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, 2012

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

of the Securities Exchange Act of 1934

Commission File No. 001-35651

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 September 30, 2012

Common Stock, $0.01 par value				1,168,606,959

THE BANK OF NEW YORK MELLON CORPORATION

Third Quarter 2012 Form 10-Q

Table of Contents


	Page
Consolidated Financial Highlights (unaudited)		2

Part I – Financial Information

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk:
General		4
Overview		4
Subsequent events		4
Highlights of third quarter 2012 results		4
Fee and other revenue		6
Net interest revenue		10
Average balances and interest rates		11
Noninterest expense		13
Income taxes		15
Review of businesses		15
Critical accounting estimates		26
Consolidated balance sheet review		26
Liquidity and dividends		38
Capital		42
Trading activities and risk management		45
Foreign exchange and other trading		46
Asset/liability management		47
Off-balance sheet arrangements		48
Supplemental information – Explanation of Non-GAAP financial measures		48
Recent accounting and regulatory developments		52
Government monetary policies and competition		61
Website information		61

Item 1. Financial Statements:
Consolidated Income Statement (unaudited)		63
Consolidated Comprehensive Income Statement (unaudited)		65
Consolidated Balance Sheet (unaudited)		66
Consolidated Statement of Cash Flows (unaudited)		67
Consolidated Statement of Changes in Equity (unaudited)		68


	Page
Notes to Consolidated Financial Statements:
Note 1 – Basis of presentation		69
Note 2 – Accounting changes and new accounting guidance		69
Note 3 – Acquisitions and dispositions		70
Note 4 – Securities		71
Note 5 – Loans and asset quality		74
Note 6 – Goodwill and intangible assets		81
Note 7 – Other assets		83
Note 8 – Net interest revenue		84
Note 9 – Employee benefit plans		84
Note 10 – Restructuring charges		85
Note 11 – Income taxes		85
Note 12 – Securitizations and variable interest entities		86
Note 13 – Preferred stock		88
Note 14 – Other comprehensive income		89
Note 15 – Fair value measurement		90
Note 16 – Fair value option		104
Note 17 – Derivative instruments		104
Note 18 – Commitments and contingent liabilities		109
Note 19 – Review of businesses		114
Note 20 – Supplemental information to the Consolidated Statement of Cash Flows		117

Item 4. Controls and Procedures		118

Forward-looking Statements		119

Part II – Other Information

Item 1. Legal Proceedings		121

Item 1A. Risk Factors		121

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		122

Item 6. Exhibits		122

Signature		123

Index to Exhibits		124

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited)


	Quarter ended									Nine months ended
(dollar amounts in millions, except per common share amounts and unless otherwise noted)	Sept. 30, 2012			June 30, 2012			Sept. 30, 2011			Sept. 30, 2012			Sept. 30, 2011

Results applicable to common shareholders of
The Bank of New York Mellon Corporation:
Net income	$	720		$	466		$	651		$	1,805		$	2,011
Basic EPS		0.61			0.39			0.53			1.51			1.61
Diluted EPS		0.61			0.39			0.53			1.51			1.61

Fee and other revenue	$	2,879		$	2,826		$	2,887		$	8,543		$	8,781
Income from consolidated investment management funds		47			57			32			147			205
Net interest revenue		749			734			775			2,248			2,204

Total revenue	$	3,675		$	3,617		$	3,694		$	10,938		$	11,190

Return on common equity (annualized) (a)		8.3	%		5.5	%		7.6	%		7.1	%		8.0	%
Non-GAAP adjusted (a)		9.2	%		8.9	%		9.0	%		9.0	%		9.4	%

Return on tangible common equity (annualized) – Non-GAAP (a)		22.1	%		15.7	%		22.1	%		19.6	%		24.2	%
Non-GAAP adjusted (a)		22.5	%		22.4	%		23.8	%		22.6	%		25.6	%

Return on average assets (annualized)		0.90	%		0.61	%		0.83	%		0.78	%		0.95	%

Fee revenue as a percentage of total revenue excluding net securities gains (losses)		78	%		78	%		78	%		78	%		78	%

Annualized fee revenue per employee (based on average headcount) (in thousands)	$	235		$	233		$	233		$	233		$	240

Percentage of non-U.S. total revenue (b)		37	%		37	%		39	%		37	%		38	%

Pre-tax operating margin (a)		27	%		16	%		26	%		22	%		26	%
Non-GAAP adjusted (a)		29	%		29	%		31	%		29	%		30	%

Net interest margin (FTE)		1.20	%		1.25	%		1.30	%		1.25	%		1.39	%

Market value of assets under management at period end (in billions)	$	1,359		$	1,299		$	1,198		$	1,359		$	1,198
Market value of assets under custody and administration at period end (in trillions)	$	27.9		$	27.1		$	25.9		$	27.9		$	25.9
Market value of cross-border assets at period end (in trillions)	$	10.1		$	9.9		$	9.6		$	10.1		$	9.6

Market value of securities on loan at period end (in billions) (c)	$	259		$	275		$	250		$	259		$	250

Average common shares and equivalents outstanding (in thousands):
Basic		1,169,674			1,181,350			1,214,126			1,181,614			1,226,132
Diluted		1,171,534			1,182,985			1,215,527			1,183,309			1,229,042

Capital ratios (d):
Estimated Basel III Tier 1 common equity ratio – Non-GAAP (a)(e)		9.3	%		8.7	%		N/A			9.3	%		N/A
Basel I Tier 1 common equity to risk-weighted assets ratio –
Non-GAAP (a)		13.3	%		13.2	%		12.5	%		13.3	%		12.5	%
Basel I Tier 1 capital ratio		15.3	%		14.7	%		14.0	%		15.3	%		14.0	%
Basel I Total (Tier 1 plus Tier 2) capital ratio		16.9	%		16.4	%		16.1	%		16.9	%		16.1	%
Basel I leverage capital ratio		5.6	%		5.5	%		5.1	%		5.6	%		5.1	%
BNY Mellon shareholders’ equity to total assets ratio (a)		10.7	%		10.5	%		10.5	%		10.7	%		10.5	%
BNY Mellon common shareholders’ equity to total assets ratio (a)		10.3	%		10.3	%		10.5	%		10.3	%		10.5	%
Tangible BNY Mellon common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (a)		6.3	%		6.1	%		5.9	%		6.3	%		5.9	%

2 BNY Mellon

The Bank of New York Mellon Corporation

Consolidated Financial Highlights (unaudited) (continued)


	Quarter ended									Nine months ended
(dollar amounts in millions, except per common share amounts and unless otherwise noted)	Sept. 30, 2012			June 30, 2012			Sept. 30, 2011			Sept. 30, 2012			Sept. 30, 2011
Selected average balances:
Interest-earning assets	$	255,228		$	239,755		$	240,253		$	243,814		$	213,636
Assets of operations	$	307,919		$	293,718		$	298,325		$	297,219		$	268,847
Total assets	$	318,914		$	305,002		$	311,463		$	308,459		$	282,745
Interest-bearing deposits	$	138,260		$	130,482		$	125,795		$	131,418		$	122,790
Noninterest-bearing deposits	$	70,230		$	62,860		$	73,389		$	66,581		$	51,808
Preferred stock	$	611		$	60		$	-		$	225		$	-
Total The Bank of New York Mellon Corporation common shareholders’ equity	$	34,522		$	34,123		$	34,008		$	34,123		$	33,437

