Edgar Filing: Bank of New York Mellon CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ ü ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2007

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

13-2614959

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

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

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

Yes ü No

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

Large accelerated filer [ ü ] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No ü

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

Class

Outstanding as of

Sept. 30, 2007

Common Stock, $.01 par value

1,138,681,554

THE BANK OF NEW YORK MELLON CORPORATION

THIRD QUARTER 2007 FORM 10-Q

TABLE OF CONTENTS


		Page No.

Introduction		2
Consolidated Financial Highlights (unaudited)		3

Part I – Financial Information

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures about Market Risk.		5
Overview		5
Third quarter 2007 highlights		6
Revenue overview		7
Segment overview		8
Fee and other revenue		9
Net interest revenue		12
Average balances and interest yields/rates		13
Noninterest expense		15
Income taxes		17
Credit loss provision and net charge-offs		18
Business segments		18
Critical accounting estimates		38
Consolidated balance sheet review		43
Liquidity and dividends		49
Capital		52
Trading activities		54
Asset/liability management		55
Contractual obligations		56
The Bank of New York historical earnings per share		57
Supplemental information		58
Recent accounting developments		58
Government monetary policies and Competition		60
Website information		60

Item 1. Financial Statements:		61
Consolidated Income Statement (unaudited)		61
Consolidated Balance Sheet (unaudited)		62
Consolidated Statement of Cash Flows (unaudited)		63
Consolidated Statement of Changes in Shareholders’ Equity (unaudited)		64

Notes to Consolidated Financial Statements		65

Item 4. Controls and Procedures.		83

Forward-Looking Statements and Risk Factors		84

Part II – Other Information

Item 1. Legal and Regulatory Proceedings.		86

Item 1A. Risk Factors.		87

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		87

Item 6. Exhibits.		87

Signature		89

Index to Exhibits		90

Introduction

On July 1, 2007, The Bank of New York Company, Inc. (“The Bank of New York”) and Mellon Financial Corporation (“Mellon”) merged into The Bank of New York Mellon Corporation (“The Bank of New York Mellon” or “BNY Mellon”), with BNY Mellon being the surviving entity. The merger was accounted for as a purchase of Mellon for accounting and financial reporting purposes. As a result, the financial results for the third quarter and year-to-date 2007 include three months of the combined company’s results, while the results for the first half of 2007 and all periods in 2006 include legacy The Bank of New York only. In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” the “company,” the “Company,” the “Corporation” and similar terms for periods prior to July 1, 2007 refer to The Bank of New York, and references to “our,” “we,” “us,” the “Company,” the “Corporation” and similar terms for periods on or after July 1, 2007 refer to BNY Mellon.

The Bank of New York Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing and execution services and treasury services through a worldwide client-focused team. We have more than $20 trillion in assets under custody and administration, more than $1.1 trillion in assets under management and service $11 trillion in outstanding debt.

The merger transaction resulted in The Bank of New York shareholders receiving .9434 shares of The Bank of New York Mellon common stock for each share of The Bank of New York common stock outstanding on the closing date of the merger. All legacy The Bank of New York earnings per share and common share outstanding amounts, in this Form 10-Q, have been restated to reflect this exchange ratio. See page 57 for additional information.

Throughout this Quarterly Report on Form 10-Q, certain measures, which are noted, exclude certain items. We believe the presentation enhances investor understanding of period to period results. We believe they reflect the principal basis on which our management monitors financial performance.

2 The Bank of New York Mellon Corporation

CONSOLIDATED FINANCIAL HIGHLIGHTS (unaudited)


The Bank of New York Mellon Corporation
			Legacy The Bank of New York only
	Quarter ended						Nine months ended ^(a)
(dollar amounts in millions, except per share amounts and unless otherwise noted)	Sept. 30, 2007		June 30, 2007		Sept. 30, 2006		Sept. 30, 2007		Sept. 30, 2006
Reported results
Net income	$	640	$	445	$	352	$	1,519	$	1,222
Basic EPS ^(b)		0.57		0.63		0.49		1.79		1.71
Diluted EPS ^(b)		0.56		0.62		0.49		1.76		1.69

Continuing operations

Fee and other revenue	$	2,931	$	1,580	$	1,263	$	5,986	$	3,898
Net interest revenue		669		452		351		1,548		1,048

Total revenue	$	3,600	$	2,032	$	1,614	$	7,534	$	4,946

Income from continuing operations	$	642	$	448	$	298	$	1,527	$	1,049

EPS from continuing operations ^(b):
Basic	$	0.57	$	0.63	$	0.42	$	1.80	$	1.47
Diluted		0.56		0.62		0.41		1.77		1.45
Diluted excluding merger and integration expense ^(c)		0.67		0.66		0.50		1.96		1.53
Diluted excluding merger and integration expense and intangible amortization ^(c)		0.74		0.69		0.51		2.10		1.57

Return on average tangible common equity		46.01%		37.27%		21.44%		41.20%		26.15%
Return on average tangible common equity excluding merger and integration expense ^(c)		54.02		39.81		25.94		45.43		27.71
Return on average common equity		8.89		15.54		11.61		11.85		14.03
Return on average common equity excluding merger and integration expense ^(c)		10.64		16.65		14.05		13.16		14.87

Fee and other revenue as a percentage of total revenue (FTE)		81%		78%		78%		79%		78%
Annualized fee and other revenue per employee (in thousands) (based on average headcount)	$	290	$	274	$	248	$	278	$	260

Non-U.S. - Percent of revenue (FTE)		30%		32%		29%		31%		30%

Pre-tax operating margin (FTE)		25%		32%		26%		29%		32%
Pre-tax operating margin (FTE) excluding merger and integration expense and intangible amortization expense		35%		36%		33%		36%		34%
Net interest margin (FTE)		2.02%		2.01%		1.89%		2.05%		1.93%
Net interest revenue (FTE)	$	674	$	454	$	358	$	1,557	$	1,069

Assets under custody and administration (in trillions)	$	20.8	$	14.9	$	12.2	$	20.8	$	12.2
Equity securities		36%		32%		31%		36%		31%
Fixed income securities		64		68		69		64		69
Cross-border assets (in trillions)	$	8.3	$	6.2	$	4.2	$	8.3	$	4.2

Assets under management (in billions) :
Equity securities	$	456	$	43	$	36	$	456	$	36
Fixed income securities		215		22		20		215		20
Overlay and alternative investments		160		47		41		160		41
Money market		275		41		34		275		34

Total assets under management	$	1,106	$	153	$	131	$	1,106	$	131

Securities lending cash collateral assets (in billions)	$	575	$	365	$	368	$	575	$	368

Average common shares and equivalents outstanding (in thousands) ^(b):
Basic		1,125,165		709,783		713,946		849,259		715,405
Diluted		1,140,797		722,661		723,272		862,669		724,249

The Bank of New York Mellon Corporation 3

CONSOLIDATED FINANCIAL HIGHLIGHTS (unaudited) (continued)


The Bank of New York Mellon Corporation
				Legacy The Bank of New York only
	Quarter ended									Nine months ended ^(a)
(dollar amounts in millions, except per share amounts and unless otherwise noted)	Sept. 30, 2007			June 30, 2007			Sept. 30, 2006			Sept. 30, 2007			Sept. 30, 2006

Capital ratios
Tier I capital ratio ^(d)		9.12%			8.09%			8.17%			9.12%			8.17%
Total (Tier I plus Tier II capital ratio) ^(d)		13.05			12.07			12.32			13.05			12.32
Adjusted tangible shareholders’ equity to assets ratio ^(d)(e)		5.31			4.53			5.58			5.31			5.58

Return on average assets		1.39%			1.57%			1.19%			1.53%			1.41%
Return on average assets excluding merger and integration costs ^(c)		1.66			1.68			1.44			1.70			1.49
Return on average tangible assets		1.78			1.74			1.25			1.81			1.48
Return on average tangible assets excluding merger and integration costs ^(c)		2.10			1.86			1.51			1.99			1.57

Selected average balances
Interest-earning assets	$	133,534		$	90,557		$	76,088		$	101,256		$	74,238
Total assets		183,828			114,323			108,864			133,699			108,472
Interest-bearing deposits		80,870			53,610			43,905			59,582			42,738
Noninterest-bearing deposits		26,466			15,334			10,687			18,944			10,561
Shareholders’ equity		28,669			11,566			10,262			17,234			10,012

Credit loss provision and net charge-offs
Total provision	$	-		$	(15	)	$	(4	)	$	(30	)	$	(5	)
Total net (charge-offs) recoveries		(35	)		5			-			(27	)		10

Loans
Allowance for loan losses as a percent of total loans		0.65%			0.73%			1.00%			0.65%			1.00%
Allowance for loan losses as a percent of non-margin loans		0.72			0.85			1.16			0.72			1.16
Total allowance for credit losses as a percent of total loans		1.00			1.08			1.40			1.00			1.40
Total allowance for credit losses as a percent of non-margin loans		1.11			1.25			1.63			1.11			1.63

Nonperforming assets
Total nonperforming assets	$	37		$	27		$	38		$	37		$	38
Nonperforming assets ratio		0.1%			0.1%			0.1%			0.1%			0.1%

Other
Employees		40,600			23,200			20,500			40,600			20,500
Book value per common share ^(b)	$	25.43		$	16.50		$	14.52		$	25.43		$	14.52
Period-end shares outstanding (in thousands) ^(b)		1,138,682			717,000			720,751			1,138,682			720,751

Dividends per share ^(b)	$	0.24		$	0.23		$	0.23		$	0.71		$	0.68
Dividend yield		2.17%			2.12%			2.46%			2.17%			2.46%
Closing common stock price per share ^(b)	$	44.14		$	43.93		$	37.38		$	44.14		$	37.38
Market capitalization at period-end		50,266			31,495			26,938			50,266			26,938

(a)

Third quarter and year-to-date 2007 include three months of the combined company’s results while the results for the second quarter 2007 and all periods in 2006 include legacy The Bank of New York only.

