10-Q 1 bk3q201710-q.htm FORM 10-Q 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, 2017
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)
 

225 Liberty 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 ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X     No ___

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

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.    [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ___    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, 2017

 
 
Common Stock, $0.01 par value
1,024,022,353

 



THE BANK OF NEW YORK MELLON CORPORATION

Third Quarter 2017 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:
 
Key third quarter 2017 events
Highlights of third quarter 2017 results
 
 
Item 1. Financial Statements:
 
 
 
Page
Notes to Consolidated Financial Statements:
 
 
 
 
 
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
(dollar amounts in millions, except per share amounts and unless otherwise noted)
Sept. 30, 2017

June 30, 2017

Sept. 30, 2016

 
Sept. 30, 2017

Sept. 30, 2016

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
Net income
$
983

$
926

$
974

 
$
2,789

$
2,603

Basic earnings per share
0.94

0.88

0.90

 
2.66

2.39

Diluted earnings per share
0.94

0.88

0.90

 
2.64

2.38

 
 
 
 
 
 
 
Fee and other revenue
$
3,167

$
3,120

$
3,150

 
$
9,305

$
9,119

Income from consolidated investment management funds
10

10

17

 
53

21

Net interest revenue
839

826

774

 
2,457

2,307

Total revenue
$
4,016

$
3,956

$
3,941

 
$
11,815

$
11,447

 
 
 
 
 
 
 
Return on common equity (annualized) (a)
10.6
%
10.4
%
10.8
%
 
10.4
%
9.8
%
Adjusted return on common equity (annualized) – Non-GAAP (a)(b)
11.0
%
10.8
%
11.3
%
 
10.9
%
10.3
%
 
 
 
 
 
 
 
Return on tangible common equity (annualized) – Non-GAAP (a)(c)
21.9
%
21.9
%
23.5
%
 
22.0
%
21.5
%
Adjusted return on tangible common equity (annualized) – Non-GAAP (a)(b)(c)
22.0
%
22.1
%
23.6
%
 
22.1
%
21.7
%
 
 
 
 
 
 
 
Return on average assets (annualized)
1.13
%
1.09
%
1.10
%
 
1.09
%
0.96
%
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
78
%
79
%
79
%
 
79
%
79
%
 
 
 
 
 
 
 
Percentage of non-U.S. total revenue
36
%
35
%
36
%
 
35
%
34
%
 
 
 
 
 
 
 
Pre-tax operating margin (a)
34
%
33
%
33
%
 
33
%
31
%
Adjusted pre-tax operating margin – Non-GAAP (a)(b)
35
%
35
%
35
%
 
34
%
33
%
 
 
 
 
 
 
 
Net interest margin
1.15
%
1.14
%
1.05
%
 
1.14
%
1.00
%
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (d)
1.16
%
1.16
%
1.06
%
 
1.16
%
1.02
%
 
 
 
 
 
 
 
Assets under management (“AUM”) at period end (in billions) (e)
$
1,824

$
1,771

$
1,715

 
$
1,824

$
1,715

Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (f)
$
32.2

$
31.1

$
30.5

 
$
32.2

$
30.5

Market value of securities on loan at period end (in billions) (g)
$
382

$
336

$
288

 
$
382

$
288

 
 
 
 
 
 
 
Average common shares and equivalents outstanding (in thousands): (h)
 
 
 
 
 
 
Basic
1,035,337

1,035,829

1,062,248

 
1,037,431

1,071,457

Diluted
1,041,138

1,041,879

1,067,682

 
1,043,585

1,077,150

 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
Interest-earning assets
$
291,841

$
289,496

$
296,703

 
$
288,283

$
308,560

Assets of operations
$
344,966

$
341,607

$
350,190

 
$
340,588

$
362,092

Total assets
$
345,709

$
342,515

$
351,230

 
$
341,510

$
363,290

Interest-bearing deposits
$
142,490

$
142,336

$
155,109

 
$
141,558

$
160,728

Long-term debt
$
28,138

$
27,398

$
23,930

 
$
27,148

$
22,779

Noninterest-bearing deposits
$
70,168

$
73,886

$
81,619

 
$
72,524

$
82,861

Preferred stock
$
3,542

$
3,542

$
3,284

 
$
3,542

$
2,798

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
36,780

$
35,862

$
35,767

 
$
35,876

$
35,616

 
 
 
 
 
 
 
Other information at period end:
 
 
 
 
 
 
Cash dividends per common share
$
0.24

$
0.19

$
0.19

 
$
0.62

$
0.53

Common dividend payout ratio
26
%
22
%
21
%
 
23
%
22
%
Common dividend yield (annualized)
1.8
%
1.5
%
1.9
%
 
1.6
%
1.8
%
Closing stock price per common share
$
53.02

$
51.02

$
39.88

 
$
53.02

$
39.88

Market capitalization
$
54,294

$
52,712

$
42,167

 
$
54,294

$
42,167

Book value per common share (a)
$
36.11

$
35.26

$
34.19

 
$
36.11

$
34.19

Tangible book value per common share – Non-GAAP (a)(c)
$
18.19

$
17.53

$
16.67

 
$
18.19

$
16.67

Full-time employees
52,900

52,800

52,300

 
52,900

52,300

Common shares outstanding (in thousands)
1,024,022

1,033,156

1,057,337

 
1,024,022

1,057,337



2 BNY Mellon

Consolidated Financial Highlights (unaudited) (continued)
Regulatory and Capital ratios
Sept. 30, 2017

June 30, 2017

Dec. 31, 2016

Average liquidity coverage ratio (“LCR”) (i)
119
%
116
%
114
%
 
 
 
 
Regulatory capital ratios: (j)
 
 
 
Standardized:
 
 
 
Common equity Tier 1 (“CET1”) ratio
12.3
%
12.0
%
12.3
%
Tier 1 capital ratio
14.6

14.3

14.5

Total (Tier 1 plus Tier 2) capital ratio
15.6

14.8

15.2

Advanced:
 
 
 
CET1 ratio
11.1

10.8

10.6

Tier 1 capital ratio
13.2

12.9

12.6

Total (Tier 1 plus Tier 2) capital ratio
14.0

13.2

13.0

 
 
 
 
Leverage capital ratio (j)
6.8

6.7

6.6

Supplementary leverage ratio (“SLR”) (j)
6.3

6.2

6.0

 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio – GAAP
11.4

11.3

11.6

BNY Mellon common shareholders’ equity to total assets ratio – GAAP
10.4

10.3

10.6

 
 
 
 
Selected regulatory capital ratios – fully phased-in – Non-GAAP: (k)
 
 
 
Estimated CET1 ratio:
 
 
 
Standardized Approach
11.9
%
11.5
%
11.3
%
Advanced Approach
10.7

10.4

9.7

 
 
 
 
Estimated SLR
6.1

6.0

5.6

(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for a reconciliation of Non-GAAP measures.
(b)
Non-GAAP information for all periods presented excludes the amortization of intangible assets and merger and integration (“M&I”), litigation and restructuring charges. Non-GAAP information for the third quarter of 2016 and for the first nine months of 2016 also excludes a recovery of the previously impaired loan to Sentinel Management Group, Inc. (“Sentinel”). Additionally, the pre-tax operating margin (Non-GAAP) excludes the net income attributable to noncontrolling interests of consolidated investment management funds.
(c)
Tangible common equity – Non-GAAP and tangible book value per common share – Non-GAAP exclude goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for the reconciliation of Non-GAAP measures.
(d)
See “Average balances and interest rates” on page 11 for a reconciliation of Non-GAAP measures.
(e)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(f)
Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.3 trillion at Sept. 30, 2017 and $1.2 trillion at both June 30, 2017 and Sept. 30, 2016.
(g)
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 $68 billion at Sept. 30, 2017, $66 billion at June 30, 2017 and $64 billion at Sept. 30, 2016.
(h)
Beginning in the third quarter of 2017, vested stock awards to retirement eligible employees are included in common shares outstanding for earnings per share purposes. This change increased both average basic and average diluted shares outstanding by approximately 6 million for the quarter, which resulted in a de minimis impact to both basic and diluted earnings per share. For additional information, see the “Consolidated Income Statement” beginning on page 57.
(i)
For additional information on our LCR, see “Liquidity and dividends” beginning on page 33.
(j)
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 leverage capital ratio is based on Tier I capital, as phased-in, and quarterly average total assets. The SLR is based on Tier 1 capital, as phased-in, and average quarterly assets and certain off-balance sheet exposures. For additional information on our capital ratios, see “Capital” beginning on page 37.
(k)
The estimated fully phased-in CET1 and SLR ratios (Non-GAAP) are based on our interpretation of the U.S. capital rules, which are being gradually phased-in over a multi-year period. For additional information on these Non-GAAP ratios, see “Capital” beginning on page 37.



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, 2016 (“2016 Annual Report”).

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

How we reported results

Throughout this Form 10-Q, certain measures, which are noted as “Non-GAAP financial measures,” exclude certain items or otherwise include components that differ from U.S. generally accepted accounting principles (“GAAP”). BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control or because they provide additional information about our ability to meet fully phased-in capital requirements. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures. See “Net interest revenue,” including the “Average balances and interest rates” beginning on page 10 for information on measures presented on a fully taxable equivalent basis. Also see “Capital” beginning on page 37 for information on our fully phased-in capital requirements.

 
Overview

The Bank of New York Mellon Corporation was the first company listed on the New York Stock Exchange (NYSE: BK). With a rich history of maintaining our financial strength and stability through all business cycles, BNY Mellon is a global investments company dedicated to improving lives through investing.

We manage and service assets for financial institutions, corporations and individual investors in 35 countries and more than 100 markets. As of Sept. 30, 2017, BNY Mellon had $32.2 trillion in assets under custody and/or administration (“AUC/A”), and $1.8 trillion in assets under management (“AUM”).

BNY Mellon is focused on enhancing our clients’ experience by leveraging our scale and expertise to deliver innovative and strategic solutions for our clients, and building trusted relationships that drive value. We hold a unique position in the global financial services industry. We service both the buy-side and sell-side, providing us with distinctive marketplace insights that enable us to support our clients’ success.

BNY Mellon’s businesses benefit from global growth in financial assets, the globalization of the investment process, changes in demographics and the continued evolution of the regulatory landscape—each providing us with opportunities to advise and service clients.

Key third quarter 2017 events

Definitive agreement to sell CenterSquare Investment Management

In September 2017, we announced that we entered into a definitive agreement to sell CenterSquare Investment Management (“CenterSquare”), one of our Investment Management boutiques. CenterSquare had approximately $9 billion in AUM in U.S. and global real estate and infrastructure investments. The transaction is subject to standard regulatory and other required approvals and is expected to be completed in the fourth quarter of 2017 or first quarter of 2018.


4 BNY Mellon

Charles W. Scharf named chief executive officer; Gerald L. Hassell, chairman, to retire

In July 2017, Charles W. Scharf was appointed chief executive officer and member of the board of directors of the Company. Mr. Scharf succeeds Gerald L. Hassell, who will continue as the Company’s chairman of the board of directors until his retirement at the end of the year. After Mr. Hassell’s retirement, Mr. Scharf will become chairman, effective Jan. 1, 2018.

Resolution plan

As required by the Dodd-Frank Act, the Parent must submit annually to the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”) a plan for its rapid and orderly resolution in the event of material financial distress or failure. The Parent filed its most recent resolution plan on July 1, 2017. We believe the 2017 resolution plan addresses all shortcomings and deficiencies identified by the FDIC and the Federal Reserve in the Company’s 2015 resolution plan. The public portion of our 2017 resolution plan is available on the Federal Reserve’s and FDIC’s websites.

In September 2017, the Federal Reserve and FDIC extended the filing deadline by one year to July 1, 2019 for the Parent’s next resolution plan.

Increase in cash dividend on common stock

BNY Mellon’s 2017 capital plan submitted in connection with our Comprehensive Capital Analysis and Review (“CCAR”) included a 26% increase in the quarterly cash dividend to $0.24 per common share. The first payment of the increased quarterly cash dividend was made on Aug. 11, 2017.

Highlights of third quarter 2017 results

We reported net income applicable to common shareholders of $983 million, or $0.94 per diluted common share, in the third quarter of 2017. Net income applicable to common shareholders was $974 million, or $0.90 per diluted common share, in the third quarter of 2016 and $926 million, or $0.88 per diluted common share, in the second quarter of 2017.

 
Highlights of the third quarter of 2017 include:

•
AUC/A totaled a record $32.2 trillion at Sept. 30, 2017 compared with $30.5 trillion at Sept. 30, 2016. The 6% increase primarily reflects higher market values, the favorable impact of a weaker U.S. dollar and net new business. (See “Investment Services business” beginning on page 19.)
•
AUM totaled a record $1.82 trillion at Sept. 30, 2017 compared with $1.72 trillion at Sept. 30, 2016. The 6% increase primarily reflects higher market values, net inflows and the favorable impact of a weaker U.S. dollar (principally versus the British pound). AUM excludes securities lending cash management assets and assets managed in the Investment Services business. (See “Investment Management business” beginning on page 16.)
•
Investment services fees totaled $1.92 billion, an increase of 1% compared with $1.89 billion in the third quarter of 2016. The increase primarily reflects higher money market fees, higher equity market values and net new business, partially offset by lower Depositary Receipts revenue. (See “Investment Services business” beginning on page 19.)
•
Investment management and performance fees totaled $901 million, an increase of 5% compared with $860 million in the third quarter of 2016. The increase primarily reflects higher equity market values and money market fees. (See “Investment Management business” beginning on page 16.)
•
Foreign exchange and other trading revenue totaled $173 million compared with $183 million in the third quarter of 2016. Foreign exchange revenue totaled $158 million, a decrease of 10% compared with $175 million in the third quarter of 2016, primarily reflecting lower volatility and lower Depositary Receipt-related foreign exchange activity, partially offset by higher volumes. (See “Fee and other revenue” beginning on page 7.)
•
Investment and other income totaled $63 million compared with $92 million in the third quarter of 2016. The decrease primarily reflects lower other income driven by our investments in renewable energy and lower seed capital gains. (See “Fee and other revenue” beginning on page 7.)


BNY Mellon 5

•
Net interest revenue totaled $839 million compared with $774 million in the third quarter of 2016. The 8% increase was primarily driven by higher interest rates, partially offset by lower average deposits and loans. Net interest margin was 1.15% in the third quarter of 2017 compared with 1.05% in the third quarter of 2016. The net interest margin (FTE) (Non-GAAP) was 1.16% in the third quarter of 2017 compared with 1.06% in the third quarter of 2016. (See “Net interest revenue” on page 10.)
•
The provision for credit losses was a credit of $6 million in the third quarter of 2017 and a credit of $19 million in the third quarter of 2016. (See “Asset quality and allowance for credit losses” beginning on page 29.)
•
Noninterest expense totaled $2.65 billion compared with $2.64 billion in the third quarter of 2016. The increase primarily reflects higher software and professional, legal and other purchased services expenses, partially offset by lower litigation expense and bank assessment charges. (See “Noninterest expense” beginning on page 13.)
•
The provision for income taxes was $348 million and the effective rate was 25.4% in the third quarter of 2017 compared with an income tax provision of $324 million and an effective tax rate of 24.6% in the third quarter of 2016. (See “Income taxes” on page 14.)

 
•
The net unrealized pre-tax gain on the total investment securities portfolio was $257 million at Sept. 30, 2017 compared with a pre-tax gain of $151 million at June 30, 2017. The increase was primarily driven by a decrease in long-term interest rates. (See “Investment securities” beginning on page 25.)
•
Our CET1 ratio under the Advanced Approach was 11.1% at Sept. 30, 2017 and 10.8% at June 30, 2017. The increase was primarily driven by CET1 generation. Our CET1 ratio under the Standardized Approach was 12.3% at Sept. 30, 2017 and 12.0% at June 30, 2017. (See “Capital” beginning on page 37.)
•
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 10.7% at Sept. 30, 2017 and 10.4% at June 30, 2017. The increase primarily reflects CET1 generation. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 11.9% at Sept. 30, 2017 and 11.5% at June 30, 2017. (See “Capital” beginning on page 37.)



6 BNY Mellon

Fee and other revenue

Fee and other revenue
 
 
 
 
 
 
 
 
YTD17

 
 
 
 
3Q17 vs.
 
 
 
vs.
(dollars in millions, unless otherwise noted)
3Q17

2Q17

3Q16

2Q17

3Q16

 
YTD17

YTD16

YTD16

Investment services fees:
 
 
 
 
 
 
 
 
 
Asset servicing (a)
$
1,105

$
1,085

$
1,067

2
 %
4
 %
 
$
3,253

$
3,176

2
 %
Clearing services
383

394

349

(3
)
10

 
1,153

1,049

10

Issuer services
288

241

337

20

(15
)
 
780

815

(4
)
Treasury services
141

140

137

1

3

 
420

407

3

Total investment services fees
1,917

1,860

1,890

3

1

 
5,606

5,447

3

Investment management and performance fees
901

879

860

3

5

 
2,622

2,502

5

Foreign exchange and other trading revenue
173

165

183

5

(5
)
 
502

540

(7
)
Financing-related fees
54

53

58

2

(7
)
 
162

169

(4
)
Distribution and servicing
40

41

43

(2
)
(7
)
 
122

125

(2
)
Investment and other income
63

122

92

N/M

N/M

 
262

271

N/M

Total fee revenue
3,148

3,120

3,126

1

1

 
9,276

9,054

2

Net securities gains
19

—

24

N/M

N/M

 
29

65

N/M
Total fee and other revenue
$
3,167

$
3,120

$
3,150

2
 %
1
 %
 
$
9,305

$
9,119

2
 %
 
 
 
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
78
%
79
%
79
%
 
 
 
79
%
79
%
 
 
 
 
 
 
 
 
 
 
 
AUM at period end (in billions) (b)
$
1,824

$
1,771

$
1,715

3
 %
6
 %
 
$
1,824

$
1,715

6
 %
AUC/A at period end (in trillions) (c)
$
32.2

$
31.1

$
30.5

4
 %
6
 %
 
$
32.2

$
30.5

6
 %
(a)
Asset servicing fees include securities lending revenue of $47 million in the third quarter of 2017, $48 million in the second quarter of 2017, $51 million in the third quarter of 2016, $144 million in the first nine months of 2017 and $153 million in the first nine months of 2016.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(c)
Includes the AUC/A of CIBC Mellon of $1.3 trillion at Sept. 30, 2017 and $1.2 trillion at both June 30, 2017 and Sept. 30, 2016.
N/M - Not meaningful.


Fee and other revenue increased 1% compared with the third quarter of 2016 and 2% (unannualized) compared with the second quarter of 2017. The increase compared with the third quarter of 2016 primarily reflects higher investment management and performance fees, asset servicing fees and clearing services fees, partially offset by lower issuer services fees, investment and other income and foreign exchange and other trading revenue. The increase compared with the second quarter of 2017 primarily reflects seasonally higher issuer services fees, investment management and performance fees, asset servicing fees and net securities gains, partially offset by lower investment and other income.

Investment services fees

Investment services fees were impacted by the following compared with the third quarter of 2016 and the second quarter of 2017:

•
Asset servicing fees increased 4% compared with the third quarter of 2016 and 2% (unannualized) compared with the second quarter of 2017. The
 
increase compared with the third quarter of 2016 primarily reflects higher equity market values and net new business, including growth in collateral management, partially offset by the impact of downsizing the retail UK transfer agency business. The increase compared with the second quarter of 2017 was primarily driven by the favorable impact of a weaker U.S. dollar and higher equity market values.
•
Clearing services fees increased 10% compared with the third quarter of 2016 and decreased 3% (unannualized) compared with the second quarter of 2017. The increase was primarily driven by higher money market fees and growth in long-term mutual fund assets. The decrease primarily reflects lower clearance volumes.
•
Issuer services fees decreased 15% compared with the third quarter of 2016 and increased 20% (unannualized) compared with the second quarter of 2017. The decrease primarily reflects fewer corporate actions, lost business and lower fees due to a reduction in shares outstanding in certain depositary receipts programs, partially offset by higher Corporate Trust revenue. The increase


BNY Mellon 7

compared with the second quarter of 2017 primarily reflects seasonality in Depositary Receipts revenue and higher Corporate Trust revenue.
•
Treasury services fees increased 3% compared with the third quarter of 2016 and 1% (unannualized) compared with the second quarter of 2017. Both increases primarily reflect higher payment volumes, partially offset by higher compensating balance credits provided to clients, which reduces fee revenue and increases net interest revenue.

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

Investment management and performance fees

Investment management and performance fees increased 5% compared with the third quarter of 2016 and 3% (unannualized) compared with the second quarter of 2017, primarily reflecting higher equity market values and money market fees. The increase compared with the third quarter of 2016 also reflects higher performance fees. The increase compared with the second quarter of 2017 also reflects the favorable impact of a weaker U.S. dollar. Changes in currency rates had an insignificant impact on the growth rate of investment management and performance fees compared with the third quarter of 2016. Performance fees were $15 million in the third quarter of 2017, $8 million in the third quarter of 2016 and $17 million in the second quarter of 2017.

Total AUM for the Investment Management business increased 6% compared with Sept. 30, 2016 and 3% compared with June 30, 2017. The increase compared with Sept. 30, 2016 primarily reflects higher market values, net inflows and the favorable impact of a weaker U.S. dollar (principally versus the British pound). The increase compared with June 30, 2017 primarily reflects the favorable impact of a weaker U.S. dollar (principally versus the British pound), higher market values and net inflows. Net long-term inflows of fixed income and multi-asset and alternative investments were offset by outflows of index, equity and liability-driven investments in the third quarter of 2017. Net short-term inflows of $10 billion in the third quarter of 2017 were a result of increased distribution through our liquidity portals.

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

Foreign exchange and other trading revenue

Foreign exchange and other trading revenue
 
 
(in millions)
3Q17

2Q17

3Q16

YTD17

YTD16

Foreign exchange
$
158

$
151

$
175

$
463

$
512

Other trading revenue
15

14

8

39

28

Total foreign exchange and other trading revenue
$
173

$
165

$
183

$
502

$
540



Foreign exchange and other trading revenue decreased 5% compared with the third quarter of 2016 and increased 5% (unannualized) compared with the second quarter of 2017.

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 10% compared with the third quarter of 2016, primarily reflecting lower volatility and lower Depositary Receipt-related foreign exchange activity, partially offset by higher volumes. Foreign exchange revenue increased 5% (unannualized) compared with the second quarter of 2017 reflecting higher 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.

Our custody clients may enter into foreign exchange transactions in a number of ways, including through our standing instruction programs. While the shift of custody clients from our standing instruction programs to other trading options has abated, our foreign exchange revenue continues to be impacted by changes in volume and volatility. For the quarter ended Sept. 30, 2017, our total revenue for all types of foreign exchange trading transactions was $158 million, or 4% of our total revenue, and approximately 28% of our foreign exchange revenue was generated by transactions in our standing instruction programs.



8 BNY Mellon

Financing-related fees

Financing-related fees, which are primarily reported in the Investment Services business and the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees decreased compared with the third quarter of 2016 primarily reflecting lower syndication fees. Financing-related fees increased compared with the second quarter of 2017 primarily reflecting higher underwriting fees.

Distribution and servicing fees

Distribution and servicing fees decreased compared with the third quarter of 2016 primarily reflecting fees paid to introducing brokers, partially offset by higher money market fees.

Investment and other income

Investment and other income
 
 
 
(in millions)
3Q17

2Q17

3Q16

YTD17

YTD16

Corporate/bank-owned life insurance
$
37

$
43

$
34

$
110

$
96

Lease-related gains
—

51

—

52

44

Expense reimbursements from joint venture
18

17

18

49

52

Equity investment income (loss)
—

7

(1
)
33

(8
)
Seed capital gains (a)
6

10

16

25

38

Asset-related gains (losses)
1

(5
)
8

(1
)
9

Other income (loss)
1

(1
)
17

(6
)
40

Total investment and other income
$
63

$
122

$
92

$
262

$
271

(a)
Excludes the gains (losses) on seed capital investments in consolidated investment management funds which are reflected in operations of consolidated investment management funds, net of noncontrolling interests. The gains on seed capital investments in consolidated investment management funds were $7 million in the third quarter of 2017, $7 million in the second quarter of 2017, $8 million in the third quarter of 2016, $29 million in the first nine months of 2017 and $15 million in the first nine months of 2016.


 
Investment and other income decreased compared with both the third quarter of 2016 and second quarter of 2017. The decrease compared with the third quarter of 2016 primarily reflects lower other income driven by increased pre-tax losses on our investments in renewable energy and lower seed capital gains. The pre-tax losses on the renewable energy investments are offset by corresponding tax benefits and credits recorded as a reduction to the provision for income taxes. The decrease compared with the second quarter of 2017 primarily reflects lease-related gains recorded in the second quarter of 2017 and lower income from corporate/bank-owned life insurance.

Year-to-date 2017 compared with year-to-date 2016

Fee and other revenue increased 2% compared with the first nine months of 2016, primarily reflecting higher investment management and performance fees, clearing services fees and asset servicing fees, partially offset by lower foreign exchange and other trading revenue, net securities gains and issuer services fees. The 5% increase in investment management and performance fees primarily reflects higher market values, money market fees and performance fees, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound). The 10% increase in clearing services fees primarily reflects higher money market fees and growth in long-term mutual fund assets. The 2% increase in asset servicing fees primarily reflects net new business, including growth in collateral management and higher equity market values, partially offset by the unfavorable impact of a stronger U.S. dollar and the impact of downsizing the retail UK transfer agency business. The 7% decrease in foreign exchange and other trading revenue primarily reflects lower volatility and lower Depositary Receipts-related foreign exchange activity. The 4% decrease in issuer services fees primarily reflects lower Depositary Receipts revenue.



BNY Mellon 9

Net interest revenue 

Net interest revenue
 
 
 
 
 
 
 
 
YTD17

 
 
 
 
3Q17 vs.
 
 
 
vs.
(dollars in millions)
3Q17

2Q17

3Q16

2Q17

3Q16

 
YTD17

YTD16

YTD16

Net interest revenue
$
839

$
826

$
774

2
%
8
 %
 
$
2,457

$
2,307

7
 %
Tax equivalent adjustment
12

12

12

N/M
N/M
 
36

39

N/M
Net interest revenue (FTE) – Non-GAAP (a)
$
851

$
838

$
786

2
%
8
 %
 
$
2,493

$
2,346

6
 %
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets
$
291,841

$
289,496

$
296,703

1
%
(2
)%
 
$
288,283

$
308,560

(7
)%
 
 
 
 
 
 
 
 
 
 
Net interest margin
1.15
%
1.14
%
1.05
%
1
 bps
10
 bps
 
1.14
%
1.00
%
14
 bps
Net interest margin (FTE) – Non-GAAP (a)
1.16
%
1.16
%
1.06
%
—

10
 bps
 
1.16
%
1.02
%
14
 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.
FTE - fully taxable equivalent.
N/M - Not meaningful.
bps - basis points.


Net interest revenue increased 8% compared with the third quarter of 2016 and 2% (unannualized) compared with the second quarter of 2017 primarily reflecting higher interest rates, partially offset by lower average deposits and loans. The sequential increase also reflects an additional interest-earning day during the quarter.

Net interest margin increased 10 basis points compared with the third quarter of 2016, primarily reflecting the factors listed above.

 
Average non-U.S. dollar deposits comprised approximately 30% of our average total deposits in the third quarter of 2017. Approximately 45% of the average non-U.S. dollar deposits in the third quarter of 2017 were euro-denominated.

Year-to-date 2017 compared with year-to-date 2016

Net interest revenue increased 7% compared with the first nine months of 2016, primarily driven by higher interest rates and lower premium amortization, partially offset by lower average deposits and interest-earning assets. The increase in the net interest margin was primarily driven by the factors listed above.



10 BNY Mellon

Average balances and interest rates
Quarter ended
 
Sept. 30, 2017
 
June 30, 2017
 
Sept. 30, 2016
(dollar amounts 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)
$
15,899

$
34

0.86
%
 
$
14,832

$
27

0.73
%
 
$
14,066

$
26

0.74
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
70,430

89

0.50

 
69,316

71

0.41

 
74,102

37

0.20

Federal funds sold and securities purchased under resale agreements
28,120

119

1.67

 
26,873

86

1.29

 
26,376

62

0.93

Margin loans
13,206

87

2.60

 
15,058

87

2.32

 
18,132

67

1.48

Non-margin loans:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
29,950

216

2.87

 
30,734

207

2.70

 
30,534

171

2.22

Foreign offices
12,788

67

2.09

 
13,001

65

1.99

 
12,912

47

1.45

Total non-margin loans
42,738

283

2.64

 
43,735

272

2.49

 
43,446

218

1.99

Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
25,349

106

1.67

 
25,928

106

1.64

 
25,279

94

1.49

U.S. Government agency obligations
61,710

309

2.00

 
59,533

290

1.95

 
56,464

240

1.70

State and political subdivisions – tax-exempt
3,226

25

3.06

 
3,298

26

3.09

 
3,598

27

2.98

Other securities
28,804

98

1.34

 
28,468

81

1.15

 
33,064

102

1.23

Trading securities
2,359

13

2.26

 
2,455

18

2.85

 
2,176

13

2.62

Total securities
121,448

551

1.81

 
119,682

521

1.74

 
120,581

476

1.58

Total interest-earning assets (a)
$
291,841

$
1,163

1.59
%
 
$
289,496

$
1,064

1.47
%
 
$
296,703

$
886

1.19
 %
Allowance for loan losses
(165
)
 
 
 
(164
)
 
 
 
(165
)
 
 
Cash and due from banks
4,961

 
 
 
4,972

 
 
 
4,189

 
 
Other assets
48,329

 
 
 
47,303

 
 
 
49,463

 
 
Assets of consolidated investment management funds
743

 
 
 
908

 
 
 
1,040

 
 
Total assets
$
345,709

 
 
 
$
342,515

 
 
 
$
351,230

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Money market rate accounts
$
7,509

$
1

0.06
%
 
$
7,379

$
1

0.04
%
 
$
7,346

$
1

0.06
 %
Savings
837

1

0.76

 
1,014

2

0.75

 
1,201

1

0.41

Demand deposits
5,932

5

0.27

 
5,659

2

0.14

 
2,681

3

0.36

Time deposits
29,934

24

0.32

 
34,757

15

0.18

 
45,186

7

0.07

Foreign offices
98,278

26

0.10

 
93,527

12

0.05

 
98,695

(18
)
(0.08
)
Total interest-bearing deposits
142,490

57

0.16

 
142,336

32

0.09

 
155,109

(6
)
(0.02
)
Federal funds purchased and securities sold under repurchase agreements
21,403

70

1.30

 
17,970

38

0.84

 
9,585

6

0.24

Trading liabilities
1,434

2

0.54

 
1,216

2

0.61

 
735

2

1.11

Other borrowed funds
2,197

7

1.38

 
1,193

4

1.24

 
874

1

0.76

Commercial paper
2,736

8

1.15

 
2,215

5

0.95

 
1,173

1

0.35

Payables to customers and broker-dealers
18,516

19

0.42

 
20,609

16

0.30

 
16,873

3

0.07

Long-term debt
28,138

149

2.07

 
27,398

129

1.87

 
23,930

93

1.54

Total interest-bearing liabilities
$
216,914

$
312

0.57
%
 
$
212,937

$
226

0.42
%
 
$
208,279

$
100

0.19
 %
Total noninterest-bearing deposits
70,168

 
 
 
73,886

 
 
 
81,619

 
 
Other liabilities
17,728

 
 
 
15,545

 
 
 
21,343

 
 
Liabilities and obligations of consolidated investment management funds
35

 
 
 
111

 
 
 
238

 
 
Total liabilities
304,845

 
 
 
302,479

 
 
 
311,479

 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
188

 
 
 
172

 
 
 
179

 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
40,322

 
 
 
39,404

 
 
 
39,051

 
 
Noncontrolling interests
354

 
 
 
460

 
 
 
521

 
 
Total permanent equity
40,676

 
 
 
39,864

 
 
 
39,572

 
 
Total liabilities, temporary equity and permanent equity
$
345,709

 
 
 
$
342,515

 
 
 
$
351,230

 
 
Net interest revenue (FTE) – Non-GAAP
 
$
851

 
 
 
$
838

 
 
 
$
786

 
Net interest margin (FTE) – Non-GAAP
 
 
1.16
%
 
 
 
1.16
%
 
 
 
1.06
 %
Less: Tax equivalent adjustment (b)
 
12

 
 
 
12

 
 
 
12

 
Net interest revenue – GAAP
 
$
839

 
 
 
$
826

 
 
 
$
774

 
Net interest margin – GAAP
 
 
1.15
%
 
 
 
1.14
%
 
 
 
1.05
 %
Note:
Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
Interest income and average yield are presented on an FTE basis (Non-GAAP).
(b)
Based on the applicable tax rate of 35%.



