Bank of New York Mellon Corp - Quarter Report: 2019 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 June 30, 2019

☐ 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 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.

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 June 30, 2019, 942,662,027 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.

THE BANK OF NEW YORK MELLON CORPORATION

Second Quarter 2019 Form 10-Q

Table of Contents



	Page
Consolidated Financial Highlights (unaudited)	2

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	4
Overview	4
Key second quarter 2019 and subsequent events	4
Highlights of second quarter 2019 results	5
Fee and other revenue	6
Net interest revenue	8
Noninterest expense	11
Income taxes	11
Review of businesses	12
Critical accounting estimates	19
Consolidated balance sheet review	19
Liquidity and dividends	29
Capital	33
Trading activities and risk management	36
Asset/liability management	39
Off-balance sheet arrangements	39
Supplemental information - Explanation of GAAP and Non-GAAP financial measures	40
Recent accounting and regulatory developments	42
Website information	43

Item 1. Financial Statements:
Consolidated Income Statement (unaudited)	44
Consolidated Comprehensive Income Statement (unaudited)	46
Consolidated Balance Sheet (unaudited)	47
Consolidated Statement of Cash Flows (unaudited)	48
Consolidated Statement of Changes in Equity (unaudited)	49



	Page
Notes to Consolidated Financial Statements:
Note 1—Basis of presentation	52
Note 2—Accounting changes and new accounting guidance	52
Note 3—Acquisitions and dispositions	53
Note 4—Securities	53
Note 5—Loans and asset quality	58
Note 6—Leasing	64
Note 7—Goodwill and intangible assets	65
Note 8—Other assets	67
Note 9—Contract revenue	68
Note 10—Net interest revenue	71
Note 11—Employee benefit plans	71
Note 12—Income taxes	72
Note 13—Variable interest entities and securitization	72
Note 14—Preferred stock	73
Note 15—Other comprehensive income (loss)	74
Note 16—Fair value measurement	76
Note 17—Fair value option	82
Note 18—Derivative instruments	82
Note 19—Commitments and contingent liabilities	89
Note 20—Lines of business	94
Note 21—Supplemental information to the Consolidated Statement of Cash Flows	97

Item 4. Controls and Procedures	98
Forward-looking Statements	99

Part II - Other Information
Item 1. Legal Proceedings.	101
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	101
Item 6. Exhibits.	101

Index to Exhibits	102
Signature	104

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)	June 30, 2019			March 31, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Results applicable to common shareholders of The Bank of New York Mellon Corporation:
Net income	$	969		$	910		$	1,055		$	1,879		$	2,190
Basic earnings per share	$	1.01		$	0.94		$	1.04		$	1.95		$	2.15
Diluted earnings per share	$	1.01		$	0.94		$	1.03		$	1.95		$	2.14

Fee and other revenue	$	3,112		$	3,032		$	3,210		$	6,144		$	6,480
Income from consolidated investment management funds	10			26			12			36			1
Net interest revenue	802			841			916			1,643			1,835
Total revenue	$	3,924		$	3,899		$	4,138		$	7,823		$	8,316

Return on common equity (annualized)	10.4		%	10.0		%	11.2		%	10.2		%	11.7		%
Return on tangible common equity (annualized) – Non-GAAP (a)	21.2		%	20.7		%	23.5		%	20.9		%	24.6		%

Return on average assets (annualized)	1.13		%	1.10		%	1.22		%	1.12		%	1.25		%

Fee revenue as a percentage of total revenue	79		%	78		%	78		%	78		%	78		%

Percentage of non-U.S. total revenue	36		%	36		%	37		%	36		%	37		%

Pre-tax operating margin	33		%	31		%	34		%	32		%	34		%

Net interest margin	1.12		%	1.20		%	1.26		%	1.16		%	1.24		%
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (b)	1.12		%	1.20		%	1.26		%	1.16		%	1.25		%

Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (c)	$	35.5		$	34.5		$	33.6		$	35.5		$	33.6
Assets under management (“AUM”) at period end (in billions) (d)	$	1,843		$	1,841		$	1,805		$	1,843		$	1,805
Market value of securities on loan at period end (in billions) (e)	$	369		$	377		$	432		$	369		$	432

Average common shares and equivalents outstanding (in thousands):
Basic	951,281			962,397			1,010,179			956,887			1,013,507
Diluted	953,928			965,960			1,014,357			959,957			1,018,020

Selected average balances:
Interest-earning assets	$	287,417		$	282,185		$	292,086		$	284,816		$	297,050
Total assets	$	342,384		$	336,165		$	346,328		$	339,292		$	352,219
Interest-bearing deposits	$	167,545		$	159,879		$	152,799		$	163,734		$	154,244
Noninterest-bearing deposits	$	52,956		$	54,583		$	64,768		$	53,765		$	67,869
Long-term debt	$	27,681		$	28,254		$	28,349		$	27,966		$	28,378
Preferred stock	$	3,542		$	3,542		$	3,542		$	3,542		$	3,542
Total The Bank of New York Mellon Corporation common shareholders’ equity	$	37,487		$	37,086		$	37,750		$	37,287		$	37,672

Other information at period end:
Cash dividends per common share	$	0.28		$	0.28		$	0.24		$	0.56		$	0.48
Common dividend payout ratio	28		%	30		%	23		%	29		%	22		%
Common dividend yield (annualized)	2.5		%	2.3		%	1.8		%	2.6		%	1.8		%
Closing stock price per common share	$	44.15		$	50.43		$	53.93		$	44.15		$	53.93
Market capitalization	$	41,619		$	48,288		$	53,927		$	41,619		$	53,927
Book value per common share	$	40.30		$	39.36		$	37.97		$	40.30		$	37.97
Tangible book value per common share – Non-GAAP (a)	$	20.45		$	19.74		$	19.00		$	20.45		$	19.00
Full-time employees	49,100			49,800			52,000			49,100			52,000
Common shares outstanding (in thousands)	942,662			957,517			999,945			942,662			999,945

2 BNY Mellon

Consolidated Financial Highlights (unaudited) (continued)



Regulatory capital and other ratios	June 30, 2019		March 31, 2019		Dec. 31, 2018
Average liquidity coverage ratio (“LCR”)	117	%	118	%	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	12.4	%	12.0	%	11.7	%
Tier 1 capital ratio	14.8		14.3		14.1
Total capital ratio	15.7		15.3		15.1

Tier 1 leverage ratio	6.8	%	6.8	%	6.6	%
Supplementary leverage ratio (“SLR”)	6.3		6.3		6.0

BNY Mellon shareholders’ equity to total assets ratio	10.9	%	11.9	%	11.2	%
BNY Mellon common shareholders’ equity to total assets ratio	10.0		10.9		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 9 for a reconciliation of this Non-GAAP measure.


(c)	Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.4 trillion at June 30, 2019, $1.3 trillion at March 31, 2019 and $1.4 trillion at June 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 $64 billion at June 30, 2019, $62 billion at March 31, 2019 and $70 billion at June 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 second quarter 2019 and subsequent events

Share repurchase program and increase in cash dividend on common stock

In June 2019, our Board of Directors approved 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.

Additionally, in July 2019, our Board of Directors approved an 11% increase in the quarterly cash dividend on common stock, from $0.28 to $0.31 per share. This increased quarterly cash dividend will be paid on Aug. 9, 2019.

4 BNY Mellon

Highlights of second quarter 2019 results

Net income applicable to common shareholders was $969 million, or $1.01 per diluted common share, in the second quarter of 2019. Net income applicable to common shareholders was $1.06 billion, or $1.03 per diluted common share, in the second quarter of 2018. The highlights below are based on the second quarter of 2019 compared with the second quarter of 2018, unless otherwise noted.


•	Total revenue of $3.9 billion decreased 5% primarily reflecting:

•

Fee revenue decreased 3% primarily reflecting cumulative AUM outflows since the second quarter of 2018, the unfavorable impact of a stronger U.S. dollar and lower foreign exchange and securities lending revenue, partially offset by higher fees in Issuer Services, growth in clearance volumes and collateral management, as well as higher client assets and volumes in Pershing. (See “Fee and other revenue” beginning on page 6.)


•	Net interest revenue decreased 12% as the higher yield on interest-earning assets was more than offset by higher deposit and funding costs, lower noninterest-bearing deposits and loan balances and the impact of hedging activities. The impact of hedging activities is offset in foreign exchange and other trading revenue. (See “Net interest revenue” on page 8.)


•	Noninterest expense of $2.6 billion decreased 4%. Over 1% of the decrease was driven by the favorable impact of a stronger U.S. dollar. The remaining decrease primarily reflects lower staff expense and decreases in most other expense categories, partially offset by continued investments in technology. (See “Noninterest expense” on page 11.)


•	Effective tax rate of 20.5%. (See “Income taxes” on page 11.)

Capital and liquidity


•	CET1 ratio under the Advanced Approach was 11.1% at June 30, 2019, unchanged compared with March 31, 2019, reflecting capital generated through earnings and the unrealized gain in our investment securities portfolio, offset by capital deployed through common stock repurchases, dividends payments and higher risk-weighted assets (“RWA”). (See “Capital” beginning on page 33.)


•	Repurchased 15.3 million common shares for $750 million and paid $270 million in dividends to common shareholders in the second quarter of 2019.

Highlights of our principal businesses

Investment Services


•	Total revenue decreased 3%.


•	Income before taxes decreased 8%.


•	AUC/A of $35.5 trillion, increased 6%, 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 10%.


•	Income before taxes decreased 17%.


•	AUM of $1.8 trillion increased 2%, 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
										2Q19 vs.										vs.
(dollars in millions, unless otherwise noted)	2Q19			1Q19			2Q18			1Q19		2Q18		YTD19			YTD18			YTD18
Investment services fees:
Asset servicing fees (a)	$	1,141		$	1,122		$	1,157		2	%	(1	)%	$	2,263		$	2,325		(3	)%
Clearing services fees (b)	410			398			401			3		2		808			825			(2	)
Issuer services fees	291			251			266			16		9		542			526			3
Treasury services fees	140			132			140			6		—		272			278			(2	)
Total investment services fees (b)	1,982			1,903			1,964			4		1		3,885			3,954			(2	)
Investment management and performance fees (b)	833			841			901			(1	)	(8	)	1,674			1,851			(10	)
Foreign exchange and other trading revenue	166			170			187			(2	)	(11	)	336			396			(15	)
Financing-related fees	50			51			53			(2	)	(6	)	101			105			(4	)
Distribution and servicing	31			31			34			—		(9	)	62			70			(11	)
Investment and other income	43			35			70			N/M		N/M		78			152			N/M
Total fee revenue	3,105			3,031			3,209			2		(3	)	6,136			6,528			(6)
Net securities gains (losses)	7			1			1			N/M		N/M		8			(48		)	N/M
Total fee and other revenue	$	3,112		$	3,032		$	3,210		3	%	(3	)%	$	6,144		$	6,480		(5	)%

Fee revenue as a percentage of total revenue	79		%	78		%	78		%					78		%	78		%

AUC/A at period end (in trillions) (c)	$	35.5		$	34.5		$	33.6		3	%	6	%	$	35.5		$	33.6		6	%
AUM at period end (in billions) (d)	$	1,843		$	1,841		$	1,805		—	%	2	%	$	1,843		$	1,805		2	%


(a)	Asset servicing fees include securities lending revenue of $44 million in the second quarter of 2019, $48 million in the first quarter of 2019, $60 million in the second quarter of 2018, $92 million in the first six months of 2019 and $115 million in the first six 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 June 30, 2019, $1.3 trillion at March 31, 2019 and $1.4 trillion at June 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 3% compared with the second quarter of 2018 and increased 3% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower investment management and performance fees, investment and other income, foreign exchange and other trading revenue and asset servicing fees, partially offset by an increase in issuer services and clearing services fees. The increase compared with the first quarter of 2019 primarily reflects higher issuer services, asset servicing and clearing services fees.

