Bank of New York Mellon Corp - FORM 8-K - EX-99.1 - QUARTERLY EARNINGS REVIEW - April 23, 2012

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Exhibit 99.1

 

LOGO

Quarterly Earnings Review

April 18, 2012

Table of Contents

 

First Quarter 2012 Financial Highlights

      2   

Financial Summary/Key Metrics

      3   

Business Metrics

      4   

Fee and Other Revenue

      6   

Net Interest Revenue

      8   

Noninterest Expense

      9   

Capital

      10   

Investment Securities Portfolio

      11   

Nonperforming Assets

      12   

Allowance for Credit Losses, Provision and Net Charge-offs

      12   

Review of Businesses

      12   

•      Investment Management

      13   

•      Investment Services

      15   

•      Other

      17   

Supplemental Information – Explanation of Non-GAAP Financial Measures

      18   

Cautionary Statement

      23   

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

FIRST QUARTER 2012 FINANCIAL HIGHLIGHTS

 

     Net income      EPS (a) (b)  
     (in millions) (a)      1Q11      4Q11     1Q12      1Q12 vs.  
     1Q11      4Q11      1Q12              1Q11     4Q11  

Earnings:

                      

Net income applicable to common shareholders – GAAP

    $ 625       $ 505       $ 619       $ 0.50       $ 0.42      $ 0.52         4 %      24 % 

Non-GAAP adjustments (a)

      6         67         N/A         —           0.06        N/A        
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

    

 

 

       

Subtotal net income – Non-GAAP

      631         572         619         0.50         0.47  (c)      0.52         4 %      11 % 

Amortization of intangible assets

      68         66         61         0.05         0.05        0.05        
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

    

 

 

       

Net income – Non-GAAP

    $ 699       $ 638       $ 680       $ 0.55       $ 0.52      $ 0.57         4 %      10 % 
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

    

 

 

       

KEY POINTS (comparisons are unannualized 1Q12 vs. 4Q11 unless otherwise stated)

 

•  

Earnings

  - Total revenue of $3.6 billion, up 3% (up 6% excluding fee and other revenue related to the Shareowner Services business sold on Dec. 31, 2011 and net income (loss) attributable to noncontrolling interests related to consolidated investment management funds).
  - Fee and other revenue up 3% (up 8% excluding fee and other revenue related to Shareowner Services).
  - Investment services fees increased 3% (up 6% excluding investment services fees related to Shareowner Services) primarily due to improved market values, higher volumes and net new business.
  - Investment management and performance fees increased 2% driven by higher market values, lower money market fee waivers and net new business, partially offset by seasonally lower performance fees. Excluding performance fees, investment management fees increased 7%.
  - Foreign exchange and other trading revenue decreased 16% as volatility decreased significantly.
  - Net interest revenue decreased 2% driven primarily by lower average client deposits and lower accretion, partially offset by increased investments in high quality investment securities.
  - Provision for credit losses of $5 million.
  - Noninterest expense decreased 3% (up 4% excluding amortization of intangible assets, restructuring charges, M&I expenses and direct expense related to Shareowner Services). The increase was primarily driven by higher litigation and legal expenses, higher incentive expense due to the vesting of long-term stock awards for retirement eligible employees and higher pension expense. Additionally, we are beginning to realize the results of our operational excellence initiatives as business development, professional and other purchased services, compensation, net occupancy and software and equipment expenses decreased.
  - Effective tax rate of 28.7%.
•  

Record levels of AUC/A and AUM

  - AUC/A of $26.6 trillion, increased 3%.
  - AUM of $1.3 trillion, increased 4%.
•  

Capital

  - Return on tangible common equity – Non-GAAP 21%. (a)
  - Repurchased 17.3 million shares for $371 million in the first quarter of 2012.
  - Estimated Basel III Tier 1 common equity ratio – Non-GAAP 7.6%, up 50 basis points sequentially. (a)
(a) See “Supplemental information” beginning on page 18 for GAAP to Non-GAAP reconciliations.
(b) Diluted earnings per share is determined based on the net income reported on the income statement less earnings allocated to participating securities of $6 million in the first quarter of 2011, $6 million in the fourth quarter of 2011 and $8 million in the first quarter of 2012, and the change in the excess of redeemable value over the fair value of noncontrolling interests of $6 million in the first quarter of 2011, $(1) million in the fourth quarter of 2011 and $(6) million in the first quarter of 2012.
(c) Does not foot due to rounding.

 

 

Page - 2

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

FINANCIAL SUMMARY

 

 

(dollars in millions, common shares in thousands)

                                  1Q12 vs.  
   1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Revenue:

               

Fee and other revenue

    $ 2,838      $ 3,056      $ 2,887      $ 2,765      $ 2,838        —   %      3 % 

Income (loss) from consolidated investment management funds

      110        63        32        (5 )      43       

Net interest revenue

      698        731        775        780        765        10        (2 ) 

Total revenue – GAAP

      3,646        3,850        3,694        3,540        3,646        —          3   

Less: Net income (loss) attributable to noncontrolling interests related to consolidated investment management funds

      44        21        13        (28 )      11       

Fee and other revenue related to Shareowner Services (a)

      62        54        44        142        —                     

Total revenue – Non-GAAP

      3,540        3,775        3,637        3,426        3,635        3        6   

Provision for credit losses

      —          —          (22 )      23        5                   

Expense:

               

Noninterest expense – GAAP

      2,697        2,816        2,771        2,828        2,756        2        (3 ) 

Less: Amortization of intangible assets

      108        108        106        106        96       

Restructuring charges

      (6 )      (7 )      (5 )      107        (9 )     

M&I expenses

      17        25        17        32        18       

Direct expense related to Shareowner Services (a)

      46        47        37        46        —                     

Total noninterest expense – Non-GAAP

      2,532        2,643        2,616        2,537        2,651        5        4   

Income:

               

Income before income taxes

      949        1,034        945        689        885       

Provision for income taxes

      279        277        281        211        254                   

Net income

    $ 670      $ 757      $ 664      $ 478      $ 631        (6 )%      32 % 

Net (income) loss attributable to noncontrolling interests (b)

      (45 )      (22 )      (13 )      27        (12 )     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

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

    $ 625      $ 735      $ 651      $ 505      $ 619                   

Key Metrics:

               

Pre-tax operating margin (c)

      26 %      27 %      26 %      19 %      24 %     

Non-GAAP adjusted (c)

      28 %      30 %      29 %      27 %      27 %     

Return on common equity (annualized) (b)

      7.7 %      8.8 %      7.6 %      5.9 %      7.4 %     

Non-GAAP (c)

      8.6 %      9.7 %      8.5 %      7.7 %      8.2 %     

Return on tangible common equity (annualized)

               

Non-GAAP (c)

      24.3 %      26.3 %      22.1 %      17.7 %      21.0 %     

Non-GAAP adjusted (c)

      24.4 %      26.6 %      22.3 %      20.4 %      21.2 %     

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

      78 %      79 %      78 %      78 %      78 %     

Percentage of non-U.S. total revenue (d)

      37 %      37 %      39 %      34 %      37 %     

Period end:

               

Full-time employees

      48,400        48,900        49,600        48,700        47,800       

Market capitalization

    $ 37,090      $ 31,582      $ 22,543      $ 24,085      $ 28,780       

Common shares outstanding

      1,241,724        1,232,691        1,212,632        1,209,675        1,192,716                   
(a) Results in the fourth quarter of 2011 include a $98 million pre-tax gain on the sale.
(b) Includes net income of $44 million in the first quarter of 2011, net income of $21 million in the second quarter of 2011, net income of $13 million in the third quarter of 2011, a net loss of $28 million in the fourth quarter of 2011 and net income of $11 million in the first quarter of 2012, respectively, attributable to noncontrolling interests related to consolidated investment management funds.
(c) See “Supplemental information” beginning on page 18 for GAAP to Non-GAAP reconciliations.
(d) Includes fee revenue, net interest revenue and income of consolidated investment management funds, net of noncontrolling interests.

Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. Unless otherwise noted, the results for 2011 include Shareowner Services.

