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Bank of New York Mellon Corporation (BK)

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Bank of New York Mellon Corporation 10-Q 2010

Documents found in this filing:

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2010

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

of the Securities Exchange Act of 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)


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

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

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

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

Yes ü No

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

Yes ü No

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


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

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

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


Class		Outstanding as of June 30, 2010

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

THE BANK OF NEW YORK MELLON CORPORATION

SECOND QUARTER 2010 FORM 10-Q

TABLE OF CONTENTS


		Page
Consolidated Financial Highlights (unaudited)		2

Part I – Financial Information

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk:
General		4
Overview		4
Second quarter 2010 and subsequent events		5
Highlights of second quarter 2010 results		6
Fee and other revenue		8
Operations of consolidated asset management funds		11
Net interest revenue		11
Average balances and interest rates		12
Noninterest expense		14
Income taxes		15
Business segments review		15
Critical accounting estimates		33
Consolidated balance sheet review		33
Support agreements		42
Liquidity and dividends		42
Capital		45
Trading activities and risk management		47
Foreign exchange and other trading		48
Asset/liability management		49
Off-balance-sheet financial instruments		49
Supplemental information – Explanation of Non-GAAP financial measures		50
Recent accounting and regulatory developments		53
Government monetary policies and competition		56
Website information		57

Item 1. Financial Statements:
Consolidated Income Statement (unaudited)		58
Consolidated Balance Sheet (unaudited)		60
Consolidated Statement of Cash Flows (unaudited)		61
Consolidated Statement of Changes in Equity (unaudited)		62
Notes to Consolidated Financial Statements		63

Item 4. Controls and Procedures.		101

Forward-looking Statements.		102

Part II – Other Information

Item 1. Legal Proceedings		103

Item 1A. Risk Factors		103

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		104

Item 6. Exhibits		104

Signature		105

Index to Exhibits		106

BNY Mellon 1

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited)


	Quarter ended									Six months ended
(dollar amounts in millions, except per share amounts and unless otherwise noted)	June 30, 2010			March 31, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Reported results applicable to common shareholders of The Bank of New York Mellon Corporation:
Net income	$	658		$	559		$	176		$	1,217		$	498
Basic EPS		0.54			0.46			0.15			1.00			0.43
Diluted EPS		0.54			0.46			0.15			1.00			0.43

Results from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation:
Income from continuing operations	$	668		$	601		$	267		$	1,269		$	630
Basic EPS from continuing operations		0.55			0.50			0.23			1.04			0.54
Diluted EPS from continuing operations		0.55			0.49			0.23			1.04			0.54

Continuing operations:
Fee and other revenue	$	2,571		$	2,549		$	2,257		$	5,120		$	4,393
Income of consolidated asset management funds		65			65			-			130			-
Net interest revenue		722			765			700			1,487			1,475

Total revenue	$	3,358		$	3,379		$	2,957		$	6,737		$	5,868
Return on common equity (annualized) (a)(b)		8.8	%		8.2	%		4.0	%		8.5	%		4.9	%
Non-GAAP adjusted (b)		9.5	%		10.6	%		6.6	%		10.0	%		8.6	%
Return on tangible common equity (annualized) –
Non-GAAP (b)		25.8	%		25.8	%		18.4	%		25.7	%		23.2	%
Non-GAAP adjusted (b)		25.5	%		30.2	%		24.0	%		27.7	%		33.3	%
Fee and other revenue as a percent of total revenue		77	%		75	%		76	%		76	%		75	%
Annualized fee revenue per employee (based on average headcount) (in thousands)	$	241		$	244		$	241		$	243		$	238
Percent of non-U.S. fee and net interest revenue including noncontrolling interests related to consolidated asset management funds		35	%		34	%		31	%		35	%		30	%
Pre-tax operating margin (b)		30	%		26	%		17	%		28	%		18	%
Non-GAAP adjusted (b)		32	%		34	%		31	%		33	%		32	%
Net interest margin (FTE)		1.74	%		1.89	%		1.80	%		1.82	%		1.84	% ^(c)
Assets under management (“AUM”) at period end (in billions)	$	1,047		$	1,105		$	926		$	1,047		$	926
Assets under custody and administration (“AUC”) at period end (in trillions)	$	21.8		$	22.4		$	20.7		$	21.8		$	20.7
Equity securities		28	%		30	%		27	%		28	%		27	%
Fixed income securities		72	%		70	%		73	%		72	%		73	%
Cross-border assets at period end (in trillions)	$	8.3		$	8.8		$	7.8		$	8.3		$	7.8
Market value of securities on loan at period end (in billions) (d)	$	248		$	253		$	290		$	248		$	290
Average common shares and equivalents outstanding (in thousands):
Basic		1,204,557			1,202,533			1,171,081			1,203,554			1,158,649
Diluted		1,208,830			1,206,286			1,174,466			1,207,578			1,160,620

