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

FORM 10-Q

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

For the Quarterly Period Ended Sept. 30, 20162017

or

[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Commission File No. 001-35651


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

Delaware13-2614959
(State or other jurisdiction of(I.R.S. Employer Identification No.)
incorporation or organization) 

225 Liberty Street
New York, New York 10286
(Address of principal executive offices) (Zip Code)

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

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

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

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

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

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

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

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

 ClassOutstanding as of
 
  Sept. 30, 20162017
 
 Common Stock, $0.01 par value1,057,336,6211,024,022,353
 


THE BANK OF NEW YORK MELLON CORPORATION

Third Quarter 20162017 Form 10-Q
Table of Contents 
 
 




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

Consolidated Financial Highlights (unaudited)
Quarter ended Year-to-dateQuarter ended Year-to-date
(dollar amounts in millions, except per common share amounts and unless otherwise noted)Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
(dollar amounts in millions, except per share amounts and unless otherwise noted)Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
Results applicable to common shareholders of The Bank of New York Mellon Corporation:      
Net income$974
$825
$820
 $2,603
$2,416
$983
$926
$974
 $2,789
$2,603
Basic earnings per share0.90
0.76
0.74
 2.39
2.15
0.94
0.88
0.90
 2.66
2.39
Diluted earnings per share0.90
0.75
0.74
 2.38
2.13
0.94
0.88
0.90
 2.64
2.38
      
Fee and other revenue3,150
2,999
3,053
 9,119
9,132
$3,167
$3,120
$3,150
 $9,305
$9,119
Income (loss) from consolidated investment management funds17
10
(22) 21
70
Income from consolidated investment management funds10
10
17
 53
21
Net interest revenue774
767
759
 2,307
2,266
839
826
774
 2,457
2,307
Total revenue$3,941
$3,776
$3,790

$11,447
$11,468
$4,016
$3,956
$3,941
 $11,815
$11,447
      
Return on common equity (annualized) (a)
10.8%9.3%9.1% 9.8%9.1%10.6%10.4%10.8% 10.4%9.8%
Adjusted return on common equity (annualized) – Non-GAAP (a)(b)
11.3%9.7%9.7% 10.3%9.7%11.0%10.8%11.3% 10.9%10.3%
      
Return on tangible common equity (annualized) – Non-GAAP (a)(c)
23.5%20.4%20.8% 21.5%20.9%21.9%21.9%23.5% 22.0%21.5%
Adjusted return on tangible common equity (annualized) – Non-GAAP (a)(b)(c)
23.6%20.5%21.0% 21.7%21.2%22.0%22.1%23.6% 22.1%21.7%
      
Return on average assets (annualized)
1.10%0.89%0.87% 0.96%0.86%1.13%1.09%1.10% 1.09%0.96%
      
Fee revenue as a percentage of total revenue79%79%81% 79%79%78%79%79% 79%79%
      
Percentage of non-U.S. total revenue36%34%37% 34%36%36%35%36% 35%34%
      
Pre-tax operating margin (a)
33%31%29% 31%29%34%33%33% 33%31%
Adjusted pre-tax operating marginNon-GAAP (a)(b)
35%33%31% 33%31%35%35%35% 34%33%
      
Net interest margin (FTE)1.06%0.98%0.98% 1.02%0.98%
Net interest margin1.15%1.14%1.05% 1.14%1.00%
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (d)
1.16%1.16%1.06% 1.16%1.02%
      
Assets under management (“AUM”) at period end (in billions) (d)
$1,715
$1,664
$1,625
 $1,715
$1,625
Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (e)
$30.5
$29.5
$28.5
 $30.5
$28.5
Market value of securities on loan at period end (in billions) (f)
$288
$278
$288
 $288
$288
Assets under management (“AUM”) at period end (in billions) (e)
$1,824
$1,771
$1,715
 $1,824
$1,715
Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (f)
$32.2
$31.1
$30.5
 $32.2
$30.5
Market value of securities on loan at period end (in billions) (g)
$382
$336
$288
 $382
$288
      
Average common shares and equivalents outstanding
(in thousands):
   
Average common shares and equivalents outstanding (in thousands): (h)
   
Basic1,062,248
1,072,583
1,098,003
 1,071,457
1,110,056
1,035,337
1,035,829
1,062,248
 1,037,431
1,071,457
Diluted1,067,682
1,078,271
1,105,645
 1,077,150
1,117,975
1,041,138
1,041,879
1,067,682
 1,043,585
1,077,150
      
Selected average balances:      
Interest-earning assets$296,703
$318,433
$315,672
 $308,560
$314,152
$291,841
$289,496
$296,703
 $288,283
$308,560
Assets of operations$350,190
$372,974
$371,328
 $362,092
$371,156
$344,966
$341,607
$350,190
 $340,588
$362,092
Total assets$351,230
$374,220
$373,453
 $363,290
$373,400
$345,709
$342,515
$351,230
 $341,510
$363,290
Interest-bearing deposits$155,109
$165,122
$169,753
 $160,728
$166,700
$142,490
$142,336
$155,109
 $141,558
$160,728
Long-term debt$28,138
$27,398
$23,930
 $27,148
$22,779
Noninterest-bearing deposits$81,619
$84,033
$85,046
 $82,861
$86,493
$70,168
$73,886
$81,619
 $72,524
$82,861
Preferred stock$3,284
$2,552
$2,552
 $2,798
$2,146
$3,542
$3,542
$3,284
 $3,542
$2,798
Total The Bank of New York Mellon Corporation common shareholders’ equity$35,767
$35,827
$35,588
 $35,616
$35,530
$36,780
$35,862
$35,767
 $35,876
$35,616
      
Other information at period end:      
Cash dividends per common share$0.19
$0.17
$0.17
 $0.53
$0.51
$0.24
$0.19
$0.19
 $0.62
$0.53
Common dividend payout ratio21%23%23% 22%24%26%22%21% 23%22%
Common dividend yield (annualized)
1.9%1.8%1.7% 1.8%1.7%1.8%1.5%1.9% 1.6%1.8%
Closing stock price per common share$39.88
$38.85
$39.15
 $39.88
$39.15
$53.02
$51.02
$39.88
 $53.02
$39.88
Market capitalization$42,167
$41,479
$42,789
 $42,167
$42,789
$54,294
$52,712
$42,167
 $54,294
$42,167
Book value per common share – GAAP (a)
$34.19
$33.72
$32.59
 $34.19
$32.59
Book value per common share (a)
$36.11
$35.26
$34.19
 $36.11
$34.19
Tangible book value per common share – Non-GAAP (a)(c)
$16.67
$16.25
$15.16
 $16.67
$15.16
$18.19
$17.53
$16.67
 $18.19
$16.67
Full-time employees52,300
52,200
51,300
 52,300
51,300
52,900
52,800
52,300
 52,900
52,300
Common shares outstanding (in thousands)
1,057,337
1,067,674
1,092,953
 1,057,337
1,092,953
1,024,022
1,033,156
1,057,337
 1,024,022
1,057,337


2 BNY Mellon



Consolidated Financial Highlights (unaudited) (continued)
Capital ratiosSept. 30, 2016
June 30, 2016
Dec. 31, 2015
Consolidated regulatory capital ratios: (g)
 
Regulatory and Capital ratiosSept. 30, 2017
June 30, 2017
Dec. 31, 2016
Average liquidity coverage ratio (“LCR”) (i)
119%116%114%
 
Regulatory capital ratios: (j)
 
Standardized:  
Common equity Tier 1 (“CET1”) ratio12.2%11.8%11.5%12.3%12.0%12.3%
Tier 1 capital ratio14.4
13.4
13.1
14.6
14.3
14.5
Total (Tier 1 plus Tier 2) capital ratio14.8
13.8
13.5
15.6
14.8
15.2
Advanced:  
CET1 ratio10.5
10.2
10.8
11.1
10.8
10.6
Tier 1 capital ratio12.5
11.5
12.3
13.2
12.9
12.6
Total (Tier 1 plus Tier 2) capital ratio12.6
11.7
12.5
14.0
13.2
13.0
  
Leverage capital ratio (g)
6.6
5.8
6.0
Supplementary leverage ratio (“SLR”) (g)
6.0
5.3
5.4
Leverage capital ratio (j)
6.8
6.7
6.6
Supplementary leverage ratio (“SLR”) (j)
6.3
6.2
6.0
  
BNY Mellon shareholders’ equity to total assets ratio – GAAP (a)
10.6
10.4
9.7
BNY Mellon common shareholders’ equity to total assets ratio – GAAP (a)
9.7
9.7
9.0
BNY Mellon tangible common shareholders’ equity to tangible assets of operations
ratio – Non-GAAP (a)(c)
6.5
6.6
6.5
BNY Mellon shareholders’ equity to total assets ratio – GAAP11.4
11.3
11.6
BNY Mellon common shareholders’ equity to total assets ratio – GAAP10.4
10.3
10.6
  
Selected regulatory capital ratios – fully phased-in – Non-GAAP:
 
Estimated CET1 ratio: (h)
 
Selected regulatory capital ratios – fully phased-in – Non-GAAP: (k)
 
Estimated CET1 ratio: 
Standardized Approach11.4
11.0
10.2
11.9%11.5%11.3%
Advanced Approach9.8
9.5
9.5
10.7
10.4
9.7
  
Estimated SLR (i)
5.7
5.0
4.9
Estimated SLR6.1
6.0
5.6
(a)See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 4849 for a reconciliation of Non-GAAP measures.
(b)Non-GAAP information for all periods presented excludes the net income (loss) attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and merger and integration (“M&I,&I”), litigation and restructuring charges. Non-GAAP information for the third quarter of 2016 and for the first nine months of 2016 also excludes a recovery of the previously impaired loan to Sentinel loan.Management Group, Inc. (“Sentinel”). Additionally, the pre-tax operating margin (Non-GAAP) excludes the net income attributable to noncontrolling interests of consolidated investment management funds.
(c)Tangible common equity – Non-GAAP and tangible book value per common share - Non-GAAP and tangible common equity exclude goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 4849 for the reconciliation of Non-GAAP measures.
(d)See “Average balances and interest rates” on page 11 for a reconciliation of Non-GAAP measures.
(e)Excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.business.
(e)(f)Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.2$1.3 trillion at Sept. 30, 2016, $1.12017 and $1.2 trillion at both June 30, 20162017 and $1.0 trillion at Sept. 30, 2015.2016.
(f)(g)Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $68 billion at Sept. 30, 2017, $66 billion at June 30, 2017 and $64 billion at Sept. 30, 2016, $56 billion at June 30, 2016 and $61 billion at Sept. 30, 2015.2016.
(g)(h)Beginning in the third quarter of 2017, vested stock awards to retirement eligible employees are included in common shares outstanding for earnings per share purposes. This change increased both average basic and average diluted shares outstanding by approximately 6 million for the quarter, which resulted in a de minimis impact to both basic and diluted earnings per share. For additional information, see the “Consolidated Income Statement” beginning on page 57.
(i)For additional information on our LCR, see “Liquidity and dividends” beginning on page 33.
(j)For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The leverage capital ratio is based on Tier I capital, as phased-in, and quarterly average total assets. The SLR is based on Tier 1 capital, as phased-in, and average quarterly assets and certain off-balance sheet exposures. For additional information on our capital ratios, see “Capital” beginning on page 37.
(h)(k)The estimated fully phased-in CET1 and SLR ratios (Non-GAAP) are based on our interpretation of the U.S. capital rules, which are being gradually phased-in over a multi-year period. For additional information on these Non-GAAP ratios, see “Capital” beginning on page 37.
(i)The estimated fully phased-in SLR (Non-GAAP) is based on our interpretation of the U.S. capital rules. When the SLR becomes effective in 2018 as a required minimum ratio, we expect to maintain an SLR of over 5%. The minimum required SLR is 3% and there is a 2% buffer, in addition to the minimum, that is applicable to BNY Mellon and other U.S. global systemically important banks (“G-SIBs”). For additional information on these Non-GAAP ratios, see “Capital” beginning on page 37.



BNY Mellon 3


Part I - Financial Information


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

General

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

Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 20152016 (“20152016 Annual Report”).

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

How we reported results

Throughout this Form 10-Q, certain measures, which are noted as “Non-GAAP financial measures,” exclude certain items or otherwise include components that differ from U.S. generally accepted accounting principles (“GAAP”). BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control.control or because they provide additional information about our ability to meet fully phased-in capital requirements. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 4849 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

We also present See “Net interest revenue,” including the net“Average balances and interest revenue and net interest marginrates” beginning on page 10 for information on measures presented on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allowsAlso see “Capital” beginning on page 37 for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impactinformation on net income.

When we refer to BNY Mellon’s “Basel III”our fully phased-in capital measures (e.g., CET1), we mean those capital measures as calculated under the U.S. capital rules.

requirements.

 
Overview

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

We manage and service assets for financial institutions, corporations and individual investors in 35 countries and more than 100 markets. As of Sept. 30, 2016,2017, BNY Mellon had $30.5$32.2 trillion in assets under custody and/or administration (“AUC/A”), and $1.7$1.8 trillion in assets under management.management (“AUM”).

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

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

Key third quarter 2016 and subsequent2017 events

Resolution planDefinitive agreement to sell CenterSquare Investment Management

In April 2016, the Federal Deposit Insurance Corporation (the “FDIC”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) jointlySeptember 2017, we announced that the agencieswe entered into a definitive agreement to sell CenterSquare Investment Management (“CenterSquare”), one of our Investment Management boutiques. CenterSquare had determined that the Company’s 2015 resolution plan was not credible or would not facilitate an orderly resolution under theapproximately $9 billion in AUM in U.S. Bankruptcy Code, the statutoryand global real estate and infrastructure investments. The transaction is subject to standard establishedregulatory and other required approvals and is expected to be completed in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and issued a joint noticefourth quarter of deficiencies and shortcomings regarding the Company’s plan and the actions that2017 or first quarter of 2018.



4 BNY Mellon


must be takenCharles W. Scharf named chief executive officer; Gerald L. Hassell, chairman, to address them. retire

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

Resolution plan

As required we made an Oct. 1, 2016 submissionby the Dodd-Frank Act, the Parent must submit annually to the agencies, which provided our plans to addressBoard of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”) a plan for its rapid and orderly resolution in the event of material financial distress or failure. The Parent filed its most recent resolution plan on July 1, 2017. We believe the 2017 resolution plan addresses all shortcomings and we believe, addressed all of the deficiencies identified by the agencies.

FollowingFDIC and the receipt of the agencies’ April 2016 feedback, we have changed our preferred resolution strategyFederal Reserve in the eventCompany’s 2015 resolution plan. The public portion of our material financial distress or failure to a single point of entry (“SPOE”) strategy. We currently believe that this requires us to issue approximately $2 - $4 billion of incremental unsecured long-term debt above our typical funding requirements by July 2017 to satisfy resource needs in a time of distress. This estimateresolution plan is subject to change as we further refine our strategyavailable on the Federal Reserve’s and related assumptions. The additional debt is currently expected to have a modest negative impact to net interest revenue.FDIC’s websites.

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

Increase in cash dividend on common stock

In conjunction with the Federal Reserve’s non-objection to BNY Mellon’s 20162017 capital plan in August 2016, we issued $1 billion of noncumulative perpetual preferred stock, $750 million of which satisfied the contingency for the repurchase of up to $560 million of common stocksubmitted in connection with our 2016 plan. In the third quarter of 2016, we repurchased $464 million of common stock. See Note 12 of the Notes to Consolidated Financial Statements for additional information on our preferred stock. See Item 2 in Part II - Other information for additional information related to our common stock repurchase program.

AlsoComprehensive Capital Analysis and Review (“CCAR”) included in the 2016 capital plan was a 12%26% increase in the quarterly cash dividend onto $0.24 per common stock to $0.19 per share. The first payment of the increased quarterly cash dividend was made on Aug. 12, 2016.11, 2017.

Settlement agreement with Sentinel’s bankruptcy trustee

On July 13, 2016, a settlement agreement between BNY Mellon and the bankruptcy trustee for Sentinel Management Group, Inc. (“Sentinel”) was accepted by the bankruptcy court. The settlement resulted in the release of trust assets to BNY Mellon. In the third quarter of 2016, we recorded a recovery of $13 million related to Sentinel.

Highlights of third quarter 20162017 results

We reported net income applicable to common shareholders of $983 million, or $0.94 per diluted common share, in the third quarter of 2017. Net income applicable to common shareholders was $974 million, or $0.90 per diluted common share, or $979 million, or $0.90 per diluted common share, as adjusted (Non-GAAP) in the third quarter of 2016. In the third quarter of 2015, net income applicable to common shareholders was $8202016 and $926 million, or $0.74$0.88 per diluted common share, or $828 million, or $0.74 per diluted common share, as adjusted (Non-GAAP). Inin the second quarter of 2016, net income applicable to common shareholders was $825 million, or $0.75 per diluted common share, or $830 million, or $0.76 per diluted common share, as adjusted (Non-GAAP)2017. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 48 for the reconciliation of Non-GAAP measures.

Highlights of the third quarter of 20162017 include:

AUC/A totaled a record $32.2 trillion at Sept. 30, 2017 compared with $30.5 trillion at Sept. 30, 2016 compared with $28.5 trillion at Sept. 30, 2015.2016. The 7%6% increase primarily reflects higher market values, partially offset by the unfavorablefavorable impact of a strongerweaker U.S. dollar.dollar and net new business. (See “Investment Services business” beginning on page 19.)
AUM totaled a record $1.82 trillion at Sept. 30, 2017 compared with $1.72 trillion at Sept. 30, 2016 compared with $1.63 trillion at Sept. 30, 2015.2016. The 6% increase primarily reflects higher market values, partially offset bynet inflows and the unfavorablefavorable impact of a strongerweaker U.S. dollar (principally versus the British pound). AUM excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.business. (See “Investment Management business” beginning on page 16.)
Investment services fees totaled $1.89$1.92 billion, an increase of 2%1% compared with $1.85$1.89 billion in the third quarter of 2015.2016. The increase primarily reflects higher money market fees, higher fees in Depositary Receiptsequity market values and higher securities lending revenue,net new business, partially offset by the unfavorable impact of a stronger U.S. dollar.lower Depositary Receipts revenue. (See “Investment Services business” beginning on page 19.)
Investment management and performance fees totaled $860$901 million, an increase of 4%5% compared with $829$860 million in the third quarter of 2015.2016. The increase primarily reflects higher equity market values and money market fees, partially offset by the unfavorable impact of a stronger U.S. dollar



BNY Mellon 5


and net outflows of AUM in prior periods.fees. (See “Investment Management business” beginning on page 16.)
Foreign exchange and other trading revenue totaled $183$173 million compared with $179$183 million in the third quarter of 2015.2016. Foreign exchange revenue totaled $175$158 million, a decrease of 3%10% compared with $180$175 million in the third quarter of 2015. The decrease2016, primarily reflectsreflecting lower volumesvolatility and volatility,lower Depositary Receipt-related foreign exchange activity, partially offset by the positive net impact of foreign currency hedging activity.higher volumes. (See “Fee and other revenue” beginning on page 7.)
Financing-related fees totaled $58 million compared with $71 million in the third quarter of 2015. The decrease primarily reflects lower underwriting fees and lower fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity. (See “Fee and other revenue” beginning on page 7.)
Investment and other income totaled $92$63 million compared with $59$92 million in the third quarter of 2015.2016. The increasedecrease primarily reflects higher asset-relatedlower other income driven by our investments in renewable energy and lower seed capital gains. (See “Fee and other revenue” beginning on page 7.)


BNY Mellon 5


Net interest revenue totaled $774$839 million compared with $759$774 million in the third quarter of 2015.2016. The 8% increase was primarily reflectsdriven by higher interest rates, partially offset by the actions we have taken to reduce the levels of our lower yielding interest-earning assetsaverage deposits and higher yielding interest-bearing deposits, as well as the impact of higher market interest rates.loans. Net interest margin was 1.15% in the third quarter of 2017 compared with 1.05% in the third quarter of 2016. The net interest margin (FTE) (Non-GAAP) was 1.16% in the third quarter of 2017 compared with 1.06% in the third quarter of 2016 compared with 0.98% in the third quarter of 2015.2016. (See “Net interest revenue” beginning on page 10.)
The provision for credit losses was a credit of $19 million, driven by net recoveries of $13 million. The provision for credit losses was $1$6 million in the third quarter of 2015.2017 and a credit of $19 million in the third quarter of 2016. (See “Asset quality and allowance for credit losses” beginning on page 29.)

Noninterest expense totaled $2.64$2.65 billion compared with $2.68$2.64 billion in the third quarter of 2015.2016. The decreaseincrease primarily reflects lowerhigher software and professional, legal and other purchased services expenses in most expense categories, primarily driven by the favorable impact of a stronger U.S. dollar, lower other, furniture and equipment, legal, net occupancy and business development expenses,, partially offset by higher stafflower litigation expense and distribution and servicing expenses.bank assessment charges. (See “Noninterest expense” beginning on page 13.)
The provision for income taxes was $324$348 million and the effective rate was 24.6%25.4% in the third quarter 2016of 2017 compared with an income tax provision of $282$324 million and an effective tax rate of 25.4%24.6% in the third quarter of 2015.2016. (See “Income taxes” on page 14.)

The net unrealized pre-tax gain on the total investment securities portfolio was $1.4 billion$257 million at Sept. 30, 20162017 compared with $1.6 billiona pre-tax gain of $151 million at June 30, 2016.2017. The increase was primarily driven by a decrease primarily reflects an increase in marketlong-term interest rates. (See “Investment securities” beginning on page 25.)
Our CET1 ratio under the Advanced Approach was 10.5%11.1% at Sept. 30, 20162017 and 10.2%10.8% at June 30, 2016.2017. The increase reflects an increase in capital and a decrease in risk-weighted assets.was primarily driven by CET1 generation. Our CET1 ratio under the Standardized Approach was 12.2%12.3% at Sept. 30, 20162017 and 11.8%12.0% at June 30, 2016.2017. (See “Capital” beginning on page 37.)
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.8%10.7% at Sept. 30, 20162017 and 9.5%10.4% at June 30, 2016.2017. The increase primarily reflects an increase in capital and a decrease in risk-weighted assets.CET1 generation. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 11.4%11.9% at Sept. 30, 20162017 and 11.0%11.5% at June 30, 2016.2017. (See “Capital” beginning on page 37.)




6 BNY Mellon


Fee and other revenue

Fee and other revenue    YTD16    YTD17
 3Q16 vs.  vs. 3Q17 vs.  vs.
(dollars in millions, unless otherwise noted)3Q16
2Q16
3Q15
2Q16
3Q15
 YTD16
YTD15
YTD153Q17
2Q17
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Investment services fees:           
Asset servicing (a)
$1,067
$1,069
$1,057
 %1 % $3,176
$3,155
1 %$1,105
$1,085
$1,067
2 %4 % $3,253
$3,176
2 %
Clearing services349
350
345

1
 1,049
1,036
1
383
394
349
(3)10
 1,153
1,049
10
Issuer services337
234
313
44
8
 815
779
5
288
241
337
20
(15) 780
815
(4)
Treasury services137
139
137
(1)
 407
418
(3)141
140
137
1
3
 420
407
3
Total investment services fees1,890
1,792
1,852
5
2
 5,447
5,388
1
1,917
1,860
1,890
3
1
 5,606
5,447
3
Investment management and performance fees860
830
829
4
4
 2,502
2,574
(3)901
879
860
3
5
 2,622
2,502
5
Foreign exchange and other trading revenue183
182
179
1
2
 540
595
(9)173
165
183
5
(5) 502
540
(7)
Financing-related fees58
57
71
2
(18) 169
169

54
53
58
2
(7) 162
169
(4)
Distribution and servicing43
43
41

5
 125
121
3
40
41
43
(2)(7) 122
125
(2)
Investment and other income92
74
59
24
56
 271
223
22
63
122
92
N/M
N/M
 262
271
N/M
Total fee revenue3,126
2,978
3,031
5
3
 9,054
9,070

3,148
3,120
3,126
1
1
 9,276
9,054
2
Net securities gains24
21
22
N/M
N/M
 65
62
5
19

24
N/M
N/M
 29
65
N/M
Total fee and other revenue$3,150
$2,999
$3,053
5 %3 % $9,119
$9,132
 %$3,167
$3,120
$3,150
2 %1 % $9,305
$9,119
2 %
          
Fee revenue as a percentage of total revenue79%79%81%  79%79% 78%79%79%  79%79% 
          
AUM at period end (in billions) (b)
$1,715
$1,664
$1,625
3 %6 % $1,715
$1,625
6 %$1,824
$1,771
$1,715
3 %6 % $1,824
$1,715
6 %
AUC/A at period end (in trillions) (c)
$30.5
$29.5
$28.5
3 %7 % $30.5
$28.5
7 %$32.2
$31.1
$30.5
4 %6 % $32.2
$30.5
6 %
(a)
Asset servicing fees include securities lending revenue of $47 million in the third quarter of 2017, $48 million in the second quarter of 2017, $51 million in the third quarter of 2016, $52$144 million in the second quarterfirst nine months of 2016, $38 million in the third quarter of 2015,2017 and $153 million in the first nine months of 2016 and $130 million in the first nine months of 2015.
2016.
(b)Excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.business.
(c)
Includes the AUC/A of CIBC Mellon of $1.2$1.3 trillion at Sept. 30, 2016, $1.12017 and $1.2 trillion at both June 30, 20162017 and $1.0 trillion at Sept. 30, 2015.2016.
N/M - Not meaningful.


Fee and other revenue increased 3%1% compared with the third quarter of 20152016 and increased 5%2% (unannualized) compared with the second quarter of 2016.2017. The year-over-year increase compared with the third quarter of 2016 primarily reflects higher investment and other income, investment management and performance fees, asset servicing fees and issuerclearing services fees, partially offset by lower financing-related fees.issuer services fees, investment and other income and foreign exchange and other trading revenue. The sequential increase compared with the second quarter of 2017 primarily reflects seasonally higher issuer services fees, investment management and performance fees, asset servicing fees and net securities gains, partially offset by lower investment and other income.

Investment services fees

Investment services fees were impacted by the following compared with the third quarter of 20152016 and the second quarter of 2016:2017:

Asset servicing fees increased 1%4% compared with the third quarter of 20152016 and slightly decreased compared with the second quarter of 2016. The year-over-year increase primarily reflects higher money market fees and securities lending revenue, partially offset by the unfavorable
impact of a stronger U.S. dollar and downsizing of the UK transfer agency business.
Clearing services fees increased 1% compared with the third quarter of 2015 and decreased slightly compared with the second quarter of 2016. The year-over-year increase was primarily driven by higher money market fees, partially offset by the impact of the previously disclosed lost business.
Issuer services fees increased 8% compared with the third quarter of 2015 and increased 44%2% (unannualized) compared with the second quarter of 2016. 2017. The year-over-year increase primarily reflects increased activity in Depositary Receipts and higher money market fees in Corporate Trust. The sequential increase primarily reflects seasonally higher fees in Depositary Receipts.
Treasury services fees were unchanged
increase compared with the third quarter of 20152016 primarily reflects higher equity market values and net new business, including growth in collateral management, partially offset by the impact of downsizing the retail UK transfer agency business. The increase compared with the second quarter of 2017 was primarily driven by the favorable impact of a weaker U.S. dollar and higher equity market values.
Clearing services fees increased 10% compared with the third quarter of 2016 and decreased 1%3% (unannualized) compared with the second quarter of 2016.2017. The increase was primarily driven by higher money market fees and growth in long-term mutual fund assets. The decrease primarily reflects lower clearance volumes.

Issuer services fees decreased 15% compared with the third quarter of 2016 and increased 20% (unannualized) compared with the second quarter of 2017. The decrease primarily reflects fewer corporate actions, lost business and lower fees due to a reduction in shares outstanding in certain depositary receipts programs, partially offset by higher Corporate Trust revenue. The increase



BNY Mellon 7


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

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

Investment management and performance fees

Investment management and performance fees totaled $860 million in the third quarter of 2016, an increase of 4%increased 5% compared with the third quarter of 20152016 and 4%3% (unannualized) compared with the second quarter of 2016.2017, primarily reflecting higher equity market values and money market fees. The increase compared with the third quarter of 2015 primarily2016 also reflects higher market values and money market fees, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows of assets under management in prior periods.performance fees. The increase compared with the second quarter of 2016 primarily2017 also reflects higher market values.the favorable impact of a weaker U.S. dollar. Changes in currency rates had an insignificant impact on the growth rate of investment management and performance fees compared with the third quarter of 2016. Performance fees were $15 million in the third quarter of 2017, $8 million in the third quarter of 2016 $7 million in the third quarter of 2015 and $9$17 million in the second quarter of 2016.2017.

Total AUM for the Investment Management business was $1.7 trillion at Sept. 30, 2016, an increase ofincreased 6% compared with Sept. 30, 20152016 and 3% compared with June 30, 2016.2017. The year-over-year increase compared with Sept. 30, 2016 primarily reflects higher market values, partially offset bynet inflows and the unfavorablefavorable impact of a strongerweaker U.S. dollar (principally versus the British pound). The increase compared with June 30, 2017 primarily reflects the favorable impact of a weaker U.S. dollar (principally versus the British pound), higher market values and net inflows. Net long-term inflows of $1fixed income and multi-asset and alternative investments were offset by outflows of index, equity and liability-driven investments in the third quarter of 2017. Net short-term inflows of $10 billion in the third quarter of 20162017 were a combinationresult of $3 billion of inflows into actively managed strategies and $2 billion of outflows from index strategies. Net short-term outflows totaled $1 billion in the third quarter of 2016.increased distribution through our liquidity portals.

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

Foreign exchange and other trading revenue

Foreign exchange and other trading revenueForeign exchange and other trading revenue Foreign exchange and other trading revenue 
Year-to-date
(in millions)3Q16
2Q16
3Q15
2016
2015
3Q17
2Q17
3Q16
YTD17
YTD16
Foreign exchange$175
$166
$180
$512
$578
$158
$151
$175
$463
$512
Other trading revenue (loss)8
16
(1)28
17
Other trading revenue15
14
8
39
28
Total foreign exchange and other trading revenue$183
$182
$179
$540
$595
$173
$165
$183
$502
$540


Foreign exchange and other trading revenue totaled $183 million indecreased 5% compared with the third quarter of 2016, $179 million in the third quarter of 2015 and $182 million inincreased 5% (unannualized) compared with the second quarter of 2016.
2017.

Foreign exchange trading 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. Involatility, and the third quarterimpact of 2016, foreign currency hedging activities. Foreign exchange revenue totaled $175 million, a decrease of 3%decreased 10% compared with the third quarter of 20152016, primarily reflecting lower volatility and an increase oflower Depositary Receipt-related foreign exchange activity, partially offset by higher volumes. Foreign exchange revenue increased 5% (unannualized) compared with the second quarter of 2016. The year-over-year decrease primarily reflects lower2017 reflecting higher volumes and volatility, partially offset by the positive net impact of foreign currency hedging activity. The year-over-year decrease also reflects the continued trend of clients migrating to lower margin products. The sequential increase primarily reflects higher Depositary Receipt-related foreign exchange activity, partially offset by lower volatility.. Foreign exchange revenue is primarily reported in the Investment Services business and, to a lesser extent, the Investment Management business and the Other segment.

Generally speaking,Our custody clients may enter into foreign exchange transactions in onea number of three ways: negotiated trading with BNY Mellon, BNY Mellon’sways, including through our standing instruction programs, or transactions with third-party foreign exchange providers. Negotiated transactions generally refer to transactions entered into byprograms. While the client or the client’s investment manager, with all decisions related to a transaction made by the client or its investment manager. The preponderanceshift of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction programs, which are Session Range and our standard Defined Spread program, provide custody clients and their investment managers with an end-to-end solution that allows them to shift to BNY Mellon the cost, management and execution risk, often in small transactions or transactions in restricted and difficult to trade currencies. A shift by custody clients from our standing instruction programs to other trading options combined with competitive market pressures on the foreign exchange business is negatively impactinghas abated, our foreign exchange revenue.revenue continues to be impacted by changes in volume and volatility. For the quarter ended Sept. 30, 2016,2017, our total revenue for all types of foreign exchange trading transactions was approximately$158 million, or 4% of our total revenue, and approximately 27%28% of our foreign exchange revenue was generated by transactions in our standing instruction programs.

Total other trading revenue was $8 million in the third quarter of 2016, compared with a $1 million loss in the third quarter of 2015 and $16 million in the second quarter of 2016. The year-over-year increase primarily reflects higher fixed income trading, partially offset by lower equity and other trading.



8 BNY Mellon


The sequential decrease primarily reflects lower results from derivative trading and hedging activity. Other trading revenue is reported in all three business segments.

Financing-related fees

Financing-related fees, which are primarily reported in the Investment Services business and the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees totaled $58 million indecreased compared with the third quarter of 2016 $71 millionin the third quarter of 2015 and $57 million inprimarily reflecting lower syndication fees. Financing-related fees increased compared with the second quarter of 2016. The year-over-year decrease2017 primarily reflects lowerreflecting higher underwriting fees and lower fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity.fees.

Distribution and servicing fees

Distribution and servicing fee revenue was $43 million infees decreased compared with the third quarter of 2016 $41 million in the third quarter of 2015 and $43 million in the second quarter of 2016. The year-over-year increase primarily reflects higher money market fees, partially offset byreflecting fees paid to introducing brokers.brokers, partially offset by higher money market fees.

Investment and other income

Investment and other incomeInvestment and other income Investment and other income 
 Year-to-date
(in millions)3Q16
2Q16
3Q15
2016
2015
3Q17
2Q17
3Q16
YTD17
YTD16
Corporate/bank-owned life insurance$34
$31
$32
$96
$96
$37
$43
$34
$110
$96
Lease-related gains
51

52
44
Expense reimbursements from joint venture18
17
16
52
47
18
17
18
49
52
Lease-related gains


44
53
Equity investment income (loss)
7
(1)33
(8)
Seed capital gains (a)
16
11
7
38
25
6
10
16
25
38
Asset-related gains (losses)8
1
(9)9
(5)1
(5)8
(1)9
Equity investment (losses)(1)(4)(6)(8)(17)
Other income17
18
19
40
24
Other income (loss)1
(1)17
(6)40
Total investment and other income$92
$74
$59
$271
$223
$63
$122
$92
$262
$271
(a)Does not includeExcludes the gain (loss)gains (losses) on seed capital investments in consolidated investment management funds which are reflected in operations of consolidated investment management funds, net of noncontrolling interests. The gain (loss)gains on seed capital investments in consolidated investment management funds waswere $7 million in the third quarter of 2017, $7 million in the second quarter of 2017, $8 million in the third quarter of 2016, $6$29 million in the second quarterfirst nine months of 2016, $(17) million in the third quarter of 2015,2017 and $15 million in the first nine months of 2016 and $7 million in the first nine months of 2015.2016.


 
Investment and other income includes corporate and bank-owned life insurance contracts, expense reimbursements from our CIBC Mellon joint venture, lease-related gains, seed capital gains, asset-related gains, equity investment losses and other income. Expense reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC Mellon joint venture. Asset-related gains include real estate, loan and other asset dispositions. Other income primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income was $92 million indecreased compared with both the third quarter of 2016 and second quarter of 2017. The decrease compared with $59 million in the third quarter of 20152016 primarily reflects lower other income driven by increased pre-tax losses on our investments in renewable energy and $74 millionlower seed capital gains. The pre-tax losses on the renewable energy investments are offset by corresponding tax benefits and credits recorded as a reduction to the provision for income taxes. The decrease compared with the second quarter of 2017 primarily reflects lease-related gains recorded in the second quarter of 2016. Both increases primarily reflect higher asset-related2017 and seed capital gains.lower income from corporate/bank-owned life insurance.

Year-to-date 20162017 compared with year-to-date 20152016

Fee and other revenue forincreased 2% compared with the first nine months of 2016, totaled $9.12 billion compared with $9.13 billion in the first nine months of 2015. The decrease primarily reflects lowerreflecting higher investment management and performance fees, clearing services fees and asset servicing fees, partially offset by lower foreign exchange and other trading revenue, partially offset by higher investmentnet securities gains and other income, issuer services fees and asset servicing fees. The decrease5% increase in investment management and performance fees primarily reflects outflows in prior periods,higher market values, money market fees and performance fees, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), the July 2015 sale of Meriten. The 10% increase in clearing services fees primarily reflects higher money market fees and lower performancegrowth in long-term mutual fund assets. The 2% increase in asset servicing fees primarily reflects net new business, including growth in collateral management and higher equity market values, partially offset by higher money market fees.the unfavorable impact of a stronger U.S. dollar and the impact of downsizing the retail UK transfer agency business. The 7% decrease in foreign exchange and other trading revenue primarily reflects lower volumesvolatility and the continued trend of clients migrating to lower margin products.Depositary Receipts-related foreign exchange activity. The increase in investment and other income primarily reflects foreign currency remeasurement gains and higher asset-related and seed capital gains. The increase4% decrease in issuer services fees primarily reflects higher money market fees in Corporate Trust. The increase in asset servicing fees primarily reflects net new business, higher money market fees and higher securities lending revenue, partially offset by the unfavorable impact of a stronger U.S. dollar.lower Depositary Receipts revenue.




BNY Mellon 9


Net interest revenue 

Net interest revenue    YTD16    YTD17
 3Q16 vs. Year-to-datevs. 3Q17 vs.  vs.
(dollars in millions)3Q16
2Q16
3Q15
2Q16
3Q15
 2016
2015
YTD153Q17
2Q17
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Net interest revenue (non-FTE)$774
$767
$759
1%
2%
 $2,307
$2,266
2%
Net interest revenue$839
$826
$774
2%8 % $2,457
$2,307
7 %
Tax equivalent adjustment12
13
14
(8)(14) 39
44
(11)12
12
12
N/M 36
39
N/M
Net interest revenue (FTE)$786
$780
$773
1%
2%
 $2,346
$2,310
2%
Net interest revenue (FTE) – Non-GAAP (a)
$851
$838
$786
2%8 % $2,493
$2,346
6 %
     
Average interest-earning assets$296,703
$318,433
$315,672
(7)%
(6)%
 $308,560
$314,152
(2)%
$291,841
$289,496
$296,703
1%(2)% $288,283
$308,560
(7)%
Net interest margin (FTE)1.06%0.98%0.98%8 bps8 bps 1.02%0.98%4 bps
     
Net interest margin1.15%1.14%1.05%1 bps10 bps 1.14%1.00%14 bps
Net interest margin (FTE) – Non-GAAP (a)
1.16%1.16%1.06%
10 bps 1.16%1.02%14 bps
(a)Net interest revenue (FTE) – Non-GAAP and net interest margin (FTE) – Non-GAAP include the tax equivalent adjustments on tax-exempt income which allows for comparisons of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income.
FTE - fully taxable equivalent.
N/M - Not meaningful.
bps - basis points.


Net interest revenue totaled $774 million in the third quarter of 2016, an increase of $15 millionincreased 8% compared with the third quarter of 20152016 and an increase of $7 million2% (unannualized) compared with the second quarter of 2016. Both increases2017 primarily reflect the actions we have taken to reduce the levels of ourreflecting higher interest rates, partially offset by lower yielding interest-earning assetsaverage deposits and higher yielding interest-bearing deposits, as well as the impact of higher market interest rates.loans. The sequential increase also reflects higher average loans.an additional interest-earning day during the quarter.

The netNet interest margin (FTE) was 1.06% inincreased 10 basis points compared with the third quarter of 2016, compared with 0.98% in the third quarter of 2015 and 0.98% in the second quarter of 2016. The year-over-year and sequential increases primarily reflectreflecting the factors notedlisted above.

Average non-U.S. dollar deposits comprised approximately 20%30% of our average total deposits in the third quarter of 2016.2017. Approximately 40%45% of the average non-U.Snon-U.S. dollar deposits were euro-denominated in the third quarter of 2016.

As previously indicated, we evaluated the impact of our resolution plan strategy on net interest revenue. We currently believe that it requires us to issue approximately $2 - $4 billion of incremental unsecured long-term debt above our typical funding requirements by July 2017 to satisfy resource needs in a time of distress. This estimate is subject to change as we further refine our strategy and related assumptions. The additional debt is currently expected to have a modest negative impact to net interest revenue.were euro-denominated.

Year-to-date 20162017 compared with year-to-date 20152016

Net interest revenue totaled $2.3 billion in the first nine months of 2016, an increase of $41 millionincreased 7% compared with the first nine months of 2015. The increase in net2016, primarily driven by higher interest revenue primarily reflects the impact of higher market interest rates and lower premium amortization, partially offset by the negative impact of interest rate hedging activitieslower average deposits and lower securities due to lower deposits. The net interest margin (FTE) was 1.02% in the first nine months of 2016, compared with 0.98% in the first nine months of 2015.interest-earning assets. The increase in the net interest margin (FTE)was primarily reflectsdriven by the factors notedlisted above.




