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 June 30, 2011

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

of the Securities Exchange Act of 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

13-2614959

(State or other jurisdiction of

incorporation or organization)

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

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

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

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

Yes ü No

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

Yes ü No

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


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

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

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


Class		Outstanding as of June 30, 2011

Common Stock, $0.01 par value		1,232,691,406

THE BANK OF NEW YORK MELLON CORPORATION

Second Quarter 2011 Form 10-Q

Table of Contents


	Page
Consolidated Financial Highlights (unaudited)		2

Part I – Financial Information

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk:
General		4
Overview		4
Second quarter 2011 and subsequent events		5
Highlights of second quarter 2011 results		5
Fee and other revenue		7
Net interest revenue		11
Average balances and interest rates		12
Noninterest expense		14
Income taxes		15
Review of businesses		15
Critical accounting estimates		27
Consolidated balance sheet review		29
Liquidity and dividends		39
Capital		43
Trading activities and risk management		45
Foreign exchange and other trading		46
Asset/liability management		47
Off-balance-sheet arrangements		47
Supplemental information – Explanation of Non-GAAP financial measures		48
Recent accounting and regulatory developments		52
Government monetary policies and competition		59
Website information		60

Item 1. Financial Statements:
Consolidated Income Statement (unaudited)		61
Consolidated Balance Sheet (unaudited)		63
Consolidated Statement of Cash Flows (unaudited)		64
Consolidated Statement of Changes in Equity (unaudited)		65

Notes to Consolidated Financial Statements:
Note 1 – Basis of presentation		66
Note 2 – Accounting changes and new accounting guidance		66
Note 3 – Acquisitions		67
Note 4 – Discontinued operations		67
Note 5 – Securities		68
Note 6 – Loans and asset quality		71
Note 7 – Goodwill and intangible assets		77
Note 8 – Other assets		79
Note 9 – Net interest revenue		80
Note 10 – Employee benefit plans		81
Note 11 – Restructuring charges		81
Note 12 – Income taxes		82
Note 13 – Securitizations and variable interest entities		82
Note 14 – Fair value of financial instruments		85
Note 15 – Fair value measurement		86
Note 16 – Fair value option		97
Note 17 – Derivative instruments		98
Note 18 – Commitments and contingent liabilities		102
Note 19 – Review of businesses		107
Note 20 – Supplemental information to the Consolidated Statement of Cash Flows		110

Item 4. Controls and Procedures		111

Forward-looking Statements		112

Part II – Other Information

Item 1. Legal Proceedings		113

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		113

Item 6. Exhibits		113

Signature		114

Index to Exhibits		115

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited)


	Quarter ended									Six months ended
(dollar amounts in millions, except per share amounts and unless otherwise noted)	June 30, 2011			March 31, 2011			June 30, 2010 (a)			June 30, 2011			June 30, 2010 (a)
Net income basis:
Reported results applicable to common shareholders of The Bank of New York Mellon Corporation:
Net income	$	735		$	625		$	658		$	1,360		$	1,217
Basic EPS		0.59			0.50			0.54			1.09			1.00
Diluted EPS		0.59			0.50			0.54			1.08			1.00

Return on common equity (annualized)		8.8	%		7.7	%		8.7	%		8.3	%		8.2	%
Return on average assets (annualized)		1.06	%		0.98	%		1.15	%		1.02	%		1.08	%

Continuing operations:
Results from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation:
Income from continuing operations	$	735		$	625		$	668		$	1,360		$	1,269
Basic EPS from continuing operations		0.59			0.50			0.55			1.09			1.04
Diluted EPS from continuing operations		0.59			0.50			0.55			1.08			1.04

Fee and other revenue	$	3,056		$	2,838		$	2,555		$	5,894		$	5,084
Income of consolidated investment management funds		63			110			65			173			130
Net interest revenue		731			698			722			1,429			1,487

Total revenue	$	3,850		$	3,646		$	3,342		$	7,496		$	6,701

Return on common equity (annualized) (b)		8.8	%		7.7	%		8.8	%		8.3	%		8.5	%

Return on tangible common equity (annualized) – Non-GAAP (b)		26.3	%		24.3	%		25.7	%		25.3	%		25.7	%

Fee revenue as a percentage of total revenue excluding net securities gains		79	%		78	%		76	%		78	%		76	%

Annualized fee revenue per employee (based on average headcount) (in thousands)	$	248		$	238		$	240		$	243		$	241

Percentage of non-U.S. total revenue		37	%		37	%		35	%		37	%		35	%

Pre-tax operating margin (b)		27	%		26	%		30	%		26	%		28	%
Non-GAAP adjusted (b)		29	%		28	%		32	%		29	%		33	%

Net interest margin (FTE)		1.41	%		1.49	%		1.74	%		1.43	%		1.82	%

Assets under management (“AUM”) at period end (in billions)	$	1,274		$	1,229		$	1,047		$	1,274		$	1,047

Assets under custody and administration (“AUC”) at period end (in trillions)	$	26.3		$	25.5		$	21.8		$	26.3		$	21.8
Equity securities		31	%		32	%		28	%		31	%		28	%
Fixed income securities		69	%		68	%		72	%		69	%		72	%
Cross-border assets at period end (in trillions)	$	10.1		$	9.9		$	8.3		$	10.1		$	8.3

Market value of securities on loan at period end (in billions) (c)	$	273		$	278		$	248		$	273		$	248

Average common shares and equivalents outstanding (in thousands):
Basic		1,230,406			1,234,076			1,204,557			1,232,232			1,203,554
Diluted		1,233,710			1,238,284			1,208,830			1,236,016			1,207,578

2 BNY Mellon

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited) (continued)


	Quarter ended									Six months ended
(dollar amounts in millions, except per share amounts and unless otherwise noted)	June 30, 2011			March 31, 2011			June 30, 2010 (a)			June 30, 2011			June 30, 2010 (a)
Capital ratios:
Estimated Basel III Tier 1 common equity ratio – Non-GAAP(d)		6.6	%		6.1	%		N/A			6.6	%		N/A
Tier 1 common equity to risk-weighted assets ratio – Non-GAAP (b)(e)		12.6	%		12.4	%		11.9	%		12.6	%		11.9	%
Tier 1 capital ratio (e)		14.1	%		14.0	%		13.5	%		14.1	%		13.5	%
Total (Tier 1 plus Tier 2) capital ratio (e)		16.7	%		16.8	%		17.2	%		16.7	%		17.2	%
Common shareholders’ equity to total assets ratio (b)		11.1	%		12.5	%		12.9	%		11.1	%		12.9	%
Tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (b)		6.0	%		5.9	%		6.3	%		6.0	%		6.3	%

Selected average balances:
Interest-earning assets	$	209,933		$	190,185		$	167,119		$	200,114		$	165,285
Assets of operations	$	264,254		$	243,356		$	216,801		$	253,863		$	214,755
Total assets	$	278,480		$	257,698		$	228,841		$	268,147		$	227,138
Interest-bearing deposits	$	125,958		$	116,515		$	99,963		$	121,263		$	100,496
Noninterest-bearing deposits	$	43,038		$	38,616		$	34,628		$	40,839		$	33,983
Total The Bank of New York Mellon Corporation shareholders’ equity	$	33,464		$	32,827		$	30,462		$	33,147		$	30,104

Other information at period end:
Full-time employees		48,900			48,400			42,700			48,900			42,700
Cash dividends per common share	$	0.13		$	0.09		$	0.09		$	0.22		$	0.18
Dividend yield (annualized)		2.0	%		1.2	%		1.5	%		1.7	%		1.5	%
Dividend payout ratio		22	%		18	%		17	%		20	%		18	%
Closing common stock price per common share	$	25.62		$	29.87		$	24.69		$	25.62		$	24.69
Market capitalization	$	31,582		$	37,090		$	29,975		$	31,582		$	29,975

Book value per common share – GAAP (b)	$	27.46		$	26.78		$	25.04		$	27.46		$	25.04
Tangible book value per common share – Non-GAAP (b)	$	10.28		$	9.67		$	9.33		$	10.28		$	9.33
Common shares outstanding (in thousands)		1,232,691			1,241,724			1,214,042			1,232,691			1,214,042

(a)

Presented on a continuing operations basis.

