EX-99.1 2 dex991.htm QUARTERLY EARNINGS REVIEW FOR FIRST QUARTER 2010 Quarterly Earnings Review for first quarter 2010

Exhibit 99.1

BNY Mellon

Quarterly Earnings Review

Financial Results

April 20, 2010

Table of Contents

 

Non-GAAP Financial Measures

    2

First Quarter 2010 Financial Highlights

    3

Financial Summary/Key Metrics (continuing operations)

    4

Assets Under Management/Custody and Administration/Market Indices

    5

Fee and Other Revenue

    6

Net Interest Revenue

    7

Noninterest Expense

    8

Adoption of New Accounting Standard

    9

Investment Securities Portfolio

    9

Foreign Exchange and Other Trading Activities Revenue

    10

Capital

    10

Nonperforming Assets

    10

Allowance for Credit Losses, Provision and Net Charge-offs

    11

Discontinued Operations

    11

Business Segments

    11

•     Asset Management

    12

•     Wealth Management

    13

•     Asset Servicing

    14

•     Issuer Services

    15

•     Clearing Services

    16

•     Treasury Services

    17

•     Other

    18

Supplemental Information – Explanation of Non-GAAP Financial Measures

    19

Cautionary Statement

    22

BNY Mellon 1Q10 Quarterly Earnings Review

 

NON-GAAP FINANCIAL MEASURES

BNY Mellon has included in this review certain Non-GAAP measures based upon tangible common shareholders’ equity. BNY Mellon believes that the ratio of tangible common shareholders’ equity to tangible assets of operations, is a measure of capital strength that adds additional useful information to investors, supplementing the Tier 1 capital ratio which is utilized by regulatory authorities. Unlike the Tier 1 ratio, the tangible common shareholders’ equity ratio fully incorporates those changes in investment securities valuations which are reflected in shareholders’ equity. In addition, this ratio is expressed as a percentage of the actual book value of assets, as opposed to a percentage of a risk-based reduced value established in accordance with regulatory requirements, although BNY Mellon in its calculation has excluded certain assets which are given a zero percent risk-weighting for regulatory purposes. This ratio is also informative to investors in BNY Mellon’s common stock because, unlike the Tier 1 capital ratio, it excludes preferred stock and trust preferred securities issued by BNY Mellon. Further, BNY Mellon believes that the return on tangible common equity measure, which excludes goodwill and intangible assets net of deferred tax liabilities, is a useful additional measure for investors because it presents a measure of BNY Mellon’s performance in reference to those assets which are productive in generating income.

BNY Mellon has provided the measure of tangible book value per share, which it believes provides additional useful information as to the level of such assets in relation to shares of common stock outstanding. BNY Mellon has presented revenue measures which exclude the effect of investment securities gains (losses) and noncontrolling interests related to consolidated asset management funds and expense measures excluding items, such as merger and integration (“M&I”) expenses, intangible amortization expenses, the FDIC special assessment; and measures which utilize net income excluding tax items such as the discrete tax benefits related to a tax loss on mortgages and the benefit of tax settlements. Return on equity measures and operating margin measures which exclude some or all of these items are also presented. BNY Mellon believes that these measures are useful to investors because they permit a focus on period to period comparisons which relate to the ability of BNY Mellon to enhance revenues and limit expenses in circumstances where such matters are within BNY Mellon’s control. The excluded items in general relate to situations where accounting rules require certain ongoing charges as a result of prior transactions, or where valuation or other accounting/regulatory requirements require charges unrelated to operational initiatives. M&I expenses primarily relate to the merger with Mellon Financial Corporation in 2007. M&I expenses generally continue for approximately three years after the transaction, and can vary on a year-to-year basis depending on the stage of the integration. BNY Mellon believes that the exclusion of M&I expenses provides investors with a focus on BNY Mellon’s business as it would appear on a consolidated going-forward basis, after such M&I expenses have ceased, typically after approximately three years. Future periods will not reflect such M&I expenses, and thus may be more easily compared to our current results if M&I expenses are excluded. With regards to the exclusion of investment securities gains (losses), BNY Mellon’s primary businesses are Asset and Wealth Management and Institutional Services. The management of these sectors is evaluated on the basis of the ability of these businesses to generate fee and net interest revenue and to control expenses, and not on the results of BNY Mellon’s investment securities portfolio. Management of the investment securities portfolio is a shared service contained in the Other segment. The primary objective of the investment securities portfolio is to generate net interest revenue from the liquidity generated by BNY Mellon’s processing businesses. BNY Mellon does not generally originate or trade the securities in the investment securities portfolio. With regards to higher yields related to the restructured investment securities portfolio, client deposits serve as the primary funding source for our investment securities portfolio and we typically allocate all interest revenue to the businesses generating the deposits. Accordingly, the higher yield related to the restructured investment securities portfolio has been included in the segment results. The presentation of financial measures excluding litigation reserves in the first quarter of 2010 provides investors the ability to view performance metrics on the basis that management views results. The presentation of income of consolidated asset management funds, net of noncontrolling interest related to the consolidation of certain assets management funds permits investors to view revenue on a basis consistent with prior periods. BNY Mellon believes that these presentations, as a supplement to GAAP information, gives investors a clearer picture of the results of its primary businesses. Restructuring charges relate to migrating positions to global growth centers and the elimination of certain positions. Excluding the discrete tax benefits related to a tax loss on mortgages permits investors to calculate the tax impact of BNY Mellon’s primary businesses.

In this earnings review, certain amounts are presented on an FTE basis. We believe that this presentation provides comparability of amounts arising from both taxable and tax exempt sources, and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income.

Each of these measures as described above is used by management to monitor financial performance, both on a company-wide and on a business segment basis. Below is a listing of certain financial measures which have been impacted by the exclusion and/or adjustment of certain items.

Revenue: Investment securities gains (losses) and income from consolidated asset management funds, net of noncontrolling interest.

Noninterest expense: Litigation reserves, M&I expenses, intangible amortization expense, FDIC special assessment and restructuring charges.

Earnings per share: Litigation reserves, M&I expenses, restructuring charges, preferred dividends, investment securities gains (losses) and discrete tax benefits.

 

 

Page - 2

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

FIRST QUARTER 2010 FINANCIAL HIGHLIGHTS

 

     Income after tax from
continuing operations (a)		    EPS from
continuing operations (a)(b)		  
     (in millions)                     1Q10 vs.  
     1Q09    4Q09     1Q10    1Q09     4Q09     1Q10    1Q09     4Q09  

Earnings:

                    

Continuing operations – GAAP

    $ 363    $ 712      $ 601    $ 0.31      $ 0.59      $ 0.49    58 %    (17 )% 

Non-GAAP adjustments (a)

      278      (45 )      114      0.24        (0.04 )      0.10     
                                                 

Subtotal Non-GAAP operating basis

      641      667        715      0.56 (c)      0.55        0.59    5 %    7 % 

Intangible amortization

      66      66        62      0.06        0.06        0.05     
                                                 

Continuing operations – Non-GAAP

    $ 707    $ 733      $ 777    $ 0.61 (c)    $ 0.60 (c)    $ 0.64    5 %    7 % 
                                                 

KEY POINTS (comparisons are unannualized 1Q10 vs. 4Q09 unless otherwise stated)

 

•  

Operating earnings

  •  

Net interest revenue increased 6% reflecting the higher yield related to the restructured investment securities portfolio and higher hedging gains, partially offset by the impact of narrowing spreads.

