BK Q3 2014 10-Q
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 September 30, 2014
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)
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Delaware | 13-2614959 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
One Wall Street
New York, New York 10286
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code -- (212) 495-1784
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ X ] | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| Class | Outstanding as of |
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| | Sept. 30, 2014 |
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| Common Stock, $0.01 par value | 1,125,709,682 |
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THE BANK OF NEW YORK MELLON CORPORATION
Third Quarter 2014 Form 10-Q
Table of Contents
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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: | |
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Item 1. Financial Statements: | |
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Notes to Consolidated Financial Statements: | |
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Part II - Other Information | |
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The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Financial Highlights (unaudited)
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| Quarter ended | | Year-to-date | |
(dollar amounts in millions, except per common share amounts and unless otherwise noted) | Sept. 30, 2014 |
| | June 30, 2014 |
| Sept. 30, 2013 |
| | Sept. 30, 2014 |
| | Sept. 30, 2013 |
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Results applicable to common shareholders of The Bank of New York Mellon Corporation: (a) | | | | | | | | | |
Net income | $ | 1,070 |
| | $ | 554 |
| $ | 962 |
| | $ | 2,285 |
| | $ | 1,527 |
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Basic EPS | 0.93 |
| | 0.48 |
| 0.82 |
| | 1.98 |
| | 1.30 |
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Diluted EPS | 0.93 |
| | 0.48 |
| 0.82 |
| | 1.97 |
| | 1.30 |
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Fee and other revenue (a) | $ | 3,851 |
| | $ | 2,980 |
| $ | 2,979 |
| | $ | 9,714 |
| | $ | 9,042 |
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Income from consolidated investment management funds | 39 |
| | 46 |
| 32 |
| | 121 |
| | 147 |
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Net interest revenue | 721 |
| | 719 |
| 772 |
| | 2,168 |
| | 2,248 |
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Total revenue (a) | $ | 4,611 |
| | $ | 3,745 |
| $ | 3,783 |
| | $ | 12,003 |
| | $ | 11,437 |
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Return on common equity (annualized) (a)(b) | 11.6 | % | | 6.1 | % | 11.1 | % | | 8.4 | % | | 5.9 | % | |
Non-GAAP (a)(b)(c) | 8.5 | % | | 8.4 | % | 8.9 | % | | 8.2 | % | | 9.1 | % | |
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Return on tangible common equity (annualized) – Non-GAAP (a)(b) | 26.2 | % | | 14.5 | % | 28.3 | % | | 19.6 | % | | 15.7 | % | |
Non-GAAP adjusted (a)(b)(c) | 18.4 | % | | 18.4 | % | 21.3 | % | | 18.1 | % | | 21.7 | % | |
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Return on average assets (annualized) (a) | 1.12 | % | | 0.60 | % | 1.12 | % | | 0.83 | % | | 0.60 | % | |
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Fee revenue as a percentage of total revenue excluding net securities gains | 83 | % | | 79 | % | 79 | % | | 81 | % | | 79 | % | |
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Percentage of non-U.S. total revenue (a)(d) | 43 | % | | 38 | % | 38 | % | | 39 | % | | 37 | % | |
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Pre-tax operating margin (a)(b) | 36 | % | | 22 | % | 26 | % | | 28 | % | | 27 | % | |
Non-GAAP (b)(c) | 29 | % | | 30 | % | 29 | % | | 28 | % | | 29 | % | |
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Net interest margin (FTE) | 0.94 | % | | 0.98 | % | 1.16 | % | | 0.99 | % | | 1.14 | % | |
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Assets under management at period end (in billions) (e) | $ | 1,646 |
| | $ | 1,636 |
| $ | 1,532 |
| | $ | 1,646 |
| | $ | 1,532 |
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Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (f) | $ | 28.3 |
| | $ | 28.5 |
| $ | 27.4 |
| | $ | 28.3 |
| | $ | 27.4 |
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Market value of securities on loan at period end (in billions) (g) | $ | 282 |
| | $ | 280 |
| $ | 255 |
| | $ | 282 |
| | $ | 255 |
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Average common shares and equivalents outstanding (in thousands): | | | | | | | | | |
Basic | 1,126,946 |
| | 1,133,556 |
| 1,148,724 |
| | 1,133,006 |
| | 1,153,327 |
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Diluted | 1,134,871 |
| | 1,139,800 |
| 1,152,679 |
| | 1,139,718 |
| | 1,156,951 |
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Capital ratios | | | | | | | | | |
Common equity Tier 1 (“CET1”) ratio (h)(i) | 11.4 | % | (b) | 11.2 | % | 14.2 | % | (b)(k) | 11.4 | % | (b) | 14.2 | % | (b)(k) |
Tier 1 capital ratio (h)(i) | 12.3 | % | (b) | 12.2 | % | 15.8 | % | (k) | 12.3 | % | (b) | 15.8 | % | (k) |
Total (Tier 1 plus Tier 2) capital ratio (h)(i) | 12.7 | % | (b) | 12.6 | % | 16.8 | % | (k) | 12.7 | % | (b) | 16.8 | % | (k) |
Leverage capital ratio (i) | 5.8 | % | | 5.9 | % | 5.6 | % | (k) | 5.8 | % | | 5.6 | % | (k) |
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BNY Mellon shareholders’ equity to total assets ratio (b) | 10.0 | % | | 9.6 | % | 9.9 | % | | 10.0 | % | | 9.9 | % | |
BNY Mellon common shareholders’ equity to total assets ratio (b) | 9.5 | % | | 9.2 | % | 9.5 | % | | 9.5 | % | | 9.5 | % | |
BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (a)(b) | 6.5 | % | | 6.4 | % | 6.3 | % | | 6.5 | % | | 6.3 | % | |
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Estimated CET1, fully phased-in – Non-GAAP: (b)(h)(j) | | | | | | | | | |
Standardized Approach | 10.8 | % | | 9.9 | % | 10.1 | % | | 10.8 | % | | 10.1 | % | |
Advanced Approach | 10.2 | % | | 10.0 | % | 11.1 | % | | 10.2 | % | | 11.1 | % | |
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Estimated supplementary leverage ratio (“SLR”), fully phased-in – Non-GAAP (b)(l) | 4.6 | % | | 4.7 | % | N/A |
| | 4.6 | % | | N/A |
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Consolidated Financial Highlights (unaudited) (continued)
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| Quarter ended | | Year-to-date | |
(dollar amounts in millions, except per common share amounts and unless otherwise noted) | Sept. 30, 2014 |
| | June 30, 2014 |
| Sept. 30, 2013 |
| | Sept. 30, 2014 |
| | Sept. 30, 2013 |
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Selected average balances | | | | | | | | | |
Interest-earning assets | $ | 311,603 |
| | $ | 300,758 |
| $ | 271,150 |
| | $ | 299,064 |
| | $ | 268,480 |
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Assets of operations | $ | 370,167 |
| | $ | 357,807 |
| $ | 329,887 |
| | $ | 357,301 |
| | $ | 326,020 |
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Total assets | $ | 380,409 |
| | $ | 369,212 |
| $ | 341,750 |
| | $ | 368,297 |
| | $ | 337,651 |
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Interest-bearing deposits | $ | 164,233 |
| | $ | 162,674 |
| $ | 153,547 |
| | $ | 160,006 |
| | $ | 150,853 |
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Noninterest-bearing deposits | $ | 82,334 |
| | $ | 77,820 |
| $ | 72,075 |
| | $ | 80,531 |
| | $ | 71,026 |
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Preferred stock | $ | 1,562 |
| | $ | 1,562 |
| $ | 1,562 |
| | $ | 1,562 |
| | $ | 1,328 |
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Total The Bank of New York Mellon Corporation common shareholders’ equity | $ | 36,751 |
| | $ | 36,565 |
| $ | 34,264 |
| | $ | 36,537 |
| | $ | 34,541 |
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Other information at period end | | | | | | | | | |
Cash dividends per common share | $ | 0.17 |
| | $ | 0.17 |
| $ | 0.15 |
| | $ | 0.49 |
| | $ | 0.43 |
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Common dividend payout ratio | 18 | % | | 35 | % | 18 | % | | 25 | % | | 33 | % | |
Common dividend yield (annualized) | 1.7 | % | | 1.8 | % | 2.0 | % | | 1.7 | % | | 1.9 | % | |
Closing stock price per common share | $ | 38.73 |
| | $ | 37.48 |
| $ | 30.19 |
| | $ | 38.73 |
| | $ | 30.19 |
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Market capitalization | $ | 43,599 |
| | $ | 42,412 |
| $ | 34,674 |
| | $ | 43,599 |
| | $ | 34,674 |
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Book value per common share – GAAP (a)(b) | $ | 32.77 |
| | $ | 32.49 |
| $ | 30.80 |
| | $ | 32.77 |
| | $ | 30.80 |
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Tangible book value per common share – Non-GAAP (a)(b) | $ | 15.30 |
| | $ | 14.88 |
| $ | 13.34 |
| | $ | 15.30 |
| | $ | 13.34 |
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Full-time employees | 50,900 |
| | 51,100 |
| 50,800 |
| | 50,900 |
| | 50,800 |
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Common shares outstanding (in thousands) | 1,125,710 |
| | 1,131,596 |
| 1,148,522 |
| | 1,125,710 |
| | 1,148,522 |
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(a) | The three and nine months ended Sept. 30, 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
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(b) | See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 56 for a reconciliation of these ratios. |
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(c) | Non-GAAP excludes amortization of intangible assets, merger and integration (“M&I”), litigation, restructuring charges, the gain on the sale of our investment in Wing Hang, the gain on the sale of the One Wall Street building, a charge (recovery) related to investment management funds, net of incentives and the (benefit)/net charge related to the disallowance of certain foreign tax credits, if applicable. |
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(d) | Includes fee revenue, net interest revenue and income of consolidated investment management funds, net of net income attributable to noncontrolling interests. |
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(e) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
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(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 $1.2 trillion at Sept. 30, 2014, June 30, 2014 and Sept. 30, 2013. |
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(g) | Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent, beginning in the fourth quarter of 2013, on behalf of CIBC Mellon clients, which totaled $65 billion at Sept. 30, 2014 and $64 billion at June 30, 2014. |
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(h) | Beginning with June 30, 2014, risk-based capital ratios include the net impact of including the total consolidated assets of certain consolidated investment management funds in risk-weighted assets. These assets were not included in prior periods. The leverage capital ratio was not affected. The June 30, 2014 risk-based capital ratios also reflect adjustments due to refinements in the data used in determining risk-weighted assets. These adjustments resulted in reductions of approximately 20 basis points to the CET1, Tier 1 capital and Total capital ratios and approximately 40 basis points to the estimated CET1 fully phased-in (Non-GAAP) ratio calculated under the Standardized Approach. For additional information on these ratios, see “Capital” beginning on page 46. |
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(i) | At Sept. 30, 2014 and June 30, 2014, the CET1, Tier 1 and Total risk-based regulatory capital ratios are based on Basel III components of capital, as phased-in, with asset risk-weightings using the Advanced Approach framework. The leverage capital ratios are based on Basel III components of capital and quarterly average total assets, as phased-in. For additional information on these ratios, see “Capital” beginning on page 46. |
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(j) | The estimated fully phased-in Basel III CET1 ratios are based on our interpretation of the final rules released by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) on July 2, 2013 (the “Final Capital Rules”), which are being gradually phased-in over a multi-year period. For additional information on these ratios, see “Capital” beginning on page 46. |
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(k) | The capital ratios for Sept. 30, 2013 are based on Basel I rules (including Basel I Tier 1 common in the case of the CET1 ratio). |
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(l) | The estimated fully phased-in SLR as of Sept. 30, 2014 is based on our interpretation of the Final Capital Rules, as supplemented by the Federal Reserve’s final rules on the SLR. The estimated fully phased-in SLR as of June 30, 2014 is based on our interpretation of the Final Capital Rules, as supplemented by the Notice of Proposed Rulemaking released in April 2014 concerning the SLR, except that off-balance sheet exposures included in total leverage exposure reflect the end of period measures, rather than a daily average. On a fully phased-in basis, we expect to satisfy a minimum SLR of over 5%, 3% attributable to a regulatory minimum SLR, and greater than 2% attributable to a buffer applicable to U.S. global systemically important banks (“G-SIBs”). |
N/A – Not available.
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Part I - Financial Information |
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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, 2013 (“2013 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. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest margin on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 56 for a reconciliation of financial measures presented in accordance with U.S. generally accepted accounting principles (“GAAP”) to adjusted Non-GAAP financial measures.
In the first quarter of 2014, BNY Mellon elected to early adopt the new accounting guidance included in Accounting Standards Update (“ASU”) 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects - a Consensus of the FASB Emerging Issues Task Force.” As a result, we
restated the prior period financial statements to reflect the impact of the retrospective application of the new accounting guidance. See Note 2 of the Notes to Consolidated Financial Statements for additional information.
Overview
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of Sept. 30, 2014, BNY Mellon had $28.3 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments.
Key third quarter 2014 and subsequent events
Acquisition of Cutwater Asset Management
In October 2014, BNY Mellon announced that it has signed an agreement to acquire Cutwater Asset Management, a U.S.-based fixed income and solutions specialist with approximately $23 billion in assets under management. Located in Armonk, NY, the firm is currently a wholly-owned subsidiary of MBIA Inc. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to close by the beginning of the first quarter of 2015.
Exit of the derivatives sales and trading business
In September 2014, BNY Mellon announced that it repositioned the BNY Mellon Markets Groups and will be exiting the derivatives sales and trading business over the next several years. This action will be beneficial to our operating margin and return on capital.
Corporate headquarters
In September 2014, BNY Mellon sold its One Wall Street office building in lower Manhattan for $585 million. BNY Mellon has occupied the 50 story, 1.1 million square foot building since 1989. The sale resulted in an after-tax gain of $204 million, or $346 million pre-tax.
Supplementary leverage ratio
The Final Capital Rules includes a minimum 3% supplementary leverage ratio (“SLR”) to become effective as a binding ratio on Jan. 1, 2018, although commencing in January 2015 each Advanced Approaches banking organization is required to calculate and report its SLR.
On Sept. 3, 2014, the U.S. federal banking agencies issued a final rule implementing the SLR. An enhanced SLR applicable to BNY Mellon and the other U.S. G-SIB bank holding companies will require a buffer in excess of 2% over the minimum 3% SLR for a total SLR in excess of 5%. In addition, the eight U.S. G-SIBs’ insured depository institution subsidiaries, regardless of the amount of their consolidated assets or assets under custody, must maintain a 6% SLR to be considered “well-capitalized.”
BNY Mellon’s estimated fully phased-in SLR of 4.6% at Sept. 30, 2014 was based on our interpretation of the Final Capital Rules, as supplemented by the final rules implementing the SLR.
BNY Mellon expects to fully satisfy the requirements of the SLR on or before it is phased-in. For additional information regarding the SLR, see “Recent accounting and regulatory developments - Regulatory developments.”
Liquidity coverage ratio
The Basel III framework requires banks and bank holding companies (“BHCs”) to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate
level of unencumbered high-quality liquid assets relative to the entity’s net stressed cash outflow for a 30-day time horizon under an acute liquidity stress scenario.
On Sept. 3, 2014 the U.S. federal banking agencies issued a final rule (the “Final LCR Rule”) to implement the LCR in the U.S. Starting on Jan. 1, 2015, covered companies, including BNY Mellon, will be required to meet an LCR of 80% percent, increasing annually by 10% increments until Jan. 1, 2017, at which time covered companies would be required to meet a liquidity coverage ratio of 100%.
BNY Mellon expects to fully satisfy the requirement of this new measure of liquidity as it is phased-in without materially impacting our businesses. For additional information regarding the LCR, see “Recent accounting and regulatory developments - Regulatory developments.”
Sale of our equity investment in Wing Hang Bank Limited (“Wing Hang”)
In July 2014, BNY International Financing Corp., a subsidiary of BNY Mellon, sold our equity investment in Wing Hang, which is located in Hong Kong, to Oversea-Chinese Banking Corporation Limited, resulting in an after-tax gain of $315 million, or $490 million pre-tax. Equity income related to our investment in Wing Hang totaled $20 million through July of 2014 and $95 million in full-year 2013, including $37 million from the sale of a property recorded in the third quarter of 2013.
Completion of federal income tax exam
As previously disclosed, our 2006 and 2009 tax years remain open primarily to permit a tax carryback claim. On Nov. 4, 2014, the IRS notified us that our carryback claim was approved and they are processing the refund. We are determining the financial statement impact of the carryback and associated interest but estimate the after-tax benefit will range between $160 million to $190 million in the fourth quarter of 2014.
Highlights of third quarter 2014 results
In the third quarter of 2014, BNY Mellon reported net income applicable to common shareholders of $1.07 billion, or $0.93 per diluted common share, or $734 million, or $0.64 per diluted common share, adjusted
for gains related to the sale of our equity investment in Wing Hang and the sale of our One Wall Street building, net of litigation and restructuring charges. In the third quarter of 2013, net income applicable to common shareholders was $962 million, or $0.82 per diluted common share, or $713 million, or $0.61 per diluted common share, adjusted for the benefit related to certain tax matters net of litigation and restructuring charges. In the second quarter of 2014, net income applicable to common shareholders was $554 million, or $0.48 per diluted common share, or $715 million, or $0.62, per diluted common share adjusted for a charge related to investment management funds and severance. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 56 for the reconciliation of Non-GAAP measures.
Highlights of the third quarter 2014 include:
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• | AUC/A totaled $28.3 trillion at Sept. 30, 2014 compared with $27.4 trillion at Sept. 30, 2013. The increase of 3% primarily reflects higher market values. (See the “Investment Services business” beginning on page 23). |
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• | Assets under management (“AUM”), excluding securities lending cash management assets and assets managed in the Investment Services business, totaled a record $1.65 trillion at Sept. 30, 2014 compared with $1.53 trillion at Sept. 30, 2013. The increase of 7% resulted from higher equity market values and net new business. (See the “Investment Management business” beginning on page 20). |
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• | Investment services fees totaled $1.8 billion, an increase of 5% compared with the third quarter of 2013. The increase primarily reflects organic growth, higher market values and net new business. (See the “Investment Services business” beginning on page 23). |
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• | Investment management and performance fees totaled $881 million, a 7% increase compared with the third quarter of 2013. The increase primarily reflects higher equity markets, the impact of a weaker U.S. dollar and higher performance fees. (See the “Investment Management business” beginning on page 20). |
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• | Foreign exchange and other trading revenue totaled $153 million in the third quarter of 2014 compared with $160 million in the third quarter of 2013. Foreign exchange revenue was flat as higher volumes were offset by lower volatility. |
Other trading revenue decreased reflecting lower derivatives trading revenue. (See “Fee and other revenue” beginning on page 7).
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• | Investment and other income totaled $890 million in the third quarter of 2014 compared with $151 million in the third quarter of 2013. The increase primarily reflects the gains on the sales of our equity investment in Wing Hang and our One Wall Street building, partially offset by lower equity investment revenue and seed capital gains. (See “Fee and other revenue” beginning on page 7). |
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• | Net interest revenue totaled $721 million in the third quarter of 2014 compared with $772 million in the third quarter of 2013. The decrease primarily resulted from lower asset yields and lower accretion, partially offset by higher average interest-bearing assets driven by higher deposits. (See “Net interest revenue” beginning on page 11). |
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• | The net unrealized pre-tax gain on our total investment securities portfolio was $1.1 billion at Sept. 30, 2014 compared with $1.2 billion at June 30, 2014. The decrease was primarily driven by an increase in market interest rates. (See “Investment securities” beginning on page 32). |
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• | The provision for credit losses was a credit of $19 million in the third quarter of 2014 driven by the continued improvement in the credit quality of the loan portfolio. (See “Asset quality and allowance for credit losses” beginning on page 37). |
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• | Noninterest expense totaled $3.0 billion in the third quarter of 2014 compared with $2.8 billion in the third quarter of 2013. The increase primarily reflects higher litigation expense, restructuring charges and the impact of a weaker U.S. dollar. Total noninterest expense excluding amortization of intangible assets, M&I, litigation and restructuring charges, and the charge (recovery) related to investment management funds (Non-GAAP) decreased slightly year-over-year. (See “Noninterest expense” beginning on page 14). |
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• | The provision for income taxes was $556 million (33.5% effective tax rate) in the third quarter of 2014. The gains on the sales of our equity investment in Wing Hang and our One Wall Street building, litigation and restructuring charges increased the effective tax rate 7.1% in the third quarter of 2014. (See “Income taxes” on page 15). |
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• | Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis, was 10.2% at Sept. 30, 2014 and 10.0% at June 30, 2014. Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully |
phased-in basis, was 10.8% at Sept. 30, 2014, compared with 9.9% at June 30, 2014. (See “Capital” beginning on page 46).
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• | In the third quarter of 2014, we repurchased 11.0 million common shares for a total cost of $431 million. |
Fee and other revenue
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| | | | | | | | | | | | | | | | | | | | | | | | |
Fee and other revenue |
|
|
|
|
|
| | | | | | | YTD14 |
| | | | | 3Q14 vs. | | Year-to-date | | vs. |
(dollars in millions, unless otherwise noted) | 3Q14 |
| 2Q14 |
| 3Q13 |
| | 3Q13 |
| 2Q14 |
| | 2014 |
| 2013 |
| | YTD13 |
Investment services fees: | | | | | | | | | | | |
Asset servicing (a) | $ | 1,025 |
| $ | 1,022 |
| $ | 964 |
| | 6 | % | — | % | | $ | 3,056 |
| $ | 2,921 |
| | 5 | % |
Clearing services | 337 |
| 326 |
| 315 |
| | 7 |
| 3 |
| | 988 |
| 940 |
| | 5 |
|
Issuer services | 315 |
| 231 |
| 322 |
| | (2 | ) | 36 |
| | 775 |
| 853 |
| | (9 | ) |
Treasury services | 142 |
| 141 |
| 137 |
| | 4 |
| 1 |
| | 419 |
| 417 |
| | — |
|
Total investment services fees | 1,819 |
| 1,720 |
| 1,738 |
| | 5 |
| 6 |
| | 5,238 |
| 5,131 |
| | 2 |
|
Investment management and performance fees | 881 |
| 883 |
| 821 |
| | 7 |
| — |
| | 2,607 |
| 2,491 |
| | 5 |
|
Foreign exchange and other trading revenue | 153 |
| 130 |
| 160 |
| | (4 | ) | 18 |
| | 419 |
| 528 |
| | (21 | ) |
Distribution and servicing | 44 |
| 43 |
| 43 |
| | 2 |
| 2 |
| | 130 |
| 137 |
| | (5 | ) |
Financing-related fees | 44 |
| 44 |
| 44 |
| | — |
| — |
| | 126 |
| 129 |
| | (2 | ) |
Investment and other income (b) | 890 |
| 142 |
| 151 |
| | N/M | N/M | | 1,134 |
| 524 |
| | N/M |
Total fee revenue (b) | 3,831 |
| 2,962 |
| 2,957 |
| | 30 |
| 29 |
| | 9,654 |
| 8,940 |
| | 8 |
|
Net securities gains | 20 |
| 18 |
| 22 |
| | N/M | N/M | | 60 |
| 102 |
| | N/M |
Total fee and other revenue (b) | $ | 3,851 |
| $ | 2,980 |
| $ | 2,979 |
| | 29 | % | 29 | % | | $ | 9,714 |
| $ | 9,042 |
| | 7 | % |
| | | | |
|
|
|
| | | | |
|
|
AUM at period end (in billions) (c) | $ | 1,646 |
| $ | 1,636 |
| $ | 1,532 |
| | 7 | % | 1 | % | | $ | 1,646 |
| $ | 1,532 |
| | 7 | % |
AUC/A at period end (in trillions) (d) | $ | 28.3 |
| $ | 28.5 |
| $ | 27.4 |
| | 3 | % | (1 | )% | | $ | 28.3 |
| $ | 27.4 |
| | 3 | % |
| |
(a) | Asset servicing fees include securities lending revenue of $37 million in the third quarter of 2014, $46 million in the second quarter of 2014, $35 million in the third quarter of 2013, $121 million in the first nine months of 2014 and $124 million in the first nine months of 2013. |
| |
(b) | Results for the third quarter of 2013 and the first nine months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
| |
(c) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
| |
(d) | Includes the AUC/A of CIBC Mellon of $1.2 trillion at Sept. 30, 2014, June 30, 2014 and Sept. 30, 2013. |
N/M - Not meaningful.
Fee and other revenue
Fee and other revenue totaled $3.9 billion in the third quarter of 2014, an increase of 29% both year-over-year and sequentially. Both increases primarily reflect the gains on the sales of the equity investment in Wing Hang and the One Wall Street building. The year-over-year increase also reflects higher asset servicing fees, investment management and performance fees and clearing services fees, partially offset by lower investment and other income (excluding the Wing Hang and One Wall Street gains) and lower foreign exchange and other trading revenue. Sequentially, the increase also reflects higher issuer services fees, clearing services fees and foreign exchange and other trading revenue, partially
offset by lower investment and other income (excluding the Wing Hang and One Wall Street gains).
Investment services fees
Investment services fees were impacted by the following compared with the third quarter of 2013 and the second quarter of 2014:
| |
• | Asset servicing fees increased 6% year-over-year and increased slightly sequentially. The year-over-year increase primarily reflects organic growth, higher market values, net new business and higher collateral management fees in Global Collateral Services. The sequential increase |
primarily reflects organic growth, partially offset by seasonally lower securities lending revenue.
| |
• | Clearing services fees increased 7% year-over-year and increased 3% (unannualized) sequentially. Both increases were driven by growth in clearing accounts and mutual fund positions, and higher asset levels. The sequential increase also reflects higher DARTS volume. |
| |
• | Issuer services fees decreased 2% year-over-year and increased 36% (unannualized) sequentially. The year-over-year decrease reflects lower Corporate Trust fees, partially offset by new business in Depositary Receipts. The sequential increase is primarily due to seasonally higher dividend fees and new business in Depositary Receipts, partially offset by lower Corporate Trust fees. We continue to estimate that net maturities of high margin structured debt securitizations could reduce the Company’s total annual revenue by up to one-half of 1% if the structured debt markets do not recover. |
| |
• | Treasury services fees increased 4% year-over-year and 1% (unannualized) sequentially. The year-over-year increase primarily reflects higher payment volumes. |
See the “Investment Services business” in “Review of businesses” for additional details.
Investment management and performance fees
Investment management and performance fees totaled $881 million in the third quarter of 2014, an increase of 7% year-over-year and a slight decrease sequentially. The year-over-year increase primarily resulted from higher equity markets, the impact of a weaker U.S. dollar and higher performance fees. The sequential decrease was primarily driven by seasonally lower performance fees and the impact of a stronger U.S. dollar. Performance fees were $22 million in the third quarter of 2014 compared with $10 million in the third quarter of 2013 and $29 million in the second quarter of 2014.
Total AUM for the Investment Management business was a record $1.65 trillion at Sept. 30, 2014, an increase of 7% year-over-year and 1% (unannualized) sequentially. The year-over-year increase primarily resulted from higher equity market values and net new business. The sequential increase primarily reflects net new business. Net long-term inflows totaled $13 billion in the third quarter of 2014 driven
by liability-driven investments, while short-term inflows were $19 billion.
See the “Investment Management business” in “Review of businesses” for additional details.
Foreign exchange and other trading revenue
|
| | | | | | | | | | | | | | | |
Foreign exchange and other trading revenue | Year-to-date |
(in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| 2014 |
| 2013 |
|
Foreign exchange | $ | 154 |
| $ | 129 |
| $ | 154 |
| $ | 413 |
| $ | 482 |
|
Other trading revenue (loss): | | | | | |
Fixed income | 2 |
| (1 | ) | (2 | ) | 2 |
| 18 |
|
Equity/other | (3 | ) | 2 |
| 8 |
| 4 |
| 28 |
|
Total other trading revenue (loss) | (1 | ) | 1 |
| 6 |
| 6 |
| 46 |
|
Total foreign exchange and other trading revenue | $ | 153 |
| $ | 130 |
| $ | 160 |
| $ | 419 |
| $ | 528 |
|
Foreign exchange and other trading revenue totaled $153 million in the third quarter of 2014, $160 million in the third quarter of 2013 and $130 million in the second quarter of 2014. In the third quarter of 2014, foreign exchange revenue totaled $154 million, unchanged year-over-year and up 19% (unannualized) sequentially. Year-over-year, higher volumes offset lower volatility. The sequential increase reflects higher volumes. Total other trading loss was $1 million in the third quarter of 2014 compared with other trading revenue of $6 million in the third quarter of 2013 and other trading revenue of $1 million in the second quarter of 2014. Both decreases primarily reflect lower derivatives trading revenue. Foreign exchange revenue and fixed income trading revenue are reported in the Investment Services business and the Other segment. Equity/other trading revenue is primarily reported in the Other segment.
The foreign exchange trading engaged in by the Company generates revenues, which are influenced by the volume of client transactions and the spread realized on these transactions. Revenues are impacted by market pressures which continue to be increasingly competitive. The level of volume and spreads is affected by market volatility, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by corporate and institutional clients. These revenues
also depend on our ability to manage the risk associated with the currency transactions we execute. A substantial majority of our foreign exchange trades are undertaken for our custody clients in transactions where BNY Mellon acts as principal, and not as an agent or broker. As a principal, we earn a profit, if any, based on our ability to risk manage the aggregate foreign currency positions that we buy and sell on a daily basis. Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction program, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client’s investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. Such transactions may be initiated by (i) contacting one of our sales desks to negotiate the rate for specific transactions, (ii) using electronic trading platforms, or (iii) electing other methods such as those pursuant to a benchmarking arrangement, in which pricing is determined by an objective market rate adjusted by a pre-negotiated spread. Our custody clients choose to use third-party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar-equivalent volume foreign exchange transactions. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction program, including a standing instruction program option called the Defined Spread Offering, which the Company introduced to clients in the first quarter of 2012, provides custody clients and their investment managers with an end-to-end solution that allows them to shift to BNY Mellon the cost, management and execution risk, often in small transactions or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. In response to competitive market pressures and client requests, we are continuing to develop standing instruction program products and services and making these new products and services available to our clients. In our historical standing instruction program, known as Session Range, we typically assigned a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than
$1 million) executed between global financial institutions, known as the “interbank range.” Using the interbank range for the given day, we typically priced client purchases of currencies at or near the high end of this range and client sales of currencies at or near the low end of this range. In the first quarter of 2014, we upgraded our Session Range program. The upgrades include pricing pursuant to pre-defined rules and enhanced post-trade reporting, with transactions priced once per day within the interbank range of the day, and subject to application of a price collar, with price being specific to session, pricing location and currency pair. A description of the pricing rules used in the upgraded Session Range program is set forth in the program’s disclosure documentation, which is available to clients and their investment managers. Separately, the standing instruction program Defined Spread Offering sets prices for transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread either to an objective market source for developed and certain emerging market currencies, or to a reference rate computed by BNY Mellon for other emerging market currencies. A description of the pricing rules is set forth in the Defined Spread Offering’s disclosure documentation, which is available to clients and their investment managers.
A shift by custody clients from the standing instruction program to other trading options combined with competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. We continue to invest in our foreign exchange trading and execution capabilities, which is leading towards enhanced customer service and higher volumes. For the quarter ended Sept. 30, 2014, our total revenue for all types of foreign exchange trading transactions was $154 million, or approximately 3% of our total revenue and approximately 29% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction program. The percentage of our foreign exchange revenue resulting from transactions undertaken through our standing instruction program declined compared with the second quarter of 2014 primarily reflecting an increase in other BNY Mellon foreign exchange activities in the third quarter of 2014.
Distribution and servicing fees
Distribution and servicing fee revenue was $44 million in the third quarter of 2014 and $43 million in both the third quarter of 2013 and second quarter of 2014.
Financing-related fees
Financing-related fees, which are primarily reported in the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees totaled $44 million in the third quarter of 2014, the third quarter of 2013 and the second quarter of 2014.
Investment and other income
|
| | | | | | | | | | | | | | | |
Investment and other income | | |
| | | | Year-to-date |
(in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| 2014 |
| 2013 |
|
Asset-related gains | $ | 836 |
| $ | 17 |
| $ | 35 |
| $ | 852 |
| $ | 49 |
|
Corporate/bank-owned life insurance | 34 |
| 30 |
| 38 |
| 94 |
| 104 |
|
Lease residual gains | 5 |
| 4 |
| 7 |
| 44 |
| 18 |
|
Expense reimbursements from joint venture | 13 |
| 15 |
| 12 |
| 40 |
| 31 |
|
Seed capital gains (losses) | (1 | ) | 15 |
| 7 |
| 20 |
| 14 |
|
Equity investment revenue (loss) | (9 | ) | 17 |
| 48 |
| 6 |
| 261 |
|
Private equity gains (losses) | 2 |
| (2 | ) | (2 | ) | 5 |
| 1 |
|
Transitional services agreements | — |
| — |
| — |
| — |
| 9 |
|
Other income (a) | 10 |
| 46 |
| 6 |
| 73 |
| 37 |
|
Total investment and other income (a) | $ | 890 |
| $ | 142 |
| $ | 151 |
| $ | 1,134 |
| $ | 524 |
|
| |
(a) | Results for the third quarter of 2013 and the first nine months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes asset-related gains, insurance contracts, lease residual gains, expense reimbursements from our CIBC Mellon joint venture, seed capital gains and losses, gains and losses on equity investments, gains and losses on private equity investments, transitional services agreements, and other income. Asset-related gains include real estate, loans and other asset dispositions. Expense
reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC Mellon joint venture. Transitional services agreements primarily relate to the Shareowner Services business, which was sold on Dec. 31, 2011. Other income primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income increased $739 million compared with the third quarter of 2013 and $748 million compared to the second quarter of 2014. Both increases primarily reflect the gains on the sales of the equity investment in Wing Hang and the One Wall Street building, partially offset by lower equity investment revenue and seed capital gains.
In July 2014, we sold our equity investment in Wing Hang resulting in an after-tax gain on $315 million, or $490 million pre-tax. Equity investment revenue related to our investment in Wing Hang totaled $20 million through July of 2014 and $95 million in full-year 2013, including $37 million from the sale of a property recorded in the third quarter of 2013.
In September 2014, we sold the corporate headquarters at One Wall Street resulting in an after-tax gain of $204 million, or $346 million pre-tax.
Year-to-date 2014 compared with year-to-date 2013
Fee and other revenue for the first nine months of 2014 totaled $9.7 billion compared with $9.0 billion in the first nine months of 2013. The increase primarily reflects the gains on the sales of the equity investment in Wing Hang and the One Wall Street building, higher asset servicing fees, investment management and performance fees, and clearing services fees, partially offset by a gain related to an equity investment recorded in the second quarter of 2013, lower foreign exchange and other trading revenue, issuer services fees, investment and other income (excluding the aforementioned gains) and securities gains.
The increase in asset servicing fees primarily reflects higher market values, organic growth, net new business and higher collateral management fees in Global Collateral Services. The increase in investment management and performance fees reflects higher market values, the impact of a weaker U.S. dollar and net new business. The increase in clearing services fees primarily reflects higher mutual fund fees. The decrease in foreign exchange and
other trading revenue primarily reflects lower volatility, partially offset by higher volumes. The decrease in issuer services fees primarily reflects the
impact of continued net maturities of high margin securitizations in Corporate Trust and lower dividend fees in Depositary Receipts.
Net interest revenue
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest revenue | | | | | | | | | YTD14 | |
| | | | | 3Q14 vs. | | Year-to-date | | vs. | |
(dollars in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| | 3Q13 |
| | 2Q14 |
| | | 2014 |
| 2013 |
| | YTD13 | |
Net interest revenue (non-FTE) | $ | 721 |
| $ | 719 |
| $ | 772 |
| | (7 | ) | % | — |
| % | | $ | 2,168 |
| $ | 2,248 |
| | (4 | ) | % |
Tax equivalent adjustment | 15 |
| 17 |
| 15 |
| | — |
| | (12 | ) | | | 48 |
| 43 |
| | 12 |
| |
Net interest revenue (FTE) – Non-GAAP | $ | 736 |
| $ | 736 |
| $ | 787 |
| | (6 | ) | % | — |
| % | | $ | 2,216 |
| $ | 2,291 |
| | (3 | ) | % |
Average interest-earning assets | $ | 311,603 |
| $ | 300,758 |
| $ | 271,150 |
| | 15 |
| % | 4 |
| % | | $ | 299,064 |
| $ | 268,480 |
| | 11 |
| % |
Net interest margin (FTE) | 0.94 | % | 0.98 | % | 1.16 | % | | (22 | ) | bps | (4 | ) | bps | | 0.99 | % | 1.14 | % | | (15 | ) | bps |
bps - basis points.
Net interest revenue totaled $721 million in the third quarter of 2014, a decrease of $51 million compared with the third quarter of 2013 and an increase of $2 million sequentially. The year-over-year decrease primarily resulted from lower asset yields and lower accretion, partially offset by higher average interest-earning assets driven by higher deposits.
Euro-denominated deposit liabilities comprised 15% of average deposits in the third quarter of 2014 and 16% of average deposits in the second quarter of 2014.
The net interest margin (FTE) was 0.94% in the third quarter of 2014, a decrease compared with 1.16% in the third quarter of 2013 and 0.98% in the second quarter of 2014. Both decreases primarily reflect the factors noted above.
In the fourth quarter of 2014, we are continuing to reduce our interbank placement assets and increasing our high quality liquid assets in the securities portfolio. The anticipated revenue as a result of these tactical actions should mitigate the impact on our net interest revenue as a result of:
| |
• | the European Central Bank’s reduction in their deposit rate to negative, and the resulting impact on lower reinvestment rates across the euro yield curve; as well as, |
| |
• | prolonged low reinvestment rates in the U.S. |
Year-to-date 2014 compared with year-to-date 2013
Net interest revenue totaled $2.2 billion in the first nine months of 2014, a decrease of 4% compared with the first nine months of 2013, primarily resulting from lower yields on average interest-earning assets, partially offset by balance sheet growth and a shift in the mix of interest-earning assets into higher yielding categories. The net interest margin (FTE) was 0.99% in the first nine months of 2014, a decrease compared with 1.14% in the first nine months of 2013 primarily reflecting higher average interest-earning assets and lower yields.
|
| | | | | | | | | | | | | | | | | | | | |
Average balances and interest rates | Quarter ended |
| Sept. 30, 2014 | | June 30, 2014 | | Sept. 30, 2013 |
(dollar amounts in millions, presented on an FTE basis) | Average balance |
| | Average rates |
| | Average balance |
| | Average rates |
| | Average balance |
| | Average rates |
|
Assets | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Interest-bearing deposits with banks (primarily foreign banks) | $ | 34,882 |
| | 0.66 | % | | $ | 41,424 |
| | 0.74 | % | | $ | 41,597 |
| | 0.66 | % |
Interest-bearing deposits held at the Federal Reserve and other central banks | 88,713 |
| | 0.23 |
| | 85,546 |
| | 0.26 |
| | 65,704 |
| | 0.23 |
|
Federal funds sold and securities purchased under resale agreements | 15,683 |
| | 0.61 |
| | 13,387 |
| | 0.58 |
| | 8,864 |
| | 0.56 |
|
Margin loans | 18,108 |
| | 1.04 |
| | 17,050 |
| | 1.05 |
| | 14,653 |
| | 1.10 |
|
Non-margin loans: | | | | | | | | | | | |
Domestic offices | 23,826 |
| | 2.20 |
| | 22,566 |
| | 2.30 |
| | 21,378 |
| | 2.40 |
|
Foreign offices | 12,901 |
| | 1.30 |
| | 13,833 |
| | 1.34 |
| | 12,225 |
| | 1.31 |
|
Total non-margin loans | 36,727 |
| | 1.88 |
| | 36,399 |
| | 1.94 |
| | 33,603 |
| | 2.01 |
|
Securities: | | | | | | | | | | | |
U.S. Government obligations | 23,067 |
| | 1.38 |
| | 17,462 |
| | 1.63 |
| | 16,540 |
| | 1.76 |
|
U.S. Government agency obligations | 46,186 |
| | 1.67 |
| | 43,167 |
| | 1.67 |
| | 45,745 |
| | 2.02 |
|
State and political subdivisions – tax-exempt | 5,830 |
| | 2.54 |
| | 6,473 |
| | 2.58 |
| | 6,518 |
| | 2.47 |
|
Other securities | 36,972 |
| | 1.37 |
| | 34,318 |
| | 1.55 |
| | 32,403 |
| | 1.92 |
|
Trading securities | 5,435 |
| | 2.36 |
| | 5,532 |
| | 2.19 |
| | 5,523 |
| | 2.83 |
|
Total securities | 117,490 |
| | 1.59 |
| | 106,952 |
| | 1.71 |
| | 106,729 |
| | 2.02 |
|
Total interest-earning assets | $ | 311,603 |
| | 1.05 | % | | $ | 300,758 |
| | 1.10 | % | | $ | 271,150 |
| | 1.28 | % |
Allowance for loan losses | (187 | ) | | | | (197 | ) | | | | (212 | ) | | |
Cash and due from banks | 6,225 |
| | | | 5,064 |
| | | | 6,400 |
| | |
Other assets | 52,526 |
| | | | 52,182 |
| | | | 52,549 |
| | |
Assets of consolidated investment management funds | 10,242 |
| | | | 11,405 |
| | | | 11,863 |
| | |
Total assets | $ | 380,409 |
| | | | $ | 369,212 |
| | | | $ | 341,750 |
| | |
Liabilities | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Money market rate accounts | $ | 5,320 |
| | 0.11 | % | | $ | 5,177 |
| | 0.12 | % | | $ | 5,509 |
| | 0.20 | % |
Savings | 1,258 |
| | 0.28 |
| | 1,185 |
| | 0.27 |
| | 1,015 |
| | 0.25 |
|
Demand deposits | 2,566 |
| | 0.21 |
| | 2,406 |
| | 0.14 |
| | 3,117 |
| | 0.08 |
|
Time deposits | 41,248 |
| | 0.04 |
| | 42,824 |
| | 0.04 |
| | 41,546 |
| | 0.04 |
|
Foreign offices | 113,841 |
| | 0.05 |
| | 111,082 |
| | 0.06 |
| | 102,360 |
| | 0.07 |
|
Total interest-bearing deposits | 164,233 |
| | 0.06 |
| | 162,674 |
| | 0.06 |
| | 153,547 |
| | 0.06 |
|
Federal funds purchased and securities sold under repurchase agreements | 20,620 |
| | (0.07 | ) | | 19,030 |
| | (0.05 | ) | | 12,164 |
| | (0.12 | ) |
Trading liabilities | 2,806 |
| | 0.84 |
| | 2,993 |
| | 0.97 |
| | 2,325 |
| | 1.69 |
|
Other borrowed funds | 933 |
| | 0.47 |
| | 1,272 |
| | 0.47 |
| | 1,047 |
| | 0.35 |
|
Commercial paper | 3,654 |
| | 0.07 |
| | 1,970 |
| | 0.08 |
| | 1,186 |
| | 0.05 |
|
Payables to customers and broker-dealers | 9,705 |
| | 0.10 |
| | 8,916 |
| | 0.09 |
| | 8,659 |
| | 0.09 |
|
Long-term debt | 20,429 |
| | 1.12 |
| | 20,361 |
| | 1.16 |
| | 19,025 |
| | 1.00 |
|
Total interest-bearing liabilities | $ | 222,380 |
| | 0.16 | % | | $ | 217,216 |
| | 0.17 | % | | $ | 197,953 |
| | 0.16 | % |
Total noninterest-bearing deposits | 82,334 |
| | | | 77,820 |
| | | | 72,075 |
| | |
Other liabilities | 27,369 |
| | | | 24,854 |
| | | | 24,380 |
| | |
Liabilities and obligations of consolidated investment management funds | 8,879 |
| | | | 10,180 |
| | | | 10,466 |
| | |
Total liabilities | 340,962 |
| | | | 330,070 |
| | | | 304,874 |
| | |
Temporary equity | | | | | | | | | | | |
Redeemable noncontrolling interests | 244 |
| | | | 225 |
| | | | 196 |
| | |
Permanent equity | | | | | | | | | | | |
Total BNY Mellon shareholders’ equity | 38,313 |
| | | | 38,127 |
| | | | 35,826 |
| | |
Noncontrolling interests | 890 |
| | | | 790 |
| | | | 854 |
| | |
Total permanent equity | 39,203 |
| | | | 38,917 |
| | | | 36,680 |
| | |
Total liabilities, temporary equity and permanent equity | $ | 380,409 |
| | | | $ | 369,212 |
| | | | $ | 341,750 |
| | |
Net interest margin (FTE) | | | 0.94 | % | | | | 0.98 | % | | | | 1.16 | % |
| |
Note: | Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year. |
|
| | | | | | | | | | | | | |
Average balances and interest rates | Year-to-date |
| Sept. 30, 2014 | | Sept. 30, 2013 |
(dollar amounts in millions, presented on an FTE basis) | Average balance |
| | Average rates |
| | Average balance |
| | Average rates |
|
Assets | | | | | | | |
Interest-earning assets: | | | | | | | |
Interest-bearing deposits with banks (primarily foreign banks) | $ | 39,283 |
| | 0.71 | % | | $ | 41,781 |
| | 0.67 | % |
Interest-bearing deposits held at the Federal Reserve and other central banks | 82,939 |
| | 0.25 |
| | 61,627 |
| | 0.22 |
|
Federal funds sold and securities purchased under resale agreements | 13,413 |
| | 0.60 |
| | 8,078 |
| | 0.54 |
|
Margin loans | 17,008 |
| | 1.05 |
| | 13,973 |
| | 1.14 |
|
Non-margin loans: | | | | | | | |
Domestic offices | 22,804 |
| | 2.27 |
| | 21,475 |
| | 2.39 |
|
Foreign offices | 13,510 |
| | 1.30 |
| | 12,042 |
| | 1.33 |
|
Total non-margin loans | 36,314 |
| | 1.91 |
| | 33,517 |
| | 2.01 |
|
Securities: | | | | | | | |
U.S. Government obligations | 19,269 |
| | 1.52 |
| | 18,405 |
| | 1.64 |
|
U.S. Government agency obligations | 44,034 |
| | 1.73 |
| | 45,270 |
| | 1.89 |
|
State and political subdivisions – tax-exempt | 6,328 |
| | 2.54 |
| | 6,364 |
| | 2.35 |
|
Other securities | 35,081 |
| | 1.52 |
| | 33,377 |
| | 1.96 |
|
Trading securities | 5,395 |
| | 2.38 |
| | 6,088 |
| | 2.51 |
|
Total securities | 110,107 |
| | 1.71 |
| | 109,504 |
| | 1.93 |
|
Total interest-earning assets | $ | 299,064 |
| | 1.11 | % | | $ | 268,480 |
| | 1.27 | % |
Allowance for loan losses | (198 | ) | | | | (237 | ) | | |
Cash and due from banks | 5,726 |
| | | | 5,338 |
| | |
Other assets | 52,709 |
| | | | 52,439 |
| | |
Assets of consolidated investment management funds | 10,996 |
| | | | 11,631 |
| | |
Total assets | $ | 368,297 |
| | | | $ | 337,651 |
| | |
Liabilities | | | | | | | |
Interest-bearing liabilities: | | | | | | | |
Interest-bearing deposits: | | | | | | | |
Money market rate accounts | $ | 5,384 |
| | 0.12 | % | | $ | 5,656 |
| | 0.24 | % |
Savings | 1,160 |
| | 0.27 |
| | 912 |
| | 0.26 |
|
Demand deposits | 2,878 |
| | 0.13 |
| | 2,872 |
| | 0.08 |
|
Time deposits | 41,871 |
| | 0.04 |
| | 40,790 |
| | 0.04 |
|
Foreign offices | 108,713 |
| | 0.06 |
| | 100,623 |
| | 0.07 |
|
Total interest-bearing deposits | 160,006 |
| | 0.06 |
| | 150,853 |
| | 0.07 |
|
Federal funds purchased and securities sold under repurchase agreements | 18,073 |
| | (0.08 | ) | | 10,197 |
| | (0.17 | ) |
Trading liabilities | 2,595 |
| | 1.08 |
| | 2,637 |
| | 1.47 |
|
Other borrowed funds | 1,080 |
| | 0.49 |
| | 1,195 |
| | 0.46 |
|
Commercial paper | 1,922 |
| | 0.07 |
| | 500 |
| | 0.06 |
|
Payables to customers and broker-dealers | 9,171 |
| | 0.09 |
| | 8,914 |
| | 0.09 |
|
Long-term debt | 20,404 |
| | 1.12 |
| | 18,969 |
| | 1.05 |
|
Total interest-bearing liabilities | $ | 213,251 |
| | 0.16 | % | | $ | 193,265 |
| | 0.18 | % |
Total noninterest-bearing deposits | 80,531 |
| | | | 71,026 |
| | |
Other liabilities | 25,620 |
| | | | 26,179 |
| | |
Liabilities and obligations of consolidated investment management funds | 9,724 |
| | | | 10,299 |
| | |
Total liabilities | 329,126 |
| | | | 300,769 |
| | |
Temporary equity | | | | | | | |
Redeemable noncontrolling interests | 238 |
| | | | 187 |
| | |
Permanent equity | | | | | | | |
Total BNY Mellon shareholders’ equity | 38,099 |
| | | | 35,869 |
| | |
Noncontrolling interests | 834 |
| | | | 826 |
| | |
Total permanent equity | 38,933 |
| | | | 36,695 |
| | |
Total liabilities, temporary equity and permanent equity | $ | 368,297 |
| | | | $ | 337,651 |
| | |
Net interest margin (FTE) | | | 0.99 | % | | | | 1.14 | % |
| |
Note: | Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year. |
Noninterest expense
|
| | | | | | | | | | | | | | | | | | | | | | | |
Noninterest expense | | | | | | | | | YTD14 |
| | | | | 3Q14 vs. | | Year-to-date | vs. |
(dollars in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| | 3Q13 |
| 2Q14 |
| | 2014 |
| 2013 |
| YTD13 |
Staff: | | | | | | | | | | |
Compensation | $ | 909 |
| $ | 903 |
| $ | 915 |
| | (1 | )% | 1 | % | | $ | 2,737 |
| $ | 2,691 |
| 2 | % |
Incentives | 340 |
| 313 |
| 339 |
| | — |
| 9 |
| | 1,012 |
| 1,041 |
| (3 | ) |
Employee benefits | 228 |
| 223 |
| 262 |
| | (13 | ) | 2 |
| | 678 |
| 765 |
| (11 | ) |
Total staff | 1,477 |
| 1,439 |
| 1,516 |
| | (3 | ) | 3 |
| | 4,427 |
| 4,497 |
| (2 | ) |
Professional, legal and other purchased services | 323 |
| 314 |
| 296 |
| | 9 |
| 3 |
| | 949 |
| 908 |
| 5 |
|
Software | 154 |
| 154 |
| 147 |
| | 5 |
| — |
| | 460 |
| 444 |
| 4 |
|
Net occupancy | 154 |
| 152 |
| 153 |
| | 1 |
| 1 |
| | 460 |
| 475 |
| (3 | ) |
Distribution and servicing | 107 |
| 112 |
| 108 |
| | (1 | ) | (4 | ) | | 326 |
| 325 |
| — |
|
Furniture and equipment | 80 |
| 82 |
| 79 |
| | 1 |
| (2 | ) | | 247 |
| 248 |
| — |
|
Sub-custodian | 67 |
| 81 |
| 71 |
| | (6 | ) | (17 | ) | | 216 |
| 212 |
| 2 |
|
Business development | 61 |
| 68 |
| 63 |
| | (3 | ) | (10 | ) | | 193 |
| 221 |
| (13 | ) |
Other | 250 |
| 347 |
| 249 |
| | — |
| (28 | ) | | 820 |
| 771 |
| 6 |
|
Amortization of intangible assets | 75 |
| 75 |
| 81 |
| | (7 | ) | — |
| | 225 |
| 260 |
| (13 | ) |
M&I, litigation and restructuring charges | 220 |
| 122 |
| 16 |
| | N/M |
| N/M |
| | 330 |
| 68 |
| N/M |
|
Total noninterest expense - GAAP | $ | 2,968 |
| $ | 2,946 |
| $ | 2,779 |
| | 7 | % | 1 | % | | $ | 8,653 |
| $ | 8,429 |
| 3 | % |
| | | | | | | | | |
|
Total staff expense as a percentage of total revenue | 32 | % | 38 | % | 40 | % | | | | | 37 | % | 39 | % |
|
| | | | | | | | | | |
Full-time employees at period end | 50,900 |
| 51,100 |
| 50,800 |
| | — | % | — | % | | 50,900 |
| 50,800 |
| — | % |
| | | | | | | | | |
|
Memo: | | | | | | | | | |
|
Total noninterest expense excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge (recovery) related to investment management funds, net of incentives – Non-GAAP | $ | 2,673 |
| $ | 2,640 |
| $ | 2,682 |
| | — | % | 1 | % | | $ | 7,994 |
| $ | 8,089 |
| (1 | )% |
N/M - Not meaningful.
Total noninterest expense was $3.0 billion in the third quarter of 2014, an increase of 7% year-over-year and 1% (unannualized) sequentially. Both increases primarily reflect higher litigation expense. The year-over-year increase also reflects higher restructuring charges, professional, legal and other purchased services expenses and the impact of a weaker U.S. dollar, partially offset by lower staff expense. The sequential increase was partially offset by the charge related to investment management funds, net of incentives, recorded in the second quarter of 2014 and lower restructuring charges. Excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge (recovery) related to investment management funds, net of incentives (Non-GAAP), noninterest expense decreased slightly year-over-year and increased 1% (unannualized) sequentially.
We continue to invest in our compliance, risk and other control functions in light of increasing regulatory requirements. While our expenses remain high in those areas as a result of the need to hire additional staff and advisors and to enhance our
technology platforms, we expect the rate of related expense growth to begin to slow as new rules are implemented.
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 2014, 57% in the third quarter of 2013 and 55% in the second quarter of 2014, excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge (recovery) related to investment management funds, net of incentives.
Staff expense was $1.5 billion in the third quarter of 2014, a decrease of 3% compared with the third quarter of 2013 and an increase of 3% (unannualized) compared with the second quarter of 2014. The year-over-year decrease primarily reflect lower pension expense, the benefit of replacing technology contractors with permanent staff and the impact of streamlining actions. The sequential increase
primarily reflects the incentive adjustment recorded in the second quarter of 2014 related to the charge related to investment management funds, the impact of the annual employee merit increase, partially offset by the impact of streamlining actions.
Non-staff expense
Non-staff expense, excluding amortization of intangible assets, M&I, litigation and restructuring charges, and the charge (recovery) related to investment management funds, net of incentives, (Non-GAAP) totaled $1.2 billion in the third quarter of 2014, an increase of 3% compared with the third quarter of 2013 and 1% compared with the second quarter of 2014. Both increases primarily reflect higher professional, legal and other purchased services.
The financial services industry has seen a continuing increase in the level of litigation and enforcement activity. As a result, we anticipate our legal and litigation costs to continue at elevated levels. For additional information on our legal proceedings, see Note 18 of the Notes to Consolidated Financial Statements.
In the second and third quarters of 2014, we recorded pre-tax restructuring charges of $120 million and $57 million, respectively, primarily reflecting severance expense related to streamlining actions. For additional information on restructuring charges, see Note 10 of the Notes to Consolidated Financial Statements.
Year-to-date 2014 compared with year-to-date 2013
Noninterest expense totaled $8.7 billion in the first nine months of 2014, an increase of $224 million, or 3%, compared with the first nine months of 2013. The increase primarily reflects higher restructuring charges and litigation expense, the charge (recovery) related to investment management funds, net of incentives, higher professional, legal and other purchased services expense and the impact of a weaker U.S. dollar, partially offset by lower pension expense, the cost of generating certain tax credits, lower amortization of intangible assets and business development expense.
Income taxes
The provision for income taxes was $556 million in the third quarter of 2014, $19 million in the third quarter of 2013 and $217 million in the second quarter of 2014. The provision in the third quarter of 2013 included a benefit of $261 million related to the U.S. Tax Court’s partial reconsideration of its original tax decision on Feb. 11, 2013 disallowing certain foreign tax credits.
The effective tax rate was 33.5% in the third quarter of 2014, 1.9% in the third quarter of 2013 and 26.7% in the second quarter of 2014. The previously disclosed gains, litigation and restructuring charges recorded in the third quarter of 2014 increased the effective tax rate by 7.1%. Excluding the impact of the partial reconsideration, the effective tax rate on an operating basis (Non-GAAP) was 27.9% in the third quarter of 2013. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 56 for additional information.
In the first quarter of 2014, BNY Mellon adopted ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects - a Consensus of the FASB Emerging Issues Task Force”. See Note 2 of the Notes to Consolidated Financial Statements for the impact of the retrospective application of this new accounting guidance.
