Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

[ X ] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended Sept. 30, 2018
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001-35651


THE BANK OF NEW YORK MELLON CORPORATION
(Exact name of registrant as specified in its charter)

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

240 Greenwich 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 x    No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No o

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

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o 
Smaller reporting company o
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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

 
 
 
Sept. 30, 2018

 
 
Common Stock, $0.01 par value
988,777,495

 




THE BANK OF NEW YORK MELLON CORPORATION

Third Quarter 2018 Form 10-Q
Table of Contents 
 
 
Page
 
 
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:
 
Highlights of third quarter 2018 results
Business continuity and operational resiliency
 
 
Item 1. Financial Statements:
 
 
 
Page
Notes to Consolidated Financial Statements:
 
Note 3—Acquisitions and dispositions
 
 
 
 
Part II - Other Information
 
 
 
Index to Exhibits
Signature




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

Consolidated Financial Highlights (unaudited)
 
Quarter ended
 
Year-to-date
(dollars in millions, except per share amounts and unless otherwise noted)
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

 
Sept. 30, 2018

Sept. 30, 2017

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
Net income
$
1,075

$
1,055

$
983

 
$
3,265

$
2,789

Basic earnings per share
$
1.07

$
1.04

$
0.94

 
$
3.21

$
2.66

Diluted earnings per share
$
1.06

$
1.03

$
0.94

 
$
3.20

$
2.64

 
 
 
 
 
 
 
Fee and other revenue
$
3,168

$
3,210

$
3,167

 
$
9,648

$
9,305

Income from consolidated investment management funds
10

12

10

 
11

53

Net interest revenue
891

916

839

 
2,726

2,457

Total revenue
$
4,069

$
4,138

$
4,016

 
$
12,385

$
11,815

 
 
 
 
 
 
 
Return on common equity (annualized)
11.2
%
11.2
%
10.6
%
 
11.6
%
10.4
%
Return on tangible common equity (annualized) – Non-GAAP (a)
23.1
%
23.5
%
21.9
%
 
24.1
%
22.0
%
 
 
 
 
 
 
 
Return on average assets (annualized)
1.28
%
1.22
%
1.13
%
 
1.26
%
1.09
%
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
78
%
78
%
78
%
 
78
%
79
%
 
 
 
 
 
 
 
Percentage of non-U.S. total revenue
37
%
37
%
36
%
 
37
%
35
%
 
 
 
 
 
 
 
Pre-tax operating margin
33
%
34
%
34
%
 
34
%
33
%
 
 
 
 
 
 
 
Net interest margin
1.27
%
1.26
%
1.15
%
 
1.25
%
1.14
%
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (b)
1.28
%
1.26
%
1.16
%
 
1.26
%
1.16
%
 
 
 
 
 
 
 
Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (c)
$
34.5

$
33.6

$
32.2

 
$
34.5

$
32.2

Assets under management (“AUM”) at period end (in billions) (d)
$
1,828

$
1,805

$
1,824

 
$
1,828

$
1,824

Market value of securities on loan at period end (in billions) (e)
$
415

$
432

$
382

 
$
415

$
382

 
 
 
 
 
 
 
Average common shares and equivalents outstanding (in thousands):
 
 
 
 
 
 
Basic
999,808

1,010,179

1,035,337

 
1,008,967

1,037,431

Diluted
1,003,665

1,014,357

1,041,138

 
1,013,242

1,043,585

 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
Interest-earning assets
$
279,218

$
292,086

$
291,841

 
$
291,040

$
288,283

Assets of operations
$
331,867

$
345,840

$
344,966

 
$
344,970

$
340,588

Total assets
$
332,341

$
346,328

$
345,709

 
$
345,520

$
341,510

Interest-bearing deposits
$
148,636

$
152,799

$
142,490

 
$
152,354

$
141,558

Long-term debt
$
28,074

$
28,349

$
28,138

 
$
28,275

$
27,148

Noninterest-bearing deposits
$
60,677

$
64,768

$
70,168

 
$
65,446

$
72,524

Preferred stock
$
3,542

$
3,542

$
3,542

 
$
3,542

$
3,542

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
38,036

$
37,750

$
36,780

 
$
37,795

$
35,876

 
 
 
 
 
 
 
Other information at period end:
 
 
 
 
 