 

 

Page - 3

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

BUSINESS METRICS

 

Investment Management metrics                                       1Q12 vs.  
      1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Changes in market value of assets under management (in billions) (a):

               

Beginning balance

    $ 1,172      $ 1,229      $ 1,274      $ 1,198      $ 1,260       

Net inflows (outflows):

               

Long-term

      31        32        4        16        7       

Money market

      (5 )      (1 )      (15 )      7        (9 )                 

Total net inflows (outflows)

      26        31        (11 )      23        (2 )     

Net market/currency impact

      31        14        (65 )      39        50                   

Ending balance

    $ 1,229      $ 1,274      $ 1,198      $ 1,260      $  1,308  (b)      6 %      4 % 

Composition of assets under management at period end (a):

               

Equity

      34 %      34 %      30 %      31 %      33 %     

Fixed income

      30        31        35        35        35       

Money market

      27        26        27        26        24       

Alternative investments and overlay

      9        9        8        8        8                   

Total

      100 %      100 %      100 %      100 %      100 %     

Wealth management:

               

Average loans (in millions)

    $ 6,825      $ 6,884      $ 6,958      $ 7,209      $ 7,422        9 %      3 % 

Average deposits (in millions)

    $ 9,272      $ 8,996      $ 10,392      $ 11,761      $ 11,491        24 %      (2 )% 
(a) Excludes securities lending cash management assets.
(b) Preliminary.

 

Investment Services metrics                                            1Q12 vs.  
      1Q11      2Q11      3Q11      4Q11      1Q12      1Q11     4Q11  

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

    $ 25.5       $ 26.3       $ 25.9       $ 25.8       $ 26.6         4 %      3 % 

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

    $ 278       $ 273       $ 250       $ 269       $ 265         (5 )%      (1 )% 

Average loans (in millions)

    $ 20,554       $ 22,891       $ 22,879       $ 26,804       $ 25,902         26 %      (3 )% 

Average deposits (in millions)

    $ 139,342       $ 153,863       $ 181,848       $ 188,539       $ 176,811         27 %      (6 )% 

Asset servicing:

                    

New business wins (AUC) (in billions)

    $ 496       $ 196       $ 96       $ 431       $ 453        

Corporate Trust:

                    

Total debt serviced (in trillions)

    $ 11.9       $ 11.8       $ 11.9       $ 11.8       $ 11.9         —   %      1 % 

Number of deals administered

      133,416         133,262         134,843         133,850         133,319         —   %      —   % 

Depositary Receipts:

                    

Number of sponsored programs

      1,367         1,386         1,384         1,389         1,391         2 %      —   % 

Clearing services:

                    

DARTS volume (in thousands)

      207.2         196.5         207.7         178.7         196.6         (5 )%      10 % 

Average active clearing accounts U.S. (in thousands)

     5,289         5,486         5,503         5,429         5,413         2 %      —   % 

Average long-term mutual fund assets (U.S. platform) (in millions)

    $ 287,682       $ 306,193       $ 287,573       $ 287,562       $ 306,212         6 %      6 % 

Average margin loans (in millions)

    $ 6,978       $ 7,506       $ 7,351       $ 7,548       $ 7,900         13 %      5 % 

Broker-Dealer:

                    

Average collateral management balances (in billions)

    $ 1,806       $ 1,845       $ 1,872       $ 1,866       $ 1,929         7 %      3 % 

Treasury services:

                    

Global payments transaction volume (in thousands)

      10,761         10,944         11,088         10,856         10,838         1 %      —   % 
(a) Represents the securities on loan managed by the Investment Services business.

 

 

Page - 4

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

Market indices                                            1Q12 vs.  
      1Q11      2Q11      3Q11      4Q11      1Q12      1Q11     4Q11  

S&P 500 Index (a)

      1326         1321         1131         1258         1408         6 %      12 % 

S&P 500 Index – daily average

      1302         1318         1227         1224         1347         3        10   

FTSE 100 Index (a)

      5909         5946         5128         5572         5768         (2 )      4   

FTSE 100 Index – daily average

      5945         5906         5470         5424         5818         (2 )      7   

MSCI World Index (a)

      1335         1331         1104         1183         1312         (2 )      11   

MSCI World Index – daily average

      1320         1332         1217         1169         1268         (4 )      8   

Barclays Capital Aggregate BondSM Index (a)

      328         341         346         347         351         7        1   

NYSE and NASDAQ share volume (in billions)

      225         213         250         206         186         (17 )      (10 ) 

JPMorgan G7 Volatility Index – daily average (b)

      11.07         11.21         12.60         12.95         10.39         (6 )      (20 ) 
(a) Period end.
(b) The JPMorgan G7 Volatility Index is based on the implied volatility in 3-month currency options.

 

 

Page - 5

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

FEE AND OTHER REVENUE

 

Fee and other revenue (a)                                       1Q12 vs.  
(dollars in millions)    1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Investment services fees:

               

Asset servicing (b)

    $ 917      $ 973      $ 922      $ 885      $ 943        3 %      7 % 

Issuer services

      351        365        442        287        251        N/M        N/M   

Memo: Issuer services excluding Shareowner Services

      292        314        400        245        251        (14 )      2   

Clearing services

      292        292        297        278        303        4        9   

Treasury services

      134        134        133        134        136        1        1   

Total investment services fees

      1,694        1,764        1,794        1,584        1,633        (4 )      3   

Investment management and performance fees

      764        779        729        730        745        (2 )      2   

Foreign exchange and other trading revenue

      198        222        200        228        191        (4 )      (16 ) 

Distribution and servicing

      53        49        43        42        46        (13 )      10   

Financing-related fees

      43        49        40        38        44        2        16   

Investment and other income

      81        145        83        146        139        72        (5 ) 

Total fee revenue

      2,833        3,008        2,889        2,768        2,798        (1 )      1   

Net securities gains (losses)

      5        48        (2 )      (3 )      40        N/M        N/M   

Total fee and other revenue – GAAP

      2,838        3,056        2,887        2,765        2,838        —          3   

Less: Fee and other revenue related to

               

Shareowner Services (c)

      62        54        44        142        —                     

Total fee and other revenue – Non-GAAP

    $ 2,776      $ 3,002      $ 2,843      $ 2,623      $ 2,838        2 %      8 % 

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

      78 %      79 %      78 %      78 %      78 %                 
(a) See “Supplemental information” beginning on page 18 for fee and other revenue excluding Shareowner Services – Non-GAAP.
(b) Asset servicing fees include securities lending revenue of $37 million in the first quarter of 2011, $62 million in the second quarter of 2011, $41 million in the third quarter of 2011, $43 million in the fourth quarter of 2011 and $49 million in the first quarter of 2012.
(c) The Shareowner Services business was sold on Dec. 31, 2011. Results in the fourth quarter of 2011 include a $98 million pre-tax gain on the sale.

N/M-Not meaningful.

KEY POINTS

 

•  

Asset servicing fees were $943 million, an increase of 3% year-over-year and 7% (unannualized) sequentially. Both increases reflect net new business and higher equity markets, as well as higher securities lending revenue driven by wider spreads.

 

•  

Issuer services fees excluding Shareowner Services were $251 million, a decrease of 14% year-over-year and an increase of 2% (unannualized) sequentially. The year-over-year decrease primarily resulted from lower money market fees, lower trust fees related to the weakness in structured products and higher fee waivers in Corporate Trust and lower Depositary Receipts revenue. Sequentially, higher Depositary Receipts revenue was partially offset by lower Corporate Trust fees.

 

•  

Clearing services fees were $303 million, an increase of 4% year-over-year and 9% (unannualized) sequentially. The year-over-year increase was driven by net new business and growth in mutual fund assets and retirement accounts, partially offset by lower trading volumes and higher money market fee waivers. The sequential increase primarily reflects higher trading volumes and growth in mutual fund assets.

 

•  

Investment management and performance fees were $745 million, a decrease of 2% year-over-year and an increase of 2% (unannualized) sequentially. The year-over-year decrease was driven by higher money market fee waivers partially offset by net new business. Sequentially, higher market values, lower money market fee waivers and net new business were partially offset by seasonally lower performance fees. Excluding performance fees, investment management fees increased 7% (unannualized) sequentially.