Investment services fees

Investment services fees were impacted by the following compared with the second quarter of 2018 and the first quarter of 2019:


•	Asset servicing fees decreased 1% compared with the second quarter of 2018 and increased 2% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower securities lending revenue, lower client activity and the unfavorable

impact of a stronger U.S. dollar, partially offset by growth in clearance volumes and collateral management. The increase compared with the first quarter of 2019 primarily reflects growth in clearance volumes and collateral management.


•	Clearing services fees increased 2% compared with the second quarter of 2018 and 3% compared with the first quarter of 2019. Both increases primarily reflect higher client assets and volumes.


•	Issuer services fees increased 9% compared with the second quarter of 2018 and 16% compared with the first quarter of 2019. Both increases primarily reflect higher fees in Depositary Receipts and Corporate Trust.


•	Treasury services fees was unchanged compared with the second quarter of 2018 and increased 6% compared with the first quarter of 2019. The increase compared with the first quarter of 2019 primarily reflects higher payment volumes.

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

6 BNY Mellon

Investment management and performance fees

Investment management and performance fees decreased 8% compared with the second quarter of 2018 and 1% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects the impact of cumulative AUM outflows since the second quarter of 2018 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 6% compared with the second quarter of 2018. The decrease compared with the first quarter of 2019 primarily reflects the timing of performance fees, partially offset by higher market values. Performance fees were $2 million in the second quarter of 2019, $12 million in the second quarter of 2018 and $31 million in the first quarter of 2019.

AUM was $1.8 trillion at June 30, 2019, an increase of 2% compared with June 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)	2Q19		1Q19		2Q18		YTD19		YTD18
Foreign exchange	$	150	$	160	$	171	$	310	$	354
Other trading revenue	16		10		16		26		42
Total foreign exchange and other trading revenue	$	166	$	170	$	187	$	336	$	396

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 second quarter of 2019, foreign exchange revenue totaled $150 million, a decrease of 12% compared with the second quarter of 2018 and 6% compared with the first quarter of 2019. Both decreases primarily reflect lower volumes and 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.

Distribution and servicing fees

Distribution and servicing fees decreased compared with the second quarter of 2018 and was unchanged compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower fees from mutual funds.

Investment and other income

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



Investment and other income
(in millions)	2Q19			1Q19			2Q18		YTD19			YTD18
Corporate/bank-owned life insurance	$	32		$	30		$	31	$	62		$	67
Expense reimbursements from joint venture	19			19			19		38			35
Seed capital gains (a)(b)	8			2			3		10			3
Asset-related gains	1			1			15		2			61
Other (loss) income (b)	(17		)	(17		)	2		(34		)	(14		)
Total investment and other income	$	43		$	35		$	70	$	78		$	152


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


(b)	The first quarter 2019 amounts were adjusted to correct the classification of certain revenue between seed capital and other income.

Investment and other income decreased compared with the second quarter of 2018 and increased compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower asset-related gains, foreign currency translation and increased pre-tax losses on investments in renewable energy, partially offset by higher seed capital gains. The increase compared with the first quarter of 2019 primarily reflects higher seed capital gains.

Year-to-date 2019 compared with year-to-date 2018

Fee and other revenue decreased 5% compared with the first six 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 net securities losses recorded in the first six months of 2018. The 10% decrease in investment management and performance fees primarily reflects the impact of cumulative AUM outflows since the

BNY Mellon 7

second quarter of 2018, the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and the impact of divestitures. 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 3% 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. The 15% decrease in foreign exchange and other trading revenue primarily reflects lower foreign exchange volumes and volatility. Net securities losses in the first six months of 2018 were driven by sales of debt securities.

Net interest revenue



Net interest revenue																				YTD19
										2Q19 vs.										vs.
(dollars in millions)	2Q19			1Q19			2Q18			1Q19		2Q18		YTD19			YTD18			YTD18
Net interest revenue	$	802		$	841		$	916		(5	)%	(12	)%	$	1,643		$	1,835		(10	)%
Add: Tax equivalent adjustment	4			4			5			N/M		N/M		8			11			N/M
Net interest revenue on a fully taxable equivalent basis (“FTE”) – Non-GAAP (a)	$	806		$	845		$	921		(5	)%	(12	)%	$	1,651		$	1,846		(11	)%

Average interest-earning assets	$	287,417		$	282,185		$	292,086		2	%	(2	)%	$	284,816		$	297,050		(4	)%

Net interest margin	1.12		%	1.20		%	1.26		%	(8	) bps	(14	) bps	1.16		%	1.24		%	(8	) bps
Net interest margin (FTE) – Non-GAAP (a)	1.12		%	1.20		%	1.26		%	(8	) bps	(14	) bps	1.16		%	1.25		%	(9	) 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 12% compared with the second quarter of 2018 and 5% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects 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 and the impact of hedging activities. The decrease compared with the first quarter of 2019 was primarily driven by higher interest-bearing deposit costs, lower noninterest-bearing deposit balances, lower yields on interest-earning assets and the impact of hedging activities, partially offset by the benefit of higher interest-bearing deposit balances. The impact of hedging activities is offset in foreign exchange and other trading revenue.

Net interest margin decreased 14 basis points compared with the second quarter of 2018 and 8 basis points compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects higher deposit rates, partially offset by higher asset yields. The decrease compared with the first quarter of 2019 primarily reflects higher deposit rates and lower asset yields.

Average non-U.S. dollar deposits comprised approximately 30% of our average total deposits in the second quarter of 2019. Approximately 45% of the average non-U.S. dollar deposits in the second 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 10% compared with the first six 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 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, partially offset by higher asset yields.

8 BNY Mellon



Average balances and interest rates	Quarter ended
	June 30, 2019						March 31, 2019						June 30, 2018
(dollars in millions)	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	$	61,756	$	113	0.72	%	$	63,583	$	139	0.87	%	$	69,676	$	136	0.77	%
Interest-bearing deposits with banks (primarily foreign banks)	13,666		64		1.87		13,857		63		1.85		15,748		56		1.41
Federal funds sold and securities purchased under resale agreements (a)	38,038		568		5.99		28,968		474		6.63		28,051		230		3.29
Margin loans	10,920		119		4.36		12,670		135		4.34		14,838		128		3.46
Non-margin loans:
Domestic offices	29,492		284		3.86		28,177		269		3.85		29,970		257		3.44
Foreign offices	9,961		81		3.29		10,511		86		3.32		12,258		88		2.87
Total non-margin loans	39,453		365		3.71		38,688		355		3.70		42,228		345		3.27
Securities:
U.S. government obligations	18,870		103		2.19		23,597		129		2.22		23,199		116		2.02
U.S. government agency obligations	66,445		428		2.58		64,867		427		2.63		63,022		374		2.37
State and political subdivisions (b)	1,735		13		2.89		2,206		15		2.71		2,677		18		2.75
Other securities (b)	30,770		157		2.04		28,647		151		2.13		28,863		126		1.75
Trading securities (b)	5,764		39		2.72		5,102		36		2.91		3,784		29		3.10
Total securities	123,584		740		2.40		124,419		758		2.45		121,545		663		2.19
Total interest-earning assets	$	287,417	$	1,969	2.74	%	$	282,185	$	1,924	2.75	%	$	292,086	$	1,558	2.14	%
Noninterest-earnings assets	54,967						53,980						54,242
Total assets	$	342,384					$	336,165					$	346,328
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic offices	$	74,180	$	251	1.36	%	$	70,562	$	224	1.29	%	$	54,200	$	105	0.78	%
Foreign offices	93,365		181		0.78		89,317		167		0.76		98,599		68		0.28
Total interest-bearing deposits	167,545		432		1.04		159,879		391		0.99		152,799		173		0.45
Federal funds purchased and securities sold under repurchase agreements (a)	11,809		372		12.64		11,922		331		11.26		18,146		158		3.48
Trading liabilities	1,735		11		2.47		1,305		7		2.25		1,198		7		2.43
Other borrowed funds	2,455		20		3.36		3,305		24		2.87		2,399		14		2.40
Commercial paper	2,957		18		2.43		1,377		8		2.44		3,869		21		2.13
Payables to customers and broker-dealers	15,666		69		1.76		16,108		70		1.76		16,349		45		1.10
Long-term debt	27,681		241		3.45		28,254		248		3.52		28,349		219		3.06
Total interest-bearing liabilities	$	229,848	$	1,163	2.03	%	$	222,150	$	1,079	1.96	%	$	223,109	$	637	1.14	%
Total noninterest-bearing deposits	52,956						54,583						64,768
Other noninterest-bearing liabilities	18,362						18,628						16,857
Total liabilities	301,166						295,361						304,734
Temporary equity
Redeemable noncontrolling interests	53						70						184
Permanent equity
Total The Bank of New York Mellon Corporation shareholders’ equity	41,029						40,628						41,292
Noncontrolling interests	136						106						118
Total permanent equity	41,165						40,734						41,410
Total liabilities, temporary equity and permanent equity	$	342,384					$	336,165					$	346,328
Net interest revenue (FTE) – Non-GAAP			$	806					$	845					$	921
Net interest margin (FTE) – Non-GAAP					1.12	%					1.20	%					1.26	%
Less: Tax equivalent adjustment (b)			4						4						5
Net interest revenue – GAAP			$	802					$	841					$	916
Net interest margin – GAAP					1.12	%					1.20	%					1.26	%

(a)

Includes the average impact of offsetting under enforceable netting agreements of approximately $51 billion for the second quarter of 2019, $44 billion for the first quarter of 2019 and $18 billion for the second 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 2.57% for the second quarter of 2019, 2.63% for the first quarter of 2019 and 2.01% for the second 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 2.39% for the second quarter of 2019, 2.40% for the first quarter of 2019 and 1.75% for the second 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)	Average rates were calculated on an FTE basis, at tax rates of approximately 21%, and annualized.