(b)

Legacy The Bank of New York earnings per share and all other share-related data are presented in post-merger share count terms. See page 57 for additional information. Also see page 58 for a reconciliation of reported net income and diluted earnings per share to non-GAAP net income and diluted earnings per share.

(c)

Calculated excluding pre-tax charges associated with merger and integration expenses ($218 million in the third quarter of 2007, $47 million in the second quarter of 2007 and $89 million in the third quarter of 2006, $280 million in the first nine months of 2007 and $89 million in the first nine months of 2006).

(d)

Includes discontinued operations.

(e)

Includes deferred tax liabilities of $1.947 billion for the third quarter and first nine months of 2007, and $149 million for the second quarter of 2007, related to non-tax deductible identifiable intangible assets. There were no deferred tax liabilities in the third quarter and first nine months of 2006.

4 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk.

BNY Mellon’s actual results of future operations may differ from those estimated or anticipated in certain forward-looking statements contained herein for reasons which are discussed below and under the heading “Forward-Looking Statements and Risk Factors.” When used in this report, words such as “estimate,” “forecast,” “project,” “anticipate,” “confident,” “target,” “expect,” “intend,” “continue,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “may,” “will,” “strategy,” “synergies,” “opportunities,” “trends” and words of similar meaning, signify forward-looking statements in addition to statements specifically identified as forward-looking statements. In addition, certain business terms used in this document are defined in The Bank of New York’s 2006 Annual Report on Form 10-K.

Overview

Our businesses

The Bank of New York Mellon Corporation (NYSE: BK) is a global leader in providing a comprehensive array of services that enable institutions and individuals to manage and service their financial assets in more than 100 markets worldwide. We have a long tradition of collaborating with clients to deliver innovative solutions through our core competencies: asset and wealth management, securities servicing and treasury services. Our extensive global client base includes a broad range of leading financial institutions, corporations, government entities, endowments/foundations and high-net-worth individuals. One of our two principal subsidiaries, The Bank of New York (the “Bank”), founded in 1784, is the oldest bank in the United States. Our other principal subsidiary, Mellon Bank, N.A. (“Mellon Bank”), was founded in 1869. Both institutions have consistently played a prominent role in the evolution of financial markets worldwide.

BNY Mellon’s businesses benefit from the global growth in financial assets. Our success is based on continuing to provide superior client service, strong investment performance and the highest fiduciary standards. Our goal is to deploy capital effectively to our businesses to accelerate their long-term growth and deliver top-tier returns to our shareholders.

Our long-term financial goal is focused on achieving superior total returns for shareholders by generating first quartile earnings per share growth over time relative to a group of 12 peer companies. Key components of this strategy include: providing the best client service versus peers (as measured through independent surveys); strong investment performance (relative to investment benchmarks); above median revenue growth (relative to peer companies for each of our businesses); competitive margins; and positive operating leverage.

Based on the growth opportunities in our businesses, we expect that an increasing percentage of our revenue and income will be derived outside the U.S.

As measurements of efficiency, over time we expect to increase the level of fee revenue per employee and increase our pre-tax margins.

We believe that our businesses are compatible with our strategy and goals for the following reasons:

Demand for our products and services is driven by market and demographic trends in the markets in which we compete. These trends include: growth in worldwide retirement and financial assets; the growth and concentration of the wealth segments; global growth in assets managed by financial institutions; and the globalization of the investment process.

Many of our products complement one another.

We are able to leverage sales, distribution and technology across our businesses benefiting our clients and shareholders.

The revenue generated by our businesses is principally fee-based.

Our businesses generally do not require as much capital for growth as traditional banking.

We pursue our long-term financial goal by focusing on organic revenue growth, expense management, superior client service, successful integration of acquisitions and disciplined capital management.

In 2007, we established a Tier I capital target of 8% as our principal capital measure. We also revised our secondary targeted capital ratio from 5% of tangible common equity to 5% of adjusted tangible common equity. The change from “tangible common equity” to “adjusted tangible common equity” reflects the

The Bank of New York Mellon Corporation 5

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

impact of the merger with Mellon and associated goodwill, intangibles and related deferred tax liability. The goodwill and intangibles created in the merger have no economic impact, but reduce tangible equity.

How we reported results

All information in this Quarterly Report on Form 10-Q is reported on a continuing operations basis, unless otherwise noted. For a description of discontinued operations, see Note 5 of Notes to Consolidated Financial Statements.

Certain amounts are presented on a fully taxable equivalent (FTE) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. In addition, third quarter and year-to-date 2007 include three months of the combined company’s results, while the results for the first half of 2007 and all periods in 2006 include legacy The Bank of New York only.

Third quarter 2007 highlights

We reported third quarter net income of $640 million and diluted earnings per share of 56 cents, and income from continuing operations of $642 million and diluted earnings per share of 56 cents. This compares to net income of $352 million, or 49 cents of diluted earnings per share, and income from continuing operations of $298 million, or 41 cents of diluted earnings per share, in the third quarter of 2006. The third quarter of 2007 included merger and integration expenses of $218 million (pre-tax), which is approximately 11 cents per share. Excluding this amount, diluted earnings per share from continuing operations in the third quarter of 2007 was 67 cents per share. The third quarter of 2006 included merger and integration expenses of $89 million (pre-tax), which is approximately 9 cents per share. Excluding this amount, diluted earnings per share from continuing operation in the third quarter of 2006 was 50 cents per share.

Third quarter 2007 results include:

The net pre-tax benefit of $27 million from a negotiated settlement received for early termination

of a contract that occurred in 2005 associated with the clearing business, as well as the pre-tax write-offs of the value of the remaining interest in a hedge fund manager that was disposed of in 2006 ($32 million) and internally developed software ($6 million). In addition, the impact of the merger in the third quarter on the New York state marginal tax rate required a recalculation of the yield on our leverage lease portfolio. The effect was a $22 million reduction in net interest revenue, together with a $45 million tax benefit recorded as a reduction to taxes. The net impact of all of these items increased earnings per share by approximately 1 cent.

Year-to-date net income was $1.519 billion, or $1.76 of diluted earnings per share, compared to $1.222 billion, or $1.69 of diluted earnings per share for the same period in 2006. Year-to-date income from continuing operations was $1.527 billion, or $1.77 of diluted earnings per share compared with $1.049 billion, or $1.45 of diluted earnings per share in 2006.

Performance highlights for the third quarter of 2007 include:

Assets under management, excluding securities lending assets, amounted to $1.106 trillion at Sept. 30, 2007 compared to $153 billion at June 30, 2007. Assets under custody and administration amounted to $20.8 trillion at Sept. 30, 2007 compared with $14.9 trillion at June 30, 2007. Both increases primarily resulted from the merger with Mellon;

Asset and wealth management fees totaled $854 million in the third quarter of 2007 compared with $133 million in the third quarter of 2006. The increase was primarily due to the merger with Mellon as well as net new business and higher equity market levels;

Asset servicing revenue was $720 million in the third quarter of 2007 compared with $346 million in the third quarter of 2006. The increase was primarily due to the merger with Mellon, as well as a record level of securities lending revenue and increased client activity related to market volatility and net new business;

Issuer services revenue was $436 million in the third quarter of 2007 compared with

6 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

$194 million in the third quarter of 2006. The increase was primarily due to the Acquired Corporate Trust Business and also reflects a strong quarter in both depositary receipts and global products within Corporate Trust, and to a lesser extent the merger with Mellon;

Performance fees were a negative $3 million reflecting the impact of market volatility during the third quarter of 2007 on certain alternative and quantitative strategies as well as weaker relative performance compared to prior quarters;

Net interest revenue of $669 million increased in the third quarter of 2007 compared with $351 million in the third quarter of 2006. The increase was primarily due to the merger with Mellon, as well as growth in client deposits and wider spreads on investment securities;

Noninterest expense was $2.706 billion in the third quarter of 2007 compared with $1.196 billion in the third quarter of 2006. The increase resulted from the merger with Mellon as well as $218 million of merger and integration expense and $131 million of intangible amortization expense recorded in the third quarter of 2007. The current quarter also included $79 million of merger related synergies ($62 million net of open positions eliminated); and

Asset quality remained strong.

Revenue overview

The vast majority of BNY Mellon’s revenue consists of fee and other revenue, given our mix of businesses, with net interest revenue primarily comprising the balance.

Fee and other revenue. In the third quarter of 2007, fee and other revenue represented 81% of total revenue, on a fully taxable equivalent basis, compared with 78% in the third quarter of 2006.

Since fee and other revenue constitutes the majority of our total revenue, we discuss it in greater detail by type of fee in the following sections, as well as in the business segments section beginning on page 18.

There we note the more specific drivers of such revenue and the factors that caused the various types of fee and other revenue to be higher or lower in the third quarter of 2007 compared with the third quarter of 2006. The business segments discussion combines, for each business sector, all types of fee and other revenue generated directly by that sector as well as fee and other revenue transferred between sectors under revenue transfer agreements, with net interest revenue generated directly by or allocated to that sector. The discussion of revenue by business segment is fundamental to an understanding of BNY Mellon’s results as it represents a principal measure by which management reviews the performance of our businesses compared with performance in prior periods, with the operating plan and with the performance of our competitors.

Net interest revenue comprised 19% of total revenue, on an FTE basis, in the third quarter of 2007 compared with 22% in the third quarter of 2006. Net interest revenue is generated from a combination of loans, investment securities, interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements. For more information, see page 12.

