Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

[ X ] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended Sept. 30, 2018
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001-35651


THE BANK OF NEW YORK MELLON CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
13-2614959
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 

240 Greenwich Street
New York, New York 10286
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No o

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

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o 
Smaller reporting company o
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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

 
Class
Outstanding as of

 
 
 
Sept. 30, 2018

 
 
Common Stock, $0.01 par value
988,777,495

 




THE BANK OF NEW YORK MELLON CORPORATION

Third Quarter 2018 Form 10-Q
Table of Contents 
 
 
Page
 
 
Part I - Financial Information
 
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures about Market Risk:
 
Highlights of third quarter 2018 results
Business continuity and operational resiliency
 
 
Item 1. Financial Statements:
 
 
 
Page
Notes to Consolidated Financial Statements:
 
Note 3—Acquisitions and dispositions
 
 
 
 
Part II - Other Information
 
 
 
Index to Exhibits
Signature




The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Financial Highlights (unaudited)
 
Quarter ended
 
Year-to-date
(dollars in millions, except per share amounts and unless otherwise noted)
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

 
Sept. 30, 2018

Sept. 30, 2017

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
Net income
$
1,075

$
1,055

$
983

 
$
3,265

$
2,789

Basic earnings per share
$
1.07

$
1.04

$
0.94

 
$
3.21

$
2.66

Diluted earnings per share
$
1.06

$
1.03

$
0.94

 
$
3.20

$
2.64

 
 
 
 
 
 
 
Fee and other revenue
$
3,168

$
3,210

$
3,167

 
$
9,648

$
9,305

Income from consolidated investment management funds
10

12

10

 
11

53

Net interest revenue
891

916

839

 
2,726

2,457

Total revenue
$
4,069

$
4,138

$
4,016

 
$
12,385

$
11,815

 
 
 
 
 
 
 
Return on common equity (annualized)
11.2
%
11.2
%
10.6
%
 
11.6
%
10.4
%
Return on tangible common equity (annualized) – Non-GAAP (a)
23.1
%
23.5
%
21.9
%
 
24.1
%
22.0
%
 
 
 
 
 
 
 
Return on average assets (annualized)
1.28
%
1.22
%
1.13
%
 
1.26
%
1.09
%
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
78
%
78
%
78
%
 
78
%
79
%
 
 
 
 
 
 
 
Percentage of non-U.S. total revenue
37
%
37
%
36
%
 
37
%
35
%
 
 
 
 
 
 
 
Pre-tax operating margin
33
%
34
%
34
%
 
34
%
33
%
 
 
 
 
 
 
 
Net interest margin
1.27
%
1.26
%
1.15
%
 
1.25
%
1.14
%
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (b)
1.28
%
1.26
%
1.16
%
 
1.26
%
1.16
%
 
 
 
 
 
 
 
Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (c)
$
34.5

$
33.6

$
32.2

 
$
34.5

$
32.2

Assets under management (“AUM”) at period end (in billions) (d)
$
1,828

$
1,805

$
1,824

 
$
1,828

$
1,824

Market value of securities on loan at period end (in billions) (e)
$
415

$
432

$
382

 
$
415

$
382

 
 
 
 
 
 
 
Average common shares and equivalents outstanding (in thousands):
 
 
 
 
 
 
Basic
999,808

1,010,179

1,035,337

 
1,008,967

1,037,431

Diluted
1,003,665

1,014,357

1,041,138

 
1,013,242

1,043,585

 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
Interest-earning assets
$
279,218

$
292,086

$
291,841

 
$
291,040

$
288,283

Assets of operations
$
331,867

$
345,840

$
344,966

 
$
344,970

$
340,588

Total assets
$
332,341

$
346,328

$
345,709

 
$
345,520

$
341,510

Interest-bearing deposits
$
148,636

$
152,799

$
142,490

 
$
152,354

$
141,558

Long-term debt
$
28,074

$
28,349

$
28,138

 
$
28,275

$
27,148

Noninterest-bearing deposits
$
60,677

$
64,768

$
70,168

 
$
65,446

$
72,524

Preferred stock
$
3,542

$
3,542

$
3,542

 
$
3,542

$
3,542

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
38,036

$
37,750

$
36,780

 
$
37,795

$
35,876

 
 
 
 
 
 
 
Other information at period end:
 
 
 
 
 
 
Cash dividends per common share
$
0.28

$
0.24

$
0.24

 
$
0.76

$
0.62

Common dividend payout ratio
26
%
23
%
26
%
 
24
%
23
%
Common dividend yield (annualized)
2.2
%
1.8
%
1.8
%
 
2.0
%
1.6
%
Closing stock price per common share
$
50.99

$
53.93

$
53.02

 
$
50.99

$
53.02

Market capitalization
$
50,418

$
53,927

$
54,294

 
$
50,418

$
54,294

Book value per common share
$
38.45

$
37.97

$
36.11

 
$
38.45

$
36.11

Tangible book value per common share – Non-GAAP (a)
$
19.35

$
19.00

$
18.19

 
$
19.35

$
18.19

Full-time employees
52,000

52,000

52,900

 
52,000

52,900

Common shares outstanding (in thousands)
988,777

999,945

1,024,022

 
988,777

1,024,022



2 BNY Mellon


Consolidated Financial Highlights (unaudited) (continued)
Regulatory capital and other ratios
Sept. 30, 2018

June 30, 2018

Dec. 31, 2017

Average liquidity coverage ratio (“LCR”)
121
%
118
%
118
%
 
 
 
 
Regulatory capital ratios: (f)
 
 
 
Advanced:
 
 
 
Common Equity Tier 1 (“CET1”) ratio
11.2
%
11.0
%
10.3
%
Tier 1 capital ratio
13.3

13.1

12.3

Total (Tier 1 plus Tier 2) capital ratio
14.1

13.8

13.0

Standardized:
 
 
 
CET1 ratio
12.4
%
11.9
%
11.5
%
Tier 1 capital ratio
14.7

14.1

13.7

Total (Tier 1 plus Tier 2) capital ratio
15.7

15.1

14.7

 
 
 
 
Tier 1 leverage ratio (f)
7.0
%
6.7
%
6.4
%
Supplementary leverage ratio (“SLR”) (f)
6.4

6.1

5.9

 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio
11.9
%
11.8
%
11.1
%
BNY Mellon common shareholders’ equity to total assets ratio
10.9

10.8

10.1

(a)
Return on tangible common equity and tangible book value per common share, Non-GAAP measures, exclude goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 41 for the reconciliation of Non-GAAP measures.
(b)
See “Average balances and interest rates” on page 9 for a reconciliation of this Non-GAAP measure.
(c)
Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.4 trillion at Sept. 30, 2018 and June 30, 2018 and $1.3 trillion at Sept. 30, 2017.
(d)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(e)
Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $69 billion at Sept. 30, 2018, $70 billion at June 30, 2018 and $68 billion at Sept. 30, 2017.
(f)
For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The risk-based regulatory capital ratios, Tier 1 leverage ratio and SLR are presented on a fully phased-in basis for Dec. 31, 2017. Beginning Jan. 1, 2018, regulatory ratios are fully phased-in. For additional information on our capital ratios, see “Capital” beginning on page 32.



BNY Mellon 3

Part I - Financial Information


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

General

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “BNY Mellon,” the “Company” and similar terms refer to The Bank of New York Mellon Corporation and its consolidated subsidiaries. The term “Parent” refers to The Bank of New York Mellon Corporation but not its subsidiaries.

Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2017 (“2017 Annual Report”).

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

Overview

Established in 1784 by Alexander Hamilton, we were the first company listed on the New York Stock Exchange (NYSE: BK). With a more than 230-year history, BNY Mellon is a global company that manages and services assets for financial institutions, corporations and individual investors in 35 countries.

BNY Mellon has two business segments, Investment Services and Investment Management, which offer a comprehensive set of capabilities and deep expertise across the investment lifecycle, enabling the company to provide solutions to buy-side and sell-side market participants, as well as leading institutional and wealth management clients globally.

The diagram below presents our two business segments and lines of business, with the remaining operations in the Other segment.

 
businesses3q18.jpg

Highlights of third quarter 2018 results

We reported net income applicable to common shareholders of $1.08 billion, or $1.06 per diluted common share, in the third quarter of 2018. Net income applicable to common shareholders was $983 million, or $0.94 per diluted common share, in the third quarter of 2017. The highlights below are based on the third quarter of 2018 compared with the third quarter of 2017, unless otherwise noted.

Total revenue of $4.1 billion increased 1% primarily reflecting:
Fee revenue increased 1% primarily reflecting higher equity market values, growth in collateral management and clearance volumes and higher performance fees, partially offset by lower foreign currency hedging. (See “Fee and other revenue” beginning on page 6.)
Net interest revenue increased 6% primarily driven by higher rates, partially offset by lower deposits and other borrowings. (See “Net interest revenue” on page 8.)
Noninterest expense of $2.7 billion increased 3% primarily reflecting investments in technology and higher litigation expense, partially offset by


4 BNY Mellon


lower staff and distribution and servicing expenses. Litigation increased noninterest expense by 2%. (See “Noninterest expense” on page 11.)
Effective tax rate of 16.5%. The impact of adjusting provisional estimates for U.S. tax legislation and other changes decreased the effective rate by approximately 4.5%. (See “Income taxes” on page 11.)

Capital and liquidity

CET1 ratio under the Advanced Approach was 11.2% at Sept. 30, 2018 and 11.0% at June 30, 2018. The increase primarily reflects lower risk-weighted assets and capital generated through earnings, partially offset by capital deployed through common stock repurchases and dividend payments. (See “Capital” beginning on page 32.)
Repurchased 12 million common shares for $602 million and paid $283 million in dividends to common shareholders.

 
Highlights of our principal businesses

Investment Services
Total revenue increased 3%.
Income before taxes decreased 6%, driven by litigation expense.
AUC/A of $34.5 trillion, up 7%, primarily reflecting net new business and higher equity market values, partially offset by the unfavorable impact of a stronger U.S. dollar.

Investment Management
Total revenue increased 2%.
Income before taxes increased 5%.
AUM of $1.8 trillion increased slightly, primarily reflecting higher market values, partially offset by the divestiture of CenterSquare Investment Management (“CenterSquare”) and other changes and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound).

See “Review of businesses” and Note 19 of the Notes to Consolidated Financial Statements for additional information on our businesses.



BNY Mellon 5


Fee and other revenue

Fee and other revenue
 
 
 
 
 
 
 
 
YTD18

 
 
 
 
3Q18 vs.
 
 
 
 vs.
(dollars in millions, unless otherwise noted)
3Q18

2Q18

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Investment services fees:
 
 
 
 
 
 
 
 
 
Asset servicing (a)
$
1,157

$
1,157

$
1,105

 %
5
 %
 
$
3,482

$
3,253

7
 %
Clearing services
383

392

383

(2
)

 
1,189

1,153

3

Issuer services
287

266

288

8


 
813

780

4

Treasury services
137

140

141

(2
)
(3
)
 
415

420

(1
)
Total investment services fees
1,964

1,955

1,917


2

 
5,899

5,606

5

Investment management and performance fees
922

910

901

1

2

 
2,792

2,622

6

Foreign exchange and other trading revenue
155

187

173

(17
)
(10
)
 
551

502

10

Financing-related fees
52

53

54

(2
)
(4
)
 
157

162

(3
)
Distribution and servicing
34

34

40


(15
)
 
104

122

(15
)
Investment and other income
41

70

63

N/M
N/M
 
193

262

N/M
Total fee revenue
3,168

3,209

3,148

(1
)
1

 
9,696

9,276

5

Net securities gains (losses)

1

19

N/M
N/M
 
(48
)
29

N/M
Total fee and other revenue
$
3,168

$
3,210

$
3,167

(1
)%
 %
 
$
9,648

$
9,305

4
 %
 
 
 
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
78
%
78
%
78
%
 
 
 
78
%
79
%
 
 
 
 
 
 
 
 
 
 
 
AUM at period end (in billions) (b)
$
1,828

$
1,805

$
1,824

1
 %
 %
 
$
1,828

$
1,824

 %
AUC/A at period end (in trillions) (c)
$
34.5

$
33.6

$
32.2

3
 %
7
 %
 
$
34.5

$
32.2

7
 %
(a)
Asset servicing fees include securities lending revenue of $58 million in the third quarter of 2018, $60 million in the second quarter of 2018, $47 million in the third quarter of 2017, $173 million in the first nine months of 2018 and $144 million in the first nine months of 2017.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(c)
Includes the AUC/A of CIBC Mellon of $1.4 trillion at Sept. 30, 2018 and June 30, 2018 and $1.3 trillion at Sept. 30, 2017.
N/M - Not meaningful.


Fee and other revenue increased slightly compared with the third quarter of 2017 and decreased 1% (unannualized) compared with the second quarter of 2018. The decrease compared with the second quarter of 2018 primarily reflects lower foreign exchange and other trading revenue and investment and other income, partially offset by seasonally higher Depositary Receipts revenue.

Investment services fees

Investment services fees were impacted by the following compared with the third quarter of 2017 and the second quarter of 2018:

Asset servicing fees increased 5% compared with the third quarter of 2017 and were unchanged compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects growth in collateral management and higher equity market values and securities lending volumes.
Clearing services fees were unchanged compared with the third quarter of 2017 and decreased 2%
 
(unannualized) compared with the second quarter of 2018. Year-over-year, higher equity market values and long-term mutual funds balances were offset by the previously disclosed lost business. The decrease compared with the second quarter of 2018 primarily reflects lower clearance revenue.
Issuer services fees decreased slightly compared with the third quarter of 2017 and increased 8% (unannualized) compared with the second quarter of 2018. The increase compared with the second quarter of 2018 primarily reflects seasonally higher Depositary Receipts revenue.
Treasury services fees decreased 3% compared with the third quarter of 2017 and 2% (unannualized) compared with the second quarter of 2018. The decrease compared with the third quarter of 2017 primarily reflects higher compensating balance credits provided to clients, which reduce fee revenue and increase net interest revenue. The decrease compared with the second quarter of 2018 primarily reflects lower payments revenue.



6 BNY Mellon


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

Investment management and performance fees

Investment management and performance fees increased 2% compared with the third quarter of 2017 and 1% (unannualized) compared with the second quarter of 2018. On a constant currency basis (Non-GAAP), investment management and performance fees increased 3% compared with the third quarter of 2017. Performance fees were $30 million in the third quarter of 2018, $15 million in the third quarter of 2017 and $12 million in the second quarter of 2018.

AUM was $1.8 trillion, up slightly compared with Sept. 30, 2017 and 1% compared with June 30, 2018. See the “Investment Management business” in “Review of businesses” for additional details regarding the drivers of investment management and performance fees, AUM and AUM flows.

Foreign exchange and other trading revenue

Foreign exchange and other trading revenue
 
(in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Foreign exchange
$
150

$
171

$
158

$
504

$
463

Other trading revenue
5

16

15

47

39

Total foreign exchange and other trading revenue
$
155

$
187

$
173

$
551

$
502



Foreign exchange revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility, and the impact of foreign currency hedging activities. Foreign exchange revenue decreased 5% compared with the third quarter of 2017 and 12% (unannualized) compared with the second quarter of 2018. The decrease compared with third quarter of 2017 primarily reflects foreign currency hedging, partially offset by higher volumes. The decrease compared with the second quarter of 2018 primarily reflects lower volumes. Foreign exchange revenue is primarily reported in the Investment Services business and, to a lesser extent, the Investment Management business and the Other segment.

 
Distribution and servicing fees

The decrease in distribution and servicing fees compared with the third quarter of 2017 primarily reflects lower fees from money market funds.

Investment and other income

The following table provides the components of investment and other income.

Investment and other income
 
 
 
(in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Corporate/bank-owned life insurance
$
36

$
31

$
37

$
103

$
110

Asset-related gains (losses)
7

15

1

68

(1
)
Expense reimbursements from joint venture
17

19

18

52

49

Seed capital gains (a)
8

3

6

11

25

Equity investment income
3

2


5

33

Lease-related gains




52

Other (loss) income
(30
)

1

(46
)
(6
)
Total investment and other income
$
41

$
70

$
63

$
193

$
262

(a)
Excludes seed capital gains related to consolidated investment management funds, which are reflected in operations of consolidated investment management funds.


Investment and other income decreased compared with the third quarter of 2017 and second quarter of 2018. Both decreases primarily reflect our investments in renewable energy, including the impact of adjusting the provisional tax estimates. Pre-tax losses on our renewable energy investments are offset by corresponding tax benefits and credits.

Year-to-date 2018 compared with year-to-date 2017

Fee and other revenue increased 4% in the first nine months of 2018, compared with the first nine months of 2017, primarily reflecting higher asset servicing fees, investment management and performance fees, foreign exchange and other trading revenue, partially offset by net securities losses and lower investment and other income. The 7% increase in asset servicing fees primarily reflects higher equity market values, securities lending and other volumes and the favorable impact of a weaker U.S. dollar. The 6% increase in investment management and performance fees primarily reflects higher equity market values, the favorable impact of a weaker U.S. dollar (principally versus the British pound) and higher performance fees. The 10% increase in foreign


BNY Mellon 7


exchange and other trading revenue primarily reflects higher volumes, partially offset by foreign currency hedging. Net securities losses primarily reflect losses recorded in the first quarter of 2018 related to the sale of debt securities. The decrease in investment and other income primarily reflects lease-related gains
 
and a net gain related to an equity investment, both recorded in the first nine months of 2017, and lower other income due in part to our investments in renewable energy, partially offset by an increase in asset-related gains.

Net interest revenue

Net interest revenue
 
 
 
 
 
 
 
 
YTD18

 
 
 
 
3Q18 vs.
 
 
 
 vs.
(dollars in millions)
3Q18

2Q18

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Net interest revenue
$
891

$
916

$
839

(3
)%
6
 %
 
$
2,726

$
2,457

11
%
Add: Tax equivalent adjustment
5

5

12

N/M
N/M
 
16

36

N/M
Net interest revenue (FTE) – Non-GAAP (a)
$
896

$
921

$
851

(3
)%
5
 %
 
$
2,742

$
2,493

10
%
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets
$
279,218

$
292,086

$
291,841

(4
)%
(4
)%
 
$
291,040

$
288,283

1
%
 
 
 
 
 
 
 
 
 
 
Net interest margin
1.27
%
1.26
%
1.15
%
1
 bps
12
 bps
 
1.25
%
1.14
%
11
 bps
Net interest margin (FTE) – Non-GAAP (a)
1.28
%
1.26
%
1.16
%
2
 bps
12
 bps
 
1.26
%
1.16
%
10
 bps
(a)
Net interest revenue (FTE) – Non-GAAP and net interest margin (FTE) – Non-GAAP include the tax equivalent adjustments on tax-exempt income which allows for comparisons of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income.
N/M - Not meaningful.
bps - basis points.


Net interest revenue increased 6% compared with the third quarter of 2017 and decreased 3% (unannualized) compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects higher interest rates, partially offset by lower deposits and other borrowings. The decrease compared with the second quarter of 2018 was primarily driven by lower deposits and other borrowings, partially offset by higher interest rates.

Net interest margin increased 12 basis points compared with the third quarter of 2017 and 1 basis point compared with the second quarter of 2018. Both increases primarily reflect higher interest rates.

 
Average non-U.S. dollar deposits comprised approximately 30% of our average total deposits in the third quarter of 2018. Approximately 40% of the average non-U.S. dollar deposits in the third quarter of 2018 were euro-denominated.

Year-to-date 2018 compared with year-to-date 2017

Net interest revenue increased 11% in the first nine months of 2018 compared with the first nine months of 2017, primarily driven by higher interest rates. The net interest margin also increased primarily driven by higher interest rates.




8 BNY Mellon


Average balances and interest rates
Quarter ended
 
Sept. 30, 2018
 
June 30, 2018
 
Sept. 30, 2017
(dollars in millions, presented on an FTE basis)
Average
balance

Interest

Average
rates

 
Average
balance

Interest

Average
rates

 
Average balance

Interest

Average rates

Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
14,691

$
59

1.58
%
 
$
15,748

$
56

1.41
%
 
$
15,899

$
34

0.86
%
Interest-bearing deposits held at the Federal Reserve and other central banks
61,216

125

0.80

 
69,676

136

0.77

 
70,430

89

0.50

Federal funds sold and securities purchased under resale agreements (a)
26,738

281

4.18

 
28,051

230

3.29

 
28,120

119

1.67

Margin loans
13,738

129

3.74

 
14,838

128

3.46

 
13,206

87

2.60

Non-margin loans:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
28,628

258

3.59

 
29,970

257

3.44

 
29,950

216

2.87

Foreign offices
11,441

86

2.98

 
12,258

88

2.87

 
12,788

67

2.09

Total non-margin loans
40,069

344

3.42

 
42,228

345

3.27

 
42,738

283

2.64

Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
24,423

129

2.09

 
23,199

116

2.02

 
25,349

106

1.67

U.S. Government agency obligations
64,612

384

2.40

 
63,022

374

2.37

 
61,710

309

2.00

State and political subdivisions – tax-exempt (b)
2,453

18

2.77

 
2,677

18

2.75

 
3,226

25

3.06

Other securities
27,017

138

1.98

 
28,863

126

1.75

 
28,804

98

1.34

Trading securities (b)
4,261

32

3.05

 
3,784

29

3.10

 
2,359

13

2.26

Total securities
122,766

701

2.28

 
121,545

663

2.19

 
121,448

551

1.81

Total interest-earning assets (b)
$
279,218

$
1,639

2.33
%
 
$
292,086

$
1,558

2.14
%
 
$
291,841

$
1,163

1.59
%
Noninterest-earnings assets
53,123

 
 
 
54,242

 
 
 
53,868

 
 
Total assets
$
332,341

 
 
 
$
346,328

 
 
 
$
345,709

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
$
57,942

$
142

0.97
%
 
$
54,200

$
105

0.78
%
 
$
44,212

$
31

0.28
%
Foreign offices
90,694

95

0.42

 
98,599

68

0.28

 
98,278

26

0.10

Total interest-bearing deposits
148,636

237

0.63

 
152,799

173

0.45

 
142,490

57

0.16

Federal funds purchased and securities sold under repurchase agreements (a)
14,199

190

5.33

 
18,146

158

3.48

 
21,403

70

1.30

Trading liabilities
1,150

7

2.32

 
1,198

7

2.43

 
1,434

2

0.54

Other borrowed funds
2,747

16

2.33

 
2,399

14

2.40

 
2,197

7

1.38

Commercial paper
3,102

16

2.10

 
3,869

21

2.13

 
2,736

8

1.15

Payables to customers and broker-dealers
16,252

51

1.23

 
16,349

45

1.10

 
18,516

19

0.42

Long-term debt
28,074

226

3.17

 
28,349

219

3.06

 
28,138

149

2.07

Total interest-bearing liabilities
$
214,160

$
743

1.37
%
 
$
223,109

$
637

1.14
%
 
$
216,914

$
312

0.57
%
Total noninterest-bearing deposits
60,677

 
 
 
64,768

 
 
 
70,168

 
 
Other noninterest-bearing liabilities
15,660

 
 
 
16,857

 
 
 
17,763

 
 
Total liabilities
290,497

 
 
 
304,734

 
 
 
304,845

 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
193

 
 
 
184

 
 
 
188

 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
Total The Bank of New York Mellon Corporation shareholders’ equity
41,578

 
 
 
41,292

 
 
 
40,322

 
 
Noncontrolling interests
73

 
 
 
118

 
 
 
354

 
 
Total permanent equity
41,651

 
 
 
41,410

 
 
 
40,676

 
 
Total liabilities, temporary equity and permanent equity
$
332,341

 
 
 
$
346,328

 
 
 
$
345,709

 
 
Net interest revenue (FTE) – Non-GAAP
 
$
896

 
 
 
$
921

 
 
 
$
851

 
Net interest margin (FTE) – Non-GAAP
 
 
1.28
%
 
 
 
1.26
%
 
 
 
1.16
%
Less: Tax equivalent adjustment (c)
 
5

 
 
 
5

 
 
 
12

 
Net interest revenue – GAAP
 
$
891

 
 
 
$
916

 
 
 
$
839

 
Net interest margin – GAAP
 
 
1.27
%
 
 
 
1.26
%
 
 
 
1.15
%
(a)
Includes the impact of offsetting under enforceable netting agreements of approximately $26 billion for the third quarter of 2018, $18 billion for the second quarter of 2018 and $7 billion for the third quarter of 2017.
(b)
Interest income and average yields are presented on an FTE basis (Non-GAAP).
(c)
The tax equivalent adjustment relates to tax-exempt securities, primarily state and political subdivisions, and is based on the federal statutory tax rate of 21% for the quarters in 2018 and 35% for the quarter in 2017, adjusted for applicable state income taxes, net of the related federal tax benefit.




BNY Mellon 9


Average balances and interest rates
Year-to-date
 
Sept. 30, 2018
 
Sept. 30, 2017
(dollars in millions, presented on an FTE basis)
Average balance

Interest

Average rates

 
Average balance

Interest

Average rates

Assets
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
14,766

$
157

1.42
%
 
$
15,153

$
83

0.73
%
Interest-bearing deposits held at the Federal Reserve and other central banks
69,921

387

0.73

 
68,613

217

0.42

Federal funds sold and securities purchased under resale agreements (a)
27,560

681

3.31

 
26,779

272

1.36

Margin loans
14,743

372

3.38

 
14,663

249

2.27

Non-margin loans:
 
 
 
 
 
 
 
Domestic offices
29,664

743

3.35

 
30,545

611

2.67

Foreign offices
12,068

251

2.78

 
13,126

189

1.93

Total non-margin loans
41,732

994

3.18

 
43,671

800

2.45

Securities:
 
 
 
 
 
 
 
U.S. Government obligations
23,698

354

2.00

 
25,835

316

1.64

U.S. Government agency obligations
63,702

1,108

2.32

 
59,384

870

1.95

State and political subdivisions – tax-exempt (b)
2,667

55

2.71

 
3,298

77

3.09

Other securities
28,175

387

1.83

 
28,531

267

1.25

Trading securities (b)
4,076

89

2.92

 
2,356

48

2.74

Total securities
122,318

1,993

2.17

 
119,404

1,578

1.76

Total interest-earning assets (b)
$
291,040

$
4,584

2.10
%
 
$
288,283

$
3,199

1.48
%
Noninterest-earnings assets
54,480

 
 
 
53,227

 
 
Total assets
$
345,520

 
 
 
$
341,510

 
 
Liabilities
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
Domestic offices
$
54,608

$
318

0.78
%
 
$
47,456

$
66

0.19
%
Foreign offices
97,746

209

0.29

 
94,102

32

0.05

Total interest-bearing deposits
152,354

527

0.46

 
141,558

98

0.09

Federal funds purchased and securities sold under repurchase agreements (a)
17,085

455

3.56

 
19,465

132

0.90

Trading liabilities
1,304

23

2.33

 
1,188

6

0.65

Other borrowed funds
2,424

39

2.16

 
1,409

13

1.26

Commercial paper
3,367

49

1.96

 
2,374

18

1.01

Payables to customers and broker-dealers
16,564

127

1.02

 
19,360

42

0.29

Long-term debt
28,275

622

2.90

 
27,148

397

1.93

Total interest-bearing liabilities
$
221,373

$
1,842

1.11
%
 
$
212,502

$
706

0.44
%
Total noninterest-bearing deposits
65,446

 
 
 
72,524

 
 
Other noninterest-bearing liabilities
17,019

 
 
 
16,428

 
 
Total liabilities
303,838

 
 
 
301,454

 
 
Temporary equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests
190

 
 
 
174

 
 
Permanent equity
 
 
 
 
 
 
 
Total The Bank of New York Mellon Corporation shareholders’ equity
41,337

 
 
 
39,418

 
 
Noncontrolling interests
155

 
 
 
464

 
 
Total permanent equity
41,492

 
 
 
39,882

 
 
Total liabilities, temporary equity and permanent equity
$
345,520

 
 
 
$
341,510

 
 
Net interest revenue (FTE) – Non-GAAP
 
$
2,742

 
 
 
$
2,493

 
Net interest margin (FTE) – Non-GAAP
 
 
1.26
%
 
 
 
1.16
%
Less: Tax equivalent adjustment (c)
 
16

 
 
 
36

 
Net interest revenue – GAAP
 
$
2,726

 
 
 
$
2,457

 
Net interest margin – GAAP
 
 
1.25
%
 
 
 
1.14
%
(a)
Includes the impact of offsetting under enforceable netting agreements of approximately $19 billion for the first nine months of 2018 and $3 billion for the first nine months of 2017.
(b)
Interest income and average yields are presented on an FTE basis (Non-GAAP).
(c)
The tax equivalent adjustment relates to tax-exempt securities, primarily state and political subdivisions, and is based on the federal statutory tax rate of 21% for year-to-date 2018 and 35% for year-to-date 2017, adjusted for applicable state income taxes, net of the related federal tax benefit.




10 BNY Mellon


Noninterest expense

Noninterest expense
 
 
 
 
 
 
 
 
YTD18

 
 
 
 
3Q18 vs.
 
 
 
 vs.
(dollars in millions)
3Q18

2Q18

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Staff (a)
$
1,478

$
1,489

$
1,485

(1
)%
 %
 
$
4,543

$
4,405

3
 %
Professional, legal and other purchased services
332

328

305

1

9

 
951

937

1

Software
189

192

175

(2
)
8

 
554

514

8

Net occupancy
139

156

141

(11
)
(1
)
 
434

417

4

Sub-custodian and clearing (b)
106

110

101

(4
)
5

 
335

312

7

Distribution and servicing
99

106

109

(7
)
(9
)
 
311

313

(1
)
Furniture and equipment
73

74

58

(1
)
26

 
208

174

20

Business development
51

62

49

(18
)
4

 
164

163

1

Bank assessment charges
49

47

51

4

(4
)
 
148

167

(11
)
Amortization of intangible assets
48

48

52


(8
)
 
145

157

(8
)
Other (a)(b)(c)
174

135

128

29

36

 
431

392

10

Total noninterest expense
$
2,738

$
2,747

$
2,654

 %
3
 %
 
$
8,224

$
7,951

3
 %
 
 
 
 
 

 
 
 


Full-time employees at period end
52,000

52,000

52,900

 %
(2
)%
 
 
 


(a)
In the first quarter of 2018, we adopted new accounting guidance included in Accounting Standards Update (“ASU”) 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which required the reclassification of the components of pension and other postretirement costs, other than the service cost component. As a result, staff expense increased and other expense decreased. Prior periods have been reclassified. See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(b)
Beginning in the first quarter of 2018, clearing expense, which was previously included in other expense, was included with sub-custodian expense. Prior periods have been reclassified.
(c)
Beginning in the first quarter of 2018, merger and integration (“M&I”), litigation and restructuring charges are no longer separately disclosed. Expenses previously reported in this line have been reclassified to existing expense categories, primarily other expense.


Total noninterest expense increased 3% compared with the third quarter of 2017 and decreased slightly compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects investments in technology and higher litigation expense, partially offset by lower staff and distribution and servicing expenses. The investments in technology are included in staff, professional, legal and other purchased services, software and furniture and equipment expenses. The decrease compared with the second quarter of 2018 primarily reflects lower net occupancy, staff and business development expenses, partially offset by higher litigation expense. The decrease in net occupancy expense is primarily due to expenses associated with the continued consolidation of our real estate recorded in the second quarter of 2018.

We expect to continue to incur additional expenses as we invest in our technology infrastructure and platforms. We also expect to incur expenses related to relocating our corporate headquarters, which is estimated to total $75 million, of which $12 million was recorded in the second quarter of 2018. We expect the remaining expenses related to relocating our corporate headquarters to be recorded in the fourth quarter of 2018.
 
Year-to-date 2018 compared with year-to-date 2017

Total noninterest expense increased 3% compared with the first nine months of 2017. The increase primarily reflects investments in technology, the unfavorable impact of a weaker U.S. dollar, higher litigation, volume-related sub-custodian and clearing expenses and expenses associated with the continued consolidation of our real estate, partially offset by lower consulting expense and decreases in other expenses.

Income taxes

BNY Mellon recorded an income tax provision of $220 million (16.5% effective tax rate) in the third quarter of 2018, including the impact of adjusting provisional estimates for U.S. tax legislation and other changes. The income tax provision was $348 million (25.4% effective tax rate) in the third quarter of 2017 and $286 million (20.5% effective tax rate) in the second quarter of 2018. For additional information, see Note 11 of the Notes to Consolidated Financial Statements.



BNY Mellon 11


Review of businesses

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

Business accounting principles

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

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

Business results are subject to reclassification when organizational changes are made. There were no significant organizational changes in the third quarter of 2018. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.

The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, incentive expense typically increases reflecting the vesting of long-term stock awards for retirement-eligible employees. In the third quarter, Depositary Receipts revenue is typically higher due to an increased level of client dividend payments. Also in the third quarter, volume-related fees may decline due to reduced client activity. In the third
 
quarter, staff expense typically increases reflecting the annual employee merit increase. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth quarter represents the end of the measurement period for many of the performance fee-eligible relationships.

The results of our businesses may also be impacted by the translation of financial results denominated in foreign currencies to the U.S. dollar. We are primarily impacted by activities denominated in the British pound and the euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency-denominated expenses than revenues. However, our Investment Management business typically has more foreign currency-denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.

Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At Sept. 30, 2018, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.03 to $0.05.

See Note 19 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.



12 BNY Mellon


Investment Services business

 
 
 
 
 
 
 
 
 
 
 
YTD18

(dollars in millions unless otherwise noted)
 
 
 
 
 
3Q18 vs.
 
 
 
 vs.
3Q18

2Q18

1Q18

4Q17

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Revenue:
 
 
 
 
 
 
 
 
 
 
 
Investment services fees:
 
 
 
 
 
 
 
 
 
 
 
Asset servicing
$
1,136

$
1,135

$
1,143

$
1,106

$
1,081

 %
5
 %
 
$
3,414

$
3,180

7
 %
Clearing services
383

391

414

400

381

(2
)
1

 
1,188

1,149

3

Issuer services
288

265

260

196

288

9


 
813

779

4

Treasury services
136

140

138

136

141

(3
)
(4
)
 
414

419

(1
)
Total investment services fees
1,943

1,931

1,955

1,838

1,891

1

3

 
5,829

5,527

5

Foreign exchange and other trading revenue
161

172

169

168

154

(6
)
5

 
502

452

11

Other (a)
126

130

126

135

142

(3
)
(11
)
 
382

407

(6
)
Total fee and other revenue
2,230

2,233

2,250

2,141

2,187


2

 
6,713

6,386

5

Net interest revenue
827

874

844

813

777

(5
)
6

 
2,545

2,245

13

Total revenue
3,057

3,107

3,094

2,954

2,964

(2
)
3

 
9,258

8,631

7

Provision for credit losses
1

1

(7
)
(2
)
(2
)
N/M
N/M
 
(5
)
(5
)
N/M
Noninterest expense (excluding amortization of intangible assets)
1,995

1,931

1,913

2,060

1,837

3

9

 
5,839

5,538

5

Amortization of intangible assets
35

36

36

37

37

(3
)
(5
)
 
107

112

(4
)
Total noninterest expense
2,030

1,967

1,949

2,097

1,874

3

8

 
5,946

5,650

5

Income before taxes
$
1,026

$
1,139

$
1,152

$
859

$
1,092

(10
)%
(6
)%
 
$
3,317

$
2,986

11
 %
 
 
 
 
 
 

 
 
 
 

Pre-tax operating margin
34
%
37
%
37
%
29
%
37
%


 
 
36
%
35
%


 
 
 
 
 
 


 
 
 
 


Securities lending revenue
$
52

$
55

$
48

$
45

$
41

(5
)%
27
 %
 
$
155

$
123

26
 %
 
 
 
 
 
 




 
 
 


Total revenue by line of business:
 
 
 
 
 




 
 
 


Asset Servicing
$
1,458

$
1,520

$
1,519

$
1,459

$
1,420

(4
)%
3
 %
 
$
4,497

$
4,144

9
 %
Pershing
558

558

581

569

542


3

 
1,697

1,611

5

Issuer Services
453

431

418

352

442

5

2

 
1,302

1,236

5

Treasury Services
324

329

321

322

316

(2
)
3

 
974

929

5

Clearance and Collateral Management
264

269

255

252

244

(2
)
8

 
788

711

11

Total revenue by line of business
$
3,057

$
3,107

$
3,094

$
2,954

$
2,964

(2
)%
3
 %
 
$
9,258

$
8,631

7
 %
 
 
 
 
 
 
 
 
 
 
 

Metrics:
 
 
 
 
 

 
 
 
 

Average loans
$
35,044

$
38,002

$
39,200

$
38,845

$
38,038

(8
)%
(8
)%
 
$
37,400

$
40,578

(8
)%
Average deposits
$
192,741

$
203,064

$
214,130

$
204,680

$
198,299

(5
)%
(3
)%
 
$
203,233

$
198,796

2
 %
 
 
 
 
 
 


 
 
 
 


AUC/A at period end (in trillions) (b)
$
34.5

$
33.6

$
33.5

$
33.3

$
32.2

3
 %
7
 %
 
$
34.5

$
32.2

7
 %
Market value of securities on loan at period end (in billions) (c)
$
415

$
432

$
436

$
408

$
382

(4
)%
9
 %
 
$
415

$
382

9
 %
 
 
 
 
 
 


 
 
 
 
 
Pershing:
 
 
 
 
 
 
 
 
 
 
 
Average active clearing accounts (U.S. platform) (in thousands)
6,108

6,080

6,075

6,126

6,203

 %
(2
)%
 
 
 
 
Average long-term mutual fund assets (U.S. platform)
$
527,336

$
512,645

$
514,542

$
508,873

$
500,998

3
 %
5
 %
 
 
 
 
Average investor margin loans (U.S. platform)
$
10,696

$
10,772

$
10,930

$
9,822

$
8,886

(1
)%
20
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Clearance and Collateral Management:
 
 
 
 
 
 
 
 
 
 
 
Average tri-party collateral management balances (in billions)
$
2,995

$
2,801

$
2,698

$
2,606

$
2,534

7
 %
18
 %
 
 
 
 
(a)
Other revenue includes investment management fees, financing-related fees, distribution and servicing revenue and investment and other income.
(b)
Includes the AUC/A of CIBC Mellon of $1.4 trillion at Sept. 30, 2018 and June 30, 2018, and $1.3 trillion at March 31, 2018, Dec. 31, 2017 and Sept. 30, 2017.
(c)
Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, which totaled $69 billion at Sept. 30, 2018, $70 billion at June 30, 2018, $73 billion at March 31, 2018, $71 billion at Dec. 31, 2017 and $68 billion at Sept. 30, 2017.
N/M - Not meaningful.