BNY Mellon 9



Average balances and interest rates	Year-to-date
	June 30, 2019						June 30, 2018
(dollars in millions)	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	$	62,665	$	252	0.80	%	$	74,346	$	262	0.70	%
Interest-bearing deposits with banks (primarily foreign banks)	13,761		127		1.86		14,804		98		1.33
Federal funds sold and securities purchased under resale agreements (a)	33,528		1,042		6.26		27,978		400		2.88
Margin loans	11,790		254		4.35		15,254		243		3.21
Non-margin loans:
Domestic offices	28,838		553		3.85		30,191		485		3.23
Foreign offices	10,235		167		3.30		12,387		165		2.68
Total non-margin loans	39,073		720		3.71		42,578		650		3.07
Securities:
U.S. government obligations	21,220		232		2.21		23,329		225		1.95
U.S. government agency obligations	65,660		855		2.60		62,998		724		2.30
State and political subdivisions (b)	1,969		28		2.80		2,776		37		2.68
Other securities (b)	29,715		308		2.08		29,005		249		1.72
Trading securities (b)	5,435		75		2.81		3,982		57		2.85
Total securities	123,999		1,498		2.42		122,090		1,292		2.12
Total interest-earning assets	$	284,816	$	3,893	2.75	%	$	297,050	$	2,945	1.99	%
Noninterest-earnings assets	54,476						55,169
Total assets	$	339,292					$	352,219
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic offices	$	72,381	$	475	1.32	%	$	52,914	$	176	0.67	%
Foreign offices	91,353		348		0.77		101,330		114		0.23
Total interest-bearing deposits	163,734		823		1.01		154,244		290		0.38
Federal funds purchased and securities sold under repurchase agreements (a)	11,865		703		11.95		18,552		265		2.88
Trading liabilities	1,521		18		2.37		1,382		16		2.33
Other borrowed funds	2,878		44		3.08		2,260		23		2.06
Commercial paper	2,171		26		2.43		3,502		33		1.89
Payables to customers and broker-dealers	15,887		139		1.76		16,723		76		0.92
Long-term debt	27,966		489		3.48		28,378		396		2.78
Total interest-bearing liabilities	$	226,022	$	2,242	2.00	%	$	225,041	$	1,099	0.98	%
Total noninterest-bearing deposits	53,765						67,869
Other noninterest-bearing liabilities	18,494						17,710
Total liabilities	298,281						310,620
Temporary equity
Redeemable noncontrolling interests	65						188
Permanent equity
Total The Bank of New York Mellon Corporation shareholders’ equity	40,829						41,214
Noncontrolling interests	117						197
Total permanent equity	40,946						41,411
Total liabilities, temporary equity and permanent equity	$	339,292					$	352,219
Net interest revenue (FTE) – Non-GAAP			$	1,651					$	1,846
Net interest margin (FTE) – Non-GAAP					1.16	%					1.25	%
Less: Tax equivalent adjustment (b)			8						11
Net interest revenue – GAAP			$	1,643					$	1,835
Net interest margin – GAAP					1.16	%					1.24	%

(a)

Includes the average impact of offsetting under enforceable netting agreements of approximately $47 billion for the first six months of 2019 and $16 billion for the first six 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 2.59% for the first six months of 2019 and 1.84% for the first six 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 2.39% for the first six months of 2019 and 1.55% for the first six 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)	Average rates were calculated on an FTE basis, at tax rates of approximately 21%, and annualized.

10 BNY Mellon

Noninterest expense



Noninterest expense															YTD19
							2Q19 vs.								vs.
(dollars in millions)	2Q19		1Q19		2Q18		1Q19		2Q18		YTD19		YTD18		YTD18
Staff	$	1,421	$	1,524	$	1,489	(7	)%	(5	)%	$	2,945	$	3,065	(4	)%
Professional, legal and other purchased services	337		325		328		4		3		662		619		7
Software and equipment	304		283		266		7		14		587		500		17
Net occupancy	138		137		156		1		(12	)	275		295		(7	)
Sub-custodian and clearing	115		105		110		10		5		220		229		(4	)
Distribution and servicing	94		91		106		3		(11	)	185		212		(13	)
Business development	56		45		62		24		(10	)	101		113		(11	)
Bank assessment charges	31		31		47		—		(34	)	62		99		(37	)
Amortization of intangible assets	30		29		48		3		(38	)	59		97		(39	)
Other	121		129		135		(6	)	(10	)	250		257		(3	)
Total noninterest expense	$	2,647	$	2,699	$	2,747	(2	)%	(4	)%	$	5,346	$	5,486	(3	)%

Full-time employees at period end	49,100		49,800		52,000		(1	)%	(6	)%

Total noninterest expense decreased 4% compared with the second quarter of 2018 and 2% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower staff expense, the favorable impact of a stronger U.S. dollar and decreases in most other expense categories, 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 first quarter of 2019 primarily reflects lower staff expense, driven by the impact of vesting of long-term stock awards for retirement eligible employees recorded in the first quarter of 2019. The decrease was partially offset by higher software and equipment, volume-related and professional, legal and other purchased services expenses.

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.

Year-to-date 2019 compared with year-to-date 2018

Noninterest expense decreased 3% compared with the first six months of 2018. The decrease primarily reflects lower staff expense, the favorable impact of a stronger U.S. dollar and decreases in most other expense categories, partially offset by continued investments in technology.

Income taxes

BNY Mellon recorded an income tax provision of $264 million (20.5% effective tax rate) in the second quarter of 2019, $286 million (20.5% effective tax rate) in the second quarter of 2018 and $237 million (19.9% effective tax rate) in the first quarter of 2019. For additional information, see Note 12 of the Notes to Consolidated Financial Statements.

BNY Mellon 11

Review of businesses

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

Business accounting principles

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

For information on the accounting principles of our businesses, 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 second 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 June 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.

12 BNY Mellon

Investment Services business



																										YTD19
(dollars in millions unless otherwise noted)																2Q19 vs.										vs.
(dollars in millions unless otherwise noted)	2Q19			1Q19			4Q18			3Q18			2Q18			1Q19		2Q18		YTD19			YTD18			YTD18
Revenue:
Investment services fees:
Asset servicing fees (a)	$	1,120		$	1,103		$	1,106		$	1,136		$	1,135		2	%	(1	)%	$	2,223		$	2,278		(2	)%
Clearing services fees (b)	411			398			398			393			400			3		3		809			824			(2	)
Issuer services fees	291			251			286			288			265			16		10		542			525			3
Treasury services fees	140			132			139			136			140			6		—		272			278			(2	)
Total investment services fees (b)	1,962			1,884			1,929			1,953			1,940			4		1		3,846			3,905			(2	)
Foreign exchange and other trading revenue	153			157			163			161			172			(3	)	(11	)	310			341			(9	)
Other (b)(c)	112			113			121			116			121			(1	)	(7	)	225			237			(5	)
Total fee and other revenue	2,227			2,154			2,213			2,230			2,233			3		—		4,381			4,483			(2	)
Net interest revenue	775			796			827			827			874			(3	)	(11	)	1,571			1,718			(9	)
Total revenue	3,002			2,950			3,040			3,057			3,107			2		(3	)	5,952			6,201			(4	)
Provision for credit losses	(4		)	8			6			1			1			N/M		N/M		4			(6		)	N/M
Noninterest expense (excluding amortization of intangible assets)	1,934			1,949			2,090			1,995			1,931			(1	)	—		3,883			3,844			1
Amortization of intangible assets	20			20			22			35			36			—		(44	)	40			72			(44	)
Total noninterest expense	1,954			1,969			2,112			2,030			1,967			(1	)	(1	)	3,923			3,916			—
Income before taxes	$	1,052		$	973		$	922		$	1,026		$	1,139		8	%	(8	)%	$	2,025		$	2,291		(12	)%

Pre-tax operating margin	35		%	33		%	30		%	34		%	37		%					34		%	37		%

Securities lending revenue	$	40		$	44		$	43		$	52		$	55		(9	)%	(27	)%	$	84		$	103		(18	)%

Total revenue by line of business:
Asset Servicing	$	1,391		$	1,407		$	1,435		$	1,458		$	1,520		(1	)%	(8	)%	$	2,798		$	3,039		(8	)%
Pershing	564			554			558			558			558			2		1		1,118			1,139			(2	)
Issuer Services	446			396			441			453			431			13		3		842			849			(1	)
Treasury Services	317			317			328			324			329			—		(4	)	634			650			(2	)
Clearance and Collateral Management	284			276			278			264			269			3		6		560			524			7
Total revenue by line of business	$	3,002		$	2,950		$	3,040		$	3,057		$	3,107		2	%	(3	)%	$	5,952		$	6,201		(4	)%

Metrics:
Average loans	$	32,287		$	33,171		$	35,540		$	35,044		$	38,002		(3	)%	(15	)%	$	32,726		$	38,598		(15	)%
Average deposits	$	201,146		$	195,082		$	203,416		$	192,741		$	203,064		3	%	(1	)%	$	198,131		$	208,567		(5	)%

AUC/A at period end (in trillions) (d)	$	35.5		$	34.5		$	33.1		$	34.5		$	33.6		3	%	6	%	$	35.5		$	33.6		6	%
Market value of securities on loan at period end (in billions) (e)	$	369		$	377		$	373		$	415		$	432		(2	)%	(15	)%	$	369		$	432		(15	)%

Pershing:
Average active clearing accounts (U.S. platform) (in thousands)	6,254			6,169			6,125			6,108			6,080			1	%	3	%
Average long-term mutual fund assets (U.S. platform)	$	532,384		$	507,606		$	489,491		$	527,336		$	512,645		5	%	4	%
Average investor margin loans (U.S. platform)	$	9,440		$	10,093		$	10,921		$	10,696		$	10,772		(6	)%	(12	)%

Clearance and Collateral Management:
Average tri-party collateral management balances (in billions)	$	3,400		$	3,266		$	3,181		$	2,995		$	2,801		4	%	21	%


(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 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 and June 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 $64 billion at June 30, 2019, $62 billion at March 31, 2019, $58 billion at Dec. 31, 2018, $69 billion at Sept. 30, 2018 and $70 billion at June 30, 2018.

N/M - Not meaningful.

BNY Mellon 13

Business description

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

We are one of the leading global investment services providers with $35.5 trillion of AUC/A at June 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 $3.4 trillion serviced globally including approximately $2.5 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 $4.1 trillion in 34 separate markets.

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

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

The Issuer Services business includes Corporate Trust and Depositary Receipts. Our Corporate Trust business delivers a full range of issuer and related investor services, including trustee, paying agency, fiduciary, escrow and other financial

services. We are a leading provider to the debt capital markets, providing customized and market-driven solutions to investors, bondholders and lenders. Our Depositary Receipts business drives global investing by providing servicing and value-added solutions that enable, facilitate and enhance cross-border trading, clearing, settlement and ownership. We are one of the largest providers of depositary receipts services in the world, partnering with leading companies from more than 50 countries.