  •  

Fee revenue was unchanged sequentially; +6% year-over-year

  •  

Money market fee waivers reduced fee revenue by 4% ($117 million) in 1Q10, impacting securities servicing fees and asset and wealth management fees

  •  

Noninterest expenses (see page 4) decreased 5%; +3% year-over-year

  •  

The sequential decrease was driven primarily by lower professional and consulting fees and business development expense

  •  

Positive operating leverage of 600 basis points sequentially and 100 basis points year-over-year

•  

Credit quality trends improving

  •  

Provision of $35 million down 46% and nonperforming assets down 17%

  •  

Unrealized pre-tax loss of $242 million on the investment portfolio improved 77%

•  

Strong capital generation

  •  

Tier 1 capital ratio 13.2%, increased 110 bps

  •  

Tier 1 common ratio 11.6%, increased 110 bps

  •  

Tangible common equity to assets ratio 6.1%, increased 90 bps

•  

Stable client assets

  •  

Assets under custody and administration $22.4 trillion, up 15% year-over-year

  •  

Assets under management $1.1 trillion, up 25% year-over-year

  •  

Long-term inflows $16 billion in 1Q10

  •  

Short-term outflows $25 billion in 1Q10

•  

Announced two asset servicing acquisitions. Both are expected to be immediately accretive to earnings and close in the third quarter of 2010.

 

(a) See Supplemental information beginning on page 19 for GAAP to Non-GAAP reconciliations.
(b) Diluted earnings per share under the two-class method was calculated after deducting earnings allocated to participating securities of $3 million in the first quarter of 2009, $6 million in the fourth quarter of 2009 and $5 million in the first quarter of 2010.
(c) Does not foot due to rounding.

 

 

Page - 3

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

FINANCIAL SUMMARY

 

(dollar amounts in millions, non-FTE basis

unless otherwise noted; common shares in thousands)

    2009     2010     1Q10 vs.  
   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Revenue:

               

Fee and other revenue – GAAP

    $ 2,136      $ 2,257      $ (2,216 )    $ 2,595      $ 2,568       

Less: Investment securities gains (losses)

      (295 )      (256 )      (4,833 )      15        7       
                                            

Total fee revenue – GAAP

    $ 2,431      $ 2,513      $ 2,617      $ 2,580      $ 2,561      5 %    (1 )% 

Income of consolidated asset management funds, net of noncontrolling interest

      -        -        -        -        22 (a)             

Total fee revenue – Non-GAAP

      2,431        2,513        2,617        2,580        2,583      6      -   

Net interest revenue – GAAP

      775        700        716        724        765      (1 )    6   

Total revenue excluding investment securities gains (losses) – Non-GAAP (b)

   $ 3,206      $ 3,213      $ 3,333      $ 3,304      $ 3,348      4      1   

Provision for credit losses

    $ 59      $ 61      $ 147      $ 65      $ 35               

Expense:

               

Noninterest expense – GAAP

    $ 2,280      $ 2,383      $ 2,318      $ 2,582      $ 2,461       

Less: Litigation reserves

      -        -        -        -        164       

M&I expenses

      68        59        54        52        26       

Restructuring charges

      10        6        (5 )      139        7       

FDIC special assessment

      -        61        -        -        -       

Amortization of intangible assets

      107        108        104        107        97       
                                            

Total noninterest expense – excluding litigation reserves, M&I expenses, restructuring charges, FDIC special assessment and intangible amortization – Non-GAAP

    $ 2,095      $ 2,149      $ 2,165      $ 2,284      $ 2,167      3      (5 ) 

Income:

               

Income (loss) from continuing operations

    $ 411      $ 501      $ (2,438 )    $ 713      $ 632      54      (11 ) 

Net (income) loss attributable to noncontrolling interest, net of tax

      (1 )      2        (1 )      (1 )      (31 ) (a)     

Redemption charge and preferred dividends

      (47 )      (236 )      -        -        -       
                                            

Income (loss) from continuing operations, net of tax

      363        267        (2,439 )      712        601       

Income (loss) from discontinued operations, net of tax

      (41 )      (91 )      (19 )      (119 )      (42 )     

Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation

    $ 322      $ 176      $ (2,458 )    $ 593      $ 559               

Key Metrics (Continuing operations):

               

Pre-tax operating margin – GAAP (c)

      20 %      17 %      N/M        20 %      26 %     

Non-GAAP adjusted (c)

      33 %      31 %      31 %      29 %      34 %     

Return on common equity (annualized) – GAAP (c)

      5.8 %      4.0 %      N/M        9.8 %      8.2 %     

Non-GAAP adjusted (c)

      10.6 %      6.6 %      9.9 %      10.1 %      10.6 %     

Return on tangible common equity (annualized)

               

Non-GAAP (c)

      28.8 %      18.4 %      N/M        33.0 %      25.8 %     

Non-GAAP adjusted (c)

      44.4 %      24.0 %      31.5 %      31.1 %      30.2 %     

Fee and other revenue as a percent of total revenue

      73 %      76 %      N/M        78 %      76 %     

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

     29 %      31 %      31 %      36 %      34 %     

Effective tax rate – GAAP

      28.2 %      2.2 %      N/M        N/M        29.0 %     

Non-GAAP adjusted (d)

      32.1 %      32.4 %      31.8 %      22.1 %      30.8 %     

Period end

               

Employees

      41,700        41,800        42,000        42,200        42,300       

Market capitalization

    $ 32,585      $ 35,255      $ 34,911      $ 33,783      $ 37,456       

Common shares outstanding

      1,153,450        1,202,828        1,204,244        1,207,835        1,212,941               
(a) Includes $30 million of noncontrolling interest related to consolidated asset management funds.
(b) Total revenue – GAAP was $2.911 billion, $2.957 billion, $(1.500) billion, $3.319 billion and $3.385 billion, respectively.
(c) See supplemental information beginning on page 19 for GAAP to Non-GAAP reconciliations.
(d) The effective tax rate – Non-GAAP for the quarters of 2009 exclude investment securities losses, M&I expenses, restructuring charges, support agreement charges, FDIC special assessment and discrete tax benefits. The effective tax rate – Non-GAAP for the first quarter of 2010 excludes M&I expenses, restructuring charges and litigation reserves related to several existing matters.

N/M – Not meaningful.

 

 

Page - 4

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

ASSETS UNDER MANAGEMENT/CUSTODY AND ADMINISTRATION TREND

 

      2009    2010    1Q10 vs.  
      1st Qtr    2nd Qtr    3rd Qtr    4th Qtr    1st Qtr    1Q09     4Q09  

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

    $ 881    $ 926    $ 966    $ 1,115    $ 1,105    25 %    (1 )% 

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

    $ 19.5    $ 20.7    $ 22.1    $ 22.3    $ 22.4    15 %    —   % 

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

    $ 293    $ 290    $ 299    $ 247    $ 253    (14 )%    2 % 
(a) Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing segment.

ASSETS UNDER MANAGEMENT FLOWS

 

 

Changes in market value of assets under management from Dec. 31, 2009 to March 31, 2010 by business segment-preliminary              
(in billions)    Asset
Management		     Wealth
Management		     Total  

Market value of assets under management at Dec. 31, 2009

    $ 1,040      $ 75      $ 1,115   

Net inflows (outflows):

       

Long-term

      15        1        16   

Money market

      (25 )      —          (25 ) 

Total net inflows (outflows)

      (10 )      1        (9 ) 

Net market/currency impact

      (1 )      —          (1 ) 

Market value of assets under management at March 31, 2010

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

COMPOSITION OF ASSETS UNDER MANAGEMENT

 

Composition of assets under management at period end (a)    2009     2010  
      1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr  

Equity

    27 %    31 %    34 %    31 %    32 % 

Money market

    45 %    43 %    39 %    32 %    30 % 

Fixed income

    19 %    17 %    17 %    21 %    21 % 

Alternative investments and overlay

    9 %    9 %    10 %    16 %    17 % 

Total

    100 %    100 %    100 %    100 %    100 % 
(a) Excludes securities lending cash management assets.