The Bank of New York Mellon Corporation 7

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Segment overview


Segment/Sector		Primary Types of Fee Revenue
Asset & Wealth Management Segment
Asset Management Sector		· Asset and wealth management fees from: Institutional clients Mutual funds Private clients · Performance fees · Distribution and servicing fees
Wealth Management Sector		· Wealth management fees from high-net-worth individuals, families and charitable gift programs, foundations and endowments
Institutional Services Segment
Asset Servicing Sector		· Asset servicing fees, including: Institutional trust and custody fees Broker-dealer services Securities lending · Foreign exchange and other trading activities
Issuer Services Sector		· Issuer services fees, including: Corporate Trust Depositary receipts Shareowner services
Clearing & Execution Services Sector		· Clearing and execution services, including: Broker Dealer and Registered Investment Advisor services Electronic trading services
Treasury Services Sector		· Treasury services fees, including: Global payment services Working capital solutions Global markets and institutional banking services · Financing-related fees
Other Segment		· Business exits · Corporate Treasury activities · Merger and integration charges

8 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Fee and other revenue


Fee and other revenue	3Q07		Legacy The Bank of New York only				3Q07 vs. 2Q07	3Q07 vs. 3Q06	Year-to-date ^(a)				YTD07 vs. YTD06
(in millions unless otherwise noted)	3Q07		2Q07		3Q06		3Q07 vs. 2Q07	3Q07 vs. 3Q06	2007		2006		YTD07 vs. YTD06
Securities servicing fees:
Asset servicing	$	720	$	427	$	346	69%	108%	$	1,540	$	1,046	47%
Issuer services		436		367		194	19	125		1,122		555	102
Clearing and execution services		304		291		302	4	1		877		981	(11)
Total securities servicing fees		1,460		1,085		842	35	73		3,539		2,582	37
Asset and wealth management fees		854		168		133	408	542		1,173		393	198
Performance fees		(3)		21		3	N/M	N/M		32		17	88
Foreign exchange and other trading activities		238		117		83	103	187		482		322	50
Treasury services		122		55		55	122	122		227		158	44
Distribution and servicing		95		2		2	N/M	N/M		99		4	N/M
Financing-related fees		51		61		62	(16)	(18)		164		189	(13)
Investment income		22		39		34	(44)	(35)		97		108	(10)
Securities gains (losses)		(9)		(2)		1	N/M	N/M		(9)		-	N/M
Other ^(b)		101		34		48	197	110		182		125	46
Total fee and other revenue	$	2,931	$	1,580	$	1,263	86%	132%	$	5,986	$	3,898	54%

Fee and other revenue as a percentage of total revenue (FTE)		81%		78%		78%				79%		78%

Market value of assets under management at period-end (in billions)	$	1,106	$	153	$	131	623%	744%	$	1,106	$	131	744%
Market value of assets under custody or administration at period-end (in trillions)	$	20.8	$	14.9	$	12.2	40%	70%	$	20.8	$	12.2	70%

(a)

Third quarter and year-to-date 2007 include three months of the combined company’s results, while second quarter 2007 and the results for all periods in 2006 include legacy The Bank of New York only.

(b)

Includes net economic value payments of $3 million and $13 million for the third and second quarters of 2007 and $41 million for the nine months ended Sept. 30, 2007.

N/M

- Not meaningful.

Fee and other revenue

The results of many of our businesses are influenced by client activities that vary by quarter. For instance, we experience seasonal increases in securities lending and depositary receipts reflecting European dividend distribution during the second quarter of the year, and to a lesser extent, in the fourth quarter of the year. Also, consistent with an overall decline in securities industry activity in the summer, we typically experience a seasonal decline in the third quarter. However, the market volatility in the third quarter of 2007 resulted in higher than normal growth in foreign exchange and other trading revenue, securities lending revenue, depositary receipts and clearing and execution fees.

The increase in fee and other revenue versus the prior year quarter primarily reflects the merger with Mellon. In addition, growth in securities servicing

fees reflects higher revenue from the Acquired Corporate Trust Business, a record level of securities lending revenue and a strong quarter in depositary receipts. The increase in foreign exchange and other trading fees resulted primarily from a significant increase in currency volatility. The sequential-quarter increase in fee and other revenue primarily reflects the merger with Mellon, growth in securities servicing and higher foreign exchange and other trading activities.

Securities servicing fees

The increase in securities servicing fees compared to the third quarter of 2006 reflects the merger with Mellon, the Acquired Corporate Trust Business, as well as strong growth in Issuer services and Asset servicing fees, partially offset by the BNY ConvergEx transaction. Securities servicing fees were up sequentially, reflecting the merger with

The Bank of New York Mellon Corporation 9

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Mellon and growth in Issuer services, Asset servicing and Clearing and execution services. See the “Institutional Services Segment” in “Business Segments” for additional details.

Asset and wealth management fees

Asset and wealth management fees increased from both the third quarter of 2006 and second quarter of 2007 primarily due to the merger with Mellon, net new business and improved equity markets.


Asset and wealth management revenue - by business sector
(in millions)	3Q07		3Q06^(a)		3Q07 vs. 3Q06
Asset Management:
Mutual funds	$	307	$	2	N/M%
Institutional clients		331		64	417
Private clients		46		12	283

Total		684		78	777
Wealth Management		152		46	230
Clearing and execution services		12		9	33
Other		6		-	N/M
Total asset and wealth management fee revenue	$	854	$	133	542%

(a)

Legacy The Bank of New York only.

Total assets under management for the Asset and Wealth management segment were $1.106 trillion at Sept. 30, 2007, up from $131 billion at Sept. 30, 2006 and $153 billion at June 30, 2007. The increases from Sept. 30, 2006 and June 30, 2007 resulted from the merger with Mellon, net new business and improved markets. Net asset flows totaled $29 billion in the third quarter of 2007 resulting from $27 billion of money market inflows and $2 billion of long-term inflows.

A large category of Asset and Wealth management fees are from managed mutual funds generated in the Asset Management sector. These fees are based on the daily average net assets of each fund and the basis point management fee paid by that fund. Managed mutual fund revenue was $307 million compared with $2 million in the third quarter of 2006. The increase resulted from the merger with Mellon.

Performance fees

Performance fees are generally calculated as a percentage of a portfolio’s performance in excess of a benchmark index or a peer group’s performance. There is an increase/decrease in incentive expense with a related change in performance fees.

Performance fees were a negative $3 million in the third quarter of 2007, a decrease of $6 million compared with the third quarter of 2006 and a decrease of $24 million compared with the second quarter of 2007, reflecting the impact of market volatility during the third quarter of 2007 on certain alternative and quantitative strategies as well as weaker relative performance.

Foreign exchange and other trading activities

Foreign exchange and other trading activities revenue, which is primarily reported in the Asset Servicing sector, increased by $155 million, or 187%, to $238 million compared with the third quarter of 2006 and increased $121 million compared with the second quarter of 2007. The increase compared to both the third quarter of 2006 and second quarter of 2007 was due to the merger with Mellon, higher client volumes, the favorable impact that resulted from increased currency volatility, and a higher valuation of the credit derivative portfolio caused by the widening of credit spreads.

Treasury services

Treasury services includes fees related to funds transfer, cash management, and liquidity management. Treasury services fees increased $67 million from both the second quarter of 2007 and third quarter of 2006 reflecting the merger with Mellon.

Distribution and servicing fees

Distribution and servicing fees earned from mutual funds are primarily based on average assets in the funds and the sales of funds managed or administered by BNY Mellon and are primarily reported in the Asset Management sector. These fees, which include 12b-1 fees, fluctuate with the overall level of net sales, the relative mix of sales between share classes and the funds’ market values. The $93 million increase in distribution and servicing fee revenue in the third quarter of 2007 compared with both the third quarter of 2006 and second quarter of 2007 primarily reflects the merger with Mellon, as well as higher sales volumes and higher market values of mutual funds. The impact of these fees on income in any one period can be more than offset by distribution and servicing expense

10 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

paid to other financial intermediaries to cover their costs for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement.

Financing-related fees

Financing-related fees, which are primarily reported in the Treasury Services sector, include capital markets and investment banking fees, loan commitment fees and credit-related trade fees. Financing-related fees decreased from the third quarter 2006 and second quarter 2007 reflecting a lower level of credit-related activities consistent with our strategic direction.

Investment income

Investment income, which is primarily reported in the Other segment and the Asset Management sector, includes the gains and losses on private equity investments and seed capital investments, income from insurance contracts, and lease residual gains and losses. The decline compared to prior periods principally reflects the lower market value of seed capital investments due to the market environment. Venture capital income was $17 million in the third quarter of 2007, down from $18 million in the second

quarter of 2007 and down from $23 million in the third quarter of 2006. On a year-to-date basis, venture capital income was $53 million, down from $68 million a year ago.

Securities gains (losses)

The $9 million securities loss for the quarter reflects a $13 million loss on CDO exposure.

Other revenue

Other revenue is comprised of expense reimbursements from joint ventures, merchant card fees, asset-related gains, equity investment income, net economic value payments and other transactions. Expense reimbursements from joint ventures relate to expenses incurred by BNY Mellon on behalf of joint ventures. Asset-related gains (losses) include loan and real estate dispositions. Equity investment income primarily reflects our proportionate share of the income from our investment in Wing Hang Bank Limited. Other transactions primarily includes low income housing, other investments and various miscellaneous revenues. The breakdown among these categories is shown in the following table:


Other revenue				Legacy The Bank of New York only
	Quarter ended								Nine months ended ^(a)
(in millions)	Sept. 30, 2007			June 30, 2007		Sept. 30, 2006			Sept. 30, 2007		Sept. 30, 2006
Expense reimbursements from joint ventures	$	31		$	-	$	-		$	31	$	-
Merchant card fees		15			-		-			15		-
Asset-related gains (losses)		(5	)		5		40			4		92
Equity investment income		13			12		11			38		36
Net economic value payments		3			13		-			41		-
Other		44			4		(3	)		53		(3	)
Other revenue	$	101		$	34	$	48		$	182	$	125

(a)

Third quarter and year-to-date 2007 include three months of the combined company’s results, while the results for the second quarter 2007 and all periods in 2006 include legacy The Bank of New York only.