Our Treasury Services business includes global payments, liquidity management, payables/receivables 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 6% compared with June 30, 2018 to $35.5 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 35% equity securities and 65% fixed-income securities at June 30, 2019 and 37% equity securities and 63% fixed-income securities at June 30, 2018.

Total revenue of $3.0 billion decreased 3% compared with the second quarter of 2018 and increased 2% compared with the first quarter of 2019. The drivers of total revenue by line of business are indicated below.

Asset Servicing revenue of $1.4 billion decreased 8% compared with the second quarter of 2018 and 1% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects lower net interest revenue, lower foreign exchange and securities lending revenue, lower client activity and the unfavorable impact of a stronger U.S. dollar. The decrease compared with the

14 BNY Mellon

first quarter of 2019 primarily reflects lower net interest revenue.

Pershing revenue of $564 million increased 1% compared with the second quarter of 2018 and 2% compared with the first quarter of 2019. Both increases primarily reflect higher client assets and volumes, partially offset by lower net interest revenue.

Issuer Services revenue of $446 million increased 3% compared with the second quarter of 2018 and 13% compared with the first quarter of 2019. Both increases primarily reflect higher fees in Depositary Receipts and Corporate Trust. The increase compared with the second quarter of 2018 was partially offset by lower net interest revenue in Corporate Trust.

Treasury Services revenue of $317 million decreased 4% compared with the second quarter of 2018 and was unchanged compared with the first quarter of 2019. The decrease primarily reflects lower net interest revenue.

Clearance and Collateral Management revenue of $284 million increased 6% compared with the second quarter of 2018 and 3% compared with the first quarter of 2019. Both increases primarily reflect growth in clearance volumes and collateral management, 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 1% compared with the second quarter of 2018 and first quarter of 2019. The decrease compared with the second quarter of 2018 was primarily driven by lower staff expense and bank assessment charges and the favorable impact of a stronger U.S. dollar, partially offset by higher investments in technology. The decrease compared with the first quarter of 2019 primarily reflects lower staff expense, partially offset by higher volume-related expenses.

Year-to date 2019 compared with year-to-date 2018

Total revenue of $6.0 billion decreased 4% compared with the first six months of 2018. Asset Servicing revenue of $2.8 billion decreased 8% primarily reflecting lower net interest revenue, lower foreign exchange and securities lending revenue, the unfavorable impact of a stronger U.S. dollar and lower client activity. Pershing revenue of $1.1 billion decreased 2% primarily reflecting previously disclosed lost business and lower net interest revenue, partially offset by higher client assets. Issuer Services revenue of $842 million decreased 1% primarily reflecting lower net interest revenue due to lower Corporate Trust deposits and lower fees in Depositary Receipts, partially offset by higher fees in Corporate Trust. Treasury Services revenue of $634 million decreased 2% primarily reflecting lower net interest revenue. Clearance and Collateral Management revenue of $560 million increased 7% primarily reflecting growth in collateral management and clearance volumes, partially offset by lower net interest revenue.

Noninterest expense of $3.9 billion increased less than 1% compared with the first six months of 2018 primarily reflecting higher investments in technology, partially offset by lower staff expense, the favorable impact of a stronger U.S. dollar and lower bank assessment charges.

BNY Mellon 15

Investment Management business



																										YTD19
																2Q19 vs.										vs.
(dollars in millions)	2Q19			1Q19			4Q18			3Q18			2Q18			1Q19		2Q18		YTD19			YTD18			YTD18
Revenue:
Investment management fees (a)	$	827		$	806		$	826		$	879		$	885		3	%	(7	)%	$	1,633		$	1,783		(8	)%
Performance fees	2			31			54			30			12			N/M		(83	)	33			60			(45	)
Investment management and performance fees (b)	829			837			880			909			897			(1	)	(8	)	1,666			1,843			(10	)
Distribution and servicing	44			45			45			47			48			(2	)	(8	)	89			98			(9	)
Other (a)	(23		)	(18		)	(35		)	(18		)	(4		)	N/M		N/M		(41		)	12			N/M
Total fee and other revenue (a)	850			864			890			938			941			(2	)	(10	)	1,714			1,953			(12	)
Net interest revenue	67			75			73			77			77			(11	)	(13	)	142			153			(7	)
Total revenue	917			939			963			1,015			1,018			(2	)	(10	)	1,856			2,106			(12	)
Provision for credit losses	(2		)	1			1			(2		)	2			N/M		N/M		(1		)	4			N/M
Noninterest expense (excluding amortization of intangible assets)	645			660			702			688			685			(2	)	(6	)	1,305			1,377			(5	)
Amortization of intangible assets	9			9			13			13			12			—		(25	)	18			25			(28	)
Total noninterest expense	654			669			715			701			697			(2	)	(6	)	1,323			1,402			(6	)
Income before taxes	$	265		$	269		$	247		$	316		$	319		(1	)%	(17	)%	$	534		$	700		(24	)%

Pre-tax operating margin	29		%	29		%	26		%	31		%	31		%					29		%	33		%
Adjusted pre-tax operating margin – Non-GAAP (c)	32		%	32		%	29		%	35		%	35		%					32		%	37		%

Total revenue by line of business:
Asset Management	$	618		$	637		$	660		$	704		$	702		(3	)%	(12	)%	$	1,255		$	1,472		(15	)%
Wealth Management	299			302			303			311			316			(1	)	(5	)	601			634			(5	)
Total revenue by line of business	$	917		$	939		$	963		$	1,015		$	1,018		(2	)%	(10	)%	$	1,856		$	2,106		(12	)%

Average balances:
Average loans	$	16,322		$	16,403		$	16,485		$	16,763		$	16,974		—	%	(4	)%	$	16,363		$	16,926		(3	)%
Average deposits	$	14,615		$	15,815		$	14,893		$	14,634		$	14,252		(8	)%	3	%	$	15,211		$	13,810		10	%


(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 6% (Non-GAAP) compared with the second 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.

16 BNY Mellon



AUM trends																2Q19 vs.
(dollars in billions)	2Q19			1Q19			4Q18			3Q18			2Q18			1Q19		2Q18
AUM at period end, by product type: (a)
Equity	$	152		$	149		$	135		$	167		$	160		2	%	(5	)%
Fixed income	209			208			200			202			197			—		6
Index	322			333			301			352			334			(3	)	(4	)
Liability-driven investments	709			709			659			652			663			—		7
Multi-asset and alternative investments	184			178			167			184			181			3		2
Cash	267			264			260			271			270			1		(1	)
Total AUM by product type	$	1,843		$	1,841		$	1,722		$	1,828		$	1,805		—	%	2	%

Changes in AUM: (a)
Beginning balance of AUM	$	1,841		$	1,722		$	1,828		$	1,805		$	1,868
Net (outflows) inflows:
Long-term strategies:
Equity	(2		)	(4		)	(8		)	(2		)	(3		)
Fixed income	(4		)	3			(1		)	2			(4		)
Liability-driven investments	1			5			14			16			2
Multi-asset and alternative investments	1			(4		)	(2		)	2			(3		)
Total long-term active strategies (outflows) inflows	(4		)	—			3			18			(8		)
Index	(22		)	(2		)	(11		)	(3		)	(7		)
Total long-term strategies (outflows) inflows	(26		)	(2		)	(8		)	15			(15		)
Short-term strategies:
Cash	2			2			(10		)	—			(11		)
Total net (outflows) inflows	(24		)	—			(18		)	15			(26		)
Net market impact	42			103			(69		)	18			17
Net currency impact	(16		)	16			(19		)	(10		)	(53		)
Divestiture/other	—			—			—			—			(1		)
Ending balance of AUM	$	1,843		$	1,841		$	1,722		$	1,828		$	1,805		—	%	2	%

Wealth Management client assets (b)	$	257		$	253		$	239		$	261		$	254		2	%	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 2% compared with June 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 $26 billion in the second quarter of 2019, primarily resulting from

outflows of index and fixed income funds. Market and regulatory trends have resulted in increased demand for lower fee asset management products, and for performance-based fees.

Total revenue of $917 million decreased 10% compared with the second quarter of 2018 and 2% compared with the first quarter of 2019.

Asset Management revenue of $618 million decreased 12% compared with the second quarter of 2018 and 3% compared with the first quarter of 2019. The decrease compared with the second quarter of 2018 primarily reflects the change in AUM, which was impacted by the cumulative outflows since the second quarter of 2018, partially offset by higher market values. The decrease compared with the second quarter of 2018 also reflects the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and the impact of divestitures and hedging activities. The decrease compared with the first quarter of 2019 primarily reflects the timing of

BNY Mellon 17

performance fees and the impact of AUM outflows, partially offset by higher market values.

Wealth Management revenue of $299 million decreased 5% compared with the second quarter of 2018 and 1% compared with the first 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 38% from non-U.S. sources in the second quarter of 2019, compared with 41% in the second quarter of 2018 and 40% in the first quarter of 2019.

Noninterest expense of $654 million decreased 6% compared with the second quarter of 2018 and 2% compared with the first quarter of 2019. Both decreases reflect lower staff expense. The decrease compared with the second quarter of 2018 also

reflects the favorable impact of a stronger U.S. dollar and lower distribution and servicing expense.

Year-to date 2019 compared with year-to-date 2018

Total revenue of $1.9 billion decreased 12% compared with the first six months of 2018. Asset Management revenue of $1.3 billion decreased 15%, primarily reflecting net outflows, the impact of divestitures, the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and the impact of hedging activities, partially offset by higher market values. Wealth management revenue of $601 million decreased 5%, reflecting lower net interest revenue and fees.

Noninterest expense of $1.3 billion decreased 6% compared with the first six months of 2018, primarily reflecting lower staff expense, the favorable impact of a stronger U.S. dollar (principally versus the British pound) and lower distribution and servicing expense.

Other segment




(in millions)	2Q19			1Q19			4Q18			3Q18			2Q18			YTD19			YTD18
Fee revenue	$	34		$	29		$	29		$	7		$	40		$	63		$	97
Net securities gains (losses)	7			1			—			—			1			8			(48		)
Total fee and other revenue	41			30			29			7			41			71			49
Net interest (expense)	(40		)	(30		)	(15		)	(13		)	(35		)	(70		)	(36		)
Total revenue (loss)	1			—			14			(6		)	6			1			13
Provision for credit losses	(2		)	(2		)	(7		)	(2		)	(6		)	(4		)	(6		)
Noninterest expense	39			61			160			6			81			100			168
(Loss) before taxes	$	(36	)	$	(59	)	$	(139	)	$	(10	)	$	(69	)	$	(95	)	$	(149	)

Average loans and leases	$	1,764		$	1,784		$	1,809		$	2,000		$	2,090		$	1,774		$	2,308

See page 20 of our 2018 Annual Report for additional information on the Other segment.

Review of financial results

Fee revenue, net securities gains and net interest expense are primarily related to corporate treasury and other investment activity, including hedging activity which offsets between fee revenue and net interest expense.

