Bank of New York Mellon Corp - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2019
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 001-35651
THE BANK OF NEW YORK MELLON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2614959 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
240 Greenwich Street
New York, New York 10286
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code – (212) 495-1784
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | BK | New York Stock Exchange |
Depositary Shares, each representing 1/4,000th of a share of Series C Noncumulative Perpetual Preferred Stock | BK PrC | New York Stock Exchange |
6.244% Fixed-to-Floating Rate Normal Preferred Capital Securities of Mellon Capital IV | BK/P | New York Stock Exchange |
(fully and unconditionally guaranteed by The Bank of New York Mellon Corporation) | ||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of Sept. 30, 2019, 922,198,877 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
THE BANK OF NEW YORK MELLON CORPORATION
Third Quarter 2019 Form 10-Q
Table of Contents
Page | |
Part I - Financial Information | |
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures about Market Risk: | |
Key third quarter 2019 events | |
Item 1. Financial Statements: | |
Page | |
Notes to Consolidated Financial Statements: | |
Note 3—Acquisitions and dispositions | |
Part II - Other Information | |
Index to Exhibits | |
Signature | |
The Bank of New York Mellon Corporation (and its subsidiaries)
Consolidated Financial Highlights (unaudited)
Quarter ended | Year-to-date | |||||||||||||||
(dollars in millions, except per share amounts and unless otherwise noted) | Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | Sept. 30, 2019 | Sept. 30, 2018 | |||||||||||
Results applicable to common shareholders of The Bank of New York Mellon Corporation: | ||||||||||||||||
Net income | $ | 1,002 | $ | 969 | $ | 1,075 | $ | 2,881 | $ | 3,265 | ||||||
Basic earnings per share | $ | 1.07 | $ | 1.01 | $ | 1.07 | $ | 3.02 | $ | 3.21 | ||||||
Diluted earnings per share | $ | 1.07 | $ | 1.01 | $ | 1.06 | $ | 3.01 | $ | 3.20 | ||||||
Fee and other revenue | $ | 3,128 | $ | 3,112 | $ | 3,168 | $ | 9,272 | $ | 9,648 | ||||||
Income from consolidated investment management funds | 3 | 10 | 10 | 39 | 11 | |||||||||||
Net interest revenue | 730 | 802 | 891 | 2,373 | 2,726 | |||||||||||
Total revenue | $ | 3,861 | $ | 3,924 | $ | 4,069 | $ | 11,684 | $ | 12,385 | ||||||
Return on common equity (annualized) | 10.6 | % | 10.4 | % | 11.2 | % | 10.3 | % | 11.6 | % | ||||||
Return on tangible common equity (annualized) – Non-GAAP (a) | 21.4 | % | 21.2 | % | 23.1 | % | 21.1 | % | 24.1 | % | ||||||
Return on average assets (annualized) | 1.13 | % | 1.13 | % | 1.28 | % | 1.12 | % | 1.26 | % | ||||||
Fee revenue as a percentage of total revenue | 81 | % | 79 | % | 78 | % | 79 | % | 78 | % | ||||||
Non-U.S. revenue as a percentage of total revenue | 37 | % | 36 | % | 37 | % | 36 | % | 37 | % | ||||||
Pre-tax operating margin | 33 | % | 33 | % | 33 | % | 32 | % | 34 | % | ||||||
Net interest margin | 0.99 | % | 1.12 | % | 1.27 | % | 1.10 | % | 1.25 | % | ||||||
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (b) | 1.00 | % | 1.12 | % | 1.28 | % | 1.11 | % | 1.26 | % | ||||||
Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (c) | $ | 35.8 | $ | 35.5 | $ | 34.5 | $ | 35.8 | $ | 34.5 | ||||||
Assets under management (“AUM”) at period end (in billions) (d) | $ | 1,881 | $ | 1,843 | $ | 1,828 | $ | 1,881 | $ | 1,828 | ||||||
Market value of securities on loan at period end (in billions) (e) | $ | 362 | $ | 369 | $ | 415 | $ | 362 | $ | 415 | ||||||
Average common shares and equivalents outstanding (in thousands): | ||||||||||||||||
Basic | 933,264 | 951,281 | 999,808 | 949,035 | 1,008,967 | |||||||||||
Diluted | 935,677 | 953,928 | 1,003,665 | 951,876 | 1,013,242 | |||||||||||
Selected average balances: | ||||||||||||||||
Interest-earning assets | $ | 294,154 | $ | 287,417 | $ | 279,218 | $ | 287,964 | $ | 291,040 | ||||||
Total assets | $ | 350,679 | $ | 342,384 | $ | 332,341 | $ | 343,129 | $ | 345,520 | ||||||
Interest-bearing deposits | $ | 177,401 | $ | 167,545 | $ | 148,636 | $ | 168,339 | $ | 152,354 | ||||||
Noninterest-bearing deposits | $ | 49,027 | $ | 52,956 | $ | 60,677 | $ | 52,168 | $ | 65,446 | ||||||
Long-term debt | $ | 28,386 | $ | 27,681 | $ | 28,074 | $ | 28,108 | $ | 28,275 | ||||||
Preferred stock | $ | 3,542 | $ | 3,542 | $ | 3,542 | $ | 3,542 | $ | 3,542 | ||||||
Total The Bank of New York Mellon Corporation common shareholders’ equity | $ | 37,597 | $ | 37,487 | $ | 38,036 | $ | 37,392 | $ | 37,795 | ||||||
Other information at period end: | ||||||||||||||||
Cash dividends per common share | $ | 0.31 | $ | 0.28 | $ | 0.28 | $ | 0.87 | $ | 0.76 | ||||||
Common dividend payout ratio | 29 | % | 28 | % | 26 | % | 29 | % | 24 | % | ||||||
Common dividend yield (annualized) | 2.7 | % | 2.5 | % | 2.2 | % | 2.6 | % | 2.0 | % | ||||||
Closing stock price per common share | $ | 45.21 | $ | 44.15 | $ | 50.99 | $ | 45.21 | $ | 50.99 | ||||||
Market capitalization | $ | 41,693 | $ | 41,619 | $ | 50,418 | $ | 41,693 | $ | 50,418 | ||||||
Book value per common share | $ | 40.75 | $ | 40.30 | $ | 38.45 | $ | 40.75 | $ | 38.45 | ||||||
Tangible book value per common share – Non-GAAP (a) | $ | 20.59 | $ | 20.45 | $ | 19.35 | $ | 20.59 | $ | 19.35 | ||||||
Full-time employees | 48,700 | 49,100 | 52,000 | 48,700 | 52,000 | |||||||||||
Common shares outstanding (in thousands) | 922,199 | 942,662 | 988,777 | 922,199 | 988,777 | |||||||||||
2 BNY Mellon
Consolidated Financial Highlights (unaudited) (continued)
Regulatory capital and other ratios | Sept. 30, 2019 | June 30, 2019 | Dec. 31, 2018 | |||
Average liquidity coverage ratio (“LCR”) | 117 | % | 117 | % | 118 | % |
Regulatory capital ratios: (f) | ||||||
Advanced: | ||||||
Common Equity Tier 1 (“CET1”) ratio | 11.1 | % | 11.1 | % | 10.7 | % |
Tier 1 capital ratio | 13.2 | 13.2 | 12.8 | |||
Total capital ratio | 14.0 | 14.0 | 13.6 | |||
Standardized: | ||||||
CET1 ratio | 12.3 | % | 12.4 | % | 11.7 | % |
Tier 1 capital ratio | 14.6 | 14.8 | 14.1 | |||
Total capital ratio | 15.6 | 15.7 | 15.1 | |||
Tier 1 leverage ratio | 6.5 | % | 6.8 | % | 6.6 | % |
Supplementary leverage ratio (“SLR”) | 6.0 | 6.3 | 6.0 | |||
BNY Mellon shareholders’ equity to total assets ratio | 11.0 | % | 10.9 | % | 11.2 | % |
BNY Mellon common shareholders’ equity to total assets ratio | 10.1 | 10.0 | 10.2 | |||
(a) | Return on tangible common equity and tangible book value per common share, Non-GAAP measures, exclude goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for the reconciliation of Non-GAAP measures. |
(b) | See “Average balances and interest rates” beginning on page 10 for a reconciliation of this Non-GAAP measure. |
(c) | Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.4 trillion at Sept. 30, 2019, June 30, 2019 and Sept. 30, 2018. |
(d) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
(e) | Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $66 billion at Sept. 30, 2019, $64 billion at June 30, 2019 and $69 billion at Sept. 30, 2018. |
(f) | For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. For additional information on our capital ratios, see “Capital” beginning on page 33. |
BNY Mellon 3
Part I - Financial Information |
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures about Market Risk |
General
In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “BNY Mellon,” the “Company” and similar terms refer to The Bank of New York Mellon Corporation and its consolidated subsidiaries. The term “Parent” refers to The Bank of New York Mellon Corporation but not its subsidiaries.
Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2018 (“2018 Annual Report”).
The following should be read in conjunction with the Consolidated Financial Statements included in this report. Investors should also read the section titled “Forward-looking Statements.”
Overview
Established in 1784 by Alexander Hamilton, we were the first company listed on the New York Stock Exchange (NYSE: BK). With a more than 230-year history, BNY Mellon is a global company that manages and services assets for financial institutions, corporations and individual investors in 35 countries.
BNY Mellon has two business segments, Investment Services and Investment Management, which offer a comprehensive set of capabilities and deep expertise across the investment lifecycle, enabling the Company to provide solutions to buy-side and sell-side market participants, as well as leading institutional and wealth management clients globally.
The diagram below presents our two business segments and lines of business, with the remaining operations in the Other segment.
Key third quarter 2019 events
Todd Gibbons named interim Chief Executive Officer; Joseph Echevarria named Non-Executive Chairman
In September 2019, Todd Gibbons was appointed interim Chief Executive Officer and member of the Board of Directors of the Company. During Todd’s career at BNY Mellon, he has held leadership roles across risk, finance, client management and many of our businesses. Most recently, Todd served as Vice Chairman and CEO of Clearing, Markets and Client Management. Todd also served for nine years as BNY Mellon’s Chief Financial Officer. Joseph Echevarria, a member of BNY Mellon’s Board of Directors since February 2015 and Lead Independent Director, was appointed Non-Executive Chairman of the Board.
Definitive agreement to sell interest in Promontory Interfinancial Network, LLC
In September 2019, MCDI (Holdings) LLC, a wholly-owned subsidiary of BNY Mellon, along with the other holders of Promontory Interfinancial Network, LLC (“PIN”), entered into a definitive agreement to sell their interests in PIN. The
4 BNY Mellon
transaction is expected to close in the fourth quarter of 2019, subject to customary closing conditions. Upon the closing of the transaction, BNY Mellon expects an after tax gain of approximately $600 million.
Highlights of third quarter 2019 results
Net income applicable to common shareholders was $1.0 billion, or $1.07 per diluted common share, in the third quarter of 2019. Net income applicable to common shareholders was $1.08 billion, or $1.06 per diluted common share, in the third quarter of 2018. The highlights below are based on the third quarter of 2019 compared with the third quarter of 2018, unless otherwise noted.
• | Total revenue of $3.9 billion decreased 5%, primarily reflecting: |
• | Fee revenue decreased 1%, primarily reflecting the cumulative AUM outflows since the third quarter of 2018, lower performance fees and the unfavorable impact of a stronger U.S. dollar, partially offset by higher fees in Issuer Services and Clearance and Collateral Management and higher client assets and volumes in Pershing. (See “Fee and other revenue” beginning on page 6.) |
• | Net interest revenue decreased 18%, primarily reflecting a lease-related impairment of $70 million, higher interest-bearing deposit and funding costs and lower noninterest-bearing deposit balances, partially offset by the benefit of higher rates earned on interest-earning assets. The lease-related impairment decreased net interest revenue 8%. (See “Net interest revenue” on page 9.) |
• | Provision for credit losses was a credit of $16 million, due in part from the sale of the loans related to a California utility company that had filed for bankruptcy. |
• | Noninterest expense of $2.6 billion decreased 5%. Nearly all of the decrease was driven by a reduction of previously established reserves for tax-related exposure of certain investment management funds that we manage, net of staff expense, and lower litigation expense. The remaining slight decrease primarily reflects the continued investments in technology, which were more than offset by lower other expenses and the |
favorable impact of a stronger U.S. dollar. (See “Noninterest expense” on page 12.)
• | Effective tax rate of 19.1% compared with 16.5% in the third quarter of 2018, which was impacted by adjustments to the provisional estimates for U.S. tax legislation and other changes. (See “Income taxes” on page 12.) |
Capital and liquidity
• | CET1 ratio under the Advanced Approaches was 11.1% at Sept. 30, 2019 and 11.1% at June 30, 2019, reflecting capital deployed through common stock repurchases and dividend payments, offset by capital generated through earnings and lower risk-weighted assets (“RWA”). (See “Capital” beginning on page 33.) |
• | Repurchased 21.3 million common shares for $981 million and paid $294 million in dividends to common shareholders in the third quarter of 2019. |
Highlights of our principal businesses
Investment Services
• | Total revenue decreased slightly. |
• | Income before income taxes increased 7%, driven by lower litigation expense. |
• | AUC/A of $35.8 trillion, increased 4%, primarily reflecting higher market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar. |
Investment Management
• | Total revenue decreased 12%. |
• | Income before income taxes decreased 5%, having benefited from the net reduction of reserves for tax-related exposure of certain investment management funds. |
• | AUM of $1.9 trillion increased 3%, primarily reflecting higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows. |
See “Review of businesses” and Note 20 of the Notes to Consolidated Financial Statements for additional information on our businesses.
BNY Mellon 5
Fee and other revenue
Fee and other revenue | YTD19 | |||||||||||||||||||||
3Q19 vs. | vs. | |||||||||||||||||||||
(dollars in millions, unless otherwise noted) | 3Q19 | 2Q19 | 3Q18 | 2Q19 | 3Q18 | YTD19 | YTD18 | YTD18 | ||||||||||||||
Investment services fees: | ||||||||||||||||||||||
Asset servicing fees (a) | $ | 1,152 | $ | 1,141 | $ | 1,157 | 1 | % | — | % | $ | 3,415 | $ | 3,482 | (2 | )% | ||||||
Clearing services fees (b) | 419 | 410 | 393 | 2 | 7 | 1,227 | 1,218 | 1 | ||||||||||||||
Issuer services fees | 324 | 291 | 287 | 11 | 13 | 866 | 813 | 7 | ||||||||||||||
Treasury services fees | 140 | 140 | 137 | — | 2 | 412 | 415 | (1 | ) | |||||||||||||
Total investment services fees (b) | 2,035 | 1,982 | 1,974 | 3 | 3 | 5,920 | 5,928 | — | ||||||||||||||
Investment management and performance fees (b) | 832 | 833 | 912 | — | (9 | ) | 2,506 | 2,763 | (9 | ) | ||||||||||||
Foreign exchange and other trading revenue | 150 | 166 | 155 | (10 | ) | (3 | ) | 486 | 551 | (12 | ) | |||||||||||
Financing-related fees | 49 | 50 | 52 | (2 | ) | (6 | ) | 150 | 157 | (4 | ) | |||||||||||
Distribution and servicing | 33 | 31 | 34 | 6 | (3 | ) | 95 | 104 | (9 | ) | ||||||||||||
Investment and other income | 30 | 43 | 41 | N/M | N/M | 108 | 193 | N/M | ||||||||||||||
Total fee revenue | 3,129 | 3,105 | 3,168 | 1 | (1 | ) | 9,265 | 9,696 | (4 | ) | ||||||||||||
Net securities (losses) gains | (1 | ) | 7 | — | N/M | N/M | 7 | (48 | ) | N/M | ||||||||||||
Total fee and other revenue | $ | 3,128 | $ | 3,112 | $ | 3,168 | 1 | % | (1 | )% | $ | 9,272 | $ | 9,648 | (4 | )% | ||||||
Fee revenue as a percentage of total revenue | 81 | % | 79 | % | 78 | % | 79 | % | 78 | % | ||||||||||||
AUC/A at period end (in trillions) (c) | $ | 35.8 | $ | 35.5 | $ | 34.5 | 1 | % | 4 | % | $ | 35.8 | $ | 34.5 | 4 | % | ||||||
AUM at period end (in billions) (d) | $ | 1,881 | $ | 1,843 | $ | 1,828 | 2 | % | 3 | % | $ | 1,881 | $ | 1,828 | 3 | % | ||||||
(a) | Asset servicing fees include securities lending revenue of $43 million in the third quarter of 2019, $44 million in the second quarter of 2019, $58 million in the third quarter of 2018, $135 million in the first nine months of 2019 and $173 million in the first nine months of 2018. |
(b) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
(c) | Includes the AUC/A of CIBC Mellon of $1.4 trillion at Sept. 30, 2019, June 30, 2019 and Sept. 30, 2018. |
(d) | Excludes securities lending cash management assets and assets managed in the Investment Services business. |
N/M - Not meaningful.
Fee and other revenue decreased 1% compared with the third quarter of 2018 and increased 1% compared with the second quarter of 2019. The decrease compared with the third quarter of 2018 primarily reflects lower investment management and performance fees and investment and other income, partially offset by higher issuer services and clearing services fees. The increase compared with the second quarter of 2019 primarily reflects higher issuer services fees, partially offset by lower foreign exchange and other trading revenue.
Investment services fees
Investment services fees were impacted by the following compared with the third quarter of 2018 and the second quarter of 2019:
• | Asset servicing fees decreased slightly compared with the third quarter of 2018 and increased 1% compared with the second quarter of 2019. The slight decrease compared with the third quarter of 2018 primarily reflects lower client activity, securities lending revenue and the unfavorable |
impact of a stronger U.S. dollar, partially offset by growth in clearance volumes and collateral management from new business. The increase compared with the second quarter of 2019 primarily reflects growth in clearance volumes and collateral management from new business.
• | Clearing services fees increased 7% compared with the third quarter of 2018 and 2% compared with the second quarter of 2019, primarily reflecting growth in client assets and accounts. |
• | Issuer services fees increased 13% compared with the third quarter of 2018 and 11% compared with the second quarter of 2019, primarily reflecting higher Depositary Receipts revenue. The increase compared with the third quarter of 2018 also reflects higher volumes in Corporate Trust. |
• | Treasury services fees increased 2% compared with the third quarter of 2018 and were unchanged compared with the second quarter of 2019. The increase compared with the third quarter of 2018 primarily reflects higher payment volumes. |
6 BNY Mellon
See the “Investment Services business” in “Review of businesses” for additional details.
Investment management and performance fees
Investment management and performance fees decreased 9% compared with the third quarter of 2018 and were essentially unchanged compared with the second quarter of 2019. The decrease compared with the third quarter of 2018 primarily reflects the impact of cumulative AUM outflows since the third quarter of 2018, lower performance fees and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), partially offset by higher market values. On a constant currency basis (Non-GAAP), investment management and performance fees decreased 7% compared with the third quarter of 2018. Performance fees were $2 million in the third quarter of 2019, $30 million in the third quarter of 2018 and $2 million in the second quarter of 2019.
AUM was $1.9 trillion at Sept. 30, 2019, an increase of 3% compared with Sept. 30, 2018, primarily reflecting higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows.
See the “Investment Management business” in “Review of businesses” for additional details regarding the drivers of investment management and performance fees, AUM and AUM flows.
Foreign exchange and other trading revenue
Foreign exchange and other trading revenue | |||||||||||||||
(in millions) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||
Foreign exchange | $ | 129 | $ | 150 | $ | 150 | $ | 439 | $ | 504 | |||||
Other trading revenue | 21 | 16 | 5 | 47 | 47 | ||||||||||
Total foreign exchange and other trading revenue | $ | 150 | $ | 166 | $ | 155 | $ | 486 | $ | 551 | |||||
Foreign exchange revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility and the impact of foreign currency hedging activities. In the third quarter of 2019, foreign exchange revenue totaled $129 million, a decrease of 14% compared with the third quarter of 2018 and second quarter of 2019. Both decreases primarily reflect the impact of foreign currency hedging activities and lower volumes. The decrease compared with the third quarter of 2018 also reflects lower volatility. Foreign exchange revenue is primarily reported in the Investment Services business and, to a lesser extent, the Investment Management business and the Other segment.
Other trading revenue totaled $21 million in the third quarter of 2019 compared with $5 million in the third quarter of 2018. The increase primarily reflects derivative and fixed income trading gains, partially offset by the impact of Investment Management hedging activities. Other trading revenue is reported in all three business segments.
BNY Mellon 7
Investment and other income
The following table provides the components of investment and other income.
Investment and other income | |||||||||||||||
(in millions) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||
Corporate/bank-owned life insurance | $ | 33 | $ | 32 | $ | 36 | $ | 95 | $ | 103 | |||||
Expense reimbursements from joint venture | 21 | 19 | 17 | 59 | 52 | ||||||||||
Seed capital gains (a) | — | 8 | 8 | 10 | 11 | ||||||||||
Asset-related gains | 2 | 1 | 7 | 4 | 68 | ||||||||||
Other (loss) | (26 | ) | (17 | ) | (27 | ) | (60 | ) | (41 | ) | |||||
Total investment and other income | $ | 30 | $ | 43 | $ | 41 | $ | 108 | $ | 193 | |||||
(a) | Excludes seed capital gains related to consolidated investment management funds, which are reflected in operations of consolidated investment management funds. |
Investment and other income decreased compared with the third quarter of 2018 and the second quarter of 2019. The decrease compared with the third quarter of 2018 primarily reflects lower seed capital gains and asset-related gains. The decrease compared with the second quarter of 2019 primarily reflects lower other income and seed capital gains.
Year-to-date 2019 compared with year-to-date 2018
Fee and other revenue decreased 4% compared with the first nine months of 2018, primarily reflecting lower investment management and performance fees, investment and other income, asset servicing fees and foreign exchange and other trading revenue, partially offset by securities losses recorded in the first nine months of 2018 and an increase in issuer services fees. The 9% decrease in investment management and performance fees primarily reflects the impact of cumulative AUM outflows, the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and lower performance fees, partially offset by higher market values. The decrease in investment and other income primarily reflects lower asset-related gains, which included the gain on the sale of CenterSquare and gains on equity investments both recorded in the first quarter of 2018. The 2% decrease in asset servicing fees primarily reflects lower client activity, the unfavorable impact of a stronger U.S. dollar and lower securities lending revenue, partially offset by growth in clearance volumes and collateral management and higher equity markets. The 12% decrease in foreign exchange and other trading revenue primarily reflects lower volumes and volatility and the impact of Investment Management hedging activities, partially offset by derivative and fixed income trading gains and the impact of foreign currency hedging activities. Net securities losses in the first nine months of 2018 were driven by sales of debt securities. The 7% increase in issuer services fees primarily reflects higher fees in Depositary Receipts and volumes in Corporate Trust.
8 BNY Mellon
Net interest revenue
Net interest revenue | YTD19 | |||||||||||||||||||||
3Q19 vs. | vs. | |||||||||||||||||||||
(dollars in millions) | 3Q19 | 2Q19 | 3Q18 | 2Q19 | 3Q18 | YTD19 | YTD18 | YTD18 | ||||||||||||||
Net interest revenue | $ | 730 | $ | 802 | $ | 891 | (9 | )% | (18 | )% | $ | 2,373 | $ | 2,726 | (13 | )% | ||||||
Add: Tax equivalent adjustment | 3 | 4 | 5 | N/M | N/M | 11 | 16 | N/M | ||||||||||||||
Net interest revenue (FTE) – Non-GAAP (a) | $ | 733 | $ | 806 | $ | 896 | (9 | )% | (18 | )% | $ | 2,384 | $ | 2,742 | (13 | )% | ||||||
Average interest-earning assets | $ | 294,154 | $ | 287,417 | $ | 279,218 | 2 | % | 5 | % | $ | 287,964 | $ | 291,040 | (1 | )% | ||||||
Net interest margin | 0.99 | % | 1.12 | % | 1.27 | % | (13 | ) bps | (28 | ) bps | 1.10 | % | 1.25 | % | (15 | ) bps | ||||||
Net interest margin (FTE) – Non-GAAP (a) | 1.00 | % | 1.12 | % | 1.28 | % | (12 | ) bps | (28 | ) bps | 1.11 | % | 1.26 | % | (15 | ) bps | ||||||
(a) | Net interest revenue (FTE) – Non-GAAP and net interest margin (FTE) – Non-GAAP include the tax equivalent adjustments on tax-exempt income which allows for comparisons of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. |
N/M - Not meaningful.
bps - basis points.
Net interest revenue decreased 18% compared with the third quarter of 2018 and 9% compared with the second quarter of 2019. The decrease compared with the third quarter of 2018 primarily reflects the lease-related impairment of $70 million, higher interest-bearing deposit and funding costs and lower noninterest-bearing deposit balances, partially offset by the benefit of higher rates earned on interest-earning assets. The lease-related impairment decreased net interest revenue 8% compared with the third quarter of 2018. The decrease compared with the second quarter of 2019 was primarily driven by the lease-related impairment. Lower deposit and funding costs and the impact of hedging were largely offset by the impact of lower rates on interest-earning assets. The impact of hedging activities is offset in foreign exchange and other trading revenue.
Net interest margin decreased 28 basis points compared with the third quarter of 2018 and 13 basis points compared with the second quarter of 2019. The lease-related impairment decreased the net interest margin for the third quarter of 2019 by 10 basis points. The remaining decrease compared with the third quarter of 2018 primarily reflects higher deposit rates and interest-earning assets, partially offset by higher asset yields.
Average non-U.S. dollar deposits comprised approximately 30% of our average total deposits in the third quarter of 2019. Approximately 40% of the average non-U.S. dollar deposits in the third quarter of 2019 were euro-denominated.
Net interest revenue in future quarters will depend on the level and mix of client deposits, deposit rates, as well as the level and shape of the yield curve, which may result in lower yields on interest-earning assets.
Year-to-date 2019 compared with year-to-date 2018
Net interest revenue decreased 13% compared with the first nine months of 2018, primarily driven by higher yields on interest-earning assets, which were more than offset by the higher deposit and funding costs, lower noninterest-bearing deposits and loan balances, the lease-related impairment and the impact of hedging activities. The impact of hedging activities is offset in foreign exchange and other trading revenue. The decrease in the net interest margin primarily reflects higher deposit rates and the lease-related impairment, partially offset by higher asset yields.
BNY Mellon 9
Average balances and interest rates | Quarter ended | ||||||||||||||||||||||||||
Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | |||||||||||||||||||||||||
(dollars in millions; average rates annualized) | Average balance | Interest | Average rates | Average balance | Interest | Average rates | Average balance | Interest | Average rates | ||||||||||||||||||
Assets | |||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
Interest-bearing deposits with the Federal Reserve and other central banks | $ | 60,030 | $ | 102 | 0.67 | % | $ | 61,756 | $ | 113 | 0.72 | % | $ | 61,216 | $ | 125 | 0.80 | % | |||||||||
Interest-bearing deposits with banks (primarily foreign banks) | 15,324 | 73 | 1.89 | 13,666 | 64 | 1.87 | 14,691 | 59 | 1.58 | ||||||||||||||||||
Federal funds sold and securities purchased under resale agreements (a) | 40,816 | 660 | 6.42 | 38,038 | 568 | 5.99 | 26,738 | 281 | 4.18 | ||||||||||||||||||
Margin loans | 10,303 | 104 | 4.02 | 10,920 | 119 | 4.36 | 13,738 | 129 | 3.74 | ||||||||||||||||||
Non-margin loans: | |||||||||||||||||||||||||||
Domestic offices | 29,285 | 202 | 2.75 | (b) | 29,492 | 284 | 3.86 | 28,628 | 258 | 3.59 | |||||||||||||||||
Foreign offices | 11,247 | 85 | 2.97 | 9,961 | 81 | 3.29 | 11,441 | 86 | 2.98 | ||||||||||||||||||
Total non-margin loans | 40,532 | 287 | 2.81 | (b) | 39,453 | 365 | 3.71 | 40,069 | 344 | 3.42 | |||||||||||||||||
Securities: | |||||||||||||||||||||||||||
U.S. government obligations | 19,315 | 103 | 2.11 | 18,870 | 103 | 2.19 | 24,423 | 129 | 2.09 | ||||||||||||||||||
U.S. government agency obligations | 67,235 | 418 | 2.49 | 66,445 | 428 | 2.58 | 64,612 | 384 | 2.40 | ||||||||||||||||||
State and political subdivisions (c) | 1,217 | 9 | 3.05 | 1,735 | 13 | 2.89 | 2,453 | 18 | 2.77 | ||||||||||||||||||
Other securities (c) | 33,729 | 148 | 1.75 | 30,770 | 157 | 2.04 | 27,017 | 138 | 1.98 | ||||||||||||||||||
Trading securities (c) | 5,653 | 41 | 2.80 | 5,764 | 39 | 2.72 | 4,261 | 32 | 3.05 | ||||||||||||||||||
Total securities (c) | 127,149 | 719 | 2.25 | 123,584 | 740 | 2.40 | 122,766 | 701 | 2.28 | ||||||||||||||||||
Total interest-earning assets (c) | $ | 294,154 | $ | 1,945 | 2.63 | % | (b) | $ | 287,417 | $ | 1,969 | 2.74 | % | $ | 279,218 | $ | 1,639 | 2.33 | % | ||||||||
Noninterest-earnings assets | 56,525 | 54,967 | 53,123 | ||||||||||||||||||||||||
Total assets | $ | 350,679 | $ | 342,384 | $ | 332,341 | |||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||||||||||||
Domestic offices | $ | 82,663 | $ | 267 | 1.28 | % | $ | 74,180 | $ | 251 | 1.36 | % | $ | 57,942 | $ | 142 | 0.97 | % | |||||||||
Foreign offices | 94,738 | 170 | 0.71 | 93,365 | 181 | 0.78 | 90,694 | 95 | 0.42 | ||||||||||||||||||
Total interest-bearing deposits | 177,401 | 437 | 0.98 | 167,545 | 432 | 1.04 | 148,636 | 237 | 0.63 | ||||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements (a) | 13,432 | 443 | 13.08 | 11,809 | 372 | 12.64 | 14,199 | 190 | 5.33 | ||||||||||||||||||
Trading liabilities | 1,371 | 8 | 2.33 | 1,735 | 11 | 2.47 | 1,150 | 7 | 2.32 | ||||||||||||||||||
Other borrowed funds | 1,148 | 10 | 3.24 | 2,455 | 20 | 3.36 | 2,747 | 16 | 2.33 | ||||||||||||||||||
Commercial paper | 3,796 | 22 | 2.26 | 2,957 | 18 | 2.43 | 3,102 | 16 | 2.10 | ||||||||||||||||||
Payables to customers and broker-dealers | 15,440 | 59 | 1.52 | 15,666 | 69 | 1.76 | 16,252 | 51 | 1.23 | ||||||||||||||||||
Long-term debt | 28,386 | 233 | 3.24 | 27,681 | 241 | 3.45 | 28,074 | 226 | 3.17 | ||||||||||||||||||
Total interest-bearing liabilities | $ | 240,974 | $ | 1,212 | 1.99 | % | $ | 229,848 | $ | 1,163 | 2.03 | % | $ | 214,160 | $ | 743 | 1.37 | % | |||||||||
Total noninterest-bearing deposits | 49,027 | 52,956 | 60,677 | ||||||||||||||||||||||||
Other noninterest-bearing liabilities | 19,280 | 18,362 | 15,660 | ||||||||||||||||||||||||
Total liabilities | 309,281 | 301,166 | 290,497 | ||||||||||||||||||||||||
Temporary equity | |||||||||||||||||||||||||||
Redeemable noncontrolling interests | 64 | 53 | 193 | ||||||||||||||||||||||||
Permanent equity | |||||||||||||||||||||||||||
Total The Bank of New York Mellon Corporation shareholders’ equity | 41,139 | 41,029 | 41,578 | ||||||||||||||||||||||||
Noncontrolling interests | 195 | 136 | 73 | ||||||||||||||||||||||||
Total permanent equity | 41,334 | 41,165 | 41,651 | ||||||||||||||||||||||||
Total liabilities, temporary equity and permanent equity | $ | 350,679 | $ | 342,384 | $ | 332,341 | |||||||||||||||||||||
Net interest revenue (FTE) – Non-GAAP | $ | 733 | $ | 806 | $ | 896 | |||||||||||||||||||||
Net interest margin (FTE) – Non-GAAP | 1.00 | % | (b) | 1.12 | % | 1.28 | % | ||||||||||||||||||||
Less: Tax equivalent adjustment (c) | 3 | 4 | 5 | ||||||||||||||||||||||||
Net interest revenue – GAAP | $ | 730 | $ | 802 | $ | 891 | |||||||||||||||||||||
Net interest margin – GAAP | 0.99 | % | (b) | 1.12 | % | 1.27 | % | ||||||||||||||||||||
(a) | Includes the average impact of offsetting under enforceable netting agreements of approximately $68 billion for the third quarter of 2019, $51 billion for the second quarter of 2019 and $26 billion for the third quarter of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the yield on federal funds sold and securities purchased under resale agreements would have been 2.42% for the third quarter of 2019, 2.57% for the second quarter of 2019 and 2.12% for the third quarter of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the rate on federal funds purchased and securities sold under repurchase agreements would have been 2.17% for the third quarter of 2019, 2.39% for the second quarter of 2019 and 1.88% for the third quarter of 2018. We believe providing the rates excluding the impact of netting is useful to investors as it is more reflective of the actual rates earned and paid. |
(b) | Includes the impact of the lease-related impairment of $70 million. On a Non-GAAP basis, excluding the lease-related impairment, the yield on non-margin loans in domestic offices would have been 3.70%, the yield on total non-margin loans would have been 3.50%, the yield on total interest-earning assets would have been 2.72% and the net interest margin and the net interest margin (FTE) – Non-GAAP would have been 1.09%. We believe providing the rates excluding the lease-related impairment is useful to investors as it is more reflective of the actual rates earned. |
(c) | Average rates were calculated on an FTE basis, at tax rates of approximately 21%. |
10 BNY Mellon
Average balances and interest rates | Year-to-date | |||||||||||||||||
Sept. 30, 2019 | Sept. 30, 2018 | |||||||||||||||||
(dollars in millions; average rates annualized) | Average balance | Interest | Average rates | Average balance | Interest | Average rates | ||||||||||||
Assets | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||
Interest-bearing deposits with the Federal Reserve and other central banks | $ | 61,777 | $ | 354 | 0.75 | % | $ | 69,921 | $ | 387 | 0.73 | % | ||||||
Interest-bearing deposits with banks (primarily foreign banks) | 14,288 | 200 | 1.87 | 14,766 | 157 | 1.42 | ||||||||||||
Federal funds sold and securities purchased under resale agreements (a) | 35,984 | 1,702 | 6.32 | 27,560 | 681 | 3.31 | ||||||||||||
Margin loans | 11,289 | 358 | 4.25 | 14,743 | 372 | 3.38 | ||||||||||||
Non-margin loans: | ||||||||||||||||||
Domestic offices | 28,989 | 755 | 3.48 | (b) | 29,664 | 743 | 3.35 | |||||||||||
Foreign offices | 10,576 | 252 | 3.18 | 12,068 | 251 | 2.78 | ||||||||||||
Total non-margin loans | 39,565 | 1,007 | 3.40 | (b) | 41,732 | 994 | 3.18 | |||||||||||
Securities: | ||||||||||||||||||
U.S. government obligations | 20,578 | 335 | 2.17 | 23,698 | 354 | 2.00 | ||||||||||||
U.S. government agency obligations | 66,191 | 1,273 | 2.56 | 63,702 | 1,108 | 2.32 | ||||||||||||
State and political subdivisions (c) | 1,716 | 37 | 2.86 | 2,667 | 55 | 2.71 | ||||||||||||
Other securities (c) | 31,068 | 456 | 1.96 | 28,175 | 387 | 1.83 | ||||||||||||
Trading securities (c) | 5,508 | 116 | 2.80 | 4,076 | 89 | 2.92 | ||||||||||||
Total securities (c) | 125,061 | 2,217 | 2.37 | 122,318 | 1,993 | 2.17 | ||||||||||||
Total interest-earning assets (c) | $ | 287,964 | $ | 5,838 | 2.71 | % | (b) | $ | 291,040 | $ | 4,584 | 2.10 | % | |||||
Noninterest-earnings assets | 55,165 | 54,480 | ||||||||||||||||
Total assets | $ | 343,129 | $ | 345,520 | ||||||||||||||
Liabilities | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||
Domestic offices | $ | 75,846 | $ | 742 | 1.31 | % | $ | 54,608 | $ | 318 | 0.78 | % | ||||||
Foreign offices | 92,493 | 518 | 0.75 | 97,746 | 209 | 0.29 | ||||||||||||
Total interest-bearing deposits | 168,339 | 1,260 | 1.00 | 152,354 | 527 | 0.46 | ||||||||||||
Federal funds purchased and securities sold under repurchase agreements (a) | 12,393 | 1,146 | 12.36 | 17,085 | 455 | 3.56 | ||||||||||||
Trading liabilities | 1,470 | 26 | 2.36 | 1,304 | 23 | 2.33 | ||||||||||||
Other borrowed funds | 2,295 | 54 | 3.11 | 2,424 | 39 | 2.16 | ||||||||||||
Commercial paper | 2,718 | 48 | 2.35 | 3,367 | 49 | 1.96 | ||||||||||||
Payables to customers and broker-dealers | 15,736 | 198 | 1.68 | 16,564 | 127 | 1.02 | ||||||||||||
Long-term debt | 28,108 | 722 | 3.40 | 28,275 | 622 | 2.90 | ||||||||||||
Total interest-bearing liabilities | $ | 231,059 | $ | 3,454 | 1.99 | % | $ | 221,373 | $ | 1,842 | 1.11 | % | ||||||
Total noninterest-bearing deposits | 52,168 | 65,446 | ||||||||||||||||
Other noninterest-bearing liabilities | 18,760 | 17,019 | ||||||||||||||||
Total liabilities | 301,987 | 303,838 | ||||||||||||||||
Temporary equity | ||||||||||||||||||
Redeemable noncontrolling interests | 65 | 190 | ||||||||||||||||
Permanent equity | ||||||||||||||||||
Total The Bank of New York Mellon Corporation shareholders’ equity | 40,934 | 41,337 | ||||||||||||||||
Noncontrolling interests | 143 | 155 | ||||||||||||||||
Total permanent equity | 41,077 | 41,492 | ||||||||||||||||
Total liabilities, temporary equity and permanent equity | $ | 343,129 | $ | 345,520 | ||||||||||||||
Net interest revenue (FTE) – Non-GAAP | $ | 2,384 | $ | 2,742 | ||||||||||||||
Net interest margin (FTE) – Non-GAAP | 1.11 | % | (b) | 1.26 | % | |||||||||||||
Less: Tax equivalent adjustment (b) | 11 | 16 | ||||||||||||||||
Net interest revenue – GAAP | $ | 2,373 | $ | 2,726 | ||||||||||||||
Net interest margin – GAAP | 1.10 | % | (b) | 1.25 | % | |||||||||||||
(a) | Includes the average impact of offsetting under enforceable netting agreements of approximately $54 billion for the first nine months of 2019 and $19 billion for the first nine months of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the yield on federal funds sold and securities purchased under resale agreements would have been 2.52% for the first nine months of 2019 and 1.94% for the first nine months of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the rate on federal funds purchased and securities sold under repurchase agreements would have been 2.30% for the first nine months of 2019 and 1.67% for the first nine months of 2018. We believe providing the rates excluding the impact of netting is useful to investors as it is more reflective of the actual rates earned and paid. |
(b) | Includes the impact of the lease-related impairment of $70 million. On a Non-GAAP basis, excluding the lease-related impairment, the yield on non-margin loans in domestic offices would have been 3.80%, the yield on total non-margin loans would have been 3.64%, the yield on total interest-earning assets would have been 2.74%, the net interest margin would have been 1.13% and the net interest margin (FTE) – Non-GAAP would have been 1.14%. We believe providing the rates excluding the lease-related impairment is useful to investors as it is more reflective of the actual rates earned. |
(c) | Average rates were calculated on an FTE basis, at tax rates of approximately 21%. |
BNY Mellon 11
Noninterest expense
Noninterest expense | YTD19 | |||||||||||||||||||||
3Q19 vs. | vs. | |||||||||||||||||||||
(dollars in millions) | 3Q19 | 2Q19 | 3Q18 | 2Q19 | 3Q18 | YTD19 | YTD18 | YTD18 | ||||||||||||||
Staff | $ | 1,479 | $ | 1,421 | $ | 1,478 | 4 | % | — | % | $ | 4,424 | $ | 4,543 | (3 | )% | ||||||
Professional, legal and other purchased services | 316 | 337 | 332 | (6 | ) | (5 | ) | 978 | 951 | 3 | ||||||||||||
Software and equipment | 309 | 304 | 262 | 2 | 18 | 896 | 762 | 18 | ||||||||||||||
Net occupancy | 138 | 138 | 139 | — | (1 | ) | 413 | 434 | (5 | ) | ||||||||||||
Sub-custodian and clearing | 111 | 115 | 106 | (3 | ) | 5 | 331 | 335 | (1 | ) | ||||||||||||
Distribution and servicing | 97 | 94 | 99 | 3 | (2 | ) | 282 | 311 | (9 | ) | ||||||||||||
Business development | 47 | 56 | 51 | (16 | ) | (8 | ) | 148 | 164 | (10 | ) | |||||||||||
Bank assessment charges | 31 | 31 | 49 | — | (37 | ) | 93 | 148 | (37 | ) | ||||||||||||
Amortization of intangible assets | 30 | 30 | 48 | — | (38 | ) | 89 | 145 | (39 | ) | ||||||||||||
Other | 32 | 121 | 174 | (74 | ) | (82 | ) | 282 | 431 | (35 | ) | |||||||||||
Total noninterest expense | $ | 2,590 | $ | 2,647 | $ | 2,738 | (2 | )% | (5 | )% | $ | 7,936 | $ | 8,224 | (4 | )% | ||||||
Full-time employees at period end | 48,700 | 49,100 | 52,000 | (1 | )% | (6 | )% | |||||||||||||||
Total noninterest expense decreased 5% compared with the third quarter of 2018 and 2% compared with the second quarter of 2019. Both decreases primarily reflect a reduction of previously established reserves for tax-related exposure of certain investment management funds that we manage, net of staff expense. The decrease compared with the third quarter of 2018 also reflects lower litigation and other expenses and the favorable impact of a stronger U.S. dollar, partially offset by continued investments in technology. The investments in technology are included in staff, professional, legal and other purchased services, and software and equipment expenses. The decrease compared with the second quarter of 2019 also reflects lower professional, legal and other purchased services expense, partially offset by higher staff expense.
Our investments in technology infrastructure and platforms are expected to continue at recent levels. As a result, we expect to incur higher technology-related expenses in 2019 than in 2018. This increase is expected to be mostly offset by decreases in other expenses as we continue to manage overall expenses.
As we continue to streamline and optimize the Company, we may take the opportunity to accelerate actions, including severance (recorded in noninterest expense) and a small repositioning of the securities portfolio (recorded in fee and other revenue), which could result in lower pre-tax earnings in the fourth quarter in the range of $100 million to $200 million.
Year-to-date 2019 compared with year-to-date 2018
Noninterest expense decreased 4% compared with the first nine months of 2018. The decrease primarily reflects the favorable impact of a stronger U.S. dollar, lower staff expense, a reduction of previously established reserves for tax-related exposure of certain investment management funds that we manage and decreases in most other expense categories, partially offset by continued investments in technology.
Income taxes
The provision for income tax was $246 million (19.1% effective tax rate) in the third quarter of 2019, $220 million (16.5% effective tax rate) in the third quarter of 2018 and $264 million (20.5% effective tax rate) in the second quarter of 2019. The effective rate for the third quarter of 2018 was impacted by adjustments to the provisional estimates for U.S. tax legislation and other changes. For additional information, see Note 12 of the Notes to Consolidated Financial Statements.
12 BNY Mellon
Review of businesses
We have an internal information system that produces performance data along product and service lines for our two principal businesses, Investment Services and Investment Management, and the Other segment.
Business accounting principles
Our business data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the businesses will track their economic performance.
For information on the accounting principles of our businesses, see Note 20 of the Notes to Consolidated Financial Statements. For information on the primary products and services in each line of business, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 23 of the Notes to Consolidated Financial Statements in our 2018 Annual Report.
Business results are subject to reclassification when organizational changes are made. There were no significant organizational changes in the third quarter of 2019. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.
The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, staff expense typically increases reflecting the vesting of long-term stock awards for retirement-eligible employees. In the third quarter, volume-related fees may decline due to reduced client activity. In the third quarter, staff expense typically
increases, reflecting the annual employee merit increase. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth and first quarters, as those quarters represent the end of the measurement period for many of the performance fee-eligible relationships.
The results of our businesses may also be impacted by the translation of financial results denominated in foreign currencies to the U.S. dollar. We are primarily impacted by activities denominated in the British pound and the euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency-denominated expenses than revenues. However, our Investment Management business typically has more foreign currency-denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.
Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At Sept. 30, 2019, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.03 to $0.05.
See Note 20 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.
BNY Mellon 13
Investment Services business
YTD19 | ||||||||||||||||||||||||||||
(dollars in millions, unless otherwise noted) | 3Q19 vs. | vs. | ||||||||||||||||||||||||||
3Q19 | 2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q19 | 3Q18 | YTD19 | YTD18 | YTD18 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Investment services fees: | ||||||||||||||||||||||||||||
Asset servicing fees (a) | $ | 1,132 | $ | 1,120 | $ | 1,103 | $ | 1,106 | $ | 1,136 | 1 | % | — | % | $ | 3,355 | $ | 3,414 | (2 | )% | ||||||||
Clearing services fees (b) | 419 | 411 | 398 | 398 | 393 | 2 | 7 | 1,228 | 1,217 | 1 | ||||||||||||||||||
Issuer services fees | 324 | 291 | 251 | 286 | 288 | 11 | 13 | 866 | 813 | 7 | ||||||||||||||||||
Treasury services fees | 139 | 140 | 132 | 139 | 136 | (1 | ) | 2 | 411 | 414 | (1 | ) | ||||||||||||||||
Total investment services fees (b) | 2,014 | 1,962 | 1,884 | 1,929 | 1,953 | 3 | 3 | 5,860 | 5,858 | — | ||||||||||||||||||
Foreign exchange and other trading revenue | 160 | 153 | 157 | 163 | 161 | 5 | (1 | ) | 470 | 502 | (6 | ) | ||||||||||||||||
Other (b)(c) | 117 | 112 | 113 | 121 | 116 | 4 | 1 | 342 | 353 | (3 | ) | |||||||||||||||||
Total fee and other revenue | 2,291 | 2,227 | 2,154 | 2,213 | 2,230 | 3 | 3 | 6,672 | 6,713 | (1 | ) | |||||||||||||||||
Net interest revenue | 753 | 775 | 796 | 827 | 827 | (3 | ) | (9 | ) | 2,324 | 2,545 | (9 | ) | |||||||||||||||
Total revenue | 3,044 | 3,002 | 2,950 | 3,040 | 3,057 | 1 | — | 8,996 | 9,258 | (3 | ) | |||||||||||||||||
Provision for credit losses | (15 | ) | (4 | ) | 8 | 6 | 1 | N/M | N/M | (11 | ) | (5 | ) | N/M | ||||||||||||||
Noninterest expense (excluding amortization of intangible assets) | 1,944 | 1,934 | 1,949 | 2,090 | 1,995 | 1 | (3 | ) | 5,827 | 5,839 | — | |||||||||||||||||
Amortization of intangible assets | 21 | 20 | 20 | 22 | 35 | 5 | (40 | ) | 61 | 107 | (43 | ) | ||||||||||||||||
Total noninterest expense | 1,965 | 1,954 | 1,969 | 2,112 | 2,030 | 1 | (3 | ) | 5,888 | 5,946 | (1 | ) | ||||||||||||||||
Income before income taxes | $ | 1,094 | $ | 1,052 | $ | 973 | $ | 922 | $ | 1,026 | 4 | % | 7 | % | $ | 3,119 | $ | 3,317 | (6 | )% | ||||||||
Pre-tax operating margin | 36 | % | 35 | % | 33 | % | 30 | % | 34 | % | 35 | % | 36 | % | ||||||||||||||
Securities lending revenue | $ | 39 | $ | 40 | $ | 44 | $ | 43 | $ | 52 | (3 | )% | (25 | )% | $ | 123 | $ | 155 | (21 | )% | ||||||||
Total revenue by line of business: | ||||||||||||||||||||||||||||
Asset Servicing | $ | 1,405 | $ | 1,391 | $ | 1,407 | $ | 1,435 | $ | 1,458 | 1 | % | (4 | )% | $ | 4,203 | $ | 4,497 | (7 | )% | ||||||||
Pershing | 568 | 564 | 554 | 558 | 558 | 1 | 2 | 1,686 | 1,697 | (1 | ) | |||||||||||||||||
Issuer Services | 466 | 446 | 396 | 441 | 453 | 4 | 3 | 1,308 | 1,302 | — | ||||||||||||||||||
Treasury Services | 312 | 317 | 317 | 328 | 324 | (2 | ) | (4 | ) | 946 | 974 | (3 | ) | |||||||||||||||
Clearance and Collateral Management | 293 | 284 | 276 | 278 | 264 | 3 | 11 | 853 | 788 | 8 | ||||||||||||||||||
Total revenue by line of business | $ | 3,044 | $ | 3,002 | $ | 2,950 | $ | 3,040 | $ | 3,057 | 1 | % | — | % | $ | 8,996 | $ | 9,258 | (3 | )% | ||||||||
Metrics: | ||||||||||||||||||||||||||||
Average loans | $ | 32,758 | $ | 32,287 | $ | 33,171 | $ | 35,540 | $ | 35,044 | 1 | % | (7 | )% | $ | 32,737 | $ | 37,400 | (12 | )% | ||||||||
Average deposits | $ | 208,044 | $ | 201,146 | $ | 195,082 | $ | 203,416 | $ | 192,741 | 3 | % | 8 | % | $ | 201,472 | $ | 203,233 | (1 | )% | ||||||||
AUC/A at period end (in trillions) (d) | $ | 35.8 | $ | 35.5 | $ | 34.5 | $ | 33.1 | $ | 34.5 | 1 | % | 4 | % | ||||||||||||||
Market value of securities on loan at period end (in billions) (e) | $ | 362 | $ | 369 | $ | 377 | $ | 373 | $ | 415 | (2 | )% | (13 | )% | ||||||||||||||
Pershing: | ||||||||||||||||||||||||||||
Average active clearing accounts (U.S. platform) (in thousands) | 6,283 | 6,254 | 6,169 | 6,125 | 6,108 | — | % | 3 | % | |||||||||||||||||||
Average long-term mutual fund assets (U.S. platform) | $ | 547,522 | $ | 532,384 | $ | 507,606 | $ | 489,491 | $ | 527,336 | 3 | % | 4 | % | ||||||||||||||
Average investor margin loans (U.S. platform) | $ | 9,222 | $ | 9,440 | $ | 10,093 | $ | 10,921 | $ | 10,696 | (2 | )% | (14 | )% | ||||||||||||||
Clearance and Collateral Management: | ||||||||||||||||||||||||||||
Average tri-party collateral management balances (in billions) | $ | 3,550 | $ | 3,400 | $ | 3,266 | $ | 3,181 | $ | 2,995 | 4 | % | 19 | % | ||||||||||||||
(a) | Asset servicing fees include the fees from the Clearance and Collateral Management business. |
(b) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
(c) | Other revenue includes investment management and performance fees, financing-related fees, distribution and servicing revenue and investment and other income. |
(d) | Includes the AUC/A of CIBC Mellon of $1.4 trillion at Sept. 30, 2019 and June 30, 2019, $1.3 trillion at March 31, 2019, $1.2 trillion at Dec. 31, 2018 and $1.4 trillion at Sept. 30, 2018. |
(e) | Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, which totaled $66 billion at Sept. 30, 2019, $64 billion at June 30, 2019, $62 billion at March 31, 2019, $58 billion at Dec. 31, 2018 and $69 billion at Sept. 30, 2018. |
N/M - Not meaningful.
14 BNY Mellon
Business description
BNY Mellon Investment Services provides business services and technology solutions to entities including financial institutions, corporations, foundations and endowments, public funds and government agencies. Our lines of business include: Asset Servicing, Pershing, Issuer Services, Treasury Services and Clearance and Collateral Management.
We are one of the leading global investment services providers with $35.8 trillion of AUC/A at Sept. 30, 2019.
• | We are the primary provider of U.S. government securities clearance and a provider of non-U.S. government securities clearance. |
• | We are a leading provider of tri-party collateral management services with an average of $3.6 trillion serviced globally including approximately $2.6 trillion of the U.S. tri-party repo market. |
• | Our agency securities lending program is one of the largest lenders of U.S. and non-U.S. securities, servicing a lendable asset pool of approximately $4.0 trillion in 34 separate markets. |
The Asset Servicing business provides a comprehensive suite of solutions. As one of the largest global custody and fund accounting providers and a trusted partner, we offer services for the safekeeping of assets in capital markets globally as well as alternative investment and structured product strategies. We provide custody and foreign exchange services, support exchange-traded funds and unit investment trusts and provide our clients outsourcing capabilities. We deliver securities lending and financing solutions on both an agency and principal basis. Our market leading liquidity services portal enables cash investments for institutional clients and includes fund research and analytics.
Pershing provides clearing, custody, business and technology solutions, delivering dependable operational support to financial organizations globally.
The Issuer Services business includes Corporate Trust and Depositary Receipts. Our Corporate Trust business delivers a full range of issuer and related investor services, including trustee, paying agency, fiduciary, escrow and other financial
services. We are a leading provider to the debt capital markets, providing customized and market-driven solutions to investors, bondholders and lenders. Our Depositary Receipts business drives global investing by providing servicing and value-added solutions that enable, facilitate and enhance cross-border trading, clearing, settlement and ownership. We are one of the largest providers of depositary receipts services in the world, partnering with leading companies from more than 50 countries.
Our Treasury Services business provides global payments, liquidity management and trade finance services for financial institutions, corporations and the public sector.
Our Clearance and Collateral Management business clears and settles equity and fixed-income transactions globally and serves as custodian for tri-party repo collateral worldwide. Our collateral services include collateral management, administration and segregation. We offer innovative solutions and industry expertise which help financial institutions and institutional investors with their liquidity, financing, risk and balance sheet challenges.
Review of financial results
AUC/A increased 4% compared with Sept. 30, 2018 to $35.8 trillion, primarily reflecting higher market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar. AUC/A consisted of 34% equity securities and 66% fixed-income securities at Sept. 30, 2019 and 37% equity securities and 63% fixed-income securities at Sept. 30, 2018.
Total revenue of $3.0 billion decreased slightly compared with the third quarter of 2018 and increased 1% compared with the second quarter of 2019. The drivers of total revenue by line of business are indicated below.
Asset Servicing revenue of $1.4 billion decreased 4% compared with the third quarter of 2018 and increased 1% compared with the second quarter of 2019. The decrease compared with the third quarter of 2018 primarily reflects lower client activity, securities lending revenue and net interest revenue and the unfavorable impact of a stronger U.S. dollar. The increase compared with the second quarter of
BNY Mellon 15
2019 primarily reflects higher foreign exchange and other trading revenue.
Pershing revenue of $568 million increased 2% compared with the third quarter of 2018 and 1% compared with the second quarter of 2019. Both increases primarily reflect growth in client assets and accounts. The increase compared with the third quarter of 2018 was partially offset by lower net interest revenue.
Issuer Services revenue of $466 million increased 3% compared with the third quarter of 2018 and 4% compared with the second quarter of 2019. Both increases primarily reflect higher Depositary Receipts revenue, partially offset by lower net interest revenue in Corporate Trust. The increase compared with the third quarter of 2018 also reflects higher volumes in Corporate Trust.
Treasury Services revenue of $312 million decreased 4% compared with the third quarter of 2018 and 2% compared with the second quarter of 2019. The decreases primarily reflect lower net interest revenue.
Clearance and Collateral Management revenue of $293 million increased 11% compared with the third quarter of 2018 and 3% compared with the second quarter of 2019. Both increases primarily reflect growth in clearance volumes and collateral management from new business. The increase compared with the third quarter of 2018 was partially offset by lower net interest revenue.
Market and regulatory trends are driving investable assets toward lower fee asset management products at reduced margins for our clients. These dynamics are also negatively impacting our investment services fees. However, at the same time, these trends are providing additional outsourcing opportunities as clients and other market participants seek to comply with new regulations and reduce their operating costs.
Noninterest expense of $2.0 billion decreased 3% compared with the third quarter of 2018 and increased 1% compared with the second quarter of 2019. The decrease compared with the third quarter of 2018 was primarily driven by lower litigation and staff expenses. The increase compared with the second quarter of 2019 primarily reflects higher staff expense.
Year-to-date 2019 compared with year-to-date 2018
Total revenue of $9.0 billion decreased 3% compared with the first nine months of 2018. Asset Servicing revenue of $4.2 billion decreased 7%, primarily reflecting lower net interest revenue, client activity and foreign exchange and other trading and securities lending revenue and the unfavorable impact of a stronger U.S. dollar. Pershing revenue of $1.7 billion decreased 1%, primarily reflecting previously disclosed lost business and lower net interest revenue, partially offset by growth in client assets and accounts. Issuer Services revenue of $1.3 billion increased slightly, primarily reflecting higher volumes in Corporate Trust and higher Depositary Receipts revenue, partially offset by lower net interest revenue in Corporate Trust. Treasury Services revenue of $946 million decreased 3%, primarily reflecting lower net interest revenue. Clearance and Collateral Management revenue of $853 million increased 8%, primarily reflecting growth in collateral management and clearance volumes, partially offset by lower net interest revenue.
Noninterest expense of $5.9 billion decreased 1% compared with the first nine months of 2018 primarily reflecting lower staff and litigation expenses, lower bank assessment charges and the favorable impact of a stronger U.S. dollar, partially offset by higher investments in technology.
16 BNY Mellon
Investment Management business
YTD19 | ||||||||||||||||||||||||||||
3Q19 vs. | vs. | |||||||||||||||||||||||||||
(dollars in millions) | 3Q19 | 2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q19 | 3Q18 | YTD19 | YTD18 | YTD18 | ||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Investment management fees (a) | $ | 826 | $ | 827 | $ | 806 | $ | 826 | $ | 879 | — | % | (6 | )% | $ | 2,459 | $ | 2,662 | (8 | )% | ||||||||
Performance fees | 2 | 2 | 31 | 54 | 30 | N/M | (93 | ) | 35 | 90 | (61 | ) | ||||||||||||||||
Investment management and performance fees (b) | 828 | 829 | 837 | 880 | 909 | — | (9 | ) | 2,494 | 2,752 | (9 | ) | ||||||||||||||||
Distribution and servicing | 45 | 44 | 45 | 45 | 47 | 2 | (4 | ) | 134 | 145 | (8 | ) | ||||||||||||||||
Other (a) | (40 | ) | (23 | ) | (18 | ) | (35 | ) | (18 | ) | N/M | N/M | (81 | ) | (6 | ) | N/M | |||||||||||
Total fee and other revenue (a) | 833 | 850 | 864 | 890 | 938 | (2 | ) | (11 | ) | 2,547 | 2,891 | (12 | ) | |||||||||||||||
Net interest revenue | 57 | 67 | 75 | 73 | 77 | (15 | ) | (26 | ) | 199 | 230 | (13 | ) | |||||||||||||||
Total revenue | 890 | 917 | 939 | 963 | 1,015 | (3 | ) | (12 | ) | 2,746 | 3,121 | (12 | ) | |||||||||||||||
Provision for credit losses | — | (2 | ) | 1 | 1 | (2 | ) | N/M | N/M | (1 | ) | 2 | N/M | |||||||||||||||
Noninterest expense (excluding amortization of intangible assets) | 580 | 645 | 660 | 702 | 688 | (10 | ) | (16 | ) | 1,885 | 2,065 | (9 | ) | |||||||||||||||
Amortization of intangible assets | 10 | 9 | 9 | 13 | 13 | 11 | (23 | ) | 28 | 38 | (26 | ) | ||||||||||||||||
Total noninterest expense | 590 | 654 | 669 | 715 | 701 | (10 | ) | (16 | ) | 1,913 | 2,103 | (9 | ) | |||||||||||||||
Income before income taxes | $ | 300 | $ | 265 | $ | 269 | $ | 247 | $ | 316 | 13 | % | (5 | )% | $ | 834 | $ | 1,016 | (18 | )% | ||||||||
Pre-tax operating margin | 34 | % | 29 | % | 29 | % | 26 | % | 31 | % | 30 | % | 33 | % | ||||||||||||||
Adjusted pre-tax operating margin – Non-GAAP (c) | 38 | % | 32 | % | 32 | % | 29 | % | 35 | % | 34 | % | 36 | % | ||||||||||||||
Total revenue by line of business: | ||||||||||||||||||||||||||||
Asset Management | $ | 605 | $ | 618 | $ | 637 | $ | 660 | $ | 704 | (2 | )% | (14 | )% | $ | 1,860 | $ | 2,176 | (15 | )% | ||||||||
Wealth Management | 285 | 299 | 302 | 303 | 311 | (5 | ) | (8 | ) | 886 | 945 | (6 | ) | |||||||||||||||
Total revenue by line of business | $ | 890 | $ | 917 | $ | 939 | $ | 963 | $ | 1,015 | (3 | )% | (12 | )% | $ | 2,746 | $ | 3,121 | (12 | )% | ||||||||
Average balances: | ||||||||||||||||||||||||||||
Average loans | $ | 16,260 | $ | 16,322 | $ | 16,403 | $ | 16,485 | $ | 16,763 | — | % | (3 | )% | $ | 16,328 | $ | 16,871 | (3 | )% | ||||||||
Average deposits | $ | 14,083 | $ | 14,615 | $ | 15,815 | $ | 14,893 | $ | 14,634 | (4 | )% | (4 | )% | $ | 14,831 | $ | 14,088 | 5 | % | ||||||||
(a) | Total fee and other revenue includes the impact of the consolidated investment management funds, net of noncontrolling interests. Additionally, other revenue includes asset servicing fees, treasury services fees, foreign exchange and other trading revenue and investment and other income. |
(b) | On a constant currency basis, investment management and performance fees decreased 7% (Non-GAAP) compared with the third quarter of 2018. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for the reconciliation of this Non-GAAP measure. |
(c) | Net of distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for the reconciliation of this Non-GAAP measure. |
N/M - Not meaningful.
BNY Mellon 17
AUM trends | 3Q19 vs. | ||||||||||||||||||
(dollars in billions) | 3Q19 | 2Q19 | 1Q19 | 4Q18 | 3Q18 | 2Q19 | 3Q18 | ||||||||||||
AUM at period end, by product type: (a) | |||||||||||||||||||
Equity | $ | 147 | $ | 152 | $ | 149 | $ | 135 | $ | 167 | (3 | )% | (12 | )% | |||||
Fixed income | 211 | 209 | 208 | 200 | 202 | 1 | 4 | ||||||||||||
Index | 321 | 322 | 333 | 301 | 352 | — | (9 | ) | |||||||||||
Liability-driven investments | 742 | 709 | 709 | 659 | 652 | 5 | 14 | ||||||||||||
Multi-asset and alternative investments | 182 | 184 | 178 | 167 | 184 | (1 | ) | (1 | ) | ||||||||||
Cash | 278 | 267 | 264 | 260 | 271 | 4 | 3 | ||||||||||||
Total AUM by product type | $ | 1,881 | $ | 1,843 | $ | 1,841 | $ | 1,722 | $ | 1,828 | 2 | % | 3 | % | |||||
Changes in AUM: (a) | |||||||||||||||||||
Beginning balance of AUM | $ | 1,843 | $ | 1,841 | $ | 1,722 | $ | 1,828 | $ | 1,805 | |||||||||
Net inflows (outflows): | |||||||||||||||||||
Long-term strategies: | |||||||||||||||||||
Equity | (4 | ) | (2 | ) | (4 | ) | (8 | ) | (2 | ) | |||||||||
Fixed income | 2 | (4 | ) | 3 | (1 | ) | 2 | ||||||||||||
Liability-driven investments | (4 | ) | 1 | 5 | 14 | 16 | |||||||||||||
Multi-asset and alternative investments | (1 | ) | 1 | (4 | ) | (2 | ) | 2 | |||||||||||
Total long-term active strategies (outflows) inflows | (7 | ) | (4 | ) | — | 3 | 18 | ||||||||||||
Index | (3 | ) | (22 | ) | (2 | ) | (11 | ) | (3 | ) | |||||||||
Total long-term strategies (outflows) inflows | (10 | ) | (26 | ) | (2 | ) | (8 | ) | 15 | ||||||||||
Short-term strategies: | |||||||||||||||||||
Cash | 11 | 2 | 2 | (10 | ) | — | |||||||||||||
Total net inflows (outflows) | 1 | (24 | ) | — | (18 | ) | 15 | ||||||||||||
Net market impact | 66 | 42 | 103 | (69 | ) | 18 | |||||||||||||
Net currency impact | (29 | ) | (16 | ) | 16 | (19 | ) | (10 | ) | ||||||||||
Ending balance of AUM | $ | 1,881 | $ | 1,843 | $ | 1,841 | $ | 1,722 | $ | 1,828 | 2 | % | 3 | % | |||||
Wealth Management client assets (b) | $ | 259 | $ | 257 | $ | 253 | $ | 239 | $ | 261 | 1 | % | (1 | )% | |||||
(a) Excludes securities lending cash management assets and assets managed in the Investment Services business.
(b) Includes AUM and AUC/A in the Wealth Management business.
Business description
Our Investment Management business consists of two lines of business, Asset Management and Wealth Management. The Asset Management business offers diversified investment management strategies and distribution of investment products. The Wealth Management business provides investment management, custody, wealth and estate planning and private banking services. See pages 18 and 19 of our 2018 Annual Report for additional information on our Investment Management business.
Review of financial results
AUM increased 3% compared with Sept. 30, 2018 primarily reflecting higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows.
Net long-term strategy outflows were $10 billion in the third quarter of 2019, primarily resulting from outflows of liability-driven investments and equity
funds. Short-term strategy inflows were $11 billion in the third quarter of 2019. Market and regulatory trends have resulted in increased demand for lower fee asset management products and for performance-based fees.
Total revenue of $890 million decreased 12% compared with the third quarter of 2018 and 3% compared with the second quarter of 2019.
Asset Management revenue of $605 million decreased 14% compared with the third quarter of 2018 and 2% compared with the second quarter of 2019. The decrease compared with the third quarter of 2018 primarily reflects the cumulative AUM outflows since the third quarter of 2018, lower performance fees, the impact of hedging activities and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), partially offset by higher market values. The decrease compared with the second quarter of 2019 primarily reflects the impact of hedging activities and the unfavorable
18 BNY Mellon
impact of a stronger U.S. dollar, partially offset by higher market values.
Wealth Management revenue of $285 million decreased 8% compared with the third quarter of 2018 and 5% compared with the second quarter of 2019. Both decreases primarily reflect lower net interest revenue, partially offset by higher market values.
Revenue generated in the Investment Management business included 39% from non-U.S. sources in the third quarter of 2019, compared with 42% in the third quarter of 2018 and 38% in the second quarter of 2019.
Noninterest expense of $590 million decreased 16% compared with the third quarter of 2018 and 10% compared with the second quarter of 2019. Both decreases primarily reflect the net reduction of the reserves for tax-related exposure of certain investment management funds and the favorable impact of a stronger U.S. dollar. The decrease compared with the third quarter of 2018 also reflects lower staff expense. The decrease compared to the
second quarter of 2019 was partially offset by higher distribution and servicing expenses.
Year-to date 2019 compared with year-to-date 2018
Total revenue of $2.7 billion decreased 12% compared with the first nine months of 2018. Asset Management revenue of $1.9 billion decreased 15%, primarily reflecting the cumulative AUM outflows, the impact of divestitures, the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), the impact of hedging activities and lower performance fees, partially offset by higher market values. Wealth management revenue of $886 million decreased 6%, reflecting lower net interest revenue and fees.
Noninterest expense of $1.9 billion decreased 9% compared with the first nine months of 2018, primarily reflecting the net reduction of the reserves for tax-related exposure of certain investment management funds, lower staff expense, the favorable impact of a stronger U.S. dollar (principally versus the British pound) and lower distribution and servicing expenses.
Other segment
(in millions) | 3Q19 | 2Q19 | 1Q19 | 4Q18 | 3Q18 | YTD19 | YTD18 | ||||||||||||||
Fee revenue | $ | 5 | $ | 34 | $ | 29 | $ | 29 | $ | 7 | $ | 68 | $ | 104 | |||||||
Net securities (losses) gains | (1 | ) | 7 | 1 | — | — | 7 | (48 | ) | ||||||||||||
Total fee and other revenue | 4 | 41 | 30 | 29 | 7 | 75 | 56 | ||||||||||||||
Net interest (expense) | (80 | ) | (40 | ) | (30 | ) | (15 | ) | (13 | ) | (150 | ) | (49 | ) | |||||||
Total (loss) revenue | (76 | ) | 1 | — | 14 | (6 | ) | (75 | ) | 7 | |||||||||||
Provision for credit losses | (1 | ) | (2 | ) | (2 | ) | (7 | ) | (2 | ) | (5 | ) | (8 | ) | |||||||
Noninterest expense | 35 | 39 | 61 | 160 | 6 | 135 | 174 | ||||||||||||||
(Loss) before income taxes | $ | (110 | ) | $ | (36 | ) | $ | (59 | ) | $ | (139 | ) | $ | (10 | ) | $ | (205 | ) | $ | (159 | ) |
Average loans and leases | $ | 1,817 | $ | 1,764 | $ | 1,784 | $ | 1,809 | $ | 2,000 | $ | 1,789 | $ | 2,204 | |||||||
See page 20 of our 2018 Annual Report for additional information on the Other segment.
Review of financial results
Fee revenue, net securities (losses) gains and net interest expense include corporate treasury and other investment activity, including hedging activity which offsets between fee revenue and net interest expense. Total revenue decreased and net interest expense increased compared with both the third quarter of
2018 and second quarter of 2019, primarily reflecting the lease-related impairment and corporate treasury activity.
Noninterest expense increased compared with the third quarter of 2018, primarily reflecting higher staff expense.
BNY Mellon 19
Year-to date 2019 compared with year-to-date 2018
Losses before income taxes increased $46 million compared with the first nine months of 2018. Total revenue decreased $82 million, primarily reflecting the lease-related impairment, corporate treasury activity and lower asset-related gains, partially offset by net securities losses recorded in the first nine months of 2018. Noninterest expense decreased $39 million, primarily reflecting lower staff expense.
Critical accounting estimates
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 2018 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, goodwill and other intangibles and litigation and regulatory contingencies, as referenced below.
Critical accounting estimates | Reference |
Allowance for loan losses and allowance for lending-related commitments | 2018 Annual Report, pages 24-25. |
Fair value of financial instruments and derivatives | 2018 Annual Report, pages 25-27. |
Goodwill and other intangibles | 2018 Annual Report, page 27. Also, see the Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, page 19. |
Litigation and regulatory contingencies | “Legal proceedings” in Note 19 of the Notes to Consolidated Financial Statements. |
Consolidated balance sheet review
One of our key risk management objectives is to maintain a balance sheet that remains strong throughout market cycles to meet the expectations of our major stakeholders, including our shareholders, clients, creditors and regulators.
We also seek to undertake overall liquidity risk, including intraday liquidity risk, that stays within our risk appetite. The objective of our balance sheet management strategy is to maintain a balance sheet that is characterized by strong liquidity and asset quality, ready access to external funding sources at competitive rates and a strong capital structure that supports our risk-taking activities and is adequate to
absorb potential losses. In managing the balance sheet, appropriate consideration is given to balancing the competing needs of maintaining sufficient levels of liquidity and complying with applicable regulations and supervisory expectations while optimizing profitability.
At Sept. 30, 2019, total assets were $373 billion, compared with $363 billion at Dec. 31, 2018. The increase in total assets was primarily driven by higher interest-bearing deposits with the Federal Reserve and other central banks and trading assets. Deposits totaled $250 billion at Sept. 30, 2019, compared with $239 billion at Dec. 31, 2018. The increase reflects higher interest-bearing deposits in both U.S. and non-U.S. offices, partially offset by lower noninterest-bearing deposits principally in U.S. offices. Total interest-bearing deposits as a percentage of total interest-earning assets were 62% at Sept. 30, 2019 and 54% at Dec. 31, 2018.
At Sept. 30, 2019, available funds totaled $140 billion which include cash and due from banks, interest-bearing deposits with the Federal Reserve and other central banks, interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements. This compares with available funds of $135 billion at Dec. 31, 2018. Total available funds as a percentage of total assets were 37% at both Sept. 30, 2019 and Dec. 31, 2018. For additional information on our liquid funds and available funds, see “Liquidity and dividends.”
Securities were $122.3 billion, or 33% of total assets, at Sept. 30, 2019, compared with $119.8 billion, or 33% of total assets, at Dec. 31, 2018. The increase primarily reflects additional investments in sovereign debt/sovereign guaranteed, agency residential mortgage-backed securities (“RMBS”), an increase in the net unrealized pre-tax gain, partially offset by net maturities and sales of U.S. Treasury and state and political subdivision securities. For additional information on our securities portfolio, see “Securities” and Note 4 of the Notes to Consolidated Financial Statements.
Loans were $55 billion, or 15% of total assets, at Sept. 30, 2019, compared with $57 billion, or 16% of total assets, at Dec. 31, 2018. The decrease was primarily driven by lower margin loans, partially offset by higher loans to financial institutions. For additional information on our loan portfolio, see “Loans” and Note 5 of the Notes to Consolidated Financial Statements.
20 BNY Mellon
Long-term debt totaled $28 billion at Sept. 30, 2019 and $29 billion at Dec. 31, 2018. The decrease reflects maturities of $4.3 billion, partially offset by issuances and an increase in the fair value of hedged long-term debt. For additional information on long-term debt, see “Liquidity and dividends.”
The Bank of New York Mellon Corporation total shareholders’ equity increased to $41.1 billion from $40.6 billion at Dec. 31, 2018. For additional information on our capital, see “Capital.”
Country risk exposure
The following table presents BNY Mellon’s top 10 exposures by country (excluding the U.S.) as of Sept.
30, 2019, as well as certain countries with higher risk profiles, and is presented on an internal risk management basis. We monitor our exposure to these
and other countries as part of our internal country risk management process.
The country risk exposure below reflects the Company’s risk to an immediate default of the counterparty or obligor based on the country of residence of the entity which incurs the liability. If there is credit risk mitigation, the country of residence of the entity providing the risk mitigation is the country of risk. The country of risk for investment securities is generally based on the domicile of the issuer of the security.
Country risk exposure | Interest-bearing deposits | Investment securities (b) | Total exposure | ||||||||||||||||||||
(in billions) | Central banks | Banks | Lending (a) | Other (c) | |||||||||||||||||||
Top 10 country exposure: | |||||||||||||||||||||||
UK | $ | 11.3 | $ | 0.5 | $ | 2.0 | $ | 5.0 | $ | 2.2 | $ | 21.0 | |||||||||||
Germany | 11.9 | 0.5 | 0.6 | 3.3 | 0.2 | 16.5 | |||||||||||||||||
Japan | 15.3 | 0.5 | 0.1 | 0.1 | 0.2 | 16.2 | |||||||||||||||||
Belgium | 5.7 | 0.8 | 0.1 | 0.1 | — | 6.7 | |||||||||||||||||
Canada | — | 2.1 | 0.3 | 2.6 | 0.9 | 5.9 | |||||||||||||||||
China | — | 2.3 | 1.7 | — | 0.3 | 4.3 | |||||||||||||||||
France | — | — | — | 2.1 | 0.8 | 2.9 | |||||||||||||||||
Luxembourg | 0.1 | 0.1 | 0.7 | — | 1.9 | 2.8 | |||||||||||||||||
Australia | — | 1.5 | 0.4 | 0.4 | 0.3 | 2.6 | |||||||||||||||||
Netherlands | — | 0.3 | 0.3 | 1.8 | 0.1 | 2.5 | |||||||||||||||||
Total Top 10 country exposure | $ | 44.3 | $ | 8.6 | $ | 6.2 | $ | 15.4 | $ | 6.9 | $ | 81.4 | (d) | ||||||||||
Select country exposure: | |||||||||||||||||||||||
Italy | $ | 0.1 | $ | 0.4 | $ | — | $ | 1.4 | $ | — | $ | 1.9 | |||||||||||
Brazil | — | — | 1.5 | 0.1 | 0.1 | 1.7 | |||||||||||||||||
Total select country exposure | $ | 0.1 | $ | 0.4 | $ | 1.5 | $ | 1.5 | $ | 0.1 | $ | 3.6 | |||||||||||
(a) | Lending includes loans, acceptances, issued letters of credit, net of participations, and lending-related commitments. |
(b) | Investment securities include both the available-for-sale and held-to-maturity portfolios. |
(c) | Other exposures include over-the-counter (“OTC”) derivative and securities financing transactions, net of collateral. |
(d) | The top 10 country exposures comprise approximately 80% of our total non-U.S. exposure. |
Our largest country risk exposure, based on our internal country risk management process at Sept. 30, 2019, was to the UK, which is planning to withdraw from the European Union (“EU”). On Oct. 28, 2019, EU leaders and the UK government agreed to extend the period during which the EU and UK could agree on the terms of the UK’s departure from the EU. Under the terms of the agreement, Brexit will occur on the earlier of the first day of the month following ratification of the revised Withdrawal Agreement by the UK Parliament and the EU Parliament, or Feb. 1, 2020. We continue to make preparations for the withdrawal. For additional information, see “Risk Factors - The United Kingdom’s referendum
decision to leave the EU has had and may continue to have negative effects on global economic conditions, global financial markets, and our business and results of operations.” in our 2018 Annual Report.
Events in recent years have resulted in increased focus on Italy and Brazil. The country risk exposure to Italy primarily consists of investment grade sovereign debt. The country risk exposure to Brazil is primarily short-term trade finance loans extended to large financial institutions. We also have operations in Brazil providing investment services and investment management services.
BNY Mellon 21
Securities
In the discussion of our securities portfolio, we have included certain credit ratings information because the information can indicate the degree of credit risk
to which we are exposed. Significant changes in ratings classifications for our securities portfolio could indicate increased credit risk for us and could be accompanied by a reduction in the fair value of our securities portfolio.
The following table shows the distribution of our total securities portfolio.
Securities portfolio | June 30, 2019 | 3Q19 change in unrealized gain (loss) | Sept. 30, 2019 | Fair value as a % of amortized cost (a) | Unrealized gain (loss) | Ratings (b) | ||||||||||||||||||||||||
BB+ and lower | ||||||||||||||||||||||||||||||
(dollars in millions) | Fair value | Amortized cost | Fair value | AAA/ AA- | A+/ A- | BBB+/ BBB- | Not rated | |||||||||||||||||||||||
Agency RMBS | $ | 52,860 | $ | 199 | $ | 53,011 | $ | 53,254 | 100 | % | $ | 243 | 100 | % | — | % | — | % | — | % | — | % | ||||||||
U.S. Treasury | 18,284 | 32 | 18,497 | 18,541 | 100 | 44 | 100 | — | — | — | — | |||||||||||||||||||
Sovereign debt/sovereign guaranteed (c) | 13,146 | 26 | 13,767 | 13,932 | 101 | 165 | 76 | 4 | 19 | 1 | — | |||||||||||||||||||
Agency commercial mortgage-backed securities (“MBS”) | 10,689 | 86 | 10,501 | 10,598 | 101 | 97 | 100 | — | — | — | — | |||||||||||||||||||
Supranational | 3,925 | 14 | 4,077 | 4,113 | 101 | 36 | 100 | — | — | — | — | |||||||||||||||||||
CLOs | 3,649 | 2 | 3,882 | 3,868 | 100 | (14 | ) | 99 | — | — | 1 | — | ||||||||||||||||||
Foreign covered bonds (d) | 3,479 | 5 | 3,651 | 3,670 | 101 | 19 | 100 | — | — | — | — | |||||||||||||||||||
U.S. government agencies | 3,866 | 31 | 3,308 | 3,344 | 101 | 36 | 100 | — | — | — | — | |||||||||||||||||||
Other asset-backed securities (“ABS”) | 2,470 | 3 | 2,477 | 2,484 | 100 | 7 | 100 | — | — | — | — | |||||||||||||||||||
Non-agency commercial MBS | 1,993 | 18 | 2,207 | 2,250 | 102 | 43 | 98 | 2 | — | — | — | |||||||||||||||||||
Foreign government agencies (e) | 1,599 | 8 | 2,175 | 2,183 | 100 | 8 | 95 | 5 | — | — | — | |||||||||||||||||||
Non-agency RMBS (f) | 1,314 | (12 | ) | 1,089 | 1,301 | 120 | 212 | 19 | 11 | 5 | 41 | 24 | ||||||||||||||||||
State and political subdivisions | 1,297 | (2 | ) | 1,175 | 1,200 | 102 | 25 | 70 | 29 | — | — | 1 | ||||||||||||||||||
Corporate bonds | 905 | 5 | 858 | 879 | 103 | 21 | 16 | 68 | 16 | — | — | |||||||||||||||||||
Other | 75 | — | 71 | 74 | 104 | 3 | — | — | — | — | 100 | |||||||||||||||||||
Total securities | $ | 119,551 | (g) | $ | 415 | $ | 120,746 | $ | 121,691 | (g) | 101 | % | $ | 945 | (g)(h) | 95 | % | 2 | % | 2 | % | 1 | % | — | % | |||||
(a) | Amortized cost reflects historical impairments. |
(b) | Represents ratings by Standard & Poor’s (“S&P”) or the equivalent. |
(c) | Primarily consists of exposure to UK, France, Germany, Spain, Italy and the Netherlands. |
(d) | Primarily consists of exposure to Canada, UK, Australia and Sweden. |
(e) | Primarily consists of exposure to Germany, the Netherlands and Sweden. |
(f) | Includes RMBS that were included in the former Grantor Trust of $753 million at June 30, 2019 and $689 million at Sept. 30, 2019. |
(g) | Includes net unrealized losses on derivatives hedging securities available-for-sale of $737 million at June 30, 2019 and $963 million at Sept. 30, 2019. |
(h) | Unrealized gains of $631 million at Sept. 30, 2019 related to available-for-sale securities, net of hedges. |
The fair value of our securities portfolio, including related hedges, was $121.7 billion at Sept. 30, 2019, compared with $119.2 billion at Dec. 31, 2018. The increase primarily reflects additional investments in sovereign debt/sovereign guaranteed, agency RMBS, and an increase in the net unrealized pre-tax gain, as well as additional investments in nearly all other types of securities, partially offset by net maturities and sales of U.S. Treasury and state and political subdivision securities.
At Sept. 30, 2019, the total securities portfolio had a net unrealized gain of $945 million, compared with a net unrealized loss of $907 million at Dec. 31, 2018, including the impact of related hedges. The increase
in the net unrealized pre-tax gain was primarily driven by lower market interest rates.
The unrealized gain (after-tax) on our available-for-sale securities portfolio, net of hedges, included in accumulated other comprehensive income (“OCI”) was $473 million at Sept. 30, 2019, compared with an unrealized loss (after-tax) of $167 million at Dec. 31, 2018.
At Sept. 30, 2019, 95% of the securities in our portfolio were rated AAA/AA-, unchanged when compared with Dec. 31, 2018.
See Note 4 of the Notes to Consolidated Financial Statements for the pre-tax net securities (losses) gains
22 BNY Mellon
by security type. See Note 16 of the Notes to Consolidated Financial Statements for details of securities by level in the fair value hierarchy.
The following table presents the amortizable purchase premium (net of discount) related to the securities portfolio and accretable discount related to the 2009 restructuring of the securities portfolio.
Net premium amortization and discount accretion of securities (a) | |||||||||||||||
(dollars in millions) | 3Q19 | 2Q19 | 1Q19 | 4Q18 | 3Q18 | ||||||||||
Amortizable purchase premium (net of discount) relating to securities: | |||||||||||||||
Balance at period end | $ | 1,308 | $ | 1,315 | $ | 1,388 | $ | 1,429 | $ | 1,536 | |||||
Estimated average life remaining at period end (in years) | 4.2 | 4.5 | 4.8 | 5.0 | 5.2 | ||||||||||
Amortization | $ | 95 | $ | 91 | $ | 78 | $ | 92 | $ | 108 | |||||
Accretable discount related to the prior restructuring of the securities portfolio: | |||||||||||||||
Balance at period end | $ | 171 | $ | 181 | $ | 193 | $ | 207 | $ | 224 | |||||
Estimated average life remaining at period end (in years) | 6.3 | 6.3 | 6.3 | 6.3 | 6.3 | ||||||||||
Accretion | $ | 13 | $ | 13 | $ | 16 | $ | 17 | $ | 20 | |||||
(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. |
Loans
Total exposure – consolidated | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||||||||||
(in billions) | Loans | Unfunded commitments | Total exposure | Loans | Unfunded commitments | Total exposure | |||||||||||||
Non-margin loans: | |||||||||||||||||||
Financial institutions | $ | 13.4 | $ | 34.9 | $ | 48.3 | $ | 11.6 | $ | 34.0 | $ | 45.6 | |||||||
Commercial | 1.7 | 13.2 | 14.9 | 2.1 | 15.2 | 17.3 | |||||||||||||
Subtotal institutional | 15.1 | 48.1 | 63.2 | 13.7 | 49.2 | 62.9 | |||||||||||||
Wealth management loans and mortgages | 15.9 | 0.8 | 16.7 | 16.0 | 0.8 | 16.8 | |||||||||||||
Commercial real estate | 5.3 | 3.9 | 9.2 | 4.8 | 3.5 | 8.3 | |||||||||||||
Lease financings | 1.1 | — | 1.1 | 1.3 | — | 1.3 | |||||||||||||
Other residential mortgages | 0.5 | — | 0.5 | 0.6 | — | 0.6 | |||||||||||||
Overdrafts | 5.3 | — | 5.3 | 5.5 | — | 5.5 | |||||||||||||
Other | 1.2 | — | 1.2 | 1.2 | — | 1.2 | |||||||||||||
Subtotal non-margin loans | 44.4 | 52.8 | 97.2 | 43.1 | 53.5 | 96.6 | |||||||||||||
Margin loans | 10.5 | 0.1 | 10.6 | 13.5 | 0.1 | 13.6 | |||||||||||||
Total | $ | 54.9 | $ | 52.9 | $ | 107.8 | $ | 56.6 | $ | 53.6 | $ | 110.2 | |||||||
At Sept. 30, 2019, total exposures of $107.8 billion decreased 2% compared with Dec. 31, 2018, primarily reflecting lower margin loans and commercial exposure, partially offset by higher financial institutions exposure.
Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios comprised 59% of our total exposure at Sept. 30, 2019 and 57% at Dec. 31, 2018. Additionally, most of our overdrafts relate to financial institutions.
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Financial institutions
The financial institutions portfolio is shown below.
Financial institutions portfolio exposure (dollars in billions) | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||||||||||||||
Loans | Unfunded commitments | Total exposure | % Inv. grade | % due <1 yr. | Loans | Unfunded commitments | Total exposure | ||||||||||||||||
Securities industry | $ | 3.2 | $ | 23.4 | $ | 26.6 | 100 | % | 94 | % | $ | 3.1 | $ | 22.5 | $ | 25.6 | |||||||
Banks | 7.9 | 1.2 | 9.1 | 80 | 97 | 6.3 | 1.6 | 7.9 | |||||||||||||||
Asset managers | 1.3 | 6.7 | 8.0 | 98 | 81 | 1.3 | 6.1 | 7.4 | |||||||||||||||
Insurance | 0.1 | 2.5 | 2.6 | 100 | 14 | 0.1 | 2.5 | 2.6 | |||||||||||||||
Government | 0.1 | 0.3 | 0.4 | 100 | 16 | 0.1 | 0.5 | 0.6 | |||||||||||||||
Other | 0.8 | 0.8 | 1.6 | 96 | 60 | 0.7 | 0.8 | 1.5 | |||||||||||||||
Total | $ | 13.4 | $ | 34.9 | $ | 48.3 | 95 | % | 86 | % | $ | 11.6 | $ | 34.0 | $ | 45.6 | |||||||
The financial institutions portfolio exposure was $48.3 billion at Sept. 30, 2019, an increase of 6% from Dec. 31, 2018, primarily reflecting higher exposure in the banks, securities industry and asset managers portfolios.
Financial institution exposures are high-quality, with 95% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification at Sept. 30, 2019. 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. For ratings of non-U.S. counterparties, our internal credit rating is generally capped at a rating equivalent to the sovereign rating of the country where the counterparty resides, regardless of the internal credit rating assigned to the counterparty or the underlying collateral.
In addition, 82% of the financial institutions exposure is secured. For example, securities industry clients and asset managers often borrow against marketable securities held in custody.
The exposure to financial institutions is generally short-term with 86% of the exposures expiring within one year. At Sept. 30, 2019, 61% of the exposure to
financial institutions expires within 90 days, compared with 16% at June 30, 2019. Secured intraday credit facilities represent nearly half of the exposure in the financial institutions portfolio and are reviewed and reapproved annually.
At Sept. 30, 2019, the secured intraday credit provided to dealers in connection with their tri-party repo activity totaled $20.6 billion and are included in the securities industry portfolio. Dealers secure the outstanding intraday credit with high-quality liquid collateral having a market value in excess of the amount of the outstanding credit.
