Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

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

of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2010

or

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

of the Securities Exchange Act of 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   13-2614959

(State or other jurisdiction of

incorporation or organization)

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

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

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

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

Yes ü     No        

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

Yes ü    No        

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

 

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

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

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

 

Class   

Outstanding as of

March 31, 2010

Common Stock, $0.01 par value    1,212,940,571

 

 


Table of Contents

THE BANK OF NEW YORK MELLON CORPORATION

FIRST 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

First quarter 2010 events

   5

Highlights of first quarter 2010 results

   5

Fee and other revenue

   7

Operations of consolidated asset management funds

   9

Net interest revenue

   10

Average balances and interest rates

   11

Noninterest expense

   12

Income taxes

   13

Business segments review

   13

Critical accounting estimates

   29

Consolidated balance sheet review

   29

Support agreements

   38

Liquidity and dividends

   38

Capital

   41

Trading activities and risk management

   43

Foreign exchange and other trading

   44

Asset/liability management

   44

Off-balance-sheet financial instruments

   45

Supplemental information – Explanation of Non-GAAP financial measures

   45

Recent accounting and regulatory developments

   49

Government monetary policies and competition

   51

Website information

   52

Item 1. Financial Statements:

  

Consolidated Income Statement (unaudited)

   53

Consolidated Balance Sheet (unaudited)

   55

Consolidated Statement of Cash Flows (unaudited)

   56

Consolidated Statement of Changes in Equity (unaudited)

   57

Notes to Consolidated Financial Statements

   58

Item 4. Controls and Procedures

   92

Forward-looking Statements

   93

Part II  – Other Information

  

Item 1. Legal Proceedings

   94

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

   94

Item 6. Exhibits

   94

Signature

   96

Index to Exhibits

   97

 

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The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited)

      Quarter ended  

(dollar amounts in millions, except per share

amounts and unless otherwise noted)

   March 31,
2010
    Dec. 31,
2009
    March 31,
2009
 

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

      

Net income

   $ 559      $ 593      $ 322   

Basic EPS

     0.46        0.49        0.28   

Diluted EPS

     0.46        0.49        0.28   

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

      

Income from continuing operations

   $ 601      $ 712      $ 363   

Basic EPS from continuing operations

     0.50        0.59        0.31   

Diluted EPS from continuing operations

     0.49        0.59        0.31   

Continuing operations:

      

Fee and other revenue

   $ 2,549      $ 2,595      $ 2,136   

Income of consolidated asset management funds

     65        -        -   

Net interest revenue

     765        724        775   
                        

Total revenue

   $ 3,379      $ 3,319      $ 2,911   

Return on common equity (annualized) (a)

     8.2     9.8     5.8

Non-GAAP adjusted (b)

     10.6     10.1     10.6

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

     25.8     33.0     28.8

Non-GAAP adjusted (b)

     30.2     31.1     44.4

Fee and other revenue as a percent of total revenue

     75     78     73

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

   $ 244      $ 243      $ 234   

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

     34     36     29

Pre-tax operating margin (b)

     26     20     20

Non-GAAP adjusted (b)

     34     29     33

Net interest margin (FTE)

     1.89     1.77     1.87 % (c) 

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

   $ 1,105      $ 1,115      $ 881   

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

   $ 22.4      $ 22.3      $ 19.5   

Equity securities

     30     29     25

Fixed income securities

     70     71     75

Cross-border assets at period end (in trillions)

   $ 8.8      $ 8.8      $ 7.3   

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

   $ 253      $ 247      $ 293   

Average common shares and equivalents outstanding (in thousands):

      

Basic

     1,202,533        1,200,359        1,146,070   

Diluted

     1,206,286        1,203,469        1,146,943   

Capital ratios (e):

      

Tier 1 capital ratio

     13.3     12.1     13.8 % (f) 

Total (Tier 1 plus Tier 2) capital ratio

     17.2     16.0     17.5 % (f) 

Common shareholders’ equity to total assets ratio (b)

     13.5     13.7     12.5

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

     6.1     5.2     4.2

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

     11.6     10.5     10.0

 

2    BNY Mellon


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The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited) (continued)

 

      Quarter ended  
(dollar amounts in millions, except per share amounts, and unless otherwise noted)    March 31,
2010
   

Dec. 31,

2009

    March 31,
2009
 

Return on average assets (annualized) (a)

     1.09     1.33     0.68

Selected average balances:

      

Interest-earning assets

   $ 163,429      $ 164,075      $ 167,427  (g) 

Assets of operations

   $ 212,685      $ 214,205      $ 220,119   

Total assets

   $ 225,415      $ 214,205      $ 220,119   

Interest-bearing deposits

   $ 101,034      $ 98,404      $ 101,983  (g) 

Noninterest-bearing deposits

   $ 33,330      $ 34,991      $ 43,051  (g) 

Total The Bank of New York Mellon Corporation shareholders’ equity

   $ 29,715      $ 28,843      $ 27,978   

Other information at period end:

      

Employees

     42,300        42,200        41,700  (g) 

Dividends per common share

   $ 0.09      $ 0.09      $ 0.24   

Dividend yield (annualized)

     1.2     1.3     3.4

Closing common stock price per common share

   $ 30.88      $ 27.97      $ 28.25   

Market capitalization

   $ 37,456      $ 33,783      $ 32,585   

Book value per common share (b)

   $ 24.47      $ 23.99      $ 22.03   

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

   $ 8.69      $ 7.90      $ 5.48   

Period end common shares outstanding (in thousands)

     1,212,941        1,207,835        1,153,450   

 

(a) Return on common equity on a net income basis was 7.6% for the first quarter of 2010, 8.2% for the fourth quarter of 2009 and 5.2% for the first quarter of 2009. Return on average assets on a net income basis was 1.0% for the first quarter of 2010, 1.10% for the fourth quarter of 2009 and 0.59% for the first quarter 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 45 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) The Tier 1 and Total capital ratios, excluding the Series B preferred stock and the common stock warrant associated with TARP, were 11.2% and 15.0% at March 31, 2009.
(g) Excludes the impact of discontinued operations.

 

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Part I – Financial Information

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

 

 

 

General

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

Certain business terms used in this document are defined in the glossary included in our 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 45 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 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 March 31, 2010, we had $22.4 trillion in assets under custody and administration and $1.1 trillion in assets under management, serviced $11.8 trillion in outstanding debt and, on average, processed $1.5 trillion of global payments per day.

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


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First quarter 2010 events

Agreement to acquire Global Investment Servicing, Inc.

As previously disclosed, in February 2010, BNY Mellon announced a definitive agreement to acquire 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 Dec. 31, 2009, GIS had approximately $855 billion in assets under administration, including $460 billion in assets under custody. BNY Mellon has previously announced its intention to raise approximately $700 million in equity as part of the transaction. The transaction is expected to be accretive to earnings and close in the third quarter of 2010, subject to necessary regulatory approvals. At closing, GIS will be included in the Institutional Services sector.

Agreement to acquire BHF Asset Servicing GmbH

In March 2010, BNY Mellon announced an agreement to acquire BHF Asset Servicing GmbH (“BAS”) for cash of EUR 253 million (US$343 million). This transaction will include the purchase of Frankfurter Service Kapitalanlage – Gesellschaft mbH (“FSKAG”), a wholly-owned fund administration affiliate.

Upon closing, BAS and FSKAG will become part of BNY Mellon’s Asset Servicing business. The combined business will offer a full range of tailored solutions for investment companies, financial institutions and institutional investors in Germany with EUR473 billion (US$642 billion) in assets under custody and administration and depotbanking volume of EUR120 billion (US$163 billion).

