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Bank of New York 10K 2010
Bank of New York 10K 2010
SUBMISSION: ACCESSION NUMBER: 000119312511049932 TYPE: 10K PUBLIC DOCUMENT COUNT: 20 PERIOD: 20101231 FILING DATE: 20110228 DATE AS OF CHANGE: 20110228 FILER: COMPANY DATA: CONFORMED NAME: Bank of New York Mellon CORP CIK: 0001390777 ASSIGNED SIC: 6022 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10K ACT: 34 FILE NUMBER: 00052710 FILM NUMBER: 11646301 BUSINESS ADDRESS: STREET1: ONE WALL STREET CITY: NEW YORK STATE: NY ZIP: 10286 PHONE: 2124951784 MAIL ADDRESS: STREET1: ONE WALL STREET CITY: NEW YORK STATE: NY ZIP: 10286
Table of Contents
FORM 10K
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 00052710
Delaware
(State or other jurisdiction of incorporation or organization)
132614959
(I.R.S. Employer Identification No.)
Registrants telephone number, including area code (212) 4951784 Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value 6.875% Preferred Trust Securities, Series E of BNY Capital IV* 5.95% Preferred Trust Securities, Series F of BNY Capital V* 6.244% FixedtoFloating Rate Normal Preferred Capital Securities of Mellon Capital IV* * Fully and unconditionally guaranteed by The Bank of New York Mellon Corporation Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange
Indicate by check mark if the registrant is a wellknown seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes [ ] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes x No 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. x Yes [ ] 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 ST (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). x Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b2 of the Exchange Act.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Act). [ ] Yes x No As of June 30, 2010, 1,209,157,971 shares, of the total outstanding shares of 1,214,041,681, of the registrants outstanding voting common stock, $0.01 par value per share, having a market value of $29,854,110,304, were held by nonaffiliates. As of January 31, 2011, 1,241,829,226 shares of the registrants voting common stock, $0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the following parts of this Form 10K: The Bank of New York Mellon Corporation 2011 Proxy StatementPart III The Bank of New York Mellon Corporation 2010 Annual Report to ShareholdersParts I, II, and IV
Table of Contents Available Information This Form 10K filed by The Bank of New York Mellon Corporation (BNY Mellon or the Company) with the Securities and Exchange Commission (the SEC) contains the Exhibits listed on the Index to Exhibits beginning on page 35, including those portions of BNY Mellons 2010 Annual Report to Shareholders (the Annual Report), which are incorporated herein by reference. For a free copy of BNY Mellons Annual Report or BNY Mellons Proxy Statement for its 2011 Annual Meeting (the Proxy), as filed with the SEC, send a written request by email to [email protected] or by mail to the Secretary of The Bank of New York Mellon Corporation, One Wall Street, New York, NY 10286. BNY Mellons Annual Report is, and the Proxy upon filing with the SEC will be, available on our website at www.bnymellon.com. We also make available, free of charge, on our website BNY Mellons annual reports on Form 10K, quarterly reports on Form 10Q, current reports on Form 8K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934 (the Exchange Act). The following materials are also available, free of charge, on our website at www.bnymellon.com under Investor Relations, Corporate Governance and are also available free of charge in print by written request from the Secretary of The Bank of New York Mellon Corporation at One Wall Street, New York, NY 10286, or [email protected]:
BNY Mellons Code of Conduct, which is applicable to all employees, including BNY Mellons senior financial officers;
the Charters of the Audit, Corporate Governance and Nominating, Human Resources and Compensation, Risk, and Corporate Social Responsibility Committees of the Board of Directors.
The contents of BNY Mellons website are not part of this Form 10K. Forwardlooking Statements This Form 10K contains statements relating to future results of BNY Mellon that are considered forwardlooking statements. These statements, which may be expressed in a variety of ways, including the use of future or present tense language, relate to, among other things: all statements about the future results of BNY Mellon, projected business growth, statements with respect to the expected outcome and impact of legal, regulatory and investigatory proceedings, and BNY Mellons plans, objectives and strategies. In addition, these forwardlooking statements relate to: the effect of regulation of current financial markets on competition; the implementation and impact of pending and proposed legislation and regulation, including the Federal Reserve and Financial Stability Boards proposals on Basel II and Basel III and the DoddFrank Act; expectations with respect to the wellcapitalized status of BNY Mellon and its bank subsidiaries; the timing and ability to pay dividends by us and our bank subsidiaries and our liquidity targets; the FDICs rule regarding adjustments to the assessment base and the impact on our business; the liability of our affiliates in certain circumstances; targeted capital ratios; statements regarding our internal capital generation and a strong balance sheet; the adequacy of our owned and leased facilities; access to capital markets; the adequacy of reserves; statements regarding risks that we may face including the impact of the following items: uncertainty in global financial markets and market volatility; adverse publicity; regulatory actions and litigation; government supervision and regulation; writedowns of financial instruments; interest rates; changes to deposit insurance premiums; increased competition; declines in capital markets on our feebased businesses; stable exchangerate environment and declines in crossborder activity; acquisitions; changes to credit ratings; soundness of other financial institutions; monetary policy and other governmental regulations; failures relating to controls and procedures; breaches of technology or employees; global regulation, conflicts and acts of terrorism; our success of new lines of business; the loss of key employees; tax and accounting pronouncements; and the estimations of reasonable possible loss with respect to legal proceedings and the expected outcome and impact of judgments and settlements, if any, arising from pending or potential legal or regulatory proceedings, and matters relating to the information returns and withholding tax. These forwardlooking statements, and other forwardlooking statements contained in other public
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Table of Contents disclosures of BNY Mellon (including those incorporated in this Form 10K) are based on assumptions that involve risks and uncertainties and that are subject to change based on various important factors (some of which are beyond BNY Mellons control), including those factors described in Risk Factors in Part I, Item 1A of this Form 10K. Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties, including, but not limited to uncertainties inherent in the litigation and litigation settlement process. In this report, and other public disclosures of BNY Mellon, words, such as estimate, forecast, project, anticipate, confident, target, expect, intend, seek, believe, plan, goal, could, should, may, will, strategy, synergies, opportunities, trends and words of similar meaning, signify forwardlooking statements. All forwardlooking statements speak only as of the date on which such statements are made, and BNY Mellon undertakes no obligation to update any statement to reflect events or circumstances after the date on which such forwardlooking statement is made or to reflect the occurrence of unanticipated events.
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Table of Contents THE BANK OF NEW YORK MELLON CORPORATION FORM 10K INDEX
PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Exhibits, financial statement schedules Signatures Index to exhibits 33 34 35 Directors, executive officers and corporate governance Executive compensation Security ownership of certain beneficial owners and management and related stockholder matters Certain relationships and related transactions, and director independence Principal accounting fees and services 30 32 32 32 32 Market for the registrants common equity, related stockholder matters and issuer purchases of equity securities Selected financial data Managements discussion and analysis of financial condition and results of operations Quantitative and qualitative disclosures about market risk Financial statements and supplementary data Changes in and disagreements with accountants on accounting and financial disclosure Controls and procedures Other information 28 28 28 28 28 28 28 Not applicable Business Risk factors Unresolved staff comments Properties Legal proceedings 4 16 26 26 27
ITEM 1. BUSINESS Description of Business The Bank of New York Mellon Corporation (BNY Mellon), a Delaware corporation (NYSE symbol: BK), is a global financial services company headquartered in New York, New York, with $1.17 trillion in assets under management and $25.0 trillion in assets under custody and administration as of Dec. 31, 2010. We divide our businesses into seven segments: Asset Management; Wealth Management; Asset Servicing; Issuer Services; Clearing Services; Treasury Services and Other. For a further discussion of BNY Mellons products and services, see the Overview and Review of businesses sections in the Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section in the Annual Report and Note 27 of the Notes to Consolidated Financial Statements in the Annual Report, which portions are incorporated herein by reference. See Available Information on page 1 of this Form 10K for a description of how to access financial and other information regarding BNY Mellon, which is incorporated herein by reference. We were formed as a bank holding company and have our executive offices in New York. With its predecessors, BNY Mellon has been in business since 1784. On July 1, 2007, The Bank of New York Company, Inc. and Mellon Financial Corporation (Mellon Financial) merged into BNY Mellon, with BNY Mellon being the surviving entity. Our two principal banks are:
The Bank of New York Mellon, a New York state chartered bank, formerly named The Bank of New York, which houses our institutional businesses, including Asset Servicing, Issuer Services, Treasury Services, BrokerDealer and Advisor Services and the bankadvised business of Asset Management.
BNY Mellon, National Association (BNY Mellon, N.A.), a nationallychartered bank, formerly named Mellon Bank, N.A., which houses our Wealth Management business.
Our U.S. bank subsidiaries engage in trust and custody activities, investment management services, banking services and various securitiesrelated activities. The deposits of the U.S. banking subsidiaries are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. We have two U.S. trust companies The Bank of New York Mellon Trust Company, National Association and BNY Mellon Trust Company of Illinois. These companies house trust products and services across the U.S. Also concentrating on trust products and services is BNY Mellon Trust of Delaware, a Delaware bank. Most asset management businesses, along with our Pershing businesses, are direct or indirect nonbank subsidiaries of BNY Mellon. Information on international operations is presented in the Net interest revenue, International operations, Consolidated balance sheet review Loans Loans by product, and Consolidated balance sheet review Loans International loans sections in the MD&A Results of Operations section in the Annual Report, Note 6 and Note 28 of the Notes to Consolidated Financial Statements in the Annual Report and in Risk Factors Global Operations, in Part I, Item 1A of this Form 10K, which portions are incorporated herein by reference. Primary Subsidiaries Exhibit 21.1 to this Form 10K presents a list of BNY Mellons primary subsidiaries as of Dec. 31, 2010. Discontinued Operations As discussed in Note 4 of the Notes to Consolidated Financial Statements in the Annual Report, BNY Mellon reports results using the discontinued operations method of accounting. Note 4 is incorporated herein by reference. All information in this Form 10K, including all supplemental information, reflects continuing operations unless otherwise noted. Supervision and Regulation BNY Mellon, including through its subsidiaries, engages in banking, investment advisory and other securitiesrelated activities in the United States and
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Table of Contents approximately 35 other countries. We are subject to extensive regulation worldwide. Regulatory bodies around the world are generally charged with protecting the interests of customers, including depositors in banking entities and investors in mutual funds and other vehicles our subsidiaries may advise, and safeguarding the integrity of securities and other financial markets. They are not, however, generally charged with protecting the interests of our shareholders or creditors. Described below are the material elements of selected laws and regulations applicable to BNY Mellon and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law or regulation, and in their application by regulatory agencies, cannot be predicted, but they may have a material effect on the business and results of BNY Mellon and its subsidiaries. For additional discussion of recent and proposed regulatory initiatives that may impact our business, see Recent Accounting and Regulatory Developments in the MD&A section of the Annual Report, which is incorporated herein by reference. The events of the past few years have led to numerous new laws in the United States and internationally for financial institutions. The DoddFrank Wall Street Reform and Consumer Protection Act (the DoddFrank Act or DoddFrank), which was enacted in July 2010, significantly restructures the financial regulatory regime in the United States, including through the creation of a new systemic risk oversight body, the Financial Stability Oversight Council (FSOC). The FSOC will coordinate the efforts of the primary U.S. financial regulatory agencies (including the Board of Governors of the Federal Reserve System (the Federal Reserve Board), the Office of the Comptroller of the Currency (the OCC), the SEC, the Commodity Futures Trading Commission (the CFTC) and the FDIC) in establishing regulations to address financial stability concerns. The DoddFrank Act directs the FSOC to make recommendations to the Federal Reserve Board as to supervisory requirements and heightened prudential standards applicable to large, interconnected bank holding companies and nonbank financial companies supervised by the Federal Reserve Board under DoddFrank, often referred to as systemically important financial institutions, including capital, leverage, liquidity and riskmanagement requirements. The DoddFrank Act mandates that the requirements applicable to systemically important financial institutions be more stringent than those applicable to other financial companies. Although the criteria for treatment as a systemically important financial institution have not yet been determined, it is probable that they will apply to BNY Mellon. In addition to the framework for systemic risk oversight implemented through the FSOC, the DoddFrank Act broadly affects the financial services industry by creating a resolution authority, and through numerous other provisions aimed at strengthening the sound operation of the financial services sector. As discussed further throughout this section, many aspects of DoddFrank are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on BNY Mellon or across the industry. In addition to the discussion in this section, see Risk Factors Recent legislative actions may have an adverse effect on the Companys operations. in Part I, Item 1A of this Form 10K. Regulated Entities of BNY Mellon BNY Mellon is regulated as a bank holding company and a financial holding company (FHC) under the Bank Holding Company Act of 1956, as amended by the 1999 financial modernization legislation known as the GrammLeachBliley Act and by the DoddFrank Act (the BHC Act). As such, it is subject to the supervision of the Federal Reserve Board. In general, the BHC Act limits the business of bank holding companies that are FHCs to banking, managing or controlling banks, performing certain servicing activities for subsidiaries, engaging in activities that the Federal Reserve Board has determined, by order or regulation, are so closely related to banking as to be a proper incident thereto, and, as a result of the GrammLeachBliley Act amendments to the BHC Act, engaging in any activity, or acquiring and retaining the shares of any company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Secretary of the U.S. Treasury Department) or (2) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments in commercial companies. Our ability to maintain FHC status is dependent upon a number of factors, including our U.S. depository institution subsidiaries continuing to qualify as well capitalized as described under Prompt Corrective Action below. Beginning in July 2011, our FHC status will also depend upon BNY Mellon
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Table of Contents maintaining its status as well capitalized and well managed under applicable Federal Reserve Board regulations. An FHC that does not continue to meet all the requirements for FHC status will, depending on which requirements it fails to meet, lose the ability to undertake new activities or make acquisitions that are not generally permissible for bank holding companies without FHC status or to continue such activities. Currently, we meet these requirements. The Bank of New York Mellon, which is BNY Mellons largest bank subsidiary, is a New York state chartered bank, is a member of the Federal Reserve System and is subject to regulation, supervision and examination by the Federal Reserve Board and the New York State Banking Department (the NYSBD). BNY Mellons national bank subsidiaries, BNY Mellon, N.A. and The Bank of New York Mellon Trust Company, National Association, are subject to primary supervision, regulation and examination by the OCC. We operate a number of brokerdealers that engage in securities underwriting and other brokerdealer activities. These companies are SEC registered brokerdealers and members of Financial Industry Regulatory Authority, Inc. (FINRA), a securities industry selfregulatory organization. BNY Mellons nonbank subsidiaries engaged in securitiesrelated activities are regulated by supervisory agencies in the countries in which they conduct business. Certain of BNY Mellons public finance activities are regulated by the Municipal Securities Rulemaking Board. Certain of BNY Mellons subsidiaries are registered with the CFTC as commodity pool operators or commodity trading advisors and, as such, are subject to CFTC regulation. Certain of our subsidiaries are registered investment advisors under the Investment Advisers Act of 1940, as amended and, as such, are supervised by the SEC. They are also subject to various U.S. federal and state laws and regulations and to the laws and regulations of any countries in which they conduct business. These laws and regulations generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. Our subsidiaries advise both public investment companies which are registered with the SEC under the Investment Company Act of 1940 (the 40 Act), including the Dreyfus family of mutual funds, and private investment companies which are not registered under the 40 Act. The shares of most investment companies advised by our subsidiaries are qualified for sale in all states in the U.S. and the District of Columbia, except for investment companies that offer products only to residents of a particular state or of a foreign country and except for certain investment companies which are exempt from such registration or qualification. Our financial services operations in the United Kingdom are subject to regulation by and supervision of the Financial Services Authority (FSA). Certain of BNY Mellons United Kingdom incorporated subsidiaries are authorized to conduct investment business in the U.K. pursuant to the U.K. Financial Services and Markets Act 2000 (FSMA 2000). Their investment management advisory activities and their sale and marketing of retail investment products are regulated by the FSA. The FSA has broad supervisory and disciplinary powers. Disciplinary powers include the power to temporarily or permanently revoke the authorization to carry on regulated business following a breach of FSMA 2000 and/or regulatory rules, the suspension of registered employees and censures and fines for both regulated businesses and their registered employees. Certain U.K. investment funds, including BNY Mellon Investment Funds, an openended investment company with variable capital advised by U.K. regulated subsidiaries of BNY Mellon, are registered with the FSA and are offered for retail sale in the U.K. The types of activities in which the foreign branches of our banking subsidiaries and our international subsidiaries may engage are subject to various restrictions imposed by the Federal Reserve Board. Those foreign branches and international subsidiaries are also subject to the laws and regulatory authorities of the countries in which they operate and, in the case of banking subsidiaries, may be subject to regulatory capital requirements in the jurisdictions in which they operate. As of Dec. 31, 2010, each of BNY Mellons nonU.S. banking subsidiaries had capital ratios above their specified minimum requirements. Dividend Restrictions Dividend payments by BNY Mellon to its shareholders are subject to the oversight of the Federal Reserve Board. On Nov. 17, 2010, the Federal Reserve Board issued Revised Temporary Addendum to SR letter 094. The letter described the process the Federal Reserve Board will follow to assess comprehensive capital plans of the 19 Supervisory Capital Assessment Program bank holding companies, including any request to take capital
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Table of Contents actions such as increased dividends or stock buybacks. The Federal Reserve Board indicated that the capital plans will be assessed against, among other things, the bank holding companys ability to achieve the Basel III capital ratio requirements referred to below as they are phased in by U.S. regulators and any potential impact of the DoddFrank Act on the companys risk profile, business strategy, corporate structure or capital adequacy. Our comprehensive capital plans, which were prepared using Basel I capital guidelines, included bank developed baseline and stress projections as well as a supervisory stress projection using adverse macroeconomic assumptions provided by the Federal Reserve Board. Any increase in BNY Mellons ongoing quarterly dividends would require consultation with the Federal Reserve Board. The Federal Reserve Boards current guidance provides that, for large bank holding companies like us, dividend payout ratios exceeding 30% of aftertax net income will receive particularly close scrutiny. BNY Mellon is a legal entity separate and distinct from its bank subsidiaries and other subsidiaries. Dividends and interest from our subsidiaries are our principal sources of funds to make capital contributions or loans to our bank subsidiaries and other subsidiaries, to pay service on our own debt, to honor our guarantees of debt issued by our subsidiaries or of trust preferred securities issued by a trust or to pay dividends on our own equity securities. Various federal and state statutes and regulations limit the amount of dividends that may be paid to us by our bank subsidiaries without regulatory consent. If, in the opinion of the applicable federal regulatory agency, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the regulator may require, after notice and hearing, that the bank cease and desist from such practice. The OCC, the Federal Reserve Board and the FDIC have indicated that the payment of dividends would constitute an unsafe and unsound practice if the payment would reduce a depository institutions capital to an inadequate level. Moreover, under the Federal Deposit Insurance Act, as amended (the FDI Act), an insured depository institution may not pay any dividends if the institution is under capitalized or if the payment of the dividend would cause the institution to become undercapitalized. In addition, the federal bank regulatory agencies have issued policy statements which provide that FDICinsured depository institutions and their holding companies should generally pay dividends only out of their current operating earnings. In general, the amount of dividends that may be paid by The Bank of New York Mellon or BNY Mellon, N.A. is limited to the lesser of the amounts calculated under a recent earnings test and an undivided profits test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared and paid by the entity in any calendar year exceeds the current years net income combined with the retained net income of the two preceding years, unless the entity obtains prior regulatory approval. Under the undivided profits test, a dividend may not be paid in excess of the entitys undivided profits (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus). As a result of charges related to the restructuring of BNY Mellons securities portfolio in 2009, The Bank of New York Mellon and BNY Mellon, N.A. will require regulatory consent prior to paying a dividend. The ability of BNY Mellons bank subsidiaries to pay dividends to BNY Mellon may also be affected by various minimum capital requirements for banking organizations. For a further discussion of restrictions on dividends, see the Liquidity and dividends section in the MD&A Results of Operations section in the Annual Report and the first five paragraphs of Note 21 of the Notes to Consolidated Financial Statements in the Annual Report, which are incorporated herein by reference. Further, BNY Mellons right to participate in the assets or earnings of a subsidiary is subject to the prior claims of creditors of the subsidiary. Transactions with Affiliates and Insiders Transactions between BNY Mellons bank subsidiaries and BNY Mellon and its nonbank subsidiaries are regulated by the Federal Reserve Board. These regulations limit the types and amounts of transactions (including loans due and extensions of credit from the U.S. bank subsidiaries) that may take place and generally require those transactions to be on an armslength basis. These regulations generally do not apply to transactions between a U.S. bank subsidiary and its subsidiaries. In general, these restrictions require that any extensions of credit must be secured by designated amounts of specified
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Table of Contents collateral and are limited, as to any one of BNY Mellon or such nonbank affiliates, to 10% of the lending banks capital stock and surplus, and, as to BNY Mellon and all such nonbank affiliates in the aggregate, to 20% of such lending banks capital stock and surplus. These restrictions, other than the 10% of capital limit on covered transactions with any one affiliate, are also applied to transactions between banks and their financial subsidiaries. The DoddFrank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization. For example, commencing in July 2012, the DoddFrank Act will require that the 10% of capital limit on covered transactions begin to apply to financial subsidiaries. Commencing in July 2012, DoddFrank has also expanded the definition of a covered transaction to include derivatives transactions under which a bank (or a subsidiary) has credit exposure (with the term credit exposure to be defined by the Federal Reserve Board under its existing rulemaking authority), as well as repurchase and reverse repurchase agreements and securities lending agreements. Deposit Insurance Our U.S. banking subsidiaries, including The Bank of New York Mellon and BNY Mellon, N.A. accept deposits, and those deposits have the benefit of FDIC insurance up to the applicable limits. The FDICs Deposit Insurance Fund (the DIF) is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of insured deposits that it holds. The FDIC required all insured depository institutions to prepay estimated assessments for all of 2010, 2011 and 2012 on December 30, 2009. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a banks federal regulatory agency. On Feb. 7, 2011, the FDIC adopted regulations required under the DoddFrank Act which set forth a new method of calculating assessments paid by large insured depository institutions, including BNY Mellon. The new regulations base insurance assessments on the average consolidated assets less the average tangible equity of the insured depository institution during the assessment period, with adjustments for custody banks, including BNY Mellon. We expect the FDIC assessment rule to have a minimal impact in 2011. For additional discussion about FDIC assessments, see Recent Accounting and Regulatory Developments in the MD&A section of the Annual Report, which is incorporated herein by reference. Source of Strength and Liability of Affiliates Federal Reserve Board policy historically has required bank holding companies to act as a source of strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries. The DoddFrank Act codifies this policy as a statutory requirement. Such support may be required by the Federal Reserve Board at times when we might otherwise determine not to provide it. In addition, any loans by BNY Mellon to its bank subsidiaries would be subordinate in right of payment to depositors and to certain other indebtedness of its banks. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank regulator to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. In addition, in certain circumstances BNY Mellons insured depository institutions could be assessed for losses incurred by another BNY Mellon insured depository institution. In the event of impairment of capital stock of one of BNY Mellons national banks or The Bank of New York Mellon, the banks stockholders could be required to pay such deficiency. Capital Requirements As a bank holding company, we are subject to consolidated regulatory capital requirements administered by the Federal Reserve Board. Our bank subsidiaries are subject to similar capital requirements, administered by the Federal Reserve Board in the case of The Bank of New York Mellon and by the OCC in the case of our national bank subsidiaries, BNY Mellon, N.A. and The Bank of New York Mellon Trust Company, National Association. These requirements are intended to ensure that banking organizations have adequate capital given the risk levels of their assets and offbalance sheet financial instruments. The riskbased capital guidelines currently applicable to bank holding companies are based on the 1988 Capital Accord (Basel I) of the Basel Committee on Banking Supervision (the Basel Committee). The federal bank regulatory agencies have adopted new riskbased capital guidelines for core banks, including BNY Mellon, based upon the Revised Framework for the International Convergence of Capital Measurement and Capital Standards (Basel II) issued by the Basel Committee in June 2004 and updated in November 2005. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity
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Table of Contents regulation, now officially identified by the Basel Committee as Basel III. Basel III, when implemented by the U.S. banking agencies and fully phasedin, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. Additional information on the calculation of our Tier 1 capital, Total capital and riskweighted assets is set forth in Capital in the MD&A Results of Operations section in the Annual Report, and additional information on our capital requirements is set forth in Recent Accounting and Regulatory Developments in the MD&A section in the Annual Report, which are incorporated herein by reference. Basel I Under the existing Basel Ibased regulations, the riskbased capital ratio is determined by dividing the components of capital, described further below, by riskadjusted assets (including certain offbalance sheet items, such as standby letters of credit). The regulatory capital rules state that voting common stockholders equity should be the predominant element within Tier 1 capital and that banking organizations should avoid overreliance on noncommon equity elements. Riskadjusted assets are determined by classifying assets and certain offbalance sheet items into weighted categories. The required minimum ratio of Total capital (the sum of Tier 1 and Tier 2 capital) to riskadjusted assets is currently 8%. The required minimum ratio of Tier 1 capital to riskadjusted assets is 4%. The riskbased capital rules state that the capital requirements are minimum standards based primarily on broad creditrisk considerations and do not take into account the other types of risk a banking organization may be exposed to (e.g., interest rate, market, liquidity and operational risks). The Federal Reserve Board may, therefore, set higher capital requirements for categories of banks (e.g. systematically important financial institutions), or for an individual bank as situations warrant. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Other factors identified by the riskbased capital requirements as important in assessing an institutions overall capital adequacy include concentration of credit risk and certain risks arising from nontraditional activities, including the management of those risks. At Dec. 31, 2010, BNY Mellons Tier 1 capital to riskadjusted assets and Total capital ratios were 13.4% and 16.3%, respectively. In addition, the riskbased capital guidelines incorporate a measure for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments. The market riskbased capital guidelines require banking organizations with large trading activities to maintain capital for market risk in an amount calculated by using the banking organizations own internal valueatrisk models, subject to parameters set by the regulators. In January 2011, the Federal Banking Agencies published proposed amendments to their market risk rules, known as Basel II.5. Those changes will result in increased capital requirements for market risk. Basel II The federal bank regulatory agencies are mandating the adoption of Basel II for core banks. BNY Mellon and its depository institution subsidiaries are core banks. The only approach available to core banks is the Advanced Internal Ratings Based (AIRB) approach for credit risk and the Advanced Measurement Approach (AMA) for operational risk. The U.S. Basel II final rule became effective on April 1, 2008. Under the final rule in its current form, 2009 was the first year for a bank to begin its first of three transitional floor periods during which banks subject to the final rule calculate their capital requirements under both the old regulations and new regulations. The U.S. Basel II rules currently provide that core banks would calculate their capital requirements only under the new Basel IIbased requirements after completion of the three transitional floor periods. In the U.S., we began the parallel run of calculations under both the old and new guidelines in the second quarter of 2010. DoddFrank requires the U.S. banking agencies to amend their capital rules to provide that minimum capital as required under the Basel Ibased rules will act as a floor for minimum capital requirements calculated in accordance with the U.S. Basel II rules. Accordingly, the transition for core banks to calculations only under the Basel IIbased requirements is being eliminated. Beginning Jan. 1, 2008, we implemented the Basel II Standardized Approach for our banks organized in the United Kingdom, Belgium and Luxembourg. We maintain an active dialogue with U.S. and international regulatory jurisdictions to facilitate a smooth Basel II reporting process. We believe Basel II will not constrain our current business practices. Basel III The Basel III final capital framework, among other things:
BNY Mellon 9
Table of Contents introduces as a new capital measure Common Equity Tier 1, or CET1, specifies that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments meeting specified requirements, defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and expands the scope of the adjustments as compared to existing regulations;
as a newly adopted international standard, a minimum ratio of CET1 to riskweighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to riskweighted assets of at least 7%);
a minimum ratio of Tier 1 capital to riskweighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);
a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to riskweighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation);
as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain offbalance sheet exposures (as the average for each quarter of the monthend ratios for the quarter); and
provides for a countercyclical capital buffer, generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 addon to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to riskweighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The implementation of the Basel III final framework will commence Jan. 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios:
The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in nonconsolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 will begin on Jan. 1, 2014 and will be phasedin over a fiveyear period (20% per year). The implementation of the capital conservation buffer will begin on Jan. 1, 2016 at 0.625% and be phased in over a fouryear period (increasing by that amount on each subsequent Jan. 1, until it reaches 2.5% on Jan. 1, 2019). The U.S. banking agencies have indicated informally that they expect to propose regulations implementing Basel III in mid2011 with final adoption of implementing regulations in mid2012. Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III, including the imposition of additional capital surcharges on globally systemically important financial institutions, which could include BNY Mellon. In addition to Basel III, DoddFrank requires the Federal banking agencies to adopt regulations affecting banking institutions capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately applicable to us may be substantially different from the Basel III final framework as published in December 2010.
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Table of Contents Impact on BNY Mellon Given that the Basel III rules are subject to change, and the scope and content of capital regulations that the U.S. banking agencies may adopt under DoddFrank is uncertain, we cannot be certain of the impact new capital regulations will have on our capital ratios. However, given our balance sheet strength and ongoing internal capital generation, we currently estimate that our Tier 1 common ratio, under Basel III guidelines, will be above 7% by Dec. 31, 2011. This estimated ratio includes an anticipated dividend increase and potential share repurchases in 2011, assuming Federal Reserve Board approval. Leverage Requirement Basel I and Basel II do not include a leverage requirement as an international standard. However, even though a leverage requirement has not been an international standard in the past, the U.S. banking agencies capital regulations do require bank holding companies and banks to comply with a minimum leverage ratio requirement (Basel III will impose a leverage requirement as an international standard). The Federal Reserve Boards existing leverage ratio for bank holding companies is that the bank holding company maintain a ratio of Tier 1 capital to its total consolidated quarterly average assets (as defined for regulatory purposes), net of the loan loss reserve, goodwill and certain other intangible assets. The rules require a minimum leverage ratio of 3% for bank holding companies that either have the highest supervisory rating or have implemented the Federal Reserve Boards riskadjusted measure for market risk. All other bank holding companies are required to maintain a minimum leverage ratio of 4%. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us. At Dec. 31, 2010, our leverage ratio was 5.8%. Also, the rules indicate that the Federal Reserve Board will consider a tangible Tier 1 leverage ratio in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organizations Tier 1 capital (excluding intangibles) to total assets (excluding intangibles). Liquidity Ratios under Basel III Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, both in the U.S. and internationally, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward will be required by regulation. One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains an adequate level of unencumbered highquality liquid assets equal to the entitys expected net cash outflow for a 30day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other, referred to as the net stable funding ratio, is designed to promote more medium and longterm funding of the assets and activities of banking entities over a oneyear time horizon. These requirements will incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of longterm debt as a funding source. The liquidity coverage ratio would be implemented subject to an observation period beginning in 2011, but would not be introduced as a requirement until Jan. 1, 2015, and the net stable funding ratio would not be introduced as a requirement until Jan. 1, 2018. These new standards are subject to further rulemaking and their terms may well change before implementation. Prompt Corrective Action The FDI Act, as amended by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), requires the federal banking agencies to take prompt corrective action in respect of depository institutions that do not meet specified capital requirements. FDICIA establishes five capital categories for FDICinsured banks: wellcapitalized, adequatelycapitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution is deemed to be well capitalized if the banking institution has a total riskbased capital ratio of 10.0% or greater, a Tier 1 riskbased capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure. The FDI Act imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. At Dec. 31, 2010, all of our bank subsidiaries were well capitalized based on the ratios and guidelines noted above. A banks capital category, however, is determined solely for the purpose of applying the prompt corrective action rules and may not be an accurate representation of the banks overall financial condition or prospects.
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Table of Contents Depositor Preference Under federal law, depositors and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver. AntiMoney Laundering and the USA Patriot Act A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the USA Patriot Act) substantially broadened the scope of U.S. antimoney laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extraterritorial jurisdiction of the U.S. The U.S. Treasury Department has proposed and, in some cases, issued a number of implementing regulations which apply various requirements of the USA Patriot Act to financial institutions such as BNY Mellons bank, brokerdealer and investment adviser subsidiaries and mutual funds and private investment companies advised or sponsored by our subsidiaries. Those regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with nonU.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the institution. Privacy The privacy provisions of the GrammLeachBliley Act generally prohibit financial institutions, including BNY Mellon, from disclosing nonpublic personal financial information of consumer customers to third parties for certain purposes (primarily marketing) unless customers have the opportunity to opt out of the disclosure. The Fair Credit Reporting Act restricts information sharing among affiliates for marketing purposes. Acquisitions Federal and state laws impose notice and approval requirements for mergers and acquisitions involving depository institutions or bank holding companies. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than 5.0% of any class of the voting shares or all or substantially all of the assets of a commercial bank, savings and loan association or bank holding company. In reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect of the transaction, financial and managerial issues including the capital position of the combined organization, convenience and needs factors, including the applicants record under the Community Reinvestment Act of 1977 which requires U.S. banks to help serve the credit needs of their communities (including credit to low and moderate income individuals and geographies) and the effectiveness of the subject organizations in combating money laundering activities. In addition, other acquisitions by BNY Mellon may be subject to informal notice and approval by the Federal Reserve Board or other regulatory authorities. Competition BNY Mellon is subject to intense competition in all aspects and areas of our business. Our Asset Management and Wealth Management businesses experience competition from asset management firms, hedge funds, investment banking companies, and other financial services companies, including trust banks, brokerage firms, and insurance companies. These firms and companies may be domiciled domestically or internationally. Our Asset Servicing, Issuer Services, Clearing Services and Treasury Services businesses compete with domestic and foreign banks that offer institutional trust, custody products and cash management products, as well as a wide range of technologically capable service providers, such as data processing and shareholder service firms and other firms that rely on automated data transfer services for institutional and retail customers. Many of our competitors, with the particular exception of bank and financial holding companies, banks and trust companies, are not subject to regulation as extensive as that described under the Supervision and Regulation section of this Form 10K and, as a result, may have a competitive advantage over us and our subsidiaries in certain respects.
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Table of Contents In recent years there has been substantial consolidation among companies in the financial services industry. Many broadbased financial services firms now have the ability to offer a wide range of products, from loans, deposittaking and insurance to brokerage and asset management, which may enhance their competitive position. As a result of current conditions in the global financial markets and the economy in general, competition could continue to intensify and consolidation of financial service companies could continue to increase. As part of our business strategy, we seek to distinguish ourselves from competitors by the level of service we deliver to our clients. We also believe that technological innovation is an important competitive factor, and, for this reason, have made and continue to make substantial investments in this area. The ability to recover quickly from unexpected events is a competitive factor, and we have devoted significant resources to being able to implement this. For additional discussion regarding competition, see Part I, Item 1A of this Form 10K, Risk Factors Competition We are subject to intense competition in all aspects of our business, which could negatively affect our ability to maintain or increase our profitability below, which is incorporated herein by reference. Employees At Dec. 31, 2010, BNY Mellon and its subsidiaries had approximately 48,000 employees. Statistical Disclosures by Bank Holding Companies The Securities Act of 1933 Industry Guide 3 and the Exchange Act Industry Guide 3 (together Guide 3) require that the following statistical disclosures be made in annual reports on Form 10K filed by bank holding companies.
I.
Distribution of Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differential
Information required by this section of Guide 3 is presented in the Annual Report in the Net interest revenue and Supplemental information Rate/volume analysis sections in the MD&A and in Note 10 of the Notes to Consolidated Financial Statements, which portions are incorporated herein by reference. II. Investment Portfolio
A.
B.
C.
Aggregate Book Value and Market Value of Investments where Issuer Exceed 10% of Stockholders Equity
Information required by this section of Guide 3 is presented in the Annual Report in the Net interest revenue and Consolidated balance sheet review Investment securities sections in the MD&A Results of Operations section and in Note 5 of the Notes to Consolidated Financial Statements, which portions are incorporated herein by reference.
III.
Loan Portfolio
A.
B.
Information required by these sections of Guide 3 is presented in the Annual Report in the Consolidated balance sheet review Loans section in the MD&A Results of Operations section and Note 1 and Note 6 of the Notes to Consolidated Financial Statements, which portions are incorporated herein by reference.
C.
D.
Information required by these sections of Guide 3 is included in the Annual Report in the Consolidated balance sheet review Loans and Nonperforming assets and International operations Crossborder risk sections in the MD&A Results of Operations section and Note 1 and Note 6 of the Notes to Consolidated Financial Statements, which portions are incorporated herein by reference.
IV.
Information required by this section of Guide 3 is included in the Annual Report in the Critical accounting estimates Asset quality and allowance for credit losses section in the MD&A Results of Operations section, which portion is incorporated herein by reference, and below. When losses on specific loans are identified, the portion deemed uncollectible is charged off. The allocation of the reserve for credit losses is presented
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Table of Contents in the Asset quality and allowance for credit losses section in the MD&A Results of Operations section in the Annual Report, as required by Guide 3, which is incorporated herein by reference. Further information on our credit policies, the factors that influenced managements judgment in determining the level of the reserve for credit exposure, and the analyses of the reserve for credit exposure are set forth in the Annual Report in the Risk management Credit risk and Critical accounting estimates sections in the MD&A Results of Operations section, Note 1 of the Notes to Consolidated Financial Statements under Allowance for loan losses and allowance for lending related commitments and in Note 6 of the Notes to Consolidated Financial Statements, which portions are incorporated herein by reference.
V.
Deposits
Information required by this section of Guide 3 is set forth in the Annual Report in the Net interest revenue and Consolidated balance sheet review Deposits sections in the MD&A Results of Operations section and in Note 9 of the Notes to Consolidated Financial Statements, which portions are incorporated herein by reference.
VI.
Information required by this section of Guide 3 is set forth in the Annual Report in the Financial summary section, which is incorporated herein by reference.
VII.
Information required by this section of Guide 3 is set forth in the Annual Report in the Consolidated balance sheet review Shortterm borrowings section in the MD&A Results of Operations section, which portion is incorporated herein by reference. Replacement Capital Covenant On Sept. 19, 2006, Mellon Financial entered into a Replacement Capital Covenant (the RCC) in connection with the issuance by Mellon Financial of 200,050,000 aggregate principal amount of Mellon Financials 6.369% junior subordinated deferrable interest debt securities, due 2066 (the Junior Subordinated Debt Securities) to Mellon Capital III (the Trust) and the issuance by the Trust of 200,000,000 aggregate liquidation amount of the Trusts 6.369% trust preferred securities (the Preferred Securities). We refer to the Junior Subordinated Debt Securities and the Preferred Securities collectively as the Securities. Pursuant to the merger, BNY Mellon assumed Mellon Financials obligations under the RCC. BNY Mellon agreed in the RCC for the benefit of persons that buy, hold or sell a specified series of its longterm indebtedness for money borrowed, called Covered Debt in the RCC, that, on or before Sept. 5, 2056:
BNY Mellon and its subsidiaries will not repay, redeem or repurchase any of the Securities, with limited exceptions, unless
BNY Mellon has obtained the prior approval of the Federal Reserve Board to do so if such approval is then required under the Federal Reserve Boards capital guidelines applicable to bank holding companies, and
the principal amount repaid or the applicable redemption or repurchase amount does not exceed specified percentages of the aggregate amount of net cash proceeds that BNY Mellon and its subsidiaries have received during the six months prior to delivery of notice of such repayment or redemption or the date of such repurchase from issuance of other securities specified in the RCC that, generally described, based on current standards are expected to receive equity credit at the time of sale or issuance equal to or greater than the equity credit attributed to the Securities at the time of such repayment, redemption or repurchase; and
BNY Mellon will not pay any interest that has been deferred on the Securities other than out of the net proceeds of common stock or certain noncumulative perpetual preferred stock that is subject to a replacement capital covenant similar to the RCC, subject to certain limitations, and BNY Mellon will not redeem interest on the Junior Subordinated Debt Securities that it has elected to capitalize, as permitted by the terms of such securities, except with the proceeds raised from the issuance or sale of common stock or rights to purchase common stock.
The series of longterm indebtedness for borrowed money that is Covered Debt under the RCC as of the date of this Form 10K is BNY Mellons 5.50% subordinated notes due Nov. 15, 2018, which have CUSIP No. 585515AE9. Each series of longterm
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Table of Contents indebtedness for money borrowed that is Covered Debt, including BNY Mellons 5.50% subordinated notes due Nov. 15, 2018, will cease to be Covered Debt on the earliest to occur of (i) the date that is two years prior to the final maturity date of such series, (ii) if BNY Mellon or a subsidiary elects to redeem or repurchase such series in whole or in part and after giving effect to such redemption or repurchase the outstanding principal amount of such series is less than $100,000,000, the applicable redemption or repurchase date, and (iii) if such series meets the other eligibility requirements set forth in the RCC for Covered Debt but is not subordinated debt, then the date (if any) on which BNY Mellon issues a series of long term indebtedness for money borrowed that meets the eligibility requirements of the RCC but is subordinated debt. The RCC includes provisions under which a new series of BNY Mellons longterm indebtedness for money borrowed will then be identified as and become the Covered Debt benefiting from the RCC. The full text of the RCC is available as Exhibit 99.1 to Mellon Financials current report on Form 8K dated Sept. 20, 2006. The description of the RCC set forth above is qualified by reference to its full text. On June 19, 2007, Mellon Financial entered into a Replacement Capital Covenant (the 2007 RCC) in connection with (i) the issuance by Mellon Capital IV (the 2007 Trust) of 500,000 of its 6.244% FixedtoFloating Rate Normal Preferred Capital Securities, or Normal PCS (together with Stripped PCS and Capital PCS issued pursuant to the terms of the Normal PCS, the PCS), having a stated amount of $1,000 per Normal PCS and $500,000,000 in the aggregate and (ii) the issuance by Mellon Financial to the 2007 Trust of $500,000,000 6.044% Junior Subordinated Notes, or Junior Notes, and a 1/100th interest in a Stock Purchase Contract under which the 2007 Trust is obligated to purchase, and Mellon Financial is obligated to sell, one share of Mellon Financials NonCumulative Perpetual Preferred Stock, Series L, $100,000 liquidation preference per share (the Preferred Stock). Pursuant to the merger, BNY Mellon assumed Mellon Financials obligation under the 2007 RCC. BNY Mellon agreed in the 2007 RCC for the benefit of persons who buy, hold, or sell a specified series of its longterm indebtedness for money borrowed, called Covered Debt, that on or before the Stock Purchase Date, as defined in the 2007 RCC (anticipated to be June 20, 2012), with respect to the Junior Notes, and on or before the Termination Date, as defined in the 2007 RCC (anticipated to be June 20, 2022), with respect to the PCS or Preferred Stock (collectively, the Junior Notes, PCS and Preferred Stock are referred to as the 2007 Securities):
BNY Mellon and its subsidiaries will not redeem or repurchase any of the 2007 Securities with limited exceptions, unless
BNY Mellon has obtained the prior approval of the Federal Reserve Board to do so if such approval is then required under the Federal Reserve Boards capital guidelines applicable to bank holding companies and
the applicable redemption or repurchase amount does not exceed specified percentages of the aggregate amount of net cash proceeds that BNY Mellon and its subsidiaries have received during the 180 days prior to delivery of notice of such redemption or repurchase from issuance of common stock or other securities specified in the 2007 RCC that, generally described, based on current standards, are expected to receive equity credit at the time of issuance equal to or greater than the equity credit attributed to the 2007 Securities at the time of such redemption or repayment.
The series of longterm indebtedness for borrowed money that is Covered Debt under the 2007 RCC as of the date of this Form 10K is BNY Mellons 5.50% subordinated notes due Nov. 15, 2018, which have CUSIP No. 585515AE9. Each series of longterm indebtedness for money borrowed that is Covered Debt, including Mellon Financials 5.50% subordinated notes due Nov. 15, 2018, will cease to be Covered Debt on the earliest to occur of (i) the date that is two years prior to the final maturity date or the defeasance of such series; (ii) if BNY Mellon or a subsidiary elects to redeem or repurchase such series in whole or in part and after giving effect to such redemption or repurchase the outstanding principal amount of such series is less than $100,000,000, the applicable redemption or repurchase date; and (iii) if such series meets the other eligibility requirements set forth in the 2007 RCC for Covered Debt but is not subordinated debt, then the date (if any) on which BNY Mellon issues a series of longterm indebtedness for money borrowed that meets the eligibility requirements of the 2007 RCC but is subordinated debt. The 2007 RCC includes provisions under which a new series of BNY Mellons longterm indebtedness for money
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Table of Contents borrowed will then be identified as and become the Covered Debt benefiting from the 2007 RCC. The full text of the 2007 RCC is available as Exhibit 99.1 to Mellon Financials current report on Form 8K dated June 20, 2007. The description of the 2007 RCC set forth above is qualified by reference to its full text. ITEM 1A. RISK FACTORS Making or continuing an investment in securities issued by us, including our common stock, involves certain risks that you should carefully consider. The following discussion sets forth some of the more important risk factors that could affect our business, financial condition or results of operations. However, other factors, besides those discussed below or elsewhere in this Form 10K or other of our reports filed with or furnished to the SEC, also could adversely affect our business or results. We cannot assure you that the risk factors described below or elsewhere in this document address all potential risks that we may face. These risk factors also serve to describe factors which may cause our results to differ materially from those described in forwardlooking statements included herein or in other documents or statements that make reference to this Form 10K. See Forwardlooking Statements. Uncertainties in global financial markets and the economy generally may materially adversely affect our business and results of operations. Our results of operations are materially affected by conditions in the domestic and global financial markets and the economy generally, both in the U.S. and elsewhere around the world. While there are indications that both the financial markets and the economy are recovering from the recent worldwide recession, a variety of factors raise concern over the course and strength of the recovery, including low interest rates, depressed home prices and increasing foreclosures, volatile equity market values, high unemployment, governmental budget deficits (including, in the U.S., at the federal, state and municipal level), contagion risk from possible default by other countries on sovereign debt, declining business and consumer confidence and the risk of increased inflation. These factors continue to have a significant effect on both the global economy and our business. The resulting economic pressure on consumers and lack of confidence in the financial markets may adversely affect certain portions of our business and our financial condition and results of operations. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:
The amount and range of our market risk exposures have been increasing over the past several years, and may continue to do so.
During periods of unfavorable market or economic conditions, the level of individual investor participation in the global markets, as well as the level of client assets, may also decrease, which would negatively impact the results of our Asset and Wealth Management businesses.
Fluctuations in global market activity could impact the flow of investment capital into or from assets under management and the way customers allocate capital among money market, equity, fixed income or other investment alternatives, which could negatively impact our Asset Management business.
Our ability to continue to operate certain commingled investment funds at a net asset value of $1.00 per unit and to allow unrestricted cash redemptions by investors in those commingled funds (or by investors in other funds managed by us which are invested in those commingled investment funds) may be adversely affected by depressed marktomarket prices of the underlying portfolio securities held by such funds, or by material defaults on such securities or by the limited sources of liquidity that are available to such funds; and we may be faced with claims from investors and exposed to financial loss as a result of our operation of such funds.
Heightened regulation of our industry will increase our costs and may limit our ability to pursue business opportunities that we would otherwise pursue.
The process we use to estimate losses inherent in our credit exposure and to ascertain the fair value of securities held by us is subject to uncertainty in that it requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these conditions might impair the ability of our borrowers and others to meet their obligations.
Our ability to access the public capital markets on favorable terms or at all could be adversely affected by further disruptions in the markets or other events, including actions by rating agencies and deteriorating investor expectations.
16 BNY Mellon
Table of Contents The value of our investments in equity and debt securities, including our marketable debt securities and pension and other postretirement plan assets, may decrease. Concerns over market volatility continue. The capital and credit markets experienced unprecedented volatility and disruption during the financial crisis. While markets stabilized in 2010, further upheaval could produce downward pressure on stock prices and credit availability for certain issuers without regard to those issuers underlying financial strength. Under these extreme conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under less volatile market conditions. Moreover, under these conditions market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale, such as crowded trades. Severe market events have historically been difficult to predict, however, and we could realize significant losses if unprecedented extreme market events were to continue, such as the recent conditions in the global financial markets and global economy. For a discussion of risk, see Risk management in the MD&A Results of Operations section in the Annual Report. If markets experience further upheavals, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations. Reputational, Legal and Regulatory RiskOur business may be negatively affected by adverse publicity, regulatory actions or litigation with respect to us, other wellknown companies and the financial services industry generally. We are subject to reputational, legal and regulatory risk in the ordinary course of our business. These risks could include adverse publicity and damage to our reputation arising from events in the financial markets, our failure or perceived failure to comply with legal and regulatory requirements, the purported actions of our employees, alleged financial reporting irregularities involving ourselves or other large and wellknown companies, increasing regulatory scrutiny of know your customer, antimoney laundering and antiterrorist procedures and their effectiveness, and litigation that may arise from our failure or perceived failure to comply with policies and procedures. Any or all of these risks could result in increased regulatory supervision, affect our ability to attract and retain customers or maintain access to the capital markets, result in lawsuits, enforcement actions, damages, fines and penalties or have other adverse effects on us. Customers of our subsidiaries may make claims pertaining to the performance of fiduciary responsibilities, which may result in material financial liability and materially impair our reputation, if not resolved in a manner favorable to the subsidiary. Investigations by various federal and state regulatory agencies, the Department of Justice and state attorneys general, and any related litigation, could have an adverse effect on us. See Legal proceedings in Note 25 of the Consolidated Financial Statements in the Annual Report. We are subject to extensive government regulation and supervision, including regulation and supervision in nonU.S. jurisdictions. We operate in a highly regulated environment, and are subject to a comprehensive statutory regulatory regime as well as oversight by governmental agencies. In light of the current conditions in the global financial markets and economy, the Obama Administration, Congress and regulators have increased their focus on the regulation of the financial services industry. New or modified regulations and related regulatory guidance, including under Basel III and the DoddFrank Act, may have unforeseen or unintended adverse effects on the financial services industry. The regulatory perspective, particularly that of the Federal Reserve Board, on regulatory capital requirements may affect our ability to make acquisitions, declare dividends or repurchase our common stock unless we can demonstrate, to the satisfaction of our regulators, that such actions would not adversely affect our regulatory capital position in the event of a severely stressed market environment. In addition, the implementation of certain of the regulations with regard to regulatory capital could disproportionately affect our regulatory capital position relative to that of our competitors. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and reputational damage, which could have a material adverse effect on our business, financial condition and results of operations. Although we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. Laws, regulations or policies, including accounting standards and
BNY Mellon 17
Table of Contents interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement. See Supervision and Regulation in this Form 10K. Some of the governmental authorities which may assert jurisdictional regulatory authority over us are located in and operate under jurisdictions outside the United States. Such jurisdictions may utilize legal principles and systems that differ materially from those encountered in the United States. Among other things, litigation in foreign jurisdictions may be decided much more quickly than in the U.S., trials may not involve testimony of witnesses who are in the courtroom and subject to crossexamination, and trials may be based solely on submission of written materials. These factors can make issues of regulatory compliance and legal proceedings more difficult to assess. We may experience further writedowns of our financial instruments and other losses related to volatile and illiquid market conditions; impairment of our instruments could harm our earnings. We maintain an investment securities portfolio of various holdings, types, and maturities. These securities are generally classified as availableforsale and, consequently, are recorded on our Consolidated Balance Sheet at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income, net of tax. Our portfolio includes nonagency U.S. and nonU.S. residential mortgagebacked securities, commercial mortgagebacked securities and credit cards, the values of which are subject to market price volatility to the extent unhedged. If such investments suffer credit losses, as we experienced with some of our investments in 2009, we may recognize in earnings the credit losses as an otherthantemporary impairment. For information regarding the sensitivity of and risks associated with the market value of portfolio investments and interest rates, refer to the Risk managementMarket risk section in the MD&A Results of Operations section in the Annual Report. Recent legislative actions may have an adverse effect on the Companys operations. In July 2010, President Obama signed into law the DoddFrank Act. This new law broadly affects the financial services industry, particularly those entities considered to be systemically important, such as bank holding companies with assets of over $50 billion, including BNY Mellon, by establishing a framework for systemic risk oversight, creating a liquidation authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and numerous other provisions aimed at strengthening the sound operation of the financial services sector. U.S. regulatory agencies banking, securities and commodities have begun to publish notices of proposed regulations required by DoddFrank during the past several months, and new bodies created by DoddFrank (including the FSOC and the Bureau of Consumer Financial Protection) are commencing operations. The related findings of various regulatory and commission studies, the interpretations issued as part of the rulemaking process and the final regulations that are issued with respect to various elements of the new law may cause changes that impact the profitability of our business activities and require that we change certain of our business practices and plans, including those relating to crossselling our products and services. These changes could also expose us to additional costs (including increased legal and compliance costs) and require us to invest significant management attention and resources to make any necessary changes. Interest Rate EnvironmentOur revenues and profits are sensitive to changes in interest rates. Our net interest revenue and cash flows are sensitive to interest rate changes and changes in valuations in the debt or equity markets over which we have no control. Our net interest revenue is the difference between the interest income earned on our interestearning assets, such as the loans we make and the securities we hold in our investment portfolio, and the interest expense incurred on our interestbearing liabilities, such as deposits and borrowed money. We also earn net interest revenue on interestfree funds we hold. The global market crisis has triggered a series of cuts in interest rates. During fiscal 2010, the Federal Open Market Committee kept the target federal funds rate between 0% and 0.25%. The low interest rate environment has compressed our net interest spread and reduced our spreadbased revenues. It has also resulted in our voluntarily waiving fees on certain money market mutual funds and related distribution fees in order to prevent our clients yields on such funds from becoming negative. Changes in interest
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Table of Contents rates could affect the interest earned on assets differently than interest paid on liabilities. A rising interest rate environment generally results in our earning a larger net interest spread. Conversely, a falling interest rate environment generally results in our earning a smaller net interest spread. If we are unable to effectively manage our interest rate risk, changes in interest rates could have a material adverse effect on our profitability. Further volatility in interest rates could trigger one or more of the following additional effects:
changes in net interest revenue depending on our balance sheet position at the time of change. See discussion under Asset/liability management in the MD&A Results of Operations section in the Annual Report;
an increased number of delinquencies, bankruptcies or defaults and more nonperforming assets and net chargeoffs as a result of abrupt increases in interest rates, including with respect to financial guaranty monoline insurers as to which we have credit exposure;
a decline in the value of our fixedincome investment portfolio as a result of increasing interest rates;
increased borrowing costs and reduced access to the capital markets caused by unfavorable financial conditions; and
decreased feebased revenues due to a slowing of capital market activity or significant declines in market value.
A more detailed discussion of the interest rate and market risks we face is contained in the Risk management section in the MD&A Results of Operations in the Annual Report. Deposit insurance premiums may continue to increase. During 2009 and 2010, due to a higher level of bank failures, the FDIC increased recurring deposit insurance premiums, imposed a special assessment on insured financial institutions, and required insured financial institutions to prepay three years of deposit premiums. Due to the continuing volume of bank failures, it is possible that a continued high level of funding will be required from insured financial institutions, such as BNY Mellon. CompetitionWe are subject to intense competition in all aspects of our business, which could negatively affect our ability to maintain or increase our profitability. Many businesses in which we operate are intensely competitive around the world. Other domestic and international banks and financial service companies such as trading firms, broker dealers, investment banks, specialized processing companies, outsourcing companies, data processing companies and asset managers aggressively compete with us for feebased business. We also face competition from both unregulated and regulated financial services organizations such as mutual funds, insurance companies, credit unions, money market funds and investment counseling firms, whose products and services span the local, national and global markets in which we conduct operations. In addition, insurance companies, investment counseling firms, brokerage houses and other business firms and individuals offer active competition for personal trust services and investment counseling services. Furthermore, pricing pressures, as a result of the ability of competitors to offer comparable or improved products or services at a lower price and customer pricing reviews, may result in a reduction in the price we can charge for our products and services which would likely negatively affect our ability to maintain or increase our profitability. Recently enacted and proposed legislation and regulation may impact our ability to conduct certain of our businesses in a costeffective manner or at all, including legislation relating to restrictions on the type of activities in which financial institutions are permitted to engage. These or other similar proposals, which may not apply to all of our competitors, could adversely impact our ability to compete effectively. A decline in our competitive position could adversely affect our ability to maintain or increase our profitability. Dependence on feebased businessWe are dependent on feebased business for a substantial majority of our revenue and our feebased revenues could be adversely affected by a slowing in capital market activity, significant declines in market values or negative trends in savings rates or in individual investment preferences. Our principal operational focus is on feebased business, as distinct from commercial banking
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Table of Contents institutions that earn most of their revenues from loans and other traditional interestgenerating products and services. We have redeployed our assets away from traditional retail banking to concentrate our resources further on feebased businesses, including cash management, custody, mutual fund services, unit investment trusts, corporate trust, depositary receipts, stock transfer, securities execution and clearance, collateral management, and asset management. Fees for many of our products and services are based on the volume of transactions processed, the market value of assets managed and administered, securities lending volume and spreads, and fees for other services rendered. Corporate actions, crossborder investing, global mergers and acquisitions activity, new debt and equity issuances, and secondary trading volumes all affect the level of our revenues. Assetbased fees are typically determined on a sliding scale so that, as the value of a client portfolio grows, we receive a smaller percentage of the increasing value as fee income. This is particularly important to our asset management, global funds services and global custody businesses. Significant declines in the values of capital assets would reduce the market value of some of the assets that we manage and administer and result in a corresponding decrease in the amount of fees we receive and therefore would have an adverse effect on our results of operations. Similarly, significant declines in the volume of capital markets activity would reduce the number of transactions we process and the amount of securities lending we do and therefore would also have an adverse effect on our results of operations. Our business generally benefits when individuals invest their savings in mutual funds and other collective funds, in defined benefit plans, unit investment trusts or exchange traded funds. If there is a decline in the savings rates of individuals, or if there is a change in investment preferences that leads to less investment in mutual funds, other collective funds and defined contribution plans, our revenues could be adversely affected. Our feebased revenues could be adversely affected by a stable exchangerate environment or decreased crossborder investing activity. The degree of volatility in foreign exchange rates can affect the amount of our foreign exchange trading revenue. Most of our foreign exchange revenue is derived from our securities servicing client base. Activity levels and spreads are generally higher when there is more volatility. Accordingly, we benefit from currency volatility and our foreign exchange revenue is likely to decrease during times of decreased currency volatility. Our future revenue may increase or decrease depending upon the extent of increases or decreases in crossborder or other investments made by our clients. Economic and political uncertainties resulting from terrorist attacks, military actions or other events, including changes in laws or regulations governing crossborder transactions, such as currency controls, could result in decreased crossborder investment activity. Decreased crossborder investing could lead to decreased demand for investor services that we provide. The trend towards use of electronic trade networks instead of traditional modes of exchange may result in unfavorable pressure on our foreign exchange business which could adversely impact our foreign exchange revenue. Our ability to retain existing business and obtain new business is dependent on our consistent execution of the feebased services we perform. We provide custody, accounting, daily pricing and administration, master trust and master custody, investment management, trustee and recordkeeping, foreign exchange, securities lending, securities execution and clearance, correspondent clearing, stock transfer, cash management, trading and information services to clients worldwide. Assets under custody and assets under management are held by us in a custodial or fiduciary capacity and are not included in our assets. If we fail to perform these services in a manner consistent with our fiduciary, custodial and other obligations, existing and potential clients may lose confidence in our ability to properly perform these services and our business may be adversely affected. In addition, any such failure may result in contingent liabilities that could have an adverse effect on our financial condition or losses that could have an adverse effect on our results of operations. Our internal strategies and forecasts assume a growing client base and increasing client usage of our services. A decline in the pace at which we attract new clients and a decline of the pace at which existing and new clients use additional services and assign additional assets to us for management or custody would adversely affect our future results of operations. A decline in the rate at which our clients
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Table of Contents outsource functions, such as their internal accounts payable activities, would also adversely affect our results of operations. Strategic acquisitions may pose integration risks. From time to time, to achieve our strategic objectives, we have acquired or invested in other companies or businesses, and may do so in the future. Each of these poses integration challenges, including successfully retaining clients and key employees of both businesses and capitalizing on certain revenue synergies. We cannot assure you that we will realize, when anticipated or at all, the positive benefits expected as a result of our acquisitions or that any businesses acquired will be successfully integrated. The soundness of financial institutions and other counterparties could adversely affect us. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have in the past led to marketwide liquidity problems and could lead to losses or defaults by us or by other institutions in the future. Many transactions expose us to credit risk in the event of default of our counterparties or clients. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations. Any material reduction in our credit rating could increase the cost of our funding from the capital markets. Our longterm debt is currently rated investment grade by the major rating agencies. These rating agencies regularly evaluate us and their ratings of our longterm debt are based on a number of factors, including our financial strength as well as factors not entirely within our control, including conditions affecting the financial services industry generally. In addition, rating agencies employ different models and formulas to assess the financial strength of a rated company, and from time to time rating agencies have, in their discretion, altered these models. Changes to the models, general economic conditions, or other circumstances outside our control could impact a rating agencys judgment of its rating and the rating it assigns us. In view of the difficulties experienced recently by many financial institutions, we believe that the rating agencies may heighten the level of scrutiny that they apply to such institutions, may increase the frequency and scope of their credit reviews, may request additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. The outcome of such a review may have adverse ratings consequences, which could have a material adverse effect on our results of operations and financial condition and affect the cost and other terms upon which we are able to obtain funding and increase our cost of capital. We cannot predict what actions rating agencies may take, or what actions we may be required to take in response to the actions of rating agencies, which may adversely affect us. Capital AdequacyWe are subject to capital adequacy guidelines and, if we fail to meet these guidelines, our financial condition would be adversely affected. Under regulatory capital adequacy guidelines and other regulatory requirements, BNY Mellon and our subsidiary banks and brokerdealers must meet guidelines that include quantitative measures of assets, liabilities and certain offbalance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. As discussed under Supervision and Regulation Capital Requirements in this Form 10K, the capital requirements applicable to us as a bank holding company as well as to our subsidiary banks are in the process of being substantially revised, in connection with Basel III and the requirements of the DoddFrank Act. If our company, our subsidiary banks, or brokerdealers failed to meet these minimum capital guidelines and other regulatory requirements, their respective financial conditions would be materially and adversely affected. In light of recent market events, DoddFrank and Basel III, BNY Mellon and
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Table of Contents our subsidiary banks will be required to satisfy additional, more stringent, capital adequacy standards. We cannot fully predict the final form of, or the effects of, these regulations. Failure by BNY Mellon or one of our U.S. bank subsidiaries to maintain its status as wellcapitalized and well managed, if unremedied over a period of time, would cause us to lose our status as a FHC and could affect the confidence of clients in us, thus also compromising our competitive position. See Supervision and Regulation in this Form 10K and the Liquidity and dividends and Capital Capital adequacy sections in the MD&A Results of Operations section and the Recent Accounting and Regulatory Developments section in the MD&A section in the Annual Report. Access to Capital MarketsIf our ability to access the capital markets is diminished, our business may be adversely affected. Our business is dependent in part on our ability to access successfully the capital markets on a regular basis. We rely on access to both shortterm money markets and longterm capital markets as significant sources of liquidity to the extent liquidity requirements are not satisfied by the cash flow from our consolidated operations. Events or circumstances, such as rising interest rates, market disruptions or loss of confidence of debt purchasers or counterparties in us or in the funds markets, could limit our access to capital markets, increase our cost of borrowing, adversely affect our liquidity, or impair our ability to execute our business plan. In addition, our ability to raise funding could be impaired if lenders develop a negative perception of our longterm or shortterm financial prospects. Such negative perceptions could be developed if we incur large trading losses, we are downgraded or put on (or remain on) negative watch by the rating agencies, we suffer a decline in the level of our business activity, regulatory authorities take significant action against us, or we discover significant employee misconduct or illegal activity, among other reasons. If we are unable to raise funding using the methods described above, we would likely need to finance or liquidate unencumbered assets, such as our investment and trading portfolios, to meet maturing liabilities. We may be unable to sell some of our assets, or we may have to sell assets at a discount from market value, either of which could adversely affect our results of operations. Monetary and Other Governmental PoliciesOur business is influenced by monetary and other governmental policies. The monetary, tax and other policies of the government and its agencies, including the Federal Reserve Board, have a significant impact on interest rates and overall financial market performance. Due to current market conditions, we anticipate that monetary, tax and other government policies will become more rigorous. Heightened regulatory scrutiny and increased sanctions, changes or potential changes in domestic and international legislation and regulation as well as domestic or international regulatory investigations impose compliance, legal, review and response costs that may impact our profitability and may allow additional competition, facilitate consolidation of competitors, or attract new competitors into our businesses. The cost of geographically diversifying and maintaining our facilities to comply with regulatory mandates necessarily results in additional costs. Various legislative initiatives are from time to time introduced in Congress or relevant state legislatures. We cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon our financial condition or operations. See Supervision and Regulation in this Form 10K. Operational RiskWe are exposed to operational risk as a result of providing certain services, which could adversely affect our results of operations. We are exposed to operational risk as a result of providing various feebased services including certain securities servicing, global payment services, private banking and asset management services. Operational risk is the risk of loss resulting from errors related to transaction processing, breaches of the internal control system and compliance requirements, fraud by employees or persons outside the company, business interruption due to system failures or other events, or other risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk. We regularly assess and monitor operational risk in our business and provide for disaster and business recovery planning, including geographical diversification of our facilities; however, the occurrence of various events, including unforeseeable and unpreventable events such as hurricanes or other natural disasters, could still damage our physical facilities or our computer systems or software, cause delay or disruptions to operational functions, impair our clients, vendors and counterparties and negatively
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Table of Contents impact our results of operations. Operational risk also includes potential legal or regulatory actions that could arise as a result of noncompliance with applicable laws and regulatory requirements which could have an adverse effect on our reputation. For a discussion of risk see Risk management in the MD&A Results of Operations section in the Annual Report. Our controls and procedures may fail or be circumvented. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition. If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and timeconsuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. Our information systems may experience an interruption or breach in security. We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies, procedures and technical safeguards designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. For a discussion of risk, see Risk management in the MD&A Results of Operations section in the Annual Report. TechnologyWe depend on our technology and intellectual property; if third parties misappropriate our intellectual property, our business may be adversely affected. We are dependent on technology because many of our products and services involve processing large volumes of data. Our technology platforms must therefore provide global capabilities and scale. Rapid technological changes require significant and ongoing investments in technology to develop competitive new products and services or adopt new technologies. Technological advances which result in lower transaction costs may adversely impact our revenues. In addition, unsuccessful implementation of technological upgrades and new products may adversely impact our ability to service and retain customers. Developments in the securities processing industry, including shortened settlement cycles and straightthroughprocessing, will necessitate ongoing changes to our business and operations and will likely require additional investment in technology. Our financial performance depends in part on our ability to develop and market new and innovative services, to adopt or develop new technologies that differentiate our products or provide cost efficiencies and to deliver these products and services to the market in a timely manner at a competitive price. Rapid technological change in the financial services industry, together with competitive pressures, require us to make significant and ongoing investments. We cannot provide any assurance that our technology spending will achieve gains in competitiveness or profitability, and the costs we incur in product development could be substantial. Accordingly, we could incur substantial development costs without achieving corresponding gains in profitability. Furthermore, if a third party were to assert a claim of infringement or misappropriation of its proprietary rights, obtained through patents or otherwise, against us with respect to one or more of our methods of doing business or conducting our operations, we could be required to spend significant amounts to defend such claims, develop alternative methods of operations, pay substantial money damages or obtain a license from the third party.
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Table of Contents Global OperationsWe are subject to political, economic, legal, operational and other risks that are inherent in operating globally. In conducting our businesses and maintaining and supporting our global operations, we are subject to risks of loss from the outbreak of hostilities or acts of terrorism and various unfavorable political, economic, legal or other developments, including social or political instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, and changes in laws and regulations. Further, our businesses and operations are increasingly expanding into new regions throughout the world, including emerging markets. Various emerging market countries have experienced severe economic and financial disruptions, including significant devaluations of their currencies, defaults or threatened defaults on sovereign debt, capital and currency exchange controls, and low or negative growth rates in their economies, as well as military activity or acts of terrorism. The possible effects of any of these conditions may adversely affect our business and increase volatility in global financial markets generally. Acts of TerrorismActs of terrorism and global conflicts may have a negative impact on our business. Acts of terrorism and global conflicts could have a significant impact on our business and operations. While we have in place business continuity and disaster recovery plans, acts of terrorism could still damage our facilities and disrupt or delay normal operations, and have a similar impact on our clients, suppliers, and counterparties. Acts of terrorism and global conflicts could also negatively impact the purchase of our products and services to the extent they resulted in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States or abroad, or in financial market settlement functions. The wars in Iraq and Afghanistan, terror attacks, political unrest, global conflicts, the national and global efforts to combat terrorism and other potential military activities and outbreaks of hostilities have affected and may further adversely affect economic growth, and may have other adverse effects on us in ways that we are unable to predict. New lines of business or new products and services may subject us to additional risks. From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. We may not be able to attract and retain skilled people. Our success depends, in large part, on our ability to attract new employees, retain and motivate our existing employees, and continue to compensate employees competitively amid intense public and regulatory scrutiny on the compensation practices of large financial institutions. Competition for the best people in most activities engaged in by us can be intense and we may not be able to hire people or to retain them. Our ability to attract and retain key executives and/or other key employees may be hindered as a result of executive compensation limits and requirements set forth in regulations that may be issued under recently proposed and enacted legislation. Tax Laws and RegulationsTax law changes or challenges to our tax positions with respect to historical transactions may adversely affect our net income, effective tax rate and our overall results of operations and financial condition. In the course of our business, we receive inquiries from both U.S. and nonU.S. tax authorities on the amount of taxes we owe, such as those matters discussed in Note 25 of the Notes to Consolidated Financial Statements in the Annual Report. If we are not successful in defending these inquiries, we may be required to adjust the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions, all of which can require a greater provision for taxes or otherwise negatively affect earnings. Probabilities and outcomes are reviewed as events unfold, and adjustments to the reserves are made when necessary, but the reserves may prove inadequate because we cannot necessarily accurately predict the outcome of any challenge, settlement or litigation or to what extent it will
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Table of Contents negatively affect us or our business. In addition, changes in tax legislation or the interpretation of existing tax laws worldwide could have a material impact on our net income. Accounting PrinciplesChanges in accounting standards could have a material impact on our financial statements. From time to time, the Financial Accounting Standards Board, the International Accounting Standards Board, the SEC and bank regulators change the financial accounting and reporting standards governing the preparation of our financial statements such as the potential adoption of International Financial Reporting Standards. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. See Recent Accounting and Regulatory Developments in the MD&A section in the Annual Report. These changes are difficult to predict and can materially impact how we record and report our financial condition and results of operations and other financial data, although, in certain instances, these changes may not have an economic impact on our business. Credit ReservesWe could incur income statement charges if our reserves for credit losses, including loan reserves, are inadequate. We have credit exposure to residential mortgages, the financial, airline and automotive industries, monoline financial guaranty insurers and many other industries. We cannot provide any assurance as to whether chargeoffs related to these sectors or to different credit risks may occur in the future. Though credit risk is inherent in lending activities, our revenues and profitability are adversely affected when our borrowers default in whole or in part on their loan obligations to us. We rely on our business experience to estimate future defaults, which we use to create loan loss reserves against our loan portfolio. In addition, current market developments may increase default and delinquency rates, which may impact our chargeoffs. We cannot provide any assurance that these reserves, based on management estimates, will not be required to be augmented due to an unexpectedly high level of defaults. If reserves for credit losses are not sufficient, we would be required to record a larger credit loss reserve against current earnings. Holding CompanyWe are a holding company, and as a result, are dependent on dividends from our subsidiaries, including our subsidiary banks, to meet our obligations, including our obligations with respect to our debt securities, and to provide funds for payment of dividends to our shareholders. We are a nonoperating holding company, whose principal assets and sources of income are our principal bank subsidiaries The Bank of New York Mellon and BNY Mellon, N.A. and our other subsidiaries. We are a legal entity separate and distinct from our banks and other subsidiaries and, therefore, we rely primarily on dividends and interest from these banking and other subsidiaries to meet our obligations, including our obligations with respect to our debt securities, and to provide funds for payment of dividends to our shareholders, to the extent declared by our board of directors. There are various legal limitations on the extent to which these banking and other subsidiaries can finance or otherwise supply funds to us (by dividend or otherwise) and certain of our affiliates. For example, as a result of charges related to the restructuring of our securities portfolio in the third quarter of 2009, The Bank of New York Mellon and BNY Mellon, N.A. currently require regulatory consent prior to paying a dividend to us. Although we maintain cash positions for liquidity at the holding company level, if these banking subsidiaries or other of our subsidiaries were unable to supply us with cash over time, we could be unable to meet our obligations, including our obligations with respect to our debt securities, or declare or pay dividends in respect of our capital stock. See Supervision and Regulation Dividend Restrictions in this Form 10K, the Liquidity and Dividends section in the MD&A Results of Operations section and Note 21 of the Notes to Consolidated Financial Statements in the Annual Report. Because we are a holding company, our rights and the rights of our creditors, including the holders of our debt securities, to a share of the assets of any subsidiary upon the liquidation or recapitalization of the subsidiary will be subject to the prior claims of the subsidiarys creditors (including, in the case of our banking subsidiaries, their depositors), except to the extent that we may ourselves be a creditor with recognized claims against the subsidiary. The rights of holders of our debt securities to benefit from those distributions will also be junior to those prior claims. Consequently, our debt securities will be effectively subordinated to all existing and future liabilities of
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Table of Contents our subsidiaries. A holder of our debt securities should look only to our assets for payments in respect of those debt securities. Limits on common stock dividends. Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so. Any increase in BNY Mellons ongoing quarterly dividend would require consultation with the Federal Reserve Board. Any reduction of, or the elimination of, our common stock dividend in the future could adversely affect the market price of our common stock. Antitakeover provisions could negatively impact our stockholders. Provisions of Delaware law and provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. Additionally, our certificate of incorporation authorizes our Board of Directors to issue additional series of preferred stock and such preferred stock could be issued as a defensive measure in response to a takeover proposal. These provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interest of our stockholders. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We believe that our owned and leased facilities are suitable and adequate for our business needs. At a number of the locations described below, we are not currently occupying all of the space under our control. Where commercially reasonable and to the extent it is not needed for future expansion, we have leased or subleased, or seek to lease or sublease, this excess space. The following is a description of our principal properties, as of Dec. 31, 2010: New York City properties We own a 49story office building located at One Wall Street that serves as our corporate headquarters. We also own our 23story operations center building located at 101 Barclay Street, and lease the land on which that building sits under a ground lease expiring in 2080. In addition, we lease approximately 372,000 square feet of space in an office building located at 200 Park Avenue and approximately 318,000 square feet of space in an office building located at 2 Hanson Place in Brooklyn. The New York City properties are utilized by all of our businesses. Pittsburgh properties We lease under a longterm, triple net lease the entire 54story office building known as BNY Mellon Center located at 500 Grant Street. In addition, we own a 42story office building located at 525 William Penn Place and a 14story office building located at 500 Ross Street. The Pittsburgh properties are utilized by all of our businesses, other than the Clearing Services business. Boston properties We lease approximately 373,000 square feet of space in a Boston office building located at One Boston Place, 201 Washington Street. We also lease under a triple net lease the entire 3story office building located at 135 Santilli Highway in Everett, Massachusetts. Additionally, we lease approximately 304,000 square feet at 4400 Computer Drive in Westborough, Massachusetts. The Boston properties are utilized by all of our businesses other than the Issuer Services and Clearing Services businesses. New Jersey properties We lease approximately 485,000 square feet of space in an office building located at 95 Christopher Columbus Drive, Jersey City, New Jersey and approximately 260,000 square feet of space in an office building located at Newport Office Center VII, 480 Washington Boulevard, Jersey City, New Jersey. The New Jersey properties are primarily utilized by our Issuer Services and Clearing Services businesses.
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Table of Contents United Kingdom properties We have a number of leased office locations in London (including approximately 234,000 square feet of space at BNY Mellon Centre at 160162 Queen Victoria Street and approximately 152,000 square feet of space at The Tower at One Canada Square at Canary Wharf), as well as other leased office locations throughout the United Kingdom, including locations in Manchester, Poole, Leeds, Brentwood, Liverpool, Swindon and Edinburgh. The UK properties are utilized by all of our businesses. India properties We lease approximately 302,000 square feet in Pune, India and approximately 300,000 square feet in Chennai, India. The India properties are utilized by all of our businesses. Other properties We also lease (and in a few instances own) office space and other facilities at numerous other locations both within and outside of the U.S., including properties located in New York, New Jersey, Pennsylvania, Massachusetts, Florida, Delaware, Texas, California, Illinois, Georgia, Washington, Colorado, the midsouth region of the U.S.; Brussels, Belgium; Navan, Wexford, Dublin and Cork in Ireland; SenningerbergNiederanven and Luxembourg City in Luxembourg; Frankfurt, Germany; Singapore; Hong Kong and Shanghai in China, and Tokyo, Japan. ITEM 3. LEGAL PROCEEDINGS The information required by this Item is set forth in the Legal proceedings section in Note 25 of the Notes to Consolidated Financial Statements in the Annual Report, which portion is incorporated herein by reference.
BNY Mellon 27
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the New York Stock Exchange under the ticker symbol BK. BNY Capital IV 6.875% Preferred Trust Securities Series E (symbol BKPrE), BNY Capital V 5.95% Preferred Trust Securities Series F (symbol BKPrF) and Mellon Capital IV 6.244% Preferred Trust Securities (symbol BK/P) are also listed on the New York Stock Exchange. Information relating to the high and low sales prices per share of our common stock and our common stock dividend for each full quarterly period during fiscal 2009 and 2010 is set forth in the Selected Quarterly Data section in the Annual Report, which is incorporated herein by reference. As of Dec. 31, 2010, there were 26,125 holders of record of our common stock. For additional information about dividends and a discussion of potential regulatory limitations on our receipt of funds from our regulated subsidiaries and our payment of dividends to shareholders, see the Liquidity and Dividends section in the MD&A Results of Operations section in the Annual Report, Note 21 of the Notes to Consolidated Financial Statements in the Annual Report and Supervision and Regulation Dividend Restrictions in this Form 10K, which portions are incorporated herein by reference. Additional information about our common stock, including information about share repurchases during the fourth quarter of 2010 and existing Board of Directors authorization with respect to purchases by us of our common stock, and other equity securities is provided in the Capital Stock repurchase programs section of the MD&AResults of Operations section in the Annual Report and Note 17 of the Notes to Consolidated Financial Statements in the Annual Report, which portions are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is set forth in Financial Summary, Summary of financial results in the MD&A Results of Operations section in the Annual Report and Note 1, Note 2, Note 3 and Note 4 of the Notes to Consolidated Financial Statements in the Annual Report, which portions are incorporated herein by reference. ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is set forth in the MD&A and Note 3, Note 16 and Note 21 of the Notes to Consolidated Financial Statements in the Annual Report, which portions are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is set forth in Offbalance sheet arrangements, Risk management, Trading activities and risk management and Asset/liability management in the MD&A Results of Operations section in the Annual Report, Note 1 of the Notes to Consolidated Financial Statements under Derivative financial instruments, Note 23, Note 25, and Note 26 of the Notes to Consolidated Financial Statements in the Annual Report, which portions are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to Item 15 on page 33 hereof for a detailed listing of the items under Financial Statements, Financial Statement Schedules, and Exhibits, which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, including the Chief Executive Officer and Chief Financial Officer, with participation by the members of the Disclosure Committee, has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining, and evaluating disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our SEC reports is timely recorded, processed, summarized and reported and that information required to be disclosed by BNY Mellon is accumulated and communicated to BNY Mellons management to allow timely decisions regarding the required disclosure. In addition, our ethics hotline can also be
28 BNY Mellon
Table of Contents used by employees and others for the anonymous communication of concerns about financial controls or reporting matters. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting In the ordinary course of business, we may routinely modify, upgrade or enhance our internal controls and procedures for financial reporting. There have not been any changes in our internal controls over financial reporting as defined in Rule 13a15(f) of the Exchange Act during the fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management Report on Internal Control over Financial Reporting and Report of Independent Registered Public Accounting Firm See Report of Management on Internal Control Over Financial Reporting and Report of Independent Registered Public Accounting Firm on pages 86 and 87 of the Annual Report, each of which is incorporated herein by reference.
BNY Mellon 29
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item is included below and in the Proxy in the following portions of the Election of Directors section: Information About the Nominees, Director Qualifications, Board Meetings and Board Committee Information Audit Committee, and Committees and Committee Charters, Nomination Procedures, Nominees for Election as Directors, Section 16(a) Beneficial Ownership Reporting Compliance and Director Compensation, which portions are incorporated herein by reference. CODE OF ETHICS We have adopted a code of ethics for our employees which we refer to as our Code of Conduct. The Code of Conduct applies to all employees of BNY Mellon and its subsidiaries, including our Chief Executive Officer (principal executive officer), Chief Financial Officer (principal financial officer) and Controller (principal accounting officer), as well as to the directors of BNY Mellon. The Code of Conduct is posted on our website at www.bnymellon.com/ ethics/codeofconduct.pdf. We also have a code of ethics for our directors, which we refer to as our Directors Code of Conduct. The Directors Code of Conduct applies to all directors of BNY Mellon. The Directors Code of Conduct is posted on our website at www. bnymellon.com/governance/directorscodeof conduct.pdf. Both the Code of Conduct and the Directors Code of Conduct are available in print, without charge, to any shareholder who requests a copy. Requests should be sent to The Bank of New York Mellon Corporation, Office of the Secretary, One Wall Street, NY, NY 10286. We intend to disclose on our website any amendments to or waiver of the Code of Conduct relating to executive officers (including the officers specified above) and will disclose any amendments to or waivers of the Directors Code of Conduct relating to our directors. EXECUTIVE OFFICERS OF THE REGISTRANT The name and age of, and positions and offices held by, each executive officer of BNY Mellon as of February 28, 2011, together with the offices held by each such person during the last five years, are listed below and on the following two pages. All executive officers serve at the pleasure of the appointing authority. No executive officer has a family relationship to any other executive officer or director.