MARKET INDICES

 

Market indices    2009    2010    1Q10 vs.  
      1st Qtr    2nd Qtr    3rd Qtr    4th Qtr    1st Qtr    1Q09     4Q09  

S&P 500 Index (a)

    798    919    1057    1115    1169    46 %    5 % 

S&P 500 Index-daily average

    809    891    995    1088    1123    39      3   

FTSE 100 Index (a)

    3926    4249    5134    5413    5680    45      5   

FTSE 100 Index-daily average

    4040    4258    4708    5235    5431    34      4   

NASDAQ Composite Index (a)

    1529    1835    2122    2269    2398    57      6   

Lehman Brothers Aggregate BondSM Index (a)

    262    280    304    301    300    15      —     

MSCI EAFE® Index (a)

    1056    1307    1553    1581    1584    50      —     

NYSE Share Volume (in billions)

    161    151    126    112    103    (36 )    (8 ) 

NASDAQ Share Volume (in billions)

    136    152    144    131    138    1      5   
(a) Period end.

 

 

Page - 5

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

FEE AND OTHER REVENUE

 

Fee and other revenue    2009     2010     1Q10 vs.  
(dollar amounts in millions)    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Securities servicing fees:

               

Asset servicing

    $ 519      $ 574      $ 600      $ 621      $ 608      17 %    (2 )% 

Securities lending revenue (a)

      90        97        43        29        29      N/M      -   

Issuer services

      364        372        359        368        333      (9 )    (10 ) 

Clearing services

      253        250        236        223        230      (9 )    3   

Total securities servicing fees

      1,226        1,293        1,238        1,241        1,200      (2 )    (3 ) 

Asset and wealth management fees

      616        637        650        736        696      13      (5 ) 

Foreign exchange and other trading activities

      307        237        246        246        263      (14 )    7   

Treasury services

      125        132        128        134        131      5      (2 ) 

Distribution and servicing

      111        107        94        85        76      (32 )    (11 ) 

Financing-related fees

      48        54        56        57        50      4      (12 ) 

Investment income

      (17 )      44        121        78        108      N/M      38   

Other

      15        9        84        3        37      N/M      N/M   

Total fee revenue – GAAP

    $ 2,431      $ 2,513      $ 2,617      $ 2,580      $ 2,561      5 %    (1 )% 

Income of consolidated asset management funds, net of noncontrolling interests

      -        -        -        -        22 (b)    N/M      N/M   

Total fee revenue – Non-GAAP

    $ 2,431      $ 2,513      $ 2,617      $ 2,580      $ 2,583      6 %    - % 

Net securities gains (losses)

      (295 )      (256 )      (4,833 )      15        7      N/M      (53 ) 

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

    $ 2,136      $ 2,257      $ (2,216 )    $ 2,595      $ 2,590      21 %    - % 

Fee and other revenue as a percent of total revenue

      73 %      76 %      N/M        78 %      76 %             
(a) Included in asset servicing revenue on the income statement.
(b) Includes $6 million previously included in asset and wealth management fees and $16 million previously included in investment income.
(c) Total fee and other revenue on a GAAP basis was $2,136, $2,257, $(2,216), $2,595 and $2,568 respectively.

N/M – Not meaningful.

KEY POINTS

 

•  

Asset servicing fees – Year-over-year growth reflects higher market values and net new business. The decrease sequentially primarily reflects lower volumes and the impact of a stronger U.S. dollar.

•  

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

•  

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

•  

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

•  

Asset and wealth management fees totaled $696 million. Excluding performance fees, asset and wealth management fees increased 12% compared with the prior year period and 1% (unannualized) sequentially. Both increases reflect improved equity values, stronger investment performance, the Insight acquisition and the impact of long-term inflows, partially offset by a reduction in fees due to money market outflows and higher fee waivers. The sequential increase was also negatively impacted by a stronger U.S. dollar.

•  

Foreign exchange and other trading activities totaled $263 million compared with $307 million in the prior year quarter and $246 million in the fourth quarter of 2009. The decrease year-over-year primarily reflects lower foreign exchange revenue driven by lower volatility, partially offset by increased volumes. The sequential increase primarily reflects higher fixed income trading revenue and lower mark-to-market adjustments on credit default swaps, partially offset by lower foreign exchange revenue, driven by lower volatility. See page 10 for a trend of foreign exchange and other trading activities revenue.

•  

Investment and other income increased $147 million year-over-year and $64 million sequentially. Both increases reflect higher lease residual gains and positive foreign currency translations. The year-over-year increase also reflects the write-down of certain equity investments in 1Q09.

 

 

Page - 6

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

NET INTEREST REVENUE

 

Net interest revenue    2009     2010     1Q10 vs.  
(dollar amounts in millions)    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Net interest revenue (non-FTE)

    $ 775      $ 700      $ 716      $ 724      $ 765      (1 )%    6 % 

Net interest revenue (FTE)

      779        704        721        729        770      (1 )    6   

Net interest margin (FTE)

      1.87 %      1.80 %      1.85 %      1.77 %      1.89 %    2 bps      12 bps   

Selected average balances:

               

Cash/interbank investments

    $ 83,276      $ 66,154      $ 64,762      $ 71,173      $ 71,788      (14 )%    1 % 

Trading account securities

      1,728        2,179        1,973        2,090        2,075      20      (1 ) 

Securities

      43,465        51,903        53,889        55,573        55,357      27      -   

Loans

      38,958        37,029        34,535        35,239        34,214      (12 )    (3 ) 
                                            

Interest-earning assets

      167,427        157,265        155,159        164,075        163,434      (2 )    -   

Interest-bearing deposits

      101,983        98,896        93,632        98,404        101,034      (1 )    3   

Noninterest-bearing deposits

      43,051        32,852        34,920        34,991        33,330      (23 )    (5 ) 

Selected average yields/rates:

               

Cash/interbank investments

      1.23 %      1.11 %      1.00 %      0.94 %      0.89 %     

Trading account securities

      2.86        2.50        2.30        2.53        2.49       

Securities

      4.26        3.12        3.20        3.36        3.67       

Loans

      2.66        2.69        2.63        2.38        2.46       

Interest-earning assets

      2.37        2.16        2.14        2.09        2.18       

Interest-bearing deposits

      0.30        0.16        0.11        0.12        0.16       

Average cash/interbank investments as a percentage of average interest-earning assets

      50 %      42 %      42 %      43 %      44 %     

Average noninterest-bearing deposits as a percentage of average interest-earning assets

     26 %      21 %      23 %      21 %      20 %             

bps – basis points.

FTE – fully taxable equivalent.

KEY POINTS

 

•  

Net interest revenue (FTE) decreased 1% year-over-year and increased 6% (unannualized) sequentially.

 

  •  

The first quarter of 2010 reflects a full quarter’s impact of the restructured investment securities portfolio.

  •  

The decrease compared with 1Q09 reflects a decline in the value of interest-free balances, a decrease in average interest-earning assets and narrowing spreads, partially offset by the higher yield on the restructured investment securities portfolio and higher hedging gains.

  •  

The sequential increase primarily reflects the higher yield related to the restructured investment securities portfolio and higher hedging gains, partially offset by narrowing spreads.

  •  

The impact of the restructured investment securities portfolio net of lost interest income on the securities sold was approximately $100 million in 1Q10. We currently expect the net impact of the portfolio restructuring to contribute approximately $320 million to net interest revenue in the full-year 2010, largely due to improved cash flow projections.

 

•  

The net interest margin (FTE) was 1.89%, compared with 1.77% in 4Q09. The increase reflects the higher yield, partially offset by lower spreads.