The transaction is expected to be accretive to earnings and close in the third quarter of 2010, subject to necessary regulatory approvals.

Adoption of new accounting standards

On Jan. 1, 2010, we adopted SFAS No. 167, “Amendments to FASB interpretation No. 46(R)” (Topic 810) issued by the Financial Accounting

Standards Board (“FASB”). See below and Notes 2 and 13 to the Notes to Consolidated Financial Statements for additional information. This statement requires ongoing assessments to determine whether an entity is a variable interest entity (“VIE”) and whether an enterprise is the primary beneficiary of a VIE and, accordingly, must consolidate the VIE in the enterprise’s financial statements. Adoption of this new statement increased consolidated total assets on our balance sheet at March 31, 2010 by $13.0 billion, or approximately 6%, from year-end for the consolidation of certain asset management funds, seed capital investments and securitizations.

In connection with our role as asset manager for collateralized loan obligation (“CLO”) funds, we have rights to fixed senior and fixed subordinated fees and may have subordinated performance fees. In addition, we typically hold a subordinated note interest in the CLO fund. Based on the economic conditions, our initial assessment on the adoption of SFAS No. 167 was that only the fixed senior fees would be received and the other interests would not absorb more than an insignificant amount of the CLO’s variability. As a result, we did not consolidate certain funds. Subsequent to our first quarter 2010 earnings release, we concluded it was likely we would receive these subordinated fees and we consolidated an additional $10 billion of CLO funds where we also have rights to performance fees and/or hold a subordinated note interest. The consolidation of these additional funds also resulted in the reclassification on the income statement of $19 million of asset management revenue to income of consolidated asset management funds, subsequent to our first quarter 2010 Earnings Release.

Highlights of first quarter 2010 results

We reported income from continuing operations applicable to the common shareholders of BNY Mellon of $601 million, or $0.49 per diluted common share, in the first quarter of 2010 compared with $712 million, or $0.59 per diluted common share, in the fourth quarter of 2009 and $363 million, or $0.31 per diluted common share, in the first quarter of 2009.

Net income applicable to common shareholders, including discontinued operations, totaled $559 million, or $0.46 per diluted common share, in the first quarter of 2010, compared with $593 million, or $0.49 per diluted common share, in the fourth quarter of 2009 and $322 million, or $0.28 diluted per common share, in the first quarter of 2009.

Results for the first quarter of 2010 include litigation reserves for several matters of $164 million (pre-tax), or $0.08 per diluted common share and merger & integration (“M&I”) expenses of $26 million (pre-tax), or $0.01 per


 

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diluted common share. (See Noninterest expense beginning on page 12.)

Highlights for the first quarter of 2010 include:

 

 

Assets under custody and administration (“AUC”) totaled $22.4 trillion at March 31, 2010 compared with $19.5 trillion at March 31, 2009 and $22.3 trillion at Dec. 31, 2009. The year-over-year increase reflects higher market values and new business. (See the Institutional Services sector on page 21).

 

Assets under management (“AUM”), excluding securities lending assets totaled $1.1 trillion at March 31, 2010 compared with $881 billion at March 31, 2009 and $1.1 trillion at Dec. 31, 2009. The year-over-year increase was primarily due to the acquisition of Insight Investment Management (“Insight”) in the fourth quarter of 2009. (See the Asset and Wealth Management sector on page 17).

 

Securities servicing revenue, excluding securities lending fee revenue, totaled $1.2 billion in the first quarter of 2010 compared with $1.1 billion in the first quarter of 2009. An increase in asset servicing revenue was partially offset by lower issuer and clearing services revenue. (See the Institutional Services sector on page 21).

 

Securities lending fee revenue totaled $29 million in the first quarter of 2010 compared with $90 million in the prior year period. The decrease reflects narrower spreads and lower loan balances. Securities lending assets totaled $253 billion at March 31, 2010 compared with $247 billion at Dec. 31, 2009 and $293 billion at March 31, 2009. (See the Institutional Services sector on page 21).

 

Asset and wealth management fees, including performance fees, totaled $678 million in the first quarter of 2010 compared with $616 million in the first quarter of 2009. The increase reflects improved market values, the Insight acquisition and the impact of long-term inflows, partially offset by a reduction in money market fees due to outflows in money markets and higher fee waivers. (See the Asset Management and Wealth Management segments beginning on page 18).

 

Foreign exchange and other trading activities revenue totaled $262 million in the first quarter of 2010 compared with $307 million in the first quarter of 2009. The decrease primarily reflects lower foreign exchange revenue, driven by lower volatility, partially offset by increased volumes. (See Fee and other revenue beginning on page 7).

 

Investment income and other revenue totaled $145 million in the first quarter of 2010 compared with a loss of $2 million in the first quarter of 2009. The increase reflects higher lease residual gains, positive foreign currency translations and the write-down of certain equity investments in the first quarter of 2009. (See Fee and other revenue beginning on page 7).

 

Net interest revenue totaled $765 million in the first quarter of 2010 compared with $775 million in the first quarter of 2009. The decrease reflects a decline in the value of interest-free balances, a decrease in average interest-earning assets and narrowing spreads, partially offset by the higher yield on the restructured investment securities portfolio and higher hedging gains. The net interest margin (FTE) for the first quarter of 2010 was 1.89% compared with 1.87% in the first quarter of 2009. (See Net interest revenue beginning on page 10).

 

The provision for credit losses was $35 million in the first quarter of 2010 compared with $59 million in the first quarter of 2009. The decrease in the provision reflects a decrease in higher risk-rated loans and nonperforming loans. (See Asset quality and allowance for credit losses beginning on page 34).

 

Noninterest expense totaled $2.5 billion in the first quarter of 2010 compared with $2.3 billion in the first quarter of 2009. The increase primarily reflects litigation reserves relating to several matters and the impact of the Insight acquisition. (See Noninterest expense beginning on page 12).

 

Unrealized net of tax losses on our total investment securities portfolio were $189 million at March 31, 2010 compared with $705 million at Dec. 31, 2009. The improvement primarily resulted from improved credit spreads. (See Consolidated balance sheet review beginning on page 29).

 

The Tier 1 capital ratio was 13.3% at March 31, 2010 compared with 12.1% at Dec. 31, 2009. The increase reflects earnings retention and lower risk-weighted assets. (See Capital beginning on page 41).

 

Nonperforming assets totaled $459 million at March 31, 2010, a decrease of $91 million, or 17%, compared with Dec. 31, 2009 primarily due to repayments and charge-offs.


 

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Fee and other revenue

 

Fee and other revenue                         1Q10 vs.  
(dollars in millions, unless otherwise noted)    1Q10     4Q09     1Q09     1Q09     4Q09  

Securities servicing fees:

          

Asset servicing

   $ 608      $ 621      $ 519      17   (2 )% 

Securities lending revenue (a)

     29        29        90      N/M      -   

Issuer services

     333        368        364      (9   (10

Clearing services

     230        223        253      (9   3   

Total securities servicing fees

     1,200        1,241        1,226      (2   (3

Asset and wealth management fees

     678        736        616      10      (8

Foreign exchange and other trading activities

     262        246        307      (15   7   

Treasury services

     131        134        125      5      (2

Distribution and servicing

     76        85        111      (32   (11

Financing-related fees

     50        57        48      4      (12

Investment income

     108        78        (17   N/M      38   

Other

     37        3        15      N/M      N/M   

Total fee revenue – GAAP

   $ 2,542      $ 2,580      $ 2,431      5   (1 )% 

Income of consolidated asset management funds, net of noncontrolling interests

     41 (b )      -        -      N/M      N/M   

Total fee revenue – Non-GAAP

   $ 2,583      $ 2,580      $ 2,431      6   -

Net securities gains (losses)