We expect the effective tax rate to be approximately 27% in the fourth quarter of 2014.
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 19 of the Notes to Consolidated Financial Statements.
Business results are subject to reclassification whenever organizational changes are made or when improvements are made in the measurement principles.
Results for the three and nine months ended Sept. 30, 2013 have been restated to reflect the impact of the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
Restructuring charges recorded in the second and third quarters of 2014 relate to corporate-level initiatives and were therefore recorded in the Other segment. In the fourth quarter of 2013, restructuring
charges were recorded in the businesses. Prior to the fourth quarter of 2013, restructuring charges were reported in the Other segment.
The results of our businesses may be influenced by client activities that vary by quarter. In the second quarter, we typically experience an increase in securities lending fees due to an increase in demand to borrow securities outside of the United States. In the third quarter, Depositary Receipts revenue is typically higher due to an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client activity. In 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 following table presents key market metrics at period end and on an average basis.
|
| | | | | | | | | | | | | | | | | | | | | |
Key market metrics | | | | | | | | | | | YTD14 vs. YTD13 |
| | | | | 3Q14 vs. | | Year-to-date |
3Q13 |
| 4Q13 |
| 1Q14 |
| 2Q14 |
| 3Q14 |
| 3Q13 |
| 2Q14 |
| | 2014 |
| 2013 |
|
S&P 500 Index (a) | 1682 |
| 1848 |
| 1872 |
| 1960 |
| 1972 |
| 17 | % | 1 | % | | 1972 |
| 1682 |
| 17 | % |
S&P 500 Index – daily average | 1675 |
| 1769 |
| 1835 |
| 1900 |
| 1976 |
| 18 |
| 4 |
| | 1905 |
| 1600 |
| 19 |
|
FTSE 100 Index (a) | 6462 |
| 6749 |
| 6598 |
| 6744 |
| 6623 |
| 2 |
| (2 | ) | | 6623 |
| 6462 |
| 2 |
|
FTSE 100 Index – daily average | 6530 |
| 6612 |
| 6680 |
| 6764 |
| 6756 |
| 3 |
| — |
| | 6733 |
| 6422 |
| 5 |
|
MSCI World Index (a) | 1544 |
| 1661 |
| 1674 |
| 1743 |
| 1698 |
| 10 |
| (3 | ) | | 1698 |
| 1544 |
| 10 |
|
MSCI World Index – daily average | 1511 |
| 1602 |
| 1647 |
| 1698 |
| 1733 |
| 15 |
| 2 |
| | 1693 |
| 1460 |
| 16 |
|
Barclays Capital Global Aggregate BondSM Index (a)(b) | 356 |
| 354 |
| 365 |
| 376 |
| 361 |
| 1 |
| (4 | ) | | 361 |
| 356 |
| 1 |
|
NYSE and NASDAQ share volume (in billions) | 166 |
| 179 |
| 196 |
| 187 |
| 173 |
| 4 |
| (7 | ) | | 556 |
| 526 |
| 6 |
|
JPMorgan G7 Volatility Index – daily average (c) | 9.72 |
| 8.20 |
| 7.80 |
| 6.22 |
| 6.21 |
| (36 | ) | — |
| | 6.74 |
| 9.53 |
| (29 | ) |
Average Fed Funds effective rate | 0.09 | % | 0.09 | % | 0.07 | % | 0.09 | % | 0.09 | % | — |
| — |
| | 0.08 | % | 0.11 | % | (3) bps |
|
| |
(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, 2014, using the Standard & Poor’s (“S&P”) 500 Index as a proxy for the global equity markets, we estimate that a 100-point change in the value of the S&P 500 Index
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. If however, global equity markets do not perform in line with the S&P 500 Index, the impact to fee revenue and earnings per share could be different.
The following consolidating schedules show the contribution of our businesses to our overall profitability.
|
| | | | | | | | | | | | | | | | |
For the quarter ended Sept. 30, 2014 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue | $ | 934 |
| (a) | $ | 2,005 |
| | $ | 928 |
| | $ | 3,867 |
| (a) |
Net interest revenue | 69 |
| | 583 |
| | 69 |
| | 721 |
| |
Total revenue | 1,003 |
| (a) | 2,588 |
| | 997 |
| | 4,588 |
| (a) |
Provision for credit losses | — |
| | — |
| | (19 | ) | | (19 | ) | |
Noninterest expense | 758 |
| | 1,879 |
| | 331 |
| | 2,968 |
| |
Income before taxes | $ | 245 |
| (a) | $ | 709 |
| | $ | 685 |
| | $ | 1,639 |
| (a) |
Pre-tax operating margin (b) | 24 | % | | 27 | % | | N/M |
| | 36 | % | |
Average assets | $ | 36,670 |
| | $ | 266,455 |
| | $ | 77,284 |
| | $ | 380,409 |
| |
Excluding amortization of intangible assets: | | | | | | | | |
Noninterest expense | $ | 727 |
| | $ | 1,835 |
| | $ | 331 |
| | $ | 2,893 |
| |
Income before taxes | 276 |
| (a) | 753 |
| | 685 |
| | 1,714 |
| (a) |
Pre-tax operating margin (b) | 27 | % | | 29 | % | | N/M |
| | 37 | % | |
| |
(a) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $39 million, net of noncontrolling interests of $23 million, for a net impact of $16 million. Income before taxes is net of noncontrolling interests of $23 million. |
| |
(b) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
|
| | | | | | | | | | | | | | | | |
For the quarter ended June 30, 2014 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue | $ | 970 |
| (a) | $ | 1,920 |
| | $ | 119 |
| | $ | 3,009 |
| (a) |
Net interest revenue | 66 |
| | 593 |
| | 60 |
| | 719 |
| |
Total revenue | 1,036 |
| (a) | 2,513 |
| | 179 |
| | 3,728 |
| (a) |
Provision for credit losses | — |
| | — |
| | (12 | ) | | (12 | ) | |
Noninterest expense | 865 |
| | 1,868 |
| | 213 |
| | 2,946 |
| |
Income (loss) before taxes | $ | 171 |
| (a) | $ | 645 |
| | $ | (22 | ) | | $ | 794 |
| (a) |
Pre-tax operating margin (b) | 16 | % | | 26 | % | | N/M |
| | 21 | % | |
Average assets | $ | 37,750 |
| | $ | 264,221 |
| | $ | 67,241 |
| | $ | 369,212 |
| |
Excluding amortization of intangible assets: | | | | | | | | |
Noninterest expense | $ | 834 |
| | $ | 1,824 |
| | $ | 213 |
| | $ | 2,871 |
| |
Income (loss) before taxes | 202 |
| (a) | 689 |
| | (22 | ) | | 869 |
| (a) |
Pre-tax operating margin (b) | 19 | % | | 27 | % | | N/M |
| | 23 | % | |
| |
(a) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $46 million, net of noncontrolling interests of $17 million, for a net impact of $29 million. Income before taxes is net of noncontrolling interests of $17 million. |
| |
(b) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
|
| | | | | | | | | | | | | | | | |
For the quarter ended Sept. 30, 2013 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue (a) | $ | 882 |
| (b) | $ | 1,949 |
| | $ | 172 |
| | $ | 3,003 |
| (b) |
Net interest revenue | 67 |
| | 619 |
| | 86 |
| | 772 |
| |
Total revenue (a) | 949 |
| (b) | 2,568 |
| | 258 |
| | 3,775 |
| (b) |
Provision for credit losses | — |
| | — |
| | 2 |
| | 2 |
| |
Noninterest expense | 724 |
| | 1,811 |
| | 244 |
| | 2,779 |
| |
Income before taxes (a) | $ | 225 |
| (b) | $ | 757 |
| | $ | 12 |
| | $ | 994 |
| (b) |
Pre-tax operating margin (a) (c) | 24 | % | | 29 | % | | N/M |
| | 26 | % | |
Average assets | $ | 38,690 |
| | $ | 246,252 |
| | $ | 56,808 |
| | $ | 341,750 |
| |
Excluding amortization of intangible assets: | | | | | | | | |
Noninterest expense | $ | 689 |
| | $ | 1,765 |
| | $ | 244 |
| | $ | 2,698 |
| |
Income before taxes (a) | 260 |
| (b) | 803 |
| | 12 |
| | 1,075 |
| (b) |
Pre-tax operating margin (a) (c) | 27 | % | | 31 | % | | N/M |
| | 28 | % | |
| |
(a) | Other segment and consolidated results have been restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
| |
(b) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $32 million, net of noncontrolling interests of $8 million, for a net impact of $24 million. Income before taxes is net of noncontrolling interests of $8 million. |
| |
(c) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
|
| | | | | | | | | | | | | | | | |
For the nine months ended Sept. 30, 2014 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue | $ | 2,804 |
| (a) | $ | 5,812 |
| | $ | 1,159 |
| | $ | 9,775 |
| (a) |
Net interest revenue | 205 |
| | 1,766 |
| | 197 |
| | 2,168 |
| |
Total revenue | 3,009 |
| (a) | 7,578 |
| | 1,356 |
| | 11,943 |
| (a) |
Provision for credit losses | — |
| | — |
| | (49 | ) | | (49 | ) | |
Noninterest expense | 2,347 |
| | 5,569 |
| | 737 |
| | 8,653 |
| |
Income before taxes | $ | 662 |
| (a) | $ | 2,009 |
| | $ | 668 |
| | $ | 3,339 |
| (a) |
Pre-tax operating margin (b) | 22 | % | | 26 | % | | N/M |
| | 28 | % | |
Average assets | $ | 37,951 |
| | $ | 263,078 |
| | $ | 67,268 |
| | $ | 368,297 |
| |
Excluding amortization of intangible assets: | | | | | | | | |
Noninterest expense | $ | 2,254 |
| | $ | 5,437 |
| | $ | 737 |
| | $ | 8,428 |
| |
Income before taxes | 755 |
| (a) | 2,141 |
| | 668 |
| | 3,564 |
| (a) |
Pre-tax operating margin (b) | 25 | % | | 28 | % | | N/M |
| | 30 | % | |
| |
(a) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $121 million, net of noncontrolling interests of $60 million, for a net impact of $61 million. Income before taxes is net of noncontrolling interests of $60 million. |
| |
(b) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
|
| | | | | | | | | | | | | | | | |
For the nine months ended Sept. 30, 2013 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue (a) | $ | 2,675 |
| (b) | $ | 5,780 |
| | $ | 671 |
| | $ | 9,126 |
| (b) |
Net interest revenue | 192 |
| | 1,905 |
| | 151 |
| | 2,248 |
| |
Total revenue (a) | 2,867 |
| (b) | 7,685 |
| | 822 |
| | 11,374 |
| (b) |
Provision for credit losses | — |
| | 1 |
| | (42 | ) | | (41 | ) | |
Noninterest expense | 2,165 |
| | 5,533 |
| | 731 |
| | 8,429 |
| |
Income before taxes (a) | $ | 702 |
| (b) | $ | 2,151 |
| | $ | 133 |
| | $ | 2,986 |
| (b) |
Pre-tax operating margin (a) (c) | 24 | % | | 27 | % | | N/M |
| | 26 | % | |
Average assets | $ | 38,462 |
| | $ | 243,769 |
| | $ | 55,420 |
| | $ | 337,651 |
| |
Excluding amortization of intangible assets: | | | | | | | | |
Noninterest expense | $ | 2,052 |
| | $ | 5,386 |
| | $ | 731 |
| | $ | 8,169 |
| |
Income before taxes (a) | 815 |
| (b) | 2,298 |
| | 133 |
| | 3,246 |
| (b) |
Pre-tax operating margin (a) (c) | 28 | % | | 29 | % | | N/M |
| | 29 | % | |
| |
(a) | Other segment and consolidated results have been restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
| |
(b) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $147 million, net of noncontrolling interests of $63 million, for a net impact of $84 million. Income before taxes is net of noncontrolling interests of $63 million. |
| |
(c) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
Investment Management business
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | YTD14 |
(dollar amounts in millions) | | | | | | | 3Q14 vs. | | Year-to-date | | vs. |
3Q13 |
| 4Q13 |
| 1Q14 |
| 2Q14 |
| 3Q14 |
| | 3Q13 | 2Q14 | | 2014 | 2013 | | YTD13 |
Revenue: | | | | | | | | | | | | | |
Investment management fees: | | | | | | | | | | | | | |
Mutual funds | $ | 293 |
| $ | 303 |
| $ | 299 |
| $ | 311 |
| $ | 315 |
| | 8 | % | 1 | % | | $ | 925 |
| $ | 891 |
| | 4 | % |
Institutional clients | 367 |
| 385 |
| 372 |
| 385 |
| 382 |
| | 4 |
| (1 | ) | | 1,139 |
| 1,093 |
| | 4 |
|
Wealth management | 145 |
| 149 |
| 153 |
| 156 |
| 158 |
| | 9 |
| 1 |
| | 467 |
| 434 |
| | 8 |
|
Investment management fees | 805 |
| 837 |
| 824 |
| 852 |
| 855 |
| | 6 |
| — |
| | 2,531 |
| 2,418 |
| | 5 |
|
Performance fees | 10 |
| 72 |
| 20 |
| 29 |
| 22 |
| | N/M | N/M | | 71 |
| 58 |
| | 22 |
|
Investment management and performance fees | 815 |
| 909 |
| 844 |
| 881 |
| 877 |
| | 8 |
| — |
| | 2,602 |
| 2,476 |
| | 5 |
|
Distribution and servicing | 41 |
| 41 |
| 40 |
| 41 |
| 41 |
| | — |
| — |
| | 122 |
| 131 |
| | (7 | ) |
Other (a) | 26 |
| 43 |
| 16 |
| 48 |
| 16 |
| | N/M | N/M | | 80 |
| 68 |
| | 18 |
|
Total fee and other revenue (a) | 882 |
| 993 |
| 900 |
| 970 |
| 934 |
| | 6 |
| (4 | ) | | 2,804 |
| 2,675 |
| | 5 |
|
Net interest revenue | 67 |
| 68 |
| 70 |
| 66 |
| 69 |
| | 3 |
| 5 |
| | 205 |
| 192 |
| | 7 |
|
Total revenue | 949 |
| 1,061 |
| 970 |
| 1,036 |
| 1,003 |
| | 6 |
| (3 | ) | | 3,009 |
| 2,867 |
| | 5 |
|
Noninterest expense (ex. amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives) | 689 |
| 760 |
| 698 |
| 725 |
| 727 |
| | 6 |
| — |
| | 2,150 |
| 2,040 |
| | 5 |
|
Income before taxes (ex. amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives) | 260 |
| 301 |
| 272 |
| 311 |
| 276 |
| | 6 |
| (11 | ) | | 859 |
| 827 |
| | 4 |
|
Amortization of intangible assets | 35 |
| 35 |
| 31 |
| 31 |
| 31 |
| | (11 | ) | — |
| | 93 |
| 113 |
| | (18 | ) |
Charge (recovery) related to investment management funds, net of incentives | — |
| — |
| (5 | ) | 109 |
| — |
| | N/M | N/M | | 104 |
| 12 |
| | N/M |
Income before taxes | $ | 225 |
| $ | 266 |
| $ | 246 |
| $ | 171 |
| $ | 245 |
| | 9 | % | 43 | % | | $ | 662 |
| $ | 702 |
| | (6 | )% |
| | | | | | | | | | | | |
|
Pre-tax operating margin | 24 | % | 25 | % | 25 | % | 16 | % | 24 | % | |
|
| | 22 | % | 24 | % | |
|
Adjusted pre-tax operating margin (a) | 33 | % | 34 | % | 34 | % | 36 | % | 33 | % | |
|
| | 34 | % | 34 | % | |
|
| | | | | | | | | | | | |
|
Wealth management: | | | | | | |
|
| | | | |
|
Average loans | $ | 9,453 |
| $ | 9,755 |
| $ | 10,075 |
| $ | 10,372 |
| $ | 10,772 |
| | 14 | % | 4 | % | | $ | 10,408 |
| $ | 9,228 |
| | 13 | % |
Average deposits | $ | 13,898 |
| $ | 14,161 |
| $ | 14,805 |
| $ | 13,458 |
| $ | 13,764 |
| | (1 | )% | 2 | % | | $ | 14,005 |
| $ | 13,618 |
| | 3 | % |
| |
(a) | Total fee and other revenue includes the impact of the consolidated investment management funds. Additionally, other revenue includes asset servicing, treasury services, foreign exchange and other trading revenue and investment and other income. Adjusted pre-tax operating margin excludes the net negative impact of money market fee waivers, amortization of intangible assets and the charge (recovery) related to investment management funds net of incentives, and is net of distribution and servicing expense. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 56 for the reconciliation of Non-GAAP measures. |
N/M - Not meaningful.
|
| | | | | | | | | | | | | | | | | | | |
AUM trends (a) | | | | | | 3Q14 vs. |
(dollar amounts in billions) | 3Q13 |
| 4Q13 |
| 1Q14 |
| 2Q14 |
| 3Q14 |
| 3Q13 |
| 2Q14 |
|
AUM at period end, by product type: | | | | | | | |
Equity | $ | 266 |
| $ | 276 |
| $ | 277 |
| $ | 282 |
| $ | 267 |
| — | % | (5 | )% |
Fixed income | 215 |
| 220 |
| 224 |
| 224 |
| 221 |
| 3 |
| (1 | ) |
Index | 303 |
| 323 |
| 328 |
| 353 |
| 345 |
| 14 |
| (2 | ) |
Liability-driven investments (b) | 394 |
| 403 |
| 436 |
| 436 |
| 455 |
| 15 |
| 4 |
|
Alternative investments | 62 |
| 62 |
| 63 |
| 66 |
| 65 |
| 5 |
| (2 | ) |
Cash | 292 |
| 299 |
| 292 |
| 275 |
| 293 |
| — |
| 7 |
|
Total AUM | $ | 1,532 |
| $ | 1,583 |
| $ | 1,620 |
| $ | 1,636 |
| $ | 1,646 |
| 7 | % | 1 | % |
| | | | | |
|
|
AUM at period end, by client type: | | | | | |
|
|
Institutional | $ | 1,041 |
| $ | 1,072 |
| $ | 1,118 |
| $ | 1,109 |
| $ | 1,131 |
| 9 | % | 2 | % |
Mutual funds | 407 |
| 425 |
| 415 |
| 440 |
| 430 |
| 6 |
| (2 | ) |
Private client | 84 |
| 86 |
| 87 |
| 87 |
| 85 |
| 1 |
| (2 | ) |
Total AUM | $ | 1,532 |
| $ | 1,583 |
| $ | 1,620 |
| $ | 1,636 |
| $ | 1,646 |
| 7 | % | 1 | % |
| | | | | | | |
Changes in AUM: | | | | | | | |
Beginning balance of AUM | $ | 1,427 |
| $ | 1,532 |
| $ | 1,583 |
| $ | 1,620 |
| $ | 1,636 |
| | |
Net inflows (outflows): | | | | | | | |
Long-term: | | | | | | | |
Equity | 3 |
| (5 | ) | (1 | ) | (4 | ) | (2 | ) | | |
Fixed income | (1 | ) | 5 |
| — |
| (1 | ) | — |
| | |
Index | 2 |
| (3 | ) | — |
| 7 |
| (3 | ) | | |
Liability-driven investments (b) | 27 |
| 4 |
| 20 |
| (17 | ) | 18 |
| | |
Alternative investments | 1 |
| 1 |
| 2 |
| 2 |
| — |
| | |
Total long-term inflows (outflows) | 32 |
| 2 |
| 21 |
| (13 | ) | 13 |
| | |
Short term: | | | | | | | |
Cash | 13 |
| 6 |
| (7 | ) | (18 | ) | 19 |
| | |
Total net inflows (outflows) | 45 |
| 8 |
| 14 |
| (31 | ) | 32 |
| | |
Net market/currency impact | 60 |
| 43 |
| 23 |
| 47 |
| (22 | ) | | |
Ending balance of AUM | $ | 1,532 |
| $ | 1,583 |
| $ | 1,620 |
| $ | 1,636 |
| $ | 1,646 |
| 7 | % | 1 | % |
| |
(a) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
| |
(b) | Includes currency and overlay assets under management. |
Business description
Our Investment Management business is comprised of our affiliated investment management boutiques, wealth management business and global distribution companies. See page 22 of our 2013 Annual Report for additional information on our Investment Management business.
Review of financial results
Investment management and performance fees are dependent on the overall level and mix of AUM and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. Assets under management were a record $1.65 trillion at Sept. 30, 2014 compared with $1.53 trillion at Sept. 30, 2013 and $1.64 trillion at June 30, 2014. The year-over-year increase primarily resulted from higher equity market values and net new business. The sequential increase primarily reflects net new business. Net long-term inflows were $13 billion in the third quarter of 2014 reflecting strong
performance in liability-driven investments. Short-term inflows were $19 billion in the third quarter of 2014.
Total revenue was $1 billion, an increase of 6% compared with the third quarter of 2013 and a decrease of 3% (unannualized) compared with the second quarter of 2014. Both comparisons were impacted by higher equity markets and lower seed capital gains. The year-over-year increase also reflects the impact of a weaker U.S. dollar and higher performance fees. The sequential decrease also reflects lower performance fees and the impact of a stronger U.S. dollar. Revenue generated in the Investment Management business included 44% from non-U.S. sources in the third quarter of 2014 compared with 44% in the third quarter of 2013 and 45% in the second quarter of 2014.
Investment management fees in the Investment Management business were $855 million in the third quarter of 2014 compared with $805 million in the third quarter of 2013 and $852 million in the second
quarter of 2014. Both increases primarily resulted from higher equity markets. The year-over-year increase also reflects the impact of a weaker U.S. dollar. The sequential increase was partially offset by the impact of a stronger U.S. dollar.
In the third quarter of 2014, 37% of investment management fees in the Investment Management business were generated from managed mutual fund fees. These fees are based on the daily average net assets of each fund and the management fee paid by that fund. Managed mutual fund fee revenue was $315 million in the third quarter of 2014 compared with $293 million in the third quarter of 2013 and $311 million in the second quarter of 2014. Both increases primarily reflect higher equity markets.
Performance fees were $22 million in the third quarter of 2014 compared with $10 million in the third quarter of 2013 and $29 million in the second quarter of 2014. The year-over-year increase primarily reflects strong performance of liability-driven investments. The sequential decrease was due to seasonality.
Distribution and servicing fees were $41 million in the third quarter of 2014, third quarter of 2013 and second quarter of 2014.
Other fee revenue was $16 million in the third quarter of 2014 compared with $26 million in the third quarter of 2013 and $48 million in the second quarter of 2014. Both decreases were primarily impacted by lower seed capital gains.
Net interest revenue was $69 million in the third quarter of 2014 compared with $67 million in the third quarter of 2013 and $66 million in the second quarter of 2014. Both increases primarily reflect higher average loans. The year-over-year increase was partially offset by lower average deposits. The sequential increase also reflects higher average deposits. Average loans increased 14% year-over-year and 4% sequentially, while average deposits decreased 1% year-over-year and increased 2% sequentially.
Noninterest expense excluding amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives, was $727 million in the third quarter of 2014 compared with $689 million in the third quarter of 2013 and $725 million in the second quarter of 2014. The year-over-year increase primarily reflects the impact of a weaker U.S. dollar and higher staff and business development expenses resulting from investments in strategic initiatives.
Year-to-date 2014 compared with year-to-date 2013
Income before taxes totaled $662 million in the first nine months of 2014 compared with $702 million in the first nine months of 2013. Income before taxes excluding amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives, was $859 million in the first nine months of 2014 compared with $827 million in the first nine months of 2013. Fee and other revenue increased $129 million compared with the first nine months of 2013 primarily due to higher equity market values and the impact of a weaker U.S. dollar, partially offset by higher money market fee waivers. Net interest revenue increased $13 million compared to the first nine months of 2013, primarily due to higher average loans and deposits. Noninterest expense excluding amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives, increased $110 million compared to the first nine months of 2013, primarily reflecting the impact of a weaker U.S. dollar, higher expenses resulting from investments in strategic initiatives and higher staff expense.
Investment Services business
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | YTD14 |
(dollar amounts in millions, unless otherwise noted) | | | | | | | 3Q14 vs. | | Year-to-date | | vs. |
3Q13 |
| 4Q13 |
| 1Q14 |
| 2Q14 |
| 3Q14 |
| | 3Q13 |
| 2Q14 |
| | 2014 |
| 2013 |
| | YTD13 |
Revenue: | | | | | | | | | | | | | |
Investment services fees: | | | | | | | | | | | | | |
Asset servicing | $ | 939 |
| $ | 957 |
| $ | 985 |
| $ | 993 |
| $ | 998 |
| | 6 | % | 1 | % | | $ | 2,976 |
| $ | 2,843 |
| | 5 | % |
Clearing services | 314 |
| 322 |
| 323 |
| 324 |
| 336 |
| | 7 |
| 4 |
| | 983 |
| 936 |
| | 5 |
|
Issuer services | 321 |
| 236 |
| 228 |
| 231 |
| 314 |
| | (2 | ) | 36 |
| | 773 |
| 851 |
| | (9 | ) |
Treasury services | 135 |
| 137 |
| 134 |
| 140 |
| 139 |
| | 3 |
| (1 | ) | | 413 |
| 407 |
| | 1 |
|
Total investment services fees | 1,709 |
| 1,652 |
| 1,670 |
| 1,688 |
| 1,787 |
| | 5 |
| 6 |
| | 5,145 |
| 5,037 |
| | 2 |
|
Foreign exchange and other trading revenue | 177 |
| 150 |
| 158 |
| 145 |
| 159 |
| | (10 | ) | 10 |
| | 462 |
| 543 |
| | (15 | ) |
Other (a) | 63 |
| 58 |
| 59 |
| 87 |
| 59 |
| | (6 | ) | (32 | ) | | 205 |
| 200 |
| | 3 |
|
Total fee and other revenue (a) | 1,949 |
| 1,860 |
| 1,887 |
| 1,920 |
| 2,005 |
| | 3 |
| 4 |
| | 5,812 |
| 5,780 |
| | 1 |
|
Net interest revenue | 619 |
| 610 |
| 590 |
| 593 |
| 583 |
| | (6 | ) | (2 | ) | | 1,766 |
| 1,905 |
| | (7 | ) |
Total revenue | 2,568 |
| 2,470 |
| 2,477 |
| 2,513 |
| 2,588 |
| | 1 |
| 3 |
| | 7,578 |
| 7,685 |
| | (1 | ) |
Provision for credit losses | — |
| — |
| — |
| — |
| — |
| | N/M | N/M | | — |
| 1 |
| | N/M |
Noninterest expense (ex. amortization of intangible assets) | 1,765 |
| 1,822 |
| 1,778 |
| 1,824 |
| 1,835 |
| | 4 |
| 1 |
| | 5,437 |
| 5,386 |
| | 1 |
|
Income before taxes (ex. amortization of intangible assets) | 803 |
| 648 |
| 699 |
| 689 |
| 753 |
| | (6 | ) | 9 |
| | 2,141 |
| 2,298 |
| | (7 | ) |
Amortization of intangible assets | 46 |
| 47 |
| 44 |
| 44 |
| 44 |
| | (4 | ) | — |
| | 132 |
| 147 |
| | (10 | ) |
Income before taxes | $ | 757 |
| $ | 601 |
| $ | 655 |
| $ | 645 |
| $ | 709 |
| | (6 | )% | 10 | % | | $ | 2,009 |
| $ | 2,151 |
| | (7 | )% |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | |
Pre-tax operating margin | 29 | % | 24 | % | 26 | % | 26 | % | 27 | % | | | | | 26 | % | 27 | % | | |
Pre-tax operating margin (ex. amortization of intangible assets) | 31 | % | 26 | % | 28 | % | 27 | % | 29 | % | | | | | 28 | % | 29 | % | | |
| | | | | | | | | | | | | |
Investment services fees as a percentage of noninterest expense (b) | 97 | % | 90 | % | 93 | % | 93 | % | 100 | % | | | | | 95 | % | 94 | % | | |
| | | | | | | | | | | | | |
Securities lending revenue | $ | 26 |
| $ | 21 |
| $ | 30 |
| $ | 35 |
| $ | 27 |
| | 4 | % | (23 | )% | | $ | 92 |
| $ | 96 |
| | (4 | )% |
| | | | | | | | | | | | | |
Metrics: | | | | | | | | | | | | | |
Average loans | $ | 27,865 |
| $ | 31,211 |
| $ | 31,468 |
| $ | 33,115 |
| $ | 33,785 |
| | 21 | % | 2 | % | | $ | 32,798 |
| $ | 27,463 |
| | 19 | % |
Average deposits | $ | 206,068 |
| $ | 216,216 |
| $ | 214,947 |
| $ | 220,701 |
| $ | 221,734 |
| | 8 | % | — | % | | $ | 219,152 |
| $ | 203,618 |
| | 8 | % |
| | | | | | |
|
|
|
| | | | | |
AUC/A at period end (in trillions) (c) | $ | 27.4 |
| $ | 27.6 |
| $ | 27.9 |
| $ | 28.5 |
| $ | 28.3 |
| | 3 | % | (1 | )% | | | | | |
Market value of securities on loan at period end (in billions) (d) | $ | 255 |
| $ | 235 |
| $ | 264 |
| $ | 280 |
| $ | 282 |
| | 11 | % | 1 | % | | | | | |
| | | | | | | | | | | | | |
Asset servicing: | | | | | | | | | | | | | |
Estimated new business wins (AUC/A) (in billions) | $ | 110 |
| $ | 123 |
| $ | 161 |
| $ | 130 |
| $ | 115 |
| | | | | | | | |
| | | | | | | | | | | | | |
Depositary Receipts: | | | | | | | | | | | | | |
Number of sponsored programs | 1,350 |
| 1,335 |
| 1,332 |
| 1,316 |
| 1,302 |
| | (4 | )% | (1 | )% | | | | | |
| | | | | | | | | | | | | |
Clearing services: | | | | | | | | | | | | | |
Global DARTS volume (in thousands) | 212 |
| 213 |
| 230 |
| 207 |
| 209 |
| | (1 | )% | 1 | % | | | | | |
Average active clearing accounts (U.S. platform) (in thousands) | 5,622 |
| 5,643 |
| 5,695 |
| 5,752 |
| 5,805 |
| | 3 | % | 1 | % | | | | | |
Average long-term mutual fund assets (U.S. platform) | $ | 377,131 |
| $ | 401,434 |
| $ | 413,658 |
| $ | 433,047 |
| $ | 442,827 |
| | 17 | % | 2 | % | | | | | |
Average investor margin loans (U.S. platform) | $ | 8,845 |
| $ | 8,848 |
| $ | 8,919 |
| $ | 9,236 |
| $ | 9,861 |
| | 11 | % | 7 | % | | | | | |
| | | | | | | | | | | | | |
Broker-Dealer: | | | | | | | | | | | | | |
Average tri-party repo balances (in billions) | $ | 1,952 |
| $ | 2,005 |
| $ | 1,983 |
| $ | 2,022 |
| $ | 2,063 |
| | 6 | % | 2 | % | | | | | |
| |
(a) | Total fee and other revenue includes investment management fees and distribution and servicing revenue. |
| |
(b) | Noninterest expense excludes amortization of intangible assets and litigation expense. |
| |
(c) | Includes the AUC/A of CIBC Mellon of $1.2 trillion at Sept. 30, 2013, Dec. 31, 2013, March 31, 2014, June 30, 2014 and Sept. 30, 2014. |
| |
(d) | Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities for which BNY Mellon acts as agent, beginning in the fourth quarter of 2013, on behalf of CIBC Mellon clients, which totaled $62 billion at Dec. 31, 2013, $66 billion at March 31, 2014, $64 billion at June 30, 2014 and $65 billion at Sept. 30, 2014. |
N/M - Not meaningful.
Business description
Our Investment Services business provides global custody and related services, government clearing, global collateral services, corporate trust and depositary receipt and clearing services, as well as global payment/working capital solutions to global financial institutional clients.
Our comprehensive suite of financial solutions includes: global custody, global fund services, securities lending, investment manager outsourcing, performance and risk analytics, alternative investment services, securities clearance, collateral management, corporate trust, American and global depositary receipt programs, cash management solutions, payment services, liquidity services and other linked revenues, principally foreign exchange, global clearing and execution, managed account services and global prime brokerage solutions. Our clients include corporations, public funds and government agencies, foundations and endowments; global financial institutions including banks, broker-dealers, asset managers, insurance companies and central banks; financial intermediaries and independent registered investment advisors; and hedge fund managers. We help our clients service their financial assets through a network of offices and service delivery centers in 35 countries across six continents.
The results of this business are driven by a number of factors, which include: the level of transaction activity; the range of services provided, which may include custody, accounting, fund administration, daily valuations, performance measurement and risk analytics, securities lending, and investment manager back-office outsourcing; the number of accounts; and the market value of assets under custody and/or administration. Market interest rates impact both securities lending revenue and the earnings on client deposit balances. Business expenses are driven by staff, technology investment, equipment and space required to support the services provided by the business and the cost of execution, clearance and custody of securities.
We are one of the leading global securities servicing providers with $28.3 trillion of AUC/A at Sept. 30, 2014. We are the largest custodian for U.S. corporate and public pension plans and we service 54% of the top 50 endowments. We are a leading custodian in the UK and service 20% of UK pensions that require
a custodian. Globalization tends to drive cross-border investment and capital flows, which increases the opportunity to provide solutions to our clients. The changing regulatory environment is also driving client demand for new solutions and services.
BNY Mellon is a leader in both global and U.S. Government securities clearance. We settle securities transactions in over 100 markets, act as a clearing agent for 18 of the 22 primary dealers and handle most of the transactions cleared through the Federal Reserve Bank of New York (by volume). As more fully described below, we are a leader in servicing tri-party repo collateral with approximately $2 trillion globally. We currently service approximately $1.4 trillion of the $1.6 trillion tri-party repo market in the U.S.
BNY Mellon offers tri-party collateral agency services to dealers and cash investors active in the tri-party repurchase, or repo, market and currently has approximately 86% of the market share of the U.S. tri-party repo market.
BNY Mellon has reduced the amount of secured intraday credit it provides to dealers in connection with their tri-party repo trades in a number of ways, including limiting the collateral used to secure intraday credit to certain more liquid asset classes, reducing the amount of time during which we extend intraday credit, implementing three-way trade confirmations, reducing the amount of credit provided in connection with processing collateral substitutions, introducing a functionality that enables us to “roll” maturing trades into new trades without extending credit, and requiring dealers to prefund their repayment obligations in connection with trades collateralized by Depository Trust Company sourced securities. Consistent with the recommendations of the Tri-Party Repo Infrastructure Reform Task Force, BNY Mellon has now achieved a 90% reduction in the amount of intraday credit provided.
Global Collateral Services serves broker-dealers and institutional investors facing expanding collateral management needs as a result of current and emerging regulatory and market requirements. Global Collateral Services brings together BNY Mellon’s global capabilities in segregating, optimizing, financing and transforming collateral on behalf of clients, including its market leading broker-dealer collateral management, securities lending,
collateral financing, liquidity and derivatives services teams.
In securities lending, we are one of the largest lenders of U.S. Treasury securities and depositary receipts and service a lending pool of approximately $3 trillion in 31 markets.
We serve as depositary for 1,302 sponsored American and global depositary receipt programs at Sept. 30, 2014, acting in partnership with leading companies from 66 countries - an estimated 60% global market share.
Pershing and its affiliates provide business solutions to approximately 1,600 financial organizations globally by delivering dependable operational support; robust trading services; flexible technology; and an expansive array of investment solutions, practice management support and service excellence.
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 18 of the Notes to Consolidated Financial Statements.
Review of financial results
AUC/A at Sept. 30, 2014 were $28.3 trillion, an increase of 3% from $27.4 trillion at Sept. 30, 2013, and a decrease of 1% from $28.5 trillion at June 30, 2014. The year-over-year increase was primarily driven by higher market values. AUC/A were comprised of 36% equity securities and 64% fixed income securities at Sept. 30, 2014 compared with 35% equity securities and 65% fixed income securities at Sept. 30, 2013.
Revenue generated in the Investment Services business included 39% from non-U.S. sources in the third quarter of 2014 compared with 36% in the third quarter of 2013 and 37% in the second quarter of 2014.
Investment services fees were $1.8 billion in the third quarter of 2014, an increase of 5% compared with the third quarter of 2013 and 6% (unannualized) compared with the second quarter of 2014 reflecting the following factors:
| |
• | Asset servicing fees (global custody, broker-dealer services and global collateral services) were $998 million in the third quarter of 2014 compared with $939 million in the third quarter of 2013 and $993 million in the second quarter of 2014. The year-over-year increase primarily reflects organic growth, higher market values, net new business and higher collateral management fees in Global Collateral Services. The sequential increase primarily reflects organic growth, partially offset by seasonally lower securities lending revenue. |
| |
• | Clearing services fees were $336 million in the third quarter of 2014 compared with $314 million in the third quarter of 2013 and $324 million in the second quarter of 2014. Both increases were driven by growth in clearing accounts and mutual fund positions, and higher asset levels. The sequential increase also reflects higher DARTS volume. |
| |
• | Issuer services fees (Corporate Trust and Depositary Receipts) were $314 million in the third quarter of 2014, compared with $321 million in the third quarter of 2013 and $231 million in the second quarter of 2014. The year- |
over-year decrease reflects lower Corporate Trust fees, partially offset by new business in Depositary Receipts. The sequential increase is primarily due to seasonally higher dividend fees and new business in Depositary Receipts, partially offset by lower Corporate Trust fees.
| |
• | Treasury services fees were $139 million in the third quarter of 2014 compared with $135 million in the third quarter of 2013 and $140 million in the second quarter of 2014. The year-over-year increase primarily reflects higher payment volumes. |
Foreign exchange and other trading revenue totaled $159 million in the third quarter of 2014, compared with $177 million in the third quarter of 2013 and $145 million in the second quarter of 2014. The year-over-year decrease primarily reflects lower volatility, partially offset by higher volumes. Sequentially, the increase reflects higher volumes.
Net interest revenue was $583 million in the third quarter of 2014 compared with $619 million in the third quarter of 2013 and $593 million in the second quarter of 2014. Both decreases primarily reflects lower yields, partially offset by higher average loans. The year-over-year decrease was partially offset by higher average deposits.
Noninterest expense, excluding amortization of intangible assets, was $1.835 billion in the third quarter of 2014, compared with $1.765 billion in the third quarter of 2013 and $1.824 billion in the second quarter of 2014. Both increases reflect higher litigation expense. The year-over-year increase also reflects higher professional and legal expenses, partially offset by lower staff expense. The sequential increase was partially offset by lower sub-custodian and staff expenses.
Year-to-date 2014 compared with year-to-date 2013
Income before taxes totaled $2.0 billion in the first nine months of 2014 compared with $2.2 billion in the first nine months of 2013. Excluding intangible amortization, income before taxes decreased $157 million. Fee and other revenue increased $32 million reflecting higher asset servicing fees driven by higher market values, organic growth and net new business, and higher clearing services fees driven by higher mutual funds fees, partially offset by lower foreign exchange and other trading revenue driven by lower volatility, and lower issuer services fees. The $139 million decrease in net interest revenue primarily reflects lower yields and lower accretion, partially offset by higher average deposits and loans. Noninterest expense (excluding intangible amortization) increased $51 million primarily due to higher professional expenses and the impact of the annual merit increase, partially offset by lower incentive and business development expenses.
Other segment
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year-to-date |
(dollars in millions) | 3Q13 |
| 4Q13 |
| 1Q14 |
| 2Q14 |
| 3Q14 |
| 2014 |
| 2013 |
|
Revenue: | | | | | | | |
Fee and other revenue | $ | 172 |
| $ | (20 | ) | $ | 112 |
| $ | 119 |
| $ | 928 |
| $ | 1,159 |
| $ | 671 |
|
Net interest revenue | 86 |
| 83 |
| 68 |
| 60 |
| 69 |
| 197 |
| 151 |
|
Total revenue | 258 |
| 63 |
| 180 |
| 179 |
| 997 |
| 1,356 |
| 822 |
|
Provision for credit losses | 2 |
| 6 |
| (18 | ) | (12 | ) | (19 | ) | (49 | ) | (42 | ) |
Noninterest expense (ex. M&I and restructuring charges) | 230 |
| 200 |
| 193 |
| 93 |
| 274 |
| 560 |
| 709 |
|
Income (loss) before taxes (ex. M&I and restructuring charges) | 26 |
| (143 | ) | 5 |
| 98 |
| 742 |
| 845 |
| 155 |
|
M&I and restructuring charges | 14 |
| 13 |
| — |
| 120 |
| 57 |
| 177 |
| 22 |
|
Income (loss) before taxes | $ | 12 |
| $ | (156 | ) | $ | 5 |
| $ | (22 | ) | $ | 685 |
| $ | 668 |
| $ | 133 |
|
Average loans and leases | $ | 10,938 |
| $ | 9,802 |
| $ | 10,104 |
| $ | 9,962 |
| $ | 10,278 |
| $ | 10,116 |
| $ | 10,799 |
|
See page 28 of our 2013 Annual Report for a description of the Other segment.
Review of financial results
Total fee and other revenue increased $756 million compared with the third quarter of 2013 and $809 million compared with the second quarter of 2014. Both increases primarily reflect the gain on the sale of our investment in Wing Hang and the gain on the sale of the One Wall Street building, partially offset by lower equity investment and other income.
Net interest revenue decreased $17 million compared with the third quarter of 2013 and increased $9 million compared with the second quarter of 2014. The year-over-year decrease primarily reflects changes in the internal credit rates to the businesses for deposits and lower average loans and leases. Sequentially, the increase reflects higher average loans and leases.
The provision for credit losses was a credit of $19 million in the third quarter of 2014 driven by the continued improvement in the credit quality of the loan portfolio.
Noninterest expense excluding M&I and restructuring charges increased $44 million compared with the third quarter of 2013 and $181 million compared with the second quarter of 2014. Both increases primarily reflect higher litigation expense. The year-over-year increase was partially offset by lower staff expense. The sequential increase also reflects higher staff expenses.
M&I and restructuring charges recorded in the third quarter of 2014 primarily reflects severance expense.
Year-to-date 2014 compared with year-to-date 2013
Income before taxes in the Other segment was $668 million in the first nine months of 2014 compared with $133 million in the first nine months of 2013. Total revenue increased $534 million resulting from the gain on the sale of our investment in Wing Hang, the gain on the sale of the One Wall Street building and the impact on net interest revenue from changes in the internal credit rates to the businesses for deposits, partially offset by a gain related to an equity investment in 2013 and lower equity investment income and securities gains. The provision for credit losses was a credit of $49 million in the first nine months of 2014 compared with a credit of $42 million in the first nine months of 2013. Both credits reflect the continued improvement in the credit quality of the loan portfolio. Noninterest expenses, excluding M&I and restructuring charges, decreased $149 million, primarily reflecting lower staff, business development and occupancy expenses and the cost of generating certain tax credits, partially offset by higher litigation expense.
Critical accounting estimates
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 2013 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 | 2013 Annual Report, pages 34 - 36. This policy is also disclosed in the “Asset quality and allowance for credit losses” section of this Form 10-Q. |
Fair value of financial instruments and derivatives | 2013 Annual Report, pages 36 and 37. |
OTTI | 2013 Annual Report, pages 37 and 38. |
Goodwill and other intangibles | 2013 Annual Report, pages 38 and 39. |
Pension accounting | 2013 Annual Report, pages 39 and 40. |
Consolidated balance sheet review
At Sept. 30, 2014, total assets were $386 billion compared with $375 billion at Dec. 31, 2013. Total assets averaged $380 billion in the third quarter of 2014 compared with $342 billion in the third quarter of 2013 and $369 billion in the second quarter of 2014. Fluctuations in the period-end and average total assets were driven in part by the level of client deposits. Deposits totaled $265 billion at Sept. 30, 2014 and $261 billion at Dec. 31, 2013. Total deposits averaged $247 billion in the third quarter of 2014, $226 billion in the third quarter of 2013 and $240 billion in the second quarter of 2014. At Sept. 30, 2014, total interest-bearing deposits were 52% of total interest-earning assets compared with 54% at Dec. 31, 2013.
At Sept. 30, 2014, we had $48 billion of liquid funds and $98 billion of cash (including $92 billion of overnight deposits with the Federal Reserve and other central banks) for a total of $146 billion of available funds. This compares with available funds of $155 billion at Dec. 31, 2013. The decrease in available funds primarily resulted from a lower level of interest-bearing deposits with the Federal Reserve and other central banks. Total available funds as a percentage of total assets was 38% at Sept. 30, 2014 compared with 41% at Dec. 31, 2013. Of the $48 billion in liquid funds held at Sept. 30, 2014, $30 billion was placed in interest-bearing deposits with large, highly-rated global financial institutions with a weighted-average life to maturity of approximately 21 days. Of the $30 billion, $6 billion was placed with banks in the Eurozone.
Investment securities were $116 billion, or 30% of total assets, at Sept. 30, 2014, compared with $99 billion, or 26% of total assets, at Dec. 31, 2013. The increase reflects a higher level of investments in U.S. Treasury securities, agency RMBS and sovereign debt/sovereign guaranteed.
Loans were $58 billion, or 15% of total assets, at Sept. 30, 2014, compared with $52 billion, or 14% of total assets, at Dec. 31, 2013. The increase in loans primarily reflects higher overdrafts, margin loans and wealth management loans and mortgages.
Long-term debt totaled $21.6 billion at Sept. 30, 2014 and $19.9 billion at Dec. 31, 2013. Senior debt issuances of $4.7 billion were partially offset by maturities of $2.9 billion in the first nine months of 2014.
Total The Bank of New York Mellon Corporation shareholders’ equity at Sept. 30, 2014 increased to $38.5 billion from $37.5 billion at Dec. 31, 2013. The increase primarily reflects earnings retention, approximately $520 million resulting from stock awards, the exercise of stock options and stock issued for employee benefit plans, and an increase in the value of our investment securities portfolio, partially offset by share repurchases and a decrease in foreign currency translation adjustments.
Exposure in Ireland, Italy, Spain, Portugal, Greece, Russia and Ukraine
We have provided expanded disclosure on countries that have experienced particular market focus on credit quality and are countries experiencing economic concerns. Where appropriate, we are offsetting the risk associated with the gross exposure in these countries with collateral that has been pledged, which primarily consists of cash or marketable securities, or by transferring the risk to a third-party guarantor in another country. See “Risk management” in the 2013 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. The liabilities of consolidated investment management funds represent the interest of the noteholders of the funds and are solely dependent on the value of the assets of the funds.
Any loss in the value of assets of consolidated investment management funds would be incurred by the fund’s noteholders.
Our exposure in Ireland is principally related to Irish-domiciled investment funds. Servicing provided to these funds and fund families may result in overdraft exposure.
Recent events in Russia and Ukraine significantly increased geopolitical tensions in Central and Eastern Europe. In addition to the exposures in the following table, we provide investments services, including acting as a depositary receipt bank, for companies in Russia. To date, our Russian-related businesses have not been materially impacted by the ongoing tensions or sanctions. Future developments including
additional sanctions against Russian entities could adversely impact these businesses and our results of operations. At Sept. 30, 2014, our exposure to Ukraine was less than $1 million.
At Sept. 30, 2014 and Dec. 31, 2013, BNY Mellon had exposure of less than $1 million in both Portugal and Greece.
The following tables present our on- and off-balance sheet exposure in Ireland, Italy and Spain at both Sept. 30, 2014 and Dec. 31, 2013. Additionally, our on- and off-balance sheet exposure to Russia is presented at Sept. 30, 2014. Exposure in the tables below reflects the country of operations and risk of the immediate counterparty.
|
| | | | | | | | | | | | | | | |
On- and off-balance sheet exposure at Sept. 30, 2014 | | | | | |
(in millions) | Ireland |
| Italy |
| Spain |
| Russia |
| Total |
|
On-balance sheet exposure | | | | | |
Gross: | | | | | |
Deposits with banks (primarily interest-bearing) (a) | $ | 176 |
| $ | 199 |
| $ | 420 |
| $ | 40 |
| $ | 835 |
|
Investment securities (primarily sovereign debt and European Floating Rate Notes) (b) | 438 |
| 938 |
| 931 |
| — |
| 2,307 |
|
Loans and leases (c) | 143 |
| 2 |
| 5 |
| 330 |
| 480 |
|
Trading assets (d) | 293 |
| 32 |
| 19 |
| — |
| 344 |
|
Total gross on-balance sheet exposure | 1,050 |
| 1,171 |
| 1,375 |
| 370 |
| 3,966 |
|
Less: | | | | | |
Collateral | 124 |
| 29 |
| 19 |
| — |
| 172 |
|
Guarantees | — |
| 2 |
| 1 |
| — |
| 3 |
|
Total collateral and guarantees | 124 |
| 31 |
| 20 |
| — |
| 175 |
|
Total net on-balance sheet exposure | $ | 926 |
| $ | 1,140 |
| $ | 1,355 |
| $ | 370 |
| $ | 3,791 |
|
Off-balance sheet exposure | | | | | |
Gross: | | | | | |
Lending-related commitments (e) | $ | 90 |
| $ | — |
| $ | — |
| $ | — |
| $ | 90 |
|
Letters of credit (f) | 62 |
| 3 |
| 13 |
| — |
| 78 |
|
Total gross off-balance sheet exposure | 152 |
| 3 |
| 13 |
| — |
| 168 |
|
Less: | | | | | |
Collateral | 80 |
| — |
| 13 |
| — |
| 93 |
|
Total net off-balance sheet exposure | $ | 72 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 75 |
|
Total exposure: | | | | | |
Total gross on- and off-balance sheet exposure | $ | 1,202 |
| $ | 1,174 |
| $ | 1,388 |
| $ | 370 |
| $ | 4,134 |
|
Less: Total collateral and guarantees | 204 |
| 31 |
| 33 |
| — |
| 268 |
|
Total net on- and off-balance sheet exposure | $ | 998 |
| $ | 1,143 |
| $ | 1,355 |
| $ | 370 |
| $ | 3,866 |
|
| |
(a) | Interest-bearing deposits with banks represent a $97 million placement with an Irish subsidiary of a UK holding company, an $8 million placement with an Irish financial institution, a $100 million placement with a financial institution in Italy, $417 million of placements with financial institutions in Spain, $173 million of nostro accounts related to our custody activities located in Ireland, Italy and Spain and $40 million of nostro accounts related to our depositary receipts business in Russia. |
| |
(b) | Investment securities represent $155 million, fair value, of residential mortgage-backed securities located in Ireland and Italy, $2.1 billion, fair value, of sovereign debt located in Ireland, Spain and Italy and $46 million, fair value, of corporate bonds located in Ireland, Italy and Spain. The investment securities were 93% investment grade. |
| |
(c) | Loans and leases primarily include $69 million of overdrafts primarily to Irish-domiciled investment funds resulting from our custody business, a $73 million commercial lease to a company located in Ireland, which was fully collateralized by U.S. Treasuries and $330 million of trade finance and syndicated loans primarily to large, state-owned financial institutions in Russia. There is no impairment associated with these loans and leases. Overdrafts occur on a daily basis in our Investment Services businesses and are generally repaid within two business days. |
| |
(d) | Trading assets represent the receivable related to over-the-counter foreign exchange and interest rate derivatives, net of master netting agreements. Trading assets include $293 million of receivables primarily due from Irish-domiciled investment funds and $51 million of receivables primarily due from financial institutions in Italy and Spain. Cash collateral on trading assets represents $51 million in Ireland and $29 million in Italy. Additionally, trading assets in Spain were collateralized by $19 million of cash and U.S. Treasuries. |
| |
(e) | Lending-related commitments include $77 million to an insurance company in Ireland, collateralized by $12 million of marketable securities, and $13 million to an investment company in Ireland, secured by a lien on the client’s collateral portfolio. |
| |
(f) | Letters of credit primarily represent $57 million extended to an insurance company in Ireland, collateralized by $55 million of marketable securities and $13 million extended to an insurance company in Spain, fully collateralized by marketable securities. Risk participations with higher risk countries counterparties are excluded. |
|
| | | | | | | | | | | | |
On- and off-balance sheet exposure at Dec. 31, 2013 | | | | |
(in millions) | Ireland |
| Italy |
| Spain |
| Total |
|
On-balance sheet exposure | | | | |
Gross: | | | | |
Deposits with banks (primarily interest-bearing) (a) | $ | 100 |
| $ | 217 |
| $ | 375 |
| $ | 692 |
|
Investment securities (primarily sovereign debt and European Floating Rate Notes) (b) | 165 |
| 279 |
| 137 |
| 581 |
|
Loans and leases (c) | 267 |
| 3 |
| 1 |
| 271 |
|
Trading assets (d) | 62 |
| 35 |
| 18 |
| 115 |
|
Total gross on-balance sheet exposure | 594 |
| 534 |
| 531 |
| 1,659 |
|
Less: | | | | |
Collateral | 87 |
| 30 |
| 18 |
| 135 |
|
Guarantees | — |
| 2 |
| 1 |
| 3 |
|
Total collateral and guarantees | 87 |
| 32 |
| 19 |
| 138 |
|
Total net on-balance sheet exposure | $ | 507 |
| $ | 502 |
| $ | 512 |
| $ | 1,521 |
|
Off-balance sheet exposure | | | | |
Gross: | | | | |
Lending-related commitments (e) | $ | 70 |
| $ | — |
| $ | — |
| $ | 70 |
|
Letters of credit (f) | 115 |
| 3 |
| 13 |
| 131 |
|
Total gross off-balance sheet exposure | 185 |
| 3 |
| 13 |
| 201 |
|
Less: | | | | |
Collateral | 68 |
| — |
| 13 |
| 81 |
|
Total net off-balance sheet exposure | $ | 117 |
| $ | 3 |
| $ | — |
| $ | 120 |
|
Total exposure: | | | | |
Total gross on- and off-balance sheet exposure | $ | 779 |
| $ | 537 |
| $ | 544 |
| $ | 1,860 |
|
Less: Total collateral and guarantees | 155 |
| 32 |
| 32 |
| 219 |
|
Total net on- and off-balance sheet exposure | $ | 624 |
| $ | 505 |
| $ | 512 |
| $ | 1,641 |
|
| |
(a) | Interest-bearing deposits with banks represent a $99 million placement with an Irish subsidiary of a UK holding company, a $100 million placement with a financial institution in Italy, $350 million of placements with financial institutions in Spain and $143 million of nostro accounts related to our custody activities located in Italy, Spain and Ireland. |
| |
(b) | Investment securities represent $257 million, fair value, of residential mortgage-backed securities located in Ireland and Italy, $308 million, fair value, of sovereign debt located in Spain and Italy, and $16 million, fair value, of asset-backed collateralized loan obligations (“CLOs”) located in Ireland. The investment securities were 74% investment grade. |
| |
(c) | Loans and leases primarily include $184 million of overdrafts primarily to Irish-domiciled investment funds resulting from our custody business, a $70 million commercial lease to a company located in Ireland, which was fully collateralized by U.S. Treasuries and $13 million of loans to financial institutions located in Ireland, which were collateralized by $12 million of marketable securities. There is no impairment associated with these loans and leases. Overdrafts occur on a daily basis in our Investment Services businesses and are generally repaid within two business days. |
| |
(d) | Trading assets represent the receivable related to the over-the-counter foreign exchange and interest rate derivatives, net of master netting agreements. Trading assets include $62 million of receivables primarily due from Irish-domiciled investment funds and $53 million of receivables primarily due from financial institutions in Italy and Spain. Cash collateral on trading assets primarily represents $30 million in Italy. Trading assets located in Spain are collateralized by $13 million of U.S. Treasuries. |
| |
(e) | Lending-related commitments include $70 million to an insurance company, collateralized by $3 million of marketable securities. |
| |
(f) | Letters of credit primarily represent $65 million extended to an insurance company in Ireland, fully collateralized by marketable securities, $48 million extended to a financial institution in Ireland and $13 million extended to an insurance company in Spain, fully collateralized by marketable securities. |
Investment securities
In the discussion of our investment securities portfolio, we have included certain credit ratings information because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications for our
investment 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 presents the distribution of our total investment securities portfolio:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities portfolio
(dollars in millions) | June 30, 2014 |
| | 3Q14 change in unrealized gain (loss) |
| Sept. 30, 2014 | Fair value as a % of amortized cost (a) |
| Unrealized gain (loss) |
| | Ratings |
| | | | BB+ and lower | |
Fair value |
| | Amortized cost |
| Fair value |
| | | AAA/ AA- | A+/ A- | BBB+/ BBB- | Not rated |
Agency RMBS | $ | 41,552 |
| | $ | (100 | ) | $ | 44,413 |
| $ | 44,372 |
| | 100 | % | $ | (41 | ) | | 100 | % | — | % | — | % | — | % | — | % |
U.S. Treasury | 18,791 |
| | (18 | ) | 25,244 |
| 25,449 |
| | 101 |
| 205 |
| | 100 |
| — |
| — |
| — |
| — |
|
Sovereign debt/sovereign guaranteed (b) | 14,812 |
| | 41 |
| 16,510 |
| 16,627 |
| | 101 |
| 117 |
| | 87 |
| — |
| 13 |
| — |
| — |
|
Non-agency RMBS (c) | 2,574 |
| | (31 | ) | 1,916 |
| 2,449 |
| | 81 |
| 533 |
| | — |
| 1 |
| 1 |
| 90 |
| 8 |
|
Non-agency RMBS | 1,227 |
| | 3 |
| 1,147 |
| 1,170 |
| | 94 |
| 23 |
| | 1 |
| 9 |
| 23 |
| 66 |
| 1 |
|
European floating rate notes (d) | 2,525 |
| | 9 |
| 2,297 |
| 2,296 |
| | 100 |
| (1 | ) | | 72 |
| 22 |
| — |
| 6 |
| — |
|
Commercial MBS | 4,397 |
| | (28 | ) | 4,798 |
| 4,829 |
| | 101 |
| 31 |
| | 93 |
| 6 |
| 1 |
| — |
| — |
|
State and political subdivisions | 6,253 |
| | 13 |
| 5,350 |
| 5,434 |
| | 102 |
| 84 |
| | 79 |
| 20 |
| — |
| — |
| 1 |
|
Foreign covered bonds (e) | 2,788 |
| | (3 | ) | 2,863 |
| 2,949 |
| | 103 |
| 86 |
| | 100 |
| — |
| — |
| — |
| — |
|
Corporate bonds | 1,693 |
| | (5 | ) | 1,636 |
| 1,670 |
| | 102 |
| 34 |
| | 21 |
| 65 |
| 14 |
| — |
| — |
|
CLO | 1,455 |
| | (1 | ) | 1,959 |
| 1,971 |
| | 101 |
| 12 |
| | 100 |
| — |
| — |
| — |
| — |
|
U.S. Government agencies | 787 |
| | (3 | ) | 704 |
| 699 |
| | 99 |
| (5 | ) | | 100 |
| — |
| — |
| — |
| — |
|
Consumer ABS | 3,278 |
| | (3 | ) | 3,024 |
| 3,025 |
| | 100 |
| 1 |
| | 99 |
| 1 |
| — |
| — |
| — |
|
Other (f) | 2,980 |
| | (3 | ) | 2,917 |
| 2,923 |
| | 100 |
| 6 |
| | 40 |
| 53 |
| — |
| — |
| 7 |
|
Total investment securities | $ | 105,112 |
| (g) | $ | (129 | ) | $ | 114,778 |
| $ | 115,863 |
| (g) | 100 | % | $ | 1,085 |
| (h) | 90 | % | 4 | % | 2 | % | 3 | % | 1 | % |
| |
(a) | Amortized cost before impairments. |
| |
(b) | Primarily comprised of exposure to U.K., France, Germany and Netherlands. |
| |
(c) | These RMBS were included in the former Grantor Trust and were marked-to-market in 2009. We believe these RMBS would receive higher credit ratings if these ratings incorporated, as additional credit enhancement, the difference between the written-down amortized cost and the current face amount of each of these securities. |
| |
(d) | Includes RMBS, commercial MBS and other securities. Primarily comprised of exposure to UK and Netherlands. |
| |
(e) | Primarily comprised of exposure to Canada, UK and Netherlands. |
| |
(f) | Includes commercial paper of $1.7 billion and $1.6 billion, fair value, and money market funds of $810 million and $789 million, fair value, at June 30, 2014 and Sept. 30, 2014, respectively. |
| |
(g) | Includes net unrealized gains on derivatives hedging securities available-for-sale of $213 million at June 30, 2014 and $137 million at Sept. 30, 2014. |
| |
(h) | Unrealized gains of $1,055 million at Sept. 30, 2014 related to available-for-sale securities. |
The fair value of our investment securities portfolio was $115.9 billion at Sept. 30, 2014 compared with $99.4 billion at Dec. 31, 2013. The increase reflects a higher level of investments in U.S. Treasury securities, agency RMBS and sovereign debt/sovereign guaranteed. In the third quarter of 2014, we received $134 million of paydowns and sold $24 million of sub-investment grade securities.