2 BNY Mellon

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited) (continued)


	Quarter ended									Six months ended
(dollar amounts in millions, except per share amounts and unless otherwise noted)	June 30, 2010			March 31, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Capital ratios (e):
Tier 1 capital ratio		13.5	%		13.3	%		12.5	%		13.5	%		12.5	%
Total (Tier 1 plus Tier 2) capital ratio		17.2	%		17.2	%		16.0	%		17.2	%		16.0	%
Common shareholders’ equity to total assets ratio (b)		12.9	%		13.5	%		13.4	%		12.9	%		13.4	%
Tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (b)		6.3	%		6.1	%		4.8	%		6.3	%		4.8	%
Tier 1 common equity to risk-weighted assets ratio (b)		11.9	%		11.6	%		11.1	%		11.9	%		11.1	%
Return on average assets (annualized) (a)		1.17	%		1.09	%		0.52	%		1.13	%		0.60	%

Selected average balances:
Interest-earning assets	$	167,119		$	163,429		$	157,265		$	165,285		$	162,318	^(f)
Assets of operations	$	216,801		$	212,685		$	208,533		$	214,755		$	214,294
Total assets	$	228,841		$	225,415		$	208,533		$	227,138		$	214,294
Interest-bearing deposits	$	99,963		$	101,034		$	98,896		$	100,496		$	100,430	^(f)
Noninterest-bearing deposits	$	34,628		$	33,330		$	32,852		$	33,983		$	37,924	^(f)
Total The Bank of New York Mellon Corporation shareholders’ equity	$	30,434		$	29,715		$	28,934		$	30,076		$	28,458

Other information at period end:
Employees		42,700			42,300			41,800			42,700			41,800
Cash dividends per common share	$	0.09		$	0.09		$	0.09		$	0.18		$	0.33
Dividend yield (annualized)		1.5	%		1.2	%		1.2	%		1.5	%		2.3	%
Closing common stock price per common share	$	24.69		$	30.88		$	29.31		$	24.69		$	29.31
Market capitalization	$	29,975		$	37,456		$	35,255		$	29,975		$	35,255
Book value per common share (b)	$	25.04		$	24.47		$	22.68		$	25.04		$	22.68
Tangible book value per common share – Non-GAAP (b)	$	9.33		$	8.69		$	6.60		$	9.33		$	6.60
Common shares outstanding (in thousands)		1,214,042			1,212,941			1,202,828			1,214,042			1,202,828

(a)

Return on common equity on a net income basis was 8.7% for the second quarter of 2010, 7.6% for the first quarter of 2010, 2.7% for the second quarter of 2009, 8.2% for the first six months of 2010 and 3.9% for the first six months of 2009. Return on average assets on a net income basis was 1.15% for the second quarter of 2010, 1.01% for the first quarter of 2010, 0.34% for the second quarter of 2009, 1.08% for the first six months of 2010 and 0.47% for the first six months of 2009. Return on average assets was calculated on a continuing operations basis even though the prior period balance sheets, in accordance with GAAP, have not been restated for discontinued operations.

(b)

See Supplemental Information beginning on page 50 for a calculation of these ratios.

(c)

Calculated on a continuing operations basis, even though the prior period balance sheet in accordance with GAAP has not been restated for discontinued operations.

(d)

Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing segment.

(e)

Includes discontinued operations.

(f)

Excludes the impact of discontinued operations.

BNY Mellon 3

Part I – Financial Information

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

General

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

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

Form 10-K.

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

How we reported results

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

Throughout this Form 10-Q, certain measures, which are noted, exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, which relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present certain amounts on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 50 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

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

Overview

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

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

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

4 BNY Mellon

Second quarter 2010 and subsequent events

Equity offering and forward sale agreement

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

Acquisition of Global Investment Servicing, Inc.