 

 

Page - 7

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

NONINTEREST EXPENSE

 

Noninterest expense    2009     2010     1Q10 vs.  
(dollar amounts in millions)    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Staff:

               

Compensation

    $ 732      $ 740      $ 747      $ 766      $ 753      3 %    (2 )% 

Incentives

      247        241        242        266        284      15      7   

Employee benefits

      190        172        168        189        183      (4 )    (3 ) 

Total staff

      1,169        1,153        1,157        1,221        1,220      4      -   

Professional, legal and other purchased services

      237        237        265        278        242      2      (13 ) 

Net occupancy

      139        142        142        141        137      (1 )    (3 ) 

Distribution and servicing

      107        106        104        109        109      2      -   

Software

      81        93        95        98        94      16      (4 ) 

Sub-custodian and clearing

      66        91        80        83        85      29      2   

Furniture and equipment

      77        76        76        80        75      (3 )    (6 ) 

Business development

      44        49        45        76        52      18      (32 ) 

Other

      175        202        201        198        153      (13 )    (23 ) 

Subtotal

      2,095        2,149        2,165        2,284        2,167      3      (5 ) 

Litigation reserves

      -        -        -        -        164      N/M      N/M   

FDIC special assessment

      -        61        -        -        -      -      -   

Amortization of intangible assets

      107        108        104        107        97      (9 )    (9 ) 

Restructuring charges

      10        6        (5 )      139        7      N/M      N/M   

M&I expenses

      68        59        54        52        26      (62 )    (50 ) 

Total noninterest expense

    $ 2,280      $ 2,383      $ 2,318      $ 2,582      $ 2,461      8 %    (5 )% 

Total staff expense as a percentage of total revenue

      40 %      39 %      N/M        37 %      36 %     

Total staff expense as a percentage of total revenue – Non-GAAP adjusted (a)

     36 %      36 %      35 %      37 %      36 %             
(a) Excluding net securities gains (losses) and noncontrolling interest of consolidated asset management funds.

N/M – Not meaningful.

KEY POINTS

 

•  

The 3% year-over-year increase in expenses (excluding the litigation reserves, amortization of intangible assets, restructuring charges and M&I expenses) was driven by the impact of the Insight acquisition, as well as higher incentive expense, sub-custodian and clearing expense and software expense.

 

•  

The sequential decrease of 5% (unannualized) (excluding the litigation reserves, amortization of intangible assets, restructuring charges and M&I expenses) primarily reflects lower professional, legal and other purchased services, seasonally lower business development expenses, and decreases in nearly all other expense categories reflecting good expense control, partially offset by the impact of the Insight acquisition.

 

•  

Results for 1Q10 include a charge related to the litigation reserves for several existing matters.

 

 

Page - 8

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

ADOPTION OF NEW ACCOUNTING STANDARD

On Jan. 1, 2010, we adopted SFAS No. 167, “Amendments to FASB Interpretation No. 46 (R)” (Topic 810, Consolidations). At March 31, 2010, our balance sheet included $3.1 billion for the consolidation of certain asset management funds, seed capital investments and securitizations, including $394 million of Class A Notes of the Grantor Trust. The new statement increased our balance sheet by $2.7 billion, or approximately 1%, from year-end.

The consolidated asset management funds are disclosed separately on the balance sheet and the securitizations are included in available for sale securities. The income statement separately discloses the operations of consolidated asset management funds ($52 million) and the net income attributable to noncontrolling interests of consolidated asset management funds ($30 million). The net of these income statement line items ($22 million) was previously disclosed in the income statement as asset and wealth management revenue ($6 million) and investment income ($16 million).

INVESTMENT SECURITIES PORTFOLIO

At March 31, 2010, the fair value of our investment securities portfolio totaled $55.5 billion. The unrealized pre-tax loss on our securities portfolio was $242 million at March 31, 2010 compared with $1.0 billion at Dec. 31, 2009 and $8.0 billion at March 31, 2009.

The following table presents the March 31, 2010 investment securities portfolio.

 

      Amortized
cost		    Fair
value		    Fair value
as a % of
amortized
cost (a)		     Unrealized
gain/(loss)		     Ratings  
(dollar amounts in millions)              AAA/
AA-		     A+/
A-		     BBB+/
BBB-		     BB+ and
lower		     Not
rated		  

Watch list:

                     

European floating rate notes (b)

    $ 5,485    $ 5,032    91 %    $ (453 )    95 %    5 %    - %    - %    - % 

Commercial MBS

      2,364      2,360    100        (4 )    93      4      3      -      -   

Prime RMBS

      1,799      1,613    88        (186 )    59      23      6      12      -   

Alt-A RMBS

      842      756    70        (86 )    28      8      1      63      -   

Subprime RMBS

      773      486    63        (287 )    72      16      5      7      -   

Credit cards

      589      588    97        (1 )    2      97      1      -      -   

Other

      362      381    53        19      1      -      20      68      11   

Total Watch list (c)

      12,214      11,216    87        (998 )    76      13      2      9      -   

Agency RMBS

      18,028      18,349    102        321      100      -      -      -      -   

Sovereign debt/sovereign guaranteed

      7,625      7,710    101        85      100      -      -      -      -   

U.S. Treasury securities

      7,036      7,083    101        47      100      -      -      -      -   

Grantor Trust (d):

                     

Alt-A RMBS

      2,462      2,605    61        143      3      4      5      88      -   

Prime RMBS

      1,928      2,024    72        96      5      7      7      81      -   

Subprime RMBS

      127      146    63        19      13      5      6      76      -   

FDIC-insured debt

      2,531      2,586    102        55      100      -      -      -      -   

U.S. government agency debt

      1,138      1,157    102        19      100      -      -      -      -   

Other

      2,679      2,650    99        (29 )    72      10      6      1      11   

Total investment securities

    $ 55,768    $ 55,526    94 %    $ (242 )    85 %    4 %    1 %    9 %    1 % 
(a) Amortized cost before impairments.
(b) Includes commercial MBS, RMBS and other securities.
(c) The “Watch list” includes those securities we view as having a higher risk of impairment charges.
(d) The Grantor Trust RMBS were marked to market in the fourth quarter of 2009. We believe these RMBS would receive a higher credit rating if the rating was based on the written-down amortized cost instead of the current face amount.

 

 

Page - 9

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

FOREIGN EXCHANGE AND OTHER TRADING ACTIVITIES REVENUE

 

Foreign exchange and other trading activities    2009     2010  
(in millions)    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr  

Foreign exchange

    $ 219      $ 240      $ 190      $ 201      $ 175   

Fixed income

      75        37        76        54        80   

Credit derivatives (a)

      (1 )      (45 )      (27 )      (11 )      (2 ) 

Other

      14        5        7        2        10   

Total

    $ 307      $ 237      $ 246      $ 246      $ 263   
(a) Used as economic hedges of loans.

CAPITAL

 

Capital ratios (a)    March 31,
2009		     Dec. 31,
2009		     March 31,
2010		  

Tier 1 capital ratio

    13.8 %(b)    12.1 %    13.2 % 

Total (Tier 1 plus Tier 2) capital ratio

    17.5 (b)    16.0      17.1   

Leverage capital ratio

    7.8 (b)    6.5      6.6   

Common shareholders’ equity to total assets ratio (c)

    12.5      13.7      14.1   

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

    4.2      5.2      6.1   

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

    10.0      10.5      11.6   
(a) Includes discontinued operations. Preliminary.
(b) The Tier 1, Total and Leverage capital ratios, excluding the Series B preferred stock and common stock warrant associated with TARP, were 11.2%, 15.0% and 6.4% at March 31, 2009.
(c) See the Supplemental information section beginning on page 19 for a calculation of these ratios.

NONPERFORMING ASSETS

 

Nonperforming assets

(dollar amounts in millions)

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

Loans:

       

Other residential mortgages

    $ 143      $ 190      $ 204   

Financial institutions

      30        172        102   

Commercial

      34        65        40   

Commercial real estate

      197        61        50   

Wealth management

      6        58        58   

Foreign

      2        -        -   

Total nonperforming loans

      412        546        454   

Other assets owned

      9        4        5   

Total nonperforming assets

    $ 421 (a)    $ 550 (a)    $ 459   

Nonperforming loans ratio

      1.0 %      1.5 %      1.3 % 

Allowance for loan losses/nonperforming loans

      114.1        92.1        114.5   

Total allowance for credit losses/nonperforming loans

      135.7        115.0        140.5   
(a) Nonperforming assets at Dec. 31, 2009 exclude discontinued operations. Nonperforming assets at March 31, 2009 includes discontinued operations of $130 million.

Nonperforming assets decreased $91 million compared with Dec. 31, 2009. The decrease primarily resulted from repayments and charge-offs.