Noninterest expense decreased $42 million compared with the second quarter of 2018 and $22 million compared with the first quarter of 2019, primarily reflecting lower staff expense. The decrease compared with the second quarter of 2018 also

reflects the expenses associated with relocating our corporate headquarters, of which $12 million was recorded in the second quarter of 2018.

Year-to date 2019 compared with year-to-date 2018

Losses before taxes decreased $54 million compared with the first six months of 2018. Total revenue decreased $12 million, primarily reflecting corporate treasury activity and lower asset-related gains, partially offset by net securities losses recorded in the first six months of 2018. Noninterest expense decreased $68 million, primarily reflecting expenses associated with relocating our corporate headquarters recorded in 2018 and lower staff expense.

18 BNY Mellon

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 policy	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 below.
Litigation and regulatory contingencies	“Legal proceedings” in Note 19 of the Notes to Consolidated Financial Statements.

Goodwill and other intangible assets

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.

In the second quarter of 2019, we performed our annual goodwill impairment test on all seven reporting units using an income approach to estimate fair values of each reporting unit. Estimated cash flows used in the income approach were based on management’s projections as of March 31, 2019. The discount rate applied to these cash flows was 10% and incorporated a 6% market equity risk premium. Estimated cash flows extend far into the future, and, by their nature, are difficult to estimate over such an extended time frame.

As a result of the annual goodwill impairment test of the seven reporting units, no goodwill impairment was recognized. The fair values of six of the Company’s reporting units were substantially in excess of the respective reporting units’ carrying value. The Asset Management reporting unit, with $7.2 billion of allocated goodwill, which is one of the

two reporting units in the Investment Management segment, exceeded its carrying value by approximately 18%. For the Asset Management reporting unit, in the future, small changes in the assumptions, such as changes in the level of AUM and operating margin, could produce a non-cash goodwill impairment. See “Critical accounting estimates” in the 2018 Annual Report for additional information on the annual goodwill impairment test.

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 June 30, 2019, total assets were $381 billion, compared with $363 billion at Dec. 31, 2018. The increase in total assets was primarily driven by higher federal funds sold and securities purchased under resale agreements. Deposits totaled $253 billion at June 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 60% at June 30, 2019 and 54% at Dec. 31, 2018.

At June 30, 2019, available funds totaled $152 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

BNY Mellon 19

funds of $135 billion at Dec. 31, 2018. Total available funds as a percentage of total assets were 40% at June 30, 2019 and 37% at Dec. 31, 2018. For additional information on our liquid funds and available funds, see “Liquidity and dividends.”

Securities were $120.1 billion, or 32% of total assets, at June 30, 2019, compared with $119.8 billion, or 33% of total assets, at Dec. 31, 2018. Lower investments in U.S. Treasury and state and political subdivision securities were more than offset by additional investments in agency residential mortgage-backed securities (“RMBS”), sovereign debt/sovereign guaranteed securities and an increase in the net unrealized pre-tax gain, as well as additional investments in nearly all other types of securities. For additional information on our securities portfolio, see “Securities” and Note 4 of the Notes to Consolidated Financial Statements.

Loans were $52 billion, or 14% of total assets, at June 30, 2019, compared with $57 billion, or 16% of total assets, at Dec. 31, 2018. The decrease was primarily driven by lower margin loans and overdrafts. For additional information on our loan portfolio, see “Loans” and Note 5 of the Notes to Consolidated Financial Statements.

Long-term debt totaled $28 billion at June 30, 2019 and $29 billion at Dec. 31, 2018. The decrease

reflects maturities of $2.8 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 $41.5 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 June 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)		Investment securities (b)		Other (c)		Total exposure
Top 10 country exposure:
UK	$	14.1	$	1.0	$	2.4	$	4.2	$	2.0	$	23.7
Germany	18.0		0.5		0.7		3.0		0.2		22.4
Japan	14.2		0.8		0.2		—		0.1		15.3
Belgium	6.0		1.0		0.1		0.2		—		7.3
Canada	—		1.6		0.2		2.6		0.8		5.2
China	—		2.2		0.8		—		0.3		3.3
France	—		0.2		—		2.0		0.4		2.6
Netherlands	—		—		0.3		1.8		0.1		2.2
Australia	—		1.1		0.3		0.5		0.3		2.2
Italy	—		0.7		—		1.3		—		2.0
Total Top 10 country exposure	$	52.3	$	9.1	$	5.0	$	15.6	$	4.2	$	86.2	(d)

Select country exposure:
Spain	$	—	$	0.2	$	0.1	$	1.3	$	—	$	1.6
Brazil	—		—		1.4		0.1		0.1		1.6
Total select country exposure	$	—	$	0.2	$	1.5	$	1.4	$	0.1	$	3.2


(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.

20 BNY Mellon

Our largest country risk exposure, based on our internal country risk management process at June 30, 2019, was to the UK, which is planning to withdraw from the European Union (“EU”). For additional information, see “Recent accounting and regulatory developments - The United Kingdom’s Withdrawal from the European Union (“Brexit”)” in our first quarter 2019 Quarterly Report on Form 10-Q and in our 2018 Annual Report, “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.”

Events in recent years have resulted in increased focus on Italy, Spain and Brazil. The country risk exposure to Italy and Spain 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.

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	March 31, 2019			2Q19 change in unrealized gain (loss)			June 30, 2019					Fair value as a % of amortized cost (a)		Unrealized gain (loss)				Ratings (b)
	March 31, 2019						June 30, 2019																	BB+ and lower
(dollars in millions)	Fair value						Amortized cost		Fair value									AAA/ AA-		A+/ A-		BBB+/ BBB-		BB+ and lower		Not rated
Agency RMBS	$	50,872		$	503		$	52,816	$	52,860		100	%	$	44			100	%	—	%	—	%	—	%	—	%
U.S. Treasury	19,545			82			18,272		18,284			100		12				100		—		—		—		—
Sovereign debt/sovereign guaranteed (c)	12,811			32			13,007		13,146			101		139				76		3		20		1		—
Agency commercial mortgage-backed securities (“MBS”)	10,800			56			10,678		10,689			100		11				100		—		—		—		—
Supranational	3,541			13			3,903		3,925			101		22				100		—		—		—		—
U.S. government agencies	3,556			8			3,861		3,866			100		5				100		—		—		—		—
CLOs	3,373			9			3,665		3,649			100		(16		)		98		—		—		1		1
Foreign covered bonds (d)	3,053			12			3,465		3,479			100		14				100		—		—		—		—
Other asset-backed securities (“ABS”)	2,037			6			2,466		2,470			100		4				100		—		—		—		—
Non-agency commercial MBS	1,476			30			1,968		1,993			101		25				98		2		—		—		—
Non-agency RMBS (e)	1,354			(1		)	1,090		1,314			121		224				13		12		5		44		26
State and political subdivisions	2,183			10			1,270		1,297			102		27				72		27		—		—		1
Corporate bonds	903			13			889		905			102		16				16		69		15		—		—
Other	1,476			1			1,671		1,674			100		3				89		7		—		—		4
Total securities	$	116,980	(f)	$	774		$	119,021	$	119,551	(f)	100	%	$	530		(f)(g)	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, Germany, France, Spain, Italy and the Netherlands.


(d)	Primarily consists of exposure to Canada, UK, Australia and Sweden.


(e)	Includes RMBS that were included in the former Grantor Trust of $791 million at March 31, 2019 and $753 million at June 30, 2019.


(f)	Includes net unrealized losses on derivatives hedging securities available-for-sale of $252 million at March 31, 2019 and $737 million at June 30, 2019.


(g)	Unrealized gains of $384 million at June 30, 2019 related to available-for-sale securities, net of hedges.

The fair value of our securities portfolio, including related hedges, was $119.6 billion at June 30, 2019, compared with $119.2 billion at Dec. 31, 2018. Lower investments in U.S. Treasury and state and political subdivision securities were more than offset

by additional investments in agency RMBS, sovereign debt/sovereign guaranteed securities and an increase in the net unrealized pre-tax gain as well as additional investments in nearly all other types of securities.

BNY Mellon 21

At June 30, 2019, the total securities portfolio had a net unrealized gain of $530 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 $287 million at June 30, 2019, compared with an unrealized loss (after-tax) of $167 million at Dec. 31, 2018.

At June 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 gains (losses) 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)	2Q19		1Q19		4Q18		3Q18		2Q18
Amortizable purchase premium (net of discount) relating to securities:
Balance at period end	$	1,315	$	1,388	$	1,429	$	1,536	$	1,642
Estimated average life remaining at period end (in years)	4.5		4.8		5.0		5.2		5.3
Amortization	$	91	$	78	$	92	$	108	$	115
Accretable discount related to the prior restructuring of the securities portfolio:
Balance at period end	$	181	$	193	$	207	$	224	$	239
Estimated average life remaining at period end (in years)	6.3		6.3		6.3		6.3		6.3
Accretion	$	13	$	16	$	17	$	20	$	24


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

Loans



Total exposure – consolidated	June 30, 2019						Dec. 31, 2018
(in billions)	Loans		Unfunded commitments		Total exposure		Loans		Unfunded commitments		Total exposure
Non-margin loans:
Financial institutions	$	11.5	$	35.6	$	47.1	$	11.6	$	34.0	$	45.6
Commercial	1.7		13.6		15.3		2.1		15.2		17.3
Subtotal institutional	13.2		49.2		62.4		13.7		49.2		62.9
Wealth management loans and mortgages	15.7		0.8		16.5		16.0		0.8		16.8
Commercial real estate	5.2		3.6		8.8		4.8		3.5		8.3
Lease financings	1.2		—		1.2		1.3		—		1.3
Other residential mortgages	0.6		—		0.6		0.6		—		0.6
Overdrafts	4.7		—		4.7		5.5		—		5.5
Other	1.2		—		1.2		1.2		—		1.2
Subtotal non-margin loans	41.8		53.6		95.4		43.1		53.5		96.6
Margin loans	10.6		0.1		10.7		13.5		0.1		13.6
Total	$	52.4	$	53.7	$	106.1	$	56.6	$	53.6	$	110.2

22 BNY Mellon

At June 30, 2019, total exposures of $106.1 billion decreased 4% compared with Dec. 31, 2018, primarily reflecting lower margin loans, commercial exposure and overdrafts, 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 June 30, 2019 and 57% at Dec. 31, 2018. Additionally, most of our overdrafts relate to financial institutions.

Financial institutions

The financial institutions portfolio is shown below.