On July 1, 2010, BNY Mellon acquired Global Investment Servicing, Inc. (“GIS”) for cash of $2.31 billion. GIS provides a comprehensive suite of products which includes subaccounting, fund accounting/administration, custody, managed account services and alternative investment services. GIS is based in Wilmington, Delaware and has approximately 4,500 employees in locations across the U.S. and Europe.

At June 30, 2010, GIS had approximately $719 billion in assets under administration, including $449 billion in assets under custody. GIS will be included in the Institutional Services sector for reporting purposes. The transaction is expected to be accretive to earnings in 2010.

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

Acquisition of BHF Asset Servicing GmbH

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

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

BAS and FSKAG will become part of BNY Mellon’s Asset Servicing segment. The combined business offers a full range of tailored solutions for investment companies, financial institutions and institutional investors in Germany with EUR569 billion (US$744 billion) in assets under custody and administration and depotbanking volume of EUR122 billion (US$159 billion). The transaction is expected to be accretive to earnings in 2010.

Asset Management joint venture in Shanghai

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

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

Agreement to acquire I(3) Advisors

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

Asset Management license in Korea

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

BNY Mellon 5

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

Creation of a Futures and Derivates Clearing Company

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

Highlights of second quarter 2010 results

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

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

Highlights for the second quarter of 2010 include:

•

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

•

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

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

•

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

•

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

•

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

•

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

•

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

6 BNY Mellon

•

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

•

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

•

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

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

•

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

•

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

•

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

BNY Mellon 7

Fee and other revenue


Fee and other revenue										2Q10 vs.				Year-to-date						YTD10 vs. YTD09
(dollars in millions, unless otherwise noted)	2Q10			1Q10			2Q09			2Q09		1Q10		2010			2009			YTD10 vs. YTD09
Securities servicing fees:
Asset servicing	$	622		$	608		$	574		8	%	2	%	$	1,230		$	1,093		13	%
Securities lending revenue		46			29			97		(53	)	59			75			187		(60	)
Issuer services		354			333			372		(5	)	6			687			736		(7	)
Clearing services		245			230			250		(2	)	7			475			503		(6	)
Total securities servicing fees		1,267			1,200			1,293		(2	)	6			2,467			2,519		(2	)
Asset and wealth management fees		676			678			637		6		-			1,354			1,253		8
Foreign exchange and other trading activities		220			262			237		(7	)	(16	)		482			544		(11	)
Treasury services		125			131			132		(5	)	(5	)		256			257		-
Distribution and servicing		77			76			107		(28	)	1			153			218		(30	)
Financing-related fees		48			50			54		(11	)	(4	)		98			102		(4	)
Investment income		72			108			44		64		(33	)		180			27		N/M
Other		73			37			9		N/M		N/M			110			24		N/M
Total fee revenue – GAAP	$	2,558		$	2,542		$	2,513		2	%	1	%	$	5,100		$	4,944		3	%
Income of consolidated asset management funds, net of noncontrolling interests		32	(a)		41	(a)		-		N/M		(22	)		73	(a)		-		N/M
Total fee revenue – Non-GAAP	$	2,590		$	2,583		$	2,513		3	%	-	%	$	5,173		$	4,944		5	%
Net securities gains (losses)		13			7			(256	)	N/M		N/M			20			(551	)	N/M
Total fee and other revenue – Non-GAAP (b)	$	2,603		$	2,590		$	2,257		15	%	1	%	$	5,193		$	4,393		18	%
Fee and other revenue as a percent of total revenue		77	%		75	%		76	%						76	%		75	%

Market value of AUM at period end (in billions)	$	1,047		$	1,105		$	926		13	%	(5	)%	$	1,047		$	926		13	%
Market value of AUC and administration at period end (in trillions)	$	21.8		$	22.4		$	20.7		6	%	(2	)%	$	21.8		$	20.7		6	%

(a)

As a result of adopting ASC 810 at March 31, 2010, we were required to segregate income from consolidated asset management funds of $65 million in the second quarter of 2010, $65 million in the first quarter of 2010 and $130 million in the first six months of 2010, and net income attributable to noncontrolling interests of $33 million, $24 million and $57 million, respectively, on the income statement. Prior to the adoption of ASC 810, the net of these income statement line items of $32 million in the second quarter of 2010, $41 million in the first quarter of 2010, and $73 million in the first six months of 2010, respectively, was included in asset and wealth management fees ($29 million, $25 million and $54 million, respectively) and investment income ($3 million, $16 million and $19 million, respectively).