 
Cash dividends per common share
$
0.28

$
0.24

$
0.24

 
$
0.76

$
0.62

Common dividend payout ratio
26
%
23
%
26
%
 
24
%
23
%
Common dividend yield (annualized)
2.2
%
1.8
%
1.8
%
 
2.0
%
1.6
%
Closing stock price per common share
$
50.99

$
53.93

$
53.02

 
$
50.99

$
53.02

Market capitalization
$
50,418

$
53,927

$
54,294

 
$
50,418

$
54,294

Book value per common share
$
38.45

$
37.97

$
36.11

 
$
38.45

$
36.11

Tangible book value per common share – Non-GAAP (a)
$
19.35

$
19.00

$
18.19

 
$
19.35

$
18.19

Full-time employees
52,000

52,000

52,900

 
52,000

52,900

Common shares outstanding (in thousands)
988,777

999,945

1,024,022

 
988,777

1,024,022



2 BNY Mellon


Consolidated Financial Highlights (unaudited) (continued)
Regulatory capital and other ratios
Sept. 30, 2018

June 30, 2018

Dec. 31, 2017

Average liquidity coverage ratio (“LCR”)
121
%
118
%
118
%
 
 
 
 
Regulatory capital ratios: (f)
 
 
 
Advanced:
 
 
 
Common Equity Tier 1 (“CET1”) ratio
11.2
%
11.0
%
10.3
%
Tier 1 capital ratio
13.3

13.1

12.3

Total (Tier 1 plus Tier 2) capital ratio
14.1

13.8

13.0

Standardized:
 
 
 
CET1 ratio
12.4
%
11.9
%
11.5
%
Tier 1 capital ratio
14.7

14.1

13.7

Total (Tier 1 plus Tier 2) capital ratio
15.7

15.1

14.7

 
 
 
 
Tier 1 leverage ratio (f)
7.0
%
6.7
%
6.4
%
Supplementary leverage ratio (“SLR”) (f)
6.4

6.1

5.9

 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio
11.9
%
11.8
%
11.1
%
BNY Mellon common shareholders’ equity to total assets ratio
10.9

10.8

10.1

(a)
Return on tangible common equity and tangible book value per common share, Non-GAAP measures, exclude goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 41 for the reconciliation of Non-GAAP measures.
(b)
See “Average balances and interest rates” on page 9 for a reconciliation of this Non-GAAP measure.
(c)
Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.4 trillion at Sept. 30, 2018 and June 30, 2018 and $1.3 trillion at Sept. 30, 2017.
(d)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(e)
Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $69 billion at Sept. 30, 2018, $70 billion at June 30, 2018 and $68 billion at Sept. 30, 2017.
(f)
For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The risk-based regulatory capital ratios, Tier 1 leverage ratio and SLR are presented on a fully phased-in basis for Dec. 31, 2017. Beginning Jan. 1, 2018, regulatory ratios are fully phased-in. For additional information on our capital ratios, see “Capital” beginning on page 32.



BNY Mellon 3

Part I - Financial Information


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

General

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “BNY Mellon,” the “Company” and similar terms refer to The Bank of New York Mellon Corporation and its consolidated subsidiaries. The term “Parent” refers to The Bank of New York Mellon Corporation but not its subsidiaries.

Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2017 (“2017 Annual Report”).

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

Overview

Established in 1784 by Alexander Hamilton, we were the first company listed on the New York Stock Exchange (NYSE: BK). With a more than 230-year history, BNY Mellon is a global company that manages and services assets for financial institutions, corporations and individual investors in 35 countries.

BNY Mellon has two business segments, Investment Services and Investment Management, which offer a comprehensive set of capabilities and deep expertise across the investment lifecycle, enabling the company to provide solutions to buy-side and sell-side market participants, as well as leading institutional and wealth management clients globally.

The diagram below presents our two business segments and lines of business, with the remaining operations in the Other segment.

 
businesses3q18.jpg

Highlights of third quarter 2018 results

We reported net income applicable to common shareholders of $1.08 billion, or $1.06 per diluted common share, in the third quarter of 2018. Net income applicable to common shareholders was $983 million, or $0.94 per diluted common share, in the third quarter of 2017. The highlights below are based on the third quarter of 2018 compared with the third quarter of 2017, unless otherwise noted.

Total revenue of $4.1 billion increased 1% primarily reflecting:
Fee revenue increased 1% primarily reflecting higher equity market values, growth in collateral management and clearance volumes and higher performance fees, partially offset by lower foreign currency hedging. (See “Fee and other revenue” beginning on page 6.)
Net interest revenue increased 6% primarily driven by higher rates, partially offset by lower deposits and other borrowings. (See “Net interest revenue” on page 8.)
Noninterest expense of $2.7 billion increased 3% primarily reflecting investments in technology and higher litigation expense, partially offset by


4 BNY Mellon


lower staff and distribution and servicing expenses. Litigation increased noninterest expense by 2%. (See “Noninterest expense” on page 11.)
Effective tax rate of 16.5%. The impact of adjusting provisional estimates for U.S. tax legislation and other changes decreased the effective rate by approximately 4.5%. (See “Income taxes” on page 11.)