     7        15        (295   N/M      (53

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

   $ 2,590      $ 2,595      $ 2,136      21   -

Fee and other revenue as a percent of total revenue

     75     78     73    

Market value of AUM at period end (in billions)

   $ 1,105      $ 1,115      $ 881      25   (1 )% 

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

   $ 22.4      $ 22.3      $ 19.5      15   -

 

(a) Included in asset servicing revenue on the income statement.
(b) As a result of adopting SFAS No. 167, we were required to segregate income from consolidated asset management funds of $65 million, and net income attributable to noncontrolling interests of $24 million, on the income statement. Prior to the adoption of SFAS No. 167, the net of these income statement line items of $41 million was included in asset and wealth management fees ($25 million) and investment income ($16 million).
(c) Total fee and other revenue on a GAAP basis was $2,549 million for the first quarter of 2010, $2,595 million for the fourth quarter of 2009 and $2,136 million for the first quarter of 2009, respectively.
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 5% versus the year-ago quarter primarily due to increases in investment income, asset servicing fees and asset and wealth management fees, partially offset by decreases in securities lending revenue, foreign exchange and other trading activities and distribution and servicing fees. Sequentially, fee revenue decreased 1% (unannualized) reflecting seasonally lower performance fees and issuer services fees partially offset by increases in investment income and other revenue.

Securities servicing fees

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

 

 

Asset servicing fees – Year-over-year results reflect higher market values and net new

 

business. The decrease sequentially primarily reflects lower volumes and the impact of a stronger U.S. dollar.

 

Securities lending revenue – The year-over-year decrease reflects narrower spreads and lower loan balances.

 

Issuer services fees – The decrease year-over-year reflects lower Corporate Trust fees due to lower money market related distribution fees, lower Depositary Receipts revenue due to lower transaction fees and lower Shareowner Services revenue resulting from lower corporate action activity. The sequential decrease primarily reflects seasonally lower Depositary Receipts revenue and lower Corporate Trust fees reflecting decreased activity in the international and conventional debt markets.

 

Clearing services fees – Year-over-year results reflect lower money market related distribution fees and lower trading volumes.

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


 

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Asset and wealth management fees

Asset and wealth management fees increased 10% year-over-year and decreased 8% (unannualized) sequentially. Excluding performance fees, asset and wealth management fees increased 9% compared with the first quarter of 2009 and decreased 2% (unannualized) sequentially. The year-over-year increase reflects improved equity values, the Insight acquisition, stronger investment performance and the impact of long-term inflows, partially offset by a reduction in fees due to money market outflows and higher fee waivers. Both fluctuations were negatively impacted by the adoption of SFAS No. 167. The sequential decrease was also impacted by a stronger U.S. dollar.

Total AUM for the Asset and Wealth Management sector were $1.1 trillion at March 31, 2010 compared with $881 billion at March 31, 2009 and $1.1 trillion at Dec. 31, 2009. The increase compared with March 31, 2009 was primarily due to the Insight acquisition in the fourth quarter of 2009 and higher market values, partially offset by a stronger U.S. dollar. The S&P 500 Index was 1169 at March 31, 2010 compared with 798 at March 31, 2009 (a 46% increase) and 1115 at Dec. 31, 2009 (a 5% 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, decreased 15% compared with the first quarter of 2009, and increased 7% (unannualized) compared with the fourth quarter of 2009. The decrease year-over-year primarily reflects lower foreign exchange revenue driven by lower volatility, partially offset by increased volumes. The sequential increase primarily reflects higher fixed income trading revenue and lower mark-to-market adjustments on credit default swaps, partially offset by lower foreign exchange revenue driven by lower volatility.

Treasury services

Treasury services fees, which are primarily reported in the Treasury Services segment, include fees related to funds transfer, cash management and liquidity management. Treasury services fees increased $6 million compared with the first quarter of 2009 and

decreased $3 million compared with the fourth quarter of 2009. The fluctuations compared with both prior periods primarily resulted from global payment fees.

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 $35 million compared with the first quarter of 2009 and $9 million compared with the fourth quarter of 2009. These decreases primarily reflect 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 increased $2 million compared with the first quarter of 2009 and decreased $7 million sequentially. The sequential decrease was driven by lower capital market fees.

Investment income

 

Investment income                    
(in millions)    1Q10    4Q09    1Q09  

Lease residual gains

   $ 52    $ 19    $ 26   

Corporate/bank-owned life insurance

     36      37      41   

Equity investment income (loss)

     12      12      (54

Private equity gains (losses)

     5      3      (20

Seed capital gains (losses)

     3      7      (10

Total investment income

   $ 108    $ 78    $ (17

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


 

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investments and private equity investments, and equity investment income (loss). The increase, compared with the first quarter of 2009, primarily reflects the write-down of certain equity investments in the first quarter of 2009, as well as higher lease residual, private equity investment and seed capital gains. The increase, compared to the fourth quarter of 2009, primarily reflects higher lease residual gains.

Other revenue

 

Other revenue                   
(in millions)    1Q10    4Q09     1Q09

Expense reimbursements from joint ventures

   $ 10    $ 7      $ 8

Asset-related gains

     3      -        6

Other income (loss)

     24      (4     1

Total other revenue

   $ 37    $ 3      $ 15

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 first quarter of 2010 compared with the first quarter of 2009 and the fourth quarter of 2009 primarily due to positive foreign currency translations.

Net investment securities gains (losses)

Net securities gains totaled $7 million in the first quarter of 2010, compared with net losses of $295 million in the first quarter of 2009 and net gains of $15 million in the fourth quarter of 2009.

 

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 investment securities gains (losses)                
(in millions)    1Q10     4Q09     1Q09  

Alt-A RMBS

   $ (7   $ (17   $ (125

Prime RMBS

     -        3        (3

Home equity lines of credit

     -        51        (18

Grantor Trust

     -        (39     -   

ABS CDOs

     -        (11     (3

European floating rate notes

     -        35        (4

Credit cards

     -        2        (2

Other

     14        (9     (140 (a) 

Total net investment securities gains (losses)

   $ 7      $ 15      $ (295

 

(a) Includes $95 million resulting from the impact of low interest rates on a structured tax investment and $37 million of seed capital write-downs.

Operations of consolidated asset management funds

On Jan. 1, 2010, we adopted SFAS No. 167 (ASC 810). See Notes 2 and 13 for additional information. As a result of adopting this new standard, we separately disclosed on the income statement the operations of consolidated asset management funds ($65 million) and the net income attributable to noncontrolling interests of consolidated asset management funds ($24 million). The net of these income statement line items ($41 million) was previously disclosed in the income statement as asset and wealth management revenue of ($25 million) and investment income ($16 million.)


 

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Net interest revenue

 

Net interest revenue                         1Q10 vs.  
(dollars in millions)    1Q10     4Q09     1Q09     1Q09     4Q09  

Net interest revenue (non-FTE)

   $ 765      $ 724      $ 775      (1 )%    6

Tax equivalent adjustment

     5        5        4      N/M      N/M   

Net interest revenue (FTE) – Non-GAAP

   $ 770      $ 729      $ 779      (1 )%    6

Average interest-earning assets

   $ 163,429      $ 164,075      $ 167,427      (2 )%    -

Net interest margin (FTE)

     1.89     1.77     1.87 %(a   2 bps    12 bps 
(a) 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 $770 million in the first quarter of 2010 compared with $779 million in the first quarter of 2009 and $729 million in the fourth quarter of 2009. The first quarter of 2010 reflects a full quarter’s impact of the accretion of discount related to the restructured investment securities portfolio.