10 BNY Mellon


Average balances and interest ratesQuarter endedQuarter ended
Sept. 30, 2016 June 30, 2016 Sept. 30, 2015Sept. 30, 2017 June 30, 2017 Sept. 30, 2016
(dollar amounts in millions, presented on an FTE basis)
Average
balance

Interest
 
Average
rates

 
Average
balance

Interest
 
Average
rates

 Average balance
Interest
 Average rates
Average
balance

Interest
Average
rates

 
Average
balance

Interest
Average
rates

 Average balance
Interest
Average rates
Assets                   
Interest-earning assets:                   
Interest-bearing deposits with banks (primarily foreign banks)$14,066
$26
 0.74 % $14,394
$24
 0.68% $20,549
$24
 0.45 %$15,899
$34
0.86% $14,832
$27
0.73% $14,066
$26
0.74 %
Interest-bearing deposits held at the Federal Reserve and other central banks74,102
37
 0.20
 97,788
72
 0.30
 84,175
43
 0.20
70,430
89
0.50
 69,316
71
0.41
 74,102
37
0.20
Federal funds sold and securities purchased under resale agreements26,376
62
 0.93
 25,813
56
 0.87
 25,366
39
 0.61
28,120
119
1.67
 26,873
86
1.29
 26,376
62
0.93
Margin loans18,132
67
 1.48
 18,226
64
 1.40
 19,839
53
 1.05
13,206
87
2.60
 15,058
87
2.32
 18,132
67
1.48
Non-margin loans:                   
Domestic offices30,534
171
 2.22
 29,413
165
 2.25
 27,411
147
 2.15
29,950
216
2.87
 30,734
207
2.70
 30,534
171
2.22
Foreign offices12,912
47
 1.45
 12,645
49
 1.57
 14,407
41
 1.13
12,788
67
2.09
 13,001
65
1.99
 12,912
47
1.45
Total non-margin loans43,446
218
 1.99
 42,058
214
 2.04
 41,818
188
 1.80
42,738
283
2.64
 43,735
272
2.49
 43,446
218
1.99
Securities:                   
U.S. Government obligations25,279
94
 1.49
 24,571
92
 1.50
 23,935
92
 1.52
25,349
106
1.67
 25,928
106
1.64
 25,279
94
1.49
U.S. Government agency obligations56,464
240
 1.70
 56,050
236
 1.68
 55,624
245
 1.76
61,710
309
2.00
 59,533
290
1.95
 56,464
240
1.70
State and political subdivisions – tax-exempt3,598
27
 2.98
 3,778
28
 2.90
 4,465
31
 2.81
3,226
25
3.06
 3,298
26
3.09
 3,598
27
2.98
Other securities33,064
102
 1.23
 33,603
104
 1.24
 37,164
119
 1.28
28,804
98
1.34
 28,468
81
1.15
 33,064
102
1.23
Trading securities2,176
13
 2.62
 2,152
13
 2.45
 2,737
18
 2.74
2,359
13
2.26
 2,455
18
2.85
 2,176
13
2.62
Total securities120,581
476
 1.58
 120,154
473
 1.57
 123,925
505
 1.63
121,448
551
1.81
 119,682
521
1.74
 120,581
476
1.58
Total interest-earning assets(a)$296,703
$886
(a)1.19 % $318,433
$903
(a)1.14% $315,672
$852
(a)1.08 %$291,841
$1,163
1.59% $289,496
$1,064
1.47% $296,703
$886
1.19 %
Allowance for loan losses(165)    (163)    (184)   (165)   (164)   (165)  
Cash and due from banks4,189
    4,141
    6,140
   4,961
   4,972
   4,189
  
Other assets49,463
    50,563
    49,700
   48,329
   47,303
   49,463
  
Assets of consolidated investment management funds1,040
    1,246
    2,125
   743
   908
   1,040
  
Total assets$351,230
    $374,220
    $373,453
   $345,709
   $342,515
   $351,230
  
Liabilities                   
Interest-bearing liabilities:                   
Interest-bearing deposits:                   
Money market rate accounts$7,346
$1
 0.06 % $7,280
$1
 0.06% $7,518
$1
 0.08 %$7,509
$1
0.06% $7,379
$1
0.04% $7,346
$1
0.06 %
Savings1,201
1
 0.41
 1,175
1
 0.39
 1,279
1
 0.27
837
1
0.76
 1,014
2
0.75
 1,201
1
0.41
Demand deposits2,681
3
 0.36
 1,790
2
 0.40
 3,105
2
 0.25
5,932
5
0.27
 5,659
2
0.14
 2,681
3
0.36
Time deposits45,186
7
 0.07
 46,629
6
 0.06
 43,529
4
 0.04
29,934
24
0.32
 34,757
15
0.18
 45,186
7
0.07
Foreign offices98,695
(18) (0.08) 108,248
2
 0.01
 114,322
1
 
98,278
26
0.10
 93,527
12
0.05
 98,695
(18)(0.08)
Total interest-bearing deposits155,109
(6) (0.02) 165,122
12
 0.03
 169,753
9
 0.02
142,490
57
0.16
 142,336
32
0.09
 155,109
(6)(0.02)
Federal funds purchased and securities sold under repurchase agreements9,585
6
 0.24
 18,204
13
 0.28
 14,796
(1) (0.04)21,403
70
1.30
 17,970
38
0.84
 9,585
6
0.24
Trading liabilities735
2
 1.11
 662
1
 0.66
 475
2
 1.42
1,434
2
0.54
 1,216
2
0.61
 735
2
1.11
Other borrowed funds874
1
 0.76
 847
2
 0.97
 628
2
 1.18
2,197
7
1.38
 1,193
4
1.24
 874
1
0.76
Commercial paper1,173
1
 0.35
 3,781
4
 0.37
 2,195
1
 0.11
2,736
8
1.15
 2,215
5
0.95
 1,173
1
0.35
Payables to customers and broker-dealers16,873
3
 0.07
 16,935
2
 0.05
 11,504
1
 0.06
18,516
19
0.42
 20,609
16
0.30
 16,873
3
0.07
Long-term debt23,930
93
 1.54
 22,838
89
 1.54
 21,070
65
 1.21
28,138
149
2.07
 27,398
129
1.87
 23,930
93
1.54
Total interest-bearing liabilities$208,279
$100
 0.19 % $228,389
$123
 0.21% $220,421
$79
 0.14 %$216,914
$312
0.57% $212,937
$226
0.42% $208,279
$100
0.19 %
Total noninterest-bearing deposits81,619
    84,033
    85,046
   70,168
   73,886
   81,619
  
Other liabilities21,343
    22,345
    27,880
   17,728
   15,545
   21,343
  
Liabilities and obligations of consolidated investment management funds238
    253
    841
   35
   111
   238
  
Total liabilities311,479
    335,020
    334,188
   304,845
   302,479
   311,479
  
Temporary equity                   
Redeemable noncontrolling interests179
    181
    252
   188
   172
   179
  
Permanent equity                   
Total BNY Mellon shareholders’ equity39,051
    38,379
    38,140
   40,322
   39,404
   39,051
  
Noncontrolling interests521
    640
    873
   354
   460
   521
  
Total permanent equity39,572
    39,019
    39,013
   40,676
   39,864
   39,572
  
Total liabilities, temporary equity and permanent equity$351,230
    $374,220
    $373,453
   $345,709
   $342,515
   $351,230
  
Net interest margin (FTE)   1.06 %    0.98%    0.98 %
Net interest revenue (FTE) – Non-GAAP $851
   $838
   $786
 
Net interest margin (FTE) – Non-GAAP 1.16%  1.16%  1.06 %
Less: Tax equivalent adjustment (b)
 12
   12
   12
 
Net interest revenue – GAAP $839
   $826
   $774
 
Net interest margin – GAAP 1.15%  1.14%  1.05 %
Note:Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
The tax equivalent adjustment was $12 million in the third quarter of 2016, $13 million in the second quarter of 2016Interest income and $14 million in the third quarter of 2015, and is basedaverage yield are presented on an FTE basis (Non-GAAP).
(b)Based on the applicable tax rate (35%)of 35%.



BNY Mellon 11


Average balances and interest ratesYear-to-dateYear-to-date
Sept. 30, 2016 Sept. 30, 2015Sept. 30, 2017 Sept. 30, 2016
(dollar amounts in millions, presented on an FTE basis)Average balance
Interest
 Average rates
 Average balance
Interest
 Average rates
Average balance
Interest
Average rates
 Average balance
Interest
Average rates
Assets            
Interest-earning assets:            
Interest-bearing deposits with banks (primarily foreign banks)$14,455
$76
 0.70 % $20,946
$82
 0.52 %$15,153
$83
0.73% $14,455
$76
0.70 %
Interest-bearing deposits held at the Federal Reserve and other central banks86,947
170
 0.26
 82,405
131
 0.21
68,613
217
0.42
 86,947
170
0.26
Federal funds sold and securities purchased under resale agreements25,275
167
 0.88
 23,127
105
 0.61
26,779
272
1.36
 25,275
167
0.88
Margin loans18,420
194
 1.41
 20,118
154
 1.02
14,663
249
2.27
 18,420
194
1.41
Non-margin loans: 
           
Domestic offices29,488
493
 2.23
 26,469
419
 2.11
30,545
611
2.67
 29,488
493
2.23
Foreign offices13,112
144
 1.47
 13,649
121
 1.18
13,126
189
1.93
 13,112
144
1.47
Total non-margin loans42,600
637
 2.00
 40,118
540
 1.80
43,671
800
2.45
 42,600
637
2.00
Securities:            
U.S. Government obligations24,778
278
 1.50
 26,560
286
 1.44
25,835
316
1.64
 24,778
278
1.50
U.S. Government agency obligations56,161
727
 1.73
 54,911
716
 1.74
59,384
870
1.95
 56,161
727
1.73
State and political subdivisions – tax-exempt3,784
83
 2.92
 4,897
99
 2.70
3,298
77
3.09
 3,784
83
2.92
Other securities33,592
309
 1.23
 38,059
366
 1.28
28,531
267
1.25
 33,592
309
1.23
Trading securities2,548
45
 2.37
 3,011
57
 2.61
2,356
48
2.74
 2,548
45
2.37
Total securities120,863
1,442
 1.59
 127,438
1,524
 1.60
119,404
1,578
1.76
 120,863
1,442
1.59
Total interest-earning assets(a)$308,560
$2,686
(a)1.16 % $314,152
$2,536
(a)1.08 %$288,283
$3,199
1.48% $308,560
$2,686
1.16 %
Allowance for loan losses(162)    (188)   (166)   (162)  
Cash and due from banks4,070
    6,376
   5,010
   4,070
  
Other assets49,624
    50,816
   47,461
   49,624
  
Assets of consolidated investment management funds1,198
    2,244
   922
   1,198
  
Total assets$363,290
    $373,400
   $341,510
   $363,290
  
Liabilities            
Interest-bearing liabilities:            
Interest-bearing deposits:            
Money market rate accounts$7,337
$3
 0.06 % $7,186
$5
 0.09 %$7,466
$3
0.05% $7,337
$3
0.06 %
Savings1,203
3
 0.36
 1,344
3
 0.28
980
5
0.70
 1,203
3
0.36
Demand deposits1,782
5
 0.40
 3,138
5
 0.22
5,656
8
0.18
 1,782
5
0.40
Time deposits44,832
19
 0.06
 44,533
11
 0.03
33,354
50
0.20
 44,832
19
0.06
Foreign offices105,574
(9) (0.01) 110,499
8
 0.01
94,102
32
0.05
 105,574
(9)(0.01)
Total interest-bearing deposits160,728
21
 0.02
 166,700
32
 0.03
141,558
98
0.09
 160,728
21
0.02
Federal funds purchased and securities sold under repurchase agreements15,471
28
 0.24
 15,139
(5) (0.04)19,465
132
0.90
 15,471
28
0.24
Trading liabilities650
5
 1.05
 633
7
 1.41
1,188
6
0.65
 650
5
1.05
Other borrowed funds827
5
 0.90
 841
7
 1.12
1,409
13
1.26
 827
5
0.90
Commercial paper1,657
5
 0.37
 2,071
2
 0.10
2,374
18
1.01
 1,657
5
0.37
Payables to customers and broker-dealers16,870
9
 0.07
 11,225
5
 0.06
19,360
42
0.29
 16,870
9
0.07
Long-term debt22,779
267
 1.55
 20,635
178
 1.14
27,148
397
1.93
 22,779
267
1.55
Total interest-bearing liabilities$218,982
$340
 0.21 % $217,244
$226
 0.14 %$212,502
$706
0.44% $218,982
$340
0.21 %
Total noninterest-bearing deposits82,861
    86,493
   72,524
   82,861
  
Other liabilities21,993
    30,004
   16,299
   21,993
  
Liabilities and obligations of consolidated investment management funds250
    900
   129
   250
  
Total liabilities324,086
    334,641
   301,454
   324,086
  
Temporary equity            
Redeemable noncontrolling interests183
    240
   174
   183
  
Permanent equity            
Total BNY Mellon shareholders’ equity38,414
    37,676
   39,418
   38,414
  
Noncontrolling interests607
    843
   464
   607
  
Total permanent equity39,021
    38,519
   39,882
   39,021
  
Total liabilities, temporary equity and permanent equity$363,290
    $373,400
   $341,510
   $363,290
  
Net interest margin (FTE)   1.02 %    0.98 %
Net interest revenue (FTE) – Non-GAAP $2,493
   $2,346
 
Net interest margin (FTE) – Non-GAAP 1.16%  1.02 %
Less: Tax equivalent adjustment (b)
 36
   39
 
Net interest revenue – GAAP $2,457
   $2,307
 
Net interest margin – GAAP 1.14%  1.00 %
Note:Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)The tax equivalent adjustment was $39 million in the first nine months of 2016Interest income and $44 million in the first nine months of 2015, and is basedaverage yield are presented on an FTE basis (Non-GAAP).
(b)Based on the applicable tax rate (35%)of 35%.




12 BNY Mellon


Noninterest expense

Noninterest expense    YTD16    YTD17
 3Q16 vs.  vs. 3Q17 vs.  vs.
(dollars in millions)3Q16
2Q16
3Q15
2Q16
3Q15
 YTD16
YTD15
YTD153Q17
2Q17
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Staff$1,467
$1,412
$1,437
4 %2 % $4,338
$4,356
 %$1,469
$1,417
$1,467
4 % % $4,358
$4,338
 %
Professional, legal and other purchased services292
290
301
1
(3) 860
902
(5)305
319
292
(4)4
 936
860
9
Software156
160
154
(3)1
 470
470

175
173
156
1
12
 514
470
9
Net occupancy143
152
152
(6)(6) 437
452
(3)141
139
143
1
(1) 416
437
(5)
Distribution and servicing105
102
95
3
11
 307
289
6
109
104
105
5
4
 313
307
2
Sub-custodian59
70
65
(16)(9) 188
210
(10)62
65
59
(5)5
 191
188
2
Furniture and equipment59
63
72
(6)(18) 187
212
(12)58
59
59
(2)(2) 174
187
(7)
Bank assessment charges (a)
51
59
61
(14)(16) 167
166
1
Business development52
65
59
(20)(12) 174
192
(9)49
63
52
(22)(6) 163
174
(6)
Other231
240
268
(4)(14) 712
760
(6)
Other (a)
177
192
170
(8)4
 536
546
(2)
Amortization of intangible assets61
59
66
3
(8) 177
197
(10)52
53
61
(2)(15) 157
177
(11)
M&I, litigation and restructuring charges18
7
11
N/M 42
67
N/M6
12
18
N/M 26
42
N/M
Total noninterest expense – GAAP$2,643
$2,620
$2,680
1 %(1)% $7,892
$8,107
(3)%$2,654
$2,655
$2,643
 % % $7,951
$7,892
1 %
          
Staff expense as a percentage of total revenue37%37%38%  38%38% 37%36%37%  37%38% 
          
Full-time employees at period end52,300
52,200
51,300

2%
 52,300
51,300
2 %52,900
52,800
52,300
 %1 % 52,900
52,300
1 %
 

         
Memo: 

         
Total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges – Non-GAAP$2,564
$2,554
$2,603
 %(1)% $7,673
$7,843
(2)%
Adjusted total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges – Non-GAAP$2,596
$2,590
$2,564
 %1 % $7,768
$7,673
1 %
(a)In the first quarter of 2017, we began disclosing bank assessment charges on a quarterly basis. The bank assessment charges were previously included in other expense. All prior periods were reclassified.
N/M - Not meaningful.


Total noninterest expense decreasedincreased less than 1% compared with the third quarter of 20152016 and increased 1% (unannualized)decreased slightly compared with the second quarter of 2016.2017. The increase primarily reflects higher software and professional, legal and other purchased services expenses, partially offset by lower litigation expense and bank assessment charges. The decrease compared with the third quarter of 2015 primarily reflects lower expenses in most categories, primarily driven by the favorable impact of a stronger U.S. dollar, lower other, furnitureprofessional, legal and equipment, legal, net occupancyother purchased services and business development expenses as well as lower bank assessment charges, partially offset by higher staff and distribution and servicing expenses. The increase compared with the second quarter of 2016 primarily reflects higher staff expense and M&I, litigation and restructuring charges, partially offset by lower expenses in most other expense categories including business development, sub-custodian, net occupancy, other, software and furniture and equipment expenses.expense. Excluding amortization of intangible assets and M&I, litigation and restructuring charges, total noninterest expense, as adjusted (Non-GAAP) decreased, increased 1% compared with the third quarter of 20152016 and increased slightlyless than 1% (unannualized) compared with the second quarter of 2016.2017.

We continue to invest in our risk management, regulatory compliance and other control functions to improve our safety and soundness and in light of increasingincreased global regulatory requirements. As a result of the submission of our 2017 resolution plan, we expect an increasebegan to experience a modest decrease in our expense run ratethe expenses relating to these functions.

functions in the third quarter of 2017.
 
Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 56%55% of total noninterest expense in the third quarter of 2016 and 54%2017, 56% in both the third quarter of 20152016 and 53% andin the second quarter of 2016.2017.

Staff expense increased 2%slightly compared with the third quarter of 2015 and2016 as the annual employee merit increase was offset by lower severance. Staff expense increased 4% (unannualized) compared with the second quarter of 2016. Both increases2017, primarily reflectdue to higher incentive and severance expensesincentives expense reflecting stronger performance and the annual employee merit increase. The increase compared with the third quarter of 2015 was partially offset by lower temporary services expense.

Non-staff expense

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

Non-staff expense totaled $1.2 billion in the third quarter of 2016, a decrease of 5% compared with the third quarter of 2015 and 3% (unannualized)



BNY Mellon 13


compared with the second quarterNon-staff expense totaled $1.2 billion, an increase of 2016. The decrease1% compared with the third quarter of 2015 primarily reflects lower expenses in most categories, primarily driven by lower other, furniture2016 and equipment, legal, net occupancy and business development expenses, partially offset by higher distribution and servicing expenses. The decrease compared with the second quarter of 2016 primarily reflects lower expenses in most non-staff expense categories including business development, sub-custodian, net occupancy, other, software and furniture and equipment expenses, partially offset by higher M&I, litigation and restructuring charges. Non-staff expense, excluding amortization of intangible assets and M&I, litigation and restructuring charges (Non-GAAP), totaled $1.1 billion in the third quarter of 2016, a decrease of 6% compared with the third quarter of 2015 and 4% (unannualized) compared with the second quarter of 2016.

We continue2017. The increase primarily reflects higher software and professional, legal and other purchased services expenses, partially offset by lower litigation expense and bank assessment charges. The decrease primarily reflects lower other, professional, legal and other purchases services and business development expenses as well as lower bank assessment charges. The decrease in professional, legal and other purchased services was driven by lower consulting expense related to benefit from the business improvement process, including the continued impact from vendor renegotiations, and the execution of additional real estate actions that will allow us to optimize our physical footprint and improve how our employees work.

For additional information on restructuring charges, see Note 9 of the Notes to Consolidated Financial Statements.resolution planning.

Year-to-date 20162017 compared with year-to-date 20152016

Noninterest expense totaled $7.9 billion inincreased 1% compared with the first nine months of 2016, a decrease of $215 million, or 3%, compared with $8.1 billionprimarily reflecting higher consulting and software expenses, partially offset by lower net occupancy. The increase in the first nine months of 2015. The decreaseconsulting expense primarily reflects lower expenses in nearly all categories. The lower expenses, primarily incentives, other, temporary services, legal, furniturehigher regulatory and equipment, business development and netcompliance costs. Net occupancy reflect, in part,expense decreased as we continue to benefit from the favorable impact of a stronger U.S. dollar and the continued benefit ofsavings generated by the business improvement process. The decrease was primarily offset by higher severance and distribution and servicing expense.

Income taxes

BNY Mellon recorded an income tax provision of $348 million (25.4% effective tax rate) in the third quarter of 2017. The income tax provision was $324 million (24.6% effective tax rate) in the third quarter of 2016. The income tax provision was $2822016 and $332 million (25.4% effective tax rate) in the third quarter
of 2015 and $290 million (24.9% effective tax rate) in the second quarter of 2016. The effective tax rates primarily benefited from foreign operations, tax-exempt income and tax credits.2017. For additional information, see Note 10 of the Notes to Consolidated Financial Statements.

We expect the effective tax rate to be approximately 25-26% in 2016.2017 based on current income tax rates. Based on our expected revenue growth as well as the mix of earnings we project for next year, we expect our effective tax rate may rise approximately 100 basis points in 2018.

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

Review of businesses

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

Business accounting principles

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

For information on the accounting principles of our businesses, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 18 of the Notes to Consolidated Financial Statements.

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

Beginning in the first quarter of 2016, we revised the net interest revenue for our business to reflect adjustments to our transfer pricing methodology to better reflect the value of certain deposits. Also beginning in the first quarter of 2016, we refined the expense allocation process for indirect expenses to simplify the expenses recorded in the Other segment to include only expenses not directly attributable to the Investment Management and Investment Services operations. These changes did not impact the consolidated results.

The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, incentiveincentives expense typically increases reflecting the vesting of long-term stock awards for retirement eligibleretirement-eligible employees. In the third quarter, Depositary Receipts revenue is typically higher due to an increased level of client dividend payments paid



14 BNY Mellon


in the quarter.payments. Also in the third quarter, volume-related fees may decline due to reduced client activity. In the third quarter, staff expense typically increases reflecting the annual employee merit increase. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth quarter represents the end of the measurement period for many of the performance fee-eligible relationships.

The results of our businesses may also be impacted by the translation of financial results denominated in foreign currencies to the U.S. dollar. We are
primarily impacted by activities denominated in the British pound euro and the Indian rupee.euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency denominated expenses than revenues. However, our Investment


14 BNY Mellon


Management business typically has more foreign currency denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management
business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.


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

Key market metrics    YTD16    YTD17
 3Q16 vs.  vs.
3Q16
2Q16
1Q16
4Q15
3Q15
2Q16
3Q15
 YTD16
YTD15
YTD15
S&P 500 Index (a)
2168
2099
2060
2044
1920
3  %13 %
 2168
1920
13 %
 3Q17 vs.  vs.
3Q17
2Q17
1Q17
4Q16
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Standard & Poor’s (“S&P”) 500 Index (a)
2519
2423
2363
2239
2168
4  %16  % 2519
2168
16  %
S&P 500 Index – daily average2162
2075
1951
2052
2027
4
7
 2065
2064

2467
2398
2326
2185
2162
3
14
 2397
2065
16
FTSE 100 Index (a)
6899
6504
6175
6242
6062
6
14
 6899
6062
14
7373
7313
7323
7143
6899
1
7
 7373
6899
7
FTSE 100 Index – daily average6765
6204
5988
6271
6399
9
6
 6326
6698
(6)7380
7391
7274
6923
6765

9
 7348
6326
16
MSCI EAFE (a)
1702
1608
1652
1716
1644
6
4
 1702
1644
4
1974
1883
1793
1684
1702
5
16
 1974
1702
16
MSCI EAFE – daily average1677
1648
1593
1732
1785
2
(6) 1640
1836
(11)1934
1856
1749
1660
1677
4
15
 1847
1640
13
Barclays Capital Global Aggregate BondSM Index (a)(b)
386
382
368
342
346
1
12
 386
346
12
480
471
459
451
486
2
(1) 480
486
(1)
NYSE and NASDAQ share volume (in billions)
186
203
218
198
206
(8)(10) 608
578
5
179
199
186
189
186
(10)(4) 565
608
(7)
JPMorgan G7 Volatility Index – daily average (c)
10.19
11.12
10.60
9.49
9.93
(8)3
 10.63
10.13
5
8.17
7.98
10.10
10.24
10.19
2
(20) 8.75
10.63
(18)
Average Fed Funds effective rate0.39%0.37%0.36%0.16%0.13%2 bps
26 bps
 0.37%0.12%25 bps
Average interest on excess reserves paid by the Federal Reserve1.25%1.04%0.79%0.55%0.50%21  bps75  bps 1.03%0.50%53  bps
     
Foreign exchange rates vs. U.S. dollar:  
  
 
    
British pound (a)
$1.30
$1.34
$1.44
$1.48
$1.52
(3)%
(14)%
 $1.30
$1.52
(14) %
$1.34
$1.30
$1.25
$1.23
$1.30
3  %3  % $1.34
$1.30
3  %
British pound – average rate1.31
1.43
1.43
1.52
1.55
(8)(15) 1.39
1.53
(9)1.31
1.28
1.24
1.24
1.31
2

 1.28
1.39
(8)
Euro (a)
1.12
1.11
1.14
1.09
1.12
1

 1.12
1.12

1.18
1.14
1.07
1.05
1.12
4
5
 1.18
1.12
5
Euro – average rate1.12
1.13
1.10
1.10
1.11
(1)1
 1.12
1.11
1
1.17
1.10
1.07
1.08
1.12
6
4
 1.13
1.12
1
(a)Period end.
(b)Unhedged in U.S. dollar terms.
(c)The JPMorgan G7 Volatility Index is based on the implied volatility in 3-month currency options.
bps - basis points.


Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At Sept. 30, 2016,2017, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.02 to $0.04.

Fee waivers are highly sensitive to changes in the Fed Funds effective rate. Assuming no change in client
 
behavior, we expect to recover approximately 70% of the pre-tax income related to fee waivers with a 50 basis point increase in the Fed Funds effective rate, inclusive of the 25 basis point increase in December 2015.

See Note 18 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.




BNY Mellon 15


Investment Management business

    YTD16    YTD17
(dollar amounts in millions)

 3Q16 vs.  vs.
3Q16
2Q16
1Q16
4Q15
3Q15
2Q16
3Q15
 YTD16
YTD15
YTD15
 3Q17 vs.  vs.
(dollars in millions)3Q17
2Q17
1Q17
4Q16
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Revenue:          
Investment management fees:          
Mutual funds$309
$304
$300
$294
$301
2 %3 % $913
$914
 %$332
$314
$299
$297
$309
6 %7 % $945
$913
4 %
Institutional clients362
344
334
350
347
5
4
 1,040
1,075
(3)367
362
348
340
362
1
1
 1,077
1,040
4
Wealth management166
160
152
155
156
4
6
 478
475
1
172
169
167
164
166
2
4
 508
478
6
Investment management fees (a)
837
808
786
799
804
4
4
 2,431
2,464
(1)871
845
814
801
837
3
4
 2,530
2,431
4
Performance fees8
9
11
55
7
N/M
14
 28
42
(33)15
17
12
32
8
N/M
88
 44
28
57
Investment management and performance fees845
817
797
854
811
3
4
 2,459
2,506
(2)886
862
826
833
845
3
5
 2,574
2,459
5
Distribution and servicing49
49
46
39
37

32
 144
113
27
51
53
52
48
49
(4)4
 156
144
8
Other (a)
(18)(10)(31)22
(5)N/M
N/M
 (59)53
N/M
(19)(16)(1)(1)(18)N/M
N/M
 (36)(59)N/M
Total fee and other revenue (a)
876
856
812
915
843
2
4
 2,544
2,672
(5)918
899
877
880
876
2
5
 2,694
2,544
6
Net interest revenue82
82
83
84
83

(1) 247
235
5
82
87
86
80
82
(6)
 255
247
3
Total revenue958
938
895
999
926
2
3
 2,791
2,907
(4)1,000
986
963
960
958
1
4
 2,949
2,791
6
Provision for credit losses
1
(1)(4)1
N/M
N/M
 
3
N/M
(2)
3
6

N/M
N/M
 1

N/M
Noninterest expense (ex. amortization of intangible assets)680
684
660
689
665
(1)2
 2,024
2,073
(2)687
683
668
672
680
1
1
 2,038
2,024
1
Amortization of intangible assets22
19
19
24
24
16
(8) 60
73
(18)15
15
15
22
22

(32) 45
60
(25)
Total noninterest expense702
703
679
713
689

2
 2,084
2,146
(3)702
698
683
694
702
1

 2,083
2,084

Income before taxes$256
$234
$217
$290
$236
9 %8 % $707
$758
(7)%$300
$288
$277
$260
$256
4 %17 % $865
$707
22 %
Income before taxes (ex. amortization of intangible
assets)Non-GAAP
$278
$253
$236
$314
$260
10 %7 % $767
$831
(8)%$315
$303
$292
$282
$278
4 %13 % $910
$767
19 %
          
Pre-tax operating margin27%25%24%29%25%  25%26% 30%29%29%27%27%  29%25% 
Adjusted pre-tax operating marginNon-GAAP (b)
33%31%30%36%34%  32%34% 35%34%34%33%33%  35%31% 
          
Average balances:          
Average loans$15,308
$14,795
$14,275
$13,447
$12,779
3 %20 % $14,795
$12,241
21 %$16,724
$16,560
$16,153
$15,673
$15,308
1 %9 % $16,481
$14,795
11 %
Average deposits$15,600
$15,518
$15,971
$15,497
$15,282
1 %2 % $15,696
$15,046
4 %$12,374
$14,866
$15,781
$15,511
$15,600
(17)%(21)% $14,283
$15,696
(9)%
(a)
Total fee and other revenue includes the impact of the consolidated investment management funds, net of noncontrolling interests. See page 5152 for a breakdown of the revenue line items in the Investment Management business impacted by the consolidated investment management funds. Additionally, other revenue includes asset servicing, treasury services, foreign exchange and other trading revenue and investment and other income.
(b)
Excludes the net negative impact of money market fee waivers, amortization of intangible assets, and provision for credit losses and is net of distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 4849 for the reconciliation of this Non-GAAP measure.
N/M - Not meaningful.



16 BNY Mellon


AUM trends (a)
 3Q16 vs. 3Q17 vs.
(dollar amounts in billions)3Q16
2Q16
1Q16
4Q15
3Q15
2Q16
3Q15
(dollars in billions)3Q17
2Q17
1Q17
4Q16
3Q16
2Q17
3Q16
AUM at period end, by product type:    
Equity$228
$225
$222
$224
$224
1 %2 %$158
$163
$158
$153
$156
(3)%1%
Fixed income221
218
219
216
216
1
2
206
198
191
186
194
4
6
Index315
305
319
329
325
3
(3)333
324
330
312
302
3
10
Liability-driven investments (b)
609
573
542
514
520
6
17
622
607
584
554
607
2
2
Alternative investments70
68
66
63
62
3
13
Multi-asset and alternative investments207
192
188
181
189
8
10
Cash272
275
271
279
278
(1)(2)298
287
276
262
267
4
12
Total AUM$1,715
$1,664
$1,639
$1,625
$1,625
3 %6 %$1,824
$1,771
$1,727
$1,648
$1,715
3 %6%
 



  
AUM at period end, by client type: 



  
Institutional$1,234
$1,182
$1,155
$1,127
$1,129
4 %9 %$1,285
$1,265
$1,243
$1,182
$1,234
2 %4%
Mutual funds396
398
405
420
419
(1)(5)447
418
397
381
396
7
13
Private client85
84
79
78
77
1
10
92
88
87
85
85
5
8
Total AUM$1,715
$1,664
$1,639
$1,625
$1,625
3 %6 %$1,824
$1,771
$1,727
$1,648
$1,715
3 %6%
    
Changes in AUM:    
Beginning balance of AUM$1,664
$1,639
$1,625
$1,625
$1,700
 $1,771
$1,727
$1,648
$1,715
$1,664
 
Net inflows (outflows):    
Long-term strategies:    
Equity(3)(2)(3)(9)(4) (2)(2)(4)(5)(6) 
Fixed income
(2)
1
(3) 4
2
2
(1)(1) 
Liability-driven investments (b)
4
15
14
11
11
 (2)15
14
(7)4
 
Alternative investments2
1
1
2
1
 
Total long-term active strategies inflows3
12
12
5
5
 
Multi-asset and alternative investments3
1
2
3
7
 
Total long-term active strategies inflows (outflows)3
16
14
(10)4
 
Index(2)(17)(11)(16)(10) (3)(13)
(1)(3) 
Total long-term strategies inflows (outflows)1
(5)1
(11)(5) 
3
14
(11)1
 
Short term strategies:    
Cash(1)4
(9)2
(10) 10
11
13
(3)(1) 
Total net (outflows)
(1)(8)(9)(15) 
Total net inflows (outflows)10
14
27
(14)
 
Net market impact/other80
71
41
24
(35) 17
1
41
(11)80
 
Net currency impact(29)(47)(19)(15)(25) 26
29
11
(42)(29) 
Acquisition
2



 
Ending balance of AUM$1,715
$1,664
$1,639
$1,625
$1,625
3 %6 %$1,824
$1,771
$1,727
$1,648
$1,715
3 %6%
(a)
Excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.business.
(b)
Includes currency overlay AUM.


Business description

Our Investment Management business consists of our affiliated investment management boutiques, wealth managementWealth Management business and global distribution companies. See pages 2319 and 2420 of our 20152016 Annual Report for additional information on our Investment Management business.

Review of financial results

Investment management fees are dependent on the overall level and mix of AUM and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. Assets under management were $1.72 trillion atincreased 6% compared with Sept. 30, 2016 compared with $1.63 trillion at Sept. 30, 2015, an increase of 6%. The increase primarily reflectsreflecting higher market values, partially offset bynet inflows and the unfavorablefavorable impact of a strongerthe weaker U.S. dollar (principally versus the British pound). The increase compared with June 30, 2017 primarily reflects the favorable impact of the weaker U.S. dollar (principally versus the British pound), higher market values and net inflows.

 
Net long-term inflows of $1fixed income and multi-asset and alternative investments were offset by outflows of index, equity and liability-driven investments in the third quarter of 2017. Net short-term inflows of $10 billion in the third quarter of 20162017 were a combinationresult of $3 billion of inflows into actively managed strategiesincreased distribution through our liquidity portals. Market and $2 billion of outflows from index strategies. Net short-term outflows were $1 billionregulatory trends have driven investable assets toward investments in the third quarter of 2016.lower fee asset management products, which negatively impacted our investment management fees.

Total revenue was $958 million, an increase of 3%increased 4% compared with the third quarter of 20152016 and 2%1% (unannualized) compared with the second quarter of 2016.2017. Both increases primarily reflect higher investment management and performance fees.

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


BNY Mellon 17


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

Investment management fees in the Investment Management business increased 4% compared with the third quarter of 2016 and 3% (unannualized) compared with the second quarter of 2017. Both increases primarily reflect higher equity market values and seed capital gains, partially offset by losses on hedging activitiesmoney market fees. The increase compared with the second quarter of 2017 also reflects the favorable impact of a weaker U.S. dollar.

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

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

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

Noninterest expense, excluding amortization of intangible assets, increased 1% compared with the third quarter of 2016 and 1% (unannualized) compared with the second quarter of 2017. The increase compared with the third quarter of 2015 also2016 primarily reflects higher other and distribution and servicing expenses, partially offset by lower severance expense. The increase compared with the second quarter of 2017 primarily reflects higher distribution and servicing expense.

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

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

Revenue generated in the Investment Management business included 40% from non-U.S. sources in the



BNY Mellon 17


third quarter Net interest revenue increased 3% primarily due to higher interest rates and average loans, partially offset by lower average deposits. Noninterest expense, excluding amortization of 2016, compared with 42% in the third quarter of 2015 and 40% in the second quarter of 2016.

Investment management fees in the Investment Management business were $837 million, an increase of 4% compared with the third quarter of 2015 and 4% (unannualized) compared with the second quarter of 2016. The increase compared with the third quarter of 2015intangible assets, increased 1% primarily reflectsreflecting higher market values and money market fees,incentives expense, driven by stronger performance, partially offset by the unfavorablefavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows of assets under management in prior periods. The increase compared with the second quarter of 2016 primarily reflects higher market values..

Performance fees were $8 million compared with $7 million in the third quarter of 2015 and $9 million in the second quarter of 2016.

Distribution and servicing fees were $49 million compared with $37 million in the third quarter of 2015 and $49 million in the second quarter of 2016. The increase compared with the third quarter of 2015 primarily reflects higher money market fees.

Other revenue was a loss of $18 million compared with a loss of $5 million in the third quarter of 2015 and a loss of $10 million in the second quarter of 2016. Both decreases primarily reflect losses on hedging activity and investments, partially offset by higher seed capital gains. The decrease compared with the third quarter of 2015 also reflects payments to Investment Services related to higher money market fees.

Net interest revenue was $82 million compared with $83 million in the third quarter of 2015 and $82 million in the second quarter of 2016. The decrease compared with the third quarter of 2015 primarily reflects the impact of changes in the internal crediting rates beginning in the first quarter of 2016, partially offset by record average loans and higher average deposits. Average loans increased 20% compared with the third quarter of 2015 and 3% compared with
the second quarter of 2016, while average deposits
increased 2% compared with the third quarter of 2015 and 1% compared with the second quarter of 2016. The increases in average loans were driven by our program to extend banking solutions to high net worth clients.

Noninterest expense, excluding amortization of intangible assets, was $680 million, an increase of 2% compared with the third quarter of 2015 and a decrease of 1% (unannualized) compared with the second quarter of 2016. The increase compared with the third quarter of 2015 was primarily driven by higher distribution and servicing expense as a result of lower money market fee waivers and higher incentive and severance expenses, partially offset by the impact of a stronger U.S. dollar. The decrease compared with the second quarter of 2016 primarily reflects lower other expenses, partially offset by higher incentive and severance expenses.

Year-to-date 2016 compared with year-to-date 2015

Income before taxes totaled $707 million in the first nine months of 2016 compared with $758 million in the first nine months of 2015. Income before taxes excluding amortization of intangible assets (Non-GAAP) was $767 million compared with $831 million in the first nine months of 2015. Fee and other revenue decreased $128 million compared with the first nine months of 2015, primarily reflecting net outflows in prior periods, the unfavorable impact of a stronger U.S. dollar and losses on hedging activity, partially offset by higher money market fees. Net interest revenue increased $12 million compared with the first nine months of 2015, primarily due to higher average loans and deposits, partially offset by the impact of changes in the internal crediting rates beginning in the first quarter of 2016. Noninterest expense, excluding amortization of intangible assets, decreased $49 million compared with the first nine months of 2015, primarily reflecting lower incentive expense and the favorable impact of the stronger U.S. dollar, partially offset by higher distribution and servicing expense as a result of lower money market fee waivers.



18 BNY Mellon


Investment Services business

(dollars in millions, unless otherwise noted)    YTD16
 3Q16 vs.  vs.
3Q16
2Q16
1Q16
4Q15
3Q15
2Q16
3Q15
 YTD16
YTD15
YTD15
    YTD17
(dollar amounts in millions, unless otherwise noted) 3Q17 vs.  vs.
3Q17
2Q17
1Q17
4Q16
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Revenue:          
Investment services fees:          
Asset servicing$1,039
$1,043
$1,016
$1,009
$1,034
 % % $3,098
$3,089
 %$1,081
$1,061
$1,038
$1,043
$1,039
2 %4 % $3,180
$3,098
3 %
Clearing services347
350
348
337
345
(1)1
 1,045
1,033
1
381
393
375
354
347
(3)10
 1,149
1,045
10
Issuer services336
233
244
199
312
44
8
 813
777
5
288
241
250
211
336
20
(14) 779
813
(4)
Treasury services136
137
129
135
135
(1)1
 402
411
(2)141
139
139
139
136
1
4
 419
402
4
Total investment services fees1,858
1,763
1,737
1,680
1,826
5
2
 5,358
5,310
1
1,891
1,834
1,802
1,747
1,858
3
2
 5,527
5,358
3
Foreign exchange and other trading revenue177
161
168
150
179
10
(1) 506
572
(12)154
145
153
157
177
6
(13) 452
506
(11)
Other (a)
148
130
125
127
129
14
15
 403
338
19
142
136
129
128
148
4
(4) 407
403
1
Total fee and other revenue2,183
2,054
2,030
1,957
2,134
6
2
 6,267
6,220
1
2,187
2,115
2,084
2,032
2,183
3

 6,386
6,267
2
Net interest revenue715
690
679
664
662
4
8
 2,084
1,958
6
777
761
707
713
715
2
9
 2,245
2,084
8
Total revenue2,898
2,744
2,709
2,621
2,796
6
4
 8,351
8,178
2
2,964
2,876
2,791
2,745
2,898
3
2
 8,631
8,351
3
Provision for credit losses1
(7)14
8
7
N/M
N/M
 8
20
N/M(2)(3)

1
N/M (5)8
N/M
Noninterest expense (ex. amortization of intangible assets)1,812
1,819
1,770
1,791
1,853

(2) 5,401
5,549
(3)1,837
1,889
1,812
1,786
1,812
(3)1
 5,538
5,401
3
Amortization of intangible assets39
40
38
40
41
(3)(5) 117
122
(4)37
38
37
38
39
(3)(5) 112
117
(4)
Total noninterest expense1,851
1,859
1,808
1,831
1,894

(2) 5,518
5,671
(3)1,874
1,927
1,849
1,824
1,851
(3)1
 5,650
5,518
2
Income before taxes$1,046
$892
$887
$782
$895
17 %17 % $2,825
$2,487
14 %$1,092
$952
$942
$921
$1,046
15 %4 % $2,986
$2,825
6 %
Income before taxes (ex. amortization of intangible assets)Non-GAAP
$1,085
$932
$925
$822
$936
16 %16 % $2,942
$2,609
13 %$1,129
$990
$979
$959
$1,085
14 %4 % $3,098
$2,942
5 %
         
Pre-tax operating margin36%33%33%30%32%  34%30% 37%33%34%34%36%  35%34%

Pre-tax operating margin (ex. provision for credit losses and amortization of intangible
assets) - Non-GAAP
37%34%35%32%34%  35%32% 
Adjusted pre-tax operating margin (ex. provision for credit losses and amortization of intangible assets)Non-GAAP
38%34%35%35%37%  36%35%

         
Investment services fees as a percentage of noninterest
expense (ex. amortization of intangible assets)
103%97%98%94%99%  99%96% 103%97%99%98%103%  100%99%

         

Securities lending revenue$42
$42
$42
$39
$33
 %27 % $126
$114
11 %$41
$42
$40
$44
$42
(2)%(2)% $123
$126
(2)%
  

       
Metrics:  

       
Average loans$44,329
$43,786
$45,004
$45,844
$46,222
1 %(4)% $44,373
$45,709
(3)%$38,038
$40,931
$42,818
$45,832
$44,329
(7)%(14)% $40,578
$44,373
(9)%
Average deposits$220,316
$221,998
$215,707
$229,241
$232,250
(1)%(5)% $219,344
$235,381
(7)%$198,299
$200,417
$197,690
$213,531
$220,316
(1)%(10)% $198,796
$219,344
(9)%
  

       

AUC/A at period end (in trillions) (b)
$30.5
$29.5
$29.1
$28.9
$28.5
3 %7 % $30.5
$28.5
7 %$32.2
$31.1
$30.6
$29.9
$30.5
4 %6 % $32.2
$30.5
6 %
Market value of securities on loan at period end (in billions) (c)
$288
$278
$300
$277
$288
4 % % $288
$288
 %$382
$336
$314
$296
$288
14 %33 % $382
$288
33 %
 



       

Asset servicing: 



       

Estimated new business wins
(AUC/A) (in billions)
$150
$167
$40
$49
$84




   $166
$152
$109
$141
$150
    
 



        
Depositary Receipts: 



   
Number of sponsored programs1,094
1,112
1,131
1,145
1,176
(2)%(7)%   
 



   
Clearing services: 



        
Average active clearing accounts (U.S. platform) (in thousands)
5,942
5,946
5,947
5,959
6,107
 %(3)%   6,203
6,159
6,058
5,960
5,942
1 %4 %   
Average long-term mutual fund assets (U.S. platform)$443,112
$431,150
$415,025
$437,260
$447,287
3 %(1)%   $500,998
$480,532
$460,977
$438,460
$443,112
4 %13 %   
Average investor margin loans (U.S. platform)$10,834
$10,633
$11,063
$11,575
$11,806
2 %(8)%   $8,886
$9,812
$10,740
$10,562
$10,834
(9)%(18)%   
 



    



   
Depositary Receipts: 



   
Number of sponsored programs938
1,025
1,050
1,062
1,094
(8)%(14)%   
     
Broker-Dealer: 



        
Average tri-party repo balances (in billions)
$2,212
$2,108
$2,104
$2,153
$2,142
5 %3 %   $2,534
$2,498
$2,373
$2,307
$2,212
1 %15 %   
(a)
Other revenue includes investment management fees, financing-related fees, distribution and servicing revenue and investment and other income.
(b)Includes the AUC/A of CIBC Mellon of $1.2$1.3 trillion at Sept. 30, 2016, $1.12017 and $1.2 trillion at June 30, 2016 and2017, March 31, 2017, Dec. 31, 2016 and $1.0 trillion at Dec. 31, 2015 and Sept. 30, 2015.2016.
(c)Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, which totaled $68 billion at Sept. 30, 2017, $66 billion at June 30, 2017, $65 billion at March 31, 2017, $63 billion at Dec. 31, 2016 and $64 billion at Sept. 30, 2016, $56 billion at June 30, 2016 and March 31, 2016, $55 billion at Dec. 31, 2015 and $61 billion at Sept. 30, 2015.2016.
N/M - Not meaningful.


BNY Mellon 19


Business description

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

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

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

We offer asset servicing, clearing services, as well as global payment/working capital solutionsissuer services and treasury services to global financial institutionalour clients.