Capital and liquidity

CET1 ratio under the Advanced Approach was 11.2% at Sept. 30, 2018 and 11.0% at June 30, 2018. The increase primarily reflects lower risk-weighted assets and capital generated through earnings, partially offset by capital deployed through common stock repurchases and dividend payments. (See “Capital” beginning on page 32.)
Repurchased 12 million common shares for $602 million and paid $283 million in dividends to common shareholders.

 
Highlights of our principal businesses

Investment Services
Total revenue increased 3%.
Income before taxes decreased 6%, driven by litigation expense.
AUC/A of $34.5 trillion, up 7%, primarily reflecting net new business and higher equity market values, partially offset by the unfavorable impact of a stronger U.S. dollar.

Investment Management
Total revenue increased 2%.
Income before taxes increased 5%.
AUM of $1.8 trillion increased slightly, primarily reflecting higher market values, partially offset by the divestiture of CenterSquare Investment Management (“CenterSquare”) and other changes and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound).

See “Review of businesses” and Note 19 of the Notes to Consolidated Financial Statements for additional information on our businesses.



BNY Mellon 5


Fee and other revenue

Fee and other revenue
 
 
 
 
 
 
 
 
YTD18

 
 
 
 
3Q18 vs.
 
 
 
 vs.
(dollars in millions, unless otherwise noted)
3Q18

2Q18

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Investment services fees:
 
 
 
 
 
 
 
 
 
Asset servicing (a)
$
1,157

$
1,157

$
1,105

 %
5
 %
 
$
3,482

$
3,253

7
 %
Clearing services
383

392

383

(2
)

 
1,189

1,153

3

Issuer services
287

266

288

8


 
813

780

4

Treasury services
137

140

141

(2
)
(3
)
 
415

420

(1
)
Total investment services fees
1,964

1,955

1,917


2

 
5,899

5,606

5

Investment management and performance fees
922

910

901

1

2

 
2,792

2,622

6

Foreign exchange and other trading revenue
155

187

173

(17
)
(10
)
 
551

502

10

Financing-related fees
52

53

54

(2
)
(4
)
 
157

162

(3
)
Distribution and servicing
34

34

40


(15
)
 
104

122

(15
)
Investment and other income
41

70

63

N/M
N/M
 
193

262

N/M
Total fee revenue
3,168

3,209

3,148

(1
)
1

 
9,696

9,276

5

Net securities gains (losses)

1

19

N/M
N/M
 
(48
)
29

N/M
Total fee and other revenue
$
3,168

$
3,210

$
3,167

(1
)%
 %
 
$
9,648

$
9,305

4
 %
 
 
 
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
78
%
78
%
78
%
 
 
 
78
%
79
%
 
 
 
 
 
 
 
 
 
 
 
AUM at period end (in billions) (b)
$
1,828

$
1,805

$
1,824

1
 %
 %
 
$
1,828

$
1,824

 %
AUC/A at period end (in trillions) (c)
$
34.5

$
33.6

$
32.2

3
 %
7
 %
 
$
34.5

$
32.2

7
 %
(a)
Asset servicing fees include securities lending revenue of $58 million in the third quarter of 2018, $60 million in the second quarter of 2018, $47 million in the third quarter of 2017, $173 million in the first nine months of 2018 and $144 million in the first nine months of 2017.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(c)
Includes the AUC/A of CIBC Mellon of $1.4 trillion at Sept. 30, 2018 and June 30, 2018 and $1.3 trillion at Sept. 30, 2017.
N/M - Not meaningful.


Fee and other revenue increased slightly compared with the third quarter of 2017 and decreased 1% (unannualized) compared with the second quarter of 2018. The decrease compared with the second quarter of 2018 primarily reflects lower foreign exchange and other trading revenue and investment and other income, partially offset by seasonally higher Depositary Receipts revenue.

Investment services fees

Investment services fees were impacted by the following compared with the third quarter of 2017 and the second quarter of 2018:

Asset servicing fees increased 5% compared with the third quarter of 2017 and were unchanged compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects growth in collateral management and higher equity market values and securities lending volumes.
Clearing services fees were unchanged compared with the third quarter of 2017 and decreased 2%
 
(unannualized) compared with the second quarter of 2018. Year-over-year, higher equity market values and long-term mutual funds balances were offset by the previously disclosed lost business. The decrease compared with the second quarter of 2018 primarily reflects lower clearance revenue.
Issuer services fees decreased slightly compared with the third quarter of 2017 and increased 8% (unannualized) compared with the second quarter of 2018. The increase compared with the second quarter of 2018 primarily reflects seasonally higher Depositary Receipts revenue.
Treasury services fees decreased 3% compared with the third quarter of 2017 and 2% (unannualized) compared with the second quarter of 2018. The decrease compared with the third quarter of 2017 primarily reflects higher compensating balance credits provided to clients, which reduce fee revenue and increase net interest revenue. The decrease compared with the second quarter of 2018 primarily reflects lower payments revenue.