Other revenue increased sequentially reflecting the merger with Mellon and a settlement received for early termination of a contract that occurred in 2005 associated with the clearing business ($28 million), partially offset by lower net economic value payments. The third quarter of 2007 included $3 million and the second quarter of 2007 included $13 million of net economic value payments primarily from European, Asian, and Latin American Corporate Trust clients’ net revenue that has not yet transferred. Upon conversion, revenue from Corporate Trust clients is reflected in Issuer Services fees and net interest revenue.

Year-to-date 2007 compared with year-to-date 2006

Fee and other revenue for the first nine months of 2007 increased $2,088 million, or 54%, compared with the first nine months of 2006. This increase primarily reflects the merger with Mellon, higher issuer services revenue including the impact of the Acquired Corporate Trust Business, and higher asset servicing revenue driven by custody, fund services, and broker dealer services, as well as higher foreign exchange and other trading activities, partially offset by the BNY ConvergEx transaction.

The Bank of New York Mellon Corporation 11

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Net interest revenue


Net interest revenue			Legacy The Bank of New York only				3Q07 vs. 2Q07	3Q07 vs. 3Q06					YTD07 vs. YTD06
Net interest revenue			Legacy The Bank of New York only						Year-to-date ^(a)
(dollar amounts in millions)	3Q07		2Q07		3Q06				2007		2006
Net interest revenue	$	669	$	452	$	351	48%	91%	$	1,548	$	1,048	48%
Tax equivalent adjustment		5		2		7	N/M	N/M		9		21	N/M
Net interest revenue (FTE)	$	674	$	454	$	358	48%	88%	$	1,557	$	1,069	46%

Net interest margin ^(b)		2.02%		2.01%		1.89%	1 bp	13 bp		2.05%		1.93%	12 bp

(a)

(b)

Calculated on a continuing operations basis even though the balance sheet, in accordance with GAAP, is not restated for discontinued operations.

N/M - Not meaningful.

bp - basis points.

Net interest revenue on an FTE basis totaled $674 million in the third quarter of 2007, compared with $358 million in the third quarter of 2006 and $454 million in the second quarter of 2007. The net interest margin was 2.02% in the third quarter of 2007, compared with 1.89% in the third quarter of 2006 and 2.01% in the second quarter of 2007.

The increase in net interest revenue from both prior periods principally reflects the merger with Mellon as well as a higher level of average interest-earning assets driven by growth in client deposits, wider spreads on investment securities, lower bond premium amortization due to slowing prepayments and a positive day variance relative to the sequential quarter. This growth was partially offset by the required recalculation of the yield on leverage leases under

SFAS 13, for changes to New York state tax rates resulting from the merger with Mellon ($22 million). The increase in interest-earning assets reflects the impact of higher deposits related to the Acquired Corporate Trust Business of $14 billion in the third quarter of 2007 compared with $9 billion in the second quarter of 2007, as well as higher client activity across our businesses which drove higher deposits.

For the nine months ended Sept. 30, 2007, net interest revenue on an FTE basis was $1.557 billion compared with $1.069 billion in 2006, while the net interest margin was 2.05% in the first nine months of 2007 and 1.93% in the first nine months of 2006. The increase in net interest revenue resulted from the factors mentioned above.

12 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

The Bank of New York Mellon Corporation


AVERAGE BALANCES AND INTEREST YIELDS/RATES ^(a)
					Legacy The Bank of New York only
	Quarter ended
	Sept. 30, 2007				June 30, 2007				Sept. 30, 2006
(dollar amounts in millions)	Average balance			Average yields/rates	Average balance			Average yields/rates	Average balance			Average yields/rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign)	$	34,461		4.83%	$	20,558		4.54%	$	16,033		4.11%
Federal funds sold and securities under resale agreements		5,504		5.26		5,846		5.25		1,907		4.63
Margin loans		5,293		6.29		5,563		6.31		5,158		6.54
Non-margin loans:
Domestic offices		27,044		5.17		19,170		5.04		18,184		4.78
Foreign offices		13,180		5.50		12,584		5.70		10,210		5.80

Total non-margin loans		40,224		5.28		31,754		5.30		28,394		5.14
Securities
U.S. government obligations		401		4.59		87		4.90		198		4.24
U.S. government agency obligations		11,671		5.56		2,775		5.20		3,427		4.95
Obligations of states and political subdivisions		734		6.55		77		8.65		99		8.67
Other securities		33,361		5.69		22,572		5.22		18,395		5.48
Trading securities		1,885		3.93		1,325		4.27		2,477		4.69

Total securities		48,052		5.60		26,836		5.17		24,596		5.33

Total interest-earning assets		133,534		5.32		90,557		5.15		76,088		5.07
Allowance for credit losses		(303	)			(290	)			(346	)
Cash and due from banks		5,013				2,631				2,226
Other assets		45,541				21,380				17,611
Assets of discontinued operations		43				45				13,285
Total assets	$	183,828			$	114,323			$	108,864
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Money market rate accounts	$	17,204		3.38%	$	6,406		2.87%	$	5,117		2.83%
Savings		793		3.09		423		1.92		460		0.74
Certificates of deposit of $100,000 & over		3,025		5.37		2,679		5.23		4,310		5.42
Other time deposits		1,392		6.32		684		5.36		294		5.03
Foreign offices		58,456		3.78		43,418		3.64		33,724		3.43

Total interest-bearing deposits		80,870		3.79		53,610		3.64		43,905		3.54
Federal funds purchased and securities under repurchase agreements		4,655		4.29		1,377		4.79		2,728		5.02
Other funds borrowed		2,790		4.90		2,321		4.22		1,834		5.99
Payables to customers and broker-dealers		5,316		3.54		5,154		3.63		4,657		3.62
Long-term debt		14,767		5.47		10,042		5.38		8,339		5.37

Total interest-bearing liabilities		108,398		4.06		72,504		3.92		61,463		3.93
Total noninterest-bearing deposits		26,466				15,334				10,687
Other liabilities		20,252				14,874				13,167
Liabilities of discontinued operations		43				45				13,285
Total liabilities		155,159				102,757				98,602
Shareholders’ equity		28,669				11,566				10,262
Total liabilities and shareholders’ equity	$	183,828			$	114,323			$	108,864
Net interest margin:
Taxable equivalent basis				2.02%				2.01%				1.89%

(a)

Average balances and rates have been impacted by allocations made to match assets of discontinued operations with liabilities of discontinued operations.

Note: Interest and average yields/rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the years, and are before the effect of reserve requirements.

The Bank of New York Mellon Corporation 13

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

The Bank of New York Mellon Corporation

AVERAGE BALANCES AND INTEREST YIELDS/RATES^(a)

Legacy The Bank

of New York only

Nine months ended

Sept. 30, 2007 ^(b)

Sept. 30, 2006

(dollar amounts in millions)

Average
balance

Average
yields/rates

Average
balance

Average
yields/rates

Assets

Interest-earning assets:

Interest-bearing deposits with banks (primarily foreign)

22,932

4.65%

12,720

3.91%

Federal funds sold and securities under resale agreements

5,266

5.24

1,775

3.99

Margin loans

5,418

6.31

5,438

6.08

Non-margin loans:

Domestic offices

21,844

5.12

17,543

4.68

Foreign offices

12,368

5.67

10,050

5.49

Total non-margin loans

34,212

5.32

27,593

4.97

Securities

U.S. government obligations

193

4.69

213

4.23

U.S. government agency obligations

5,816

5.39

3,795

4.65

Obligations of states and political subdivisions

301

6.88

109

8.42

Other securities

25,133

5.44

18,717

5.19

Trading securities

1,985

4.49

3,878

4.55

Total securities

33,428

5.38

26,712

5.03

Total interest-earning assets

101,256

5.24

74,238

4.87

Allowance for credit losses

(293

)

(341

)

Cash and due from banks

3,365

3,187

Other assets

29,313

17,532

Assets of discontinued operations

13,856

Total assets

133,699

108,472

Liabilities and shareholders’ equity

Interest-bearing liabilities:

Money market rate accounts

9,967

3.18%

5,251

2.57%

Savings

545

2.47

461

1.29

Certificates of deposit of $100,000 & over

2,945

5.35

4,221

5.03

Other time deposits

890

5.83

629

4.67

Foreign offices

45,235

3.71

32,176

3.12

Total interest-bearing deposits

59,582

3.72

42,738

3.25

Federal funds purchased and securities under repurchase agreements

2,531

4.52

2,532

4.65

Other funds borrowed

2,331

4.14

2,045

4.54

Payables to customers and broker-dealers

5,074

3.59

4,972

3.34

Long-term debt

11,254

5.46

8,167

5.13

Total interest-bearing liabilities

80,772

3.99

60,454

3.61

Total noninterest-bearing deposits

18,944

10,561

Other liabilities

16,691

13,589

Liabilities of discontinued operations

13,856

Total liabilities

116,465

98,460

Shareholders’ equity

17,234

10,012

Total liabilities and shareholders’ equity

133,699

108,472

Net interest margin:

Taxable equivalent basis

2.05%

1.93%

(a)

Average balances and rates have been impacted by allocations made to match assets of discontinued operations with liabilities of discontinued operations.