Other information at period end:
Cash dividends per common share	$	0.13		$	0.13		$	0.13		$	0.39		$	0.35
Common dividend payout ratio		21	%		33	%		25	%		26	%		22	%
Common dividend yield (annualized)		2.3	%		2.4	%		2.8	%		2.3	%		2.5	%
Closing common stock price per common share	$	22.62		$	21.95		$	18.59		$	22.62		$	18.59
Market capitalization	$	26,434		$	25,929		$	22,543		$	26,434		$	22,543
Book value per common share – GAAP (a)	$	30.11		$	28.81		$	27.79		$	30.11		$	27.79
Tangible book value per common share – Non-GAAP (a)	$	12.59		$	11.47		$	10.55		$	12.59		$	10.55

Full-time employees		48,700			48,200			49,600			48,700			49,600

Common shares outstanding (in thousands)		1,168,607			1,181,298			1,212,632			1,168,607			1,212,632

(a)

See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48 for a calculation of these ratios.

(b)

Includes fee revenue, net interest revenue and income (loss) from consolidated investment management funds, net of net income (loss) attributable to noncontrolling interests.

(c)

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

(d)

When in this Form 10-Q we refer to BNY Mellon’s or our bank subsidiary’s “Basel I” capital measures (e.g., Basel I Total capital or Basel I Tier 1 capital), we mean Total or Tier 1 capital, as applicable, as calculated under the Board of Governors of the Federal Reserve System’s (the “Federal Reserve”) risk-based capital guidelines that are based on the 1988 Basel Accord, which is often referred to as “Basel I”.

(e)

The estimated Basel III Tier 1 common equity ratios at Sept. 30, 2012 and June 30, 2012 are based on the Notices of Proposed Rulemaking (“NPRs”) and final market risk rule initially released on June 7, 2012 and published in the Federal Register on Aug. 30, 2012 and calculated on an Advanced Approaches basis, as amended by Basel III. The estimated Basel III Tier 1 common equity ratio of 6.5% at Sept. 30, 2011 is based on prior Basel III guidance and the proposed market risk rule.

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 and its consolidated subsidiaries. The term “Parent” refers to The Bank of New York Mellon Corporation but not its subsidiaries.

Certain business terms used in this document are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2011 (“2011 Annual Report”).

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

How we reported results

Throughout this Form 10-Q, measures which are noted as “Non-GAAP” exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest margin on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48 for a reconciliation of financial measures presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) to adjusted Non-GAAP financial measures.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for

institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. At Sept. 30, 2012, we had $27.9 trillion in assets under custody and administration and $1.4 trillion in assets under management, serviced $11.6 trillion in outstanding debt and processed global payments averaging $1.4 trillion per day.

Subsequent events

Impact of Hurricane Sandy

Although several of our facilities in the northeastern U.S. were impacted by Hurricane Sandy, our business continuity plans have functioned well and have enabled us to continue to provide high-quality service to our clients. We expect some loss of revenue related to market closures on Oct. 29, 2012 and Oct. 30, 2012 and reduced business activity in the immediate aftermath of the storm. However, we are unable to estimate the loss of revenue and storm-related costs at this time.

Acquisition of remaining 50% interest in WestLB Mellon Asset Management joint venture

On Oct. 1, 2012, BNY Mellon acquired the remaining 50% interest in the WestLB Mellon Asset Management joint venture from Portigon (formerly known as WestLB AG) and consolidated our German Asset Management business. WestLB Mellon Asset Management was formed in early 2006 as a 50:50 joint venture between BNY Mellon and Portigon. At the date of the acquisition, the WestLB Mellon Asset Management joint venture had over 170 employees and more than $29 billion in assets under management.

Highlights of third quarter 2012 results

We reported net income applicable to common shareholders of BNY Mellon of $720 million, or $0.61 per diluted common share in the third quarter of 2012 compared with $651 million, or $0.53 per diluted common share, in the third quarter of 2011 and $466 million, or $0.39 per diluted common share, in the second quarter of 2012.

4 BNY Mellon

Highlights for the third quarter of 2012 include:

•

Assets under custody and administration (“AUC”) totaled a record $27.9 trillion at Sept. 30, 2012 compared with $25.9 trillion at Sept. 30, 2011 and $27.1 trillion at June 30, 2012. This represents an increase of 8% compared with the prior year and 3% sequentially. Both increases were driven by higher market values and net new business. (See the “Review of businesses – Investment Services business” beginning on page 22).

•

Assets under management (“AUM”), excluding securities lending assets, totaled a record $1.4 trillion at Sept. 30, 2012, compared with $1.2 trillion at Sept. 30, 2011 and $1.3 trillion at June 30, 2012. This represents an increase of 13% compared with the prior year and 5% sequentially. Both increases resulted from higher market values and net inflows. (See the “Review of businesses – Investment Management business” beginning on page 19).

•

Investment services fees totaled $1.7 billion in the third quarter of 2012 compared with $1.8 billion in the third quarter of 2011. The decrease was primarily driven by lower Depositary Receipts revenue, the impact of the sale of the Shareowner Services business in the fourth quarter of 2011 and lower Corporate Trust fees, partially offset by higher asset servicing and securities lending revenue. (See the “Review of businesses – Investment Services business” beginning on page 22).

•

Investment management and performance fees totaled $779 million in the third quarter of 2012 compared with $729 million in the third quarter of 2011. The increase was primarily driven by higher market values and net new business. (See the “Review of businesses – Investment Management business” beginning on page 19).

•

Foreign exchange and other trading revenue totaled $182 million in the third quarter of 2012 compared with $200 million in the third quarter of 2011. In the third quarter of 2012, foreign exchange revenue totaled $121 million, a decrease of 45% year-over-year reflecting lower volatility and volumes. Other trading revenue was $61 million in the third quarter of 2012 compared with a loss of $21 million in the third quarter of 2011. The increase primarily reflects improved fixed income trading. (See “Fee and other revenue” beginning on page 6).

•

Investment and other income totaled $124 million in the third quarter of 2012 compared

with $83 million in the third quarter of 2011. The increase primarily resulted from higher seed capital gains. (See “Fee and other revenue” beginning on page 6).

•

Net interest revenue totaled $749 million in the third quarter of 2012 compared with $775 million in the third quarter of 2011. The decrease was primarily driven by lower accretion and the elimination of interest on European Central Bank deposits, partially offset by increased investment in high-quality investment securities. The net interest margin (FTE) for the third quarter of 2012 was 1.20% compared with 1.30% in the third quarter of 2011. The decrease primarily reflects lower reinvestment yields, the elimination of interest on European Central Bank deposits, lower accretion and growth in customer deposits. (See “Net interest revenue” on page 10).

•

The provision for credit losses was a credit of $5 million in the third quarter of 2012 primarily resulting from loan sales and repayments. The provision for credit losses in the third quarter of 2011 was a credit of $22 million. (See “Consolidated balance sheet review – Asset quality and allowance for credit losses” beginning on page 34).