(b)

Total fee and other revenue on a GAAP basis was $2,571 million for the second quarter of 2010, $2,549 million for the first quarter of 2010, $2,257 million for the second quarter of 2009, $5,120 million for the first six months of 2010 and $4,393 million for the first six months of 2009.

N/M

– Not meaningful.

Fee revenue

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

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

Securities servicing fees

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

•

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

•

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

•

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

8 BNY Mellon

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

•

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

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

Asset and wealth management fees

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

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

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

Foreign exchange and other trading activities

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

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

Treasury services

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

Distribution and servicing fees

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

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

Financing-related fees

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

BNY Mellon 9

Investment income


Investment income									Year-to-date
(in millions)	2Q10			1Q10		2Q09			2010			2009
Corporate/bank-owned life insurance	$	37		$	36	$	31		$	73		$	72
Lease residual gains		14			52		(10	)		66			16
Equity investment income (loss)		20			12		13			32			(41	)
Private equity gains (losses)		6			5		(9	)		11			(29	)
Seed capital gains (losses)		(5	)		3		19			(2	)		9
Total investment income	$	72		$	108	$	44		$	180		$	27

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

Other revenue


Other revenue								Year-to-date
(in millions)	2Q10		1Q10		2Q09			2010		2009
Expense reimbursements from joint ventures	$	8	$	10	$	7		$	18	$	15
Asset-related gains		3		3		16			6		22
Other income (loss)		62		24		(14	)		86		(13	)
Total other revenue	$	73	$	37	$	9		$	110	$	24

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

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

Net investment securities gains (losses)

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

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

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


Net securities gains (losses)										Year-to-date
(in millions)	2Q10			1Q10			2Q09			2010			2009
Alt-A RMBS	$	(6	)	$	(7	)	$	(114	)	$	(13	)	$	(239	)
Prime RMBS		-			-			(9	)		-			(12	)
Home equity lines of credit		-			-			(4	)		-			(22	)
European floating rate notes		-			-			(66	)		-			(70	)
Credit cards		-			-			(26	)		-			(28	)
Other		19			14			(37	)		33			(180	)
Net securities gains (losses)	$	13		$	7		$	(256	)	$	20		$	(551	)

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

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

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

10 BNY Mellon

Operations of consolidated asset management funds

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

We also separately disclosed the following on the income statement.


Income from consolidated asset management funds, net of noncontrolling interests							Year-to-date
(in millions)	2Q10		1Q10		2Q09		2010		2009
Operations of consolidated asset management funds	$	65	$	65	$	-	$	130	$	-
Noncontrolling interest of consolidated asset management funds		33		24		-		57		-
Income from consolidated asset management funds, net of noncontrolling interests	$	32	$	41	$	-	$	73	$	-

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


							Year-to-date
(in millions)	2Q10		1Q10		2Q09		2010		2009
Asset and wealth management revenue	$	29	$	25	$	-	$	54	$	-
Investment income		3		16		-		19		-
Total	$	32	$	41	$	-	$	73	$	-

Net interest revenue


Net interest revenue										2Q10 vs.				Year-to-date						YTD10 vs. YTD09
(dollars in millions)	2Q10			1Q10			2Q09			2Q09		1Q10		2010			2009			YTD10 vs. YTD09
Net interest revenue (non-FTE)	$	722		$	765		$	700		3	%	(6	)%	$	1,487		$	1,475		1	%
Tax equivalent adjustment		5			5			4		N/M		N/M			10			8		N/M
Net interest revenue (FTE) – Non-GAAP	$	727		$	770		$	704		3	%	(6	)%	$	1,497		$	1,483		1	%
Average interest-earning assets	$	167,119		$	163,429		$	157,265		6	%	2	%	$	165,285		$	162,318	(a)	2	%
Net interest margin (FTE)		1.74	%		1.89	%		1.80	%	(6	)bps	(15	)bps		1.82	%		1.84	%(b)	(2	)bps

(a)

Excludes the impact of discontinued operations.

(b)

Calculated on a continuing operations basis, even though the prior period balance sheet, in accordance with GAAP has not been restated for discontinued operations.

