XFRA:BN9 Bank of New York Mellon Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012

or

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

of the Securities Exchange Act of 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   13-2614959

(State or other jurisdiction of

incorporation or organization)

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

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

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

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

Yes ü     No         

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ü     No         

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

 

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

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

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

 

Class  

Outstanding as of

March 31, 2012

Common Stock, $0.01 par value   1,192,716,454


Table of Contents

THE BANK OF NEW YORK MELLON CORPORATION

First Quarter 2012 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 2012 event

     4   

Highlights of first quarter 2012 results

     4   

Fee and other revenue

     6   

Net interest revenue

     9   

Average balances and interest rates

     10   

Noninterest expense

     11   

Income taxes

     12   

Review of businesses

     12   

Critical accounting estimates

     21   

Consolidated balance sheet review

     22   

Liquidity and dividends

     35   

Capital

     39   

Trading activities and risk management

     43   

Foreign exchange and other trading

     43   

Asset/liability management

     44   

Off-balance sheet arrangements

     45   

Supplemental information – Explanation of Non-GAAP financial measures

     45   

Recent accounting and regulatory developments

     49   

Government monetary policies and competition

     57   

Website information

     57   

Item 1. Financial Statements:

  

Consolidated Income Statement (unaudited)

     59   

Consolidated Comprehensive Income Statement (unaudited)

     61   

Consolidated Balance Sheet (unaudited)

     62   

Consolidated Statement of Cash Flows (unaudited)

     63   

Consolidated Statement of Changes in Equity (unaudited)

     64   

Notes to Consolidated Financial Statements:

  

Note 1 – Basis of presentation

     65   

Note 2 – Accounting changes and new accounting guidance

     65   

Note 3 – Acquisitions and dispositions

     66   

Note 4 – Securities

     67   

Note 5 – Loans and asset quality

     70   

Note 6 – Goodwill and intangible assets

     76   

Note 7 – Other assets

     78   

Note 8 – Net interest revenue

     78   

Note 9 – Employee benefit plans

     79   

Note 10 – Restructuring charges

     79   

Note 11 – Income taxes

     80   

Note 12 – Securitizations and variable interest entities

     80   

Note 13 – Other comprehensive income

     83   

Note 14 – Fair value of financial instruments

     84   

Note 15 – Fair value measurement

     87   

Note 16 – Fair value option

     98   

Note 17 – Derivative instruments

     98   

Note 18 – Commitments and contingent liabilities

     102   

Note 19 – Review of businesses

     107   

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

     109   

Item 4. Controls and Procedures

     110   

Forward-looking Statements.

     111   

Part II - Other Information

  

Item 1. Legal Proceedings

     113   

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

     113   

Item 6. Exhibits

     113   

Signature

     114   

Index to Exhibits

     115   


Table of Contents

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited)

     

Quarter ended

 

(dollar amounts in millions, except per share amounts

and unless otherwise noted)

   March 31,
2012
   

Dec. 31,

2011

    March 31,
2011
 

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

      

Net income

   $ 619      $ 505      $ 625   

Basic EPS

     0.52        0.42        0.50   

Diluted EPS

     0.52        0.42        0.50   

Fee and other revenue

   $ 2,838      $ 2,765      $ 2,838   

Income (loss) of consolidated investment management funds

     43        (5     110   

Net interest revenue

     765        780        698   
  

 

 

   

 

 

   

 

 

 

Total revenue

   $ 3,646      $ 3,540      $ 3,646   

Return on common equity (annualized) (a)

     7.4     5.9     7.7

Non-GAAP adjusted (a)

     8.2        7.7        8.6   

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

     21.0     17.7     24.3

Non-GAAP adjusted (a)

     21.2        20.4        24.4   

Return on average assets (annualized)

     0.83     0.63     0.98

Fee revenue as a percentage of total revenue excluding net securities gains (losses)

     78     78     78

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

   $ 233      $ 223      $ 238   

Percentage of non-U.S. total revenue (b)

     37     34     37

Pre-tax operating margin (a)

     24     19     26

Non-GAAP adjusted (a)

     27        27        28   

Net interest margin (FTE)

     1.32     1.27     1.49

Market value of assets under management at period end (in billions)

   $ 1,308      $ 1,260      $ 1,229   

Market value of assets under custody and administration at period end (in trillions)

   $ 26.6      $ 25.8      $ 25.5   

Market value of cross-border assets at period end (in trillions)

   $ 10.4      $ 9.7      $ 9.9   

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

   $ 265      $ 269      $ 278   

Average common shares and equivalents outstanding (in thousands):

      

Basic

     1,193,931        1,204,994        1,234,076   

Diluted

     1,195,558        1,205,586        1,238,284   

Capital ratios:

      

Estimated Basel III Tier 1 common equity ratio – Non-GAAP (a)(d)

     7.6     7.1     6.1

Basel I Tier 1 common equity to risk-weighted assets ratio – Non-GAAP (a)

     13.9     13.4     12.4

Basel I Tier 1 capital ratio

     15.6     15.0     14.0

Basel I Total (Tier 1 plus Tier 2) capital ratio

     17.5     17.0     16.8

Basel I leverage capital ratio

     5.6     5.2     6.1

BNY Mellon’s shareholders’ equity to total assets ratio (a)

     11.3     10.3     12.5

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

     6.5     6.4     5.9

Selected average balances:

      

Interest-earning assets

   $ 236,331      $ 247,724      $ 190,179   

Assets of operations

   $ 289,900      $ 304,235      $ 243,356   

Total assets

   $ 301,344      $ 316,074      $ 257,698   

Interest-bearing deposits

   $ 125,438      $ 130,343      $ 116,615   

Noninterest-bearing deposits

   $ 66,613      $ 76,309      $ 38,616   

Total The Bank of New York Mellon Corporation shareholders’ equity

   $ 33,718      $ 33,761      $ 32,827   

 

2    BNY Mellon


Table of Contents

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,
2012
   

Dec. 31,

2011

    March 31,
2011
 

Other information at period end:

      

Cash dividends per common share

   $ 0.13      $ 0.13      $ 0.09   

Common dividend payout ratio

     25 %      31     18

Dividend yield (annualized)

     2.2 %      2.6     1.2

Closing common stock price per common share

   $ 24.13      $ 19.91      $ 29.87   

Market capitalization

   $ 28,780      $ 24,085      $ 37,090   

Book value per common share – GAAP (a)

   $ 28.51      $ 27.62      $ 26.78   

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

   $ 11.17      $ 10.57      $ 9.67   

Full-time employees

     47,800        48,700        48,400   

Common shares outstanding (in thousands)

     1,192,716        1,209,675        1,241,724   

 

(a) See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 45 for a calculation of these ratios.
(b) Includes fee revenue, net interest revenue and income of consolidated investment management funds, net of noncontrolling interests.
(c) Represents the securities on loan managed by the Investment Services business.
(d) Our estimated Basel III Tier 1 common equity ratio – Non-GAAP reflects our current interpretation of the Basel III rules. Our estimated Basel III Tier 1 common equity ratio could change in the future as the U.S. regulatory agencies implement Basel III or if our businesses change.

 

BNY Mellon    3


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Part I – Financial Information

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

 

 

General

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “BNY Mellon,” the “Company” and similar terms refer to The Bank of New York Mellon Corporation 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 document are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2011 (“2011 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.”

How we reported results

Throughout this Form 10-Q, measures which are noted as “Non-GAAP” measures exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest margin 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. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 45 for a reconciliation of financial measures presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) to adjusted Non-GAAP financial measures.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a global financial services company focused on helping clients manage and

service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. At March 31, 2012, we had $26.6 trillion in assets under custody and administration and $1.3 trillion in assets under management, serviced $11.9 trillion in outstanding debt and processed global payments averaging $1.4 trillion per day.

First quarter 2012 event

Capital plan and share repurchase program

In March 2012, BNY Mellon received confirmation that the Board of Governors of the Federal Reserve System (the “Federal Reserve”) did not object to our 2012 comprehensive capital plan. Our 2012 capital plan includes the repurchase of up to $1.16 billion of outstanding common stock and the continuation of the 13 cents per share quarterly cash dividend.

Highlights of first quarter 2012 results

We reported net income applicable to common shareholders of BNY Mellon of $619 million, or $0.52 per diluted common share, in the first quarter of 2012 compared with $625 million, or $0.50 per diluted common share, in the first quarter of 2011 and $505 million, or $0.42 per diluted common share, in the fourth quarter of 2011.

Highlights for the first quarter of 2012 include:

 

   

Assets under custody and administration (“AUC”) totaled a record $26.6 trillion at March 31, 2012 compared with $25.5 trillion at March 31, 2011 and $25.8 trillion at Dec. 31, 2011. This represents an increase of 4% compared with the prior year and 3% sequentially. The increases were driven by net new business and higher market values. (See the “Review of businesses – Investment Services business” beginning on page 18).