Age
Year appointed
Robert P. Kelly Chairman and Chief Executive Officer Gerald L. Hassell President Curtis Y. Arledge Vice Chairman Thomas P. (Todd) Gibbons Vice Chairman and Chief Financial Officer Timothy F. Keaney Vice Chairman James P. Palermo Vice Chairman Karen B. Peetz Vice Chairman Brian G. Rogan Vice Chairman Richard F. Brueckner Senior Executive Vice President Arthur Certosimo Senior Executive Vice President Lisa B. Peters Senior Executive Vice President Brian T. Shea
56
2007 (1)
59
2007 (2)
46
2010 (3)
54
2007 (4)
49
2007 (5)
55
2007 (6)
55
2007 (7)
53
2007 (8)
61
2007 (9)
55
2009 (10)
53
2007 (11)
50
2010 (12)
Senior Executive Vice President Jane C. Sherburne Senior Executive Vice President and General Counsel Kurt D. Woetzel Senior Executive Vice President John A. Park Controller 58 2008 (15) 55 2007 (14) 60 2010 (13)
30 BNY Mellon
Table of Contents (1) Mr. Kelly also serves as Chairman and Chief Executive Officer of The Bank of New York Mellon and BNY Mellon, N.A. Prior to the merger, Mr. Kelly served as Chairman, President and Chief Executive Officer of Mellon Financial Corporation and Mellon Bank, N.A. since February 2006. From prior to 2005 to January 2006, Mr. Kelly was Chief Financial Officer of Wachovia Corporation, a financial services company, and its predecessor, First Union Corporation.
(2)
Mr. Hassell also serves as the President of The Bank of New York Mellon and BNY Mellon, N.A. Prior to the merger, Mr. Hassell served as President of The Bank of New York Company, Inc. and The Bank of New York since at least 2005.
(3)
Mr. Arledge also serves as Chief Executive Officer of BNY Mellon Asset Management and Vice Chairman of The Bank of New York Mellon and BNY Mellon, N.A. From 2008 to November 2010, Mr. Arledge served as Chief Investment Officer for fixed income portfolios at BlackRock, Inc., an investment management firm. From prior to 2005 to 2008, Mr. Arledge served as the global head of the fixed income division of the corporate and investment banking group in Wachovia Corporation, a financial services company.
(4)
Mr. Gibbons also serves as Vice Chairman and Chief Financial Officer of The Bank of New York Mellon and BNY Mellon, N.A. Mr. Gibbons served as Chief Risk Officer of BNY Mellon from July 1, 2007 to July 1, 2008. Prior to the merger, Mr. Gibbons served as Senior Executive Vice President and Chief Financial Officer of The Bank of New York Company, Inc. from September 2006 until June 2007. Prior to the merger, he also served as Senior Executive Vice President of The Bank of New York since April 2005 and as Chief Financial Officer from September 2006 until June 2007. Mr. Gibbons also served as Chief Risk Officer of The Bank of New York Company from at least 2005 to 2006.
(5)
Mr. Keaney also serves as Vice Chairman of The Bank of New York Mellon and BNY Mellon, N.A. Prior to the merger, Mr. Keaney served as Senior Executive Vice President of The Bank of New York since May 2006. He served as Executive Vice President of The Bank of New York from at least 2005 to May 2006. Mr. Palermo also serves as Vice Chairman of The Bank of New York Mellon and BNY Mellon, N.A. Prior to the merger, Mr. Palermo served as Vice Chairman of Mellon Financial Corporation and Mellon Bank, N.A. since at least 2005.
(6)
(7)
Ms. Peetz also serves as Vice Chairman of The Bank of New York Mellon and BNY Mellon, N.A. Prior to the merger, Ms. Peetz served as Senior Executive Vice President of The Bank of New York since May 2006. She served as Executive Vice President of The Bank of New York from at least 2005 to May 2006.
(8)
Mr. Rogan also serves as Vice Chairman of The Bank of New York Mellon and BNY Mellon, N.A. Prior to the merger, Mr. Rogan served as Senior Executive Vice President of The Bank of New York since November 2005.
(9)
Mr. Brueckner has served as Chairman of Pershing LLC since October 1, 2010. He also serves as Senior Executive Vice President of The Bank of New York Mellon and Vice President of BNY Mellon, N.A. Prior to the merger, Mr. Brueckner served as Senior Executive Vice President of The Bank of New York since May 2006. He also served as Chief Executive Officer of Pershing LLC since at least 2005 to October 1, 2010.
(10) Mr. Certosimo also serves as Senior Executive Vice President of The Bank of New York Mellon and BNY Mellon, N.A. He served as an Executive Vice President of The Bank of New York Mellon beginning in July of 2007 and ending in May 2009. Prior to July 2007, Mr. Certosimo served as head of Broker Dealer Services and Alternative Investment Services and Executive Vice President of The Bank of New York since at least 2005.
(11) Ms. Peters also serves as Senior Executive Vice President of The Bank of New York Mellon and BNY Mellon, N.A. Prior to the merger, Ms. Peters served as an Executive Vice President of Mellon Bank, N.A. since at least 2005.
(12) Mr. Shea has served as Chief Executive Officer of Pershing LLC since October 1, 2010 and also serves as Senior Executive Vice President of The Bank of New York Mellon and BNY Mellon, N.A. Mr. Shea served as President and Chief Operating Officer of Pershing LLC from at least 2005 to October 1, 2010.
BNY Mellon 31
Table of Contents (13) Ms. Sherburne also serves as Senior Executive Vice President and General Counsel of The Bank of New York Mellon and BNY Mellon, N.A. From 2009 to May 2010, Ms. Sherburne conducted a private legal practice. Ms. Sherburne served as General Counsel for Wachovia Corporation, a financial services company, from 2008 to 2009 and as General Counsel for the Global Consumer Group of Citigroup Inc., a financial services company, from at least 2005 to 2008.
(14) Mr. Woetzel also serves as Senior Executive Vice President of The Bank of New York Mellon and Vice President of BNY Mellon, N.A. Prior to the merger, Mr. Woetzel served as Senior Executive Vice President of The Bank of New York since May 2006. He served as Executive Vice President of The Bank of New York from at least 2005 to May 2006.
(15) Mr. Park has also served as Executive Vice President of The Bank of New York Mellon and BNY Mellon, N.A. since August 2009, and Controller of The Bank of New York Mellon and BNY Mellon, N.A. since May 2008. Mr. Park served as Managing Director of The Bank of New York Mellon beginning with our merger and ending in May 2008. Prior to the merger, Mr. Park served as Managing Director of The Bank of New York since at least 2005. The Bank of New York Mellon, BNY Mellon, N.A. and Pershing LLC, as referenced in the foregoing footnotes, are subsidiaries of The Bank of New York Mellon Corporation. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included in the Proxy in the following portions of the Election of Directors section: Compensation and Risk, Director Compensation, Executive Compensation, Compensation Discussion and Analysis, Board Meetings and Board Committee Information Human Resources and Compensation Committee Compensation Committee Interlocks and Insider Participation, and the Report of the Human Resources and Compensation Committee, which are incorporated herein by reference. The information incorporated herein by reference to the Report of the Human Resources and Compensation Committee is deemed furnished hereunder. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item is included in the Proxy in the following portions of the Election of Directors section: Beneficial Ownership of Shares by Holders of 5% or More of Outstanding Stock, Beneficial Ownership of Shares by Directors and Executive Officers, and Executive Compensation Equity Compensation Plans Table, which are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item is included in the Proxy in the following portions of the Election of Directors section: Corporate Governance Matters Director Independence and Business Relationships and Related Party Transactions Policy and Board Meetings and Board Committee Information Audit Committee and Corporate Governance and Nominating Committee and Human Resources and Compensation Committee, which are incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item is included in the Proxy in the following portion of the Election of Directors section: Audit Fees, Audit Related Fees, Tax Fees and All Other Fees, which is incorporated herein by reference.
32 BNY Mellon
(a)
The financial statements, schedules and exhibits required for this Form 10K are incorporated by reference as indicated in the following index. Page numbers refer to pages of the Annual Report for items (1) Financial Statements and (c) Other Financial Data. (1) Financial Statements Consolidated Income Statement Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (2) Exhibits See (b) below. Page No. 88 and 89 90 91 92 through 94 95 through 162 163
(b) (c)
The exhibits listed on the Index to Exhibits on pages 35 through 52 hereof are incorporated by reference or filed or furnished herewith in response to this Item. Other Financial Data Selected Quarterly Data Page No. 79
BNY Mellon 33
Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, BNY Mellon has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Bank of New York Mellon Corporation By: /s/ Robert P. Kelly Robert P. Kelly Chairman and Chief Executive Officer DATED: February 28, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of BNY Mellon and in the capacities and on the date indicated.
Signature
Capacities
By: /s/ Robert P. Kelly Robert P. Kelly Chairman and Chief Executive Officer By: /s/ Thomas P. Gibbons Thomas P. Gibbons Chief Financial Officer By: /s/ John A. Park John A. Park Controller Ruth E. Bruch; Nicholas M. Donofrio; Gerald L. Hassell; Edmund F. Kelly; Richard J. Kogan; Michael J. Kowalski; John A. Luke, Jr.; Robert Mehrabian; Mark A. Nordenberg; Catherine A. Rein; William C. Richardson; Samuel C. Scott III; John P. Surma; and Wesley W. von Schack By: /s/ Arlie R. Nogay Arlie R. Nogay Attorneyinfact
Directors
34 BNY Mellon
Pursuant to the rules and regulations of the SEC, BNY Mellon has filed certain agreements as exhibits to this Form 10K. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in BNY Mellons public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe BNY Mellons actual state of affairs at the date hereof and should not be relied upon.
Exhibit
Description
Method of Filing
2.1
Amended and Restated Agreement and Plan of Merger, dated as of December 3, 2006, as amended and restated as of February 23, 2007, and as further amended and restated as of March 30, 2007, between The Bank of New York Company, Inc., Mellon Financial Corporation and The Bank of New York Mellon Corporation (the Company). Stock Purchase Agreement, dated as of February 1, 2010, by and between The PNC Financial Services Group, Inc. and The Bank of New York Mellon Corporation. Restated Certificate of Incorporation of The Bank of New York Mellon Corporation. Amended and Restated ByLaws of The Bank of New York Mellon Corporation, as amended and restated on July 10, 2007 and subsequently amended on April 14, 2009, August 11, 2009, February 9, 2010, July 2, 2010 and October 12, 2010. None of the instruments defining the rights of holders of longterm debt of the Company represent longterm debt in excess of 10% of the total assets of the Company. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument. Trust Agreement dated November 16, 1993 (Trust Agreement) related to certain executive compensation plans and agreements.
Previously filed as Exhibit 2.1 to the Companys Current Report on Form 8K (File No. 00052710 and File No. 00106152) as filed with the Commission on July 2, 2007, and incorporated herein by reference.
2.2
Previously filed as Exhibit 2.1 to the Companys Current Report on Form 8K (File No. 00052710) as filed with the Commission on February 3, 2010, and incorporated herein by reference. Previously filed as Exhibit 3.1 to the Companys Current Report on Form 8K (File No. 00052710 and File No. 00106152) as filed with the Commission on July 2, 2007, and incorporated herein by reference. Filed herewith.
3.1
3.2
4.1
N/A
10.1*
Previously filed as Exhibit 10(m) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1993, and incorporated herein by reference.
BNY Mellon 35
Exhibit
Description
Method of Filing
10.2*
Amendment Number 1 dated May 13, 1994 to the Trust Agreement related to executive compensation agreements. Amendment Number 2 dated April 11, 1995 to the Trust Agreement related to executive compensation agreements. Amendment dated October 11, 1994 to Trust Agreement related to certain executive compensation plans and agreements. Amendment Number 4 dated January 31, 1996 to the Trust Agreement related to executive compensation agreements. Amendment Number 5 dated January 14, 1997 to the Trust Agreement related to executive compensation agreements. Amendment Number 6 dated January 31, 1997 to the Trust Agreement related to executive compensation agreements. Amendment Number 7 dated May 9, 1997 to the Trust Agreement related to executive compensation agreements. Amendment Number 8 dated July 8, 1997 to the Trust Agreement related to executive compensation agreements.
Previously filed as Exhibit 10(b) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10(c) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10(r) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1994, and incorporated herein by reference. Previously filed as Exhibit 10(e) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10(d) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1996, and incorporated herein by reference. Previously filed as Exhibit 10(c) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1996, and incorporated herein by reference. Previously filed as Exhibit 10(h) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10(i) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference.
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
36 BNY Mellon
Exhibit
Description
Method of Filing
10.10*
Amendment Number 9 dated October 1, 1997 to the Trust Agreement related to executive compensation agreements. Amendment Number 10 dated September 11, 1998 to the Trust Agreement related to executive compensation agreements. Amendment Number 11 dated December 23, 1999 to the Trust Agreement related to executive compensation. Amendment Number 12 dated July 11, 2000 to the Trust Agreement related to executive compensation agreements. Amendment Number 13 dated January 22, 2001 to the Trust Agreement related to executive compensation agreements. Amendment Number 14 dated June 28, 2002 to the Trust Agreement related to executive compensation agreements. Amendment Number 15 dated June 30, 2003 to the Trust Agreement related to executive compensation agreements. Amendment Number 16 dated September 15, 2003 to the Trust Agreement related to executive compensation agreements.
Previously filed as Exhibit 10(a) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1997, and incorporated herein by reference. Previously filed as Exhibit 10(oo) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1998, and incorporated herein by reference. Previously filed as Exhibit 10(gg) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1999, and incorporated herein by reference. Previously filed as Exhibit 10(f) to The Bank of New York Company, Inc.s Quarterly Report on Form 10Q (File No. 00106152) for the quarter ended September 30, 2000, and incorporated herein by reference. Previously filed as Exhibit 10(jjj) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2000, and incorporated herein by reference. Previously filed as Exhibit 10(o) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10(p) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10(q) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference.
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
BNY Mellon 37
Exhibit
Description
Method of Filing
10.18*
Amendment Number 17 dated June 10, 2004 to the Trust Agreement related to executive compensation agreements. Amendment Number 18 dated June 29, 2005 to the Trust Agreement related to executive compensation agreements. Amendment Number 19 dated July 31, 2007 to the Trust Agreement related to executive compensation agreements. The Bank of New York Company, Inc. Excess Contribution Plan as amended through July 10, 1990. Amendments dated February 23, 1994 and November 9, 1993 to The Bank of New York Company, Inc. Excess Contribution Plan. Amendment to The Bank of New York Company, Inc. Excess Contribution Plan dated November 14, 1995. Amendment to The Bank of New York Company, Inc. Excess Contribution Plan dated November 12, 2002. Amendment to The Bank of New York Company, Inc. Excess Contribution Plan dated December 15, 2006.
Previously filed as Exhibit 10(r) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2004, and incorporated herein by reference. Previously filed as Exhibit 10(s) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2005, and incorporated herein by reference. Previously filed as Exhibit 10.20 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 28, 2008 and incorporated herein by reference. Previously filed as Exhibit 10(b) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1990, and incorporated herein by reference. Previously filed as Exhibit 10(c) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1993, and incorporated herein by reference. Previously filed as Exhibit 10(l) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1997, and incorporated herein by reference. Previously filed as Exhibit 10(v) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10(y) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2006, and incorporated herein by reference.
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
38 BNY Mellon
Exhibit
Description
Method of Filing
10.26*
The Bank of New York Company, Inc. Excess Benefit Plan as amended through December 8, 1992. Amendment dated May 10, 1994 to The Bank of New York Company, Inc. Excess Benefit Plan. Amendment dated November 14, 1995 to The Bank of New York Company, Inc. Excess Benefit Plan. Amendment dated December 10, 1996 to The Bank of New York Company, Inc. Excess Benefit Plan. The Bank of New York Company, Inc. 2003 LongTerm Incentive Plan.
Previously filed as Exhibit 10(d) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1993, and incorporated herein by reference. Previously filed as Exhibit 10(g) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1994, and incorporated herein by reference. Previously filed as Exhibit 10(i) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1995, and incorporated herein by reference. Previously filed as Exhibit 10(kk) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1999, and incorporated herein by reference. Previously filed as Exhibit B to The Bank of New York Company, Inc.s Definitive Proxy Statement (File No. 00106152) dated March 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10(ee) to The Bank of New York Company, Inc.s Form 10K (File No. 00106152) for the year ended December 31, 2005, and incorporated herein by reference. Previously filed as Exhibit 10(gg) to The Bank of New York Company, Inc.s Form 10K (File No. 00106152) for the year ended December 31, 2006, and incorporated herein by reference. Previously filed as Exhibit 99.1 to the Companys Current Report on Form 8K (File No. 00052710) dated February 27, 2008, and incorporated herein by reference. Previously filed as Exhibit 10(aa) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1998, and incorporated herein by reference.
10.27*
10.28*
10.29*
10.30*
10.31*
Amendment dated December 28, 2005 to the 2003 LongTerm Incentive Plan of The Bank of New York Company, Inc. Amendment dated December 15, 2006 to the 2003 LongTerm Incentive Plan of The Bank of New York Company, Inc. Amendment dated February 21, 2008 to the 2003 LongTerm Incentive Plan of The Bank of New York Company, Inc. The Bank of New York Company, Inc. 1999 LongTerm Incentive Plan.
10.32*
10.33*
10.34*
BNY Mellon 39
Exhibit
Description
Method of Filing
10.35*
Amendment dated July 11, 2000 to The Bank of New York Company, Inc. 1999 LongTerm Incentive Plan. Amendment dated December 28, 2005 to the 1999 LongTerm Incentive Plan of The Bank of New York Company, Inc. Amendment dated December 15, 2006 to the 1999 LongTerm Incentive Plan of The Bank of New York Company, Inc. The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. Amendment dated March 9, 1993 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. Amendment effective October 11, 1994 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. Amendment dated June 11, 1996 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. Amendment dated November 12, 1996 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan.
Previously filed as Exhibit 10(b) to The Bank of New York Company, Inc.s Quarterly Report on Form 10Q (File No. 00106152) for the quarter ended September 30, 2000, and incorporated herein by reference. Previously filed as Exhibit 10(qq) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2005, and incorporated herein by reference. Previously filed as Exhibit 10(uu) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the period ended December 31, 2006, and incorporated herein by reference. Previously filed as Exhibit 10(n) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1992, and incorporated herein by reference. Previously filed as Exhibit 10(k) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1993, and incorporated herein by reference. Previously filed as Exhibit 10(o) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1994, and incorporated herein by reference. Previously filed as Exhibit 10(a) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1996, and incorporated herein by reference. Previously filed as Exhibit 10(b) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1996, and incorporated herein by reference.
10.36*
10.37*
10.38*
10.39*
10.40*
10.41*
10.42*
40 BNY Mellon
Exhibit
Description
Method of Filing
10.43*
Amendment dated July 11, 2000 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. Amendment dated February 13, 2001 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. Amendment dated December 13, 2005 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan. Deferred Compensation Plan for NonEmployee Directors of The Bank of New York Company, Inc. Amendment dated November 8, 1994 to Deferred Compensation Plan for NonEmployee Directors of The Bank of New York Company, Inc. Amendment dated February 11, 1997 to the Directors Deferred Compensation Plan for The Bank of New York Company, Inc. Amendment to Deferred Compensation Plan for NonEmployee Directors of The Bank of New York Company, Inc. effective as of December 1, 1993. Amendment dated November 12, 2002 to Deferred Compensation Plan for NonEmployee Directors of The Bank of New York Company, Inc.
Previously filed as Exhibit 10(e) to The Bank of New York Company, Inc.s Quarterly Report on Form 10Q (File No. 00106152) for the quarter ended September 30, 2000, and incorporated herein by reference. Previously filed as Exhibit 10(ggg) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2000, and incorporated herein by reference. Previously filed as Exhibit 10(yy) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2005, and incorporated herein by reference. Previously filed as Exhibit 10(s) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1993, and incorporated herein by reference. Previously filed as Exhibit 10(z) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1994, and incorporated herein by reference. Previously filed as Exhibit 10(j) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 1996, and incorporated herein by reference. Previously filed as Exhibit 10(d) to The Bank of New York Company, Inc.s Quarterly Report on Form 10Q (File No. 00106152) for the quarter ended September 30, 2000, and incorporated herein by reference. Previously filed as Exhibit 10(yy) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2003, and incorporated herein by reference.
10.44*
10.45*
10.46*
10.47*
10.48*
10.49*
10.50*
BNY Mellon 41
Exhibit
Description
Method of Filing
10.51*
Form of Stock Option Agreement under The Bank of New York Company, Inc.s 2003 LongTerm Incentive Plan. Form of Restricted Stock Agreement under The Bank of New York Company, Inc.s 2003 LongTerm Incentive Plan. Form of Stock Option Agreement under The Bank of New York Company, Inc.s 2003 LongTerm Incentive Plan. Mellon Financial Corporation LongTerm Profit Incentive Plan (2004), as amended effective April 17, 2007. Mellon Financial Corporation Stock Option Plan for Outside Directors (2001), effective February 20, 2001. Mellon Financial Corporation Director Equity Plan (2006).
Previously filed as Exhibit 10.3 to The Bank of New York Company, Inc.s Quarterly Report on Form 10Q (File No. 00106152) for the quarter ended September 30, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.2 to The Bank of New York Company, Inc.s Quarterly Report on Form 10Q (File No. 00106152) for the quarter ended June 30, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.9 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended June 30, 2007, and incorporated herein by reference. Previously filed as Exhibit 10.2 to Mellon Financial Corporations Quarterly Report on Form 10Q (File No. 00107410) for the quarter ended March 31, 2007, and incorporated herein by reference. Previously filed as Exhibit 10.1 to Mellon Financial Corporations Quarterly Report on Form 10Q (File No. 00107410) for the quarter ended June 30, 2001, and incorporated herein by reference. Previously filed as Exhibit A to Mellon Financial Corporations Proxy Statement (File No. 00107410) dated March 15, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.9 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 2001, and incorporated herein by reference. Previously filed as Exhibit 99.3 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated October 16, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.71 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 28, 2008, and incorporated herein by reference.
10.52*
10.53*
10.54*
10.55*
10.56*
10.57*
Mellon Financial Corporation 1990 Elective Deferred Compensation Plan for Directors and Members of the Advisory Board, as amended, effective January 1, 2002. Form of Mellon Financial Corporation Elective Deferred Compensation Plan for Directors (Post December 31, 2004). The Bank of New York Mellon Corporation Deferred Compensation Plan for Directors, effective January 1, 2008.
10.58*
10.59*
42 BNY Mellon
Exhibit
Description
Method of Filing
10.60*
Mellon Financial Corporation Elective Deferred Compensation Plan for Senior Officers, as amended, effective January 1, 2003. Form of Mellon Financial Corporation Elective Deferred Compensation Plan for Senior Officers (Post December 31, 2004). Form of Mellon Financial Corporation Elective Deferred Compensation Plan (Post December 31, 2004). Mellon Bank IRC Section 401(a)(17) Plan, as amended, effective September 15, 1998. Mellon Bank Optional Life Insurance Plan, as amended, effective January 15, 1999. Mellon Bank Executive Life Insurance Plan, as amended, effective January 15, 1999. Mellon Bank Senior Executive Life Insurance Plan, as amended, effective January 15, 1999. Mellon Bank Executive Life Insurance Plan (2005).
Previously filed as Exhibit 4.2 to Mellon Financial Corporations Registration Statement on Form S8 (File No. 333109193) dated September 26, 2003, and incorporated herein by reference. Previously filed as Exhibit 99.1 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated October 16, 2006, and incorporated herein by reference. Previously filed as Exhibit 99.2 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated October 16, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.2 to Mellon Financial Corporations Quarterly Report on Form 10Q (File No. 00107410) for the quarter ended September 30, 1998, and incorporated herein by reference. Previously filed as Exhibit 10.9 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 1998, and incorporated herein by reference. Previously filed as Exhibit 10.10 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 1998, and incorporated herein by reference. Previously filed as Exhibit 10.11 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 1998, and incorporated herein by reference. Previously filed as Exhibit 99.2 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 2004, and incorporated herein by reference.
10.61*
10.62*
10.63*
10.64*
10.65*
10.66*
10.67*
BNY Mellon 43
Exhibit
Description
Method of Filing
10.68**
Mellon Financial Corporation ShareSuccess Plan, as amended, effective May 21, 2002. Form of Mellon Financial Corporation, LongTerm Profit Incentive Plan, Type I Stock Option Agreement. Form of Mellon Financial Corporation, Performance Accelerated Restricted Stock Agreement Corporate Performance Goals. Form of Mellon Financial Corporation, Deferred Share Award Agreement (Performance Accelerated Restricted Stock) Corporate Performance Goals. Form of Type I Stock Option Agreement of Mellon Financial Corporation.
Previously filed as Exhibit 10.1 to Mellon Financial Corporations Quarterly Report on Form 10Q (File No. 00107410) for the quarter ended June 30, 2002, and incorporated herein by reference. Previously filed as Exhibit 10.1 to Mellon Financial Corporations Quarterly Report on Form 10Q (File No. 00107410) for the quarter ended September 30, 2004, and incorporated herein by reference. Previously filed as Exhibit 99.1 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated January 18, 2005, and incorporated herein by reference. Previously filed as Exhibit 99.7 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated January 18, 2005, and incorporated herein by reference. Previously filed as Exhibit 99.8 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated January 18, 2005, and incorporated herein by reference. Previously filed as Exhibit 10.35 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 2004, and incorporated herein by reference. Previously filed as Exhibit 99.2 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated December 19, 2005, and incorporated herein by reference. Previously filed as Item 1.01(1) to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated February 15, 2005, and incorporated herein by reference. Previously filed as Item 1.01(1) to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated December 19, 2005, and incorporated herein by reference.
10.69*
10.70*
10.71*
10.72*
10.73*
10.74*
Form of Nonqualified Stock Option Agreement of Mellon Financial Corporation. Description regarding administration and compliance with Section 409A of the Internal Revenue Code for Mellon Financial Corporation. Description regarding administration and compliance with Section 409A of the Internal Revenue Code for Mellon Financial Corporation.
10.75*
10.76*
* **
Management contract or compensatory plan arrangement. Nonshareholder approved compensatory plan pursuant to which BNY Mellons Common Stock may be issued to employees of BNY Mellon. No executive officers or directors of BNY Mellon are permitted to participate in this plan.
44 BNY Mellon
Exhibit
Description
Method of Filing
10.77*
Form of NonQualified Stock Option Agreement for Mellon Financial Corporation. Form of Type I Stock Option Agreement for Mellon Financial Corporation. Mellon Financial Corporation LongTerm Profit Incentive Plan (2004) NonQualified Stock Option Agreement, dated February 20, 2007. Form of Indemnification Agreement with Directors and Senior Officers of Mellon Financial Corporation and Mellon Bank, N.A. Letter Agreement entered into by Mellon Financial Corporation and Robert P. Kelly dated January 30, 2006, accepted January 31, 2006. Amendment to Agreements between Mellon Financial Corporation and Robert P. Kelly dated December 22, 2006. Description regarding amendments entered into on December 22, 2006 by Robert P. Kelly and Mellon Financial Corporation to his Change in Control Severance Agreement, employment letter agreement and equity award agreement. Stock Option Agreement dated as of June 25, 2007, between The Bank of New York Company, Inc. and Gerald L. Hassell. Transition Agreement dated as of June 25, 2007, between The Bank of New York Company, Inc. and Gerald L. Hassell.
Previously filed as Exhibit 99.1 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated January 23, 2006, and incorporated herein by reference. Previously filed as Exhibit 99.2 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated January 23, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.98 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 28, 2008 and incorporated herein by reference. Previously filed as Exhibit B to Mellon Financial Corporations Proxy Statement (File No. 00107410) dated March 13, 1987, and incorporated herein by reference. Previously filed as Exhibit 99.1 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated January 31, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.51 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 2006, and incorporated herein by reference. Previously filed as Item 5.02 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated December 22, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.3 to The Bank of New York Company, Inc.s Current Report on Form 8K (File No. 00106152) as filed with the Commission on June 29, 2007, and incorporated herein by reference. Previously filed as Exhibit 10.4 to The Bank of New York Company, Inc.s Current Report on Form 8K (File No. 00106152) as filed with the Commission on June 29, 2007, and incorporated herein by reference.
10.78*
10.79*
10.80*
10.81*
10.82*
10.83*
10.84*
10.85*
BNY Mellon 45
Exhibit
Description
Method of Filing
10.86*
Service Agreement dated as of June 25, 2007, between The Bank of New York Company, Inc. and Thomas A. Renyi. Stock Option Agreement dated as of June 25, 2007, between The Bank of New York Company, Inc. and Thomas A. Renyi. Employment Agreement between Mellon Financial Corporation and Steven G. Elliott, effective as of February 1, 2004. Amendment to Agreements between Mellon Financial Corporation and Steven G. Elliott dated December 22, 2006. Description regarding amendments entered into on December 22, 2006 by Steven G. Elliott and Mellon Financial Corporation to his Change in Control Severance Agreement, employment agreement, equity award agreement and related matters. Form of Nonqualified Stock Option Agreement Chief Executive Officer and Senior Vice Chairman of Mellon Financial Corporation. Form of Performance Accelerated Restricted Stock Agreement Senior Vice Chairman. Confidentiality and NonSolicitation Agreement made as of April 20, 2006, by and between Mellon Financial Corporation and Ronald P. OHanley.
Previously filed as Exhibit 10.1 to The Bank of New York Company, Inc.s Current Report on Form 8K (File No. 00106152) as filed with the Commission on June 29, 2007, and incorporated herein by reference. Previously filed as Exhibit 10.2 to The Bank of New York Company, Inc.s Current Report on Form 8K (File No. 00106152) as filed with the Commission on June 29, 2007, and incorporated herein by reference. Previously filed as Exhibit 10.16 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 2003, and incorporated herein by reference. Previously filed as Exhibit 10.52 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 2006, and incorporated herein by reference. Previously filed as Item 5.02 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated December 22, 2006, and incorporated herein by reference. Previously filed as Exhibit 99.3 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated May 17, 2005, and incorporated herein by reference. Previously filed as Exhibit 99.2 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated May 17, 2005, and incorporated herein by reference. Previously filed as Exhibit 99.2 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated April 20, 2006, and incorporated herein by reference.
10.87*
10.88*
10.89*
10.90*
10.91*
10.92*
10.93*
46 BNY Mellon
Exhibit
Description
Method of Filing
10.94*
Description regarding team equity incentive awards, replacement equity awards and special stock option award to executives named therein. Lease agreement dated July 16, 2004 between Suntrust Equity Funding, LLC and Tennessee Processing Center LLC. Master Agreement dated July 16, 2004 between The Bank of New York Company, Inc. and Tennessee Processing Center LLC, Suntrust Equity Funding, LLC. Purchase & Assumption Agreement, dated as of April 7, 2006 by and between The Bank of New York Company, Inc. and JPMorgan Chase & Co. Amended and Restated Purchase & Assumption Agreement, dated as of October 1, 2006, by and between The Bank of New York Company, Inc. and JPMorgan Chase & Co. Lease dated as of December 31, 2004, between 500 Grant Street Associates Limited Partnership and Mellon Bank, N.A. with respect to One Mellon Center. Nonprosecution agreement with the U.S. Attorneys Offices for the Eastern and Southern Districts of New York.
Previously filed as Item 5.02 to the Companys Current Report on Form 8K (File No. 00052710) dated July 13, 2007, and incorporated herein by reference. Previously filed as Exhibit 10(ooo) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2005, and incorporated herein by reference. Previously filed as Exhibit 10(ppp) to The Bank of New York Company, Inc.s Annual Report on Form 10K (File No. 00106152) for the year ended December 31, 2005, and incorporated herein by reference. Previously filed as Exhibit 99.1 to The Bank of New York Company, Inc.s Current Report on Form 8K (File No. 00106152) as filed with the Commission on April 13, 2006, and incorporated herein by reference. Previously filed as Exhibit 10.2 to The Bank of New York Company, Inc.s Quarterly Report on Form 10Q (File No. 00106152) for the quarter ended September 30, 2006, and incorporated herein by reference. Previously filed as Exhibit 99.1 to Mellon Financial Corporations Annual Report on Form 10K (File No. 00107410) for the year ended December 31, 2004, and incorporated herein by reference. Previously filed as Exhibit 99.1 to The Bank of New York Company, Inc.s Current Report on Form 8K (File No. 00106152) as filed with the Commission on November 8, 2005, and incorporated herein by reference.
10.95
10.96
10.97
10.98
10.99
10.100
BNY Mellon 47
Exhibit
Description
Method of Filing
10.101
Letter from the United States Attorney, Western District of Pennsylvania, dated August 14, 2006, addressed to W. Thomas McGough, Jr., Esq., Efrem Grail, Esq., and Michael Bleier, Esq., setting forth the Settlement Agreement between the United States Attorney for the Western District of Pennsylvania and Mellon Bank, N.A., signed on behalf of Mellon Bank, N.A. on August 17, 2006. Form of 2008 Stock Option Agreement between The Bank of New York Mellon Corporation and Robert P. Kelly. Form of 2008 Stock Option Agreement between The Bank of New York Mellon Corporation and Thomas A. Renyi. Form of 2008 Stock Option Agreement between The Bank of New York Mellon Corporation and Messrs. Gerald L. Hassell and Bruce W. Van Saun. Form of 2008 Stock Option Agreement between The Bank of New York Mellon Corporation and Steven G. Elliott. Form of Long Term Incentive Plan Deferred Stock Unit Agreement for Directors of The Bank of New York Corporation. General Release of Thomas A. Renyi, dated July 22, 2008.
Previously filed as Exhibit 99.1 to Mellon Financial Corporations Current Report on Form 8K (File No. 00107410) dated August 18, 2006, and incorporated herein by reference.
10.102*
Previously filed as Exhibit 10.9 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended March 31, 2008, and incorporated herein by reference. Previously filed as Exhibit 10.10 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended March 31, 2008, and incorporated herein by reference. Previously filed as Exhibit 10.11 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended March 31, 2008, and incorporated herein by reference. Previously filed as Exhibit 10.12 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended March 31, 2008, and incorporated herein by reference. Previously filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended June 30, 2008, and incorporated herein by reference. Previously filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended September 30, 2008, and incorporated herein by reference.
10.103*
10.104*
10.105*
10.106*
10.107*
48 BNY Mellon
Exhibit
Description
Method of Filing
10.108*
Previously filed as Exhibit 10.2 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended September 30, 2008, and incorporated herein by reference. Previously filed as Item 5.02 to the Companys Current Report on Form 8K (File No. 00052710) as filed with the Commission on July 17, 2008, and incorporated herein by reference. Previously filed as Exhibit 10.5 to the Companys Quarterly Report on Form 10Q (File No. 00052710) for the quarter ended September 30, 2008, and incorporated herein by reference.
10.109*
Letter Agreement entered into by The Bank of New York Mellon Corporation and Bruce Van Saun, dated Aug. 22, 2008, accepted Aug. 25, 2008. Description regarding amendments entered into on July 7, 2008 by The Bank of New York Mellon Corporation and Thomas P. Gibbons.
10.110*
10.111
Letter Agreement, dated October 26, 2008, including Securities Purchase Agreement Standard Terms incorporated by reference therein, between the Company and the United States Department of the Treasury. Amendment to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, dated December 18, 2008. Amendment to The Bank of New York Company, Inc. Amended and Restated 2003 LongTerm Incentive Plan, dated December 18, 2008. Amendment to The Bank of New York Company, Inc. Excess Benefit Plan, dated December 18, 2008. Amendment to The Bank of New York Company, Inc. Excess Contribution Plan, dated December 18, 2008. Amendment to Change in Control Agreement, dated December 15, 2008, between The Bank of New York Mellon Corporation and Steven G. Elliott.
Previously filed as Exhibit 10.1 to the Companys Current Report on Form 8K (File No. 00052710) filed on October 30, 2008, and incorporated herein by reference. Previously filed as Exhibit 10.156 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.157 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.158 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.159 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.160 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference.
10.112*
10.113*
10.114*
10.115*
10.116*
BNY Mellon 49
Exhibit
Description
Method of Filing
10.117*
Amendment to Continuing Terms of Employment Agreement, dated December 15, 2008, between The Bank of New York Mellon Corporation and Steven G. Elliott. Amendment to Letter Agreement relating to Section 409A of the Internal Revenue Code, dated December 15, 2008, between The Bank of New York Mellon Corporation and Robert P. Kelly. Amendment to Letter Agreement, dated December 15, 2008, between The Bank of New York Mellon Corporation and Robert P. Kelly. Form of Indemnification Agreement with Executive Officers of The Bank of New York Mellon Corporation. Form of Indemnification Agreement with Directors of The Bank of New York Mellon Corporation. Amendment to Transition Agreement, dated December 15, 2008, between The Bank of New York Mellon Corporation and Gerald L. Hassell. Amendment to the Mellon Bank IRC Section 401(a)(17) Plan and Mellon Bank Benefit Restoration Plan, dated December 22, 2008. Amendment to the Mellon Financial Corporation Executive Deferred Compensation Plan for Senior Officers, dated December 22, 2008. Amendment to the Mellon Financial Corporation Executive Deferred Compensation Plan, dated December 22, 2008. Form of Amended and Restated Indemnification Agreement with Directors of The Bank of New York Mellon Corporation.
Previously filed as Exhibit 10.162 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.164 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.165 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.166 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.167 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.169 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.171 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.172 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.173 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 27, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10Q (File No. 00052710) filed on November 6, 2009, and incorporated herein by reference.
10.118*
10.119*
10.120*
10.121*
10.122*
10.123*
10.124*
10.125*
10.126*
50 BNY Mellon
Exhibit
Description
Method of Filing
10.127*
Form of Amended and Restated Indemnification Agreement with Executive Officers of The Bank of New York Mellon Corporation. Settlement and Release Agreement dated October 21, 2009, by and between The Federal Customs Service of the Russian Federation and The Bank of New York Mellon (English version). General Release of Torry Berntsen, dated August 6, 2009.
Previously filed as Exhibit 10.2 to the Companys Quarterly Report on Form 10Q (File No. 00052710) filed on November 6, 2009, and incorporated herein by reference. Previously filed as Exhibit 99.2 to the Companys Current Report on Form 8K (File No. 00052710) filed on October 23, 2009, and incorporated herein by reference. Previously filed as Exhibit 10.156 to the Companys Annual Report on Form 10K (File No. 00052710) filed on February 26, 2010, and incorporated herein by reference. Previously filed as Exhibit 10.1 to the Companys Current Report on Form 8K (File No. 00052710) as filed with the Commission on June 7, 2010, and incorporated herein by reference. Previously filed as Exhibit 99.1 to the Companys Current Report on Form 8K (File No. 00052710) as filed with the Commission on July 16, 2010, and incorporated herein by reference. Previously filed as Exhibit 99.2 to the Companys Current Report on Form 8K (File No. 00052710) as filed with the Commission on July 16, 2010, and incorporated herein by reference. Previously filed as Exhibit 99.3 to the Companys Current Report on Form 8K (File No. 00052710) as filed with the Commission on July 16, 2010, and incorporated herein by reference. Filed herewith. Filed herewith. Filed herewith.
10.128
10.129*
10.130
Confirmation of Forward Sale Transaction dated as of June 3, 2010 between The Bank of New York Mellon Corporation and Goldman, Sachs & Co. The Bank of New York Mellon Corporation Executive Severance Plan, effective July 13, 2010. Form of Notice Letter between The Bank of New York Mellon Corporation and Certain Executive Officers. The Bank of New York Mellon Corporation Policy Regarding Shareholder Approval of Future Senior Officers Severance Arrangements, adopted July 12, 2010. Form of Executive Restricted Stock Agreement. Form of Executive Stock Option Agreement. Computation of Ratio of Earnings to Fixed Charges.
10.131*
10.132*
10.133*
BNY Mellon 51
Exhibit
Description
Method of Filing
13.1
All portions of The Bank of New York Mellon Corporation 2010 Annual Report to Shareholders that are incorporated herein by reference. The remaining portions are furnished for the information of the Securities and Exchange Commission and are not filed as part of this filing. Primary subsidiaries of the Company. Consent of KPMG LLP. Power of Attorney. Certification of the Chairman and Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002. Certification of the Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002. Certification of the Chairman and Chief Executive Officer pursuant to Section 906 of the SarbanesOxley Act of 2002. Certification of the Chief Financial Officer pursuant to Section 906 of the SarbanesOxley Act of 2002. XBRL Instance Document. XBRL Taxonomy Extension Schema Document. XBRL Taxonomy Extension Calculation Linkbase Document. XBRL Taxonomy Extension Definition Linkbase Document. XBRL Taxonomy Extension Label Linkbase Document. XBRL Taxonomy Extension Presentation Linkbase Document.
Filed herewith.
21.1 23.1 24.1 31.1 31.2 32.1 32.2 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE
Filed herewith. Filed herewith. Filed herewith. Filed herewith. Filed herewith. Furnished herewith. Furnished herewith. Furnished herewith. Furnished herewith. Furnished herewith. Furnished herewith. Furnished herewith. Furnished herewith.
52 BNY Mellon
Exhibit 3.2 THE BANK OF NEW YORK MELLON CORPORATION AMENDED AND RESTATED BYLAWS (As Amended April 14, 2009, August 11, 2009, February 9, 2010, July 2, 2010 and October 12, 2010) ARTICLE ONE Meetings of Stockholders Section 1. ANNUAL MEETINGS. The annual meeting of the stockholders of the Corporation for the election of Directors and the transaction of all other business that may properly come before the meeting shall be held on such date as the Board of Directors shall determine and specify in the notice of such meeting. The annual meeting shall be held at such time and place, and upon such notice, as the Board of Directors shall determine, in the city of New York, New York, or such other city as the Board of Directors shall determine, except that, at least once every three years, the meeting shall be held in Pittsburgh, Pennsylvania. Section 2. SPECIAL MEETINGS. Special meetings of the stockholders may be called for any purpose by the Board of Directors, the Chief Executive Officer or the Chairman, and any such special meeting shall be held at the place, day and time and upon such notice as the Board of Directors or such person shall determine. Section 3. NOTICE OF MEETINGS. Whenever stockholders are required or permitted to take any action at a meeting, a notice of the meeting shall be given in any manner permitted by law which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the notice of any meeting shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholders address as it appears on the records of the Corporation. Section 4. ORGANIZATION. Only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in Section 11(a) of this Article One with respect to an annual meeting of stockholders and Section 11(b) of this Article One with respect to a special meeting of stockholders. The officer presiding at the meeting shall have the power and the duty to determine whether any business proposed to be brought before a meeting was proposed in accordance with the procedures set forth in these ByLaws and, if any business is not in compliance with such procedures, to declare that such defective proposal shall be disregarded. The officer presiding at the meeting shall have authority on his or her own motion to adjourn the meeting from time to time without the approval of the stockholders who are present in person or represented by proxy and entitled to
vote, whether or not constituting a quorum, and without notice other than announcement at the meeting. The Board of Directors may, to the extent not prohibited by law, adopt such rules and regulations for the conduct of the meetings of stockholders as it deems appropriate. Except to the extent inconsistent with the rules and regulations adopted by the Board of Directors, the officer presiding at the meeting of stockholders shall have the right and authority to prescribe rules, regulations and procedures and to do all acts as, in the judgment of such officer, are appropriate for the proper conduct of the meeting. Section 5. VOTING. Unless otherwise provided in the certificate of incorporation (including any certificate of designations with respect to any series of preferred stock), each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder that has voting power on the matter in question. Stockholders may vote at any meeting in person or may authorize another person or persons to act for such stockholder by proxy in any manner permitted by law. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary of the Corporation a revocation of the proxy or a new proxy bearing a later date. Voting at meetings of stockholders need not be by written ballot. Section 6. RECORD DATES. (a) Record Date for Meetings of Stockholders. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the day immediately preceding the day on which notice is given, or, if notice is waived, the day immediately preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) Record Date for Consents of Stockholders in Lieu of Meetings. In order that the Corporation may determine the stockholders entitled to consent to any corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 10 days after the date on which the resolution fixing the record date is adopted by the Board of Directors. If no record date has
been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the Corporation having custody of the book in which such proceedings of meetings of stockholders are recorded. Delivery made to the Corporations registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the day on which the Board of Directors adopts the resolution taking such prior action. (c) Record Date for Dividends, Distributions and Other Rights in Respect of Stock. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 days prior to such action. If no record date has been fixed by the Board of Directors, the record date for determining stockholders for any such purpose shall be the day on which the Board of Directors adopts the resolution relating thereto. Section 7. QUORUM; STOCKHOLDER ACTION. The presence, in person or by proxy, of stockholders entitled to cast at least a majority of the votes that all stockholders are entitled to cast shall constitute a quorum for the transaction of business at any meeting of stockholders. Without limiting the power and authority of the officer presiding at a meeting, pursuant to Section 4 of this Article One, to adjourn such meeting without a vote of stockholders, in the absence of a quorum of the holders of all outstanding shares of stock entitled to vote on a matter, the holders of such shares so present or represented may, by majority vote, adjourn such meeting from time to time until a quorum shall be so present or represented, without notice other than announcement at the meeting. When a quorum is once present, it shall not be broken by the subsequent withdrawal of any stockholder from the meeting. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Unless otherwise provided by law or the Certificate of Incorporation, any action of the stockholders to be taken at a meeting of stockholders (other than election of Directors to the extent set forth in
Section 8 of this Article One) may be taken by a majority of the votes cast with respect to the matter at any duly convened stockholders meeting. Section 8. REQUIRED VOTE FOR DIRECTORS. Except as otherwise provided by these ByLaws, each director shall be elected by the vote of the majority of the votes cast with respect to that directors election at any meeting for the election of directors at which a quorum is present, provided that if, as of the record date of such meeting as initially announced, the number of nominees exceeds the number of directors to be elected at such meeting (a Contested Election), the directors shall be elected by the vote of a plurality of the votes cast. For purposes of this Section 8 of this Article One of these ByLaws, a majority of votes cast shall mean that the number of votes cast for a directors election exceeds the number of votes cast against that directors election (with abstentions not counted as a vote cast either for or against that directors election). Section 9. LIST OF STOCKHOLDERS. The Secretary or other officer of the Corporation who has charge of the stock ledger shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to examination by any stockholder, for any purpose germane to the meeting, for a period of at least 10 days prior to the meeting, either (at the election of the Corporation) (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is included in the notice of the meeting or (ii) during ordinary business hours at the principal place of business of the Corporation. The list of stockholders shall also be open to examination by any stockholder at the meeting (and for the duration thereof) as required by applicable law. Except as otherwise provided by law, the identity of stockholders entitled to examine the list of stockholders required by this Section 9, to vote in person or by proxy at any meeting of stockholders or to execute written consents to corporate action without a meeting shall be conclusively determined by reference to the stock ledger. Section 10. INSPECTOR OF ELECTIONS. The Corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the Corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the Corporation represented at the meeting and such inspectors count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election. Section 11. NOTICE OF BUSINESS TO BE PRESENTED AT STOCKHOLDER MEETINGS. (a) Annual Meetings of Stockholders. The proposal of business to be considered by the stockholders at an annual meeting of stockholders may be made (x) pursuant to the Corporations notice of meeting, (y) by or at the direction of the Board of Directors or (z) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section 11, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 11. For business to be properly brought before an annual meeting by a stockholder pursuant to clause (z) of the preceding sentence, such business must be a proper matter for stockholder action and the stockholder must have given timely notice in compliance with the following requirements in writing to the Secretary of the Corporation: (i) To be timely, a stockholders notice given pursuant to this Section 11 must be received at the principal executive offices of the Corporation, addressed to the Secretary, not less than 90 calendar days or more than 120 calendar days before the anniversary date of the Corporations proxy statement released to stockholders in connection with the previous years annual meeting. Notwithstanding the preceding sentence, if the date of the annual meeting at which such business is to be presented has been changed by more than 30 calendar days from the date of the most recent previous annual meeting, a stockholders notice shall be considered timely if so received by the Corporation (A) on or before the later of (1) 120 calendar days before the date of the annual meeting at which such business is to be presented or (2) 30 calendar days following the first public announcement by the Corporation of the date of such annual meeting and (B) not later than 15 calendar days prior to the scheduled mailing date of the Corporations proxy materials for such annual meeting. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholders notice as described above. (ii) A stockholders notice given pursuant to this Section 11 shall set forth (A) the name and address of the stockholder who intends to make the proposal and the classes and numbers of shares of the Corporations
stock beneficially owned by such stockholder, (B) a representation that the stockholder is and will at the time of the annual meeting be a holder of record of stock of the Corporation entitled to vote at such meeting on the proposal(s) specified in the notice and intends to appear in person or by proxy at the meeting to present such proposal(s), (C) a description of the business the stockholder intends to bring before the meeting, including the text of any proposal or proposals to be presented for action by the stockholders, (D) the name and address of any beneficial owner(s) of the Corporations stock on whose behalf such business is to be presented and the class and number of shares beneficially owned by each such beneficial owner and (E) the reasons for conducting such business at the meeting and any material interest in such business of such stockholder or any such beneficial owner. (b) Special Meetings of Stockholders. The matters to be considered and brought before any special meeting of stockholders shall be limited to only such matters as shall be brought properly before such meeting pursuant to the Corporations notice of such special meeting. (c) General. (i) For purposes of this Section, (A) public announcement shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) and (B) beneficial ownership shall be determined in accordance with Rule 13d3 under the Exchange Act or any successor rule. (ii) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section (iii) Nothing in this Section 11 shall be deemed to affect any rights of a stockholder to request inclusion of a proposal in the Corporations proxy statement pursuant to Rule 14a8 under the Exchange Act, or any successor rule, or to present for action at an annual meeting any proposal so included. ARTICLE TWO Directors
Section 1. BOARD OF DIRECTORS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Except as expressly limited by law, all corporate powers of the Corporation shall be vested in and may be exercised by the Board of Directors. Section 2. NUMBER. The Board of Directors shall consist of such number of Directors as shall be fixed from time to time by a majority vote of the Board of Directors. Section 3. ELECTION; TERM OF OFFICE. Each Director hereafter elected shall hold office until the next annual meeting of stockholders and until his or her successor is elected and has qualified, or until his or her death or until he or she shall resign or shall have been removed or disqualified. Section 4. NOMINATION. Nominations for the election of Directors may be made by the Board of Directors, a committee thereof or any officer of the Corporation to whom the Board of Directors or such committee shall have delegated such authority. Upon proper notice given to the Corporation, nominations may also be made by any stockholder entitled to vote in the election of Directors. Written notice of a stockholders intent to make a nomination or nominations for Director must be given to the Corporation either by United States mail or personal delivery to the Secretary of the Corporation (i) in the case of an annual meeting, not less than 90 calendar days or more than 120 calendar days before the anniversary date of the Corporations proxy statement released to stockholders in connection with the previous years annual meeting and (ii) in the case of a special meeting at which directors are to be elected, not later than the close of business on the tenth calendar day following the earlier of the day on which notice of the date of the meeting was mailed and the day on which public announcement of the date of the meeting was made. Notwithstanding clause (i) of the preceding sentence, if the date of the annual meeting at which Directors are to be elected has been changed by more than 30 calendar days from the date of the most recent previous annual meeting, a stockholders notice of intent to make a nomination or nominations for Director shall be considered timely if so received by the Corporation (A) on or before the later of (x) 120 calendar days before the date of the annual meeting at which such business is to be presented or (y) 30 calendar days following the first public announcement by the Corporation of the date of such annual meeting and (B) not later than 15 calendar days prior to the scheduled mailing date of the Corporations proxy materials for such annual meeting. The notice must include: (1) the name and address of the stockholder who intends to make the nomination and a representation that the stockholder is and will at the time of the annual meeting be a holder of record of Common Stock entitled to vote at such annual meeting and that the stockholder intends to appear in person or by proxy at the annual meeting to make the nomination or nominations set forth in the notice, (2) the name and address of the person or persons to be nominated for election as Director and such other information regarding the proposed nominee or nominees as would be required to be included in a proxy statement filed pursuant to the rules and regulations of the Securities and Exchange Commission, (3) a description of all arrangements or undertakings between the stockholder and each proposed nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder and (4) a consent signed by each of the proposed nominees agreeing to serve as a Director if so elected. The Board of Directors will be under no obligation to recommend a proposed nominee, even though the notice as set forth above has been given. Section 5. VACANCIES. Any vacancy on the Board of Directors resulting from death, resignation, disqualification or removal from office or other cause, as well as any vacancy resulting from an increase in the number of Directors which occurs between annual meetings of the stockholders at which Directors are elected, shall be filled only by a majority vote of the remaining Directors then in office, whether or not a quorum, except that those vacancies resulting from removal from office by a vote of the stockholders may be filled by a vote of the stockholders at the same meeting at which such removal occurs. The Directors chosen to fill vacancies shall hold office for a term expiring at the end of the next annual meeting of stockholders. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. Section 6. REMOVAL. Any Director may be removed from office at any time without assigning any cause by the holders of a majority of the shares then entitled to vote at an election of directors. Section 7. EXCEPTIONS FOR PREFERENCE DIRECTORS. The provisions of Sections 4 through 6 of this Article Two shall not apply to any Director of the Corporation who may be elected under specified circumstances by holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation of the Corporation. Section 8. ORGANIZATIONAL MEETING. A meeting of the Board of Directors for the purpose of organizing the new Board, appointing the officers of the Corporation for the ensuing year and transacting other business shall be held without notice immediately following the annual election of Directors or as soon thereafter as is practicable at such time and place as the Secretary may designate. Section 9. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places as the Board of Directors shall determine in accordance with the Corporate Governance Guidelines or which are otherwise furnished to the Directors at its Organization Meeting each year, and if so determined or furnished, notice of such meetings need not be given. Section 10. SPECIAL MEETINGS. The Chief Executive Officer, the Chairman or the President may call a special meeting of the Board of Directors at any time. Any such officer or the Secretary shall call a special meeting of the Board upon the written request of any three members of the Board. A special meeting shall be held at such time and place as may be designated by the person or persons calling the meeting. The person or persons calling the meeting shall cause such notice of the meeting and of its purpose to be given as hereinafter provided in this Section 10, but, except as otherwise expressly provided by law or by these ByLaws, the purposes thereof need not be stated in such
notice. Except as otherwise provided by law, notice of the special meeting stating the place, date and hour of the meeting shall be given to each Director either (i) by mail or courier not less than 48 hours before the date of the meeting or (ii) by telephone, telegram or facsimile or electronic transmission, not less than 24 hours before the time of the meeting or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances (provided that notice of any meeting need not be given to any director who shall either submit, before or after such meeting, a waiver of notice or attend the meeting without protesting, at the beginning thereof, the lack of notice). Section 11. QUORUM; BOARD ACTION. A majority of the Board of Directors shall constitute a quorum for the transaction of business at any meeting. Unless otherwise provided by law, by these ByLaws or in the Certificate of Incorporation of the Corporation, any action of the Board may be taken upon the affirmative vote of a majority of the Directors present at a duly convened meeting or upon the unanimous written consent of all Directors. In case at any meeting of the Board of Directors a quorum shall not be present, a majority of the members of the Board of Directors present may adjourn the meeting from time to time until a quorum shall be present. Section 12. PARTICIPATION OTHER THAN BY ATTENDANCE. To the full extent permitted by law, any Director may participate in any regular or special meeting of the Board of Directors or of any committee of the Board of Directors of which he or she is a member by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting are able to hear each other. Section 13. ACTION BY DIRECTORS WITHOUT A MEETING. Unless otherwise restricted by the Certificate of Incorporation or these ByLaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing (which writing may include by electronic mail), and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee, as the case may be. Section 14. COMPENSATION. Each Director who does not receive a salary from the Corporation or any affiliate thereof shall be entitled to such compensation as the Board shall determine for his or her service upon the Board of Directors and any of its committees, for his or her attendance at meetings of the Board and any of its committees and for his or her expenses incident thereto. Directors shall also be entitled to such compensation as the Board shall determine for services rendered to the Corporation in any capacity other than as Directors. Section 15. RESIGNATION. Any Director may resign by submitting his or her resignation to the Chief Executive Officer, the Chairman, the President or the Secretary of the Corporation. Such resignation shall become effective upon its submission or at any later time specified therein.
ARTICLE THREE Committees of the Board of Directors Section 1. APPOINTMENT; POWERS. The Board of Directors may appoint one or more standing or temporary committees consisting of two or more Directors. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board of Directors may invest such committees with such powers and authority, subject to such conditions, as it may see fit, but no such committee shall have the power or authority with respect to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by law to be submitted to stockholders for approval or (ii) adopting, amending or repealing these ByLaws. Section 2. EXECUTIVE COMMITTEE. The Board of Directors shall appoint from among its members an Executive Committee which, so far as may be permitted by law and except as specifically limited by the Board of Directors pursuant to Section 1 of this Article Three, shall have all the powers and may exercise all the authority of the Board of Directors during the intervals between the meetings thereof. All acts done and powers conferred by the Executive Committee shall be deemed to be, and may be certified as being, done by or conferred under authority of the Board of Directors. Section 3. AUDIT COMMITTEE. The Board of Directors shall appoint from among its members, none of whom shall be an officer of the Corporation, an Audit Committee, which, so far as may be permitted by law and except as specifically limited by the Board of Directors pursuant to Section 1 of this Article Three, shall have all the powers and responsibilities and shall perform the functions specified in the Charter of the Audit Committee, as approved by the Board of Directors, and in any supplemental statement that the Board of Directors may adopt with regards to the functions of the Audit Committee. Section 4. CORPORATE GOVERNANCE AND NOMINATING COMMITTEE. The Board of Directors shall appoint from among its members, none of whom shall be an officer of the Corporation, a Corporate Governance and Nominating Committee, which, so far as may be permitted by law and except as specifically limited by the Board of Directors pursuant to Section 1 of this Article Three, shall have all the powers and responsibilities and shall perform the functions specified in the Charter of the Corporate Governance and Nominating Committee, as approved by the Board of Directors, and in any supplemental statement that the Board of Directors may adopt with regards to the functions of the Corporate Governance and Nominating Committee. Section 5. HUMAN RESOURCES AND COMPENSATION COMMITTEE. The Board of Directors shall appoint from among its members, none of whom shall be an officer of the Corporation, a Human Resources and Compensation Committee, which, so
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far as may be permitted by law and except as specifically limited by the Board of Directors pursuant to Section 1 of this Article Three, shall have all the powers and responsibilities and shall perform the functions specified in the Charter of the Human Resources and Compensation Committee, as approved by the Board of Directors, and in any supplemental statement that the Board of Directors may adopt with regards to the functions of the Human Resources and Compensation Committee. Section 6. RISK COMMITTEE. The Board of Directors shall appoint from among its members, a Risk Committee, which, so far as may be permitted by law and except as specifically limited by the Board of Directors pursuant to Section 1 of this Article Three, shall have all the powers and responsibilities and shall perform the functions specified in the Charter of the Risk Committee, as approved by the Board of Directors, and in any supplemental statement that the Board of Directors may adopt with regards to the functions of the Risk Committee. Section 7. CORPORATE SOCIAL RESPONSIBILITY COMMITTEE. The Board of Directors shall appoint from among its members, a Corporate Social Responsibility Committee, which, so far as may be permitted by law and except as specifically limited by the Board of Directors pursuant to Section 1 of this Article Three, shall have all the powers and responsibilities and shall perform the functions specified in the Charter of the Corporate Social Responsibility Committee, as approved by the Board of Directors, and in any supplemental statement that the Board of Directors may adopt with regards to the functions of the Corporate Social Responsibility Committee. Section 8. [Intentionally omitted.] Section 9. TERM; VACANCIES. (a) All committee members appointed by the Board of Directors shall serve at the pleasure of the Board of Directors; and (b) the Board of Directors may fill any committee vacancy. Section 10. ORGANIZATION. All committees shall determine their own organization, procedures and times and places of meeting, unless otherwise directed by the Board of Directors and except as otherwise provided in these ByLaws. In the absence of a provision by the Board of Directors or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article Two of these ByLaws. ARTICLE FOUR Officers
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Section 1. CHIEF EXECUTIVE OFFICER. The Board of Directors shall appoint a Chief Executive Officer. The Chief Executive Officer shall be the chief executive officer of the Corporation, shall report directly to the Board of Directors and shall be responsible for the general management of the affairs of the Corporation. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. The Chief Executive Officer shall have general executive powers concerning all the operations and business of the Corporation and shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board of Directors or as may be provided by law, and he or she may delegate to any other officer such executive and other powers and duties as he or she deems advisable. Section 2. CHAIRMAN. The Board of Directors shall appoint one of its members to be Chairman. The Chairman shall preside at all meetings of the stockholders and of the Board of Directors and shall have and exercise such further powers as may be conferred upon, or assigned to, him or her by the Board of Directors or as may be provided by law. In the event of the absence or temporary disability of the Chairman, the Lead Director shall preside at the applicable meetings of the stockholders and/or the Board of Directors during which such absence or disability exists and, in the event of the absence or temporary disability of the Chairman and the Lead Director, any other officer of the Corporation or Director designated by the Board of Directors shall preside at the applicable meetings of the stockholders and/or Board of Directors during which such absence or disability exists. Section 3. PRESIDENT. The Board of Directors shall appoint a President. The President shall have and exercise such powers and duties as may be conferred upon, or assigned to, him or her by the Board of Directors or the Chief Executive Officer or as may be provided by law. Section 4. SENIOR OFFICERS. The Board of Directors may appoint, or the Chief Executive Officer may appoint, subject to confirmation by the Board of Directors, one or more senior officers of the Corporation, any of whom may be designated as Vice Chairmen or as senior executive vice presidents or given any other descriptive titles, as the Board of Directors or the Human Resources and Compensation Committee of the Board of Directors shall specify from time to time. Each senior officer shall have and exercise such powers and duties as may be conferred upon, or assigned to, him or her by the Board of Directors or the Chief Executive Officer. Section 5. SECRETARY; ASSISTANT SECRETARIES. The Board of Directors shall appoint a Secretary. The Secretary shall act as secretary of all meetings of the stockholders, of the Board of Directors and of the Executive Committee, and he or she shall keep minutes of all such meetings. The Secretary shall give such notice of the meetings as is required by law or these ByLaws. The Secretary shall be the custodian of the minute book, stock record and transfer books and all other general corporate records. The Secretary shall be the custodian of the corporate seal and shall have the power to affix and attest the same, and he or she may delegate such power to one or more officers,
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employees or agents of the Corporation. The Secretary shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board of Directors or the Chief Executive Officer or as may be provided by law. The Board of Directors or the Chief Executive Officer may appoint one or more Assistant Secretaries who shall assist the Secretary in the performance of his or her duties. At the direction of the Secretary or in the event of his or her absence or disability, an Assistant Secretary shall perform the duties of the Secretary. Each Assistant Secretary shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board of Directors, the Chief Executive Officer or the Secretary. Section 6. TREASURER; ASSISTANT TREASURERS. The Board of Directors shall appoint a Treasurer. The Treasurer shall have and exercise such powers and duties as may be conferred upon, or assigned to, him or her by the Board of Directors or the Chief Executive Officer. The Board of Directors or the Chief Executive Officer may appoint one or more Assistant Treasurers who shall assist the Treasurer in the performance of his or her duties. At the direction of the Treasurer or in the event of his or her absence or disability, an Assistant Treasurer shall perform the duties of the Treasurer. Each Assistant Treasurer shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board of Directors, the Chief Executive Officer or the Treasurer. Section 7. CHIEF AUDITOR. Subject to any requirement of law or the rules of any exchange on which shares of Common Stock of the Corporation are listed, the Board of Directors shall appoint a Chief Auditor who shall be the chief auditing officer of the Corporation. He or she shall report to the Audit Committee and shall continuously examine the affairs of the Corporation under the general supervision and direction of the Board of Directors. He or she shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Audit Committee or the Board of Directors. The Board of Directors may also appoint other officers who shall perform such auditing duties as may be assigned to them by the Board of Directors or the Chief Auditor of the Corporation. Section 8. OTHER OFFICERS. The Board of Directors, the Chief Executive Officer or the delegate of either of them may appoint or hire such additional officers of the Corporation, who may be designated as executive vice presidents, managing directors, senior vice presidents, first vice presidents, vice presidents, assistant vice presidents, officers, assistant officers, senior associates, associates, or given any other descriptive titles, and may hire such additional employees, as it or he or she may deem necessary or desirable to transact the business of the Corporation, and may establish the conditions of employment of any of the persons mentioned above and may fix their compensation and dismiss them. Such persons may have such descriptive titles as may be appropriate, and they shall, respectively, have and exercise such powers and duties as pertain to their several offices or as may be conferred upon, or assigned to, them by the appropriate appointing authority and as are not inconsistent with any provisions of these ByLaws.
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Section 9. TENURE OF OFFICE. The Chief Executive Officer, the Chairman and the President shall each hold office for the year for which the Board of Directors was elected and until the appointment and qualification of his or her successor or until his or her earlier death, resignation, disqualification or removal. All other officers and employees shall hold office at the pleasure of the appropriate appointing authority. The Board of Directors may remove any officer with or without cause at any time. Section 10. COMPENSATION. The Board of Directors shall fix the compensation of those officers appointed pursuant to Sections 1, 2, 3 and 7 of this Article Four and of any other officers of the Corporation or any officers of any subsidiary of the Corporation that the Board of Directors shall deem appropriate, and it may award additional compensation to any officer or employee of the Corporation or any officer of any subsidiary for any year or years based upon the performance of that person during any such period, the success of the operations of the Corporation or any subsidiary thereof during any such period or any other reason that the Board of Directors shall deem appropriate. Unless the Board of Directors shall otherwise direct, the Chief Executive Officer or his or her delegate shall fix the compensation of all other officers or employees of the Corporation or any subsidiary thereof. ARTICLE FIVE Certain Governance Matters Section 1. [Intentionally omitted.] Section 2. [Intentionally omitted.] Section 3. [Intentionally omitted.] Section 4. [Intentionally omitted.] Section 5. [Intentionally omitted.] Section 6. CORPORATE NAME: During the period beginning July 1, 2007 and ending on July 1, 2012, the Board of Directors shall not recommend for adoption by the stockholders of the Corporation, or otherwise approve or effect, any change to the name of the Corporation without the unanimous affirmative vote of the Board of Directors. Section 7. AMENDMENTS. Prior to July 1, 2012, the provisions of Section 6 of this Article Five may be modified, amended or repealed, and any ByLaw provision or other resolution inconsistent with Section 6 may be adopted, or any such modification, amendment, repeal or inconsistent ByLaw provisions or other resolutions recommended for adoption by the stockholders of the Corporation, only by the unanimous affirmative vote of the Board of Directors. In the event of any inconsistency between any other provision of these ByLaws and any provision of this Article Five, the provisions of this Article Five shall control.
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ARTICLE SIX Stock, Stock Certificates and Holders of Record Section 1. STOCK CERTIFICATES. Shares of stock of the Corporation shall be represented by certificates or, to the extent provided in Sections 5 and 6 of this Article Six or as otherwise required by law, shall be uncertificated. Stock certificates shall be in such form as the Board of Directors may from time to time prescribe in accordance with law and the requirements of any exchange upon which such shares are listed. Such certificates shall be signed by the Chairman, President or Vice President, countersigned by the Secretary, the Treasurer or any other officer so authorized by the Board of Directors and permitted by law and sealed with the seal of the Corporation, and such signatures and seal may be facsimile or otherwise as permitted by law. In case any officer, registrar or transfer agent who has signed, or whose facsimile signature has been placed upon, any stock certificate shall have ceased to be such officer, registrar or transfer agent, as the case may be, before the certificate is issued, as a result of death, resignation or otherwise, the certificate may be issued by the Corporation with the same effect as if the officer, registrar or transfer agent, as the case may be, had not ceased to be such at the date of the certificates issue. Section 2. TRANSFER OF STOCK. Except as otherwise provided by law, transfers of shares of stock of the Corporation shall be made only upon the books of the Corporation only by the registered holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, or with a transfer agent duly appointed, and upon surrender of the certificate or certificates for such shares properly endorsed, if such shares are represented by a certificate, and payment of all taxes thereon. Section 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owners legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or shares. Section 4. HOLDERS OF RECORD. The Corporation shall be entitled to treat any person in whose name shares of stock of the Corporation stand on its books as the holder and owner in fact thereof for all purposes. Section 5. UNCERTIFICATED SECURITIES. All or part of the shares of common stock of the Corporation may be uncertificated shares to the extent determined by the Board of Directors from time to time; however, in no event shall shares of common stock represented by a certificate be deemed uncertificated until the certificate is surrendered to the Corporation.
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Section 6. DETERMINATIONS AS TO ISSUANCE, TRANSFER AND REGISTRATION. The Board of Directors (or any officer or other person as the Board of Directors may designate) from time to time may make such rules, policies and procedures as it, he or she may deem appropriate concerning the issue, transfer and registration of shares of stock of the Corporation, whether certificated or uncertificated. ARTICLE SEVEN Signing Authority and Corporate Transactions Section 1. SIGNING AUTHORITY. The Chief Executive Officer, the Chairman, the President, any senior officer or any Vice President of the Corporation shall have full power and authority, in the name and on behalf of the Corporation, under seal of the Corporation or otherwise, to execute, acknowledge and deliver any and all agreements, instruments or other documents relating to property or rights of all kinds held or owned by the Corporation or to the operation of the Corporation, all as may be incidental to the operation of the Corporation and subject to such limitations as the Board of Directors or the Chief Executive Officer may impose. Any such agreement, instrument or document may also be executed, acknowledged and delivered in the name and on behalf of the Corporation, under seal of the Corporation or otherwise, by such other officers, employees or agents of the Corporation as the Board of Directors, the Chief Executive Officer or the delegate of either of them may from time to time authorize. In each such case, the authority so conferred shall be subject to such limitations as the Board of Directors, the Chief Executive Officer or the delegate may impose. Any officer, employee or agent authorized hereunder to execute, acknowledge and deliver any such agreement, instrument or document is also authorized to cause the Secretary, any Assistant Secretary or any other authorized person to affix the seal of the Corporation thereto and to attest it. Section 2. VOTING AND ACTING WITH RESPECT TO STOCK AND OTHER SECURITIES OWNED BY THE CORPORATION. The Chief Executive Officer, the Chairman, the President, any senior officer or any Vice President shall have the power and authority to vote and act with respect to all stock and other securities in any other corporation owned by this Corporation, subject to such limitations as the Board of Directors or the Chief Executive Officer may impose. Such power and authority may be conferred upon any other officer, employee or agent by the Board, the Chief Executive Officer or the delegate of either of them, and such authority may be general or may be limited to specific instances. Any person so authorized shall have the power to appoint an attorney or attorneys, with general power of substitution, as proxies for the Corporation with full power to vote and act on behalf of the Corporation with respect to such stock and other securities. ARTICLE EIGHT General Provisions
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Section 1. FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 2. RECORDS. The Certificate of Incorporation, ByLaws and the proceedings of all meetings of the stockholders, the Board of Directors, the Executive Committee, and any other committee of the Board of Directors shall be recorded in appropriate minute books provided for this purpose or in any other information storage device (whether in paper or electronic form), provided that the records so kept can be converted into clearly legible form within a reasonable period of time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. The minutes of each meeting shall be signed by the Secretary or other person acting as secretary of the meeting. Section 3. SEAL. The Board of Directors may from time to time prescribe the form of a suitable corporate seal. Section 4. NUMBER. Any reference in these ByLaws to the singular includes the plural and vice versa unless the context indicates otherwise. ARTICLE NINE ByLaws Section 1. AMENDMENTS. Except as otherwise provided in Article Five of these ByLaws or in Article SIXTH, Section (b) of the Certificate of Incorporation, these ByLaws may be amended, altered and repealed, and new ByLaws may be adopted, either by action of the stockholders or (except as otherwise provided by law or these ByLaws) by action of the Board of Directors. Section 2. INSPECTION. A copy of the ByLaws, with all amendments thereto, shall at all times be kept in a convenient place at the principal office of the Corporation and shall be open for inspection to all stockholders during normal business hours.
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Exhibit 10.134 THE BANK OF NEW YORK MELLON CORPORATION The Bank of New York Mellon Corporation LongTerm Incentive Plan FORM OF RESTRICTED STOCK AGREEMENT The Bank of New York Mellon Corporation (the Corporation) and , a key employee (the Grantee) of the Corporation, in consideration of the covenants and agreements herein contained and intending to be legally bound hereby, agree as follows: SECTION 1: Stock Award 1.1 Award. Subject to the terms and conditions set forth in this Restricted Stock Agreement (this Agreement) and to the terms of The Bank of New York Mellon Corporation LongTerm Incentive Plan (the Plan), the Corporation hereby awards to the Grantee shares of the Corporations common stock, par value $.01, (the Common Stock) on (the Grant Date), subject to adjustment as provided in Article IX of the Plan. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan. 1.2 Acceptance. The Grantee accepts the award confirmed hereby, and agrees to be bound by the terms and provisions of this Agreement and the Plan, as the Agreement and the Plan may be amended from time to time; provided, however, that no alteration, amendment, revocation or termination of this Agreement or the Plan shall, without the written consent of the Grantee, adversely affect the rights of the Grantee with respect to the award. 1.3 Dividend Rights. During the period prior to vesting, the Grantee will have the right to receive dividends paid with respect to the Common Stock in cash[, provided that the Grantee is employed by the Corporation on the dividend record date]. In the event that the Grantee receives additional shares as an adjustment with respect to the award, such additional shares will be subject to the same restrictions as if granted under this Agreement as of the Grant Date. Corporation, when used herein with reference to employment of the Grantee, shall include any Affiliate of the Corporation. SECTION 2: Restrictions on Transfer 2.1 Nontransferable. No shares of Common Stock awarded hereunder or any interest therein may be sold, transferred, assigned, pledged or otherwise disposed of (any such action being hereinafter referred to as a Disposition) by the Grantee until such time as this restriction lapses with respect to such shares pursuant to Section 3 hereof, and any attempt to make such a Disposition shall be null and void and result in the immediate forfeiture and return to the Corporation without consideration of any shares of Common Stock as to which restrictions on Disposition shall at such time be in effect. 2.2 Legend. The Grantee agrees that a restrictive legend in substantially the following form may be placed on the shares of Common Stock awarded hereunder: The sale, transfer, assignment, pledge or other disposition of the shares represented hereby is subject to the restrictions set forth in The Bank of New York Mellon Corporation LongTerm Incentive
Plan and in the Restricted Stock Agreement executed thereunder dated as of , copies of each of which are available for inspection at the office of the Corporate Compensation Division of the Human Resources Department of The Bank of New York Mellon Corporation. No such transaction shall be recognized as valid or effective unless there shall have been compliance with the terms and conditions of such Plan and Agreement. 2.3 Custody. The Grantee hereby authorizes the Corporation or its agents to retain custody of the Common Stock awarded hereunder until such time as the restrictions on Disposition lapse. As soon as practicable after the date on which restrictions on Disposition of any shares lapse, the Corporation will cause such shares to be credited to a bookentry account in the Grantees name with the restrictive legend described in Section 2.2 hereof removed. As soon as practicable, if requested by the Corporation, the Grantee shall deliver a signed copy of this Agreement to the Corporate Compensation Division of the Corporations Human Resources Department. The Grantee understands that the transfer agent for the Common Stock will be instructed to effect transfers of the shares of Common Stock awarded hereunder only upon satisfaction of the conditions set forth herein and in the Plan. SECTION 3: Vesting, Forfeiture, Termination of Employment and Disability 3.1 Vesting Period[, Required Tier 1 Capital Ratio] and Forfeiture. (a) Vesting. Subject to Sections [3.1(b),] 3.2, 3.3 and 4.6 hereof, if the Grantee remains continuously employed by the Corporation through the close of business on [ , the restrictions on Disposition of the Common Stock set forth in Section 2.1 hereof shall lapse in full on such date and the Grantee shall receive the shares of Common Stock free of such restrictions on Disposition.] [the applicable anniversary of the Grant Date, the restrictions on Disposition of the Common Stock set forth in Section 2.1 of this Agreement shall lapse in accordance with the following schedule and the Grantee shall receive such shares of Common Stock free of such restrictions on Disposition: [vesting to occur ratably over years.]] [(b) Required Tier 1 Capital Ratio. As promptly as practicable following the end of calendar year , the Human Resources and Compensation Committee of the Corporations Board of Directors (the Committee) shall determine in accordance with the terms of this Agreement whether the Corporations Tier 1 Capital Ratio (as hereinafter described) at was greater than or equal to % (the Performance Requirement). If the Committee determines that the Performance Requirement has not been satisfied, all shares of Common Stock awarded hereunder shall be forfeited and returned to the Corporation without further action being required of the Corporation. For the purposes of this Agreement, Tier 1 Capital Ratio shall be as defined by US regulators on the Grant Date with the numerator equaling Tier 1 capital as defined by US regulators on the Grant Date and the denominator equaling the risk weighted assets as defined by US regulators on the Grant Date. Notwithstanding the provisions of Sections 3.2 or 3.3 below, under no circumstances will the restrictions on Disposition of the Common Stock set forth in Section 2.1 hereof lapse unless and until the Committee determines that the Performance Requirement has been satisfied.] [(b)/(c)] Forfeiture Upon Termination of Employment. Upon the effective date of a termination of the Grantees employment with the Corporation occurring prior to the lapse of restrictions on Disposition pursuant to this Section 3.1 or pursuant to Sections 3.2 or 3.3 hereof, all
shares of Common Stock then subject to restrictions on Disposition shall immediately be forfeited and returned to the Corporation without consideration or further action being required of the Corporation [except in situations where vesting would have occurred but for [(i)] a delay pursuant to Section 3.4 below[; or (ii) the fact that a determination has not yet been made as to whether the Performance Requirement has been satisfied. In the event that the Committee has already determined that the Performance Requirement has been satisfied as of the date of the Grantees termination, the restrictions on Disposition shall lapse on the termination date unless Section 3.4 requires a later vesting date. If, however, the Committee has not determined whether the Performance Requirement has been satisfied as of the date of Grantees termination, the restrictions on Disposition shall lapse immediately if and when the Committee determines that the Performance Requirement has been satisfied, unless Section 3.4 requires a later vesting date]]. The effective date of the Grantees termination shall be the date upon which the Grantee ceases to perform services as an employee of the Corporation, without regard to accrued vacation, severance or other benefits or the characterization thereof on the payroll records of the Corporation. 3.2 Specified Terminations of Employment. (a) Death, [Without Cause/Good Reason/Constructive Discharge,] [Age & Service Rule/Retirement, Specified Age,] [Displacement/Transition/Separation Pay,] Sale of Business. The restrictions on Disposition of the Common Stock set forth in Section 2.1 hereof shall lapse immediately upon termination of the Grantees employment with the Corporation if such termination is by reason of (i) the Grantees death, [(ii) the Grantees termination of employment by the Corporation without Cause, as defined in ,] [(iii) the Grantees termination of employment by Grantee for Good Reason,/Constructive Discharge as defined in ,] [(iv) The Grantees retirement with the consent of the Corporation,] [(v)] the Grantees termination on or after the Grantees attainment of age 55 but prior to age 60 with ten years of credited employment with the Corporation, [(vi)] the Grantees termination on or after the Grantees attainment of age 60, [(vii)] [a displacement/separation, as determined in accordance with the Mellon Financial Corporation Displacement Program/The Bank of New York Company, Inc. Separation Plan/The Bank of New York Mellon Corporation Separation Plan, as then in effect, or] a termination providing transition/separation pay [from the Corporation], or [(viii)] the Grantees termination by the Corporation due to a sale of a business unit or subsidiary of the Corporation by which the Grantee is employed. (b) [Other Age & Service Rule. If the Grantees employment with the Corporation terminates on or after the Grantees attainment of age 55 but prior to age 60 and the Grantee has less than 10 years of credited employment with the Corporation, effective immediately upon the Grantees termination of employment, the restrictions on Disposition of the Common Stock set forth in Section 2.1 shall lapse upon a number of shares of Common Stock equal to (i) the number of whole and fractional months from the Grant Date through the date upon which the Grantees employment is terminated [(without regard to any delayed vesting under Section 3.4 below)], divided by (ii) [ ], with the result multiplied by (iii) the number of shares of Common Stock awarded hereunder, [with any resulting fractional share rounded up. All then remaining shares of Common Stock awarded hereunder shall be forfeited immediately] [with that result reduced by (iv) the number of shares of Common Stock granted hereunder upon which the restrictions on Disposition had already lapsed as of the date of termination. In such case, any resulting fractional share shall be rounded up and all then remaining shares of Common Stock awarded hereunder shall be forfeited immediately].