 

 

Page - 6

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

 

 

 

•     Foreign exchange and other trading revenue                    

(dollars in millions)

    1Q11     2Q11     3Q11     4Q11     1Q12  

Foreign exchange

    $ 173      $ 184      $ 221      $ 183      $ 136   

Fixed income

      17        28        (21 )      41        47   

Credit derivatives (Used as economic hedges of loans)

      (1 )      (1 )      1        (2 )      (2 ) 

Other

      9        11        (1 )      6        10   

Total

    $ 198      $ 222      $ 200      $ 228      $ 191   

Foreign exchange and other trading revenue totaled $191 million compared with $198 million in the first quarter of 2011 and $228 million in the fourth quarter of 2011. In the first quarter of 2012, foreign exchange revenue totaled $136 million, a decrease of 21% year-over-year and 26% (unannualized) sequentially. The year-over-year decrease reflects lower volumes and volatility, while sequentially, volumes were unchanged and volatility decreased 20%. Other trading revenue was $55 million in the first quarter of 2012 compared with $25 million in the first quarter of 2011 and $45 million in the fourth quarter of 2011. Both increases were primarily driven by higher fixed income trading.

 

•  

Investment and other income totaled $139 million compared with $81 million in the first quarter of 2011 and $146 million in the fourth quarter of 2011. The year-over-year increase primarily resulted from higher leasing and seed capital gains. Sequentially, the decline primarily resulted from the $98 million pre-tax gain on the sale of the Shareowner Services business recorded in the fourth quarter of 2011, partially offset by higher leasing and seed capital gains in the first quarter of 2012.

 

 

Page - 7

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

NET INTEREST REVENUE

 

Net interest revenue                                       1Q12 vs.  
(dollars in millions)    1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Net interest revenue (non-FTE)

    $ 698      $ 731      $ 775      $ 780      $ 765        10 %      (2 )% 

Net interest revenue (FTE)

      702        737        782        790        776        11        (2 ) 

Net interest margin (FTE)

      1.49 %      1.41 %      1.30 %      1.27 %      1.32 %      (17 ) bps      5  bps 

Selected average balances:

               

Cash/interbank investments

    $ 82,518      $ 97,936      $ 126,392      $ 121,017      $ 103,795        26 %      (14 )% 

Trading account securities

      3,698        2,877        2,509        2,490        2,519        (32 )      1   

Securities

      65,397        68,782        70,863        79,981        86,808        33        9   

Loans

      38,566        40,328        40,489        44,236        43,209        12        (2 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

Interest-earning assets

      190,179        209,923        240,253        247,724        236,331        24        (5 ) 

Interest-bearing deposits

      116,515        125,958        125,795        130,343        125,438        8        (4 ) 

Noninterest-bearing deposits

      38,616        43,038        73,389        76,309        66,613        73        (13 ) 

Selected average yields/rates:

               

Cash/interbank investments

      0.73 %      0.73 %      0.66 %      0.61 %      0.64 %     

Trading account securities

      2.44        2.44        2.62        2.94        2.78       

Securities

      2.96        2.89        2.87        2.60        2.44       

Loans

      2.08        2.02        1.96        1.87        1.95       

Interest-earning assets

      1.80        1.70        1.55        1.50        1.56       

Interest-bearing deposits

      0.17        0.22        0.21        0.18        0.14       

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

      43 %      47 %      53 %      49 %      44 %     

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

      20 %      21 %      31 %      31 %      28 %                 

bps – basis points.

FTE – fully taxable equivalent.

KEY POINTS

 

•  

Net interest revenue totaled $765 million in 1Q12, an increase of $67 million compared with 1Q11 and a decrease of $15 million sequentially. The year-over-year increase in net interest revenue was primarily driven by higher average client deposits, increased investment in high quality investment securities and higher loan levels, partially offset by narrower spreads and lower accretion. The sequential decrease was primarily driven by lower average client deposits and lower accretion, partially offset by increased investments in high quality investment securities.

  - Average noninterest-bearing client deposits increased $28 billion, or 73%, compared with 1Q11 and decreased $10 billion, or 13%, compared with 4Q11.
•  

The net interest margin (FTE) was 1.32% in 1Q12, compared with 1.27% in 4Q11 and 1.49% in 1Q11. The year-over-year decrease in the net interest margin (FTE) was primarily driven by increased client deposits nearly half of which were invested in liquid, lower-yielding assets. The sequential increase in the net interest margin (FTE) primarily reflects increased investments in high quality investment securities and a decrease in lower-yielding interest-bearing deposits with banks.

 

 

Page - 8

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

NONINTEREST EXPENSE

 

Noninterest expense (a)                                       1Q12 vs.  
(dollars in millions)    1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Staff:

               

Compensation

    $ 876      $ 903      $ 903      $ 885      $ 861        (2 )%      (3 )% 

Incentives

      325        328        328        281        352        8        25   

Employee benefits

      223        232        226        216        240        8        11   

Total staff

      1,424        1,463        1,457        1,382        1,453        2        5   

Professional, legal and other purchased services

      283        301        311        322        299        6        (7 ) 

Software and equipment

      206        203        193        213        205        —          (4 ) 

Net occupancy

      153        161        151        159        147        (4 )      (8 ) 

Distribution and servicing

      111        109        100        96        101        (9 )      5   

Sub-custodian

      68        88        80        62        70        3        13   

Business development

      56        73        57        75        56        —          (25 ) 

Other

      277        292        304        274        320        16        17   

Amortization of intangible assets

      108        108        106        106        96        (11 )      (9 ) 

Restructuring charges

      (6 )      (7 )      (5 )      107        (9 )      N/M        N/M   

M&I expenses

      17        25        17        32        18        6        (44 ) 

Total noninterest expense – GAAP

    $ 2,697      $ 2,816      $ 2,771      $ 2,828      $ 2,756        2 %      (3 )% 

Total staff expense as a percentage of total revenue

      39 %      38 %      39 %      39 %      40 %                 

Memo:

               

Total noninterest expense excluding amortization of intangible assets, restructuring charges, M&I expenses and direct expense related to Shareowner Services – Non-GAAP

    $ 2,532      $ 2,643      $ 2,616      $ 2,537      $ 2,651        5 %      4 % 
(a) See “Supplemental information” beginning on page 18 for noninterest expense excluding the direct expense related to Shareowner Services – Non-GAAP.

N/M – Not meaningful.

KEY POINTS

 

•  

Total noninterest expense (excluding amortization of intangible assets, restructuring charges, merger and integration (“M&I”) expenses and direct expense related to Shareowner Services) (Non-GAAP) increased 5% compared with the prior year period and 4% (unannualized) sequentially.

  - The year-over-year increase primarily reflects higher litigation and legal expenses, higher incentive expense due to the vesting of long-term stock awards for retirement eligible employees and higher pension expense.
  - The sequential increase was driven by higher litigation expense, higher incentive expense due to the vesting of long-term stock awards for retirement eligible employees and higher pension expenses. Additionally, we are beginning to realize the results of our operational excellence initiatives as business development, professional and other purchased services, compensation, net occupancy and software and equipment expenses decreased.

 

 

Page - 9

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

CAPITAL

 

Basel I Tier 1 common equity generation                                     
(dollars in millions)        1Q11     2Q11      3Q11     4Q11         1Q12  

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

      $    625      $ 735       $ 651      $ 505        $    619   

Add: Amortization of intangible assets, net of tax

      68        68         67        66        61   

Gross Basel I Tier 1 common equity generated

      693        803         718        571        680   

Less capital deployed:

            

Dividends

      111        163         160        159        158   

Common stock repurchases

      32        272         462        69        371   

Goodwill and intangible assets related to acquisitions/dispositions

      12        —           16        (241 )      —     

Total capital deployed

      155        435         638        (13 )      529   

Add: Other

      257        139         (43 )      (114 )      146   

Net Basel I Tier 1 common equity generated

      $    795      $ 507       $ 37      $ 470        $    297   
                                 
Capital ratios    March 31,
2011		             Dec. 31,
2011		            March 31,
2012 (a)		  

Estimated Basel III Tier 1 common equity ratio – Non-GAAP (b)(c)

      6.1 %         7.1 %        7.6 % 

Basel I Tier 1 common equity to risk-weighted assets ratio – Non-GAAP (c)

      12.4           13.4          13.9   

Basel I Tier 1 capital ratio

      14.0           15.0          15.6   

Basel I total (Tier 1 plus Tier 2) capital ratio

      16.8           17.0          17.5   

Basel I leverage capital ratio

      6.1           5.2          5.6   

Common shareholders’ equity to total assets ratio (c)

      12.5           10.3          11.3   

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

      5.9                 6.4                6.5   
(a) Preliminary.
(b) Our estimated Basel III Tier 1 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 future as the U.S. regulatory agencies implement Basel III or if our businesses change.
(c) See “Supplemental information” beginning on page 18 for a calculation of these ratios.