(b)

Average balances and rates for nine months ended 2007 include three months of the combined company’s results and six months of legacy The Bank of New York.

14 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Noninterest expense


Noninterest expense			Legacy The Bank of New York Only				3Q07 vs. 2Q07	3Q07 vs. 3Q06	Year-to-date^(a)				YTD07 vs. YTD06
(in millions)	3Q07		2Q07		3Q06		3Q07 vs. 2Q07	3Q07 vs. 3Q06	2007		2006		YTD07 vs. YTD06
Staff:
Compensation	$	764	$	472	$	404	62%	89%	$	1,695	$	1,182	43%
Incentives		347		171		141	103	146		665		422	58
Employee benefits		169		109		99	55	71		392		300	31
Total staff		1,280		752		644	70	99		2,752		1,904	45
Professional, legal and other purchased services		241		132		89	83	171		503		256	96
Net occupancy		144		81		70	78	106		304		206	48
Distribution and servicing		127		4		4	N/M	N/M		135		12	N/M
Software		91		57		53	60	72		202		161	25
Furniture and equipment		80		54		46	48	74		184		145	27
Sub-custodian		58		42		31	38	87		134		101	33
Business development		56		37		27	51	107		123		78	58
Clearing and execution		52		44		52	18	-		133		161	(17)
Communications		33		23		26	43	27		75		74	1
Other		195		87		51	124	282		354		174	103
Subtotal		2,357		1,313		1,093	80	116		4,899		3,272	50
Merger and integration expense:
The Bank of New York Mellon		205		35		-	N/M	N/M		244		-	N/M
Acquired Corporate Trust Business		13		12		89	N/M	N/M		36		89	N/M
Amortization of intangible assets		131		29		14	N/M	N/M		188		42	N/M
Total noninterest expense	$	2,706	$	1,389	$	1,196	95%	126%	$	5,367	$	3,403	58%
Total staff expense as a percentage of total revenue (FTE)		35%		37%		40%				36%		38%
Employees at period-end		40,600		23,200		20,500	75%	98%		40,600		20,500	98%

(a)

N/M - Not meaningful

Total noninterest expense increased compared with the third quarter of 2006 and second quarter of 2007. The merger with Mellon, the purchase of the Acquired Corporate Trust Business and the disposition of certain execution businesses in the BNY ConvergEx transaction, significantly impacted comparisons of the third quarter of 2007 to the third quarter of 2006. The net impact of these transactions increased nearly all expense categories. The results also reflect the write-off of the remaining interest in a hedge fund manager that was disposed of in 2006 ($32 million) and the write-off of internally developed software ($6 million), partially offset by $79 million in expense synergies ($62 million net of open positions eliminated), in the third quarter of 2007. The sequential quarter increase reflects the merger with Mellon and the write-off of the interest in the hedge fund manager partially offset by the expense synergies. The increase in merger and

integration expense and intangible amortization expense compared to both prior periods resulted from the merger with Mellon.

Staff expense

Given the company’s mix of fee-based businesses, which are staffed primarily with high quality professionals, staff expense comprised approximately 54% of total noninterest expense excluding merger and integration and intangible amortization in the third quarter of 2007.

Staff expense is comprised of:

compensation expense, which includes;

base salary expense, primarily driven by headcount;

the cost of temporary help and overtime; and

severance expense;

The Bank of New York Mellon Corporation 15

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

incentive expense, which includes:

additional compensation earned under a wide range of sales commission plans and incentive plans designed to reward a combination of individual, business unit and corporate performance goals; and

stock-based compensation expense; and

employee benefit expense, primarily medical benefits, payroll taxes, pension and other retirement benefits.

The increase in staff expense reflects a net increase in headcount associated with the Mellon merger and the Acquired Corporate Trust Business, the consolidation of AIB/BNY, higher incentive expense, and organic business growth, partially offset by the BNY ConvergEx transaction.

Non-staff expense

Non-staff expense includes certain expenses that vary with the levels of business activity and levels of expensed business investments, fixed infrastructure costs and expenses associated with corporate activities related to technology, compliance, productivity initiatives and corporate development.

Non-staff expense, excluding merger and integration expense and intangible amortization expense, totaled $1.077 billion in the third quarter of 2007 compared with $449 million in the third quarter of 2006. Non-staff expense was impacted by the merger with Mellon, the Acquired Corporate Trust Business, the consolidation of AIB/BNY, and the BNY ConvergEX transaction, and included the following activity:

A $123 million increase in distribution and servicing expense related to the merger with Mellon. Distribution and servicing expense represents amounts paid to other financial intermediaries to cover their costs for distribution (marketing support, administration and record keeping) and servicing of mutual funds. Generally, increases in distribution and servicing expense reflect higher net sales. Distribution and servicing expense in any one year is not fully recovered by higher distribution and service revenue; rather it contributes to future growth in mutual fund

management revenue reflecting the growth in mutual fund assets generated through certain distribution channels;

The increase in professional, legal and other purchased services, business development and equipment expense reflect business growth and strategic initiatives;

Software expense increased reflecting business growth, strategic initiatives and the write-off of internally developed software ($6 million);

The increase in subcustodian expenses reflects increased asset values, higher transaction volumes and increased depositary receipts activity; and

Other expense increased reflecting the write-off of the remaining interest in a hedge fund manager and organic business growth.

In the third quarter of 2007 we incurred $205 million of merger and integration expenses related to the merger with Mellon. Merger and integration expenses are comprised of the following:

Personnel related—includes severance, retention, relocation expenses, stock option and restricted stock expense ($73 million)

Transaction costs—includes investment banker and legal fees, and foundation funding ($65 million)

Integration/conversion costs—including consulting, system conversions and staff ($52 million)

One-time costs—includes facilities related costs, asset write-offs, vendor contract modifications, reloading and net gain (loss) on disposals ($15 million)

We also incurred $13 million of merger and integration expense associated with the Acquired Corporate Trust Business in the third quarter of 2007.

Amortization of intangible assets increased to $131 million in the third quarter of 2007 compared with $14 million in the third quarter of 2006, reflecting the merger with Mellon.

SFAS No. 123 (Revised 2004)

On Jan. 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004) (“SFAS 123(R)”), “Share-Based Payment”, which is

16 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” We adopted SFAS 123(R) using the “modified prospective” method. Under this method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. As of Jan. 1, 2006, we were amortizing all of our unvested stock option grants. Certain of our stock compensation grants vest when the employee retires. SFAS 123(R) requires the completion of expensing of new grants with this feature by the first date the employee is eligible to retire. For grants prior to Jan. 1, 2006, we will continue to expense them over their stated vesting period. As a result of the early retirement provisions, the adoption of SFAS 123(R) increased pre-tax expense in 2006 by $12 million.

During the nine months ended Sept. 30, 2007, approximately 8 million options were granted. In the third quarter of both 2007 and 2006, we recorded $20 million and $11 million of stock option expense, respectively. The SFAS 123(R) impact related to early retirement, stemming from stock-based compensation grants, was $4 million for the third quarter of 2007 and $17 million in the first nine months of 2007.

The fair value of options granted in 2007 and 2006 were estimated at the grant date using the following weighted average assumptions:


Assumptions^(a)	Quarter ended		Nine months ended
	Sept. 30, 2007	Sept. 30, 2006^(b)	Sept. 30, 2007	Sept. 30, 2006
Dividend yield	2.22%	-%	2.42%	2.77%
Expected volatility	22.39	-	22.94	22.43
Risk free interest rates	4.76	-	4.46	4.72
Expected options lives (in years)	6	-	6	6

(a)

Third quarter and year-to-date 2007 include three months of the combined company’s results while the results for the third quarter and year-to-date 2006 include legacy The Bank of New York only.

(b)

There were no stock options granted in the third quarter of 2006.

Year-to-date 2007 compared with year-to-date 2006

Total noninterest expense was $5.367 billion in the first nine months of 2007, compared with $3.403 billion in the first nine months of 2006. The increase primarily reflects the same factors impacting the quarterly results.

Income taxes

The effective tax rate for the third quarter of 2007 was 28.2%, compared to 29.4% in the third quarter of 2006 and 31.9% in the second quarter of 2007. The lower effective tax rate in the third quarter of 2007 compared with the third quarter of 2006 reflects the impact of the recalculation of the yield on the leverage lease portfolio under SFAS 13. Excluding this adjustment, the effective tax rate was 32.4%. On a year-to-date basis, the effective tax rate was 30.5% compared with 32.2% in the first nine months of 2006.

The projected effective tax rate for the fourth quarter of 2007 ranges between 33.5% and 34.0%. The anticipated increase in the effective tax rate is primarily attributable to the adverse effect of the merger in 2007 on New York state and local income taxes, and an increase in foreign taxes.

Our effective tax rate benefits from the amount of synthetic fuel tax credits (Section 29 of the Internal Revenue Code) we receive. These credits relate to investments that produce alternative fuel from coal byproducts and are impacted by the price of oil.

To manage our exposure in 2007 to the risk of an increase in oil prices that could reduce synthetic fuel tax credits, we entered into an option contract covering a specified number of barrels of oil that settles at the end of 2007. The option contract economically hedges a portion of our projected 2007 synthetic fuel tax credit benefit. The contract does not qualify for hedge accounting and, as a result, changes in the fair value of the option are recorded in trading income.

Although oil prices have increased during the first few weeks of the fourth quarter of 2007, any phase-out above our assumptions will not have a material effect on our 2007 earnings. The synthetic fuel program terminates at the end of 2007.