BNY Mellon 13


Business description

BNY Mellon Investment Services provides business services and technology solutions to entities including financial institutions, corporations, foundations and endowments, public funds and government agencies. Our lines of business include: Asset Servicing, Pershing, Issuer Services, Treasury Services and Clearance and Collateral Management.

We are one of the leading global investment services providers with $34.5 trillion of AUC/A at Sept. 30, 2018.

We are the primary provider of U.S. government securities clearance and a provider of non-U.S. government securities clearance.
We are a leading provider of tri-party collateral management services with an average of $3.0 trillion serviced globally including approximately $2.1 trillion of the U.S. tri-party repo market.
Our agency securities lending program is one of the largest lenders of U.S. and non-U.S. securities, servicing a lendable asset pool of approximately $3.7 trillion in 34 separate markets.

The Asset Servicing business provides a comprehensive suite of solutions. As one of the largest global custody and fund accounting providers and a trusted partner, we offer services for the safekeeping of assets in capital markets globally as well as alternative investment and structured product strategies. We provide custody and foreign exchange services, support exchange-traded funds and unit investment trusts and provide our clients outsourcing capabilities. We deliver securities lending and financing solutions on both an agency and principal basis. Our market leading liquidity services portal enables cash investments for institutional clients and includes fund research and analytics.

Pershing provides clearing, custody, business and technology solutions, delivering dependable operational support to financial organizations globally.

The Issuer Services business includes Corporate Trust and Depositary Receipts. Our Corporate Trust business delivers a full range of issuer and related investor services, including trustee, paying agency, fiduciary, escrow and other financial
 
services. We are a leading provider to the debt capital markets, providing customized and market-driven solutions to investors, bondholders and lenders. Our Depositary Receipts business drives global investing by providing servicing and value-added solutions that enable, facilitate and enhance cross-border trading, clearing, settlement and ownership. We are one of the largest providers of depositary receipts services in the world, partnering with leading companies from more than 50 countries.

Our Treasury Services business includes customizable solutions and innovative technology that deliver high-quality cash management, payment and trade support for corporate and institutional global treasury needs.

Our Clearance and Collateral Management business clears and settles equity and fixed-income transactions globally and serves as custodian for tri-party repo collateral worldwide. Our collateral services include collateral management, administration and segregation.

We offer innovative solutions and industry expertise which help financial institutions and institutional investors to mine opportunities from liquidity, financing, risk and balance sheet challenges.

Review of financial results

AUC/A increased 7% compared with Sept. 30, 2017 to $34.5 trillion, primarily reflecting net new business and higher equity market values, partially offset by the unfavorable impact of a stronger U.S. dollar. AUC/A consisted of 37% equity securities and 63% fixed-income securities at both Sept. 30, 2018 and Sept. 30, 2017.

Total revenue of $3.1 billion increased 3% compared with the third quarter of 2017 and decreased 2% (unannualized) compared with the second quarter of 2018. Net interest revenue increased, compared with the third quarter of 2017, in all businesses, primarily driven by higher interest rates. The drivers of fee revenue by line of business are indicated below.

Asset Servicing revenue of $1.5 billion increased 3% compared with the third quarter of 2017 and decreased 4% (unannualized) compared with the second quarter of 2018. The increase compared with


14 BNY Mellon


the third quarter of 2017 primarily reflects higher equity market values, securities lending volumes, net interest revenue and foreign exchange volumes. The decrease compared with second quarter of 2018 primarily reflects lower net interest revenue, primarily driven by lower deposit balances, and lower foreign exchange volumes.

Pershing revenue of $558 million increased 3% compared with the third quarter of 2017 and was unchanged compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects higher net interest revenue, equity market values and long-term mutual funds balances, partially offset by the previously disclosed lost business.

Issuer Services revenue of $453 million increased 2% compared with the third quarter of 2017 and 5% (unannualized) compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects higher net interest revenue in Corporate Trust. The increase compared with the second quarter of 2018 primarily reflects seasonality in Depositary Receipts.

Treasury Services revenue of $324 million increased 3% compared with the third quarter of 2017 and decreased 2% (unannualized) compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects higher net interest revenue and transaction volumes. The decrease compared with the second quarter of 2018 primarily reflects lower net interest revenue.

Clearance and Collateral Management revenue of $264 million increased 8% compared with the third quarter of 2017 and decreased 2% (unannualized) compared with the second quarter of 2018. The increase compared with the third quarter of 2017 primarily reflects growth in collateral management, clearance volumes and net interest revenue. The decrease compared with the second quarter of 2018 primarily reflects lower net interest revenue.

Market and regulatory trends are driving investable assets toward lower fee asset management products at reduced margins for our clients. These dynamics are also negatively impacting our investment services
 
fees. However, at the same time, these trends are providing additional outsourcing opportunities as clients and other market participants seek to comply with new regulations and reduce their operating costs.

Noninterest expense of $2.0 billion increased 8% compared with the third quarter of 2017 and 3% (unannualized) compared with the second quarter of 2018. Both increases were primarily driven by investments in technology and higher litigation expense, partially offset by lower staff expense. Litigation increased noninterest expense by 3%.

Year-to-date 2018 compared with year-to-date 2017

Total revenue of $9.3 billion increased 7% compared with the first nine months of 2017. Net interest revenue increased in all lines of business primarily driven by higher interest rates. Asset Servicing revenue of $4.5 billion increased 9% compared with the first nine months of 2017 primarily reflecting higher net interest revenue, higher foreign exchange and securities lending volumes, equity market values and the favorable impact of a weaker U.S. dollar. Pershing revenue of $1.7 billion increased 5% compared with the first nine months of 2017 primarily reflecting higher net interest revenue, and higher fees due to growth in long-term mutual fund balances, partially offset by the impact of previously disclosed lost business. Issuer Services revenue of $1.3 billion increased 5% compared with the first nine months of 2017 primarily reflecting higher net interest revenue in Corporate Trust and higher Depositary Receipts revenue. Treasury Services revenue of $974 million increased 5% compared with the first nine months of 2017 primarily reflecting higher net interest revenue and transaction volumes. Clearance and Collateral Management revenue of $788 million increased 11% compared with the first nine months of 2017 primarily reflecting growth in collateral management, higher clearance volumes and higher net interest revenue.

Noninterest expense of $5.9 billion increased 5% compared with the first nine months of 2017 primarily reflecting investments in technology, higher litigation expense and the unfavorable impact of a weaker U.S. dollar.


BNY Mellon 15


Investment Management business

 
 
 
 
 
 
 
 
 
 
 
YTD18
 
 
 
 
 
 
3Q18 vs.
 
 
 
 vs.
(dollars in millions)
3Q18

2Q18

1Q18

4Q17

3Q17

2Q18

3Q17

 
YTD18

YTD17

YTD17

Revenue:
 
 
 
 
 
 
 
 
 
 
 
Investment management fees (a)
$
879

$
885

$
898

$
898

$
871

(1
)%
1
 %
 
$
2,662

$
2,530

5
 %
Performance fees
30

12

48

50

15

N/M

100

 
90

44

105

Investment management and performance fees (b)
909

897

946

948

886

1

3

 
2,752

2,574

7

Distribution and servicing
47

48

50

51

51

(2
)
(8
)
 
145

156

(7
)
Other (a)
(18
)
(4
)
16

(25
)
(19
)
N/M

N/M

 
(6
)
(36
)
N/M

Total fee and other revenue (a)
938

941

1,012

974

918


2

 
2,891

2,694

7

Net interest revenue
77

77

76

74

82


(6
)
 
230

255

(10
)
Total revenue
1,015

1,018

1,088

1,048

1,000


2

 
3,121

2,949

6

Provision for credit losses
(2
)
2

2

1

(2
)
N/M

N/M

 
2

1

N/M

Noninterest expense (excluding amortization of intangible assets)
688

685

692

756

687



 
2,065

2,038

1

Amortization of intangible assets
13

12

13

15

15

8

(13
)
 
38

45

(16
)
Total noninterest expense
701

697

705

771

702

1


 
2,103

2,083

1

Income before taxes
$
316

$
319

$
381

$
276

$
300

(1
)%
5
 %
 
$
1,016

$
865

17
 %
 
 
 
 
 
 
 
 
 
 
 

Pre-tax operating margin
31
%
31
%
35
%
26
%
30
%
 
 
 
33
%
29
%


Adjusted pre-tax operating margin – Non-GAAP (c)
35
%
35
%
39
%
29
%
34
%
 
 
 
36
%
33
%


 
 
 
 
 
 
 
 
 
 
 

Total revenue by line of business:
 
 
 
 
 
 
 
 
 
 

Asset Management
$
704

$
702

$
770

$
738

$
693

 %
2
 %
 
$
2,176

$
2,037

7
 %
Wealth Management
311

316

318

310

307

(2
)
1

 
945

912

4

Total revenue by line of business
$
1,015

$
1,018

$
1,088

$
1,048

$
1,000

 %
2
 %
 
$
3,121

$
2,949

6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Average balances:
 
 
 
 
 
 
 
 
 
 
 
Average loans
$
16,763

$
16,974

$
16,876

$
16,813

$
16,724

(1
)%
 %
 
$
16,871

$
16,481

2
 %
Average deposits
$
14,634

$
14,252

$
13,363

$
11,633

$
12,374

3
 %
18
 %
 
$
14,088

$
14,283

(1
)%
(a)
Total fee and other revenue includes the impact of the consolidated investment management funds, net of noncontrolling interests. Additionally, other revenue includes asset servicing, treasury services, foreign exchange and other trading revenue and investment and other income.
(b)
On a constant currency basis, investment management and performance fees increased 3% (Non-GAAP) compared with the third quarter of 2017. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 41 for the reconciliation of this Non-GAAP measure.
(c)
Net of distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 41 for the reconciliation of this Non-GAAP measure. In the first quarter of 2018, the adjusted pre-tax margin Non-GAAP for prior periods was restated to include amortization of intangible assets and the provision for credit losses.
N/M - Not meaningful.


16 BNY Mellon


AUM trends (a)
 
 
 
 
 
 
3Q18 vs.
(dollars in billions)
3Q18

2Q18

1Q18

 
4Q17

3Q17

2Q18

3Q17

AUM at period end, by product type:
 
 
 
 
 
 
 
 
Equity
$
167

$
160

$
161

 
$
161

$
158

4
 %
6
 %
Fixed income
202

197

206

 
206

206

3

(2
)
Index
352

334

333

 
350

333

5

6

Liability-driven investments (b)
652

663

700

 
667

622

(2
)
5

Multi-asset and alternative investments
184

181

185

 
214

207

2

(11
)
Cash
271

270

283

 
295

298


(9
)
Total AUM by product type
$
1,828

$
1,805

$
1,868

 
$
1,893

$
1,824

1
 %
 %
 
 
 
 
 
 
 


Changes in AUM:
 
 
 
 
 
 
 
 
Beginning balance of AUM
$
1,805

$
1,868

$
1,893

 
$
1,824

$
1,771

 
 
Net inflows (outflows):
 
 
 
 
 
 
 
 
Long-term strategies:
 
 
 
 
 
 
 
 
Equity
(2
)
(3
)

 
(6
)
(2
)
 
 
Fixed income
2

(4
)
7

 
(2
)
4

 
 
Liability-driven investments (b)
16

2

13

 
23

(2
)
 
 
Multi-asset and alternative investments
2

(3
)
(3
)
 
2

3

 
 
Total long-term active strategies inflows (outflows)
18

(8
)
17

 
17

3

 
 
Index
(3
)
(7
)
(13
)
 
(1
)
(3
)
 
 
Total long-term strategies inflows (outflows)
15

(15
)
4

 
16


 
 
Short-term strategies:
 
 
 
 
 
 
 
 
Cash

(11
)
(14
)
 
(4
)
10

 
 
Total net inflows (outflows)
15

(26
)
(10
)
 
12

10

 
 
Net market impact
18

17

(14
)
 
47

17

 
 
Net currency impact
(10
)
(53
)
29

 
10

26

 
 
Divestitures/Other

(1
)
(30
)
(c)


 
 
Ending balance of AUM
$
1,828

$
1,805

$
1,868

 
$
1,893

$
1,824

1
 %
 %
 
 
 
 
 
 
 




Wealth Management client assets (d)
$
261

$
254

$
246

 
$
251

$
245

3
 %
7
 %
(a)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(b)
Includes currency overlay AUM.
(c)
Primarily reflects a change in methodology beginning in the first quarter of 2018 to exclude AUM related to equity method investments as well as the CenterSquare divestiture.
(d)
Includes AUM and AUC/A in the Wealth Management business.


Business description

Our Investment Management business consists of two lines of business, Asset Management and Wealth Management. The Asset Management business offers diversified investment management strategies and distribution of investment products. The Wealth Management business provides investment management, custody, wealth and estate planning and private banking services. See pages 19 and 20 of our 2017 Annual Report for additional information on our Investment Management business.

Review of financial results

AUM increased slightly compared with Sept. 30, 2017 reflecting higher market values, partially offset by the divestiture of CenterSquare and other changes and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound).
 
Net long-term inflows of $15 billion in the third quarter of 2018 were a result of $18 billion of inflows from actively managed strategies, primarily liability-driven investments, and $3 billion of outflows from index funds. Market and regulatory trends have resulted in increased demand for lower fee asset management products, and for performance-based fees.

Total revenue of $1.0 billion increased 2% compared with the third quarter of 2017 and decreased slightly compared with the second quarter of 2018.

Asset Management revenue of $704 million increased 2% compared with the third quarter of 2017 and increased slightly compared with the second quarter of 2018. The increase compared with the third quarter of 2017 reflects higher equity market values and performance fees, partially offset by the impact of net outflows and the divestiture of CenterSquare.


BNY Mellon 17


Wealth Management revenue of $311 million increased 1% compared with the third quarter of 2017 and decreased 2% (unannualized) compared with the second quarter of 2018. The decrease compared with the second quarter of 2018 primarily reflects lower net interest revenue, partially offset by higher equity market values.

Revenue generated in the Investment Management business included 42% from non-U.S. sources in the third quarter of 2018, compared with 41% in the third quarter of 2017 and second quarter of 2018.

Year-to-date 2018 compared with year-to-date 2017

Total revenue of $3.1 billion increased 6% compared with the first nine months of 2017. Asset
 
Management revenue of $2.2 billion increased 7% compared with the first nine months of 2017, primarily reflecting higher equity market values, the favorable impact of a weaker U.S. dollar (principally versus the British pound) and higher performance fees. Wealth management revenue of $945 million increased 4%, primarily reflecting higher equity market values, partially offset by lower net interest revenue.

Noninterest expense of $2.1 billion increased 1% primarily reflecting the unfavorable impact of a weaker U.S. dollar and investments in technology.


Other segment

 
 
 
 
 
 
 
 
(in millions)
3Q18

2Q18

1Q18

4Q17

3Q17

YTD18

YTD17

Fee revenue (loss)
$
7

$
40

$
57

$
(221
)
$
50

$
104

$
225

Net securities gains (losses)

1

(49
)
(26
)
19

(48
)
29

Total fee and other revenue (loss)
7

41

8

(247
)
69

56

254

Net interest (expense)
(13
)
(35
)
(1
)
(36
)
(20
)
(49
)
(43
)
Total (loss) revenue
(6
)
6

7

(283
)
49

7

211

Provision for credit losses
(2
)
(6
)

(5
)
(2
)
(8
)
(14
)
Noninterest expense
6

81

87

135

77

174

212

(Loss) income before taxes
$
(10
)
$
(69
)
$
(80
)
$
(413
)
$
(26
)
$
(159
)
$
13

 
 
 
 
 
 
 
 
Average loans and leases
$
2,000

$
2,090

$
2,530

$
1,114

$
1,182

$
2,204

$
1,275



See pages 25 and 26 of our 2017 Annual Report for additional information on the Other segment.

Review of financial results

Fee revenue decreased $43 million compared with the third quarter of 2017 and decreased $33 million compared with the second quarter of 2018. Both decreases primarily reflect our investments in renewable energy, including the impact of adjusting the provisional tax estimates (offset in income tax and de minimis to net income), and foreign currency hedging.

Net interest expense decreased $7 million compared with the third quarter of 2017 and $22 million compared with the second quarter of 2018. Both decreases primarily resulted from corporate treasury activity.

 
Noninterest expense decreased $71 million compared with the third quarter of 2017 and $75 million compared with the second quarter of 2018. Both decreases primarily reflect lower staff expense. The sequential decrease also reflects the expenses associated with the consolidation of our real estate recorded in second quarter of 2018. We expect to record the remaining expense related to relocating our corporate headquarters in the fourth quarter of 2018.

Year-to-date 2018 compared with year-to-date 2017

Income before taxes decreased $172 million compared with the first nine months of 2017. Total revenue decreased $204 million, primarily reflecting lease-related gains and a net gain related to an equity investment, both recorded in 2017, net securities losses, losses on our investments in renewable energy and lower foreign currency hedging. Noninterest expense decreased $38 million, primarily reflecting


18 BNY Mellon


lower pension expense and a methodological change in 2017 for allocating employee benefits expense to the business segments with no impact to consolidated results, partially offset by higher net occupancy expense, including the expenses associated with the continued consolidation of our real estate.

Critical accounting estimates

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 2017 Annual Report. Our critical accounting estimates are those related to the allowance for loan losses and allowance for lending-related commitments, fair value of financial instruments and derivatives, other-than-temporary impairment (“OTTI”), goodwill and other intangibles, and pension accounting, as referenced below.

Critical policy
Reference
Allowance for loan losses and allowance for lending-related commitments
2017 Annual Report, pages 29-30
Fair value of financial instruments and derivatives
2017 Annual Report, pages 30-32
OTTI
2017 Annual Report, pages 32-33
Goodwill and other intangibles
2017 Annual Report, pages 33-34
Pension accounting
2017 Annual Report, pages 34-35


Consolidated balance sheet review

One of our key risk management objectives is to maintain a balance sheet that remains strong throughout market cycles to meet the expectations of our major stakeholders, including our shareholders, clients, creditors and regulators.

We also seek to verify that the overall liquidity risk, including intraday liquidity risk, that we undertake stays within our risk appetite. The objective of our balance sheet management strategy is to maintain a balance sheet that is characterized by strong liquidity and 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. In managing the balance sheet, appropriate consideration is given to balancing the competing needs of maintaining sufficient levels of liquidity and complying with applicable regulations and supervisory expectations while optimizing profitability.
 
At Sept. 30, 2018, total assets were $350 billion compared with $372 billion at Dec. 31, 2017. The decrease in total assets was primarily driven by lower interest-bearing deposits with the Federal Reserve and other central banks and loans. Deposits totaled $232 billion at Sept. 30, 2018 and $244 billion at Dec. 31, 2017. The decrease primarily reflects lower interest-bearing deposits in non-U.S. offices and noninterest-bearing deposits principally in U.S. offices, partially offset by higher interest-bearing deposits in U.S. offices. At Sept. 30, 2018, total interest-bearing deposits were 56% of total interest-earning assets, compared with 51% at Dec. 31, 2017.

At Sept. 30, 2018, we had $43 billion of liquid funds (which include interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements) and $80 billion of cash (including $75 billion of overnight deposits with the Federal Reserve and other central banks) for a total of $123 billion of available funds. This compares with available funds of $137 billion at Dec. 31, 2017. Total available funds as a percentage of total assets were 35% at Sept. 30, 2018 and 37% at Dec. 31, 2017. For additional information on our liquid funds and available funds, see “Liquidity and dividends.”

Securities were $119 billion, or 34% of total assets, at Sept. 30, 2018, compared with $120 billion, or 32% of total assets, at Dec. 31, 2017. The decrease primarily reflects declines in sovereign debt/sovereign guaranteed securities, other securities and securities issued by state and political subdivisions, partially offset by increases in agency commercial mortgage-backed securities (“MBS”) and U.S. government agency securities. For additional information on our securities portfolio, see “Securities” and Note 4 of the Notes to Consolidated Financial Statements.

Loans were $54 billion, or 15% of total assets, at Sept. 30, 2018, compared with $62 billion, or 17% of total assets, at Dec. 31, 2017. The decrease in loans was primarily driven by lower loans to financial institutions and margin loans. For additional information on our loan portfolio, see “Loans” and Note 5 of the Notes to Consolidated Financial Statements.

Long-term debt totaled $28 billion at both Sept. 30, 2018 and Dec. 31, 2017. The balance reflects issuances of $4.2 billion, offset by maturities of $3.4 billion and a decrease in the fair value of hedged


BNY Mellon 19


long-term debt. For additional information on long-term debt, see “Liquidity and dividends.”

The Bank of New York Mellon Corporation total shareholders’ equity increased to $42 billion from $41 billion at Dec. 31, 2017. For additional information on our capital, see “Capital.”

Country risk exposure

We have exposure to certain countries with higher risk profiles. Exposure described below reflects the country of operations and risk of the immediate counterparty. Ratings of our counterparties are capped at the rating of the country. We continue to monitor our exposure to these and other countries as part of our risk management process. See “Risk management” in our 2017 Annual Report for additional information on how our exposures are managed.

BNY Mellon has a limited economic interest in the performance of assets of consolidated investment management funds, and therefore they are excluded from this disclosure.

Italy and Spain

We had net exposure of $1.3 billion to Italy and $1.8 billion to Spain at Sept. 30, 2018 and $1.8 billion to Italy and $2.1 billion to Spain at Dec. 31, 2017. At both Sept. 30, 2018 and Dec. 31, 2017, exposure to Italy and Spain primarily consisted of investment grade sovereign debt. Securities exposure totaled $984 million to Italy and $1.5 billion to Spain at Sept. 30, 2018 and $1.3 billion to Italy and $1.6 billion to Spain at Dec. 31, 2017.
 
Brazil

We have operations in Brazil providing investment services and investment management services. At Sept. 30, 2018 and Dec. 31, 2017, we had total net exposure to Brazil of $1.6 billion and $1.4 billion, respectively. This included $1.5 billion and $1.3 billion, respectively, in loans, which are primarily short-term trade finance loans extended to large established financial institutions. At Sept. 30, 2018 and Dec. 31, 2017, we held $102 million and $136 million, respectively, of non-investment grade sovereign debt.

Turkey

We mainly provide treasury and issuer services, as well as foreign exchange products primarily to the top-ten largest financial institutions in the country. As of Sept. 30, 2018 and Dec. 31, 2017, our exposure totaled $415 million and $707 million, respectively, consisting primarily of syndicated credit facilities and trade finance loans.

Securities

In the discussion of our securities portfolio, we have included certain credit ratings information because the information can indicate the degree of credit risk to which we are exposed. Significant changes in ratings classifications for our securities portfolio could indicate increased credit risk for us and could be accompanied by a reduction in the fair value of our securities portfolio.



20 BNY Mellon


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

Securities portfolio
June 30, 2018

 
3Q18
change in
unrealized
gain (loss)

Sept. 30, 2018
Fair value
as a % of amortized
cost (a)

Unrealized
gain (loss)

 
Ratings (b)
 
 
 
 
 
BB+
and
lower
 
(dollars in millions)
 Fair
value

 
Amortized
cost

Fair
value

 
 
AAA/
AA-
A+/
A-
BBB+/
BBB-
Not
rated
Agency RMBS
$
49,741

 
$
(214
)
$
50,934

$
49,555

 
97
%
$
(1,379
)
 
100
%
%
%
%
%
U.S. Treasury
23,962

 
(61
)
24,827

24,622

 
99

(205
)
 
100





Sovereign debt/sovereign guaranteed (c)
13,069

 
(45
)
12,338

12,386

 
100

48

 
74

6

19

1


Agency commercial MBS
11,019

 
(2
)
11,129

11,050

 
99

(79
)
 
100





CLOs
3,177

 
(3
)
3,368

3,363

 
100

(5
)
 
98



1

1

U.S. government agencies
3,269

 
(1
)
3,143

3,127

 
99

(16
)
 
100





Foreign covered bonds (d)
2,976

 
(8
)
3,066

3,054

 
100

(12
)
 
100





State and political subdivisions
2,646

 
(13
)
2,372

2,352

 
99

(20
)
 
78

18



4

Non-agency RMBS (e)
1,621

 
(17
)
1,265

1,529

 
121

264

 
7

9

10

64

10

Non-agency commercial MBS
1,391

 
1

1,484

1,473

 
99

(11
)
 
96

4




Corporate bonds
1,146

 
(1
)
1,140

1,118

 
98

(22
)
 
12

72

16



Other (f)
4,484

 
(3
)
4,480

4,464

 
100

(16
)
 
98




2

Total securities
$
118,501

(g)
$
(367
)
$
119,546

$
118,093

(g)
99
%
$
(1,453
)
(g)(h)
94
%
2
%
3
%
1
%
%
(a)
Amortized cost reflects historical impairments.
(b)
Represents ratings by S&P or the equivalent.
(c)
Primarily consists of exposure to UK, France, Germany, Spain, Italy, the Netherlands and Ireland.
(d)
Primarily consists of exposure to Canada, UK, Australia and Sweden.
(e)
Includes residential mortgage-backed securities (“RMBS”) that were included in the former Grantor Trust of $943 million at June 30, 2018 and $889 million at Sept. 30, 2018.
(f)
Includes commercial paper with a fair value of $699 million at June 30, 2018. There was no commercial paper at Sept. 30, 2018.
(g)
Includes net unrealized gains on derivatives hedging securities available-for-sale of $373 million at June 30, 2018 and $593 million at Sept. 30, 2018.
(h)
Unrealized losses of $311 million at Sept. 30, 2018 related to available-for-sale securities, net of hedges.


The fair value of our securities portfolio, including related hedges, was $118.1 billion at Sept. 30, 2018, compared with $119.9 billion at Dec. 31, 2017. The decrease primarily reflects declines in sovereign debt/sovereign guaranteed securities, other securities driven by the reclassification of money market fund investments to trading assets and securities issued by states and political subdivisions, partially offset by increases in agency commercial mortgage-backed and U.S. government agency securities.

At Sept. 30, 2018, the total securities portfolio had a net unrealized loss of $1.5 billion, compared with a net unrealized loss of $85 million at Dec. 31, 2017,
 
including the impact of related hedges. The increase in the net unrealized pre-tax loss was primarily driven by higher interest rates.

The unrealized loss, net of tax, on our available-for-sale securities portfolio included in accumulated other comprehensive income (“OCI”) was $228 million at Sept. 30, 2018, compared with an unrealized gain of $184 million at Dec. 31, 2017.

At Sept. 30, 2018, 94% of the securities in our portfolio were rated AAA/AA-, compared with 93% at Dec. 31, 2017.



BNY Mellon 21


The following table presents the amortizable purchase premium (net of discount) related to the securities portfolio and accretable discount related to the 2009 restructuring of the securities portfolio.

Net premium amortization and discount accretion of securities (a)
 
 
 
 
 
(dollars in millions)
3Q18

2Q18

1Q18

4Q17

3Q17

Amortizable purchase premium (net of discount) relating to securities:
 
 
 
 
 
Balance at period end
$
1,536

$
1,642

$
1,827

$
1,987

$
2,053

Estimated average life remaining at period end (in years)
5.2

5.3

5.2

5.0

5.0

Amortization
$
108

$
115

$
122

$
135

$
140

Accretable discount related to the prior restructuring of the securities portfolio:
 
 
 
 
 
Balance at period end
$
224

$
239

$
250

$
274

$
302

Estimated average life remaining at period end (in years)
6.3

6.3

6.3

6.3

6.5

Accretion
$
20

$
24

$
25

$
26

$
24

(a)
Amortization of purchase premium decreases net interest revenue while accretion of discount increases net interest revenue. Both were recorded on a level yield basis.


We routinely test our securities for OTTI. See “Critical accounting estimates” for additional information regarding OTTI.

On a quarterly basis, we perform our impairment analysis using several factors, including projected loss severities and default rates. In the third quarter of 2018, this analysis resulted in other-than-temporary credit losses of less than $1 million, primarily in our non-agency RMBS portfolio. At Sept. 30, 2018, if we were to increase or decrease each of our projected loss severity and default rates by 100 basis points on each of the positions in our
 
non-agency RMBS portfolio, including the securities previously held by the Grantor Trust, credit-related impairment charges on these securities would have increased or decreased by less than $1 million (pre-tax). See Note 4 of the Notes to Consolidated Financial Statements for the projected weighted-average default rates and loss severities.

See Note 4 of the Notes to Consolidated Financial Statements for the pre-tax net securities gains (losses) by security type. See Note 15 of the Notes to Consolidated Financial Statements for details of securities by level in the fair value hierarchy.


Loans 

Total exposure – consolidated
Sept. 30, 2018
 
Dec. 31, 2017
(in billions)
Loans

Unfunded
commitments

Total
exposure

 
Loans

Unfunded
commitments

Total
exposure

Non-margin loans:
 
 
 
 
 
 
 
Financial institutions
$
10.4

$
34.0

$
44.4

 
$
13.1

$
32.5

$
45.6

Commercial
2.1

15.3

17.4

 
2.9

18.0

20.9

Subtotal institutional
12.5

49.3

61.8

 
16.0

50.5

66.5

Wealth management loans and mortgages
16.0

0.9

16.9

 
16.5

1.1

17.6

Commercial real estate
5.0

3.6

8.6

 
4.9

3.5

8.4

Lease financings
1.3


1.3

 
1.3


1.3

Other residential mortgages
0.6


0.6

 
0.7


0.7

Overdrafts
3.8


3.8

 
5.1


5.1

Other
1.3


1.3

 
1.2


1.2

Subtotal non-margin loans
40.5

53.8

94.3

 
45.7

55.1

100.8

Margin loans
13.5


13.5

 
15.8


15.8

Total
$
54.0

$
53.8

$
107.8

 
$
61.5

$
55.1

$
116.6

 


At Sept. 30, 2018, total exposures of $107.8 billion decreased 8% compared with Dec. 31, 2017, primarily reflecting lower exposure in the
 
commercial, margin loan and financial institutions portfolios as well as lower overdrafts.
 


22 BNY Mellon


Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios comprised 57% of our total exposure at
 
both Sept. 30, 2018 and Dec. 31, 2017. Additionally, most of our overdrafts relate to financial institutions.

Financial institutions

The financial institutions portfolio is shown below.

Financial institutions
portfolio exposure
(dollars in billions)
Sept. 30, 2018
 
Dec. 31, 2017
Loans

Unfunded
commitments

Total
exposure

% Inv.
grade

% due
<1 yr.

 
Loans

Unfunded
commitments

Total
exposure

Securities industry
$
2.3

$
21.4

$
23.7

99
%
99
%
 
$
3.6

$
19.2

$
22.8

Asset managers
1.3

6.3

7.6

98

85

 
1.4

6.4

7.8

Banks
5.9

1.3

7.2

69

93

 
7.0

1.2

8.2

Insurance
0.1

3.1

3.2

100

11

 
0.1

3.5

3.6

Government
0.1

0.5

0.6

100

48

 
0.1

0.9

1.0

Other
0.7

1.4

2.1

97

62

 
0.9

1.3

2.2

Total
$
10.4

$
34.0

$
44.4

94
%
87
%
 
$
13.1

$
32.5

$
45.6

 


The financial institutions portfolio exposure was $44.4 billion at Sept. 30, 2018, a 3% decrease compared with $45.6 billion at Dec. 31, 2017, primarily reflecting lower exposure in the banks, insurance and government portfolios, partially offset by an increase in securities industry exposure.

Financial institution exposures are high-quality, with 94% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification at Sept. 30, 2018. Each customer is assigned an internal credit rating, which is mapped to an equivalent external rating agency grade based upon a number of dimensions, which are continually evaluated and may change over time. The exposure to financial institutions is generally short-term. Of these exposures, 87% expire within one year and 64% expire within 90 days. In addition, 80% of the financial institutions exposure is secured. For example, securities industry clients and asset managers often borrow against marketable securities held in custody.

For ratings of non-U.S. counterparties, our internal credit rating is generally capped at a rating equivalent to the sovereign rating of the country where the counterparty resides, regardless of the internal credit rating assigned to the counterparty or the underlying collateral.
 
At Sept. 30, 2018, the secured intraday credit provided to dealers in connection with their tri-party repo activity totaled $20.9 billion and was primarily included in the securities industry portfolio. Dealers secure the outstanding intraday credit with high-quality liquid collateral having a market value in excess of the amount of the outstanding credit.

Our bank exposure primarily relates to our global trade finance. These exposures are short-term in nature, with 93% due in less than one year. The investment grade percentage of our bank exposure was 69% at Sept. 30, 2018, compared with 68% at Dec. 31, 2017. Our non-investment grade exposures are primarily to Brazil and Turkey. These loans are primarily trade finance loans and syndicated credit facilities.

The asset manager portfolio exposure was high-quality, with 98% of the exposures meeting our investment grade equivalent ratings criteria as of Sept. 30, 2018. These exposures are generally short-term liquidity facilities, with the majority to regulated mutual funds.



BNY Mellon 23


Commercial

The commercial portfolio is presented below.

Commercial portfolio exposure
Sept. 30, 2018
 
Dec. 31, 2017
(dollars in billions)
Loans

Unfunded
commitments

Total
exposure

% Inv.
grade

% due
<1 yr.

 
Loans

Unfunded
commitments

Total
exposure

Manufacturing
$
0.9

$
5.2

$
6.1

95
%
9
%
 
$
1.3

$
6.1

$
7.4

Services and other
0.6

4.7

5.3

97

27

 
0.9

6.0

6.9

Energy and utilities
0.5

4.2

4.7

95

12

 
0.7

4.4

5.1

Media and telecom
0.1

1.2

1.3

94

9

 

1.5

1.5

Total
$
2.1

$
15.3

$
17.4

95
%
15
%
 
$
2.9

$
18.0

$
20.9

 


The commercial portfolio exposure was $17.4 billion at Sept. 30, 2018, a 17% decrease compared with $20.9 billion at Dec. 31, 2017, primarily reflecting lower exposure in the services and other and manufacturing portfolios.

Utilities-related exposure represents approximately 77% of the energy and utilities portfolio at Sept. 30, 2018. The remaining exposure in the energy and utilities portfolio, which includes exposure to refining, exploration and production companies, integrated companies and pipelines, was 82% investment grade at Sept. 30, 2018, and 77% at Dec. 31, 2017.

Our credit strategy is to focus on investment grade clients that are active users of our non-credit services. The following table summarizes the percentage of the financial institutions and commercial portfolio exposures that are investment grade.

Percentage of the portfolios that are investment grade
 
Sept. 30, 2018

June 30,
2018

March 31,
2018

Dec. 31, 2017

Sept. 30, 2017

 
Financial institutions
94
%
94
%
93
%
93
%
93
%
Commercial
95
%
96
%
95
%
95
%
95
%


Wealth management loans and mortgages

Our wealth management exposure was $16.9 billion at Sept. 30, 2018, compared with $17.6 billion at Dec. 31, 2017. Wealth management loans and mortgages primarily consist of loans to high-net-worth individuals, which are secured by marketable securities and/or residential property. Wealth management mortgages are primarily interest-only, adjustable-rate mortgages with a weighted-average
 
loan-to-value ratio of 62% at origination. Less than 1% of the mortgages were past due at Sept. 30, 2018.

At Sept. 30, 2018, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 24%; New York - 18%; Massachusetts - 11%; Florida - 8%; and other - 39%.

Commercial real estate

Our commercial real estate exposure totaled $8.6 billion at Sept. 30, 2018, compared with $8.4 billion at Dec. 31, 2017. Our income-producing 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 also include construction and renovation facilities. Our client base consists of experienced developers and long-term holders of real estate assets. Loans are approved on the basis of existing or projected cash flows and supported by appraisals and knowledge of local market conditions. Development loans are structured with moderate leverage, and in many instances, involve some level of recourse to the developer.