We generated $680 million of gross Basel I Tier 1 common equity in the first quarter of 2012.

Our estimated Basel III Tier 1 common equity ratio – Non-GAAP was 7.6% at March 31, 2012 compared with 7.1% at Dec. 31, 2011 and 6.1% at March 31, 2011. The sequential improvement in the ratio was driven by an increase in the value of our investment securities portfolio, earnings retention and lower risk-weighted assets, partially offset by share repurchases.

 

 

Page - 10

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

INVESTMENT SECURITIES PORTFOLIO

At March 31, 2012, the fair value of our investment securities portfolio totaled $88.2 billion. The unrealized pre-tax net gain on our total securities portfolio was $1.2 billion at March 31, 2012 compared with $793 million at Dec. 31, 2011. During the first quarter of 2012, we received $229 million of paydowns and sold approximately $23 million of sub-investment grade securities. The investment securities previously included in the former Grantor Trust were marked down to approximately 60% of face value in 2009. At March 31, 2012, these securities were trading above adjusted amortized cost with a total unrealized pre-tax gain of $364 million.

The following table shows the distribution of our investment securities portfolio.

 

Investment securities portfolio                                           
     Dec. 31,
2011		    

1Q12
change in

unrealized
gain/(loss)

     March 31, 2012     Fair value
as a % of
amortized
cost (a)		     Unrealized
gain/(loss)		     Ratings  
(dollars in millions)   

Fair

value

       Amortized
cost		     

Fair

value

        

AAA/

AA-

     A+/A-    

BBB+/

BBB-

     BB+ and
lower		     Not
rated		  

Agency RMBS

    $ 27,493      $ 53      $ 33,882       $ 34,538        102 %    $ 656        100 %      —   %      —   %      —   %      —   % 

U.S. Treasury securities

      17,999        (119 )      14,920         15,173        101        253        100        —          —          —          —     

Sovereign debt/sovereign guaranteed (b)

      11,881        53        11,961         12,171        102        210        100        —          —          —          —     

Non-agency RMBS (c)

      3,179        187        2,868         3,232        68        364        1        1        2        96        —     

Non-agency RMBS

      1,780        101        2,036         1,787        81        (249 )      20        15        12        53        —     

European floating rate notes (d)

      3,025        26        3,726         3,405        90        (321 )      69        23        5        3        —     

Commercial MBS

      3,003        41        3,052         3,161        104        109        82        16        2        —          —     

State and political subdivisions

      2,806        (7 )      4,055         4,067        101        12        83        14        2        —          1   

Foreign covered bonds (e)

      2,425        21        3,171         3,207        101        36        99        1        —          —          —     

Corporate bonds

      1,738        59        1,642         1,696        103        54        14        77        8        1        —     

CLO

      1,233        14        1,129         1,118        99        (11 )      100        —          —          —          —     

FDIC-insured debt

      1,112        (12 )      154         154        100        —          100        —          —          —          —     

U.S. Government agency debt

      958        3        1,079         1,108        103        29        100        —          —          —          —     

Credit cards

      397        —          324         328        102        4        20        80        —          —          —     

Other

      2,709        (31 )      3,022         3,058        101        36        44        52        —          1        3   

Total investment securities

    $ 81,738  (f)    $ 389      $ 87,021       $ 88,203  (f)      101 %    $ 1,182        88 %      6 %      1 %      5 %      —   % 
(a) Amortized cost before impairments.
(b) Primarily comprised of exposure to United Kingdom, France, Germany and Netherlands.
(c) These RMBS were included in the former Grantor Trust and were marked-to-market in 2009. We believe these RMBS would receive higher credit ratings if these ratings incorporated, as additional credit enhancement, the difference between the written-down amortized cost and the current face amount of each of these securities.
(d) Includes RMBS, commercial MBS and other securities. Primarily comprised of exposure to UK and Netherlands.
(e) Primarily comprised of exposure to Germany and Canada.
(f) Includes net unrealized losses on derivatives hedging securities available-for-sale of $269 million at Dec. 31, 2011 and $20 million at March 31, 2012.

 

 

Page - 11

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

NONPERFORMING ASSETS

 

Nonperforming assets

(dollars in millions)

    March 31,
2011		     Dec. 31,
2011		     March 31,
2012		  

Loans:

       

Other residential mortgages

    $ 245      $ 203      $ 188   

Commercial real estate

      36        40        39   

Wealth management

      56        32        35   

Commercial

      32        21        32   

Financial institutions

      4        23        14   

Foreign

      7        10        10   

Total nonperforming loans

      380        329        318   

Other assets owned

      6        12        13   

Total nonperforming assets (a)

    $ 386      $ 341      $ 331   

Nonperforming assets ratio

      0.96 %      0.78 %      0.77 % 

Allowance for loan losses/nonperforming loans

      122.9        119.8        121.4   

Total allowance for credit losses/nonperforming loans

      145.8        151.1        155.3   

 

(a) Loans of consolidated investment management funds are not part of BNY Mellon’s loan portfolio. Included in these loans are nonperforming loans of $239 million at March 31, 2011, $101 million at Dec. 31, 2011 and $180 million at March 31, 2012. These loans are recorded at fair value and therefore do not impact the provision for credit losses and allowance for loan losses, and accordingly are excluded from the nonperforming assets table above.

ALLOWANCE FOR CREDIT LOSSES, PROVISION AND NET CHARGE-OFFS

 

Allowance for credit losses, provision and net charge-offs

(dollars in millions)

    1Q11     4Q11     1Q12  

Allowance for credit losses – beginning of period

    $ 571      $ 498      $ 497   

Provision for credit losses

      —          23        5   

Net (charge-offs) recoveries:

       

Other residential mortgages

      (16 )      (14 )      (8 ) 

Commercial

      1        (7 )      —     

Foreign

      —          (2 )      —     

Commercial real estate

      (3 )      (1 )      —     

Financial institutions

      1        —          —     

Net (charge-offs) recoveries

      (17 )      (24 )      (8 ) 

Allowance for credit losses – end of period

    $ 554      $ 497      $ 494   

Allowance for loan losses

    $ 467      $ 394      $ 386   

Allowance for lending-related commitments

      87        103        108   

The provision for credit losses was $5 million in the first quarter of 2012 compared with $23 million in the fourth quarter of 2011 and no provision in the first quarter of 2011.

REVIEW OF BUSINESSES

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.

 

 

Page - 12

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

INVESTMENT MANAGEMENT provides investment management services to institutional and retail investors, as well as investment management, wealth and estate planning and private banking solutions to high net worth individuals and families, and foundations and endowments.

 

                                         1Q12 vs.  