BNY Mellon 11

Average balances and interest rates
Year-to-date
 
Sept. 30, 2017
 
Sept. 30, 2016
(dollar amounts 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)
$
15,153

$
83

0.73
%
 
$
14,455

$
76

0.70
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
68,613

217

0.42

 
86,947

170

0.26

Federal funds sold and securities purchased under resale agreements
26,779

272

1.36

 
25,275

167

0.88

Margin loans
14,663

249

2.27

 
18,420

194

1.41

Non-margin loans:
 
 
 
 
 
 
 
Domestic offices
30,545

611

2.67

 
29,488

493

2.23

Foreign offices
13,126

189

1.93

 
13,112

144

1.47

Total non-margin loans
43,671

800

2.45

 
42,600

637

2.00

Securities:
 
 
 
 
 
 
 
U.S. Government obligations
25,835

316

1.64

 
24,778

278

1.50

U.S. Government agency obligations
59,384

870

1.95

 
56,161

727

1.73

State and political subdivisions – tax-exempt
3,298

77

3.09

 
3,784

83

2.92

Other securities
28,531

267

1.25

 
33,592

309

1.23

Trading securities
2,356

48

2.74

 
2,548

45

2.37

Total securities
119,404

1,578

1.76

 
120,863

1,442

1.59

Total interest-earning assets (a)
$
288,283

$
3,199

1.48
%
 
$
308,560

$
2,686

1.16
 %
Allowance for loan losses
(166
)
 
 
 
(162
)
 
 
Cash and due from banks
5,010

 
 
 
4,070

 
 
Other assets
47,461

 
 
 
49,624

 
 
Assets of consolidated investment management funds
922

 
 
 
1,198

 
 
Total assets
$
341,510

 
 
 
$
363,290

 
 
Liabilities
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
Money market rate accounts
$
7,466

$
3

0.05
%
 
$
7,337

$
3

0.06
 %
Savings
980

5

0.70

 
1,203

3

0.36

Demand deposits
5,656

8

0.18

 
1,782

5

0.40

Time deposits
33,354

50

0.20

 
44,832

19

0.06

Foreign offices
94,102

32

0.05

 
105,574

(9
)
(0.01
)
Total interest-bearing deposits
141,558

98

0.09

 
160,728

21

0.02

Federal funds purchased and securities sold under repurchase agreements
19,465

132

0.90

 
15,471

28

0.24

Trading liabilities
1,188

6

0.65

 
650

5

1.05

Other borrowed funds
1,409

13

1.26

 
827

5

0.90

Commercial paper
2,374

18

1.01

 
1,657

5

0.37

Payables to customers and broker-dealers
19,360

42

0.29

 
16,870

9

0.07

Long-term debt
27,148

397

1.93

 
22,779

267

1.55

Total interest-bearing liabilities
$
212,502

$
706

0.44
%
 
$
218,982

$
340

0.21
 %
Total noninterest-bearing deposits
72,524

 
 
 
82,861

 
 
Other liabilities
16,299

 
 
 
21,993

 
 
Liabilities and obligations of consolidated investment management funds
129

 
 
 
250

 
 
Total liabilities
301,454

 
 
 
324,086

 
 
Temporary equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests
174

 
 
 
183

 
 
Permanent equity
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
39,418

 
 
 
38,414

 
 
Noncontrolling interests
464

 
 
 
607

 
 
Total permanent equity
39,882

 
 
 
39,021

 
 
Total liabilities, temporary equity and permanent equity
$
341,510

 
 
 
$
363,290

 
 
Net interest revenue (FTE) – Non-GAAP
 
$
2,493

 
 
 
$
2,346

 
Net interest margin (FTE) – Non-GAAP
 
 
1.16
%
 
 
 
1.02
 %
Less: Tax equivalent adjustment (b)
 
36

 
 
 
39

 
Net interest revenue – GAAP
 
$
2,457

 
 
 
$
2,307

 
Net interest margin – GAAP
 
 
1.14
%
 
 
 
1.00
 %
Note:
Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
Interest income and average yield are presented on an FTE basis (Non-GAAP).
(b)
Based on the applicable tax rate of 35%.




12 BNY Mellon

Noninterest expense

Noninterest expense
 
 
 
 
 
 
 
 
YTD17

 
 
 
 
3Q17 vs.
 
 
 
vs.
(dollars in millions)
3Q17

2Q17

3Q16

2Q17

3Q16

 
YTD17

YTD16

YTD16

Staff
$
1,469

$
1,417

$
1,467

4
 %
—
 %
 
$
4,358

$
4,338

—
 %
Professional, legal and other purchased services
305

319

292

(4
)
4

 
936

860

9

Software
175

173

156

1

12

 
514

470

9

Net occupancy
141

139

143

1

(1
)
 
416

437

(5
)
Distribution and servicing
109

104

105

5

4

 
313

307

2

Sub-custodian
62

65

59

(5
)
5

 
191

188

2

Furniture and equipment
58

59

59

(2
)
(2
)
 
174

187

(7
)
Bank assessment charges (a)
51

59

61

(14
)
(16
)
 
167

166

1

Business development
49

63

52

(22
)
(6
)
 
163

174

(6
)
Other (a)
177

192

170

(8
)
4

 
536

546

(2
)
Amortization of intangible assets
52

53

61

(2
)
(15
)
 
157

177

(11
)
M&I, litigation and restructuring charges
6

12

18

N/M
N/M
 
26

42

N/M
Total noninterest expense – GAAP
$
2,654

$
2,655

$
2,643

—
 %
—
 %
 
$
7,951

$
7,892

1
 %
 
 
 
 
 
 
 
 
 
 
Staff expense as a percentage of total revenue
37
%
36
%
37
%
 
 
 
37
%
38
%
 
 
 
 
 
 
 
 
 
 
 
Full-time employees at period end
52,900

52,800

52,300

—
 %
1
 %
 
52,900

52,300

1
 %
 
 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
 
Adjusted total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges – Non-GAAP
$
2,596

$
2,590

$
2,564

—
 %
1
 %
 
$
7,768

$
7,673

1
 %
(a)
In the first quarter of 2017, we began disclosing bank assessment charges on a quarterly basis. The bank assessment charges were previously included in other expense. All prior periods were reclassified.
N/M - Not meaningful.


Total noninterest expense increased less than 1% compared with the third quarter of 2016 and decreased slightly compared with the second quarter of 2017. The increase primarily reflects higher software and professional, legal and other purchased services expenses, partially offset by lower litigation expense and bank assessment charges. The decrease primarily reflects lower other, professional, legal and other purchased services and business development expenses as well as lower bank assessment charges, partially offset by higher staff expense. Excluding amortization of intangible assets and M&I, litigation and restructuring charges, total noninterest expense, as adjusted (Non-GAAP), increased 1% compared with the third quarter of 2016 and less than 1% (unannualized) compared with the second quarter of 2017.

We continue to invest in our risk management, regulatory compliance and other control functions to improve our safety and soundness and in light of increased global regulatory requirements. As a result of the submission of our 2017 resolution plan, we began to experience a modest decrease in the expenses relating to these functions in the third quarter of 2017.
 
Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 55% of total noninterest expense in the third quarter of 2017, 56% in the third quarter of 2016 and 53% in the second quarter of 2017.

Staff expense increased slightly compared with the third quarter of 2016 as the annual employee merit increase was offset by lower severance. Staff expense increased 4% (unannualized) compared with the second quarter of 2017, primarily due to higher incentives expense reflecting stronger performance and the annual employee merit increase.

Non-staff expense

Non-staff expense includes certain expenses that vary with the levels of business activity and levels of expensed business investments, fixed infrastructure costs and expenses associated with corporate activities related to technology, compliance, legal, productivity initiatives and business development.



BNY Mellon 13

Non-staff expense totaled $1.2 billion, an increase of 1% compared with the third quarter of 2016 and a decrease of 4% (unannualized) compared with the second quarter of 2017. The increase primarily reflects higher software and professional, legal and other purchased services expenses, partially offset by lower litigation expense and bank assessment charges. The decrease primarily reflects lower other, professional, legal and other purchases services and business development expenses as well as lower bank assessment charges. The decrease in professional, legal and other purchased services was driven by lower consulting expense related to resolution planning.

Year-to-date 2017 compared with year-to-date 2016

Noninterest expense increased 1% compared with the first nine months of 2016, primarily reflecting higher consulting and software expenses, partially offset by lower net occupancy. The increase in consulting expense primarily reflects higher regulatory and compliance costs. Net occupancy expense decreased as we continue to benefit from the savings generated by the business improvement process.

Income taxes

BNY Mellon recorded an income tax provision of $348 million (25.4% effective tax rate) in the third quarter of 2017. The income tax provision was $324 million (24.6% effective tax rate) in the third quarter of 2016 and $332 million (25.4% effective tax rate) in the second quarter of 2017. For additional information, see Note 10 of the Notes to Consolidated Financial Statements.

We expect the effective tax rate to be approximately 25-26% in 2017 based on current income tax rates. Based on our expected revenue growth as well as the mix of earnings we project for next year, we expect our effective tax rate may rise approximately 100 basis points in 2018.

Any legislation affecting income tax rates could have an impact on our future effective tax rate, the significance of which would depend on the timing, nature and scope of any such legislation, as well as the level and composition of our earnings.

 
Review of businesses

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

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 types of revenue by business and how our businesses are presented and analyzed, see Note 18 of the Notes to Consolidated Financial Statements.

Business results are subject to reclassification when organizational changes are made or when improvements are made in the measurement principles.

The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, incentives 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


14 BNY Mellon

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.

The following table presents key market metrics at period end and on an average basis.

Key market metrics
 
 
 
 
 
 
 
 
 
 
YTD17

 
 
 
 
 
 
3Q17 vs.
 
 
 
vs.
 
3Q17

2Q17

1Q17

4Q16

3Q16

2Q17

3Q16

 
YTD17

YTD16

YTD16

Standard & Poor’s (“S&P”) 500 Index (a)
2519

2423

2363

2239

2168

4
  %
16
  %
 
2519

2168

16
  %
S&P 500 Index – daily average
2467

2398

2326

2185

2162

3

14

 
2397

2065

16

FTSE 100 Index (a)
7373

7313

7323

7143

6899

1

7

 
7373

6899

7

FTSE 100 Index – daily average
7380

7391

7274

6923

6765

—

9

 
7348

6326

16

MSCI EAFE (a)
1974

1883

1793

1684

1702

5

16

 
1974

1702

16

MSCI EAFE – daily average
1934

1856

1749

1660

1677

4

15

 
1847

1640

13

Barclays Capital Global Aggregate BondSM Index (a)(b)
480

471

459

451

486

2

(1
)
 
480

486

(1
)
NYSE and NASDAQ share volume (in billions)
179

199

186

189

186

(10
)
(4
)
 
565

608

(7
)
JPMorgan G7 Volatility Index – daily average (c)
8.17

7.98

10.10

10.24

10.19

2

(20
)
 
8.75

10.63

(18
)
Average interest on excess reserves paid by the Federal Reserve
1.25
%
1.04
%
0.79
%
0.55
%
0.50
%
21
  bps
75
  bps
 
1.03
%
0.50
%
53
  bps
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange rates vs. U.S. dollar:
 
 
 
 
 

 
 
 
 
 
British pound (a)
$
1.34

$
1.30

$
1.25

$
1.23

$
1.30

3
  %
3
  %
 
$
1.34

$
1.30

3
  %
British pound – average rate
1.31

1.28

1.24

1.24

1.31

2

—

 
1.28

1.39

(8
)
Euro (a)
1.18

1.14

1.07

1.05

1.12

4

5

 
1.18

1.12

5

Euro – average rate
1.17

1.10

1.07

1.08

1.12

6

4

 
1.13

1.12

1

(a)
Period end.
(b)
Unhedged in U.S. dollar terms.
(c)
The JPMorgan G7 Volatility Index is based on the implied volatility in 3-month currency options.
bps - basis points.


Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At Sept. 30, 2017, 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 $0.02 to $0.04.
 
See Note 18 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.



BNY Mellon 15

Investment Management business

 
 
 
 
 
 
 
 
 
 
 
YTD17

 
 
 
 
 
 
3Q17 vs.
 
 
 
vs.
(dollars in millions)
3Q17

2Q17

1Q17

4Q16

3Q16

2Q17

3Q16

 
YTD17

YTD16

YTD16

Revenue:
 
 
 
 
 
 
 
 
 
 
 
Investment management fees:
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
$
332

$
314

$
299

$
297

$
309

6
 %
7
 %
 
$
945

$
913

4
 %
Institutional clients
367

362

348

340

362

1

1

 
1,077

1,040

4

Wealth management
172

169

167

164

166

2

4

 
508

478

6

Investment management fees (a)
871

845

814

801

837

3

4

 
2,530

2,431

4

Performance fees
15

17

12

32

8

N/M

88

 
44

28

57

Investment management and performance fees
886

862

826

833

845

3

5

 
2,574

2,459

5

Distribution and servicing
51

53

52

48

49

(4
)
4

 
156

144

8

Other (a)
(19
)
(16
)
(1
)
(1
)
(18
)
N/M

N/M

 
(36
)
(59
)
N/M

Total fee and other revenue (a)
918

899

877

880

876

2

5

 
2,694

2,544

6

Net interest revenue
82

87

86

80

82

(6
)
—

 
255

247

3

Total revenue
1,000

986

963

960

958

1

4

 
2,949

2,791

6

Provision for credit losses
(2
)
—

3

6

—

N/M

N/M

 
1

—

N/M

Noninterest expense (ex. amortization of intangible assets)
687

683

668

672

680

1

1

 
2,038

2,024

1

Amortization of intangible assets
15

15

15

22

22

—

(32
)
 
45

60

(25
)
Total noninterest expense
702

698

683

694

702

1

—

 
2,083

2,084

—

Income before taxes
$
300

$
288

$
277

$
260

$
256

4
 %
17
 %
 
$
865

$
707

22
 %
Income before taxes (ex. amortization of intangible assets) – Non-GAAP
$
315

$
303

$
292

$
282

$
278

4
 %
13
 %
 
$
910

$
767

19
 %
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax operating margin
30
%
29
%
29
%
27
%
27
%
 
 
 
29
%
25
%
 
Adjusted pre-tax operating margin – Non-GAAP (b)
35
%
34
%
34
%
33
%
33
%
 
 
 
35
%
31
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average balances:
 
 
 
 
 
 
 
 
 
 
 
Average loans
$
16,724

$
16,560

$
16,153

$
15,673

$
15,308

1
 %
9
 %
 
$
16,481

$
14,795

11
 %
Average deposits
$
12,374

$
14,866

$
15,781

$
15,511

$
15,600

(17
)%
(21
)%
 
$
14,283

$
15,696

(9
)%
(a)
Total fee and other revenue includes the impact of the consolidated investment management funds, net of noncontrolling interests. See page 52 for a breakdown of the revenue line items in the Investment Management business impacted by the consolidated investment management funds. Additionally, other revenue includes asset servicing, treasury services, foreign exchange and other trading revenue and investment and other income.
(b)
Excludes amortization of intangible assets, provision for credit losses and distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for the reconciliation of this Non-GAAP measure.
N/M - Not meaningful.



16 BNY Mellon

AUM trends (a)
 
 
 
 
 
3Q17 vs.
(dollars in billions)
3Q17

2Q17

1Q17

4Q16

3Q16

2Q17

3Q16

AUM at period end, by product type:
 
 
 
 
 
 
 
Equity
$
158

$
163

$
158

$
153

$
156

(3
)%
1
%
Fixed income
206

198

191

186

194

4

6

Index
333

324

330

312

302

3

10

Liability-driven investments (b)
622

607

584

554

607

2

2

Multi-asset and alternative investments
207

192

188

181

189

8

10

Cash
298

287

276

262

267

4

12

Total AUM
$
1,824

$
1,771

$
1,727

$
1,648

$
1,715

3
 %
6
%
 
 
 
 
 
 
 
 
AUM at period end, by client type:
 
 
 
 
 
 
 
Institutional
$
1,285

$
1,265

$
1,243

$
1,182

$
1,234

2
 %
4
%
Mutual funds
447

418

397

381

396

7

13

Private client
92

88

87

85

85

5

8

Total AUM
$
1,824

$
1,771

$
1,727

$
1,648

$
1,715

3
 %
6
%
 
 
 
 
 
 
 
 
Changes in AUM:
 
 
 
 
 
 
 
Beginning balance of AUM
$
1,771

$
1,727

$
1,648

$
1,715

$
1,664

 
 
Net inflows (outflows):
 
 
 
 
 
 
 
Long-term strategies:
 
 
 
 
 
 
 
Equity
(2
)
(2
)
(4
)
(5
)
(6
)
 
 
Fixed income
4

2

2

(1
)
(1
)
 
 
Liability-driven investments (b)
(2
)
15

14

(7
)
4

 
 
Multi-asset and alternative investments
3

1

2

3

7

 
 
Total long-term active strategies inflows (outflows)
3

16

14

(10
)
4

 
 
Index
(3
)
(13
)
—

(1
)
(3
)
 
 
Total long-term strategies inflows (outflows)
—

3

14

(11
)
1

 
 
Short term strategies:
 
 
 
 
 
 
 
Cash
10

11

13

(3
)
(1
)
 
 
Total net inflows (outflows)
10

14

27

(14
)
—

 
 
Net market impact/other
17

1

41

(11
)
80

 
 
Net currency impact
26

29

11

(42
)
(29
)
 
 
Ending balance of AUM
$
1,824

$
1,771

$
1,727

$
1,648

$
1,715

3
 %
6
%
(a)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(b)
Includes currency overlay AUM.


Business description

Our Investment Management business consists of our affiliated investment management boutiques, Wealth Management business and global distribution companies. See pages 19 and 20 of our 2016 Annual Report for additional information on our Investment Management business.

Review of financial results

AUM increased 6% compared with Sept. 30, 2016 primarily reflecting higher market values, net inflows and the favorable impact of the weaker U.S. dollar (principally versus the British pound). The increase compared with June 30, 2017 primarily reflects the favorable impact of the weaker U.S. dollar (principally versus the British pound), higher market values and net inflows.

 
Net long-term inflows of fixed income and multi-asset and alternative investments were offset by outflows of index, equity and liability-driven investments in the third quarter of 2017. Net short-term inflows of $10 billion in the third quarter of 2017 were a result of increased distribution through our liquidity portals. Market and regulatory trends have driven investable assets toward investments in lower fee asset management products, which negatively impacted our investment management fees.

Total revenue increased 4% compared with the third quarter of 2016 and 1% (unannualized) compared with the second quarter of 2017. Both increases primarily reflect higher investment management and performance fees.

Revenue generated in the Investment Management business included 41% from non-U.S. sources in the


BNY Mellon 17

third quarter of 2017, compared with 40% in both the third quarter of 2016 and second quarter of 2017.

Investment management fees in the Investment Management business increased 4% compared with the third quarter of 2016 and 3% (unannualized) compared with the second quarter of 2017. Both increases primarily reflect higher equity market values and money market fees. The increase compared with the second quarter of 2017 also reflects the favorable impact of a weaker U.S. dollar.

Distribution and servicing fees increased compared with the third quarter of 2016 primarily reflecting higher money market fees.

Other revenue decreased compared with the third quarter of 2016 primarily reflecting higher payments to Investment Services related to higher money market fees.

Net interest revenue was unchanged compared with the third quarter of 2016 and decreased 6% (unannualized) compared with the second quarter of 2017. The decrease primarily reflects lower average deposits. Average loans increased 9% compared with the third quarter of 2016 and 1% compared with the second quarter of 2017. Average deposits decreased 21% compared with the third quarter of 2016 and 17% compared with the second quarter of 2017.

 
Noninterest expense, excluding amortization of intangible assets, increased 1% compared with the third quarter of 2016 and 1% (unannualized) compared with the second quarter of 2017. The increase compared with the third quarter of 2016 primarily reflects higher other and distribution and servicing expenses, partially offset by lower severance expense. The increase compared with the second quarter of 2017 primarily reflects higher distribution and servicing expense.

Year-to-date 2017 compared with year-to-date 2016

Income before taxes increased 22% compared with the first nine months of 2016, primarily reflecting revenue growth of 6%, partially offset by a 1% increase in noninterest expense, excluding amortization of intangible assets. Fee and other revenue increased 6% primarily reflecting higher investment management and performance fees. The increase in investment management and performance fees primarily reflects higher market values, money market fees and performance fees, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound). Net interest revenue increased 3% primarily due to higher interest rates and average loans, partially offset by lower average deposits. Noninterest expense, excluding amortization of intangible assets, increased 1% primarily reflecting higher incentives expense, driven by stronger performance, partially offset by the favorable impact of a stronger U.S. dollar (principally versus the British pound).



18 BNY Mellon

Investment Services business

 
 
 
 
 
 
 
 
 
 
 
YTD17
(dollar amounts in millions, unless otherwise noted)
 
 
 
 
 
3Q17 vs.
 
 
 
vs.
3Q17

2Q17

1Q17

4Q16

3Q16

2Q17

3Q16

 
YTD17

YTD16

YTD16

Revenue:
 
 
 
 
 
 
 
 
 
 
 
Investment services fees:
 
 
 
 
 
 
 
 
 
 
 
Asset servicing
$
1,081

$
1,061

$
1,038

$
1,043

$
1,039

2
 %
4
 %
 
$
3,180

$
3,098

3
 %
Clearing services
381

393

375

354

347

(3
)
10

 
1,149

1,045

10

Issuer services
288

241

250

211

336

20

(14
)
 
779

813

(4
)
Treasury services
141

139

139

139

136

1

4

 
419

402

4

Total investment services fees
1,891

1,834

1,802

1,747

1,858

3

2

 
5,527

5,358

3

Foreign exchange and other trading revenue
154

145

153

157

177

6

(13
)
 
452

506

(11
)
Other (a)
142

136

129

128

148

4

(4
)
 
407

403

1

Total fee and other revenue
2,187

2,115

2,084

2,032

2,183

3

—

 
6,386

6,267

2

Net interest revenue
777

761

707

713

715

2

9

 
2,245

2,084

8

Total revenue
2,964

2,876

2,791

2,745

2,898

3

2

 
8,631

8,351

3

Provision for credit losses
(2
)
(3
)
—

—

1

N/M
N/M
 
(5
)
8

N/M
Noninterest expense (ex. amortization of intangible assets)
1,837

1,889

1,812

1,786

1,812

(3
)
1

 
5,538

5,401

3

Amortization of intangible assets
37

38

37

38

39

(3
)
(5
)
 
112

117

(4
)
Total noninterest expense
1,874

1,927

1,849

1,824

1,851

(3
)
1

 
5,650

5,518

2

Income before taxes
$
1,092

$
952

$
942

$
921

$
1,046

15
 %
4
 %
 
$
2,986

$
2,825

6
 %
Income before taxes (ex. amortization of intangible assets) – Non-GAAP
$
1,129

$
990

$
979

$
959

$
1,085

14
 %
4
 %
 
$
3,098

$
2,942

5
 %
 
 
 
 
 
 
 
 
 
 
 

Pre-tax operating margin
37
%
33
%
34
%
34
%
36
%
 
 
 
35
%
34
%


Adjusted pre-tax operating margin (ex. provision for credit losses and amortization of intangible assets) – Non-GAAP
38
%
34
%
35
%
35
%
37
%
 
 
 
36
%
35
%


 
 
 
 
 
 
 
 
 
 
 

Investment services fees as a percentage of noninterest expense (ex. amortization of intangible assets)
103
%
97
%
99
%
98
%
103
%
 
 
 
100
%
99
%


 
 
 
 
 
 
 
 
 
 
 


Securities lending revenue
$
41

$
42

$
40

$
44

$
42

(2
)%
(2
)%
 
$
123

$
126

(2
)%
 
 
 
 
 
 
 
 
 
 
 

Metrics:
 
 
 
 
 
 
 
 
 
 

Average loans
$
38,038

$
40,931

$
42,818

$
45,832

$
44,329

(7
)%
(14
)%
 
$
40,578

$
44,373

(9
)%
Average deposits
$
198,299

$
200,417

$
197,690

$
213,531

$
220,316

(1
)%
(10
)%
 
$
198,796

$
219,344

(9
)%
 
 
 
 
 
 
 
 
 
 
 


AUC/A at period end (in trillions) (b)
$
32.2

$
31.1

$
30.6

$
29.9

$
30.5

4
 %
6
 %
 
$
32.2

$
30.5

6
 %
Market value of securities on loan at period end (in billions) (c)
$
382

$
336

$
314

$
296

$
288

14
 %
33
 %
 
$
382

$
288

33
 %
 
 
 
 
 
 
 
 
 
 
 


Asset servicing:
 
 
 
 
 
 
 
 
 
 


Estimated new business wins
(AUC/A) (in billions)
$
166

$
152

$
109

$
141

$
150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Clearing services:
 
 
 
 
 
 
 
 
 
 
 
Average active clearing accounts (U.S. platform) (in thousands)
6,203

6,159

6,058

5,960

5,942

1
 %
4
 %
 
 
 
 
Average long-term mutual fund assets (U.S. platform)
$
500,998

$
480,532

$
460,977

$
438,460

$
443,112

4
 %
13
 %
 
 
 
 
Average investor margin loans (U.S. platform)
$
8,886

$
9,812

$
10,740

$
10,562

$
10,834

(9
)%
(18
)%
 
 
 
 
 
 
 
 
 
 




 
 
 
 
Depositary Receipts:
 
 
 
 
 




 
 
 
 
Number of sponsored programs
938

1,025

1,050

1,062

1,094

(8
)%
(14
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Broker-Dealer:
 
 
 
 
 
 
 
 
 
 
 
Average tri-party repo balances (in billions)
$
2,534

$
2,498

$
2,373

$
2,307

$
2,212

1
 %
15
 %
 
 
 
 
(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 $1.3 trillion at Sept. 30, 2017 and $1.2 trillion at June 30, 2017, March 31, 2017, Dec. 31, 2016 and Sept. 30, 2016.
(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 $68 billion at Sept. 30, 2017, $66 billion at June 30, 2017, $65 billion at March 31, 2017, $63 billion at Dec. 31, 2016 and $64 billion at Sept. 30, 2016.
N/M - Not meaningful.


BNY Mellon 19

Business description

BNY Mellon Investment Services provides business and technology solutions across the investments process to financial institutions, corporations, foundations and endowments, public funds and government agencies.

We are one of the leading global investment services providers with $32.2 trillion of AUC/A at Sept. 30, 2017.

•
We are the primary provider of U.S. government securities clearance and a provider of non-U.S. government securities clearance. We provide services to settle securities transactions in approximately 100 markets.
•
We are a leading provider of tri-party repo collateral services with approximately $2.5 trillion serviced globally and approximately $1.6 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 $3.3 trillion in 33 separate markets.
•
We serve as trustee and/or paying agent on more than 50,000 debt-related issuances globally.
•
As one of the largest providers of depositary receipts services in the world, we served as depositary for 938 sponsored American and global depositary receipts programs at Sept. 30, 2017, acting in partnership with leading companies from 59 countries.

We offer asset servicing, clearing services, issuer services and treasury services to our clients. BNY Mellon’s comprehensive suite of asset servicing solutions includes: custody, foreign exchange, fund services, securities finance, investment manager outsourcing, performance and risk analytics, alternative investment services, broker-dealer services, and collateral and liquidity services.

As one of the largest fund accounting providers and a trusted partner, we offer services to ensure the safekeeping of assets in capital markets globally. These services include financial reporting, tax reporting services, calculating and reporting net asset values (“NAV”), computing yields, maintaining brokerage account records, and providing
 
administrative support to clients so they may meet their Securities and Exchange Commission (“SEC”) and other compliance requirements.

Our alternative investment services and structured products business provides a full range of solutions for alternative investment managers, including prime custody, fund accounting, and client and regulatory reporting services. We also support exchange-traded funds and unit investment trusts, providing fund administration, custody, basket creation and dissemination, authorized participant interaction and order processing, among other services.

Securities finance delivers solutions on both an agency and principal basis. The principal finance program supports a diverse group of client segments, including hedge and liquid alternative funds and other institutional clients.

In liquidity services, our market leading portal enables cash investments for institutional clients via money market funds, deposit products, and direct investments in money market securities, and includes fund research and analytics.

Our broker-dealer services business clears and settles equity and fixed-income transactions globally and serves as custodian for tri-party repo collateral worldwide.

Clearing services, primarily Pershing LLC, an indirect subsidiary of BNY Mellon (“Pershing”) and its affiliates, provides business and technology solutions to financial organizations globally, delivering dependable operational support, robust trading services, flexible technology, an expansive array of investment and retirement solutions, practice management support and service excellence.

Our collateral services include collateral management, administration and segregation. We offer innovative solutions, like new collateral types and transaction structures, automation and efficiency, access to global markets, and industry expertise, to help financial institutions and institutional investors mine opportunities from liquidity, financing, risk and balance sheet challenges.

Our corporate trust business delivers a full range of issuer and related investor services, including trustee, paying agency, fiduciary, escrow and other financial services.


20 BNY Mellon

Our treasury services include customizable solutions and innovative technology that deliver high-quality cash management, payment and trade support for corporate and institutional global treasury needs. We are a leading provider to the debt capital markets, providing customized and market-driven solutions to investors, bondholders and lenders.

We also provide credit facilities and solutions to support our clients globally.

Role of BNY Mellon, as a trustee, for mortgage-backed securitizations

BNY Mellon acts as trustee and document custodian for certain mortgage-backed security (“MBS”) securitization trusts. The role of trustee for MBS securitizations is limited; our primary role as trustee is to calculate and distribute monthly bond payments to bondholders. As a document custodian, we hold the mortgage, note, and related documents provided to us by the loan originator or seller and provide periodic reporting to these parties. BNY Mellon, either as document custodian or trustee, does not receive mortgage underwriting files (the files that contain information related to the creditworthiness of the borrower). As trustee or custodian, we have no responsibility or liability for the quality of the portfolio; we are liable only for performance of our limited duties as described above and in the trust documents. BNY Mellon is indemnified by the servicers or directly from trust assets under the governing agreements. BNY Mellon may appear as the named plaintiff in legal actions brought by servicers in foreclosure and other related proceedings because the trustee is the nominee owner of the mortgage loans within the trusts.

BNY Mellon also has been named as a defendant in legal actions brought by MBS investors alleging that the trustee has expansive duties under the governing agreements, including to investigate and pursue claims against other parties to the MBS transaction. For additional information on our legal proceedings related to this matter, see Note 17 of the Notes to Consolidated Financial Statements.

Review of financial results

AUC/A increased 6% compared with Sept. 30, 2016 to a record $32.2 trillion, primarily reflecting higher market values, the favorable impact of a weaker U.S. dollar and net new business. AUC/A consisted of
 
37% equity securities and 63% fixed income securities at Sept. 30, 2017, compared with 34% equity securities and 66% fixed income securities at Sept. 30, 2016.

Investment services fees increased 2% compared with the third quarter of 2016 and 3% (unannualized) compared with the second quarter of 2017, reflecting the following factors:

•
Asset servicing fees (custody, fund services, broker-dealer services, securities finance, collateral and liquidity services) increased 4% compared with the third quarter of 2016 and 2% (unannualized) compared with the second quarter of 2017. The increase compared with the third quarter of 2016 primarily reflects higher equity market values and net new business, including growth in collateral management, partially offset by the impact of downsizing the retail UK transfer agency business. The increase compared with the second quarter of 2017 was primarily driven by the favorable impact of a weaker U.S. dollar and higher equity market values.
•
Clearing services fees increased 10% compared with the third quarter of 2016 primarily driven by higher money market fees and growth in long-term mutual fund assets. Clearing services fees decreased 3% (unannualized) compared with the second quarter of 2017 primarily reflecting lower clearance volumes.
•
Issuer services fees (Depositary Receipts and Corporate Trust) decreased 14% compared with the third quarter of 2016 and increased 20% (unannualized) compared with the second quarter of 2017. The decrease compared with the third quarter of 2016 primarily reflects fewer corporate actions, lost business and lower fees due to a reduction in shares outstanding in certain depositary receipts programs, partially offset by higher Corporate Trust revenue. The increase compared with the second quarter of 2017 primarily reflects seasonality in Depositary Receipts revenue and higher Corporate Trust revenue.
•
Treasury services fees (global payments, trade finance and cash management) increased 4% compared with the third quarter of 2016 and 1% (unannualized) compared with the second quarter of 2017 primarily reflecting higher payment volumes, partially offset by higher compensating


BNY Mellon 21

balance credits provided to clients, which reduces fee revenue and increases 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.

Foreign exchange and other trading revenue decreased 13% compared with the third quarter of 2016 primarily reflecting lower volatility and lower Depositary Receipt-related foreign exchange activity, partially offset by higher volumes. Foreign exchange and other trading revenue increased 6% (unannualized) compared with the second quarter of 2017 primarily reflecting higher volumes.

Other revenue decreased 4% compared with the third quarter of 2016 and increased 4% (unannualized) compared with the second quarter of 2017. The third quarter of 2016 results include termination fees related to the clearing services business. Both comparisons reflect higher payments from Investment Management related to higher money market fees.

Net interest revenue increased 9% compared with the third quarter of 2016 primarily reflecting the impact of the higher interest rates, partially offset by lower average deposits and loans. Net interest revenue increased 2% (unannualized) compared with the second quarter of 2017 primarily reflecting higher interest rates.

Noninterest expense, excluding amortization of intangible assets, increased 1% compared with the third quarter of 2016 and decreased 3% (unannualized) compared with the second quarter of 2017. The increase primarily reflects additional technology related-costs, partially offset by lower staff expense. The decrease primarily reflects lower consulting expense, volume-related clearing and sub-custodian expenses and lower business development expense.

 
Year-to-date 2017 compared with year-to-date 2016

Income before taxes increased 6% compared with the first nine months of 2016, primarily driven by revenue growth of 3%, partially offset by a 3% increase in noninterest expense, excluding amortization of intangible assets. Fee and other revenue increased 2% primarily reflecting higher clearing services and asset servicing fees, partially offset by lower foreign exchange and other trading revenue. The increase in clearing services fees primarily reflects higher money market fees and growth in long-term mutual fund assets. The increase in asset servicing fees primarily reflects net new business, including growth in collateral management and higher equity market values, partially offset by the impact of downsizing the retail UK transfer agency business and the unfavorable impact of a stronger U.S. dollar. The decrease in foreign exchange and other trading revenue primarily reflects lower volatility and lower Depositary Receipt-related foreign exchange activity. Net interest revenue increased 8% primarily due to higher interest rates, partially offset by lower average deposits. Noninterest expense, excluding amortization of intangible assets, increased 3% primarily reflecting higher expenses from regulatory and compliance costs and additional technology investments, partially offset by lower litigation expense and the favorable impact of a stronger U.S. dollar.