 

 

Page - 10

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

ALLOWANCE FOR CREDIT LOSSES, PROVISION AND NET CHARGE-OFFS

 

Allowance for credit losses, provision and net charge-offs    Quarter ended  
(in millions)    March 31,
2009		     Dec. 31,
2009		     March 31,
2010		  

Allowance for credit losses – beginning of period

    $ 529      $ 596      $ 628   

Provision for credit losses

      59        65        35   

Transferred to discontinued operations

      21        -        -   

Net (charge-offs) recoveries:

       

Other residential mortgages

      (12 )      (17 )      (12 ) 

Financial institutions

      (10 )      -        (20 ) 

Commercial

      (12 )      (14 )      12   

Commercial real estate

      (17 )      (2 )      (5 ) 

Leasing

      1        -        -   

Total net (charge-offs) recoveries

      (50 )      (33 )      (25 ) 

Allowance for credit losses – end of period (a)

    $ 559      $ 628      $ 638   

Allowance for loan losses

    $ 470      $ 503      $ 520   

Allowance for unfunded commitments

      89        125        118   
(a) The allowance for credit losses at March 31, 2010 and Dec. 31, 2009 excludes discontinued operations. The allowance for credit losses includes discontinued operations of $40 million at March 31, 2009.

The provision for credit losses was $35 million in the first quarter of 2010 compared with $65 million in the fourth quarter of 2009. The decrease in the provision reflects a decrease in higher risk rated loans and nonperforming loans. During the first quarter of 2010, the total allowance for credit losses increased $10 million and net charge-offs totaled $25 million.

DISCONTINUED OPERATIONS

In the second quarter of 2009, we adopted discontinued operations accounting for Mellon United National Bank (“MUNB”) located in Florida. It was determined that this business no longer fit our strategic focus on our asset management and securities servicing businesses. On Jan. 15, 2010, we completed the sale of MUNB. This business was formerly included in the Other segment. In the first quarter of 2010, we recorded an after-tax loss on discontinued operations of $42 million primarily reflecting lower of cost or market write-downs on the retained loans.

BUSINESS SEGMENTS

See BNY Mellon’s 2009 Annual Report for information on the accounting principles of our business segments. In addition, client deposits serve as the primary funding source for our investment securities portfolio and we typically allocate all interest revenue to the businesses generating the deposits. Accordingly, the higher yield related to the restructured investment securities portfolio has been included in the segment results.

 

 

Page - 11

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

ASSET MANAGEMENT (provides asset management services through a number of asset management companies to institutional and individual investors)

 

(dollar amounts in millions,

unless otherwise noted)

    2009     2010     1Q10 vs.  
   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Revenue:

               

Asset and wealth management:

               

Mutual funds

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

Institutional clients

      181        175        197        227        264      46      16   

Private clients

      32        31        34        38        38      19      -   

Performance fees

      7        26        1        59        13      86      (78 ) 

Total asset and wealth management revenue

      483        498        506        590        557      15      (6 ) 

Distribution and servicing

      92        90        84        84        75      (18 )    (11 ) 

Other

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

Total fee and other revenue (a)

      479        529        592        680        649      35      (5 ) 

Net interest revenue

      15        7        7        3        -      N/M      N/M   

Total revenue (b)

      494        536        599        683        649      31      (5 ) 

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

      412        419        415        465        453      10      (3 ) 

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

      82        117        184        218        196      139      (10 ) 

Support agreement charges

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

Amortization of intangible assets

      55        55        53        56        50      (9 )    (11 ) 

Income before taxes

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

Pre-tax operating margin

      8 %      12 %      16 %      24 %      23 %     

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

      19 %      22 %      25 %      32 %      30 %     

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

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

Assets under management-net inflows (outflows):

               

Long-term (in billions)

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

Money market (in billions)

    $ (11 )    $ (2 )    $ (14 )    $ (22 )    $ (25 )             
(a) Total fee and other revenue for the first quarter of 2010 includes income from consolidated asset management funds of $52 million, and net income attributable to noncontrolling interests of $30 million. The net of these income statement line items of $22 million is included above in institutional client revenue of $6 million and other revenue of $16 million.
(b) Investment securities gains (losses) were $(34) million in 1Q09, $(45) million in 2Q09, $- million in 3Q09, $1 million in 4Q09 and $- million in 1Q10. Excluding investment securities gains (losses), the total revenue growth rate 1Q10 vs.1Q09 was 23%.
(c) The pre-tax operating margin, excluding intangible amortization, support agreement charges and investment securities gains (losses) was 22% for 1Q09, 28% for 2Q09, 31% for 3Q09, 32% for 4Q09 and 30% for 1Q10.

N/M – Not meaningful.

KEY POINTS

 

•  

Asset Management generated 2,100 basis points of positive operating leverage compared with 1Q09 excluding intangible amortization and support agreement charges.

•  

Asset and wealth management fees totaled $557 million. Excluding performance fees, asset and wealth management fees increased 14% compared with the prior year period and 2% (unannualized) sequentially. Both increases reflect improved equity values, stronger investment performance, the Insight acquisition and the impact of long-term inflows, partially offset by a reduction in fees due to money market outflows and higher fee waivers. The sequential increase was also negatively impacted by a stronger U.S. dollar.

•  

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

•  

The increase in other fee revenue compared with 1Q09 primarily reflects investment write-downs in 1Q09 and the higher value of seed capital investments.

•  

Noninterest expense (ex. intangible amortization and support agreement charges) increased 10% year-over-year and decreased 3% (unannualized) sequentially. The year-over-year increase primarily reflects the impact of the Insight acquisition. The sequential decrease reflects lower legal expenses and strong expense management, partially offset by the Insight acquisition.

•  

50% non-U.S. revenue in both 1Q10 and 4Q09.

 

 

Page - 12

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

WEALTH MANAGEMENT (provides investment management, wealth and estate planning and private banking solutions to high net worth individuals, families, endowments and foundations and related entities)

 

(dollar amounts in millions,

unless otherwise noted)

    2009     2010     1Q10 vs.  
   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Revenue:

               

Asset and wealth management

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

Other

      19        12        13        15        10      (47 )    (33 ) 

Total fee and other revenue

      141        140        146        151        146      4      (3 ) 

Net interest revenue

      50        49        49        46        55      10      20   

Total revenue

      191        189        195        197        201      5      2   

Provision for credit losses

      -        -        -        1        -      -      N/M   

Noninterest expense (ex. intangible amortization)

      129        136        135        138        136      5      (1 ) 

Income before taxes (ex. intangible amortization)

      62        53        60        58        65      5      12   

Amortization of intangible assets

      11        11        12        11        9      (18 )    (18 ) 

Income before taxes

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

Pre-tax operating margin

      27 %      22 %      25 %      24 %      28 %     

Pre-tax operating margin (ex. intangible amortization)

      32 %      28 %      31 %      29 %      32 %     

Average loans

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

Average deposits

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

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

    $ 132      $ 142      $ 151      $ 154      $ 157      19 %    2 % 

N/M – Not meaningful.

KEY POINTS

 

•  

Wealth Management generated 300 basis points of positive operating leverage sequentially, excluding intangible amortization. Income before taxes (ex. intangible amortization) was up 5% compared to 1Q09 and 12% (unannualized) compared to 4Q09.

•  

Wealth Management total fee and other revenue was up 4% compared to 1Q09 reflecting organic growth and the impact of higher equity markets, partially offset by lower capital markets fees. Fee revenue was down 3% (unannualized) sequentially, as organic growth was more than offset by seasonally lower performance fees.

•  

1Q10 represents the 17th consecutive quarter of positive long-term asset flows. Total client assets were $157 billion at March 31, 2010, up $25 billion, or 19%, from March 31, 2009 and $3 billion, or 2%, from Dec. 31, 2009.

•  

Net interest revenue increased 10% year-over-year and 20% (unannualized) sequentially due to high quality loan growth and higher loan spreads, and the higher yield related to the restructured investment securities portfolio, partially offset by lower deposit margins. Average loans increased 17% year-over-year and 2% (unannualized) sequentially. Average deposit levels increased 4% year-over-year and 7% (unannualized) sequentially.