The Bank of New York Mellon Corporation 17

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Credit loss provision and net charge-offs


Credit loss provision and net charge-offs			Legacy The Bank of New York Only
	Quarter ended						Nine months ended^(a)
(in millions)	Sept. 30, 2007		June 30, 2007		Sept. 30, 2006		Sept. 30, 2007		Sept. 30, 2006
Provision for credit losses	$	-	$	(15)	$	(4)	$	(30)	$	(5)

Net (charge-offs)/recoveries:
Commercial	$	-	$	-	$	-	$	(5)	$	2
Leases		(35)		5		-		(22)		-
Foreign		-		-		-		-		7
Other		-		-		-		-		1
Total net (charge-offs)/recoveries	$	(35)	$	5	$	-	$	(27)	$	10

(a)

There was no provision for credit losses for the third quarter of 2007, compared with a credit of $4 million in the third quarter of 2006 and a credit of $15 million in the second quarter of 2007, reflecting continued strong credit quality. We recorded a net charge-off of $35 million in the third quarter of 2007, compared with a net recovery of $5 million in the second quarter of 2007. Net charge-offs in the third quarter of 2007 include $36 million of charge-offs related to leased aircraft. The second quarter of 2007 includes $5 million of recoveries related to leased aircraft that were sold. For the nine months ended Sept. 30, 2007, the provision for credit losses was a credit of $30 million compared with a credit of $5 million in the first nine months of 2006. We recorded a net charge-off of $27 million for the nine months ended Sept. 30, 2007 compared with a net recovery of $10 million in the first nine months of 2006.

Business segments

We have an internal information system that produces performance data for our three business segments along product and service lines.

Business Segments Accounting Principles

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

The accounting policies of the business segments are the same as those described in Note 1 of The Bank of New York’s 2006 Annual Report except segment results are subject to restatement whenever improvements are made in the measurement principles or when organizational changes are made. Net interest revenue differs from the amounts shown in the Consolidated Income Statement because amounts presented in the Business Segments are on a fully taxable equivalent basis (FTE). In the first, second and third quarters of 2007, in connection with the merger with Mellon, business segment reporting was realigned to reflect the new business structure of the combined company. In addition, several allocation methodologies were also revised to achieve greater harmonization with Mellon’s methodologies. All prior periods have been restated to reflect these revisions. It is anticipated that remaining allocation methodologies will be harmonized during the first half of 2008.

The operations of acquired businesses are integrated with the existing business segments soon after most acquisitions are completed. As a result of the integration of staff support functions, management of customer relationships, operating processes and the financial impact of funding the acquisitions, we cannot precisely determine the impact of acquisitions on income before taxes and therefore do not report it.

We now provide segment data for three segments with the Asset and Wealth Management Segment and Institutional Services Segment being further

18 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

divided into sector groupings. These segments are shown below:

Asset and Wealth Management Segment

Asset Management sector

Wealth Management sector

Institutional Services Segment

Asset Servicing sector

Issuer Services sector

Clearing and Execution Services sector

Treasury Services sector

Other Segment

The business segment information is reported on a continuing operations basis for all periods presented. See Note 5 of this report for a discussion of discontinued operations.

On July 1, 2007, we merged with Mellon Financial Corporation and on Oct. 1, 2006, we sold substantially all of the assets of our Retail Business.

The results of our business segments are presented and analyzed on an internal management reporting basis:

Revenue amounts reflect fee revenue generated by each segment, as well as fee revenue transferred between sectors under revenue transfer agreements.

Revenues and expenses associated with specific client bases are included in those segments. For example, foreign exchange activity associated with clients using custody products is allocated to the Asset Servicing sector within the Institutional Services Segment (which includes our custody operations).

Balance sheet assets and liabilities and their related income or expense are specifically assigned to each segment. Segments with a net liability position have also been allocated assets from the securities portfolio.

Net interest revenue is allocated to segments based on the yields on the assets and liabilities generated by each segment. We employ a funds transfer pricing system that matches funds with the specific assets and liabilities of each segment based on their interest sensitivity and maturity characteristics.

The measure of revenues and profit or loss by a segment has been adjusted to present segment data on an FTE basis.

The provision for credit losses is allocated to segments based on changes in each segment’s credit risk during the period. Previously, the provision for credit losses was based on management’s judgment as to average credit losses that would have been incurred in the operations of the segment over a credit cycle of a period of years.

Support and other indirect expenses are allocated to segments based on internally-developed methodologies.

Goodwill and intangibles are reflected within individual business segments.

The operations of the Acquired Corporate Trust Business are included only from Oct. 1, 2006, the date on which it was acquired.

The operations of Mellon are included only from July 1, 2007, the effective date of the merger.

The Bank of New York Mellon Corporation 19

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)


Market indexes	3Q06	4Q06	1Q07	2Q07	3Q07	3Q07 vs. 2Q07		Year-to-date		YTD07 vs. YTD06
Market indexes	3Q06	4Q06	1Q07	2Q07	3Q07	3Q07 vs. 2Q07		2007	2006	YTD07 vs. YTD06
S&P 500 Index ^(a)	1,336	1,418	1,421	1,503	1,527	2	%	1,527	1,336	14	%
FTSE 100 Index ^(a)	5,961	6,221	6,308	6,608	6,467	(2	)	6,467	5,961	8
NASDAQ Composite Index ^(a)	2,258	2,415	2,422	2,603	2,702	4		2,702	2,258	20
Lehman Brothers Aggregate Bond^sm Index ^(a)	220.0	226.6	230.8	227.9	246.2	8		246.2	220.0	12
MSCI EAFE^® Index ^(a)	1,885.3	2,074.5	2,147.5	2,262.2	2,300.3	2		2,300.3	1,885.3	22
NYSE Volume (in billions)	108.8	114.4	123.8	127.7	145.5	14		397.0	344.1	15
NASDAQ Volume (in billions)	114.6	121.5	131.4	134.0	137.0	2		402.3	379.6	6

(a)

Period end.

The results of many of our sectors are influenced by client activities that vary by quarter. For instance, we experience seasonal increases in securities lending and depositary receipts reflecting the European dividend distribution season during the second quarter of the year, and to a lesser extent, in the fourth quarter of the year. Also, consistent with an overall decline in securities industry activity in the summer, we typically experience a seasonal decline in the third quarter.

The volatile market environment in the third quarter of 2007 resulted in an unseasonably strong quarter in securities lending revenue, foreign exchange and other trading revenue and clearing and execution fees. Depositary receipts were also strong in the third quarter, reflecting business growth and dividend distributions. Non-program equity trading volumes were up 11% sequentially and up 25% year-over-year. In addition, average daily U.S. fixed-income trading volume was up 9% sequentially and 21% year-over-year. Total debt issuance decreased 47% sequentially and decreased 27% year-over-year. The issuance of global collateralized debt obligations was down 55% versus the third quarter of 2006.

As of Sept. 30, 2007, our assets under custody and administration rose to $20.8 trillion, from $12.2 trillion at Sept. 30, 2006 and $14.9 trillion at June 30, 2007. The increase in assets under custody and administration from Sept. 30, 2006 primarily reflects the merger with Mellon, rising asset prices, growth in the custody business and the impact of the Acquired Corporate Trust Business. The increase compared with June 30, 2007, primarily resulted from the merger with Mellon. Equity securities comprised 36% and fixed-income securities were 64% of the assets under custody and administration at Sept. 30, 2007, compared with 31% equity securities and 69% fixed-income securities at Sept. 30, 2006. Assets under custody and administration at Sept. 30, 2007 consisted of assets related to the custody, mutual funds, and corporate trust businesses of $16.1 trillion, broker-dealer services assets of $2.5 trillion, and all other assets of $2.2 trillion.

The consolidating schedules on the following pages show the contribution of the company’s sectors to its overall profitability.

20 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)


For the quarter ended Sept. 30, 2007 *(in millions,* *presented on* *an FTE basis)*	Asset Management			Wealth Management		Total Asset & Wealth Management Segment		Asset Servicing		Issuer Services		Clearing & Execution Services		Treasury Services			Total Institutional Services Segment			Other Segment			Total Continuing Operations
Fee and other revenue	$	746		$	162	$	908	$	907	$	460	$	372	$	221		$	1,960		$	72		$	2,940
Net interest revenue		(5	)		85		80		206		159		77		131			573			21			674
Total revenue		741			247		988		1,113		619		449		352			2,533			93			3,614
Provision for credit losses		-			-		-		-		-		-		-			-			-			-
Noninterest expense		609			183		792		761		311		324		202			1,598			316			2,706
Income before taxes	$	132		$	64	$	196	$	352	$	308	$	125	$	150		$	935		$	(223	)	$	908
Pre-tax operating margin *^(a)*		18%			26%		20%		32%		50%		28%		43%			37%			N/M			25%
Average assets	$	12,771		$	13,754	$	26,525	$	25,129	$	7,590	$	15,897	$	23,726		$	72,342		$	84,918		$	183,785	^(b)
Excluding intangible amortization:
Noninterest expense	$	539		$	162	$	701	$	755	$	291	$	318	$	195		$	1,559		$	315		$	2,575
Income before taxes		202			85		287		358		328		131		157			974			(222	)		1,039
Pre-tax operating margin *^(a)*		27%			34%		29%		32%		53%		29%		45%			38%			N/M			29%