At Sept. 30, 2018, 58% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type, with 42% secured by residential buildings, 36% secured by office buildings, 13% secured by retail properties and 9% secured by other categories. Approximately 98% of the unsecured portfolio consists of real estate investment trusts (“REITs”) and real estate operating companies, which are both predominantly investment grade.

At Sept. 30, 2018, our commercial real estate portfolio consists of the following concentrations:


24 BNY Mellon


REITs and real estate operating companies - 41%; New York metro - 39%; and other - 20%.

Lease financings

The leasing portfolio exposure totaled $1.3 billion at both Sept. 30, 2018 and Dec. 31, 2017. At Sept. 30, 2018, the lease financings portfolio consisted of exposures backed by well-diversified assets, including large-ticket transportation equipment, and approximately 96% of the leasing portfolio exposure was investment grade, or investment grade equivalent.

Other residential mortgages

The other residential mortgages portfolio primarily consists of 1-4 family residential mortgage loans and totaled $623 million at Sept. 30, 2018 and $708 million at Dec. 31, 2017. Included in this portfolio at Sept. 30, 2018 are $140 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 Alt-A loans. As of Sept. 30, 2018, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 12% of the serviced loan balance was at least 60 days delinquent. The properties securing the prime and Alt-A mortgage loans were located (in order of concentration) in California, Florida, Virginia, the tri-state area (New York, New Jersey and Connecticut) and Maryland.

To determine the projected loss on the prime and Alt-A mortgage portfolios, 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).

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients. Overdrafts occur on a daily basis primarily in the custody and securities clearance business and are generally repaid within two business days.

Other loans

Other loans primarily include loans to consumers that are fully collateralized with equities, mutual funds and fixed-income securities.

Margin loans

Margin loans are collateralized with marketable securities, and borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. Margin loans included $2.3 billion at Sept. 30, 2018 and $4.2 billion at Dec. 31, 2017 related to a term loan program that offers fully collateralized loans to broker-dealers.

Asset quality and allowance for credit losses

Our credit strategy is to focus on investment grade clients who are active users of our non-credit services. Our primary exposure to the credit risk of a customer consists of funded loans, unfunded contractual commitments to lend, standby letters of credit (“SBLC”) and overdrafts associated with our custody and securities clearance businesses.



BNY Mellon 25


The following table details changes in our allowance for credit losses.

Allowance for credit losses activity
Sept. 30, 2018

June 30, 2018

Dec. 31, 2017

Sept. 30, 2017

(dollars in millions)
Non-margin loans
$
40,519

$
42,719

$
45,755

$
45,196

Margin loans
13,468

15,057

15,785

13,872

Total loans
$
53,987

$
57,776

$
61,540

$
59,068

Beginning balance of allowance for credit losses
$
254

$
256

$
265

$
270

Provision for credit losses
(3
)
(3
)
(6
)
(6
)
Net recoveries:
 
 
 
 
Other residential mortgages

1

2

1

Net recoveries

1

2

1

Ending balance of allowance for credit losses
$
251

$
254

$
261

$
265

Allowance for loan losses
$
140

$
145

$
159

$
161

Allowance for lending-related commitments
111

109

102

104

Allowance for loan losses as a percentage of total loans
0.26
%
0.25
%
0.26
%
0.27
%
Allowance for loan losses as a percentage of non-margin loans
0.35

0.34

0.35

0.36

Total allowance for credit losses as a percentage of total loans
0.46

0.44

0.42

0.45

Total allowance for credit losses as a percentage of non-margin loans
0.62

0.59

0.57

0.59



The allowance for credit losses decreased $10 million compared with Dec. 31, 2017 and $14 million compared with Sept. 30, 2017. Both decreases were driven by the credit to provision for credit losses, partially offset by the impact of an update to the usage given default parameter in the second quarter of 2018. The usage given default parameter associated with the estimate of the probability of drawdown at default was updated, resulting in an $11 million increase to the allowance for lending-related commitments in the second quarter of 2018.

We had $13.5 billion of secured margin loans on our balance sheet at Sept. 30, 2018 compared with $15.8 billion at Dec. 31, 2017 and $13.9 billion at Sept. 30, 2017. 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 as a percentage of non-margin loans is a more appropriate metric to measure the adequacy of the reserve.

The allowance for loan losses and allowance for lending-related commitments represent management’s estimate of losses inherent in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. To the extent actual results differ from forecasts or management’s judgment, the allowance for credit losses may be greater or less than future charge-offs.

Based on an evaluation of the allowance for credit losses as discussed in “Critical accounting estimates” and Note 1 of the Notes to Consolidated Financial
 
Statements, both in our 2017 Annual Report, we have allocated our allowance for credit losses as follows.

 
Allocation of allowance
Sept. 30, 2018

June 30, 2018

Dec. 31, 2017

Sept. 30, 2017

 
 
Commercial
30
%
30
%
30
%
31
%
 
Commercial real estate
29

29

29

28

 
Foreign
13

13

13

13

 
Financial institutions
10

10

9

9

 
Wealth management (a)
9

9

8

8

 
Other residential mortgages
7

7

8

8

 
Lease financing
2

2

3

3

 
Total
100
%
100
%
100
%
100
%
(a)
Includes the allowance for wealth management mortgages.


The allocation of the 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 losses.

The credit rating assigned to each credit is a significant variable in determining the allowance. If each credit were rated one grade better, the allowance would have decreased by $61 million, while if each credit were rated one grade worse, the allowance would have increased by $100 million. Similarly, if the loss given default were one rating worse, the allowance would have increased by $39 million, while if the loss given default were one rating better, the allowance would have decreased by $28 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 less than $1 million, respectively.



26 BNY Mellon


Nonperforming assets

Total nonperforming assets were $81 million at Sept. 30, 2018 compared with $90 million at Dec. 31, 2017. The decrease primarily reflects lower other residential mortgage loans driven by paydowns and sales. See Note 5 of the Notes to Consolidated Financial Statements for additional information on nonperforming assets.

Deposits

Total deposits were $231.6 billion at Sept. 30, 2018, a decrease of 5% compared with $244.3 billion at Dec. 31, 2017. The decrease primarily reflects lower interest-bearing deposits in non-U.S. offices and noninterest-bearing deposits principally in U.S. offices, partially offset by higher interest-bearing deposits in U.S. offices.

Noninterest-bearing deposits were $65.8 billion at Sept. 30, 2018 compared with $82.7 billion at Dec. 31, 2017. Interest-bearing deposits were $165.8 billion at Sept. 30, 2018 compared with $161.6 billion at Dec. 31, 2017.

Short-term borrowings

We fund ourselves primarily through deposits and, to a lesser extent, other short-term borrowings and long-term debt. Short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements, payables to customers and broker-dealers, commercial paper and other borrowed funds. Certain other borrowings, for example, securities sold under repurchase agreements, require the delivery of securities as collateral.

See “Liquidity and dividends” for a discussion of long-term debt and liquidity metrics that we monitor.

Information related to federal funds purchased and securities sold under repurchase agreements is presented below.

 
Federal funds purchased and securities sold under repurchase agreements
 
Quarter ended
(dollars in millions)
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

Maximum month-end balance during the quarter
$
13,020

$
14,138

$
21,850

Average daily balance (a)
$
14,199

$
18,146

$
21,403

Weighted-average rate during the quarter (a)
5.33
%
3.48
%
1.30
%
Ending balance (b)
$
10,158

$
13,200

$
10,314

Weighted-average rate at period end (b)
7.33
%
4.24
%
1.35
%
(a)
Includes the impact of offsetting under enforceable netting agreements of $25,922 million for the third quarter of 2018, $17,975 million for the second quarter of 2018 and $6,518 million for the third quarter of 2017.
(b)
Includes the impact of offsetting under enforceable netting agreements of $58,540 million at Sept. 30, 2018, $36,766 million at June 30, 2018 and $19,171 million at Sept. 30, 2017.


Fluctuations of federal funds purchased and securities sold under repurchase agreements between periods reflect changes in overnight borrowing opportunities. The increase in the weighted-average rates, compared with both June 30, 2018 and Sept. 30, 2017, primarily reflects the impact of offsetting under enforceable netting agreements on the balance sheet and higher interest rates.

Information related to payables to customers and broker-dealers is presented below.

Payables to customers and broker-dealers
 
Quarter ended
(dollars in millions)
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

Maximum month-end balance during the quarter
$
19,232

$
20,349

$
21,563

Average daily balance (a)
$
19,073

$
19,402

$
21,280

Weighted-average rate during the quarter (a)
1.23
%
1.10
%
0.42
%
Ending balance
$
18,683

$
19,123

$
21,176

Weighted-average rate at period end
1.30
%
1.08
%
0.43
%
(a)
The weighted-average rate is calculated based on, and is applied to, the average interest-bearing payables to customers and broker-dealers, which were $16,252 million in the third quarter of 2018, $16,349 million in the second quarter of 2018 and $18,516 million in the third quarter of 2017.


Payables to customers and broker-dealers represent funds awaiting re-investment and short sale proceeds payable on demand. Payables to customers and broker-dealers are driven by customer trading activity levels and market volatility.


BNY Mellon 27


Information related to commercial paper is presented below.

Commercial paper
Quarter ended
(dollars in millions)
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

Maximum month-end balance during the quarter
$
4,422

$
4,470

$
4,277

Average daily balance
$
3,102

$
3,869

$
2,736

Weighted-average rate during the quarter
2.10
%
2.13
%
1.15
%
Ending balance
$
735

$
2,508

$
2,501

Weighted-average rate at period end
2.06
%
2.24
%
1.18
%


The Bank of New York Mellon, our largest bank subsidiary, issues commercial paper that matures within 397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The decrease in the commercial paper ending balance, compared with both June 30, 2018 and Sept. 30, 2017, primarily reflects management of overall liquidity. The increase in weighted-average rates, compared with the third quarter of 2017, primarily reflects increases in the Fed Funds effective rate and the issuance of higher-yielding term commercial paper.

Information related to other borrowed funds is presented below.

Other borrowed funds
Quarter ended
(dollars in millions)
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

Maximum month-end balance during the quarter
$
3,269

$
3,053

$
3,353

Average daily balance
$
2,747

$
2,399

$
2,197

Weighted-average rate during the quarter
2.33
%
2.40
%
1.38
%
Ending balance
$
2,934

$
3,053

$
3,353

Weighted-average rate at period end
2.48
%
2.53
%
1.56
%


Other borrowed funds primarily include borrowings from the Federal Home Loan Bank (“FHLB”), overdrafts of sub-custodian account balances in our Investment Services businesses, capital lease obligations and borrowings under lines of credit by our Pershing subsidiaries. Overdrafts typically relate to timing differences for settlements. The decrease in the ending balance of other borrowed funds, compared with Sept. 30, 2017 primarily reflects a decline in overdrafts and lower capital lease obligations due the purchase of the leased asset,
 
partially offset by an increase in borrowings from the FHLB.

Liquidity and dividends

BNY Mellon defines liquidity as the ability of the Parent and its subsidiaries to access funding or convert assets to cash quickly and efficiently, or to roll over or issue new debt, especially during periods of market stress, at a reasonable cost and in order to meet its short-term (up to one year) obligations. Funding 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 and collateral needs without adversely affecting daily operations or our financial condition. Funding liquidity risk can arise from funding mismatches, market constraints from the inability to convert assets to cash, the inability to hold or raise cash, low overnight deposits, deposit run-off or contingent liquidity events.

We also manage liquidity risks on an intraday basis. Intraday liquidity risk is the risk that BNY Mellon cannot access funds during the business day to make payments or settle immediate obligations, usually in real time. Intraday liquidity risk can arise from timing mismatches, market constraints from the inability to convert assets to cash, the inability to raise cash intraday, low overnight deposits and/or adverse stress events.

Changes in economic conditions or exposure to credit, market, operational, legal and reputational risks also can affect BNY Mellon’s liquidity risk profile and are considered in our liquidity risk framework.

The Parent’s policy is to have access to sufficient unencumbered cash and cash equivalents at each quarter-end to cover forecasted debt redemptions, net interest payments and net tax payments for the following 18-month period, and to provide sufficient collateral to satisfy transactions subject to Section 23A of the Federal Reserve Act. As of Sept. 30, 2018, the Parent was in compliance with this policy. For additional information on our liquidity policy, see “Risk Management - Liquidity risk” in our 2017 Annual Report. Our overall approach to liquidity management is further described in “Liquidity and dividends” in our 2017 Annual Report.



28 BNY Mellon


We define available funds for internal liquidity management purposes as liquid funds (which include interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements), cash and due from banks, and interest-
 
bearing deposits with the Federal Reserve and other central banks. The following table presents our total available funds, including liquid funds, at period end and on an average basis.

Available and liquid funds
Sept. 30, 2018

Dec. 31, 2017

Average
(in millions)
3Q18

2Q18

3Q17

Available funds:
 
 
 
 
 
Liquid funds:
 
 
 
 
 
Interest-bearing deposits with banks
$
14,519

$
11,979

$
14,691

$
15,748

$
15,899

Federal funds sold and securities purchased under resale agreements
28,722

28,135

26,738

28,051

28,120

Total liquid funds
43,241

40,114

41,429

43,799

44,019

Cash and due from banks
5,047

5,382

5,000

4,916

4,961

Interest-bearing deposits with the Federal Reserve and other central banks
74,725

91,510

61,216

69,676

70,430

Total available funds
$
123,013

$
137,006

$
107,645

$
118,391

$
119,410

Total available funds as a percentage of total assets
35
%
37
%
32
%
34
%
35
%
 


We had $43.2 billion of liquid funds at Sept. 30, 2018 and $40.1 billion at Dec. 31, 2017. Of the $43.2 billion in liquid funds held at Sept. 30, 2018, $14.5 billion was placed in interest-bearing deposits with large, highly-rated global financial institutions with a weighted-average life to maturity of approximately 20 days. Of the $14.5 billion, $2.1 billion was placed with banks in the Eurozone.

Total available funds were $123.0 billion at Sept. 30, 2018, compared with $137.0 billion at Dec. 31, 2017. The decrease was primarily due to a decrease in interest-bearing deposits with the Federal Reserve and other central banks.

Average non-core sources of funds, such as federal funds purchased and securities sold under repurchase agreements, trading liabilities, commercial paper and other borrowed funds, were $24.2 billion for the nine months ended Sept. 30, 2018 and $24.4 billion for the nine months ended Sept. 30, 2017. The decrease primarily reflects a decrease in federal funds purchased and securities sold under repurchase agreements, partially offset by an increase in other borrowed funds and commercial paper.

Average foreign deposits, primarily from our European-based Investment Services business, were $97.7 billion for the nine months ended Sept. 30, 2018, compared with $94.1 billion for the nine months ended Sept. 30, 2017. Average interest-bearing domestic deposits were $54.6 billion for the nine months ended Sept. 30, 2018 and $47.5 billion for the nine months ended Sept. 30, 2017. The
 
increase primarily reflects an increase in demand deposits.

Average payables to customers and broker-dealers were $16.6 billion for the nine months ended Sept. 30, 2018 and $19.4 billion for the nine months ended Sept. 30, 2017. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.

Average long-term debt was $28.3 billion for the nine months ended Sept. 30, 2018 and $27.1 billion for the nine months ended Sept. 30, 2017, with the increase primarily reflecting issuances of long-term debt.

Average noninterest-bearing deposits decreased to $65.4 billion for the nine months ended Sept. 30, 2018 from $72.5 billion for the nine months ended Sept. 30, 2017, reflecting a decrease in client deposits.

A significant reduction in our Investment Services business would reduce our access to deposits. See “Asset/liability management” for additional factors that could impact our deposit balances.

Sources of liquidity

The Parent’s three major sources of liquidity are access to the debt and equity markets, dividends from its subsidiaries, and cash on hand and cash otherwise made available in business-as-usual circumstances to the Parent through a committed credit facility with our intermediate holding company (“IHC”).



BNY Mellon 29


Our ability to access the capital markets on favorable terms, or at all, is partially dependent on our credit ratings, which are as follows:

Credit ratings at Sept. 30, 2018
 
 
 
 
 
 
 
  
Moody’s
 
S&P
 
Fitch
 
DBRS
Parent:
 
 
 
 
 
 
 
Long-term senior debt
A1
 
A
 
AA-
 
AA (low)
Subordinated debt
A2
 
A-
 
A+
 
A (high)
Preferred stock
Baa1
 
BBB
 
BBB
 
A (low)
Outlook - Parent:
Stable
 
Stable
 
Stable
 
Stable
 
The Bank of New York Mellon:
Long-term senior debt
Aa2
 
AA-
 
AA
 
AA
Subordinated debt
Aa3
 
A
 
A+
 
NR
Long-term deposits
Aa1
 
AA-
 
AA+
 
AA
Short-term deposits
P1
 
A-1+
 
F1+
 
R-1 (high)
Commercial paper
P1
 
A-1+
 
F1+
 
R-1 (high)
 
 
 
 
 
 
 
 
BNY Mellon, N.A.:
 
 
 
 
 
 
 
Long-term senior debt
Aa2
 
AA-
 
AA 
(a)
AA
Long-term deposits
Aa1
 
AA-
 
AA+
 
AA
Short-term deposits
P1
 
A-1+
 
F1+
 
R-1 (high)
 
 
 
 
 
 
 
 
Outlook - Banks:
Stable
 
Stable
 
Stable
 
Stable
(a)
Represents senior debt issuer default rating.
NR - Not rated.


Long-term debt totaled $28.1 billion at Sept. 30, 2018 and $28.0 billion at Dec. 31, 2017. The balance reflects issuances of $4.2 billion, offset by maturities of $3.4 billion and a decrease in the fair value of hedged long-term debt. The Parent has $250 million of long-term debt that will mature in the fourth quarter of 2018.

In August 2018, we issued $750 million of fixed rate senior notes maturing in 2023 at an annual interest rate of 3.45% and $400 million of fixed rate senior notes maturing in 2028 at an annual interest rate of 3.85%.

In the second quarter of 2018, BNY Mellon established programs for the issuance of notes and certificates of deposit (“CDs”) issued by The Bank of New York Mellon, our largest bank subsidiary. These programs are designed to improve diversity of our funding sources and provide additional flexibility in our liquidity planning. There were no notes or CDs issued through these programs in the third quarter of 2018.

The Bank of New York Mellon, our largest bank subsidiary, issues commercial paper that matures within 397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The average commercial paper borrowings were $3.1 billion for the three months
 
ended Sept. 30, 2018 and $2.7 billion for the three months ended Sept. 30, 2017. Commercial paper outstanding was $735 million at Sept. 30, 2018 and $3.1 billion at Dec. 31, 2017.

Subsequent to Sept. 30, 2018, our U.S. bank subsidiaries could declare dividends to the Parent of approximately $4.8 billion, without the need for a regulatory waiver. In addition, at Sept. 30, 2018, non-bank subsidiaries of the Parent had liquid assets of approximately $1.7 billion. Restrictions on our ability to obtain funds from our subsidiaries are discussed in more detail in “Supervision and Regulation - Capital Planning and Stress Testing - Payment of Dividends, Stock Repurchases and Other Capital Distributions” and in Note 17 of the Notes to Consolidated Financial Statements in our 2017 Annual Report.

Pershing LLC has uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. Pershing LLC has eight separate uncommitted lines of credit amounting to $1.5 billion in aggregate. There were no borrowings under these lines in the third quarter of 2018. Pershing Limited, an indirect UK-based subsidiary of BNY Mellon, has two separate uncommitted lines of credit amounting to $250 million in aggregate. Average borrowings under these lines were $1 million, in aggregate, in the third quarter of 2018.


30 BNY Mellon


The double leverage ratio is the ratio of our equity investment in subsidiaries divided by our consolidated parent company equity, which includes our noncumulative perpetual preferred stock. In short, the double leverage ratio measures the extent to which equity in subsidiaries is financed by Parent company debt. As the double leverage ratio increases, this can reflect greater demands on a company’s cash flows in order to service interest payments and debt maturities. BNY Mellon’s double leverage ratio is managed in a range considering the high level of unencumbered available liquid assets held in its principal subsidiaries (such as central bank deposits and government securities), the Company’s cash generating fee-based business model, with fee revenue representing 78% of total revenue in the third quarter of 2018, and the dividend capacity of our banking subsidiaries. Our double leverage ratio was 120.0% at Sept. 30, 2018 and 122.5% at Dec. 31, 2017, and within the range targeted by management.

Uses of funds

The Parent’s major uses of funds are payment of dividends, repurchases of common stock, principal and interest payments on its borrowings, acquisitions and additional investments in its subsidiaries.

In August 2018, a quarterly cash dividend of $0.28 per common share was paid to common shareholders. Our common stock dividend payout ratio was 24% for the first nine months of 2018.

In the third quarter of 2018, we repurchased 12 million common shares at an average price of $51.50 per common share for a total cost of $602 million.

Liquidity coverage ratio

U.S. regulators have established an LCR that requires certain banking organizations, including BNY Mellon, to maintain a minimum amount of unencumbered high-quality liquid assets (“HQLA”) sufficient to withstand the net cash outflow under a hypothetical standardized acute liquidity stress scenario for a 30-day time horizon.

The following table presents the consolidated HQLA at Sept. 30, 2018, and the average HQLA and average LCR for the third quarter of 2018.

 
Consolidated HQLA and LCR
Sept. 30, 2018

(dollars in billions)
Securities (a)
$
106

Cash (b)
68

Total consolidated HQLA (c)
$
174

 
 
Total consolidated HQLA - average (c)
$
158

Average LCR
121
%
(a)
Primarily includes securities of U.S. government-sponsored enterprises, U.S. Treasury, sovereign securities, U.S. agency and investment-grade corporate debt.
(b)
Primarily includes cash on deposit with central banks.
(c)
Consolidated HQLA presented before adjustments. After haircuts and the impact of trapped liquidity, consolidated HQLA totaled $130 billion at Sept. 30, 2018 and averaged $117 billion for the third quarter of 2018.


The U.S. LCR rule requires BNY Mellon and each of our affected domestic bank subsidiaries to meet an LCR of at least 100%. BNY Mellon and each of our affected domestic bank subsidiaries were compliant with the U.S. LCR requirements throughout the first nine months of 2018.

We also perform liquidity stress tests (“LSTs”) to evaluate whether the Company and certain domestic bank subsidiaries maintain sufficient liquidity resources under multiple stress scenarios. LSTs are based on scenarios that measure liquidity risks under unlikely but plausible conditions. We perform these tests under various time horizons ranging from one day to one year in a base case, as well as supplemental tests to determine whether the Company and certain domestic subsidiaries’ liquidity is sufficient for severe market events and firm-specific events. The Parent’s LST framework includes a test known as the Resolution Liquidity Adequacy and Positioning (“RLAP”). The RLAP test is designed to ensure that the liquidity needs of certain key subsidiaries in a stress environment can be met by available resources held at the entity or at the Parent or IHC, as applicable. Under our scenario testing program, the results of the tests indicate that we have sufficient liquidity.

Statement of cash flows

The following summarizes the activity reflected on the consolidated statement of cash flows. While this information may be helpful to highlight certain macro trends and business strategies, the cash flow analysis may not be as relevant when analyzing changes in our net earnings and net assets. We believe that in addition to the traditional cash flow analysis, the discussion related to liquidity and dividends and


BNY Mellon 31


asset/liability management herein may provide more useful context in evaluating our liquidity position and related activity.

Net cash provided by operating activities was $2.8 billion in the nine months ended Sept. 30, 2018, compared with $3.4 billion in the nine months ended Sept. 30, 2017. In the first nine months of 2018, net cash provided by operations primarily resulted from earnings, partially offset by changes in trading activities. In the first nine months of 2017, net cash provided by operations was principally the result of earnings.

Net cash provided by investing activities was $18.0 billion in the nine months ended Sept. 30, 2018, compared with net cash used for investing activities of $13.5 billion in the nine months ended Sept. 30, 2017. In the first nine months of 2018, net cash provided by investing activities primarily reflects changes in interest-bearing deposits with the Federal Reserve and other central banks and changes in loans,
 
partially offset by changes in interest-bearing deposits with banks. In the first nine months of 2017, changes in interest-bearing deposits with the Federal Reserve and other central banks was a significant use of funds.

Net cash used for financing activities was $21.6 billion in the nine months ended Sept. 30, 2018, compared with net cash provided by financing activities of $11.2 billion in the nine months ended Sept. 30, 2017. In the first nine months of 2018, net cash used for financing activities primarily reflects changes in deposits, changes in federal funds purchased and securities sold under repurchase agreements, repayment of long-term debt, a decrease in commercial paper and common stock repurchases, partially offset by net proceeds from the issuance of long-term debt. In the first nine months of 2017, the proceeds from the issuance of long-term debt, changes in deposits and increases in commercial paper and other borrowed funds were significant sources of funds, partially offset by common stock repurchases.


Capital

Capital data
(dollars in millions except per share amounts; common shares in thousands)
Sept. 30, 2018

June 30, 2018

Dec. 31, 2017

Average common equity to average assets
11.4
%
10.9
%
10.5
%
 
 
 
 
At period end:
 
 
 
BNY Mellon shareholders’ equity to total assets ratio
11.9
%
11.8
%
11.1
%
BNY Mellon common shareholders’ equity to total assets ratio
10.9
%
10.8
%
10.1
%
Total BNY Mellon shareholders’ equity
$
41,560

$
41,505

$
41,251

Total BNY Mellon common shareholders’ equity (a)
$
38,018

$
37,963

$
37,709

BNY Mellon tangible common shareholders’ equity – Non-GAAP (a)
$
19,135

$
19,000

$
18,486

Book value per common share (a)
$
38.45

$
37.97

$
37.21

Tangible book value per common share – Non-GAAP (a)
$
19.35

$
19.00

$
18.24

Closing stock price per common share
$
50.99

$
53.93

$
53.86

Market capitalization
$
50,418

$
53,927

$
54,584

Common shares outstanding
988,777

999,945

1,013,442

 
 
 
 
Cash dividends per common share
$
0.28

$
0.24

$
0.24

Common dividend payout ratio
26
%
23
%
22
%
Common dividend yield (annualized)
2.2
%
1.8
%
1.8
%
(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 41 for a reconciliation of GAAP to Non-GAAP.


The Bank of New York Mellon Corporation total shareholders’ equity increased to $41.6 billion at Sept. 30, 2018 from $41.3 billion at Dec. 31, 2017. The increase primarily reflects earnings, partially offset by common stock repurchases, dividend payments and unrealized losses on securities available-for-sale.
 
In the third quarter of 2018, we repurchased 12 million common shares at an average price of $51.50 per common share for a total cost of $602 million under the current program.

The unrealized loss, net of tax, on our available-for-sale securities portfolio included in accumulated OCI


32 BNY Mellon


was $228 million at Sept. 30, 2018, compared with a net unrealized gain of $184 million at Dec. 31, 2017. The decrease in the unrealized gain, net of tax, was primarily driven by higher interest rates.

Capital adequacy

Regulators establish certain levels of capital for BHCs 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 U.S. bank subsidiaries and BNY Mellon must, among other things, qualify as “well capitalized.” As of Sept. 30, 2018 and Dec. 31, 2017, BNY Mellon and our U.S. bank subsidiaries were “well capitalized.”

Failure to satisfy regulatory standards, including “well capitalized” status or capital adequacy rules more generally, could result in limitations on our activities and adversely affect our financial condition. See the discussion of these matters in “Supervision and Regulation - Regulated Entities of BNY Mellon
 
and Ancillary Regulatory Requirements” and “Risk Factors - Operational Risk - Failure to satisfy regulatory standards, including “well capitalized” and “well managed” status or capital adequacy and liquidity rules more generally, could result in limitations on our activities and adversely affect our business and financial condition” in our 2017 Annual Report.

The U.S. banking agencies’ capital rules are based on the framework adopted by the Basel Committee on Banking Supervision, as amended from time to time. For additional information on these capital requirements, see “Supervision and Regulation” in our 2017 Annual Report. BNY Mellon is subject to the U.S. capital rules, which are being gradually phased-in over a multi-year period through Jan. 1, 2019. The phase-in requirements for capital were completed on Jan. 1, 2018.

Our risk-based capital adequacy is determined using the higher of risk-weighted assets (“RWAs”) determined using the Advanced Approach and Standardized Approach.



BNY Mellon 33


The table below presents our consolidated and largest bank subsidiary regulatory capital ratios.

Consolidated and largest bank subsidiary regulatory capital ratios
Sept. 30, 2018
 
 
 
Dec. 31, 2017
 
Well capitalized

 
Minimum
required

 
Capital
ratios

 
June 30, 2018

 
Fully phased-in

Transitional

(b)
 
(a)
 
 
Consolidated regulatory capital ratios: (c)(d)
 
 
 
 
 
 
 
 
 
 
 
Advanced Approach:
 
 
 
 
 
 
 
 
 
 
 
CET1 ratio
N/A

(e)
7.5
%
 
11.2
%
 
11.0
%
 
10.3
%
10.7
%
 
Tier 1 capital ratio
6
%
 
9

 
13.3

 
13.1

 
12.3

12.7

 
Total capital ratio
10
%
 
11

 
14.1

 
13.8

 
13.0

13.4

 
Standardized Approach:
 
 
 
 
 
 
 
 
 
 
 
CET1 ratio
N/A

(e)
7.5
%
 
12.4
%
 
11.9
%
 
11.5
%
11.9
%
 
Tier 1 capital ratio
6
%
 
9

 
14.7

 
14.1

 
13.7

14.2

 
Total capital ratio
10
%
 
11

 
15.7

 
15.1

 
14.7

15.1

 
Tier 1 leverage ratio
N/A

(e)
4

 
7.0

 
6.7

 
6.4

6.6

 
SLR (f)
N/A

(e)
5

 
6.4

 
6.1

 
5.9

6.1

 
 
 
 
 
 
 
 
 
 
 
 
 
The Bank of New York Mellon regulatory
capital ratios: (c)
 
 
 
 
 
 
 
 
 
 
 
Advanced Approach:
 
 
 
 
 
 
 
 
 
 
 
CET1 ratio
6.5
%
 
6.375
%
 
14.9
%
 
14.9
%
 
N/A

14.1
%
 
Tier 1 capital ratio
8

 
7.875

 
15.2

 
15.2

 
N/A

14.4

 
Total capital ratio
10

 
9.875

 
15.6

 
15.6

 
N/A

14.7

 
Tier 1 leverage ratio
5

 
4

 
8.2

 
7.9

 
N/A

7.6

 
SLR (f)
6

 
3

 
7.4

 
7.1

 
6.7

6.9

 
(a)
Minimum requirements for Sept. 30, 2018 include minimum thresholds plus currently applicable buffers.
(b)
Reflects transitional adjustments to CET1, Tier 1 capital, Tier 2 capital required in 2017 under the U.S. capital rules.
(c)
For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The Tier 1 leverage ratio is based on Tier 1 capital and quarterly average total assets.
(d)
See page 36 for the capital ratios with the phase-in of the capital conservation buffer and the U.S. G-SIB surcharge, as well as the introduction of the SLR buffer.
(e)
The Federal Reserve’s regulations do not establish well capitalized thresholds for these measures for BHCs.
(f)
SLR became a binding measure on Jan. 1, 2018. The SLR is based on Tier 1 capital and total leverage exposure, which includes certain off-balance sheet exposures.


Our CET1 ratio determined under the Advanced Approach was 11.2% at Sept. 30, 2018 and 10.7%, on a transitional basis, at Dec. 31, 2017. The ratio increased compared to Dec. 31, 2017, primarily reflecting lower RWAs and capital generated through earnings, partially offset by the final phase-in requirements under the U.S. capital rules and the capital deployed through common stock repurchases and dividend payments.

Our SLR was 6.4% at Sept. 30, 2018 and 6.1%, on a transitional basis, at Dec. 31, 2017.

For additional information on the U.S. capital rules, see “Supervision and Regulation - Capital Requirements - Generally” in our 2017 Annual Report and “Recent regulatory developments” in our Quarterly Reports on Form 10-Q for the first and second quarters of 2018.

 
The Advanced Approach capital ratios are significantly impacted by RWAs for operational risk. Our operational loss risk model is informed by external losses, including fines and penalties levied against institutions in the financial services industry, particularly those that relate to businesses in which we operate, and as a result external losses have impacted and could in the future impact the amount of capital that we are required to hold.

Our capital ratios are necessarily subject to, among other things, anticipated compliance with all necessary enhancements to model calibration, approval by regulators of certain models used as part of RWA calculations, other refinements, further implementation guidance from regulators, market practices and standards and any changes BNY Mellon may make to its businesses. As a consequence of these factors, our capital ratios may materially change, and may be volatile over time and from period to period.



34 BNY Mellon


The following table presents our capital components and RWAs.

Capital components and risk-weighted assets
 
 
Dec. 31, 2017
 
 
Sept. 30, 2018

June 30, 2018

Fully phased-in

Transitional
Approach

(a)
(in millions)
CET1:
 
 
 
 
 
Common shareholders’ equity
$
38,018

$
37,963

$
37,709

$
37,859

 
Adjustments for:
 
 
 
 
 
Goodwill and intangible assets (b)
(18,883
)
(18,963
)
(19,223
)
(18,684
)
 
Net pension fund assets
(218
)
(216
)
(211
)
(169
)
 
Equity method investments
(368
)
(363
)
(387
)
(372
)
 
Deferred tax assets
(42
)
(41
)
(41
)
(33
)
 
Other
10

6

(9
)
(8
)
 
Total CET1
18,517

18,386

17,838

18,593

 
Other Tier 1 capital:
 
 
 
 
 
Preferred stock
3,542

3,542

3,542

3,542

 
Deferred tax assets



(8
)
 
Net pension fund assets



(42
)
 
Other
(57
)
(51
)
(41
)
(41
)
 
Total Tier 1 capital
$
22,002

$
21,877

$
21,339

$
22,044

 
Tier 2 capital:
 
 
 
 
 
Subordinated debt
$
1,250

$
1,250

$
1,250

$
1,250

 
Allowance for credit losses
251

254

261

261

 
Other
(6
)
(6
)
(12
)
(12
)
 
Total Tier 2 capital – Standardized Approach
1,495

1,498

1,499

1,499

 
Excess of expected credit losses
53

53

31

31

 
Less: Allowance for credit losses
251

254

261

261

 
Total Tier 2 capital – Advanced Approach
$
1,297

$
1,297

$
1,269

$
1,269

 
Total capital:
 
 
 
 
 
Standardized Approach
$
23,497

$
23,375

$
22,838

$
23,543

 
Advanced Approach
$
23,299

$
23,174

$
22,608

$
23,313

 
 
 
 
 
 
 
Risk-weighted assets:
 
 
 
 
 
Standardized Approach
$
149,348

$
154,612

$
155,324

$
155,621

 
Advanced Approach:
 
 
 
 
 
Credit Risk
$
93,499

$
95,888

$
101,366

$
101,681

 
Market Risk
3,988

3,804

3,657

3,657

 
Operational Risk
67,650

67,888

68,688

68,688

 
Total Advanced Approach
$
165,137

$
167,580

$
173,711

$
174,026

 
 
 
 
 
 
 
Average assets for Tier 1 leverage ratio
$
312,779

$
326,700

$
330,894

$
331,600

 
Total leverage exposure for SLR
$
341,566

$
355,773

$
360,543

$
361,249

 
(a)
Reflects transitional adjustments to CET1, Tier 1 capital, Tier 2 capital required in 2017 under the U.S. capital rules.
(b)
Reduced by deferred tax liabilities associated with intangible assets and tax deductible goodwill.


BNY Mellon 35


The table below presents the factors that impacted the CET1 capital.

CET1 generation
Sept. 30, 2018

(in millions)
CET1 – Beginning of period
$
18,386

Net income applicable to common shareholders of The Bank of New York Mellon Corporation
1,075

Goodwill and intangible assets, net of related deferred tax liabilities
80

Gross CET1 generated
1,155

Capital deployed:
 
Common stock dividends
(283
)
Common stock repurchased
(602
)
Total capital deployed
(885
)
Other comprehensive income:
 
Foreign currency translation
(58
)
Unrealized loss on assets available-for-sale
(144
)
Defined benefit plans
18

Unrealized gain on cash flow hedges
(4
)
Total other comprehensive income
(188
)
Additional paid-in capital (a)
53

Other (deductions) additions:
 
Net pension fund assets
(2
)
Deferred tax assets
(1
)
Embedded goodwill
(5
)
Other
4

Total other deductions
(4
)
Net CET1 generated
131

CET1 – End of period
$
18,517

(a)
Primarily related to stock awards, the exercise of stock options and stock issued for employee benefit plans.
 
Minimum capital ratios and capital buffers

The U.S. capital rules include a series of buffers and surcharges over required minimums that apply to BHCs, including BNY Mellon, which are being phased-in over time. Banking organizations with a risk-based ratio or SLR above the minimum required level, but with a risk-based ratio or SLR below the minimum level with buffers, will face constraints on dividends, equity repurchases and discretionary executive compensation based on the amount of the shortfall. Different regulatory capital buffers apply to our banking subsidiaries.