22 BNY Mellon

Other segment

 
 
 
 
 
 
 
 
(in millions)
3Q17

2Q17

1Q17

4Q16

3Q16

YTD17

YTD16

Revenue:
 
 
 
 
 
 
 
Fee and other revenue
$
69

$
113

$
72

$
42

$
100

$
254

$
324

Net interest (expense) revenue
(20
)
(22
)
(1
)
38

(23
)
(43
)
(24
)
Total revenue
49

91

71

80

77

211

300

Provision for credit losses
(2
)
(4
)
(8
)
1

(20
)
(14
)
(26
)
Noninterest expense (ex. M&I and restructuring charges)
77

28

106

108

88

211

282

M&I and restructuring charges
—

—

1

2

—

1

2

Total noninterest expense
77

28

107

110

88

212

284

(Loss) income before taxes
$
(26
)
$
67

$
(28
)
$
(31
)
$
9

$
13

$
42

(Loss) income before taxes (ex. M&I and restructuring charges) – Non-GAAP
$
(26
)
$
67

$
(27
)
$
(29
)
$
9

$
14

$
44

 
 
 
 
 
 
 
 
Average loans and leases
$
1,182

$
1,302

$
1,341

$
2,142

$
1,941

$
1,275

$
1,853



See page 26 of our 2016 Annual Report for additional information on the Other segment.

Review of financial results

Total fee and other revenue decreased $31 million compared with the third quarter of 2016 and $44 million compared with the second quarter of 2017. The decrease compared with the third quarter of 2016 primarily reflects lower other income, driven by increased losses on our investments in renewable energy, and lower asset-related and net securities gains. The decrease compared with the second quarter of 2017 primarily reflects lease-related gains recorded in the second quarter of 2017 and lower income from corporate/bank-owned life insurance, partially offset by higher net securities gains.

Net interest expense decreased $3 million compared with the third quarter of 2016 and $2 million compared with the second quarter of 2017. Both decreases primarily reflect higher interest rates.

Noninterest expense, excluding M&I and restructuring charges, decreased $11 million compared with the third quarter of 2016 and increased $49 million compared with the second quarter of 2017. The decrease was primarily driven by lower litigation and other expenses. The increase was primarily driven by higher staff expense resulting from a methodology change in the second quarter of 2017 for allocating employee benefits expense to the business segments with no impact to consolidated results. The increase was partially offset by lower other and professional, legal and other purchased services expenses.
 
Year-to-date 2017 compared with year-to-date 2016

Income before taxes decreased $29 million compared with the first nine months of 2016. Fee and other revenue decreased $70 million primarily reflecting lower net securities gains and lower other income driven by increased pre-tax losses on our investments in renewable energy. Net interest expense increased $19 million reflecting the impact of higher crediting rates to the businesses. Noninterest expense, excluding M&I and restructuring charges, decreased $71 million primarily reflecting lower staff, other and litigation expenses.

Critical accounting estimates

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 2016 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
2016 Annual Report, pages 29-31.
Fair value of financial instruments and derivatives
2016 Annual Report, pages 31-32.
OTTI
2016 Annual Report, page 33.
Goodwill and other intangibles
Second quarter 2017 Form 10-Q, page 24.
Pension accounting
2016 Annual Report, pages 34-36.


BNY Mellon 23

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 ensure that the overall liquidity risk, including intra-day 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, 2017, total assets were $354 billion compared with $333 billion at Dec. 31, 2016. The increase in total assets was primarily driven by higher interest-bearing deposits with the Federal Reserve and other central banks, partially offset by lower loans. Deposits totaled $231 billion at Sept. 30, 2017 and $221 billion at Dec. 31, 2016, and were driven by higher interest-bearing deposits in non-U.S. offices. At Sept. 30, 2017, total interest-bearing deposits were 50% of total interest-earning assets, compared with 51% at Dec. 31, 2016.

At Sept. 30, 2017, 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 $82 billion of cash (including $76 billion of overnight deposits with the Federal Reserve and other central banks) for a total of $125 billion of available funds. This compares with available funds of $104 billion at Dec. 31, 2016. Total available funds as a percentage of total assets were 35% at Sept. 30, 2017 compared with 31% at Dec. 31, 2016. For additional information on our liquid funds and available funds, see “Liquidity and dividends.”

Investment securities were $120.0 billion, or 34% of total assets, at Sept. 30, 2017, compared with $114.7 billion, or 34% of total assets, at Dec. 31, 2016. The increase in investment securities primarily reflects additional investments in commercial mortgage-
 
backed securities (“MBS”) and residential mortgage-backed securities (“RMBS”), partially offset by fewer investments in consumer asset-backed securities (“ABS”). For additional information on our investment securities portfolio, see “Investment securities” and Note 4 of the Notes to Consolidated Financial Statements.

Loans were $59.1 billion, or 17% of total assets, at Sept. 30, 2017, compared with $64.5 billion, or 19% of total assets, at Dec. 31, 2016. The decrease in loans was primarily driven by lower margin loans and loans to financial institutions. For additional information on our loan portfolio, see “Loans” and Note 5 of the Notes to Consolidated Financial Statements.

Long-term debt totaled $28.4 billion at Sept. 30, 2017 and $24.5 billion at Dec. 31, 2016. The increase reflects issuances of $4.75 billion, partially offset by the maturity of $500 million and the redemption of trust preferred securities. For additional information on long-term debt, see “Liquidity and dividends.”

The Bank of New York Mellon Corporation total shareholders’ equity increased to $40.5 billion from $38.8 billion at Dec. 31, 2016. 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. We continue to monitor our exposure to these and other countries as part of our risk management process. See “Risk management” in our 2016 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

Events in recent years have resulted in increased focus on Italy and Spain. We had net exposure of $1.3 billion to Italy and $2.0 billion to Spain at Sept. 30, 2017. We had net exposure of $1.2 billion to Italy and $2.0 billion to Spain at Dec. 31, 2016. At both Sept. 30, 2017 and Dec. 31, 2016, exposure to Italy and Spain primarily consisted of investment grade


24 BNY Mellon

sovereign debt. Investment securities exposure totaled $1.2 billion in Italy and $1.7 billion in Spain at Sept. 30, 2017 and $1.1 billion in Italy and $1.8 billion in Spain at Dec. 31, 2016.

Brazil

Current conditions in Brazil have resulted in increased focus on its economic and political stability. We have operations in Brazil providing investment services and investment management services. In addition, at Sept. 30, 2017 and Dec. 31, 2016, we had total net exposure to Brazil of $1.4 billion and $1.3 billion, respectively. This included $1.2 billion and $1.3 billion, respectively, in loans, which are primarily short-term trade finance loans extended to large financial institutions. At Sept. 30, 2017 and Dec. 31, 2016, we held $140 million and $73 million, respectively, of noninvestment grade sovereign debt.

 
Turkey

Events in recent years have resulted in increased focus on exposure to Turkey. We mainly provide treasury and issuer services, as well as foreign exchange products primarily to the top-10 largest financial institutions in the country. As of Sept. 30, 2017 and Dec. 31, 2016, our exposure totaled $780 million and $713 million, respectively, consisting primarily of syndicated credit facilities and trade finance loans.

Investment securities

In the discussion of our investment 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 investment securities portfolio could indicate increased credit risk for us and could be accompanied by a reduction in the fair value of our investment securities portfolio.

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

Investment securities
portfolio


(dollars in millions)
June 30, 2017

 
3Q17
change in
unrealized
gain (loss)

Sept. 30, 2017
Fair value
as a % of amortized
cost (a)

Unrealized
gain (loss)

 
Ratings (b)
 
 
 
 
BB+
and
lower
 
 Fair
value

 
Amortized
cost

Fair
value

 
 
AAA/
AA-
A+/
A-
BBB+/
BBB-
Not
rated
Agency RMBS
$
49,544

 
$
81

$
50,121

$
49,917

 
100
%
$
(204
)
 
100
%
—
%
—
%
—
%
—
%
U.S. Treasury
25,325

 
(5
)
25,256

25,159

 
100

(97
)
 
100

—

—

—

—

Sovereign debt/sovereign guaranteed (c)
14,025

 
6

13,951

14,102

 
101

151

 
72

6

21

1

—

Non-agency RMBS (d)
1,239

 
9

885

1,185

 
84

300

 
—

1

3

87

9

Non-agency RMBS
627

 
9

555

594

 
97

39

 
7

4

17

71

1

European floating rate
notes (e)
523

 
(1
)
393

387

 
98

(6
)
 
63

37

—

—

—

Commercial MBS
10,574

 
5

11,051

11,033

 
100

(18
)
 
99

1

—

—

—

State and political subdivisions
3,299

 
1

3,109

3,141

 
101

32

 
80

17

—

—

3

Foreign covered bonds (f)
2,471

 
1

2,612

2,626

 
101

14

 
100

—

—

—

—

Corporate bonds
1,318

 
4

1,262

1,275

 
101

13

 
17

69

14

—

—

CLOs
2,642

 
1

2,542

2,550

 
100

8

 
99

—

—

1

—

U.S. government agencies
2,210

 
2

2,480

2,496

 
101

16

 
100

—

—

—

—

Consumer ABS
1,330

 
1

1,152

1,157

 
100

5

 
89

4

5

2

—

Other (g)
3,758

 
(8
)
4,118

4,122

 
100

4

 
81

17

—

—

2

Total investment securities
$
118,885

(h)
$
106

$
119,487

$
119,744

(h)
100
%
$
257

(h)(i)
93
%
3
%
3
%
1
%
—
%
(a)
Amortized cost before impairments.
(b)
Represents ratings by S&P, or the equivalent.
(c)
Primarily consists of exposure to UK, France, Germany, Spain, Italy and the Netherlands.
(d)
These RMBS were included in the former Grantor Trust and were marked-to-market in 2009. We believe these RMBS would receive higher credit ratings if these ratings incorporated, as additional credit enhancements, the difference between the written-down amortized cost and the current face amount of each of these securities.
(e)
Includes RMBS and commercial MBS. Primarily consists of exposure to UK and the Netherlands.
(f)
Primarily consists of exposure to Canada, Australia, the Netherlands, Norway and UK.
(g)
Includes commercial paper with a fair value of $700 million and $700 million and money market funds with a fair value of $896 million and $939 million at June 30, 2017 and Sept. 30, 2017, respectively.
(h)
Includes net unrealized losses on derivatives hedging securities available-for-sale of $251 million at June 30, 2017 and $238 million at Sept. 30, 2017.
(i)
Unrealized gains of $324 million at Sept. 30, 2017 related to available-for-sale securities, net of hedges.


BNY Mellon 25

The fair value of our investment securities portfolio was $119.7 billion at Sept. 30, 2017, compared with $114.3 billion at Dec. 31, 2016. The higher level of securities primarily reflects additional investments in commercial MBS and agency RMBS, partially offset by a decrease in consumer ABS.

At Sept. 30, 2017, the total investment securities portfolio had a net unrealized pre-tax gain of $257 million compared with a pre-tax loss of $221 million at Dec. 31, 2016, including the impact of related hedges. The net unrealized pre-tax gain was primarily driven by a decrease in long-term interest rates.
 
The unrealized gain, net of tax, on our available-for-sale investment securities portfolio included in accumulated other comprehensive income (“OCI”) was $226 million at Sept. 30, 2017, compared with $45 million at Dec. 31, 2016.

At Sept. 30, 2017, 93% of the securities in our portfolio were rated AAA/AA-, unchanged compared with Dec. 31, 2016.

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

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

Net premium amortization and discount accretion of investment securities (a)
 
 
 
 
 
(dollars in millions)
3Q17

2Q17

1Q17

4Q16

3Q16

Amortizable purchase premium (net of discount) relating to investment securities:
 
 
 
 
 
Balance at period end
$
2,053

$
2,111

$
2,058

$
2,188

$
2,267

Estimated average life remaining at period end (in years)
5.0

5.0

4.9

4.9

4.5

Amortization
$
140

$
134

$
138

$
146

$
163

Accretable discount related to the prior restructuring of the investment securities portfolio:
 
 
 
 
 
Balance at period end
$
302

$
279

$
299

$
315

$
331

Estimated average life remaining at period end (in years)
6.5

6.3

6.2

6.2

5.9

Accretion
$
24

$
25

$
25

$
25

$
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.


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

Net securities gains (losses)
 
 
 
(in millions)
3Q17

2Q17

3Q16

YTD17

YTD16

Agency RMBS
$
4

$
—

$
9

$
5

$
22

U.S. Treasury
1

(1
)
(1
)
—

4

Foreign covered bonds
—

—

—

—

10

Non-agency RMBS
(1
)
—

(1
)
(2
)
1

Other
15

1

17

26

28

Total net securities gains
$
19

$
—

$
24

$
29

$
65



On a quarterly basis, we perform our impairment analysis using several factors, including projected loss severities and default rates. In the third quarter of 2017, this analysis resulted in other-than-temporary credit losses of $1 million primarily in our non-agency RMBS portfolio. At Sept. 30, 2017, 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.

The following table shows the fair value of the European floating rate notes by geographical location at Sept. 30, 2017. The net unrealized loss on these securities was $6 million at Sept. 30, 2017, compared with $11 million at Dec. 31, 2016.

European floating rate notes at Sept. 30, 2017 (a)
(in millions)
RMBS

Other

Total fair
value

United Kingdom
$
169

$
58

$
227

Netherlands
160

—

160

Total fair value
$
329

$
58

$
387

(a)
Sixty-three percent of these securities are in the AAA to AA- ratings category.




26 BNY Mellon

See Note 14 of the Notes to Consolidated Financial Statements for details of securities by level in the fair value hierarchy.
 


Loans 

Total exposure – consolidated
Sept. 30, 2017
 
Dec. 31, 2016
(in billions)
Loans

Unfunded
commitments

Total
exposure

 
Loans

Unfunded
commitments

Total
exposure

Non-margin loans:
 
 
 
 
 
 
 
Financial institutions
$
11.9

$
32.7

$
44.6

 
$
14.7

$
33.7

$
48.4

Commercial
3.0

16.6

19.6

 
2.6

17.5

20.1

Subtotal institutional
14.9

49.3

64.2

 
17.3

51.2

68.5

Wealth management loans and mortgages
16.3

1.1

17.4

 
15.6

1.3

16.9

Commercial real estate
4.9

3.5

8.4

 
4.7

3.2

7.9

Lease financings
1.3

—

1.3

 
1.7

—

1.7

Other residential mortgages
0.7

—

0.7

 
0.9

—

0.9

Overdrafts
5.8

—

5.8

 
5.5

—

5.5

Other
1.3

—

1.3

 
1.2

—

1.2

Subtotal non-margin loans
45.2

53.9

99.1

 
46.9

55.7

102.6

Margin loans
13.9

—

13.9

 
17.6

0.1

17.7

Total
$
59.1

$
53.9

$
113.0

 
$
64.5

$
55.8

$
120.3

 


At Sept. 30, 2017, total exposures of $113.0 billion decreased 6% compared with Dec. 31, 2016, primarily reflecting lower margin loans and exposure to financial institutions, partially offset by higher wealth management loans and mortgages.
 
Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios comprised 57% of our total exposure at both Sept. 30, 2017 and Dec. 31, 2016. Additionally, most of our overdrafts relate to financial institutions.

Financial institutions

The financial institutions portfolio is shown below.

Financial institutions
portfolio exposure
(dollar amounts in billions)
Sept. 30, 2017
 
Dec. 31, 2016
Loans

Unfunded
commitments

Total
exposure

% Inv.
grade

% due
<1 yr.

 
Loans

Unfunded
commitments

Total
exposure

Securities industry
$
2.9

$
19.0

$
21.9

99
%
99
%
 
$
3.8

$
19.2

$
23.0

Asset managers
1.6

6.5

8.1

97

87

 
1.5

6.2

7.7

Banks
6.3

1.4

7.7

68

94

 
7.9

2.0

9.9

Insurance
0.1

3.4

3.5

99

17

 
0.1

3.8

3.9

Government
—

1.0

1.0

91

46

 
0.1

0.9

1.0

Other
1.0

1.4

2.4

98

45

 
1.3

1.6

2.9

Total
$
11.9

$
32.7

$
44.6

93
%
86
%
 
$
14.7

$
33.7

$
48.4

 


The financial institutions portfolio exposure was $44.6 billion at Sept. 30, 2017, compared with $48.4 billion at Dec. 31, 2016. The decrease primarily reflects lower exposure in the banks and securities industry portfolios.

Financial institution exposures are high-quality, with 93% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification at Sept. 30, 2017. 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, 86% expire within one year and 61% 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.



BNY Mellon 27

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, 2017, the secured intraday credit provided to dealers in connection with their tri-party repo activity totaled $18.5 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 94% due in less than one year. The investment grade percentage of our bank exposure was 68% at Sept. 30, 2017, compared with 69% at Dec. 31, 2016.

The asset manager portfolio exposure was high-quality with 97% of the exposures meeting our investment grade equivalent ratings criteria as of Sept. 30, 2017. These exposures are generally short-term liquidity facilities, with the vast majority to regulated mutual funds.

Commercial

The commercial portfolio is presented below.

Commercial portfolio exposure
Sept. 30, 2017
 
Dec. 31, 2016
(dollar amounts in billions)
Loans

Unfunded
commitments

Total
exposure

% Inv.
grade

% due
<1 yr.

 
Loans

Unfunded
commitments

Total
exposure

Manufacturing
$
1.4

$
6.3

$
7.7

96
%
22
%
 
$
1.1

$
6.7

$
7.8

Services and other
0.9

4.4

5.3

95

28

 
0.6

4.3

4.9

Energy and utilities
0.6

4.5

5.1

95

7

 
0.6

4.7

5.3

Media and telecom
0.1

1.4

1.5

95

15

 
0.3

1.8

2.1

Total
$
3.0

$
16.6

$
19.6

95
%
19
%
 
$
2.6

$
17.5

$
20.1

 


The commercial portfolio exposure decreased to $19.6 billion at Sept. 30, 2017, from $20.1 billion at Dec. 31, 2016, primarily reflecting lower exposure in the media and telecom portfolio.

Utilities-related exposure represents approximately 78% of the energy and utilities portfolio. The remaining exposure in the energy and utilities portfolio, which includes exposure to exploration and production companies, refining, pipelines and integrated companies, was 76% investment grade at both Sept. 30, 2017 and Dec. 31, 2016.

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, 2017

June 30, 2017

March 31, 2017

Dec. 31, 2016

Sept. 30, 2016

 
Financial institutions
93
%
93
%
93
%
92
%
93
%
Commercial
95
%
96
%
95
%
94
%
94
%


 
Our credit strategy is to focus on investment grade clients that are active users of our non-credit services. The execution of our strategy has resulted in 93% of our financial institutions portfolio and 95% of our commercial portfolio rated as investment grade at Sept. 30, 2017.

Wealth management loans and mortgages

Our wealth management exposure was $17.4 billion at Sept. 30, 2017, compared with $16.9 billion at Dec. 31, 2016. 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. In the wealth management portfolio, less than 1% of the mortgages were past due at Sept. 30, 2017.

At Sept. 30, 2017, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 24%; New York - 19%; Massachusetts - 11%; Florida - 8%; and other - 38%.


28 BNY Mellon

Commercial real estate

Our commercial real estate exposure totaled $8.4 billion at Sept. 30, 2017, compared with $7.9 billion at Dec. 31, 2016. 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, 2017, 59% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type, with 45% secured by residential buildings, 35% secured by office buildings, 12% secured by retail properties and 8% secured by other categories. Approximately 97% 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, 2017, our commercial real estate portfolio consists of the following concentrations: New York metro - 40%; REITs and real estate operating companies - 40%; and other - 20%.

Lease financings

The leasing portfolio exposure totaled $1.3 billion at Sept. 30, 2017 compared with $1.7 billion at Dec. 31, 2016. At Sept. 30, 2017, approximately 94% of the leasing portfolio exposure was investment grade, or investment grade equivalent.

At Sept. 30, 2017, the lease financings portfolio consisted of exposures backed by well-diversified assets, including large-ticket transportation equipment.

Other residential mortgages

The other residential mortgages portfolio primarily consists of 1-4 family residential mortgage loans and totaled $741 million at Sept. 30, 2017 and $854 million at Dec. 31, 2016. Included in this portfolio at Sept. 30, 2017 are $181 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, 2017, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 11% 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 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 $4.2 billion at Sept. 30, 2017 and $6.3 billion at Dec. 31, 2016 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 and overdrafts associated with our custody and securities clearance businesses.


BNY Mellon 29

Allowance for credit losses activity
Sept. 30, 2017

June 30, 2017

Dec. 31, 2016

Sept. 30, 2016

(dollar amounts in millions)
Non-margin loans
$
45,196

$
47,516

$
46,868

$
48,411

Margin loans
13,872

14,157

17,590

17,557

Total loans
$
59,068

$
61,673

$
64,458

$
65,968

Beginning balance of allowance for credit losses
$
270

$
276

$
274

$
280

Provision for credit losses
(6
)
(7
)
7

(19
)
Net recoveries:
 
 
 
 
Other residential mortgages
1

1

—

—

Financial institutions
—

—

—

13

Net recoveries
1

1

—

13

Ending balance of allowance for credit losses
$
265

$
270

$
281

$
274

Allowance for loan losses
$
161

$
165

$
169

$
148

Allowance for lending-related commitments
104

105

112

126

Allowance for loan losses as a percentage of total loans
0.27
%
0.27
%
0.26
%
0.22
%
Allowance for loan losses as a percentage of non-margin loans
0.36

0.35

0.36

0.31

Total allowance for credit losses as a percentage of total loans
0.45

0.44

0.44

0.42

Total allowance for credit losses as a percentage of non-margin loans
0.59

0.57

0.60

0.57



Net recoveries were $1 million in the third quarter of 2017 and second quarter of 2017. Net recoveries in the third quarter of 2016 of $13 million were recorded in the financial institutions portfolio.

The provision for credit losses was a credit of $6 million in the third quarter of 2017, a credit of $7 million in the second quarter of 2017 and a credit of $19 million in the third quarter of 2016.

The total allowance for credit losses was $265 million at Sept. 30, 2017, $281 million at Dec. 31, 2016 and $274 million at Sept. 30, 2016. The ratio of the total allowance for credit losses to non-margin loans was 0.59% at Sept. 30, 2017, 0.60% at Dec. 31, 2016 and 0.57% at Sept. 30, 2016. The ratio of the allowance for loan losses to non-margin loans was 0.36% at Sept. 30, 2017, 0.36% at Dec. 31, 2016 and 0.31% at Sept. 30, 2016.

We had $13.9 billion of secured margin loans on our balance sheet at Sept. 30, 2017 compared with $17.6 billion at Dec. 31, 2016 and $17.6 billion at Sept. 30, 2016. 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 probable losses inherent in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. For additional information on this process, see “Critical
 
accounting estimates” in our 2016 Annual Report. 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 2016 Annual Report, we have allocated our allowance for credit losses as follows.

 
Allocation of allowance
Sept. 30, 2017

June 30, 2017

Dec. 31, 2016

Sept. 30, 2016

 
 
Commercial
31
%
30
%
29
%
33
%
 
Commercial real estate
28

28

26

23

 
Foreign
13

13

13

11

 
Financial institutions
9

8

9

11

 
Wealth management (a)
8

9

8

7

 
Other residential mortgages
8

8

10

10

 
Lease financing
3

4

5

5

 
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 loss.

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 $65 million, while if each credit were rated one grade worse, the allowance would have increased by $109 million. Similarly, if the loss given default were one rating worse, the


30 BNY Mellon

allowance would have increased by $41 million, while if the loss given default were one rating better, the allowance would have decreased by $29 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.


Nonperforming assets

The following table shows the distribution of nonperforming assets.

Nonperforming assets
Sept. 30, 2017

June 30, 2017

Dec. 31, 2016

(dollars in millions)
Nonperforming loans:
 
 
 
Other residential mortgages
$
80

$
84

$
91

Wealth management loans and mortgages
8

10

8

Financial institutions
2

2

—

Lease financings
—

—

4

Total nonperforming loans
90

96

103

Other assets owned
4

4

4

Total nonperforming assets
$
94

$
100

$
107

Nonperforming assets ratio
0.16
%
0.16
%
0.17
%
Nonperforming assets ratio, excluding margin loans
0.21

0.21

0.23

Allowance for loan losses/nonperforming loans
178.9

171.9

164.1

Allowance for loan losses/nonperforming assets
171.3

165.0

157.9

Total allowance for credit losses/nonperforming loans
294.4

281.3

272.8

Total allowance for credit losses/nonperforming assets
281.9

270.0

262.6



Nonperforming assets activity
Sept. 30, 2017

June 30, 2017

Dec. 31, 2016

(in millions)
Balance at beginning of quarter
$
100

$
107

$
109

Additions
3

2

4

Return to accrual status
(1
)
—

—

Charge-offs
—

—

—

Paydowns/sales
(8
)
(9
)
(6
)
Balance at end of quarter
$
94

$
100

$
107



Nonperforming assets decreased $13 million compared with Dec. 31, 2016, primarily reflecting lower other residential mortgages and lease financings.

The nonperforming assets ratio was 0.16% at Sept. 30, 2017, 0.16% at June 30, 2017 and 0.17% at Dec. 31, 2016. The ratio of the allowance for loan losses to nonperforming loans was 178.9% at Sept. 30, 2017, 171.9% at June 30, 2017 and 164.1% at Dec. 31, 2016. The ratio of the total allowance for credit losses to nonperforming loans was 294.4% at Sept. 30, 2017, 281.3% at June 30, 2017 and 272.8% at Dec. 31, 2016.

Deposits

Total deposits were $231.0 billion at Sept. 30, 2017, an increase of 4% compared with $221.5 billion at
 
Dec. 31, 2016. The increase in deposits primarily reflects higher interest-bearing deposits in non-U.S. offices and noninterest-bearing deposits in U.S. offices, partially offset by lower interest-bearing deposits in U.S. offices.

Noninterest-bearing deposits were $80.4 billion at Sept. 30, 2017 compared with $78.3 billion at Dec. 31, 2016. Interest-bearing deposits were $150.6 billion at Sept. 30, 2017 compared with $143.2 billion at Dec. 31, 2016.

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.



BNY Mellon 31

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, 2017

June 30, 2017

Sept. 30, 2016

Maximum month-end balance during the quarter
$
21,850

$
19,786

$
11,184

Average daily balance
$
21,403

$
17,970

$
9,585

Weighted-average rate during the quarter
1.30
%
0.84
%
0.24
%
Ending balance
$
10,314

$
10,934

$
8,052

Weighted-average rate at period end
1.35
%
0.93
%
0.25
%


Fluctuations of federal funds purchased and securities sold under repurchase agreements between periods resulted from changes in overnight borrowing opportunities. The increase in the weighted-average rates, compared with Sept. 30, 2016, primarily reflects increases in the Fed Funds effective rate.

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, 2017

June 30, 2017

Sept. 30, 2016

Maximum month-end balance during the quarter
$
21,563

$
21,622

$
21,162

Average daily balance (a)
$
21,280

$
21,078

$
20,616

Weighted-average rate during the quarter (a)
0.42
%
0.30
%
0.07
%
Ending balance
$
21,176

$
21,622

$
21,162

Weighted-average rate at period end
0.43
%
0.34
%
0.07
%
(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 $18,516 million in the third quarter of 2017, $20,609 million in the second quarter of 2017 and $16,873 million in the third quarter of 2016.


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.

 
Information related to commercial paper is presented below.

Commercial paper
Quarter ended
(dollars in millions)
Sept. 30, 2017

June 30, 2017

Sept. 30, 2016

Maximum month-end balance during the quarter
$
4,277

$
2,193

$
1,000

Average daily balance
$
2,736

$
2,215

$
1,173

Weighted-average rate during the quarter
1.15
%
0.95
%
0.35
%
Ending balance
$
2,501

$
876

$
—

Weighted-average rate at period end
1.18
%
0.98
%
—
%


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 increase in commercial paper balances, compared with prior periods, primarily reflects management of overall liquidity. The increase in weighted-average rates, compared with prior periods, 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, 2017

June 30, 2017

Sept. 30, 2016

Maximum month-end balance during the quarter
$
3,353

$
2,379

$
993

Average daily balance
$
2,197

$
1,193

$
874

Weighted-average rate during the quarter
1.38
%
1.24
%
0.76
%
Ending balance
$
3,353

$
1,338

$
993

Weighted-average rate at period end
1.56
%
1.69
%
0.75
%


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 increase in other borrowed funds balances compared with both prior periods primarily reflects borrowings from the FHLB. The increase compared with Sept. 30, 2016 also reflects an increase in capital lease obligations as a result of converting an operating lease to a capital lease.


32 BNY Mellon

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 rollover 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 intra-day 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 an inability to convert assets to cash, an 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, 2017, the Parent was in compliance with this policy. For additional information on our liquidity policy, see “Risk Management - Liquidity risk” in our 2016 Annual Report. Our overall approach to liquidity management is further described in “Liquidity and dividends” in our 2016 Annual Report.

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, 2017

Dec. 31, 2016

Average
(dollars in millions)
3Q17

2Q17

3Q16

Available funds:
 
 
 
 
 
Liquid funds:
 
 
 
 
 
Interest-bearing deposits with banks
$
15,256

$
15,086

$
15,899

$
14,832

$
14,066

Federal funds sold and securities purchased under resale agreements
27,883

25,801

28,120

26,873

26,376

Total liquid funds
43,139

40,887

44,019

41,705

40,442

Cash and due from banks
5,557

4,822

4,961

4,972

4,189

Interest-bearing deposits with the Federal Reserve and other central banks
75,808

58,041

70,430

69,316

74,102

Total available funds
$
124,504

$
103,750

$
119,410

$
115,993

$
118,733

Total available funds as a percentage of total assets
35
%
31
%
35
%
34
%
34
%
 


We had $43 billion of liquid funds at Sept. 30, 2017 and $41 billion at Dec. 31, 2016. Of the $43 billion in liquid funds held at Sept. 30, 2017, $15 billion was placed in interest-bearing deposits with large, highly rated global financial institutions with a weighted-average life to maturity of approximately nine days. Of the $15 billion, $3 billion was placed with banks in the Eurozone.

Total available funds were $125 billion at Sept. 30, 2017, compared with $104 billion at Dec. 31, 2016.
 
The increase was primarily due to an increase in interest-bearing deposits with the Federal Reserve and other central banks.

On an average basis for the nine months ended Sept. 30, 2017 and the nine months ended Sept. 30, 2016, non-core sources of funds, such as money market rate accounts, federal funds purchased and securities sold under repurchase agreements, trading liabilities, commercial paper and other borrowings, were $31.9 billion and $25.9 billion, respectively. The increase


BNY Mellon 33

primarily reflects an increase in securities sold under repurchase agreements.

Average foreign deposits, primarily from our European-based Investment Services business, were $94.1 billion for the nine months ended Sept. 30, 2017, compared with $105.6 billion for the nine months ended Sept. 30, 2016. Domestic savings, interest-bearing demand and time deposits averaged $40.0 billion for the nine months ended Sept. 30, 2017 and $47.8 billion for the nine months ended Sept. 30, 2016. The decrease primarily reflects a decrease in time deposits, partially offset by an increase in demand deposits.

Average payables to customers and broker-dealers were $19.4 billion for the nine months ended Sept. 30, 2017 and $16.9 billion for the nine months ended Sept. 30, 2016. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.

Long-term debt averaged $27.1 billion for the nine months ended Sept. 30, 2017 and $22.8 billion for the nine months ended Sept. 30, 2016, reflecting issuances of long-term debt.

Average noninterest-bearing deposits decreased to $72.5 billion for the nine months ended Sept. 30, 2017 from $82.9 billion for the nine months ended Sept. 30, 2016, 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

In the second quarter of 2017, we entered into a support agreement with certain key subsidiaries to facilitate the provision of capital and liquidity resources in the event of material financial distress or failure. Pursuant to the support agreement, the Parent transferred its intercompany loans and most of its cash to our intermediate holding company (“IHC”), and will continue to transfer cash and other liquid financial assets to the IHC, subject to certain amounts retained by the Parent to meet its near-term cash needs. In connection with the initial transfer, the IHC issued unsecured subordinated funding notes to the Parent. The IHC has also provided the Parent with a committed line of credit that allows the Parent to draw funds necessary to service near-term obligations. The Parent’s and the IHC’s obligations under the support agreement are secured.
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 IHC.

The Parent had cash of $416 million at Sept. 30, 2017, compared with $8.7 billion at Dec. 31, 2016, a decrease of $8.3 billion, primarily reflecting the transfer of cash to the IHC pursuant to the support agreement.



34 BNY Mellon

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, 2017
 
 
 
 
 
 
 
  
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 $28.4 billion at Sept. 30, 2017 and $24.5 billion at Dec. 31, 2016. The increase reflects issuances of $4.75 billion, partially offset by the maturity of $500 million and the redemption of trust preferred securities. The Parent has $250 million of long-term debt that will mature in the remainder of 2017.

In August 2017, we issued $750 million of fixed rate senior subordinated notes maturing in 2029 at an annual interest rate of 3.30%.

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 $2.7 billion in the third quarter of 2017 and $1.2 billion in the third quarter of 2016. Commercial paper outstanding was $2.5 billion at Sept. 30, 2017. There was no commercial paper outstanding at Dec. 31, 2016.

Subsequent to Sept. 30, 2017, our U.S. bank subsidiaries could declare dividends to the Parent of approximately $6.2 billion, without the need for a regulatory waiver. In addition, at Sept. 30, 2017, non-bank subsidiaries of the Parent had liquid assets of approximately $1.6 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 2016 Annual Report.