6 BNY Mellon


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

Investment management and performance fees

Investment management and performance fees increased 2% compared with the third quarter of 2017 and 1% (unannualized) compared with the second quarter of 2018. On a constant currency basis (Non-GAAP), investment management and performance fees increased 3% compared with the third quarter of 2017. Performance fees were $30 million in the third quarter of 2018, $15 million in the third quarter of 2017 and $12 million in the second quarter of 2018.

AUM was $1.8 trillion, up slightly compared with Sept. 30, 2017 and 1% compared with June 30, 2018. See the “Investment Management business” in “Review of businesses” for additional details regarding the drivers of investment management and performance fees, AUM and AUM flows.

Foreign exchange and other trading revenue

Foreign exchange and other trading revenue
 
(in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Foreign exchange
$
150

$
171

$
158

$
504

$
463

Other trading revenue
5

16

15

47

39

Total foreign exchange and other trading revenue
$
155

$
187

$
173

$
551

$
502



Foreign exchange revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility, and the impact of foreign currency hedging activities. Foreign exchange revenue decreased 5% compared with the third quarter of 2017 and 12% (unannualized) compared with the second quarter of 2018. The decrease compared with third quarter of 2017 primarily reflects foreign currency hedging, partially offset by higher volumes. The decrease compared with the second quarter of 2018 primarily reflects lower volumes. Foreign exchange revenue is primarily reported in the Investment Services business and, to a lesser extent, the Investment Management business and the Other segment.

 
Distribution and servicing fees

The decrease in distribution and servicing fees compared with the third quarter of 2017 primarily reflects lower fees from money market funds.

Investment and other income

The following table provides the components of investment and other income.

Investment and other income
 
 
 
(in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Corporate/bank-owned life insurance
$
36

$
31

$
37

$
103

$
110

Asset-related gains (losses)
7

15

1

68

(1
)
Expense reimbursements from joint venture
17

19

18

52

49

Seed capital gains (a)
8

3

6

11

25

Equity investment income
3

2


5

33

Lease-related gains




52

Other (loss) income
(30
)

1

(46
)
(6
)
Total investment and other income
$
41

$
70

$
63

$
193

$
262

(a)
Excludes seed capital gains related to consolidated investment management funds, which are reflected in operations of consolidated investment management funds.


Investment and other income decreased compared with the third quarter of 2017 and second quarter of 2018. Both decreases primarily reflect our investments in renewable energy, including the impact of adjusting the provisional tax estimates. Pre-tax losses on our renewable energy investments are offset by corresponding tax benefits and credits.

Year-to-date 2018 compared with year-to-date 2017

Fee and other revenue increased 4% in the first nine months of 2018, compared with the first nine months of 2017, primarily reflecting higher asset servicing fees, investment management and performance fees, foreign exchange and other trading revenue, partially offset by net securities losses and lower investment and other income. The 7% increase in asset servicing fees primarily reflects higher equity market values, securities lending and other volumes and the favorable impact of a weaker U.S. dollar. The 6% increase in investment management and performance fees primarily reflects higher equity market values, the favorable impact of a weaker U.S. dollar (principally versus the British pound) and higher performance fees. The 10% increase in foreign


BNY Mellon 7


exchange and other trading revenue primarily reflects higher volumes, partially offset by foreign currency hedging. Net securities losses primarily reflect losses recorded in the first quarter of 2018 related to the sale of debt securities. The decrease in investment and other income primarily reflects lease-related gains
 
and a net gain related to an equity investment, both recorded in the first nine months of 2017, and lower other income due in part to our investments in renewable energy, partially offset by an increase in asset-related gains.

Net interest revenue

Net interest revenue
 
 
 
 
 
 
 
 
YTD18

 
 
 
 
3Q18 vs.
 
 
 
 vs.
(dollars in millions)
3Q18

2Q18

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Net interest revenue
$
891

$
916

$
839

(3
)%
6
 %
 
$
2,726

$
2,457

11
%
Add: Tax equivalent adjustment
5

5

12

N/M
N/M
 
16

36

N/M
Net interest revenue (FTE) – Non-GAAP (a)
$
896

$
921

$
851

(3
)%
5
 %
 
$
2,742

$
2,493

10
%
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets
$
279,218

$
292,086

$
291,841

(4
)%
(4
)%
 
$
291,040

$
288,283

1
%
 
 
 
 
 
 
 
 
 
 
Net interest margin
1.27
%
1.26
%
1.15
%
1
 bps
12
 bps
 
1.25
%
1.14
%
11
 bps
Net interest margin (FTE) – Non-GAAP (a)
1.28
%
1.26
%
1.16
%
2
 bps
12
 bps
 
1.26
%
1.16
%
10
 bps
(a)
Net interest revenue (FTE) – Non-GAAP and net interest margin (FTE) – Non-GAAP include the tax equivalent adjustments on tax-exempt income which allows for comparisons 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.
N/M - Not meaningful.
bps - basis points.