(b)

See Supplemental Information beginning on page 48 for a calculation of these ratios.

(c)

Represents the securities on loan managed by the Investment Services business.

(d)

Our estimated Basel III Tier I common equity ratio (Non-GAAP) reflects our current interpretation of the Basel III rules. Our estimated Basel III Tier 1 common equity ratio could change in the near future as the U.S. regulatory agencies implement Basel III or if our businesses change.

(e)

Determined under Basel I regulatory guidelines. The three-month and six-month periods ended June 30, 2010 include discontinued operations.

BNY Mellon 3

Part I – Financial Information

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

General

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “BNY Mellon,” the “Company,” and similar terms refer to The Bank of New York Mellon Corporation.

Certain business terms used in this document are defined in the glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2010 (“2010 Annual Report”).

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

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 discussion of discontinued operations, see Note 4 to the Notes to Consolidated Financial Statements.

Throughout this Form 10-Q, certain measures, which are noted, exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present certain amounts 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. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

In the first quarter of 2011, BNY Mellon realigned its internal reporting structure and business presentation to focus on its two principal businesses, Investment Management and Investment Services. The realignment reflects management’s approach to assessing performance and decisions regarding resource allocations. Investment Management includes the former Asset Management and Wealth Management businesses. Investment Services includes the former Asset Servicing, Issuer Services and Clearing Services businesses as well as the Cash Management business previously included in the former Treasury Services business. The credit-related activities previously included in the former Treasury Services business, are now included in the Other segment. The income statement has been changed to reflect this realignment as follows:

•

Investment management and performance fees consist of the former asset and wealth management fee revenue; and

•

Investment services fees consist of the former securities servicing fees, including asset servicing, issuer services, clearing services, as well as treasury services fee revenue.

All prior periods were reclassified. The reclassifications did not affect the results of operations.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a leading manager and servicer of financial assets globally, operating in 36 countries and serving more than 100 markets. Our global client base consists of the world’s largest financial institutions, corporations, government agencies, high-net-worth individuals, families, endowments and foundations and related entities. At June 30, 2011, we had $26.3 trillion in assets under custody and administration and $1.27 trillion in assets under management, serviced $11.8 trillion in outstanding debt and, on average, processed $1.7 trillion of global payments per day.

4 BNY Mellon

BNY Mellon’s businesses benefit from the global growth in financial assets and from the globalization of the investment process. Over the long term, our financial goals are focused on deploying capital to accelerate the long-term growth of our businesses and achieving superior total returns to shareholders by generating first quartile earnings per share growth over time relative to a group of peer companies.

Key components of our strategy include: providing superior client service versus peers; strong investment performance relative to investment benchmarks; above-median revenue growth relative to peer companies; increasing the percentage of revenue and income derived from outside the U.S.; successful integration of acquired businesses; competitive margins; and positive operating leverage. We have established Tier 1 capital as our principal capital measure and have established a targeted ratio of Tier 1 capital to risk-weighted assets of 10%. We expect to update our capital targets once Basel III guidelines are finalized.

Second quarter 2011 and subsequent events

Agreement to sell Shareowner Services

On April 27, 2011, BNY Mellon announced a definitive agreement to sell its Shareowner Services business. The sales price of $550 million is expected to result in a pre-tax gain and a modest after-tax loss primarily due to the write-off of non-tax deductible goodwill associated with the business. The transaction is expected to enhance BNY Mellon’s capital position, adding approximately 20 basis points to our Basel III Tier 1 common equity ratio. The transaction is anticipated to close in the fourth quarter of 2011, subject to regulatory approval.

Acquisition of Talon Asset Management

On July 1, 2011, BNY Mellon acquired the wealth management operations of Chicago-based Talon Asset Management (“Talon”). Talon manages more than $800 million in assets for wealthy families and institutions. The acquisition of Talon represents BNY Mellon’s first wealth management office in Chicago, the third largest wealth management market in the U.S.

Agreement to sell equity stake in ConvergEx Group

On July 20, 2011, BNY Mellon announced a definitive agreement to sell a majority of its equity stake in ConvergEx Group, in an all-cash transaction expected to close in the third quarter of 2011. BNY Mellon will remain a less than 5% shareholder immediately after closing. Upon closing, the transaction is expected to enhance BNY Mellon’s capital position, adding approximately 15 basis points to our Basel III Tier 1 common equity ratio.

Highlights of second quarter 2011 results

We reported net income applicable to common shareholders of BNY Mellon of $735 million, or $0.59 per diluted common share, in the second quarter of 2011 compared with $625 million, or $0.50 per diluted common share, in the first quarter of 2011 and $658 million, or $0.54 per diluted common share, in the second quarter of 2010.

Highlights for the second quarter of 2011 include:

•

Assets under custody and administration (“AUC”) totaled a record $26.3 trillion at June 30, 2011 compared with $21.8 trillion at June 30, 2010 and $25.5 trillion at March 31, 2011. The increase compared with June 30, 2010 reflects the acquisitions of Global Investment Servicing (“GIS”) on July 1, 2010 and BHF Asset Servicing GmbH (“BAS”) on Aug. 2, 2010 (collectively, “the Acquisitions”), net new business and the change in market values. The sequential increase was driven by net new business. (See the Investment Services business on page 23).

•

Assets under management (“AUM”), excluding securities lending assets, totaled a record $1.27 trillion at June 30, 2011 compared with $1.05 trillion at June 30, 2010 and $1.23 trillion at March 31, 2011. This represents an increase of 22% compared with the prior year and 4% sequentially. The year-over-year increase was driven by net new business and the change in market values. The sequential increase was driven by net new business. (See the Investment Management business on page 20).

•

Investment services fees totaled $1.8 billion in the second quarter of 2011 compared with $1.4 billion in the second quarter of 2010. The increase reflects the impact of the Acquisitions, net new business, higher Depositary Receipts revenue and higher securities lending revenue, partially offset by higher money market fee

BNY Mellon 5

waivers. (See the Investment Services business on page 23).

•

Investment management and performance fees totaled $779 million in the second quarter of 2011 compared with $686 million in the second quarter of 2010. The increase reflects higher market values and net new business, partially offset by higher money market fee waivers. (See the Investment Management business beginning on page 20).