Pershing has uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. Pershing 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 2017. 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 $6 million, in aggregate, in the third quarter of 2017.

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


BNY Mellon 35

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 fees representing approximately 80% of revenue, and the dividend capacity of our banking subsidiaries. Our double leverage ratio was 123.2% at Sept. 30, 2017 and 119.1% at Dec. 31, 2016, 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 2017, a quarterly cash dividend was paid to common shareholders of $0.24 per common share. Our common stock dividend payout ratio was 23% for the first nine months of 2017. The Federal Reserve’s instructions for the 2017 CCAR provided that, for large bank holding companies like us, dividend payout ratios exceeding 30% of after-tax net income would receive particularly close scrutiny.

In the third quarter of 2017, we repurchased 12 million common shares at an average price of $52.74 per common share for a total cost of $650 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, 2017, and the average HQLA and average LCR for the third quarter of 2017.

 
Consolidated HQLA and LCR
Sept. 30, 2017

(dollars in billions)
Securities (a)
$
105

Cash (b)
70

Total consolidated HQLA (c)
$
175

 
 
Total consolidated HQLA - average (c)
$
162

Average LCR
119
%
(a)
Primarily includes U.S. Treasury, U.S. agency, sovereign securities, securities of U.S. government-sponsored enterprises, investment-grade corporate debt and publicly traded common equity.
(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 $137 billion at Sept. 30, 2017 and averaged $126 billion for the third quarter of 2017.


The U.S. LCR rule became fully phased-in on Jan. 1, 2017 and requires BNY Mellon and each of our affected domestic bank subsidiaries to meet an LCR of at least 100%. The LCR for BNY Mellon and each of our domestic bank subsidiaries was compliant with the U.S. LCR requirements for the third quarter of 2017. For additional information on the LCR, see “Supervision and Regulation - Liquidity Standards - Basel III and U.S. Rules and Proposals” in our 2016 Annual Report.

We also perform liquidity stress tests to evaluate whether the Company maintains sufficient liquidity resources under multiple stress scenarios. Stress tests 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’s liquidity is sufficient for severe market events and firm-specific events. Under our scenario testing program, the results of the tests indicate that the Company has sufficient liquidity.

As part of our resolution planning, we monitor, among other measures, our Resolution Liquidity Adequacy and Positioning (“RLAP”).  The RLAP methodologies are 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. 



36 BNY Mellon

Statement of cash flows

The following summarizes the activity reflected on the 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 asset/liability management herein may provide more useful context in evaluating our liquidity position and related activity.

Net cash provided by operating activities was $3.4 billion in the nine months ended Sept. 30, 2017, compared with $1.6 billion in the nine months ended Sept. 30, 2016. In the first nine months of 2017, cash flows provided by operations were principally the result of earnings. In the first nine months of 2016, cash flows provided by operations were principally the result of earnings and changes in trading activities, partially offset by changes in accruals.

Net cash used for investing activities was $14.0 billion in the nine months ended Sept. 30, 2017, compared with cash provided by investing activities
 
of $21.1 billion in the nine months ended Sept. 30, 2016. 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. In the first nine months of 2016, changes in interest-bearing deposits with the Federal Reserve and other central banks was a significant source of funds, partially offset by changes in federal funds sold and securities purchased under resale agreements.

Net cash provided by financing activities was $11.2 billion in the nine months ended Sept. 30, 2017, compared with cash used for financing activities of $24.2 billion in the nine months ended Sept. 30, 2016. 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 repurchased. In the first nine months of 2016, changes in deposits, changes in federal funds purchased and securities sold under repurchase agreements, repayment of long-term debt and treasury stock repurchases were significant uses of funds, partially offset by the issuance of long-term debt.


Capital

Capital data
(dollar amounts in millions except per share amounts; common shares in thousands)
Sept. 30, 2017

June 30, 2017

Dec. 31, 2016

Average common equity to average assets
10.6
%
10.5
%
10.2
%
 
 
 
 
At period end:
 
 
 
BNY Mellon shareholders’ equity to total assets ratio
11.4
%
11.3
%
11.6
%
BNY Mellon common shareholders’ equity to total assets ratio
10.4
%
10.3
%
10.6
%
Total BNY Mellon shareholders’ equity
$
40,523

$
39,974

$
38,811

Total BNY Mellon common shareholders’ equity
$
36,981

$
36,432

$
35,269

BNY Mellon tangible common shareholders’ equity – Non-GAAP (a)
$
18,630

$
18,106

$
16,957

Book value per common share (a)
$
36.11

$
35.26

$
33.67

Tangible book value per common share – Non-GAAP (a)
$
18.19

$
17.53

$
16.19

Closing stock price per common share
$
53.02

$
51.02

$
47.38

Market capitalization
$
54,294

$
52,712

$
49,630

Common shares outstanding
1,024,022

1,033,156

1,047,488

 
 
 
 
Cash dividends per common share
$
0.24

$
0.19

$
0.19

Common dividend payout ratio
26
%
22
%
25
%
Common dividend yield
1.8
%
1.5
%
1.6
%
(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for a reconciliation of GAAP to Non-GAAP.




BNY Mellon 37

The Bank of New York Mellon Corporation total shareholders’ equity increased to $40.5 billion at Sept. 30, 2017 from $38.8 billion at Dec. 31, 2016. The increase primarily reflects earnings, foreign currency translation adjustments, $638 million resulting from stock awards, the exercise of stock options and stock issued for employee benefit plans, and the unrealized gain in our investment securities portfolio, partially offset by share repurchases and dividends.

The unrealized gain, net of tax, on our available-for-sale investment securities portfolio recorded in accumulated other comprehensive income was $226 million at Sept. 30, 2017, compared with $45 million at Dec. 31, 2016. The increase in the unrealized gain, net of tax, was primarily driven by a decrease in long-term interest rates.

Our 2017 capital plan, submitted in connection with our CCAR, included the authorization to repurchase an average of $650 million of common stock each quarter starting in the third quarter of 2017 and continuing through the second quarter of 2018. In the third quarter of 2017, we repurchased 12 million common shares at an average price of $52.74 per common share for a total cost of $650 million.

Also included in the 2017 capital plan was a 26% increase in the quarterly cash dividend to $0.24 per common share. The first payment of the increased quarterly cash dividend was made on Aug. 11, 2017.

Capital adequacy

Regulators establish certain levels of capital for bank holding companies and banks, including BNY Mellon and our bank subsidiaries, in accordance with established quantitative measurements. For the Parent to maintain its status as a financial holding company, our U.S. bank subsidiaries and BNY Mellon must, among other things, qualify as “well capitalized.”

As of Sept. 30, 2017 and Dec. 31, 2016, 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 2016 Annual Report.

The “well capitalized” and other capital categories (where applicable), as established by applicable regulations for bank holding companies and depository institutions, have been established by those regulations solely for purposes of implementing their respective requirements (for example, eligibility for financial holding company status in the case of bank holding companies and prompt corrective action measures in the case of depository institutions). A bank holding company’s or depository institution’s qualification for a capital category may not constitute an accurate representation of the entity’s overall financial condition or prospects.

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 2016 Annual Report. BNY Mellon is subject to the U.S. capital rules, which are being gradually phased-in over a multi-year period through 2018.

Our estimated CET1 and SLR ratios on a fully phased-in basis are based on our current interpretation of the U.S. capital rules. Our risk-based capital adequacy is determined using the higher of risk-weighted assets (“RWAs”) determined using the Advanced Approach and Standardized Approach.



38 BNY Mellon

The transitional capital ratios for Sept. 30, 2017 and June 30, 2017 included in the following table were negatively impacted by the additional phase-in requirements that became effective on Jan. 1, 2017.

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

 
Minimum
required

 
Capital
ratios

 
June 30, 2017

 
Dec. 31, 2016

 
(a)
 
 
Consolidated regulatory capital ratios: (b)
 
 
 
 
 
 
 
 
 
Standardized Approach:
 
 
 
 
 
 
 
 
 
CET1 ratio
N/A

(c)
6.5
%
 
12.3
%
 
12.0
%
 
12.3
%
Tier 1 capital ratio
6
%
 
8

 
14.6

 
14.3

 
14.5

Total (Tier 1 plus Tier 2) capital ratio
10

 
10

 
15.6

 
14.8

 
15.2

Advanced Approach:
 
 
 
 
 
 
 
 
 
CET1 ratio
N/A

(c)
6.5
%
 
11.1
%
 
10.8
%
 
10.6
%
Tier 1 capital ratio
6
%
 
8

 
13.2

 
12.9

 
12.6

Total (Tier 1 plus Tier 2) capital ratio
10

 
10

 
14.0

 
13.2

 
13.0

Leverage capital ratio (b)
N/A

(c)
4

 
6.8

 
6.7

 
6.6

SLR (d)
5

(c)(e)
3

 
6.3

 
6.2

 
6.0

 
 
 
 
 
 
 
 
 
 
Selected regulatory capital ratios – fully phased-in – Non-GAAP: (c)
 
 
 
 
 
 
 
 
 
Estimated CET1 ratio:
 
 
 
 
 
 
 
 
 
Standardized Approach
8.5
%
(e)
6.5
%
 
11.9
%
 
11.5
%
 
11.3
%
Advanced Approach
8.5

(e)
6.5

 
10.7

 
10.4

 
9.7

Estimated SLR
5

(e)
3

 
6.1

 
6.0

 
5.6

 
 
 
 
 
 
 
 
 
 
The Bank of New York Mellon regulatory capital ratios: (b)
 
 
 
 
 
 
 
 
 
Advanced Approach:
 
 
 
 
 
 
 
 
 
CET1 ratio
6.5
%
 
5.75
%
 
14.8
%
 
14.1
%
 
13.6
%
Tier 1 capital ratio
8

 
7.25

 
15.1

 
14.4

 
13.9

Total (Tier 1 plus Tier 2) capital ratio
10

 
9.25

 
15.5

 
14.8

 
14.2

Leverage capital ratio
5

 
4

 
7.8

 
7.6

 
7.2

SLR (d)
6

 
3

 
7.1

 
6.9

 
6.5

 
 
 
 
 
 
 
 
 
 
Selected regulatory capital ratios – fully phased-in – Non-GAAP:
 
 
 
 
 
 
 
 
 
Estimated SLR
6
%
 
3
%
 
6.8
%
 
6.7
%
 
6.1
%
(a)
Minimum requirements for Sept. 30, 2017 include Basel III minimum thresholds plus currently applicable buffers.
(b)
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 leverage capital ratio is based on Tier 1 capital, as phased-in and quarterly average total assets.
(c)
The Federal Reserve’s regulations do not establish well capitalized thresholds for these measures for bank holding companies.
(d)
The SLR does not become a binding measure until the first quarter of 2018. The SLR is based on Tier 1 capital, as phased-in, and average quarterly assets and certain off-balance sheet exposures.
(e)
Fully phased-in Basel III minimum with expected buffers. See page 41 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.


Our CET1 ratio determined under the Advanced Approach was 11.1% at Sept. 30, 2017 and 10.6% at Dec. 31, 2016. The increase primarily reflects CET1 generation, partially offset by the additional phase-in requirements under the U.S. capital rules that became effective Jan. 1, 2017.

Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 10.7% at Sept. 30, 2017 and 9.7% at Dec. 31, 2016. The increase primarily reflects CET1 generation. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a
 
fully phased-in basis was 11.9% at Sept. 30, 2017 and 11.3% at Dec. 31, 2016.

The estimated fully phased-in SLR (Non-GAAP) of 6.1% at Sept. 30, 2017 and 5.6% at Dec. 31, 2016 was based on our interpretation of the U.S. capital rules, as supplemented by the Federal Reserve’s final rules on the SLR. BNY Mellon will be subject to an enhanced SLR, which will require a buffer in excess of 2% over the minimum SLR of 3%. The insured depository institution subsidiaries of the U.S. global systemically important banks (“G-SIBs”), including


BNY Mellon 39

those of BNY Mellon, must maintain a 6% SLR to be considered “well capitalized.”

For additional information on the U.S. capital rules, see “Supervision and Regulation - Capital Requirements - Generally” in our 2016 Annual Report.

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.

Management views the estimated fully phased-in CET1 and other risk-based capital ratios and SLR as key measures in monitoring BNY Mellon’s capital position and progress against future regulatory capital standards. Additionally, the presentation of the estimated fully phased-in CET1 and other risk-based capital ratios and SLR are intended to allow investors to compare these ratios with estimates presented by other companies.

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, 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.

Minimum capital ratios and capital buffers

The U.S. capital rules include a series of buffers and surcharges over required minimums that apply to bank holding companies, 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 minimums, buffers and surcharges apply to our banking subsidiaries.

The U.S. capital rules introduced a capital conservation buffer and countercyclical capital buffer that add to the minimum regulatory capital ratios. The capital conservation buffer–1.25% for 2017 and 2.5% when fully phased-in on Jan. 1, 2019–is designed to absorb losses during periods of economic stress and applies to all banking organizations. During periods of excessive growth, the capital conservation buffer may be expanded through the imposition of a countercyclical capital buffer that may be as high as an additional 2.5%. The countercyclical capital buffer, when applicable, applies only to Advanced Approach banking organizations. The countercyclical capital buffer is currently set to zero with respect to U.S. exposures, but it could increase if the banking agencies determine that systemic vulnerabilities are meaningfully above normal.

BNY Mellon is subject to an additional G-SIB surcharge, which is implemented as an extension of the capital conservation buffer and must be satisfied with CET1 capital. For 2017, the G-SIB surcharge applicable to BNY Mellon is 0.75%, and, when fully phased-in on Jan. 1, 2019, as calculated, applying metrics as currently applicable to BNY Mellon, would be 1.5%.

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. The U.S. capital rules also provide for transitional arrangements for qualifying instruments, deductions and adjustments, which are not reflected in this table. Buffers and surcharges are not applicable to the leverage capital ratio. These buffers, other than the SLR buffer, and surcharge began to phase-in on Jan. 1, 2016 and will be fully implemented on Jan. 1, 2019.


40 BNY Mellon

Capital ratio requirements
Well capitalized

 
Minimum ratios

 
Minimum ratios with buffers, as phased-in (a)
 
 
 
2017

 
2018

 
2019

 
Capital conservation buffer (CET1)
 
 
 
 
1.25
%
 
1.875
%
 
2.5
%
 
U.S. G-SIB surcharge (CET1) (b)(c)
 
 
 
 
0.75
%
 
1.125
%
 
1.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
 
 
 
CET1 ratio
N/A

 
4.5
%
 
6.5
%
 
7.5
%
 
8.5
%
 
Tier 1 capital ratio
6.0
%
 
6.0
%
 
8.0
%
 
9.0
%
 
10.0
%
 
Total capital ratio
10.0
%
 
8.0
%
 
10.0
%
 
11.0
%
 
12.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Enhanced SLR buffer (Tier 1 capital)
N/A

 
 
 
N/A

 
2.0
%
 
2.0
%
 
SLR
N/A

 
3.0
%
 
N/A

 
5.0
%
 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Bank subsidiaries: (c)
 
 
 
 
 
 
 
 
 
 
CET1 ratio
6.5
%
 
4.5
%
 
5.75
%
 
6.375
%
 
7.0
%
 
Tier 1 capital ratio
8.0
%
 
6.0
%
 
7.25
%
 
7.875
%
 
8.5
%
 
Total capital ratio
10.0
%
 
8.0
%
 
9.25
%
 
9.875
%
 
10.5
%
 
 
 
 
 
 
 
 
 
 
 
 
SLR
6.0
%
 
3.0
%
 
N/A

 
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.


The table below presents the factors that impacted the transitional and fully phased-in CET1.

Estimated CET1 generation
Quarter ended Sept. 30, 2017
(in millions)
Transitional basis (a)

Fully phased-in - Non-GAAP (b)

CET1 – Beginning of period
$
18,371

$
17,629

Net income applicable to common shareholders of The Bank of New York Mellon Corporation
983

983

Goodwill and intangible assets, net of related deferred tax liabilities
(33
)
(26
)
Gross CET1 generated
950

957

Capital deployed:
 
 
Common stock dividends
(253
)
(253
)
Common stock repurchased
(650
)
(650
)
Total capital deployed
(903
)
(903
)
Other comprehensive income:
 
 
Foreign currency translation
281

281

Unrealized loss on assets available-for-sale
13

16

Defined benefit plans
12

15

Total other comprehensive income
306

312

Additional paid-in capital (c)
156

156

Other additions (deductions):
 
 
Deferred tax assets
(1
)
(2
)
Embedded goodwill
(9
)
(8
)
Total other deductions
(10
)
(10
)
Net CET1 generated
499

512

CET1 – End of period
$
18,870

$
18,141

(a)
Reflects transitional adjustments to CET1 required under the U.S. capital rules.
(b)
Estimated.
(c)
Primarily related to stock awards, the exercise of stock options and stock issued for employee benefit plans.



BNY Mellon 41

The following table presents the components of our transitional and fully phased-in CET1, Tier 1 and Tier 2 capital, the RWAs determined under both the Standardized and Advanced Approaches, the average assets used for leverage capital purposes and the total leverage exposure for estimated SLR purposes.

Capital components and ratios
Sept. 30, 2017
 
June 30, 2017
 
Dec. 31, 2016
(dollars in millions)
Transitional
Approach (a)

Fully
phased-in - Non-GAAP (b)

 
Transitional
Approach (a)

Fully
phased-in - Non-GAAP (b)

 
Transitional
Approach (a)

Fully
phased-in - Non-GAAP (b)

CET1:
 
 
 
 
 
 
 
 
Common shareholders’ equity
$
37,195

$
36,981

 
$
36,652

$
36,432

 
$
35,794

$
35,269

Goodwill and intangible assets
(17,876
)
(18,351
)
 
(17,843
)
(18,325
)
 
(17,314
)
(18,312
)
Net pension fund assets
(72
)
(90
)
 
(72
)
(90
)
 
(55
)
(90
)
Equity method investments
(334
)
(348
)
 
(325
)
(340
)
 
(313
)
(344
)
Deferred tax assets
(31
)
(39
)
 
(30
)
(37
)
 
(19
)
(32
)
Other
(12
)
(12
)
 
(11
)
(11
)
 
—

(1
)
Total CET1
18,870

18,141


18,371

17,629

 
18,093

16,490

Other Tier 1 capital:
 
 
 
 
 
 
 
 
Preferred stock
3,542

3,542

 
3,542

3,542

 
3,542

3,542

Deferred tax assets
(8
)
—

 
(7
)
—

 
(13
)
—

Net pension fund assets
(19
)
—

 
(18
)
—

 
(36
)
—

Other
(34
)
(34
)
 
(24
)
(24
)
 
(121
)
(121
)
Total Tier 1 capital
$
22,351

$
21,649


$
21,864

$
21,147

 
$
21,465

$
19,911

Tier 2 capital:
 
 
 
 
 
 
 
 
Subordinated debt
$
1,300

$
1,250

 
$
550

$
550

 
$
550

$
550

Allowance for credit losses
265

265

 
270

270

 
281

281

Trust preferred securities
—

—

 
—

—

 
148

—

Other
(7
)
(7
)
 
(7
)
(7
)
 
(12
)
(11
)
Total Tier 2 capital - Standardized Approach
1,558

1,508


813

813

 
967

820

Excess of expected credit losses
49

49

 
59

59

 
50

50

Less: Allowance for credit losses
265

265

 
270

270

 
281

281

Total Tier 2 capital - Advanced Approach
$
1,342

$
1,292


$
602

$
602

 
$
736

$
589

Total capital:
 
 
 
 
 
 
 
 
Standardized Approach
$
23,909

$
23,157

 
$
22,677

$
21,960

 
$
22,432

$
20,731

Advanced Approach
$
23,693

$
22,941

 
$
22,466

$
21,749

 
$
22,201

$
20,500


 
 
 
 
 
 
 
 
Risk-weighted assets:
 
 
 
 
 
 
 
 
Standardized Approach
$
153,494

$
152,995

 
$
153,179

$
152,645

 
$
147,671

$
146,475

Advanced Approach:
 
 
 
 
 
 
 
 
Credit Risk
$
98,201

$
97,672

 
$
99,030

$
98,465

 
$
97,659

$
96,391

Market Risk
2,996

2,996

 
3,225

3,225

 
2,836

2,836

Operational Risk
68,625

68,625

 
67,788

67,788

 
70,000

70,000

Total Advanced Approach
$
169,822

$
169,293


$
170,043

$
169,478

 
$
170,495

$
169,227

 
 
 
 
 
 
 
 
 
Standardized Approach:
 
 
 
 
 
 
 
 
CET1 ratio
12.3
%
11.9
%
 
12.0
%
11.5
%
 
12.3
%
11.3
%
Tier 1 capital ratio
14.6

14.2

 
14.3

13.9

 
14.5

13.6

Total (Tier 1 plus Tier 2) capital ratio
15.6

15.1

 
14.8

14.4

 
15.2

14.2

Advanced Approach:
 
 
 
 
 
 
 
 
CET1 ratio
11.1
%
10.7
%
 
10.8
%
10.4
%
 
10.6
%
9.7
%
Tier 1 capital ratio
13.2

12.8

 
12.9

12.5

 
12.6

11.8

Total (Tier 1 plus Tier 2) capital ratio
14.0

13.6

 
13.2

12.8

 
13.0

12.1

 
 
 
 
 
 
 
 
 
Average assets for leverage capital purposes
$
327,555

 
 
$
324,423

 
 
$
326,809

 
Total leverage exposure for SLR purposes
 
$
355,960

 
 
$
352,448

 
 
$
355,083

(a)
Reflects transitional adjustments to CET1, Tier 1 capital and Tier 2 capital required in 2017 and 2016 under the U.S. capital rules.
(b)
Estimated.



42 BNY Mellon

The following table shows the impact on the consolidated capital ratios at Sept. 30, 2017 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, 2017
 
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
 
10
 
Advanced Approach
6
 
8
 
 
 
 
 
 
Leverage capital
3
 
2
 
 
 
 
 
 
SLR
3
 
2
 
 
 
 
 
 
Estimated CET1 ratio, fully phased-in – Non-GAAP:
 
 
 
 
Standardized Approach
7
 
8
 
Advanced Approach
6
 
6
 
 
 
 
 
 
Estimated SLR, fully phased-in – Non-GAAP
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.

Supplementary Leverage Ratio

BNY Mellon has presented its consolidated and largest bank subsidiary’s estimated fully phased-in SLRs based on its interpretation of the U.S. capital rules, which are being gradually phased-in over a multi-year period and on the application of such rules to BNY Mellon’s businesses as currently conducted.



BNY Mellon 43

The following table presents the components of our SLR on both the transitional and fully phased-in basis for BNY Mellon and our largest bank subsidiary, The Bank of New York Mellon.

SLR
Sept. 30, 2017
 
June 30, 2017
 
Dec. 31, 2016
(dollars in millions)
Transitional basis

Fully
phased-in -
Non-GAAP (a)

 
Transitional basis

Fully
phased-in -
Non-GAAP (a)

 
Transitional basis

Fully
phased-in -
Non-GAAP (a)

Consolidated:
 
 
 
 
 
 
 
 
Total Tier 1 capital
$
22,351

$
21,649

 
$
21,864

$
21,147

 
$
21,465

$
19,911

 
 
 
 
 
 
 
 
 
Total leverage exposure:
 
 
 
 
 
 
 
 
Quarterly average total assets
$
345,709

$
345,709

 
$
342,515

$
342,515

 
$
344,142

$
344,142

Less: Amounts deducted from Tier 1 capital
18,154

18,856

 
18,092

18,810

 
17,333

18,887

Total on-balance sheet assets, as adjusted
327,555

326,853


324,423

323,705

 
326,809

325,255

Off-balance sheet exposures:
 
 
 
 
 
 
 
 
Potential future exposure for derivative contracts (plus certain other items)
6,213

6,213

 
6,014

6,014

 
6,021

6,021

Repo-style transaction exposures
1,034

1,034

 
631

631

 
533

533

Credit-equivalent amount of other off-balance sheet exposures (less SLR exclusions)
21,860

21,860

 
22,098

22,098

 
23,274

23,274

Total off-balance sheet exposures
29,107

29,107


28,743

28,743

 
29,828

29,828

Total leverage exposure
$
356,662

$
355,960


$
353,166

$
352,448

 
$
356,637

$
355,083

 
 
 
 
 
 
 
 
 
SLR - Consolidated (b)
6.3
%
6.1
%
 
6.2
%
6.0
%
 
6.0
%
5.6
%
 
 
 
 
 
 
 
 
 
The Bank of New York Mellon, our largest bank subsidiary:
 
 
 
 
 
 
 
 
Tier 1 capital
$
20,718

$
19,955

 
$
19,897

$
19,125

 
$
19,011

$
17,708

Total leverage exposure
$
292,759

$
292,421

 
$
286,983

$
286,634

 
$
291,022

$
290,230

 
 
 
 
 
 
 
 
 
SLR - The Bank of New York Mellon (b)
7.1
%
6.8
%
 
6.9
%
6.7
%
 
6.5
%
6.1
%
(a)
Estimated.
(b)
The estimated fully phased-in SLR (Non-GAAP) is based on our interpretation of the U.S. capital rules. When the SLR is fully phased-in in 2018 as a required minimum ratio, we expect to maintain an SLR of over 5%. The minimum required SLR is 3% and there is a 2% buffer, in addition to the minimum, that is applicable to U.S. G-SIBs. The insured depository institution subsidiaries of the U.S. G-SIBs, including those of BNY Mellon, must maintain a 6% SLR to be considered “well-capitalized.”


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 16 of the Notes to Consolidated Financial Statements for additional information on the VaR methodology.



44 BNY Mellon

In an effort to improve our enterprise level risk management capabilities, we have changed our VaR model from Monte Carlo simulation to historical simulation for both management and RWA calculations. This change was effective as of Jan. 1, 2017. In addition to this model enhancement, the impact of credit valuation adjustment (“CVA”) is now included.

The following tables indicate the calculated VaR amounts for the trading portfolio for the designated periods using the newly implemented historical simulation VaR model. The impact of changes in methodology is not material.

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


VaR (a)
2Q17
June 30, 2017

(in millions)
Average

Minimum

Maximum

Interest rate
$
3.3

$
2.8

$
4.1

$
4.0

Foreign exchange
4.3

3.4

5.8

4.6

Equity
0.2

0.1

1.1

1.1

Credit
1.1

0.5

1.4

0.8

Diversification
(4.8
)
N/M

N/M

(5.8
)
Overall portfolio
4.1

3.3

5.4

4.7


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)
Beginning Jan. 1, 2017, the VaR figures reflect the impact of the CVA and hedges as per the guidance included in ASC 820, Fair Value Measurement. 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 following tables indicate the calculated VaR amounts for the trading portfolio for the designated periods as previously reported under the former Monte Carlo simulation VaR model.

 
VaR (a)
3Q16
Sept. 30, 2016

(in millions)
Average

Minimum

Maximum

Interest rate
$
7.3

$
5.4

$
8.9

$
7.9

Foreign exchange
4.2

3.2

7.5

3.7

Equity
0.6

0.5

0.8

0.6

Credit
0.3

0.3

0.4

0.4

Diversification
(5.8
)
N/M

N/M

(5.7
)
Overall portfolio
6.6

5.0

7.7

6.9


VaR (a)
YTD16
(in millions)
Average

Minimum

Maximum

Interest rate
$
6.3

$
4.3

$
8.9

Foreign exchange
2.8

1.2

11.1

Equity
0.6

0.4

0.8

Credit
0.3

0.2

0.4

Diversification
(4.0
)
N/M

N/M

Overall portfolio
6.0

4.3

7.7

(a)
VaR figures do not reflect the impact of the CVA guidance in ASC 820, Fair Value Measurement. This is consistent with the regulatory treatment. 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.



BNY Mellon 45

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 2017, interest rate risk generated 37% of average gross VaR, foreign exchange risk generated 42% of average gross VaR, equity risk accounted for 10% of average gross VaR and credit risk generated 11% of average gross VaR. During the third quarter of 2017, our daily trading loss did not exceed our calculated VaR amount of the overall portfolio.

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, 2017

June 30,
2017

March 31,
2017

Dec. 31, 2016

Sept. 30, 2016

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

—

—

—

—

$(2.5) – $0
1

2

1

3

6

$0 – $2.5
29

31

31

28

22

$2.5 – $5.0
29

27

26

23

25

More than $5.0
4

4

4

7

11

(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 $4.7 billion at Sept. 30, 2017 and $5.7 billion at Dec. 31, 2016.

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 $3.3 billion at Sept. 30, 2017 and $4.4 billion at Dec. 31, 2016.

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, 2017, our OTC derivative assets of $3.6 billion included a CVA deduction of $30 million. Our OTC derivative liabilities of $3.2 billion included a debit valuation adjustment (“DVA”) of $2 million related to our own credit spread. Net of hedges, the CVA decreased by $1 million and the DVA was unchanged in the third quarter of 2017. The net impact of these adjustments increased foreign exchange and other trading revenue by $1 million in the third quarter of 2017.

In the second quarter of 2017, net of hedges, the CVA decreased by $3 million and the DVA decreased by $1 million. The net impact of these adjustments increased foreign exchange and other trading revenue by $2 million in the second quarter of 2017.

In the third quarter of 2016, net of hedges, the CVA decreased by $8 million and the DVA decreased by $4 million. The net impact of these adjustments increased foreign exchange and other trading revenue by $4 million in the third quarter of 2016.

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.


46 BNY Mellon

Foreign exchange and other trading counterparty risk
rating profile (a)
 
Quarter ended
 
Sept. 30, 2017

June 30,
2017

March 31,
2017

Dec. 31, 2016

Sept. 30, 2016

Rating:
 
 
 
 
 
AAA to AA-
41
%
44
%
43
%
35
%
45
%
A+ to A-
30

27

36

39

32

BBB+ to BBB-
24

22

17

22

19

Noninvestment grade (BB+ and lower)
5

7

4

4

4

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 are interest rate risk and foreign exchange risk. Our primary market risk is exposure to movements in U.S. dollar interest rates and certain foreign currency interest rates. We actively manage interest rate sensitivity and use earnings simulation and discounted cash flow models to identify interest rate exposures.

An earnings simulation model is the primary tool used to assess changes in pre-tax net interest revenue. The model incorporates management’s assumptions regarding interest rates, balance changes on core deposits, market spreads, changes in the prepayment behavior of loans and securities and the impact of
 
derivative financial instruments used for interest rate risk management purposes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior and are inherently uncertain. As a result, the earnings simulation model cannot precisely estimate net interest revenue or the impact of higher or lower interest rates on net interest revenue. Actual results may differ from projected results due to timing, magnitude and frequency of interest rate changes, and changes in market conditions and management’s strategies, among other factors.

The table below relies on certain critical assumptions regarding the balance sheet and depositors’ behavior related to interest rate fluctuations and the prepayment and extension risk in certain of our assets. Generally, there has been an inverse relationship between interest rates and client deposit levels. To the extent that actual behavior is different from that assumed in the models, there could be a change in interest rate sensitivity.

We evaluate the effect on earnings by running various interest rate ramp scenarios from a baseline scenario. The interest rate ramp scenarios are reviewed to examine the impact of large interest rate movements. In each scenario, all currencies interest rates are shifted higher or lower. 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, 2017

June 30,
2017

March 31,
2017

Dec. 31, 2016

Sept. 30, 2016

up 200 bps parallel rate ramp vs. baseline (a)
$
(2
)
$
(69
)
$
(136
)
$
6

$
62

up 100 bps parallel rate ramp vs. baseline (a)
112

58

87

145

147

Long-term up 50 bps, short-term unchanged (b)
113

92

92

81

116

Long-term down 50 bps, short-term unchanged (b)
(129
)
(85
)
(104
)
(88
)
(128
)
(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.
bps - basis points.


The baseline scenario used for the calculations in the estimated changes in net interest revenue table above as of Sept. 30, 2017, June 30, 2017, March 31, 2017 and Dec. 31, 2016 are based on our quarter-end balance sheet and the spot yield curve. The baseline scenario used for Sept. 30, 2016 was based on implied forward yield curves. We revised the
 
methodology as of Dec. 31, 2016 as we believe using the spot yield curve for the baseline scenario provides a more accurate reflection of net interest revenue sensitivity given the recent increase in short-term interest rates and the implied forward rates. Because interest rates and the implied forward yield curves were lower in prior periods, the impact of using a


BNY Mellon 47

spot yield curve versus an implied forward yield curve was not as significant. 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 point per quarter increase.

Our net interest revenue sensitivity table above incorporates assumptions about the impact of changes in interest rates on depositor behavior based on historical experience. Given the current historically low interest rate environment and the potential change to the implementation of monetary policy, the impact of depositor behavior is highly uncertain. The lower sensitivity in the ramp up 200 basis point scenario compared with the 100 basis point scenario is driven by the assumption of increased deposit runoff and forecasted changes in the deposit pricing.

Growth or contraction of deposits could also be affected by the following factors:

•
Monetary policy;
•
Global economic uncertainty;
•
Our ratings relative to other financial institutions’ ratings; and
•
Regulatory reform.

Any of these events could change our assumptions about depositor behavior and have a significant impact on our balance sheet and net interest revenue.

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 credit guarantees and a securitization. Guarantees include lending-related guarantees issued as part of our corporate banking business and securities lending indemnifications issued as part of our Investment Services business. See Note 17 of the Notes to Consolidated Financial Statements for a further discussion of our off-balance sheet arrangements.