   

Assets under management (“AUM”), excluding securities lending assets, totaled a record $1.31 trillion at March 31, 2012, compared with $1.23 trillion at March 31, 2011 and $1.26 trillion at

 

 

4    BNY Mellon


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Dec. 31, 2011. This represents an increase of 6% compared with the prior year and 4% sequentially. The year-over-year increase primarily reflects net new business and higher market values. On a sequential basis, the increase resulted from higher market values. (See the “Review of businesses – Investment Management business” beginning on page 16).

   

Investment services fees totaled $1.6 billion in the first quarter of 2012 compared with $1.7 billion in the first quarter of 2011. The decrease primarily resulted from the impact of the sale of the Shareowner Services business in the fourth quarter of 2011, partially offset by higher Asset Servicing and Clearing services fees. (See the “Review of businesses – Investment Services business” beginning on page 18).

   

Investment management and performance fees totaled $745 million in the first quarter of 2012 compared with $764 million in the first quarter of 2011. The decrease was driven by higher money market fee waivers, partially offset by net new business. (See the “Review of businesses – Investment Management business” beginning on page 16).

   

Foreign exchange and other trading revenue totaled $191 million in the first quarter of 2012 compared with $198 million in the first quarter of 2011. In the first quarter of 2012, foreign exchange revenue totaled $136 million, a decrease of 21%, reflecting lower volumes and volatility. Other trading revenue was $55 million in the first quarter of 2012 compared to $25 million in the first quarter of 2011. The increase was primarily driven by higher fixed income trading. (See “Fee and other revenue” beginning on page 6).

   

Investment income and other revenue totaled $139 million in the first quarter of 2012 compared with $81 million in the first quarter of 2011. The increase primarily resulted from higher leasing and seed capital gains. (See “Fee and other revenue” beginning on page 6).

   

Net interest revenue totaled $765 million in the first quarter of 2012 compared with $698 million in the first quarter of 2011. The increase was primarily driven by higher average client deposits, increased investment in high-quality investment securities and higher loan levels, partially offset by narrower spreads and lower accretion. The net interest margin (FTE) for the first quarter of 2012 was 1.32% compared with 1.49% in the first quarter of 2011. The decrease reflects higher client deposits nearly half of

   

which were invested in liquid, lower-yielding assets (See “Net interest revenue” on page 9).

   

The provision for credit losses was $5 million in the first quarter of 2012 compared with no provision for credit losses in the first quarter of 2011. (See “Consolidated balance sheet review – Asset quality and allowance for credit losses” beginning on page 30).

   

Noninterest expense totaled $2.8 billion in the first quarter of 2012 compared with $2.7 billion in the first quarter of 2011. The increase primarily reflects higher litigation and legal expenses, as well as higher incentive expense due to the vesting of long-term stock awards for retirement-eligible employees and higher pension expense. (See “Noninterest expense” beginning on page 11).

   

BNY Mellon recorded an income tax provision of $254 million (28.7% effective tax rate) in the first quarter of 2012 compared with an income tax provision of $279 million (29.3% effective tax rate) in the first quarter of 2011. (See “Income taxes” on page 12).

   

The unrealized pre-tax gain on our total investment securities portfolio was $1.2 billion at March 31, 2012 compared with $793 million at Dec. 31, 2011. The increase in the valuation of the investment securities portfolio was driven by higher asset-backed securities prices. (See “Consolidated balance sheet review – Investment securities” beginning on page 26).

   

At March 31, 2012, our estimated Basel III Tier 1 common equity ratio was 7.6%, compared with 7.1% at Dec. 31, 2011, an improvement of 50 basis points. The improvement was driven by an increase in the value of our investment securities portfolio, earnings retention and lower risk-weighted assets, partially offset by share repurchases. (See “Capital” beginning on page 39).

   

We generated $680 million of gross Basel I Tier 1 common equity in the first quarter of 2012, primarily driven by earnings. Our Basel I Tier 1 capital ratio was 15.6% at March 31, 2012 compared with 15.0% at Dec. 31, 2011. (See “Capital” beginning on page 39).

   

In the first quarter of 2012, we repurchased 17.3 million common shares in the open market at an average price of $21.53 per share for a total of $371 million.

 

 

BNY Mellon    5


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Fee and other revenue

 

Fee and other revenue (a)

 

                        1Q12 vs.  
(dollars in millions, unless otherwise noted)    1Q12     4Q11     1Q11     1Q11     4Q11  

Investment services fees:

          

Asset servicing (b)

   $ 943      $ 885      $ 917        3     7

Issuer services

     251        287        351        (28     (13

Memo: Issuer services excluding Shareowner Services

     251        245        292        (14     2   

Clearing services

     303        278        292        4        9   

Treasury services

     136        134        134        1        1   

Total investment services fees

     1,633        1,584        1,694        (4     3   

Investment management and performance fees

     745        730        764        (2     2   

Foreign exchange and other trading revenue

     191        228        198        (4     (16

Distribution and servicing

     46        42        53        (13     10   

Financing-related fees

     44        38        43        2        16   

Investment income

     102        69        67        52        48   

Other

     37        77        14        164        (52

Total fee revenue

     2,798        2,768        2,833        (1     1   

Net securities gains (losses)

     40        (3     5        N/M        N/M   

Total fee and other revenue—GAAP

     2,838        2,765        2,838        -        3   

Less: Fee and other revenue related to Shareowner Services (c)

     -        142        62                   

Total fee and other revenue excluding Shareowner Services – Non-GAAP

   $ 2,838      $ 2,623      $ 2,776        2     8

Fee revenue as a percent of total revenue excluding net securities gains (losses)

     78 %      78     78    

Market value of AUM at period end (in billions)

   $ 1,308      $ 1,260      $ 1,229        6     4

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

   $ 26.6      $ 25.8      $ 25.5        4     3

 

(a) See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 45 for fee and other revenue excluding Shareowner Services – Non-GAAP.
(b) Asset servicing fees include securities lending revenue of $49 million in the first quarter of 2012, $43 million in the fourth quarter of 2011 and $37 million in the first quarter of 2011.
(c) The Shareowner Services business was sold on Dec. 31, 2011. Results in the fourth quarter of 2011 include a $98 million pre-tax gain on the sale.
N/M – Not meaningful.

 

Fee and other revenue

Fee and other revenue was unchanged year-over-year and increased 3% (unannualized) sequentially. Excluding the impact of the Shareowner Services business, fee and other revenue increased 2% year-over-year and 8% (unannualized) sequentially. The year-over-year increase primarily reflects new business and higher equity markets, higher seed capital and leasing gains and higher foreign currency remeasurement gains, partially offset by higher fee waivers. The sequential increase primarily reflects higher market values, new business, seed capital and leasing gains, partially offset by lower foreign exchange and other trading revenue, as well as seasonally lower performance fees.

Investment services fees

Investment services fees were impacted by the following, compared with the first quarter of 2011 and the fourth quarter of 2011:

 

   

Asset servicing fees were $943 million, an increase of 3% year-over-year and 7%

(unannualized) sequentially. Both increases reflect net new business and higher equity markets, as well as higher securities lending revenue driven by wider spreads.

   

Issuer services fees were $251 million, a decrease of 28% year-over-year and 13% (unannualized) sequentially. Excluding Shareowner Services, Issuer services decreased 14% year-over-year and increased 2% (unannualized) sequentially. The year-over-year decrease primarily resulted from lower money market related fees and lower trust fees related to the weakness in structured products in Corporate Trust and lower Depositary Receipts revenue. Sequentially, higher Depositary Receipts revenue was partially offset by lower Corporate Trust fees.

   

Clearing services fees were $303 million, an increase of 4% year-over-year and 9% (unannualized) sequentially. The year-over-year increase was driven by net new business and growth in mutual fund assets and retirement accounts, partially offset by lower trading volumes and higher money market fee waivers. The sequential increase primarily reflects higher trading volumes and growth in mutual fund assets.

 

 

6    BNY Mellon


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Treasury services fees were $136 million, an increase of 1% both year-over-year and (unannualized) sequentially. Both increases were primarily driven by higher global payment fees.

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

Investment management and performance fees

Investment management and performance fees totaled $745 million in the first quarter of 2012, a decrease of 2% year-over-year and an increase of 2% (unannualized) sequentially. The year-over-year decrease was driven by higher money market fee waivers, partially offset by net new business. Sequentially, higher market values, lower money market fee waivers and net new business were partially offset by seasonally lower performance fees. Performance fees were $16 million in the first quarter of 2012, $17 million in the first quarter of 2011 and $47 million in the fourth quarter of 2011. Excluding performance fees, investment management fees increased 7% (unannualized) sequentially.

Total AUM for the Investment Management business was a record $1.31 trillion at March 31, 2012 compared with $1.23 trillion at March 31, 2011 and $1.26 trillion at Dec. 31, 2011. The year-over-year increase primarily reflects net new business and higher market values. On a sequential basis, the increase resulted from higher market values.