Our bank exposure primarily relates to our global trade finance. These exposures are short-term in nature, with 97% due in less than one year. The investment grade percentage of our bank exposure was 80% at Sept. 30, 2019, compared with 77% at Dec. 31, 2018. Our non-investment grade exposures are primarily in Brazil. These loans are primarily trade finance loans.
The asset manager portfolio exposure was high-quality, with 98% of the exposures meeting our investment grade equivalent ratings criteria as of Sept. 30, 2019. These exposures are generally short-term liquidity facilities, with the majority to regulated mutual funds.
24 BNY Mellon
Commercial
The commercial portfolio is presented below.
Commercial portfolio exposure | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||||||||||||||
(dollars in billions) | Loans | Unfunded commitments | Total exposure | % Inv. grade | % due <1 yr. | Loans | Unfunded commitments | Total exposure | |||||||||||||||
Manufacturing | $ | 0.8 | $ | 4.7 | $ | 5.5 | 92 | % | 12 | % | $ | 0.8 | $ | 5.1 | $ | 5.9 | |||||||
Services and other | 0.7 | 3.7 | 4.4 | 97 | 17 | 0.7 | 4.8 | 5.5 | |||||||||||||||
Energy and utilities | 0.2 | 3.8 | 4.0 | 98 | 4 | 0.5 | 4.1 | 4.6 | |||||||||||||||
Media and telecom | — | 1.0 | 1.0 | 92 | — | 0.1 | 1.2 | 1.3 | |||||||||||||||
Total | $ | 1.7 | $ | 13.2 | $ | 14.9 | 95 | % | 11 | % | $ | 2.1 | $ | 15.2 | $ | 17.3 | |||||||
The commercial portfolio exposure was $14.9 billion at Sept. 30, 2019, a decrease of 14% from Dec. 31, 2018, reflecting lower exposure in all the portfolios.
Utilities-related exposure represents approximately 75% of the energy and utilities portfolio at Sept. 30, 2019. The exposure in the energy and utilities portfolio, which includes exposure to refining, exploration and production companies and integrated companies, was 98% investment grade at Sept. 30, 2019, and 88% at Dec. 31, 2018. In the third quarter of 2019, we sold the remaining exposure related to a California utility company that had filed for bankruptcy of approximately $100 million.
Our credit strategy is to focus on investment grade clients that are active users of our non-credit services. The following table summarizes the percentage of the financial institutions and commercial portfolio exposures that are investment grade.
Percentage of the portfolios that are investment grade | ||||||||||
Quarter ended | ||||||||||
Sept. 30, 2019 | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | ||||||
Financial institutions | 95 | % | 95 | % | 94 | % | 95 | % | 94 | % |
Commercial | 95 | % | 95 | % | 95 | % | 95 | % | 95 | % |
Wealth management loans and mortgages
Our wealth management exposure was $16.7 billion at Sept. 30, 2019, compared with $16.8 billion at Dec. 31, 2018. Wealth management loans and mortgages primarily consist of loans to high-net-worth individuals, which are secured by marketable securities and/or residential property. Wealth management mortgages are primarily interest-only, adjustable-rate mortgages with a weighted-average
loan-to-value ratio of 62% at origination. Less than 1% of the mortgages were past due at Sept. 30, 2019.
At Sept. 30, 2019, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 23%; New York - 18%; Massachusetts - 10%; Florida - 8%; and other - 41%.
Commercial real estate
Our commercial real estate exposure totaled $9.2 billion at Sept. 30, 2019, compared with $8.3 billion at Dec. 31, 2018. Our income-producing commercial real estate facilities are focused on experienced owners and are structured with moderate leverage based on existing cash flows. Our commercial real estate lending activities also include construction and renovation facilities. Our client base consists of experienced developers and long-term holders of real estate assets. Loans are approved on the basis of existing or projected cash flows and supported by appraisals and knowledge of local market conditions. Development loans are structured with moderate leverage, and in many instances, involve some level of recourse to the developer.
At Sept. 30, 2019, 65% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type, with 45% secured by residential buildings, 39% secured by office buildings, 8% secured by retail properties and 8% secured by other categories. Approximately 96% of the unsecured portfolio consists of real estate investment trusts (“REITs”) and real estate operating companies, which are both predominantly investment grade.
At Sept. 30, 2019, our commercial real estate portfolio consisted of the following concentrations:
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New York metro - 46%; REITs and real estate operating companies - 33%; and other - 21%.
Lease financings
The leasing portfolio exposure totaled $1.1 billion at Sept. 30, 2019 and $1.3 billion at Dec. 31, 2018 and consisted of exposures backed by well-diversified assets, including large-ticket transportation equipment, the largest consisting of passenger and freight train cars. In the third quarter of 2019, we recorded a lease-related impairment of $70 million. At Sept. 30, 2019, approximately 98% of the leasing portfolio exposure was investment grade, or investment grade equivalent.
Other residential mortgages
The other residential mortgages portfolio primarily consists of 1-4 family residential mortgage loans and totaled $520 million at Sept. 30, 2019 and $594 million at Dec. 31, 2018. Included in this portfolio at Sept. 30, 2019 were $102 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007, of which 11% of the serviced loan balance was at least 60 days delinquent.
Overdrafts
Overdrafts primarily relate to custody and securities clearance clients and are generally repaid within two business days.
Other loans
Other loans primarily include loans to consumers that are fully collateralized with equities, mutual funds and fixed-income securities.
Margin loans
Margin loan exposure of $10.6 billion at Sept. 30, 2019 and $13.6 billion at Dec. 31, 2018 was collateralized with marketable securities. Borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. Margin loans included $1.1 billion at Sept. 30, 2019 and $2.6 billion at Dec. 31, 2018 related to a term loan program that offers fully collateralized loans to broker-dealers. The decrease in margin loans was primarily driven by lower client demand.
Asset quality and allowance for credit losses
Our credit strategy is to focus on investment grade clients who are active users of our non-credit services. Our primary exposure to the credit risk of a customer consists of funded loans, unfunded contractual commitments to lend, standby letters of credit (“SBLC”) and overdrafts associated with our custody and securities clearance businesses.
The following table details changes in our allowance for credit losses.
Allowance for credit losses activity | Sept. 30, 2019 | June 30, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | ||||||||
(dollars in millions) | ||||||||||||
Non-margin loans | $ | 44,417 | $ | 41,794 | $ | 43,080 | $ | 40,519 | ||||
Margin loans | 10,464 | 10,602 | 13,484 | 13,468 | ||||||||
Total loans | $ | 54,881 | $ | 52,396 | $ | 56,564 | $ | 53,987 | ||||
Beginning balance of allowance for credit losses | $ | 241 | $ | 248 | $ | 251 | $ | 254 | ||||
Provision for credit losses | (16 | ) | (8 | ) | — | (3 | ) | |||||
Net (charge-offs) recoveries: | ||||||||||||
Commercial | (1 | ) | — | — | — | |||||||
Wealth management loans and mortgages | — | (1 | ) | — | — | |||||||
Other residential mortgages | — | 2 | — | — | ||||||||
Foreign | — | — | 1 | — | ||||||||
Net (charge-offs) recoveries | (1 | ) | 1 | 1 | — | |||||||
Ending balance of allowance for credit losses | $ | 224 | $ | 241 | $ | 252 | $ | 251 | ||||
Allowance for loan losses | $ | 127 | $ | 146 | $ | 146 | $ | 140 | ||||
Allowance for lending-related commitments | 97 | 95 | 106 | 111 | ||||||||
Allowance for loan losses as a percentage of total loans | 0.23 | % | 0.28 | % | 0.26 | % | 0.26 | % | ||||
Allowance for loan losses as a percentage of non-margin loans | 0.29 | 0.35 | 0.34 | 0.35 | ||||||||
Total allowance for credit losses as a percentage of total loans | 0.41 | 0.46 | 0.45 | 0.46 | ||||||||
Total allowance for credit losses as a percentage of non-margin loans | 0.50 | 0.58 | 0.58 | 0.62 | ||||||||
26 BNY Mellon
The allowance for credit losses decreased $28 million compared with Dec. 31, 2018, primarily reflecting the sale of the remaining exposure related to a California utility company that had filed for bankruptcy and lower lending-related commitments.
The provision for credit losses was a credit of $16 million in the third quarter 2019 due in part from the sale of the remaining exposure related to a California utility company that had filed for bankruptcy. The provision for credit losses was a credit of $8 million in the second quarter of 2019 driven by lower credit exposure, and a credit of $3 million in the third quarter of 2018.
We had $10.5 billion of secured margin loans on our balance sheet at Sept. 30, 2019 compared with $13.5 billion at Dec. 31, 2018 and Sept. 30, 2018. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to them. As a result, we believe that the ratio of total allowance for credit losses as a percentage of non-margin loans is a more appropriate metric to measure the adequacy of the reserve.
The allowance for loan losses and allowance for lending-related commitments represent management’s estimate of losses inherent in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. To the extent actual results differ from forecasts or management’s judgment, the allowance for credit losses may be greater or less than future charge-offs.
Based on an evaluation of the allowance for credit losses as discussed in “Critical accounting estimates” and Note 1 of the Notes to Consolidated Financial Statements, both in our 2018 Annual Report, we have allocated our allowance for credit losses as presented below.
Allocation of allowance | Sept. 30, 2019 | June 30, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | |||||
Commercial real estate | 35 | % | 30 | % | 30 | % | 29 | % | |
Commercial | 27 | 32 | 32 | 30 | |||||
Foreign | 13 | 13 | 13 | 13 | |||||
Financial institutions | 9 | 9 | 9 | 10 | |||||
Wealth management (a) | 9 | 8 | 8 | 9 | |||||
Other residential mortgages | 6 | 6 | 6 | 7 | |||||
Lease financings | 1 | 2 | 2 | 2 | |||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | |
(a) | Includes the allowance for wealth management mortgages. |
The allocation of the allowance for credit losses is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the losses.
The credit rating assigned to each credit is a significant variable in determining the allowance. If each credit were rated one grade better, the allowance would have decreased by $55 million, while if each credit were rated one grade worse, the allowance would have increased by $91 million. Similarly, if the loss given default were one rating worse, the allowance would have increased by $52 million, while if the loss given default were one rating better, the allowance would have decreased by $55 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 table below presents our nonperforming assets.
Nonperforming assets | Sept. 30, 2019 | Dec. 31, 2018 | ||||
(dollars in millions) | ||||||
Nonperforming loans: | ||||||
Other residential mortgages | $ | 62 | $ | 67 | ||
Wealth management loans and mortgages | 24 | 9 | ||||
Total nonperforming loans | 86 | 76 | ||||
Other assets owned | 2 | 3 | ||||
Total nonperforming assets | $ | 88 | $ | 79 | ||
Nonperforming assets ratio | 0.16 | % | 0.14 | % | ||
Nonperforming assets ratio, excluding margin loans | 0.20 | 0.18 | ||||
Allowance for loan losses/nonperforming loans | 147.7 | 192.1 | ||||
Allowance for loan losses/nonperforming assets | 144.3 | 184.8 | ||||
Total allowance for credit losses/nonperforming loans | 260.5 | 331.6 | ||||
Total allowance for credit losses/nonperforming assets | 254.5 | 319.0 | ||||
Nonperforming assets increased $9 million compared with Dec. 31, 2018, primarily reflecting the second quarter 2019 refinement of the application of our nonperforming assets policy for first lien residential mortgage loans greater than 90 days delinquent.
Deposits
Total deposits were $249.7 billion at Sept. 30, 2019, an increase of 5%, compared with $238.8 billion at Dec. 31, 2018. The increase reflects higher interest-bearing deposits in both U.S. and non-U.S. offices,
BNY Mellon 27
partially offset by lower noninterest-bearing deposits principally in U.S. offices.
Noninterest-bearing deposits were $55.5 billion at Sept. 30, 2019 compared with $70.8 billion at Dec. 31, 2018. Interest-bearing deposits were $194.2 billion at Sept. 30, 2019 compared with $168.0 billion at Dec. 31, 2018.
Short-term borrowings
We fund ourselves primarily through deposits and, to a lesser extent, other short-term borrowings and long-term debt. Short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements, payables to customers and broker-dealers, commercial paper and other borrowed funds. Certain other borrowings, for example, securities sold under repurchase agreements, require the delivery of securities as collateral.
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, 2019 | June 30, 2019 | Sept. 30, 2018 | ||||||
Maximum month-end balance during the quarter | $ | 16,967 | $ | 12,127 | $ | 13,020 | |||
Average daily balance (a) | $ | 13,432 | $ | 11,809 | $ | 14,199 | |||
Weighted-average rate during the quarter (a) | 13.08 | % | 12.64 | % | 5.33 | % | |||
Ending balance (b) | $ | 11,796 | $ | 11,757 | $ | 10,158 | |||
Weighted-average rate at period end (b) | 11.70 | % | 14.43 | % | 7.33 | % | |||
(a) | Includes the average impact of offsetting under enforceable netting agreements of $67,519 million for the third quarter of 2019, $50,710 million for the second quarter of 2019 and $25,922 million for the third quarter of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the weighted-average rates would have been 2.17% for the third quarter of 2019, 2.39% for the second quarter of 2019 and 1.88% for the third quarter of 2018. We believe providing the rates excluding the impact of netting is useful to investors as it is more reflective of the actual rates paid. |
(b) | Includes the impact of offsetting under enforceable netting agreements of $60,094 million at Sept. 30, 2019, $78,433 million at June 30, 2019 and $58,540 million at Sept. 30, 2018. |
Fluctuations of federal funds purchased and securities sold under repurchase agreements between periods reflect changes in overnight borrowing opportunities. The fluctuations in the weighted-average rates
compared with June 30, 2019 and Sept. 30, 2018, primarily reflect repurchase agreement activity with the Fixed Income Clearing Corporation (“FICC”), where we record interest expense gross, but the ending and average balances reflect the impact of offsetting under enforceable netting agreements. This activity primarily relates to government securities collateralized resale and repurchase agreements executed with clients that are novated to and settle with the FICC.
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, 2019 | June 30, 2019 | Sept. 30, 2018 | ||||||
Maximum month-end balance during the quarter | $ | 19,103 | $ | 19,149 | $ | 19,232 | |||
Average daily balance (a) | $ | 18,619 | $ | 18,679 | $ | 19,073 | |||
Weighted-average rate during the quarter (a) | 1.52 | % | 1.76 | % | 1.23 | % | |||
Ending balance | $ | 18,364 | $ | 18,946 | $ | 18,683 | |||
Weighted-average rate at period end | 1.34 | % | 1.73 | % | 1.30 | % | |||
(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 $15,440 million in the third quarter of 2019, $15,666 million in the second quarter of 2019 and $16,252 million in the third quarter of 2018. |
Payables to customers and broker-dealers represent funds awaiting re-investment and short sale proceeds payable on demand. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.
Information related to commercial paper is presented below.
Commercial paper | Quarter ended | ||||||||
(dollars in millions) | Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | ||||||
Maximum month-end balance during the quarter | $ | 5,692 | $ | 8,894 | $ | 4,422 | |||
Average daily balance | $ | 3,796 | $ | 2,957 | $ | 3,102 | |||
Weighted-average rate during the quarter | 2.26 | % | 2.43 | % | 2.10 | % | |||
Ending balance | $ | 3,538 | $ | 8,894 | $ | 735 | |||
Weighted-average rate at period end | 1.88 | % | 2.35 | % | 2.06 | % | |||
The Bank of New York Mellon issues commercial paper that matures within 397 days from date of issue
28 BNY Mellon
and is not redeemable prior to maturity or subject to voluntary prepayment. The fluctuations in the commercial paper balances, compared with prior periods, primarily reflect funding of investments in short-term assets.
Information related to other borrowed funds is presented below.
Other borrowed funds | Quarter ended | ||||||||
(dollars in millions) | Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | ||||||
Maximum month-end balance during the quarter | $ | 1,358 | $ | 2,732 | $ | 3,269 | |||
Average daily balance | $ | 1,148 | $ | 2,455 | $ | 2,747 | |||
Weighted-average rate during the quarter | 3.24 | % | 3.36 | % | 2.33 | % | |||
Ending balance | $ | 820 | $ | 1,921 | $ | 2,934 | |||
Weighted-average rate at period end | 3.16 | % | 3.84 | % | 2.48 | % | |||
Other borrowed funds primarily include borrowings from the Federal Home Loan Bank (“FHLB”), overdrafts of sub-custodian account balances in our Investment Services businesses, finance lease liabilities and borrowings under lines of credit by our Pershing subsidiaries. Overdrafts typically relate to timing differences for settlements. The decrease in other borrowed funds, compared with prior periods, primarily reflects a decrease in borrowings from the FHLB.
Liquidity and dividends
BNY Mellon defines liquidity as the ability of the Parent and its subsidiaries to access funding or convert assets to cash quickly and efficiently, or to roll over or issue new debt, especially during periods of market stress, at a reasonable cost, and in order to meet its short-term (up to one year) obligations. Funding liquidity risk is the risk that BNY Mellon cannot meet its cash and collateral obligations at a reasonable cost for both expected and unexpected cash flow and collateral needs without adversely affecting daily operations or our financial condition.
Funding liquidity risk can arise from funding mismatches, market constraints from the inability to convert assets into cash, the inability to hold or raise cash, low overnight deposits, deposit run-off or contingent liquidity events.
We also manage liquidity risk on an intraday basis. Intraday liquidity risk is the risk that BNY Mellon cannot access funds during the business day to make payments or settle immediate obligations, usually in real time. Intraday liquidity risk can arise from timing mismatches, market constraints from the inability to convert assets into cash, the inability to raise cash intraday, low overnight deposits and/or adverse stress events.
Changes in economic conditions or exposure to credit, market, operational, legal and reputational risks also can affect BNY Mellon’s liquidity risk profile and are considered in our liquidity risk framework.
The Parent’s policy is to have access to sufficient unencumbered cash and cash equivalents at each quarter-end to cover forecasted debt redemptions, net interest payments and net tax payments for the following 18-month period, and to provide sufficient collateral to satisfy transactions subject to Section 23A of the Federal Reserve Act.
As of Sept. 30, 2019, the Parent was in compliance with this policy. For additional information on our liquidity policy, see “Risk Management - Liquidity risk” in our 2018 Annual Report.
We define available funds for internal liquidity management purposes as cash and due from banks, interest-bearing deposits with the Federal Reserve and other central banks, interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements. The following table presents our total available funds at period end and on an average basis.
Available funds | Sept. 30, 2019 | Dec. 31, 2018 | Average | ||||||||||||
(dollars in millions) | 3Q19 | 2Q19 | 3Q18 | ||||||||||||
Cash and due from banks | $ | 6,718 | $ | 5,864 | $ | 5,250 | $ | 5,083 | $ | 5,000 | |||||
Interest-bearing deposits with the Federal Reserve and other central banks | 73,811 | 67,988 | 60,030 | 61,756 | 61,216 | ||||||||||
Interest-bearing deposits with banks | 15,417 | 14,148 | 15,324 | 13,666 | 14,691 | ||||||||||
Federal funds sold and securities purchased under resale agreements | 43,723 | 46,795 | 40,816 | 38,038 | 26,738 | ||||||||||
Total available funds | $ | 139,669 | $ | 134,795 | $ | 121,420 | $ | 118,543 | $ | 107,645 | |||||
Total available funds as a percentage of total assets | 37 | % | 37 | % | 35 | % | 35 | % | 32 | % | |||||
BNY Mellon 29
Total available funds were $139.7 billion at Sept. 30, 2019, compared with $134.8 billion at Dec. 31, 2018. The increase was primarily due to higher interest-bearing deposits with the Federal Reserve and other central banks and interest-bearing deposits with banks, partially offset by lower federal funds sold and securities purchased under resale agreements.
Average non-core sources of funds, such as federal funds purchased and securities sold under repurchase agreements, trading liabilities, commercial paper and other borrowed funds, were $18.9 billion for the nine months ended Sept. 30, 2019 and $24.2 billion for the nine months ended Sept. 30, 2018. The decrease was primarily due to lower federal funds purchased and securities sold under repurchase agreements.
Average foreign deposits, primarily from our European-based Investment Services businesses, were $92.5 billion for the nine months ended Sept. 30, 2019, compared with $97.7 billion for the nine months ended Sept. 30, 2018. The decrease primarily reflects client activity. Average interest-bearing domestic deposits were $75.8 billion for the nine months ended Sept. 30, 2019 and $54.6 billion for the nine months ended Sept. 30, 2018. The increase primarily reflects an increase in demand and time deposits.
Average payables to customers and broker-dealers were $15.7 billion for the nine months ended Sept. 30, 2019 and $16.6 billion for the nine months ended Sept. 30, 2018. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.
Average long-term debt was $28.1 billion for the nine months ended Sept. 30, 2019 and $28.3 billion for the nine months ended Sept. 30, 2018.
Average noninterest-bearing deposits decreased to $52.2 billion for the nine months ended Sept. 30, 2019 from $65.4 billion for the nine months ended Sept. 30, 2018, primarily reflecting client activity.
A significant reduction in our Investment Services business would reduce our access to deposits. See “Asset/liability management” for additional factors that could impact our deposit balances.
Sources of liquidity
The Parent’s three major sources of liquidity are access to the debt and equity markets, dividends from its subsidiaries, and cash on hand and cash otherwise made available in business-as-usual circumstances to the Parent through a committed credit facility with our intermediate holding company (“IHC”).
Our ability to access the capital markets on favorable terms, or at all, is partially dependent on our credit ratings, which are as follows:
Credit ratings at Sept. 30, 2019 | |||||||
Moody’s | S&P | Fitch | DBRS | ||||
Parent: | |||||||
Long-term senior debt | A1 | A | AA- | AA (low) | |||
Subordinated debt | A2 | A- | A+ | A (high) | |||
Preferred stock | Baa1 | BBB | BBB | A (low) | |||
Outlook - Parent | Stable | Stable | Stable | Positive | |||
The Bank of New York Mellon: | |||||||
Long-term senior debt | Aa2 | AA- | AA | AA | |||
Subordinated debt | NR | A | NR | NR | |||
Long-term deposits | Aa1 | AA- | AA+ | AA | |||
Short-term deposits | P1 | A-1+ | F1+ | R-1 (high) | |||
Commercial paper | P1 | A-1+ | F1+ | R-1 (high) | |||
BNY Mellon, N.A.: | |||||||
Long-term senior debt | Aa2 | (a) | AA- | AA | (a) | AA | |
Long-term deposits | Aa1 | AA- | AA+ | AA | |||
Short-term deposits | P1 | A-1+ | F1+ | R-1 (high) | |||
Outlook - Banks | Stable | Stable | Stable | Positive | |||
(a) | Represents senior debt issuer default rating. |
NR - Not rated.
30 BNY Mellon
In November 2019, DBRS upgraded the Parent’s long-term senior debt rating to AA, the subordinated debt rating to AA (low) and the preferred stock rating to A. DBRS also upgraded The Bank of New York Mellon and BNY Mellon, N.A.’s long-term senior debt rating to AA (high) and long-term deposits to AA (high). The short-term ratings of the Parent, The Bank of New York Mellon and BNY Mellon N.A. were confirmed.
Long-term debt totaled $27.9 billion at Sept. 30, 2019 and $29.2 billion at Dec. 31, 2018. The decrease reflects maturities of $4.3 billion, partially offset by issuances of $2.3 billion and an increase in the fair value of hedged long-term debt. No long-term debt will mature in the fourth quarter of 2019.
The Parent issued $1 billion of fixed rate senior notes maturing in 2022 at an annual interest rate of 1.950% in August 2019, and $750 million of fixed rate senior notes maturing in 2024 at an annual interest rate of 2.100% in October 2019.
The Bank of New York Mellon may issue notes and certificates of deposit (“CDs”). At Sept. 30, 2019 and Dec. 31, 2018, $2.0 billion and $2.8 billion, respectively, of CDs were outstanding. At Sept. 30, 2019 and Dec. 31, 2018, $2.3 billion and $1.0 billion, respectively, of notes were outstanding.
The Bank of New York Mellon also issues commercial paper that matures within 397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The average commercial paper outstanding was $2.7 billion for the nine months ended Sept. 30, 2019 and $3.4 billion for the nine months ended Sept. 30, 2018. Commercial paper outstanding was $3.5 billion at Sept. 30, 2019 and $1.9 billion at Dec. 31, 2018.
Subsequent to Sept. 30, 2019, our U.S. bank subsidiaries could declare dividends to the Parent of approximately $1.2 billion, without the need for a regulatory waiver. In addition, at Sept. 30, 2019, non-bank subsidiaries of the Parent had liquid assets of approximately $1.6 billion. Restrictions on our ability to obtain funds from our subsidiaries are discussed in more detail in “Supervision and Regulation - Capital Planning and Stress Testing - Payment of Dividends, Stock Repurchases and Other Capital Distributions” and in Note 18 of the Notes to Consolidated Financial Statements in our 2018 Annual Report.
Pershing LLC has uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. Pershing LLC has three separate uncommitted lines of credit amounting to $750 million in aggregate. There were no borrowings under these lines in the third quarter of 2019. Pershing Limited, an indirect UK-based subsidiary of BNY Mellon, has three separate uncommitted lines of credit amounting to $350 million in aggregate. Average borrowings under these lines were $1 million, in aggregate, in the third quarter of 2019.
The double leverage ratio is the ratio of our equity investment in subsidiaries divided by our consolidated Parent company equity, which includes our noncumulative perpetual preferred stock. In short, the double leverage ratio measures the extent to which equity in subsidiaries is financed by Parent company debt. As the double leverage ratio increases, this can reflect greater demands on a company’s cash flows in order to service interest payments and debt maturities. BNY Mellon’s double leverage ratio is managed in a range considering the high level of unencumbered available liquid assets held in its principal subsidiaries (such as central bank deposit placements and government securities), the Company’s cash generating fee-based business model, with fee revenue representing 81% of total revenue in the third quarter of 2019, and the dividend capacity of our banking subsidiaries. Our double leverage ratio was 118.1% at Sept. 30, 2019 and 117.7% at Dec. 31, 2018, and within the range targeted by management.
Uses of funds
The Parent’s major uses of funds are payment of dividends, repurchases of common stock, principal and interest payments on its borrowings, acquisitions and additional investments in its subsidiaries.
In August 2019, a quarterly cash dividend of $0.31 per common share was paid to common shareholders. Our common stock dividend payout ratio was 29% for the first nine months of 2019.
In the third quarter of 2019, we repurchased 21.3 million common shares at an average price of $46.11 per common share for a total cost of $981 million.
BNY Mellon 31
Liquidity coverage ratio
U.S. regulators have established an LCR that requires certain banking organizations, including BNY Mellon, to maintain a minimum amount of unencumbered high-quality liquid assets (“HQLA”) sufficient to withstand the net cash outflow under a hypothetical standardized acute liquidity stress scenario for a 30-day time horizon.
The following table presents BNY Mellon’s consolidated HQLA at Sept. 30, 2019, and the average HQLA and average LCR for the third quarter of 2019.
Consolidated HQLA and LCR | Sept. 30, 2019 | ||
(dollars in billions) | |||
Securities (a) | $ | 119 | |
Cash (b) | 67 | ||
Total consolidated HQLA (c) | $ | 186 | |
Total consolidated HQLA - average (c) | $ | 168 | |
Average LCR | 117 | % | |
(a) | Primarily includes securities of U.S. government-sponsored enterprises, U.S. Treasury, sovereign securities, U.S. agency and investment-grade corporate debt. |
(b) | Primarily includes cash on deposit with central banks. |
(c) | Consolidated HQLA presented before adjustments. After haircuts and the impact of trapped liquidity, consolidated HQLA totaled $142 billion at Sept. 30, 2019 and averaged $125 billion for the third quarter of 2019. |
BNY Mellon and each of our affected domestic bank subsidiaries were compliant with the U.S. LCR requirements of at least 100% throughout the third quarter of 2019.
Statement of cash flows
The following summarizes the activity reflected on the consolidated statement of cash flows. While this information may be helpful to highlight certain macro trends and business strategies, the cash flow analysis may not be as relevant when analyzing changes in our net earnings and net assets. We believe that in addition to the traditional cash flow analysis, the discussion related to liquidity and dividends and asset/liability management herein may provide more useful context in evaluating our liquidity position and related activity.
Net cash provided by operating activities was $2.6 billion in the nine months ended Sept. 30, 2019, compared with $2.8 billion in the nine months ended Sept. 30, 2018. In the nine months ended Sept. 30, 2019 and nine months ended Sept. 30, 2018, cash flows provided by operations primarily resulted from earnings, partially offset by changes in trading activities.
Net cash used for investing activities was $5.2 billion in the nine months ended Sept. 30, 2019, compared with net cash provided by investing activities of $18.0 billion in the nine months ended Sept. 30, 2018. In the nine months ended Sept. 30, 2019, net cash used for investing activities primarily reflects changes in interest-bearing deposits with the Federal Reserve and other central banks, partially offset by change in federal funds sold and securities purchased under resale agreements. In the nine months ended Sept. 30, 2018, net cash provided by investing activities primarily reflects changes in interest-bearing deposits with the Federal Reserve and other central banks and changes in loans, partially offset by changes in interest-bearing deposits with banks.
Net cash provided by financing activities was $3.5 billion in the nine months ended Sept. 30, 2019, compared with net cash used for financing activities of $21.6 billion in the nine months ended Sept. 30, 2018. In the nine months ended Sept. 30, 2019, net cash provided by financing activities primarily reflects changes in deposits and net proceeds from the issuance of long-term debt, partially offset by repayments of long-term debt, changes in federal funds purchased and securities sold under repurchase agreements, changes in other borrowed funds and common stock repurchases. In the nine months ended Sept. 30, 2018, net cash used for financing activities primarily reflects changes in deposits, changes in federal funds purchased and securities sold under repurchase agreements, repayments of long-term debt, a change in commercial paper and common stock repurchases, partially offset by net proceeds from the issuance of long-term debt.
32 BNY Mellon
Capital
Capital data (dollars in millions, except per share amounts; common shares in thousands) | Sept. 30, 2019 | June 30, 2019 | Dec. 31, 2018 | ||||||
Average common equity to average assets | 10.7 | % | 10.9 | % | 11.2 | % | |||
At period end: | |||||||||
BNY Mellon shareholders’ equity to total assets ratio | 11.0 | % | 10.9 | % | 11.2 | % | |||
BNY Mellon common shareholders’ equity to total assets ratio | 10.1 | % | 10.0 | % | 10.2 | % | |||
Total BNY Mellon shareholders’ equity | $ | 41,120 | $ | 41,533 | $ | 40,638 | |||
Total BNY Mellon common shareholders’ equity (a) | $ | 37,578 | $ | 37,991 | $ | 37,096 | |||
BNY Mellon tangible common shareholders’ equity – Non-GAAP (a) | $ | 18,988 | $ | 19,275 | $ | 18,290 | |||
Book value per common share (a) | $ | 40.75 | $ | 40.30 | $ | 38.63 | |||
Tangible book value per common share – Non-GAAP (a) | $ | 20.59 | $ | 20.45 | $ | 19.04 | |||
Closing stock price per common share | $ | 45.21 | $ | 44.15 | $ | 47.07 | |||
Market capitalization | $ | 41,693 | $ | 41,619 | $ | 45,207 | |||
Common shares outstanding | 922,199 | 942,662 | 960,426 | ||||||
Cash dividends per common share | $ | 0.31 | $ | 0.28 | $ | 0.28 | |||
Common dividend payout ratio | 29 | % | 28 | % | 33 | % | |||
Common dividend yield (annualized) | 2.7 | % | 2.5 | % | 2.4 | % | |||
(a) | See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 40 for a reconciliation of GAAP to Non-GAAP. |
The Bank of New York Mellon Corporation total shareholders’ equity increased to $41.1 billion at Sept. 30, 2019 from $40.6 billion at Dec. 31, 2018. The increase primarily reflects earnings, the unrealized gain in our investment securities portfolio, and additional paid-in capital resulting from stock awards, partially offset by common stock repurchases and dividend payments.
In the third quarter of 2019, we repurchased 21.3 million common shares at an average price of $46.11 per common share for a total of $981 million under the current program.
The unrealized gain (after-tax) on our available-for-sale securities portfolio, net of hedges, included in accumulated OCI was $473 million at Sept. 30, 2019, compared with an unrealized loss (after-tax) of $167 million at Dec. 31, 2018. The increase in the unrealized gain, net of tax, was primarily driven by lower market interest rates.
Capital adequacy
Regulators establish certain levels of capital for bank holding companies (“BHCs”) and banks, including BNY Mellon and our bank subsidiaries, in accordance with established quantitative measurements. For the Parent to maintain its status as a financial holding company, our U.S. bank subsidiaries and BNY
Mellon must, among other things, qualify as “well capitalized.” As of Sept. 30, 2019 and Dec. 31, 2018, BNY Mellon and our U.S. bank subsidiaries were “well capitalized.”
Failure to satisfy regulatory standards, including “well capitalized” status or capital adequacy rules more generally, could result in limitations on our activities and adversely affect our financial condition. See the discussion of these matters in “Supervision and Regulation - Regulated Entities of BNY Mellon and Ancillary Regulatory Requirements” and “Risk Factors - Operational Risk - Failure to satisfy regulatory standards, including “well capitalized” and “well managed” status or capital adequacy and liquidity rules more generally, could result in limitations on our activities and adversely affect our business and financial condition,” both in our 2018 Annual Report.
The U.S. banking agencies’ capital rules are based on the framework adopted by the Basel Committee on Banking Supervision, as amended from time to time. For additional information on these capital requirements, see “Supervision and Regulation” in our 2018 Annual Report. BNY Mellon is subject to the U.S. capital rules, which were gradually phased-in over a multi-year period through Jan. 1, 2019. The phase-in requirements for consolidated capital were completed on Jan. 1, 2018.
BNY Mellon 33
The table below presents our consolidated and largest bank subsidiary regulatory capital ratios.
Consolidated and largest bank subsidiary regulatory capital ratios | Sept. 30, 2019 | June 30, 2019 | Dec. 31, 2018 | |||||||||||
Well capitalized | Minimum required | Capital ratios | Capital ratios | Capital ratios | ||||||||||
(a) | ||||||||||||||
Consolidated regulatory capital ratios: (b) | ||||||||||||||
Advanced Approaches: | ||||||||||||||
CET1 ratio | N/A | (c) | 8.5 | % | 11.1 | % | 11.1 | % | 10.7 | % | ||||
Tier 1 capital ratio | 6 | % | 10 | 13.2 | 13.2 | 12.8 | ||||||||
Total capital ratio | 10 | % | 12 | 14.0 | 14.0 | 13.6 | ||||||||
Standardized Approach: | ||||||||||||||
CET1 ratio | N/A | (c) | 8.5 | % | 12.3 | % | 12.4 | % | 11.7 | % | ||||
Tier 1 capital ratio | 6 | % | 10 | 14.6 | 14.8 | 14.1 | ||||||||
Total capital ratio | 10 | % | 12 | 15.6 | 15.7 | 15.1 | ||||||||
Tier 1 leverage ratio | N/A | (c) | 4 | 6.5 | 6.8 | 6.6 | ||||||||
SLR (d) | N/A | (c) | 5 | 6.0 | 6.3 | 6.0 | ||||||||
The Bank of New York Mellon regulatory capital ratios: (b) | ||||||||||||||
Advanced Approaches: | ||||||||||||||
CET1 ratio | 6.5 | % | 7 | % | 14.5 | % | 14.2 | % | 14.0 | % | ||||
Tier 1 capital ratio | 8 | 8.5 | 14.5 | 14.2 | 14.3 | |||||||||
Total capital ratio | 10 | 10.5 | 14.5 | 14.2 | 14.7 | |||||||||
Tier 1 leverage ratio | 5 | 4 | 7.0 | 7.3 | 7.6 | |||||||||
SLR (d) | 6 | 3 | 6.4 | 6.7 | 6.8 | |||||||||
(a) | Minimum requirements for Sept. 30, 2019 include minimum thresholds plus currently applicable buffers. |
(b) | For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The Tier 1 leverage ratio is based on Tier 1 capital and quarterly average total assets. The fully phased-in U.S. G-SIB surcharge of 1.5% is subject to change. The countercyclical capital buffer is currently set to 0%. |
(c) | The Federal Reserve’s regulations do not establish well capitalized thresholds for these measures for BHCs. |
(d) | The SLR is based on Tier 1 capital and total leverage exposure, which includes certain off-balance sheet exposures. |
Our CET1 ratio determined under the Advanced Approaches was 11.1% at Sept. 30, 2019 and 10.7% at Dec. 31, 2018. The increase compared with Dec. 31, 2018 primarily reflects capital generated through earnings, the unrealized gain on our investment securities portfolio and additional paid-in capital resulting from stock awards, partially offset by capital deployed through common stock repurchases and dividend payments. RWAs are essentially flat compared with Dec. 31, 2018, as an increase in credit risk RWAs was offset by a decrease in operational risk RWAs primarily due to the external loss data used in our model.
The Advanced Approaches capital ratios are significantly impacted by RWAs for operational risk. Our operational loss risk model is informed by external losses, including fines and penalties levied
against institutions in the financial services industry, particularly those that relate to businesses in which we operate, and as a result external losses have impacted and could in the future impact the amount of capital that we are required to hold.
Our capital ratios are necessarily subject to, among other things, anticipated compliance with all necessary enhancements to model calibration, approval by regulators of certain models used as part of RWA calculations, other refinements, further implementation guidance from regulators, market practices and standards and any changes BNY Mellon may make to its businesses. As a consequence of these factors, our capital ratios may materially change, and may be volatile over time and from period to period.
34 BNY Mellon
The following table presents our capital components and RWAs.
Capital components and risk-weighted assets | Sept. 30, 2019 | June 30, 2019 | Dec. 31, 2018 | ||||||
(in millions) | |||||||||
CET1: | |||||||||
Common shareholders’ equity | $ | 37,578 | $ | 37,991 | $ | 37,096 | |||
Adjustments for: | |||||||||
Goodwill and intangible assets (a) | (18,590 | ) | (18,716 | ) | (18,806 | ) | |||
Net pension fund assets | (326 | ) | (331 | ) | (320 | ) | |||
Equity method investments | (361 | ) | (358 | ) | (361 | ) | |||
Deferred tax assets | (44 | ) | (45 | ) | (42 | ) | |||
Other | (61 | ) | (7 | ) | — | ||||
Total CET1 | 18,196 | 18,534 | 17,567 | ||||||
Other Tier 1 capital: | |||||||||
Preferred stock | 3,542 | 3,542 | 3,542 | ||||||
Other | (61 | ) | (61 | ) | (65 | ) | |||
Total Tier 1 capital | $ | 21,677 | $ | 22,015 | $ | 21,044 | |||
Tier 2 capital: | |||||||||
Subordinated debt | $ | 1,250 | $ | 1,250 | $ | 1,250 | |||
Allowance for credit losses | 224 | 241 | 252 | ||||||
Other | (6 | ) | (6 | ) | (10 | ) | |||
Total Tier 2 capital – Standardized Approach | 1,468 | 1,485 | 1,492 | ||||||
Excess of expected credit losses | — | 41 | 65 | ||||||
Less: Allowance for credit losses | 224 | 241 | 252 | ||||||
Total Tier 2 capital – Advanced Approaches | $ | 1,244 | $ | 1,285 | $ | 1,305 | |||
Total capital: | |||||||||
Standardized Approach | $ | 23,145 | $ | 23,500 | $ | 22,536 | |||
Advanced Approaches | $ | 22,921 | $ | 23,300 | $ | 22,349 | |||
Risk-weighted assets: | |||||||||
Standardized Approach | $ | 148,399 | $ | 149,226 | $ | 149,618 | |||
Advanced Approaches: | |||||||||
Credit Risk | $ | 98,553 | $ | 94,304 | $ | 92,917 | |||
Market Risk | 3,356 | 3,241 | 3,454 | ||||||
Operational Risk | 62,263 | 69,025 | 68,300 | ||||||
Total Advanced Approaches | $ | 164,172 | $ | 166,570 | $ | 164,671 | |||
Average assets for Tier 1 leverage ratio | $ | 331,241 | $ | 322,879 | $ | 319,007 | |||
Total leverage exposure for SLR | $ | 359,023 | $ | 350,747 | $ | 347,943 | |||
(a) | Reduced by deferred tax liabilities associated with intangible assets and tax deductible goodwill. |
The table below presents the factors that impacted CET1 capital.
CET1 generation | 3Q19 | ||
(in millions) | |||
CET1 – Beginning of period | $ | 18,534 | |
Net income applicable to common shareholders of The Bank of New York Mellon Corporation | 1,002 | ||
Goodwill and intangible assets, net of related deferred tax liabilities | 126 | ||
Gross CET1 generated | 1,128 | ||
Capital deployed: | |||
Common stock dividend payments | (294 | ) | |
Common stock repurchases | (981 | ) | |
Total capital deployed | (1,275 | ) | |
Other comprehensive income: | |||
Foreign currency translation | (273 | ) | |
Unrealized gain on assets available-for-sale | 64 | ||
Defined benefit plans | 10 | ||
Unrealized gain on cash flow hedges | (6 | ) | |
Total other comprehensive income | (205 | ) | |
Additional paid-in capital (a) | 65 | ||
Other additions (deductions): | |||
Net pension fund assets | 5 | ||
Deferred tax assets | 1 | ||
Embedded goodwill | (3 | ) | |
Other | (54 | ) | |
Total other deductions | (51 | ) | |
Net CET1 deployed | (338 | ) | |
CET1 – End of period | $ | 18,196 | |
(a) | Primarily related to stock awards, the exercise of stock options and stock issued for employee benefit plans. |
The following table shows the impact on the consolidated capital ratios at Sept. 30, 2019 of a $100 million increase or decrease in common equity, or a $1 billion increase or decrease in RWAs, quarterly average assets or total leverage exposure.
Sensitivity of consolidated capital ratios at Sept. 30, 2019 | ||||
Increase or decrease of | ||||
(in basis points) | $100 million in common equity | $1 billion in RWA, quarterly average assets or total leverage exposure | ||
CET1: | ||||
Standardized Approach | 7 | bps | 8 | bps |
Advanced Approaches | 6 | 7 | ||
Tier 1 capital: | ||||
Standardized Approach | 7 | 10 | ||
Advanced Approaches | 6 | 8 | ||
Total capital: | ||||
Standardized Approach | 7 | 11 | ||
Advanced Approaches | 6 | 9 | ||
Tier 1 leverage | 3 | 2 | ||
SLR | 3 | 2 | ||
BNY Mellon 35
Capital ratios vary depending on the size of the balance sheet at period end and the levels and types of investments in assets. The balance sheet size fluctuates from period to period 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.
Total Loss-Absorbing Capacity (“TLAC”)
The final TLAC rule establishing external TLAC, external long-term debt (“LTD”) and related requirements for U.S. G-SIBs, including BNY Mellon, at the top-tier holding company level became effective on Jan. 1, 2019.
The following summarizes the minimum requirements for BNY Mellon’s external TLAC and external LTD ratios, plus currently applicable buffers.
As a % of RWAs (a) | As a % of total leverage exposure | |
Eligible external TLAC ratios | Regulatory minimum of 18% plus a buffer (b) equal to the sum of 2.5%, the method 1 G-SIB surcharge (currently 1%), and the countercyclical capital buffer, if any | Regulatory minimum of 7.5% plus a buffer (c) equal to 2% |
Eligible external LTD ratios | Regulatory minimum of 6% plus the greater of the method 1 or method 2 G-SIB surcharge (currently 1.5%) | 4.5% |
(a) RWA is the greater of Standardized and Advanced Approaches.
(b) Buffer to be met using only CET1.
(c) | Buffer to be met using only Tier 1 capital. |
External TLAC consists of the Parent’s Tier 1 capital and eligible unsecured long-term debt issued by it that has a remaining term to maturity of at least one year and satisfies certain other conditions. Eligible long-term debt consists of the unpaid principal balance of eligible unsecured debt securities, subject to haircuts for amounts due to be paid within two years, and satisfy certain other conditions. Debt issued prior to Dec. 31, 2016 has been permanently grandfathered to the extent these instruments otherwise would be ineligible only due to containing
impermissible acceleration rights or being governed by foreign law.
The following table presents our external TLAC and external LTD ratios.
TLAC and LTD ratios | Sept. 30, 2019 | |||||
Minimum required | Minimum ratios with buffers | |||||
Ratios | ||||||
Eligible external TLAC: | ||||||
As a percentage of RWA | 18.0 | % | 21.5 | % | 26.5 | % |
As a percentage of total leverage exposure | 7.5 | % | 9.5 | % | 12.1 | % |
Eligible external LTD: | ||||||
As a percentage of RWA | 7.5 | % | N/A | 11.8 | % | |
As a percentage of total leverage exposure | 4.5 | % | N/A | 5.4 | % | |
If BNY Mellon maintains risk-based ratio or leverage TLAC measures above the minimum required level, but with a risk-based ratio or leverage below the minimum level with buffers, we will face constraints on dividends, equity repurchases and discretionary executive compensation based on the amount of the shortfall.