(dollars in millions,

unless otherwise noted)

    1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Revenue:

               

Investment management:

               

Mutual funds

    $ 283      $ 290      $ 263      $ 237      $ 260        (8 )%      10 % 

Institutional clients

      319        319        311        299        322        1        8   

Wealth management

      164        163        157        154        157        (4 )      2   

Investment management

      766        772        731        690        739        (4 )      7   

Performance fees

      17        18        11        47        16        (6 )      N/M   

Distribution and servicing

      51        48        41        41        45        (12 )      10   

Other (a)

      34        24        (26 )      (11 )      52        N/M        N/M   

Total fee and other revenue (a)

      868        862        757        767        852        (2 )      11   

Net interest revenue

      52        48        51        55        55        6        —     

Total revenue

      920        910        808        822        907        (1 )      10   

Provision for credit losses

      —          1        —          —          —          N/M        N/M   

Noninterest expense (ex. amortization of intangible assets)

      627        641        622        632        619        (1 )      (2 ) 

Income before taxes (ex. amortization of intangible assets)

      293        268        186        190        288        (2 )      52   

Amortization of intangible assets

      55        53        53        53        48        (13 )      (9 ) 

Income before taxes

    $ 238      $ 215      $ 133      $ 137      $ 240        1 %      75 % 

Pre-tax operating margin

      26 %      24 %      16 %      17 %      26 %     

Pre-tax operating margin (ex. amortization of intangible assets and net of distribution and servicing expense) (b)

      36 %      33 %      26 %      26 %      36 %     

Metrics:

               

Changes in market value of assets under management (in billions) (c):

               

Beginning balance

    $ 1,172      $ 1,229      $ 1,274      $ 1,198      $ 1,260       

Net inflows (outflows):

               

Long-term

      31        32        4        16        7       

Money market

      (5 )      (1 )      (15 )      7        (9 )                 

Total net inflows (outflows)

      26        31        (11 )      23        (2 )     

Net market/currency impact

      31        14        (65 )      39        50                   

Ending balance

    $ 1,229      $ 1,274      $ 1,198      $ 1,260      $ 1,308 (d)      6 %      4 % 

Composition of assets under management at period end (c):

               

Equity

      34 %      34 %      30 %      31 %      33 %     

Fixed income

      30        31        35        35        35       

Money market

      27        26        27        26        24       

Alternative investments and overlay

      9        9        8        8        8                   

Total

      100 %      100 %      100 %      100 %      100 %     

Wealth management:

               

Average loans

    $ 6,825      $ 6,884      $ 6,958      $ 7,209      $ 7,422        9 %      3 % 

Average deposits

    $ 9,272      $ 8,996      $ 10,392      $ 11,761      $ 11,491        24 %      (2 )% 
(a) Total fee and other revenue includes the impact of the consolidated investment management funds. See “Supplemental information” beginning on page 18. Additionally, other revenue includes asset servicing and treasury services revenue.
(b) Distribution and servicing expense is netted with distribution and servicing revenue for the purpose of this calculation of pre-tax operating margin. Distribution and servicing expense totaled $110 million, $108 million, $99 million, $95 million and $100 million, respectively.
(c) Excludes securities lending cash management assets.
(d) Preliminary.
N/M – Not meaningful.

 

 

Page - 13

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

INVESTMENT MANAGEMENT KEY POINTS

 

•  

Assets under management were a record $1.3 trillion at March 31, 2012, an increase of 6% year-over-year and 4% sequentially. The year-over-year increase primarily resulted from net new business and higher market values. On a sequential basis, the increase resulted from higher market values.

 

  - Net long-term inflows were $7 billion and short-term outflows were $9 billion in 1Q12. Long-term inflows benefited from fixed income and active equity assets.

 

•  

Generated positive operating leverage sequentially, excluding amortization of intangible assets.

 

•  

Investment management fees decreased 4% year-over-year and increased 7% (unannualized) sequentially. The year-over-year decrease was driven by higher money market fee waivers, partially offset by net new business. The sequential increase reflects higher market values, lower money market fee waivers and net new business.

 

•  

Other revenue was $52 million in 1Q12 compared with revenue of $34 million in 1Q11 and a loss of $11 million in 4Q11. Both increases were primarily driven by higher seed capital gains. Sequentially, the increase also reflects a $30 million write-down of an equity investment recorded in 4Q11.

 

•  

Net interest revenue increased 6% year-over-year and was unchanged sequentially. The year-over-year increase primarily resulted from higher average loans and deposits.

 

  - Average loans increased 9% year-over-year and 3% sequentially; average deposits increased 24% year-over-year and decreased 2% sequentially.

 

•  

Total noninterest expense (ex. amortization of intangible assets) decreased 1% year-over-year and 2% (unannualized) sequentially. The year-over-year decrease was driven by lower distribution and servicing expense and lower professional, legal and other purchased services. The sequential decrease primarily resulted from lower incentive expense due to seasonally lower performance fees, and lower business development expense, partially offset by higher distribution and servicing expense.

 

•  

45% non-U.S. revenue in 1Q12 vs. 41% in 1Q11.

 

 

Page - 14

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

INVESTMENT SERVICES provides global custody and related services, broker-dealer services, alternative investment services, corporate trust, depositary receipt and clearing services as well as global payment/working capital solutions to global financial institutions.

 

                                         1Q12 vs.  
(dollars in millions, unless otherwise noted)    1Q11     2Q11     3Q11     4Q11     1Q12     1Q11     4Q11  

Revenue:

               

Investment services fees:

               

Asset servicing

    $ 890      $ 943      $ 894      $ 858      $ 915        3 %      7 % 

Issuer services

      292        314        401        245        251        (14 )      2   

Clearing services

      292        292        297        278        303        4        9   

Treasury services

      133        134        132        133        136        2        2   

Total investment services fees

      1,607        1,683        1,724        1,514        1,605        —          6   

Foreign exchange and other trading revenue

      209        203        236        196        176        (16 )      (10 ) 

Other (a)

      73        81        68        71        73        —          3   

Total fee and other revenue (a)

      1,889        1,967        2,028        1,781        1,854        (2 )      4   

Net interest revenue

      621        650        661        634        644        4        2   

Total revenue

      2,510        2,617        2,689        2,415        2,498        —          3   

Provision for credit losses

      —          —          —          —          16       
 		 N/
M		  
  		    
 		 N/
M		  
  

Noninterest expense (ex. amortization of intangible assets)

      1,702        1,775        1,851        1,706        1,781        5        4   

Income before taxes (ex. amortization of intangible assets)

      808        842        838        709        701        (13 )      (1 ) 

Amortization of intangible assets

      50        50        49        50        48        (4 )      (4 ) 

Income before taxes

    $ 758      $ 792      $ 789      $ 659      $ 653        (14 )%      (1 )% 

Pre-tax operating margin

      30 %      30 %      29 %      27 %      26 %     

Pre-tax operating margin (ex. amortization of intangible assets)

      32 %      32 %      31 %      29 %      28 %     

Investment services fees as a percentage of noninterest expense (b)

      96 %      96 %      98 %      90 %      94 %     

Metrics:

               

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

    $ 25.5      $ 26.3      $ 25.9      $ 25.8      $ 26.6        4 %      3 % 

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

    $ 278      $ 273      $ 250      $ 269      $ 265        (5 )%      (1 )% 

Securities lending revenue

    $ 27      $ 52      $ 32      $ 35      $ 39        44 %      11 % 

Average loans

    $ 20,554      $ 22,891      $ 22,879      $ 26,804      $ 25,902        26 %      (3 )% 

Average deposits

    $ 139,342      $ 153,863      $ 181,848      $ 188,539      $ 176,811        27 %      (6 )% 

Asset servicing:

               

New business wins (AUC) (in billions)

    $ 496      $ 196      $ 96      $ 431      $ 453       

Corporate Trust:

               

Total debt serviced (in trillions)

    $ 11.9      $ 11.8      $ 11.9      $ 11.8      $ 11.9        —   %      1 % 

Number of deals administered

      133,416        133,262        134,843        133,850        133,319        —   %      —   % 

Depositary Receipts:

               

Number of sponsored programs

      1,367        1,386        1,384        1,389        1,391        2 %      —   % 

Clearing services:

               

DARTS volume (in thousands)

      207.2        196.5        207.7        178.7        196.6        (5 )%      10 % 

Average active clearing accounts U.S. (in thousands)

      5,289        5,486        5,503        5,429        5,413        2 %      —   % 

Average long-term mutual fund assets (U.S. platform)

    $ 287,682      $ 306,193      $ 287,573      $ 287,562      $ 306,212        6 %      6 % 

Average margin loans

    $ 6,978      $ 7,506      $ 7,351      $ 7,548      $ 7,900        13 %      5 % 

Broker-Dealer:

               

Average collateral management balances (in billions)

    $ 1,806      $ 1,845      $ 1,872      $ 1,866      $ 1,929        7 %      3 % 

Treasury services:

               

Global payments transaction volume (in thousands)

      10,761        10,944        11,088        10,856        10,838        1 %      —   % 
(a) Total fee and other revenue includes investment management fees and distribution and servicing revenue.
(b) Noninterest expense excludes amortization of intangible assets, support agreement charges and litigation expense.
(c) Represents the securities on loan managed by the Investment Services business.