N/M

- Not meaningful.

bps

- basis points.

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

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

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

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

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

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

BNY Mellon 11

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

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

Average balances and interest rates


Average balances and interest rates (a)	Quarter ended
	June 30, 2010					March 31, 2010					June 30, 2009
(dollar amounts in millions)	Average balance			Average rates		Average balance			Average rates		Average balance			Average rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)	$	50,741		1.01	%	$	55,800		1.03	%	$	56,917		1.18	%
Interest-bearing deposits held at the Federal Reserve and other central banks		18,280		0.34			12,129		0.33			6,338		0.37
Federal funds sold and securities under resale agreements		4,652		0.66			3,859		0.71			2,899		1.29
Margin loans		5,786		1.49			5,241		1.49			4,134		1.62
Non-margin loans:
Domestic offices		20,750		2.89			19,510		3.12			20,740		3.18
Foreign offices		10,128		1.53			9,463		1.62			12,155		2.21

Total non-margin loans		30,878		2.45			28,973		2.63			32,895		2.82
Securities:
U.S. government obligations		6,162		1.46			6,600		1.40			1,679		1.67
U.S. government agency obligations		19,629		3.48			19,429		3.58			14,748		3.74
State and political subdivisions		638		6.56			670		6.37			710		6.92
Other securities		27,601		4.14			28,653		4.20			34,766		2.85
Trading securities		2,752		2.62			2,075		2.49			2,179		2.50

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

Total interest-earning assets		167,119		2.08	%		163,429		2.18	%		157,265		2.16	%
Allowance for loan losses		(517	)				(502	)				(426	)
Cash and due from banks		3,673					3,514					3,412
Other assets		46,266					45,346					45,975
Assets of discontinued operations		260					898					2,307
Assets of consolidated asset management funds		12,040					12,730					-
Total assets	$	228,841				$	225,415				$	208,533
Liabilities and equity
Interest-bearing liabilities:
Money market rate accounts	$	24,279		0.10	%	$	21,741		0.09	%	$	19,037		0.10	%
Savings		1,389		0.27			1,372		0.27			1,070		0.44
Certificates of deposit of $100,000 & over		332		0.16			648		0.25			942		1.00
Other time deposits		5,902		0.26			5,224		0.30			4,190		0.48
Foreign offices		68,061		0.19			72,049		0.16			73,657		0.14

Total interest-bearing deposits		99,963		0.17			101,034		0.16			98,896		0.16
Federal funds purchased and securities sold under repurchase agreements		4,441		0.19			3,697		0.07			2,485		(0.46	)
Other borrowed funds		4,223		2.08			2,805		1.97			2,756		1.04
Payables to customers and broker-dealers		6,596		0.09			6,372		0.08			4,901		0.13
Long-term debt		16,462		1.75			16,808		1.50			16,793		2.35

Total interest-bearing liabilities		131,685		0.43	%		130,716		0.36	%		125,831		0.46	%
Total noninterest-bearing deposits		34,628					33,330					32,852
Other liabilities		20,042					18,420					18,578
Liabilities of discontinued operations		260					898					2,307
Liabilities and obligations of consolidated asset management funds		11,046					11,540					-
Total liabilities		197,661					194,904					179,568
Total BNY Mellon shareholders’ equity		30,434					29,715					28,934
Noncontrolling interest		58					26					31
Noncontrolling interests of consolidated asset management funds		688					770					-
Total equity		31,180					30,511					28,965
Total liabilities and equity	$	228,841				$	225,415				$	208,533
Net interest margin – Taxable equivalent basis				1.74	%				1.89	%				1.80	%

(a)

Presented on a continuing operations basis even though the balance sheet is not restated for discontinued operations.