Trading activities and risk management
Our trading activities are focused on acting as a market-maker for our customers, facilitating customer trades and risk mitigating hedging in compliance with the Volcker Rule. The risk from market-making activities for customers is managed by our traders and limited in total exposure through a system of position limits, value-at-risk (“VaR”) methodology and other market sensitivity measures. VaR is the potential loss in value due to adverse market movements over a defined time horizon with a specified confidence level. The calculation of our VaR used by management and presented below assumes a one-day holding period, utilizes a 99% confidence level and incorporates non-linear product characteristics. VaR facilitates comparisons across portfolios of different risk characteristics. VaR also captures the diversification of aggregated risk at the firm-wide level.
36 BNY Mellon
VaR represents a key risk management measure and it is important to note the inherent limitations to VaR, which include:
• | VaR does not estimate potential losses over longer time horizons where moves may be extreme; |
• | VaR does not take account of potential variability of market liquidity; and |
• | Previous moves in market risk factors may not produce accurate predictions of all future market moves. |
See Note 18 of the Notes to Consolidated Financial Statements for additional information on the VaR methodology.
The following tables indicate the calculated VaR amounts for the trading portfolio for the designated periods using the historical simulation VaR model.
VaR (a) | 3Q19 | Sept. 30, 2019 | ||||||||||
(in millions) | Average | Minimum | Maximum | |||||||||
Interest rate | $ | 4.7 | $ | 3.7 | $ | 7.3 | $ | 4.3 | ||||
Foreign exchange | 3.0 | 1.8 | 5.1 | 3.3 | ||||||||
Equity | 0.9 | 0.6 | 1.2 | 1.1 | ||||||||
Credit | 1.0 | 0.5 | 2.0 | 1.6 | ||||||||
Diversification | (3.5 | ) | N/M | N/M | (3.6 | ) | ||||||
Overall portfolio | 6.1 | 4.0 | 8.2 | 6.7 | ||||||||
VaR (a) | 2Q19 | June 30, 2019 | ||||||||||
(in millions) | Average | Minimum | Maximum | |||||||||
Interest rate | $ | 4.2 | $ | 3.3 | $ | 5.2 | $ | 3.8 | ||||
Foreign exchange | 2.7 | 1.9 | 4.2 | 2.3 | ||||||||
Equity | 0.8 | 0.6 | 0.9 | 0.7 | ||||||||
Credit | 0.8 | 0.5 | 1.2 | 0.9 | ||||||||
Diversification | (3.2 | ) | N/M | N/M | (3.2 | ) | ||||||
Overall portfolio | 5.3 | 4.0 | 6.9 | 4.5 | ||||||||
VaR (a) | 3Q18 | Sept. 30, 2018 | ||||||||||
(in millions) | Average | Minimum | Maximum | |||||||||
Interest rate | $ | 3.6 | $ | 3.0 | $ | 5.0 | $ | 3.7 | ||||
Foreign exchange | 3.6 | 2.9 | 5.6 | 5.5 | ||||||||
Equity | 0.5 | — | 0.8 | 0.1 | ||||||||
Credit | 0.8 | 0.6 | 1.1 | 0.9 | ||||||||
Diversification | (3.8 | ) | N/M | N/M | (4.6 | ) | ||||||
Overall portfolio | 4.7 | 3.6 | 6.3 | 5.6 | ||||||||
VaR (a) | YTD19 | ||||||||
(in millions) | Average | Minimum | Maximum | ||||||
Interest rate | $ | 4.3 | $ | 3.2 | $ | 7.3 | |||
Foreign exchange | 3.2 | 1.8 | 6.4 | ||||||
Equity | 0.8 | 0.6 | 1.2 | ||||||
Credit | 0.8 | 0.4 | 2.0 | ||||||
Diversification | (3.3 | ) | N/M | N/M | |||||
Overall portfolio | 5.8 | 4.0 | 9.5 | ||||||
VaR (a) | YTD18 | ||||||||
(in millions) | Average | Minimum | Maximum | ||||||
Interest rate | $ | 4.0 | $ | 3.0 | $ | 5.5 | |||
Foreign exchange | 4.2 | 2.9 | 8.3 | ||||||
Equity | 0.7 | — | 1.2 | ||||||
Credit | 1.0 | 0.6 | 2.6 | ||||||
Diversification | (4.4 | ) | N/M | N/M | |||||
Overall portfolio | 5.5 | 3.6 | 10.4 | ||||||
(a) | VaR exposure does not include the impact of the Company’s consolidated investment management funds and seed capital investments. |
N/M - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a minimum and maximum portfolio diversification effect.
The interest rate component of VaR represents instruments whose values predominantly vary with the level or volatility of interest rates. These instruments include, but are not limited to, sovereign debt, swaps, swaptions, forward rate agreements, exchange-traded futures and options, and other interest rate derivative products.
The foreign exchange component of VaR represents instruments whose values predominantly vary with the level or volatility of currency exchange rates or interest rates. These instruments include, but are not limited to, currency balances, spot and forward transactions, currency options, exchange-traded futures and options, and other currency derivative products.
The equity component of VaR consists of instruments that represent an ownership interest in the form of domestic and foreign common stock or other equity-linked instruments. These instruments include, but are not limited to, common stock, exchange-traded funds, preferred stock, listed equity options (puts and calls), OTC equity options, equity total return swaps, equity index futures and other equity derivative products.
The credit component of VaR represents instruments whose values predominantly vary with the creditworthiness of counterparties. These instruments include, but are not limited to, credit derivatives (credit default swaps and exchange-traded credit index instruments), exposures from corporate credit spreads and mortgage prepayments. Credit derivatives are used to hedge various credit exposures.
BNY Mellon 37
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 2019, interest rate risk generated 49% of average gross VaR, foreign exchange risk generated 31% of average gross VaR, equity risk generated 9% of average gross VaR and credit risk generated 11% of average gross VaR. During the third quarter of 2019, our daily trading loss did not exceed our calculated VaR amount of the overall portfolio.
The following table of total daily trading revenue or loss illustrates the number of trading days in which our trading revenue or loss fell within particular ranges during the past five quarters.
Distribution of trading revenue (loss) (a) | |||||||||||
Quarter ended | |||||||||||
(dollars in millions) | Sept. 30, 2019 | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | ||||||
Revenue range: | Number of days | ||||||||||
Less than $(2.5) | 2 | — | 1 | 1 | — | ||||||
$(2.5) – $0 | 7 | 4 | 5 | 7 | 6 | ||||||
$0 – $2.5 | 26 | 30 | 22 | 17 | 30 | ||||||
$2.5 – $5.0 | 22 | 23 | 23 | 24 | 20 | ||||||
More than $5.0 | 7 | 7 | 10 | 13 | 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 $10.2 billion at Sept. 30, 2019 and $7.0 billion at Dec. 31, 2018.
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 $4.8 billion at Sept. 30, 2019 and $3.5 billion at Dec. 31, 2018.
Under our fair value methodology for derivative contracts, an initial “risk-neutral” valuation is performed on each position assuming time-
discounting based on a AA credit curve. In addition, we consider credit risk in arriving at the fair value of our derivatives.
We reflect external credit ratings as well as observable credit default swap spreads for both ourselves and our counterparties when measuring the fair value of our derivative positions. Accordingly, the valuation of our derivative positions is sensitive to the current changes in our own credit spreads, as well as those of our counterparties.
At Sept. 30, 2019, our OTC derivative assets, including those in hedging relationships, of $3.5 billion included a credit valuation adjustment (“CVA”) deduction of $31 million. Our OTC derivative liabilities, including those in hedging relationships, of $3.1 billion included a debit valuation adjustment (“DVA”) of $1 million related to our own credit spread. Net of hedges, the CVA decreased by $1 million and the DVA was unchanged in the third quarter of 2019, which increased foreign exchange and other trading revenue by $1 million. The net impact increased foreign exchange and other trading revenue by $1 million in the second quarter of 2019 and decreased foreign exchange and other trading revenue by $1 million in the third quarter of 2018.
The table below summarizes the risk ratings for our foreign exchange and interest rate derivative counterparty credit exposure during the past five quarters. This information indicates the degree of risk to which we are exposed. Significant changes in ratings classifications for our foreign exchange and other trading activity could result in increased risk for us.
Foreign exchange and other trading counterparty risk rating profile (a) | ||||||||||
Quarter ended | ||||||||||
Sept. 30, 2019 | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | ||||||
Rating: | ||||||||||
AAA to AA- | 55 | % | 54 | % | 49 | % | 50 | % | 48 | % |
A+ to A- | 24 | 26 | 28 | 28 | 30 | |||||
BBB+ to BBB- | 16 | 17 | 20 | 18 | 19 | |||||
BB+ and lower (b) | 5 | 3 | 3 | 4 | 3 | |||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
(a) | Represents credit rating agency equivalent of internal credit ratings. |
(b) | Non-investment grade. |
38 BNY Mellon
Asset/liability management
Our diversified business activities include processing securities, accepting deposits, investing in securities, lending, raising money as needed to fund assets and other transactions. The market risks from these activities include interest rate risk and foreign exchange risk. Our primary market risk is exposure to movements in U.S. dollar interest rates and certain foreign currency interest rates. We actively manage interest rate sensitivity and use earnings simulation and discounted cash flow models to identify interest rate exposures.
An earnings simulation model is the primary tool used to assess changes in pre-tax net interest revenue. The model incorporates management’s assumptions regarding interest rates, market spreads, changes in the prepayment behavior of loans and securities and the impact of derivative financial instruments used for interest rate risk management purposes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior and are inherently uncertain. Actual results may differ materially from projected results due to timing, magnitude and frequency of interest rate changes, and changes in market conditions and management’s strategies, among other factors.
In the table below, we use the earnings simulation model to run various interest rate ramp scenarios from a baseline scenario. The interest rate ramp scenarios examine the impact of large interest rate movements. In each scenario, all currencies’ interest rates are shifted higher or lower. The baseline scenario is based on our quarter-end balance sheet and the spot yield curve. The 100 basis point ramp scenario assumes rates change 25 basis points above or below the yield curve in each of the next four quarters and the 200 basis point ramp scenario assumes a 50 basis point per quarter change. 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 net interest revenue sensitivity methodology assumes static deposit levels and also assumes that no management actions will be taken to mitigate the effects of interest rate changes.
The following table shows net interest revenue sensitivity for BNY Mellon.
Estimated changes in net interest revenue (in millions) | Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | ||||||
Up 200 bps parallel rate ramp vs. baseline (a) | $ | 187 | $ | 380 | $ | 362 | |||
Up 100 bps parallel rate ramp vs. baseline (a) | 74 | 200 | 180 | ||||||
Down 100 bps parallel rate ramp vs. baseline (a) | (45 | ) | (179 | ) | (140 | ) | |||
Long-term up 50 bps, short-term unchanged (b) | 115 | 171 | 83 | ||||||
Long-term down 50 bps, short-term unchanged (b) | (119 | ) | (192 | ) | (96 | ) | |||
(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. |
The change in the sensitivity compared with June 30, 2019 was primarily driven by the impact of lower rates and balance sheet mix changes, including the fixed versus floating rate exposure of the investment portfolio.
To illustrate the net interest revenue sensitivity to deposit runoff, we note that a $5 billion instantaneous reduction of U.S. dollar denominated noninterest-bearing deposits would reduce the net interest revenue sensitivity results in the ramp up 100 basis point and 200 basis point scenarios in the table above by approximately $120 million and approximately $150 million, respectively. The impact would be smaller if the runoff was assumed to be a mixture of interest-bearing and noninterest-bearing deposits.
For a discussion of factors impacting the growth or contraction of deposits, see “Risk Factors - Our business, financial condition and results of operations could be adversely affected if we do not effectively manage our liquidity,” in our 2018 Annual Report.
Off-balance sheet arrangements
Off-balance sheet arrangements discussed in this section are limited to guarantees, retained or contingent interests and obligations arising out of unconsolidated variable interest entities (“VIEs”). For BNY Mellon, these items include certain guarantees. Guarantees include SBLCs issued as part of our corporate banking business and securities lending indemnifications issued as part of our Investment Services business. See Note 19 of the Notes to Consolidated Financial Statements for a further discussion of our off-balance sheet arrangements.
BNY Mellon 39
Supplemental information - Explanation of GAAP and Non-GAAP financial measures
BNY Mellon has included in this Form 10-Q certain Non-GAAP financial measures on a tangible basis as a supplement to generally accepted accounting principles (“GAAP”) information, which exclude goodwill and intangible assets, net of deferred tax liabilities. BNY Mellon believes that the return on tangible common equity is additional useful information for investors because it presents a measure of those assets that can generate income, and the tangible book value per common share is additional useful information because it presents the level of tangible assets in relation to shares of common stock outstanding.
The presentation of the growth rates of investment management and performance fees on a constant
currency basis permits investors to assess the significance of changes in foreign currency exchange rates. Growth rates on a constant currency basis were determined by applying the current period foreign currency exchange rates to the prior period revenue. BNY Mellon believes that this presentation, as a supplement to GAAP information, gives investors a clearer picture of the related revenue results without the variability caused by fluctuations in foreign currency exchange rates.
BNY Mellon has also included the operating margin for the Investment Management business net of distribution and servicing expense that was passed to third parties who distribute or service our managed funds. BNY Mellon believes that this measure is useful when evaluating the performance of the Investment Management business relative to industry competitors.
The following table presents the reconciliation of the return on common equity and tangible common equity.
Return on common equity and tangible common equity reconciliation | |||||||||||||||
(dollars in millions) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP | $ | 1,002 | $ | 969 | $ | 1,075 | $ | 2,881 | $ | 3,265 | |||||
Add: Amortization of intangible assets | 30 | 30 | 48 | 89 | 145 | ||||||||||
Less: Tax impact of amortization of intangible assets | 7 | 7 | 11 | 21 | 34 | ||||||||||
Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation, excluding amortization of intangible assets – Non-GAAP | $ | 1,025 | $ | 992 | $ | 1,112 | $ | 2,949 | $ | 3,376 | |||||
Average common shareholders’ equity | $ | 37,597 | $ | 37,487 | $ | 38,036 | $ | 37,392 | $ | 37,795 | |||||
Less: Average goodwill | 17,267 | 17,343 | 17,391 | 17,328 | 17,492 | ||||||||||
Average intangible assets | 3,141 | 3,178 | 3,283 | 3,176 | 3,340 | ||||||||||
Add: Deferred tax liability – tax deductible goodwill | 1,103 | 1,094 | 1,066 | 1,103 | 1,066 | ||||||||||
Deferred tax liability – intangible assets | 679 | 687 | 699 | 679 | 699 | ||||||||||
Average tangible common shareholders’ equity – Non-GAAP | $ | 18,971 | $ | 18,747 | $ | 19,127 | $ | 18,670 | $ | 18,728 | |||||
Return on common equity (annualized) – GAAP | 10.6 | % | 10.4 | % | 11.2 | % | 10.3 | % | 11.6 | % | |||||
Return on tangible common equity (annualized) – Non-GAAP | 21.4 | % | 21.2 | % | 23.1 | % | 21.1 | % | 24.1 | % | |||||
40 BNY Mellon
The following table presents the reconciliation of book value and tangible book value per common share.
Book value and tangible book value per common share reconciliation | Sept. 30, 2019 | June 30, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | ||||||||
(dollars in millions, except common shares) | ||||||||||||
BNY Mellon shareholders’ equity at period end – GAAP | $ | 41,120 | $ | 41,533 | $ | 40,638 | $ | 41,560 | ||||
Less: Preferred stock | 3,542 | 3,542 | 3,542 | 3,542 | ||||||||
BNY Mellon common shareholders’ equity at period end – GAAP | 37,578 | 37,991 | 37,096 | 38,018 | ||||||||
Less: Goodwill | 17,248 | 17,337 | 17,350 | 17,390 | ||||||||
Intangible assets | 3,124 | 3,160 | 3,220 | 3,258 | ||||||||
Add: Deferred tax liability – tax deductible goodwill | 1,103 | 1,094 | 1,072 | 1,066 | ||||||||
Deferred tax liability – intangible assets | 679 | 687 | 692 | 699 | ||||||||
BNY Mellon tangible common shareholders’ equity at period end – Non-GAAP | $ | 18,988 | $ | 19,275 | $ | 18,290 | $ | 19,135 | ||||
Period-end common shares outstanding (in thousands) | 922,199 | 942,662 | 960,426 | 988,777 | ||||||||
Book value per common share – GAAP | $ | 40.75 | $ | 40.30 | $ | 38.63 | $ | 38.45 | ||||
Tangible book value per common share – Non-GAAP | $ | 20.59 | $ | 20.45 | $ | 19.04 | $ | 19.35 | ||||
The following table presents the impact of changes in foreign currency exchange rates on our consolidated investment management and performance fees.
Constant currency reconciliation – Consolidated | 3Q19 vs. | |||||||
(dollars in millions) | 3Q19 | 3Q18 | 3Q18 | |||||
Investment management and performance fees – GAAP (a) | $ | 832 | $ | 912 | (9 | )% | ||
Impact of changes in foreign currency exchange rates | — | (14 | ) | |||||
Adjusted investment management and performance fees – Non-GAAP | $ | 832 | $ | 898 | (7 | )% | ||
(a) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
The following table presents the impact of changes in foreign currency exchange rates on investment management and performance fees reported in the Investment Management business.
Constant currency reconciliation – Investment Management business | 3Q19 vs. | |||||||
(dollars in millions) | 3Q19 | 3Q18 | 3Q18 | |||||
Investment management and performance fees – GAAP | $ | 828 | $ | 909 | (9 | )% | ||
Impact of changes in foreign currency exchange rates | — | (14 | ) | |||||
Adjusted investment management and performance fees – Non-GAAP | $ | 828 | $ | 895 | (7 | )% | ||
The following table presents the reconciliation of the pre-tax operating margin for the Investment Management business.
Pre-tax operating margin reconciliation - Investment Management business | |||||||||||||||||||||
(dollars in millions) | 3Q19 | 2Q19 | 1Q19 | 4Q18 | 3Q18 | YTD19 | YTD18 | ||||||||||||||
Income before income taxes – GAAP | $ | 300 | $ | 265 | $ | 269 | $ | 247 | $ | 316 | $ | 834 | $ | 1,016 | |||||||
Total revenue – GAAP | $ | 890 | $ | 917 | $ | 939 | $ | 963 | $ | 1,015 | $ | 2,746 | $ | 3,121 | |||||||
Less: Distribution and servicing expense | 98 | 94 | 91 | 95 | 99 | 283 | 312 | ||||||||||||||
Adjusted total revenue, net of distribution and servicing expense – Non-GAAP | $ | 792 | $ | 823 | $ | 848 | $ | 868 | $ | 916 | $ | 2,463 | $ | 2,809 | |||||||
Pre-tax operating margin – GAAP (a) | 34 | % | 29 | % | 29 | % | 26 | % | 31 | % | 30 | % | 33 | % | |||||||
Adjusted pre-tax operating margin, net of distribution and servicing expense – Non-GAAP (a) | 38 | % | 32 | % | 32 | % | 29 | % | 35 | % | 34 | % | 36 | % | |||||||
(a) | Income before income taxes divided by total revenue. |
BNY Mellon 41
Recent accounting and regulatory developments
Recently issued accounting standards
The following Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) has not yet been adopted.
ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an ASU, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU introduces a new current expected credit losses model, which will apply to financial assets subject to credit losses and measured at amortized cost, including held-to-maturity securities and certain off-balance sheet credit exposures. The guidance will also change current practice for the impairment model for available-for-sale debt securities. The available-for-sale debt securities model will require the use of an allowance to record estimated credit losses and subsequent recoveries.
The standard requires a cumulative effect of initial application to be recognized in retained earnings at the date of initial application. We plan to adopt the new standard on Jan. 1, 2020. BNY Mellon has developed expected credit loss models and approaches that include consideration of multiple forecast scenarios and other methodologies, and our focus for the remainder of 2019 is model validation, business process refinements and continued parallel testing to ensure the expected credit losses are calculated in accordance with the standard. We are continuing to assess the impact of the standard on our consolidated financial statements, disclosures and internal controls. Based on the current economic environment and our current portfolio composition, we expect a reduction in the allowance for credit losses. The adoption impact will depend on the size, composition and remaining expected lives of financial instruments, the macroeconomic conditions and forecasts at the time of adoption, as well as any refinements to our models, methodologies and other key assumptions.
Recent regulatory developments
For a summary of additional regulatory matters relevant to our operations, see “Supervision and
Regulation” in our 2018 Annual Report and “Recent regulatory developments” in our 2019 Form 10-Qs. The following discussions summarize certain regulatory developments that may affect BNY Mellon, the impact of which we are still evaluating.
Revisions to Resolution Planning Requirements
In October 2019, the Board of Governors of the Federal Reserve System (“FRB”) and Federal Deposit Insurance Corporation (“FDIC”) issued a final rule modifying certain resolution plan requirements. The final rule allows U.S. G-SIBs, such as BNY Mellon, to file alternating full and, more limited, targeted resolution plans every two years. BNY Mellon’s next targeted resolution plan is due on July 1, 2021, followed by a full resolution plan submission due on July 1, 2023. The final rule does not generally modify the components or informational requirements of full resolution plans. See “Supervision and Regulation - Recovery and Resolution” in our 2018 Annual Report for additional information.
Revisions to Certain Stress Testing Requirements
In October 2019, the FRB finalized its previously proposed revisions to the enhanced prudential standards regulations, which removed the requirement for BNY Mellon and other affected BHCs to conduct a mid-cycle company-run stress test. BNY Mellon will continue to be required to conduct an annual company-run stress test. The FRB also eliminated the adverse scenario from supervisory and company-run stress tests to which BNY Mellon and other affected BHCs are subject. Both changes will be effective with the 2020 stress-test cycle. See “Supervision and Regulation - Capital Planning and Stress Testing” in our 2018 Annual Report for additional information.
Revisions to the Volcker Rule
Over the course of August, September and October 2019, the FRB, the Office of the Comptroller of the Currency (“OCC”), FDIC, the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) issued final rules containing revisions to the Volcker Rule. The most impactful aspects of the revisions with respect to BNY Mellon concern the compliance requirements applicable to banks with moderate exposure to trading assets and trading liabilities. Banks with less
42 BNY Mellon
than $20 billion and more than $1 billion of trading assets and trading liabilities will now be subject to a compliance program tailored to their moderate exposure to trading. Specifically, among other revisions, such “moderate trading” banks will not be required to file an annual CEO attestation and will not be required to file quantitative metrics. Furthermore, the comprehensive six-pillar compliance program associated with the Volcker Rule will no longer apply to “moderate trading” banks; rather, such banks are permitted to tailor their compliance programs to the size and nature of their activities. BNY Mellon expects to be treated as a “moderate trading” bank under the revised Volcker Rule.
The final revisions include many other changes to the existing rule, most of which are to the proprietary trading section of the regulations. They do not include the proposed revision of definitions applicable to the prohibition on proprietary trading, which would have made all financial instruments accounted for at fair value on a recurring basis subject to the prohibition. Rather, the revisions are likely to result in fewer financial instruments and other transactions being subjected to the prohibitions. Further, compliance with key exemptions is likely to be less challenging under the revised regulations. The revisions are effective on Jan. 1, 2020; institutions must comply by Jan. 1, 2021 but may elect to comply as soon as the revisions are effective. For more information regarding the Volcker Rule, see “Supervision and Regulation - Volcker Rule” in our 2018 Annual Report.
Website information
Our website is www.bnymellon.com. We currently make available the following information under the Investor Relations portion of our website. With respect to filings with the SEC, we post such information as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.
• | All of our SEC filings, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, as well as proxy statements and SEC Forms 3, 4 and 5; |
• | Financial statements and footnotes prepared using eXtensible Business Reporting Language (“XBRL”); |
• | Our earnings materials and selected management conference calls and presentations; |
• | Other regulatory disclosures, including: Pillar 3 Disclosures (and Market Risk Disclosure contained therein); Liquidity Coverage Ratio Disclosures; Federal Financial Institutions Examination Council - Consolidated Reports of Condition and Income for a Bank With Domestic and Foreign Offices; Consolidated Financial Statements for Bank Holding Companies; and the Dodd-Frank Act Stress Test Results for BNY Mellon and The Bank of New York Mellon; and |
• | Our Corporate Governance Guidelines, Amended and Restated By-laws, Directors’ Code of Conduct and the Charters of the Audit, Finance, Corporate Governance, Nominating and Social Responsibility, Human Resources and Compensation, Risk and Technology Committees of our Board of Directors. |
We may use our website, our Twitter account (twitter.com/BNYMellon) and other social media channels as additional means of disclosing information to the public. The information disclosed through those channels may be considered to be material. The contents of our website or social media channels referenced herein are not incorporated by reference into this Quarterly Report on Form 10-Q.
BNY Mellon 43
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, 2019 | June 30, 2019 | Sept. 30, 2018 | Sept. 30, 2019 | Sept. 30, 2018 | |||||||||||
Fee and other revenue | ||||||||||||||||
Investment services fees: | ||||||||||||||||
Asset servicing fees | $ | 1,152 | $ | 1,141 | $ | 1,157 | $ | 3,415 | $ | 3,482 | ||||||
Clearing services fees (a) | 419 | 410 | 393 | 1,227 | 1,218 | |||||||||||
Issuer services fees | 324 | 291 | 287 | 866 | 813 | |||||||||||
Treasury services fees | 140 | 140 | 137 | 412 | 415 | |||||||||||
Total investment services fees (a) | 2,035 | 1,982 | 1,974 | 5,920 | 5,928 | |||||||||||
Investment management and performance fees (a) | 832 | 833 | 912 | 2,506 | 2,763 | |||||||||||
Foreign exchange and other trading revenue | 150 | 166 | 155 | 486 | 551 | |||||||||||
Financing-related fees | 49 | 50 | 52 | 150 | 157 | |||||||||||
Distribution and servicing | 33 | 31 | 34 | 95 | 104 | |||||||||||
Investment and other income | 30 | 43 | 41 | 108 | 193 | |||||||||||
Total fee revenue | 3,129 | 3,105 | 3,168 | 9,265 | 9,696 | |||||||||||
Net securities (losses) gains — including other-than-temporary impairment | (1 | ) | 8 | — | 8 | (48 | ) | |||||||||
Noncredit-related portion of other-than-temporary impairment (recognized in other comprehensive income) | — | 1 | — | 1 | — | |||||||||||
Net securities (losses) gains | (1 | ) | 7 | — | 7 | (48 | ) | |||||||||
Total fee and other revenue | 3,128 | 3,112 | 3,168 | 9,272 | 9,648 | |||||||||||
Operations of consolidated investment management funds | ||||||||||||||||
Investment income | 4 | 10 | 10 | 40 | 12 | |||||||||||
Interest of investment management fund note holders | 1 | — | — | 1 | 1 | |||||||||||
Income from consolidated investment management funds | 3 | 10 | 10 | 39 | 11 | |||||||||||
Net interest revenue | ||||||||||||||||
Interest revenue | 1,942 | 1,965 | 1,634 | 5,827 | 4,568 | |||||||||||
Interest expense | 1,212 | 1,163 | 743 | 3,454 | 1,842 | |||||||||||
Net interest revenue | 730 | 802 | 891 | 2,373 | 2,726 | |||||||||||
Total revenue | 3,861 | 3,924 | 4,069 | 11,684 | 12,385 | |||||||||||
Provision for credit losses | (16 | ) | (8 | ) | (3 | ) | (17 | ) | (11 | ) | ||||||
Noninterest expense | ||||||||||||||||
Staff | 1,479 | 1,421 | 1,478 | 4,424 | 4,543 | |||||||||||
Professional, legal and other purchased services | 316 | 337 | 332 | 978 | 951 | |||||||||||
Software and equipment | 309 | 304 | 262 | 896 | 762 | |||||||||||
Net occupancy | 138 | 138 | 139 | 413 | 434 | |||||||||||
Sub-custodian and clearing | 111 | 115 | 106 | 331 | 335 | |||||||||||
Distribution and servicing | 97 | 94 | 99 | 282 | 311 | |||||||||||
Business development | 47 | 56 | 51 | 148 | 164 | |||||||||||
Bank assessment charges | 31 | 31 | 49 | 93 | 148 | |||||||||||
Amortization of intangible assets | 30 | 30 | 48 | 89 | 145 | |||||||||||
Other | 32 | 121 | 174 | 282 | 431 | |||||||||||
Total noninterest expense | 2,590 | 2,647 | 2,738 | 7,936 | 8,224 | |||||||||||
Income | ||||||||||||||||
Income before income taxes | 1,287 | 1,285 | 1,334 | 3,765 | 4,172 | |||||||||||
Provision for income taxes | 246 | 264 | 220 | 747 | 788 | |||||||||||
Net income | 1,041 | 1,021 | 1,114 | 3,018 | 3,384 | |||||||||||
Net (income) loss attributable to noncontrolling interests (includes $(3), $(4), $(3), $(17) and $1 related to consolidated investment management funds, respectively) | (3 | ) | (4 | ) | (3 | ) | (17 | ) | 1 | |||||||
Net income applicable to shareholders of The Bank of New York Mellon Corporation | 1,038 | 1,017 | 1,111 | 3,001 | 3,385 | |||||||||||
Preferred stock dividends | (36 | ) | (48 | ) | (36 | ) | (120 | ) | (120 | ) | ||||||
Net income applicable to common shareholders of The Bank of New York Mellon Corporation | $ | 1,002 | $ | 969 | $ | 1,075 | $ | 2,881 | $ | 3,265 | ||||||
(a) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
44 BNY Mellon
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, 2019 | June 30, 2019 | Sept. 30, 2018 | Sept. 30, 2019 | Sept. 30, 2018 | |||||||||||
Net income applicable to common shareholders of The Bank of New York Mellon Corporation | $ | 1,002 | $ | 969 | $ | 1,075 | $ | 2,881 | $ | 3,265 | ||||||
Less: Earnings allocated to participating securities | 3 | 4 | 7 | 12 | 22 | |||||||||||
Net income applicable to common shareholders of The Bank of New York Mellon Corporation after required adjustment for the calculation of basic and diluted earnings per common share | $ | 999 | $ | 965 | $ | 1,068 | $ | 2,869 | $ | 3,243 | ||||||
Average common shares and equivalents outstanding of The Bank of New York Mellon Corporation | Quarter ended | Year-to-date | |||||||||
(in thousands) | Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | Sept. 30, 2019 | Sept. 30, 2018 | ||||||
Basic | 933,264 | 951,281 | 999,808 | 949,035 | 1,008,967 | ||||||
Common stock equivalents | 3,811 | 3,891 | 6,451 | 4,484 | 6,967 | ||||||
Less: Participating securities | (1,398 | ) | (1,244 | ) | (2,594 | ) | (1,643 | ) | (2,692 | ) | |
Diluted | 935,677 | 953,928 | 1,003,665 | 951,876 | 1,013,242 | ||||||
Anti-dilutive securities (a) | 3,701 | 3,999 | 6,972 | 4,269 | 7,061 | ||||||
(a) | Represents stock options, restricted stock, restricted stock units and participating securities outstanding but not included in the computation of diluted average common shares because their effect would be anti-dilutive. |
Earnings per share applicable to common shareholders of The Bank of New York Mellon Corporation | Quarter ended | Year-to-date | ||||||||||||||
(in dollars) | Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | Sept. 30, 2019 | Sept. 30, 2018 | |||||||||||
Basic | $ | 1.07 | $ | 1.01 | $ | 1.07 | $ | 3.02 | $ | 3.21 | ||||||
Diluted | $ | 1.07 | $ | 1.01 | $ | 1.06 | $ | 3.01 | $ | 3.20 | ||||||
See accompanying unaudited Notes to Consolidated Financial Statements.
BNY Mellon 45
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Comprehensive Income Statement (unaudited)
Quarter ended | Year-to-date | |||||||||||||||
(in millions) | Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | Sept. 30, 2019 | Sept. 30, 2018 | |||||||||||
Net income | $ | 1,041 | $ | 1,021 | $ | 1,114 | $ | 3,018 | $ | 3,384 | ||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Foreign currency translation adjustments | (276 | ) | 10 | (60 | ) | (237 | ) | (216 | ) | |||||||
Unrealized gain (loss) on assets available-for-sale: | ||||||||||||||||
Unrealized gain (loss) arising during the period | 63 | 287 | (144 | ) | 589 | (483 | ) | |||||||||
Reclassification adjustment | 1 | (5 | ) | — | (5 | ) | 37 | |||||||||
Total unrealized gain (loss) on assets available-for-sale | 64 | 282 | (144 | ) | 584 | (446 | ) | |||||||||
Defined benefit plans: | ||||||||||||||||
Net (loss) arising during the period | — | — | — | (9 | ) | — | ||||||||||
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost | 10 | 10 | 18 | 30 | 51 | |||||||||||
Total defined benefit plans | 10 | 10 | 18 | 21 | 51 | |||||||||||
Net unrealized (loss) on cash flow hedges | (6 | ) | — | (4 | ) | (1 | ) | (20 | ) | |||||||
Total other comprehensive (loss) income, net of tax (a) | (208 | ) | 302 | (190 | ) | 367 | (631 | ) | ||||||||
Total comprehensive income | 833 | 1,323 | 924 | 3,385 | 2,753 | |||||||||||
Net (income) loss attributable to noncontrolling interests | (3 | ) | (4 | ) | (3 | ) | (17 | ) | 1 | |||||||
Other comprehensive loss (income) attributable to noncontrolling interests | 3 | — | 2 | 1 | 7 | |||||||||||
Comprehensive income applicable to shareholders of The Bank of New York Mellon Corporation | $ | 833 | $ | 1,319 | $ | 923 | $ | 3,369 | $ | 2,761 | ||||||
(a) | Other comprehensive (loss) income attributable to The Bank of New York Mellon Corporation shareholders was $(205) million for the quarter ended Sept. 30, 2019, $302 million for the quarter ended June 30, 2019, $(188) million for the quarter ended Sept. 30, 2018, $368 million for the nine months ended Sept. 30, 2019 and $(624) million for the nine months ended Sept. 30, 2018. |
See accompanying unaudited Notes to Consolidated Financial Statements.
46 BNY Mellon
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Balance Sheet (unaudited)
Sept. 30, 2019 | Dec. 31, 2018 | |||||
(dollars in millions, except per share amounts) | ||||||
Assets | ||||||
Cash and due from banks | $ | 6,718 | $ | 5,864 | ||
Interest-bearing deposits with the Federal Reserve and other central banks | 73,811 | 67,988 | ||||
Interest-bearing deposits with banks ($2,274 and $2,394 is restricted) | 15,417 | 14,148 | ||||
Federal funds sold and securities purchased under resale agreements | 43,723 | 46,795 | ||||
Securities: | ||||||
Held-to-maturity (fair value of $34,092 and $33,302) | 33,778 | 33,982 | ||||
Available-for-sale | 88,562 | 85,809 | ||||
Total securities | 122,340 | 119,791 | ||||
Trading assets | 10,180 | 7,035 | ||||
Loans | 54,881 | 56,564 | ||||
Allowance for loan losses | (127 | ) | (146 | ) | ||
Net loans | 54,754 | 56,418 | ||||
Premises and equipment | 3,149 | 1,832 | ||||
Accrued interest receivable | 596 | 671 | ||||
Goodwill | 17,248 | 17,350 | ||||
Intangible assets | 3,124 | 3,220 | ||||
Other assets (includes $674 and $742, at fair value) | 21,727 | 21,298 | ||||
Subtotal assets of operations | 372,787 | 362,410 | ||||
Assets of consolidated investment management funds, at fair value | 381 | 463 | ||||
Total assets | $ | 373,168 | $ | 362,873 | ||
Liabilities | ||||||
Deposits: | ||||||
Noninterest-bearing (principally U.S. offices) | $ | 55,452 | $ | 70,783 | ||
Interest-bearing deposits in U.S. offices | 90,946 | 74,904 | ||||
Interest-bearing deposits in non-U.S. offices | 103,262 | 93,091 | ||||
Total deposits | 249,660 | 238,778 | ||||
Federal funds purchased and securities sold under repurchase agreements | 11,796 | 14,243 | ||||
Trading liabilities | 4,756 | 3,479 | ||||
Payables to customers and broker-dealers | 18,364 | 19,731 | ||||
Commercial paper | 3,538 | 1,939 | ||||
Other borrowed funds | 820 | 3,227 | ||||
Accrued taxes and other expenses | 5,081 | 5,669 | ||||
Other liabilities (including allowance for lending-related commitments of $97 and $106, also includes $605 and $88, at fair value) | 9,796 | 5,774 | ||||
Long-term debt (includes $386 and $371, at fair value) | 27,872 | 29,163 | ||||
Subtotal liabilities of operations | 331,683 | 322,003 | ||||
Liabilities of consolidated investment management funds, at fair value | 15 | 2 | ||||
Total liabilities | 331,698 | 322,005 | ||||
Temporary equity | ||||||
Redeemable noncontrolling interests | 147 | 129 | ||||
Permanent equity | ||||||
Preferred stock – par value $0.01 per share; authorized 100,000,000 shares; issued 35,826 and 35,826 shares | 3,542 | 3,542 | ||||
Common stock – par value $0.01 per share; authorized 3,500,000,000 shares; issued 1,373,782,514 and 1,364,877,915 shares | 14 | 14 | ||||
Additional paid-in capital | 27,471 | 27,118 | ||||
Retained earnings | 30,789 | 28,652 | ||||
Accumulated other comprehensive loss, net of tax | (2,893 | ) | (3,171 | ) | ||
Less: Treasury stock of 451,583,637 and 404,452,246 common shares, at cost | (17,803 | ) | (15,517 | ) | ||
Total The Bank of New York Mellon Corporation shareholders’ equity | 41,120 | 40,638 | ||||
Nonredeemable noncontrolling interests of consolidated investment management funds | 203 | 101 | ||||
Total permanent equity | 41,323 | 40,739 | ||||
Total liabilities, temporary equity and permanent equity | $ | 373,168 | $ | 362,873 | ||
See accompanying unaudited Notes to Consolidated Financial Statements.
BNY Mellon 47
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Statement of Cash Flows (unaudited)
Nine months ended Sept. 30, | ||||||
(in millions) | 2019 | 2018 | ||||
Operating activities | ||||||
Net income | $ | 3,018 | $ | 3,384 | ||
Net (income) loss attributable to noncontrolling interests | (17 | ) | 1 | |||
Net income applicable to shareholders of The Bank of New York Mellon Corporation | 3,001 | 3,385 | ||||
Adjustments to reconcile net income to net cash (used for) provided by operating activities: | ||||||
Provision for credit losses | (17 | ) | (11 | ) | ||
Pension plan contributions | (30 | ) | (47 | ) | ||
Depreciation and amortization | 971 | 1,011 | ||||
Deferred tax (benefit) | (185 | ) | (401 | ) | ||
Net securities (gains) losses | (7 | ) | 48 | |||
Change in trading assets and liabilities | (1,880 | ) | (1,282 | ) | ||
Change in accruals and other, net | 714 | 109 | ||||
Net cash provided by operating activities | 2,567 | 2,812 | ||||
Investing activities | ||||||
Change in interest-bearing deposits with banks | (1,503 | ) | (3,367 | ) | ||
Change in interest-bearing deposits with the Federal Reserve and other central banks | (7,171 | ) | 15,570 | |||
Purchases of securities held-to-maturity | (5,390 | ) | (4,029 | ) | ||
Paydowns of securities held-to-maturity | 3,501 | 3,289 | ||||
Maturities of securities held-to-maturity | 2,274 | 6,047 | ||||
Purchases of securities available-for-sale | (33,929 | ) | (22,898 | ) | ||
Sales of securities available-for-sale | 7,482 | 5,538 | ||||
Paydowns of securities available-for-sale | 5,260 | 5,683 | ||||
Maturities of securities available-for-sale | 20,006 | 6,113 | ||||
Net change in loans | 1,478 | 7,227 | ||||
Sales of loans and other real estate | 147 | 257 | ||||
Change in federal funds sold and securities purchased under resale agreements | 3,071 | (592 | ) | |||
Net change in seed capital investments | 68 | 54 | ||||
Purchases of premises and equipment/capitalized software | (1,112 | ) | (819 | ) | ||
Proceeds from the sale of premises and equipment | — | 23 | ||||
Dispositions, net of cash | — | 84 | ||||
Other, net | 588 | (163 | ) | |||
Net cash (used for) provided by investing activities | (5,230 | ) | 18,017 | |||
Financing activities | ||||||
Change in deposits | 13,207 | (10,680 | ) | |||
Change in federal funds purchased and securities sold under repurchase agreements | (2,447 | ) | (5,005 | ) | ||
Change in payables to customers and broker-dealers | (1,332 | ) | (1,487 | ) | ||
Change in other borrowed funds | (2,422 | ) | (133 | ) | ||
Change in commercial paper | 1,599 | (2,340 | ) | |||
Net proceeds from the issuance of long-term debt | 2,246 | 4,144 | ||||
Repayments of long-term debt | (4,250 | ) | (3,400 | ) | ||
Proceeds from the exercise of stock options | 51 | 74 | ||||
Issuance of common stock | 19 | 30 | ||||
Treasury stock acquired | (2,286 | ) | (1,897 | ) | ||
Common cash dividends paid | (834 | ) | (774 | ) | ||
Preferred cash dividends paid | (120 | ) | (120 | ) | ||
Other, net | 23 | 32 | ||||
Net cash provided by (used for) financing activities | 3,454 | (21,556 | ) | |||
Effect of exchange rate changes on cash | (57 | ) | (57 | ) | ||
Change in cash and due from banks and restricted cash | ||||||
Change in cash and due from banks and restricted cash | 734 | (784 | ) | |||
Cash and due from banks and restricted cash at beginning of period | 8,258 | 7,133 | ||||
Cash and due from banks and restricted cash at end of period | $ | 8,992 | $ | 6,349 | ||
Cash and due from banks and restricted cash: | ||||||
Cash and due from banks at end of period (unrestricted cash) | $ | 6,718 | $ | 5,047 | ||
Restricted cash at end of period | 2,274 | 1,302 | ||||
Cash and due from banks and restricted cash at end of period | $ | 8,992 | $ | 6,349 | ||
Supplemental disclosures | ||||||
Interest paid | $ | 3,528 | $ | 1,795 | ||
Income taxes paid | 697 | 699 | ||||
Income taxes refunded | 445 | 155 | ||||
See accompanying unaudited Notes to Consolidated Financial Statements.