•

Noninterest expense totaled $2.7 billion in the third quarter of 2012 compared with $2.8 billion in the third quarter of 2011. The decrease primarily reflects lower merger and integration (“M&I”), litigation and restructuring charges and the sale of the Shareowner Services business, partially offset by the cost of certain tax credits and the benefit of state investment tax credits recorded in the third quarter of 2011. (See “Noninterest expense” beginning on page 13).

•

BNY Mellon recorded an income tax provision of $225 million (23.1% effective tax rate) in the third quarter of 2012 compared with $281 million (29.7% effective tax rate) in the third quarter of 2011. The decrease in the effective tax rate in the third quarter of 2012 was primarily driven by the completion of state audits. (See “Income taxes” on page 15).

•

The unrealized pre-tax gain on our total investment securities portfolio was $2.5 billion at Sept. 30, 2012 compared with $1.4 billion at June 30, 2012. The increase in the valuation of the investment securities portfolio primarily reflects a decline in interest rates and improved credit spreads. (See “Consolidated balance sheet review – Investment securities” beginning on page 29).

BNY Mellon 5

•

At Sept. 30, 2012, our estimated Basel III Tier 1 common equity ratio was 9.3% compared with 8.7% at June 30, 2012. The increase was primarily due to earnings retention and an increase in the value of the investment portfolio, partially offset by higher risk-weighted assets. (See “Capital” beginning on page 42).

•

We generated $780 million of gross Basel I Tier 1 common equity in the third quarter of 2012, primarily driven by earnings. Our Basel I Tier 1 capital ratio was 15.3% at Sept. 30, 2012 compared with 14.0% at Sept. 30, 2011. (See “Capital” beginning on page 42).

•

In the third quarter of 2012, we repurchased 13.4 million common shares in the open market at an average price of $21.47 per share for a total of $288 million. (See “Capital” beginning on page 42).

Fee and other revenue


Fee and other revenue (a)																						YTD12 vs. YTD11
										3Q12 vs.						Year-to-date
(dollars in millions, unless otherwise noted)	3Q12			2Q12			3Q11			3Q11			2Q12			2012			2011
Investment services fees:
Asset servicing (b)	$	942		$	950		$	922			2	%		(1	)%	$	2,835		$	2,812			1	%
Issuer services		311			275			442			(30	)		13			837			1,158			(28	)
Memo: Issuer services excluding
Shareowner Services		311			275			400			(22	)		13			837			1,006			(17	)
Clearing services		287			309			297			(3	)		(7	)		899			881			2
Treasury services		138			134			133			4			3			408			401			2
Total investment services fees		1,678			1,668			1,794			(6	)		1			4,979			5,252			(5	)
Investment management and performance fees		779			797			729			7			(2	)		2,321			2,272			2
Foreign exchange and other trading revenue		182			180			200			(9	)		1			553			620			(11	)
Distribution and servicing		48			46			43			12			4			140			145			(3	)
Financing-related fees		46			37			40			15			24			127			132			(4	)
Investment and other income		124			48			83			N/M			N/M			311			309			1
Total fee revenue		2,857			2,776			2,889			(1	)		3			8,431			8,730			(3	)
Net securities gains (losses)		22			50			(2	)		N/M			N/M			112			51			N/M
Total fee and other revenue – GAAP		2,879			2,826			2,887			–			2			8,543			8,781			(3	)
Less: Fee and other revenue related to Shareowner Services (c)		–			(3	)		44									(3	)		160
Total fee and other revenue excluding Shareowner Services – Non-GAAP	$	2,879		$	2,829		$	2,843			1	%		2	%	$	8,546		$	8,621			(1	)%
Fee revenue as a percentage of total revenue excluding net securities gains (losses)		78	%		78	%		78	%								78	%		78	%
Market value of AUM at period end (in billions)	$	1,359		$	1,299		$	1,198			13	%		5	%	$	1,359		$	1,198			13	%
Market value of AUC and administration at period end (in trillions)	$	27.9		$	27.1		$	25.9			8	%		3	%	$	27.9		$	25.9			8	%

(a)

See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48 for fee and other revenue excluding Shareowner Services – Non-GAAP.

(b)

Asset servicing fees include securities lending revenue of $49 million in the third quarter of 2012, $59 million in the second quarter of 2012, $41 million in the third quarter of 2011, $157 million in the first nine months of 2012 and $140 million in the first nine months of 2011.

(c)

The Shareowner Services business was sold on Dec. 31, 2011.

N/M

– Not meaningful.

Fee and other revenue

Fee and other revenue was $2.9 billion in the third quarter of 2012, virtually unchanged compared with the third quarter of 2011 and an increase of 2% (unannualized) sequentially. Excluding the impact of the Shareowner Services business, fee and other revenue increased 1% year-over-year primarily

reflecting higher investment management and performance fees and investment and other income, partially offset by lower issuer services fee and foreign exchange and other trading revenue. Sequentially, fee and other revenue increased 2% (unannualized) primarily as a result of higher investment and other income and seasonally higher Depositary Receipts revenue, partially offset by lower net securities gains, clearing services revenue and performance fees.

6 BNY Mellon

Investment services fees

Investment services fees were impacted by the following, compared with the third quarter of 2011 and the second quarter of 2012:

•

Asset servicing fees were $942 million, an increase of 2% year-over-year and a decrease of 1% (unannualized) sequentially. The year-over-year increase primarily reflects net new business and higher market values and securities lending revenue. The sequential decrease was primarily driven by a seasonal decrease in securities lending revenue, partially offset by net new business and higher market values.

•

Issuer services fees were $311 million, a decrease of 30% year-over-year and an increase of 13% (unannualized) sequentially. Excluding Shareowner Services, Issuer services decreased 22% year-over-year. The year-over-year decrease primarily resulted from lower Depositary Receipts revenue driven by lower volumes, and lower Corporate Trust fees reflecting the continued net run-off of structured debt securitizations. This run-off could reduce the Company’s total annual revenue by one-half to three-quarters of 1% if the structured debt markets do not recover. The sequential increase resulted from seasonally higher Depositary Receipts revenue, partially offset by lower Corporate Trust fees.

•

Clearing services fees were $287 million, a decrease of 3% year-over-year and 7% (unannualized) sequentially. Both decreases were primarily driven by lower DARTS volume.

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

Investment management and performance fees

Investment management and performance fees were $779 million, an increase of 7% year-over-year and a decrease of 2% (unannualized) sequentially. Performance fees were $10 million in the third quarter of 2012, $11 million in the third quarter of 2011 and $54 million in the second quarter of 2012. Excluding performance fees, investment management fees increased 7% year-over-year and 3% (unannualized) sequentially. Both increases were driven by higher market values and net new business.

Total AUM for the Investment Management business was $1.4 trillion at Sept. 30, 2012, an increase of 13% compared with $1.2 trillion at Sept. 30, 2011 and an increase of 5% compared with $1.3 trillion at June 30, 2012. Both increases resulted from higher market values and net inflows.