•

Foreign exchange and other trading revenue totaled $222 million in the second quarter of 2011 compared with $220 million in the second quarter of 2010. In the second quarter of 2011, foreign exchange revenue totaled $184 million, a decrease of 25% compared with the second quarter of 2010, as higher volumes were more than offset by declines in volatility. Other trading revenue was $38 million in the second quarter of 2011, an increase of $64 million compared with the second quarter of 2010 driven by higher fixed income trading revenue. Additionally, the second quarter of 2010 included negative credit valuation adjustments (“CVA”) related to derivatives. (See Fee and other revenue beginning on page 7).

•

Investment income and other revenue totaled $145 million in the second quarter of 2011, unchanged from the second quarter of 2010. The second quarter of 2011 results include gains related to loans held-for-sale retained from a previously divested banking subsidiary, as well as higher seed capital and private equity investment revenue, offset by lower foreign currency translation and leasing gains. (See Fee and other revenue beginning on page 7).

•

Net interest revenue totaled $731 million in the second quarter of 2011 compared with $722 million in the second quarter of 2010. The increase reflects growth in client deposits and the purchase of high quality securities, partially offset by lower spreads resulting from the continued impact of the low rate environment.

(See Net interest revenue beginning on page 11). The net interest margin (FTE) for the second quarter of 2011 was 1.41% compared with 1.74% in the second quarter of 2010. The decline reflects tighter spreads.

•

Net securities gains of $48 million in the second quarter of 2011 primarily resulted from the sale of longer dated U.S. Treasury and agency securities.

•

There was no provision for credit losses in the second quarter of 2011 compared with a provision of $20 million in the second quarter of 2010. (See Asset quality and allowance for credit losses beginning on page 34).

•

Noninterest expense totaled $2.8 billion in the second quarter of 2011 compared with $2.3 billion in the second quarter of 2010. The increase reflects the impact of the Acquisitions, higher litigation/legal expenses, the impact of the annual employee merit increase in the second quarter of 2011, as well as higher volume-related and business development expenses. (See Noninterest expense beginning on page 14).

•

Unrealized net of tax gains on our total investment securities portfolio were $408 million at June 30, 2011 compared with $279 million at March 31, 2011. The improvement in the valuation of the investment securities portfolio was driven by a decline in interest rates. (See Consolidated balance sheet review beginning on page 29).

•

At June 30, 2011, our estimated Basel III Tier 1 common equity ratio was 6.6%, an increase of approximately 45 basis points from March 31, 2011, reflecting our strong capital generation and risk-weighted asset mix.

•

We generated $803 million of Basel I Tier 1 common equity in the second quarter of 2011, primarily driven by earnings retention. Our Basel I Tier 1 capital ratio was 14.1% at June 30, 2011 compared with 14.0% at March 31, 2011. (See Capital beginning on page 43).

6 BNY Mellon

Fee and other revenue


Fee and other revenue										2Q11 vs.						Year-to-date						YTD11
(dollars in millions, unless otherwise noted)	2Q11			1Q11			2Q10			2Q10			1Q11			2011			2010			vs. YTD10
Investment services fees:
Asset servicing (a)	$	980		$	923		$	668			47	%		6	%	$	1,903		$	1,305			46	%
Issuer services		365			351			354			3			4			716			687			4
Clearing services		292			292			245			19			-			584			475			23
Treasury services		127			128			125			2			(1	)		255			256			-
Total investment services fees		1,764			1,694			1,392			27			4			3,458			2,723			27
Investment management and performance fees		779			764			686			14			2			1,543			1,372			12
Foreign exchange and other trading revenue		222			198			220			1			12			420			482			(13	)
Distribution and servicing		49			53			51			(4	)		(8	)		102			99			3
Financing-related fees		49			43			48			2			14			92			98			(6	)
Investment income		71			67			72			(1	)		6			138			180			(23	)
Other		74			14			73			1			N/M			88			110			(20	)
Total fee revenue		3,008			2,833			2,542			18			6			5,841			5,064			15
Net securities gains		48			5			13			N/M			N/M			53			20			N/M
Total fee and other revenue	$	3,056	(b)	$	2,838	(b)	$	2,555			20	%		8	%		$5,894	(b)		$5,084			16	%

Fee revenue as a percent of total revenue excluding net securities gains		79	%		78	%		76	%								78	%		76	%

Market value of AUM at period end (in billions)	$	1,274		$	1,229		$	1,047			22	%		4	%	$	1,274		$	1,047			22	%
Market value of AUC and administration at period end (in trillions)	$	26.3		$	25.5		$	21.8			21	%		3	%	$	26.3		$	21.8			21	%

(a)

Asset servicing fees include securities lending revenue of $62 million in the second quarter of 2011, $37 million in the first quarter of 2011, $46 million in the second quarter of 2010, $99 million in the first six months of 2011 and $75 million in the first six months of 2010.

(b)

Total fee revenue from the Acquisitions was $261 million in both the second and first quarters of 2011 and $522 million in the first six months of 2011.

N/M

– Not meaningful.

Fee revenue

Fee revenue increased 18% year-over-year and 6% (unannualized) sequentially. The year-over-year increase primarily reflects the impact of the Acquisitions, higher market values and net new business. The sequential increase primarily reflects net new business, seasonally higher securities lending revenue, higher Depositary Receipts revenue and gains on loans held-for-sale retained from a previously divested bank subsidiary.

Investment services fees

Investment services fees were impacted by the following, compared with the second quarter of 2010 and first quarter of 2011:

•

Asset servicing fees – The year-over-year increase was primarily driven by the impact of the Acquisitions, higher market values, net new business and higher securities lending revenue due to higher loan balances and spreads. The sequential increase reflects seasonally higher securities lending revenue and net new business.

•

Issuer services fees – The year-over-year increase reflects higher Depositary Receipts revenue driven by higher corporate actions and service fees, partially offset by lower Shareowner Services and Corporate Trust revenue. The sequential increase reflects seasonally higher Depositary Receipts revenue, partially offset by lower Shareowner Services and Corporate Trust revenue.

•

Clearing services fees – The year-over-year increase reflects the impact of the GIS acquisition, growth in mutual fund assets and positions and new business, partially offset by lower transaction volumes and higher money market fee waivers. Sequentially, the impact of higher mutual fund positions was offset by lower transaction volumes and higher money market fee waivers.

•

Treasury services fees –These fees were flat year-over-year and sequentially.

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

BNY Mellon 7

Investment management and performance fees

Investment management and performance fees totaled $779 million in the second quarter of 2011, an increase of 14% year-over-year and 2% (unannualized) sequentially. The year-over-year increase reflects higher market values and net new business. The sequential increase primarily reflects net new business. Both the year-over-year and sequential increases were partially offset by higher money market fee waivers. Performance fees were $18 million in the second quarter of 2011 compared with $19 million in the second quarter of 2010 and $17 million in the first quarter of 2011.

Total AUM for the Investment Management business was $1.27 trillion at June 30, 2011 compared with $1.23 trillion at March 31, 2011 and $1.05 trillion at June 30, 2010. The year-over-year increase was driven by net new business and the change in market values. The sequential increase was driven by net new business. The S&P 500 Index was 1321 at June 30, 2011 compared with 1326 at March 31, 2011 and 1031 at June 30, 2010 (a 28% increase).

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

Foreign exchange and other trading revenue


Foreign exchange and other trading revenue
										Year-to-date
(in millions)	2Q11			1Q11			2Q10			2011			2010
Foreign exchange	$	184		$	173		$	246		$	357		$	421
Fixed income		28			17			(32	)		45			48
Credit derivatives (a)		(1	)		(1	)		4			(2	)		2
Other		11			9			2			20			11
Total	$	222		$	198		$	220		$	420		$	482

(a)

Used as economic hedges of loans.