48 BNY Mellon
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Statement of Changes in Equity (unaudited)
The Bank of New York Mellon Corporation shareholders | Non-redeemable noncontrolling interests of consolidated investment management funds | Total permanent equity | Redeemable non- controlling interests/ temporary equity | |||||||||||||||||||||||||
(in millions, except per share amount) | Preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive (loss), net of tax | Treasury stock | ||||||||||||||||||||||
Balance at June 30, 2019 | $ | 3,542 | $ | 14 | $ | 27,406 | $ | 30,081 | $ | (2,688 | ) | $ | (16,822 | ) | $ | 166 | $ | 41,699 | (a) | $ | 136 | |||||||
Shares issued to shareholders of noncontrolling interests | — | — | — | — | — | — | — | — | 16 | |||||||||||||||||||
Other net changes in noncontrolling interests | — | — | 2 | — | — | — | 34 | 36 | (2 | ) | ||||||||||||||||||
Net income | — | — | — | 1,038 | — | — | 3 | 1,041 | — | |||||||||||||||||||
Other comprehensive income | — | — | — | — | (205 | ) | — | — | (205 | ) | (3 | ) | ||||||||||||||||
Dividends: | ||||||||||||||||||||||||||||
Common stock at $0.31 per share | — | — | — | (294 | ) | — | — | — | (294 | ) | — | |||||||||||||||||
Preferred stock | — | — | — | (36 | ) | — | — | — | (36 | ) | — | |||||||||||||||||
Repurchase of common stock | — | — | — | — | — | (981 | ) | — | (981 | ) | — | |||||||||||||||||
Common stock issued under: | ||||||||||||||||||||||||||||
Employee benefit plans | — | — | 6 | — | — | — | — | 6 | — | |||||||||||||||||||
Stock awards and options exercised | — | — | 57 | — | — | — | — | 57 | — | |||||||||||||||||||
Balance at Sept. 30, 2019 | $ | 3,542 | $ | 14 | $ | 27,471 | $ | 30,789 | $ | (2,893 | ) | $ | (17,803 | ) | $ | 203 | $ | 41,323 | (a) | $ | 147 | |||||||
(a) | Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $37,991 million at June 30, 2019 and $37,578 million at Sept. 30, 2019. |
The Bank of New York Mellon Corporation shareholders | Non-redeemable noncontrolling interests of consolidated investment management funds | Total permanent equity | Redeemable non- controlling interests/ temporary equity | |||||||||||||||||||||||||
(in millions, except per share amount) | Preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive (loss), net of tax | Treasury stock | ||||||||||||||||||||||
Balance at March 31, 2019 | $ | 3,542 | $ | 14 | $ | 27,349 | $ | 29,382 | $ | (2,990 | ) | $ | (16,072 | ) | $ | 122 | $ | 41,347 | (a) | $ | 122 | |||||||
Shares issued to shareholders of noncontrolling interests | — | — | — | — | — | — | — | — | 16 | |||||||||||||||||||
Other net changes in noncontrolling interests | — | — | 2 | — | — | — | 40 | 42 | (2 | ) | ||||||||||||||||||
Net income | — | — | — | 1,017 | — | — | 4 | 1,021 | — | |||||||||||||||||||
Other comprehensive income | — | — | — | — | 302 | — | — | 302 | — | |||||||||||||||||||
Dividends: | ||||||||||||||||||||||||||||
Common stock at $0.28 per share | — | — | — | (270 | ) | — | — | — | (270 | ) | — | |||||||||||||||||
Preferred stock | — | — | — | (48 | ) | — | — | — | (48 | ) | — | |||||||||||||||||
Repurchase of common stock | — | — | — | — | — | (750 | ) | — | (750 | ) | — | |||||||||||||||||
Common stock issued under: | ||||||||||||||||||||||||||||
Employee benefit plans | — | — | 6 | — | — | — | — | 6 | — | |||||||||||||||||||
Stock awards and options exercised | — | — | 49 | — | — | — | — | 49 | — | |||||||||||||||||||
Balance at June 30, 2019 | $ | 3,542 | $ | 14 | $ | 27,406 | $ | 30,081 | $ | (2,688 | ) | $ | (16,822 | ) | $ | 166 | $ | 41,699 | (a) | $ | 136 | |||||||
(a) | Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $37,683 million at March 31, 2019 and $37,991 million at June 30, 2019. |
BNY Mellon 49
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Statement of Changes in Equity (unaudited) (continued)
The Bank of New York Mellon Corporation shareholders | Non-redeemable noncontrolling interests of consolidated investment management funds | Total permanent equity | Redeemable non- controlling interests/ temporary equity | |||||||||||||||||||||||||
(in millions, except per share amount) | Preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive (loss), net of tax | Treasury stock | ||||||||||||||||||||||
Balance at June 30, 2018 | $ | 3,542 | $ | 14 | $ | 26,981 | $ | 27,306 | $ | (2,795 | ) | $ | (13,543 | ) | $ | 52 | $ | 41,557 | (a) | $ | 189 | |||||||
Shares issued to shareholders of noncontrolling interests | — | — | — | — | — | — | — | — | 22 | |||||||||||||||||||
Other net changes in noncontrolling interests | — | — | (4 | ) | — | — | — | 35 | 31 | 2 | ||||||||||||||||||
Net income | — | — | — | 1,111 | — | — | 3 | 1,114 | — | |||||||||||||||||||
Other comprehensive (loss) | — | — | — | — | (188 | ) | — | — | (188 | ) | (2 | ) | ||||||||||||||||
Dividends: | ||||||||||||||||||||||||||||
Common stock at $0.28 per share | — | — | — | (283 | ) | — | — | — | (283 | ) | — | |||||||||||||||||
Preferred stock | — | — | — | (36 | ) | — | — | — | (36 | ) | — | |||||||||||||||||
Repurchase of common stock | — | — | — | — | — | (602 | ) | — | (602 | ) | — | |||||||||||||||||
Common stock issued under: | ||||||||||||||||||||||||||||
Employee benefit plans | — | — | 7 | — | — | — | — | 7 | — | |||||||||||||||||||
Direct stock purchase and dividend reinvestment plan | — | — | 7 | — | — | — | — | 7 | — | |||||||||||||||||||
Stock awards and options exercised | — | — | 43 | — | — | — | — | 43 | — | |||||||||||||||||||
Balance at Sept. 30, 2018 | $ | 3,542 | $ | 14 | $ | 27,034 | $ | 28,098 | $ | (2,983 | ) | $ | (14,145 | ) | $ | 90 | $ | 41,650 | (a) | $ | 211 | |||||||
(a) | Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $37,963 million at June 30, 2018 and $38,018 million at Sept. 30, 2018. |
The Bank of New York Mellon Corporation shareholders | Non-redeemable noncontrolling interests of consolidated investment management funds | Total permanent equity | Redeemable non- controlling interests/ temporary equity | |||||||||||||||||||||||||
(in millions, except per share amount) | Preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive (loss), net of tax | Treasury stock | ||||||||||||||||||||||
Balance at Dec. 31, 2018 | $ | 3,542 | $ | 14 | $ | 27,118 | $ | 28,652 | $ | (3,171 | ) | $ | (15,517 | ) | $ | 101 | $ | 40,739 | (a) | $ | 129 | |||||||
Reclassification of certain tax effects related to adopting ASU 2018-02 | — | — | — | 90 | (90 | ) | — | — | — | — | ||||||||||||||||||
Adjusted balance at Jan. 1, 2019 | 3,542 | 14 | 27,118 | 28,742 | (3,261 | ) | (15,517 | ) | 101 | 40,739 | 129 | |||||||||||||||||
Shares issued to shareholders of noncontrolling interests | — | — | — | — | — | — | — | — | 52 | |||||||||||||||||||
Redemption of subsidiary shares from noncontrolling interests | — | — | — | — | — | — | — | — | (7 | ) | ||||||||||||||||||
Other net changes in noncontrolling interests | — | — | 23 | — | — | — | 85 | 108 | (26 | ) | ||||||||||||||||||
Net income | — | — | — | 3,001 | — | — | 17 | 3,018 | — | |||||||||||||||||||
Other comprehensive income | — | — | — | — | 368 | — | — | 368 | (1 | ) | ||||||||||||||||||
Dividends: | ||||||||||||||||||||||||||||
Common stock at $0.87 per share | — | — | — | (834 | ) | — | — | — | (834 | ) | — | |||||||||||||||||
Preferred stock | — | — | — | (120 | ) | — | — | — | (120 | ) | — | |||||||||||||||||
Repurchase of common stock | — | — | — | — | — | (2,286 | ) | — | (2,286 | ) | — | |||||||||||||||||
Common stock issued under: | ||||||||||||||||||||||||||||
Employee benefit plans | — | — | 22 | — | — | — | — | 22 | — | |||||||||||||||||||
Direct stock purchase and dividend reinvestment plan | — | — | 11 | — | — | — | — | 11 | — | |||||||||||||||||||
Stock awards and options exercised | — | — | 297 | — | — | — | — | 297 | — | |||||||||||||||||||
Balance at Sept. 30, 2019 | $ | 3,542 | $ | 14 | $ | 27,471 | $ | 30,789 | $ | (2,893 | ) | $ | (17,803 | ) | $ | 203 | $ | 41,323 | (a) | $ | 147 | |||||||
(a) | Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $37,096 million at Dec. 31, 2018 and $37,578 million at Sept. 30, 2019. |
50 BNY Mellon
The Bank of New York Mellon Corporation (and its subsidiaries) |
Consolidated Statement of Changes in Equity (unaudited) (continued)
The Bank of New York Mellon Corporation shareholders | Non-redeemable noncontrolling interests of consolidated investment management funds | Total permanent equity | Redeemable non- controlling interests/ temporary equity | |||||||||||||||||||||||||
(in millions, except per share amount) | Preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive (loss), net of tax | Treasury stock | ||||||||||||||||||||||
Balance at Dec. 31, 2017 | $ | 3,542 | $ | 14 | $ | 26,665 | $ | 25,635 | $ | (2,357 | ) | $ | (12,248 | ) | $ | 316 | $ | 41,567 | (a) | $ | 179 | |||||||
Adjustment for the cumulative effect of applying ASU 2014-09 for contract revenue | — | — | — | (55 | ) | — | — | — | (55 | ) | — | |||||||||||||||||
Adjustment for the cumulative effect of applying ASU 2017-12 for derivatives and hedging | — | — | — | 27 | (2 | ) | — | — | 25 | — | ||||||||||||||||||
Adjusted balance at Jan. 1, 2018 | 3,542 | 14 | 26,665 | 25,607 | (2,359 | ) | (12,248 | ) | 316 | 41,537 | 179 | |||||||||||||||||
Shares issued to shareholders of noncontrolling interests | — | — | — | — | — | — | — | — | 56 | |||||||||||||||||||
Redemption of subsidiary shares from noncontrolling interests | — | — | — | — | — | — | — | — | (32 | ) | ||||||||||||||||||
Other net changes in noncontrolling interests | — | — | (17 | ) | — | — | — | (225 | ) | (242 | ) | 15 | ||||||||||||||||
Net income (loss) | — | — | — | 3,385 | — | — | (1 | ) | 3,384 | — | ||||||||||||||||||
Other comprehensive (loss) | — | — | — | — | (624 | ) | — | — | (624 | ) | (7 | ) | ||||||||||||||||
Dividends: | ||||||||||||||||||||||||||||
Common stock at $0.76 per share | — | — | — | (774 | ) | — | — | — | (774 | ) | — | |||||||||||||||||
Preferred stock | — | — | — | (120 | ) | — | — | — | (120 | ) | — | |||||||||||||||||
Repurchase of common stock | — | — | — | — | — | (1,897 | ) | — | (1,897 | ) | — | |||||||||||||||||
Common stock issued under: | ||||||||||||||||||||||||||||
Employee benefit plans | — | — | 24 | — | — | — | — | 24 | — | |||||||||||||||||||
Direct stock purchase and dividend reinvestment plan | — | — | 23 | — | — | — | — | 23 | — | |||||||||||||||||||
Stock awards and options exercised | — | — | 339 | — | — | — | — | 339 | — | |||||||||||||||||||
Balance at Sept. 30, 2018 | $ | 3,542 | $ | 14 | $ | 27,034 | $ | 28,098 | $ | (2,983 | ) | $ | (14,145 | ) | $ | 90 | $ | 41,650 | (a) | $ | 211 | |||||||
(a) | Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $37,709 million at Dec. 31, 2017 and $38,018 million at Sept. 30, 2018. |
See accompanying unaudited Notes to Consolidated Financial Statements.
BNY Mellon 51
Notes to Consolidated Financial Statements |
Note 1–Basis of presentation
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.
Basis of presentation
The accounting and financial reporting policies of BNY Mellon, a global financial services company, conform to U.S. GAAP and prevailing industry practices. For information on our significant accounting and reporting policies, see Note 1 in our 2018 Annual Report.
The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been made. These financial statements should be read in conjunction with our 2018 Annual Report. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates based upon assumptions about future economic and market conditions which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Amounts subject to estimates are items such as allowance for loan losses and lending-related commitments, fair value of financial instruments and derivatives, goodwill and other intangibles and litigation and regulatory contingencies. Among other effects, such changes in estimates could result in future impairments of goodwill and intangible assets and establishment of allowances for loan losses and lending-related commitments as well as accruals for litigation and regulatory contingencies.
Note 2–Accounting changes and new accounting guidance
The following accounting changes and new accounting guidance were adopted in the first quarter of 2019.
ASU 2016-02, Leases
In February 2016, the FASB issued an ASU, Leases. The primary objective of this ASU is to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and expand related disclosures. This ASU requires a “right-of-use” asset and a payment obligation liability on the balance sheet for most leases and subleases. Additionally, depending on the lease classification under the standard, it may result in different expense recognition patterns and classification than under existing accounting principles. For leases classified as finance leases, it will result in higher expense recognition in the earlier periods and lower expense in the later periods of the lease.
The Company adopted this guidance on Jan. 1, 2019 using the alternative transition method on a prospective basis and recognized right-of-use assets of $1.3 billion and lease liabilities of $1.5 billion on the consolidated balance sheet, both based on the present value of the expected remaining lease payments. See Note 6 for the disclosures required by this ASU.
ASU 2018-02, Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued an ASU, Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU permits a reclassification from accumulated other comprehensive income to retained earnings for the tax effects of items within accumulated other comprehensive income that do not reflect the lower statutory tax rate which was enacted by the 2017 U.S. tax legislation. BNY Mellon adopted this guidance in the first quarter of 2019, which resulted in a $90 million reclassification that decreased accumulated other comprehensive income and increased retained earnings.
52 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
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. Contingent payments totaled $4 million in the third quarter of 2019 and $6 million in the first nine months of 2019.
At Sept. 30, 2019, we are potentially obligated to pay additional consideration which, using reasonable assumptions, could range from $4 million to $13 million over the next three years, but could be higher as certain of the arrangements do not contain a contractual maximum.
The transactions described below did not have a material impact on BNY Mellon’s results of operations.
Transactions in 2018
On Jan. 2, 2018, BNY Mellon completed the sale of CenterSquare, one of our Investment Management boutiques, and recorded a gain on this transaction. CenterSquare had approximately $10 billion in AUM in U.S. and global real estate and infrastructure investments. In addition, goodwill of $52 million was removed from the consolidated balance sheet as a result of this sale.
On June 29, 2018, BNY Mellon completed the exchange of its majority equity interest in Amherst Capital Management LLC for a minority equity stake in Amherst Holdings LLC. Goodwill of $13 million was removed from the consolidated balance sheet and a gain was recorded as a result of this sale.
Note 4–Securities
The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of securities at Sept. 30, 2019 and Dec. 31, 2018, respectively.
Securities at Sept. 30, 2019 | Gross unrealized | |||||||||||
Amortized cost | Fair value | |||||||||||
(in millions) | Gains | Losses | ||||||||||
Available-for-sale: | ||||||||||||
Agency RMBS | $ | 26,359 | $ | 169 | $ | 137 | $ | 26,391 | ||||
U.S. Treasury | 14,480 | 662 | 16 | 15,126 | ||||||||
Sovereign debt/sovereign guaranteed | 12,980 | 172 | 2 | 13,150 | ||||||||
Agency commercial MBS | 9,304 | 282 | 10 | 9,576 | ||||||||
Supranational | 4,052 | 44 | 3 | 4,093 | ||||||||
CLOs | 3,882 | 1 | 15 | 3,868 | ||||||||
Foreign covered bonds | 3,575 | 22 | 4 | 3,593 | ||||||||
Other ABS | 2,477 | 10 | 3 | 2,484 | ||||||||
U.S. government agencies | 2,386 | 91 | — | 2,477 | ||||||||
Non-agency commercial MBS | 2,207 | 62 | 1 | 2,268 | ||||||||
Foreign government agencies | 2,175 | 12 | 1 | 2,186 | ||||||||
Non-agency RMBS (a) | 1,003 | 217 | 7 | 1,213 | ||||||||
State and political subdivisions | 1,159 | 27 | 2 | 1,184 | ||||||||
Corporate bonds | 858 | 22 | 1 | 879 | ||||||||
Other debt securities | 71 | 3 | — | 74 | ||||||||
Total securities available-for-sale (b) | $ | 86,968 | $ | 1,796 | $ | 202 | $ | 88,562 | ||||
Held-to-maturity: | ||||||||||||
Agency RMBS | $ | 26,652 | $ | 270 | $ | 59 | $ | 26,863 | ||||
U.S. Treasury | 4,017 | 31 | 4 | 4,044 | ||||||||
Agency commercial MBS | 1,197 | 34 | 1 | 1,230 | ||||||||
U.S. government agencies | 922 | 1 | 1 | 922 | ||||||||
Sovereign debt/sovereign guaranteed | 787 | 40 | — | 827 | ||||||||
Non-agency RMBS | 86 | 4 | 2 | 88 | ||||||||
Foreign covered bonds | 76 | 1 | — | 77 | ||||||||
Supranational | 25 | — | — | 25 | ||||||||
State and political subdivisions | 16 | — | — | 16 | ||||||||
Total securities held-to-maturity | $ | 33,778 | $ | 381 | $ | 67 | $ | 34,092 | ||||
Total securities | $ | 120,746 | $ | 2,177 | $ | 269 | $ | 122,654 | ||||
(a) | Includes $689 million that was included in the former Grantor Trust. |
(b) | Includes gross unrealized gains of $33 million and gross unrealized losses of $70 million recorded in accumulated other comprehensive income related to securities that were transferred from available-for-sale to held-to-maturity. The unrealized gains and losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities. |
BNY Mellon 53
Notes to Consolidated Financial Statements (continued) |
Securities at Dec. 31, 2018 | Gross unrealized | |||||||||||
Amortized cost | Fair value | |||||||||||
(in millions) | Gains | Losses | ||||||||||
Available-for-sale: | ||||||||||||
Agency RMBS | $ | 25,594 | $ | 83 | $ | 369 | $ | 25,308 | ||||
U.S. Treasury | 20,190 | 96 | 210 | 20,076 | ||||||||
Sovereign debt/sovereign guaranteed | 10,663 | 108 | 21 | 10,750 | ||||||||
Agency commercial MBS | 9,836 | 16 | 161 | 9,691 | ||||||||
CLOs | 3,410 | — | 46 | 3,364 | ||||||||
Supranational | 2,985 | 7 | 8 | 2,984 | ||||||||
Foreign covered bonds | 2,890 | 7 | 19 | 2,878 | ||||||||
State and political subdivisions | 2,251 | 18 | 22 | 2,247 | ||||||||
Other ABS | 1,776 | 1 | 4 | 1,773 | ||||||||
U.S. government agencies | 1,676 | 5 | 24 | 1,657 | ||||||||
Non-agency commercial MBS | 1,491 | 1 | 28 | 1,464 | ||||||||
Non-agency RMBS (a) | 1,095 | 241 | 11 | 1,325 | ||||||||
Foreign government agencies | 1,164 | 1 | 4 | 1,161 | ||||||||
Corporate bonds | 1,074 | 6 | 26 | 1,054 | ||||||||
Other debt securities | 72 | 5 | — | 77 | ||||||||
Total securities available-for-sale (b) | $ | 86,167 | $ | 595 | $ | 953 | $ | 85,809 | ||||
Held-to-maturity: | ||||||||||||
Agency RMBS | $ | 25,507 | $ | 32 | $ | 632 | $ | 24,907 | ||||
U.S. Treasury | 4,727 | 3 | 77 | 4,653 | ||||||||
U.S. government agencies | 1,497 | — | 10 | 1,487 | ||||||||
Agency commercial MBS | 1,195 | — | 26 | 1,169 | ||||||||
Sovereign debt/sovereign guaranteed | 833 | 26 | — | 859 | ||||||||
Non-agency RMBS | 100 | 4 | 2 | 102 | ||||||||
Foreign covered bonds | 80 | 1 | — | 81 | ||||||||
Supranational | 26 | 1 | — | 27 | ||||||||
State and political subdivisions | 17 | — | — | 17 | ||||||||
Total securities held-to-maturity | $ | 33,982 | $ | 67 | $ | 747 | $ | 33,302 | ||||
Total securities | $ | 120,149 | $ | 662 | $ | 1,700 | $ | 119,111 | ||||
(a) | Includes $832 million that was included in the former Grantor Trust. |
(b) | Includes gross unrealized gains of $39 million and gross unrealized losses of $87 million recorded in accumulated other comprehensive income related to securities that were transferred from available-for-sale to held-to-maturity. The unrealized gains and losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities. |
The following table presents the realized gains, losses and impairments, on a gross basis.
Net securities (losses) gains | |||||||||||||||
(in millions) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||
Realized gross gains | $ | 1 | $ | 12 | $ | 1 | $ | 18 | $ | 5 | |||||
Realized gross losses | (1 | ) | (5 | ) | (1 | ) | (10 | ) | (53 | ) | |||||
Recognized gross impairments | (1 | ) | — | — | (1 | ) | — | ||||||||
Total net securities (losses) gains | $ | (1 | ) | $ | 7 | $ | — | $ | 7 | $ | (48 | ) | |||
The following table presents pre-tax net securities (losses) gains by type.
Net securities (losses) gains | |||||||||||||||
(in millions) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||
U.S. Treasury | $ | — | $ | 3 | $ | (1 | ) | $ | 4 | $ | (5 | ) | |||
Sovereign debt/sovereign guaranteed | — | 2 | — | 3 | — | ||||||||||
State and political subdivisions | — | 2 | — | 2 | (1 | ) | |||||||||
Agency RMBS | — | — | — | — | (42 | ) | |||||||||
Other | (1 | ) | — | 1 | (2 | ) | — | ||||||||
Total net securities (losses) gains | $ | (1 | ) | $ | 7 | $ | — | $ | 7 | $ | (48 | ) | |||
Temporarily impaired securities
At Sept. 30, 2019, the gross unrealized losses on the securities portfolio were primarily attributable to an increase in interest rates from the date of purchase, and for certain securities that were transferred from available-for-sale to held-to-maturity, an increase in interest rates through the date they were transferred. Specifically, $70 million of the unrealized losses at Sept. 30, 2019 and $87 million at Dec. 31, 2018 reflected in the available-for-sale sections of the tables below relate to certain securities (primarily Agency RMBS) that were transferred in prior periods from available-for-sale to held-to-maturity. The unrealized losses will be amortized into net interest revenue over the contractual lives of the securities. The transfer created a new cost basis for the securities. As a result, if these securities have experienced unrealized losses since the date of transfer, the corresponding fair value and unrealized losses would be reflected in the held-to-maturity sections of the following tables. We do not intend to sell these securities, and it is not more likely than not that we will have to sell these securities.
54 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
The following tables show the aggregate fair value of securities with a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more.
Temporarily impaired securities at Sept. 30, 2019 | Less than 12 months | 12 months or more | Total | |||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||
(in millions) | ||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||
Agency RMBS | $ | 9,513 | $ | 32 | $ | 4,485 | $ | 105 | $ | 13,998 | $ | 137 | ||||||||
U.S. Treasury | 2,536 | 11 | 764 | 5 | 3,300 | 16 | ||||||||||||||
Sovereign debt/sovereign guaranteed | 2,227 | 2 | 149 | — | 2,376 | 2 | ||||||||||||||
Agency commercial MBS | 1,691 | 7 | 583 | 3 | 2,274 | 10 | ||||||||||||||
Supranational | 979 | 2 | 204 | 1 | 1,183 | 3 | ||||||||||||||
CLOs | 1,491 | 4 | 1,098 | 11 | 2,589 | 15 | ||||||||||||||
Foreign covered bonds | 712 | 2 | 440 | 2 | 1,152 | 4 | ||||||||||||||
Other ABS | 1,062 | 3 | 55 | — | 1,117 | 3 | ||||||||||||||
Non-agency commercial MBS | 554 | 1 | 55 | — | 609 | 1 | ||||||||||||||
Foreign government agencies | 860 | 1 | 50 | — | 910 | 1 | ||||||||||||||
Non-agency RMBS (a) | 26 | 1 | 111 | 6 | 137 | 7 | ||||||||||||||
State and political subdivisions | 101 | 2 | 16 | — | 117 | 2 | ||||||||||||||
Corporate bonds | 77 | 1 | 67 | — | 144 | 1 | ||||||||||||||
Total securities available-for-sale (b) | $ | 21,829 | $ | 69 | $ | 8,077 | $ | 133 | $ | 29,906 | $ | 202 | ||||||||
Held-to-maturity: | ||||||||||||||||||||
Agency RMBS | $ | 3,745 | $ | 12 | $ | 4,952 | $ | 47 | $ | 8,697 | $ | 59 | ||||||||
U.S. Treasury | 346 | 2 | 1,104 | 2 | 1,450 | 4 | ||||||||||||||
Agency commercial MBS | 67 | 1 | — | — | 67 | 1 | ||||||||||||||
U.S. government agencies | 225 | 1 | 225 | — | 450 | 1 | ||||||||||||||
Non-agency RMBS | 7 | — | 39 | 2 | 46 | 2 | ||||||||||||||
Total securities held-to-maturity | $ | 4,390 | $ | 16 | $ | 6,320 | $ | 51 | $ | 10,710 | $ | 67 | ||||||||
Total temporarily impaired securities | $ | 26,219 | $ | 85 | $ | 14,397 | $ | 184 | $ | 40,616 | $ | 269 | ||||||||
(a) | Includes $5 million of securities with an unrealized loss of less than $1 million for less than 12 months and $2 million of securities with an unrealized loss of less than $1 million for 12 months or more that were included in the former Grantor Trust. |
(b) | Includes gross unrealized losses of $70 million for 12 months or more recorded in accumulated other comprehensive income related to securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities. There were no gross unrealized losses for less than 12 months. |
BNY Mellon 55
Notes to Consolidated Financial Statements (continued) |
Temporarily impaired securities at Dec. 31, 2018 | 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: | ||||||||||||||||||||
Agency RMBS | $ | 6,678 | $ | 30 | $ | 9,250 | $ | 339 | $ | 15,928 | $ | 369 | ||||||||
U.S. Treasury | 6,126 | 23 | 6,880 | 187 | 13,006 | 210 | ||||||||||||||
Sovereign debt/sovereign guaranteed | 2,185 | 8 | 988 | 13 | 3,173 | 21 | ||||||||||||||
Agency commercial MBS | 4,505 | 50 | 3,082 | 111 | 7,587 | 161 | ||||||||||||||
CLOs | 3,280 | 46 | 2 | — | 3,282 | 46 | ||||||||||||||
Supranational | 974 | 2 | 481 | 6 | 1,455 | 8 | ||||||||||||||
Foreign covered bonds | 1,058 | 7 | 736 | 12 | 1,794 | 19 | ||||||||||||||
State and political subdivisions | 316 | 1 | 668 | 21 | 984 | 22 | ||||||||||||||
Other ABS | 1,289 | 4 | 23 | — | 1,312 | 4 | ||||||||||||||
U.S. government agencies | 513 | 4 | 673 | 20 | 1,186 | 24 | ||||||||||||||
Non-agency commercial MBS | 1,015 | 14 | 362 | 14 | 1,377 | 28 | ||||||||||||||
Non-agency RMBS (a) | 94 | 1 | 157 | 10 | 251 | 11 | ||||||||||||||
Foreign government agencies | 397 | 1 | 256 | 3 | 653 | 4 | ||||||||||||||
Corporate bonds | 685 | 24 | 50 | 2 | 735 | 26 | ||||||||||||||
Total securities available-for-sale (b) | $ | 29,115 | $ | 215 | $ | 23,608 | $ | 738 | $ | 52,723 | $ | 953 | ||||||||
Held-to-maturity: | ||||||||||||||||||||
Agency RMBS | $ | 4,602 | $ | 56 | $ | 17,107 | $ | 576 | $ | 21,709 | $ | 632 | ||||||||
U.S. Treasury | 157 | 2 | 4,343 | 75 | 4,500 | 77 | ||||||||||||||
U.S. government agencies | — | — | 1,111 | 10 | 1,111 | 10 | ||||||||||||||
Agency commercial MBS | 477 | 7 | 654 | 19 | 1,131 | 26 | ||||||||||||||
Non-agency RMBS | 22 | 1 | 31 | 1 | 53 | 2 | ||||||||||||||
Total securities held-to-maturity | $ | 5,258 | $ | 66 | $ | 23,246 | $ | 681 | $ | 28,504 | $ | 747 | ||||||||
Total temporarily impaired securities | $ | 34,373 | $ | 281 | $ | 46,854 | $ | 1,419 | $ | 81,227 | $ | 1,700 | ||||||||
(a) | Includes $22 million of securities with an unrealized loss of less than $1 million for less than 12 months and $3 million of securities with an unrealized loss of less than $1 million for 12 months or more that were included in the former Grantor Trust. |
(b) | Includes gross unrealized losses of $87 million for 12 months or more recorded in accumulated other comprehensive income related to securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities. There were no gross unrealized losses for less than 12 months. |
The following table shows the maturity distribution by carrying amount and yield (on a tax equivalent basis) of our securities portfolio.
Maturity distribution and yields on securities at Sept. 30, 2019 | U.S. Treasury | U.S. government agencies | State and political subdivisions | Other bonds, notes and debentures | Mortgage/ asset-backed | ||||||||||||||||||||||||||||
(dollars in millions) | Amount | Yield (a) | Amount | Yield (a) | Amount | Yield (a) | Amount | Yield (a) | Amount | Yield (a) | Total | ||||||||||||||||||||||
Securities available-for-sale: | |||||||||||||||||||||||||||||||||
One year or less | $ | 2,692 | 2.60 | % | $ | 81 | 2.28 | % | $ | 144 | 2.85 | % | $ | 8,129 | 1.20 | % | $ | — | — | % | $ | 11,046 | |||||||||||
Over 1 through 5 years | 5,703 | 1.78 | 804 | 2.54 | 799 | 3.18 | 13,993 | 1.22 | — | — | 21,299 | ||||||||||||||||||||||
Over 5 through 10 years | 3,851 | 2.23 | 1,592 | 2.76 | 130 | 3.05 | 1,649 | 1.01 | — | — | 7,222 | ||||||||||||||||||||||
Over 10 years | 2,880 | 3.11 | — | — | 111 | 2.72 | 204 | 1.78 | — | — | 3,195 | ||||||||||||||||||||||
Mortgage-backed securities | — | — | — | — | — | — | — | — | 39,448 | 3.00 | 39,448 | ||||||||||||||||||||||
Asset-backed securities | — | — | — | — | — | — | — | — | 6,352 | 3.09 | 6,352 | ||||||||||||||||||||||
Total | $ | 15,126 | 2.29 | % | $ | 2,477 | 2.68 | % | $ | 1,184 | 3.08 | % | $ | 23,975 | 1.20 | % | $ | 45,800 | 3.02 | % | $ | 88,562 | |||||||||||
Securities held-to-maturity: | |||||||||||||||||||||||||||||||||
One year or less | $ | 1,106 | 1.45 | % | $ | 300 | 1.49 | % | $ | — | — | % | $ | 186 | 0.66 | % | $ | — | — | % | $ | 1,592 | |||||||||||
Over 1 through 5 years | 2,600 | 1.96 | 478 | 2.29 | 3 | 5.68 | 488 | 0.79 | — | — | 3,569 | ||||||||||||||||||||||
Over 5 through 10 years | 311 | 2.18 | 132 | 2.81 | — | — | 214 | 0.43 | — | — | 657 | ||||||||||||||||||||||
Over 10 years | — | — | 12 | 3.25 | 13 | 4.76 | — | — | — | — | 25 | ||||||||||||||||||||||
Mortgage-backed securities | — | — | — | — | — | — | — | — | 27,935 | 2.96 | 27,935 | ||||||||||||||||||||||
Total | $ | 4,017 | 1.84 | % | $ | 922 | 2.12 | % | $ | 16 | 4.93 | % | $ | 888 | 0.67 | % | $ | 27,935 | 2.96 | % | $ | 33,778 | |||||||||||
(a) | Yields are based upon the amortized cost of securities. |
56 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Other-than-temporary impairment
For each security in the securities portfolio, a quarterly review is conducted to determine if an OTTI has occurred. See Note 1 of the Notes to Consolidated Financial Statements in our 2018 Annual Report for a discussion of the determination of OTTI.
The following table reflects 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) | 3Q19 | 3Q18 | ||||
Beginning balance as of June 30 | $ | 77 | $ | 79 | ||
Add: Initial OTTI credit losses | — | — | ||||
Subsequent OTTI credit losses | 1 | — | ||||
Less: Realized losses for securities sold | — | 1 | ||||
Ending balance as of September 30 | $ | 78 | $ | 78 | ||
Debt securities credit loss roll forward | ||||||
(in millions) | YTD19 | YTD18 | ||||
Beginning balance as of Dec. 31 | $ | 78 | $ | 84 | ||
Add: Initial OTTI credit losses | — | — | ||||
Subsequent OTTI credit losses | 1 | — | ||||
Less: Realized losses for securities sold | 1 | 6 | ||||
Ending balance as of September 30 | $ | 78 | $ | 78 | ||
Pledged assets
At Sept. 30, 2019, BNY Mellon had pledged assets of $116 billion, including $91 billion pledged as collateral for potential borrowings at the Federal Reserve Discount Window and $6 billion pledged as collateral for borrowing at the FHLB. The components of the assets pledged at Sept. 30, 2019 included $98 billion of securities, $13 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 assets account at the Federal Reserve.
At Dec. 31, 2018, BNY Mellon had pledged assets of $120 billion, including $96 billion pledged as collateral for potential borrowing at the Federal Reserve Discount Window and $7 billion pledged as collateral for borrowing at the FHLB. The components of the assets pledged at Dec. 31, 2018 included $100 billion of securities, $15 billion of loans, $4 billion of trading assets and $1 billion of interest-bearing deposits with banks.
At Sept. 30, 2019 and Dec. 31, 2018, pledged assets included $17 billion and $13 billion, respectively, for which the recipients were permitted to sell or repledge the assets delivered.
We also obtain securities as collateral, including receipts under resale agreements, securities borrowed, derivative contracts and custody agreements on terms which permit us to sell or repledge the securities to others. At Sept. 30, 2019 and Dec. 31, 2018, the market value of the securities received that can be sold or repledged was $129 billion and $151 billion, respectively. We routinely sell or repledge these securities through delivery to third parties. As of Sept. 30, 2019 and Dec. 31, 2018, the market value of securities collateral sold or repledged was $83 billion and $101 billion, respectively.
Restricted cash and securities
Cash and securities may be segregated under federal and other regulations or requirements. At Sept. 30, 2019 and Dec. 31, 2018, cash segregated under federal and other regulations or requirements was $2 billion and $2 billion, respectively. Restricted cash is included in interest-bearing deposits with banks on the consolidated balance sheet. Securities segregated for these purposes were $2 billion at Sept. 30, 2019 and $2 billion at Dec. 31, 2018. Restricted securities were sourced from securities purchased under resale agreements and are included in federal funds sold and securities purchased under resale agreements on the consolidated balance sheet.
BNY Mellon 57
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, 2019 and Dec. 31, 2018.
Loans | Sept. 30, 2019 | Dec. 31, 2018 | ||||
(in millions) | ||||||
Domestic: | ||||||
Commercial | $ | 1,335 | $ | 1,949 | ||
Commercial real estate | 5,292 | 4,787 | ||||
Financial institutions | 4,973 | 5,091 | ||||
Lease financings | 559 | 706 | ||||
Wealth management loans and mortgages | 15,764 | 15,843 | ||||
Other residential mortgages | 520 | 594 | ||||
Overdrafts | 1,247 | 1,550 | ||||
Other | 1,143 | 1,181 | ||||
Margin loans | 10,177 | 13,343 | ||||
Total domestic | 41,010 | 45,044 | ||||
Foreign: | ||||||
Commercial | 358 | 183 | ||||
Commercial real estate | 18 | — | ||||
Financial institutions | 8,441 | 6,492 | ||||
Lease financings | 569 | 551 | ||||
Wealth management loans and mortgages | 92 | 122 | ||||
Other (primarily overdrafts) | 4,106 | 4,031 | ||||
Margin loans | 287 | 141 | ||||
Total foreign | 13,871 | 11,520 | ||||
Total loans (a) | $ | 54,881 | $ | 56,564 | ||
(a) | Net of unearned income of $325 million at Sept. 30, 2019 and $358 million at Dec. 31, 2018 primarily related to domestic and foreign lease financings. |
Our loan portfolio consists of three portfolio segments: commercial, lease financings and mortgages. We manage our portfolio at the class level, which consists of six classes of financing receivables: commercial, commercial real estate, financial institutions, lease financings, wealth management loans and mortgages, and other residential mortgages.
The following tables are presented for each class of financing receivables and provide additional information about our credit risks and the adequacy of our allowance for credit losses.
58 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Allowance for credit losses
Activity in the allowance for credit losses is presented below.
Allowance for credit losses activity for the quarter ended Sept. 30, 2019 | Wealth management loans and mortgages | Other residential mortgages | ||||||||||||||||||||||||||
(in millions) | Commercial | Commercial real estate | Financial institutions | Lease financings | All other | Foreign | Total | |||||||||||||||||||||
Beginning balance | $ | 77 | $ | 72 | $ | 21 | $ | 4 | $ | 20 | $ | 14 | $ | — | $ | 33 | $ | 241 | ||||||||||
Charge-offs | (1 | ) | — | — | — | — | — | — | — | (1 | ) | |||||||||||||||||
Recoveries | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Net (charge-offs) | (1 | ) | — | — | — | — | — | — | — | (1 | ) | |||||||||||||||||
Provision | (15 | ) | 5 | — | (1 | ) | — | — | — | (5 | ) | (16 | ) | |||||||||||||||
Ending balance | $ | 61 | $ | 77 | $ | 21 | $ | 3 | $ | 20 | $ | 14 | $ | — | $ | 28 | $ | 224 | ||||||||||
Allowance for: | ||||||||||||||||||||||||||||
Loan losses | $ | 10 | $ | 57 | $ | 7 | $ | 3 | $ | 17 | $ | 14 | $ | — | $ | 19 | $ | 127 | ||||||||||
Lending-related commitments | 51 | 20 | 14 | — | 3 | — | — | 9 | 97 | |||||||||||||||||||
Individually evaluated for impairment: | ||||||||||||||||||||||||||||
Loan balance | $ | — | $ | — | $ | — | $ | — | $ | 16 | $ | — | $ | — | $ | — | $ | 16 | ||||||||||
Allowance for loan losses | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Collectively evaluated for impairment: | ||||||||||||||||||||||||||||
Loan balance | $ | 1,335 | $ | 5,292 | $ | 4,973 | $ | 559 | $ | 15,748 | $ | 520 | $ | 12,567 | (a) | $ | 13,871 | $ | 54,865 | |||||||||
Allowance for loan losses | 10 | 57 | 7 | 3 | 17 | 14 | — | 19 | 127 | |||||||||||||||||||
(a) | Includes $1,247 million of domestic overdrafts, $10,177 million of margin loans and $1,143 million of other loans at Sept. 30, 2019. |
Allowance for credit losses activity for the quarter ended June 30, 2019 | Wealth management loans and mortgages | Other residential mortgages | ||||||||||||||||||||||||||
(in millions) | Commercial | Commercial real estate | Financial institutions | Lease financings | All other | Foreign | Total | |||||||||||||||||||||
Beginning balance | $ | 82 | $ | 74 | $ | 23 | $ | 4 | $ | 21 | $ | 15 | $ | — | $ | 29 | $ | 248 | ||||||||||
Charge-offs | — | — | — | — | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||
Recoveries | — | — | — | — | — | 2 | — | — | 2 | |||||||||||||||||||
Net (charge-offs) recoveries | — | — | — | — | (1 | ) | 2 | — | — | 1 | ||||||||||||||||||
Provision | (5 | ) | (2 | ) | (2 | ) | — | — | (3 | ) | — | 4 | (8 | ) | ||||||||||||||
Ending balance | $ | 77 | $ | 72 | $ | 21 | $ | 4 | $ | 20 | $ | 14 | $ | — | $ | 33 | $ | 241 | ||||||||||
Allowance for: | ||||||||||||||||||||||||||||
Loan losses | $ | 23 | $ | 57 | $ | 8 | $ | 4 | $ | 17 | $ | 14 | $ | — | $ | 23 | $ | 146 | ||||||||||
Lending-related commitments | 54 | 15 | 13 | — | 3 | — | — | 10 | 95 | |||||||||||||||||||
Individually evaluated for impairment: | ||||||||||||||||||||||||||||
Loan balance | $ | 96 | $ | — | $ | — | $ | — | $ | 16 | $ | — | $ | — | $ | — | $ | 112 | ||||||||||
Allowance for loan losses | 10 | — | — | — | — | — | — | — | 10 | |||||||||||||||||||
Collectively evaluated for impairment: | ||||||||||||||||||||||||||||
Loan balance | $ | 1,356 | $ | 5,192 | $ | 4,574 | $ | 662 | $ | 15,563 | $ | 549 | $ | 12,849 | (a) | $ | 11,539 | $ | 52,284 | |||||||||
Allowance for loan losses | 13 | 57 | 8 | 4 | 17 | 14 | — | 23 | 136 | |||||||||||||||||||
(a) | Includes $1,575 million of domestic overdrafts, $10,152 million of margin loans and $1,122 million of other loans at June 30, 2019. |
BNY Mellon 59
Notes to Consolidated Financial Statements (continued) |
Allowance for credit losses activity for the quarter ended Sept. 30, 2018 | Wealth management loans and mortgages | Other residential mortgages | All other | Foreign | Total | |||||||||||||||||||||||
(in millions) | Commercial | Commercial real estate | Financial institutions | Lease financings | ||||||||||||||||||||||||
Beginning balance | $ | 76 | $ | 74 | $ | 24 | $ | 6 | $ | 23 | $ | 18 | $ | — | $ | 33 | $ | 254 | ||||||||||
Charge-offs | — | — | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||
Recoveries | — | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||
Net recoveries | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Provision | — | (1 | ) | 1 | — | (2 | ) | (1 | ) | — | — | (3 | ) | |||||||||||||||
Ending balance | $ | 76 | $ | 73 | $ | 25 | $ | 6 | $ | 21 | $ | 17 | $ | — | $ | 33 | $ | 251 | ||||||||||
Allowance for: | ||||||||||||||||||||||||||||
Loan losses | $ | 17 | $ | 53 | $ | 9 | $ | 6 | $ | 17 | $ | 17 | $ | — | $ | 21 | $ | 140 | ||||||||||
Lending-related commitments | 59 | 20 | 16 | — | 4 | — | — | 12 | 111 | |||||||||||||||||||
Individually evaluated for impairment: | ||||||||||||||||||||||||||||
Loan balance | $ | — | $ | — | $ | — | $ | — | $ | 4 | $ | — | $ | — | $ | — | $ | 4 | ||||||||||
Allowance for loan losses | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Collectively evaluated for impairment: | ||||||||||||||||||||||||||||
Loan balance | $ | 1,928 | $ | 5,034 | $ | 4,237 | $ | 738 | $ | 15,848 | $ | 623 | $ | 15,306 | (a) | $ | 10,269 | $ | 53,983 | |||||||||
Allowance for loan losses | 17 | 53 | 9 | 6 | 17 | 17 | — | 21 | 140 | |||||||||||||||||||
(a) | Includes $784 million of domestic overdrafts, $13,326 million of margin loans and $1,196 million of other loans at Sept. 30, 2018. |
Allowance for credit losses activity for the nine months ended Sept. 30, 2019 | Wealth management loans and mortgages | Other residential mortgages | All other | Foreign | Total | ||||||||||||||||||||||
(in millions) | Commercial | Commercial real estate | Financial institutions | Lease financings | |||||||||||||||||||||||
Beginning balance | $ | 81 | $ | 75 | $ | 22 | $ | 5 | $ | 21 | $ | 16 | $ | — | $ | 32 | $ | 252 | |||||||||
Charge-offs | (12 | ) | — | — | — | (1 | ) | — | — | — | (13 | ) | |||||||||||||||
Recoveries | — | — | — | — | — | 2 | — | — | 2 | ||||||||||||||||||
Net (charge-offs) recoveries | (12 | ) | — | — | — | (1 | ) | 2 | — | — | (11 | ) | |||||||||||||||
Provision | (8 | ) | 2 | (1 | ) | (2 | ) | — | (4 | ) | — | (4 | ) | (17 | ) | ||||||||||||
Ending balance | $ | 61 | $ | 77 | $ | 21 | $ | 3 | $ | 20 | $ | 14 | $ | — | $ | 28 | $ | 224 | |||||||||
Allowance for credit losses activity for the nine months ended Sept. 30, 2018 | Wealth management loans and mortgages | Other residential mortgages | All other | Foreign | Total | ||||||||||||||||||||||
(in millions) | Commercial | Commercial real estate | Financial institutions | Lease financings | |||||||||||||||||||||||
Beginning balance | $ | 77 | $ | 76 | $ | 23 | $ | 8 | $ | 22 | $ | 20 | $ | — | $ | 35 | $ | 261 | |||||||||
Charge-offs | — | — | — | — | — | (1 | ) | — | — | (1 | ) | ||||||||||||||||
Recoveries | — | — | — | — | — | 2 | — | — | 2 | ||||||||||||||||||
Net recoveries | — | — | — | — | — | 1 | — | — | 1 | ||||||||||||||||||
Provision | (1 | ) | (3 | ) | 2 | (2 | ) | (1 | ) | (4 | ) | — | (2 | ) | (11 | ) | |||||||||||
Ending balance | $ | 76 | $ | 73 | $ | 25 | $ | 6 | $ | 21 | $ | 17 | $ | — | $ | 33 | $ | 251 | |||||||||
60 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Nonperforming assets
The table below presents our nonperforming assets.
Nonperforming assets (in millions) | Sept. 30, 2019 | Dec. 31, 2018 | |||||
Nonperforming loans: | |||||||
Other residential mortgages | $ | 62 | $ | 67 | |||
Wealth management loans and mortgages | 24 | 9 | |||||
Total nonperforming loans | 86 | 76 | |||||
Other assets owned | 2 | 3 | |||||
Total nonperforming assets | $ | 88 | $ | 79 | |||
At Sept. 30, 2019, undrawn commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material.
Lost interest
Interest revenue would have increased by $1 million in the third quarter of 2019, $4 million in the second quarter of 2019, $1 million in the third quarter of 2018, $4 million in the first nine months of 2019 and $4 million in the first nine months of 2018 if nonperforming loans at period-end had been performing for the entire respective period.
Impaired loans
The tables below present information about our impaired loans.