Financial institutions portfolio exposure (dollars in billions)	June 30, 2019										Dec. 31, 2018
	Loans		Unfunded commitments		Total exposure		% Inv. grade		% due <1 yr.		Loans		Unfunded commitments		Total exposure
Securities industry	$	2.5	$	24.3	$	26.8	99	%	92	%	$	3.1	$	22.5	$	25.6
Asset managers	1.4		6.7		8.1		98		81		1.3		6.1		7.4
Banks	6.5		1.0		7.5		76		98		6.3		1.6		7.9
Insurance	0.1		2.4		2.5		100		10		0.1		2.5		2.6
Government	0.1		0.3		0.4		100		16		0.1		0.5		0.6
Other	0.9		0.9		1.8		86		56		0.7		0.8		1.5
Total	$	11.5	$	35.6	$	47.1	95	%	85	%	$	11.6	$	34.0	$	45.6

The financial institutions portfolio exposure was $47.1 billion at June 30, 2019, an increase of 3% from Dec. 31, 2018, primarily reflecting higher exposure to the securities industry and asset managers portfolios, partially offset by lower exposure to the banks portfolio.

Financial institution exposures are high-quality, with 95% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification at June 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. The exposure to financial institutions is generally short-term. Of these exposures, 85% expire within one year and 16% expire within 90 days. In addition, 84% of the financial institutions exposure is secured. For example, securities industry clients and asset managers often borrow against marketable securities held in custody.

For ratings of non-U.S. counterparties, our internal credit rating is generally capped at a rating equivalent to the sovereign rating of the country where the counterparty resides, regardless of the internal credit

rating assigned to the counterparty or the underlying collateral.

At June 30, 2019, the secured intraday credit provided to dealers in connection with their tri-party repo activity totaled $20.6 billion and was primarily included in the securities industry portfolio. Dealers secure the outstanding intraday credit with high-quality liquid collateral having a market value in excess of the amount of the outstanding credit.

Our bank exposure primarily relates to our global trade finance. These exposures are short-term in nature, with 98% due in less than one year. The investment grade percentage of our bank exposure was 76% at June 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 June 30, 2019. These exposures are generally short-term liquidity facilities, with the majority to regulated mutual funds.

BNY Mellon 23

Commercial

The commercial portfolio is presented below.



Commercial portfolio exposure	June 30, 2019										Dec. 31, 2018
(dollars in billions)	Loans		Unfunded commitments		Total exposure		% Inv. grade		% due <1 yr.		Loans		Unfunded commitments		Total exposure
Manufacturing	$	0.7	$	4.7	$	5.4	94	%	7	%	$	0.8	$	5.1	$	5.9
Services and other	0.7		3.9		4.6		96		16		0.7		4.8		5.5
Energy and utilities	0.3		3.8		4.1		95		7		0.5		4.1		4.6
Media and telecom	—		1.2		1.2		93		8		0.1		1.2		1.3
Total	$	1.7	$	13.6	$	15.3	95	%	10	%	$	2.1	$	15.2	$	17.3

The commercial portfolio exposure was $15.3 billion at June 30, 2019, a decrease of 12% from Dec. 31, 2018, primarily driven by lower unfunded commitments.

Utilities-related exposure represents approximately 76% of the energy and utilities portfolio at June 30, 2019. Included in this portfolio is unsecured funded exposure of approximately $100 million to a California utility company that filed for bankruptcy in the first quarter of 2019. In July, we entered into agreements to sell all of this exposure, which are expected to settle in the third quarter of 2019, and will result in an $8 million reduction to the allowance for credit losses.

The remaining exposure in the energy and utilities portfolio, which includes exposure to refining, exploration and production companies, integrated companies and pipelines, was 94% investment grade at June 30, 2019, and 88% at Dec. 31, 2018.

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
	June 30, 2019		March 31, 2019		Dec. 31, 2018		Sept. 30, 2018		June 30, 2018
Financial institutions	95	%	94	%	95	%	94	%	94	%
Commercial	95	%	95	%	95	%	95	%	96	%

Wealth management loans and mortgages

Our wealth management exposure was $16.5 billion at June 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 June 30, 2019.

At June 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 $8.8 billion at June 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 June 30, 2019, 63% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type, with 42% secured by residential buildings, 40% secured by office

24 BNY Mellon

buildings, 9% secured by retail properties and 9% 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 June 30, 2019, our commercial real estate portfolio consisted of the following concentrations: New York metro - 42%; REITs and real estate operating companies - 36%; and other - 22%.

Lease financings

The leasing portfolio exposure totaled $1.2 billion at June 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. At June 30, 2019, approximately 97% 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 $549 million at June 30, 2019 and $594 million at Dec. 31, 2018. Included in this portfolio at June 30, 2019 were $111 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007, of which 10% 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 $10.7 billion at June 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 June 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.

BNY Mellon 25

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



Allowance for credit losses activity	June 30, 2019			March 31, 2019			Dec. 31, 2018			June 30, 2018
(dollars in millions)
Non-margin loans	$	41,794		$	41,176		$	43,080		$	42,719
Margin loans	10,602			12,311			13,484			15,057
Total loans	$	52,396		$	53,487		$	56,564		$	57,776
Beginning balance of allowance for credit losses	$	248		$	252		$	251		$	256
Provision for credit losses	(8		)	7			—			(3		)
Net recoveries (charge-offs):
Other residential mortgages	2			—			—			1
Wealth management loans and mortgages	(1		)	—			—			—
Commercial	—			(11		)	—			—
Foreign	—			—			1			—
Net recoveries (charge-offs)	1			(11		)	1			1
Ending balance of allowance for credit losses	$	241		$	248		$	252		$	254
Allowance for loan losses	$	146		$	146		$	146		$	145
Allowance for lending-related commitments	95			102			106			109
Allowance for loan losses as a percentage of total loans	0.28		%	0.27		%	0.26		%	0.25		%
Allowance for loan losses as a percentage of non-margin loans	0.35			0.35			0.34			0.34
Total allowance for credit losses as a percentage of total loans	0.46			0.46			0.45			0.44
Total allowance for credit losses as a percentage of non-margin loans	0.58			0.60			0.58			0.59

The allowance for credit losses decreased $11 million compared with Dec. 31, 2018, primarily reflecting a decrease in loans and lending-related commitments.

The provision for credit losses was a credit of $8 million in the second quarter 2019 driven by lower credit exposure. The provision of $7 million in the first quarter 2019 was driven by our exposure to a California utility company that filed for bankruptcy.

We had $10.6 billion of secured margin loans on our balance sheet at June 30, 2019 compared with $13.5 billion at Dec. 31, 2018 and $15.1 billion at June 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 follows.



Allocation of allowance	June 30, 2019		March 31, 2019		Dec. 31, 2018		June 30, 2018
Allocation of allowance	June 30, 2019		March 31, 2019		Dec. 31, 2018		June 30, 2018
Commercial	32	%	33	%	32	%	30	%
Commercial real estate	30		30		30		29
Foreign	13		12		13		13
Financial institutions	9		9		9		10
Wealth management (a)	8		8		8		9
Other residential mortgages	6		6		6		7
Lease financing	2		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 $56 million, while if each credit were rated one grade worse, the allowance would have increased by $107 million. Similarly, if the loss given default were one rating worse, the allowance would have increased by $34 million, while if the loss given default were one rating better,

26 BNY Mellon

the allowance would have decreased by $28 million. For impaired credits, if the net carrying value of the loans was 10% higher or lower, the allowance would have decreased or increased by less than $1 million, respectively.

Nonperforming assets

The table below presents our nonperforming assets.



Nonperforming assets	June 30, 2019			Dec. 31, 2018
(dollars in millions)
Nonperforming loans:
Commercial	$	96		$	—
Other residential mortgages	65			67
Wealth management loans and mortgages	23			9
Total nonperforming loans	184			76
Other assets owned	2			3
Total nonperforming assets (a)	$	186		$	79
Nonperforming assets ratio	0.35		%	0.14		%
Nonperforming assets ratio, excluding margin loans	0.45			0.18
Allowance for loan losses/nonperforming loans	79.3			192.1
Allowance for loan losses/nonperforming assets	78.5			184.8
Total allowance for credit losses/nonperforming loans	131.0			331.6
Total allowance for credit losses/nonperforming assets	129.6			319.0


(a)	In the second quarter 2019, we refined the application of our nonperforming assets policy for first lien residential mortgage loans greater than 90 days delinquent that resulted in a $12 million increase in nonperforming assets.



Nonperforming assets activity	June 30, 2019			Dec. 31, 2018
(in millions)	June 30, 2019			Dec. 31, 2018
Balance at beginning of quarter	$	174		$	81
Additions	17			4
Return to accrual status	—			(1		)
Charge-offs	1			(1		)
Paydowns/sales	(6		)	(4		)
Balance at end of quarter	$	186		$	79

Nonperforming assets increased by $107 million compared with Dec. 31, 2018, primarily reflecting loans to a California utility company that filed for bankruptcy. Our nonperforming assets are expected to decrease in the third quarter of 2019 as a result of sales of the loans related to this utility company.

Deposits

Total deposits were $252.9 billion at June 30, 2019, an increase of 6%, 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, partially offset by lower noninterest-bearing deposits principally in U.S. offices.

Noninterest-bearing deposits were $58.3 billion at June 30, 2019 compared with $70.8 billion at Dec. 31, 2018. Interest-bearing deposits were $194.6 billion at June 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)	June 30, 2019			March 31, 2019			June 30, 2018
Maximum month-end balance during the quarter	$	12,127		$	12,113		$	14,138
Average daily balance (a)	$	11,809		$	11,922		$	18,146
Weighted-average rate during the quarter (a)	12.64		%	11.26		%	3.48		%
Ending balance (b)	$	11,757		$	11,761		$	13,200
Weighted-average rate at period end (b)	14.43		%	9.82		%	4.24		%

(a)

Includes the average impact of offsetting under enforceable netting agreements of $50,710 million for the second quarter of 2019, $44,091 million for the first quarter of 2019 and $17,975 million for the second quarter of 2018. On a Non-GAAP basis, excluding the impact of offsetting, the weighted-average rates would have been 2.39% for the second quarter of 2019, 2.40% for the first quarter of 2019 and 1.75% for the second 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 $78,433 million at June 30, 2019, $47,461 million at March 31, 2019 and $36,766 million at June 30, 2018.

BNY Mellon 27

Fluctuations of federal funds purchased and securities sold under repurchase agreements between periods reflect changes in overnight borrowing opportunities. The increase in the weighted-average rates, compared with both March 31, 2019 and June 30, 2018, primarily reflects the increase in repurchase agreement activity with the Fixed Income Clearing Corporation (“FICC”), where we record interest expense gross, but the average balances reflect the impact of offsetting under enforceable netting agreements. The increased 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)	June 30, 2019			March 31, 2019			June 30, 2018
Maximum month-end balance during the quarter	$	19,149		$	20,343		$	20,349
Average daily balance (a)	$	18,679		$	19,291		$	19,402
Weighted-average rate during the quarter (a)	1.76		%	1.76		%	1.10		%
Ending balance	$	18,946		$	19,310		$	19,123
Weighted-average rate at period end	1.73		%	1.75		%	1.08		%


(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 $15,666 million in the second quarter of 2019, $16,108 million in the first quarter of 2019 and $16,349 million in the second 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 levels and market volatility.

Information related to commercial paper is presented below.