Foreign exchange and other trading revenue was $222 million in the second quarter of 2011, compared with $220 million in the second quarter of 2010, and $198 million in the first quarter of 2011. In the second quarter of 2011, foreign exchange revenue totaled $184 million, a decrease of 25% year-over-year and an increase of 6% (unannualized) sequentially. The year-over-year decrease reflects lower volatility partially offset by higher volumes. The increase sequentially primarily reflects higher volatility. Other trading revenue was $38 million in the second quarter of 2011, an increase of $64 million compared with the second quarter of 2010

and $13 million compared with the first quarter of 2011. Both increases were driven by higher fixed income trading revenue. Additionally, the second quarter of 2010 included negative CVA related to derivatives. Foreign exchange and other trading revenue is primarily reported in the Investment Services business. Other trading revenue is also reported in the Other segment.

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

8 BNY Mellon

or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. Our custody clients choose to use third party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar equivalent volume foreign exchange transactions.

We typically price negotiated trades for our custody clients at a spread over our estimation of the current market rate for a particular currency or based on an agreed third-party benchmark. With respect to our standing instruction program, we typically assign a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than $1 million) executed between global financial institutions, known as the “interbank range”. Using the interbank range for the given day, we typically price purchases of currencies at or near the low end of this range and sales of currencies at or near the high end of this range. For the six months ended June 30, 2011, our total revenue for all types of foreign exchange trading transactions was $357 million, which is approximately 5% of our total revenue. Of that 5%, approximately 40% resulted from foreign exchange transactions undertaken through our standing instruction program.

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 that we manage or administer and are primarily reported in the Investment Management business. 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.

Distribution and servicing fee revenue decreased $2 million compared with the second quarter of 2010 and $4 million compared with the first quarter of 2011. The year-over-year decrease primarily reflects lower redemption fees. The sequential decrease primarily reflects increased money market fee waivers. The impact of distribution and servicing fees on income in any one period can be more than offset by distribution and servicing expense paid to other financial intermediaries to cover their cost 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 Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees increased $1 million compared with the second quarter of 2010 and $6 million sequentially. The sequential increase was primarily driven by higher capital markets fees.

Investment income


Investment income									Year-to-date
(in millions)	2Q11			1Q11		2Q10			2011		2010
Corporate/bank-owned life insurance	$	42		$	37	$	37		$	79	$	73
Lease residual gains (losses)		(5	)		13		14			8		66
Equity investment income		19			5		20			24		32
Private equity gains		12			10		6			22		11
Seed capital gains (losses)		3			2		(5	)		5		(2	)
Total investment income	$	71		$	67	$	72		$	138	$	180

Investment income, which is primarily reported in the Other segment and Investment Management business, includes income from insurance contracts, lease residual gains and losses, gains and losses on seed capital investments and private equity investments, and equity investment income. The decrease, compared with the second quarter of 2010, reflects lease residual losses, primarily offset by higher seed capital and private equity gains. The increase, compared to the first quarter of 2011, reflects higher equity investment income and corporate/bank-owned insurance income partially offset by losses on lease residuals.

Other revenue


Other revenue									Year-to-date
(in millions)	2Q11			1Q11			2Q10		2011			2010
Asset-related gains	$	66		$	14		$	3	$	80		$	6
Expense reimbursements from joint ventures		8			9			8		17			18
Economic value payments		1			2			-		3			-
Other income (loss)		(1	)		(11	)		62		(12	)		86
Total other revenue	$	74		$	14		$	73	$	88		$	110

Other revenue includes asset-related gains, expense reimbursements from joint ventures, economic value payments and other income (loss). Asset-related gains include loan, real estate and other asset

BNY Mellon 9

dispositions. Expense reimbursements from joint ventures relate to expenses incurred by BNY Mellon on behalf of joint ventures. Economic value payments relate to deposits from the GIS acquisition that have not yet transferred to BNY Mellon. Other income (loss) primarily includes foreign currency translation, other investments and various miscellaneous revenues.

Total other revenue increased in the second quarter of 2011 compared with both the second quarter of 2010 and the first quarter of 2011 primarily due to $58 million in net gains recorded in the second quarter of 2011 related to loans held-for-sale retained from a previously divested bank subsidiary. Compared with the second quarter of 2010, these gains were partially offset by lower foreign currency translation gains.

Net securities gains

Net securities gains totaled $48 million in the second quarter of 2011, compared with $13 million in the second quarter of 2010 and $5 million in the first quarter of 2011. In the second quarter of 2011, $1.8 billion of U.S. Treasury securities were sold at a gain of $41 million and collateralized loan obligations were sold at a gain of $17 million. These gains were partially offset by losses of $11 million on the sale of $63 million of European floating rate notes and $8 million of impairment charges on subprime, Alt-A RMBS and European floating rate notes.

The following table details net securities gains by type of security. See “Consolidated balance sheet review” for further information on the investment securities portfolio.


Net securities gains										Year-to-date
(in millions)	2Q11			1Q11			2Q10			2011			2010
U.S. Treasury	$	41		$	-		$	-		$	41		$	-
Agency RMBS		8			-			-			8			-
Alt-A RMBS		(1	)		5			(6	)		4			(13	)
Prime RMBS		-			9			-			9			-
Subprime RMBS		(6	)		(6	)		-			(12	)		-
European floating rate notes		(12	)		(3	)		-			(15	)		-
Other		18			-			19			18			33
Net securities gains	$	48		$	5		$	13		$	53		$	20

Year-to-date 2011 compared with year-to-date 2010

Fee and other revenue for the first six months of 2011 totaled $5.9 billion compared with $5.1 billion in the first six months of 2010. The increase primarily reflects the impact of the Acquisitions, higher market values, net new business and higher securities lending revenue due to higher loan balances and spreads, offset in part by lower foreign exchange and other trading revenue and lower investment and other income.

The increase in investment services fees reflects the impact of the Acquisitions, net new business and improved market values. The increase in investment management and performance fees reflects higher market values and net new business. The decrease in foreign exchange and other trading revenue was driven by lower foreign exchange revenue primarily resulting from a decline in volatility. The decrease in investment income reflects lower lease residual gains. The decrease in other revenue in the first six months of 2011 reflects lower foreign currency translation gains, partially offset by gains on loans held-for-sale retained from a previously divested banking subsidiary. Net securities gains increased $33 million in the first six months of 2011 compared with the first six months of 2010.

10 BNY Mellon

Net interest revenue


Net interest revenue																						YTD11
										2Q11 vs.						Year-to-date						vs.
(dollars in millions)	2Q11			1Q11			2Q10			2Q10			1Q11			2011			2010			YTD10
Net interest revenue (non-FTE)	$	731		$	698		$	722			1	%		5	%	$	1,429		$	1,487			(4	)%
Tax equivalent adjustment		6			4			5			N/M			N/M			10			10			N/M
Net interest revenue (FTE) – Non-GAAP	$	737		$	702		$	727			1	%		5	%	$	1,439		$	1,497			(4	)%
Average interest-earning assets	$	209,933		$	190,185		$	167,119			26	%		10	%	$	200,114		$	165,285			21	%
Net interest margin (FTE)		1.41	%		1.49	%		1.74	%		(33	)bps		(8	)bps		1.43	%		1.82	%		(39	)bps

N/M – Not meaningful.

bps – basis points.