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)	3Q12		2Q12		3Q11			2012		2011
Foreign exchange	$	121	$	157	$	221		$	414	$	578
Other trading revenue:
Fixed income		54		16		(21	)		117		24
Credit derivatives/other (a)		7		7		-			22		18
Total other trading revenue		61		23		(21	)		139		42
Total	$	182	$	180	$	200		$	553	$	620

(a)

Credit derivatives are used as economic hedges of loans.

Foreign exchange and other trading revenue totaled $182 million in the third quarter of 2012, $200 million in the third quarter of 2011 and $180 million in the second quarter of 2012. In the third quarter of 2012, foreign exchange revenue totaled $121 million, a decrease of 45% year-over-year and 23% (unannualized) sequentially. Both decreases reflect lower volatility and volumes. Additionally, foreign exchange revenue continues to be impacted by increasingly competitive market pressures. Other trading revenue was $61 million in the third quarter of 2012 compared with a loss of $21 million in the third quarter of 2011 and revenue of $23 million in the second quarter of 2012. The increases compared with both prior periods reflect improved fixed income trading. Foreign exchange revenue is primarily reported in the Investment Services business. Other trading revenue is primarily reported in the Other segment.

The foreign exchange trading engaged in by the Company generates revenues, which are influenced by the volume of client transactions and the spread realized on these transactions. The level of volume and spreads is affected by market volatility, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by

BNY Mellon 7

corporate and institutional clients. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute. A substantial majority of our foreign exchange trades is undertaken for our custody clients in transactions where BNY Mellon acts as principal, and not as an agent or broker. As a principal, we earn a profit, if any, based on our ability to risk manage the aggregate foreign currency positions that we buy and sell on a daily basis. Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction program, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client’s investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. Such transactions may be initiated by (i) contacting one of our sales desks to negotiate the rate for specific transactions, (ii) using electronic trading platforms, or (iii) electing other methods such as those pursuant to a benchmarking arrangement, in which pricing is determined by an objective market rate plus a pre-negotiated spread. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction program, including a standing instruction program option called the Defined Spread Offering, which the Company introduced to clients in the first quarter of 2012, provides custody clients and their investment managers with an end-to-end solution that allows them to shift to BNY Mellon the cost, management and execution risk, often in small transactions not otherwise eligible for a more favorable rate or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. In response to competitive market pressures and client requests, we are continuing to develop standing instruction program products and services and making these new products and services available to our clients. Our custody clients choose to use third-party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar-equivalent volume foreign exchange transactions.

We typically price negotiated trades for our custody clients at a spread over either our estimation of the current market rate for a particular currency or an agreed upon third-party benchmark. With respect to our standing instruction program, we typically assign a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than $1 million) executed between global financial institutions, known as the “interbank range.” Using the interbank range for the given day, we typically price purchases of currencies at or near the low end of this range and sales of currencies at or near the high end of this range. The standing instruction program Defined Spread Offering prices transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread to an objective market source for developed and certain emerging market currencies or to a reference rate computed by BNY Mellon for other emerging market currencies. A shift by custody clients from the standing instruction program to other trading options combined with the increasing competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. For the quarter ended Sept. 30, 2012, our total revenue for all types of foreign exchange trading transactions was $121 million, or approximately 3% of our total revenue. Approximately 41% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction program.

Distribution and servicing fees

Distribution and servicing fee revenue was $48 million in the third quarter of 2012 compared with $43 million in the third quarter of 2011 and $46 million in the second quarter of 2012. The increases primarily reflect higher market values and lower fee waivers.

Financing-related fees

Financing-related fees, which are primarily reported in the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees were $46 million in the third quarter of 2012, $40 million in the third quarter of 2011 and $37 million in the second quarter of 2012. Both increases reflect higher capital markets fees. The sequential increase also includes higher credit-related fees.

8 BNY Mellon

Investment and other income


Investment and other income										Year-to-date
(in millions)	3Q12			2Q12			3Q11			2012		2011
Corporate/bank-owned life insurance	$	41		$	32		$	40		$	107	$	119
Seed capital gains (losses)		28			–			(8	)		52		(3	)
Lease residual gains		–			3			14			37		22
Expense reimbursements from joint ventures		10			9			11			29		28
Equity investment revenue (loss)		16			(5	)		12			17		36
Asset-related gains		17			–			28			15		108
Private equity gains (losses)		(1	)		1			(7	)		4		15
Other income (loss)		13			8			(7	)		50		(16	)
Total	$	124		$	48		$	83		$	311	$	309

Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes income from insurance contracts, gains and losses on seed capital investments, lease residual gains, expense reimbursements from joint ventures, equity investment revenue or loss, asset-related gains, gains and losses on private equity investments, and other income (loss). Asset-related gains include loan, real estate and other asset dispositions. Expense reimbursements from joint ventures relate to expenses incurred by BNY Mellon on behalf of joint ventures. Other income (loss) primarily includes fees from transitional service agreements, foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income increased $41 million compared with the third quarter of 2011 and $76 million compared with the second quarter of 2012. The year-over-year increase primarily resulted from higher seed capital gains. Sequentially, the increase primarily resulted from seed capital gains, higher equity investment revenue and higher asset-related gains.

Net securities gains (losses)

Net securities gains totaled $22 million in the third quarter of 2012 compared with net losses of $2 million in the third quarter of 2011 and net gains of $50 million in the second quarter of 2012.

Year-to-date 2012 compared with year-to-date 2011

Fee and other revenue for the first nine months of 2012 totaled $8.5 billion compared with $8.8 billion in the first nine months of 2011. The decrease primarily reflects the impact of the sale of the Shareowner Services business. Excluding the impact of the Shareowner Services business, fee and other revenue decreased 1% primarily reflecting lower issuer services fees and foreign exchange and other trading revenue, offset in part by higher investment management and performance fees and net securities gains.

The decrease in issuer services fees primarily reflects lower Depositary Receipts revenue, as well as lower Corporate Trust fees reflecting the continued net run-off of structured debt securitizations. The decrease in foreign exchange and other trading revenue was driven by lower foreign exchange volatility and volumes, partially offset by higher fixed income revenue. The increase in investment management and performance fees primarily reflects higher performance fees, higher market values and net new business. Net securities gains increased $61 million in the first nine months of 2012 compared with the first nine months of 2011.

BNY Mellon 9

Net interest revenue


Net interest revenue (a)																						YTD12
										3Q12 vs.						Year-to-date						vs.
(dollars in millions)	3Q12			2Q12			3Q11			3Q11			2Q12			2012			2011			YTD11
Net interest revenue (non-FTE)	$	749		$	734		$	775			(3	)%		2	%	$	2,248		$	2,204			2	%
Tax equivalent adjustment		16			13			7			N/M			N/M			40			17			N/M
Net interest revenue (FTE) – Non-GAAP	$	765		$	747		$	782			(2	)%		2	%	$	2,288		$	2,221			3	%
Average interest-earning assets	$	255,228		$	239,755		$	240,253			6	%		6	%	$	243,814		$	213,636			14	%
Net interest margin (FTE)		1.20	%		1.25	%		1.30	%		(10	) bps		(5	) bps		1.25	%		1.39	%		(14	) bps

bps—basis points.

FTE – fully taxable equivalent.