Commercial paper	Quarter ended
(dollars in millions)	June 30, 2019			March 31, 2019			June 30, 2018
Maximum month-end balance during the quarter	$	8,894		$	4,601		$	4,470
Average daily balance	$	2,957		$	1,377		$	3,869
Weighted-average rate during the quarter	2.43		%	2.44		%	2.13		%
Ending balance	$	8,894		$	2,773		$	2,508
Weighted-average rate at period end	2.35		%	2.40		%	2.24		%

The Bank of New York Mellon 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 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)	June 30, 2019			March 31, 2019			June 30, 2018
Maximum month-end balance during the quarter	$	2,732		$	3,969		$	3,053
Average daily balance	$	2,455		$	3,305		$	2,399
Weighted-average rate during the quarter	3.36		%	2.87		%	2.40		%
Ending balance	$	1,921		$	3,932		$	3,053
Weighted-average rate at period end	3.84		%	3.31		%	2.53		%

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.

28 BNY Mellon

Liquidity and dividends

BNY Mellon defines liquidity as the ability of the Parent and its subsidiaries to access funding or convert assets to cash quickly and efficiently, or to 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 June 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	June 30, 2019			Dec. 31, 2018			Average
(dollars in millions)	June 30, 2019			Dec. 31, 2018			2Q19			1Q19			2Q18
Cash and due from banks	$	5,556		$	5,864		$	5,083		$	4,853		$	4,916
Interest-bearing deposits with the Federal Reserve and other central banks	69,700			67,988			61,756			63,583			69,676
Interest-bearing deposits with banks	15,491			14,148			13,666			13,857			15,748
Federal funds sold and securities purchased under resale agreements	61,201			46,795			38,038			28,968			28,051
Total available funds	$	151,948		$	134,795		$	118,543		$	111,261		$	118,391
Total available funds as a percentage of total assets	40		%	37		%	35		%	33		%	34		%

Total available funds were $151.9 billion at June 30, 2019, compared with $134.8 billion at Dec. 31, 2018. The increase was primarily due to higher federal funds sold and securities purchased under resale agreements and interest-bearing deposits with the Federal Reserve and other central banks.

Average non-core sources of funds, such as federal funds purchased and securities sold under repurchase agreements, trading liabilities, commercial paper and other borrowed funds, were $18.4 billion for the six months ended June 30, 2019 and $25.7 billion for the six months ended June 30, 2018. The decrease primarily reflects a decrease in federal funds

purchased and securities sold under repurchase agreements.

Average foreign deposits, primarily from our European-based Investment Services businesses, were $91.4 billion for the six months ended June 30, 2019, compared with $101.3 billion for the six months ended June 30, 2018. The decrease primarily reflects client activity. Average interest-bearing domestic deposits were $72.4 billion for the six months ended June 30, 2019 and $52.9 billion for the six months ended June 30, 2018. The increase primarily reflects an increase in demand deposits.

BNY Mellon 29

Average payables to customers and broker-dealers were $15.9 billion for the six months ended June 30, 2019 and $16.7 billion for the six months ended June 30, 2018. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.

Average long-term debt was $28.0 billion for the six months ended June 30, 2019 and $28.4 billion for the six months ended June 30, 2018.

Average noninterest-bearing deposits decreased to $53.8 billion for the six months ended June 30, 2019 from $67.9 billion for the six months ended June 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 June 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		Stable

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		Stable


(a)	Represents senior debt issuer default rating.

NR - Not rated.

Long-term debt totaled $28.2 billion at June 30, 2019 and $29.2 billion at Dec. 31, 2018. The decrease reflects maturities of $2.8 billion, partially offset by issuances of $1.25 billion and an increase in the fair value of hedged long-term debt. The Parent has $1.5 billion of long-term debt that will mature in the remainder of 2019.

In June 2019, The Bank of New York Mellon, our largest bank subsidiary, issued $1.25 billion of floating rate senior notes maturing in 2021 at an

annual interest rate of 3-month LIBOR plus 28 basis points.

The Bank of New York Mellon may issue notes and certificates of deposit (“CDs”). At June 30, 2019 and Dec. 31, 2018, $3.1 billion and $2.8 billion, respectively, of CDs were outstanding. At June 30, 2019 and Dec. 31, 2018, $2.3 billion and $1.0 billion, respectively, of notes issued by The Bank of New York Mellon were outstanding.

30 BNY Mellon

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 $2.2 billion for the six months ended June 30, 2019 and $3.5 billion for the six months ended June 30, 2018. Commercial paper outstanding was $8.9 billion at June 30, 2019 and $1.9 billion at Dec. 31, 2018.

Subsequent to June 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 June 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 second 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 $2 million, in aggregate, in the second 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 79% of total revenue in the second quarter of 2019, and the dividend capacity of our banking subsidiaries. Our double leverage ratio was 117.1% at June 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 May 2019, a quarterly cash dividend of $0.28 per common share was paid to common shareholders. Our common stock dividend payout ratio was 29% for the first six months of 2019.

In the second quarter of 2019, we repurchased 15.3 million common shares at an average price of $48.97 per common share for a total cost of $750 million.

In June 2019, following 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.

In July 2019, BNY Mellon increased the quarterly cash dividend on common stock by approximately 11%, from $0.28 to $0.31 per share. This increased quarterly cash dividend will be paid on Aug. 9, 2019.

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.

BNY Mellon 31

The following table presents BNY Mellon’s consolidated HQLA at June 30, 2019, and the average HQLA and average LCR for the second quarter of 2019.



Consolidated HQLA and LCR	June 30, 2019
(dollars in billions)	June 30, 2019
Securities (a)	$	134
Cash (b)	63
Total consolidated HQLA (c)	$	197

Total consolidated HQLA - average (c)	$	166
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 $153 billion at June 30, 2019 and averaged $118 billion for the second 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 second 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 used for operating activities was $2.5 billion in the six months ended June 30, 2019, compared with net cash provided by operating activities of

$1.6 billion in the six months ended June 30, 2018. In the six months ended June 30, 2019, cash flows used for operations primarily resulted from changes in accruals and trading activities, partially offset by earnings. In the six months ended June 30, 2018, cash flows provided by operations primarily resulted from earnings, partially offset by changes in accruals and trading activities.

Net cash used for investing activities was $11.4 billion in the six months ended June 30, 2019, compared with net cash provided by investing activities of $15.2 billion in the six months ended June 30, 2018. In the six months ended June 30, 2019, net cash used for investing activities primarily reflects changes in federal funds sold and securities purchased under resale agreements, partially offset by changes in loans. In the six months ended June 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 $13.2 billion in the six months ended June 30, 2019, compared with net cash used for financing activities of $16.8 billion in the six months ended June 30, 2018. In the six months ended June 30, 2019, net cash provided by financing activities primarily reflects changes in deposits and changes in commercial paper, partially offset by repayment of long-term debt, changes in federal funds purchased and securities sold under repurchase agreements and changes in other borrowed funds. In the six months ended June 30, 2018, net cash used for financing activities primarily reflects changes in deposits, repayment of long-term debt, changes in federal funds purchased and securities sold under repurchase agreements 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)	June 30, 2019			March 31, 2019			Dec. 31, 2018
Average common equity to average assets	10.9		%	11.0		%	11.2		%

At period end:
BNY Mellon shareholders’ equity to total assets ratio	10.9		%	11.9		%	11.2		%
BNY Mellon common shareholders’ equity to total assets ratio	10.0		%	10.9		%	10.2		%
Total BNY Mellon shareholders’ equity	$	41,533		$	41,225		$	40,638
Total BNY Mellon common shareholders’ equity (a)	$	37,991		$	37,683		$	37,096
BNY Mellon tangible common shareholders’ equity – Non-GAAP (a)	$	19,275		$	18,896		$	18,290
Book value per common share (a)	$	40.30		$	39.36		$	38.63
Tangible book value per common share – Non-GAAP (a)	$	20.45		$	19.74		$	19.04
Closing stock price per common share	$	44.15		$	50.43		$	47.07
Market capitalization	$	41,619		$	48,288		$	45,207
Common shares outstanding	942,662			957,517			960,426

Cash dividends per common share	$	0.28		$	0.28		$	0.28
Common dividend payout ratio	28		%	30		%	33		%
Common dividend yield (annualized)	2.5		%	2.3		%	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 $41.5 billion at June 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 second quarter of 2019, we repurchased 15.3 million common shares at an average price of $48.97 per common share for a total of $750 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 $287 million at June 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 June 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	June 30, 2019								March 31, 2019		Dec. 31, 2018
	Well capitalized			Minimum required			Capital ratios		Capital ratios		Capital ratios
	Well capitalized			Minimum required		(a)	Capital ratios		Capital ratios		Capital ratios
Consolidated regulatory capital ratios: (b)
Advanced Approach:
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	%		12.4	%	12.0	%	11.7	%
Tier 1 capital ratio	6	%		10			14.8		14.3		14.1
Total capital ratio	10	%		12			15.7		15.3		15.1
Tier 1 leverage ratio	N/A		(c)	4			6.8		6.8		6.6
SLR (d)	N/A		(c)	5			6.3		6.3		6.0

The Bank of New York Mellon regulatory capital ratios: (b)
Advanced Approach:
CET1 ratio	6.5	%		7	%		14.2	%	14.2	%	14.0	%
Tier 1 capital ratio	8			8.5			14.2		14.4		14.3
Total capital ratio	10			10.5			14.2		14.9		14.7
Tier 1 leverage ratio	5			4			7.3		7.6		7.6
SLR (d)	6			3			6.7		6.9		6.8


(a)	Minimum requirements for June 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 Approach was 11.1% at June 30, 2019 and 10.7% at Dec. 31, 2018. The ratio increased compared with Dec. 31, 2018, primarily reflecting capital generated through earnings, the unrealized gain in our investment securities portfolio and additional paid-in capital resulting from stock awards, partially offset by capital deployed through common stock repurchases, dividend payments and higher RWAs.

Our SLR was 6.3% at June 30, 2019 and 6.0% at Dec. 31, 2018.

The Advanced Approach capital ratios are significantly impacted by RWAs for operational risk. Our operational loss risk model is informed by external losses, including fines and penalties levied

against institutions in the financial services industry, particularly those that relate to businesses in which we operate, and as a result external losses have impacted and could in the future impact the amount of capital that we are required to hold.

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

34 BNY Mellon

The following table presents our capital components and RWAs.