•  

Noninterest expense (excluding intangible amortization) increased 5% compared to 1Q09 and decreased 1% (unannualized) sequentially. The year-over-year increase primarily reflects higher production-related incentive and FDIC expenses, partially offset by workforce reductions and expense control.

•  

Wealth Management has office sites in 17 states and 3 countries, including 16 of the top 25 domestic wealth markets.

 

 

Page - 13

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

ASSET SERVICING (provides global custody and related services and broker-dealer services to corporate and public retirement funds, foundations and endowments and global financial institutions)

 

(dollar amounts in millions,

unless otherwise noted)

    2009     2010     1Q10 vs.  
   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Revenue:

               

Securities servicing fees - ex. securities lending revenue

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

Securities lending revenue

      79        85        32        25        24      N/M      (4 ) 

Foreign exchange and other trading activities

      210        216        190        177        170      (19 )    (4 ) 

Other

      48        46        50        33        35      (27 )    6   

Total fee and other revenue

      841        904        845        816        798      (5 )    (2 ) 

Net interest revenue

      249        211        229        205        210      (16 )    2   

Total revenue

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

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

      704        721        748        788        740      5      (6 ) 

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

      386        394        326        233        268      (31 )    15   

Support agreement charges

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

Amortization of intangible assets

      7        9        6        6        6      (14 )    -   

Income before taxes

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

Pre-tax operating margin

      34 %      36 %      32 %      23 %      28 %     

Pre-tax operating margin (ex. intangible amortization)

      35 %      37 %      32 %      23 %      29 %     

Average deposits

    $ 57,084      $ 50,583      $ 52,271      $ 51,755      $ 52,183      (9 )%    1 % 

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

    $ 293      $ 290      $ 299      $ 247      $ 253      (14 )%    2 % 
(a) Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing segment.

N/M – Not meaningful.

KEY POINTS

 

•  

Securities servicing fees – ex. securities lending revenue decreased 2% (unannualized) sequentially and increased 13% compared with 1Q09. The year-over-year increase reflects higher market values and net new business. The sequential decrease reflects lower volumes and the impact of a stronger U.S. dollar.

•  

Securities lending fees decreased $55 million compared with 1Q09 and $1 million sequentially. Both decreases reflect lower volumes. The year-over-year decrease also reflects lower spreads. Spreads decreased 65% compared with 1Q09 and 6% sequentially. Volumes decreased 12% compared with 1Q09 and 8% (unannualized) sequentially.

•  

Foreign exchange and other trading activities decreased 19% compared with 1Q09 and 4% (unannualized) sequentially. Both decreases reflect lower volatility, partially offset by higher volumes.

•  

Net interest revenue decreased 16% compared to the prior year period and increased 2% (unannualized) sequentially. The decrease compared with 1Q09 reflects lower deposit levels and spreads, partially offset by the higher yield related to the 4Q09 investment portfolio restructuring. The sequential increase reflects higher deposit levels and a higher yield related to the restructured investment securities portfolio, partially offset by lower spreads.

•  

Noninterest expense (excluding intangible amortization and support agreement charges) increased $36 million compared with 1Q09 and decreased $48 million sequentially. The year-over-year increase reflects higher sub-custodial fees resulting from higher asset values and transaction volumes and the impact of a weaker U.S. dollar. The sequential decrease, which was primarily driven by lower legal expenses, resulted in 500 basis points of positive operating leverage.

•  

1Q10 new business wins totaled $205 billion (win rate of 62%).

•  

2010 R&M Global Custody Survey – Ranked #1 overall.

•  

43% non-U.S. revenue in 1Q10 vs. 34% in 1Q09.

 

 

Page - 14

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

ISSUER SERVICES (provides corporate trust, depositary receipt and shareowner services to corporations and institutions)

 

(dollar amounts in millions,

unless otherwise noted)

    2009     2010     1Q10 vs.  
   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Revenue:

               

Securities servicing fees - issuer services

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

Other

      42        40        30        43        25      (40 )    (42 ) 

Total fee and other revenue

      405        413        389        410        358      (12 )    (13 ) 

Net interest revenue

      200        185        180        203        252      26      24   

Total revenue

      605        598        569        613        610      1      -   

Noninterest expense (ex. intangible amortization)

      297        305        304        318        304      2      (4 ) 

Income before taxes (ex. intangible amortization)

      308        293        265        295        306      (1 )    4   

Amortization of intangible assets

      21        20        20        20        20      N/M      N/M   

Income before taxes

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

Pre-tax operating margin

      48 %      46 %      43 %      45 %      47 %     

Pre-tax operating margin (ex. intangible amortization)

      51 %      49 %      47 %      48 %      50 %     

Number of depositary receipt programs

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

Average deposits

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

N/M – Not meaningful.

KEY POINTS

 

•  

Total revenue increased 1% compared to 1Q09 and is flat sequentially:

 

  •  

Corporate Trust – Total revenue increased year-over-year and sequentially reflecting continued leading market share position and higher net interest revenue driven by higher average customer deposit balances and the higher yield related to the restructured investment securities portfolio, partially offset by decreased activity in the international and conventional debt markets and lower money market related distribution fees due to the low interest rate environment.

  •  

Depositary Receipts – Year-over-year revenue was impacted by lower transaction fees, partially offset by higher issuance fees. Revenue decreased sequentially primarily due to seasonally lower corporate action fees and lower foreign exchange and other trading revenue. Depositary Receipts issuances have exceeded cancellations for four consecutive quarters.

  •  

Shareowner Services – Revenue decreased year-over-year due to lower corporate action activity partially offset by higher market values on employee stock option plans. Revenue increased sequentially reflecting higher net interest revenue resulting from an increase in deposit levels associated with transaction activity and the higher yield related to the restructured investment securities portfolio.

 

•  

Noninterest expense (excluding intangible amortization) increased 2% year-over-year and decreased 4% (unannualized) sequentially. The sequential decrease reflects a seasonal decrease in expenses and lower legal expense.

 

•  

39% non-U.S. revenue in 1Q10 vs. 40% in 1Q09.

 

 

Page - 15

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

CLEARING SERVICES (provides clearing, financing and custody services for broker-dealers and registered investment advisors)

 

(dollar amounts in millions,

unless otherwise noted)

    2009     2010     1Q10 vs.  
   1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Revenue:

               

Securities servicing fees - clearing services

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

Other

      72        66        59        45        44      (39 )    (2 ) 

Total fee and other revenue

      321        314        291        264        271      (16 )    3   

Net interest revenue

      82        87        81        90        95      16      6   

Total revenue

      403        401        372        354        366      (9 )    3   

Noninterest expense (ex. intangible amortization)

      252        256        245        241        255      1      6   

Income before taxes (ex. intangible amortization)

      151        145        127        113        111      (26 )    (2 ) 

Amortization of intangible assets

      7        7        6        7        6      N/M      N/M   

Income before taxes

    $ 144      $ 138      $ 121      $ 106      $ 105      (27 )%    (1 )% 

Pre-tax operating margin

      36 %      34 %      33 %      30 %      29 %     

Pre-tax operating margin (ex. intangible amortization)

      37 %      36 %      34 %      32 %      30 %     

Average active accounts (in thousands)

      5,452        4,999        4,771        4,758        4,811      (12 )%    1 % 

Average margin loans

    $ 4,207      $ 4,121      $ 4,322      $ 4,651      $ 5,229      24 %    12 % 

Average payables to customers and broker-dealers

    $ 3,797      $ 4,901      $ 5,845      $ 6,476      $ 6,495      71 %    - % 

N/M – Not meaningful.

KEY POINTS

 

•  

Clearing Services results reflect lower money market fund fees, offset partially by higher net interest revenue.

 

•  

Total fee and other revenue decreased 16% compared with 1Q09 and increased 3% (unannualized) sequentially. The year-over-year decrease was primarily due to lower money market related distribution fees and lower trading volumes. The sequential increase was primarily due to higher trading revenue.