(c) Change in Control. If the Grantees employment is terminated by the Corporation without cause, as defined in Section 3.5(e) of the Plan, within two years after a Change in Control occurring after the Grant Date, the restrictions on Disposition of the Common Stock set forth in Section 2.1 hereof shall lapse immediately upon termination of the Grantees employment with the Corporation. 3.3 Disability. The restrictions on Disposition of the Common Stock set forth in Section 2.1 hereof shall lapse on the first day for which the Grantee receives longterm disability benefits under the Corporations longterm disability plan. [3.4 Delayed Vesting. Notwithstanding the foregoing provisions of this Section 3, any vesting under this Agreement which would otherwise occur within one year from the Grant Date will be delayed until the one year anniversary of the Grant Date except in the case of vesting due to death, disability or as may be required by prior contractual obligation.] SECTION 4: Miscellaneous 4.1 No Right to Employment. Neither the award of Common Stock nor anything else contained in this Agreement or the Plan shall be deemed to limit or restrict the right of the Corporation to terminate the Grantees employment at any time, for any reason, with or without cause. 4.2 Compliance with Laws. Notwithstanding any other provision of this Agreement, the Grantee hereby agrees to take any action, and consents to the taking of any action by the Corporation, with respect to the Common Stock awarded hereunder necessary to achieve compliance with applicable laws or regulations in effect from time to time. Any determination in this connection by the Committee shall be final, binding and conclusive. The Corporation shall in no event be obligated to register any securities pursuant to the Securities Act of 1933 (as the same shall be in effect from time to time) or to take any other affirmative action in order to cause the award of Common Stock under the Plan, the lapsing of restrictions thereon or the delivery of shares in bookentry form or otherwise therefore to comply with any law or regulation in effect from time to time. [The Grantee understands and agrees that, during the U.S. Treasurys Troubled Asset Relief Program (TARP) restricted period, awards to any individual who is one of the Corporations senior executive officers or one of the Corporations most highly compensated employees under the American Recovery and Reinvestment Act of 2009 (ARRA) may be affected by ARRA and the regulations as may be adopted pursuant to ARRA. As a result, the Corporation may reduce, delay vesting, revoke, cancel, claw back or impose different terms and conditions, and/or pay in an alternative form for any such individual if the Corporation deems it necessary or advisable to do so in its sole discretion in order to comply with the Emergency Economic Stabilization Act of 2008 as amended by ARRA or other applicable law or regulation.] [For the avoidance of doubt, the Grantee understands and agrees that if any payment or other obligation under of arising from this Agreement, including without limitation dividend rights, or the Plan is in conflict with or is restricted by any U.S. federal, state or local or other applicable law (including without limitation, any regulations and interpretations thereunder) [or any agreement between the Corporation and any government regulator or listing requirements of the principal securities exchange on which the Corporations shares are then listed], then the Corporation may reduce, revoke, cancel, adjust, clawback or impose different terms and conditions to the extent it deems necessary or appropriate, in its sole discretion, to effect such compliance.] [If
the Corporation determines that it is necessary or appropriate for any payments under this Agreement to be delayed in order to avoid additional tax, interest and or penalties under Section 409A of the Internal Revenue Code, then the payments would not be made before the date which is the first day following the six (6) month anniversary of the date of the Grantees termination of employment (or upon earlier death).] 4.3 Plan Governs. This is the Award Agreement referred to in Section 2.3(b) of the Plan. To the extent that any written and effective offer letter or employment agreement with the Grantee contains terms with respect to vesting of restricted stock that are more favorable than those contained herein, such terms shall apply as if part of this Agreement, provided that the Grantee has complied with the terms of such offer letter and/or employment agreement. In the event of any inconsistency between the provisions of this Agreement and the Plan, the Plan shall govern. A copy of the Plan may be obtained from the Corporate Compensation Division of the Corporations Human Resources Department. No amount of income received by the Grantee pursuant to the Common Stock shall be considered compensation for purposes of any pension or retirement plan, insurance plan or any other employee benefit plan of the Corporation. 4.4 Liability for Breach. The Grantee hereby indemnifies the Corporation and holds it harmless from and against any and all damages or liabilities incurred by the Corporation (including liabilities for attorneys fees and disbursements) arising out of any breach by the Grantee of this Agreement, including, without limitation, any attempted Disposition in violation of Section 2.1 hereof. 4.5 Tax Withholding. The Grantee shall be advised by the Corporation as to the amount of any federal, state, local or foreign income or employment taxes required to be withheld on the compensation income resulting from the award of, or lapse of restrictions on, the Common Stock. The Grantee shall pay any taxes required to be withheld directly to the Corporation in cash upon request; provided, however, that where the restrictions on Disposition set forth in Section 2.1 hereof have lapsed the Grantee may satisfy such obligation in whole or in part by requesting the Corporation in writing to withhold from the Common Stock otherwise deliverable to the Grantee or by delivering to the Corporation shares of its Common Stock having a Fair Market Value, on the date the restrictions lapse equal to the amount of the aggregate minimum statutory withholding tax obligation to be so satisfied, in accordance with such rules as the Committee may prescribe. If the Grantee does not make such request, the Corporation will automatically net unless it has previously requested payment in cash. The Corporations obligation to issue or credit shares to the Grantee is contingent upon the Grantees satisfaction of an amount sufficient to satisfy any federal, state, local or other withholding tax requirements, notwithstanding the lapse of the restrictions thereon. 4.6 Forfeiture and Repayment. If: (a) during the course of the Grantees employment with the Corporation, the Grantee engages in conduct or it is discovered that the Grantee engaged in conduct that is materially adverse to the interests of the Corporation, including failures to comply with the Corporations rules or regulations, fraud, or conduct contributing to any financial restatements or irregularities; (b) during the course of the Grantees employment with the Corporation and, unless the Grantee has posttermination obligations or duties owed to the Corporation or its Affiliates pursuant to an individual agreement set forth in subsection [(c)/(d)] below, for one year thereafter, the Grantee engages in solicitation and/or diversion of customers or employees [and/or] [; (c) during the course of the Grantees employment with the Corporation, the Grantee engages in] competition with the Corporation or its Affiliates; or
[(c)/(d)] following termination of the Grantees employment with the Corporation for any reason, with or without cause, the Grantee violates any posttermination obligations or duties owed to the Corporation or its Affiliates or any agreement with the Corporation or its Affiliates, including without limitation, any employment agreement, confidentiality agreement or other agreement restricting postemployment conduct; the Corporation may cancel all or any portion of this award with respect to the shares subject to restrictions on Disposition and/or require repayment of any shares (or the value thereof) or amounts which were acquired from the award. The Corporation shall have sole discretion to determine what constitutes such conduct. [The Grantee further agrees and acknowledges that the award is also subject to recovery or clawback by the Corporation under and pursuant to the terms of .] 4.7 Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of New York, other than any choice of law provisions calling for the application of laws of another jurisdiction. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Grant Date.
[Name] 6
Exhibit 10.135 THE BANK OF NEW YORK MELLON CORPORATION The Bank of New York Mellon Corporation LongTerm Incentive Plan FORM OF NONSTATUTORY STOCK OPTION AGREEMENT The Bank of New York Mellon Corporation (the Corporation) and , a key employee (the Optionee) of the Corporation, in consideration of the covenants and agreements herein contained and intending to be legally bound hereby, agree as follows: SECTION 1: Grant 1.1 Grant of Option. Subject to the terms and conditions set forth in this Nonstatutory Stock Option Agreement (this Agreement) and to the terms of The Bank of New York Mellon Corporation LongTerm Incentive Plan (the Plan), the Corporation hereby grants to the Optionee a stock option (the Option) to purchase shares of the Corporations common stock, par value $.01, (the Common Stock) from the Corporation at a price of $ per share (the Option Price), which is the Fair Market Value of the shares of Common Stock covered by the Option on (the Grant Date). Capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan. 1.2 Acceptance. The Optionee accepts the grant of the Option confirmed hereby, and agrees to be bound by the terms and provisions of this Agreement and the Plan, as the Agreement and the Plan may be amended from time to time; provided, however, that no alteration, amendment, revocation or termination of the Agreement or the Plan shall, without the written consent of the Optionee, adversely affect the rights of the Optionee with respect to the Option. SECTION 2: Vesting, Exercise and Expiration 2.1 Vesting. Subject to Sections 3 and 4.8 of this Agreement, the Option will vest and become exercisable in annual installments over a fouryear vesting period according to the following vesting schedule:
1
/4 of the Option will vest upon the 1 st anniversary of the Grant Date;
an additional 1/4 of the Option will vest upon the 2 nd anniversary of the Grant Date; an additional 1/4 of the Option will vest upon the 3 rd anniversary of the Grant Date; and an additional 1/4 of the Option will vest upon the 4 th anniversary of the Grant Date; provided that the Optionee is employed by the Corporation on such anniversary, with all fractional shares, if any, rounded up and vesting as whole shares upon the earlier vesting date(s). Corporation, when used herein with reference to employment of the Optionee, shall include any Affiliate of the Corporation. To the extent vested, the Option may be exercised in whole or in part from the date of vesting through and including the Option Expiration Date, as defined in Section 2.3 hereof, subject to any limits provided in Section 3.
2.2 Exercise. This Option shall be exercised by the Optionee by delivering to the Corporate Compensation Division of the Corporations Human Resources Department (i) this Agreement signed by the Optionee, (ii) a written (including electronic) notification specifying the number of shares which the Optionee then desires to purchase, (iii) a check payable to the order of the Corporation, which may include cash forwarded through the broker or other agentsponsored exercise or financing program approved by the Corporation, and/or shares, or certification of ownership for shares, of Common Stock equal in value to the aggregate Option Price of such shares and/or an instruction from the Optionee directing the Corporation to withhold shares of Common Stock otherwise receivable upon exercise of this Option (subject to any restrictions regarding prior ownership of such shares or an equivalent number of shares imposed by the Corporation), and (iv) a stock power executed in blank for any shares of Common Stock delivered or withheld pursuant to clause (iii) hereof. Shares of Common Stock surrendered, certified or withheld in exercise of this Option shall be subject to terms and conditions imposed by the Committee and shall be valued as of the date, and by the means, prescribed by the Corporations procedures in effect at the time of such exercise and in accordance with the terms of the Plan. As soon as practicable after each exercise of this Option and compliance by the Optionee with all applicable conditions, the Corporation will credit the number of shares of Common Stock, if any, which the Optionee is entitled to receive upon such exercise under the provisions of this Agreement to a bookentry account in the Optionees name. 2.3 Expiration. The Option shall expire and cease to be exercisable on the earlier of (a) either (i) the last trading day immediately preceding the ten year anniversary of the Grant Date or, if earlier, (ii) the date of cancellation provided for in Section 4.8 (the earlier of (i) and (ii) referred to as the Option Expiration Date) or (b) the expiration date provided for in Section 3. SECTION 3: Termination of Employment and Disability 3.1 Termination of Employment. (a) General. If the Optionees employment with the Corporation is terminated, this Option will expire on the Termination Date except as provided in Sections 3.2 or 3.3 hereof. (b) Meaning of Terms. As used in this Agreement, (i) Termination Date shall mean the date upon which the Optionee ceases performing services as an employee of the Corporation, without regard to accrued vacation, severance or other benefits or the characterization thereof on the payroll records of the Corporation; and (ii) Payroll Separation Date shall mean the last day for which the Optionee receives salary continuance or separation/transition pay from the Corporation, if any, without regard to any period during which receipt of payments may be delayed to avoid imposition of additional taxes under Section 409A of the Internal Revenue Code of 1986, as amended (the Code). If the Optionee does not receive salary continuance or separation/transition pay from the Corporation, the Payroll Separation Date will be the same date as the Termination Date.
3.2 Specified Terminations of Employment. (a) [Termination without Cause. If the Optionees employment is terminated by the Corporation without cause, as defined in Section 3.5(e) of the Plan, the unvested portion of the Option will expire on the Termination Date and the Optionee will have thirty days following the Termination Date to exercise the portion of the Option that was vested on the Termination Date; provided, however, (i) if the Optionee is entitled to benefits under the Mellon Financial Corporation Displacement Program/The Bank of New York Company, Inc. Separation Plan/The Bank of New York Mellon Corporation Separation Plan, then in effect (and such plan does not otherwise provide for vesting and exercise periods for stock options), or is entitled to separation/transition pay, the unvested portion of the Option will expire on the Payroll Separation Date and the vested portion of the Option may be exercised for one year following the Payroll Separation Date, or (ii) if the Optionee is entitled to benefits under The Bank of New York Company, Inc. Separation Plan and such plan provides for vesting and exercise periods for stock options, then such vesting and exercise periods described in such plan shall apply; provided further, in any case the Option may not extend beyond the Option Expiration Date.][Termination without Cause/Constructive Discharge. If the Optionees employment is terminated (i) by the Corporation without Cause, as defined in ; or (ii) by the Optionee for constructive discharge, as was defined in , this Option shall automatically become fully exercisable and the Optionee shall have the right to exercise this Option until the Option Expiration Date.] (b) [Termination following Satisfaction of Age and Service Criteria][Retirement]: (i) [Age 55 60. If the Payroll Separation Date occurs on or after the Optionees attainment of age 55 but prior to age 60, the Option will continue to vest as set forth in Section 2.1 hereof through the Payroll Separation Date and the Optionee will have three years from the Payroll Separation Date to exercise the portion of the Option that was vested as of such date (or, if earlier, until the Option Expiration Date).] [If the Optionees employment with the Corporation is terminated by reason of retirement with the consent of the Corporation, this Option will automatically become fully exercisable upon the Termination Date and the Optionee will have the right to exercise this Option until the Option Expiration Date.] (ii) [To the extent Subsection 3.2(b)(i) hereof does not apply, if the Optionees employment with the Corporation is terminated and] [Age 60 65. If] the Payroll Separation Date occurs on or after the Optionees attainment of age 60 but prior to age 65, the Option will continue to vest as set forth in Section 2.1 hereof during the five year period following the Payroll Separation Date and the Optionee will have five years following the Payroll Separation Date to exercise the Option to the extent it is or becomes vested during such period (or, if earlier, until the Option Expiration Date). (iii) [To the extent Subsection 3.2(b)(i) hereof does not apply, if the Optionees employment with the Corporation is terminated and] [Age 65 and over. If] the Payroll Separation Date occurs on or after the Optionees attainment of age 65, this Option will automatically become fully exercisable upon the Termination Date (or, if the Optionee has not attained age 65 on the Termination Date, upon the date on which the Optionee attains age 65) and the Optionee will have seven years following the Payroll Separation Date to exercise the Optionees vested Option (or if earlier, until the Option Expiration Date).
(c) Sale of Business Unit or Subsidiary. If the Optionees employment with the Corporation is terminated by the Corporation due to the sale of a business unit or subsidiary of the Corporation by which the Optionee is employed, and the Optionee is not displaced/separated pursuant to the Mellon Financial Corporation Displacement Program/The Bank of New York Company, Inc. Separation Plan/The Bank of New York Mellon Corporation Separation Plan, then in effect, or otherwise entitled to transition/separation pay, upon the Termination Date any then unvested Option shall vest on a prorata basis equal to (i) the number of whole and fractional months from the Grant Date through the Termination Date [(without regard to any delayed vesting under Section 3.4 below)], divided by (ii) 48 months, with the result multiplied by (iii) the total number of the shares subject to the Option, with that result reduced by (iv) the number of shares subject to the Option that were already vested as of the Termination Date, and the remaining portion of the Option will expire immediately. In such case, the Optionee will have two years following the Termination Date to exercise the Option that was or became vested as of the Termination Date (or if earlier, until the Option Expiration Date). (d) Death. If the Optionee shall die while employed by the Corporation, or within a period following termination of employment during which this Option remains exercisable, the then remaining unvested portion of this Option shall automatically become fully exercisable and the executor or administrator of the Optionees estate or the person or persons to whom the Optionee shall have transferred such right by Will or by the laws of descent and distribution will have [two years following the date of death to exercise the Optionees vested Option (or if earlier, until the Option Expiration Date)] [the right to exercise this Option until the Option Expiration Date]. (e) Change in Control. If the Optionees employment is terminated by the Corporation without cause, as defined in Section 3.5(e) of the Plan, within two years after a Change in Control occurring after the Grant Date, this Option shall automatically become fully exercisable and the Optionee will have one year following the Payroll Separation Date to exercise the Optionees vested Option (or if earlier, until the Option Expiration Date) [or such longer period as provided in Section 3.2(a) hereof]. [(f) Special Termination Right. If the Optionees employment is terminated pursuant to the terms and conditions of the Special Termination Right, as such term is defined in , the unvested portion of the Option will fully vest and become immediately exercisable upon the Termination Date, and will continue to be outstanding and in effect for (i) five years following the Termination Date if such termination occurs on or after Optionees attainment of age 55 or (ii) three years following the Termination Date if such termination occurs before Optionees attainment of age 55 (or, in either case, if earlier, until the Option Expiration Date).] 3.3 Disability. This Option shall automatically vest and become fully exercisable on the first day for which the Optionee receives longterm disability benefits under the Corporations longterm disability plan, and the Optionee will have [two years following such date to exercise the Optionees vested Option (or if earlier, until the Option Expiration Date)] [the right to exercise this Option until the Option Expiration Date].
[3.4 Delayed Vesting. Notwithstanding the foregoing provisions of this Section, any vesting under this Agreement which would otherwise occur within one year from the Grant Date will be delayed until the one year anniversary of the Grant Date except in the case of vesting due to death, disability or as may be required by prior contractual obligation.] SECTION 4: Miscellaneous 4.1 No Right to Employment. Neither the grant of the Option nor anything else contained in this Agreement or the Plan shall be deemed to limit or restrict the right of the Corporation to terminate the Optionees employment at any time, for any reason, with or without cause. 4.2 Nontransferable. This Option may not be transferred except by the Optionee upon his or her death. No other assignment or transfer of this Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise shall be permitted, but immediately upon any such assignment or transfer this Option shall terminate and become of no further effect. During the Optionees life this Option shall be exercisable only by the Optionee, and after the Optionees death the Option shall remain subject to any restrictions on exercise and otherwise as if held by the Optionee. Whenever the word Optionee is used in any provision of this Option under circumstances where the provision should logically be construed to apply to the executors, the administrators or other persons to whom this Option may be transferred, the word Optionee shall be deemed to include such person or persons. 4.3 Adjustment. This Option is subject to adjustment as provided in Article IX of the Plan. 4.4 Compliance with Laws. Notwithstanding any other provision hereof, the Optionee hereby agrees that he or she will not exercise the Option, and that the Corporation will not be obligated to issue any shares to the Optionee hereunder, if the exercise thereof or the issuance of such shares shall constitute a violation by the Optionee or the Corporation of any provision of law or regulation of any governmental authority. Any determination in this connection by the Committee shall be final, binding and conclusive. The Corporation shall in no event be obliged to register any securities pursuant to the Securities Act of 1933 (as the same shall be in effect from time to time) or to take any other affirmative action in order to cause the exercise of the Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. [The Optionee understands and agrees that, during the U.S. Treasurys Troubled Asset Relief Program (TARP) restricted period, awards to any individual who is one of the Corporations senior executive officers or one of the Corporations most highly compensated employees under the American Recovery and Reinvestment Act of 2009 (ARRA) may be affected by ARRA and the regulations as may be adopted pursuant to ARRA. As a result, the Corporation may reduce, delay vesting, revoke, cancel, claw back or impose different terms and conditions, and/or pay in an alternative form for any such individual if the Corporation deems it necessary or advisable to do so in its sole discretion in order to comply with the Emergency
Economic Stabilization Act of 2008 as amended by ARRA or other applicable law or regulation.] [For the avoidance of doubt, the Optionee understands and agrees that if any payment or other obligation under of arising from this Agreement or the Plan is in conflict with or is restricted by any U.S. federal, state or local or other applicable law (including without limitation, any regulations and interpretations thereunder), then the Corporation may reduce, revoke, cancel, clawback or impose different terms and conditions to the extent it deems necessary or appropriate, in its sole discretion, to effect such compliance.] 4.5 Plan Governs. This is the Award Agreement referred to in Section 2.3(b) of the Plan. To the extent that any written and effective offer letter or employment agreement with the Optionee contains terms with respect to vesting and exercise periods of stock options that are more favorable than those contained herein, such terms shall apply as if part of this Agreement, provided that the Optionee has complied with the terms of such offer letter and/or employment agreement. In the event of any inconsistency between the provisions of this Agreement and the Plan, the Plan shall govern. A copy of the Plan may be obtained from the Corporate Compensation Division of the Corporations Human Resources Department. No amount of income received by an Optionee pursuant to this Agreement shall be considered compensation for purposes of any pension or retirement plan, insurance plan or any other employee benefit plan of the Corporation. 4.6 Nonstatutory Stock Option. The parties hereto agree that the Option granted hereby is not, and should not be construed to be, an incentive stock option under Section 422 of the Code. 4.7 Tax Withholding. In each case where the Optionee exercises this Option in whole or in part, the Corporation will notify the Optionee of the amount of withholding tax, if any, required under federal and, where applicable, state and local law, and the Optionee shall, forthwith upon the receipt of such notice, remit the required amount to the Corporation or, in accordance with such regulations as the Committee may prescribe, elect to have the withholding obligation satisfied in whole or in part by the Corporation withholding full shares of Common Stock and crediting them against the withholding obligation. The Corporations obligation to issue or credit shares to the Optionee is contingent upon the Optionees satisfaction of an amount sufficient to satisfy any federal, state, local or other withholding tax requirements. 4.8 Forfeiture and Repayment. If: (a) during the course of the Optionees employment with the Corporation or, if longer, the period during which this Option is outstanding, the Optionee engages in conduct or it is discovered that the Optionee engaged in conduct that is materially adverse to the interests of the Corporation, including failures to comply with the Corporations rules or regulations, fraud, or conduct contributing to any financial restatements or irregularities; (b) during the course of the Optionees employment with the Corporation and, unless the Optionee has posttermination obligations or duties owed to the Corporation or its Affiliates pursuant to an individual agreement set forth in subsection [(c)/(d)] below, for one year thereafter, the Optionee engages in solicitation and/or diversion of customers or employees [and/or] [; (c) during the course of the Optionees employment with the Corporation, the Optionee engages in] competition with the Corporation or its Affiliates]; or
[(c)/(d)] following termination of the Optionees employment with the Corporation for any reason, with or without cause, the Optionee violates any posttermination obligations or duties owed to the Corporation or its Affiliates or any agreement with the Corporation or its Affiliates, including without limitation, any employment agreement, confidentiality agreement or other agreement restricting postemployment conduct; the Corporation may cancel all or any portion of this Option with respect to the shares not yet exercised and/or require repayment of any shares (or the value thereof) or amounts which were acquired from exercise of the Option. The Corporation shall have sole discretion to determine what constitutes such conduct. [The Optionee further agrees and acknowledges that the award is also subject to recovery or clawback by the Corporation under and pursuant to the terms of .] 4.9 Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of New York, other than any choice of law rules calling for the application of laws of another jurisdiction. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Grant Date.
Exhibit 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES The Bank of New York Mellon Corporation
2010
2009
2006 (b)
Earnings Income from continuing operations before income taxes Fixed charges, excluding interest on deposits Income from continuing operations before income taxes and fixed charges, excluding interest on deposits Interest on deposits Income from continuing operations before income taxes and fixed charges, including interest on deposits Fixed charges Interest expense, excluding interest on deposits Onethird net rental expense (c) Total fixed charges, excluding interest on deposits Interest on deposits Total fixed charges, including interest on deposits Earnings to fixed charges ratios Excluding interest on deposits Including interest on deposits
701
8.11 6.18
(3.16) (2.15)
2.91 1.70
3.82 1.91
3.52 1.95
Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. Results for 2006 include legacy The Bank of New York Company, Inc. only. The proportion deemed representative of the interest factor.
FINANCIAL SECTION
THE BANK OF NEW YORK MELLON CORPORATION 2010 ANNUAL REPORT TABLE OF CONTENTS
Financial Summary Managements Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations: General Overview 2010 events Summary of financial results Fee and other revenue Operations of consolidated asset management funds Net interest revenue Noninterest expense Support agreements Income taxes Review of businesses International operations Critical accounting estimates Consolidated balance sheet review Liquidity and dividends Commitments and obligations Offbalance sheet arrangements Capital Risk management Trading activities and risk management Foreign exchange and other trading Asset/liability management Business continuity Supplemental Information: Explanation of NonGAAP financial measures (unaudited) Rate/volume analysis (unaudited) Recent Accounting and Regulatory Developments Selected Quarterly Data (unaudited) Forwardlooking Statements Glossary Report of Management on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm
Page 2
4 4 5 5 8 10 11 14 15 16 16 29 32 38 51 54 55 55 58 62 62 63 64 66 71 72 79 80 82 86 87 Page 88 90 91 92 95 102 104 105 106 110 115 117 118 118 118 119 120 121 122 122 125 126 127 129 135 138 140 148 149
Financial Statements: Consolidated Income Statement Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to Consolidated Financial Statements: Note 1Summary of significant accounting and reporting policies Note 2Accounting changes and new accounting guidance Note 3Acquisitions and dispositions Note 4Discontinued operations Note 5Securities Note 6Loans and asset quality Note 7Goodwill and intangible assets Note 8Other assets Note 9Deposits Note 10Net interest revenue Note 11Other noninterest expense Note 12Restructuring charges Note 13Income taxes Note 14Extraordinary (loss)consolidation of commercial paper conduit Note 15Longterm debt Note 16Securitizations and variable interest entities Note 17Shareholders equity Note 18Comprehensive results Note 19Stockbased compensation Note 20Employee benefit plans Note 21Company financial information Note 22Fair value of financial instruments Note 23Fair value measurement Note 24Fair value option Note 25Commitments and contingent liabilities
Note 26Derivative instruments Note 27Review of businesses Note 28International operations Note 29Supplemental information to the Consolidated Statement of Cash Flows Report of Independent Registered Public Accounting Firm Directors, Senior Management and Executive Officers Performance Graph Corporate Information Inside back cover
Table of Contents The Bank of New York Mellon Corporation (and its subsidiaries)
Financial Summary (dollar amounts in millions, except per common share amounts and unless otherwise noted) Year ended Dec. 31 Fee revenue Income of consolidated asset management funds (c) Net securities gains (losses) Net interest revenue Total revenue Provision for credit losses Noninterest expense Income (loss) from continuing operations before income taxes Provision (benefit) for income taxes Net income (loss) from continuing operations Net income (loss) from discontinued operations Extraordinary (loss) on consolidation of commercial paper conduits, net of tax Net income (loss) Net (income) loss attributable to noncontrolling interests (c) Redemption charge and preferred dividends Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation Earnings per diluted common share applicable to common shareholders of The Bank of New York Mellon Corporation: Net income (loss) from continuing operations Net income (loss) from discontinued operations Extraordinary (loss), net of tax Net income (loss) applicable to common stock At Dec. 31 Interestearning assets Assets of operations Total assets (c) Deposits Longterm debt Preferred (Series B) stock Total The Bank of New York Mellon Corporation common shareholders equity At Dec. 31 Assets under management (AUM) (in billions) Assets under custody and administration (AUC) (in trillions) Crossborder assets (in trillions) Market value of securities on loan (in billions) (f) 2010 $ 10,697 226 27 2,925 13,875 11 10,170 3,694 1,047 2,647 (66) 2,581 (63) $ 2,518 2009 $ 10,108 (5,369) 2,915 7,654 332 9,530 (2,208) (1,395) (813) (270) (1,083) (1) (283) $ (1,367) $ 2008 $ 12,342 (1,628) 2,859 13,573 104 11,523 1,946 491 1,455 14 (26) 1,443 (24) (33) 1,386 $ 2007 (a) $ 9,254 (201) 2,245 11,298 (11) 8,094 3,215 987 2,228 10 (180) 2,058 (19) 2,039 $ 2006 (b) $ 5,337 2 1,499 6,838 (20) 4,675 2,183 694 1,489 1,371 2,860 (13) 2,847
$ $
$ $
$ $
$ $
$ $
$180,541 232,493 247,259 145,339 16,517 32,354 $ 1,172 25.0 9.2 278
$161,537 212,224 212,224 135,050 17,234 28,977 $ 1,115 22.3 8.8 247
$184,591 237,512 237,512 159,673 15,865 2,786 25,264 $ 928 20.2 7.5 326
$144,883 197,656 197,656 118,125 16,873 29,403 $ 1,121 23.1 10.0 633
$ 77,462 103,206 103,206 62,146 8,773 11,429 $ 142 15.5 6.3 399
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. (b) Results for 2006 include legacy The Bank of New York Company, Inc. only. All legacy The Bank of New York Company, Inc. earnings per share and sharerelated data are presented in postmerger share count terms. (c) Includes the impact of adopting ASC 810. See Operations of consolidated asset management funds and Note 2 of the Notes to Consolidated Financial Statements for additional information. (d) Does not foot due to rounding. (e) Diluted earnings per common share for 2009 was calculated using average basic shares. Adding back the dilutive shares would result in antidilution. (f) Represents the securities on loan, both cash and noncash, managed by the Asset Servicing business.
BNY Mellon
Table of Contents Financial Summary (continued) (dollar amounts in millions, except per common share amounts and unless otherwise noted) Net income basis: Return on common equity (c) Return on tangible common equity (c) Return on average assets (c) Continuing operations basis: Return on common equity (c)(d) NonGAAP adjusted (c)(d) Return on tangible common equity NonGAAP (c)(d) NonGAAP adjusted (c)(d) Pretax operating margin (d) NonGAAP adjusted (d) Fee revenue as a percentage of total revenue excluding net securities gains (losses) (d) Fee revenue per employee (based on average headcount) (in thousands) Percentage of nonU.S. fee, net interest revenue and income of consolidated asset management funds, net of noncontrolling interests Net interest margin (on fully taxable equivalent basis) Cash dividends per common share Common dividend payout ratio Dividend yield Closing common stock price per common share Market capitalization (in billions) Book value per common share GAAP (d) Tangible book value per common share NonGAAP (d) Fulltime employees Yearend common shares outstanding (in thousands) Average total equity to average total assets $ 2010 8.1% 25.6 1.06 8.3% 9.8 26.3 28.0 27 32 78 241 36% 1.70 0.36 17.6% 1.2% 30.20 37.5 26.06 8.91 48,000 1,241,530 13.1% $ 2009 N/M N/M N/M N/M 9.3% N/M 32.1 N/M 31 78 241 32% 1.82 0.51 N/M 1.8% 27.97 33.8 23.99 7.90 42,200 1,207,835 13.4% $ 2008 5.0% 20.7 0.67 5.0% 14.2 20.5 48.7 14 39 79 290 33% (e) 1.89 (e) 0.96 80.0% 3.4% 28.33 32.5 22.00 5.18 42,500 1,148,467 13.7% $ 2007 (a) 11.0% 29.3 1.49 10.9% 13.6 29.2 33.6 28 36 80 291 32% 2.05 0.95 43.6% 1.9% 48.76 55.9 25.66 8.00 41,200 1,145,983 13.6% $ 2006 (b) 27.6% 50.7 2.67 14.3% 15.5 26.7 28.0 32 35 78 262 30% 2.01 0.91 23.1% 2.2% 41.73 29.8 16.03 7.73 22,400 713,079 9.7%
$ $
$ $
$ $
$ $
$ $
Capital ratios at Dec. 31 (f) Tier 1 capital ratio 13.4% 12.1% 13.2% 9.3% 8.2% Total (Tier 1 plus Tier 2) capital ratio 16.3 16.0 16.9 13.2 12.5 Leverage capital ratio 5.8 6.5 6.9 6.5 6.7 BNY Mellon shareholders equity to total assets ratio (d) 13.1 13.7 10.6 14.9 11.1 Tangible BNY Mellon shareholders equity to tangible assets of operations ratio NonGAAP (d) 5.8 5.2 3.8 5.2 5.7 Tier 1 common equity to riskweighted assets ratio (d) 11.8 10.5 9.4 7.6 6.7 (a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. (b) Results for 2006 include legacy The Bank of New York Company, Inc. only. All legacy The Bank of New York Company, Inc. earnings per share and sharerelated data are presented in postmerger share count terms. (c) Calculated before the extraordinary losses in 2008 and 2007. (d) See Supplemental Information beginning on page 66 for a calculation of these ratios. (e) Excluding the SILO/LILO charge, the percentage of nonU.S. fee and net interest revenue was 32% and the net interest margin was 2.21% for the year ended Dec. 31, 2008. (f) Includes discontinued operations. BNY Mellon 3
Table of Contents Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations
General In this Annual Report, references to our, we, us, BNY Mellon, the Company, and similar terms for periods on or after July 1, 2007 refer to The Bank of New York Mellon Corporation and references to our, we, us, the Company, and similar terms prior to July 1, 2007 refer to The Bank of New York Company, Inc. BNY Mellons actual results of future operations may differ from those estimated or anticipated in certain forwardlooking statements contained herein for reasons which are discussed below and under the heading Forwardlooking Statements. When used in this Annual Report, words such as estimate, forecast, project, anticipate, confident, target, expect, intend, continue, seek, believe, plan, goal, could, should, may, will, strategy, synergies, opportunities, trends, and words of similar meaning, signify forwardlooking statements in addition to statements specifically identified as forwardlooking statements. Certain business terms used in this document are defined in the Glossary. The following should be read in conjunction with the Consolidated Financial Statements included in this Annual Report. Investors should also read the section entitled Forwardlooking Statements. How we reported results All information in this Annual Report is reported on a continuing operations basis, unless otherwise noted. For a description of discontinued operations, see Note 4 in the Notes to Consolidated Financial Statements. Throughout this Annual Report, certain measures, which are noted, exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on periodtoperiod comparisons, which relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present certain amounts on a fully taxable equivalent (FTE) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and taxexempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See Supplemental information Explanation of NonGAAP financial measures beginning on page 66 for a reconciliation of financial measures presented in accordance with GAAP to adjusted nonGAAP financial measures. On July 1, 2007, The Bank of New York Company, Inc. and Mellon Financial Corporation (Mellon Financial) merged into The Bank of New York Mellon Corporation (together with its consolidated subsidiaries, BNY Mellon), with BNY Mellon being the surviving entity. Results for 2007 reflect six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. Results prior to 2007 reflect legacy The Bank of New York Company, Inc. only. Overview BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a leading manager and servicer of global financial assets, operating in 36 countries and serving more than 100 markets. Our global client base consists of the worlds largest financial institutions, corporations, government agencies, highnetworth individuals, families, endowments and foundations and related entities. At Dec. 31, 2010, we had $25.0 trillion in assets under custody and administration and $1.17 trillion in assets under management, serviced $12.0 trillion in outstanding debt and, on average, processed $1.6 trillion of global payments per day. BNY Mellons businesses benefit from the global growth in financial assets and from the globalization of the investment process. Over the long term, our financial goals are focused on deploying capital to accelerate the longterm growth of our businesses and achieving superior total returns to shareholders by generating first quartile earnings per share growth over time relative to a group of peer companies. Key components of our strategy include: providing superior client service versus peers; strong investment performance relative to investment benchmarks; abovemedian revenue growth relative to peer companies; increasing the percentage of revenue and income derived from outside the U.S.; successful integration of acquisitions; competitive margins; and positive operating leverage. We have established Tier 1 capital as our principal capital measure and have established a targeted ratio of Tier 1 capital to riskweighted assets of 10%. We expect to update our capital targets once Basel III guidelines are finalized.
BNY Mellon
2010 events Acquisition of Global Investment Servicing, Inc. On July 1, 2010, BNY Mellon acquired Global Investment Servicing, Inc. (GIS) for cash of $2.3 billion. GIS provides a comprehensive suite of products that includes subaccounting, fund accounting/administration, custody, managed account services and alternative investment services. GIS is based in Wilmington, Delaware, and has approximately 4,500 employees in locations across the U.S. and Europe. At June 30, 2010, GIS had approximately $719 billion in assets under administration, including $449 billion in assets under custody. GIS is included in the Institutional Services Group for reporting purposes. At Dec. 31, 2010, approximately $6.8 billion of deposits related to GIS are expected to transition to BNY Mellon by the end of 2011. Until the transition is completed, we will receive net economic value payments for these deposits. Acquisition of BHF Asset Servicing GmbH On Aug. 2, 2010, BNY Mellon acquired BHF Asset Servicing GmbH (BAS) for cash of EUR281 million (US$370 million). This transaction included the purchase of Frankfurter Service Kapitalanlage Gesellschaft mbH (FSKAG), a wholly owned fund administration affiliate. BAS and FSKAG became part of BNY Mellons Asset Servicing business. The combined business offers a full range of tailored solutions for investment companies, financial institutions and institutional investors in Germany with EUR569 billion (US$744 billion) in assets under custody and administration and depotbanking volume of EUR122 billion (US$159 billion) at acquisition. The aforementioned acquisitions were accretive to earnings in 2010. Asset Management joint venture in Shanghai In July 2010, the China Securities Regulatory Commission authorized BNY Mellon and Western Securities to establish a joint venture fund management company in China. The new company, BNY Mellon Western Fund Management Company Limited (BNY Mellon Western Fund Management), is owned by BNY Mellon (49%) and Western Securities (51%). BNY Mellon Western Fund Management manages domestic Chinese securities in a range of local retail fund products. BNY Mellon Western Fund Management also focuses on leveraging distribution within the Chinese banking and securities sectors. Acquisition of I3 Advisors On Sept. 1, 2010, BNY Mellon acquired I3 Advisors of Toronto, an independent wealth advisory company with more than C$3.8 billion in assets under advisement at acquisition. This was BNY Mellons first wealth management acquisition in Canada. Common stock offering In June 2010, BNY Mellon priced 25.9 million common shares in an underwritten public offering, at $27.00 per common share. In connection with this offering, BNY Mellon entered into a forward sale agreement with a forward purchaser, who borrowed and sold to the public through the underwriters shares of the Companys common stock. In September 2010, BNY Mellon settled the forward sale agreement. At settlement, BNY Mellon received net proceeds of approximately $677 million. The proceeds were primarily used to fund the acquisition of GIS. Adoption of new accounting standards On Jan. 1, 2010, we adopted ASC 810, Consolidation issued by the Financial Accounting Standards Board (FASB). This statement requires ongoing assessments to determine whether an entity is a variable interest entity (VIE) and whether an enterprise is the primary beneficiary of a VIE and, accordingly, must consolidate the VIE in the enterprises financial statements. Adoption of this new statement increased consolidated total assets on our balance sheet at Dec. 31, 2010 by $14.6 billion for the consolidation of certain asset management funds, seed capital investments and securitizations. See below and Notes 2 and 16 to the Notes to Consolidated Financial Statements for additional information. Summary of financial results We reported net income from continuing operations applicable to the common shareholders of BNY Mellon of $2.6 billion, or $2.11 per diluted common share in 2010. This compares with a net loss from continuing operations of $1.1 billion, or $0.93 per diluted common share in 2009 and net income from continuing operations of $1.4 billion, or diluted earnings per common share of $1.21, in 2008.
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In 2010, the net income applicable to common shareholders, including discontinued operations, totaled $2.5 billion, or $2.05 per diluted common share, compared with a net loss of $1.4 billion, or $1.16 per diluted common share, in 2009 and net income of $1.4 billion, or $1.20 per diluted common share, in 2008. Highlights of 2010 results
Assets under custody and administration (AUC) totaled a record $25.0 trillion at Dec. 31, 2010 compared with $22.3 trillion at Dec. 31, 2009. This increase was primarily driven by the acquisitions of GIS and BAS (collectively, the Acquisitions), higher market values and net new business. (See Institutional Services Group beginning on page 22.) Assets under management (AUM) totaled a record $1.17 trillion at Dec. 31, 2010 compared with $1.12 trillion at Dec. 31, 2009. The increase was driven by higher market values and net new business. (See Asset and Wealth Management Group beginning on page 18.) Securities servicing fee revenue totaled $5.6 billion in 2010 compared with $5.0 billion in 2009. Asset servicing revenue increased as a result of the Acquisitions, higher market values and net new business. The increase in clearing services revenue was primarily driven by the GIS acquisition. Issuer services revenue was flat compared to 2009. (See Institutional Services Group beginning on page 22.) Asset and wealth management fees, including performance fees totaled $2.9 billion in 2010 compared with $2.7 billion in 2009. The increase reflects higher market values globally, the full year impact of the Insight acquisition and new business, partially offset by a reduction in money market fees due to higher fee waivers and outflows in money markets. (See Asset Management business and Wealth Management business beginning on page 20.) Foreign exchange and other trading revenue totaled $886 million in 2010 compared with $1.0 billion in 2009. The decrease primarily resulted from both lower fixed income and derivatives trading revenue and lower foreign exchange revenue. (See Fee and other revenue beginning on page 8.) Investment income and other revenue totaled $467 million in 2010 compared with $337 million in 2009. The increase primarily reflects positive foreign currency translations and higher equity investment income. (See Fee and other revenue beginning on page 8.)
Net interest revenue totaled $2.9 billion in both 2010 and 2009 as a higher yield on the restructured investment securities portfolio and higher interestearning assets in 2010 were offset by lower spreads. (See Net interest revenue beginning on page 11.) The provision for credit losses was $11 million in 2010 compared with $332 million in 2009. The decrease in the provision primarily reflects a 66% decline in criticized assets compared with Dec. 31, 2009. (See Asset quality and allowance for credit losses beginning on page 45.) Noninterest expense totaled $10.2 billion in 2010 compared with $9.5 billion in 2009. The increase reflects the impact of the Acquisitions, the fullyear impact of the Insight acquisition and higher compensation expense. (See Noninterest expense beginning on page 14.) Merger and integration (M&I) expenses were $139 million (pretax), or $0.07 per diluted common share in 2010 compared with $233 million (pretax), or $0.12 per diluted common share in 2009. (See Noninterest expense beginning on page 14.) The unrealized net of tax gain on our total investment securities portfolio was $150 million at Dec. 31, 2010 compared with a net of tax loss of $705 million at Dec. 31, 2009. The improvement in the valuation of the investment securities portfolio was due to the decline in interest rates and the tightening of credit spreads. (See Consolidated balance sheet review beginning on page 38.) Our Tier 1 capital ratio was 13.4% at Dec. 31, 2010, compared with 12.1% at Dec. 31, 2009. The increase primarily reflects earnings retention, the third quarter 2010 common equity issuance of $677 million and lower riskweighted assets, partially offset by the impact of the Acquisitions. (See Capital beginning on page 55.) Results for 2009 We reported a net loss from continuing operations applicable to the common shareholders of BNY Mellon of $1.1 billion, or $0.93 per diluted common share in 2009 and a net loss applicable to common shareholders, including discontinued operations, of $1.4 billion, or $1.16 per diluted common share. These results were primarily driven by:
Investment securities (pretax) net losses of $5.4 billion in 2009 reflecting the restructuring of the investment securities portfolio.
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A provision for credit losses of $332 million in 2009, reflecting a higher number of downgrades and deterioration in certain industry sectors. M&I expenses of $233 million (pretax). An aftertax redemption charge of $196.5 million related to the repurchase of the Series B preferred stock issued to the U.S. Treasury as part of the Troubled Asset Relief Program (TARP) Capital Purchase Program and $86.5 million for dividends/accretion on the Series B preferred stock. Results for 2009 also included lower securities servicing revenue, lower asset and wealth management fees and lower foreign exchange and other trading revenue. Results for 2008 Results for 2008 were significantly impacted by the merger with Mellon Financial. The merger increased asset servicing revenue, asset and wealth management revenue, foreign exchange and other trading revenue, treasury services revenue, distribution and servicing revenue and had a lesser impact on issuer services revenue. Noninterest expense was also significantly impacted by the merger. Results for 2008 also included:
Securities writedowns of $1.6 billion (pretax), primarily relating to negative market assumptions in the housing industry; Support agreements provided to clients which resulted in an $894 million (pretax) charge; A charge relating to certain SILOs/LILOs of $489 million (pretax) as well as the settlement of several audit cycles; M&I expenses of $483 million (pretax); A restructuring charge of $181 million (pretax) related to global workforce reduction initiatives; and The consolidation of the assets of our banksponsored commercial paper conduit, Old Slip Funding, LLC (Old Slip) which resulted in an extraordinary aftertax loss of $26 million.
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Fee and other revenue (dollars in millions unless otherwise noted) Securities servicing fees: Asset servicing Securities lending revenue Issuer services Clearing services Total securities servicing fees Asset and wealth management fees Foreign exchange and other trading revenue Treasury services Distribution and servicing Financingrelated fees Investment income Other Total fee revenue GAAP Income of consolidated asset management funds, net of noncontrolling interests Total fee revenue NonGAAP Net securities gains (losses) Total fee and other revenue NonGAAP (b) Fee revenue as a percentage of total revenue excluding securities gains (losses) (c) Market value of AUM at period end (in billions) Market value of AUC and administration at period end (in trillions) 2010 $ 2,939 150 1,460 1,005 5,554 2,868 (a) 886 517 210 195 308 (a) 159 10,697 167 (a) 10,864 27 $10,891 78% $ 1,172 $ 25.0 2009 $ 2,314 259 1,463 962 4,998 2,677 1,036 519 326 215 226 111 10,108 10,108 (5,369) $ 4,739 78% $ 1,115 $ 22.3 2008 $ 2,581 789 1,685 1,065 6,120 3,218 1,462 514 421 186 207 214 12,342 12,342 (1,628) $10,714 $ $ 79% 928 20.2
2010 vs. 2009 27% (42) 4 11 7 (14) (36) (9) 36 43 6 N/M 7 N/M 130% 5% 12%
2009 vs. 2008 (10)% (67) (13) (10) (18) (17) (29) 1 (23) 16 9 (48) (18) N/M (18) N/M (56)% 20% 10%
(a) Asset and wealth management fees exclude $125 million and investment income excludes $42 million as a result of consolidating certain asset management funds. These fees, net of noncontrolling interests, are included in income of consolidated asset management funds. This change resulted from adopting ASC 810, see Operations of consolidated asset management funds beginning on page 10. (b) Total fee and other revenue on a GAAP basis was $10,724 million in 2010, $4,739 million in 2009 and $10,714 million in 2008. Total fee revenue from the Acquisitions was $480 million in 2010. (c) See Supplemental Information beginning on page 66 for a calculation of this ratio.
Fee revenue Fee revenue increased 6% in 2010 compared with 2009, primarily reflecting the impact of the Acquisitions, the fullyear impact of the Insight acquisition, improved market values and new business, partially offset by lower foreign exchange and other trading revenue, lower distribution and servicing fees and lower securities lending revenue. Securities servicing fees Securities servicing fees were impacted by the following compared to 2009:
Asset servicing fees increased 27%, reflecting the impact of the Acquisitions, higher market values, net new business and asset inflows from existing clients.
Securities lending revenue decreased 42% as a result of narrower spreads and lower loan balances. In 2010, securities lending loan balances stabilized and spreads normalized. Issuer services fees were flat as higher Depositary Receipts revenue resulting from higher issuance, corporate action and service fees was offset by lower Corporate Trust fee revenue, reflecting continued weakness in the structured debt markets and lower money market related distribution fees, and lower Shareowner Services revenue, reflecting lower corporate action fees. Clearing services fees increased 4%, primarily as a result of the impact of the GIS acquisition and growth in mutual fund assets, partially offset by lower money market related distribution fees. See the Institutional Services Group in Review of businesses for additional details.
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Asset and wealth management fees Asset and wealth management fees totaled $2.9 billion in 2010, an increase of 7% compared with 2009. Adjusted for performance fees and income from consolidated asset management funds, net of noncontrolling interests, these fees increased 11%, compared with 2009. The increase reflects improved market values, the Insight acquisition and the impact of net new business. Total AUM for the Asset and Wealth Management Group were a record $1.17 trillion at Dec. 31, 2010, compared with $1.12 trillion at Dec. 31, 2009. The increase was primarily due to higher market values and net new business. Longterm inflows in 2010 were $48 billion and benefited from strength in institutional fixed income and global equity products and positive retail flows. The S&P 500 index was 1258 at Dec. 31, 2010, compared with 1115 at Dec. 31, 2009, a 13% increase. See the Asset and Wealth Management businesses in Review of businesses for additional details regarding the drivers of asset and wealth management fees. Foreign exchange and other trading revenue Foreign exchange and other trading revenue, which is primarily reported in the Asset Servicing business, decreased $150 million, or 14%, from $1,036 million in 2009. In 2010, foreign exchange revenue totaled $787 million, a decrease of 7% compared with 2009, driven by lower volatility. Other trading revenue totaled $99 million in 2010, a decrease of 47% compared with 2009, largely due to lower fixed income and derivatives trading revenue. Treasury services Treasury services fees, which are primarily reported in the Treasury Services business, include fees related to funds transfer, cash management and liquidity management. Treasury services fees were flat compared with 2009. Distribution and servicing fees Distribution and servicing fees earned from mutual funds are primarily based on average assets in the funds and the sales of funds that we manage or administer and are primarily reported in the Asset Management business. These fees, which include 12b1 fees, fluctuate with the overall level of net sales, the relative mix of sales between share classes and the funds market values. The $116 million decrease in distribution and servicing fee revenue in 2010 compared with 2009 primarily reflects lower money market assets under management and higher redemptions in 2009. The impact of distribution and servicing fees on income in any one period can be more than offset by distribution and servicing expense paid to other financial intermediaries to cover their costs for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement. Financingrelated fees Financingrelated fees, which are primarily reported in the Treasury Services business, include capital markets fees, loan commitment fees and creditrelated trade fees. Financingrelated fees decreased $20 million from 2009 primarily as a result of lower capital markets and credit related fees, primarily reflecting our strategy to reduce targeted risk exposure. Investment income
Investment income (in millions) Corporate/bankowned life insurance Lease residual gains Equity investment income (loss) Private equity gains (losses) Seed capital gains (losses) Total investment income 2010 $150 69 51 29 9 $308 2009 $151 90 (28) (18) 31 $226 2008 $145 89 54 1 (82) $207
Investment income, which is primarily reported in the Other and Asset Management businesses, includes income from insurance contracts, lease residual gains and losses, gains and losses on seed capital investments and private equity investments, and equity investment income (loss). The increase, compared with 2009, primarily reflects higher equity investment revenue, driven by the writedown of certain equity investments in 2009, and higher private equity gains, partially offset by lower lease residual gains and lower seed capital gains.
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Other revenue
Other revenue (in millions) Assetrelated gains Expense reimbursements from joint ventures Economic value payments Other income (loss) Total other revenue 2010 $ 22 37 7 93 $159 2009 $ 76 31 4 $111 2008 $ 45 29 140 $214
Other revenue includes assetrelated gains, expense reimbursements from joint ventures, economic value payments and other income (loss). Assetrelated 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. Economic value payments relate to deposits from the GIS acquisition that have not yet transferred to BNY Mellon. Other income (loss) primarily includes foreign currency translation, other investments and various miscellaneous revenues. Total other revenue increased compared with 2009, primarily reflecting higher foreign currency translations partially offset by lower assetrelated gains. The decrease in assetrelated gains compared with 2009 primarily reflects a gain on the sale of the VISA shares recorded in 2009. Net investment securities gains (losses) Net investment securities gains totaled $27 million in 2010 compared with losses totaling $5.4 billion in 2009. The loss in 2009 primarily resulted from a charge related to restructuring the investment securities portfolio. The following table details investment securities gains (losses) by type of security. See Consolidated balance sheet review for further information on the investment securities portfolio.
Net securities gains (losses) (in millions) AltA RMBS Prime RMBS Subprime RMBS European floating rate notes Home equity lines of credit Commercial MBS Grantor Trust Credit cards ABS CDOs Other Total net securities gains (losses) 2009 compared with 2008
2009 $ (3,113) (1,008) (322) (269) (205) (89) (39) (26) (23) (275) $ (5,369)
Fee and other revenue decreased in 2009 compared with 2008, primarily reflecting net securities losses recorded in 2009. Net securities losses totaled $5.4 billion in 2009 compared with losses of $1.6 billion in 2008. The loss in 2009 primarily resulted from a charge related to restructuring the investment securities portfolio. Fee and other revenue was also impacted by the following:
Asset servicing revenue decreased, primarily due to lower average market values in 2009, lower client activity and a stronger U. S. dollar, partially offset by new business; Securities lending revenue decreased, primarily as a result of lower spreads and lower loan balances; Issuer services revenue decreased as a result of lower Depositary Receipts revenue, lower Corporate Trust fees and lower Shareowner Services revenue; Asset and wealth management revenue decreased due to lower average global market values in 2009, lower money market related fees due to increased fee waivers and shortterm outflows, and a stronger U. S. dollar; Foreign exchange and other trading revenue decreased primarily as a result of lower foreign exchange revenue driven by lower volumes and a lower valuation of credit default swaps; Other revenue decreased primarily reflecting a lower level of foreign currency translation.
Operations of consolidated asset management funds On Jan. 1, 2010, we adopted ASC 810. See Notes 2 and 16 in the Notes to Consolidated Financial Statements for additional information. Adoption of this standard resulted in an increase in consolidated total assets on our balance sheet at Dec. 31, 2010, of $14.6 billion, or an increase of approximately 7% from Dec. 31, 2009. We also separately disclosed the following on the income statement.
10
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Income from consolidated asset management funds, net of noncontrolling interests (in millions) 2010 2009 2008 Operations of consolidated asset management funds $226 $ $ Noncontrolling interest of consolidated asset management funds 59 Income from consolidated asset management funds, net of noncontrolling interests $167 $ $ Prior to the adoption of ASC 810 on Jan. 1, 2010, income from consolidated asset management funds, net of noncontrolling interests would have been disclosed on the income statement as follows.
(in millions) Asset and wealth management revenue Investment income Total
2009 $ $
2008 $ $
Net interest revenue (dollars in millions) Net interest revenue (nonFTE) Tax equivalent adjustment Net interest revenue (FTE) NonGAAP SILO/LILO charges Net interest revenue excluding SILO/LILO charges (FTE) NonGAAP Average interestearning assets Net interest margin (FTE) Net interest margin (FTE) excluding SILO/LILO charges (FTE) NonGAAP $ 2010 2,925 19 2,944 $ 2009 2,915 18 2,933 $ 2008 2,859 21 2,880 489
Net interest revenue totaled $2.9 billion in 2010, essentially unchanged compared with 2009. Net interest revenue in 2010 reflects a higher yield on the restructured investment securities portfolio, net of lost interest on the securities sold and higher average interestearning assets, primarily offset by narrower spreads. The net interest margin was 1.70% in 2010 compared with 1.82% in 2009. The lower net interest margin in 2010 was driven by lower spreads and higher interestearning assets in a lowerrate environment, which more than offset the higher yield on the restructured investment securities portfolio. Average interestearning assets were $172.8 billion in 2010, compared with $161.0 billion in 2009. The increase in 2010 from 2009 was driven by higher client deposit levels in 2010. Average total securities increased to $60.9 billion in 2010, up from $53.2 billion in 2009, reflecting our strategy to invest in highquality, governmentguaranteed securities. 2009 compared with 2008 Net interest revenue was $2.9 billion in 2009, essentially unchanged from 2008, which included a $489 million charge related to SILO/LILOs. Excluding the SILO/LILO charges, net interest revenue decreased compared with 2008 as low interest rates resulted in a decline in the value of interestfree balances and lower spreads, offset in part by an increase in average interestearning assets driven by client deposits. The net interest margin was 1.82% in 2009 compared with 1.89% in 2008, which was negatively impacted by the SILO/LILO charges. The net interest margin, excluding the SILO/LILO charges, was 2.21% in 2008. In 2009, net interest revenue and the related margin were impacted by persistently low interest rates globally.
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Average balances and interest rates (dollar amounts in millions, presented on an FTE basis) Assets Interestearning assets: Interestbearing deposits with banks (primarily foreign banks) Interestbearing deposits held at the Federal Reserve and other central banks Federal funds sold and securities under resale agreements Margin loans Nonmargin loans: Domestic offices: Consumer Commercial Foreign offices Total nonmargin loans Securities: U.S. government obligations U.S. government agency obligations State and political subdivisions Other securities: Domestic offices Foreign offices Total other securities Trading securities: Domestic offices Foreign offices Total trading securities Total securities Total interestearning assets Allowance for loan losses Cash and due from banks Other assets Assets of discontinued operations Assets of consolidated asset management funds Total assets Liabilities and equity Interestbearing deposits: Domestic offices: Money market rate accounts Savings Certificates of deposits of $100,000 & over Other time deposits Total domestic Foreign offices: Banks Government and official institutions Other Total foreign Total interestbearing deposits Federal funds purchased and securities sold under repurchase agreements Trading liabilities Other borrowed funds: Domestic offices Foreign offices Total other borrowed funds Payables to customers and brokerdealers Longterm debt Total interestbearing liabilities Total noninterestbearing deposits Other liabilities Liabilities of discontinued operations Liabilities of consolidated asset management funds Total liabilities Noncontrolling interests The Bank of New York Mellon Corporation shareholders equity Total liabilities, temporary equity and permanent equity Net interest margin taxable equivalent basis Percentage of assets attributable to foreign offices (d) Percentage of liabilities attributable to foreign offices (a) (b) (c) (d)
Average balance $ 56,679 14,253 4,660 5,900 5,485 15,305 9,615 30,405 7,857 20,140 627 14,683 14,906 29,589 2,568 115 2,683 60,896 $172,793 (522) 3,832 47,978 404 (c) 13,355 $237,840
2010 Interest $ 554 49 64 88 231 356 151 738 (a) 119 674 41 981 173 1,154 71 71 2,059 $ 3,552 (b)
Average rates 0.98% 0.34 1.37 1.50 4.21 2.33 1.57 2.43 1.50 3.34 6.48 6.68 1.16 3.90 2.79 0.26 2.68 3.38 2.06%
$ 25,490 1,396 368 5,622 32,876 5,364 1,423 64,567 71,354 104,230 5,356 1,630 1,386 677 2,063 6,439 16,673 $136,391 35,208 21,767 404 (c) 12,218 205,988 752 31,100 $237,840 43% 36
0.10% 0.26 0.17 0.27 0.14 0.33 0.05 0.20 0.21 0.19 0.80 1.32 2.97 0.39 2.12 0.09 1.80 0.45%
1.70%
Includes fees of $46 million in 2010. Nonaccrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest. The tax equivalent adjustment was $19 million in 2010, and is based on the federal statutory tax rate (35%) and applicable state and local taxes. Average balances and rates are impacted by allocations made to match assets of discontinued operations with liabilities of discontinued operations. Includes the Cayman Islands branch office.
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Average balances and interest rates (continued) (dollar amounts in millions, presented on an FTE basis) Assets Interestearning assets: Interestbearing deposits with banks (primarily foreign banks) Interestbearing deposits held at the Federal Reserve and other central banks Other shortterm investments U.S. Governmentbacked commercial paper Federal funds sold and securities under resale agreements Margin loans Nonmargin loans: Domestic offices: Consumer Commercial Foreign offices Total nonmargin loans Securities: U.S. Government obligations U.S. Government agency obligations State and political subdivisions Other securities: Domestic offices Foreign offices Total other securities Trading securities Domestic offices Foreign offices Total trading securities Total securities Total interestearning assets Allowance for loan losses Cash due from banks Other assets Assets of discontinued operations Total assets Liabilities and equity Interestbearing deposits: Domestic offices: Money market rate accounts Savings Certificates of deposit of $100,000 & over Other time deposits Total domestic Foreign offices: Banks Government and official institutions Other Total foreign Total interestbearing deposits Federal funds purchased and securities under repurchase agreements Trading liabilities Other borrowed funds: Domestic offices Foreign offices Total other borrowed funds Borrowings from the Federal Reserve related to ABCP Payables to customers and brokerdealers Longterm debt Total interestbearing liabilities Total noninterestbearing deposits Other liabilities Liabilities of discontinued operations Total liabilities Total equity Total liabilities and equity Net interest margin taxable equivalent basis Percentage of assets attributable to foreign offices (e) Percentage of liabilities attributable to foreign offices (a) Average balance $ 55,797 11,938 317 3,238 4,340 5,417 15,061 11,606 32,084 3,218 16,019 680 20,444 10,887 31,331 1,934 59 1,993 53,241 $160,955 (420) 3,638 45,766 2,188 (d) $212,127
2009 Interest $ 683 43 9 31 69 262 362 250 874 (b) 50 592 47 832 244 1,076 50 1 51 1,816 $ 3,525 (c) Average rates 1.22% 0.36 2.95 0.97 1.59 4.83 2.41 2.15 2.72 1.54 3.70 6.92 4.07 2.24 3.43 2.57 1.40 2.54 3.41 2.19% Average balance $ 46,473 4,754 2,348 6,494 5,427 6,081 20,926 14,172 41,179 596 10,846 744 23,124 8,386 31,510 1,696 134 1,830 45,526 $152,201 (314) 6,190 49,439 2,441 (d) $209,957
2008 Interest $ 1,753 27 71 149 183 307 157 563 1,027 (b) 18 479 55 1,249 463 1,712 66 5 71 2,335 $ 5,545 (c) Average rates 3.77% 0.56 3.03 2.30 3.37 5.05 0.75 (a) 3.97 2.49 (a) 3.03 4.42 7.20 5.41 5.52 5.44 3.92 3.44 3.88 5.13 3.64% (a)
$ 18,619 1,136 961 4,922 25,638 5,182 866 66,520 72,568 98,206 2,695 1,283 980 592 1,572 317 5,262 16,893 $126,228 36,446 18,760 2,188 (d) 183,622 28,505 $212,127 37% 34
0.09% 0.47 0.85 0.47 0.21 0.25 0.09 0.15 0.16 0.17 0.88 2.68 0.85 1.99 2.25 0.12 2.17 0.47%
$ 13,882 966 2,041 6,264 23,153 11,801 1,420 55,539 68,760 91,913 4,624 585 1,704 970 2,674 2,348 5,495 16,353 $123,992 33,724 20,979 2,441 (d) 181,136 28,821 $209,957 35% 36
0.96% 1.22 2.83 1.98 1.42 1.56 1.75 2.21 2.09 1.92 1.00 0.77 3.32 3.00 3.21 2.25 1.25 3.93 2.15%
26 5 31 7 6 366 $ 592
1.82%
1.89% (a)
Includes the impact of the SILO/LILO charge in 2008. Excluding this charge, the domestic offices nonmargin commercial loan rate would have been 3.09%, the total nonmargin loan rate would have been 3.68%, the interestearning assets rate would have been 3.96% and the net interest margin would have been 2.21%. Includes fees of $43 million in 2009 and $35 million in 2008. Nonaccrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest. The tax equivalent adjustments were $18 million in 2009 and $21 million in 2008, and are based on the federal statutory tax rate (35%) and applicable state and local taxes. Average balances and rates are impacted by allocations made to match assets of discontinued operations with liabilities of discontinued operations. Includes the Cayman Islands branch office.
(b)
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Noninterest expense
Noninterest expense (dollars in millions) Staff: Compensation Incentives Employee benefits Total staff Professional, legal and other purchased services Net occupancy Software Distribution and servicing Furniture and equipment Business development Subcustodian Other Subtotal Special litigation reserves Support agreement charges FDIC special assessment Amortization of intangible assets Restructuring charges Merger and integration expenses Total noninterest expense Total staff expense as a percentage of total revenue (b) Fulltime employees at period end (a) Noninterest expense from the Acquisitions was $381 million in 2010. 2010 $ 3,237 1,193 785 5,215 1,099 588 410 377 315 271 247 903 9,425 (a) 164 (7) 421 28 139 $10,170 38% 48,000 2009 $ 2,985 996 719 4,700 1,017 564 367 393 309 214 203 908 8,675 N/A (15) 61 426 150 233 $ 9,530 61% 42,200 2008 $ 3,242 1,247 700 5,189 1,021 570 331 517 323 278 255 1,008 9,492 N/A 894 473 181 483 $11,523 38% 42,500
2010 vs. 2009 8% 20 9 11 8 4 12 (4) 2 27 22 (1) 9 N/M N/M N/M (1) (81) (40) 7% 14% 2009 vs. (8)% 2008 (20) 3 (9) (1) 11 (24) (4) (23) (20) (10) (9) N/M N/M N/M (10) (17) (52) (17)% (1)%
(b) Excluding investment securities gains (losses) and the 2008 SILO/LILO charge, total staff expense as a percentage of total revenue (NonGAAP) was 38% in 2010, 36% in 2009 and 33% in 2008.
Total noninterest expense increased $640 million, or 7%, compared with 2009, reflecting the impact of the Acquisitions and the fullyear impact of the Insight acquisition, which impacted virtually all expense categories, higher incentive, litigation, business development and software expenses. Staff expense Given our mix of feebased businesses, which are staffed with highquality professionals, staff expense comprised approximately 55% of total noninterest expense in 2010, excluding special litigation reserves, support agreement charges, amortization of intangible assets, restructuring charges and M&I expenses. Staff expense is comprised of:
compensation expense, which includes: base salary expense, primarily driven by headcount; the cost of temporary help and overtime; and
severance expense; incentive expense, which includes: additional compensation earned under a wide range of sales commission and incentive plans designed to reward a combination of individual, business unit and corporate performance goals; as well as, stockbased compensation expense; and employee benefit expense, primarily medical benefits, payroll taxes, pension and other retirement benefits. The increase in staff expense compared with 2009 reflects the impact of the Acquisitions and the fullyear impact of the Insight acquisition, higher incentive expense primarily in the Asset Management business and the annual merit increase, which was effective in the second quarter of 2010. The higher incentive expense primarily resulted from increased earnings, reflecting higher market levels, increased performance fees and the impact of adjusting compensation to market levels.
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Nonstaff expense Nonstaff expense includes certain expenses that vary with the levels of business activity and levels of expensed business investments, fixed infrastructure costs and expenses associated with corporate activities related to technology, compliance, productivity initiatives and corporate development. Nonstaff expense, excluding special litigation reserves, support agreement charges, FDIC special assessment, amortization of intangible assets, restructuring charges and M&I expense totaled $4.2 billion in 2010 compared with $4.0 billion in 2009. The increase primarily reflects the impact of the Acquisitions and the fullyear impact of the Insight acquisition. Also impacting noninterest expense in 2010 compared with 2009 were higher professional, legal and other purchased services, higher software expense, higher business development expense in support of new business growth, higher volume driven subcustodian expense and higher litigation expense. Given the severity of the economic downturn, the financial services industry has seen a continuing increase in the level of litigation activity. As a result, we anticipate litigation costs to continue to exceed historic trend levels. For additional information on litigation matters, see Note 25 of the Notes to Consolidated Financial Statements. For additional information on support agreements, see the Support agreements section. For additional information on restructuring charges, see Note 12 of the Notes to Consolidated Financial Statements. In 2010, we incurred $139 million of M&I expenses related to the Acquisitions and the merger with Mellon Financial. The Financial Services Compensation Scheme (FSCS) is the UKs compensation fund of last resort for customers of authorized financial services firms. It covers business conducted by firms authorized by the Financial Services Authority (FSA) in the UK. Due to the insolvency of a UK investment firm in 2009, BNY Mellon and other financial institutions doing business in the UK expect to incur an additional FSCS levy in 2011. BNY Mellon expects the FSCS levy to slightly increase noninterest expense in 2011. 2009 compared with 2008 Total noninterest expense was $9.5 billion in 2009, a decrease of $2.0 billion or 17% compared with 2008. The decrease primarily reflects lower support agreement charges, strong expense control, mergerrelated synergies and a stronger U.S. dollar in 2009. Noninterest expense in 2009 also included the following activity:
A pretax restructuring charge of $139 million related to our global location strategy and $11 million associated with our workforce reduction program announced in 2008. M&I expenses of $233 million related to the merger with Mellon Financial comprised of the following: integration/conversion costs ($160 million); personnel related costs ($57 million); and onetime costs ($16 million). A special assessment of $61 million paid to the FDIC.
Support agreements In 2008, we voluntarily entered into agreements under which we committed to provided support to clients invested in money market mutual funds, cash sweep funds and similar collective funds, managed by our affiliates, as well as clients invested in funds within our securities lending business. These support agreements were designed to enable these funds to continue to operate at a stable net asset value. In 2010, we recorded a credit to support agreement charges of $7 million (pretax). This credit was driven by a reduction in the support agreement reserve primarily due to improved pricing of Lehman securities, partially offset by a decision to support five Dreyfus money market funds primarily for a realized loss which arose from the financial crisis. At Dec. 31, 2010, the value of Lehman securities increased to approximately 23.0% from 19.5% at Dec. 31, 2009. At Dec. 31, 2010, our additional potential maximum exposure to support agreements was approximately $116 million, after deducting the reserve, assuming the securities subject to these agreements being valued at zero and the NAV of the related funds declining below established thresholds. This exposure includes agreements covering Lehman securities ($103 million), as well as other client support agreements ($13 million).
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Income taxes BNY Mellon recorded an income tax provision, on a continuing operations basis, of $1.0 billion (28.3% effective tax rate) in 2010 compared with an income tax benefit of $1.4 billion (63.2% effective tax rate) in 2009 and an income tax provision of $491 million (25.2% effective tax rate) in 2008. The 2010 effective tax rate on our continuing operations reflects a higher proportion of income earned in lowertaxed foreign jurisdictions. The 2009 effective tax rate on our loss from continuing operations was higher than the 35% federal statutory rate because of additional tax benefits from a tax loss on mortgages, the final SILO/LILO tax settlement, investment securities losses and a higher proportion of lowertaxed foreign earnings. Excluding the impact of restructuring charges, M&I expenses and special litigation reserves, the effective tax rate was 29.0% in 2010. Excluding the impact of investment securities losses, M&I expenses, FDIC special assessment, restructuring charges and benefits from discrete tax items, the effective tax rate for 2009 was 29.8%. Excluding the impact of investment securities losses, M&I expenses, restructuring charges, support agreement charges and the SILO/LILO/tax settlement, the effective tax rate for 2008 was 32.8%. We expect the effective tax rate to be approximately 3031% in 2011. Review of businesses The results of our businesses are presented and analyzed as follows:
Asset Management Wealth Management Asset Servicing Issuer Services Clearing Services Treasury Services Other
We have an internal information system that produces performance data for our seven businesses along product and service lines. For information on the accounting principles of our businesses, the primary types of revenue generated by each business and how our businesses are presented and analyzed, see Note 27 of the Notes to Consolidated Financial Statements. Information on our businesses is reported on a continuing operations basis for all periods presented. See Note 4 to the Notes to Consolidated Financial Statements for a discussion of discontinued operations. The results of our businesses in 2010 were driven by the following factors. Higher market values and new business benefited the Asset and Wealth management businesses, while increases in the Issuer Services business from higher customer deposit balances and Depositary Receipts revenue were offset by the continued weakness in the structured debt markets. Results in Asset Servicing benefited from the Acquisitions, higher market values and new business but were negatively impacted by lower foreign currency volatility, as well as narrower spreads and lower loan balances in securities lending. Money market fee waivers also continue to suppress results in Asset Management, Issuer and Clearing Services, while lower New York Stock Exchange (NYSE) share volumes, down 19% in 2010, continued to impact results in Clearing Services. Compared with 2009, net interest revenue increased in several businesses, driven by the higher yield related to the restructured investment securities portfolio and a higher level of interestearning assets, partially offset by low spreads resulting from the lower interest rate environment. Noninterest expense increased compared with 2009 in Asset Servicing and Clearing Services primarily as a result of the Acquisitions. Noninterest expense also increased compared with 2009 in Asset Management, reflecting higher incentive expense resulting from increased performance fees and the fullyear impact of the Insight acquisition. Net securities gains (losses) and restructuring charges are recorded in the Other business. In addition, M&I expenses are a corporate level item and are therefore recorded in the Other business. The following table presents the value of certain market indices at period end and on an average basis.
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Market indices S&P 500 Index (a) S&P 500 Index daily average FTSE 100 Index (a) FTSE 100 Index daily average NASDAQ Composite Index (a) sm Lehman Brothers Aggregate Bond Index (a) MSCI EAFE Index (a) NYSE Share Volume (in billions) NASDAQ Share Volume (in billions) (a) Period end. 2010 1258 1140 5900 5468 2653 323 1658 445 552 2009 1115 948 5413 4568 2269 301 1581 549 564 2008 903 1221 4434 5368 1577 275 1237 660 577
Increase/(Decrease) 2010 vs. 2009 2009 vs. 2008 13% 23% 20 (22) 9 22 20 (15) 17 44 7 9 5 28 (19) (17) (2) (2)
On a daily average basis, the S&P 500 Index and the FTSE 100 Index increased 20% in 2010 versus 2009. The period end S&P 500 Index increased 13% at Dec. 31, 2010, versus Dec. 31, 2009. The period end FTSE 100 Index increased 9% at Dec. 31, 2010, versus Dec. 31, 2009. The period end NASDAQ Composite Index increased 17% at Dec. 31, 2010, versus Dec. 31, 2009. NYSE and NASDAQ share volumes decreased 19% and 2% respectively in 2010 compared with 2009. The changes in the value of market indices primarily impact fee revenue in the Asset and Wealth Management businesses and to a lesser extent our securities servicing businesses. At Dec. 31, 2010, using the S&P 500 Index as a proxy for the 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 to 2% and fully diluted earnings per common share on a continuing operations basis by $0.06$0.07. 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 current low interest rate environment continues to adversely impact our net interest revenue and corresponding net interest margin, as well as money market mutual fund and money market fund related distribution fees. At Dec. 31, 2010, we estimate that an immediate 100 basis point increase in overnight interest rates from current rates would increase annual pretax income by approximately $450 million. Both fee revenue and net interest revenue would benefit from this increase. The following consolidating schedules show the contribution of our businesses to our overall profitability.
For the year ended Dec. 31, 2010 (dollar amounts in millions) Fee and other revenue Net interest revenue Total revenue Provision for credit losses Noninterest expense Income before taxes Pretax operating margin (b) Average assets Excluding amortization of intangible assets: Noninterest expense Income before taxes Pretax operating margin (b) Asset Management $ 2,644 (a) (1) 2,643 2,082 $ 561 (a) 21% $ 26,307 $ 1,881 762 29%
Total Asset and Wealth Management Wealth Group Management $ 590 $ 3,234 227 226 817 3,460 2 2 611 2,693 $ 204 $ 765 25% 22% $ 10,618 $ 36,925 $ 575 240 29% $ 2,456 1,002 29%
Asset Servicing $ 3,809 864 4,673 3,399 $ 1,274 27% $ 66,678 $ 3,352 1,321 28%
Issuer Services $ 1,576 903 2,479 1,354 $ 1,125 45% $ 51,623 $ 1,271 1,208 49%
Clearing Services $ 1,152 368 1,520 1,138 $ 382 25% $ 21,361 $ 1,109 411 27%
Treasury Services $ 841 632 1,473 769 $ 704 48% $ 26,519 $ 746 727 49%
Total Institutional Services Group $ 7,378 2,767 10,145 6,660 $ 3,485 34% $ 166,181 $ 6,478 3,667 36%
Other $ 279 (68) 211 9 817 $ (615) N/M $34,330 $ 815 (613) N/M
Total Continuing Operations $ 10,891 (a) 2,925 13,816 11 10,170 $ 3,635 (a) 26% $ 237,436 (c) $ 9,749 4,056 29%
(a) Total fee and other revenue and income before taxes for 2010 includes income from consolidated asset management funds of $226 million net of income attributable to noncontrolling interests of $59 million. The net of these income statement line items of $167 million is included above in fee and other revenue. (b) Income before taxes divided by total revenue. (c) Including average assets of discontinued operations of $404 million for 2010, consolidated average assets were $237,840 million.
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For the year ended Dec. 31, 2009 Total Asset and Wealth Management Group Total Institutional Services Group
Asset Management
Wealth Management
Asset Servicing
Issuer Services
Clearing Services
Treasury Services
Other
Fee and other revenue Net interest revenue Total revenue Provision for credit losses Noninterest expense Income before taxes Pretax operating margin (a) Average assets Excluding amortization of intangible assets: Noninterest expense Income before taxes Pretax operating margin (a)
578 194 772 1 583 $ 188 24% $ 9,276 $ 538 233 30%
$ 2,825 226 3,051 1 2,498 $ 552 18% $ 21,840 $ 2,234 816 27%
$ 3,406 894 4,300 2,956 $ 1,344 31% $60,842 $ 2,928 1,372 32%
$ 1,617 768 2,385 1,305 $ 1,080 45% $50,752 $ 1,224 1,161 49%
$ 1,190 340 1,530 1,021 $ 509 33% $18,455 $ 994 536 35%
835 613 1,448 772 $ 676 47% $25,971 $ 747 701 49%
7,048 2,615 9,663 6,054 $ 3,609 37% $ 156,020 $ 5,893 3,770 39%
$ (5,134) 74 (5,060) 331 978 $ (6,369) N/M $32,079 $ 977 (6,368) N/M
4,739 2,915 7,654 332 9,530 $ (2,208) N/M $209,939 (b) $ 9,104 (1,782) N/M
(a) Income before taxes divided by total revenue. (b) Including average assets of discontinued operations of $2,188 million in 2009, consolidated average assets were $212,127 million.
For the year ended Dec. 31, 2008 Total Asset and Wealth Management Group Total Institutional Services Group
Asset Management
Wealth Management
Asset Servicing
Issuer Services
Clearing Services
Treasury Services
Other
Fee and other revenue Net interest revenue Total revenue Provision for credit losses Noninterest expense Income before taxes Pretax operating margin (a) Average assets Excluding amortization of intangible assets: Noninterest expense Income before taxes Pretax operating margin (a)
624 200 824 639 $ 185 23% $ 10,044 $ 585 239 29%
$ 3,418 275 3,693 3,280 $ 413 11% $ 23,311 $ 2,971 722 20%
$ 4,429 1,086 5,515 3,784 $ 1,731 31% $59,150 $ 3,760 1,755 32%
$ 1,859 710 2,569 1,416 $ 1,153 45% $35,169 $ 1,335 1,234 48%
$ 1,292 321 1,613 1,130 $ 483 30% $18,358 $ 1,104 509 32%
956 730 1,686 831 $ 855 51% $25,603 $ 804 882 52%
8,536 2,847 11,383 7,161 $ 4,222 37% $ 138,280 $ 7,003 4,380 38%
$ (1,240) (263) (1,503) 104 1,082 $ (2,689) N/M $45,925 $ 1,076 (2,683) N/M
$ 10,714 2,859 13,573 104 11,523 $ 1,946 14% $207,516 (b) $ 11,050 2,419 18%
(a) Income before taxes divided by total revenue. (b) Including average assets of discontinued operations of $2,441 million in 2008, consolidated average assets were $209,957 million in 2008.
Asset and Wealth Management Group Asset and Wealth Management fee revenue is dependent on the overall level and mix of AUM and the management fees expressed in basis points (onehundredth of one percent) charged for managing those assets. Assets under management were a record $1.17 trillion at Dec. 31, 2010, an increase of 5% compared with $1.12 trillion at Dec. 31, 2009. The increase primarily reflects higher market values and new business, offset in part by money market net outflows. The overall level of AUM for a given period is determined by:
the beginning level of AUM; the net flows of new assets during the period resulting from new business wins and existing client enrichments reduced by the loss of clients and withdrawals; and the impact of market price appreciation or depreciation, the impact of any acquisitions or divestitures and foreign exchange rates.
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These components are shown in the changes in market value of AUM table below. The mix of AUM is determined principally by client asset allocation decisions among equities, fixed income, alternative investments and overlay, and money market products. The trend of this mix is shown in the AUM at period end, by product type, table below. Managed equity assets typically generate higher percentage fees than money market and fixedincome assets. Also, actively managed assets typically generate higher management fees than indexed or passively managed assets of the same type. Management fees are typically subject to fee schedules based on the overall level of assets managed for a single client or by individual asset class and style. This is most prevalent for institutional assets where amounts we manage for individual clients are typically large. A key driver of organic growth in asset and wealth management fees is the amount of net new AUM flows. Overall market conditions are also key drivers, with a significant longterm economic driver being the growth of global financial assets. Performance fees, included in asset and wealth management fee revenue on the income statement, are earned in the Asset and Wealth Management Group. These fees are generally calculated as a percentage of a portfolios performance in excess of a benchmark index or a peer groups performance.
AUM at period end, by product type (in billions) Equity securities Money market Fixed income securities Alternative investments and overlay Total AUM (a) Results for 2006 include legacy The Bank of New York Company, Inc. only.
AUM at period end, by client type (in billions) Institutional Mutual funds Private client Total AUM (a) Results for 2006 include legacy The Bank of New York Company, Inc. only. 2010 $ 639 454 79 $1,172 2009 $ 611 416 88 $1,115 2008 $445 400 83 $928 2007 $ 671 349 101 $1,121 2006 (a) $105 15 22 $142
Changes in market value of AUM in the Asset and Wealth Management Group (in billions) Beginning balance market value of AUM Net inflows (outflows): Longterm Money market Total net inflows (outflows) Net market/currency impact Acquisitions/divestitures Ending balance market value of AUM 2010 $1,115 48 (18) 30 27 $1,172 2009 $ 928 (6) (49) (55) 95 147 $1,115 2008 $1,121 (43) 92 49 (235) (7) $ 928
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(dollar amounts in millions, unless otherwise noted) Revenue: Asset and wealth management: Mutual funds Institutional clients Private clients Performance fees Total asset and wealth management revenue Distribution and servicing Other Total fee and other revenue Net interest revenue (expense) Total revenue Noninterest expense (ex. amortization of intangible assets and support agreement charges) Income before taxes (ex. amortization of intangible assets and support agreement charges) Amortization of intangible assets Support agreement charges Income before taxes Memo: Income before taxes (ex. amortization of intangible assets) Pretax operating margin Pretax operating margin (ex. amortization of intangible assets) (a) AUM (in billions) AUM inflows (outflows) (in billions): Longterm (in billions) Money market (in billions) (a) 2010 $1,066 1,074 151 123 2,414 201 29 2,644 (1) 2,643 1,862 781 201 19 $ 561 $ 762 21% 29% $1,107 $ 48 $ (18) 2009 $1,098 789 135 93 2,115 279 (147) 2,247 32 2,279 1,678 601 219 18 $ 364 $ 583 16% 26% $1,045 $ (9) $ (49)
2010 vs. 2009 (3)% 36 12 32 14 (28) N/M 18 N/M 16 11 30 (8) 6 54% 31%
6%
The pretax operating margin, excluding amortization of intangible assets, support agreement charges and investment securities gains (losses) was 29% for both 2010 and 2009.
Business description BNY Mellon Asset Management is the umbrella organization for our affiliated investment management boutiques and is responsible, through various subsidiaries, for U.S. and nonU.S. retail, intermediary and institutional distribution of investment management and related services. The investment management boutiques offer a broad range of equity, fixed income, cash and alternative/overlay products. In addition to the investment subsidiaries, BNY Mellon Asset Management includes BNY Mellon Asset Management International, which is responsible for the distribution of investment management products internationally, and the Dreyfus Corporation and its affiliates, which are responsible for U.S. distribution of retail mutual funds, separate accounts and annuities. We are one of the worlds largest asset managers with a top10 position in both the U.S. and Europe and 11 th position globally. The results of the Asset Management business are mainly driven by the period end and average levels of assets managed as well as the mix of those assets, as previously shown. Results for this business are also impacted by sales of feebased products. In addition, performance fees may be generated when the investment performance exceeds various benchmarks and satisfies other criteria. Expenses in this business are mainly driven by staffing costs, incentives, distribution and servicing expense, and product distribution costs. In July 2010, the China Securities Regulatory Commission (CSRC) authorized BNY Mellon and Western Securities to establish a joint venture fund management company in China. The new company, BNY Mellon Western Fund Management Company Limited, is owned by BNY Mellon (49%) and Western Securities (51%). BNY Mellon Western Fund Management manages domestic Chinese securities in a range of local retail fund products. BNY Mellon Western Fund Management also focuses on leveraging distribution within the Chinese banking and securities sectors. In November 2009, we acquired Insight, which specializes in liabilitydriven investment solutions, active fixed income and alternative investments. The acquisition of Insight impacted fee revenue and noninterest expense in 2010 compared with 2009. Review of financial results In 2010, Asset Management had pretax income of $561 million compared with $364 million in 2009. Excluding amortization of intangible assets and support agreement charges, pretax income was $781 million in 2010 compared with $601 million in 2009. Results for 2010 reflect improved market values, the fullyear impact of the Insight acquisition and net new business, partially offset by higher incentive expenses. Asset and wealth management revenue in the Asset Management business was $2.4 billion in 2010 compared with $2.1 billion in 2009. The increase reflects improved market values, the fullyear impact of the Insight acquisition, higher performance fees and net new business, partially offset by a reduction in money market fees due to higher fee waivers and money market outflows.