 

 

Page - 15

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

INVESTMENT SERVICES KEY POINTS

 

•  

Investment services fees totaled $1.6 billion, unchanged year-over-year and an increase of 6% (unannualized) sequentially.

 

  - Asset servicing fees (global custody, broker-dealer services and alternative investment services) were $915 million in 1Q12 compared with $890 million in 1Q11 and $858 million in 4Q11. Both increases reflect net new business and higher equity markets, as well as higher securities lending revenue driven by wider spreads.

 

  - Issuer services fees (Corporate Trust and Depositary Receipts) were $251 million in 1Q12 compared with $292 million in 1Q11 and $245 million in 4Q11. The year-over-year decrease primarily resulted from lower money market fees, lower trust fees related to the weakness in structured products and higher fee waivers in Corporate Trust and lower Depositary Receipts revenue. Sequentially, higher Depositary Receipts revenue was partially offset by lower Corporate Trust fees.

 

  - Clearing services fees (Pershing) were $303 million in 1Q12 compared with $292 million in 1Q11 and $278 million in 4Q11. The year-over-year increase was driven by net new business and growth in mutual fund assets and retirement accounts, partially offset by lower trading volumes and higher money market fee waivers. The sequential increase primarily reflects higher trading volumes and growth in mutual fund assets.

 

•  

Foreign exchange and other trading revenue decreased 16% year-over-year and 10% (unannualized) sequentially. The year-over-year decrease primarily reflects lower volumes and volatility, while sequentially, volumes were unchanged and volatility decreased 20%.

 

•  

Net interest revenue was $644 million in 1Q12 compared with $621 million in 1Q11 and $634 million in 4Q11. The year-over-year increase reflects higher average client deposits, partially offset by lower accretion. The sequential increase reflects wider spreads on deposit balances, partially offset by lower accretion.

 

•  

The provision for credit losses of $16 million in the first quarter of 2012 primarily resulted from a broker-dealer customer that filed for bankruptcy. This charge was previously recorded in the Other segment.

 

•  

Noninterest expense (excluding amortization of intangible assets) increased 5% year-over-year and 4% (unannualized) sequentially. Both increases reflect higher litigation and legal expenses. The sequential increase also reflects higher volume-related expenses and expenses in support of new business partially offset by expense control initiatives.

 

•  

36% non-U.S. revenue in 1Q12 vs. 37% in 1Q11.

 

 

Page - 16

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

OTHER SEGMENT primarily includes credit-related services, the leasing portfolio, corporate treasury activities, business exits, M&I expenses and other corporate revenue and expense items. Results in 2011 include the Shareowner Services business.

 

(dollars in millions)    1Q11     2Q11     3Q11     4Q11     1Q12  

Revenue:

           

Fee and other revenue

    $ 147      $ 269      $ 121      $ 240      $ 164   

Net interest revenue

      25        33        63        91        66   

Total revenue

      172        302        184        331        230   

Provision for credit losses

      —          (1 )      (22 )      23        (11 ) 

Noninterest expense (ex. amortization of intangible assets,restructuring charges and M&I expenses)

      249        274        180        245        251   

Income (loss) before taxes (ex. amortization of intangible assets,restructuring charges and M&I expenses)

      (77 )      29        26        63        (10 ) 

Amortization of intangible assets

      3        5        4        3        —     

Restructuring charges

      (6 )      (7 )      (5 )      107        (9 ) 

M&I expenses

      17        25        17        32        18   

Income (loss) before taxes

    $ (91 )    $ 6      $ 10      $ (79 )    $ (19 ) 

Average loans and leases

    $ 11,187      $ 10,553      $ 10,652      $ 10,223      $ 9,885   

KEY POINTS

 

•  

Total fee and other revenue increased $17 million compared with 1Q11 and decreased $76 million compared with 4Q11. The year-over-year increase reflects higher net securities gains and higher leasing gains and an improved credit valuation adjustment, partially offset by the impact of the sale of the Shareowner Services business. The sequential decrease was driven by the sale of the Shareowner Services business, partially offset by higher net securities gains and higher leasing gains.

 

•  

Net interest revenue increased $41 million compared with 1Q11 and decreased $25 million compared with 4Q11. The year-over-year growth reflects increased investments in high quality investment securities. Sequentially, the decrease was primarily driven by lower average deposits, partially offset by increased investment securities.

 

•  

The provision for credit losses was a credit of $11 million in the first quarter of 2012 primarily resulting from the reclassification of a previously recorded charge to the Investment Services business.

 

•  

Noninterest expense (excluding amortization of intangible assets, restructuring charges and M&I expenses) increased $2 million compared with 1Q11 and $6 million compared with 4Q11. Both increases were primarily driven by higher incentive expense due to the vesting of long-term awards for retirement eligible employees and higher pension expense, partially offset by the impact of the sale of the Shareowner Services business.

 

 

Page - 17

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

SUPPLEMENTAL INFORMATION – EXPLANATION OF NON-GAAP FINANCIAL MEASURES

BNY Mellon has included in this Earnings Review certain Non-GAAP financial measures based upon tangible common shareholders’ equity. BNY Mellon believes that the ratio of Tier 1 common equity to risk-weighted assets and the ratio of tangible common shareholders’ equity to tangible assets of operations are measures of capital strength that provide additional useful information to investors, supplementing the Tier 1 and Total capital ratios which are utilized by regulatory authorities. The ratio of Tier 1 common equity to risk-weighted assets excludes trust preferred securities, which will be phased out of Tier 1 regulatory capital beginning in 2013. Unlike the Tier 1 and Total capital ratios, the tangible common shareholders’ equity ratio fully incorporates those changes in investment securities valuations which are reflected in total shareholders’ equity. In addition, this ratio is expressed as a percentage of the actual book value of assets, as opposed to a percentage of a risk-based reduced value established in accordance with regulatory requirements, although BNY Mellon in its calculation has excluded certain assets which are given a zero percent risk-weighting for regulatory purposes. Further, BNY Mellon believes that the return on tangible common equity measure, which excludes goodwill and intangible assets net of deferred tax liabilities, is a useful additional measure for investors because it presents a measure of BNY Mellon’s performance in reference to those assets which are productive in generating income. BNY Mellon has presented its estimated Basel III Tier 1 common equity ratio on a basis that is representative of how it currently understands the Basel III rules. Management views the Basel III Tier 1 common equity ratio as a key measure in monitoring BNY Mellon’s capital position. Additionally, the presentation of the Basel III Tier 1 common equity ratio allows investors to compare BNY Mellon’s Basel III Tier 1 common equity ratio with estimates presented by other companies.

BNY Mellon has provided a measure of tangible book value per share, which it believes provides additional useful information as to the level of such assets in relation to shares of common stock outstanding. BNY Mellon has presented revenue measures which exclude the effect of net securities gains (losses) and noncontrolling interests related to consolidated investment management funds; and expense measures which exclude restructuring charges, M&I expenses and amortization of intangible assets expenses. Return on equity and operating margin measures, which exclude some or all of these items, are also presented. Operating margin measures also exclude noncontrolling interests related to consolidated investment management funds. BNY Mellon believes that these measures are useful to investors because they permit a focus on period to period comparisons which relate to the ability of BNY Mellon to enhance revenues and limit expenses in circumstances where such matters are within BNY Mellon’s control. The excluded items in general relate to certain ongoing charges as a result of prior transactions, or where we have incurred charges unrelated to operational initiatives. M&I expenses primarily relate to the acquisitions of Global Investment Servicing on July 1, 2010 and BHF Asset Servicing GmbH on Aug. 2, 2010. M&I expenses generally continue for approximately three years after the transaction and can vary on a year-to-year basis depending on the stage of the integration. BNY Mellon believes that the exclusion of M&I expenses provides investors with a focus on BNY Mellon’s business as it would appear on a consolidated going-forward basis, after such M&I expenses have ceased. Future periods will not reflect such M&I expenses, and thus may be more easily compared to our current results if M&I expenses are excluded. With regards to the exclusion of net securities gains (losses), BNY Mellon’s primary businesses are Investment Management and Investment Services. The management of these businesses is evaluated on the basis of the ability of these businesses to generate fee and net interest revenue and to control expenses, and not on the results of BNY Mellon’s investment securities portfolio. The investment securities portfolio is managed within the Other segment. The primary objective of the investment securities portfolio is to generate net interest revenue from the liquidity generated by BNY Mellon’s processing businesses. BNY Mellon does not generally originate or trade the securities in the investment securities portfolio. Restructuring charges relate to our operational excellence initiatives and migrating positions to global growth centers. Excluding these charges permits investors to view expenses on a basis consistent with how management views the business.