48 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 based on estimated fully phased-in CET1 and other risk-based capital ratios, the estimated fully phased-in SLR and tangible common shareholders’ equity. BNY Mellon believes that the CET1 and other risk-based capital ratios, on a fully phased-in basis, and the SLR, on a fully phased-in basis, are measures of capital strength that provide additional useful information to investors, supplementing the capital ratios which are, or were, required by regulatory authorities. The tangible common shareholders’ equity ratio, which excludes goodwill and intangible assets, net of deferred tax liabilities, includes changes in investment securities valuations which are reflected in total shareholders’ equity. 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.

BNY Mellon has presented revenue measures, which exclude the effect of noncontrolling interests related to consolidated investment management funds, and expense measures, which exclude amortization of intangible assets and M&I, litigation and restructuring charges. Operating margin, operating leverage and return on equity measures, which
 
exclude some or all of these items, as well as the recovery related to Sentinel, are also presented. Operating margin measures may also exclude the provision for credit losses and distribution and servicing expense. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, which relate to the ability of BNY Mellon to enhance revenues and limit expenses in circumstances where such matters are within BNY Mellon’s control. M&I expenses primarily relate to acquisitions and generally continue for approximately three years after the transaction. Litigation charges represent accruals for loss contingencies that are both probable and reasonably estimable, but exclude standard business-related legal fees. Restructuring charges relate to our streamlining actions and Operational Excellence Initiatives. Excluding the charges mentioned above permits investors to view expenses on a basis consistent with how management views the business.

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

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



BNY Mellon 49

The following table presents the reconciliation of the pre-tax operating margin ratio.

Pre-tax operating margin
3Q17

2Q17

3Q16

YTD17

YTD16

(dollars in millions)
Income before income taxes – GAAP
$
1,368

$
1,308

$
1,317

$
3,882

$
3,573

Less: Net income attributable to noncontrolling interests of consolidated investment management funds
3

3

9

24

6

Add: Amortization of intangible assets
52

53

61

157

177

M&I, litigation and restructuring charges
6

12

18

26

42

Recovery related to Sentinel
—

—

(13
)
—

(13
)
Income before income taxes, as adjusted – Non-GAAP (a)
$
1,423

$
1,370

$
1,374

$
4,041

$
3,773

 
 
 
 
 
 
Fee and other revenue – GAAP
$
3,167

$
3,120

$
3,150

$
9,305

$
9,119

Income from consolidated investment management funds – GAAP
10

10

17

53

21

Net interest revenue – GAAP
839

826

774

2,457

2,307

Total revenue – GAAP
4,016

3,956

3,941

11,815

11,447

Less: Net income attributable to noncontrolling interests of consolidated investment management funds
3

3

9

24

6

Total revenue, as adjusted – Non-GAAP (a)
$
4,013

$
3,953

$
3,932

$
11,791

$
11,441

 
 
 
 
 
 
Pre-tax operating margin – GAAP (b)(c)
34
%
33
%
33
%
33
%
31
%
Adjusted pre-tax operating margin – Non-GAAP (a)(b)(c)
35
%
35
%
35
%
34
%
33
%
(a)
Non-GAAP information for all periods presented excludes the net income attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and M&I, litigation and restructuring charges. Non-GAAP information for the third quarter of 2016 and for the first nine months of 2016 also excludes a recovery of the previously impaired Sentinel loan.
(b)
Income before taxes divided by total revenue.
(c)
Our GAAP earnings include tax-advantaged investments such as low income housing, renewable energy, corporate/bank-owned life insurance and tax-exempt securities. The benefits of these investments are primarily reflected in tax expense. If reported on a tax-equivalent basis, these investments would increase revenue and income before taxes by $102 million for the third quarter of 2017, $106 million for the second quarter of 2017, $74 million for the third quarter of 2016, $309 million for the first nine months of 2017 and $225 million for the first nine months of 2016 and would increase our pre-tax operating margin by approximately 1.6% for the third quarter of 2017, 1.8% for the second quarter of 2017, 1.2% for the third quarter of 2016, 1.7% for the first nine months of 2017 and 1.3% for the first nine months of 2016.


The following table presents the reconciliation of operating leverage.

Operating leverage
3Q17

2Q17

3Q16

3Q17 vs.
(dollars in millions)
2Q17

3Q16

Total revenue – GAAP
$
4,016

$
3,956

$
3,941

1.52
 %
1.90
%
Less: Net income attributable to noncontrolling interests of consolidated investment management funds
3

3

9

 
 
Total revenue, as adjusted – Non-GAAP
$
4,013

$
3,953

$
3,932

1.52
 %
2.06
%
 
 
 
 
 
 
Total noninterest expense – GAAP
$
2,654

$
2,655

$
2,643

(0.04
)%
0.42
%
Less: Amortization of intangible assets
52

53

61

 
 
M&I, litigation and restructuring charges
6

12

18

 
 
Total noninterest expense, as adjusted – Non-GAAP
$
2,596

$
2,590

$
2,564

0.23
 %
1.25
%
 
 
 
 
 
 
Operating leverage – GAAP (a)
 
 
 
156
 bps
148
 bps
Adjusted operating leverage – Non-GAAP (a)(b)
 
 
 
129
 bps
81
 bps
(a)
Operating leverage is the rate of increase (decrease) in total revenue less the rate of increase (decrease) in total noninterest expense.
(b)
Non-GAAP operating leverage for all periods presented excludes the net income attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and M&I, litigation and restructuring charges.
bps - basis points.




50 BNY Mellon

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

Return on common equity and tangible common equity
3Q17

2Q17

3Q16

YTD17

YTD16

(dollars in millions)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP
$
983

$
926

$
974

$
2,789

$
2,603

Add:  Amortization of intangible assets
52

53

61

157

177

Less: Tax impact of amortization of intangible assets
17

19

21

54

62

Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation excluding amortization of intangible assets – Non-GAAP
1,018

960

1,014

2,892

2,718

Add: M&I, litigation and restructuring charges
6

12

18

26

42

Recovery related to Sentinel
—

—

(13
)
—

(13
)
Less: Tax impact of M&I, litigation and restructuring charges
—

3

5

5

13

Tax impact of recovery related to Sentinel
—

—

(5
)
—

(5
)
Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation, as adjusted – Non-GAAP (a)
$
1,024

$
969

$
1,019

$
2,913

$
2,739

 
 
 
 
 
 
Average common shareholders’ equity
$
36,780

$
35,862

$
35,767

$
35,876

$
35,616

Less: Average goodwill
17,497

17,408

17,463

17,415

17,549

Average intangible assets
3,487

3,532

3,711

3,532

3,770

Add: Deferred tax liability – tax deductible goodwill (b)
1,561

1,542

1,477

1,561

1,477

Deferred tax liability – intangible assets (b)
1,092

1,095

1,116

1,092

1,116

Average tangible common shareholders’ equity – Non-GAAP
$
18,449

$
17,559

$
17,186

$
17,582

$
16,890

 
 
 
 
 
 
Return on common equity – GAAP (c)
10.6
%
10.4
%
10.8
%
10.4
%
9.8
%
Adjusted return on common equity – Non-GAAP (a)(c)
11.0
%
10.8
%
11.3
%
10.9
%
10.3
%
 
 
 
 
 
 
Return on tangible common equity – Non-GAAP (c)
21.9
%
21.9
%
23.5
%
22.0
%
21.5
%
Adjusted return on tangible common equity – Non-GAAP (a)(c)
22.0
%
22.1
%
23.6
%
22.1
%
21.7
%
(a)
Non-GAAP information for all periods presented excludes the amortization of intangible assets and M&I, litigation and restructuring charges. Non-GAAP information for the third quarter of 2016 and for the first nine months of 2016 also excludes a recovery of the previously impaired Sentinel loan.
(b)
Deferred tax liabilities are based on fully phased-in Basel III capital rules.
(c)
Quarterly returns are annualized.


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

Book value per common share
Sept. 30, 2017

June 30,
2017

Dec. 31, 2016

Sept. 30, 2016

(dollars in millions, unless otherwise noted)
BNY Mellon shareholders’ equity at period end – GAAP
$
40,523

$
39,974

$
38,811

$
39,695

Less: Preferred stock
3,542

3,542

3,542

3,542

BNY Mellon common shareholders’ equity at period end – GAAP
36,981

36,432

35,269

36,153

Less: Goodwill
17,543

17,457

17,316

17,449

Intangible assets
3,461

3,506

3,598

3,671

Add: Deferred tax liability – tax deductible goodwill (a)
1,561

1,542

1,497

1,477

Deferred tax liability – intangible assets (a)
1,092

1,095

1,105

1,116

BNY Mellon tangible common shareholders’ equity at period end – Non-GAAP
$
18,630

$
18,106

$
16,957

$
17,626

 
 
 
 
 
Period-end common shares outstanding (in thousands)
1,024,022

1,033,156

1,047,488

1,057,337

 
 
 
 
 
Book value per common share – GAAP
$
36.11

$
35.26

$
33.67

$
34.19

Tangible book value per common share – Non-GAAP
$
18.19

$
17.53

$
16.19

$
16.67

(a)
Deferred tax liabilities are based on fully phased-in Basel III capital rules.







BNY Mellon 51

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

Income from consolidated investment management funds, net of noncontrolling interests 
 
YTD17

YTD16

(in millions)
3Q17

2Q17

3Q16

Income from consolidated investment management funds
$
10

$
10

$
17

$
53

$
21

Less: Net income attributable to noncontrolling interests of consolidated investment management funds
3

3

9

24

6

Income from consolidated investment management funds, net of noncontrolling interests
$
7

$
7

$
8

$
29

$
15



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

Income from consolidated investment management funds, net of noncontrolling interests - Investment Management business
(in millions)
3Q17

2Q17

1Q17

4Q16

3Q16

YTD17

YTD16

Investment management fees
$
1

$
2

$
2

$
4

$
2

$
5

$
7

Other (Investment income (loss))
6

5

13

(3
)
6

24

8

Income from consolidated investment management funds, net of noncontrolling interests
$
7

$
7

$
15

$
1

$
8

$
29

$
15



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

Pre-tax operating margin - Investment Management business
 
 
 
 
 
 
(dollars in millions)
3Q17

2Q17

1Q17

4Q16

3Q16

YTD17

YTD16

Income before income taxes – GAAP
$
300

$
288

$
277

$
260

$
256

$
865

$
707

Add: Amortization of intangible assets
15

15

15

22

22

45

60

Provision for credit losses
(2
)
—

3

6

—

1

—

Adjusted income before income taxes, excluding amortization of intangible assets and provision for credit losses – Non-GAAP
$
313

$
303

$
295

$
288

$
278

$
911

$
767

 
 
 
 
 
 
 
 
Total revenue – GAAP
$
1,000

$
986

$
963

$
960

$
958

$
2,949

$
2,791

Less:  Distribution and servicing expense
110

104

101

98

104

315

306

Adjusted total revenue, net of distribution and servicing expense – Non-GAAP
$
890

$
882

$
862

$
862

$
854

$
2,634

$
2,485

 
 
 
 
 
 
 
 
Pre-tax operating margin – GAAP (a)
30
%
29
%
29
%
27
%
27
%
29
%
25
%
Adjusted pre-tax operating margin, excluding amortization of intangible assets, provision for credit losses and distribution and servicing expense – Non-GAAP (a)
35
%
34
%
34
%
33
%
33
%
35
%
31
%
(a)
Income before taxes divided by total revenue.




52 BNY Mellon

Recent accounting and regulatory developments

Recently issued accounting standards

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

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, partial-term hedging and the introduction of the “last of layer” method for hedges of portfolios of prepayable financial assets. The guidance also changed presentation and disclosure requirements and made changes to how the shortcut method is applied which may result in the Company using that method going forward for certain hedging relationships.

This ASU is effective for the first quarter of 2019, with early adoption permitted. Certain transition elections are available including the ability to reclassify a debt security from held-to-maturity to available-for-sale if it is eligible to be hedged under the last of layer method with any unrealized gain or loss at the transfer date being recorded in other comprehensive income. If this ASU is adopted early, the new guidance will be applicable as of the beginning of that year. BNY Mellon is currently assessing the impacts of the new standard.

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 benefit cost in the income statement. The ASU also permits only the service cost component of net benefit cost to be eligible for capitalization. The ASU is effective for the first quarter of 2018, with early adoption permitted. The guidance in this ASU should be applied retrospectively for the presentation of the service cost component and the other components in the income statement, and prospectively for the capitalization of the service cost component in assets. BNY Mellon is assessing the impacts of the new standard.  For information on the components of our pension and post-retirement health plan costs, see Note 9 of the Notes to Consolidated Financial Statements in this Form 10-Q and Note 16 of the Notes to Consolidated Financial Statements in our 2016 Annual Report.  To the extent that our recent trend of having a net credit for pension and other post-retirement costs continues, the standard will result in an increase to staff expense and a reduction in other expense.

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 statement of cash flows and is effective for the first quarter of 2018. Earlier application is permitted. BNY Mellon is assessing the impacts of the new standard, and expects to include restricted cash (which totaled $4 billion as of Sept. 30, 2017) with cash and due from banks when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

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 and is effective for the first quarter of 2018. Earlier application is permitted, however all of the amendments must be adopted in the same period. BNY Mellon is assessing the impacts of the new


BNY Mellon 53

standard, and does not expect this ASU to materially affect the results of operations or financial condition.

ASU 2016-13, Financial Instruments – Credit Losses

In June 2016, the FASB issued an ASU, Financial Instruments – Credit Losses. 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. Earlier application is permitted beginning with the first quarter of 2019. BNY Mellon has begun its implementation efforts and is currently identifying key interpretive issues, and will assess existing credit loss forecasting models and processes against the new guidance to determine what modifications may be required. 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.

ASU 2014-09, Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, 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, guidance on accounting for certain contract costs and additional disclosure requirements about revenue and contract costs. The standard supersedes most existing revenue recognition guidance and is effective for the first quarter of 2018 using either the retrospective or cumulative effect transition method upon adoption.

The Company has completed its evaluation of the potential impact of this guidance on our accounting policies, and based on that evaluation, the timing of most of our revenue recognition will remain the same and the impacts will not be material. The impacts primarily relate to deferring and amortizing certain
 
sales commission costs related to obtaining customer contracts and the timing of recognizing the contra revenue related to certain payments made to customers. The Company plans to adopt the guidance as of Jan. 1, 2018 using the cumulative effect transition method. The Company is currently developing the disclosures required about revenue and contract costs and finalizing changes to internal control.

ASU 2016-02, Leases

In February 2016, the FASB issued ASU 2016-02, 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. ASU 2016-02 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. We will utilize the modified retrospective transition approach as of the beginning of the earliest period presented, which will result in a cumulative effect recorded in the earliest period presented. Additionally, the standard allows for various optional practical expedients to assist with the implementation and reporting requirements. We are currently evaluating the potential impact of the leasing standard on our consolidated financial statements and evaluating the practical expedients that may be elected. Upon adoption, the implementation of the leasing standard is expected to result in an immaterial increase in both assets and liabilities.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, 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


54 BNY Mellon

changes in the fair value recognized through net income, unless one of two available exceptions apply. The first exception, a scope exception, allows Federal Reserve Bank stock, FHLB stock and other exchange memberships held by broker dealers to remain accounted for at cost, less impairment. The second exception, a practicability exception, will be available for equity investments that do not have readily determinable fair values and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurement. To the extent the practicability exception applies, such investments will be accounted for at cost adjusted for impairment, if any, plus or minus changes from observable price changes.

The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from the entity’s “own credit risk” when the entity has elected to measure the liability at fair value. The amendments also eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair values of financial instruments measured at amortized cost that are on the balance sheet.

The Company plans to adopt this guidance in the first quarter of 2018 using the cumulative effect method of adoption. BNY Mellon does not expect the adoption of this ASU to have a material impact to the financial statements.

Recent regulatory developments

For a summary of additional regulatory matters relevant to our operations, see Supervision and Regulation in our 2016 Annual Report.

Final Rule on Qualified Financial Contracts

On Sept. 1, 2017, the Federal Reserve adopted a final rule to require U.S. global systemically important banking organizations (“G-SIBs”) and the U.S. operations of foreign G-SIBs to amend their covered qualified financial contracts (“QFCs”). The FDIC adopted a substantially equivalent proposal on Oct. 30, 2017 and the Office of the Comptroller of the Currency is expected to do so in the near future. QFCs generally include derivatives, repurchase agreements and securities lending arrangements, among others. The final rule includes two key requirements. First, the final rule generally requires
 
that QFCs of G-SIBs explicitly provide that any resolution stays applicable to the exercise of default rights with respect to such QFCs and to any resolution transfers under U.S. special resolution regimes apply to such covered QFCs.  Second, the final rule requires that QFCs of G-SIBs be amended to neither permit the exercise of default or cross-default rights against entities covered by the final rule based on the resolution or bankruptcy of an affiliate of such entities, nor allow for any transfer restrictions with respect to such QFCs.

The final rule allows G-SIBs to comply with the rule by adhering to the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol (the “Protocol”) or a similar protocol that accomplishes the contractual amendments required by the rule. BNY Mellon entities that engage in QFC activities covered by the Protocol have adhered to the Protocol.  Compliance with the Federal Reserve’s final rule will be required on a phased-in basis beginning on Jan. 1, 2019. BNY Mellon is evaluating the impact of the new regulations on its activities.

Resolution plan

As required by the Dodd-Frank Act, BNY Mellon must submit annually to the Federal Reserve and the FDIC a plan for its rapid and orderly resolution in the event of material financial distress or failure. BNY Mellon filed its most recent resolution plan on July 1, 2017. We believe the 2017 resolution plan addresses all shortcomings and deficiencies identified by the FDIC and the Federal Reserve in the Company’s 2015 resolution plan. The public portion of our 2017 resolution plan is available on the Federal Reserve’s and FDIC’s websites.

In September 2017, the Federal Reserve and FDIC extended the filing deadline by one year to July 1, 2019 for the Parent’s next resolution plan.



BNY Mellon 55

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 SEC filings, 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, SEC Forms 3, 4 and 5 and any proxy statement mailed by us in connection with the solicitation of proxies;
•
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 and Nominating, Corporate Social Responsibility, Human Resources and Compensation, Risk and Technology Committees of our Board of Directors.

The contents of the website listed above or any other websites referenced herein are not incorporated into this Quarterly Report on Form 10-Q.



56 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, 2017

June 30, 2017

Sept. 30, 2016

 
Sept. 30, 2017

Sept. 30, 2016

(in millions)
 
Fee and other revenue
 
 
 
 
 
 
Investment services fees:
 
 
 
 
 
 
Asset servicing
$
1,105

$
1,085

$
1,067

 
$
3,253

$
3,176

Clearing services
383

394

349

 
1,153

1,049

Issuer services
288

241

337

 
780

815

Treasury services
141

140

137

 
420

407

Total investment services fees
1,917

1,860

1,890

 
5,606

5,447

Investment management and performance fees
901

879

860

 
2,622

2,502

Foreign exchange and other trading revenue
173

165

183

 
502

540

Financing-related fees
54

53

58

 
162

169

Distribution and servicing
40

41

43

 
122

125

Investment and other income
63

122

92

 
262

271

Total fee revenue
3,148

3,120

3,126

 
9,276

9,054

Net securities gains — including other-than-temporary impairment
18

—

27

 
28

67

Noncredit-related portion of other-than-temporary impairment
(recognized in other comprehensive income)
(1
)
—

3

 
(1
)
2

Net securities gains
19

—

24

 
29

65

Total fee and other revenue
3,167

3,120

3,150

 
9,305

9,119

Operations of consolidated investment management funds
 
 
 
 
 
 
Investment income
10

10

20

 
57

27

Interest of investment management fund note holders
—

—

3

 
4

6

Income from consolidated investment management funds
10

10

17

 
53

21

Net interest revenue
 
 
 
 
 
 
Interest revenue
1,151

1,052

874

 
3,163

2,647

Interest expense
312

226

100

 
706

340

Net interest revenue
839

826

774

 
2,457

2,307

Total revenue
4,016

3,956

3,941

 
11,815

11,447

Provision for credit losses
(6
)
(7
)
(19
)
 
(18
)
(18
)
Noninterest expense
 
 
 
 
 
 
Staff
1,469

1,417

1,467

 
4,358

4,338

Professional, legal and other purchased services
305

319

292

 
936

860

Software
175

173

156

 
514

470

Net occupancy
141

139

143

 
416

437

Distribution and servicing
109

104

105

 
313

307

Sub-custodian
62

65

59

 
191

188

Furniture and equipment
58

59

59

 
174

187

Bank assessment charges (a)
51

59

61

 
167

166

Business development
49

63

52

 
163

174

Other (a)
177

192

170

 
536

546

Amortization of intangible assets
52

53

61

 
157

177

Merger and integration, litigation and restructuring charges
6

12

18

 
26

42

Total noninterest expense
2,654

2,655

2,643

 
7,951

7,892

Income
 
 
 
 
 
 
Income before income taxes
1,368

1,308

1,317

 
3,882

3,573

Provision for income taxes
348

332

324

 
949

897

Net income
1,020

976

993

 
2,933

2,676

Net (income) loss attributable to noncontrolling interests (includes $(3), $(3), $(9), $(24) and $(6) related to consolidated investment management funds, respectively)
(2
)
(1
)
(6
)
 
(18
)
1

Net income applicable to shareholders of The Bank of New York Mellon Corporation
1,018

975

987

 
2,915

2,677

Preferred stock dividends
(35
)
(49
)
(13
)
 
(126
)
(74
)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation
$
983

$
926

$
974

 
$
2,789

$
2,603

(a)
In the first quarter of 2017, we began disclosing bank assessment charges on a quarterly basis. The bank assessment charges were previously included in other expense. All prior periods were reclassified.



BNY Mellon 57
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, 2017

June 30, 2017

Sept. 30, 2016

 
Sept. 30, 2017

Sept. 30, 2016

(in millions)
 
Net income applicable to common shareholders of The Bank of New York Mellon Corporation
$
983

$
926

$
974

 
$
2,789

$
2,603

Less:  Earnings allocated to participating securities (a)
8

13

15

 
35

39

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
$
975

$
913

$
959


$
2,754

$
2,564



Average common shares and equivalents outstanding of The Bank of New York Mellon Corporation (a)
Quarter ended
 
Year-to-date
Sept. 30, 2017

June 30, 2017

Sept. 30, 2016

 
Sept. 30, 2017

Sept. 30, 2016

(in thousands)
 
Basic
1,035,337

1,035,829

1,062,248

 
1,037,431

1,071,457

Common stock equivalents
9,226

15,598

15,406

 
14,216

15,306

Less: Participating securities
(3,425
)
(9,548
)
(9,972
)
 
(8,062
)
(9,613
)
Diluted
1,041,138

1,041,879

1,067,682

 
1,043,585

1,077,150

 
 
 
 
 
 
 
Anti-dilutive securities (b)
8,059

16,256

32,232

 
13,906

32,699



Earnings per share applicable to common shareholders of The Bank of New York Mellon Corporation (c)
Quarter ended
 
Year-to-date
Sept. 30, 2017

June 30, 2017

Sept. 30, 2016

 
Sept. 30, 2017

Sept. 30, 2016

(in dollars)
 
Basic
$
0.94

$
0.88

$
0.90

 
$
2.66

$
2.39

Diluted
$
0.94

$
0.88

$
0.90

 
$
2.64

$
2.38

(a)
Beginning in the third quarter of 2017, vested stock awards to retirement eligible employees are included in common shares outstanding for earnings per share purposes. This change increased both average basic and average diluted shares outstanding by approximately 6 million and reduced earnings allocated to participating securities by $6 million for the quarter, which resulted in a de minimis impact to both basic and diluted earnings per share.
(b)
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.
(c)
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 Notes to Consolidated Financial Statements.



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

Consolidated Comprehensive Income Statement (unaudited)

 
Quarter ended
 
Year-to-date
 
Sept. 30, 2017

June 30, 2017

Sept. 30, 2016

 
Sept. 30, 2017

Sept. 30, 2016

(in millions)
 
Net income
$
1,020

$
976

$
993

 
$
2,933

$
2,676

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

330

(186
)
 
741

(433
)
Unrealized gain on assets available-for-sale:
 
 
 
 
 
 
Unrealized gain (loss) arising during the period
28

91

(53
)
 
213

227

Reclassification adjustment
(12
)
(1
)
(15
)
 
(19
)
(43
)
Total unrealized gain (loss) on assets available-for-sale
16

90

(68
)
 
194

184

Defined benefit plans:
 
 
 
 
 
 
Net gain arising during the period
—

—

—

 
2

2

Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost
15

16

14

 
49

43

Total defined benefit plans
15

16

14

 
51

45

Net unrealized gain (loss) on cash flow hedges
—

1

2

 
11

(4
)
Total other comprehensive income (loss), net of tax (a)
317

437

(238
)
 
997

(208
)
Total comprehensive income
1,337

1,413

755

 
3,930

2,468

Net (income) loss attributable to noncontrolling interests
(2
)
(1
)
(6
)
 
(18
)
1

Other comprehensive (income) loss attributable to noncontrolling interests
(5
)
(6
)
5

 
(13
)
23

Comprehensive income applicable to shareholders of The Bank of New York Mellon Corporation
$
1,330

$
1,406

$
754

 
$
3,899

$
2,492

(a)
Other comprehensive income (loss) attributable to The Bank of New York Mellon Corporation shareholders was $312 million for the quarter ended Sept. 30, 2017, $431 million for the quarter ended June 30, 2017, $(233) million for the quarter ended Sept. 30, 2016, $984 million for the nine months ended Sept. 30, 2017 and $(185) million for the nine months ended Sept. 30, 2016.


See accompanying Notes to Consolidated Financial Statements.



BNY Mellon 59
The Bank of New York Mellon Corporation (and its subsidiaries)

Consolidated Balance Sheet (unaudited)

  
Sept. 30, 2017

Dec. 31, 2016

(dollars in millions, except per share amounts)
Assets
 
 
Cash and due from:
 
 
Banks
$
5,557

$
4,822

Interest-bearing deposits with the Federal Reserve and other central banks
75,808

58,041

Interest-bearing deposits with banks
15,256

15,086

Federal funds sold and securities purchased under resale agreements
27,883

25,801

Securities:
 


Held-to-maturity (fair value of $39,928 and $40,669)
39,995

40,905

Available-for-sale
80,054

73,822

Total securities
120,049

114,727

Trading assets
4,666

5,733

Loans
59,068

64,458

Allowance for loan losses
(161
)
(169
)
Net loans
58,907

64,289

Premises and equipment
1,631

1,303

Accrued interest receivable
547

568

Goodwill
17,543

17,316

Intangible assets
3,461

3,598

Other assets (includes $827 and $1,339, at fair value)
22,287

20,954

Subtotal assets of operations
353,595

332,238

Assets of consolidated investment management funds, at fair value
802

1,231

Total assets
$
354,397

$
333,469

Liabilities
 


Deposits:
 


Noninterest-bearing (principally U.S. offices)
$
80,380

$
78,342

Interest-bearing deposits in U.S. offices
46,023

52,049

Interest-bearing deposits in non-U.S. offices
104,593

91,099

Total deposits
230,996

221,490

Federal funds purchased and securities sold under repurchase agreements
10,314

9,989

Trading liabilities
3,253

4,389

Payables to customers and broker-dealers
21,176

20,987

Commercial paper
2,501

—

Other borrowed funds
3,353

754

Accrued taxes and other expenses 
6,070

5,867

Other liabilities (including allowance for lending-related commitments of $104 and $112, also includes $812 and $597, at fair value)
7,195

5,635

Long-term debt (includes $369 and $363, at fair value)
28,408

24,463

Subtotal liabilities of operations
313,266

293,574

Liabilities of consolidated investment management funds, at fair value
27

315

Total liabilities
313,293

293,889

Temporary equity
 


Redeemable noncontrolling interests
197

151

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 1,352,363,932 and 1,333,706,427 shares
14

13

Additional paid-in capital
26,588

25,962

Retained earnings
24,757

22,621

Accumulated other comprehensive loss, net of tax
(2,781
)
(3,765
)
Less: Treasury stock of 328,341,579 and 286,218,126 common shares, at cost
(11,597
)
(9,562
)
Total The Bank of New York Mellon Corporation shareholders’ equity
40,523

38,811

Nonredeemable noncontrolling interests of consolidated investment management funds
384

618

Total permanent equity
40,907

39,429

Total liabilities, temporary equity and permanent equity
$
354,397

$
333,469



See accompanying Notes to Consolidated Financial Statements.


60 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)
2017

 
2016

Operating activities
 
 
 
Net income
$
2,933

 
$
2,676

Net (income) loss attributable to noncontrolling interests
(18
)
 
1

Net income applicable to shareholders of The Bank of New York Mellon Corporation
2,915

 
2,677

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
(18
)
 
(18
)
Pension plan contributions
(12
)
 
(17
)
Depreciation and amortization
1,044

 
1,118

Deferred tax expense (benefit)
272

 
(282
)
Net securities (gains)
(29
)
 
(65
)
Change in trading assets and liabilities
(66
)
 
1,680

Originations of loans held-for-sale
—

 
(350
)
Proceeds from the sales of loans originated for sale
—

 
802

Change in accruals and other, net
(756
)
 
(3,988
)
Net cash provided by operating activities
3,350

 
1,557

Investing activities
 
 
 
Change in interest-bearing deposits with banks
507

 
880

Change in interest-bearing deposits with the Federal Reserve and other central banks
(14,467
)
 
33,473

Purchases of securities held-to-maturity
(5,878
)
 
(4,169
)
Paydowns of securities held-to-maturity
3,332

 
3,577

Maturities of securities held-to-maturity
3,412

 
2,933

Purchases of securities available-for-sale
(18,974
)
 
(21,491
)
Sales of securities available-for-sale
3,531

 
5,624

Paydowns of securities available-for-sale
7,047

 
6,552

Maturities of securities available-for-sale
4,820

 
7,610

Net change in loans
5,283

 
(2,884
)
Sales of loans and other real estate
369

 
172

Change in federal funds sold and securities purchased under resale agreements
(2,082
)
 
(10,456
)
Net change in seed capital investments
(52
)
 
(57
)
Purchases of premises and equipment/capitalized software
(933
)
 
(495
)
Proceeds from the sale of premises and equipment
—

 
65

Acquisitions, net of cash
—

 
(38
)
Dispositions, net of cash
—

 
1

Other, net
82

 
(239
)
Net cash (used for) provided by investing activities
(14,003
)
 
21,058

Financing activities
 
 
 
Change in deposits
4,459

 
(18,378
)
Change in federal funds purchased and securities sold under repurchase agreements
325

 
(6,950
)
Change in payables to customers and broker-dealers
177

 
(743
)
Change in other borrowed funds
2,187

 
427

Change in commercial paper
2,501

 
—

Net proceeds from the issuance of long-term debt
4,739

 
4,982

Repayments of long-term debt
(796
)
 
(2,453
)
Proceeds from the exercise of stock options
383

 
129

Issuance of common stock
24

 
20

Issuance of preferred stock
—

 
990

Treasury stock acquired
(2,035
)
 
(1,550
)
Common cash dividends paid
(653
)
 
(576
)
Preferred cash dividends paid
(126
)
 
(74
)
Other, net
46

 
(2
)
Net cash provided by (used for) financing activities
11,231

 
(24,178
)
Effect of exchange rate changes on cash
157

 
(17
)
Change in cash and due from banks
 
 
 
Change in cash and due from banks
735

 
(1,580
)
Cash and due from banks at beginning of period
4,822

 
6,537

Cash and due from banks at end of period
$
5,557

 
$
4,957

Supplemental disclosures
 
 
 
Interest paid
$
721

 
$
371

Income taxes paid
316

 
597

Income taxes refunded
19

 
293



See accompanying Notes to Consolidated Financial Statements.


BNY Mellon 61
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) 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 Notes to Consolidated Financial Statements.



62 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, 2016. 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 the allowance for loan losses and lending-related commitments, the 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 investment securities, goodwill and intangible assets and establishment of allowances for loan losses and lending-related commitments as well as changes in pension and post-retirement expense.

 
Note 2 - Accounting change and new accounting guidance

ASU 2017-04, Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This ASU simplifies the annual goodwill impairment test by eliminating Step 2. The Step 2 calculation estimated the implied goodwill using the fair values of all assets, including previously unrecorded intangibles, and liabilities at the date of the test. Step 2 was required if the first step of the annual test indicated that the fair value of a reporting unit is less than its carrying value. After adopting this ASU, the amount of any goodwill impairment will be determined by the excess of the carrying value of a reporting unit over its fair value. The Company early adopted this ASU in the second quarter of 2017, in conjunction with its annual goodwill impairment test. The annual test did not result in any impairment.

ASU 2016-09, Compensation – Stock Compensation

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, recognition of forfeitures and classification on the statement of cash flows. The Company adopted this ASU effective Jan. 1, 2017.

For the first nine months of 2017, we recorded an income tax benefit of $45 million related to the vesting of stock awards and option exercises in the provision for income taxes. Previously, this had been recorded directly to additional paid-in capital. The impact in future periods will vary depending on the number of restricted stock units vesting (which primarily occurs in the first quarter of each year), the number of stock options exercised and the change in value since the grant date.

We continue to apply our accounting policy election for estimating forfeitures. Additionally, beginning in the quarter ended March 31, 2017, we report excess tax benefits related to stock-based compensation as operating activities on the statement of cash flows and the employee taxes paid will continue to be reported as financing activities.



BNY Mellon 63
Notes to Consolidated Financial Statements (continued)
 

Note 3 - Acquisitions

We sometimes structure our acquisitions with both an initial payment and later contingent payments tied to post-closing revenue or income growth. Contingent payments totaled $2 million in the third quarter of 2017 and the first nine months of 2017.