At Sept. 30, 2014, the total investment securities portfolio had a net unrealized pre-tax gain of $1.1 billion compared with $309 million at Dec. 31, 2013. The increase in the net unrealized pre-tax gain was primarily driven by the reduction in market interest rates. The unrealized net of tax gain on our
investment securities available-for-sale portfolio included in accumulated other comprehensive income was $654 million at Sept. 30, 2014, compared with $357 million at Dec. 31, 2013.
At Sept. 30, 2014, 90% of the securities in our portfolio were rated AAA/AA- compared with 89% of the securities rated AAA/AA- at Dec. 31, 2013.
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 restructuring of the investment securities portfolio.
|
| | | | | | | | | | | | | | | |
Net premium amortization and discount accretion of investment securities (a) | | | | | |
(dollars in millions) | 3Q13 |
| 4Q13 |
| 1Q14 |
| 2Q14 |
| 3Q14 |
|
Amortizable purchase premium (net of discount) relating to investment securities: | | | | | |
Balance at period end | $ | 2,519 |
| $ | 2,377 |
| $ | 2,236 |
| $ | 2,225 |
| $ | 2,317 |
|
Estimated average life remaining at period end (in years) | 5.2 |
| 5.2 |
| 5.0 |
| 4.8 |
| 4.6 |
|
Amortization | $ | 147 |
| $ | 142 |
| $ | 145 |
| $ | 156 |
| $ | 159 |
|
Accretable discount related to the restructuring of the investment securities portfolio: | | | | | |
Balance at period end | $ | 675 |
| $ | 642 |
| $ | 534 |
| $ | 510 |
| $ | 465 |
|
Estimated average life remaining at period end (in years) | 6.1 |
| 6.0 |
| 6.3 |
| 6.2 |
| 6.6 |
|
Accretion | $ | 55 |
| $ | 52 |
| $ | 46 |
| $ | 41 |
| $ | 40 |
|
| |
(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) | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
State and political subdivisions | $ | 7 |
| $ | 7 |
| $ | — |
| $ | 13 |
| $ | — |
|
U.S. Treasury | 1 |
| 1 |
| 22 |
| 12 |
| 49 |
|
U.S. Government agencies | — |
| — |
| — |
| 7 |
| — |
|
Foreign covered bonds | — |
| 3 |
| — |
| 3 |
| 8 |
|
European floating rate notes | 2 |
| — |
| 3 |
| 1 |
| (3 | ) |
Commercial MBS | 1 |
| — |
| — |
| 1 |
| 15 |
|
Non-agency RMBS | 4 |
| (2 | ) | (4 | ) | — |
| (3 | ) |
Other | 5 |
| 9 |
| 1 |
| 23 |
| 36 |
|
Total net securities gains | $ | 20 |
| $ | 18 |
| $ | 22 |
| $ | 60 |
| $ | 102 |
|
On a quarterly basis, we perform our impairment analysis using several factors, including projected loss severities and default rates. In the third quarter of 2014, this analysis resulted in $2 million of credit losses primarily on our Alt-A and prime RMBS portfolios. At Sept. 30, 2014, if we were to increase or decrease each of our projected loss severities and default rates by 100 basis points on each of the positions in our non-agency RMBS portfolios, including the securities previously held by the Grantor Trust, credit-related impairment charges on
these securities would have increased or decreased by $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, 2014. The unrealized loss on these securities was $1 million at Sept. 30, 2014, an improvement of $9 million compared with $10 million at June 30, 2014.
|
| | | | | | | | | | | |
European floating rate notes at Sept. 30, 2014 (a) |
(in millions) | RMBS |
| | Other |
| | Total fair value |
|
United Kingdom | $ | 1,425 |
| | $ | 114 |
| | $ | 1,539 |
|
Netherlands | 571 |
| | — |
| | 571 |
|
Ireland | 152 |
| | — |
| | 152 |
|
Other | 34 |
| | — |
| | 34 |
|
Total fair value | $ | 2,182 |
| | $ | 114 |
| | $ | 2,296 |
|
| |
(a) | 72% of these securities are in the AAA to AA- ratings category. |
See Note 15 of the Notes to Consolidated Financial Statements for details of securities by level in the fair value hierarchy.
Loans
|
| | | | | | | | | | | | | | | | | | | |
Total exposure – consolidated | Sept. 30, 2014 | | Dec. 31, 2013 |
(in billions) | Loans |
| Unfunded commitments |
| Total exposure |
| | Loans |
| Unfunded commitments |
| Total exposure |
|
Non-margin loans: | | | | | | | |
Financial institutions | $ | 14.6 |
| $ | 15.5 |
| $ | 30.1 |
| | $ | 14.4 |
| $ | 17.0 |
| $ | 31.4 |
|
Commercial | 1.5 |
| 18.7 |
| 20.2 |
| | 1.6 |
| 19.5 |
| 21.1 |
|
Subtotal institutional | 16.1 |
| 34.2 |
| 50.3 |
| | 16.0 |
| 36.5 |
| 52.5 |
|
Wealth management loans and mortgages | 10.8 |
| 1.6 |
| 12.4 |
| | 9.8 |
| 1.7 |
| 11.5 |
|
Commercial real estate | 2.4 |
| 2.7 |
| 5.1 |
| | 2.0 |
| 2.4 |
| 4.4 |
|
Lease financings | 2.2 |
| — |
| 2.2 |
| | 2.3 |
| — |
| 2.3 |
|
Other residential mortgages | 1.3 |
| — |
| 1.3 |
| | 1.4 |
| — |
| 1.4 |
|
Overdrafts | 6.3 |
| — |
| 6.3 |
| | 3.7 |
| — |
| 3.7 |
|
Other | 0.9 |
| — |
| 0.9 |
| | 0.8 |
| — |
| 0.8 |
|
Subtotal non-margin loans | 40.0 |
| 38.5 |
| 78.5 |
| | 36.0 |
| 40.6 |
| 76.6 |
|
Margin loans | 17.5 |
| 0.7 |
| 18.2 |
| | 15.7 |
| 0.5 |
| 16.2 |
|
Total | $ | 57.5 |
| $ | 39.2 |
| $ | 96.7 |
| | $ | 51.7 |
| $ | 41.1 |
| $ | 92.8 |
|
At Sept. 30, 2014, total exposures were $96.7 billion, an increase of 4% from $92.8 billion at Dec. 31, 2013. The increase in total exposure primarily reflects higher exposure in overdrafts, margin loans, wealth management loans and mortgages and commercial real estate portfolios, partially offset by lower exposure in the financial institutions and commercial portfolios.
Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios made up 52% of our total lending exposure at Sept. 30, 2014 and 57% at Dec. 31, 2013. Additionally, a substantial portion of our overdrafts relate to financial institutions and commercial customers.
Financial institutions
The diversity of the financial institutions portfolio is shown in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial institutions portfolio exposure (dollar amounts in billions) | Sept. 30, 2014 | | Dec. 31, 2013 |
Loans |
| | Unfunded commitments |
| | Total exposure |
| | % Inv. grade |
| | % due <1 yr |
| | Loans |
| | Unfunded commitments |
| | Total exposure |
|
Banks | $ | 9.0 |
| | $ | 1.6 |
| | $ | 10.6 |
| | 87 | % | | 89 | % | | $ | 9.4 |
| | $ | 2.3 |
| | $ | 11.7 |
|
Asset managers | 1.5 |
| | 4.6 |
| | 6.1 |
| | 99 |
| | 77 |
| | 1.4 |
| | 4.1 |
| | 5.5 |
|
Securities industry | 3.6 |
| | 1.3 |
| | 4.9 |
| | 91 |
| | 95 |
| | 2.9 |
| | 2.0 |
| | 4.9 |
|
Insurance | 0.1 |
| | 4.0 |
| | 4.1 |
| | 99 |
| | 19 |
| | 0.1 |
| | 4.3 |
| | 4.4 |
|
Government | — |
| | 3.0 |
| | 3.0 |
| | 97 |
| | 30 |
| | 0.4 |
| | 3.2 |
| | 3.6 |
|
Other | 0.4 |
| | 1.0 |
| | 1.4 |
| | 96 |
| | 24 |
| | 0.2 |
| | 1.1 |
| | 1.3 |
|
Total | $ | 14.6 |
| | $ | 15.5 |
| | $ | 30.1 |
| | 93 | % | | 69 | % | | $ | 14.4 |
| | $ | 17.0 |
| | $ | 31.4 |
|
The financial institutions portfolio exposure was $30.1 billion at Sept. 30, 2014 compared with $31.4 billion at Dec. 31, 2013. The decrease primarily reflects lower exposure to banks.
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, 2014. 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, 69% expire within one year, and 36% expire within 90 days. In addition, 36% of the financial institutions exposure is secured. For example, securities industry and asset managers often borrow against marketable securities held in custody.
For ratings of non-U.S. counterparties, as a conservative measure, 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.
Our bank exposure primarily relates to our global trade finance and U.S. dollar-clearing businesses. These exposures are predominately to investment grade counterparties and are short term in nature.
The asset manager portfolio exposures are high-quality, with 99% of the exposures meeting our investment grade equivalent ratings criteria as of Sept. 30, 2014. These exposures are generally short-term liquidity facilities, with the vast majority to regulated mutual funds.
Commercial
The diversity of the commercial portfolio is presented in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial portfolio exposure | Sept. 30, 2014 | | Dec. 31, 2013 |
(dollar amounts in billions) | Loans |
| | Unfunded commitments |
| | Total exposure |
| | % Inv. grade |
| | % due <1 yr |
| | Loans |
| | Unfunded commitments |
| | Total exposure |
|
Services and other | $ | 0.7 |
| | $ | 5.8 |
| | $ | 6.5 |
| | 95 | % | | 27 | % | | $ | 0.6 |
| | $ | 6.0 |
| | $ | 6.6 |
|
Energy and utilities | 0.4 |
| | 5.7 |
| | 6.1 |
| | 98 |
| | 8 |
| | 0.7 |
| | 5.9 |
| | 6.6 |
|
Manufacturing | 0.3 |
| | 5.6 |
| | 5.9 |
| | 91 |
| | 9 |
| | 0.2 |
| | 5.9 |
| | 6.1 |
|
Media and telecom | 0.1 |
| | 1.6 |
| | 1.7 |
| | 90 |
| | 10 |
| | 0.1 |
| | 1.7 |
| | 1.8 |
|
Total | $ | 1.5 |
| | $ | 18.7 |
| | $ | 20.2 |
| | 94 | % | | 15 | % | | $ | 1.6 |
| | $ | 19.5 |
| | $ | 21.1 |
|
The commercial portfolio exposure decreased 4% to $20.2 billion at Sept. 30, 2014, from $21.1 billion at Dec. 31, 2013, primarily reflecting a decrease in the energy and utilities and manufacturing portfolios.
The table below 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, 2013 |
| Dec. 31, 2013 |
| March 31, 2014 |
| June 30, 2014 |
| Sept. 30, 2014 |
|
Financial institutions | 92 | % | 93 | % | 94 | % | 93 | % | 93 | % |
Commercial | 94 | % | 94 | % | 94 | % | 94 | % | 94 | % |
Our credit strategy is to focus on investment grade names to support cross-selling opportunities and avoid single name/industry concentrations and our goal is to maintain a predominantly investment grade loan portfolio. The execution of our strategy has resulted in 93% of our financial institutions portfolio and 94% of our commercial portfolio rated as investment grade at Sept. 30, 2014.
Wealth management loans and mortgages
Our wealth management exposure was $12.4 billion at Sept. 30, 2014 compared with $11.5 billion at Dec. 31, 2013. Wealth management loans and mortgages are primarily comprised 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 an average loan-to-value ratio of 65% at origination. In the wealth management portfolio, less than 1% of the mortgages were past due at Sept. 30, 2014.
At Sept. 30, 2014, the wealth management mortgage portfolio was comprised of the following geographic concentrations: California - 21%; New York - 21%; Massachusetts - 15%; Florida - 9%; and other - 34%.
Commercial real estate
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. Our commercial real estate exposure totaled $5.1 billion at Sept. 30, 2014 compared with $4.4 billion at Dec. 31, 2013.
At Sept. 30, 2014, 59% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type, with 61% secured by residential buildings, 20% secured by office buildings, 10% secured by retail properties, and 9% secured by other categories. Approximately 97% of the unsecured portfolio is comprised of real estate investment trusts (“REITs”), which are primarily investment grade, and real estate operating companies.
At Sept. 30, 2014, our commercial real estate portfolio is comprised of the following concentrations: New York metro - 46%; REITs and real estate operating companies - 40%; and other - 14%.
Lease financings
The leasing portfolio exposure totaled $2.2 billion and included $145 million of airline exposures at Sept. 30, 2014, compared with $2.3 billion of leasing exposures, including $166 million of airline exposures, at Dec. 31, 2013. At Sept. 30, 2014, approximately 87% of the leasing exposure was investment grade.
At Sept. 30, 2014, the $2.1 billion non-airline lease financing portfolio consisted of exposures backed by well-diversified assets, primarily large-ticket transportation equipment.
At Sept. 30, 2014, our $145 million of exposure to the airline industry consisted of $61 million to major U.S. carriers, $75 million to foreign airlines and $9 million to U.S. regional airlines.
Our airline lease customers experienced a recent recovery in the industry. However, a significant portion of these customers remain highly leveraged and vulnerable to both economic downturns and rising fuel prices. We continue to closely monitor this portfolio.
We utilize the lease financing portfolio as part of our tax management strategy.
Other residential mortgages
The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $1.3 billion at Sept. 30, 2014, compared with $1.4 billion at Dec. 31, 2013. Included in this portfolio at Sept. 30, 2014 are $366 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, 2014, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 18% 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 includes 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 $7.4 billion of loans at Sept. 30, 2014 and $6.7 billion at Dec. 31, 2013 related to a term loan program that offers fully collateralized loans to broker-dealers.
Tri-party repo committed credit facilities
We are working to partially convert the secured intraday credit provided to dealers in connection with their tri-party repo trades from uncommitted credit to committed credit in the first quarter of 2015. The dealers will be required to fully secure the outstanding intraday credit with high quality liquid assets having a market value in excess of the amount of the outstanding credit.
Asset quality and allowance for credit losses
Over the past several years, we have improved our risk profile through greater focus on clients who are
active users of our non-credit services, de-emphasizing broad-based loan growth. Our primary exposure to the credit risk of a customer consists of funded loans, unfunded formal contractual commitments to lend, standby letters of credit and overdrafts associated with our custody and securities clearance businesses.
The role of credit has shifted to one that complements our other services instead of as a lead product. We believe credit solidifies customer relationships and, through a disciplined allocation of capital, can earn acceptable rates of return as part of an overall relationship.
The following table details changes in our allowance for credit losses.
|
| | | | | | | | | | | | |
Allowance for credit losses activity (dollar amounts in millions) | Sept. 30, 2014 |
| June 30, 2014 |
| Dec. 31, 2013 |
| Sept. 30, 2013 |
|
Margin loans | $ | 17,548 |
| $ | 17,685 |
| $ | 15,652 |
| $ | 15,146 |
|
Non-margin loans | 39,979 |
| 41,563 |
| 36,005 |
| 34,992 |
|
Total loans | $ | 57,527 |
| $ | 59,248 |
| $ | 51,657 |
| $ | 50,138 |
|
Allowance for credit losses - beginning of period | $ | 311 |
| $ | 326 |
| $ | 339 |
| $ | 337 |
|
Provision for credit losses | (19 | ) | (12 | ) | 6 |
| 2 |
|
Net (charge-offs) recoveries: | | | | |
Foreign | (1 | ) | (2 | ) | (3 | ) | 1 |
|
Wealth management loans and mortgages | — |
| (1 | ) | — |
| — |
|
Other residential mortgages | 1 |
| (1 | ) | — |
| — |
|
Financial institutions | — |
| — |
| 3 |
| — |
|
Commercial | (4 | ) | 1 |
| (1 | ) | (1 | ) |
Net (charge-offs) | (4 | ) | (3 | ) | (1 | ) | — |
|
Allowance for credit losses - end of period | $ | 288 |
| $ | 311 |
| $ | 344 |
| $ | 339 |
|
Allowance for loan losses | $ | 191 |
| $ | 187 |
| $ | 210 |
| $ | 206 |
|
Allowance for lending-related commitments | 97 |
| 124 |
| 134 |
| 133 |
|
Allowance for loan losses as a percentage of total loans | 0.33 | % | 0.32 | % | 0.41 | % | 0.41 | % |
Allowance for loan losses as a percentage of non-margin loans | 0.48 |
| 0.45 |
| 0.58 |
| 0.59 |
|
Total allowance for credit losses as a percentage of total loans | 0.50 |
| 0.52 |
| 0.67 |
| 0.68 |
|
Total allowance for credit losses as a percentage of non-margin loans | 0.72 |
| 0.75 |
| 0.96 |
| 0.97 |
|
Net charge-offs were $4 million in the third quarter of 2014 and $3 million in the second quarter of 2014. Net charge-offs in the third quarter of 2014 were primarily in the commercial loan portfolio. Net charge offs in the second quarter of 2014 were primarily in the foreign loans, wealth management loans and mortgages and other residential mortgages portfolios. There were no net charge-offs in the third quarter of 2013.
The provision for credit losses was a credit of $19 million in the third quarter of 2014 driven by the continued improvement in the credit quality of the loan portfolio. The provision for credit losses was $2
million in the third quarter of 2013 and a credit of $12 million in the second quarter of 2014.
The total allowance for credit losses was $288 million at Sept. 30, 2014, $344 million at Dec. 31, 2013 and $339 million at Sept. 30, 2013. The ratio of the total allowance for credit losses to non-margin loans was 0.72% at Sept. 30, 2014, 0.96% at Dec. 31, 2013 and 0.97% at Sept. 30, 2013. The ratio of the allowance for loan losses to non-margin loans was 0.48% at Sept. 30, 2014 compared with 0.58% at Dec. 31, 2013 and 0.59% at Sept. 30, 2013. The decrease in the total allowance for credit losses and the lower ratios at Sept. 30, 2014 compared with both prior periods
primarily reflects an improvement in the credit quality in the loan portfolio.
We had $17.5 billion of secured margin loans on our balance sheet at Sept. 30, 2014 compared with $15.7 billion at Dec. 31, 2013 and $15.1 billion at Sept. 30, 2013. 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.
We utilize a quantitative methodology and qualitative framework for determining the allowance for loan losses and the allowance for lending-related commitments. Within this qualitative framework, management applies judgment when assessing internal risk factors and environmental factors to compute an additional allowance for each component of the loan portfolio.
The three elements of the allowance for loan losses and the allowance for lending-related commitments include the qualitative allowance framework. The three elements are:
| |
• | an allowance for impaired credits of $1 million or greater; |
| |
• | an allowance for higher risk-rated credits and pass-rated credits; and |
| |
• | an allowance for residential mortgage loans. |
Our lending is primarily to institutional customers. As a result, our loans are generally larger than $1 million. Therefore, the first element, impaired credits, is based on individual analysis of all impaired loans of $1 million or greater. The allowance is measured by the difference between the recorded value of impaired loans and their impaired value. Impaired value is either the present value of the expected future cash flows from the borrower, the market value of the loan, or the fair value of the collateral.
The second element, higher risk-rated credits and pass-rated credits, is based on our probable loss model. All loans over $1 million are individually
analyzed before being assigned a credit rating. All borrowers are assigned to pools based on their credit rating. The probable loss inherent in each loan in a pool incorporates the borrower’s credit rating, loss given default rating and maturity. The loss given default incorporates a recovery expectation and an estimate of the use of the facility at default (usage given default). The borrower’s probability of default is derived from the associated credit rating. Borrower ratings are reviewed at least annually and are periodically mapped to third-party databases, including rating agency and default and recovery databases, to ensure ongoing consistency and validity. Higher risk-rated credits are reviewed quarterly.
The third element, the allowance for residential mortgage loans, is determined by segregating six mortgage pools into delinquency periods ranging from current through foreclosure. Each of these delinquency periods is assigned a probability of default. A specific loss given default is assigned for each mortgage pool. BNY Mellon also assigns all residential mortgage pools, except home equity lines of credit, a probability of default and loss given default based on default and loss data derived from our residential mortgage portfolio. For each pool, the inherent loss is calculated using the above factors. The resulting probable loss factor (the probability of default multiplied by the loss given default) is applied against the loan balance to determine the allowance held for each pool. For home equity lines of credit, probability of default and loss given default are based on external data from third-party databases due to the small size of the portfolio and insufficient internal data.
The qualitative framework is used to determine an additional allowance for each portfolio based on the factors below:
Internal risk factors:
| |
• | Nonperforming loans to total non-margin loans; |
| |
• | Criticized assets to total loans and lending-related commitments; |
| |
• | Borrower concentration; and |
| |
• | Significant concentration in high risk industries. |
Environmental risk factors:
| |
• | U.S. non-investment grade default rate; |
| |
• | Change in real GDP (quarter over quarter). |
The objective of the qualitative framework is to capture incurred losses that may not have been fully captured in the quantitative reserve, which is based primarily on historical data. Management determines the qualitative allowance each period based on judgment informed by consideration of internal and external risk factors and other considerations that may be deemed relevant during the period. Once determined in the aggregate, our qualitative allowance is then allocated to each of our loan classes based on the respective classes’ quantitative allowance balances with the allocations adjusted, when necessary, for class specific risk factors.
For each risk factor, we calculate the minimum and maximum values, and percentiles in-between, to evaluate the distribution of our historical experience. The distribution of historical experience is compared to the risk factor’s current quarter observed experience to assess the current risk inherent in the portfolio and overall direction/trend of a risk factor relative to our historical experience.
Based on this analysis, we assign a risk level - no impact, low, moderate, high and elevated - to each risk factor for the current quarter. Management assesses the impact of each risk factor to determine an aggregate risk level. We do not quantify the impact of any particular risk factor. Management’s assessment of the risk factors, as well as the trend in the quantitative allowance, supports management’s judgment for the overall required qualitative allowance. A smaller qualitative allowance may be required when our quantitative allowance has reflected incurred losses associated with the aggregate risk level. A greater qualitative allowance may be required if our quantitative allowance does not yet reflect the incurred losses associated with the aggregate risk level. Our consideration of these factors has remained consistent for the quarter ended Sept. 30, 2014. Additionally, the qualitative allowance as a percentage of the total allowance increased slightly from Dec. 31, 2013 to Sept. 30, 2014 due to the current economic environment and geopolitical factors.
The methodologies to determine the loss given default, probability of default and usage given default allowance parameters utilized in our probable loss model to calculate the quantitative allowance were updated in the fourth quarter of 2013.
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 above, we have allocated our allowance for credit losses as follows:
|
| | | | | | | | |
Allocation of allowance | Sept. 30, 2014 |
| June 30, 2014 |
| Dec. 31, 2013 |
| Sept. 30, 2013 |
|
Commercial | 25 | % | 24 | % | 24 | % | 27 | % |
Other residential mortgages | 17 |
| 15 |
| 16 |
| 21 |
|
Commercial real estate | 16 |
| 14 |
| 12 |
| 9 |
|
Foreign | 14 |
| 15 |
| 16 |
| 14 |
|
Lease financing | 12 |
| 11 |
| 11 |
| 12 |
|
Financial institutions | 9 |
| 14 |
| 14 |
| 12 |
|
Wealth management (a) | 7 |
| 7 |
| 7 |
| 5 |
|
| 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 $80 million, while if each credit were rated one grade worse, the allowance would have increased by $162 million. Similarly, if the loss given default were one rating worse, the allowance would have increased by $29 million, while if the loss given default were one rating better, the allowance would have decreased by $28 million. For impaired credits, if the net carrying value of the loans was 10% higher or lower, the allowance would have decreased or increased by less than $1 million, respectively.
Nonperforming assets
The following table shows the distribution of nonperforming assets.
|
| | | | | | | | | |
Nonperforming assets (dollars in millions) | Sept. 30, 2014 |
| June 30, 2014 |
| Dec. 31, 2013 |
|
Loans: | | | |
Other residential mortgages | $ | 113 |
| $ | 105 |
| $ | 117 |
|
Commercial | 13 |
| 13 |
| 15 |
|
Wealth management loans and mortgages | 13 |
| 12 |
| 11 |
|
Foreign | — |
| 4 |
| 6 |
|
Commercial real estate | 4 |
| 4 |
| 4 |
|
Total nonperforming loans | 143 |
| 138 |
| 153 |
|
Other assets owned | 4 |
| 4 |
| 3 |
|
Total nonperforming assets (a) | $ | 147 |
| $ | 142 |
| $ | 156 |
|
Nonperforming assets ratio | 0.26 | % | 0.24 | % | 0.30 | % |
Nonperforming assets ratio, excluding margin loans | 0.4 |
| 0.3 |
| 0.4 |
|
Allowance for loan losses/nonperforming loans | 133.6 |
| 135.5 |
| 137.3 |
|
Allowance for loan losses/nonperforming assets | 129.9 |
| 131.7 |
| 134.6 |
|
Total allowance for credit losses/nonperforming loans | 201.4 |
| 225.4 |
| 224.8 |
|
Total allowance for credit losses/nonperforming assets | 195.9 |
| 219.0 |
| 220.5 |
|
| |
(a) | Loans of consolidated investment management funds are not part of BNY Mellon’s loan portfolio. Included in the loans of consolidated investment management funds are nonperforming loans of $79 million at Sept. 30, 2014, $68 million at June 30, 2014 and $16 million at Dec. 31, 2013. These loans are recorded at fair value and therefore do not impact the provision for credit losses and allowance for loan losses, and accordingly are excluded from the nonperforming assets table above. |
|
| | | | | | | | | |
Nonperforming assets activity (in millions) | Sept. 30, 2014 |
| June 30, 2014 |
| Dec. 31, 2013 |
|
Balance at beginning of period | $ | 142 |
| $ | 146 |
| $ | 172 |
|
Additions | 16 |
| 7 |
| 7 |
|
Return to accrual status | (1 | ) | (3 | ) | (10 | ) |
Charge-offs | — |
| (4 | ) | (5 | ) |
Paydowns/sales | (10 | ) | (4 | ) | (8 | ) |
Balance at end of period | $ | 147 |
| $ | 142 |
| $ | 156 |
|
Nonperforming assets were $147 million at Sept. 30, 2014, an increase of $5 million compared with $142 million at June 30, 2014. The increase primarily resulted from additions in the other residential mortgage loan portfolio, partially offset by sales in the foreign and other residential loan portfolios.
See Note 5 of the Notes to Consolidated Financial Statements for additional information on our past due loans. See “Nonperforming assets” in Note 1 of the Notes to Consolidated Financial Statements in our 2013 Annual Report for our policy for placing loans on nonaccrual status.
Deposits
Total deposits were $264.9 billion at Sept. 30, 2014, an increase of 1% compared with $261.1 billion at Dec. 31, 2013. The increase in deposits reflects higher noninterest-bearing and interest-bearing deposits principally in U.S. offices, partially offset by lower interest-bearing deposits in non-U.S. offices.
Noninterest-bearing deposits were $101.1 billion at Sept. 30, 2014 compared with $95.4 billion at Dec. 31, 2013. Interest-bearing deposits were $163.8 billion at Sept. 30, 2014 compared with $165.7 billion at Dec. 31, 2013.
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 are comprised 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” below for a discussion of long-term debt and liquidity metrics that we monitor.
Information related to federal funds purchased and securities sold under repurchase agreements is presented below.
|
| | | | | | | | | |
Federal funds purchased and securities sold under repurchase agreements |
| Quarter ended |
(dollars in millions) | Sept. 30, 2014 |
| June 30, 2014 |
| Sept. 30, 2013 |
|
Maximum daily balance during the quarter | $ | 28,746 |
| $ | 29,522 |
| $ | 20,994 |
|
Average daily balance | $ | 20,620 |
| $ | 19,030 |
| $ | 12,164 |
|
Weighted-average rate during the quarter | (0.07 | )% | (0.05 | )% | (0.12 | )% |
Ending balance | $ | 9,687 |
| $ | 10,301 |
| $ | 9,737 |
|
Weighted-average rate at period end | (0.05 | )% | (0.04 | )% | (0.07 | )% |
Federal funds purchased and securities sold under repurchase agreements were $9.7 billion at Sept. 30, 2014 compared with $10.3 billion at June 30, 2014 and $9.7 billion at Sept. 30, 2013. The maximum daily balance was $28.7 billion in the third quarter of 2014 compared with $29.5 billion in the second quarter of 2014 and $21.0 billion in the third quarter of 2013. The average daily balance was $20.6 billion in the third quarter of 2014, $19.0 billion in the second quarter of 2014 and $12.2 billion in the third quarter of 2013. Fluctuations between periods resulted from overnight borrowing opportunities. The weighted-average rates in all periods presented reflect revenue earned on securities sold under repurchase agreements related to certain securities for which we were able to charge for lending them.
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, 2014 |
| June 30, 2014 |
| Sept. 30, 2013 |
|
Maximum daily balance during the quarter | $ | 20,244 |
| $ | 17,746 |
| $ | 16,938 |
|
Average daily balance (a) | $ | 18,041 |
| $ | 16,727 |
| $ | 15,405 |
|
Weighted-average rate during the quarter | 0.10 | % | 0.09 | % | 0.09 | % |
Ending balance | $ | 20,155 |
| $ | 17,242 |
| $ | 15,293 |
|
Weighted-average rate at period end | 0.13 | % | 0.09 | % | 0.10 | % |
| |
(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 $9,705 million in the third quarter of 2014, $8,916 million in the second quarter of 2014 and $8,659 million in the third quarter of 2013. |
Payables to customers and broker-dealers represent funds awaiting re-investment and short sale proceeds payable on demand. Payables to customers and
broker-dealers were $20.2 billion at Sept. 30, 2014 compared with $17.2 billion at June 30, 2014 and $15.3 billion at Sept. 30, 2013. 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, 2014 |
| June 30, 2014 |
| Sept. 30, 2013 |
|
Maximum daily balance during the quarter | $ | 5,003 |
| $ | 4,932 |
| $ | 4,873 |
|
Average daily balance | $ | 3,654 |
| $ | 1,970 |
| $ | 1,186 |
|
Weighted-average rate during the quarter | 0.07 | % | 0.08 | % | 0.05 | % |
Ending balance | $ | — |
| $ | 27 |
| $ | 1,851 |
|
Weighted-average rate at period end | — | % | 0.01 | % | 0.01 | % |
There was no commercial paper outstanding at Sept. 30, 2014 compared with $27 million at June 30, 2014 and $1.9 billion at Sept. 30, 2013. Average commercial paper outstanding was $3.7 billion in the third quarter of 2014, $2.0 billion in the second quarter of 2014 and $1.2 billion in the third quarter of 2013. The maximum daily balance was $5.0 billion in the third quarter of 2014 compared with $4.9 billion in the second quarter of 2014 and $4.9 billion in the third quarter of 2013. The increase in the average daily balance in the third quarter of 2014 was primarily driven by attractive short-term borrowing opportunities. Our commercial paper matures within 397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment.
Information related to other borrowed funds is presented below.
|
| | | | | | | | | |
Other borrowed funds | Quarter ended |
(dollars in millions) | Sept. 30, 2014 |
| June 30, 2014 |
| Sept. 30, 2013 |
|
Maximum daily balance during the quarter | $ | 1,744 |
| $ | 1,983 |
| $ | 3,633 |
|
Average daily balance | $ | 933 |
| $ | 1,272 |
| $ | 1,047 |
|
Weighted-average rate during the quarter | 0.47 | % | 0.47 | % | 0.35 | % |
Ending balance | $ | 852 |
| $ | 1,458 |
| $ | 844 |
|
Weighted-average rate at period end | 0.43 | % | 0.45 | % | 0.46 | % |
Other borrowed funds primarily include overdrafts of sub-custodian account balances in our Investment Services businesses and borrowings under lines of credit by our Pershing subsidiaries. Overdrafts typically relate to timing differences for settlements. Other borrowed funds were $852 million at Sept. 30, 2014 compared with $1.5 billion at June 30, 2014 and $844 million at Sept. 30, 2013. Other borrowed funds averaged $933 million in the third quarter of 2014, $1.3 billion in the second quarter of 2014 and $1.0 billion in the third quarter of 2013. The maximum daily balance was $1.7 billion in the third quarter of 2014 compared with $2.0 billion in the second quarter of 2014 and $3.6 billion in the third quarter of 2013. Fluctuations from prior periods primarily reflect changes in overdrafts of sub-custodian account balances in our Investment Services businesses.
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, especially during periods of market stress. Liquidity risk is the risk that BNY Mellon cannot meet its cash and collateral obligations at a reasonable cost for both expected and unexpected cash flows, without adversely affecting daily operations or our financial condition. Liquidity risk can arise from cash flow mismatches, market constraints from the inability to convert assets to cash, inability to raise cash in the markets, deposit run-off, or contingent liquidity events.
For additional information on our liquidity policy, see “Risk Management - Liquidity risk” in our 2013 Annual Report.
Our overall approach to liquidity management is to ensure that sources of liquidity are sufficient in amount and diversity such that changes in funding requirements at the Parent and at the various bank subsidiaries can be accommodated routinely without material adverse impact on earnings, daily operations or our financial condition.
BNY Mellon seeks to maintain an adequate liquidity cushion in both normal and stressed environments and seeks to diversify funding sources by line of business, customer and market segment.
Additionally, we seek to maintain liquidity ratios within approved limits and liquidity risk tolerance, maintain a liquid asset buffer that can be liquidated, financed and/or pledged as necessary, and control the levels and sources of wholesale funds.
Potential uses of liquidity include withdrawals of customer deposits and client drawdowns on unfunded credit or liquidity facilities. We actively monitor unfunded lending-related commitments, thereby reducing unanticipated funding requirements.
When monitoring liquidity, we evaluate multiple metrics in order to have ample liquidity for expected and unexpected events. Metrics include cashflow mismatches, asset maturities, debt spreads, peer ratios, liquid assets, unencumbered collateral, funding sources and balance sheet liquidity ratios.
Internal ratios we currently monitor as part of our standard analysis include total loans as a percentage of total deposits, deposits as a percentage of total interest-earning assets, foreign deposits as a percentage of total interest-earning assets, purchased funds as a percentage of total interest-earning assets, liquid assets as a percentage of total interest-earning assets, liquid assets as a percentage of purchased funds, and discount window collateral and central bank deposits as a percentage of total deposits. All of these internal ratios exceeded our minimum guidelines at Sept. 30, 2014. In addition, we monitor the revised Basel III LCR. We continue to evaluate the Final LCR Rule, and expect to fully satisfy the requirements as it is phased-in beginning Jan. 1, 2015 without materially impacting our business.
We also perform liquidity stress tests to ensure the Company maintains sufficient liquidity resources under multiple stress scenarios. Stress tests are based on scenarios that measure liquidity risks under unlikely but plausible events. The Company performs 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.
Commencing January 2015, we will also be subject to the liquidity requirements of the Federal Reserve’s heightened prudential standards for BHCs with total consolidated assets of $50 billion or more, described
under “Supervision and Regulation - Enhanced Prudential Standards” in our 2013 Annual Report.
We define available funds 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 table below presents our total available funds including liquid funds at period-end and on an average basis. The lower level of available funds at Sept. 30, 2014 compared with Dec. 31, 2013 primarily resulted from our plan to reduce interbank placement assets with an increase in high quality liquid assets in our investment securities portfolio.
|
| | | | | | | | | | | | | | | | | | | | | | |
Available and liquid funds | Sept. 30, 2014 |
| Dec. 31, 2013 |
| | Average |
(in millions) | | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
Available funds: | | | | | | | | |
Liquid funds: | | | | | | | | |
Interest-bearing deposits with banks | $ | 30,341 |
| $ | 35,300 |
| | $ | 34,882 |
| $ | 41,424 |
| $ | 41,597 |
| $ | 39,283 |
| $ | 41,781 |
|
Federal funds sold and securities purchased under resale agreements | 17,375 |
| 9,161 |
| | 15,683 |
| 13,387 |
| 8,864 |
| 13,413 |
| 8,078 |
|
Total liquid funds | 47,716 |
| 44,461 |
| | 50,565 |
| 54,811 |
| 50,461 |
| 52,696 |
| 49,859 |
|
Cash and due from banks | 6,410 |
| 6,460 |
| | 6,225 |
| 5,064 |
| 6,400 |
| 5,726 |
| 5,338 |
|
Interest-bearing deposits with the Federal Reserve and other central banks | 92,317 |
| 104,359 |
| | 88,713 |
| 85,546 |
| 65,704 |
| 82,939 |
| 61,627 |
|
Total available funds | $ | 146,443 |
| $ | 155,280 |
| | $ | 145,503 |
| $ | 145,421 |
| $ | 122,565 |
| $ | 141,361 |
| $ | 116,824 |
|
Total available funds as a percentage of total assets | 38 | % | 41 | % | | 38 | % | 39 | % | 36 | % | 38 | % | 35 | % |
On an average basis, 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 $29.1 billion for the first nine months of 2014 and $20.2 billion for the first nine months of 2013. The increase primarily reflects higher levels of securities sold under repurchase agreements. Average foreign deposits, primarily from our European-based Investment Services business, were $108.7 billion for the first nine months of 2014 compared with $100.6 billion for the first nine months of 2013. The increase primarily reflects growth in client deposits. Domestic savings, interest-bearing demand and time deposits averaged $45.9 billion for the first nine months of 2014 compared with $44.6 billion for the first nine months of 2013. The increase primarily reflects higher time deposits.
Average payables to customers and broker-dealers were $9.2 billion for the first nine months of 2014 and $8.9 billion for the first nine months of 2013. Payables to customers and broker-dealers are driven by customer trading activity and market volatility. Long-term debt averaged $20.4 billion for the first nine months of 2014 and $19.0 billion for the first nine months of 2013. The increase in average long-term debt was driven by issuance of long-term debt in anticipation of upcoming debt maturities. Average noninterest-bearing deposits increased to $80.5
billion for the first nine months of 2014 from $71.0 billion for the first nine months of 2013, reflecting growth 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.
The Parent has four major sources of liquidity:
| |
• | dividends from its subsidiaries; |
| |
• | access to the commercial paper market; and |
| |
• | access to the debt and equity markets. |
Subsequent to Sept. 30, 2014, our bank subsidiaries could declare dividends to the Parent of approximately $2.4 billion, without the need for a regulatory waiver. In addition, at Sept. 30, 2014, non-bank subsidiaries of the Parent had liquid assets of approximately $1.4 billion.
In August 2014, BNY Mellon paid a quarterly cash dividend of $0.17 per common share. Our common stock dividend payout ratio was 25% for the first nine months of 2014. The Federal Reserve’s current guidance provides that, for large bank holding companies like us, dividend payout ratios exceeding 30% of after-tax net income will receive particularly close scrutiny.
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 19 of the Notes to Consolidated Financial Statements, both contained in our 2013 Annual Report.
The Parent’s average commercial paper borrowings were $3.7 billion in the the third quarter of 2014 and $1.2 billion in the third quarter of 2013. The Parent had cash of $9.3 billion at Sept. 30, 2014, compared with $6.8 billion at Dec. 31, 2013. In addition to issuing commercial paper for funding purposes, the Parent issues commercial paper, on an overnight basis, to certain custody clients with excess demand deposit balances. This overnight program was ended at the end of the third quarter of 2014. There was no overnight commercial paper outstanding issued by the Parent at Sept. 30, 2014 and $96 million at Dec. 31, 2013. Net of commercial paper outstanding, the Parent’s cash position at Sept. 30, 2014, increased by $2.6 billion compared with Dec. 31, 2013, primarily reflecting the issuance of senior medium-term notes and an increase in net loans from subsidiaries, partially offset by maturities of long-term debt and common share repurchases.
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 and loans to its subsidiaries.
In the third quarter of 2014, we repurchased 11.0 million common shares at an average price of $39.29 per common share for a total cost of $431 million.
The Parent’s liquidity policy is to have sufficient unencumbered cash and cash equivalents on hand to meet its forecasted debt redemptions, net interest payments and net tax payments over the next 18 to 24 months without the need to receive dividends from its bank subsidiaries or issue debt. As of Sept. 30, 2014, the Parent was in compliance with its liquidity policy.
Our ability to access the capital markets on favorable terms, or at all, is partially dependent on our credit ratings, which, as of Sept. 30, 2014, were as follows:
|
| | | | | |
Credit ratings |
| 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 | Baa2 | BBB | BBB | | A (low) |
Trust preferred securities | A3 | BBB | BBB+ | | A (high) |
Short-term debt | P1 | A-1 | F1+ | | R-1 (middle) |
Outlook - Parent: | Stable | Negative | Stable | | Stable |
|
The Bank of New York Mellon: |
Long-term senior debt | Aa2 | AA- | AA- | | AA |
Long-term deposits | Aa2 | AA- | AA | | AA |
Short-term deposits | P1 | A-1+ | F1+ | | R-1 (high) |
| | | | | |
BNY Mellon, N.A.: | | | | | |
Long-term senior debt | Aa2 | AA- | AA- | (a) | AA |
Long-term deposits | Aa2 | 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. |
As a result of S&P’s government support assumptions on certain U.S. financial institutions, the Parent’s ratings by S&P benefit from one notch of “lift”. Similarly, The Bank of New York Mellon’s and BNY Mellon, N.A.’s ratings benefit from two notches of “lift” from Moody’s Investor Service (“Moody’s”) and one notch of “lift” from S&P. In June 2013, S&P indicated that they are reconsidering the inclusion of assumed government support in its ratings on the eight U.S. bank holding companies that they view as having high systemic importance, including The Bank of New York Mellon Corporation. For further discussion on the impact of a credit rating downgrade, see Note 17 of the Notes to Consolidated Financial Statements.
Long-term debt totaled $21.6 billion at Sept. 30, 2014 and $19.9 billion at Dec. 31, 2013. Senior debt issuances of $4.7 billion were partially offset by maturities of $2.9 billion in the first nine months of 2014. We have $1.45 billion of long-term debt that will mature in the fourth quarter of 2014.
The following table presents the long-term debt issued by the Parent in the third quarter of 2014.
|
| | | |
Debt issuances | Quarter ended |
|
(in millions) | Sept. 30, 2014 |
|
Senior medium-term notes: | |
3-month LIBOR + 48 bps senior medium-term notes due 2019 | $ | 350 |
|
2.3% senior medium-term notes due 2019 | 1,150 |
|
3.25% senior medium-term notes due 2024 | 500 |
|
Total debt issuances | $ | 2,000 |
|
The double leverage ratio is the ratio of investment in subsidiaries divided by our consolidated equity, which includes our noncumulative perpetual preferred stock plus trust preferred securities. Our double leverage ratio was 111.7% at Sept. 30, 2014 and 109.4% at Dec. 31, 2013. The double leverage ratio is monitored by regulators and rating agencies and is an important constraint on our ability to invest in our subsidiaries and expand our businesses.
Pershing LLC, an indirect subsidiary of BNY Mellon, has uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. Pershing LLC has eight separate uncommitted lines of credit amounting to $1.5 billion in aggregate. Average daily borrowing under these lines was $5 million, in aggregate, in the third quarter of 2014.
Pershing Limited, an indirect UK-based subsidiary of BNY Mellon, has two separate uncommitted lines of credit amounting to $250 million in aggregate in place for liquidity purposes, which are guaranteed by the Parent. Average borrowings under these lines was $32 million, in aggregate, in the third quarter of 2014.
Statement of cash flows
Cash provided by operating activities was $3.3 billion in the nine months ended Sept. 30, 2014 compared with $55 million used for operating activities in the nine months ended Sept. 30, 2013. In the first nine months of 2014, cash flows from operations were
principally the result of earnings and changes in trading activities. In the first nine months of 2013, cash flows used for operations were principally the result of changes in trading activities and accruals and other balances, partially offset by earnings.
In the nine months ended Sept. 30, 2014, cash used for investing activities was $10.7 billion compared with $8.5 billion in the nine months ended Sept. 30, 2013. In the first nine months of 2014, purchases of securities, changes in federal funds sold and securities purchased under resale agreements and an increase in loans were significant uses of funds, partially offset by sales, paydowns and maturities of securities and decreases in interest-bearing deposits with banks and with the Federal Reserve and other central banks. In the first nine months of 2013, purchases of securities, changes in interest-bearing deposits with the Federal Reserve and other central banks, loans and and federal funds sold and securities purchased under resale agreements were a significant use of funds, partially offset by sales, paydowns and maturities of securities and a decrease in interest-bearing deposits with banks.
In the nine months ended Sept. 30, 2014, cash provided by financing activities was $7.4 billion compared with $11.2 billion in the nine months ended Sept. 30, 2013. In the first nine months of 2014, the net proceeds from the issuance of long-term debt and increases in payables to customers and broker-dealers and deposits were significant sources of funds, partially offset by the repayment of long-term debt and treasury stock repurchases. In the first nine months of 2013, an increase in deposits, the net proceeds from the issuance of long-term debt, changes in federal funds purchased and securities sold under repurchase agreements and commercial paper were significant sources of funds, partially offset by repayment of long-term debt, a decrease in payables to customers and broker-dealers and treasury stock repurchases.
Capital
|
| | | | | | | | | | | |
Capital data (dollar amounts in millions except per share amounts; common shares in thousands) | Sept. 30, 2014 |
| | June 30, 2014 |
| | Dec. 31, 2013 |
|
Average common equity to average assets | 9.7 | % | | 9.9 | % | | 10.0 | % |
| | | | | |
At period end: | | | | | |
BNY Mellon shareholders’ equity to total assets ratio (a) | 10.0 | % | | 9.6 | % | | 10.0 | % |
BNY Mellon common shareholders’ equity to total assets ratio (a) | 9.5 | % | | 9.2 | % | | 9.6 | % |
BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (a) | 6.5 | % | | 6.4 | % | | 6.8 | % |
Total BNY Mellon shareholders’ equity – GAAP | $ | 38,451 |
| | $ | 38,326 |
| | $ | 37,497 |
|
Total BNY Mellon common shareholders’ equity – GAAP | $ | 36,889 |
| | $ | 36,764 |
| | $ | 35,935 |
|
BNY Mellon tangible common shareholders’ equity – Non-GAAP (a) | $ | 17,229 |
| | $ | 16,839 |
| | $ | 15,934 |
|
Book value per common share – GAAP (a) | $ | 32.77 |
| | $ | 32.49 |
| | $ | 31.46 |
|
Tangible book value per common share – Non-GAAP (a) | $ | 15.30 |
| | $ | 14.88 |
| | $ | 13.95 |
|
Closing stock price per common share | $ | 38.73 |
| | $ | 37.48 |
| | $ | 34.94 |
|
Market capitalization | $ | 43,599 |
| | $ | 42,412 |
| | $ | 39,910 |
|
Common shares outstanding | 1,125,710 |
| | 1,131,596 |
| | 1,142,250 |
|
| | | | | |
Cash dividends per common share | $ | 0.17 |
| | $ | 0.17 |
| | $ | 0.15 |
|
Common dividend payout ratio | 18 | % | | 35 | % | | 34 | % |
Common dividend yield (annualized) | 1.7 | % | | 1.8 | % | | 1.7 | % |
| |
(a) | See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 56 for a reconciliation of GAAP to non-GAAP. |
Total The Bank of New York Mellon Corporation shareholders’ equity at Sept. 30, 2014 increased to $38.5 billion from $37.5 billion at Dec. 31, 2013. The increase primarily reflects earnings retention, approximately $520 million resulting from stock awards, the exercise of stock options and stock issued for employee benefit plans, and an increase in the value of our investment securities portfolio, partially offset by share repurchases and a decrease in foreign currency translation adjustments.
The unrealized net of tax gain on our investment securities portfolio recorded in accumulated other comprehensive income was $654 million at Sept. 30, 2014, compared with $357 million at Dec. 31, 2013. The increase in the valuation of the investment securities portfolio was driven by the reduction in market interest rates.
In the first nine months of 2014, we repurchased 35.2 million common shares at an average price of $35.17 per common share for a total cost of $1.2 billion.
From Oct. 1, 2014 through Nov. 6, 2014, we repurchased 4.0 million common shares at an average price of $38.17 per common share for a total cost of $153 million.
On Oct. 17, 2014, The Bank of New York Mellon Corporation declared a quarterly common stock dividend of $0.17 per common share. This cash dividend was paid on Nov. 7, 2014 to shareholders of record as of the close of business on Oct. 28, 2014.
Capital adequacy
Regulators establish certain levels of capital for bank holding companies and banks, including BNY Mellon and our bank subsidiaries, in accordance with established quantitative measurements. For the Parent to maintain its status as a financial holding company, our bank subsidiaries and BNY Mellon must, among other things, qualify as “well capitalized”.
As of Sept. 30, 2014 and Dec. 31, 2013, BNY Mellon and our bank subsidiaries were considered “well capitalized” on the basis of the Tier 1 and Total capital to risk-weighted assets ratios and the leverage capital ratio (Tier 1 capital to quarterly average assets as defined for regulatory purposes).
Our consolidated and largest bank subsidiary, The Bank of New York Mellon, regulatory capital ratios are shown below.
|
| | | | | | | | | | | | | | | |
Consolidated and largest bank subsidiary capital ratios | Well capitalized |
| | Adequately capitalized |
| | Sept. 30, 2014 |
| | June 30, 2014 |
| | Dec. 31, 2013 |
| |
Consolidated regulatory capital ratios: (a)(b) | | | | | | | | | | |
CET1 ratio | N/A |
| | 4% |
| | 11.4 | % | (c) | 11.2 | % | | 14.5 | % | (c) |
Tier 1 capital ratio | 6 | % | (d) | 5.5% |
| | 12.3 | % | (c) | 12.2 | % | | 16.2 | % | |
Total (Tier 1 plus Tier 2) capital ratio | 10 | % | (d) | 8% |
| | 12.7 | % | (c) | 12.6 | % | | 17.0 | % | |
Leverage capital ratio | N/A |
| | 4% |
| | 5.8 | % | | 5.9 | % | | 5.4 | % | |
| | | | | | | | | | |
Selected regulatory capital ratios – fully phased-in – Non-GAAP: (c) | | | | | | | | | | |
Estimated CET1 ratio | | | | | | | | | | |
Standardized Approach | (e) |
| | (e) |
| | 10.8 | % | | 9.9 | % | | 10.6 | % | |
Advanced Approach | (e) |
| | (e) |
| | 10.2 | % | | 10.0 | % | | 11.3 | % | |
Estimated SLR (f) | N/A |
| | 3 | % | (g) | 4.6 | % | | 4.7 | % | | N/A |
| |
| | | | | | | | | | |
The Bank of New York Mellon regulatory capital ratios: (b) | | | | | | | | | | |
Tier 1 capital ratio | 6 | % | | 4% |
| | 13.3 | % | | 12.6 | % | | 14.6 | % | |
Total (Tier 1 plus Tier 2) capital ratio | 10 | % | | 8% |
| | 13.5 | % | | 12.8 | % | | 15.1 | % | |
Leverage capital ratio | 5 | % | | 3-4% |
| (h) | 5.4 | % | | 5.4 | % | | 5.3 | % | |
| |
(a) | Beginning with June 30, 2014, risk-based capital ratios include the net impact of including the total consolidated assets of certain consolidated investment management funds in risk-weighted assets. These assets were not included in prior periods. The leverage capital ratio was not affected. |
| |
(b) | The June 30, 2014 risk-based capital ratios reflect adjustments due to refinements in the data used in determining risk-weighted assets. These adjustments resulted in reductions of approximately 20 basis points to the consolidated CET1, Tier 1 capital and Total capital ratios, approximately 40 basis points to the consolidated estimated CET1 fully phased-in (Non-GAAP) ratio calculated under the Standardized Approach and approximately 30 basis points to The Bank of New York Mellon Tier 1 capital and Total capital ratios. |
| |
(c) | See “Supplemental Information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 56 for a reconciliation of these ratios. |
| |
(d) | As established under Basel I rules. The Final Capital Rule does not establish the standards for determining whether a bank holding company is well-capitalized. |
| |
(e) | On a fully phased-in basis, we expect to satisfy a minimum CET1 ratio of at least 7%, expected to rise to 8%, assuming an additional G-SIB buffer of 1%. |
| |
(f) | The estimated fully phased-in SLR as of Sept. 30, 2014 is based on our interpretation of the Final Capital Rules, as supplemented by the Federal Reserve’s final rules on the SLR. The estimated fully phased-in SLR as of June 30, 2014 is based on our interpretation of the Final Capital Rules, as supplemented by the Notice of Proposed Rulemaking released in April 2014 concerning the SLR, except that off-balance sheet exposures included in total leverage exposure reflect the end of period measures, rather than a daily average. |
| |
(g) | On a fully phased-in basis, we expect to satisfy a minimum SLR of over 5%, 3% attributable to an adequately capitalized SLR, and greater than 2% attributable to a buffer applicable to U.S. G-SIBs. |
| |
(h) | The required leverage capital ratio for state member banks to be adequately capitalized is 3% or 4%, depending on factors specified in regulations. |
N/A – Not available and/or not applicable.
Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis, was 10.2% at Sept. 30, 2014 and 10.0% at June 30, 2014. Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis, was 10.8% at Sept. 30, 2014, compared with 9.9% at June 30, 2014. The estimated Basel III CET1 ratio (Non-GAAP) calculated under the Advanced Approach was impacted by an increase in estimated Basel III CET1 capital offset by an increase in estimated risk-weighted assets (“RWA”) primarily related to increased operational risk RWA driven by the external loss data used in our model.
Our estimated Basel III CET1 ratios on a fully phased-in basis are based on our current interpretation, expectations and understanding of the Final Capital Rules released by the Federal Reserve on July 2, 2013, which are being gradually phased-in over a multi-year period. The estimated fully phased-in Basel III CET1 ratios assume all relevant regulatory model approvals. The Final Capital Rules require approval by banking regulators of certain models used as part of risk-weighted asset calculations. If these models are not approved, the estimated fully phased-in capital ratios would likely be adversely impacted. Risk-weighted assets at Sept. 30, 2014 and June 30, 2014 under the transitional
Advanced Approach do not reflect the use of a simple value-at-risk methodology for repo-style transactions (including agented indemnified securities lending transactions), eligible margin loans, and similar transactions. The company has requested written approval to use this methodology. The estimated net impact of such a value-at-risk methodology for Sept. 30, 2014 regulatory capital ratios calculated under the transitional Advanced Approach would have been an increase of approximately 25 to 30 basis points to the CET1, Tier 1 and Total capital ratios. The leverage capital ratio was not affected.
Reporting of the Basel III Advanced Approach became effective June 30, 2014. At Sept. 30, 2014 and June 30, 2014, the CET1, Tier 1 and Total risk-based regulatory capital ratios are based on Basel III components of capital, as phased-in, and asset risk-weightings using the Advanced Approach framework under the Final Capital Rules. The transitional Standardized risk-based capital ratios (which represent the Collins Floor comparison) of the CET1, Tier 1 and Total risk-based regulatory capital ratios were 15.1%, 16.3% and 17.0%, respectively, at Sept. 30, 2014 and 14.3%, 15.5% and 16.2%, respectively, at June 30, 2014, and are calculated based on Basel III components of capital, as phased-in, and asset risk-weightings using the general risk-based guidelines included in the Final Capital Rules (which
for 2014 look to Basel I-based requirements). The leverage capital ratios for Sept. 30, 2014 and June 30, 2014 are based on Basel III components of capital and quarterly average total assets, as phased-in. The risk-based and leverage capital ratios for Dec. 31, 2013 are based on Basel I rules (including Basel I Tier 1 common in the case of the CET1 ratio).
The estimated fully phased-in SLR of 4.6% (Non-GAAP) at Sept. 30, 2014 was based on our interpretation of the Final Capital Rules, as supplemented by the Federal Reserve’s final rules on the SLR.
For information regarding various factors that could impact our capital ratios, see “Supplemental Information - Explanation of GAAP and Non-GAAP financial measures.” For additional information on the Final Capital Rules, see “Recent accounting and regulatory developments - Regulatory developments” in our 2013 Annual Report. The Basel III Advanced Approach capital ratios are significantly impacted by operational losses. 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 and could in the future impact the amount of capital that we are required to hold.
The table below presents the factors that impacted net Basel III CET1.
|
| | | | | | | | | |
Estimated Basel III CET1 generation presented on a fully phased-in basis – Non-GAAP | Quarter ended |
(in millions)
| Sept. 30, 2014 |
| June 30, 2014 |
| Dec. 31, 2013 |
|
Estimated fully phased-in Basel III CET1 – Non-GAAP – Beginning of period | $ | 16,277 |
| $ | 15,951 |
| $ | 14,643 |
|
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP | 1,070 |
| 554 |
| 513 |
|
Goodwill and intangible assets, net of related deferred tax liabilities | 265 |
| (10 | ) | 35 |
|
Gross Basel III CET1 generated | 1,335 |
| 544 |
| 548 |
|
Capital deployed: | | | |
Dividends | (196 | ) | (197 | ) | (176 | ) |
Common stock repurchased | (431 | ) | (431 | ) | (321 | ) |
Total capital deployed | (627 | ) | (628 | ) | (497 | ) |
Other comprehensive income (loss): | | | |
Foreign currency translation | (512 | ) | 76 |
| 93 |
|
Unrealized gain (loss) on assets available-for-sale | (9 | ) | 196 |
| (100 | ) |
Pension liabilities | 19 |
| 17 |
| 449 |
|
Unrealized gain (loss) on cash flow hedges | (12 | ) | (2 | ) | 5 |
|
Total other comprehensive income (loss) | (514 | ) | 287 |
| 447 |
|
Additional paid-in capital (a) | 196 |
| 127 |
| 99 |
|
Other additions (deductions): | | | |
Net pension fund assets | — |
| (2 | ) | (434 | ) |
Deferred tax assets | — |
| 1 |
| (23 | ) |
Cash flow hedges | 12 |
| 2 |
| (5 | ) |
Embedded goodwill | 46 |
| (4 | ) | 41 |
|
Investment in unconsolidated subsidiaries | — |
| — |
| (7 | ) |
Other | (5 | ) | (1 | ) | (2 | ) |
Total other additions (deductions) | 53 |
| (4 | ) | (430 | ) |
Net Basel III CET1 generated | 443 |
| 326 |
| 167 |
|
Estimated fully phased-in Basel III CET1 – Non-GAAP – End of period | $ | 16,720 |
| $ | 16,277 |
| $ | 14,810 |
|
| |
(a) | Primarily related to stock awards, the exercise of stock options and stock issued for employee benefit plans. |
The following table presents the components of our transitional Basel III CET1, Tier 1 and Tier 2 capital, the Basel III risk-weighted assets determined under the Standardized and Advanced Approaches, the average assets used for leverage capital purposes and the leverage exposure for estimated SLR purposes at Sept. 30, 2014 and June 30, 2014.
|
| | | | | | | |
| Components of transitional Basel III capital (a) (in millions) | Sept. 30, 2014 |
| June 30, 2014 |
|
|
| CET1: | | |
| Common shareholders’ equity | $ | 36,986 |
| $ | 36,869 |
|
| Goodwill and intangible assets | (17,272 | ) | (17,472 | ) |
| Net pension fund assets | (21 | ) | (21 | ) |
| Equity method investments | (291 | ) | (331 | ) |
| Deferred tax assets | (3 | ) | (3 | ) |
| Other | 1 |
| (7 | ) |
| Total CET1 | 19,400 |
| 19,035 |
|
| Other Tier 1 capital: | | |
| Preferred stock | 1,562 |
| 1,562 |
|
| Trust preferred securities | 162 |
| 171 |
|
| Disallowed deferred tax assets | (14 | ) | (14 | ) |
| Net pension fund assets | (85 | ) | (85 | ) |
| Other | (10 | ) | — |
|
| Total Tier 1 capital | 21,015 |
| 20,669 |
|
| | | |
| Tier 2 capital: | | |
| Trust preferred securities | 162 |
| 171 |
|
| Subordinated debt | 397 |
| 398 |
|
| Allowance for credit losses | 288 |
| 311 |
|
| Other | (6 | ) | — |
|
| Total Tier 2 capital - Standardized Approach | 841 |
| 880 |
|
| Excess of expected credit losses | 12 |
| 45 |
|
| Less: Allowance for credit losses | 288 |
| 311 |
|
| Total Tier 2 capital - Advanced Approach | $ | 565 |
| $ | 614 |
|
| | | |
| Total capital: | | |
| Standardized Approach | $ | 21,856 |
| $ | 21,549 |
|
| Advanced Approach | $ | 21,580 |
| $ | 21,283 |
|
|
| | |
| Risk-weighted assets: (b) | | |
| Standardized Approach | $ | 128,756 |
| $ | 133,049 |
|
| Advanced Approach: | | |
| Credit Risk | $ | 119,266 |
| $ | 123,669 |
|
| Market Risk | 3,488 |
| 5,437 |
|
| Operational Risk | 47,498 |
| 40,200 |
|
| Total Advanced Approach | $ | 170,252 |
| $ | 169,306 |
|
| | | |
| Average assets for leverage capital purposes | $ | 362,793 |
| $ | 351,605 |
|
| Total leverage exposure for estimated SLR purposes - Non-GAAP (c) | $ | 393,861 |
| $ | 382,505 |
|
| |
(a) | On a regulatory basis as determined under the Final Capital Rules. |
| |
(b) | An adjustment was made to the June 30, 2014 transitional Advanced approach risk-weighted assets due to refinements in the data used in the calculation. |
| |
(c) | See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 56 for additional information. |
The following table presents the components of our Basel I Tier 1 and Total risk-based capital, the Basel I risk-weighted assets as well as average assets used for leverage capital purposes at Dec. 31, 2013.
|
| | | | |
| Components of Basel I Tier 1 and total risk-based capital (a) (in millions) | Dec. 31, 2013 |
|
|
| Tier 1 capital: | |
| Common shareholders’ equity | $ | 35,959 |
|
| Preferred stock | 1,562 |
|
| Trust preferred securities | 330 |
|
| Adjustments for: | |
| Goodwill and intangible assets (b) | (20,001 | ) |
| Pensions/cash flow hedges | 891 |
|
| Securities valuation allowance | (387 | ) |
| Merchant banking investments | (19 | ) |
| Total Tier 1 capital | 18,335 |
|
| Tier 2 capital: | |
| Qualifying unrealized gains on equity securities | 1 |
|
| Qualifying subordinated debt | 550 |
|
| Qualifying allowance for credit losses | 344 |
|
| Total Tier 2 capital | 895 |
|
| Total risk-based capital | $ | 19,230 |
|
| Total risk-weighted assets | $ | 113,322 |
|
| Average assets for leverage capital purposes | $ | 336,787 |
|
| |
(a) | On a regulatory basis as determined under Basel I rules. |
| |
(b) | Reduced by deferred tax liabilities associated with non-tax deductible identifiable intangible assets of $1,222 million and deferred tax liabilities associated with tax deductible goodwill of $1,302 million at Dec. 31, 2013. |
The following table presents the amount of capital by which BNY Mellon and our largest bank subsidiary, The Bank of New York Mellon, exceeded the capital thresholds determined under the transitional rules at Sept. 30, 2014.
|
| | | | | | | |
Capital above thresholds at Sept. 30, 2014 (in millions) | Consolidated |
| | The Bank of New York Mellon |
|
CET1 | $ | 12,590 |
| | N/A |
|
Tier 1 capital | 10,800 |
| | $ | 8,685 |
|
Total capital | 4,555 |
| | 4,384 |
|
Leverage capital | 6,503 |
| | 1,258 |
|
N/A - Not applicable.
The following table shows the impact of a $1 billion increase or decrease in risk-weighted assets/quarterly average assets or a $100 million increase or decrease in common equity on the consolidated capital ratios at Sept. 30, 2014.
|
| | | | |
Potential impact to capital ratios at Sept. 30, 2014 | |
| Increase or decrease of |
(basis points) | $100 million in common equity | $1 billion in risk-weighted assets/quarterly average assets |
CET1: | | | | |
Standardized Approach | 8 | bps | 12 | bps |
Advanced Approach | 6 | | 7 | |
| | | | |
Tier 1 capital: | | | | |
Standardized Approach | 8 | | 13 | |
Advanced Approach | 6 | | 7 | |
| | | | |
Total capital: | | | | |
Standardized Approach | 8 | | 13 | |
Advanced Approach | 6 | | 7 | |
| | | | |
Leverage capital | 3 | | 2 | |
| | | | |
Estimated CET1 ratio, fully phased-in – Non-GAAP: | | | | |
Standardized Approach | 6 | | 7 | |
Advanced Approach | 6 | | 6 | |
Our tangible BNY Mellon common shareholders’ equity to tangible assets of operations ratio was 6.5% at Sept. 30, 2014 and 6.8% at Dec. 31, 2013. The decrease primarily reflects a lower level of cash on deposit with the Federal Reserve and other central banks.
At Sept. 30, 2014, we had $324 million of trust preferred securities outstanding, of which 50% currently qualify as Tier 1 capital and 50% as Tier 2 capital. Under the Final Capital Rules, these trust preferred securities may continue to be included in Tier 1 capital up to the following percentages: calendar year 2014 - 50%; calendar year 2015 - 25%; and calendar year 2016 and beyond - 0%. Certain amounts of trust preferred securities that are excluded from additional Tier 1 capital due to this phase-in schedule may be eligible for inclusion in Tier 2 capital, pursuant to the standards established in the Final Capital Rules. Any decision to take action with respect to these trust preferred securities will be based on several considerations including interest rates and the availability of cash and capital.
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 our 2013 Annual Report in “Supervision and Regulation-Regulated Entities of BNY Mellon and Ancillary Regulatory Requirements” and “Risk Factors-Operational and Business Risk-Failure to satisfy regulatory standards, including “well capitalized” and “well managed” status or capital adequacy rules more generally, could result in limitations on our activities and adversely affect our business and financial condition.”
Capital ratios vary depending on the size of the balance sheet at quarter-end and the level and types of investments in assets. The balance sheet size fluctuates from quarter to quarter based on levels of customer and market activity. In general, when servicing clients are more actively trading securities, deposit balances and the balance sheet as a whole are higher. In addition, when markets experience significant volatility or stress, our balance sheet size may increase considerably as client deposit levels increase.
Trading activities and risk management
Our trading activities are focused on acting as a market maker for our customers and facilitating customer trades. Positions managed for our own account are immaterial to our foreign exchange and other trading revenue and to our overall results of operations. The risk from market-making activities for customers is managed by our traders and limited in total exposure through a system of position limits, a value-at-risk (“VaR”) methodology based on a Monte Carlo simulation, stop loss advisory triggers, and other market sensitivity measures. The calculation of our VaR used by management and presented below assumes a one-day holding period, utilizes a 99% confidence level, and incorporates the non-linear characteristics of options. See Note 17 of the Notes to Consolidated Financial Statements for additional information on the VaR methodology.
The following tables indicate the calculated VaR amounts for the trading portfolio for the designated periods:
|
| | | | | | | | | | | | |
VaR (a) | 3rd Quarter 2014 | Sept. 30, 2014 |
|
(in millions) | Average | Minimum | Maximum |
Interest rate | $ | 5.7 |
| $ | 4.1 |
| $ | 6.8 |
| $ | 5.4 |
|
Foreign exchange | 0.9 |
| 0.4 |
| 1.5 |
| 0.7 |
|
Equity | 1.4 |
| 0.8 |
| 2.3 |
| 1.0 |
|
Diversification | (2.0 | ) | N/M |
| N/M |
| (1.4 | ) |
Overall portfolio | 6.0 |
| 4.5 |
| 7.3 |
| 5.7 |
|
|
| | | | | | | | | | | | |
VaR (a) | 2nd Quarter 2014 | June 30, 2014 |
|
(in millions) | Average | Minimum | Maximum |
Interest rate | $ | 7.7 |
| $ | 5.5 |
| $ | 10.5 |
| $ | 6.4 |
|
Foreign exchange | 1.0 |
| 0.6 |
| 2.7 |
| 1.1 |
|
Equity | 1.8 |
| 1.3 |
| 2.9 |
| 1.8 |
|
Diversification | (2.6 | ) | N/M |
| N/M |
| (3.0 | ) |
Overall portfolio | 7.9 |
| 5.7 |
| 10.3 |
| 6.3 |
|
|
| | | | | | | | | | | | |
VaR (a) | 3rd Quarter 2013 | Sept. 30, 2013 |
|
(in millions) | Average | Minimum | Maximum |
Interest rate | $ | 9.6 |
| $ | 6.8 |
| $ | 12.6 |
| $ | 9.9 |
|
Foreign exchange | 1.1 |
| 0.6 |
| 1.9 |
| 1.9 |
|
Equity | 2.4 |
| 1.4 |
| 3.4 |
| 3.4 |
|
Diversification | (2.8 | ) | N/M |
| N/M |
| (3.9 | ) |
Overall portfolio | 10.3 |
| 7.0 |
| 12.9 |
| 11.3 |
|
|
| | | | | | | | | |
VaR (a) | Year-to-date 2014 |
(in millions) | Average | Minimum | Maximum |
Interest rate | $ | 7.3 |
| $ | 4.1 |
| $ | 13.4 |
|
Foreign exchange | 1.0 |
| 0.4 |
| 2.7 |
|
Equity | 1.8 |
| 0.8 |
| 4.0 |
|
Diversification | (2.5 | ) | N/M |
| N/M |
|
Overall portfolio | 7.6 |
| 4.5 |
| 13.0 |
|
|
| | | | | | | | | |
VaR (a) | Year-to-date 2013 |
(in millions) | Average | Minimum | Maximum |
Interest rate | $ | 10.7 |
| $ | 6.8 |
| $ | 14.8 |
|
Foreign exchange | 1.1 |
| 0.5 |
| 2.3 |
|
Equity | 2.5 |
| 1.1 |
| 4.4 |
|
Diversification | (2.9 | ) | N/M |
| N/M |
|
Overall portfolio | 11.4 |
| 7.0 |
| 14.8 |
|
| |
(a) | VaR figures do not reflect the impact of credit valuation adjustment (“CVA”) guidance in Accounting Standards Codification (“ASC”) 820. 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: debt
securities, mortgage-backed securities, 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, and exchange-traded futures and options, and other currency derivative products.
The equity component of VaR is comprised 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, Depositary Receipts, listed equity options (puts and calls), over-the-counter (“OTC”) equity options, equity total return swaps, equity index futures and other equity derivative products.
The 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 2014, interest rate risk generated 71% of average VaR, equity risk generated 17% of average VaR and foreign exchange risk accounted for 12% of average VaR. During the third quarter of 2014, our daily trading loss did not exceed our calculated VaR amount of the overall portfolio on any given day.
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. The year-over-year and sequential increases in the number of days when the daily trading revenue exceeded $5 million were primarily driven by higher foreign exchange trading volumes. The remaining year-over-year fluctuations were primarily driven by changes in foreign exchange volatility, while the sequential fluctuations were primarily driven by higher foreign exchange volume and changes in equity derivative revenue.
|
| | | | | | | | | | |
Distribution of trading revenue (loss) (a) |
(dollar amounts in millions) | Quarter ended |
Sept. 30, 2013 |
| Dec. 31, 2013 |
| March 31, 2014 |
| June 30, 2014 |
| Sept. 30, 2014 |
|
Revenue range: | Number of days |
Less than $(2.5) | — |
| — |
| — |
| — |
| — |
|
$(2.5) - $0 | 3 |
| 6 |
| 9 |
| 6 |
| 3 |
|
$0 - $2.5 | 30 |
| 30 |
| 25 |
| 31 |
| 34 |
|
$2.5 - $5.0 | 27 |
| 24 |
| 24 |
| 26 |
| 20 |
|
More than $5.0 | 4 |
| 2 |
| 3 |
| 1 |
| 7 |
|
| |
(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 $12 billion at both Sept. 30, 2014 and Dec. 31, 2013.
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 $8 billion at Sept. 30, 2014 compared with $7 billion at Dec. 31, 2013.
Under our mark-to-market 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.
As required by ASC 820, Fair Value Measurements and Disclosures, we reflect external credit ratings as well as observable credit default swap spreads for both ourselves as well as our counterparties when measuring the fair value of our derivative positions. Accordingly, the valuation of our derivative positions is sensitive to the current changes in our own credit spreads, as well as those of our counterparties. In addition, in cases where a counterparty is deemed impaired, further analyses are performed to value such positions.
At Sept. 30, 2014, our OTC derivative assets of $5.9 billion included a CVA deduction of $34 million. Our OTC derivative liabilities of $6.4 billion included a debit valuation adjustment (“DVA”) of $5 million related to our own credit spread. Net of hedges, the CVA decreased $9 million and the DVA was unchanged in the third quarter of 2014. The net
impact of these adjustments increased foreign exchange and other trading revenue by $9 million in the third quarter of 2014.
In the second quarter of 2014, net of hedges, the CVA increased $2 million and the DVA was unchanged. The net impact of these adjustments decreased foreign exchange and other trading revenue by $2 million in the second quarter of 2014.
In the third quarter of 2013, net of hedges, the CVA decreased $2 million and the DVA increased $1 million. The net impact of these adjustments increased foreign exchange and other trading revenue by $3 million in the third quarter of 2013.
The table below summarizes the risk ratings for our foreign exchange and interest rate derivative counterparty credit exposure. This information indicates the degree of risk to which we are exposed. Significant changes in ratings classifications for our foreign exchange and other trading activity could result in increased risk for us. The sequential change in the AAA to AA- and A+ to A- ratings categories reflects an increase in A+ to A- exposures due to stronger U.S. dollar.
|
| | | | | | | | | | |
Foreign exchange and other trading counterparty risk rating profile (a) |
| Quarter ended |
| Sept. 30, 2013 |
| Dec. 31, 2013 |
| March 31, 2014 |
| June 30, 2014 |
| Sept. 30, 2014 |
|
Rating: | | | | | |
AAA to AA- | 35 | % | 32 | % | 41 | % | 44 | % | 37 | % |
A+ to A- | 43 |
| 47 |
| 38 |
| 35 |
| 45 |
|
BBB+ to BBB- | 16 |
| 16 |
| 16 |
| 16 |
| 14 |
|
Non-investment grade (BB+ and lower) | 6 |
| 5 |
| 5 |
| 5 |
| 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.
These scenarios do not reflect strategies that management could employ to limit the impact as interest rate expectations change. 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. To the extent that actual behavior is different from that assumed in the models, there could be a change in interest rate sensitivity.
We evaluate the effect on earnings by running various interest rate ramp scenarios from a baseline scenario. These scenarios are reviewed to examine the impact of large interest rate movements. Interest rate sensitivity is quantified by calculating the change in 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 | |
(dollars in millions) | Sept. 30, 2013 |
| | Dec. 31, 2013 |
| | March 31, 2014 |
| | June 30, 2014 |
| | Sept. 30, 2014 |
|
up 200 bps parallel rate ramp vs. baseline (a) | $ | 617 |
| | $ | 677 |
| | $ | 447 |
| | $ | 426 |
| | $ | 457 |
|
up 100 bps parallel rate ramp vs. baseline (a) | 387 |
| | 466 |
| | 376 |
| | 364 |
| | 365 |
|
Long-term up 50 bps, short-term unchanged (b) | 174 |
| | 44 |
| | 50 |
| | 47 |
| | 37 |
|
Long-term down 50 bps, short-term unchanged (b) | (144 | ) | | (47 | ) | | (46 | ) | | (40 | ) | | (44 | ) |
| |
(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 100 basis point ramp scenario assumes rates increase 25 basis points 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, a rise in interest rates could lead to higher depositor withdrawals than historically experienced.
Growth or contraction of deposits could also be affected by the following factors:
| |
• | Global economic uncertainty; |
| |
• | Our ratings relative to other financial institutions’ ratings; and |
| |
• | Money market mutual fund and other 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 securitizations. 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 18 of the Notes to Consolidated Financial Statements for a further discussion of our off-balance sheet arrangements.
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 upon fully phased-in Basel III CET1, SLR, Basel I CET1 and tangible common shareholders’ equity. BNY Mellon believes that the Basel III CET1 ratio on a fully phased-in basis, the SLR on a fully phased-in basis, the ratio of Basel I CET1 to risk-weighted assets and the ratio of tangible common shareholders’ equity to tangible assets of operations are measures of capital strength that provide additional useful information to investors, supplementing the capital ratios which are, or were, utilized by regulatory authorities. The tangible common shareholders’ equity ratio includes changes in investment securities valuations which are reflected in total shareholders’ equity. In addition, this ratio is expressed as a percentage of the actual book value of assets, as opposed to a percentage of a risk-based reduced value established in accordance with regulatory requirements, although BNY Mellon in its reconciliation has excluded certain assets which are given a zero percent risk-weighting for regulatory purposes and the assets of consolidated investment management funds to which BNY Mellon has limited economic exposure. Further, BNY Mellon believes that the return on tangible common equity measure, which excludes goodwill and intangible assets net of deferred tax liabilities, is a useful additional measure for investors because it presents a measure of BNY Mellon’s performance in reference to those assets that can generate income. BNY Mellon has provided a measure of tangible book value per share, which it believes provides additional useful information as to the level of such assets in relation to shares of common stock outstanding.
BNY Mellon has presented revenue measures which exclude the effect of noncontrolling interests related to consolidated investment management funds, a gain on the sale of our investment in Wing Hang, a gain on the sale of the One Wall Street building, and a loss related to an equity investment; and expense measures which exclude M&I expenses, litigation charges, restructuring charges, amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives. Earnings per share, return on equity measures and operating margin measures, which exclude some or all of these items, are also presented. Earnings per share and return on equity measures also exclude the (benefit) net charge related to the disallowance of
certain foreign tax credits. Operating margin measures may also exclude amortization of intangible assets and the net negative impact of money market fee waivers, net of 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. The excluded items, in general, relate to certain ongoing charges as a result of prior transactions or where we have incurred charges. M&I expenses primarily relate to the acquisitions of Global Investment Servicing on July 1, 2010 and BHF Asset Servicing GmbH on Aug. 2, 2010. M&I expenses generally continue for approximately three years after the transaction and can vary on a year-to-year basis depending on the stage of the integration. BNY Mellon believes that the exclusion of M&I expenses provides investors with a focus on BNY Mellon’s business as it would appear on a consolidated going-forward basis, after such M&I expenses have ceased. Future periods will not reflect such M&I expenses, and thus may be more easily compared to our current results if M&I expenses are excluded. 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, Operational Excellence Initiatives and migrating positions to Global Delivery Centers. Excluding these charges 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.
In this Form 10-Q, the net interest margin is presented on an FTE basis. We believe that this presentation provides comparability of amounts arising from both taxable and tax-exempt sources, and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. Each of these measures as described above is used by management to monitor financial
performance, both on a company-wide and on a business-level basis.
Results for the three and nine months ended Sept. 30, 2013 were restated to reflect the retrospective
application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
The following table presents the reconciliation of net income and diluted earnings per common share.
|
| | | | | | | | | | | | | | | | | | | | |
Reconciliation of net income and diluted EPS – GAAP to Non-GAAP | 3Q14 | | 2Q14 | | 3Q13 |
| Net |
| Diluted |
| | Net |
| Diluted |
| | Net |
| Diluted |
|
(in millions, except per common share amounts) | income |
| EPS |
| | income |
| EPS |
| | income |
| EPS |
|
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP | $ | 1,070 |
| $ | 0.93 |
| | $ | 554 |
| $ | 0.48 |
| | $ | 962 |
| $ | 0.82 |
|
Less: Gain on the sale of our investment in Wing Hang | 315 |
| 0.27 |
| | — |
| — |
| | — |
| — |
|
Gain on the sale of the One Wall Street building | 204 |
| 0.18 |
| | — |
| — |
| | — |
| — |
|
Add: Litigation and restructuring charges | 183 |
| 0.16 |
| | 76 |
| 0.06 |
| | 12 |
| 0.01 |
|
Charge related to investment management funds, net of incentives | — |
| — |
| | 85 |
| 0.07 |
| | — |
| — |
|
Benefit related to the disallowance of certain foreign tax credits | — |
| — |
| | — |
| — |
| | (261 | ) | (0.22 | ) |
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – Non-GAAP | $ | 734 |
| $ | 0.64 |
| | $ | 715 |
| $ | 0.62 |
| (a) | $ | 713 |
| $ | 0.61 |
|
| |
(a) | Does not foot due to rounding. |
The following table presents the reconciliation of the pre-tax operating margin ratio.
|
| | | | | | | | | | | | | | | |
Reconciliation of income before income taxes – pre-tax operating margin (dollars in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
Income before income taxes – GAAP | $ | 1,662 |
| $ | 811 |
| $ | 1,002 |
| $ | 3,399 |
| $ | 3,049 |
|
Less: Net income attributable to noncontrolling interests of consolidated investment management funds | 23 |
| 17 |
| 8 |
| 60 |
| 63 |
|
Gain on the sale of our investment in Wing Hang
| 490 |
| — |
| — |
| 490 |
| — |
|
Gain on the sale of the One Wall Street building
| 346 |
| — |
| — |
| 346 |
| — |
|
Add: Amortization of intangible assets | 75 |
| 75 |
| 81 |
| 225 |
| 260 |
|
M&I, litigation and restructuring charges | 220 |
| 122 |
| 16 |
| 330 |
| 68 |
|
Charge (recovery) related to investment management funds, net of incentives | — |
| 109 |
| — |
| 104 |
| 12 |
|
Income before income taxes, as adjusted – Non-GAAP (b) | $ | 1,098 |
| $ | 1,100 |
| $ | 1,091 |
| $ | 3,162 |
| $ | 3,326 |
|
| | | | | |
Fee and other revenue – GAAP | $ | 3,851 |
| $ | 2,980 |
| $ | 2,979 |
| $ | 9,714 |
| $ | 9,042 |
|
Income from consolidated investment management funds – GAAP | 39 |
| 46 |
| 32 |
| 121 |
| 147 |
|
Net interest revenue – GAAP | 721 |
| 719 |
| 772 |
| 2,168 |
| 2,248 |
|
Total revenue – GAAP | 4,611 |
| 3,745 |
| 3,783 |
| 12,003 |
| 11,437 |
|
Less: Net income attributable to noncontrolling interests of consolidated investment management funds | 23 |
| 17 |
| 8 |
| 60 |
| 63 |
|
Gain on the sale of our investment in Wing Hang | 490 |
| — |
| — |
| 490 |
| — |
|
Gain on the sale of the One Wall Street building | 346 |
| — |
| — |
| 346 |
| — |
|
Total revenue, as adjusted – Non-GAAP (b) | $ | 3,752 |
| $ | 3,728 |
| $ | 3,775 |
| $ | 11,107 |
| $ | 11,374 |
|
| | | | | |
Pre-tax operating margin (a) | 36 | % | 22 | % | 26 | % | 28 | % | 27 | % |
Pre-tax operating margin – Non-GAAP (a)(b) | 29 | % | 30 | % | 29 | % | 28 | % | 29 | % |
| |
(a) | Income before taxes divided by total revenue. |
| |
(b) | Non-GAAP excludes M&I, litigation and restructuring charges, the gain on the sale of our investment in Wing Hang, the gain on the sale of the One Wall Street building, a charge (recovery) related to investment management funds, net of incentives and net income attributable to noncontrolling interests of consolidated investment management funds, if applicable. |
The following table presents the reconciliation of the returns on common equity and tangible common equity.
|
| | | | | | | | | | | | | | | |
Return on common equity and tangible common equity (dollars in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP | $ | 1,070 |
| $ | 554 |
| $ | 962 |
| $ | 2,285 |
| $ | 1,527 |
|
Add: Amortization of intangible assets, net of tax | 49 |
| 49 |
| 52 |
| 147 |
| 167 |
|
Net income applicable to common shareholders of The Bank of New York Mellon Corporation excluding amortization of intangible assets – Non-GAAP | 1,119 |
| 603 |
| 1,014 |
| 2,432 |
| 1,694 |
|
Less: Gain on the sale of our investment in Wing Hang | 315 |
| — |
| — |
| 315 |
| — |
|
Gain on the sale of the One Wall Street building
| 204 |
| — |
| — |
| 204 |
| — |
|
Add: M&I, litigation and restructuring charges | 183 |
| 76 |
| 12 |
| 252 |
| 44 |
|
Charge (recovery) related to investment management funds, net of incentives | — |
| 85 |
| — |
| 81 |
| 9 |
|
(Benefit) net charge related to the disallowance of certain foreign tax credits | — |
| — |
| (261 | ) | — |
| 593 |
|
Net income applicable to common shareholders of The Bank of New York Mellon Corporation, as adjusted – Non-GAAP (b) | $ | 783 |
| $ | 764 |
| $ | 765 |
| $ | 2,246 |
| $ | 2,340 |
|
| | | | | |
Average common shareholders’ equity | $ | 36,751 |
| $ | 36,565 |
| $ | 34,264 |
| $ | 36,537 |
| $ | 34,541 |
|
Less: Average goodwill | 18,109 |
| 18,149 |
| 17,975 |
| 18,110 |
| 17,975 |
|
Average intangible assets | 4,274 |
| 4,354 |
| 4,569 |
| 4,350 |
| 4,662 |
|
Add: Deferred tax liability – tax deductible goodwill (a) | 1,317 |
| 1,338 |
| 1,262 |
| 1,317 |
| 1,262 |
|
Deferred tax liability – intangible assets (a) | 1,230 |
| 1,247 |
| 1,242 |
| 1,230 |
| 1,242 |
|
Average tangible common shareholders’ equity – Non-GAAP | $ | 16,915 |
| $ | 16,647 |
| $ | 14,224 |
| $ | 16,624 |
| $ | 14,408 |
|
| | | | | |
Return on common equity – GAAP (b)(c) | 11.6 | % | 6.1 | % | 11.1 | % | 8.4 | % | 5.9 | % |
Return on common equity – Non-GAAP (b)(c) | 8.5 | % | 8.4 | % | 8.9 | % | 8.2 | % | 9.1 | % |
| | | | | |
Return on tangible common equity – Non-GAAP (b)(c) | 26.2 | % | 14.5 | % | 28.3 | % | 19.6 | % | 15.7 | % |
Return on tangible common equity – Non-GAAP adjusted (b)(c) | 18.4 | % | 18.4 | % | 21.3 | % | 18.1 | % | 21.7 | % |
| |
(a) | Deferred tax liabilities are based on fully phased-in Basel III rules. The quarters of 2014 include deferred tax liabilities on tax deductible intangible assets permitted under Basel III rules. |
| |
(b) | Non-GAAP excludes M&I, litigation and restructuring charges, the gain on the sale of our investment in Wing Hang, the gain on the sale of the One Wall Street building, a charge (recovery) related to investment management funds, net of incentives and the (benefit) net charge related to the disallowance of certain foreign tax credits, if applicable. |
The following table presents the calculation of the effective tax rate.
|
| | | |
Effective tax rate | |
(dollars in millions) | 3Q13 |
|
Provision for income taxes – GAAP | $ | 19 |
|
Add: Benefit related to the disallowance of certain foreign tax credits | 261 |
|
Provision for income taxes – Non-GAAP | $ | 280 |
|
| |
Income before taxes – GAAP | $ | 1,002 |
|
| |
Effective tax rate – GAAP | 1.9 | % |
Effective tax rate – Operating basis – Non-GAAP | 27.9 | % |
The following table presents the reconciliation of the equity to assets ratio and book value per common share.
|
| | | | | | | | | | | | |
Equity to assets and book value per common share | Sept. 30, 2014 |
| June 30, 2014 |
| Dec. 31, 2013 |
| Sept. 30, 2013 |
|
(dollars in millions, unless otherwise noted) |
BNY Mellon shareholders’ equity at period end – GAAP | $ | 38,451 |
| $ | 38,326 |
| $ | 37,497 |
| $ | 36,935 |
|
Less: Preferred stock | 1,562 |
| 1,562 |
| 1,562 |
| 1,562 |
|
BNY Mellon common shareholders’ equity at period end – GAAP | 36,889 |
| 36,764 |
| 35,935 |
| 35,373 |
|
Less: Goodwill | 17,992 |
| 18,196 |
| 18,073 |
| 18,025 |
|
Intangible assets | 4,215 |
| 4,314 |
| 4,452 |
| 4,527 |
|
Add: Deferred tax liability – tax deductible goodwill (a) | 1,317 |
| 1,338 |
| 1,302 |
| 1,262 |
|
Deferred tax liability – intangible assets (a) | 1,230 |
| 1,247 |
| 1,222 |
| 1,242 |
|
BNY Mellon tangible common shareholders’ equity at period end – Non-GAAP | $ | 17,229 |
| $ | 16,839 |
| $ | 15,934 |
| $ | 15,325 |
|
| | | | |
Total assets at period end – GAAP | $ | 386,296 |
| $ | 400,740 |
| $ | 374,516 |
| $ | 372,124 |
|
Less: Assets of consolidated investment management funds | 9,562 |
| 10,428 |
| 11,272 |
| 11,691 |
|
Subtotal assets of operations – Non-GAAP | 376,734 |
| 390,312 |
| 363,244 |
| 360,433 |
|
Less: Goodwill | 17,992 |
| 18,196 |
| 18,073 |
| 18,025 |
|
Intangible assets | 4,215 |
| 4,314 |
| 4,452 |
| 4,527 |
|
Cash on deposit with the Federal Reserve and other central banks (b) | 90,978 |
| 104,916 |
| 105,384 |
| 96,316 |
|
Tangible total assets of operations at period end – Non-GAAP | $ | 263,549 |
| $ | 262,886 |
| $ | 235,335 |
| $ | 241,565 |
|
| | | | |
BNY Mellon shareholders’ equity to total assets – GAAP | 10.0 | % | 9.6 | % | 10.0 | % | 9.9 | % |
BNY Mellon common shareholders’ equity to total assets – GAAP | 9.5 | % | 9.2 | % | 9.6 | % | 9.5 | % |
BNY Mellon tangible common shareholders’ equity to tangible assets of operations – Non-GAAP | 6.5 | % | 6.4 | % | 6.8 | % | 6.3 | % |
| | | | |
Period-end common shares outstanding (in thousands) | 1,125,710 |
| 1,131,596 |
| 1,142,250 |
| 1,148,522 |
|
| | | | |
Book value per common share – GAAP | $ | 32.77 |
| $ | 32.49 |
| $ | 31.46 |
| $ | 30.80 |
|
Tangible book value per common share – Non-GAAP | $ | 15.30 |
| $ | 14.88 |
| $ | 13.95 |
| $ | 13.34 |
|
| |
(a) | Deferred tax liabilities are based on fully phased-in Basel III rules. The quarters of 2014 include deferred tax liabilities on tax deductible intangible assets permitted under Basel III rules. |
| |
(b) | Assigned a zero percentage risk-weighting by the regulators. |
The following table presents income from consolidated investment management funds, net of noncontrolling interests.
|
| | | | | | | | | | | | | | | |
Income from consolidated investment management funds, net of noncontrolling interests (in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
Income from consolidated investment management funds | $ | 39 |
| $ | 46 |
| $ | 32 |
| $ | 121 |
| $ | 147 |
|
Less: Net income attributable to noncontrolling interests of consolidated investment management funds | 23 |
| 17 |
| 8 |
| 60 |
| 63 |
|
Income from consolidated investment management funds, net of noncontrolling interests | $ | 16 |
| $ | 29 |
| $ | 24 |
| $ | 61 |
| $ | 84 |
|
The following table presents the line items in the Investment Management business impacted by the consolidated investment management funds.
|
| | | | | | | | | | | | | | | |
Income from consolidated investment management funds, net of noncontrolling interests (in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
Investment management fees | $ | 15 |
| $ | 18 |
| $ | 20 |
| $ | 51 |
| $ | 60 |
|
Other (Investment income) | 1 |
| 11 |
| 4 |
| 10 |
| 24 |
|
Income from consolidated investment management funds, net of noncontrolling interests | $ | 16 |
| $ | 29 |
| $ | 24 |
| $ | 61 |
| $ | 84 |
|
The following table presents the reconciliation of the pre-tax operating margin for the Investment Management business.
|
| | | | | | | | | | | | | | | | | | | | | |
Pre-tax operating margin - Investment Management business | | | | | | Year-to-date |
(dollars in millions) | 3Q13 |
| 4Q13 |
| 1Q14 |
| 2Q14 |
| 3Q14 |
| 2014 | 2013 |
Income before income taxes – GAAP | $ | 225 |
| $ | 266 |
| $ | 246 |
| $ | 171 |
| $ | 245 |
| $ | 662 |
| $ | 702 |
|
Add: Amortization of intangible assets | 35 |
| 35 |
| 31 |
| 31 |
| 31 |
| 93 |
| 113 |
|
Money market fee waivers | 30 |
| 33 |
| 35 |
| 28 |
| 29 |
| 92 |
| 75 |
|
Charge (recovery) related to investment management funds, net of incentives | — |
| — |
| (5 | ) | 109 |
| — |
| 104 |
| 12 |
|
Income before income taxes excluding amortization of intangible assets, money market fee waivers and the charge (recovery) related to investment management funds, net of incentives – Non-GAAP | $ | 290 |
| $ | 334 |
| $ | 307 |
| $ | 339 |
| $ | 305 |
| $ | 951 |
| $ | 902 |
|
| | | | | | | |
Total revenue – GAAP | $ | 949 |
| $ | 1,061 |
| $ | 970 |
| $ | 1,036 |
| $ | 1,003 |
| $ | 3,009 |
| $ | 2,867 |
|
Less: Distribution and servicing expense | 107 |
| 108 |
| 106 |
| 111 |
| 105 |
| 322 |
| 321 |
|
Money market fee waivers benefiting distribution and servicing expense | 38 |
| 38 |
| 38 |
| 37 |
| 38 |
| 113 |
| 109 |
|
Add: Money market fee waivers impacting total revenue | 68 |
| 71 |
| 73 |
| 65 |
| 67 |
| 205 |
| 184 |
|
Total revenue net of distribution and servicing expense and excluding money market fee waivers – Non-GAAP | $ | 872 |
| $ | 986 |
| $ | 899 |
| $ | 953 |
| $ | 927 |
| $ | 2,779 |
| $ | 2,621 |
|
| | | | | | | |
Pre-tax operating margin (a) | 24 | % | 25 | % | 25 | % | 16 | % | 24 | % | 22 | % | 24 | % |
Pre-tax operating margin, excluding amortization of intangible assets, money market fee waivers, the charge (recovery) related to investment management funds, net of incentives and net of distribution and servicing expense – Non-GAAP (a) | 33 | % | 34 | % | 34 | % | 36 | % | 33 | % | 34 | % | 34 | % |
| |
(a) | Income before taxes divided by total revenue. |
Capital Ratios
BNY Mellon has presented its estimated fully phased-in Basel III CET1 ratios and SLR based on its interpretation of the Final Capital Rules, which are being gradually phased-in over a multi-year period, as supplemented by the Federal Reserve’s final rules concerning the SLR published on Sept. 3, 2014, and on the application of such rules to BNY Mellon’s businesses as currently conducted. Management views the estimated fully phased-in Basel III CET1 ratio 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 Basel III CET1 ratios and SLR are intended to allow investors to compare these ratios with estimates presented by other companies. The estimated fully phased-in Basel III CET1 ratios assume all relevant regulatory approvals. The Final Capital Rules require approval by banking regulators of certain models used as part of risk-weighted asset calculations. If these models are not approved, the estimated fully phased-in Basel III CET1 ratios would likely be adversely impacted.
Risk-weighted assets at Sept. 30, 2014 and June 30, 2014 under the transitional Advanced Approach do not reflect the use of a simple value-at-risk
methodology for repo-style transactions (including agented indemnified securities lending transactions), eligible margin loans, and similar transactions. BNY Mellon has requested written approval to use this methodology.
Our capital ratios are necessarily subject to, among other things, BNY Mellon’s further review of applicable rules, anticipated compliance with all necessary enhancements to model calibration, approval by regulators of certain models used as part of risk-weighted asset calculations, other refinements, further implementation guidance from regulators, market practices and standards and any changes BNY Mellon may make to its businesses. Consequently, our capital ratios remain subject to ongoing review and revision and may change based on these factors.
The following are the primary differences between risk-weighted assets determined under fully phased-in Basel III-Standardized Approach and Basel I. Credit risk is determined under Basel I using predetermined risk-weights and asset classes and relies in part on the use of external credit ratings. Under fully phased-in Basel III, the Standardized Approach uses a broader range of predetermined risk-weights and asset classes and certain alternatives to external credit ratings. Securitization exposure receives a higher risk-
weighting under fully phased-in Basel III than Basel I, and fully phased-in Basel III includes additional adjustments for market risk, counterparty credit risk and equity exposures. Additionally, the Standardized Approach eliminates the use of the VaR approach, whereas the Advanced Approach permits the VaR approach but requires certain model qualifications
and approvals, for determining risk-weighted assets on certain repo-style transactions. In 2014, Standardized Approach and Advanced Approach risk-weighted assets include transition adjustments for intangible assets, other than goodwill, and equity exposure.
The table presented below compares the fully phased-in Basel III capital components and ratios to those amounts determined under the currently effective rules using the transitional phase-in requirements.
|
| | | | | | | | | | | |
| Basel III capital components and ratios at Sept. 30, 2014
(dollars in millions) | Fully phased-in Basel III |
| | | Transitional Approach |
|
| Adjustments (a) |
|
| CET1: | | | | |
| Common shareholders’ equity | $ | 36,889 |
| $ | 97 |
| (b) | $ | 36,986 |
|
| Goodwill and intangible assets | (19,660 | ) | 2,388 |
| (c) | (17,272 | ) |
| Net pension fund assets | (106 | ) | 85 |
| (d) | (21 | ) |
| Equity method investments | (383 | ) | 92 |
| (c) | (291 | ) |
| Deferred tax assets | (17 | ) | 14 |
| (d) | (3 | ) |
| Other | (3 | ) | 4 |
| (e) | 1 |
|
| Total CET1 | 16,720 |
| 2,680 |
| | 19,400 |
|
| Other Tier 1 capital: | | | | |
| Preferred stock | 1,562 |
| — |
| | 1,562 |
|
| Trust preferred securities | — |
| 162 |
| (f) | 162 |
|
| Disallowed deferred tax assets | — |
| (14 | ) | (d) | (14 | ) |
| Net pension fund assets | — |
| (85 | ) | (d) | (85 | ) |
| Other | (6 | ) | (4 | ) | | (10 | ) |
| Total Tier 1 capital | 18,276 |
| 2,739 |
| | 21,015 |
|
| | | | | |
| Tier 2 capital: | | | | |
| Trust preferred securities | — |
| 162 |
| (f) | 162 |
|
| Subordinated debt | 397 |
| — |
| | 397 |
|
| Allowance for credit losses | 288 |
| — |
| | 288 |
|
| Other | (6 | ) | — |
| | (6 | ) |
| Total Tier 2 capital - Standardized Approach | 679 |
| 162 |
| | 841 |
|
| Excess of expected credit losses | 26 |
| (14 | ) | | 12 |
|
| Less: Allowance for credit losses | 288 |
| — |
| | 288 |
|
| Total Tier 2 capital - Advanced Approach | $ | 417 |
| $ | 148 |
| | $ | 565 |
|
| | | | | |
| Total capital: | | | | |
| Standardized Approach | $ | 18,955 |
| $ | 2,901 |
| | $ | 21,856 |
|
| Advanced Approach | $ | 18,693 |
| $ | 2,887 |
| | $ | 21,580 |
|
| | | | | |
| Risk-weighted assets: | | | | |
| Standardized Approach | $ | 154,272 |
| $ | (25,516 | ) | | $ | 128,756 |
|
| Advanced Approach | $ | 164,088 |
| $ | 6,164 |
| | $ | 170,252 |
|
| | | | | |
| Standardized Approach: | | | | |
| Estimated Basel III CET1 ratio | 10.8 | % | | | 15.1 | % |
| Tier 1 capital ratio | 11.8 |
| | | 16.3 |
|
| Total (Tier 1 plus Tier 2) capital ratio | 12.3 |
| | | 17.0 |
|
| | | | | |
| Advanced Approach: | | | | |
| Estimated Basel III CET1 ratio | 10.2 | % | | | 11.4 | % |
| Tier 1 capital ratio | 11.1 |
| | | 12.3 |
|
| Total (Tier 1 plus Tier 2) capital ratio | 11.4 |
| | | 12.7 |
|
| |
(a) | Reflects transition adjustments to CET1, Tier 1 capital and Tier 2 capital required in 2014 under the Final Capital Rules. |
| |
(b) | Represents the portion of accumulated other comprehensive (income) loss excluded from common equity. |
| |
(c) | Represents intangible assets, other than goodwill, net of the corresponding deferred tax liabilities. |
| |
(d) | Represents the deduction for net pension fund assets and disallowed deferred tax assets in CET1 and Tier 1 capital. |
| |
(e) | Represents the transitional adjustments related to cash flow hedges. |
| |
(f) | During 2014, 50% of outstanding trust preferred securities are included in Tier 1 capital and 50% in Tier 2 capital. |
The following table presents the reconciliation of our estimated fully phased-in Basel III CET1 ratio under the Standardized Approach and Advanced Approach.
|
| | | | | | | | | | | | |
Estimated fully phased-in Basel III CET1 ratio – Non-GAAP | Sept. 30, 2014 |
| June 30, 2014 |
| Dec. 31, 2013 |
| Sept. 30, 2013 |
|
(dollars in millions) |
Total Tier 1 capital | $ | 21,015 |
| $ | 20,669 |
| $ | 18,335 |
| $ | 18,074 |
|
Adjustments to determine estimated fully phased-in Basel III CET1: | | | | |
Deferred tax liability – tax deductible intangible assets | — |
| — |
| 70 |
| 82 |
|
Intangible deduction | (2,388 | ) | (2,453 | ) | — |
| — |
|
Preferred stock | (1,562 | ) | (1,562 | ) | (1,562 | ) | (1,562 | ) |
Trust preferred securities | (162 | ) | (171 | ) | (330 | ) | (324 | ) |
Other comprehensive income (loss) and net pension fund assets: | | | | |
Securities available-for-sale | 578 |
| 586 |
| 387 |
| 487 |
|
Pension liabilities | (675 | ) | (691 | ) | (900 | ) | (1,348 | ) |
Net pension fund assets | — |
| — |
| (713 | ) | (279 | ) |
Total other comprehensive income (loss) and net pension fund assets | (97 | ) | (105 | ) | (1,226 | ) | (1,140 | ) |
Equity method investments | (92 | ) | (99 | ) | (445 | ) | (479 | ) |
Deferred tax assets | — |
| — |
| (49 | ) | (26 | ) |
Other | 6 |
| (2 | ) | 17 |
| 18 |
|
Total estimated fully phased-in Basel III CET1 – Non-GAAP | $ | 16,720 |
| $ | 16,277 |
| $ | 14,810 |
| $ | 14,643 |
|
| | | | |
Under the Standardized Approach: (a) | | | | |
Estimated fully phased-in Basel III risk-weighted assets – Non-GAAP | $ | 154,272 |
| $ | 164,759 |
| $ | 139,865 |
| $ | 145,589 |
|
| | | | |
Estimated fully phased-in Basel III CET1 ratio – Non-GAAP (b) | 10.8 | % | 9.9 | % | 10.6 | % | 10.1 | % |
| | | | |
Under the Advanced Approach: | | | | |
Estimated fully phased-in Basel III risk-weighted assets – Non-GAAP | $ | 164,088 |
| $ | 162,072 |
| $ | 130,849 |
| $ | 131,583 |
|
| | | | |
Estimated fully phased-in Basel III CET1 ratio – Non-GAAP (b) | 10.2 | % | 10.0 | % | 11.3 | % | 11.1 | % |
| |
(a) | The June 30, 2014 estimated fully phased-in Basel III Standardized Approach risk weighted assets and CET1 ratio (Non-GAAP) reflect an adjustment due to refinements in the data used in determining risk-weighted assets. The adjustment resulted in a reduction of approximately 40 basis points to the ratio. |
| |
(b) | Beginning with June 30, 2014, risk-based capital ratios include the net impact of including the total consolidated assets of certain consolidated investment management funds in risk-weighted assets. These assets were not included in prior periods. |
The following table presents the reconciliation of our Basel I CET1 ratio.
|
| | | | | | |
Basel I CET1 ratio (dollars in millions) | Dec. 31, 2013 |
| Sept. 30, 2013 |
|
Total Tier 1 capital – Basel I | $ | 18,335 |
| $ | 18,074 |
|
Less: Trust preferred securities | 330 |
| 324 |
|
Preferred stock | 1,562 |
| 1,562 |
|
Total CET1 – Basel I | $ | 16,443 |
| $ | 16,188 |
|
| | |
Total risk-weighted assets – Basel I | $ | 113,322 |
| $ | 114,404 |
|
| | |
Basel I CET1 ratio – Non-GAAP | 14.5 | % | 14.2 | % |
The following table presents the components of our fully phased-in estimated SLR.
|
| | | | | | |
Estimated fully phased-in SLR – Non-GAAP (a) (dollars in millions) | Sept. 30, 2014 |
| June 30, 2014 |
|
Total estimated fully phased-in Basel III CET1 – Non-GAAP | $ | 16,720 |
| $ | 16,277 |
|
Additional Tier 1 capital | 1,556 |
| 1,562 |
|
Total Tier 1 capital | $ | 18,276 |
| $ | 17,839 |
|
| | |
Total leverage exposure: | | |
Quarterly average total assets | $ | 380,409 |
| $ | 369,212 |
|
Less: Amounts deducted from Tier 1 capital | 20,166 |
| 20,480 |
|
Total on-balance sheet assets, as adjusted | 360,243 |
| 348,732 |
|
Off-balance sheet exposures: | | |
Potential future exposure for derivatives contracts (plus certain other items) | 11,694 |
| 11,115 |
|
Repo-style transaction exposures included in SLR | — |
| — |
|
Credit-equivalent amount of other off-balance sheet exposures (less SLR exclusions) | 21,924 |
| 22,658 |
|
Total off-balance sheet exposures | 33,618 |
| 33,773 |
|
Total leverage exposure | $ | 393,861 |
| $ | 382,505 |
|
| | |
Estimated fully phased-in SLR – Non-GAAP | 4.6 | % | 4.7 | % |
| |
(a) | The estimated fully phased-in SLR as of Sept. 30, 2014 is based on our interpretation of the Final Capital Rules, as supplemented by the Federal Reserve’s final rules on the SLR. The estimated fully phased-in SLR as of June 30, 2014 is based on our interpretation of the Final Capital Rules, as supplemented by the Notice of Proposed Rulemaking released in April 2014 concerning the SLR, except that off-balance sheet exposures included in total leverage exposure reflect the end of period measures, rather than a daily average. On a fully phased-in basis, we expect to satisfy a minimum SLR of over 5%, 3% attributable to a regulatory minimum SLR, and greater than 2% attributable to a buffer applicable to U.S. G-SIBs. |
Recent accounting and regulatory developments
Recently Issued Accounting Standards
ASU - 2014-11 - Transfers and Servicing (Topic 860): Repurchase-to Maturity Transactions, Repurchase Financings, and Disclosures
On June 12, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), “Transfers and Servicing (Topic 860): Repurchase-to Maturity Transactions, Repurchase Financing, and Disclosures.” This ASU amends the accounting guidance for “repo-to-maturity” transactions and repurchase agreements executed as repurchase financings. This ASU requires public entities to apply the accounting changes and comply with the enhanced disclosure requirements for the first interim or annual reporting period beginning after Dec. 15, 2014. However, for repurchase and securities lending transactions reported as secured borrowings, the ASU’s enhanced disclosures are effective for annual periods beginning after Dec. 15, 2014 and interim periods beginning after March 15, 2015. Early adoption is not permitted.
ASU - 2014-09 - Revenue from Contracts with Customers
On May 28, 2014, the FASB issued ASU, “Revenue from Contracts with Customers” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on Jan. 1, 2017. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that this ASU will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
ASU - 2014-08 - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
On April 10, 2014, the FASB issued ASU, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the criteria for determining which future disposals can be presented as discontinued operations and modifies related disclosure requirements. This ASU is effective for periods beginning on or after Dec. 15, 2014. Early adoption is permitted.
Proposed Accounting Standards
Proposed ASU - Principal versus Agent Analysis
In November 2011, the FASB issued a proposed ASU “Principal versus Agent Analysis.” This proposed ASU would rescind the 2010 indefinite deferral of FAS 167 for certain investment funds, including mutual funds, hedge funds, mortgage real estate investment funds, private equity funds, and venture capital funds, and amends the pre-existing guidance for evaluating consolidation of voting general partnerships and similar entities. The proposed ASU also amends the criteria for determining whether an entity is a variable interest entity under FAS 167, which could affect whether an entity is within its scope. Accordingly, certain funds that previously were not consolidated must be reviewed to determine whether they will now be required to be consolidated. The proposed accounting standard will continue to require BNY Mellon to determine whether or not it has a variable interest in a variable interest entity. However, consolidation of its variable interest entity and voting general partnership asset management funds will be based on whether or not BNY Mellon, as the asset manager, uses its power as a decision maker as either a principal or an agent. Based on a preliminary review of the proposed ASU and consideration of the FASB’s recent redeliberations, we do not expect to be required to consolidate a material amount of additional mutual funds, hedge funds, mortgage real estate investment funds, private equity funds, and venture capital funds. In addition, we expect to deconsolidate substantially all of the CLOs we currently consolidate. The FASB has recently concluded re-deliberating changes to the proposed ASU. A final ASU is expected to be issued in late 2014 or early 2015. The final guidance is expected to be effective for annual reporting periods beginning after Dec. 15, 2015. Early adoption in
fiscal years beginning before the effective date is expected to be permitted.