 

•  

Net interest revenue increased 16% compared with 1Q09 and 6% (unannualized) sequentially. Both increases were driven by the higher yield related to the restructured investment securities portfolio.

 

•  

Noninterest expense (excluding intangible amortization) increased 1% compared to 1Q09 and 6% (unannualized) sequentially. The sequential increase primarily reflects recoveries of prior period charges.

 

 

Page - 16

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

TREASURY SERVICES (provides treasury services, global payment services, working capital solutions, capital markets business and large corporate banking)

 

      2009     2010     1Q10 vs.  
(dollar amounts in millions)    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr     1Q09     4Q09  

Revenue:

               

Treasury services

    $ 121      $ 128      $ 124      $ 130      $ 127      5 %    (2 )% 

Other

      106        52        82        92        98      (8 )    7   

Total fee and other revenue

      227        180        206        222        225      (1 )    1   

Net interest revenue

      159        157        149        148        176      11      19   

Total revenue

      386        337        355        370        401      4      8   

Noninterest expense (ex. intangible amortization)

      189        191        180        187        182      (4 )    (3 ) 

Income before taxes (ex. intangible amortization)

      197        146        175        183        219      11      20   

Amortization of intangible assets

      6        7        6        6        6      -      -   

Income before taxes

    $ 191      $ 139      $ 169      $ 177      $ 213      12 %    20 % 

Pre-tax operating margin

      50 %      41 %      48 %      48 %      53 %     

Pre-tax operating margin (ex. intangible amortization)

      51 %      43 %      49 %      50 %      55 %     

Average loans

    $ 13,921      $ 13,228      $ 11,648      $ 10,982      $ 10,436      (25 )%    (5 )% 

Average deposits

    $ 24,867      $ 20,321      $ 19,989      $ 22,138      $ 22,257      (10 )%    1 % 

KEY POINTS

 

•  

Total fee and other revenue was up 1% (unannualized) sequentially and down 1% year-over-year.

 

  •  

The sequential increase was due primarily to higher capital market fees and lower mark-to-market adjustments on credit default swaps, partially offset by lower global payment fees.

  •  

Year-over-year, the decline resulted from lower capital market fees and lower foreign exchange revenue, primarily offset by higher global payment fees.

 

•  

Net interest revenue was up 19% (unannualized) sequentially and 11% year-over-year, both increases primarily resulted from the higher yield related to the restructured investment securities portfolio, partially offset by lower average loan balances reflecting our credit strategy to reduce targeted risk exposure.

 

•  

Noninterest expense (excluding intangible amortization) decreased 4% compared with 1Q09 and 3% (unannualized) sequentially. The year-over-year decrease reflects expense reduction initiatives as well as overall expense control. The sequential decrease primarily reflects ongoing expense management and seasonally lower expenses in 1Q10.

 

 

Page - 17

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

OTHER (primarily includes the leasing portfolio, corporate treasury activities, business exits, M&I expenses and other corporate revenue and expense items)

 

      2009     2010  
(dollar amounts in millions)    1st Qtr     2nd Qtr     3rd Qtr     4th Qtr     1st Qtr  

Revenue:

           

Fee and other revenue

    $ (278 )    $ (223 )    $ (4,685 )    $ 52      $ 143   

Net interest revenue (expense)

      20        4        21        29        (23 ) 

Total revenue

      (258 )      (219 )      (4,664 )      81        120   

Provision for credit losses

      59        61        147        64        35   

Noninterest expense (ex. Litigation reserves, FDIC special assessment, intangible amortization, M&I expenses and restructuring charges)

      120        136        125        152        120   

Income (loss) before taxes (ex. Litigation reserves, FDIC special assessment, intangible amortization, M&I expenses and restructuring charges)

      (437 )      (416 )      (4,936 )      (135 )      (35 ) 

Litigation reserves

      -        -        -        -        164   

FDIC special assessment

      -        61        -        -        -   

Amortization of intangible assets

      -        (1 )      1        1        -   

M&I expenses

      68        59        54        52        26   

Restructuring charges

      10        6        (5 )      139        7   

Income (loss) before taxes

    $ (515 )    $ (541 )    $ (4,986 )    $ (327 )    $ (232 ) 

KEY POINTS

 

•  

Total fee and other revenue increased $421 million compared to 1Q09 and $91 million compared to 4Q09. The year-over-year increase is due to investment securities losses recorded in 1Q09 and higher leasing gains. The sequential increase relates primarily to leasing gains and foreign currency translation.

 

•  

Noninterest expense (excluding litigation reserves, FDIC special assessment, intangible amortization, M&I expenses and restructuring charges) was unchanged compared to 1Q09 and decreased $32 million sequentially. The sequential decrease reflects employee benefit adjustments recorded in 4Q09 and a seasonal decrease in business development expense.

 

•  

Results in 1Q10 include $164 million related to litigation reserves for several existing matters.

 

 

Page - 18

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

SUPPLEMENTAL INFORMATION – EXPLANATION OF NON-GAAP FINANCIAL MEASURES

 

Reconciliation of net income and EPS – GAAP to Non-GAAP    1Q09     4Q09     1Q10  
(in millions, except earnings per share amounts)    Net income     EPS (a)     Net income     EPS (a)     Net income     EPS (a)  

Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP – Diluted EPS basis (a)

    $ 322      $ 0.28      $ 593      $ 0.49      $ 559      $ 0.46   

Income (loss) from discontinued operations, net of tax

      (41 )      (0.04 )      (119 )      (0.10 )      (42 )      (0.03 ) 

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

      363        0.31 (b)      712        0.59        601        0.49   

Litigation reserves

      -        -        -        -        98        0.08   

M&I expenses

      41        0.04        33        0.03        16        0.01   

Restructuring charges

      7        0.01        86        0.07        5        -   

Preferred dividends

      47        0.04        -        -        -        -   

Net securities (gains) losses

      183        0.16        (31 )      (0.03 )      (5 )      -   

Discrete tax benefits

      -        -        (133 )      (0.11 )      -        -   

Income from continuing operations applicable to common shareholders excluding litigation reserves, M&I expenses, restructuring charges, preferred dividends, net securities gains (losses) and discrete tax benefits – Non-GAAP

      641        0.56        667        0.55        715        0.59 (b) 

Intangible amortization

      66        0.06        66        0.06        62        0.05   

Income from continuing operations applicable to common shareholders excluding litigation reserves, M&I expenses, restructuring charges, preferred dividends, net securities gains (losses), discrete tax benefits and intangible amortization – Non-GAAP

    $ 707      $ 0.61 (b)    $ 733      $ 0.60 (b)    $ 777      $ 0.64   
(a) Diluted earnings per share under the two-class method was calculated after deducting earnings allocated to participating securities of $3 million in the first quarter of 2009, $6 million in the fourth quarter of 2009 and $5 million in the first quarter of 2010.
(b) Does not foot due to rounding.

