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BK > SEC Filings for BK > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for BANK OF NEW YORK MELLON CORP


8-Nov-2013

Quarterly Report

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

General

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

Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2012 ("2012 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, certain measures, which are noted as "Non-GAAP financial 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 GAAP and Non-GAAP financial measures" beginning on page 52 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 investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of Sept. 30, 2013, BNY Mellon had $27.4 trillion in assets under custody and/or administration, and $1.5 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments.

Key third quarter 2013 and subsequent events

Proposed rulemaking concerning implementation of minimum liquidity standards

On Oct. 24, 2013, the Federal Reserve approved a notice of proposed rulemaking developed jointly with the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") regarding the U.S. implementation of the Basel III liquidity coverage ratio (the "LCR Notice"). The LCR Notice would establish a quantitative liquidity coverage ratio requirement for certain banking organizations, including BNY Mellon, designed to ensure that such organizations maintain an adequate level of unencumbered high-quality liquid assets equal to the entity's expected net cash outflow for a 30-day time horizon under an acute liquidity stress scenario. This proposal is expected to be open for comment until Jan. 31, 2014. For additional information regarding the LCR Notice, see "Recent accounting and regulatory developments - Regulatory developments".

4 BNY Mellon


Sale of Newton's private client business

On Sept. 27, 2013, Newton Management Limited, together with Newton Investment Management Limited, an investment boutique of BNY Mellon, sold Newton's private client business. Assets under management related to Newton's private client business totaled $3 billion on Sept. 27, 2013. As a result of this sale, we recorded a pre-tax gain of $27 million and an after-tax gain of $5 million.

U.S. Tax Court ruling

As previously disclosed, the U.S. Tax Court, on Sept. 23, 2013, amended its prior ruling that disallowed certain foreign tax credits that BNY Mellon claimed for the 2001 and 2002 tax years. The new ruling increased the interest expense that BNY Mellon could deduct as a valid business expense and excluded certain items from BNY Mellon's taxable income for those years. The combination of these items for all years involved and related interest, increased after-tax income in the third quarter of 2013 by $261 million, or $0.22 per diluted common share. The U.S. Tax Court has not made a final ruling on these amounts, so there could be further adjustments in future periods.

New risk-based and leverage regulatory capital rules

In July 2013, the federal banking agencies finalized rules (the "Final Capital Rules") revising the capital framework applicable to U.S. bank holding companies ("BHCs") and banks. The Final Capital Rules implement Basel III and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act" or "Dodd-Frank") for U.S. BHCs and banks (including by redefining the components of capital and establishing higher minimum percentages for applicable capital ratios) and substantially revise the agencies' general risk-based capital rules in a manner designed to make them more risk sensitive. The Final Capital Rules establish a graduated implementation schedule and will be principally phased-in by 2019. In general, the Final Capital Rules largely adhere to the rules as initially proposed in June 2012 and as summarized in the Company's 2012 Annual Report. Our estimated Basel III Tier 1 common equity ratio (Non-GAAP) calculated under the Standardized Approach and based on our interpretation of and expectations regarding the Final Capital Rules, on a fully phased-in basis, was 10.1% at Sept. 30, 2013 and 9.3% at

June 30, 2013. For additional information on the Final Capital Rules, see "Capital" and "Recent accounting and regulatory developments - Regulatory developments".

Supplementary leverage ratio proposals

The Final Capital Rules implement, among other things, for Advanced Approaches banking organizations, including the Company, a new Basel III-based supplementary leverage ratio with a minimum of 3%, to become effective Jan. 1, 2018. In addition, the Basel Committee and the U.S. banking agencies are each independently considering potential changes to the supplementary leverage ratio that, individually or taken together, could make it substantially more restrictive. In June 2013, the Basel Committee issued a consultative document proposing revisions to the supplementary leverage ratio's denominator.

Separately, on July 9, 2013, the U.S. banking agencies proposed revisions to the supplementary leverage ratio under a notice of proposed rulemaking that would only apply to the largest U.S. BHCs and banks, including BNY Mellon. The July 9 proposal would increase the supplementary leverage requirement for affected holding companies to exceed 5%. In addition, this proposal would establish a supplementary leverage ratio "well capitalized" threshold of 6% for affected insured depository institutions under the U.S. banking agencies prompt corrective action framework, including our largest banking subsidiary, The Bank of New York Mellon.