N/M – Not meaningful.

Net interest revenue totaled $749 million in the third quarter of 2012, a decrease of $26 million compared with the third quarter of 2011 and an increase of $15 million sequentially. The year-over-year decrease in net interest revenue was primarily driven by lower accretion and the elimination of interest on European Central Bank deposits, partially offset by increased investment in high-quality investment securities. The increase compared with the second quarter of 2012 primarily reflects higher interest-earning assets driven by higher deposit levels, partially offset by the elimination of interest on European Central Bank deposits.

The net interest margin (FTE) was 1.20% in the third quarter of 2012 compared with 1.30% in the third quarter of 2011 and 1.25% in the second quarter of 2012. The decreases in net interest margin (FTE) compared with both prior periods primarily reflect

lower reinvestment yields, the elimination of interest on European Central Bank deposits, lower accretion and growth in customer deposits.

Year-to-date 2012 compared with year-to-date 2011

Net interest revenue totaled $2.2 billion in the first nine months of 2012, an increase of 2% compared with the first nine months of 2011. The increase primarily reflects higher average client deposits, increased investment in higher quality investment securities and higher loan levels, partially offset by narrower spreads and lower accretion. The net interest margin (FTE) was 1.25% in the first nine months of 2012, compared with 1.39% in the first nine months of 2011. The decline was primarily driven by lower accretion, lower reinvestment yields and increased client deposits which were invested in lower-yielding assets.

10 BNY Mellon

Average balances and interest rates


Average balances and interest rates	Quarter ended
	Sept. 30, 2012						June 30, 2012						Sept. 30, 2011
(dollar amounts in millions)	Average balance			Average rates			Average balance			Average rates			Average balance			Average rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)	$	41,201			0.96	%	$	38,474			0.98	%	$	60,412			1.00	%
Interest-bearing deposits held at the Federal Reserve and other central banks		61,849			0.21			57,904			0.27			61,115			0.31
Federal funds sold and securities purchased under resale agreements		5,315			0.64			5,493			0.62			4,865			0.71
Margin loans		13,033			1.30			13,331			1.27			9,379			1.34
Non-margin loans:
Domestic offices		18,821			2.63			19,663			2.52			21,583			2.43
Foreign offices		10,574			1.61			9,998			1.86			9,527			1.52

Total non-margin loans		29,395			2.26			29,661			2.30			31,110			2.15
Securities:
U.S. government obligations		18,917			1.38			15,387			1.65			14,079			1.57
U.S. government agency obligations		41,430			1.94			39,070			2.23			20,998			2.93
State and political subdivisions – tax exempt		5,933			2.57			4,777			2.65			1,611			4.13
Other securities		33,724			2.51			32,625			2.51			34,175			3.30
Trading securities		4,431			2.40			3,033			2.57			2,509			2.62

Total securities		104,435			2.06			94,892			2.26			73,372			2.86

Total interest-earning assets	$	255,228			1.40	%	$	239,755			1.48	%	$	240,253			1.55	%
Allowance for loan losses		(361	)					(382	)					(437	)
Cash and due from banks		4,276						4,412						5,204
Other assets		48,776						49,933						53,305
Assets of consolidated investment management funds		10,995						11,284						13,138
Total assets	$	318,914					$	305,002					$	311,463
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Money market rate and demand deposit accounts	$	9,724			0.23	%	$	8,421			0.24	%	$	4,611			0.35	%
Savings		730			0.17			702			0.13			1,613			0.12
Time deposits		34,193			0.07			33,180			0.11			35,991			0.07
Foreign offices		93,613			0.10			88,179			0.13			83,580			0.26

Total interest-bearing deposits		138,260			0.10			130,482			0.13			125,795			0.21
Federal funds purchased and securities sold under repurchase agreements		10,092			(0.06	)		11,254			0.01			10,164			0.03
Trading liabilities		1,397			1.87			1,256			1.87			1,911			1.25
Other borrowed funds		887			1.31			1,114			1.88			1,956			0.87
Commercial paper		968			0.12			1,436			0.29			300			0.08
Payables to customers and broker-dealers		8,141			0.10			7,895			0.10			7,692			0.10
Long-term debt		19,535			1.66			20,084			1.67			18,256			1.60

Total interest-bearing liabilities	$	179,280			0.28	%	$	173,521			0.32	%	$	166,074			0.37	%
Total noninterest-bearing deposits		70,230						62,860						73,389
Other liabilities		23,712						23,588						25,462
Liabilities and obligations of consolidated investment management funds		9,686						10,072						11,728
Total liabilities		282,908						270,041						276,653
Temporary equity
Redeemable noncontrolling interests		134						78						61
Permanent equity
Total BNY Mellon shareholders’ equity		35,133						34,183						34,008
Noncontrolling interests		739						700						741
Total permanent equity		35,872						34,883						34,749
Total liabilities, temporary equity and permanent equity	$	318,914					$	305,002					$	311,463
Net interest margin (FTE)					1.20	%					1.25	%					1.30	%

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 11


Average balances and interest rates	Nine months ended
		Sept. 30, 2012					Sept. 30, 2011
(dollar amounts in millions)		Average balance		Average rates			Average balance		Average rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign banks)	$	38,267		1.07	%	$	59,124		0.96	%
Interest-bearing deposits held at the Federal Reserve and other central banks		61,096		0.25			38,666		0.31
Federal funds sold and securities purchased under resale agreements		5,327		0.66			4,653		0.56
Margin loans		13,089		1.29			8,798		1.38
Non-margin loans:
Domestic offices		19,534		2.54			21,509		2.51
Foreign offices		10,252		1.74			9,495		1.50

Total non-margin loans		29,786		2.26			31,004		2.20
Securities:
U.S. government obligations		17,197		1.52			13,759		1.60
U.S. government agency obligations		37,630		2.18			20,564		3.01
State and political subdivisions – tax exempt		4,693		2.69			1,038		4.88
Other securities		33,397		2.62			33,006		3.34
Trading securities		3,332		2.55			3,024		2.49

Total securities		96,249		2.26			71,391		2.89

Total interest-earning assets	$	243,814		1.48	%	$	213,636		1.68	%
Allowance for loan losses		(378	)				(465	)
Cash and due from banks		4,320					4,548
Other assets		49,463					51,128
Assets of consolidated investment management funds		11,240					13,898
Total assets	$	308,459				$	282,745
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Money market rate and demand deposit accounts	$	7,557		0.24	%	$	4,738		0.38	%
Savings		693		0.14			1,564		0.12
Time deposits		33,666		0.09			34,336		0.09
Foreign offices		89,502		0.13			82,152		0.24

Total interest-bearing deposits		131,418		0.13			122,790		0.20
Federal funds purchased and securities sold under repurchase agreements		9,977		(0.02	)		8,762		0.05
Trading liabilities		1,269		1.77			2,063		1.79
Other borrowed funds		1,502		1.17			1,872		1.16
Commercial paper		824		0.22			114		0.09
Payables to customers and broker-dealers		7,865		0.10			7,082		0.10
Long-term debt		20,051		1.71			17,555		1.70

