d) Includes fees of $35 million in 2008 and $32 million in 2007. Nonaccrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest.
(e) The tax equivalent adjustments were $21 million in 2008 and $12 million in 2007, and are based on the federal statutory tax rate (35%) and applicable state and local taxes.
(f) Includes the Cayman Islands branch office.

 

BNY Mellon     19


Table of Contents

Results of Operations (continued)

 

 

Noninterest expense

 

Noninterest expense    2009      2008      2007 (a)      2009
vs.
2008
     2008
vs.
2007
 
(dollars in millions)               

Staff:

              

Compensation

   $ 2,985       $ 3,242       $ 2,464       (8 )%     32

Incentives

     996         1,247         1,111       (20    12   

Employee benefits

     719         700         551       3       27   

Total staff

     4,700         5,189  (b)       4,126  (b)     (9    26   

Professional, legal and other purchased services

     1,017         1,021  (b)       760  (b)     -       34   

Net occupancy

     564         570         447       (1    28   

Distribution and servicing

     426         517         268       (18    93   

Software

     367         331         280       11       18   

Sub-custodian and clearing

     320         335  (c)       406  (c)     (4    (17

Furniture and equipment

     309         323         266       (4    21   

Business development

     214         278         189       (23    47   

Other

     791         928         631       (15    47   

Subtotal

     8,708         9,492         7,373       (8    29   

Support agreement charges

     (15      894         3       N/M       N/M   

FDIC special assessment

     61         -         -       N/M       N/M   

Restructuring charges

     150         181         -       (17    N/M   

Amortization of intangible assets

     426         473         314       (10    51   

Merger and integration expenses:

              

The Bank of New York Mellon Corporation

     233         471         355       (51    33   

Acquired Corporate Trust Business

     -         12         49       N/M       N/M   

Total noninterest expense

   $ 9,563       $ 11,523       $ 8,094       (17 )%     42

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

     61      38      37      

Employees at period end

     42,200         42,500         41,200       (1 )%     3
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc.
(b) In 2009, certain temporary/consulting expenses were reclassified from professional, legal and other purchased services to staff expense. This reclassification totaled $100 million in 2008 and $19 million in 2007.
(c) In 2009, global sub-custodian out-of-pocket expense related to client reimbursements was reclassified from sub-custodian expense to asset servicing revenue. This reclassification totaled $22 million in 2008 and $23 million in 2007.
(d) Excluding investment securities gains (losses) and the 2008 SILO/LILO charges, total staff expense as a percentage of total revenue (Non-GAAP) was 36% in 2009, 33% in 2008 and 36% in 2007.

 

Total noninterest expense decreased $2.0 billion, or 17%, compared with 2008 reflecting: lower support agreement charges; an 8% decrease in compensation expense and a 20% decrease in incentive expense, driven by strong expense control; merger-related synergies and a stronger U.S. dollar in 2009.

Staff expense

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

Staff expense is comprised of:

 

  ·  

compensation expense, which includes:

  ·  

base salary expense, primarily driven by headcount;

  ·  

the cost of temporary help and overtime; and

  ·  

severance expense;

  ·  

incentive expense, which includes:

  ·  

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

  ·  

stock-based compensation expense; and

  ·  

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

The decrease in staff expense compared with 2008 reflects lower compensation expense which was driven by the workforce reduction program announced in 2008 and the relocation of positions to lower cost locations. The decrease in incentive expense primarily resulted from lower incentive expense in every business segment, reflecting the decreased operating results in the segments.


 

20     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

Non-staff expense

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

Non-staff expense, excluding support agreement charges, FDIC special assessment, restructuring charges, amortization of intangible assets and M&I expense totaled $4.0 billion in 2009 compared with $4.3 billion in 2008. The decrease primarily reflects declines in nearly every expense category. The decreases in non-staff expense reflect overall expense control. The decrease in other expense also reflects charges recorded in 2008 related to credit monitoring charges for lost tapes and the write-down of seed capital investments related to a formerly affiliated hedge fund manager.