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The Asset Management business generated 500 basis points of positive operating leverage in 2010 compared with 2009, excluding intangible amortization and support agreement charges. In 2010, 44% of asset and wealth management fees in the Asset Management business were generated from managed mutual fund fees. These fees are based on the daily average net assets of each fund and the basis point management fee paid by that fund. Managed mutual fund fee revenue was $1.1 billion in both 2010 and 2009. Distribution and servicing fees were $201 million in 2010 compared with $279 million in 2009. The decrease resulted from lower money market assets under management and higher redemption fees in prior periods. Other fee revenue was $29 million in 2010 compared with a loss of $147 million in 2009 and includes $9 million of securities gains in 2010 and $78 million of securities losses in 2009. The improvement also includes a higher value of seed capital investments in 2010. Revenue generated in the Asset Management business includes 51% from nonU.S. sources in 2010 and 42% in 2009. The increase is primarily due to the fullyear impact of the Insight acquisition. Noninterest expense (excluding amortization of intangible assets and support agreement charges) was $1.9 billion in 2010 compared with $1.7 billion in 2009. The increase primarily resulted from higher incentives expense resulting from an increase in performance fees, as well as the impact of adjusting compensation to market levels, and the fullyear impact of the Insight acquisition. Support agreement charges in 2010 primarily reflect a decision to support five Dreyfus money market funds primarily for a realized loss which arose from the financial crisis. The support agreement charges in 2009 related to the final charge for four Dreyfus money market funds support agreements entered into in 2008. 2009 compared with 2008 Income before taxes was $364 million in 2009, compared with $228 million in 2008. Income before taxes (excluding amortization of intangible assets and support agreement charges) was $601 million in 2009 compared with $818 million in 2008. Fee and other revenue decreased $547 million, primarily due to the weakness in global equity market values for most of 2009, outflows of money market investments, higher fee waivers, a stronger U.S. dollar and the divestiture of three small investment boutiques in 2009. The decrease was partially offset by the impact of the Insight acquisition in the fourth quarter of 2009 and changes in the market value of seed capital investments. Noninterest expense (excluding amortization of intangible assets and support agreement charges) decreased $373 million in 2009 compared with 2008 primarily due to staff reductions, expense management, the consolidation of investment processes and a stronger U.S. dollar. Wealth Management business
(dollar amounts in millions, unless otherwise noted) Revenue: Asset and wealth management Other Total fee and other revenue Net interest revenue Total revenue Provision for credit losses Noninterest expense (ex. amortization of intangible assets) Income before taxes (ex. amortization of intangible assets) Amortization of intangible assets Income before taxes Pretax operating margin Pretax operating margin (ex. amortization of intangible assets) Average loans Average assets Average deposits Market value of total client assets under management and custody at period end (in billions) Business description
2010 540 50 590 227 817 2 575 240 36 $ 204 25% 29% $ 6,451 10,618 8,208 $ 166 $
2009 $ 519 59 578 194 772 1 538 233 45 $ 188 24% 30% $5,821 9,276 6,772 $ 154
In the Wealth Management business, we offer a full array of investment management, wealth and estate planning and private banking solutions to help clients protect, grow and transfer their wealth. Clients include highnetworth individuals and families, charitable gift programs, endowments and foundations and related entities. Client assets reached $166 billion at yearend, and BNY Mellon Wealth Management was ranked as the nations 8th largest wealth manager and 3rd largest private banker. We serve our clients through an expansive network of office sites in 17 states and 4 countries, including 16 of the top 25 domestic wealth markets.
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The results of the Wealth Management business are driven by the level and mix of assets managed and under custody, the level of activity in client accounts and private banking volumes. Net interest revenue is determined by loan and deposit volumes and the interest rate spread between customer rates and internal funds transfer rates on loans and deposits. Expenses of this business are driven by staff expense in the investment management, sales, service and support groups. On Sept. 1, 2010, we acquired I3 Advisors of Toronto, an independent wealth advisory company with more than C$3.8 billion under advisement at acquisition. Review of financial results Income before taxes was $204 million in 2010 compared with $188 million in 2009. Income before taxes (excluding amortization of intangible assets) was $240 million in 2010 compared with $233 million in 2009. Results compared with 2009 reflect growth in fee revenue and net interest revenue, partially offset by higher noninterest expense. Total fee and other revenue was $590 million in 2010 compared with $578 million in 2009. The increase was driven by higher equity market levels and the acquisition of I3 Wealth Advisors. Client assets under management and custody were $166 billion at Dec. 31, 2010, an increase of $12 billion, or 8%, compared with $154 billion at Dec. 31, 2009. The increase was driven by higher equity market levels and the acquisition of I3 Wealth Advisors. Net interest revenue increased $33 million in 2010 compared with 2009, primarily due to higher deposit levels, growth in highquality loans and the higher yield on the restructured investment securities portfolio, partially offset by spread compression on deposits. Average deposit balances increased $1.4 billion, or 21%, while average loan balances increased $630 million, or 11%. Noninterest expense (excluding amortization of intangible assets) increased $37 million compared with 2009, due to higher compensation, marketing, litigation and FDIC expenses and the acquisition of I3 Wealth Advisors. 2009 compared with 2008 Income before taxes was $188 million in 2009 compared with $185 million in 2008. Income before taxes (excluding amortization of intangible assets and support agreement charges), decreased $21 million. Fee and other revenue decreased $46 million due to lower average equity market levels and lower capital market fees, partially offset by organic growth. Net interest revenue decreased $6 million as a result of deposit spread tightening. Noninterest expense (excluding amortization of intangible assets and support agreement charges) decreased $32 million due to workforce reductions, strong expense control and the impact of mergerrelated synergies. Institutional Services Group We are one of the leading global securities servicing providers, with assets under custody and administration at Dec. 31, 2010 of $25.0 trillion, an increase of 12% from $22.3 trillion at Dec. 31, 2009, primarily reflecting the Acquisitions, as well as higher market values and new business. Equity securities constituted 32% and fixedincome securities constituted 68% of the assets under custody and administration at Dec. 31, 2010, compared with 29% equity securities and 71% fixed income securities at Dec. 31, 2009. The shift in composition was due primarily to an increase in equity market valuations. Assets under custody and administration at Dec. 31, 2010, consisted of assets related to custody, mutual funds, and corporate trust businesses of $20.1 trillion, brokerdealer services assets of $3.2 trillion and all other assets of $1.7 trillion. Market value of securities on loan at Dec. 31, 2010, increased to $278 billion from $247 billion at Dec. 31, 2009. The increase reflects higher asset valuations and the GIS acquisition, partially offset by lower government volumes.
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On July 1, 2010, we completed the acquisition of GIS and on Aug. 2, 2010, we completed the acquisition of BAS. See the 2010 events section for additional information. These acquisitions were integrated into the Institutional Services businesses.
Assets under custody and administration trend 2010 Market value of assets under custody and administration at period end (in trillions) (b) Market value of securities on loan at period end (in billions) (c) (a) Results for 2006 include legacy The Bank of New York Company, Inc. only. (b) Includes the assets under custody or administration of CIBC Mellon Global Securities Services Company, a joint venture with the Canadian Imperial Bank of Commerce, of $1.1 trillion at Dec. 31, 2010, $905 billion at Dec. 31, 2009, $697 billion at Dec. 31, 2008, and $989 billion at Dec. 31, 2007. (c) Represents the total amount of securities on loan, both cash and noncash, managed by the Asset Servicing business. $25.0 $ 278 $22.3 $ 247 $20.2 $ 326 $23.1 $ 633 $15.5 $ 399 2009 2008 2007 2006 (a)
(dollar amounts in millions, unless otherwise noted) Revenue: Securities servicing feesasset servicing Securities lending revenue Foreign exchange and other trading revenue Other Total fee and other revenue Net interest revenue Total revenue Noninterest expense (ex. amortization of intangible assets and support agreement charges) Income before taxes (ex. amortization of intangible assets and support agreement charges) Amortization of intangible assets Support agreement charges Income before taxes Memo: Income before taxes (ex. amortization of intangible assets) Pretax operating margin Pretax operating margin (ex. amortization of intangible assets) Average assets Average deposits Business description
2010 $ 2,804 106 693 206 3,809 864 4,673 3,378 1,295 47 (26) $ 1,274 $ 1,321 27% 28% $66,678 56,820
2009 $ 2,215 221 793 177 3,406 894 4,300 2,961 1,339 28 (33) $ 1,344 $ 1,372 31% 32% $60,842 52,907
2010 vs. 2009 27% (52) (13) 16 12 (3) 9 14 (3) 68 21 (5)% (4)%
10% 7
The Asset Servicing business includes global custody, global fund services, securities lending, outsourcing, performance and risk analytics, alternative investment services, securities clearance, collateral management, derivative services and creditrelated services and other linked revenues, principally foreign exchange. Clients include corporate and public retirement funds, foundations and endowments and global financial institutions including banks, brokerdealers, asset managers, insurance companies and central banks. The results of the Asset Servicing business are driven by a number of factors which include: the level of transaction activity; the range of services provided, including custody, accounting, fund administration, daily valuations, performance measurement and risk analytics, securities lending, and investment manager backoffice outsourcing; and the market value of assets under administration and custody. Market interest rates impact both securities lending revenue and the earnings on client deposit balances. Brokerdealer fees depend on the level of activity in the fixed income and equity markets and the financing needs of customers, which are typically higher when the equity and fixedincome markets are active. Also, triparty repo arrangements remain a key revenue driver in brokerdealer services. Our Asset Servicing business also generates foreign exchange trading revenues, which are influenced by the volume of client transactions and the spread realized on these transactions, market volatility in major currencies, the level of crossborder assets held in custody for clients, the level and nature of underlying crossborder investments and other transactions undertaken by corporate and institutional clients. As part of our foreign exchange business, we offer a standing instruction program that provides a costeffective and efficient option, to our clients, for handling a high volume of small transactions or difficult to execute transactions in restricted and
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emerging markets currencies. Our foreign exchange platform provides custody clients and their investment managers an endtoend solution that transfers to BNY Mellon much of the burden, risk and infrastructure cost associated with foreign exchange transactions. Custody clients and their investment managers have the option of executing their transactions pursuant to the standing instruction program, through any of the other foreign exchange trading options made available by BNY Mellon, or with another foreign exchange provider. Business expenses are principally driven by staffing levels and technology investments. We are one of the leading global securities servicing providers, with a total of $25.0 trillion of assets under custody and administration at Dec. 31, 2010. We continue to maintain our number one ranking in two major global custody surveys. We are the largest custodian for U.S. corporate and public pension plans and we service 44% of the top 50 endowments. We are a leading custodian in the UK and service 25% of UK pensions. European asset servicing continues to grow across all products, reflecting significant crossborder investment and capital flow. We are one of the largest providers of fund services in the world, servicing $5.6 trillion in assets. We are the second largest administrator in the alternative investment services industry based on assets. We service 44% of the funds in the U.S. exchangetraded funds marketplace. In securities lending, we are one of the largest lenders of U.S. Treasury securities and depositary receipts and service a lending pool of more than $2.6 trillion in 31 markets. We are one of the largest global providers of performance and risk analytics, with $8.9 trillion in assets under measurement. BNY Mellon is a leader in both global securities and U.S. Government securities clearance. At Dec. 31, 2010, we cleared and settled equity and fixed income transactions in over 100 markets and handled most of the transactions cleared through the Federal Reserve Bank of New York for 14 of the 18 primary dealers. We are an industry leader in collateral management, servicing $1.8 trillion in triparty balances worldwide at Dec 31, 2010. Review of financial results Income before taxes was $1.3 billion in both 2010 and 2009. Income before taxes, excluding amortization of intangible assets and support agreement charges, was $1.3 billion in both 2010 and 2009. Revenue in 2010 was impacted by the Acquisitions, higher market values and new business, primarily offset by an increase in noninterest expenses driven by the Acquisitions, higher volumedriven expenses and expense incurred to support business growth. Asset servicing won $1.5 trillion of new business in 2010. Revenue generated in the Asset Servicing business includes 40% from nonU.S. sources in 2010 compared with 37% in 2009. Securities servicing fees increased $589 million in 2010 compared with 2009, driven by the impact of the Acquisitions, higher market values, new business and asset inflows from existing clients. Securities lending revenue decreased $115 million compared to 2009. The decrease primarily reflects lower volumes, driven by a lower demand for U.S. Government securities, and lower spreads. Spreads decreased 44% and volumes decreased 4% compared with 2009. Foreign exchange and other trading revenue decreased $100 million compared with 2009, primarily reflecting lower volatility partially offset by higher volumes and new business. Net interest revenue decreased $30 million compared with 2009, primarily driven by narrower spreads on deposits, offset in part by the higher yield related to the restructured investment securities portfolio and higher deposit levels. Noninterest expense (excluding amortization of intangible assets and support agreement charges) increased $417 million compared with 2009. The increase in expenses primarily reflects the impact of the Acquisitions, higher subcustodian fees resulting from higher asset values and transaction volumes, higher professional, legal and other purchased services and increased expenses in support of business growth. 2009 compared with 2008 Income before taxes was $1.3 billion in 2009, compared with $1.7 billion in 2008. Income before taxes (excluding amortization of intangible assets and support agreement charges) was $1.3 billion in 2009 compared with $2.3 billion in 2008. Fee and other revenue decreased $1.0 billion, primarily due to lower
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securities lending revenue, lower foreign exchange and other trading revenue, lower market values for most of 2009 and a stronger U.S. dollar, partially offset by new business. Net interest revenue decreased $192 million, primarily driven by lower spreads. Noninterest expense (excluding amortization of intangible assets and support agreement charges) decreased $258 million, primarily due to lower incentive expense, strong overall expense control and a stronger U.S. dollar. Issuer Services business
(dollar amounts in millions) Revenue: Securities servicing feesissuer services Other Total fee and other revenue Net interest revenue Total revenue Noninterest expense (ex. amortization of intangible assets) Income before taxes (ex. amortization of intangible assets) Amortization of intangible assets Income before taxes Pretax operating margin Pretax operating margin (ex. amortization of intangible assets) Average assets Average deposits Number of depositary receipt programs Business description
2010 $ 1,459 117 1,576 903 2,479 1,271 1,208 83 $ 1,125 45% 49% $51,623 $47,219 1,363
2009 $ 1,462 155 1,617 768 2,385 1,224 1,161 81 $ 1,080 45% 49% $50,752 $45,936 1,330
2% 3% 2%
The Issuer Services business provides a diverse array of products and services to global fixed income and equity issuers. BNY Mellon is the leading provider of corporate trust services for all major debt categories across conventional, structured finance and specialty debt. BNY Mellon services $12.0 trillion in outstanding debt from 61 locations, in 20 countries. We serve as depositary for 1,363 sponsored American and global depositary receipt programs, acting in partnership with leading companies from 68 countries. In addition to topranked transfer agency services, BNY Mellon Shareowner Services offers a comprehensive suite of equity solutions, including recordkeeping and corporate actions processing, demutualizations, direct investment, dividend reinvestment, proxy solicitation, escrow services and employee stock plan administration. Fee revenue in the Issuer Services business depends on:
the volume and type of issuance of fixed income securities; depositary receipts issuance and cancellation volume; corporate actions impacting depositary receipts; and stock transfer, corporate actions and equity trading volumes.
Expenses in the Issuer Services business are driven by staff, equipment, and space required to support the services provided by the business. Role of BNY Mellon, as a trustee, for mortgagebacked securitizations BNY Mellon acts as trustee and document custodian for certain mortgagebacked security (MBS) securitization trusts. The role of trustee for MBS securitizations is limited. Our primary role as trustee is to calculate and distribute monthly bond payments to bondholders. As a document custodian, we are required to notify the mortgage service providers and the seller of the loan whether the files contain the mortgage note and other required documents. BNY Mellon, either as document custodian or trustee, does not receive mortgage underwriting files (the files that contain information related to the credit worthiness of the borrower). As trustee or custodian, we have no responsibility or liability for the quality of the portfolio; we are liable only for performance of the limited duties as described above and in the trust document. Review of financial results Income before taxes increased $45 million in 2010 compared with 2009. The results reflect higher net interest revenue and Depositary Receipts revenue, partially offset by weakness in the structured debt markets. Revenue generated in the Issuer Services business includes 44% from nonU.S. sources in 2010 compared with 40% in 2009.
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Total fee and other revenue decreased $41 million in 2010 compared with 2009, as a result of:
Corporate Trust revenue Decreased due to continued weakness in the structured debt markets and lower money market related distribution fees due to the low interest rate environment. Depositary Receipts revenue Increased due to higher issuance, corporate action and servicing fees as well as new business. In 2010, Depositary Receipts issuances exceeded cancellations by $2.2 billion, an increase of $1.0 billion from 2009. Shareowner Services revenue Decreased due to lower transfer agency and corporate action fees.
Net interest revenue increased $135 million in 2010 compared with 2009, driven by a higher yield related to the restructured investment securities portfolio and increased deposits. Average deposits were $47.2 billion in 2010 compared with $45.9 billion in 2009. Noninterest expense (excluding amortization of intangible assets) increased $47 million in 2010 compared with 2009 driven by higher FDIC expense, professional, legal and other purchased services expense, subcustodian expenses and the anticipated settlement of a withholding tax matter with the Internal Revenue Service. 2009 compared with 2008 Income before taxes was $1.1 billion in both 2009 and 2008. Fee and other revenue decreased $242 million, reflecting lower global issuances and lower overall corporate actions that were partially offset by the benefit of new business. Net interest revenue increased $58 million, primarily driven by higher customer deposit balances primarily in Corporate Trust. Noninterest expense (excluding amortization of intangible assets) decreased $111 million reflecting lower staff expense due to a 21% decrease in incentive expense and credit monitoring charges related to lost tapes recorded in 2008. Clearing Services business
(dollar amounts in millions, unless otherwise noted) Revenue: Securities servicing feesclearing services Other Total fee and other revenue Net interest revenue Total revenue Noninterest expense (ex. amortization of intangible assets) Income before taxes (ex. amortization of intangible assets) Amortization of intangible assets Income before taxes Pretax operating margin Pretax operating margin (ex. amortization of intangible assets) Average active accounts (in thousands) Average assets Average margin loans Average payables to customers and brokerdealers Business description
2010 $ 993 159 1,152 368 1,520 1,109 411 29 $ 382 25% 27% 4,901 $21,361 $ 5,891 $ 6,429 $
2009 948 242 1,190 340 1,530 994 536 27 $ 509 33% 35% 4,995 $18,455 $ 4,326 $ 5,262
Our Clearing Services business consists of Pershings global clearing and execution business in over 60 markets. Located in 21 offices worldwide, Pershing provides operational support, trading services, flexible technology, an expansive array of investment solutions, including managed accounts, mutual funds and cash management, practice management support and service excellence. Pershing takes a consultative approach, working behind the scenes for its more than 100,000 investment professionals and 1,500 customers who represent approximately five million individual and institutional investors. Pershing serves a broad array of customers including financial intermediaries, brokerdealers, independent registered investment advisors and hedge fund managers. Pershing is the enterprise name for Pershing, Pershing Advisor Solutions, Pershing Prime Services, iNautix USA, Albridge Solutions, Coates Analytics, the Lockwood companies, and international affiliates in Canada, Ireland, the UK, India and Singapore.
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Revenue in this business includes transactional revenue from trade execution and clearance for brokerdealer services, registered investment advisor services and prime brokerage services, which are primarily driven by retail and institutional investor trading volumes. Revenue is also generated from securities lending and investing cash balances held for investors. A substantial amount of revenue in this business is also generated from nontransactional activities, such as: providing services to mutual funds and money market funds, asset gathering, retirement account administration; and other services. Business expenses are driven by staff, technology investment, equipment and space required to support the services provided by the business and the cost of execution and clearance and custody of securities. Review of financial results Income before taxes was $382 million in 2010 compared with $509 million in 2009. The decrease reflects lower trading volumes, lower cash management related distribution fees and higher expenses related to new business conversions. Revenue comparisons were impacted by historically low interest rates, which created higher levels of cash management fee waivers and lower spreads on interest bearing balances. Total fee and other revenue decreased $38 million in 2010 compared with 2009. The decrease reflects a decline in trading volumes and lower cash management related distribution fees, partially offset by the impact of the GIS acquisition and higher mutual fund balances and positions. Trading volumes on the NYSE were down 19% in 2010 compared with 2009. Net interest revenue increased $28 million compared with 2009, reflecting the higher yield related to the restructured investment securities portfolio and higher loan volume, partially offset by lower spreads. Average margin loans were up 36% in 2010. This increase was driven by increased prime brokerage and brokerdealer activity. Noninterest expense (excluding amortization of intangible assets) increased $115 million in 2010 compared with 2009, primarily reflecting the impact of the GIS acquisition, new business conversions, including the first phase of the conversion of a large global wealth management firm, and the impact of adjusting compensation to market levels. In the fourth quarter of 2010, we completed the first phase of the conversion of a large global wealth management firm. We expect to complete the final phase of the conversion in the first quarter of 2011 and anticipate that the revenue related to this new business will exceed expenses in the second quarter of 2011. 2009 compared with 2008 Income before taxes was $509 million in 2009 compared with $483 million in 2008. Total fee and other revenue decreased 8%, reflecting lower cash management related distribution fees and trading volumes. Net interest revenue increased $19 million reflecting wider spreads. Noninterest expense (excluding amortization of intangible assets) decreased $110 million reflecting lower compensation costs and strong expense control. Treasury Services business
(dollars in millions) Revenue: Treasury services Other Total fee and other revenue Net interest revenue Total revenue Noninterest expense (ex. amortization of intangible assets) Income before taxes (ex. amortization of intangible assets) Amortization of intangible assets Income before taxes Pretax operating margin Pretax operating margin (ex. amortization of intangible assets) Average loans Average assets Average deposits
2010 500 341 841 632 1,473 746 727 23 $ 704 48% 49% $10,012 $26,519 $22,405 $ $
2009 503 332 835 613 1,448 747 701 25 $ 676 47% 49% $12,434 25,971 21,816
(19)% 2% 3%
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Business description The Treasury Services business includes cash management solutions, trade finance services, international payment services, global markets, capital markets and liquidity services. Treasury services revenue is directly influenced by the volume of transactions and payments processed, loan levels, types of service provided, net interest revenue earned from deposit balances generated by activity across our business operations and the value of the credit derivatives portfolio. Treasury services revenue is indirectly influenced by other factors, including market volatility in major currencies and the level and nature of underlying crossborder investments, as well as other transactions undertaken by corporate and institutional clients. Business expenses are driven by staff, equipment and space required to support the services provided, as well as operating services in support of volume increases. With a network of more than 2,000 correspondent financial institutions, our Treasury Services group delivers highquality performance in global payments, trade services, cash management, capital markets, foreign exchange and derivatives. We help clients in their efforts to optimize cash flow, manage liquidity and make payments more efficiently around the world in more than 100 currencies. We are the fourth largest Fedwire and CHIPS payment processor, processing about 160,000 global payments daily totaling an average of $1.6 trillion. Our corporate lending strategy is to focus on those clients and industries that are major users of securities servicing and treasury services. Revenue from our lending activities is primarily driven by loan levels and spreads over funding costs. Review of financial results Income before taxes was $704 million in 2010, compared with $676 million in 2009. Revenue from the GIS acquisition and strong expense control were partially offset by lower money market fees and lower financingrelated revenue. The Treasury Services business generated 200 basis points of positive operating leverage in 2010 compared with 2009, excluding amortization of intangible assets. Total fee and other revenue increased $6 million in 2010 compared with 2009. The increase was driven by the impact of the GIS acquisition and an improvement in the marktomarket adjustment on credit default swaps, partially offset by lower money market fees and lower global payment fees. The increase in net interest revenue compared with 2009 primarily reflects a higher yield on the restructured investment securities portfolio partially offset by lower average loan balances reflecting our strategy to reduce targeted risk exposure. Noninterest expense (excluding amortization of intangible assets) in 2010 was essentially unchanged compared with 2009, as the impact of the GIS acquisition was primarily offset by strong expense control. 2009 compared with 2008 Income before taxes was $676 million in 2009, compared with $855 million in 2008. Total fee and other revenue decreased $121 million, reflecting marktomarket losses on the credit derivatives portfolio used to economically hedge loans. Net interest revenue decreased $117 million compared with 2008, reflecting lower loan levels and tighter spreads resulting from the lower interest rate environment in 2009. Noninterest expense (excluding amortization of intangible assets) decreased $57 million, primarily due to mergerrelated synergies and strong expense control.
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Other Businesses
(dollars in millions) Revenue: Fee and other revenue Net interest revenue (expense) Total revenue Provision for credit losses Noninterest expense (ex. special litigation reserves, FDIC special assessment, amortization of intangible assets, restructuring charges and M&I expenses) Income (loss) before taxes (ex. special litigation reserves, FDIC special assessment, amortization of intangible assets, restructuring charges and M&I expenses) Special litigation reserves FDIC special assessment Amortization of intangible assets Restructuring charges M&I expenses Income (loss) before taxes Average assets Average deposits Business description
2010 $ 279 (68) 211 9 484 (282) 164 2 28 139 $ (615) $ 34,330 $ 4,689
2009 $ (5,134) 74 (5,060) 331 533 (5,924) N/A 61 1 150 233 $ (6,369) $ 32,079 $ 7,221
On Jan. 15, 2010, we completed the sale of Mellon United National Bank (MUNB), our national bank located in Florida. We applied discontinued operations accounting to this business. This business was formerly included in the Other businesses group. The Other business primarily includes:
the results of the lease financing portfolio; corporate treasury activities, including our investment securities portfolio; 33.2% equity interest in BNY ConvergEx Group; and business exits and corporate overhead.
net interest revenue from the lease financing portfolio; interest income remaining after transfer pricing allocations; fee and other revenue from corporate and bankowned life insurance; and gains (losses) associated with the valuation of investment securities and other assets.
Expenses include:
M&I expenses; restructuring charges; direct expenses supporting lease financing, investing and funding activities; and certain corporate overhead not directly attributable to the operations of other businesses.
Review of financial results Income before taxes was a loss of $615 million in 2010 compared with a loss of $6.4 billion in 2009. The Other business includes the following activity in 2010:
lease residual gains of $69 million; a provision for credit losses of $9 million; a $164 million charge related to special litigation reserves taken in the first quarter of 2010; and M&I expenses of $139 million related to the Acquisitions and the Mellon Financial merger.
2009 compared with 2008 Income before taxes was a loss of $6.4 billion in 2009 compared with a loss of $2.7 billion in 2008. Total fee and other revenue decreased primarily due to net securities losses related to the restructured investment securities portfolio recorded in 2009. Net interest revenue increased $337 million primarily reflecting the SILO/LILO charge recorded in 2008. The provision for credit losses increased $227 million in 2009 reflecting downgrades in the insurance, media and residential mortgage portfolios. International operations Our primary international activities consist of securities servicing, asset management and global payment services. Our clients include some of the worlds largest asset managers, insurance companies, corporations, financial intermediaries, local authorities and pension funds. Through our global network of offices, we have developed a deep understanding of local requirements and cultural needs and we pride ourselves in providing dedicated service through our multilingual sales, marketing and client service teams.
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We conduct business through subsidiaries, branches, and representative offices in 36 countries. We have operational centers based in Brussels, Cork, Dublin, Navan, Wexford, Luxembourg, Singapore, Wroclaw, throughout the United Kingdom including London, Manchester, Brentwood, Edinburgh and Poole, and Chennai and Pune in India. At Dec. 31, 2010, we had approximately 9,000 employees in Europe, the Middle East and Africa (EMEA), approximately 7,000 employees in the AsiaPacific region (APAC) and approximately 700 employees in other global locations, primarily Brazil. At Dec. 31, 2010, our crossborder assets under custody and administration were $9.2 trillion compared with $8.8 trillion at Dec. 31, 2009. This increase primarily reflects higher market values as the FTSE 100 and MSCI EAFE indices increased 9% and 5%, respectively. In Europe, we maintain a significant presence in the Undertakings for Collective Investment in Transferable Securities Directives (UCITS) servicing field. In Ireland, BNY Mellon is the largest administrator of thirdparty assets and largest provider of trustee services. In Luxembourg, BNY Mellon is a top 10 ranked fund administrator. We provide global clearance services in more than 100 markets and service $1.8 trillion in daily triparty balances spanning 40 markets. In July the acquisition of GIS expanded our securities servicing and alternative investment services businesses worldwide and enhanced our managed account platform, performance reporting capabilities and business intelligence tools for brokerdealer and registered investment advisor clients. In August, we completed the acquisition of BAS which expanded BNY Mellons existing capabilities to include German domestic custody and KAG fund administration. We serve as the depositary for 1,363 sponsored American and global depositary receipt programs, acting in partnership with leading companies from 68 countries. As the worlds leading provider of corporate trust and agency services, BNY Mellon services $12.0 trillion in outstanding debt from 61 locations, in 20 countries, for clients including governments and their agencies, multinational corporations, financial institutions and other entities that access the global debt markets. We leverage our global footprint and expertise to deliver customized and marketdriven solutions across a full range of debt issuer and related investor services. BNY Mellon Asset Management operates on a multiboutique model, bringing investors the skills of our specialist boutique asset managers, which together manage investments spanning virtually all asset classes. We are one of the largest global asset managers, ranking 11th in the institutional marketplace and are the 6th largest asset manager active in Europe. We are also a market leader in the field of liabilitydriven investments. In July we created, with Western Securities, a joint venture fund management company in China. The new company, BNY Mellon Western Fund Management Company Limited manages domestic Chinese securities in a range of local retail fund products. At Dec. 31, 2010, approximately 34% of BNY Mellons AUM were managed by our international operations, compared with 32% in 2009. The increase primarily resulted from net longterm inflows and improved market values. We process 160,000 global payments daily, totaling an average of $1.6 trillion. With payment services provided in more than 100 currencies through more than 2,000 correspondent bank accounts worldwide, we are a recognized leader in receivables and payables processing. We have over 50 years of experience providing trade and cash services to financial institutions and central banks outside of the U.S. In addition, we offer a broad range of servicing and fiduciary products to financial institutions, corporations and central banks depending on the state of market development. In emerging markets, we lead with global payments and issuer services, introducing other products as the markets mature. For more established markets, our focus is on global, not local, securities servicing products and alternative investments. We are also a leading provider and major market maker in the area of foreign exchange and interestrate risk management services, dealing in over 100 currencies. Our financial results, as well as our level of assets under custody and administration, and management, are impacted by the translation of financial results
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denominated in foreign currencies to the U.S. dollar. We are primarily impacted by activities denominated in the British pound, and to a lesser extent, the Euro. If the U.S. dollar depreciates against these currencies, the translation impact is a higher level of fee revenue, net interest revenue, noninterest expense and assets under management and custody and administration. Conversely, if the U.S. dollar appreciates, the translated levels of fee revenue, net interest revenue, noninterest expense and assets under management and custody and administration will be lower.
Foreign exchange rates for one U.S. dollar 2010 Spot rate (at Dec. 31): British pound Euro Yearly average rate: British pound Euro $ $ 1.5545 1.3373 1.5457 1.3270 $ $ 2009 1.6154 1.4348 1.5659 1.3946 $ $ 2008 1.4626 1.3976 1.8552 1.4713
International clients accounted for 36% of revenue in 2010 compared with 53% in 2009. Excluding the impact of the net investment securities losses, international clients accounted for 36% of revenue in 2010 compared with 32% in 2009. Income from international continuing operations was $1.5 billion in 2010 compared with $1.1 billion in 2009. In 2010, revenues from EMEA were $3.5 billion, compared with $2.8 billion in 2009 and $3.6 billion in 2008. Revenues from EMEA were up 24% for 2010 compared to 2009. The increase in 2010 primarily reflects improved market values and the acquisitions of Insight and BAS, partially offset by a stronger U.S. dollar in 2010. Revenue from EMEA in 2010 was spread across most of our businesses. Asset Servicing generated 44%, Asset Management 27%, Issuer Services 19%, Treasury Services 6% and Clearing Services 4% of revenues from EMEA. Income from continuing operations from EMEA was $916 million in 2010 compared with $667 million in 2009 and $859 million in 2008. Revenues from APAC were $745 million in 2010 compared with $669 million in 2009 and $796 million in 2008. The increase in APAC revenue in 2010 resulted from higher depositary receipts revenue and net interest revenue. Revenue from APAC in 2010 was generated by the following businesses: Asset Management 27%, Treasury Services 27%, Asset Servicing 23%, Issuer Services 21% and Clearing Services 2%. Income from continuing operations from APAC was $295 million in 2010 compared with $222 million in 2009 and $247 million in 2008. Income from continuing operations from EMEA and APAC were driven by the same factors affecting revenue. In addition, income from continuing operations from EMEA in 2010 compared with 2009, and 2009 compared with 2008, was negatively impacted by the strength of the U.S. dollar versus the Euro and British pound. For additional information regarding our International operations, see Note 28 of the Notes to Consolidated Financial Statements. Crossborder risk Foreign assets are subject to general risks attendant to the conduct of business in each foreign country, including economic uncertainties and each foreign governments regulations. In addition, our foreign assets may be affected by changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors. Crossborder outstandings include loans, acceptances, interestbearing deposits with other banks, other interest bearing investments, and other monetary assets which are denominated in U.S. dollars or other nonlocal currency. Also included are local currency outstandings not hedged or funded by local borrowings.
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The table below shows our crossborder outstandings for the last three years where crossborder exposure exceeds 1.00% of total assets (denoted with *) or 0.75% of total assets (denoted with **).
Crossborder outstandings (a) (in millions) 2010: France* Germany* Netherlands* Australia * Switzerland * Belgium* Japan** United Kingdom ** Hong Kong ** 2009: France* Germany* Netherlands* Spain* Belgium* United Kingdom* Japan** Ireland** 2008: Netherlands* France* Belgium* United Kingdom* Germany* Ireland**
Banks and other financial institutions (b) $ 6,109 7,007 4,338 2,663 2,839 2,411 2,261 533 1,908 6,519 5,325 2,765 3,903 3,162 2,850 1,809 932 2,459 2,865 2,579 2,386 2,285 1,153
Total Public sector $ 20 15 56 75 377 1 140 Commercial, industrial and other $ 124 312 1,205 (d) 275 30 184 7 1,411 18 1,307 156 1,312 (d) 133 199 613 7 895 (d) 1,888 (d) 90 288 430 277 1,167 (d) crossborder outstandings (c) $ 6,253 7,334 5,543 2,938 2,869 2,595 2,268 1,944 1,926 7,882 5,556 4,077 4,036 3,738 3,463 1,816 1,828 4,347 3,095 2,867 2,816 2,562 2,320
(a) At Dec. 31, 2010, exposures to Spain and Ireland totaled $1.7 billion and included $481 million in investment securities and $1.1 billion in shortterm placements. (b) Primarily shortterm placements. (c) Excludes assets of consolidated asset management funds. (d) Primarily European floating rate notes.
Emerging markets exposure At Dec. 31, 2010, our emerging markets exposures, totaled approximately $9.1 billion. These exposures consisted primarily of interestbearing deposits with banks and shortterm loans, and a $347 million investment in Wing Hang Bank Limited (Wing Hang), which is located in Hong Kong. This compares with emerging market exposure of $7.9 billion in 2009, including an investment of $316 million in Wing Hang. Critical accounting estimates Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements under Summary of Significant Accounting and Reporting Policies. Our more critical accounting estimates are those related to the allowance for loan losses and allowance for lendingrelated commitments, fair value of financial instruments and derivatives, otherthantemporary impairment, goodwill and other intangibles, and pension accounting. Further information on policies related to the allowance for loan losses and allowance for lendingrelated commitments can be found under Summary of significant accounting and reporting policies in Note 1 of the Notes to Consolidated Financial Statements, Further information on the valuation of derivatives and securities where quoted market prices are not available can be found under Fair value measurement in Note 23 of the Notes to Consolidated Financial Statements. Further information on policies related to goodwill and intangible assets can be found in Goodwill and
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intangible assets in Note 7 of the Notes to Consolidated Financial Statements. Additional information on pensions can be found in Employee benefit plans in Note 20 of the Notes to Consolidated Financial Statements. Allowance for loan losses and allowance for lendingrelated commitments In 2010, we expanded the description of the elements of the allowance for loan losses and lending related commitments from three to four. This change did not impact the methodology used to calculate the allowance or provision for credit losses. The four elements of the allowance for loan losses and allowance for lendingrelated commitments consist of: (1) an allowance for impaired credits (nonaccrual loans over $1 million); (2) an allowance for higher riskrated credits and passrated credits; (3) an allowance for residential mortgage loans (previously included in element 2); and (4) an unallocated allowance based on general economic conditions and risk factors in our individual markets for our current portfolio. Further discussion of the four elements can be found in Note 1 of the Notes to Consolidated Financial Statements. It is difficult to quantify the impact of changes in forecasts on our allowance for loan losses and allowance for lendingrelated commitments. Nevertheless, we believe the following discussion may enable investors to better understand the variables that drive the allowance for loan losses and allowance for lendingrelated commitments. The allowance for loan losses and allowance for lendingrelated commitments represents managements estimate of probable losses inherent in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. The portion of the allowance related to impaired credits is based on the present value of expected future cash flows; however, as a practical expedient, it may be based on the credits observable market price. Additionally, it may be based on the fair value of collateral if the credit is collateral dependent. The allowance for higher riskrated and passrated credits are assigned probability of default ratings based on internal ratings after analyzing the credit quality of each borrower/counterparty. Our internal ratings are generally consistent with external ratings agencies default databases. Loss given default ratings are driven by the collateral, structure, and seniority of each individual asset and are consistent with external loss given default/recovery databases. The portion of the allowance for residential mortgage loans is determined by segregating six mortgage pools into delinquency periods ranging from current through foreclosure with the delinquency periods assigned a probability of default. A specific loss given default based on a combination of external loss data from third party databases and internal loss history is assigned for each mortgage pool. For each pool, the expected loss is calculated using the above factors. The resulting expected loss factor is applied against the loan balance to determine the reserve held for each pool. Changes in the estimates of probability of default, risk ratings, loss given default/recovery rates, and cash flows could have a direct impact on the allocated allowance for loan losses. To the extent actual results differ from forecasts or managements judgment, the allowance for credit losses may be greater or less than future chargeoffs. The credit rating assigned to each credit is another significant variable in determining the allowance. If each credit were rated one grade better, the allowance would have decreased by $75 million, while if each credit were rated one grade worse, the allowance would have increased by $111 million. Similarly, if the loss given default were one rating worse, the allowance would have increased by $32 million, while if the loss given default were one rating better, the allowance would have decreased by $54 million. For impaired credits, if the net carrying value of the loans was 10% higher or lower, the allowance would have decreased or increased by $2 million, respectively. A key variable in determining the allowance is managements judgment in determining the size of the unallocated allowance. At Dec. 31, 2010, the unallocated allowance was $116 million, or 20% of the total allowance. At Dec. 31, 2010, if the unallocated allowance, as a percentage of the total allowance, was 5% higher or lower, the allowance would have increased by approximately $38 million or decreased by approximately $34 million, respectively. Fair value of financial instruments We adopted guidance related to Fair Value Measurement included in ASC 820 and Fair Value Option included in ASC 825 effective Jan. 1, 2008. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. The standard also established a threelevel hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
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Effective Jan. 1, 2009, we adopted guidance related to Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, included in ASC 820. This ASC provides guidance on how to determine the fair value when the volume and level of activity for the asset or liability have significantly decreased and reemphasizes that the objective of a fair value measurement remains an exit price notion. Fair value Securities Level 1 Securities Recent quoted prices from exchange transactions are used for debt and equity securities that are actively traded on exchanges and for U.S. Treasury securities and U.S. Government securities that are actively traded in highly liquid overthecounter markets. Level 2 Securities For securities where quotes from recent transactions are not available for identical securities, we determine fair value primarily based on pricing sources with reasonable levels of price transparency. The pricing sources employ financial models or obtain comparisons to similar instruments to arrive at consensus prices. Specifically, the pricing sources obtain recent transactions for similar types of securities (e.g., vintage, position in the securitization structure) and ascertain variables such as discount rate and speed of prepayment for the type of transaction and apply such variables to similar types of bonds. We view these as observable transactions in the current market place and classify such securities as Level 2. In addition, we have significant investments in more actively traded agency RMBS and other types of securities such as FDICinsured debt and sovereign debt. The pricing sources derive the prices for these securities largely from quotes they obtain from three major interdealer brokers. The pricing sources receive their daily observed trade price and other information feeds from the interdealer brokers. For securities with bond insurance, the financial strength of the insurance provider is analyzed and that information is included in the fair value assessment for such securities. The pricing sources discontinue pricing any specific security whenever they determine there is insufficient observable data to provide a good faith opinion on price. The pricing sources did not discontinue pricing for any securities in our investment securities portfolio at Dec. 31, 2010. The prices provided by pricing sources are subject to review and challenges by industry participants, including ourselves. Level 3 Securities Where we have used our own cash flow models and estimates to value the securities, we classify them in Level 3 of the ASC 820 hierarchy. More than 99% of our securities are valued by pricing sources with reasonable levels of price transparency. Less than 1% of our securities are priced based on nonbinding dealer quotes and are included in Level 3 of the fair value hierarchy. See Note 23 to the Notes to Consolidated Financial Statements for details of our securities by ASC 820 hierarchy level. Fair value Derivative financial instruments Level 1 Derivative financial instruments Includes derivative financial instruments that are actively traded on exchanges, principally foreign exchange futures and forward contracts. Level 2 Derivative financial instruments Includes the majority of our derivative financial instruments priced using internally developed models that use observable inputs for interest rates, paydowns (both actual and expected), foreign exchange rates, option volatilities and other factors. The valuation process takes into consideration factors such as counterparty credit quality, liquidity, concentration concerns and results of stress tests. Level 3 Derivative financial instruments Certain interest rate swaps with counterparties that are highly structured entities require significant judgment and analysis to adjust the value determined by standard pricing models. These interest rate swaps are included in Level 3 of the ASC 820 hierarchy and compose less than 1% of our derivative financial instruments at fair value.
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To test the appropriateness of the valuations, we subject the models to review and approval by an independent internal risk management function, benchmark the models against similar instruments and validate model estimates to actual cash transactions. In addition, we perform detailed reviews and analyses of profit and loss. Valuation adjustments are determined and controlled by a function independent of the area initiating the risk position. As markets and products develop and the pricing for certain products becomes more transparent, we refine our valuation methods. Any changes to the valuation models are reviewed by management to ensure the changes are justified. To confirm that our valuation policies are consistent with exit prices as prescribed by ASC 820, we reviewed our derivative valuations using recent transactions in the marketplace, pricing services and the results of similar types of transactions. As a result of maximizing observable inputs as required by ASC 820, we reflect external credit ratings as well as observable credit default swap spreads for both ourselves as well as our counterparties when measuring the fair value of our derivative positions. Accordingly, the valuation of our derivative positions is sensitive to the current changes in our own credit spreads, as well as those of our counterparties. For details of our derivative financial instruments by ASC 820 hierarchy level, see Note 26 to the Notes to Consolidated Financial Statements. Fair value option ASC 825 provides the option to elect fair value as an alternative measurement basis for selected financial assets, financial liabilities, unrecognized firm commitments and written loan commitments which are not subject to fair value under other accounting standards. Under ASC 825, fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in income. See Note 24 to the Notes to Consolidated Financial Statements for additional disclosure regarding the fair value option. Fair value Judgments In times of illiquid markets and financial stress, actual prices and valuations may significantly diverge from results predicted by models. In addition, other factors can affect our estimate of fair value, including market dislocations, incorrect model assumptions, and unexpected correlations. These valuation methods could expose us to materially different results should the models used or underlying assumptions be inaccurate. See Basis of Presentation in Note 1 to the Notes to Consolidated Financial Statements. Otherthantemporary impairment In April 2009, the FASB issued new guidance included in ASC 320 which modifies the otherthantemporary impairment (OTTI) model for investments in debt securities. Under this guidance, a debt security is considered impaired if its fair value is less than its amortized cost basis. An OTTI is triggered if (1) the intent is to sell the security, (2) the security will more likely than not have to be sold before the impairment is recovered, or (3) the amortized cost basis is not expected to be recovered. When an entity does not intend to sell the security before recovery of its cost basis, it will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income. For each nonagency RMBS, which includes AltA, subprime and prime RMBS not backed by the government, in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if an OTTI has occurred. To determine if the unrealized loss for nonagency RMBS is otherthantemporary, we project total estimated defaults of the underlying mortgages and multiply that calculated amount by an estimate of realizable value upon sale of these assets in the marketplace (severity) in order to determine the projected collateral loss. We also evaluate the current credit enhancement underlying the bond to determine the impact on cash flows. If we determine that a given RMBS position will be subject to a writedown or loss, we record the expected credit loss as a charge to earnings. During 2010, the housing market and broader economy improved slightly. As a result, we adjusted our nonagency RMBS estimated default and loss severity assumptions to decrease estimated defaults and increased the amount we expect to receive to cover the value of the original loan. See Note 5 of the Notes to Consolidated Financial Statements for projected weightedaverage default rates and loss severities for the 2007, 2006 and late2005 nonagency RMBS and Grantor Trust portfolios at Dec. 31, 2010 and 2009. If actual delinquencies, default rates and loss severity assumptions worsen, we would expect additional impairment losses to be recorded in future periods.
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Net securities gains in 2010 were $27 million compared with losses of $5.4 billion in 2009. The losses in 2009 reflect both credit and noncredit related losses on our investment securities portfolio, including securities for which we declared our intent to sell or restructure. If we were to increase or decrease each of our loss severity and projected default rates by 100 basis points on each of the positions in our AltA, subprime and prime RMBS portfolios including the securities previously held by the Grantor Trust, creditrelated impairment charges on these securities would have increased by $3 million (pretax) or decreased by $3 million (pretax) at Dec. 31, 2010. In addition, we assess OTTI for an appropriate subset of our investment securities subject to guidance included in ASC 325 Investments Other by testing for an adverse change in cash flows. Any unrealized loss on a security identified as otherthantemporarily impaired under ASC 325 analysis is charged to earnings. Upon acquisition of a security, BNY Mellon decides whether it is within the scope of ASC 325 or if it will be evaluated for impairment under ASC 320. Subsequently, if the security is downgraded, we do not alter this decision. ASC 325 is an interpretation of ASC 320 for certain debt securities which are beneficial interests in securitized financial assets. Specifically, ASC 325 provides incremental impairment guidance for a subset of the debt securities within the scope of ASC 320. For securities where there is no debt rating at acquisition, and the security is a beneficial interest in securitized financial assets, we use the ASC 325 impairment model. For securities where there is no debt rating at acquisition and the security is not a beneficial interest in securitized financial assets we use the ASC 320 impairment model. Goodwill and other intangibles We record all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinitelived intangibles and other intangibles, at fair value as required by ASC 805 Business Combinations and ASC 350 Intangibles Goodwill and Other. The initial recording of goodwill and intangibles requires subjective judgments concerning estimates of the fair value of the acquired assets and liabilities. Goodwill ($18.0 billion at Dec. 31, 2010) and indefinitelived intangible assets ($2.7 billion at Dec. 31, 2010) are not amortized but are subject to tests for impairment annually or more often if events or circumstances indicate they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. Key judgments in accounting for intangibles include useful life and classification between goodwill and indefinitelived intangibles or other intangibles which require amortization. At Dec. 31, 2010, we had $23.7 billion of goodwill, indefinitelived intangibles, and other intangible assets. See Notes 1 and 7 of the Notes to Consolidated Financial Statements for additional information regarding goodwill, intangible assets and annual impairment testing. Pension accounting BNY Mellon has defined benefit pension plans covering approximately 26,600 U.S. employees and approximately 2,000 nonU.S. employees. BNY Mellon has two qualified and several nonqualified defined benefit pension plans in the U.S. and several pension plans overseas. As of Dec. 31, 2010, the U.S. plans accounted for 83% of the projected benefit obligation. The pension expense for BNY Mellon plans was $47 million in 2010 compared to a pension credit of $17 million in 2009 and a pension credit of $20 million in 2008. Effective Jan. 1, 2011, the U.S. pension plan was amended to reduce benefits earned by participants for service after 2010, and to freeze plan participation such that no new employees will enter the plan after Dec. 31, 2010. This change in the pension plan is expected to reduce pension expense by approximately $40 million in 2011. A net pension expense of approximately $87 million is expected to be recorded by BNY Mellon in 2011, assuming currency exchange rates at Dec. 31, 2010. The expected increase in pension expense in 2011 is primarily driven by the change in plan assumptions partially offset by the plan changes mentioned above. A number of key assumption and measurement date values determine pension expense. The key elements include the longterm rate of return on plan assets, the discount rate, the marketrelated value of plan assets and the price used to value stock in the ESOP.
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(dollars in millions, except per share amounts) Domestic plans: Longterm rate of return on plan assets Discount rate Marketrelated value of plan assets (a) ESOP stock price (a) Net U.S. pension credit/(expense) All other net pension credit/(expense) Total net pension credit/(expense) (a)
Marketrelated value of plan assets and ESOP stock price are for the beginning of the plan year. See Summary of Significant Accounting and Reporting Policies in Note 1 of the Notes to Consolidated Financial Statements.
The discount rate for U.S. pension plans was determined after reviewing equivalent rates obtained by discounting the pension plans expected cash flows using various highquality longterm corporate bond yield curves. We also reviewed the results of several models that matched bonds to our pension cash flows. After reviewing the various indices and models, we selected a discount rate of 5.71% as of Dec. 31, 2010. The discount rates for foreign pension plans are based on highquality corporate bond rates in countries that have an active corporate bond market. In those countries with no active corporate bond market, discount rates are based on local government bond rates plus a credit spread. Our expected longterm rate of return on plan assets is based on anticipated returns for each applicable asset class. Anticipated returns are weighted for the expected allocation for each asset class. Anticipated returns are based on forecasts for prospective returns in the equity and fixed income markets, which should track the longterm historical returns for these markets. We also consider the growth outlook for U.S. and global economies, as well as current and prospective interest rates. The marketrelated value of plan assets also influences the level of pension expense. Differences between expected and actual returns are recognized over five years to compute an actuarially derived marketrelated value of plan assets. For the legacy Mellon Financial plans, the marketrelated value of assets was set equal to the assets market value as of July 1, 2007. The averaging of actuarial gains and losses for the legacy Mellon Financial plan assets is being phased in over a fiveyear period beginning July 1, 2007. Unrecognized actuarial gains and losses are amortized over the future service period of active employees if they exceed a threshold amount. BNY Mellon currently has $1.1 billion of unrecognized losses which are being amortized. The annual impacts of hypothetical changes in the key elements on pension costs are shown in the table below.
Pension expense (dollar amounts in millions, except per share amounts) Longterm rate of return on plan assets Change in pension expense Discount rate Change in pension expense Marketrelated value of plan assets Change in pension expense ESOP stock price Change in pension expense (Decrease) in (100) bp $ 44 (50) bp $ 33 (20)% $ 168 $ (10) $ 13 Increase in pension expense (50) bp $ 22 (25) bp $ 17 (10)% $ 84 $ (5) $ 6 50 bp $(22) 25 bp $(16) 10% $(84) $ 5 $ (6) pension expense 100 bp $ (44) 50 bp $ (31) 20% $(164) $ 10 $ (12)
In addition to its pension plans, BNY Mellon has an Employee Stock Ownership Plan (ESOP). Benefits payable under The Bank of New York Mellon Corporation Pension Plan are offset by the equivalent value of benefits earned under the ESOP for employees who participated in the legacy Retirement Plan of the Bank of New York Company, Inc.
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Consolidated balance sheet review At Dec. 31, 2010, total assets were $247.3 billion compared with $212.2 billion at Dec. 31, 2009. Deposits totaled $145.3 billion at Dec. 31, 2010, and $135.1 billion at Dec. 31, 2009. The increase in consolidated total assets resulted from the addition of $14.6 billion for the adoption of ASC 810, a higher level of both interestbearing and noninterestbearing deposits and the impact of the Acquisitions. Total assets averaged $237.8 billion in 2010, compared with $212.1 billion in 2009. The increase in average assets primarily reflects the factors mentioned above. Total deposits averaged $139.4 billion in 2010 and $134.7 billion in 2009. At Dec. 31, 2010, we had approximately $55.4 billion of liquid funds and $22.2 billion of cash (including approximately $18.5 billion of overnight deposits with the Federal Reserve and other central banks) for a total of approximately $77.6 billion of available funds. This compares with available funds of $70.9 billion at Dec. 31, 2009. Our percentage of liquid assets to total assets was 31% at Dec. 31, 2010, compared with 33% at Dec. 31, 2009. Our interestbearing deposits with banks are all placed with large highly rated global financial institutions. The average life of the interestbearing deposits is approximately 47 days. Investment securities were $66.3 billion or 27% of total assets at Dec. 31, 2010, compared with $56.0 billion or 26% of total assets at Dec. 31, 2009. The increase primarily reflects a higher level of U.S. Treasury securities, securities acquired in the Acquisitions and an increase in the unrealized gain on the securities portfolio. Loans were $37.8 billion or 15% of total assets at Dec. 31, 2010, compared with $36.7 billion or 17% of total assets at Dec. 31, 2009. The increase in loan levels was primarily due to higher margin loans. Total shareholders equity applicable to BNY Mellon was $32.4 billion at Dec. 31, 2010, and $29.0 billion at Dec. 31, 2009. The increase in total shareholders equity primarily reflects retained earnings in 2010, the improvement in our investment securities portfolio due to the decline in interest rates and the tightening of credit spreads, and the issuance of $677 million of common equity. BNY Mellon, through its involvement in the Government Securities Clearing Corporation (GSCC), settles government securities transactions on a net basis for payment and delivery through the Fed wire system. As a result, at Dec. 31, 2010, the assets and liabilities of BNY Mellon were reduced by $2.5 billion for the netting of repurchase agreements and reverse repurchase agreement transactions executed with the same counterparty under standardized Master Repurchase Agreements. This netting is performed in accordance with FASB Interpretation No. 41 (ASC 21020) Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements. Investment securities In the discussion of our investment securities portfolio, we have included certain credit ratings information because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications for our investment portfolio could indicate increased credit risk for us and could be accompanied by a reduction in the fair value of our investment securities portfolio.
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The following table shows the distribution of our total investment securities portfolio:
Dec. 31, 2010 Amortized cost $ 5,067 2,225 1,454 690 724 512 308 10,980 19,780 8,536 12,650 2,164 1,626 128 2,884 2,428 1,007 3,833 $66,016
(dollar amounts in millions) Watch list: (b) European floating rate notes (c) Commercial MBS Prime RMBS AltA RMBS Subprime RMBS Credit cards Other Total Watch list (b) Agency RMBS Sovereign debt/sovereign guaranteed U.S. Treasury securities Grantor Trust: AltA RMBS (d) Prime RMBS (d) Subprime RMBS (d) Foreign covered bonds FDICinsured debt U.S. Government agency debt Other Total investment securities (a) Amortized cost before impairments.
Fair value gain/(loss) $ 5,503 2,302 1,684 779 470 610 465 11,813 19,016 8,753 6,378 4,160 N/A N/A N/A 2,003 1,260 2,489 $ 55,872 $
248 153 167 94 127 21 34 844 139 41 (35) 467 N/A N/A N/A (16) 6 (27) (18) $ 1,401
Ratings Fair value as a % of A+/ BB+ and Fair amortized Unrealized AAA/ BBB+/ Not value gain/(loss) AA A BBB lower rated cost (a) $ 4,636 91% $ (431) 94% 6% % % % 2,281 102 56 92 5 3 1,373 93 (81) 52 14 7 27 671 74 (19) 28 5 1 66 533 73 (191) 65 12 7 16 517 99 5 2 97 1 331 48 23 3 1 24 19 53 10,342 89 (638) 75 11 3 9 2 20,157 102 377 100 8,585 100 49 100 12,635 100 (15) 100 2,513 66 349 3 4 3 90 1,825 76 199 2 3 95 158 71 30 14 86 2,868 99 (16) 100 2,474 102 46 100 1,005 100 (2) 100 3,807 99 (26) 52 5 4 1 38 $66,369 (e) 96% $ 353 (e) 87% 2% 1% 8% 2%
(b) The Watch list includes those securities we view as having a higher risk of impairment charges. (c) Includes RMBS, commercial MBS, and other securities. (d) These RMBS were previously included in the 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 writtendown amortized cost and the current face amount of each of these securities. (e) Includes a $60 million unrealized gain on derivatives hedging securities available for sale.
The fair value of our investment securities portfolio was $66.4 billion at Dec. 31, 2010, compared with $55.9 billion at Dec. 31, 2009. The increase in the fair value of the securities portfolio primarily reflects a higher level of U.S. Treasury securities, securities acquired in the Acquisitions and an increase in the unrealized gain of the securities portfolio. At Dec. 31, 2010, the total investment securities portfolio had an unrealized pretax gain of $353 million compared with an unrealized pretax loss of $1.0 billion at Dec. 31, 2009. The unrealized net of tax gain on our investment securities availableforsale portfolio included in other comprehensive income was $151 million at Dec. 31, 2010, compared with a loss of $619 million at Dec. 31, 2009. The improvement in the valuation of the investment securities portfolio was due to the decline in interest rates and the tightening of credit spreads. In 2009, we established a Grantor Trust in connection with the restructuring of our investment securities portfolio. The Grantor Trust is in the process of being dissolved. The securities previously held in the Grantor Trust are included in our securities portfolio. The investment securities previously included in the Grantor Trust were marked down to approximately 60% of face value in 2009. At Dec. 31, 2010, these securities were trading above adjusted amortized cost with a total unrealized pretax gain of $578 million. At Dec. 31, 2010, 87% of the securities in our portfolio were rated AAA/AA, compared with 86% at Dec. 31, 2009. We routinely test our investment securities for OTTI. (See Critical accounting estimates for additional disclosure regarding OTTI.) At Dec. 31, 2010, we had $1.7 billion of accretable discount related to the restructuring of the investment securities portfolio. The discount related to these transactions had a remaining average life of
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approximately 4.1 years. The accretion of discount related to these securities increases net interest revenue and is recorded on a level yield basis. The discount accretion totaled $458 million in 2010 and $91 million in 2009. Also, at Dec. 31, 2010, we had $779 million of net amortizable purchase premium relating to investment securities with a remaining average life of approximately 3.3 years. For these securities, the amortization of net premium decreased net interest revenue and is recorded on a level yield basis. We recorded net premium amortization of $242 million in 2010 and $68 million in 2009. Net securities gains in 2010 were $27 million. The following table provides pretax securities gains (losses) by type.
Net securities gains (losses) (in millions) AltA RMBS Prime RMBS Subprime RMBS European floating rate notes Home equity lines of credit Commercial MBS Grantor Trust Credit cards ABS CDOs Other Total net securities gains (losses) 2010 $ (13) (4) (3) 47 $ 27 2009 $ (3,113) (1,008) (322) (269) (205) (89) (39) (26) (23) (275) $ (5,369) 2008 $ (1,236) (12) (12) (104) (122) (142) $ (1,628)
The deterioration in the economy in 2009 and 2008 had a significant impact on our AltA, prime and subprime RMBS portfolios. The investment securities losses in 2009 and 2008 reflected both credit and noncredit related impairment. At Dec. 31, 2010, the investment securities portfolio includes $57 million of assets not accruing interest primarily related to securities issued by Lehman or its affiliates. These securities are held at market value. The following table shows the fair value of the European floating rate notes by geographical location at Dec. 31, 2010. The unrealized loss on these securities was $431 million at Dec. 31, 2010, an improvement of $248 million from an unrealized loss of $679 million at Dec. 31, 2009.
European floating rate notes at Dec. 31, 2010 (a) (in millions) RMBS Other Total (a) United Kingdom $ 2,178 274 $ 2,452 Netherlands $ 1,061 81 $ 1,142 $ Other 752 290 $ 1,042
Included in our investment securities portfolio are the following securities that have a credit enhancement through a guarantee by a monoline insurer:
Investment securities guaranteed by monoline insurers (in millions) State and political subdivisions Mortgagebacked securities Total fair value Amortized cost less securities losses Marktomarket unrealized (loss) (pretax) (a) The par value guaranteed by the monoline insurers was $741 million. Dec. 31, 2010 $ 539 109 $ 648 (a) $ 685 $ (37) Dec. 31, 2009 $ 610 137 $ 747 $ 761 $ (14)
At Dec. 31, 2010, securities guaranteed by monoline insurers were rated 46% AAA to AA, 15% A+ to A, 15% BBB+ to BBB and 24% BB+ and lower. The decrease in the fair value of these securities from Dec. 31, 2009, reflects maturities, calls and paydowns. In all cases, when purchasing the securities, we reviewed the credit quality of the underlying securities, as well as the insurer. See Note 23 of the Notes to Consolidated Financial Statements for the detail of securities by level in the fair value hierarchy.
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The following table shows the maturity distribution by carrying amount and yield (on a tax equivalent basis) of our investment securities portfolio at Dec. 31, 2010.
Investment securities portfolio U.S. Treasury AmountYield (a) $ 1,194 8,677 2,738 $12,609 $ 0.91% 1.27 2.80 1.57% % % State and U.S. political government subdivisions agency AmountYield (a) AmountYield (a) $ 465 540 $1,005 $ 2.99% 1.30 2.08% % % $ 5 50 8 445 $508 $ 2 20 97 $119 9.05% 2.21 7.74 4.48 4.35% % 6.88 6.67 6.60 6.61% Other bonds, notes and debentures AmountYield (a) $ 7,784 5,661 1,050 264 $14,759 $ 1.84% 2.16 3.09 1.31 2.05% % %
(dollars in millions) Securities availableforsale: One year or less Over 1 through 5 years Over 5 through 10 years Over 10 years Mortgagebacked securities Assetbacked securities Equity securities Total Securities heldtomaturity: One year or less Over 1 through 5 years Over 5 through 10 years Over 10 years Mortgagebacked securities Equity securities Total
Mortgage/ assetbacked and equity securities AmountYield (a) $ 30,398 788 2,585 $33,771 $ 3,532 4 $ 3,536 % 5.47 1.52 0.40 4.99% % 1.93 1.68 1.93%
Total $ 9,448 14,928 3,796 709 30,398 788 2,585 $62,652 $ 2 20 97 3,532 4 $ 3,655
We also have equity investments categorized as other assets (parenthetical amounts indicate carrying values at Dec. 31, 2010). Included in other assets are joint ventures and other equity investments ($1.6 billion), seed capital ($185 million), Federal Reserve Bank stock ($400 million), private equity investments ($143 million), and tax advantaged lowincome housing investments ($466 million). For additional information on the fair value of our private equity investments and seed capital, see Note 23 of the Notes to Consolidated Financial Statements. Our equity investment in Wing Hang had a fair value of $827 million (book value of $347 million) based on its share price at Dec. 31, 2010. An agreement with certain other shareholders of Wing Hang prohibits the sale of this interest without their permission. We received dividends from Wing Hang of $6 million, $2 million and $26 million in 2010, 2009 and 2008, respectively. Private equity activities consist of investments in private equity funds, mezzanine financings, and direct equity investments. Consistent with our policy to focus on our core activities, we continue to reduce our exposure to these activities. The carrying and fair value of our private equity investments was $143 million at Dec. 31, 2010, down $44 million from $187 million at Dec. 31, 2009. At Dec. 31, 2010, private equity investments consisted of investments in private equity funds of $137 million, direct equity of less than $1 million, and leveraged bond funds of $6 million. Investment income was $29 million in 2010. At Dec. 31, 2010, we had $35 million of unfunded investment commitments to private equity funds. If unused, the commitments expire between 2011 and 2015. Commitments to private equity limited partnerships may extend beyond the expiration period shown above to cover certain followon investments, claims and liabilities, and organizational and partnership expenses.
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Loans Total exposure consolidated (in billions) Nonmargin loans: Financial institutions Commercial Subtotal institutional Wealth management loans and mortgages Commercial real estate Lease financing Other residential mortgages Overdrafts Other Subtotal nonmargin loans Margin loans Total Loans $ 9.3 1.6 10.9 6.5 1.6 3.1 2.1 6.0 0.8 31.0 6.8 $37.8 Dec. 31, 2010 Unfunded commitments $ 15.8 18.8 34.6 1.8 1.6 0.1 38.1 38.1 Total exposure $ 25.1 20.4 45.5 8.3 3.2 3.2 2.1 6.0 0.8 69.1 6.8 75.9 Dec. 31, 2009 Unfunded commitments $ 18.5 22.5 41.0 1.8 1.7 0.1 44.6 44.6 Total exposure $ 27.2 25.5 52.7 8.0 3.7 3.6 2.2 6.0 0.4 76.6 4.7 81.3
Loans $ 8.7 3.0 11.7 6.2 2.0 3.5 2.2 6.0 0.4 32.0 4.7 $36.7
At Dec. 31, 2010, total exposures were $75.9 billion, a decrease of 7% from $81.3 billion at Dec. 31, 2009, reflecting a decrease in institutional, commercial real estate and lease financing exposures, partially offset by an increase in margin loans. We tightly monitor risk within our loan portfolio and continue to reduce risk by:
Avoiding single name/industry concentrations, using credit default swaps as appropriate. Exiting highrisk portfolios. Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios make up 60% of our total lending exposure.
Financial institutions The diversity of the financial institutions portfolio is shown in the following table.
Financial institutions portfolio exposure (dollar amounts in billions) Securities industry Banks Insurance Asset managers Government Other Total Loans $3.9 4.2 0.1 0.8 0.2 0.1 $9.3 Unfunded commitments $ 2.3 2.2 5.0 2.4 2.1 1.8 $ 15.8
The financial institutions portfolio exposure was $25.1 billion at Dec. 31, 2010, compared to $27.2 billion at Dec. 31, 2009. The change from Dec. 31, 2009, primarily reflects decreases in insurance, government and asset manager exposure, partially offset by increased exposure to brokerdealers. Financial institution exposures are high quality with 91% meeting the investment grade equivalent criteria of our rating system at Dec. 31, 2010. These exposures are generally shortterm, with 73% expiring within one year, and are frequently secured by securities that we may hold in custody on behalf of those financial institutions. For example, securities industry and asset managers often borrow against marketable securities held in custody.
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As a conservative measure, our internal credit rating classification for international counterparties caps the rating based upon the sovereign rating of the country where the counterparty resides regardless of the credit rating of the counterparty or the underlying collateral. Our exposure to banks is predominately to investment grade counterparties in developed countries. Noninvestment grade bank exposures are short term in nature supporting our global trade finance and U.S. dollar clearing businesses in developing countries. The asset manager portfolio exposures are high quality with 99% meeting our investment grade equivalent ratings criteria at Dec. 31, 2010. These exposures are generally shortterm liquidity facilities with the vast majority to regulated mutual funds.
Commercial The diversity of the commercial portfolio is shown in the following table.
Commercial portfolio exposure (dollar amounts in billions) Services and other Manufacturing Energy and utilities Media and telecom Total Loans $0.7 0.4 0.3 0.2 $1.6 Unfunded commitments $ 5.9 5.9 5.4 1.6 $ 18.8
Dec. 31, 2010 Total exposure $ 6.6 6.3 5.7 1.8 $ 20.4
Dec. 31, 2009 Unfunded commitments $ 7.7 6.4 6.3 2.1 $ 22.5
The commercial portfolio exposure decreased 20% to $20.4 billion at Dec. 31, 2010, from $25.5 billion at Dec. 31, 2009, reflecting our strategy to reduce targeted risk exposure. Our goal is to migrate toward a predominantly investment grade portfolio. The table below summarizes the percent of the financial institutions and commercial exposures that are investment grade.
Percent of the portfolios that are investment grade Financial institutions Commercial Dec. 31 2010 91% 89% Dec. 31, 2009 85% 80% Dec. 31, 2008 90% 80%
Our credit strategy is to focus on investment grade names to support crossselling opportunities, avoid single name/industry concentrations and exit highrisk portfolios. Each customer is assigned an internal rating grade, which is mapped to an external rating agency grade equivalent based upon a number of dimensions which are continually evaluated and may change over time. The execution of our strategy, as well as an adjustment in the credit ratings of our existing portfolio, has resulted in a higher percentage of the portfolio that is investment grade at Dec. 31, 2010, compared with Dec. 31 2009. Wealth management loans and mortgages Wealth Management loans and mortgages are primarily composed of loans to highnetworth individuals, which are secured by marketable securities and/or residential property. Wealth management mortgages are primarily interestonly adjustable rate mortgages with an average loan to value ratio of 61% at origination. In the wealth management portfolio, 1% of the mortgages were past due at Dec. 31, 2010. At Dec. 31, 2010, the private wealth mortgage portfolio was comprised of the following geographic concentrations: New York 25%; Massachusetts 17%; California 17%; Florida 8%; and other 33%. Commercial real estate Our commercial real estate facilities are focused on experienced owners and are structured with moderate leverage based on existing cash flows. Our commercial real estate lending activities include both construction facilities and mediumterm loans. Our client base consists of experienced developers and longterm holders of real estate assets. Loans are approved on the basis of existing or projected cash flow, and supported by appraisals and knowledge of local market conditions. Development loans are
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structured with moderate leverage, and in most instances, involve some level of recourse to the developer. Our commercial real estate exposure totaled $3.2 billion at Dec. 31, 2010 compared with $3.7 billion at Dec. 31, 2009. At Dec. 31, 2010, approximately 70% of our commercial real estate portfolio is secured. The secured portfolio is diverse by project type with approximately 58% secured by residential buildings, 21% secured by office buildings, 8% secured by retail properties, and 13% secured by other categories. Approximately 96% of the unsecured portfolio is allocated to investment grade real estate investment trusts (REITs) under revolving credit agreements. At Dec. 31, 2010, our commercial real estate portfolio is comprised of the following geographic concentrations: New York metro 49%; investment grade REITs 29%; and other 22%. Lease financings The lease financing portfolio consisted of nonairline exposures of $3.0 billion and $210 million of airline exposures at Dec. 31, 2010. Approximately 90% of the lease financing exposure is investment grade, or investment grade equivalent. At Dec. 31, 2010, the nonairline portion of the lease financing portfolio consisted of $3.0 billion of exposures backed by welldiversified assets, primarily largeticket transportation equipment. The largest component is rail, consisting of both passenger and freight trains. Assets are both domestic and foreignbased, with primary concentrations in the United States and European countries. Excluding airline lease financing, counterparty rating equivalents at Dec. 31, 2010, were as follows:
9% of the counterparties are AA or better; 38% are A; 48% are BBB; and 5% are noninvestment grade
At Dec. 31, 2010, our $210 million of exposure to the airline industry consisted of $12 million of real estate lease exposure, as well as the airline lease financing portfolio which included $72 million to major U.S. carriers, $114 million to foreign airlines and $12 million to U.S. regional airlines. In 2010, the U.S domestic airline industry has shown significant improvement in revenues and yields. Despite this improvement, these carriers continue to have extremely high debt levels. Combined with their high fixedcost operating models, the domestic airlines remain vulnerable. As such, we continue to maintain a sizable allowance for loan losses against these exposures and continue to closely monitor the portfolio. We utilize the lease financing portfolio as part of our tax management strategy. Other residential mortgages The other residential mortgage portfolio primarily consists of 14 family residential mortgage loans and totaled $2.1 billion at Dec. 31, 2010. Included in this portfolio is approximately $745 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007 that are predominantly prime mortgage loans, with a small portion of AltA loans. As of Dec. 31, 2010, the remaining prime and AltA mortgage loans in this portfolio had a weightedaverage loantovalue ratio of 75% at origination and approximately 30% of these loans were at least 60 days delinquent. The properties securing the prime and AltA mortgage loans were located (in order of concentration) in California, Florida, Virginia, Maryland and the tristate area (New York, New Jersey and Connecticut). To determine the projected loss on the prime and AltA mortgage portfolio, we calculate the total estimated defaults of these mortgages and multiply that amount by an estimate of realizable value upon sale in the marketplace (severity). At Dec. 31, 2010, we had less than $15 million in subprime mortgages included in the other residential mortgage portfolio. The subprime loans were issued to support our Community Reinvestment Act requirements. Overdrafts Overdrafts primarily relate to custody and securities clearance clients. Overdrafts occur on a daily basis in the custody and securities clearance business and are generally repaid within two business days. Other loans Other loans primarily includes loans to consumers that are fully collateralized with equities, mutual funds and fixed income securities, as well as bankers acceptances.
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BNY Mellon
Loans by product The following table shows trends in the loans outstanding at yearend on a continuing operations basis over the last five years.
Loans by product at year end (in millions) Domestic: Financial institutions Commercial Wealth Management loans and mortgages Commercial real estate Lease financing (b) Other residential mortgages Overdrafts Other Margin loans Total domestic Foreign: Financial institutions Commercial Lease financings (b) Government and official institutions Other (primarily overdrafts) Total foreign Total loans (a) Results for 2006 include legacy The Bank of New York Company, Inc. only.
2010 $ 4,630 1,250 6,506 1,592 1,605 2,079 4,524 771 6,810 29,767 4,626 345 1,545 1,525 8,041 $37,808
2009 $ 5,509 2,324 6,162 2,044 1,703 2,179 3,946 407 4,657 28,931 3,147 634 1,816 52 2,109 7,758 $36,689
2008 $ 5,546 5,786 5,333 3,081 1,809 2,505 4,835 485 3,977 33,357 3,755 573 2,154 1,434 2,121 10,037 $43,394
2007 $ 8,934 5,099 4,521 3,019 1,980 3,115 4,037 363 5,210 36,278 4,892 852 2,935 312 5,662 14,653 $50,931
2006 (a) $ 9,694 3,390 1,355 1,371 2,228 2,927 1,728 52 5,167 27,912 3,184 1,033 3,298 9 2,357 9,881 $37,793
(b) Includes unearned income on domestic and foreign lease financings of $2,036 million at Dec. 31, 2010, $2,282 million at Dec. 31, 2009, $2,836 million at Dec. 31, 2008, $4,050 million at Dec. 31, 2007 and $3,336 million at Dec. 31, 2006.
Maturity of loan portfolio The following table shows the maturity structure of our loan portfolio at Dec. 31, 2010.
Maturity of loan portfolio at Dec. 31, 2010 (a) Within 1 year $ 4,285 149 647 4,524 537 6,810 16,952 6,242 $23,194 Between 1 and 5 years $ 345 1,094 362 1,801 254 $ 2,055 (b) After 5 years $ 7 583 234 824 $ 824 (b)
(in millions) Domestic: Financial institutions Commercial Commercial real estate Overdrafts Other Margin loans Subtotal Foreign Total (a) (b)
Total $ 4,630 1,250 1,592 4,524 771 6,810 19,577 6,496 $26,073
Excludes loans collateralized by residential properties, lease financings and wealth management loans and mortgages. Variable rate loans due after one year totaled $2.8 billion and fixed rate loans totaled $125 million.
International loans We have credit relationships in the international markets, particularly in areas associated with our securities servicing and trade finance activities. Excluding lease financings, these activities resulted in outstanding international loans of $6.5 billion and $5.9 billion as of Dec. 31, 2010 and 2009, respectively. This increase primarily resulted from an increase in loans to financial institutions. Asset quality and allowance for credit losses Over the past several years, we have improved our risk profile through greater focus on clients who are active users of our noncredit services, deemphasizing broadbased loan growth. Our primary exposure to the credit risk of a customer consists of funded loans, unfunded formal contractual commitments to lend, standby letters of credit and overdrafts associated with our custody and securities clearance businesses.
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The role of credit has shifted to one that complements our other services instead of as a lead product. Credit solidifies customer relationships and, through a disciplined allocation of capital, can earn acceptable rates of return as part of an overall relationship. We have implemented a credit strategy to reduce exposures that no longer meet risk/return criteria, including an assessment of overall relationship profitability. In addition, we make use of credit derivatives and other risk mitigants as economic hedges of portions of the credit risk in our portfolio. The effect of these transactions is to transfer credit risk to creditworthy, independent third parties. The following table details changes in our allowance for credit losses for the last five years.
Allowance for credit losses activity (dollar amounts in millions) Margin loans Nonmargin loans Total loans at Dec. 31, Average loans outstanding Allowance for credit losses: Balance, Jan. 1, Domestic Foreign Unallocated Total Chargeoffs: Commercial Commercial real estate Financial institutions Lease financing Wealth management loans and mortgages Other residential mortgage Foreign Other Total chargeoffs Recoveries: Commercial Commercial real estate Financial institutions Lease financing Wealth management loans and mortgages Other residential mortgage Foreign Other Total recoveries Net chargeoffs Provision for credit losses Transferred to discontinued operations Acquisitions/dispositions and other Balance, Dec. 31, Domestic Foreign Unallocated Total allowance, Dec. 31, (b) Allowance for loan losses Allowance for lending related commitments Net chargeoffs to average loans outstanding Net chargeoffs to total allowance for credit losses Allowance for loan losses as a percent of total loans Allowance for loan losses as a percent of nonmargin loans Total allowance for credit losses as a percent of total loans Total allowance for credit losses as a percent of nonmargin loans 2010 $ 6,810 30,998 37,808 36,305 $ 555 47 26 628 (5) (8) (25) (4) (46) (88) 15 1 2 2 20 (68) 11 408 47 116 $ 571 $ 498 73 0.19% 11.91 1.32 1.61 1.51 1.84 2009 $ 4,657 32,032 36,689 36,424 $ 448 19 62 529 (90) (31) (34) (1) (60) (216) 1 1 2 (214) 332 (19) 555 47 26 $ 628 $ 503 125 0.59% 34.08 1.37 1.57 1.71 1.96 2008 $ 3,977 39,417 43,394 48,132 $ 341 37 116 494 (21) (15) (9) (1) (20) (17) (83) 2 3 1 4 10 (73) 104 27 (23) 448 19 62 $ 529 $ 415 114 0.15% 13.80 0.96 1.05 1.22 1.34 2007 (a) $ 5,210 45,721 50,931 41,515 $ 312 23 102 437 (22) (36) (19) (1) (78) 1 13 1 15 (63) (11) 1 130 341 37 116 $ 494 $ 327 167 0.15% 12.75 0.64 0.72 0.97 1.08 2006 (a) $ 5,167 32,626 37,793 33,612 $ 343 31 96 470 (27) (2) (29) 3 4 7 2 16 (13) (20) 312 23 102 437 287 150 0.04% 2.97 0.76 0.88 1.16 1.34
$ $
(a) Chargeoffs, recoveries and the provision for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. These categories for 2006 reflect legacy The Bank of New York Company, Inc. (b) The allowance for credit losses at Dec. 31, 2010, and 2009 excludes discontinued operations. The allowance for credit losses includes discontinued operations of $35 million at Dec. 31, 2008, and $17 million at Dec. 31, 2007.
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Net chargeoffs were $68 million in 2010, $214 million in 2009 and $73 million in 2008. Chargeoffs in 2010 included $46 million of other residential mortgages primarily located in California, New York and Florida, $17 million related to a mortgage company, partially offset by $10 million of net recoveries from the media portfolio. Net chargeoffs in 2009 included $71 million related to print and broadcast media, $60 million of residential mortgages primarily located in California, New York, New Jersey and Florida, $31 million related to commercial real estate exposure in Florida and New York, $38 million to finance and leasing companies and $8 million to an auto parts manufacturer. The provision for credit losses was $11 million in 2010 compared with $332 million in 2009 and $104 million in 2008. The decrease in the provision for credit losses in 2010 compared with 2009 primarily reflects broad improvement in the quality of the credit portfolio driven by a 66% decrease in criticized assets compared with Dec. 31, 2009, primarily in the insurance, automotive and media portfolios. Criticized assets include impaired credits and higher riskrated credits. Also impacting the provision for credit losses were decreases in nonperforming loans, particularly in the insurance portfolio. The total allowance for credit losses was $571 million at Dec. 31, 2010, and $628 million Dec. 31, 2009. The decrease in the allowance for credit losses reflects a lower provision in 2010 resulting from a 66% decline in criticized assets. The ratio of the total allowance for credit losses to yearend nonmargin loans was 1.84% at Dec. 31, 2010, and 1.96% at Dec. 31, 2009. The decrease reflects the decline in criticized assets in 2010. The ratio of the allowance for loan losses to yearend nonmargin loans remained stable at 1.61% at Dec. 31, 2010, compared with 1.57% at Dec. 31, 2009. We had $6.8 billion of secured margin loans on our balance sheet at Dec. 31, 2010, compared with $4.7 billion at Dec. 31, 2009. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to them. As a result, we believe that the ratio of total allowance for credit losses to nonmargin loans is a more appropriate metric to measure the adequacy of the reserve. Based on an evaluation of the four elements of the allowance for credit losses, as discussed in Note 1 of Notes to Consolidated Financial Statements, as well as individual credits, historical credit losses, and global economic factors, we have allocated our allowance for credit losses on a continuing operations basis as follows:
Allocation of allowance
2010 (a)
2009 (a)
2008 (a)
2007 (a)
2006 (b)
Commercial Other residential mortgages Lease financing Financial institutions Wealth management (c) Commercial real estate Foreign Unallocated Total (a) (b) (c)
13% 33 12 2 6 6 8 20 100%
24% 25 12 12 9 7 7 4 100%
30% 15 15 9 5 10 4 12 100%
33% 5 15 6 3 7 8 23 100%
31% 4 31 2 2 2 5 23 100%
Excludes discontinued operations in 2010 and 2009. The allowance for credit losses includes discontinued operations in 2008 and 2007. Reflects legacy The Bank of New York Company, Inc. only. Includes the allowance for wealth management mortgages.
The allocation of allowance for credit losses is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the loss. The unallocated allowance reflects various factors in the current credit environment and is also available to, among other things, absorb further deterioration across all of our portfolios resulting from the current economic environment. The unallocated allowance for credit losses was 20% at Dec. 31, 2010, an increase from 4% at Dec. 31, 2009. We believe the unallocated allowance, at Dec. 31, 2010, is appropriate given the uncertainty of the economys direction and the potential for continued credit quality and valuation pressures in the residential mortgage and commercial real estate portfolios.
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Nonperforming assets The following table shows the distribution of nonperforming assets at the end of each of the last five years.