Net interest revenue totaled $731 million in the second quarter of 2011 compared with $722 million in the second quarter of 2010 and $698 million in the first quarter of 2011. Both the year-over-year and sequential increases were primarily driven by growth in client deposits and the purchase of high quality securities, partially offset by lower spreads resulting from the continued impact of the low rate environment.

The net interest margin was 1.41% in the second quarter of 2011 compared with 1.74% in the second quarter of 2010 and 1.49% in the first quarter of 2011. The decline from both prior periods primarily reflects tighter spreads.

Year-to-date 2011 compared with year-to-date 2010

Net interest revenue totaled $1.4 billion in the first six months of 2011, compared with $1.5 billion in the first six months of 2010. The decrease primarily reflects lower spreads resulting from the low interest rate environment, partially offset by growth in client deposits and the purchase of high quality securities. The net interest margin was 1.43% in the first six months of 2011, compared with 1.82% in the first six months of 2010. The decline primarily reflects tighter spreads.

BNY Mellon 11

Average balances and interest rates


Average balances and interest rates	Quarter ended
	June 30, 2011						March 31, 2011						June 30, 2010
(dollar amounts in millions)	Average balance			Average rates			Average balance			Average rates			Average balance			Average rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)	$	59,291			1.24	%	$	57,637			1.03	%	$	50,741			1.01	%
Interest-bearing deposits held at the Federal Reserve and other central banks		34,078			0.32			20,373			0.32			18,280			0.34
Federal funds sold and securities purchased under resale agreements		4,577			0.46			4,514			0.50			4,652			0.66
Margin loans		9,508			1.34			7,484			1.48			5,786			1.49
Non-margin loans:
Domestic offices		21,113			2.54			21,891			2.57			20,750			2.89
Foreign offices		9,707			1.53			9,191			1.44			10,128			1.53

Total non-margin loans		30,820			2.24			31,082			2.24			30,878			2.45
Securities:
U.S. government obligations		14,337			1.63			12,849			1.61			6,162			1.46
U.S. government agency obligations		20,466			3.09			20,221			2.98			19,629			3.48
State and political subdivisions		934			5.32			557			6.37			638			6.56
Other securities		33,045			3.25			31,770			3.43			27,601			4.14
Trading securities		2,877			2.44			3,698			2.44			2,752			2.62

Total securities		71,659			2.87			69,095			2.93			56,782			3.58

Total interest-earning assets		209,933			1.78	%		190,185			1.85	%		167,119			2.08	%
Allowance for loan losses		(463	)					(494	)					(517	)
Cash and due from banks		4,325						4,088						3,673
Other assets		50,459						49,577						46,266
Assets of discontinued operations		-						-						260
Assets of consolidated investment management funds		14,226						14,342						12,040
Total assets	$	278,480					$	257,698					$	228,841
Liabilities
Interest-bearing liabilities:
Money market rate accounts (a)	$	4,029			0.41	%	$	5,417			0.38	%	$	3,892			0.48	%
Savings		1,646			0.16			1,600			0.16			1,389			0.27
Certificates of deposit of $100,000 & over		369			0.05			296			0.06			332			0.16
Other time deposits (a)		34,484			0.08			31,823			0.09			26,289			0.08
Foreign offices		85,430			0.44			77,379			0.29			68,061			0.19

Total interest-bearing deposits		125,958			0.34			116,515			0.23			99,963			0.17
Federal funds purchased and securities sold under repurchase agreements		10,894			0.06			5,172			0.07			4,441			0.19
Trading liabilities		1,524			1.09			2,764			1.14			1,668			1.45
Other borrowed funds		1,877			2.04			1,821			2.69			2,555			2.48
Payables to customers and broker-dealers		6,843			0.09			6,701			0.10			6,596			0.09
Long-term debt		17,380			1.63			17,014			1.87			16,462			1.75

Total interest-bearing liabilities		164,476			0.47	%		149,987			0.45	%		131,685			0.43	%
Total noninterest-bearing deposits		43,038						38,616						34,628
Other liabilities		23,694						22,350						20,042
Liabilities of discontinued operations		-						-						260
Liabilities and obligations of consolidated investment management funds		12,966						13,114						11,046
Total liabilities		244,174						224,067						197,661
Temporary equity
Redeemable noncontrolling interests		65						76						12
Permanent equity
Total BNY Mellon shareholders’ equity		33,464						32,827						30,462
Noncontrolling interests		-						8						18
Noncontrolling interests of consolidated investment management funds		777						720						688
Total permanent equity		34,241						33,555						31,168
Total liabilities, temporary equity and permanent equity	$	278,480					$	257,698					$	228,841
Net interest margin – Taxable equivalent basis					1.41	%					1.49	%					1.74	%

(a)

In the second quarter of 2011, certain Money market rate accounts were reclassified to Other time deposits. All prior periods have been restated.

Note:

Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.

12 BNY Mellon


Average balances and interest rates	Six months ended
	June 30, 2011						June 30, 2010
(dollar amounts in millions)	Average balance			Average rates			Average balance			Average rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)	$	58,469			1.12	%	$	53,256			1.02	%
Interest-bearing deposits held at the Federal Reserve and other central banks		27,263			0.32			15,222			0.33
Federal funds sold and securities under resale agreements		4,546			0.47			4,258			0.68
Margin loans		8,502			1.38			5,515			1.49
Non-margin loans:
Domestic offices		21,500			2.52			20,134			3.02
Foreign offices		9,450			1.47			9,797			1.58

Total non-margin loans		30,950			2.20			29,931			2.54
Securities:
U.S. government obligations		13,597			1.61			6,380			1.43
U.S. government agency obligations		20,344			3.02			19,530			3.53
State and political subdivisions		747			5.66			654			6.49
Other securities		32,411			3.31			28,124			4.17
Trading securities		3,285			2.44			2,415			2.57

Total securities		70,384			2.89			57,103			3.60

Total interest-earning assets		200,114			1.80	%		165,285			2.13	%
Allowance for loan losses		(479	)					(509	)
Cash and due from banks		4,207						3,594
Other assets		50,021						45,808
Assets of discontinued operations		-						577
Assets of consolidated investment management funds		14,284						12,383
Total assets	$	268,147					$	227,138
Liabilities
Interest-bearing liabilities:
Money market rate accounts (a)	$	4,719			0.38	%	$	3,530			0.45	%
Savings		1,623			0.16			1,380			0.27
Certificates of deposit of $100,000 & over		333			0.05			489			0.22
Other time deposits (a)		33,161			0.09			25,053			0.09
Foreign offices		81,427			0.36			70,044			0.18

Total interest-bearing deposits		121,263			0.28			100,496			0.16
Federal funds purchased and securities sold under repurchase agreements		8,049			0.06			4,071			0.14
Trading liabilities		2,141			1.11			1,424			2.58
Other borrowed funds		1,849			2.33			2,094			5.05
Payables to customers and broker-dealers		6,772			0.09			6,485			0.08
Long-term debt		17,198			1.75			16,634			1.63

Total interest-bearing liabilities		157,272			0.46	%		131,204			0.39	%
Total noninterest-bearing deposits		40,839						33,983
Other liabilities		23,026						19,236
Liabilities of discontinued operations		-						577
Liabilities and obligations of consolidated investment management funds		13,040						11,291
Total liabilities		234,177						196,291
Temporary equity
Redeemable noncontrolling interests		70						6
Permanent equity
Total BNY Mellon shareholders’ equity		33,147						30,104
Noncontrolling interests		4						8
Noncontrolling interests of consolidated investment management funds		749						729
Total permanent equity		33,900						30,841
Total liabilities, temporary equity and permanent equity	$	268,147					$	227,138
Net interest margin – Taxable equivalent basis					1.43	%					1.82	%

(a)

In the second quarter of 2011, certain Money market rate accounts were reclassified to Other time deposits. All prior periods have been restated.