Proposed ASU - Leases
In May 2013, the FASB and the International Accounting Standards Board (“IASB”) issued a revised proposed ASU on leases. The proposed ASU introduces new accounting models for both lessees and lessors, primarily to address concerns related to off-balance-sheet financing arrangements available to lessees under current guidance. The proposal would require lessees to account for all leases on the balance sheet, except for certain short-term leases that have a maximum possible lease term of 12 months or less, including any options to renew. A lessee would recognize on its balance sheet (1) an asset for its right to use the underlying asset over the lease term and (2) a liability representing its obligation to make lease payments over the lease term. The income statement impact for lessees would depend on the nature of the underlying asset - that is, whether the underlying asset is property or an asset other than property - and the terms and conditions of the lease. The proposed ASU also introduces new accounting guidance for lessors. Lessors would account for leases under either the new receivable-and-residual approach or an approach similar to current operating-lease accounting. The appropriate approach to use would depend on the nature of the underlying asset - that is, whether the underlying asset is property or an asset other than property - and the terms and conditions of the lease. If finalized, the proposed ASU would converge the most significant aspects of the FASB’s and IASB’s accounting for lease contracts. In March 2014, the FASB and IASB re-deliberated the ASU and were unable to reach a consensus on certain key issues. Deliberations are expected to continue over the coming months. An effective date is not expected before 2018.
Proposed ASU - Financial Instruments - Credit Losses
In December 2012, the FASB issued a proposed ASU, “Financial Instruments-Credit Losses.” This proposed ASU would result in a single model to account for credit losses on financial assets. The proposal would remove the probable threshold for recognizing credit losses and require a current estimate of the expected contractual cash flows an entity does not expect to collect on financial assets that are not measured at fair value through the income
statement. The proposal would also change current practice for recognizing OTTI and interest income on debt securities. In addition, the proposal would result in the recognition of an allowance for credit losses for nearly all types of debt instruments. The proposal would expand the credit quality disclosures to require information about changes in the factors that influence estimates of credit losses and the reasons for those changes. The FASB has decided on a current expected credit loss model for financial assets measured at amortized cost. Currently, the FASB is re-deliberating based on comments received. An effective date has not been determined.
Proposed ASU - Recognition and Measurement of Financial Assets and Financial Liabilities
In February 2013, the FASB issued a proposed ASU, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This proposed ASU would affect entities that hold financial assets and liabilities and would change the methodology related to recognition, classification, measurement and presentation of financial instruments. The scope of the proposed ASU would exclude instruments classified in shareholders’ equity, share-based arrangements, pension plans, leases, guarantees and derivative instruments accounted under ASC 815, Derivatives and Hedging. Financial assets would be classified and measured based on the instrument’s cash flow characteristics and an entity’s business model for managing the instrument. Financial liabilities would generally be measured initially at their transaction price. The proposal includes three principal classification and measurement categories: (1) fair value for which all changes in fair value are recognized in net income; (2) fair value with qualifying changes in fair value recognized in other comprehensive income; and (3) amortized cost. This proposed ASU requires financial assets and liabilities to be presented separately on the balance sheet by measurement category. In addition, the fair value of financial assets and liabilities accounted for under amortized cost would be presented parenthetically on the balance sheet. In January 2014, the FASB tentatively decided not to continue to pursue the business model assessment approach for classification and measurement of financial assets. The FASB is currently re-deliberating based on the comments received and is expected to issue a final standard by the end of 2014. An effective date is not expected before 2017.
Adoption of new accounting standards
For a discussion of the adoption of new accounting standards, see Note 2 of the Notes to Consolidated Financial Statements.
IFRS
IFRS are a set of standards and interpretations adopted by the IASB. Commencing with the issuance of the “roadmap” in November 2008, the SEC has considered potential methods of incorporation of IFRS in the United States. The use of IFRS for U.S. companies with global operations would allow for streamlined reporting, allow for easier access to foreign capital markets and investments, and facilitate cross-border acquisitions, ventures or spin-offs.
In July 2012, the SEC staff released its final report on IFRS. This Final Report will be used by the SEC Commissioners to decide whether and, if so, when and how to incorporate IFRS into the financial reporting system for U.S. companies. It is not known when the SEC will make a final decision on the adoption of IFRS in the United States.
While the SEC decides whether IFRS will be required to be used in the preparation of our consolidated financial statements, a number of countries have mandated the use of IFRS by BNY Mellon’s subsidiaries in their statutory reports filed in those countries. Such countries include Belgium, Brazil, the Netherlands, Australia, Hong Kong, Canada and South Korea.
Update to Internal Controls - Integrated Framework
On May 14, 2013, The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued an updated version of its Internal Control - Integrated Framework (the “2013 Framework”). Originally issued in 1992, the framework helps organizations design, implement and evaluate the effectiveness of internal controls. Updates to the framework were intended to clarify internal control concepts and simplify their use and application. The 1992 framework will remain available during the transition period, which extends to Dec. 15, 2014, after which time COSO will consider it as superseded by the 2013 Framework. Concurrent with the 2013 Framework release, COSO indicated that organizations reporting externally
should clearly disclose whether the original Framework or the updated Framework was utilized. BNY Mellon is currently transitioning to the COSO 2013 Framework as it relates to our Internal Control over Financial Reporting.
Regulatory developments
For a summary of additional regulatory matters relevant to our operations, see “Supervision and regulation” in our 2013 Annual Report and “Regulatory Developments” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014.
Liquidity Coverage Ratio
Historically, regulation and monitoring of financial institution liquidity principally has been addressed as a supervisory matter, both in the U.S. and internationally, without required formulaic measures. The Basel III framework requires banks and BHCs to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation. One test, referred to as the LCR, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets relative to the entity’s net stressed cash outflow for a 30-day time horizon under an acute liquidity stress scenario.
In October 2013, the U.S. federal banking agencies issued an NPR to implement the Basel III liquidity coverage ratio in the U.S. (“Proposed LCR Rule”). The agencies indicated that the Proposed LCR Rule is more stringent than the Basel III LCR in certain elements, including the eligibility of high quality liquid assets and an accelerated implementation timeline. On Sept. 3, 2014, the U.S. federal banking agencies issued a final rule (the “Final LCR Rule”) to implement the LCR. Consistent with the Proposed LCR Rule, the Final LCR Rule is more stringent than the Basel III LCR in several respects. The Final LCR Rule also contains several changes from the Proposed LCR Rule, including:
| |
• | a new transition period for compliance with the daily LCR calculation requirement (during which monthly calculation is permitted), |
| |
• | total net stressed cash outflows will be calculated based on net outflows over a 30-day period, plus |
a maturity mismatch add-on (rather than the peak day approach of the Proposed LCR Rule), and
| |
• | a definition of operational deposits that qualifies deposits of registered investment companies and registered investment advisers. |
Starting on Jan. 1, 2015, covered companies, including BNY Mellon, will be required to meet an LCR of 80% percent, increasing annually by 10% increments until Jan. 1, 2017, at which time covered companies will be required to meet a liquidity coverage ratio of 100%.
Supplementary Leverage Ratio
In July 2013, the U.S. federal banking agencies finalized the Basel III-based capital rules in the U.S. Among other new requirements, the Final Capital Rules introduced a 3% SLR for all Advanced Approaches banking organizations. The SLR becomes effective as a binding ratio on Jan. 1, 2018, although commencing in January 2015 each Advanced Approaches banking organization is required to calculate and report its SLR. Unlike the Tier 1 leverage ratio that has long applied to U.S. banking organizations, the SLR includes certain off-balance sheet exposures in the denominator, including the potential future exposure of derivative contracts and notional amount of commitments.
In April 2014, the U.S. federal banking agencies adopted an “enhanced” SLR for banking organizations with total consolidated assets of more than $700 billion or assets under custody of more than $10 trillion, as well as their depository institution subsidiaries. The enhanced SLR would apply to the eight U.S. banking organizations that have been identified as G-SIBs by the Financial Stability Board (including BNY Mellon) and their insured depository institution subsidiaries. The enhanced SLR requires BNY Mellon and the other U.S. G-SIB bank holding companies to maintain a 2% buffer over the minimum 3% SLR for a total 5% SLR in order to avoid certain restrictions on capital distributions and discretionary bonus payments. In addition, the eight U.S. G-SIBs’ insured depository institution subsidiaries, regardless of the amount of their consolidated assets or assets under custody, must maintain a 6% SLR to be deemed “well-capitalized” under the “prompt corrective action” framework. The final enhanced SLR rule for U.S. G-SIBs, like the SLR more generally applicable to all Advanced
Approaches banking organizations, will become effective on Jan. 1, 2018.
In April 2014, the U.S. federal banking agencies issued a notice of proposed rulemaking (“SLR NPR”) to modify the SLR denominator in the U.S. to align with the final Basel III changes to the SLR denominator. The proposed changes would apply to all Advanced Approaches banking organizations subject to the SLR and all the G-SIBs and their insured depository institution subsidiaries subject to the enhanced SLR. On Sept. 3, 2014 the agencies issued a final rule implementing the SLR NPR. The final SLR is generally consistent with the terms of the SLR NPR, but also contains certain changes, including using the average of three month-end calculations for off-balance sheet items. Consistent with the SLR NPR, the final rules do not exempt or limit any categories of balance sheet assets, such as central bank deposits, from the denominator of the SLR.
Capital Planning and Stress Testing
BNY Mellon’s capital distributions are subject to supervision and regulation by the Federal Reserve. The Comprehensive Capital Analysis and Review (“CCAR”) and the Dodd-Frank Act Stress Tests (“DFAST”) are a major component of the Federal Reserve’s oversight.
In October 2014, the Federal Reserve finalized a proposal to revise certain aspects of its rules pertaining to CCAR and DFAST. These revisions include, among other changes, limitations on the ability of a BHC subject to CCAR to make capital distributions in a given quarter if its actual capital issuances in that quarter are less than the amount indicated in its capital plan and to eliminate the need to obtain prior approval for “accretive” issuances of capital instruments that would qualify for inclusion in the numerator of regulatory capital ratios.
In addition, for the CCAR 2015 exercise, the Federal Reserve’s authorization for capital distributions will extend five quarters, through June 30, 2016, in order to account for the shift in the capital plan cycle in 2016. Starting Jan. 1, 2016, the annual CCAR capital plan cycle will begin on Jan. 1, and BNY Mellon will be required to submit its capital plan to the Federal Reserve by April 5 of that year, and the Federal Reserve will respond to CCAR capital plans by June 30. For purposes of CCAR 2015, if a BHC receives a
non-objection to its capital plan, it generally may make the capital distributions included in its capital plan submission beginning on April 1, 2015, through June 30, 2016, without seeking prior approval from or providing prior notice to the Federal Reserve.
Money Market Fund Reforms
Regulators have focused on risks that money market funds (“MMFs”) may pose to financial stability. In July 2014, the Securities and Exchange Commission finalized rules (the “MMF Rules”) that will require institutional prime money market funds (including institutional municipal money market funds) to maintain a floating net asset value (“NAV”) based on the current market value of the securities in their portfolios rounded to the fourth decimal place. Previously, such funds could maintain a stable NAV of $1.00. Government MMFs and retail MMFs are exempt from these requirements and may continue to maintain a stable NAV. The MMF Rules also provide new tools to MMFs’ boards of directors to address a run on a fund. In particular the MMF Rules allow a MMF’s board of directors to impose liquidity fees of up to 2% or temporarily suspend redemptions for up to 10 days if a MMF’s level of weekly liquid assets falls below 30 percent of its total assets. Government MMFs are not required to adopt the liquidity fees and redemption gates provision, but they may opt to do so. In addition, there is a two year transition period before the floating NAV and the fees and gate requirements become effective.
Beyond these primary reforms, the MMF Rules also expand disclosure requirements, tighten the diversification requirements and impose additional stress testing requirements. There is an 18 month transition period before these requirements become effective. The MMF Rules also introduce a new Form N-CR, which would require MMFs to disclose certain events (for example, the imposition or removal of fees or gates, the primary consideration or factors taken into account by a board of directors, in its decision related to fees and gates, and portfolio security defaults). The MMF Rules establish a nine month transition period before reporting on Form N-CR is required.
The final MMF Rules are highly complex, and we are continuing to evaluate their impact. It is possible that the MMR Rules could result in changes to the size and composition of our AUM, AUC/A, and total deposits.
Resolution Planning
Large BHCs must develop and submit annually to the Federal Reserve and FDIC for review resolution plans for their rapid and orderly liquidation in the event of material financial distress or failure. We submitted our 2013 resolution plan in October 2013 and our 2014 resolution plan in July 2014. In August, 2014, the Federal Reserve and the FDIC announced completion of their reviews of the 2013 resolution plans submitted by 11 large, complex banking organizations (including BNY Mellon), referred to as the “first wave filers”, and notified the first wave filers that certain shortcomings in the 2013 resolution plans must be addressed in the 2015 resolution plans, which are required to be submitted on or before July 1, 2015. See the discussion of this matter in our 2013 Annual Report in “Risk Factors - Operational and Business Risk - We are subject to extensive government regulation and supervision and have been impacted by a significant amount of rulemaking as a result of the 2008 financial crisis.”
Expected Regulatory Initiatives
In addition to the aforementioned regulatory changes, we anticipate banking regulators and policymakers to propose new or modified regulations that will further alter the regulatory framework in which we operate and may have unforeseen or unintended adverse effects on us or the financial services industry more generally. Several expected regulatory proposals may impact BNY Mellon, including, but not limited to:
| |
• | Implementation of the Net Stable Funding Ratio, which is a longer-term liquidity coverage measure, in the U.S. |
| |
• | The development of formal regulations and related changes in supervisory practices to facilitate cross-border resolutions. Attendant to these changes may be the imposition of a “total loss-absorbing capacity” standard affecting the Company’s regulatory capital and the amount of holding company senior unsecured long-term debt outstanding. |
| |
• | Contribution requirements for the Single Resolution Fund and bank levies in Europe. |
| |
• | Limitations on certain single counterparty credit exposures. |
| |
• | Final standards in Europe implementing the European Market Infrastructure Regulation and Target2-Securities settlement system. |
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: Basel II.5 Market Risk Disclosures; Pillar 3 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, Directors Code of Conduct and the Charters of the Audit, 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.
|
|
Item 1. Financial Statements |
|
The Bank of New York Mellon Corporation (and its subsidiaries) |
|
Consolidated Income Statement (unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Quarter ended | | Year-to-date |
(in millions) | Sept. 30, 2014 |
| | June 30, 2014 |
| | Sept. 30, 2013 |
| | Sept. 30, 2014 |
| | Sept. 30, 2013 |
|
Fee and other revenue | | | | | | | | | |
Investment services fees: | | | | | | | | | |
Asset servicing | $ | 1,025 |
| | $ | 1,022 |
| | $ | 964 |
| | $ | 3,056 |
| | $ | 2,921 |
|
Clearing services | 337 |
| | 326 |
| | 315 |
| | 988 |
| | 940 |
|
Issuer services | 315 |
| | 231 |
| | 322 |
| | 775 |
| | 853 |
|
Treasury services | 142 |
| | 141 |
| | 137 |
| | 419 |
| | 417 |
|
Total investment services fees | 1,819 |
| | 1,720 |
| | 1,738 |
| | 5,238 |
| | 5,131 |
|
Investment management and performance fees | 881 |
| | 883 |
| | 821 |
| | 2,607 |
| | 2,491 |
|
Foreign exchange and other trading revenue | 153 |
| | 130 |
| | 160 |
| | 419 |
| | 528 |
|
Distribution and servicing | 44 |
| | 43 |
| | 43 |
| | 130 |
| | 137 |
|
Financing-related fees | 44 |
| | 44 |
| | 44 |
| | 126 |
| | 129 |
|
Investment and other income (a) | 890 |
| | 142 |
| | 151 |
| | 1,134 |
| | 524 |
|
Total fee revenue (a) | 3,831 |
| | 2,962 |
| | 2,957 |
| | 9,654 |
| | 8,940 |
|
Net securities gains — including other-than-temporary impairment | 21 |
| | 18 |
| | 24 |
| | 62 |
| | 107 |
|
Noncredit-related portion of other-than-temporary impairment (recognized in other comprehensive income) | 1 |
| | — |
| | 2 |
| | 2 |
| | 5 |
|
Net securities gains | 20 |
| | 18 |
| | 22 |
| | 60 |
| | 102 |
|
Total fee and other revenue (a) | 3,851 |
| | 2,980 |
| | 2,979 |
| | 9,714 |
| | 9,042 |
|
Operations of consolidated investment management funds | | | | | | | | | |
Investment income | 123 |
| | 141 |
| | 134 |
| | 402 |
| | 439 |
|
Interest of investment management fund note holders | 84 |
| | 95 |
| | 102 |
| | 281 |
| | 292 |
|
Income from consolidated investment management funds | 39 |
| | 46 |
| | 32 |
| | 121 |
| | 147 |
|
Net interest revenue | | | | | | | | | |
Interest revenue | 809 |
| | 811 |
| | 855 |
| | 2,432 |
| | 2,506 |
|
Interest expense | 88 |
| | 92 |
| | 83 |
| | 264 |
| | 258 |
|
Net interest revenue | 721 |
| | 719 |
| | 772 |
| | 2,168 |
| | 2,248 |
|
Provision for credit losses | (19 | ) | | (12 | ) | | 2 |
| | (49 | ) | | (41 | ) |
Net interest revenue after provision for credit losses | 740 |
| | 731 |
| | 770 |
| | 2,217 |
| | 2,289 |
|
Noninterest expense | | | | | | | | | |
Staff | 1,477 |
| | 1,439 |
| | 1,516 |
| | 4,427 |
| | 4,497 |
|
Professional, legal and other purchased services | 323 |
| | 314 |
| | 296 |
| | 949 |
| | 908 |
|
Software | 154 |
| | 154 |
| | 147 |
| | 460 |
| | 444 |
|
Net occupancy | 154 |
| | 152 |
| | 153 |
| | 460 |
| | 475 |
|
Distribution and servicing | 107 |
| | 112 |
| | 108 |
| | 326 |
| | 325 |
|
Furniture and equipment | 80 |
| | 82 |
| | 79 |
| | 247 |
| | 248 |
|
Sub-custodian | 67 |
| | 81 |
| | 71 |
| | 216 |
| | 212 |
|
Business development | 61 |
| | 68 |
| | 63 |
| | 193 |
| | 221 |
|
Other | 250 |
| | 347 |
| | 249 |
| | 820 |
| | 771 |
|
Amortization of intangible assets | 75 |
| | 75 |
| | 81 |
| | 225 |
| | 260 |
|
Merger and integration, litigation and restructuring charges | 220 |
| | 122 |
| | 16 |
| | 330 |
| | 68 |
|
Total noninterest expense | 2,968 |
| | 2,946 |
| | 2,779 |
| | 8,653 |
| | 8,429 |
|
Income | | | | | | | | | |
Income before income taxes (a) | 1,662 |
| | 811 |
| | 1,002 |
| | 3,399 |
| | 3,049 |
|
Provision for income taxes (a) | 556 |
| | 217 |
| | 19 |
| | 1,005 |
| | 1,420 |
|
Net income (a) | 1,106 |
| | 594 |
| | 983 |
| | 2,394 |
| | 1,629 |
|
Net (income) attributable to noncontrolling interests (includes $(23), $(17), $(8), $(60) and $(63) related to consolidated investment management funds, respectively) | (23 | ) | | (17 | ) | | (8 | ) | | (60 | ) | | (64 | ) |
Net income applicable to shareholders of The Bank of New York Mellon Corporation (a) | 1,083 |
| | 577 |
| | 975 |
| | 2,334 |
| | 1,565 |
|
Preferred stock dividends | (13 | ) | | (23 | ) | | (13 | ) | | (49 | ) | | (38 | ) |
Net income applicable to common shareholders of The Bank of New York Mellon Corporation (a) | $ | 1,070 |
| | $ | 554 |
| | $ | 962 |
| | $ | 2,285 |
| | $ | 1,527 |
|
| |
(a) | Results for the third quarter of 2013 and the first nine months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
|
|
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 |
(in millions) | Sept. 30, 2014 |
| | June 30, 2014 |
| | Sept. 30, 2013 |
| | Sept. 30, 2014 |
| | Sept. 30, 2013 |
|
Net income applicable to common shareholders of The Bank of New York Mellon Corporation (a) | $ | 1,070 |
| | $ | 554 |
| | $ | 962 |
| | $ | 2,285 |
| | $ | 1,527 |
|
Less: Earnings allocated to participating securities (a) | 20 |
| | 10 |
| | 18 |
| | 43 |
| | 27 |
|
Change in the excess of redeemable value over the fair value of noncontrolling interests | N/A |
| | N/A |
| | — |
| | N/A |
| | 1 |
|
Net income applicable to the common shareholders of The Bank of New York Mellon Corporation after required adjustments for the calculation of basic and diluted earnings per common share (a) | $ | 1,050 |
| | $ | 544 |
| | $ | 944 |
| | $ | 2,242 |
| | $ | 1,499 |
|
|
| | | | | | | | | | | | | | |
Average common shares and equivalents outstanding of The Bank of New York Mellon Corporation | Quarter ended | | Year-to-date |
(in thousands) | Sept. 30, 2014 |
| | June 30, 2014 |
| | Sept. 30, 2013 |
| | Sept. 30, 2014 |
| | Sept. 30, 2013 |
|
Basic | 1,126,946 |
| | 1,133,556 |
| | 1,148,724 |
| | 1,133,006 |
| | 1,153,327 |
|
Common stock equivalents | 20,807 |
| | 18,198 |
| | 17,236 |
| | 19,547 |
| | 16,242 |
|
Less: Participating securities | (12,882 | ) | | (11,954 | ) | | (13,281 | ) | | (12,835 | ) | | (12,618 | ) |
Diluted | 1,134,871 |
| | 1,139,800 |
| | 1,152,679 |
| | 1,139,718 |
| | 1,156,951 |
|
| | | | | | | | | |
Anti-dilutive securities (b) | 40,360 |
| | 45,784 |
| | 58,735 |
| | 45,368 |
| | 77,758 |
|
|
| | | | | | | | | | | | | | | | | | | |
Earnings per share applicable to the common shareholders of The Bank of New York Mellon Corporation (a)(c) | Quarter ended | | Year-to-date |
(in dollars) | Sept. 30, 2014 |
| | June 30, 2014 |
| | Sept. 30, 2013 |
| | Sept. 30, 2014 |
| | Sept. 30, 2013 |
|
Basic | $ | 0.93 |
| | $ | 0.48 |
| | $ | 0.82 |
| | $ | 1.98 |
| | $ | 1.30 |
|
Diluted | $ | 0.93 |
| | $ | 0.48 |
| | $ | 0.82 |
| | $ | 1.97 |
| | $ | 1.30 |
|
| |
(a) | Results for the third quarter of 2013 and the first nine months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
| |
(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, and the change in the excess of redeemable value over the fair value of noncontrolling interests, if applicable. |
N/A - Not applicable.
See accompanying Notes to Consolidated Financial Statements.
|
|
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Comprehensive Income Statement (unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Quarter ended | | Year-to-date |
(in millions) | Sept. 30, 2014 |
| | June 30, 2014 |
| | Sept. 30, 2013 |
| | Sept. 30, 2014 |
| | Sept. 30, 2013 |
|
Net income (a) | $ | 1,106 |
| | $ | 594 |
| | $ | 983 |
| | $ | 2,394 |
| | $ | 1,629 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Foreign currency translation adjustments | (589 | ) | | 77 |
| | 385 |
| | (475 | ) | | 81 |
|
Unrealized gain (loss) on assets available-for-sale: | | | | | | | | | |
Unrealized gain (loss) arising during the period | 4 |
| | 210 |
| | (72 | ) | | 376 |
| | (814 | ) |
Reclassification adjustment | (13 | ) | | (14 | ) | | (2 | ) | | (40 | ) | | (49 | ) |
Total unrealized gain (loss) on assets available-for-sale | (9 | ) | | 196 |
| | (74 | ) | | 336 |
| | (863 | ) |
Defined benefit plans: | | | | | | | | | |
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost | 19 |
| | 17 |
| | 31 |
| | 55 |
| | 105 |
|
Total defined benefit plans | 19 |
| | 17 |
| | 31 |
| | 55 |
| | 105 |
|
Net unrealized gain (loss) on cash flow hedges | (12 | ) | | (2 | ) | | 12 |
| | (13 | ) | | 4 |
|
Total other comprehensive income (loss), net of tax (b) | (591 | ) | | 288 |
| | 354 |
| | (97 | ) | | (673 | ) |
Net (income) attributable to noncontrolling interests | (23 | ) | | (17 | ) | | (8 | ) | | (60 | ) | | (64 | ) |
Other comprehensive (income) loss attributable to noncontrolling interests | 77 |
| | (1 | ) | | (42 | ) | | 73 |
| | (23 | ) |
Net comprehensive income | $ | 569 |
| | $ | 864 |
| | $ | 1,287 |
| | $ | 2,310 |
| | $ | 869 |
|
| |
(a) | Results for the third quarter of 2013 and the first nine months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
| |
(b) | Other comprehensive income (loss) attributable to The Bank of New York Mellon Corporation shareholders was $(514) million for the quarter ended Sept. 30, 2014, $287 million for the quarter ended June 30, 2014 , $312 million for the quarter ended Sept. 30, 2013, $(24) million for the nine months ended Sept. 30, 2014 and $(696) million for the nine months ended Sept. 30, 2013. |
See accompanying Notes to Consolidated Financial Statements.
|
|
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Balance Sheet (unaudited)
|
| | | | | | | |
| Sept. 30, |
| | Dec. 31, |
|
(dollars in millions, except per share amounts) | 2014 |
| | 2013 |
|
Assets | | | |
Cash and due from: | | | |
Banks | $ | 6,410 |
| | $ | 6,460 |
|
Interest-bearing deposits with the Federal Reserve and other central banks | 92,317 |
| | 104,359 |
|
Interest-bearing deposits with banks | 30,341 |
| | 35,300 |
|
Federal funds sold and securities purchased under resale agreements | 17,375 |
| | 9,161 |
|
Securities: | | | |
Held-to-maturity (fair value of $20,167 and $19,443) | 20,137 |
| | 19,743 |
|
Available-for-sale | 95,559 |
| | 79,309 |
|
Total securities | 115,696 |
| | 99,052 |
|
Trading assets | 11,613 |
| | 12,098 |
|
Loans | 57,527 |
| | 51,657 |
|
Allowance for loan losses | (191 | ) | | (210 | ) |
Net loans | 57,336 |
| | 51,447 |
|
Premises and equipment | 1,351 |
| | 1,655 |
|
Accrued interest receivable | 565 |
| | 621 |
|
Goodwill | 17,992 |
| | 18,073 |
|
Intangible assets | 4,215 |
| | 4,452 |
|
Other assets (includes $1,850 and $1,728, at fair value) | 21,523 |
| | 20,566 |
|
Subtotal assets of operations | 376,734 |
| | 363,244 |
|
Assets of consolidated investment management funds, at fair value: | | | |
Trading assets | 8,823 |
| | 10,397 |
|
Other assets | 739 |
| | 875 |
|
Subtotal assets of consolidated investment management funds, at fair value | 9,562 |
| | 11,272 |
|
Total assets | $ | 386,296 |
|
| $ | 374,516 |
|
Liabilities | | | |
Deposits: | | | |
Noninterest-bearing (principally U.S. offices) | $ | 101,105 |
| | $ | 95,475 |
|
Interest-bearing deposits in U.S. offices | 56,740 |
| | 56,640 |
|
Interest-bearing deposits in Non-U.S. offices | 107,051 |
| | 109,014 |
|
Total deposits | 264,896 |
| | 261,129 |
|
Federal funds purchased and securities sold under repurchase agreements | 9,687 |
| | 9,648 |
|
Trading liabilities | 7,734 |
| | 6,945 |
|
Payables to customers and broker-dealers | 20,155 |
| | 15,707 |
|
Commercial paper | — |
| | 96 |
|
Other borrowed funds | 852 |
| | 663 |
|
Accrued taxes and other expenses | 6,482 |
| | 6,996 |
|
Other liabilities (including allowance for lending-related commitments of $97 and $134, also includes $235 and $503, at fair value) | 7,169 |
| | 4,827 |
|
Long-term debt (includes $337 and $321, at fair value) | 21,583 |
| | 19,864 |
|
Subtotal liabilities of operations | 338,558 |
| | 325,875 |
|
Liabilities of consolidated investment management funds, at fair value: | | | |
Trading liabilities | 8,130 |
| | 10,085 |
|
Other liabilities | 10 |
| | 46 |
|
Subtotal liabilities of consolidated investment management funds, at fair value | 8,140 |
| | 10,131 |
|
Total liabilities | 346,698 |
| | 336,006 |
|
Temporary equity | | | |
Redeemable noncontrolling interests | 246 |
| | 230 |
|
Permanent equity | | | |
Preferred stock – par value $0.01 per share; authorized 100,000,000 shares; issued 15,826 and 15,826 shares | 1,562 |
| | 1,562 |
|
Common stock – par value $0.01 per share; authorized 3,500,000,000 shares; issued 1,286,670,537 and 1,268,036,220 shares | 13 |
| | 13 |
|
Additional paid-in capital | 24,499 |
| | 24,002 |
|
Retained earnings | 17,670 |
| | 15,952 |
|
Accumulated other comprehensive loss, net of tax | (916 | ) | | (892 | ) |
Less: Treasury stock of 160,960,855 and 125,786,430 common shares, at cost | (4,377 | ) | | (3,140 | ) |
Total The Bank of New York Mellon Corporation shareholders’ equity | 38,451 |
| | 37,497 |
|
Nonredeemable noncontrolling interests of consolidated investment management funds | 901 |
| | 783 |
|
Total permanent equity | 39,352 |
| | 38,280 |
|
Total liabilities, temporary equity and permanent equity | $ | 386,296 |
| | $ | 374,516 |
|
See accompanying Notes to Consolidated Financial Statements.
|
|
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Statement of Cash Flows (unaudited)
|
| | | | | | | |
| Nine months ended Sept. 30, |
(in millions) | 2014 |
| | 2013 |
|
Operating activities | | | |
Net income (a) | $ | 2,394 |
| | $ | 1,629 |
|
Net (income) attributable to noncontrolling interests | (60 | ) | | (64 | ) |
Net income applicable to shareholders of The Bank of New York Mellon Corporation (a) | 2,334 |
| | 1,565 |
|
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | |
Provision for credit losses | (49 | ) | | (41 | ) |
Pension plan contributions | (37 | ) | | (30 | ) |
Depreciation and amortization | 976 |
| | 1,051 |
|
Deferred tax (benefit) (a) | (510 | ) | | 314 |
|
Net securities (gains) and venture capital (income) | (65 | ) | | (103 | ) |
Change in trading activities | 1,154 |
| | (1,866 | ) |
Change in accruals and other, net (a) | (505 | ) | | (945 | ) |
Net cash provided by (used for) operating activities | 3,298 |
| | (55 | ) |
Investing activities | | | |
Change in interest-bearing deposits with banks | 4,950 |
| | 3,997 |
|
Change in interest-bearing deposits with the Federal Reserve and other central banks | 12,042 |
| | (5,409 | ) |
Purchases of securities held-to-maturity | (2,132 | ) | | (6,737 | ) |
Paydowns of securities held-to-maturity | 1,399 |
| | 1,107 |
|
Maturities of securities held-to-maturity | 99 |
| | 31 |
|
Purchases of securities available-for-sale | (51,428 | ) | | (19,787 | ) |
Sales of securities available-for-sale | 25,253 |
| | 14,824 |
|
Paydowns of securities available-for-sale | 5,424 |
| | 7,854 |
|
Maturities of securities available-for-sale | 4,417 |
| | 2,339 |
|
Net change in loans | (6,060 | ) | | (3,586 | ) |
Sales of loans and other real estate | 259 |
| | 104 |
|
Change in federal funds sold and securities purchased under resale agreements | (8,214 | ) | | (2,598 | ) |
Change in seed capital investments | (240 | ) | | (144 | ) |
Purchases of premises and equipment/capitalized software | (595 | ) | | (372 | ) |
Proceeds from the sale of premises and equipment | 585 |
| | — |
|
Acquisitions, net of cash | (25 | ) | | (17 | ) |
Dispositions, net of cash | 64 |
| | 84 |
|
Other, net | 3,543 |
| | (227 | ) |
Net cash (used for) investing activities | (10,659 | ) | | (8,537 | ) |
Financing activities | | | |
Change in deposits | 2,442 |
| | 8,741 |
|
Change in federal funds purchased and securities sold under repurchase agreements | 39 |
| | 2,310 |
|
Change in payables to customers and broker-dealers | 4,448 |
| | (802 | ) |
Change in other borrowed funds | 275 |
| | (541 | ) |
Change in commercial paper | (96 | ) | | 1,513 |
|
Net proceeds from the issuance of long-term debt | 4,686 |
| | 2,696 |
|
Repayments of long-term debt | (2,921 | ) | | (1,928 | ) |
Proceeds from the exercise of stock options | 276 |
| | 171 |
|
Issuance of common stock | 20 |
| | 19 |
|
Issuance of preferred stock | — |
| | 494 |
|
Treasury stock acquired | (1,237 | ) | | (705 | ) |
Common cash dividends paid | (566 | ) | | (505 | ) |
Preferred cash dividends paid | (49 | ) | | (38 | ) |
Other, net | 94 |
| | (181 | ) |
Net cash provided by financing activities | 7,411 |
| | 11,244 |
|
Effect of exchange rate changes on cash | (100 | ) | | (75 | ) |
Change in cash and due from banks | | | |
Change in cash and due from banks | (50 | ) | | 2,577 |
|
Cash and due from banks at beginning of period | 6,460 |
| | 4,727 |
|
Cash and due from banks at end of period | $ | 6,410 |
| | $ | 7,304 |
|
Supplemental disclosures | | | |
Interest paid | $ | 291 |
| | $ | 286 |
|
Income taxes paid | 514 |
| | 305 |
|
Income taxes refunded | 142 |
| | 24 |
|
| |
(a) | Information for the nine months ended Sept. 30, 2013 was restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
See accompanying Notes to Consolidated Financial Statements.
|
|
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 amounts) | Preferred stock |
| Common stock |
| Additional paid-in capital |
| Retained earnings |
| Accumulated other comprehensive income (loss), net of tax |
| Treasury stock |
|
Dec. 31, 2013 | $ | 1,562 |
| $ | 13 |
| $ | 24,002 |
| $ | 15,952 |
| $ | (892 | ) | $ | (3,140 | ) | $ | 783 |
| $ | 38,280 |
| (a) | $ | 230 |
|
Shares issued to shareholders of noncontrolling interests | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | 49 |
|
Redemption of subsidiary shares from noncontrolling interests | — |
| — |
| (31 | ) | — |
| — |
| — |
| — |
| (31 | ) | | (54 | ) |
Other net changes in noncontrolling interests | — |
| — |
| 10 |
| — |
| — |
| — |
| 126 |
| 136 |
| | 26 |
|
Net income | — |
| — |
| — |
| 2,334 |
| — |
| — |
| 60 |
| 2,394 |
| | — |
|
Other comprehensive income (loss) | — |
| — |
| — |
| — |
| (24 | ) | — |
| (68 | ) | (92 | ) | | (5 | ) |
Dividends: | | | | | | | | | | |
Common stock at $0.49 per share | — |
| — |
| — |
| (567 | ) | — |
| — |
| — |
| (567 | ) | | — |
|
Preferred stock | — |
| — |
| — |
| (49 | ) | — |
| — |
| — |
| (49 | ) | | — |
|
Repurchase of common stock | — |
| — |
| — |
| — |
| — |
| (1,237 | ) | — |
| (1,237 | ) | | — |
|
Common stock issued under: | | | | | | | | | | |
Employee benefit plans | — |
| — |
| 18 |
| — |
| — |
| — |
| — |
| 18 |
| | — |
|
Direct stock purchase and dividend reinvestment plan | — |
| — |
| 16 |
| — |
| — |
| — |
| — |
| 16 |
| | — |
|
Stock awards and options exercised | — |
| — |
| 484 |
| — |
| — |
| — |
| — |
| 484 |
| | — |
|
Balance at Sept. 30, 2014 | $ | 1,562 |
| $ | 13 |
| $ | 24,499 |
| $ | 17,670 |
| $ | (916 | ) | $ | (4,377 | ) | $ | 901 |
| $ | 39,352 |
| (a) | $ | 246 |
|
| |
(a) | Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $35,935 million at Dec. 31, 2013 and $36,889 million at Sept. 30, 2014. |
See accompanying Notes to Consolidated Financial Statements.
|
|
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 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, 2013. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with current period presentation.
In the first quarter of 2014, BNY Mellon elected to early adopt the new accounting guidance included in Accounting Standards Update (“ASU”) 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects - a Consensus of the FASB Emerging Issues Task Force.” As a result, we restated the prior period financial statements to reflect the impact of the retrospective application of the new accounting guidance. See Note 2 of the Notes to Consolidated Financial Statements for additional information.
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 other-than-temporary impairments, goodwill and
intangible assets 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.
Subsequent Event
As previously disclosed, our 2006 and 2009 tax years remain open primarily to permit a tax carryback claim. On Nov. 4, 2014, the IRS notified us that our carryback claim was approved and they are processing the refund. We are determining the financial statement impact of the carryback and associated interest but estimate the after-tax benefit will range between $160 million to $190 million in the fourth quarter of 2014.
Note 2 - Accounting changes and new accounting guidance
ASU - 2014-01 - Accounting for Investments in Qualified Affordable Housing Projects - a Consensus of the FASB Emerging Issues Task Force
In January 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects - a Consensus of the FASB Emerging Issues Task Force.” This ASU permits entities that invest in a qualified affordable housing project through a limited liability entity to elect to account for the income statement effects of such investments using the proportional amortization method if certain conditions are met. The impact to the income statement was recorded in income tax expense. Investments in qualified affordable housing projects not accounted for using the proportional amortization method were accounted for as an equity method investment or cost method investment. In addition, the Company included the value of commitments to fund qualified affordable housing projects on the balance sheet. These investments are recorded in other assets. In the first quarter of 2014, we restated the prior period financial statements to reflect the impact of the retrospective application of the new accounting guidance.
|
|
Notes to Consolidated Financial Statements (continued) |
|
The table below presents the impact of the new accounting guidance on our previously reported earnings per share applicable to the common shareholders.
|
| | | | | | | | | | | | | | | |
Earnings per share applicable to the common shareholders of The Bank of New York Mellon Corporation | As previously reported | | As revised |
(in dollars) | 3Q13 |
| | YTD13 |
| | 3Q13 |
| | YTD13 |
|
Basic | $ | 0.83 |
| | $ | 1.31 |
| | $ | 0.82 |
| | $ | 1.30 |
|
Diluted | $ | 0.82 |
| | $ | 1.30 |
| | $ | 0.82 |
| | $ | 1.30 |
|
The table below presents the impact of the new accounting guidance on our previously reported income statements.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Income statement | As previously reported | | Adjustments | | As revised |
(in millions) | 3Q13 |
| | YTD13 |
| | 3Q13 |
| | YTD13 |
| | 3Q13 |
| | YTD13 |
|
Investment and other income | $ | 135 |
| | $ | 476 |
| | $ | 16 |
| | $ | 48 |
| | $ | 151 |
| | $ | 524 |
|
Total fee revenue | 2,941 |
| | 8,892 |
| | 16 |
| | 48 |
| | 2,957 |
| | 8,940 |
|
Total fee and other revenue | 2,963 |
| | 8,994 |
| | 16 |
| | 48 |
| | 2,979 |
| | 9,042 |
|
Income before income taxes | 986 |
| | 3,001 |
| | 16 |
| | 48 |
| | 1,002 |
| | 3,049 |
|
Provision (benefit) for income taxes | (2 | ) | | 1,365 |
| | 21 |
| | 55 |
| | 19 |
| | 1,420 |
|
Net income (loss) | 988 |
| | 1,636 |
| | (5 | ) | | (7 | ) | | 983 |
| | 1,629 |
|
Net income (loss) applicable to shareholders of The Bank of New York Mellon Corporation | 980 |
| | 1,572 |
| | (5 | ) | | (7 | ) | | 975 |
| | 1,565 |
|
Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation | 967 |
| | 1,534 |
| | (5 | ) | | (7 | ) | | 962 |
| | 1,527 |
|
Note 3 - Acquisitions and dispositions
We sometimes structure our acquisitions with both an initial payment and later contingent payments tied to post-closing revenue or income growth. There were no contingent payments in the third quarter of 2014. Contingent payments were $1 million in the first nine months of 2014.
At Sept. 30, 2014, we were potentially obligated to pay additional consideration which, using reasonable assumptions for the performance of the acquired companies and joint ventures based on contractual agreements, could amount to $5 million over the next 3 months. The acquisitions and dispositions described below did not have a material impact on BNY Mellon’s results of operations.
Acquisitions in 2014
On May 1, 2014, BNY Mellon acquired the remaining 65% interest of HedgeMark International, LLC for $26 million. Since 2011, BNY Mellon held a 35% ownership stake in HedgeMark. Goodwill related to this acquisition totaled $47 million and is included in the Investment Services business. The customer relationship intangible asset related to this acquisition is included in our Investment Services business and totaled $1 million.
Dispositions in 2014
On April 23, 2014, BNY Mellon sold the subsidiary that conducts corporate trust business in Mexico that was part of our Investment Services business, for $65 million. As a result of this sale, we recorded an after-tax gain of $4 million. In addition, goodwill of $8 million and customer relationship intangible assets of $1 million were removed from the balance sheet as a result of this sale.
Dispositions in 2013
On May 31, 2013, BNY Mellon sold SourceNet Solutions, our accounts payable outsourcing support services provider that was part of our Investment Services business, for $11 million. As a result of this sale, we recorded a pre-tax gain of $2 million and an after-tax gain of $10 million.
On Sept. 27, 2013, Newton Management Limited, together with Newton Investment Management Limited, an investment boutique of BNY Mellon, sold Newton’s private client business, for $120 million. As a result of this sale, we recorded a pre-tax gain of $27 million and an after-tax gain of $5 million. In addition, goodwill of $69 million and customer relationship intangible assets of $7 million were removed from the balance sheet as a result of this sale.
|
|
Notes to Consolidated Financial Statements (continued) |
|
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, 2014 and Dec. 31, 2013.
|
| | | | | | | | | | | | | |
Securities at Sept. 30, 2014 | Amortized cost |
| Gross unrealized | Fair value |
| |
(in millions) | Gains |
| Losses |
|
Available-for-sale: | | | | | |
U.S. Treasury | $ | 21,078 |
| $ | 112 |
| $ | 89 |
| $ | 21,101 |
| |
U.S. Government agencies | 360 |
| 4 |
| 3 |
| 361 |
| |
State and political subdivisions | 5,321 |
| 108 |
| 25 |
| 5,404 |
| |
Agency RMBS | 30,286 |
| 327 |
| 405 |
| 30,208 |
| |
Non-agency RMBS | 990 |
| 41 |
| 26 |
| 1,005 |
| |
Other RMBS | 1,851 |
| 33 |
| 25 |
| 1,859 |
| |
Commercial MBS | 1,993 |
| 43 |
| 12 |
| 2,024 |
| |
Agency commercial MBS | 2,883 |
| 18 |
| 14 |
| 2,887 |
| |
Asset-backed CLOs | 1,984 |
| 12 |
| — |
| 1,996 |
| |
Other asset-backed securities | 3,024 |
| 7 |
| 6 |
| 3,025 |
| |
Foreign covered bonds | 2,863 |
| 87 |
| 1 |
| 2,949 |
| |
Corporate bonds | 1,636 |
| 44 |
| 10 |
| 1,670 |
| |
Other debt securities | 17,571 |
| 171 |
| 7 |
| 17,735 |
| (a) |
Equity securities | 96 |
| 1 |
| — |
| 97 |
| |
Money market funds | 789 |
| — |
| — |
| 789 |
| |
Non-agency RMBS (b) | 1,916 |
| 537 |
| 4 |
| 2,449 |
| |
Total securities available-for-sale (c) | 94,641 |
| 1,545 |
| 627 |
| 95,559 |
| |
Held-to-maturity: | | | | | |
U.S. Treasury | 4,166 |
| 27 |
| 44 |
| 4,149 |
| |
U.S. Government agencies | 344 |
| — |
| 6 |
| 338 |
| |
State and political subdivisions | 29 |
| 1 |
| — |
| 30 |
| |
Agency RMBS | 14,127 |
| 131 |
| 94 |
| 14,164 |
| |
Non-agency RMBS | 157 |
| 10 |
| 2 |
| 165 |
| |
Other RMBS | 337 |
| 4 |
| 11 |
| 330 |
| |
Commercial MBS | 14 |
| — |
| — |
| 14 |
| |
Other securities | 963 |
| 14 |
| — |
| 977 |
| |
Total securities held-to-maturity | 20,137 |
| 187 |
| 157 |
| 20,167 |
| |
Total securities | $ | 114,778 |
| $ | 1,732 |
| $ | 784 |
| $ | 115,726 |
| |
| |
(a) | Includes $15.7 billion, at fair value, of government-sponsored and guaranteed entities, and sovereign debt. |
| |
(b) | Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011. |
| |
(c) | Includes gross unrealized gains of $64 million and gross unrealized losses of $296 million recorded in accumulated other comprehensive income primarily related to Agency RMBS that were transferred from available-for-sale to held-to-maturity in 2013. The unrealized gains and losses will be amortized into net interest revenue over the estimated lives of the securities. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | |
Securities at Dec. 31, 2013 | Amortized cost |
| Gross unrealized | Fair value |
| |
(in millions) | Gains |
| Losses |
|
Available-for-sale: | | | | | |
U.S. Treasury | $ | 13,363 |
| $ | 94 |
| $ | 605 |
| $ | 12,852 |
| |
U.S. Government agencies | 937 |
| 16 |
| 5 |
| 948 |
| |
State and political subdivisions | 6,706 |
| 60 |
| 92 |
| 6,674 |
| |
Agency RMBS | 25,564 |
| 307 |
| 550 |
| 25,321 |
| |
Non-agency RMBS | 1,148 |
| 44 |
| 50 |
| 1,142 |
| |
Other RMBS | 2,299 |
| 43 |
| 57 |
| 2,285 |
| |
Commercial MBS | 2,324 |
| 60 |
| 27 |
| 2,357 |
| |
Agency commercial MBS | 1,822 |
| 1 |
| 34 |
| 1,789 |
| |
Asset-backed CLOs | 1,551 |
| 11 |
| — |
| 1,562 |
| |
Other asset-backed securities | 2,894 |
| 6 |
| 9 |
| 2,891 |
| |
Foreign covered bonds | 2,798 |
| 73 |
| — |
| 2,871 |
| |
Corporate bonds | 1,808 |
| 32 |
| 25 |
| 1,815 |
| |
Other debt securities | 13,077 |
| 91 |
| 18 |
| 13,150 |
| (a) |
Equity securities | 18 |
| 1 |
| — |
| 19 |
| |
Money market funds | 938 |
| — |
| — |
| 938 |
| |
Non-agency RMBS (b) | 2,131 |
| 567 |
| 3 |
| 2,695 |
| |
Total securities available-for-sale (c) | 79,378 |
| 1,406 |
| 1,475 |
| 79,309 |
| |
Held-to-maturity: | | | | | |
U.S. Treasury | 3,324 |
| 28 |
| 84 |
| 3,268 |
| |
U.S. Government agencies | 419 |
| — |
| 13 |
| 406 |
| |
State and political subdivisions | 44 |
| — |
| — |
| 44 |
| |
Agency RMBS | 14,568 |
| 20 |
| 236 |
| 14,352 |
| |
Non-agency RMBS | 186 |
| 10 |
| 3 |
| 193 |
| |
Other RMBS | 466 |
| 3 |
| 20 |
| 449 |
| |
Commercial MBS | 16 |
| 1 |
| — |
| 17 |
| |
Other securities | 720 |
| — |
| 6 |
| 714 |
| |
Total securities held-to-maturity | 19,743 |
| 62 |
| 362 |
| 19,443 |
| |
Total securities | $ | 99,121 |
| $ | 1,468 |
| $ | 1,837 |
| $ | 98,752 |
| |
| |
(a) | Includes $11.4 billion, at fair value, of government-sponsored and guaranteed entities, and sovereign debt. |
| |
(b) | Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011. |
| |
(c) | Includes gross unrealized gains of $74 million and gross unrealized losses of $343 million recorded in accumulated other comprehensive income primarily related to Agency RMBS that were transferred from available-for-sale to held-to-maturity in 2013. The unrealized gains and losses will be amortized into net interest revenue over the estimated lives of the securities. |
The following table presents the gross securities gains, losses and impairments.
|
| | | | | | | | | | | | | | | |
Net securities gains (losses) | | | | |
(in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
Realized gross gains | $ | 23 |
| $ | 20 |
| $ | 29 |
| $ | 73 |
| $ | 137 |
|
Realized gross losses | (1 | ) | — |
| (4 | ) | (4 | ) | (10 | ) |
Recognized gross impairments | (2 | ) | (2 | ) | (3 | ) | (9 | ) | (25 | ) |
Total net securities gains | $ | 20 |
| $ | 18 |
| $ | 22 |
| $ | 60 |
| $ | 102 |
|
Temporarily impaired securities
At Sept. 30, 2014, substantially all of the unrealized losses on the investment securities portfolio were attributable to an increase in interest rates and credit spreads widening since purchase. We do not intend to sell these securities and it is not more likely than not that we will have to sell these securities.
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.
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | | |
Temporarily impaired securities at Sept. 30, 2014 | 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 | $ | 8,717 |
| $ | 20 |
| | $ | 2,870 |
| $ | 69 |
| | $ | 11,587 |
| $ | 89 |
|
U.S. Government agencies | — |
| — |
| | 98 |
| 3 |
| | 98 |
| 3 |
|
State and political subdivisions | 126 |
| 18 |
| | 471 |
| 7 |
| | 597 |
| 25 |
|
Agency RMBS | 6,492 |
| 26 |
| | 7,136 |
| 379 |
| | 13,628 |
| 405 |
|
Non-agency RMBS | 48 |
| — |
| | 400 |
| 26 |
| | 448 |
| 26 |
|
Other RMBS | 159 |
| — |
| | 512 |
| 25 |
| | 671 |
| 25 |
|
Commercial MBS | 208 |
| 1 |
| | 441 |
| 11 |
| | 649 |
| 12 |
|
Agency commercial MBS | 631 |
| 2 |
| | 592 |
| 12 |
| | 1,223 |
| 14 |
|
Other asset-backed securities | 636 |
| 1 |
| | 586 |
| 5 |
| | 1,222 |
| 6 |
|
Foreign covered bonds | 342 |
| 1 |
| | — |
| — |
| | 342 |
| 1 |
|
Corporate bonds | 22 |
| — |
| | 236 |
| 10 |
| | 258 |
| 10 |
|
Other debt securities | 1,568 |
| 1 |
| | 326 |
| 6 |
| | 1,894 |
| 7 |
|
Non-agency RMBS (a) | 25 |
| 1 |
| | 45 |
| 3 |
| | 70 |
| 4 |
|
Total securities available-for-sale (b) | $ | 18,974 |
| $ | 71 |
| | $ | 13,713 |
| $ | 556 |
| | $ | 32,687 |
| $ | 627 |
|
Held-to-maturity: | | | | | | | | |
U.S. Treasury | $ | 1,009 |
| $ | 9 |
| | $ | 1,782 |
| $ | 35 |
| | $ | 2,791 |
| $ | 44 |
|
U.S. Government agencies | — |
| — |
| | 337 |
| 6 |
| | 337 |
| 6 |
|
Agency RMBS | 1,651 |
| 8 |
| | 5,260 |
| 86 |
| | 6,911 |
| 94 |
|
Non-agency RMBS | 1 |
| — |
| | 25 |
| 2 |
| | 26 |
| 2 |
|
Other RMBS | — |
| — |
| | 233 |
| 11 |
| | 233 |
| 11 |
|
Total securities held-to-maturity | $ | 2,661 |
| $ | 17 |
| | $ | 7,637 |
| $ | 140 |
| | $ | 10,298 |
| $ | 157 |
|
Total temporarily impaired securities | $ | 21,635 |
| $ | 88 |
| | $ | 21,350 |
| $ | 696 |
| | $ | 42,985 |
| $ | 784 |
|
| |
(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 $296 million recorded in accumulated other comprehensive income primarily related to Agency RMBS that were transferred from available-for-sale to held-to-maturity in 2013. The unrealized gains and losses will be amortized into net interest revenue over the estimated lives of the securities. |
|
| | | | | | | | | | | | | | | | | | | | |
Temporarily impaired securities at Dec. 31, 2013 | 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 | $ | 7,719 |
| $ | 605 |
| | $ | — |
| $ | — |
| | $ | 7,719 |
| $ | 605 |
|
U.S. Government agencies | 97 |
| 5 |
| | — |
| — |
| | 97 |
| 5 |
|
State and political subdivisions | 2,374 |
| 55 |
| | 222 |
| 37 |
| | 2,596 |
| 92 |
|
Agency RMBS | 12,011 |
| 226 |
| | 83 |
| 324 |
| | 12,094 |
| 550 |
|
Non-agency RMBS | 102 |
| 7 |
| | 592 |
| 43 |
| | 694 |
| 50 |
|
Other RMBS | 93 |
| 14 |
| | 614 |
| 43 |
| | 707 |
| 57 |
|
Commercial MBS | 517 |
| 21 |
| | 174 |
| 6 |
| | 691 |
| 27 |
|
Agency commercial MBS | 1,390 |
| 34 |
| | — |
| — |
| | 1,390 |
| 34 |
|
Other asset-backed securities | 1,529 |
| 9 |
| | 38 |
| — |
| | 1,567 |
| 9 |
|
Corporate bonds | 612 |
| 25 |
| | — |
| — |
| | 612 |
| 25 |
|
Other debt securities | 2,976 |
| 18 |
| | — |
| — |
| | 2,976 |
| 18 |
|
Non-agency RMBS (a) | 59 |
| 1 |
| | 22 |
| 2 |
| | 81 |
| 3 |
|
Total securities available-for-sale (b) | $ | 29,479 |
| $ | 1,020 |
|
| $ | 1,745 |
| $ | 455 |
|
| $ | 31,224 |
| $ | 1,475 |
|
Held-to-maturity: | | | | | | | | |
U.S. Treasury | $ | 2,278 |
| $ | 84 |
| | $ | — |
| $ | — |
| | $ | 2,278 |
| $ | 84 |
|
U.S. Government agencies | 406 |
| 13 |
| | — |
| — |
| | 406 |
| 13 |
|
Agency RMBS | 12,639 |
| 236 |
| | — |
| — |
| | 12,639 |
| 236 |
|
Non-agency RMBS | 10 |
| — |
| | 65 |
| 3 |
| | 75 |
| 3 |
|
Other RMBS | — |
| — |
| | 261 |
| 20 |
| | 261 |
| 20 |
|
Other securities | 641 |
| 6 |
| | — |
| — |
| | 641 |
| 6 |
|
Total securities held-to-maturity | $ | 15,974 |
| $ | 339 |
|
| $ | 326 |
| $ | 23 |
|
| $ | 16,300 |
| $ | 362 |
|
Total temporarily impaired securities | $ | 45,453 |
| $ | 1,359 |
|
| $ | 2,071 |
| $ | 478 |
|
| $ | 47,524 |
| $ | 1,837 |
|
| |
(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 $343 million recorded in accumulated other comprehensive income primarily related to Agency RMBS that were transferred from available-for-sale to held-to-maturity in 2013. The unrealized gains and losses will be amortized into net interest revenue over the estimated lives of the securities. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
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, 2014.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Maturity distribution and yield on investment securities at Sept. 30, 2014 | 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 | $ | 2,418 |
| 0.21 | % | | $ | 135 |
| 1.75 | % | | $ | 243 |
| 1.30 | % | | $ | 7,227 |
| 0.81 | % | | $ | — |
| — | % | | $ | 10,023 |
|
Over 1 through 5 years | 13,176 |
| 0.86 |
| | 137 |
| 2.09 |
| | 3,079 |
| 2.15 |
| | 12,934 |
| 1.09 |
| | — |
| — |
| | 29,326 |
|
Over 5 through 10 years | 1,358 |
| 2.83 |
| | 89 |
| 1.52 |
| | 1,783 |
| 3.51 |
| | 2,183 |
| 2.38 |
| | — |
| — |
| | 5,413 |
|
Over 10 years | 4,149 |
| 3.12 |
| | — |
| — |
| | 299 |
| 2.76 |
| | 10 |
| 3.16 |
| | — |
| — |
| | 4,458 |
|
Mortgage-backed securities | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 40,432 |
| 2.35 |
| | 40,432 |
|
Asset-backed securities | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 5,021 |
| 1.09 |
| | 5,021 |
|
Equity securities (b) | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 886 |
| — |
| | 886 |
|
Total | $ | 21,101 |
| 1.35 | % | | $ | 361 |
| 1.82 | % | | $ | 5,404 |
| 2.59 | % | | $ | 22,354 |
| 1.13 | % | | $ | 46,339 |
| 2.17 | % | | $ | 95,559 |
|
Securities held-to-maturity: | | | | | | | | | | | | | | | | |
One year or less | $ | 150 |
| 0.28 | % | | $ | — |
| — | % | | $ | 1 |
| 3.80 | % | | $ | 3 |
| 0.03 | % | | $ | — |
| — | % | | $ | 154 |
|
Over 1 through 5 years | 2,858 |
| 1.27 |
| | 233 |
| 1.03 |
| | — |
| — |
| | 739 |
| 0.62 |
| | — |
| — |
| | 3,830 |
|
Over 5 through 10 years | 1,158 |
| 2.21 |
| | 111 |
| 1.61 |
| | 10 |
| 6.92 |
| | 221 |
| 0.94 |
| | — |
| — |
| | 1,500 |
|
Over 10 years | — |
| — |
| | — |
| — |
| | 18 |
| 4.34 |
| | — |
| — |
| | — |
| — |
| | 18 |
|
Mortgage-backed securities | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 14,635 |
| 2.69 |
| | 14,635 |
|
Total | $ | 4,166 |
| 1.49 | % | | $ | 344 |
| 1.21 | % | | $ | 29 |
| 5.16 | % | | $ | 963 |
| 0.69 | % | | $ | 14,635 |
| 2.69 | % | | $ | 20,137 |
|
| |
(a) | Yields are based upon the amortized cost of securities. |
| |
(b) | Includes money market funds. |
Other-than-temporary impairment
We routinely conduct periodic reviews of all securities using economic models to identify and evaluate each investment security to determine whether OTTI has occurred. 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, 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, 2014 and Dec. 31, 2013.
|
| | | | | | | | | | | |
Projected weighted-average default rates and loss severities |
| Sept. 30, 2014 | | Dec. 31, 2013 |
| Default rate |
| | Severity |
| | Default rate |
| | Severity |
|
Alt-A | 38 | % | | 58 | % | | 40 | % | | 57 | % |
Subprime | 55 | % | | 74 | % | | 58 | % | | 71 | % |
Prime | 23 | % | | 42 | % | | 22 | % | | 42 | % |
|
|
Notes to Consolidated Financial Statements (continued) |
|
The following table provides net pre-tax securities gains (losses) by type.
|
| | | | | | | | | | | | | | | |
Net securities gains (losses) | | |
(in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
State and political subdivisions | $ | 7 |
| $ | 7 |
| $ | — |
| $ | 13 |
| $ | — |
|
U.S. Treasury | 1 |
| 1 |
| 22 |
| 12 |
| 49 |
|
U.S. Government agencies | — |
| — |
| — |
| 7 |
| — |
|
Foreign covered bonds | — |
| 3 |
| — |
| 3 |
| 8 |
|
European floating rate notes | 2 |
| — |
| 3 |
| 1 |
| (3 | ) |
Commercial MBS | 1 |
| — |
| — |
| 1 |
| 15 |
|
Non-agency RMBS | 4 |
| (2 | ) | (4 | ) | — |
| (3 | ) |
Other | 5 |
| 9 |
| 1 |
| 23 |
| 36 |
|
Total net securities gains | $ | 20 |
| $ | 18 |
| $ | 22 |
| $ | 60 |
| $ | 102 |
|
The following table reflects investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. The additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred. The deductions represent credit losses on securities that have been sold, are required to be sold, or for which it is our intention to sell.
|
| | | | | | |
Debt securities credit loss roll forward | |
(in millions) | 3Q14 |
| 3Q13 |
|
Beginning balance as of June 30 | $ | 107 |
| $ | 164 |
|
Add: Initial OTTI credit losses | — |
| — |
|
Subsequent OTTI credit losses | 2 |
| 3 |
|
Less: Realized losses for securities sold | 7 |
| 2 |
|
Ending balance as of Sept. 30 | $ | 102 |
| $ | 165 |
|
|
| | | | | | |
Debt securities credit loss roll forward | Year-to-date |
(in millions) | 2014 |
| 2013 |
|
Beginning balance as of Jan. 1 | $ | 119 |
| $ | 288 |
|
Add: Initial OTTI credit losses | 2 |
| 16 |
|
Subsequent OTTI credit losses | 7 |
| 10 |
|
Less: Realized losses for securities sold | 26 |
| 149 |
|
Ending balance as of Sept. 30 | $ | 102 |
| $ | 165 |
|
Pledged assets
At Sept. 30, 2014, BNY Mellon had pledged assets of $85 billion, including $69 billion pledged as collateral for potential borrowings at the Federal Reserve Discount Window. The components of the assets pledged at Sept. 30, 2014 included $75 billion of securities, $5 billion of loans, $4 billion of trading assets and $1 billion of interest-bearing deposits with banks.