The presentation of income (loss) of consolidated investment management funds, net of net income (loss) attributable to noncontrolling interest related to the consolidation of certain investment management funds permits investors to view revenue on a basis consistent with prior periods. BNY Mellon believes that these presentations, as a supplement to GAAP information, give investors a clearer picture of the results of its primary businesses.

 

 

Page - 18

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

In this Earnings Review, the net interest margin is presented on an FTE basis. We believe that this presentation provides comparability of amounts arising from both taxable and tax-exempt sources, and is consistent with industry practice.

Each of these measures as described above is used by management to monitor financial performance, both on a company-wide and on a business-level basis.

 

Reconciliation of net income and EPS – GAAP to Non-GAAP    1Q11      4Q11     1Q12  
(dollars in millions, except per common share amounts)    Net
income		     EPS      Net
income		      EPS     Net
income		      EPS  

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

    $ 625      $ 0.50       $ 505       $ 0.42      $ 619       $ 0.52   

Add:     Restructuring charges

      (5 )      N/A         67         0.06        N/A         N/A   

      M&I expenses

      11        N/A         N/A         N/A        N/A         N/A   

 Net income applicable to common shareholders excluding restructuring charges and M&I expenses – Non-GAAP

      631        0.50         572         0.47  (a)      619         0.52   

Add:     Amortization of intangible assets

      68        0.05         66         0.05        61         0.05   

Net income applicable to common shareholders excluding restructuring charges, M&I expenses and amortization of intangible assets – Non-GAAP

    $ 699      $ 0.55       $ 638       $ 0.52      $ 680       $ 0.57   
(a) Does not foot due to rounding.

N/A – Not applicable.

 

Reconciliation of income before income taxes – pre-tax operating margin  
(dollars in millions)      1Q11        2Q11        3Q11        4Q11        1Q12   

Income before income taxes – GAAP

    $ 949      $ 1,034      $ 945      $ 689      $ 885   

Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds

      44        21        13        (28 )      11   

Add: Amortization of intangible assets

      108        108        106        106        96   

Restructuring charges

      (6 )      (7 )      (5 )      107        (9 ) 

M&I expenses

      17        25        17        32        18   

Income before income taxes excluding net income (loss) attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets, restructuring charges and M&I expenses – Non-GAAP

    $ 1,024      $ 1,139      $ 1,050      $ 962      $ 979   

Fee and other revenue – GAAP

    $ 2,838      $ 3,056      $ 2,887      $ 2,765      $ 2,838   

Income of consolidated investment management funds – GAAP

      110        63        32        (5 )      43   

Net interest revenue – GAAP

      698        731        775        780        765   

Total revenue – GAAP

      3,646        3,850        3,694        3,540        3,646   

Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds

      44        21        13        (28 )      11   

Total revenue excluding net income (loss) attributable to noncontrolling interests of consolidated investmentmanagement funds – Non-GAAP

    $ 3,602      $ 3,829      $ 3,681      $ 3,568      $ 3,635   
Pre-tax operating margin (a)      26 %      27 %      26 %      19 %      24 % 

Pre-tax operating margin excluding net income (loss) attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets, restructuring charges and M&I expenses – Non-GAAP (a)

      28 %      30 %      29 %      27 %      27 % 
(a) Income before taxes divided by total revenue.

 

 

Page - 19

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

Return on common equity and tangible common equity

(dollars in millions)

    1Q11     2Q11     3Q11     4Q11     1Q12  

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

    $ 625      $ 735      $ 651      $ 505      $ 619   

Add:  Amortization of intangible assets, net of tax

      68        68        67        66        61   

Net income applicable to common shareholders of The Bank of New York Mellon Corporation excluding amortization of intangible assets – Non-GAAP

      693        803        718        571        680   

Less:  Net securities gains (losses)

      3        N/A        N/A        N/A        N/A   

Add:  Restructuring charges

      (5 )      (5 )      (3 )      67        (6 ) 

          M&I expenses

      11        16        11        21        12   

Net income applicable to common shareholders of The Bank of New York Mellon Corporation excluding amortization of intangible assets, net securities gains (losses), restructuring charges and M&I expenses – Non-GAAP

    $ 696      $ 814      $ 726      $ 659      $ 686   

Average common shareholders’ equity

    $ 32,827      $ 33,464      $ 34,008      $ 33,761      $ 33,718   

Less:  Average goodwill

      18,121        18,193        18,156        18,044        17,962   

          Average intangible assets

      5,664        5,547        5,453        5,333        5,121   

Add: Deferred tax liability – tax deductible goodwill

      862        895        915        967        972   

Deferred tax liability – non-tax deductible intangible assets

      1,658        1,630        1,604        1,459        1,428   

Average tangible common shareholders’ equity – Non-GAAP

    $ 11,562      $ 12,249      $ 12,918      $ 12,810      $ 13,035   

Return on common equity– GAAP (a)

      7.7 %      8.8 %      7.6 %      5.9 %      7.4 % 

Return on common equity excluding amortization of intangible assets, net securities gains (losses),restructuring charges and M&I expenses – Non-GAAP (a)

      8.6 %      9.7 %      8.5 %      7.7 %      8.2 % 

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

      24.3 %      26.3 %      22.1 %      17.7 %      21.0 % 

Return on tangible common equity excluding net securities gains (losses), restructuring charges and M&I expenses – Non-GAAP (a)

      24.4 %      26.6 %      22.3 %      20.4 %      21.2 % 
(a) Annualized.
N/A – Not applicable.

 

Equity to assets and book value per common share    March 31,     Dec. 31,     March 31,  
(dollars in millions, unless otherwise noted)    2011     2011     2012  

BNY Mellon shareholders’ equity at period end – GAAP

    $ 33,258      $ 33,417      $ 34,000   

Less: Goodwill

      18,156        17,904        18,002   

            Intangible assets

      5,617        5,152        5,072   

Add: Deferred tax liability – tax deductible goodwill

      862        967        972   

            Deferred tax liability – non-tax deductible intangible assets

      1,658        1,459        1,428   

Tangible BNY Mellon shareholders’ equity at period end – Non-GAAP

    $ 12,005      $ 12,787      $ 13,326   

Total assets at period end – GAAP

    $ 266,444      $ 325,266      $ 300,169   

Less: Assets of consolidated investment management funds

      14,699        11,347        11,609   

Subtotal assets of operations – Non-GAAP

      251,745        313,919        288,560   

Less:   Goodwill

      18,156        17,904        18,002   

           Intangible assets

      5,617        5,152        5,072   

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

      24,613        90,230        61,992   

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

    $ 203,359      $ 200,633      $ 203,494   

BNY Mellon shareholders’ equity to total assets – GAAP

      12.5 %      10.3 %      11.3 % 

Tangible BNY Mellon shareholders’ equity to tangible assets of operations – Non-GAAP

      5.9 %      6.4 %      6.5 % 

Period end common shares outstanding (in thousands)

      1,241,724        1,209,675        1,192,716   

Book value per common share

    $ 26.78      $ 27.62      $ 28.51   

Tangible book value per common share – Non-GAAP

    $ 9.67      $ 10.57      $ 11.17   
(a) Assigned a zero percent risk-weighting by the regulators.