For additional information regarding the supplementary leverage ratio proposals, see "Recent accounting and regulatory developments - Regulatory developments".

Highlights of third quarter 2013 results

In the third quarter of 2013, we reported net income applicable to common shareholders of BNY Mellon of $967 million, or $0.82 per diluted common share, including a $261 million, or $0.22 per diluted common share, benefit related to the U.S. Tax Court's partial reconsideration of a tax decision. These results compare with $720 million, or $0.61 per diluted common share, in the third quarter of 2012 and $833 million, or $0.71 per diluted common share, in the second quarter of 2013. The second quarter of 2013 results include an after-tax gain of $109 million,

BNY Mellon 5

or $0.09 per diluted common share, related to an equity investment.

Highlights of the third quarter 2013 include:

Assets under custody and/or administration ("AUC/A") totaled $27.4 trillion at Sept. 30, 2013 compared with $26.4 trillion at Sept. 30, 2012 and $26.2 trillion at June 30, 2013. The year-over-year increase of 4% primarily reflects higher market values and net new business. See the "Investment Services business" beginning on page 22.)

Assets under management ("AUM") totaled a record $1.53 trillion at Sept. 30, 2013 compared with $1.36 trillion at Sept. 30, 2012 and $1.43 trillion at June 30, 2013. The year-over-year increase of 13% primarily resulted from net new business and higher market values. (See the "Investment Management business" beginning on page 19).

Investment services fees increased 4% in the third quarter of 2013 compared with the third quarter of 2012. The increase was driven by higher clearing services, asset servicing, and issuer services revenue. (See the "Investment Services business" beginning on page 22).

Investment management and performance fees totaled $821 million in the third quarter of 2013, an increase of 5%, compared with $779 million in the third quarter of 2012. The increase was driven by higher equity market values and net new business, partially offset by the average impact of the stronger U.S. dollar. (See the "Investment Management business" beginning on page 19).

Foreign exchange and other trading revenue totaled $160 million in the third quarter of 2013 compared with $182 million in the third quarter of 2012. In the third quarter of 2013, foreign exchange revenue increased 27% year-over-year, driven by higher volumes and volatility. Other trading revenue decreased in the third quarter of 2013 reflecting lower fixed income trading. (See "Fee and other revenue" beginning on page 7).

Investment income and other revenue totaled $135 million in the third quarter of 2013 compared with $124 million in the third quarter of 2012. The increase primarily resulted from higher equity investment revenue, partially offset by lower seed capital gains. (See "Fee and other revenue" beginning on page 7).

Net interest revenue totaled $772 million in the third quarter of 2013 compared with $749 million in the third quarter of 2012. The increase was primarily driven by lower premium amortization on investment securities, higher average interest-earning assets, a change in the mix of earning assets, and lower funding costs. (See "Net interest revenue" beginning on page 11).

The net unrealized pre-tax gain on our total investment securities portfolio was $723 million at Sept. 30, 2013 compared with $656 million at June 30, 2013. The increase primarily reflects lower credit spreads on foreign securities. (See "Investment securities" beginning on page 30).

The provision for credit losses was $2 million in the third quarter of 2013 and a credit of $5 million in the the third quarter of 2012. (See "Asset quality and allowance for credit losses" beginning on page 35).

Noninterest expense totaled $2.8 billion in the third quarter of 2013 compared with $2.7 billion in the third quarter of 2012. The increase primarily resulted from higher staff expense. (See "Noninterest expense" beginning on page 14).

The benefit for income taxes totaled $2 million for the third quarter of 2013 and included a benefit of $261 million related to the U.S. Tax Court's partial reconsideration of a tax decision. This compared with an income tax provision of $225 million (23.1% effective tax rate) in the third quarter of 2012. (See "Income taxes" on page 16).

At Sept. 30, 2013, our estimated Basel III Tier 1 common equity ratio (Non-GAAP) calculated under the Standard Approach, on a fully phased-in basis, was 10.1% compared with 9.3% at June 30, 2013. (See "Capital" beginning on page 44).

In the third quarter of 2013, we repurchased 3.9 million common shares in the open market, at an average price of $31.28 per share, for a total of $121 million.