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 asset account at the Federal Reserve.
At Sept. 30, 2014, pledged assets included $8 billion for which the recipients were permitted to sell or repledge the assets delivered.
At Dec. 31, 2013, BNY Mellon had pledged assets of $81 billion, including $64 billion pledged as collateral for potential borrowing at the Federal Reserve Discount Window. The components of the assets pledged at Dec. 31, 2013 included $70 billion of securities, $5 billion of trading assets, $5 billion of loans and $1 billion of interest-bearing deposits with banks. At Dec. 31, 2013, pledged assets included $5 billion 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, 2014 and Dec. 31, 2013, the market value of the securities received that can be sold or repledged was $43 billion and $31 billion, respectively. We routinely sell or repledge these securities through delivery to third parties. As of Sept. 30, 2014 and Dec. 31, 2013, the market value of securities collateral sold or repledged was $19 billion and $13 billion, respectively.
|
|
Notes to Consolidated Financial Statements (continued) |
|
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, 2014 and Dec. 31, 2013.
|
| | | | | | | |
Loans | Sept. 30, 2014 |
| | Dec. 31, 2013 |
|
(in millions) | |
Domestic: | | | |
Financial institutions | $ | 5,465 |
| | $ | 4,511 |
|
Commercial | 1,317 |
| | 1,534 |
|
Wealth management loans and mortgages | 10,733 |
| | 9,743 |
|
Commercial real estate | 2,390 |
| | 2,001 |
|
Lease financings | 1,293 |
| | 1,322 |
|
Other residential mortgages | 1,262 |
| | 1,385 |
|
Overdrafts | 1,235 |
| | 1,314 |
|
Other | 855 |
| | 768 |
|
Margin loans | 17,548 |
| | 15,652 |
|
Total domestic | 42,098 |
| | 38,230 |
|
Foreign: | | | |
Financial institutions | 9,109 |
| | 9,848 |
|
Commercial | 241 |
| | 113 |
|
Wealth management loans and mortgages | 92 |
| | 75 |
|
Commercial real estate | 13 |
| | 9 |
|
Lease financings | 879 |
| | 945 |
|
Other (primarily overdrafts) | 5,095 |
| | 2,437 |
|
Total foreign | 15,429 |
| | 13,427 |
|
Total loans (a) | $ | 57,527 |
| | $ | 51,657 |
|
| |
(a) | Net of unearned income of $894 million at Sept. 30, 2014 and $1,020 million at Dec. 31, 2013 primarily on domestic and foreign lease financings. |
Our loan portfolio is comprised of three portfolio segments: commercial, lease financings and mortgages. We manage our portfolio at the class level which is comprised of six classes of financing receivables: commercial, commercial real estate, financial institutions, lease financings, wealth management loans and mortgages and other residential mortgages. The following tables are presented for each class of financing receivable, and provide additional information about our credit risks and the adequacy of our allowance for credit losses.
|
|
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, 2014 | Wealth management loans and mortgages |
| Other residential mortgages |
| | | | |
(in millions) | Commercial |
| Commercial real estate |
| Financial institutions |
| Lease financings |
| All Other |
| | Foreign |
| Total |
|
Beginning balance | $ | 74 |
| $ | 45 |
| $ | 43 |
| $ | 33 |
| $ | 22 |
| $ | 47 |
| $ | — |
| | $ | 47 |
| $ | 311 |
|
Charge-offs | (4 | ) | — |
| — |
| — |
| — |
| — |
| — |
| | (1 | ) | (5 | ) |
Recoveries | — |
| — |
| — |
| — |
| — |
| 1 |
| — |
| | — |
| 1 |
|
Net (charge-offs) recoveries | (4 | ) | — |
| — |
| — |
| — |
| 1 |
| — |
| | (1 | ) | (4 | ) |
Provision | 1 |
| 2 |
| (18 | ) | 1 |
| — |
| — |
| — |
| | (5 | ) | (19 | ) |
Ending balance | $ | 71 |
| $ | 47 |
| $ | 25 |
| $ | 34 |
| $ | 22 |
| $ | 48 |
| $ | — |
| | $ | 41 |
| $ | 288 |
|
Allowance for: | | | | | | | | | | |
Loan losses | $ | 20 |
| $ | 30 |
| $ | 9 |
| $ | 34 |
| $ | 17 |
| $ | 48 |
| $ | — |
| | $ | 33 |
| $ | 191 |
|
Lending-related commitments | 51 |
| 17 |
| 16 |
| — |
| 5 |
| — |
| — |
| | 8 |
| 97 |
|
Individually evaluated for impairment: | | | | | | | | | | |
Loan balance | $ | 13 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 9 |
| $ | — |
| $ | — |
| | $ | — |
| $ | 25 |
|
Allowance for loan losses | 4 |
| 1 |
| — |
| — |
| 1 |
| — |
| — |
| | — |
| 6 |
|
Collectively evaluated for impairment: | | | | | | | | | | |
Loan balance | $ | 1,304 |
| $ | 2,387 |
| $ | 5,465 |
| $ | 1,293 |
| $ | 10,724 |
| $ | 1,262 |
| $ | 19,638 |
| (a) | $ | 15,429 |
| $ | 57,502 |
|
Allowance for loan losses | 16 |
| 29 |
| 9 |
| 34 |
| 16 |
| 48 |
| — |
| | 33 |
| 185 |
|
| |
(a) | Includes $1,235 million of domestic overdrafts, $17,548 million of margin loans and $855 million of other loans at Sept. 30, 2014. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses activity for the quarter ended June 30, 2014 | Wealth management loans and mortgages |
| Other residential mortgages |
| | | | |
(in millions) | Commercial |
| Commercial real estate |
| Financial institutions |
| Lease financings |
| All Other |
| | Foreign |
| Total |
|
Beginning balance | $ | 79 |
| $ | 42 |
| $ | 48 |
| $ | 35 |
| $ | 23 |
| $ | 50 |
| $ | — |
|
| $ | 49 |
| $ | 326 |
|
Charge-offs | — |
| — |
| — |
| — |
| (1 | ) | (1 | ) | — |
|
| (2 | ) | (4 | ) |
Recoveries | 1 |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| 1 |
|
Net (charge-offs) recoveries | 1 |
| — |
| — |
| — |
| (1 | ) | (1 | ) | — |
|
| (2 | ) | (3 | ) |
Provision | (6 | ) | 3 |
| (5 | ) | (2 | ) | — |
| (2 | ) | — |
| | — |
| (12 | ) |
Ending balance | $ | 74 |
| $ | 45 |
| $ | 43 |
| $ | 33 |
| $ | 22 |
| $ | 47 |
| $ | — |
|
| $ | 47 |
| $ | 311 |
|
Allowance for: | | | | | | | | | | |
Loan losses | $ | 17 |
| $ | 27 |
| $ | 8 |
| $ | 33 |
| $ | 16 |
| $ | 47 |
| $ | — |
|
| $ | 39 |
| $ | 187 |
|
Lending-related commitments | 57 |
| 18 |
| 35 |
| — |
| 6 |
| — |
| — |
|
| 8 |
| 124 |
|
Individually evaluated for impairment: | | | | | | | | | | |
Loan balance | $ | 13 |
| $ | 3 |
| $ | — |
| $ | — |
| $ | 9 |
| $ | — |
| $ | — |
|
| $ | 5 |
| $ | 30 |
|
Allowance for loan losses | 3 |
| 1 |
| — |
| — |
| 2 |
| — |
| — |
|
| 1 |
| 7 |
|
Collectively evaluated for impairment: | | | | | | | | | | |
Loan balance | $ | 1,531 |
| $ | 2,205 |
| $ | 5,761 |
| $ | 1,321 |
| $ | 10,310 |
| $ | 1,309 |
| $ | 20,275 |
| (a) | $ | 16,506 |
| $ | 59,218 |
|
Allowance for loan losses | 14 |
| 26 |
| 8 |
| 33 |
| 14 |
| 47 |
| — |
|
| 38 |
| 180 |
|
| |
(a) | Includes $1,748 million of domestic overdrafts, $17,685 million of margin loans and $842 million of other loans at June 30, 2014. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses activity for the quarter ended Sept. 30, 2013 | Wealth management loans and mortgages |
| Other residential mortgages |
| All Other |
| | Foreign |
| Total |
|
(in millions) | Commercial |
| Commercial real estate |
| Financial institutions |
| Lease financings |
| |
Beginning balance | $ | 93 |
| $ | 30 |
| $ | 34 |
| $ | 41 |
| $ | 19 |
| $ | 75 |
| $ | — |
|
| $ | 45 |
| $ | 337 |
|
Charge-offs | (1 | ) | — |
| — |
| — |
| — |
| (1 | ) | — |
|
| — |
| (2 | ) |
Recoveries | — |
| — |
| — |
| — |
| — |
| 1 |
| — |
|
| 1 |
| 2 |
|
Net (charge-offs) | (1 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| 1 |
| — |
|
Provision | (1 | ) | 2 |
| 7 |
| (2 | ) | (1 | ) | (5 | ) | — |
|
| 2 |
| 2 |
|
Ending balance | $ | 91 |
| $ | 32 |
| $ | 41 |
| $ | 39 |
| $ | 18 |
| $ | 70 |
| $ | — |
|
| $ | 48 |
| $ | 339 |
|
Allowance for: | | | | | | | | | | |
Loan losses | $ | 17 |
| $ | 19 |
| $ | 7 |
| $ | 39 |
| $ | 14 |
| $ | 70 |
| $ | — |
|
| $ | 40 |
| $ | 206 |
|
Lending-related commitments | 74 |
| 13 |
| 34 |
| — |
| 4 |
| — |
| — |
|
| 8 |
| 133 |
|
Individually evaluated for impairment: | | | | | | | | | | |
Loan balance | $ | 15 |
| $ | 3 |
| $ | 1 |
| $ | — |
| $ | 13 |
| $ | — |
| $ | — |
|
| $ | 9 |
| $ | 41 |
|
Allowance for loan losses | 3 |
| 1 |
| — |
| — |
| 3 |
| — |
| — |
|
| 4 |
| 11 |
|
Collectively evaluated for impairment: | | | | | | | | | | |
Loan balance | $ | 1,529 |
| $ | 1,967 |
| $ | 3,724 |
| $ | 1,278 |
| $ | 9,368 |
| $ | 1,433 |
| $ | 17,334 |
| (a) | $ | 13,464 |
| $ | 50,097 |
|
Allowance for loan losses | 14 |
| 18 |
| 7 |
| 39 |
| 11 |
| 70 |
| — |
|
| 36 |
| 195 |
|
| |
(a) | Includes $1,487 million of domestic overdrafts, $15,146 million of margin loans and $701 million of other loans at Sept. 30, 2013. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses activity for the nine months ended Sept. 30, 2014 | Wealth management loans and mortgages |
| Other residential mortgages |
| All Other |
| Foreign |
| Total |
|
(in millions) | Commercial |
| Commercial real estate |
| Financial institutions |
| Lease financings |
|
Beginning balance | $ | 83 |
| $ | 41 |
| $ | 49 |
| $ | 37 |
| $ | 24 |
| $ | 54 |
| $ | — |
| $ | 56 |
| $ | 344 |
|
Charge-offs | (4 | ) | — |
| — |
| — |
| (1 | ) | (2 | ) | — |
| (3 | ) | (10 | ) |
Recoveries | 1 |
| — |
| — |
| — |
| — |
| 2 |
| — |
| — |
| 3 |
|
Net (charge-offs) recoveries | (3 | ) | — |
| — |
| — |
| (1 | ) | — |
| — |
| (3 | ) | (7 | ) |
Provision | (9 | ) | 6 |
| (24 | ) | (3 | ) | (1 | ) | (6 | ) | — |
| (12 | ) | (49 | ) |
Ending balance | $ | 71 |
| $ | 47 |
| $ | 25 |
| $ | 34 |
| $ | 22 |
| $ | 48 |
| $ | — |
| $ | 41 |
| $ | 288 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses activity for the nine months ended Sept. 30, 2013 | Wealth management loans and mortgages |
| Other residential mortgages |
| All Other |
| Foreign |
| Total |
|
(in millions) | Commercial |
| Commercial real estate |
| Financial institutions |
| Lease financings |
|
Beginning balance | $ | 104 |
| $ | 30 |
| $ | 36 |
| $ | 49 |
| $ | 30 |
| $ | 88 |
| $ | 2 |
| $ | 48 |
| $ | 387 |
|
Charge-offs | (3 | ) | — |
| — |
| — |
| — |
| (7 | ) | — |
| — |
| (10 | ) |
Recoveries | — |
| — |
| — |
| — |
| — |
| 2 |
| — |
| 1 |
| 3 |
|
Net (charge-offs) | (3 | ) | — |
| — |
| — |
| — |
| (5 | ) | — |
| 1 |
| (7 | ) |
Provision | (10 | ) | 2 |
| 5 |
| (10 | ) | (12 | ) | (13 | ) | (2 | ) | (1 | ) | (41 | ) |
Ending balance | $ | 91 |
| $ | 32 |
| $ | 41 |
| $ | 39 |
| $ | 18 |
| $ | 70 |
| $ | — |
| $ | 48 |
| $ | 339 |
|
|
|
Notes to Consolidated Financial Statements (continued) |
|
Nonperforming assets
The table below presents the distribution of our nonperforming assets.
|
| | | | | | | |
Nonperforming assets | Sept. 30, 2014 |
| | Dec. 31, 2013 |
|
(in millions) |
Nonperforming loans: | | | |
Other residential mortgages | $ | 113 |
| | $ | 117 |
|
Commercial | 13 |
| | 15 |
|
Wealth management loans and mortgages | 13 |
| | 11 |
|
Foreign | — |
| | 6 |
|
Commercial real estate | 4 |
| | 4 |
|
Total nonperforming loans | 143 |
| | 153 |
|
Other assets owned | 4 |
| | 3 |
|
Total nonperforming assets (a) | $ | 147 |
| | $ | 156 |
|
| |
(a) | Loans of consolidated investment management funds are not part of BNY Mellon’s loan portfolio. Included in the loans of consolidated investment management funds are nonperforming loans of $79 million at Sept. 30, 2014 and $16 million at Dec. 31, 2013. These loans are recorded at fair value and therefore do not impact the provision for credit losses and allowance for loan losses, and accordingly are excluded from the nonperforming assets table above. |
At Sept. 30, 2014, undrawn commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material.
Lost interest
|
| | | | | | | | | | | | | | | |
Lost interest | | | | | |
(in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| YTD14 |
| YTD13 |
|
Amount by which interest income recognized on nonperforming loans exceeded reversals | $ | — |
| $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 1 |
|
Amount by which interest income would have increased if nonperforming loans at period-end had been performing for the entire period | $ | 2 |
| $ | 2 |
| $ | 3 |
| $ | 5 |
| $ | 8 |
|
Impaired loans
The tables below provide information about our impaired loans. We use the discounted cash flow method as the primary method for valuing impaired loans.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans | Quarter ended |
| Sept. 30, 2014 | | June 30, 2014 | | Sept. 30, 2013 |
(in millions) | Average recorded investment |
| | Interest income recognized |
| | Average recorded investment |
| | Interest income recognized |
| | Average recorded investment |
| | Interest income recognized |
|
Impaired loans with an allowance: | | | | | | | | | | | |
Commercial | $ | 13 |
| | $ | — |
| | $ | 13 |
| | $ | — |
| | $ | 30 |
| | $ | — |
|
Commercial real estate | 3 |
| | — |
| | 2 |
| | — |
| | 2 |
| | — |
|
Financial institutions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Wealth management loans and mortgages | 7 |
| | — |
| | 8 |
| | — |
| | 10 |
| | — |
|
Foreign | 2 |
| | — |
| | 6 |
| | — |
| | 9 |
| | — |
|
Total impaired loans with an allowance | 25 |
| | — |
| | 29 |
| | — |
| | 51 |
| | — |
|
Impaired loans without an allowance: | | | | | | | | | | | |
Commercial | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
|
Commercial real estate | 1 |
| | — |
| | 1 |
| | — |
| | 7 |
| | — |
|
Financial institutions | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
|
Wealth management loans and mortgages | 2 |
| | — |
| | 2 |
| | — |
| | 4 |
| | — |
|
Total impaired loans without an allowance (a) | 3 |
| | — |
| | 3 |
| | — |
| | 17 |
| | — |
|
Total impaired loans | $ | 28 |
| | $ | — |
| | $ | 32 |
| | $ | — |
| | $ | 68 |
| | $ | — |
|
| |
(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. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | |
Impaired loans | Year-to-date |
| Sept. 30, 2014 | | Sept. 30, 2013 |
(in millions) | Average recorded investment |
| | Interest income recognized |
| | Average recorded investment |
| | Interest income recognized |
|
Impaired loans with an allowance: | | | | | | | |
Commercial | $ | 14 |
| | $ | — |
| | $ | 43 |
| | $ | 1 |
|
Commercial real estate | 2 |
| | — |
| | 6 |
| | — |
|
Financial institutions | — |
| | — |
| | — |
| | — |
|
Wealth management loans and mortgages | 8 |
| | — |
| | 18 |
| | — |
|
Foreign | 4 |
| | — |
| | 9 |
| | — |
|
Total impaired loans with an allowance | 28 |
| | — |
| | 76 |
| | 1 |
|
Impaired loans without an allowance: | | | | | | | |
Commercial | — |
| | — |
| | 2 |
| | — |
|
Commercial real estate | 1 |
| | — |
| | 7 |
| | — |
|
Financial institutions | — |
| | — |
| | 2 |
| | — |
|
Wealth management loans and mortgages | 2 |
| | — |
| | 4 |
| | — |
|
Total impaired loans without an allowance (a) | 3 |
| | — |
| | 15 |
| | — |
|
Total impaired loans | $ | 31 |
| | $ | — |
| | $ | 91 |
| | $ | 1 |
|
| |
(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. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans | Sept. 30, 2014 | | Dec. 31, 2013 |
(in millions) | Recorded investment |
| | Unpaid principal balance |
| | Related allowance (a) |
| | Recorded investment |
| | Unpaid principal balance |
| | Related allowance (a) |
|
Impaired loans with an allowance: | | | | | | | | | | | |
Commercial | $ | 13 |
| | $ | 13 |
| | $ | 4 |
| | $ | 15 |
| | $ | 20 |
| | $ | 2 |
|
Commercial real estate | 2 |
| | 3 |
| | 1 |
| | 2 |
| | 4 |
| | 1 |
|
Financial institutions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Wealth management loans and mortgages | 7 |
| | 8 |
| | 1 |
| | 9 |
| | 9 |
| | 3 |
|
Foreign | — |
| | — |
| | — |
| | 6 |
| | 17 |
| | 1 |
|
Total impaired loans with an allowance | 22 |
| | 24 |
| | 6 |
| | 32 |
| | 50 |
| | 7 |
|
Impaired loans without an allowance: | | | | | | | | | | | |
Commercial real estate | 1 |
| | 1 |
| | N/A |
| | 1 |
| | 1 |
| | N/A |
|
Wealth management loans and mortgages | 2 |
| | 2 |
| | N/A |
| | 3 |
| | 3 |
| | N/A |
|
Total impaired loans without an allowance (b) | 3 |
| | 3 |
| | N/A |
| | 4 |
| | 4 |
| | N/A |
|
Total impaired loans (c) | $ | 25 |
| | $ | 27 |
| | $ | 6 |
| | $ | 36 |
| | $ | 54 |
| | $ | 7 |
|
| |
(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, 2014 and Dec. 31, 2013. The allowance for loan loss associated with these loans totaled less than $1 million at both Sept. 30, 2014 and Dec. 31, 2013. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
Past due loans
The table below sets forth information about our past due loans.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Past due loans and still accruing interest | Sept. 30, 2014 | | Dec. 31, 2013 |
| Days past due | Total past due |
| | Days past due | Total past due |
|
(in millions) | 30-59 |
| 60-89 |
| >90 |
| 30-59 |
| 60-89 |
| >90 |
|
Domestic: | | | | | | | | | |
Financial institutions (a) | $ | — |
| $ | — |
| $ | 312 |
| $ | 312 |
| | $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
Other residential mortgages | 20 |
| 3 |
| 3 |
| 26 |
| | 32 |
| 6 |
| 6 |
| 44 |
|
Commercial real estate | 6 |
| — |
| — |
| 6 |
| | 22 |
| 2 |
| — |
| 24 |
|
Wealth management loans and mortgages | 24 |
| 2 |
| 25 |
| 51 |
| | 45 |
| 3 |
| 1 |
| 49 |
|
Total domestic | 50 |
| 5 |
| 340 |
| 395 |
| | 136 |
| 11 |
| 7 |
| 154 |
|
Foreign | — |
| — |
| — |
| — |
| | — |
| — |
| — |
| — |
|
Total past due loans | $ | 50 |
| $ | 5 |
| $ | 340 |
| $ | 395 |
|
| $ | 136 |
| $ | 11 |
| $ | 7 |
| $ | 154 |
|
| |
(a) | Past due loans at Sept. 30, 2014 include a loan to an asset manager, Sentinel Management Group, Inc. (“Sentinel”), which was reestablished as a fully collateralized performing loan in the first quarter of 2014. |
In August 2007, BNY Mellon loaned $312 million to Sentinel Management Group, Inc. (“Sentinel”), secured by securities and cash. Sentinel filed for bankruptcy in 2007, and BNY Mellon’s status as a secured lender is the subject of continuing litigation. In 2010, the district court ruled in favor of BNY Mellon, and the loan was repaid. An appellate court reversed the district court’s ruling on Aug. 26, 2013, and remanded to the district court for further proceedings. BNY Mellon held no loans to Sentinel at Dec. 31, 2013. On Jan. 22, 2014, the Bankruptcy Court, ordered that the funds distributed to BNY Mellon after the district court’s favorable decision be returned to the bankruptcy estate and held in a reserve earmarked for purposes of BNY Mellon’s claim until the district court issues its decision on the merits of the challenges to BNY Mellon’s lien. Accordingly, the loan was reestablished as a fully collateralized performing loan in the first quarter of 2014. Through
Sept. 30, 2014, accrued interest on the reestablished loan totaled $28 million. The ongoing litigation could result in a ruling adverse to BNY Mellon at some point in the future. For additional information on our legal proceedings related to this matter, see Note 18 of the Notes to Consolidated Financial Statements.
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 TDRs that occurred in the third quarter of 2014, second quarter of 2014 and third quarter of 2013.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TDRs | 3Q14 | | 2Q14 | | 3Q13 |
| | 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 | 27 |
| | $ | 4 |
| | $ | 5 |
| | 28 |
| | $ | 5 |
| | $ | 6 |
| | 34 |
| | $ | 8 |
| | $ | 9 |
|
Wealth management loans and mortgages | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total TDRs | 27 |
| | $ | 4 |
| | $ | 5 |
| | 29 |
| | $ | 5 |
| | $ | 6 |
| | 34 |
| | $ | 8 |
| | $ | 9 |
|
|
|
Notes to Consolidated Financial Statements (continued) |
|
Other residential mortgages
The modifications of the other residential mortgage loans in the third quarter of 2014, second quarter of 2014 and third quarter of 2013 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.
Wealth management loans and mortgages
The modifications of the wealth management loans and mortgages in the second quarter of 2014 consisted of a change in payment terms and extensions of the maturity date. The difference between the book value of the loan and the estimated fair value of the collateral is included in the allowance for credit losses.
TDRs that subsequently defaulted
There were 10 residential mortgage loans that had been restructured in a TDR during the previous 12 months and have subsequently defaulted in the third quarter of 2014. The total recorded investment of these loans was $2 million.
Credit quality indicators
Our credit strategy is to focus on investment grade names to support cross-selling opportunities and avoid single name/industry concentrations. Each customer is assigned an internal credit rating which is mapped to an external rating agency grade equivalent based upon a number of dimensions which are continually evaluated and may change over time.
The following tables set forth information about credit quality indicators.
Commercial loan portfolio
|
| | | | | | | | | | | | | | | | | | | | | | | |
Commercial loan portfolio – Credit risk profile by creditworthiness category |
| Commercial | | Commercial real estate | | Financial institutions |
(in millions) | Sept. 30, 2014 |
| | Dec. 31, 2013 |
| | Sept. 30, 2014 |
| | Dec. 31, 2013 |
| | Sept. 30, 2014 |
| | Dec. 31, 2013 |
|
Investment grade | $ | 1,326 |
| | $ | 1,323 |
| | $ | 1,603 |
| | $ | 1,444 |
| | $ | 12,837 |
| | $ | 12,598 |
|
Non-investment grade | 232 |
| | 324 |
| | 800 |
| | 566 |
| | 1,737 |
| | 1,761 |
|
Total | $ | 1,558 |
| | $ | 1,647 |
| | $ | 2,403 |
| | $ | 2,010 |
| | $ | 14,574 |
| | $ | 14,359 |
|
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, 2014 |
| Dec. 31, 2013 |
|
Wealth management loans: | | |
Investment grade | $ | 5,396 |
| $ | 4,920 |
|
Non-investment grade | 70 |
| 64 |
|
Wealth management mortgages | 5,359 |
| 4,834 |
|
Total | $ | 10,825 |
| $ | 9,818 |
|
|
|
Notes to Consolidated Financial Statements (continued) |
|
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 an average loan-to-value ratio of 65% at origination. In the wealth management portfolio, less than 1% of the mortgages were past due at Sept. 30, 2014.
At Sept. 30, 2014, the wealth management mortgage portfolio was comprised of the following geographic concentrations: California - 21%; New York - 21%; Massachusetts - 15%; Florida - 9%; and other - 34%.
Other residential mortgages
The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $1,262 million at Sept. 30, 2014 and $1,385 million at Dec. 31, 2013. These loans are not typically correlated to external ratings. Included in this portfolio at Sept. 30, 2014 are $366 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, 2014, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 18% 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 $6,301 million at Sept. 30, 2014 and $3,715 million at Dec. 31, 2013. Overdrafts occur on a daily basis in the custody and securities clearance business and are generally repaid within two business days.
Other loans
Other loans primarily includes loans to consumers that are fully collateralized with equities, mutual funds and fixed income securities.
Margin loans
We had $17,548 million of secured margin loans on our balance sheet at Sept. 30, 2014 compared with $15,652 million at Dec. 31, 2013. 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
Impairment testing
Goodwill impairment testing is performed at least annually at the reporting unit level. Intangible assets not subject to amortization are tested annually for impairment or more often if events or circumstances indicate they may be impaired.
BNY Mellon’s three business segments include seven reporting units for which goodwill impairment testing is performed on an annual basis. In the second quarter of 2014, BNY Mellon conducted an annual goodwill impairment test on all seven reporting units. The estimated fair value of the seven reporting units exceeded the carrying value and no goodwill impairment was recognized.
|
|
Notes to Consolidated Financial Statements (continued) |
|
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, 2013 | $ | 9,473 |
| | $ | 8,550 |
| | $ | 50 |
| | $ | 18,073 |
|
Acquisitions/dispositions | — |
| | 39 |
| | — |
| | 39 |
|
Foreign currency translation | (45 | ) | | (75 | ) | | — |
| | (120 | ) |
Balance at Sept. 30, 2014 | $ | 9,428 |
| | $ | 8,514 |
| | $ | 50 |
| | $ | 17,992 |
|
|
| | | | | | | | | | | | | | | |
Goodwill by business (in millions) | Investment Management |
| (a) | Investment Services |
| | Other |
| (a) | Consolidated |
|
Balance at Dec. 31, 2012 | $ | 9,440 |
| | $ | 8,517 |
| | $ | 118 |
| | $ | 18,075 |
|
Dispositions | — |
| | — |
| | (69 | ) | | (69 | ) |
Foreign currency translation | (12 | ) | | 13 |
| | 1 |
| | 2 |
|
Other (b) | 17 |
| | — |
| | — |
| | 17 |
|
Balance at Sept. 30, 2013 | $ | 9,445 |
| | $ | 8,530 |
| | $ | 50 |
| | $ | 18,025 |
|
| |
(a) | Includes the reclassification of goodwill associated with the Newton Private Clients business from Investment Management to the Other segment. |
| |
(b) | Other changes in goodwill include purchase price adjustments and certain other reclassifications. |
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, 2013 | $ | 2,065 |
| | $ | 1,538 |
| | $ | 849 |
| | $ | 4,452 |
|
Amortization | (93 | ) | | (132 | ) | | — |
| | (225 | ) |
Foreign currency translation | (7 | ) | | (5 | ) | | — |
| | (12 | ) |
Balance at Sept. 30, 2014 | $ | 1,965 |
| | $ | 1,401 |
| | $ | 849 |
| | $ | 4,215 |
|
|
| | | | | | | | | | | | | | | |
Intangible assets – net carrying amount by business (in millions) | Investment Management |
| (a) | Investment Services |
| | Other |
| (a) | Consolidated |
|
Balance at Dec. 31, 2012 | $ | 2,220 |
| | $ | 1,732 |
| | $ | 857 |
| | $ | 4,809 |
|
Disposition | — |
| | (1 | ) | | (7 | ) | | (8 | ) |
Amortization | (113 | ) | | (147 | ) | (b) | — |
| | (260 | ) |
Foreign currency translation | — |
| | 1 |
| | (1 | ) | | — |
|
Other (c) | (13 | ) | | (1 | ) | | — |
| | (14 | ) |
Balance at Sept. 30, 2013 | $ | 2,094 |
| | $ | 1,584 |
| | $ | 849 |
| | $ | 4,527 |
|
| |
(a) | Includes the reclassification of intangible assets associated with the Newton Private Clients business from Investment Management to the Other segment. |
| |
(b) | Includes an $8 million intangible asset impairment recorded in the second quarter of 2013. |
| |
(c) | Other changes in intangible assets include purchase price adjustments and certain other reclassifications. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
The table below provides a breakdown of intangible assets by type.
|
| | | | | | | | | | | | | | |
Intangible assets | Sept. 30, 2014 | | Dec. 31, 2013 |
|
(in millions) | Gross carrying amount |
| Accumulated amortization |
| Net carrying amount |
| Remaining weighted- average amortization period | | Net carrying amount |
|
Subject to amortization: | | | | | | |
Customer relationships—Investment Management | $ | 2,013 |
| $ | (1,514 | ) | $ | 499 |
| 11 years | | $ | 594 |
|
Customer contracts—Investment Services | 2,335 |
| (1,316 | ) | 1,019 |
| 11 years | | 1,150 |
|
Other | 82 |
| (67 | ) | 15 |
| 4 years | | 16 |
|
Total subject to amortization | 4,430 |
| (2,897 | ) | 1,533 |
| 11 years | | 1,760 |
|
Not subject to amortization: (a) | | | | | | |
Trade name | 1,361 |
| N/A |
| 1,361 |
| N/A | | 1,369 |
|
Customer relationships | 1,321 |
| N/A |
| 1,321 |
| N/A | | 1,323 |
|
Total not subject to amortization | 2,682 |
| N/A |
| 2,682 |
| N/A | | 2,692 |
|
Total intangible assets | $ | 7,112 |
| $ | (2,897 | ) | $ | 4,215 |
| N/A | | $ | 4,452 |
|
| |
(a) | Intangible assets not subject to amortization have an indefinite life. |
N/A - Not applicable.
Estimated annual amortization expense for current intangibles for the next five years is as follows:
|
| | | | |
For the year ended Dec. 31, | Estimated amortization expense (in millions) | |
2014 | | $ | 300 |
|
2015 | | 269 |
|
2016 | | 241 |
|
2017 | | 216 |
|
2018 | | 182 |
|
Note 7 - Other assets
|
| | | | | | |
Other assets | Sept. 30, |
| Dec. 31, |
|
(in millions) | 2014 |
| 2013 |
|
Corporate/bank owned life insurance | $ | 4,558 |
| $ | 4,482 |
|
Accounts receivable | 4,032 |
| 3,616 |
|
Fails to deliver | 3,311 |
| 864 |
|
Equity in joint venture and other investments (a) | 2,792 |
| 3,220 |
|
Income taxes receivable | 1,516 |
| 2,499 |
|
Software | 1,326 |
| 1,251 |
|
Prepaid pension assets | 1,299 |
| 1,209 |
|
Fair value of hedging derivatives | 777 |
| 1,282 |
|
Prepaid expenses | 401 |
| 451 |
|
Due from customers on acceptances | 54 |
| 379 |
|
Other | 1,457 |
| 1,313 |
|
Total other assets | $ | 21,523 |
| $ | 20,566 |
|
| |
(a) | Includes Federal Reserve Bank stock of $446 million and $441 million, respectively, at cost. |
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, which consist of investments in private equity funds, mezzanine financings, small business investment companies (“SBICs”) and direct equity investments. Seed capital and private equity investments are included in other assets. Consistent with our policy to focus on our core activities, we continue to reduce our exposure to private equity investments that are not compliant with the Volcker Rule.
The fair value of certain of these investments has been estimated using the net asset value (“NAV”) per share of BNY Mellon’s ownership interest in the funds. The table below presents information about BNY Mellon’s investments in seed capital and private equity investments that have been valued using NAV.
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | |
Seed capital and private equity investments valued using NAV |
| Sept. 30, 2014 | | Dec. 31, 2013 |
(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) | $ | 335 |
| | $ | — |
| Daily-quarterly | 0-180 days | | $ | 275 |
| | $ | 23 |
| Monthly-yearly | 3-45 days |
Private equity investments (b)(c) | 31 |
| | 52 |
| N/A | N/A | | 86 |
| | 31 |
| N/A | N/A |
Total | $ | 366 |
| | $ | 52 |
| | | | $ | 361 |
| | $ | 54 |
| | |
| |
(a) | Other funds include various market neutral, leveraged loans, hedge funds, real estate and structured credit funds. Redemption notice periods vary by fund. |
| |
(b) | Private equity funds primarily include numerous venture capital funds that invest in various sectors of the economy. Private equity funds do not have redemption rights. Distributions from such funds will be received as the underlying investments in the funds are liquidated. |
| |
(c) | Includes investments and unfunded commitments related to SBICs of $16 million and $48 million, respectively, at Sept. 30, 2014 and $7 million and $20 million, respectively, at Dec. 31, 2013. |
N/A - Not applicable.
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 |
(in millions) | Sept. 30, 2014 |
| June 30, 2014 |
| Sept. 30, 2013 |
| | Sept. 30, 2014 |
| Sept. 30, 2013 |
|
Interest revenue | | | | | | |
Non-margin loans | $ | 174 |
| $ | 176 |
| $ | 169 |
| | $ | 519 |
| $ | 505 |
|
Margin loans | 48 |
| 44 |
| 41 |
| | 134 |
| 119 |
|
Securities: | | | | | | |
Taxable | 398 |
| 383 |
| 460 |
| | 1,186 |
| 1,354 |
|
Exempt from federal income taxes | 24 |
| 27 |
| 25 |
| | 78 |
| 72 |
|
Total securities | 422 |
| 410 |
| 485 |
| | 1,264 |
| 1,426 |
|
Deposits with banks | 58 |
| 77 |
| 70 |
| | 208 |
| 209 |
|
Deposits with the Federal Reserve and other central banks | 51 |
| 55 |
| 39 |
| | 152 |
| 101 |
|
Federal funds sold and securities purchased under resale agreements | 24 |
| 19 |
| 13 |
| | 60 |
| 33 |
|
Trading assets | 32 |
| 30 |
| 38 |
| | 95 |
| 113 |
|
Total interest revenue | 809 |
| 811 |
| 855 |
| | 2,432 |
| 2,506 |
|
Interest expense | | | | | | |
Deposits | 24 |
| 24 |
| 26 |
| | 70 |
| 83 |
|
Federal funds purchased and securities sold under repurchase agreements | (4 | ) | (3 | ) | (4 | ) | | (11 | ) | (13 | ) |
Trading liabilities | 6 |
| 7 |
| 9 |
| | 21 |
| 29 |
|
Other borrowed funds | 1 |
| 2 |
| 1 |
| | 4 |
| 4 |
|
Commercial paper | 1 |
| — |
| — |
| | 1 |
| — |
|
Customer payables | 2 |
| 2 |
| 2 |
| | 6 |
| 6 |
|
Long-term debt | 58 |
| 60 |
| 49 |
| | 173 |
| 149 |
|
Total interest expense | 88 |
| 92 |
| 83 |
| | 264 |
| 258 |
|
Net interest revenue | $ | 721 |
| $ | 719 |
| $ | 772 |
| | $ | 2,168 |
| $ | 2,248 |
|
|
|
Notes to Consolidated Financial Statements (continued) |
|
Note 9 - Employee benefit plans
The components of net periodic benefit cost are as follows.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost (credit) | | Quarter ended | | |
| Sept. 30, 2014 | | June 30, 2014 | | Sept. 30, 2013 |
(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 | $ | 14 |
| $ | 9 |
| $ | 1 |
| | $ | 14 |
| $ | 9 |
| $ | 1 |
| | $ | 16 |
| $ | 9 |
| $ | 1 |
|
Interest cost | 45 |
| 11 |
| 3 |
| | 45 |
| 11 |
| 3 |
| | 43 |
| 10 |
| 2 |
|
Expected return on assets | (79 | ) | (15 | ) | (2 | ) | | (79 | ) | (15 | ) | (2 | ) | | (73 | ) | (12 | ) | (2 | ) |
Other | 28 |
| 4 |
| — |
| | 30 |
| 4 |
| — |
| | 49 |
| 3 |
| 1 |
|
Net periodic benefit cost | $ | 8 |
| $ | 9 |
| $ | 2 |
| | $ | 10 |
| $ | 9 |
| $ | 2 |
| | $ | 35 |
| $ | 10 |
| $ | 2 |
|
|
| | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost (credit) | | Year-to-date | | |
| Sept. 30, 2014 | | Sept. 30, 2013 |
(in millions) | Domestic pension benefits |
| Foreign pension benefits |
| Health care benefits |
| | Domestic pension benefits |
| Foreign pension benefits |
| Health care benefits |
|
Service cost | $ | 42 |
| $ | 27 |
| $ | 3 |
| | $ | 48 |
| $ | 27 |
| $ | 3 |
|
Interest cost | 135 |
| 33 |
| 9 |
| | 129 |
| 30 |
| 6 |
|
Expected return on assets | (237 | ) | (45 | ) | (6 | ) | | (219 | ) | (36 | ) | (6 | ) |
Other | 86 |
| 12 |
| — |
| | 142 |
| 11 |
| 3 |
|
Net periodic benefit cost | $ | 26 |
| $ | 27 |
| $ | 6 |
| | $ | 100 |
| $ | 32 |
| $ | 6 |
|
Note 10 - Restructuring charges
Aggregate restructuring charges are included in M&I, litigation and restructuring charges on the income statement. Restructuring charges recorded in the second and third quarters of 2014 relate to corporate-level initiatives and were therefore recorded in the Other segment. In the fourth quarter of 2013, restructuring charges were recorded in the businesses. Prior to the fourth quarter of 2013, restructuring charges were reported in the Other segment. Severance payments are primarily paid over the salary continuance period in accordance with the separation plan.
Streamlining actions
In the second quarter of 2014, we disclosed streamlining actions which included rationalizing our staff and simplifying and automating global processes primarily related to actions taken across investment services, technology, and operations. This charge was comprised of $125 million of severance costs. In the third quarter of 2014, we recorded a restructuring charge of $53 million primarily related to severance. The following table presents the activity in the reserve through Sept. 30, 2014.
|
| | | |
Streamlining actions – restructuring reserve activity |
(in millions) | Total |
|
Original restructuring charge | $ | 125 |
|
Utilization | (16 | ) |
Balance at June 30, 2014 | 109 |
|
Net additional charges | 53 |
|
Utilization | (55 | ) |
Balance at Sept. 30, 2014 | $ | 107 |
|
The table below presents the restructuring charge if it had been allocated by business.
|
| | | | | | | | | |
Streamlining actions – restructuring charge by business
(in millions) | 3Q14 |
| 2Q14 |
| Total charges since inception |
|
Investment Management | $ | 7 |
| $ | 15 |
| $ | 22 |
|
Investment Services | 23 |
| 76 |
| 99 |
|
Other segment (including Business Partners) | 23 |
| 34 |
| 57 |
|
Total restructuring charge (recovery) | $ | 53 |
| $ | 125 |
| $ | 178 |
|
|
|
Notes to Consolidated Financial Statements (continued) |
|
Operational Excellence Initiatives
In 2011, we announced our Operational Excellence Initiatives which include an expense reduction initiative impacting approximately 1,500 positions, as well as additional initiatives to transform operations, technology and corporate services that will increase productivity and reduce the growth rate of expenses. We recorded a pre-tax restructuring charge of $107 million related to the Operational Excellence Initiatives in 2011. This charge was comprised of $78 million of severance costs and $29 million primarily for operating lease-related items and consulting costs. In the third quarter of 2014, we recorded a charge of $4 million. The following table presents the activity in the restructuring reserve related to the Operational Excellence Initiatives through Sept. 30, 2014.
|
| | | | | | | | | |
Operational Excellence Initiatives 2011 – restructuring reserve activity |
(in millions) | Severance |
| Other |
| Total |
|
Original restructuring charge | $ | 78 |
| $ | 29 |
| $ | 107 |
|
Net additional charges (net recovery/gain) | 95 |
| (57 | ) | 38 |
|
Utilization | (129 | ) | 28 |
| (101 | ) |
Balance at June 30, 2014 | 44 |
| — |
| 44 |
|
Net additional charge | 4 |
| — |
| 4 |
|
Utilization | (12 | ) | — |
| (12 | ) |
Balance at Sept. 30, 2014 | $ | 36 |
| $ | — |
| $ | 36 |
|
The table below presents the restructuring charge if it had been allocated by business.
|
| | | | | | | | | | |
Operational Excellence Initiatives 2011 – restructuring charge (recovery) by business | | Total charges since inception |
|
(in millions) | 3Q14 |
| 2Q14 |
| |
Investment Management | $ | (2 | ) | $ | — |
| | $ | 50 |
|
Investment Services | 4 |
| (3 | ) | | 86 |
|
Other segment (including Business Partners) | 2 |
| (2 | ) | | 13 |
|
Total restructuring charge (recovery) | $ | 4 |
| $ | (5 | ) | | $ | 149 |
|
Note 11 - Income taxes
The statutory federal income tax rate is reconciled to our effective income tax rate below:
|
| | | | |
Effective tax rate | Nine months ended |
| Sept. 30, 2014 |
| Sept. 30, 2013 (a) |
|
Federal rate | 35.0 | % | 35.0 | % |
State and local income taxes, net of federal income tax benefit | 2.2 |
| 3.0 |
|
Tax-exempt income | (2.5 | ) | (2.8 | ) |
Foreign operations | (1.9 | ) | (4.4 | ) |
Tax credits | (0.8 | ) | (2.2 | ) |
Tax litigation | — |
| 19.4 |
|
Leverage lease adjustment | (1.0 | ) | (2.3 | ) |
Other – net | (1.4 | ) | 0.9 |
|
Effective tax rate | 29.6 | % | 46.6 | % |
| |
(a) | Results for the first nine months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
As previously disclosed, on Nov. 10, 2009, BNY Mellon filed a petition with the U.S. Tax Court challenging the Internal Revenue Service’s (“IRS”) disallowance of certain foreign tax credits claimed for the 2001 and 2002 tax years. Trial was held from April 16 to May 17, 2012. On Feb. 11, 2013, BNY Mellon received an adverse decision from the U.S. Tax Court. On Sept. 23, 2013, the U.S. Tax Court amended its prior ruling to allow BNY Mellon an interest expense deduction and to exclude certain items from taxable income. The net impact of the court rulings for all years involved and related interest decreased after-tax income in 2013 by $593 million.
The U.S. Tax Court ruling was finalized on Feb. 20, 2014. On March 5, 2014, BNY Mellon appealed the decision to the Second Circuit Court of Appeals. On Sept. 25, 2014, the government filed its response to our appeal. In addition to requesting that the denial of foreign tax credits be upheld, the government also requested a reversal of the interest deduction allowed by the Tax Court in the amended decision. If the interest deduction is ultimately disallowed, further income tax expense of approximately $100 million may be required. See Note 18 of the Notes to Consolidated Financial Statements for additional information.
|
|
Notes to Consolidated Financial Statements (continued) |
|
Our total tax reserves as of Sept. 30, 2014 were $811 million compared with $829 million at June 30, 2014. If these tax reserves were unnecessary, $811 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, 2014 is accrued interest, where applicable, of $197 million. The additional tax benefit related to interest for the nine months ended Sept. 30, 2014 was $1 million compared with additional tax expense of $187 million for the nine months ended Sept. 30, 2013.
It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by an amount up to $204 million as a result of adjustments related to tax years that are still subject to examination.
With the exception of 2006, our federal income tax returns are closed for all periods through 2008. The years 2009 and 2010 are no longer under examination, but remain open for carryback claims. Our New York State and New York City income tax returns are closed to examination through 2010. Our UK income tax returns are closed to examination through 2011.
Note 12 - Securitizations and variable interest entities
BNY Mellon’s VIEs generally include certain retail, institutional and alternative investment funds offered to its retail and institutional customers in which it acts as the fund’s investment manager. BNY Mellon earns management fees on these funds as well as performance fees in certain funds. It may also provide start-up capital in its new funds. These VIEs are included in the scope of ASU 2010-10, which defers the application of ASU 2009-17 for certain investment funds, and are reviewed for consolidation based on the guidance in ASC 810, Consolidation.
BNY Mellon has other VIEs, including securitization trusts and CLOs, in which BNY Mellon serves as the investment manager. In addition, we provide trust and custody services for a fee to entities sponsored by other corporations in which we have no other interest. These VIEs are evaluated under the guidance included in ASU 2009-17. BNY Mellon has two securitizations and several CLOs, which were assessed and consolidated in accordance with ASU 2009-17.
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, 2014 and Dec. 31, 2013, based on the assessments performed in accordance with ASC 810 and ASU 2009-17. The net assets of any consolidated VIE are solely available to settle the liabilities of the VIE and to settle any investors’ ownership liquidation requests, including any seed capital invested in the VIE by BNY Mellon.
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| | | | | | | | | |
Investments consolidated under ASC 810 and ASU 2009-17 at Sept. 30, 2014 |
(in millions) | Investment Management funds |
| Securitizations |
| Total consolidated investments |
|
Available-for-sale | $ | — |
| $ | 415 |
| $ | 415 |
|
Trading assets | 8,823 |
| — |
| 8,823 |
|
Other assets | 739 |
| — |
| 739 |
|
Total assets | $ | 9,562 |
| $ | 415 |
| $ | 9,977 |
|
Trading liabilities | $ | 8,130 |
| $ | — |
| $ | 8,130 |
|
Other liabilities | 10 |
| 354 |
| 364 |
|
Total liabilities | $ | 8,140 |
| $ | 354 |
| $ | 8,494 |
|
Nonredeemable noncontrolling interests | $ | 901 |
| $ | — |
| $ | 901 |
|
|
| | | | | | | | | |
Investments consolidated under ASC 810 and ASU 2009-17 at Dec. 31, 2013 |
(in millions) | Investment Management funds |
| Securitizations |
| Total consolidated investments |
|
Available-for-sale | $ | — |
| $ | 487 |
| $ | 487 |
|
Trading assets | 10,397 |
| — |
| 10,397 |
|
Other assets | 875 |
| — |
| 875 |
|
Total assets | $ | 11,272 |
| $ | 487 |
| $ | 11,759 |
|
Trading liabilities | $ | 10,085 |
| $ | — |
| $ | 10,085 |
|
Other liabilities | 46 |
| 438 |
| 484 |
|
Total liabilities | $ | 10,131 |
| $ | 438 |
| $ | 10,569 |
|
Nonredeemable noncontrolling interests | $ | 783 |
| $ | — |
| $ | 783 |
|
BNY Mellon is not contractually required to provide financial or any other support to any of our VIEs. Additionally, creditors of any consolidated VIEs do not have any recourse to the general credit of BNY Mellon.
Non-consolidated VIEs
As of Sept. 30, 2014 and Dec. 31, 2013, the following assets related to the VIEs where BNY Mellon is not the primary beneficiary are included in our consolidated financial statements.
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | |
Non-consolidated VIEs at Sept. 30, 2014 | Maximum loss exposure |
|
(in millions) | Assets |
| Liabilities |
|
Other | $ | 183 |
| $ | — |
| $ | 183 |
|
|
| | | | | | | | | |
Non-consolidated VIEs at Dec. 31, 2013 | Maximum loss exposure |
|
(in millions) | Assets |
| Liabilities |
|
Other | $ | 134 |
| $ | — |
| $ | 134 |
|
The maximum loss exposure indicated in the above tables relates solely to BNY Mellon’s seed capital or residual interests invested in the VIEs.
Note 13 - Preferred stock
BNY Mellon has 100 million authorized shares of preferred stock with a par value of $0.01. The table below summarizes BNY Mellon’s preferred stock issued and outstanding at Sept. 30, 2014 and Dec. 31, 2013.
|
| | | | | | | | | | | | | | | | | | |
Preferred stock summary | Liquidation preference per share (in dollars) | | Total shares issued and outstanding | | | |
| | | | Carrying value (a) |
(dollars in millions, unless otherwise noted) | Per annum dividend rate | | Sept. 30, 2014 |
| Dec. 31, 2013 |
| Sept. 30, 2014 |
| Dec. 31, 2013 |
|
Series A | Noncumulative Perpetual Preferred Stock | Greater of (i) three-month LIBOR plus 0.565% for the related distribution period; or (ii) 4.000% |
| $ | 100,000 |
| | 5,001 |
| 5,001 |
| | $ | 500 |
| $ | 500 |
|
Series C | Noncumulative Perpetual Preferred Stock | 5.2 | % | $ | 100,000 |
| | 5,825 |
| 5,825 |
| | 568 |
| 568 |
|
Series D | Noncumulative Perpetual Preferred Stock | 4.50% commencing Dec. 20, 2013 to but excluding June 20, 2023, then a floating rate equal to the three-month LIBOR plus 2.46% |
| $ | 100,000 |
| | 5,000 |
| 5,000 |
| | 494 |
| 494 |
|
Total | | | | 15,826 |
| 15,826 |
| | $ | 1,562 |
| $ | 1,562 |
|
| |
(a) | The carrying value of the Series C and Series D preferred stock is recorded net of issuance costs. |
Holders of both the Series A and Series C preferred stock are entitled to receive dividends on each dividend payment date (March 20, June 20, September 20 and December 20 of each year), if declared by BNY Mellon’s Board of Directors. Holders of the Series D preferred stock are entitled to receive dividends, if declared by our board of directors, on each June 20 and December 20, to but excluding June 20, 2023; and on each March 20, June 20, September 20 and December 20, from and including June 20, 2023. BNY Mellon’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or any of our shares that rank junior to the preferred stock as to the payment of dividends and/or the distribution of any assets on any liquidation, dissolution or winding-up of BNY Mellon will be prohibited, subject to
certain restrictions, in the event that we do not declare and pay in full preferred dividends for the then current dividend period of the Series A preferred stock or the last preceding dividend period of the Series C and Series D preferred stock.
All of the outstanding shares of the Series A preferred stock are owned by Mellon Capital IV, which will pass through any dividend on the Series A preferred stock to the holders of its Normal Preferred Capital Securities. All of the outstanding shares of the Series C and Series D preferred stock are held by the depositary of the depositary shares, which will pass through the applicable portion of any dividend on the Series C and Series D preferred stock to the holders of record of their respective depositary shares.
On Sept. 22, 2014, The Bank of New York Mellon Corporation paid the following dividends for the noncumulative perpetual preferred stock for the dividend period ending in September 2014 to holders of record as of the close of business on Sept. 5, 2014:
| |
• | $1,044.44 per share on the Series A Preferred Stock (equivalent to $10.4444 per Normal Preferred Capital Security of Mellon Capital IV, each representing 1/100th interest in a share of Series A Preferred Stock); and |
| |
• | $1,300.00 per share on the Series C Preferred Stock (equivalent to $0.3250 per depositary |
|
|
Notes to Consolidated Financial Statements (continued) |
|
share, each representing a 1/4,000th interest in a share of the Series C Preferred Stock).