Our BNY Mellon’s comprehensive suite of financialasset servicing solutions includes: global custody, globalforeign exchange, fund services, securities lending,finance, investment manager outsourcing, performance and risk analytics, alternative investment services, securities clearance, collateral management, corporate trust, American and global depositary receipt programs, cash management solutions, payment services, liquiditybroker-dealer services, and other linked revenues, principally foreign exchange, global clearingcollateral and execution, managed account services and global prime brokerage solutions. Our clients include corporations, public funds and government agencies, foundations and endowments; global financial institutions including banks, broker-dealers, asset managers, insurance companies and central banks; financial intermediaries and independent registered investment advisors; hedge fund managers; and funds that we manage through our Investment Management business. We help our clients service their financial assets through a network of offices and service delivery centers in 35 countries across six continents.liquidity services.

The results of this business are driven by a number of factors, which include: the level of transaction activity; the range of services provided, which may include custody, accounting, fund administration, daily valuations, performance measurement and risk analytics, securities lending, and investment manager back-office outsourcing; the number of accounts; and the market value of assets under custody and/or administration. Market interest rates impact both securities lending revenue and the earnings on client balances. Business expenses are driven by staff, technology investment, equipment and space required to support the services provided by the business and the cost of execution, clearance and custody of securities.

We are one of the leading global securities servicing providers with $30.5 trillion of AUC/A at Sept. 30, 2016. We areAs one of the largest custodians for U.S. corporatefund accounting providers and public pension plansa trusted partner, we offer services to ensure the safekeeping of assets in capital markets globally. These services include financial reporting, tax reporting services, calculating and we service 50% of the top-50 endowments. We are a leadingreporting net asset values (“NAV”), computing yields, maintaining brokerage account records, and providing
 
custodian in the UK, servicing aroundadministrative support to clients so they may meet their Securities and Exchange Commission (“SEC”) and other compliance requirements.

Our alternative investment services and structured products business provides a fifthfull range of UK pensions that require a custodian,solutions for alternative investment managers, including prime custody, fund accounting, and with approximately 20% of such assets for the sector in our custody. Globalization tends to drive cross-borderclient and regulatory reporting services. We also support exchange-traded funds and unit investment trusts, providing fund administration, custody, basket creation and capital flows, which increases the opportunity to provide solutions to our clients. The changing regulatory environment is also driving client demand for new solutionsdissemination, authorized participant interaction and order processing, among other services.

BNY Mellon isSecurities finance delivers solutions on both an agency and principal basis. The principal finance program supports a leader in both globaldiverse group of client segments, including hedge and U.S. Government securities clearance. We settle securities transactions in over 100 marketsliquid alternative funds and handle most of the transactions cleared through the Federal Reserve Bank of New York for 19 of the 23 primary dealers. We are a leader in servicing tri-party collateral with approximately $2.2 trillion serviced globally. We currently service approximately $1.4 trillion, or approximately 86%, of the $1.6 trillion tri-party repo market in the U.S.

Global Collateral Services serves broker-dealers andother institutional investors facing expanding collateral management needs as a result of current and emerging regulatory and market requirements. Global Collateral Services brings together BNY Mellon’s global capabilities in segregating, optimizing, financing and transforming collateral on behalf of clients, including its market leading broker-dealer collateral management, securities lending, collateral financing, liquidity and derivatives services teams.clients.

In securities lending, we are one of the largest lenders of U.S. Treasuryliquidity services, our market leading portal enables cash investments for institutional clients via money market funds, deposit products, and direct investments in money market securities, and depositary receiptsincludes fund research and service a lending pool of approximately $3.0 trillion in 33 markets.analytics.

We servedOur broker-dealer services business clears and settles equity and fixed-income transactions globally and serves as depositarycustodian for 1,094 sponsored American and global depositary receipt programs at Sept. 30, 2016, acting in partnership with leading companies from 63 countries - an estimated 57% global market share.tri-party repo collateral worldwide.

Clearing services, primarily Pershing LLC, an indirect subsidiary of BNY Mellon (“Pershing”) and its affiliates, provideprovides business and technology solutions to approximately 1,500 financial organizations globally, by delivering dependable operational support, robust trading services, flexible technology, and an expansive array of investment and retirement solutions, practice management support and service excellence.

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

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



20 BNY Mellon


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

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

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

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

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

Review of financial results

AUC/A totaled $30.5increased 6% compared with Sept. 30, 2016 to a record $32.2 trillion, an increase from $28.5 trillionprimarily reflecting higher market values, the favorable impact of a weaker U.S. dollar and net new business. AUC/A consisted of
37% equity securities and 63% fixed income securities at Sept. 30, 2015. The increase was primarily driven by higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar. AUC/A consisted of2017, compared with 34% equity securities and 66% fixed income securities at both Sept. 30, 2016 and Sept. 30, 2015.2016.

Investment services fees were $1.9 billion, an increase ofincreased 2% compared with the third quarter of 20152016 and 5%3% (unannualized) compared with the second quarter of 20162017, reflecting the following factors:

Asset servicing fees (global custody,(custody, fund services, broker-dealer services, securities finance, collateral and Global Collateral Services) were $1.039 billionliquidity services) increased 4% compared with $1.034 billion in the third quarter of 20152016 and $1.043 billion in2% (unannualized) compared with the second quarter of 2016.2017. The increase compared with the third quarter of 20152016 primarily reflects higher moneyequity market feesvalues and securities lending revenue, partially offset by the unfavorable impact of a stronger U.S. dollar and downsizing of the UK transfer agency business.
Clearing services fees were $347 million compared with $345 millionnet new business, including growth in the third quarter of 2015 and $350 million in the second quarter of 2016. The increase compared with the third quarter of 2015 was primarily driven by higher money market fees,collateral management, partially offset by the impact of previously disclosed lostdownsizing the retail UK transfer agency business.
Issuer services fees (Corporate Trust and Depositary Receipts) were $336 million compared with $312 million in the third quarter of 2015 and $233 million in the second quarter of 2016. The increase compared with the third quarter of 2015 primarily reflects increased activity in Depositary Receipts and higher money market fees in Corporate Trust. The increase compared with the second quarter of 20162017 was primarily reflects seasonallydriven by the favorable impact of a weaker U.S. dollar and higher fees in Depositary Receipts.equity market values.
Treasury
Clearing services fees were $136 millionincreased 10% compared with $135 million in the third quarter of 20152016 primarily driven by higher money market fees and $137 milliongrowth in long-term mutual fund assets. Clearing services fees decreased 3% (unannualized) compared with the second quarter of 2016.2017 primarily reflecting lower clearance volumes.

Foreign exchangeIssuer services fees (Depositary Receipts and other trading revenue totaled $177 millionCorporate Trust) decreased 14% compared with $179 million in the third quarter of 20152016 and $161 million inincreased 20% (unannualized) compared with the second quarter of 2016.2017. The decrease compared with the third quarter of 20152016 primarily reflects fewer corporate actions, lost business and lower volumesfees due to a reduction in shares outstanding in certain depositary receipts programs, partially offset by higher Corporate Trust revenue. The increase compared with the second quarter of 2017 primarily reflects seasonality in Depositary Receipts revenue and volatility. The decreasehigher Corporate Trust revenue.
Treasury services fees (global payments, trade finance and cash management) increased 4% compared with the third quarter of 2015 also reflects the continued trend of clients migrating to lower margin products. The increase2016 and 1% (unannualized) compared with the second quarter of 2016 2017 primarily reflectingprimarily reflects higher Depositary Receipt-related foreign exchange activity,payment volumes, partially offset by lower volatility.

Other revenue was $148 million compared with $129 million in the third quarter of 2015 and $130 million in the second quarter of 2016. Both comparisons reflect increased payments from Investment Management related to higher money market fees,compensating



BNY Mellon 21


balance credits provided to clients, which reduces fee revenue and termination fees relatedincreases 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 lost business in our clearing services business. The increasecomply with new regulations and reduce their operating costs.

Foreign exchange and other trading revenue decreased 13% compared with the third quarter of 2015 was2016 primarily reflecting lower volatility and lower Depositary Receipt-related foreign exchange activity, partially offset by certain fees paid to introducing brokershigher volumes. Foreign exchange and lower financing-related fees. The increaseother trading revenue increased 6% (unannualized) compared with the second quarter of 2017 primarily reflecting higher volumes.

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

Net interest revenue was $715 million compared with $662 million in the third quarter of 2015 and $690 million in the second quarter of 2016. The increaseincreased 9% compared with the third quarter of 20152016 primarily reflectsreflecting the impact of the first quarter of 2016 changes in the internal creditinghigher interest rates, for deposits. The increasepartially offset by lower average deposits and loans. Net interest revenue increased 2% (unannualized) compared with the second quarter of 20162017 primarily reflectsreflecting higher asset yields and lower interest on deposits.rates.

Noninterest expense, excluding amortization of intangible assets, was $1.81 billion compared with $1.85 billionin thethird quarter of 2015 and $1.82 billion in the second quarter of 2016. The decreaseincreased 1% compared with the third quarter of 20152016 and decreased 3% (unannualized) compared with the second quarter of 2017. The increase primarily reflects additional technology related-costs, partially offset by lower staff expense. The decrease primarily reflects lower otherconsulting expense, volume-related clearing and legal expenses. Bothsub-custodian expenses and lower business development expense.

 
decreases also reflect lower sub-custodian and business development expenses, partially offset by higher incentive expenses and the annual employee merit increase.

Year-to-date 20162017 compared with year-to-date 20152016

Income before taxes totaled $2.8 billion in the first nine months of 2016 compared with $2.5 billion in the first nine months of 2015. Income before taxes excluding amortization of intangible assets (Non-GAAP) increased $333 million. Fee and other revenue increased $47 million, or 1%,6% compared with the first nine months of 20152016, primarily driven by revenue growth of 3%, partially offset by a 3% increase in noninterest expense, excluding amortization of intangible assets. Fee and other revenue increased 2% primarily reflecting higher investmentclearing services fees and other revenue,asset servicing fees, partially offset by lower foreign exchange and other trading revenue. The $126 million increase in clearing services fees primarily reflects higher money market fees and growth in long-term mutual fund assets. The increase in asset servicing fees primarily reflects net interestnew business, including growth in collateral management and higher equity market values, partially offset by the impact of downsizing the retail UK transfer agency business and the unfavorable impact of a stronger U.S. dollar. The decrease in foreign exchange and other trading revenue primarily reflects the impact of changes in the internal creditinglower volatility and lower Depositary Receipt-related foreign exchange activity. Net interest revenue increased 8% primarily due to higher interest rates, forpartially offset by lower average deposits. Noninterest expense, excluding amortization of intangible amortization, decreased $148 millionassets, increased 3% primarily due toreflecting higher expenses from regulatory and compliance costs and additional technology investments, partially offset by lower litigation professional, legalexpense and other purchased services and sub-custodian expenses.the favorable impact of a stronger U.S. dollar.


22 BNY Mellon



Other segment

  
(dollars in millions)3Q16
2Q16
1Q16
4Q15
3Q15
YTD16
YTD15
(in millions)3Q17
2Q17
1Q17
4Q16
3Q16
YTD17
YTD16
Revenue:  
Fee and other revenue$100
$95
$129
$89
$59
$324
$247
$69
$113
$72
$42
$100
$254
$324
Net interest (expense) revenue(23)(5)4
12
14
(24)73
(20)(22)(1)38
(23)(43)(24)
Total revenue77
90
133
101
73
300
320
49
91
71
80
77
211
300
Provision for credit losses(20)(3)(3)159
(7)(26)(26)(2)(4)(8)1
(20)(14)(26)
Noninterest expense (ex. amortization of intangible assets and M&I and restructuring charges (recoveries))88
53
141
150
97
282
284
Amortization of intangible assets



1

2
M&I and restructuring charges (recoveries)
3
(1)(4)(2)2
2
Noninterest expense (ex. M&I and restructuring charges)77
28
106
108
88
211
282
M&I and restructuring charges

1
2

1
2
Total noninterest expense88
56
140
146
96
284
288
77
28
107
110
88
212
284
Income (loss) before taxes$9
$37
$(4)$(204)$(16)$42
$58
Income (loss) before taxes (ex. amortization of
intangible assets and M&I and restructuring charges (recoveries))Non-GAAP
$9
$40
$(5)$(208)$(17)$44
$62
(Loss) income before taxes$(26)$67
$(28)$(31)$9
$13
$42
(Loss) income before taxes (ex. M&I and restructuring charges)Non-GAAP
$(26)$67
$(27)$(29)$9
$14
$44
  
Average loans and leases$1,941
$1,703
$1,917
$2,673
$2,656
$1,853
$2,287
$1,182
$1,302
$1,341
$2,142
$1,941
$1,275
$1,853


See page 2026 of our first quarter 2016 Form 10-QAnnual Report for a description ofadditional information on the Other segment.

Review of financial results

Total fee and other revenue increased $41decreased $31 million compared with the third quarter of 20152016 and $5$44 million compared with the second quarter of 2016. Both increases primarily reflect higher asset-related
gains. The increase compared with the third quarter of 2015 also reflects the positive net impact of foreign currency hedging activities and higher fixed income trading.

Net interest revenue decreased $37 million compared with the third quarter of 2015 and $18 million compared with the second quarter of 2016. Both decreases were driven by the results of the leasing



22 BNY Mellon


portfolio inclusive of changes to internal transfer pricing in the first quarter of 2016.

The provision for credit losses was a credit of $20 million in the third quarter of 2016 primarily reflecting a net recovery of $13 million recorded in the financial institutions portfolio. The recovery reflects the receipt of trust assets from the bankruptcy proceedings of Sentinel in excess of the carrying value.

Noninterest expense, excluding amortization of intangible assets, M&I and restructuring charges (recoveries), decreased $9 million compared with the third quarter of 2015 and increased $35 million compared with the second quarter of 2016.2017. The decrease compared with the third quarter of 20152016 primarily reflects lower furnitureother income, driven by increased losses on our investments in renewable energy, and equipmentlower asset-related and net occupancy expenses, partially offset by higher other expense.securities gains. The increasedecrease compared with the second quarter of 2016 was2017 primarily driven by the annual employee merit increase and higher professional, legal and other purchased services.

Year-to-date 2016 compared with year-to-date 2015

Income before taxesreflects lease-related gains recorded in the Other segment was $42 million in the first nine monthssecond quarter of 2016 compared with $58 million in the first nine months of 2015. Total revenue decreased $20 million primarily reflecting2017 and lower net interest revenue,income from corporate/bank-owned life insurance, partially offset by higher net securities gains.

Net interest expense decreased $3 million compared with the positive net impactthird quarter of foreign currency hedging activities2016 and $2 million compared with the second quarter of 2017. Both decreases primarily reflect higher fixed income trading revenue. interest rates.

Noninterest expense, excluding amortization of intangible assets, M&I and restructuring charges, decreased $2$11 million compared with the third quarter of 2016 and increased $49 million compared with the second quarter of 2017. The decrease was primarily reflectingdriven by lower equipmentlitigation and other expenses. The increase was primarily driven by higher staff expense resulting from a methodology change in the second quarter of 2017 for allocating employee benefits expense to the business segments with no impact to consolidated results. The increase was partially offset by lower other and professional, legal and other purchased services partially offsetexpenses.
Year-to-date 2017 compared with year-to-date 2016

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

Critical accounting estimates

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 20152016 Annual Report. Our critical accounting estimates are those related to the allowance for loan losses and allowance for lending-related commitments, fair value of financial instruments and derivatives, other-than-temporary impairment (“OTTI”), goodwill and other intangibles, and pension accounting, as referenced below.

Critical policyReference
Allowance for loan losses and allowance for lending-related commitments20152016 Annual Report, pages 33 - 35.29-31.
Fair value of financial instruments and derivatives20152016 Annual Report, pages 35 - 37.31-32.
OTTI20152016 Annual Report, page 37.33.
Goodwill and other intangibles2015 Annual Report, pages 37 - 38 and Note 5 beginning onSecond quarter 2017 Form 10-Q, page 74.24.
Pension accounting20152016 Annual Report, pages 38 - 40.34-36.


BNY Mellon 23


Consolidated balance sheet review

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

We also seek to ensure that the overall liquidity risk, including intra-day liquidity risk, that we undertake stays within our risk appetite. The objective of our balance sheet management strategy is to maintain a balance sheet that is characterized by strong liquidity and asset quality, ready access to external funding sources at competitive rates and a strong capital structure that supports our risk-taking activities and is adequate to absorb potential losses. In managing the balance sheet, appropriate consideration is given to balancing the competing needs of maintaining sufficient levels of liquidity and complying with applicable regulations and supervisory expectations while optimizing profitability.

At Sept. 30, 2016,2017, total assets were $374$354 billion compared with $394$333 billion at Dec. 31, 2015.2016. The decreaseincrease in total assets was primarily driven by higher interest-bearing deposits with the Federal Reserve and other central banks, partially offset by lower customer deposits.loans. Deposits totaled $261$231 billion at Sept. 30, 20162017 and $280$221 billion at Dec. 31, 2015.2016, and were driven by higher interest-bearing deposits in non-U.S. offices. At Sept. 30, 2016,2017, total interest-bearing deposits were 49%50% of total interest-earning assets, compared with 54%51% at Dec. 31, 2015.

Total assets averaged $351 billion in the third quarter of 2016 compared with $373 billion in the third quarter of 2015 and $374 billion in the second quarter of 2016. The year-over-year and sequential decreases in average total assets were primarily driven by lower levels of deposits and federal funds purchased and securities sold under repurchase agreements.

Total deposits averaged $237 billion in the third quarter of 2016 compared with $255 billion in the third quarter of 2015 and $249 billion in the second quarter of 2016. The year-over-year decrease in average total deposits primarily reflects a decrease in deposits located in foreign offices and noninterest-bearing deposits, partially offset by higher time deposits. The sequential decrease primarily reflects a decrease in deposits located in foreign offices, noninterest-bearing deposits and time deposits.

At Sept. 30, 2016,2017, we had $49$43 billion of liquid funds (which include interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements) and $86$82 billion of cash (including $80$76 billion of overnight deposits with the Federal Reserve and other central banks) for a total of $135$125 billion of available funds. This compares with available funds of $159$104 billion at Dec. 31, 2015. The decrease in available funds primarily reflects the decrease of overnight deposits with the Federal Reserve and other central banks.



BNY Mellon 23


2016. Total available funds as a percentage of total assets was 36%were 35% at Sept. 30, 20162017 compared with 40%31% at Dec. 31, 2015. Of the $49 billion in2016. For additional information on our liquid funds held at Sept. 30, 2016, $14 billion was placed in interest-bearing deposits with large, highly-rated global financial institutions with a weighted-average life to maturity of approximately 43 days. Of the $14 billion, $4 billion was placed with banks in the Eurozone.and available funds, see “Liquidity and dividends.”

Investment securities were $119.0$120.0 billion, or 32%34% of total assets, at Sept. 30, 2016,2017, compared with $119.2$114.7 billion, or 30%34% of total assets, at Dec. 31, 2015.2016. The decreaseincrease in investment securities primarily reflects decreasesadditional investments in Agency RMBS, sovereign debt/sovereign guaranteedcommercial mortgage-
backed securities other asset-backed(“MBS”) and residential mortgage-backed securities state and political subdivisions, other RMBS and commercial MBS,(“RMBS”), partially offset by increasesfewer investments in Agency commercial MBSconsumer asset-backed securities (“ABS”). For additional information on our investment securities portfolio, see “Investment securities” and U.S. Treasury securities.Note 4 of the Notes to Consolidated Financial Statements.

Loans were $66.0$59.1 billion, or 18%17% of total assets, at Sept. 30, 2016,2017, compared with $63.7$64.5 billion, or 16%19% of total assets, at Dec. 31, 2015.2016. The increasedecrease in loans was primarily reflects higher overdrafts, wealth management loans and mortgages and commercial real estate loans, partially offsetdriven by lower margin loans and loans to financial institutions. For additional information on our loan portfolio, see “Loans” and Note 5 of the Notes to Consolidated Financial Statements.

Long-term debt totaled $24.4$28.4 billion at Sept. 30, 20162017 and $21.5$24.5 billion at Dec. 31, 2015.2016. The increase reflects the issuanceissuances of $5.0$4.75 billion, of senior debt, including $2.0 billion in the third quarter of 2016, and an increase in the fair value of hedged long-term debt, partially offset by the maturity of $2.45 billion$500 million and the redemption of trust preferred securities. For additional information on long-term debt, including $1.0 billion in the third quarter of 2016.see “Liquidity and dividends.”

The Bank of New York Mellon Corporation total shareholders’ equity increased to $39.7$40.5 billion from $38.0$38.8 billion at Dec. 31, 2015. The increase primarily reflects earnings retention, issuance of preferred stock, approximately $383 million resulting from stock awards, the exercise of stock options and stock issued for employee benefit plans, and an increase in the unrealized gain2016. For additional information on our investment securities portfolio. The increase was partially offset by share repurchases and foreign currency translation adjustments.capital, see “Capital.”

Country risk exposure

We have exposure to certain countries and territories that have had a heightened focus due to recent events.
Where appropriate, we offset the creditwith higher risk associated with the exposure in these countries with collateral that has been pledged, which primarily consists of cash or marketable securities, or by transferring the risk to a third-party guarantor in another country or territory.profiles. Exposure described below reflects the country of operations and risk of the immediate counterparty. We continue to monitor our exposure to these and other countries as part of our Risk Managementrisk management process. See “Risk management” in our 20152016 Annual Report for additional information on how our exposures are managed.

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

Italy Spain, Portugal and GreeceSpain

Over the past severalEvents in recent years there have been concerns about European sovereign debtresulted in increased focus on Italy and its impact on the European banking system, as a number of European countries, including Italy, Spain, Portugal and Greece, experienced credit deterioration.Spain. We had total net exposure to Italy and Spain of $3.8 billion at Sept. 30, 2016 including $1.5 billion to Italy and $2.3 billion to Spain. The total net exposure was $3.6 billion at Dec. 31, 2015, including $1.6$1.3 billion to Italy and $2.0 billion to Spain. ExposureSpain at Sept. 30, 2017. We had net exposure of $1.2 billion to Italy and $2.0 billion to Spain at Dec. 31, 2016. At both Sept. 30, 2017 and Dec. 31, 2016, exposure to Italy and Spain at both periods primarily consisted of investment grade


24 BNY Mellon


sovereign debt and European Floating Rate notes. At both Sept. 30, 2016 and Dec. 31, 2015, investmentdebt. Investment securities exposure totaled $1.4$1.2 billion in Italy and $2.0$1.7 billion in Spain. At bothSpain at Sept. 30, 20162017 and $1.1 billion in Italy and $1.8 billion in Spain at Dec. 31, 2015, BNY Mellon had exposure of less than $1 million to Portugal and Greece. 2016.

Brazil

Current conditions in Brazil have resulted in increased focus on its economic and political stability. We have operations in Brazil providing investment services and investment management services. In addition, at Sept. 30, 20162017 and Dec. 31, 2015,2016, we had total net exposure to Brazil of $1.7$1.4 billion and $2.2$1.3 billion, respectively. This included $1.6$1.2 billion and $2.1$1.3 billion, respectively, in loans, which are primarily short-term trade finance loans extended to large financial institutions. At Sept. 30, 2017 and Dec. 31, 2016, we held $71$140 million and $73 million, respectively, of noninvestment grade sovereign debt.



24 BNY Mellon


debt and at Dec. 31, 2015, we held $95 million of investment grade sovereign debt. Turkey

Other countries and territories

Events in recent years have resulted in increased focus on exposuresexposure to Turkey, Russia and Puerto Rico. Related to Turkey, weTurkey. We mainly provide treasury and issuer services, as well as foreign exchange products primarily to the top-tentop-10 largest financial institutions in the country. As of Sept. 30, 2017 and Dec. 31, 2016, our exposure totaled $727$780 million and $713 million, respectively, consisting primarily of syndicated credit facilities and trade finance loans. At Sept. 30, 2016 and Dec. 31, 2015, our exposure to Russia was $66 million and $63 million, respectively. Related to Puerto Rico, BNY Mellon had margin loan
exposure that was collateralized with a concentration of Puerto Rican securities. The margin loan exposure was approximately $35 million and $50 million, at Sept. 30, 2016 and Dec. 31, 2015.

Investment securities

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


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

Investment securities
portfolio


(dollars in millions)
June 30, 2016
 
3Q16
change in
unrealized
gain (loss)

Sept. 30, 2016
Fair value
as a % of amortized
cost (a)

Unrealized
gain (loss)

 RatingsJune 30, 2017
 
3Q17
change in
unrealized
gain (loss)

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

Unrealized
gain (loss)

 
Ratings (b)
 
BB+
and
lower
   
BB+
and
lower
 
Fair
value

 
Amortized
cost

Fair
value

  
AAA/
AA-
A+/
A-
BBB+/
BBB-
Not
rated
Fair
value

 
Amortized
cost

Fair
value

  
AAA/
AA-
A+/
A-
BBB+/
BBB-
Not
rated
Agency RMBS$49,506
 $(70)$48,498
$48,987
 101%$489
 100%%%%%$49,544
 $81
$50,121
$49,917
 100%$(204) 100%%%%%
U.S. Treasury23,893
 (154)25,112
25,135
 100
23
 100




25,325
 (5)25,256
25,159
 100
(97) 100




Sovereign debt/sovereign guaranteed (b)(c)
15,605
 12
15,690
15,998
 102
308
 74
5
21


14,025
 6
13,951
14,102
 101
151
 72
6
21
1

Non-agency RMBS (c)(d)
1,529
 5
1,166
1,463
 80
297
 
1
1
90
8
1,239
 9
885
1,185
 84
300
 
1
3
87
9
Non-agency RMBS797
 8
741
757
 94
16
 8
4
16
71
1
627
 9
555
594
 97
39
 7
4
17
71
1
European floating rate
notes (d)(e)
1,104
 15
869
851
 98
(18) 71
22
7


523
 (1)393
387
 98
(6) 63
37



Commercial MBS6,316
 8
7,236
7,310
 101
74
 98
2



10,574
 5
11,051
11,033
 100
(18) 99
1



State and political subdivisions3,765
 (24)3,494
3,578
 102
84
 80
17


3
3,299
 1
3,109
3,141
 101
32
 80
17


3
Foreign covered bonds (e)(f)
2,376
 (4)2,395
2,433
 102
38
 100




2,471
 1
2,612
2,626
 101
14
 100




Corporate bonds1,610
 (3)1,585
1,638
 103
53
 16
68
16


1,318
 4
1,262
1,275
 101
13
 17
69
14


CLOs2,482
 16
2,530
2,534
 100
4
 100




2,642
 1
2,542
2,550
 100
8
 99


1

U.S. Government agencies1,889
 3
1,820
1,808
 99
(12) 100

���


U.S. government agencies2,210
 2
2,480
2,496
 101
16
 100




Consumer ABS2,454
 7
2,202
2,203
 100
1
 98

2


1,330
 1
1,152
1,157
 100
5
 89
4
5
2

Other (f)(g)
4,002
 (23)3,931
3,961
 101
30
 60

38

2
3,758
 (8)4,118
4,122
 100
4
 81
17


2
Total investment securities$117,328
(g)$(204)$117,269
$118,656
(g)101%$1,387
(g)(h)91%2%5%2%%$118,885
(h)$106
$119,487
$119,744
(h)100%$257
(h)(i)93%3%3%1%%
(a)Amortized cost before impairments.
(b)Represents ratings by S&P, or the equivalent.
(c)Primarily consists of exposure to UK, France, Germany, Spain, Italy and Italy.the Netherlands.
(c)(d)These RMBS were included in the former Grantor Trust and were marked-to-market in 2009. We believe these RMBS would receive higher credit ratings if these ratings incorporated, as additional credit enhancements, the difference between the written-down amortized cost and the current face amount of each of these securities.
(d)(e)Includes RMBS and commercial MBS. Primarily consists of exposure to UK and the Netherlands.
(e)(f)Primarily consists of exposure to Canada, UK,Australia, the Netherlands, Norway and Netherlands.UK.
(f)(g)
Includes commercial paper with a fair value of $1.7 billion$700 million and $1.5 billion700 million and money market funds with a fair value of $865$896 million and $931939 million at June 30, 20162017 and Sept. 30, 2016,2017, respectively.
(g)(h)
Includes net unrealized losses on derivatives hedging securities available-for-sale of $1,023$251 million at June 30, 20162017 and $1,001$238 million at Sept. 30, 20162017.
(h)(i)
Unrealized gains of $728$324 million at Sept. 30, 20162017 related to available-for-sale securities.securities, net of hedges.


The fair value of our total investment securities portfolio was $118.7 billion at Sept. 30, 2016 compared with $118.8 billion at Dec. 31, 2015. The decrease primarily reflects a decrease in sovereign
debt/sovereign guaranteed and consumer ABS, partially offset by an increase in commercial MBS.




BNY Mellon 25


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

At Sept. 30, 2016,2017, the total investment securities portfolio had a net unrealized pre-tax gain of $1.4 billion$257 million compared with $357a pre-tax loss of $221 million at Dec. 31, 2015,2016, including the impact of related hedges. The increase in the net unrealized pre-tax gain was primarily driven by a decrease in marketlong-term interest rates.

The unrealized gain, net of tax, on our available-for-sale investment securities portfolio included in accumulated other comprehensive income (“OCI”) was $517
$226 million at Sept. 30, 2016,2017, compared with $329$45 million at Dec. 31, 2015.2016.

At Sept. 30, 2016, 91%2017, 93% of the securities in our portfolio were rated AAA/AA-, unchanged compared with 90% at Dec. 31, 2015.2016.

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



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

Net premium amortization and discount accretion of investment securities (a)
  
(dollars in millions)3Q16
2Q16
1Q16
4Q15
3Q15
3Q17
2Q17
1Q17
4Q16
3Q16
Amortizable purchase premium (net of discount) relating to investment securities:  
Balance at period end$2,267
$2,251
$2,233
$2,319
$2,433
$2,053
$2,111
$2,058
$2,188
$2,267
Estimated average life remaining at period end (in years)
4.5
4.4
4.5
4.7
4.6
5.0
5.0
4.9
4.9
4.5
Amortization$163
$169
$163
$161
$176
$140
$134
$138
$146
$163
Accretable discount related to the prior restructuring of the investment securities portfolio:  
Balance at period end$331
$342
$325
$355
$401
$302
$279
$299
$315
$331
Estimated average life remaining at period end (in years)
5.9
5.9
6.0
6.1
6.0
6.5
6.3
6.2
6.2
5.9
Accretion$24
$26
$27
$29
$33
$24
$25
$25
$25
$24
(a)Amortization of purchase premium decreases net interest revenue while accretion of discount increases net interest revenue. Both were recorded on a level yield basis.


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

Net securities gains (losses)Net securities gains (losses)Net securities gains (losses) 
(in millions)3Q16
2Q16
3Q15
YTD16YTD153Q17
2Q17
3Q16
YTD17
YTD16
Agency RMBS$9
$5
$7
$22
$8
$4
$
$9
$5
$22
U.S. Treasury1
(1)(1)
4
Foreign covered bonds

1
10
2




10
U.S. Treasury(1)4
8
4
42
Non-agency RMBS(1)4
(1)1
(3)(1)
(1)(2)1
Other17
8
7
28
13
15
1
17
26
28
Total net securities gains$24
$21
$22
$65
$62
$19
$
$24
$29
$65


On a quarterly basis, we perform our impairment analysis using several factors, including projected loss severities and default rates. In the third quarter of 2016,2017, this analysis resulted in other-than-temporary credit losses of $1 million primarily in our non-agency RMBS portfolio. At Sept. 30, 2016,2017, if we were to increase or decrease each of our projected loss severitiesseverity and default rates by 100 basis points on each of the positions in our non-agency RMBS
portfolio, including the securities previously held by the Grantor Trust, credit-related impairment charges
on these securities would have increased or decreased by less than $1 million (pre-tax). See Note 34 of the Notes to Consolidated Financial Statements for the projected weighted-average default rates and loss severities.

The following table shows the fair value of the European floating rate notes by geographical location at Sept. 30, 2016.2017. The net unrealized loss on these securities was $18$6 million at Sept. 30, 2016,2017, compared with $24$11 million at Dec. 31, 2015.2016.

European floating rate notes at Sept. 30, 2016 (a)
European floating rate notes at Sept. 30, 2017 (a)
European floating rate notes at Sept. 30, 2017 (a)
(in millions)RMBS
Other
Total fair
value

RMBS
Other
Total fair
value

United Kingdom$460
$59
$519
$169
$58
$227
Netherlands270

270
160

160
Ireland62

62
Total fair value$792
$59
$851
$329
$58
$387
(a)71%Sixty-three percent of these securities are in the AAA to AA- ratings category.




26 BNY Mellon


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



26 BNY Mellon


Loans 

Total exposure – consolidatedSept. 30, 2016 Dec. 31, 2015Sept. 30, 2017 Dec. 31, 2016
(in billions)Loans
Unfunded
commitments

Total
exposure

 Loans
Unfunded
commitments

Total
exposure

Loans
Unfunded
commitments

Total
exposure

 Loans
Unfunded
commitments

Total
exposure

Non-margin loans:      
Financial institutions$14.7
$36.1
$50.8
 $15.9
$36.0
$51.9
$11.9
$32.7
$44.6
 $14.7
$33.7
$48.4
Commercial2.7
16.7
19.4
 2.3
18.2
20.5
3.0
16.6
19.6
 2.6
17.5
20.1
Subtotal institutional17.4
52.8
70.2
 18.2
54.2
72.4
14.9
49.3
64.2
 17.3
51.2
68.5
Wealth management loans and mortgages15.1
1.3
16.4
 13.3
1.6
14.9
16.3
1.1
17.4
 15.6
1.3
16.9
Commercial real estate4.7
3.3
8.0
 3.9
3.3
7.2
4.9
3.5
8.4
 4.7
3.2
7.9
Lease financings1.8

1.8
 1.9

1.9
1.3

1.3
 1.7

1.7
Other residential mortgages0.9

0.9
 1.1

1.1
0.7

0.7
 0.9

0.9
Overdrafts7.3

7.3
 4.5

4.5
5.8

5.8
 5.5

5.5
Other1.2

1.2
 1.2

1.2
1.3

1.3
 1.2

1.2
Subtotal non-margin loans48.4
57.4
105.8
 44.1
59.1
103.2
45.2
53.9
99.1
 46.9
55.7
102.6
Margin loans17.6
0.1
17.7
 19.6
0.6
20.2
13.9

13.9
 17.6
0.1
17.7
Total$66.0
$57.5
$123.5
 $63.7
$59.7
$123.4
$59.1
$53.9
$113.0
 $64.5
$55.8
$120.3
 


At Sept. 30, 2016,2017, total exposures were $123.5of $113.0 billion a slight increasedecreased 6% compared with Dec. 31, 2015. Increases in overdrafts2016, primarily reflecting lower margin loans and theexposure to financial institutions, partially offset by higher wealth management loans and mortgages portfolio were offset by decreases in margin loans and exposure in the financial institutions and commercial portfolios.mortgages.
 
Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios comprised 57% of our total lending exposure at both Sept. 30, 20162017 and 59% at Dec. 31, 2015.2016. Additionally, a substantial portionmost of our overdrafts relate to financial institutions.


Financial institutions

The financial institutions portfolio is shown below.

Financial institutions
portfolio exposure
(dollar amounts in billions)
Sept. 30, 2016 Dec. 31, 2015Sept. 30, 2017 Dec. 31, 2016
Loans
Unfunded
commitments

Total
exposure

 
% Inv.
grade

 
% due
<1 yr.

 Loans
Unfunded
commitments

Total
exposure

Loans
Unfunded
commitments

Total
exposure

% Inv.
grade

% due
<1 yr.

 Loans
Unfunded
commitments

Total
exposure

Securities industry$3.8
$20.9
$24.7
 99% 99% $3.1
$20.6
$23.7
$2.9
$19.0
$21.9
99%99% $3.8
$19.2
$23.0
Asset managers1.6
6.5
8.1
97
87
 1.5
6.2
7.7
Banks7.8
2.0
9.8
 70
 86
 9.4
2.1
11.5
6.3
1.4
7.7
68
94
 7.9
2.0
9.9
Asset managers1.5
6.2
7.7
 99
 82
 2.0
5.6
7.6
Insurance0.1
4.3
4.4
 99
 29
 0.2
4.5
4.7
0.1
3.4
3.5
99
17
 0.1
3.8
3.9
Government0.1
1.1
1.2
 93
 47
 0.1
1.9
2.0

1.0
1.0
91
46
 0.1
0.9
1.0
Other1.4
1.6
3.0
 99
 30
 1.1
1.3
2.4
1.0
1.4
2.4
98
45
 1.3
1.6
2.9
Total$14.7
$36.1
$50.8
 93% 83% $15.9
$36.0
$51.9
$11.9
$32.7
$44.6
93%86% $14.7
$33.7
$48.4
 


The financial institutions portfolio exposure was $50.8$44.6 billion at Sept. 30, 2016,2017, compared with $51.9$48.4 billion at Dec. 31, 2015.2016. The decrease primarily reflects lower loansexposure in the banks portfolio and lower unfunded commitments in the government portfolio, partially offset by an increase in exposure in the securities industry portfolio.portfolios.

Financial institution exposures are high-quality, with 93% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification at Sept. 30, 2016.2017. Each customer is assigned an internal credit rating, which is mapped to
 
an equivalent external rating agency grade based upon a number of dimensions, which are continually evaluated and may change over time. The exposure to financial institutions is generally short-term. Of these exposures, 83%86% expire within one year and 60%61% expire within 90 days. In addition, 79%80% of the financial institutions exposure is secured. For example, securities industry clients and asset managers often borrow against marketable securities held in custody.



BNY Mellon 27


For ratings of non-U.S. counterparties, our internal credit rating is generally capped at a rating equivalent



BNY Mellon 27


to the sovereign rating of the country where the counterparty resides, regardless of the internal credit rating assigned to the counterparty or the underlying collateral.

At Sept. 30, 2017, the secured intraday credit provided to dealers in connection with their tri-party repo activity totaled $18.5 billion and was primarily included in the securities industry portfolio. Dealers secure the outstanding intraday credit with high-quality liquid collateral having a market value in excess of the amount of the outstanding credit.
Our bank exposure primarily relates to our global trade finance. These exposures are short-term in nature, with 86%94% due in less than one year. The investment grade percentage of our bank exposure was 70%68% at Sept. 30, 2016,2017, compared with 86%69% at Dec. 31, 2015. The decrease in the investment grade percentage reflects the impact of the downgrade in
the sovereign rating of Brazil to noninvestment grade. Our exposure in Brazil includes $1.6 billion in loans, which are primarily short-term trade finance loans extended to large financial institutions.2016.

The asset manager portfolio exposures areexposure was high-quality with 99%97% of the exposures meeting our investment grade equivalent ratings criteria as of Sept. 30, 2016.2017. These exposures are generally short-term liquidity facilities, with the vast majority to regulated mutual funds.


Commercial

The commercial portfolio is presented below.

Commercial portfolio exposureSept. 30, 2016 Dec. 31, 2015Sept. 30, 2017 Dec. 31, 2016
(dollar amounts in billions)Loans
Unfunded
commitments

Total
exposure

 
% Inv.
grade

 
% due
<1 yr.

 Loans
Unfunded
commitments

Total
exposure

Loans
Unfunded
commitments

Total
exposure

% Inv.
grade

% due
<1 yr.

 Loans
Unfunded
commitments

Total
exposure

Manufacturing$1.1
$6.0
$7.1
 93% 12% $0.6
$6.3
$6.9
$1.4
$6.3
$7.7
96%22% $1.1
$6.7
$7.8
Services and other0.7
4.7
5.4
 94
 20
 0.8
5.5
6.3
0.9
4.4
5.3
95
28
 0.6
4.3
4.9
Energy and utilities0.6
4.7
5.3
 94
 9
 0.6
4.9
5.5
0.6
4.5
5.1
95
7
 0.6
4.7
5.3
Media and telecom0.3
1.3
1.6
 94
 1
 0.3
1.5
1.8
0.1
1.4
1.5
95
15
 0.3
1.8
2.1
Total$2.7
$16.7
$19.4
 94% 12% $2.3
$18.2
$20.5
$3.0
$16.6
$19.6
95%19% $2.6
$17.5
$20.1
 


The commercial portfolio exposure decreased to $19.4$19.6 billion at Sept. 30, 2016,2017, from $20.5$20.1 billion at Dec. 31, 2015,2016, primarily reflecting decreaseslower exposure in all portfolios except for the manufacturingmedia and telecom portfolio.

Utilities-related exposure represents approximately three-quarters78% of the energy and utilities portfolio. The remaining exposure in the energy and utilities portfolio, which includes exposure to refining, integrated companies, exploration and production companies, refining, pipelines and pipelines,integrated companies, was 78%76% investment grade at both Sept. 30, 2016, compared with 94% at2017 and Dec. 31, 2015.2016.

The following table summarizes the percentage of the financial institutions and commercial portfolio exposures that are investment grade.

Percentage of the portfolios that are investment gradePercentage of the portfolios that are investment gradePercentage of the portfolios that are investment grade 
Sept. 30, 2016
June 30, 2016
March 31, 2016
Dec. 31, 2015
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
March 31, 2017
Dec. 31, 2016
Sept. 30, 2016
Financial institutions93%92%93%96%96%93%93%93%92%93%
Commercial94%94%93%94%94%95%96%95%94%94%


 
Our credit strategy is to focus on investment grade clients that are active users of our non-credit services. The execution of our strategy has resulted in 93% of our financial institutions portfolio and 94%95% of our commercial portfolio rated as investment grade at Sept. 30, 2016.2017.

Wealth management loans and mortgages

Our wealth management exposure was $16.4$17.4 billion at Sept. 30, 2016,2017, compared with $14.9$16.9 billion at Dec. 31, 2015.2016. Wealth management loans and mortgages primarily consist of loans to high net worthhigh-net-worth individuals, which are secured by marketable securities and/or residential property. Wealth management mortgages are primarily interest-only, adjustable rateadjustable-rate mortgages with a weighted-average loan-to-value ratio of 61%62% at origination. In the wealth management portfolio, less than 1% of the mortgages were past due at Sept. 30, 2016.2017.

At Sept. 30, 2016,2017, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 24%; New York - 20%19%; Massachusetts - 12%11%; Florida - 7%8%; and other - 37%38%.




28 BNY Mellon


Commercial real estate

Our commercial real estate exposure totaled $8.4 billion at Sept. 30, 2017, compared with $7.9 billion at Dec. 31, 2016. Our income-producing commercial real estate facilities are focused on experienced owners and are structured with moderate leverage based on existing cash flows. Our commercial real estate lending activities also include construction and renovation facilities. Our client base consists of experienced developers and long-term holders of real estate assets. Loans are approved on the basis of existing or projected cash flows and supported by appraisals and knowledge of local market conditions. Development loans are structured with moderate leverage, and in many instances, involve some level of recourse to the developer. Our commercial real estate exposure totaled $8.0 billion at Sept. 30, 2016, compared with $7.2 billion at Dec. 31, 2015.

At Sept. 30, 2016, 61%2017, 59% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type, with 46%45% secured by residential buildings, 36%35% secured by office buildings, 12% secured by retail properties and 6%8% secured by other categories. Approximately 98%97% of the unsecured portfolio consists of real estate investment trusts (“REITs”) and real estate operating companies, which are both predominantly investment grade.

At Sept. 30, 2016,2017, our commercial real estate portfolio consists of the following concentrations: New York metro - 43%40%; REITs and real estate operating companies - 38%40%; and other - 19%20%.

Lease financings

The leasing portfolio exposure totaled $1.8$1.3 billion at Sept. 30, 2016,2017 compared with $1.9$1.7 billion at Dec. 31, 2015.2016. At Sept. 30, 2016,2017, approximately 93%94% of the leasing portfolio exposure was investment grade, or investment grade equivalent.

At Sept. 30, 2016,2017, the lease financingfinancings portfolio consisted of exposures backed by well-diversified assets, primarilyincluding large-ticket transportation equipment.