Net interest revenue increased 6% compared with the third quarter of 2017 and decreased 3% (unannualized) compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects higher interest rates, partially offset by lower deposits and other borrowings. The decrease compared with the second quarter of 2018 was primarily driven by lower deposits and other borrowings, partially offset by higher interest rates.

Net interest margin increased 12 basis points compared with the third quarter of 2017 and 1 basis point compared with the second quarter of 2018. Both increases primarily reflect higher interest rates.

 
Average non-U.S. dollar deposits comprised approximately 30% of our average total deposits in the third quarter of 2018. Approximately 40% of the average non-U.S. dollar deposits in the third quarter of 2018 were euro-denominated.

Year-to-date 2018 compared with year-to-date 2017

Net interest revenue increased 11% in the first nine months of 2018 compared with the first nine months of 2017, primarily driven by higher interest rates. The net interest margin also increased primarily driven by higher interest rates.




8 BNY Mellon


Average balances and interest rates
Quarter ended
 
Sept. 30, 2018
 
June 30, 2018
 
Sept. 30, 2017
(dollars in millions, presented on an FTE basis)
Average
balance

Interest

Average
rates

 
Average
balance

Interest

Average
rates

 
Average balance

Interest

Average rates

Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
14,691

$
59

1.58
%
 
$
15,748

$
56

1.41
%
 
$
15,899

$
34

0.86
%
Interest-bearing deposits held at the Federal Reserve and other central banks
61,216

125

0.80

 
69,676

136

0.77

 
70,430

89

0.50

Federal funds sold and securities purchased under resale agreements (a)
26,738

281

4.18

 
28,051

230

3.29

 
28,120

119

1.67

Margin loans
13,738

129

3.74

 
14,838

128

3.46

 
13,206

87

2.60

Non-margin loans:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
28,628

258

3.59

 
29,970

257

3.44

 
29,950

216

2.87

Foreign offices
11,441

86

2.98

 
12,258

88

2.87

 
12,788

67

2.09

Total non-margin loans
40,069

344

3.42

 
42,228

345

3.27

 
42,738

283

2.64

Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
24,423

129

2.09

 
23,199

116

2.02

 
25,349

106

1.67

U.S. Government agency obligations
64,612

384

2.40

 
63,022

374

2.37

 
61,710

309

2.00

State and political subdivisions – tax-exempt (b)
2,453

18

2.77

 
2,677

18

2.75

 
3,226

25

3.06

Other securities
27,017

138

1.98

 
28,863

126

1.75

 
28,804

98

1.34

Trading securities (b)
4,261

32

3.05

 
3,784

29

3.10

 
2,359

13

2.26

Total securities
122,766

701

2.28

 
121,545

663

2.19

 
121,448

551

1.81

Total interest-earning assets (b)
$
279,218

$
1,639

2.33
%
 
$
292,086

$
1,558

2.14
%
 
$
291,841

$
1,163

1.59
%
Noninterest-earnings assets
53,123

 
 
 
54,242

 
 
 
53,868

 
 
Total assets
$
332,341

 
 
 
$
346,328

 
 
 
$
345,709

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
$
57,942

$
142

0.97
%
 
$
54,200

$
105

0.78
%
 
$
44,212

$
31

0.28
%
Foreign offices
90,694

95

0.42

 
98,599

68

0.28

 
98,278

26

0.10

Total interest-bearing deposits
148,636

237

0.63

 
152,799

173

0.45

 
142,490

57

0.16

Federal funds purchased and securities sold under repurchase agreements (a)
14,199

190

5.33

 
18,146

158

3.48

 
21,403

70

1.30

Trading liabilities
1,150

7

2.32

 
1,198

7

2.43

 
1,434

2

0.54

Other borrowed funds
2,747

16

2.33

 
2,399

14

2.40

 
2,197

7

1.38

Commercial paper
3,102

16

2.10

 
3,869

21

2.13

 
2,736

8

1.15

Payables to customers and broker-dealers
16,252

51

1.23

 
16,349

45

1.10

 
18,516

19

0.42

Long-term debt
28,074

226

3.17

 
28,349

219

3.06

 
28,138

149

2.07

Total interest-bearing liabilities
$
214,160

$
743

1.37
%
 
$
223,109

$
637

1.14
%
 
$
216,914

$
312

0.57
%
Total noninterest-bearing deposits
60,677

 
 