Impaired loans | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | |||||||||||||||||||||||||
(in millions) | Average recorded investment | Interest revenue recognized | Average recorded investment | Interest revenue recognized | Average recorded investment | Interest revenue recognized | Average recorded investment | Interest revenue recognized | Average recorded investment | Interest revenue recognized | ||||||||||||||||||||
Impaired loans with an allowance: | ||||||||||||||||||||||||||||||
Commercial | $ | 48 | $ | — | $ | 96 | $ | — | $ | — | $ | — | $ | 48 | $ | — | $ | — | $ | — | ||||||||||
Wealth management loans and mortgages | — | — | — | — | — | — | — | — | 1 | — | ||||||||||||||||||||
Total impaired loans with an allowance | 48 | — | 96 | — | — | — | 48 | — | 1 | — | ||||||||||||||||||||
Impaired loans without an allowance: (a) | ||||||||||||||||||||||||||||||
Wealth management loans and mortgages | 16 | — | 10 | — | 4 | — | 10 | — | 4 | — | ||||||||||||||||||||
Total impaired loans | $ | 64 | $ | — | $ | 106 | $ | — | $ | 4 | $ | — | $ | 58 | $ | — | $ | 5 | $ | — | ||||||||||
(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, 2019 | Dec. 31, 2018 | |||||||||||||||||
(in millions) | Recorded investment | Unpaid principal balance | Related allowance (a) | Recorded investment | Unpaid principal balance | Related allowance (a) | |||||||||||||
Impaired loans without an allowance: (b) | |||||||||||||||||||
Wealth management loans and mortgages | 16 | 16 | N/A | 4 | 4 | N/A | |||||||||||||
Total impaired loans (c) | $ | 16 | $ | 16 | $ | — | $ | 4 | $ | 4 | $ | — | |||||||
(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, 2019 and Dec. 31, 2018, respectively. The allowance for loan losses associated with these loans totaled less than $1 million at both Sept. 30, 2019 and Dec. 31, 2018, respectively. |
N/A - Not applicable.
BNY Mellon 61
Notes to Consolidated Financial Statements (continued) |
Past due loans
The table below presents our past due loans.
Past due loans and still accruing interest | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||||||||||||||||
Days past due | Total past due | Days past due | Total past due | ||||||||||||||||||||||
(in millions) | 30-59 | 60-89 | ≥90 | 30-59 | 60-89 | ≥90 | |||||||||||||||||||
Financial institutions | $ | 99 | $ | — | $ | — | $ | 99 | $ | 3 | $ | 3 | $ | — | $ | 6 | |||||||||
Wealth management loans and mortgages | 46 | — | — | 46 | 22 | 1 | 5 | 28 | |||||||||||||||||
Other residential mortgages | 10 | 3 | — | 13 | 12 | 6 | 7 | 25 | |||||||||||||||||
Commercial real estate | 13 | — | — | 13 | 1 | — | — | 1 | |||||||||||||||||
Total past due loans | $ | 168 | $ | 3 | $ | — | $ | 171 | $ | 38 | $ | 10 | $ | 12 | $ | 60 | |||||||||
Troubled debt restructurings
A modified loan is considered a TDR if the debtor is experiencing financial difficulties and the creditor grants a concession to the debtor that would not otherwise be considered. We modified loans of $4 million in the third quarter of 2019, $1 million in the third quarter of 2018 and less than $1 million in the second quarter of 2019. The loans were primarily other residential mortgages.
Credit quality indicators
Our credit strategy is to focus on investment-grade clients that are active users of our non-credit services. Each customer is assigned an internal credit rating, which is mapped to an external rating agency grade equivalent, if possible, based upon a number of dimensions, which are continually evaluated and may change over time.
The following tables present information about credit quality indicators.
Commercial loan portfolio
Commercial loan portfolio – Credit risk profile by creditworthiness category | Commercial | Commercial real estate | Financial institutions | |||||||||||||||||
Sept. 30, 2019 | Dec. 31, 2018 | Sept. 30, 2019 | Dec. 31, 2018 | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||||||||
(in millions) | ||||||||||||||||||||
Investment grade | $ | 1,652 | $ | 2,036 | $ | 4,753 | $ | 4,184 | $ | 11,346 | $ | 9,586 | ||||||||
Non-investment grade | 41 | 96 | 557 | 603 | 2,068 | 1,997 | ||||||||||||||
Total | $ | 1,693 | $ | 2,132 | $ | 5,310 | $ | 4,787 | $ | 13,414 | $ | 11,583 | ||||||||
The commercial loan portfolio is divided into investment grade and non-investment grade categories based on the assigned internal credit ratings, which are generally consistent with those 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 | ||||||
Sept. 30, 2019 | Dec. 31, 2018 | |||||
(in millions) | ||||||
Wealth management loans: | ||||||
Investment grade | $ | 6,966 | $ | 6,901 | ||
Non-investment grade | 57 | 106 | ||||
Wealth management mortgages | 8,833 | 8,958 | ||||
Total | $ | 15,856 | $ | 15,965 | ||
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
62 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
loans are typically investment grade fixed-income securities, equities and/or mutual funds. Internal ratings for this portion of the wealth management portfolio, therefore, would equate to investment-grade external ratings. Wealth management loans are provided to select customers based on the pledge of other types of assets, including business assets, fixed assets or a modest amount of commercial real estate. For the loans collateralized by other assets, the credit quality of the obligor is carefully analyzed, but we do not consider this portfolio of loans to be investment grade.
Credit quality indicators for wealth management mortgages are not correlated to external ratings. Wealth management mortgages are typically loans to high-net-worth individuals, which are secured primarily by residential property. These loans are primarily interest-only, adjustable rate mortgages with a weighted-average loan-to-value ratio of 62% at origination. In the wealth management portfolio, less than 1% of the mortgages were past due at Sept. 30, 2019.
At Sept. 30, 2019, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 23%; New York - 18%; Massachusetts - 10%; Florida - 8%; and other - 41%.
Other residential mortgages
The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $520 million at Sept. 30, 2019 and $594 million at Dec. 31, 2018. These loans are not typically correlated to external ratings. Included in this portfolio at Sept. 30, 2019 were $102 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007, of which, 11% of the serviced loan balance was at least 60 days delinquent.
Overdrafts
Overdrafts primarily relate to custody and securities clearance clients and totaled $5.3 billion at Sept. 30, 2019 and $5.5 billion at Dec. 31, 2018. Overdrafts occur on a daily basis primarily in the custody and securities clearance business and are generally repaid within two business days.
Other loans
Other loans primarily include loans to consumers that are fully collateralized with equities, mutual funds and fixed-income securities.
Margin loans
We had $10.5 billion of secured margin loans at Sept. 30, 2019 compared with $13.5 billion at Dec. 31, 2018. 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–Leasing
Significant accounting policy
We determine if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments. The ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. We use our incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of lease payments. In addition to the lease payments, the determination of an ROU asset may also include certain adjustments related to lease incentives and initial direct costs incurred. Options to extend or terminate a lease are included in the determination of the ROU asset and lease liability only when it is reasonably certain that we will exercise that option.
Lease expense for operating leases is recognized on a straight-line basis over the lease term, while the lease expense for finance leases is recognized using the effective interest method. ROU assets are reviewed for impairment when events or circumstances indicate that the carrying amount may not be recoverable. For
BNY Mellon 63
Notes to Consolidated Financial Statements (continued) |
operating leases, if deemed impaired, the ROU asset is written down and the remaining balance is subsequently amortized on a straight-line basis which results in lease expense recognition that is similar to finance leases.
We have elected to account for the lease and non-lease components as a single lease component and exclude the non-lease variable components. Additionally, for certain equipment leases, we apply a portfolio approach to account for the operating lease ROU assets and liabilities.
BNY Mellon engages in subleasing activities and reports the rental income as part of net occupancy expense, as this activity is not a significant business activity and is part of the Company’s customary business practice.
BNY Mellon engages in leverage lease transactions that were entered into prior to Dec. 31, 2018. These leases are grandfathered under the new standard and will continue to be accounted for under the prior guidance unless subsequently modified.
Leases
We have operating and finance leases for corporate offices, data centers and certain equipment. Our leases have remaining lease terms of one year to 20 years, some of which include options to extend or terminate the lease. In some of our corporate office locations, we may enter into sublease arrangements for portions or all of the space and/or lease term.
The following table presents the consolidated balance sheet information related to operating and finance leases.
Balance sheet information | Sept. 30, 2019 | ||||||||
(dollar in millions) | Operating leases | Finance leases | Total | ||||||
Right-of-use assets (a) | $ | 1,274 | $ | 19 | $ | 1,293 | |||
Lease liability (b) | $ | 1,488 | $ | 6 | $ | 1,494 | |||
Weighted average: | |||||||||
Remaining lease term | 9.9 years | 3.0 years | |||||||
Discount rate (annualized) | 2.99 | % | 2.81 | % | |||||
(a) | Included in premises and equipment on the consolidated balance sheet. |
(b) | Operating lease liabilities are included in other liabilities and finance lease liabilities are included in other borrowed funds, both on the consolidated balance sheet. |
The following table presents the components of lease expense.
Lease expense | Quarter ended | Year-to-date | |||||||
(in millions) | Sept. 30, 2019 | Sept. 30, 2019 | |||||||
Operating lease expense | $ | 66 | $ | 198 | |||||
Variable lease expense | 10 | 29 | |||||||
Sublease income | (8 | ) | (24 | ) | |||||
Finance lease expense: | |||||||||
Amortization of right-of-use assets | 2 | 6 | |||||||
Interest on lease liabilities | — | — | |||||||
Total finance lease expense | $ | 2 | $ | 6 | |||||
Total lease expense | $ | 70 | $ | 209 | |||||
The following table presents cash flow information related to leases.
Cash flow information | Nine months ended | |||
(in millions) | Sept. 30, 2019 | |||
Cash paid for amounts included in measurement of liabilities: | ||||
Operating cash flows from finance leases | $ | — | ||
Operating cash flows from operating leases | $ | 203 | ||
Financing cash flows from finance leases | $ | 16 | ||
See Note 21 for information on non-cash operating and/or finance lease transactions.
The following table presents the maturity of lease liabilities on operating leases prior to adopting ASU 2016-02, Leases.
Maturities of lease liabilities | Operating leases | ||
(in millions) | |||
For the year ended Dec. 31, | |||
2019 | $ | 264 | |
2020 | 244 | ||
2021 | 211 | ||
2022 | 172 | ||
2023 | 136 | ||
2024 and thereafter | 432 | ||
Total | $ | 1,459 | |
64 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
The following table presents the maturities of lease liabilities after adopting ASU 2016-02, Leases.
Maturities of lease liabilities | Operating leases | Finance leases | ||||
(in millions) | ||||||
For the year ended Dec. 31, | ||||||
2019 (excluding nine months ended Sept. 30, 2019) | $ | 80 | $ | 5 | ||
2020 | 275 | 1 | ||||
2021 | 220 | — | ||||
2022 | 181 | — | ||||
2023 | 144 | — | ||||
2024 and thereafter | 803 | — | ||||
Total lease payments | 1,703 | 6 | ||||
Less: Imputed interest | (215 | ) | — | |||
Total | $ | 1,488 | $ | 6 | ||
Note 7–Goodwill and intangible assets
Goodwill
The tables below provide a breakdown of goodwill by business.
Goodwill by business (in millions) | Investment Services | Investment Management | Other | Consolidated | ||||||||
Balance at Dec. 31, 2018 | $ | 8,333 | $ | 8,970 | $ | 47 | $ | 17,350 | ||||
Foreign currency translation | (45 | ) | (57 | ) | — | (102 | ) | |||||
Balance at Sept. 30, 2019 | $ | 8,288 | $ | 8,913 | $ | 47 | $ | 17,248 | ||||
Goodwill by business (in millions) | Investment Services | Investment Management | Other | Consolidated | ||||||||
Balance at Dec. 31, 2017 | $ | 8,389 | $ | 9,128 | $ | 47 | $ | 17,564 | ||||
Dispositions | — | (65 | ) | — | (65 | ) | ||||||
Foreign currency translation | (39 | ) | (70 | ) | — | (109 | ) | |||||
Balance at Sept. 30, 2018 | $ | 8,350 | $ | 8,993 | $ | 47 | $ | 17,390 | ||||
Intangible assets
The tables below provide a breakdown of intangible assets by business.
Intangible assets – net carrying amount by business (in millions) | Investment Services | Investment Management | Other | Consolidated | ||||||||
Balance at Dec. 31, 2018 | $ | 758 | $ | 1,613 | $ | 849 | $ | 3,220 | ||||
Amortization | (61 | ) | (28 | ) | — | (89 | ) | |||||
Foreign currency translation | (1 | ) | (6 | ) | — | (7 | ) | |||||
Balance at Sept. 30, 2019 | $ | 696 | $ | 1,579 | $ | 849 | $ | 3,124 | ||||
Intangible assets – net carrying amount by business (in millions) | Investment Services | Investment Management | Other | Consolidated | ||||||||
Balance at Dec. 31, 2017 | $ | 888 | $ | 1,674 | $ | 849 | $ | 3,411 | ||||
Amortization | (107 | ) | (38 | ) | — | (145 | ) | |||||
Foreign currency translation | (1 | ) | (7 | ) | — | (8 | ) | |||||
Balance at Sept. 30, 2018 | $ | 780 | $ | 1,629 | $ | 849 | $ | 3,258 | ||||
BNY Mellon 65
Notes to Consolidated Financial Statements (continued) |
The table below provides a breakdown of intangible assets by type.
Intangible assets | Sept. 30, 2019 | Dec. 31, 2018 | ||||||||||||||||||
(in millions) | Gross carrying amount | Accumulated amortization | Net carrying amount | Remaining weighted- average amortization period | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||
Subject to amortization: (a) | ||||||||||||||||||||
Customer contracts—Investment Services | $ | 1,516 | $ | (1,191 | ) | $ | 325 | 10 years | $ | 1,572 | $ | (1,186 | ) | $ | 386 | |||||
Customer relationships—Investment Management | 890 | (714 | ) | 176 | 11 years | 899 | (699 | ) | 200 | |||||||||||
Other | 64 | (15 | ) | 49 | 14 years | 26 | (12 | ) | 14 | |||||||||||
Total subject to amortization | 2,470 | (1,920 | ) | 550 | 11 years | 2,497 | (1,897 | ) | 600 | |||||||||||
Not subject to amortization: (b) | ||||||||||||||||||||
Tradenames | 1,291 | N/A | 1,291 | N/A | 1,332 | N/A | 1,332 | |||||||||||||
Customer relationships | 1,283 | N/A | 1,283 | N/A | 1,288 | N/A | 1,288 | |||||||||||||
Total not subject to amortization | 2,574 | N/A | 2,574 | N/A | 2,620 | N/A | 2,620 | |||||||||||||
Total intangible assets | $ | 5,044 | $ | (1,920 | ) | $ | 3,124 | N/A | $ | 5,117 | $ | (1,897 | ) | $ | 3,220 | |||||
(a) | Excludes fully amortized intangible assets. |
(b) | Intangible assets not subject to amortization have an indefinite life. |
N/A - Not applicable.
Estimated annual amortization expense for current intangibles for the next five years is as follows:
For the year ended Dec. 31, | Estimated amortization expense (in millions) | |||
2019 | $ | 117 | ||
2020 | 104 | |||
2021 | 81 | |||
2022 | 63 | |||
2023 | 52 | |||
Impairment testing
The goodwill impairment test is performed at least annually at the reporting unit level. Intangible assets not subject to amortization are tested for impairment annually or more often if events or circumstances indicate they may be impaired.
BNY Mellon’s three business segments include seven reporting units for which goodwill impairment testing is performed on an annual basis. The Investment Services segment is comprised of four reporting units; the Investment Management segment is comprised of two reporting units and one reporting unit is included in the Other segment. As a result of the annual goodwill impairment test of the seven reporting units conducted in the second quarter of 2019, no goodwill impairment was recognized.
Note 8–Other assets
The following table provides the components of other assets presented on the consolidated balance sheet.
Other assets | Sept. 30, 2019 | Dec. 31, 2018 | ||||
(in millions) | ||||||
Corporate/bank-owned life insurance | $ | 5,179 | $ | 4,937 | ||
Accounts receivable | 3,319 | 3,692 | ||||
Fails to deliver | 3,091 | 2,274 | ||||
Software | 1,706 | 1,652 | ||||
Prepaid pension assets | 1,479 | 1,357 | ||||
Equity in a joint venture and other investments | 1,178 | 1,064 | ||||
Renewable energy investments | 1,174 | 1,264 | ||||
Qualified affordable housing project investments | 1,047 | 999 | ||||
Income taxes receivable | 512 | 1,125 | ||||
Federal Reserve Bank stock | 465 | 484 | ||||
Prepaid expense | 461 | 385 | ||||
Fair value of hedging derivatives | 287 | 289 | ||||
Seed capital | 167 | 224 | ||||
Other (a) | 1,662 | 1,552 | ||||
Total other assets | $ | 21,727 | $ | 21,298 | ||
(a) | At Sept. 30, 2019 and Dec. 31, 2018, other assets include $23 million and $111 million, respectively, of Federal Home Loan Bank stock, at cost. |
Non-readily marketable equity securities
Non-readily marketable equity securities do not have readily determinable fair values. These investments are valued using a measurement alternative where the investments are carried at cost, less any impairment, and plus or minus changes resulting from observable
66 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
price changes in orderly transactions for an identical or similar investment of the same issuer. The observable price changes are recorded in investment and other income on the consolidated income statement. Our non-readily marketable equity securities totaled $62 million at Sept. 30, 2019 and $55 million at Dec. 31, 2018 and are included in equity in a joint venture and other investments in the table above.
The following table presents the adjustments on the non-readily marketable equity securities.
Non-readily marketable equity securities | Life-to-date | |||||||||||||||||
(in millions) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | |||||||||||||
Upward adjustments | $ | 1 | $ | 2 | $ | 3 | $ | 3 | $ | 28 | $ | 31 | ||||||
Downward adjustments | — | (1 | ) | (1 | ) | (1 | ) | (1 | ) | (2 | ) | |||||||
Net adjustments | $ | 1 | $ | 1 | $ | 2 | $ | 2 | $ | 27 | $ | 29 | ||||||
Qualified affordable housing project investments
We invest in affordable housing projects primarily to satisfy the Company’s requirements under the Community Reinvestment Act. Our total investment in qualified affordable housing projects totaled $1.0 billion at Sept. 30, 2019 and Dec. 31, 2018. Commitments to fund future investments in qualified affordable housing projects totaled $504 million at Sept. 30, 2019 and $479 million at Dec. 31, 2018 and are recorded in other liabilities. A summary of the commitments to fund future investments is as follows: 2019 – $59 million; 2020 – $173 million; 2021 – $161 million; 2022 – $81 million; 2023 – $6 million; and 2024 and thereafter – $24 million.
Tax credits and other tax benefits recognized were $39 million in the third quarter of 2019, $40 million in the third quarter of 2018, $39 million in the second quarter of 2019, $117 million in the first nine months of 2019 and $122 million in the first nine months of 2018.
Amortization expense included in the provision for income taxes was $33 million in the third quarter of 2019, $34 million in the third quarter of 2018, $32 million in the second quarter of 2019, $97 million in the first nine months of 2019 and $102 million in the first nine months of 2018.
Investments valued using net asset value per share
In our Investment Management business, we manage investment assets, including equities, fixed income, money market and multi-asset and alternative investment funds for institutions and other investors. As part of that activity, we make seed capital investments in certain funds. We also hold private equity investments, specifically small business investment companies (“SBICs”), which are compliant with the Volcker Rule, and certain other corporate investments. Seed capital, private equity and other corporate investments are included in other assets on the consolidated balance sheet. The fair value of certain of these investments was estimated using the net asset value (“NAV”) per share for BNY Mellon’s ownership interest in the funds.
The table below presents information on our investments valued using NAV.
Investments valued using NAV | |||||||||||||||||||
Sept. 30, 2019 | Dec. 31, 2018 | ||||||||||||||||||
(dollars in millions) | Fair value | Unfunded commitments | Redemption frequency | Redemption notice period | Fair value | Unfunded commitments | Redemption frequency | Redemption notice period | |||||||||||
Seed capital | $ | 59 | $ | — | Daily-quarterly | 1-90 days | $ | 54 | $ | — | Daily-quarterly | 1-90 days | |||||||
Private equity investments (SBICs) (a) | 86 | 49 | N/A | N/A | 74 | 41 | N/A | N/A | |||||||||||
Other (b) | 32 | — | Daily-quarterly | 1-95 days | 87 | — | Daily-quarterly | 1-95 days | |||||||||||
Total | $ | 177 | $ | 49 | $ | 215 | $ | 41 | |||||||||||
(a) | Private equity investments include Volcker Rule-compliant investments in SBICs that invest in various sectors of the economy. Private equity investments do not have redemption rights. Distributions from such investments will be received as the underlying investments in the private equity investments, which have a life of 10 years, are liquidated. |
(b) | Primarily relates to investments in funds that relate to deferred compensation arrangements with employees. |
N/A - Not applicable.
BNY Mellon 67
Notes to Consolidated Financial Statements (continued) |
Note 9–Contract revenue
Fee revenue in Investment Services and Investment Management is primarily variable, based on levels of AUC/A, AUM and the level of client-driven transactions, as specified in fee schedules. See Note 9 of the Notes to Consolidated Financial Statements in our 2018 Annual Report for information on the nature of our services and revenue recognition. See Note 23 of the Notes to Consolidated Financial Statement in our 2018 Annual Report for additional
information on our principal businesses, Investment Services and Investment Management, and the primary services provided.
Disaggregation of contract revenue
Contract revenue is included in fee revenue on the consolidated income statement. The following tables present fee revenue related to contracts with customers, disaggregated by type of fee revenue, for each business segment.
Disaggregation of contract revenue by business segment (a) | ||||||||||||||||||||||||||||||||||||||
Quarter ended | ||||||||||||||||||||||||||||||||||||||
Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | ||||||||||||||||||||||||||||||||||||
(in millions) | IS | IM | Other | Total | IS | IM | Other | Total | IS | IM | Other | Total | ||||||||||||||||||||||||||
Fee revenue - contract revenue: | ||||||||||||||||||||||||||||||||||||||
Investment services fees: | ||||||||||||||||||||||||||||||||||||||
Asset servicing fees | $ | 1,100 | $ | 20 | $ | 1 | $ | 1,121 | $ | 1,089 | $ | 20 | $ | — | $ | 1,109 | $ | 1,103 | $ | 21 | $ | — | $ | 1,124 | ||||||||||||||
Clearing services fees (b) | 419 | — | — | 419 | 411 | — | (1 | ) | 410 | 393 | — | — | 393 | |||||||||||||||||||||||||
Issuer services fees | 324 | — | — | 324 | 291 | — | — | 291 | 288 | — | — | 288 | ||||||||||||||||||||||||||
Treasury services fees | 140 | — | — | 140 | 140 | 1 | — | 141 | 136 | — | — | 136 | ||||||||||||||||||||||||||
Total investment services fees (b) | 1,983 | 20 | 1 | 2,004 | 1,931 | 21 | (1 | ) | 1,951 | 1,920 | 21 | — | 1,941 | |||||||||||||||||||||||||
Investment management and performance fees (b) | 4 | 825 | — | 829 | 4 | 829 | — | 833 | 3 | 904 | — | 907 | ||||||||||||||||||||||||||
Financing-related fees | 14 | — | — | 14 | 16 | — | 1 | 17 | 13 | — | 1 | 14 | ||||||||||||||||||||||||||
Distribution and servicing | (12 | ) | 45 | — | 33 | (13 | ) | 44 | — | 31 | (13 | ) | 48 | — | 35 | |||||||||||||||||||||||
Investment and other income | 72 | (50 | ) | — | 22 | 69 | (48 | ) | — | 21 | 71 | (51 | ) | (1 | ) | 19 | ||||||||||||||||||||||
Total fee revenue - contract revenue | 2,061 | 840 | 1 | 2,902 | 2,007 | 846 | — | 2,853 | 1,994 | 922 | — | 2,916 | ||||||||||||||||||||||||||
Fee and other revenue - not in scope of ASC 606 (c)(d) | 230 | (7 | ) | 3 | 226 | 220 | 4 | 41 | 265 | 236 | 16 | 7 | 259 | |||||||||||||||||||||||||
Total fee and other revenue | $ | 2,291 | $ | 833 | $ | 4 | $ | 3,128 | $ | 2,227 | $ | 850 | $ | 41 | $ | 3,118 | $ | 2,230 | $ | 938 | $ | 7 | $ | 3,175 | ||||||||||||||
(a) | Business segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. |
(b) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
(c) | Primarily includes foreign exchange and other trading revenue, financing-related fees, asset servicing fees, investment and other income and net securities gains (losses), all of which are accounted for using other accounting guidance. |
(d) | The Investment Management business includes income from consolidated investment management funds, net of noncontrolling interests, of $- million in the third quarter of 2019, $6 million in the second quarter of 2019 and $7 million in the third quarter of 2018. |
IS - Investment Services segment.
IM - Investment Management segment.
68 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Disaggregation of contract revenue by business segment (a) | |||||||||||||||||||||||||
Year-to-date | |||||||||||||||||||||||||
Sept. 30, 2019 | Sept. 30, 2018 | ||||||||||||||||||||||||
(in millions) | IS | IM | Other | Total | IS | IM | Other | Total | |||||||||||||||||
Fee revenue - contract revenue: | |||||||||||||||||||||||||
Investment services fees: | |||||||||||||||||||||||||
Asset servicing fees | $ | 3,262 | $ | 60 | $ | 1 | $ | 3,323 | $ | 3,318 | $ | 67 | $ | 1 | $ | 3,386 | |||||||||
Clearing services fees (b) | 1,228 | — | (1 | ) | 1,227 | 1,217 | — | 1 | 1,218 | ||||||||||||||||
Issuer services fees | 866 | — | — | 866 | 813 | — | — | 813 | |||||||||||||||||
Treasury services fees | 412 | 1 | — | 413 | 414 | 1 | — | 415 | |||||||||||||||||
Total investment services fees (b) | 5,768 | 61 | — | 5,829 | 5,762 | 68 | 2 | 5,832 | |||||||||||||||||
Investment management and performance fees (b) | 12 | 2,491 | — | 2,503 | 12 | 2,739 | — | 2,751 | |||||||||||||||||
Financing-related fees | 47 | — | 1 | 48 | 45 | — | 1 | 46 | |||||||||||||||||
Distribution and servicing | (39 | ) | 134 | — | 95 | (41 | ) | 146 | — | 105 | |||||||||||||||
Investment and other income | 210 | (147 | ) | — | 63 | 209 | (152 | ) | — | 57 | |||||||||||||||
Total fee revenue - contract revenue | 5,998 | 2,539 | 1 | 8,538 | 5,987 | 2,801 | 3 | 8,791 | |||||||||||||||||
Fee and other revenue - not in scope of ASC 606 (c)(d) | 674 | 8 | 74 | 756 | 726 | 90 | 53 | 869 | |||||||||||||||||
Total fee and other revenue | $ | 6,672 | $ | 2,547 | $ | 75 | $ | 9,294 | $ | 6,713 | $ | 2,891 | $ | 56 | $ | 9,660 | |||||||||
(a) | Business segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. |
(b) | In the first quarter of 2019, we reclassified certain platform-related fees to clearing services fees from investment management and performance fees. Prior periods have been reclassified. |
(c) | Primarily includes foreign exchange and other trading revenue, financing-related fees, asset servicing fees, investment and other income and net securities gains (losses), all of which are accounted for using other accounting guidance. |
(d) | The Investment Management business includes income from consolidated investment management funds, net of noncontrolling interests, of $22 million in the first nine months of 2019 and $12 million in the first nine months of 2018. |
IS - Investment Services segment.
IM - Investment Management segment.
Contract balances
Our clients are billed based on fee schedules that are agreed upon in each customer contract. Receivables from customers were $2.4 billion at Sept. 30, 2019 and $2.5 billion at Dec. 31, 2018. An allowance is maintained for accounts receivable which is generally based on the number of days outstanding. Adjustments to the allowance are recorded in other expense on the consolidated income statement. We recorded a provision of $2 million in the third quarter of 2019, third quarter of 2018 and second quarter of 2019 and $8 million in the first nine months of 2019 and first nine months of 2018.
Contract assets represent accrued revenues that have not yet been billed to the customers due to certain contractual terms other than the passage of time and were $47 million at Sept. 30, 2019 and $36 million at Dec. 31, 2018. Accrued revenues recorded as contract assets are usually billed on an annual basis. There were no impairments recorded on contract assets in the first nine months of 2019.
Both receivables from customers and contract assets are included in other assets on the consolidated balance sheet.
Contract liabilities represent payments received in advance of providing services under certain contracts and were $193 million at Sept. 30, 2019 and $171 million at Dec. 31, 2018. Contract liabilities are included in other liabilities on the consolidated balance sheet. Revenue recognized in the third quarter of 2019 relating to contract liabilities as of June 30, 2019 was $61 million. Revenue recognized in the first nine months of 2019 relating to contract liabilities as of Dec. 31, 2018 was $91 million.
Changes in contract assets and liabilities primarily relate to either party’s performance under the contracts.
Contract costs
Incremental costs for obtaining contracts that are deemed recoverable are capitalized as contract costs. Such costs result from the payment of sales incentives, primarily in the Wealth Management business, and totaled $91 million at Sept. 30, 2019 and $98 million at Dec. 31, 2018. Capitalized sales incentives are amortized based on the transfer of goods or services to which the assets relate and typically average nine years. The amortization of capitalized sales incentives, which is primarily included in staff expense on the consolidated income
BNY Mellon 69
Notes to Consolidated Financial Statements (continued) |
statement, totaled $7 million in the third quarter of 2019, $6 million in the third quarter of 2018, $5 million in the second quarter of 2019 and $17 million in the first nine months of 2019 and first nine months of 2018.
Costs to fulfill a contract are capitalized when they relate directly to an existing contract or a specific anticipated contract, generate or enhance resources that will be used to fulfill performance obligations and are recoverable. Such costs generally represent set-up costs, which include any direct cost incurred at the inception of a contract which enables the fulfillment of the performance obligation and totaled $17 million at Sept. 30, 2019 and $20 million at Dec. 31, 2018. These capitalized costs are amortized on a straight-line basis over the expected contract period which generally range from seven to nine years. The amortization is included in other expense on the consolidated income statement and totaled $1 million
in the third quarter of 2019 and third quarter of 2018, $2 million in the second quarter of 2019 and $4 million in the first nine months of 2019 and first nine months of 2018.
There were no impairments recorded on capitalized contract costs in the first nine months of 2019.
Unsatisfied performance obligations
We do not have any unsatisfied performance obligations other than those that are subject to a practical expedient election under Accounting Standards Codification (“ASC”) 606, Revenue From Contracts With Customers. The practical expedient election applies to (i) contracts with an original expected length of one year or less, and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Note 10–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, 2019 | June 30, 2019 | Sept. 30, 2018 | Sept. 30, 2019 | Sept. 30, 2018 | |||||||||||||
Interest revenue | ||||||||||||||||||
Deposits with the Federal Reserve and other central banks | $ | 102 | $ | 113 | $ | 125 | $ | 354 | $ | 387 | ||||||||
Deposits with banks | 73 | 64 | 59 | 200 | 157 | |||||||||||||
Federal funds sold and securities purchased under resale agreements | 660 | 568 | 281 | 1,702 | 681 | |||||||||||||
Margin loans | 104 | 119 | 129 | 358 | 372 | |||||||||||||
Non-margin loans | 287 | (a) | 365 | 344 | 1,007 | (a) | 994 | |||||||||||
Securities: | ||||||||||||||||||
Taxable | 669 | 687 | 650 | 2,062 | 1,846 | |||||||||||||
Exempt from federal income taxes | 7 | 10 | 14 | 29 | 43 | |||||||||||||
Total securities | 676 | 697 | 664 | 2,091 | 1,889 | |||||||||||||
Trading securities | 40 | 39 | 32 | 115 | 88 | |||||||||||||
Total interest revenue | 1,942 | 1,965 | 1,634 | 5,827 | 4,568 | |||||||||||||
Interest expense | ||||||||||||||||||
Deposits | 437 | 432 | 237 | 1,260 | 527 | |||||||||||||
Federal funds purchased and securities sold under repurchase agreements | 443 | 372 | 190 | 1,146 | 455 | |||||||||||||
Trading liabilities | 8 | 11 | 7 | 26 | 23 | |||||||||||||
Other borrowed funds | 10 | 20 | 16 | 54 | 39 | |||||||||||||
Commercial paper | 22 | 18 | 16 | 48 | 49 | |||||||||||||
Customer payables | 59 | 69 | 51 | 198 | 127 | |||||||||||||
Long-term debt | 233 | 241 | 226 | 722 | 622 | |||||||||||||
Total interest expense | 1,212 | 1,163 | 743 | 3,454 | 1,842 | |||||||||||||
Net interest revenue | 730 | 802 | 891 | 2,373 | 2,726 | |||||||||||||
Provision for credit losses | (16 | ) | (8 | ) | (3 | ) | (17 | ) | (11 | ) | ||||||||
Net interest revenue after provision for credit losses | $ | 746 | $ | 810 | $ | 894 | $ | 2,390 | $ | 2,737 | ||||||||
(a) | Includes the impact of a lease-related impairment of $70 million. |
70 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Note 11–Employee benefit plans
The components of net periodic benefit (credit) cost are presented below. The service cost component is reflected in staff expense, whereas the remaining components are reflected in other expense.
Net periodic benefit (credit) cost | Quarter ended | ||||||||||||||||||||||||||||
Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | |||||||||||||||||||||||||||
(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 | $ | — | $ | 3 | $ | — | $ | — | $ | 3 | $ | — | $ | — | $ | 7 | $ | 1 | |||||||||||
Interest cost | 44 | 8 | 2 | 45 | 8 | 1 | 42 | 8 | 1 | ||||||||||||||||||||
Expected return on assets | (84 | ) | (11 | ) | (1 | ) | (84 | ) | (12 | ) | (2 | ) | (85 | ) | (14 | ) | (2 | ) | |||||||||||
Other | 13 | — | (1 | ) | 13 | 1 | — | 19 | 5 | (1 | ) | ||||||||||||||||||
Net periodic benefit (credit) cost | $ | (27 | ) | $ | — | $ | — | $ | (26 | ) | $ | — | $ | (1 | ) | $ | (24 | ) | $ | 6 | $ | (1 | ) | ||||||
Net periodic benefit (credit) cost | Year-to-date | ||||||||||||||||||
Sept. 30, 2019 | Sept. 30, 2018 | ||||||||||||||||||
(in millions) | Domestic pension benefits | Foreign pension benefits | Health care benefits | Domestic pension benefits | Foreign pension benefits | Health care benefits | |||||||||||||
Service cost | $ | — | $ | 9 | $ | — | $ | — | $ | 21 | $ | 1 | |||||||
Interest cost | 133 | 24 | 5 | 127 | 24 | 5 | |||||||||||||
Expected return on assets | (252 | ) | (34 | ) | (5 | ) | (255 | ) | (43 | ) | (6 | ) | |||||||
Other | 39 | 1 | (2 | ) | 53 | 17 | (2 | ) | |||||||||||
Net periodic benefit (credit) cost | $ | (80 | ) | $ | — | $ | (2 | ) | $ | (75 | ) | $ | 19 | $ | (2 | ) | |||
Note 12–Income taxes
The provision for income tax was $246 million (19.1% effective tax rate) in the third quarter of 2019, $220 million (16.5% effective tax rate) in the third quarter of 2018 and $264 million (20.5% effective tax rate) in the second quarter of 2019. The effective rate for the third quarter of 2018 was impacted by adjustments to the provisional estimates for U.S. tax legislation and other changes.
Our total tax reserves as of Sept. 30, 2019 were $147 million compared with $135 million at June 30, 2019. If these tax reserves were unnecessary, $147 million would affect the effective tax rate in future periods. We recognize accrued interest and penalties, if applicable, related to income taxes in the provision for income taxes on the consolidated income statement. Included in the balance sheet at Sept. 30, 2019 is accrued interest, where applicable, of $27 million. The additional tax expense related to interest for the nine months ended Sept. 30, 2019 was $9 million, compared with $3 million for the nine months ended Sept. 30, 2018.
It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by approximately $100 million as a result of adjustments related to tax years that are still subject to examination.
Our federal income tax returns are closed to examination through 2013. Our New York State, New York City and UK income tax returns are closed to examination through 2012.
Note 13–Variable interest entities and securitization
BNY Mellon has variable interests in VIEs, which include investments in retail, institutional and alternative investment funds, including collateralized loan obligation (“CLO”) structures in which we provide asset management services, some of which are consolidated. The investment funds are offered to our retail and institutional clients to provide them with access to investment vehicles with specific investment objectives and strategies that address the client’s investment needs.
BNY Mellon 71
Notes to Consolidated Financial Statements (continued) |
BNY Mellon earns management fees from these funds as well as performance fees in certain funds and may also provide start-up capital for its new funds. The funds are primarily financed by our customers’ investments in the funds’ equity or debt.
Additionally, BNY Mellon invests in qualified affordable housing and renewable energy projects, which are designed to generate a return primarily through the realization of tax credits by the Company. The projects, which are structured as limited
partnerships and LLCs, are also VIEs, but are not consolidated.
The following table presents the incremental assets and liabilities included in BNY Mellon’s consolidated balance sheet as of Sept. 30, 2019 and Dec. 31, 2018. The net assets of any consolidated VIE are solely available to settle the liabilities of the VIE and to settle any investors’ ownership liquidation requests, including any seed capital invested in the VIE by BNY Mellon.
Consolidated investments | |||||||||||||||||||||
Sept. 30, 2019 | Dec. 31, 2018 | ||||||||||||||||||||
(in millions) | Investment Management funds | Securitization | Total consolidated investments | Investment Management funds | Securitization | Total consolidated investments | |||||||||||||||
Trading assets | $ | 349 | $ | 400 | $ | 749 | $ | 243 | $ | 400 | $ | 643 | |||||||||
Other assets | 32 | — | 32 | 220 | — | 220 | |||||||||||||||
Total assets | $ | 381 | (a) | $ | 400 | $ | 781 | $ | 463 | (b) | $ | 400 | $ | 863 | |||||||
Trading liabilities | $ | 7 | $ | — | $ | 7 | $ | — | $ | — | $ | — | |||||||||
Other liabilities | 8 | 386 | 394 | 2 | 371 | 373 | |||||||||||||||
Total liabilities | $ | 15 | (a) | $ | 386 | $ | 401 | $ | 2 | (b) | $ | 371 | $ | 373 | |||||||
Nonredeemable noncontrolling interests | $ | 203 | (a) | $ | — | $ | 203 | $ | 101 | (b) | $ | — | $ | 101 | |||||||
(a) | Includes voting model entities (“VMEs”) with assets of $53 million, liabilities of $2 million and nonredeemable noncontrolling interests of $2 million. |
(b) | Includes VMEs with assets of $253 million, liabilities of $2 million and nonredeemable noncontrolling interests of less than $1 million. |
BNY Mellon has not provided financial or other support that was not otherwise contractually required to be provided to our VIEs. Additionally, creditors of any consolidated VIEs do not have any recourse to the general credit of BNY Mellon.
Non-consolidated VIEs
As of Sept. 30, 2019 and Dec. 31, 2018, the following assets and liabilities related to the VIEs where BNY
Mellon is not the primary beneficiary are included in our consolidated balance sheets and primarily relate to accounting for our investments in qualified affordable housing and renewable energy projects.
The maximum loss exposure indicated in the table below relates solely to BNY Mellon’s investments in, and unfunded commitments to, the VIEs.
Non-consolidated VIEs | |||||||||||||||||||
Sept. 30, 2019 | Dec. 31, 2018 | ||||||||||||||||||
(in millions) | Assets | Liabilities | Maximum loss exposure | Assets | Liabilities | Maximum loss exposure | |||||||||||||
Securities - Available-for-sale (a) | $ | 206 | $ | — | $ | 206 | $ | 214 | $ | — | $ | 214 | |||||||
Other | 2,436 | 503 | 2,941 | 2,450 | 479 | 2,929 | |||||||||||||
(a) | Includes investments in the Company’s sponsored CLOs. |
72 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Note 14–Preferred stock
BNY Mellon has 100 million authorized shares of preferred stock with a par value of $0.01 per share. The following table summarizes BNY Mellon’s preferred stock issued and outstanding at Sept. 30, 2019 and Dec. 31, 2018.
Preferred stock summary (a) | Total shares issued and outstanding | Carrying value (b) | ||||||||||
(in millions) | ||||||||||||
Sept. 30, 2019 | Dec. 31, 2018 | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||
Per annum dividend rate | ||||||||||||
Series A | Greater of (i) three-month LIBOR plus 0.565% for the related distribution period; or (ii) 4.000% | 5,001 | 5,001 | $ | 500 | $ | 500 | |||||
Series C | 5.2% | 5,825 | 5,825 | 568 | 568 | |||||||
Series D | 4.50% to but excluding June 20, 2023, then a floating rate equal to the three-month LIBOR plus 2.46% | 5,000 | 5,000 | 494 | 494 | |||||||
Series E | 4.95% to and including June 20, 2020, then a floating rate equal to the three-month LIBOR plus 3.42% | 10,000 | 10,000 | 990 | 990 | |||||||
Series F | 4.625% to and including Sept. 20, 2026, then a floating rate equal to the three-month LIBOR plus 3.131% | 10,000 | 10,000 | 990 | 990 | |||||||
Total | 35,826 | 35,826 | $ | 3,542 | $ | 3,542 | ||||||
(a) | All outstanding preferred stock is noncumulative perpetual preferred stock with a liquidation preference of $100,000 per share. |
(b) | The carrying value of the Series C, Series D, Series E and Series F preferred stock is recorded net of issuance costs. |
The table below presents the dividends paid on our preferred stock.
Preferred dividends paid | ||||||||||||||||||||||||||||||||||||||
(dollars in millions, except per share amounts) | Depositary shares per share | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||||||||||||||||||||||||
Per share | Total dividend | Per share | Total dividend | Per share | Total dividend | Per share | Total dividend | Per share | Total dividend | |||||||||||||||||||||||||||||
Series A | 100 | (a) | $ | 1,022.22 | $ | 5 | $ | 1,022.22 | $ | 5 | $ | 1,022.22 | $ | 5 | $ | 3,044.44 | $ | 15 | $ | 3,044.44 | $ | 15 | ||||||||||||||||
Series C | 4,000 | 1,300.00 | 8 | 1,300.00 | 7 | 1,300.00 | 8 | 3,900.00 | 23 | 3,900.00 | 23 | |||||||||||||||||||||||||||
Series D | 100 | N/A | — | 2,250.00 | 11 | N/A | — | 2,250.00 | 11 | 2,250.00 | 11 | |||||||||||||||||||||||||||
Series E | 100 | N/A | — | 2,475.00 | 25 | N/A | — | 2,475.00 | 25 | 2,475.00 | 25 | |||||||||||||||||||||||||||
Series F | 100 | 2,312.50 | 23 | N/A | — | 2,312.50 | 23 | 4,625.00 | 46 | 4,625.00 | 46 | |||||||||||||||||||||||||||
Total | $ | 36 | $ | 48 | $ | 36 | $ | 120 | $ | 120 | ||||||||||||||||||||||||||||
(a) | Represents Normal Preferred Capital Securities. |
N/A - Not applicable.
For additional information on the preferred stock, see Note 14 of the Notes to Consolidated Financial Statements in our 2018 Annual Report.