From Oct. 1, 2013 through Nov. 7, 2013, we repurchased 10.0 million common shares in the open market, at an average price of $31.83 per common share for a total of $318 million.

6 BNY Mellon
--------------------------------------------------------------------------------

Fee and other revenue

Fee and other revenue                                                                                   YTD13
                                                                  3Q13 vs.          Year-to-date         vs.
(dollars in millions, unless
otherwise noted)                  3Q13      2Q13      3Q12     3Q12    2Q13         2013      2012      YTD12
Investment services fees:
Asset servicing (a)            $   964   $   988   $   942        2  %   (2 )%   $ 2,921   $ 2,835        3  %
Issuer services                    322       294       311        4      10          853       837        2
Clearing services                  315       321       287       10      (2 )        940       899        5
Treasury services                  137       139       138       (1 )    (1 )        417       408        2
Total investment services fees   1,738     1,742     1,678        4       -        5,131     4,979        3
Investment management and
performance fees                   821       848       779        5      (3 )      2,491     2,321        7
Foreign exchange and other
trading revenue                    160       207       182      (12 )   (23 )        528       553       (5 )
Distribution and servicing          43        45        48      (10 )    (4 )        137       140       (2 )
Financing-related fees              44        44        46       (4 )     -          129       127        2
Investment and other income        135       269       124        9      N/M         476       311       N/M
Total fee revenue                2,941     3,155     2,857        3      (7 )      8,892     8,431        5
Net securities gains                22        32        22       N/M     N/M         102       112       N/M
Total fee and other revenue -
GAAP                           $ 2,963   $ 3,187   $ 2,879        3  %   (7 )%   $ 8,994   $ 8,543        5  %

Fee revenue as a percentage of
total revenue excluding net
securities gains                    79 %      79 %      78 %                          79 %      78 %

AUM at period end (in
billions) (b)                  $ 1,532   $ 1,432   $ 1,359       13  %    7  %   $ 1,532   $ 1,359       13  %
AUC/A at period end (in
trillions) (c)                 $  27.4   $  26.2   $  26.4        4  %    5  %   $  27.4   $  26.4        4  %

(a) Asset servicing fees include securities lending revenue of $35 million in the third quarter of 2013, $50 million in the second quarter of 2013, $49 million in the third quarter of 2012, $124 million in the first nine months of 2013 and $157 million in the first nine months of 2012.

(b) Excludes securities lending cash management assets and assets managed in the Investment Services business.

(c) Includes the AUC/A of CIBC Mellon of $1.2 trillion at Sept. 30, 2013, $1.1 trillion at June 30, 2013 and $1.2 trillion at Sept. 30, 2012.

N/M - Not meaningful.

Fee and other revenue

Fee and other revenue totaled $3.0 billion in the third quarter of 2013, an increase of 3% year-over-year and a decrease of 7% (unannualized) sequentially. The year-over-year increase was driven by higher investment services fees and investment management and performance fees, partially offset by lower foreign exchange and other trading revenue. The sequential decrease was driven primarily by lower investment and other income, foreign exchange and other trading revenue and performance fees, partially offset by seasonally higher Depositary Receipts revenue.

Investment services fees

Investment services fees were impacted by the following compared with the third quarter of 2012 and the second quarter of 2013:

Asset servicing fees increased 2% year-over-year and decreased 2% (unannualized) sequentially. The year-over-year increase primarily reflect

higher market values, organic growth and net new business, partially offset by lower securities
lending revenue which resulted from narrower spreads. The sequential decrease primarily resulted from a seasonal decrease in securities lending revenue, lower activity and lower expense reimbursements.
Issuer services fees increased 4% year-over-year and 10% (unannualized) sequentially. The year-over-year increase primarily reflects higher Depositary Receipts revenue, partially offset by lower money market mutual fund balances and higher money market fee waivers in Corporate Trust. The sequential increase primarily resulted from seasonally higher Depositary Receipts revenue, partially offset by lower expense reimbursements in Corporate Trust. We continue to estimate that the run-off of high margin securitizations could reduce the Company's total annual revenue by up to one-half of 1% if the structured debt markets do not recover.