 
64,768

 
 
 
70,168

 
 
Other noninterest-bearing liabilities
15,660

 
 
 
16,857

 
 
 
17,763

 
 
Total liabilities
290,497

 
 
 
304,734

 
 
 
304,845

 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
193

 
 
 
184

 
 
 
188

 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
Total The Bank of New York Mellon Corporation shareholders’ equity
41,578

 
 
 
41,292

 
 
 
40,322

 
 
Noncontrolling interests
73

 
 
 
118

 
 
 
354

 
 
Total permanent equity
41,651

 
 
 
41,410

 
 
 
40,676

 
 
Total liabilities, temporary equity and permanent equity
$
332,341

 
 
 
$
346,328

 
 
 
$
345,709

 
 
Net interest revenue (FTE) – Non-GAAP
 
$
896

 
 
 
$
921

 
 
 
$
851

 
Net interest margin (FTE) – Non-GAAP
 
 
1.28
%
 
 
 
1.26
%
 
 
 
1.16
%
Less: Tax equivalent adjustment (c)
 
5

 
 
 
5

 
 
 
12

 
Net interest revenue – GAAP
 
$
891

 
 
 
$
916

 
 
 
$
839

 
Net interest margin – GAAP
 
 
1.27
%
 
 
 
1.26
%
 
 
 
1.15
%
(a)
Includes the impact of offsetting under enforceable netting agreements of approximately $26 billion for the third quarter of 2018, $18 billion for the second quarter of 2018 and $7 billion for the third quarter of 2017.
(b)
Interest income and average yields are presented on an FTE basis (Non-GAAP).
(c)
The tax equivalent adjustment relates to tax-exempt securities, primarily state and political subdivisions, and is based on the federal statutory tax rate of 21% for the quarters in 2018 and 35% for the quarter in 2017, adjusted for applicable state income taxes, net of the related federal tax benefit.




BNY Mellon 9


Average balances and interest rates
Year-to-date
 
Sept. 30, 2018
 
Sept. 30, 2017
(dollars in millions, presented on an FTE basis)
Average balance

Interest

Average rates

 
Average balance

Interest

Average rates

Assets
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
14,766

$
157

1.42
%
 
$
15,153

$
83

0.73
%
Interest-bearing deposits held at the Federal Reserve and other central banks
69,921

387

0.73

 
68,613

217

0.42

Federal funds sold and securities purchased under resale agreements (a)
27,560

681

3.31

 
26,779

272

1.36

Margin loans
14,743

372

3.38

 
14,663

249

2.27

Non-margin loans:
 
 
 
 
 
 
 
Domestic offices
29,664

743

3.35

 
30,545

611

2.67

Foreign offices
12,068

251

2.78

 
13,126

189

1.93

Total non-margin loans
41,732

994

3.18

 
43,671

800

2.45

Securities:
 
 
 
 
 
 
 
U.S. Government obligations
23,698

354

2.00

 
25,835

316

1.64

U.S. Government agency obligations
63,702

1,108

2.32

 
59,384

870

1.95

State and political subdivisions – tax-exempt (b)
2,667

55

2.71

 
3,298

77

3.09

Other securities
28,175

387

1.83

 
28,531

267

1.25

Trading securities (b)
4,076

89

2.92

 
2,356

48

2.74

Total securities
122,318

1,993

2.17

 
119,404

1,578

1.76

Total interest-earning assets (b)
$
291,040

$
4,584

2.10
%
 
$
288,283

$
3,199

1.48
%
Noninterest-earnings assets
54,480

 
 
 
53,227

 
 
Total assets
$
345,520

 
 
 
$
341,510

 
 
Liabilities
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
Domestic offices
$
54,608

$
318

0.78
%
 
$
47,456

$
66

0.19
%
Foreign offices
97,746

209

0.29

 
94,102

32

0.05

Total interest-bearing deposits
152,354

527

0.46

 
141,558

98

0.09

Federal funds purchased and securities sold under repurchase agreements (a)
17,085

455

3.56

 
19,465

132

0.90

Trading liabilities
1,304

23

2.33

 
1,188

6

0.65

Other borrowed funds
2,424

39

2.16

 
1,409

13

1.26

Commercial paper
3,367

49

1.96

 
2,374

18

1.01

Payables to customers and broker-dealers
16,564

127

1.02

 
19,360

42

0.29

Long-term debt
28,275

622

2.90

 
27,148

397

1.93

Total interest-bearing liabilities
$
221,373

$
1,842

1.11
%
 
$
212,502

$
706

0.44
%
Total noninterest-bearing deposits
65,446

 
 