BNY Mellon 73
Notes to Consolidated Financial Statements (continued) |
Note 15–Other comprehensive income (loss)
Components of other comprehensive income (loss) | Quarter ended | ||||||||||||||||||||||||||||
Sept. 30, 2019 | June 30, 2019 | Sept. 30, 2018 | |||||||||||||||||||||||||||
(in millions) | Pre-tax amount | Tax (expense) benefit | After-tax amount | Pre-tax amount | Tax (expense) benefit | After-tax amount | Pre-tax amount | Tax (expense) benefit | After-tax amount | ||||||||||||||||||||
Foreign currency translation: | |||||||||||||||||||||||||||||
Foreign currency translation adjustments arising during the period (a) | $ | (213 | ) | $ | (63 | ) | $ | (276 | ) | $ | 29 | $ | (19 | ) | $ | 10 | $ | (21 | ) | $ | (39 | ) | $ | (60 | ) | ||||
Total foreign currency translation | (213 | ) | (63 | ) | (276 | ) | 29 | (19 | ) | 10 | (21 | ) | (39 | ) | (60 | ) | |||||||||||||
Unrealized gain (loss) on assets available-for-sale: | |||||||||||||||||||||||||||||
Unrealized gain (loss) arising during period | 88 | (25 | ) | 63 | 384 | (97 | ) | 287 | (190 | ) | 46 | (144 | ) | ||||||||||||||||
Reclassification adjustment (b) | 1 | — | 1 | (7 | ) | 2 | (5 | ) | — | — | — | ||||||||||||||||||
Net unrealized gain (loss) on assets available-for-sale | 89 | (25 | ) | 64 | 377 | (95 | ) | 282 | (190 | ) | 46 | (144 | ) | ||||||||||||||||
Defined benefit plans: | |||||||||||||||||||||||||||||
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b) | 13 | (3 | ) | 10 | 12 | (2 | ) | 10 | 23 | (5 | ) | 18 | |||||||||||||||||
Total defined benefit plans | 13 | (3 | ) | 10 | 12 | (2 | ) | 10 | 23 | (5 | ) | 18 | |||||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||||||||||||||
Unrealized hedge (loss) gain arising during period | (9 | ) | 4 | (5 | ) | 2 | (2 | ) | — | (9 | ) | 2 | (7 | ) | |||||||||||||||
Reclassification of net loss (gain) to net income: | |||||||||||||||||||||||||||||
Interest rate contracts - interest expense | 1 | — | 1 | — | — | — | — | — | — | ||||||||||||||||||||
FX contracts - staff expense | (2 | ) | — | (2 | ) | — | — | — | 4 | (1 | ) | 3 | |||||||||||||||||
Total reclassifications to net income | (1 | ) | — | (1 | ) | — | — | — | 4 | (1 | ) | 3 | |||||||||||||||||
Net unrealized (loss) gain on cash flow hedges | (10 | ) | 4 | (6 | ) | 2 | (2 | ) | — | (5 | ) | 1 | (4 | ) | |||||||||||||||
Total other comprehensive (loss) income | $ | (121 | ) | $ | (87 | ) | $ | (208 | ) | $ | 420 | $ | (118 | ) | $ | 302 | $ | (193 | ) | $ | 3 | $ | (190 | ) | |||||
(a) | Includes the impact of hedges of net investments in foreign subsidiaries. See Note 18 for additional information. |
(b) | The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the consolidated income statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense on the consolidated income statement. |
74 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Components of other comprehensive income (loss) | Year-to-date | ||||||||||||||||||
Sept. 30, 2019 | Sept. 30, 2018 | ||||||||||||||||||
(in millions) | Pre-tax amount | Tax (expense) benefit | After-tax amount | Pre-tax amount | Tax (expense) benefit | After-tax amount | |||||||||||||
Foreign currency translation: | |||||||||||||||||||
Foreign currency translation adjustments arising during the period (a) | $ | (157 | ) | $ | (80 | ) | $ | (237 | ) | $ | (122 | ) | $ | (94 | ) | $ | (216 | ) | |
Total foreign currency translation | (157 | ) | (80 | ) | (237 | ) | (122 | ) | (94 | ) | (216 | ) | |||||||
Unrealized gain (loss) on assets available-for-sale: | |||||||||||||||||||
Unrealized gain (loss) arising during period | 794 | (205 | ) | 589 | (635 | ) | 152 | (483 | ) | ||||||||||
Reclassification adjustment (b) | (7 | ) | 2 | (5 | ) | 48 | (11 | ) | 37 | ||||||||||
Net unrealized gain (loss) on assets available-for-sale | 787 | (203 | ) | 584 | (587 | ) | 141 | (446 | ) | ||||||||||
Defined benefit plans: | |||||||||||||||||||
Net (loss) gain arising during the period | (11 | ) | 2 | (9 | ) | — | — | — | |||||||||||
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b) | 38 | (8 | ) | 30 | 67 | (16 | ) | 51 | |||||||||||
Total defined benefit plans | 27 | (6 | ) | 21 | 67 | (16 | ) | 51 | |||||||||||
Unrealized (loss) gain on cash flow hedges: | |||||||||||||||||||
Unrealized hedge (loss) gain arising during period | (1 | ) | (2 | ) | (3 | ) | (19 | ) | 4 | (15 | ) | ||||||||
Reclassification of net loss (gain) to net income: | |||||||||||||||||||
Interest rate contracts - interest expense | 1 | — | 1 | — | — | — | |||||||||||||
FX contracts - staff expense | (1 | ) | 2 | 1 | (4 | ) | 1 | (3 | ) | ||||||||||
FX contracts - other revenue | — | — | — | (3 | ) | 1 | (2 | ) | |||||||||||
Total reclassifications to net income | — | 2 | 2 | (7 | ) | 2 | (5 | ) | |||||||||||
Net unrealized (loss) gain on cash flow hedges | (1 | ) | — | (1 | ) | (26 | ) | 6 | (20 | ) | |||||||||
Total other comprehensive income (loss) | $ | 656 | $ | (289 | ) | $ | 367 | $ | (668 | ) | $ | 37 | $ | (631 | ) | ||||
(a) | Includes the impact of hedges of net investments in foreign subsidiaries. See Note 18 for additional information. |
(b) | The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the consolidated income statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense on the consolidated income statement. |
BNY Mellon 75
Notes to Consolidated Financial Statements (continued) |
Note 16–Fair value measurement
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. A three-level hierarchy for fair value measurements is utilized based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. BNY Mellon’s own creditworthiness is considered when valuing liabilities. See Note 19 of the Notes to Consolidated Financial Statements in our 2018 Annual Report for
information on how we determine fair value and the fair value hierarchy.
The following tables present the financial instruments carried at fair value at Sept. 30, 2019 and Dec. 31, 2018, by caption on the consolidated balance sheet and by the three-level valuation hierarchy. We have included credit ratings information in certain of the tables because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications could result in increased risk for us.
Assets measured at fair value on a recurring basis at Sept. 30, 2019 | Total carrying value | ||||||||||||||
(dollars in millions) | Level 1 | Level 2 | Level 3 | Netting (a) | |||||||||||
Available-for-sale securities: | |||||||||||||||
Agency RMBS | $ | — | $ | 26,391 | $ | — | $ | — | $ | 26,391 | |||||
U.S. Treasury | 15,126 | — | — | — | 15,126 | ||||||||||
Sovereign debt/sovereign guaranteed | 8,325 | 4,825 | — | — | 13,150 | ||||||||||
Agency commercial MBS | — | 9,576 | — | — | 9,576 | ||||||||||
Supranational | — | 4,093 | — | — | 4,093 | ||||||||||
CLOs | — | 3,868 | — | — | 3,868 | ||||||||||
Foreign covered bonds | — | 3,593 | — | — | 3,593 | ||||||||||
Other ABS | — | 2,484 | — | — | 2,484 | ||||||||||
U.S. government agencies | — | 2,477 | — | — | 2,477 | ||||||||||
Non-agency commercial MBS | — | 2,268 | — | — | 2,268 | ||||||||||
Foreign government agencies | — | 2,186 | — | — | 2,186 | ||||||||||
Non-agency RMBS (b) | — | 1,213 | — | — | 1,213 | ||||||||||
State and political subdivisions | — | 1,184 | — | — | 1,184 | ||||||||||
Corporate bonds | — | 879 | — | — | 879 | ||||||||||
Other debt securities | — | 74 | — | — | 74 | ||||||||||
Total available-for-sale securities | 23,451 | 65,111 | — | — | 88,562 | ||||||||||
Trading assets: | |||||||||||||||
Debt instruments | 1,217 | 3,658 | — | — | 4,875 | ||||||||||
Equity instruments (c) | 2,066 | — | — | — | 2,066 | ||||||||||
Derivative assets not designated as hedging: | |||||||||||||||
Interest rate | 7 | 4,833 | — | (2,585 | ) | 2,255 | |||||||||
Foreign exchange | — | 5,066 | — | (4,094 | ) | 972 | |||||||||
Equity and other contracts | — | 14 | — | (2 | ) | 12 | |||||||||
Total derivative assets not designated as hedging | 7 | 9,913 | — | (6,681 | ) | 3,239 | |||||||||
Total trading assets | 3,290 | 13,571 | — | (6,681 | ) | 10,180 | |||||||||
Other assets: | |||||||||||||||
Derivative assets designated as hedging: | |||||||||||||||
Foreign exchange | — | 287 | — | — | 287 | ||||||||||
Total derivative assets designated as hedging | — | 287 | — | — | 287 | ||||||||||
Other assets (d) | 51 | 159 | — | — | 210 | ||||||||||
Assets measured at NAV (d) | 177 | ||||||||||||||
Subtotal assets of operations at fair value | 26,792 | 79,128 | — | (6,681 | ) | 99,416 | |||||||||
Percentage of assets of operations prior to netting | 25 | % | 75 | % | — | % | |||||||||
Assets of consolidated investment management funds | 359 | 22 | — | — | 381 | ||||||||||
Total assets | $ | 27,151 | $ | 79,150 | $ | — | $ | (6,681 | ) | $ | 99,797 | ||||
Percentage of total assets prior to netting | 26 | % | 74 | % | — | % | |||||||||
76 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Liabilities measured at fair value on a recurring basis at Sept. 30, 2019 | Total carrying value | ||||||||||||||
(dollars in millions) | Level 1 | Level 2 | Level 3 | Netting (a) | |||||||||||
Trading liabilities: | |||||||||||||||
Debt instruments | $ | 2,044 | $ | 90 | $ | — | $ | — | $ | 2,134 | |||||
Equity instruments | 75 | — | — | — | 75 | ||||||||||
Derivative liabilities not designated as hedging: | |||||||||||||||
Interest rate | 11 | 4,070 | — | (2,532 | ) | 1,549 | |||||||||
Foreign exchange | — | 5,012 | — | (4,024 | ) | 988 | |||||||||
Equity and other contracts | 1 | 19 | — | (10 | ) | 10 | |||||||||
Total derivative liabilities not designated as hedging | 12 | 9,101 | — | (6,566 | ) | 2,547 | |||||||||
Total trading liabilities | 2,131 | 9,191 | — | (6,566 | ) | 4,756 | |||||||||
Long-term debt (c) | — | 386 | — | — | 386 | ||||||||||
Other liabilities – derivative liabilities designated as hedging: | |||||||||||||||
Interest rate | — | 521 | — | — | 521 | ||||||||||
Foreign exchange | — | 84 | — | — | 84 | ||||||||||
Total other liabilities – derivative liabilities designated as hedging | — | 605 | — | — | 605 | ||||||||||
Subtotal liabilities of operations at fair value | 2,131 | 10,182 | — | (6,566 | ) | 5,747 | |||||||||
Percentage of liabilities of operations prior to netting | 17 | % | 83 | % | — | % | |||||||||
Liabilities of consolidated investment management funds | 2 | 13 | — | — | 15 | ||||||||||
Total liabilities | $ | 2,133 | $ | 10,195 | $ | — | $ | (6,566 | ) | $ | 5,762 | ||||
Percentage of total liabilities prior to netting | 17 | % | 83 | % | — | % | |||||||||
(a) | ASC 815, Derivatives and Hedging, permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. Netting is applicable to derivatives not designated as hedging instruments included in trading assets or trading liabilities and derivatives designated as hedging instruments included in other assets or other liabilities. Netting is allocated to the derivative products based on the net fair value of each product. |
(b) | Includes $689 million in Level 2 that was included in the former Grantor Trust. |
(c) | Includes certain interests in securitizations. |
(d) | Includes seed capital, private equity investments and other assets. |
BNY Mellon 77
Notes to Consolidated Financial Statements (continued) |
Assets measured at fair value on a recurring basis at Dec. 31, 2018 | Total carrying value | ||||||||||||||
(dollars in millions) | Level 1 | Level 2 | Level 3 | Netting (a) | |||||||||||
Available-for-sale securities: | |||||||||||||||
Agency RMBS | $ | — | $ | 25,308 | $ | — | $ | — | $ | 25,308 | |||||
U.S. Treasury | 20,076 | — | — | — | 20,076 | ||||||||||
Sovereign debt/sovereign guaranteed | 6,613 | 4,137 | — | — | 10,750 | ||||||||||
Agency commercial MBS | — | 9,691 | — | — | 9,691 | ||||||||||
CLOs | — | 3,364 | — | — | 3,364 | ||||||||||
Supranational | — | 2,984 | — | — | 2,984 | ||||||||||
Foreign covered bonds | — | 2,878 | — | — | 2,878 | ||||||||||
State and political subdivisions | — | 2,247 | — | — | 2,247 | ||||||||||
Other ABS | — | 1,773 | — | — | 1,773 | ||||||||||
U.S. government agencies | — | 1,657 | — | — | 1,657 | ||||||||||
Non-agency commercial MBS | — | 1,464 | — | — | 1,464 | ||||||||||
Non-agency RMBS (b) | — | 1,325 | — | — | 1,325 | ||||||||||
Foreign government agencies | — | 1,161 | — | — | 1,161 | ||||||||||
Corporate bonds | — | 1,054 | — | — | 1,054 | ||||||||||
Other debt securities | — | 77 | — | — | 77 | ||||||||||
Total available-for-sale securities | 26,689 | 59,120 | — | — | 85,809 | ||||||||||
Trading assets: | |||||||||||||||
Debt instruments | 801 | 2,594 | — | — | 3,395 | ||||||||||
Equity instruments (c) | 1,114 | — | — | — | 1,114 | ||||||||||
Derivative assets not designated as hedging: | |||||||||||||||
Interest rate | 7 | 3,583 | — | (2,202 | ) | 1,388 | |||||||||
Foreign exchange | — | 4,807 | — | (3,724 | ) | 1,083 | |||||||||
Equity and other contracts | 9 | 59 | — | (13 | ) | 55 | |||||||||
Total derivative assets not designated as hedging | 16 | 8,449 | — | (5,939 | ) | 2,526 | |||||||||
Total trading assets | 1,931 | 11,043 | — | (5,939 | ) | 7,035 | |||||||||
Other assets: | |||||||||||||||
Derivative assets designated as hedging: | |||||||||||||||
Interest rate | — | 23 | — | — | 23 | ||||||||||
Foreign exchange | — | 266 | — | — | 266 | ||||||||||
Total derivative assets designated as hedging | — | 289 | — | — | 289 | ||||||||||
Other assets (d) | 68 | 170 | — | — | 238 | ||||||||||
Assets measured at NAV (d) | 215 | ||||||||||||||
Subtotal assets of operations at fair value | 28,688 | 70,622 | — | (5,939 | ) | 93,586 | |||||||||
Percentage of assets of operations prior to netting | 29 | % | 71 | % | — | % | |||||||||
Assets of consolidated investment management funds | 210 | 253 | — | — | 463 | ||||||||||
Total assets | $ | 28,898 | $ | 70,875 | $ | — | $ | (5,939 | ) | $ | 94,049 | ||||
Percentage of total assets prior to netting | 29 | % | 71 | % | — | % | |||||||||
78 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Liabilities measured at fair value on a recurring basis at Dec. 31, 2018 | Total carrying value | ||||||||||||||
(dollars in millions) | Level 1 | Level 2 | Level 3 | Netting (a) | |||||||||||
Trading liabilities: | |||||||||||||||
Debt instruments | $ | 1,006 | $ | 118 | $ | — | $ | — | $ | 1,124 | |||||
Equity instruments | 75 | — | — | — | 75 | ||||||||||
Derivative liabilities not designated as hedging: | |||||||||||||||
Interest rate | 12 | 3,104 | — | (2,508 | ) | 608 | |||||||||
Foreign exchange | — | 5,215 | — | (3,626 | ) | 1,589 | |||||||||
Equity and other contracts | 1 | 118 | — | (36 | ) | 83 | |||||||||
Total derivative liabilities not designated as hedging | 13 | 8,437 | — | (6,170 | ) | 2,280 | |||||||||
Total trading liabilities | 1,094 | 8,555 | — | (6,170 | ) | 3,479 | |||||||||
Long-term debt (c) | — | 371 | — | — | 371 | ||||||||||
Other liabilities – derivative liabilities designated as hedging: | |||||||||||||||
Interest rate | — | 74 | — | — | 74 | ||||||||||
Foreign exchange | — | 14 | — | — | 14 | ||||||||||
Total other liabilities – derivative liabilities designated as hedging | — | 88 | — | — | 88 | ||||||||||
Subtotal liabilities of operations at fair value | 1,094 | 9,014 | — | (6,170 | ) | 3,938 | |||||||||
Percentage of liabilities of operations prior to netting | 11 | % | 89 | % | — | % | |||||||||
Liabilities of consolidated investment management funds | 2 | — | — | — | 2 | ||||||||||
Total liabilities | $ | 1,096 | $ | 9,014 | $ | — | $ | (6,170 | ) | $ | 3,940 | ||||
Percentage of total liabilities prior to netting | 11 | % | 89 | % | — | % | |||||||||
(a) | ASC 815, Derivatives and Hedging, permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. Netting is applicable to derivatives not designated as hedging instruments included in trading assets or trading liabilities and derivatives designated as hedging instruments included in other assets or other liabilities. Netting is allocated to the derivative products based on the net fair value of each product. |
(b) | Includes $832 million in Level 2 that was included in the former Grantor Trust. |
(c) | Includes certain interests in securitizations. |
(d) | Includes seed capital, private equity investments and other assets. |
BNY Mellon 79
Notes to Consolidated Financial Statements (continued) |
Details of certain available-for-sale securities measured at fair value on a recurring basis | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||||||||||||||||
Total carrying value | Ratings (a) | Total carrying value | Ratings (a) | ||||||||||||||||||||||
AAA/ AA- | A+/ A- | BBB+/ BBB- | BB+ and lower | AAA/ AA- | A+/ A- | BBB+/ BBB- | BB+ and lower | ||||||||||||||||||
(dollars in millions) | (b) | (b) | |||||||||||||||||||||||
Non-agency RMBS (c), originated in: | |||||||||||||||||||||||||
2007-2019 | $ | 376 | 41 | % | 1 | % | 3 | % | 55 | % | $ | 315 | 15 | % | 2 | % | 3 | % | 80 | % | |||||
2006 | 310 | — | 20 | — | 80 | 363 | — | 19 | — | 81 | |||||||||||||||
2005 | 333 | 7 | 1 | 8 | 84 | 396 | 9 | 1 | 7 | 83 | |||||||||||||||
2004 and earlier | 194 | 17 | 21 | 11 | 51 | 251 | 16 | 24 | 11 | 49 | |||||||||||||||
Total non-agency RMBS | $ | 1,213 | 17 | % | 9 | % | 5 | % | 69 | % | $ | 1,325 | 9 | % | 11 | % | 5 | % | 75 | % | |||||
Non-agency commercial MBS originated in: | |||||||||||||||||||||||||
2009-2019 | $ | 2,268 | 98 | % | 2 | % | — | % | — | % | $ | 1,464 | 96 | % | 4 | % | — | % | — | % | |||||
Foreign covered bonds: | |||||||||||||||||||||||||
Canada | $ | 1,656 | 100 | % | — | % | — | % | — | % | $ | 1,524 | 100 | % | — | % | — | % | — | % | |||||
United Kingdom | 880 | 100 | — | — | — | 529 | 100 | — | — | — | |||||||||||||||
Australia | 412 | 100 | — | — | — | 333 | 100 | — | — | — | |||||||||||||||
Sweden | 269 | 100 | — | — | — | 187 | 100 | — | — | — | |||||||||||||||
Other | 376 | 100 | — | — | — | 305 | 100 | — | — | — | |||||||||||||||
Total foreign covered bonds | $ | 3,593 | 100 | % | — | % | — | % | — | % | $ | 2,878 | 100 | % | — | % | — | % | — | % | |||||
Sovereign debt/sovereign guaranteed: | |||||||||||||||||||||||||
United Kingdom | $ | 3,815 | 100 | % | — | % | — | % | — | % | $ | 2,153 | 100 | % | — | % | — | % | — | % | |||||
Germany | 2,120 | 100 | — | — | — | 1,826 | 100 | — | — | — | |||||||||||||||
France | 1,473 | 100 | — | — | — | 1,548 | 100 | — | — | — | |||||||||||||||
Italy | 1,393 | — | — | 100 | — | 939 | — | — | 100 | — | |||||||||||||||
Spain | 1,382 | — | 5 | 95 | — | 1,365 | — | — | 100 | — | |||||||||||||||
Netherlands | 774 | 100 | — | — | — | 875 | 100 | — | — | — | |||||||||||||||
Canada | 478 | 100 | — | — | — | 378 | 100 | — | — | — | |||||||||||||||
Hong Kong | 465 | 100 | — | — | — | 450 | 100 | — | — | — | |||||||||||||||
Singapore | 434 | 100 | — | — | — | 165 | 100 | — | — | — | |||||||||||||||
Ireland | 349 | — | 100 | — | — | 625 | — | 100 | — | — | |||||||||||||||
Other (d) | 467 | 53 | 23 | — | 24 | 426 | 75 | — | — | 25 | |||||||||||||||
Total sovereign debt/sovereign guaranteed | $ | 13,150 | 75 | % | 4 | % | 21 | % | — | % | $ | 10,750 | 72 | % | 6 | % | 21 | % | 1 | % | |||||
Foreign government agencies: | |||||||||||||||||||||||||
Germany | $ | 843 | 100 | % | — | % | — | % | — | % | $ | 401 | 100 | % | — | % | — | % | — | % | |||||
Netherlands | 684 | 100 | — | — | — | 461 | 100 | — | — | — | |||||||||||||||
Sweden | 205 | 100 | — | — | — | 23 | 100 | — | — | — | |||||||||||||||
Other | 454 | 76 | 24 | — | — | 276 | 100 | — | — | — | |||||||||||||||
Total foreign government agencies | $ | 2,186 | 95 | % | 5 | % | — | % | — | % | $ | 1,161 | 100 | % | — | % | — | % | — | % | |||||
(a) | Represents ratings by S&P or the equivalent. |
(b) | At Sept. 30, 2019 and Dec. 31, 2018, sovereign debt/sovereign guaranteed securities were included in Level 1 and Level 2 in the valuation hierarchy. All other assets in the table are Level 2 assets in the valuation hierarchy. |
(c) | Includes $689 million at Sept. 30, 2019 and $832 million at Dec. 31, 2018 that were included in the former Grantor Trust. |
(d) | Includes non-investment grade sovereign debt/sovereign guaranteed securities related to Brazil of $113 million at Sept. 30, 2019 and $107 million at Dec. 31, 2018. |
Assets and liabilities measured at fair value on a nonrecurring basis
Under certain circumstances, we make adjustments to the fair value of our assets, liabilities and unfunded lending-related commitments although they are not measured at fair value on an ongoing basis. Examples would be the recording of an impairment of an asset and non-readily marketable equity securities
carried at cost with upward or downward adjustments.
The following table presents the financial instruments carried on the consolidated balance sheet by caption and level in the fair value hierarchy as of Sept. 30, 2019 and Dec. 31, 2018, for which a nonrecurring change in fair value has been recorded in the respective year.
80 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Assets measured at fair value on a nonrecurring basis | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||||||||||||||||
Total carrying value | Total carrying value | ||||||||||||||||||||||||
(in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Loans (a) | $ | — | $ | 59 | $ | 4 | $ | 63 | $ | — | $ | 64 | $ | 4 | $ | 68 | |||||||||
Other assets (b) | — | 64 | — | 64 | — | 57 | — | 57 | |||||||||||||||||
Total assets at fair value on a nonrecurring basis | $ | — | $ | 123 | $ | 4 | $ | 127 | $ | — | $ | 121 | $ | 4 | $ | 125 | |||||||||
(a) | The fair value of these loans decreased $1 million in the quarter ended Sept. 30, 2019 and less than $1 million in the quarter ended Dec. 31, 2018, based on the fair value of the underlying collateral, as required by guidance in ASC 310, Receivables, with an offset to the allowance for credit losses. |
(b) | Includes non-readily marketable equity securities carried at cost with upward or downward adjustments and other assets received in satisfaction of debt. |
Estimated fair value of financial instruments
The following tables present the estimated fair value and the carrying amount of financial instruments not carried at fair value on the consolidated balance sheet at Sept. 30, 2019 and Dec. 31, 2018, by caption on the consolidated balance sheet and by the valuation hierarchy.
Summary of financial instruments | Sept. 30, 2019 | ||||||||||||||
(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 | $ | — | $ | 73,811 | $ | — | $ | 73,811 | $ | 73,811 | |||||
Interest-bearing deposits with banks | — | 15,434 | — | 15,434 | 15,417 | ||||||||||
Federal funds sold and securities purchased under resale agreements | — | 43,723 | — | 43,723 | 43,723 | ||||||||||
Securities held-to-maturity | 4,871 | 29,221 | — | 34,092 | 33,778 | ||||||||||
Loans (a) | — | 54,186 | — | 54,186 | 53,626 | ||||||||||
Other financial assets | 6,718 | 1,206 | — | 7,924 | 7,924 | ||||||||||
Total | $ | 11,589 | $ | 217,581 | $ | — | $ | 229,170 | $ | 228,279 | |||||
Liabilities: | |||||||||||||||
Noninterest-bearing deposits | $ | — | $ | 55,452 | $ | — | $ | 55,452 | $ | 55,452 | |||||
Interest-bearing deposits | — | 195,449 | — | 195,449 | 194,208 | ||||||||||
Federal funds purchased and securities sold under repurchase agreements | — | 11,796 | — | 11,796 | 11,796 | ||||||||||
Payables to customers and broker-dealers | — | 18,364 | — | 18,364 | 18,364 | ||||||||||
Commercial paper | — | 3,538 | — | 3,538 | 3,538 | ||||||||||
Borrowings | — | 1,103 | — | 1,103 | 1,103 | ||||||||||
Long-term debt | — | 28,209 | — | 28,209 | 27,486 | ||||||||||
Total | $ | — | $ | 313,911 | $ | — | $ | 313,911 | $ | 311,947 | |||||
(a) | Does not include the leasing portfolio. |
BNY Mellon 81
Notes to Consolidated Financial Statements (continued) |
Summary of financial instruments | Dec. 31, 2018 | ||||||||||||||
(in millions) | Level 1 | Level 2 | Level 3 | Total estimated fair value | Carrying amount | ||||||||||
Assets: | |||||||||||||||
Interest-bearing deposits with the Federal Reserve and other central banks | $ | — | $ | 67,988 | $ | — | $ | 67,988 | $ | 67,988 | |||||
Interest-bearing deposits with banks | — | 14,168 | — | 14,168 | 14,148 | ||||||||||
Federal funds sold and securities purchased under resale agreements | — | 46,795 | — | 46,795 | 46,795 | ||||||||||
Securities held-to-maturity | 5,512 | 27,790 | — | 33,302 | 33,982 | ||||||||||
Loans (a) | — | 55,142 | — | 55,142 | 55,161 | ||||||||||
Other financial assets | 5,864 | 1,383 | — | 7,247 | 7,247 | ||||||||||
Total | $ | 11,376 | $ | 213,266 | $ | — | $ | 224,642 | $ | 225,321 | |||||
Liabilities: | |||||||||||||||
Noninterest-bearing deposits | $ | — | $ | 70,783 | $ | — | $ | 70,783 | $ | 70,783 | |||||
Interest-bearing deposits | — | 165,914 | — | 165,914 | 167,995 | ||||||||||
Federal funds purchased and securities sold under repurchase agreements | — | 14,243 | — | 14,243 | 14,243 | ||||||||||
Payables to customers and broker-dealers | — | 19,731 | — | 19,731 | 19,731 | ||||||||||
Commercial paper | — | 1,939 | — | 1,939 | 1,939 | ||||||||||
Borrowings | — | 3,584 | — | 3,584 | 3,584 | ||||||||||
Long-term debt | — | 28,347 | — | 28,347 | 28,792 | ||||||||||
Total | $ | — | $ | 304,541 | $ | — | $ | 304,541 | $ | 307,067 | |||||
(a) | Does not include the leasing portfolio. |
Note 17–Fair value option
We elected fair value as an alternative measurement for selected financial assets and liabilities. The following table presents the assets and liabilities of consolidated investment management funds, at fair value.
Assets and liabilities of consolidated investment management funds, at fair value | ||||||
Sept. 30, 2019 | Dec. 31, 2018 | |||||
(in millions) | ||||||
Assets of consolidated investment management funds: | ||||||
Trading assets | $ | 349 | $ | 243 | ||
Other assets | 32 | 220 | ||||
Total assets of consolidated investment management funds | $ | 381 | $ | 463 | ||
Liabilities of consolidated investment management funds: | ||||||
Trading liabilities | $ | 7 | $ | — | ||
Other liabilities | 8 | 2 | ||||
Total liabilities of consolidated investment management funds | $ | 15 | $ | 2 | ||
BNY Mellon values the assets and liabilities of its consolidated investment management funds using quoted prices for identical assets or liabilities in active markets or observable inputs such as quoted prices for similar assets or liabilities. Quoted prices for either identical or similar assets or liabilities in
inactive markets may also be used. Accordingly, fair value best reflects the interests BNY Mellon holds in the economic performance of the consolidated
investment management funds. Changes in the value of the assets and liabilities are recorded in the consolidated income statement as investment income of consolidated investment management funds and in the interest of investment management fund note holders, respectively.
We have elected the fair value option on $240 million of long-term debt. The fair value of this long-term debt was $386 million at Sept. 30, 2019 and $371 million at Dec. 31, 2018. The long-term debt is valued using observable market inputs and is included in Level 2 of the valuation hierarchy.
The following table presents the changes in fair value of long-term debt recorded in foreign exchange and other trading revenue in the consolidated income statement.
Foreign exchange and other trading revenue (a) | |||||||||||||||
(in millions) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||
Long-term debt | $ | (3 | ) | $ | (7 | ) | $ | — | $ | (15 | ) | $ | 4 | ||
(a) | The changes in fair value are approximately offset by an economic hedge included in foreign exchange and other trading revenue. |
Note 18–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-
82 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
maker for our customers and facilitating customer trades in compliance with the Volcker Rule.
The notional amounts for derivative financial instruments express the dollar volume of the transactions; however, credit risk is much smaller. We perform credit reviews and enter into netting agreements and collateral arrangements to minimize the credit risk of derivative financial instruments. We enter into offsetting positions to reduce exposure to foreign currency, interest rate and equity price risk.
Use of derivative financial instruments involves reliance on counterparties. Failure of a counterparty to honor its obligation under a derivative contract is a risk we assume whenever we engage in a derivative contract. There were no counterparty default losses recorded in the third quarter of 2019.
Hedging derivatives
We utilize interest rate swap agreements to manage our exposure to interest rate fluctuations. We enter into fair value hedges as an interest rate risk management strategy to reduce fair value variability by converting certain fixed rate interest payments associated with available-for-sale securities and long-term debt to LIBOR. We also utilize interest rate swaps and forward exchange contracts as cash flow hedges to manage our exposure to interest and foreign exchange rate changes.
The available-for-sale securities hedged consist of U.S. Treasury bonds, agency and non-agency commercial MBS, sovereign debt, corporate bonds and covered bonds that had original maturities of 30 years or less at initial purchase. At Sept. 30, 2019, $12.6 billion face amount of available-for-sale securities were hedged with interest rate swaps designated as fair value hedges that had notional values of $12.6 billion.
The fixed rate long-term debt instruments hedged generally have original maturities of five to 30 years. In fair value hedging relationships, debt is hedged with “receive fixed rate, pay variable rate” swaps. At Sept. 30, 2019, $13.9 billion par value of debt was hedged with interest rate swaps designated as fair value hedges that had notional values of $13.9 billion. In addition, at Sept. 30, 2019, the Company utilized interest rate swaps with notional values of $1.0 billion as cash flow hedges to convert floating rate long-term debt with a par value of $1.0 billion to a
fixed interest rate. A pre-tax loss of $1 million was recognized in OCI related to the cash flow hedges at Sept. 30, 2019 and will be reclassified to earnings over the next 12 months.
In addition, we utilize forward foreign exchange contracts as hedges to mitigate foreign exchange exposures. We use forward foreign exchange contracts as cash flow hedges to convert certain forecasted non-U.S. dollar revenue and expenses into U.S. dollars. We use forward foreign exchange contracts with maturities of 12 months or less as cash flow hedges to hedge our foreign exchange exposure to Indian rupee, British pound, Hong Kong dollar, Singapore dollar and Polish zloty revenue and expense transactions in entities that have the U.S. dollar as their functional currency. As of Sept. 30, 2019, the hedged forecasted foreign currency transactions and designated forward foreign exchange contract hedges were $369 million (notional), with a pre-tax loss of $1 million recorded in accumulated OCI. This loss will be reclassified to earnings over the next 12 months.
We also utilize forward foreign exchange contracts as fair value hedges of the foreign exchange risk associated with available-for-sale securities. Forward points are designated as an excluded component and amortized into earnings over the hedge period. The unamortized derivative value associated with the excluded component is recognized in accumulated OCI. At Sept. 30, 2019, $139 million face amount of available-for-sale securities were hedged with foreign currency forward contracts that had a notional value of $139 million.
Forward foreign exchange contracts are also used to hedge the value of our net investments in foreign subsidiaries. These forward foreign exchange contracts have maturities of less than one year. The derivatives employed are designated as hedges of changes in value of our foreign investments due to exchange rates. Changes in the value of the forward foreign exchange contracts offset the changes in value of the foreign investments due to changes in foreign exchange rates. The change in fair market value of these forward foreign exchange contracts is reported within foreign currency translation adjustments in shareholders’ equity, net of tax. At Sept. 30, 2019, forward foreign exchange contracts with notional amounts totaling $7.3 billion were designated as net investment hedges.
BNY Mellon 83
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, 2019, had a combined U.S. dollar equivalent value of $167 million.
The following table presents the gains (losses) related to our hedging derivative portfolio recognized in the consolidated income statement.
Income statement impact of fair value and cash flow hedges | ||||||||||||||||
(in millions) | Location of gains (losses) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||
Interest rate fair value hedges of available-for-sale securities | ||||||||||||||||
Derivative | Interest revenue | $ | (250 | ) | $ | (486 | ) | $ | 214 | $ | (1,119 | ) | $ | 747 | ||
Hedged item | Interest revenue | 243 | 480 | (209 | ) | 1,099 | (725 | ) | ||||||||
Interest rate fair value hedges of long-term debt | ||||||||||||||||
Derivative | Interest expense | 146 | 300 | (101 | ) | 631 | (610 | ) | ||||||||
Hedged item | Interest expense | (145 | ) | (298 | ) | 103 | (627 | ) | 609 | |||||||
Foreign exchange fair value hedges of available-for-sale securities | ||||||||||||||||
Derivative (a) | Other revenue | 2 | (5 | ) | — | 3 | — | |||||||||
Hedged item | Other revenue | (2 | ) | 5 | — | (2 | ) | — | ||||||||
Cash flow hedge of interest rate risk | ||||||||||||||||
(Loss) reclassified from OCI into income | Interest expense | (1 | ) | — | — | (1 | ) | — | ||||||||
Cash flow hedges of forecasted FX exposures | ||||||||||||||||
Gain reclassified from OCI into income | Other revenue | — | — | — | — | 3 | ||||||||||
Gain (loss) reclassified from OCI into income | Staff expense | 2 | — | (4 | ) | 1 | 4 | |||||||||
(Loss) gain recognized in the consolidated income statement due to fair value and cash flow hedging relationships | $ | (5 | ) | $ | (4 | ) | $ | 3 | $ | (15 | ) | $ | 28 | |||
(a) | Includes de minimis gains in the third quarter of 2019 and second quarter of 2019 and a gain of $1 million in the first nine months of 2019 associated with the amortization of the excluded component. At Sept. 30, 2019 and Dec. 31, 2018, the remaining accumulated OCI balance associated with the excluded component was de minimis. |
The following table presents the impact of hedging derivatives used in net investment hedging relationships in the consolidated income statement.
Impact of derivative instruments used in net investment hedging relationships in the income statement | ||||||||||||||||||||||||||||||||
(in millions) | Gain or (loss) recognized in accumulated OCI on derivatives | Gain or (loss) reclassified from accumulated OCI into income | ||||||||||||||||||||||||||||||
Derivatives in net investment hedging relationships | Location of gain or (loss) reclassified from accumulated OCI into income | |||||||||||||||||||||||||||||||
3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | |||||||||||||||||||||||
FX contracts | $ | 252 | $ | 76 | $ | 83 | $ | 322 | $ | 354 | Net interest revenue | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
The following table presents information on the hedged items in fair value hedging relationships.
Hedged items in fair value hedging relationships | Carrying amount of hedged asset or liability | Hedge accounting basis adjustment increase (decrease) (a) | |||||||||||
(in millions) | Sept. 30, 2019 | Dec. 31, 2018 | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||
Available-for-sale securities (b) | $ | 12,684 | $ | 19,201 | $ | 1,090 | $ | (125 | ) | ||||
Long-term debt | $ | 14,340 | $ | 16,147 | $ | 239 | $ | (453 | ) | ||||
(a) | Includes $140 million and $- million of basis adjustment increases on discontinued hedges associated with available-for-sale securities at Sept. 30, 2019 and Dec. 31, 2018, respectively, and $221 million and $284 million of basis adjustment decreases on discontinued hedges associated with long-term debt at Sept. 30, 2019 and Dec. 31, 2018, respectively. |
(b) | Excludes hedged items where only foreign currency risk is the designated hedged risk, as the basis adjustments related to foreign currency hedges will not reverse through the consolidated income statement in future periods. The carrying amount excluded for available-for-sale securities was $139 million at Sept. 30, 2019 and $148 million at Dec. 31, 2018. |
84 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
The following table summarizes the notional amount and credit exposure of our total derivative portfolio at Sept. 30, 2019 and Dec. 31, 2018.
Impact of derivative instruments on the balance sheet | Notional value | Asset derivatives fair value | Liability derivatives fair value | |||||||||||||||||
Sept. 30, 2019 | Dec. 31, 2018 | Sept. 30, 2019 | Dec. 31, 2018 | Sept. 30, 2019 | Dec. 31, 2018 | |||||||||||||||
(in millions) | ||||||||||||||||||||
Derivatives designated as hedging instruments: (a)(b) | ||||||||||||||||||||
Interest rate contracts | $ | 27,510 | $ | 35,890 | $ | — | $ | 23 | $ | 521 | $ | 74 | ||||||||
Foreign exchange contracts | 7,792 | 6,330 | 287 | 266 | 84 | 14 | ||||||||||||||
Total derivatives designated as hedging instruments | $ | 287 | $ | 289 | $ | 605 | $ | 88 | ||||||||||||
Derivatives not designated as hedging instruments: (b)(c) | ||||||||||||||||||||
Interest rate contracts | $ | 320,205 | $ | 248,534 | $ | 4,840 | $ | 3,590 | $ | 4,081 | $ | 3,116 | ||||||||
Foreign exchange contracts | 823,138 | 831,730 | 5,066 | 4,807 | 5,012 | 5,215 | ||||||||||||||
Equity contracts | 1,559 | 927 | 14 | 68 | 17 | 118 | ||||||||||||||
Credit contracts | 165 | 150 | — | — | 3 | 1 | ||||||||||||||
Total derivatives not designated as hedging instruments | $ | 9,920 | $ | 8,465 | $ | 9,113 | $ | 8,450 | ||||||||||||
Total derivatives fair value (d) | $ | 10,207 | $ | 8,754 | $ | 9,718 | $ | 8,538 | ||||||||||||
Effect of master netting agreements (e) | (6,681 | ) | (5,939 | ) | (6,566 | ) | (6,170 | ) | ||||||||||||
Fair value after effect of master netting agreements | $ | 3,526 | $ | 2,815 | $ | 3,152 | $ | 2,368 | ||||||||||||
(a) | The fair value of asset derivatives and liability derivatives designated as hedging instruments is recorded as other assets and other liabilities, respectively, on the consolidated balance sheet. |
(b) | For derivative transactions settled at clearing organizations, cash collateral exchanged is deemed a settlement of the derivative each day. The settlement reduces the gross fair value of derivative assets and liabilities and a corresponding decrease in the effect of master netting agreements, with no impact to the consolidated balance sheet. |
(c) | The fair value of asset derivatives and liability derivatives not designated as hedging instruments is recorded as trading assets and trading liabilities, respectively, on the consolidated balance sheet. |
(d) | Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815, Derivatives and Hedging. |
(e) | Effect of master netting agreements includes cash collateral received and paid of $815 million and $700 million, respectively, at Sept. 30, 2019, and $809 million and $1,040 million, respectively, at Dec. 31, 2018. |
Trading activities (including trading derivatives)
Our trading activities are focused on acting as a market-maker for our customers, facilitating customer trades and risk mitigating economic hedging in compliance with the Volcker Rule. The change in the fair value of the derivatives utilized in our trading activities is recorded in foreign exchange and other trading revenue on the consolidated income statement.
The following table presents our foreign exchange and other trading revenue.
Foreign exchange and other trading revenue | |||||||||||||||
(in millions) | 3Q19 | 2Q19 | 3Q18 | YTD19 | YTD18 | ||||||||||
Foreign exchange | $ | 129 | $ | 150 | $ | 150 | $ | 439 | $ | 504 | |||||
Other trading revenue | 21 | 16 | 5 | 47 | 47 | ||||||||||
Total foreign exchange and other trading revenue | $ | 150 | $ | 166 | $ | 155 | $ | 486 | $ | 551 | |||||
Foreign exchange revenue includes income from purchasing and selling foreign currencies and currency forwards, futures and options. Other trading
revenue reflects results from trading in cash instruments including fixed income and equity securities and non-foreign exchange derivatives.
We also use derivative financial instruments as risk mitigating economic hedges, which are not formally designated as accounting hedges. This includes hedging the foreign currency, interest rate or market risks inherent in some of our balance sheet exposures, such as seed capital investments and deposits, as well as certain investment management fee revenue streams. We also use total return swaps to economically hedge obligations arising from the Company’s deferred compensation plan whereby the participants defer compensation and earn a return linked to the performance of investments they select. The gains or losses on these total return swaps are recorded in staff expense on the consolidated income statement and were a de minimis loss in the third quarter of 2019 and gains of $7 million in the third quarter of 2018, $5 million in the second quarter of 2019, $23 million in the first nine months of 2019 and $6 million in the first nine months of 2018.
We manage trading risk through a system of position limits, a VaR methodology based on historical
BNY Mellon 85
Notes to Consolidated Financial Statements (continued) |
simulation and other market sensitivity measures. Risk is monitored and reported to senior management by a separate unit, independent from trading, on a daily basis. Based on certain assumptions, the VaR methodology is designed to capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period, utilizes a 99% confidence level and incorporates non-linear product characteristics. The VaR model is one of several statistical models used to develop economic capital results, which are allocated to lines of business for computing risk-adjusted performance.
VaR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences. As a result, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and management’s assessment of market conditions. Additional stress scenarios based upon historical market events are also performed. Stress tests may incorporate the impact of reduced market liquidity and the breakdown of historically observed correlations and extreme scenarios. VaR and other statistical measures, stress testing and sensitivity analysis are incorporated in other risk management materials.
Counterparty credit risk and collateral
We assess credit risk of our counterparties through regular examination of their financial statements, confidential communication with the management of those counterparties and regular monitoring of publicly available credit rating information. This and other information is used to develop proprietary credit rating metrics used to assess credit quality.
Collateral requirements are determined after a comprehensive review of the credit quality of each counterparty. Collateral is generally held or pledged in the form of cash and/or highly liquid government securities. Collateral requirements are monitored and adjusted daily.
Additional disclosures concerning derivative financial instruments are provided in Note 16.
Disclosure of contingent features in OTC derivative instruments
Certain OTC derivative contracts and/or collateral agreements contain credit-risk contingent features triggered upon a rating downgrade in which the
counterparty has the right to request additional collateral or the right to terminate the contracts in a net liability position.
The following table shows the aggregate fair value of OTC derivative contracts in net liability positions that contained credit-risk contingent features and the value of collateral that has been posted.
Sept. 30, 2019 | Dec. 31, 2018 | |||||
(in millions) | ||||||
Aggregate fair value of OTC derivatives in net liability positions (a) | $ | 4,034 | $ | 2,877 | ||
Collateral posted | $ | 3,820 | $ | 2,801 | ||
(a) | Before consideration of cash collateral. |
The aggregate fair value of OTC derivative contracts containing credit-risk contingent features can fluctuate from quarter to quarter due to changes in market conditions, composition of counterparty trades, new business or changes to the contingent features.
The Bank of New York Mellon, our largest banking subsidiary, enters into the substantial majority of our OTC derivative contracts and/or collateral agreements. As such, the contingent features may be triggered if The Bank of New York Mellon’s long-term issuer rating was downgraded.
The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions for three key ratings triggers.
Potential close-out exposures (fair value) (a) | ||||||
(in millions) | Sept. 30, 2019 | Dec. 31, 2018 | ||||
If The Bank of New York Mellon’s rating changed to: (b) | ||||||
A3/A- | $ | 17 | $ | 15 | ||
Baa2/BBB | $ | 472 | $ | 116 | ||
Ba1/BB+ | $ | 2,131 | $ | 1,041 | ||
(a) | The amounts represent potential total close-out values if The Bank of New York Mellon’s long-term issuer rating were to immediately drop to the indicated levels, and do not reflect collateral posted. |
(b) | Represents rating by Moody’s/S&P. |
If The Bank of New York Mellon’s debt rating had fallen below investment grade on Sept. 30, 2019 and Dec. 31, 2018, existing collateral arrangements would have required us to post additional collateral of $65 million and $100 million, respectively.