Note:

Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.

BNY Mellon 13

Noninterest expense


Noninterest expense																						YTD11
										2Q11 vs.						Year-to-date						vs.
(dollars in millions)	2Q11			1Q11			2Q10			2Q10			1Q11			2011			2010			YTD10
Staff:
Compensation	$	903		$	876		$	763			18	%		3	%	$	1,779		$	1,516			17	%
Incentives		328			325			272			21			1			653			556			17
Employee benefits		232			223			199			17			4			455			382			19
Total staff		1,463			1,424			1,234			19			3			2,887			2,454			18
Professional, legal and other purchased services		301			283			256			18			6			584			497			18
Net occupancy		161			153			143			13			5			314			280			12
Software		121			122			91			33			(1	)		243			185			31
Distribution and servicing		109			111			90			21			(2	)		220			179			23
Furniture and equipment		82			84			71			15			(2	)		166			146			14
Sub-custodian		88			68			65			35			29			156			117			33
Business development		73			56			68			7			30			129			120			8
Other		292			277			201			45			5			569			387			47
Subtotal		2,690	(a)		2,578	(a)		2,219			21			4			5,268	(a)		4,365			21
Amortization of intangible assets		108			108			98			10			-			216			195			11
Restructuring charges		(7	)		(6	)		(15	)		N/M			N/M			(13	)		(8	)		N/M
M&I expenses		25			17			14			79			47			42			40			5
Special litigation reserves		N/A			N/A			N/A			N/M			N/M			N/A			164			N/M
Total noninterest expense	$	2,816		$	2,697		$	2,316			22	%		4	%	$	5,513		$	4,756			16	%
Total staff expense as a percent of total revenue		38	%		39	%		37	%								39	%		37	%
Employees at period end		48,900			48,400			42,700			15	%		1	%		48,900			42,700			15	%

(a)

Noninterest expense from the Acquisitions was $210 million in the second quarter of 2011, $203 million in the first quarter of 2011 and $413 million in the first six months of 2011.

N/A – Not applicable.

N/M – Not meaningful.

Total noninterest expense increased $500 million compared with the second quarter of 2010 and $119 million compared with the first quarter of 2011. Excluding amortization of intangible assets, restructuring charges and merger and integration expenses (“M&I”), noninterest expense increased $471 million year-over-year and $112 million sequentially. The year-over-year increase was primarily driven by the impact of the Acquisitions and higher litigation/legal expense. Both the year-over-year and sequential increases reflect the impact of the annual employee merit increase in the second quarter of 2011, as well as higher volume-related and business development expenses. The year-over-year increase, excluding the impact of the Acquisitions, was 12%.

Staff expense

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

The increase in staff expense compared with the second quarter of 2010 primarily reflects the impact of the Acquisitions and higher incentives driven by new business. The year-over-year and sequential increases were also impacted by the annual employee merit increase in the second quarter of 2011, as well as higher payroll taxes, healthcare and pension expenses.

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 amortization of intangible assets, restructuring charges and M&I expenses, totaled $1.2 billion in the second quarter of 2011 compared with $1.0 billion in the second quarter of 2010 and $1.2 billion in the first quarter of 2011. The year-over-year increase primarily reflects the impact of the Acquisitions, higher litigation/legal expenses, as well as higher volume-related and business development expenses. Non-staff expense

14 BNY Mellon

in the second quarter of 2011 compared with the first quarter of 2011 includes higher legal expense and higher volume-related and business development expenses. Additionally, the increase in Other non-staff expense compared with the first quarter of 2011 primarily resulted from a first quarter 2011 increase in the value of collateral related to customer support agreements.

Given the severity of the economic downturn, the financial services industry has seen a continuing increase in the level of litigation activity. As a result, we anticipate litigation costs to continue to exceed historic trend levels. For additional information on litigation matters, see Note 18 of the Notes to Consolidated Financial Statements.

For additional information on restructuring charges, see Note 11 of the Notes to Consolidated Financial Statements.

In the second quarter of 2011, we incurred $25 million of M&I expenses primarily related to the integration of the Acquisitions.

Year-to-date 2011 compared with year-to-date 2010

Noninterest expense in the first six months of 2011 increased $757 million, or 16% compared with the first six months of 2010. The increase primarily reflects the impact of the Acquisitions, higher incentives driven by new business, higher litigation/legal, pension and healthcare, volume-related and business development expenses.

Income taxes

The effective tax rate for the second quarter of 2011 was 26.9% compared with an effective tax rate of 30.2% on a continuing operations basis in the second quarter of 2010 and an effective tax rate of 29.3% in the first quarter of 2011. The lower tax rate in the second quarter of 2011 was due primarily to the impact of the consolidated investment management funds. Adjusted for the impact of the consolidated investment management funds, the effective tax rate on an operating basis (non-GAAP) was 30.0% in the second quarter of 2011, compared with 30.8% in the second quarter of 2010 and 30.2% in the first quarter of 2011. See the Supplemental information section beginning on page 48 for additional information.

Review of businesses

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

Organization of our business

In the first quarter of 2011, BNY Mellon realigned its internal reporting structure and business presentation to focus on its two principal businesses, Investment Management and Investment Services. The realignment reflects management’s approach to assessing performance and decisions regarding resource allocations. Investment Management includes the former Asset Management and Wealth Management businesses; Investment Services includes the former Asset Servicing, Issuer Services and Clearing Services businesses as well as the Cash Management business previously included in the Treasury Services business. The Other segment includes credit-related activities previously included in the Treasury Services business, the lease financing portfolio, corporate treasury activities, including our investment securities portfolio, our investment in ConvergEx Group, business exits and corporate overhead. All prior periods presented in this Form 10-Q are presented accordingly.

Also in the first quarter of 2011, we revised the net interest revenue for our businesses to reflect a new approach which adjusts our transfer pricing methodology to better reflect the value of certain domestic deposits. All prior period business results have been restated to reflect this revision. This revision did not impact the consolidated results.

Business accounting principles

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

For additional information on the accounting principles of our businesses, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 19 of the Notes to Consolidated Financial Statements. In addition, client deposits serve as the primary funding source for our investment securities portfolio and we

BNY Mellon 15

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 results of the businesses.

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

Information on our businesses is reported on a continuing operations basis for all periods in 2010. See Note 4 of the Notes to Consolidated Financial Statements for a discussion of discontinued operations.