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

For additional information on the FDIC special assessment, see the Impact of the current market environment on our business and regulatory events section.

As part of an ongoing effort to improve efficiency and develop a global operating model that provides the highest quality of service to our clients, BNY Mellon continues to execute on its global location strategy. This strategy includes migrating positions to our global growth centers and the elimination of certain positions.

In 2009, we recorded a pre-tax restructuring charge of $139 million related to our global location strategy. This charge was comprised of $102 million for severance costs and $37 million for asset write-offs and other costs. We also recorded additional pre-tax restructuring charges of $11 million associated with our workforce reduction program announced in 2008. See Note 13 of the Notes to Consolidated Financial Statements for additional information regarding restructuring charges.

In 2009, we incurred $233 million of M&I expenses related to the merger with Mellon Financial, comprised of the following:

 

  ·  

Integration/conversion costs – including consulting, system conversions and staff ($160 million);

  ·  

Personnel related costs – including severance, retention, relocation expenses, accelerated vesting of stock options and restricted stock expense ($57 million); and

  ·  

One-time costs – including facilities related costs, asset write-offs, vendor contract modifications, rebranding and net gains and losses on disposals ($16 million).

2008 compared with 2007

Total noninterest expense was $11.5 billion in 2008, an increase of $3.4 billion or 42% compared with 2007. The increase primarily reflects the merger with Mellon Financial partially offset by the sale of the execution businesses and also included the following activity:

 

  ·  

an $894 million charge related to support agreements related to BNY Mellon’s voluntary support of clients invested in money market mutual funds, cash sweep funds and similar collective funds, managed by our affiliates, impacted by the bankruptcy of Lehman Brothers Holdings, Inc. (“Lehman”);

  ·  

the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing B.V. in the fourth quarter of 2007;

  ·  

a $181 million restructuring charge related to our global workforce reduction program;

  ·  

a $50 million charge related to credit monitoring for lost tapes; and

  ·  

M&I expenses of $471 million related to the merger with Mellon Financial, comprised of the following: integration/conversion costs ($302 million); personnel related costs ($151 million); and one-time costs ($18 million).

Income taxes

BNY Mellon recorded an income tax benefit, on a continuing operations basis, of $1.4 billion (63.2% effective tax rate) in 2009 compared to tax provisions of $491 million (25.2% effective tax rate) in 2008 and $987 million (30.7% effective tax rate) in 2007. The 2009 effective tax rate on our loss from continuing operations is higher than the 35% federal statutory rate because of additional tax benefits from a tax loss on mortgages, the final SILO/LILO tax settlement, investment securities losses and a higher proportion of lower taxed foreign earnings. The lower effective tax rate in 2008 compared with 2007 primarily resulted from lower domestic earnings and a higher proportion of income earned in lower taxed foreign jurisdictions.


 

BNY Mellon     21


Table of Contents

Results of Operations (continued)

 

 

Excluding the impact of investment securities losses, M&I expenses, FDIC special assessment, restructuring charges and benefits from discrete tax items primarily related to a tax loss on mortgages and tax settlements, the effective tax rate for 2009 was 29.8%. Excluding the impact of investment securities losses, M&I expenses, restructuring charges, support agreement charges and the SILO/LILO/tax settlement, the effective tax rate for 2008 was 32.8%. Excluding the impact of the investment securities losses and M&I expenses, the effective tax rate for 2007 was 32.3%.

Income of certain foreign subsidiaries is not currently subject to U.S. income tax as a result of the active financing deferral provision. This provision expired for tax years beginning on Jan. 1, 2010. Absent an extension, income that qualifies for the active financing provision may require U.S. tax to be recorded. BNY Mellon is in the process of evaluating the impact if the law is not extended.

Extraordinary loss - consolidation of commercial paper conduits

At the end of 2008 and 2007, we called the first loss notes of Old Slip and TRFC, respectively, making us the primary beneficiary and triggering the consolidation of these commercial paper conduits. The consolidation of these conduits resulted in the recognition of extraordinary losses (non-cash accounting charges) of $26 million after-tax, or $0.02 per common share in 2008, associated with Old Slip, and $180 million after-tax, or $0.19 per common share in 2007, associated with TRFC.