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

Foreign exchange and other trading revenue

 

Foreign exchange and other trading revenue

  

       
(in millions)    1Q12     4Q11     1Q11  

Foreign exchange

   $ 136      $ 183      $ 173   

Fixed income

     47        41        17   

Credit derivatives (a)

     (2     (2     (1

Other

     10        6        9   

Total

   $ 191      $ 228      $ 198   

 

(a) Used as economic hedges of loans.

Foreign exchange and other trading revenue totaled $191 million in the first quarter of 2012, $198 million in the first quarter of 2011 and $228 million in the fourth quarter of 2011. In the first quarter of 2012, foreign exchange revenue totaled $136 million, a decrease of 21% year-over-year and 26% (unannualized) sequentially. The year-over-year decrease reflects lower volumes and volatility, while sequentially, volumes were unchanged and volatility decreased 20%. Additionally, foreign exchange revenue continues to be impacted by increasingly competitive market pressures. Other trading revenue was $55 million in the first quarter of 2012 compared with $25 million in the first quarter of 2011 and $45 million in the fourth quarter of 2011. Both increases were primarily driven by higher fixed income trading. Foreign exchange revenue is primarily reported in the Investment Services business. Other trading revenue is primarily reported in the Other segment.

The foreign exchange trading engaged in by the Company generates revenues, which are influenced by the volume of client transactions and the spread realized on these transactions. The level of volume and spreads is affected by market volatility, 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. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute. A substantial majority of our foreign exchange trades is undertaken for our custody clients in transactions where BNY Mellon acts as principal, and not as an agent or broker. As a principal, we earn a profit, if any, based on our ability to risk manage the aggregate foreign currency positions that we buy and sell on a daily basis. Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction program, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client’s investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. Such transactions may be initiated by (i) contacting one of our sales desks to negotiate the rate for specific transactions, (ii) using electronic trading platforms, or (iii) electing other methods such as those pursuant to a benchmarking arrangement, in which pricing is determined by an objective market rate plus a pre-negotiated spread. The preponderance of the notional value of our

 

 

BNY Mellon    7


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trading volume with clients is in negotiated trading. Our standing instruction program, including a new standing instruction program option called the Defined Spread Offering, which the Company introduced to clients in the first quarter of 2012, provides custody clients and their investment managers with an end-to-end solution that allows them to shift to BNY Mellon the cost, management and execution risk, often in small transactions not otherwise eligible for a more favorable rate or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. In response to competitive market pressures and client requests, we are continuing to develop standing instruction program products and services and making these new products and services available to our clients. Our custody clients may also choose to use third-party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar-equivalent volume foreign exchange transactions.

We typically price negotiated trades for our custody clients at a spread over our estimation of the current market rate for a particular currency or based on an agreed upon third-party benchmark. With respect to our standing instruction program, we typically assign a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than $1 million) executed between global financial institutions, known as the “interbank range.” Using the interbank range for the given day, we typically price purchases of currencies at or near the low end of this range and sales of currencies at or near the high end of this range. The standing instruction program Defined Spread Offering prices transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread to an objective market source for developed and certain emerging market currencies or to a reference rate computed by BNY Mellon for restricted and other currencies. A shift by custody clients from the standing instruction program to other trading options combined with the increasing competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. For the quarter ended March 31, 2012, our total revenue for all types of foreign exchange trading transactions was $136 million, which is approximately 4% of our total revenue. Approximately 46% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction program.

Distribution and servicing fees

Distribution and servicing fee revenue was $46 million in the first quarter of 2012 compared with $53 million in the first quarter of 2011 and $42 million in the fourth quarter of 2011. The year-over-year decrease primarily reflects higher money market fee waivers. The sequential increase primarily reflects lower money market fee waivers and increased equity market values.

Financing-related fees

Financing-related fees, which are primarily reported in the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees were $44 million in the first quarter of 2012, $43 million in the first quarter of 2011 and $38 million in the fourth quarter of 2011. Both increases were primarily driven by higher capital markets fees.

Investment income

 

Investment income                        
(in millions)    1Q12      4Q11      1Q11  

Corporate/bank-owned life insurance

   $ 34       $ 35       $ 37   

Lease residual gains

     34         20         13   

Seed capital gains

     24         3         2   

Equity investment income

     6         8         5   

Private equity gains

     4         3         10   

Total

   $ 102       $ 69       $ 67   

Investment income, which is primarily reported in the Other segment and Investment Management business, includes income from insurance contracts, lease residual gains and losses, gains and losses on seed capital investments, equity investment income and gains and losses on private equity investments. Investment income increased $35 million compared with the first quarter of 2011 and $33 million compared with the fourth quarter of 2011. Both increases primarily resulted from higher seed capital and leasing gains.

Other revenue

 

Other revenue                      
(in millions)    1Q12     4Q11     1Q11  

Asset-related gains (losses)

   $ (2   $ 69      $ 14   

Expense reimbursements from joint ventures

     10        10        9   

Other income (loss)

     29        (2     (9

Total

   $ 37      $ 77      $ 14   

Other revenue includes asset-related gains (losses), expense reimbursements from joint ventures, economic value payments and other income (loss). Asset-related gains (losses) 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 fees from transitional service agreements, foreign

 

 

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currency remeasurement gain (loss), other investments and various miscellaneous revenues.

Total other revenue increased $23 million in the first quarter of 2012 compared with the first quarter of 2011 and decreased $40 million compared with the fourth quarter of 2011. The year-over-year increase primarily reflects higher foreign currency remeasurement gains, partially offset by lower asset related gains. The sequential decline primarily resulted from the $98 million pre-tax gain on the

sale of the Shareowner Services business recorded in the fourth quarter of 2011, partially offset by higher foreign currency remeasurement gains.

Net securities gains (losses)

Net securities gains totaled $40 million in the first quarter of 2012, compared with net gains of $5 million in the first quarter of 2011 and net losses of $3 million in the fourth quarter of 2011.

 

 

Net interest revenue

 

Net interest revenue                                    
                       1Q12 vs.  
(dollars in millions)    1Q12     4Q11     1Q11     1Q11     4Q11  

Net interest revenue (non-FTE)

   $ 765      $ 780      $ 698        10 %     (2 )% 

Tax equivalent adjustment

     11        10        4        N/M        N/M   

Net interest revenue (FTE) – Non-GAAP

   $ 776      $ 790      $ 702        11     (2 )% 

Average interest-earning assets

   $ 236,331      $ 247,724      $ 190,179        24     (5 )% 

Net interest margin (FTE)

     1.32     1.27     1.49     (17 ) bps      5 bps   

bps - basis points.

 

Net interest revenue totaled $765 million in the first quarter of 2012 compared with $698 million in the first quarter of 2011 and $780 million in the fourth quarter of 2011. The year-over-year increase was primarily driven by higher average client deposits, increased investment in high-quality investment securities and higher loan levels, partially offset by narrower spreads and lower accretion. The sequential decrease was primarily driven by lower average client deposits and lower accretion, partially offset by increased investments in high-quality investment securities.

The net interest margin (FTE) was 1.32% in the first quarter of 2012 compared with 1.49% in the first quarter of 2011 and 1.27% in the fourth quarter of 2011. The year-over-year decrease in the net interest margin (FTE) was primarily driven by increased client deposits, nearly half of which were invested in liquid, lower-yielding assets. The sequential increase in the net interest margin (FTE) primarily reflects increased investments in high-quality investment securities and a decrease in lower-yielding interest-bearing deposits with banks.

 

 

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Average balances and interest rates

 

Average balances and interest rates    Quarter ended  
     March 31, 2012     Dec. 31, 2011     March 31, 2011  
(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)

   $ 35,095        1.30   $ 43,628        1.08   $ 57,637        0.90

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

     63,526        0.27        72,118        0.32        20,367        0.32   

Federal funds sold and securities purchased under resale agreements

     5,174        0.73        5,271        0.64        4,514        0.50   

Margin loans

     12,901        1.29        11,886        1.26        7,484        1.48   

Non-margin loans:

            

Domestic offices

     20,128        2.46        21,794        2.37        21,856        2.57   

Foreign offices

     10,180        1.77        10,556        1.54        9,226        1.44   
  

 

 

     

 

 

     

 

 

   

Total non-margin loans

     30,308        2.23        32,350        2.10        31,082        2.22   

Securities:

            

U.S. government obligations

     17,268        1.56        18,693        1.45        12,849        1.61   

U.S. government agency obligations

     32,347        2.44        25,006        2.58        20,221        2.98   

State and political subdivisions – tax exempt

     3,354        2.97        2,452        3.47        557        6.37   

Other securities

     33,839        2.84        33,830        3.19        31,770        3.43   

Trading securities

     2,519        2.78        2,490        2.94        3,698        2.44   
  

 

 

     

 

 

     

 

 

   

Total securities

     89,327        2.44        82,471        2.60        69,095        2.96   
  

 

 

     

 

 

     

 

 

   