The results of our businesses in the second quarter of 2011 compared with the second quarter of 2010 reflect higher market values and the impact of new business. Year-over-year results in the Investment Services business also benefited from the impact of the Acquisitions, higher Depositary Receipts and securities lending revenue, and higher clearing revenue, partially offset by lower foreign exchange volatility. Sequentially, results in our Investment Management business reflected net new business, which was more than offset by lower net interest

revenue, higher incentives and the annual employee merit increase in the second quarter of 2011. Sequential results in the Investment Services business reflected net new business, seasonally higher Depositary Receipts and securities lending revenue, and higher mutual fund positions. Money market fee waivers continue to negatively impact results in both the Investment Management and Investment Services businesses.

Net interest revenue was impacted by growth in client deposits and the purchase of high quality securities, partially offset by lower spreads resulting from the continued impact of the low interest rate environment.

Noninterest expense increased year-over-year reflecting the Acquisitions and higher litigation and legal expenses. Noninterest expense also increased year-over-year and sequentially as a result of higher expense driven by new business and the annual employee merit increase in the second quarter of 2011.

Net securities gains and restructuring charges are recorded in the Other segment. In addition, M&I expenses are a corporate level item and are therefore recorded in the Other segment.

The following table presents the value of certain market indices at period end and on an average basis.


Market indices																					YTD11
											2Q11 vs.						Year-to-date				vs.
	2Q10		3Q10		4Q10		1Q11		2Q11		2Q10			1Q11			2011		2010		YTD10
S&P 500 Index (a)		1031		1141		1258		1326		1321		28	%		-	%		1321		1031		28	%
S&P 500 Index – daily average		1135		1095		1204		1302		1318		16			1			1310		1129		16
FTSE 100 Index (a)		4917		5549		5900		5909		5946		21			1			5946		4917		21
FTSE 100 Index-daily average		5361		5312		5760		5945		5906		10			(1	)		5926		5394		10
Barclay’s Capital Aggregate Bond^smIndex (a)		299		329		323		328		341		14			4			341		299		14
MSCI EAFE^® Index (a)		1348		1561		1658		1703		1708		27			-			1708		1348		27
NYSE and NASDAQ Share Volume (in billions)		299		233		219		225		209		(30	)		(7	)		434		545		(20	)

(a)

Period end.

The period end S&P 500 Index was unchanged sequentially and increased 28% year-over-year. The period end FTSE 100 Index increased 1% sequentially and 21% year-over-year. On a daily average basis, the S&P 500 Index increased 1% sequentially and 16% year-over-year while the FTSE 100 Index decreased 1% sequentially and increased 10% year-over-year.

The changes in the value of market indices primarily impact fee revenue in Investment Management and to a lesser extent Investment Services.

At June 30, 2011, using the S&P 500 Index as a proxy for global equity markets, we estimate that a 100 point change in the value of the S&P 500 Index, sustained for one year, would impact fee revenue by

16 BNY Mellon

approximately 1 to 2% and fully diluted earnings per common share on a continuing operations basis by $0.06-$0.07. If the global equity markets over- or under-perform the S&P 500 Index, the impact to fee revenue and earnings per share could be different.

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


For the quarter ended June 30, 2011 (dollar amounts in millions)	Investment Management			Investment Services			Other			Consolidated
Fee and other revenue	$	865	(a)	$	2,018		$	215		$	3,098	(a)
Net interest revenue		47			666			18			731
Total revenue		912			2,684			233			3,829
Provision for credit losses		1			-			(1	)		-
Noninterest expense		696			1,891			229			2,816
Income (loss) before taxes	$	215	(a)	$	793		$	5		$	1,013	(a)
Pre-tax operating margin (b)		24	%		30	%		N/M			26	%
Average assets	$	36,742		$	193,498		$	48,240		$	278,480
Excluding amortization of intangible assets:
Noninterest expense	$	643		$	1,837		$	228		$	2,708
Income before taxes		268			847			6			1,121
Pre-tax operating margin (b)		29	%		32	%		N/M			29	%

(a)

Total fee and other revenue and income before taxes for the second quarter of 2011 include income from consolidated investment management funds of $63 million, net of noncontrolling interests of $21 million, for a net impact of $42 million.

(b)

Income before taxes divided by total revenue.

N/M – Not meaningful.


For the quarter ended March 31, 2011 (dollar amounts in millions)	Investment Management			Investment Services			Other			Consolidated
Fee and other revenue	$	870	(a)	$	1,950		$	84		$	2,904	(a)
Net interest revenue		53			639			6			698
Total revenue		923			2,589			90			3,602
Provision for credit losses		-			-			-			-
Noninterest expense		685			1,816			196			2,697
Income (loss) before taxes	$	238	(a)	$	773		$	(106	)	$	905	(a)
Pre-tax operating margin (b)		26	%		30	%		N/M			25	%
Average assets	$	37,318		$	178,752		$	41,628		$	257,698
Excluding amortization of intangible assets:
Noninterest expense	$	630		$	1,763		$	196		$	2,589
Income (loss) before taxes		293			826			(106	)		1,013
Pre-tax operating margin (b)		32	%		32	%		N/M			28	%

(a)

Total fee and other revenue and income before taxes for the first quarter of 2011 include income from consolidated investment management funds of $110 million, net of noncontrolling interests of $44 million, for a net impact of $66 million.

(b)

Income before taxes divided by total revenue.

N/M – Not meaningful.

BNY Mellon 17


For the quarter ended Dec. 31, 2010 (dollar amounts in millions)	Investment Management			Investment Services			Other			Total continuing operations
Fee and other revenue	$	899	(a)	$	2,010		$	108		$	3,017	(a)
Net interest revenue		50			598			72			720
Total revenue		949			2,608			180			3,737
Provision for credit losses		2			-			(24	)		(22	)
Noninterest expense		728			1,812			263			2,803
Income (loss) before taxes	$	219	(a)	$	796		$	(59	)	$	956	(a)
Pre-tax operating margin (b)		23	%		31	%		N/M			26	%
Average assets	$	37,648		$	176,719		$	41,819		$	256,186	(c)
Excluding amortization of intangible assets:
Noninterest expense	$	667		$	1,759		$	262		$	2,688
Income (loss) before taxes		280			849			(58	)		1,071
Pre-tax operating margin (b)		29	%		33	%		N/M			29	%

(a)

Total fee and other revenue and income before taxes for the fourth quarter of 2010 include income from consolidated investment management funds of $59 million, net of noncontrolling interests of $14 million, for a net impact of $45 million.

(b)

Income before taxes divided by total revenue.

(c)

Including average assets of discontinued operations of $223 million for the fourth quarter of 2010, consolidated average assets were $256,409 million.

N/M – Not meaningful.


For the quarter ended Sept. 30, 2010 (dollar amounts in millions)	Investment Management			Investment Services			Other			Total continuing operations
Fee and other revenue	$	793	(a)	$	1,865		$	59		$	2,717	(a)
Net interest revenue		50			589			79			718
Total revenue		843			2,454			138			3,435
Provision for credit losses		-			-			(22	)		(22	)
Noninterest expense		683			1,682			246			2,611
Income (loss) before taxes	$	160	(a)	$	772		$	(86	)	$	846	(a)
Pre-tax operating margin (b)		19	%		31	%		N/M			25	%
Average assets	$	36,197		$	160,597		$	43,284		$	240,078	(c)
Excluding amortization of intangible assets:
Noninterest expense	$	624		$	1,630		$	246		$	2,500
Income (loss) before taxes		219			824			(86	)		957
Pre-tax operating margin (b)		26	%		34	%		N/M			28	%

(a)

Total fee and other revenue and income before taxes for the third quarter of 2010 include income from consolidated investment management funds of $37 million, net of noncontrolling interests of $(12) million, for a net impact of $49 million.