 

 

Page - 20

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

Calculation of Basel I Tier 1 common equity to risk-weighted assets ratio

(dollars in millions)

    March 31,
2011		     Dec. 31,
2011		     March 31,
2012 (a)		  

Total Tier 1 capital – Basel I

    $ 14,402      $ 15,389      $ 15,696   

Less: Trust preferred securities

      1,686        1,659        1,669   

Total Tier 1 common equity

    $ 12,716      $ 13,730      $ 14,027   

Total risk-weighted assets – Basel I

    $ 102,887      $ 102,255      $ 100,785   

Basel I Tier 1 common equity to risk-weighted assets ratio

      12.4 %      13.4 %      13.9 % 
(a) Preliminary.

The following table presents the calculation of our estimated Basel III Tier 1 common equity ratio on a fully-phased-in basis.

 

Estimated Basel III Tier 1 common equity ratio – Non-GAAP (a)

(dollars in millions)

    March 31,
2011		     Dec. 31,
2011		     March 31,
2012 (b)		  

Total Tier 1 capital – Basel I

    $ 14,402      $ 15,389      $ 15,696   

Less: Trust preferred securities

      1,686        1,659        1,669   

 Adjustments related to available-for-sale securities and pension liabilities included in accumulated other comprehensive income (c)

      729        944        701   

           Adjustments related to equity method investments (c)

      524        555        571   

           Net pensions fund assets (c)

      409        90        100   

           Other

      —          (3 )      (2 ) 

Total estimated Basel III Tier 1 common equity

    $ 11,054      $ 12,144      $ 12,657   

Total risk-weighted assets – Basel I

    $ 102,887      $ 102,255      $ 100,785   

Add:   Adjustments (d)

      77,199        67,813        65,889   

Total estimated Basel III risk-weighted assets

    $ 180,086      $ 170,068      $ 166,674   

Estimated Basel III Tier 1 common equity ratio – Non-GAAP

      6.1 %      7.1 %      7.6 % 
(a) Our estimated Basel III Tier 1 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.
(b) Preliminary.
(c) Basel III does not add back to capital the adjustment to other comprehensive income that Basel I and Basel II make for pension liabilities and available-for-sale securities. Also, under Basel III, pension assets recorded on the balance sheet and adjustments related to equity method investments are a deduction from capital.
(d) Primary differences between Basel I and Basel III include: the determination of credit risk under Basel I uses predetermined risk weights and asset classes, while under Basel III includes borrower credit ratings and internal risk models; the treatment of securitizations that fall below investment grade receive a significantly higher risk-weighting under Basel III than Basel I; also, Basel III includes additional adjustments for operational risk, market risk, counterparty credit risk and equity exposures.

The following table presents income from consolidated investment management funds, net of noncontrolling interests.

 

Income from consolidated investment management funds, net of noncontrolling interests

(dollars in millions)

    1Q11      2Q11      3Q11      4Q11     1Q12  

Income (loss) from consolidated investment management funds

    $ 110       $ 63       $ 32       $ (5 )    $ 43   

Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds

      44         21         13         (28 )      11   

Income from consolidated investment management funds, net of noncontrolling interests

    $ 66       $ 42       $ 19       $ 23      $ 32   

 

 

Page - 21

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

The following table presents the line items in the Investment Management business impacted by the consolidated investment management funds.

 

Income from consolidated investment management funds, net of noncontrolling interests

(dollars in millions)

    1Q11      2Q11      3Q11     4Q11      1Q12  

Investment management and performance fees

    $ 31       $ 29       $ 27      $ 20       $ 22   

Other (Investment income)

      35         13         (8 )      3         10   

Income from consolidated investment management funds, net of noncontrolling interests

    $ 66       $ 42       $ 19      $ 23       $ 32   

The following tables present fee and other revenue and noninterest expense excluding Shareowner Services.

 

Fee and other revenue excluding Shareowner Services                                    1Q12 vs.  
(dollars in millions)                  1Q11      2Q11      3Q11     4Q11     1Q12      1Q11     4Q11  

Investment services fees:

                  

Asset servicing

      $     917       $ 973       $ 922      $ 885      $ 943         3 %      7 % 

Issuer services

      292         314         400        245        251         (14 )      2   

Clearing services

      292         292         297        278        303         4        9   

Treasury services

      134         134         133        134        136         1        1   

Total investment services fees

      1,635         1,713         1,752        1,542        1,633         —          6   

Investment management and performance fees

      764         779         729        730        745         (2 )      2   

Foreign exchange and other trading revenue

      197         221         200        227        191         (3 )      (16 ) 

Distribution and servicing

      53         49         43        42        46         (13 )      10   

Financing-related fees

      41         47         38        37        44         7        19   

Investment and other income

      81         145         83        48        139         N/M        N/M   

Total fee revenue

      2,771         2,954         2,845        2,626        2,798         1        7   

Net securities gains (losses)

      5         48         (2 )      (3 )      40         N/M        N/M   

Total fee and other revenue

      $2,776       $ 3,002       $ 2,843      $ 2,623      $ 2,838         2 %      8 % 

 

Noninterest expense excluding Shareowner Services                                  1Q12 vs.  
(dollars in millions)                1Q11     2Q11     3Q11     4Q11      1Q12     1Q11     4Q11  

Staff:

                

Compensation

      $     862      $ 888      $ 889      $ 871       $ 861        —   %      (1 )% 

Incentives

      323        327        327        278         352        9        27   

Employee benefits

      219        229        222        213         240        10        13   

Total staff

      1,404        1,444        1,438        1,362         1,453        3        7   

Professional, legal and other purchased services

      272        289        300        310         299        10        (4 ) 

Software and equipment

      205        203        192        212         205        —          (3 ) 

Net occupancy

      150        158        149        156         147        (2 )      (6 ) 

Distribution and servicing

      111        109        100        96         101        (9 )      5   

Sub-custodian

      68        88        80        62         70        3        13   

Business development

      56        72        57        74         56        —          (24 ) 

Other

      266        280        300        265         320        20        21   

Subtotal

      2,532        2,643        2,616        2,537         2,651        5        4   

Amortization of intangible assets

      105        104        103        103         96        (9 )      (7 ) 

Restructuring charges

      (6 )      (7 )      (5 )      107         (9 )     
 		 N/
M		  
  		    
 		 N/
M		  
  

M&I expenses

      17        25        17        32         18        6        (44 ) 

Total noninterest expense

      $2,648      $ 2,765      $ 2,731      $ 2,779       $ 2,756        4 %      (1 )% 

The following table presents investment management fees net of performance fees.

 

Investment management and performance fees                                      1Q12 vs.  
(dollars in millions)                       1Q11      2Q11      3Q11      4Q11      1Q12      1Q11     4Q11  

Investment management and performance fees

      $764       $ 779       $ 729       $ 730       $ 745         (2 )%      2 % 

Less: Performance fees

      17         18         11         47         16         N/M        N/M   

Investment management fees

      $747       $ 761       $ 718       $ 683       $ 729         (2 )%      7 % 

 

 

Page - 22

BNY Mellon 1Q12 Quarterly Earnings Review

 

 

Cautionary Statement

A number of statements (i) in this Quarterly Earnings Review, (ii) in our presentations and (iii) in the responses to questions on our conference call discussing our quarterly results and other public events may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 including statements made regarding our operational excellence initiatives. These statements may be expressed in a variety of ways, including the use of future or present tense language. These statements and other forward-looking statements contained in other public disclosures of The Bank of New York Mellon Corporation which make reference to the cautionary factors described in this Earnings Review, are based upon current beliefs and expectations and are subject to significant risks and uncertainties (some of which are beyond BNY Mellon’s control). Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties, including, but not limited to, the risk factors and other uncertainties set forth in BNY Mellon’s Annual Report on Form 10-K for the year ended Dec. 31, 2011 and BNY Mellon’s other filings with the Securities and Exchange Commission. All forward-looking statements in this Earnings Review speak only as of April 18, 2012, and BNY Mellon undertakes no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.

 

 

Page - 23

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