Other residential mortgages

The other residential mortgages portfolio primarily consists of 1-4 family residential mortgage loans and totaled $0.9 billion$741 million at Sept. 30, 20162017 and $1.1 billion$854 million at Dec. 31, 2015.2016. Included in this portfolio at Sept. 30, 2017 are $181 million of mortgage loans
 
2016 are $236 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007 that are predominantly prime mortgage loans, with a small portion of Alt-A loans. As of Sept. 30, 2016,2017, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 13%11% of the serviced loan balance was at least 60 days delinquent. The properties securing the prime and Alt-A mortgage loans were located (in order of concentration) in California, Florida, Virginia, the tri-state area (New York, New Jersey and Connecticut) and Maryland.

To determine the projected loss on the prime and Alt-A mortgage portfolios, we calculate the total estimated defaults of these mortgages and multiply that amount by an estimate of realizable value upon sale in the marketplace (severity).

Overdrafts

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

Other loans

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

Margin loans

Margin loans are collateralized with marketable securities, and borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. Margin loans included $7.2$4.2 billion at Sept. 30, 20162017 and $7.8$6.3 billion at Dec. 31, 2015 of loans2016 related to a term loan program that offers fully collateralized loans to broker-dealers.

Asset quality and allowance for credit losses

Over the past several years, we have improved our risk profile through greaterOur credit strategy is to focus on investment grade clients who are active users of our non-credit services, de-emphasizing broad-based loan growth.services. Our primary exposure to the credit risk of a customer consists of funded loans, unfunded formal contractual commitments to lend, standby letters of credit and overdrafts associated with our custody and securities clearance businesses.



BNY Mellon 29


The role of credit has shifted to one that complements our other services instead of as a lead product. We believe credit solidifies customer relationships and, through a disciplined allocation of capital, we can
earn acceptable rates of return as part of an overall relationship.

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


Allowance for credit losses activitySept. 30, 2016
June 30, 2016
Dec. 31, 2015
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Dec. 31, 2016
Sept. 30, 2016
(dollar amounts in millions)
Non-margin loans$45,196
$47,516
$46,868
$48,411
Margin loans$17,557
$18,594
$19,573
$19,414
13,872
14,157
17,590
17,557
Non-margin loans48,411
45,601
43,708
43,557
Total loans$65,968
$64,195
$63,281
$62,971
$59,068
$61,673
$64,458
$65,968
Beginning balance of allowance for credit losses$280
$287
280
$278
$270
$276
$274
$280
Provision for credit losses(19)(9)163
1
(6)(7)7
(19)
Net recoveries (charge-offs): 
Net recoveries: 
Other residential mortgages1
1


Financial institutions13

(170)



13
Other residential mortgages
1
2
1
Foreign
1


Net recoveries (charge-offs)13
2
(168)1
Net recoveries1
1

13
Ending balance of allowance for credit losses$274
$280
$275
$280
$265
$270
$281
$274
Allowance for loan losses$148
$158
$157
$181
$161
$165
$169
$148
Allowance for lending-related commitments126
122
118
99
104
105
112
126
Allowance for loan losses as a percentage of total loans0.22%0.25%0.25%0.29%0.27%0.27%0.26%0.22%
Allowance for loan losses as a percentage of non-margin loans0.31
0.35
0.36
0.42
0.36
0.35
0.36
0.31
Total allowance for credit losses as a percentage of total loans0.42
0.44
0.43
0.44
0.45
0.44
0.44
0.42
Total allowance for credit losses as a percentage of non-margin loans0.57
0.61
0.63
0.64
0.59
0.57
0.60
0.57


Net recoveries of $13 million in the third quarter of 2016 were recorded in the financial institutions portfolio. The recovery reflects the receipt of trust assets from the bankruptcy proceedings of Sentinel in excess of the carrying value of $171 million. Net recoveries were $2 million in the second quarter of 2016 and $1 million in the third quarter of 2015.2017 and second quarter of 2017. Net recoveries in the third quarter of 2016 of $13 million were recorded in the financial institutions portfolio.

The provision for credit losses was a credit of $6 million in the third quarter of 2017, a credit of $7 million in the second quarter of 2017 and a credit of $19 million in the third quarter of 2016 driven by net recoveries of $13 million. The provision for credit losses was a credit of $9 million in the second quarter of 2016 and $1 million in the third quarter of 2015.2016.

The total allowance for credit losses was $265 million at Sept. 30, 2017, $281 million at Dec. 31, 2016 and $274 million at Sept. 30, 2016, $275 million at Dec. 31, 2015 and $280 million at Sept. 30, 2015.2016. The ratio of the total allowance for credit losses to non-margin loans was 0.59% at Sept. 30, 2017, 0.60% at Dec. 31, 2016 and 0.57% at Sept. 30, 2016, 0.63% at Dec. 31, 2015 and 0.64% at Sept. 30, 2015.2016. The ratio of the allowance for loan losses to non-margin loans was 0.36% at Sept. 30, 2017, 0.36% at Dec. 31, 2016 and 0.31% at Sept. 30, 2016 compared with 0.36% at Dec. 31, 2015 and 0.42% at Sept. 30, 2015.2016.

We had $17.6$13.9 billion of secured margin loans on our balance sheet at Sept. 30, 20162017 compared with $19.6$17.6 billion at Dec. 31, 20152016 and $19.4$17.6 billion at Sept. 30, 2015.2016. We have rarely suffered a loss on these types
of loans and do not allocate any of our allowance for credit losses to them. As a result, we believe that the ratio of total allowance for credit losses as a percentage of non-margin loans is a more appropriate metric to measure the adequacy of the reserve.

The allowance for loan losses and allowance for lending-related commitments represent management’s estimate of probable losses inherent in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. For additional information on this process, see “Critical
accounting estimates” in our 20152016 Annual Report.

To the extent actual results differ from forecasts or management’s judgment, the allowance for credit losses may be greater or less than future charge-offs.

Based on an evaluation of the allowance for credit losses as discussed in “Critical accounting estimates” and Note 1 of the Notes to Consolidated Financial Statements, both in our 20152016 Annual Report, we have allocated our allowance for credit losses as follows.




30 BNY Mellon


 Allocation of allowanceSept. 30, 2016
June 30, 2016
Dec. 31, 2015
Sept. 30, 2015
 
 Commercial33%32%30%27%
 Commercial real estate23
23
22
22
 Foreign11
13
13
14
 Other residential mortgages10
10
12
13
 Financial institutions11
10
11
10
 
Wealth management (a)
7
7
7
8
 Lease financing5
5
5
6
 Total100%100%100%100%
 Allocation of allowanceSept. 30, 2017
June 30, 2017
Dec. 31, 2016
Sept. 30, 2016
 
 Commercial31%30%29%33%
 Commercial real estate28
28
26
23
 Foreign13
13
13
11
 Financial institutions9
8
9
11
 
Wealth management (a)
8
9
8
7
 Other residential mortgages8
8
10
10
 Lease financing3
4
5
5
 Total100%100%100%100%
(a)Includes the allowance for wealth management mortgages.


The allocation of the allowance for credit losses is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the loss.

The credit rating assigned to each credit is a significant variable in determining the allowance. If each credit were rated one grade better, the allowance would have decreased by $68$65 million, while if each credit were rated one grade worse, the allowance would have increased by $134$109 million. Similarly, if the loss given default were one rating worse, the


30 BNY Mellon


allowance would have increased by $45$41 million, while if the loss given default were one rating better, the allowance would have decreased by $37$29 million. For impaired credits, if the net carrying value of the
loans was 10% higher or lower, the allowance would have decreased or increased by less than $1 million, respectively.



Nonperforming assets

The following table shows the distribution of nonperforming assets.

Nonperforming assetsSept. 30, 2016
June 30, 2016
Dec. 31, 2015
Sept. 30, 2017
June 30, 2017
Dec. 31, 2016
(dollars in millions)
Nonperforming loans:  
Other residential mortgages$93
$97
$102
$80
$84
$91
Wealth management loans and mortgages7
10
11
8
10
8
Financial institutions2
2

Lease financings4
4



4
Commercial real estate1
2
2
Financial institutions
171
171
Total nonperforming loans105
284
286
90
96
103
Other assets owned4
5
6
4
4
4
Total nonperforming assets$109
$289
$292
$94
$100
$107
Nonperforming assets ratio0.17%0.45%0.46%0.16%0.16%0.17%
Nonperforming assets ratio, excluding margin loans0.23
0.63
0.67
0.21
0.21
0.23
Allowance for loan losses/nonperforming loans141.0
55.6
54.9
178.9
171.9
164.1
Allowance for loan losses/nonperforming assets135.8
54.7
53.8
171.3
165.0
157.9
Total allowance for credit losses/nonperforming loans261.0
98.6
96.2
294.4
281.3
272.8
Total allowance for credit losses/nonperforming assets251.4
96.9
94.2
281.9
270.0
262.6


Nonperforming assets activitySept. 30, 2016
June 30, 2016
Dec. 31, 2015
Sept. 30, 2017
June 30, 2017
Dec. 31, 2016
(in millions)
Balance at beginning of period$289
$292
$123
Balance at beginning of quarter$100
$107
$109
Additions3
4
347
3
2
4
Return to accrual status
(1)(1)(1)

Charge-offs(1)
(171)


Paydowns/sales(182)(6)(6)(8)(9)(6)
Balance at end of period$109
$289
$292
Balance at end of quarter$94
$100
$107


Nonperforming assets were $109 million at Sept. 30, 2016, a decrease of $183decreased $13 million compared with $292 million at Dec. 31, 2015. The decrease in nonperforming loans2016, primarily reflects the receipt of trust assets from the bankruptcy proceedings of Sentinel.reflecting lower other residential mortgages and lease financings.

The nonperforming assets ratio was 0.17%0.16% at Sept. 30, 2016, 0.45%2017, 0.16% at June 30, 20162017 and 0.46%0.17% at Dec. 31, 2015.2016. The ratio of the allowance for loan losses to nonperforming loans was 141.0%178.9% at Sept. 30, 2016, 55.6%2017, 171.9% at June 30, 20162017 and 54.9%164.1% at Dec. 31, 2015.2016. The ratio of the total allowance for credit losses to nonperforming loans was 261.0%294.4% at Sept. 30, 2016, 98.6%2017, 281.3% at June 30, 20162017 and 96.2%272.8% at Dec. 31, 2015. The changes in these ratios at Sept. 30, 2016 compared with both prior periods reflect the decrease in nonperforming assets as a result of the recovery related to Sentinel.




BNY Mellon 31

2016.

Deposits

Total deposits were $261.4$231.0 billion at Sept. 30, 2016, a decrease2017, an increase of 7%4% compared with $279.6$221.5 billion at
Dec. 31, 2016. The increase in deposits primarily reflects higher interest-bearing deposits in non-U.S. offices and noninterest-bearing deposits in U.S. offices, partially offset by lower interest-bearing deposits in U.S. offices.

Noninterest-bearing deposits were $80.4 billion at Sept. 30, 2017 compared with $78.3 billion at Dec. 31, 2015. The decrease in deposits primarily reflects lower interest-bearing deposits in non-U.S. offices. Noninterest-bearing2016. Interest-bearing deposits were $105.6$150.6 billion at Sept. 30, 20162017 compared with $96.3$143.2 billion at Dec. 31, 2015. Interest-bearing deposits were $155.8 billion at Sept. 30, 2016 compared with $183.3 billion at Dec. 31, 2015.2016.

Short-term borrowings

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

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



BNY Mellon 31


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

Federal funds purchased and securities sold under
repurchase agreements
Federal funds purchased and securities sold under
repurchase agreements
Federal funds purchased and securities sold under
repurchase agreements
Quarter endedQuarter ended
(dollars in millions)Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
Maximum month-end balance during the quarter$11,184
$23,355
$12,367
$21,850
$19,786
$11,184
Average daily balance$9,585
$18,204
$14,796
$21,403
$17,970
$9,585
Weighted-average rate during the quarter0.24%0.28%(0.04)%1.30%0.84%0.24%
Ending balance$8,052
$7,611
$8,824
$10,314
$10,934
$8,052
Weighted-average rate at period end0.25%0.34%(0.08)%1.35%0.93%0.25%


Fluctuations of federal funds purchased and securities sold under repurchase agreements between periods resulted from changes in overnight borrowing opportunities. The increase in the weighted-average rates, for the third quarter of 2016 compared with the third quarter of 2015Sept. 30, 2016, primarily reflects the December 2015 increaseincreases in the Fed Funds effective rate.

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

Payables to customers and broker-dealers
Quarter endedQuarter ended
(dollars in millions)Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
Maximum month-end balance during the quarter$21,162
$21,642
$22,236
$21,563
$21,622
$21,162
Average daily balance (a)
$20,616
$21,144
$21,941
$21,280
$21,078
$20,616
Weighted-average rate during the quarter (a)
0.07%0.05%0.06%0.42%0.30%0.07%
Ending balance$21,162
$21,172
$22,236
$21,176
$21,622
$21,162
Weighted-average rate at period end0.07%0.06%0.06%0.43%0.34%0.07%
(a)
The weighted-average rate is calculated based on, and is applied to, the average interest-bearing payables to customers and broker-dealers, which were $16,873$18,516 million in the third quarter of 2016, $16,9352017, $20,609 million in the second quarter of 20162017 and $11,504$16,873 million in the third quarter of 20152016.


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 paperQuarter endedQuarter ended
(dollars in millions)Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
Maximum month-end balance during the quarter$1,000
$4,950
$4,800
$4,277
$2,193
$1,000
Average daily balance$1,173
$3,781
$2,195
$2,736
$2,215
$1,173
Weighted-average rate during the quarter0.35%0.37%0.11%1.15%0.95%0.35%
Ending balance$
$
$
$2,501
$876
$
Weighted-average rate at period end%%%1.18%0.98%%


The Parent’s commercial paper program was discontinued in August 2015. In the first quarter of 2016, The Bank of New York Mellon, our largest bank subsidiary, began issuingissues commercial paper that matures within 364397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The increase in commercial paper balances, compared with prior periods, primarily reflects management of overall liquidity. The increase in weighted-average rates, compared with prior periods, primarily reflects increases in the Fed Funds effective rate and the issuance of higher-yielding term commercial paper.




32 BNY Mellon


Information related to other borrowed funds is presented below.

Other borrowed fundsQuarter endedQuarter ended
(dollars in millions)Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
Maximum month-end balance during the quarter$993
$1,098
$648
$3,353
$2,379
$993
Average daily balance$874
$847
$628
$2,197
$1,193
$874
Weighted-average rate during the quarter0.76%0.97%1.18%1.38%1.24%0.76%
Ending balance$993
$1,098
$648
$3,353
$1,338
$993
Weighted-average rate at period end0.75%0.44%1.15%1.56%1.69%0.75%


Other borrowed funds primarily include borrowings from the Federal Home Loan Bank (“FHLB”), overdrafts of sub-custodian account balances in our Investment Services businesses, capital lease obligations and borrowings under lines of credit by our Pershing subsidiaries. Overdrafts typically relate to timing differences for settlements. FluctuationsThe increase in other borrowed funds balances compared with both prior periods primarily reflect changesreflects borrowings from the FHLB. The increase compared with Sept. 30, 2016 also reflects an increase in overdraftscapital lease obligations as a result of sub-custodian account balances in our Investment Services businesses.converting an operating lease to a capital lease.


32 BNY Mellon


Liquidity and dividends

BNY Mellon defines liquidity as the ability of the Parent and its subsidiaries to access funding or convert assets to cash quickly and efficiently, or to rollover or issue new debt, especially during periods of market stress, at a reasonable cost and in order to meet its short-term (up to one year) obligations. LiquidityFunding liquidity risk is the risk that BNY Mellon cannot meet its cash and collateral obligations at a reasonable cost for both expected and unexpected cash flows,flow and collateral needs without adversely affecting daily operations or our financial condition. LiquidityFunding liquidity risk can arise from cash flowfunding mismatches, market constraints from the inability to convert assets to cash, the inability to hold or raise cash, in the markets,low overnight deposits, deposit run-off or contingent liquidity events.

We also
manage liquidity risks on an intra-day basis, in a manner designed to ensurebasis. Intraday liquidity risk is the risk that we canBNY Mellon cannot access required funds during the business day to make payments or settle immediate obligations, oftenusually in real time. Intraday liquidity risk can arise from timing mismatches, market constraints from an inability to convert assets to cash, an inability to raise cash intraday, low overnight deposits and/or adverse stress events.
Changes in economic conditions or exposure to credit, market, operational, legal and reputational risks also can affect BNY Mellon’s liquidity risk profile and are considered in our liquidity risk framework.

The Parent’s liquidity policy is to have access to sufficient unencumbered cash and cash equivalents on hand at each quarter-end to cover forecasted debt redemptions, net interest payments and net tax payments for the following 18 month18-month period, and to provide sufficient collateral to satisfy transactions subject to Section 23A of the Federal Reserve Act. As of Sept. 30, 2016,2017, the Parent was in compliance with this policy. For additional information on our liquidity policy, see “Risk Management - Liquidity risk” in our 20152016 Annual Report. Our overall approach to liquidity management is further described in “Liquidity and dividends” in our 20152016 Annual Report.

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

Available and liquid fundsSept. 30, 2017
Dec. 31, 2016
Average
(dollars in millions)3Q17
2Q17
3Q16
Available funds:     
Liquid funds:     
Interest-bearing deposits with banks$15,256
$15,086
$15,899
$14,832
$14,066
Federal funds sold and securities purchased under resale agreements27,883
25,801
28,120
26,873
26,376
Total liquid funds43,139
40,887
44,019
41,705
40,442
Cash and due from banks5,557
4,822
4,961
4,972
4,189
Interest-bearing deposits with the Federal Reserve and other central banks75,808
58,041
70,430
69,316
74,102
Total available funds$124,504
$103,750
$119,410
$115,993
$118,733
Total available funds as a percentage of total assets35%31%35%34%34%


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

Total available funds were $125 billion at Sept. 30, 20162017, compared with $104 billion at Dec. 31, 20152016.
The increase was primarily reflects a decreasedue to an increase in overnightinterest-bearing deposits with the Federal Reserve and other central banks, partially offset by an increase in federal funds sold and securities purchased under resale agreements.banks.


Available and liquid fundsSept. 30, 2016
Dec. 31, 2015
 Average
(in millions) 3Q16
2Q16
3Q15
Available funds:      
Liquid funds:      
Interest-bearing deposits with banks$14,416
$15,146
 $14,066
$14,394
$20,549
Federal funds sold and securities purchased under resale agreements34,851
24,373
 26,376
25,813
25,366
Total liquid funds49,267
39,519
 40,442
40,207
45,915
Cash and due from banks4,957
6,537
 4,189
4,141
6,140
Interest-bearing deposits with the Federal Reserve and other central banks80,359
113,203
 74,102
97,788
84,175
Total available funds$134,583
$159,259
 $118,733
$142,136
$136,230
Total available funds as a percentage of total assets36%40% 34%38%36%



BNY Mellon 33


On an average basis for the nine months ended Sept. 30, 20162017 and the nine months ended Sept. 30, 2015,2016, non-core sources of funds, such as money market rate accounts, federal funds purchased and securities sold under repurchase agreements, trading liabilities, commercial paper and other borrowings, were $31.9 billion and $25.9 billion, for both periods. respectively. The increase


BNY Mellon 33


primarily reflects an increase in securities sold under repurchase agreements.

Average foreign deposits, primarily from our European-based Investment Services business, were $94.1 billion for the nine months ended Sept. 30, 2017, compared with $105.6 billion for the nine months ended Sept. 30, 2016 compared with $110.52016. Domestic savings, interest-bearing demand and time deposits averaged $40.0 billion for the nine months ended Sept. 30, 2015. Domestic savings, interest-bearing demand2017 and time deposits averaged $47.8 billion for the nine months ended Sept. 30, 20162016. The decrease primarily reflects a decrease in time deposits, partially offset by an increase in demand deposits.

Average payables to customers and $49.0broker-dealers were $19.4 billion for the nine months ended Sept. 30, 2015. The decrease primarily reflects lower demand deposits. Average payables to customers2017 and broker-dealers were $16.9 billion for the nine months ended Sept. 30, 2016 and $11.2 billion for the nine months ended Sept. 30, 2015.2016. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.

Long-term debt averaged $27.1 billion for the nine months ended Sept. 30, 2017 and $22.8 billion for the nine months ended Sept. 30, 2016, and $20.6reflecting issuances of long-term debt.

Average noninterest-bearing deposits decreased to $72.5 billion for the nine months ended Sept. 30, 2015. Average
noninterest-bearing deposits decreased to2017 from $82.9 billion for the nine months ended Sept. 30, 2016, from $86.5 billion for the nine months ended Sept. 30, 2015, reflecting a decrease in client deposits.

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

Sources of liquidity

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

The Parent had cash of $9.5 billion$416 million at Sept. 30, 2016,2017, compared with $9.1$8.7 billion at Dec. 31, 2015, an increase2016, a decrease of $430 million$8.3 billion, primarily reflecting the issuancetransfer of long-term debt and preferred stock, partially offset by maturities of long-term debt, common stock repurchases and a net decrease in loans from subsidiaries.cash to the IHC pursuant to the support agreement.



34 BNY Mellon


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

Credit ratings at Sept. 30, 20162017       
  Moody’s S&P Fitch DBRS
Parent:       
Long-term senior debtA1 A AA- AA (low)
Subordinated debtA2 A- A+ A (high)
Preferred stockBaa1 BBB BBB A (low)
Trust preferred securitiesA3BBBBBB+A (high)
Outlook - Parent:Stable Stable Stable Stable
 
The Bank of New York Mellon:
Long-term senior debtAa2 AA- AA AA
Subordinated debtAa3 A A+ NR
Long-term depositsAa1 AA- AA+ AA
Short-term depositsP1 A-1+ F1+ R-1 (high)
Commercial paperP1 A-1+ F1+ R-1 (high)
        
BNY Mellon, N.A.:       
Long-term senior debtAa2 AA- 
AA 
(a)AA
Long-term depositsAa1 AA- AA+ AA
Short-term depositsP1 A-1+ F1+ R-1 (high)
        
Outlook - Banks:Stable Stable Stable Stable
(a)Represents senior debt issuer default rating.
NR - Not rated.


In October 2016, S&P stated that in light of the resubmissions by the eight U.S. G-SIBs of their resolution plans, S&P will include the ramifications of structural changes resulting from those resolution
plans in its evaluations of the U.S. G-SIBs’ credit profiles.  If S&P determines that such structuralchanges increase risks to our bondholders, our ratings could be negatively impacted.



34 BNY Mellon


In October 2016, Moody’s noted that while the U.S. G-SIB resolution plans are likely to have moderately negative implications for creditors, Moody’s did not believe that the specific disclosed features of the resolution plans would impact these issuers’ ratings.

Long-term debt totaled $24.4$28.4 billion at Sept. 30, 20162017 and $21.5$24.5 billion at Dec. 31, 2015.2016. The increase reflects the issuanceissuances of $5.0$4.75 billion, of senior debt, including $2.0 billion in the third quarter of 2016, and an increase in the fair value of hedged long-term debt, partially offset by the maturity of $2.45 billion$500 million and the redemption of trust preferred securities. The Parent has $250 million of long-term debt including $1.0 billionthat will mature in the third quarterremainder of 2016.2017.

In October 2016,August 2017, we issued $750 million of floatingfixed rate senior subordinated notes maturing in 20232029 at an annual interest rate of three-month LIBOR plus 105 basis points and $500 million of senior subordinated medium-term notes maturing in 2028 at an annual interest rate of 3.00%3.30%.

In conjunction with our 2016 capital plan, on Aug. 1, 2016, we completed a $1 billion offering of preferred stock, $750 million of which satisfied the contingency for the repurchase of up to $560 million of common stock. We issued 10,000 shares of Series F preferred stock, which have a liquidation preference of $100,000 per share. Dividends on the Series F noncumulative perpetual preferred stock will be paid, if declared by our board of directors, at an annual rate equal to 4.625% on each March 20 and September 20, commencing March 20, 2017, through and including Sept. 20, 2026; and a floating rate equal to three-month LIBOR plus 3.131% on each March 20, June 20, September 20 and December 20, commencing Dec. 20, 2026. See Note 12 of the Notes to Consolidated Financial Statements for additional information on our preferred stock.

The Bank of New York Mellon, our largest bank subsidiary, began issuingissues commercial paper in the first quarter of 2016. The commercial paperthat matures within 364397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The Parent’s commercial paper program was discontinued in August 2015. The average commercial paper borrowings were $1.2$2.7 billion (The Bank of New York Mellon) in the third quarter of 20162017 and $2.2$1.2 billion (Parent) in the third quarter of 2015.2016. Commercial paper outstanding was $2.5 billion at Sept. 30, 2017. There was no commercial paper outstanding at Sept. 30, 2016 and Dec. 31, 2015.2016.

Subsequent to Sept. 30, 2016,2017, our U.S. bank subsidiaries could declare dividends to the Parent of approximately $4.8$6.2 billion, without the need for a regulatory waiver. Currently, The Bank of New York Mellon, our primary subsidiary, is no longer paying regular dividends to the Parent in order to increase its Tier 1 capital in advance of the SLR becoming effective. In addition, at Sept. 30, 2016,2017, non-bank subsidiaries of the Parent had liquid assets of approximately $1.3$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 1917 of the Notes to Consolidated Financial Statements ofin our 20152016 Annual Report.

Pershing LLC, an indirect subsidiary of BNY Mellon, has uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. Pershing LLC has eight separate uncommitted lines of credit amounting to $1.5 billion in aggregate. Average daily borrowingThere were no borrowings under these lines was $2 million, in aggregate, in the third quarter of 2016.2017. Pershing Limited, an indirect UK-based subsidiary of BNY Mellon, has two separate uncommitted lines of credit amounting to $250 million in aggregate in place for liquidity purposes, which are guaranteed by the Parent.aggregate. Average borrowings under these lines were $103$6 million, in aggregate, in the third quarter of 2016.2017.

The double leverage ratio is the ratio of our equity investment in subsidiaries divided by our consolidated parent company equity, which includes our noncumulative perpetual preferred stock plus qualifying trust preferred securities.stock. In short, the double leverage ratio measures the extent to which equity in subsidiaries is financed by parentParent 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 both the


BNY Mellon 35


high level of unencumbered available liquid assets held in its principal subsidiaries (such as central bank deposits and government securities), the Company’s cash generating fee-based business model, with fees representing approximately 80% of revenue, and the dividend capacity of our banking subsidiaries. Our double leverage ratio was 117.2%123.2% at Sept. 30, 2016



BNY Mellon 35


2017 and 115.7%119.1% at Dec. 31, 2015,2016, and within the range targeted by management.

Uses of funds

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

Included in the 2016 capital plan wasIn August 2017, a 12% increase the quarterly cash dividend on common stock to $0.19 per share. This increased quarterly cash dividend was paid on Aug. 12, 2016.to common shareholders of $0.24 per common share. Our common stock dividend payout ratio was 22%23% for the first nine months of 2016.2017. The Federal Reserve’s instructions for the 2016 Comprehensive Capital Analysis & Review (“CCAR”)2017 CCAR provided that, for large bank holding companies like us, dividend payout ratios exceeding 30% of after-tax net income would receive particularly close scrutiny.

In the third quarter of 2016,2017, we repurchased 11.612 million common shares at an average price of $40.18$52.74 per common share for a total cost of $464$650 million.

Liquidity coverage ratio (“LCR”)

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

The following table presents the Company’s consolidated HQLA and LCR as ofat Sept. 30, 2016.2017, and the average HQLA and average LCR for the third quarter of 2017.

Consolidated HQLA and LCRSept. 30, 2017
(dollars in billions)
Securities (a)
$105
Cash (b)
70
Total consolidated HQLA (c)
$175
  
Total consolidated HQLA - average (c)
$162
Average LCR119%
Consolidated HQLA and LCRSept. 30, 2016
(in billions)
Securities (a)
$120
Cash (b)
75
Total consolidated HQLA (c)
$195
  
Liquidity coverage ratio (d)
109%
(a)Primarily includes U.S. Treasury, U.S. agency, sovereign securities, securities of U.S. Government-sponsoredgovernment-sponsored enterprises, investment-grade corporate debt and publicly traded common equity.
(b)Primarily includes cash on deposit with central banks.
(c)Consolidated HQLA presented before haircuts.adjustments. After haircuts and the impact of trapped liquidity, consolidated HQLA totaled $166 billion.$137 billion at Sept. 30, 2017 and averaged $126 billion for the third quarter of 2017.
(d)Based on our interpretation of the final rule issued by the U.S. federal banking agencies to implement the LCR in the U.S. (“Final LCR Rule”).


The U.S. LCR rulesrule became effectivefully phased-in on Jan. 1, 2015,2017 and currently requirerequires BNY Mellon and each of our affected domestic bank subsidiaries to meet an LCR of 90%, increasing toat least 100% when fully phased-in on Jan. 1, 2017. As. The LCR for BNY Mellon and each of Sept. 30, 2016, based on our interpretation of the Final LCR Rule, we believe we and our domestic bank subsidiaries are in compliancewas compliant with applicablethe U.S. LCR requirements on a fully phased-in basis. Following our reviewfor the third quarter of the FDIC’s revised brokered deposits FAQ issued on June 30, 2016, we do not believe this revised guidance will materially impact the LCR for us and our domestic bank subsidiaries.

2017. For additional information on the LCR, see “Supervision and Regulation - Liquidity Standards - Basel III and U.S. Rules and Proposals” in our 20152016 Annual Report.

We also perform liquidity stress tests to ensureevaluate whether the Company maintains sufficient liquidity resources under multiple stress scenarios. Stress tests are based on scenarios that measure liquidity risks under unlikely but plausible events.conditions. We perform these tests under various time horizons ranging from one day to one year in a base case, as well as supplemental tests to determine whether the Company’s liquidity is sufficient for severe market events and firm-specific events. Under our scenario testing program, the results of the tests indicate that the Company has sufficient liquidity.

As part of our resolution planning, we monitor, among other measures, our Resolution Liquidity Adequacy and Positioning (“RLAP”).  The RLAP methodologies are designed to ensure that the liquidity needs of certain key subsidiaries in a stress environment can be met by available resources held at the entity or at the Parent or IHC, as applicable. 



36 BNY Mellon


Statement of cash flows

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

CashNet cash provided by operating activities was $3.4 billion in the nine months ended Sept. 30, 2017, compared with $1.6 billion in the nine months ended Sept. 30, 2016 compared with $4.0 billion in the nine months ended Sept. 30, 2015.2016. In the first nine months of both 2016 and 2015,2017, cash flows fromprovided by operations were principally the result of earnings. In the first nine months of 2016, cash flows provided by operations were principally the result of earnings and changes in trading activities. Cash



36 BNY Mellon


flows from operations in the first nine months of 2016 wereactivities, partially offset by changes in accruals.

CashNet cash used for investing activities was $14.0 billion in the nine months ended Sept. 30, 2017, compared with cash provided by investing activities was
of $21.1 billion in the nine months ended Sept. 30, 2016 compared with cash used for investing activities of $248 million in2016. In the first nine months ended Sept. 30, 2015.of 2017, changes in interest-bearing deposits with the Federal Reserve and other central banks was a significant use of funds. In the first nine months of 2016, the changechanges in interest-bearing deposits with the Federal Reserve and other central banks was a significant source of funds, partially offset by a changechanges in federal funds sold and securities purchased under resale agreements. In

Net cash provided by financing activities was $11.2 billion in the first nine months of 2015, purchases of securities, changes in federal funds sold and securities purchased under resale agreements and changes in loans were significant uses of funds, partially offset by sales, paydowns and maturities of securities available-for-sale and changes in interest-bearing depositsended Sept. 30, 2017, compared with the Federal Reserve and other central banks.
Cashcash used for financing activities wasof $24.2 billion in the nine months ended Sept. 30, 2016 compared with $2.5 billion in2016. In the first nine months ended Sept. 30, 2015.of 2017, the proceeds from the issuance of long-term debt, changes in deposits and increases in commercial paper and other borrowed funds were significant sources of funds, partially offset by common stock repurchased. In the first nine months of 2016, changes in deposits, changes in federal funds purchased and securities sold under repurchase agreements, repayment of long-term debt and treasury stock repurchases were significant uses of funds, partially offset by the issuance of long-term debt. In the first nine months of 2015, the repayment of long-term debt, changes in federal funds purchased and securities sold under repurchase agreements and treasury stock repurchases were significant uses of funds, partially offset by the issuance of long-term debt, changes in payables to customers and broker-dealers and the issuance of preferred stock.



Capital

Capital data
(dollar amounts in millions except per share amounts; common shares in thousands)
Sept. 30, 2016
June 30, 2016
Dec. 31, 2015
Sept. 30, 2017
June 30, 2017
Dec. 31, 2016
Average common equity to average assets10.2%9.6%9.7%10.6%10.5%10.2%
  
At period end:  
BNY Mellon shareholders’ equity to total assets ratio – GAAP (a)
10.6%10.4%9.7%
BNY Mellon common shareholders’ equity to total assets ratio – GAAP (a)
9.7%9.7%9.0%
BNY Mellon tangible common shareholders’ equity to tangible assets of operations
ratio – Non-GAAP (a)
6.5%6.6%6.5%
Total BNY Mellon shareholders’ equity – GAAP$39,695
$38,559
$38,037
Total BNY Mellon common shareholders’ equity – GAAP$36,153
$36,007
$35,485
BNY Mellon shareholders’ equity to total assets ratio11.4%11.3%11.6%
BNY Mellon common shareholders’ equity to total assets ratio10.4%10.3%10.6%
Total BNY Mellon shareholders’ equity$40,523
$39,974
$38,811
Total BNY Mellon common shareholders’ equity$36,981
$36,432
$35,269
BNY Mellon tangible common shareholders’ equity – Non-GAAP (a)
$17,626
$17,349
$16,574
$18,630
$18,106
$16,957
Book value per common share – GAAP (a)
$34.19
$33.72
$32.69
Book value per common share (a)
$36.11
$35.26
$33.67
Tangible book value per common share – Non-GAAP (a)
$16.67
$16.25
$15.27
$18.19
$17.53
$16.19
Closing stock price per common share$39.88
$38.85
$41.22
$53.02
$51.02
$47.38
Market capitalization$42,167
$41,479
$44,738
$54,294
$52,712
$49,630
Common shares outstanding1,057,337
1,067,674
1,085,343
1,024,022
1,033,156
1,047,488
  
Cash dividends per common share$0.19
$0.17
$0.17
$0.24
$0.19
$0.19
Common dividend payout ratio21%23%30%26%22%25%
Common dividend yield (annualized)
1.9%1.8%1.6%
Common dividend yield1.8%1.5%1.6%
(a)See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 4849 for a reconciliation of GAAP to Non-GAAP.




BNY Mellon 37


The Bank of New York Mellon Corporation total shareholders’ equity increased to $39.7$40.5 billion at Sept. 30, 20162017 from $38.0$38.8 billion at Dec. 31, 2015.2016. The increase primarily reflects earnings, retention, issuance of preferred stock, approximately $383foreign currency translation adjustments, $638 million resulting from stock awards, the exercise of stock options and stock issued for employee benefit plans, and an increase in the unrealized gain onin our investment securities portfolio. The increase was
portfolio, partially offset by share repurchases and foreign currency translation adjustments.dividends.

The unrealized gain, net of tax, on our available-for-sale investment securities portfolio recorded in accumulated other comprehensive income was $517$226 million at Sept. 30, 20162017, compared with $329$45 million at Dec. 31, 2015.2016. The increase in the unrealized gain, net of tax, was primarily driven by a declinedecrease in marketlong-term interest rates.



BNY Mellon 37


BNY Mellon’s tangible common shareholders’ equity to tangible assets of operations ratio (Non-GAAP) was 6.5% at both Sept. 30, 2016 and Dec. 31, 2015.

In conjunction with the Federal Reserve’s non-objection to BNY Mellon’s 2016Our 2017 capital plan, submitted in August 2016, we issued $1 billionconnection with our CCAR, included the authorization to repurchase an average of noncumulative perpetual preferred stock, $750 million of which satisfied the contingency for the repurchase of up to $560$650 million of common stock each quarter starting in connection with our 2016 plan.the third quarter of 2017 and continuing through the second quarter of 2018. In the third quarter of 2016,2017, we repurchased 11.612 million common shares at an average price of $40.18$52.74 per common share for a total cost of $464$650 million.

Also included in the 20162017 capital plan was a 12%26% increase in the quarterly cash dividend onto $0.24 per common stock to $0.19 per share. The first payment of the increased quarterly cash dividend was made on Aug. 12, 2016.11, 2017.

Capital adequacy

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

As of Sept. 30, 2017 and Dec. 31, 2016, BNY Mellon and our U.S. bank subsidiaries were “well capitalized.” As of Dec. 31, 2015, BNY Mellon and our U.S. bank subsidiaries, with the exception of BNY Mellon, N.A., were “well capitalized.” As of Dec. 31, 2015, BNY Mellon, N.A. was not “well capitalized” because its Total capital ratio was 9.89%, which was below the 10% “well capitalized” threshold. With the filing of its March 31, 2016 Call Report, BNY Mellon, N.A.’s Total capital ratio was 10.94%, which is above the 10% “well capitalized” threshold.

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 and Business 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.”condition” in our 20152016 Annual Report.

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

The U.S. banking agencies’ capital rules have beenare 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 20152016 Annual Report. BNY Mellon is subject to the U.S. capital rules, which are being gradually phased-in over a multi-year period through 2018.

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



38 BNY Mellon


The transitional capital ratios for Sept. 30, 20162017 and June 30, 20162017 included in the following table below were negatively impacted by the additional phase-in requirements that became effective on Jan. 1, 2016.2017.



38 BNY Mellon


Consolidated and largest bank subsidiary regulatory capital ratiosSept. 30, 2016  Sept. 30, 2017    
Well capitalized
 Minimum
required

 
Capital
ratios

 June 30, 2016
Dec. 31, 2015
Well capitalized
 Minimum
required

 
Capital
ratios

 June 30, 2017
 Dec. 31, 2016
(a)  (a) 
Consolidated regulatory capital ratios: (b)
                
Standardized:       
Standardized Approach:         
CET1 ratioN/A
(c)5.5% 12.2% 11.8%11.5%N/A
(c)6.5% 12.3% 12.0% 12.3%
Tier 1 capital ratio6% 7% 14.4% 13.4%13.1%6% 8
 14.6
 14.3
 14.5
Total (Tier 1 plus Tier 2) capital ratio10% 9% 14.8% 13.8%13.5%10
 10
 15.6
 14.8
 15.2
Advanced:       
Advanced Approach:         
CET1 ratioN/A
(c)5.5% 10.5% 10.2%10.8%N/A
(c)6.5% 11.1% 10.8% 10.6%
Tier 1 capital ratio6% 7% 12.5% 11.5%12.3%6% 8
 13.2
 12.9
 12.6
Total (Tier 1 plus Tier 2) capital ratio10% 9% 12.6% 11.7%12.5%10
 10
 14.0
 13.2
 13.0
Leverage capital ratio (b)
N/A
(c)4% 6.6% 5.8%6.0%N/A
(c)4
 6.8
 6.7
 6.6
SLR (d)
5%(c)(e)3% 6.0% 5.3%5.4%5
(c)(e)3
 6.3
 6.2
 6.0
                
Selected regulatory capital ratiosfully phased-inNon-GAAP: (e)(c)
                
Estimated CET1 ratio:                
Standardized Approach8.5% 5.5% 11.4% 11.0%10.2%8.5%(e)6.5% 11.9% 11.5% 11.3%
Advanced Approach8.5% 5.5% 9.8% 9.5%9.5%8.5
(e)6.5
 10.7
 10.4
 9.7
Estimated SLR (d)
5% 3% 5.7% 5.0%4.9%5
(e)3
 6.1
 6.0
 5.6
                
The Bank of New York Mellon regulatory capital ratios: (b)
                
Advanced:       
Advanced Approach:         
CET1 ratio6.5% 5.125% 12.7% 12.0%11.8%6.5% 5.75% 14.8% 14.1% 13.6%
Tier 1 capital ratio8% 6.625% 13.1% 12.3%12.3%8
 7.25
 15.1
 14.4
 13.9
Total (Tier 1 plus Tier 2) capital ratio10% 8.625% 13.3% 12.6%12.5%10
 9.25
 15.5
 14.8
 14.2
Leverage capital ratio5% 4% 6.9% 6.1%5.9%5
 4
 7.8
 7.6
 7.2
SLR (d)
6% 3% 6.2% 5.6%5.3%6
 3
 7.1
 6.9
 6.5
                
Selected regulatory capital ratios – fully phased-in – Non-GAAP:       
Selected regulatory capital ratios – fully phased-in – Non-GAAP:
         
Estimated SLR (d)
6% 3% 5.9% 5.3%4.8%6% 3% 6.8% 6.7% 6.1%
(a)
Minimum requirements for Sept. 30, 2016 and June 30, 20162017 include Basel III minimum thresholds plus currently applicable buffers.
(b)
For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The leverage capital ratio is based on Tier 1 capital, as phased-in and quarterly average total assets.
(c)
The Federal Reserve’s regulations do not establish well capitalized thresholds for these measures for bank holding companies.
(d)
The SLR does not become a binding measure until the first quarter of 2018. The SLR is based on Tier 1 capital, as phased-in, and average quarterly assets and certain off-balance sheet exposures.
(e)
Fully phased-in Basel III minimum with expected buffers. See page 41 for the capital ratios with the phase-in of the capital conservation buffer and the estimated U.S. G-SIB surcharge, as well as the introduction of the SLR buffer.


Our CET1 ratio determined under the Advanced Approach was 10.5%11.1% at Sept. 30, 20162017 and 10.8%10.6% at Dec. 31, 2015.2016. The decreaseincrease primarily reflects higher risk-weighted assets driven by higher operational risk RWAs,CET1 generation, partially offset by an increase in capital.the additional phase-in requirements under the U.S. capital rules that became effective Jan. 1, 2017.

Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.8%10.7% at Sept. 30, 20162017 and 9.5%9.7% at Dec. 31, 2015.2016. The increase primarily reflects CET1 generation. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a
fully phased-in basis was 11.4%11.9% at Sept. 30, 20162017 and 10.2%11.3% at Dec. 31, 2015.2016.

The estimated fully phased-in SLR (Non-GAAP) of 5.7%6.1% at Sept. 30, 20162017 and 4.9%5.6% at Dec. 31, 2015
2016 was based on our interpretation of the U.S. capital rules, as supplemented by the Federal Reserve’s final rules on the SLR. BNY Mellon will be subjectedsubject to an enhanced SLR, which will require a buffer in excess of 2% over the minimum SLR of 3%. The insured depository institution subsidiaries of the U.S. G-SIBs,global systemically important banks (“G-SIBs”), including


BNY Mellon 39


those of BNY Mellon, must maintain a 6% SLR to be considered “well capitalized.” We expect our depository institutions to satisfy the 6% “well capitalized” threshold required for well-capitalized status when the SLR becomes effective as a binding ratio in 2018.

For additional information on the U.S. capital rules, see “Supervision and Regulation - Capital



BNY Mellon 39


Requirements - Generally” in our 20152016 Annual Report.

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

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

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

Minimum capital ratios and capital buffers

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

The U.S. capital rules introduced a capital conservation buffer and countercyclical capital buffer that add to the minimum regulatory capital ratios. The capital conservation buffer - 0.625%buffer–1.25% for 20162017 and 2.5% when fully phased-in on Jan. 1, 2019 - 2019–is designed to absorb losses during periods of economic stress and applies to all banking organizations. During periods of excessive growth, the capital conservation buffer may be expanded through the imposition of a countercyclical capital buffer that may be as high as an additional 2.5%. The countercyclical capital buffer, when applicable, applies only to Advanced Approach banking organizations. The countercyclical capital buffer is currently set to zero with respect to U.S. exposures, but it could increase if the banking agencies determine that systemic vulnerabilities are meaningfully above normal.