Total interest-earning assets

   $ 236,331        1.56   $ 247,724        1.50   $ 190,179        1.80

Allowance for loan losses

     (392       (384       (494  

Cash and due from banks

     4,271          4,695          4,094     

Other assets

     49,690          52,200          49,577     

Assets of consolidated investment management funds

     11,444                11,839                14,342           

Total assets

   $ 301,344              $ 316,074              $ 257,698           

Liabilities

            

Interest-bearing liabilities:

            

Interest-bearing deposits:

            

Money market rate accounts

   $ 4,299        0.27   $ 4,666        0.27   $ 5,417        0.38

Savings

     787        0.30        1,163        0.19        1,600        0.16   

Certificates of deposit of $100,000 & over

     30        0.39        396        0.05        296        0.06   

Other time deposits

     33,588        0.08        35,624        0.07        31,823        0.09   

Demand deposits

     64        0.01        —          —          —          —     

Foreign offices

     86,670        0.15        88,494        0.22        77,379        0.19   
  

 

 

     

 

 

     

 

 

   

Total interest-bearing deposits

     125,438        0.14        130,343        0.18        116,515        0.17   

Federal funds purchased and securities sold under repurchase agreements

     8,584        (0.02     8,008        (0.07     5,172        0.07   

Trading liabilities

     1,153        1.55        1,225        1.62        2,764        1.86   

Other borrowed funds

     2,579        0.79        2,159        0.93        1,821        1.61   

Payables to customers and broker-dealers

     7,555        0.11        8,023        0.08        6,701        0.10   

Long-term debt

     20,538        1.79        19,546        1.55        17,014        1.87   
  

 

 

     

 

 

     

 

 

   

Total interest-bearing liabilities

   $ 165,847        0.34   $ 169,304        0.34   $ 149,987        0.40

Total noninterest-bearing deposits

     66,613          76,309          38,616     

Other liabilities

     24,248          25,432          22,350     

Liabilities and obligations of consolidated investment management funds

     10,159                10,516                13,114           

Total liabilities

     266,867          281,561          224,067     

Temporary equity

            

Redeemable noncontrolling interests

     72          55          76     

Permanent equity

            

Total BNY Mellon shareholders’ equity

     33,718          33,761          32,827     

Noncontrolling interests

     —            1          8     

Noncontrolling interests of consolidated investment management funds

     687                696                720           

Total permanent equity

     34,405                34,458                33,555           

Total liabilities, temporary equity and permanent equity

   $ 301,344              $ 316,074              $ 257,698           

Net interest margin—Taxable equivalent basis

             1.32             1.27             1.49
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                         1Q12 vs.  

(dollars in millions)

     1Q12        4Q11        1Q11        1Q11        4Q11   

Staff:

          

Compensation

   $ 861      $ 885      $ 876        (2 )%      (3 )% 

Incentives

     352        281        325        8        25   

Employee benefits

     240        216        223        8        11   

Total staff

     1,453        1,382        1,424        2        5   

Professional, legal and other purchased services

     299        322        283        6        (7

Net occupancy

     147        159        153        (4     (8

Software

     119        129        122        (2     (8

Distribution and servicing

     101        96        111        (9     5   

Furniture and equipment

     86        84        84        2        2   

Sub-custodian

     70        62        68        3        13   

Business development

     56        75        56        —          (25

Other

     320        274        277        16        17   

Subtotal

     2,651        2,583        2,578        3        3   

Amortization of intangible assets

     96        106        108        (11     (9

Restructuring charges

     (9     107        (6     N/M        N/M   

M&I expenses

     18        32        17        6        (44

Total noninterest expense – GAAP

   $ 2,756      $ 2,828      $ 2,697        2     (3 )% 

Total staff expense as a percent of total revenue

     40     39     39    

Full-time employees at period end

     47,800        48,700        48,400        (1 )%      (2 )% 

N/M—Not meaningful.

 

          
Noninterest expense excluding Shareowner Services                      1Q12 vs.  

(dollars in millions)

     1Q12        4Q11        1Q11        1Q11        4Q11   

Staff:

          

Compensation

   $ 861      $ 871      $ 862        —       (1 )% 

Incentives

     352        278        323        9        27   

Employee benefits

     240        213        219        10        13   

Total staff

     1,453        1,362        1,404        3        7   

Professional, legal and other purchased services

     299        310        272        10        (4

Net occupancy

     147        156        150        (2     (6

Software

     119        125        119        —          (5

Distribution and servicing

     101        96        111        (9     5   

Furniture and equipment

     86        83        83        4        4   

Sub-custodian

     70        62        68        3        13   

Business development

     56        74        56        —          (24

Other

     320        269        269        19        19   

Subtotal

     2,651        2,537        2,532        5        4   

Amortization of intangible assets

     96        103        105        (9     (7

Restructuring charges

     (9     107        (6     N/M        N/M   

M&I expenses

     18        32        17        6        (44

Total noninterest expense – Non-GAAP

   $ 2,756      $ 2,779      $ 2,648        4     (1 )% 

Total staff expense as a percent of total revenue

     40     40     39    

Full-time employees at period end

     47,800        47,800        47,500        1     —  

N/M—Not meaningful.

 

Total noninterest expense increased 2% compared with the first quarter of 2011 and decreased 3% (unannualized) compared with the fourth quarter of 2011. Excluding amortization of intangible assets, restructuring charges, merger and integration expenses (“M&I”) and the direct expenses related to Shareowner Services, noninterest expense increased 5% year-over-year and 4% (unannualized) sequentially. Both increases

primarily reflect higher litigation and legal expenses, as well as higher incentive expense due to the vesting of long-term stock awards for retirement-eligible employees and higher pension expense. Sequentially, we are beginning to realize the results of our operational excellence initiatives as business development, professional and other purchased services, compensation, net occupancy and software expenses decreased.

 

 

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The following staff and non-staff expense discussions exclude the impact of the Shareowner Services business.

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 55% of total noninterest expense in both the first quarter of 2012 and the first quarter of 2011 and 54% in the fourth quarter of 2011, excluding amortization of intangible assets, restructuring charges and M&I expenses.

Staff expense totaled $1.5 billion in the first quarter of 2012, an increase of 3% compared with the first quarter of 2011 and 7% (unannualized) compared with the fourth quarter of 2011. Both increases in staff expense primarily reflect higher incentive expense due to the vesting of long-term stock awards for retirement-eligible employees and higher pension expense, partially offset by lower compensation expense.

Non-staff expense

Non-staff expense, excluding amortization of intangible assets, restructuring charges and M&I expenses, totaled $1.2 billion in the first quarter of 2012, an increase of 6% compared with the first quarter of 2011 and 2% (unannualized) compared with the fourth quarter of 2011. The year-over-year increase primarily reflects higher litigation and legal expenses, partially offset by lower distribution and servicing expense. The sequential increase was driven by higher litigation expense, primarily offset by lower business development, professional and other purchased services, net occupancy and software expenses.

In the first quarter of 2012, we incurred $18 million of M&I expenses primarily related to the integration of the acquisitions of Global Investment Servicing on July 1, 2010 and BHF Asset Servicing GmbH on Aug. 2, 2010.

The financial services industry has seen a continuing increase in the level of litigation activity. As a result, we anticipate our legal and litigation costs to continue at elevated levels. For additional information on litigation matters, see Note 18 of the Notes to Consolidated Financial Statements.

As a result of our operational excellence initiatives, we are currently on track to achieve our anticipated pre-tax savings of $240-$260 million in 2012 on an annualized pre-tax basis.

Income taxes

The effective tax rate for the first quarter of 2012 was 28.7% compared with an effective tax rate of 29.3% in the first quarter of 2011 and 30.6% in the fourth quarter of 2011. For the components of the effective tax rate, see Note 11 of the Notes to Consolidated Financial Statement.

We expect the effective tax rate to be approximately 27-29% in the second quarter of 2012.

Under U.S. tax law, income from certain non-U.S. subsidiaries has not been subject to U.S. income tax as result of a deferral provision applicable to income that is derived in active conduct of a banking and financing business. This active financing deferral provision for these foreign subsidiaries expired for tax years beginning on Jan. 1, 2012. We do not anticipate a material impact to our 2012 financial statements if the law is not extended and will monitor the financial statement impact for subsequent years.

Review of businesses

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

Organization of our business

On Dec. 31, 2011, BNY Mellon sold its Shareowner Services business. In the first quarter of 2012, we reclassified the results of the Shareowner Services business from the Investment Services business to the Other segment. The reclassification did not impact the consolidated results. All prior periods have been restated.

Business accounting principles

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

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

 

 

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The results of our businesses may be influenced by client activities that vary by quarter. In the second quarter, we typically experience an increase in securities lending fees due to an increase in demand to borrow securities outside of the United States. In the third quarter, depositary receipts revenue is

typically higher due to an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client activity. 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 following table presents the value of certain market indices at period end and on an average basis.