Business segments review

The results of our business segments are presented and analyzed along the following business lines:

 

  ·  

Asset Management

  ·  

Wealth Management

  ·  

Asset Servicing

  ·  

Issuer Services

  ·  

Clearing Services

  ·  

Treasury Services

  ·  

Other

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

For information on the accounting principles of our business segments, the primary types of revenue generated by each segment and the basis on which our

segments are reported and analyzed, see Note 28 of the Notes to Consolidated Financial Statements.

Our business segments continued to face a difficult operating environment in 2009. Lower equity markets and decreases in corporate actions and fixed income issuances in 2009 significantly and adversely impacted revenues in our asset and wealth management and securities servicing businesses. New business across these segments partially offset the adverse impact of the markets. Fee waivers and lower money market related distribution fees in 2009 decreased revenue in the Asset Management, Issuer Services and Clearing Services segments. The low interest rate environment in 2009, compared with 2008, as well as a decline in the value of interest-free balances and narrowing spreads resulted in lower net interest revenue in the Asset Servicing and Treasury Services segments. Net interest revenue in 2008 included SILO/LILO charges of $489 million which were recorded in the Other segment.

Investment securities losses in 2009, 2008 and 2007 were primarily recorded in the Other segment. Strong expense control and the impact of merger-related synergies resulted in lower noninterest expense in every segment compared with 2008. Also in 2008, we elected to support clients impacted by the Lehman bankruptcy, as well as clients impacted by the declining value of certain structured investment vehicle (“SIV”) securities. These support agreements had a significant impact on the 2008 results of the Asset Management and Asset Servicing segments. Restructuring charges recorded in 2009 and 2008 were recorded in the Other segment. In addition, M&I expenses are a corporate level item and are therefore recorded in the Other segment.

The merger with Mellon Financial had a considerable impact on the comparison of business segment results from 2008 to 2007. The merger significantly impacted the Asset Management, Wealth Management and Asset Servicing segments and, to a lesser extent, the Issuer Services, Treasury Services and the Other segments.

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


 

22     BNY Mellon


Table of Contents

Results of Operations (continued)

 

 

Market indices                            Increase/(Decrease)  
      2009      2008      2007      2009 vs. 2008      2008 vs. 2007  

S&P 500 Index (a)

   1115      903      1468      23    (38 )% 

S&P 500 Index – daily average

   948      1221      1477      (22    (17

FTSE 100 Index (a)

   5413      4434      6457      22       (31

FTSE 100 Index – daily average

   4568      5368      6403      (15    (16

NASDAQ Composite Index (a)

   2269      1577      2652      44       (41

Lehman Brothers Aggregate BondSM Index (a)

   301      275      258      9       7   

MSCI EAFE® Index (a)

   1581      1237      2253      28       (45

NYSE Share Volume (in billions)

   549      660      532      (17    24   

NASDAQ Share Volume (in billions)

   564      577      540      (2    7   
(a) Period end.

 

On a daily average basis, the S&P 500 Index decreased 22% and the FTSE 100 Index decreased 15% in 2009 versus 2008. The period end S&P 500 Index increased 23% at Dec. 31, 2009 versus Dec. 31, 2008. The period end FTSE 100 Index increased 22% at Dec. 31, 2009 versus Dec. 31, 2008. The period end NASDAQ Composite Index increased 44% at Dec. 31, 2009 versus Dec. 31, 2008. Average daily U.S. fixed-income trading volume was down 23% in 2009 compared with 2008. Total debt issuances decreased 11% in 2009 compared with 2008.

The changes in the value of market indices impact fee revenue in the Asset and Wealth Management

segments and our securities servicing businesses. At Dec. 31, 2009, using the S&P 500 Index as a proxy for the equity markets, we estimate that a 100 point change in the value of the S&P 500 Index, sustained for one year, would impact fee revenue by approximately 1-2% and fully diluted earnings per common share on a continuing operations basis by $0.06-$0.07.