The decrease in net interest revenue compared with the first quarter of 2009 principally reflects a decline in noninterest-bearing demand deposits, a decrease in average interest-earning assets and narrowing spreads, partially offset by the higher yield on the restructured investment securities portfolio and higher hedging gains. The increase in net interest revenue compared with the fourth quarter of 2009 primarily reflects the higher yield related to the restructured investment securities portfolio and higher hedging gains, partially offset by narrowing spreads.

 

The net interest margin was 1.89% in the first quarter of 2010 compared with 1.87% in the first quarter of 2009 and 1.77% in the fourth quarter of 2009. The increase compared with both prior periods reflects the higher yield on the restructured investment securities portfolio, partially offset by lower spreads.

The impact of the restructured investment securities portfolio, net of lost interest revenue on the securities sold, was approximately $100 million and was included in net interest revenue in the first quarter of 2010. We currently expect the net impact of the portfolio restructuring to contribute approximately $320 million to net interest revenue in the full-year 2010, largely due to improved cash flow projections.


 

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Average balances and interest rates

 

Average balances and interest rates (a)    Quarter ended  
        
     March 31, 2010     Dec. 31, 2009     March 31, 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)

   $ 55,800      1.03   $ 55,467      1.09   $ 56,505      1.56

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

     12,129      0.33        11,430      0.32        23,192      0.37   

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

     -      -        -      -        1,269      3.15   

Federal funds sold and securities under resale agreements

     3,859      0.71        4,276      0.65        2,310      0.81   

Margin loans

     5,241      1.49        4,665      1.55        4,219      1.63   

Non-margin loans:

            

Domestic offices

     19,510      3.12        20,212      2.89        21,630      2.91   

Foreign offices

     9,463      1.62        10,362      1.75        13,109      2.56   
                              

Total non-margin loans

     28,973      2.63        30,574      2.51        34,739      2.78   

Securities:

            

U.S. government obligations

     6,600      1.40        5,729      1.44        787      2.50   

U.S. government agency obligations

     19,429      3.58        19,530      3.59        12,063      3.71   

State and political subdivisions

     670      6.37        607      7.35        767      6.71   

Other securities

     28,653      4.20        29,707      3.49        29,848      4.47   

Trading securities

     2,075      2.49        2,090      2.53        1,728      2.86   
                              

Total securities

     57,427      3.63        57,663      3.32        45,193      4.22   
                              

Total interest-earning assets

     163,429      2.18     164,075      2.09     167,427      2.37

Allowance for loan losses

     (502       (448       (378  

Cash and due from banks

     3,514          3,104          4,824     

Other assets

     45,346          45,481          45,880     

Assets of discontinued operations

     898          1,993          2,366     

Assets of consolidated asset management funds

     12,730              -              -         

Total assets

   $ 225,415            $ 214,205            $ 220,119         

Liabilities and equity

            

Interest-bearing liabilities:

            

Money market rate accounts

   $ 21,741      0.09   $ 20,062      0.08   $ 18,563      0.10

Savings

     1,372      0.27        1,196      0.49        1,165      0.61   

Certificates of deposit of $100,000 & over

     648      0.25        589      0.32        1,479      1.11   

Other time deposits

     5,224      0.30        4,872      0.43        5,574      0.55   

Foreign offices

     72,049      0.16        71,685      0.10        75,202      0.31   
                              

Total interest-bearing deposits

     101,034      0.16        98,404      0.12        101,983      0.30   

Federal funds purchased and securities sold under repurchase agreements

     3,697      0.07        3,361      0.14        1,839      0.09   

Other borrowed funds

     2,805      1.97        2,618      1.86        3,785      1.57   

Borrowings from Federal Reserve related to asset-backed commercial paper

     -      -        -      -        1,269      2.25   

Payables to customers and broker-dealers

     6,372      0.08        6,476      0.07        3,797      0.20   

Long-term debt

     16,808      1.50        17,863      1.89        15,493      2.72   
                              

Total interest-bearing liabilities

     130,716      0.36     128,722      0.40     128,166      0.64

Total noninterest-bearing deposits

     33,330          34,991          43,051     

Other liabilities

     18,420          19,633          18,523     

Liabilities of discontinued operations

     898          1,993          2,366     

Liabilities and obligations of consolidated asset management funds

     11,540              -              -         

Total liabilities

     194,904          185,339          192,106     

Total BNY Mellon shareholders’ equity

     29,715          28,843          27,978     

Noncontrolling interest

     26          23          35     

Noncontrolling interests of consolidated asset management funds

     770              -              -         

Total equity

     30,511              28,866              28,013         

Total liabilities and equity

   $ 225,415            $ 214,205            $ 220,119         

Net interest margin – Taxable equivalent basis

           1.89           1.77           1.87

 

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

 

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Noninterest expense

 

Noninterest expense                         1Q10 vs.  
(dollars in millions)    1Q10     4Q09     1Q09     1Q09     4Q09  

Staff:

          

Compensation

   $ 753      $ 766      $ 732      3   (2 )% 

Incentives

     284        266        247      15      7   

Employee benefits

     183        189        190      (4   (3

Total staff

     1,220        1,221        1,169      4      -   

Professional, legal and other purchased services

     241        278        237      2      (13

Net occupancy

     137        141        139      (1   (3

Distribution and servicing

     109        109        107      2      -   

Software

     94        98        81      16      (4

Furniture and equipment

     75        80        77      (3   (6

Sub-custodian

     52        55        39      33      (5

Business development

     52        76        44      18      (32

Other

     186        226        202      (8   (18

Subtotal

     2,166        2,284        2,095      3      (5

Litigation reserves

     164        -        -      N/M      N/M   

Amortization of intangible assets

     97        107        107      (9   (9

Restructuring charges

     7        139        10      N/M      N/M   

M&I expenses

     26        52        68      (62   (50

Total noninterest expense

   $ 2,460      $ 2,582      $ 2,280      8   (5 )% 

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

     36     37     40    

Employees at period end

     42,300        42,200        41,700  (b   1   -

 

(a) Total staff expense as a percentage of total revenue excluding net securities gains (losses) and net of noncontrolling interest of consolidated asset management funds, was 36% in the first quarter of 2010, 37% in the fourth quarter of 2009 and 36% in the first quarter of 2009.
(b) Excludes the impact of discontinued operations.
N/M - Not meaningful.

 

Total noninterest expense increased $180 million compared with the first quarter of 2009 and decreased $122 million compared with the fourth quarter of 2009. Results for the first quarter of 2010 include a charge related to the litigation reserves for several existing matters. The year-over-year increase was driven by the impact of the Insight acquisition, as well as higher incentive expense, sub-custodian expense and software expense. The sequential decrease primarily reflects lower professional, legal and other purchased services, seasonally lower business development expenses and decreases in nearly all other expense categories reflecting good expense control, partially offset by the impact of the Insight acquisition.

In the second quarter of 2010, we estimate noninterest expense will include approximately $15 million related to the U.K. bonus tax.

Staff expense

Given our mix of fee-based businesses, which are staffed with high quality professionals, staff expense comprised 56% of total noninterest expense, excluding litigation reserves, intangible amortization, restructuring charges and M&I expenses.

The increase in staff expense compared with the first quarter of 2009 reflects the impact of the Insight acquisition and higher incentives driven by improved results in the Asset Management segment. Staff expense was relatively unchanged sequentially

as the impact of the Insight acquisition was offset by expense management efforts.

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 litigation reserves, intangible amortization, restructuring charges and M&I expenses, totaled $946 million in the first quarter of 2010 compared with $926 million in the first quarter of 2009 and $1.1 billion in the fourth quarter of 2009. The increase compared with the first quarter of 2009 primarily reflects higher sub-custodian expense and software expense and the impact of the Insight acquisition. The decrease compared with the fourth quarter of 2009 reflects lower professional, legal and other purchased services, seasonally lower business development


 

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expenses and decreases in nearly all other expense categories reflecting good expense control.