The preferred stock is not subject to the operation of a sinking fund and is not convertible into, or exchangeable for, shares of our common stock or any other class or series of our other securities. Subject to the restrictions in BNY Mellon’s 2007 replacement capital covenant, subsequently amended on May 8 and Sept. 11, 2012, we may redeem the Series A preferred stock, in whole or in part, at our option. We may also, at our option, redeem the shares of the Series C preferred stock in whole or in part, on or after the dividend payment date in September 2017
and the Series D preferred stock in whole or in part, on or after the dividend payment date in June 2023. Both the Series C or Series D preferred stock can be redeemed in whole but not in part at any time within 90 days following a regulatory capital treatment event (as defined in the Certificate of Designations of the Series C preferred stock and the Certificate of Designations of the Series D preferred stock).
Terms of the Series A preferred stock, Series C preferred stock, and Series D preferred stock are more fully described in each of their Certificate of Designations, each of which is filed as an Exhibit to this Form 10-Q.
Note 14 - Other comprehensive income (loss)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Components of other comprehensive income (loss) |
| Quarter ended |
| Sept. 30, 2014 | | June 30, 2014 | | Sept. 30, 2013 |
(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 | $ | (505 | ) | $ | (84 | ) | $ | (589 | ) | | $ | 49 |
| $ | 28 |
| $ | 77 |
| | $ | 295 |
| $ | 90 |
| $ | 385 |
|
Total foreign currency translation | (505 | ) | (84 | ) | (589 | ) | | 49 |
| 28 |
| 77 |
| | 295 |
| 90 |
| 385 |
|
Unrealized gain (loss) on assets available-for-sale: | | | | | | | | | | | |
Unrealized gain (loss) arising during period | (18 | ) | 22 |
| 4 |
| | 287 |
| (77 | ) | 210 |
| | (112 | ) | 40 |
| (72 | ) |
Reclassification adjustment (a) | (20 | ) | 7 |
| (13 | ) | | (18 | ) | 4 |
| (14 | ) | | (10 | ) | 8 |
| (2 | ) |
Net unrealized gain (loss) on assets available-for-sale | (38 | ) | 29 |
| (9 | ) | | 269 |
| (73 | ) | 196 |
| | (122 | ) | 48 |
| (74 | ) |
Defined benefit plans: | | | | | | | | | | | |
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (a) | 31 |
| (12 | ) | 19 |
| | 31 |
| (14 | ) | 17 |
| | 52 |
| (21 | ) | 31 |
|
Total defined benefit plans | 31 |
| (12 | ) | 19 |
| | 31 |
| (14 | ) | 17 |
| | 52 |
| (21 | ) | 31 |
|
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | |
Unrealized hedge gain (loss) arising during period | 15 |
| (6 | ) | 9 |
| | (3 | ) | (3 | ) | (6 | ) | | (57 | ) | 25 |
| (32 | ) |
Reclassification adjustment (a) | (31 | ) | 10 |
| (21 | ) | | 1 |
| 3 |
| 4 |
| | 74 |
| (30 | ) | 44 |
|
Net unrealized gain (loss) on cash flow hedges | (16 | ) | 4 |
| (12 | ) | | (2 | ) | — |
| (2 | ) | | 17 |
| (5 | ) | 12 |
|
Total other comprehensive income (loss) | $ | (528 | ) | $ | (63 | ) | $ | (591 | ) | | $ | 347 |
| $ | (59 | ) | $ | 288 |
| | $ | 242 |
| $ | 112 |
| $ | 354 |
|
| |
(a) | The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the Consolidated Income Statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense on the Consolidated Income Statement. See Note 17 of the Notes to Consolidated Financial Statements for the location of the reclassification adjustment related to cash flow hedges on the Consolidated Income Statement. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | |
Components of other comprehensive income (loss) |
| Year-to-date |
| Sept. 30, 2014 | | Sept. 30, 2013 |
(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 | $ | (432 | ) | $ | (43 | ) | $ | (475 | ) | | $ | 57 |
| $ | 24 |
| $ | 81 |
|
Total foreign currency translation | (432 | ) | (43 | ) | (475 | ) | | 57 |
| 24 |
| 81 |
|
Unrealized gain (loss) on assets available-for-sale: | | | | | | | |
Unrealized gain (loss) arising during the period | 519 |
| (143 | ) | 376 |
| | (1,336 | ) | 522 |
| (814 | ) |
Reclassification adjustment (a) | (60 | ) | 20 |
| (40 | ) | | (90 | ) | 41 |
| (49 | ) |
Net unrealized gain (loss) on assets available-for-sale | 459 |
| (123 | ) | 336 |
| | (1,426 | ) | 563 |
| (863 | ) |
Defined benefit plans: | | | | | | | |
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (a) | 92 |
| (37 | ) | 55 |
| | 171 |
| (66 | ) | 105 |
|
Total defined benefit plans | 92 |
| (37 | ) | 55 |
| | 171 |
| (66 | ) | 105 |
|
Unrealized gain (loss) on cash flow hedges: | | | | | | | |
Unrealized hedge gain (loss) arising during period | 18 |
| (9 | ) | 9 |
| | 127 |
| (51 | ) | 76 |
|
Reclassification adjustment (a) | (34 | ) | 12 |
| (22 | ) | | (123 | ) | 51 |
| (72 | ) |
Net unrealized gain (loss) on cash flow hedges | (16 | ) | 3 |
| (13 | ) | | 4 |
| — |
| 4 |
|
Total other comprehensive income (loss) | $ | 103 |
| $ | (200 | ) | $ | (97 | ) | | $ | (1,194 | ) | $ | 521 |
| $ | (673 | ) |
| |
(a) | The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the Consolidated Income Statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense on the Consolidated Income Statement. See Note 17 of the Notes to Consolidated Financial Statements for the location of the reclassification adjustment related to cash flow hedges on the Consolidated Income Statement. |
Note 15 - Fair value measurement
The guidance related to “Fair Value Measurement” included in ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date and establishes a framework for measuring fair value. It establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and expands the disclosures about instruments measured at fair value. ASC 820 requires consideration of a company’s own creditworthiness when valuing liabilities.
The standard provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The objective is to determine from
weighted indicators of fair value a reasonable point within the range that is most representative of fair value under current market conditions.
Determination of fair value
Following is a description of our valuation methodologies for assets and liabilities measured at fair value. We have established processes for determining fair values. Fair value is based upon quoted market prices in active markets, where available. For financial instruments where quotes from recent exchange transactions are not available, we determine fair value based on discounted cash flow analysis, comparison to similar instruments, and the use of financial models. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Model-based pricing uses inputs of observable prices, where available, for interest rates, foreign exchange rates, option volatilities and other factors. Models are benchmarked and validated by an independent internal risk management function. Our valuation process takes into consideration factors such as counterparty credit quality, liquidity, concentration concerns, and observability of model parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.
|
|
Notes to Consolidated Financial Statements (continued) |
|
Most derivative contracts are valued using internally developed models which are calibrated to observable market data and employ standard market pricing theory for their valuations. An initial “risk-neutral” valuation is performed on each position assuming time-discounting based on a AA credit curve. Then, to arrive at a fair value that incorporates counter-party credit risk, a credit adjustment is made to these results by discounting each trade’s expected exposures to the counterparty using the counterparty’s credit spreads, as implied by the credit default swap market. We also adjust expected liabilities to the counterparty using BNY Mellon’s own credit spreads, as implied by the credit default swap market. Accordingly, the valuation of our derivative position is sensitive to the current changes in our own credit spreads as well as those of our counterparties.
In certain cases, recent prices may not be observable for instruments that trade in inactive or less active markets. Upon evaluating the uncertainty in valuing financial instruments subject to liquidity issues, we make an adjustment to their value. The determination of the liquidity adjustment includes the availability of external quotes, the time since the latest available quote and the price volatility of the instrument.
Certain parameters in some financial models are not directly observable and, therefore, are based on management’s estimates and judgments. These financial instruments are normally traded less actively. We apply valuation adjustments to mitigate the possibility of error and revision in the model based estimate value. Examples include products where parameters such as correlation and recovery rates are unobservable.
The methods described above for instruments that trade in inactive or less active markets may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.
Valuation hierarchy
ASC 820 established a three-level valuation hierarchy for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date. The three levels are described below.
Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 assets and liabilities include debt and equity securities, derivative financial instruments actively traded on exchanges and U.S. Treasury securities that are actively traded in highly liquid over-the-counter markets.
Level 2: Observable inputs other than Level 1 prices, for example, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 assets and liabilities include debt instruments that are traded less frequently than exchange-traded securities and derivative instruments whose model inputs are observable in the market or can be corroborated by market-observable data. Examples in this category are agency and non-agency mortgage-backed securities, corporate debt securities and over-the-counter derivative contracts.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Examples in this category include certain private equity investments, derivative contracts that are highly structured or long-dated, and interests in certain securitized financial assets.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Securities
Where quoted prices are available in an active market, we classify the securities within Level 1 of the valuation hierarchy. Securities include both long and short positions. Level 1 securities include highly liquid government bonds, money market funds, foreign covered bonds and exchange-traded equities.
|
|
Notes to Consolidated Financial Statements (continued) |
|
If quoted market prices are not available, we estimate fair values using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include agency and non-agency mortgage-backed securities, state and political subdivisions, commercial mortgage-backed securities, sovereign debt, corporate bonds and foreign covered bonds.
For securities where quotes from recent transactions are not available for identical securities, we determine fair value primarily based on pricing sources with reasonable levels of price transparency that employ financial models or obtain comparison to similar instruments to arrive at “consensus” prices.
Specifically, the pricing sources obtain recent transactions for similar types of securities (e.g., vintage, position in the securitization structure) and ascertain variables such as discount rate and speed of prepayment for the types of transaction and apply such variables to similar types of bonds. We view these as observable transactions in the current marketplace and classify such securities as Level 2. Pricing sources discontinue pricing any specific security whenever they determine there is insufficient observable data to provide a good faith opinion on price.
In addition, we have significant investments in more actively traded agency RMBS and other types of securities such as sovereign debt. The pricing sources derive the prices for these securities largely from quotes they obtain from three major inter-dealer brokers. The pricing sources receive their daily observed trade price and other information feeds from the inter-dealer brokers.
For securities with bond insurance, the financial strength of the insurance provider is analyzed and that information is included in the fair value assessment for such securities.
In certain cases where there is limited activity or less transparency around inputs to the valuation, we classify those securities in Level 3 of the valuation hierarchy. Securities classified within Level 3 primarily include securities of state and political subdivisions and distressed debt securities.
At Sept. 30, 2014, more than 99% of our securities were valued by pricing sources with reasonable levels of price transparency. Less than 1% of our securities were priced based on economic models and non-binding dealer quotes, and are included in Level 3 of the ASC 820 hierarchy.
Consolidated collateralized loan obligations
BNY Mellon values assets in consolidated CLOs using observable market prices observed from the secondary loan market. The returns to the note holders are solely dependent on the assets and accordingly equal the value of those assets. Based on the structure of the CLOs, the valuation of the assets is attributable to the note holders. Changes in the values of assets and liabilities are reflected in the income statement as investment and other income and interest of investment management fund note holders, respectively. Consolidated CLOs are generally classified within Level 2 of the valuation hierarchy.
Derivatives
We classify exchange-traded derivatives valued using quoted prices in Level 1 of the valuation hierarchy. Examples include exchange-traded equity and foreign exchange options. Since few other classes of derivative contracts are listed on an exchange, most of our derivative positions are valued using internally developed models that use as their basis readily observable market parameters, and we classify them in Level 2 of the valuation hierarchy. Such derivatives include swaps and options, foreign exchange spot and forward contracts and credit default swaps.
Derivatives valued using models with significant unobservable market parameters in markets that lack two-way flow are classified in Level 3 of the valuation hierarchy. Examples include long-dated interest rate or currency swaps and options, where parameters may be unobservable for longer maturities; and certain products, where correlation risk is unobservable. The fair value of these derivatives compose approximately 1% of our derivative financial instruments. Additional disclosures of derivative instruments are provided in Note 17 of the Notes to Consolidated Financial Statements.
|
|
Notes to Consolidated Financial Statements (continued) |
|
Loans and unfunded lending-related commitments
Where quoted market prices are not available, we generally base the fair value of loans and unfunded lending-related commitments on observable market prices of similar instruments, including bonds, credit derivatives and loans with similar characteristics. If observable market prices are not available, we base the fair value on estimated cash flows adjusted for credit risk which are discounted using an interest rate appropriate for the maturity of the applicable loans or the unfunded lending-related commitments.
Unrealized gains and losses, if any, on unfunded lending-related commitments carried at fair value are classified in other assets and other liabilities, respectively. Loans and unfunded lending-related commitments carried at fair value are generally classified within Level 2 of the valuation hierarchy.
Seed capital
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. Seed capital is included in other assets. When applicable, we value seed capital based on the published NAV of the fund. We include funds in which ownership interests in the fund are publicly traded in an active market and institutional funds in which investors trade in and out daily in Level 1 of the valuation hierarchy. We include open-end funds where investors are allowed to sell their ownership interest back to the fund less frequently than daily and where our interest in the fund contains no other rights or obligations in Level 2 of the valuation hierarchy. However, we generally include investments in funds that allow investors to sell their ownership interest back to the fund less frequently than monthly in Level 3, unless actual redemption prices are observable.
For other types of investments in funds, we consider all of the rights and obligations inherent in our ownership interest, including the reported NAV as well as other factors that affect the fair value of our interest in the fund. To the extent the NAV measurements reported for the investments are based on unobservable inputs or include other rights and obligations (e.g., obligation to meet cash calls), we
generally classify them in Level 3 of the valuation hierarchy.
Certain interests in securitizations
For certain interests in securitizations that are classified in securities available-for-sale, trading assets and long-term debt, we use discounted cash flow models, which generally include assumptions of projected finance charges related to the securitized assets, estimated net credit losses, prepayment assumptions and estimates of payments to third-party investors. When available, we compare our fair value estimates and assumptions to market activity and to the actual results of the securitized portfolio.
Private equity investments
Our Other segment includes holdings of nonpublic private equity investment through funds managed by third-party investment managers. We value private equity investments initially based upon the transaction price, which we subsequently adjust to reflect expected exit values as evidenced by financing and sale transactions with third parties or through ongoing reviews by the investment managers.
Private equity investments also include publicly held equity investments, generally obtained through the initial public offering of privately held equity investments. These equity investments are often held in a partnership structure. Publicly held investments are marked-to-market at the quoted public value less adjustments for regulatory or contractual sales restrictions or adjustments to reflect the difficulty in selling a partnership interest.
Discounts for restrictions are quantified by analyzing the length of the restriction period and the volatility of the equity security. Publicly held private equity investments are primarily classified in Level 2 of the valuation hierarchy.
The following tables present the financial instruments carried at fair value at Sept. 30, 2014 and Dec. 31, 2013, by caption on the consolidated balance sheet and by ASC 820 valuation hierarchy (as described above). We have included credit ratings information in certain of the tables because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications could result in increased risk for us.
|
|
Notes to Consolidated Financial Statements (continued) |
|
There were no material transfers between Level 1 and Level 2 during the third quarter of 2014.
|
| | | | | | | | | | | | | | | |
Assets measured at fair value on a recurring basis at Sept. 30, 2014 |
(dollar amounts in millions) | Level 1 |
| Level 2 |
| Level 3 |
| Netting (a) |
| Total carrying value |
|
Available-for-sale securities: | | | | | |
U.S. Treasury | $ | 21,101 |
| $ | — |
| $ | — |
| $ | — |
| $ | 21,101 |
|
U.S. Government agencies | — |
| 361 |
| — |
| — |
| 361 |
|
Sovereign debt | 79 |
| 15,626 |
| — |
| — |
| 15,705 |
|
State and political subdivisions (b) | — |
| 5,393 |
| 11 |
| — |
| 5,404 |
|
Agency RMBS | — |
| 30,208 |
| — |
| — |
| 30,208 |
|
Non-agency RMBS | — |
| 1,005 |
| — |
| — |
| 1,005 |
|
Other RMBS | — |
| 1,859 |
| — |
| — |
| 1,859 |
|
Commercial MBS | — |
| 2,024 |
| — |
| — |
| 2,024 |
|
Agency commercial MBS | — |
| 2,887 |
| — |
| — |
| 2,887 |
|
Asset-backed CLOs | — |
| 1,996 |
| — |
| — |
| 1,996 |
|
Other asset-backed securities | — |
| 3,025 |
| — |
| — |
| 3,025 |
|
Equity securities | 97 |
| — |
| — |
| — |
| 97 |
|
Money market funds (b) | 789 |
| — |
| — |
| — |
| 789 |
|
Corporate bonds | — |
| 1,670 |
| — |
| — |
| 1,670 |
|
Other debt securities | — |
| 2,030 |
| — |
| — |
| 2,030 |
|
Foreign covered bonds | 2,266 |
| 683 |
| — |
| — |
| 2,949 |
|
Non-agency RMBS (c) | — |
| 2,449 |
| — |
| — |
| 2,449 |
|
Total available-for-sale securities | 24,332 |
| 71,216 |
| 11 |
| — |
| 95,559 |
|
Trading assets: | | | | | |
Debt and equity instruments (b) | 3,137 |
| 3,267 |
| — |
| — |
| 6,404 |
|
Derivative assets not designated as hedging: | | | | | |
Interest rate | 3 |
| 15,570 |
| 18 |
| (13,269 | ) | 2,322 |
|
Foreign exchange | — |
| 6,348 |
| — |
| (3,708 | ) | 2,640 |
|
Equity | 120 |
| 285 |
| 6 |
| (164 | ) | 247 |
|
Total derivative assets not designated as hedging | 123 |
| 22,203 |
| 24 |
| (17,141 | ) | 5,209 |
|
Total trading assets | 3,260 |
| 25,470 |
| 24 |
| (17,141 | ) | 11,613 |
|
Other assets: | | | | | |
Derivative assets designated as hedging: | | | | | |
Interest rate | — |
| 573 |
| — |
| — |
| 573 |
|
Foreign exchange | — |
| 204 |
| — |
| — |
| 204 |
|
Total derivative assets designated as hedging | — |
| 777 |
| — |
| — |
| 777 |
|
Other assets (d) | 223 |
| 771 |
| 79 |
| — |
| 1,073 |
|
Total other assets | 223 |
| 1,548 |
| 79 |
| — |
| 1,850 |
|
Subtotal assets of operations at fair value | 27,815 |
| 98,234 |
| 114 |
| (17,141 | ) | 109,022 |
|
Percentage of assets prior to netting | 22 | % | 78 | % | — | % | | |
Assets of consolidated investment management funds: | | | | | |
Trading assets | 115 |
| 8,708 |
| — |
| — |
| 8,823 |
|
Other assets | 578 |
| 161 |
| — |
| — |
| 739 |
|
Total assets of consolidated investment management funds | 693 |
| 8,869 |
| — |
| — |
| 9,562 |
|
Total assets | $ | 28,508 |
| $ | 107,103 |
| $ | 114 |
| $ | (17,141 | ) | $ | 118,584 |
|
Percentage of assets prior to netting | 21 | % | 79 | % | — | % | | |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | |
Liabilities measured at fair value on a recurring basis at Sept. 30, 2014 |
(dollar amounts in millions) | Level 1 |
| Level 2 |
| Level 3 |
| Netting (a) |
| Total carrying value |
|
Trading liabilities: | | | | | |
Debt and equity instruments | $ | 1,160 |
| $ | 318 |
| $ | — |
| $ | — |
| $ | 1,478 |
|
Derivative liabilities not designated as hedging: | | | | | |
Interest rate | 10 |
| 16,084 |
| 23 |
| (13,450 | ) | 2,667 |
|
Foreign exchange | — |
| 6,180 |
| — |
| (3,003 | ) | 3,177 |
|
Equity and other contracts | 56 |
| 535 |
| 3 |
| (182 | ) | 412 |
|
Total derivative liabilities not designated as hedging | 66 |
| 22,799 |
| 26 |
| (16,635 | ) | 6,256 |
|
Total trading liabilities | 1,226 |
| 23,117 |
| 26 |
| (16,635 | ) | 7,734 |
|
Long-term debt (b) | — |
| 337 |
| — |
| — |
| 337 |
|
Other liabilities - derivative liabilities designated as hedging: | | | | | |
Interest rate | — |
| 178 |
| — |
| — |
| 178 |
|
Foreign exchange | — |
| 57 |
| — |
| — |
| 57 |
|
Total other liabilities - derivative liabilities designated as hedging | — |
| 235 |
| — |
| — |
| 235 |
|
Subtotal liabilities of operations at fair value | 1,226 |
| 23,689 |
| 26 |
| (16,635 | ) | 8,306 |
|
Percentage of liabilities prior to netting | 5 | % | 95 | % | — | % | | |
Liabilities of consolidated investment management funds: | | | | | |
Trading liabilities | — |
| 8,130 |
| — |
| — |
| 8,130 |
|
Other liabilities | 1 |
| 9 |
| — |
| — |
| 10 |
|
Total liabilities of consolidated investment management funds | 1 |
| 8,139 |
| — |
| — |
| 8,140 |
|
Total liabilities | $ | 1,227 |
| $ | 31,828 |
| $ | 26 |
| $ | (16,635 | ) | $ | 16,446 |
|
Percentage of liabilities prior to netting | 4 | % | 96 | % | — | % | | |
| |
(a) | ASC 815 permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. 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. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | |
Assets measured at fair value on a recurring basis at Dec. 31, 2013 |
(dollar amounts in millions) | Level 1 |
| Level 2 |
| Level 3 |
| Netting (a) |
| Total carrying value |
|
Available-for-sale securities: | | | | | |
U.S. Treasury | $ | 12,852 |
| $ | — |
| $ | — |
| $ | — |
| $ | 12,852 |
|
U.S. Government agencies | — |
| 948 |
| — |
| — |
| 948 |
|
Sovereign debt | 40 |
| 11,314 |
| — |
| — |
| 11,354 |
|
State and political subdivisions (b) | — |
| 6,663 |
| 11 |
| — |
| 6,674 |
|
Agency RMBS | — |
| 25,321 |
| — |
| — |
| 25,321 |
|
Non-agency RMBS | — |
| 1,142 |
| — |
| — |
| 1,142 |
|
Other RMBS | — |
| 2,285 |
| — |
| — |
| 2,285 |
|
Commercial MBS | — |
| 2,357 |
| — |
| — |
| 2,357 |
|
Agency commercial MBS | — |
| 1,789 |
| — |
| — |
| 1,789 |
|
Asset-backed CLOs | — |
| 1,562 |
| — |
| — |
| 1,562 |
|
Other asset-backed securities | — |
| 2,891 |
| — |
| — |
| 2,891 |
|
Equity securities | 19 |
| — |
| — |
| — |
| 19 |
|
Money market funds (b) | 938 |
| — |
| — |
| — |
| 938 |
|
Corporate bonds | — |
| 1,815 |
| — |
| — |
| 1,815 |
|
Other debt securities | — |
| 1,796 |
| — |
| — |
| 1,796 |
|
Foreign covered bonds | 2,238 |
| 633 |
| — |
| — |
| 2,871 |
|
Non-agency RMBS (c) | — |
| 2,695 |
| — |
| — |
| 2,695 |
|
Total available-for-sale securities | 16,087 |
| 63,211 |
| 11 |
| — |
| 79,309 |
|
Trading assets: | | | | | |
Debt and equity instruments (b) | 4,559 |
| 4,338 |
| 1 |
| — |
| 8,898 |
|
Derivative assets not designated as hedging: | | | | | |
Interest rate | 4 |
| 14,702 |
| 6 |
| (13,231 | ) | 1,481 |
|
Foreign exchange | — |
| 3,609 |
| 1 |
| (2,294 | ) | 1,316 |
|
Equity | 274 |
| 395 |
| 15 |
| (281 | ) | 403 |
|
Total derivative assets not designated as hedging | 278 |
| 18,706 |
| 22 |
| (15,806 | ) | 3,200 |
|
Total trading assets | 4,837 |
| 23,044 |
| 23 |
| (15,806 | ) | 12,098 |
|
Other assets: | | | | | |
Derivative assets designated as hedging: | | | | | |
Interest rate | — |
| 1,206 |
| — |
| — |
| 1,206 |
|
Foreign exchange | — |
| 76 |
| — |
| — |
| 76 |
|
Total derivative assets designated as hedging | — |
| 1,282 |
| — |
| — |
| 1,282 |
|
Other assets (d) | 148 |
| 193 |
| 105 |
| — |
| 446 |
|
Total other assets | 148 |
| 1,475 |
| 105 |
| — |
| 1,728 |
|
Subtotal assets of operations at fair value | 21,072 |
| 87,730 |
| 139 |
| (15,806 | ) | 93,135 |
|
Percentage of assets prior to netting | 19 | % | 81 | % | — | % | | |
Assets of consolidated investment management funds: | | | | | |
Trading assets | 61 |
| 10,336 |
| — |
| — |
| 10,397 |
|
Other assets | 739 |
| 136 |
| — |
| — |
| 875 |
|
Total assets of consolidated investment management funds | 800 |
| 10,472 |
| — |
| — |
| 11,272 |
|
Total assets | $ | 21,872 |
| $ | 98,202 |
| $ | 139 |
| $ | (15,806 | ) | $ | 104,407 |
|
Percentage of assets prior to netting | 18 | % | 82 | % | — | % | | |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | |
Liabilities measured at fair value on a recurring basis at Dec. 31, 2013 |
(dollar amounts in millions) | Level 1 |
| Level 2 |
| Level 3 |
| Netting (a) |
| Total carrying value |
|
Trading liabilities: | | | | | |
Debt and equity instruments | $ | 1,030 |
| $ | 585 |
| $ | — |
| $ | — |
| $ | 1,615 |
|
Derivative liabilities not designated as hedging: | | | | | |
Interest rate | 3 |
| 15,178 |
| 31 |
| (12,429 | ) | 2,783 |
|
Foreign exchange | — |
| 3,536 |
| — |
| (1,711 | ) | 1,825 |
|
Equity and other contracts | 214 |
| 745 |
| 44 |
| (281 | ) | 722 |
|
Total derivative liabilities not designated as hedging | 217 |
| 19,459 |
| 75 |
| (14,421 | ) | 5,330 |
|
Total trading liabilities | 1,247 |
| 20,044 |
| 75 |
| (14,421 | ) | 6,945 |
|
Long-term debt (b) | — |
| 321 |
| — |
| — |
| 321 |
|
Other liabilities - derivative liabilities designated as hedging: | | | | | |
Interest rate | — |
| 167 |
| — |
| — |
| 167 |
|
Foreign exchange | — |
| 336 |
| — |
| — |
| 336 |
|
Total other liabilities - derivative liabilities designated as hedging | — |
| 503 |
| — |
| — |
| 503 |
|
Subtotal liabilities of operations at fair value | 1,247 |
| 20,868 |
| 75 |
| (14,421 | ) | 7,769 |
|
Percentage of liabilities prior to netting | 6 | % | 94 | % | — | % | | |
Liabilities of consolidated investment management funds: | | | | | |
Trading liabilities | 16 |
| 10,069 |
| — |
| — |
| 10,085 |
|
Other liabilities | — |
| 46 |
| — |
| — |
| 46 |
|
Total liabilities of consolidated investment management funds | 16 |
| 10,115 |
| — |
| — |
| 10,131 |
|
Total liabilities | $ | 1,263 |
| $ | 30,983 |
| $ | 75 |
| $ | (14,421 | ) | $ | 17,900 |
|
Percentage of liabilities prior to netting | 4 | % | 96 | % | — | % | | |
| |
(a) | ASC 815 permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. 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. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Details of certain items measured at fair value on a recurring basis | Sept. 30, 2014 | | Dec. 31, 2013 |
Total carrying value (a) |
| | Ratings | | Total carrying value (a) |
| | Ratings |
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 | $ | 80 |
| | — | % | — | % | — | % | 100 | % | | $ | 90 |
| | — | % | — | % | 41 | % | 59 | % |
2006 | 152 |
| | — |
| — |
| — |
| 100 |
| | 156 |
| | — |
| — |
| — |
| 100 |
|
2005 | 297 |
| | — |
| 22 |
| 19 |
| 59 |
| | 330 |
| | — |
| 24 |
| 16 |
| 60 |
|
2004 and earlier | 476 |
| | 3 |
| 5 |
| 29 |
| 63 |
| | 566 |
| | 3 |
| 6 |
| 30 |
| 61 |
|
Total non-agency RMBS | $ | 1,005 |
| | 1 | % | 9 | % | 19 | % | 71 | % | | $ | 1,142 |
| | 1 | % | 10 | % | 23 | % | 66 | % |
Commercial MBS - Domestic, originated in: | | | | | | | | | | | | | |
2009-2014 | $ | 584 |
| | 84 | % | 16 | % | — | % | — | % | | $ | 466 |
| | 81 | % | 19 | % | — | % | — | % |
2008 | 21 |
| | 100 |
| — |
| — |
| — |
| | 22 |
| | 59 |
| 41 |
| — |
| — |
|
2007 | 366 |
| | 66 |
| 20 |
| 14 |
| — |
| | 457 |
| | 69 |
| 20 |
| 11 |
| — |
|
2006 | 620 |
| | 83 |
| 17 |
| — |
| — |
| | 683 |
| | 84 |
| 16 |
| — |
| — |
|
2005 | 341 |
| | 100 |
| — |
| — |
| — |
| | 486 |
| | 100 |
| — |
| — |
| — |
|
2004 and earlier | 16 |
| | 100 |
| — |
| — |
| — |
| | 153 |
| | 93 |
| 7 |
| — |
| — |
|
Total commercial MBS - Domestic | $ | 1,948 |
| | 83 | % | 14 | % | 3 | % | — | % | | $ | 2,267 |
| | 84 | % | 14 | % | 2 | % | — | % |
Foreign covered bonds: | | | | | | | | | | | | | |
Canada | $ | 1,337 |
| | 100 | % | — | % | — | % | — | % | | $ | 851 |
| | 100 | % | — | % | — | % | — | % |
United Kingdom | 665 |
| | 100 |
| — |
| — |
| — |
| | 803 |
| | 100 |
| — |
| — |
| — |
|
Netherlands | 254 |
| | 100 |
| — |
| — |
| — |
| | 298 |
| | 100 |
| — |
| — |
| — |
|
Other | 693 |
| | 100 |
| — |
| — |
| — |
| | 919 |
| | 100 |
| — |
| — |
| — |
|
Total foreign covered bonds | $ | 2,949 |
| | 100 | % | — | % | — | % | — | % | | $ | 2,871 |
| | 100 | % | — | % | — | % | — | % |
European floating rate notes - available-for-sale: | | | | | | | | | | | | | |
United Kingdom | $ | 1,450 |
| | 84 | % | 16 | % | — | % | — | % | | $ | 1,668 |
| | 79 | % | 21 | % | — | % | — | % |
Netherlands | 319 |
| | 100 |
| — |
| — |
| — |
| | 434 |
| | 100 |
| — |
| — |
| — |
|
Ireland | 152 |
| | — |
| — |
| — |
| 100 |
| | 165 |
| | 10 |
| — |
| — |
| 90 |
|
Italy | — |
| | — |
| — |
| — |
| — |
| | 104 |
| | — |
| 100 |
| — |
| — |
|
Other | 31 |
| | 91 |
| 1 |
| — |
| 8 |
| | 42 |
| | 89 |
| 5 |
| — |
| 6 |
|
Total European floating rate notes - available-for-sale | $ | 1,952 |
| | 80 | % | 12 | % | — | % | 8 | % | | $ | 2,413 |
| | 75 | % | 19 | % | — | % | 6 | % |
Sovereign debt: | | | | | | | | | | | | | |
United Kingdom | $ | 5,077 |
| | 100 | % | — | % | — | % | — | % | | $ | 4,709 |
| | 100 | % | — | % | — | % | — | % |
France | 3,856 |
| | 100 |
| — |
| — |
| — |
| | 1,568 |
| | 100 |
| — |
| — |
| — |
|
Netherlands | 1,783 |
| | 100 |
| — |
| — |
| — |
| | 2,105 |
| | 100 |
| — |
| — |
| — |
|
Germany | 1,582 |
| | 100 |
| — |
| — |
| — |
| | 2,182 |
| | 100 |
| — |
| — |
| — |
|
Spain | 917 |
| | — |
| — |
| 100 |
| — |
| | 137 |
| | — |
| — |
| 100 |
| — |
|
Italy | 906 |
| | — |
| — |
| 100 |
| — |
| | 171 |
| | — |
| — |
| 100 |
| — |
|
Ireland | 283 |
| | — |
| — |
| 100 |
| — |
| | — |
| | — |
| — |
| — |
| — |
|
Other | 1,301 |
| | 90 |
| 2 |
| 8 |
| — |
| | 482 |
| | 100 |
| — |
| — |
| — |
|
Total sovereign debt | $ | 15,705 |
| | 86 | % | — | % | 14 | % | — | % | | $ | 11,354 |
| | 97 | % | — | % | 3 | % | — | % |
Non-agency RMBS (b), originated in: | | | | | | | | | | | | | |
2007 | $ | 751 |
| | — | % | — | % | — | % | 100 | % | | $ | 812 |
| | — | % | — | % | — | % | 100 | % |
2006 | 701 |
| | — |
| — |
| 1 |
| 99 |
| | 780 |
| | — |
| — |
| 1 |
| 99 |
|
2005 | 772 |
| | — |
| 3 |
| 1 |
| 96 |
| | 854 |
| | — |
| 3 |
| — |
| 97 |
|
2004 and earlier | 225 |
| | — |
| 4 |
| 10 |
| 86 |
| | 249 |
| | — |
| 4 |
| 16 |
| 80 |
|
Total non-agency RMBS (b) | $ | 2,449 |
| | — | % | 1 | % | 2 | % | 97 | % | | $ | 2,695 |
| | — | % | 1 | % | 2 | % | 97 | % |
| |
(a) | At Sept. 30, 2014 and Dec. 31, 2013, foreign covered bonds and sovereign debt 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. |
| |
(b) | 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 frequently manage the risks of Level 3 financial instruments
using securities and derivatives positions that are Level 1 or 2 instruments which are not included in the table; accordingly, the gains or losses below do not reflect the effect of our risk management activities related to the Level 3 instruments.
The Company has a Level 3 Pricing Committee which evaluates the valuation techniques used in determining the fair value of Level 3 assets and liabilities.
|
|
Notes to Consolidated Financial Statements (continued) |
|
The tables below include a roll forward of the balance sheet amounts for the three and nine months ended Sept. 30, 2014 and 2013 (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 for the three months ended Sept. 30, 2014 |
| Available-for-sale securities |
| | Trading assets | | | | Total assets |
|
(in millions) | State and political subdivisions |
| | Debt and equity instruments |
| | Derivative assets |
| (a) | Other assets |
| |
Fair value at June 30, 2014 | $ | 11 |
| | $ | 1 |
| | $ | 22 |
| | $ | 98 |
| | $ | 132 |
|
Transfers out of Level 3 | — |
| | — |
| | (10 | ) | | — |
| | (10 | ) |
Total gains or (losses) for the period: | | | | | | |
| |
|
Included in earnings (or changes in net assets) | — |
| (b) | — |
| (c) | 13 |
| (c) | (10 | ) | (d) | 3 |
|
Sales and settlements: | | | | | | | | | |
Sales | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) |
Settlements | — |
| | (1 | ) | | (1 | ) | | — |
| | (2 | ) |
Fair value at Sept. 30, 2014 | $ | 11 |
| | $ | — |
| | $ | 24 |
| | $ | 79 |
| | $ | 114 |
|
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period | | | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
|
| |
(a) | Derivative assets are reported on a gross basis. |
| |
(b) | Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss) except for the credit portion of OTTI losses which are recorded in securities gains (losses). |
| |
(c) | Reported in foreign exchange and other trading revenue. |
| |
(d) | Reported in investment and other income. |
|
| | | | | | | |
Fair value measurements for liabilities using significant unobservable inputs for the three months ended Sept. 30, 2014 |
| Trading liabilities |
| | Total liabilities |
|
(in millions) | Derivative liabilities |
| (a) |
Fair value at June 30, 2014 | $ | 51 |
| | $ | 51 |
|
Transfers out of Level 3 | (2 | ) | | (2 | ) |
Total (gains) or losses for the period: | | | |
Included in earnings (or changes in net liabilities) | (23 | ) | (b) | (23 | ) |
Fair value at Sept. 30, 2014 | $ | 26 |
| | $ | 26 |
|
Change in unrealized (gains) or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period | $ | (12 | ) | | $ | (12 | ) |
| |
(a) | Derivative liabilities are reported on a gross basis. |
| |
(b) | Reported in foreign exchange and other trading revenue. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Fair value measurements for assets using significant unobservable inputs for the three months ended Sept. 30, 2013 | |
| Available-for-sale securities | | Trading assets | | | | | Assets of consolidated investment management funds |
| |
(in millions) | State and political subdivisions |
| | Debt and equity instruments |
| | Derivative assets |
| (a) | Other assets |
| | Total assets of operations |
| |
Fair value at June 30, 2013 | $ | 52 |
| | $ | 2 |
| | $ | 42 |
| | $ | 113 |
| | $ | 209 |
| $ | 44 |
| |
Transfers out of Level 3 | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | — |
| |
Total gains or (losses) for the period: | | | | | | | | | | | |
Included in earnings (or changes in net assets) | (1 | ) | (b) | 1 |
| (c) | (2 | ) | (c) | (2 | ) | (d) | (4 | ) | 2 |
| (e) |
Sales | — |
| | — |
| | — |
| | (10 | ) | | (10 | ) | (46 | ) | |
Fair value at Sept. 30, 2013 | $ | 51 |
| | $ | 3 |
| | $ | 26 |
| | $ | 101 |
| | $ | 181 |
| $ | — |
| |
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period | | | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | (2 | ) | $ | — |
| |
| |
(a) | Derivative assets are reported on a gross basis. |
| |
(b) | Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss) except for the credit portion of OTTI losses which are recorded in securities gains (losses). |
| |
(c) | Reported in foreign exchange and other trading revenue. |
| |
(d) | Reported in investment and other income. |
| |
(e) | Reported in income from consolidated investment management funds. |
|
| | | | | | | |
Fair value measurements for liabilities using significant unobservable inputs for the three months ended Sept. 30, 2013 |
| Trading liabilities |
| | Total liabilities |
|
(in millions) | Derivative liabilities |
| (a) |
Fair value at June 30, 2013 | $ | 117 |
| | $ | 117 |
|
Transfers out of Level 3 | (13 | ) | | (13 | ) |
Total (gains) or losses for the period: | | | |
Included in earnings (or changes in net liabilities) | (5 | ) | (b) | (5 | ) |
Settlements | (7 | ) | | (7 | ) |
Fair value at Sept. 30, 2013 | $ | 92 |
| | $ | 92 |
|
Change in unrealized (gains) or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period | $ | (1 | ) | | $ | (1 | ) |
| |
(a) | Derivative liabilities are reported on a gross basis. |
| |
(b) | Reported in foreign exchange and other trading revenue. |
|
| | | | | | | | | | | | | | | | | | | |
Fair value measurements for assets using significant unobservable inputs for the nine months ended Sept. 30, 2014 |
| Available-for-sale securities |
| | Trading assets | | | | Total assets |
|
(in millions) | State and political subdivisions |
| | Debt and equity instruments |
| | Derivative assets |
| (a) | Other assets |
| |
Fair value at Dec. 31, 2013 | $ | 11 |
| | $ | 1 |
| | $ | 22 |
| | $ | 105 |
| | $ | 139 |
|
Transfers out of Level 3 | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
Total gains or (losses) for the period: | | | | | | | | | |
Included in earnings (or changes in net assets) | — |
| (b) | — |
| (c) | 15 |
| (c) | (5 | ) | (d) | 10 |
|
Purchases, sales and settlements: | | | | | | | | | |
Purchases | — |
| | — |
| | — |
| | 14 |
| | 14 |
|
Sales | — |
| | — |
| | — |
| | (35 | ) | | (35 | ) |
Settlements | — |
| | (1 | ) | | (1 | ) | | — |
| | (2 | ) |
Fair value at Sept. 30, 2014 | $ | 11 |
| | $ | — |
| | $ | 24 |
| | $ | 79 |
| | $ | 114 |
|
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period | | | $ | — |
| | $ | 19 |
| | $ | — |
| | $ | 19 |
|
| |
(a) | Derivative assets are reported on a gross basis. |
| |
(b) | Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss) except for the credit portion of OTTI losses which are recorded in securities gains (losses). |
| |
(c) | Reported in foreign exchange and other trading revenue. |
| |
(d) | Reported in investment and other income. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | |
Fair value measurements for liabilities using significant unobservable inputs for the nine months ended Sept. 30, 2014 |
| Trading liabilities |
| | Total liabilities |
|
(in millions) | Derivative liabilities |
| (a) |
Fair value at Dec. 31, 2013 | $ | 75 |
| | $ | 75 |
|
Transfers out of Level 3 | (39 | ) | | (39 | ) |
Total (gains) or losses for the period: | | | |
Included in earnings (or changes in net liabilities) | (13 | ) | (b) | (13 | ) |
Purchases | 3 |
| | 3 |
|
Fair value at Sept 30, 2014 | $ | 26 |
| | $ | 26 |
|
Change in unrealized (gains) or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period | $ | 1 |
| | $ | 1 |
|
| |
(a) | Derivative liabilities are reported on a gross basis. |
| |
(b) | Reported in foreign exchange and other trading revenue. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Fair value measurements for assets using significant unobservable inputs for the nine months ended Sept. 30, 2013 | |
| Available-for-sale securities | | Trading assets | | | | | Assets of consolidated investment management funds |
| |
(in millions) | State and political subdivisions |
| | Debt and equity instruments |
| | Derivative assets |
| (a) | Other assets |
| | Total assets of operations |
| |
Fair value at Dec. 31, 2012 | $ | 45 |
| | $ | 48 |
| | $ | 58 |
| | $ | 120 |
| | $ | 271 |
| $ | 44 |
| |
Transfers out of Level 3 | — |
| | — |
| | (19 | ) | | — |
| | (19 | ) | — |
| |
Total gains or (losses) for the period: | | | | | | | | | | | |
Included in earnings (or changes in net assets) | 6 |
| (b) | 4 |
| (c) | (13 | ) | (c) | (2 | ) | (d) | (5 | ) | 2 |
| (e) |
Purchases and sales: | | | | | | | | | | | |
Purchases | — |
| | — |
| | — |
| | 3 |
| | 3 |
| — |
| |
Sales | — |
| | (49 | ) | | — |
| | (20 | ) | | (69 | ) | (46 | ) | |
Fair value at Sept. 30, 2013 | $ | 51 |
| | $ | 3 |
| | $ | 26 |
| | $ | 101 |
| | $ | 181 |
| $ | — |
| |
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period | | | $ | — |
| | $ | (13 | ) | | $ | — |
| | $ | (13 | ) | $ | — |
| |
| |
(a) | Derivative assets are reported on a gross basis. |
| |
(b) | Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss) except for the credit portion of OTTI losses which are recorded in securities gains (losses). |
| |
(c) | Reported in foreign exchange and other trading revenue. |
| |
(d) | Reported in investment and other income. |
| |
(e) | Reported in income from consolidated investment management funds. |
|
| | | | | | | |
Fair value measurements for liabilities using significant unobservable inputs for the nine months ended Sept 30, 2013 |
| Trading liabilities |
| | Total liabilities |
|
(in millions) | Derivative liabilities |
| (a) |
Fair value at Dec. 31, 2012 | $ | 224 |
| | $ | 224 |
|
Transfers out of Level 3 | (17 | ) | | (17 | ) |
Total (gains) or losses for the period: | | | |
Included in earnings (or changes in net liabilities) | (110 | ) | (b) | (110 | ) |
Settlements | (5 | ) | | (5 | ) |
Fair value at Sept 30, 2013 | $ | 92 |
| | $ | 92 |
|
Change in unrealized (gains) or losses for the period included in earnings (or changes in net assets) for liabilities held at the end of the reporting period | $ | 27 |
| | $ | 27 |
|
| |
(a) | Derivative liabilities are reported on a gross basis. |
| |
(b) | Reported in foreign exchange and other trading revenue. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
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, 2014 and Dec. 31, 2013, for which a nonrecurring change in fair value has been recorded during the quarters ended Sept. 30, 2014 and Dec. 31, 2013.
|
| | | | | | | | | | | | | | | |
Assets measured at fair value on a nonrecurring basis at Sept. 30, 2014 | | Total carrying value |
|
(in millions) | Level 1 |
| | Level 2 |
| | Level 3 |
| |
Loans (a) | $ | — |
| | $ | 114 |
| | $ | 5 |
| | $ | 119 |
|
Other assets (b) | — |
| | 10 |
| | — |
| | 10 |
|
Total assets at fair value on a nonrecurring basis | $ | — |
| | $ | 124 |
| | $ | 5 |
| | $ | 129 |
|
|
| | | | | | | | | | | | | | | |
Assets measured at fair value on a nonrecurring basis at Dec. 31, 2013 | | Total carrying value |
|
(in millions) | Level 1 |
| | Level 2 |
| | Level 3 |
| |
Loans (a) | $ | — |
| | $ | 128 |
| | $ | 9 |
| | $ | 137 |
|
Other assets (b) | — |
| | 15 |
| | — |
| | 15 |
|
Total assets at fair value on a nonrecurring basis | $ | — |
| | $ | 143 |
| | $ | 9 |
| | $ | 152 |
|
| |
(a) | During the quarters ended Sept. 30, 2014 and Dec. 31, 2013, the fair value of these loans decreased less than $1 million and $1 million, respectively, based on the fair value of the underlying collateral as allowed by ASC 310, Accounting by Creditors for Impairment of a loan, with an offset to the allowance for credit losses. |
| |
(b) | Includes other assets received in satisfaction of debt and loans held for sale. Loans held for sale are carried on the balance sheet at the lower of cost or market value. |
Level 3 unobservable inputs
The following tables present the unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy.
|
| | | | | | | | |
Quantitative information about Level 3 fair value measurements of assets |
(dollars in millions) | Fair value at Sept. 30, 2014 | | Valuation techniques | Unobservable input | Range |
|
Measured on a recurring basis: | | | | | |
Available-for-sale securities: | | | | | |
State and political subdivisions | | $ | 11 |
| Discounted cash flow | Expected credit loss | 4 | % |
Trading assets: | | | | | |
Derivative assets: | | | | | |
Interest rate contracts: | | | | | |
Structured foreign exchange swaptions | | 18 |
| Option pricing model (a) | Correlation risk | 0%-25% |
|
| | | | Long-term foreign exchange volatility | 11%-18% |
|
Equity: | | | | | |
Equity options | | 6 |
| Option pricing model (a) | Long-term equity volatility | 21%-25% |
|
Measured on a nonrecurring basis: | | | | | |
Loans | | 5 |
| Discounted cash flows | Timing of sale | 0-12 months |
|
| | | | Cap rate | 8 | % |
| | | | Cost to complete/sell | 0%-40% |
|
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | |
Quantitative information about Level 3 fair value measurements of liabilities |
(dollars in millions) | Fair value at Sept. 30, 2014 | | Valuation techniques | Unobservable input | Range |
Measured on a recurring basis: | | | | | |
Trading liabilities: | | | | | |
Derivative liabilities: | | | | | |
Interest rate contracts: | | | | | |
Structured foreign exchange swaptions | | $ | 23 |
| Option pricing model (a) | Correlation risk | 0%-25% |
| | | | Long-term foreign exchange volatility | 11%-18% |
Equity: | | | | | |
Equity options | | 3 |
| Option pricing model (a) | Long-term equity volatility | 21%-22% |
| |
(a) | The option pricing model uses market inputs such as foreign currency exchange rates, interest rates and volatility to calculate the fair value of the option. |
Estimated fair value of financial instruments
The carrying amounts of our financial instruments (i.e., monetary assets and liabilities) are determined under different accounting methods - see Note 1 of the Notes to Consolidated Financial Statements in our 2013 Annual Report. The following disclosure discusses these instruments on a uniform fair value basis. However, active markets do not exist for a significant portion of these instruments. For financial instruments where quoted prices from identical assets and liabilities in active markets do not exist, we determine fair value based on discounted cash flow analysis and comparison to similar instruments. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Other judgments would result in different fair values. The assumptions used at Sept. 30, 2014 and Dec. 31, 2013 include discount rates ranging principally from 0.56% to 3.74%. The fair value information supplements the basic financial statements and other traditional financial data presented throughout this report.
A summary of the practices used for determining fair value and the respective level in the valuation hierarchy for financial assets and liabilities not recorded at fair value follows.
Interest-bearing deposits with the Federal Reserve and other central banks and interest-bearing deposits with banks
The estimated fair value of interest-bearing deposits with the Federal Reserve and other central banks is equal to the book value as these interest-bearing deposits are generally considered cash equivalents. These instruments are classified as Level 2 within the valuation hierarchy. The estimated fair value of interest-bearing deposits with banks is generally
determined using discounted cash flows and duration of the instrument to maturity. The primary inputs used to value these transactions are interest rates based on current LIBOR market rates and time to maturity. Interest-bearing deposits with banks are classified as Level 2 within the valuation hierarchy.
Federal funds sold and securities purchased under resale agreements
The estimated fair value of federal funds sold and securities purchased under resale agreements is based on inputs such as interest rates and tenors. Federal funds sold and securities purchased under resale agreements are classified as Level 2 within the valuation hierarchy.
Securities held-to-maturity
Where quoted prices are available in an active market for identical assets and liabilities, we classify the securities as Level 1 within the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include U.S. Treasury securities.
If quoted market prices are not available for identical assets and liabilities, we estimate fair value using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Examples of such instruments, which would generally be classified as Level 2 within the valuation hierarchy, include certain agency and non-agency mortgage-backed securities, commercial mortgage-backed securities and state and political subdivision securities. For securities where quotes from active markets are not available for identical securities, we determine fair value primarily based on pricing sources with reasonable levels of price transparency
|
|
Notes to Consolidated Financial Statements (continued) |
|
that employ financial models or obtain comparison to similar instruments to arrive at “consensus” prices.
Specifically, the pricing sources obtain active market prices for similar types of securities (e.g., vintage, position in the securitization structure) and ascertain variables such as discount rate and speed of prepayment for the types of transaction and apply such variables to similar types of bonds. We view these as observable transactions in the current marketplace and classify such securities as Level 2 within the valuation hierarchy.
Loans
For residential mortgage loans, fair value is estimated using discounted cash flow analysis, adjusting where appropriate for prepayment estimates, using interest rates currently being offered for loans with similar terms and maturities to borrowers. The estimated fair value of margin loans and overdrafts is equal to the book value due to the short-term nature of these assets. The estimated fair value of other types of loans, including our term loan program, is determined using discounted cash flows. Inputs include current LIBOR market rates adjusted for credit spreads. These loans are generally classified as Level 2 within the valuation hierarchy.
Other financial assets
Other financial assets include cash, the Federal Reserve Bank stock and accrued interest receivable. Cash is classified as Level 1 within the valuation hierarchy. The Federal Reserve Bank stock is not redeemable or transferable. The estimated fair value of the Federal Reserve Bank stock is based on the issue price and is classified as Level 2 within the valuation hierarchy. Accrued interest receivable is generally short-term. As a result, book value is considered to equal fair value. Accrued interest receivable is included as Level 2 within the valuation hierarchy.
Noninterest-bearing and interest-bearing deposits
Interest-bearing deposits are comprised of money market rate and demand deposits, savings deposits and time deposits. Except for time deposits, book value is considered to equal fair value for these deposits due to their short duration to maturity or payable on demand feature. The fair value of interest-bearing time deposits is determined using
discounted cash flow analysis. Inputs primarily consist of current LIBOR market rates and time to maturity. For all noninterest-bearing deposits, book value is considered to equal fair value as a result of the short duration of the deposit. Interest-bearing and noninterest-bearing deposits are classified as Level 2 within the valuation hierarchy.
Federal funds purchased and securities sold under repurchase agreements
The estimated fair value of federal funds purchased and securities sold under repurchase agreements is based on inputs such as interest rates and tenors. Federal funds purchased and securities sold under repurchase agreements are classified as Level 2 within the valuation hierarchy.
Payables to customers and broker-dealers
The estimated fair value of payables to customers and broker-dealers is equal to the book value, due to the demand feature of the payables to customers and broker-dealers, and are classified as Level 2 within the valuation hierarchy.
Borrowings
Borrowings primarily consist of overdrafts of subcustodian account balances in our Investment Services businesses, commercial paper and accrued interest payable. The estimated fair value of overdrafts of subcustodian account balances in our Investment Services businesses is considered to equal book value as a result of the short duration of the overdrafts and is included as Level 2 within the valuation hierarchy. Overdrafts are typically repaid within two days. The estimated fair value of our commercial paper is based on discount and duration of the commercial paper. Our commercial paper matures within 397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. Our commercial paper is included in Level 2 of the valuation hierarchy. Accrued interest payable is generally short-term. As a result, book value is considered to equal fair value. Accrued interest payable is included as Level 2 within the valuation hierarchy.
Long-term debt
The estimated fair value of long-term debt is based on current rates for instruments of the same remaining
|
|
Notes to Consolidated Financial Statements (continued) |
|
maturity or quoted market prices for the same or similar issues. Long-term debt is classified as Level 2 within the valuation hierarchy.
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, 2014 and Dec. 31, 2013, by caption on the consolidated balance sheet and by ASC 820 valuation hierarchy (as described above).
|
| | | | | | | | | | | | | | | | | |
Summary of financial instruments | Sept. 30, 2014 |
(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 | $ | — |
| $ | 92,317 |
| $ | — |
| | $ | 92,317 |
| | $ | 92,317 |
|
Interest-bearing deposits with banks | — |
| 30,354 |
| — |
| | 30,354 |
| | 30,341 |
|
Federal funds sold and securities purchased under resale agreements | — |
| 17,375 |
| — |
| | 17,375 |
| | 17,375 |
|
Securities held-to-maturity | 4,149 |
| 16,018 |
| — |
| | 20,167 |
| | 20,137 |
|
Loans | — |
| 55,242 |
| — |
| | 55,242 |
| | 55,164 |
|
Other financial assets | 6,410 |
| 1,081 |
| — |
| | 7,491 |
| | 7,491 |
|
Total | $ | 10,559 |
| $ | 212,387 |
| $ | — |
| | $ | 222,946 |
| | $ | 222,825 |
|
Liabilities: | | | | | | | |
Noninterest-bearing deposits | $ | — |
| $ | 101,105 |
| $ | — |
| | $ | 101,105 |
| | $ | 101,105 |
|
Interest-bearing deposits | — |
| 162,737 |
| — |
| | 162,737 |
| | 163,791 |
|
Federal funds purchased and securities sold under repurchase agreements | — |
| 9,687 |
| — |
| | 9,687 |
| | 9,687 |
|
Payables to customers and broker-dealers | — |
| 20,155 |
| — |
| | 20,155 |
| | 20,155 |
|
Borrowings | — |
| 986 |
| — |
| | 986 |
| | 986 |
|
Long-term debt | — |
| 21,669 |
| — |
| | 21,669 |
| | 21,246 |
|
Total | $ | — |
| $ | 316,339 |
| $ | — |
| | $ | 316,339 |
| | $ | 316,970 |
|
|
| | | | | | | | | | | | | | | | | |
Summary of financial instruments | Dec. 31, 2013 |
(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 | $ | — |
| $ | 104,359 |
| $ | — |
| | $ | 104,359 |
| | $ | 104,359 |
|
Interest-bearing deposits with banks | — |
| 35,323 |
| — |
| | 35,323 |
| | 35,300 |
|
Federal funds sold and securities purchased under resale agreements | — |
| 9,161 |
| — |
| | 9,161 |
| | 9,161 |
|
Securities held-to-maturity | 3,268 |
| 16,175 |
| — |
| | 19,443 |
| | 19,743 |
|
Loans | — |
| 49,316 |
| — |
| | 49,316 |
| | 49,180 |
|
Other financial assets | 6,460 |
| 1,141 |
| — |
| | 7,601 |
| | 7,601 |
|
Total | $ | 9,728 |
| $ | 215,475 |
| $ | — |
| | $ | 225,203 |
| | $ | 225,344 |
|
Liabilities: | | | | | | | |
Noninterest-bearing deposits | $ | — |
| $ | 95,475 |
| $ | — |
| | $ | 95,475 |
| | $ | 95,475 |
|
Interest-bearing deposits | — |
| 165,253 |
| — |
| | 165,253 |
| | 165,654 |
|
Federal funds purchased and securities sold under repurchase agreements | — |
| 9,648 |
| — |
| | 9,648 |
| | 9,648 |
|
Payables to customers and broker-dealers | — |
| 15,707 |
| — |
| | 15,707 |
| | 15,707 |
|
Borrowings | — |
| 919 |
| — |
| | 919 |
| | 919 |
|
Long-term debt | — |
| 19,965 |
| — |
| | 19,965 |
| | 19,543 |
|
Total | $ | — |
| $ | 306,967 |
| $ | — |
| | $ | 306,967 |
| | $ | 306,946 |
|
|
|
Notes to Consolidated Financial Statements (continued) |
|
The table below summarizes the carrying amount of the hedged financial instruments, the notional amount of the hedge and the unrealized gain (loss) (estimated fair value) of the derivatives.
|
| | | | | | | | | | | | |
Hedged financial instruments | Carrying amount |
| Notional amount of hedge |
| Unrealized |
(in millions) | Gain |
| (Loss) |
|
Sept. 30, 2014 | | | | |
Interest-bearing deposits with banks | $ | 292 |
| $ | 292 |
| $ | 20 |
| $ | — |
|
Securities available-for-sale | 6,772 |
| 6,971 |
| 227 |
| (129 | ) |
Long-term debt | 17,534 |
| 17,300 |
| 344 |
| (49 | ) |
Dec. 31, 2013 | |
Interest-bearing deposits with banks | $ | 1,396 |
| $ | 1,396 |
| $ | 30 |
| $ | (19 | ) |
Securities available-for-sale | 5,914 |
| 6,647 |
| 721 |
| (95 | ) |
Long-term debt | 15,036 |
| 14,755 |
| 483 |
| (72 | ) |
Note 16 - Fair value option
ASC 825 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments and written loan commitments.