At Sept. 30, 2017, we are potentially obligated to pay additional consideration which, using reasonable assumptions, could range from $0 million to $16 million over the next two years, but could be higher as certain of the arrangements do not contain a contractual maximum. The acquisition described below did not have a material impact on BNY Mellon’s results of operations.

Acquisition in 2016

On April 1, 2016, BNY Mellon acquired the assets of Atherton Lane Advisers, LLC, a U.S.-based investment manager with approximately $2.45 billion in AUM and servicer for approximately 700 high-net-worth clients, for cash of $38 million, plus contingent payments measured at $22 million. Goodwill related to this acquisition totaled $29 million and is included in the Investment Management business. The customer relationship intangible asset related to this acquisition is included in the Investment Management business, with an estimated life of 14 years, and totaled $30 million at acquisition.


 
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, 2017 and Dec. 31, 2016.

Securities at Sept. 30, 2017
Gross
unrealized
 
 
Amortized cost

Fair
value

(in millions)
Gains

Losses

Available-for-sale:
 
 
 
 
U.S. Treasury
$
15,389

$
236

$
123

$
15,502

U.S. government agencies
866

4

6

864

State and political subdivisions
3,091

57

24

3,124

Agency RMBS
24,546

135

250

24,431

Non-agency RMBS
491

37

3

525

Other RMBS
270

3

8

265

Commercial MBS
960

9

4

965

Agency commercial MBS
9,026

41

57

9,010

CLOs
2,542

9

1

2,550

Other asset-backed securities
1,152

5

—

1,157

Foreign covered bonds
2,529

20

7

2,542

Corporate bonds
1,262

21

8

1,275

Sovereign debt/sovereign guaranteed
12,393

195

23

12,565

Other debt securities
3,149

12

10

3,151

Equity securities
2

2

—

4

Money market funds
939

—

—

939

Non-agency RMBS (a)
885

304

4

1,185

Total securities available-for-sale (b)
$
79,492

$
1,090

$
528

$
80,054

Held-to-maturity:
 
 
 
 
U.S. Treasury
$
9,867

$
21

$
29

$
9,859

U.S. government agencies
1,614

—

6

1,608

State and political subdivisions
18

—

1

17

Agency RMBS
25,575

96

185

25,486

Non-agency RMBS
64

5

—

69

Other RMBS
65

—

1

64

Commercial MBS
6

—

—

6

Agency commercial MBS
1,118

5

5

1,118

Foreign covered bonds
83

1

—

84

Sovereign debt/sovereign guaranteed
1,558

32

—

1,590

Other debt securities
27

—

—

27

Total securities held-to-maturity
$
39,995

$
160

$
227

$
39,928

Total securities
$
119,487

$
1,250

$
755

$
119,982

(a)
Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)
Includes gross unrealized gains of $53 million and gross unrealized losses of $155 million recorded in accumulated other comprehensive income related to investment 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.


64 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Securities at Dec. 31, 2016
Gross
unrealized


 
Amortized cost

Fair
value

(in millions)
Gains

Losses

Available-for-sale:
 
 
 
 
U.S. Treasury
$
14,373

$
115

$
181

$
14,307

U.S. government agencies
366

2

9

359

State and political subdivisions
3,392

38

52

3,378

Agency RMBS
22,929

148

341

22,736

Non-agency RMBS
620

31

13

638

Other RMBS
517

4

8

513

Commercial MBS
931

8

11

928

Agency commercial MBS
6,505

28

84

6,449

CLOs
2,593

6

1

2,598

Other asset-backed securities
1,729

4

6

1,727

Foreign covered bonds
2,126

24

9

2,141

Corporate bonds
1,391

22

17

1,396

Sovereign debt/sovereign guaranteed
12,248

261

20

12,489

Other debt securities
1,952

19

10

1,961

Equity securities
2

1

—

3

Money market funds
842

—

—

842

Non-agency RMBS (a)
1,080

286

9

1,357

Total securities available-for-sale (b)
$
73,596

$
997

$
771

$
73,822

Held-to-maturity:
 
 
 
 
U.S. Treasury
$
11,117

$
22

$
41

$
11,098

U.S. government agencies
1,589

—

6

1,583

State and political subdivisions
19

—

1

18

Agency RMBS
25,221

57

299

24,979

Non-agency RMBS
78

4

2

80

Other RMBS
142

—

4

138

Commercial MBS
7

—

—

7

Agency commercial MBS
721

1

10

712

Foreign covered bonds
74

1

—

75

Sovereign debt/sovereign guaranteed
1,911

42

—

1,953

Other debt securities
26

—

—

26

Total securities held-to-maturity
$
40,905

$
127

$
363

$
40,669

Total securities
$
114,501

$
1,124

$
1,134

$
114,491

(a)
Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)
Includes gross unrealized gains of $62 million and gross unrealized losses of $190 million recorded in accumulated other comprehensive income related to investment 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 gross securities gains, losses and impairments.

Net securities gains (losses)
 
 
 
(in millions)
3Q17

2Q17

3Q16

YTD17

YTD16

Realized gross gains
$
20

$
3

$
26

$
34

$
71

Realized gross losses
—

(2
)
(1
)
(2
)
(1
)
Recognized gross impairments
(1
)
(1
)
(1
)
(3
)
(5
)
Total net securities gains
$
19

$
—

$
24

$
29

$
65



In September 2017, other residential mortgage-backed securities with an aggregate amortized cost of $74 million and fair value of $76 million were transferred from held-to-maturity securities to available-for-sale securities. Due to recent ratings downgrades, the Company no longer intends to hold these securities to maturity.

Temporarily impaired securities

At Sept. 30, 2017, the unrealized losses on the investment 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, $155 million of the unrealized losses at Sept. 30, 2017 and $190 million at Dec. 31, 2016 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 65
Notes to Consolidated Financial Statements (continued)
 

The following tables show the aggregate related fair value of investments with a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more at Sept. 30, 2017 and Dec. 31, 2016.

Temporarily impaired securities at Sept. 30, 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
$
7,900

$
111

 
$
495

$
12

 
$
8,395

$
123

U.S. government agencies
399

6

 
—

—

 
399

6

State and political subdivisions
310

4

 
384

20

 
694

24

Agency RMBS
8,935

72

 
4,145

178

 
13,080

250

Non-agency RMBS
5

—

 
156

3

 
161

3

Other RMBS
72

4

 
83

4

 
155

8

Commercial MBS
193

2

 
92

2

 
285

4

Agency commercial MBS
3,610

47

 
561

10

 
4,171

57

CLOs
449

1

 
—

—

 
449

1

Foreign covered bonds
1,017

7

 
28

—

 
1,045

7

Corporate bonds
306

3

 
144

5

 
450

8

Sovereign debt/sovereign guaranteed
2,263

20

 
137

3

 
2,400

23

Other debt securities
1,347

9

 
84

1

 
1,431

10

Non-agency RMBS (a)
8

2

 
13

2

 
21

4

Total securities available-for-sale (b)
$
26,814

$
288

 
$
6,322

$
240

 
$
33,136

$
528

Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Treasury
$
7,281

$
29

 
$
—

$
—

 
$
7,281

$
29

U.S. government agencies
1,459

5

 
99

1

 
1,558

6

State and political subdivisions
—

—

 
4

1

 
4

1

Agency RMBS
17,125

172

 
847

13

 
17,972

185

Other RMBS
15

—

 
35

1

 
50

1

Agency commercial MBS
557

5

 
—

—

 
557

5

Total securities held-to-maturity
$
26,437

$
211

 
$
985

$
16

 
$
27,422

$
227

Total temporarily impaired securities
$
53,251

$
499

 
$
7,307

$
256

 
$
60,558

$
755

(a)
Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)
Gross unrealized losses for 12 months or more of $155 million were recorded in accumulated other comprehensive income and related to investment 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.


66 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Temporarily impaired securities at Dec. 31, 2016
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
$
8,489

$
181

 
$
—

$
—

 
$
8,489

$
181

U.S. government agencies
257

9

 
—

—

 
257

9

State and political subdivisions
1,058

33

 
131

19

 
1,189

52

Agency RMBS
14,766

141

 
1,673

200

 
16,439

341

Non-agency RMBS
21

—

 
332

13

 
353

13

Other RMBS
26

—

 
136

8

 
162

8

Commercial MBS
302

7

 
163

4

 
465

11

Agency commercial MBS
3,570

78

 
589

6

 
4,159

84

CLOs
443

1

 
404

—

 
847

1

Other asset-backed securities
276

1

 
357

5

 
633

6

Foreign covered bonds
712

9

 
—

—

 
712

9

Corporate bonds
594

16

 
7

1

 
601

17

Sovereign debt/sovereign guaranteed
1,521

20

 
63

—

 
1,584

20

Other debt securities
742

10

 
50

—

 
792

10

Non-agency RMBS (a)
25

—

 
47

9

 
72

9

Total securities available-for-sale (b)
$
32,802

$
506


$
3,952

$
265


$
36,754

$
771

Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Treasury
$
6,112

$
41

 
$
—

$
—

 
$
6,112

$
41

U.S. government agencies
1,533

6

 
—

—

 
1,533

6

State and political subdivisions
—

—

 
4

1

 
4

1

Agency RMBS
19,498

297

 
102

2

 
19,600

299

Non-agency RMBS
4

—

 
48

2

 
52

2

Other RMBS
15

—

 
123

4

 
138

4

Agency commercial MBS
621

10

 
—

—

 
621

10

Total securities held-to-maturity
$
27,783

$
354


$
277

$
9


$
28,060

$
363

Total temporarily impaired securities
$
60,585

$
860


$
4,229

$
274


$
64,814

$
1,134

(a)
Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)
Includes gross unrealized losses for 12 months or more of $190 million recorded in accumulated other comprehensive income related to investment 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 investment securities portfolio at Sept. 30, 2017.

Maturity distribution and yield on investment securities at Sept. 30, 2017
U.S. Treasury
 
U.S. government
agencies
 
State and political
subdivisions
 
Other bonds, notes and debentures
 
Mortgage/
asset-backed and
equity securities
 
 
(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
$
2,223

1.02
%
 
$
—

—
%
 
$
438

2.60
%
 
$
3,852

1.01
%
 
$
—

—
%
 
$
6,513

Over 1 through 5 years
5,790

1.66

 
174

1.29

 
1,576

3.07

 
12,648

0.99

 
—

—

 
20,188

Over 5 through 10 years
4,002

1.90

 
690

2.46

 
912

3.34

 
2,835

0.81

 
—

—

 
8,439

Over 10 years
3,487

3.11

 
—

—

 
198

2.36

 
198

1.64

 
—

—

 
3,883

Mortgage-backed securities
—

—

 
—

—

 
—

—

 
—

—

 
36,381

2.78

 
36,381

Asset-backed securities
—

—

 
—

—

 
—

—

 
—

—

 
3,707

2.32

 
3,707

Equity securities (b)
—

—

 
—

—

 
—

—

 
—

—

 
943

—

 
943

Total
$
15,502

1.96
%
 
$
864

2.23
%
 
$
3,124

3.04
%
 
$
19,533

0.97
%
 
$
41,031

2.68
%
 
$
80,054

Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One year or less
$
4,943

0.97
%
 
$
731

0.99
%
 
$
—

—
%
 
$
700

0.60
%
 
$
—

—
%
 
$
6,374

Over 1 through 5 years
3,517

1.67

 
883

1.38

 
2

6.88

 
307

0.59

 
—

—

 
4,709

Over 5 through 10 years
1,407

1.92

 
—

—

 
2

6.86

 
661

0.73

 
—

—

 
2,070

Over 10 years
—

—

 
—

—

 
14

5.32

 
—

—

 
—

—

 
14

Mortgage-backed securities
—

—

 
—

—

 
—

—

 
—

—

 
26,828

2.80

 
26,828

Total
$
9,867

1.36
%
 
$
1,614

1.20
%
 
$
18

5.64
%
 
$
1,668

0.65
%
 
$
26,828

2.80
%
 
$
39,995

(a)
Yields are based upon the amortized cost of securities.
(b)
Includes money market funds.


BNY Mellon 67
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 investment securities portfolio in 2009, at Sept. 30, 2017 and Dec. 31, 2016.

Projected weighted-average default rates and loss severities
 
Sept. 30, 2017
 
Dec. 31, 2016
 
Default rate

Severity

 
Default rate

Severity

Alt-A
22
%
54
%
 
30
%
54
%
Subprime
38
%
66
%
 
49
%
70
%
Prime
13
%
39
%
 
18
%
39
%

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

Net securities gains (losses)
 
 
 
 
(in millions)
3Q17

2Q17

3Q16

YTD17

YTD16

Agency RMBS
$
4

$
—

$
9

$
5

$
22

U.S. Treasury
1

(1
)
(1
)
—

4

Foreign covered bonds
—

—

—

—

10

Non-agency RMBS
(1
)
—

(1
)
(2
)
1

Other
15

1

17

26

28

Total net securities gains
$
19

$
—

$
24

$
29

$
65



The following tables reflect investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. The additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred. The deductions represent credit losses on securities that have been sold, are required to be sold, or for which it is our intention to sell.

Debt securities credit loss roll forward
 
 
(in millions)
3Q17

3Q16

Beginning balance as of June 30
$
85

$
91

Add: Initial OTTI credit losses
—

—

 Subsequent OTTI credit losses
1

1

Less: Realized losses for securities sold
2

5

Ending balance as of Sept. 30
$
84

$
87


Debt securities credit loss roll forward
 
 
(in millions)
YTD17

YTD16

Beginning balance as of Jan. 1
$
88

$
91

Add: Initial OTTI credit losses
—

—

 Subsequent OTTI credit losses
3

5

Less: Realized losses for securities sold
7

9

Ending balance as of Sept. 30
$
84

$
87



Pledged assets

At Sept. 30, 2017, BNY Mellon had pledged assets of $108 billion, including $87 billion pledged as collateral for potential borrowings at the Federal Reserve Discount Window and $4 billion pledged as collateral for borrowing at the Federal Home Loan Bank. The components of the assets pledged at Sept. 30, 2017 included $92 billion of securities, $13 billion of loans, $2 billion of trading assets and $1 billion of interest-bearing deposits with banks.



68 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, 2016, BNY Mellon had pledged assets of $102 billion, including $84 billion pledged as collateral for potential borrowing at the Federal Reserve Discount Window. The components of the assets pledged at Dec. 31, 2016 included $87 billion of securities, $8 billion of loans, $4 billion of interest-bearing deposits with banks and $3 billion of trading assets.

At Sept. 30, 2017 and Dec. 31, 2016, pledged assets included $13 billion and $6 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, 2017 and Dec. 31, 2016, the market value of the securities received that can be sold or repledged was $68 billion and $50 billion, respectively. We routinely sell or repledge these securities through delivery to third parties. As of Sept. 30, 2017 and Dec. 31, 2016, the market value of securities collateral sold or repledged was $39 billion and $20 billion, respectively.

Restricted cash and securities

Cash and securities may also be segregated under federal and other regulations or requirements. At Sept. 30, 2017 and Dec. 31, 2016, cash segregated under federal and other regulations or requirements was $4 billion and $3 billion, respectively. Restricted cash is included in interest-bearing deposits with banks on the consolidated balance sheet. Securities segregated for these purposes were $2 billion at Sept. 30, 2017 and $2 billion at Dec. 31, 2016. Restricted securities were sourced from securities purchased under resale agreements at Sept. 30, 2017 and Dec. 31, 2016 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, 2017 and Dec. 31, 2016.

Loans
Sept. 30, 2017

Dec. 31, 2016

(in millions)
Domestic:
 
 
Financial institutions
$
5,155

$
6,342

Commercial
2,698

2,286

Wealth management loans and mortgages
16,161

15,555

Commercial real estate
4,921

4,639

Lease financings
823

989

Other residential mortgages
741

854

Overdrafts
1,487

1,055

Other
1,159

1,202

Margin loans
13,720

17,503

Total domestic
46,865

50,425

Foreign:
 
 
Financial institutions
6,741

8,347

Commercial
305

331

Wealth management loans and mortgages
104

99

Commercial real estate
6

15

Lease financings
522

736

Other (primarily overdrafts)
4,373

4,418

Margin loans
152

87

Total foreign
12,203

14,033

Total loans (a)
$
59,068

$
64,458

(a)
Net of unearned income of $414 million at Sept. 30, 2017 and $527 million at Dec. 31, 2016 primarily on 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 69
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, 2017
Wealth management loans and mortgages

Other
residential
mortgages

 
 
 
 
(in millions)
Commercial

Commercial
real estate

Financial
institutions

Lease
financings

All
other

 
Foreign

Total

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 quarter ended June 30, 2017
Wealth management loans and mortgages

Other
residential
mortgages

 
 
 
 
(in millions)
Commercial

Commercial
real estate

Financial
institutions

Lease
financings

All
other

 
Foreign

Total

Beginning balance
$
82

$
73

$
23

$
10

$
26

$
25

$
—

 
$
37

$
276

Charge-offs
—

—

—

—

—

—

—

 
—

—

Recoveries
—

—

—

—

—

1

—

 
—

1

Net recoveries
—

—

—

—

—

1

—

 
—

1

Provision
(2
)
2

—

—

(1
)
(3
)
—

 
(3
)
(7
)
Ending balance
$
80

$
75

$
23

$
10

$
25

$
23

$
—

 
$
34

$
270

Allowance for:
 
 
 
 
 
 
 
 
 
 
Loan losses
$
26

$
55

$
7

$
10

$
21

$
23

$
—


$
23

$
165

Lending-related commitments
54

20

16

—

4

—

—


11

105

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$
—

$
—

$
2

$
—

$
7

$
—

$
—


$
—

$
9

Allowance for loan losses
—

—

2

—

3

—

—


—

5

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$
2,580

$
5,017

$
5,952

$
847

$
16,024

$
780

$
15,950

(a)
$
14,514

$
61,664

Allowance for loan losses
26

55

5

10

18

23

—


23

160

(a)
Includes $855 million of domestic overdrafts, $13,973 million of margin loans and $1,122 million of other loans at June 30, 2017.




70 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Allowance for credit losses activity for the quarter ended Sept. 30, 2016
Wealth management loans and mortgages

Other
residential
mortgages

All
other

 
Foreign

Total

(in millions)
Commercial

Commercial
real estate

Financial
institutions

Lease
financings

 
Beginning balance
$
90

$
63

$
29

$
14

$
18

$
29

$
—

 
$
37

$
280

Charge-offs
—

—

—

—

—

(1
)
—

 
—

(1
)
Recoveries
—

—

13

—

—

1

—

 
—

14

Net recoveries
—

—

13

—

—

—

—

 
—

13

Provision
1

—

(13
)
—

—

(1
)
—

 
(6
)
(19
)
Ending balance
$
91

$
63

$
29

$
14

$
18

$
28

$
—

 
$
31

$
274

Allowance for:
 
 
 
 
 
 
 
 
 
 
Loan losses
$
22

$
45

$
9

$
14

$
14

$
28

$
—

 
$
16

$
148

Lending-related commitments
69

18

20

—

4

—

—

 
15

126

Individually evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$
—

$
1

$
—

$
4

$
4

$
—

$
—

 
$
—

$
9

Allowance for loan losses
—

1

—

2

—

—

—

 
—

3

Collectively evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
Loan balance
$
2,292

$
4,693

$
6,783

$
1,013

$
15,027

$
901

$
20,189

(a)
$
15,061

$
65,959

Allowance for loan losses
22

44

9

12

14

28

—

 
16

145

(a)
Includes $1,580 million of domestic overdrafts, $17,487 million of margin loans and $1,122 million of other loans at Sept. 30, 2016.


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



Allowance for credit losses activity for the nine months ended Sept. 30, 2016
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

$
59

$
31

$
15

$
19

$
34

$
—

$
35

$
275

Charge-offs
—

—

—

—

—

(1
)
—

—

(1
)
Recoveries
—

—

13

—

—

4

—

1

18

Net recoveries
—

—

13

—

—

3

—

1

17

Provision
9

4

(15
)
(1
)
(1
)
(9
)
—

(5
)
(18
)
Ending balance
$
91

$
63

$
29

$
14

$
18

$
28

$
—

$
31

$
274





BNY Mellon 71
Notes to Consolidated Financial Statements (continued)
 

Nonperforming assets

The table below presents our nonperforming assets. 

 
Nonperforming assets
(in millions)
Sept. 30, 2017

Dec. 31, 2016

 
 
Nonperforming loans:
 
 
 
Other residential mortgages
$
80

$
91

 
Wealth management loans and mortgages
8

8

 
Financial institutions
2

—

 
Lease financings
—

4

 
Total nonperforming loans
90

103

 
Other assets owned
4

4

 
Total nonperforming assets
$
94

$
107



At Sept. 30, 2017, undrawn commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material.
 
Lost interest

The table below presents the amount of lost interest income.

Lost interest
 
 
 
 
 
(in millions)
3Q17

2Q17

3Q16

YTD17

YTD16

Amount by which interest income recognized on nonperforming loans exceeded reversals
$
—

$
—

$
—

$
—

$
—

Amount by which interest income would have increased if nonperforming loans at period end had been performing for the entire period
$
1

$
1

$
1

$
4

$
4






Impaired loans

The tables below present information about our impaired loans. We use the discounted cash flow method as the primary method for valuing impaired loans. 

Impaired loans
3Q17
2Q17
3Q16
 
YTD17
YTD16
(in millions)
Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

 
Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Impaired loans with an allowance:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
—

$
—

$
—

$
—

$
1

$
—

 
$
—

$
—

$
1

$
—

Financial institutions
2

—

1

—

—

—

 
1

—

—

—

Wealth management loans and mortgages
2

—

3

—

3

—

 
3

—

5

—

Lease financings
—

—

—

—

4

—

 
1

—

3

—

Total impaired loans with an allowance
4

—

4

—

8

—

 
5

—

9

—

Impaired loans without an allowance:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

—

—

—

1

—

 
—

—

1

—

Financial institutions
—

—

—

—

85

—

 
—

—

128

—

Wealth management loans and mortgages
4

—

3

—

3

—

 
3

—

2

—

Total impaired
loans without an allowance (a)
4

—

3

—

89

—

 
3

—

131

—

Total impaired loans
$
8

$
—

$
7

$
—

$
97

$
—

 
$
8

$
—

$
140

$
—

(a)
When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.




72 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Impaired loans
Sept. 30, 2017
 
Dec. 31, 2016
(in millions)
Recorded
investment

Unpaid
principal
balance

Related
allowance (a)

 
Recorded
investment

Unpaid
principal
balance

Related
allowance (a)

Impaired loans with an allowance:
 
 
 
 
 
 
 
Commercial real estate
$
—

$
3

$
—

 
$
—

$
3

$
—

Financial institutions
2

2

2

 
—

—

—

Wealth management loans and mortgages
1

1

—

 
3

3

3

Lease financings
—

—

—

 
4

4

2

Total impaired loans with an allowance
3

6

2

 
7

10

5

Impaired loans without an allowance:
 
 
 
 
 
 
 
Wealth management loans and mortgages
4

4

N/A

 
2

2

N/A

Total impaired loans without an allowance (b)
4

4

N/A

 
2

2

N/A

Total impaired loans (c)
$
7

$
10

$
2

 
$
9

$
12

$
5

(a)
The allowance for impaired loans is included in the allowance for loan losses.
(b)
When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.
(c)
Excludes an aggregate of less than $1 million of impaired loans in amounts individually less than $1 million at both Sept. 30, 2017 and Dec. 31, 2016, respectively. The allowance for loan losses associated with these loans totaled less than $1 million at both Sept. 30, 2017 and Dec. 31, 2016, respectively.


Past due loans

The table below presents our past due loans. 

Past due loans and still accruing interest
Sept. 30, 2017
 
Dec. 31, 2016
 
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
$
51

$
60

$
—

$
111

 
$
78

$
—

$
—

$
78

Wealth management loans and mortgages
86

15

1

102

 
21

2

—

23

Other residential mortgages
20

3

5

28

 
20

6

7

33

Financial institutions
—

—

—

—

 
1

27

—

28

Total past due loans
$
157

$
78

$
6

$
241


$
120

$
35

$
7

$
162

 


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. A TDR may include a transfer of real estate or other assets from the debtor to the creditor, or a modification of the term of the loan. Not all modified loans are considered TDRs.

The following table presents our TDRs.

TDRs
3Q17
 
2Q17
 
3Q16
 
 
Outstanding
recorded investment
 
 
Outstanding
recorded investment
 
 
Outstanding
recorded investment
(dollars in millions)
Number of
contracts

Pre-modification
 
Post-modification
 
 
Number of contracts

Pre-modification
 
Post-modification
 
 
Number of contracts

Pre-modification
 
Post-modification
 
Other residential mortgages
19

 
$
5

 
$
5

 
16

 
$
4

 
$
4

 
17

 
$
4

 
$
4

Wealth management loans and mortgages
1

 
2

 
2

 
—

 
—

 
—

 
—

 
—

 
—

Total TDRs
20

 
$
7

 
$
7

 
16

 
$
4

 
$
4

 
17

 
$
4

 
$
4





BNY Mellon 73
Notes to Consolidated Financial Statements (continued)
 

Other residential mortgages

The modifications of the other residential mortgage loans in the third quarter of 2017, second quarter of 2017 and third quarter of 2016 consisted of reducing the stated interest rates and, in certain cases, a forbearance of default and extending the maturity dates. The modified loans are primarily collateral dependent for which the value is based on the fair value of the collateral.

TDRs that subsequently defaulted

There were three residential mortgage loans that had been restructured in a TDR during the previous 12
 
months and have subsequently defaulted in the third quarter of 2017. The total recorded investment of these loans was less than $1 million.

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.

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, 2017

Dec. 31, 2016

 
Sept. 30, 2017

Dec. 31, 2016

 
Sept. 30, 2017

Dec. 31, 2016

(in millions)
 
 
Investment grade
$
2,857

$
2,397

 
$
4,339

$
3,823

 
$
9,217

$
11,459

Non-investment grade
146

220

 
588

831

 
2,679

3,230

Total
$
3,003

$
2,617

 
$
4,927

$
4,654

 
$
11,896

$
14,689



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, 2017

Dec. 31, 2016

Wealth management loans:
 
 
Investment grade
$
7,128

$
7,127

Non-investment grade
135

260

Wealth management mortgages
9,002

8,267

Total
$
16,265

$
15,654



 
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


74 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

than 1% of the mortgages were past due at Sept. 30, 2017.

At Sept. 30, 2017, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 24%; New York - 19%; Massachusetts - 11%; Florida - 8%; and other - 38%.

Other residential mortgages

The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $741 million at Sept. 30, 2017 and $854 million at Dec. 31, 2016. These loans are not typically correlated to external ratings. Included in this portfolio at Sept. 30, 2017 are $181 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, 2017, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 11% 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.

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients and totaled $5.8 billion at Sept. 30,
 
2017 and $5.5 billion at Dec. 31, 2016. Overdrafts occur on a daily basis in the custody and securities clearance business and are generally repaid within two business days.

Other loans

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

Margin loans

We had $13.9 billion of secured margin loans on our balance sheet at Sept. 30, 2017 compared with $17.6 billion at Dec. 31, 2016. 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
(in millions)
Investment
Management

Investment
Services

Other

Consolidated

Balance at Dec. 31, 2016
$
9,000

$
8,269

$
47

$
17,316

Foreign currency translation
120

107

—

227

Balance at Sept. 30, 2017
$
9,120

$
8,376

$
47

$
17,543



Goodwill by business
(in millions)
Investment
Management

Investment
Services

Other

Consolidated

Balance at Dec. 31, 2015
$
9,207

$
8,366

$
45

$
17,618

Acquisitions
29

(1
)
—

28

Foreign currency translation
(167
)
(30
)
—

(197
)
Other (a)
2

(4
)
2

—

Balance at Sept. 30, 2016
$
9,071

$
8,331

$
47

$
17,449

(a)
Other changes in goodwill include purchase price adjustments and certain other reclassifications.



BNY Mellon 75
Notes to Consolidated Financial Statements (continued)
 

Intangible assets

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

Intangible assets – net carrying amount by business
(in millions)
Investment
Management

Investment
Services

Other

Consolidated

Balance at Dec. 31, 2016
$
1,717

$
1,032

$
849

$
3,598

Amortization
(45
)
(112
)
—

(157
)
Foreign currency translation
16

4

—

20

Balance at Sept. 30, 2017
$
1,688

$
924

$
849

$
3,461



Intangible assets – net carrying amount by business
(in millions)
Investment
Management

Investment
Services

Other

Consolidated

Balance at Dec. 31, 2015
$
1,807

$
1,186

$
849

$
3,842

Acquisitions
30

2

—

32

Amortization
(60
)
(117
)
—

(177
)
Foreign currency translation
(27
)
1

—

(26
)
Balance at Sept. 30, 2016
$
1,750

$
1,072

$
849

$
3,671



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

Intangible assets
Sept. 30, 2017
 
Dec. 31, 2016
(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 relationships—Investment Management
$
1,483

$
(1,221
)
$
262

11 years
 
$
1,439

$
(1,136
)
$
303

Customer contracts—Investment Services
2,257

(1,705
)
552

10 years
 
2,249

(1,590
)
659

Other
25

(22
)
3

2 years
 
37

(33
)
4

Total subject to amortization
3,765

(2,948
)
817

10 years
 
3,725

(2,759
)
966

Not subject to amortization: (b)
 
 
 
 
 
 
 
 
Trade name
1,350

N/A

1,350

N/A
 
1,348

N/A

1,348

Customer relationships
1,294

N/A

1,294

N/A
 
1,284

N/A

1,284

Total not subject to amortization
2,644

N/A

2,644

N/A
 
2,632

N/A

2,632

Total intangible assets
$
6,409

$
(2,948
)
$
3,461

N/A
 
$
6,357

$
(2,759
)
$
3,598

(a)
Excludes fully amortized intangible assets.
(b)
Intangible assets not subject to amortization have an indefinite life.


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)
 
2017
 
$
209

2018
 
180

2019
 
109

2020
 
98

2021
 
75



 
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 eight reporting units for which goodwill impairment testing is performed on an annual basis. In the second quarter of 2017, BNY Mellon conducted an annual goodwill impairment test on all eight reporting units.


76 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

As a result of the annual goodwill impairment test of the eight reporting units, no goodwill impairment was recognized.

Note 7 - Other assets 

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

Other assets
Sept. 30, 2017

Dec. 31, 2016

(in millions)
Corporate/bank-owned life insurance
$
4,824

$
4,789

Accounts receivable
3,899

4,060

Fails to deliver
3,532

1,732

Software
1,513

1,451

Renewable energy investments
1,344

1,282

Equity in a joint venture and other investments
1,153

1,063

Income taxes receivable
1,020

1,172

Qualified affordable housing project investments

988

914

Prepaid pension assets
951

836

Prepaid expenses
512

438

Federal Reserve Bank stock
474

466

Fair value of hedging derivatives
344

784

Due from customers on acceptances
318

340

Seed capital
302

395

Other (a)
1,113

1,232

Total other assets
$
22,287

$
20,954

(a)
At Sept. 30, 2017, other assets include $76 million 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 $988 million at Sept. 30, 2017 and $914 million at Dec. 31, 2016. Commitments to fund future investments in qualified affordable housing projects totaled $439 million at Sept. 30, 2017 and $369 million at Dec. 31, 2016. A summary of the commitments to fund future investments is as follows: 2017 – $75 million; 2018 –
 
$161 million; 2019 – $107 million; 2020 – $79 million; 2021 – $1 million; and 2022 and thereafter – $16 million.

Tax credits and other tax benefits recognized were $39 million in the third quarter of 2017, $39 million in the third quarter of 2016, $38 million in the second quarter of 2017, $115 million in the first nine months of 2017 and $115 million in the first nine months of 2016.

Amortization expense included in the provision for income taxes was $29 million in the third quarter of 2017, $30 million in the third quarter of 2016, $28 million in the second quarter of 2017, $84 million in the first nine months of 2017 and $86 million in the first nine months of 2016.

Certain seed capital and private equity investments valued using net asset value per share

In our Investment Management business, we manage investment assets, including equities, fixed income, money market and alternative investment funds for institutions and other investors. As part of that activity, we make seed capital investments in certain funds. BNY Mellon also holds private equity investments, specifically in small business investment companies (“SBICs”), which are compliant with the Volcker Rule. Seed capital and private equity investments are generally included in other assets. Certain risk retention investments in our CLOs are classified as available-for-sale securities.

The fair value of certain of these investments has been estimated using the NAV per share of BNY Mellon’s ownership interest in the funds. The table below presents information about our investments in seed capital and private equity investments that have been valued using NAV.

Seed capital and private equity investments valued using NAV
 
Sept. 30, 2017
 
Dec. 31, 2016
(dollar amounts in millions)
Fair
value

Unfunded 
commitments
 
Redemption 
frequency
Redemption 
notice period
 
Fair
value

Unfunded
commitments
 
Redemption 
frequency
Redemption 
notice period
Seed capital and other funds (a)
$
97

 
$
2

Daily-quarterly
1-95 days
 
$
171

 
$
1

Daily-quarterly
1-180 days
Private equity investments (SBICs) (b)
54

 
47

N/A
N/A
 
43

 
46

N/A
N/A
Total
$
151

 
$
49

 
 
 
$
214

 
$
47

 
 
(a)
Other funds include various leveraged loans, hedge funds and structured credit funds. Redemption notice periods vary by fund.
(b)
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 are liquidated.