Nonperforming assets at Dec. 31 (dollars in millions) Loans: Other residential mortgages Wealth management Commercial real estate Commercial Foreign Financial institutions Total nonperforming loans Other assets owned Total nonperforming assets (b) Nonperforming assets ratio Allowance for loan losses/nonperforming loans Allowance for loan losses/nonperforming assets Total allowance for credit losses/nonperforming loans Total allowance for credit losses/nonperforming assets (a) Reflects legacy The Bank of New York Company, Inc. only. (b) Nonperforming assets at Dec. 31, 2010, and Dec. 31, 2009, exclude discontinued operations. Nonperforming assets at Dec. 31, 2008, and 2007 include discontinued operations of $96 million and $18 million, respectively. (c) The adoption of ASC 810 resulted in BNY Mellon consolidating loans of consolidated asset management funds of $13.8 billion at Dec. 31, 2010 into trading assets. These loans are not part of BNY Mellons loan portfolio. Included in these loans are $218 million of nonperforming loans. 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. 2010 $ 244 59 44 34 7 5 393 6 $ 399 (c) 1.1% 126.7 124.8 145.3 143.1 2009 $ 190 58 61 65 172 546 4 $ 550 1.5% 92.1 91.5 115.0 114.2 $ 2008 97 2 130 14 41 284 8 $ 292 0.7% 146.1 142.1 186.3 181.2 $ 2007 20 40 15 87 24 186 4 $ 190 0.4% 175.8 172.1 265.6 260.0 2006 (a) $ 2 26 9 37 1 $ 38 0.1% 775.7 755.3 1,181.1 1,150.0
Nonperforming assets were $399 million at Dec. 31, 2010, a decrease of $151 million compared with Dec. 31, 2009. The decrease primarily resulted from repayments of $136 million in the insurance portfolio, $24 million in the commercial real estate portfolio, $11 million in the commercial loan portfolio, chargeoffs of $86 million in the financial institutions, commercial real estate, commercial, wealth management, and other residential mortgage portfolios, and sales of $25 million from the other residential mortgage portfolio and $21 from the commercial loan portfolio. Also in 2010, $10 million in the commercial portfolio and $19 million in other residential mortgages returned to accrual status. Additions in 2010 included $145 million in the other residential mortgages portfolio, $17 million in the commercial loans portfolio, $14 million in commercial real estate portfolio, $12 million in the wealth management loan portfolio and $7 million in the financial institutions loan portfolio. Nonperforming assets activity (in millions) Balance at beginning of year Additions Return to accrual status Chargeoffs Paydowns/sales Transferred to discontinued operations Other Balance at end of year The following table shows loans past due 90 days or more and still accruing interest. 2010 $ 550 202 (32) (86) (236) 1 $ 399 2009 $ 292 611 (12) (151) (71) (96) (23) $ 550
Past due loans still accruing interest at yearend (in millions) Domestic: Consumer Commercial Total domestic Foreign Total past due loans (a) Reflects legacy The Bank of New York Company, Inc. only.
2010 $ 21 12 33 $ 33
2006 (a) $ 9 7 16 $ 16
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Past due loans at Dec. 31, 2010 were primarily comprised of $21 million of other residential mortgages and $12 million of commercial real estate loans. The $398 million decrease in past due loans compared with 2009 primarily resulted from the repayment of a loan to an asset manager that had previously filed for bankruptcy. For additional information, see Note 6 of the Notes to Consolidated Financial Statements. Deposits Total deposits were $145.3 billion at Dec. 31, 2010, an increase of 8% compared with $135.1 billion at Dec. 31, 2009. The increase in deposits reflects higher domestic deposits. Noninterestbearing deposits were $38.7 billion at Dec. 31, 2010, compared with $33.5 billion at Dec. 31, 2009. Interestbearing deposits were $106.6 billion at Dec. 31, 2010, compared with $101.6 billion at Dec. 31, 2009. The aggregate amount of deposits by foreign customers in domestic offices was $9.7 billion and $11.0 billion at Dec. 31, 2010 and 2009, respectively. Deposits in foreign offices totaled approximately $73 billion at Dec. 31, 2010, and approximately $71 billion at Dec. 31, 2009. The majority of these deposits were in amounts in excess of $100,000 and were primarily overnight foreign deposits. The following table shows the maturity breakdown of domestic time deposits of $100,000 or more at Dec. 31, 2010.
Domestic time deposits > $100,000 at Dec. 31, 2010 (in millions) 3 months or less Between 3 and 6 months Between 6 and 12 months Over 12 months Total Shortterm borrowings We fund ourselves primarily through deposits and other borrowings, which are comprised of federal funds purchased and securities sold under repurchase agreements, trading liabilities, payables to customers and brokerdealers, commercial paper, other borrowed funds and longterm debt. Certain other borrowings, for example, securities sold under repurchase agreements, require the delivery of securities as collateral. See Liquidity and dividends below for a discussion of longterm debt and liquidity metrics that we monitor and The Bank of New York Mellon Corporation parent companys (the Parent) limited reliance on shortterm borrowings. Information related to federal funds purchased and securities sold under repurchase agreements is presented below. Certificates of deposits $ 264 17 34 53 $ 368 Other Time deposits $ 28,864 $ 28,864 Total $ 29,128 17 34 53 $ 29,232
Federal funds purchased and securities sold under repurchase agreements (dollar amounts in millions) Maximum daily balance during the year Average daily balance Weightedaverage rate during the year Ending balance at Dec. 31 Average rate at Dec. 31 2010 $16,006 $ 5,356 0.80% $ 5,602 2.12% 2009 $9,076 $2,695 % $3,348 0.01% 2008 $15,530 $ 4,624 1.00% $ 1,372 0.14%
Federal funds purchased and securities sold under repurchase agreements (dollar amounts in millions) Maximum daily balance during the quarter Average daily balance Weighted average rate during the quarter Ending balance Average rate at period end Dec. 31, 2010 $12,080 $ 7,256 2.13% $ 5,602 2.12% Quarter ended Sept. 30, 2010 $ 16,006 $ 5,984 0.09% $ 3,301 0.12% Dec. 31, 2009 $ 4,955 $ 3,361 0.14% $ 3,348 0.01%
Federal funds purchased and securities sold under repurchase agreements were $5.6 billion at Dec. 31, 2010, compared with $3.3 billion at Dec. 31, 2009, and Sept. 30, 2010. The increase compared to both prior periods primarily relates to the consolidation of repurchase agreement activity performed on behalf of clients at our asset management subsidiary in Brazil at Dec. 31, 2010. The increase in interest rates compared with prior periods primarily relates to higher interest rates in Brazil.
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Payables to customers and brokerdealers (dollar amounts in millions) Maximum daily balance during the year Average daily balance (a) Weightedaverage rate during the year Ending balance at Dec. 31 Average rate at Dec. 31 (a)
Excludes average noninterestbearing payables to customers and brokerdealers of $4.8 billion in 2010, $4.4 billion in 2009 and $2.8 billion in 2008.
Payables to customers and brokerdealers (dollar amounts in millions) Maximum daily balance during the quarter Average daily balance (a) Weighted average rate during the quarter Ending balance Average rate at period end (a) Dec. 31, 2010 $10,565 $ 5,878 0.11% $ 9,962 0.12% Quarter ended Sept. 30, 2010 $ 10,895 $ 6,910 0.08% $ 10,895 0.08% Dec. 31, 2009 $ 10,721 $ 6,476 0.07% $ 10,721 0.07%
Excludes average noninterestbearing payables to customers and brokerdealers of $4.8 billion in the fourth quarter of 2010, $4.8 billion in the third quarter of 2010 and $4.9 billion in the fourth quarter of 2009.
Payables to customers and brokerdealers represent funds held payable on demand and short sale proceeds. Payables to customers and brokerdealers were $10.0 billion at Dec. 31, 2010, $10.7 billion at Dec. 31, 2009, and $10.9 billion at Sept. 30, 2010. Payables to customers and brokerdealers are driven by customer trading activity and their expectations of market asset levels. Information related to commercial paper is presented below.
Commercial paper (dollar amounts in millions) Maximum daily balance during the year Average daily balance Weightedaverage rate during the year Ending balance at Dec. 31 Average rate at Dec. 31 Commercial paper 2010 $ 128 $ 18 0.05% $ 10 0.05% 2009 $ 537 $ 196 0.01% $ 12 0.02% 2008 $4,215 $ 274 2.95% $ 138 0.05% Dec. 31, 2009 $ 201 $ 154 0.01% $ 12 0.02%
Quarter ended Dec. 31, Sept. 30, (dollar amounts in millions) 2010 2010 Maximum daily balance during the quarter $ 53 $ 128 Average daily balance $ 13 $ 32 Weighted average rate during the quarter 0.03% 0.07% Ending balance $ 10 $ 9 Average rate at period end 0.05% 0.05% Commercial paper outstanding was $10 million at Dec. 31, 2010, compared with $12 million at Dec. 31, 2009, and $9 million at Sept. 30, 2010. Information related to other borrowed funds is presented below.
Other borrowed funds (dollar amounts in millions) Maximum daily balance during the year Average daily balance Average rate during the year Balance at Dec. 31 Average rate at Dec. 31
Other borrowed funds (dollar amounts in millions) Maximum daily balance during the quarter Dec. 31, 2010 $5,359
Average daily balance Weighted average rate during the quarter Ending balance Average rate at period end
$ $
Other borrowed funds primarily include: term federal funds purchased under agreement to resell; borrowings under lines of credit by our Pershing subsidiaries; and overdrafts of subcustodian account balances in our securities servicing businesses. Overdrafts in these accounts typically relate to timing differences for settlements of these business activities. Other borrowed funds were $2.9 billion at Dec. 31, 2010, compared with $477 million at Dec. 31, 2009, and $2.2 billion at Sept. 30, 2010.
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Liquidity and dividends BNY Mellon defines liquidity as the ability of the Company and its subsidiaries to access funding or convert assets to cash quickly and efficiently, especially during periods of market stress. Liquidity risk is the risk that BNY Mellon cannot meet its cash and collateral obligations at a reasonable cost for both expected and unexpected cash flow, without adversely affecting daily operations or financial conditions. Liquidity risk can arise from cash flow mismatches, market constraints from inability to convert assets to cash, inability to raise cash in the markets or deposit runoff. Our overall approach to liquidity management is to ensure that sources of liquidity are sufficient in amount and diversity such that changes in funding requirements at the Parent and at the various bank subsidiaries can be accommodated routinely without material adverse impact on earnings, daily operations or our financial condition. BNY Mellon seeks to maintain an adequate liquidity cushion in both normal and stressed environments and seeks to diversify funding sources by line of business, customer and market segment. Additionally, we seek to maintain liquidity ratios within approved limits and liquidity risk tolerance; maintain a liquid asset buffer that can be liquidated, financed and/or pledged as necessary; and control the levels and sources of wholesale funds. Potential uses of liquidity include withdrawals of customer deposits and client drawdowns on unfunded credit or liquidity facilities. We actively monitor unfunded loan commitments, thereby reducing unanticipated funding requirements. When monitoring liquidity, we evaluate multiple metrics to ensure ample liquidity for expected and unexpected events. Metrics include cashflow mismatches, asset maturities, access to debt and money markets, debt spreads, peer ratios, unencumbered collateral, funding sources and balance sheet liquidity ratios. We have begun to monitor the Basel III liquidity coverage ratio as applied to us, based on our current interpretation of Basel III. Ratios we currently monitor as part of our standard analysis include total loans as a percentage of total deposits, deposits as a percentage of total assets, foreign deposits as a percentage of total assets, purchased funds as a percentage of total assets, liquid assets as a percentage of total assets and liquid assets as a percentage of purchased funds. All of these ratios exceeded our minimum guidelines at Dec. 31, 2010. We also perform stress tests to verify sufficient funding capacity is accessible after conducting multiple economic scenarios. At Dec. 31, 2010, we had approximately $55.4 billion of liquid funds and $22.2 billion of cash (including approximately $18.5 billion in overnight deposits with the Federal Reserve and other central banks) for a total of approximately $77.6 billion of available funds. This compares with available funds of $70.9 billion at Dec. 31, 2009. Our percentage of liquid assets to total assets was 31% at Dec. 31, 2010, compared with 33% at Dec. 31, 2009. The decrease from Dec. 31, 2009, primarily resulted from the adoption of ASC 810 (SFAS No. 167), which increased the consolidated total assets on our balance sheet by $14.6 billion at Dec. 31, 2010. On an average basis for 2010 and 2009, noncore sources of funds such as money market rate accounts, certificates of deposit greater than $100,000, federal funds purchased, trading liabilities and other borrowings were $34.9 billion and $25.1 billion, respectively. The increase primarily reflects higher levels of money market rate accounts and federal funds purchased. Average foreign deposits, primarily from our Europeanbased securities servicing business, were $71.4 billion in 2010 compared with $72.6 billion in 2009. Domestic savings and other time deposits averaged $7.0 billion in 2010 compared with $6.1 billion in 2009. Average payables to customers and brokerdealers were $6.4 billion in 2010 and $5.3 billion in 2009. Longterm debt averaged $16.7 billion in 2010 and $16.9 billion in 2009. Average noninterestbearing deposits decreased to $35.2 billion in 2010 from $36.4 billion in 2009. A significant reduction in our securities servicing businesses would reduce our access to deposits. The Parent has five major sources of liquidity:
cash on hand; dividends from its subsidiaries; access to the commercial paper market; a revolving credit agreement with third party financial institutions; and access to the longterm debt and equity markets.
As a result of charges recorded in 2009 related to the restructuring of the investment securities portfolio, The Bank of New York Mellon and BNY Mellon, N.A. are required to obtain consent from our
BNY Mellon
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regulators prior to paying a dividend. Despite this limitation, management estimates that liquidity at the Parent will continue to be sufficient to meet BNY Mellons ongoing quarterly dividends at the current level of $0.09 per share, as well as any increase to the dividend approved as part of our capital plan which was submitted to the Federal Reserve in 2011. In addition, at Dec. 31, 2010, nonbank subsidiaries of the Parent had liquid assets of approximately $1.2 billion. Any increase in BNY Mellons ongoing quarterly dividends would require consultation with the Federal Reserve. The Federal Reserves current guidance provides that, for large bank holding companies like us, dividend payout ratios exceeding 30% of aftertax net income will receive particularly close scrutiny. Restrictions on our ability to obtain funds from our subsidiaries are discussed in more detail in Note 21 of the Notes to Consolidated Financial Statements. In 2010 and 2009, the Parents average commercial paper borrowings were $18 million and $186 million, respectively. The Parent had cash of $3.2 billion at Dec. 31, 2010, compared with $4.4 billion at Dec. 31, 2009. The decrease in Parent cash resulted primarily from the paydown of longterm debt in 2010. The Parent issues commercial paper, on an overnight basis, to certain custody clients with excess demand deposit balances. Overnight commercial paper outstanding issued by the Parent was $10 million and $12 million at Dec. 31, 2010 and 2009, respectively. Net of commercial paper outstanding, the Parents cash position at Dec. 31, 2010, decreased by $1.2 billion compared with Dec. 31, 2009, reflecting maturities of longterm debt. The Parents reliance on shortterm unsecured funding sources such as commercial paper, federal funds and Eurodollars purchased, certificates of deposit, time deposits and bank notes is limited. The Parents liquidity target is to have sufficient cash on hand to meet its obligations over the next 18 months without the need to receive dividends from its bank subsidiaries or issue debt. As of Dec. 31, 2010, the Parent met its liquidity target. In July 2010, the Parent launched a new commercial paper program, which is in addition to the program discussed above, under which it may issue commercial paper to certain institutional accredited investors in transactions exempt from the registration requirements of the Securities Act of 1933, as amended. Commercial paper notes issued under this program will have a maturity not exceeding 397 days from the date of issuance. There was no commercial paper outstanding under this program at Dec. 31, 2010. We currently have a $226 million credit agreement with 10 financial institutions that matures in October 2011. The fee on this facility depends on our credit rating and at Dec. 31, 2010, was 6 basis points. The credit agreement requires us to maintain:
shareholders equity of $5 billion; a ratio of Tier 1 capital plus the allowance for credit losses to nonperforming assets of at least 2.5; a double leverage ratio less than 130%; and adequate capitalization of all our banks for regulatory purposes.
We are currently in compliance with these covenants. There were no borrowings under this facility at Dec. 31, 2010. We also have the ability to access the capital markets. In June 2010, we filed shelf registration statements on Form S3 with the Securities and Exchange Commission (SEC) covering the issuance of certain securities, including an unlimited amount of debt, common stock, preferred stock and trust preferred securities, as well as common stock issued under the Direct Stock Purchase and Dividend Reinvestment Plans. Our ability to access the capital markets on favorable terms, or at all, is partially dependent on our credit ratings, which, as of Dec. 31, 2010, were as follows:
Debt ratings at Dec. 31, 2010 Moodys Parent: Longterm senior debt Subordinated debt The Bank of New York Mellon: Longterm senior debt Longterm deposits BNY Mellon, N.A.: Longterm senior debt Longterm deposits Outlook Aa2 Aa3 Aaa Aaa Aaa Aaa Stable
(a)
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In April 2010, one of the rating agencies announced that regulatory changes in the DoddFrank Wall Street Reform and Consumer Protection Act (the DoddFrank Act), could result in lower debt and deposit ratings for U.S. banks and other financial institutions whose ratings currently benefit from assumed government support. The rating agency anticipates that once implementing regulations clarify the final form of regulatory reform, the potentially affected ratings would be placed under review. The rating agency further indicated it would consider the pace over which any benefits resulting from regulatory reform would accrue versus the likely pace over which systemic support would be curtailed. Currently, the ratings for the Parent benefit from one notch of lift and The Bank of New York Mellon and BNY Mellon, N.A. benefit two notches of lift as a result of the rating agencys government support assumptions. Other institutions benefit between one and five notches of lift. If these rating changes occur as proposed, the Parent, The Bank of New York Mellon and BNY Mellon, N.A. would remain at the highest level for all U.S. bank holding companies and U.S. banks. The Parents major uses of funds are payment of dividends, principal and interest on its borrowings, acquisitions, and additional investments in its subsidiaries. Longterm debt decreased to $16.5 billion at Dec. 31, 2010 from $17.2 billion at Dec. 31, 2009, primarily due to $1.85 billion of senior and subordinated longterm debt that matured in 2010 and $750 million of retail mediumterm notes that were called in 2010. In 2010, we issued $650 million of Senior Notes maturing in 2015 with a 2.95% interest rate, $600 million of Senior Notes maturing in 2016 with a 2.5% interest rate, and $100 million of Floating Rate Senior Notes maturing in 2013. The Parent has $1.3 billion of longterm debt that will mature in 2011 and has the option to call $592 million of subordinated debt in 2011, which it may call and refinance if market conditions are favorable. We have $850 million of trust preferred securities that are freely callable in 2011. These securities qualify as Tier 1 capital. Any decision to call these securities will be based on interest rates, the availability of cash and capital, and regulatory conditions, as well as the implementation of the DoddFrank Act, which eliminates these trust preferred securities from the Tier 1 capital of large bank holding companies, including BNY Mellon, over a threeyear period beginning Jan. 1, 2013. In June 2010, BNY Mellon priced 25.9 million common shares in an underwritten public offering, at $27.00 per common share. In connection with this offering, BNY Mellon entered into a forward sale agreement with a forward purchaser, who borrowed and sold to the public through the underwriters shares of the Companys common stock. In September 2010, BNY Mellon settled the forward sale agreement. At settlement, BNY Mellon received net proceeds of approximately $677 million. The proceeds were primarily used to fund the acquisition of GIS. The double leverage ratio is the ratio of investment in subsidiaries divided by our consolidated equity plus trust preferred securities. Our double leverage ratio at Dec. 31, 2010 and 2009, was 100.7%, and 104.8%, respectively. Our target double leverage ratio is a maximum of 120%. The double leverage ratio is monitored by regulators and rating agencies and is an important constraint on our ability to invest in our subsidiaries and expand our businesses. Pershing LLC, an indirect subsidiary of BNY Mellon, has committed and uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. The committed line of credit of $935 million extended by 14 financial institutions matures in March 2011. We expect this line of credit will be renewed. In 2010, the daily average borrowing against this line of credit was $93 million. Additionally, Pershing LLC has another committed line of credit for $125 million extended by one financial institution that matures in September 2011. The daily average borrowing against this line of credit was $1 million during 2010. Pershing LLC has six separate uncommitted lines of credit, amounting to $1.4 billion in aggregate. Average daily borrowing under these lines was $592 million, in aggregate, during 2010. The committed line of credit maintained by Pershing LLC requires the Parent to maintain:
shareholders equity of $5 billion; a ratio of Tier 1 capital plus the allowance for credit losses to nonperforming assets of at least 2.5; and a double leverage ratio less than 130%.
We are currently in compliance with these covenants. Pershing Limited, an indirect UKbased subsidiary of BNY Mellon, has committed and uncommitted lines of credit in place for liquidity purposes, which are
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guaranteed by the Parent. The committed line of credit of $233 million extended by five financial institutions matures in March 2011. We expect this line to be renewed. The average daily borrowing under this line was $5 million, in aggregate, in 2010. Pershing Limited has three separate uncommitted lines of credit amounting to $250 million in aggregate. In 2010, average daily borrowing under these lines was less than $1 million in aggregate. Statement of cash flows Cash provided by operating activities was $4.1 billion in 2010, compared with $3.8 billion in 2009 and $2.9 billion in 2008. In 2010 and 2008, the cash flows from operations in 2008 were principally the result of earnings. In 2009, earnings, excluding the noncash impact of investment securities losses, depreciation and amortization and accruals and other balances, partially offset by deferred tax benefits and changes in trading activities, were a significant source of funds. In 2010, cash used for investing activities was $14.9 billion compared with cash provided by investing activities of $23.1 billion in 2009 and $56.0 billion used for investing activities in 2008. In 2010, purchases of securities availableforsale, an increase in interestbearing deposits with the Federal Reserve and other central banks, and the Acquisitions were a significant use of funds. In 2009, interestbearing deposits with the Federal Reserve and other central banks was a significant source of funds, partially offset by purchases of securities available for sale. In 2008, interestbearing deposits at the Federal Reserve and other central banks and interestbearing deposits with banks were a significant use of funds, and federal funds sold and securities purchased under resale agreements and loans to customers were a significant source of funds. In 2010, cash provided by financing activities was $10.8 billion, compared to $28.0 billion used for financing activities in 2009 and $51.8 billion provided by financing activities in 2008. In 2010, change in deposits, federal funds purchased and securities sold under repurchase agreements, other funds borrowed and the proceeds from issuances of longterm debt were significant sources of funds, partially offset by repayments of longterm debt. In 2009, change in deposits, other borrowed funds and the repurchase of the Series B preferred stock and the warrant were significant uses of funds, partially offset by proceeds from the issuance of long term debt and common stock, and the change in federal funds purchased and securities sold under repurchase agreements. In 2008, deposits and other funds borrowed, partially offset by use of funds for the repayments of longterm debt and commercial paper were the primary source of funds. Commitments and obligations We have contractual obligations to make fixed and determinable payments to third parties as indicated in the table below. The table excludes certain obligations such as trade payables and trading liabilities, where the obligation is shortterm or subject to valuation based on market factors.
Contractual obligations at Dec. 31, 2010 Less than (in millions) Deposits without a stated maturity Term deposits Federal funds purchased and securities sold under repurchase agreements Payables to customers and brokerdealers Other borrowed funds Longterm debt (a) Unfunded pension and post retirement benefits Capital leases Total contractual obligations (a) Including interest. Total $ 33,359 73,278 5,602 9,962 2,868 21,883 389 48 $147,389 1 year $ 33,359 73,235 5,602 9,962 2,868 1,988 51 29 $127,094
Payments due by period Over 13 years $ 17 6,163 75 19 $ 6,274 35 years $ 22 4,929 75 $ 5,026 5 years $ 4 8,803 188 $ 8,995
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We have entered into fixed and determinable commitments as indicated in the table below:
Other commitments at Dec. 31, 2010 (in millions) Securities lending indemnifications Lending commitments Standby letters of credit Operating leases Commercial letters of credit Investment commitments (a) Purchase obligations (b) Support agreements Total commitments (a) Includes private equity and Community Reinvestment Act commitments. Total $278,069 29,100 8,483 2,225 512 230 903 116 $319,638
Amount of commitment expiration per period Less than Over 1 year $278,069 10,513 6,113 311 500 27 448 $295,981 13 years $ 16,306 2,183 550 12 6 377 13 $ 19,447 35 years $ 1,944 187 427 2 55 103 $ 2,718 5 years $ 337 937 195 23 $1,492
(b) Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms.
In addition to the amounts shown in the table above, at Dec. 31, 2010, $289 million of unrecognized tax benefits have been recorded as liabilities in accordance with ASC 740. Related to these unrecognized tax benefits, we have also recorded a liability for potential interest of $52 million. At this point, it is not possible to determine when these amounts will be settled or resolved. Offbalance sheet arrangements Offbalance sheet arrangements required to be discussed in this section are limited to guarantees, retained or contingent interests, support agreements, certain derivative instruments related to our common stock, and obligations arising out of unconsolidated variable interest entities. For BNY Mellon, these items include certain credit guarantees and securitizations. Guarantees include: lendingrelated guarantees issued as part of our corporate banking business; securities lending indemnifications issued as part of our servicing and fiduciary businesses; and support agreements issued to customers in our asset servicing and asset management businesses. See the Support agreements section and Note 25 of the Notes to Consolidated Financial Statements for a further discussion of our offbalance sheet arrangements. Capital
Capital data (dollar amounts in millions except per share amounts; common shares in thousands) At period end: BNY Mellon shareholders equity to total assets ratio Total BNY Mellon shareholders equity Tangible BNY Mellon shareholders equity NonGAAP (a) Book value per common share Tangible book value per common share NonGAAP (a) Closing common stock price per share Market capitalization Common shares outstanding Fullyear: Average common equity to average assets Cash dividends per common share Dividend yield (a) See Supplemental information beginning on page 65 for a reconciliation of GAAP to nonGAAP.
2010 $ $ $ $ $ $ 13.1% 32,354 11,057 26.06 8.91 30.20 37,494 1,241,530 13.1% 0.36 1.2% $ $ $ $ $ $
2009 13.7% 28,977 9,540 23.99 7.90 27.97 33,783 1,207,835 13.4% 0.51 1.8%
Total The Bank of New York Mellon Corporation shareholders equity increased compared with Dec. 31, 2009. The increase primarily reflects earnings retention in 2010, an unrealized gain in the investment securities portfolio resulting from a decline in interest rates and tighter credit spreads and the issuance of $677 million (25.9 million shares) of common equity in 2010. In June 2010, BNY Mellon priced 25.9 million common shares in an underwritten public offering, at $27.00 per common share. In connection with this offering, BNY Mellon entered into a forward sale
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agreement with a forward purchaser, who borrowed and sold to the public through the underwriters shares of the Companys common stock. BNY Mellon settled the forward sale agreement in September 2010 and received net proceeds of $677 million from this transaction. The unrealized net of tax gain on our availableforsale securities portfolio recorded in other comprehensive income was $151 million at Dec. 31, 2010, compared with an unrealized net of tax loss of $619 million at Dec 31, 2009. The improvement primarily reflects a decline in interest rates and tighter credit spreads. In January 2011, we declared a quarterly common stock dividend of $0.09 per common share that was paid on Feb. 9, 2011, to shareholders of record as of the close of business on Jan. 31, 2011. Capital adequacy Regulators establish certain levels of capital for bank holding companies and banks, including BNY Mellon and our bank subsidiaries, in accordance with established quantitative measurements. For the Parent to maintain its status as a financial holding company, our bank subsidiaries must, among other things, qualify as well capitalized. In addition, major bank holding companies such as the Parent corporation are expected by the regulators to be well capitalized. As of Dec. 31, 2010 and 2009, the Parent and our bank subsidiaries were considered well capitalized on the basis of the ratios (defined by regulation) of Total and Tier 1 capital to riskweighted assets and leverage (Tier 1 capital to average assets).
Our consolidated and largest bank subsidiary, The Bank of New York Mellon, capital ratios are shown below.
Consolidated and largest bank subsidiary capital ratios Consolidated capital ratios: Tier 1 Total capital Leverage guideline Tangible BNY Mellon shareholders equity to tangible assets of operations ratio NonGAAP (a) Tier 1 common equity to riskweighted assets ratio (a) The Bank of New York Mellon capital ratios: Tier 1 Total capital Leverage (a) See Supplemental information beginning on page 65 for a calculation of this ratio. N/A Not applicable at the consolidated company level.
Well capitalized 6% 10 5
Dec. 31, 2010 13.4% 16.3 5.8 5.8% 11.8 2009 12.1% 16.0 6.5 5.2% 10.5 11.2% 15.0 6.3
6% 10 5
4% 8 3
If a bank holding company or bank fails to qualify as adequately capitalized, regulatory sanctions and limitations are imposed. At Dec. 31, 2010, the amounts of capital by which BNY Mellon and our largest bank subsidiary, The Bank of New York Mellon, exceed the wellcapitalized guidelines are as follows:
Capital above guidelines at Dec. 31, 2010 (in millions) Tier 1 capital Total capital Leverage Consolidated $ 7,512 6,413 1,802 The Bank of New York Mellon $ 4,667 4,519 592
The Tier 1 capital ratio varies depending on the size of the balance sheet at quarterend and the level and types of investments. The balance sheet size fluctuates from quarter to quarter based on levels of customer and market activity. In general, when servicing clients are more actively trading securities, deposit balances and the balance sheet as a whole is higher. Our Tier 1 capital ratio was 13.4% at Dec. 31, 2010, compared with 12.1% at Dec. 31, 2009. The increase in the Tier 1 capital ratio compared with Dec. 31, 2009, primarily reflects earnings retention, the 2010 common equity issuance of $677 million and lower riskweighted assets, partially offset by the impact of the Acquisitions. The Acquisitions, net of the equity raise, reduced Tier 1 and Tier 1 common ratios by approximately 195 basis points and the tangible common shareholders equity ratio by approximately 100 basis points. At Dec. 31, 2010, our total assets were $247.3 billion compared with $212.2 billion at
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Dec. 31, 2009. The increase in assets did not impact our riskweighted assets as the increase was primarily in lower riskweighted government investments and deposits with the Federal Reserve and other central banks, as well as assets of consolidated asset management funds which are discussed below. Our Tier 1 leverage ratio was 5.8% at Dec. 31, 2010, compared with 6.5% at Dec. 31, 2009. The decrease primarily reflects higher average assets in 2010 compared with 2009 and the impact of the Acquisitions. In January 2010, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and the Office of Thrift Supervision issued a final rule requiring banks to hold capital for assets consolidated under ASU 200916 and ASU 200917. As a result of applying ASU 200917, BNY Mellon consolidated approximately $14 billion of collateralized loan obligation (CLO) funds into trading assets and liabilities as of Dec. 31, 2010. Any loss from the assets of these funds will be absorbed by the senior and junior noteholders of the funds and not by BNY Mellon. The resulting regulatory capital required for these zerorisk positions is de minimis. The final rule allows for a phasein of 50% of the effect on riskweighted assets and allowance for loan losses includable in Tier 2 capital that results from implementation of this standard for the quarter ending Dec. 31, 2010, with full phasein for the quarter ending March 31, 2011. BNY Mellon elected to defer the implementation of ASC 810 for capital purposes. At Dec. 31, 2010, had we fully phasedin the implementation of ASC 810, our Tier 1 capital ratio would have been negatively impacted by approximately 2 basis points. A billion dollar change in riskweighted assets changes the Tier 1 ratio by approximately 13 basis points while a $100 million change in common equity changes the Tier 1 ratio by approximately 10 basis points. Our tangible BNY Mellon shareholders equity to tangible assets of operations ratio was 5.8% at Dec. 31, 2010, up from 5.2% at Dec. 31, 2009. The increase compared with the prior year primarily reflects earnings retention, the $677 million common equity issuance and an improvement in the value of our investment securities portfolio. At Dec. 31, 2010, we had approximately $1.7 billion of trust preferred securities outstanding, net of issuance costs, all of which qualifies as Tier 1 capital.
The following tables present the components of our Tier 1 and Total riskbased capital and riskweighted assets at Dec. 31, 2010 and 2009.
Components of Tier 1 and total riskbased capital (a) (in millions) Tier 1 capital: Common shareholders equity Trust preferred securities Adjustments for: Goodwill and other intangibles (b) Pensions/cash flow hedges Securities valuation allowance Merchant banking investment Total Tier 1 capital Tier 2 capital: Qualifying unrealized gains on equity securities Qualifying subordinated debt Qualifying allowance for credit losses Total Tier 2 capital Total riskbased capital (a) On a regulatory basis as determined under Basel 1 guidelines and including discontinued operations.
Dec. 31, 2010 $ 32,354 1,676 (21,297) 1,053 (170) (19) 13,597 5 2,381 571 2,957 $ 16,554
2009
$ 28,977 1,686 (19,437) 1,070 619 (32) 12,883 3 3,429 665 4,097 $ 16,980
(b) Reduced by deferred tax liabilities associated with nontax deductible identifiable intangible assets of $1,625 million at Dec. 31, 2010, and $1,680 million at Dec. 31, 2009, and deferred tax liabilities associated with tax deductible goodwill of $816 million at Dec. 31, 2010, and $720 million at Dec. 31, 2009.
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(in millions) Assets: Cash, due from banks and interestbearing deposits in banks Securities Trading assets Fed funds sold and securities purchased under resale agreements Loans Allowance for loan losses Other assets Total assets Offbalance sheet exposure: Commitments to extend credit Securities lending Standby letters of credit and other guarantees Derivative instruments Total offbalance sheet exposure Market risk equivalent assets Total riskweighted assets Average assets for leverage capital purposes
2010 Balance Risk sheet/ weighted notional assets amount 72,424 66,307 6,276 5,169 37,808 (498) 59,773 $ 247,259 $ 29,845 279,931 10,696 1,438,995 $1,759,467 $ $ 10,718 18,230 304 24,368 21,127 $ 74,747 $ 10,946 101 9,341 4,678 $ 25,066 1,594 $101,407 $235,905 $
2009 Balance Risk sheet/ weighted notional assets amount 67,396 56,049 6,001 3,535 36,689 (503) 43,057 $ 212,224 $ 33,598 249,120 14,426 1,314,246 $1,611,390 $ 11,923 17,633 17 25,746 20,589 $ 75,908 $ 12,180 132 11,886 4,552 $ 28,750 1,670 $106,328 $196,857
(a) On a regulatory basis as determined under Basel 1 guidelines and including discontinued operations. Stock repurchase programs
(common shares in thousands) October 2010 November 2010 December 2010 Fourth quarter 2010 Total shares repurchased 6 1 35 42(a) Average price per share $ 26.98 25.73 29.02 $ 28.65
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under plans or programs 33,800 33,800 33,800 33,800
(a) These shares were purchased at a purchase price of approximately $1 million from employees, primarily in connection with the employees payment of taxes upon the vesting of restricted stock.
On Dec. 18, 2007, the Board of Directors of BNY Mellon authorized the repurchase of up to 35 million shares of common stock. There is no expiration date on this repurchase program. Risk management Governance Risk management and oversight begins with the Board of Directors and two key Board committees: the Risk Committee and the Audit Committee. The Risk Committee is comprised entirely of independent directors and meets on a regular basis to review and assess the control processes with respect to the Companys inherent risks. They also review and assess the risk management activities of the Company and the Companys fiduciary risk policies and activities. Policy formulation and daytoday oversight of the Risk Management Framework is delegated to the Chief Risk Officer, who, together with the Chief Auditor and Chief Compliance Officer, helps ensure an effective risk management governance structure. The functions of the Risk Committee are described in more detail in its charter, a copy of which is available on our website, www.bnymellon.com. The Audit Committee is also comprised entirely of independent directors, all of whom are financially literate within the meaning of the NYSE listing standards, and two of whom have been determined to be audit committee financial experts as set out in the rules and regulations under the Securities Exchange Act of 1934, as amended (the Exchange Act), and to have accounting or related financial management
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expertise within the meaning of the NYSE listing standards, and who have banking and financial management expertise within the meaning of the FDIC rules. The Audit Committee meets on a regular basis to perform an oversight review of the integrity of the financial statements and financial reporting process, compliance with legal and regulatory requirements, our independent registered public accountants qualifications and independence, and the performance of our registered public accountant and internal audit function. The Audit Committee also reviews managements assessment of the adequacy of internal controls. The functions of the Audit Committee are described in more detail in its charter, a copy of which is available on our website, www.bnymellon.com. The Senior Risk Management Committee (SRMC) is the most senior management body responsible for ensuring that emerging risks are weighed against the corporate risk appetite and that any material amendments to the risk appetite statement are properly vetted and recommended to the Executive Committee and the Board for approval. The SRMC also reviews any material breaches to our risk appetite and approves action plans required to remediate the issue. SRMC provides oversight for the risk management, compliance and ethics framework. The Chief Executive Officer, Chief Risk Officer and Chief Financial Officer are among SRMCs members. Risk appetite statement BNY Mellon defines risk appetite as the level of risk it is normally willing to accept while pursuing the interests of our major stakeholders, including our clients, shareholders, employees and regulators. The Company has adopted the following as its risk appetite statement: Risk taking is a fundamental characteristic of providing financial services and arises in every transaction we undertake. Our risk appetite is driven by the fact that we are a leading provider of financial services and play a major role in the global marketplace. As a result, we are committed to maintaining a balance sheet, which remains strong throughout market cycles, to meet the expectations of our major stakeholders, including our clients, shareholders, employees and regulators. The balance sheet will be characterized by strong liquidity, superior asset quality, ready access to external funding sources at competitive rates and a strong capital structure that supports our risk taking activities and is adequate to absorb potential losses. These characteristics support our goal of superior debt rating versus our peers (currently AA at the holding company level). To that end, the companys Risk Management Framework has been designed to:
ensure that appropriate risk tolerances (limits) are in place to govern our risk taking activities across all businesses and risk types; ensure that our risk appetite principles permeate the company culture and are incorporated into our strategic decisionmaking processes; ensure rigorous monitoring and reporting of key risk metrics to senior management and the board of directors; and ensure that there is an ongoing, and forwardlooking, capital planning process to support our risk taking activities.
Primary risk types The understanding, identification and management of risk are essential elements for the successful management of BNY Mellon. Our primary risk exposures are:
Description The risk of loss resulting from inadequate or failed internal processes, human factors and systems, or from external events. The risk of loss due to adverse changes in the financial markets. Market risk arises from derivative financial instruments, such as futures, forwards, swaps and options, and other financial instruments, including loans, securities, deposits, and other borrowings. Our market risks are primarily interest rate and foreign exchange risk, equity risk and credit risk. The possible loss we would suffer if any of our borrowers or other counterparties were to default on their obligations to us. Credit risk arises primarily from lending, trading, and securities servicing activities.
In providing a comprehensive array of products and services, we are exposed to operational risk. Operational risk may result from, but is not limited to, errors related to transaction processing, breaches of the internal control system and compliance requirements, fraud by employees or persons outside
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BNY Mellon or business interruption due to system failures or other events. Operational risk also includes potential legal or regulatory actions that could arise as a result of noncompliance with applicable laws and/or regulatory requirements. In the case of an operational event, we could suffer a financial loss as well as damage to our reputation. We continue to improve our ability to gather and monitor our risk information across the enterprise. To address these risks, we maintain comprehensive policies and procedures and an internal control framework designed to provide a sound operational environment. These controls have been designed to manage operational risk at appropriate levels given our financial strength, the business environment and markets in which we operate, the nature of our businesses, and considering factors such as competition and regulation. Our internal auditors and internal control group monitor and test the overall effectiveness of the internal control and financial reporting systems on an ongoing basis. We have also established procedures that are designed to ensure that policies relating to conduct, ethics and business practices are followed on a uniform basis. Among the procedures designed to ensure effectiveness are our Code of Conduct, Know Your Customer, and compliance training programs. Operational risk management We have established operational risk management as an independent risk discipline. The Operational Risk Management (ORM) Group reports to the Chief Risk Officer. The organizational framework for operational risk is based upon a strong risk culture that incorporates both governance and risk management activities comprising:
Board Oversight and Governance The Risk Committee of the Board approves and oversees our operational risk management strategy in addition to credit and market risk. The Risk Committee meets regularly to review and approve operational risk management initiatives, discuss key risk issues, and review the effectiveness of the risk management systems. Accountability of Businesses Business managers are responsible for maintaining an effective system of internal controls commensurate with their risk profiles and in accordance with BNY Mellon policies and procedures.
ORM Group The ORM Group is responsible for developing risk management policies and tools for assessing, measuring, monitoring and managing operational risk for BNY Mellon. The primary objectives of the ORM group are to promote effective risk management, identify emerging risks, create incentives for generating continuous improvement in controls, and to optimize capital. Market risk In addition to the Risk Committee and SRMC, oversight of market risk is performed by certain committees and through executive review meetings. Detailed reviews of derivative trading positions and of all model validations/stress tests results are conducted during the Global Markets Weekly Risk Review. Senior managers from Risk Management and Sales and Trading attend the review. Business Risk meetings for the Global Markets and Capital Markets businesses also provide a forum for market risk oversight. The goal of Business Risk meetings, which are held at least quarterly, is to review key risk and control issues and related initiatives facing all lines of business including Global Markets and Capital Markets. The following activities are also addressed during Business Risks meetings:
Reporting of all new Monitoring Limits and changes to existing limits; Monitoring of trading exposures, VaR, market sensitivities and stress testing results; and Reporting results of all model validations.
The Derivatives Documentation Committee reviews and approves variations in the Companys documentation standards as it relates to derivative transactions. In addition, this committee reviews all outstanding confirmations to identify potential exposure to the Company. Finally, the Risk Quantification and Modelling Committee validates and reviews backtesting results. Credit risk To balance the value of our activities with the credit risk incurred in pursuing them, we set and monitor internal credit limits for activities that entail credit risk, most often on the size of the exposure and the maximum maturity of credit extended. For credit exposures driven by changing market rates and prices, exposure measures include an addon for such potential changes.
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We manage credit risk at both the individual exposure level as well as at the portfolio level. Credit risk at the individual exposure level is managed through our credit approval system of Credit Portfolio Managers (CPMs) and the Chief Credit Officer (CCO). The CPMs and CCO are responsible for approving the size, terms and maturity of all credit exposures as well as the ongoing monitoring of the exposures. In addition, they are responsible for assigning and maintaining the risk ratings on each exposure. Credit risk management at the portfolio level is supported by Enterprise Risk Architecture (ERA), formerly the Portfolio Management Division within the Risk Management and Compliance Sector. The ERA is responsible for calculating two fundamental credit measures. First, we project a statistically expected credit loss, used to help determine the appropriate loan loss reserve and to measure customer profitability. Expected loss considers three basic components: the estimated size of the exposure whenever default might occur, the probability of default before maturity and the severity of the loss we would incur, commonly called loss given default. For Institutional, Wealth and Commercial Real Estate, where most of our credit risk is created, unfunded commitments are assigned a usage given default percentage. Borrowers/Counterparties are assigned ratings by CPMs and the CCO on an 18grade scale, which translate to a scaled probability of default. Additionally, transactions are assigned lossgivendefault ratings (on a 12grade scale) that reflect the transactions structures including the effects of guarantees, collateral, and relative seniority of position. The second fundamental measurement of credit risk calculated by the ERA is called economic capital. Our economic capital model estimates the capital required to support the overall credit risk portfolio. Using a Monte Carlo simulation engine and measures of correlation among borrower defaults, the economic model examines extreme and highly unlikely scenarios of portfolio credit loss in order to estimate creditrelated capital, and then allocates that capital to individual borrowers and exposures. The creditrelated capital calculation supports a second tier of policy standards and limits by serving as an input to both profitability analysis and concentration limits of capital at risk with any one borrower, industry or country. The ERA is responsible for the calculation methodologies and the estimates of the inputs used in those methodologies for the determination of expected loss and economic capital. These methodologies and input estimates are regularly evaluated to ensure their appropriateness and accuracy. As new techniques and data become available, the ERA attempts to incorporate, where appropriate, those techniques or data. Credit risk is intrinsic to much of the banking business and necessary to its smooth functioning. However, BNY Mellon seeks to limit both on and offbalance sheet credit risk through prudent underwriting and the use of capital only where riskadjusted returns warrant. We seek to manage risk and improve our portfolio diversification through syndications, asset sales, credit enhancements, credit derivatives, and active collateralization and netting agreements. In addition, we have a separate Credit Risk Review group, which is part of Internal Audit, made up of experienced loan review officers who perform timely reviews of the loan files and credit ratings assigned to the loans. Global compliance Our global compliance function provides leadership, guidance, and oversight to help our businesses identify applicable laws and regulations and implement effective measures to meet the specific requirements. Compliance takes a proactive approach by anticipating evolving regulatory standards and remaining aware of industry best practices, legislative initiatives, competitive issues, and public expectations and perceptions. The function uses its global reach to disseminate information about compliancerelated matters throughout BNY Mellon. The Chief Compliance and Ethics Officer reports to the Chief Risk Officer, is a member of key committees of BNY Mellon and provides regular updates to the Audit and Risk Committees of the Board of Directors. Internal audit Our internal audit function reports directly to the Audit Committee of the Board of Directors. Internal audit utilizes a riskbased approach to its audit activity covering the risks in the operational, compliance, regulatory, technology, fraud, processing and other key risk areas of BNY Mellon. Internal Audit has unrestricted access to BNY Mellon and regularly participates in key committees of BNY Mellon. Economic capital BNY Mellon has implemented a methodology to quantify economic capital. We define economic capital as the capital required to protect against
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unexpected economic losses over a oneyear period at a level consistent with the solvency of a firm with a target debt rating. We quantify economic capital requirements for the risks inherent in our business activities using statistical modeling techniques and then aggregate them at the consolidated level. A capital reduction, or diversification benefit, is applied to reflect the unlikely event of experiencing an extremely large loss in each type of risk at the same time. Economic capital levels are directly related to our risk profile. As such, it has become a part of our internal capital assessment process and, along with regulatory capital, is a key component to ensuring that the actual level of capital is commensurate with our risk profile, and is sufficient to provide the financial flexibility to undertake future strategic business initiatives. The framework and methodologies to quantify each of our risk types have been developed by the ERA and are designed to be consistent with our risk management principles. The framework has been approved by senior management and has been reviewed by the Risk Committee of the Board of Directors. Due to the evolving nature of quantification techniques, we expect to continue to refine the methodologies used to estimate our economic capital requirements. Trading activities and risk management Our trading activities are focused on acting as a market maker for our customers. The risk from these marketmaking activities and from our own positions is managed by our traders and limited in total exposure through a system of position limits, a valueatrisk (VAR) methodology based on a Monte Carlo simulation, stop loss advisory triggers, and other market sensitivity measures. See Note 26 of the Notes to Consolidated Financial Statements for additional information on the VAR methodology. The following tables indicate the calculated VAR amounts for the trading portfolio for the years ended Dec. 31, 2010, and 2009.
VAR (a) (in millions) Interest rate Foreign exchange Equity Credit Diversification Overall portfolio VAR (a) Average $ 5.9 2.7 3.6 0.6 (5.3) 7.5 Minimum $ 1.2 0.7 1.3 0.2 N/M 3.5
2010 Maximum $ 10.9 5.0 7.6 1.3 N/M 11.4 2009 Dec. 31 $ 4.3 0.7 2.1 0.2 (3.4) 3.9
(in millions) Average Minimum Maximum Dec. 31 Interest rate $ 5.8 $ 2.8 $ 11.7 $ 6.9 Foreign exchange 2.4 0.8 5.6 1.0 Equity 2.7 1.3 8.1 1.6 Credit 2.9 0.7 7.5 0.7 Diversification (6.1) N/M N/M (2.1) Overall portfolio 7.7 3.9 13.5 8.1 (a) VAR figures do not reflect the impact of the credit valuation adjustment guidance in ASC 820. This is consistent with the treatment under our regulatory requirements. N/M Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a portfolio diversification effect. During 2010, interest rate risk generated 46% of average VAR, credit risk generated 5% of average VAR, equity risk generated 28% of average VAR, and foreign exchange risk accounted for 21% of average VAR. During 2010, our daily trading loss did not exceed our calculated VAR amount of the overall portfolio on any given day. BNY Mellon monitors a volatility index of global currency using a basket of 30 major currencies. In 2010, the volatility of this index decreased approximately 18 basis points from 2009. The following table of total daily trading revenue or loss illustrates the number of trading days in which our trading revenue or loss fell within particular ranges during the past year.
Distribution of trading revenues (losses) (a) (dollar amounts in millions) Revenue range: Less than $(2.5) $(2.5) $0 $0 $2.5 $2.5 $5.0 More than $5.0 (a) Dec. 31, 2009 1 5 13 22 21 March 31, 2010 3 15 22 21 Quarter ended June 30, 2010 Number of days 1 2 18 21 22 Sept. 30, 2010 2 3 27 23 9 Dec. 31, 2010 1 7 15 23 17
Distribution of trading revenues (losses) does not reflect the impact of the credit valuation adjustment guidance in ASC 820. This is consistent with the treatment under our regulatory requirements.
Foreign exchange and other trading Under our marktomarket methodology for derivative contracts, an initial riskneutral valuation is performed on each position assuming timediscounting based on a AA credit curve. In addition, we consider credit risk in arriving at the fair value of our derivatives.
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As required by ASC 820 Fair Value Measurements and Disclosures, we reflect external credit ratings as well as observable credit default swap spreads for both ourselves as well as our counterparties when measuring the fair value of our derivative positions. Accordingly, the valuation of our derivative positions is sensitive to the current changes in our own credit spreads, as well as those of our counterparties. In addition, in cases where a counterparty is deemed impaired, further analyses are performed to value such positions. At Dec. 31, 2010, our overthecounter (OTC) derivative assets of $4.3 billion included a credit valuation adjustment (CVA) deduction of $78 million, including $27 million related to the declining credit quality of CDO counterparties and Lehman. Our OTC derivative liabilities of $5.3 billion included debit valuation adjustments (DVA) of $30 million related to our own credit spread. In 2010, we chargedoff a $38 million realized loss against the CVA reserves. The CVA, net of the chargeoff, decreased foreign exchange and other trading revenue $2 million in 2010. Adjustments to our own credit spread, the DVA, did not impact foreign exchange and other trading revenue in 2010. At Dec. 31, 2009, our OTC derivative assets of $4.8 billion included a CVA deduction of $114 million, including $61 million related to the declining credit quality of CDO counterparties. Our OTC derivative liabilities of $4.6 billion included $30 million of DVA related to our own credit spread. Adjustments to the CVA and DVA decreased foreign exchange and other trading activities revenue by $38 million in 2009. Adjustments to our own credit spread decreased foreign exchange and other trading activities revenue by $15 million in 2009. The table below summarizes the risk ratings for our foreign exchange and interest rate derivative counterparty credit exposure. This information indicates the degree of risk to which we are exposed and significant changes in ratings classifications for which our foreign exchange and other trading activity could result in increased risk for us.
Foreign exchange and other trading counterparty risk rating profile (a) Rating: AAA to AA A+ to A BBB+ to BBB Noninvestment grade (BB+ and lower) Total (a) Represents credit rating agency equivalent of internal credit ratings.
Asset/liability management Our diversified business activities include processing securities, accepting deposits, investing in securities, lending, raising money as needed to fund assets, and other transactions. The market risks from these activities are interest rate risk and foreign exchange risk. Our primary market risk is exposure to movements in U.S. dollar interest rates and certain foreign currency interest rates. We actively manage interest rate sensitivity and use earnings simulation and discounted cash flow models to identify interest rate exposures. An earnings simulation model is the primary tool used to assess changes in pretax net interest revenue. The model incorporates managements assumptions regarding interest rates, balance changes on core deposits, market spreads, changes in the prepayment behavior of loans and securities and the impact of derivative financial instruments used for interest rate risk management purposes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior and are inherently uncertain. As a result, the earnings simulation model cannot precisely estimate net interest revenue or the impact of higher or lower interest rates on net interest revenue. Actual results may differ from projected results due to timing, magnitude and frequency of interest rate changes, and changes in market conditions and managements strategies, among other factors. These scenarios do not reflect strategies that management could employ to limit the impact as interest rate expectations change. The table below
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relies on certain critical assumptions regarding the balance sheet and depositors behavior related to interest rate fluctuations and the prepayment and extension risk in certain of our assets. To the extent that actual behavior is different from that assumed in the models, there could be a change in interest rate sensitivity. We evaluate the effect on earnings by running various interest rate ramp scenarios from a baseline scenario. These scenarios are reviewed to examine the impact of large interest rate movements. Interest rate sensitivity is quantified by calculating the change in pretax net interest revenue between the scenarios over a 12month measurement period. The following table shows net interest revenue sensitivity for BNY Mellon:
Estimated changes in net interest revenue (dollar amounts in millions) up 200 bps vs. baseline up 100 bps vs. baseline Longterm up 50 bps, shortterm unchanged (a) Longterm down 50 bps, shortterm unchanged (a) (a) Longterm is equal to or greater than one year.
Dec. 31, 2010 $ $143 127 110 (98) % 4.9% 4.4 3.8 (3.3)
The baseline scenarios Fed Funds rate in the Dec. 31, 2010, analysis was 0.25%. The 100 basis point ramp scenario assumes shortterm rates change 25 basis points in each of the next four quarters and the 200 basis point ramp scenario assumes a 50 basis point per quarter change. The up 200 basis point and the up 100 basis point Dec. 31, 2010, scenarios assume 10year rates rising 92 and 63 basis points, respectively. We also project future cash flows from our assets and liabilities over a longterm horizon and then discount these cash flows using instantaneous parallel shocks to prevailing interest rates. This measure reflects the structural balance sheet interest rate sensitivity by discounting all future cash flows. The aggregation of these discounted cash flows is the Economic Value of Equity (EVE). The following table shows how the EVE would change in response to changes in interest rates:
Estimated changes in EVE at Dec. 31, 2010 Rate change: up 200 bps vs. baseline up 100 bps vs. baseline These results do not reflect strategies that management could employ to limit the impact as interest rate expectations change.
2.8% 1.7
The asymmetrical accounting treatment of the impact of a change in interest rates on our balance sheet may create a situation in which an increase in interest rates can adversely affect reported equity and regulatory capital, even though economically there may be no impact on our economic capital position. For example, an increase in rates will result in a decline in the value of our fixed income investment portfolio, which will be reflected through a reduction in other comprehensive income in our shareholders equity, thereby affecting our tangible common equity (TCE) ratios. Under current accounting rules, to the extent the fair value option provided in ASC 825 is not applied, there is no corresponding change on our fixed liabilities, even though economically these liabilities are more valuable as rates rise. We project the impact of this change using the same interest rate shock assumptions described earlier and compare the projected marktomarket on the investment securities portfolio at Dec. 31, 2010, under the higher rate environments versus a stable rate scenario. The table below shows the impact of a change in interest rates on the TCE ratio:
Estimated changes in the TCE ratio at Dec. 31, 2010 (in basis points) up 200 bps vs. baseline up 100 bps vs. baseline These results do not reflect strategies that management could employ to limit the impact as interest rate expectations change.
(86) (41)
To manage foreign exchange risk, we fund foreign currencydenominated assets with liability instruments denominated in the same currency. We utilize various foreign exchange contracts if a liability denominated in the same currency is not available or desired, and to minimize the earnings impact of translation gains or losses created by investments in foreign markets. The foreign exchange risk related to the interest rate spread on foreign currencydenominated asset/liability positions is managed as part of our trading activities. We use forward foreign exchange contracts to protect the value of our net investment in foreign operations. At Dec. 31, 2010, net investments in foreign operations totaled approximately $9.4 billion and were spread across 14 foreign currencies. Business continuity We are prepared for events that could damage our physical facilities, cause delay or disruptions to operational functions, including telecommunications
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networks, or impair our employees, clients, vendors and counterparties. Key elements of our business continuity strategies are extensive planning and testing, and diversity of business operations, data centers and telecommunications infrastructure. We have established multiple geographically diverse locations for our funds transfer and brokerdealer services operational units, which provide redundant functionality to facilitate uninterrupted operations. Our securities clearing, mutual fund accounting and custody, securities lending, master trust, Unit Investment Trust, corporate trust, stock transfer, item processing, wealth management and treasury units have common functionality in multiple sites designed to facilitate continuance of operations or rapid recovery. In addition, we have recovery positions for over 12,800 employees on a global basis of which over 8,000 are proprietary. We continue to enhance geographic diversity for business operations by moving additional personnel to growth centers outside of existing major urban centers. We replicate 100% of our critical production computer data to multiple recovery data centers. We have an active telecommunications diversity program. All major buildings and data centers have diverse telecommunications carriers. The data centers have multiple fiber optic rings and have been designed so that there is no single point of failure. All major buildings have been designed with diverse telecommunications access and connect to at least two geographically dispersed connection points. We have an active program to audit circuits for route diversity and to test customer backup connections. In 2003, the Federal Reserve, OCC and SEC jointly published the Interagency Paper, Sound Practices to Strengthen the Resilience of the U.S. Financial System (Sound Practices Paper). The purpose of the document was to define the guidelines for the financial services industry and other interested parties regarding best practices related to business continuity planning. Under these guidelines, we are a key clearing and settlement organization required to meet a higher standard for business continuity. We believe we have substantially met all of the requirements of the Sound Practices Paper. As a core clearing and settlement organization, we believe that we are at the forefront of the industry in improving business continuity practices. We are committed to seeing that requirements for business continuity are met not just within our own facilities, but also within those of vendors and service providers whose operation is critical to our safety and soundness. To that end, we have a Service Provider Management Office whose function is to review new and existing service providers and vendors to see that they meet our standards for business continuity, as well as for information security, financial stability, and personnel practices, etc. We have developed a comprehensive plan to prepare for the possibility of a flu pandemic, which anticipates significant reduced staffing levels and will provide for increased remote working by staff for one or more periods lasting several weeks. Although we are committed to observing best practices as well as meeting regulatory requirements, geopolitical uncertainties and other external factors will continue to create risk that cannot always be identified and anticipated. Due to BNY Mellons robust business recovery systems and processes, we are not materially impacted by climate change, nor do we expect material impacts in the near term. We have and will continue to implement processes and capital projects to deal with the risks of the changing climate. The company has invested in the development of products and services that support the markets related to climate change.
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Explanation of NonGAAP financial measures BNY Mellon has included in this Annual Report certain NonGAAP financial measures based upon tangible common shareholders equity. BNY Mellon believes that the ratio of tangible common shareholders equity to tangible assets of operations is a measure of capital strength that provides additional useful information to investors, supplementing the Tier 1 capital ratio which is utilized by regulatory authorities. Unlike the Tier 1 capital ratio, 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 riskbased reduced value established in accordance with regulatory requirements, although BNY Mellon in its calculation has excluded certain assets which are given a zero percent riskweighting for regulatory purposes. This ratio is also informative to investors in BNY Mellons common stock because, unlike the Tier 1 capital ratio, it excludes trust preferred securities issued by BNY Mellon. Further, BNY Mellon believes that the return on tangible common equity measure, which excludes goodwill and intangible assets net of deferred tax liabilities, is a useful additional measure for investors because it presents a measure of BNY Mellons performance in reference to those assets which are productive in generating income. 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), SILO/LILO charges and noncontrolling interests related to consolidated asset management funds; expense measures which exclude restructuring charges, an FDIC special assessment, support agreement charges, assetbased taxes, M&I expenses, special litigation reserves and amortization of intangible assets; and measures which utilize net income excluding tax items such as the benefit of tax settlements and discrete tax benefits related to a tax loss on mortgages. Return on equity measures and operating margin measures which exclude some or all of these items are also presented. BNY Mellon believes that these measures are useful to investors because they permit a focus on period to period comparisons which relate to the ability of BNY Mellon to enhance revenues and limit expenses in circumstances where such matters are within BNY Mellons control. The excluded items in general relate to situations where accounting rules require certain ongoing charges as a result of prior transactions, or where valuation or other accounting/regulatory requirements require charges unrelated to operational initiatives. M&I expenses primarily relate to the merger with Mellon Financial Corporation in 2007 and the Acquisitions in 2010. M&I expenses generally continue for approximately three years after the transaction and can vary on a yeartoyear 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 Mellons business as it would appear on a consolidated goingforward basis, after such M&I expenses have ceased, typically after approximately three years. Future periods will not reflect such M&I expenses, and thus may be more easily compared to our current results if M&I expenses are excluded. With regards to the exclusion of net securities gains (losses), BNY Mellons primary businesses are Asset and Wealth Management and Institutional 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 Mellons investment securities portfolio. The investment securities portfolio is managed within the Other group of businesses. The primary objective of the investment securities portfolio is to generate net interest revenue from the liquidity generated by BNY Mellons processing businesses. BNY Mellon does not generally originate or trade the securities in the investment securities portfolio. With regards to higher yields related to the restructured investment securities portfolio, client deposits serve as the primary funding source for our investment securities portfolio and we typically allocate all interest revenue to the businesses generating the deposits. Accordingly, the higher yield related to the restructured investment securities portfolio has been included in the results of our businesses. The SILO/LILO charges relate to a onetime settlement with the IRS of tax structured lease transactions in 2008. BNY Mellon believes that excluding the SILO/LILO charges from net interest revenue provides investors with a clearer impact of the net interest margin generated on our interestearning assets. Restructuring charges relate to migrating positions to global growth centers and the elimination of certain positions. Excluding the discrete tax benefits related to a tax loss on mortgages and the benefit of tax settlements permits investors to calculate the tax impact of BNY Mellons primary businesses. The presentation of financial measures excluding special litigation reserves provides investors with the ability to view performance metrics on the basis that management views results. The presentation of income
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of consolidated asset management funds, net of noncontrolling interests related to the consolidation of certain asset management funds, permits investors to view revenue on a basis consistent with prior periods. BNY Mellon believes that these presentations, as a supplement to GAAP information, gives investors a clearer picture of the results of its primary businesses. In this Annual Report, certain amounts are presented on an FTE basis. We believe that this presentation provides comparability of amounts arising from both taxable and taxexempt sources, and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. Each of these measures as described above is used by management to monitor financial performance, both on a companywide and on a businesslevel basis.
Reconciliation of income (loss) from continuing operations before income taxes pretax operating margin (dollars in millions) Income (loss) from continuing operations before income taxes GAAP Less: Net securities gains (losses) Noncontrolling interests of consolidated asset management funds Add: SILO/LILO charges Support agreement charges FDIC special assessment M&I expenses Restructuring charges Assetbased taxes Special litigation reserves Amortization of intangible assets Income (loss) from continuing operations before income taxes excluding net securities gains (losses), noncontrolling interests of consolidated asset management funds, SILO/LILO charges, support agreement charges, FDIC special assessment, M&I expenses, restructuring charges, assetbased taxes, special litigation reserves and amortization of intangible assets NonGAAP Fee and other revenue GAAP Income of consolidated asset management funds GAAP Net interest revenue GAAP Total revenue GAAP Less: Net securities gains (losses) Noncontrolling interests of consolidated asset management funds Add: SILO/LILO charges Total revenue excluding net securities gains (losses), noncontrolling interests of consolidated asset management funds and SILO/LILO charges NonGAAP Pretax operating margin (c) Pretax operating margin, excluding net securities gains (losses), noncontrolling interests of consolidated asset management funds, SILO/LILO charges, support agreement charges, FDIC special assessment, M&I expenses, restructuring charges, assetbased taxes, special litigation reserves and amortization of intangible assets NonGAAP (c)
32%
31%
39%
36%
35%
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. (b) Results for 2006 include legacy The Bank of New York Company, Inc. only. (c) Income (loss) before taxes divided by total revenue.
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Reconciliation of fee revenue as a percentage of total revenue (dollars in millions) Fee and other revenue GAAP Less: Net securities gains (losses) Total fee revenue GAAP
2007 (a) $ 9,053 (201) $ 9,254 $ 9,053 2,245 11,298 (201) $11,499 80%
Fee and other revenue GAAP $10,724 $ 4,739 $10,714 Income of consolidated asset management funds GAAP 226 Net interest revenue GAAP 2,925 2,915 2,859 Total revenue GAAP 13,875 7,654 13,573 Less: Net securities gains (losses) 27 (5,369) (1,628) Noncontrolling interests of consolidated asset management funds 59 Add: SILO/LILO charges 489 Total revenue excluding net securities gains (losses), noncontrolling interest of consolidated asset management funds and SILO/LILO charges NonGAAP $13,789 $13,023 $15,690 Fee revenue as a percentage of total revenue excluding securities gains (loss), noncontrolling interests of consolidated asset management funds and SILO/LILO charges 78% 78% 79% (a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. (b) Results for 2006 include legacy The Bank of New York Company, Inc. only.
Asset servicing revenue (in millions) Asset servicing revenue Less: Securities lending fee revenue Asset servicing revenue excluding securities lending fee revenue Asset and wealth management fee revenue (dollars in millions) Asset and wealth management fee revenue Less: Performance fees Add: Revenue from consolidated asset management funds, net of noncontrolling interests Asset and wealth management fee revenue excluding performance fees 2010 $ 2,868 121 125 $ 2,872
11%
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Return on common equity and tangible common equity continuing operations (dollars in millions) Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation before extraordinary loss Less: Net income (loss) from discontinued operations Net income (loss) from continuing operations applicable to common shareholders of The Bank of New York Mellon Add: Amortization of intangible assets Net income (loss) from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation before extraordinary loss excluding amortization of intangible assets NonGAAP Less: Net securities gains (losses) Add: SILO/LILO/tax settlements Support agreement charges FDIC special assessment M&I expenses Restructuring charges Discrete tax benefits and the benefit of tax settlements Special litigation reserves Net income (loss) from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation before extraordinary loss excluding net securities gains (losses), SILO/LILO/tax settlements, support agreement charges, FDIC special assessment, M&I expenses, restructuring charges, discrete tax benefits and the benefit of tax settlements, special litigation reserves and amortization of intangible assets NonGAAP Average common shareholders equity Less: Average goodwill Average intangible assets Add: Deferred tax liability tax deductible goodwill Deferred tax liability nontax deductible intangible assets Average tangible common shareholders equity NonGAAP Return on common equity before extraordinary loss GAAP Return on common equity before extraordinary loss excluding net securities gains (losses), SILO/LILO/tax settlements, support agreement charges, FDIC special assessment, M&I expenses, restructuring charges, discrete tax benefits and the benefit of tax settlements, special litigation reserves and amortization of intangible assets NonGAAP Return on tangible common equity before extraordinary loss NonGAAP Return on tangible common equity before extraordinary loss excluding net securities gains (losses), SILO/LILO/tax settlements, support agreement charges, FDIC special assessment, M&I expenses, restructuring charges, discrete tax benefits and the benefit of tax settlements and special litigation reserves NonGAAP
2010
2009
2008
2007 (a)
2006 (b)
2,848 17 N/A 91 19 98
1,526 1 72 N/A
9.8% 26.3%
9.3% N/M
14.2% 20.5%
13.6% 29.2%
15.5% 26.7%
28.0%
32.1%
48.7%
33.6%
28.0%
(a) Results for 2007 include six months of BNY Mellon and six months of legacy The Bank of New York Company, Inc. (b) Results for 2006 include legacy The Bank of New York Company, Inc. only.
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Equity to assets and book value per common share (dollars in millions unless otherwise noted) BNY Mellon shareholders equity at period end GAAP Less: Goodwill Intangible assets Add: Deferred tax liability tax deductible goodwill Deferred tax liability nontax deductible intangible assets Tangible BNY Mellon shareholders equity at period end NonGAAP Total assets at period end GAAP Less: Assets of consolidated asset management funds Total assets of operations NonGAAP Less: Goodwill Intangible assets Cash on deposit with the Federal Reserve and other central banks (b) U.S. Governmentbacked commercial paper (b) Tangible total assets at period end NonGAAP BNY Mellon shareholders equity to total assets GAAP Tangible BNY Mellon shareholders equity to tangible assets of operations NonGAAP Period end common shares outstanding (in thousands) 1,241,530 1,207,835 1,148,467 1,145,983 $ $ 713,079 16.03 7.73 2010 $ 32,354 18,042 5,696 816 1,625 $ 11,057 $ $ 2009 28,977 16,249 5,588 720 1,680 9,540 $ Dec. 31, 2008 $ 25,264 15,898 5,856 599 1,841 5,950 $ $ 2007 29,403 16,331 6,402 495 2,006 9,171 $ 2006 (a) $ 11,429 5,008 1,453 384 162 5,514
Book value per common share $ 26.06 $ 23.99 $ 22.00 $ 25.66 Tangible book value per common share NonGAAP $ 8.91 $ 7.90 $ 5.18 $ 8.00 (a) The 2006 sharerelated data includes legacy The Bank of New York Company, Inc. only and is presented in post merger share count terms. (b) Assigned a zero percent risk weighting by the regulators.
Calculation of the Tier 1 common equity to riskweighted assets ratio (a) (dollars in millions) Total Tier 1 capital Less: Trust preferred securities Series B preferred stock Total Tier 1 common equity Total riskweighted assets Tier 1 common equity to riskweighted assets ratio 2010 $ 13,597 1,676 $ 11,921 $ 101,407 11.8% $ $ 2009 12,883 1,686 11,197 Dec. 31, 2008 $ 15,402 1,654 2,786 $ 10,962 $ 116,713 9.4% $ $ 2007 11,259 2,030 9,229 2006 (b) $ 6,350 1,150 $ 5,200 $ 77,567 6.7%
$ 106,328 10.5%
$ 120,866 7.6%
(a) On a regulatory basis using Tier 1 capital as determined under Basel 1 guidelines. Includes discontinued operations. (b) Legacy The Bank of New York Company, Inc. only.
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Rate/volume analysis
Rate/Volume analysis (a) (dollar amounts in millions, presented on an FTE basis) Interest revenue Interestearning assets: Interestbearing deposits with banks (primarily foreign banks) Interestbearing deposits with the Federal Reserve and other central banks Other shortterm investments U.S. governmentbacked commercial paper Federal funds sold and securities under resale agreements Margin loans Nonmargin loans: Domestic offices: Consumer Commercial Foreign offices Total nonmargin loans Securities: U.S. government obligations U.S. government agency obligations State and political subdivisions Other securities: Domestic offices Foreign offices Total other securities Trading securities: Domestic offices Foreign offices Total trading securities Total securities Total interest revenue Interest expense Interestbearing deposits Domestic offices: Money market rate accounts Savings Certificates of deposits of $100,000 & over Other time deposits Total domestic Foreign offices: Banks Government and official institutions Other Total foreign Total interestbearing deposits Federal funds purchased and securities sold under repurchase agreements Trading liabilities Other borrowed funds: Domestic offices Foreign offices Total other borrowed funds Borrowings from Federal Reserve related to assetbacked commercial paper Payables to customers and brokerdealers Longterm debt Total interest expense Changes in net interest revenue (a)
2010 over (under) 2009 Due to change in Average Average Net balance rate change $ 9 8 (4) 17 23 3 6 (38) (29) 70 143 (3) (281) 71 (210) 16 16 16 $ 40 $ (138) (2) (5) 16 (4) (34) (12) (61) (107) (1) (61) (3) 430 (142) 288 5 (1) 4 227 (13) $ (129) 6 (9) 33 19 (31) (6) (99) (136) 69 82 (6) 149 (71) 78 21 (1) 20 243 $ 27
2009 over (under) 2008 Due to change in Average Average Net balance rate change $ 295 29 (60) (55) (31) (32) (55) (89) (176) 44 201 (5) (132) 111 (21) 8 (2) 6 225 $ 227 $ (1,365) (13) (2) (63) (83) (13) 260 (224) 23 (12) (88) (3) (285) (330) (615) (24) (2) (26) (744) $ (2,247) $(1,070) 16 (62) (118) (114) (45) 205 (313) (153) 32 113 (8) (417) (219) (636) (16) (4) (20) (519) $(2,020)
$ 34 2 (21) (22) (7) (69) (7) 204 128 121 (14) 6 (22) (8) (30) (46) (3) 21 $ 55 $ 172
(150) (9) (29) (79) (267) (102) (17) (1,329) (1,448) (1,715) (32) 1
$ (116) (7) (50) (101) (274) (171) (24) (1,125) (1,320) (1,594) (46) 7 (31) (24) (55) (46) (63) (276) $(2,073) $ 53
12 1 13 (3) 1 (5) $ 16 $ 24
$ $
$ $
Changes which are solely due to balance changes or rate changes are allocated to such categories on the basis of the respective percentage changes in average balances and average rates. Changes in interest revenue or interest expense arising from the combination of rate and volume variances are allocated proportionately to rate and volume based on their relative absolute magnitudes.
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ASU 201029Disclosure of Supplementary Pro Forma Information for Business Combinations In December 2010, the FASB issued ASU 201029, Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU specifies that if a public entity presents comparative financial statements, the entity would disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The ASU was effective prospectively for business combinations consummated on or after Jan. 1, 2011. ASU 201101Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 201020 In January 2011, the FASB issued ASU 201101, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 201020. This ASU temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 201020 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. Proposed ASUAccounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities In May 2010, the FASB issued Proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities. Under this proposed ASU, most financial instruments would be measured at fair value in the balance sheet. In January 2011, the FASB determined preliminarily not to require certain financial assets to be measured at fair value on the balance sheet. The decision is subject to change until a final financial instruments standard is issued, which is expected later in 2011. Measurement of a financial instrument would be determined based on its characteristics and an entitys business strategy and would fall into one of the following three classifications:
Fair valueNet incomeencompasses financial assets used in an entitys trading or heldforsale activities. Changes in fair value would be recognized in net income. Fair valueOther comprehensive incomeincludes financial assets held primarily for investing activities, including those used to manage interest rate or liquidity risk. Changes in fair value would be recognized in other comprehensive income. Amortized costincludes financial assets related to the advancement of funds (through a lending or customerfinancing activity) that are managed with the intent to collect those cash flows (including interest and fees).
The Board tentatively decided that the business strategy should be determined by the business activities that an entity uses in acquiring and managing financial assets. Supplementary DocumentImpairment On Jan. 31, 2011, the FASB issued a Supplementary Document, Impairment. The Supplementary Document proposes to replace the incurred loss impairment models under U.S. GAAP with an expected loss impairment model. The document focuses on when and how credit impairment should be recognized. The proposal is limited to open portfolios of assets such as portfolios that are constantly changing, through originations, purchases, transfers, writeoffs, sales and repayments. The proposal in the Supplementary Document would apply to loans and debt instruments under U.S. GAAP that are managed on an open portfolio basis provided they are not measured at fair value with changes in fair value recognized in net income. Comments on this proposal are due on April 1, 2011. Proposed ASUAmendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs In June 2010, the FASB issued Proposed ASU, Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This proposed ASU would change the wording used to describe many of the principles and requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value
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measurements, and would change how the fair value measurement guidance in ASC 820 is applied. This proposed ASU would also require several new disclosures: (a) measurement uncertainty disclosures, (b) reasons if an entitys use of an asset is different from its highest and best use, and (c) fair value hierarchy disclosures for financial instruments not measured at fair value. Comments on this proposed ASU were due on Sept. 7, 2010. The effective date will be determined after the FASB considers the feedback on this proposed ASU. Proposed ASURevenue from Contracts with Customers In June 2010, the FASB issued Proposed ASU, Revenue from Contracts with Customers. This proposed ASU is the result of a joint project of the FASB and IASB to clarify the principles for recognizing revenue and develop a common standard for U.S. GAAP and IFRS. This proposed ASU would establish a broad principle that would require an entity to identify the contract with a customer, identify the separate performance obligations in the contract, determine the transaction price, allocate the transaction price to the separate performance obligations and recognize revenue when each separate performance obligation is satisfied. In February 2011, the FASB and IASB revised several aspects of the original proposal to include distinguishing between goods and services, segmenting contracts, accounting for warranty obligations, and deferring contract origination costs. The FASB and IASB plan to issue a final standard in June 2011. Proposed ASUDisclosure of Certain Loss Contingencies In July 2010, the FASB issued Proposed ASU, Disclosure of Certain Loss Contingencies. This proposed ASU would require an entity to disclose qualitative and quantitative information about loss contingencies to enable financial statement users to understand the nature of loss contingencies, their potential magnitude and their potential timing (if known). Available information may be limited during the early stages of a loss contingencys life cycle and therefore, disclosure may be less extensive in early stages of a loss contingency. In subsequent reporting periods, disclosure may be more extensive as additional information about a potentially unfavorable outcome becomes available. Additionally, an entity may aggregate disclosures about similar contingencies so that the disclosures are understandable and not too detailed. An entity would also then disclose the basis for aggregation. On Oct. 27, 2010, the FASB announced that is has decided to rule out a 2010 effective date. The FASB did not project a new proposed effective date pending its redeliberations on the proposal. FASB and IASB project on Leases In August 2010, the FASB and IASB issued a joint Proposed ASU, Leases. This proposed ASU would require that lessees and lessors apply a right of use model in accounting for all leases, including leases of right of use assets in subleases (other than leases of biological and intangible assets, leases to explore for or use natural resources and leases of some investment property). The model would require lessees to recognize an asset representing the right to use the underlying property over the estimated lease term (the right of use asset) and a liability to make future lease payments in their balance sheet. Lessees would no longer classify each lease as either operating or capital, and the model would fundamentally change the accounting and reporting of leases currently classified as operating leases and substantially increase both assets and liabilities of lessees. A lessor would recognize an asset representing its right to receive lease payments and, depending on its exposure to risks or benefits associated with the underlying asset, would either recognize a lease liability while continuing to recognize the underlying asset (performance obligation approach), or derecognize the rights in the underlying asset that it transfers to the lessee and continue to recognize a residual asset representing its rights to the underlying asset at the end of the lease term (derecognition approach). Comments on this proposed ASU were due on Dec. 15, 2010. The effective date will be determined after the FASB considers the feedback on this proposed ASU. Proposed ASUHow the Carrying Amount of a Reporting Unit Should Be Calculated When Performing Step 1 of the Goodwill Impairment Test In October 2010, the FASB issued Proposed ASU, How the Carrying Amount of a Reporting Unit Should Be Calculated When Performing Step 1 of the Goodwill Impairment Test. This proposed ASU would clarify that the equity premise is the only method an entity can use for purposes of calculating the carrying amount of a reporting unit. The equity premise reflects the net amount of all of the assets and liabilities assigned to the reporting unit(s) of a reporting entity. Additionally, this proposed ASU would modify Step 1 of the goodwill impairment test
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for reporting units with zero or negative carrying amounts. For those reporting units, an entity would be required to perform Step 2 of the goodwill impairment test if there are adverse qualitative factors that indicate that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with existing guidance. Lastly, this proposed ASU does not allow any previously recognized goodwill impairment taken as a result of applying an alternative premise before adopting this proposed ASU to be reversed. Comments on this proposed ASU were due on Nov. 5, 2010. This proposed ASU would be effective for annual and interim periods beginning Jan. 1, 2011. Proposed ASUClarifications to Accounting for Troubled Debt Restructurings by Creditors In October 2010, the FASB issued Proposed ASU, Clarifications to Accounting for Troubled Debt Restructurings by Creditors. This proposed ASU would provide clarifying guidance for creditors when determining whether they granted concessions and whether the debtor is experiencing financial difficulty. Comments on this proposed ASU were due on Dec. 13, 2010. The FASB has tentatively decided for purposes of measuring impairment of a receivable restructured in a troubled debt restructuring, this proposed ASU would be effective on a prospective basis for restructurings occurring on or after Jan. 1, 2011. Creditors would be precluded from using the borrowers effective rate test to assess whether a restructuring is troubled. Furthermore, the proposed ASU would specify that the absence of a market rate for a loan with risks similar to the restructured loan is an indicator of a troubled debt restructuring, but not a determinative factor, and that the assessment should consider all of the modified terms of the restructuring, including any additional collateral or guarantees. For purposes of identifying and disclosing troubled debt restructurings, this proposed ASU would be effective for interim and annual periods ending June 30, 2011. Proposed ASUOffsetting In January 2011, the FASB issued Proposed ASU, Offsetting. Under this proposal an entity would be required to offset a recognized financial asset and a recognized financial liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the financial asset and financial liability on a net basis or to realize the financial asset and settle the financial liability simultaneously. An entity that fails to satisfy either criterion would be prohibited from offsetting the financial asset and the financial liability in the statement of financial position. This proposal would require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Comments on this proposed ASU are due on April 28, 2011. Adoption of new accounting standards For a discussion of the adoption of new accounting standards, see Note 2 to the Notes to Consolidated Financial Statements. Regulatory developments Evolving regulatory environment On July 21, 2010, President Obama signed the DoddFrank Wall Street Reform and Consumer Protection Act (the DoddFrank Act). This new law broadly affects the financial services industry by establishing a framework for systemic risk oversight, creating a resolution authority for institutions determined to be systemically important, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and containing numerous other provisions aimed at strengthening the sound operation of the financial services sector. It will fundamentally change the system of oversight described under BusinessSupervision and Regulation in Part I, Item 1 of our Annual Report on Form 10K. Many aspects of the law are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact to BNY Mellon or across the industry. We are currently assessing the following regulatory developments, which may have an impact on BNY Mellons business. FDIC assessment base and rates changes On Feb. 7, 2011 the FDIC approved a final rule on Assessments, Dividends, Assessment Base and Large Bank Pricing. The rule implements changes to the deposit insurance assessment system that mandates the DoddFrank Act to require the FDIC to amend the assessment base used for calculating deposit insurance assessments. Consistent with the DoddFrank Act, the rule defines the assessment base to be average consolidated total assets of the insured depository
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institution during the assessment period, minus average tangible equity and in certain cases, adjustments for custody and bankers banks. The FDIC rule adjusts the assessment base for custodial banks in recognition of the fact that such banks need to hold liquid assets to facilitate the payments and processes associated with their custody and safekeeping accounts. The rule limits the custody bank assessment adjustment to 0% riskweighted assets plus 50% of those assets with a Basel riskweighting of 20%, up to the average amount of deposit transaction accounts on the custodial banks balance sheet which can be directly linked to fiduciary or custody and safekeeping accounts. The rule also adjusts the assessment rates to mitigate the impact of the expanded assessment base on the overall amount of assessment revenue. The base rate schedule, which includes adjustments for unsecured debt, depository institution debt and brokered deposits, also creates a separate category for large and highly complex institutions ( this category would include both The Bank of New York Mellon and BNY Mellon, N.A.). The proposal provides a broad range of assessment rates (2.545 basis points) for large and highly complex institutions. BNY Mellon expects the FDIC assessment rule to have a minimal impact in 2011. FDIC Restoration Plan On Oct. 19, 2010, the FDIC proposed a comprehensive, longrange plan for Deposit Insurance Fund management and adopted a Restoration Plan. The Restoration Plan will forego the uniform 3 basis point assessment rate increase previously scheduled to go in effect Jan. 1, 2011, and keep the current rate schedule in effect. Current assessment rates will remain in effect until the reserve ratio reaches 1.15%, which is expected to occur at the end of 2018. The Restoration Plan also increases the designated reserve ratio, pursuant to the requirements of the DoddFrank Act, to 1.35% by Sept. 30, 2020, rather than 1.15% by the end of 2016, and calls for the FDIC to pursue further rulemaking in 2011 regarding the statutory requirement that the FDIC offset the effect on small institutions of this requirement. The Restoration Plan is effective immediately. Federal Reserves assessment of comprehensive capital plans On Nov. 17, 2010, the Federal Reserve issued Revised Temporary Addendum to SR letter 094. The letter described the process the Federal Reserve will follow to assess comprehensive capital plans of the 19 Supervisory Capital Assessment Program bank holding companies including any request to take capital actions such as increased dividends or stock buybacks. The comprehensive capital plans, which were prepared using Basel I capital guidelines, included bank developed baseline and stress projections as well as a supervisory stress projection using adverse macroeconomic assumptions provided by the Federal Reserve. The Company also provided the Federal Reserve with projections covering the time period it will take us to fully comply with Basel III capital guidelines, including the 7% Tier 1 common, 8.5% Tier 1 and 3% leverage ratios. Certain templates were submitted to the Federal Reserve on Dec. 22, 2010, and the capital plan was filed by Jan. 7, 2011. The Federal Reserve is expected to provide a response to first quarter capital actions, such as a dividend increase and share repurchases, no later than March 21, 2011, and feedback on the comprehensive capital plan by April 30, 2011. Establishment of a RiskBased Capital Floor In December 2010, the regulatory agencies issued a notice of proposed rulemaking (NPR) which would amend the advanced riskbased capital adequacy standards to be consistent with provisions of the DoddFrank Act and also amend the general riskbased capital rules to provide additional flexibility and to create capital requirements for certain assets not held by depository institutions. The NPR would revise the advanced approaches rule by replacing the transitional floors set forth by the Basel Committee with a permanent riskbased capital floor. The DoddFrank Act states that applicable agencies will establish minimum riskbased capital requirements that shall not be less than the generally applicable capital requirements, which shall serve as a floor for any capital requirements the agencies may require. The proposed permanent floor will equal the Tier 1 and total riskbased capital requirements under the current generally applicable riskbased capital rules. Each quarter the minimum Tier 1 capital ratio and the total riskbased capital ratio must be calculated under both the general riskbased capital rules and the advanced approaches riskbased capital rules and then the lower of both the Tier 1 and total riskbased capital ratios must be used.