BNY Mellon is subject to an additional G-SIB surcharge, which will beis implemented as an extension of the capital conservation buffer and must be satisfied with CET1 capital. For 2016,2017, the G-SIB surcharge applicable to BNY Mellon is 0.375%0.75%, and, when fully phased-in on Jan. 1, 2019, as calculated, applying metrics as currently applicable to BNY Mellon, would be 1.5%.

The following table presents the principal minimum capital ratio requirements with buffers and surcharges, as phased-in, applicable to the Parent.Parent and The Bank of New York Mellon. This table does not include the imposition of a countercyclical capital buffer. The U.S. capital rules also provide for transitional arrangements for qualifying instruments, deductions and adjustments, which are not reflected in this table. Buffers and surcharges are not applicable to the leverage capital ratio. These buffers, other than the SLR buffer, and surcharge began to phase-in on Jan. 1, 2016 and will be fully implemented on Jan. 1, 2019.



40 BNY Mellon


Consolidated capital ratio requirementsWell capitalized
 Minimum ratios
 
Minimum ratios with buffers, as phased-in (a)
Capital ratio requirementsWell capitalized
 Minimum ratios
 
Minimum ratios with buffers, as phased-in (a)
Well capitalized
 Minimum ratios
 2016
 2017
 2018
 2019
  2017
 2018
 2019
 
Capital conservation buffer (CET1) 0.625% 1.25% 1.875% 2.5%     1.25% 1.875% 2.5% 
U.S. G-SIB surcharge (CET1) (b)(c)
    0.375% 0.75% 1.125% 1.5%     0.75% 1.125% 1.5% 
                      
Consolidated:                      
CET1 ratioN/A
 4.5% 5.5% 6.5% 7.5% 8.5% N/A
 4.5% 6.5% 7.5% 8.5% 
Tier 1 capital ratio6.0% 6.0% 7.0% 8.0% 9.0% 10.0% 6.0% 6.0% 8.0% 9.0% 10.0% 
Total capital ratio10.0% 8.0% 9.0% 10.0% 11.0% 12.0% 10.0% 8.0% 10.0% 11.0% 12.0% 
                      
Enhanced SLR buffer (Tier 1 capital)N/A
   N/A
 N/A
 2.0% 2.0% N/A
   N/A
 2.0% 2.0% 
SLRN/A
 3.0% N/A
 N/A
 5.0% 5.0% N/A
 3.0% N/A
 5.0% 5.0% 
                      
Bank subsidiaries: (c)
                      
CET1 ratio6.5% 4.5% 5.125% 5.75% 6.375% 7.0% 6.5% 4.5% 5.75% 6.375% 7.0% 
Tier 1 capital ratio8.0% 6.0% 6.625% 7.25% 7.875% 8.5% 8.0% 6.0% 7.25% 7.875% 8.5% 
Total capital ratio10.0% 8.0% 8.625% 9.25% 9.875% 10.5% 10.0% 8.0% 9.25% 9.875% 10.5% 
                      
SLR6.0% 3.0% N/A
 N/A
 6.0%(d)6.0%(d)6.0% 3.0% N/A
 6.0%(d)6.0%(d)
(a)
Countercyclical capital buffer currently set to 0%.
(b)
The fully phased-in U.S. G-SIB surcharge of 1.5% applicable to BNY Mellon is subject to change.
(c)
The U.S. G-SIB surcharge is not applicable to the regulatory capital ratios of the bank subsidiaries.
(d)
Well capitalized threshold.


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

Estimated CET1 generation presented on a transitional and fully phased-in basisNon-GAAP
 Quarter ended Sept. 30, 2016
Estimated CET1 generationQuarter ended Sept. 30, 2017
(in millions) 
Transitional basis (b)

Fully phased-in Non-GAAP (c)

Transitional basis (a)

Fully phased-in - Non-GAAP (b)

CET1 – Beginning of period $18,275
$16,873
$18,371
$17,629
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP 974
974
Net income applicable to common shareholders of The Bank of New York Mellon Corporation983
983
Goodwill and intangible assets, net of related deferred tax liabilities 109
131
(33)(26)
Gross CET1 generated 1,083
1,105
950
957
Capital deployed:   
Dividends (205)(205)
Common stock dividends(253)(253)
Common stock repurchased (464)(464)(650)(650)
Total capital deployed (669)(669)(903)(903)
Other comprehensive income:   
Foreign currency translation (181)(181)281
281
Unrealized loss on assets available-for-sale (41)(68)13
16
Pension liabilities 8
13
Unrealized gain on cash flow hedges 3
3
Defined benefit plans12
15
Total other comprehensive income (211)(233)306
312
Additional paid-in capital (a)
 74
74
Additional paid-in capital (c)
156
156
Other additions (deductions):   
Net pension fund assets 

Deferred tax assets(1)(2)
Embedded goodwill 8
9
(9)(8)
Other (1)
Total other additions 7
9
Total other deductions(10)(10)
Net CET1 generated 284
286
499
512
CET1 – End of period $18,559
$17,159
$18,870
$18,141
(a)Reflects transitional adjustments to CET1 required under the U.S. capital rules.
(b)Estimated.
(c)Primarily related to stock awards, the exercise of stock options and stock issued for employee benefit plans.
(b)Reflects transitional adjustments to CET1 required under the U.S. capital rules.
(c)Estimated.



BNY Mellon 41


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

Capital components and ratiosSept. 30, 2016 June 30, 2016 Dec. 31, 2015Sept. 30, 2017 June 30, 2017 Dec. 31, 2016
(dollars in millions)
Transitional
Approach (a)

Fully
phased-in - Non-GAAP (b)

 
Transitional
Approach
(a)

Fully
phased-in - Non-GAAP
(b)

 
Transitional
Approach
(a)

Fully
phased-in - Non-GAAP (b)

Transitional
Approach (a)

Fully
phased-in - Non-GAAP (b)

 
Transitional
Approach
(a)

Fully
phased-in - Non-GAAP (b)

 
Transitional
Approach
(a)

Fully
phased-in - Non-GAAP (b)

CET1:          
Common shareholders’ equity$36,450
$36,153
 $36,282
$36,007
 $36,067
$35,485
$37,195
$36,981
 $36,652
$36,432
 $35,794
$35,269
Goodwill and intangible assets(17,505)(18,527) (17,614)(18,658) (17,295)(18,911)(17,876)(18,351) (17,843)(18,325) (17,314)(18,312)
Net pension fund assets(56)(94) (56)(94) (46)(116)(72)(90) (72)(90) (55)(90)
Equity method investments(314)(347) (322)(356) (296)(347)(334)(348) (325)(340) (313)(344)
Deferred tax assets(15)(25) (14)(23) (8)(20)(31)(39) (30)(37) (19)(32)
Other(1)(1) (1)(3) (5)(9)(12)(12) (11)(11) 
(1)
Total CET118,559
17,159
 18,275
16,873
 18,417
16,082
18,870
18,141

18,371
17,629
 18,093
16,490
Other Tier 1 capital:          
Preferred stock3,542
3,542
 2,552
2,552
 2,552
2,552
3,542
3,542
 3,542
3,542
 3,542
3,542
Trust preferred securities

 

 74

Deferred tax assets(10)
 (9)
 (12)
(8)
 (7)
 (13)
Net pension fund assets(38)
 (38)
 (70)
(19)
 (18)
 (36)
Other(110)(109) (112)(110) (25)(22)(34)(34) (24)(24) (121)(121)
Total Tier 1 capital21,943
20,592
 20,668
19,315
 20,936
18,612
$22,351
$21,649

$21,864
$21,147
 $21,465
$19,911
Tier 2 capital:          
Trust preferred securities156

 161

 222

Subordinated debt149
149
 149
149
 149
149
$1,300
$1,250
 $550
$550
 $550
$550
Allowance for credit losses274
274
 280
280
 275
275
265
265
 270
270
 281
281
Trust preferred securities

 

 148

Other(6)(6) (6)(7) (12)(12)(7)(7) (7)(7) (12)(11)
Total Tier 2 capital - Standardized Approach573
417
 584
422
 634
412
1,558
1,508

813
813
 967
820
Excess of expected credit losses33
33
 36
36
 37
37
49
49
 59
59
 50
50
Less: Allowance for credit losses274
274
 280
280
 275
275
265
265
 270
270
 281
281
Total Tier 2 capital - Advanced Approach$332
$176
 $340
$178
 $396
$174
$1,342
$1,292

$602
$602
 $736
$589
Total capital:          
Standardized Approach$22,516
$21,009
 $21,252
$19,737
 $21,570
$19,024
$23,909
$23,157
 $22,677
$21,960
 $22,432
$20,731
Advanced Approach$22,275
$20,768
 $21,008
$19,493
 $21,332
$18,786
$23,693
$22,941
 $22,466
$21,749
 $22,201
$20,500

          
Risk-weighted assets:          
Standardized Approach$152,410
$151,173
 $154,464
$153,198
 $159,893
$158,015
$153,494
$152,995
 $153,179
$152,645
 $147,671
$146,475
Advanced Approach:          
Credit Risk$100,398
$99,078
 $104,367
$103,024
 $106,974
$105,099
$98,201
$97,672
 $99,030
$98,465
 $97,659
$96,391
Market Risk3,009
3,009
 2,080
2,080
 2,148
2,148
2,996
2,996
 3,225
3,225
 2,836
2,836
Operational Risk72,825
72,825
 72,725
72,725
 61,262
61,262
68,625
68,625
 67,788
67,788
 70,000
70,000
Total Advanced Approach$176,232
$174,912
 $179,172
$177,829
 $170,384
$168,509
$169,822
$169,293

$170,043
$169,478
 $170,495
$169,227
          
Standardized Approach:          
CET1 ratio12.2%11.4% 11.8%11.0% 11.5%10.2%12.3%11.9% 12.0%11.5% 12.3%11.3%
Tier 1 capital ratio14.4%13.6% 13.4%12.6% 13.1%11.8%14.6
14.2
 14.3
13.9
 14.5
13.6
Total (Tier 1 plus Tier 2) capital ratio14.8%13.9% 13.8%12.9% 13.5%12.0%15.6
15.1
 14.8
14.4
 15.2
14.2
Advanced Approach:          
CET1 ratio10.5%9.8% 10.2%9.5% 10.8%9.5%11.1%10.7% 10.8%10.4% 10.6%9.7%
Tier 1 capital ratio12.5%11.8% 11.5%10.9% 12.3%11.0%13.2
12.8
 12.9
12.5
 12.6
11.8
Total (Tier 1 plus Tier 2) capital ratio12.6%11.9% 11.7%11.0% 12.5%11.1%14.0
13.6
 13.2
12.8
 13.0
12.1
          
Average assets for leverage capital purposes$333,487
  $356,344
  $351,435
 $327,555
  $324,423
  $326,809
 
Total leverage exposure for SLR purposes $362,302
  $385,670
  $382,810
 $355,960
  $352,448
  $355,083
(a)Reflects transitional adjustments to CET1, Tier 1 capital and Tier 2 capital required in 20162017 and 20152016 under the U.S. capital rules.
(b)Estimated.



42 BNY Mellon


The following table presents the amount of capital by which BNY Mellon and our largest bank subsidiary, The Bank of New York Mellon, exceeded the capital thresholds determined under the transitional rules at Sept. 30, 2016.

Capital above thresholds at Sept. 30, 2016
(in millions)Consolidated
 
The Bank of New York Mellon (b)

CET1$8,866
(a)$8,904
Tier 1 capital9,607
(a)7,254
Total capital4,652
(b)4,765
Leverage capital8,604
(a)5,105
(a)Based on minimum required standards, with applicable buffers.
(b)Based on well capitalized standards.


The following table shows the impact on the consolidated capital ratios at Sept. 30, 20162017 of a $100 million increase or decrease in common equity, or a $1 billion increase or decrease in RWA,RWAs, quarterly average assets or total leverage exposure.

Sensitivity of consolidated capital ratios at Sept. 30, 2017
 Increase or decrease of
(in basis points)
$100 million
in common 
equity
$1 billion in 
RWA, quarterly
average assets or total leverage exposure
CET1:    
Standardized Approach7bps8bps
Advanced Approach6 7 
     
Tier 1 capital:    
Standardized Approach7 10 
Advanced Approach6 8 
     
Total capital:    
Standardized Approach7 10 
Advanced Approach6 8 
     
Leverage capital3 2 
     
SLR3 2 
     
Estimated CET1 ratio, fully phased-in – Non-GAAP:    
Standardized Approach7 8 
Advanced Approach6 6 
     
Estimated SLR, fully phased-in – Non-GAAP3 2 
Sensitivity of consolidated capital ratios at Sept. 30, 2016
 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 Approach7bps8bps
Advanced Approach6 6 
     
Tier 1 capital:    
Standardized Approach7 10 
Advanced Approach6 7 
     
Total capital:    
Standardized Approach7 10 
Advanced Approach6 7 
     
Leverage capital3 2 
     
SLR3 2 
     
Estimated CET1 ratio, fully phased-in – Non-GAAP:    
Standardized Approach7 8 
Advanced Approach6 6 
     
Estimated SLR, fully phased-in – Non-GAAP3 2 

 
At Sept. 30, 2016, we had $260 millionof outstanding trust preferred securities, a portion of which is eligible for inclusion in Tier 2 capital. Any decision to take action with respect to these trust preferred securities will be based on several considerations including interest rates, our credit spreads, the availability of cash and capital and compliance with our internal and regulatory requirements for Tier 1 and Tier 2 capital based capital ratios.

Capital ratios vary depending on the size of the balance sheet at quarter-end and the levellevels and types of investments in assets. The balance sheet size fluctuates from quarter to quarter based on levels of customer and market activity. In general, when servicing clients are more actively trading securities, deposit balances and the balance sheet as a whole are higher. In addition, when markets experience significant volatility or stress, our balance sheet size may increase considerably as client deposit levels increase.

Supplementary Leverage Ratio

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




BNY Mellon 43


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

SLRSept. 30, 2016 June 30, 2016 Dec. 31, 2015Sept. 30, 2017 June 30, 2017 Dec. 31, 2016
(dollars in millions)Transitional basis
Fully phased-in Non-GAAP (a)

 Transitional basis
Fully phased-in Non-GAAP (a)

 Transitional basis
Fully phased-in Non-GAAP (a)

Transitional basis
Fully
phased-in -
Non-GAAP (a)

 Transitional basis
Fully
phased-in -
Non-GAAP (a)

 Transitional basis
Fully
phased-in -
Non-GAAP (a)

Consolidated:          
Total Tier 1 capital$21,943
$20,592
 $20,668
$19,315
 $20,936
$18,612
$22,351
$21,649
 $21,864
$21,147
 $21,465
$19,911
          
Total leverage exposure:          
Quarterly average total assets$351,230
$351,230
 $374,220
$374,220
 $368,590
$368,590
$345,709
$345,709
 $342,515
$342,515
 $344,142
$344,142
Less: Amounts deducted from Tier 1 capital17,743
19,095
 17,876
19,234
 17,650
19,403
18,154
18,856
 18,092
18,810
 17,333
18,887
Total on-balance sheet assets, as adjusted333,487
332,135
 356,344
354,986
 350,940
349,187
327,555
326,853

324,423
323,705
 326,809
325,255
Off-balance sheet exposures:          
Potential future exposure for derivatives contracts (plus certain other items)6,149
6,149
 6,125
6,125
 7,158
7,158
Potential future exposure for derivative contracts (plus certain other items)6,213
6,213
 6,014
6,014
 6,021
6,021
Repo-style transaction exposures447
447
 402
402
 440
440
1,034
1,034
 631
631
 533
533
Credit-equivalent amount of other off-balance sheet exposures (less SLR exclusions)23,571
23,571
 24,157
24,157
 26,025
26,025
21,860
21,860
 22,098
22,098
 23,274
23,274
Total off-balance sheet exposures30,167
30,167
 30,684
30,684
 33,623
33,623
29,107
29,107

28,743
28,743
 29,828
29,828
Total leverage exposure$363,654
$362,302
 $387,028
$385,670
 $384,563
$382,810
$356,662
$355,960

$353,166
$352,448
 $356,637
$355,083
          
SLR - Consolidated(b)6.0%5.7% 5.3%5.0% 5.4%4.9%6.3%6.1% 6.2%6.0% 6.0%5.6%
          
The Bank of New York Mellon, our largest bank subsidiary:          
Tier 1 capital$18,701
$17,592
 $18,049
$16,948
 $16,814
$15,142
$20,718
$19,955
 $19,897
$19,125
 $19,011
$17,708
Total leverage exposure$299,641
$299,236
 $322,978
$322,588
 $316,812
$316,270
$292,759
$292,421
 $286,983
$286,634
 $291,022
$290,230
          
SLR - The Bank of New York Mellon (b)
6.2%5.9% 5.6%5.3% 5.3%4.8%7.1%6.8% 6.9%6.7% 6.5%6.1%
(a)Estimated.
(b)We expectThe estimated fully phased-in SLR (Non-GAAP) is based on our depository institutions to satisfyinterpretation of the 6% “well capitalized” threshold required for well-capitalized status whenU.S. capital rules. When the SLR becomes effectiveis fully phased-in in 2018 as a bindingrequired minimum ratio, we expect to maintain an SLR of over 5%. The minimum required SLR is 3% and there is a 2% buffer, in 2018.addition to the minimum, that is applicable to U.S. G-SIBs. The insured depository institution subsidiaries of the U.S. G-SIBs, including those of BNY Mellon, must maintain a 6% SLR to be considered “well-capitalized.”


Trading activities and risk management

Our trading activities are focused on acting as a market-maker for our customers, and 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 based on a Monte Carlo simulation 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 non-linear characteristicsfirm wide level.

VaR represents a key risk management measure and it is important to note the inherent limitations to VaR, which include:

VaR does not estimate potential losses over longer time horizons where moves may be extreme;
VaR does not take account of options. potential variability of market liquidity; and
Previous moves in market risk factors may not produce accurate predictions of all future market moves.

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



44 BNY Mellon


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

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

VaR (a)
3Q17Sept. 30, 2017
(in millions)Average
Minimum
Maximum
Interest rate$3.3
$2.8
$4.2
$2.7
Foreign exchange3.7
3.1
5.6
4.8
Equity0.9
0.8
1.1
0.9
Credit1.0
0.6
1.4
1.0
Diversification(5.1)N/M
N/M
(5.3)
Overall portfolio3.8
3.2
5.3
4.1

VaR (a)
2Q17June 30, 2017
(in millions)Average
Minimum
Maximum
Interest rate$3.3
$2.8
$4.1
$4.0
Foreign exchange4.3
3.4
5.8
4.6
Equity0.2
0.1
1.1
1.1
Credit1.1
0.5
1.4
0.8
Diversification(4.8)N/M
N/M
(5.8)
Overall portfolio4.1
3.3
5.4
4.7

VaR (a)
YTD17
(in millions)Average
Minimum
Maximum
Interest rate$3.5
$2.8
$4.9
Foreign exchange3.9
2.6
5.8
Equity0.4
0.1
1.1
Credit1.1
0.5
1.7
Diversification(4.9)N/M
N/M
Overall portfolio4.0
3.2
5.4
(a)
Beginning Jan. 1, 2017, the VaR figures reflect the impact of the CVA and hedges as per the guidance included in ASC 820, Fair Value Measurement. VaR exposure does not include the impact of the Company’s consolidated investment management funds and seed capital investments.
N/M - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a minimum and maximum portfolio diversification effect.


The following tables indicate the calculated VaR amounts for the trading portfolio for the designated periods as previously reported under the former Monte Carlo simulation VaR model.

 
VaR (a)
3Q16Sept. 30, 2016
3Q16Sept. 30, 2016
(in millions)Average
Minimum
Maximum
Average
Minimum
Maximum
Interest rate$7.3
$5.4
$8.9
$7.9
$7.3
$5.4
$8.9
$7.9
Foreign exchange4.2
3.2
7.5
3.7
4.2
3.2
7.5
3.7
Equity0.6
0.5
0.8
0.6
0.6
0.5
0.8
0.6
Credit0.3
0.3
0.4
0.4
0.3
0.3
0.4
0.4
Diversification(5.8)N/M
N/M
(5.7)(5.8)N/M
N/M
(5.7)
Overall portfolio$6.6
$5.0
$7.7
$6.9
6.6
5.0
7.7
6.9

VaR (a)
2Q16June 30, 2016
(in millions)Average
Minimum
Maximum
Interest rate$6.2
$5.5
$7.1
$6.4
Foreign exchange2.5
1.9
11.1
2.8
Equity0.6
0.4
0.7
0.6
Credit0.3
0.2
0.4
0.3
Diversification(3.7)N/M
N/M
(3.6)
Overall portfolio$5.9
$5.0
$6.9
$6.5

VaR (a)
3Q15Sept. 30, 2015
(in millions)Average
Minimum
Maximum
Interest rate$5.0
$4.0
$5.9
$5.6
Foreign exchange0.9
0.6
1.9
1.3
Equity0.9
0.6
1.5
0.8
Diversification(1.8)N/M
N/M
(2.4)
Overall portfolio$5.0
$4.0
$6.1
$5.3



44 BNY Mellon


VaR (a)
YTD16
(in millions)Average
Minimum
Maximum
Interest rate$6.3
$4.3
$8.9
Foreign exchange2.8
1.2
11.1
Equity0.6
0.4
0.8
Credit0.3
0.2
0.4
Diversification(4.0)N/M
N/M
Overall portfolio$6.0
$4.3
$7.7


VaR (a)
YTD15YTD16
(in millions)Average
Minimum
Maximum
Average
Minimum
Maximum
Interest rate$5.2
$3.6
$8.0
$6.3
$4.3
$8.9
Foreign exchange0.9
0.5
1.9
2.8
1.2
11.1
Equity1.1
0.6
1.9
0.6
0.4
0.8
Credit0.3
0.2
0.4
Diversification(1.9)N/M
N/M
(4.0)N/M
N/M
Overall portfolio$5.3
$3.9
$8.5
6.0
4.3
7.7
(a)VaR figures do not reflect the impact of the credit valuation adjustment (“CVA”)CVA guidance in Accounting Standards Codification (“ASC”) 820.ASC 820, Fair Value Measurement. This is consistent with the regulatory treatment. VaR exposure does not include the impact of the Company’s consolidated investment management funds and seed capital investments.
N/M - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a minimum and maximum portfolio diversification effect.


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

The foreign exchange component of VaR represents instruments whose values predominantly vary with the level or volatility of currency exchange rates or interest rates. These instruments include, but are not limited to: currency balances, spot and forward transactions, currency options, 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, Depositary Receipts,preferred stock, listed equity options (puts and calls), over-the-counter (“OTC”) equity options, equity total return swaps, equity index futures and other equity derivative products.



BNY Mellon 45


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

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

During the third quarter of 2016,2017, interest rate risk generated 59%37% of average gross VaR, foreign exchange risk generated 34%42% of average gross VaR, equity risk accounted for 5%10% of average gross VaR and credit risk generated 2%11% of average gross VaR. During the third quarter of 2016,2017, our daily trading loss exceededdid not exceed our calculated VaR amount of the overall portfolio on one occasion.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)
 
(dollar amounts
in millions)
Quarter ended
Sept. 30, 2016
June 30,
2016

March 31,
2016

Dec. 31, 2015
Sept. 30, 2015
Revenue range:Number of days
Less than $(2.5)
1



$(2.5) - $06
2
3
4
7
$0 - $2.522
20
29
23
27
$2.5 - $5.025
38
21
29
21
More than $5.011
3
9
6
10
Distribution of trading revenue (loss) (a)
   
 Quarter ended
(dollars in millions)Sept. 30, 2017
June 30,
2017

March 31,
2017

Dec. 31, 2016
Sept. 30, 2016
Revenue range:Number of days
Less than $(2.5)




$(2.5) – $01
2
1
3
6
$0 – $2.529
31
31
28
22
$2.5 – $5.029
27
26
23
25
More than $5.04
4
4
7
11
(a)Trading revenue (loss) includes realized and unrealized gains and losses primarily related to spot and forward foreign exchange transactions, derivatives and securities trades for our customers and excludes any associated commissions, underwriting fees and net interest revenue.


Trading assets include debt and equity instruments and derivative assets, primarily interest rate and foreign exchange contracts, not designated as hedging instruments. Trading assets were $5$4.7 billion at Sept. 30, 20162017 and $7$5.7 billion at Dec. 31, 2015.2016.

Trading liabilities include debt and equity instruments and derivative liabilities, primarily interest rate and
foreign exchange contracts, not designated as hedging instruments. Trading liabilities were $4$3.3 billion at Sept. 30, 20162017 and $5$4.4 billion at Dec. 31, 2015.2016.



BNY Mellon 45


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.derivatives.

We reflect external credit ratings as well as observable credit default swap spreads for both ourselves as well asand our counterparties when measuring the fair value of our derivative positions. Accordingly, the valuation of our derivative positions is sensitive to the current changes in our own credit spreads, as well as those of our counterparties.

At Sept. 30, 2016,2017, our OTC derivative assets of $4.2$3.6 billion included a CVA deduction of $57$30 million. Our OTC derivative liabilities of $4.3$3.2 billion included a debit valuation adjustment (“DVA”) of $2 million related to our own credit spread. Net of hedges, the CVA decreased by $1 million and the DVA was unchanged in the third quarter of 2017. The net impact of these adjustments increased foreign exchange and other trading revenue by $1 million in the third quarter of 2017.

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

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

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

In the third quarter of 2015, net of hedges, the CVA increased $5 million and the DVA was unchanged. The net impact of these adjustments decreased foreign exchange and other trading revenue by $5 million in the third quarter of 2015.

The table below summarizes the risk ratings for our foreign exchange and interest rate derivative counterparty credit exposure.exposure during the past five quarters. This information indicates the degree of risk to which we are exposed. Significant changes in ratings classifications for our foreign exchange and other trading activity could result in increased risk for us.


46 BNY Mellon


Foreign exchange and other trading counterparty risk rating profile (a)
Foreign exchange and other trading counterparty risk rating profile (a)
 
Foreign exchange and other trading counterparty risk
rating profile (a)
Quarter endedQuarter ended
Sept. 30, 2016
June 30,
2016

March 31,
2016

Dec. 31, 2015
Sept. 30, 2015
Sept. 30, 2017
June 30,
2017

March 31,
2017

Dec. 31, 2016
Sept. 30, 2016
Rating:  
AAA to AA-45%38%44%43%46%41%44%43%35%45%
A+ to A-32
40
37
42
38
30
27
36
39
32
BBB+ to BBB-19
18
14
13
14
24
22
17
22
19
Non-investment grade (BB+ and lower)4
4
5
2
2
Noninvestment grade (BB+ and lower)5
7
4
4
4
Total100%100%100%100%100%100%100%100%100%100%
(a)Represents credit rating agency equivalent of internal credit ratings.


Asset/liability management

Our diversified business activities include processing securities, accepting deposits, investing in securities, lending, raising money as needed to fund assets and other transactions. The market risks from these activities are interest rate risk and foreign exchange risk. Our primary market risk is exposure to movements in U.S. dollar interest rates and certain foreign currency interest rates. We actively manage interest rate sensitivity and use earnings simulation and discounted cash flow models to identify interest rate exposures.

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

As of Sept. 30, 2016, these scenarios reflect strategies that management could employ as interest rate expectations change. The table below relies on certain critical assumptions regarding the balance sheet and depositors’ behavior related to interest rate fluctuations and the prepayment and extension risk in



46 BNY Mellon


certain of our assets. Generally, there has been an inverse relationship between interest rates and client deposit levels. To the extent that actual behavior is different from that assumed in the models, there could be a change in interest rate sensitivity.

We evaluate the effect on earnings by running various interest rate ramp scenarios from a baseline scenario.
The interest rate ramp scenarios are reviewed to examine the impact of large interest rate movements. In each scenario, all currencies interest rates are shifted higher or lower. Interest rate sensitivity is quantified by calculating the change in pre-tax net interest revenue between the scenarios over a 12-month measurement period.


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

Estimated changes in net interest revenue
(dollars in millions)
Sept. 30, 2016
June 30,
2016

March 31,
2016

Dec. 31, 2015
Sept. 30, 2015
Estimated changes in net interest revenue
(in millions)
Sept. 30, 2017
June 30,
2017

March 31,
2017

Dec. 31, 2016
Sept. 30, 2016
up 200 bps parallel rate ramp vs. baseline (a)
$62
$91
$103
$179
$275
$(2)$(69)$(136)$6
$62
up 100 bps parallel rate ramp vs. baseline (a)
147
158
189
191
290
112
58
87
145
147
Long-term up 50 bps, short-term unchanged (b)
116
130
104
33
20
113
92
92
81
116
Long-term down 50 bps, short-term unchanged (b)
(128)(96)(93)(91)(81)(129)(85)(104)(88)(128)
(a)
In the parallel rate ramp, both short-term and long-term rates move in four equal quarterly increments.
(b)Long-term is equal to or greater than one year.
bps - basis points.


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


BNY Mellon 47


spot yield curve versus an implied forward yield curve was not as significant. The 100 basis point ramp scenario assumes rates increase 25 basis points above the forward yield curve in each of the next four quarters and the 200 basis point ramp scenario assumes a 50 basis point per quarter increase.

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

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

Monetary policy;
Global economic uncertainty;
Our ratings relative to other financial institutions’ ratings; and
Money market mutual fund and other regulatoryRegulatory reform.

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

Off-balance sheet arrangements

Off-balance sheet arrangements discussed in this section are limited to guarantees, retained or contingent interests and obligations arising out of unconsolidated variable interest entities (“VIEs”). For BNY Mellon, these items include certain credit guarantees and securitizations.a securitization. Guarantees include lending-related guarantees issued as part of our corporate banking business and securities lending indemnifications issued as part of our Investment Services business. See Note 17 of the Notes to Consolidated Financial Statements for a further discussion of our off-balance sheet arrangements.




48 BNY Mellon 47


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

BNY Mellon has included in this Form 10-Q certain Non-GAAP financial measures based on estimated fully phased-in CET1 and other risk-based capital ratios, the estimated fully phased-in SLR and tangible common shareholders’ equity. BNY Mellon believes that the CET1 and other risk-based capital ratios, on a fully phased-in basis, and the SLR, on a fully phased-in basis, and the ratio of tangible common shareholders’ equity to tangible assets of operations are measures of capital strength that provide additional useful information to investors, supplementing the capital ratios which are, or were, required by regulatory authorities. The tangible common shareholders’ equity ratio, which excludes goodwill and intangible assets, net of deferred tax liabilities, includes changes in investment securities valuations which are reflected in total shareholders’ equity. In addition, this ratio is expressed as a percentage of the actual book value of assets, as opposed to a percentage of a risk-based reduced value established in accordance with regulatory requirements, although BNY Mellon in its reconciliation has excluded certain assets which are given a zero percent risk-weighting for regulatory purposes and the assets of consolidated investment management funds to which BNY Mellon has limited economic exposure. Further, BNY Mellon believes that the return on tangible common equity measure which excludes goodwill and intangible assets, net of deferred tax liabilities, is aan additional useful additional measure for investors because it presents a measure of those assets that can generate income. BNY Mellon has provided a measure of tangible book value per common share, which it believes provides additional useful information as to the level of tangible assets in relation to shares of common stock outstanding.

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

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

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




48 BNY Mellon 49


The following table presents the reconciliation of net income applicable to common shareholders of The Bank of New York Mellon Corporation and diluted earnings per common share.

Reconciliation of net income and diluted EPS – GAAP to3Q16 2Q16 3Q15 
  Non-GAAP
(in millions, except per common share amounts)
Net income
Diluted EPS
 Net income
Diluted EPS
 Net income
Diluted EPS
 
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP$974
$0.90
 $825
$0.75
 $820
$0.74
 
Add: M&I, litigation and restructuring charges18
  7
  11
  
Tax impact of the recovery related to Sentinel5
  N/A
  N/A
  
Less: Recovery related to Sentinel13
  N/A
  N/A
  
Tax impact of M&I, litigation and restructuring charges5
  2
  3
  
Non-GAAP adjustments – after-tax5

 5

 8
0.01
 
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – Non-GAAP$979
$0.90
 $830
$0.76
(a)$828
$0.74
(a)
(a)Does not foot due to rounding.


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

Reconciliation of income before income taxes – pre-tax operating margin3Q16
2Q16
3Q15
YTD16
YTD15
Pre-tax operating margin3Q17
2Q17
3Q16
YTD17
YTD16
(dollars in millions)3Q16
2Q16
3Q15
YTD16
YTD15
Income before income taxes – GAAP$1,368
$1,308
$1,317
$3,882
$3,573
Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds9
4
(5)6
63
Less: Net income attributable to noncontrolling interests of consolidated investment management funds3
3
9
24
6
Add: Amortization of intangible assets61
59
66
177
197
52
53
61
157
177
M&I, litigation and restructuring charges18
7
11
42
67
6
12
18
26
42
Recovery related to Sentinel(13)

(13)


(13)
(13)
Income before income taxes, as adjusted – Non-GAAP (a)
$1,374
$1,227
$1,191
$3,773
$3,565
$1,423
$1,370
$1,374
$4,041
$3,773
  
Fee and other revenue – GAAP$3,150
$2,999
$3,053
$9,119
$9,132
$3,167
$3,120
$3,150
$9,305
$9,119
Income (loss) from consolidated investment management funds – GAAP17
10
(22)21
70
Income from consolidated investment management funds – GAAP10
10
17
53
21
Net interest revenue – GAAP774
767
759
2,307
2,266
839
826
774
2,457
2,307
Total revenue – GAAP3,941
3,776
3,790
11,447
11,468
4,016
3,956
3,941
11,815
11,447
Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds9
4
(5)6
63
Less: Net income attributable to noncontrolling interests of consolidated investment management funds3
3
9
24
6
Total revenue, as adjusted – Non-GAAP (a)
$3,932
$3,772
$3,795
$11,441
$11,405
$4,013
$3,953
$3,932
$11,791
$11,441
  
Pre-tax operating margin – GAAP (b)(c)
33%31%29%31%29%34%33%33%33%31%
Adjusted pre-tax operating margin – Non-GAAP (a)(b)(c)
35%33%31%33%31%35%35%35%34%33%
(a)Non-GAAP information for all periods presented excludes the net income (loss) attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and M&I, litigation and restructuring charges. Non-GAAP information for the third quarter of 2016 and for the first nine months of 2016 also excludes a recovery of the previously impaired Sentinel loan.
(b)Income before taxes divided by total revenue.
(c)
Our GAAP earnings include tax-advantaged investments such as low income housing, renewable energy, corporate/bank-owned life insurance and tax-exempt securities. The benefits of these investments are primarily reflected in tax expense. If reported on a tax-equivalent basis, these investments would increase revenue and income before taxes by $102 million for the third quarter of 2017, $106 million for the second quarter of 2017, $74 million for the third quarter of 2016, $74$309 million for the second quarterfirst nine months of 2016, $53 million for the third quarter of 2015,2017 and $225 million for the first nine months of 2016 and $169 million for the first nine months of 2015 and would increase our pre-tax operating margin by approximately 1.6% for the third quarter of 2017, 1.8% for the second quarter of 2017, 1.2% for the third quarter of 2016, 1.3%1.7% for the second quarterfirst nine months of 2016, 1.0% for the third quarter of 2015,2017 and 1.3% for the first nine months of 2016 and 1.0% for the first nine months of 2015.2016.


BNY Mellon 49


The following table presents the reconciliation of operating leverage.

Operating leverage3Q16
2Q16
3Q15
3Q16 vs.3Q17
2Q17
3Q16
3Q17 vs.
(dollars in millions)2Q16
3Q15
2Q17
3Q16
Total revenue – GAAP$3,941
$3,776
$3,790
4.37%
3.98%
$4,016
$3,956
$3,941
1.52 %1.90%
Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds9
4
(5) 
Less: Net income attributable to noncontrolling interests of consolidated investment management funds3
3
9
 
Total revenue, as adjusted – Non-GAAP$3,932
$3,772
$3,795
4.24%
3.61%
$4,013
$3,953
$3,932
1.52 %2.06%
    
Total noninterest expense – GAAP$2,643
$2,620
$2,680
0.88%
(1.38)%
$2,654
$2,655
$2,643
(0.04)%0.42%
Less: Amortization of intangible assets61
59
66
 52
53
61
 
M&I, litigation and restructuring charges18
7
11
 6
12
18
 
Total noninterest expense, as adjusted – Non-GAAP$2,564
$2,554
$2,603
0.39%
(1.50)%
$2,596
$2,590
$2,564
0.23 %1.25%
    
Operating leverage – GAAP (a)
 349 bps536 bps 156 bps148 bps
Adjusted operating leverage – Non-GAAP (a)(b)
 385 bps511 bps 129 bps81 bps
(a)Operating leverage is the rate of increase (decrease) in total revenue less the rate of increase (decrease) in total noninterest expense.
(b)Non-GAAP operating leverage for all periods presented excludes the net income (loss) attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and M&I, litigation and restructuring charges.
bps - basis points.




50 BNY Mellon


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

Return on common equity and tangible common equity3Q16
2Q16
3Q15
YTD16
YTD15
3Q17
2Q17
3Q16
YTD17
YTD16
(dollars in millions)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP$974
$825
$820
$2,603
$2,416
$983
$926
$974
$2,789
$2,603
Add: Amortization of intangible assets61
59
66
177
197
52
53
61
157
177
Less: Tax impact of amortization of intangible assets21
21
23
62
67
17
19
21
54
62
Net income applicable to common shareholders of The Bank of New
York Mellon Corporation excluding amortization of intangible
assets – Non-GAAP
1,014
863
863
2,718
2,546
Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation excluding amortization of intangible assets – Non-GAAP1,018
960
1,014
2,892
2,718
Add: M&I, litigation and restructuring charges18
7
11
42
67
6
12
18
26
42
Recovery related to Sentinel(13)

(13)


(13)
(13)
Less: Tax impact of M&I, litigation and restructuring charges5
2
3
13
23

3
5
5
13
Tax impact of recovery related to Sentinel(5)

(5)


(5)
(5)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation, as adjusted – Non-GAAP (a)
$1,019
$868
$871
$2,739
$2,590
Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation, as adjusted – Non-GAAP (a)
$1,024
$969
$1,019
$2,913
$2,739
  
Average common shareholders’ equity$35,767
$35,827
$35,588
$35,616
$35,530
$36,780
$35,862
$35,767
$35,876
$35,616
Less: Average goodwill17,463
17,622
17,742
17,549
17,750
17,497
17,408
17,463
17,415
17,549
Average intangible assets3,711
3,789
3,962
3,770
4,027
3,487
3,532
3,711
3,532
3,770
Add: Deferred tax liability – tax deductible goodwill (b)
1,477
1,452
1,379
1,477
1,379
1,561
1,542
1,477
1,561
1,477
Deferred tax liability – intangible assets (b)
1,116
1,129
1,164
1,116
1,164
1,092
1,095
1,116
1,092
1,116
Average tangible common shareholders’ equity – Non-GAAP$17,186
$16,997
$16,427
$16,890
$16,296
$18,449
$17,559
$17,186
$17,582
$16,890
  
Return on common equity – GAAP (c)
10.8%9.3%9.1%9.8%9.1%10.6%10.4%10.8%10.4%9.8%
Adjusted return on common equity – Non-GAAP (a)(c)
11.3%9.7%9.7%10.3%9.7%11.0%10.8%11.3%10.9%10.3%
  
Return on tangible common equity – Non-GAAP (c)
23.5%20.4%20.8%21.5%20.9%21.9%21.9%23.5%22.0%21.5%
Adjusted return on tangible common equity – Non-GAAP (a)(c)
23.6%20.5%21.0%21.7%21.2%22.0%22.1%23.6%22.1%21.7%
(a)Non-GAAP information for all periods presented excludes the amortization of intangible assets and M&I, litigation and restructuring charges. Non-GAAP information for the third quarter of 2016 and for the first nine months of 2016 also excludes a recovery of the previously impaired Sentinel loan.
(b)Deferred tax liabilities are based on fully phased-in Basel III capital rules.
(c)Annualized.Quarterly returns are annualized.


50 BNY Mellon


The following table presents the reconciliation of the equity to assets ratio and book value per common share.

Equity to assets and book value per common shareSept. 30, 2016
June 30, 2016
Dec. 31, 2015
Sept. 30, 2015
Book value per common shareSept. 30, 2017
June 30,
2017

Dec. 31, 2016
Sept. 30, 2016
(dollars in millions, unless otherwise noted)Sept. 30, 2016
June 30, 2016
Dec. 31, 2015
Sept. 30, 2015
BNY Mellon shareholders’ equity at period end – GAAP$40,523
$39,974
$38,811
$39,695
Less: Preferred stock3,542
2,552
2,552
2,552
3,542
3,542
3,542
3,542
BNY Mellon common shareholders’ equity at period end – GAAP36,153
36,007
35,485
35,618
36,981
36,432
35,269
36,153
Less: Goodwill17,449
17,501
17,618
17,679
17,543
17,457
17,316
17,449
Intangible assets3,671
3,738
3,842
3,914
3,461
3,506
3,598
3,671
Add: Deferred tax liability – tax deductible goodwill (a)
1,477
1,452
1,401
1,379
1,561
1,542
1,497
1,477
Deferred tax liability – intangible assets (a)
1,116
1,129
1,148
1,164
1,092
1,095
1,105
1,116
BNY Mellon tangible common shareholders’ equity at
period end – Non-GAAP
$17,626
$17,349
$16,574
$16,568
$18,630
$18,106
$16,957
$17,626
  
Total assets at period end – GAAP$374,114
$372,351
$393,780
$377,371
Less: Assets of consolidated investment management funds1,009
1,083
1,401
2,297
Subtotal assets of operations – Non-GAAP373,105
371,268
392,379
375,074
Less: Goodwill17,449
17,501
17,618
17,679
Intangible assets3,671
3,738
3,842
3,914
Cash on deposit with the Federal Reserve and other central banks (b)
80,362
88,080
116,211
86,426
Tangible total assets of operations at period end – Non-GAAP$271,623
$261,949
$254,708
$267,055
 
BNY Mellon shareholders’ equity to total assets ratio – GAAP10.6%10.4%9.7%10.1%
BNY Mellon common shareholders’ equity to total
assets ratio – GAAP
9.7%9.7%9.0%9.4%
BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP6.5%6.6%6.5%6.2%
 
Period-end common shares outstanding (in thousands)
1,057,337
1,067,674
1,085,343
1,092,953
1,024,022
1,033,156
1,047,488
1,057,337
  
Book value per common share – GAAP$34.19
$33.72
$32.69
$32.59
$36.11
$35.26
$33.67
$34.19
Tangible book value per common share – Non-GAAP$16.67
$16.25
$15.27
$15.16
$18.19
$17.53
$16.19
$16.67
(a)Deferred tax liabilities are based on fully phased-in Basel III capital rules.
(b)Assigned a zero percentage risk-weighting by the regulators.