Total interest-bearing liabilities		172,906		0.32	%		160,238		0.38	%
Total noninterest-bearing deposits		66,581					51,808
Other liabilities		23,850					23,848
Liabilities and obligations of consolidated investment management funds		9,971					12,598
Total liabilities		273,308					248,492
Temporary equity
Redeemable noncontrolling interests		94					67
Permanent equity
Total BNY Mellon shareholders’ equity		34,348					33,437
Noncontrolling interests		709					749
Total permanent equity		35,057					34,186
Total liabilities, temporary equity and permanent equity	$	308,459				$	282,745
Net interest margin (FTE)				1.25	%				1.39	%

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

Noninterest expense


Noninterest expense										3Q12 vs.						Year-to-date						YTD12 vs.
(dollars in millions)	3Q12			2Q12			3Q11			3Q11			2Q12			2012			2011			YTD11
Staff:
Compensation	$	893		$	866		$	903			(1	)%		3	%	$	2,620		$	2,682			(2	)%
Incentives		306			311			328			(7	)		(2	)		969			981			(1	)
Employee benefits		237			238			226			5			—			715			681			5
Total staff		1,436			1,415			1,457			(1	)		1			4,304			4,344			(1	)
Professional, legal and other purchased services		292			309			311			(6	)		(6	)		900			895			1
Net occupancy		149			141			151			(1	)		6			437			465			(6	)
Software		127			127			113			12			—			373			356			5
Distribution and servicing		109			103			100			9			6			313			320			(2	)
Furniture and equipment		81			82			80			1			(1	)		249			246			1
Sub-custodian		65			70			80			(19	)		(7	)		205			236			(13	)
Business development		60			71			57			5			(15	)		187			186			1
Other		265			254			224			18			4			739			700			6
Amortization of intangible assets		95			97			106			(10	)		(2	)		288			322			(11	)
M&I, litigation and restructuring charges		26			378			92			N/M			N/M			513			214			N/M
Total noninterest expense – GAAP	$	2,705		$	3,047		$	2,771			(2	)%		(11	)%	$	8,508		$	8,284			3	%
Total staff expense as a percent of total revenue		39	%		39	%		39	%								39	%		39	%
Full-time employees at period end		48,700			48,200			49,600			(2	)%		1	%		48,700			49,600			(2	)%
N/M—Not meaningful.
Noninterest expense excluding Shareowner Services										3Q12 vs.						Year-to-date						YTD12 vs.
(dollars in millions)	3Q12			2Q12			3Q11			3Q11			2Q12			2012			2011			YTD11
Staff:
Compensation	$	893		$	866		$	889			—	%		3	%	$	2,620		$	2,639			(1	)%
Incentives		306			311			327			(6	)		(2	)		969			977			(1	)
Employee benefits		237			238			222			7			—			715			670			7
Total staff		1,436			1,415			1,438			—			1			4,304			4,286			—
Professional, legal and other purchased services		292			309			300			(3	)		(6	)		900			861			5
Net occupancy		149			141			149			—			6			437			457			(4	)
Software		127			127			110			15			—			373			348			7
Distribution and servicing		109			103			100			9			6			313			320			(2	)
Furniture and equipment		81			82			79			3			(1	)		249			244			2
Sub-custodian		65			70			80			(19	)		(7	)		205			236			(13	)
Business development		60			71			57			5			(15	)		187			185			1
Other		265			254			223			19			4			739			681			9
Subtotal		2,584			2,572			2,536			2			—			7,707			7,618			1
Amortization of intangible assets		95			97			103			(8	)		(2	)		288			312			(8	)
M&I, litigation and restructuring charges		26			378			92			N/M			N/M			513			214			N/M
Total noninterest expense – Non-GAAP	$	2,705		$	3,047		$	2,731			(1	)%		(11	)%	$	8,508		$	8,144			4	%
Total staff expense as a percent of total revenue		39	%		39	%		39	%								39	%		39	%
Full-time employees at period end		48,700			48,200			48,700			—	%		1	%		48,700			48,700			—	%

N/M—Not meaningful.

Total noninterest expense decreased 2% compared with the third quarter of 2011 and 11% (unannualized) compared with the second quarter of 2012. Both decreases primarily reflect lower litigation charges. Excluding amortization of intangible assets, M&I, litigation and restructuring charges and the direct expenses related to Shareowner Services, noninterest expense increased 2% year-over-year and was flat sequentially. The year-over-year increase reflects the cost of

generating certain tax credits in the third quarter of 2012 and the benefit of state investment tax credits recorded in the third quarter of 2011. Sequentially, decreases in professional, legal and other purchased services and business development expenses were offset by the annual employee merit increase and support agreement charges.

BNY Mellon 13

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 56% of total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges in the third quarter of 2012, 57% in the third quarter of 2011 and 55% in the second quarter of 2012.

Staff expense totaled $1.4 billion in the third quarter of 2012, a decrease of 1% compared with the third quarter of 2011 and an increase of 1% (unannualized) compared with the second quarter of 2012. The year-over-year decrease in staff expense primarily reflects the impact of the sale of the Shareowner Services business. The sequential increase was driven by the annual employee merit increase given in the third quarter.

Non-staff expense

Non-staff expense, excluding amortization of intangible assets and M&I, litigation and restructuring charges totaled $1.1 billion in the third quarter of 2012, an increase of 3% compared with the third quarter of 2011 and a decrease of 1% (unannualized) compared with the second quarter of 2012. The increase in non-staff expense year-over-year primarily reflects the cost of generating certain tax credits in the third quarter of 2012 and the benefit of state investment tax credits recorded in the third quarter of 2011, partially offset by the impact of the sale of the Shareowner Services business. The sequential decrease was driven by lower professional, legal and other purchased services and

business development expenses, partially offset by support agreement charges.

On July 5, 2012, BNY Mellon, N.A. and The Bank of New York Mellon entered into a settlement agreement related to a previously disclosed class action lawsuit pending in federal court in Oklahoma and initiated by CompSource Oklahoma concerning losses in connection with the investment of securities lending collateral in Sigma Finance Inc. (“Sigma”). The company recorded a pre-tax charge in the second quarter of 2012 of approximately $350 million primarily related to claims involving Sigma investments.

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

Year-to-date 2012 compared with year-to-date 2011

Noninterest expense in the first nine months of 2012 increased 3% compared with the first nine months of 2011. The increase primarily reflects higher litigation charges, higher professional, legal and other professional services, the cost of generating certain tax credits in the first nine months of 2012, the benefit of state investment tax credits recorded in the third quarter of 2011 and higher software expenses, partially offset by the sale of the Shareowner Services business and lower volume-driven expenses and lower compensation expense.

Operational excellence initiatives update


Expense initiatives (pre-tax)	Program savings								Annualized targeted savings by the end of 2012
(dollar amounts in millions)	1Q12		2Q12		3Q12		through 3Q12		Annualized targeted savings by the end of 2012
Business operations	$	45	$	55	$	63	$	163	$	225 - $ 240
Technology		16		21		21		58	$	75 - $ 85
Corporate services		14		18		21		53	$	60 - $ 65
Gross savings (a)		75		94		105		274	$	360 - $ 390
Less: Incremental program costs (b)		5		23		23		51	$	120 - $ 130
Net savings (c)	$	70	$	71	$	82	$	223	$	240 - $ 260

(a)

Represents the estimated pre-tax run rate expense savings since program inception in 2011. Total Company actual operating expense may increase or decrease due to other factors.