The following table presents the principal minimum capital ratio requirements with buffers and surcharges, as phased-in, applicable to the Parent and The Bank of New York Mellon. This table does not include the imposition of a countercyclical capital buffer. Buffers and surcharges are not applicable to the Tier 1 leverage ratio. These buffers, other than the SLR buffer, and surcharge will be fully implemented on Jan. 1, 2019.


Capital ratio requirements
 
 
Minimum ratios with buffers, as phased-in (a)
 
 
Well capitalized

Minimum ratios

 
 
 
 
2018

 
2019

 
Capital conservation buffer (CET1)
 
 
 
1.875
%
 
2.5
%
 
U.S. G-SIB surcharge (CET1) (b)(c)
 
 
 
1.125
%
 
1.5
%
 
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
CET1 ratio
N/A

4.5
%
 
7.5
%
 
8.5
%
 
Tier 1 capital ratio
6.0
%
6.0
%
 
9.0
%
 
10.0
%
 
Total capital ratio
10.0
%
8.0
%
 
11.0
%
 
12.0
%
 
 
 
 
 
 
 
 
 
Enhanced SLR buffer (Tier 1 capital)
N/A

 
 
2.0
%
 
2.0
%
 
SLR
N/A

3.0
%
 
5.0
%
 
5.0
%
 
 
 
 
 
 
 
 
 
Bank subsidiaries: (c)
 
 
 
 
 
 
 
CET1 ratio
6.5
%
4.5
%
 
6.375
%
 
7.0
%
 
Tier 1 capital ratio
8.0
%
6.0
%
 
7.875
%
 
8.5
%
 
Total capital ratio
10.0
%
8.0
%
 
9.875
%
 
10.5
%
 
 
 
 
 
 
 
 
 
SLR
6.0
%
3.0
%
 
6.0
%
(d)
6.0
%
(d)
(a)
Countercyclical capital buffer currently set to 0%.
(b)
The fully phased-in U.S. G-SIB surcharge of 1.5% applicable to BNY Mellon is subject to change.
(c)
The U.S. G-SIB surcharge is not applicable to the regulatory capital ratios of the bank subsidiaries.
(d)
Well capitalized threshold.



36 BNY Mellon


The following table shows the impact on the consolidated capital ratios at Sept. 30, 2018 of a $100 million increase or decrease in common equity, or a $1 billion increase or decrease in RWAs, quarterly average assets or total leverage exposure.

Sensitivity of consolidated capital ratios at Sept. 30, 2018
 
Increase or decrease of
(in basis points)
$100 million
in common 
equity
$1 billion in 
RWA, quarterly
average assets or total leverage exposure
CET1:
 
 
 
 
Standardized Approach
7
bps
8
bps
Advanced Approach
6
 
7
 
 
 
 
 
 
Tier 1 capital:
 
 
 
 
Standardized Approach
7
 
10
 
Advanced Approach
6
 
8
 
 
 
 
 
 
Total capital:
 
 
 
 
Standardized Approach
7
 
11
 
Advanced Approach
6
 
9
 
 
 
 
 
 
Tier 1 leverage
3
 
2
 
 
 
 
 
 
SLR
3
 
2
 


Capital ratios vary depending on the size of the balance sheet at quarter-end and the levels and types of investments in assets. 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 are higher. In addition, when markets experience significant volatility or stress, our balance sheet size may increase considerably as client deposit levels increase.

Trading activities and risk management

Our trading activities are focused on acting as a market-maker for our customers, facilitating customer trades and risk mitigating hedging in compliance with the Volcker Rule. The risk from market-making activities for customers is managed by our traders and limited in total exposure through a system of position limits, value-at-risk (“VaR”) methodology and other market sensitivity measures. VaR is the potential loss in value due to adverse market movements over a defined time horizon with a specified confidence level. The calculation of our VaR used by management and presented below assumes a one-day holding period, utilizes a 99% confidence level, and incorporates non-linear product characteristics. VaR
 
facilitates comparisons across portfolios of different risk characteristics. VaR also captures the diversification of aggregated risk at the firm-wide level.

VaR represents a key risk management measure and it is important to note the inherent limitations to VaR, which include:
VaR does not estimate potential losses over longer time horizons where moves may be extreme;
VaR does not take account of potential variability of market liquidity; and
Previous moves in market risk factors may not produce accurate predictions of all future market moves.

See Note 17 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 designated periods using the historical simulation VaR model.

VaR (a)
3Q18
Sept. 30, 2018

(in millions)
Average

Minimum

Maximum

Interest rate
$
3.6

$
3.0

$
5.0

$
3.7

Foreign exchange
3.6

2.9

5.6

5.5

Equity
0.5


0.8

0.1

Credit
0.8

0.6

1.1

0.9

Diversification
(3.8
)
N/M

N/M

(4.6
)
Overall portfolio
4.7

3.6

6.3

5.6



VaR (a)
2Q18
June 30, 2018

(in millions)
Average

Minimum

Maximum

Interest rate
$
4.0

$
3.3

$
5.2

$
3.5

Foreign exchange
3.7

2.9

5.7

3.5

Equity
0.7

0.5

1.0

0.5

Credit
0.8

0.6

1.0

1.0

Diversification
(3.9
)
N/M

N/M

(3.9
)
Overall portfolio
5.3

4.3

7.0

4.6



VaR (a)
3Q17
Sept. 30, 2017

(in millions)
Average

Minimum

Maximum

Interest rate
$
3.3

$
2.8

$
4.2

$
2.7

Foreign exchange
3.7

3.1

5.6

4.8

Equity
0.9

0.8

1.1

0.9

Credit
1.0

0.6

1.4

1.0

Diversification
(5.1
)
N/M

N/M

(5.3
)
Overall portfolio
3.8

3.2

5.3

4.1




BNY Mellon 37


VaR (a)
YTD18
(in millions)
Average

Minimum

Maximum

Interest rate
$
4.0

$
3.0

$
5.5

Foreign exchange
4.2

2.9

8.3

Equity
0.7


1.2

Credit
1.0

0.6

2.6

Diversification
(4.4
)
N/M

N/M

Overall portfolio
5.5

3.6

10.4



VaR (a)
YTD17
(in millions)
Average

Minimum

Maximum

Interest rate
$
3.5

$
2.8

$
4.9

Foreign exchange
3.9

2.6

5.8

Equity
0.4

0.1

1.1

Credit
1.1

0.5

1.7

Diversification
(4.9
)
N/M

N/M

Overall portfolio
4.0

3.2

5.4

(a)
VaR exposure does not include the impact of the Company’s consolidated investment management funds and seed capital investments.
N/M - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a minimum and maximum portfolio diversification effect.


The interest rate component of VaR represents instruments whose values predominantly vary with the level or volatility of interest rates. These instruments include, but are not limited to: sovereign debt, swaps, swaptions, forward rate agreements, exchange-traded futures and options, and other interest rate derivative products.

The foreign exchange component of VaR represents instruments whose values predominantly vary with the level or volatility of currency exchange rates or interest rates. These instruments include, but are not limited to: currency balances, spot and forward transactions, currency options, exchange-traded futures and options, and other currency derivative products.

The equity component of VaR consists of instruments that represent an ownership interest in the form of domestic and foreign common stock or other equity-linked instruments. These instruments include, but are not limited to: common stock, exchange-traded funds, preferred stock, listed equity options (puts and calls), over-the-counter (“OTC”) equity options, equity total return swaps, equity index futures and other equity derivative products.

The credit component of VaR represents instruments whose values predominantly vary with the credit
 
worthiness of counterparties. These instruments include, but are not limited to, credit derivatives (credit default swaps and exchange-traded credit index instruments) and exposures from corporate credit spreads, and mortgage prepayments. Credit derivatives are used to hedge various credit exposures.

The diversification component of VaR is the risk reduction benefit that occurs when combining portfolios and offsetting positions, and from the correlated behavior of risk factor movements.

During the third quarter of 2018, interest rate risk generated 42% of average gross VaR, foreign exchange risk generated 42% of average gross VaR, equity risk accounted for 6% of average gross VaR and credit risk generated 10% of average gross VaR. During the third quarter of 2018, our daily trading loss did not exceed our calculated VaR amount of the overall portfolio on any occasion.

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 five quarters.

Distribution of trading revenue (loss) (a)
 
 
 
 
Quarter ended
(dollars in millions)
Sept. 30, 2018

June 30,
2018

March 31,
2018

Dec. 31, 2017

Sept. 30, 2017

Revenue range:
Number of days
Less than $(2.5)

1


2


$(2.5) – $0
6

3

2

4

1

$0 – $2.5
30

21

18

23

29

$2.5 – $5.0
20

30

32

22

29

More than $5.0
7

9

10

11

4

(a)
Trading revenue (loss) includes realized and unrealized gains and losses primarily related to spot and forward foreign exchange transactions, derivatives and securities trades for our customers and excludes any associated commissions, underwriting fees and net interest revenue.


Trading assets include debt and equity instruments and derivative assets, primarily interest rate and foreign exchange contracts, not designated as hedging instruments. Trading assets were $7.8 billion at Sept. 30, 2018 and $6.0 billion at Dec. 31, 2017. The increase was impacted by the reclassification of money market fund investments of approximately $1 billion primarily from available-for-sale securities.



38 BNY Mellon


Trading liabilities include debt and equity instruments and derivative liabilities, primarily interest rate and foreign exchange contracts, not designated as hedging instruments. Trading liabilities were $3.5 billion at Sept. 30, 2018 and $4.0 billion at Dec. 31, 2017.

Under our fair value methodology for derivative contracts, an initial “risk-neutral” valuation is performed on each position assuming time-discounting based on a AA credit curve. In addition, we consider credit risk in arriving at the fair value of our derivatives.

We reflect external credit ratings as well as observable credit default swap spreads for both ourselves and 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.

At Sept. 30, 2018, our OTC derivative assets, including those in hedging relationships, of $2.3 billion included a credit valuation adjustment (“CVA”) deduction of $18 million. Our OTC derivative liabilities, including those in hedging relationships, of $2.2 billion included a debit valuation adjustment (“DVA”) of $2 million related to our own credit spread. Net of hedges, the CVA increased by $1 million and the DVA was unchanged in the third quarter of 2018, which decreased foreign exchange and other trading revenue. The net impact was an increase of $2 million in the second quarter of 2018 and an increase of $1 million in the third quarter of 2017.

The table below summarizes the risk ratings for our foreign exchange and interest rate derivative counterparty credit exposure during the past five quarters. This information indicates the degree of risk to which we are exposed. Significant changes in ratings classifications for our foreign exchange and other trading activity could result in increased risk for us.
 
Foreign exchange and other trading counterparty risk rating profile (a)
 
 
Quarter ended
 
Sept. 30, 2018

June 30,
2018

March 31,
2018

Dec. 31, 2017

Sept. 30, 2017

Rating:
 
 
 
 
 
AAA to AA-
48
%
37
%
48
%
44
%
41
%
A+ to A-
30

41

27

31

30

BBB+ to BBB-
19

18

20

20

24

Non-investment grade (BB+ and lower)
3

4

5

5

5

Total
100
%
100
%
100
%
100
%
100
%
(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 include 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 pre-tax net interest revenue. The model incorporates management’s assumptions regarding interest rates, 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. Actual results may differ materially from projected results due to timing, magnitude and frequency of interest rate changes, and changes in market conditions and management’s strategies, among other factors.

In the table below, we use the earnings simulation model to run various interest rate ramp scenarios from a baseline scenario. The interest rate ramp scenarios examine the impact of large interest rate movements. In each scenario, all currencies’ interest rates are shifted higher or lower. The baseline scenario is based on our quarter-end balance sheet and the spot yield curve. The 100 basis point ramp scenario assumes rates increase 25 basis points above the yield curve in each of the next four quarters and the 200 basis point ramp scenario assumes a 50 basis


BNY Mellon 39


point per quarter increase. Interest rate sensitivity is quantified by calculating the change in pre-tax net interest revenue between the scenarios over a 12-month measurement period.

The following table shows net interest revenue sensitivity for BNY Mellon.

Estimated changes in net interest revenue
(in millions)
Sept. 30, 2018

June 30,
2018

Sept. 30, 2017

Up 200 bps parallel rate ramp vs. baseline (a)
$
362

$
372

$
364

Up 100 bps parallel rate ramp vs. baseline (a)
180

183

214

Long-term up 50 bps, short-term unchanged (b)
83

72

113

Long-term down 50 bps, short-term unchanged (b)
(96
)
(89
)
(129
)
(a)
In the parallel rate ramp, both short-term and long-term rates move in four equal quarterly increments.
(b)
Long-term is equal to or greater than one year.


Sensitivities in the 200 bps and 100 bps parallel rate ramp scenarios decreased in the third quarter of 2018 from the second quarter of 2018 primarily driven by lower deposit and loan balances, partially offset by higher interest rates. In the first quarter of 2018, we changed the net interest revenue sensitivity methodology to assume static deposit levels. Previously, our sensitivities included assumptions about deposit runoff which were difficult to predict. Prior period results have been restated to conform to the current methodology.

 
To illustrate the net interest revenue sensitivity to deposit runoff, we note that a $5 billion reduction of U.S. dollar denominated non-interest bearing deposits would reduce the net interest revenue sensitivity results in the ramp up 100 basis point and 200 basis point scenarios in the table above by approximately $140 million and approximately $175 million, respectively. The impact would be smaller if the runoff was assumed to be a mixture of interest-bearing and noninterest-bearing deposits.

For a discussion of factors impacting the growth or contraction of deposits, see “Risk Factors - Our business, financial condition and results of operations could be adversely affected if we do not effectively manage our liquidity,” in our 2017 Annual Report.

Off-balance sheet arrangements

Off-balance sheet arrangements discussed in this section are limited to guarantees, retained or contingent interests and obligations arising out of unconsolidated variable interest entities (“VIEs”). For BNY Mellon, these items include certain guarantees. Guarantees include SBLCs issued as part of our corporate banking business and securities lending indemnifications issued as part of our Investment Services business. See Note 18 of the Notes to Consolidated Financial Statements for a further discussion of our off-balance sheet arrangements.



40 BNY Mellon


Supplemental information - Explanation of GAAP and Non-GAAP financial measures

BNY Mellon has included in this Form 10-Q certain Non-GAAP financial measures on a tangible basis, as a supplement to GAAP information. Tangible common shareholders’ equity excludes goodwill and intangible assets, net of deferred tax liabilities. BNY Mellon believes that the return on tangible common equity measure is an additional useful measure for investors because it presents a measure of those assets that can generate income. BNY Mellon has provided a measure of tangible book value per common share, which it believes provides additional useful information as to the level of tangible assets in relation to shares of common stock outstanding.

The presentation of the growth rates of investment management and performance fees on a constant
 
currency basis permits investors to assess the significance of changes in foreign currency exchange rates. Growth rates on a constant currency basis were determined by applying the current period foreign currency exchange rates to the prior period revenue. BNY Mellon believes that this presentation, as a supplement to GAAP information, gives investors a clearer picture of the related revenue results without the variability caused by fluctuations in foreign currency exchange rates.

BNY Mellon has presented the operating margin for the Investment Management business net of distribution and servicing expense that was passed to third parties who distribute or service our managed funds. BNY Mellon believes that this measure is useful when evaluating the performance of the Investment Management business relative to industry competitors.


The following table presents the reconciliation of the return on common equity and tangible common equity.

Return on common equity and tangible common equity reconciliation
 
 
 
 
 
(dollars in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP
$
1,075

$
1,055

$
983

$
3,265

$
2,789

Add:  Amortization of intangible assets
48

48

52

145

157

Less: Tax impact of amortization of intangible assets
11

11

17

34

54

Adjusted net income applicable to common shareholders of The Bank of
New York Mellon Corporation, excluding amortization of intangible
assets – Non-GAAP
$
1,112

$
1,092

$
1,018

$
3,376

$
2,892

 
 
 
 
 
 
Average common shareholders’ equity
$
38,036

$
37,750

$
36,780

$
37,795

$
35,876

Less: Average goodwill
17,391

17,505

17,497

17,492

17,415

Average intangible assets
3,283

3,341

3,487

3,340

3,532

Add: Deferred tax liability – tax deductible goodwill (a)
1,066

1,054

1,561

1,066

1,561

Deferred tax liability – intangible assets (a)
699

709

1,092

699

1,092

Average tangible common shareholders’ equity – Non-GAAP
$
19,127

$
18,667

$
18,449

$
18,728

$
17,582

 
 
 
 
 
 
Return on common equity (annualized) – GAAP 
11.2
%
11.2
%
10.6
%
11.6
%
10.4
%
Return on tangible common equity (annualized) – Non-GAAP
23.1
%
23.5
%
21.9
%
24.1
%
22.0
%
(a)
Deferred tax liabilities for the periods in 2017 are based on fully phased-in U.S. capital rules.


BNY Mellon 41


The following table presents the reconciliation of the book value and tangible book value per common share.

Book value and tangible book value per common share reconciliation
Sept. 30, 2018

June 30, 2018

Dec. 31, 2017

Sept. 30, 2017

(dollars in millions except common shares)
BNY Mellon shareholders’ equity at period end – GAAP
$
41,560

$
41,505

$
41,251

$
40,523

Less: Preferred stock
3,542

3,542

3,542

3,542

BNY Mellon common shareholders’ equity at period end – GAAP
38,018

37,963

37,709

36,981

Less: Goodwill
17,390

17,418

17,564

17,543

Intangible assets
3,258

3,308

3,411

3,461

Add: Deferred tax liability – tax deductible goodwill (a)
1,066

1,054

1,034

1,561

Deferred tax liability – intangible assets (a)
699

709

718

1,092

BNY Mellon tangible common shareholders’ equity at period end – Non-GAAP
$
19,135

$
19,000

$
18,486

$
18,630

 
 
 
 
 
Period-end common shares outstanding (in thousands)
988,777

999,945

1,013,442

1,024,022

 
 
 
 
 
Book value per common share – GAAP
$
38.45

$
37.97

$
37.21

$
36.11

Tangible book value per common share – Non-GAAP
$
19.35

$
19.00

$
18.24

$
18.19

(a)
Deferred tax liabilities at Dec. 31, 2017 and Sept. 30, 2017 are based on fully phased-in U.S. capital rules.


The following table presents the impact of changes in foreign currency exchange rates on our consolidated investment management and performance fees.

Constant currency reconciliation – Consolidated
 
 
3Q18 vs.

(dollars in millions)
3Q18

3Q17

3Q17

Investment management and performance fees
$
922

$
901

2
%
Impact of changes in foreign currency exchange rates

(4
)
 
Adjusted investment management and performance fees – Non-GAAP
$
922

$
897

3
%


The following table presents the impact of changes in foreign currency exchange rates on investment management and performance fees reported in the Investment Management business.

Constant currency reconciliation – Investment Management business
 
 
3Q18 vs.

(dollars in millions)
3Q18

3Q17

3Q17

Investment management and performance fees
$
909

$
886

3
%
Impact of changes in foreign currency exchange rates

(4
)
 
Adjusted investment management and performance fees – Non-GAAP
$
909

$
882

3
%


The following table presents the reconciliation of the pre-tax operating margin for the Investment Management business.

Pre-tax operating margin reconciliation - Investment Management business
 
 
 
 
 
(dollars in millions)
3Q18

2Q18

1Q18

4Q17

3Q17

YTD18

YTD17

Income before income taxes – GAAP
$
316

$
319

$
381

$
276

$
300

$
1,016

$
865

 
 
 
 
 
 
 
 
Total revenue – GAAP
$
1,015

$
1,018

$
1,088

$
1,048

$
1,000

$
3,121

$
2,949

Less:  Distribution and servicing expense
99

103

110

107

110

312

315

Adjusted total revenue, net of distribution and servicing expense – Non-GAAP
$
916

$
915

$
978

$
941

$
890

$
2,809

$
2,634

 
 
 
 
 
 
 
 
Pre-tax operating margin – GAAP (a)
31
%
31
%
35
%
26
%
30
%
33
%
29
%
Adjusted pre-tax operating margin, net of distribution and servicing expense – Non-GAAP (a)
35
%
35
%
39
%
29
%
34
%
36
%
33
%
(a)
Income before taxes divided by total revenue.


42 BNY Mellon


Recent accounting and regulatory developments

Recently issued accounting standards

The following ASUs issued by the Financial Accounting Standards Board (“FASB”) have not yet been adopted.

ASU 2016-02, Leases

In February 2016, the FASB issued an ASU, Leases. The primary objective of this ASU is to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and expand related disclosures. This ASU requires a “right-of-use” asset and a payment obligation liability on the balance sheet for most leases and subleases. Additionally, depending on the lease classification under the standard, it may result in different expense recognition patterns and classification than under existing accounting principles. For leases classified as finance leases, it will result in higher expense recognition in the earlier periods and lower expense in the later periods of the lease. The standard is effective for the first quarter of 2019, with early adoption permitted. As permitted under a recently approved ASU, we expect to elect the alternative transition method which allows for the recognition of leases using a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption of the standard. While we continue to assess the impact on our consolidated financial statements, we currently expect to recognize right-of-use assets and additional lease liabilities of less than $2 billion each, based on the present value of the expected remaining lease payments.

ASU 2018-02, Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an ASU, Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU permits a reclassification from accumulated other comprehensive income to retained earnings for the tax effects of items within accumulated other comprehensive income that do not reflect the lower statutory tax rate which was enacted by the U.S. tax legislation. This ASU is effective for the first quarter of 2019, with early adoption permitted. The guidance
 
in this ASU may be applied retrospectively to the period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We are assessing the impacts of the new standard, but would not expect this ASU to have a material impact.

ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued an ASU, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU introduces a new current expected credit losses model, which will apply to financial assets subject to credit losses and measured at amortized cost, including held-to-maturity securities and certain off-balance sheet credit exposures. The guidance will also change current practice for the impairment model for available-for-sale debt securities. The available-for-sale debt securities model will require the use of an allowance to record estimated credit losses and subsequent recoveries. This ASU is effective for the first quarter of 2020, with early application permitted beginning with the first quarter of 2019. BNY Mellon has begun its implementation efforts and is currently working through key interpretive issues, and in 2018, we are addressing credit loss forecasting models and related processes. The extent of the impact to our financial statements upon adoption depends on several factors including the remaining expected life of financial instruments at the time of adoption, the establishment of an allowance for expected credit loss on held-to-maturity securities, and the macroeconomic conditions and forecasts that exist at that date. We do not expect to early adopt this ASU.

Recent regulatory developments

For a summary of regulatory matters relevant to our operations, see “Supervision and Regulation” in our 2017 Annual Report and “Recent regulatory developments” in our Quarterly Report on Form 10-Q for the first and second quarters of 2018.



BNY Mellon 43


Business continuity and operational resiliency

Business continuity and operational resiliency are priorities for the Company. Core elements of our business continuity and operational resiliency strategies include advance planning, maintaining multiple data centers, testing our capabilities, maintaining diversity of business operations and telecommunications infrastructure, and reviewing the business continuity and information security capabilities of our service providers. These capabilities are intended to enable the Company to maintain its operations and appropriately respond to events that could damage our physical facilities, cause delays or disruptions to operational functions (including telecommunications networks), or impair the ability of our employees to work, of our vendors to provide services to us, or of our clients and counterparties to communicate and transact with us. Those events include information security incidents, technology disruptions, acts of terrorism, natural disasters, pandemics and global conflicts.

We continue to evaluate and strengthen our business continuity and operational resiliency capabilities and have increased our investments in technology to steadily enhance those capabilities, including our ability to resume and sustain our operations.


 
Website information

Our website is www.bnymellon.com. We currently make available the following information under the Investor Relations portion of our website. With respect to filings with the Securities and Exchange Commission (“SEC”), we post such information as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

All of our SEC filings, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, as well as proxy statements and SEC Forms 3, 4 and 5;
Financial statements and footnotes prepared using eXtensible Business Reporting Language (“XBRL”);
Our earnings materials and selected management conference calls and presentations;
Other regulatory disclosures, including: Pillar 3 Disclosures (and Market Risk Disclosure contained therein); Liquidity Coverage Ratio Disclosures; Federal Financial Institutions Examination Council - Consolidated Reports of Condition and Income for a Bank With Domestic and Foreign Offices; Consolidated Financial Statements for Bank Holding Companies; and the Dodd-Frank Act Stress Test Results for BNY Mellon and The Bank of New York Mellon; and
Our Corporate Governance Guidelines, Amended and Restated By-laws, Directors Code of Conduct and the Charters of the Audit, Finance, Corporate Governance, Nominating and Social Responsibility, Human Resources and Compensation, Risk and Technology Committees of our Board of Directors.

We may use our website, our Twitter account (twitter.com/BNYMellon) and other social media channels as additional means of disclosing information to the public. The information disclosed through those channels may be considered to be material. The contents of our website or social media channels referenced herein are not incorporated by reference into this Quarterly Report on Form 10-Q.



44 BNY Mellon

Item 1. Financial Statements
 
The Bank of New York Mellon Corporation (and its subsidiaries)
 


Consolidated Income Statement (unaudited)
 
Quarter ended
 
Year-to-date
 
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

 
Sept. 30, 2018

Sept. 30, 2017

(in millions)
 
Fee and other revenue
 
 
 
 
 
 
Investment services fees:
 
 
 
 
 
 
Asset servicing
$
1,157

$
1,157

$
1,105

 
$
3,482

$
3,253

Clearing services
383

392

383

 
1,189

1,153

Issuer services
287

266

288

 
813

780

Treasury services
137

140

141

 
415

420

Total investment services fees
1,964

1,955

1,917

 
5,899

5,606

Investment management and performance fees
922

910

901

 
2,792

2,622

Foreign exchange and other trading revenue
155

187

173

 
551

502

Financing-related fees
52

53

54

 
157

162

Distribution and servicing
34

34

40

 
104

122

Investment and other income
41

70

63

 
193

262

Total fee revenue
3,168

3,209

3,148

 
9,696

9,276

Net securities gains (losses) — including other-than-temporary impairment

1

18

 
(48
)
28

Noncredit-related portion of other-than-temporary impairment (recognized in other comprehensive income)


(1
)
 

(1
)
Net securities gains (losses)

1

19

 
(48
)
29

Total fee and other revenue
3,168

3,210

3,167

 
9,648

9,305

Operations of consolidated investment management funds
 
 
 
 
 
 
Investment income
10

13

10

 
12

57

Interest of investment management fund note holders

1


 
1

4

Income from consolidated investment management funds
10

12

10

 
11

53

Net interest revenue
 
 
 
 
 
 
Interest revenue
1,634

1,553

1,151

 
4,568

3,163

Interest expense
743

637

312

 
1,842

706

Net interest revenue
891

916

839

 
2,726

2,457

Total revenue
4,069

4,138

4,016

 
12,385

11,815

Provision for credit losses
(3
)
(3
)
(6
)
 
(11
)
(18
)
Noninterest expense
 
 
 
 
 
 
Staff (a)
1,478

1,489

1,485

 
4,543

4,405

Professional, legal and other purchased services
332

328

305

 
951

937

Software
189

192

175

 
554

514

Net occupancy
139

156

141

 
434

417

Sub-custodian and clearing (b)
106

110

101

 
335

312

Distribution and servicing
99

106

109

 
311

313

Furniture and equipment
73

74

58

 
208

174

Business development
51

62

49

 
164

163

Bank assessment charges
49

47

51

 
148

167

Amortization of intangible assets
48

48

52

 
145

157

Other (a)(b)(c)
174

135

128

 
431

392

Total noninterest expense
2,738

2,747

2,654

 
8,224

7,951

Income
 
 
 
 
 
 
Income before income taxes
1,334

1,394

1,368

 
4,172

3,882

Provision for income taxes
220

286

348

 
788

949

Net income
1,114

1,108

1,020

 
3,384

2,933

Net (income) loss attributable to noncontrolling interests (includes $(3), $(7), $(3), $1 and $(24) related to consolidated investment management funds, respectively)
(3
)
(5
)
(2
)
 
1

(18
)
Net income applicable to shareholders of The Bank of New York Mellon Corporation
1,111

1,103

1,018

 
3,385

2,915

Preferred stock dividends
(36
)
(48
)
(35
)
 
(120
)
(126
)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation
$
1,075

$
1,055

$
983

 
$
3,265

$
2,789

(a)
In the first quarter of 2018, we adopted new accounting guidance included in ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which required the reclassification of the components of pension and other postretirement costs, other than the service cost component. As a result, staff expense increased and other expense decreased. Prior periods have been reclassified. See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(b)
Beginning in the first quarter of 2018, clearing expense, which was previously included in other expense, was included with sub-custodian expense. Prior periods have been reclassified.
(c)
Beginning in the first quarter of 2018, M&I, litigation and restructuring charges are no longer separately disclosed. Expenses previously reported in this line have been reclassified to existing expense categories, primarily other expense.


BNY Mellon 45

The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Income Statement (unaudited) (continued) 

Net income applicable to common shareholders of The Bank of New York Mellon Corporation used for the earnings per share calculation
Quarter ended
 
Year-to-date
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

 
Sept. 30, 2018

Sept. 30, 2017

(in millions)
 
Net income applicable to common shareholders of The Bank of New York Mellon Corporation
$
1,075

$
1,055

$
983

 
$
3,265

$
2,789

Less:  Earnings allocated to participating securities
7

7

8

 
22

35

Net income applicable to common shareholders of The Bank of New York Mellon Corporation after required adjustment for the calculation of basic and diluted earnings per common share
$
1,068

$
1,048

$
975


$
3,243

$
2,754



Average common shares and equivalents outstanding of The Bank of New York Mellon Corporation
Quarter ended
 
Year-to-date
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

 
Sept. 30, 2018

Sept. 30, 2017

(in thousands)
 
Basic
999,808

1,010,179

1,035,337

 
1,008,967

1,037,431

Common stock equivalents
6,451

6,451

9,226

 
6,967

14,216

Less: Participating securities
(2,594
)
(2,273
)
(3,425
)
 
(2,692
)
(8,062
)
Diluted
1,003,665

1,014,357

1,041,138

 
1,013,242

1,043,585

 
 
 
 
 
 
 
Anti-dilutive securities (a)
6,972

7,208

8,059

 
7,061

13,906



Earnings per share applicable to common shareholders of The Bank of New York Mellon Corporation (b)
Quarter ended
 
Year-to-date
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

 
Sept. 30, 2018

Sept. 30, 2017

(in dollars)
 
Basic
$
1.07

$
1.04

$
0.94

 
$
3.21

$
2.66

Diluted
$
1.06

$
1.03

$
0.94

 
$
3.20

$
2.64

(a)
Represents stock options, restricted stock, restricted stock units and participating securities outstanding but not included in the computation of diluted average common shares because their effect would be anti-dilutive.
(b)
Basic and diluted earnings per share under the two-class method are determined on the net income applicable to common shareholders of The Bank of New York Mellon Corporation reported on the income statement less earnings allocated to participating securities.


See accompanying unaudited Notes to Consolidated Financial Statements.



46 BNY Mellon

The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Comprehensive Income Statement (unaudited)

 
Quarter ended
 
Year-to-date
 
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

 
Sept. 30, 2018

Sept. 30, 2017

(in millions)
 
Net income
$
1,114

$
1,108

$
1,020

 
$
3,384

$
2,933

Other comprehensive income, net of tax:
 
 
 
 
 
 
Foreign currency translation adjustments
(60
)
(400
)
286

 
(216
)
741

Unrealized (loss) gain on assets available-for-sale:
 
 
 
 
 
 
Unrealized (loss) gain arising during the period
(144
)
(64
)
28

 
(483
)
213

Reclassification adjustment


(12
)
 
37

(19
)
Total unrealized (loss) gain on assets available-for-sale
(144
)
(64
)
16

 
(446
)
194

Defined benefit plans:
 
 
 
 
 
 
Net gain arising during the period



 

2

Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost
18

16

15

 
51

49

Total defined benefit plans
18

16

15

 
51

51

Net unrealized (loss) gain on cash flow hedges
(4
)
(14
)

 
(20
)
11

Total other comprehensive (loss) income, net of tax (a)
(190
)
(462
)
317

 
(631
)
997

Total comprehensive income
924

646

1,337

 
2,753

3,930

Net (income) loss attributable to noncontrolling interests
(3
)
(5
)
(2
)
 
1

(18
)
Other comprehensive loss (income) attributable to noncontrolling interests
2

10

(5
)
 
7

(13
)
Comprehensive income applicable to shareholders of The Bank of New York Mellon Corporation
$
923

$
651

$
1,330

 
$
2,761

$
3,899

(a)
Other comprehensive income (loss) attributable to The Bank of New York Mellon Corporation shareholders was $(188) million for the quarter ended Sept. 30, 2018, $(452) million for the quarter ended June 30, 2018, $312 million for the quarter ended Sept. 30, 2017, $(624) million for the nine months ended Sept. 30, 2018 and $984 million for the nine months ended Sept. 30, 2017.


See accompanying unaudited Notes to Consolidated Financial Statements.



BNY Mellon 47

The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Balance Sheet (unaudited)

  
Sept. 30, 2018

Dec. 31, 2017

(dollars in millions, except per share amounts)
Assets
 
 
Cash and due from:
 
 
Banks
$
5,047

$
5,382

Interest-bearing deposits with the Federal Reserve and other central banks
74,725

91,510

Interest-bearing deposits with banks ($1,302 and $1,751 is restricted)
14,519

11,979

Federal funds sold and securities purchased under resale agreements
28,722

28,135

Securities:
 
 
Held-to-maturity (fair value of $33,345 and $40,512)
34,486

40,827

Available-for-sale
84,155

79,543

Total securities
118,641

120,370

Trading assets
7,804

6,022

Loans
53,987

61,540

Allowance for loan losses
(140
)
(159
)
Net loans
53,847

61,381

Premises and equipment
1,832

1,634

Accrued interest receivable
640

610

Goodwill
17,390

17,564

Intangible assets
3,258

3,411

Other assets (includes $832 and $791, at fair value)
22,846

23,029

Subtotal assets of operations
349,271

371,027

Assets of consolidated investment management funds, at fair value
499

731

Total assets
$
349,770

$
371,758

Liabilities
 


Deposits:
 


Noninterest-bearing (principally U.S. offices)
$
65,846

$
82,716

Interest-bearing deposits in U.S. offices
73,525

52,294

Interest-bearing deposits in non-U.S. offices
92,219

109,312

Total deposits
231,590

244,322

Federal funds purchased and securities sold under repurchase agreements
10,158

15,163

Trading liabilities
3,536

3,984

Payables to customers and broker-dealers
18,683

20,184

Commercial paper
735

3,075

Other borrowed funds
2,934

3,028

Accrued taxes and other expenses 
5,601

6,225

Other liabilities (including allowance for lending-related commitments of $111 and $102, also includes $74 and $800, at fair value)
6,552

6,050

Long-term debt (includes $363 and $367, at fair value)
28,113

27,979

Subtotal liabilities of operations
307,902

330,010

Liabilities of consolidated investment management funds, at fair value
7

2

Total liabilities
307,909

330,012

Temporary equity
 
 
Redeemable noncontrolling interests
211

179

Permanent equity
 
 
Preferred stock – par value $0.01 per share; authorized 100,000,000 shares; issued 35,826 and 35,826 shares
3,542

3,542

Common stock – par value $0.01 per share; authorized 3,500,000,000 shares; issued 1,364,286,053 and 1,354,163,581 shares
14

14

Additional paid-in capital
27,034

26,665

Retained earnings
28,098

25,635

Accumulated other comprehensive loss, net of tax
(2,983
)
(2,357
)
Less: Treasury stock of 375,508,558 and 340,721,136 common shares, at cost
(14,145
)
(12,248
)
Total The Bank of New York Mellon Corporation shareholders’ equity
41,560

41,251

Nonredeemable noncontrolling interests of consolidated investment management funds
90

316

Total permanent equity
41,650

41,567

Total liabilities, temporary equity and permanent equity
$
349,770

$
371,758



See accompanying unaudited Notes to Consolidated Financial Statements.