BNY Mellon 51


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


Income (loss) from consolidated investment management funds, net of noncontrolling interests 
   
(in millions)3Q16
2Q16
3Q15
YTD16
YTD15
Income (loss) from consolidated investment management funds$17
$10
$(22)$21
$70
Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds9
4
(5)6
63
Income (loss) from consolidated investment management funds, net of noncontrolling interests$8
$6
$(17)$15
$7
Income from consolidated investment management funds, net of noncontrolling interests 
 YTD17
YTD16
(in millions)3Q17
2Q17
3Q16
Income from consolidated investment management funds$10
$10
$17
$53
$21
Less: Net income attributable to noncontrolling interests of consolidated investment management funds3
3
9
24
6
Income from consolidated investment management funds, net of noncontrolling interests$7
$7
$8
$29
$15


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

Income (loss) from consolidated investment management funds, net of noncontrolling interests - Investment Management business
Income from consolidated investment management funds, net of noncontrolling interests - Investment Management businessIncome from consolidated investment management funds, net of noncontrolling interests - Investment Management business
(in millions)3Q16
2Q16
1Q16
4Q15
3Q15
YTD16
YTD15
3Q17
2Q17
1Q17
4Q16
3Q16
YTD17
YTD16
Investment management fees$2
$3
$2
$7
$3
$7
$8
$1
$2
$2
$4
$2
$5
$7
Other (Investment income (loss))6
3
(1)4
(20)8
(1)6
5
13
(3)6
24
8
Income (loss) from consolidated investment management funds, net of noncontrolling interests$8
$6
$1
$11
$(17)$15
$7
Income from consolidated investment management funds, net of noncontrolling interests$7
$7
$15
$1
$8
$29
$15




BNY Mellon 51


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

Pre-tax operating margin - Investment Management businessPre-tax operating margin - Investment Management business Pre-tax operating margin - Investment Management business 
(dollars in millions)3Q16
2Q16
1Q16
4Q15
3Q15
YTD16
YTD15
3Q17
2Q17
1Q17
4Q16
3Q16
YTD17
YTD16
Income before income taxes – GAAP$256
$234
$217
$290
$236
$707
$758
$300
$288
$277
$260
$256
$865
$707
Add: Amortization of intangible assets22
19
19
24
24
60
73
15
15
15
22
22
45
60
Provision for credit losses
1
(1)(4)1

3
(2)
3
6

1

Money market fee waivers11
11
9
23
28
31
90
Income before income taxes excluding amortization of intangible assets, provision for credit losses and money market fee waivers – Non-GAAP$289
$265
$244
$333
$289
$798
$924
Adjusted income before income taxes, excluding amortization of intangible assets and provision for credit losses – Non-GAAP$313
$303
$295
$288
$278
$911
$767
  
Total revenue – GAAP$958
$938
$895
$999
$926
$2,791
$2,907
$1,000
$986
$963
$960
$958
$2,949
$2,791
Less: Distribution and servicing expense
104
102
100
92
94
306
286
110
104
101
98
104
315
306
Money market fee waivers benefiting distribution and servicing expense15
15
23
27
35
53
110
Add: Money market fee waivers impacting total revenue26
26
32
50
63
84
200
Total revenue net of distribution and servicing expense and excluding money market fee waivers – Non-GAAP$865
$847
$804
$930
$860
$2,516
$2,711
Adjusted total revenue, net of distribution and servicing expense – Non-GAAP$890
$882
$862
$862
$854
$2,634
$2,485
  
Pre-tax operating margin – GAAP (a)
27%25%24%29%25%25%26%30%29%29%27%27%29%25%
Adjusted pre-tax operating margin, excluding amortization of intangible assets, provision for credit losses, money market fee waivers and net of distribution and servicing expense – Non-GAAP (a)
33%31%30%36%34%32%34%
Adjusted pre-tax operating margin, excluding amortization of intangible assets, provision for credit losses and distribution and servicing expense – Non-GAAP (a)
35%34%34%33%33%35%31%
(a)Income before taxes divided by total revenue.





52 BNY Mellon


Recent accounting and regulatory developments

Recently Issuedissued accounting standards

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

ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities

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

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

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

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

In March 2017, the FASB issued an ASU, Compensation-Retirement Benefits - Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires the disaggregation of the service cost component from the other components of the net benefit cost in the income statement. The ASU also permits only the service cost component of net benefit cost to be eligible for capitalization. The ASU is effective for the first quarter of 2018, with early adoption permitted. The guidance in this ASU should be applied retrospectively for the presentation of the service cost component and the other components in the income statement, and prospectively for the capitalization of the service cost component in assets. BNY Mellon is assessing the impacts of the new standard. For information on the components of our pension and post-retirement health plan costs, see Note 9 of the Notes to Consolidated Financial Statements in this Form 10-Q and Note 16 of the Notes to Consolidated Financial Statements in our 2016 Annual Report.  To the extent that our recent trend of having a net credit for pension and other post-retirement costs continues, the standard will result in an increase to staff expense and a reduction in other expense.

ASU 2016-18, Statement of Cash Flows Restricted Cash

In November 2016, the FASB issued an ASU, Statement of Cash Flows – Restricted Cash. This ASU provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows and is effective for the first quarter of 2018. Earlier application is permitted. BNY Mellon is assessing the impacts of the new standard, and expects to include restricted cash (which totaled $4 billion as of Sept. 30, 2017) with cash and due from banks when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

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

In August 2016, the Financial Accounting Standards Board (“FASB”)FASB issued an Accounting Standards Update (“ASU”), “StatementASU, Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments.”Payments. This ASU provides guidance on eight specific cash flow presentation issues and is effective for fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years.the first quarter of 2018. Earlier application is permitted, however all of the amendments must be adopted in the same period. BNY Mellon is assessing the impacts of the new


BNY Mellon 53


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

ASU 2016-13, Financial Instruments Credit Losses

In June 2016, the FASB issued an ASU, “FinancialFinancial InstrumentsCredit LossesCredit Losses.”. This ASU introduces a new current expected credit losses model, which will apply to financial assets subject to credit losses and measured at amortized cost, including held-to-maturity securities and certain off-balance sheet credit exposures. The guidance wouldwill also change current practice for the impairment model for AFSavailable-for-sale debt securities. The AFSavailable-for-sale debt securities model will require the use of an allowance to record estimated credit losses and subsequent recoveries. This ASU is effective for fiscal years beginning after Dec. 15, 2019.the first quarter of 2020. Earlier application is permitted after Dec. 15, 2018.beginning with the first quarter of 2019. BNY Mellon has begun its implementation efforts and is assessingcurrently identifying key interpretive issues, and will assess existing credit loss forecasting models and processes against the impactsnew guidance to determine what modifications may be required. The extent of the new standard.impact to our financial statements upon adoption depends on several factors including the remaining expected life of financial instruments at the time of adoption, the establishment of an allowance for expected credit loss on held-to-maturity securities, and the macroeconomic conditions and forecasts that exist at that date.

ASU 2016-09, Compensation Stock Compensation

In March 2016, the FASB issued an ASU, “CompensationStock Compensation.” This standard simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2016. The adoption of the ASU will result in increased volatility to the Company’s income tax expense but is not expected to
have a material impact on the Company’s balance sheet or equity.

ASU 2014-09, Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, “RevenueRevenue from Contracts with Customers” which requires an entity to recognize. This ASU, as amended, provides guidance on the amountrecognition of revenue related to which it expects to be entitled for the transfer of promised goods or services to customers.customers, guidance on accounting for certain contract costs and additional disclosure requirements about revenue and contract costs. The ASU will replacestandard supersedes most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications.

The new standards areis effective for the Company on Jan. 1,first quarter of 2018 with early adoption permitted no earlier than Jan. 1, 2017. The standards permit the use ofusing either the retrospective or cumulative effect transition method upon adoption.

The Company has completed its evaluation of the potential impact of this guidance on our accounting policies, and based on that evaluation, the timing of most of our revenue recognition will remain the same and the impacts will not be material. The impacts primarily relate to deferring and amortizing certain
sales commission costs related to obtaining customer contracts and the timing of recognizing the contra revenue related to certain payments made to customers. The Company plans to adopt the guidance as of Jan. 1, 2018 using the cumulative effect transition method. The Company is evaluatingcurrently developing the effect that these ASUs will have on its consolidated financial statementsdisclosures required about revenue and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of these standards on its ongoing financial reporting.contract costs and finalizing changes to internal control.

ASU 2016-07, Investments Equity Method and Joint Ventures2016-02, Leases

In March 2016, the FASB issued an ASU, “Investments Equity Method and Joint Ventures,” which eliminates the requirement to retrospectively apply the equity method when an increase in ownership interest in the investee prompts a change from the cost method to the equity method. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15,



BNY Mellon 53


2016. Earlier application is permitted. The Company will apply this ASU prospectively beginning in 2017.

ASU 2016-02, Leases

In February 2016, the FASB issued ASU 2016-02, “Leases.”Leases. The standard introduces a new accounting model for lesseesprimary objective of this ASU is to increase transparency and was issued primarily to address concerns related to off-balance sheet financing arrangements available to lessees under current guidance. The standard requires lessees to account for all leasescomparability by recognizing lease assets and liabilities on the balance sheet except for certain short-term leases that haveand expand related disclosures. ASU 2016-02 requires a maximum possible lease term of 12 months. A lessee will recognize“right-of-use” asset and a payment obligation liability on itsthe balance sheet (1) an asset for its right to use the underlying asset overmost leases and subleases. Additionally, depending on the lease term, including optional paymentclassification under the standard, it may result in different expense recognition patterns and classification than under existing accounting principles. For leases classified as finance leases, it will result in higher expense recognition in the earlier periods only ifand lower expense in the lessee is reasonably certain to exercise the option and (2) a liability representing its obligation to make lease payments over the lease term. The classification of leases and the income statement impact for lessees will depend on whether the leases meet certain criterion, including when the lessee is deemed to obtain effective controllater periods of the underlying asset. lease.

The accounting for lessors is largely unchanged from the previous accounting guidance, except for leverage lease accounting which is not permitted for leases entered into or modified after the effective date of the new standard. The FASB requires a modified retrospective method of adoption. The final guidancestandard is effective for reporting periods beginning after Dec. 15, 2018. BNY Mellon is assessing the impactsfirst quarter of 2019, with early adoption permitted. We will utilize the modified retrospective transition approach as of the new standard.beginning of the earliest period presented, which will result in a cumulative effect recorded in the earliest period presented. Additionally, the standard allows for various optional practical expedients to assist with the implementation and reporting requirements. We are currently evaluating the potential impact of the leasing standard on our consolidated financial statements and evaluating the practical expedients that may be elected. Upon adoption, the implementation of the leasing standard is expected to result in an immaterial increase in both assets and liabilities.

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

In January 2016, the FASB issued ASU 2016-01, “RecognitionRecognition and Measurement of Financial Assets and Financial Liabilities.”Liabilities. The new ASU requires investments in equity securities that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with


54 BNY Mellon


changes in the fair value recognized through net income, unless one of two available exceptions apply. The first exception, a scope exception, allows Federal Reserve Bank Stock, Federal Home Loan Bankstock, FHLB stock and other exchange memberships held by broker dealers to remain accounted for at cost, less impairment. It also does not apply to derivative instruments that are subject to the requirements of ASC 815, Derivatives and Hedging. The second exception, a practicability exception, will be available
for equity investments that do not have readily determinable fair values and do not qualify for the practical expedient to estimate fair value under ASC 820,, Fair Value Measurement. To the extent the practicability exception applies, such investments will be accounted for at cost adjusted for impairment, if any, plus or minus changes from observable price changes.

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

This ASU is effective for fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years. If certain requirements are met, early adoptionThe Company plans to adopt this guidance in the first quarter of 2018 using the “own credit risk” provision is permitted; early adoption of the other provisions is not permitted. The FASB requires a modified retrospectivecumulative effect method of adoption. BNY Mellon is assessingdoes not expect the impactsadoption of this ASU to have a material impact to the new standard.financial statements.

Recent regulatory developments

For a summary of additional regulatory matters relevant to our operations, see “SupervisionSupervision and regulation”Regulation in our 20152016 Annual Report.

Resolution planFinal Rule on Qualified Financial Contracts

In April 2016, the FDIC andOn Sept. 1, 2017, the Federal Reserve jointly announced that the Agencies had determined that the Company’s 2015 resolution plan was not credible or would not facilitate an orderly resolution underadopted a final rule to require U.S. global systemically important banking organizations (“G-SIBs”) and the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Act, and issuedoperations of foreign G-SIBs to amend their covered qualified financial contracts (“QFCs”). The FDIC adopted a joint notice of deficiencies and shortcomings regarding the Company’s plansubstantially equivalent proposal on Oct. 30, 2017 and the actions that must be taken to address them. As required, we made an Oct. 1, 2016 submission to the agencies, which provided our plans to address the shortcomings and, we believe, addressed all of the deficiencies identified by the agencies.

Following the receipt of the agencies’ April 2016 feedback, we have changed our preferred resolution strategy in the event of our material financial distress or failure to an SPOE strategy. We currently believe that this requires us to issue approximately $2 - $4 billion of incremental unsecured long-term debt



54 BNY Mellon


above our typical funding requirements by July 2017 to satisfy resource needs in a time of distress. This estimate is subject to change as we further refine our strategy and related assumptions. The additional debt is currently expected to have a modest negative impact to net interest revenue.

Cyber security regulatory proposals

On Sept. 13, 2016, the New York State Department of Financial Services (“NYSDFS”) proposed a new cybersecurity regulation. The proposed rule would require financial institutions regulated by NYSDFS, including BNY Mellon, to establish a cybersecurity program, adopt a written cybersecurity policy, designate a chief information security officer, and have policies and procedures in place to ensure the security of information systems and nonpublic information accessible to, or held by, third parties. The proposed rule also includes a variety of other requirements to protect the confidentiality, integrity, and availability of information systems.

Following the NYSDFS proposal, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency (the “OCC”) approved a joint advance noticeis expected to do so in the near future. QFCs generally include derivatives, repurchase agreements and securities lending arrangements, among others. The final rule includes two key requirements. First, the final rule generally requires
that QFCs of proposed rulemakingG-SIBs explicitly provide that would impose enhanced cyber risk management standards on banking organizations with $50 billion or more in total consolidated assets and certain of their service providers. The standards address five categories:

cyber risk governance;
cyber risk management;
internal dependency management;
external dependency management;
incident response, cyber resilience, and situational awareness. 

The agencies are also considering proposing more stringent “Sector Critical Standards” that would apply to systems “deemed criticalany resolution stays applicable to the financial sector”. BNYM is monitoring further developmentsexercise of default rights with respect to bothsuch QFCs and to any resolution transfers under U.S. special resolution regimes apply to such covered QFCs.  Second, the NYSDFS and federal agency rulemaking in this area.final rule requires that QFCs of G-SIBs be amended to neither permit the exercise of default or cross-default rights against entities covered by the final rule based on the resolution or bankruptcy of an affiliate of such entities, nor allow for any transfer restrictions with respect to such QFCs.

SEC rules on mutual funds
On Oct. 13, 2016, the Securities and Exchange Commission (the “SEC”) adopted regulations that impose new requirements on mutual funds, exchange-traded funds, and other registered investment companies. The new rules would require mutual funds (other than money market funds) to provide portfolio-wide and position-level holdings data to the SEC on a monthly basis. This data would include the pricing of portfolio securities, information regarding repurchase and securities lending activities, and the terms of derivatives contracts. Information contained in reports for the last month of each fund’s fiscal quarter would be made available to the public within 60 days of the end of the relevant quarter.
The new rules also impose liquidity risk management requirements that are intended to reduce the risk that funds will not be able to meet shareholder redemptions and to minimize the impact of redemptions on remaining shareholders. Each fund would be required to establish a liquidity risk management program; classify the investments in its portfolio into one of four liquidity categories; maintain a highly liquid investment minimum; and limit illiquid investments to 15 percent of net assets. The new rules also permit funds to use swing pricing in certain circumstances. The compliance dates for the reporting requirements depend on the applicable reporting form. Most funds would be requiredfinal rule allows G-SIBs to comply with the liquidity risk management requirementsrule by Dec.adhering to the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol (the “Protocol”) or a similar protocol that accomplishes the contractual amendments required by the rule. BNY Mellon entities that engage in QFC activities covered by the Protocol have adhered to the Protocol.  Compliance with the Federal Reserve’s final rule will be required on a phased-in basis beginning on Jan. 1, 2018. The SEC has delayed the effective date of the swing pricing amendments.2019. BNY Mellon is evaluating the cost of compliance and the impact of the new regulations on its activities.

Proposed changes to CCAR rulesResolution plan

On Sept. 26, 2016,As required by the Dodd-Frank Act, BNY Mellon must submit annually to the Federal Reserve releasedand the FDIC a noticeplan for its rapid and orderly resolution in the event of proposed rulemaking (“NPR”) that would introduce several changes tomaterial financial distress or failure. BNY Mellon filed its most recent resolution plan on July 1, 2017. We believe the 2017 CCAR cycle, including by: (i) reducingresolution plan addresses all shortcomings and deficiencies identified by the de minimis exception for additional capital distributions from 1.00% of a BHC’s Tier 1 capital to 0.25%; (ii) introducing “blackout periods” for notices regarding or requests for approval to make additional capital distributions;FDIC and (iii) extending the range of dates from which the Federal Reserve may selectin the “as of” dateCompany’s 2015 resolution plan. The public portion of our 2017 resolution plan is available on the Federal Reserve’s and FDIC’s websites.

In September 2017, the Federal Reserve and FDIC extended the filing deadline by one year to July 1, 2019 for the global market shock component of the supervisory stress test macroeconomic scenarios applicable to certain bank holding companies. Comments on this NPR are due Nov. 25, 2016.Parent’s next resolution plan.




BNY Mellon 55


Website information

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

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

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




56 BNY Mellon

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


Consolidated Income Statement (unaudited)

Quarter ended Year-to-dateQuarter ended Year-to-date
Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in millions)  
Fee and other revenue      
Investment services fees:      
Asset servicing$1,067
$1,069
$1,057
 $3,176
$3,155
$1,105
$1,085
$1,067
 $3,253
$3,176
Clearing services349
350
345
 1,049
1,036
383
394
349
 1,153
1,049
Issuer services337
234
313
 815
779
288
241
337
 780
815
Treasury services137
139
137
 407
418
141
140
137
 420
407
Total investment services fees1,890
1,792
1,852
 5,447
5,388
1,917
1,860
1,890
 5,606
5,447
Investment management and performance fees860
830
829
 2,502
2,574
901
879
860
 2,622
2,502
Foreign exchange and other trading revenue183
182
179
 540
595
173
165
183
 502
540
Financing-related fees58
57
71
 169
169
54
53
58
 162
169
Distribution and servicing43
43
41
 125
121
40
41
43
 122
125
Investment and other income92
74
59
 271
223
63
122
92
 262
271
Total fee revenue3,126
2,978
3,031
 9,054
9,070
3,148
3,120
3,126
 9,276
9,054
Net securities gains — including other-than-temporary impairment27
21
22
 67
65
18

27
 28
67
Noncredit-related portion of other-than-temporary impairment
(recognized in other comprehensive income)
3


 2
3
(1)
3
 (1)2
Net securities gains24
21
22
 65
62
19

24
 29
65
Total fee and other revenue3,150
2,999
3,053
 9,119
9,132
3,167
3,120
3,150
 9,305
9,119
Operations of consolidated investment management funds      
Investment income (loss)20
10
(6) 27
96
Investment income10
10
20
 57
27
Interest of investment management fund note holders3

16
 6
26


3
 4
6
Income (loss) from consolidated investment management funds17
10
(22) 21
70
Income from consolidated investment management funds10
10
17
 53
21
Net interest revenue      
Interest revenue874
890
838
 2,647
2,492
1,151
1,052
874
 3,163
2,647
Interest expense100
123
79
 340
226
312
226
100
 706
340
Net interest revenue774
767
759
 2,307
2,266
839
826
774
 2,457
2,307
Total revenue3,941
3,776
3,790
 11,447
11,468
4,016
3,956
3,941
 11,815
11,447
Provision for credit losses(19)(9)1
 (18)(3)(6)(7)(19) (18)(18)
Noninterest expense      
Staff1,467
1,412
1,437
 4,338
4,356
1,469
1,417
1,467
 4,358
4,338
Professional, legal and other purchased services292
290
301
 860
902
305
319
292
 936
860
Software156
160
154
 470
470
175
173
156
 514
470
Net occupancy143
152
152
 437
452
141
139
143
 416
437
Distribution and servicing105
102
95
 307
289
109
104
105
 313
307
Sub-custodian59
70
65
 188
210
62
65
59
 191
188
Furniture and equipment59
63
72
 187
212
58
59
59
 174
187
Bank assessment charges (a)
51
59
61
 167
166
Business development52
65
59
 174
192
49
63
52
 163
174
Other231
240
268
 712
760
Other (a)
177
192
170
 536
546
Amortization of intangible assets61
59
66
 177
197
52
53
61
 157
177
Merger and integration, litigation and restructuring charges18
7
11
 42
67
6
12
18
 26
42
Total noninterest expense2,643
2,620
2,680
 7,892
8,107
2,654
2,655
2,643
 7,951
7,892
Income      
Income before income taxes1,317
1,165
1,109
 3,573
3,364
1,368
1,308
1,317
 3,882
3,573
Provision for income taxes324
290
282
 897
838
348
332
324
 949
897
Net income993
875
827
 2,676
2,526
1,020
976
993
 2,933
2,676
Net (income) loss attributable to noncontrolling interests (includes $(9), $(4), $5, $(6) and $(63) related to consolidated investment management funds, respectively)(6)(2)6
 1
(61)
Net (income) loss attributable to noncontrolling interests (includes $(3), $(3), $(9), $(24) and $(6) related to consolidated investment management funds, respectively)(2)(1)(6) (18)1
Net income applicable to shareholders of The Bank of New York Mellon Corporation987
873
833
 2,677
2,465
1,018
975
987
 2,915
2,677
Preferred stock dividends(13)(48)(13) (74)(49)(35)(49)(13) (126)(74)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation$974
$825
$820
 $2,603
$2,416
$983
$926
$974
 $2,789
$2,603

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



BNY Mellon 57

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

Consolidated Income Statement (unaudited)(continued) 

Net income applicable to common shareholders of The Bank of New York Mellon Corporation used for the earnings per share calculationQuarter ended Year-to-dateQuarter ended Year-to-date
Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in millions)  
Net income applicable to common shareholders of The Bank of New York Mellon Corporation$974
$825
$820
 $2,603
$2,416
$983
$926
$974
 $2,789
$2,603
Less: Earnings allocated to participating securities(a)15
13
6
 39
34
8
13
15
 35
39
Net income applicable to the common shareholders of The Bank of New York Mellon Corporation after required adjustment for the calculation of basic and diluted earnings per common share$959
$812
$814

$2,564
$2,382
Net income applicable to common shareholders of The Bank of New York Mellon Corporation after required adjustment for the calculation of basic and diluted earnings per common share$975
$913
$959

$2,754
$2,564


Average common shares and equivalents outstanding of The Bank of New York Mellon Corporation(a)Quarter ended Year-to-dateQuarter ended Year-to-date
Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in thousands)  
Basic1,062,248
1,072,583
1,098,003
 1,071,457
1,110,056
1,035,337
1,035,829
1,062,248
 1,037,431
1,071,457
Common stock equivalents15,406
14,551
16,476
 15,306
17,371
9,226
15,598
15,406
 14,216
15,306
Less: Participating securities(9,972)(8,863)(8,834) (9,613)(9,452)(3,425)(9,548)(9,972) (8,062)(9,613)
Diluted1,067,682
1,078,271
1,105,645
 1,077,150
1,117,975
1,041,138
1,041,879
1,067,682
 1,043,585
1,077,150
      
Anti-dilutive securities (a)(b)
32,232
32,974
28,119
 32,699
29,378
8,059
16,256
32,232
 13,906
32,699


Earnings per share applicable to the common shareholders of The Bank of New York Mellon Corporation (b)
Quarter ended Year-to-date
Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
Earnings per share applicable to common shareholders of The Bank of New York Mellon Corporation (c)
Quarter ended Year-to-date
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in dollars)Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
 
Basic $0.94
$0.88
$0.90
 $2.66
$2.39
Diluted$0.90
$0.75
$0.74
 $2.38
$2.13
$0.94
$0.88
$0.90
 $2.64
$2.38
(a)Beginning in the third quarter of 2017, vested stock awards to retirement eligible employees are included in common shares outstanding for earnings per share purposes. This change increased both average basic and average diluted shares outstanding by approximately 6 million and reduced earnings allocated to participating securities by $6 million for the quarter, which resulted in a de minimis impact to both basic and diluted earnings per share.
(b)Represents stock options, restricted stock, restricted stock units and participating securities outstanding but not included in the computation of diluted average common shares because their effect would be anti-dilutive.
(b)(c)Basic and diluted earnings per share under the two-class method are determined on the net income applicable to common shareholders of The Bank of New York Mellon Corporation reported on the income statement less earnings allocated to participating securities, and the change in the excess of redeemable value over the fair value of noncontrolling interests, if applicable.securities.


See accompanying Notes to Consolidated Financial Statements.



58 BNY Mellon

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

Consolidated Comprehensive Income Statement (unaudited)

Quarter ended Year-to-dateQuarter ended Year-to-date
Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in millions)  
Net income$993
$875
$827
 $2,676
$2,526
$1,020
$976
$993
 $2,933
$2,676
Other comprehensive income (loss), net of tax:      
Foreign currency translation adjustments(186)(284)(163) (433)(435)286
330
(186) 741
(433)
Unrealized (loss) gain on assets available-for-sale:   
Unrealized (loss) gain arising during the period(53)117
7
 227
(217)
Unrealized gain on assets available-for-sale:   
Unrealized gain (loss) arising during the period28
91
(53) 213
227
Reclassification adjustment(15)(13)(14) (43)(39)(12)(1)(15) (19)(43)
Total unrealized (loss) gain on assets available-for-sale(68)104
(7) 184
(256)
Total unrealized gain (loss) on assets available-for-sale16
90
(68) 194
184
Defined benefit plans:      
Net gain (loss) arising during the period

2
 2
(107)
Net gain arising during the period


 2
2
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost14
14
21
 43
47
15
16
14
 49
43
Total defined benefit plans14
14
23
 45
(60)15
16
14
 51
45
Net unrealized gain (loss) on cash flow hedges2
(9)
 (4)8

1
2
 11
(4)
Total other comprehensive (loss), net of tax (a)
(238)(175)(147) (208)(743)
Total other comprehensive income (loss), net of tax (a)
317
437
(238) 997
(208)
Total comprehensive income755
700
680

2,468
1,783
1,337
1,413
755
 3,930
2,468
Net (income) loss attributable to noncontrolling interests(6)(2)6
 1
(61)(2)(1)(6) (18)1
Other comprehensive loss attributable to noncontrolling interests5
13
17
 23
22
Comprehensive income applicable to The Bank of New York Mellon Corporation$754
$711
$703
 $2,492
$1,744
Other comprehensive (income) loss attributable to noncontrolling interests(5)(6)5
 (13)23
Comprehensive income applicable to shareholders of The Bank of New York Mellon Corporation$1,330
$1,406
$754
 $3,899
$2,492
(a)Other comprehensive income (loss) attributable to The Bank of New York Mellon Corporation shareholders was $312 million for the quarter ended Sept. 30, 2017, $431 million for the quarter ended June 30, 2017, $(233) million for the quarter ended Sept. 30, 2016, $(162)$984 million for the quarter ended June 30, 2016, $(130) million for the quarternine months ended Sept. 30, 2015,2017 and $(185) million for the nine months ended Sept. 30, 2016 and $(721) million for the nine months ended Sept. 30, 2015.2016.


See accompanying Notes to Consolidated Financial Statements.



BNY Mellon 59

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

Consolidated Balance Sheet (unaudited)

Sept. 30, 2016
Dec. 31, 2015
Sept. 30, 2017
Dec. 31, 2016
(dollars in millions, except per share amounts)
Assets  
Cash and due from:  
Banks$4,957
$6,537
$5,557
$4,822
Interest-bearing deposits with the Federal Reserve and other central banks80,359
113,203
75,808
58,041
Interest-bearing deposits with banks14,416
15,146
15,256
15,086
Federal funds sold and securities purchased under resale agreements34,851
24,373
27,883
25,801
Securities:  

Held-to-maturity (fair value of $41,387 and $43,204)40,728
43,312
Held-to-maturity (fair value of $39,928 and $40,669)39,995
40,905
Available-for-sale78,270
75,867
80,054
73,822
Total securities118,998
119,179
120,049
114,727
Trading assets5,340
7,368
4,666
5,733
Loans (includes $29 and $422, at fair value)65,997
63,703
Loans59,068
64,458
Allowance for loan losses(148)(157)(161)(169)
Net loans65,849
63,546
58,907
64,289
Premises and equipment1,338
1,379
1,631
1,303
Accrued interest receivable522
562
547
568
Goodwill17,449
17,618
17,543
17,316
Intangible assets3,671
3,842
3,461
3,598
Other assets (includes $1,702 and $1,087, at fair value)25,355
19,626
Other assets (includes $827 and $1,339, at fair value)22,287
20,954
Subtotal assets of operations373,105
392,379
353,595
332,238
Assets of consolidated investment management funds, at fair value: 
Trading assets873
1,228
Other assets136
173
Subtotal assets of consolidated investment management funds, at fair value1,009
1,401
Assets of consolidated investment management funds, at fair value802
1,231
Total assets$374,114
$393,780
$354,397
$333,469
Liabilities  

Deposits:  

Noninterest-bearing (principally U.S. offices)$105,632
$96,277
$80,380
$78,342
Interest-bearing deposits in U.S. offices56,713
51,704
46,023
52,049
Interest-bearing deposits in Non-U.S. offices99,033
131,629
Interest-bearing deposits in non-U.S. offices104,593
91,099
Total deposits261,378
279,610
230,996
221,490
Federal funds purchased and securities sold under repurchase agreements8,052
15,002
10,314
9,989
Trading liabilities4,154
4,501
3,253
4,389
Payables to customers and broker-dealers21,162
21,900
21,176
20,987
Commercial paper2,501

Other borrowed funds993
523
3,353
754
Accrued taxes and other expenses
5,687
5,986
6,070
5,867
Other liabilities (including allowance for lending-related commitments of $126 and $118, also includes $1,120 and $392, at fair value)7,709
5,490
Long-term debt (includes $376 and $359, at fair value)24,374
21,547
Other liabilities (including allowance for lending-related commitments of $104 and $112, also includes $812 and $597, at fair value)7,195
5,635
Long-term debt (includes $369 and $363, at fair value)28,408
24,463
Subtotal liabilities of operations333,509
354,559
313,266
293,574
Liabilities of consolidated investment management funds, at fair value: 
Trading liabilities219
229
Other liabilities13
17
Subtotal liabilities of consolidated investment management funds, at fair value232
246
Liabilities of consolidated investment management funds, at fair value27
315
Total liabilities333,741
354,805
313,293
293,889
Temporary equity  

Redeemable noncontrolling interests178
200
197
151
Permanent equity  

Preferred stock – par value $0.01 per share; authorized 100,000,000 shares; issued 35,826 and 25,826 shares3,542
2,552
Common stock – par value $0.01 per share; authorized 3,500,000,000 shares; issued 1,325,167,583 and 1,312,941,113 shares13
13
Preferred stock – par value $0.01 per share; authorized 100,000,000 shares; issued 35,826 and 35,826 shares3,542
3,542
Common stock – par value $0.01 per share; authorized 3,500,000,000 shares; issued 1,352,363,932 and 1,333,706,427 shares14
13
Additional paid-in capital25,637
25,262
26,588
25,962
Retained earnings22,002
19,974
24,757
22,621
Accumulated other comprehensive loss, net of tax(2,785)(2,600)(2,781)(3,765)
Less: Treasury stock of 267,830,962 and 227,598,128 common shares, at cost(8,714)(7,164)
Less: Treasury stock of 328,341,579 and 286,218,126 common shares, at cost(11,597)(9,562)
Total The Bank of New York Mellon Corporation shareholders’ equity39,695
38,037
40,523
38,811
Nonredeemable noncontrolling interests of consolidated investment management funds500
738
384
618
Total permanent equity40,195
38,775
40,907
39,429
Total liabilities, temporary equity and permanent equity$374,114
$393,780
$354,397
$333,469


See accompanying Notes to Consolidated Financial Statements.


60 BNY Mellon

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

Consolidated Statement of Cash Flows (unaudited)

Nine months ended Sept. 30,Nine months ended Sept. 30,
(in millions)2016
2015
2017
 2016
Operating activities    
Net income$2,676
$2,526
$2,933
 $2,676
Net loss (income) attributable to noncontrolling interests1
(61)
Net (income) loss attributable to noncontrolling interests(18) 1
Net income applicable to shareholders of The Bank of New York Mellon Corporation2,677
2,465
2,915
 2,677
Adjustments to reconcile net income to net cash provided by (used for) operating activities: 
Adjustments to reconcile net income to net cash provided by operating activities:   
Provision for credit losses(18)(3)(18) (18)
Pension plan contributions(17)(41)(12) (17)
Depreciation and amortization1,118
1,084
1,044
 1,118
Deferred tax (benefit)(282)(179)
Net securities (gains) and venture capital (income)(68)(63)
Change in trading activities1,680
511
Deferred tax expense (benefit)272
 (282)
Net securities (gains)(29) (65)
Change in trading assets and liabilities(66) 1,680
Originations of loans held-for-sale(350)

 (350)
Proceeds from the sales of loans originated for sale802


 802
Change in accruals and other, net(3,985)211
(756) (3,988)
Net cash provided by operating activities1,557
3,985
3,350
 1,557
Investing activities    
Change in interest-bearing deposits with banks880
(522)507
 880
Change in interest-bearing deposits with the Federal Reserve and other central banks33,473
14,256
(14,467) 33,473
Purchases of securities held-to-maturity(4,169)(14,545)(5,878) (4,169)
Paydowns of securities held-to-maturity3,577
2,648
3,332
 3,577
Maturities of securities held-to-maturity2,933
961
3,412
 2,933
Purchases of securities available-for-sale(21,491)(26,795)(18,974) (21,491)
Sales of securities available-for-sale5,624
16,085
3,531
 5,624
Paydowns of securities available-for-sale6,552
6,712
7,047
 6,552
Maturities of securities available-for-sale7,610
12,201
4,820
 7,610
Net change in loans(2,884)(4,237)5,283
 (2,884)
Sales of loans and other real estate172
316
369
 172
Change in federal funds sold and securities purchased under resale agreements(10,456)(8,599)(2,082) (10,456)
Net change in seed capital investments(57)367
(52) (57)
Purchases of premises and equipment/capitalized software(495)(427)(933) (495)
Proceeds from the sale of premises and equipment65
16

 65
Acquisitions, net of cash(38)(9)
 (38)
Dispositions, net of cash1
17

 1
Other, net(239)1,307
82
 (239)
Net cash provided by (used for) investing activities21,058
(248)
Net cash (used for) provided by investing activities(14,003) 21,058
Financing activities    
Change in deposits(18,378)(505)4,459
 (18,378)
Change in federal funds purchased and securities sold under repurchase agreements(6,950)(2,645)325
 (6,950)
Change in payables to customers and broker-dealers(743)1,055
177
 (743)
Change in other borrowed funds427
(217)2,187
 427
Change in commercial paper2,501
 
Net proceeds from the issuance of long-term debt4,982
4,190
4,739
 4,982
Repayments of long-term debt(2,453)(3,259)(796) (2,453)
Proceeds from the exercise of stock options129
263
383
 129
Issuance of common stock20
20
24
 20
Issuance of preferred stock990
990

 990
Treasury stock acquired(1,550)(1,924)(2,035) (1,550)
Common cash dividends paid(576)(574)(653) (576)
Preferred cash dividends paid(74)(49)(126) (74)
Other, net(2)140
46
 (2)
Net cash (used for) financing activities(24,178)(2,515)
Net cash provided by (used for) financing activities11,231
 (24,178)
Effect of exchange rate changes on cash(17)42
157
 (17)
Change in cash and due from banks    
Change in cash and due from banks(1,580)1,264
735
 (1,580)
Cash and due from banks at beginning of period6,537
6,970
4,822
 6,537
Cash and due from banks at end of period$4,957
$8,234
$5,557
 $4,957
Supplemental disclosures    
Interest paid$371
$285
$721
 $371
Income taxes paid597
746
316
 597
Income taxes refunded293
893
19
 293


See accompanying Notes to Consolidated Financial Statements.


BNY Mellon 61

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

Consolidated Statement of Changes in Equity (unaudited)

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

Total
permanent
equity

 
Redeemable
non-
controlling
interests/
temporary
equity

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

Total
permanent
equity

 
Redeemable
non-
controlling
interests/
temporary
equity

(in millions, except per
share amounts)
Preferred stock
Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated
other
comprehensive (loss) income,
net of tax

Treasury
stock

Balance at Dec. 31, 2015$2,552
$13
$25,262
$19,974
$(2,600)$(7,164)$738
$38,775
(a)$200
(in millions, except per
share amount)
Preferred stock
Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated
other
comprehensive (loss) income,
net of tax

Treasury
stock

Non-
redeemable
noncontrolling
interests of
consolidated
investment
management
funds

Total
permanent
equity

 
Redeemable
non-
controlling
interests/
temporary
equity

Balance at Dec. 31, 2016$3,542
$13
$25,962
$22,621
$(3,765)$(9,562)
Shares issued to shareholders of noncontrolling interests







 42








 40
Redemption of subsidiary shares from noncontrolling interests







 (45)







 (16)
Other net changes in noncontrolling interests

(8)


(244)(252) 11


(11)


(258)(269) 15
Net income (loss)


2,677


6
2,683
 (7)


2,915


24
2,939
 (6)
Other comprehensive income (loss)



(185)

(185) (23)
Other comprehensive income



984


984
 13
Dividends:      
Common stock at $0.53 per share


(575)


(575) 
Common stock at $0.62 per
share



(653)


(653) 
Preferred stock


(74)


(74) 



(126)


(126) 
Repurchase of common stock




(1,550)
(1,550) 





(2,035)
(2,035) 
Common stock issued under:      
Employee benefit plans

22




22
 


21




21
 
Direct stock purchase and dividend reinvestment plan

15




15
 


18




18
 
Preferred stock issued990






990
 
Stock awards and options exercised

346




346
 

1
598




599
 
Balance at Sept. 30, 2016$3,542
$13
$25,637
$22,002
$(2,785)$(8,714)$500
$40,195
(a)$178
Balance at Sept. 30, 2017$3,542
$14
$26,588
$24,757
$(2,781)$(11,597)$384
$40,907
(a)$197
(a)Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $35,485$35,269 million at Dec. 31, 20152016 and $36,153$36,981 million at Sept. 30, 2016.2017.


See accompanying Notes to Consolidated Financial Statements.



62 BNY Mellon

Notes to Consolidated Financial Statements
 


Note 1 - Basis of presentation

Basis of presentation

The accounting and financial reporting policies of BNY Mellon, a global financial services company, conform to U.S. generally accepted accounting principles (“GAAP”) and prevailing industry practices.

The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been made. These financial statements should be read in conjunction with BNY Mellon’s Annual Report on Form 10-K for the year ended Dec. 31, 2015.2016. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with current period presentation.

Use of estimates

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


 
Note 2 - AcquisitionsAccounting change and dispositionsnew accounting guidance

ASU 2017-04, Simplifying the Test for Goodwill Impairment

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

ASU 2016-09, Compensation Stock Compensation

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

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

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



BNY Mellon 63

Notes to Consolidated Financial Statements(continued)

Note 3 - Acquisitions

We sometimes structure our acquisitions with both an initial payment and later contingent payments tied to post-closing revenue or income growth. There were no contingentContingent payments totaled $2 million in the third quarter of 20162017 and $4 million in the first nine months of 2016.2017.

At Sept. 30, 2016,2017, we are potentially obligated to pay additional consideration which, using reasonable assumptions, could range from $0 million to $2016 million over the next threetwo years, but could be higher as certain of the arrangements do not contain a contractual maximum. The acquisitions and dispositionacquisition described below did not have a material impact on BNY Mellon’s results of operations.

Acquisition in 2016

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

Acquisition in 2015

On Jan. 2, 2015, BNY Mellon acquired Cutwater Asset Management, a U.S.-based, fixed income and solutions specialist with approximately $23 billion in assets under management.

Disposition in 2015

On July 31, 2015, BNY Mellon sold Meriten Investment Management GmbH (“Meriten”), a German-based investment management boutique, for $40 million. As a result of this sale, we recorded an after-tax loss of $12 million. Goodwill of $22 million and customer relationship intangible assets of $9 million were removed from the balance sheet as a result of this sale.




BNY Mellon 63

Notes to Consolidated Financial Statements(continued)

Note 34 - Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of securities at Sept. 30, 20162017 and Dec. 31, 2015.2016.

Securities at Sept. 30, 2016
Gross
unrealized
 
Securities at Sept. 30, 2017Securities at Sept. 30, 2017
Gross
unrealized
 
Amortized cost
Gross
unrealized
Fair
value

Amortized cost
Fair
value

(in millions)Gains
Losses
Available-for-sale:  
U.S. Treasury$13,947
$670
$8
$14,609
$15,389
$236
$123
$15,502
U.S. Government agencies291
10

301
U.S. government agencies866
4
6
864
State and political subdivisions3,475
99
15
3,559
3,091
57
24
3,124
Agency RMBS23,447
290
229
23,508
24,546
135
250
24,431
Non-agency RMBS659
28
14
673
491
37
3
525
Other RMBS649
5
10
644
270
3
8
265
Commercial MBS939
27
5
961
960
9
4
965
Agency commercial MBS5,775
114
8
5,881
9,026
41
57
9,010
CLOs2,530
5
1
2,534
2,542
9
1
2,550
Other asset-backed securities2,202
9
8
2,203
1,152
5

1,157
Foreign covered bonds2,316
40
1
2,355
2,529
20
7
2,542
Corporate bonds1,585
54
1
1,638
1,262
21
8
1,275
Sovereign debt/sovereign guaranteed13,657
348

14,005
12,393
195
23
12,565
Other debt securities2,970
32

3,002
3,149
12
10
3,151
Equity securities2
1

3
2
2

4
Money market funds931


931
939


939
Non-agency RMBS (a)
1,166
304
7
1,463
885
304
4
1,185
Total securities available-for-sale (b)
$76,541
$2,036
$307
$78,270
$79,492
$1,090
$528
$80,054
Held-to-maturity:  
U.S. Treasury$11,165
$154
$
$11,319
$9,867
$21
$29
$9,859
U.S. Government agencies1,529
1

1,530
U.S. government agencies1,614

6
1,608
State and political subdivisions19
1
1
19
18

1
17
Agency RMBS25,051
433
5
25,479
25,575
96
185
25,486
Non-agency RMBS82
4
2
84
64
5

69
Other RMBS158

11
147
65

1
64
Commercial MBS29


29
6


6
Agency commercial MBS555
19

574
1,118
5
5
1,118
Foreign covered bonds79
2

81
83
1

84
Sovereign debt/sovereign guaranteed2,033
64

2,097
1,558
32

1,590
Other debt securities28


28
27


27
Total securities held-to-maturity$40,728
$678
$19
$41,387
$39,995
$160
$227
$39,928
Total securities$117,269
$2,714
$326
$119,657
$119,487
$1,250
$755
$119,982
(a)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)Includes gross unrealized gains of $68$53 million and gross unrealized losses of $204 million recorded in accumulated other comprehensive income related to investment securities that were transferred from available-for-sale to held-to-maturity. The unrealized gains and losses primarily are related to Agency RMBS and will be amortized into net interest revenue over the estimated lives of the securities.