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Comments on the NPR must be received by Feb. 28, 2011. This NPR is not expected to have a significant impact on banking organizations. FDICs Executive Compensation Proposal The DoddFrank Act requires federal regulators to prescribe regulations or guidelines regarding incentivebased compensation practices at certain financial institutions. On Feb. 7, 2011, the FDIC issued an interagency NPR which, among other things, would require certain executive officers of covered financial institutions with total consolidated assets of $50 billion or more, such as ours, to defer at least 50% of their annual incentivebased compensation for a minimum of three years. The NPR will be published for a 45day comment period following approval by all of the other agencies involved in the rulemaking, including the Federal Reserve and the SEC. Capital requirements The U.S. federal bank regulatory agencies riskbased capital guidelines are based upon the 1988 Capital Accord of the Basel Committee on Banking Supervision (the Basel Committee). The Basel Committee issued in June 2004 and updated in November 2005 a revised framework for capital adequacy commonly known Basel II that sets capital requirements for operational risk and refines the existing capital requirements for credit risk. In the United States, regulators are mandating the adoption of Basel II for core banks. BNY Mellon and its depository institution subsidiaries are core banks. The only approach available to core banks is the Advanced Internal Ratings Based (AIRB) approach for credit risk and the Advanced Measurement Approach (AMA) for operational risk. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as Basel III. Additional information on Basel II and Basel III is presented below. Basel II In the U.S., Basel II became effective on April 1, 2008. Under the final rule, 2009 was the first year for a bank to begin its first of three transitional floor periods during which banks subject to the final rule calculate their capital requirements under both the old guidelines and new guidelines. As previously mentioned, the regulatory agencies have proposed to eliminate the transitional floor periods under Basel II. Beginning Jan. 1, 2008 we implemented the Basel II Standardized Approach in the United Kingdom, Belgium and Luxembourg. In the U.S., BNY Mellon began the Basel II parallel run in the second quarter of 2010. Our capital models are currently with the Federal Reserve for their approval. Under Basel II guidelines, our riskweighted assets for credit risk exposures are expected to decline. However, we expect the Basel II requirement that operational risk be included in riskweighted assets will more than offset the decline in credit exposure. Under Basel I, securitizations that fall below investment grade are included in riskweighted assets. Under Basel II, securitizations that fall below investment grade are deducted 50% from Tier 1 and 50% from total capital. Based on our current estimates for Basel II at Dec. 31, 2010, our Tier 1 and Total capital ratios would have exceeded wellcapitalized guidelines. Basel III Under Basel III standards, when fully phased in on Jan. 1, 2019, banking institutions will be required to satisfy three riskbased capital ratios:
A Tier 1 common equity ratio of at least 7.0%, 4.5% attributable to a minimum Tier 1 common equity ratio and 2.5% attributable to a capital conservation buffer; A Tier 1 capital ratio of at least 6.0%, exclusive of the capital conservation buffer (8.5% upon full implementation of the capital conservation buffer); and A total capital ratio of at least 8.0%, exclusive of the capital conservation buffer (10.5% upon full implementation of the capital conservation buffer).
Basel III also provides for a countercyclical capital buffer, generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a Tier 1 capital addon to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a Tier 1 common equity ratio above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
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The phasein of the new rules is to commence on Jan. 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios:
3.5% Tier 1 common equity to riskweighted assets; 4.5% Tier 1 capital to riskweighted assets; and 8.0% Total capital to riskweighted assets.
The phasein of the capital conservation buffer will commence on Jan. 1, 2016, and the rules will be fully phasedin by Jan. 1, 2019. For systemically important banks, the Federal Reserve may increase the capital buffer. The purpose of these new capital requirements is to ensure financial institutions are better capitalized to withstand periods of unfavorable financial and economic conditions. These capital rules are subject to interpretation and implementation by U.S. regulatory authorities. Under Basel III, certain items, to the extent they exceed 10% of Tier 1 capital individually, or 15% of Tier 1 capital in the aggregate, would be deducted from our capital. These items include:
Deferred tax assets that arise from timing differences; and Significant investments in unconsolidated financial institutions.
At Dec. 31, 2010, BNY Mellon did not exceed the 15% threshold, but we exceeded the 10% threshold for significant investment in unconsolidated financial institutions by approximately $500 million. Also, pension assets recorded on the balance sheet are a deduction from capital, and 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 availableforsalesecurities. Similar to Basel II, the Basel III proposal also incorporates the riskweighted asset impact of operational risk, which will be partially offset by a decline in credit exposure. Additionally, Basel III changes the treatment of securitizations that fall below investment grade. Under Basel II guidelines, securitizations that fall below investment grade are deducted equally from Tier I and total capital. However, under Basel III, banking institutions will be required to apply a 1,250% risk weight to these securitizations and include them as a component of riskweighted assets. Our feebased model enables us to maintain a relatively low risk asset mix, primarily composed of highquality securities, central bank deposits, liquid placements and predominantly investment grade loans. As a result of our asset mix, we have the flexibility to manage to a lower level of riskweighted assets over time. Given that the Basel III rules are subject to change, we cannot be certain of the impact the new regulations will have on our capital ratios. However, given our balance sheet strength and ongoing internal capital generation, we currently estimate that our Tier 1 common ratio, under Basel III guidelines, will be above 7% by Dec. 31, 2011. This estimated ratio includes an anticipated dividend increase and potential share repurchases in 2011, assuming Federal Reserve approval. Leverage Requirement Basel I and Basel II do not include a leverage requirement as an international standard. However, even though a leverage requirement has not been an international standard in the past, the U.S. banking agencies capital regulations do require bank holding companies and banks to comply with a minimum leverage ratio requirement (Basel III will impose a leverage requirement as an international standard). The Federal Reserve Boards existing leverage ratio for bank holding companies is that the bank holding company maintain a ratio of Tier 1 capital to its total consolidated quarterly average assets (as defined for regulatory purposes), net of the loan loss reserve, goodwill and certain other intangible assets. The rules require a minimum leverage ratio of 3% for bank holding companies that either have the highest supervisory rating or have implemented the Federal Reserve Boards riskadjusted measure for market risk. All other bank holding companies are required to maintain a minimum leverage ratio of 4%. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us. At Dec. 31, 2010, our leverage ratio was 5.8%. Also, the rules indicate that the Federal Reserve Board will consider a tangible Tier 1 leverage ratio in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organizations Tier 1 capital (excluding intangibles) to total assets (excluding intangibles). IFRS International Financial Reporting Standards (IFRS) are a set of standards and interpretations adopted by the International Accounting Standards Board. The
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SEC is currently considering a potential IFRS adoption process in the U.S., which would, in the near term, provide domestic issuers with an alternative accounting method and ultimately could replace U.S. GAAP reporting requirements with IFRS reporting requirements. The intention of this adoption would be to provide the capital markets community with a single set of highquality, globally accepted accounting standards. The adoption of IFRS for U.S. companies with global operations would allow for streamlined reporting, allow for easier access to foreign capital markets and investments, and facilitate crossborder acquisitions, ventures or spinoffs. In November 2008, the SEC proposed a roadmap for phasing in mandatory IFRS filings by U.S. public companies. The roadmap is conditional on progress towards milestones that would demonstrate improvements in both the infrastructure of international standard setting and the preparation of the U.S. financial reporting community. The SEC will monitor progress of these milestones through the end of 2011, when the SEC plans to consider requiring U.S. public companies to adopt IFRS. In February 2010, the SEC issued a statement confirming their position that they continue to believe that a single set of highquality, globally accepted accounting standards would benefit U.S. investors. The SEC continues to support the dual goals of improving financial reporting in the U.S. and reducing countrybycountry disparities in financial reporting. The SEC is developing a work plan to aid in its evaluation of the impact of IFRS on the U.S. securities market. If the SEC determines in 2011 to incorporate IFRS into the U.S. financial reporting system, and the work plan validates the fourtofive year timeline for implementation, the first time that U.S. companies would be required to report under IFRS would be no earlier than 2015. While the SEC decides whether IFRS will be required to be used in the preparation of our consolidated financial statements, a number of countries have mandated the use of IFRS by BNY Mellons subsidiaries in their statutory reports. Such countries include Belgium, Brazil, the Netherlands, Australia and Hong Kong. Other countries that have established an IFRS conversion time frame which will affect our statutory reporting include Canada (2011), South Korea (2011), Argentina (2012), the United Kingdom (2013), Ireland (2013) and Taiwan (2013).
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Quarter ended (dollar amounts in millions, except per share amounts) Consolidated income statement Total fee and other revenue Income of consolidated asset management funds Net interest revenue Total revenue Provision for credit losses Noninterest expense Income (loss) from continuing operations before income taxes and extraordinary (loss) Provision (benefit) for income taxes Net income (loss) from continuing operations Net loss from discontinued operations Net income (loss) Net (income) loss attributable to noncontrolling interests Redemption charge and preferred dividends Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation Basic earnings per share Continuing operations Discontinued operations Net income (loss) applicable to common stock Diluted earnings per share Continuing operations Discontinued operations Net income (loss) applicable to common stock Average balances Interestbearing deposits with banks Securities Loans Total interestearning assets Assets of operations Total assets Deposits Longterm debt Total The Bank of New York Mellon Corporation shareholders equity Net interest margin (FTE) (b) Annualized return on common equity (b) Pretax operating margin (b) Common stock data (c) Market price per share range: High Low Average Period end close Dividends per common share Market capitalization (d) (a) (b) (c) Amount does not foot due to rounding. Continuing operations basis. At Dec. 31, 2010, there were 26,125 shareholders registered with our stock transfer agent, compared with 27,727 at Dec. 31, 2009, and 29,428 at Dec. 31, 2008. In addition, there were approximately 44,051 of BNY Mellons current and former employees at Dec. 31, 2010, who participate in BNY Mellons 401(k) Retirement Savings Plans. All shares of BNY Mellons common stock held by the Plans for its participants are registered in the names of The Bank of New York Mellon Corporation and Fidelity Management Trust Company, as trustee. At period end. Dec. 31 $ 2,972 59 720 3,751 (22) 2,803 970 265 705 (11) 694 (15) $ $ $ $ $ 679 0.55 (0.01) 0.55 (a) 0.55 (0.01) 0.54 $ $ $ $ $ Sept. 30 $ 2,668 37 718 3,423 (22) 2,611 834 220 614 (3) 611 11 622 0.51 0.51 0.51 0.51 $ $ $ $ $ 2010 June 30 $ 2,555 65 722 3,342 20 2,316 1,006 304 702 (10) 692 (34) 658 0.55 (0.01) 0.54 0.55 (0.01) 0.54 $ $ $ $ $ March 31 $ 2,529 65 765 3,359 35 2,440 884 258 626 (42) 584 (25) 559 0.50 (0.04) 0.46 0.49 (0.03) 0.46 $ $ $ $ $ Dec. 31 $ 2,577 724 3,301 65 2,564 672 (41) 713 (119) 594 (1) 593 0.59 (0.10) 0.49 0.59 (0.10) 0.49 Sept. 30 $ (2,223) 716 (1,507) 147 2,311 (3,965) (1,527) (2,438) (19) (2,457) (1) $ (2,458) $ $ $ $ (2.04) (0.02) (2.05) (a) (2.04) (0.02) (2.05) (a) $ $ $ $ $ 2009 June 30 $ 2,253 700 2,953 61 2,379 513 12 501 (91) 410 2 (236) 176 0.23 (0.08) 0.15 0.23 (0.08) 0.15 $ $ $ $ $ March 31 $ 2,132 775 2,907 59 2,276 572 161 411 (41) 370 (1) (47) 322 0.31 (0.04) 0.28 (a) 0.31 (0.04) 0.28 (a)
$ 76,447 65,370 37,529 187,597 241,734 256,409 151,401 16,624 32,379 1.54% 8.5% 26% $ 30.63 24.65 27.49 30.20 0.09 $ 37,494
$ 70,244 57,993 36,769 172,759 226,378 240,325 137,231 16,798 31,868 1.67% 7.8% 24% $ 26.95 23.78 25.44 26.13 0.09 $ 32,413
$ 69,021 54,030 36,664 167,119 216,801 228,841 134,591 16,462 30,462 1.74% 8.8% 30% 32.65 24.63 29.01 24.69 0.09 $ 29,975 $
$ 67,929 55,352 34,214 163,429 212,685 225,415 134,364 16,808 29,715 1.89% 8.2% 26% 31.46 26.35 29.20 30.88 0.09 $ 37,456 $
$ 66,897 55,573 35,239 164,075 214,205 214,205 133,395 17,863 28,843 1.77% 9.8% 20% 29.94 25.80 27.38 27.97 0.09 $ 33,783 $
$ 61,319 53,889 34,535 155,159 205,786 205,786 128,552 17,393 28,144 1.85% N/M N/M 31.57 26.11 28.70 28.99 0.09 $ 34,911 $
$ 63,255 51,903 37,029 157,265 208,533 208,533 131,748 16,793 26,566 1.80% 4.0% 17% 33.62 23.75 28.41 29.31 0.09 $ 35,255 $
$ 79,697 43,465 38,958 167,427 220,119 220,119 145,034 15,493 25,189 1.87% 5.8% 20% 29.28 15.44 24.72 28.25 0.24 $ 32,585 $
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Some statements in this document are forwardlooking. These include all statements about the future results of BNY Mellon; projected business growth; BNY Mellons plans and strategies, product launches, areas of focus and longterm financial goals; expectations with respect to litigation costs, the impact of FSCS levies and our effective tax rate for 2011; statements on the planned conversion of our wealth management acquisition and revenue expected from this acquisition; expectations with respect to fees and assets, factors affecting the performance of our businesses: the impact of foreign exchange rates on our financial results and levels of assets under custody and management; descriptions of our critical accounting estimates, including managements estimates of probable losses; managements judgment in determining the size of unallocated allowances, the effect of credit ratings on allowances, estimates and cash flow models; judgments and analyses with respect to interest rate swaps, estimates of fair value, otherthantemporary impairment, goodwill and other intangibles, effects of delinquencies, default rates and loss severity assumptions on impairment losses; and longterm financial goals, objectives and strategies. In addition, these forwardlooking statements relate to: our focus on increasing the percentage of revenue and income from outside the U.S.; expectations with respect to climate change, reasons why our businesses are compatible with our strategies and goals; growth in our businesses and assets; globalization of the investment process; deposit levels; expectations with respect to earnings per share; assumptions with respect to pension plans, including expenses and expected future returns; statements with respect to our intent to sell or hold securities; expectations with respect to our future exposure to private equity activities; statements on our credit strategies; goals with respect to our commercial loan portfolios; descriptions of our allowance for credit losses and loan losses; statements with respect to an increase in our dividends and our liquidity targets; the effect of a significant reduction in our securities servicing business on our access to deposits; the impact of a change in rating agencies method of review on BNY Mellons ratings; expectations with respect to capital, including anticipated repayment and call of outstanding securities; expectations with respect to our lines of credit; our goal of migrating to a predominantly investment grade credit portfolio; the effect of a change in riskweighted assets or common equity on Tier 1 capital, the effect of a change in interest rates on our earnings and the effect of a change in the value of the S&P 500 Index; statements on our target double leverage ratios and our target capital ratios; expectations with respect to the well capitalized status of BNY Mellon and its bank subsidiaries; plans for and the effects of the implementation of Basel II and Basel III; compliance with the requirements of the Sound Practices Paper; statements regarding maintaining a strong balance sheet and a superior debt rating; descriptions of our risk management framework; statements regarding risks that we may face and the impact of such risks; qualifications of our economic capital; statements with respect to our risk management methodologies; descriptions of our earnings simulation models and assumptions; statements with respect to our business continuity plans; the effect of geopolitical factors and other external factors on risk; timing and impact of adoption of recent accounting pronouncements; the overall financial impact of DoddFrank; the FDICs rule regarding adjustments to the assessment base and the impact of the assessment rule; timing of the Federal Reserves response to capital actions and feedback on the capital plan; the FDICs amendments to the riskbased capital standards and its impact on banking organizations; the FDICs proposal regarding incentivebased compensation; the impact of Basel II guidelines on riskweighted assets; the Federal Reserves plan regarding capital buffer; the SECs plans regarding IFRS; ability to realize benefit of deferred tax assets including carryovers; calculations of the fair value of our option grants; statements with respect to unrecognized tax benefits and compensation costs; our assessment of the adequacy of our accruals for tax liabilities; amount of dividends bank subsidiaries can pay without regulatory waiver; estimations of reasonable possible loss with respect to legal proceedings and the expected outcome and impact of judgments and settlements, if any, arising from pending or potential legal or regulatory proceedings, and matters relating to the information returns and withholding tax. In this report, any other report, any press release or any written or oral statement that BNY Mellon or its executives may make, words, such as estimate, forecast, project, anticipate, confident, target, expect, intend, seek, believe, plan, goal, could, should, may, will, strategy, synergies, opportunities, trends and words of similar meaning, signify forwardlooking statements. Factors that could cause BNY Mellons results to differ materially from those described in the forwardlooking statements, as well as other uncertainties affecting future results and the value of BNY Mellons stock and factors which represent risk associated with the business and operations of BNY
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Mellon, can be found in the Risk Factors section of BNY Mellons Annual Report on Form 10K for the year ended Dec. 31, 2010, and any subsequent reports filed with the SEC by BNY Mellon pursuant to the Exchange Act. Forwardlooking statements, including discussions and projections of future results of operations and discussions of future plans contained in the MD&A, are based on managements current expectations and assumptions that involve risk and uncertainties and that are subject to change based on various important factors (some of which are beyond BNY Mellons control), including adverse changes in market conditions, and the timing of such changes, and the actions that management could take in response to these changes. Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties and the risks and uncertainties described in the documents referred to in the preceding paragraph. The Risk Factors discussed in the Form 10K could cause or contribute to such differences. Investors should consider all risks mentioned elsewhere in this document and in subsequent reports filed by BNY Mellon with the Commission pursuant to the Exchange Act, as well as other uncertainties affecting future results and the value of BNY Mellons stock. All forwardlooking statements speak only as of the date on which such statements are made, and BNY Mellon undertakes no obligation to update any statement to reflect events or circumstances after the date on which such forwardlooking statement is made or to reflect the occurrence of unanticipated events.
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Accumulated Benefit Obligation (ABO)The actuarial present value of benefits (vested and nonvested) attributed to employee services rendered. AltA securitiesA mortgage risk categorization that falls between prime and subprime. Borrowers behind these mortgages will typically have clean credit histories but the mortgage itself will generally have issues that increase its risk profile such as inadequate documentation of the borrowers income or higher loantovalue and debttoincome ratios. Alternative investmentsUsually refers to investments in hedge funds, leveraged loans, subordinated and distressed debt, real estate and foreign currency overlay. Many hedge funds pursue strategies that are uncommon relative to mutual funds. Examples of alternative investment strategies are: longshort equity, event driven, statistical arbitrage, fixed income arbitrage, convertible arbitrage, short bias, global macro and equity market neutral. APACAsiaPacific region. Assets Under Custody And Administration (AUC)Assets beneficially owned by our clients or customers which we hold in various capacities for which various services are provided, such as custody, accounting, administration valuations and performance measurement. These assets are not on our balance sheet. ASCAccounting Standards Codification. Assets Under Management (AUM)Includes assets beneficially owned by our clients or customers which we hold in various capacities that are either actively or passively managed, as well as the value of hedges supporting customer liabilities. These assets and liabilities are not on our balance sheet. bpbasis point. Collateral managementA comprehensive program designed to simplify collateralization and expedite securities transfers for buyers and sellers. BNY Mellon acts as an independent collateral manager positioned between the buyer and seller to ensure proper collateralization throughout the term of the transaction. Services include verification of securities eligibility and maintenance of margin requirements. Collateralized Debt Obligations (CDOs)A type of assetbacked security and structured credit product constructed from a portfolio of fixedincome assets. CDOs are divided into different tranches and losses are applied in reverse order of seniority. Collateralized loan obligation (CLO)A debt security backed by a pool of commercial loans. Collective trust fundAn investment fund formed from the pooling of investments by investors. Credit derivativesContractual agreements that provide insurance against a credit event of one or more referenced credits. The nature of the credit event is established by the buyer and seller at the inception of the transaction. Such events include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a contingent payment by the seller (insurer) following a credit event. Credit riskThe risk of loss due to borrower or counterparty default. Currency swapsAn agreement to exchange stipulated amounts of one currency for another currency. Depositary Receipts (DR)A negotiable security that generally represents a nonU.S. companys publicly traded equity. Although typically denominated in U.S. dollars, DRs can also be denominated in Euros. DRs are eligible to trade on all U.S. stock exchanges and many European stock exchanges. American Depositary Receipts (ADR) trade only in the U.S. DerivativeA contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices. Discontinued operationsThe operating results of a component of an entity, as defined by ASC 205, that are removed from continuing operations when that component has been disposed of or it is managements intention to sell the component. DoddFrank Wall Street Reform and Consumer Protection Act (the DoddFrank Act)Regulatory reform legislation signed into law on July 21, 2010. This new law broadly affects the financial services industry by establishing a framework for systemic risk oversight, creating a
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resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and containing numerous other provisions aimed at strengthening the sound operation of the financial services sector. Double leverageThe situation that exists when a holding companys equity investments in wholly owned subsidiaries (including goodwill and intangibles) exceed its equity capital. Double leverage is created when a bank holding company issues debt and downstreams the proceeds to a subsidiary as an equity investment. Economic Value of Equity (EVE)An aggregation of discounted future cash flows of assets and liabilities over a longterm horizon. EMEAEurope, the Middle East and Africa. Exchange traded fundEach share of an exchange traded fund tracks a basket of stocks in some index or benchmark, providing investors with a vehicle that closely parallels the performance of these benchmarks while allowing for intraday trading. eXtensible Business Reporting Language (XBRL)a language for the electronic communication of business and financial data. FASBFinancial Accounting Standards Board. FDICFederal Deposit Issuance Corporation. Foreign currency optionsSimilar to interest rate options except they are based on foreign exchange rates. Also, see interest rate options in this glossary. Foreign currency swapsAn agreement to exchange stipulated amounts of one currency for another currency at one or more future dates. Foreign exchange contractsContracts that provide for the future receipt or delivery of foreign currency at previously agreedupon terms. Forward rate agreementsContracts to exchange payments on a specified future date, based on a market change in interest rates from trade date to contract settlement date. Fully Taxable Equivalent (FTE)Basis for comparison of yields on assets having ordinary taxability with assets for which special tax exemptions apply. The FTE adjustment reflects an increase in the interest yield or return on a taxexempt asset to a level that would be comparable had the asset been fully taxable. Generally Accepted Accounting Principles (GAAP)Accounting rules and conventions defining acceptable practices in preparing financial statements in the U.S. The FASB is the primary source of accounting rules. Grantor TrustA legal, passive entity through which passthrough securities are sold to investors. Hedge fundA fund, usually used by wealthy individuals and institutions, which is allowed to use diverse strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage and derivatives. Hedge funds are exempt from many of the rules and regulations governing mutual funds, which allow them to accomplish aggressive investing goals. Legal requirements in many countries allow only certain sophisticated investors to participate in hedge funds. ImpairmentWhen an assets market value is less than its carrying value. Interest rate options, including caps and floorsContracts to modify interest rate risk in exchange for the payment of a premium when the contract is initiated. As a writer of interest rate options, we receive a premium in exchange for bearing the risk of unfavorable changes in interest rates. Conversely, as a purchaser of an option, we pay a premium for the right, but not the obligation, to buy or sell a financial instrument or currency at predetermined terms in the future. Interest rate sensitivityThe exposure of net interest income to interest rate movements. Interest rate swapsContracts in which a series of interest rate flows in a single currency is exchanged over a prescribed period. Interest rate swaps are the most common type of derivative contract that we use in our asset/liability management activities. An example of a situation in which we would utilize an interest rate swap would be to convert our fixedrate debt to a variable rate. By entering into a swap, the principal amount of a debt remains unchanged, but the interest stream changes.
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Investment grade loans and commitmentsThose where the customer has a Moodys longterm rating of Baa3 or better; and/or a Standard & Poors longterm rating of BBB or better; or if unrated, an equivalent rating using our internal risk ratings. Joint ventureA company or entity owned and operated by a group of companies for a specific business purpose, no one of which has a majority interest. LeaseInLeaseOut (LILO) transactionA transaction in which a person or entity leases property from the owner for a specified time period and then leases the property back to that owner for a shorter time period. The obligations of the property owner as sublessee are usually secured by deposits, letters of credit, or marketable securities. Leverage ratioTier 1 capital divided by leverage assets. Leverage assets are defined as quarterly average total assets, net of goodwill, intangibles and certain other items as required by the Federal Reserve. Liquidity riskThe risk of being unable to fund our portfolio of assets at appropriate maturities and rates, and the risk of being unable to liquidate a position in a timely manner at a reasonable price. Loans for purchasing or carrying securitiesLoans primarily to brokers and dealers in securities. Margin loansA loan that is used to purchase shares of stock. The shares purchased are used as collateral for the loan. Market riskThe potential loss in value of portfolios and financial instruments caused by movements in market variables, such as interest and foreign exchange rates, credit spreads, and equity and commodity prices. Master netting agreementAn agreement between two counterparties that have multiple contracts with each other that provides for the net settlement of all contracts through a single payment in the event of default or termination of any one contract. MortgageBacked Security (MBS)An assetbacked security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. N/ANot applicable. N/MNot meaningful. Net interest marginThe result of dividing net interest revenue by average interestearning assets. Noninvestment grade loans and commitments Those where the customer has a Moodys longterm rating below Baa3; and/or a Standard & Poors longterm rating below BBB; or if unrated, an equivalent rating using our internal risk ratings. Operating leverageThe rate of increase in revenue to the rate of increase in expenses. Operational riskThe risk of loss resulting from inadequate or failed processes or systems, human factors or external events. Performance feesFees received by an investment advisor based upon the funds performance for the period relative to various predetermined benchmarks. Prime securitiesA classification of securities collateralized by loans to borrowers who have a highvalue and/or a good credit history. Private equity/venture capitalInvestment in startup companies or those in the early processes of developing products and services with perceived, longterm growth potential. Pretax operating marginIncome before taxes for a period divided by total revenue for that period. Projected Benefit Obligation (PBO)The actuarial present value of all benefits accrued on employee service rendered prior to the calculation date, including allowance for future salary increases if the pension benefit is based on future compensation levels. Rating AgencyAn independent agency that assesses the credit quality and likelihood of default of an issue or issuer and assigns a rating to that issue or issuer. Real Estate Investment Trust (REIT) An investorowned corporation, trust or association that sells shares to investors and invests in incomeproducing property. Residential MortgageBacked Security (RMBS)An assetbacked security whose cash flows are backed by principal and interest payments of a set of residential mortgage loans.
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Restructuring chargesTypically result from the consolidation and/or relocation of operations. Restructuring charges may be incurred in connection with a business combination, a change in an enterprises strategic plan or a managerial response to declines in demand. Return on assetsIncome divided by average assets. Return on common equityIncome divided by average common shareholders equity. Return on tangible common equityIncome, excluding amortization of intangible assets, divided by average tangible common shareholders equity. SaleInLeaseOut (SILO) transactionA transaction in which an entity sells its property to a corporation. The corporation simultaneously leases the property back to the entity for a shorter period of time. The SILO arrangement typically involves a service contract which guarantees a fixed return to the corporation. Securities lending transactionA fully collateralized transaction in which the owner of a security agrees to lend the security through an agent (The Bank of New York Mellon) to a borrower, usually a broker/dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract, which generally matures in less than 90 days. SubcustodianA local provider (e.g., a bank) contracted to provide specific custodial related services in a selected country or geographic area. Services generally include holding foreign securities in safekeeping, facilitating settlements and reporting holdings to the custodian. Subprime securitiesA classification of securities collateralized by loans to borrowers who have a tarnished or limited credit history. Subprime securities carry increased credit risk and subsequently carry higher interest rates. Tangible common shareholders equity to tangible assets ratio (TCE)Common shareholders equity less goodwill and intangible assets adjusted for deferred tax liabilities associated with tax deductible goodwill and nontax deductible intangible assets divided by period end total assets less goodwill, intangible assets, deposits with the Federal Reserve and other central banks, and U.S. governmentbacked commercial paper. Tangible common shareholders equityCommon equity less goodwill and intangible assets adjusted for deferred tax liabilities associated with nontax deductible intangible assets and tax deductible goodwill. Tier 1 and total capitalIncludes common shareholders equity (excluding certain components of comprehensive income), Series B preferred stock, qualifying trust preferred securities, less goodwill and certain intangible assets adjusted for deferred tax liabilities associated with nontax deductible intangible assets and tax deductible goodwill and a deduction for certain nonfinancial equity investments and disallowed deferred tax assets. Total capital includes Tier 1 capital, qualifying unrealized equity securities gains, qualifying subordinated debt and the allowance for credit losses. Tier 1 common equity to riskweighted assets ratioTier 1 capital excluding trust preferred securities and preferred stock divided by riskweighted assets. Unfunded commitmentsLegally binding agreements to provide a defined level of financing until a specified future date. ValueatRisk (VAR)A measure of the dollar amount of potential loss at a specified confidence level from adverse market movements in an ordinary market environment. Variable Interest Entity (VIE)An entity that: (1) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (2) has equity owners that lack the right to make significant decisions affecting the entitys operations; and/or (3) has equity owners that do not have an obligation to absorb or the right to receive the entitys losses or return.
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Management of BNY Mellon is responsible for establishing and maintaining adequate internal control over financial reporting for BNY Mellon, as such term is defined in Rule 13a15(f) under the Exchange Act. BNY Mellons management, including its principal executive officer and principal financial officer, has assessed the effectiveness of BNY Mellons internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal ControlIntegrated Framework. Based upon such assessment, management believes that, as of December 31, 2010, BNY Mellons internal control over financial reporting is effective based upon those criteria. KPMG LLP, the independent registered public accounting firm that audited BNY Mellons 2010 financial statements included in this Annual Report under Financial Statements and Notes, has issued a report with respect to the effectiveness of BNY Mellons internal control over financial reporting. This report appears on page 87.
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The Board of Directors and Shareholders The Bank of New York Mellon Corporation: We have audited The Bank of New York Mellon Corporations (BNY Mellon) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). BNY Mellons management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on BNY Mellons internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, BNY Mellon maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BNY Mellon as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, and cash flows for each of the years in the threeyear period ended December 31, 2010, and our report dated February 28, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP New York, New York February 28, 2011
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Table of Contents The Bank of New York Mellon Corporation (and its subsidiaries)
(in millions) Fee and other revenue Securities servicing fees: Asset servicing Issuer services Clearing services Total securities servicing fees Asset and wealth management fees Foreign exchange and other trading revenue Treasury services Distribution and servicing Financingrelated fees Investment income Other Total fee revenue Net securities gains (losses), including otherthantemporary impairment Noncreditrelated (losses) on securities not expected to be sold (recognized in OCI) Net securities gains (losses) Total fee and other revenue Operations of consolidated asset management funds Investment income Interest of asset management fund note holders Income of consolidated asset management funds Net interest revenue Interest revenue Interest expense Net interest revenue Provision for credit losses Net interest revenue after provision for credit losses Noninterest expense Staff Professional, legal and other purchased services Net occupancy Software Distribution and servicing Furniture and equipment Business development Subcustodian Other Subtotal Amortization of intangible assets Restructuring charges Merger and integration expenses Total noninterest expense Income Income (loss) from continuing operations before income taxes Provision (benefit) for income taxes Net income (loss) from continuing operations Discontinued operations: Income (loss) from discontinued operations Provision (benefit) for income taxes Net income (loss) from discontinued operations Extraordinary (loss) on consolidation of commercial paper conduit, net of tax Net income (loss) Net (income) attributable to noncontrolling interests ($(59) for year ended Dec. 31, 2010 related to asset management funds) Redemption charge and preferred dividends Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation
2010 $ 3,089 1,460 1,005 5,554 2,868 886 517 210 195 308 159 10,697 (43) (70) 27 10,724 663 437 226 3,533 608 2,925 11 2,914 5,215 1,099 588 410 377 315 271 247 1,060 9,582 421 28 139 10,170 3,694 1,047 2,647 (110) (44) (66) 2,581 (63) $ 2,518
Year ended Dec. 31, 2009 $ 2,573 1,463 962 4,998 2,677 1,036 519 326 215 226 111 10,108 (5,552) (183) (5,369) 4,739 3,507 592 2,915 332 2,583 4,700 1,017 564 367 393 309 214 203 954 8,721 426 150 233 9,530 (2,208) (1,395) (813) (421) (151) (270) (1,083) (1) (283) $ (1,367)
2008 $ 3,370 1,685 1,065 6,120 3,218 1,462 514 421 186 207 214 12,342 (1,628) (1,628) 10,714 5,524 2,665 2,859 104 2,755 5,189 1,021 570 331 517 323 278 255 1,902 10,386 473 181 483 11,523 1,946 491 1,455 28 14 14 (26) 1,443 (24) (33) $ 1,386
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Table of Contents The Bank of New York Mellon Corporation (and its subsidiaries)
Earnings per common share applicable to the common shareholders of The Bank of New York Mellon Corporation (a) (in dollars) Basic: Net income (loss) from continuing operations Net income (loss) from discontinued operations Extraordinary (loss), net of tax Net income (loss) applicable to common stock Diluted: Net income (loss) from continuing operations Net income (loss) from discontinued operations Extraordinary (loss), net of tax Net income (loss) applicable to common stock Average common shares and equivalents outstanding of The Bank of New York Mellon Corporation (in thousands) Basic Common stock equivalents Participating securities Diluted Antidilutive securities (d) Reconciliation of net income (loss) from continuing operations applicable to the common shareholders of The Bank of New York Mellon Corporation (in millions) Net income (loss) from continuing operations Net (income) loss attributable to noncontrolling interests Redemption charge and preferred dividends Net income (loss) from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation Net income (loss) from discontinued operations Extraordinary (loss), net of tax Net income (loss) applicable to the common shareholders of The Bank of New York Mellon Corporation
Year ended Dec. 31, 2009 $ $ $ $ (0.93) (0.23) (1.16) (0.93) (0.23) (1.16) $ $ $ $
Year ended Dec. 31, 2009 1,178,907 1,178,907 (c) 98,112 Year ended Dec. 31, 2009 $ (813) (1) (283) (1,097) (270) $ (1,367) $
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(a) Basic and diluted earnings per share under the twoclass method were calculated after deducting earnings allocated to participating securities of $23 million in 2010, $ million in 2009 and $10 million in 2008. (b) Does not foot due to rounding. (c) Diluted earnings per share for the year ended Dec. 31, 2009, was calculated using average basic shares. Adding back the dilutive shares would be antidilutive. (d) Represents stock options, restricted stock, restricted stock units, participating securities and warrants outstanding but not included in the computation of diluted average common shares because their effect would be antidilutive. See accompanying Notes to Consolidated Financial Statements.
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Table of Contents The Bank of New York Mellon Corporation (and its subsidiaries)
(dollar amounts in millions, except per share amounts) Assets Cash and due from: Banks Interestbearing deposits with the Federal Reserve and other central banks Interestbearing deposits with banks Federal funds sold and securities purchased under resale agreements Securities: Heldtomaturity (fair value of $3,657 and $4,240) Availableforsale (Dec. 31, 2010 includes $483 previously securitized) Total securities Trading assets Loans Allowance for loan losses Net loans Premises and equipment Accrued interest receivable Goodwill Intangible assets Other assets (includes $1,075 and $863, at fair value) Assets of discontinued operations Subtotal assets of operations Assets of consolidated asset management funds, at fair value: Trading assets Other assets Subtotal assets of consolidated asset management funds, at fair value Total assets Liabilities Deposits: Noninterestbearing (principally domestic offices) Interestbearing deposits in domestic offices Interestbearing deposits in foreign offices Total deposits Federal funds purchased and securities sold under repurchase agreements Trading liabilities Payables to customers and brokerdealers Commercial paper Other borrowed funds Accrued taxes and other expenses Other liabilities (including allowance for lending related commitments of $73 and $125, also includes $590 and $610, at fair value) Longterm debt (Dec. 31, 2010 includes $269 at fair value) Liabilities of discontinued operations Subtotal liabilities of operations Liabilities of consolidated asset management funds, at fair value: Trading liabilities Other liabilities Subtotal liabilities of consolidated asset management funds, at fair value Total liabilities Temporary equity: Redeemable noncontrolling interests Permanent equity: Common stock par value $0.01 per common share; authorized 3,500,000,000 common shares; issued 1,244,608,989 and 1,208,861,641 common shares Additional paidin capital Retained earnings Accumulated other comprehensive loss, net of tax Less: Treasury stock of 3,078,794 and 1,026,927 common shares, at cost Total The Bank of New York Mellon Corporation shareholders equity Nonredeemable noncontrolling interests Nonredeemable noncontrolling interests of consolidated asset management funds Total permanent equity Total liabilities, temporary equity and permanent equity
Dec. 31, 2010 $ 3,675 18,549 50,200 5,169 3,655 62,652 66,307 6,276 37,808 (498) 37,310 1,693 508 18,042 5,696 18,790 278 232,493 14,121 645 14,766 $247,259 $ 38,703 37,937 68,699 145,339 5,602 6,911 9,962 10 2,858 6,164 7,176 16,517 200,539 13,561 2 13,563 214,102 92 12 22,885 10,898 (1,355) (86) 32,354 12 699 33,065 $247,259 $
2009 3,732 7,362 56,302 3,535 4,417 51,632 56,049 6,001 36,689 (503) 36,186 1,602 639 16,249 5,588 16,737 2,242 212,224
$212,224 $ 33,477 32,944 68,629 135,050 3,348 6,396 10,721 12 477 4,484 3,891 17,234 1,608 183,221 183,221 12 21,917 8,912 (1,835) (29) 28,977 26 29,003 $212,224
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Table of Contents The Bank of New York Mellon Corporation (and its subsidiaries)
(in millions) Operating activities Net income (loss) Net income attributable to noncontrolling interests Net income (loss) from discontinued operations Extraordinary (loss), net of taxes Net income (loss) from continuing operations attributable to The Bank of New York Mellon Corporation Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities: Provision for credit losses Depreciation and amortization Deferred income tax (benefit) expense Net securities (gains) losses and venture capital income Change in trading activities Pension plan contribution Change in accruals and other, net Net effect of discontinued operations Net cash provided by operating activities Investing activities Change in interestbearing deposits with banks Change in interestbearing deposits with the Federal Reserve and other central banks Change in margin loans Purchases of securities heldtomaturity Paydowns of securities heldtomaturity Maturities of securities heldtomaturity Purchases of securities availableforsale Sales of securities availableforsale Paydowns of securities availableforsale Maturities of securities availableforsale Net principal received from loans to customers Sales of loans and other real estate Change in federal funds sold and securities purchased under resale agreements Change in seed capital investments Purchases of premises and equipment/capitalized software Acquisitions, net cash Dispositions, net cash Proceeds from the sale of premises and equipment Other, net Net effect of discontinued operations Net cash (used for) provided by investing activities Financing activities Change in deposits Change in federal funds purchased and securities sold under repurchase agreements Change in payables to customers and brokerdealers Change in other funds borrowed Change in commercial paper Net proceeds from the issuance of longterm debt Repayments of longterm debt Proceeds from the exercise of stock options Issuance of common stock Tax benefit realized on sharebased payment awards Treasury stock acquired Common cash dividends paid Series B preferred stock (repurchased) issued Common stock warrant (repurchased) issued Preferred dividends paid Net effect of discontinued operations Net cash provided by (used for) financing activities Effect of exchange rate changes on cash Change in cash and due from banks Change in cash and due from banks Cash and due from banks at beginning of period Cash and due from banks at end of period Supplemental disclosures Interest paid Income taxes paid Income taxes refunded See accompanying Notes to Consolidated Financial Statements.
2010 $ 2,581 (63) (66) 2,584 11 629 1,199 (57) (155) (46) (115) 4,050 7,073 (11,187) (2,153) (19) 255 316 (23,585) 5,981 7,944 2,666 2,463 511 (1,634) (160) (230) (2,793) 133 14 (591) 59 (14,937) 8,527 2,058 (762) 1,988 (2) 1,347 (2,614) 31 697 1 (41) (440) 10,790 40 (57) 3,732 $ 3,675 $ 591 699 197
Year ended Dec. 31, 2009 $ (1,083) (1) (270) (814) 332 711 (1,970) 5,387 (636) (394) 1,192 (27) 3,781 (9,635) 45,908 (680) (114) 643 280 (28,665) 3,975 6,361 2,001 4,948 851 (1,545) (8) (318) (364) 6 (987) 431 23,088 (24,774) 2,602 1,447 (5,717) (126) 3,350 (1,882) 16 1,371 4 (28) (599) (3,000) (136) (73) (428) (27,973) (53) (1,157) 4,889 $ 3,732 $ 682 2,392 664
2008 $ 1,443 (24) 14 (26) 1,431 104 878 (1,257) 1,659 (368) (80) 513 34 2,914 (13,973) (53,270) 1,233 267 238 (11,561) 114 4,950 5,468 4,660 334 6,095 56 (303) (511) 310 41 (171) 48 (55,975) 48,780 (660) 1,696 5,596 (3,941) 2,647 (4,082) 182 40 14 (308) (1,107) 2,779 221 (22) (82) 51,753 (438) (1,746) 6,635 $ 4,889 $ 2,682 2,455 65
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Table of Contents The Bank of New York Mellon Corporation (and its subsidiaries)
Accumulated Non other redeemable comprehensive Additional Common (in millions, except per share amounts) Balance at Dec. 31, 2009 Adjustments for the cumulative effect of applying ASC 810 Adjustments for the cumulative effect of applying ASC 825 Adjusted balance at Jan. 1, 2010 Shares issued to shareholders of noncontrolling interests Redemption of subsidiary shares from noncontrolling interests Distributions paid to noncontrolling interests Other net changes in noncontrolling interests Consolidation of asset management funds Deconsolidation of asset management funds Comprehensive income: Net income Other comprehensive income, net of tax Reclassification adjustment (b) Total comprehensive income Dividends on common stock at $0.36 per share Repurchase of common stock Common stock issued under: Stock forward contract Employee benefit plans Direct stock purchase and dividend reinvestment plan Stock awards and options exercised Balance at Dec. 31, 2010 (a) (b) (c) stock $12 12 $12 paidin capital $ 21,917 21,917 (18) 15 676 34 16 245 $ 22,885 Retained earnings $ 8,912 52 (73) 8,891 (55) 2,518 (14) 2,504 (441) (1) $ 10,898 income (loss), net of tax (1,835) 24 (1,811) 461 (5) 456 (1,355) Treasury stock (29) (29) (41) 1 (17) (86) non controlling interest 26 26 (4) (10) 12
interest of consolidated asset manage ment funds (89) 785 (12) 59 (44) 15 699 Redeemable non controlling $ interests/ temporary 44 (6) equity 50 4 4 92
$ 29,003 (a) 76 Total (73) 29,006 permanent (18) equity (4) (139) 785 (12) 2,577 417 (19) 2,975 (c) (441) (41) 676 35 16 227 $ 33,065 (a)
Includes total The Bank of New York Mellon common shareholders equity of $28,977 million at Dec. 31, 2009, and $32,354 million at Dec. 31, 2010. Includes $(15) million (after tax) related to OTTI, and a $14 million reclassification to retained earnings from other comprehensive income. Comprehensive income attributable to The Bank of New York Mellon Corporation shareholders totaled $2,960 million for the year ended Dec. 31, 2010.
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(in millions, except per share amounts) Balance at Dec. 31, 2008 Adjustments for the cumulative effect of applying ASC 320, net of taxes of $470 Adjusted balance at Jan. 1, 2009 Purchase of subsidiary shares from noncontrolling interests Distributions paid to noncontrolling interests Comprehensive income: Net income Other comprehensive income, net of tax Reclassification adjustment Total comprehensive income Dividends: Common stock at $0.51 per share Preferred stock at $24.58 per share Repurchase of: Common stock Series B preferred stock Common stock warrant Common stock issued: In public offering In connection with acquisitions and investments Under employee benefit plans Under direct stock purchase and dividend reinvestment plan Amortization of preferred stock discount and redemption charge Stock awards and options exercised Other Balance at Dec. 31, 2009 (a) (b) (c)
The Bank of New York Mellon Corporation shareholders Accumulated other comprehensive income Additional (loss), paidin Retained Common net of tax capital earnings stock $ 11 $ 20,432 $ 10,225 $ (5,401) 11 1 12 20,432 (74) (136) 1,346 85 49 19 197 (1) $ 21,917 676 10,901 (1,084) (1,084) (599) (69) (214) (23) $ 8,912 (676) (6,077) 926 3,316 4,242 (1,835)
Non redeemable noncontrolling interests $ 39 39 (11) (7) 1 4 5 26 Total permanent equity $ 28,089 (a) 28,089 (85) (7) (1,083) 930 3,316 (b) 3,163 (c) (599) (69) (28) (3,000) (136) 1,347 85 51 19 197 (24) $ 29,003 (a)
Includes total common shareholders equity of $25,264 million at Dec. 31, 2008, and $28,977 million at Dec. 31, 2009. Includes $3,348 million (after tax) related to OTTI that was reclassified to net securities gains (losses) on the income statement. Comprehensive income attributable to The Bank of New York Mellon Corporation shareholders totaled $3,158 million for the year ended Dec. 31, 2009.
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Table of Contents The Bank of New York Mellon Corporation (and its subsidiaries)
(in millions, except per share amounts) Balance at Dec. 31, 2007 Adjustments for the cumulative effect of applying ASC 715 and ASC 825, net of taxes of $24 Adjusted balance at Jan. 1, 2008 Purchase of subsidiary shares from noncontrolling interests Distributions paid to noncontrolling interest Comprehensive income: Net income Other comprehensive income, net of tax Reclassification adjustment Total comprehensive income Dividends: Common stock at $0.96 per share Preferred stock at $8.75 per share Repurchase of common stock Common stock issued under: Employee benefit plans Direct stock purchase and dividend reinvestment plan Series B preferred stock issued Amortization of preferred stock discount Stock awards and options exercised Warrant issued in connection with TARP Other Balance at Dec. 31, 2008 (a) (b)
The Bank of New York Mellon Corporation shareholders Accumulated other comprehensive income Additional (loss), paidin Retained Common net of tax capital earnings stock $ 11 $ 19,990 $ 9,990 $ (549) 11 11 19,990 12 200 221 9 $ 20,432 (57) 9,933 1,419 1,419 (1,107) (26) (3) (1) (7) 17 $ 10,225 (549) (5,824) 972 (4,852) (5,401)
Non redeemable noncontrolling interests $ 182 182 (148) (7) 24 (12) 12 39 Total permanent equity $ 29,585 (a) (57) 29,528 (148) (7) 1,443 (5,836) 972 (3,421)(b) (1,107) (26) (308) 67 30 2,779 449 221 32 $ 28,089 (a)
Includes total common shareholders equity of $29,403 million at Dec. 31, 2007 and $25,264 million at Dec. 31, 2008. Comprehensive loss attributable to The Bank of New York Mellon Corporation shareholders totaled $3,433 million for the year ended Dec. 31, 2008.
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Note 1Summary of significant accounting and reporting policies Basis of Presentation The accounting and financial reporting policies of BNY Mellon, a global financial services company, conform to U.S. generally accepted accounting principles (GAAP) and prevailing industry practices. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates based on assumptions about future economic and market conditions which affect reported amounts and related disclosures in our financial statements. Amounts subject to estimates are items such as the allowance for loan losses and lendingrelated commitments, goodwill and intangible assets, pension accounting, the fair value of financial instruments and otherthantemporary impairments. Actual results could differ from these estimates. In the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the annual periods have been made. Certain other immaterial reclassifications have been made to prior years to place them on a basis comparable with current period presentation. The consolidated financial statements include the accounts of BNY Mellon and its subsidiaries. Equity investments of less than a majority but at least 20% ownership are accounted for by the equity method and classified as other assets. Earnings on these investments are reflected in fee and other revenue as securities servicing fees or investment income, as appropriate, in the period earned. Our most significant equity method investments are:
Equity method investments at Dec. 31, 2010 (dollars in millions) CIBC Mellon Wing Hang Siguler Guff ConvergEx West LB Joint Venture
The income statement and balance sheet include results of acquired businesses accounted for under the acquisition method of accounting pursuant to ASC 805Business Combinations and equity investments from the dates of acquisition. For acquisitions prior to Jan. 1, 2009, we recorded any contingent purchase payments when the amounts were resolved and became payable. For acquisitions occurring after Dec. 31, 2008, contingent purchase consideration was measured at its fair value and recorded on the purchase date. The Parent financial statements in Note 21 of the Notes to Consolidated Financial Statements include the accounts of the Parent; those of a wholly owned financing subsidiary that functions as a financing entity for BNY Mellon and its subsidiaries by issuing commercial paper and other debt guaranteed by BNY Mellon; and MIPA, LLC, a single member company, created to hold and administer corporate owned life insurance. Financial data for the Parent, the financing subsidiary and the single member company are combined for financial reporting purposes because of the limited function of these entities and the unconditional guarantee by BNY Mellon of their obligations. Variable interest entities We consider the underlying facts and circumstances of individual transactions when assessing whether or not an entity is a potential variable interest entity (VIE). VIEs are entities in which equity investors do not have the characteristics of a controlling financial interest. BNY Mellon applies ASC 810 to its mutual funds, hedge funds, private equity funds, collective investment funds and real estate investment trusts, which were determined to be VIEs. Generally, the company is deemed to be the primary beneficiary and thus required to consolidate a VIE, if BNY Mellon has a variable interest (or combination of variable interests) that, based on a quantitative analysis, will absorb a majority of the VIEs expected losses, that will receive a majority of the VIEs expected residual returns, or both. A variable interest is a contractual, ownership or other interest that changes with changes in the fair value of the VIEs net assets. Expected losses and expected residual returns are measures of variability in the expected cash flows of a VIE. BNY Mellons other VIEs are evaluated under the guidance included in ASU 200917. These other VIEs, include securitization trusts, which are no longer considered QSPEs, and CLOs, in which BNY Mellon serves as the investment manager. In addition, we provide trust and custody services for a fee to entities sponsored by other corporations in which we have no other interest. The company must determine whether or not its variable interests in these VIEs based on qualitative analysis provide BNY Mellon with a controlling financial interest in the VIE. The
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analysis includes an assessment of the characteristics of the VIE. The Company is considered to have a controlling financial interest in the VIE, which would require consolidation of the VIE, if it has the following characteristics: (1) the power to direct the activities that most significantly impact the VIEs economic performance; and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Nature of operations BNY Mellon is a global leader in providing a broad range of financial products and services in domestic and international markets. Through our seven businesses (Asset Management, Wealth Management, Asset Servicing, Issuer Services, Clearing Services, Treasury Services and Other), we serve the following major classes of customersinstitutions, corporations, and high net worth individuals. For institutions and corporations, we provide the following services:
investment management; trust and custody; foreign exchange; securities lending; depositary receipts; corporate trust; shareowner services; global payment/cash management; and banking services.
For individuals, we provide mutual funds, separate accounts, wealth management and private banking services. BNY Mellons asset management businesses provide investment products in many asset classes and investment styles on a global basis. Trading account securities, availableforsale securities, and heldtomaturity securities Securities are accounted for under ASC 320 InvestmentsDebt and Equity Securities. Securities are generally classified in the trading, availableforsale investment or the heldtomaturity investment securities portfolios when they are purchased. Securities are classified as trading securities when our intention is to resell. Securities are classified as availableforsale securities when we intend to hold the securities for an indefinite period of time or when the securities may be used for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure, prepayment risk and liquidity needs. Securities are classified as heldtomaturity securities when we intend to hold them until maturity. Seed capital investments are classified as other assets, trading securities or availableforsale securities, depending on the nature of the investment and managements intent. Trading securities are stated at fair value. Trading revenue includes both realized and unrealized gains and losses. The liability incurred on shortsale transactions, representing the obligation to deliver securities, is included in trading liabilities at fair value. Availableforsale securities are stated at fair value. The difference between fair value and amortized cost representing unrealized gains or losses on assets classified as availableforsale, are recorded net of tax as an addition to or deduction from other comprehensive income (OCI), unless a security is deemed to have an otherthantemporary impairment (OTTI). Gains and losses on sales of availableforsale securities are reported in the income statement. The cost of debt and equity securities sold is determined on a specific identification and average cost method, respectively. Unrealized gains and losses on seed capital investments classified as other assets are recorded in investment income. Heldtomaturity securities are stated at cost. Income on securities purchased is adjusted for amortization of premium and accretion of discount on a level yield basis, unless a security is otherthantemporarily impaired. Effective 2009, the Company adopted FAS 1152 and FAS 1242 Recognition and Presentation of OtherThanTemporary Impairments (included in ASC 320), which changed the accounting and disclosure for OTTI. Under this new guidance, only the credit component of an OTTI of a debt security is recognized in earnings and the noncredit component is recognized in OCI when we do not intend to sell the security and it is more likely than not that BNY Mellon will not be required to sell the security prior to recovery. For heldtomaturity debt securities, the amount of OTTI recorded in OCI for the noncredit portion of a previous OTTI is amortized prospectively, as an increase to the carrying amount of the security, over the remaining life of the security on the basis of the timing of future estimated cash flows of the securities. In order not to be required to recognize the noncredit component of an OTTI in earnings, management is
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required to assert that it does not have the intent to sell the security and that it is more likely than not it will not have to sell the security before recovery of its cost basis. If we intend to sell the security or it is more likely than not that BNY Mellon will be required to sell the security prior to recovery, the noncredit component of OTTI is recognized in earnings and subsequently accreted to interest income on an effective yield basis over the life of the security. ASC 325 InvestmentsOther provides additional specific guidance for unrated investments which are beneficial interests in securitized financial assets. BNY Mellon decides whether a security is within the scope of ASC 325 upon its acquisition and does not alter this decision if the security is subsequently downgraded. Under ASC 325, the excess of future estimated cash flows over the initial carrying amount of the investment is accreted to interest income over the life of the investment using the effective yield method. We routinely conduct periodic reviews to identify and evaluate each investment security to determine whether OTTI has occurred. We examine various factors when determining whether an impairment, representing the fair value of a security being below its amortized cost, is other than temporary. The following are examples of factors that BNY Mellon considers:
The length of time and the extent to which the fair value has been less than the amortized cost basis; Whether management has an intent to sell the security; Whether the decline in fair value is attributable to specific adverse conditions affecting a particular investment; Whether the decline in fair value is attributable to specific conditions, such as conditions in an industry or in a geographic area; Whether a debt security has been downgraded by a rating agency; Whether a debt security exhibits cash flow deterioration; and For each nonagency RMBS, we compare the remaining credit enhancement that protects the individual security from losses against the projected losses of principal and/or interest expected to come from the underlying mortgage collateral, to determine whether such credit losses might directly impact the relevant security.
The accounting policies for the determination of the fair value of financial instruments and OTTI have been identified as critical accounting estimates as they require us to make numerous assumptions based on available market data. See Note 5 of the Notes to Consolidated Financial Statements for these disclosures. Loans and leases Loans are reported net of any unearned discount. Loan origination and upfront commitment fees, as well as certain direct loan origination and commitment costs, are deferred and amortized as a yield adjustment over the lives of the related loans. Deferred fees and costs are netted against outstanding loan balances. Loans held for sale are carried at the lower of aggregate cost or fair value. Unearned revenue on direct financing leases is accreted over the lives of the leases in decreasing amounts to provide a constant rate of return on the net investment in the leases. Revenue on leveraged leases is recognized on a basis to achieve a constant yield on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Gains and losses on residual values of leased equipment sold are included in investment income. Considering the nature of these leases and the number of significant assumptions, there is risk associated with the income recognition on these leases should any of the assumptions change materially in future periods. Nonperforming assets Commercial loans are placed on nonaccrual status when principal or interest is past due 90 days or more, or when there is reasonable doubt that interest or principal will be collected. When a first lien residential mortgage loan reaches 90 days delinquent, it is subject to an impairment test and may be placed on nonaccrual status. At 180 days delinquent, the loan is subject to further impairment testing. The loan will remain on accrual status if the realizable value of the collateral exceeds the unpaid principal balance plus accrued interest. If the loan is impaired, a chargeoff is taken and the loan is placed on nonaccrual status. At 270 days delinquent, all first lien mortgages are placed on nonaccrual status. Second lien mortgages are automatically placed on nonaccrual status when they reach 90 days delinquent. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed
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against current period interest revenue. Interest receipts on nonaccrual and impaired loans are recognized as interest revenue or are applied to principal when we believe the ultimate collectability of principal is in doubt. Nonaccrual loans generally are restored to an accrual basis when principal and interest become current. A loan is considered to be impaired, as defined by ASC 310Accounting by Creditors for Impairment of a Loan, when it is probable that we will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. An impairment allowance is measured on loans greater than $1 million and which meet the definition of an impaired loan per ASC 310. Impaired loans greater than $1 million are required to be measured based upon the loans market price, the present value of expected future cash flows, discounted at the loans initial effective interest rate, or at fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, an impairment allowance is established by either an allocation of the allowance for credit losses or by a provision for credit losses. Impairment allowances are not needed when the recorded investment in an impaired loan is less than the loan valuation. Allowance for loan losses and allowance for lending related commitments The allowance for loans losses, shown as a valuation allowance to loans, and the allowance for lending related commitments are referred to as BNY Mellons allowance for credit exposure. The accounting policy for the determination of the adequacy of the allowances has been identified as a critical accounting estimate as it requires us to make numerous complex and subjective estimates and assumptions relating to amounts which are inherently uncertain. The allowance for loans losses is maintained to absorb losses inherent in the loan portfolio as of the balance sheet date based on our judgment. The allowance determination methodology is designed to provide procedural discipline in assessing the appropriateness of the allowance. Credit losses are charged against the allowance. Recoveries are added to the allowance. The methodology for determining the allowance for lending related commitments considers the same factors as the allowance for loan losses, as well as an estimate of the probability of drawdown. In 2010, we expanded the description of the elements of the allowance for loan losses and lending related commitments from three to four. This change did not impact the methodology used to calculate the allowance or provision for credit losses. The four elements of the allowance for loan losses and the allowance for lending related commitments are:
an allowance for impaired credits (nonaccrual loans over $1 million); an allowance for higher riskrated credits and passrated credits; an allowance for residential mortgage loans (previously included in element 2); and an unallocated allowance based on general economic conditions and risk factors in our individual markets.
Our lending is primarily to institutional customers. As a result, our loans are generally larger than $1 million. Therefore, the first element, impaired credits, is based on individual analysis of all nonperforming loans over $1 million. The allowance is measured by the difference between the recorded value of impaired loans and their impaired value. Impaired value is either the present value of the expected future cash flows from the borrower, the market value of the loan, or the fair value of the collateral. The second element, higher riskrated credits and passrated credits, is based on our expected loss model. All borrowers are assigned to pools based on their credit ratings. The expected loss for each loan in a pool incorporates the borrowers credit rating, loss given default rating and maturity. The loss given default incorporates a recovery expectation. The borrowers probability of default is derived from the associated credit rating. Borrower ratings are reviewed at least annually and are periodically mapped to third party databases, including rating agency and default and recovery databases, to ensure ongoing consistency and validity. Higher riskrated credits are reviewed quarterly. Commercial loans over $1 million are individually analyzed before being assigned a credit rating. We also apply this technique to our lease financing and wealth management portfolios. The third element, the allowance for residential mortgage loans is determined by segregating six mortgage pools into delinquency periods ranging from current through foreclosure. Each of these delinquency periods is assigned a probability of default. A specific loss given default based on a
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combination of external loss data from third party databases and internal loss history is assigned for each mortgage pool. For each pool, the expected loss is calculated using the above factors. The resulting expected loss factor is applied against the loan balance to determine the reserve held for each pool. The fourth element, the unallocated allowance, is based on managements judgment regarding the following factors:
Economic conditions including duration of the current cycle; Collateral values; Specific credits and industry conditions; Results of bank regulatory and internal credit exams; Geopolitical issues and their impact on the economy; and Volatility and model risk.
The allocation of allowance for credit losses is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the loss. Premises and equipment Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straightline method over the estimated useful life of the owned asset and, for leasehold improvements, over the lesser of the remaining term of the leased facility or the estimated economic life of the improvement. For owned and capitalized assets, estimated useful lives range from 2 to 40 years. Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized and amortized to operating expense over their identified useful lives. Software BNY Mellon capitalizes costs relating to acquired software and internaluse software development projects that provide new or significantly improved functionality. We capitalize projects that are expected to result in longerterm operational benefits, such as replacement systems or new applications that result in significantly increased operational efficiencies or functionality. All other costs incurred in connection with an internaluse software project are expensed as incurred. Capitalized software is recorded in other assets. Identified intangible assets and goodwill Identified intangible assets with estimable lives are amortized in a pattern consistent with the assets identifiable cash flows or using a straightline method over their remaining estimated benefit periods if the pattern of cash flows is not estimable. Intangible assets with estimable lives are reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Goodwill and intangibles with indefinite lives are not amortized, but are assessed at least annually for impairment. The accounting policy for valuing and impairment testing of identified intangible assets and goodwill has been identified as a critical accounting estimate as it requires us to make numerous complex and subjective estimates. See Note 7 of the Notes to Consolidated Financial Statements for additional disclosures related to goodwill and intangible assets. Noncontrolling Interests Noncontrolling interests included in permanent equity are adjusted for the income or (loss) attributable to the noncontrolling interest holders and any distributions to those shareholders. Redeemable noncontrolling interests are reported as temporary equity. In accordance with ASC 480, Distinguishing Liabilities from Equity, BNY Mellon recognizes changes in the redemption value of the redeemable noncontrolling interests as they occur and adjusts the carrying value to be equal to the redemption value. Fee revenue We record security servicing fees, asset and wealth management fees, foreign exchange and other trading revenue, treasury services, financingrelated fees, distribution and servicing, and other revenue when the services are provided and earned based on contractual terms, when amounts are determined and collectibility is reasonably assured. Additionally, we recognize revenue from nonrefundable, upfront implementation fees under outsourcing contracts using a straightline method, commencing in the period the ongoing services are performed through the expected term of the contractual relationship. Incremental direct setup costs of implementation, up to the related implementation fee or minimum fee revenue amount, are deferred and amortized over the same period that the related implementation fees are recognized. If a client terminates an outsourcing contract prematurely, the unamortized deferred incremental direct setup
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costs and the unamortized deferred upfront implementation fees related to that contract are recognized in the period the contract is terminated. Performance fees are recognized in the period in which the performance fees are earned and become determinable. Performance fees are generally calculated as a percentage of the applicable portfolios performance in excess of a benchmark index or a peer groups performance. When a portfolio underperforms its benchmark or fails to generate positive performance, subsequent years performance must generally exceed this shortfall prior to fees being earned. Amounts billable in subsequent years and which are subject to a clawback if performance thresholds in those years are not met are not recognized since the fees are potentially uncollectible. These fees are recognized when it is determined that they will be collected. When a multiyear performance contract provides that fees earned are billed ratably over the performance period, only the portion of the fees earned that are nonrefundable are recognized. Net interest revenue Revenue on interestearning assets and expense on interestbearing liabilities is recognized based on the effective yield of the related financial instrument. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated to U.S. dollars at the rate of exchange on the balance sheet date. Transaction gains and losses are included in the income statement. Translation gains and losses on investments in foreign entities with functional currencies that are not the U.S. dollar are recorded as foreign currency translation adjustments in other comprehensive results. Revenue and expense accounts are translated monthly at an average monthly exchange rate. Pension The measurement date for BNY Mellons pension plans is Dec. 31. Plan assets are determined based on fair value generally representing observable market prices. The projected benefit obligation is determined based on the present value of projected benefit distributions at an assumed discount rate. The discount rate utilized is based on the yield of highquality corporate bonds available in the marketplace. The net periodic pension expense or credit includes service costs, interest costs based on an assumed discount rate, an expected return on plan assets based on an actuarially derived marketrelated value and amortization of prior years actuarial gains and losses. Actuarial gains and losses include the impact of plan amendments, gains or losses related to changes in the amount of the projected benefit obligation or plan assets resulting from experience different from the assumed rate of return, changes in the discount rate or other assumptions. To the extent an actuarial gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the marketrelated value of plan assets, the excess is recognized over the future service periods of active employees. Our expected longterm rate of return on plan assets is based on anticipated returns for each asset class. Anticipated returns are weighted for the expected allocation for each asset class and are based on forecasts for prospective returns in the equity and fixed income markets, which should track the longterm historical returns for these markets. We also consider the growth outlook for U.S. and global economies, as well as current and prospective interest rates. The marketrelated value utilized to determine the expected return on plan assets is based on the fair value of plan assets adjusted for the difference between expected returns and actual performance of plan assets. The difference between actual experience and expected returns on plan assets is included as an adjustment in the marketrelated value over a fiveyear period. BNY Mellons accounting policy regarding pensions has been identified as a critical accounting estimate as it is regarded to be critical to the presentation of our financial statements since it requires management to make numerous complex and subjective assumptions relating to amounts which are inherently uncertain. See Note 20 of the Notes to Consolidated Financial Statements for additional disclosures related to pensions. Severance BNY Mellon provides separation benefits for U.S.based employees through The Bank of New York Mellon Corporation Supplemental Unemployment Benefit Plan, which replaced The Bank of New York Mellon Corporation Separation Plan, The Bank of New York Company, Inc. Separation Plan and the Mellon Financial Corporation Displacement Program for separations on or after May 24, 2010. These benefits are provided to eligible employees separated from their jobs for business reasons not related to individual performance. Basic separation benefits are
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generally based on the employees years of continuous benefited service. Severance for employees based outside of the U.S. is determined in accordance with local agreements and legal requirements. Separation expense is recorded when management commits to an action that will result in separation and the amount of the liability can be reasonably estimated. Income taxes We record current tax liabilities or assets through charges or credits to the current tax provision for the estimated taxes payable or refundable for the current year. Deferred tax assets and liabilities are recorded for future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized. A tax position that fails to meet a morelikelythannot recognition threshold will result in either reduction of current or deferred tax assets, and/or recording of current or deferred tax liabilities. Interest and penalties related to income taxes are recorded as income tax expense. Derivative financial instruments Derivative contracts, such as futures contracts, forwards, interest rate swaps, foreign currency swaps and options and similar products used in trading activities are recorded at fair value. Gains and losses are included in foreign exchange and other trading revenue in fee and other revenue. Unrealized gains and losses are reported on a gross basis in trading account assets and trading liabilities, after taking into consideration master netting agreements. We enter into various derivative financial instruments for nontrading purposes primarily as part of our asset/liability management (ALM) process. These derivatives are designated as fair value and cash flow hedges of certain assets and liabilities when we enter into the derivative contracts. Gains and losses associated with fair value hedges are recorded in income as well as any change in the value of the related hedged item. Gains and losses on cash flow hedges are recorded in other comprehensive income. Foreign currency transaction gains and losses related to a hedged net investment in a foreign operation, net of their tax effect, are recorded with cumulative foreign currency translation adjustments within other comprehensive income. We formally document all relationships between hedging instruments and hedged items, as well as our riskmanagement objectives and strategy for undertaking various hedge transactions. We formally assess, both at the hedges inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective and whether those derivatives are expected to remain highly effective in future periods. We evaluate ineffectiveness in terms of amounts that could impact a hedges ability to qualify for hedge accounting and the risk that the hedge could result in more than a de minimis amount of ineffectiveness. At inception, the potential causes of ineffectiveness related to each of our hedges is assessed to determine if we can expect the hedge to be highly effective over the life of the transaction and to determine the method for evaluating effectiveness on an ongoing basis. Recognizing that changes in the value of derivatives used for hedging or the value of hedged items could result in significant ineffectiveness, we have processes in place that are designed to identify and evaluate such changes when they occur. Quarterly, we perform a quantitative effectiveness assessment and record any ineffectiveness in current earnings. We discontinue hedge accounting prospectively when we determine that a derivative is no longer an effective hedge, the derivative expires, is sold, or management discontinues the derivatives hedge designation. Subsequent gains and losses on these derivatives are included in foreign exchange and other trading revenue. For fair value hedges, the accumulated gain or loss on the hedged item is amortized on a yield basis over the remaining life of the hedged item. Accumulated gains and losses, net of tax effect, from cash flow hedges are reclassified from other comprehensive income and recognized in current earnings in other revenue upon receipt of the hedged cash flow. The accounting policy for the determination of the fair value of derivative financial instruments has been identified as a critical accounting estimate as it requires us to make numerous assumptions based on the available market data. See Note 26 of the Notes to Consolidated Financial Statements for additional disclosures related to derivative financial instruments disclosures.
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Statement of cash flows We have defined cash as cash and due from banks. Cash flows from hedging activities are classified in the same category as the items hedged. Stock options Compensation expense is recognized in the income statement, on a straightline basis, over the applicable vesting period, for all sharebased payments. Certain of our stock compensation grants vest when the employee retires. ASC 718 requires the completion of expensing of new grants with this feature by the first date the employee is eligible to retire. For grants prior to Jan. 1, 2006, we will continue to expense them over their stated vesting period. Note 2Accounting changes and new accounting guidance ASU 200916Accounting for Transfers of Financial Assets In December 2009, the FASB issued ASU 200916 Accounting for Transfers of Financial Assets. This formally codified SFAS No. 166, Accounting for Transfers of Financial Assets, an Amendment to FASB Statement No. 140. This ASU removed (1) the concept of a qualifying special purpose entity (QSPE) from SFAS No. 140 (ASC 860Transfers and Servicing) and (2) the exceptions from applying FASB Interpretation No. (FIN) 46 (R) (ASC 810Consolidation) to QSPEs. This ASU revised the derecognition requirements for transfers of financial assets and the initial measurement of beneficial interests that are received as proceeds by a transferor in connection with transfers of financial assets. This ASU also required additional disclosure about transfers of financial assets and a transferors continuing involvement with such transferred financial assets. This ASU was effective Jan. 1, 2010, at which time any QSPEs were evaluated for consolidation in accordance with ASC 810. ASU 200917Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities In December 2009, the FASB issued ASU 200917 Improvements to Financial Reporting by Entities Involved with Variable Interest Entities. This ASU amended ASC 810 to require ongoing assessments to determine whether an entity is a variable interest entity (VIE) and whether an enterprise is the primary beneficiary of a VIE. This ASU also amended the guidance for determining which enterprise, if any, is the primary beneficiary of a VIE by requiring the enterprise to initially perform a qualitative analysis to determine if the enterprises variable interest or interests give it a controlling financial interest. Consolidation is based on a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. If a company has control and the right to receive benefits or the obligation to absorb losses which could potentially be significant to the VIE, then consolidation is required. This ASU was effective Jan. 1, 2010, and primarily impacted our asset management businesses. This ASU does not change the economic risk related to these businesses and therefore, BNY Mellons computation of economic capital required by our businesses did not change. This statement also required additional disclosures about an enterprises involvement in a VIE, including the requirement for sponsors of a VIE to disclose information even if they do not hold a significant variable interest in the VIE. At Dec. 31, 2010, our consolidated balance sheet included $15,249 million of assets of VIEs that would not have been included in our consolidated balance sheet prior to effectiveness of the statement. Those assets included seed capital investments in mutual funds sponsored by our affiliates and securitizations. Adoption of this new statement accounted for an increase in consolidated total assets on our balance sheet at Dec. 31, 2010 of $14.6 billion, or approximately 7% from year end. In February 2010, the FASB issued ASU 201010, Amendments for Certain Investment Funds which deferred the requirements of ASU 200917 for asset managers interests in entities that apply the specialized accounting guidance for investment companies or that have the attributes of investment companies and asset managers interests in money market funds. This amendment was effective Jan. 1, 2010. As a result of adopting the accounting for VIEs, we recorded a cumulative effect adjustment of $76 million to retained earnings and OCI in the first quarter of 2010. Also, we marked the assets and liabilities to market, and as a result, recorded a $73 million charge to retained earnings in the first quarter of 2010.
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In January 2010, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and the Office of Thrift Supervision issued a final rule requiring banks to hold capital for assets consolidated under ASC 810. The final rule allows for a phasein of 50% of the effect on riskweighted assets and allowance for loan losses includable in Tier 2 capital that results from implementation of this standard for the quarters ending Sept. 30, 2010, and Dec. 31, 2010, with full phasein for the quarter ending March 31, 2011. BNY Mellon elected to defer the full implementation of ASC 810 for capital purposes pursuant to this rule. At Dec. 31, 2010, had we fully phasedin the implementation of ASC 810, our Tier 1 capital ratio would have been negatively impacted by approximately 2 basis points. ASU 20106Improving Disclosures About Fair Value Measurements In January 2010, the FASB issued ASU 20106, Improving Disclosures about Fair Value Measurements. This amended ASC 820 to clarify existing requirements regarding disclosures of inputs and valuation techniques and levels of disaggregation. This ASU also required the following new disclosures: (1) significant transfers in and out of Levels 1 and 2 and the reasons that such transfers were made; and (2) additional disclosures in the reconciliation of Level 3 activity, including information on a gross basis for purchases, sales, issuances and settlements. This ASU is required in interim and annual financial statements and was effective March 31, 2010. See Note 23 of the Notes to Consolidated Financial Statements for these disclosures. Additional disclosures about Level 3 purchases, sales, issuances and settlements in the rollforward activity for fair value measurements will be effective March 31, 2011. ASU 201011Scope Exception Related to Embedded Credit Derivatives In March 2010, the Financial Accounting Standards Board (FASB) issued ASU 201011, Scope Exception Related to Embedded Credit Derivatives. This ASU amended Subtopic 81515 to clarify the scope of the exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. It addressed how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting. This ASU was effective July 1, 2010. The impact of this ASU was immaterial to our results of operations. ASU 201018Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset In April 2010, the FASB issued ASU 201018, Effect of a Loan Modification when the Loan is Part of a Pool that is Accounted for as a Single Asset. This ASU provided guidance that would maintain the integrity of the pool as a single unit of account and exempt these loans from troubled debt restructuring reporting. Modified purchased credit impaired loans accounted for in a pool would remain in the pool subject to ASC 31030 regardless of whether the modification is a troubled debt restructuring. An entity continues to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This ASU does not contain any additional disclosure requirements. This ASU was effective July 1, 2010. The impact of this ASU was immaterial to our results of operations. ASU 201020Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses In July 2010, the FASB issued ASU 201020, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU required additional disclosures about the allowance for credit losses and the credit quality of financing receivables. This ASU defined two levels of disaggregationportfolio segment and class of financing receivable. Existing disclosures were amended to require: rollforward schedule of allowance for credit losses, with the ending balance further disaggregated on the basis of impairment method; related recorded investment in each ending balance noted above; nonaccrual status by class of financing receivable; and impaired financing receivables by class of financing receivables. This ASU required the following additional disclosures: credit quality indicators by class of financing receivable; aging of past due financing receivables by class; nature and extent of troubled debt restructuring by class of financing receivable and their effect on allowance for credit losses; nature and extent of financing receivables modified as troubled debt restructurings by class and their effect on the allowance for credit losses; and significant purchases
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and sales by portfolio segment. These disclosures are presented in Note 6 to the Consolidated Financial Statements. Adopted in 2009 Otherthantemporary impairment In April 2009, the FASB issued new guidance on recognition and presentation of otherthantemporary impairments, included in ASC 320InvestmentsDebt and Equity Securities. This new guidance replaced the intent and ability indication in previous guidance by specifying that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered otherthantemporarily impaired unless there is a credit loss. When an entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an otherthantemporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For heldtomaturity debt securities, the amount of OTTI recorded in OCI for the noncredit portion of a previous OTTI should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. ASC 320 requires entities to initially apply the provisions of the standard to previously otherthantemporarily impaired debt securities (i.e. debt securities that the entity does not intend to sell and that the entity is not more likely than not required to sell before recovery) existing as of the date of initial adoption by making a cumulativeeffect adjustment to the opening balance of retained earnings in the period of adoption. The cumulativeeffect adjustment reclassifies the noncredit portion of a previously otherthantemporarily impaired debt security held as of the date of initial adoption to accumulated OCI from retained earnings. This guidance also amends the previous disclosure provisions of ASC 320 for both debt and equity securities. It requires disclosures in interim and annual periods for major security types identified on the basis of how an entity manages, monitors and measures its securities and the nature and risks of the security. We adopted this new guidance effective Jan 1, 2009. As a result of adopting this guidance, BNY Mellon recorded a cumulativeeffect adjustment of $676 million (aftertax) to reclassify the noncredit component of the previously recognized OTTI from retained earnings to accumulated OCI (for those securities where management did not intend to sell the security and it was not more likely than not that BNY Mellon would have been required to sell the securities before recovery). Note 3Acquisitions and dispositions We sometimes structure our acquisitions with both an initial payment and later contingent payments tied to postclosing revenue or income growth. For acquisitions completed prior to Jan. 1, 2009, we record the fair value of contingent payments as an additional cost of the entity acquired in the period that the payment becomes probable. For acquisitions completed after Jan. 1, 2009, subsequent changes in the fair value of a contingent consideration liability will be recorded through the income statement. Contingent payments totaled $92 million in 2010. At Dec. 31, 2010, we were potentially obligated to pay additional consideration which, using reasonable assumptions for the performance of the acquired companies and joint ventures based on contractual agreements, could range from approximately $12 million to $42 million over the next three years. None of the potential contingent additional consideration was recorded as goodwill at Dec. 31, 2010. Acquisitions in 2010 On July 1, 2010, we acquired GIS for cash of $2.3 billion. GIS provides a comprehensive suite of products which includes subaccounting, fund accounting/administration, custody, managed account services and alternative investment services. Assets acquired totaled approximately $590 million. Liabilities assumed totaled approximately $250 million. Goodwill related to this acquisition is included in our asset servicing and clearing services businesses and totaled $1,505 million, of which $1,256 million is tax deductible and $249 million is nontax deductible. Customer contract intangible assets related to this acquisition are included in our asset servicing and clearing services businesses, with lives ranging from 10 years to 20 years by business, and totaled $477 million. On Aug. 2, 2010, we acquired BAS for cash of EUR281 million (US$370 million). This transaction included the purchase of Frankfurter Service KapitalanlageGesellschaft mbH (FSKAG), a
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wholly owned fund administration affiliate. The combined business offers a full range of tailored solutions for investment companies, financial institutions and institutional investors in Germany. Assets acquired totaled approximately EUR 2.7 billion (US $3.6 billion) and primarily consisted of securities of approximately EUR1.9 billion (US $2.6 billion). Liabilities assumed totaled approximately EUR2.6 billion (US $3.4 billion) and primarily consisted of deposits of approximately EUR 1.7 billion (US $2.3 billion). Goodwill related to this acquisition of $272 million is tax deductible and is included in our asset servicing business. Customer contract intangible assets related to this acquisition are included in our asset servicing business, with a life of 10 years, and totaled $40 million. On Sept. 1, 2010, we completed the acquisition of I3 Advisors of Toronto, an independent wealth advisory company with more than C$3.8 billion in assets under advisement at acquisition, for cash of C$22.2 million (US $21.1 million). Goodwill related to this acquisition is included in our wealth management business and totaled $8 million and is nontax deductible. Customer relationship intangible assets related to this acquisition are included in our wealth management business, with a life of 33 years, and totaled $10 million. In the second quarter of 2010, we acquired a Canadian trust company for C$29 million. Divestitures in 2010 On Jan. 15, 2010, BNY Mellon sold MUNB, our national bank subsidiary located in Florida. The results for MUNB were classified as discontinued operations. See Note 4 for additional information on the MUNB transaction. Acquisitions in 2009 In November 2009, we acquired Insight Investment Management Limited (Insight) for 235 million ($377 million of cash and stock). Based in London, Insight specializes in liabilitydriven investment solutions, active fixed income and alternative investments. Insight had $138 billion in assets under management at acquisition. Goodwill related to this acquisition is nontax deductible and totaled $202 million. Intangible assets (primarily customer contracts) related to the transaction, with a life up to 11 years, totaled $111 million. In November 2009, BNY Mellon acquired a 20% minority interest in Siguler Guff & Company, LLC (and certain related entities), a multistrategy private equity firm with approximately $8 billion in assets under management and committed capital. Acquisitions in 2008 In January 2008, we acquired ARX Capital Management (ARX). ARX is a leading independent asset management business, headquartered in Rio de Janeiro, Brazil. On Dec. 31, 2008, we acquired the Australian (Ankura Capital) and UK (Blackfriars Asset Management) businesses from our Asset Management joint venture with WestLB. Dispositions in 2008 In February 2008, we sold our BTrade and GTrade execution businesses to BNY ConvergEx Group. These businesses were sold at book value. In June 2008, we sold Mellon 1 st Business Bank (M1BB), based in Los Angeles, California. There was no gain or loss recorded on this transaction. Note 4Discontinued operations On Jan. 15, 2010, BNY Mellon sold MUNB, our national bank subsidiary located in Florida. We have applied discontinued operations accounting to this business. The income statements for all periods in this Annual Report are presented on a continuing operations basis. In 2010, we recorded an aftertax loss on discontinued operations of $66 million, primarily reflecting lower of cost or market writedowns on the retained MUNB loans held for sale.