 
72,524

 
 
Other noninterest-bearing liabilities
17,019

 
 
 
16,428

 
 
Total liabilities
303,838

 
 
 
301,454

 
 
Temporary equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests
190

 
 
 
174

 
 
Permanent equity
 
 
 
 
 
 
 
Total The Bank of New York Mellon Corporation shareholders’ equity
41,337

 
 
 
39,418

 
 
Noncontrolling interests
155

 
 
 
464

 
 
Total permanent equity
41,492

 
 
 
39,882

 
 
Total liabilities, temporary equity and permanent equity
$
345,520

 
 
 
$
341,510

 
 
Net interest revenue (FTE) – Non-GAAP
 
$
2,742

 
 
 
$
2,493

 
Net interest margin (FTE) – Non-GAAP
 
 
1.26
%
 
 
 
1.16
%
Less: Tax equivalent adjustment (c)
 
16

 
 
 
36

 
Net interest revenue – GAAP
 
$
2,726

 
 
 
$
2,457

 
Net interest margin – GAAP
 
 
1.25
%
 
 
 
1.14
%
(a)
Includes the impact of offsetting under enforceable netting agreements of approximately $19 billion for the first nine months of 2018 and $3 billion for the first nine months of 2017.
(b)
Interest income and average yields are presented on an FTE basis (Non-GAAP).
(c)
The tax equivalent adjustment relates to tax-exempt securities, primarily state and political subdivisions, and is based on the federal statutory tax rate of 21% for year-to-date 2018 and 35% for year-to-date 2017, adjusted for applicable state income taxes, net of the related federal tax benefit.




10 BNY Mellon


Noninterest expense

Noninterest expense
 
 
 
 
 
 
 
 
YTD18

 
 
 
 
3Q18 vs.
 
 
 
 vs.
(dollars in millions)
3Q18

2Q18

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Staff (a)
$
1,478

$
1,489

$
1,485

(1
)%
 %
 
$
4,543

$
4,405

3
 %
Professional, legal and other purchased services
332

328

305

1

9

 
951

937

1

Software
189

192

175

(2
)
8

 
554

514

8

Net occupancy
139

156

141

(11
)
(1
)
 
434

417

4

Sub-custodian and clearing (b)
106

110

101

(4
)
5

 
335

312

7

Distribution and servicing
99

106

109

(7
)
(9
)
 
311

313

(1
)
Furniture and equipment
73

74

58

(1
)
26

 
208

174

20

Business development
51

62

49

(18
)
4

 
164

163

1

Bank assessment charges
49

47

51

4

(4
)
 
148

167

(11
)
Amortization of intangible assets
48

48

52


(8
)
 
145

157

(8
)
Other (a)(b)(c)
174

135

128

29

36

 
431

392

10

Total noninterest expense
$
2,738

$
2,747

$
2,654

 %
3
 %
 
$
8,224

$
7,951

3
 %
 
 
 
 
 

 
 
 


Full-time employees at period end
52,000

52,000

52,900

 %
(2
)%
 
 
 


(a)
In the first quarter of 2018, we adopted new accounting guidance included in Accounting Standards Update (“ASU”) 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which required the reclassification of the components of pension and other postretirement costs, other than the service cost component. As a result, staff expense increased and other expense decreased. Prior periods have been reclassified. See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(b)
Beginning in the first quarter of 2018, clearing expense, which was previously included in other expense, was included with sub-custodian expense. Prior periods have been reclassified.
(c)
Beginning in the first quarter of 2018, merger and integration (“M&I”), litigation and restructuring charges are no longer separately disclosed. Expenses previously reported in this line have been reclassified to existing expense categories, primarily other expense.


Total noninterest expense increased 3% compared with the third quarter of 2017 and decreased slightly compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects investments in technology and higher litigation expense, partially offset by lower staff and distribution and servicing expenses. The investments in technology are included in staff, professional, legal and other purchased services, software and furniture and equipment expenses. The decrease compared with the second quarter of 2018 primarily reflects lower net occupancy, staff and business development expenses, partially offset by higher litigation expense. The decrease in net occupancy expense is primarily due to expenses associated with the continued consolidation of our real estate recorded in the second quarter of 2018.

We expect to continue to incur additional expenses as we invest in our technology infrastructure and platforms. We also expect to incur expenses related to relocating our corporate headquarters, which is estimated to total $75 million, of which $12 million was recorded in the second quarter of 2018. We expect the remaining expenses related to relocating our corporate headquarters to be recorded in the fourth quarter of 2018.
 