Note:

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

12 BNY Mellon


Average balances and interest rates (a)	Six months ended
	June 30, 2010					June 30, 2009
(dollar amounts in millions)	Average balance			Average rates		Average balance			Average rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)	$	53,256		1.02	%	$	56,711		1.37	%
Interest-bearing deposits held at the Federal Reserve and other central banks		15,222		0.33			14,719		0.37
Other short-term investments – U.S. government-backed commercial paper		-		-			631		3.15
Federal funds sold and securities under resale agreements		4,258		0.68			2,606		1.08
Margin loans		5,515		1.49			4,177		1.62
Non-margin loans:
Domestic offices		20,134		3.02			21,183		3.04
Foreign offices		9,797		1.58			12,629		2.39

Total non-margin loans		29,931		2.54			33,812		2.80
Securities:
U.S. government obligations		6,380		1.43			1,236		1.93
U.S. government agency obligations		19,530		3.53			13,413		3.74
State and political subdivisions		654		6.49			738		6.81
Other securities		28,124		4.17			32,320		3.59
Trading securities		2,415		2.57			1,955		2.66

Total securities		57,103		3.60			49,662		3.61

Total interest-earning assets		165,285		2.13	%		162,318		2.27	%
Allowance for loan losses		(509	)				(402	)
Cash and due from banks		3,594					4,114
Other assets		45,808					45,928
Assets of discontinued operations		577					2,336
Assets of consolidated asset management funds		12,383					-
Total assets	$	227,138				$	214,294
Liabilities and equity
Interest-bearing liabilities:
Money market rate accounts	$	23,017		0.10	%	$	18,802		0.10	%
Savings		1,380		0.27			1,117		0.53
Certificates of deposit of $100,000 & over		489		0.22			1,208		1.07
Other time deposits		5,566		0.28			4,878		0.52
Foreign offices		70,044		0.18			74,425		0.23

Total interest-bearing deposits		100,496		0.16			100,430		0.23
Federal funds purchased and securities sold under repurchase agreements		4,071		0.14			2,164		(0.23	)
Other borrowed funds		3,518		2.03			3,268		1.34
Borrowings from Federal Reserve related to asset-backed commercial paper		-		-			631		2.25
Payables to customers and broker-dealers		6,485		0.08			4,352		0.16
Long-term debt		16,634		1.63			16,147		2.52

Total interest-bearing liabilities		131,204		0.39	%		126,992		0.55	%
Total noninterest-bearing deposits		33,983					37,924
Other liabilities		19,236					18,551
Liabilities of discontinued operations		577					2,336
Liabilities and obligations of consolidated asset management funds		11,291					-
Total liabilities		196,291					185,803
Total BNY Mellon shareholders’ equity		30,076					28,458
Noncontrolling interest		42					33
Noncontrolling interests of consolidated asset management funds		729					-
Total equity		30,847					28,491
Total liabilities and equity	$	227,138				$	214,294
Net interest margin – Taxable equivalent basis				1.82	%				1.84	%

(a)

Presented on a continuing operations basis even though the balance sheet is not restated for discontinued operations.

Note:

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

BNY Mellon 13

Noninterest expense


Noninterest expense (dollars in millions)										2Q10 vs.				Year-to-date						YTD10 vs. YTD09
Noninterest expense (dollars in millions)	2Q10			1Q10			2Q09			2Q09		1Q10		2010			2009			YTD10 vs. YTD09
Staff:
Compensation	$	763		$	753		$	740		3	%	1	%	$	1,516		$	1,472		3	%
Incentives		272			284			241		13		(4	)		556			488		14
Employee benefits		199			183			172		16		9			382			362		6
Total staff		1,234			1,220			1,153		7		1			2,454			2,322		6
Professional, legal and other purchased services		256			241			237		8		6			497			474		5
Net occupancy		143			137			142		1		4			280			281		-
Distribution and servicing		106			109			106		-		(3	)		215			213		1
Software		91			94			93		(2	)	(3	)		185			174		6
Furniture and equipment		71			75			76		(7	)	(5	)		146			153		(5	)
Sub-custodian		65			52			60		8		25			117			99		18
Business development		68			52			49		39		31			120			93		29
Other		201			186			233		(14	)	8			387			435		(11	)
Subtotal		2,235			2,166			2,149		4		3			4,401			4,244		4
Special litigation reserves		N/A			164			N/A		N/M		N/M			164			N/A		N/M
FDIC special assessment		-			-			61		N/M		-			-			61		N/M
Amortization of intangible assets		98			97			108		(9	)	1			195			215		(9	)
Restructuring charges		(15	)		7			6		N/M		N/M			(8	)		16		N/M
M&I expenses		14			26			59		(76	)	(46	)		40			127		(69	)
Total noninterest expense	$	2,332		$	2,460		$	2,383		(2	)%	(5	)%	$	4,792		$	4,663		3	%
Total staff expense as a percent of total revenue		37	%		36	%		39	% (a)						36	%		40	%
Employees at period end		42,700			42,300			41,800		2	%	1	%		42,700			41,800		2	%

(a)

Total staff expense as a percentage of total revenue excluding net securities gains (losses) was 36% in the second quarter of 2009.