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Discontinued operations (in millions) Fee and other revenue Net interest revenue Provision for loan losses Net interest revenue after provision for loan losses Noninterest expense: Staff Professional, legal and other purchased services Net occupancy Other Goodwill impairment Total noninterest expense Income (loss) from operations Loss on assets held for sale Loss on sale of MUNB Provision (benefit) for income taxes Net income (loss) from discontinued operations
2008 $ 24 93 27 66 26 10 5 21 62 28 14 $ 14
Discontinued operations assets and liabilities Dec. 31, (in millions) Cash and due from banks Securities Loans, net of allowance for loan losses Premises and equipment Deferred taxes Other assets Assets of discontinued operations Deposits: Noninterestbearing Interestbearing Total deposits Other liabilities Liabilities of discontinued operations All information in these Financial Statements and Notes reflects continuing operations, unless otherwise noted. Note 5Securities The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of securities at Dec. 31, 2010 and 2009. 2010 $ 183 90 5 $ 278 $ 2009 446 488 1,225 12 71 $ 2,242 $ $ 539 958 1,497 111 $ 1,608
Securities at Dec. 31, 2010 (in millions) Availableforsale: U.S. Treasury U.S. Government agencies State and political subdivisions Agency RMBS AltA RMBS Prime RMBS Subprime RMBS Other RMBS Commercial MBS Assetbacked CLOs Other assetbacked securities Foreign covered bonds Other debt securities Equity securities Money market funds AltA RMBS (b) Prime RMBS (b) Subprime RMBS (b) Total securities availableforsale Heldtomaturity: State and political subdivisions Agency RMBS Amortized cost $ 12,650 1,007 559 19,383 475 1,305 696 1,665 2,650 263 532 2,884 11,800 36 2,538 2,164 1,626 128 62,361 119 397 $ Gross unrealized Gains 97 2 4 387 34 8 1 89 9 148 11 364 205 30 1,389 2 33 Losses $ 138 4 55 43 39 86 188 335 100 14 2 16 57 15 6 1,098 Fair
value
$ 12,609 1,005 508 19,727 470 1,227 508 1,331 2,639 249 539 2,868 11,891 (a) 47 2,538 2,513 1,825 158 62,652 121 430
AltA RMBS Prime RMBS Subprime RMBS Other RMBS Commercial MBS Other securities Total securities heldtomaturity Total securities (a) (b)
5 2 69 111 $ 1,500
19 5 3 81 1 109 $ 1,207
Includes $11.0 billion, at fair value, of governmentsponsored and guaranteed entities, and sovereign debt. Previously included in the Grantor Trust. The Grantor Trust is in the process of being dissolved.
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Securities at Gross unrealized Dec. 31, 2009 Amortized (in millions) Gains Losses cost Availableforsale: U.S. Treasury $ 6,358 $ 30 $ 10 U.S. Government agencies 1,235 25 State and political subdivisions 538 6 24 Agency RMBS 18,247 303 95 AltA RMBS 588 12 63 Prime RMBS 1,743 3 234 Subprime RMBS 758 311 Other RMBS 2,199 1 430 Commercial MBS 2,762 31 203 Assetbacked CLOs 424 15 50 Other assetbacked securities 869 5 38 Other debt securities 11,419 86 48 Equity securities 1,314 8 1 Grantor Trust Class B certificates (b) 4,049 111 Total securities availableforsale 52,503 636 1,507 Heldtomaturity: State and political subdivisions 150 3 Agency RMBS 531 30 AltA RMBS 304 62 Prime RMBS 189 17 Subprime RMBS 30 7 Other RMBS 3,195 39 162 Commercial MBS 11 1 Other securities 7 Total securities heldtomaturity 4,417 72 249 Total securities $ 56,920 $ 708 $ 1,756 (a) Includes $10.8 billion, at fair value, of governmentsponsored and guaranteed entities, and sovereign debt. (b) The Grantor Trust contains AltA, prime and subprime RMBS. The amortized cost and fair value of securities at Dec. 31, 2010, by contractual maturity, are as follows:
Fair
value $ 6,378 1,260 520 18,455 537 1,512 447 1,770 2,590 389 836 11,457 (a) 1,321 4,160 51,632 153 561 242 172 23 3,072 10 7 4,240 $ 55,872
Securities by contractual maturity at Dec. 31, 2010 Availableforsale Amortized (in millions) Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgagebacked securities Assetbacked securities Equity Total securities $ cost 9,362 14,872 3,887 779 30,092 795 2,574 $ 62,361 $ Fair Heldtomaturity Amortized Fair $ cost 2 20 97 3,532 4 $ 3,655 $ value 2 21 98 3,532 4 $ 3,657
Net securities gains (losses) (in millions) Realized gross gains Realized gross losses Recognized gross impairments Total net securities gains (losses) Temporarily impaired securities
At Dec. 31, 2010, substantially all of the unrealized losses on the investment securities portfolio were attributable to credit spreads widening since purchase, and interest rate movements. We do not intend to sell these securities and it is not more likely than not that we will have to sell. The following tables show the aggregate related fair value of investments with a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for greater than 12 months.
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Temporarily impaired securities at Dec. 31, 2010 (in millions) Availableforsale: U.S. Treasury U.S. Government agencies State and political subdivisions Agency RMBS AltA RMBS Prime RMBS Subprime RMBS Other RMBS Commercial MBS Assetbacked CLOs Other assetbacked securities Foreign covered bonds Other debt securities Grantor Trust AltA RMBS Grantor Trust Prime RMBS Total securities availableforsale Heldtomaturity: AltA RMBS Prime RMBS Subprime RMBS Other RMBS Commercial MBS Total securities heldtomaturity Total temporarily impaired securities
Less than 12 months Fair Unrealized value losses $ 6,519 489 210 5,079 55 315 3 49 28 1 2,553 1,068 196 139 $16,704 18 315 $ 333 $17,037 $ $ 138 4 39 42 3 13 17 1 16 37 15 6 331 5 5 336 $
12 months or more Fair Unrealized value losses 122 206 104 739 484 1,275 536 249 32 61 $3,808 $ 108 73 25 614 33 $ 853 $4,661 $ 16 1 36 73 188 318 99 14 2 20 767 19 5 3 76 1 104 871
Fair value $ 6,519 489 332 5,285 159 1,054 487 1,324 564 249 33 2,553 1,129 196 139 $20,512 126 73 25 929 33 $ 1,186 $21,698 $
Total Unrealized losses $ 138 4 55 43 39 86 188 335 100 14 2 16 57 15 6 1,098 19 5 3 81 1 109 1,207 (a)
$ $
$ $
$ $
$ $
$ $
$ $
(a) Includes otherthantemporarily impaired securities in which portions of the otherthantemporary impairment loss remains in OCI.
Temporarily impaired securities at Dec. 31, 2009 (in millions) Availableforsale: U.S. Treasury State and political subdivisions Agency RMBS AltA RMBS Prime RMBS Subprime RMBS Other RMBS Commercial MBS Assetbacked CLOs Other assetbacked securities Other debt securities Equity securities Total securities availableforsale Heldtomaturity: AltA RMBS Prime RMBS Subprime RMBS Other RMBS Commercial MBS Total securities heldtomaturity Total temporarily impaired securities
Less than 12 months Fair Unrealized value losses $1,226 50 7,297 5 1 18 33 16 $8,646 $ 2 $ 2 $8,648 $ 9 13 76 1 2 6 107 1 1 108 $
12 months or more Fair Unrealized value losses 176 171 2,061 311 1,480 446 1,764 1,290 274 706 8,804 3 $17,486 $ 221 172 23 3,072 10 $ 3,498 $20,984 $ 1 11 19 63 233 309 430 203 44 38 48 1 1,400 61 17 7 162 1 248 1,648
Fair value $ 1,402 221 9,358 311 1,485 447 1,764 1,290 292 706 8,837 19 $26,132 $ 223 172 23 3,072 10 $ 3,500 $29,632
Total Unrealized losses $ 10 24 95 63 234 311 430 203 50 38 48 1 1,507 62 17 7 162 1 249 1,756 (a)
$ $
$ $
$ $
$ $
$ $
$ $
(a) Includes otherthantemporarily impaired securities in which portions of the otherthantemporary impairment loss remains in OCI.
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Otherthantemporary impairment For certain debt securities that have no debt rating at acquisition and are beneficial interests in securitized financial assets under ASC 325, OTTI occurs when we determine that there has been an adverse change in cash flows and the present value of those remaining cash flows is less than the present value of the remaining cash flows estimated at the securitys acquisition date (or last estimated cash flow revision date). We routinely conduct periodic reviews to identify and evaluate each investment security to determine whether OTTI has occurred. Economic models are used to determine whether an OTTI has occurred on these securities. While all securities are considered, the securities primarily impacted by OTTI testing are nonagency RMBS. For each nonagency RMBS in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if an OTTI has occurred. Various inputs to the economic models are used to determine if an unrealized loss on nonagency RMBS is otherthantemporary. The most significant inputs are:
Default ratethe number of mortgage loans expected to go into default over the life of the transaction, which is driven by the roll rate of loans in each performance bucket that will ultimately migrate to default; and Severitythe loss expected to be realized when a loan defaults
To determine if the unrealized loss for nonagency RMBS is otherthantemporary, we project total estimated defaults of the underlying assets (mortgages) and multiply that calculated amount by an estimate of realizable value upon sale of these assets in the marketplace (severity) in order to determine the projected collateral loss. We also evaluate the current credit enhancement underlying the bond to determine the impact on cash flows. If we determine that a given RMBS position will be subject to a writedown or loss, we record the expected credit loss as a charge to earnings. In addition, we have estimated the expected loss by taking into account observed performance of the underlying securities, industry studies, market forecasts, as well as our view of the economic outlook affecting collateral. The table below shows the projected weightedaverage default rates and loss severities for the 2007, 2006 and late2005 nonagency RMBS and Grantor Trust portfolios at Dec. 31, 2010 and 2009.
Dec. 31, 2010 AltA Subprime Prime Default Rate 42% 68% 20% Severity 49% 65% 42% Default Rate 43% 74% 19%
The following table provides pretax net securities gains (losses) by type.
Net securities gains (losses) (in millions) AltA RMBS Prime RMBS Subprime RMBS European floating rate notes Home equity lines of credit Commercial MBS Grantor Trust Credit cards ABS CDOs Other Total net securities gains (losses) 2010 $ (13) (4) (3) 47 $ 27 2009 $ (3,113) (1,008) (322) (269) (205) (89) (39) (26) (23) (275) $ (5,369) 2008 $ (1,236) (12) (12) (104) (122) (142) $ (1,628)
The following table reflects investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. The additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred. The deductions represent credit losses on securities that have been sold, are required to be sold or it is our intention to sell.
Debt securities credit loss roll forward (in millions) Beginning balance as of Dec. 31 Add: Initial OTTI credit losses Subsequent OTTI credit losses 2010 $244 10 6 2009 $ 525 644 208
Less: Realized losses for securities sold / Securities intended or required to be sold Ending balance as of Dec. 31
consolidated
78 $182
1,116 17 $ 244
At Dec. 31, 2010, assets amounting to $60.6 billion were pledged primarily for potential borrowing at the Federal Reserve Discount Window. The significant components of pledged assets were as follows: $55.3 billion of securities, $1.6 billion of interestbearing deposits with banks and $3.7 billion of loans. Also included in these pledged assets was securities
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availableforsale of $42 million which were pledged as collateral for actual borrowings. The lenders in these borrowings have the right to repledge or sell these securities. We obtain securities under resale, securities borrowed and custody agreements on terms which permit us to repledge or resell the securities to others. As of Dec. 31, 2010, the market value of the securities received that can be sold or repledged was $6.7 billion. We routinely repledge or lend these securities to third parties. As of Dec. 31, 2010, the market value of collateral repledged and sold was $1.3 billion. Note 6Loans and asset quality Our loan portfolio is comprised of three portfolio segments, commercial, lease financing and mortgages. We manage our portfolio at the class level which is comprised of six classes of financing receivables: commercial, commercial real estate, financial institutions, lease financings, wealth management loans and mortgages, and other residential mortgages. The following tables are presented for each class of financing receivable, and provide additional information about our credit risks and the adequacy of our allowance for credit losses. Loans The table below provides the details of our loan distribution and industry concentrations of credit risk at Dec. 31, 2010 and 2009: Loans Dec. 31, (in millions) 2010 2009 Domestic: Financial institutions $ 4,630 $ 5,509 Commercial 1,250 2,324 Wealth management loans and mortgages 6,506 6,162 Commercial real estate 1,592 2,044 Lease financings (a) 1,605 1,703 Other residential mortgages 2,079 2,179 Overdrafts 4,524 3,946 Other 771 407 Margin loans 6,810 4,657 Total domestic 29,767 28,931 Foreign: Financial institutions 4,626 3,147 Commercial 345 634 Lease financings (a) 1,545 1,816 Government and official institutions 52 Other (primarily overdrafts) 1,525 2,109 Total foreign 8,041 7,758 Total loans $ 37,808 $ 36,689 (a) Includes unearned income on domestic and foreign lease financings of $2,036 million at Dec. 31, 2010 and $2,282 million at Dec. 31, 2009. In the ordinary course of business, we and our banking subsidiaries have made loans at prevailing interest rates and terms to our directors and executive officers and to entities in which certain of our directors have an ownership interest or direct or indirect subsidiaries of such entities. The aggregate amount of these loans was $3 million, $4 million and $12 million at Dec. 31, 2010, 2009, and 2008 respectively. These loans are primarily extensions of credit under revolving lines of credit established for such entities.
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Allowance for credit losses Transactions in the allowance for credit losses are summarized as follows:
Allowance for credit losses activity for the year ended Dec. 31, 2010 Wealth Other Commercial management All real Financial Lease loans and residential estate institutions financing (dollars in millions) Commercial mortgages mortgages Other (a)Foreign (b) Unallocated Beginning balance $ 149 $ 43 $ 73 $ 77 $ 56 $ 157 $ $ 47 $ 26 Chargeoffs (5) (8) (25) (4) (46) Recoveries 15 1 2 2 Net chargeoffs 10 (7) (23) (4) (44) Provision (85) (4) (41) (5) (19) 74 1 90 Ending balance $ 74 $ 32 $ 9 $ 72 $ 33 $ 187 $ 1 $ 47 $ 116 Allowance for: Loans losses $ 41 $ 22 $ 1 $ 72 $ 31 $ 187 $ 1 $ 42 $ 101 Unfunded commitments 33 10 8 2 5 15 Individually evaluated for impairment: Loan balance $ 32 $ 44 $ 4 $ $ 53 $ $ $ 7 $ Allowance for loan losses 10 9 5 2 Collectively evaluated for impairment: Loan balance $ 1,218 $ 1,548 $ 4,626 $ 1,605 $ 6,453 $ 2,079 $12,105 $ 8,034 $ Allowance for loan losses 31 13 1 72 26 187 1 40 101 (a) Includes $4,524 million of domestic overdrafts and $6,810 million of margin loans at Dec. 31, 2010. (b) Includes $1,525 million of other foreign loans (primarily overdrafts) at Dec. 31, 2010.
$37,668 472
Allowance for credit losses activity for the year ended Dec. 31, 2009 (dollars in millions) Beginning balance Chargeoffs Recoveries Net chargeoffs Provision Transferred to discontinued operations Ending balance Allowance for: Loans losses Unfunded commitments Individually evaluated for impairment: Loan balance Allowance for loan losses Collectively evaluated for impairment: Loan balance Allowance for loan losses Commercial $ 159 (90) (90) 81 $ $ (1) 149 90 59 63 10 Commercial Financial Lease real estate institutions financing $ 52 $ 50 $ 79 (31) (34) 1 (31) (34) 1 39 57 (3) $ $ (17) 43 30 13 58 13 $ $ 73 40 33 171 25 $ $ 77 77
Wealth Other management All loans and residential mortgages mortgages Other (a)Foreign (b) Unallocated $ 28 $ 78 $ 2 $ 19 $ 62 (1) (60) 1 (60) 28 140 (2) 28 (36) $ $ 56 54 2 53 3 $ $ (1) 157 157 $ $ $ $ 47 34 13 $ $ 26 21 5
Total 529 (216) 2 (214) 332 (19) 628 503 125 345 51
$ $
2,261 80
1,986 17
5,338 15
$ 1,703 77
6,109 51
$ 2,179 157
$9,010
$ 7,758 34
21
$36,344 452
(a) Includes $3,946 million of domestic overdrafts and $4,657 million of margin loans at Dec. 31, 2009. (b) Includes $2,109 million of other foreign loans (primarily overdrafts) at Dec. 31, 2009.
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Allowance for credit losses activity for the year ended Dec. 31, 2008 (dollars in millions) Beginning balance Chargeoffs Recoveries Net chargeoffs Provision Transferred to discontinued operations Disposition Ending balance Allowance for: Loans losses Unfunded commitments Individually evaluated for impairment: Loan balance Allowance for loan losses Collectively evaluated for impairment: Loan balance Allowance for loan losses Commercial $ 162 (21) 2 (19) 16 2 (2) 159 90 69 14 8 Commercial Financial Lease real estate institutions financing $ 35 $ 30 $ 73 (15) (9) 3 (15) (9) 3 28 29 3 24 (20) 52 45 7 125 25 50 35 15 41 17 79 79
Wealth Other management All loans and residential mortgages mortgages Other (a) Foreign (b) Unallocated $ 15 $ 25 $ 1 $ 37 $ 116 (1) (20) (17) 1 4 (20) (13) 13 73 1 (5) (54) 28 23 5 6 1 1 (1) 78 78 $ $ 2 2 $ $ 19 14 5 62 49 13
Total 494 (83) 10 (73) 104 27 (23) 529 415 114 186 51
$ $
$ $
$ $
$ $
$ $
$ $
$ $
$ $
5,772 82
2,956 20
5,505 18
$ 1,809 79
5,327 22
$ 2,505 78
$9,297 2
$10,037 14
49
$43,208 364
(a) Includes $4,835 million of overdrafts and $3,977 million of margin loans at Dec. 31, 2008. (b) Includes $2,121 million of other foreign loans (primarily overdrafts) at Dec. 31, 2008.
Nonperforming assets The table below sets forth information about our nonperforming assets.
Nonperforming assets (in millions) Nonperforming loans: Domestic: Commercial Commercial real estate Financial institutions Wealth management Other residential mortgages Total domestic Foreign loans Total nonperforming loans Other assets owned Total nonperforming assets (a)
Dec. 31, 2010 $ 34 44 5 59 244 386 7 393 6 $399(a) 2009 $ 65 61 172 58 190 546 546 4 $550
The adoption of ASC 810 resulted in BNY Mellon consolidating loans of consolidated asset management funds of $13.8 billion at Dec. 31, 2010, into trading assets. These loans are not part of BNY Mellons loan portfolio. Included in these loans are $218 million of nonperforming loans. 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.
At Dec. 31, 2010, undrawn commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material. Lost interest
Lost interest (in millions) Amount by which interest income recognized on nonperforming loans exceeded reversals: Total Foreign Amount by which interest income would have increased if nonperforming loans at yearend had been performing for the entire year: Total (a) Foreign (a)
2010 $ 2 $20
2008 $ $ 12
Lost interest excludes discontinued operations for 2010 and 2009. Lost interest includes discontinued operations of $5 million in 2008.
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Impaired loans The table below sets forth information about our impaired loans. We use the discounted cash flow method as the primary method for valuing impaired loans.
Impaired loans Recorded (in millions) investment Impaired loans with an allowance: Commercial (b) $ 30 Commercial real estate 25 Financial institutions 4 Wealth management loans and mortgages 52 Foreign 7 Total impaired loans with an allowance 118 Impaired loans without an allowance (a): Commercial 2 Commercial real estate 19 Wealth management loans and mortgages 1 Total impaired loans without an allowance (c) 22 Total impaired loans (b) $140 Allowance for impaired loans (a) Average balance of impaired loans during the year Interest income recognized on impaired loans during the year
Dec. 31, 2010 Unpaid principal balance Related allowance (a) $ 30 $ 10 39 9 10 52 5 7 2 138 26 6 19 2 27 165 26
Year ended Dec. 31, 2010 Average recorded investment $ 30 34 35 53 2 154 6 11 3 20 174 Interest income recognized $ 1 1 2 2
Recorded investment Dec. 31 2009 $ 30 49 171 53 303 33 9 42 $345 $ 51 216 2 2008 $ 14 104 41 6 165 21 21 $186 (d) $ 51 178
(a) The allowance for impaired loans is included in the allowance for loan losses. (b) Excludes an aggregate of $3 million of impaired commercial loans in amounts individually less than $1 million at Dec. 31, 2010. The allowance for loan loss associated with these loans totaled less than $1 million at Dec. 31, 2010. (c) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans. (d) Total impaired loans include discontinued operations of $93 million at Dec. 31, 2008. Past due loans The table below sets forth information about our past due loans.
Past due loans and still accruing at yearend (in millions) Domestic: Commercial Commercial real estate Financial institutions Wealth management loans and mortgages Other residential mortgages Total domestic Foreign Total past due loans 3059 $ 10 174 (a) 10 62 (a) 40 296 $296
(a) At Jan. 31, 2011, $136 million of commercial real estate loans and $26 million of wealth management loans and mortgages were no longer past due.
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Credit quality indicators Our credit strategy is to focus on investment grade names to support cross selling opportunities, avoid single name/industry concentrations and exit high risk portfolios. Each customer is assigned an internal rating grade which is mapped to an external rating agency grade equivalent based upon a number of dimensions which are continually evaluated and may change over time. The execution of our strategy, as well as an adjustment in the credit ratings of our existing portfolio, has resulted in a higher percentage of the portfolio that is investment grade at Dec. 31, 2010, compared with Dec. 31 2009.
The following tables set forth information about credit quality indicators. Commercial loan portfolio
Credit quality indicatorsCommercial loan portfolio at year end Credit risk profile by creditworthiness category (in millions) Investment grade Noninvestment grade Total Commercial 2010 2009 $ 964 $1,267 631 1,691 $1,595 $2,958 Commercial real estate 2010 2009 $ 1,072 $ 1,038 520 1,006 $ 1,592 $ 2,044 Financial institutions 2010 2009 $7,894 $6,571 1,362 2,085 $9,256 $8,656
The commercial loan portfolio is divided into investment grade and noninvestment grade categories based on rating criteria largely consistent with those of the public rating agencies. Each customer in the portfolio is assigned an internal rating grade. These internal rating grades are generally consistent with the ratings categories of the public rating agencies. Customers with ratings consistent with BBB/Baa3 or better are considered to be investment grade. Those clients with ratings lower than this threshold are considered to be noninvestment grade. Wealth management loans and mortgages
Credit quality indicators Wealth management loans and mortgages at year end Credit risk profile by internally assigned grade (in millions) Wealth management loans: Investment grade Noninvestment grade Wealth management mortgages Total
Wealth management nonmortgage loans are not typically correlated to external ratings. A majority of the Wealth Management loans are secured by the customers Investment Management Accounts or custody accounts. Eligible assets pledged for these loans are typically investment grade, fixed income securities, equities and/or mutual funds. Internal ratings for this portion of the Wealth Management portfolio, therefore, would equate to investmentgrade external ratings. Wealth Management loans are provided to select customers based on the pledge of other types of assets, including business assets, fixed assets, or a modest amount of commercial real estate. For these latter loans, the credit quality of the obligor is carefully analyzed, but we do not consider this modest portfolio of loans to be of investment grade quality. Credit quality indicators for Wealth management mortgages are not correlated to external ratings. Wealth management mortgages are typically loans to highnetworth individuals, which are secured by marketable securities and/or residential property. These loans are primarily interestonly adjustable rate mortgages with an average loan to value ratio of 61% at origination. Approximately 1% of these mortgages were past due at Dec. 31, 2010. At Dec. 31, 2010, the private wealth mortgage portfolio was comprised of the following geographic concentrations: New York 25%; Massachusetts 17%; California 17%; Florida 8%; and other 33%. Other residential mortgages The other residential mortgage portfolio primarily consists of 14 family residential mortgage loans and totaled $2.1 billion at Dec. 31, 2010. These loans are not typically correlated to external ratings. Included in this portfolio is approximately $745 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007 that are predominantly prime mortgage loans, with a small portion of AltA loans. As of Dec. 31, 2010, the remaining prime and
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AltA mortgage loans in this portfolio had a weightedaverage loantovalue ratio of 75% at origination and approximately 30% of these loans were at least 60 days delinquent. The properties securing the prime and AltA mortgage loans were located (in order of concentration) in California, Florida, Virginia, Maryland and the tristate area (New York, New Jersey and Connecticut). Overdrafts Overdrafts primarily relate to custody and securities clearance clients and totaled $6,049 million at Dec. 31, 2010, and $6,055 million at Dec. 31, 2009. Overdrafts occur on a daily basis in the custody and securities clearance business and are generally repaid within two business days. Margin loans We had $6,810 million of secured margin loans on our balance sheet at Dec. 31, 2010, compared with $4,657 million at Dec. 31, 2009. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to them. Other loans Other loans primarily includes loans to consumers that are fully collateralized with equities, mutual funds and fixed income securities, as well as bankers acceptances. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to them. Reverse repurchase agreements Reverse repurchase agreements are transactions fully collateralized with high quality liquid securities. These transactions carry no credit risk and therefore are not allocated an allowance for credit losses. Note 7Goodwill and intangible assets Goodwill BNY Mellons businesses are the reporting units for which annual goodwill impairment testing is done in accordance with ASC 350. The goodwill impairment test is performed in two steps. The first step compares the estimated fair value of the business with its carrying amount, including goodwill. If the estimated fair value of the business exceeds its carrying amount, goodwill of the business is considered not impaired. However, if the carrying amount of the business exceeds its estimated fair value, a second step would be performed that would compare the implied fair value of the businesss goodwill with the carrying amount of that goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other determinants. Estimated cash flows extend far into the future and, by their nature, are difficult to estimate over such an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, changes in discount rates, and specific industry or market sector conditions. The carrying amount of goodwill in each of our six businesses in continuing operations was tested in 2010 and 2009 using observable market data, when available, to estimate fair values. In addition, material events and circumstances that might be indicators of possible impairment were assessed during interim periods. These included the changing business climate, regulatory and legal factors, changes in our competitors, and the earnings outlook for our businesses. BNY Mellons market capitalization exceeded its net book value at the end of each quarter of 2010 and 2009. The fair values of each of our six businesses were estimated for the 2010 goodwill impairment test using discounted cash flow analyses since there were few comparable public company transactions in 20092010. The analyses incorporated our forecasts and longerterm earnings growth estimates by business and discount rates ranging from 12.0% to 15.5% that incorporated measured stock price volatilities of the businesses principal public company competitors and a 6% average excess return over riskfree rates. The estimated fair values of each of these six businesses exceeded their respective carrying amounts by 10% or greater and no goodwill impairment was indicated. Goodwill and intangible assets could be subject to impairment in future periods if economic conditions that impact our businesses worsen. Impairment would be a noncash charge. The level of goodwill increased in 2010 due to the acquisitions of GIS, BAS and I3 partially offset by foreign exchange translation on nonU.S. dollar denominated goodwill.
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Goodwill by business (in millions) Balance at Dec. 31, 2008 Acquisitions Foreign exchange translation Transferred to discontinued operations Other (b) Balance at Dec. 31, 2009 Acquisitions Foreign exchange translation Other (b) Balance at Dec. 31, 2010 Asset Management $ 7,218 202 174 15 $ 7,609 (44) 86 $ 7,651 Wealth Management $ 1,694 9 $ 1,703 8 (3) $ 1,708 Asset Servicing $ 3,360 37 $ 3,397 1,389 (31) (7) $ 4,748 Issuer Services $ 2,463 14 11 $ 2,488 13 7 $ 2,508 Clearing Services $ 902 15 1 $ 918 388 (6) $ 1,300 Treasury Services $ 123 4 $ 127 $ 127 Other $ 138 (128) (a) (3) $ 7 (1) (6) $ Total $15,898 202 240 (128) 37 $16,249 1,798 (75) 70 $18,042
(a) Includes a $50 million goodwill impairment recorded in 2009. No goodwill impairment was recorded in 2010. (b) Other changes in goodwill include purchase price adjustments and certain other reclassifications.
Intangible assets Indefinitelived intangible assets are evaluated for impairment at least annually by comparing their fair values, estimated using discounted cash flow analyses, to their carrying values. Other intangible assets ($3.0 billion at Dec. 31, 2010) are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is initially based on undiscounted cash flow projections. Other key judgments in accounting for intangibles include useful life and classification between goodwill and indefinitelived intangibles or other intangibles that require amortization. The increase in intangible assets in 2010 compared with 2009 resulted from the acquisitions of GIS, BAS and I3, partially offset by amortization of intangible assets. Amortization of intangible assets was $421 million, $426 million and $473 million in 2010, 2009 and 2008, respectively. No impairment losses were recorded on intangible assets in 2010 or 2009.
Intangible assets net carrying amount by business Asset (in millions) Management Balance at Dec. 31, 2008 $ 2,595 Acquisitions 111 Amortization (219) Foreign exchange translation 44 Transferred to discontinued operations Other (a) (1) Balance at Dec. 31, 2009 $ 2,530 Acquisitions 5 Amortization (201) Foreign exchange translation (9) Other (a) (2) Balance at Dec. 31, 2010 $ 2,323
Asset Servicing $ 302 (28) 1 6 $ 281 470 (47) (2) (5) $ 697
Total $5,856 122 (426) 48 (4) (8) $5,588 545 (421) (9) (7) $5,696
(a) Other changes in intangible assets include purchase price adjustments and certain other reclassifications.
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Intangible assets Gross carrying amount $2,102 2,566 49 85 4,802 1,375 1,314 10 2,699 $7,501
Dec. 31, 2010 Net carrying amount $ 1,119 1,830 4 44 2,997 1,375 1,314 10 2,699 $ 5,696 Remaining weighted average amortization period 12 yrs. 15 yrs. 3 yrs. 6 yrs. 14 yrs. N/A N/A N/A N/A N/A Gross carrying amount $2,060 2,039 49 98 4,246 1,368 1,320 10 2,698 $6,944
Dec. 31, 2009 Net carrying amount $ 1,336 1,478 8 68 2,890 1,368 1,320 10 2,698 $ 5,588
(in millions) Subject to amortization: Customer relationshipsAsset and Wealth Management Customer contractsInstitutional services Deposit premiums Other Total subject to amortization Not subject to amortization: (a) Trade name Customer relationships Other Total not subject to amortization Total intangible assets
Accumulated amortization $ (983) (736) (45) (41) (1,805) N/A N/A N/A N/A (1,805)
Accumulated amortization $ (724) (561) (41) (30) (1,356) N/A N/A N/A N/A (1,356)
Estimated annual amortization expense for current intangibles for the next five years is as follows:
For the year ended Dec. 31, 2011 2012 2013 2014 2015 Note 8Other assets Estimated amortization expense (in millions) $428 398 348 310 278
Other assets (in millions) Corporate/bank owned life insurance Accounts receivable Income taxes receivable Equity in joint ventures and other investments (a) Fails to deliver Software Prepaid expenses Prepaid pension assets Fair value of hedging derivatives Due from customers on acceptances Other Total other assets (a) Includes Federal Reserve Bank stock of $400 million and $397 million, respectively, at cost.
Dec. 31, $ 2010 4,071 3,506 2,826 2,818 1,428 896 834 732 709 424 546 18,790 $ 2009 3,900 3,528 1,867 2,816 911 595 1,089 714 408 502 407 16,737
Seed capital and private equity investments valued using net asset value per share In our Asset Management business, we manage investment assets, including equities, fixed income, money market and alternative investment funds for institutions and other investors; as part of that activity we make seed capital investments in certain funds. Seed capital is included in trading assets, securities availableforsale and other assets depending on the nature of the investment. BNY Mellon also holds private equity investments, which consist of investments in private equity funds, mezzanine financings and direct equity investments. Private equity investments are included in other assets. Consistent with our policy to focus on our core activities, we continue to reduce our exposure to private equity investments. The fair value of these investments has been estimated using the net asset value (NAV) per share of BNY Mellons ownership interest in the funds. The table below presents information about BNY Mellons investments in seed capital and private equity investments.
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Seed capital and private equity investments valued using NAV Dec. 31, 2010 (dollar amounts in millions) Fair value Unfunded commitments Hedge funds (a) $ 23 $ Private equity funds (b) 143 27 Other funds (c) 74 Total $ 240 $ 27
(a) Hedge funds include multistrategy funds that utilize a variety of investment strategies and equity longshort hedge funds that include various funds that invest over both longterm and shortterm investment horizons. (b) Private equity funds primarily include numerous venture capital funds that invest in various sectors of the economy. Private equity funds do not have redemption rights. Distributions from such funds will be received as the underlying investments in the funds are liquidated. (c) Other funds primarily include market neutral, leveraged loans, real estate and structured credit funds.
Note 9Deposits The aggregate amount of time deposits in denominations of $100,000 or greater was approximately $35.3 billion at Dec. 31, 2010, and $34.0 billion at Dec. 31, 2009. At Dec. 31, 2010, the scheduled maturities of all time deposits for the years 2011 through 2015 and 2016 and thereafter are as follows: $35.4 billion; $15 million; $2 million; $19 million; $3 million; and $4 million, respectively. Note 10Net interest revenue
Net interest revenue (in millions) Interest revenue Nonmargin loans Margin loans Securities: Taxable Exempt from federal income taxes Total securities Other shortterm investmentsU.S. governmentbacked commercial paper Deposits in banks Deposits with the Federal Reserve and other central banks Federal funds sold and securities purchased under resale agreements Trading assets Total interest revenue Interest expense Deposits in domestic offices Deposits in foreign offices Borrowings from Federal Reserve related to ABCP Federal funds purchased and securities sold under repurchase agreements Trading liabilities Other borrowed funds Customer payables Longterm debt Total interest expense Net interest revenue Note 11Other noninterest expense
2010 $ 738 88 1,944 25 1,969 554 49 64 71 3,533 46 148 43 21 44 6 300 608 $ 2,925 $
2009 874 69 1,718 30 1,748 9 683 43 31 50 3,507 54 117 7 11 31 6 366 592 $ 2,915
2008 $ 1,027 183 2,210 35 2,245 71 1,753 27 149 69 5,524 328 1,437 53 46 4 86 69 642 2,665 $ 2,859
The following table provides a breakdown of other noninterest expense presented on the consolidated income statement.
Other noninterest expense (in millions) Clearing Communications Support agreement charges Other (a) Total other (a)
Includes a $164 million special litigation reserve recorded in 2010 and $61 million of FDIC special assessment recorded in 2009.
In 2010 and 2009, we recorded credits to support agreement charges of $7 million and $15 million, respectively. These credits reflect a reduction in the support agreement reserve, primarily due to improved pricing of Lehman securities. At Dec. 31, 2010, the value of Lehman securities increased to approximately 23.0% from 19.5% at Dec. 31, 2009. In 2008, we recorded support agreement charges of $894 million. In response to market events in 2008, we voluntarily provided support to clients invested in money market mutual funds, cash sweep funds and similar collective funds managed by our affiliates, as well as clients invested in funds within our securities lending
business. These support agreements were designed to enable these funds to continue to operate at a stable net asset value.
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Note 12Restructuring charges Global location strategy BNY Mellon continues to execute its global location strategy. This strategy includes migrating positions to our global growth centers and is expected to result in moving and/or eliminating approximately 3,000 positions. In 2009, we recorded a pretax restructuring charge of $139 million related to this strategy. This charge was comprised of $102 million for severance costs and $37 million primarily for asset writeoffs and expense related to the closing of offices. In 2010, we recorded additional charges of $35 million associated with the global location strategy. The charge recorded in 2010 was comprised of $29 million for severance costs and $6 million primarily for asset writeoffs and expense related to the closing of offices.
Severance payments related to these positions are primarily paid over the salary continuance period in accordance with the separation plan. Workforce reduction program In the fourth quarter of 2008, we announced that, due to weakness in the global economy, we would reduce our workforce by an estimated 1,800 positions, and as a result, recorded a pretax restructuring charge of $181 million. In 2010, we recorded a recovery of $7 million associated with this workforce reduction program. We completed this program in 2010. Severance payments related to positions covered by this program are primarily paid over the salary continuance period in accordance with the separation plan.
The restructuring charges are recorded as a separate line on the income statement. The following tables present the activity in the restructuring reserves through Dec. 31, 2010.
Global location strategy 2009 restructuring charge reserve activity (in millions) Original restructuring charge Utilization Balance at Dec. 31, 2009 Additional charges Utilization Balance at Dec. 31, 2010 Severance $ 102 102 29 (50) $ 81 Asset writeoffs/other $ 37 (23) 14 6 (1) $ 19 Total $139 (23) 116 35 (51) $100
Workforce reduction program 2008 restructuring charge reserve activity (in millions) Original restructuring charge Additional charges/(recovery) Utilization Balance at Dec. 31, 2009 Additional (recovery) Utilization Balance at Dec. 31, 2010 Severance $ 166 4 (105) $ 65 (7) (42) $ 16
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The restructuring charges were recorded in the Other business as these restructurings were corporate initiatives and not directly related to the operating performance of these businesses. The tables below present the restructuring charges if they had been allocated by business.
Global location strategy 2009 restructuring charge by business (in millions) Asset management Asset servicing Issuer services Wealth management Treasury services Clearing services Other (including Business Partners) Total restructuring charge 2010 $ 13 14 2 12 (6) $ 35 2009 $ 32 34 18 8 8 8 31 $139
Total charges
(in millions) Asset management Asset servicing Issuer services Wealth management Treasury services Clearing services Other (including Business Partners) Total restructuring charge Note 13Income taxes
2008 $ 64 34 15 13 6 6 43 $181
Provision (benefit) for income taxes from continuing operations (in millions) Current taxes: Federal Foreign State and local Total current tax expense Deferred taxes: Federal Foreign State and local Total deferred tax expense (benefit) Provision (benefit) for income taxes The components of income (loss) before taxes are as follows:
2010 $ (670) 408 110 (152) 1,278 (75) (4) 1,199 $1,047
Components of income (loss) before taxes (in millions) Domestic Foreign Income (loss) before taxes The components of our net deferred tax liability are as follows:
Net deferred tax liability (in millions) Depreciation and amortization Lease financings Pension obligation
Dec. 31, 2010 $ 2,366 1,093 190 2009 $ 2,725 1,197 277
Securities valuation Reserves not deducted for tax Credit losses on loans Net operating loss carryover Other assets Other liabilities Tax credit carryforward Net deferred tax liability
As of Dec. 31, 2010, we have net operating loss carryfowards for state and local income tax purposes of $1.8 billion which will expire in 2029. In addition, we have alternative minimum tax credit carryforwards of $45 million with an indefinite life. We have not recorded a valuation allowance because we expect to realize our deferred tax assets including these carryovers. As of Dec. 31, 2010, we had approximately $2.7 billion of earnings attributable to foreign subsidiaries that have been permanently reinvested abroad and for which no provision has been recorded for income tax that would occur if repatriated. It is not practicable at this time to determine the income tax liability that would result upon repatriation of these earnings.
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The following table presents a reconciliation of the statutory federal income tax rate to our effective income tax rate applicable to income from continuing operations.
Effective tax rate Federal rate State and local income taxes, net of federal income tax benefit Credit for lowincome housing investments Taxexempt income Foreign operations Tax settlements Tax loss on mortgages Other net Effective rate 2010 35.0% 2.4 (1.8) (2.3) (5.2) 0.2 28.3%
Year ended Dec. 31, 2009 35.0% 4.5 2.6 2.9 3.5 4.0 10.8 (0.1) 63.2%
Unrecognized tax positions (in millions) Beginning balance at Jan. 1, gross Unrecognized tax benefits acquired Prior period tax positions: Increases Decreases Current period tax positions Settlements Statute expiration Ending balance at Dec. 31, gross
Our total tax reserves as of Dec. 31, 2010, were $289 million compared with $335 million at Dec. 31, 2009. If these tax reserves were unnecessary, $232 million would affect the effective tax rate in future periods. We recognize accrued interest and penalties, if applicable, related to income taxes in income tax expense. Included in the balance sheet at Dec. 31, 2010, is accrued interest, where applicable, of $52 million. The additional tax expense related to interest for the year ended Dec. 31, 2010, was $9 million compared with $89 million for the year ended Dec. 31, 2009. Our federal consolidated income tax returns are closed to examination through 2002. Our New York State and New York City return examinations have been completed through 2008. Our United Kingdom income tax returns are closed through 2007. Note 14Extraordinary (loss) consolidation of commercial paper conduit At the end of 2008, we called the first loss notes of Old Slip, making us the primary beneficiary and triggering the consolidation of this commercial paper conduit. The consolidation of this conduit resulted in the recognition of extraordinary losses (noncash accounting charges) of $26 million aftertax, or $0.02 per common share in 2008.
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Longterm debt (in millions) Senior debt: Fixed rate Floating rate Subordinated debt (a) Junior subordinated debentures (a) Total (a) Fixed rate.
Dec. 31, 2009 Rate Amount 3.106.92% 0.050.69% 4.407.40% 5.957.78% $ 7,949 2,869 4,795 1,621 $ 17,234
The aggregate amounts of notes and debentures that mature during the next five years for BNY Mellon are as follows: 2011 $1.30 billion , 2012 $3.45 billion, 2013 $1.61 billion, 2014 $2.27 billion and 2015 $1.43 billion. At Dec. 31, 2010, subordinated debt aggregating $845 million will be redeemable at our option as follows: 2011 $592 million, 2012 $144 million, and after 2012 $109 million. Junior subordinated debentures Wholly owned subsidiaries of BNY Mellon (the Trusts) have issued cumulative CompanyObligated Mandatory Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures (Trust Preferred Securities). The sole assets of each trust are junior subordinated deferrable interest debentures of BNY Mellon whose maturities and interest rates match the Trust Preferred Securities. Our obligations under the agreements that relate to the Trust Preferred Securities, the Trusts and the debentures constitute a full and unconditional guarantee by us of the Trusts obligations under the Trust Preferred Securities. The assets for Mellon Capital IV are currently (i) our remarketable 6.044% junior subordinated notes due 2043, and (ii) interests in stock purchase contracts between Mellon Capital IV and us. On the stock purchase date, as defined in the prospectus supplement for the Trust Preferred Securities of Mellon Capital IV, the sole assets of the trust will be shares of a series of our noncumulative perpetual preferred stock.
The following table sets forth a summary of the Trust Preferred Securities issued by the Trusts as of Dec. 31, 2010:
Trust Preferred Securities at Dec. 31, 2010 (dollar amounts in millions) BNY Institutional Capital Trust A BNY Capital IV BNY Capital V MEL Capital III (c) MEL Capital IV Total
Interest Assets rate of trust (a) 7.78% $ 309 6.88 206 5.95 361 6.37 300 6.24 500 $ 1,676
(a) Junior subordinated debentures and interest in stock purchase contracts for Mellon Capital IV. (b) Call price decreases ratably to par in the year 2016. (c) Amount was translated from Sterling into U.S. dollars on a basis of U.S. $1.55 to 1, the rate of exchange on Dec. 31, 2010.
We have the option to shorten the maturity of BNY Capital IV to 2013 or extend the maturity to 2047. The BNY Capital Preferred Trust Securities have been converted to floating rate via interest rate swaps. Note 16Securitizations and variable interest entities Variable Interest Entities Accounting guidance on the consolidation of Variable Interest Entities (VIEs), is included in ASC 810, Consolidation, and ASU 200917, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. Effective Jan. 1, 2010, the FASB approved ASU 201010 Amendments for Certain Investment Funds, which defers the requirements of ASU 200917 for asset managers interests in entities that apply the specialized accounting guidance for investment companies or that have the attributes of investment companies and for interests in money market funds.
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Accounting guidance on the consolidation of VIEs applies to certain entities in which the equity investors:
do not have sufficient equity at risk for the entity to finance its activities without additional financial support, and lack one or more of the following characteristics of a controlling financial interest: The power through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entitys economic performance (ASU 200917 model). The direct or indirect ability to make decisions about the entitys activities through voting rights or similar rights (ASC 810 model). The obligation to absorb the expected losses of the entity. The right to receive the expected residual returns of the entity.
BNY Mellons VIEs generally include retail, institutional and alternative investment funds offered to its retail and institutional customers in which it acts as the funds investment manager. BNY Mellon earns management fees on these funds as well as performance fees in certain funds. It may also provide startup capital in its new funds. These VIEs are included in the scope of ASU 201010 and are reviewed for consolidation based on the guidance in ASC 810. BNY Mellon applies ASC 810 to its mutual funds, hedge funds, private equity funds, collective investment funds and real estate investment trusts. If these entities are determined to be VIEs, primary beneficiary calculations are prepared in accordance with ASC 810 to determine whether or not BNY Mellon is the primary beneficiary and required to consolidate the VIE. The primary beneficiary of a VIE is the party that absorbs a majority of the variable interests expected losses, receives a majority of its expected residual returns or both. The primary beneficiary calculations include estimates of ranges and probabilities of losses and returns from the funds. The calculated expected gains and expected losses are allocated to the variable interest holders of the funds, which are generally the funds investors and which may include BNY Mellon, in order to determine which entity is required to consolidate the VIE, if any. BNY Mellon has other VIEs, including securitization trusts, which are no longer considered QSPEs, and CLOs, in which BNY Mellon serves as the investment manager. In addition, we provide trust and custody services for a fee to entities sponsored by other corporations in which we have no other interest. These VIEs are evaluated under the guidance included in ASU 200917. BNY Mellon has two securitizations and several CLOs, which are assessed for consolidation in accordance with ASU 200917. The primary beneficiary of these VIEs is the entity whose variable interests provide it with a controlling financial interest, which includes the power to direct the activities that most significantly impact the VIEs economic performance and the obligation to absorb losses of the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. In order to determine if it has a controlling financial interest in these VIEs, BNY Mellon assesses the VIEs purpose and design along with the risks it was designed to create and pass through to its variable interest holders. We also assess our involvement in the VIE and the involvement of any other variable interest holders in the VIE. Generally, as the sponsor and the manager of its VIEs, BNY Mellon has the power to control the activities that significantly impact the VIEs economic performance. Both a qualitative and quantitative analysis of BNY Mellons variable interests are performed to determine if BNY Mellon has the obligation to absorb losses of the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The analyses included assessments related to the expected performance of the VIEs and its related impact on BNY Mellons seed capital, management fees or residual interests in the VIEs. We also assess any potential impact the VIEs expected performance has on our performance fees. The following table presents the incremental assets and liabilities included in BNY Mellons consolidated financial statements, after applying intercompany eliminations, as of Dec. 31, 2010, based on the assessments performed in accordance with ASC 810 and ASU 200917. The net assets of any consolidated VIE are solely available to settle the liabilities of the VIE and to settle any investors ownership liquidation requests, including any seed capital invested in the VIE by BNY Mellon.
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Investments consolidated under ASC 810 at Dec. 31, 2010 Total Asset consolidated Management investments funds Securitizations (in millions) Available for sale $ $ 483 $ 483 Trading assets 14,121 14,121 Other assets 645 645 Total assets $ 14,766 $ 483 $ 15,249 Trading liabilities 13,561 13,561 Other liabilities 2 386 388 Total liabilities $ 13,563 $ 386 $ 13,949 Noncontrolling interests $ 699 $ $ 699 BNY Mellon voluntarily provided capital support agreements to certain VIEs (see below). With the exception of these agreements, we are not contractually required to provide financial or any other support to any of our VIEs. Additionally, creditors of any consolidated VIEs do not have any recourse to the general credit of BNY Mellon. Nonconsolidated VIEs As of Dec. 31, 2010, the following assets related to the VIEs, where BNY Mellon is not the primary beneficiary, are included in its consolidated financial statements.
Nonconsolidated VIEs at Dec. 31, 2010 (in millions) Trading Other Total Assets $ 24 34 $ 58 Liabilities $ $
The maximum loss exposure indicated in the above table relates solely to BNY Mellons seed capital or residual interests invested in the VIEs. Credit supported VIEs BNY Mellon voluntarily provided limited credit support to certain money market, collective, commingled and separate account funds (the Funds). Entering into such support agreements represents an event under ASC 810, and is subject to its interpretations. In analyzing the Funds for which credit support was provided, it was determined that interest rate risk and credit risk are the two main risks that the Funds are designed to create and pass through to their investors. Accordingly, interest rate and credit risk were analyzed to determine if BNY Mellon was the primary beneficiary of each of the Funds. BNY Mellons analysis of the credit risk variability and interest rate risk variability associated with the supported Funds resulted in BNY Mellon not being the primary beneficiary and therefore the Funds were not consolidated. The table below shows the financial statement items related to nonconsolidated VIEs to which we have provided credit support agreements at Dec. 31, 2010, and Dec. 31, 2009.
Credit supported VIEs at Dec. 31, 2010 (in millions) Other Assets $ Liabilities $
Credit supported VIEs at Dec. 31, 2009 (in millions) Other Consolidated credit supported VIEs Assets $ Liabilities $ 14
Certain funds have been created solely with securities that are subject to credit support agreements where we have agreed to absorb the majority of loss. Accordingly, these funds have been consolidated into BNY Mellon and have affected the following financial statement items at Dec. 31, 2010, and Dec. 31, 2009.
Consolidated credit supported VIEs at Dec. 31, 2010 (in millions) Availableforsale Other Total Assets $ 53 $ 53 Liabilities $ 126 $ 126 Maximum loss exposure $ 53 51 $ 104
Consolidated credit supported VIEs at Dec. 31, 2009 (in millions) Availableforsale Other Total Assets $ 47 $ 47 Liabilities $ 190 $ 190 Maximum loss exposure $ 47 46 $ 93
The maximum loss exposure shown above for the credit support agreements provided to BNY Mellons VIEs primarily reflects a complete loss on the Lehman Brothers Holdings Inc. securities for BNY Mellons clients that accepted our offer of support. As of Dec. 31, 2010, BNY Mellon recorded $126 million in liabilities related to its VIEs for which credit support agreements were provided.
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Note 17Shareholders equity BNY Mellon has 3.5 billion authorized shares of common stock with a par value of $0.01 per share, 100 million authorized shares of preferred stock with a par value of $0.01 per share. At Dec. 31, 2010, 1,241,530,195 shares of common stock were outstanding. There were no shares of preferred stock outstanding at Dec. 31, 2010. In June 2010, BNY Mellon priced 25.9 million common shares in an underwritten public offering, at $27.00 per common share. In connection with this offering, BNY Mellon entered into a forward sale agreement with a forward purchaser, who borrowed and sold to the public through the underwriters shares of the Companys common stock. BNY Mellon settled the forward sale agreement in September 2010 and received net proceeds of $677 million from this transaction. Troubled Asset Relief Program In 2008, BNY Mellon issued and sold to the U.S. Treasury $3 billion of preferred stock and a warrant to purchase shares of common stock in accordance with the terms of the Troubled Asset Relief Program Capital Purchase Program. In 2009, BNY Mellon repurchased the Series B preferred stock for its $3 billion liquidation value. BNY Mellon recorded an aftertax redemption charge of $196.5 million in 2009, representing the difference between the amortized cost of the Series B preferred stock and the repurchase price. Also in 2009, BNY Mellon repurchased for $136 million the warrant for 14,516,129 shares of our common stock. Common stock repurchase program On Dec. 18, 2007, our Board of Directors authorized the repurchase of up to 35 million shares of common stock. There were no shares repurchased under this program in 2010. At Dec. 31, 2010, 33.8 million shares were available for repurchase under the December 2007 program. There is no expiration date on this repurchase program. Capital adequacy Regulators establish certain levels of capital for bank holding companies and banks, including BNY Mellon and our bank subsidiaries, in accordance with established quantitative measurements. For the Parent to maintain its status as a financial holding company, our bank subsidiaries must, among other things, qualify as well capitalized. In addition, major bank holding companies such as the Parent are expected by the regulators to be well capitalized. As of Dec. 31, 2010 and 2009, the Parent and our bank subsidiaries were considered well capitalized on the basis of the ratios (defined by regulation) of Total and Tier 1 capital to riskweighted assets and leverage (Tier 1 capital to average assets). The following tables present the components of our Tier 1 and total riskbased capital, as well as our consolidated and largest bank subsidiary capital ratios at Dec. 31, 2010 and 2009.
Components of Tier 1 and total riskbased capital (a) (in millions) Tier 1 capital: Common shareholders equity Trust preferred securities Adjustments for: Goodwill and other intangibles (b) Pensions/cash flow hedges Securities valuation allowance Merchant banking investment Total Tier 1 capital Tier 2 capital: Qualifying unrealized gains on equity securities Qualifying subordinated debt Qualifying allowance for credit losses Total Tier 2 capital Total riskbased capital Total riskweighted assets (a) (b) On a regulatory basis as determined under Basel 1 guidelines and including discontinued operations. 2010 $ 32,354 1,676 (21,297) 1,053 (170) (19) 13,597 5 2,381 571 2,957 16,554 101,407
Dec. 31, 2009 $ 28,977 1,686 (19,437) 1,070 619 (32) 12,883 3 3,429 665 4,097 16,980 106,328
$ $
$ $
Reduced by deferred tax liabilities associated with nontax deductible identifiable intangible assets of $1,625 million at Dec. 31, 2010, and $1,680 million at Dec. 31, 2009, and deferred tax liabilities associated with tax deductible goodwill of $816 million at Dec. 31, 2010, and $720 million at Dec. 31, 2009.
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Consolidated and largest bank Dec. 31, subsidiary capital ratios (a) 2010 2009 Consolidated capital ratios: Tier 1 13.4% 12.1% Total capital 16.3 16.0 Leverage 5.8 6.5 Largest bank capital ratios: Tier 1 11.4% 11.2% Total capital 15.3 15.0 Leverage 5.3 6.3 (a) For a banking institution to qualify as well capitalized, its Tier 1, Total (Tier 1 plus Tier 2) and leverage capital ratios must be at least 6%, 10% and 5%, respectively. To qualify as adequately capitalized, Tier 1, Total and leverage capital ratios must be at least 4%, 8% and 3%, respectively. At Dec. 31, 2010, we had $1,676 million of trust preferred securities outstanding, net of issuance costs, all of which qualified as Tier 1 capital. If a bank holding company or bank fails to qualify as adequately capitalized, regulatory sanctions and limitations are imposed. At Dec. 31, 2010, the amounts of capital by which BNY Mellon and our largest bank subsidiary, The Bank of New York Mellon, exceed the well capitalized guidelines are as follows:
Capital above guidelines at Dec. 31, 2010 (in millions) Tier 1 capital Total capital Leverage Consolidated $ 7,512 6,413 1,802 The Bank of New York Mellon $ 4,667 4,519 592
ASC 820 Adjustments Foreign currency translation $ 11 (374) (374) (363) (363) 227 227 (136) (136) (319) (18) (b) (337) (473) Other post retirement benefits $ (73) 7 7 (66) (66) (1) (1) (67) (67) 12 12 (55)
2008 beginning balance, net of tax (expense) benefit Change in 2008, net of tax (expense) benefit of $(113), $566, $(6), $3,359, $(1), $3,805 Reclassification adjustment, net of tax (expense) benefit of $ , $ , $ , $(645), $1, $(644) 2008 total unrealized gain (loss) 2008 ending balance, net of tax (expense) benefit Adjustments for the cumulative effect of applying ASC 320, net of taxes of $, $, $, $470, $, $470 Adjusted balance at Jan. 1, 2009 Change in 2009, net of tax (expense) benefit of $(82), $14, $(34), $(489), $(1), $(592) Reclassification adjustment, net of tax (expense) benefit $, $, $, $(2,022), $, $(2,022) 2009 total unrealized gain (loss) 2009 ending balance, net of tax (expense) benefit Adjustments for the cumulative effect of applying ASC 810 Adjusted balance at Jan. 1, 2010 Change in 2010, net of tax (expense) benefit of $(68), $15, $(3), $(469), $, $(525) Reclassification/other adjustment, net of tax (expense) benefit $ , $ , $ , $12, $2, $14 2010 total unrealized gain (loss) 2010 ending balance, net of tax (expense) benefit
Pensions $ (148) (808) (808) $ (956) (956) (46) (46) $(1,002) (1,002) 9 9 $ (993)
Unrealized gain (loss) on assets available for sale $ (342) (4,694) 983 (3,711) $ (4,053) (676) (4,729) 762 3,348 4,110 (619) 24 (595) 747 18(b) 765 170
Unrealized gain (loss) on cash flow $ hedges 3 (a) 45 (11) 34 37 37 (16) (32) (48) (11) (11) 12 (5) 7 (4)
Total accumulated unrealized $ (549) gain (loss) (5,824) 972 (4,852) (5,401) (676) (6,077) 926 3,316 4,242 (1,835) 24 (1,811) 461 (5) 456 (1,355)
(a) Includes unrealized gain (loss) on foreign currency cash flow hedges of $ million, $(1) million and $7 million at Dec. 31, 2010, Dec. 31, 2009 and Dec. 31, 2008, respectively. (b) Includes a net reclassification adjustment of $14 million to retained earnings from other comprehensive income.
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Note 19Stockbased compensation Our LongTerm Incentive Plans provide for the issuance of stock options, restricted stock, restricted stock units (RSUs) and other stockbased awards to employees of BNY Mellon. At Dec. 31, 2010, under the LongTerm Incentive Plan approved in April 2008, we may issue 33,594,759 new options. Of this amount, 18,986,212 shares may be issued as restricted stock or RSUs. Stockbased compensation expense related to retirement eligibility vesting totaled $25 million in 2010 and $16 million in 2009, respectively. Stock options Our LongTerm Incentive Plans provide for the issuance of stock options at fair market value at the date of grant to officers and employees of BNY Mellon. Generally, each option granted is exercisable between one and ten years from the date of grant. The compensation cost that has been charged against income was $87 million, $86 million and $108 million for 2010, 2009 and 2008, respectively. The total income tax benefit recognized in the income statement was $35 million, $35 million and $44 million for 2010, 2009 and 2008, respectively. We used a latticebased binomial method to calculate the fair value on the date of grant. The fair value of each option award is estimated on the date of grant using the weightedaverage assumptions noted in the following table:
Assumptions Dividend yield Expected volatility Riskfree interest rate Expected option lives (in years) For 2010 and 2009, assumptions were determined as follows:
Expected volatilities are based on implied volatilities from traded options on our stock, historical volatility of our stock, and other factors. We use historical data to estimate option exercises and employee terminations within the valuation model. The riskfree rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding.
A summary of the status of our options as of Dec. 31, 2010, and changes during the year, is presented below:
Weighted average remaining Shares subject Weightedaverage exercise price 36.36 30.25 21.58 39.31 $ 35.21 35.28 37.93 contractual term (in years)
Balance at Dec. 31, 2009 Granted Exercised Canceled Balance at Dec. 31, 2010 Vested and expected to vest at Dec. 31, 2010 Exercisable at Dec. 31, 2010
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Stock options outstanding at Dec. 31, 2010 Options outstanding Weighted average remaining contractual life (in years) 6.84 4.38 4.56 0.12 5.19 Options exercisable (a)
(a) At Dec. 31, 2009 and 2008, 65,703,148 and 66,280,895 options were exercisable at an average price per common share of $38.96 and $38.71, respectively.
Aggregate intrinsic value of options (in millions) Outstanding at Dec. 31, Exercisable at Dec. 31, The weightedaverage fair value of options at grant date was $8.38 in 2010, $4.59 in 2009 and $10.33 in 2008. 2010 $193 $ 77 2009 $167 $ 26 2008 $ 31 $ 31
The total intrinsic value of options exercised during the years ended Dec. 31, 2010, 2009 and 2008 was $12 million, $3 million and $53 million, respectively. As of Dec. 31, 2010, there was $146 million of total unrecognized compensation cost related to nonvested options. The unrecognized compensation cost is expected to be recognized over a weightedaverage period of two years. Cash received from option exercises for the years ended Dec. 31, 2010, 2009 and 2008, was $31 million, $16 million and $182 million, respectively. The actual tax benefit realized for the tax deductions from options exercised totaled $1 million, $4 million and $14 million for the years ended Dec. 31, 2010, 2009 and 2008, respectively. Restricted stock, restricted stock units (RSU) and Total Shareholder Return awards Restricted stock and RSUs are granted under our LongTerm Incentive Plans at no cost to the recipient. These awards are subject to forfeiture until certain restrictions have lapsed, including continued employment, for a specified period. The recipient of a share of restricted stock is entitled to voting rights and generally is entitled to dividends on the common stock. An RSU entitles the recipient to receive a share of common stock after the applicable restrictions lapse. The recipient generally is entitled to receive cash payments equivalent to any dividends paid on the underlying common stock during the period the RSU is outstanding but does not receive voting rights. In March 2008, BNY Mellon granted Total Shareholder Return (TSR) awards. Under the terms of the TSR Performance share awards, a target award comprised of restricted stock was granted to an employee at the beginning of the threeyear performance period beginning on Jan. 1, 2008 through Dec. 31, 2010. BNY Mellons actual TSR for the performance period is compared to the results of a peer group (weighted twothirds) and an S&P 500 Financial Services Index (weighted onethird). Any dividends earned during the vesting period are held in escrow and are paid out at the end of the performance period along with the actual shares earned based on BNY Mellons performance relative to the two peer groups. There were 241,084 total TSR awards outstanding as of Dec. 31, 2010. The fair value of restricted stock, RSUs and TSRs is equal to the fair market value of our common stock on the date of grant. The expense is recognized over the vesting period of one to seven years. The total compensation expense recognized for restricted stock, RSUs and TSRs was $119 million, $124 million and $134 million recognized in 2010, 2009 and 2008, respectively.
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The following table summarizes our nonvested restricted stock, RSU and TSR activity for 2010.
Nonvested restricted stock, RSUs and TSRs activity Nonvested restricted stock, RSUs and TSRs at Dec. 31, 2009 Granted Vested Forfeited Nonvested restricted stock, RSUs and TSRs at Dec. 31, 2010 Number of shares 10,538,540 4,959,756 (3,427,013) (751,507) 11,319,776
As of Dec. 31, 2010, $119 million of total unrecognized compensation costs related to nonvested restricted stock, RSUs and TSRs is expected to be recognized over a weightedaverage period of approximately two years. Subsidiary LongTerm Incentive plans BNY Mellon also has several subsidiary LongTerm Incentive Plans which have issued restricted subsidiary shares to certain employees. These share awards are subject to forfeiture until certain restrictions have lapsed, including continued employment for a specified period of time. The shares are nonvoting and nondividend paying. Once the restrictions lapse, which are generally 35 years, the shares can only be sold, at the option of the employee, to BNY Mellon at a price based generally on the fair value of the subsidiary at the time of repurchase. In certain instances BNY Mellon has an election to call the shares. Note 20Employee benefit plans BNY Mellon has defined benefit and defined contribution retirement plans covering substantially all fulltime and eligible parttime employees and other postretirement plans providing healthcare benefits for certain retired employees. Pension and postretirement healthcare plans The following tables report the combined data for our domestic and foreign defined benefit pension and post retirement healthcare plans.
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(dollar amounts in millions) Weightedaverage assumptions used to determine benefit obligations Discount rate Rate of compensation increase Change in benefit obligation (a) Benefit obligation at beginning of period Service cost Interest cost Employee contributions Amendments Actuarial gain (loss) (Acquisitions) divestitures Benefits paid Foreign exchange adjustment Benefit obligation at end of period Change in fair value of plan assets Fair value at beginning of period Actual return on plan assets Employer contributions Employee contributions (Acquisitions) divestitures Benefit payments Foreign exchange adjustment Fair value at end of period Funded status at end of period Amounts recognized in accumulated other comprehensive (income) loss consist of: Net loss (gain) Prior service cost (credit) Net initial obligation (asset) Total (before tax effects)
Pension Benefits Domestic Foreign 2010 2009 2010 2009 5.71% 3.50 $(2,835) (90) (171) 26 (224) 155 N/A (3,139) 3,331 427 25 (155) N/A 3,628 $ 489 $ 1,582 (94) $ 1,488 6.21% 3.50 $(2,559) (96) (160) (185) 165 N/A (2,835) 2,673 479 344 (165) N/A 3,331 $ 496 $ 1,552 (82) $ 1,470 5.29% 4.47 $(555) (28) (30) (1) (3) (28) (11) 10 20 (626) 540 70 21 1 10 (10) (21) 611 $ (15) $ 177 3 $ 180 5.74% 4.64 $(365) (20) (24) (1) (121) 10 (34) (555) 387 74 50 1 (10) 38 540 $ (15) $ 200 $ 200
Healthcare Benefits Domestic Foreign 2010 2009 2010 2009 5.71% 3.50 $(242) (2) (14) 5 21 N/A (232) 66 5 21 (21) N/A 71 $(161) $ 56 (4) 8 $ 60 6.21% 3.50 $(269) (2) (16) 21 24 N/A (242) 56 10 24 (24) N/A 66 $(176) $ 65 (4) 12 $ 73 5.40% $ (3) (3) $ (3) $ (4) $ (4) 5.85% $ (2) (1) (3) $ (3) $ (6) $ (6)
(a) The benefit obligation for pension benefits is the projected benefit obligation and for healthcare benefits, it is the accumulated benefit obligation.
Net periodic benefit cost (credit) (dollar amounts in millions) Weightedaverage assumptions as of Jan. 1: Marketrelated value of plan assets Discount rate Expected rate of return on plan assets Rate of compensation increase Components of net periodic benefit cost (credit): Service cost Interest cost Expected return on assets Amortization of: Net initial obligation (asset) Prior service cost (credit) Net actuarial (gain) loss Settlement (gain) loss Other Net periodic benefit cost (credit) 2010 $3,861 6.21% 8.00 3.50 $ 90 171 (303) $ Domestic 2009 $3,651 6.38% 8.00 3.50 96 160 (295)
Pension Benefits 2008 $3,706 6.38% 8.00 3.50 $ 84 142 (290) 2010 $ 529 5.74% 6.69 4.64 $ 28 30 (37) 11 $ 32 Foreign 2009 $ 459 6.18% 6.40 4.11 $ 20 24 (32) 3 $ 15 2008 $ 542 5.75% 7.28 4.43 $ 27 26 (37) 3 $ 19 $ 2010 $ 76 6.21% 8.00 N/A 2 14 (6) $ Domestic 2009 $ 77 6.38% 8.00 N/A 2 16 (6)
Healthcare Benefits 2008 $ 77 6.38% 8.00 N/A $ 3 17 (6) $ 2010 N/A 5.85% N/A N/A $ Foreign 2009 N/A 6.25% N/A N/A $ 2008 N/A 5.80% N/A N/A
(14) 71 $ 15
(10) 11 10 14 $ (39)
4 5 $ 19
4 5 $ 21
4 5 $ 23
(1) $ (1)
(1) $ (1)
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Changes in other comprehensive (income) loss in 2010 (in millions) Net loss (gain) arising during period Recognition of prior years net (loss) Prior service cost (credit) arising during period Recognition of prior years service (cost) credit Recognition of net initial (obligation) asset Foreign exchange adjustment Total recognized in other comprehensive (income) loss (before tax effects)
Pension Benefits Domestic Foreign $ 101 $ (10) (71) (11) (26) 3 14 N/A (2) $ 18 $ (20)
Amounts expected to be recognized in net periodic benefit cost (income) in 2011 (before tax effects) (in millions) (Gain) loss recognition Prior service cost recognition Net initial obligation (asset) recognition Pension Benefits Domestic Foreign $109 $ 14 (16) Healthcare Benefits Domestic Foreign $4 $ 1 4
Domestic (in millions) 2010 2009 Pension benefits: Prepaid benefit cost $ 680 $ 681 Accrued benefit cost (191) (185) Total pension benefits $ 489 $ 496 Healthcare benefits: Accrued benefit cost $(161) $(176) Total healthcare benefits $(161) $(176) The accumulated benefit obligation for all defined benefit plans was $3.6 billion at Dec. 31, 2010, and $3.2 billion at Dec. 31, 2009.
Foreign 2010 $ 52 (67) $(15) $ (3) $ (3) 2009 $ 33 (48) $ (15) $ (3) $ (3)
Plans with obligations in excess of plan assets (in millions) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets For information on pension assumptions see the Critical accounting estimates section. Assumed healthcare cost trendDomestic postretirement healthcare benefits
Foreign 2009 $ 41 38 14
The assumed healthcare cost trend rate used in determining benefit expense for 2011 is 8.00% decreasing to 5.00% in 2016. This projection is based on various economic models that forecast a decreasing growth rate of healthcare expenses over time. The underlying assumption is that healthcare expense growth cannot outpace gross national product (GNP) growth indefinitely, and over time a lower equilibrium growth rate will be achieved. Further, the growth rate assumed in 2016 bears a reasonable relationship to the discount rate. An increase in the healthcare cost trend rate of one percentage point for each year would increase the accumulated postretirement benefit obligation by $14.9 million, or 6%, and the sum of the service and interest costs by $0.9 million, or 6%. Conversely, a decrease in this rate of one percentage point for each year would decrease the benefit obligation by $13.4 million, or 6%, and the sum of the service and interest costs by $0.8 million, or 6%. Assumed healthcare cost trendForeign postretirement healthcare benefits An increase in the healthcare cost trend rate of one percentage point for each year would increase the accumulated postretirement benefit obligation by less than $1 million and the sum of the service and interest costs by less than $1 million. Conversely, a decrease in this rate of one percentage point for each year would decrease the benefit obligation by less than $1 million and the sum of the service and interest costs by less than $1 million. Investment strategy and asset allocation BNY Mellon is responsible for the administration of various pension and healthcare postretirement benefits plans, both domestically and internationally. Prior to July 21, 2008, the plans were administered by The Bank of New York Company, Inc.s and Mellon Financial Corporations respective Benefits Committees. Since July 21, 2008, the domestic plans
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have been administered by BNY Mellons Benefits Administration Committee (the Committee). Prior to July 21, 2008, the Benefits Committee was, and since July 21, 2008, BNY Mellons Benefits Administration Committee has been, a named fiduciary of the domestic plans. Subject to the following, at all relevant times, BNY Mellons Benefits Investment Committee, another named fiduciary to the Plan, is responsible for the investment of Plan assets. The Committees responsibilities include the investment of all domestic defined benefit plan assets, as well as the determination of investment options offered to participants in all domestic defined contribution plans. The Benefits Investment Committee conducts periodic reviews of investment performances, asset allocation and investment manager suitability. Our investment objective for U.S. and foreign plans is to maximize total return while maintaining a broadly diversified portfolio for the primary purpose of satisfying obligations for future benefit payments. Equities are the main holding of the plans. Alternative investments (including private equities) and fixed income securities provide diversification and, in certain cases, lower the volatility of returns. In general, equity securities and alternative investments within any domestic plans portfolio can be maintained in the range of 30% to 70% of total plan assets, fixedincome securities can range from 20% to 50% of plan assets and cash equivalents can be held in amounts ranging from 0% to 5% of plan assets. Actual asset allocation within the approved ranges varies from time to time based on economic conditions (both current and forecast) and the advice of professional advisors. Our pension assets were invested as follows at Dec. 31, 2010 and 2009:
Asset allocations Equities Fixed income Private equities Alternative investment Real estate Cash Total pension benefits 2010 57% 33 3 6 1 100%
We held no BNY Mellon Corporation stock in our pension plans at Dec. 31, 2009 and 2010. Assets of the U.S. postretirement healthcare plan are invested in an insurance contract. BNY Mellon expects to make cash contributions to fund its defined benefit pension plans in 2011 of $26 million for the domestic plans and $57 million for the foreign plans. BNY Mellon expects to make cash contributions to fund its postretirement healthcare plans in 2011 of $21 million for the domestic plans and less than $1 million for the foreign plans. The following benefit payments for BNY Mellons pension and healthcare plans, which reflect expected future service as appropriate, are expected to be paid:
(in millions) Pension benefits: Year 2011 2012 2013 2014 2015 20162020 Total pension benefits Healthcare benefits: Year 2011 2012 2013 2014 2015 20162020 Total healthcare benefits
Domestic $ 172 174 183 194 204 1,173 2,100 21 21 21 22 22 104 211
Foreign $ 10 9 12 11 13 90 145 1 1
$ $
$ $
Effective Jan. 1, 2011, the U.S. pension plan was amended to reduce benefits earned by participants for service after 2010, and to freeze plan participation such that no new employees will enter the plan after Dec. 31, 2010. Fair value measurement of plan assets In accordance with ASC 715, BNY Mellon has established a threelevel hierarchy for fair value measurements of its pension plan assets based upon the transparency of inputs to the valuation of an asset as of the measurement date. The valuation hierarchy is consistent with guidance in ASC 820 which is detailed in Note 23 to the Consolidated Financial Statements. The following is a description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such assets pursuant to the valuation hierarchy.
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Cash and currency This category consists primarily of foreign currency balances. Foreign currency is translated monthly based on current exchange rates. Common and preferred stock and exchange traded funds These types of securities are valued at the closing price reported in the active market in which the individual securities are traded, if available. Where there is no readily available market quotations, we determine fair value primarily based on pricing sources with reasonable levels of price transparency. Venture capital investments and partnership interests There are no readily available market quotations for these funds. The fair value of the investments is based on the Plans ownership percentage of the fair value of the underlying funds as provided by the fund managers. These funds are typically valued on a quarterly basis. The Plans venture capital investments and partnership interests are valued at NAV as a practical expedient for fair value. Collective trust funds There are no readily available market quotations for these funds. The fair value of the fund is based on the securities in the portfolio, which typically is the amount that the fund might reasonably expect to receive for the securities upon a sale. These funds are either valued on a daily or monthly basis. Corporate debt and government obligations Certain corporate debt and government obligations are valued at the closing price reported in the active market in which the bonds are traded. Other corporate debt and government obligations are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the bonds are valued using discounted cash flows that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. U.S. Treasury securities Treasury securities are valued at the closing price reported in the active market in which the individual security is traded. Fund of funds There are no readily available market quotations for these funds. The fair value of the fund is based on NAVs of the funds in the portfolio, which reflects the value of the underlying securities. The fair value of the underlying securities is typically the amount that the fund might reasonably expect to receive upon selling those hard to value or illiquid securities within the portfolios. For securities that are readily valued, fair value is the closing price at the end of the period. These funds are valued on a monthly basis. The following tables present the fair value of each major category of plan assets as of Dec. 31, 2010, by captions and by ASC 820 valuation hierarchy (as described above).
Plan assets measured at fair value on a recurring basis domestic plans at Dec. 31, 2010 (in millions) Collective trust funds Common and preferred stock Corporate debt obligations U.S. and sovereign government obligations Fund of funds Venture capital and partnership interests Exchange traded funds Total domestic plan assets, at fair value Level 1 $ 778 272 3 $ 1,053 Level 2 $ 1,181 777 209 159 $ 2,326 Level 3 $ 134 115 $ 249 Total fair value $ 1,181 778 777 481 293 115 3 $ 3,628
Plan assets measured at fair value on a recurring basis foreign plans at Dec. 31, 2010 (in millions) Common stock Sovereign government obligations Corporate debt obligations Cash and currency Venture capital and partnership interests Collective trust funds Total foreign plan assets, at fair value Level 1 $ 234 57 26 $ 317 Level 2 $ 97 46 81 29 $ 253 Level 3 $ 41 $ 41 Total fair value $ 331 103 81 26 41 29 $ 611
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Plan assets measured at fair value on a recurring basis domestic plans at Dec. 31, 2009 (in millions) Collective trust funds Corporate debt obligations Common and preferred stock U.S. and sovereign government obligations Fund of funds Venture capital and partnership interests Exchange traded funds Total domestic plan assets, at fair value Level 1 $ 718 374 3 $ 1,095 Level 2 $ 972 795 96 142 $ 2,005 Level 3 $ 121 110 $ 231 Total fair value $ 972 795 718 470 263 110 3 $ 3,331
Plan assets measured at fair value on a recurring basis foreign plans at Dec. 31, 2009 Total (in millions) Level 1 Level 2 Level 3 fair value Collective trust funds $ $ 266 $ $ 266 Common stock 176 176 Sovereign government obligations 39 39 Venture capital and partnership interests 36 36 Cash and currency 14 14 Corporate debt obligations 9 9 Total foreign plan assets, at fair value $ 229 $ 275 $ 36 $ 540 At Dec. 31, 2010, BNY Mellon had $351 million of pension and post retirement plan assets in alternative investment funds valued using net asset value. These investments are redeemable at net asset value under agreements with the underlying funds. These investments include $125 million that contain a redemption provision which requires notice of 90 days. Our alternative investment funds consist primarily of venture capital and partnership interests and hedge fund of funds. As of Dec. 31, 2010, there were $41 million of unfunded commitments relating to our venture capital and partnership interests.
Changes in Level 3 fair value measurements The table below includes a rollforward of the plan assets for the years ended Dec. 31, 2010 and 2009 (including the change in fair value), for financial instruments classified in Level 3 of the valuation hierarchy.
Fair value measurements using significant unobservable inputsdomestic plansfor the year ended Dec. 31, 2010 Changes in unrealized gains and (losses) related to plan assets held at Dec. 31, 2010
(in millions)
Venture capital and partnership interests Fund of funds Total plan assets at fair value
$ $
$ $
8 5 13
$ $
(3) 8 5
$ $
$ $
$ $
2 2 4
Change in
Fair value measurements using significant unobservable inputsforeign plans for the year ended Dec. 31, 2010
(in millions)
unrealized gains and (losses) related to plan assets held at Dec. 31, 2010
Venture capital and partnership interests Total plan assets at fair value
$ $
36 36
$ $
5 5
$ $
$ $
$ $
41 41
$ $
5 5
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Fair value measurements using significant unobservable inputsdomestic plansfor the year ended Dec. 31, 2009 Changes in unrealized gains and (losses) related to plan assets held at Dec. 31, 2009
(in millions)
Venture capital and partnership interests Fund of funds Total plan assets at fair value
$108 81 $189
$ $
(3) 8 5
$ $
5 32 37
$ $
$ $
$ $
(13) 1 (12)
Change in
Fair value measurements using significant unobservable inputsforeign plans for the year ended Dec. 31, 2009
(in millions)
unrealized gains and (losses) related to plan assets held at Dec. 31, 2009
Venture capital and partnership interests Total plan assets at fair value
$ 33 $ 33
$ $
3 3
$ $
$ $
$ $
36 36
$ $
3 3
Defined contribution plans We have an Employee Stock Ownership Plan (ESOP) covering certain domestic fulltime employees with more than one year of service. The ESOP works in conjunction with the defined benefit pension plan. Employees are entitled to the higher of their benefit under the ESOP or such defined benefit pension plan at retirement. Benefits payable under the defined benefit pension plan are offset by the equivalent value of benefits earned under the ESOP. Contributions are made equal to required principal and interest payments on borrowings by the ESOP. At Dec. 31, 2010, and Dec. 31, 2009, the ESOP owned 7.4 million and 8.1 million shares of our stock, respectively. The fair value of total ESOP assets was $228 million and $246 million at Dec. 31, 2010, and Dec. 31, 2009. There were no contributions in 2010, 2009 or 2008. There was no ESOP related expense in 2010, 2009 and 2008. We have defined contribution plans, excluding the ESOP, for which we recognized a cost of $106 million in 2010, $98 million in 2009 and $107 million in 2008. Effective September 2008, the Benefits Investment Committee appointed Fiduciary Counselors, Inc. to serve as the independent fiduciary to (i) make certain fiduciary decisions related to the continued prudence of offering the common stock of BNY Mellon or its affiliates as an investment option under the plans other than with respect to plan sponsor decisions, and (ii) select and monitor any internally managed investments (active or passive, including mutual funds) of BNY Mellon or its affiliates to be offered to participants as investment options under the Plan. Note 21Company financial information Our bank subsidiaries are subject to dividend limitations under the Federal Reserve Act, as well as national and state banking laws. Under these statutes, prior regulatory consent is required for dividends in any year that would exceed the banks net profits for such year combined with retained net profits for the prior two years. Additionally, such bank subsidiaries may not declare dividends in excess of net profits on hand, as defined, after deducting the amount by which the principal amount of all loans, on which interest is past due for a period of six months or more, exceeds the allowance for credit losses. The Bank of New York Mellon, which is a New York state chartered bank, is also prohibited from paying dividends in excess of net profits. As a result of charges recorded in 2009 related to the restructuring of the investment securities portfolio, The Bank of New York Mellon and BNY Mellon, N.A. are required to obtain consent from our regulators prior to paying a dividend. Despite this limitation, management estimates that liquidity at the Parent will continue to be sufficient to meet BNY Mellons ongoing quarterly dividends at the current rate as well as any increase to the dividend approved as part of our capital plan which was submitted to the Federal Reserve in 2011. The payment of dividends also is limited by minimum capital requirements imposed on banks. As of Dec. 31, 2010, BNY Mellons bank subsidiaries exceeded these minimum requirements. The bank subsidiaries declared dividends of $239 million in 2010, $659 million in 2009 and $575 million in 2008. The Federal Reserve Board and the OCC have issued additional guidelines that require
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bank holding companies and national banks to continually evaluate the level of cash dividends in relation to their respective operating income, capital needs, asset quality and overall financial condition. The Federal Reserve Board has issued a policy statement with respect to the payment of cash dividends by bank holding companies. The policy statement provides that as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding companys capital needs, asset quality and overall financial condition. The Federal Reserve Board can also prohibit a dividend if payment would constitute an unsafe or unsound banking practice. Any increase in BNY Mellons ongoing quarterly dividends would require consultation with the Federal Reserve. The Federal Reserves current guidance provides that, for large bank holding companies like us, dividend payout ratios exceeding 30% of aftertax net income will receive particularly close scrutiny. On Nov. 17, 2010, the Federal Reserve issued Revised Temporary Addendum to SR letter 094. The letter described the process the Federal Reserve will follow to assess comprehensive capital plans of the 19 Supervisory Capital Assessment Program bank holding companies including any request to take capital actions such as increased dividends or stock buybacks. The comprehensive capital plans, which were prepared using Basel I capital guidelines, included bank developed baseline and stress projections as well as a supervisory stress projection using adverse macroeconomic assumptions provided by the Federal Reserve.