 

Market indices                                            1Q12 vs.  
   1Q11      2Q11      3Q11      4Q11      1Q12      1Q11     4Q11  

S&P 500 Index (a)

     1326         1321         1131         1258         1408         6     12

S&P 500 Index – daily average

     1302         1318         1227         1224         1347         3        10   

FTSE 100 Index (a)

     5909         5946         5128         5572         5768         (2     4   

FTSE 100 Index – daily average

     5945         5906         5470         5424         5818         (2     7   

MSCI World Index (a)

     1335         1331         1104         1183         1312         (2     11   

MSCI World Index – daily average

     1320         1332         1217         1169         1268         (4     8   

Barclays Capital Aggregate BondSM Index (a)

     328         341         346         347         351         7        1   

NYSE and NASDAQ share volume (in billions)

     225         213         250         206         186         (17     (10

JPMorgan G7 Volatility Index – daily average (b)

     11.07         11.21         12.60         12.95         10.39         (6     (20
(a) Period end.
(b) The JPMorgan G7 Volatility Index is based on the implied volatility in 3-month currency options.

 

Fee revenue in Investment Management, and to a lesser extent Investment Services, is impacted by the value of market indices. At March 31, 2012, using the S&P 500 Index as a proxy for the global equity markets, we estimate that a 100-point change in the value of the S&P 500 Index, sustained for one year,

would impact fee revenue by approximately 1% and fully diluted earnings per common share by $0.03 to $0.05. If global equity markets over- or under-perform the S&P 500 Index, the impact to fee revenue and earnings per share could be different.

 

 

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

 

For the quarter ended March 31, 2012

 

  

Investment

Management

   

Investment

Services

   

Other

   

Consolidated

 

(dollar amounts

in millions)

        

Fee and other revenue

   $ 852 (a)    $ 1,854      $ 164      $ 2,870 (a) 

Net interest revenue

     55        644        66        765   

Total revenue

     907        2,498        230        3,635   

Provision for credit losses

     -        16        (11     5   

Noninterest expense

     667        1,829        260        2,756   

Income (loss) before taxes

   $ 240 (a)    $ 653      $ (19   $ 874 (a) 

Pre-tax operating margin (b)

     26     26     N/M        24

Average assets

   $ 36,475      $ 215,899      $ 48,970      $ 301,344   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 619      $ 1,781      $ 260      $ 2,660   

Income (loss) before taxes

     288 (a)      701        (19     970 (a) 

Pre-tax operating margin (b)

     32     28     N/M        27
(a) Total fee and other revenue includes income from consolidated investment management funds of $43 million, net of noncontrolling interests of $11 million, for a net impact of $32 million. Income before taxes includes noncontrolling interests of $11 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

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For the quarter ended Dec. 31, 2011

 

                            
(dollar amounts
in millions)
  

Investment

Management

   

Investment

Services

    Other     Consolidated  

Fee and other revenue

   $ 767 (a)    $ 1,781      $ 240      $ 2,788 (a) 

Net interest revenue

     55        634        91        780   

Total revenue

     822        2,415        331        3,568   

Provision for credit losses

     -        -        23        23   

Noninterest expense

     685        1,756        387        2,828   

Income (loss) before taxes

   $ 137 (a)    $ 659      $ (79   $ 717 (a) 

Pre-tax operating margin (b)

     17     27     N/M        20

Average assets

   $ 37,163      $ 228,668      $ 50,243      $ 316,074   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 632      $ 1,706      $ 384      $ 2,722   

Income (loss) before taxes

     190 (a)      709        (76     823 (a) 

Pre-tax operating margin (b)

     23     29     N/M        23
(a) Total fee and other revenue includes a loss from consolidated investment management funds of $5 million, net of loss attributable to noncontrolling interests of $28 million, for a net impact of $23 million. Income before taxes includes a loss attributable to noncontrolling interests of $28 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

For the quarter ended Sept. 30, 2011

 

                            
(dollar amounts
in millions)
  

Investment

Management

   

Investment

Services

    Other     Consolidated  

Fee and other revenue

   $  757  (a)    $ 2,028      $ 121      $  2,906  (a) 

Net interest revenue

     51        661        63        775   

Total revenue

     808        2,689        184        3,681   

Provision for credit losses

     -        -        (22     (22

Noninterest expense

     675        1,900        196        2,771   

Income (loss) before taxes

   $  133 (a)    $ 789      $ 10      $ 932  (a) 

Pre-tax operating margin (b)

     16     29     N/M        25

Average assets

   $ 36,949      $ 220,930      $ 53,584      $ 311,463   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 622      $ 1,851      $ 192      $ 2,665   

Income (loss) before taxes

     186 (a)      838        14        1,038 (a) 

Pre-tax operating margin (b)

     23     31     N/M        28
(a) Total fee and other revenue includes income from consolidated investment management funds of $32 million, net of noncontrolling interests of $13 million, for a net impact of $19 million. Income before taxes includes noncontrolling interests of $13 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

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For the quarter ended June 30, 2011

 

(dollar amounts

in millions)

  

Investment
Management

   

Investment
Services

    Other     Consolidated  

Fee and other revenue

   $  862   (a)    $ 1,967      $ 269      $  3,098   (a) 

Net interest revenue

     48        650        33        731   

Total revenue

     910        2,617        302        3,829   

Provision for credit losses

     1        -        (1     -   

Noninterest expense

     694        1,825        297        2,816   

Income (loss) before taxes

   $  215   (a)    $ 792      $ 6      $  1,013   (a) 

Pre-tax operating margin (b)

     24     30     N/M        26

Average assets

   $ 36,741      $ 191,756      $ 49,983      $ 278,480   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 641      $ 1,775      $ 292      $ 2,708   

Income (loss) before taxes

     268  (a)      842        11        1,121   (a) 

Pre-tax operating margin (b)

     29     32     N/M        29
(a) Total fee and other revenue includes income from consolidated investment management funds of $63 million, net of noncontrolling interests of $21 million, for a net impact of $42 million. Income before taxes includes noncontrolling interests of $21 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

For the quarter ended March 31, 2011    Investment     Investment                
(dollar amounts in millions)    Management     Services     Other     Consolidated  

Fee and other revenue

   $ 868 (a)    $ 1,889      $ 147      $ 2,904 (a) 

Net interest revenue

     52        621        25        698   

Total revenue

     920        2,510        172        3,602   

Noninterest expense

     682        1,752        263        2,697   

Income (loss) before taxes

   $ 238 (a)    $ 758      $ (91   $ 905 (a) 

Pre-tax operating margin (b)

     26     30     N/M        25

Average assets

   $ 37,315      $ 176,162      $ 44,221      $ 257,698   

Excluding amortization of intangible assets:

        

Noninterest expense

   $ 627      $ 1,702      $ 260      $ 2,589   

Income (loss) before taxes

     293 (a)      808        (88     1,013 (a) 

Pre-tax operating margin (b)

     32     32     N/M        28
(a) Total fee and other revenue includes income from consolidated investment management funds of $110 million, net of noncontrolling interests of $44 million, for a net impact of $66 million. Income before taxes includes noncontrolling interests of $44 million.
(b) Income before taxes divided by total revenue.
N/M – Not meaningful.

 

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Investment Management business

 

(dollar amounts in millions,

                                      1Q12 vs.  

unless otherwise noted)

   1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Revenue:

              

Investment management fees:

              

Mutual funds

   $ 283      $ 290      $ 263      $ 237      $ 260        (8 )%      10

Institutional clients

     319        319        311        299        322        1        8   

Wealth management

     164        163        157        154        157        (4     2   

Investment management fees

     766        772        731        690        739        (4     7   

Performance fees

     17        18        11        47        16        (6     N/M   

Distribution and servicing

     51        48        41        41        45        (12     10   

Other (a)

     34        24        (26     (11     52        N/M        N/M   

Total fee and other revenue (a)

     868        862        757        767        852        (2     11   

Net interest revenue

     52        48        51        55        55        6        -   

Total revenue

     920        910        808        822        907        (1     10   

Provision for credit losses

     -        1        -        -        -        N/M        N/M   

Noninterest expense (ex. amortization of intangible assets)

     627        641        622        632        619        (1     (2

Income before taxes (ex. amortization of intangible assets)

     293        268        186        190        288        (2     52   

Amortization of intangible assets

     55        53        53        53        48        (13     (9

Income before taxes

   $ 238      $ 215      $ 133      $ 137      $ 240        1     75

Pre-tax operating margin

     26     24     16     17     26    

Pre-tax operating margin (ex. amortization of intangible assets
and net of distribution and servicing expense) (b)

     36     33     26     26     36    

Wealth management:

              

Average loans

   $ 6,825      $ 6,884      $ 6,958      $ 7,209      $ 7,422        9     3

Average deposits

   $ 9,272      $ 8,996      $ 10,392      $ 11,761      $ 11,491        24     (2 )% 

 

(a) Total fee and other revenue includes the impact of the consolidated investment management funds. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 45. Additionally, other revenue includes asset servicing and treasury services revenue.
(b) Distribution and servicing expense is netted with the distribution and servicing revenue for the purpose of this calculation of pre-tax operating margin. Distribution and servicing expense totaled $110 million, $108 million, $99 million, $95 million and $100 million, respectively.
N/M – Not meaningful.