N/A

– Not applicable.

N/M

– Not meaningful.

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

Staff expense

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

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

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

Non-staff expense

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

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

14 BNY Mellon

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

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

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

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

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

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

Income taxes

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

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

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

Business segments review

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

Business segments accounting principles

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

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

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

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

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

BNY Mellon 15

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

Our business segments continued to face a challenging operating environment in the second quarter of 2010. Year-over-year higher market values and new business benefited the Asset and Wealth management segments, while a continued low level of debt issuances in the global markets and a lower level of corporate actions negatively impacted results in Issuer Services. Results in Asset Servicing benefited from higher market values and new business but were negatively impacted by lower foreign currency volatility as well as narrower spreads and lower loan balances in securities lending. Money market fee waivers also continue to suppress results in Asset Management, Issuer and Clearing Services. On a sequential basis, new business, higher transaction volumes and seasonally higher Depositary Receipts were primarily offset by

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

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

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


Market indices						2Q10 vs.				Year-to-date		YTD10 vs. YTD09
	2Q09	3Q09	4Q09	1Q10	2Q10	2Q09		1Q10		2010	2009	YTD10 vs. YTD09
S&P 500 Index (a)	919	1057	1115	1169	1031	12	%	(12	)%	1031	919	12	%
S&P 500 Index – daily average	891	995	1088	1123	1135	27		1		1129	851	33
FTSE 100 Index (a)	4249	5134	5413	5680	4917	16		(13	)	4917	4249	16
FTSE 100 Index – daily average	4258	4708	5235	5431	5361	26		(1	)	5394	4149	30
NASDAQ Composite Index (a)	1835	2122	2269	2398	2109	15		(12	)	2109	1835	15
Lehman Brothers Aggregate Bond^smIndex (a)	280	304	301	300	299	7		-		299	280	7
MSCI EAFE^® Index (a)	1307	1553	1581	1584	1348	3		(15	)	1348	1307	3
NYSE Share Volume (in billions)	151	126	112	103	140	(7	)	36		243	312	(22	)
NASDAQ Share Volume (in billions)	152	144	131	143	159	5		11		302	288	5

(a)

Period end.

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

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

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

At June 30, 2010, using the S&P 500 Index as a proxy for the equity markets, we estimate that a 100 point change in the value of the S&P 500 Index, sustained for one year, would impact fee revenue by approximately 1-2% and fully diluted earnings per common share on a continuing operations basis by $0.06-$0.07.

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

16 BNY Mellon


For the quarter ended June 30, 2010 (dollar amounts in millions)	Asset Management			Wealth Management			Total Asset and Wealth Management Sector			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Sector			Other Segment			Total continuing operations
Fee and other revenue	$	637	(a)	$	147		$	784		$	906		$	380		$	276		$	196		$	1,758		$	61		$	2,603	(a)
Net interest revenue		1			56			57			216			216			93			161			686			(21	)		722
Total revenue		638			203			841			1,122			596			369			357			2,444			40			3,325
Provision for credit losses		-			-			-			-			-			-			-			-			20			20
Noninterest expense		517			154			671			786			339			277			193			1,595			66			2,332
Income before taxes	$	121	(a)	$	49		$	170		$	336		$	257		$	92		$	164		$	849		$	(46	)	$	973	(a)
Pre-tax operating margin (b)		19	%		24	%		20	%		30	%		43	%		25	%		46	%		35	%		N/M			29	%
Average assets	$	24,895		$	10,399		$	35,294		$	62,940		$	48,938		$	21,550		$	26,485		$	159,913		$	33,374		$	228,581	(c)
Excluding intangible amortization:
Noninterest expense	$	467		$	145		$	612		$	781		$	318		$	270		$	188		$	1,557		$	65		$	2,234
Income before taxes		171			58			229			341			278			99			169			887			(45	)		1,071
Pre-tax operating margin (b)		27	%		28	%		27	%		30	%		47	%		27	%		47	%		36	%		N/M			32	%

(a)

Total fee and other revenue and income before taxes for the second quarter of 2010 includes income from consolidated asset management funds of $65 million net of income attributable to noncontrolling interests of $33 million. The net of these income statement line items of $32 million is included above in fee and other revenue.