(b)

Income before taxes divided by total revenue.

(c)

Including average assets of discontinued operations of $247 million for the third quarter of 2010, consolidated average assets were $240,325 million.

N/M – Not meaningful.

18 BNY Mellon


For the quarter ended June 30, 2010 (dollar amounts in millions)	Investment Management			Investment Services			Other		Total continuing operations
Fee and other revenue	$	767	(a)	$	1,714		$	106	$	2,587	(a)
Net interest revenue		53			608			61		722
Total revenue		820			2,322			167		3,309
Provision for credit losses		1			-			19		20
Noninterest expense		655			1,560			101		2,316
Income (loss) before taxes	$	164	(a)	$	762		$	47	$	973	(a)
Pre-tax operating margin (b)		20	%		33	%		N/M		29	%
Average assets	$	33,944		$	154,644		$	39,993	$	228,581	(c)
Excluding amortization of intangible assets:
Noninterest expense	$	596		$	1,521		$	101	$	2,218
Income (loss) before taxes		223			801			47		1,071
Pre-tax operating margin (b)		27	%		34	%		N/M		32	%

(a)

Total fee and other revenue and income before taxes for the second quarter of 2010 includes income from consolidated investment management funds of $65 million, net of noncontrolling interests of $33 million, for a net impact of $32 million.

(b)

Income before taxes divided by total revenue.

(c)

Including average assets of discontinued operations of $260 million for the second quarter of 2010, consolidated average assets were $228,841 million.

N/M – Not meaningful.


For the six months ended June 30, 2011 (dollar amounts in millions)	Investment Management			Investment Services			Other			Consolidated
Fee and other revenue	$	1,735	(a)	$	3,968		$	299		$	6,002	(a)
Net interest revenue		100			1,305			24			1,429
Total revenue		1,835			5,273			323			7,431
Provision for credit losses		1			-			(1	)		-
Noninterest expense		1,381			3,707			425			5,513
Income (loss) before taxes	$	453	(a)	$	1,566		$	(101	)	$	1,918	(a)
Pre-tax operating margin (b)		25	%		30	%		N/M			26	%
Average assets	$	37,029		$	186,166		$	44,952		$	268,147
Excluding amortization of intangible assets:
Noninterest expense	$	1,273		$	3,600		$	424		$	5,297
Income (loss) before taxes		561			1,673			(100	)		2,134
Pre-tax operating margin (b)		31	%		32	%		N/M			29	%

(a)

Total fee and other revenue and income before taxes for the first six months of 2011 include income from consolidated investment management funds of $173 million, net of noncontrolling interests of $65 million, for a net impact of $108 million.

(b)

Income before taxes divided by total revenue.

N/M – Not meaningful.


For the six months ended June 30, 2010 (dollar amounts in millions)	Investment Management			Investment Services			Other			Total continuing operations
Fee and other revenue	$	1,542	(a)	$	3,304		$	311		$	5,157	(a)
Net interest revenue		105			1,261			121			1,487
Total revenue		1,647			4,565			432			6,644
Provision for credit losses		1			-			54			55
Noninterest expense		1,282			3,017			457			4,756
Income (loss) before taxes	$	364	(a)	$	1,548		$	(79	)	$	1,833	(a)
Pre-tax operating margin (b)		22	%		34	%		N/M			28	%
Average assets	$	33,875		$	154,436		$	38,250		$	226,561	(c)
Excluding amortization of intangible assets:
Noninterest expense	$	1,165		$	2,940		$	456		$	4,561
Income (loss) before taxes		481			1,625			(78	)		2,028
Pre-tax operating margin (b)		29	%		36	%		N/M			31	%

(a)

Total fee and other revenue and income before taxes for the first six months of 2010 include income from consolidated investment management funds of $130 million, net of noncontrolling interests of $57 million, for a net impact of $73 million.

(b)

Income before taxes divided by total revenue.

(c)

Including average assets of discontinued operations of $577 million for the first six months of 2010, consolidated average assets were $227,138 million.

N/M – Not meaningful.

BNY Mellon 19

Investment Management business


																												YTD11
(dollar amounts in millions, unless otherwise noted)																2Q11 vs.						Year-to-date						vs.
(dollar amounts in millions, unless otherwise noted)	2Q10			3Q10			4Q10			1Q11			2Q11			2Q10			1Q11			2011			2010			YTD10
Revenue:
Investment management and performance fees:
Mutual funds	$	254		$	270		$	293		$	283		$	290			14	%		2	%	$	573		$	503			14	%
Institutional clients		279			282			300			319			319			14			-			638			559			14
Wealth management		153			154			157			164			163			7			(1	)		327			312			5
Performance fees		19			16			75			17			18			(5	)		6			35			32			9
Total investment management and performance fees		705			722			825			783			790			12			1			1,573			1,406			12
Distribution and servicing		49			53			52			51			48			(2	)		(6	)		99			96			3
Other (a)		13			18			22			36			27			N/M			(25	)		63			40			58
Total fee and other revenue (a)		767			793			899			870			865			13			(1	)		1,735			1,542			13
Net interest revenue		53			50			50			53			47			(11	)		(11	)		100			105			(5	)
Total revenue		820			843			949			923			912			11			(1	)		1,835			1,647			11
Provision for credit losses		1			-			2			-			1			N/M			N/M			1			1			N/M
Noninterest expense (ex. amortization of intangible assets)		596			624			667			630			643			8			2			1,273			1,165			9
Income before taxes (ex. amortization of intangible assets)		223			219			280			293			268			20			(9	)		561			481			17
Amortization of intangible assets		59			59			61			55			53			(10	)		(4	)		108			117			(8	)
Income before taxes	$	164		$	160		$	219		$	238		$	215			31	%		(10	)%	$	453		$	364			24	%

Pre-tax operating margin		20	%		19	%		23	%		26	%		24	%								25	%		22	%
Pre-tax operating margin (ex. amortization of intangible assets and net of distribution and servicing expense) (b)		31	%		29	%		33	%		36	%		33	%								35	%		33	%

Metrics:
Changes in market value of AUM (in billions) (c):
Beginning balance	$	1,105		$	1,047		$	1,141		$	1,172		$	1,229
Net inflows (outflows):
Long-term		12			11			9			31			32
Money market		(17	)		18			6			(5	)		(1	)
Total net inflows (outflows)		(5	)		29			15			26			31
Net market/currency impact		(53	)		65			16			31			14
Ending balance	$	1,047		$	1,141		$	1,172		$	1,229		$	1,274			22	%		4	%

AUM at period end, by client type (in billions) (c):
Institutional	$	595		$	639		$	639		$	701		$	733			23	%		5	%
Mutual funds		370			418			454			451			462			25			2
Private client		82			84			79			77			79			(4	)		3
Total AUM	$	1,047		$	1,141		$	1,172		$	1,229		$	1,274			22	%		4	%

Composition of AUM at period end, by product type (in billions) (c):
Equity securities	$	307		$	352		$	379		$	417		$	428			39	%		3	%
Fixed income securities		317			348			342			362			398			26			10
Money market		314			329			332			337			337			7			-
Alternative investments and overlay		109			112