Securities at Dec. 31, 2015Gross
unrealized


 Amortized cost
Fair
value

(in millions)Gains
Losses
Available-for-sale:    
U.S. Treasury$12,693
$175
$36
$12,832
U.S. Government agencies386
2
1
387
State and political subdivisions3,968
91
13
4,046
Agency RMBS23,549
239
287
23,501
Non-agency RMBS782
31
20
793
Other RMBS1,072
10
21
1,061
Commercial MBS1,400
8
16
1,392
Agency commercial MBS4,031
24
35
4,020
CLOs2,363
1
13
2,351
Other asset-backed securities2,909
1
17
2,893
Foreign covered bonds2,125
46
3
2,168
Corporate bonds1,740
26
14
1,752
Sovereign debt/sovereign guaranteed13,036
211
30
13,217
Other debt securities2,732
46
3
2,775
Equity securities3
1

4
Money market funds886


886
Non-agency RMBS (a)
1,435
362
8
1,789
Total securities available-for-sale (b)
$75,110
$1,274
$517
$75,867
Held-to-maturity:    
U.S. Treasury$11,326
$25
$51
$11,300
U.S. Government agencies1,431

6
1,425
State and political subdivisions20

1
19
Agency RMBS26,036
134
205
25,965
Non-agency RMBS118
5
2
121
Other RMBS224
1
10
215
Commercial MBS9


9
Agency commercial MBS503

9
494
Foreign covered bonds76


76
Sovereign debt/sovereign guaranteed3,538
22
11
3,549
Other debt securities31


31
Total securities held-to-maturity$43,312
$187
$295
$43,204
Total securities$118,422
$1,461
$812
$119,071
(a)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)Includes gross unrealized gains of $84 million and gross unrealized losses of $248$155 million recorded in accumulated other comprehensive income related to investment securities that were transferred from available-for-sale to held-to-maturity. The unrealized gains and losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the estimatedcontractual lives of the securities.





64 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Securities at Dec. 31, 2016Gross
unrealized


 Amortized cost
Fair
value

(in millions)Gains
Losses
Available-for-sale:    
U.S. Treasury$14,373
$115
$181
$14,307
U.S. government agencies366
2
9
359
State and political subdivisions3,392
38
52
3,378
Agency RMBS22,929
148
341
22,736
Non-agency RMBS620
31
13
638
Other RMBS517
4
8
513
Commercial MBS931
8
11
928
Agency commercial MBS6,505
28
84
6,449
CLOs2,593
6
1
2,598
Other asset-backed securities1,729
4
6
1,727
Foreign covered bonds2,126
24
9
2,141
Corporate bonds1,391
22
17
1,396
Sovereign debt/sovereign guaranteed12,248
261
20
12,489
Other debt securities1,952
19
10
1,961
Equity securities2
1

3
Money market funds842


842
Non-agency RMBS (a)
1,080
286
9
1,357
Total securities available-for-sale (b)
$73,596
$997
$771
$73,822
Held-to-maturity:    
U.S. Treasury$11,117
$22
$41
$11,098
U.S. government agencies1,589

6
1,583
State and political subdivisions19

1
18
Agency RMBS25,221
57
299
24,979
Non-agency RMBS78
4
2
80
Other RMBS142

4
138
Commercial MBS7


7
Agency commercial MBS721
1
10
712
Foreign covered bonds74
1

75
Sovereign debt/sovereign guaranteed1,911
42

1,953
Other debt securities26


26
Total securities held-to-maturity$40,905
$127
$363
$40,669
Total securities$114,501
$1,124
$1,134
$114,491
(a)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)Includes gross unrealized gains of $62 million and gross unrealized losses of $190 million recorded in accumulated other comprehensive income related to investment securities that were transferred from available-for-sale to held-to-maturity. The unrealized gains and losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities.
The following table presents the gross securities gains, losses and impairments.

Net securities gains (losses)Net securities gains (losses) Net securities gains (losses) 
(in millions)3Q16
2Q16
3Q15
YTD16
YTD15
3Q17
2Q17
3Q16
YTD17
YTD16
Realized gross gains$26
$23
$23
$71
$66
$20
$3
$26
$34
$71
Realized gross losses(1)

(1)(1)
(2)(1)(2)(1)
Recognized gross impairments(1)(2)(1)(5)(3)(1)(1)(1)(3)(5)
Total net securities gains$24
$21
$22
$65
$62
$19
$
$24
$29
$65


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

Temporarily impaired securities

At Sept. 30, 2016,2017, the unrealized losses on the investment securities portfolio were primarily attributable to an increase in interest rates from date of purchase, and for certain securities that were
transferred from available-for-sale to held-to-maturity, an increase in interest rates through the date they were transferred. Specifically, $204$155 million of the unrealized losses at Sept. 30, 20162017 and $248$190 million at Dec. 31, 20152016 reflected in the available-for-sale sections of the tables below relate to certain securities (primarily Agency RMBS) that were transferred in prior periods from available-for-sale to held-to-maturity. The unrealized losses will be amortized into net interest revenue over the estimatedcontractual lives of the securities. The transfer created a new cost basis for the securities. As a result, if these securities have experienced unrealized losses since the date of transfer, the corresponding fair value and unrealized losses would be reflected in the held-to-maturity sections of the following tables. We do not intend to sell these securities and it is not more likely than not that we will have to sell these securities.




BNY Mellon 65

Notes to Consolidated Financial Statements(continued)

The following tables show the aggregate related fair value of investments with a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more at Sept. 30, 20162017 and Dec. 31, 2015.2016.


Temporarily impaired securities at Sept. 30, 2016Less than 12 months 12 months or more Total
Temporarily impaired securities at Sept. 30, 2017Less than 12 months 12 months or more Total
(in millions)Fair
value

Unrealized
losses

 Fair
value

Unrealized
losses

 Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

 Fair
value

Unrealized
losses

 Fair
value

Unrealized
losses

Available-for-sale:          
U.S. Treasury$1,945
$8
 $
$
 $1,945
$8
$7,900
$111
 $495
$12
 $8,395
$123
U.S. government agencies399
6
 

 399
6
State and political subdivisions281
1
 130
14
 411
15
310
4
 384
20
 694
24
Agency RMBS6,580
21
 1,490
208
 8,070
229
8,935
72
 4,145
178
 13,080
250
Non-agency RMBS29

 351
14
 380
14
5

 156
3
 161
3
Other RMBS38
1
 151
9
 189
10
72
4
 83
4
 155
8
Commercial MBS99

 172
5
 271
5
193
2
 92
2
 285
4
Agency commercial MBS1,106
3
 608
5
 1,714
8
3,610
47
 561
10
 4,171
57
CLOs97

 854
1
 951
1
449
1
 

 449
1
Other asset-backed securities12

 434
8
 446
8
Foreign covered bonds1,017
7
 28

 1,045
7
Corporate bonds155
1
 

 155
1
306
3
 144
5
 450
8
Sovereign debt/sovereign guaranteed2,263
20
 137
3
 2,400
23
Other debt securities1,347
9
 84
1
 1,431
10
Non-agency RMBS (a)
44

 44
7
 88
7
8
2
 13
2
 21
4
Foreign covered bonds179
1
 64

 243
1
Total securities available-for-sale (b)
$10,565
$36
 $4,298
$271
 $14,863
$307
$26,814
$288
 $6,322
$240
 $33,136
$528
Held-to-maturity:          
U.S. Treasury$7,281
$29
 $
$
 $7,281
$29
U.S. government agencies1,459
5
 99
1
 1,558
6
State and political subdivisions$
$
 $4
$1
 $4
$1


 4
1
 4
1
Agency RMBS1,601
4
 75
1
 1,676
5
17,125
172
 847
13
 17,972
185
Non-agency RMBS5

 49
2
 54
2
Other RMBS15
1
 132
10
 147
11
15

 35
1
 50
1
Agency commercial MBS557
5
 

 557
5
Total securities held-to-maturity$1,621
$5
 $260
$14
 $1,881
$19
$26,437
$211
 $985
$16
 $27,422
$227
Total temporarily impaired securities$12,186
$41
 $4,558
$285
 $16,744
$326
$53,251
$499
 $7,307
$256
 $60,558
$755
(a)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)Gross unrealized losses for 12 months or more of $204$155 million were recorded in accumulated other comprehensive income and related to investment securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the estimatedcontractual lives of the securities. There were no gross unrealized losses for less than 12 months.


BNY Mellon 65

Notes to Consolidated Financial Statements(continued)

Temporarily impaired securities at Dec. 31, 2015Less than 12 months 12 months or more Total
(in millions)
Fair
value

Unrealized
losses

 
Fair
value

Unrealized
losses

 
Fair
value

Unrealized
losses

Available-for-sale:        
U.S. Treasury$6,343
$36
 $
$
 $6,343
$36
U.S. Government agencies148
1
 10

 158
1
State and political subdivisions143
2
 117
11
 260
13
Agency RMBS8,500
44
 1,316
243
 9,816
287
Non-agency RMBS72

 417
20
 489
20
Other RMBS2

 298
21
 300
21
Commercial MBS567
9
 224
7
 791
16
Agency commercial MBS2,551
31
 172
4
 2,723
35
CLOs1,599
10
 455
3
 2,054
13
Other asset-backed securities2,001
10
 546
7
 2,547
17
Corporate bonds338
10
 128
4
 466
14
Sovereign debt/sovereign guaranteed2,063
30
 43

 2,106
30
Non-agency RMBS (a)
45
1
 52
7
 97
8
Other debt securities505
3
 

 505
3
Foreign covered bonds515
3
 

 515
3
Total securities available-for-sale (b)
$25,392
$190

$3,778
$327

$29,170
$517
Held-to-maturity:        
U.S. Treasury$9,121
$51
 $
$
 $9,121
$51
U.S. Government agencies1,122
6
 

 1,122
6
State and political subdivisions4
1
 

 4
1
Agency RMBS16,491
171
 1,917
34
 18,408
205
Non-agency RMBS40

 29
2
 69
2
Other RMBS9

 166
10
 175
10
Agency commercial MBS494
9
 

 494
9
Sovereign debt/sovereign guaranteed2,161
11
 

 2,161
11
Total securities held-to-maturity$29,442
$249

$2,112
$46

$31,554
$295
Total temporarily impaired securities$54,834
$439

$5,890
$373

$60,724
$812
(a)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)Includes gross unrealized losses for less than 12 months of $8 million and gross unrealized losses for 12 months or more of $240 million recorded in accumulated other comprehensive income related to investment securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses primarily related to Agency RMBS and will be amortized into net interest revenue over the estimated lives of the securities.


The following table shows the maturity distribution by carrying amount and yield (on a tax equivalent basis) of our investment securities portfolio at Sept. 30, 2016.

Maturity distribution and yield on investment securities at Sept. 30, 2016
U.S.
Treasury
 
U.S.
Government
agencies
 
State and
political
subdivisions
 
Other bonds,
notes and
debentures
 
Mortgage/
asset-backed and
equity securities
  
(dollars in millions)Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Total
Securities available-for-sale:                
One year or less$2,515
0.68% $
% $176
2.80% $5,842
0.93% $
% $8,533
Over 1 through 5 years5,810
1.44
 40
1.25
 1,822
2.85
 12,256
1.05
 

 19,928
Over 5 through 10 years2,445
1.72
 261
2.34
 1,363
3.52
 2,679
1.18
 

 6,748
Over 10 years3,839
3.11
 

 198
1.48
 223
1.69
 

 4,260
Mortgage-backed securities

 

 

 

 33,130
2.66
 33,130
Asset-backed securities

 

 

 

 4,737
1.73
 4,737
Equity securities (b)


 

 

 

 934

 934
Total$14,609
1.79% $301
2.19% $3,559
3.03% $21,000
1.04% $38,801
2.48% $78,270
Securities held-to-maturity:                
One year or less$1,745
0.79% $75
0.68% $
% $541
0.57% $
% $2,361
Over 1 through 5 years6,922
1.19
 1,454
1.11
 1
7.12
 862
0.62
 

 9,239
Over 5 through 10 years2,498
1.90
 

 4
6.76
 737
0.69
 

 3,239
Over 10 years

 

 14
5.31
 

 

 14
Mortgage-backed securities

 

 

 

 25,875
2.73
 25,875
Total$11,165
1.29% $1,529
1.09% $19
5.67% $2,140
0.63% $25,875
2.73% $40,728
(a)Yields are based upon the amortized cost of securities.
(b)Includes money market funds.


66 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Temporarily impaired securities at Dec. 31, 2016Less than 12 months 12 months or more Total
(in millions)
Fair
value

Unrealized
losses

 
Fair
value

Unrealized
losses

 
Fair
value

Unrealized
losses

Available-for-sale:        
U.S. Treasury$8,489
$181
 $
$
 $8,489
$181
U.S. government agencies257
9
 

 257
9
State and political subdivisions1,058
33
 131
19
 1,189
52
Agency RMBS14,766
141
 1,673
200
 16,439
341
Non-agency RMBS21

 332
13
 353
13
Other RMBS26

 136
8
 162
8
Commercial MBS302
7
 163
4
 465
11
Agency commercial MBS3,570
78
 589
6
 4,159
84
CLOs443
1
 404

 847
1
Other asset-backed securities276
1
 357
5
 633
6
Foreign covered bonds712
9
 

 712
9
Corporate bonds594
16
 7
1
 601
17
Sovereign debt/sovereign guaranteed1,521
20
 63

 1,584
20
Other debt securities742
10
 50

 792
10
Non-agency RMBS (a)
25

 47
9
 72
9
Total securities available-for-sale (b)
$32,802
$506

$3,952
$265

$36,754
$771
Held-to-maturity:        
U.S. Treasury$6,112
$41
 $
$
 $6,112
$41
U.S. government agencies1,533
6
 

 1,533
6
State and political subdivisions

 4
1
 4
1
Agency RMBS19,498
297
 102
2
 19,600
299
Non-agency RMBS4

 48
2
 52
2
Other RMBS15

 123
4
 138
4
Agency commercial MBS621
10
 

 621
10
Total securities held-to-maturity$27,783
$354

$277
$9

$28,060
$363
Total temporarily impaired securities$60,585
$860

$4,229
$274

$64,814
$1,134
(a)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(b)Includes gross unrealized losses for 12 months or more of $190 million recorded in accumulated other comprehensive income related to investment securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities. There were no gross unrealized losses for less than 12 months.


The following table shows the maturity distribution by carrying amount and yield (on a tax equivalent basis) of our investment securities portfolio at Sept. 30, 2017.

Maturity distribution and yield on investment securities at Sept. 30, 2017U.S. Treasury 
U.S. government
agencies
 
State and political
subdivisions
 Other bonds, notes and debentures 
Mortgage/
asset-backed and
equity securities
  
(dollars in millions)Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Total
Securities available-for-sale:                
One year or less$2,223
1.02% $
% $438
2.60% $3,852
1.01% $
% $6,513
Over 1 through 5 years5,790
1.66
 174
1.29
 1,576
3.07
 12,648
0.99
 

 20,188
Over 5 through 10 years4,002
1.90
 690
2.46
 912
3.34
 2,835
0.81
 

 8,439
Over 10 years3,487
3.11
 

 198
2.36
 198
1.64
 

 3,883
Mortgage-backed securities

 

 

 

 36,381
2.78
 36,381
Asset-backed securities

 

 

 

 3,707
2.32
 3,707
Equity securities (b)


 

 

 

 943

 943
Total$15,502
1.96% $864
2.23% $3,124
3.04% $19,533
0.97% $41,031
2.68% $80,054
Securities held-to-maturity:                
One year or less$4,943
0.97% $731
0.99% $
% $700
0.60% $
% $6,374
Over 1 through 5 years3,517
1.67
 883
1.38
 2
6.88
 307
0.59
 

 4,709
Over 5 through 10 years1,407
1.92
 

 2
6.86
 661
0.73
 

 2,070
Over 10 years

 

 14
5.32
 

 

 14
Mortgage-backed securities

 

 

 

 26,828
2.80
 26,828
Total$9,867
1.36% $1,614
1.20% $18
5.64% $1,668
0.65% $26,828
2.80% $39,995
(a)Yields are based upon the amortized cost of securities.
(b)Includes money market funds.


BNY Mellon 67

Notes to Consolidated Financial Statements(continued)

Other-than-temporary impairment

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

Default rate - the number of mortgage loans expected to go into default over the life of the transaction, which is driven by the roll rate of loans in each performance bucket that will ultimately migrate to default; and
Severity - the loss expected to be realized when a loan defaults.

To determine if an unrealized loss is other-than-temporary, we project total estimated defaults of the underlying assets (mortgages) and multiply that calculated amount by an estimate of realizable value upon sale of these assets in the marketplace (severity) in order to determine the projected collateral loss. In determining estimated default rate and severity assumptions, we review the performance of the underlying securities, industry studies and market forecasts, as well as our view of the economic outlook affecting collateral. We also evaluate the current credit enhancement underlying the bond to determine the impact on cash flows. If we determine that a given security will be subject to a write-down or loss, we record the expected credit loss as a charge to earnings.

The table below shows the projected weighted-average default rates and loss severities for the 2007, 2006 and late 2005 non-agency RMBS and the securities previously held in the Grantor Trust that we established in connection with the restructuring of our investment securities portfolio in 2009, at Sept. 30, 20162017 and Dec. 31, 20152016.

Projected weighted-average default rates and loss severities
Sept. 30, 2016 Dec. 31, 2015Sept. 30, 2017 Dec. 31, 2016
Default rate
Severity
 Default rate
Severity
Default rate
Severity
 Default rate
Severity
Alt-A31%56% 33%57%22%54% 30%54%
Subprime49%70% 52%75%38%66% 49%70%
Prime18%39% 18%40%13%39% 18%39%

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

Net securities gains (losses)Net securities gains (losses) Net securities gains (losses) 
(in millions)3Q16
2Q16
3Q15
YTD16YTD153Q17
2Q17
3Q16
YTD17
YTD16
Agency RMBS$9
$5
$7
$22
$8
$4
$
$9
$5
$22
U.S. Treasury1
(1)(1)
4
Foreign covered bonds

1
10
2




10
U.S. Treasury(1)4
8
4
42
Non-agency RMBS(1)4
(1)1
(3)(1)
(1)(2)1
Other17
8
7
28
13
15
1
17
26
28
Total net securities gains$24
$21
$22
$65
$62
$19
$
$24
$29
$65


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

Debt securities credit loss roll forward  
(in millions)3Q16
3Q15
3Q17
3Q16
Beginning balance as of June 30$91
$91
$85
$91
Add: Initial OTTI credit losses



Subsequent OTTI credit losses1
1
1
1
Less: Realized losses for securities sold5

2
5
Ending balance as of Sept. 30$87
$92
$84
$87

Debt securities credit loss roll forwardYear-to-date 
(in millions)2016
2015
YTD17
YTD16
Beginning balance as of Jan. 1$91
$93
$88
$91
Add: Initial OTTI credit losses



Subsequent OTTI credit losses5
2
3
5
Less: Realized losses for securities sold9
3
7
9
Ending balance as of Sept. 30$87
$92
$84
$87


Pledged assets

At Sept. 30, 2016,2017, BNY Mellon had pledged assets of $104$108 billion, including $86$87 billion pledged as collateral for potential borrowings at the Federal Reserve Discount Window.Window and $4 billion pledged as collateral for borrowing at the Federal Home Loan Bank. The components of the assets pledged at Sept. 30, 20162017 included $90$92 billion of securities, $8$13 billion of loans, $4$2 billion of trading assets and $1 billion of interest-bearing deposits with banks and $2 billion of trading assets.banks.

If there has been no borrowing at the Federal Reserve Discount Window, the Federal Reserve generally



68 BNY Mellon 67

Notes to Consolidated Financial Statements (continued)
 

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

At Dec. 31, 2015,2016, BNY Mellon had pledged assets of $101$102 billion, including $84 billion pledged as collateral for potential borrowing at the Federal Reserve Discount Window. The components of the assets pledged at Dec. 31, 20152016 included $88$87 billion of securities, $8 billion of loans, $3 billion of trading assets and $2$4 billion of interest-bearing deposits with banks.banks and $3 billion of trading assets.

At Sept. 30, 20162017 and Dec. 31, 2015,2016, pledged assets included $6$13 billion and $7$6 billion, respectively, for which the recipients were permitted to sell or repledge the assets delivered.

We also obtain securities as collateral, including receipts under resale agreements, securities borrowed, derivative contracts and custody agreements on terms which permit us to sell or repledge the securities to others. At Sept. 30, 20162017 and Dec. 31, 2015,2016, the market value of the securities received that can be sold or repledged was $60$68 billion and $52$50 billion, respectively. We routinely sell or repledge these securities through delivery to third parties. As of Sept. 30, 20162017 and Dec. 31, 2015,2016, the market value of securities collateral sold or repledged was $20$39 billion and $17$20 billion, respectively.

Restricted cash and securities

Cash and securities may also be segregated under federal and other regulations or requirements. At Sept. 30, 20162017 and Dec. 31, 2015,2016, cash segregated under federal and other regulations or requirements was $4 billion and $3 billion, and $4 billion, respectively. SegregatedRestricted cash is included in interest-bearing deposits with banks on the consolidated balance sheet. Securities segregated for these purposes were $2 billion at Sept. 30, 20162017 and $1$2 billion at Dec. 31, 2015. Segregated2016. Restricted securities were sourced from securities purchased under resale agreements at Sept. 30, 2017 and Dec. 31, 2016 and are included in federal funds sold and securities purchased under resale agreements on the consolidated balance sheet. Segregated securities are included in trading assets on the consolidated balance sheet at Dec. 31, 2015.

 
Note 45 - Loans and asset quality

Loans

The table below provides the details of our loan portfolio and industry concentrations of credit risk at Sept. 30, 20162017 and Dec. 31, 2015.2016.

LoansSept. 30, 2016
Dec. 31, 2015
Sept. 30, 2017
Dec. 31, 2016
(in millions)
Domestic:  
Financial institutions$6,783
$6,640
$5,155
$6,342
Commercial2,292
2,115
2,698
2,286
Wealth management loans and mortgages15,031
13,247
16,161
15,555
Commercial real estate4,723
3,899
4,921
4,639
Lease financings1,017
1,007
823
989
Other residential mortgages901
1,055
741
854
Overdrafts1,580
911
1,487
1,055
Other1,122
1,137
1,159
1,202
Margin loans17,487
19,340
13,720
17,503
Total domestic50,936
49,351
46,865
50,425
Foreign:  
Financial institutions7,963
9,259
6,741
8,347
Commercial373
227
305
331
Wealth management loans and mortgages97
100
104
99
Commercial real estate17
46
6
15
Lease financings731
850
522
736
Other (primarily overdrafts)5,810
3,637
4,373
4,418
Margin loans70
233
152
87
Total foreign15,061
14,352
12,203
14,033
Total loans (a)
$65,997
$63,703
$59,068
$64,458
(a)
Net of unearned income of $563414 million at Sept. 30, 20162017 and $674527 million at Dec. 31, 20152016 primarily on domestic and foreign lease financings.


Our loan portfolio consists of three portfolio segments: commercial, lease financings and mortgages. We manage our portfolio at the class level which consists of six classes of financing receivables: commercial, commercial real estate, financial institutions, lease financings, wealth management loans and mortgages, and other residential mortgages.

The following tables are presented for each class of financing receivable and provide additional information about our credit risks and the adequacy of our allowance for credit losses.




68 BNY Mellon 69

Notes to Consolidated Financial Statements (continued)
 

Allowance for credit losses

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

Allowance for credit losses activity for the quarter ended Sept. 30, 2016Wealth management loans and mortgages
Other residential mortgages
   
Allowance for credit losses activity for the quarter ended Sept. 30, 2017Allowance for credit losses activity for the quarter ended Sept. 30, 2017Wealth management loans and mortgages
Other
residential
mortgages

   
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

Wealth management loans and mortgages
Other residential mortgages
All
Other

 Foreign
Total
Commercial
Commercial
real estate

Financial
institutions

Lease
financings

All
other

 Foreign
Total
Beginning balance$90
$63
$29
$14
$
 $37
$280
$80
$75
$23
$10
$25
$23
$
 $34
$270
Charge-offs




(1)
 
(1)






 

Recoveries

13


1

 
14





1

 
1
Net recoveries

13




 
13





1

 
1
Provision1

(13)

(1)
 (6)(19)1


(1)(4)(3)
 1
(6)
Ending balance$91
$63
$29
$14
$18
$28
$
 $31
$274
$81
$75
$23
$9
$21
$21
$
 $35
$265
Allowance for:      
Loan losses$22
$45
$9
$14
$14
$28
$
 $16
$148
$26
$57
$7
$9
$17
$21
$
 $24
$161
Lending-related commitments69
18
20

4


 15
126
55
18
16

4


 11
104
Individually evaluated for impairment:      
Loan balance$
$1
$
$4
$4
$
$
 $
$9
$
$
$2
$
$5
$
$
 $
$7
Allowance for loan losses
1

2



 
3


2




 
2
Collectively evaluated for impairment:      
Loan balance$2,292
$4,693
$6,783
$1,013
$15,027
$901
$20,189
(a)$15,061
$65,959
$2,698
$4,921
$5,153
$823
$16,156
$741
$16,366
(a)$12,203
$59,061
Allowance for loan losses22
44
9
12
14
28

 16
145
26
57
5
9
17
21

 24
159
(a)Includes $1,487 million of domestic overdrafts, $13,720 million of margin loans and $1,159 million of other loans at Sept. 30, 2017.


Allowance for credit losses activity for the quarter ended June 30, 2017Wealth management loans and mortgages
Other
residential
mortgages

    
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

All
other

 Foreign
Total
Beginning balance$82
$73
$23
$10
$26
$25
$
 $37
$276
Charge-offs






 

Recoveries




1

 
1
Net recoveries




1

 
1
Provision(2)2


(1)(3)
 (3)(7)
Ending balance$80
$75
$23
$10
$25
$23
$
 $34
$270
Allowance for:          
Loan losses$26
$55
$7
$10
$21
$23
$

$23
$165
Lending-related commitments54
20
16

4



11
105
Individually evaluated for impairment:          
Loan balance$
$
$2
$
$7
$
$

$
$9
Allowance for loan losses

2

3




5
Collectively evaluated for impairment:          
Loan balance$2,580
$5,017
$5,952
$847
$16,024
$780
$15,950
(a)$14,514
$61,664
Allowance for loan losses26
55
5
10
18
23


23
160
(a)Includes $855 million of domestic overdrafts, $13,973 million of margin loans and $1,122 million of other loans at June 30, 2017.




70 BNY Mellon

Notes to Consolidated Financial Statements(continued)

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

All
other

 Foreign
Total
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

 
Beginning balance$90
$63
$29
$14
$18
$29
$
 $37
$280
Charge-offs




(1)
 
(1)
Recoveries

13


1

 
14
Net recoveries

13




 
13
Provision1

(13)

(1)
 (6)(19)
Ending balance$91
$63
$29
$14
$18
$28
$
 $31
$274
Allowance for:          
Loan losses$22
$45
$9
$14
$14
$28
$
 $16
$148
Lending-related commitments69
18
20

4


 15
126
Individually evaluated for impairment:          
Loan balance$
$1
$
$4
$4
$
$
 $
$9
Allowance for loan losses
1

2



 
3
Collectively evaluated for impairment:          
Loan balance$2,292
$4,693
$6,783
$1,013
$15,027
$901
$20,189
(a)$15,061
$65,959
Allowance for loan losses22
44
9
12
14
28

 16
145
(a)Includes $1,580 million of domestic overdrafts, $17,487 million of margin loans and $1,122 million of other loans at Sept. 30, 2016.


Allowance for credit losses activity for the quarter ended June 30, 2016Wealth management loans and mortgages
Other residential mortgages
    
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

All
Other

 Foreign
Total
Beginning balance$88
$62
$32
$16
$18
$32
$
 $39
$287
Charge-offs






 

Recoveries




1

 1
2
Net recoveries




1

 1
2
Provision2
1
(3)(2)
(4)
 (3)(9)
Ending balance$90
$63
$29
$14
$18
$29
$
 $37
$280
Allowance for:          
Loan losses$25
$43
$9
$14
$15
$29
$

$23
$158
Lending-related commitments65
20
20

3



14
122
Individually evaluated for impairment:          
Loan balance$
$2
$171
$4
$8
$
$

$
$185
Allowance for loan losses
1

2
1




4
Collectively evaluated for impairment:          
Loan balance$2,377
$4,222
$6,690
$1,023
$14,437
$945
$20,842
(a)$13,474
$64,010
Allowance for loan losses25
42
9
12
14
29


23
154
Allowance for credit losses activity for the nine months ended Sept. 30, 2017Wealth management loans and mortgages
Other
residential
mortgages

All
other

Foreign
Total
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

Beginning balance$82
$73
$26
$13
$23
$28
$
$36
$281
Charge-offs




(1)

(1)
Recoveries




3


3
Net recoveries




2


2
Provision(1)2
(3)(4)(2)(9)
(1)(18)
Ending balance$81
$75
$23
$9
$21
$21
$
$35
$265
(a)Includes $1,331 million of domestic overdrafts, $18,388 million of margin loans and $1,123 million of other loans at June 30, 2016.


Allowance for credit losses activity for the nine months ended Sept. 30, 2016Wealth management loans and mortgages
Other
residential
mortgages

All
other

Foreign
Total
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

Beginning balance$82
$59
$31
$15
$19
$34
$
$35
$275
Charge-offs




(1)

(1)
Recoveries

13


4

1
18
Net recoveries

13


3

1
17
Provision9
4
(15)(1)(1)(9)
(5)(18)
Ending balance$91
$63
$29
$14
$18
$28
$
$31
$274




BNY Mellon 69

Notes to Consolidated Financial Statements(continued)

Allowance for credit losses activity for the quarter ended Sept. 30, 2015Wealth management loans and mortgages
Other residential mortgages
All
Other

 Foreign
Total
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

 
Beginning balance$75
$58
$30
$20
$22
$37
$

$36
$278
Charge-offs




(1)


(1)
Recoveries




2



2
Net recoveries




1



1
Provision1
4
(2)(2)1
(3)

2
1
Ending balance$76
$62
$28
$18
$23
$35
$

$38
$280
Allowance for:          
Loan losses$29
$40
$12
$18
$18
$35
$

$29
$181
Lending-related commitments47
22
16

5



9
99
Individually evaluated for impairment:          
Loan balance$
$
$
$
$9
$
$

$
$9
Allowance for loan losses
1


1




2
Collectively evaluated for impairment:          
Loan balance$1,869
$3,328
$6,774
$1,106
$12,552
$1,080
$21,661
(a)$14,592
$62,962
Allowance for loan losses29
39
12
18
17
35


29
179
(a)Includes $1,311 million of domestic overdrafts, $19,200 million of margin loans and $1,150 million of other loans at Sept. 30, 2015.


Allowance for credit losses activity for the nine months ended Sept. 30, 2016Wealth management loans and mortgages
Other
residential
mortgages

All
Other

Foreign
Total
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

Beginning balance$82
$59
$31
$15
$19
$34
$
$35
$275
Charge-offs




(1)

(1)
Recoveries

13


4

1
18
Net recoveries

13


3

1
17
Provision9
4
(15)(1)(1)(9)
(5)(18)
Ending balance$91
$63
$29
$14
$18
$28
$
$31
$274


Allowance for credit losses activity for the nine months ended Sept. 30, 2015Wealth management loans and mortgages
Other
residential
mortgages

All
Other

Foreign
Total
(in millions)Commercial
Commercial
real estate

Financial
institutions

Lease
financings

Beginning balance$60
$50
$31
$32
$22
$41
$
$44
$280
Charge-offs




(2)

(2)
Recoveries

1


4


5
Net recoveries

1


2


3
Provision16
12
(4)(14)1
(8)
(6)(3)
Ending balance$76
$62
$28
$18
$23
$35
$
$38
$280




70 BNY Mellon71

Notes to Consolidated Financial Statements (continued)
 

Nonperforming assets

The table below presents the distribution of our nonperforming assets. 

 
Nonperforming assets
(in millions)
Sept. 30, 2016
Dec. 31, 2015
 
 Nonperforming loans:  
 Other residential mortgages$93
$102
 Wealth management loans and mortgages7
11
 Lease financings4

 Commercial real estate1
2
 Financial institutions
171
 Total nonperforming loans105
286
 Other assets owned4
6
 Total nonperforming assets$109
$292
 
Nonperforming assets
(in millions)
Sept. 30, 2017
Dec. 31, 2016
 
 Nonperforming loans:  
 Other residential mortgages$80
$91
 Wealth management loans and mortgages8
8
 Financial institutions2

 Lease financings
4
 Total nonperforming loans90
103
 Other assets owned4
4
 Total nonperforming assets$94
$107


At Sept. 30, 20162017, undrawn commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material. Nonperforming
 
loans decreased primarily reflecting the settlement agreement in the bankruptcy proceedings of Sentinel.

Lost interest

The table below presents the amount of lost interest income.

Lost interest  
(in millions)3Q16
2Q16
3Q15
YTD16
YTD15
3Q17
2Q17
3Q16
YTD17
YTD16
Amount by which interest income recognized on nonperforming loans exceeded reversals$
$
$
$
$
$
$
$
$
$
Amount by which interest income would have increased if nonperforming loans at period-end had been performing for the entire period$1
$1
$2
$4
$5
Amount by which interest income would have increased if nonperforming loans at period end had been performing for the entire period$1
$1
$1
$4
$4






Impaired loans

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

Impaired loansQuarter ended Year-to-date3Q172Q173Q16 YTD17YTD16
Sept. 30, 2016June 30, 2016Sept. 30, 2015 Sept. 30, 2016Sept. 30, 2015
(in millions)
Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

 Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

 Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Impaired loans with an allowance:      
Commercial real estate$1
$
$1
$
$
$
 $1
$
$
$
$
$
$
$
$1
$
 $
$
$1
$
Financial institutions2

1



 1



Wealth management loans and mortgages3

6

6

 5

6

2

3

3

 3

5

Lease financings4

4



 3







4

 1

3

Total impaired loans with an allowance8

11

6

 9

6

4

4

8

 5

9

Impaired loans without an allowance:
      
Commercial real estate1

1



 1







1

 

1

Financial institutions85

171



 128







85

 

128

Wealth management loans and mortgages3

2

2

 2

2

4

3

3

 3

2

Total impaired
loans without an
allowance (a)
89

174

2

 131

2

4

3

89

 3

131

Total impaired loans$97
$
$185
$
$8
$
 $140
$
$8
$
$8
$
$7
$
$97
$
 $8
$
$140
$
(a)When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.




72 BNY Mellon 71

Notes to Consolidated Financial Statements (continued)
 

Impaired loansSept. 30, 2016 Dec. 31, 2015Sept. 30, 2017 Dec. 31, 2016
(in millions)
Recorded
investment

Unpaid
principal
balance

Related
allowance (a)

 
Recorded
investment

Unpaid
principal
balance

Related
allowance (a)

Recorded
investment

Unpaid
principal
balance

Related
allowance (a)

 
Recorded
investment

Unpaid
principal
balance

Related
allowance (a)

Impaired loans with an allowance:      
Commercial real estate$1
$4
$1
 $1
$3
$1
$
$3
$
 $
$3
$
Financial institutions2
2
2
 


Wealth management loans and mortgages1
1

 6
7
1
1
1

 3
3
3
Lease financings4
4
2
 





 4
4
2
Total impaired loans with an allowance6
9
3
 7
10
2
3
6
2
 7
10
5
Impaired loans without an allowance:
      
Commercial real estate

N/A
 

N/A
Financial institutions

N/A
 171
312
N/A
Wealth management loans and mortgages3
3
N/A
 2
2
N/A
4
4
N/A
 2
2
N/A
Total impaired loans without an allowance (b)
3
3
N/A
 173
314
N/A
4
4
N/A
 2
2
N/A
Total impaired loans (c)
$9
$12
$3
 $180
$324
$2
$7
$10
$2
 $9
$12
$5
(a)The allowance for impaired loans is included in the allowance for loan losses.
(b)When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.
(c)
Excludes an aggregate of less than $1 million and an aggregate of $2 million of impaired loans in amounts individually less than $1 million at both Sept. 30, 20162017 and Dec. 31, 20152016, respectively. The allowance for loan losslosses associated with these loans totaled less than $1 million at both Sept. 30, 20162017 and Dec. 31, 20152016, respectively.


Past due loans

The table below sets forth information aboutpresents our past due loans. 

Past due loans and still accruing interestSept. 30, 2016 Dec. 31, 2015Sept. 30, 2017 Dec. 31, 2016
Days past due
Total
past due

 Days past due
Total
past due

Days past due
Total
past due

 Days past due
Total
past due

(in millions)30-59
60-89
>90
30-59
60-89
>90
30-59
60-89
≥90
30-59
60-89
≥90
Financial institutions (a)
$143
$
$
$143
 $
$
$
$
Commercial real estate$51
$60
$
$111
 $78
$
$
$78
Wealth management loans and mortgages25
3

28
 69
2
1
72
86
15
1
102
 21
2

23
Other residential mortgages17
5
6
28
 22
5
4
31
20
3
5
28
 20
6
7
33
Commercial real estate23


23
 57
11

68
Commercial10


10
 



Financial institutions



 1
27

28
Total past due loans$218
$8
$6
$232

$148
$18
$5
$171
$157
$78
$6
$241

$120
$35
$7
$162
 
(a)Substantially all of these past due loans have been repaid subsequent to Sept 30, 2016.




Troubled debt restructurings (“TDRs”)

A modified loan is considered a TDR if the debtor is experiencing financial difficulties and the creditor grants a concession to the debtor that would not
otherwise be considered. A TDR may include a
transfer of real estate or other assets from the debtor to the creditor, or a modification of the term of the loan. Not all modified loans are considered TDRs.


The following table presents TDRs that occurred in the third quarter of 2016, second quarter of 2016 and third quarter of 2015.our TDRs.

TDRs3Q16 2Q16 3Q153Q17 2Q17 3Q16
 
Outstanding
recorded investment
  
Outstanding
recorded investment
  
Outstanding
recorded investment
 
Outstanding
recorded investment
  
Outstanding
recorded investment
  
Outstanding
recorded investment
(dollars in millions)
Number of
contracts

Pre-modification Post-modification  Number of contracts
Pre-modification Post-modification  Number of contracts
Pre-modification Post-modification 
Number of
contracts

Pre-modification Post-modification  Number of contracts
Pre-modification Post-modification  Number of contracts
Pre-modification Post-modification 
Other residential mortgages17
 $4
 $4
 23
 $4
 $5
 14
 $2
 $3
19
 $5
 $5
 16
 $4
 $4
 17
 $4
 $4
Wealth management loans and mortgages1
 2
 2
 
 
 
 
 
 
Total TDRs17
 $4
 $4
 23
 $4
 $5
 14
 $2
 $3
20
 $7
 $7
 16
 $4
 $4
 17
 $4
 $4




72 BNY Mellon 73

Notes to Consolidated Financial Statements (continued)
 

Other residential mortgages

The modifications of the other residential mortgage loans in the third quarter of 2016,2017, second quarter of 20162017 and third quarter of 20152016 consisted of reducing the stated interest rates and, in certain cases, a forbearance of default and extending the maturity dates. The modified loans are primarily collateral dependent for which the value is based on the fair value of the collateral.

TDRs that subsequently defaulted

There were eightthree residential mortgage loans and one wealth management loan that had been restructured in
a TDR during the previous 12
months and have subsequently defaulted in the third quarter of 2016.2017. The total recorded investment of these loans was $3less than $1 million.

Credit quality indicators

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

The following tables set forthpresent information about credit quality indicators.


Commercial loan portfolio

Commercial loan portfolio – Credit risk profile by creditworthiness categoryCommercial loan portfolio – Credit risk profile by creditworthiness categoryCommercial Commercial real estate Financial institutions
Commercial Commercial real estate Financial institutions
Commercial loan portfolio – Credit risk profile
by creditworthiness category
Sept. 30, 2017
Dec. 31, 2016
 Sept. 30, 2017
Dec. 31, 2016
 Sept. 30, 2017
Dec. 31, 2016
Sept. 30, 2016
 Dec. 31, 2015
 Sept. 30, 2016
 Dec. 31, 2015
 Sept. 30, 2016
 Dec. 31, 2015
  
Investment grade$2,433
 $2,026
 $3,962
 $2,678
 $11,512
 $13,965
$2,857
$2,397
 $4,339
$3,823
 $9,217
$11,459
Non-investment grade232
 316
 778
 1,267
 3,234
 1,934
146
220
 588
831
 2,679
3,230
Total$2,665
 $2,342
 $4,740
 $3,945
 $14,746
 $15,899
$3,003
$2,617
 $4,927
$4,654
 $11,896
$14,689


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

Wealth management loans and mortgages

Wealth management loans and mortgages – Credit risk
profile by internally assigned grade
Wealth management loans and mortgages – Credit risk
profile by internally assigned grade
Wealth management loans and mortgages – Credit risk
profile by internally assigned grade
(in millions)Sept. 30, 2016
Dec. 31, 2015
Sept. 30, 2017
Dec. 31, 2016
Wealth management loans:  
Investment grade$7,136
$6,529
$7,128
$7,127
Non-investment grade112
171
135
260
Wealth management mortgages7,880
6,647
9,002
8,267
Total$15,128
$13,347
$16,265
$15,654


 
Wealth management non-mortgage loans are not typically rated by external rating agencies. A majority of the wealth management loans are secured by the customers’ investment management accounts or custody accounts. Eligible assets pledged for these loans are typically investment grade fixed-income securities, equities and/or mutual funds. Internal ratings for this portion of the wealth management portfolio, therefore, would equate to investment grade external ratings. Wealth management loans are provided to select customers based on the pledge of other types of assets, including business assets, fixed assets or a modest amount of commercial real estate. For the loans collateralized by other assets, the credit quality of the obligor is carefully analyzed, but we do not consider this portfolio of loans to be investment grade.

Credit quality indicators for wealth management mortgages are not correlated to external ratings. Wealth management mortgages are typically loans to high net worthhigh-net-worth individuals, which are secured primarily by residential property. These loans are primarily interest-only, adjustable rate mortgages with a weighted-average loan-to-value ratio of 61%62% at origination. In the wealth management portfolio, less



74 BNY Mellon 73

Notes to Consolidated Financial Statements (continued)
 

than 1% of the mortgages were past due at Sept. 30, 2016.2017.

At Sept. 30, 2016,2017, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 24%; New York - 20%19%; Massachusetts - 12%11%; Florida - 7%8%; and other - 37%38%.

Other residential mortgages

The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and totaled $901$741 million at Sept. 30, 20162017 and $1,055$854 million at Dec. 31, 2015.2016. These loans are not typically correlated to external ratings. Included in this portfolio at Sept. 30, 20162017 are $236$181 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007 that are predominantly prime mortgage loans, with a small portion of Alt-A loans. As of Sept. 30, 2016,2017, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 13%11% of the serviced loan balance was at least 60 days delinquent. The properties securing the prime and Alt-A mortgage loans were located (in order of concentration) in California, Florida, Virginia, the tri-state area (New York, New Jersey and Connecticut) and Maryland.

Overdrafts

Overdrafts primarily relate to custody and securities clearance clients and totaled $7,323 million$5.8 billion at Sept. 30, 2016
2017 and $4,483 million$5.5 billion at Dec. 31, 2015.2016. Overdrafts occur on a daily basis in the custody and securities clearance business and are generally repaid within two business days.

Other loans

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

Margin loans

We had $17,557 million$13.9 billion of secured margin loans on our balance sheet at Sept. 30, 20162017 compared with $19,573 million$17.6 billion at Dec. 31, 2015.2016. Margin loans are collateralized with marketable securities, and borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to margin loans.

Reverse repurchase agreements

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


Note 56 - Goodwill and intangible assets

Goodwill

The tables below provide a breakdown of goodwill by business.