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 that litigation costs for the remainder of 2010 to exceed historic trend levels. For additional information on litigation matters, see Note 17 of the Notes to Consolidated Financial Statements.

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

In the first quarter of 2010, we incurred $26 million of M&I expenses primarily related to the merger with Mellon Financial Corporation.

Income taxes

The effective tax rate on a continuing operations basis for the first quarter of 2010 was 29.1%, compared with 28.2% in the first quarter of 2009. Excluding the impact of litigation reserves, restructuring charges and M&I expenses, the effective tax rate was 31.0% in the first quarter of 2010. Excluding investment securities losses and M&I expense, the effective tax rate was 32.1% in the first quarter of 2009.

We expect the operating effective tax rate on a continuing operation basis to be approximately 31% for the second 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 Form 10-K.

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 difficult operating environment in the first quarter of 2010. Year-over-year higher market values and new business benefited the Asset and Wealth management segments, while a lower level of corporate actions and fixed income issuances negatively impacted results in Issuer Services. Results in Asset Servicing were also negatively impacted by lower foreign currency volatility and lower spreads in securities lending. On a sequential basis, improved equity markets and new business were offset by seasonally lower Depositary Receipts and performance fees. Lower money market related distribution fees decreased revenue on both a year-over-year and linked quarter basis.

Compared with the first and fourth quarters of 2009, net interest revenue increased in nearly all segments driven by the full quarter’s impact of the higher yield on the restructured investment securities portfolio.

Investment securities gains (losses) are recorded in the Other segment. Strong expense control resulted in lower noninterest expense in nearly every segment compared with the fourth quarter of 2009.


 

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

 


 

Market indices                                  1Q10 vs  
      1Q09    2Q09    3Q09    4Q09    1Q10    1Q09     4Q09  

S&P 500 Index (a)

   798    919    1057    1115    1169    46   5

S&P 500 Index – daily average

   809    891    995    1088    1123    39      3   

FTSE 100 Index (a)

   3926    4249    5134    5413    5680    45      5   

FTSE 100 Index – daily average

   4040    4258    4708    5235    5431    34      4   

NASDAQ Composite Index (a)

   1529    1835    2122    2269    2398    57      6   

Lehman Brothers Aggregate Bondsm Index (a)

   262    280    304    301    300    15      -   

MSCI EAFE® Index (a)

   1056    1307    1553    1581    1584    50      -   

NYSE Share Volume (in billions)

   161    151    126    112    103    (36   (8

NASDAQ Share Volume (in billions)

   136    152    144    131    138    1      5   

 

(a) Period end.

 

Average daily U.S. fixed-income trading volume was up 6% sequentially and 2% year-over-year. Total debt issuances were up 35% sequentially and down 1% year-over-year.

The period end S&P 500 Index increased 5% sequentially and 46% year-over-year. The period end FTSE 100 Index increased 5% sequentially and 45% year-over-year. On a daily average basis, the S&P 500 Index increased 3% sequentially and 39% year-over-year and the FTSE 100 Index increased 4% sequentially and 34% year-over-year. The period end NASDAQ Composite Index increased 6% sequentially and 57% 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 March 31, 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.


 

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 $41 million, net of income attributable to noncontrolling interests of $24 million related to consolidated asset management funds.
(b) Income before taxes divided by total revenue.
(c) Including average assets of discontinued operations of $898 million for the first quarter of 2010, consolidated average assets were $225,415 million.
N/M - Not meaningful.

 

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For the quarter ended Dec. 31, 2009     Total Asset                                 Total                

 

(dollar amounts in millions)

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

 

(dollar amounts in millions)

  Asset
Management
    Wealth
Management
    and Wealth
Management
Sector
    Asset
Servicing
    Issuer
Services
    Clearing
Services
    Treasury
Services
    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        195        794        1,074        569        372        355        2,370        (4,664     (1,500

Provision for credit losses

    -        -        -        -        -        -        -        -        147        147   

Noninterest expense

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

Income before taxes

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

Pre-tax operating margin (a)

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

Average assets

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

Excluding intangible amortization:

                   

Noninterest expense

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

Income before taxes

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

Pre-tax operating margin (a)

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

 

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

 

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For the quarter ended June 30, 2009                 Total Asset                                 Total                

 

(dollar amounts

in millions)

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

Fee and other revenue

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

Net interest revenue

    7        49        56        211        185        87        157        640        4        700   

Total revenue

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

Provision for credit losses

    -        -        -        -        -        -        -        -        61        61   

Noninterest expense

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

Income before taxes

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

Pre-tax operating margin (a)

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

Average assets

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

Excluding intangible amortization:

                   

Noninterest expense

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

Income before taxes

    117        53        170        409        293        145        146        993        (542     621   

Pre-tax operating margin (a)

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

 

(a)

Income before taxes divided by total revenue.

(b)

Including average assets of discontinued operations of $2,307 million for the second quarter of 2009, consolidated average assets were $208,533 million.

N/M – Not meaningful.

 

For the quarter ended March 31, 2009                 Total Asset                                 Total                

 

(dollar amounts

in millions)

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

Fee and other revenue

  $ 479      $ 141      $ 620      $ 841      $ 405      $ 321      $ 227      $ 1,794      $ (278   $ 2,136   

Net interest revenue

    15        50        65        249        200        82        159        690        20        775   

Total revenue

    494        191        685        1,090        605        403        386        2,484        (258     2,911   

Provision for credit losses

    -        -        -        -        -        -        -        -        59        59   

Noninterest expense

    453        140        593        717        318        259        195        1,489        198        2,280   

Income before taxes

  $ 41      $ 51      $ 92      $ 373      $ 287      $ 144      $ 191      $ 995      $ (515   $ 572   

Pre-tax operating margin (a)

    8     27     13     34     48     36     50     40     N/M        20

Average assets

  $ 12,663      $ 9,611      $ 22,274      $ 65,204      $ 50,864      $ 18,600      $ 28,665      $ 163,333      $ 32,146      $ 217,753  (b

Excluding intangible amortization:

                   

Noninterest expense

  $ 398      $ 129      $ 527      $ 710      $ 297      $ 252      $ 189      $ 1,448      $ 198      $ 2,173   

Income before taxes

    96        62        158        380        308        151        197        1,036        (515     679   

Pre-tax operating margin (a)

    19     32     23     35     51     38     51     42     N/M        23

 

(a) Income before taxes divided by total revenue.
(b) Including average assets of discontinued operations of $2,366 million for the first quarter of 2009, consolidated average assets were $220,119 million.
N/M – Not meaningful.

 

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Asset and Wealth Management Sector

 

Asset and Wealth Management fee revenue is dependent on the overall level and mix of AUM and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. Assets under management were $1.1 trillion at March 31, 2010, compared with $1.1 trillion at Dec. 31, 2009 and $881 billion at March 31, 2009. The increase compared with March 31, 2009 primarily reflects the Insight acquisition, improved equity values and the impact of long-term inflows.

 

Net asset outflows in the first quarter of 2010 totaled $9 billion, reflecting $25 billion of money market outflows partially offset by $16 billion of long-term inflows.