Legacy The Bank of New York Only
For the quarter ended June 30, 2007 (in millions, presented on an FTE basis)	Asset Management			Wealth Management		Total Asset & Wealth Management Segment		Asset Servicing		Issuer Services		Clearing & Execution Services		Treasury Services			Total Institutional Services Segment			Other Segment			Total Continuing Operations
Fee and other revenue	$	122		$	52	$	174	$	520	$	390	$	320	$	145		$	1,375		$	31		$	1,580
Net interest revenue		4			15		19		155		128		63		93			439			(4	)		454
Total revenue		126			67		193		675		518		383		238			1,814			27			2,034
Provision for credit losses		-			-		-		-		-		-		(7	)		(7	)		(8	)		(15	)
Noninterest expense		72			56		128		473		253		299		129			1,154			107			1,389
Income before taxes	$	54		$	11	$	65	$	202	$	265	$	84	$	116		$	667		$	(72	)	$	660
Pre-tax operating margin ^(a)		43%			16%		34%		30%		51%		22%		49%			37%			N/M			32%
Average assets	$	1,387		$	1,487	$	2,874	$	12,146	$	5,104	$	16,267	$	16,966		$	50,483		$	60,921		$	114,278	^(b)
Excluding intangible amortization:
Noninterest expense	$	68		$	56	$	124	$	471	$	236	$	293	$	129		$	1,129		$	107		$	1,360
Income before taxes		58			11		69		204		282		90		116			692			(72	)		689
Pre-tax operating margin ^(a)		46%			16%		36%		30%		54%		23%		49%			38%			N/M			34%


Legacy The Bank of New York Only
For the quarter ended March 31, 2007 (in millions, presented on an FTE basis)	Asset Management		Wealth Management		Total Asset & Wealth Management Segment		Asset Servicing		Issuer Services		Clearing & Execution Services		Treasury Services			Total Institutional Services Segment			Other Segment			Total Continuing Operations
Fee and other revenue	$	101	$	51	$	152	$	476	$	356	$	308	$	132		$	1,272		$	51		$	1,475
Net interest revenue		6		16		22		132		110		61		97			400			7			429
Total revenue		107		67		174		608		466		369		229			1,672			58			1,904
Provision for credit losses		-		-		-		-		-		-		(3	)		(3	)		(12	)		(15	)
Noninterest expense		67		55		122		442		251		276		130			1,099			51			1,272
Income before taxes	$	40	$	12	$	52	$	166	$	215	$	93	$	102		$	576		$	19		$	647
Pre-tax operating margin ^(a)		37%		18%		30%		27%		46%		25%		45%			34%			N/M			34%
Average assets	$	1,387	$	1,448	$	2,835	$	10,610	$	4,235	$	16,363	$	17,003		$	48,211		$	50,929		$	101,975	^(b)
Excluding intangible amortization:
Noninterest expense	$	63	$	55	$	118	$	441	$	234	$	270	$	130		$	1,075		$	51		$	1,244
Income before taxes		44		12		56		167		232		99		102			600			19			675
Pre-tax operating margin ^(a)		41%		18%		32%		27%		50%		27%		45%			36%			N/M			35%

The Bank of New York Mellon Corporation 21

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)


Legacy The Bank of New York Only
For the quarter ended Dec. 31, 2006 (in millions, presented on an FTE basis)	Asset Management		Wealth Management		Total Asset & Wealth Management Segment		Asset Servicing		Issuer Services			Clearing & Execution Services		Treasury Services			Total Institutional Services Segment			Other Segment			Total Continuing Operations
Fee and other revenue	$	109	$	49	$	158	$	414	$	371		$	296	$	134		$	1,215		$	68		$	1,441
Net interest revenue		7		15		22		137		107			76		101			421			9			452
Total revenue		116		64		180		551		478			372		235			1,636			77			1,893
Provision for credit losses		-		-		-		-		(1	)		2		(7	)		(6	)		(9	)		(15	)
Noninterest expense		74		53		127		421		246			262		129			1,058			100			1,285
Income before taxes	$	42	$	11	$	53	$	130	$	233		$	108	$	113		$	584		$	(14	)	$	623
Pre-tax operating margin ^(a)		36%		17%		29%		24%		49%			29%		48%			36%			N/M			33%
Average assets	$	1,226	$	1,481	$	2,707	$	9,453	$	3,988		$	14,825	$	16,615		$	44,881		$	54,499		$	102,087	^(b)
Excluding intangible amortization:
Noninterest expense	$	70	$	53	$	123	$	413	$	230		$	256	$	129		$	1,028		$	100		$	1,251
Income before taxes		46		11		57		138		249			114		113			614			(14	)		657
Pre-tax operating margin ^(a)		40%		17%		32%		25%		52%			31%		48%			38%			N/M			35%


Legacy The Bank of New York Only
For the quarter ended Sept. 30, 2006 (in millions, presented on an FTE basis)	Asset Management		Wealth Management		Total Asset & Wealth Management Segment		Asset Servicing		Issuer Services		Clearing & Execution Services		Treasury Services			Total Institutional Services Segment			Other Segment			Total Continuing Operations
Fee and other revenue	$	84	$	47	$	131	$	437	$	205	$	328	$	143		$	1,113		$	19		$	1,263
Net interest revenue		3		16		19		119		49		70		98			336			3			358
Total revenue		87		63		150		556		254		398		241			1,449			22			1,621
Provision for credit losses		-		-		-		-		1		-		(3	)		(2	)		(2	)		(4	)
Noninterest expense		58		52		110		414		127		309		126			976			110			1,196
Income before taxes	$	29	$	11	$	40	$	142	$	126	$	89	$	118		$	475		$	(86	)	$	429
Pre-tax operating margin^(a)		33%		17%		27%		26%		50%		22%		49%			33%			N/M			26%
Average assets	$	1,082	$	1,503	$	2,585	$	8,641	$	1,359	$	16,363	$	16,680		$	43,043		$	49,951		$	95,579	^(b)
Excluding intangible amortization:
Noninterest expense	$	54	$	52	$	106	$	413	$	126	$	301	$	126		$	966		$	110		$	1,182
Income before taxes		33		11		44		143		127		97		118			485			(86	)		443
Pre-tax operating margin ^(a)		38%		17%		29%		26%		50%		24%		49%			33%			N/M			27%

(a)

Income before taxes divided by total revenue.

(b)

Including average assets of discontinued operations of $43 million, $45 million, $66 million, $51 million and $13,285 million for quarters ended Sept. 30, 2007, June 30, 2007, March 31, 2007, Dec. 31, 2006 and Sept. 30, 2006, consolidated average assets were $183,828 million for the third quarter of 2007, $114,323 million for the second quarter of 2007, $102,041 million for the first quarter of 2007, $102,138 million for the fourth quarter of 2006 and $108,864 million for the third quarter of 2006.

N/M - Not meaningful.

22 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

For the nine months ended

Sept. 30, 2007 ^(a)

(in millions,

presented on

an FTE basis)

Asset
Management

Wealth
Management

Total

Asset &
Wealth
Management
Segment

Asset
Servicing

Issuer
Services

Clearing &
Execution
Services

Treasury
Services

Total
Institutional
Services
Segment

Other
Segment

Total
Continuing
Operations

Fee and other revenue

969

265

1,234

1,903

1,206

1,000

498

4,607

154

5,995

Net interest revenue

116

121

493

397

201

321

1,412

1,557

Total revenue

974

381

1,355

2,396

1,603

1,201

819

6,019

178

7,552

Provision for credit losses

(10

)

(10

)

(20

)

(30

)

Noninterest expense

748

294

1,042

1,676

815

899

461

3,851

474

5,367

Income before taxes

226

313

720

788

302

368

2,178

(276

)

2,215

Pre-tax operating margin ^(b)

23%

30%

49%

25%

45%

36%

N/M

29%

Average assets

5,223

5,608

10,831

16,015

5,655

16,174

19,256

57,100

65,710

133,641

^(d)

Excluding intangible amortization:

Noninterest expense

670

273

943

1,667

761

881

454

3,763

473

5,179

Income before taxes

304

108

412

729

842

320

375

2,266

(275

)

2,403

Pre-tax operating margin ^(b)

31%

28%

30%

53%

27%

46%

38%

N/M

32%


Legacy The Bank of New York Only
For the nine months ended Sept. 30, 2006 *^(c)* (in millions, presented on an FTE basis)	Asset Management		Wealth Management			Total Asset & Wealth Management Segment			Asset Servicing		Issuer Services		Clearing & Execution Services			Treasury Services		Total Institutional Services Segment		Other Segment			Total Continuing Operations
Fee and other revenue	$	248	$	149		$	397		$	1,298	$	590	$	1,063		$	436	$	3,387	$	114		$	3,898
Net interest revenue		8		45			53			339		151		202			291		983		33			1,069
Total revenue		256		194			450			1,637		741		1,265			727		4,370		147			4,967
Provision for credit losses		-		(2	)		(2	)		-		1		(6	)		12		7		(10	)		(5	)
Noninterest expense		163		157			320			1,209		369		928			381		2,887		196			3,403
Income before taxes	$	93	$	39		$	132		$	428	$	371	$	343		$	334	$	1,476	$	(39	)	$	1,569
Pre-tax operating margin ^(b)		36%		20%			29%			26%		50%		27%			46%		34%		N/M			32%
Average assets	$	1,021	$	1,491		$	2,512		$	8,315	$	1,342	$	16,969		$	16,165	$	42,791	$	49,313		$	94,616	^(d)
Excluding intangible amortization:
Noninterest expense	$	152	$	157		$	309		$	1,204	$	367	$	904		$	381	$	2,856	$	196		$	3,361
Income before taxes		104		39			143			433		373		367			334		1,507		(39	)		1,611
Pre-tax operating margin ^(b)		41%		20%			32%			26%		50%		29%			46%		34%		N/M			32%

(a)

Nine months ended 2007 include three months of the combined company’s results and six months of legacy The Bank of New York only.

(b)

Income before taxes divided by total revenue.

(c)

Legacy The Bank of New York only.