 

                                              
AUM trends (a)                                   1Q12 vs.  
(in billions)    1Q11     2Q11     3Q11     4Q11      1Q12     1Q11     4Q11  

AUM at period end, by product type:

               

Equity securities

   $ 417      $ 428      $ 354      $ 390       $ 429        3     10

Fixed income securities

     362        398        419        437         451        25        3   

Money market

     337        337        321        328         319        (5     (3

Alternative investments and overlay

     113        111        104        105         109        (4     4   

Total AUM

   $ 1,229      $ 1,274      $ 1,198      $ 1,260       $ 1,308        6     4

AUM at period end, by client type:

               

Institutional

   $ 701      $ 733      $ 719      $ 757       $ 829        18     10

Mutual funds

     451        462        406        427         404        (10     (5

Private client

     77        79        73        76         75        (3     (1

Total AUM

   $ 1,229      $ 1,274      $ 1,198      $ 1,260       $ 1,308        6     4

Changes in market value of AUM:

               

Beginning balance

   $ 1,172      $ 1,229      $ 1,274      $ 1,198       $ 1,260       

Net inflows (outflows):

               

Long-term

     31        32        4        16         7       

Money market

     (5     (1     (15     7         (9                

Total net inflows (outflows)

     26        31        (11     23         (2    

Net market/currency impact

     31        14        (65     39         50                   

Ending balance

   $ 1,229      $ 1,274      $ 1,198      $ 1,260       $ 1,308        6     4

 

(a) Excludes securities lending cash management assets.

 

16    BNY Mellon


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Business description

Our Investment Management business is comprised of our affiliated investment management boutiques and wealth management business. See page 19 of the 2011 Annual Report for additional information on our Investment Management business.

Review of financial results

Investment management and performance fees are dependent on the overall level and mix of AUM and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. Assets under management were a record $1.31 trillion at March 31, 2012 compared with $1.23 trillion at March 31, 2011 and $1.26 trillion at Dec. 31, 2011. The year-over-year increase primarily reflects net new business and higher market values. On a sequential basis, the increase resulted from higher market values.

Net long-term inflows were $7 billion and net short-term outflows were $9 billion in the first quarter of 2012. Long-term inflows benefited from fixed income and active equity assets.

Revenue generated in the Investment Management business includes 45% from non-U.S. sources in the first quarter of 2012 compared with 41% in the first quarter of 2011 and 44% in the fourth quarter of 2011.

In the first quarter of 2012, the Investment Management business had pre-tax income of $240 million compared with $238 million in the first quarter of 2011 and $137 million in the fourth quarter of 2011. Excluding amortization of intangible assets, pre-tax income was $288 million in the first quarter of 2012 compared with $293 million in the first quarter of 2011 and $190 million in the fourth quarter of 2011. Investment Management results compared with both prior periods reflect the impact of changes in equity values, money market fee waivers and net new business.

Investment management fees in the Investment Management business were $739 million in the first quarter of 2012 compared with $766 million in the first quarter of 2011 and $690 million in the fourth quarter of 2011. The year-over-year decrease was driven by higher money market fee waivers, partially offset by net new business. The sequential increase reflects higher market values, lower money market fee waivers and net new business.

Performance fees were $16 million in the first quarter of 2012 compared with $17 million in the first quarter of 2011 and $47 million in the fourth quarter of 2011. The sequential decrease primarily reflects seasonality.

In the first quarter of 2012, 35% of investment management fees in the Investment Management business were generated from managed mutual fund fees. These fees are based on the daily average net assets of each fund and the management fee paid by that fund. Managed mutual fund fee revenue was $260 million in the first quarter of 2012 compared with $283 million in the first quarter of 2011 and $237 million in the fourth quarter of 2011. The year-over-year decrease primarily reflects higher money market fee waivers. The sequential increase primarily resulted from lower money market fee waivers, improved equity markets and net new business.

Distribution and servicing fees were $45 million in the first quarter of 2012 compared with $51 million in the first quarter of 2011 and $41 million in the fourth quarter of 2011. The year-over-year decrease primarily reflects higher money market fee waivers. The sequential increase primarily reflects lower money market fee waivers.

Other fee revenue was $52 million in the first quarter of 2012 compared with $34 million in the first quarter of 2011 and a loss of $11 million in the fourth quarter of 2011. Both increases were primarily driven by higher seed capital gains. Sequentially, the increase also reflects a $30 million write-down of an equity investment recorded in the fourth quarter of 2011.

Net interest revenue was $55 million in the first quarter of 2012 compared with $52 million in the first quarter of 2011 and $55 million in the fourth quarter of 2011. The year-over-year increase primarily resulted from higher average loans and deposits. Average loans increased 9% year-over-year and 3% sequentially; average deposits increased 24% year-over-year and decreased 2% sequentially.

Noninterest expense (excluding amortization of intangible assets) was $619 million in the first quarter of 2012 compared with $627 million in the first quarter of 2011 and $632 million in the fourth quarter of 2011. The year-over-year decrease was driven by lower distribution and servicing expense and lower professional, legal and other purchased services. The sequential decrease primarily resulted from lower incentive expense due to seasonally lower performance fees and lower business development expense, partially offset by higher distribution and servicing expense.

 

 

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Investment Services business

 

                                                    
                                   1Q12 vs.  
(dollar amounts in millions, unless otherwise noted)    1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Revenue:

              

Investment services fees:

              

Asset servicing

   $ 890      $ 943      $ 894      $ 858      $ 915        3     7

Issuer services

     292        314        401        245        251        (14     2   

Clearing services

     292        292        297        278        303        4        9   

Treasury services

     133        134        132        133        136        2        2   

Total investment services fees

     1,607        1,683        1,724        1,514        1,605        -        6   

Foreign exchange and other trading revenue

     209        203        236        196        176        (16     (10

Other (a)

     73        81        68        71        73        -        3   

Total fee and other revenue (a)

     1,889        1,967        2,028        1,781        1,854        (2     4   

Net interest revenue

     621        650        661        634        644        4        2   

Total revenue

     2,510        2,617        2,689        2,415        2,498        -        3   

Provision for credit losses

     -        -        -        -        16        N/M        N/M   

Noninterest expense (ex. amortization of intangible assets)

     1,702        1,775        1,851        1,706        1,781        5        4   

Income before taxes (ex. amortization of intangible assets)

     808        842        838        709        701        (13     (1

Amortization of intangible assets

     50        50        49        50        48        (4     (4

Income before taxes

   $ 758      $ 792      $ 789      $ 659      $ 653        (14 )%      (1 )% 

Pre-tax operating margin

     30     30     29     27     26    

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

     32     32     31     29     28    

Investment services fees as a percentage of noninterest expense (b)

     96     96     98     90     94    

Securities lending revenue

   $ 27      $ 52      $ 32      $ 35      $ 39        44     11

Metrics:

              

Average loans

   $ 20,554      $ 22,891      $ 22,879      $ 26,804      $ 25,902        26     (3 )% 

Average deposits

   $ 139,342      $ 153,863      $ 181,848      $ 188,539      $ 176,811        27     (6 )% 

Asset servicing:

              

New business wins (AUC) (in billions)

   $ 496      $ 196      $ 96      $ 431      $ 453       

Corporate Trust:

              

Total debt serviced (in trillions)

   $ 11.9      $ 11.8      $ 11.9      $ 11.8      $ 11.9        -     1

Number of deals administered

     133,416        133,262        134,843        133,850        133,319        -     -

Depositary Receipts:

              

Number of sponsored programs

     1,367        1,386        1,384        1,389        1,391        2     -

Clearing services:

              

DARTS volume (in thousands)

     207.2        196.5        207.7        178.7        196.6        (5 )%      10

Average active clearing accounts U.S. (in thousands)

     5,289        5,486        5,503        5,429        5,413        2     -

Average long-term mutual fund assets (U.S. platform)

   $ 287,682      $ 306,193      $ 287,573      $ 287,562      $ 306,212        6     6

Average margin loans

   $ 6,978      $ 7,506      $ 7,351      $ 7,548      $ 7,900        13     5

Broker-Dealer:

              

Average collateral management balances (in billions)

   $ 1,806      $ 1,845      $ 1,872      $ 1,866      $ 1,929        7     3

Treasury services:

              

Global payments transaction volume (in thousands)

     10,761        10,944        11,088        10,856        10,838        1     -

 

(a) Total fee and other revenue includes investment management fees and distribution and servicing revenue.
(b) Noninterest expense excludes amortization of intangible assets, support agreement charges and litigation expense.