48 BNY Mellon

The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Statement of Cash Flows (unaudited)

 
Nine months ended Sept. 30,
(in millions)
2018

2017

Operating activities
 
 
Net income
$
3,384

2,933

Net loss (income) attributable to noncontrolling interests
1

(18
)
Net income applicable to shareholders of The Bank of New York Mellon Corporation
3,385

2,915

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
Provision for credit losses
(11
)
(18
)
Pension plan contributions
(47
)
(12
)
Depreciation and amortization
1,011

1,044

Deferred tax (benefit) expense
(401
)
272

Net securities losses (gains)
48

(29
)
Change in trading assets and liabilities
(1,282
)
(66
)
Change in accruals and other, net (a)
109

(730
)
Net cash provided by operating activities (a)
2,812

3,376

Investing activities
 
 
Change in interest-bearing deposits with banks (a)
(3,367
)
1,033

Change in interest-bearing deposits with the Federal Reserve and other central banks
15,570

(14,467
)
Purchases of securities held-to-maturity
(4,029
)
(5,878
)
Paydowns of securities held-to-maturity
3,289

3,332

Maturities of securities held-to-maturity
6,047

3,412

Purchases of securities available-for-sale
(22,898
)
(18,974
)
Sales of securities available-for-sale
5,538

3,531

Paydowns of securities available-for-sale
5,683

7,047

Maturities of securities available-for-sale
6,113

4,820

Net change in loans
7,227

5,283

Sales of loans and other real estate
257

369

Change in federal funds sold and securities purchased under resale agreements (a)
(592
)
(2,082
)
Net change in seed capital investments
54

(52
)
Purchases of premises and equipment/capitalized software
(819
)
(933
)
Proceeds from the sale of premises and equipment
23


Dispositions, net of cash
84


Other, net (a)
(163
)
58

Net cash provided by (used for) investing activities (a)
18,017

(13,501
)
Financing activities
 
 
Change in deposits
(10,680
)
4,459

Change in federal funds purchased and securities sold under repurchase agreements
(5,005
)
325

Change in payables to customers and broker-dealers
(1,487
)
177

Change in other borrowed funds
(133
)
2,187

Change in commercial paper
(2,340
)
2,501

Net proceeds from the issuance of long-term debt
4,144

4,739

Repayments of long-term debt
(3,400
)
(796
)
Proceeds from the exercise of stock options
74

383

Issuance of common stock
30

24

Treasury stock acquired
(1,897
)
(2,035
)
Common cash dividends paid
(774
)
(653
)
Preferred cash dividends paid
(120
)
(126
)
Other, net
32

44

Net cash (used for) provided by financing activities
(21,556
)
11,229

Effect of exchange rate changes on cash
(57
)
157

Change in cash and due from banks and restricted cash (a)
 
 
Change in cash and due from banks and restricted cash
(784
)
1,261

Cash and due from banks and restricted cash at beginning of period
7,133

8,204

Cash and due from banks and restricted cash at end of period
$
6,349

$
9,465

Cash and due from banks and restricted cash: (a)
 
 
Cash and due from banks at end of period (unrestricted cash)
$
5,047

$
5,557

Restricted cash at end of period
1,302

3,908

Cash and due from banks and restricted cash at end of period
$
6,349

$
9,465

Supplemental disclosures
 
 
Interest paid
$
1,795

$
721

Income taxes paid
699

316

Income taxes refunded
155

19

(a)
Reflects the impact of adopting new accounting guidance included in ASU 2016-15 and ASU 2016-18. Prior periods have been restated. See Note 2 of the Notes to Consolidated Financial Statements for additional information.


See accompanying unaudited Notes to Consolidated Financial Statements.


BNY Mellon 49

The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Statement of Changes in Equity (unaudited)

 
The Bank of New York Mellon Corporation shareholders
Non-
redeemable
noncontrolling
interests of
consolidated
investment
management
funds

Total
permanent
equity

 
Redeemable
non-
controlling
interests/
temporary
equity

(in millions, except per
share amount)
Preferred stock

Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated other comprehensive (loss), net
of tax

Treasury
stock

Balance at June 30, 2018
$
3,542

$
14

$
26,981

$
27,306

$
(2,795
)
$
(13,543
)
$
52

$
41,557

(a)
$
189

Shares issued to shareholders of noncontrolling interests








 
22

Other net changes in noncontrolling interests


(4
)



35

31

 
2

Net income



1,111



3

1,114

 

Other comprehensive (loss)




(188
)


(188
)
 
(2
)
Dividends:
 
 
 
 
 
 
 
 
 
 
Common stock at $0.28 per
share



(283
)



(283
)
 

Preferred stock



(36
)



(36
)
 

Repurchase of common stock





(602
)

(602
)
 

Common stock issued under:
 
 
 
 
 
 
 
 
 
 
Employee benefit plans


7





7

 

Direct stock purchase and dividend reinvestment plan


7





7

 

Stock awards and options exercised


43





43

 

Balance at Sept. 30, 2018
$
3,542

$
14

$
27,034

$
28,098

$
(2,983
)
$
(14,145
)
$
90

$
41,650

(a)
$
211

(a)
Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $37,963 million at June 30, 2018 and $38,018 million at Sept. 30, 2018.


 
The Bank of New York Mellon Corporation shareholders
Non-
redeemable
noncontrolling
interests of
consolidated
investment
management
funds

Total
permanent
equity

 
Redeemable
non-
controlling
interests/
temporary
equity

(in millions, except per
share amount)
Preferred stock

Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated other comprehensive (loss), net
of tax

Treasury
stock

Balance at March 31, 2018
$
3,542

$
14

$
26,911

$
26,496

$
(2,343
)
$
(12,892
)
$
212

$
41,940

(a)
$
184

Shares issued to shareholders of noncontrolling interests








 
17

Other net changes in noncontrolling interests


(2
)



(167
)
(169
)
 

Net income (loss)



1,103



7

1,110

 
(2
)
Other comprehensive (loss)




(452
)


(452
)
 
(10
)
Dividends:
 
 
 
 
 
 
 
 
 
 
Common stock at $0.24 per
share



(245
)



(245
)
 

Preferred stock



(48
)



(48
)
 

Repurchase of common stock





(651
)

(651
)
 

Common stock issued under:
 
 
 
 
 
 
 
 
 
 
Employee benefit plans


7





7

 

Direct stock purchase and dividend reinvestment plan


7





7

 

Stock awards and options exercised


58





58

 

Balance at June 30, 2018
$
3,542

$
14

$
26,981

$
27,306

$
(2,795
)
$
(13,543
)
$
52

$
41,557

(a)
$
189

(a)
Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $38,186 million at March 31, 2018 and $37,963 million at June 30, 2018.




50 BNY Mellon

The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Statement of Changes in Equity (unaudited) (continued) 

 
The Bank of New York Mellon Corporation shareholders
Non-
redeemable
noncontrolling
interests of
consolidated
investment
management
funds

Total
permanent
equity

 
Redeemable
non-
controlling
interests/
temporary
equity

(in millions, except per
share amount)
Preferred stock

Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated other comprehensive (loss) income, net of tax

Treasury
stock

Balance at June 30, 2017
$
3,542

$
13

$
26,432

$
24,027

$
(3,093
)
$
(10,947
)
$
343

$
40,317

(a)
$
181

Shares issued to shareholders of noncontrolling interests








 
11

Other net changes in noncontrolling interests


(2
)



38

36

 
1

Net income (loss)



1,018



3

1,021

 
(1
)
Other comprehensive income




312



312

 
5

Dividends:
 
 
 
 
 
 
 
 
 
 
Common stock at $0.24 per
share



(253
)



(253
)
 

Preferred stock



(35
)



(35
)
 

Repurchase of common stock





(650
)

(650
)
 

Common stock issued under:
 
 
 
 
 
 
 
 
 
 
Employee benefit plans


6





6

 

Direct stock purchase and dividend reinvestment plan


8





8

 

Stock awards and options exercised

1

144





145

 

Balance at Sept. 30, 2017
$
3,542

$
14

$
26,588

$
24,757

$
(2,781
)
$
(11,597
)
$
384

$
40,907

(a)
$
197

(a)
Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $36,432 million at June 30, 2017 and $36,981 million at Sept. 30, 2017.

 
The Bank of New York Mellon Corporation shareholders
Non-
redeemable
noncontrolling
interests of
consolidated
investment
management
funds

Total
permanent
equity

 
Redeemable
non-
controlling
interests/
temporary
equity

(in millions, except per
share amount)
Preferred stock

Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated other comprehensive (loss), net
of tax

Treasury
stock

Balance at Dec. 31, 2017
$
3,542

$
14

$
26,665

$
25,635

$
(2,357
)
$
(12,248
)
$
316

$
41,567

(a)
$
179

Adjustment for the cumulative effect of applying ASU 2014-09 for contract revenue



(55
)



(55
)
 

Adjustment for the cumulative effect of applying ASU 2017-12 for derivatives and hedging



27

(2
)


25

 

Adjusted balance at Jan. 1, 2018
3,542

14

26,665

25,607

(2,359
)
(12,248
)
316

41,537

 
179

Shares issued to shareholders of noncontrolling interests








 
56

Redemption of subsidiary shares from noncontrolling interests








 
(32
)
Other net changes in noncontrolling interests


(17
)



(225
)
(242
)
 
15

Net income (loss)



3,385



(1
)
3,384

 

Other comprehensive (loss)




(624
)


(624
)
 
(7
)
Dividends:
 
 
 
 
 
 
 
 
 
 
Common stock at $0.76 per
share



(774
)



(774
)
 

Preferred stock



(120
)



(120
)
 

Repurchase of common stock





(1,897
)

(1,897
)
 

Common stock issued under:
 
 
 
 
 
 
 
 
 
 
Employee benefit plans


24





24

 

Direct stock purchase and dividend reinvestment plan


23





23

 

Stock awards and options exercised


339





339

 

Balance at Sept. 30, 2018
$
3,542

$
14

$
27,034

$
28,098

$
(2,983
)
$
(14,145
)
$
90

$
41,650

(a)
$
211

(a)
Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $37,709 million at Dec. 31, 2017 and $38,018 million at Sept. 30, 2018.


BNY Mellon 51

The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Statement of Changes in Equity (unaudited) (continued) 

 
The Bank of New York Mellon Corporation shareholders
Non-redeemable
noncontrolling
interests of
consolidated
investment
management
funds

Total
permanent
equity

 
Redeemable
non-
controlling
interests/
temporary
equity

(in millions, except per
share amount)
Preferred stock

Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated other comprehensive (loss) income, net of tax

Treasury
stock

Balance at Dec. 31, 2016
$
3,542

$
13

$
25,962

$
22,621

$
(3,765
)
$
(9,562
)
$
618

$
39,429

(a)
$
151

Shares issued to shareholders of noncontrolling interests








  
40

Redemption of subsidiary shares from noncontrolling interests








  
(16
)
Other net changes in noncontrolling interests


(11
)



(258
)
(269
)
 
15

Net income (loss)



2,915



24

2,939

  
(6
)
Other comprehensive income




984



984

 
13

Dividends:
 
 
 
 
 
 
 
 
 
 
Common stock at $0.62 per
share



(653
)



(653
)
 

Preferred stock



(126
)



(126
)
 

Repurchase of common stock





(2,035
)

(2,035
)
 

Common stock issued under:
 
 
 
 
 
 
 
 
 
 
Employee benefit plans


21





21

 

Direct stock purchase and dividend reinvestment plan


18





18

 

Stock awards and options exercised

1

598





599

 

Balance at Sept. 30, 2017
$
3,542

$
14

$
26,588

$
24,757

$
(2,781
)
$
(11,597
)
$
384

$
40,907

(a)
$
197

(a)
Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $35,269 million at Dec. 31, 2016 and $36,981 million at Sept. 30, 2017.


See accompanying unaudited Notes to Consolidated Financial Statements.



52 BNY Mellon

Notes to Consolidated Financial Statements
 


Note 1–Basis of presentation

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 accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been made. These financial statements should be read in conjunction with BNY Mellon’s Annual Report on Form 10-K for the year ended Dec. 31, 2017. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with current period presentation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates based upon assumptions about future economic and market conditions which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Amounts subject to estimates are items such as allowance for loan losses and lending-related commitments, fair value of financial instruments and derivatives, other-than-temporary impairment, goodwill and other intangibles and pension accounting. Among other effects, such changes in estimates could result in future impairments of securities, goodwill and intangible assets and establishment of allowances for loan losses and lending-related commitments as well as changes in pension and postretirement expense.

Note 2–Accounting changes and new accounting guidance

The following accounting changes and new accounting guidance were adopted in 2018.
 
ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued an ASU, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The objective of this ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities and to simplify the application of hedge accounting guidance.

The most significant impact of the new guidance to the Company relates to the new accounting alternatives for fair value hedges of interest rate risk, specifically, the ability to hedge only the benchmark component of the contractual cash flows and partial-term hedging. The guidance also changed presentation and disclosure requirements and made changes to how the shortcut method is applied, which resulted in the Company using that method going forward for certain hedging relationships.

BNY Mellon elected to early adopt this ASU on Jan. 31, 2018, which is the “as of” date for which the Company was permitted to make certain elections and the measurement date for recording the adoption impact for certain hedge modifications. As part of the adoption, we elected to reclassify approximately $1.1 billion of debt securities from held-to-maturity to available-for-sale which resulted in a decrease of $47 million pre-tax to accumulated other comprehensive income. The Company also elected to modify certain hedge relationships as of the adoption date primarily to utilize the benchmark component method of measuring hedge effectiveness, as such method is deemed to more closely match risk management objectives with accounting results. The Company recognized a $27 million after-tax increase in retained earnings as of Jan. 1, 2018 associated with the adoption impact of these hedge modifications.

ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued an ASU, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires the disaggregation of the service cost component from the other components of the net


BNY Mellon 53

Notes to Consolidated Financial Statements (continued)
 

benefit cost in the consolidated income statement. The ASU also permits only the service cost component of net benefit cost to be eligible for capitalization. BNY Mellon adopted this ASU in the first quarter of 2018, and applied the guidance retrospectively for the presentation of the service cost component and the other components in the consolidated income statement, and prospectively for the capitalization of the service cost component in assets. The adoption of this standard increased staff expense and decreased other expense by $16 million for the third quarter of 2017 and $48 million for the first nine months of 2017.

ASU 2016-18, Statement of Cash Flows: Restricted Cash

In November 2016, the FASB issued an ASU, Statement of Cash Flows: Restricted Cash. This ASU provides guidance on the presentation of restricted cash or restricted cash equivalents in the consolidated statement of cash flows. Restricted cash consists of excess client funds held by our broker-dealer business and totaled $1.3 billion at Sept. 30, 2018 and $3.9 billion at Sept. 30, 2017. Restricted cash is included in interest-bearing deposits with banks on the consolidated balance sheet and with cash and due from banks when reconciling the beginning and end-of-period balances on the consolidated statement of cash flows.

We adopted the guidance in this ASU retrospectively. As a result, the change in interest-bearing deposits with banks, which is included in investing activities on the consolidated statement of cash flows, was restated to reflect the increase in restricted cash of $526 million for the nine months ended Sept. 30, 2017. The change in restricted cash was a $449 million decrease for the nine months ended Sept. 30, 2018.

ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued an ASU, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on eight specific cash flow presentation issues. The most significant impact for BNY Mellon relates to distributions received from equity method investees. For equity method investments, BNY Mellon elected to report distributions received from
 
equity method investees using the cumulative earnings approach. Distributions received are considered returns on investment and classified as cash inflows from operating activities on the consolidated statement of cash flows. To the extent the returns on investment exceeded the cumulative equity in earnings recognized, the excess would be considered a return of investment and classified as cash inflows from investing activities on the consolidated statement of cash flows. We adopted the guidance in this ASU retrospectively. As a result, the change in accruals and other, net, which is included in operating activities on the consolidated statement of cash flows, was restated to reflect distributions received of $24 million for the nine months ended Sept. 30, 2017. These distributions were previously included in other, net in investing activities on the consolidated statement of cash flows. Distributions received for the nine months ended Sept. 30, 2018 were $24 million. The remaining seven specific cash flow presentation issues do not materially impact BNY Mellon.

ASU 2014-09, Revenue from Contracts with Customers

In May 2014, the FASB issued an ASU, Revenue from Contracts with Customers. This ASU, as amended, provides guidance on the recognition of revenue related to the transfer of promised goods or services to customers and guidance on accounting for certain contract costs. The standard provides a single revenue model to be applied by reporting companies under U.S. GAAP and supersedes most existing revenue recognition guidance.

The Company adopted the guidance on Jan. 1, 2018 using the cumulative effect transition method applied to contracts not completed as of Dec. 31, 2017, which resulted in a $55 million after-tax reduction to retained earnings. The comparative financial information for 2017 has not been restated and continues to be reported under the accounting standards in effect for that period.

Although the impact of the adoption of this ASU was not material, the most significant changes and quantitative impact of the changes are disclosed below.



54 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Payments to customers

The timing of recognizing the reduction in revenue for certain payments made to depositary receipts customers has changed. Prior to adoption, annual payments to customers were capitalized and amortized as contra revenue over the remaining contract period, subject to impairment reviews.

Under the new guidance, annual payments are recorded as a reduction in revenue in proportion to the expected annual revenue generated from the related customer contract.

Costs to obtain a customer contract

Prior to adoption, costs to obtain a customer contract, primarily sales incentives, were expensed as incurred. Under the new guidance, an asset is recognized for the incremental sales incentives that are considered costs of obtaining a contract with a customer, if those costs are expected to be recovered.

The table below presents the cumulative effect of the adoption of the new guidance on the consolidated balance sheet as of Dec. 31, 2017.

Impact on the consolidated balance sheet
 
 
Dec. 31, 2017

Impact of
adoption

Jan. 1, 2018

(in millions)
Assets
 
 
 
Other assets
$
23,029

$
(9
)
$
23,020

 

 
 
Liabilities

 
 
Accrued tax and other expenses
$
6,225

$
(18
)
$
6,207

Other liabilities
6,050

64

6,114

 

 
 
Equity

 
 
Retained earnings
$
25,635

$
(55
)
$
25,580



The impact of the new guidance on the consolidated income statement for the third quarter of 2018 and the first nine months of 2018, and consolidated balance sheet as of Sept. 30, 2018, was de minimis. See Note 8 for additional revenue and contract costs disclosures.

 
ASU 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued an ASU, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires investments in equity securities that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with changes in the fair value recognized through net income, unless one of two available exceptions applies. The first exception, a scope exception, allows Federal Reserve Bank stock, FHLB stock and exchange memberships to remain accounted for at cost, less impairment. The second practicability exception is an election available for equity investments that do not have readily determinable fair values. For certain investments where the Company has chosen the practicability exception, such investments are accounted for at cost adjusted for impairment, if any, plus or minus observable price changes.

The Company adopted this guidance in the first quarter of 2018 using the cumulative effect method of adoption, with a de minimis impact to retained earnings. As part of the adoption, we reclassified money market fund investments of approximately $1 billion to trading assets, primarily from available-for-sale securities.

We have non-readily marketable equity securities where we are utilizing the practicability exception of $55 million at Sept. 30, 2018 and $53 million at June 30, 2018. We recognized net upward adjustments on these securities of $2 million in the third quarter of 2018 and $5 million in the second quarter of 2018. Both upward adjustments were driven by activity that resulted in observable price changes.

ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued an ASU, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU requires disclosure of the changes in unrealized gains or losses included in OCI for Level 3 assets or liabilities held at the end of the period and the range and weighted-average of the significant unobservable inputs used in determining


BNY Mellon 55

Notes to Consolidated Financial Statements (continued)
 

the fair value of Level 3 assets and liabilities. This ASU removes the requirement to disclose the transfers between Level 1 and Level 2 of the fair value hierarchy and the valuation process for determining Level 3 fair value measurements. BNY Mellon adopted this ASU in the third quarter of 2018 and applied the guidance prospectively for the new disclosure requirements and retrospectively for disclosure requirements that have been removed.

Note 3–Acquisitions and dispositions

We sometimes structure our acquisitions with both an initial payment and later contingent payments tied to post-closing revenue or income growth. There were no contingent payments in the third quarter of 2018 or the first nine months of 2018.

At Sept. 30, 2018, we are potentially obligated to pay additional consideration which, using reasonable assumptions, could range from $0 million to $7 million over the next two years, but could be higher as certain of the arrangements do not contain a contractual maximum.

The transactions described below did not have a material impact on BNY Mellon’s results of operations.

On Jan. 2, 2018, BNY Mellon completed the sale of CenterSquare, one of our Investment Management boutiques, and recorded a gain on this transaction. CenterSquare had approximately $10 billion in AUM in U.S. and global real estate and infrastructure investments. In addition, goodwill of $52 million was removed from the consolidated balance sheet as a result of this sale.

On June 29, 2018, BNY Mellon completed the exchange of its majority equity interest in Amherst Capital Management LLC for a minority equity stake in Amherst Holdings LLC. Goodwill of $13 million was removed from the consolidated balance sheet and a gain was recorded as a result of this sale.



 
Note 4–Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of securities at Sept. 30, 2018 and Dec. 31, 2017, respectively.

Securities at Sept. 30, 2018
Gross
unrealized
 
 
Amortized cost

Fair
value

(in millions)
Gains

Losses

Available-for-sale:
 
 
 
 
U.S. Treasury
$
19,904

$
18

$
410

$
19,512

U.S. government agencies
1,571


46

1,525

State and political subdivisions
2,355

15

34

2,336

Agency RMBS
25,283

79

495

24,867

Non-agency RMBS (a)
1,158

269

8

1,419

Non-agency commercial MBS
1,484

1

26

1,459

Agency commercial MBS
9,867

6

260

9,613

CLOs
3,368

3

8

3,363

Foreign covered bonds
2,985

7

20

2,972

Corporate bonds
1,140

7

29

1,118

Sovereign debt/sovereign guaranteed
11,491

100

49

11,542

Other debt securities
4,454

3

28

4,429

Total securities available-for-sale (b)
$
85,060

$
508

$
1,413

$
84,155

Held-to-maturity:
 
 
 
 
U.S. Treasury
$
4,923

$
1

$
133

$
4,791

U.S. government agencies
1,572


19

1,553

State and political subdivisions
17


1

16

Agency RMBS
25,651

3

966

24,688

Non-agency RMBS
107

4

1

110

Agency commercial MBS
1,262


52

1,210

Foreign covered bonds
81

1


82

Sovereign debt/sovereign guaranteed
847

22


869

Other debt securities
26



26

Total securities held-to-maturity
$
34,486

$
31

$
1,172

$
33,345

Total securities
$
119,546

$
539

$
2,585

$
117,500

(a)
Includes $889 million that was included in the former Grantor Trust.
(b)
Includes gross unrealized gains of $42 million and gross unrealized losses of $93 million recorded in accumulated other comprehensive income related to securities that were transferred from available-for-sale to held-to-maturity. The unrealized gains and losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities.


56 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Securities at Dec. 31, 2017
Gross
unrealized
 
 
Amortized cost

Fair
value

(in millions)
Gains

Losses

Available-for-sale:
 
 
 
 
U.S. Treasury
$
15,159

$
264

$
160

$
15,263

U.S. government agencies
917

1

10

908

State and political subdivisions
2,949

31

23

2,957

Agency RMBS
24,002

108

291

23,819

Non-agency RMBS (a)
1,265

317

4

1,578

Other RMBS
152

3

6

149

Non-agency commercial MBS
1,360

6

6

1,360

Agency commercial MBS
8,793

36

67

8,762

CLOs
2,898

12

1

2,909

Other asset-backed securities
1,040

3


1,043

Foreign covered bonds
2,520

18

9

2,529

Corporate bonds
1,249

17

11

1,255

Sovereign debt/sovereign guaranteed
12,405

175

23

12,557

Other debt securities
3,494

9

12

3,491

Money market funds
963



963

Total securities available-for-sale (b)
$
79,166

$
1,000

$
623

$
79,543

Held-to-maturity:
 
 
 
 
U.S. Treasury
$
9,792

$
6

$
56

$
9,742

U.S. government agencies
1,653


12

1,641

State and political subdivisions
17


1

16

Agency RMBS
26,208

51

332

25,927

Non-agency RMBS
57

5


62

Other RMBS
65


1

64

Non-agency commercial MBS
6



6

Agency commercial MBS
1,324

2

9

1,317

Foreign covered bonds
84

2


86

Sovereign debt/sovereign guaranteed
1,593

30


1,623

Other debt securities
28



28

Total securities held-to-maturity
$
40,827

$
96

$
411

$
40,512

Total securities
$
119,993

$
1,096

$
1,034

$
120,055

(a)
Includes $1,091 million that was included in the former Grantor Trust.
(b)
Includes gross unrealized gains of $50 million and gross unrealized losses of $144 million recorded in accumulated other comprehensive income related to securities that were transferred from available-for-sale to held-to-maturity. The unrealized gains and losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities.

 
The following table presents the realized gains, losses and impairments, on a gross basis.

Net securities gains (losses)
 
 
 
 
(in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Realized gross gains
$
1

$
2

$
20

$
5

$
34

Realized gross losses
(1
)
(1
)

(53
)
(2
)
Recognized gross impairments


(1
)

(3
)
Total net securities gains (losses)
$

$
1

$
19

$
(48
)
$
29



In the first quarter of 2018, we adopted the new accounting guidance included in ASU 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. As a result, money market fund investments were reclassified to trading assets, primarily from available-for-sale securities.

In the first quarter of 2018, certain debt securities with an aggregate amortized cost of $1,117 million and fair value of $1,070 million were transferred from held-to-maturity securities to available-for-sale securities as part of the adoption of ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.

Temporarily impaired securities

At Sept. 30, 2018, the unrealized losses on the securities portfolio were primarily attributable to an increase in interest rates from date of purchase, and for certain securities that were transferred from available-for-sale to held-to-maturity, an increase in interest rates through the date they were transferred. Specifically, $93 million of the unrealized losses at Sept. 30, 2018 and $144 million at Dec. 31, 2017 reflected in the available-for-sale sections of the tables below relate to certain securities (primarily Agency RMBS) that were transferred in prior periods from available-for-sale to held-to-maturity. The unrealized losses will be amortized into net interest revenue over the contractual lives of the securities. The transfer created a new cost basis for the securities. As a result, if these securities have experienced unrealized losses since the date of transfer, the corresponding fair value and unrealized losses would be reflected in the held-to-maturity sections of the following tables. We do not intend to sell these securities, and it is not more likely than not that we will have to sell these securities.


BNY Mellon 57

Notes to Consolidated Financial Statements (continued)
 

The following tables show the aggregate fair value of securities with a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more at Sept. 30, 2018 and Dec. 31, 2017, respectively.

Temporarily impaired securities at Sept. 30, 2018
Less than 12 months
 
12 months or more
 
Total
Fair
value

Unrealized
losses

 
Fair
value

Unrealized
losses

 
Fair
value

Unrealized
losses

(in millions)
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. Treasury
$
12,651

$
171

 
$
4,996

$
239

 
$
17,647

$
410

U.S. government agencies
1,279

32

 
247

14

 
1,526

46

State and political subdivisions
733

5

 
560

29

 
1,293

34

Agency RMBS
8,668

149

 
7,105

346

 
15,773

495

Non-agency RMBS (a)
39


 
188

8

 
227

8

Non-agency commercial MBS
795

21

 
135

5

 
930

26

Agency commercial MBS
5,238

124

 
2,329

136

 
7,567

260

CLOs
1,578

7

 
27

1

 
1,605

8

Foreign covered bonds
1,079

6

 
624

14

 
1,703

20

Corporate bonds
710

27

 
54

2

 
764

29

Sovereign debt/sovereign guaranteed
3,555

26

 
1,194

23

 
4,749

49

Other debt securities
2,300

16

 
686

12

 
2,986

28

Total securities available-for-sale (b)
$
38,625

$
584

 
$
18,145

$
829

 
$
56,770

$
1,413

Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Treasury
$
2,268

$
62

 
$
2,372

$
71

 
$
4,640

$
133

U.S. government agencies
681

8

 
871

11

 
1,552

19

State and political subdivisions


 
4

1

 
4

1

Agency RMBS
11,018

299

 
13,396

667

 
24,414

966

Non-agency RMBS
20


 
37

1

 
57

1

Agency commercial MBS
747

28

 
464

24

 
1,211

52

Total securities held-to-maturity
$
14,734

$
397

 
$
17,144

$
775

 
$
31,878

$
1,172

Total temporarily impaired securities
$
53,359

$
981

 
$
35,289

$
1,604

 
$
88,648

$
2,585

(a)
Includes $6 million with an unrealized loss of less than $1 million for less than 12 months and $6 million with an unrealized loss of less than $1 million for 12 months or more that were included in the former Grantor Trust.
(b)
Includes gross unrealized losses of $93 million for 12 months or more recorded in accumulated other comprehensive income related to securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities. There were no gross unrealized losses for less than 12 months.


58 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Temporarily impaired securities at Dec. 31, 2017
Less than 12 months
 
12 months or more
 
Total
(in millions)
Fair
value

Unrealized
losses

 
Fair
value

Unrealized
losses

 
Fair
value

Unrealized
losses

Available-for-sale:
 
 
 
 
 
 
 
 
U.S. Treasury
$
7,429

$
131

 
$
2,175

$
29

 
$
9,604

$
160

U.S. government agencies
588

6

 
160

4

 
748

10

State and political subdivisions
732

3

 
518

20

 
1,250

23

Agency RMBS
8,567

66

 
5,834

225

 
14,401

291

Non-agency RMBS (a)
20


 
149

4

 
169

4

Other RMBS
71

4

 
45

2

 
116

6

Non-agency commercial MBS
476

3

 
122

3

 
598

6

Agency commercial MBS
3,077

28

 
1,332

39

 
4,409

67

CLOs
260

1

 


 
260

1

Foreign covered bonds
953

7

 
116

2

 
1,069

9

Corporate bonds
274

2

 
288

9

 
562

11

Sovereign debt/sovereign guaranteed
1,880

12

 
559

11

 
2,439

23

Other debt securities
1,855

7

 
368

5

 
2,223

12

Total securities available-for-sale (b)
$
26,182

$
270

 
$
11,666

$
353

 
$
37,848

$
623

Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Treasury
$
6,389

$
41

 
$
2,909

$
15

 
$
9,298

$
56

U.S. government agencies
791

4

 
850

8

 
1,641

12

State and political subdivisions


 
4

1

 
4

1

Agency RMBS
9,458

81

 
12,305

251

 
21,763

332

Other RMBS


 
50

1

 
50

1

Agency commercial MBS
737

7

 
60

2

 
797

9

Total securities held-to-maturity
$
17,375

$
133

 
$
16,178

$
278

 
$
33,553

$
411

Total temporarily impaired securities
$
43,557

$
403

 
$
27,844

$
631

 
$
71,401

$
1,034

(a)
Includes $7 million with an unrealized loss of less than $1 million for less than 12 months and $12 million with an unrealized loss of $1 million for 12 months or more that were included in the former Grantor Trust.
(b)
Includes gross unrealized losses of $144 million for 12 months or more recorded in accumulated other comprehensive income related to securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities. There were no gross unrealized losses for less than 12 months.


The following table shows the maturity distribution by carrying amount and yield (on a tax equivalent basis) of our securities portfolio.

Maturity distribution and yields on securities at Sept. 30, 2018
U.S. Treasury
 
U.S. government
agencies
 
State and political
subdivisions
 
Other bonds, notes and debentures
 
Mortgage/
asset-backed
 
 
(dollars in millions)
Amount

Yield (a)

 
Amount

Yield (a)

 
Amount

Yield (a)

 
Amount

Yield (a)

 
Amount

Yield (a)

 
Total

Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
7,485

1.91
%
 
$
145

2.16
%
 
$
426

2.28
%
 
$
5,637

1.23
%
 
$

%
 
$
13,693

Over 1 through 5 years
6,380

2.02

 
357

2.20

 
1,128

2.92

 
11,214

1.20

 


 
19,079

Over 5 through 10 years
2,385

2.25

 
1,023

2.75

 
587

2.57

 
2,280

0.88

 


 
6,275

Over 10 years
3,262

3.11

 


 
195

2.92

 
183

1.68

 


 
3,640

Mortgage-backed securities


 


 


 


 
37,358

3.13

 
37,358

Asset-backed securities


 


 


 


 
4,110

3.30

 
4,110

Total
$
19,512

2.19
%
 
$
1,525

2.56
%
 
$
2,336

2.72
%
 
$
19,314

1.17
%
 
$
41,468

3.15
%
 
$
84,155

Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
907

1.31
%
 
$
507

1.21
%
 
$

%
 
$

%
 
$

%
 
$
1,414

Over 1 through 5 years
3,705

1.81

 
1,065

2.34

 
2

5.63

 
437

0.46

 


 
5,209

Over 5 through 10 years
311

2.18

 


 
1

5.93

 
517

0.85

 


 
829

Over 10 years


 


 
14

4.76

 


 


 
14

Mortgage-backed securities


 


 


 


 
27,020

2.88

 
27,020

Total
$
4,923

1.74
%
 
$
1,572

1.97
%
 
$
17

4.95
%
 
$
954

0.67
%
 
$
27,020

2.88
%
 
$
34,486

(a)
Yields are based upon the amortized cost of securities.




BNY Mellon 59

Notes to Consolidated Financial Statements (continued)
 

Other-than-temporary impairment

We conduct periodic reviews of all securities to determine whether OTTI has occurred. Such reviews may incorporate the use of economic models. Various inputs to the economic models are used to determine if an unrealized loss on securities is other-than-temporary. For example, the most significant inputs related to non-agency RMBS are:

Default rate - the 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
Severity - the loss expected to be realized when a loan defaults.

To determine if an unrealized loss is other-than-temporary, 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. In determining estimated default rate and severity assumptions, we review the performance of the underlying securities, industry studies and market forecasts, as well as our view of the economic outlook affecting collateral. We also evaluate the current credit enhancement underlying the bond to determine the impact on cash flows. If we determine that a given security will be subject to a write-down or loss, we record the expected credit loss as a charge to earnings.

The table below shows the projected weighted-average default rates and loss severities for the 2007, 2006 and late 2005 non-agency RMBS and the securities previously held in the Grantor Trust that we established in connection with the restructuring of our securities portfolio in 2009, at Sept. 30, 2018 and Dec. 31, 2017. See Note 15 for carrying values of these securities.

Projected weighted-average default rates and loss severities
 
Sept. 30, 2018
 
Dec. 31, 2017
 
Default rate

Severity

 
Default rate

Severity

Alt-A
20
%
52
%
 
22
%
53
%
Subprime
35
%
65
%
 
38
%
66
%
Prime
12
%
40
%
 
13
%
39
%

 
The following table presents pre-tax net securities gains (losses) by type.

Net securities gains (losses)
 
 
 
 
(in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Agency RMBS
$

$

$
4

$
(42
)
$
5

U.S. Treasury
(1
)

1

(5
)

Non-agency RMBS


(1
)

(2
)
Other
1

1

15

(1
)
26

Total net securities gains (losses)
$

$
1

$
19

$
(48
)
$
29



The following tables reflect 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 for which it is our intention to sell.

Debt securities credit loss roll forward
 
(in millions)
3Q18

3Q17

Beginning balance as of June 30
$
79

$
85

Add: Initial OTTI credit losses


 Subsequent OTTI credit losses

1

Less: Realized losses for securities sold
1

2

Ending balance as of Sept. 30
$
78

$
84


Debt securities credit loss roll forward
 
 
(in millions)
YTD18

YTD17

Beginning balance as of Dec. 31
$
84

$
88

Add: Initial OTTI credit losses


 Subsequent OTTI credit losses

3

Less: Realized losses for securities sold
6

7

Ending balance as of Sept. 30
$
78

$
84



Pledged assets

At Sept. 30, 2018, BNY Mellon had pledged assets of $114 billion, including $93 billion pledged as collateral for potential borrowings at the Federal Reserve Discount Window and $6 billion pledged as collateral for borrowing at the Federal Home Loan Bank. The components of the assets pledged at Sept. 30, 2018 included $96 billion of securities, $14 billion of loans, $4 billion of trading assets and less than $1 billion of interest-bearing deposits with banks.



60 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

If there has been no borrowing at the Federal Reserve Discount Window, the Federal Reserve generally allows banks to freely move assets in and out of their pledged assets account to sell or repledge the assets for other purposes. BNY Mellon regularly moves assets in and out of its pledged assets account at the Federal Reserve.

At Dec. 31, 2017, BNY Mellon had pledged assets of $111 billion, including $92 billion pledged as collateral for potential borrowing at the Federal Reserve Discount Window and $5 billion pledged as collateral for borrowing at the Federal Home Loan Bank. The components of the assets pledged at Dec. 31, 2017 included $96 billion of securities, $13 billion of loans and $2 billion of trading assets.

At Sept. 30, 2018 and Dec. 31, 2017, pledged assets included $11 billion and $10 billion, respectively, for which the recipients were permitted to sell or repledge the assets delivered.

We also obtain securities as collateral, including receipts under resale agreements, securities borrowed, derivative contracts and custody agreements on terms which permit us to sell or repledge the securities to others. At Sept. 30, 2018 and Dec. 31, 2017, the market value of the securities received that can be sold or repledged was $117 billion and $86 billion, respectively. We routinely sell or repledge these securities through delivery to third parties. As of Sept. 30, 2018 and Dec. 31, 2017, the market value of securities collateral sold or repledged was $83 billion and $49 billion, respectively.

Restricted cash and securities

Cash and securities may be segregated under federal and other regulations or requirements. At Sept. 30, 2018 and Dec. 31, 2017, cash segregated under federal and other regulations or requirements was $1 billion and $2 billion, respectively. Restricted cash is included in interest-bearing deposits with banks on the consolidated balance sheet. Securities segregated for these purposes were less than $1 billion at Sept. 30, 2018 and $1 billion at Dec. 31, 2017. Restricted securities were sourced from securities purchased under resale agreements at Sept. 30, 2018 and Dec. 31, 2017 and are included in federal funds sold and securities purchased under resale agreements on the consolidated balance sheet.

 
Note 5–Loans and asset quality

Loans

The table below provides the details of our loan portfolio and industry concentrations of credit risk at Sept. 30, 2018 and Dec. 31, 2017.