AUM at period end, by product type

(in billions)

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

Equity securities

   $ 242    $ 289    $ 328    $ 339    $ 346

Money market

     393      393      376      360      335

Fixed income securities

     167      159      169      235      234

Alternative investments and overlay

     79      85      93      181      190
 

Total AUM

   $ 881    $ 926    $ 966    $ 1,115    $ 1,105
 

 

AUM at period end, by client type

(in billions)

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

Institutional

   $ 394    $ 425    $ 461    $ 611    $ 620

Mutual funds

     413      421      421      416      396

Private client

     74      80      84      88      89
 

Total AUM

   $ 881    $ 926    $ 966    $ 1,115    $ 1,105
 

 

 

Changes in market value of AUM from Dec. 31, 2009 to March 31, 2010 – by business segment

 

(in billions)

   Asset
Management
    Wealth
Management
    Total  
   

Market value of AUM at Dec. 31, 2009:

   $ 1,040      $ 75      $ 1,115   

Net inflows (outflows):

      

Long-term

     15        1        16   

Money market

     (25     -        (25
   

Total net inflows (outflows)

     (10     1        (9

Net market/currency impact

     (1     -        (1
   

Market value of AUM at March 31, 2010

   $ 1,029  (a   $ 76  (b   $ 1,105   
(a) Excludes $5 billion subadvised for the Wealth Management segment.
(b) Excludes private client assets managed in the Asset Management segment.

 

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Asset Management segment

 

(dollar amounts in millions, unless otherwise noted)

                                      1Q10 vs.  
   1Q09     2Q09     3Q09     4Q09     1Q10     1Q09     4Q09  

Revenue:

              

Asset and wealth management:

              

Mutual funds

   $ 263      $ 266      $ 274      $ 266      $ 242      (8 )%    (9 )% 

Institutional clients

     181        175        197        227        264      46      16   

Private clients

     32        31        34        38        38      19      -   

Performance fees

     7        26        1        59        13      86      (78

Total asset and wealth management revenue

     483        498        506        590        557      15      (6

Distribution and servicing

     92        90        84        84        75      (18   (11

Other

     (96     (59     2        6        17      N/M      N/M   

Total fee and other revenue (a)

     479        529        592        680        649      35      (5

Net interest revenue

     15        7        7        3        -      N/M      N/M   

Total revenue (b)

     494        536        599        683        649      31      (5

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

     412        419        415        465        453      10      (3

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

     82        117        184        218        196      139      (10

Amortization of intangible assets

     55        55        53        56        50      (9   (11

Support agreement charges

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

Income before taxes

   $ 41      $ 62      $ 99      $ 162      $ 146      256   (10 )% 

Memo: Income before taxes (ex. intangible amortization)

   $ 96      $ 117      $ 152      $ 218      $ 196      104   (10 )% 

Pre-tax operating margin

     8     12     16     24     23    

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

     19     22     25     32     30    

AUM (in billions) (d)

   $ 818      $ 860      $ 897      $ 1,045      $ 1,034      26   (1 )% 

AUM net inflows (outflows) :

              

Long-term (in billions)

   $ (2   $ (18   $ (2   $ 13      $ 15       

Money-market (in billions)

   $ (11   $ (2   $ (14   $ (22   $ (25            
(a) Total fee and other revenue for the first quarter of 2010 includes income from consolidated asset management funds of $65 million and income attributable to noncontrolling interests of $24 million. The net of these income statement line items of $41 million is included above in institutional client revenue of $25 million and other revenue of $16 million.
(b) Investment securities gains (losses) were $(34) million in 1Q09, $(45) million in 2Q09, $- million in 3Q09, $1 million in 4Q09 and $- in 1Q10. Excluding investment securities gains (losses), the total revenue growth rate was 23% for 1Q10 vs. 1Q09.
(c) The pre-tax operating margin, excluding intangible amortization, support agreement charges and investment securities gains (losses) was 22% for 1Q09, 28% for 2Q09, 31% for 3Q09, 32% for 4Q09 and 30% for 1Q10.
(d) Includes $3 billion, $3 billion, $5 billion, $5 billion and $5 billion subadvised for the Wealth Management segment, respectively.
N/M – Not meaningful.

 

Business description

BNY Mellon Asset Management is the umbrella organization for our affiliated investment management boutiques and is responsible, through various subsidiaries, for U.S. and non-U.S. retail, intermediary and institutional distribution of investment management and related services. The investment management boutiques offer a broad range of equity, fixed income, cash and alternative/overlay products. In addition to the investment subsidiaries, BNY Mellon Asset Management includes BNY Mellon Asset Management International, which is responsible for the distribution of investment management products internationally, and the Dreyfus Corporation and its affiliates, which are responsible for U.S. distribution of retail mutual funds, separate accounts and annuities. We are one of the world’s largest asset

managers with a top 10 position in both the U.S. and Europe and 11th position globally.

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

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


 

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

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

Review of financial results

In the first quarter of 2010, Asset Management had pre-tax income of $146 million compared with $41 million in the first quarter of 2009 and $162 million in the fourth quarter of 2009. Excluding amortization of intangible assets, pre-tax income was $196 million in the first quarter of 2010 compared with $96 million in the first quarter of 2009 and $218 million in the fourth quarter of 2009. Results reflect improved equity values, stronger investment performance and the impact of the Insight acquisition. The decrease sequentially reflects a seasonal decrease in performance fees.

The Asset Management segment generated 2,100 basis points of positive operating leverage compared with the first quarter of 2009, excluding intangible amortization and support agreement charges.

Asset and wealth management revenue in the Asset Management segment was $557 million in the first quarter of 2010 compared with $483 million in the first quarter of 2009 and $590 million in the fourth quarter of 2009. Excluding performance fees, asset and wealth management fee revenue increased 14% compared with the prior year period and 2% (unannualized) sequentially. Both increases reflect improved equity values, stronger investment performance, 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 sequential increase was also negatively impacted by a stronger U.S. dollar. Performance fees were $13 million in the first quarter of 2010 compared with $59 million in the fourth quarter of 2009. The decrease reflects seasonality. Performance fees earned by BNY Mellon typically occur in the fourth quarter.

 

In the first quarter of 2010, net long-term inflows of $15 billion were more than offset by $25 billion of money market outflows. Long-term inflows benefited from strength in institutional global equity and fixed income products and the fourth consecutive quarter of positive flows in retail funds.

In the first quarter of 2010, 43% of Asset and Wealth Management fees in the Asset Management segment were generated from managed mutual fund fees. These fees are based on the daily average net assets of each fund and the basis point management fee paid by that fund. Managed mutual fund fee revenue was $242 million in the first quarter of 2010 compared with $263 million in the first quarter of 2009 and $266 million in the fourth quarter of 2009. The decreases reflect outflows in money market funds and higher fee waivers.

Distribution and servicing fees were $75 million in the first quarter of 2010 compared with $92 million in the first quarter of 2009 and $84 million in the fourth quarter of 2009. The decreases primarily reflect lower money market inflows.

Other fee revenue was $17 million in the first quarter of 2010 compared with losses of $96 million in the first quarter of 2009 and gains of $6 million in the fourth quarter of 2009. The year-over-year increase primarily reflects investment write-downs in the first quarter of 2009 and the higher value of seed capital investments.

Revenue generated in the Asset Management segment includes 50% from non-U.S. sources in the first quarter of 2010 and the fourth quarter of 2009. Excluding investment securities losses in the first quarter of 2009, revenue includes 39% generated from non-U.S. sources.

Noninterest expense (excluding amortization of intangible assets and support agreement charges) was $453 million in the first quarter of 2010 compared with $412 million in the first quarter of 2009 and $465 million in the fourth quarter of 2009. The year-over-year increase primarily reflects the impact of the Insight acquisition. The sequential decrease reflects lower legal expenses and strong expense management.