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 |
(in millions) | Sept. 30, 2014 |
| Dec. 31, 2013 |
|
Assets of consolidated investment management funds: | | |
Trading assets | $ | 8,823 |
| $ | 10,397 |
|
Other assets | 739 |
| 875 |
|
Total assets of consolidated investment management funds | $ | 9,562 |
| $ | 11,272 |
|
Liabilities of consolidated investment management funds: | | |
Trading liabilities | $ | 8,130 |
| $ | 10,085 |
|
Other liabilities | 10 |
| 46 |
|
Total liabilities of consolidated investment management funds | $ | 8,140 |
| $ | 10,131 |
|
BNY Mellon values assets in consolidated CLOs using observable market prices observed from the secondary loan market. The returns to the note holders are solely dependent on the assets and accordingly equal the value of those assets. Mark-to-market valuation best reflects the limited interest BNY Mellon has in the economic performance of the consolidated CLOs. Changes in the values of assets and liabilities are reflected in the income statement as investment income of consolidated investment management funds.
We have elected the fair value option on $240 million of long-term debt in connection with ASC 810. The fair value of this long-term debt was $337 million at Sept. 30, 2014 and $321 million at Dec. 31, 2013. The long-term debt is valued using observable market inputs and is included in Level 2 of the ASC 820 hierarchy.
The following table presents the changes in fair value of the long-term debt included in foreign exchange and other trading revenue in the consolidated income statement.
|
| | | | | | | | | | | | | |
Foreign exchange and other trading revenue | | | |
| Quarter ended | | Year-to-date |
(in millions) | Sept. 30, 2014 |
| Sept. 30, 2013 |
| | Sept. 30, 2014 |
| Sept. 30, 2013 |
|
Changes in the fair value of long-term debt (a) | $ | 1 |
| $ | (2 | ) | | $ | (16 | ) | $ | 19 |
|
| |
(a) | The change in fair value of the long-term debt is approximately offset by an economic hedge included in foreign exchange and other trading revenue. |
Note 17 - Derivative instruments
We use derivatives to manage exposure to market risk including interest rate risk, equity price risk and foreign currency risk, as well as credit risk. Our trading activities are focused on acting as a market-maker for our customers and facilitating customer trades. Positions managed for our own account are immaterial to our foreign exchange and other trading revenue and to our overall results of operations.
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
|
|
Notes to Consolidated Financial Statements (continued) |
|
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. Counterparty default losses were $7.6 million in the third quarter of 2014 and $1.2 million in the third quarter of 2013.
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.
The available-for-sale investment securities hedged consist of sovereign debt, U.S. Treasury bonds, agency commercial mortgage-backed securities 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, 2014, $6.8 billion face amount of securities were hedged with interest rate swaps that had notional values of $7.0 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, 2014, $17.3 billion par value of debt was hedged with interest rate swaps that had notional values of $17.3 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 British Pound, Euro, Hong Kong Dollar, Indian Rupee and Singapore Dollar 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, 2014, the hedged forecasted foreign currency transactions and designated forward foreign exchange contract hedges were $264 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.
We use forward foreign exchange contracts with remaining maturities of nine months or less as hedges against our foreign exchange exposure to Australian Dollar, Euro and Swiss Franc with respect to interest-bearing deposits with banks and their associated forecasted interest revenue. These hedges are designated as cash flow hedges. These hedges are effected such that their maturities and notional values match those of the deposits with banks. As of Sept. 30, 2014, the hedged interest-bearing deposits with banks and their designated forward foreign exchange contract hedges were $442 million (notional), with a pre-tax loss of less than $1 million recorded in accumulated other comprehensive income. This loss will be reclassified to net interest revenue 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 accumulated translation adjustments in shareholders’ equity, net of tax. At Sept. 30, 2014, forward foreign exchange contracts with notional amounts totaling $6.5 billion were designated as hedges.
|
|
Notes to Consolidated Financial Statements (continued) |
|
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, 2014, had a combined U.S. dollar equivalent value of $551 million.
Ineffectiveness related to derivatives and hedging relationships was recorded in income as follows:
|
| | | | | | |
Ineffectiveness | Nine months ended |
(in millions) | Sept. 30, 2014 |
| Sept. 30, 2013 |
|
Fair value hedges of securities | $ | (7.7 | ) | $ | 10.4 |
|
Fair value hedges of deposits and long-term debt | (12.0 | ) | 3.8 |
|
Cash flow hedges | 0.1 |
| (0.1 | ) |
Other (a) | (0.1 | ) | 0.1 |
|
Total | $ | (19.7 | ) | $ | 14.2 |
|
| |
(a) | Includes ineffectiveness recorded on foreign exchange hedges. |
The following table summarizes the notional amount and credit exposure of our total derivative portfolio at Sept. 30, 2014 and Dec. 31, 2013.
|
| | | | | | | | | | | | | | | | | | | | |
Impact of derivative instruments on the balance sheet | Notional value | | Asset derivatives fair value | | Liability derivatives fair value |
(in millions) | Sept. 30, 2014 |
| Dec. 31, 2013 |
| | Sept. 30, 2014 |
| Dec. 31, 2013 |
| | Sept. 30, 2014 |
| Dec. 31, 2013 |
|
Derivatives designated as hedging instruments (a): | | | | | | | | |
Interest rate contracts | $ | 24,271 |
| $ | 21,402 |
| | $ | 573 |
| $ | 1,206 |
| | $ | 178 |
| $ | 167 |
|
Foreign exchange contracts | 7,255 |
| 7,382 |
| | 204 |
| 76 |
| | 57 |
| 336 |
|
Total derivatives designated as hedging instruments | | | | $ | 777 |
| $ | 1,282 |
| | $ | 235 |
| $ | 503 |
|
Derivatives not designated as hedging instruments (b): | | | | | | | | |
Interest rate contracts | $ | 836,009 |
| $ | 767,341 |
| | $ | 15,591 |
| $ | 14,712 |
| | $ | 16,117 |
| $ | 15,212 |
|
Foreign exchange contracts | 566,093 |
| 420,142 |
| | 6,348 |
| 3,610 |
| | 6,180 |
| 3,536 |
|
Equity contracts | 15,343 |
| 24,123 |
| | 411 |
| 684 |
| | 594 |
| 1,003 |
|
Credit contracts | — |
| 101 |
| | — |
| — |
| | — |
| — |
|
Total derivatives not designated as hedging instruments | | | | $ | 22,350 |
| $ | 19,006 |
| | $ | 22,891 |
| $ | 19,751 |
|
Total derivatives fair value (c) | | | | $ | 23,127 |
| $ | 20,288 |
| | $ | 23,126 |
| $ | 20,254 |
|
Effect of master netting agreements (d) | | | | (17,141 | ) | (15,806 | ) | | (16,635 | ) | (14,421 | ) |
Fair value after effect of master netting agreements | | | | $ | 5,986 |
| $ | 4,482 |
| | $ | 6,491 |
| $ | 5,833 |
|
| |
(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. |
| |
(d) | Effect of master netting agreements includes cash collateral received and paid of $1,122 million and $616 million, respectively, at Sept. 30, 2014, and $1,841 million and $456 million, respectively, at Dec. 31, 2013. |
At Sept. 30, 2014, $600 billion (notional) of interest rate contracts will mature within one year, $134 billion between one and five years, and $126 billion after five years. At Sept. 30, 2014, $550 billion (notional) of foreign exchange contracts will mature within one year, $15 billion between one and five years, and $8 billion after five years.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Impact of derivative instruments on 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 |
3Q14 |
| | 2Q14 |
| | 3Q13 |
| | 3Q14 |
| | 2Q14 |
| | 3Q13 |
|
Interest rate contracts | Net interest revenue | | $ | (200 | ) | | $ | (109 | ) | | $ | 143 |
| | Net interest revenue | | $ | 195 |
| | $ | 102 |
| | $ | (137 | ) |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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) |
3Q14 |
| 2Q14 |
| 3Q13 |
| | | 3Q14 |
| 2Q14 |
| 3Q13 |
| | | 3Q14 |
| 2Q14 |
| 3Q13 |
|
FX contracts | $ | — |
| $ | (1 | ) | $ | 4 |
| | Net interest revenue | | $ | (1 | ) | $ | — |
| $ | (5 | ) | | Net interest revenue | | $ | — |
| $ | — |
| $ | — |
|
FX contracts | (5 | ) | — |
| (5 | ) | | Other revenue | | 1 |
| 1 |
| (1 | ) | | Other revenue | | 0.2 |
| (0.2 | ) | (0.2 | ) |
FX contracts | 29 |
| (6 | ) | (67 | ) | | Trading revenue | | 29 |
| (6 | ) | (67 | ) | | Trading revenue | | — |
| — |
| — |
|
FX contracts | (8 | ) | 3 |
| 11 |
| | Salary expense | | 2 |
| 4 |
| (1 | ) | | Salary expense | | — |
| — |
| — |
|
Total | $ | 16 |
| $ | (4 | ) | $ | (57 | ) | | | | $ | 31 |
| $ | (1 | ) | $ | (74 | ) | | | | $ | 0.2 |
| $ | (0.2 | ) | $ | (0.2 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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) |
3Q14 |
| 2Q14 |
| 3Q13 |
| | | 3Q14 |
| 2Q14 |
| 3Q13 |
| | | 3Q14 |
| 2Q14 |
| 3Q13 |
|
FX contracts | $ | 308 |
| $ | (129 | ) | $ | (192 | ) | | Net interest revenue | | $ | — |
| $ | (1 | ) | $ | 2 |
| | Other revenue | | $ | (0.2 | ) | $ | 0.2 |
| $ | — |
|
|
| | | | | | | | | | | | | | | | | | | |
Impact of derivative instruments on 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 Nine months ended | | Location of gain or(loss) recognized in income on hedged item | | Gain or (loss) recognized in hedged item Nine months ended |
Sept. 30, 2014 |
| | Sept. 30, 2013 |
| | Sept. 30, 2014 |
| | Sept. 30, 2013 |
|
Interest rate contracts | Net interest revenue | | $ | (594 | ) | | $ | 388 |
| | Net interest revenue | | $ | 574 |
| | $ | (374 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in cash flow hedging relationships | Gain or (loss) recognized in accumulated OCI on derivatives(effective portion) Nine months ended | | Location of gain or (loss) reclassified from accumulated OCI into income (effective portion) | | Gain or (loss) reclassified from accumulated OCI into income (effective portion) Nine months ended | | 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) Nine months ended |
Sept. 30, 2014 |
| | Sept. 30, 2013 |
| | | Sept. 30, 2014 |
| | Sept. 30, 2013 |
| | | Sept. 30, 2014 |
| | Sept. 30, 2013 |
|
FX contracts | $ | (2 | ) | | $ | (23 | ) | | Net interest revenue | | $ | (2 | ) | | $ | (24 | ) | | Net interest revenue | | $ | — |
| | $ | — |
|
FX contracts | (2 | ) | | (4 | ) | | Other revenue | | 2 |
| | (1 | ) | | Other revenue | | 0.1 |
| | (0.1 | ) |
FX contracts | 26 |
| | 150 |
| | Trading revenue | | 26 |
| | 150 |
| | Trading revenue | | — |
| | — |
|
FX contracts | (4 | ) | | 4 |
| | Salary expense | | 8 |
| | (2 | ) | | Salary expense | | — |
| | — |
|
Total | $ | 18 |
| | $ | 127 |
| | | | $ | 34 |
| | $ | 123 |
| | | | $ | 0.1 |
| | $ | (0.1 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in net investment hedging relationships | Gain or (loss) recognized in accumulated OCI on derivatives (effective portion) Nine months ended | | Location of gain or (loss) reclassified from accumulated OCI into income (effective portion) | | Gain or (loss) reclassified from accumulated OCI into income (effective portion) Nine months ended | | Location of gain or (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Gain or (loss) recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing) Nine months ended |
Sept. 30, 2014 |
| | Sept. 30, 2013 |
| | | Sept. 30, 2014 |
| | Sept. 30, 2013 |
| | | Sept. 30, 2014 |
| | Sept. 30, 2013 |
|
FX contracts | $ | 163 |
| | $ | 13 |
| | Net interest revenue | | $ | (1 | ) | | $ | 2 |
| | Other revenue | | $ | (0.1 | ) | | $ | 0.1 |
|
|
|
Notes to Consolidated Financial Statements (continued) |
|
Trading activities (including trading derivatives)
We manage trading risk through a system of position limits, a VaR methodology based on Monte Carlo simulations, stop loss advisory triggers, and other market sensitivity measures. Risk is monitored and reported to senior management by a separate unit on a daily basis. Based on certain assumptions, the VaR methodology is designed to capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period for most instruments, utilizes a 99% confidence level, and incorporates the non-linear characteristics of options. The VaR model is one of several statistical models used to develop economic capital results, which is allocated to lines of business for computing 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, by their design, incorporate the impact of reduced liquidity and the breakdown of observed correlations. The results of these stress tests are reviewed weekly with senior management.
Revenue from foreign exchange and other trading included the following:
|
| | | | | | | | | | | | | | | |
Foreign exchange and other trading revenue | Year-to-date |
(in millions) | 3Q14 |
| 2Q14 |
| 3Q13 |
| 2014 |
| 2013 |
|
Foreign exchange | $ | 154 |
| $ | 129 |
| $ | 154 |
| $ | 413 |
| $ | 482 |
|
Other trading revenue (loss): | | | | | |
Fixed income | 2 |
| (1 | ) | (2 | ) | 2 |
| 18 |
|
Equity/other | (3 | ) | 2 |
| 8 |
| 4 |
| 28 |
|
Total other trading revenue (loss) | (1 | ) | 1 |
| 6 |
| 6 |
| 46 |
|
Total foreign exchange and other trading revenue | $ | 153 |
| $ | 130 |
| $ | 160 |
| $ | 419 |
| $ | 528 |
|
Foreign exchange includes income from purchasing and selling foreign currencies and currency forwards, futures and options. Fixed income reflects results from futures and forward contracts, interest rate swaps, structured foreign currency swaps, options, and fixed income securities. Equity/other primarily includes revenue from equity securities and equity derivatives.
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 15 of the Notes to Consolidated Financial Statements.
Disclosure of contingent features in over-the-counter (“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 all 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.
|
|
Notes to Consolidated Financial Statements (continued) |
|
The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions as of Sept. 30, 2014 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- | | $ | 53 | million |
Baa2/BBB | | $ | 960 | million |
Ba1/BB+ | | $ | 2,643 | 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, 2014, existing collateral arrangements would have required us to have posted an additional $470 million of collateral.
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 netting agreement for which we are not currently netting.
|
| | | | | | | | | | | | | | | | | | | |
Offsetting of financial assets and derivative assets at Sept. 30, 2014 | | | | |
| | | | |
| 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 | $ | 14,761 |
| $ | 13,269 |
| | $ | 1,492 |
| $ | 395 |
| $ | — |
| $ | 1,097 |
|
Foreign exchange contracts | 4,732 |
| 3,708 |
| | 1,024 |
| 151 |
| — |
| 873 |
|
Equity contracts | 331 |
| 164 |
| | 167 |
| 5 |
| — |
| 162 |
|
Total derivatives subject to netting arrangements | 19,824 |
| 17,141 |
| | 2,683 |
| 551 |
| — |
| 2,132 |
|
Total derivatives not subject to netting arrangements | 3,303 |
| — |
| | 3,303 |
| — |
| — |
| 3,303 |
|
Total derivatives | 23,127 |
| 17,141 |
| | 5,986 |
| 551 |
| — |
| 5,435 |
|
Reverse repurchase agreements | 9,973 |
| 1,168 |
| (b) | 8,805 |
| 8,802 |
| — |
| 3 |
|
Securities borrowing | 8,553 |
| — |
| | 8,553 |
| 8,239 |
| — |
| 314 |
|
Total | $ | 41,653 |
| $ | 18,309 |
| | $ | 23,344 |
| $ | 17,592 |
| $ | — |
| $ | 5,752 |
|
| |
(a) | Includes the effect of netting agreements and net cash collateral paid. The offset related to the over-the-counter 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. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | |
Offsetting of financial assets and derivative assets at Dec. 31, 2013 | | | | |
| | | | | | | |
| 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 | $ | 14,798 |
| $ | 13,231 |
| | $ | 1,567 |
| $ | 599 |
| $ | — |
| $ | 968 |
|
Foreign exchange contracts | 2,778 |
| 2,294 |
| | 484 |
| 18 |
| — |
| 466 |
|
Equity contracts | 607 |
| 281 |
| | 326 |
| 3 |
| — |
| 323 |
|
Total derivatives subject to netting arrangements | 18,183 |
| 15,806 |
| | 2,377 |
| 620 |
| — |
| 1,757 |
|
Total derivatives not subject to netting arrangements | 2,105 |
| — |
| | 2,105 |
| — |
| — |
| 2,105 |
|
Total derivatives | 20,288 |
| 15,806 |
| | 4,482 |
| 620 |
| — |
| 3,862 |
|
Reverse repurchase agreements | 5,511 |
| 1,096 |
| (b) | 4,415 |
| 4,413 |
| — |
| 2 |
|
Securities borrowing | 4,669 |
| — |
| | 4,669 |
| 4,555 |
| — |
| 114 |
|
Total | $ | 30,468 |
| $ | 16,902 |
| | $ | 13,566 |
| $ | 9,588 |
| $ | — |
| $ | 3,978 |
|
| |
(a) | Includes the effect of netting agreements and net cash collateral paid. The offset related to the over-the-counter 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 financial liabilities and derivative liabilities at Sept. 30, 2014 | | | |
| | | | |
| Gross liabilities recognized |
| Gross amounts offset in the balance sheet |
| | Net liabilities recognized on 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 | $ | 15,688 |
| $ | 13,450 |
| | $ | 2,238 |
| $ | 1,842 |
| $ | — |
| $ | 396 |
|
Foreign exchange contracts | 4,174 |
| 3,003 |
| | 1,171 |
| 372 |
| — |
| 799 |
|
Equity contracts | 502 |
| 182 |
| | 320 |
| 250 |
| — |
| 70 |
|
Total derivatives subject to netting arrangements | 20,364 |
| 16,635 |
| | 3,729 |
| 2,464 |
| — |
| 1,265 |
|
Total derivatives not subject to netting arrangements | 2,762 |
| — |
| | 2,762 |
| — |
| — |
| 2,762 |
|
Total derivatives | 23,126 |
| 16,635 |
| | 6,491 |
| 2,464 |
| — |
| 4,027 |
|
Repurchase agreements | 8,024 |
| 1,168 |
| (b) | 6,856 |
| 6,849 |
| — |
| 7 |
|
Securities lending | 2,658 |
| — |
| | 2,658 |
| 2,547 |
| — |
| 111 |
|
Total | $ | 33,808 |
| $ | 17,803 |
| | $ | 16,005 |
| $ | 11,860 |
| $ | — |
| $ | 4,145 |
|
| |
(a) | Includes the effect of netting agreements and net cash collateral received. The offset related to the over-the-counter 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. |
|
|
Notes to Consolidated Financial Statements (continued) |
|
|
| | | | | | | | | | | | | | | | | | | |
Offsetting of financial liabilities and derivative liabilities at Dec. 31, 2013 | | | |
| | | | |
| Gross liabilities recognized |
| Gross amounts offset in the balance sheet |
| | Net liabilities recognized on 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 | $ | 14,914 |
| $ | 12,429 |
| | $ | 2,485 |
| $ | 1,686 |
| $ | — |
| $ | 799 |
|
Foreign exchange contracts | 2,292 |
| 1,711 |
| | 581 |
| 382 |
| — |
| 199 |
|
Equity contracts | 800 |
| 281 |
| | 519 |
| 269 |
| — |
| 250 |
|
Total derivatives subject to netting arrangements | 18,006 |
| 14,421 |
| | 3,585 |
| 2,337 |
| — |
| 1,248 |
|
Total derivatives not subject to netting arrangements | 2,248 |
| — |
| | 2,248 |
| — |
| — |
| 2,248 |
|
Total derivatives | 20,254 |
| 14,421 |
| | 5,833 |
| 2,337 |
| — |
| 3,496 |
|
Repurchase agreements | 8,581 |
| 1,096 |
| (b) | 7,485 |
| 7,482 |
| — |
| 3 |
|
Securities lending | 1,947 |
| — |
| | 1,947 |
| 1,884 |
| — |
| 63 |
|
Total | $ | 30,782 |
| $ | 15,517 |
| | $ | 15,265 |
| $ | 11,703 |
| $ | — |
| $ | 3,562 |
|
| |
(a) | Includes the effect of netting agreements and net cash collateral received. The offset related to the over-the-counter 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. |
Note 18 - Commitments and contingent liabilities
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 in the balance sheet. Our off-balance sheet risks are managed and monitored in manners similar to those used for on-balance sheet risks. Significant industry concentrations related to credit exposure at Sept. 30, 2014 are disclosed in the financial institutions portfolio exposure table and the commercial portfolio exposure table below.
|
| | | | | | | | | |
Financial institutions portfolio exposure (in billions) | Sept. 30, 2014 |
Loans |
| Unfunded commitments |
| Total exposure |
|
Banks | $ | 9.0 |
| $ | 1.6 |
| $ | 10.6 |
|
Asset managers | 1.5 |
| 4.6 |
| 6.1 |
|
Securities industry | 3.6 |
| 1.3 |
| 4.9 |
|
Insurance | 0.1 |
| 4.0 |
| 4.1 |
|
Government | — |
| 3.0 |
| 3.0 |
|
Other | 0.4 |
| 1.0 |
| 1.4 |
|
Total | $ | 14.6 |
| $ | 15.5 |
| $ | 30.1 |
|
|
| | | | | | | | | |
Commercial portfolio exposure (in billions) | Sept. 30, 2014 |
Loans |
| Unfunded commitments |
| Total exposure |
|
Services and other | $ | 0.7 |
| $ | 5.8 |
| $ | 6.5 |
|
Energy and utilities | 0.4 |
| 5.7 |
| 6.1 |
|
Manufacturing | 0.3 |
| 5.6 |
| 5.9 |
|
Media and telecom | 0.1 |
| 1.6 |
| 1.7 |
|
Total | $ | 1.5 |
| $ | 18.7 |
| $ | 20.2 |
|
Major concentrations in securities lending are primarily to broker-dealers and are generally collateralized with cash. Securities lending transactions are discussed below.
|
|
Notes to Consolidated Financial Statements (continued) |
|
The following table presents a summary of our off-balance sheet credit risks, net of participations.
|
| | | | | | |
Off-balance sheet credit risks | Sept. 30, |
| Dec. 31, |
|
(in millions) | 2014 |
| 2013 |
|
Lending commitments (a) | $ | 32,961 |
| $ | 34,039 |
|
Standby letters of credit (b) | 5,862 |
| 6,721 |
|
Commercial letters of credit | 339 |
| 310 |
|
Securities lending indemnifications (c) | 299,304 |
| 244,382 |
|
| |
(a) | There were no participations at Sept. 30, 2014. Net of participations totaling $6 million at Dec. 31, 2013. |
| |
(b) | Net of participations totaling $773 million at Sept. 30, 2014 and $720 million at Dec. 31, 2013. |
| |
(c) | 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, 2014 and $60 billion at Dec. 31, 2013. |
Included in lending commitments are facilities that provide liquidity for variable rate tax-exempt securities wrapped by monoline insurers. The credit approval for these facilities is based on an assessment of the underlying tax-exempt issuer and considers factors other than the financial strength of the monoline insurer.
The total potential loss on undrawn lending commitments, standby and commercial letters of credit, and securities lending indemnifications is equal to the total notional amount if drawn upon, which does not consider the value of any collateral.
Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. A summary of lending commitment maturities is as follows: $9.5 billion in less than one year, $23.3 billion in one to five years and $151 million over five years.
Standby letters of credit (“SBLC”) principally support corporate obligations and were collateralized with cash and securities of $642 million and $418 million at Sept. 30, 2014 and Dec. 31, 2013, respectively. At Sept. 30, 2014, $3.3 billion of the SBLCs will expire within one year and $2.6 billion in one to five years.
We must recognize, at the inception of standby letters of credit and foreign and other guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by ASC 460 Guarantees, the fair value of the liability, which was recorded with a corresponding asset in other assets,
was estimated as the present value of contractual customer fees.
The estimated liability for losses related to these commitments and SBLCs, if any, is included in the allowance for lending-related commitments. The allowance for lending-related commitments was $97 million at Sept. 30, 2014 and $134 million at Dec. 31, 2013.
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, |
| | Dec. 31, |
|
| 2014 |
| | 2013 |
|
Investment grade | 90 | % | | 86 | % |
Non-investment grade | 10 | % | | 14 | % |
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 $339 million at Sept. 30, 2014 compared with $310 million at Dec. 31, 2013.
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
|
|
Notes to Consolidated Financial Statements (continued) |
|
undertaken. Securities lending transactions are generally entered into only with highly-rated counterparties. Securities lending indemnifications were secured by collateral of $310 billion at Sept. 30, 2014 and $252 billion at Dec. 31, 2013.
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, 2014 and Dec. 31, 2013, $65 billion and $60 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 $67 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.
We expect many of these guarantees to expire without the need to advance any cash. The revenue associated with guarantees frequently depends on the credit rating of the obligor and the structure of the transaction, including collateral, if any.
Operating leases
On June 25, 2014, BNY Mellon entered into a lease agreement for approximately 350,000 square feet of office space located at Brookfield Place, 225 Liberty Street, New York, New York. The term of the lease is 20 years from the lease commencement, which is expected to begin on or about Jan. 1, 2015. A summary of the future minimum rental commitments under this operating lease is as follows: 2015 - $3 million; 2016 - $19 million; 2017 - $19 million; 2018 - $19 million; 2019 - $19 million; and 2020 and thereafter - $313 million.
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. With the charge recorded in the second quarter of 2014 for this matter, 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 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, 2014 and Dec. 31, 2013, we have not recorded any material liabilities under these arrangements.
Clearing and settlement exchanges
We are a minority 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 or to provide financial 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. In addition, any ancillary costs that occur as a result of any mark-to-market loss cannot be quantified. At Sept. 30, 2014 and Dec. 31, 2013, we
|
|
Notes to Consolidated Financial Statements (continued) |
|
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 and regulatory matters. Claims for significant monetary damages are often asserted in many of these legal actions, while claims for disgorgement, penalties and/or other remedial sanctions may be sought in regulatory matters. It is inherently difficult to predict the eventual outcomes of such matters given their complexity and the particular facts and circumstances at issue in each of these matters. However, on the basis of our current knowledge and understanding, we do not believe that judgments or settlements, if any, arising from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage) will have a material adverse effect on the consolidated financial position or liquidity of BNY Mellon, although they could have a material effect on net income in a given period.
In view of the inherent unpredictability of outcomes in litigation and regulatory matters, particularly where (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel legal theories or a large number of parties, as a matter of course there is considerable uncertainty surrounding the timing or ultimate resolution of litigation and regulatory matters, including a possible eventual loss, fine, penalty or business impact, if any, associated with each such matter. In accordance with applicable accounting guidance, BNY Mellon establishes accruals for litigation and regulatory matters when those matters proceed to a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. BNY Mellon will continue to monitor such matters for developments that could affect the amount of the 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 herein for which a loss contingency may, in the future, be reasonably possible (whether in excess of a related accrued liability or where there is no accrued liability), BNY Mellon is currently unable to estimate a range of reasonably possible loss. For those matters where BNY Mellon is able to estimate a reasonably possible loss, 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.
The following describes certain judicial, regulatory and arbitration proceedings involving BNY Mellon:
Sentinel Matters
As previously disclosed, on Jan. 18, 2008, The Bank of New York Mellon filed a proof of claim in the Chapter 11 bankruptcy proceeding of Sentinel Management Group, Inc. (“Sentinel”) pending in federal court in the Northern District of Illinois, seeking to recover approximately $312 million loaned to Sentinel and secured by securities and cash in an account maintained by Sentinel at The Bank of New York Mellon. On March 3, 2008, the bankruptcy trustee filed an adversary complaint against The Bank of New York Mellon seeking to disallow The Bank of New York Mellon’s claim and seeking damages for allegedly aiding and abetting Sentinel insiders in misappropriating customer assets and improperly using those assets as collateral for the loan. In a decision dated Nov. 3, 2010, the court found for The Bank of New York Mellon and against the bankruptcy trustee, holding that The Bank of New York Mellon’s loan to Sentinel is valid, fully secured and not subject to equitable subordination. The bankruptcy trustee appealed this decision, and on Aug. 9, 2012, the United States Court of Appeals for the Seventh Circuit issued a decision affirming the trial court’s judgment. On Sept. 7, 2012, the bankruptcy trustee filed a petition for rehearing on the fraudulent transfer portion of the opinion and, on Nov. 30, 2012, the Court of Appeals withdrew its opinion and vacated its judgment. On Aug. 26, 2013, the Court of Appeals reversed its own prior decision and the district court’s decision with respect to the bankruptcy trustee’s fraudulent transfer and equitable subordination claims and remanded the case to the district court for further
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Notes to Consolidated Financial Statements (continued) |
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proceedings. See Note 5 of the Notes to Consolidated Financial Statements for additional information.
As previously disclosed, in November 2009, the Division of Enforcement of the U.S. Commodities Futures Trading Commission (“CFTC”) indicated that it is considering a recommendation to the CFTC that it file a civil enforcement action against The Bank of New York Mellon for possible violations of the Commodity Exchange Act and CFTC regulations in connection with its relationship to Sentinel. The Bank of New York Mellon responded in writing to the CFTC on Jan. 29, 2010 and provided an explanation as to why an enforcement action is unwarranted.
Securities Lending Matters
As previously disclosed, BNY Mellon or its affiliates have been named as defendants in a number of lawsuits initiated by participants in BNY Mellon’s securities lending program, which is a part of BNY Mellon’s Investment Services business. The lawsuits were filed on various dates from 2009 to 2013, and are currently pending in courts in North Carolina and Illinois. The complaints assert contractual, statutory, and common law claims, including claims for negligence and breach of fiduciary duty. The plaintiffs allege losses in connection with the investment of securities lending collateral in Lehman Brothers Holdings, Inc., and seek damages as to those losses.
Foreign Exchange Matters
As previously disclosed, beginning in December 2009, government authorities have been conducting inquiries seeking information relating primarily to standing instruction foreign exchange transactions in connection with custody services BNY Mellon provides to public pension plans and certain other custody clients. BNY Mellon is cooperating with these inquiries.
In addition, on Oct. 4, 2011, the New York Attorney General’s Office, the New York City Comptroller and various city pension and benefit funds filed a lawsuit asserting claims under the Martin Act and state and city false claims acts. On Aug. 5, 2013, the court dismissed the false claims act claims, and certain plaintiffs have since filed a notice of appeal. Also, on Oct. 4, 2011, the United States Department of Justice (“DOJ”) filed a civil lawsuit seeking civil penalties under 12 U.S.C. Section 1833a and injunctive relief under 18 U.S.C. Section 1345 based on alleged ongoing violations of 18 U.S.C. Sections 1341 and
1343 (mail and wire fraud). On Jan. 17, 2012, the court approved a partial settlement resolving the DOJ’s claim for injunctive relief. In October 2011, several public pension funds in the state of California purported to intervene in a qui tam lawsuit that was removed to federal district court in California. On March 30, 2012, the court dismissed certain of plaintiffs’ claims, including all claims under the California False Claims Act. Certain plaintiffs refiled their claims and, on May 1, 2014, the court again dismissed the California False Claims Act claims, along with certain other claims. Plaintiffs sought leave to file an amended complaint that would reassert some of those claims, but the court denied their motion.
BNY Mellon has also been named as a defendant in several putative class action federal lawsuits filed on various dates in 2011, 2012 and 2014. The complaints, which assert claims including breach of contract and ERISA and securities laws violations, all allege that the prices BNY Mellon charged for standing instruction foreign exchange transactions executed in connection with custody services provided by BNY Mellon were improper. In addition, BNY Mellon has been named as a nominal defendant in several derivative lawsuits filed in 2011 and 2012 in state and federal court in New York. On July 2, 2013, the court in the consolidated federal derivative action dismissed all of plaintiffs’ claims. On Oct. 1, 2013, the court in the consolidated state derivative action dismissed all of plaintiffs’ claims, and one of the plaintiffs has appealed. All of the pending lawsuits are currently in discovery. To the extent the lawsuits are pending in federal court, they are being coordinated for pre-trial purposes in federal court in New York.
Tax Litigation
As previously disclosed, on Aug. 17, 2009, BNY Mellon received a Statutory Notice of Deficiency disallowing tax benefits for the 2001 and 2002 tax years in connection with a 2001 transaction that involved the payment of UK corporate income taxes that were credited against BNY Mellon’s U.S. corporate income tax liability. On Nov. 10, 2009, BNY Mellon filed a petition with the U.S. Tax Court contesting the disallowance of the benefits. Following a trial, the Tax Court upheld the IRS’s Notice of Deficiency and disallowed BNY Mellon’s tax credits and associated transaction costs on Feb. 11, 2013. On Sept. 23, 2013, the Tax Court issued a supplemental opinion, partially reducing the tax
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Notes to Consolidated Financial Statements (continued) |
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implications to BNY Mellon of its earlier decision. The Tax Court entered a decision formally implementing its prior rulings on Feb. 20, 2014. BNY Mellon appealed the decision to the Second Circuit Court of Appeals on March 5, 2014. See Note 11 of the Notes to Consolidated Financial Statements for additional information.
Mortgage-Securitization Trusts Proceedings
As previously disclosed, The Bank of New York Mellon as trustee is the petitioner in a legal proceeding filed in New York State Supreme Court, New York County on June 29, 2011, seeking approval of a proposed settlement involving Bank of America Corporation and bondholders in certain Countrywide residential mortgage-securitization trusts. The New York and Delaware Attorneys General have intervened in this proceeding. The trial in this matter ended on Nov. 21, 2013. On Jan. 31, 2014, the court issued its decision approving the settlement except to the extent that it releases loan modification claims. The court approved all the other terms of the settlement. On Feb. 21, 2014, The Bank of New York Mellon appealed the court’s decision to exempt loan modification claims from the settlement approval and several objectors to the settlement cross-appealed. The Bank of New York Mellon has also been named as a defendant in a lawsuit brought in New York State court on June 18, 2014 by a group of institutional investors. This lawsuit is one of a number of legal actions brought by MBS investors alleging that the trustee has expansive duties under the governing agreements, including to investigate and pursue breach of representation and warranty claims against other parties to the MBS transactions.
Matters Related to R. Allen Stanford
As previously disclosed, in late December 2005, Pershing LLC 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 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 four pending lawsuits against Pershing in Texas. In addition, alleged purchasers have filed nearly forty FINRA arbitration claims against Pershing in Texas, Florida, Louisiana, Mississippi, Tennessee, Arkansas, North
Carolina and Georgia. 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 FINRA arbitration hearings began in the fourth quarter of 2014 and are scheduled to continue through the first quarter of 2016.
UK Financial Conduct Authority Matter
As previously disclosed, The UK Financial Conduct Authority (the “FCA”) is conducting an investigation into compliance by BNY Mellon, London Branch and BNY Mellon (International) Limited (the “firms”) with the FCA’s Client Assets Sourcebook, which sets out the regime in the UK for the protection of client interests. The firms are in the process of responding to information requests from the FCA.
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 Brazil for losses related to a Postalis investment fund for which DTVM serves as fund administrator. Postalis alleges that DTVM failed properly to perform alleged duties, including alleged duties to conduct due diligence of and exert control over the fund manager, Atlântica Administração de Recursos (“Atlântica”), and Atlântica’s investments.
Note 19 - Lines of businesses
We have an internal information system that produces performance data along product and services 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 whenever
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Notes to Consolidated Financial Statements (continued) |
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improvements are made in the measurement principles.
Results for the three and nine months ended Sept. 30, 2013 have been restated to reflect the impact of the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects
(ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
The accounting policies of the businesses are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in our 2013 Annual Report.
The primary types of revenue for our two principal businesses and the Other segment are presented below:
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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 |
Investment Services | Asset servicing fees, including institutional trust and custody fees, broker-dealer services, global collateral services and securities lending Issuer services fees, including Corporate Trust and Depositary Receipts Clearing services fees, including broker-dealer services, registered investment advisor services and prime brokerage services Treasury services fees, including global payment services and working capital solutions Foreign exchange |
Other segment | Credit-related activities Leasing operations Corporate treasury activities Global markets and institutional banking services Business exits |
The results of our businesses are presented and analyzed on an internal management reporting basis:
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• | 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. |
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• | Revenues and expenses associated with specific client bases are included in those businesses. For example, foreign exchange activity associated with clients using custody products is allocated to Investment Services. |
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• | 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. |
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• | Incentive expense related to restricted stock and certain corporate overhead charges are allocated to the businesses. |
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• | Support and other indirect expenses are allocated to businesses based on internally-developed methodologies. |
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• | Recurring FDIC expense is allocated to the businesses based on average deposits generated within each business. |
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• | Litigation expense is generally recorded in the business in which the charge occurs. |
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• | 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. |
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• | 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 |
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Notes to Consolidated Financial Statements (continued) |
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securities portfolio restructured in 2009 has been included in the results of the businesses.
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• | M&I expense is a corporate level item and is recorded in the Other segment. |
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• | Restructuring charges recorded in the second and third quarters of 2014 relate to corporate-level initiatives and were therefore recorded in the Other segment. In the fourth quarter of 2013, restructuring charges were recorded in the |
businesses. Prior to the fourth quarter of 2013, restructuring charges were reported in the Other segment.
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• | 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. |
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• | Goodwill and intangible assets are reflected within individual businesses. |
The following consolidating schedules show the contribution of our businesses to our overall profitability.
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For the quarter ended Sept. 30, 2014 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue | $ | 934 |
| (a) | $ | 2,005 |
| | $ | 928 |
| | $ | 3,867 |
| (a) |
Net interest revenue | 69 |
| | 583 |
| | 69 |
| | 721 |
| |
Total revenue | 1,003 |
| (a) | 2,588 |
| | 997 |
| | 4,588 |
| (a) |
Provision for credit losses | — |
| | — |
| | (19 | ) | | (19 | ) | |
Noninterest expense | 758 |
| | 1,879 |
| | 331 |
| | 2,968 |
| |
Income before taxes | $ | 245 |
| (a) | $ | 709 |
| | $ | 685 |
| | $ | 1,639 |
| (a) |
Pre-tax operating margin (b) | 24 | % | | 27 | % | | N/M |
| | 36 | % | |
Average assets | $ | 36,670 |
| | $ | 266,455 |
| | $ | 77,284 |
| | $ | 380,409 |
| |
| |
(a) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $39 million, net of noncontrolling interests of $23 million, for a net impact of $16 million. Income before taxes is net of noncontrolling interests of $23 million. |
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(b) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
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| | | | | | | | | | | | | | | | |
For the quarter ended June 30, 2014 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue | $ | 970 |
| (a) | $ | 1,920 |
| | $ | 119 |
| | $ | 3,009 |
| (a) |
Net interest revenue | 66 |
| | 593 |
| | 60 |
| | 719 |
| |
Total revenue | 1,036 |
| (a) | 2,513 |
| | 179 |
| | 3,728 |
| (a) |
Provision for credit losses | — |
| | — |
| | (12 | ) | | (12 | ) | |
Noninterest expense | 865 |
| | 1,868 |
| | 213 |
| | 2,946 |
| |
Income (loss) before taxes | $ | 171 |
| (a) | $ | 645 |
| | $ | (22 | ) | | $ | 794 |
| (a) |
Pre-tax operating margin (b) | 16 | % | | 26 | % | | N/M |
| | 21 | % | |
Average assets | $ | 37,750 |
| | $ | 264,221 |
| | $ | 67,241 |
| | $ | 369,212 |
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(a) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $46 million, net of noncontrolling interests of $17 million, for a net impact of $29 million. Income before taxes is net of noncontrolling interests of $17 million. |
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(b) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
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Notes to Consolidated Financial Statements (continued) |
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For the quarter ended Sept. 30, 2013 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue (a) | $ | 882 |
| (b) | $ | 1,949 |
| | $ | 172 |
| | $ | 3,003 |
| (b) |
Net interest revenue | 67 |
| | 619 |
| | 86 |
| | 772 |
| |
Total revenue (a) | 949 |
| (b) | 2,568 |
| | 258 |
| | 3,775 |
| (b) |
Provision for credit losses | — |
| | — |
| | 2 |
| | 2 |
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Noninterest expense | 724 |
| | 1,811 |
| | 244 |
| | 2,779 |
| |
Income before taxes (a) | $ | 225 |
| (b) | $ | 757 |
| | $ | 12 |
| | $ | 994 |
| (b) |
Pre-tax operating margin (a)(c) | 24 | % | | 29 | % | | N/M |
| | 26 | % | |
Average assets | $ | 38,690 |
| | $ | 246,252 |
| | $ | 56,808 |
| | $ | 341,750 |
| |
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(a) | Consolidated results and Other segment results have been restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
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(b) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $32 million, net of noncontrolling interests of $8 million, for a net impact of $24 million. Income before taxes is net of noncontrolling interests of $8 million. |
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(c) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
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For the nine months ended Sept. 30, 2014 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue | $ | 2,804 |
| (a) | $ | 5,812 |
| | $ | 1,159 |
| | $ | 9,775 |
| (a) |
Net interest revenue | 205 |
| | 1,766 |
| | 197 |
| | 2,168 |
| |
Total revenue | 3,009 |
| (a) | 7,578 |
| | 1,356 |
| | 11,943 |
| (a) |
Provision for credit losses | — |
| | — |
| | (49 | ) | | (49 | ) | |
Noninterest expense | 2,347 |
| | 5,569 |
| | 737 |
| | 8,653 |
| |
Income before taxes | $ | 662 |
| (a) | $ | 2,009 |
| | $ | 668 |
| | $ | 3,339 |
| (a) |
Pre-tax operating margin (b) | 22 | % | | 26 | % | | N/M |
| | 28 | % | |
Average assets | $ | 37,951 |
| | $ | 263,078 |
| | $ | 67,268 |
| | $ | 368,297 |
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(a) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $121 million, net of noncontrolling interests of $60 million, for a net impact of $61 million. Income before taxes is net of noncontrolling interests of $60 million. |
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(b) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
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For the nine months ended Sept. 30, 2013 (dollar amounts in millions) | Investment Management |
| | Investment Services |
| | Other |
| | Consolidated |
| |
Fee and other revenue (a) | $ | 2,675 |
| (b) | $ | 5,780 |
| | $ | 671 |
| | $ | 9,126 |
| (b) |
Net interest revenue | 192 |
| | 1,905 |
| | 151 |
| | 2,248 |
| |
Total revenue (a) | 2,867 |
| (b) | 7,685 |
| | 822 |
| | 11,374 |
| (b) |
Provision for credit losses | — |
| | 1 |
| | (42 | ) | | (41 | ) | |
Noninterest expense | 2,165 |
| | 5,533 |
| | 731 |
| | 8,429 |
| |
Income before taxes (a) | $ | 702 |
| (b) | $ | 2,151 |
| | $ | 133 |
| | $ | 2,986 |
| (b) |
Pre-tax operating margin (a)(c) | 24 | % | | 27 | % | | N/M |
| | 26 | % | |
Average assets | $ | 38,462 |
| | $ | 243,769 |
| | $ | 55,420 |
| | $ | 337,651 |
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(a) | Consolidated results and Other segment results have been restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
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(b) | Both total fee and other revenue and total revenue include income from consolidated investment management funds of $147 million, net of noncontrolling interests of $63 million, for a net impact of $84 million. Income before taxes is net of noncontrolling interests of $63 million. |
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(c) | Income before taxes divided by total revenue. |
N/M - Not meaningful.
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Notes to Consolidated Financial Statements (continued) |
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Note 20 - 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.
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Noncash investing and financing transactions | Nine months ended Sept. 30, |
(in millions) | 2014 |
| 2013 |
|
Transfers from loans to other assets for other real estate owned (“OREO”) | $ | 3 |
| $ | 3 |
|
Change in assets of consolidated VIEs | 1,710 |
| 210 |
|
Change in liabilities of consolidated VIEs | 1,991 |
| 277 |
|
Change in noncontrolling interests of consolidated VIEs | 118 |
| 12 |
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Item 4. Controls and Procedures |
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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.
As previously disclosed, we reviewed our process for the reporting of information in our public filings and we have instituted ongoing enhancements to the data collection processes and systems relating to AUC/A and other information in our public filings.
Changes in internal control over financial reporting
In the ordinary course of business, we may routinely modify, upgrade or enhance our internal controls and procedures for financial reporting. There have not been any changes in our internal controls over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the third quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Forward-looking Statements |
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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 and our long-term goals and strategies. In addition, these forward-looking statements relate to expectations regarding: our capital ratios; the acquisition of Cutwater Asset Management; the impact of repositioning the BNY Mellon Markets Groups; satisfying the requirements of the SLR and LCR and the impact to our businesses; the financial impact of the tax carryback claim and associated interest; the impact of the net maturities of high margin structured debt securitizations on our total annual revenue; our foreign exchange revenues and the impact of enhancements in our foreign exchange trading and execution capabilities; our plans to reduce our interbank placement assets and increase our securities portfolio inventory of high quality liquid assets and impact on net interest revenue; the rate of expense growth; elevated levels of legal and litigation costs; our effective tax rate; the impact of seasonality on our businesses; estimations of the impact of market value changes on our fee revenue and earnings per share; estimated new business wins in AUC/A; the impact of globalization and a changing regulatory environment on the demand for our products and services; our tri-party repo business; our appearance as the named plaintiff in legal actions brought by servicers in foreclosure and other related proceedings; the impact of the situation in Russia; overdraft exposure with respect to Irish-domiciled investment funds; assumptions with respect to residential mortgage-backed securities; the expected impact of actions on our investment securities portfolio in the event of a rise in interest rates; effects of changes in projected loss severities and default rates on impairment charges; the impact of significant changes in ratings classifications for our investment securities portfolio; goals with respect to our commercial portfolio; our credit strategies; our airline lease customers; the impact of an update to our methodologies utilized in our probable loss model; the impact on our allowance for loan losses of changes in assigned credit ratings; efforts to partially convert tri party repo trades from uncommitted to committed credit; our goals with respect to our liquidity cushion, diversity of funding sources, liquidity ratios, a liquid asset buffer, and the levels and sources of wholesale funds; the potential uses of liquidity; the impact of a reduction in our Investment Services businesses; our liquidity policy; our access to capital markets; the impact of a change in rating agencies’ assumptions on ratings of the
Parent, The Bank of New York Mellon and BNY Mellon, N.A.; capital, including actions with regard to outstanding securities; our 2014 capital plan, including share repurchases; the impact of model approval on capital ratios; the impact of external losses on the operational loss risk model; the effects of changes in risk-weighted assets/quarterly average assets or changes in common equity levels on capital ratios; the capitalization status of BNY Mellon and its bank subsidiaries; the effects of customer behavior and market volatility or stress on our balance sheet size and client deposit levels; our foreign exchange and other trading counterparty risk rating profile; our earnings simulation model; estimations and assumptions on net interest revenue and net interest rate sensitivities; impact of certain events on the growth or contraction of deposits, our assumptions about depositor behavior, our balance sheet and net interest revenue; the timing and effects of pending and proposed legislation, regulation and accounting standards, including: resolution planning, capital planning and stress testing, money market fund reforms, LCR and SLR, and other expected regulatory initiatives; the timing and effects of pending and proposed accounting standards, including: transfers and servicing: repurchase-to maturity transactions, repurchase financings and disclosures; revenue from contracts with customers, principal versus agent analysis; leases; financial instruments - credit losses; recognition and measurement of financial assets and financial liabilities, IFRS; update to internal controls- integrated framework; our anticipated actions with respect to legal or regulatory proceedings; future litigation costs; the expected outcome and the impact of judgments and settlements, if any, arising from pending or potential legal or regulatory proceedings; and our expectations with respect to litigation accruals.
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,” “target,” “expect,” “intend,” “continue,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “would,” “may,” “will,” “strategy,” “synergies,” “opportunities,” “trends” and words of similar meaning, may signify forward-looking statements.
Forward-looking statements, including discussions and projections of future results of operations and discussions of future plans contained in the
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Forward-looking Statements (continued) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations, are based on management’s current expectations and assumptions that involve risk and uncertainties and that are subject to change based on various important factors (some of which are beyond BNY Mellon’s control), including adverse changes in market conditions, and the timing of such changes, and the actions that management could take in response to these changes. Actual results may differ materially from those expressed or implied as a result of a number of factors, including those discussed in the “Risk Factors” section of our 2013 Annual Report, such as: government regulation and supervision, and recent legislative and regulatory developments; regulatory actions or litigation; adverse publicity with respect to us, other well-known companies and the financial services industry generally; continued litigation and regulatory investigations and proceedings involving our foreign exchange standing instruction program; failure to satisfy regulatory standards, including capital adequacy rules; operational risk; failure or circumvention of our controls and procedures; disruption or breach in security of our information systems that results in a loss of confidential client information or impacts our ability to provide services to our clients; failure to update our technology; change or uncertainty in monetary, tax and other governmental policies; intense competition in all aspects of our business; the risks relating to new lines of business or new products and services, and the failure to grow our existing businesses; failure to attract and retain employees; political, economic, legal, operational and other risks inherent in operating globally; acts of terrorism, natural disasters, pandemics and global conflicts; our strategic acquisitions, including our ability to successfully integrate acquired businesses and potential liabilities from legacy claims against the acquired businesses; ongoing concerns about the financial stability of several countries in Europe, the failure or instability of any of our significant counterparties in Europe, or a breakup of the European Monetary Union; continuing uncertainty in financial markets and weakness in the economy generally; low or volatile interest rates; market volatility; further write-downs of financial instruments that we own and other losses related to volatile and illiquid market conditions; our dependence on fee-based business for a substantial majority of our revenue and the potential adverse effects of a slowing in capital markets activity, weak financial markets or negative trends in savings rates or in individual investment preferences; the impact of
a stable exchange-rate environment or decreased cross-border investing activity on our foreign exchange revenues; any material reduction in our credit ratings or the credit ratings of certain of our subsidiaries; the failure or instability of any of our significant counterparties, and our assumption of credit and counterparty risk; credit, regulatory and reputation risks as a result of our tri-party repo agent services; the impact of not effectively managing our liquidity; inadequate reserves for credit losses, including loan reserves; tax law changes or challenges to our tax positions; changes in accounting standards; risks associated with being a holding company, including our dependence on dividends from our subsidiary banks; and the impact of provisions of Delaware law and the Federal Reserve on our ability to return capital to shareholders. Investors should consider all risks in our 2013 Annual Report and any subsequent reports filed with the SEC by BNY Mellon pursuant to the Exchange Act. All forward-looking statements speak only as of the date on which such statements are made, and BNY Mellon undertakes no obligation to update any statement to reflect events or circumstances after the date on which such forward-looking statement is made or to reflect the occurrence of unanticipated events. The contents of BNY Mellon’s website or any other websites referenced herein are not part of this report.
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Part II - Other Information |
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Item 1. Legal Proceedings
The information required by this Item is set forth in the “Legal proceedings” section in Note 18 of the Notes to Consolidated Financial Statements, which portion is incorporated herein by reference in response to this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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(c) | The following table discloses repurchases of our common stock made in the third quarter of 2014. 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
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Share repurchases - third quarter of 2014 | | | |
(dollars in millions, except per share information; common shares in thousands) | Total shares repurchased |
| | Average price per share |
| | 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, 2014 | | |
July 2014 | 7,021 |
| | $ | 39.41 |
| | 7,021 |
| | $ | 1,024 |
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August 2014 | 3,792 |
| | 39.08 |
| | 3,792 |
| | 876 |
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September 2014 | 159 |
| | 38.97 |
| | 159 |
| | 870 |
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Third quarter of 2014 (a) | 10,972 |
| | 39.29 |
| | 10,972 |
| | 863 |
| (b) |
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(a) | Includes 72 thousand shares repurchased at a purchase price of $3 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 $39.29. |
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(b) | Represents the maximum value of the shares authorized to be repurchased through the first quarter of 2015, including employee benefit plan repurchases, in connection with the Federal Reserve’s non-objection to our 2014 capital plan. |
On March 26, 2014, in connection with the Federal Reserve’s non-objection to our 2014 capital plan, the Board of Directors authorized a new stock purchase program providing for the repurchase of an aggregate of $1.74 billion of common stock beginning in the second quarter of 2014 and continuing through the first quarter of 2015.
Item 6. Exhibits
Pursuant to the rules and regulations of the SEC, BNY Mellon has filed certain agreements as exhibits to this Quarterly Report on Form 10-Q. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in BNY Mellon’s public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof and should not be relied upon.
The list of exhibits required to be filed as exhibits to this report appears on page 137 hereof, under “Index to Exhibits”, which is incorporated herein by reference.
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.
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| THE BANK OF NEW YORK MELLON CORPORATION |
| (Registrant) |
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Date: November 7, 2014 | By: | | /s/ John A. Park |
| | | John A. Park |
| | | Corporate Controller |
| | | (Duly Authorized Officer and |
| | | Principal Accounting Officer of |
| | | the Registrant) |
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Exhibit No. | | Description | | Method of Filing |
2.1 | | Amended and Restated Agreement and Plan of Merger, dated as of Dec. 3, 2006, as amended and restated as of Feb. 23, 2007, and as further amended and restated as of March 30, 2007, between The Bank of New York Company, Inc., Mellon Financial Corporation and The Bank of New York Mellon Corporation (the “Company”).
| | Previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (File Nos. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference.
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2.2 | | Stock Purchase Agreement, dated as of Feb. 1, 2010, by and between The PNC Financial Services Group, Inc. and The Bank of New York Mellon Corporation. | | Previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on Feb. 3, 2010, and incorporated herein by reference. |
3.1 | | Restated Certificate of Incorporation of The Bank of New York Mellon Corporation. | | Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File Nos. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference. |
3.2 | | Certificate of Designations of The Bank of New York Mellon Corporation with respect to Series A Noncumulative Preferred Stock dated June 15, 2007. | | 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 | | Certificate of Designations of The Bank of New York Mellon Corporation with respect to Series C Noncumulative Perpetual Preferred Stock dated Sept. 13, 2012. | | 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 | | Certificate of Designations of The Bank of New York Mellon Corporation with respect to the Series D Noncumulative Perpetual Preferred Stock, dated May 16, 2013. | | 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.
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3.5 | | Amended and Restated By-Laws of The Bank of New York Mellon Corporation, as amended and restated on Oct. 8, 2013. | | 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. 8, 2013, 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, 2014. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument. | | N/A |
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Index to Exhibits (continued) |
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Exhibit No. | | Description | | Method of Filing |
10.1 | * | Amendment to The Bank of New York Mellon Corporation Executive Severance Plan, effective as of Aug. 11, 2014. | | Filed herewith. |
10.2 | | First Amendment to Purchase and Sale Agreement between The Bank of New York Mellon and MIP One Wall Street Acquisition LLC, dated Sept. 26, 2014. | | Filed herewith. |
12.1 | | Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. | | Filed herewith. |
31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. |
31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | Filed herewith. |
32.1 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | Furnished herewith. |
32.2 | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | Furnished herewith. |
101.INS | | XBRL Instance Document. | | Filed herewith. |
101.SCH | | XBRL Taxonomy Extension Schema Document. | | Filed herewith. |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | Filed herewith. |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | Filed herewith. |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | Filed herewith. |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | Filed herewith. |
* Management contract or compensatory plan arrangement. |