BNY Mellon 77
Notes to Consolidated Financial Statements (continued)
 

Note 8 - 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, 2017

June 30, 2017

Sept. 30, 2016

 
Sept. 30, 2017

Sept. 30, 2016

(in millions)
 
Interest revenue
 
 
 
 
 
 
Non-margin loans
$
283

$
272

$
218

 
$
800

$
637

Margin loans
87

87

67

 
249

194

Securities:
 
 
 
 
 
 
Taxable
510

476

434

 
1,447

1,307

Exempt from federal income taxes
16

16

17

 
49

53

Total securities
526

492

451


1,496

1,360

Deposits with banks
34

27

26

 
83

76

Deposits with the Federal Reserve and other central banks
89

71

37

 
217

170

Federal funds sold and securities purchased under resale agreements
119

86

62

 
272

167

Trading assets
13

17

13

 
46

43

Total interest revenue
1,151

1,052

874


3,163

2,647

Interest expense
 
 
 
 
 
 
Deposits
57

32

(6
)
 
98

21

Federal funds purchased and securities sold under repurchase agreements
70

38

6

 
132

28

Trading liabilities
2

2

2

 
6

5

Other borrowed funds
7

4

1

 
13

5

Commercial paper
8

5

1

 
18

5

Customer payables
19

16

3

 
42

9

Long-term debt
149

129

93

 
397

267

Total interest expense
312

226

100


706

340

Net interest revenue
839

826

774


2,457

2,307

Provision for credit losses
(6
)
(7
)
(19
)
 
(18
)
(18
)
Net interest revenue after provision for credit losses
$
845

$
833

$
793


$
2,475

$
2,325



Note 9 - Employee benefit plans

The components of net periodic benefit (credit) cost are as follows.

Net periodic benefit (credit) cost
Quarter ended
Sept. 30, 2017
 
June 30, 2017
 
Sept. 30, 2016
(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

$
—

 
$
—

$
7

$
—

 
$
—

$
8

$
1

Interest cost
45

8

2

 
45

8

2

 
45

9

2

Expected return on assets
(81
)
(12
)
(2
)
 
(81
)
(12
)
(2
)
 
(82
)
(13
)
(2
)
Other
17

9

(1
)
 
17

9

(1
)
 
17

4

(1
)
Net periodic benefit (credit) cost
$
(19
)
$
12

$
(1
)
 
$
(19
)
$
12

$
(1
)
 
$
(20
)
$
8

$
—





78 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Net periodic benefit (credit) cost
 
Year-to-date
 
 
 
Sept. 30, 2017
 
Sept. 30, 2016
(in millions)
Domestic pension benefits

Foreign pension benefits

Health care benefits

 
Domestic pension benefits

Foreign pension benefits

Health care benefits

Service cost
$
—

$
21

$
—

 
$
—

$
24

$
3

Interest cost
135

24

6

 
135

27

6

Expected return on assets
(243
)
(36
)
(6
)
 
(246
)
(39
)
(6
)
Other
51

27

(3
)
 
52

13

(3
)
Net periodic benefit (credit) cost
$
(57
)
$
36

$
(3
)
 
$
(59
)
$
25

$
—



Note 10 - Income taxes

BNY Mellon recorded an income tax provision of $348 million (25.4% effective tax rate) in the third quarter of 2017. The income tax provision was $324 million (24.6% effective tax rate) in the third quarter of 2016 and $332 million (25.4% effective tax rate) in the second quarter of 2017.

Our total tax reserves as of Sept. 30, 2017 were $157 million compared with $143 million at June 30, 2017. If these tax reserves were unnecessary, $157 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, 2017 is accrued interest, where applicable, of $24 million. The additional tax expense related to interest for the nine months ended Sept. 30, 2017 was $7 million, compared with $2 million for the nine months ended Sept. 30, 2016.

It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by approximately $57 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 11 - 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 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 discussed above are included in the scope of ASU 2015-02, which was adopted effective Jan. 1, 2015, 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 tables present the incremental assets and liabilities included in BNY Mellon’s consolidated financial statements, after applying intercompany eliminations, as of Sept. 30, 2017 and Dec. 31, 2016. 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.



BNY Mellon 79
Notes to Consolidated Financial Statements (continued)
 

Investments consolidated at Sept. 30, 2017
(in millions)
Investment
Management
funds
Securitization

Total
consolidated
investments

Securities - Available-for-sale
$
—

 
$
400

$
400

Trading assets
576

 
—

576

Other assets
226

 
—

226

Total assets
$
802

(a)
$
400

$
1,202

Other liabilities
$
27

 
$
369

$
396

Total liabilities
$
27

(a)
$
369

$
396

Nonredeemable noncontrolling interests
$
384

(a)
$
—

$
384

 
(a)
Includes voting model entities (“VMEs”) with assets of $90 million, liabilities of $2 million and nonredeemable noncontrolling interests of $20 million.


Investments consolidated at Dec. 31, 2016
(in millions)
Investment
Management
funds
Securitization

Total
consolidated
investments

Securities - Available-for-sale
$
—

 
$
400

$
400

Trading assets
979

 
—

979

Other assets
252

 
—

252

Total assets
$
1,231

(a)
$
400

$
1,631

Trading liabilities
$
282

 
$
—

$
282

Other liabilities
33

 
363

396

Total liabilities
$
315

(a)
$
363

$
678

Nonredeemable noncontrolling interests
$
618

(a)
$
—

$
618

(a)
Includes VMEs with assets of $114 million, liabilities of $3 million and nonredeemable noncontrolling interests of $25 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, 2017 and Dec. 31, 2016, 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.

Non-consolidated VIEs at Sept. 30, 2017
(in millions)
Assets

Liabilities

Maximum loss exposure

Securities - Available-for-sale (a)
$
143

$
—

$
143

Other
2,559

439

3,321

(a)
Investments in the Company’s sponsored CLOs.


Non-consolidated VIEs at Dec. 31, 2016
(in millions)
Assets

Liabilities

Maximum loss exposure

Securities - Available-for-sale (a)
$
42

$
—

$
42

Other
2,400

369

2,769

(a)
Investments in the Company’s sponsored CLOs.


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



80 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Note 12 - 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, 2017 and Dec. 31, 2016.

Preferred stock summary (a)
Total shares issued and outstanding
 
Carrying value (b)
 
 
(in millions)
 
Per annum dividend rate
Sept. 30, 2017

Dec. 31, 2016

Sept. 30, 2017

Dec. 31, 2016

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.


On Sept. 20, 2017, The Bank of New York Mellon Corporation paid the following dividends for the noncumulative perpetual preferred stock for the dividend period ending in September 2017 to holders of record as of the close of business on Sept. 5, 2017:

•
$1,022.22 per share on the Series A Preferred Stock (equivalent to $10.2222 per Normal Preferred Capital Security of Mellon Capital IV, each representing a 1/100th interest in a share of the Series A Preferred Stock);
•
$1,300.00 per share on the Series C Preferred Stock (equivalent to $0.3250 per depositary share, each representing a 1/4,000th interest in a share of the Series C Preferred Stock); and
 
•
$2,312.50 per share on the Series F Preferred Stock (equivalent to $23.1250 per depositary share, each representing a 1/100th interest in a share of the Series F Preferred Stock).

For additional information on the preferred stock, see Note 13 of the Notes to Consolidated Financial Statements in our 2016 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 81
Notes to Consolidated Financial Statements (continued)
 

Note 13 - Other comprehensive income (loss)

Components of other comprehensive income (loss)
Quarter ended
Sept. 30, 2017
 
June 30, 2017
 
Sept. 30, 2016
(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)
$
221

$
65

$
286

 
$
249

$
81

$
330

 
$
(104
)
$
(82
)
$
(186
)
Total foreign currency translation
221

65

286

 
249

81

330

 
(104
)
(82
)
(186
)
Unrealized gain (loss) on assets available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) arising during period
47

(19
)
28

 
146

(55
)
91

 
(87
)
34

(53
)
Reclassification adjustment (b)
(19
)
7

(12
)
 
—

(1
)
(1
)
 
(24
)
9

(15
)
Net unrealized gain (loss) on assets available-for-sale
28

(12
)
16

 
146

(56
)
90

 
(111
)
43

(68
)
Defined benefit plans:
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) arising during the period
—

—

—

 
—

—

—

 
—

—

—

Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b)
25

(10
)
15

 
24

(8
)
16

 
22

(8
)
14

Total defined benefit plans
25

(10
)
15

 
24

(8
)
16

 
22

(8
)
14

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

(2
)
 
(8
)
4

(4
)
 
(24
)
7

(17
)
Reclassification adjustment (b)
3

(1
)
2

 
9

(4
)
5

 
28

(9
)
19

Net unrealized gain (loss) on cash flow hedges
1

(1
)
—

 
1

—

1

 
4

(2
)
2

Total other comprehensive income (loss)
$
275

$
42

$
317

 
$
420

$
17

$
437

 
$
(189
)
$
(49
)
$
(238
)
(a)
Includes the impact of hedges of net investments in foreign subsidiaries. See Note 16 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 16 of the Notes to Consolidated Financial Statements for the location of the reclassification adjustment related to cash flow hedges on the Consolidated Income Statement.


Components of other comprehensive income (loss)
Year-to-date
 
Sept. 30, 2017
 
Sept. 30, 2016
(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)
$
566

$
175

$
741

 
$
(223
)
$
(210
)
$
(433
)
Total foreign currency translation
566

175

741

 
(223
)
(210
)
(433
)
Unrealized gain (loss) on assets available-for-sale:
 
 
 
 
 
 
 
Unrealized gain (loss) arising during period
357

(144
)
213

 
338

(111
)
227

Reclassification adjustment (b)
(29
)
10

(19
)
 
(65
)
22

(43
)
Net unrealized gain (loss) on assets available-for-sale
328

(134
)
194

 
273

(89
)
184

Defined benefit plans:
 
 
 
 
 
 
 
Net gain (loss) arising during the period
3

(1
)
2

 
3

(1
)
2

Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b)
74

(25
)
49

 
65

(22
)
43

Total defined benefit plans
77

(26
)
51

 
68

(23
)
45

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

(1
)
3

 
(115
)
38

(77
)
Reclassification adjustment (b)
13

(5
)
8

 
110

(37
)
73

Net unrealized gain (loss) on cash flow hedges
17

(6
)
11

 
(5
)
1

(4
)
Total other comprehensive income (loss)
$
988

$
9

$
997

 
$
113

$
(321
)
$
(208
)
(a)
Includes the impact of hedges of net investments in foreign subsidiaries. See Note 16 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 16 of the Notes to Consolidated Financial Statements for the location of the reclassification adjustment related to cash flow hedges on the Consolidated Income Statement.




82 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Note 14 - 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 2016 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, 2017 and Dec. 31, 2016, 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. There were no material transfers between Level 1 and Level 2 during the third quarter of 2017.

Assets measured at fair value on a recurring basis at Sept. 30, 2017
Total carrying
value

(dollar amounts in millions)
Level 1

Level 2

Level 3

Netting (a)

Available-for-sale securities:
 
 
 
 
 
U.S. Treasury
$
15,502

$
—

$
—

$
—

$
15,502

U.S. government agencies
—

864

—

—

864

Sovereign debt/sovereign guaranteed
74

12,491

—

—

12,565

State and political subdivisions
—

3,124

—

—

3,124

Agency RMBS
—

24,431

—

—

24,431

Non-agency RMBS
—

525

—

—

525

Other RMBS
—

265

—

—

265

Commercial MBS
—

965

—

—

965

Agency commercial MBS
—

9,010

—

—

9,010

CLOs
—

2,550

—

—

2,550

Other asset-backed securities
—

1,157

—

—

1,157

Equity securities
4

—

—

—

4

Money market funds (b)
939

—

—

—

939

Corporate bonds
—

1,275

—

—

1,275

Other debt securities
—

3,151

—

—

3,151

Foreign covered bonds
2,284

258

—

—

2,542

Non-agency RMBS (c)
—

1,185

—

—

1,185

Total available-for-sale securities
18,803

61,251

—

—

80,054

Trading assets:
 
 
 
 
 
Debt and equity instruments (b)
433

1,016

—

—

1,449

Derivative assets not designated as hedging:
 
 
 
 
 
Interest rate
3

6,731

—

(5,301
)
1,433

Foreign exchange
—

4,879

—

(3,120
)
1,759

Equity and other contracts
1

73

—

(49
)
25

Total derivative assets not designated as hedging
4

11,683

—

(8,470
)
3,217

Total trading assets
437

12,699

—

(8,470
)
4,666

Other assets:
 
 
 
 
 
Derivative assets designated as hedging:
 
 
 
 
 
Interest rate
—

307

—

—

307

Foreign exchange
—

37

—

—

37

Total derivative assets designated as hedging
—

344

—

—

344

Other assets (d)
148

184

—

—

332

Other assets measured at net asset value (d)
 
 
 
 
151

Total other assets
148

528

—

—

827

Subtotal assets of operations at fair value
19,388

74,478

—

(8,470
)
85,547

Percentage of assets of operations prior to netting
21
%
79
%
—
%
 
 
Assets of consolidated investment management funds
398

404

—

—

802

Total assets
$
19,786

$
74,882

$
—

$
(8,470
)
$
86,349

Percentage of total assets prior to netting
21
%
79
%
—
%
 
 


BNY Mellon 83
Notes to Consolidated Financial Statements (continued)
 

Liabilities measured at fair value on a recurring basis at Sept. 30, 2017
Total carrying
value

(dollar amounts in millions)
Level 1

Level 2

Level 3

Netting (a)

Trading liabilities:
 
 
 
 
 
Debt and equity instruments
$
684

$
159

$
—

$
—

$
843

Derivative liabilities not designated as hedging:
 
 
 
 
 
Interest rate
3

6,681

—

(5,705
)
979

Foreign exchange
—

4,463

—

(3,095
)
1,368

Equity and other contracts
3

135

—

(75
)
63

Total derivative liabilities not designated as hedging
6

11,279

—

(8,875
)
2,410

Total trading liabilities
690

11,438

—

(8,875
)
3,253

Long-term debt (b)
—

369

—

—

369

Other liabilities – derivative liabilities designated as hedging:
 
 
 
 
 
Interest rate
—

494

—

—

494

Foreign exchange
—

318

—

—

318

Total other liabilities – derivative liabilities designated as hedging
—

812

—

—

812

Subtotal liabilities of operations at fair value
690

12,619

—

(8,875
)
4,434

Percentage of liabilities of operations prior to netting
5
%
95
%
—
%
 
 
Liabilities of consolidated investment management funds
2

25

—

—

27

Total liabilities
$
692

$
12,644

$
—

$
(8,875
)
$
4,461

Percentage of total liabilities prior to netting
5
%
95
%
—
%
 
 
(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 certain interests in securitizations.
(c)
Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(d)
Includes private equity investments and seed capital.


84 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Assets measured at fair value on a recurring basis at Dec. 31, 2016
Total carrying
value

(dollar amounts in millions)
Level 1

Level 2

Level 3

Netting (a)

Available-for-sale securities:
 
 
 
 
 
U.S. Treasury
$
14,307

$
—

$
—

$
—

$
14,307

U.S. government agencies
—

359

—

—

359

Sovereign debt/sovereign guaranteed
66

12,423

—

—

12,489

State and political subdivisions
—

3,378

—

—

3,378

Agency RMBS
—

22,736

—

—

22,736

Non-agency RMBS
—

638

—

—

638

Other RMBS
—

513

—

—

513

Commercial MBS
—

928

—

—

928

Agency commercial MBS
—

6,449

—

—

6,449

CLOs
—

2,598

—

—

2,598

Other asset-backed securities
—

1,727

—

—

1,727

Equity securities
3

—

—

—

3

Money market funds (b)
842

—

—

—

842

Corporate bonds
—

1,396

—

—

1,396

Other debt securities
—

1,961

—

—

1,961

Foreign covered bonds
1,876

265

—

—

2,141

Non-agency RMBS (c)
—

1,357

—

—

1,357

Total available-for-sale securities
17,094

56,728

—

—

73,822

Trading assets:
 
 
 
 
 
Debt and equity instruments (b)
240

2,013

—

—

2,253

Derivative assets not designated as hedging:
 
 
 
 
 
Interest rate
4

7,583

—

(6,047
)
1,540

Foreign exchange
—

6,104

—

(4,172
)
1,932

Equity and other contracts
—

46

—

(38
)
8

Total derivative assets not designated as hedging
4

13,733

—

(10,257
)
3,480

Total trading assets
244

15,746

—

(10,257
)
5,733

Other assets:
 
 
 
 
 
Derivative assets designated as hedging:
 
 
 
 
 
Interest rate
—

415

—

—

415

Foreign exchange
—

369

—

—

369

Total derivative assets designated as hedging
—

784

—

—

784

Other assets (d)
268

73

—

—

341

Other assets measured at net asset value (d)
 
 
 
 
214

Total other assets
268

857

—

—

1,339

Subtotal assets of operations at fair value
17,606

73,331

—

(10,257
)
80,894

Percentage of assets of operations prior to netting
19
%
81
%
—
%
 
 
Assets of consolidated investment management funds
464

767

—

—

1,231

Total assets
$
18,070

$
74,098

$
—

$
(10,257
)
$
82,125

Percentage of total assets prior to netting
20
%
80
%
—
%
 
 



BNY Mellon 85
Notes to Consolidated Financial Statements (continued)
 

Liabilities measured at fair value on a recurring basis at Dec. 31, 2016
Total carrying
value

(dollar amounts in millions)
Level 1

Level 2

Level 3

Netting (a)

Trading liabilities:
 
 
 
 
 
Debt and equity instruments
$
349

$
236

$
—

$
—

$
585

Derivative liabilities not designated as hedging:
 
 
 
 
 
Interest rate
4

7,629

—

(6,634
)
999

Foreign exchange
—

6,103

—

(3,363
)
2,740

Equity and other contracts
—

115

—

(50
)
65

Total derivative liabilities not designated as hedging
4

13,847

—

(10,047
)
3,804

Total trading liabilities
353

14,083

—

(10,047
)
4,389

Long-term debt (b)
—

363

—

—

363

Other liabilities – derivative liabilities designated as hedging:
 
 
 
 
 
Interest rate
—

545

—

—

545

Foreign exchange
—

52

—

—

52

Total other liabilities – derivative liabilities designated as hedging
—

597

—

—

597

Subtotal liabilities of operations at fair value
353

15,043

—

(10,047
)
5,349

Percentage of liabilities of operations prior to netting
2
%
98
%
—
%
 
 
Liabilities of consolidated investment management funds
3

312

—

—

315

Total liabilities
$
356

$
15,355

$
—

$
(10,047
)
$
5,664

Percentage of total liabilities prior to netting
2
%
98
%
—
%
 
 
(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 certain interests in securitizations.
(c)
Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(d)
Includes private equity investments and seed capital.



86 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Details of certain items measured at fair value
 on a recurring basis
Sept. 30, 2017
 
Dec. 31, 2016
Total
carrying
value (b)

 
Ratings (a)
 
Total
carrying value (b)

 
Ratings (a)
AAA/
AA-

A+/
A-

BBB+/
BBB-

BB+ and
lower

 
 
AAA/
AA-

A+/
A-

BBB+/
BBB-

BB+ and
lower

(dollar amounts in millions)
 
Non-agency RMBS, originated in:
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
$
42

 
—
%
—
%
—
%
100
%
 
$
58

 
—
%
—
%
—
%
100
%
2006
85

 
—

—

—

100

 
98

 
—

—

—

100

2005
152

 
20

3

18

59

 
180

 
23

5

9

63

2004 and earlier
246

 
4

2

27

67

 
302

 
5

3

24

68

Total non-agency RMBS
$
525

 
8
%
2
%
14
%
76
%
 
$
638

 
9
%
3
%
14
%
74
%
Commercial MBS - Domestic, originated in:
 
 
 
 
 
 
 
 
 
 
 
 
 
2009-2017
$
909

 
89
%
11
%
—
%
—
%
 
$
674

 
84
%
16
%
—
%
—
%
2008
5

 
100

—

—

—

 
14

 
100

—

—

—

2007
—

 
—

—

—

—

 
190

 
71

29

—

—

2006
—

 
—

—

—

—

 
3

 
7

93

—

—

Total commercial MBS - Domestic
$
914

 
89
%
11
%
—
%
—
%
 
$
881

 
81
%
19
%
—
%
—
%
Foreign covered bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
Canada
$
1,648

 
100
%
—
%
—
%
—
%
 
$
1,320

 
100
%
—
%
—
%
—
%
Australia
261

 
100

—

—

—

 
40

 
100

—

—

—

Netherlands
177

 
100

—

—

—

 
160

 
100

—

—

—

United Kingdom
136

 
100

—

—

—

 
280

 
100

—

—

—

Other
320

 
100

—

—

—

 
341

 
100

—

—

—

Total foreign covered bonds
$
2,542

 
100
%
—
%
—
%
—
%
 
$
2,141

 
100
%
—
%
—
%
—
%
European floating rate notes - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom
$
204

 
87
%
13
%
—
%
—
%
 
$
379

 
90
%
10
%
—
%
—
%
Netherlands
113

 
37

63

—

—

 
125

 
100

—

—

—

Ireland
—

 
—

—

—

—

 
58

 
—

—

100

—

Total European floating rate notes - available-for-sale
$
317

 
69
%
31
%
—
%
—
%
 
$
562

 
83
%
7
%
10
%
—
%
Sovereign debt/sovereign guaranteed:
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom
$
3,036

 
100
%
—
%
—
%
—
%
 
$
3,209

 
100
%
—
%
—
%
—
%
France
1,993

 
100

—

—

—

 
1,998

 
100

—

—

—

Spain
1,740

 
—

—

100

—

 
1,749

 
—

—

100

—

Germany
1,688

 
100

—

—

—

 
1,347

 
100

—

—

—

Italy
1,169

 
—

—

100

—

 
1,130

 
—

—

100

—

Netherlands
1,016

 
100

—

—

—

 
1,061

 
100

—

—

—

Ireland
832

 
—

100

—

—

 
736

 
—

100

—

—

Belgium
809

 
100

—

—

—

 
1,005

 
100

—

—

—

Other (c)
282

 
48

3

—

49

 
254

 
71

—

—

29

Total sovereign debt/sovereign guaranteed
$
12,565

 
69
%
7
%
23
%
1
%
 
$
12,489

 
70
%
6
%
23
%
1
%
Non-agency RMBS (d), originated in:
 
 
 
 
 
 
 
 
 
 
 
 
 
2007
$
337

 
—
%
—
%
—
%
100
%
 
$
387

 
—
%
—
%
—
%
100
%
2006
345

 
—

—

—

100

 
391

 
—

—

—

100

2005
387

 
1

1

1

97

 
437

 
—

2

1

97

2004 and earlier
116

 
2

2

22

74

 
142

 
2

2

17

79

Total non-agency RMBS (d)
$
1,185

 
—
%
1
%
3
%
96
%
 
$
1,357

 
—
%
1
%
2
%
97
%
(a)
Represents ratings by S&P, or the equivalent.
(b)
At Sept. 30, 2017 and Dec. 31, 2016, foreign covered bonds and 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 noninvestment grade sovereign debt/sovereign guaranteed securities related to Brazil of $140 million at Sept. 30, 2017 and $73 million at Dec. 31, 2016.
(d)
Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.


Changes in Level 3 fair value measurements

Our classification of a financial instrument in Level 3 of the valuation hierarchy is based on the significance of the unobservable factors to the overall fair value measurement. However, these instruments generally include other observable components that are actively quoted or validated to third-party sources; accordingly, the gains and losses in the table below include changes in fair value due to observable parameters as well as the unobservable parameters in our valuation methodologies. We also manage the
 
risks of Level 3 financial instruments using securities and derivatives positions that are Level 1 or Level 2 instruments which are not included in the table; accordingly, the gains or losses below do not reflect the effect of our risk management activities related to the Level 3 instruments.

The Company has a Level 3 Pricing Committee which evaluates the valuation techniques used in


BNY Mellon 87
Notes to Consolidated Financial Statements (continued)
 

determining the fair value of Level 3 assets and liabilities.

There were no financial instruments recorded at fair value on a recurring basis classified in Level 3 of the valuation hierarchy in the first nine months of 2017.
 
The table below includes a roll forward of the balance sheet amount for the three and nine months ended Sept. 30, 2016 (including the change in fair value), for financial instruments classified in Level 3 of the valuation hierarchy.

Fair value measurements for assets using significant unobservable inputs
Loans
(in millions)
3Q16

YTD16

Fair value at the beginning of the period
$
101

$
—

Transfers into Level 3
—

19

Total gains for the period included in earnings (a)
—

2

Purchases and sales:
 
 
Purchases
—

113

Issuances
1

1

Sales
(102
)
(135
)
Fair value at Sept. 30, 2016
$
—

$
—

Change in unrealized gains for the period included in earnings for assets held at the end of the reporting period
$
—

$
—

(a)
Reported in investment and other income.


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. An example would be the recording of an impairment of an asset.
 
The following tables present the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy as of Sept. 30, 2017 and Dec. 31, 2016, for which a nonrecurring change in fair value has been recorded during the quarters ended Sept. 30, 2017 and Dec. 31, 2016.

Assets measured at fair value on a nonrecurring basis at Sept. 30, 2017
Total carrying
value

(in millions)
Level 1

Level 2

Level 3

Loans (a)
$
—

$
75

$
7

$
82

Other assets (b)
—

4

—

4

Total assets at fair value on a nonrecurring basis
$
—

$
79

$
7

$
86

 

Assets measured at fair value on a nonrecurring basis at Dec. 31, 2016
Total carrying
value

(in millions)
Level 1

Level 2

Level 3

Loans (a)
$
—

$
84

$
7

$
91

Other assets (b)
—

4

—

4

Total assets at fair value on a nonrecurring basis
$
—

$
88

$
7

$
95

(a)
During the quarters ended Sept. 30, 2017 and Dec. 31, 2016, the fair value of these loans decreased less than $1 million and $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.


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, 2017 and Dec. 31, 2016, by caption on the consolidated balance sheet and by the valuation
 
hierarchy. See Note 18 of the Notes to Consolidated Financial Statements in our 2016 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.



88 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Summary of financial instruments
Sept. 30, 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
$
—

$
75,808

$
—

$
75,808

$
75,808

Interest-bearing deposits with banks
—

15,254

—

15,254

15,256

Federal funds sold and securities purchased under resale agreements
—

27,883

—

27,883

27,883

Securities held-to-maturity
9,943

29,985

—

39,928

39,995

Loans (a)
—

57,709

—

57,709

57,562

Other financial assets
5,557

1,169

—

6,726

6,726

Total
$
15,500

$
207,808

$
—

$
223,308

$
223,230

Liabilities:
 
 
 
 
 
Noninterest-bearing deposits
$
—

$
80,380

$
—

$
80,380

$
80,380

Interest-bearing deposits
—

148,967

—

148,967

150,616

Federal funds purchased and securities sold under repurchase agreements
—

10,314

—

10,314

10,314

Payables to customers and broker-dealers
—

21,176

—

21,176

21,176

Commercial paper
—

2,501

—

2,501

2,501

Borrowings
—

3,544

—

3,544

3,544

Long-term debt
—

28,335

—

28,335

28,039

Total
$
—

$
295,217

$
—

$
295,217

$
296,570

(a)
Does not include the leasing portfolio.


Summary of financial instruments
Dec. 31, 2016
(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
$
—

$
58,041

$
—

$
58,041

$
58,041

Interest-bearing deposits with banks
—

15,091

—

15,091

15,086

Federal funds sold and securities purchased under resale agreements
—

25,801

—

25,801

25,801

Securities held-to-maturity
11,173

29,496

—

40,669

40,905

Loans (a)
—

62,829

—

62,829

62,564

Other financial assets
4,822

1,112

—

5,934

5,934

Total
$
15,995

$
192,370

$
—

$
208,365

$
208,331

Liabilities:
 
 
 
 
 
Noninterest-bearing deposits
$
—

$
78,342

$
—

$
78,342

$
78,342

Interest-bearing deposits
—

141,418

—

141,418

143,148

Federal funds purchased and securities sold under repurchase agreements
—

9,989

—

9,989

9,989

Payables to customers and broker-dealers
—

20,987

—

20,987

20,987

Borrowings
—

960

—

960

960

Long-term debt
—

24,184

—

24,184

24,100

Total
$
—

$
275,880

$
—

$
275,880

$
277,526

(a)
Does not include the leasing portfolio.


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
(in millions)
Gain

(Loss)

Sept. 30, 2017
 
 
 
 
Securities available-for-sale
$
12,416

$
12,333

$
56

$
(337
)
Long-term debt
24,249

24,200

249

(157
)
Dec. 31, 2016
 
Securities available-for-sale
$
9,184

$
9,233

$
83

$
(342
)
Long-term debt
20,511

20,450

330

(203
)


BNY Mellon 89
Notes to Consolidated Financial Statements (continued)
 

Note 15 - Fair value option

We elected fair value as an alternative measurement for selected financial assets and financial liabilities.

The following table presents the assets and liabilities, by type, of consolidated investment management funds recorded at fair value.

Assets and liabilities of consolidated investment management funds, at fair value
 
Sept. 30, 2017

Dec. 31, 2016

(in millions)
Assets of consolidated investment management funds:
 
 
Trading assets
$
576

$
979

Other assets
226

252

Total assets of consolidated investment management funds
$
802

$
1,231

Liabilities of consolidated investment management funds:
 
 
Trading liabilities
$
—

$
282

Other liabilities
27

33

Total liabilities of consolidated investment management funds
$
27

$
315



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 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 $369 million at Sept. 30, 2017 and $363 million at Dec. 31, 2016. 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 changes in fair value of long-term debt and certain loans for which we elected the fair value option that we previously held in 2016, and the location of the changes in the income statement.

 
Impact of changes in fair value in the income statement (a)
(in millions)
3Q17

2Q17

3Q16

YTD17

YTD16

Loans:
 
 
 
 
 
Investment and other income
$
—

$
—

$
(1
)
$
—

$
13

Long-term debt:
 
 
 
 
 
Foreign exchange and other trading revenue
$
(1
)
$
(4
)
$
2

$
(6
)
$
(17
)
(a)
The changes in fair value of the loans and long-term debt are approximately offset by economic hedges included in foreign exchange and other trading revenue.


Note 16 - 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.

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 2017 or the third quarter of 2016.

Hedging derivatives

We utilize interest rate swap agreements to manage our exposure to interest rate fluctuations. For hedges of available-for-sale investment securities, deposits and long-term debt, the hedge documentation specifies the terms of the hedged items and the interest rate swaps and indicates that the derivative is hedging a fixed rate item and is a fair value hedge, that the hedge exposure is to the changes in the fair value of the hedged item due to changes in benchmark interest rates, and that the strategy is to eliminate fair value variability by converting fixed rate interest payments to LIBOR.



90 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

The available-for-sale investment securities hedged consist of U.S. Treasury bonds, agency commercial MBS, sovereign debt and covered bonds that had original maturities of 30 years or less at initial purchase. The swaps on all of these investment securities are not callable. All of these securities are hedged with “pay fixed rate, receive variable rate” swaps of similar maturity, repricing and fixed rate coupon. At Sept. 30, 2017, $12.4 billion face amount of securities were hedged with interest rate swaps that had notional values of $12.3 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 non-callable debt is hedged with “receive fixed rate, pay variable rate” swaps with similar maturity, repricing and fixed rate coupon. Callable debt is hedged with callable swaps where the call dates of the swaps exactly match the call dates of the debt. At Sept. 30, 2017, $24.2 billion par value of debt was hedged with interest rate swaps that had notional values of $24.2 billion.

In addition, we enter into foreign exchange hedges. We use forward foreign exchange contracts with maturities of nine months or less to hedge our Indian rupee, British pound, Hong Kong dollar, Singapore dollar, Polish zloty, Canadian dollar and Japanese yen foreign exchange exposure with respect to foreign currency forecasted revenue and expense transactions in entities that have the U.S. dollar as their functional currency. As of Sept. 30, 2017, the hedged forecasted foreign currency transactions and designated forward foreign exchange contract hedges were $539 million (notional), with a pre-tax loss of $9 million recorded in accumulated other comprehensive income. This loss will be reclassified to income or expense over the next nine 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 two years. The derivatives employed are designated as hedges of changes in value of our foreign investments due to exchange rates. Changes in the value of the forward foreign exchange contracts offset the changes in value of the foreign investments due to changes in foreign exchange rates. The change in fair market value of these forward foreign exchange contracts is deferred and reported within foreign currency translation adjustments in shareholders’ equity, net of tax. At Sept. 30, 2017, forward foreign exchange contracts with notional amounts totaling $7.8 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, 2017, had a combined U.S. dollar equivalent value of $181 million.

Ineffectiveness related to derivatives and hedging relationships was recorded in income as follows:

Ineffectiveness
Nine months ended
(in millions)
Sept. 30, 2017

Sept. 30, 2016

Fair value hedges of securities
$
(13.3
)
$
(5.4
)
Fair value hedges of long-term debt
0.1

(23.0
)
Cash flow hedges
—

—

Other (a)
—

—

Total
$
(13.2
)
$
(28.4
)
(a)
Includes ineffectiveness recorded on foreign exchange hedges.


BNY Mellon 91
Notes to Consolidated Financial Statements (continued)
 

The following table summarizes the notional amount and credit exposure of our total derivative portfolio at Sept. 30, 2017 and Dec. 31, 2016.