 

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Wealth Management segment

 

(dollar amounts in millions unless otherwise noted)

                                      1Q10 vs.  
   1Q09     2Q09     3Q09     4Q09     1Q10     1Q09     4Q09  

Revenue:

              

Asset and wealth management

   $ 122      $ 128      $ 133      $ 136      $ 136      11   -

Other

     19        12        13        15        10      (47   (33

Total fee and other revenue

     141        140        146        151        146      4      (3

Net interest revenue

     50        49        49        46        55      10      20   

Total revenue

     191        189        195        197        201      5      2   

Provision for credit losses

     -        -        -        1        -      -      N/M   

Noninterest expense (ex. intangible amortization)

     129        136        135        138        136      5      (1

Income before taxes (ex. intangible amortization)

     62        53        60        58        65      5      12   

Amortization of intangible assets

     11        11        12        11        9      (18   (18

Income before taxes

   $ 51      $ 42      $ 48      $ 47      $ 56      10   19

Pre-tax operating margin

     27     22     25     24     28    

Pre-tax operating margin (ex. intangible amortization)

     32     28     31     29     32    

Average loans

   $ 5,388      $ 5,684      $ 6,010      $ 6,191      $ 6,302      17   2

Average assets

     9,611        9,131        9,122        9,246        9,722      1      5   

Average deposits

     7,058        6,628        6,602        6,804        7,310      4      7   

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

   $ 132      $ 142      $ 151      $ 154      $ 157      19   2
N/M – Not meaningful.

 

Business description

In the Wealth Management segment, we offer a full array of investment management, wealth and estate planning and private banking solutions to help clients protect, grow and transfer their wealth. Clients include high net worth individuals, families, endowments and foundations and related entities. BNY Mellon Wealth Management is a top 10 U.S. wealth manager with $157 billion in client assets. We serve our clients through an expansive network of office sites in 17 states and 3 countries, including 16 of the top 25 domestic wealth markets.

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

Review of financial results

Income before taxes was $56 million in the first quarter of 2010, compared with $51 million in the first quarter of 2009 and $47 million in the fourth quarter of 2009. Income before taxes, excluding intangible amortization, was $65 million in the first quarter of 2010, compared with $62 million in the

first quarter of 2009 and $58 million in the fourth quarter of 2009. Results in the first quarter of 2010 reflect 17 consecutive quarters of positive long-term assets under management and custody flows, high quality loan growth and expense control. Excluding intangible amortization, Wealth Management generated 300 basis points of positive operating leverage sequentially.

Total fee and other revenue was $146 million in the first quarter of 2010, compared with $141 million in the first quarter of 2009 and $151 million in the fourth quarter of 2009. The increase compared with the first quarter of 2009 reflects organic growth and the impact of higher equity markets, partially offset by lower capital market fees. Fee revenue was down sequentially, as organic growth was more than offset by seasonally lower performance fees.

Client assets under management and custody were $157 billion at March 31, 2010, compared with $132 billion at March 31, 2009 and $154 billion at Dec. 31, 2009. Both increases reflect organic growth and higher equity market levels.

Net interest revenue increased $5 million year-over-year and $9 million sequentially due to high quality loan growth and higher loan spreads, and the higher yield related to the restructured investment securities portfolio, partially offset by lower deposit margins. Average loans increased 17% year-over-year and 2%


 

20    BNY Mellon


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(unannualized) sequentially. Average deposit levels increased 4% year-over-year and 7% (unannualized) sequentially.

Noninterest expense (excluding amortization of intangible assets) increased $7 million compared with the first quarter of 2009 and decreased $2 million compared with the fourth quarter of 2009. The year-over-year increase primarily reflects higher production-related incentive compensation for employees and FDIC expenses, partially offset by workforce reductions and expense control.

Institutional Services Sector

At March 31, 2010, our assets under custody and administration totaled $22.4 trillion, up slightly from $22.3 trillion at Dec. 31, 2009 and a 15% increase from $19.5 trillion at March 31, 2009. The year-over-year increase reflects higher market values and new business. Equity securities constituted 32% and fixed-income securities constituted 68% of the assets under custody and administration at both March 31,

2010 and Dec. 31, 2009, compared with 25% equity securities and 75% fixed income securities at March 31, 2009. Assets under custody and administration at March 31, 2010 consisted of assets related to custody, mutual funds, and corporate trust businesses of $18.0 trillion, broker-dealer service assets of $2.8 trillion, and all other assets of $1.6 trillion.

The market value of securities on loan at March 31, 2010 increased to $253 billion compared with $247 billion at Dec. 31, 2009. The market value of securities on loan was $293 billion at March 31, 2009. The year-over-year decline reflects de-leveraging in the financial markets.

In February 2010, we announced a definitive agreement to acquire Global Investment Servicing, Inc. and in March 2010, we announced an agreement to acquire BHF Asset Servicing GmbH. See the “First quarter 2010 events” section for additional information.


 

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

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

   $ 19.5    $ 20.7    $ 22.1    $ 22.3    $ 22.4

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

   $ 293    $ 290    $ 299    $ 247    $ 253
(a) Includes the assets under custody or administration of CIBC Mellon Global Securities Services Company, a joint venture with Canadian Imperial Bank of Commerce, of $690 billion at March 31, 2009, $810 billion at June 30, 2009, $943 billion at Sept. 30, 2009, $905 billion at Dec. 31, 2009 and $964 billion at March 31, 2010.
(b) Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing segment.

 

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Asset Servicing segment

 

(dollars amounts in millions, unless otherwise noted)                                       1Q10 vs.  
   1Q09     2Q09     3Q09     4Q09     1Q10     1Q09     4Q09  

Revenue:

              

Securities servicing fees – asset servicing

   $ 504      $ 557      $ 573      $ 581      $ 569      13   (2 )% 

Securities lending revenue

     79        85        32        25        24      N/M      (4

Foreign exchange and other trading activities

     210        216        190        177        170      (19   (4

Other

     48        46        50        33        35      (27   6   

Total fee and other revenue

     841        904        845        816        798      (5   (2

Net interest revenue

     249        211        229        205        210      (16   2   

Total revenue

     1,090        1,115        1,074        1,021        1,008      (8   (1

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

     704        721        748        788        740      5      (6

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

     386        394        326        233        268      (31   15   

Support agreement charges

     6        (15     (19     (5     (23   N/M      N/M   

Amortization of intangible assets

     7        9        6        6        6      (14   -   

Income before taxes

   $ 373      $ 400      $ 339      $ 232      $ 285      (24 )%    23

Memo: Income before taxes (ex. intangible amortization)

   $ 380      $ 409      $ 345      $ 238      $ 291      (23 )%    22

Pre-tax operating margin

     34     36     32     23     28    

Pre-tax operating margin (ex. intangible amortization)

     35     37     32     23     29    

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

   $ 293      $ 290      $ 299      $ 247      $ 253      (14 )%    2

Average assets

   $ 65,204      $ 58,339      $ 59,914      $ 59,980      $ 59,704      (8 )%    -

Average deposits

   $ 57,084      $ 50,583      $ 52,271      $ 51,755      $ 52,183      (9 )%    1
(a) The pre-tax operating margin, excluding support agreement charges and intangible amortization, was 27% in the first quarter of 2010, 23% in the fourth quarter of 2009 and 35% in the first quarter of 2009.

N/M - Not meaningful.

 

Business description

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

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

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

We are one of the leading global securities servicing providers with a total of $22.4 trillion of assets under custody and administration at March 31, 2010. We continue to maintain our number one ranking in the two major global custody surveys. We are one of the largest providers of fund services in the world, servicing $4.9 trillion in assets. We also service 44% of the funds in the U.S. exchange-traded funds marketplace. We are the largest custodian for U.S. corporate and public pension plans. BNY Mellon Asset Servicing services 44% of the top 50 endowments.