(b)

Income before taxes divided by total revenue.

(c)

Including average assets of discontinued operations of $260 million for the second quarter of 2010, consolidated average assets were $228,841 million.

N/M

- Not meaningful.


For the quarter ended March 31, 2010 (dollar amounts in millions)	Asset Management			Wealth Management			Total Asset and Wealth Management Sector			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Sector			Other Segment			Total continuing operations
Fee and other revenue	$	649	(a)	$	146		$	795		$	798		$	358		$	271		$	225		$	1,652		$	143		$	2,590	(a)
Net interest revenue		-			55			55			210			252			95			176			733			(23	)		765
Total revenue		649			201			850			1,008			610			366			401			2,385			120			3,355
Provision for credit losses		-			-			-			-			-			-			-			-			35			35
Noninterest expense		503			145			648			723			324			261			188			1,496			316			2,460
Income before taxes	$	146	(a)	$	56		$	202		$	285		$	286		$	105		$	213		$	889		$	(231	)	$	860	(a)
Pre-tax operating margin (b)		23	%		28	%		24	%		28	%		47	%		29	%		53	%		37	%		N/M			26	%
Average assets	$	25,187		$	9,722		$	34,909		$	59,704		$	52,838		$	20,338		$	26,716		$	159,596		$	30,012		$	224,517	(c)
Excluding intangible amortization:
Noninterest expense	$	453		$	136		$	589		$	717		$	304		$	255		$	182		$	1,458		$	316		$	2,363
Income before taxes		196			65			261			291			306			111			219			927			(231	)		957
Pre-tax operating margin (b)		30	%		32	%		31	%		29	%		50	%		30	%		55	%		39	%		N/M			29	%

(a)

Total fee and other revenue and income before taxes for the first quarter of 2010 includes income from consolidated asset management funds of $65 million net of income attributable to noncontrolling interests of $24 million. The net of these income statement line items of $41 million is included above in fee and other revenue.

(b)

Income before taxes divided by total revenue.

(c)

Including average assets of discontinued operations of $898 million for the first quarter of 2010, consolidated average assets were $225,415 million.

N/M

- Not meaningful.

BNY Mellon 17


For the quarter ended Dec. 31, 2009							Total Asset and Wealth Management Sector															Total Institutional Services Sector
(dollar amounts in millions)	Asset Management			Wealth Management			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	$	680		$	151		$	831		$	816		$	410		$	264		$	222		$	1,712		$	52		$	2,595
Net interest revenue		3			46			49			205			203			90			148			646			29			724
Total revenue		683			197			880			1,021			613			354			370			2,358			81			3,319
Provision for credit losses		-			1			1			-			-			-			-			-			64			65
Noninterest expense		521			149			670			789			338			248			193			1,568			344			2,582
Income before taxes	$	162		$	47		$	209		$	232		$	275		$	106		$	177		$	790		$	(327	)	$	672
Pre-tax operating margin (a)		24	%		24	%		24	%		23	%		45	%		30	%		48	%		34	%		N/M			20	%
Average assets	$	12,859		$	9,246		$	22,105		$	59,980		$	52,028		$	20,365		$	26,275		$	158,648		$	31,459		$	212,212	(b)
Excluding intangible amortization:
Noninterest expense	$	465		$	138		$	603		$	783		$	318		$	241		$	187		$	1,529		$	343		$	2,475
Income before taxes		218			58			276			238			295			113			183			829			(326	)		779
Pre-tax operating margin (a)		32	%		29	%		31	%		23	%		48	%		32	%		50	%		35	%		N/M			23	%

(a)

Income before taxes divided by total revenue.

(b)

Including average assets of discontinued operations of $1,993 million for the fourth quarter of 2009, consolidated average assets were $214,205 million.

N/M

– Not meaningful.


For the quarter ended Sept. 30, 2009					Total Asset and Wealth Management Sector										Total Institutional Services Sector
(dollar amounts in millions)	Asset Management		Wealth Management		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	$	592	$	146	$	738	$	845	$	389	$	291	$	206	$	1,731	$	(4,685	)	$	(2,216	)
Net interest revenue		7		49		56		229		180		81		149		639		21			716
Total revenue		599

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