Loans
Sept. 30, 2018

Dec. 31, 2017

(in millions)
Domestic:
 
 
Commercial
$
1,928

$
2,744

Commercial real estate
5,034

4,900

Financial institutions
4,237

5,568

Lease financings
738

772

Wealth management loans and mortgages
15,852

16,420

Other residential mortgages
623

708

Overdrafts
784

963

Other
1,196

1,131

Margin loans
13,326

15,689

Total domestic
43,718

48,895

Foreign:
 
 
Commercial
223

167

Commercial real estate
2


Financial institutions
6,154

7,483

Lease financings
545

527

Wealth management loans and mortgages
104

108

Other (primarily overdrafts)
3,099

4,264

Margin loans
142

96

Total foreign
10,269

12,645

Total loans (a)
$
53,987

$
61,540

(a)
Net of unearned income of $367 million at Sept. 30, 2018 and $394 million at Dec. 31, 2017 primarily related to domestic and foreign lease financings.


Our loan portfolio consists of three portfolio segments: commercial, lease financings and mortgages. We manage our portfolio at the class level, which consists 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.



BNY Mellon 61

Notes to Consolidated Financial Statements (continued)
 

Allowance for credit losses

Transactions in the allowance for credit losses are summarized as follows.

Allowance for credit losses activity for the quarter ended Sept. 30, 2018
 
Wealth management loans and mortgages

Other
residential
mortgages

 
 
 
 
(in millions)
Commercial

Commercial
real estate

Financial
institutions

Lease
financings

All
other

 
Foreign

Total

Beginning balance
$
76

$
74

$
24

$
6

$
23

$
18

$

 
$
33

$
254

Charge-offs





(1
)

 

(1
)
Recoveries





1


 

1

Net recoveries







 


Provision

(1
)
1


(2
)
(1
)

 

(3
)
Ending balance
$
76

$
73

$
25

$
6

$
21

$
17

$

 
$
33

$
251

Allowance for:
 
 
 
 
 
 
 
 
 
 
Loan losses
$
17

$
53

$
9

$
6

$
17

$
17

$

 
$
21

$
140

Lending-related commitments
59

20

16


4



 
12

111

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$

$

$

$

$
4

$

$

 
$

$
4

Allowance for loan losses







 


Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$
1,928

$
5,034

$
4,237

$
738

$
15,848

$
623

$
15,306

(a)
$
10,269

$
53,983

Allowance for loan losses
17

53

9

6

17

17


 
21

140

(a)
Includes $784 million of domestic overdrafts, $13,326 million of margin loans and $1,196 million of other loans at Sept. 30, 2018.


Allowance for credit losses activity for the quarter ended June 30, 2018
 
Wealth management loans and mortgages

Other
residential
mortgages

 
 
 
 
(in millions)
Commercial

Commercial
real estate

Financial
institutions

Lease
financings

All
other

 
Foreign

Total

Beginning balance
$
75

$
75

$
22

$
7

$
23

$
19

$

 
$
35

$
256

Charge-offs







 


Recoveries





1


 

1

Net recoveries





1


 

1

Provision
1

(1
)
2

(1
)

(2
)

 
(2
)
(3
)
Ending balance
$
76

$
74

$
24

$
6

$
23

$
18

$

 
$
33

$
254

Allowance for:
 
 
 
 
 
 
 
 
 
 
Loan losses
$
17

$
55

$
8

$
6

$
19

$
18

$

 
$
22

$
145

Lending-related commitments
59

19

16


4



 
11

109

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$

$

$

$

$
5

$

$

 
$

$
5

Allowance for loan losses







 


Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$
2,117

$
4,974

$
5,526

$
758

$
16,186

$
653

$
17,173

(a)
$
10,384

$
57,771

Allowance for loan losses
17

55

8

6

19

18


 
22

145

(a)
Includes $1,090 million of domestic overdrafts, $14,914 million of margin loans and $1,169 million of other loans at June 30, 2018.




62 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Allowance for credit losses activity for the quarter ended Sept. 30, 2017
 
Wealth management loans and mortgages

Other
residential
mortgages

All
other

 
Foreign

Total

(in millions)
Commercial

Commercial
real estate

Financial
institutions

Lease
financings

 
Beginning balance
$
80

$
75

$
23

$
10

$
25

$
23

$

 
$
34

$
270

Charge-offs







 


Recoveries





1


 

1

Net recoveries





1


 

1

Provision
1



(1
)
(4
)
(3
)

 
1

(6
)
Ending balance
$
81

$
75

$
23

$
9

$
21

$
21

$

 
$
35

$
265

Allowance for:
 
 
 
 
 
 
 
 
 
 
Loan losses
$
26

$
57

$
7

$
9

$
17

$
21

$

 
$
24

$
161

Lending-related commitments
55

18

16


4



 
11

104

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$

$

$
2

$

$
5

$

$

 
$

$
7

Allowance for loan losses


2





 

2

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$
2,698

$
4,921

$
5,153

$
823

$
16,156

$
741

$
16,366

(a)
$
12,203

$
59,061

Allowance for loan losses
26

57

5

9

17

21


 
24

159

(a)
Includes $1,487 million of domestic overdrafts, $13,720 million of margin loans and $1,159 million of other loans at Sept. 30, 2017.


Allowance for credit losses activity for the nine months ended Sept. 30, 2018
Wealth management loans and mortgages

Other
residential
mortgages

All
other

Foreign

Total

(in millions)
Commercial

Commercial
real estate

Financial
institutions

Lease
financings

Beginning balance
$
77

$
76

$
23

$
8

$
22

$
20

$

$
35

$
261

Charge-offs





(1
)


(1
)
Recoveries





2



2

Net recoveries





1



1

Provision
(1
)
(3
)
2

(2
)
(1
)
(4
)

(2
)
(11
)
Ending balance
$
76

$
73

$
25

$
6

$
21

$
17

$

$
33

$
251



Allowance for credit losses activity for the nine months ended Sept. 30, 2017
Wealth management loans and mortgages

Other
residential
mortgages

All
other

Foreign

Total

(in millions)
Commercial

Commercial
real estate

Financial
institutions

Lease
financings

Beginning balance
$
82

$
73

$
26

$
13

$
23

$
28

$

$
36

$
281

Charge-offs





(1
)


(1
)
Recoveries





3



3

Net recoveries





2



2

Provision
(1
)
2

(3
)
(4
)
(2
)
(9
)

(1
)
(18
)
Ending balance
$
81

$
75

$
23

$
9

$
21

$
21

$

$
35

$
265





BNY Mellon 63

Notes to Consolidated Financial Statements (continued)
 

Nonperforming assets

The table below presents our nonperforming assets. 

 
Nonperforming assets
(in millions)
Sept. 30, 2018

Dec. 31, 2017

 
 
Nonperforming loans:
 
 
 
Other residential mortgages
$
69

$
78

 
Wealth management loans and mortgages
9

7

 
Commercial real estate

1

 
Total nonperforming loans
78

86

 
Other assets owned
3

4

 
Total nonperforming assets
$
81

$
90




 
Lost interest

Interest income would have increased by $1 million in the third quarter of 2018, second quarter of 2018 and third quarter of 2017 and $4 million in the first nine months of 2018 and first nine months of 2017 if nonperforming loans at period-end had been performing for the entire respective quarter.

Impaired loans

We use the discounted cash flow method as the primary method for valuing impaired loans. The average recorded investment and unpaid principal balance of impaired loans were $10 million or less for the third quarter 2018, second quarter 2018 and the third quarter 2017. The allowance related to impaired loans was less than $1 million at Sept. 30, 2018 and $1 million at Dec. 31, 2017.

Past due loans

The table below presents our past due loans. 

Past due loans and still accruing interest
Sept. 30, 2018
 
Dec. 31, 2017
 
Days past due
Total
past due

 
Days past due
Total
past due

(in millions)
30-59

60-89

≥90

30-59

60-89

≥90

Commercial real estate
$
42

$

$

$
42

 
$
44

$

$

$
44

Other residential mortgages
20

4

9

33

 
18

5

5

28

Financial institutions
33



33

 
1



1

Wealth management loans and mortgages
19

8

1

28

 
39

5


44

Total past due loans
$
114

$
12

$
10

$
136

 
$
102

$
10

$
5

$
117

 


Troubled debt restructurings (“TDRs”)

A modified loan is considered a TDR if the debtor is experiencing financial difficulties and the creditor grants a concession to the debtor that would not otherwise be considered. We modified loans of $1 million in the third quarter of 2018, $1 million in the second quarter of 2018 and $7 million in the third quarter of 2017, primarily other residential mortgages.
 

Credit quality indicators

Our credit strategy is to focus on investment-grade clients that are active users of our non-credit services. Each customer is assigned an internal credit rating, which is mapped to an external rating agency grade equivalent, if possible, based upon a number of dimensions, which are continually evaluated and may change over time.


64 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

The following tables present information about credit quality indicators.

Commercial loan portfolio

Commercial loan portfolio – Credit risk profile
by creditworthiness category
Commercial
 
Commercial real estate
 
Financial institutions
Sept. 30, 2018

Dec. 31, 2017

 
Sept. 30, 2018

Dec. 31, 2017

 
Sept. 30, 2018

Dec. 31, 2017

(in millions)
 
 
Investment grade
$
2,073

$
2,685

 
$
4,390

$
4,277

 
$
8,009

$
10,021

Non-investment grade
78

226

 
646

623

 
2,382

3,030

Total
$
2,151

$
2,911

 
$
5,036

$
4,900

 
$
10,391

$
13,051



The commercial loan portfolio is divided into investment grade and non-investment grade categories based on rating criteria largely consistent with those of the public rating agencies. Each customer in the portfolio is assigned an internal credit rating. These internal credit ratings are generally consistent with the ratings categories of the public rating agencies. Customers with ratings consistent with BBB- (S&P)/Baa3 (Moody’s) or better are considered to be investment grade. Those clients with ratings lower than this threshold are considered to be non-investment grade.

Wealth management loans and mortgages

Wealth management loans and mortgages – Credit risk
profile by internally assigned grade
(in millions)
Sept. 30, 2018

Dec. 31, 2017

Wealth management loans:
 
 
Investment grade
$
6,822

$
7,042

Non-investment grade
82

185

Wealth management mortgages
9,052

9,301

Total
$
15,956

$
16,528



Wealth management non-mortgage loans are not typically rated by external rating agencies. 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 investment-grade 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 the loans collateralized by other assets, the credit
 
quality of the obligor is carefully analyzed, but we do not consider this portfolio of loans to be investment grade.

Credit quality indicators for wealth management mortgages are not correlated to external ratings. Wealth management mortgages are typically loans to high-net-worth individuals, which are secured primarily by residential property. These loans are primarily interest-only, adjustable rate mortgages with a weighted-average loan-to-value ratio of 62% at origination. In the wealth management portfolio, less than 1% of the mortgages were past due at Sept. 30, 2018.

At Sept. 30, 2018, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 24%; New York - 18%; Massachusetts - 11%; Florida - 8%; and other - 39%.

Other residential mortgages

The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $623 million at Sept. 30, 2018 and $708 million at Dec. 31, 2017. These loans are not typically correlated to external ratings. Included in this portfolio at Sept. 30, 2018 are $140 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 Alt-A loans. As of Sept. 30, 2018, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination, and 12% of the serviced loan balance was at least 60 days delinquent. The properties securing the prime and Alt-A mortgage loans were located (in order of concentration) in California, Florida, Virginia, the tri-state area (New York, New Jersey and Connecticut) and Maryland.



BNY Mellon 65

Notes to Consolidated Financial Statements (continued)
 

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients and totaled $3.8 billion at Sept. 30, 2018 and $5.1 billion at Dec. 31, 2017. Overdrafts occur on a daily basis primarily in the custody and securities clearance business and are generally repaid within two business days.

Other loans

Other loans primarily include loans to consumers that are fully collateralized with equities, mutual funds and fixed-income securities.

Margin loans

We had $13.5 billion of secured margin loans on our balance sheet at Sept. 30, 2018 compared with $15.8
 
billion at Dec. 31, 2017. Margin loans are collateralized with marketable securities, and borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to margin loans.

Reverse repurchase agreements

Reverse repurchase agreements are transactions fully collateralized with high-quality liquid securities. These transactions carry minimal credit risk and therefore are not allocated an allowance for credit losses.


Note 6–Goodwill and intangible assets

Goodwill

The tables below provide a breakdown of goodwill by business.

Goodwill by business
Investment
Services

Investment
Management

Other

Consolidated

(in millions)
Balance at Dec. 31, 2017
$
8,389

$
9,128

$
47

$
17,564

Dispositions

(65
)

(65
)
Foreign currency translation
(39
)
(70
)

(109
)
Balance at Sept. 30, 2018
$
8,350

$
8,993

$
47

$
17,390



Goodwill by business
Investment
Services

Investment
Management

Other

Consolidated

(in millions)
Balance at Dec. 31, 2016
$
8,269

$
9,000

$
47

$
17,316

Foreign currency translation
107

120


227

Balance at Sept. 30, 2017
$
8,376

$
9,120

$
47

$
17,543



Intangible assets

The tables below provide a breakdown of intangible assets by business.

Intangible assets – net carrying amount by business
Investment
Services

Investment
Management

Other

Consolidated

(in millions)
Balance at Dec. 31, 2017
$
888

$
1,674

$
849

$
3,411

Amortization
(107
)
(38
)

(145
)
Foreign currency translation
(1
)
(7
)

(8
)
Balance at Sept. 30, 2018
$
780

$
1,629

$
849

$
3,258




66 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Intangible assets – net carrying amount by business
Investment
Services

Investment
Management

Other

Consolidated

(in millions)
Balance at Dec. 31, 2016
$
1,032

$
1,717

$
849

$
3,598

Amortization
(112
)
(45
)

(157
)
Foreign currency translation
4

16


20

Balance at Sept. 30, 2017
$
924

$
1,688

$
849

$
3,461



The table below provides a breakdown of intangible assets by type.

Intangible assets
Sept. 30, 2018
 
Dec. 31, 2017
(in millions)
Gross
carrying
amount

Accumulated
amortization

Net
carrying
amount

Remaining
weighted-
average
amortization
period
 
Gross
carrying
amount

Accumulated
amortization

Net
carrying
amount

Subject to amortization: (a)
 
 
 
 
 
 
 
 
Customer contracts—Investment Services
$
1,591

$
(1,183
)
$
408

10 years
 
$
2,260

$
(1,744
)
$
516

Customer relationships—Investment Management
1,249

(1,037
)
212

11 years
 
1,262

(1,015
)
247

Other
31

(16
)
15

4 years
 
42

(23
)
19

Total subject to amortization
2,871

(2,236
)
635

10 years
 
3,564

(2,782
)
782

Not subject to amortization: (b)
 
 
 
 
 
 
 
 
Tradenames
1,332

N/A

1,332

N/A
 
1,334

N/A

1,334

Customer relationships
1,291

N/A

1,291

N/A
 
1,295

N/A

1,295

Total not subject to amortization
2,623

N/A

2,623

N/A
 
2,629

N/A

2,629

Total intangible assets
$
5,494

$
(2,236
)
$
3,258

N/A
 
$
6,193

$
(2,782
)
$
3,411

(a)
Excludes fully amortized intangible assets.
(b)
Intangible assets not subject to amortization have an indefinite life.
N/A - Not applicable.


Estimated annual amortization expense for current intangibles for the next five years is as follows:

For the year ended
Dec. 31,
Estimated amortization expense
(in millions)
 
2018
 
$
180

2019
 
116

2020
 
102

2021
 
78

2022
 
60



Impairment testing

The goodwill impairment test is performed at least annually at the reporting unit level. Intangible assets not subject to amortization are tested for impairment annually or more often if events or circumstances indicate they may be impaired.

 
BNY Mellon’s three business segments include seven reporting units for which goodwill impairment testing is performed on an annual basis. The Investment Services segment is comprised of four reporting units; the Investment Management segment is comprised of two reporting units and one reporting unit is included in the Other segment. As a result of the annual goodwill impairment test of the seven reporting units conducted in the second quarter of 2018, no goodwill impairment was recognized.



BNY Mellon 67

Notes to Consolidated Financial Statements (continued)
 

Note 7–Other assets 

The following table provides the components of other assets presented on the consolidated balance sheet.

Other assets
Sept. 30, 2018

Dec. 31, 2017

(in millions)
Corporate/bank-owned life insurance
$
4,901

$
4,857

Fails to deliver
3,719

2,817

Accounts receivable
3,638

4,590

Software
1,579

1,499

Prepaid pension assets
1,558

1,416

Renewable energy investments
1,293

1,368

Equity in a joint venture and other investments
1,143

1,083

Income taxes receivable
1,087

1,533

Qualified affordable housing project investments
1,033

1,014

Federal Reserve Bank stock
483

477

Prepaid expense
477

395

Fair value of hedging derivatives
347

323

Seed capital
245

288

Other (a)
1,343

1,369

Total other assets
$
22,846

$
23,029

(a)
At Sept. 30, 2018 and Dec. 31, 2017, other assets include $97 million and $82 million, respectively, of Federal Home Loan Bank stock, at cost.


Qualified affordable housing project investments

We invest in affordable housing projects primarily to satisfy the Company’s requirements under the Community Reinvestment Act. Our total investment in qualified affordable housing projects totaled $1.0 billion at Sept. 30, 2018 and $1.0 billion at Dec. 31, 2017. Commitments to fund future investments in qualified affordable housing projects totaled $487 million at Sept. 30, 2018 and $486 million at Dec. 31, 2017 and is recorded in other liabilities. A summary of the commitments to fund future investments is as
 
follows: 2018$66 million; 2019$138 million; 2020$116 million; 2021$120 million; 2022$29 million; and 2023 and thereafter$18 million.

Tax credits and other tax benefits recognized were $40 million in the third quarter of 2018, $42 million in the second quarter of 2018, $39 million in the third quarter of 2017, $122 million in the first nine months of 2018 and $115 million in the first nine months of 2017.

Amortization expense included in the provision for income taxes was $34 million in the third quarter of 2018, $35 million in the second quarter of 2018, $29 million in the third quarter of 2017, $102 million in the first nine months of 2018 and $84 million in the first nine months of 2017.

Investments valued using net asset value per share

In our Investment Management business, we manage investment assets, including equities, fixed income, money market and multi-asset and alternative investment funds for institutions and other investors. As part of that activity, we make seed capital investments in certain funds. We also hold private equity investments, specifically in small business investment companies (“SBICs”), which are compliant with the Volcker Rule, and certain other corporate investments. Seed capital, private equity and other corporate investments are included in other assets on the consolidated balance sheet. The fair value of these investments was estimated using the net asset value (“NAV”) per share for BNY Mellon’s ownership interest in the funds.

The table below presents information on our investments valued using NAV.

Other assets valued using NAV
 
Sept. 30, 2018
 
Dec. 31, 2017
(dollars in millions)
Fair
value

Unfunded 
commitments
 
Redemption 
frequency
Redemption 
notice period
 
Fair
value

Unfunded
commitments
 
Redemption 
frequency
Redemption 
notice period
Seed capital
$
51

 
$

Daily-quarterly
1-90 days
 
$
40

 
$
1

Daily-quarterly
1-90 days
Private equity investments (SBICs) (a)
75

 
42

N/A
N/A
 
55

 
42

N/A
N/A
Other (b)
74

 

Daily-quarterly
1-95 days
 
59

 

Daily-quarterly
1-95 days
Total
$
200

 
$
42

 
 
 
$
154

 
$
43

 
 
(a)
Private equity investments primarily include Volcker Rule-compliant investments in SBICs that invest in various sectors of the economy. Private equity investments do not have redemption rights. Distributions from such investments will be received as the underlying investments in the private equity investments, which have a life of 10 years, are liquidated.
(b)
Primarily relates to investments in funds that relate to deferred compensation arrangements with employees.
N/A - Not applicable.


68 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Note 8–Contract revenue

Significant accounting policy

Revenue is based on terms specified in a contract with a customer, and excludes any amounts collected on behalf of third parties. Revenue is recognized when, or as, a performance obligation is satisfied by transferring control of a good or service to a customer. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that reflects the transfer of goods and services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time the customer obtains control of the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for the promised goods and services. Taxes assessed by a governmental authority, that are both imposed on, and concurrent with, a specific revenue-producing transaction, are collected from a customer and are excluded from revenue.

Nature of services and revenue recognition

Fee revenue in Investment Services and Investment Management is primarily variable, based on levels of AUC/A, AUM and the level of client-driven transactions, as specified in fee schedules.

Investment Services fees are based primarily on the market value of AUC/A; client accounts, balances and the volume of transactions; securities lending volume and spreads; and fees for other services. Certain fees based on the market value of assets are calculated in arrears on a monthly or quarterly basis.

Substantially all services within the Investment Services business are provided over time. Revenue on these services is recognized using the time elapsed method, equal to the expected invoice amount, which typically represents the value provided to the customer for our performance completed to date.
 
Trade execution and clearing services are delivered at a point-in-time, based on customer actions. Revenue for trade execution and clearing services is recognized on trade date, which is consistent with the time that the service was provided. Customers are generally billed for services on a monthly or quarterly basis.

Investment management fees are dependent on the overall level and mix of AUM. The management fees, expressed in basis points, are charged for managing those assets. Management fees are typically subject to fee schedules based on the overall level of assets managed and products in which those assets are invested.

Investment management fee revenue also includes transactional- and account-based fees. These fees along with distribution and servicing fees are recognized when the services have been completed. Clients are generally billed for services performed on a monthly or quarterly basis.

Performance fees are generally calculated as a percentage of the applicable portfolio’s performance in excess of a benchmark index or a peer group’s performance. Performance fees are recognized at the end of the measurement period when they are determinable.

See Note 19 for additional information on our principal businesses, Investment Services and Investment Management, and the primary services provided.

Disaggregation of contract revenue

Contract revenue is included in fee revenue on the consolidated income statement. The following table presents fee revenue related to contracts with customers, disaggregated by type, for each business segment.



BNY Mellon 69

Notes to Consolidated Financial Statements (continued)
 

Disaggregation of contract revenue by business segment (a)
 
 
 
 
 
 
Quarter ended Sept. 30, 2018
 
Quarter ended June 30, 2018
(in millions)
Investment Services

Investment Management

Other

Total

 
Investment Services

Investment Management

Other

Total

Fee revenue - contract revenue:
 
 
 
 
 
 
 
 
 
Investment services fees:
 
 
 
 
 
 
 
 
 
Asset servicing
$
1,103

$
21

$

$
1,124

 
$
1,098

$
21

$
1

$
1,120

Clearing services
383



383

 
392



392

Issuer services
288



288

 
265



265

Treasury services
136



136

 
140

1


141

Total investment services fees
1,910

21


1,931

 
1,895

22

1

1,918

Investment management and performance fees
13

904


917

 
14

893


907

Financing-related fees
13


1

14

 
15



15

Distribution and servicing
(13
)
48


35

 
(14
)
48


34

Investment and other income
71

(51
)
(1
)
19

 
69

(50
)
1

20

Total fee revenue - contract revenue
1,994

922


2,916

 
1,979

913

2

2,894

Fee and other revenue - not in scope of
ASC 606 (b)(c)
236

16

7

259

 
254

28

39

321

Total fee and other revenue
$
2,230

$
938

$
7

$
3,175

 
$
2,233

$
941

$
41

$
3,215

(a)
Business segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting.
(b)
Primarily includes foreign exchange and other trading revenue, financing-related fees, investment and other income and net securities gains, all of which are accounted for using other accounting guidance.
(c)
The Investment Management business includes income from consolidated investment management funds, net of noncontrolling interests, of $7 million in the third quarter of 2018 and $5 million in the second quarter of 2018.


Disaggregation of contract revenue by business segment (a)
 
Year-to-date Sept. 30, 2018
(in millions)
Investment Services

Investment Management

Other

Total

Fee revenue - contract revenue:
 
 
 
 
Investment services fees:
 
 
 
 
Asset servicing
$
3,318

$
67

$
1

$
3,386

Clearing services
1,188


1

1,189

Issuer services
813



813

Treasury services
414

1


415

Total investment services fees
5,733

68

2

5,803

Investment management and performance fees
41

2,739


2,780

Financing-related fees
45


1

46

Distribution and servicing
(41
)
146


105

Investment and other income
209

(152
)

57

Total fee revenue - contract revenue
5,987

2,801

3

8,791

Fee and other revenue - not in scope of
ASC 606 (b)(c)
726

90

53

869

Total fee and other revenue
$
6,713

$
2,891

$
56

$
9,660

(a)
Business segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting.
(b)
Primarily includes foreign exchange and other trading revenue, financing-related fees, investment and other income and net securities gains, all of which are accounted for using other accounting guidance.
(c)
The Investment Management business includes income from consolidated investment management funds, net of noncontrolling interests of $12 million in the first nine months of 2018.

 
Contract balances

Our clients are billed based on fee schedules that are agreed upon in each customer contract. Receivable from customers were $3.9 billion at Jan. 1, 2018 and $2.5 billion at Sept. 30, 2018. An allowance is maintained for accounts receivables which is generally based on the number of days outstanding. Adjustments to the allowance are recorded in other expense in the consolidated income statement. Provisions of $2 million and $8 million were recorded in the third quarter of 2018 and first nine months of 2018, respectively.

Contract assets represent accrued revenues that have not yet been billed to the customers due to certain contractual terms other than the passage of time and were $30 million at Jan. 1, 2018 and $56 million at Sept. 30, 2018. Accrued revenues recorded as contract assets are usually billed on an annual basis. There were no impairments recorded on contract assets in the third quarter of 2018.

Both receivables from customers and contract assets are included in other assets on the consolidated balance sheet.

Contract liabilities represent payments received in advance of providing services under certain contracts and were $167 million at Jan. 1, 2018 and $195 million at Sept. 30, 2018. Contract liabilities are


70 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

included in other liabilities on the consolidated balance sheet. Revenue recognized in the third quarter of 2018 relating to contract liabilities as of June 30, 2018 was $60 million. Revenue recognized in the first nine months of 2018 relating to contract liabilities as of Jan. 1, 2018 was $87 million.

Changes in contract assets and liabilities primarily relate to either party’s performance under the contracts.

Contract costs

Incremental costs for obtaining contracts that are deemed recoverable are capitalized as contract costs. Such costs result from the payment of sales incentives, primarily in the Wealth Management business, and totaled $99 million at Sept. 30, 2018. Capitalized sales incentives are amortized based on the transfer of goods or services to which the assets relate and typically average nine years. The amortization of capitalized sales incentives, which is primarily included in staff expense, totaled $6 million in the third quarter of 2018 and $17 million in the first nine months of 2018.

Costs to fulfill a contract are capitalized when they relate directly to an existing contract or specific
 
anticipated contract, generate or enhance resources that will be used to fulfill performance obligations and are recoverable. Such costs generally represent set-up costs, which include any direct cost incurred at inception of a contract which enables the fulfillment of the performance obligation and totaled $13 million at Sept. 30, 2018. These capitalized costs are amortized on a straight-line basis over the expected contract period which generally range from seven to nine years. The amortization is included in other expense and totaled $1 million in the third quarter of 2018 and $4 million in the first nine months of 2018.

There were no impairments recorded on capitalized contract costs in the third quarter of 2018.

Unsatisfied performance obligations

We do not have any unsatisfied performance obligations other than those that are subject to a practical expedient election under Accounting Standards Codification (“ASC”) 606, Revenue From Contracts With Customers. The practical expedient election applies to (i) contracts with an original expected length of one year or less, and (ii)
contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.



BNY Mellon 71

Notes to Consolidated Financial Statements (continued)
 

Note 9–Net interest revenue

The following table provides the components of net interest revenue presented on the consolidated income statement.

Net interest revenue
Quarter ended
 
Year-to-date
 
Sept. 30, 2018

June 30, 2018

Sept. 30, 2017

 
Sept. 30, 2018

Sept. 30, 2017

(in millions)
 
Interest revenue
 
 
 
 
 
 
Deposits with banks
$
59

$
56

$
34

 
$
157

$
83

Deposits with the Federal Reserve and other central banks
125

136

89

 
387

217

Federal funds sold and securities purchased under resale agreements
281

230

119

 
681

272

Margin loans
129

128

87

 
372

249

Non-margin loans
344

345

283

 
994

800

Securities:
 
 
 
 
 
 
Taxable
650

615

510

 
1,846

1,447

Exempt from federal income taxes
14

14

16

 
43

49

Total securities
664

629

526

 
1,889

1,496

Trading securities
32

29

13

 
88

46

Total interest revenue
1,634

1,553

1,151

 
4,568

3,163

Interest expense
 
 
 
 
 
 
Deposits
237

173

57

 
527

98

Federal funds purchased and securities sold under repurchase agreements
190

158

70

 
455

132

Trading liabilities
7

7

2

 
23

6

Other borrowed funds
16

14

7

 
39

13

Commercial paper
16

21

8

 
49

18

Customer payables
51

45

19

 
127

42

Long-term debt
226

219

149

 
622

397

Total interest expense
743

637

312

 
1,842

706

Net interest revenue
891

916

839

 
2,726

2,457

Provision for credit losses
(3
)
(3
)
(6
)
 
(11
)
(18
)
Net interest revenue after provision for credit losses
$
894

$
919

$
845

 
$
2,737

$
2,475



Note 10–Employee benefit plans

The components of net periodic benefit (credit) cost are as follows. The service cost component is reflected in staff expense, whereas the remaining components are reflected in other expense.

Net periodic benefit (credit) cost
Quarter ended
Sept. 30, 2018
 
June 30, 2018
 
Sept. 30, 2017
(in millions)
Domestic pension benefits

Foreign pension benefits

Health care benefits

 
Domestic pension benefits

Foreign pension benefits

Health care benefits

 
Domestic pension benefits

Foreign pension benefits

Health care benefits

Service cost
$

$
7

$
1

 
$

$
7

$

 
$

$
7

$

Interest cost
42

8

1

 
42

8

2

 
45

8

2

Expected return on assets
(85
)
(14
)
(2
)
 
(85
)
(14
)
(2
)
 
(81
)
(12
)
(2
)
Other
19

5

(1
)
 
17

6


 
17

9

(1
)
Net periodic benefit (credit) cost
$
(24
)
$
6

$
(1
)
 
$
(26
)
$
7

$

 
$
(19
)
$
12

$
(1
)



72 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Net periodic benefit (credit) cost
Year-to-date
 
Sept. 30, 2018
 
Sept. 30, 2017
(in millions)
Domestic pension benefits

Foreign pension benefits

Health care benefits

 
Domestic pension benefits

Foreign pension benefits

Health care benefits

Service cost
$

$
21

$
1

 
$

$
21

$

Interest cost
127

24

5

 
135

24

6

Expected return on assets
(255
)
(43
)
(6
)
 
(243
)
(36
)
(6
)
Other
53

17

(2
)
 
51

27

(3
)
Net periodic benefit (credit) cost
$
(75
)
$
19

$
(2
)
 
$
(57
)
$
36

$
(3
)


Note 11–Income taxes

BNY Mellon recorded an income tax provision of $220 million (16.5% effective tax rate) in the third quarter of 2018, including the impact of adjusting provisional estimates for U.S. tax legislation and other changes. The income tax provision was $348 million (25.4% effective tax rate) in the third quarter of 2017 and $286 million (20.5% effective tax rate) in the second quarter of 2018.

In December 2017, the Tax Cuts and Jobs Act of 2017 (“U.S. tax legislation”) was signed into law in the United States. U.S. GAAP requires companies to recognize the effect of tax law changes on deferred tax assets and liabilities and other recognized assets in the period of enactment. Also in December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No.118 (“SAB 118”). SAB 118 allows the recording of a provisional estimate to reflect the income tax impact of the U.S. tax legislation and provides a measurement period up to one year from the enactment date. In the fourth quarter of 2017, BNY Mellon recorded a $710 million provisional tax benefit to reflect the impact of the U.S tax legislation.

Income tax (benefit) expense
 
(estimated in millions)
4Q17

Remeasurement of net deferred tax liabilities
$
(1,472
)
Repatriation tax
723

Other items
39

Net income tax (benefit)
$
(710
)


In the third quarter of 2018, BNY Mellon adjusted its 2017 provisional tax calculation and recorded an additional $93 million tax benefit. The tax benefit is comprised of $70 million for remeasurement of net deferred tax liabilities and $23 million for reduction in repatriation tax. We expect to complete our analysis under SAB 118 in the fourth quarter of 2018.

 
Our total tax reserves as of Sept. 30, 2018 were $98 million compared with $101 million at June 30, 2018. If these tax reserves were unnecessary, $98 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 Sept. 30, 2018 is accrued interest, where applicable, of $18 million. The additional tax expense related to interest for the nine months ended Sept. 30, 2018 was $3 million, compared with $7 million for the nine months ended Sept. 30, 2017.

It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by approximately $7 million as a result of adjustments related to tax years that are still subject to examination.

Our federal income tax returns are closed to examination through 2013. Our New York State, New York City and UK income tax returns are closed to examination through 2012.

Note 12–Variable interest entities and securitization

BNY Mellon has variable interests in VIEs, which include investments in retail, institutional and alternative investment funds, including collateralized loan obligation (“CLO”) structures in which we provide asset management services, some of which are consolidated. The investment funds are offered to our retail and institutional clients to provide them with access to investment vehicles with specific investment objectives and strategies that address the client’s investment needs.

BNY Mellon earns management fees from these funds as well as performance fees in certain funds and may also provide start-up capital for its new


BNY Mellon 73

Notes to Consolidated Financial Statements (continued)
 

funds. The funds are primarily financed by our customers’ investments in the funds’ equity or debt.

Additionally, BNY Mellon invests in qualified affordable housing and renewable energy projects, which are designed to generate a return primarily through the realization of tax credits by the Company. The projects, which are structured as limited partnerships and LLCs, are also VIEs, but are not consolidated.

The VIEs previously discussed are included in the scope of ASU 2015-02 and are reviewed for consolidation based on the guidance in ASC 810, Consolidation. We reconsider and reassess whether or not we are the primary beneficiary of a VIE when governing documents or contractual arrangements are
 
changed that would reallocate the obligation to absorb expected losses or receive expected residual returns between BNY Mellon and the other investors. This could occur when BNY Mellon disposes of its variable interests in the fund, when additional variable interests are issued to other investors or when we acquire additional variable interests in the VIE.

The following table presents the incremental assets and liabilities included in BNY Mellon’s consolidated financial statements as of Sept. 30, 2018 and Dec. 31, 2017. 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.

Consolidated investments
 
 
 
 
 
 
Sept. 30, 2018
 
Dec. 31, 2017
(in millions)
Investment
Management
funds
Securitization

Total
consolidated
investments

 
Investment
Management
funds
Securitization

Total
consolidated
investments

Securities - Available-for-sale
$

 
$

$

 
$

 
$
400

$
400

Trading assets
243

 
400

643

 
516

 

516

Other assets
256

 

256

 
215

 

215

Total assets
$
499

(a)
$
400

$
899

 
$
731

(b)
$
400

$
1,131

Other liabilities
$
7

 
$
363

$
370

 
$
2

 
$
367

$
369

Total liabilities
$
7

(a)
$
363

$
370

 
$
2

(b)
$
367

$
369

Nonredeemable noncontrolling interests
$
90

(a)
$

$
90

 
$
316

(b)
$

$
316

 
(a)
Includes voting model entities (“VMEs”) with assets of $283 million, liabilities of $1 million and nonredeemable noncontrolling interests of less than $1 million.
(b)
Includes VMEs with assets of $84 million, liabilities of $1 million and nonredeemable noncontrolling interests of $1 million.


BNY Mellon has not provided financial or other support that was not otherwise contractually required to be provided to our VIEs. Additionally, creditors of any consolidated VIEs do not have any recourse to the general credit of BNY Mellon.

Non-consolidated VIEs

As of Sept. 30, 2018 and Dec. 31, 2017, the following assets and liabilities related to the VIEs where BNY
 
Mellon is not the primary beneficiary are included in our consolidated financial statements and primarily relate to accounting for our investments in qualified affordable housing and renewable energy projects.

The maximum loss exposure indicated in the table below relates solely to BNY Mellon’s investments in, and unfunded commitments to, the VIEs.

Non-consolidated VIEs
 
 
 
 
 
Sept. 30, 2018
 
Dec. 31, 2017
(in millions)
Assets

Liabilities

Maximum loss exposure

 
Assets

Liabilities

Maximum loss exposure

Securities - Available-for-sale (a)
$
219

$

$
219

 
$
203

$

$
203

Other
2,516

487

3,003

 
2,592

486

3,078

(a)
Includes investments in the Company’s sponsored CLOs.




74 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Note 13–Preferred stock

BNY Mellon has 100 million authorized shares of preferred stock with a par value of $0.01 per share. The following table summarizes BNY Mellon’s preferred stock issued and outstanding at Sept. 30, 2018 and Dec. 31, 2017.

Preferred stock summary (a)
Total shares issued and outstanding
 
Carrying value (b)
 
 
(in millions)
 
Per annum dividend rate
Sept. 30, 2018

Dec. 31, 2017

Sept. 30, 2018

Dec. 31, 2017

Series A
Greater of (i) three-month LIBOR plus 0.565% for the related distribution period; or (ii) 4.000%
5,001

5,001

 
$
500

$
500

Series C
5.2%
5,825

5,825

 
568

568

Series D
4.50% to but excluding June 20, 2023, then a floating rate equal to the three-month LIBOR plus 2.46%
5,000

5,000

 
494

494

Series E
4.95% to and including June 20, 2020, then a floating rate equal to the three-month LIBOR plus 3.42%
10,000

10,000

 
990

990

Series F
4.625% to and including Sept. 20, 2026, then a floating rate equal to the three-month LIBOR plus 3.131%
10,000

10,000

 
990

990

Total
35,826

35,826

 
$
3,542

$
3,542

(a)
All outstanding preferred stock is noncumulative perpetual preferred stock with a liquidation preference of $100,000 per share.
(b)
The carrying value of the Series C, Series D, Series E and Series F preferred stock is recorded net of issuance costs.