The Company also provided the Federal Reserve with projections covering the time period it will take us to fully comply with Basel III capital guidelines, including the 7% Tier 1 common, 8.5% Tier 1, and 3% leverage ratios. Certain templates were submitted to the Federal Reserve on Dec. 22, 2010 and the capital plan was filed by Jan. 7, 2011. The Federal Reserve is expected to provide a response to first quarter capital actions, such as a dividend increase and share repurchases, no later than March 21, 2011 and feedback on the comprehensive capital plan by April 30, 2011. The Federal Reserve Act limits and requires collateral for extensions of credit by our insured subsidiary banks to BNY Mellon and certain of its nonbank affiliates. Also, there are restrictions on the amounts of investments by such banks in stock and other securities of BNY Mellon and such affiliates, and restrictions on the acceptance of their securities as collateral for loans by such banks. Extensions of credit by the banks to each of our affiliates are limited to 10% of such banks regulatory capital, and in the aggregate for BNY Mellon and all such affiliates to 20%, and collateral must be between 100% and 130% of the amount of the credit, depending on the type of collateral. Our insured subsidiary banks are required to maintain reserve balances with Federal Reserve Banks under the Federal Reserve Act and Regulation D. Required balances averaged $2.2 billion and $2.0 billion for the years 2010 and 2009, respectively. In addition, under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon the banks shareholders, pro rata, and to the extent necessary, if any such assessment is not paid by any shareholder after three months notice, to sell the stock of such shareholder to make good the deficiency.
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The Parents condensed financial statements are as follows: Condensed Income StatementThe Bank of New York Mellon Corporation (Parent Corporation) (a)
Year ended Dec. 31 (in millions) Dividends from bank subsidiaries Dividends from nonbank subsidiaries Interest revenue from bank subsidiaries Interest revenue from nonbank subsidiaries Gain (loss) on securities held for sale Other revenue Total revenue Interest (including $14 in 2010, $23 in 2009 and $79 in 2008 to subsidiaries) Other expense Total expense Income (loss) before income taxes and equity in undistributed net income of subsidiaries Provision (benefit) for income taxes Equity in undistributed net income (loss): Bank subsidiaries Nonbank subsidiaries Net income (loss) Redemption charge and preferred dividends Net income (loss) applicable to common shareholders of The Bank of New York Mellon (a) Includes results of discontinued operations and the extraordinary loss in 2008.
2010 200 74 211 131 5 73 694 285 221 506 188 (465)
2009 611 176 228 146 (2) 81 1,240 366 338 704 536 (357)
2008 495 237 214 234 (72) 54 1,162 710 737 1,447 (285) (433)
Condensed Balance SheetThe Bank of New York Mellon Corporation (Parent Corporation)
Dec. 31, (in millions) Assets: Cash and due from banks Securities Loansnet of allowance Investment in and advances to subsidiaries and associated companies: Banks Other Subtotal Corporateowned life insurance Other assets Total assets Liabilities: Deferred compensation Commercial paper Affiliate borrowings Other liabilities Longterm debt Total liabilities Shareholders equity Total liabilities and shareholders equity 2010 $ 3,452 219 52 26,349 20,578 46,927 650 3,014 54,314 497 10 3,344 2,682 15,427 21,960 32,354 54,314 $ 2009 4,649 233 113 23,671 19,420 43,091 1,058 2,757 51,901 500 12 3,355 2,649 16,408 22,924 28,977 51,901
$ $
$ $
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Condensed Statement of Cash FlowsThe Bank of New York Mellon Corporation (Parent Corporation)
Year ended Dec. 31 (in millions) Operating activities: Net income (loss) Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Amortization Equity in undistributed net (income)/loss of subsidiaries Change in accrued interest receivable Change in accrued interest payable Change in taxes payable (a) Other, net Net cash provided by/(used in) operating activities Investing activities: Purchases of securities Proceeds from sales of securities Change in loans Acquisitions of, investments in, and advances to subsidiaries Other, net Net cash used in investing activities Financing activities: Net change in commercial paper Proceeds from issuance of longterm debt Repayments of longterm debt Change in advances from subsidiaries Issuance of common stock Treasury stock acquired Cash dividends paid Series B preferred stock issued/(repurchased) Warrant issued/(repurchased) Tax benefit realized on share based payment awards Net cash (used in)/provided by financing activities Change in cash and due from banks Cash and due from banks at beginning of year Cash and due from banks at end of year Supplemental disclosures Interest paid Income taxes paid (b) Income taxes refunded (b) (a) (b)
2010 $ 2,518 14 (1,865) 2 2 (321) 179 529 (5) 43 61 (1,002) 208 (695) (2) 1,347 (2,614) (10) 728 (41) (440) 1 (1,031) (1,197) 4,649 $ 3,452 $ $ 284 442 178
2009 $ (1,084) 13 1,977 (41) (1) (482) (455) (73) (9) 129 110 (566) (336) (4) 3,350 (1,277) 59 1,387 (28) (673) (3,000) (136) 4 (318) (727) 5,376 $ 4,649 $ 367 $ 1,013 609
2008 $ 1,419 17 (1,271) 58 2 (84) 880 1,021 (198) 346 11 (1,131) 9 (963) (49) 2,647 (3,814) 321 222 (308) (1,129) 2,779 221 14 904 962 4,414 $ 5,376 $ $ 708 891 37
Includes payments received from subsidiaries for taxes of $900 million in 2010, $967 million in 2009 and $1,025 million in 2008. Includes discontinued operations.
Note 22Fair value of financial instruments The carrying amounts of our financial instruments (i.e., monetary assets and liabilities) are determined under different accounting methods see Note 1 to the Consolidated Financial Statements. The following disclosure discusses these instruments on a uniform fair value basis. However, active markets do not exist for a significant portion of these instruments, principally loans and commitments. As a result, fair value determinations require significant subjective judgments regarding future cash flows. Other judgments would result in different fair values. Among the assumptions we used are discount rates ranging principally from 0.12% to 6.46% at Dec. 31, 2010, and 0.05% to 6.27% at Dec. 31, 2009. The fair value information supplements the basic financial statements and other traditional financial data presented throughout this report. Note 23, Fair value measurement presents assets and liabilities measured at fair value by the three level valuation hierarchy established under ASC 820, as well as a roll forward schedule of fair value measurements using significant unobservable inputs. Note 24, Fair value option presents the instruments for which fair value accounting was elected and the corresponding income statement impact of those instruments. A summary of the practices used for determining fair value is as follows. Interestbearing deposits with banks The fair value of interestbearing deposits with banks is based on discounted cash flows. Securities, trading activities, and derivatives used for ALM The fair value of securities and trading assets and liabilities is based on quoted market prices, dealer quotes or pricing models. Fair value amounts for derivative instruments, such as options, futures and forward rate contracts, commitments to purchase and sell foreign exchange, and foreign currency swaps, are similarly determined. The fair value of overthecounter interest rate swaps is the discounted value of projected future cash flows, adjusted for other factors including, but not limited to and if applicable, optionality and implied volatilities, as well as counterparty credit.
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Loans and commitments For residential mortgage loans, fair value is estimated using discounted cash flow analyses, adjusting where appropriate for prepayment estimates, using interest rates currently being offered for loans with similar terms and maturities to borrowers. To determine the fair value of other types of loans, BNY Mellon uses discounted future cash flows using current market rates. The fair value of commitments to extend credit, standby letters of credit and commercial letters of credit is based upon the cost to settle the commitment. Other financial assets Fair value is assumed to equal carrying value for these assets due to their short maturity. Deposits, borrowings and longterm debt The fair value of noninterestbearing deposits and payables to customers and brokerdealers is assumed to be their carrying amount. The fair value of interestbearing deposits, borrowings and longterm debt is based upon current rates for instruments of the same remaining maturity or quoted market prices for the same or similar issues.
Summary of financial instruments (in millions) Assets: Interestbearing deposits with banks Securities Trading assets Loans and commitments Derivatives used for ALM Other financial assets Total financial assets Assets of discontinued operations Assets of consolidated asset management funds primarily trading Nonfinancial assets Total assets Liabilities: Noninterestbearing deposits Interestbearing deposits Payables to customers and brokerdealers Borrowings Longterm debt Trading liabilities Derivatives used for ALM Total financial liabilities Liabilities of discontinued operations Liabilities of consolidated asset management funds primarily trading Nonfinancial liabilities Total liabilities Dec. 31, 2010 Carrying Estimated amount fair value $ 50,200 72,440 6,276 34,163 834 31,167 195,080 278 14,766 37,135 247,259 38,703 106,636 9,962 8,599 16,517 6,911 44 187,372 13,563 13,167 214,102 $ $ 50,253 71,944 6,276 34,241 834 31,167 194,715 278 14,766 $ 38,703 107,417 9,962 8,599 17,120 6,911 44 188,756 13,563 $ $ $ Dec. 31, 2009 Carrying Estimated amount fair value 56,302 60,461 6,001 32,673 422 18,793 174,652 2,242 35,330 212,224 33,477 101,573 10,721 3,922 17,234 6,396 71 173,394 1,608 8,219 183,221 $ $ 56,374 60,544 6,001 32,712 422 18,793 174,846 2,242
$ $
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The table below summarizes the carrying amount of the hedged financial instruments and the related notional amount of the hedge and estimated fair value (unrealized gain (loss)) of the derivatives that were linked to these items:
Unrealized
(in millions) At Dec. 31, 2010: Securities heldforsale Deposits Longterm debt At Dec. 31, 2009: Loans Securities heldforsale Deposits Longterm debt Note 23Fair value measurement
Gain $ 2,170 27 12,540 $ 1 216 26 12,378 amount $ 2,168 25 11,774 $ 1 211 25 11,599 $ 51 3 780 $ 422
The guidance related to Fair Value Measurement, included in ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date and establishes a framework for measuring fair value. It establishes a threelevel hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and expands the disclosures about instruments measured at fair value. ASC 820 requires consideration of a companys own creditworthiness when valuing liabilities. The standard provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The objective is to determine from weighted indicators of fair value a reasonable point within the range that is most representative of fair value under current market conditions. Determination of fair value Following is a description of our valuation methodologies for assets and liabilities measured at fair value. We have established processes for determining fair values. Fair value is based upon quoted market prices, where available. For financial instruments where quotes from recent exchange transactions are not available, we determine fair value based on discounted cash flow analysis, comparison to similar instruments, and the use of financial models. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Modelbased pricing uses inputs of observable prices for interest rates, foreign exchange rates, option volatilities and other factors. Models are benchmarked and validated by an independent internal risk management function. Our valuation process takes into consideration factors such as counterparty credit quality, liquidity, concentration concerns, observability of model parameters and the results of stress tests. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. Most derivative contracts are valued using internally developed models which are calibrated to observable market data and employ standard market pricing theory for their valuations. An initial riskneutral valuation is performed on each position assuming timediscounting based on a AA credit curve. Then, to arrive at a fair value that incorporates counterparty credit risk, a credit adjustment is made to these results by discounting each trades expected exposures to the counterparty using the counterpartys credit spreads, as implied by the credit default swap market. We also adjust expected liabilities to the counterparty using BNY Mellons own credit spreads, as implied by the credit default swap market. Accordingly, the valuation of our derivative position is sensitive to the current changes in our own credit spreads as well as those of our counterparties. In certain cases, we may face additional costs to exit large risk positions or recent prices may not be observable for instruments that trade in inactive or less active markets. The costs to exit large risk positions are based on evaluating the negative change in the market during the time it would take for us to bring those positions to normal market levels for those instruments. Upon evaluating the uncertainty in valuing financial instruments subject to liquidity issues, we make an adjustment to their value. The
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determination of the liquidity adjustment includes the availability of external quotes, the time since the latest available quote and the price volatility of the instrument. Certain parameters in some financial models are not directly observable and, therefore, are based on managements estimates and judgments. These financial instruments are normally traded less actively. Examples include certain credit products where parameters such as correlation and recovery rates are unobservable. We apply valuation adjustments to mitigate the possibility of error and revision in the model based estimate value. The methods described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value. Valuation hierarchy ASC 820 establishes a threelevel valuation hierarchy for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are described below. Level 1: Inputs to the valuation methodology are recent quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 assets and liabilities include debt and equity securities and derivative financial instruments actively traded on exchanges and U.S. Treasury securities and U.S. Government securities that are actively traded in highly liquid over the counter markets. Level 2: Observable inputs other than Level 1 prices, for example, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 assets and liabilities include debt instruments that are traded less frequently than exchange traded securities and derivative instruments whose model inputs are observable in the market or can be corroborated by market observable data. Examples in this category are certain variable and fixed rate agency and nonagency securities, corporate debt securities and derivative contracts. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Examples in this category include interests in certain securitized financial assets, certain private equity investments, and derivative contracts that are highly structured or longdated. A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Loans and unfunded lendingrelated commitments Where quoted market prices are not available, we generally base the fair value of loans and unfunded lendingrelated commitments on observable market prices of similar instruments, including bonds, credit derivatives and loans with similar characteristics. If observable market prices are not available, we base the fair value on estimated cash flows adjusted for credit risk which are discounted using an interest rate appropriate for the maturity of the applicable loans or the unfunded commitments. Unrealized gains and losses on unfunded lending commitments carried at fair value are classified in Other assets and Other liabilities, respectively. Loans and unfunded lending commitments carried at fair value are generally classified within Level 2 of the valuation hierarchy. Securities Where quoted prices are available in an active market, we classify the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchangetraded equities. If quoted market prices are not available, we estimate fair values using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain agency and
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nonagency mortgagebacked securities, commercial mortgagebacked securities and European floating rate notes. For securities where quotes from recent transactions are not available for identical securities, we determine fair value primarily based on pricing sources with reasonable levels of price transparency that employ financial models or obtain comparison to similar instruments to arrive at consensus prices. Specifically, the pricing sources obtain recent transactions for similar types of securities (e.g., vintage, position in the securitization structure) and ascertain variables such as discount rate and speed of prepayment for the types of transaction and apply such variables to similar types of bonds. We view these as observable transactions in the current marketplace and classify such securities as Level 2. Pricing sources discontinue pricing any specific security whenever they determine there is insufficient observable data to provide a good faith opinion on price. In addition, we have significant investments in more actively traded agency RMBS and the pricing sources derive the prices for these securities largely from quotes they obtain from three major interdealer brokers. The pricing sources receive their daily observed trade price and other information feeds from the interdealer brokers. For securities with bond insurance, the financial strength of the insurance provider is analyzed and that information is included in the fair value assessment for such securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, we classify those securities in Level 3 of the valuation hierarchy. Securities classified within Level 3 primarily include other retained interests in securitizations, securities of state and political subdivisions and other debt securities. At Dec. 31, 2010, approximately 99% of our securities were valued by pricing sources with reasonable levels of price transparency. Less than 1% of our securities were priced based on economic models and nonbinding dealer quotes, and are included in Level 3 of the ASC 820 hierarchy. Consolidated collateralized loan obligations BNY Mellon values assets in consolidated CLOs using observable market prices observed from the secondary loan market. The returns to the note holders are solely dependent on the assets and accordingly equal the value of those assets. Based on the structure of the CLOs, the valuation of the assets is attributable to the senior note holders. Changes in the values of assets and liabilities are reflected in the income statement as investment income and interest of asset management fund note holders, respectively. Derivatives We classify exchangetraded derivatives valued using quoted prices in Level 1 of the valuation hierarchy. Examples include exchangedtraded equity and foreign exchange options. Since few other classes of derivative contracts are listed on an exchange, most of our derivative positions are valued using internally developed models that use as their basis readily observable market parameters and we classify them in Level 2 of the valuation hierarchy. Such derivatives include basic interest rate swaps and options and credit default swaps. Derivatives valued using models with significant unobservable market parameters and that are traded less actively or in markets that lack twoway flow, are classified in Level 3 of the valuation hierarchy. Examples include longdated interest rate or currency swaps, where swap rates may be unobservable for longer maturities; and certain credit products, where correlation and recovery rates are unobservable. Certain interest rate swaps with counterparties that are highly structured entities require significant judgment and analysis to adjust the value determined by standard pricing models. The fair value of these interest rate swaps compose less than 1% of our derivative financial instruments. Additional disclosures of derivative instruments are provided in Note 26 to the Consolidated Financial Statements. Seed capital In our Asset Management business we manage investment assets, including equities, fixed income, money market and alternative investment funds for institutions and other investors; as part of that activity we make seed capital investments in certain funds. Seed capital is included in trading assets, securities availableforsale and other assets, depending on the
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nature of the investment. When applicable, we value seed capital based on the published net asset value (NAV) of the fund. We include funds in which ownership interests in the fund are publicly traded in an active market and institutional funds in which investors trade in and out daily in Level 1 of the valuation hierarchy. We include openend funds where investors are allowed to sell their ownership interest back to the fund less frequently than daily and where our interest in the fund contains no other rights or obligations in Level 2 of the valuation hierarchy. However, we generally include investments in funds that allow investors to sell their ownership interest back to the fund less frequently than monthly in Level 3, unless actual redemption prices are observable. For other types of investments in funds, we consider all of the rights and obligations inherent in our ownership interest, including the reported NAV as well as other factors that affect the fair value of our interest in the fund. To the extent the NAV measurements reported for the investments are based on unobservable inputs or include other rights and obligations (e.g., obligation to meet cash calls), we generally classify them in Level 3 of the valuation hierarchy. Certain interests in securitizations For certain interests in securitizations which are classified in securities availableforsale and other assets, we use discounted cash flow models which generally include assumptions of projected finance charges related to the securitized assets, estimated net credit losses, prepayment assumptions and estimates of payments to thirdparty investors. When available, we compare our fair value estimates and assumptions to market activity and to the actual results of the securitized portfolio. Changes in these assumptions may significantly impact our estimate of fair value of the interests in securitizations; accordingly, we generally classify them in Level 3 of the valuation hierarchy. Private equity investments Our other business includes holdings of nonpublic private equity investment through funds managed by third party investment managers. We value private equity investments initially based upon the transaction price, which we subsequently adjust to reflect expected exit values as evidenced by financing and sale transactions with third parties or through ongoing reviews by the investment managers. Nonpublic private equity investments are included in Level 3 of the valuation hierarchy. Private equity investments also include publicly held equity investments, generally obtained through the initial public offering of privately held equity investments. These equity investments are often held in a partnership structure. Publicly held investments are marked to market at the quoted public value less adjustments for regulatory or contractual sales restrictions or adjustments to reflect the difficulty in selling a partnership interest. Discounts for restrictions are quantified by analyzing the length of the restriction period and the volatility of the equity security. Publicly held investments are primarily classified in Level 2 of the valuation hierarchy. The following tables present the financial instruments carried at fair value at Dec. 31, 2010 and 2009, by caption on the consolidated balance sheet and by ASC 820 valuation hierarchy (as described above). We have included credit ratings information in certain of the tables because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications could result in increased risk for us. There were no transfers between Level 1 and Level 2 during 2010.
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Assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2010 (dollar amounts in millions) Availableforsale securities: U.S. Treasury U.S. Government agencies Sovereign debt State and political subdivisions Agency RMBS AltA RMBS Prime RMBS Subprime RMBS Other RMBS Commercial MBS Assetbacked CLOs Other assetbacked securities Equity securities (b) Money markets funds Other debt securities (b) Foreign covered bonds AltA RMBS (c) Prime RMBS (c) Subprime RMBS (c) Total securities availableforsale Trading assets: Debt and equity instruments (d) Derivative assets: Interest rate Foreign exchange Equity Other Total derivative assets Total trading assets Loans Other assets (e) Subtotal assets of operations at fair value Percent of assets prior to netting Assets of consolidated asset management funds: Trading assets Other assets Total assets of consolidated asset management funds Total assets Percent of assets prior to netting Trading liabilities: Debt and equity instruments Derivative liabilities: Interest rate Foreign exchange Equity Other Total derivative liabilities Total trading liabilities Longterm debt Other liabilities (f) Subtotal liabilities at fair value Percent of liabilities prior to netting Liabilities of consolidated asset management funds: Trading liabilities Other liabilities Total liabilities of consolidated asset management funds Total liabilities Percent of liabilities prior to netting (a) (b) (c) (d) (e) (f) (g) Level 1 $12,609 27 18 2,538 91 2,260 17,543 1,598 272 3,561 79 1 3,913 5,511 52 $23,106 26.9% 279 499 778 $23,884 23.8% $ 1,277 3,648 54 3,702 4,979 115 $ 5,094 22.2% 2 2 $ 5,096 14.0% Level 2 $ 1,005 8,522 498 19,727 470 1,227 508 1,331 2,639 249 539 29 3,193 608 2,513 1,825 158 45,041 710 15,260 100 370 1 15,731 16,441 910 $62,392 72.7% 13,842 144 13,986 $76,378 75.9% $ 443 Level 3 $ 10 58 68 32 119 119 151 6 113 $ 338 0.4% 2 2 $ 340 0.3% $ 6 Netting (a) $ N/A N/A N/A N/A (15,827) (g) (15,827) $(15,827) $(15,827) $ Total carrying value $ 12,609 1,005 8,549 508 19,727 470 1,227 508 1,331 2,639 249 539 47 2,538 3,342 2,868 2,513 1,825 158 62,652 2,340
$ $
16,126 59 304 4 16,493 16,936 269 473 $17,678 77.0% 13,561 13,561 $31,239 85.5%
ASC 815 permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. Includes seed capital and certain interests in securitizations. Previously included in the Grantor Trust. Includes loans classified as trading assets and certain interests in securitizations. Includes private equity investments, seed capital and derivatives in designated hedging relationships. Includes the fair value adjustment for certain unfunded lendingrelated commitments and derivatives in designated hedging relationships and support agreements. Netting cannot be disaggregated by product.
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Details of certain items measured at fair value on a recurring basis at Dec. 31, 2010 (dollar amounts in millions)
AltA RMBS, originated in: 2007 2006 2005 2004 and earlier Total AltA RMBS Prime RMBS, originated in: 2007 2006 2005 2004 and earlier Total prime RMBS Subprime RMBS, originated in: 2007 2005 2004 and earlier Total subprime RMBS Commercial MBSDomestic, originated in: 2007 2006 2005 2004 and earlier Total commercial MBSDomestic Foreign covered bonds: Germany Canada Total foreign covered bonds European Floating Rate Notes: United Kingdom Netherlands Other Total European Floating Rate Notes Sovereign debt: United Kingdom Germany France Netherlands Other Total sovereign debt AltA RMBS (b), originated in: 2007 2006 2005 2004 and earlier Total AltA RMBS (b) Prime RMBS (b), originated in: 2007 2006 2005 2004 and earlier Total Prime RMBS (b) Subprime RMBS (b), originated in: 2007 2006 2005 2004 and earlier Total Subprime RMBS (b) (a)
Ratings AAA/ AA
% 70 11% 50% 39 79 52% % 25 74 64% 83% 90 100 100 92% 99% 100 100% 99% 78 73 85% 100% 100 100 100 93 100% % 2 22 3% % 2 49 2% % 53 14%
A+/ A
% 25 4% 28% 39 12 16% 8% 12 13 13% 8% 10 5% 1% % 1% 22 27 15% % 6 % % 46 4% % 5 47 3% % %
BBB+/ BBB
% 5 1% 7% 14 6 8% 92% 12 5 7% 9% 3% % % % % % % % 4 19 3% % 1 % % %
$ $
685 582 489 528 $ 2,284 $ 2,260 (a) 608 $ 2,868 848 150 909 $ 1,907 $ 3,214 3,065 1,845 396 29 $ 8,549 792 660 820 241 $ 2,513 $ 679 431 672 43 $ 1,825 15 89 13 41 158 $ $
At Dec. 31, 2010, the German foreign covered bonds were considered Level 1 in the valuation hierarchy. All other assets in the table above are considered Level 2 assets in the valuation hierarchy. Previously included in the Grantor Trust.
(b)
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Assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2009 (dollar amounts in millions) Availableforsale securities: U.S. Treasury U.S. Government agencies State and political subdivisions Agency RMBS AltA RMBS Prime RMBS Subprime RMBS Other RMBS Commercial MBS Assetbacked CLOs Other assetbacked securities Equity securities (b) Other debt securities (b) Grantor Trust Class B certificates Total availableforsale securities Trading assets: Debt and equity instruments (c) Derivative assets Total trading assets Loans Other assets (d) Total assets at fair value Percent of assets prior to netting Trading liabilities: Debt and equity instruments Derivative liabilities Total trading liabilities Other liabilities (e) Total liabilities at fair value Percent of liabilities prior to netting Level 1 $ 6,378 461 76 6,915 524 2,779 3,303 2 14 $10,234 14.4% $ 442 2,850 3,292 2 $ 3,294 17.0% Level 2 $ 1,260 520 18,455 537 1,512 447 1,770 2,590 383 836 860 11,331 4,160 44,661 Level 3 $ 6 50 56 Netting (a) $ Total carrying value $ 6,378 1,260 520 18,455 537 1,512 447 1,770 2,590 389 836 1,321 11,457 4,160 51,632 1,439 4,562 6,001 39 863 58,535 1,194 5,202 6,396 610 7,006
745 14,317 15,062 12 685 $60,420 84.8% $ 752 14,671 15,423 605 $16,028 82.5%
$ $
(a) ASC 815 permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. (b) Includes seed capital and certain interests in securitizations. (c) Includes loans classified as trading assets and certain interests in securitizations. (d) Includes private equity investments, seed capital and derivatives in designated hedging relationships. (e) Includes the fair value adjustment for certain unfunded lendingrelated commitments and derivatives in designated hedging relationships and support agreements.
Changes in Level 3 fair value measurements The tables below include a roll forward of the balance sheet amounts for the years ended Dec. 31, 2010 and 2009 (including the change in fair value), for financial instruments classified in Level 3 of the valuation hierarchy. Our classification of a financial instrument in Level 3 of the valuation hierarchy is based on the significance of the unobservable factors to the overall fair value measurement. However, these instruments generally include other observable components that are actively quoted or validated to third party sources; accordingly, the gains and losses in the table below include changes in fair value due to observable parameters as well as the unobservable parameters in our valuation methodologies. We also frequently manage the risks of Level 3 financial instruments using securities and derivatives positions that are Level 1 or 2 instruments which are not included in the table; accordingly, the gains or losses below do not reflect the effect of our risk management activities related to the Level 3 instruments. In accordance with ASC 820, BNY Mellon adjusts the discount rate on securities to reflect what they would sell for in an orderly market (model price) and
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compares the model prices to prices provided by pricing sources. If the difference between the model price and the prices provided by pricing sources is outside of established thresholds, the securities are included in Level 3. In 2009, BNY Mellon transferred securities from Level 3 to Level 2 because the price of the securities provided by the pricing sources converged with the model price of the securities determined by BNY Mellon.
Fair value measurements using significant unobservable inputs year ended Dec. 31, 2010 Fair value Dec. 31, 2009 $ 6 50 56 170 146 316 25 164 561 (92) (3) (95)
Total realized/ unrealized gains/ (losses) recorded in Comprehensive income $ (a) Purchases, issuances and settlements, net $ 8 8 3 2 5 (18) (4) (9) (6) (24) (30)
Transfers in/(out) of Level 3 $ (6) 9 (2) 1 (140) 15 (125) (3) (60) (187) 2 2
(in millions) Availableforsale securities: Assetbacked CLOs State and political subdivisions Other debt securities Total availableforsale Trading assets: Debt and equity instruments Derivative assets Total trading assets Loans Other assets Total assets Trading liabilities: Debt and equity instruments Derivative liabilities Other liabilities Total liabilities
Income $ 1 2 3 (a) (1) (44) (45) (b) 2 13 (c) $(27) $ (57) (b) 1 (c) $(56)
Change in unrealized gains and (losses) Fair value related to Dec. 31, instruments held at Dec. 31, 2010 2010 $ 10 58 68 32 119 151 6 113 338 (6) (171) (2) (179) $ 1 2 3 28 28 31 (122) (122)
$ $ $
$ $ $
$ $ $
$ $ $
$ $ $
$ $ $
Fair value measurements using significant unobservable inputs year ended Dec. 31, 2009 Fair value Dec. 31, 2008 $ 22 17 13 357 409 20 83 103 200 712
Total realized/ unrealized gains/ (losses) recorded in Purchases, issuances and settlements, net $ 1 (19) (18) (20) (1) (21) (5) 11 (33) Transfers in/(out) of Level 3 $ (18) (16) (182) (216) 151 17 168 31 (7) (24) 4 3 7
(in millions) Availableforsale securities: Assetbacked CLOs Other assetbacked securities Equity securities Other debt securities Total availableforsale Trading assets: Debt and equity instruments Derivative assets Total trading assets Loans Other assets Total assets Trading liabilities: Derivative liabilities Other liabilities Total liabilities
Income $ (76) (99) (175) (a) 21 51 72 (b) (1) (40) (c) $(144) $ 56 (b) (6) (c) $ 50
Change in unrealized gains and (losses) Fair value related to Dec. instruments 31, held at Dec. 31, 2009 2009 $ 6 50 56 170 146 316 25 164 561 (92) (3) (95) $ 3 (16) (13) (1) (14) (21) (2) (23)
$ $ $
$ $ $
$ $ $
$ $ $
$ $ $
$ (149) $ (149)
(a) Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss) except for the credit portion of OTTI losses which are recorded in securities gains (losses). (b) Reported in foreign exchange and other trading revenue. (c) Reported in foreign exchange and other trading revenue, except for derivatives in designated hedging relationships which are recorded in interest revenue and interest expense.
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Assets and liabilities measured at fair value on a nonrecurring basis Under certain circumstances, we make adjustments to fair value our assets, liabilities and unfunded lendingrelated commitments although they are not measured at fair value on an ongoing basis. An example would be the recording of an impairment of an asset. The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy as of Dec. 31, 2010 and 2009, for which a nonrecurring change in fair value has been recorded during the years ended Dec. 31, 2010 and 2009.
Assets measured at fair value on a nonrecurring basis at Dec. 31, 2010 (in millions) Loans (a) Other assets (b) Total assets at fair value on a nonrecurring basis Level 1 $ $ Level 2 $ 188 6 $ 194 Level 3 $ 53 $ 53 Total carrying value $ 241 6 $ 247
Assets measured at fair value on a nonrecurring basis at Dec. 31, 2009 (in millions) Loans (a) Other assets (b) Total assets at fair value on a nonrecurring basis Level 1 $ $ Level 2 $ 298 4 $ 302 Level 3 $ 91 $ 91 Total carrying value $ 389 4 $ 393
(a) During the years ended Dec. 31, 2010 and 2009, the fair value of these loans was reduced $15 million and $18 million, based on the fair value of the underlying collateral as allowed by ASC 310, Accounting by Creditors for Impairment of a loan, with an offset to the allowance for credit losses. (b) Other assets received in satisfaction of debt. The fair value of these assets was reduced by $1 million in 2010 and less than $1 million in 2009, based on the fair value of the underlying collateral with an offset in other revenue.
Note 24Fair value option ASC 825 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments and written loan commitments not previously carried at fair value. On Jan. 1, 2010, we adopted SFAS No. 167, Amendments to FASB interpretation No. 46(R) (Topic 810), issued by the Financial Accounting Standards Board (FASB). In accordance with the guidance included in ASC 810, we consolidated assets of consolidated asset management funds. The following table presents the assets and liabilities, by type, of consolidated asset management funds. We recorded these assets and liabilities at fair value and they are classified as trading assets and liabilities. Assets and liabilities of consolidated asset management funds, at fair value (in millions) Assets of consolidated asset management funds: Trading assets Other assets Total assets of consolidated asset management funds Liabilities of consolidated asset 2010 Dec. 31, 2009
$ $
management funds: Trading liabilities $ 13,561 $ Other liabilities 2 Total liabilities of consolidated asset management funds $ 13,563 $ Noncontrolling interests of consolidated asset management funds $ 699 $ BNY Mellon values assets in consolidated CLOs using observable market prices observed from the secondary loan market. The returns to the note holders are solely dependent on the assets and accordingly equal the value of those assets. Accordingly, marktomarket best reflects the limited interest BNY Mellon has in the economic performance of the consolidated CLOs. Changes in the values of assets and liabilities are reflected in the income statement as investment income of consolidated asset management funds.
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We have elected the fair value option on $240 million of longterm debt in connection with ASC 810. At Dec. 31, 2010, the fair value of this longterm debt was $269 million. We have also elected the fair value option on approximately $118 million of unfunded lending related commitments. The following table presents the changes in fair value of these unfunded lending related commitments and longterm debt included in foreign exchange and other trading revenue in the consolidated income statement for the years ended Dec. 31, 2010 and 2009.
Foreign exchange and other trading revenue Year ended Dec. 31, (in millions) Loans Longterm debt (a) (a) The change in fair value of the longterm debt is approximately offset by an economic hedge included in trading. 2010 $ (29) 2009 $ 3
The longterm debt is valued using observable market inputs and is included in Level 2 of the ASC 820 hierarchy. Unfunded loan commitments are valued using quotes from dealers in the loan markets, and are included in Level 3 of the ASC 820 hierarchy. The fair market value of unfunded lendingrelated commitments for which the fair value option was elected was a liability of less than $1 million at Dec. 31, 2010 and Dec. 31, 2009 and is included in other liabilities. Note 25Commitments and contingent liabilities In the normal course of business, various commitments and contingent liabilities are outstanding which are not reflected in the accompanying consolidated balance sheets. Our significant trading and offbalance sheet risks are securities, foreign currency and interest rate risk management products, commercial lending commitments, letters of credit, securities lending indemnifications and support agreements. We assume these risks to reduce interest rate and foreign currency risks, to provide customers with the ability to meet credit and liquidity needs, to hedge foreign currency and interest rate risks and to trade for our own account. These items involve, to varying degrees, credit, foreign exchange and interest rate risk not recognized in the balance sheet. Our offbalance sheet risks are managed and monitored in manners similar to those used for onbalance sheet risks. Significant industry concentrations related to credit exposure at Dec. 31, 2010, are disclosed in the Financial institutions portfolio exposure table and the Commercial portfolio exposure table below.
Financial institutions portfolio exposure (in billions) Securities industry Banks Insurance Asset managers Government Other Total Loans $ 3.9 4.2 0.1 0.8 0.2 0.1 $ 9.3
Commercial portfolio exposure (in billions) Services and other Manufacturing Energy and utilities Media and telecom Total Loans $ 0.7 0.4 0.3 0.2 $ 1.6
Major concentrations in securities lending are primarily to brokerdealers and are generally collateralized with cash. Securities lending transactions are discussed below. A summary of our offbalance sheet credit risks, net of participations, at Dec. 31, 2010 and 2009 follows:
Offbalance sheet credit risks (in millions) Lending commitments (a) Standby letters of credit (b) Commercial letters of credit Securities lending indemnifications Support agreements
Dec. 31, 2010 $ 29,100 8,483 512 278,069 116 $ 2009 32,454 11,359 789 247,560 86
(a) (b)
Net of participations totaling $423 million at Dec. 31, 2010 and $541 million at Dec. 31, 2009. Net of participations totaling $1.7 billion at Dec. 31, 2010 and $2.2 billion at Dec. 31, 2009.
Included in lending commitments are facilities that provide liquidity for variable rate taxexempt securities wrapped by monoline insurers. The credit approval for these facilities is based on an assessment of the underlying taxexempt issuer and considers factors other than the financial strength of the monoline insurer.
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The total potential loss on undrawn lending commitments, standby and commercial letters of credit, and securities lending indemnifications is equal to the total notional amount if drawn upon, which does not consider the value of any collateral. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. A summary of lending commitment maturities is as follows: $10.5 billion less than one year; $18.3 billion in one to five years and $0.3 billion over five years. Standby letters of credit (SBLC) principally support corporate obligations. As shown in the offbalance sheet credit risks table, the maximum potential exposure of SBLCs was $8.5 billion at Dec. 31, 2010, and $11.4 billion at Dec. 31, 2009, and includes $628 million and $1.0 billion that were collateralized with cash and securities at Dec. 31, 2010 and 2009, respectively. At Dec. 31, 2010, approximately $6.1 billion of the SBLCs will expire within one year and the remaining $2.4 billion will expire within one to five years. We must recognize, at the inception of standby letters of credit and foreign and other guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by ASC 460 Guarantees, the fair value of the liability, which was recorded with a corresponding asset in other assets, was estimated as the present value of contractual customer fees. The estimated liability for losses related to these commitments and SBLCs, if any, is included in the allowance for unfunded commitments. The allowance for unfunded commitments was $73 million at Dec. 31, 2010, and $125 million at Dec. 31, 2009. Payment/performance risk of SBLCs is monitored using both historical performance and internal ratings criteria. BNY Mellons historical experience is that SBLCs typically expire without being funded. SBLCs below investment grade are monitored closely for payment/performance risk. The table below shows SBLCs by investment grade:
Standby letters of credit Investment grade Noninvestment grade 2010 89% 11%
A commercial letter of credit is normally a shortterm instrument used to finance a commercial contract for the shipment of goods from a seller to a buyer. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction. As a result, the total contractual amounts do not necessarily represent future cash requirements. Commercial letters of credit totaled $512 million at Dec. 31, 2010, compared with $789 million at Dec. 31, 2009. A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security (typically through an agent, in our case, The Bank of New York Mellon) to a borrower, usually a brokerdealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract, which normally matures in less than 90 days. We typically lend securities with indemnification against broker default. We generally require the borrower to provide 102% cash collateral, which is monitored on a daily basis, thus reducing credit risk. Market risk can also arise in securities lending transactions. These risks are controlled through policies limiting the level of risk that can be undertaken. Securities lending transactions are generally entered into only with highly rated counterparties. Securities lending indemnifications were secured by collateral of $285 billion at Dec. 31, 2010, and $254 billion at Dec. 31, 2009. We recorded $150 million of fee revenue from securities lending transactions in 2010 compared with $259 million in 2009. We expect many of these guarantees to expire without the need to advance any cash. The revenue associated with guarantees frequently depends on the credit rating of the obligor and the structure of the transaction, including collateral, if any. Our potential exposure to support agreements was approximately $116 million at Dec. 31, 2010, compared with $86 million at Dec. 31, 2009. Potential support agreement exposure is determined based on the securities subject to these agreements being valued at zero and the NAV of the related funds declining below established thresholds. This exposure includes agreements covering Lehman securities, as well as other client support agreements.
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Trust and transfer agent activities BNY Mellon maintains several escrow accounts in which deposits are received from clients in connection with corporate trust and dividend and interest payment services. Since BNY Mellon acts only as a transfer and trust agent for these funds, neither the assets nor the corresponding liability are included in these financial statements. In connection with the performance of these services, BNY Mellon invests such funds in interestearning investments solely in an agency capacity. The interest earned is recognized in the financial statements as interest income. Customer balances maintained in an agency capacity and not reflected on BNY Mellons balance sheets totaled approximately $275 million at Dec. 31, 2010, and $1.4 billion at Dec. 31, 2009. In addition, as a result of the GIS acquisition, our clients maintain approximately $6.8 billion of custody cash on deposit with other institutions. Revenue generated from these balances is included in other revenue on the income statement. These deposits are expected to transition to BNY Mellon by the end of 2011. Operating leases Net rent expense for premises and equipment was $314 million in 2010, $327 million in 2009 and $362 million in 2008. At Dec. 31, 2010, we were obligated under various noncancelable lease agreements, some of which provide for additional rents based upon real estate taxes, insurance and maintenance and for various renewal options. A summary of the future minimum rental commitments under noncancelable operating leases, net of related sublease revenue, is as follows: 2011$311 million; 2012$284 million; 2013$266 million; 2014$225 million; and 2015$202 million; and 2016 through 2030$937 million. Other We have provided standard representations for underwriting agreements, acquisition and divestiture agreements, sales of loans and commitments, and other similar types of arrangements and customary indemnification for claims and legal proceedings related to providing financial services. Insurance has been purchased to mitigate certain of these risks. We are a minority equity investor in, and member of, several industry clearing or settlement exchanges through which foreign exchange, securities or other transactions settle. Certain of these industry clearing or settlement exchanges require their members to guarantee their obligations and liabilities or to provide financial support in the event other partners do not honor their obligations. It is not possible to estimate a maximum potential amount of payments that could be required with such agreements. Legal proceedings In the ordinary course of business, BNY Mellon and its subsidiaries are routinely named as defendants in or made parties to pending and potential legal actions and regulatory matters. Claims for significant monetary damages are often asserted in many of these legal actions, while claims for disgorgement, penalties and/or other remedial sanctions may be sought in regulatory matters. It is inherently difficult to predict the eventual outcomes of such matters given their complexity and the particular facts and circumstances at issue in each of these matters. However, on the basis of our current knowledge and understanding, we do not believe that judgments or settlements, if any, arising from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage), will have a material adverse effect on the consolidated financial position or liquidity of BNY Mellon, although they could have a material effect on net income in a given period. In view of the inherent unpredictability of outcomes in litigation and regulatory matters, particularly where (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel legal theories or a large number of parties, as a matter of course there is considerable uncertainty surrounding the timing or ultimate resolution of litigation and regulatory matters, including a possible eventual loss, fine, penalty or business impact, if any, associated with each such matter. In accordance with applicable accounting guidance, BNY Mellon establishes reserves for litigation and regulatory matters when those matters proceed to a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. BNY Mellon will continue to monitor such matters for developments that could affect the amount of the reserve, and will adjust the reserve amount as appropriate. If the loss contingency in question is not both probable and reasonably estimable, BNY Mellon does not establish a reserve and the matter will continue to be monitored for any developments that would make the loss contingency both probable and
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reasonably estimable. BNY Mellon believes that its accruals for legal proceedings are appropriate and, in the aggregate, are not material to the consolidated financial position of BNY Mellon, although future accruals could have a material effect on net income in a given period. For certain of those matters described herein for which a loss contingency may, in the future, be reasonably possible (whether in excess of a related accrued liability or where there is no accrued liability), BNY Mellon is currently unable to estimate a range of reasonably possible loss. For those matters where BNY Mellon is able to estimate a reasonably possible loss, exclusive of those matters described herein that are subject to the accounting and reporting requirements of ASC 740 (FASB Interpretation 48)(FIN48), the aggregate range of such reasonably possible loss is between $200 million to $500 million in excess of the accrued liability (if any) related to those matters. The following describes certain judicial, regulatory and arbitration proceedings involving BNY Mellon: Sentinel Matters As previously disclosed, on Jan. 18, 2008, The Bank of New York Mellon filed a proof of claim in the Chapter 11 bankruptcy proceeding of Sentinel Management Group, Inc. (Sentinel) pending in federal court in the Northern District of Illinois, seeking to recover approximately $312 million loaned to Sentinel and secured by securities and cash in an account maintained by Sentinel at The Bank of New York Mellon. On March 3, 2008, the bankruptcy Trustee filed an adversary complaint against The Bank of New York Mellon seeking to disallow The Bank of New York Mellons claim and seeking damages for allegedly aiding and abetting Sentinel insiders in misappropriating customer assets and improperly using those assets as collateral for the loan. In a decision dated Nov. 3, 2010, the court found for The Bank of New York Mellon and against the Trustee, holding that The Bank of New York Mellons loan to Sentinel is valid, fully secured, and not subject to equitable subordination. The bankruptcy Trustee appealed this decision on Dec. 1, 2010. As previously disclosed, in November 2009, the Division of Enforcement of the U.S. Commodities Futures Trading Commission (CFTC) indicated that it is considering a recommendation to the CFTC that it file a civil enforcement action against The Bank of New York Mellon for possible violations of the Commodity Exchange Act and CFTC regulations in connection with its relationship to Sentinel. The Bank of New York Mellon responded in writing to the CFTC on Jan. 29, 2010 and provided an explanation as to why an enforcement action is unwarranted. Auction Rate Securities Matters As previously disclosed, in April 2008, BNY Mellon notified the SEC that Mellon Financial Markets LLC (MFM) placed orders on behalf of certain issuers to purchase their own Auction Rate Securities (ARS). The Texas State Securities Board, Florida Office of Financial Regulation and the New York State Attorney General began investigating this matter in approximately October 2008 and are focused on whether and to what extent the issuers orders had the effect of reducing the clearing rate and preventing failed auctions. These investigations, with which MFM is fully cooperating, are ongoing. As previously disclosed, in February and April 2009, two institutional customers filed lawsuits in Texas state District Court for Dallas County, and California state Superior Court for Orange County. A third institutional customer filed an arbitration proceeding in December 2008, alleging misrepresentations and omissions in the sale of ARS. Together, these three customers seek rescission of approximately $68 million of ARS, damages of approximately $20 million, and interest and attorneys fees. Agency Cross Trading Matter As previously disclosed, on July 22, 2008, BNY Mellon notified FINRA and the SEC that employees of BNY Mellon Securities LLC, a brokerdealer subsidiary of the Company, which executed orders to purchase and sell securities on behalf of Mellon Investor Services LLC, failed to comply with certain best execution and regulatory requirements in connection with agency cross trades. On Jan. 14, 2011, the SEC announced the settlement of its subsequent action against BNY Mellon Securities LLC, finding that it had failed to supervise traders on its equity desk, censuring BNY Mellon Securities LLC and imposing monetary sanctions totaling $24 million. Securities Lending Matters As previously disclosed, BNY Mellon or its affiliates have been named as defendants in a number of lawsuits initiated by participants in BNY Mellons securities lending program, which is a part of BNY Mellons Asset Servicing business. The lawsuits were filed on various dates from December 2008 to 2011,
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and are currently pending in courts in Oklahoma, New York, Washington, California and South Carolina and in commercial court in London. The complaints assert contractual, statutory, and common law claims, including claims for negligence and breach of fiduciary duty. The plaintiffs allege losses in connection with the investment of securities lending collateral, including losses related to investments in Sigma Finance Inc., Lehman Brothers Holdings, Inc. and certain assetbacked securities, and seek damages as to those losses. Two of the pending cases seek to proceed as class actions. Matters Relating To Bernard L. Madoff As previously disclosed, on May 11, 2010, the New York State Attorney General commenced a civil lawsuit against Ivy Asset Management LLC (Ivy), a subsidiary of BNY Mellon that manages primarily fundsofhedgefunds, and two of its former officers in New York state court. The lawsuit alleges that Ivy, in connection with its role as subadvisor to investment managers whose clients invested with Madoff, did not disclose certain material facts about Madoff. The complaint seeks an accounting of compensation received from January 1997 to the present by the Ivy defendants in connection with the Madoff investments, and unspecified damages, including restitution, disgorgement, costs and attorneys fees. As previously disclosed, on Oct. 21, 2010, the U.S. Department of Labor commenced a civil lawsuit against Ivy, two of its former officers, and others in federal court in the Southern District of New York. The lawsuit alleges that Ivy violated the Employee Retirement Income Security Act (ERISA) by failing to disclose certain material facts about Madoff to investment managers subadvised by Ivy whose clients included employee benefit plan investors. The complaint seeks disgorgement and damages. On Dec. 8, 2010, the Trustee overseeing the Madoff liquidation sued many of the same defendants in bankruptcy court in New York, seeking to avoid withdrawals from Madoff investments made by various fundsoffunds (including six fundsoffunds managed by Ivy). As previously disclosed, Ivy or its affiliates have been named in a number of civil lawsuits filed beginning Jan. 27, 2009 relating to certain investment funds that allege losses due to the Madoff investments. Ivy acted as a subadvisor to the investment managers of some of those funds. Plaintiffs assert various causes of action including securities and commonlaw fraud. Certain of the cases seek to proceed as class actions and/or to assert derivative claims on behalf of the funds. Most of the cases have been consolidated in two actions in federal court in the Southern District of New York, with certain cases filed in New York state Supreme Court for New York and Nassau counties. Medical Capital Litigations As previously disclosed, The Bank of New York Mellon has been named as a defendant in a number of putative class actions and nonclass actions brought by numerous plaintiffs in connection with its role as indenture trustee for debt issued by affiliates of Medical Capital Corporation. The actions, filed in late 2009 and currently pending in federal court in the Central District of California, allege that The Bank of New York Mellon breached its fiduciary and contractual obligations to the holders of the underlying securities, and seek unspecified damages. Foreign Exchange Matters As previously disclosed, beginning in December 2009, certain governmental authorities have requested information or served subpoenas on BNY Mellon seeking information relating to foreign exchange transactions in connection with custody services BNY Mellon provides to certain clients, including certain governmental entities and public pension plans. BNY Mellon is cooperating with these inquiries. In January 2011, the Virginia Attorney General filed a Notice of Intervention in a lawsuit filed in Virginia Circuit Court, Fairfax County by a private party under the Virginia Fraud Against Taxpayers Act. The plaintiff in that action alleges that BNY Mellon improperly charged and reported prices for foreign exchange transactions in connection with custody services BNY Mellon provides to certain Virginia pension funds. In February 2011, the Florida Attorney General filed a Notice of Intervention in a lawsuit filed in Florida Circuit Court, Leon County by a private party under the Florida False Claims Act. The plaintiff in that action alleges that BNY Mellon improperly charged and reported prices for foreign exchange transactions in connection with custody services BNY Mellon provides to a Florida pension fund. German BrokerDealer Litigation As previously disclosed, on various dates from 2004 to 2011, BNY Mellon subsidiary Pershing LLC (Pershing) was named as a defendant in more than 100 lawsuits filed in Germany by plaintiffs who are investors with accounts at German brokerdealers. The plaintiffs allege that Pershing, which had a contractual relationship with the brokerdealers through which the brokerdealers executed options
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transactions on behalf of the brokerdealers clients, should be held liable for the tortious acts of the brokerdealers. Plaintiffs seek to recover their investment losses, interest, and statutory attorneys fees and costs. On March 9, 2010, the German Federal Supreme Court ruled in the plaintiffs favor in one of these cases, and held Pershing liable for a German brokerdealers tortious acts. On July 19, 2010, Pershing appealed that decision to the German Constitutional Court. In another similar case, in December 2010, the Federal Supreme Court denied Pershings appeals, and ruled in favor of 12 plaintiffs, in conformance with its March 2010 decision. On Jan. 25, 2011, the Federal Supreme Court ruled in the plaintiffs favor in four other similar cases, and remanded an additional four cases to the appellate court for further findings. Lyondell Litigation As previously disclosed, in an action filed in New York state Supreme Court for New York County, on Sept. 14, 2010, plaintiffs as holders of debt issued by Basell AF in 2005 allege that The Bank of New York Mellon, as indenture trustee, breached its contractual and fiduciary obligations by executing an intercreditor agreement in 2007 in connection with Basells acquisition of Lyondell Chemical Company. Plaintiffs are seeking damages for their alleged losses resulting from the execution of the 2007 intercreditor agreement that allowed the company to increase the amount of its senior debt. Withholding Tax Matters As previously disclosed, in 2007, in connection with its obligation to file information and withholding tax returns with the IRS for its various businesses, BNY Mellon became aware of certain inconsistencies in supporting documentation and records for certain of BNY Mellons businesses, and initiated an extensive companywide review. We notified the IRS of the inconsistencies and continue to cooperate with the IRS in its review of this matter. Tax Litigation As previously disclosed, in Aug. 17, 2009, BNY Mellon received a Statutory Notice of Deficiency disallowing tax benefits for the 2001 and 2002 tax years in connection with a 2001 transaction that involved the payment of U.K. corporate income taxes that were credited against BNY Mellons U.S. corporate income tax liability. On Nov. 10, 2009, BNY Mellon filed a petition with the U.S. Tax Court contesting the disallowance of the benefits. A trial is currently scheduled for Dec. 5, 2011. The aggregate tax benefit for all six years in question is approximately $900 million, including interest. In the event BNY Mellon is unsuccessful in defending its position, the IRS has agreed not to assess underpayment penalties. Note 26Derivative instruments We use derivatives to manage exposure to market risk, interest rate risk, credit risk and foreign currency risk, to generate profits from proprietary trading and to assist customers with their risk management objectives. The notional amounts for derivative financial instruments express the dollar volume of the transactions; however, credit risk is much smaller. We perform credit reviews and enter into netting agreements to minimize the credit risk of foreign currency and interest rate risk management products. We enter into offsetting positions to reduce exposure to foreign exchange and interest rate risk. Use of derivative financial instruments involves reliance on counterparties. Failure of a counterparty to honor its obligation under a derivative contract is a risk we assume whenever we engage in a derivative contract. In 2010 and 2009, counterparty default losses on both trading and hedging derivatives were $39 million and $4 million, respectively. Reserves for losses incurred in 2010 were established in prior years. As a result, these counterparty default losses did not impact income in 2010. Hedging derivatives We utilize interest rate swap agreements to manage our exposure to interest rate fluctuations. For hedges of investment securities held for sale, deposits and longterm debt, the hedge documentation specifies the terms of the hedged items and the interest rate swaps and indicates that the derivative is hedging a fixedrate item and is a fair value hedge, that the hedge exposure is to the changes in the fair value of the hedged item due to changes in benchmark interest rates, and that the strategy is to eliminate fair value variability by converting fixedrate interest payments to LIBOR. The securities hedged consist of sovereign debt, U.S. Treasury bonds and assetbacked securities, and generally had weighted average lives of 10 years or less at initial purchase. The assetbacked securities are callable six months prior to maturity. The swaps on
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the assetbacked securities are callable six months prior to maturity. The swaps on the sovereign debt and U.S. Treasury bonds are not callable. All of these securities are hedged with pay fixed rate, receive variable rate swaps of the same maturity, repricing and fixed rate coupon. At Dec. 31, 2010, $2.2 billion of securities were hedged with interest rate swaps that had notional values of $2.2 billion. The fixed rate deposits hedged generally have original maturities of 5 to 11 years and are not callable. These deposits are hedged with receive fixed rate, pay variable rate swaps of similar maturity, repricing and fixed rate coupon. The swaps are not callable. At Dec. 31, 2010, $25 million of deposits were hedged with interest rate swaps that had notional values of $25 million. The fixed rate longterm debt hedged generally have original maturities of 5 to 30 years. We issue both callable and noncallable debt. The noncallable debt is hedged with simple interest rate swaps similar to those described for deposits. Callable debt is hedged with callable swaps where the call dates of the swaps exactly match the call dates of the debt. At Dec. 31, 2010, $11.8 billion of debt was hedged with interest rate swaps that had notional values of $11.8 billion. In addition, we enter into foreign exchange hedges. We use forward foreign exchange contracts with maturities of 12 months or less to hedge our Sterling, Euro and Indian Rupee foreign exchange exposure with respect to foreign currency forecasted revenue transactions in entities that have the U.S. dollar as their functional currency. As of Dec. 31, 2010, the hedged forecasted foreign currency transactions and designated forward foreign exchange contract hedges were $270 million (notional), with less than $1 million of pretax losses recorded in other comprehensive income. These losses will be reclassified to income or expense over the next twelve months. We use forward foreign exchange contracts with remaining maturities of ten months or less as hedges against our exposure to Euro, Australian Dollar, Norwegian Krona, and Hong Kong Dollar foreign exchange exposure with respect to interestbearing deposits with banks and their associated forecasted interest revenue. These hedges are designated as cash flow hedges. These hedges are effected such that their maturities and notional values match those of the deposits with banks. As of Dec. 31, 2010, the hedged placements and their designated forward foreign exchange contract hedges were $6.8 billion (notional), with less than $1 million of pretax gain recorded in other comprehensive income. This gain will be reclassified to net interest revenue and other income over the next ten months. Forward foreign exchange contracts are also used to hedge the value of our net investments in foreign subsidiaries. These forward foreign exchange contracts usually have maturities of less than two years. The derivatives employed are designated as hedges of changes in value of our foreign investments due to exchange rates. Changes in the value of the forward foreign exchange contracts offset the changes in value of the foreign investments due to changes in foreign exchange rates. The change in fair market value of these forward foreign exchange contracts is deferred and reported within accumulated translation adjustments in shareholders equity, net of tax. At Dec. 31, 2010, forward foreign exchange contracts with notional amounts totaling $4.8 billion, were designated as hedges. In addition to forward foreign exchange contracts, we also designate nonderivative financial instruments as hedges of our net investments in foreign subsidiaries. Those nonderivative financial instruments designated as hedges of our net investments in foreign subsidiaries were all longterm liabilities of BNY Mellon in various currencies, and, at Dec. 31, 2010, had a combined U.S. dollar equivalent value of $853 million. Ineffectiveness related to derivatives and hedging relationships was recorded in income as follows:
Ineffectiveness (in millions) Fair value hedges on loans Fair value hedges of securities Fair value hedges of deposits and longterm debt Cash flow hedges Other (a) Total (a) Includes ineffectiveness recorded on foreign exchange hedges.
Year ended Dec. 31, 2009 $(0.1) 0.1 2.2 0.1 $ 2.3
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The following table summarizes the notional amount and credit exposure of our total derivative portfolio at Dec. 31, 2010 and 2009.
Impact of derivative instruments on the balance sheet Notional value Dec. 31, Dec. 31, (in millions) Derivatives designated as hedging instruments (b): Interest rate contracts Foreign exchange contracts Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments (c): Interest rate contracts Equity contracts Credit contracts Foreign exchange contracts Total derivatives not designated as hedging instruments Total derivatives fair value (d) Effect of master netting agreements Fair value after effect of master netting agreements 2010 $ 13,967 11,816 $ 2009 11,836 3,645 Asset derivatives fair value (a) Dec. 31, 2010 $ $ $1,090,718 6,905 681 315,050 $1,030,847 7,710 806 259,402 707 2 709 Dec. 31, 2009 $ $ 408 408
Liability derivatives fair value (a) Dec. 31, 2010 $ $ 33 116 149 Dec. 31, 2009 $ $ 106 97 203
(a) Derivative financial instruments are reported net of cash collateral received and paid of $889 million and $243 million, respectively at Dec. 31, 2010 and $429 million and $160 million, respectively at Dec. 31, 2009. (b) The fair value of asset derivatives and liability derivatives designated as hedging instruments is recorded as other assets and other liabilities, respectively, on the balance sheet. (c) The fair value of asset derivatives and liability derivatives not designated as hedging instruments is recorded as trading assets and trading liabilities, respectively, on the balance sheet. (d) Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815.
At Dec. 31, 2010 approximately $ 399 billion (notional) of interest rate contracts will mature within one year, $ 442 billion between one and five years, and $ 264 billon after five years. At Dec. 31, 2010, approximately $ 313 billion (notional) of foreign exchange contracts will mature within one year, $ 7 billion between one and five years, and $ 7 billion after five years.
Impact of derivative instruments on the income statement (in millions) Amount of gain (loss) recognized in income on derivatives Year ended Dec. 31, 2010 2009 $ 370 $ (406) Amount of gain (loss) recognized in hedged item Year ended Dec. 31, 2010 2009 $ (366) $ 408
Location of gain (loss) recognized in income on hedged item Net interest revenue
Amount of gain or (loss) recognized in OCI on derivative (effective portion) Year ended Dec. 31, 2010 2009 $ $ (7) (134) (1) (1) $ (142) $ (1) Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion) Year ended Dec. 31, 2010 2009 $ $ 26 (6) (135) 6 (1) $ (142) $ 32 Location of gain or (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) Net interest revenue Net interest revenue Other revenue Salary expense
Derivatives in cash flow hedging relationships Interest rate contracts FX contracts FX contracts FX contracts Total
Location of gain or (loss) reclassified from accumulated OCI into income (effective portion) Net interest revenue Net interest revenue Other revenue Salary expense
Amount of gain or (loss) recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing) Year ended Dec. 31, 2010 2009 $ $ $ $
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Amount of gain (loss) recognized in OCI on derivatives (effective portion) Year ended Dec. 31, 2010 2009 $(52) $(298)
Location of gain (loss) reclassified from accumulated OCI into income (effective portion) Net interest revenue
Amount of gain (loss) reclassified from accumulated OCI into income (effective portion) Year ended Dec. 31, 2010 2009 $ $
Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) Other revenue
Amount of gain (loss) Recognized in income on derivatives (Ineffectiveness portion and amount excluded from effectiveness testing) Year ended Dec. 31, 2010 2009 $ (0.2) $ 0.1
Trading activities (including trading derivatives) Our trading activities are focused on acting as a market maker for our customers. The risk from these marketmaking activities and from our own positions is managed by our traders and limited in total exposure as described below. We manage trading risk through a system of position limits, a VAR methodology based on Monte Carlo simulations, stop loss advisory triggers, and other market sensitivity measures. Risk is monitored and reported to senior management by a separate unit on a daily basis. Based on certain assumptions, the VAR methodology is designed to capture the potential overnight pretax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a oneday holding period for most instruments, utilizes a 99% confidence level, and incorporates the nonlinear characteristics of options. The VAR model is one of several statistical models used to develop economic capital results, which is allocated to lines of business for computing riskadjusted performance. As the VAR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and managements assessment of market conditions. Additional stress scenarios based upon historic market events are also performed. Stress tests, by their design, incorporate the impact of reduced liquidity and the breakdown of observed correlations. The results of these stress tests are reviewed weekly with senior management. Revenue from foreign exchange and other trading revenue included the following:
Foreign exchange and other trading revenue (in millions) Foreign exchange Fixed income Credit derivatives (a) Other Total (a) Used as economic hedges of loans. 2010 $ 787 80 (7) 26 $ 886 $ 2009 850 242 (84) 28 $ 1,036 2008 $ 1,197 147 30 88 $ 1,462
Foreign exchange includes income from purchasing and selling foreign currencies and currency forwards, futures, and options. Fixed income reflects results from futures and forward contracts, interest rate swaps, foreign currency swaps, options and fixed income securities. Credit derivatives include revenue from credit default swaps. Other primarily includes income from equity securities and equity derivatives. Counterparty credit risk and collateral We assess credit risk of our counterparties through regular periodic examination of their financial statements, confidential communication with the management of those counterparties and regular monitoring of publicly available credit rating information. This and other information is used to develop proprietary credit rating metrics used to assess credit quality. Collateral requirements are determined after a comprehensive review of the credit quality of each counterparty. Collateral is generally held or pledged in the form of cash or highly liquid government securities. Collateral requirements are monitored and adjusted daily. Additional disclosures concerning derivative financial instruments are provided in Note 23 of the Notes to Consolidated Financial Statements.
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Disclosure of contingent features in overthecounter (OTC) derivative instruments Certain of the BNY Mellons OTC derivative contracts and/or collateral agreements contain provisions that may require us to take certain actions if its public debt rating fell to a certain level. Early termination provisions, or closeout agreements in those contracts could trigger immediate payment of outstanding contracts that are in net liability positions. Certain collateral agreements would require us to immediately post additional collateral to cover some or all of BNY Mellons liabilities to a counterparty. The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions as of Dec. 31, 2010 for three key ratings triggers:
If BNY Mellons rating was changed to: A3/A Baa2/BBB Bal/BB+ (a) The change between rating categories is incremental, not cumulative. Potential closeout exposures (fair value) (a) $ 442 million $ 915 million $ 1,548 million
Additionally, if BNY Mellons debt rating had fallen below investment grade on Dec. 31, 2010, existing collateral arrangements would have required us to have posted an additional $971 million of collateral. Note 27Review of businesses We have an internal information system that produces performance data for our seven businesses along product and service lines. The following discussion of our businesses satisfies the disclosure requirements for ASC 280, Segment Reporting. 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. Business results are subject to reclassification whenever improvements are made in the measurement principles or when organizational changes are made. The accounting policies of the businesses are the same as those described in Note 1 of the Notes to Consolidated Financial Statements. The operations of acquired businesses are integrated with the existing businesses soon after they are completed. As a result of the integration of staff support functions, management of customer relationships, operating processes and the financial impact of funding acquisitions, we cannot precisely determine the impact of acquisitions on income before taxes and therefore do not report it. Information on our businesses is reported on a continuing operations basis for all periods presented. See Note 4 of the Notes to Consolidated Financial Statements for a discussion of discontinued operations.
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We provide data for seven businesses, with certain businesses combined into groups as shown below:
Group of businesses/Business Asset and Wealth Management Group Asset Management business
Primary types of revenue Asset and wealth management fees from: Mutual funds Institutional clients Private clients Performance fees
Distribution and servicing fees Wealth management fees from highnetworth individuals and families, endowments and foundations and related entities. Asset servicing fees, including: Institutional trust and custody fees Brokerdealer services Securities lending
Foreign exchange Issuer services fees, including: Corporate trust Depositary receipts Employee investment plan services
Registered investment advisor services Treasury services fees, including: Global payment services Working capital solutions
Other Businesses
Financingrelated fees Leasing operations Corporate treasury activities Global markets and institutional banking services Business exits
The results of our businesses are presented and analyzed on an internal management reporting basis:
Revenue amounts reflect fee and other revenue generated by each business. Fee and other revenue transferred between businesses under revenue transfer agreements is included within other revenue in each business. Revenues and expenses associated with specific client bases are included in those businesses. For example, foreign exchange activity associated with clients using custody products is allocated to the Asset Servicing business. Net interest revenue is allocated to businesses based on the yields on the assets and liabilities generated by each business. We employ a funds transfer pricing system that matches funds with the specific assets and liabilities of each business based on their interest sensitivity and maturity characteristics.
Support and other indirect expenses are allocated to businesses based on internallydeveloped methodologies. Recurring FDIC expense is allocated to the businesses based on average deposits generated within each business. Special litigation reserves is a corporate level item and is therefore recorded in the Other businesses.
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Management of the investment securities portfolio is a shared service contained in the Other businesses. As a result, gains and losses associated with the valuation of the securities portfolio are included in the Other businesses. Client deposits serve as the primary funding source for our investment securities portfolio. We typically allocate all interest revenue to the businesses generating the deposits. Accordingly, the higher yield related to the restructured investment securities portfolio has been included in the results of the businesses. Support agreement charges are recorded in the business in which the charges occurred. The restructuring charges recorded in 2010, 2009 and 2008 resulted from corporate initiatives and therefore were recorded in the Other businesses. Balance sheet assets and liabilities and their related income or expense are specifically assigned to each business. Businesses with a net liability position have been allocated assets. Goodwill and intangible assets are reflected within individual businesses. M&I expenses are corporate level items and are therefore recorded in the Other businesses. Total revenue includes approximately $2.1 billion in 2010, $1.6 billion in 2009 and $2.0 billion in 2008, of international operations domiciled in the U.K. which is 15%, 21% and 14% of total revenue, respectively.
The following consolidating schedules show the contribution of our businesses to our overall profitability.
For the year ended Dec. 31, 2010 Total Asset and Wealth Management Group $ 3,234 226 3,460 2 2,693 $ 765 22% $ 36,925 Total Institutional Services Group $ 7,378 2,767 10,145 6,660 $ 3,485 34% $ 166,181
(dollar amounts in millions) Fee and other revenue Net interest revenue Total revenue Provision for credit losses Noninterest expense Income before taxes Pretax operating margin (b) Average assets
Asset Management $ 2,644 (a) (1) 2,643 2,082 $ 561 (a) 21% $ 26,307
Total Continuing Operations $ 10,891 (a) 2,925 13,816 11 10,170 $ 3,635 (a) 26% $ 237,436 (c)
(a) Total fee and other revenue and income before taxes for 2010 includes income from consolidated asset management funds of $226 million net of income attributable to noncontrolling interests of $59 million. The net of these income statement line items of $167 million is included above in fee and other revenue. (b) Income before taxes divided by total revenue. (c) Including average assets of discontinued operations of $404 million for 2010, consolidated average assets were $237,840 million.
For the year ended Dec. 31, 2009 Total Asset and Wealth Management Asset Wealth Group Management Management $ 2,247 $ 578 $ 2,825 32 194 226 2,279 772 3,051 1 1 1,915 583 2,498 $ 364 $ 188 $ 552 16% 24% 18% $ 12,564 $ 9,276 $ 21,840 Total Institutional Services Group $ 7,048 2,615 9,663 6,054 $ 3,609 37% $ 156,020
(dollar amounts in millions) Fee and other revenue Net interest revenue Total revenue Provision for credit losses Noninterest expense Income before taxes Pretax operating margin (a) Average assets
Total Continuing Operations $ 4,739 2,915 7,654 332 9,530 $ (2,208) N/M $ 209,939 (b)
(a) Income before taxes divided by total revenue. (b) Including average assets of discontinued operations of $2,188 million in 2009, consolidated average assets were $212,127 million.
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For the year ended Dec. 31, 2008 Total Asset and Wealth Management Asset Wealth Group Management Management $ 2,794 $ 624 $ 3,418 75 200 275 2,869 824 3,693 2,641 639 3,280 $ 228 $ 185 $ 413 8% 23% 11% $ 13,267 $ 10,044 $ 23,311 Total Institutional Services Group $ 8,536 2,847 11,383 7,161 $ 4,222 37% $ 138,280
(dollar amounts in millions) Fee and other revenue Net interest revenue Total revenue Provision for credit losses Noninterest expense Income before taxes Pretax operating margin (a) Average assets (a) (b)
Total Continuing Operations $ 10,714 2,859 13,573 104 11,523 $ 1,946 14% $ 207,516 (b)
Income before taxes divided by total revenue. Including average assets of discontinued operations of $2,441 million in 2008, consolidated average assets were $209,957 million in 2008.
Note 28International operations International activity includes asset and wealth management and securities servicing fee revenue generating businesses, foreign exchange trading activity, loans and other revenue producing assets and transactions in which the customer is domiciled outside of the United States and/or the international activity is resident at an international entity. Due to the nature of our international and domestic activities, it is not possible to precisely distinguish between internationally and domestically domiciled customers. As a result, it is necessary to make certain subjective assumptions such as: Income from continuing operations from international operations is determined after internal allocations for interest revenue, taxes, expenses, and provision and allowance for credit losses. Expense charges to international operations include those directly incurred in connection with such activities, as well as an allocable share of general support and overhead charges.
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Total revenue, income before income taxes, income from continuing operations and total assets of our international operations are shown in the table below.
International operations (in millions) EMEA International APAC Other Total International Total Domestic Total
2010 (a): Total assets (b) Total revenue Income before taxes Income from continuing operations 2009 (a): Total assets (b) Total revenue Income before taxes Income from continuing operations 2008: Total assets (b) Total revenue Income before taxes Income from continuing operations (a) Presented on a continuing operations basis.
$72,629 (c) 3,497 (c) 1,222 916 $58,011 (c) 2,825 (c)(d) 863 (d) 667 (d) $49,037 (c) 3,604 (c) 1,176 859
$8,806 745 394 295 $5,588 669 287 222 $3,527 796 338 247
$3,124 735 348 261 $1,375 578 257 199 $1,383 607 292 213
$ 84,559 4,977 1,964 1,472 $ 64,974 4,072 1,407 1,088 $ 53,947 5,007 1,806 1,319
$162,422 8,898 1,730 1,175 $145,008 3,582 (3,615) (1,901) (e) $183,565 8,566 140 136 (e)
$246,981 13,875 3,694 2,647 $209,982 7,654 (2,208) (813) $237,512 13,573 1,946 1,455
(b) Total assets include longlived assets, which are not considered by management to be significant in relation to total assets. Longlived assets are primarily located in the U.S. (c) Includes revenue of approximately $2.1 billion, $1.6 billion and $2.0 billion, and assets of approximately $44.7 billion, $43.0 billion and $27.1 billion, in 2010, 2009 and 2008, respectively, of international operations domiciled in the UK, which is 15%, 21% and 14% of total revenue and 18%, 20% and 11% of total assets, respectively. (d) In 2009, excludes the $269 million of investment securities losses on the European floating rate notes. (e) Domestic income from continuing operations in 2009 and 2008 was reduced by investment securities losses. Domestic income from continuing operations in 2008 was also reduced by the SILO/LILO charge and support agreement charges.
Note 29Supplemental information to the Consolidated Statement of Cash Flows Noncash investing and financing transactions that, appropriately, are not reflected in the Consolidated Statement of Cash Flows are listed below.
Noncash investing and financing transactions (in millions) Transfers from loans to other assets for OREO Assets of consolidated VIEs Liabilities of consolidated VIEs Noncontrolling interests of consolidated VIEs Issuance of common stock for acquisitions
2008 $ 12
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The Board of Directors and Shareholders The Bank of New York Mellon Corporation: We have audited the accompanying consolidated balance sheets of The Bank of New York Mellon Corporation and subsidiaries (BNY Mellon) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, and cash flows for each of the years in the threeyear period ended December 31, 2010. These consolidated financial statements are the responsibility of BNY Mellons management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BNY Mellon as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the threeyear period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in 2010, BNY Mellon changed their methods of accounting related to the consolidation of variable interest entities and, in 2009, changed their methods of accounting for otherthantemporary impairments. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BNY Mellons internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2011 expressed an unqualified opinion on the effectiveness of BNY Mellons internal control over financial reporting.
/s/ KPMG LLP New York, New York February 28, 2011
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Directors Ruth E. Bruch Retired Senior Vice President and Chief Information Officer Kellogg Company Cereal and convenience foods Nicholas M. Donofrio Retired Executive Vice President, Innovation and Technology IBM Corporation Developer, manufacturer and provider of advanced information technologies and services Gerald L. Hassell President The Bank of New York Mellon Corporation Edmund F. (Ted) Kelly Chairman and Chief Executive Officer Liberty Mutual Group Multiline insurance company Robert P. Kelly Chairman and Chief Executive Officer The Bank of New York Mellon Corporation Richard J. Kogan Retired Chairman, President and Chief Executive Officer ScheringPlough Corporation International researchbased development and manufacturing Michael J. Kowalski Chairman and Chief Executive Officer Tiffany & Co. International designer, manufacturer and distributor of jewelry and fine goods John A. Luke, Jr. Chairman and Chief Executive Officer MeadWestvaco Corporation Manufacturer of paper, packaging and specialty chemicals Robert Mehrabian Chairman, President and Chief Executive Officer Teledyne Technologies, Inc. Advanced industrial technologies Mark A. Nordenberg
Chancellor and Chief Executive Officer University of Pittsburgh Major public research university Catherine A. Rein Retired Senior Executive Vice President and Chief Administrative Officer MetLife, Inc. Insurance and financial services company William C. Richardson President and Chief Executive Officer Emeritus The W. K. Kellogg Foundation Retired Chairman and CoTrustee of The W. K. Kellogg Foundation Trust Private foundation Samuel C. Scott III Retired Chairman, President and Chief Executive Officer Corn Products International, Inc. Global producers of cornrefined products and ingredients John P. Surma Chairman and Chief Executive Officer United States Steel Corporation Steel manufacturing Wesley W. von Schack Retired Chairman, President and Chief Executive Officer Energy East Corporation Energy services company Senior Management Robert P. Kelly Chairman and Chief Executive Officer Gerald L. Hassell President Executive Officers Curtis Y. Arledge Chief Executive Officer, BNY Mellon Asset Management Richard F. Brueckner Chairman, Pershing LLC Arthur Certosimo Chief Executive Officer, Alternative, BrokerDealer Services and Treasury Services Thomas P. (Todd) Gibbons Chief Financial Officer Timothy F. Keaney Chief Executive Officer,
BNY Mellon Asset Servicing; Chairman of EMEA James P. Palermo Chief Executive Officer, Global Client Management John A. Park Controller Karen B. Peetz Chief Executive Officer, Financial Markets and Treasury Services Lisa B. Peters Chief Human Resources Officer Brian G. Rogan Chief Risk Officer Brian T. Shea Chief Executive Officer, Pershing LLC Jane C. Sherburne General Counsel Kurt D. Woetzel Head of Global Operations and Technology and Chief Administrative Officer
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The Bank of New York Mellon Corporation S&P 500 Financial Index S&P 500 Peer Group
This graph shows The Bank of New York Mellon Corporations cumulative total shareholder returns over the fiveyear period from Dec. 31, 2005 to Dec. 31, 2010. The graph reflects total shareholder returns for The Bank of New York Company, Inc. from Dec. 31, 2005 to June 29, 2007, and for The Bank of New York Mellon Corporation from July 2, 2007 to Dec. 31, 2010. June 29, 2007 was the last day of trading on the NYSE of The Bank of New York Company, Inc. common stock and July 2, 2007 was the first day of trading on the NYSE of The Bank of New York Mellon Corporation common stock. We are showing combined The Bank of New York Company, Inc.The Bank of New York Mellon Corporation shareholder returns because The Bank of New York Mellon Corporation does not have a fiveyear history as a public company. Our peer group is composed of asset managers and institutional service providers that represent our primary competitors. We also utilize the S&P 500 Financial Index as a benchmark against our performance. The graph also shows the cumulative total returns for the same fiveyear period of the S&P 500 Index, the S&P 500 Financial Index, as well as our peer group listed below. The comparison assumes a $100 investment on Dec. 31, 2005 in The Bank of New York Company, Inc. common stock (which was converted on a 0.9434 for one basis into The Bank of New York Mellon Corporation common stock on July 1, 2007), in the S&P 500 Financial Index, in the S&P 500 Index and in the peer group detailed below and assumes that all dividends were reinvested.
Peer Group* American Express Company Bank of America Corporation BlackRock, Inc. The Charles Schwab Corporation
Citigroup Inc. JPMorgan Chase & Co. Northern Trust Corporation The PNC Financial Services Group, Inc.
Prudential Financial, Inc. State Street Corporation U.S. Bancorp Wells Fargo & Company
* Returns are weighted by market capitalization at the beginning of the measurement period.
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Exhibit 21.1 THE BANK OF NEW YORK MELLON CORPORATION PRIMARY SUBSIDIARIES DEC. 31, 2010
BNY Mellon Capital Markets Holdings, Inc. State of Incorporation: New York
THE BANK OF NEW YORK MELLON CORPORATION PRIMARY SUBSIDIARIES DEC. 31, 2010 Continued
BNY Mellon Performance & Risk Analytics, Inc. State of Incorporation: Delaware
BNY Mellon Servicos Financeiros Distribuidora de Titulos e Valores Mobiliarios S.A. Incorporation: Brazil
THE BANK OF NEW YORK MELLON CORPORATION PRIMARY SUBSIDIARIES DEC. 31, 2010 Continued
The Bank of New York Mellon Trust Company, National Association Incorporation: United States
Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors The Bank of New York Mellon Corporation: We consent to the incorporation by reference in:
Form
Registration Statement
Filer
S8 S8 S8 S8 S8 S3 S3 S3 S3 S3 S3 S3
333171258 333150324 333150323 333149473 333144216 333167832 333167829 33316783201 33316783202 33316783203 33316783204 33316783205
The Bank of New York Mellon Corporation The Bank of New York Mellon Corporation The Bank of New York Mellon Corporation The Bank of New York Mellon Corporation The Bank of New York Mellon Corporation The Bank of New York Mellon Corporation The Bank of New York Mellon Corporation BNY Capital X BNY Capital IX BNY Capital VIII BNY Capital VII BNY Capital VI
of our reports dated February 28, 2011, with respect to the consolidated balance sheets of The Bank of New York Mellon Corporation and subsidiaries (BNY Mellon) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, and cash flows for each of the years in the threeyear period ended December 31, 2010, and the effectiveness of internal control over financial reporting as of December 31, 2010, which reports appear in the December 31, 2010 Annual Report on Form 10K of BNY Mellon. The aforementioned report with respect to the consolidated financial statements of BNY Mellon refers to changes, in 2010, in BNY Mellons methods of accounting related to the consolidation of variable interest entities and, in 2009, changes to BNY Mellons accounting for otherthantemporary impairments. /s/ KPMG LLP New York, New York February 28, 2011
Exhibit 24.1 POWER OF ATTORNEY THE BANK OF NEW YORK MELLON CORPORATION Know all men by these presents, that each person whose signature appears below constitutes and appoints Jane C. Sherburne and Arlie R. Nogay, and each of them, such persons true and lawful attorneyinfact and agent, with full power of substitution and revocation, for such person and in such persons name, place and stead, in any and all capacities, to sign one or more Annual Reports on Form 10K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for The Bank of New York Mellon Corporation for the year ended December 31, 2010, and any and all amendments thereto, and to file same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and with the New York Stock Exchange, Inc., granting unto said attorneysinfact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneysinfact and agents and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney shall be effective as of February 28, 2011 and shall continue in full force and effect until revoked by the undersigned in a writing filed with the secretary of the Corporation.
/s/ Ruth E. Bruch Ruth E. Bruch, Director /s/ Nicholas M. Donofrio Nicholas M. Donofrio, Director /s/ Gerald L. Hassell Gerald L. Hassell, Director /s/ Edmund F. Kelly Edmund F. Kelly, Director /s/ Richard J. Kogan Richard J. Kogan, Director /s/ Michael J. Kowalski Michael J. Kowalski, Director /s/ John A. Luke, Jr. John A. Luke, Jr., Director
/s/ Robert Mehrabian Robert Mehrabian, Director /s/ Mark A. Nordenberg Mark A. Nordenberg, Director /s/ Catherine A. Rein Catherine A. Rein, Director /s/ William C. Richardson William C. Richardson, Director /s/ Samuel C. Scott III Samuel C. Scott III, Director /s/ John P. Surma John P. Surma, Director /s/ Wesley W. von Schack Wesley W. von Schack, Director
1.
I have reviewed this annual report on Form 10K of The Bank of New York Mellon Corporation (the registrant);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
/s/ Robert P. Kelly Name: Robert P. Kelly Title: Chief Executive Officer
1.
I have reviewed this annual report on Form 10K of The Bank of New York Mellon Corporation (the registrant);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
/s/ Thomas P. Gibbons Name: Thomas P. Gibbons Title: Chief Financial Officer
Exhibit 32.1 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, the undersigned officer of The Bank of New York Mellon Corporation (the Company), hereby certifies, to his knowledge, that BNY Mellons Annual Report on Form 10K for the year ended Dec. 31, 2010 (the Report) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of BNY Mellon.
/s/ Robert P. Kelly Name: Robert P. Kelly Title: Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 32.2 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, the undersigned officer of The Bank of New York Mellon Corporation (the Company), hereby certifies, to his knowledge, that BNY Mellons Annual Report on Form 10K for the year ended Dec. 31, 2010 (the Report) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of BNY Mellon.
/s/ Thomas P. Gibbons Name: Thomas P. Gibbons Title: Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.