The following consolidating schedules show the contribution of our segments to our overall profitability. Business segments are reported on a continuing operations basis for all periods presented.


 

For the year ended Dec. 31, 2009

(dollars in millions)

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

Fee and other revenue

  $ 2,280      $ 578      $ 2,858      $ 3,369      $ 1,611      $ 1,190      $ 878      $ 7,048      $ (5,134   $ 4,772   

Net interest revenue

    31        194        225        892        768        340        616        2,616        74        2,915   

Total revenue

  $ 2,311      $ 772      $ 3,083      $ 4,261      $ 2,379      $ 1,530      $ 1,494        9,664        (5,060     7,687   

Provision for credit losses

    -        1        1        -        -        -        -        -        331        332   

Noninterest expense

    1,948        578        2,526        2,941        1,302        1,021        794        6,058        979        9,563   

Income before taxes

  $ 363      $ 193      $ 556      $ 1,320      $ 1,077      $ 509      $ 700      $ 3,606      $ (6,370   $ (2,208

Pre-tax operating margin (a)

    16     25     18     31     45     33     47     37     N/M        N/M   

Average assets

  $ 12,567      $ 9,278      $ 21,845      $ 60,804      $ 50,746      $ 18,455      $ 26,046      $ 156,051      $ 32,043      $ 209,939 (b) 

Excluding intangible amortization:

                   

Noninterest expense

  $ 1,729      $ 533      $ 2,262      $ 2,913      $ 1,221      $ 994      $ 769      $ 5,897      $ 978      $ 9,137   

Income before taxes

    582        238        820        1,348        1,158        536        725        3,767        (6,369     (1,782

Pre-tax operating margin (a)

    25     31     27     32     49     35     49     39     N/M        N/M   

 

BNY Mellon     23


Table of Contents

Results of Operations (continued)

 

 

For the year ended Dec. 31, 2008

 

(dollars in millions)

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

Fee and other revenue

  $ 2,794      $ 624      $ 3,418      $ 4,416      $ 1,851      $ 1,292      $ 977      $ 8,536      $ (1,240   $ 10,714   

Net interest revenue

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

Total revenue

    2,869        824        3,693        5,502        2,561        1,613        1,707        11,383        (1,503     13,573   

Provision for credit losses

    -        -        -        -        -        -        -        -        104        104   

Noninterest expense

    2,641        634        3,275        3,783        1,413        1,130        840        7,166        1,082        11,523   

Income before taxes

  $ 228      $ 190      $ 418      $ 1,719      $ 1,148      $ 483      $ 867      $ 4,217      $ (2,689   $ 1,946   

Pre-tax operating margin (a)

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

Average assets

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

Excluding intangible amortization:

                   

Noninterest expense

  $ 2,386      $ 580      $ 2,966      $ 3,759      $ 1,332      $ 1,104      $ 813      $ 7,008      $ 1,076      $ 11,050   

Income before taxes

    483        244        727        1,743        1,229        509        894        4,375        (2,683     2,419   

Pre-tax operating margin (a)

    17     30     20     32     48     32     52     38     N/M        18
                   

For the year ended Dec. 31, 2007 (c)

 

(dollars in millions)

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

Fee and other revenue

  $ 1,872      $ 423      $ 2,295      $ 2,957      $ 1,660      $ 1,130      $ 741      $ 6,488      $ 270      $ 9,053   

Net interest revenue

    10        111        121        693        567        303        521        2,084        40        2,245   

Total revenue

    1,882        534        2,416        3,650        2,227        1,433        1,262        8,572        310        11,298   

Provision for credit losses

    -        -        -        -        -        -        -        -        (11     (11

Noninterest expense

    1,372        413        1,785        2,497        1,159        1,047        663        5,366        943        8,094   

Income before taxes

  $ 510      $ 121      $ 631      $ 1,153      $ 1,068      $ 386      $ 599      $ 3,206      $ (622