Impact of derivative instruments on the balance sheet
Notional value
 
Asset derivatives
fair value
 
Liability derivatives
fair value
(in millions)
Sept. 30, 2017

Dec. 31, 2016

 
Sept. 30, 2017

Dec. 31, 2016

 
Sept. 30, 2017

Dec. 31, 2016

Derivatives designated as hedging instruments: (a)
 
 
 
 
 
 
 
 
Interest rate contracts
$
36,533

$
29,683

 
$
307

$
415

 
$
494

$
545

Foreign exchange contracts
8,399

7,796

 
37

369

 
318

52

Total derivatives designated as hedging instruments
 
 
 
$
344

$
784

 
$
812

$
597

Derivatives not designated as hedging instruments: (b)
 
 
 
 
 
 
 
 
Interest rate contracts
$
283,384

$
325,412

 
$
6,734

$
7,587

 
$
6,684

$
7,633

Foreign exchange contracts
639,336

530,729

 
4,879

6,104

 
4,463

6,103

Equity contracts
1,354

1,167

 
74

46

 
134

112

Credit contracts
180

160

 
—

—

 
4

3

Total derivatives not designated as hedging instruments
 
 
 
$
11,687

$
13,737

 
$
11,285

$
13,851

Total derivatives fair value (c)
 
 
 
$
12,031

$
14,521

 
$
12,097

$
14,448

Effect of master netting agreements (d)
 
 
 
(8,470
)
(10,257
)
 
(8,875
)
(10,047
)
Fair value after effect of master netting agreements
 
 
 
$
3,561

$
4,264

 
$
3,222

$
4,401

(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 balance sheet.
(b)
The fair value of asset derivatives and liability derivatives not designated as hedging instruments is recorded as trading assets and trading liabilities, respectively, on the balance sheet.
(c)
Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815, Derivatives and Hedging.
(d)
Effect of master netting agreements includes cash collateral received and paid of $834 million and $1,239 million, respectively, at Sept. 30, 2017, and $1,119 million and $909 million, respectively, at Dec. 31, 2016.


The following tables present the impact of derivative instruments used in fair value, cash flow and net investment hedging relationships in the income statement.

Impact of derivative instruments in the income statement
(in millions)
 
 
Derivatives in fair value hedging relationships
Location of
gain or (loss)
recognized in income
on derivatives
 
Gain or (loss) recognized in income
on derivatives
 
Location of
gain or (loss)
recognized in income
on hedged item
 
Gain or (loss) recognized
in hedged item
3Q17

 
2Q17

 
3Q16

 
3Q17

 
2Q17

 
3Q16

Interest rate contracts
Net interest revenue
 
$
(33
)
 
$
2

 
$
(174
)
 
Net interest revenue
 
$
31

 
$
(9
)
 
$
168



Derivatives in cash flow hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss)
reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion
and amount excluded from
effectiveness testing)
3Q17

2Q17

3Q16

 
 
3Q17

2Q17

3Q16

 
 
3Q17

2Q17

3Q16

FX contracts
$
—

$
—

$
(7
)
 
Net interest revenue
 
$
—

$
—

$
(6
)
 
Net interest revenue
 
$
—

$
—

$
—

FX contracts
3

(1
)
—

 
Other revenue
 
—

—

—

 
Other revenue
 
—

—

—

FX contracts
(1
)
—

(19
)
 
Trading revenue
 
(1
)
—

(19
)
 
Trading revenue
 
—

—

—

FX contracts
(4
)
(7
)
2

 
Salary expense
 
(2
)
(9
)
(3
)
 
Salary expense
 
—

—

—

Total
$
(2
)
$
(8
)
$
(24
)
 
 
 
$
(3
)
$
(9
)
$
(28
)
 
 
 
$
—

$
—

$
—





92 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Derivatives in net
investment hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss)
reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion
and amount excluded from
effectiveness testing)
3Q17

2Q17

3Q16

 
 
3Q17

2Q17

3Q16

 
 
3Q17

2Q17

3Q16

FX contracts
$
(206
)
$
(274
)
$
47

 
Net interest revenue
 
$
—

$
—

$
—

 
Other revenue
 
$
—

$
—

$
—



Impact of derivative instruments in the income statement
(in millions)
 
Derivatives in fair value hedging relationships
Location of
gain or (loss)
recognized in income
on derivatives
 
Gain or (loss) recognized in income on derivatives
 
Location of
gain or (loss)
recognized in income
on hedged item
 
Gain or (loss) recognized
in hedged item
YTD17

 
YTD16

YTD17

 
YTD16

Interest rate contracts
Net interest revenue
 
$
(21
)
 
$
(445
)
 
Net interest revenue
 
$
8

 
$
417



Derivatives in cash flow hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion
and amount excluded from
effectiveness testing)
YTD17

YTD16

 
 
YTD17

YTD16

 
 
YTD17

YTD16

FX contracts
$
—

$
(16
)
 
Net interest revenue
 
$
—

$
(16
)
 
Net interest revenue
 
$
—

$
—

FX contracts
2

—

 
Other revenue
 
—

—

 
Other revenue
 
—

—

FX contracts
2

(89
)
 
Trading revenue
 
2

(89
)
 
Trading revenue
 
—

—

FX contracts
—

(10
)
 
Salary expense
 
(15
)
(5
)
 
Salary expense
 
—

—

Total
$
4

$
(115
)
 
 
 
$
(13
)
$
(110
)
 
 
 
$
—

$
—



Derivatives in net
investment hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss)
reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives 
(ineffectiveness portion
and amount excluded from
effectiveness testing)
YTD17

YTD16

 
 
YTD17

YTD16

 
 
YTD17

YTD16

FX contracts
$
(576
)
$
320

 
Net interest revenue
 
$
—

$
—

 
Other revenue
 
$
—

$
—



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.

 
As the VaR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and 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.



BNY Mellon 93
Notes to Consolidated Financial Statements (continued)
 

The following table presents our foreign exchange and other trading revenue.

Foreign exchange and other trading revenue
(in millions)
3Q17

2Q17

3Q16

YTD17

YTD16

Foreign exchange
$
158

$
151

$
175

$
463

$
512

Other trading revenue
15

14

8

39

28

Total foreign exchange and other trading revenue
$
173

$
165

$
183

$
502

$
540



Foreign exchange revenue includes income from purchasing and selling foreign currencies and currency forwards, futures and options. Other trading revenue reflects results from futures and forward contracts, interest rate swaps, structured foreign currency swaps, options, equity derivatives and fixed income and equity securities.

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 or highly liquid government securities. Collateral requirements are monitored and adjusted daily.

Additional disclosures concerning derivative financial instruments are provided in Note 14 of the Notes to Consolidated Financial Statements.

Disclosure of contingent features in OTC derivative instruments

Certain OTC derivative contracts and/or collateral agreements of The Bank of New York Mellon, our largest banking subsidiary and the subsidiary through which BNY Mellon enters into the substantial majority of its OTC derivative contracts and/or collateral agreements, contain provisions that may require us to take certain actions if The Bank of New York Mellon’s public debt rating fell to a certain level. Early termination provisions, or “close-out”
 
agreements, in those contracts could trigger immediate payment of outstanding contracts that are in net liability positions. Certain collateral agreements would require The Bank of New York Mellon to immediately post additional collateral to cover some or all of The Bank of New York Mellon’s liabilities to a counterparty.

The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions as of Sept. 30, 2017 for three key ratings triggers.

If The Bank of New York Mellon’s rating was changed to (Moody’s/S&P)
Potential close-out exposures (fair value) (a)
 
A3/A-
 
$
92
 million
Baa2/BBB
 
$
430
 million
Ba1/BB+
 
$
1,899
 million
(a)
The amounts represent potential total close-out values if The Bank of New York Mellon’s rating were to immediately drop to the indicated levels.


The aggregated fair value of contracts impacting potential trade close-out amounts and collateral obligations can fluctuate from quarter to quarter due to changes in market conditions, changes in the composition of counterparty trades, new business or changes to the agreement definitions establishing close-out or collateral obligations.

Additionally, if The Bank of New York Mellon’s debt rating had fallen below investment grade on Sept. 30, 2017, existing collateral arrangements would have required us to post an additional $151 million of collateral.



94 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 


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, 2017
 
 
 
 
 
Gross assets recognized

Gross amounts offset in the balance sheet

 
Net assets recognized on 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
$
6,182

$
5,301

 
$
881

$
189

$
—

$
692

Foreign exchange contracts
4,281

3,120

 
1,161

82

—

1,079

Equity and other contracts
69

49

 
20

—

—

20

Total derivatives subject to netting arrangements
10,532

8,470

 
2,062

271

—

1,791

Total derivatives not subject to netting arrangements
1,499

—

 
1,499

—

—

1,499

Total derivatives
12,031

8,470

 
3,561

271

—

3,290

Reverse repurchase agreements
36,118

19,171

(b)
16,947

16,890

—

57

Securities borrowing
10,936

—

 
10,936

10,627

—

309

Total
$
59,085

$
27,641

 
$
31,444

$
27,788

$
—

$
3,656

(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 assets and financial assets at Dec. 31, 2016
 
 
 
 
 
Gross assets recognized

Gross amounts offset in the balance sheet

 
Net assets recognized
on 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
$
7,205

$
6,047

 
$
1,158

$
321

$
—

$
837

Foreign exchange contracts
5,265

4,172

 
1,093

202

—

891

Equity and other contracts
44

38

 
6

—

—

6

Total derivatives subject to netting arrangements
12,514

10,257

 
2,257

523

—

1,734

Total derivatives not subject to netting arrangements
2,007

—

 
2,007

—

—

2,007

Total derivatives
14,521

10,257

 
4,264

523

—

3,741

Reverse repurchase agreements
17,588

481

(b)
17,107

17,104

—

3

Securities borrowing
8,694

—

 
8,694

8,425

—

269

Total
$
40,803

$
10,738

 
$
30,065

$
26,052

$
—

$
4,013

(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.




BNY Mellon 95
Notes to Consolidated Financial Statements (continued)
 

Offsetting of derivative liabilities and financial liabilities at Sept. 30, 2017
Net liabilities recognized on 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
$
7,103

$
5,705

 
$
1,398

$
1,311

$
—

$
87

Foreign exchange contracts
4,074

3,095

 
979

234

—

745

Equity and other contracts
130

75

 
55

49

—

6

Total derivatives subject to netting arrangements
11,307

8,875

 
2,432

1,594

—

838

Total derivatives not subject to netting arrangements
790

—

 
790

—

—

790

Total derivatives
12,097

8,875

 
3,222

1,594

—

1,628

Repurchase agreements
27,321

19,171

(b)
8,150

8,149

—

1

Securities lending
1,904

—

 
1,904

1,812

—

92

Total
$
41,322

$
28,046

 
$
13,276

$
11,555

$
—

$
1,721

(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.


Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2016
Net liabilities recognized
on 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
$
8,116

$
6,634

 
$
1,482

$
1,266

$
—

$
216

Foreign exchange contracts
4,957

3,363

 
1,594

355

—

1,239

Equity and other contracts
104

50

 
54

54

—

—

Total derivatives subject to netting arrangements
13,177

10,047

 
3,130

1,675

—

1,455

Total derivatives not subject to netting arrangements
1,271

—

 
1,271

—

—

1,271

Total derivatives
14,448

10,047

 
4,401

1,675

—

2,726

Repurchase agreements
8,703

481

(b)
8,222

8,222

—

—

Securities lending
1,615

—

 
1,615

1,522

—

93

Total
$
24,766

$
10,528

 
$
14,238

$
11,419

$
—

$
2,819

(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.


96 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Secured borrowings

The following tables present 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 at Sept. 30, 2017
 
Remaining contractual maturity of the agreements
(in millions)
Overnight and continuous

Up to 30 days

30 days or more

Total

Repurchase agreements:
 
 
 
 
U.S. Treasury
$
21,432

$
—

$
—

$
21,432

U.S. government agencies
489

110

—

599

Agency RMBS
1,798

190

—

1,988

Corporate bonds
282

—

940

1,222

Other debt securities
254

—

871

1,125

Equity securities
466

—

489

955

Total
$
24,721

$
300

$
2,300

$
27,321

Securities lending:
 
 
 
 
U.S. government agencies
$
15

$
—

$
—

$
15

Other debt securities
477

—

—

477

Equity securities
1,412

—

—

1,412

Total
$
1,904

$
—

$
—

$
1,904

Total borrowings
$
26,625

$
300

$
2,300

$
29,225



Repurchase agreements and securities lending transactions accounted for as secured borrowings at Dec. 31, 2016
 
Remaining contractual maturity of the agreements
(in millions)
Overnight and continuous

Up to 30 days

30 days or more

Total

Repurchase agreements:
 
 
 
 
U.S. Treasury
$
2,488

$
4

$
—

$
2,492

U.S. government agencies
396

10

—

406

Agency RMBS
3,294

386

—

3,680

Corporate bonds
304

—

694

998

Other debt securities
146

—

563

709

Equity securities
375

—

43

418

Total
$
7,003

$
400

$
1,300

$
8,703

Securities lending:
 
 
 
 
U.S. government agencies
$
39

$
—

$
—

$
39

Other debt securities
477

—

—

477

Equity securities
1,099

—

—

1,099

Total
$
1,615

$
—

$
—

$
1,615

Total borrowings
$
8,618

$
400

$
1,300

$
10,318



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 97
Notes to Consolidated Financial Statements (continued)
 

Note 17 - 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 risk 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, 2017

Dec. 31, 2016

(in millions)
Lending commitments
$
49,983

$
51,270

Standby letters of credit (a)
3,619

4,185

Commercial letters of credit
265

339

Securities lending indemnifications (b)
406,434

317,690

(a)
Net of participations totaling $681 million at Sept. 30, 2017 and $662 million at Dec. 31, 2016.
(b)
Excludes the indemnification for securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $65 billion at Sept. 30, 2017 and $61 billion at Dec. 31, 2016.


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: $29.8 billion in less than one year, $20.0 billion in one to five years and $158 million over five years.

 
Standby letters of credit (“SBLC”) principally support corporate obligations and were collateralized with cash and securities of $178 million at Sept. 30, 2017 and $293 million at Dec. 31, 2016. At Sept. 30, 2017, $2.3 billion of the SBLCs will expire within one year and $1.2 billion in one to five years and $48 million in over 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 $104 million at Sept. 30, 2017 and $112 million at Dec. 31, 2016.

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, 2017

Dec. 31, 2016

  
Investment grade
86
%
89
%
Non-investment grade
14
%
11
%


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 $265 million at Sept. 30, 2017 and $339 million at Dec. 31, 2016.

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 and the structure of the transaction, including collateral, if any.


98 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

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, which normally matures in less than 90 days.

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 $424 billion at Sept. 30, 2017 and $331 billion at Dec. 31, 2016.

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, 2017 and Dec. 31, 2016, $65 billion and $61 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 $69 billion and $64 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, 2017. The tables below present our credit exposure in the financial institutions and commercial portfolios.

 
Financial institutions
portfolio exposure
(in billions)
Sept. 30, 2017
Loans

Unfunded
commitments

Total
exposure

Securities industry
$
2.9

$
19.0

$
21.9

Asset managers
1.6

6.5

8.1

Banks
6.3

1.4

7.7

Insurance
0.1

3.4

3.5

Government
—

1.0

1.0

Other
1.0

1.4

2.4

Total
$
11.9

$
32.7

$
44.6

 

Commercial portfolio
exposure
(in billions)
Sept. 30, 2017
Loans

Unfunded
commitments

Total
exposure

Manufacturing
$
1.4

$
6.3

$
7.7

Services and other
0.9

4.4

5.3

Energy and utilities
0.6

4.5

5.1

Media and telecom
0.1

1.4

1.5

Total
$
3.0

$
16.6

$
19.6



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 99
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, 2017 and Dec. 31, 2016, 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, 2017 and Dec. 31, 2016, 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 $940 million in excess of the accrued liability (if any) related to those matters.


100 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 253 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. The remaining FINRA action has been resolved and dismissed.

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, Associaceão 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 has been transferred to São Paulo.

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.

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.



BNY Mellon 101
Notes to Consolidated Financial Statements (continued)
 

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 this matter.

Note 18 - 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 or when improvements are made in the measurement principles.

The accounting policies of the businesses are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in our 2016 Annual Report.

The primary types of revenue for our two principal businesses and the Other segment are presented below.

Business
Primary types of revenue
Investment Management
•   Investment management and performance fees from:
Mutual funds
Institutional clients
Private clients
High-net-worth individuals and families, endowments and foundations and related entities
•   Distribution and servicing fees
•   Other revenue from seed capital investments
Investment Services
•   Asset servicing fees, including custody fees, fund services, broker-dealer services, securities finance and collateral and liquidity services
•   Issuer services fees, including Depositary Receipts and Corporate Trust
•   Clearing services fees
•   Treasury services fees, including global payments, trade finance and cash management
•   Foreign exchange revenue
•   Financing-related fees and net interest revenue from credit-related activities
Other segment
•   Net interest revenue and lease-related gains (losses) from leasing operations
•   Gain (loss) on securities and net interest revenue from corporate treasury activity
•   Other trading revenue from derivatives and other trading activity
•   Results of business exits


The results of our businesses are presented and analyzed on an internal management reporting basis.

•
Revenue amounts reflect fee and other revenue generated by each business. Fee and other revenue transferred between businesses under revenue transfer agreements is included within other revenue in each business.
•
Revenues and expenses associated with specific client bases are included in those businesses. For example, foreign exchange activity associated
 
with clients using custody products is 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.


102 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

•
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 investment 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 investment securities portfolio.
 
We typically allocate all interest revenue to the businesses generating the deposits. Accordingly, accretion related to the portion of the investment securities portfolio restructured in 2009 has been included in the results of the businesses.
•
M&I expense is a corporate level item and is recorded in the Other segment.
•
Restructuring charges relate to corporate-level initiatives and were therefore recorded in the Other segment.
•
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 presents the contribution of our businesses to our overall profitability.

For the quarter ended Sept. 30, 2017
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
(dollar amounts in millions)
Fee and other revenue
$
918

(a) 
$
2,187

 
$
69

 
$
3,174

(a) 
Net interest revenue (expense)
82

 
777

 
(20
)
 
839

 
Total revenue
1,000

(a)
2,964

 
49

 
4,013

(a)
Provision for credit losses
(2
)
 
(2
)
 
(2
)
 
(6
)
 
Noninterest expense
702

 
1,874

 
77

 
2,653

(b)
Income (loss) before taxes
$
300

(a) 
$
1,092

 
$
(26
)
 
$
1,366

(a)(b)
Pre-tax operating margin (c)
30
%
 
37
%
 
N/M

 
34
%
 
Average assets
$
31,689

 
$
252,461

 
$
61,559

 
$
345,709

 
(a)
Both fee and other revenue and total revenue include the 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 interest of $1 million related to other consolidated subsidiaries.
(c)
Income before taxes divided by total revenue.
N/M - Not meaningful.


For the quarter ended June 30, 2017
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
(dollar amounts in millions)
Fee and other revenue
$
899

(a) 
$
2,115

 
$
113

 
$
3,127

(a) 
Net interest revenue (expense)
87

 
761

 
(22
)
 
826

 
Total revenue
986

(a)
2,876

 
91

 
3,953

(a)
Provision for credit losses
—

 
(3
)
 
(4
)
 
(7
)
 
Noninterest expense
698

 
1,927

 
28

 
2,653

(b)
Income before taxes
$
288

(a) 
$
952

 
$
67

 
$
1,307

(a)(b)
Pre-tax operating margin (c)
29
%
 
33
%
 
N/M

 
33
%
 
Average assets
$
31,355

 
$
254,724

 
$
56,436

 
$
342,515

 
(a)
Both fee and other revenue and total revenue include the 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 interest of $2 million related to other consolidated subsidiaries.
(c)
Income before taxes divided by total revenue.
N/M - Not meaningful.



BNY Mellon 103
Notes to Consolidated Financial Statements (continued)
 

For the quarter ended Sept. 30, 2016
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
(dollar amounts in millions)
Fee and other revenue
$
876

(a) 
$
2,183

 
$
100

 
$
3,159

(a) 
Net interest revenue (expense)
82

 
715

 
(23
)
 
774

 
Total revenue
958

(a)
2,898

 
77

 
3,933

(a)
Provision for credit losses
—

 
1

 
(20
)
 
(19
)
 
Noninterest expense
702

 
1,851

 
88

 
2,641

(b)
Income before taxes
$
256

(a) 
$
1,046

 
$
9

 
$
1,311

(a)(b)
Pre-tax operating margin (c)
27
%
 
36
%
 
N/M

 
33
%
 
Average assets
$
30,392

 
$
275,714

 
$
45,124

 
$
351,230

 
(a)
Both fee and other revenue and total revenue include net income from consolidated investment management funds of $8 million, representing $17 million of income and noncontrolling interests of $9 million. Income before taxes is net of noncontrolling interests of $9 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interest of $2 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, 2017
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
(dollar amounts in millions)
Fee and other revenue
$
2,694

(a)
$
6,386

 
$
254

 
$
9,334

(a) 
Net interest revenue (expense)
255

 
2,245

 
(43
)
 
2,457

 
Total revenue
2,949

(a)
8,631

 
211

 
11,791

(a) 
Provision for credit losses
1

 
(5
)
 
(14
)
 
(18
)
 
Noninterest expense
2,083

 
5,650

 
212

 
7,945

(b)
Income before taxes
$
865

(a)
$
2,986

 
$
13

 
$
3,864

(a)(b)
Pre-tax operating margin (c)
29
%
 
35
%
 
N/M

 
33
%
 
Average assets
$
31,372

 
$
252,675

 
$
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.


For the nine months ended Sept. 30, 2016
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
(dollar amounts in millions)
Fee and other revenue
$
2,544

(a)
$
6,267

 
$
324

 
$
9,135

(a)
Net interest revenue (expense)
247

 
2,084

 
(24
)
 
2,307

 
Total revenue
2,791

(a)
8,351

 
300

 
11,442

(a)
Provision for credit losses
—

 
8

 
(26
)
 
(18
)
 
Noninterest expense
2,084

 
5,518

 
284

 
7,886

(b)
Income before taxes
$
707

(a)
$
2,825

 
$
42

 
$
3,574

(a)(b)
Pre-tax operating margin (c)
25
%
 
34
%
 
N/M

 
31
%
 
Average assets
$
30,048

 
$
275,410

 
$
57,832

 
$
363,290

 
(a)
Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $15 million, representing $21 million of income and noncontrolling interests of $6 million. Income before taxes is net of a loss attributable to noncontrolling interests of $6 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.




104 BNY Mellon
Notes to Consolidated Financial Statements (continued)
 

Note 19 - Supplemental information to the Consolidated Statement of Cash Flows

Noncash investing and financing transactions that, appropriately, are not reflected in the Consolidated Statement of Cash Flows are listed below.

Noncash investing and financing transactions
Nine months ended Sept. 30,
(in millions)
2017

 
2016

Transfers from loans to other assets for other real estate owned (“OREO”)
$
3

 
$
4

Change in assets of consolidated VIEs
429

 
392

Change in liabilities of consolidated VIEs
288

 
14

Change in nonredeemable noncontrolling interests of consolidated investment management funds
234

 
238

Securities purchased not settled
1,277

 
229

Securities sales not settled
—

 
218

Securities matured not settled
350

 
—

Held-to-maturity securities transferred to available-for-sale
74

 
10

Premises and equipment/capitalized software funded by capital lease obligations
347

 
12

 


BNY Mellon 105
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 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



106 BNY Mellon
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 and capital management and processes, goals, strategies, outlook, objectives, expectations (including those regarding our performance results, regulatory, technology, market, economic or accounting developments, legal proceedings and other contingencies, effective tax rate, estimates (including those regarding capital ratios), intentions (including those regarding our resolution strategy), 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” 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 2016 Annual Report and this Form 10-Q, such as: an information security event or technology disruption that results in a loss of information or impacts our ability to provide services to our clients and any material adverse effect on our business and results of operations; failure of our technology or that of a third party or vendor, or if we neglect to update our technology, develop and market new technology to meet clients’ needs or protect our intellectual property and any material adverse effect on our business; a determination that our resolution plan is not credible and any material negative impact on our business, reputation, results of operations and financial condition and the application of our Title I preferred resolution strategy or resolution under the Title II orderly liquidation authority and any adverse effects on our liquidity, financial condition and security holders; extensive government rulemaking regulation, and supervision, which have, and in the future may, compel us to change how we manage our businesses, could have a material adverse effect on our business, financial condition and results of operations and have increased our compliance and operational risks and costs; failure to satisfy regulatory standards, including “well capitalized” and
 
“well managed” status or capital adequacy and liquidity rules, and any resulting limitations on our activities, or adverse effects on our business and financial condition; regulatory or enforcement actions or litigation and any material adverse effect on our results of operations or harm to our businesses or reputation; adverse events, publicity, government scrutiny or other reputational harm and any negative effect on our businesses; operational risk and any material adverse effect on our business; failure or circumvention of our controls and procedures and any material adverse effect on our business, reputation, results of operations and financial condition; failure of our risk management framework to be effective in mitigating risk and reducing the potential for losses; change or uncertainty in monetary, tax and other governmental policies and the impact on our businesses, profitability and ability to compete; political, economic, legal, operational and other risks inherent in operating globally and any adverse effect on our business; acts of terrorism, natural disasters, pandemics and global conflicts and any negative impact on our business and operations; ongoing concerns about the financial stability of certain countries, the failure or instability of any of our significant global counterparties, new barriers to global trade or a breakup of the EU or Eurozone and any material adverse effect on our business and results of operations; the United Kingdom’s referendum decision to leave the EU and any negative effects on global economic conditions, global financial markets, and our business and results of operations; weakness and volatility in financial markets and the economy generally and any material adverse effect on our business, results of operations and financial condition; changes in interest rates and any material adverse effect on our profitability; write-downs of securities that we own and other losses related to volatile and illiquid market conditions and any reduction in our earnings or impact on our financial condition; our dependence on fee-based business for a substantial majority of our revenue and the adverse effects of a slowing in market activity, weak financial markets, underperformance and/or negative trends in savings rates or in investment preferences; any adverse effect on our foreign exchange revenues from decreased market volatility or cross-border investment activity of our clients; the failure or perceived weakness of any of our significant counterparties, and our assumption of credit and counterparty risk, which could expose us to loss and adversely affect our business; any material reduction in our credit ratings or the credit ratings of


BNY Mellon 107
Forward-looking Statements (continued)
 

our principal bank subsidiaries, which 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; any adverse effect on our business, financial condition and results of operations of not effectively managing our liquidity; the potential to incur losses if our allowance for credit losses is inadequate; the risks relating to new lines of business, new products and services or transformational or strategic project initiatives and the failure to implement these initiatives, which could affect our results of operations; the risks and uncertainties relating to our strategic transactions and any adverse effect on our business, results of operations and financial condition; competition in all aspects of our business and any negative effect on our ability to maintain or increase our profitability; failure to attract and retain employees and any adverse effect on our business; tax law changes or challenges to our tax positions and any adverse effect on our net income, effective tax rate and overall results of operations and financial condition; changes in accounting standards and any material impact on our reported financial condition, results of operations,
 
cash flows and other financial data; risks associated with being a non-operating holding company, including our dependence on dividends from our subsidiaries to meet obligations, to provide funds for payment of dividends and for stock repurchases; and the impact of provisions of U.S. banking laws and regulations, including those governing capital and the approval of our capital plan, applicable provisions of Delaware law or failure to pay full and timely dividends on our preferred stock, on our ability to return capital to shareholders.

Investors should consider all risk factors discussed in our 2016 Annual Report, this Form 10-Q 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.



108 BNY Mellon
Part II - Other Information
 

Item 1. Legal Proceedings

The information required by this Item is set forth in the “Legal proceedings” section in Note 17 of the Notes to Consolidated Financial Statements, which portion is incorporated herein by reference in response to this item.

Item 1A. Risk Factors

The following discussion supplements the discussion of risk factors that could affect our business, financial condition or results of operations set forth in Part I, Item 1A, Risk Factors, on pages 90 through 116 of our 2016 Annual Report. The discussion of Risk Factors, as so supplemented, sets forth our most significant risk factors that could affect our business, financial condition or results of operations. However, other factors, besides that discussed below or in our 2016 Annual Report or other of our reports filed with or furnished to the SEC, also could adversely affect our business or results. We cannot assure you that the risk factors described below or elsewhere in this report and such other reports address all potential risks that we may face. These risk factors also serve to describe factors which may cause our results to differ materially from those described in forward-looking statements included herein or in other documents or statements that make reference to this Form 10-Q. See Forward-looking Statements.

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.

Large BHCs must develop and submit to the Federal Reserve and the FDIC for review plans for their rapid and orderly resolution in the event of material financial distress or failure. BNY Mellon and The Bank of New York Mellon each file periodic complementary resolution plans. In April 2016, the Federal Reserve and the FDIC jointly determined that our 2015 resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code. The agencies issued a joint notice of deficiencies and shortcomings and the actions that
 
must be taken to address them, which we responded to in an Oct. 1, 2016 submission. In December 2016, the agencies jointly determined that our Oct. 1, 2016 submission adequately remedied the identified deficiencies. If the agencies determine that our future submissions are not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, and we fail to address the deficiencies in a timely manner, the agencies may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on our growth, activities or operations. If we continue to fail to adequately remedy any deficiencies identified in future submissions, we could be required to divest assets or operations that the agencies determine necessary to facilitate our orderly resolution.

Following the receipt of feedback from the Federal Reserve and the FDIC in April 2016 on our 2015 resolution plan, we determined that, in the event of our material financial distress or failure, our preferred resolution strategy under Title I of the Dodd-Frank Act is a single point of entry strategy.

In connection with our single point of entry resolution strategy, we have established the IHC to facilitate the provision of capital and liquidity resources to certain key subsidiaries in the event of material financial distress or failure. In the second quarter of 2017, we entered into a binding support agreement that required the IHC to provide that support. The support agreement required the Parent to transfer its intercompany loans and most of its cash to the IHC, and requires the Parent to continue to transfer cash and other liquid financial assets to the IHC.

If our projected liquidity resources deteriorate so severely that resolution of the Parent becomes imminent, the committed line of credit the IHC provided to the Parent will automatically terminate, with all amounts outstanding becoming due and payable, and the support agreement will require the Parent to transfer most of its remaining assets (other than stock in subsidiaries and a cash reserve to fund bankruptcy expenses) to the IHC. As a result, during a period of severe financial stress the Parent might commence bankruptcy proceedings at an earlier time than it otherwise would if the support agreement had not been implemented.

If the Parent were to become subject to a bankruptcy proceeding and our single point of entry strategy is successful, creditors of some or all of our material


BNY Mellon 109
Part II - Other Information (continued)
 

entities would receive full recoveries on their claims, while the Parent’s security holders, including unsecured debt holders, could face significant losses, potentially including the loss of their entire investment. It is possible that the application of the single point of entry strategy – in which the Parent would be the only legal entity to enter resolution proceedings – could result in greater losses to holders of our unsecured debt securities and other securities than the losses that could result from the application of a different resolution strategy. Further, if the single point of entry strategy is not successful, our liquidity and financial condition would be adversely affected and our security holders may, as a consequence, be in a worse position than if the strategy had not been implemented.

In addition, Title II of the Dodd-Frank Act established an orderly liquidation process in the event of the failure of a large systemically important financial institution, such as BNY Mellon, in order to avoid or mitigate serious adverse effects on the U.S. financial system. Specifically, when a U.S. G-SIB, such as BNY Mellon is in default or danger of default, and certain specified conditions are met, the FDIC may be appointed receiver under the orderly liquidation authority, and BNY Mellon would be resolved under that authority instead of the U.S. Bankruptcy Code.

 
U.S. supervisors have indicated that a single point of entry strategy may be a desirable strategy to resolve a large financial institution such as BNY Mellon under Title II in a manner that would, similar to our preferred strategy under our Title I resolution plan, impose losses on shareholders, unsecured debt holders and other unsecured creditors of the top-tier holding company (in our case, the Parent), while permitting the holding company’s subsidiaries to continue to operate and remain solvent. Under such a strategy, assuming the Parent entered resolution proceedings and its subsidiaries remained solvent, losses at the subsidiary level could be transferred to the Parent and ultimately borne by the Parent’s security holders (including holders of the Parent’s unsecured debt securities), while third-party creditors of the Parent’s subsidiaries would receive full recoveries on their claims. Accordingly, the Parent’s security holders (including holders of unsecured debt securities and other unsecured creditors) could face losses in excess of what otherwise would have been the case.




110 BNY Mellon
Part II - Other Information (continued)
 

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 2017. 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 2017
 
 
 
 
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, 2017
 
 
(dollars in millions, except per share information; common shares in thousands)
Total shares
repurchased

 
Average price
per share

 
 
July 2017
7

 
$
51.08

 
7

 
$
2,600

 
August 2017
12,300

 
52.74

 
12,300

 
1,951

 
September 2017
9

 
52.29

 
9

 
1,950

 
Third quarter of 2017 (a)
12,316

 
$
52.74

 
12,316

 
$
1,950

(b)
(a)
Includes 32 thousand shares repurchased at a purchase price of $2 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 $52.74.
(b)
Represents the maximum value of the shares authorized to be repurchased through the second quarter of 2018, including employee benefit plan repurchases, in connection with the Federal Reserve’s non-objection to our 2017 capital plan.


On June 28, 2017, in connection with the Federal Reserve’s non-objection to our 2017 capital plan, BNY Mellon announced a share repurchase plan providing for the repurchase of up to $2.6 billion of common stock and up to an additional $500 million of common stock contingent on a prior issuance of $500 million of noncumulative perpetual preferred stock. The 2017 capital plan began in the third quarter of 2017 and continues through the second quarter of 2018. 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.



BNY Mellon 111
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 Oct. 19, 2015, 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, 2017. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument.
 
N/A


112 BNY Mellon
Index to Exhibits (continued)
 


Exhibit No.
 
Description
 
Method of Filing
12.1
 
 
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.





BNY Mellon 113






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 7, 2017
By:
 
/s/ Kurtis R. Kurimsky
 
 
 
Kurtis R. Kurimsky
 
 
 
Corporate Controller
 
 
 
(Duly Authorized Officer and
 
 
 
Principal Accounting Officer of
 
 
 
the Registrant)




114 BNY Mellon