 

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We are a leading custodian in the U.K. and service 30% of U.K. pensions. European asset servicing continues to grow across all products, reflecting significant cross-border investment and capital flow. In our alternative investment services business, we are a top 10 service provider to single manager hedge funds, funds of hedge funds and private equity. In securities lending, we are one of the largest lenders of U.S. Treasury securities and depositary receipts and service a lending pool of $2.1 trillion in 31 markets around the world. We are one of the largest global providers of performance and risk analytics with $8.9 trillion in assets under measurement.

Our broker-dealer service business is a leader in global clearance, clearing equity and fixed income transactions in more than 100 markets. We are a leading clearing agent for U.S. government securities, handling a majority of transactions cleared through the Federal Reserve Bank of New York and clearing for 13 of the 18 primary dealers. We are a leading collateral management agent with $1.5 trillion in tri-party balances worldwide at March 31, 2010.

Review of financial results

Income before taxes was $285 million in the first quarter of 2010 compared with $373 million in the first quarter of 2009, and $232 million in the fourth quarter of 2009. Income before taxes, excluding intangible amortization and support agreement charges, was $268 million in the first quarter of 2010 compared with $386 million in the first quarter of 2009 and $233 million in the fourth quarter of 2009. The decrease in income before taxes compared with the first quarter of 2009 primarily resulted from lower securities lending revenue, foreign exchange revenue and net interest revenue, partially offset by higher securities servicing fees. The sequential increase primarily reflects lower legal expenses and continued strong expense control.

Revenue generated in the Asset Servicing segment includes 43% from non-U.S. sources in the first quarter of 2010, 34% in the first quarter of 2009 and 41% in the fourth quarter of 2009.

 

Securities servicing fees, excluding securities lending revenue, increased $65 million, or 13%, compared with the first quarter of 2009 and decreased $12 million, or 2% (unannualized) sequentially. The year-over-year increase reflects higher market values and net new business. The sequential decrease reflects lower transaction volumes and the impact of a stronger U.S. dollar.

Securities lending revenue decreased $55 million compared to the first quarter of 2009 and $1 million sequentially. Both decreases reflect lower volumes. The year-over-year decrease also reflects lower spreads. Spreads decreased 65% compared with the first quarter of 2009 and 6% sequentially. Volumes decreased 12% compared with the first quarter of 2009 and 8% (unannualized) sequentially.

Foreign exchange and other trading decreased 19% compared with the first quarter of 2009 and 4% (unannualized) sequentially. Both decreases reflect lower volatility, partially offset by higher volumes.

Net interest revenue decreased 16% compared to the prior year period and increased 2% (unannualized) sequentially. The decrease compared with the first quarter of 2009 reflects lower deposit levels and spreads, partially offset by the higher yield related to the restructured investment securities portfolio. The sequential increase reflects higher deposit levels and the higher yield related to the restructured investment securities portfolio, partially offset by lower spreads.

Noninterest expense (excluding amortization of intangible assets and support agreement charges) increased $36 million compared with the first quarter of 2009 and decreased $48 million sequentially. The year-over-year increase reflects higher sub-custodial fees resulting from higher asset values and transaction volumes, and the impact of a weaker U.S. dollar. The sequential decrease, which was primarily driven by lower legal expenses, resulted in 500 basis points of positive operating leverage.


 

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Issuer Services segment

 

                                         1Q10 vs.  
(dollars in millions)    1Q09     2Q09     3Q09     4Q09     1Q10     1Q09     4Q09  

Revenue:

              

Securities servicing fees – issuer services

   $ 363      $ 373      $ 359      $ 367      $ 333      (8 )%    (9 )% 

Other

     42        40        30        43        25      (40   (42

Total fee and other revenue

     405        413        389        410        358      (12   (13

Net interest revenue

     200        185        180        203        252      26      24   

Total revenue

     605        598        569        613        610      1      -   

Noninterest expense (ex. intangible amortization)

     297        305        304        318        304      2      (4

Income before taxes (ex. intangible amortization)

     308        293        265        295        306      (1   4   

Amortization of intangible assets

     21        20        20        20        20      N/M      N/M   

Income before taxes

   $ 287      $ 273      $ 245      $ 275      $ 286      -   4

Pre-tax operating margin

     48     46     43     45     47    

Pre-tax operating margin (ex. intangible amortization)

     51     49     47     48     50    

Average assets

   $ 50,864      $ 52,161      $ 47,975      $ 52,028      $ 52,838      4   2

Average deposits

   $ 45,963      $ 47,293      $ 43,183      $ 47,320      $ 48,470      5   2

Number of depositary receipt programs

     1,330        1,320        1,322        1,330        1,336      -   -

N/M – Not meaningful.

 

Business description

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

As the world’s leading provider of corporate trust and agency services, BNY Mellon services $11.8 trillion in outstanding debt from 61 locations in 20 countries. We are the number one provider of corporate trust services for all major debt categories across conventional, structured credit and specialty debt. We serve as depositary for 1,336 sponsored American and global depositary receipt programs, acting in partnership with leading companies from 67 countries. In addition to top-ranked stock transfer agency services, BNY Mellon Shareowner Services offers a comprehensive suite of equity solutions, including record-keeping and corporate actions processing, demutualizations, direct investment, dividend reinvestment, proxy solicitation and employee stock plan administration.

Fee revenue in the Issuer Services segment depends on:

 

 

the volume of issuance of fixed income securities;

 

depositary receipts issuance and cancellation volume;

 

corporate actions impacting depositary receipts; and

 

stock transfer, corporate actions and equity trading volumes.

 

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

Review of financial results

Income before taxes was $286 million in the first quarter of 2010, compared with $287 million in the first quarter of 2009 and $275 million in the fourth quarter of 2009. Issuer Services results reflect net interest revenue due to higher yield related to the restructured investment securities portfolio and higher average customer deposits, as well as continued expense control, partially offset by lower fee revenue driven by lower corporate actions and decreased activity in debt markets.

Total fee and other revenue decreased 12% year-over-year and 13% sequentially.

 

 

Corporate Trust – Fee and other revenue decreased year-over-year and sequentially. Results for both periods reflect new business which was more than offset by decreased activity in the international and conventional debt markets and lower money market related distribution fees due to the low interest rate environment.

 

Depositary Receipts – Fee and other revenue decreased year-over-year and sequentially. Year-over-year revenue was impacted by lower transaction fees, partially offset by higher


 

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issuance fees. Revenue decreased sequentially due to seasonally lower corporate action fees and lower foreign exchange and other trading revenue. Depositary receipts issuances have exceeded cancellations for four consecutive quarters.

 

Shareowner Services – Fee and other revenue decreased year-over-year and sequentially. Both decreases were due to lower corporate action activity, partially offset by higher market values on employee stock option plans.

 

Net interest revenue increased $52 million, or 26%, compared with the first quarter of 2009, and increased $49 million, or 24% (unannualized), compared with the fourth quarter of 2009. Both the year-over-year and sequential increases reflect the higher yield related to the restructured investment securities portfolio and average customer deposit balances.

Noninterest expense (excluding intangible amortization) increased $7 million, or 2%, compared with the first quarter of 2009 and decreased $14 million, or 4% (unannualized) sequentially. The year-over-year increase was primarily driven by higher FDIC expense. The sequential decrease reflects a seasonal decrease in expenses and lower legal expense.


 

Clearing Services segment

 

(dollar amounts in millions, unless otherwise noted)                                       1Q10 vs.  
   1Q09     2Q09     3Q09     4Q09     1Q10     1Q09     4Q09  

Revenue:

              

Securities servicing fees – clearing services

   $ 249      $ 248      $ 232      $ 219      $ 227      (9 )%    4

Other