(b)

Represents incremental program costs incurred to implement the operational excellence initiatives. These costs will fluctuate by quarter.

(c)

Net savings cannot be annualized due to the variability of program costs.

14 BNY Mellon

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

Through Sept. 30, 2012, we accomplished the following operational excellence initiatives:

Business Operations

•

Consolidated Treasury Services functions (e.g., check processing and lockbox operations) in our Pittsburgh Service Center.

•

Continued global footprint positions migration. Lowered operating costs as we began to ramp up the Eastern European Global Delivery Center.

•

Reengineered Dreyfus and Global Fund Accounting operations to reduce headcount.

•

Realized synergies in custody operations and clearing related to the Global Investment Servicing (“GIS”) acquisition.

•

Completed client conversions related to our BHF Asset Servicing GmbH acquisition.

Technology

•

Migrated GIS systems to BNY Mellon platforms—over 95% of the production applications have been successfully migrated as of Sept. 30, 2012.

•

Insourced software engineers to Global Delivery Centers.

•

Standardized infrastructure through server elimination and software rationalization.

Corporate Services

•

Consolidated offices in Los Angeles, New York and the EMEA region.

•

Benefited from the enhanced global procurement program.

Income taxes

The effective tax rate was 23.1% in the third quarter of 2012. The lower than expected effective tax rate primarily reflects the benefit of completing state audits. The effective tax rate was 29.7% in the third quarter of 2011 and 15.8% in the second quarter of 2012. The effective tax rate in the second quarter of 2012 included the benefit of certain tax credits.

We expect the tax rate to be approximately 27%-28% in the fourth quarter of 2012.

Under U.S. tax law, income from certain non-U.S. subsidiaries has not been subject to U.S. income tax as result of a deferral provision applicable to income that is derived in active conduct of a banking and

financing business. This active financing deferral provision for these foreign subsidiaries expired for tax years beginning on Jan. 1, 2012. We do not anticipate a material impact to our 2012 financial statements if the law is not extended and will monitor the financial statement impact for subsequent years.

Review of businesses

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

Organization of our business

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

Business accounting principles

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

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

The results of our businesses may be influenced by client activities that vary by quarter. In the second quarter, we typically experience an increase in securities lending fees due to an increase in demand to borrow securities outside of the United States. In the third quarter, depositary receipts revenue is typically higher due to an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client activity. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth quarter represents the end of the measurement period for many of the performance fee-eligible relationships.

BNY Mellon 15

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


Market indices											3Q12 vs.						Year-to-date				YTD12 vs. YTD11
	3Q11		4Q11		1Q12		2Q12		3Q12		3Q11			2Q12			2012		2011		YTD12 vs. YTD11
S&P 500 Index (a)		1131		1258		1408		1362		1441		27	%		6	%		1441		1131		27	%
S&P 500 Index – daily average		1227		1224		1347		1351		1400		14			4			1366		1282		7
FTSE 100 Index (a)		5128		5572		5768		5571		5742		12			3			5742		5128		12
FTSE 100 Index – daily average		5470		5424		5818		5555		5742		5			3			5708		5767		(1	)
MSCI World Index (a)		1104		1183		1312		1236		1312		19			6			1312		1104		19
MSCI World Index – daily average		1217		1169		1268		1235		1273		5			3			1258		1289		(2	)
Barclays Capital Aggregate Bond^SMIndex (a)		346		347		351		353		368		6			4			368		346		6
NYSE and NASDAQ share volume (in billions)		250		206		186		192		173		(31	)		(10	)		550		688		(20	)
JPMorgan G7 Volatility Index – daily average (b)		12.60		12.95		10.39		10.30		8.70		(31	)		(16	)		9.80		11.64		(16	)

(a)

Period end.

(b)

The JPMorgan G7 Volatility Index is based on the implied volatility in 3-month currency options.

Fee revenue in Investment Management, and to a lesser extent Investment Services, is impacted by the value of market indices. At Sept. 30, 2012, using the S&P 500 Index as a proxy for the global equity markets, we estimate that a 100-point change in the value of the S&P 500 Index, sustained for one year,

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

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


For the quarter ended Sept. 30, 2012 (dollar amounts in millions)	Investment Management			Investment Services			Other			Consolidated

Fee and other revenue	$	872	(a)	$	1,879		$	150		$	2,901	(a)
Net interest revenue		52			608			89			749
Total revenue		924			2,487			239			3,650
Provision for credit losses		—			(4	)		(1	)		(5	)
Noninterest expense		692			1,782			231			2,705
Income (loss) before taxes	$	232	(a)	$	709		$	9		$	950	(a)
Pre-tax operating margin (b)		25	%		29	%		N/M			26	%
Average assets	$	35,775		$	224,289		$	58,850		$	318,914
Excluding amortization of intangible assets:
Noninterest expense	$	644		$	1,735		$	231		$	2,610
Income (loss) before taxes		280	(a)		756			9			1,045	(a)
Pre-tax operating margin (b)		30	%		30	%		N/M			29	%

(a)

Total fee and other revenue includes income from consolidated investment management funds of $47 million, net of noncontrolling interests of $25 million, for a net impact of $22 million. Income before taxes includes noncontrolling interests of $25 million.

(b)

Income before taxes divided by total revenue.

N/M

– Not meaningful.

16 BNY Mellon

For the quarter ended June 30, 2012


(dollar amounts in millions)	Investment Management			Investment Services			Other			Consolidated
Fee and other revenue	$	861	(a)	$	1,881		$	112		$	2,854	(a)
Net interest revenue		52			607			75			734
Total revenue		913			2,488			187			3,588
Provision for credit losses		-			(14	)		(5	)		(19	)
Noninterest expense		690			2,146			211			3,047
Income (loss) before taxes	$	223	(a)	$	356		$	(19	)	$	560	(a)
Pre-tax operating margin (b)		24	%		14	%		N/M			16	%
Average assets	$	35,970		$	209,454		$	59,578		$	305,002
Excluding amortization of intangible assets:
Noninterest expense	$	642		$	2,097		$	211		$	2,950
Income (loss) before taxes		271	(a)		405			(19	)		657	(a)
Pre-tax operating margin (b)		30	%		16	%		N/M			18	%

(a)

Total fee and other revenue includes income from consolidated investment management funds of $57 million, net of noncontrolling interests of $29 million, for a net impact of $28 million. Income before taxes includes noncontrolling interests of $29 million.

(b)

Income before taxes divided by total revenue.

N/M

– Not meaningful.