Capital components and risk-weighted assets	June 30, 2019			March 31, 2019			Dec. 31, 2018
(in millions)	June 30, 2019			March 31, 2019			Dec. 31, 2018
CET1:
Common shareholders’ equity	$	37,991		$	37,683		$	37,096
Adjustments for:
Goodwill and intangible assets (a)	(18,716		)	(18,787		)	(18,806		)
Net pension fund assets	(331		)	(334		)	(320		)
Equity method investments	(358		)	(357		)	(361		)
Deferred tax assets	(45		)	(43		)	(42		)
Other	(7		)	(6		)	—
Total CET1	18,534			18,156			17,567
Other Tier 1 capital:
Preferred stock	3,542			3,542			3,542
Other	(61		)	(59		)	(65		)
Total Tier 1 capital	$	22,015		$	21,639		$	21,044
Tier 2 capital:
Subordinated debt	$	1,250		$	1,250		$	1,250
Allowance for credit losses	241			248			252
Other	(6		)	(1		)	(10		)
Total Tier 2 capital – Standardized Approach	1,485			1,497			1,492
Excess of expected credit losses	41			53			65
Less: Allowance for credit losses	241			248			252
Total Tier 2 capital – Advanced Approach	$	1,285		$	1,302		$	1,305
Total capital:
Standardized Approach	$	23,500		$	23,136		$	22,536
Advanced Approach	$	23,300		$	22,941		$	22,349

Risk-weighted assets:
Standardized Approach	$	149,226		$	151,101		$	149,618
Advanced Approach:
Credit Risk	$	94,304		$	92,798		$	92,917
Market Risk	3,241			3,507			3,454
Operational Risk	69,025			67,313			68,300
Total Advanced Approach	$	166,570		$	163,618		$	164,671

Average assets for Tier 1 leverage ratio	$	322,879		$	316,586		$	319,007
Total leverage exposure for SLR	$	350,747		$	344,829		$	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	2Q19
(in millions)
CET1 – Beginning of period	$	18,156
Net income applicable to common shareholders of The Bank of New York Mellon Corporation	969
Goodwill and intangible assets, net of related deferred tax liabilities	71
Gross CET1 generated	1,040
Capital deployed:
Common stock dividend payments	(270		)
Common stock repurchases	(750		)
Total capital deployed	(1,020		)
Other comprehensive income:
Foreign currency translation	10
Unrealized gain on assets available-for-sale	282
Defined benefit plans	10
Total other comprehensive income	302
Additional paid-in capital (a)	57
Other additions (deductions):
Net pension fund assets	3
Deferred tax assets	(2		)
Embedded goodwill	(1		)
Other	(1		)
Total other deductions	(1		)
Net CET1 generated	378
CET1 – End of period	$	18,534


(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 June 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 June 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 Approach	6		7

Tier 1 capital:
Standardized Approach	7		10
Advanced Approach	6		8

Total capital:
Standardized Approach	7		11
Advanced Approach	6		8

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	June 30, 2019
	Minimum required		Minimum ratios with buffers
					Ratios
Eligible external TLAC:
As a percentage of RWA	18.0	%	21.5	%	26.6	%
As a percentage of total leverage exposure	7.5	%	9.5	%	12.6	%

Eligible external LTD:
As a percentage of RWA	7.5	%	N/A		11.9	%
As a percentage of total leverage exposure	4.5	%	N/A		5.6	%

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)	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)	1Q19							March 31, 2019
(in millions)	Average			Minimum		Maximum
Interest rate	$	4.0		$	3.2	$	5.3	$	4.2
Foreign exchange	3.8			2.8		6.4		3.9
Equity	0.7			0.6		1.1		0.9
Credit	0.6			0.4		1.0		0.7
Diversification	(2.9		)	N/M		N/M		(3.5		)
Overall portfolio	6.2			4.6		9.5		6.2



VaR (a)	2Q18							June 30, 2018
(in millions)	Average			Minimum		Maximum
Interest rate	$	4.0		$	3.3	$	5.2	$	3.5
Foreign exchange	3.7			2.9		5.7		3.5
Equity	0.7			0.5		1.0		0.5
Credit	0.8			0.6		1.0		1.0
Diversification	(3.9		)	N/M		N/M		(3.9		)
Overall portfolio	5.3			4.3		7.0		4.6



VaR (a)	YTD19
(in millions)	Average			Minimum		Maximum
Interest rate	$	4.1		$	3.2	$	5.3
Foreign exchange	3.3			1.9		6.4
Equity	0.7			0.6		1.1
Credit	0.7			0.4		1.2
Diversification	(3.1		)	N/M		N/M
Overall portfolio	5.7			4.0		9.5



VaR (a)	YTD18
(in millions)	Average			Minimum		Maximum
Interest rate	$	4.2		$	3.3	$	5.5
Foreign exchange	4.5			2.9		8.3
Equity	0.8			0.5		1.2
Credit	1.1			0.6		2.6
Diversification	(4.7		)	N/M		N/M
Overall portfolio	5.9			4.3		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 second quarter of 2019, interest rate risk generated 50% of average gross VaR, foreign exchange risk generated 32% of average gross VaR, equity risk generated 9% of average gross VaR and credit risk generated 9% of average gross VaR. During the second 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)	June 30, 2019	March 31, 2019	Dec. 31, 2018	Sept. 30, 2018	June 30, 2018
(dollars in millions)	June 30, 2019	March 31, 2019	Dec. 31, 2018	Sept. 30, 2018	June 30, 2018
Revenue range:	Number of days
Less than $(2.5)	—	1	1	—	1
$(2.5) – $0	4	5	7	6	3
$0 – $2.5	30	22	17	30	21
$2.5 – $5.0	23	23	24	20	30
More than $5.0	7	10	13	7	9


(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 $8.6 billion at June 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 $3.8 billion at June 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 June 30, 2019, our OTC derivative assets, including those in hedging relationships, of $3.0 billion included a credit valuation adjustment (“CVA”) deduction of $26 million. Our OTC derivative liabilities, including those in hedging relationships, of $2.6 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 second quarter of 2019, which increased foreign exchange and other trading revenue by $1 million. The net impact of these adjustments increased foreign exchange and other trading revenue by less than $1 million in the first quarter of 2019 and $2 million in the second 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
	June 30, 2019		March 31, 2019		Dec. 31, 2018		Sept. 30, 2018		June 30, 2018
	June 30, 2019		March 31, 2019		Dec. 31, 2018		Sept. 30, 2018		June 30, 2018
Rating:
AAA to AA-	54	%	49	%	50	%	48	%	37	%
A+ to A-	26		28		28		30		41
BBB+ to BBB-	17		20		18		19		18
BB+ and lower (b)	3		3		4		3		4
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)	June 30, 2019			March 31, 2019			June 30, 2018
Up 200 bps parallel rate ramp vs. baseline (a)	$	380		$	410		$	372
Up 100 bps parallel rate ramp vs. baseline (a)	200			208			183
Down 100 bps parallel rate ramp vs. baseline (a)	(179		)	(91		)	(70		)
Long-term up 50 bps, short-term unchanged (b)	171			149			72
Long-term down 50 bps, short-term unchanged (b)	(192		)	(178		)	(89		)


(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.

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 $150 million and approximately $180 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)	2Q19			1Q19			2Q18			YTD19			YTD18
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP	$	969		$	910		$	1,055		$	1,879		$	2,190
Add: Amortization of intangible assets	30			29			48			59			97
Less: Tax impact of amortization of intangible assets	7			7			11			14			23
Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation, excluding amortization of intangible assets – Non-GAAP	$	992		$	932		$	1,092		$	1,924		$	2,264

Average common shareholders’ equity	$	37,487		$	37,086		$	37,750		$	37,287		$	37,672
Less: Average goodwill	17,343			17,376			17,505			17,360			17,543
Average intangible assets	3,178			3,209			3,341			3,193			3,369
Add: Deferred tax liability – tax deductible goodwill	1,094			1,083			1,054			1,094			1,054
Deferred tax liability – intangible assets	687			690			709			687			709
Average tangible common shareholders’ equity – Non-GAAP	$	18,747		$	18,274		$	18,667		$	18,515		$	18,523

Return on common equity (annualized) – GAAP	10.4		%	10.0		%	11.2		%	10.2		%	11.7		%
Return on tangible common equity (annualized) – Non-GAAP	21.2		%	20.7		%	23.5		%	20.9		%	24.6		%

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	June 30, 2019		March 31, 2019		Dec. 31, 2018		June 30, 2018
(dollars in millions, except common shares)
BNY Mellon shareholders’ equity at period end – GAAP	$	41,533	$	41,225	$	40,638	$	41,505
Less: Preferred stock	3,542		3,542		3,542		3,542
BNY Mellon common shareholders’ equity at period end – GAAP	37,991		37,683		37,096		37,963
Less: Goodwill	17,337		17,367		17,350		17,418
Intangible assets	3,160		3,193		3,220		3,308
Add: Deferred tax liability – tax deductible goodwill	1,094		1,083		1,072		1,054
Deferred tax liability – intangible assets	687		690		692		709
BNY Mellon tangible common shareholders’ equity at period end – Non-GAAP	$	19,275	$	18,896	$	18,290	$	19,000

Period-end common shares outstanding (in thousands)	942,662		957,517		960,426		999,945

Book value per common share – GAAP	$	40.30	$	39.36	$	38.63	$	37.97
Tangible book value per common share – Non-GAAP	$	20.45	$	19.74	$	19.04	$	19.00

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						2Q19 vs.
(dollars in millions)	2Q19		2Q18			2Q18
Investment management and performance fees (a)	$	833	$	901		(8	)%
Impact of changes in foreign currency exchange rates	—		(16		)
Adjusted investment management and performance fees – Non-GAAP	$	833	$	885		(6	)%


(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						2Q19 vs.
(dollars in millions)	2Q19		2Q18			2Q18
Investment management and performance fees	$	829	$	897		(8	)%
Impact of changes in foreign currency exchange rates	—		(16		)
Adjusted investment management and performance fees – Non-GAAP	$	829	$	881		(6	)%

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)	2Q19			1Q19			4Q18			3Q18			2Q18			YTD19			YTD18
Income before income taxes – GAAP	$	265		$	269		$	247		$	316		$	319		$	534		$	700

Total revenue – GAAP	$	917		$	939		$	963		$	1,015		$	1,018		$	1,856		$	2,106
Less: Distribution and servicing expense	94			91			95			99			103			185			213
Adjusted total revenue, net of distribution and servicing expense – Non-GAAP	$	823		$	848		$	868		$	916		$	915		$	1,671		$	1,893

Pre-tax operating margin – GAAP (a)	29		%	29		%	26		%	31		%	31		%	29		%	33		%
Adjusted pre-tax operating margin, net of distribution and servicing expense – Non-GAAP (a)	32		%	32		%	29		%	35		%	35		%	32		%	37		%


(a)	Income before 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. BNY Mellon has developed expected credit loss models and approaches that include forecasting and other methodologies, and our focus for the remainder of 2019 is on model validation as well as business process refinements and 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. The adoption impact will depend on several factors, including the composition and remaining expected lives of financial instruments at the time of adoption, the establishment of an allowance for expected credit losses on held-to-maturity securities, and the macroeconomic conditions and forecasts that exist at that date. We plan to adopt the new standard on Jan. 1, 2020.

Recent regulatory developments

For a summary of additional regulatory matters relevant to our operations, see “Supervision and Regulation” in