Year-to-date 2018 compared with year-to-date 2017

Total noninterest expense increased 3% compared with the first nine months of 2017. The increase primarily reflects investments in technology, the unfavorable impact of a weaker U.S. dollar, higher litigation, volume-related sub-custodian and clearing expenses and expenses associated with the continued consolidation of our real estate, partially offset by lower consulting expense and decreases in other expenses.

Income taxes

BNY Mellon recorded an income tax provision of $220 million (16.5% effective tax rate) in the third quarter of 2018, including the impact of adjusting provisional estimates for U.S. tax legislation and other changes. The income tax provision was $348 million (25.4% effective tax rate) in the third quarter of 2017 and $286 million (20.5% effective tax rate) in the second quarter of 2018. For additional information, see Note 11 of the Notes to Consolidated Financial Statements.



BNY Mellon 11


Review of businesses

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

Business accounting principles

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

For information on the accounting principles of our businesses, the primary products and services in each line of business, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 19 of the Notes to Consolidated Financial Statements.

Business results are subject to reclassification when organizational changes are made. There were no significant organizational changes in the third quarter of 2018. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.

The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, incentive expense typically increases reflecting the vesting of long-term stock awards for retirement-eligible employees. In the third quarter, Depositary Receipts revenue is typically higher due to an increased level of client dividend payments. Also in the third quarter, volume-related fees may decline due to reduced client activity. In the third
 
quarter, staff expense typically increases reflecting the annual employee merit increase. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth quarter represents the end of the measurement period for many of the performance fee-eligible relationships.

The results of our businesses may also be impacted by the translation of financial results denominated in foreign currencies to the U.S. dollar. We are primarily impacted by activities denominated in the British pound and the euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency-denominated expenses than revenues. However, our Investment Management business typically has more foreign currency-denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.

Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At Sept. 30, 2018, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.03 to $0.05.

See Note 19 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.



12 BNY Mellon


Investment Services business

 
 
 
 
 
 
 
 
 
 
 
YTD18

(dollars in millions unless otherwise noted)
 
 
 
 
 
3Q18 vs.
 
 
 
 vs.
3Q18

2Q18

1Q18

4Q17

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Revenue:
 
 
 
 
 
 
 
 
 
 
 
Investment services fees:
 
 
 
 
 
 
 
 
 
 
 
Asset servicing
$
1,136

$
1,135

$
1,143

$
1,106

$
1,081

 %
5
 %
 
$
3,414

$
3,180

7
 %
Clearing services
383

391

414

400

381

(2
)
1

 
1,188

1,149

3

Issuer services
288

265

260

196

288

9


 
813

779

4

Treasury services
136

140

138

136

141

(3
)
(4
)
 
414

419

(1
)
Total investment services fees
1,943

1,931

1,955

1,838

1,891

1

3

 
5,829

5,527

5

Foreign exchange and other trading revenue
161

172

169

168

154

(6
)
5

 
502

452

11

Other (a)
126

130

126

135

142

(3
)
(11
)
 
382

407

(6
)
Total fee and other revenue
2,230

2,233

2,250

2,141

2,187


2

 
6,713

6,386

5

Net interest revenue
827

874

844

813

777

(5
)
6

 
2,545

2,245

13

Total revenue
3,057

3,107

3,094

2,954

2,964

(2
)
3

 
9,258

8,631

7

Provision for credit losses
1

1

(7
)
(2
)
(2
)
N/M
N/M
 
(5
)
(5
)
N/M
Noninterest expense (excluding amortization of intangible assets)
1,995

1,931

1,913

2,060

1,837

3

9

 
5,839

5,538

5

Amortization of intangible assets
35

36

36

37

37

(3
)
(5
)
 
107

112

(4
)
Total noninterest expense
2,030

1,967

1,949

2,097

1,874

3

8

 
5,946

5,650

5

Income before taxes
$
1,026

$
1,139

$
1,152

$
859

$
1,092

(10
)%
(6
)%
 
$
3,317

$
2,986

11
 %
 
 
 
 
 
 

 
 
 
 

Pre-tax operating margin
34
%
37
%
37
%
29
%
37
%


 
 
36
%
35
%


 
 
 
 
 
 


 
 
 
 


Securities lending revenue
$
52

$
55

$
48

$
45

$
41

(5
)%
27
 %
 
$
155

$
123

26
 %
 
 
 
 
 
 




 
 
 


Total revenue by line of business:
 
 
 
 
 




 
 
 


Asset Servicing
$
1,458

$
1,520

$
1,519

$
1,459

$
1,420

(4
)%
3
 %
 
$
4,497

$
4,144

9
 %
Pershing
558

558

581

569

542


3

 
1,697

1,611

5

Issuer Services
453

431

418

352

442

5

2

 
1,302

1,236

5

Treasury Services
324

329

321

322

316

(2