86 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
The following tables present derivative instruments and financial instruments that are either subject to an enforceable netting agreement or offset by collateral arrangements. There were no derivative instruments or financial instruments subject to a legally enforceable netting agreement for which we are not currently netting.
Offsetting of derivative assets and financial assets at Sept. 30, 2019 | |||||||||||||||||||
Gross assets recognized | Gross amounts offset in the balance sheet | Net assets recognized in the balance sheet | Gross amounts not offset in the balance sheet | ||||||||||||||||
(in millions) | (a) | Financial instruments | Cash collateral received | Net amount | |||||||||||||||
Derivatives subject to netting arrangements: | |||||||||||||||||||
Interest rate contracts | $ | 3,292 | $ | 2,585 | $ | 707 | $ | 203 | $ | — | $ | 504 | |||||||
Foreign exchange contracts | 4,882 | 4,094 | 788 | 1 | — | 787 | |||||||||||||
Equity and other contracts | 2 | 2 | — | — | — | — | |||||||||||||
Total derivatives subject to netting arrangements | 8,176 | 6,681 | 1,495 | 204 | — | 1,291 | |||||||||||||
Total derivatives not subject to netting arrangements | 2,031 | — | 2,031 | — | — | 2,031 | |||||||||||||
Total derivatives | 10,207 | 6,681 | 3,526 | 204 | — | 3,322 | |||||||||||||
Reverse repurchase agreements | 93,236 | 60,094 | (b) | 33,142 | 33,122 | — | 20 | ||||||||||||
Securities borrowing | 10,581 | — | 10,581 | 10,266 | — | 315 | |||||||||||||
Total | $ | 114,024 | $ | 66,775 | $ | 47,249 | $ | 43,592 | $ | — | $ | 3,657 | |||||||
(a) | Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions. |
(b) | Offsetting of reverse repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system. |
Offsetting of derivative assets and financial assets at Dec. 31, 2018 | |||||||||||||||||||
Gross assets recognized | Gross amounts offset in the balance sheet | Net assets recognized in the balance sheet | Gross amounts not offset in the balance sheet | ||||||||||||||||
(in millions) | (a) | Financial instruments | Cash collateral received | Net amount | |||||||||||||||
Derivatives subject to netting arrangements: | |||||||||||||||||||
Interest rate contracts | $ | 2,654 | $ | 2,202 | $ | 452 | $ | 133 | $ | — | $ | 319 | |||||||
Foreign exchange contracts | 4,409 | 3,724 | 685 | 70 | — | 615 | |||||||||||||
Equity and other contracts | 38 | 13 | 25 | — | — | 25 | |||||||||||||
Total derivatives subject to netting arrangements | 7,101 | 5,939 | 1,162 | 203 | — | 959 | |||||||||||||
Total derivatives not subject to netting arrangements | 1,653 | — | 1,653 | — | — | 1,653 | |||||||||||||
Total derivatives | 8,754 | 5,939 | 2,815 | 203 | — | 2,612 | |||||||||||||
Reverse repurchase agreements | 112,245 | 76,040 | (b) | 36,205 | 36,205 | — | — | ||||||||||||
Securities borrowing | 10,588 | — | 10,588 | 10,286 | — | 302 | |||||||||||||
Total | $ | 131,587 | $ | 81,979 | $ | 49,608 | $ | 46,694 | $ | — | $ | 2,914 | |||||||
(a) | Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions. |
(b) | Offsetting of reverse repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system. |
BNY Mellon 87
Notes to Consolidated Financial Statements (continued) |
Offsetting of derivative liabilities and financial liabilities at Sept. 30, 2019 | Net liabilities recognized in the balance sheet | ||||||||||||||||||
Gross liabilities recognized | Gross amounts offset in the balance sheet | Gross amounts not offset in the balance sheet | |||||||||||||||||
(in millions) | (a) | Financial instruments | Cash collateral pledged | Net amount | |||||||||||||||
Derivatives subject to netting arrangements: | |||||||||||||||||||
Interest rate contracts | $ | 4,562 | $ | 2,532 | $ | 2,030 | $ | 1,679 | $ | — | $ | 351 | |||||||
Foreign exchange contracts | 4,639 | 4,024 | 615 | 226 | — | 389 | |||||||||||||
Equity and other contracts | 18 | 10 | 8 | — | — | 8 | |||||||||||||
Total derivatives subject to netting arrangements | 9,219 | 6,566 | 2,653 | 1,905 | — | 748 | |||||||||||||
Total derivatives not subject to netting arrangements | 499 | — | 499 | — | — | 499 | |||||||||||||
Total derivatives | 9,718 | 6,566 | 3,152 | 1,905 | — | 1,247 | |||||||||||||
Repurchase agreements | 69,004 | 60,094 | (b) | 8,910 | 8,910 | — | — | ||||||||||||
Securities lending | 758 | — | 758 | 724 | — | 34 | |||||||||||||
Total | $ | 79,480 | $ | 66,660 | $ | 12,820 | $ | 11,539 | $ | — | $ | 1,281 | |||||||
(a) | Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions. |
(b) | Offsetting of repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system. |
Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2018 | Net liabilities recognized in the balance sheet | ||||||||||||||||||
Gross liabilities recognized | Gross amounts offset in the balance sheet | Gross amounts not offset in the balance sheet | |||||||||||||||||
(in millions) | (a) | Financial instruments | Cash collateral pledged | Net amount | |||||||||||||||
Derivatives subject to netting arrangements: | |||||||||||||||||||
Interest rate contracts | $ | 3,144 | $ | 2,508 | $ | 636 | $ | 547 | $ | — | $ | 89 | |||||||
Foreign exchange contracts | 4,747 | 3,626 | 1,121 | 187 | — | 934 | |||||||||||||
Equity and other contracts | 75 | 36 | 39 | 37 | — | 2 | |||||||||||||
Total derivatives subject to netting arrangements | 7,966 | 6,170 | 1,796 | 771 | — | 1,025 | |||||||||||||
Total derivatives not subject to netting arrangements | 572 | — | 572 | — | — | 572 | |||||||||||||
Total derivatives | 8,538 | 6,170 | 2,368 | 771 | — | 1,597 | |||||||||||||
Repurchase agreements | 84,665 | 76,040 | (b) | 8,625 | 8,625 | — | — | ||||||||||||
Securities lending | 997 | — | 997 | 937 | — | 60 | |||||||||||||
Total | $ | 94,200 | $ | 82,210 | $ | 11,990 | $ | 10,333 | $ | — | $ | 1,657 | |||||||
(a) | Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions. |
(b) | Offsetting of repurchase agreements relates to our involvement in the FICC, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system. |
88 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Secured borrowings
The following table presents the contract value of repurchase agreements and securities lending transactions accounted for as secured borrowings by the type of collateral provided to counterparties.
Repurchase agreements and securities lending transactions accounted for as secured borrowings | |||||||||||||||||||||||||
Sept. 30, 2019 | Dec. 31, 2018 | ||||||||||||||||||||||||
Remaining contractual maturity | Total | Remaining contractual maturity | Total | ||||||||||||||||||||||
(in millions) | Overnight and continuous | Up to 30 days | 30 days or more | Overnight and continuous | Up to 30 days | 30 days or more | |||||||||||||||||||
Repurchase agreements: | |||||||||||||||||||||||||
U.S. Treasury | $ | 60,878 | $ | — | $ | — | $ | 60,878 | $ | 76,822 | $ | — | $ | — | $ | 76,822 | |||||||||
U.S. government agencies | 930 | — | — | 930 | 759 | — | — | 759 | |||||||||||||||||
Agency RMBS | 3,383 | — | — | 3,383 | 3,184 | — | 4 | 3,188 | |||||||||||||||||
Corporate bonds | 268 | — | 1,719 | 1,987 | 416 | — | 1,413 | 1,829 | |||||||||||||||||
Other debt securities | 217 | — | 1,038 | 1,255 | 271 | — | 1,106 | 1,377 | |||||||||||||||||
Equity securities | 78 | — | 493 | 571 | 163 | — | 527 | 690 | |||||||||||||||||
Total | $ | 65,754 | $ | — | $ | 3,250 | $ | 69,004 | $ | 81,615 | $ | — | $ | 3,050 | $ | 84,665 | |||||||||
Securities lending: | |||||||||||||||||||||||||
U.S. government agencies | $ | 9 | $ | — | $ | — | $ | 9 | $ | 7 | $ | — | $ | — | $ | 7 | |||||||||
Other debt securities | 228 | — | — | 228 | 294 | — | — | 294 | |||||||||||||||||
Equity securities | 521 | — | — | 521 | 696 | — | — | 696 | |||||||||||||||||
Total | $ | 758 | $ | — | $ | — | $ | 758 | $ | 997 | $ | — | $ | — | $ | 997 | |||||||||
Total borrowings | $ | 66,512 | $ | — | $ | 3,250 | $ | 69,762 | $ | 82,612 | $ | — | $ | 3,050 | $ | 85,662 | |||||||||
BNY Mellon’s repurchase agreements and securities lending transactions primarily encounter risk associated with liquidity. We are required to pledge collateral based on predetermined terms within the agreements. If we were to experience a decline in the fair value of the collateral pledged for these transactions, we could be required to provide additional collateral to the counterparty, therefore decreasing the amount of assets available for other liquidity needs that may arise. BNY Mellon also offers tri-party collateral agency services in the tri-party repo market where we are exposed to credit risk. In order to mitigate this risk, we require dealers to fully secure intraday credit.
Note 19–Commitments and contingent liabilities
Off-balance sheet arrangements
In the normal course of business, various commitments and contingent liabilities are outstanding that are not reflected in the accompanying consolidated balance sheets.
Our significant trading and off-balance sheet risks are securities, foreign currency and interest rate risk
management products, commercial lending commitments, letters of credit and securities lending indemnifications. We assume these risks to reduce interest rate and foreign currency risks, to provide customers with the ability to meet credit and liquidity needs and to hedge foreign currency and interest rate risks. These items involve, to varying degrees, credit, foreign currency and interest rate risks not recognized on the balance sheet. Our off-balance sheet risks are managed and monitored in manners similar to those used for on-balance sheet risks.
The following table presents a summary of our off-balance sheet credit risks.
Off-balance sheet credit risks | Sept. 30, 2019 | Dec. 31, 2018 | ||||
(in millions) | ||||||
Lending commitments | $ | 50,303 | $ | 50,631 | ||
Standby letters of credit (a) | 2,417 | 2,817 | ||||
Commercial letters of credit | 156 | 165 | ||||
Securities lending indemnifications (b)(c) | 398,226 | 401,504 | ||||
(a) | Net of participations totaling $154 million at Sept. 30, 2019 and $163 million at Dec. 31, 2018. |
(b) | Excludes the indemnification for securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $63 billion at Sept. 30, 2019 and $56 billion at Dec. 31, 2018. |
(c) | Includes cash collateral, invested in indemnified repurchase agreements, held by us as securities lending agent of $42 billion at Sept. 30, 2019 and $35 billion at Dec. 31, 2018. |
BNY Mellon 89
Notes to Consolidated Financial Statements (continued) |
The total potential loss on undrawn lending commitments, standby and commercial letters of credit, and securities lending indemnifications is equal to the total notional amount if drawn upon, which does not consider the value of any collateral.
Since many of the lending commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. A summary of lending commitment maturities is as follows: $31.3 billion in less than one year, $18.7 billion in one to five years and $346 million over five years.
SBLCs principally support obligations of corporate clients and were collateralized with cash and securities of $166 million at Sept. 30, 2019 and $223 million at Dec. 31, 2018. At Sept. 30, 2019, $1.6 billion of the SBLCs will expire within one year, $783 million in one to five years and $4 million over five years.
We must recognize, at the inception of an SBLC and foreign and other guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The fair value of the liability, which was recorded with a corresponding asset in other assets, was estimated as the present value of contractual customer fees. The estimated liability for losses related to SBLCs and foreign and other guarantees, if any, is included in the allowance for lending-related commitments.
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, 2019 | Dec. 31, 2018 | ||
Investment grade | 90 | % | 89 | % |
Non-investment grade | 10 | % | 11 | % |
A commercial letter of credit is normally a short-term instrument used to finance a commercial contract for the shipment of goods from a seller to a buyer. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on
the underlying transaction. As a result, the total contractual amounts do not necessarily represent future cash requirements. Commercial letters of credit totaled $156 million at Sept. 30, 2019 and $165 million at Dec. 31, 2018.
We expect many of the lending commitments and letters of credit to expire without the need to advance any cash. The revenue associated with guarantees frequently depends on the credit rating of the obligor and the structure of the transaction, including collateral, if any. The allowance for lending-related commitments was $97 million at Sept. 30, 2019 and $106 million at Dec. 31, 2018.
A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security (typically through an agent, in our case, The Bank of New York Mellon), to a borrower, usually a broker-dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract.
We typically lend securities with indemnification against borrower default. We generally require the borrower to provide collateral with a minimum value of 102% of the fair value of the securities borrowed, which is monitored on a daily basis, thus reducing credit risk. Market risk can also arise in securities lending transactions. These risks are controlled through policies limiting the level of risk that can be undertaken. Securities lending transactions are generally entered into only with highly rated counterparties. Securities lending indemnifications were secured by collateral of $417 billion at Sept. 30, 2019 and $420 billion at Dec. 31, 2018.
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, 2019 and Dec. 31, 2018, $63 billion and $56 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 $59 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.
90 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
Unsettled repurchase and reverse repurchase agreements
In the normal course of business, we enter into repurchase agreements and reverse repurchase agreements that settle at a future date. In repurchase agreements, BNY Mellon receives cash from and provides securities as collateral to a counterparty at settlement. In reverse repurchase agreements, BNY Mellon advances cash to and receives securities as collateral from the counterparty at settlement. These transactions are recorded on the consolidated balance sheet on settlement date. At Sept. 30, 2019, we had no unsettled repurchase agreements and $1.3 billion of unsettled reverse repurchase agreements which all settled the following day.
Industry concentrations
We have significant industry concentrations related to credit exposure at Sept. 30, 2019. The tables below present our credit exposure in the financial institutions and commercial portfolios.
Financial institutions portfolio exposure (in billions) | Sept. 30, 2019 | ||||||||
Loans | Unfunded commitments | Total exposure | |||||||
Securities industry | $ | 3.2 | $ | 23.4 | $ | 26.6 | |||
Banks | 7.9 | 1.2 | 9.1 | ||||||
Asset managers | 1.3 | 6.7 | 8.0 | ||||||
Insurance | 0.1 | 2.5 | 2.6 | ||||||
Government | 0.1 | 0.3 | 0.4 | ||||||
Other | 0.8 | 0.8 | 1.6 | ||||||
Total | $ | 13.4 | $ | 34.9 | $ | 48.3 | |||
Commercial portfolio exposure (in billions) | Sept. 30, 2019 | ||||||||
Loans | Unfunded commitments | Total exposure | |||||||
Manufacturing | $ | 0.8 | $ | 4.7 | $ | 5.5 | |||
Services and other | 0.7 | 3.7 | 4.4 | ||||||
Energy and utilities | 0.2 | 3.8 | 4.0 | ||||||
Media and telecom | — | 1.0 | 1.0 | ||||||
Total | $ | 1.7 | $ | 13.2 | $ | 14.9 | |||
Major concentrations in securities lending are primarily to broker-dealers and are generally collateralized with cash and/or securities.
Exposure for certain administrative errors
In connection with certain offshore tax-exempt funds that we manage, we were potentially liable to the funds for certain administrative errors. The errors
related to the resident status of such funds, which exposed the Company to a tax liability related to the funds’ earnings. In the third quarter of 2019, we reduced the previously established reserves for this exposure based on recent discussions and agreement with the tax authorities.
Sponsored Member Repo Program
BNY Mellon is a sponsoring member in the FICC sponsored member program, where we submit eligible overnight repurchase and reverse repurchase transactions in U.S. treasury securities (“Sponsored Member Transactions”) between BNY Mellon and our sponsored member clients for novation and clearing through FICC pursuant to the FICC Government Securities Division rulebook (the “FICC Rules”). We also guarantee to FICC the prompt and full payment and performance of our sponsored member clients’ respective obligations under the FICC Rules in connection with such clients’ Sponsored Member Transactions. We minimize our credit exposure under this guaranty by obtaining a security interest in our sponsored member clients’ collateral and rights under Sponsored Member Transactions. See “Offsetting assets and liabilities” in Note 18 for additional information on our repurchase and reverse repurchase agreements.
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
BNY Mellon 91
Notes to Consolidated Financial Statements (continued) |
have to make any material payments for these indemnifications is remote. At Sept. 30, 2019 and Dec. 31, 2018, we have not recorded any material liabilities under these arrangements.
Clearing and settlement exchanges
We are a noncontrolling equity investor in, and/or member of, several industry clearing or settlement exchanges through which foreign exchange, securities, derivatives or other transactions settle. Certain of these industry clearing and settlement exchanges require their members to guarantee their obligations and liabilities and/or to provide liquidity support in the event other members do not honor their obligations. We believe the likelihood that a clearing or settlement exchange (of which we are a member) would become insolvent is remote. Additionally, certain settlement exchanges have implemented loss allocation policies that enable the exchange to allocate settlement losses to the members of the exchange. It is not possible to quantify such mark-to-market loss until the loss occurs. Any ancillary costs that occur as a result of any mark-to-market loss cannot be quantified. In addition, we also sponsor clients as members on clearing and settlement exchanges and guarantee their obligations. At Sept. 30, 2019 and Dec. 31, 2018, we have not recorded any material liabilities under these arrangements.
Legal proceedings
In the ordinary course of business, BNY Mellon is routinely named as defendants in or made parties to pending and potential legal actions. We also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal). Claims for significant monetary damages are often asserted in many of these legal actions, while claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought in governmental and regulatory matters. It is inherently difficult to predict the eventual outcomes of such matters given their complexity and the particular facts and circumstances at issue in each of these matters. However, on the basis of our current knowledge and understanding, we do not believe that judgments, settlements or orders, if any, arising from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage) will have a material adverse effect on the consolidated financial position or liquidity of BNY
Mellon, although they could have a material effect on our results of operations 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 regularly monitors 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 continues 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 the results of operations in a given period.
For certain of those matters described here for which a loss contingency may, in the future, be reasonably possible (whether in excess of a related accrued liability or where there is no accrued liability), BNY Mellon is currently unable to estimate a range of reasonably possible loss. For those matters described here where BNY Mellon is able to estimate a reasonably possible loss, the aggregate range of such reasonably possible loss is up to $850 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:
Mortgage-Securitization Trusts Proceedings
The Bank of New York Mellon has been named as a defendant in a number of legal actions brought by
92 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
MBS investors alleging that the trustee has expansive duties under the governing agreements, including the duty to investigate and pursue breach of representation and warranty claims against other parties to the MBS transactions. Six actions remain pending in federal and state court.
Matters Related to R. Allen Stanford
In late December 2005, Pershing LLC (“Pershing”) became a clearing firm for Stanford Group Co. (“SGC”), a registered broker-dealer that was part of a group of entities ultimately controlled by R. Allen Stanford (“Stanford”). Stanford International Bank (“SIB”), also controlled by Stanford, issued certificates of deposit (“CDs”). Some investors allegedly wired funds from their SGC accounts to purchase CDs. In 2009, the SEC charged Stanford with operating a Ponzi scheme in connection with the sale of CDs, and SGC was placed into receivership. Alleged purchasers of CDs have filed 15 lawsuits against Pershing that are pending in Texas, including a putative class action. The purchasers allege that Pershing, as SGC’s clearing firm, assisted Stanford in a fraudulent scheme and assert contractual, statutory and common law claims. On July 12, 2018, a federal district court dismissed six of the individual lawsuits and those cases are on appeal. On March 8, 2019, a group of investors filed a putative class action against The Bank of New York Mellon, making the same allegations as in the prior actions brought against Pershing. FINRA arbitration proceedings also have been initiated by alleged purchasers asserting similar claims.
Brazilian Postalis Litigation
BNY Mellon Servicos Financeiros DTVM S.A. (“DTVM”), a subsidiary that provides asset services in Brazil, acts as administrator for certain investment funds in which a public pension fund for postal workers called Postalis-Instituto de Seguridade Social dos Correios e Telégrafos (“Postalis”) invested. On Aug. 22, 2014, Postalis sued DTVM in Rio de Janeiro, Brazil for losses related to a Postalis fund for which DTVM is administrator. Postalis alleges that DTVM failed to properly perform duties, including to conduct due diligence of and exert control over the manager. On March 12, 2015, Postalis filed a lawsuit in Rio de Janeiro against DTVM and BNY Mellon Administração de Ativos Ltda. (“Ativos”) alleging failure to properly perform duties relating to another fund of which DTVM is administrator and Ativos is manager. On Dec. 14, 2015, Associacão dos Profissionais dos Correios (“ADCAP”), a Brazilian
postal workers association, filed a lawsuit in São Paulo against DTVM and other defendants alleging that DTVM improperly contributed to Postalis investment losses. On March 20, 2017, the lawsuit was dismissed without prejudice, and ADCAP has appealed that decision. On Dec. 17, 2015, Postalis filed three lawsuits in Rio de Janeiro against DTVM and Ativos alleging failure to properly perform duties with respect to investments in several other funds. On Feb. 4, 2016, Postalis filed a lawsuit in Brasilia against DTVM, Ativos and BNY Mellon Alocação de Patrimônio Ltda., an investment management subsidiary, alleging failure to properly perform duties and liability for losses with respect to investments in various funds of which the defendants were administrator and/or manager. On Jan. 16, 2018, the Brazilian Federal Prosecution Service (“MPF”) filed a civil lawsuit in São Paulo against DTVM alleging liability for Postalis losses based on alleged failures to properly perform certain duties as administrator to certain funds in which Postalis invested or controller of Postalis’s own investment portfolio. On April 18, 2018, the court dismissed the lawsuit without prejudice, and the MPF has appealed that decision. In addition, the Tribunal de Contas da Uniao, an administrative tribunal, has initiated two proceedings with the purpose of determining liability for losses to two investment funds administered by DTVM in which Postalis was the exclusive investor. On Oct. 4, 2019, Postalis and another pension fund filed a request for arbitration in São Paulo against DTVM and Ativos alleging liability for losses to an investment fund for which DTVM was administrator and Ativos was manager.
Brazilian Silverado Litigation
DTVM acts as administrator for the Fundo de Investimento em Direitos Creditórios Multisetorial Silverado Maximum (“Silverado Maximum Fund”), which invests in commercial credit receivables. On June 2, 2016, the Silverado Maximum Fund sued DTVM in its capacity as administrator, along with Deutsche Bank S.A. - Banco Alemão in its capacity as custodian and Silverado Gestão e Investimentos Ltda. in its capacity as investment manager. The Fund alleges that each of the defendants failed to fulfill its respective duty, and caused losses to the Fund for which the defendants are jointly and severally liable.
German Tax Matters
German authorities are investigating past “cum/ex” trading, which involved the purchase of equity
BNY Mellon 93
Notes to Consolidated Financial Statements (continued) |
securities on or shortly before the dividend date, but settled after that date, potentially resulting in an unwarranted refund of withholding tax. German authorities have taken the view that past cum/ex trading may have resulted in tax avoidance or evasion. European subsidiaries of BNY Mellon have been informed by German authorities about investigations into potential cum/ex trading by certain third-party investment funds, where one of the subsidiaries had acquired entities that served as depositary and/or fund manager for those third-party investment funds. We have received information requests from the authorities relating to pre-acquisition activity and are cooperating fully with those requests. We have not received any tax demand concerning cum/ex trading. In addition, in August 2019, the District Court of Bonn ordered that one of these subsidiaries be joined as a secondary party in connection with the prosecution of unrelated third parties. Trial commenced in September. In connection with the acquisition of the subject entities, we obtained an indemnity for liabilities from the sellers that we intend to pursue as necessary.
Note 20–Lines of business
We have an internal information system that produces performance data along product and service lines for our two principal businesses and the Other segment. The primary products and services and types of revenue for our principal businesses and a description of the Other segment are presented in Note 23 of the Notes to Consolidated Financial Statements in our 2018 Annual Report.
Business accounting principles
Our business data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the businesses will track their economic performance.
Business results are subject to reclassification when organizational changes are made. There were no significant organizational changes in the third quarter of 2019. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.
The accounting policies of the businesses are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in our 2018 Annual Report.
The results of our businesses are presented and analyzed on an internal management reporting basis.
• | Revenue amounts reflect fee and other revenue generated by each business. Fee and other revenue transferred between businesses under revenue transfer agreements is included within other revenue in each business. |
• | Revenues and expenses associated with specific client bases are included in those businesses. For example, foreign exchange activity associated with clients using custody products is included in Investment Services. |
• | Net interest revenue is allocated to businesses based on the yields on the assets and liabilities generated by each business. We employ a funds transfer pricing system that matches funds with the specific assets and liabilities of each business based on their interest sensitivity and maturity characteristics. |
• | The provision for credit losses associated with the respective credit portfolios is reflected in each business segment. |
• | Incentives expense related to restricted stock is allocated to the businesses. |
• | Support and other indirect expenses are allocated to businesses based on internally developed methodologies. |
• | Recurring FDIC expense is allocated to the businesses based on average deposits generated within each business. |
• | Litigation expense is generally recorded in the business in which the charge occurs. |
• | Management of the securities portfolio is a shared service contained in the Other segment. As a result, gains and losses associated with the valuation of the securities portfolio are included in the Other segment. |
• | Client deposits serve as the primary funding source for our securities portfolio. We typically allocate all interest revenue to the businesses generating the deposits. Accordingly, accretion related to the portion of the securities portfolio restructured in 2009 has been included in the results of the businesses. |
94 BNY Mellon
Notes to Consolidated Financial Statements (continued) |
• | Balance sheet assets and liabilities and their related income or expense are specifically assigned to each business. Businesses with a net liability position have been allocated assets. |
• | Goodwill and intangible assets are reflected within individual businesses. |
The following consolidating schedules present the contribution of our businesses to our overall profitability.
For the quarter ended Sept. 30, 2019 | Investment Services | Investment Management | Other | Consolidated | ||||||||||||
(dollars in millions) | ||||||||||||||||
Total fee and other revenue | $ | 2,291 | $ | 833 | (a) | $ | 4 | $ | 3,128 | (a) | ||||||
Net interest revenue (expense) | 753 | 57 | (80 | ) | 730 | |||||||||||
Total revenue (loss) | 3,044 | 890 | (a) | (76 | ) | 3,858 | (a) | |||||||||
Provision for credit losses | (15 | ) | — | (1 | ) | (16 | ) | |||||||||
Noninterest expense | 1,965 | 590 | 35 | 2,590 | ||||||||||||
Income (loss) before income taxes | $ | 1,094 | $ | 300 | (a) | $ | (110 | ) | $ | 1,284 | (a) | |||||
Pre-tax operating margin (b) | 36 | % | 34 | % | N/M | 33 | % | |||||||||
Average assets | $ | 269,784 | $ | 30,326 | $ | 50,569 | $ | 350,679 | ||||||||
(a) | Total fee and other revenue includes net income from consolidated investment management funds of $- million, representing $3 million of income and noncontrolling interests of $3 million. Total revenue and income before income taxes are net of noncontrolling interests of $3 million. |
(b) | Income before income taxes divided by total revenue. |
N/M - Not meaningful.
For the quarter ended June 30, 2019 | Investment Services | Investment Management | Other | Consolidated | ||||||||||||
(dollars in millions) | ||||||||||||||||
Total fee and other revenue | $ | 2,227 | $ | 850 | (a) | $ | 41 | $ | 3,118 | (a) | ||||||
Net interest revenue (expense) | 775 | 67 | (40 | ) | 802 | |||||||||||
Total revenue | 3,002 | 917 | (a) | 1 | 3,920 | (a) | ||||||||||
Provision for credit losses | (4 | ) | (2 | ) | (2 | ) | (8 | ) | ||||||||
Noninterest expense | 1,954 | 654 | 39 | 2,647 | ||||||||||||
Income (loss) before income taxes | $ | 1,052 | $ | 265 | (a) | $ | (36 | ) | $ | 1,281 | (a) | |||||
Pre-tax operating margin (b) | 35 | % | 29 | % | N/M | 33 | % | |||||||||
Average assets | $ | 264,639 | $ | 30,709 | $ | 47,036 | $ | 342,384 | ||||||||
(a) | Total fee and other revenue includes net income from consolidated investment management funds of $6 million, representing $10 million of income and noncontrolling interests of $4 million. Total revenue and income before income taxes are net of noncontrolling interests of $4 million. |
(b) | Income before income taxes divided by total revenue. |
N/M - Not meaningful.
For the quarter ended Sept. 30, 2018 | Investment Services | Investment Management | Other | Consolidated | ||||||||||||
(dollars in millions) | ||||||||||||||||
Total fee and other revenue | $ | 2,230 | $ | 938 | (a) | $ | 7 | $ | 3,175 | (a) | ||||||
Net interest revenue (expense) | 827 | 77 | (13 | ) | 891 | |||||||||||
Total revenue (loss) | 3,057 | 1,015 | (a) | (6 | ) | 4,066 | (a) | |||||||||
Provision for credit losses | 1 | (2 | ) | (2 | ) | (3 | ) | |||||||||
Noninterest expense | 2,030 | 701 | 6 | 2,737 | (b) | |||||||||||
Income (loss) before income taxes | $ | 1,026 | $ | 316 | (a) | $ | (10 | ) | $ | 1,332 | (a)(b) | |||||
Pre-tax operating margin (c) | 34 | % | 31 | % | N/M | 33 | % | |||||||||
Average assets | $ | 246,276 | $ | 31,283 | $ | 54,782 | $ | 332,341 | ||||||||
(a) | Total fee and other revenue includes net income from consolidated investment management funds of $7 million, representing $10 million of income and noncontrolling interests of $3 million. Total revenue and income before income taxes are net of noncontrolling interests of $3 million. |
(b) | Noninterest expense and income before income taxes include a loss attributable to noncontrolling interests of $1 million related to other consolidated subsidiaries. |
(c) | Income before income taxes divided by total revenue. |
N/M - Not meaningful.
BNY Mellon 95
Notes to Consolidated Financial Statements (continued) |
For the nine months ended Sept. 30, 2019 | Investment Services | Investment Management | Other | Consolidated | ||||||||||||
(dollars in millions) | ||||||||||||||||
Total fee and other revenue | $ | 6,672 | $ | 2,547 | (a) | $ | 75 | $ | 9,294 | (a) | ||||||
Net interest revenue (expense) | 2,324 | 199 | (150 | ) | 2,373 | |||||||||||
Total revenue (loss) | 8,996 | 2,746 | (a) | (75 | ) | 11,667 | (a) | |||||||||
Provision for credit losses | (11 | ) | (1 | ) | (5 | ) | (17 | ) | ||||||||
Noninterest expense | 5,888 | 1,913 | 135 | 7,936 | ||||||||||||
Income (loss) before income taxes | $ | 3,119 | $ | 834 | (a) | $ | (205 | ) | $ | 3,748 | (a) | |||||
Pre-tax operating margin (b) | 35 | % | 30 | % | N/M | 32 | % | |||||||||
Average assets | $ | 263,489 | $ | 30,724 | $ | 48,916 | $ | 343,129 | ||||||||
(a) | Total fee and other revenue includes net income from consolidated investment management funds of $22 million, representing $39 million of income and noncontrolling interests of $17 million. Total revenue and income before income taxes are net of noncontrolling interests of $17 million. |
(b) | Income before income taxes divided by total revenue. |
N/M - Not meaningful.
For the nine months ended Sept. 30, 2018 | Investment Services | Investment Management | Other | Consolidated | ||||||||||||
(dollars in millions) | ||||||||||||||||
Total fee and other revenue | $ | 6,713 | $ | 2,891 | (a) | $ | 56 | $ | 9,660 | (a) | ||||||
Net interest revenue (expense) | 2,545 | 230 | (49 | ) | 2,726 | |||||||||||
Total revenue | 9,258 | 3,121 | (a) | 7 | 12,386 | (a) | ||||||||||
Provision for credit losses | (5 | ) | 2 | (8 | ) | (11 | ) | |||||||||
Noninterest expense | 5,946 | 2,103 | 174 | 8,223 | (b) | |||||||||||
Income (loss) before income taxes | $ | 3,317 | $ | 1,016 | (a) | $ | (159 | ) | $ | 4,174 | (a)(b) | |||||
Pre-tax operating margin (c) | 36 | % | 33 | % | N/M | 34 | % | |||||||||
Average assets | $ | 262,804 | $ | 31,577 | $ | 51,139 | $ | 345,520 | ||||||||
(a) | Total fee and other revenue includes net income from consolidated investment management funds of $12 million, representing $11 million of income and a loss attributable to noncontrolling interests of $1 million. Total revenue and income before income taxes are net of a loss attributable to noncontrolling interests of $1 million. |
(b) | Noninterest expense and income before income taxes include a loss attributable to noncontrolling interests of $1 million related to other consolidated subsidiaries. |
(c) | Income before income taxes divided by total revenue. |
N/M - Not meaningful.
Note 21–Supplemental information to the Consolidated Statement of Cash Flows
Non-cash investing and financing transactions that, appropriately, are not reflected in the consolidated statement of cash flows are listed below.
Non-cash investing and financing transactions | Nine months ended Sept. 30, | ||||||
(in millions) | 2019 | 2018 | |||||
Transfers from loans to other assets for other real estate owned | $ | 1 | $ | 2 | |||
Change in assets of consolidated investment management funds | 120 | 232 | |||||
Change in liabilities of consolidated investment management funds | 13 | 5 | |||||
Change in nonredeemable noncontrolling interests of consolidated investment management funds | 102 | 226 | |||||
Securities purchased not settled | 804 | 885 | |||||
Securities sold not settled | — | 249 | |||||
Available-for-sale securities transferred to trading assets | — | 963 | |||||
Held-to-maturity securities transferred to available-for-sale | — | 1,087 | |||||
Premises and equipment/capitalized software funded by finance lease obligations | 14 | 25 | |||||
Premises and equipment/operating lease obligations | 1,440 | (a) | — | ||||
(a) | Includes $1,244 million related to the adoption of ASU 2016-02, Leases, and $196 million related to new or modified leases. |
96 BNY Mellon
Item 4. Controls and Procedures |
Disclosure controls and procedures
Our management, including the interim 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 interim 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 interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Changes in internal control over financial reporting
In the ordinary course of business, we may routinely modify, upgrade or enhance our internal controls and procedures for financial reporting. There have not been any changes in our internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
BNY Mellon 97
Forward-looking Statements |
Some statements in this document are forward-looking. These include all statements about the usefulness of Non-GAAP measures, the future results of BNY Mellon, our businesses, financial, liquidity and capital condition, results of operations, liquidity, risk and capital management and processes, goals, strategies, outlook, objectives, expectations (including those regarding our performance results, expenses, nonperforming assets, closing of certain transactions, impacts of currency fluctuations, impacts of trends on our businesses, regulatory, technology, market, economic or accounting developments and the impacts of such developments on our businesses, legal proceedings and other contingencies), effective tax rate, estimates (including those regarding expenses, losses inherent in our credit portfolios and capital ratios), intentions (including those regarding our capital returns and investment in technology), targets, opportunities, potential actions, growth (including those regarding our net interest revenue sensitivity and growth) and initiatives.
In this report, any other report, any press release or any written or oral statement that BNY Mellon or its executives may make, words, such as “estimate,” “forecast,” “project,” “anticipate,” “likely,” “target,” “expect,” “intend,” “continue,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “would,” “may,” “might,” “will,” “strategy,” “synergies,” “opportunities,” “trends,” “future” and words of similar meaning, may signify forward-looking statements.
Actual results may differ materially from those expressed or implied as a result of a number of factors, including those discussed in “Risk Factors” in our 2018 Annual Report, such as:
• | a communications or technology disruption or failure that results in a loss of information, delays our ability to access information or impacts our ability to provide services to our clients may materially adversely affect our business, financial condition and results of operations; |
• | a cybersecurity incident, or a failure to protect our computer systems, networks and information and our clients’ information against cybersecurity threats, could result in the theft, loss, unauthorized access to, disclosure, use or alteration of information, system or network failures, or loss of access to information; any such incident or failure could adversely impact our ability to conduct our businesses, damage our reputation and cause losses; |
• | our business may be materially adversely affected by operational risk; |
• | our risk management framework may not be effective in mitigating risk and reducing the potential for losses; |
• | we are subject to extensive government rulemaking, regulation and supervision; these rules and regulations have, and in the future may, compel us to change how we manage our businesses, which could have a material adverse effect on our business, financial condition and results of operations; in addition, these rules and regulations have increased our compliance and operational risk and costs; |
• | regulatory or enforcement actions or litigation could materially adversely affect our results of operations or harm our businesses or reputation; |
• | our businesses may be negatively affected by adverse events, publicity, government scrutiny or other reputational harm; |
• | failure to satisfy regulatory standards, including “well capitalized” and “well managed” status or capital adequacy and liquidity rules more generally, could result in limitations on our activities and adversely affect our business and financial condition; |
• | a failure or circumvention of our controls and procedures could have a material adverse effect on our business, reputation, results of operations and financial condition; |
• | the application of our Title I preferred resolution strategy or resolution under the Title II orderly liquidation authority could adversely affect the Parent’s liquidity and financial condition and the Parent’s security holders; |
• | if our resolution plan is determined not to be credible or not to facilitate an orderly resolution under the U.S. Bankruptcy Code, our business, reputation, results of operations and financial condition could be materially negatively impacted; |
• | acts of terrorism, impacts from climate change, natural disasters, pandemics, global conflicts and other geopolitical events may have a negative impact on our business and operations; |
• | we are dependent on fee-based business for a substantial majority of our revenue and our fee-based revenues could be adversely affected by slowing in market activity, weak financial markets, underperformance and/or negative trends in savings rates or in investment preferences; |
• | weakness and volatility in financial markets and the economy generally may materially adversely |
98 BNY Mellon
Forward-looking Statements (continued) |
affect our business, results of operations and financial condition;
• | transitions away from, or changes in the calculation of, LIBOR and other benchmark rates could adversely impact our business and results of operations; |
• | the United Kingdom’s referendum decision to leave the EU has had and may continue to have negative effects on global economic conditions, global financial markets, and our business and results of operations; |
• | changes in interest rates and yield curves could have a material adverse effect on our profitability; |
• | we may experience write-downs of securities that we own and other losses related to volatile and illiquid market conditions, reducing our earnings and impacting our financial condition; |
• | our FX revenue may be adversely affected by decreases in market volatility and the cross-border investment activity of our clients; |
• | the failure or perceived weakness of any of our significant counterparties, many of whom are major financial institutions and sovereign entities, and our assumption of credit and counterparty risk, could expose us to loss and adversely affect our business; |
• | our business, financial condition and results of operations could be adversely affected if we do not effectively manage our liquidity; |
• | we could incur losses if our allowance for credit losses, including loan and lending-related commitments reserves, is inadequate; |
• | any material reduction in our credit ratings or the credit ratings of our principal bank subsidiaries, The Bank of New York Mellon or BNY Mellon, N.A., could increase the cost of funding and borrowing to us and our rated subsidiaries and have a material adverse effect on our results of operations and financial condition and on the value of the securities we issue; |
• | new lines of business, new products and services or transformational or strategic project initiatives may subject us to additional risks, and the failure to implement these initiatives could affect our results of operations; |
• | we are subject to competition in all aspects of our business, which could negatively affect our ability to maintain or increase our profitability; |
• | our business may be adversely affected if we are unable to attract and retain employees; |
• | our strategic transactions present risks and uncertainties and could have an adverse effect on our business, results of operations and financial condition; |
• | tax law changes or challenges to our tax positions with respect to historical transactions may adversely affect our net income, effective tax rate and our overall results of operations and financial condition; |
• | our ability to return capital to shareholders is subject to the discretion of our Board of Directors and may be limited by U.S. banking laws and regulations, including those governing capital and the approval of our capital plan, applicable provisions of Delaware law or our failure to pay full and timely dividends on our preferred stock; |
• | the Parent is a non-operating holding company, and as a result, is dependent on dividends from its subsidiaries and extensions of credit from its IHC to meet its obligations, including with respect to its securities, and to provide funds for share repurchases and payment of dividends to its stockholders; and |
• | changes in accounting standards governing the preparation of our financial statements and future events could have a material impact on our reported financial condition, results of operations, cash flows and other financial data. |
Investors should consider all risk factors discussed in our 2018 Annual Report and any subsequent reports filed with the SEC by BNY Mellon pursuant to the Exchange Act. All forward-looking statements speak only as of the date on which such statements are made, and BNY Mellon undertakes no obligation to update any statement to reflect events or circumstances after the date on which such forward-looking statement is made or to reflect the occurrence of unanticipated events. The contents of BNY Mellon’s website or any other websites referenced herein are not part of this report.
BNY Mellon 99
Part II - Other Information |
Item 1. Legal Proceedings.
The information required by this Item is set forth in the “Legal proceedings” section in Note 19 of the Notes to Consolidated Financial Statements, which portion is incorporated herein by reference in response to this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) | The following table discloses repurchases of our common stock made in the third quarter of 2019. All of the Company’s preferred stock outstanding has preference over the Company’s common stock with respect to the payment of dividends. |
Issuer purchases of equity securities
Share repurchases - third quarter of 2019 | 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, 2019 | ||||||||||||
(dollars in millions, except per share information; common shares in thousands) | Total shares repurchased | Average price per share | ||||||||||||
July 2019 | 11,276 | $ | 46.67 | 11,276 | $ | 3,414 | ||||||||
August 2019 | 9,765 | 45.49 | 9,765 | 2,969 | ||||||||||
September 2019 | 233 | 44.99 | 233 | 2,959 | ||||||||||
Third quarter of 2019 (a) | 21,274 | $ | 46.11 | 21,274 | 2,959 | (b) | ||||||||
(a) | Includes 29 thousand shares repurchased at a purchase price of $1 million from employees, primarily in connection with the employees’ payment of taxes upon the vesting of restricted stock. The average price per share of open market purchases was $46.11. |
(b) | Represents the maximum value of the shares authorized to be repurchased through the second quarter of 2020, including employee benefit plan repurchases. |
In June 2019, in connection with the Federal Reserve’s non-objection to our 2019 capital plan, BNY Mellon announced a share repurchase plan providing for the repurchase of up to $3.94 billion of common stock starting in the third quarter of 2019 and continuing through the second quarter of 2020. This new share repurchase plan replaces all previously authorized share repurchase plans.
Share repurchases may be executed through open market repurchases, in privately negotiated transactions or by other means, including through repurchase plans designed to comply with Rule
10b5-1 and other derivative, accelerated share repurchase and other structured transactions. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions and the common stock trading price; the Company’s capital position, liquidity and financial performance; alternative uses of capital; and legal and regulatory considerations.
Item 6. Exhibits.
The list of exhibits required to be filed as exhibits to this report appears below.
100 BNY Mellon
Index to Exhibits |
Exhibit No. | Description | Method of Filing | ||
3.1 | Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference. | |||
3.2 | Previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 5, 2007, and incorporated herein by reference. | |||
3.3 | Previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form 8A12B (File No. 001-35651) as filed with the Commission on Sept. 14, 2012, and incorporated herein by reference. | |||
3.4 | Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on May 16, 2013, and incorporated herein by reference. | |||
3.5 | Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on April 28, 2015, and incorporated herein by reference. | |||
3.6 | Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on Aug. 1, 2016, and incorporated herein by reference. | |||
3.7 | Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on April 10, 2019, and incorporated herein by reference. | |||
3.8 | Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on Feb. 13, 2018, and incorporated herein by reference. | |||
BNY Mellon 101
Index to Exhibits (continued) |
Exhibit No. | Description | Method of Filing | ||
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, 2019. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument. | N/A | ||
10.1 | * | Filed herewith. | ||
31.1 | Filed herewith. | |||
31.2 | Filed herewith. | |||
32.1 | Furnished herewith. | |||
32.2 | Furnished herewith. | |||
101.INS | Inline XBRL Instance Document. | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | Filed herewith. | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | Filed herewith. | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | Filed herewith. | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | Filed herewith. | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | Filed herewith. | ||
104 | The cover page of the Company’s Quarterly Report on Form 10-Q for the quarter ended Sept. 30, 2019, formatted in inline XBRL. | The cover page interactive data file is embedded within the inline XBRL document and included in Exhibit 101. | ||
* Management contract or compensatory plan, contract or arrangement.
102 BNY Mellon
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE BANK OF NEW YORK MELLON CORPORATION | |
(Registrant) | |
Date: November 7, 2019 | By: | /s/ Kurtis R. Kurimsky | |
Kurtis R. Kurimsky | |||
Corporate Controller | |||
(Duly Authorized Officer and | |||
Principal Accounting Officer of | |||
the Registrant) | |||
BNY Mellon 103