The table below presents the dividends paid on our preferred stock.

Dividend paid per preferred share
 
 
 
 
 
 
 
 
 
 
 
 
 
Depositary shares
per share

 
 
 
 
 
 
 
 
 
 
 
 
 
 
3Q18
 
2Q18
 
3Q17
 
YTD18
 
YTD17
 
per share

in millions

 
per share

in millions

 
per share

in millions

 
per share

in millions

 
per share

in millions

Series A
100 (a)

$
1,022.22

$
5

 
$
1,022.22

$
5

 
$
1,022.22

$
5

 
$
3,044.44

$
15

 
$
3,044.44

$
15

Series C
4,000

1,300.00

8

 
1,300.00

7

 
1,300.00

7

 
3,900.00

23

 
3,900.00

23

Series D
100

N/A


 
2,250.00

11

 
N/A


 
2,250.00

11

 
2,250.00

11

Series E
100

N/A


 
2,475.00

25

 
N/A


 
2,475.00

25

 
2,475.00

25

Series F
100

2,312.50

23

 
N/A


 
2,312.50

23

 
4,625.00

46

 
5,254.51

52

Total
 
 
$
36

 
 
$
48

 
 
$
35

 
 
$
120

 
 
$
126

(a)
Represents Normal Preferred Capital Securities.


For additional information on the preferred stock, see Note 13 of the Notes to Consolidated Financial Statements in our 2017 Annual Report.

 
Terms of the Series A, Series C, Series D, Series E and Series F preferred stock are more fully described in each of their Certificates of Designations, each of which is filed as an Exhibit to this Form 10-Q.



BNY Mellon 75

Notes to Consolidated Financial Statements (continued)
 

Note 14–Other comprehensive income (loss)

Components of other comprehensive income (loss)
Quarter ended
Sept. 30, 2018
 
June 30, 2018
 
Sept. 30, 2017
(in millions)
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

Foreign currency translation:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments arising during the period (a)
$
(21
)
$
(39
)
$
(60
)
 
$
(302
)
$
(98
)
$
(400
)
 
$
221

$
65

$
286

Total foreign currency translation
(21
)
(39
)
(60
)
 
(302
)
(98
)
(400
)
 
221

65

286

Unrealized (loss) gain on assets available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Unrealized (loss) gain arising during period
(190
)
46

(144
)
 
(103
)
39

(64
)
 
47

(19
)
28

Reclassification adjustment (b)



 
(1
)
1


 
(19
)
7

(12
)
Net unrealized (loss) gain on assets available-for-sale
(190
)
46

(144
)
 
(104
)
40

(64
)
 
28

(12
)
16

Defined benefit plans:
 
 
 
 
 
 
 
 
 
 
 
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b)
23

(5
)
18

 
22

(6
)
16

 
25

(10
)
15

Total defined benefit plans
23

(5
)
18

 
22

(6
)
16

 
25

(10
)
15

Unrealized (loss) gain on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Unrealized hedge (loss) gain arising during period
(9
)
2

(7
)
 
(17
)
3

(14
)
 
(2
)

(2
)
Reclassification of net loss (gain) to net income:
 
 
 
 
 
 
 
 
 
 
 
FX contracts - trading revenue



 



 
1

(1
)

FX contracts - other revenue



 
1


1

 



FX contracts - salary expense
4

(1
)
3

 
(2
)
1

(1
)
 
2


2

Total reclassifications to net income (b)
4

(1
)
3

 
(1
)
1


 
3

(1
)
2

Net unrealized (loss) gain on cash flow hedges
(5
)
1

(4
)
 
(18
)
4

(14
)
 
1

(1
)

Total other comprehensive (loss) income
$
(193
)
$
3

$
(190
)
 
$
(402
)
$
(60
)
$
(462
)
 
$
275

$
42

$
317


Components of other comprehensive income (loss)
Year-to-date
 
Sept. 30, 2018
 
Sept. 30, 2017
(in millions)
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

Foreign currency translation:
 
 
 
 
 
 
 
Foreign currency translation adjustments arising during the period (a)
$
(122
)
$
(94
)
$
(216
)
 
$
566

$
175

$
741

Total foreign currency translation
(122
)
(94
)
(216
)
 
566

175

741

Unrealized (loss) gain on assets available-for-sale:
 
 
 
 
 
 
 
Unrealized (loss) gain arising during period
(635
)
152

(483
)
 
357

(144
)
213

Reclassification adjustment (b)
48

(11
)
37

 
(29
)
10

(19
)
Net unrealized (loss) gain on assets available-for-sale
(587
)
141

(446
)
 
328

(134
)
194

Defined benefit plans:
 
 
 
 
 
 
 
Net gain (loss) arising during the period



 
3

(1
)
2

Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b)
67

(16
)
51

 
74

(25
)
49

Total defined benefit plans
67

(16
)
51

 
77

(26
)
51

Unrealized (loss) gain on cash flow hedges:
 
 
 
 
 
 
 
Unrealized hedge (loss) gain arising during period
(19
)
4

(15
)
 
4

(1
)
3

Reclassification of net (gain) loss to net income:
 
 
 
 
 
 
 
FX contracts - trading revenue



 
(2
)

(2
)
FX contracts - other revenue
(3
)
1

(2
)
 



FX contracts - salary expense
(4
)
1

(3
)
 
15

(5
)
10

Total reclassifications to net income (b)
(7
)
2

(5
)
 
13

(5
)
8

Net unrealized (loss) gain on cash flow hedges
(26
)
6

(20
)
 
17

(6
)
11

Total other comprehensive (loss) income
$
(668
)
$
37

$
(631
)
 
$
988

$
9

$
997

(a)
Includes the impact of hedges of net investments in foreign subsidiaries. See Note 17 for additional information.
(b)
The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the Consolidated Income Statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense on the Consolidated Income Statement. See Note 17 for the location of the reclassification adjustment related to cash flow hedges on the Consolidated Income Statement.


76 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Note 15–Fair value measurement

Fair value is defined 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. A three-level hierarchy for fair value measurements is utilized based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. BNY Mellon’s own creditworthiness is considered when valuing liabilities. See Note 18 of the Notes to Consolidated Financial Statements in our 2017 Annual Report for
 
information on how we determine fair value and the fair value hierarchy.

The following tables present the financial instruments carried at fair value at Sept. 30, 2018 and Dec. 31, 2017, by caption on the consolidated balance sheet and by the three-level valuation hierarchy. 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.

Assets measured at fair value on a recurring basis at Sept. 30, 2018
Total carrying
value

(dollars in millions)
Level 1

Level 2

Level 3

Netting (a)

Available-for-sale securities:
 
 
 
 
 
U.S. Treasury
$
19,512

$

$

$

$
19,512

U.S. government agencies

1,525



1,525

Sovereign debt/sovereign guaranteed
9,180

2,362



11,542

State and political subdivisions

2,336



2,336

Agency RMBS

24,867



24,867

Non-agency RMBS (b)

1,419



1,419

Non-agency commercial MBS

1,459



1,459

Agency commercial MBS

9,613



9,613

CLOs

3,363



3,363

Corporate bonds

1,118



1,118

Other debt securities

4,429



4,429

Foreign covered bonds

2,972



2,972

Total available-for-sale securities
28,692

55,463



84,155

Trading assets:
 
 
 
 
 
Debt instruments
1,648

2,791



4,439

Equity instruments (c)
1,429




1,429

Derivative assets not designated as hedging:
 
 
 
 
 
Interest rate
8

3,228


(2,121
)
1,115

Foreign exchange

3,611


(2,807
)
804

Equity and other contracts

40


(23
)
17

Total derivative assets not designated as hedging
8

6,879


(4,951
)
1,936

Total trading assets
3,085

9,670


(4,951
)
7,804

Other assets:
 
 
 
 
 
Derivative assets designated as hedging:
 
 
 
 
 
Interest rate

151



151

Foreign exchange

196



196

Total derivative assets designated as hedging

347



347

Other assets (d)
101

184



285

Other assets measured at NAV (d)
 
 
 
 
200

Total other assets
101

531



832

Subtotal assets of operations at fair value
31,878

65,664


(4,951
)
92,791

Percentage of assets of operations prior to netting
33
%
67
%
%
 
 
Assets of consolidated investment management funds
216

283



499

Total assets
$
32,094

$
65,947

$

$
(4,951
)
$
93,290

Percentage of total assets prior to netting
33
%
67
%
%
 
 


BNY Mellon 77

Notes to Consolidated Financial Statements (continued)
 

Liabilities measured at fair value on a recurring basis at Sept. 30, 2018
Total carrying
value

(dollars in millions)
Level 1

Level 2

Level 3

Netting (a)

Trading liabilities:
 
 
 
 
 
Debt instruments
$
1,186

$
216

$

$

$
1,402

Equity instruments
22




22

Derivative liabilities not designated as hedging:
 
 
 
 
 
Interest rate
4

2,813


(2,262
)
555

Foreign exchange

3,937


(2,455
)
1,482

Equity and other contracts
2

108


(35
)
75

Total derivative liabilities not designated as hedging
6

6,858


(4,752
)
2,112

Total trading liabilities
1,214

7,074


(4,752
)
3,536

Long-term debt (c)

363



363

Other liabilities – derivative liabilities designated as hedging:
 
 
 
 
 
Interest rate

36



36

Foreign exchange

38



38

Total other liabilities – derivative liabilities designated as hedging

74



74

Subtotal liabilities of operations at fair value
1,214

7,511


(4,752
)
3,973

Percentage of liabilities of operations prior to netting
14
%
86
%
%
 
 
Liabilities of consolidated investment management funds

7



7

Total liabilities
$
1,214

$
7,518

$

$
(4,752
)
$
3,980

Percentage of total liabilities prior to netting
14
%
86
%
%
 
 
(a)
ASC 815, Derivatives and Hedging, permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. Netting is applicable to derivatives not designated as hedging instruments included in trading assets or trading liabilities and derivatives designated as hedging instruments included in other assets or other liabilities. Netting is allocated to the derivative products based on the net fair value of each product.
(b)
Includes $889 million in Level 2 that was included in the former Grantor Trust.
(c)
Includes certain interests in securitizations.
(d)
Includes seed capital, private equity investments and other assets.


78 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Assets measured at fair value on a recurring basis at Dec. 31, 2017
Total carrying
value

(dollars in millions)
Level 1

Level 2

Level 3

Netting (a)

Available-for-sale securities:
 
 
 
 
 
U.S. Treasury
$
15,263

$

$

$

$
15,263

U.S. government agencies

908



908

Sovereign debt/sovereign guaranteed
9,919

2,638



12,557

State and political subdivisions

2,957



2,957

Agency RMBS

23,819



23,819

Non-agency RMBS (b)

1,578



1,578

Other RMBS

149



149

Non-agency commercial MBS

1,360



1,360

Agency commercial MBS

8,762



8,762

CLOs

2,909



2,909

Other asset-backed securities

1,043



1,043

Money market funds (c)
963




963

Corporate bonds

1,255



1,255

Other debt securities

3,491



3,491

Foreign covered bonds

2,529



2,529

Total available-for-sale securities
26,145

53,398



79,543

Trading assets:
 
 
 
 
 
Debt and equity instruments (c)
1,344

1,910



3,254

Derivative assets not designated as hedging:
 
 
 
 
 
Interest rate
9

6,430


(5,075
)
1,364

Foreign exchange

5,104


(3,720
)
1,384

Equity and other contracts

70


(50
)
20

Total derivative assets not designated as hedging
9

11,604


(8,845
)
2,768

Total trading assets
1,353

13,514


(8,845
)
6,022

Other assets:
 
 
 
 
 
Derivative assets designated as hedging:
 
 
 
 
 
Interest rate

278



278

Foreign exchange

45



45

Total derivative assets designated as hedging

323



323

Other assets (d)
144

170



314

Other assets measured at NAV (d)
 
 
 
 
154

Total other assets
144

493



791

Subtotal assets of operations at fair value
27,642

67,405


(8,845
)
86,356

Percentage of assets of operations prior to netting
29
%
71
%
%
 
 
Assets of consolidated investment management funds
322

409



731

Total assets
$
27,964

$
67,814

$

$
(8,845
)
$
87,087

Percentage of total assets prior to netting
29
%
71
%
%
 
 



BNY Mellon 79

Notes to Consolidated Financial Statements (continued)
 

Liabilities measured at fair value on a recurring basis at Dec. 31, 2017
Total carrying
value

(dollars in millions)
Level 1

Level 2

Level 3

Netting (a)

Trading liabilities:
 
 
 
 
 
Debt and equity instruments
$
1,128

$
80

$

$

$
1,208

Derivative liabilities not designated as hedging:
 
 
 
 
 
Interest rate
4

6,349


(5,495
)
858

Foreign exchange

5,067


(3,221
)
1,846

Equity and other contracts

153


(81
)
72

Total derivative liabilities not designated as hedging
4

11,569


(8,797
)
2,776

Total trading liabilities
1,132

11,649


(8,797
)
3,984

Long-term debt (c)

367



367

Other liabilities – derivative liabilities designated as hedging:
 
 
 
 
 
Interest rate

534



534

Foreign exchange

266



266

Total other liabilities – derivative liabilities designated as hedging

800



800

Subtotal liabilities of operations at fair value
1,132

12,816


(8,797
)
5,151

Percentage of liabilities of operations prior to netting
8
%
92
%
%
 
 
Liabilities of consolidated investment management funds
1

1



2

Total liabilities
$
1,133

$
12,817

$

$
(8,797
)
$
5,153

Percentage of total liabilities prior to netting
8
%
92
%
%
 
 
(a)
ASC 815, Derivatives and Hedging, permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. Netting is applicable to derivatives not designated as hedging instruments included in trading assets or trading liabilities and derivatives designated as hedging instruments included in other assets or other liabilities. Netting is allocated to the derivative products based on the net fair value of each product.
(b)
Includes $1,091 million in Level 2 that was included in the former Grantor Trust.
(c)
Includes certain interests in securitizations.
(d)
Includes private equity investments and seed capital.




80 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Details of certain available-for-sale securities measured at fair value on a recurring basis
Sept. 30, 2018
 
Dec. 31, 2017
Total
carrying
value (b)

 
Ratings (a)
 
Total
carrying value

 
Ratings (a)
AAA/
AA-

A+/
A-

BBB+/
BBB-

BB+ and
lower

 
AAA/
AA-

A+/
A-

BBB+/
BBB-

BB+ and
lower

(dollars in millions)
 
(b)
Non-agency RMBS (c), originated in:
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
$
337

 
15
%
2
%
4
%
79
%
 
$
419

 
13
%
3
%
%
84
%
2006
385

 

18

1

81

 
467

 

17


83

2005
426

 
5

1

10

84

 
509

 
6

2

6

86

2004 and earlier
271

 
3

5

30

62

 
332

 
3

2

31

64

Total non-agency RMBS
$
1,419

 
5
%
7
%
10
%
78
%
 
$
1,727

(d)
6
%
6
%
8
%
80
%
Non-agency commercial MBS, originated in:
 
 
 
 
 
 
 
 
 
 
 
 
 
2009-2017
$
1,412

 
96
%
4
%
%
%
 
$
1,309

 
94
%
6
%
%
%
2005
47

 
100




 
51

 
100




Total non-agency commercial MBS
$
1,459

 
96
%
4
%
%
%
 
$
1,360

 
94
%
6
%
%
%
Foreign covered bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
Canada
$
1,583

 
100
%
%
%
%
 
$
1,659

 
100
%
%
%
%
United Kingdom
524

 
100




 
103

 
100




Australia
363

 
100




 
265

 
100




Sweden
191

 
100




 
136

 
100




Other
311

 
100




 
366

 
100




Total foreign covered bonds
$
2,972

 
100
%
%
%
%
 
$
2,529

 
100
%
%
%
%
Sovereign debt/sovereign guaranteed:
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom
$
2,627

 
100
%
%
%
%
 
$
3,052

 
100
%
%
%
%
Germany
1,853

 
100




 
1,586

 
100




France
1,837

 
100




 
2,046

 
100




Spain
1,444

 


100


 
1,635

 


100


Italy
972

 


100


 
1,292

 


100


Netherlands
887

 
100




 
1,027

 
100




Ireland
792

 

100



 
843

 

100



Canada
325

 
100




 

 




Belgium
312

 
100




 
803

 
100




Other (e)
493

 
79



21

 
273

 
50



50

Total sovereign debt/sovereign guaranteed
$
11,542

 
71
%
7
%
21
%
1
%
 
$
12,557

 
69
%
7
%
23
%
1
%
(a)
Represents ratings by S&P or the equivalent.
(b)
At Sept. 30, 2018 and Dec. 31, 2017, sovereign debt/sovereign guaranteed securities were included in Level 1 and Level 2 in the valuation hierarchy. All other assets in the table are Level 2 assets in the valuation hierarchy.
(c)
Includes $889 million at Sept. 30, 2018 and $1,091 million at Dec. 31, 2017 that were included in the former Grantor Trust.
(d)
Includes other RMBS.
(e)
Includes non-investment grade sovereign debt/sovereign guaranteed securities related to Brazil of $102 million at Sept. 30, 2018 and $136 million at Dec. 31, 2017.


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 lending-related commitments although they are not measured at fair value on an ongoing basis. Examples would be the recording of an impairment of an asset and non-
 
readily marketable equity securities carried at cost with upward or downward adjustments.

The following table presents the financial instruments carried on the consolidated balance sheet by caption and level in the fair value hierarchy as of Sept. 30, 2018 and Dec. 31, 2017, for which a nonrecurring change in fair value has been recorded during the quarters ended Sept. 30, 2018 and Dec. 31, 2017.

Assets measured at fair value on a nonrecurring basis
Sept. 30, 2018
 
Dec. 31, 2017
 
 
 
Total carrying
value

 
 
 
 
Total carrying
value

(in millions)
Level 1

Level 2

Level 3

 
Level 1

Level 2

Level 3

Loans (a)
$

$
65

$
4

$
69

 
$

$
73

$
6

$
79

Other assets (b)

9


9

 

4


4

Total assets at fair value on a nonrecurring basis
$

$
74

$
4

$
78

 
$

$
77

$
6

$
83

 
(a)
During the quarters ended Sept. 30, 2018 and Dec. 31, 2017, the fair value of these loans decreased less than $1 million and less than $1 million, respectively, based on the fair value of the underlying collateral based on guidance in ASC 310, Receivables, with an offset to the allowance for credit losses.
(b)
Includes other assets received in satisfaction of debt.



BNY Mellon 81

Notes to Consolidated Financial Statements (continued)
 

Estimated fair value of financial instruments

The following tables present the estimated fair value and the carrying amount of financial instruments not carried at fair value on the consolidated balance sheet at Sept. 30, 2018 and Dec. 31, 2017, by caption on the consolidated balance sheet and by the valuation hierarchy. See Note 18 of the Notes to Consolidated Financial Statements in our 2017 Annual Report for additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value.

Summary of financial instruments
Sept. 30, 2018
(in millions)
Level 1

Level 2

Level 3

Total
estimated
fair value

Carrying
amount

Assets:
 
 
 
 
 
Interest-bearing deposits with the Federal Reserve and other central banks
$

$
74,725

$

$
74,725

$
74,725

Interest-bearing deposits with banks

14,538


14,538

14,519

Federal funds sold and securities purchased under resale agreements

28,722


28,722

28,722

Securities held-to-maturity
5,660

27,685


33,345

34,486

Loans (a)

52,613


52,613

52,564

Other financial assets
5,047

1,337


6,384

6,384

Total
$
10,707

$
199,620

$

$
210,327

$
211,400

Liabilities:
 
 
 
 
 
Noninterest-bearing deposits
$

$
65,846

$

$
65,846

$
65,846

Interest-bearing deposits

163,990


163,990

165,744

Federal funds purchased and securities sold under repurchase agreements

10,158


10,158

10,158

Payables to customers and broker-dealers

18,683


18,683

18,683

Commercial paper

735


735

735

Borrowings

3,229


3,229

3,229

Long-term debt

27,217


27,217

27,750

Total
$

$
289,858

$

$
289,858

$
292,145

(a)
Does not include the leasing portfolio.


Summary of financial instruments
Dec. 31, 2017
(in millions)
Level 1

Level 2

Level 3

Total estimated
fair value

Carrying
amount

Assets:
 
 
 
 
 
Interest-bearing deposits with the Federal Reserve and other central banks
$

$
91,510

$

$
91,510

$
91,510

Interest-bearing deposits with banks

11,982


11,982

11,979

Federal funds sold and securities purchased under resale agreements

28,135


28,135

28,135

Securities held-to-maturity
11,365

29,147


40,512

40,827

Loans (a)

60,219


60,219

60,082

Other financial assets
5,382

1,244


6,626

6,626

Total
$
16,747

$
222,237

$

$
238,984

$
239,159

Liabilities:
 
 
 
 
 
Noninterest-bearing deposits
$

$
82,716

$

$
82,716

$
82,716

Interest-bearing deposits

160,042


160,042

161,606

Federal funds purchased and securities sold under repurchase agreements

15,163


15,163

15,163

Payables to customers and broker-dealers

20,184


20,184

20,184

Commercial paper

3,075


3,075

3,075

Borrowings

2,931


2,931

2,931

Long-term debt

27,789


27,789

27,612

Total
$

$
311,900

$

$
311,900

$
313,287

(a)
Does not include the leasing portfolio.




82 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

The table below summarizes the carrying amount of the hedged financial instruments, the notional amount of the hedge and the unrealized gain (loss) (estimated fair value) of the derivatives.

Hedged financial instruments
Carrying
amount

Notional amount of hedge

 
 
 
Unrealized (a)
(in millions)
Gain

(Loss)

Sept. 30, 2018
 
 
 
 
Securities available-for-sale
$
17,602

$
18,009

$
151

$
(36
)
Long-term debt
19,904

20,650



Dec. 31, 2017
 
Securities available-for-sale
$
12,307

$
12,365

$
102

$
(301
)
Long-term debt
23,821

23,950

175

(233
)
(a)
Unrealized gain/loss amounts reflect the fact that certain of the derivatives are cleared and settled through central clearing counterparties where cash collateral received and paid is deemed a settlement of the derivative.


Note 16–Fair value option

We elected fair value as an alternative measurement for selected financial assets and liabilities. The following table presents the assets and liabilities of consolidated investment management funds, at fair value.

Assets and liabilities of consolidated investment management funds, at fair value
 
 
Sept. 30, 2018

Dec. 31, 2017

(in millions)
Assets of consolidated investment management funds:
 
 
Trading assets
$
243

$
516

Other assets
256

215

Total assets of consolidated investment management funds
$
499

$
731

Liabilities of consolidated investment management funds:
 
 
Other liabilities
$
7

$
2

Total liabilities of consolidated investment management funds
$
7

$
2



BNY Mellon values the assets and liabilities of its consolidated investment management funds using quoted prices for identical assets or liabilities in active markets or observable inputs such as quoted prices for similar assets or liabilities. Quoted prices for either identical or similar assets or liabilities in inactive markets may also be used. Accordingly, fair value best reflects the interests BNY Mellon holds in the economic performance of the consolidated investment management funds. Changes in the value of the assets and liabilities are recorded in the consolidated income statement as investment income of consolidated investment management funds and in the interest of investment management fund note holders, respectively.

 
We have elected the fair value option on $240 million of long-term debt. The fair value of this long-term debt was $363 million at Sept. 30, 2018 and $367 million at Dec. 31, 2017. The long-term debt is valued using observable market inputs and is included in Level 2 of the valuation hierarchy.

The following table presents the change in fair value of long-term debt recorded in foreign exchange and other trading revenue in the consolidated income statement.

Foreign exchange and other trading revenue (a)
 
(in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Long-term debt
$

$

$
(1
)
$
4

$
(6
)
(a)
The change in fair value is approximately offset by an economic hedge included in foreign exchange and other trading revenue.


Note 17–Derivative instruments

We use derivatives to manage exposure to market risk, including interest rate risk, equity price risk and foreign currency risk, as well as credit risk. Our trading activities are focused on acting as a market-maker for our customers and facilitating customer trades in compliance with the Volcker Rule.

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 and collateral arrangements to minimize the credit risk of derivative financial instruments. We enter into offsetting positions to reduce exposure to foreign currency, interest rate and equity price risk.



BNY Mellon 83

Notes to Consolidated Financial Statements (continued)
 

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. There were no counterparty default losses recorded in the third quarter of 2018 or the third quarter of 2017.

Hedging derivatives

We utilize interest rate swap agreements to manage our exposure to interest rate fluctuations. We enter into fair value hedges as an interest rate risk management strategy to reduce fair value variability by converting certain fixed rate interest payments associated with available-for-sale securities, deposits and long-term debt to LIBOR.

The available-for-sale securities hedged consist of U.S. Treasury bonds, agency and non-agency commercial MBS, sovereign debt, corporate bonds and covered bonds that had original maturities of 30 years or less at initial purchase. At Sept. 30, 2018, $17.8 billion face amount of available-for-sale securities were hedged with interest rate swaps designated as fair value hedges that had notional values of $17.9 billion.

The fixed rate long-term debt instruments hedged generally have original maturities of five to 30 years. We issue both callable and non-callable debt. The debt is hedged with “receive fixed rate, pay variable rate” swaps. At Sept. 30, 2018, $20.7 billion par value of debt was hedged with interest rate swaps that had notional values of $20.7 billion.

In addition, we utilize forward foreign exchange contracts as hedges to mitigate foreign exchange exposures. We use forward foreign exchange contracts as cash flow hedges to convert certain forecasted non-U.S. dollar revenue and expenses into
 
U.S. dollars. We use forward foreign exchange contracts with maturities of 12 months or less as cash flow hedges to hedge our foreign exchange exposure to Indian rupee, British pound, Hong Kong dollar, Singapore dollar, Polish zloty and Canadian dollar revenue and expense transactions in entities that have the U.S. dollar as their functional currency. As of Sept. 30, 2018, the hedged forecasted foreign currency transactions and designated forward foreign exchange contract hedges were $272 million (notional), with a pre-tax loss of $14 million recorded in accumulated OCI. This loss will be reclassified to earnings over the next 12 months.

Forward foreign exchange contracts are also used to hedge the value of our net investments in foreign subsidiaries. These forward foreign exchange contracts have maturities of less than one year. 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 foreign currency translation adjustments in shareholders’ equity, net of tax. At Sept. 30, 2018, forward foreign exchange contracts with notional amounts totaling $7.2 billion were designated as hedges.

In addition to forward foreign exchange contracts, we also designate non-derivative financial instruments as hedges of our net investments in foreign subsidiaries. Those non-derivative financial instruments designated as hedges of our net investments in foreign subsidiaries were all long-term liabilities of BNY Mellon in various currencies, and, at Sept. 30, 2018, had a combined U.S. dollar equivalent value of $177 million.



84 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

The following table presents the gains (losses) related to our hedging derivative portfolio recognized in the consolidated income statement.

Income statement impact of fair value and cash flow hedges
 
 
 
 
 
 
 
(in millions)
Location of
gains (losses)
3Q18

2Q18

3Q17

 
YTD18

YTD17

Fair value hedges of available-for-sale securities
 
 
 
 
 
 
 
 
Derivative
Interest income
$
214

$
136

$
12

 
$
747

$
(9
)
 
Hedged item
Interest income
(209
)
(133
)
(12
)
 
(725
)
(4
)
Fair value hedges of long-term debt
 
 
 
 
 
 
 
 
Derivative
Interest expense
(101
)
(131
)
(45
)
 
(610
)
(12
)
 
Hedged item
Interest expense
103

129

43

 
609

12

Cash flow hedges of forecasted FX exposures
 
 
 
 
 
 
 
 
(Loss) gain reclassified from OCI into income
Trading revenue


(1
)
 

2

 
(Loss) gain reclassified from OCI into income
Other revenue

(1
)

 
3


 
(Loss) gain reclassified from OCI into income
Salary expense
(4
)
2

(2
)
 
4

(15
)
 
Gains (losses) recognized in the consolidated income statement due to fair value and cash flow hedging relationships
 
$
3

$
2

$
(5
)
 
$
28

$
(26
)


The following table presents the impact of hedging derivatives used in net investment hedging relationships in the consolidated income statement.

Impact of derivative instruments used in net investment hedging relationships in the income statement
 
 
(in millions)
 
 
 
 
 
Derivatives in net investment hedging relationships
Gain or (loss) recognized in accumulated OCI on derivatives
 
Location of gain or (loss) reclassified from accumulated OCI into income
Gain or (loss) reclassified from accumulated OCI into income
3Q18

2Q18

3Q17

YTD18

YTD17

 
3Q18

2Q18

3Q17

YTD18

YTD17

FX contracts
$
83

$
429

$
(206
)
$
354

$
(576
)
 
Net interest revenue
$

$

$

$

$



The following table presents information on the hedged items in fair value hedging relationships.

Hedged items in fair value hedging relationships at Sept. 30, 2018
Carrying amount of hedged asset or liability
 
Hedge accounting basis adjustment (decrease)
 
 
(in millions)
 
Available-for-sale securities
 
$
17,602

 
$
(584
)
 
Long-term debt
 
19,904

 
(747
)
(a)
(a)
Includes $111 million of basis adjustment on long-term debt associated with terminated hedges.



BNY Mellon 85

Notes to Consolidated Financial Statements (continued)
 

The following table summarizes the notional amount and credit exposure of our total derivative portfolio at Sept. 30, 2018 and Dec. 31, 2017.

Impact of derivative instruments on the balance sheet
Notional value
 
Asset derivatives
fair value
 
Liability derivatives
fair value
(in millions)
Sept. 30, 2018

Dec. 31, 2017

 
Sept. 30, 2018

Dec. 31, 2017

 
Sept. 30, 2018

Dec. 31, 2017

Derivatives designated as hedging instruments: (a)(b)
 
 
 
 
 
 
 
 
Interest rate contracts
$
38,659

$
36,315

 
$
151

$
278

 
$
36

$
534

Foreign exchange contracts
7,487

8,923

 
196

45

 
38

266

Total derivatives designated as hedging instruments
 
 
 
$
347

$
323

 
$
74

$
800

Derivatives not designated as hedging instruments: (b)(c)
 
 
 
 
 
 
 
 
Interest rate contracts
$
272,429

$
267,485

 
$
3,236

$
6,439

 
$
2,817

$
6,353

Foreign exchange contracts
685,871

767,999

 
3,611

5,104

 
3,937

5,067

Equity contracts
961

1,698

 
40

70

 
106

149

Credit contracts
180

180

 


 
4

4

Total derivatives not designated as hedging instruments
 
 
 
$
6,887

$
11,613

 
$
6,864

$
11,573

Total derivatives fair value (d)
 
 
 
$
7,234

$
11,936

 
$
6,938

$
12,373

Effect of master netting agreements (e)
 
 
 
(4,951
)
(8,845
)
 
(4,752
)
(8,797
)
Fair value after effect of master netting agreements
 
 
 
$
2,283

$
3,091

 
$
2,186

$
3,576

(a)
The fair value of asset derivatives and liability derivatives designated as hedging instruments is recorded as other assets and other liabilities, respectively, on the consolidated balance sheet.
(b)
Pursuant to a rule change at a clearing organization in 2018, cash collateral exchanged is deemed a settlement of the derivative each day. The impact of the change reduced the gross fair value of derivative assets and liabilities and a corresponding decrease in effect of master netting agreements, with no impact to the consolidated 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 consolidated balance sheet.
(d)
Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815, Derivatives and Hedging.
(e)
Effect of master netting agreements includes cash collateral received and paid of $607 million and $408 million, respectively, at Sept. 30, 2018, and $925 million and $877 million, respectively, at Dec. 31, 2017.


Trading activities (including trading derivatives)

We manage trading risk through a system of position limits, a VaR methodology based on historical simulation and other market sensitivity measures. Risk is monitored and reported to senior management by a separate unit, independent from trading, on a daily basis. Based on certain assumptions, the VaR methodology is designed to capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period, utilizes a 99% confidence level and incorporates non-linear product characteristics. The VaR model is one of several statistical models used to develop economic capital results, which are allocated to lines of business for computing risk-adjusted performance.

VaR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences. As a result, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and management’s assessment of market conditions. Additional stress scenarios based upon historical market events are also
 
performed. Stress tests may incorporate the impact of reduced market liquidity and the breakdown of historically observed correlations and extreme scenarios. VaR and other statistical measures, stress testing and sensitivity analysis are incorporated in other risk management materials.

The following table presents our foreign exchange and other trading revenue.

Foreign exchange and other trading revenue
 
 
(in millions)
3Q18

2Q18

3Q17

YTD18

YTD17

Foreign exchange
$
150

$
171

$
158

$
504

$
463

Other trading revenue
5

16

15

47

39

Total foreign exchange and other trading revenue
$
155

$
187

$
173

$
551

$
502



Foreign exchange revenue includes income from purchasing and selling foreign currencies and currency forwards, futures and options. Other trading revenue reflects results from trading in cash instruments including fixed income and equity securities and non-foreign exchange derivatives.



86 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Counterparty credit risk and collateral

We assess credit risk of our counterparties through regular 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 and/or highly liquid government securities. Collateral requirements are monitored and adjusted daily.

Additional disclosures concerning derivative financial instruments are provided in Note 15 of the Notes to Consolidated Financial Statements.

Disclosure of contingent features in OTC derivative instruments

Certain OTC derivative contracts and/or collateral agreements contain credit-risk contingent features triggered upon a rating downgrade in which the counterparty has the right to request additional collateral or the right to terminate the contracts in a net liability position.

The following table shows the aggregate fair value of OTC derivative contracts in net liability positions that contained credit-risk contingent features and the value of collateral that has been posted.

(in millions)
Sept. 30, 2018

Dec. 31, 2017

Aggregate fair value of OTC derivatives in net liability positions (a)
$
1,811

$
2,393

Collateral posted
$
1,690

$
2,115

(a)
Before consideration of cash collateral.


 
The aggregate fair value of OTC derivative contracts containing credit-risk contingent features can fluctuate from quarter to quarter due to changes in market conditions, composition of counterparty trades, new business or changes to the contingent features.

The Bank of New York Mellon, our largest banking subsidiary, enters into the substantial majority of our OTC derivative contracts and/or collateral agreements. As such, the contingent features may be triggered if The Bank of New York Mellon’s long-term issuer rating was downgraded.

The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions for three key ratings triggers.

Potential close-out exposures (fair value) (a)
 
(in millions)
Sept. 30, 2018

Dec. 31, 2017

If The Bank of New York Mellon’s rating changed to: (b)
 
 
A3/A-
$
29

$
92

Baa2/BBB
$
190

$
748

Ba1/BB+
$
644

$
2,007

(a)
The amounts represent potential total close-out values if The Bank of New York Mellon’s long-term issuer rating were to immediately drop to the indicated levels, and do not reflect collateral posted.
(b)
Represents rating by Moody’s/S&P.


If The Bank of New York Mellon’s debt rating had fallen below investment grade on Sept. 30, 2018 and Dec. 31, 2017, existing collateral arrangements would have required us to post additional collateral of $106 million and $102 million, respectively.



BNY Mellon 87

Notes to Consolidated Financial Statements (continued)
 

Offsetting assets and liabilities

The following tables present derivative instruments and financial instruments that are either subject to an enforceable netting agreement or offset by collateral arrangements. There were no derivative instruments or financial instruments subject to a legally enforceable netting agreement for which we are not currently netting.