BNY Mellon 7

Clearing services fees increased 10% year-over-year and decreased 2% (unannualized) sequentially. The year-over-year increase was driven by higher mutual fund and asset-based fees and volumes, partially offset by higher money market fee waivers. The sequential decrease was primarily driven by seasonally lower clearance revenue reflecting a decrease in DARTs, and higher money market fee waivers.

Treasury services fees decreased 1% both year-over-year and (unannualized) sequentially. Both decreases primarily reflect lower cash management fees.

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

Investment management and performance fees

Investment management and performance fees totaled $821 million in the third quarter of 2013, an increase of 5% year-over-year and a decrease of 3% (unannualized) sequentially. The year-over-year increase was primarily driven by higher equity market values and net new business, partially offset by the average impact of the stronger U.S. dollar. The sequential decrease primarily reflects seasonally lower performance fees, partially offset by net new business and higher equity market values. Comparisons to both prior periods were negatively impacted by higher money market fee waivers. Performance fees were $10 million in both the third quarter of 2013 and the third quarter of 2012, and $33 million in the second quarter of 2013.

Total AUM for the Investment Management business was a record $1.53 trillion at Sept. 30, 2013, a 13% increase compared with the prior year and 7% increase sequentially. Both increases primarily resulted from net new business and higher market values. Long-term inflows totaled $32 billion and short-term inflows totaled $13 billion for the third quarter of 2013. Long-term inflows benefited from liability-driven investments, alternative investments and active equity and index funds.

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

                                                        Year-to-date
(in millions)                  3Q13    2Q13   3Q12      2013       2012
Foreign exchange              $ 154   $ 179  $ 121  $    482      $ 414
Other trading revenue:
Fixed income                     (2 )    12     54        18        117
Equity/other                      8      16      7        28         22
Total other trading revenue       6      28     61        46        139
Total                         $ 160   $ 207  $ 182  $    528      $ 553

Foreign exchange and other trading revenue totaled $160 million in the third quarter of 2013, $182 million in the third quarter of 2012 and $207 million in the second quarter of 2013. In the third quarter of 2013, foreign exchange revenue totaled $154 million, an increase of 27% year-over-year and a decrease of 14% (unannualized) sequentially. The year-over-year increase primarily reflects higher volumes and volatility. The sequential decrease was primarily driven by lower volatility while volumes increased slightly. Other trading revenue was $6 million in the third quarter of 2013 compared with $61 million in the third quarter of 2012 and $28 million in the second quarter of 2013. The decrease compared with both prior periods primarily reflects lower fixed income trading revenue due to lower derivatives trading revenue. The year-over-year decrease also reflects a loss on inventory driven by higher interest rates. Foreign exchange revenue and fixed income trading revenue is reported in the Investment Services business and the Other segment. Equity/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 are 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

8 BNY Mellon


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 trading volume with clients is in negotiated trading. Our standing instruction program, including a 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 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 either our estimation of the current market rate for a particular currency or 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 other emerging market currencies. A shift by custody clients from the standing instruction program to other trading options combined with competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. For the quarter ended Sept. 30, 2013, our total revenue for all types of foreign exchange trading transactions was $154 million, or approximately 4% of our total revenue and approximately 45% 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 $43 million in the third quarter of 2013, $48 million in the third quarter of 2012 and $45 million in the second quarter of 2013. Both decreases were impacted by higher fee waivers. The year-over-year decrease also reflects the average impact of the stronger U.S. dollar.

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 third quarter of 2013, $46 million in the third quarter of 2012 and $44 million in the second quarter of 2013.

                                                                    BNY Mellon 9
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Investment and other income

Investment and other income
                                                                   Year-to-date
(in millions)                              3Q13    2Q13   3Q12      2013     2012
Equity investment revenue                 $  48   $ 200  $  16   $   261    $  17
Corporate/bank-owned life insurance          38      32     41       104      107
Asset-related gains                          35       7     17        49       12
Expense reimbursements from joint venture    12       8     10        31       29
Lease residual gains                          7      10      -        18       37
Seed capital gains                            7       1     28        14       52
Transitional services agreements              -       4      6         9       19
Private equity gains (losses)                (2 )     5     (1 )       1        4
Other income (loss)                         (10 )     2      7       (11 )     34
Total investment and other income         $ 135   $ 269  $ 124   $   476    $ 311

Investment and other income, which is primarily reported in the Other segment . . .

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