(d)

Including average assets of discontinued operations of $58 million for first nine months of 2007 and $13,856 million for the first nine months of 2006, consolidated average assets were $133,699 million for the first nine months of 2007 and $108,472 million for the first nine months of 2006.

N/M - Not meaningful.

The Bank of New York Mellon Corporation 23

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Asset and Wealth Management Segment

Asset and Wealth Management fee revenue is dependent on the overall level and mix of assets under management (“AUM”) and the management fees charged for managing those assets. Assets under management were $1,106 billion at Sept. 30, 2007, compared with $131 billion at Sept. 30, 2006, and $153 billion at June 30, 2007. The year-over-year increase in AUM primarily reflects the merger with Mellon and continued growth across asset classes and strategies. The increase from June 30, 2007 reflects the merger with Mellon.


Assets under management at period-end, by product type	Legacy The Bank of New York Only
(in billions)	Sept. 30, 2006		Dec. 31, 2006		March 31, 2007		June 30, 2007		Sept. 30, 2007
Equity securities	$	36	$	39	$	41	$	43	$	456
Fixed income securities		20		21		22		22		215
Overlay and alternative investments		41		44		45		47		160
Money market		34		38		34		41		275
Total assets under management	$	131	$	142	$	142	$	153	$	1,106


Assets under management at period-end, by client type	Legacy The Bank of New York Only
(in billions)	Sept. 30, 2006		Dec. 31, 2006		March 31, 2007		June 30, 2007		Sept. 30, 2007
Institutional	$	98	$	105	$	106	$	113	$	682
Mutual funds		12		15		15		18		323
Private client		21		22		21		22		101
Total market value of assets under management	$	131	$	142	$	142	$	153	$	1,106


Changes in market value of assets under management from June 30, 2007 to Sept. 30, 2007 - by business sector
(in billions)	Asset Management			Wealth Management		Total
Market value of assets under management at June 30, 2007:
The Bank of New York	$	129		$	24	$	153
Mellon Financial		868			61		929
Net inflows:
Long-term		1			1		2
Money market		27			-		27

Total net inflows		28			1		29
Net market depreciation ^(a)		(5	)		-		(5)
Market value of assets under management at Sept. 30, 2007	$	1,020		$	86	$	1,106

(a)

Includes the effect of changes in foreign exchange rates.

24 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Asset Management sector


(dollar amounts in millions, unless otherwise noted; presented on an FTE basis)	Legacy The Bank of New York Only											3Q07 vs. 3Q06		Year-to-date ^(a)					YTD07 vs. YTD06
	3Q06		4Q06		1Q07		2Q07		3Q07			3Q07 vs. 3Q06		2007			2006		YTD07 vs. YTD06
Revenue:
Asset and wealth management:
Mutual funds	$	2	$	3	$	3	$	4	$	307		N/M		$	314		$	7	N/M
Institutional clients		64		72		68		80		331		417	%		479			180	166	%
Private clients		12		13		13		15		46		283			74			35	111

Total asset management revenue		78		88		84		99		684		777			867			222	291
Performance fees		3		18		14		21		(3	)	(200	)		32			17	88
Distribution and servicing		-		-		-		-		89		-			89			-	-
Other		3		3		3		2		(24	)	(900	)		(19	)		9	(311	)

Total fee and other revenue		84		109		101		122		746		788			969			248	291
Net interest revenue (expense)		3		7		6		4		(5	)	N/M			5			8	(38	)

Total revenue		87		116		107		126		741		752			974			256	280
Noninterest expense (excluding intangible amortization)		54		70		63		68		539		898			670			152	341

Income before taxes (excluding intangible amortization)		33		46		44		58		202		512			304			104	192
Amortization of intangible assets		4		4		4		4		70		N/M			78			11	N/M

Income before taxes	$	29	$	42	$	40	$	54	$	132		355	%	$	226		$	93	143	%

Memo: Income before taxes (excluding intangible amortization and non-operating items) ^(b)	$	33	$	46	$	44	$	58	$	234		609	%	$	336		$	104	223	%
Pre-tax operating margin (excluding intangible amortization)		38%		40%		41%		46%		27%					31%			41%
Average assets	$	1,082	$	1,226	$	1,387	$	1,387	$	12,771		N/M		$	5,223		$	1,021	412	%

(a)

Third quarter and year-to-date 2007 include three months of the combined company’s results, while results prior to July 1, 2007 include legacy The Bank of New York only.

(b)

Third quarter 2007 excludes a pre-tax charge ($32 million) related to the write-off of the value of the remaining interest in a hedge fund manager that was disposed of in 2006.

N/M - Not meaningful.

Business description

Asset Management is comprised of BNY Mellon Institutional Asset Management, which consists of a number of asset management boutiques offering a broad range of equity, fixed income, hedge and liquidity management products; BNY Mellon Asset Managment International (formerly Mellon Global Investments), which distributes investment management products internationally; and all products and services associated with the Dreyfus Corporation complex of equity, fixed income and money market mutual funds, separate accounts and annuities.

We are a top 15 global asset manager; a top 10 U.S. asset manager; and the seventh largest asset manager in Europe. We are also a top five tax-exempt, institutional U.S. asset manager.

The results of the Asset Management sector are mainly driven by the period-end and average levels of

assets managed as well as the mix of those assets, as shown in the table on page 24. Managed equity assets typically generate higher percentage fees than money market and fixed-income assets. Also, actively managed assets typically generate higher management fees than indexed or passively managed assets of the same type. In addition, performance fees may be generated when the investment performance of products exceeds various benchmarks and satisfies other criteria. Results for this sector are also impacted by sales of fee-based products such as fixed and variable annuities and separately managed accounts. Expenses in this sector are mainly driven by staffing costs, incentives, distribution and servicing expense, and product distribution costs.

Review of financial results

Income before taxes was $132 million in the third quarter of 2007 compared with $29 million in the third

The Bank of New York Mellon Corporation 25

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

quarter of 2006, and $54 million in the second quarter of 2007. Income before taxes (excluding intangible amortization) was $202 million in the third quarter of 2007 compared with $33 million in the third quarter of 2006 and $58 million in the second quarter of 2007. The third quarter of 2007 also included a $32 million charge related to the write-off of the value of the remaining interest in a hedge fund manager that was disposed of in 2006. Excluding this charge, income before taxes (excluding intangible amortization) was $234 million in the third quarter of 2007.

Fee and other revenue was $746 million in the third quarter of 2007 compared with $84 million in the third quarter of 2006 primarily reflecting the merger with Mellon, net new business and improved equity markets. Performance fees were negative $3 million in the third quarter of 2007 reflecting the impact of market volatility on certain alternative and quantitative strategies. Other fee revenue decreased, principally reflecting the lower market value of seed capital investments due to the market environment. Fee and other revenue increased on a sequential-quarter basis primarily reflecting the same factors affecting year-over-year results.

Noninterest expense (excluding intangible amortization) was $539 million in the third quarter of 2007 compared with $54 million in the third

quarter of 2006 primarily reflecting the merger with Mellon and higher incentive compensation, temporary labor, technology, legal expenses and the write-off of the remaining interest in a hedge fund manager. The sequential-quarter increase in noninterest expense primarily reflects the merger with Mellon and legal, technology and other compensation expenses, and the write-off of the interest in a hedge fund manager.

On a year-to-date basis, income before taxes was $226 million in the first nine months of 2007 compared with $93 million in the first nine months of 2006. Income before taxes (excluding intangible amortization) was $304 million in the first nine months of 2007 compared with $104 million in the first nine months of 2006. Income before taxes (excluding intangible amortization) was $336 million excluding the write-off of the interest in a hedge fund manager. Fee and other revenue increased $721 million, primarily due to the merger with Mellon and higher asset management fees from institutional clients. Noninterest expense (excluding intangible amortization) increased $518 million in the first nine months of 2007 compared with the first nine months of 2006 primarily due to the merger with Mellon and higher other compensation, salaries and temporary labor, technology, occupancy and legal expenses.

26 The Bank of New York Mellon Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and

Results of Operations; Quantitative and Qualitative Disclosures about Market Risk. (continued)

Wealth Management sector


(dollar amounts in millions, unless otherwise noted; presented on an FTE basis)	Legacy The Bank of New York Only								3Q07		3Q07 vs. 3Q06		Year-to-date ^(a)					YTD07 vs. YTD06
	3Q06		4Q06		1Q07		2Q07		3Q07		3Q07 vs. 3Q06		2007		2006			YTD07 vs. YTD06
Revenue:
Asset and wealth management	$	46	$	48	$	50	$	50	$	152	230	%	$	252	$	145		74	%
Other		1		1		1		2		10	900			13		4		225

Total fee and other revenue		47		49		51		52		162	245			265		149		78
Net interest revenue		16		15		16		15		85	431			116		45		158

Total revenue		63		64		67		67		247	292			381		194		96
Provision for credit losses		-		-		-		-		-	-			-		(2	)	N/M
Noninterest expense (excluding intangible amortization)		52		53		55		56		162	212			273		157		74

Income before taxes (excluding intangible amortization)		11		11		12		11		85	673			108		39		177
Amortization of intangible assets		-		-		-		-		21	-			21		-		-

Income before taxes	$	11	$	11	$	12	$	11	$	64	482		$	87	$	39		123

Pre-tax operating margin (excluding intangible amortization)		17%		17%		18%		16%		34%				28%		20%

Average loans	$	1,410	$	1,373	$	1,336	$	1,341	$	6,590	367		$	3,109	$	1,397		123
Average assets		1,503		1,481		1,448		1,487		13,754	815			5,608		1,491		276
Average deposits		1,116		1,090		1,119		1,065		11,289	912			4,528		1,122		304

Market value of total client assets at period-end (in billions)

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