 

Assets under custody and administration trend                                            1Q12 vs.  
      1Q11      2Q11      3Q11      4Q11      1Q12      1Q11     4Q11  

Market value of assets under custody and
administration at period-end (in trillions) (a)

   $ 25.5       $ 26.3       $ 25.9       $ 25.8       $ 26.6         4     3

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

   $ 278       $ 273       $ 250       $ 269       $ 265         (5 )%      (1 )% 

 

(a) Includes the assets under custody or administration of CIBC Mellon Global Securities Services Company, a joint venture with the Canadian Imperial Bank of Commerce, of $1.1 trillion at March 31, 2011, $1.1 trillion at June 30, 2011, $1.0 trillion at Sept. 30, 2011, $1.1 trillion at Dec. 31, 2011 and $1.2 trillion at March 31, 2012.
(b) Represents the total amount of securities on loan managed by the Investment Services business.

 

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Business description

Our Investment Services business provides global custody and related services, broker-dealer services, alternative investment services, corporate trust and depositary receipt, as well as clearing services and global payment/working capital solutions to institutional clients. See page 22 of the 2011 Annual Report for additional information on our Investment Services business.

We are one of the leading global securities servicing providers with a total of $26.6 trillion of assets under custody and administration at March 31, 2012. We are the largest custodian for U.S. corporate and public pension plans, and we service 44% of the top 50 endowments. We are a leading custodian in the UK and service 20% of UK pensions. European asset servicing continues to grow across all products, reflecting significant cross-border investment and capital flows.

We are one of the largest providers of fund services in the world, servicing over $6.5 trillion in assets. We are the third largest fund administrator in the alternative investment services industry and service 43% of the funds in the U.S. exchange-traded funds marketplace.

BNY Mellon is a leader in both global securities and U.S. Government securities clearance. We clear and settle equity and fixed income transactions in over 100 markets and handle most of the transactions cleared through the Federal Reserve Bank of New York for 17 of the 21 primary dealers. We are an industry leader in collateral management, servicing $1.8 trillion as a clearing bank in tri-party balances worldwide at March 31, 2012.

In connection with our role as a clearing and custody bank for the tri-party repurchase (“repo”) transaction market, we work with dealers who use repos to finance their securities by selling them to counterparties, agreeing to buy them back at a later date. In tri-party repos, a clearing and custody bank such as BNY Mellon acts as the intermediary between a dealer and its counterparty in settling the transaction and providing mark-to-market and other services.

In securities lending, we are one of the largest lenders of U.S. Treasury securities and depositary receipts and service a lending pool of approximately $3 trillion in 28 markets. We are one of the largest global providers of performance and risk analytics reporting, with $9.6 trillion in assets under measurement.

 

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

We serve as depositary for 1,391 sponsored American and global depositary receipt programs at March 31, 2012, acting in partnership with leading companies from more than 65 countries – a 62% global market share.

With a network of more than 2,000 correspondent financial institutions, we help clients in their efforts to optimize cash flow, manage liquidity and make payments more efficiently around the world in more than 100 currencies. We are the fifth largest Fedwire and fourth largest CHIPS payment processor, processing about 170,000 global payments daily totaling an average of $1.4 trillion.

Pershing, our clearing service, takes a consultative approach, working with more than 1,500 financial organizations and 100,000 investment professionals who collectively represent approximately 5.5 million individual and institutional investors by delivering dependable operational support; robust trading services; flexible technology; an expansive array of investment solutions, including managed accounts, mutual funds and cash management; practice management support; and service excellence.

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

BNY Mellon acts as trustee and document custodian for certain mortgage-backed security (“MBS”) securitization trusts. The role of trustee for MBS securitizations is limited; our primary role as trustee is to calculate and distribute monthly bond payments to bondholders. As a document custodian, we hold the mortgage, note, and related documents provided to us by the loan originator or seller and provide periodic reporting to these parties. BNY Mellon, either as document custodian or trustee, does not receive mortgage underwriting files (the files that contain information related to the creditworthiness of the borrower). As trustee or custodian, we have no responsibility or liability for the quality of the portfolio; we are liable only for performance of our limited duties as described above and in the trust document. BNY Mellon is indemnified by the servicers or directly from trust assets under the governing agreements. BNY Mellon may appear as the named plaintiff in legal actions brought by servicers in foreclosure and other related proceedings because the trustee is the nominee owner of the mortgage loans within the trusts.

 

 

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Review of financial results

Assets under custody and administration at March 31, 2012 were a record $26.6 trillion, an increase of 4% from $25.5 trillion at March 31, 2011 and 3% from $25.8 trillion at Dec. 31, 2011. Both increases were driven by net new business and higher market values. Assets under custody and administration were comprised of 32% equity securities and 68% fixed income securities at March 31, 2012 and March 31, 2011 and 30% equity securities and 70% fixed income securities at Dec. 31, 2011. Assets under custody and administration at March 31, 2012 consisted of assets related to custody, mutual funds and corporate trust businesses of $21.0 trillion, broker-dealer service assets of $3.5 trillion, and all other assets of $2.1 trillion.

Income before taxes was $653 million in the first quarter of 2012 compared with $758 million in the first quarter of 2011 and $659 million in the fourth quarter of 2011. Income before taxes, excluding amortization of intangible assets, was $701 million in the first quarter of 2012 compared with $808 million in the first quarter of 2011 and $709 million in the fourth quarter of 2011. Investment Services results reflect net new business, changes in equity and fixed income market values, lower foreign exchange fee revenue and the adverse impact of the low interest rate environment.

Revenue generated in the Investment Services businesses includes 36% from non-U.S. sources in the first quarter of 2012, 37% in the first quarter of 2011 and 35% in the fourth quarter of 2011.

Investment services fees decreased $2 million compared with the first quarter of 2011 and increased $91 million, or 6% (unannualized), sequentially.

 

   

Asset servicing revenue (global custody, broker-dealer services and alternative investment services) was $915 million in the first quarter of 2012 compared with $890 million in the first quarter of 2011 and $858 million in the fourth quarter of 2011. Both increases reflect net new business and higher equity markets, as well as higher securities lending revenue driven by wider spreads.

   

Issuer services revenue (Corporate Trust and Depositary Receipts) was $251 million in the first quarter of 2012

   

compared with $292 million in the first quarter of 2011 and $245 million in the fourth quarter of 2011. The year-over-year decrease primarily resulted from lower money market related fees and lower trust fees related to the weakness in structured products in Corporate Trust and lower Depositary Receipts revenue. Sequentially, higher Depositary Receipts revenue was partially offset by lower Corporate Trust fees.

   

Clearing services revenue (Pershing) was $303 million in the first quarter of 2012 compared with $292 million in the first quarter of 2011 and $278 million in the fourth quarter of 2011. The year-over-year increase was driven by net new business and growth in mutual fund assets and retirement accounts, partially offset by lower trading volumes and higher money market fee waivers. The sequential increase primarily reflects higher trading volumes and growth in mutual fund assets.

Foreign exchange and other trading revenue decreased 16% compared with the first quarter of 2011 and 10% (unannualized) sequentially. The year-over-year decrease primarily reflects lower volumes and volatility, while sequentially, volumes were unchanged and volatility decreased 20%.

Net interest revenue was $644 million in the first quarter of 2012 compared with $621 million in the first quarter of 2011 and $634 million in the fourth quarter of 2011. The year-over-year increase reflects higher average client deposits, partially offset by lower accretion. The sequential increase reflects wider spreads on deposit balances, partially offset by lower accretion.

The provision for credit losses of $16 million in the first quarter of 2012 primarily resulted from a broker-dealer customer that filed for bankruptcy. This charge was previously recorded in the Other segment in the fourth quarter of 2011.

Noninterest expense (excluding amortization of intangible assets) increased 5% compared with the first quarter of 2011 and 4% (unannualized) sequentially. Both increases primarily reflect higher litigation and legal expenses. The sequential increase also reflects higher volume-related expenses and expenses in support of new business, partially offset by expense control initiatives.

 

 

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Other segment

 

 

(dollars in millions)

   1Q11     2Q11     3Q11     4Q11     1Q12  

Revenue:

          

Fee and other revenue

   $ 147      $ 269      $ 121      $ 240      $ 164   

Net interest revenue

     25        33        63        91        66   

Total revenue

     172        302        184        331        230   

Provision for credit losses

     -        (1     (22     23        (11

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

     249        274        180        245        251   

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

     (77     29        26        63        (10

Amortization of intangible assets

     3        5        4        3        -   

Restructuring charges

     (6     (7     (5     107        (9

M&I expenses

     17        25        17        32        18   

Income (loss) before taxes

   $ (91   $ 6      $ 10      $ (79   $ (19 ) 

Average loans and leases

   $ 11,187      $ 10,553      $ 10,652      $ 10,223      $ 9,885   

 

See page 24 of the 2011 Annual Report for a description of the Other segment. On Dec. 31, 2011, BNY Mellon sold its Shareowner Services business. In the first quarter of 2012, we reclassified the results of the Shareowner Services business to the Other segment from the Investment Services business.

Review of financial results

Income before taxes was a loss of $19 million in the first quarter of 2012 compared with a loss of $91 million in the first quarter of 2011 and a loss of $79 million in the fourth quarter of 2011.