 

 

Page - 19

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

Reconciliation of income (loss) from continuing operations before income taxes – pre-tax operating margin  
(dollars in millions)    1Q09     2Q09     3Q09     4Q09     1Q10  

Income (loss) from continuing operations before income taxes – GAAP

    $ 572      $ 513      $ (3,965 )    $ 672      $ 889   

Less:  Net securities gains (losses)

      (295 )      (256 )      (4,833 )      15        7   

          Noncontrolling interest of consolidated asset management funds

      -        -        -        -        30   

Add: Litigation reserves

      -        -        -        -        164   

Asset-based taxes

      -        -        20        -        -   

FDIC special assessment

      -        61        -        -        -   

M&I expenses

      68        59        54        52        26   

Restructuring charges

      10        6        (5 )      139        7   

Intangible amortization

      107        108        104        107        97   

Income (loss) from continuing operations before income taxes excluding net securities gains (losses), noncontrolling interest of consolidated asset management funds, litigation reserves, asset-based taxes, FDIC special assessment, M&I expenses, restructuring charges and intangible amortization – Non-GAAP

    $ 1,052      $ 1,003      $ 1,041      $ 955      $ 1,146   

Fee and other revenue – GAAP

    $ 2,136      $ 2,257      $ (2,216 )    $ 2,595      $ 2,568   

Income of consolidated asset management funds – GAAP

      -        -        -        -        52   

Net interest revenue – GAAP

      775        700        716        724        765   

Total revenue – GAAP

      2,911        2,957        (1,500 )      3,319        3,385   

Less:  Net securities gains (losses)

      (295 )      (256 )      (4,833 )      15        7   

                 Noncontrolling interest of consolidated asset management funds

      -        -        -        -        30   

Total revenue excluding net securities gains (losses) and noncontrolling interest of consolidated asset management funds – Non-GAAP

    $ 3,206      $ 3,213      $ 3,333      $ 3,304      $ 3,348   

Pre-tax operating margin (a)

      20 %      17 %      N/M        20 %      26 % 

Pre-tax operating margin excluding net securities gains (losses), noncontrolling interest of consolidated asset management funds, litigation reserves, asset-based taxes, FDIC special assessment, M&I expenses, restructuring charges and intangible amortization – Non-GAAP (a)

      33 %      31 %      31 %      29 %      34 % 
(a) Income (loss) before taxes divided by total revenue.

N/M – Not meaningful.

 

 

Page - 20

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

Return on common equity and tangible common equity – continuing operations

(dollars in millions)

    1Q09     2Q09     3Q09     4Q09     1Q10  

Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP

    $ 322      $ 176      $ (2,458 )    $ 593      $ 559   

Less: Income (loss) from discontinued operations, net of tax

      (41 )      (91 )      (19 )      (119 )      (42 ) 

Net income (loss) from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation

      363        267        (2,439 )      712        601   

Intangible amortization

      66        67        65        66        62   

Net income (loss) from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation excluding intangible amortization – Non-GAAP

      429        334        (2,374 )      778        663   

Less: Net securities gains (losses)

      (183 )      (161 )      (3,047 )      31        5   

Add: Litigation reserves

      -        -        -        -        98   

FDIC special assessment

      -        36        -        -        -   

M&I expenses

      41        36        34        33        16   

Restructuring charges

      7        4        (3 )      86        5   

Discrete tax benefits and the benefit of tax settlements

      -        (134 )      -        (133 )      -   

Net income (loss) from continuing operations excluding net securities gains (losses), litigation reserves, FDIC special assessment, M&I expenses, restructuring charges, discrete tax benefits and the benefit of tax settlements and intangible amortization – Non-GAAP

    $ 660      $ 437      $ 704      $ 733      $ 777   

Average common shareholders’ equity

    $ 25,189      $ 26,566      $ 28,144      $ 28,843      $ 29,720   

Less:  Average goodwill

      15,837        15,989        16,048        16,291        16,143   

          Average intangible assets

      5,752        5,673        5,608        5,587        5,513   

Add:  Deferred tax liability – tax deductible goodwill

      624        643        666        720        720   

          Deferred tax liability – non-tax deductible intangible assets

      1,808        1,743        1,717        1,680        1,660   

Average tangible common shareholders’ equity – Non-GAAP

    $ 6,032      $ 7,290      $ 8,871      $ 9,365      $ 10,444   

Return on common equity – GAAP (a)

      5.8 %      4.0 %      N/M        9.8 %      8.2 % 

Return on common equity excluding net securities gains (losses), litigation reserves , FDIC special assessment, M&I expenses, restructuring charges, discrete tax benefits and the benefit of tax settlements and intangible amortization – Non-GAAP (a)

      10.6 %      6.6 %      9.9 %      10.1 %      10.6 % 

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

      28.8 %      18.4 %      N/M        33.0 %      25.8 % 

Return on tangible common equity excluding net securities gains (losses), litigation reserves, FDIC special assessment, M&I expenses, restructuring charges, discrete tax benefits and the benefit of tax settlements and intangible amortization – Non-GAAP (a)

      44.4 %      24.0 %      31.5 %      31.1 %      30.2 % 
(a) Annualized.

N/M – Not meaningful.

 

Securities servicing fees                  
(in millions)    1Q09    4Q09    1Q10

Securities servicing fees

    $ 1,226    $ 1,241    $ 1,200

Less: Securities lending fee revenue

      90      29      29

Securities servicing fees excluding securities lending fee revenue

    $ 1,136    $ 1,212    $ 1,171

 

Asset and wealth management fee revenue                      1Q10 vs.  
(dollars in millions)    1Q09    4Q09    1Q10    1Q09     4Q09  

Asset and wealth management fee revenue

    $ 616    $ 736    $ 696    13 %    (5 )% 

Less: Performance fees

      7      59      13             

Asset and wealth management fee revenue excluding performance fees

    $ 609    $ 677    $ 683    12 %    1 % 

 

 

Page - 21

BNY Mellon 1Q10 Quarterly Earnings Review

 

 

Calculation of common and tangible common shareholders’ equity to assets

(dollars in millions)

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

Common shareholders’ equity at period end – GAAP

    $ 25,415      $ 28,977      $ 29,688   

Less:  Goodwill

      15,805        16,249        16,077   

          Intangible assets

      5,717        5,588        5,449   

Add:  Deferred tax liability – tax deductible goodwill

      624        720        720   

          Deferred tax liability – non-tax deductible intangible assets

      1,808        1,680        1,660   

Tangible common shareholders’ equity at period end – Non-GAAP

    $ 6,325      $ 9,540      $ 10,542   

Total assets at period end – GAAP

    $ 203,478      $ 212,224      $ 210,251   

Less: Assets of consolidated asset management funds

      -        -        2,259   

Total assets of operations – Non-GAAP

      203,478        212,224        207,992   

Less:  Goodwill

      15,805        16,249        16,077   

          Intangible assets

      5,717        5,588        5,449   

          Cash on deposit with the Federal Reserve and other central banks (a)

      29,679        7,375        14,709   

Tangible total assets of operations at period end – Non-GAAP

    $ 152,277      $ 183,012      $ 171,757   

Common shareholders’ equity to total assets – GAAP

      12.5 %      13.7 %      14.1 % 

Tangible common shareholders’ equity to tangible total assets of operations – Non-GAAP

      4.2 %      5.2 %      6.1 % 
(a) Assigned a zero percent risk weighting by the regulators.

 

Calculation of Tier 1 common equity to risk-weighted assets ratio (a)

(dollars in millions)

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

Total Tier 1 capital

    $ 16,242      $ 12,883      $ 13,430   

Less:  Trust preferred securities

      1,648        1,686        1,667   

          Series B preferred stock

      2,795        -        -   

Total Tier 1 common equity

    $ 11,799      $ 11,197      $ 11,763   

Total risk-weighted assets

    $ 117,412      $ 106,328      $ 101,705   

Tier 1 common equity to risk-weighted assets ratio

      10.0 %      10.5 %      11.6 % 
(a) On a regulatory basis.

CAUTIONARY STATEMENT

A number of statements (i) in this Quarterly Earnings Review, (ii) in our presentations and (iii) in the responses to questions on our conference call discussing our quarterly results and other public events may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which may be expressed in a variety of ways, including the use of future or present tense language, relate to, among other things, expectations with respect to the economy, intended acquisitions, including the expected impact on earnings and the timing of anticipated closing, credit ratings of the RMBS in the Grantor Trust, statements with respect to the expected impact of BNY Mellon’s portfolio restructuring on net interest revenue, as well as BNY Mellon’s overall plans, strategies, goals, objectives, expectations, estimates and intentions. These statements are based upon current beliefs and expectations and are subject to significant risks and uncertainties (some of which are beyond BNY Mellon’s control). Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties, including, but not limited to, the risk factors and other uncertainties set forth in BNY Mellon’s Annual Report on Form 10-K for the year ended Dec. 31, 2009, and BNY Mellon’s other filings with the Securities and Exchange Commission. All forward-looking statements in this earnings review speak only as of April 20, 2010 and BNY Mellon undertakes no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.

 

 

Page - 22