For the quarter ended Sept. 30, 2011
(dollar amounts in millions)	Investment Management			Investment Services			Other			Consolidated
Fee and other revenue	$	757	(a)	$	2,028		$	121		$	2,906	(a)
Net interest revenue		51			661			63			775
Total revenue		808			2,689			184			3,681
Provision for credit losses		-			-			(22	)		(22	)
Noninterest expense		675			1,898			198			2,771
Income (loss) before taxes	$	133	(a)	$	791		$	8		$	932	(a)
Pre-tax operating margin (b)		16	%		29	%		N/M			25	%
Average assets	$	36,949		$	220,930		$	53,584		$	311,463
Excluding amortization of intangible assets:
Noninterest expense	$	622		$	1,849		$	194		$	2,665
Income (loss) before taxes		186	(a)		840			12			1,038	(a)
Pre-tax operating margin (b)		23	%		31	%		N/M			28	%

(a)

Total fee and other revenue includes income from consolidated investment management funds of $32 million, net of noncontrolling interests of $13 million, for a net impact of $19 million. Income before taxes includes noncontrolling interests of $13 million.

(b)

Income before taxes divided by total revenue.

N/M

– Not meaningful.

For the nine months ended Sept. 30, 2012

(dollar amounts
in millions)

Investment
Management

Investment
Services

Other

Consolidated

Fee and other revenue

2,585

(a)

5,612

428

8,625

(a)

Net interest revenue

159

1,857

232

2,248

Total revenue

2,744

7,469

660

10,873

Provision for credit losses

)

(17

)

(19

)

Noninterest expense

2,049

5,755

704

8,508

Income (loss) before taxes

695

(a)

1,716

(27

)

2,384

(a)

Pre-tax operating margin (b)

N/M

Average assets

36,071

215,991

56,397

308,459

Excluding amortization of intangible assets:

Noninterest expense

1,905

5,611

704

8,220

Income (loss) before taxes

839

(a)

1,860

(27

)

2,672

(a)

Pre-tax operating margin (b)

N/M

(a)

Total fee and other revenue includes income from consolidated investment management funds of $147 million, net of noncontrolling interests of $65 million, for a net impact of $82 million. Income before taxes includes noncontrolling interests of $65 million.

(b)

Income before taxes divided by total revenue.

N/M

– Not meaningful.

BNY Mellon 17


For the nine months ended Sept. 30, 2011 (dollar amounts in millions)	Investment Management			Investment Services			Other			Consolidated
Fee and other revenue	$	2,487	(a)	$	5,884		$	537		$	8,908	(a)
Net interest revenue		151			1,931			122			2,204
Total revenue		2,638			7,815			659			11,112
Provision for credit losses		1			-			(23	)		(22	)
Noninterest expense		2,051			5,477			756			8,284
Income (loss) before taxes	$	586	(a)	$	2,338		$	(74	)	$	2,850	(a)
Pre-tax operating margin (b)		22	%		30	%		N/M			26	%
Average assets	$	37,000		$	196,447		$	49,298		$	282,745
Excluding amortization of intangible assets:
Noninterest expense	$	1,890		$	5,328		$	744		$	7,962
Income (loss) before taxes		747	(a)		2,487			(62	)		3,172	(a)
Pre-tax operating margin (b)		28	%		32	%		N/M			29	%

(a)

Total fee and other revenue includes income from consolidated investment management funds of $205 million, net of noncontrolling interests of $78 million, for a net impact of $127 million. Income before taxes includes noncontrolling interests of $78 million.

(b)

Income before taxes divided by total revenue.

N/M

– Not meaningful.

18 BNY Mellon

Investment Management business



																3Q12 vs.						Year-to-date						YTD12 vs. YTD11
(dollar amounts in millions, unless otherwise noted)	3Q11			4Q11			1Q12			2Q12			3Q12			3Q11			2Q12			2012			2011			YTD12 vs. YTD11
Revenue:
Investment management fees:
Mutual funds	$	263		$	237		$	260		$	270		$	283			8	%		5	%	$	813		$	836			(3	)%
Institutional clients		311			299			322			321			334			7			4			977			949			3
Wealth management		157			154			157			158			158			1			-			473			484			(2	)
Investment management fees		731			690			739			749			775			6			3			2,263			2,269			-
Performance fees		11			47			16			54			10			(9	)		(81	)		80			46			74
Distribution and servicing		41			41			45			45			47			15			4			137			140			(2	)
Other (a)		(26	)		(11	)		52			13			40			N/M			N/M			105			32			N/M
Total fee and other revenue (a)		757			767			852			861			872			15			1			2,585			2,487			4
Net interest revenue		51			55			55			52			52			2			-			159			151			5
Total revenue		808			822			907			913			924			14			1			2,744			2,638			4
Provision for credit losses		-			-			-			-			-			-			-			-			1			N/M
Noninterest expense (ex. amortization ofintangible assets)		622			632			619			642			644			4			-			1,905			1,890			1
Income before taxes (ex.amortization of intangible assets)		186			190			288			271			280			51			3			839			747			12
Amortization of intangible assets		53			53			48			48			48			(9	)		-			144			161			(11	)
Income before taxes	$	133		$	137		$	240		$	223		$	232			74	%		4	%	$	695		$	586			19	%
Pre-tax operating margin		16	%		17	%		26	%		24	%		25	%								25	%		22	%
Pre-tax operating margin (ex. amortization of intangible assets and net of distribution and servicing expense) (b)		26	%		26	%		36	%		34	%		34	%								34	%		32	%
Wealth management:
Average loans	$	6,958		$	7,209		$	7,430		$	7,763		$	8,122			17	%		5	%	$	7,773		$	6,890			13	%
Average deposits	$	10,392		$	11,761		$	11,491		$	11,259		$	11,372			9	%		1	%	$	11,374		$	9,558			19	%

(a)

Total fee and other revenue includes the impact of the consolidated investment management funds. See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 48. Additionally, other revenue includes asset servicing and treasury services revenue.

(b)

Distribution and servicing expense is netted with the distribution and servicing revenue for the purpose of this calculation of pre-tax operating margin. Distribution and servicing expense totaled $99 million, $95 million, $100 million, $102 million, $107 million, $309 million and $317 million, respectively.

N/M

– Not meaningful.


AUM trends (a)														3Q12 vs.
(dollar amounts in billions)	3Q11			4Q11		1Q12			2Q12			3Q12		3Q11			2Q12
AUM at period end, by product type:
Equity securities	$	354		$	390	$	429		$	417		$	446		26	%		7	%
Fixed income securities		419			437		451			480			506		21			5
Money market		321			328		319			299			307		(4	)		3
Alternative investments and overlay		104			105		109			103			100		(4	)		(3	)
Total AUM	$	1,198		$	1,260	$	1,308		$	1,299		$	1,359		13	%		5	%

AUM at period end, by client type:
Institutional	$	719		$	757	$	829		$	835		$	883		23	%		6	%
Mutual funds		406			427		404			388			398		(2	)		3
Private client		73			76		75			76			78		7			3
Total AUM	$	1,198		$	1,260	$	1,308		$	1,299		$	1,359		13	%		5	%

Changes in market value of AUM:
Beginning balance	$	1,274		$	1,198	$	1,260		$	1,308		$	1,299
Net inflows (outflows):
Long-term		4			16		7			26			9
Money market		(15	)		7		(9	)		(14	)		9
Total net inflows (outflows)		(11	)		23		(2	)		12			18
Net market/currency impact		(65	)		39		50			(21	)		42
Ending balance	$	1,198		$	1,260	$	1,308