Total fee and other revenue increased $17 million compared with the first quarter of 2011 and decreased $76 million compared with the fourth quarter of 2011. The year-over-year increase reflects higher net securities gains, higher leasing gains and an improved credit valuation adjustment, partially offset by the impact of the sale of the Shareowner Services business. The sequential decrease was driven by the sale of the Shareowner Services business, partially offset by higher net securities gains and higher leasing gains.

Net interest revenue increased $41 million compared with the first quarter of 2011 and decreased $25 million compared with the fourth quarter of 2011. The year-over-year growth reflects increased investments in high-quality investment securities. Sequentially, the decrease was primarily driven by lower average deposits, partially offset by increased investment securities.

Noninterest expense (excluding amortization of intangible assets, restructuring charges and M&I expenses) increased $2

million compared with the first quarter of 2011 and $6 million compared with the fourth quarter of 2011. Both increases were primarily driven by higher incentive expense due to the vesting of long-term awards for retirement-eligible employees and higher pension expense, partially offset by the impact of the sale of the Shareowner Services business.

Critical accounting estimates

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements contained in the 2011 Annual Report. Our more critical accounting estimates are those related to the allowance for loan losses and allowance for lending-related commitments, fair value of financial instruments, other-than-temporary impairment (“OTTI”), goodwill and other intangibles and pension accounting, as referenced below.

 

Critical policy

  

Reference

Allowance for loan losses and allowance for lending-related commitments    2011 Annual Report, pages 29 and 30.

Fair value of financial instruments

   2011 Annual Report, pages 30 through 32.

OTTI

   2011 Annual Report, page 32. See page 27 of this Form 10-Q for the impact of market assumptions on portions of our securities portfolio.

Goodwill and other intangibles

   2011 Annual Report, pages 32 through 34. Also, see below.

Pension accounting

   2011 Annual Report, pages 34 and 35.
 

 

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Goodwill and other intangibles

BNY Mellon’s three business segments include seven reporting units for which goodwill impairment testing is performed on an annual basis, in the second quarter. GAAP also requires that an interim test be done whenever events or circumstances occur that may indicate that it is more likely than not that the fair value of any reporting unit might be less than its carrying value.

The Company performed an interim goodwill test during the fourth quarter of 2011. As of the date of the fourth quarter 2011 interim test, the fair values of six of the Company’s reporting units were substantially in excess of the respective reporting units’ carrying value. The Asset Management reporting unit, with $7.7 billion of allocated goodwill, which is one of the two reporting units in the Investment Management segment, exceeded its carrying value by approximately 10%. See “Critical accounting estimates” in the 2011 Annual Report for additional information on the annual and fourth quarter 2011 interim goodwill impairment tests.

Although there was no specific event or circumstance in the first quarter of 2012 that would require an interim test, BNY Mellon conducted an additional goodwill impairment analysis of the Asset Management reporting unit. Using assumptions generally consistent with the interim test conducted in the fourth quarter of 2011, the fair value of this reporting unit was estimated using both an income approach and a market approach. The results of the first quarter 2012 goodwill impairment test of the Asset Management reporting unit indicated that the fair value estimates of the reporting unit exceeded its carrying value by approximately 15%.

For the Asset Management reporting unit, in the future, small changes in the assumptions could produce a non-cash goodwill impairment, which would have no effect on our regulatory capital ratios. In addition to the other factors and assumptions discussed beginning on page 33 of our 2011 Annual Report, certain money market fee waiver practices and changes in the level of assets under management could have an effect on Asset Management broadly, as well as the fair value of this reporting unit.

Consolidated balance sheet review

At March 31, 2012, total assets were $300 billion compared with $325 billion at Dec. 31, 2011. The decrease in consolidated total assets resulted from a reduction in client deposits. Deposits totaled $192 billion at March 31, 2012 and $219 billion at Dec. 31, 2011. At March 31, 2012, total interest-bearing deposits were 54% of total interest-earning assets. Total assets averaged $301 billion in the first quarter of 2012 compared with $258 billion in the first quarter of 2011 and $316 billion in the fourth quarter of 2011. The fluctuations compared with both prior periods primarily reflect changes in the levels of client deposits. Total deposits averaged $192 billion in the first quarter of 2012, $155 billion in the first quarter of 2011 and $207 billion in the fourth quarter of 2011.

At March 31, 2012, we had approximately $40 billion of liquid funds and $66 billion of cash (including approximately $62 billion of overnight deposits with the Federal Reserve and other central banks) for a total of approximately $106 billion of available funds. This compares with available funds of $135 billion at Dec. 31, 2011. Our percentage of liquid assets to total assets was 36% at March 31, 2012 compared with 42% at Dec. 31, 2011. The decreases in available funds and liquid assets to total assets were due to a decline in noninterest-bearing deposits after the sharp increase in deposit levels experienced at year-end relating to global market uncertainties. At March 31, 2012, of our $40 billion in liquid funds, approximately $35 billion are placed in interest-bearing deposits with large, highly rated global financial institutions with a weighted-average life to maturity of approximately 54 days. Of the $35 billion, $5.6 billion was placed with banks in the Eurozone.

Investment securities were $88 billion, or 29% of total assets, at March 31, 2012 compared with $82 billion, or 25% of total assets, at Dec. 31, 2011. The increase primarily reflects larger investments in agency RMBS and state and political subdivision securities, as well as an improvement in the unrealized gain of our investment securities portfolio.

Loans were $43 billion, or 14% of total assets, at March 31, 2012 compared with $44 billion, or 14% of total assets, at Dec. 31, 2011. The decrease in loan levels primarily reflects lower overdrafts, partially offset by an increase in margin loans.

 

 

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Long-term debt increased to $20.3 billion at March 31, 2012 from $19.9 billion at Dec. 31, 2011, primarily due to the issuance of $1.25 billion of senior notes, partially offset by $750 million of senior debt that matured in the first quarter of 2012.

Total shareholders’ equity applicable to BNY Mellon was $34.0 billion at March 31, 2012 and $33.4 billion at Dec. 31, 2011. The increase in total shareholders’ equity primarily reflects earnings retention and an increase in the value of our investment securities portfolio, partially offset by share repurchases.

BNY Mellon, through its involvement in the Fixed Income Clearing Corporation, settles government securities transactions on a net basis for payment and delivery through the Fedwire system. As a result, at March 31, 2012, the assets and liabilities of BNY Mellon were reduced by $10 million for the netting of repurchase agreements and reverse repurchase agreement transactions executed with the same counterparty under standardized Master Repurchase Agreements.

Exposure in Ireland, Italy, Spain and Portugal

The following tables present our on- and off-balance sheet exposure in Ireland, Italy, Spain, and Portugal at March 31, 2012 and Dec. 31, 2011. We have provided expanded disclosure on these countries as they have experienced particular market focus on credit quality and are countries experiencing economic concerns. Where appropriate, we are offsetting the risk associated with the gross exposure in these countries with collateral that has been pledged, which primarily consists of cash or marketable securities, or by transferring the risk to a third-party guarantor in another country.

BNY Mellon has a limited economic interest in the performance of assets of consolidated investment management funds, and therefore they are excluded from this presentation. The liabilities of consolidated investment management funds represent the interest of the noteholders of the funds and are solely dependent on the value of the assets. Any loss in the value of assets of consolidated investment management funds would be incurred by the fund’s noteholders.

At March 31, 2012 and Dec. 31, 2011, BNY Mellon had no exposure to Greece and no sovereign exposure to the countries disclosed below.

Our exposure to Ireland is principally related to Irish-domiciled investment funds. Servicing provided to these funds and fund families may result in overdraft exposure.

See “Risk management” in the 2011 Annual Report for additional information on how our exposures are managed.

 

 

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Exposure in the tables below reflects the country of operations and risk of the immediate counterparty.

 

On- and off-balance sheet exposure at March 31, 2012                                        

 

(in millions)

   Ireland      Italy      Spain      Portugal      Total  

On-balance sheet exposure

              

Gross:

              

Interest-bearing deposits with banks (a)

   $ 100       $ 23       $ 12       $ -       $ 135   

Investment securities (primarily European

              

Floating Rate Notes) (b)

     215         153         28         -         396   

Loans and leases (c)

     339         64         14         -         417   

Trading assets (d)

     32         37         16         1         86   

Total gross on-balance sheet exposure

     686         277         70         1         1,034   

Less:

              

Collateral

     70         31         7         1         109   

Guarantees

     -         2         1         -         3   

Total collateral and guarantees

     70         33         8         1         112   

Total net on-balance sheet exposure

   $ 616       $ 244       $ 62       $ -       $ 922   

Off-balance sheet exposure

              

Gross:

              

Lending-related commitments (e)

   $ 223       $ -       $ -       $ -       $ 223   

Letters of credit (f)

     49         4         14         -         67   

Total gross off-balance sheet exposure

     272         4         14         -         290   

Less:

              

Collateral