Offsetting of derivative assets and financial assets at Sept. 30, 2018
 
 
 
 
 
Gross assets recognized

Gross amounts offset in the balance sheet

 
Net assets recognized in the balance sheet

Gross amounts not offset in the balance sheet
 
(in millions)
(a)
Financial instruments

Cash collateral received

Net amount

Derivatives subject to netting arrangements:
 
 
 
 
 
 
 
Interest rate contracts
$
2,600

$
2,121

 
$
479

$
162

$

$
317

Foreign exchange contracts
3,351

2,807

 
544

37


507

Equity and other contracts
44

23

 
21



21

Total derivatives subject to netting arrangements
5,995

4,951

 
1,044

199


845

Total derivatives not subject to netting arrangements
1,239


 
1,239



1,239

Total derivatives
7,234

4,951

 
2,283

199


2,084

Reverse repurchase agreements
76,304

58,540

(b)
17,764

17,629


135

Securities borrowing
10,958


 
10,958

10,632


326

Total
$
94,496

$
63,491

 
$
31,005

$
28,460

$

$
2,545


Offsetting of derivative assets and financial assets at Dec. 31, 2017
 
 
 
 
 
Gross assets recognized

Gross amounts offset in the balance sheet

 
Net assets recognized
in the
balance sheet

Gross amounts not offset in the balance sheet
 
(in millions)
(a)
Financial instruments

Cash collateral received

Net amount

Derivatives subject to netting arrangements:
 
 
 
 
 
 
 
Interest rate contracts
$
5,915

$
5,075

 
$
840

$
178

$

$
662

Foreign exchange contracts
4,666

3,720

 
946

116


830

Equity and other contracts
67

50

 
17



17

Total derivatives subject to netting arrangements
10,648

8,845

 
1,803

294


1,509

Total derivatives not subject to netting arrangements
1,288


 
1,288



1,288

Total derivatives
11,936

8,845

 
3,091

294


2,797

Reverse repurchase agreements
42,784

25,848

(b)
16,936

16,923


13

Securities borrowing
11,199


 
11,199

10,858


341

Total
$
65,919

$
34,693

 
$
31,226

$
28,075

$

$
3,151

(a)
Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)
Offsetting of reverse repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


Offsetting of derivative liabilities and financial liabilities at Sept. 30, 2018
Net liabilities recognized in the balance sheet

 
 
 
 
Gross liabilities recognized

Gross amounts offset in the balance sheet

 
Gross amounts not offset in the balance sheet
 
(in millions)
(a)
Financial instruments

Cash collateral pledged

Net amount

Derivatives subject to netting arrangements:
 
 
 
 
 
 
 
Interest rate contracts
$
2,795

$
2,262

 
$
533

$
414

$

$
119

Foreign exchange contracts
3,433

2,455

 
978

116


862

Equity and other contracts
106

35

 
71

67


4

Total derivatives subject to netting arrangements
6,334

4,752

 
1,582

597


985

Total derivatives not subject to netting arrangements
604


 
604



604

Total derivatives
6,938

4,752

 
2,186

597


1,589

Repurchase agreements
67,165

58,540

(b)
8,625

8,625



Securities lending
1,436


 
1,436

1,357


79

Total
$
75,539

$
63,292

 
$
12,247

$
10,579

$

$
1,668



88 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2017
Net liabilities recognized
in the
balance sheet

 
 
 
 
Gross liabilities recognized

Gross amounts offset in the balance sheet

 
Gross amounts not offset in the balance sheet
 
(in millions)
(a)
Financial instruments

Cash collateral pledged

Net amount

Derivatives subject to netting arrangements:
 
 
 
 
 
 
 
Interest rate contracts
$
6,810

$
5,495

 
$
1,315

$
1,222

$

$
93

Foreign exchange contracts
4,765

3,221

 
1,544

177


1,367

Equity and other contracts
143

81

 
62

58


4

Total derivatives subject to netting arrangements
11,718

8,797

 
2,921

1,457


1,464

Total derivatives not subject to netting arrangements
655


 
655



655

Total derivatives
12,373

8,797

 
3,576

1,457


2,119

Repurchase agreements
33,908

25,848

(b)
8,060

8,059


1

Securities lending
2,186


 
2,186

2,091


95

Total
$
48,467

$
34,645

 
$
13,822

$
11,607

$

$
2,215

(a)
Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)
Offsetting of repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


Secured borrowings

The following table presents the contract value of repurchase agreements and securities lending transactions accounted for as secured borrowings by the type of collateral provided to counterparties.

Repurchase agreements and securities lending transactions accounted for as secured borrowings
 
Sept. 30, 2018
 
Dec. 31, 2017
 
Remaining contractual maturity
Total

 
Remaining contractual maturity
Total

(in millions)
Overnight and continuous

Up to 30 days

30 days or more

 
Overnight and continuous

Up to 30 days

30 days or more

Repurchase agreements:
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
59,999

$

$

$
59,999

 
$
26,883

$
11

$

$
26,894

U.S. government agencies
517


3

520

 
570

180


750

Agency RMBS
2,438


5

2,443

 
2,574

109


2,683

Corporate bonds
742


1,888

2,630

 
373


1,052

1,425

Other debt securities
194


776

970

 
253


731

984

Equity securities
225


378

603

 
655


517

1,172

Total
$
64,115

$

$
3,050

$
67,165

 
$
31,308

$
300

$
2,300

$
33,908

Securities lending:
 
 
 
 
 
 
 
 
 
U.S. government agencies
$
1

$

$

$
1

 
$
72

$

$

$
72

Other debt securities
438



438

 
316



316

Equity securities
997



997

 
1,798



1,798

Total
$
1,436

$

$

$
1,436

 
$
2,186

$

$

$
2,186

Total borrowings
$
65,551

$

$
3,050

$
68,601

 
$
33,494

$
300

$
2,300

$
36,094



BNY Mellon’s repurchase agreements and securities lending transactions primarily encounter risk associated with liquidity. We are required to pledge collateral based on predetermined terms within the agreements. If we were to experience a decline in the fair value of the collateral pledged for these transactions, we could be required to provide
 
additional collateral to the counterparty, therefore decreasing the amount of assets available for other liquidity needs that may arise. BNY Mellon also offers tri-party collateral agency services in the tri-party repo market where we are exposed to credit risk. In order to mitigate this risk, we require dealers to fully secure intraday credit.



BNY Mellon 89

Notes to Consolidated Financial Statements (continued)
 

Note 18–Commitments and contingent liabilities

Off-balance sheet arrangements

In the normal course of business, various commitments and contingent liabilities are outstanding that are not reflected in the accompanying consolidated balance sheets.

Our significant trading and off-balance sheet risks are securities, foreign currency and interest rate risk management products, commercial lending commitments, letters of credit and securities lending indemnifications. We assume these risks to reduce interest rate and foreign currency risks, to provide customers with the ability to meet credit and liquidity needs and to hedge foreign currency and interest rate risks. These items involve, to varying degrees, credit, foreign currency and interest rate risks not recognized on the balance sheet. Our off-balance sheet risks are managed and monitored in manners similar to those used for on-balance sheet risks.

The following table presents a summary of our off-balance sheet credit risks.

Off-balance sheet credit risks
Sept. 30, 2018

Dec. 31, 2017

(in millions)
Lending commitments
$
50,858

$
51,467

Standby letters of credit (a)
2,779

3,531

Commercial letters of credit
159

122

Securities lending indemnifications (b)(c)
452,261

432,084

(a)
Net of participations totaling $163 million at Sept. 30, 2018 and $672 million at Dec. 31, 2017.
(b)
Excludes the indemnification for securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $67 billion at Sept. 30, 2018 and $69 billion at Dec. 31, 2017.
(c)
Includes cash collateral, invested in indemnified repurchase agreements, held by us as securities lending agent of $45 billion at Sept. 30, 2018 and $33 billion at Dec. 31, 2017.


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 lending 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: $31.4 billion in less than one
 
year, $19.3 billion in one to five years and $96 million over five years.

SBLCs principally support obligations of corporate clients and were collateralized with cash and securities of $229 million at Sept. 30, 2018 and $160 million at Dec. 31, 2017. At Sept. 30, 2018, $1.9 billion of the SBLCs will expire within one year and $853 million in one to five years.

We must recognize, at the inception of an SBLC and foreign and other guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. 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 SBLCs and foreign and other guarantees, if any, is included in the allowance for lending-related commitments. The allowance for lending-related commitments was $111 million at Sept. 30, 2018 and $102 million at Dec. 31, 2017.

Payment/performance risk of SBLCs is monitored using both historical performance and internal ratings criteria. BNY Mellon’s 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
Sept. 30, 2018

Dec. 31, 2017

  
Investment grade
89
%
84
%
Non-investment grade
11
%
16
%


A commercial letter of credit is normally a short-term 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 $159 million at Sept. 30, 2018 and $122 million at Dec. 31, 2017.

We expect many of the lending commitments and letters of credit to expire without the need to advance any cash. The revenue associated with guarantees frequently depends on the credit rating of the obligor


90 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

and the structure of the transaction, including collateral, if any.

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 broker-dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract.

We typically lend securities with indemnification against borrower default. We generally require the borrower to provide collateral with a minimum value of 102% of the fair value of the securities borrowed, 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 $474 billion at Sept. 30, 2018 and $451 billion at Dec. 31, 2017.

CIBC Mellon, a joint venture between BNY Mellon and the Canadian Imperial Bank of Commerce (“CIBC”), engages in securities lending activities.  CIBC Mellon, BNY Mellon and CIBC jointly and severally indemnify securities lenders against specific types of borrower default.  At Sept. 30, 2018 and Dec. 31, 2017, $67 billion and $69 billion, respectively, of borrowings at CIBC Mellon, for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, were secured by collateral of $71 billion and $73 billion, respectively. If, upon a default, a borrower’s collateral was not sufficient to cover its related obligations, certain losses related to the indemnification could be covered by the indemnitors.

Industry concentrations

We have significant industry concentrations related to credit exposure at Sept. 30, 2018. The tables below present our credit exposure in the financial institutions and commercial portfolios.

 
Financial institutions
portfolio exposure
(in billions)
Sept. 30, 2018
Loans

Unfunded
commitments

Total
exposure

Securities industry
$
2.3

$
21.4

$
23.7

Asset managers
1.3

6.3

7.6

Banks
5.9

1.3

7.2

Insurance
0.1

3.1

3.2

Government
0.1

0.5

0.6

Other
0.7

1.4

2.1

Total
$
10.4

$
34.0

$
44.4

 

Commercial portfolio
exposure
(in billions)
Sept. 30, 2018
Loans

Unfunded
commitments

Total
exposure

Manufacturing
$
0.9

$
5.2

$
6.1

Services and other
0.6

4.7

5.3

Energy and utilities
0.5

4.2

4.7

Media and telecom
0.1

1.2

1.3

Total
$
2.1

$
15.3

$
17.4



Major concentrations in securities lending are primarily to broker-dealers and are generally collateralized with cash and/or securities.

Exposure for certain administrative errors

In connection with certain offshore tax-exempt funds that we manage, we may be liable to the funds for certain administrative errors. The errors relate to the resident status of such funds, potentially exposing the Company to a tax liability related to the funds’ earnings. The Company is in discussions with tax authorities regarding the funds. We believe we are appropriately accrued and the additional reasonably possible exposure is not significant.

Indemnification arrangements

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 that are not otherwise included above. Insurance has been purchased to mitigate certain of these risks. Generally, there are no stated or notional amounts included in these indemnifications and the contingencies triggering the obligation for indemnification are not expected to occur. Furthermore, often counterparties to these transactions provide us with comparable indemnifications. We are unable to develop an estimate of the maximum payout under these


BNY Mellon 91

Notes to Consolidated Financial Statements (continued)
 

indemnifications for several reasons. In addition to the lack of a stated or notional amount in a majority of such indemnifications, we are unable to predict the nature of events that would trigger indemnification or the level of indemnification for a certain event. We believe, however, that the possibility that we will have to make any material payments for these indemnifications is remote. At Sept. 30, 2018 and Dec. 31, 2017, we have not recorded any material liabilities under these arrangements.

Clearing and settlement exchanges

We are a noncontrolling equity investor in, and/or member of, several industry clearing or settlement exchanges through which foreign exchange, securities, derivatives or other transactions settle. Certain of these industry clearing and settlement exchanges require their members to guarantee their obligations and liabilities and/or to provide liquidity support in the event other members do not honor their obligations. We believe the likelihood that a clearing or settlement exchange (of which we are a member) would become insolvent is remote. Additionally, certain settlement exchanges have implemented loss allocation policies that enable the exchange to allocate settlement losses to the members of the exchange. It is not possible to quantify such mark-to-market loss until the loss occurs. Any ancillary costs that occur as a result of any mark-to-market loss cannot be quantified. In addition, we also sponsor clients as members on clearing and settlement exchanges and guarantee their obligations. At Sept. 30, 2018 and Dec. 31, 2017, we have not recorded any material liabilities under these arrangements.

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. We also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal). Claims for significant monetary damages are often asserted in many of these legal actions, while claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought in governmental and 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, settlements or orders, 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 governmental 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 governmental 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 accruals for litigation and governmental 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 accrual, and will adjust the accrual amount as appropriate. If the loss contingency in question is not both probable and reasonably estimable, BNY Mellon does not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and 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 here 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 described here where BNY Mellon is able to estimate a reasonably possible loss, the aggregate range of such reasonably possible loss is up to $900 million in excess of the accrued liability (if any) related to those matters.


92 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

The following describes certain judicial, regulatory and arbitration proceedings involving BNY Mellon:

Mortgage-Securitization Trusts Proceedings
The Bank of New York Mellon has been named as a defendant in a number of legal actions brought by MBS investors alleging that the trustee has expansive duties under the governing agreements, including the duty to investigate and pursue breach of representation and warranty claims against other parties to the MBS transactions. These actions include a lawsuit brought in New York State court on June 18, 2014, and later re-filed in federal court, by a group of institutional investors who purport to sue on behalf of 233 MBS trusts.

Matters Related to R. Allen Stanford
In late December 2005, Pershing LLC (“Pershing”) became a clearing firm for Stanford Group Co. (“SGC”), a registered broker-dealer that was part of a group of entities ultimately controlled by R. Allen Stanford (“Stanford”). Stanford International Bank (“SIB”), also controlled by Stanford, issued certificates of deposit (“CDs”). Some investors allegedly wired funds from their SGC accounts to purchase CDs. In 2009, the SEC charged Stanford with operating a Ponzi scheme in connection with the sale of CDs, and SGC was placed into receivership. Alleged purchasers of CDs have filed 15 lawsuits against Pershing that are pending in Texas, including two putative class actions. The purchasers allege that Pershing, as SGC’s clearing firm, assisted Stanford in a fraudulent scheme and assert contractual, statutory and common law claims. On July 12, 2018, a federal district court dismissed six of the individual lawsuits and those cases are on appeal. A series of FINRA arbitration proceedings also have been initiated by alleged purchasers asserting similar claims.

Brazilian Postalis Litigation
BNY Mellon Servicos Financeiros DTVM S.A. (“DTVM”), a subsidiary that provides a number of asset services in Brazil, acts as administrator for certain investment funds in which the exclusive investor is a public pension fund for postal workers called Postalis-Instituto de Seguridade Social dos Correios e Telégrafos (“Postalis”). On Aug. 22, 2014, Postalis sued DTVM in Rio de Janeiro, Brazil for losses related to a Postalis investment fund for which DTVM serves as fund administrator. Postalis alleges that DTVM failed to properly perform alleged duties, including duties to conduct due diligence of and exert control over the fund manager, Atlântica
 
Administração de Recursos (“Atlântica”), and Atlântica’s investments. On March 12, 2015, Postalis filed a lawsuit in Rio de Janeiro against DTVM and BNY Mellon Administração de Ativos Ltda. (“Ativos”) alleging failure to properly perform alleged duties relating to another fund of which DTVM is administrator and Ativos is investment manager. On Dec. 14, 2015, Associacão dos Profissionais dos Correiros (“ADCAP”), a Brazilian postal workers association, filed a lawsuit in São Paulo against DTVM and other defendants alleging that DTVM improperly contributed to investment losses in the Postalis portfolio. On March 20, 2017, the lawsuit was dismissed without prejudice, and ADCAP has appealed that decision. On Dec. 17, 2015, Postalis filed three additional lawsuits in Rio de Janeiro against DTVM and Ativos alleging failure to properly perform alleged duties and liabilities for losses with respect to investments in several other funds. On Feb. 4, 2016, Postalis filed another lawsuit in Brasilia against DTVM, Ativos and BNY Mellon Alocação de Patrimônio Ltda., an investment management subsidiary, alleging failure to properly perform duties and liability for losses with respect to investments in various other funds of which the defendants were administrator and/or manager. The lawsuit was transferred to São Paulo and then returned to Brasilia. On Jan. 16, 2018, the Brazilian Federal Prosecution Service (“MPF”) filed a civil lawsuit in São Paulo against DTVM alleging liability for Postalis losses based on alleged failures by DTVM to properly perform certain duties while acting as administrator to certain funds in which Postalis invested or controller of Postalis’s own investment portfolio. On April 18, 2018, the court dismissed the lawsuit without prejudice, and the MPF has appealed that decision.

Depositary Receipt Litigation
Between late December 2015 and February 2016, four putative class action lawsuits were filed against BNY Mellon asserting claims relating to BNY Mellon’s foreign exchange pricing when converting dividends and other distributions from non-U.S. companies in its role as depositary bank to Depositary Receipt issuers. The claims are for breach of contract and violations of ERISA. The lawsuits have been consolidated into two suits that are pending in federal court in the Southern District of New York. The parties in the lawsuits have reached agreements in principle to resolve the suits, which are subject to court approval.



BNY Mellon 93

Notes to Consolidated Financial Statements (continued)
 

Brazilian Silverado Litigation
DTVM acts as administrator for the Fundo de Investimento em Direitos Creditórios Multisetorial Silverado Maximum (“Silverado Maximum Fund”), which invests in commercial credit receivables. On June 2, 2016, the Silverado Maximum Fund sued DTVM in its capacity as administrator, along with Deutsche Bank S.A. - Banco Alemão in its capacity as custodian and Silverado Gestão e Investimentos Ltda. in its capacity as investment manager. The Fund alleges that each of the defendants failed to fulfill its respective duty, and caused losses to the Fund for which the defendants are jointly and severally liable.

Depositary Receipt Pre-Release Inquiry
In March 2014, the Staff of the U.S. Securities and Exchange Commission’s Enforcement Division (the “Staff”) commenced an investigation into certain issuers of American Depositary Receipts (“ADRs”), including BNY Mellon, for the period of 2011 to 2015. The Staff has issued several requests to BNY Mellon for information relating to the pre-release of ADRs. In May 2017, BNY Mellon began discussions with the Staff about a possible resolution of the investigation. BNY Mellon has fully cooperated with the investigation and has reached an agreement in principle with the Staff to resolve this matter, which is subject to the Commission’s approval.
 
Note 19–Lines of business

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

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 when organizational changes are made. There were no significant organizational changes in the third quarter of 2018. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.

The accounting policies of the businesses are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in our 2017 Annual Report.


94 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

The primary products and services and types of revenue for our two principal businesses and a description of the Other segment are presented below.

Investment Services business
 
 
 
 
 
Line of business
 
Primary products and services
 
Primary types of revenue
Asset Servicing
 
Custody, accounting, ETF services, middle-office solutions, transfer agency, services for private equity and real estate funds, foreign exchange, securities lending, liquidity/lending services, prime brokerage and data analytics
 
- Asset servicing fees (includes securities lending revenue)
- Foreign exchange revenue
- Net interest revenue
- Financing-related fees
 
 
 
 
 
Pershing
 
Clearing and custody, investment, wealth and retirement solutions, technology and enterprise data management, trading services and prime brokerage

 
- Clearing services fees
- Net interest revenue
 
 
 
 
 
Issuer Services
 
Corporate Trust (trustee, administration and agency services and reporting and transparency) and Depositary Receipts (issuer services and support for brokers and investors)
 
- Issuer services fees
- Net interest revenue
- Foreign exchange revenue
 
 
 
 
 
Treasury Services
 
Integrated cash management solutions including payments, foreign exchange, liquidity management, receivables processing and payables management and trade finance and processing

 
- Treasury services fees
- Net interest revenue
 
 
 
 
 
Clearance and Collateral Management
 
U.S. government clearing, global collateral management and tri-party repo
 
- Asset servicing fees
- Net interest revenue

 
 
 
 
 
Investment Management business
 
 
 
 
 
Line of business
 
Primary products and services
 
Primary types of revenue
Asset Management
 
Diversified investment management strategies and distribution of investment products
 
- Investment management fees
- Performance fees
- Distribution and servicing fees
 
 
 
 
 
Wealth Management
 
Investment management, custody, wealth and estate planning and private banking services
 
- Investment management fees
- Net interest revenue
 
 
 
 
 
Other segment
 
Description
 
Primary types of revenue
 
 
Includes leasing portfolio, corporate treasury activities, including our securities portfolio, derivatives and other trading activity, corporate and bank-owned life insurance, renewable energy investments and business exits
 
- Net interest revenue
- Investment and other income
- Net gain (loss) on securities
- Other trading revenue




BNY Mellon 95

Notes to Consolidated Financial Statements (continued)
 

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 included in Investment Services.
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.
The provision for credit losses associated with the respective credit portfolios is reflected in each business segment.
Incentives expense related to restricted stock is allocated to the businesses.
Support and other indirect expenses are allocated to businesses based on internally developed methodologies.
 
Recurring FDIC expense is allocated to the businesses based on average deposits generated within each business.
Litigation expense is generally recorded in the business in which the charge occurs.
Management of the securities portfolio is a shared service contained in the Other segment. As a result, gains and losses associated with the valuation of the securities portfolio are included in the Other segment.
Client deposits serve as the primary funding source for our securities portfolio. We typically allocate all interest revenue to the businesses generating the deposits. Accordingly, accretion related to the portion of the securities portfolio restructured in 2009 has been included in the results of the 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.


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

For the quarter ended Sept. 30, 2018
Investment
Services

 
Investment
Management

 
Other

 
Consolidated

 
(dollars in millions)
Total fee and other revenue
$
2,230

 
$
938

(a)
$
7

 
$
3,175

(a) 
Net interest revenue (expense)
827

 
77

 
(13
)
 
891

 
Total revenue (loss)
3,057

 
1,015

(a)
(6
)
 
4,066

(a) 
Provision for credit losses
1

 
(2
)
 
(2
)
 
(3
)
 
Noninterest expense
2,030

 
701

 
6

 
2,737

(b)
Income (loss) before taxes
$
1,026

 
$
316

(a)
$
(10
)
 
$
1,332

(a)(b)
Pre-tax operating margin (c)
34
%
 
31
%
 
N/M

 
33
%
 
Average assets
$
246,276

 
$
31,283

 
$
54,782

 
$
332,341

 
(a)
Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $7 million, representing $10 million of income and noncontrolling interests of $3 million. Income before taxes is net of noncontrolling interests of $3 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interests of $1 million related to other consolidated subsidiaries.
(c)
Income before taxes divided by total revenue.
N/M - Not meaningful.




96 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

For the quarter ended June 30, 2018
Investment
Services

 
Investment
Management

 
Other

 
Consolidated

 
(dollars in millions)
Total fee and other revenue
$
2,233

 
$
941

(a)
$
41

 
$
3,215

(a)
Net interest revenue (expense)
874

 
77

 
(35
)
 
916

 
Total revenue
3,107

 
1,018

(a)
6

 
4,131

(a)
Provision for credit losses
1

 
2

 
(6
)
 
(3
)
 
Noninterest expense
1,967

 
697

 
81

 
2,745

(b)
Income (loss) before taxes
$
1,139

 
$
319

(a)
$
(69
)
 
$
1,389

(a)(b)
Pre-tax operating margin (c)
37
%
 
31
%
 
N/M

 
34
%
 
Average assets
$
264,387

 
$
31,504

 
$
50,437

 
$
346,328

 
(a)
Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $5 million, representing $12 million of income and noncontrolling interests of $7 million. Income before taxes is net of noncontrolling interests of $7 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interests of $2 million related to other consolidated subsidiaries.
(c)
Income before taxes divided by total revenue.
N/M - Not meaningful.


For the quarter ended Sept. 30, 2017
Investment
Services

 
Investment
Management

 
Other

 
Consolidated

 
(dollars in millions)
Total fee and other revenue
$
2,187

 
$
918

(a)
$
69

 
$
3,174

(a)
Net interest revenue (expense)
777

 
82

 
(20
)
 
839

 
Total revenue
2,964

 
1,000

(a)
49

 
4,013

(a)
Provision for credit losses
(2
)
 
(2
)
 
(2
)
 
(6
)
 
Noninterest expense
1,874

 
702

 
77

 
2,653

(b)
Income (loss) before taxes
$
1,092

 
$
300

(a)
$
(26
)
 
$
1,366

(a)(b)
Pre-tax operating margin (c)
37
%
 
30
%
 
N/M

 
34
%
 
Average assets
$
252,461

 
$
31,689

 
$
61,559

 
$
345,709

 
(a)
Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $7 million, representing $10 million of income and noncontrolling interests of $3 million. Income before taxes is net of noncontrolling interests of $3 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interests of $1 million related to other consolidated subsidiaries.
(c)
Income before taxes divided by total revenue.
N/M - Not meaningful.


For the nine months ended Sept. 30, 2018
Investment
Services

 
Investment
Management

 
Other

 
Consolidated

 
(dollars in millions)
Total fee and other revenue
$
6,713

 
$
2,891

(a)
$
56

 
$
9,660

(a) 
Net interest revenue (expense)
2,545

 
230

 
(49
)
 
2,726

 
Total revenue
9,258

 
3,121

(a)
7

 
12,386

(a) 
Provision for credit losses
(5
)
 
2

 
(8
)
 
(11
)
 
Noninterest expense
5,946

 
2,103

 
174

 
8,223

(b)
Income (loss) before taxes
$
3,317

 
$
1,016

(a)
$
(159
)
 
$
4,174

(a)(b)
Pre-tax operating margin (c)
36
%
 
33
%
 
N/M

 
34
%
 
Average assets
$
262,804

 
$
31,577

 
$
51,139

 
$
345,520

 
(a)
Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $12 million, representing $11 million of income and a loss attributable to noncontrolling interests of $1 million. Income before taxes is net of a loss attributable to noncontrolling interests of $1 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interests of $1 million related to other consolidated subsidiaries.
(c)
Income before taxes divided by total revenue.
N/M - Not meaningful.




BNY Mellon 97

Notes to Consolidated Financial Statements (continued)
 

For the nine months ended Sept. 30, 2017
Investment
Services

 
Investment
Management

 
Other

 
Consolidated

 
(dollars in millions)
Total fee and other revenue
$
6,386

 
$
2,694

(a)
$
254

 
$
9,334

(a)
Net interest revenue (expense)
2,245

 
255

 
(43
)
 
2,457

 
Total revenue
8,631

 
2,949

(a)
211

 
11,791

(a)
Provision for credit losses
(5
)
 
1

 
(14
)
 
(18
)
 
Noninterest expense
5,650

 
2,083

 
212

 
7,945

(b)
Income before taxes
$
2,986

 
$
865

(a)
$
13

 
$
3,864

(a)(b)
Pre-tax operating margin (c)
35
%
 
29
%
 
N/M

 
33
%
 
Average assets
$
252,675

 
$
31,372

 
$
57,463

 
$
341,510

 
(a)
Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $29 million, representing $53 million of income and noncontrolling interests of $24 million. Income before taxes is net of noncontrolling interests of $24 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interest of $6 million related to other consolidated subsidiaries.
(c)
Income before taxes divided by total revenue.
N/M - Not meaningful.


Note 20–Supplemental information to the Consolidated Statement of Cash Flows

Non-cash investing and financing transactions that, appropriately, are not reflected in the consolidated statement of cash flows are listed below.

Non-cash investing and financing transactions
Nine months ended Sept. 30,
(in millions)
2018

 
2017

Transfers from loans to other assets for other real estate owned
$
2

 
$
3

Change in assets of consolidated VIEs
232

 
429

Change in liabilities of consolidated VIEs
5

 
288

Change in nonredeemable noncontrolling interests of consolidated investment management funds
226

 
234

Securities purchased not settled
885

 
1,277

Securities sold not settled
249

 

Securities matured not settled

 
350

Available-for-sale securities transferred to trading assets
963

 

Held-to-maturity securities transferred to available-for-sale
1,087

 
74

Premises and equipment/capitalized software funded by capital lease obligations
25

 
347

 


98 BNY Mellon

Item 4. 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 Mellon’s management to allow timely decisions regarding the required disclosure. In addition, our ethics hotline can also be 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 Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the third quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



BNY Mellon 99

Forward-looking Statements
 


Some statements in this document are forward-looking. These include all statements about the usefulness of Non-GAAP measures, the future results of BNY Mellon, our businesses, financial, liquidity and capital condition, results of operations, liquidity, risk and capital management and processes, goals, strategies, outlook, objectives, expectations (including those regarding our performance results, expenses, seasonality in our businesses, impacts of currency fluctuations, impacts of trends on our businesses, regulatory, technology, market, economic or accounting developments, legal proceedings and other contingencies), effective tax rate, estimates (including those regarding expenses, losses inherent in our credit portfolios, capital ratios and the tax benefit related to U.S. tax legislation), intentions (including those regarding our real estate strategy, capital returns and investment in technology), targets, opportunities and initiatives.

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,” “likely,” “target,” “expect,” “intend,” “continue,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “would,” “may,” “might,” “will,” “strategy,” “synergies,” “opportunities,” “trends,” “future” and words of similar meaning, may signify forward-looking statements.

Actual results may differ materially from those expressed or implied as a result of a number of factors, including those discussed in the “Risk Factors” section of our 2017 Annual Report and this Form 10-Q, such as: a communications or technology disruption or failure that results in a loss of information or impacts our ability to provide services to our clients may materially adversely affect our business, financial condition and results of operations; a cybersecurity incident, or a failure to protect our computer systems, networks and information and our clients’ information against cybersecurity threats, could result in a loss of information, adversely impact our ability to conduct our businesses, and damage our reputation and cause losses; our business may be materially adversely affected by operational risk; failure to satisfy regulatory standards, including “well capitalized” and “well managed” status or capital adequacy and liquidity rules more generally, could result in limitations on our activities and adversely affect our business and financial condition; we are subject to
 
extensive government rulemaking, regulation and supervision; these rules and regulations have, and in the future may, compel us to change how we manage our businesses, which could have a material adverse effect on our business, financial condition and results of operations; rules and regulations have increased our compliance and operational risk and costs; our risk management framework may not be effective in mitigating risk and reducing the potential for losses; a failure or circumvention of our controls and procedures could have a material adverse effect on our business, reputation, results of operations and financial condition; if our resolution plan is determined not to be credible or not to facilitate an orderly resolution under the U.S. Bankruptcy Code, our business, reputation, results of operations and financial condition could be materially negatively impacted; the application of our Title I preferred resolution strategy or resolution under the Title II orderly liquidation authority could adversely affect our liquidity and financial condition and our security holders; regulatory or enforcement actions or litigation could materially adversely affect our results of operations or harm our businesses or reputation; our businesses may be negatively affected by adverse events, publicity, government scrutiny or other reputational harm; acts of terrorism, natural disasters, pandemics, global conflicts and other geopolitical events may have a negative impact on our business and operations; we are dependent on fee-based business for a substantial majority of our revenue and our fee-based revenues could be adversely affected by slowing in market activity, weak financial markets, underperformance and/or negative trends in savings rates or in investment preferences; weakness and volatility in financial markets and the economy generally may materially adversely affect our business, results of operations and financial condition; the United Kingdom’s referendum decision to leave the EU has had and may continue to have negative effects on global economic conditions, global financial markets, and our business and results of operations; changes in interest rates and yield curves could have a material adverse effect on our profitability; we may experience write-downs of securities that we own and other losses related to volatile and illiquid market conditions, reducing our earnings and impacting our financial condition; ongoing concerns about the financial stability of certain countries, new barriers to global trade or a breakup of the EU or Eurozone could have a material adverse effect on our business and results of operations; our FX revenue may be adversely affected


100 BNY Mellon

Forward-looking Statements (continued)
 

by decreases in market volatility and the cross-border investment activity of our clients; the failure or perceived weakness of any of our significant counterparties, many of whom are major financial institutions and sovereign entities, and our assumption of credit and counterparty risk, could expose us to loss and adversely affect our business; our business, financial condition and results of operations could be adversely affected if we do not effectively manage our liquidity; any material reduction in our credit ratings or the credit ratings of our principal bank subsidiaries, The Bank of New York Mellon or BNY Mellon, N.A., could increase the cost of funding and borrowing to us and our rated subsidiaries and have a material adverse effect on our results of operations and financial condition and on the value of the securities we issue; we could incur losses if our allowance for credit losses, including loan and lending related commitments reserves, is inadequate; new lines of business, new products and services or transformational or strategic project initiatives may subject us to additional risks, and the failure to implement these initiatives could affect our results of operations; we are subject to competition in all aspects of our business, which could negatively affect our ability to maintain or increase our profitability; our business may be adversely affected if we are unable to attract and retain employees; our strategic transactions present risks and uncertainties and could have an adverse effect on our business, results of operations and financial condition; tax law changes, including the recent enactment of the Tax Act, 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; our ability to return capital to shareholders is subject to the discretion of our board of directors and may be limited by U.S. banking laws and regulations, including those governing capital and the approval of our capital plan, applicable provisions of Delaware law or our failure to pay full and timely dividends on our preferred stock; changes in the method pursuant to which the LIBOR and other benchmark rates are determined could adversely impact our business and results of operations; the Parent is a non-operating holding company, and as a result, is dependent on dividends from its subsidiaries and extensions of credit from its IHC to meet its obligations, including with respect to its securities, and to provide funds for share repurchases and payment of dividends to its stockholders; changes in accounting standards governing the preparation of our financial statements and future events could have a material impact on our reported financial condition, results of operations, cash flows and other financial data.

Investors should consider all risk factors discussed in our 2017 Annual Report and any subsequent reports filed with the SEC by BNY Mellon pursuant to the Exchange Act. All forward-looking 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 forward-looking statement is made or to reflect the occurrence of unanticipated events. The contents of BNY Mellon’s website or any other websites referenced herein are not part of this report.



BNY Mellon 101

Part II - Other Information
 

Item 1. Legal Proceedings.

The information required by this Item is set forth in the “Legal proceedings” section in Note 18 of the Notes to Consolidated Financial Statements, which portion is incorporated herein by reference in response to this item.

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

(c)
The following table discloses repurchases of our common stock made in the third quarter of 2018. All of the Company’s preferred stock outstanding has preference over the Company’s common stock with respect to the payment of dividends.

Issuer purchases of equity securities

Share repurchases - third quarter of 2018
 
 
 
 
Total shares
repurchased as
 part of a publicly
announced plan
or program

Maximum approximate dollar value of shares that may yet be purchased under the publicly announced plans or programs at Sept. 30, 2018
 
 
(dollars in millions, except per share information; common shares in thousands)
Total shares
repurchased

 
Average price
per share

 
 
July 2018
5

 
$
53.74

 
5

 
$
2,400

 
August 2018
8,364

 
51.35

 
8,364

 
1,970

 
September 2018
3,307

 
51.88

 
3,307

 
1,798

 
Third quarter of 2018 (a)
11,676

 
$
51.50

 
11,676

 
$
1,798

(b)
(a)
Includes 25 thousand shares repurchased at a purchase price of $1 million from employees, primarily in connection with the employees’ payment of taxes upon the vesting of restricted stock. The average price per share of open market purchases was $51.50.
(b)
Represents the maximum value of the shares authorized to be repurchased through the second quarter of 2019, including employee benefit plan repurchases, in connection with the Federal Reserve’s non-objection to our 2018 capital plan.


In June 2018, in connection with the Federal Reserve’s non-objection to our 2018 capital plan, BNY Mellon announced a share repurchase plan providing for the repurchase of up to $2.4 billion of common stock starting in the third quarter of 2018 and continuing through the second quarter of 2019. This new share repurchase plan replaces all previously authorized share repurchase plans.

Share repurchases may be executed through repurchase plans designed to comply with Rule 10b5-1 and through derivative, accelerated share repurchase and other structured transactions. The
 
timing and exact amount of any common stock repurchases will depend on various factors, including market conditions and the common stock trading price; the Company’s capital position, liquidity and financial performance; alternative uses of capital; and legal and regulatory considerations.


Item 6. Exhibits.

The list of exhibits required to be filed as exhibits to this report appears below.



102 BNY Mellon

Index to Exhibits
 

Exhibit No.
 
Description
 
Method of Filing
3.1
 
 
Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference.
3.2
 
 
Previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 5, 2007, and incorporated herein by reference.
3.3
 
 
Previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form 8A12B (File No. 001-35651) as filed with the Commission on Sept. 14, 2012, and incorporated herein by reference.
3.4
 
 
Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on May 16, 2013, and incorporated herein by reference.

3.5
 

 
Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on April 28, 2015, and incorporated herein by reference.

3.6
 
 
Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on Aug. 1, 2016, and incorporated herein by reference.
3.7
 
 
Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on Feb. 13, 2018, and incorporated herein by reference.
4.1
 
None of the instruments defining the rights of holders of long-term debt of the Parent or any of its subsidiaries represented long-term debt in excess of 10% of the total assets of the Company as of Sept. 30, 2018. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument.
 
N/A


BNY Mellon 103

Index to Exhibits (continued)
 


Exhibit No.
 
Description
 
Method of Filing
10.1
*
 
Filed herewith.
31.1
 
 
Filed herewith.
31.2
 
 
Filed herewith.
32.1
 
 
Furnished herewith.
32.2
 
 
Furnished herewith.
101.INS
 
XBRL Instance Document.
 
Filed herewith.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
Filed herewith.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
Filed herewith.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
Filed herewith.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
Filed herewith.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
Filed herewith.

* Management contract or compensatory plan, contract or arrangement.



104 BNY Mellon







SIGNATURE








Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.










 
THE BANK OF NEW YORK MELLON CORPORATION
 
(Registrant)

 
 
 
 
Date: November 6, 2018
By:
 
/s/ Kurtis R. Kurimsky
 
 
 
Kurtis R. Kurimsky
 
 
 
Corporate Controller
 
 
 
(Duly Authorized Officer and
 
 
 
Principal Accounting Officer of
 
 
 
the Registrant)




BNY Mellon 105