Goodwill by business
(in millions)
Investment
Management

Investment
Services

Other
Consolidated
Balance at Dec. 31, 2016$9,000
$8,269
$47
$17,316
Foreign currency translation120
107

227
Balance at Sept. 30, 2017$9,120
$8,376
$47
$17,543


Goodwill by business
(in millions)
Investment
Management

Investment
Services

Other
Consolidated
Balance at Dec. 31, 2015$9,207
$8,366
$45
$17,618
Acquisitions29
(1)
28
Foreign currency translation(167)(30)
(197)
Other (a)
2
(4)2

Balance at Sept. 30, 2016$9,071
$8,331
$47
$17,449
(a)Other changes in goodwill include purchase price adjustments and certain other reclassifications.



BNY Mellon 75

Notes to Consolidated Financial Statements(continued)

Intangible assets

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

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

Investment
Services

Other
Consolidated
Balance at Dec. 31, 2016$1,717
$1,032
$849
$3,598
Amortization(45)(112)
(157)
Foreign currency translation16
4

20
Balance at Sept. 30, 2017$1,688
$924
$849
$3,461


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

Investment
Services

Other
Consolidated
Balance at Dec. 31, 2015$1,807
$1,186
$849
$3,842
Acquisitions30
2

32
Amortization(60)(117)
(177)
Foreign currency translation(27)1

(26)
Balance at Sept. 30, 2016$1,750
$1,072
$849
$3,671


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

Intangible assetsSept. 30, 2017 Dec. 31, 2016
(in millions)
Gross
carrying
amount

Accumulated
amortization

Net
carrying
amount

Remaining
weighted-
average
amortization
period
 Gross
carrying
amount

Accumulated
amortization

Net
carrying
amount

Subject to amortization: (a)
        
Customer relationships—Investment Management$1,483
$(1,221)$262
11 years $1,439
$(1,136)$303
Customer contracts—Investment Services2,257
(1,705)552
10 years 2,249
(1,590)659
Other25
(22)3
2 years 37
(33)4
Total subject to amortization3,765
(2,948)817
10 years 3,725
(2,759)966
Not subject to amortization: (b)
        
Trade name1,350
N/A
1,350
N/A 1,348
N/A
1,348
Customer relationships1,294
N/A
1,294
N/A 1,284
N/A
1,284
Total not subject to amortization2,644
N/A
2,644
N/A 2,632
N/A
2,632
Total intangible assets$6,409
$(2,948)$3,461
N/A $6,357
$(2,759)$3,598
(a)Excludes fully amortized intangible assets.
(b)Intangible assets not subject to amortization have an indefinite life.


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

For the year ended
Dec. 31,
Estimated amortization expense
(in millions)
 
2017 $209
2018 180
2019 109
2020 98
2021 75


Impairment testing

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

BNY Mellon’s three business segments include eight reporting units for which goodwill impairment testing is performed on an annual basis. In the second quarter of 2016,2017, BNY Mellon conducted an annual goodwill impairment test on all eight reporting units. The estimated fair value of the eight reporting units exceeded the carrying value and no goodwill impairment was recognized.



Goodwill

The tables below provide a breakdown of goodwill by business.

Goodwill by business
(in millions)
Investment
Management

 Investment
Services

(a)Other
(a)Consolidated
Balance at Dec. 31, 2015$9,207
 $8,366
 $45
 $17,618
Acquisition/dispositions29
 (1) 
 28
Foreign currency translation(167) (30) 
 (197)
Other (c)
2
 (4) 2
 
Balance at Sept. 30, 2016$9,071
 $8,331
 $47
 $17,449


7476 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

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

Note 7 - Other assets

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

Goodwill by business
(in millions)
Investment
Management

(b)Investment
Services

(a)Other
(a)(b)Consolidated
Balance at Dec. 31, 2014$9,328
 $8,471
 $70
 $17,869
Acquisitions/dispositions10
 
 (22) (12)
Foreign currency translation(93) (80) (2) (175)
Other (c)
(3) 
 
 (3)
Balance at Sept. 30, 2015$9,242
 $8,391
 $46
 $17,679
Other assetsSept. 30, 2017
Dec. 31, 2016
(in millions)
Corporate/bank-owned life insurance$4,824
$4,789
Accounts receivable3,899
4,060
Fails to deliver3,532
1,732
Software1,513
1,451
Renewable energy investments1,344
1,282
Equity in a joint venture and other investments1,153
1,063
Income taxes receivable1,020
1,172
Qualified affordable housing project investments

988
914
Prepaid pension assets951
836
Prepaid expenses512
438
Federal Reserve Bank stock474
466
Fair value of hedging derivatives344
784
Due from customers on acceptances318
340
Seed capital302
395
Other (a)
1,113
1,232
Total other assets$22,287
$20,954
(a)Includes the reclassificationAt Sept. 30, 2017, other assets include $76 million of goodwill associated with credit-related activities from the Other segment to Investment Services.
(b)Includes the reclassification of goodwill associated with Meriten from Investment Management to the Other segment.
(c)Other changes in goodwill include purchase price adjustments and certain other reclassifications.Federal Home Loan Bank stock, at cost.


Intangible assetsQualified affordable housing project investments

The tables below provide a breakdownWe invest in affordable housing projects primarily to satisfy the Company’s requirements under the Community Reinvestment Act. Our total investment in qualified affordable housing projects totaled $988 million at Sept. 30, 2017 and $914 million at Dec. 31, 2016. Commitments to fund future investments in qualified affordable housing projects totaled $439 million at Sept. 30, 2017 and $369 million at Dec. 31, 2016. A summary of intangible assets by business.
Intangible assets – net carrying amount by business
(in millions)
Investment
Management


Investment
Services

 Other
 Consolidated
Balance at Dec. 31, 2015$1,807
 $1,186
 $849
 $3,842
Acquisition30
 2
 
 32
Amortization (a)
(60) (117) 
 (177)
Foreign currency translation(27) 1
 
 (26)
Balance at Sept. 30, 2016$1,750
 $1,072
 $849
 $3,671


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

(b)Investment
Services

 Other
(b)Consolidated
Balance at Dec. 31, 2014$1,911
 $1,355
 $861
 $4,127
Acquisitions/dispositions9
 
 (9) 
Amortization(73) (122) (2) (197)
Foreign currency translation(10) (5) (1) (16)
Balance at Sept. 30, 2015$1,837
 $1,228
 $849
 $3,914
(a)Includes a $3 million impairment charge related to the write-down of the value of a customer contract intangible in the Investment Management business to its fair value.
(b)Includes the reclassification of intangible assets associated with Meriten from Investment Management to the Other segment.


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

Intangible assetsSept. 30, 2016 Dec. 31, 2015
(in millions)
Gross
carrying
amount

Accumulated
amortization

Net
carrying
amount

Remaining
weighted-
average
amortization
period
 Gross
carrying
amount

Accumulated
amortization

Net
carrying
amount

Subject to amortization: (a)
        
Customer relationships—Investment Management$1,547
$(1,224)$323
11 years $1,593
$(1,235)$358
Customer contracts—Investment Services2,258
(1,559)699
10 years 2,260
(1,450)810
Other38
(32)6
2 years 40
(31)9
Total subject to amortization3,843
(2,815)1,028
10 years 3,893
(2,716)1,177
Not subject to amortization: (b)
        
Trade name1,353
N/A
1,353
N/A 1,358
N/A
1,358
Customer relationships1,290
N/A
1,290
N/A 1,307
N/A
1,307
Total not subject to amortization2,643
N/A
2,643
N/A 2,665
N/A
2,665
Total intangible assets$6,486
$(2,815)$3,671
N/A $6,558
$(2,716)$3,842
(a)Excludes fully amortized intangible assets.
(b)Intangible assets not subject to amortization have an indefinite life.




BNY Mellon 75

Notes to Consolidated Financial Statements(continued)

Estimated annual amortization expense for current intangibles for the next five yearscommitments to fund future investments is as follows:

For the year ended
Dec. 31,
Estimated amortization expense
(in millions)
 
2016 $234
2017 209
2018 179
2019 108
2020 98


2017Note 6 - Other assets

Other assetsSept. 30, 2016
Dec. 31, 2015
(in millions)
Fails to deliver$6,932
$1,494
Corporate/bank-owned life insurance4,770
4,704
Accounts receivable4,332
3,535
Equity in joint venture and other investments (a)
3,516
3,329
Software1,411
1,355
Fair value of hedging derivatives1,139
716
Income taxes receivable875
1,554
Prepaid pension assets847
727
Prepaid expenses401
464
Due from customers on acceptances249
258
Other883
1,490
Total other assets$25,355
$19,626
(a)Includes Federal Reserve Bank stock of $465 million and $453 million, respectively, at cost.

$75 million; 2018
 
$161 million; 2019$107 million; 2020$79 million; 2021$1 million; and 2022 and thereafter$16 million.

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

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

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

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

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


Seed capital and private equity investments valued using NAV
Sept. 30, 2016 Dec. 31, 2015Sept. 30, 2017 Dec. 31, 2016
(dollar amounts in millions)
Fair
value

Unfunded 
commitments
 
Redemption 
frequency
Redemption 
notice period
 
Fair
value

Unfunded
commitments
 
Redemption 
frequency
Redemption 
notice period
Fair
value

Unfunded 
commitments
 
Redemption 
frequency
Redemption 
notice period
 
Fair
value

Unfunded
commitments
 
Redemption 
frequency
Redemption 
notice period
Seed capital and other funds (a)
$172
 $1
Daily-quarterly1-180 days $83
 $1
Daily-quarterly1-180 days$97
 $2
Daily-quarterly1-95 days $171
 $1
Daily-quarterly1-180 days
Private equity investments (SBICs) (b)
40
 49
N/A 34
 58
N/A54
 47
N/A 43
 46
N/A
Total$212
 $50
  $117
 $59
 $151
 $49
  $214
 $47
 
(a)Other funds include various leveraged loans, structured credithedge funds and hedgestructured credit funds. Redemption notice periods vary by fund.
(b)Private equity investments primarily include Volcker Rule-compliant investments in SBICs that invest in various sectors of the economy. Private equity investments do not have redemption rights. Distributions from such investments will be received as the underlying investments in the private equity investments are liquidated.
N/A

BNY Mellon 77

Notes to Consolidated Financial Statements(continued)

Note 8 - Not applicable.Net interest revenue

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

Net interest revenueQuarter ended Year-to-date
 Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in millions) 
Interest revenue      
Non-margin loans$283
$272
$218
 $800
$637
Margin loans87
87
67
 249
194
Securities:      
Taxable510
476
434
 1,447
1,307
Exempt from federal income taxes16
16
17
 49
53
Total securities526
492
451

1,496
1,360
Deposits with banks34
27
26
 83
76
Deposits with the Federal Reserve and other central banks89
71
37
 217
170
Federal funds sold and securities purchased under resale agreements119
86
62
 272
167
Trading assets13
17
13
 46
43
Total interest revenue1,151
1,052
874

3,163
2,647
Interest expense      
Deposits57
32
(6) 98
21
Federal funds purchased and securities sold under repurchase agreements70
38
6
 132
28
Trading liabilities2
2
2
 6
5
Other borrowed funds7
4
1
 13
5
Commercial paper8
5
1
 18
5
Customer payables19
16
3
 42
9
Long-term debt149
129
93
 397
267
Total interest expense312
226
100

706
340
Net interest revenue839
826
774

2,457
2,307
Provision for credit losses(6)(7)(19) (18)(18)
Net interest revenue after provision for credit losses$845
$833
$793

$2,475
$2,325


Note 9 - Employee benefit plans

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

Net periodic benefit (credit) costQuarter ended
Sept. 30, 2017 June 30, 2017 Sept. 30, 2016
(in millions)Domestic pension benefits
Foreign pension benefits
Health care benefits
 Domestic pension benefits
Foreign pension benefits
Health care benefits
 Domestic pension benefits
Foreign pension benefits
Health care benefits
Service cost$
$7
$
 $
$7
$
 $
$8
$1
Interest cost45
8
2
 45
8
2
 45
9
2
Expected return on assets(81)(12)(2) (81)(12)(2) (82)(13)(2)
Other17
9
(1) 17
9
(1) 17
4
(1)
Net periodic benefit (credit) cost$(19)$12
$(1) $(19)$12
$(1) $(20)$8
$



Qualified affordable housing project investments

We invest in affordable housing projects primarily to satisfy the Company’s requirements under the Community Reinvestment Act. Our total investment in qualified affordable housing projects totaled $890 million at Sept. 30, 2016 and $918 million at Dec. 31, 2015. Commitments to fund future investments in qualified affordable housing projects totaled $366
million at Sept. 30, 2016 and $393 million at Dec. 31, 2015. A summary of the commitments to fund future investments is as follows: 2016—$146 million; 2017—$57 million; 2018—$113 million; 2019—$33 million; 2020—$5 million and 2021 and thereafter—$12 million.

Tax credits and other tax benefits recognized were $39 million in the third quarter of 2016, $33 million



7678 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

in the third quarter of 2015, $38 million in the second quarter of 2016, $115 million in the first nine months of 2016 and $98 million in the first nine months of 2015.

Amortization expense included in the provision for income taxes was $30 million in the third quarter of
2016, $23 million in the third quarter of 2015, $28 million in the second quarter of 2016, $86 million in the first nine months of 2016 and $74 million in the first nine months of 2015.



Note 7 - Net interest revenue

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

Net interest revenueQuarter ended Year-to-date
(in millions)Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
Interest revenue      
Non-margin loans$218
$214
$188
 $637
$540
Margin loans67
64
53
 194
154
Securities:      
Taxable434
429
453
 1,307
1,360
Exempt from federal income taxes17
18
20
 53
63
Total securities451
447
473
 1,360
1,423
Deposits with banks26
24
24
 76
82
Deposits with the Federal Reserve and other central banks37
72
43
 170
131
Federal funds sold and securities purchased under resale agreements62
56
39
 167
105
Trading assets13
13
18
 43
57
Total interest revenue874
890
838

2,647
2,492
Interest expense      
Deposits(6)12
9
 21
32
Federal funds purchased and securities sold under repurchase agreements6
13
(1) 28
(5)
Trading liabilities2
1
2
 5
7
Other borrowed funds1
2
2
 5
7
Customer payables3
2
1
 9
5
Commercial paper1
4
1
 5
2
Long-term debt93
89
65
 267
178
Total interest expense100
123
79

340
226
Net interest revenue774
767
759

2,307
2,266
Provision for credit losses(19)(9)1
 (18)(3)
Net interest revenue after provision for credit losses$793
$776
$758
 $2,325
$2,269
Net periodic benefit (credit) cost Year-to-date  
 Sept. 30, 2017 Sept. 30, 2016
(in millions)Domestic pension benefits
Foreign pension benefits
Health care benefits
 Domestic pension benefits
Foreign pension benefits
Health care benefits
Service cost$
$21
$
 $
$24
$3
Interest cost135
24
6
 135
27
6
Expected return on assets(243)(36)(6) (246)(39)(6)
Other51
27
(3) 52
13
(3)
Net periodic benefit (credit) cost$(57)$36
$(3) $(59)$25
$


Note 8 - Employee benefit plans


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

Net periodic benefit (credit) costQuarter ended
 Sept. 30, 2016 June 30, 2016 Sept. 30, 2015
(in millions)Domestic pension benefits
Foreign pension benefits
Health care benefits
 Domestic pension benefits
Foreign pension benefits
Health care benefits
 Domestic pension benefits
Foreign pension benefits
Health care benefits
Service cost$
$8
$1
 $
$8
$1
 $
$8
$1
Interest cost45
9
2
 45
9
2
 42
10
2
Expected return on assets(82)(13)(2) (82)(13)(2) (83)(13)(2)
Other17
4
(1) 17
5
(1) 26
6

Net periodic benefit (credit) cost$(20)$8
$
 $(20)$9
$
 $(15)$11
$1




BNY Mellon 77

Notes to Consolidated Financial Statements(continued)

Net periodic benefit (credit) cost Year-to-date  
 Sept. 30, 2016 Sept. 30, 2015
(in millions)Domestic pension benefits
Foreign pension benefits
Health care benefits
 Domestic pension benefits
Foreign pension benefits
Health care benefits
Service cost$
$24
$3
 $30
$24
$3
Interest cost135
27
6
 127
30
6
Expected return on assets(246)(39)(6) (249)(39)(6)
Curtailment (gain)


 (30)

Other52
13
(3) 83
18

Net periodic benefit (credit) cost$(59)$25
$
 $(39)$33
$3


Note 9 - Restructuring charges

BNY Mellon initiated two restructuring programs, Streamlining actions in 2014 and Operational Excellence Initiatives in 2011. Additional details regarding these programs are presented in Note 9 - Restructuring charges, in our 2015 Annual Report. Aggregate charges are included in M&I, litigation and restructuring charges on the consolidated income statement. Restructuring charges related to corporate-level initiatives and were therefore recorded in the Other segment. Severance payments are primarily paid over the salary continuance period in accordance with the separation plan.

The following summarizes the restructuring activity for the third quarter of 2016. There were no additional restructuring charges recorded in the third quarter of 2016. For the Streamlining actions program, we utilized $4 million of the reserve in the third quarter of 2016. The remaining reserve balance for the Streamlining actions program was $7 million at Sept. 30, 2016. For the Operational Excellence Initiatives program, we utilized $1 million of the reserve in the third quarter of 2016. The remaining reserve balance for the Operational Excellence Initiatives program was $3 million at Sept. 30, 2016.

Note 10 - Income taxes

BNY Mellon recorded an income tax provision of $348 million (25.4% effective tax rate) in the third quarter of 2017. The income tax provision was $324 million (24.6% effective tax rate) in the third quarter of 2016 and $282$332 million (25.4% effective tax rate) in the thirdsecond quarter of 2015. Both effective tax rates primarily reflect benefits from foreign operations, tax-exempt income and tax credits.2017.

Our total tax reserves as of Sept. 30, 20162017 were $144$157 million compared with $178$143 million at June 30, 2016.2017. If these tax reserves were unnecessary, $144$157 million would affect the effective tax rate in future periods. We recognize accrued interest and penalties, if
applicable, related to income taxes in income tax expense. Included in the balance sheet at Sept. 30, 20162017 is accrued interest, where applicable, of $18$24 million. The additional tax expense related to interest for the nine months ended Sept. 30, 20162017 was $2$7 million, compared with $4$2 million for the nine months ended Sept. 30, 2015.2016.

It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by approximately $23$57 million as a result of adjustments related to tax years that are still subject to examination.

Our federal income tax returns are closed to examination through 2013. Our New York State, tax returns are closed to examination through 2012. Our New York City income tax returns are closed to examination through 2010. Ourand UK income tax returns are closed to examination through 2012.

Note 11 - SecuritizationsVariable interest entities and variable interest entitiessecuritization

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

BNY Mellon earns management fees from these funds as well as performance fees in certain funds and may also provide start-up capital for its new funds. The VIEsfunds are primarily financed by our customers’ investments in the funds’ equity or debt. These

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

The VIEs discussed above are included in the scope of ASU 2015-02, which was adopted effective Jan. 1, 2015, and are reviewed for consolidation based on the guidance in ASC 810.




810, 78 BNY MellonConsolidation

Notes to Consolidated Financial Statements. (continued)

We reconsider and reassess whether or not we are the primary beneficiary of a VIE when governing documents or contractual arrangements are changed whichthat would reallocate the obligation to absorb expected losses or receive expected residual returns between BNY Mellon and the other investors,investors. This could occur when BNY Mellon disposes of its variable interests in the fund, or when additional variable interests are issued to other investors andor when we acquire additional variable interests in the VIE.

The following tables present the incremental assets and liabilities included in BNY Mellon’s consolidated financial statements, after applying intercompany eliminations, as of Sept. 30, 20162017 and Dec. 31, 2015, based on the assessments performed in accordance with ASC 810, as amended by ASU 2015-02.2016. The net assets of any consolidated VIE are solely available to settle the liabilities of the VIE and to settle any investors’ ownership liquidation requests, including any seed capital invested in the VIE by BNY Mellon.


Investments consolidated at Sept. 30, 2016
(in millions)
Investment
Management
funds
Securitizations
Total
consolidated
investments

Available-for-sale securities$
 $400
$400
Trading assets873
 
873
Other assets136
 
136
Total assets$1,009
(a)$400
$1,409
Trading liabilities$219
 $
$219
Other liabilities13
 376
389
Total liabilities$232
(a)$376
$608
Nonredeemable noncontrolling interests$500
(a)$
$500

BNY Mellon 79

Notes to Consolidated Financial Statements(continued)

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

Securities - Available-for-sale$
 $400
$400
Trading assets576
 
576
Other assets226
 
226
Total assets$802
(a)$400
$1,202
Other liabilities$27
 $369
$396
Total liabilities$27
(a)$369
$396
Nonredeemable noncontrolling interests$384
(a)$
$384
 
(a)Includes voting model entities (“VMEs”) with assets of $90 million, liabilities of $2 million and nonredeemable noncontrolling interests of $20 million.


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

Securities - Available-for-sale$
 $400
$400
Trading assets979
 
979
Other assets252
 
252
Total assets$1,231
(a)$400
$1,631
Trading liabilities$282
 $
$282
Other liabilities33
 363
396
Total liabilities$315
(a)$363
$678
Nonredeemable noncontrolling interests$618
(a)$
$618
(a)Includes VMEs with assets of $134$114 million, liabilities of $2$3 million and nonredeemable noncontrolling interests of $16$25 million.


Investments consolidated at Dec. 31, 2015
(in millions)
Investment
Management
funds
Securitizations
Total
consolidated
investments

Available-for-sale securities$
 $400
$400
Trading assets1,228
 
1,228
Other assets173
 
173
Total assets$1,401
(a)$400
$1,801
Trading liabilities$229
 $
$229
Other liabilities17
 359
376
Total liabilities$246
(a)$359
$605
Nonredeemable noncontrolling interests$738
(a)$
$738
(a)Includes VMEs with assets of $190 million, liabilities of $1 million and nonredeemable noncontrolling interests of $5 million.

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

Non-consolidated VIEs

As of Sept. 30, 20162017 and Dec. 31, 2015,2016, the following assets and liabilities related to the VIEs where BNY Mellon is not the primary beneficiary are included in our consolidated financial statements.statements and primarily relate to accounting for our investments in qualified affordable housing and renewable energy projects.

Non-consolidated VIEs at Sept. 30, 2016
Non-consolidated VIEs at Sept. 30, 2017Non-consolidated VIEs at Sept. 30, 2017
(in millions)Assets
Liabilities
Maximum loss exposure
Assets
Liabilities
Maximum loss exposure
Securities - Available-for-sale (a)
$143
$
$143
Other$208
$
$208
2,559
439
3,321
(a)Investments in the Company’s sponsored CLOs.


Non-consolidated VIEs at Dec. 31, 2015
Non-consolidated VIEs at Dec. 31, 2016Non-consolidated VIEs at Dec. 31, 2016
(in millions)Assets
Liabilities
Maximum loss exposure
Assets
Liabilities
Maximum loss exposure
Securities - Available-for-sale (a)
$42
$
$42
Other$189
$
$189
2,400
369
2,769
(a)Investments in the Company’s sponsored CLOs.


The maximum loss exposure indicated in the above tables relates solely to BNY Mellon’s seed capital or residual interests investedinvestments in, and unfunded commitments to, the VIEs.




80 BNY Mellon 79

Notes to Consolidated Financial Statements (continued)
 

Note 12 - Preferred stock

BNY Mellon has 100 million authorized shares of preferred stock with a par value of $0.01.$0.01 per share. The following table summarizes BNY Mellon’s preferred stock issued and outstanding at Sept. 30, 20162017 and Dec. 31, 2015.2016.


Preferred stock summary(a)Preferred stock summary(a)
Liquidation
preference
per share
(in dollars)
 Total shares issued and outstanding  Preferred stock summary(a)Total shares issued and outstanding 
Carrying value (b)
   
Carrying value (a)
 (in millions)
(dollars in millions, unless
otherwise noted)
Per annum dividend rate Sept. 30, 2016
Dec. 31, 2015
Sept. 30, 2016
Dec. 31, 2015
Per annum dividend rateSept. 30, 2017
Dec. 31, 2016
Sept. 30, 2017 
Dec. 31, 2016
Series ANoncumulative Perpetual Preferred StockGreater of (i) three-month LIBOR plus 0.565% for the related distribution period; or (ii) 4.000%
$100,000
 5,001
5,001
 $500
$500
Greater of (i) three-month LIBOR plus 0.565% for the related distribution period; or (ii) 4.000%5,001
5,001
 $
$500
Series CNoncumulative Perpetual Preferred Stock5.2%$100,000
 5,825
5,825
 568
568
5.2%5,825
5,825
 568
568
Series DNoncumulative Perpetual Preferred Stock4.50% commencing Dec. 20, 2013 to but excluding June 20, 2023, then a floating rate equal to the three-month LIBOR plus 2.46%
$100,000
 5,000
5,000
 494
494
4.50% to but excluding June 20, 2023, then a floating rate equal to the three-month LIBOR plus 2.46%5,000
5,000
 494
494
Series ENoncumulative Perpetual Preferred Stock4.95% commencing Dec. 20, 2015 to and including June 20, 2020, then a floating rate equal to the three-month LIBOR plus 3.42%
$100,000
 10,000
10,000
 990
990
4.95% to and including June 20, 2020, then a floating rate equal to the three-month LIBOR plus 3.42%10,000
10,000
 990
990
Series FNoncumulative Perpetual Preferred Stock4.625% commencing Mar. 20, 2017 to and including Sept. 20, 2026, then a floating rate equal to the three-month LIBOR plus 3.131%
$100,000
 10,000

 990

4.625% to and including Sept. 20, 2026, then a floating rate equal to the three-month LIBOR plus 3.131%10,000
10,000
 990
990
TotalTotal   35,826
25,826
 $3,542
$2,552
Total35,826
35,826
 $3,542
$3,542
(a)All outstanding preferred stock is noncumulative perpetual preferred stock with a liquidation preference of $100,000 per share.
(b)The carrying value of the Series C, Series D, Series E and Series F preferred stock is recorded net of issuance costs.


Holders of both the Series A and Series C preferred stock are entitled to receive dividends on each dividend payment date (March 20, June 20, September 20 and December 20 of each year), if declared by BNY Mellon’s Board of Directors. Holders of the Series D preferred stock are entitled to receive dividends, if declared by our board of directors, on each June 20 and December 20, to but excluding June 20, 2023; and on each March 20, June 20, September 20 and December 20, from and including June 20, 2023. Holders of the Series E preferred stock are entitled to receive dividends, if declared by our board of directors, on each June 20 and December 20, to and including June 20, 2020; and on each March 20, June 20, September 20 and December 20, from and including September 20, 2020. Holders of the Series F preferred stock are entitled to receive dividends, if declared by our board of directors, on each March 20 and September. 20, commencing March 20, 2017, to and including Sept. 20, 2026; and on each March 20, June 20, September 20 and December 20, commencing Dec. 20, 2026. BNY Mellon’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or any of our shares that rank junior to the preferred stock as to the payment of dividends and/or the distribution of any assets on any
liquidation, dissolution or winding-up of BNY Mellon will be prohibited, subject to certain restrictions, in the event that we do not declare and pay in full preferred dividends for the then current dividend period of the Series A preferred stock or the last preceding dividend period of the Series C, Series D, Series E and Series F preferred stock.

All of the outstanding shares of the Series A preferred stock are owned by Mellon Capital IV, which will pass through any dividend on the Series A preferred stock to the holders of its Normal Preferred Capital Securities. All of the outstanding shares of the Series C, Series D, Series E and Series F preferred stock are held by the depositary of the depositary shares, which will pass through the applicable portion of any dividend on the Series C, Series D, Series E and Series F preferred stock to the holders of record of their respective depositary shares.

On Sept. 20, 2016,2017, The Bank of New York Mellon Corporation paid the following dividends for the noncumulative perpetual preferred stock for the dividend period ending in September 20162017 to holders of record as of the close of business on Sept. 5, 2016:2017:




80 BNY Mellon

Notes to Consolidated Financial Statements(continued)

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

The preferred stock is not subject to the operation of a sinking fund; and is not convertible into, or exchangeable for, shares of our common stock or any other class or series of our other securities. Subject to the restrictions in BNY Mellon’s 2007 replacement capital covenant, subsequently amended on May 8 and Sept. 11, 2012, we may redeem the Series A preferred stock, in whole or in part, at our option. We may also, at our option, redeem the shares of the
 
Series C preferred stock, in whole or in part,$2,312.50 per share on or after the dividend payment date in September 2017, the Series D preferred stock, in whole or in part, on or after the dividend payment date in June 2023, the Series E preferred stock, in whole or in part, on or after the dividend payment date in June 2020 and the Series F preferred stock,Preferred Stock (equivalent to $23.1250 per depositary share, each representing a 1/100th interest in whole or in part, on or after the dividend payment date in September 2026. The Series C, Series D, Series E or Series F preferred stock can be redeemed, in whole but not in part, at any time within 90 days following a regulatory capital treatment event (as defined in eachshare of the Series C, Series D, Series E and Series F’s CertificatesF Preferred Stock).

For additional information on the preferred stock, see Note 13 of Designation).the Notes to Consolidated Financial Statements in our 2016 Annual Report.

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



BNY Mellon 81

Notes to Consolidated Financial Statements(continued)

Note 13 - Other comprehensive income (loss)

Components of other comprehensive income (loss)Quarter endedQuarter ended
Sept. 30, 2016 June 30, 2016 Sept. 30, 2015Sept. 30, 2017 June 30, 2017 Sept. 30, 2016
(in millions)
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

Foreign currency translation:          
Foreign currency translation adjustments arising during the period (a)
$(104)$(82)$(186) $(164)$(120)$(284) $(132)$(31)$(163)$221
$65
$286
 $249
$81
$330
 $(104)$(82)$(186)
Total foreign currency translation(104)(82)(186) (164)(120)(284) (132)(31)(163)221
65
286
 249
81
330
 (104)(82)(186)
Unrealized gain (loss) on assets available-for-sale:          
Unrealized gain (loss) arising during period(87)34
(53) 182
(65)117
 (3)10
7
47
(19)28
 146
(55)91
 (87)34
(53)
Reclassification adjustment (b)
(24)9
(15) (21)8
(13) (22)8
(14)(19)7
(12) 
(1)(1) (24)9
(15)
Net unrealized gain (loss) on assets available-for-sale(111)43
(68) 161
(57)104
 (25)18
(7)28
(12)16
 146
(56)90
 (111)43
(68)
Defined benefit plans:          
Net gain (loss) arising during the period


 


 3
(1)2



 


 


Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b)
22
(8)14
 21
(7)14
 32
(11)21
25
(10)15
 24
(8)16
 22
(8)14
Total defined benefit plans22
(8)14
 21
(7)14
 35
(12)23
25
(10)15
 24
(8)16
 22
(8)14
Unrealized gain (loss) on cash flow hedges:          
Unrealized hedge gain (loss) arising during period(24)7
(17) (10)4
(6) (3)(6)(9)(2)
(2) (8)4
(4) (24)7
(17)
Reclassification adjustment (b)
28
(9)19
 (4)1
(3) 3
6
9
3
(1)2
 9
(4)5
 28
(9)19
Net unrealized gain (loss) on cash flow hedges4
(2)2
 (14)5
(9) 


1
(1)
 1

1
 4
(2)2
Total other comprehensive income (loss)$(189)$(49)$(238) $4
$(179)$(175)
$(122)$(25)$(147)$275
$42
$317
 $420
$17
$437
 $(189)$(49)$(238)
(a)Includes the impact of hedges of net investments in foreign subsidiaries. See Note 16 for additional information.
(b)The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the Consolidated Income Statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense on the Consolidated Income Statement. See Note 16 of the Notes to Consolidated Financial Statements for the location of the reclassification adjustment related to cash flow hedges on the Consolidated Income Statement.


Components of other comprehensive income (loss)Year-to-date
 Sept. 30, 2017 Sept. 30, 2016
(in millions)
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

Foreign currency translation:       
Foreign currency translation adjustments arising during the period (a)
$566
$175
$741
 $(223)$(210)$(433)
Total foreign currency translation566
175
741
 (223)(210)(433)
Unrealized gain (loss) on assets available-for-sale:       
Unrealized gain (loss) arising during period357
(144)213
 338
(111)227
Reclassification adjustment (b)
(29)10
(19) (65)22
(43)
Net unrealized gain (loss) on assets available-for-sale328
(134)194
 273
(89)184
Defined benefit plans:       
Net gain (loss) arising during the period3
(1)2
 3
(1)2
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b)
74
(25)49
 65
(22)43
Total defined benefit plans77
(26)51
 68
(23)45
Unrealized gain (loss) on cash flow hedges:       
Unrealized hedge gain (loss) arising during period4
(1)3
 (115)38
(77)
Reclassification adjustment (b)
13
(5)8
 110
(37)73
Net unrealized gain (loss) on cash flow hedges17
(6)11
 (5)1
(4)
Total other comprehensive income (loss)$988
$9
$997
 $113
$(321)$(208)
(a)Includes the impact of hedges of net investments in foreign subsidiaries. See Note 16 for additional information.
(b)The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the Consolidated Income Statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense on the Consolidated Income Statement. See Note 16 of the Notes to Consolidated Financial Statements for the location of the reclassification adjustment related to cash flow hedges on the Consolidated Income Statement.




82 BNY Mellon 81

Notes to Consolidated Financial Statements (continued)
 

Components of other comprehensive income (loss)Year-to-date
 Sept. 30, 2016 Sept. 30, 2015
(in millions)
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

 
Pre-tax
amount

Tax
(expense)
benefit

After-tax
amount

Foreign currency translation:       
Foreign currency translation adjustments arising during the period (a)
$(223)$(210)$(433) $(396)$(39)$(435)
Total foreign currency translation(223)(210)(433) (396)(39)(435)
Unrealized gain (loss) on assets available-for-sale:       
Unrealized gain (loss) arising during period338
(111)227
 (300)83
(217)
Reclassification adjustment (b)
(65)22
(43) (62)23
(39)
Net unrealized gain (loss) on assets available-for-sale273
(89)184
 (362)106
(256)
Defined benefit plans:       
Net gain (loss) arising during the period3
(1)2
 (182)75
(107)
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b)
65
(22)43
 71
(24)47
Total defined benefit plans68
(23)45
 (111)51
(60)
Unrealized gain (loss) on cash flow hedges:       
Unrealized hedge gain (loss) arising during period(115)38
(77) 


Reclassification adjustment (b)
110
(37)73
 11
(3)8
Net unrealized gain (loss) on cash flow hedges(5)1
(4) 11
(3)8
Total other comprehensive income (loss)$113
$(321)$(208) $(858)$115
$(743)
(a)Includes the impact of hedges of net investments in foreign subsidiaries. See Note 16 for additional information.
(b)The reclassification adjustment related to the unrealized gain (loss) on assets available-for-sale is recorded as net securities gains on the Consolidated Income Statement. The amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost is recorded as staff expense on the Consolidated Income Statement. See Note 16 of the Notes to Consolidated Financial Statements for the location of the reclassification adjustment related to cash flow hedges on the Consolidated Income Statement.


Note 14 - Fair value measurement

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. A three-level hierarchy for fair value measurements is utilized based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. BNY Mellon’s own creditworthiness is considered when valuing liabilities. See Note 2018 of the Notes to Consolidated Financial Statements in our 20152016 Annual Report for information on how we determine fair value and the fair value hierarchy.
 
The following tables present the financial instruments carried at fair value at Sept. 30, 20162017 and Dec. 31, 2015,2016, by caption on the consolidated balance sheet and by the three-level valuation hierarchy. We have included credit ratings information in certain of the tables because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications could result in increased risk for us. There were no material transfers between Level 1 and Level 2 during the third quarter of 2016.2017.



82 BNY Mellon

Notes to Consolidated Financial Statements(continued)

Assets measured at fair value on a recurring basis at Sept. 30, 2016Total carrying
value

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

(dollar amounts in millions)Level 1
Level 2
Level 3
Netting (a)

Total carrying
value

Level 1
Level 2
Level 3
Netting (a)

Available-for-sale securities:  
U.S. Treasury$14,609
$
$
$
$14,609
$15,502
$
$
$
$15,502
U.S. Government agencies
301


301
U.S. government agencies
864


864
Sovereign debt/sovereign guaranteed70
13,935


14,005
74
12,491


12,565
State and political subdivisions
3,559


3,559

3,124


3,124
Agency RMBS
23,508


23,508

24,431


24,431
Non-agency RMBS
673


673

525


525
Other RMBS
644


644

265


265
Commercial MBS
961


961

965


965
Agency commercial MBS
5,881


5,881

9,010


9,010
CLOs
2,534


2,534

2,550


2,550
Other asset-backed securities
2,203


2,203

1,157


1,157
Equity securities3



3
4



4
Money market funds (b)
931



931
939



939
Corporate bonds
1,638


1,638

1,275


1,275
Other debt securities
3,002


3,002

3,151


3,151
Foreign covered bonds2,110
245


2,355
2,284
258


2,542
Non-agency RMBS (c)

1,463


1,463

1,185


1,185
Total available-for-sale securities17,723
60,547


78,270
18,803
61,251


80,054
Trading assets:  
Debt and equity instruments (b)
353
1,940


2,293
433
1,016


1,449
Derivative assets not designated as hedging:  
Interest rate7
12,353

(10,408)1,952
3
6,731

(5,301)1,433
Foreign exchange
3,289

(2,212)1,077

4,879

(3,120)1,759
Equity and other contracts3
60

(45)18
1
73

(49)25
Total derivative assets not designated as hedging10
15,702

(12,665)3,047
4
11,683

(8,470)3,217
Total trading assets363
17,642

(12,665)5,340
437
12,699

(8,470)4,666
Loans
29


29
Other assets:  
Derivative assets designated as hedging:  
Interest rate
764


764

307


307
Foreign exchange
375


375

37


37
Total derivative assets designated as hedging
1,139


1,139

344


344
Other assets (d)
302
49


351
148
184


332
Other assets measured at net asset value (d)
  212
  151
Total other assets302
1,188


1,702
148
528


827
Subtotal assets of operations at fair value18,388
79,406

(12,665)85,341
19,388
74,478

(8,470)85,547
Percentage of assets prior to netting19%81%% 
Assets of consolidated investment management funds: 
Trading assets252
621


873
Other assets97
39


136
Total assets of consolidated investment management funds349
660


1,009
Percentage of assets of operations prior to netting21%79%% 
Assets of consolidated investment management funds398
404


802
Total assets$18,737
$80,066
$
$(12,665)$86,350
$19,786
$74,882
$
$(8,470)$86,349
Percentage of assets prior to netting19%81%% 
Percentage of total assets prior to netting21%79%% 


BNY Mellon 83

Notes to Consolidated Financial Statements (continued)
 

Liabilities measured at fair value on a recurring basis at Sept. 30, 2016Total carrying
value

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

(dollar amounts in millions)Level 1
Level 2
Level 3
Netting (a)

Total carrying
value

Level 1
Level 2
Level 3
Netting (a)

Trading liabilities:  
Debt and equity instruments$800
$189
$
$
$989
$684
$159
$
$
$843
Derivative liabilities not designated as hedging:  
Interest rate24
12,308

(10,541)1,791
3
6,681

(5,705)979
Foreign exchange
3,235

(1,936)1,299

4,463

(3,095)1,368
Equity and other contracts
122

(47)75
3
135

(75)63
Total derivative liabilities not designated as hedging24
15,665

(12,524)3,165
6
11,279

(8,875)2,410
Total trading liabilities824
15,854

(12,524)4,154
690
11,438

(8,875)3,253
Long-term debt (b)

376


376

369


369
Other liabilities - derivative liabilities designated as hedging: 
Other liabilities derivative liabilities designated as hedging:
 
Interest rate
1,077


1,077

494


494
Foreign exchange
43


43

318


318
Total other liabilities - derivative liabilities designated as hedging
1,120


1,120
Total other liabilities – derivative liabilities designated as hedging
812


812
Subtotal liabilities of operations at fair value824
17,350

(12,524)5,650
690
12,619

(8,875)4,434
Percentage of liabilities prior to netting5%95%% 
Liabilities of consolidated investment management funds: 
Trading liabilities
219


219
Other liabilities2
11


13
Total liabilities of consolidated investment management funds2
230


232
Percentage of liabilities of operations prior to netting5%95%% 
Liabilities of consolidated investment management funds2
25


27
Total liabilities$826
$17,580
$
$(12,524)$5,882
$692
$12,644
$
$(8,875)$4,461
Percentage of liabilities prior to netting4%96%% 
Percentage of total liabilities prior to netting5%95%% 
(a)ASC 815, Derivatives and Hedging, permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. Netting is applicable to derivatives not designated as hedging instruments included in trading assets or trading liabilities, and derivatives designated as hedging instruments included in other assets or other liabilities. Netting is allocated to the derivative products based on the net fair value of each product.
(b)Includes certain interests in securitizations.
(c)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(d)Includes private equity investments and seed capital.


84 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Assets measured at fair value on a recurring basis at Dec. 31, 2015
Total carrying
value

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

(dollar amounts in millions)Level 1
Level 2
Level 3
Netting (a)

Total carrying
value

Level 1
Level 2
Level 3
Netting (a)

Available-for-sale securities:  
U.S. Treasury$12,832
$
$
$
$12,832
$14,307
$
$
$
$14,307
U.S. Government agencies
387


387
U.S. government agencies
359


359
Sovereign debt/sovereign guaranteed35
13,182


13,217
66
12,423


12,489
State and political subdivisions
4,046


4,046

3,378


3,378
Agency RMBS
23,501


23,501

22,736


22,736
Non-agency RMBS
793


793

638


638
Other RMBS
1,061


1,061

513


513
Commercial MBS
1,392


1,392

928


928
Agency commercial MBS
4,020


4,020

6,449


6,449
CLOs
2,351


2,351

2,598


2,598
Other asset-backed securities
2,893


2,893

1,727


1,727
Equity securities4



4
3



3
Money market funds (b)
886



886
842



842
Corporate bonds
1,752


1,752

1,396


1,396
Other debt securities
2,775


2,775

1,961


1,961
Foreign covered bonds1,966
202


2,168
1,876
265


2,141
Non-agency RMBS (c)

1,789


1,789

1,357


1,357
Total available-for-sale securities15,723
60,144


75,867
17,094
56,728


73,822
Trading assets:  
Debt and equity instruments (b)
1,232
2,167


3,399
240
2,013


2,253
Derivative assets not designated as hedging:  
Interest rate10
10,034

(8,071)1,973
4
7,583

(6,047)1,540
Foreign exchange
4,905

(2,981)1,924

6,104

(4,172)1,932
Equity and other contracts15
120

(63)72

46

(38)8
Total derivative assets not designated as hedging25
15,059

(11,115)3,969
4
13,733

(10,257)3,480
Total trading assets1,257
17,226

(11,115)7,368
244
15,746

(10,257)5,733
Loans
422


422
Other assets:
  
Derivative assets designated as hedging:  
Interest rate
497


497

415


415
Foreign exchange
219


219

369


369
Total derivative assets designated as hedging
716


716

784


784
Other assets (d)
192
62


254
268
73


341
Other assets measured at net asset value (d)
 117
 214
Total other assets192
778


1,087
268
857


1,339
Subtotal assets of operations at fair value17,172
78,570

(11,115)84,744
17,606
73,331

(10,257)80,894
Percentage of assets prior to netting18%82%% 
Assets of consolidated investment management funds: 
Trading assets455
773


1,228
Other assets157
16


173
Total assets of consolidated investment management funds612
789


1,401
Percentage of assets of operations prior to netting19%81%% 
Assets of consolidated investment management funds464
767


1,231
Total assets$17,784
$79,359
$
$(11,115)$86,145
$18,070
$74,098
$
$(10,257)$82,125
Percentage of assets prior to netting18%82%% 
Percentage of total assets prior to netting20%80%% 



BNY Mellon 85

Notes to Consolidated Financial Statements (continued)
 

Liabilities measured at fair value on a recurring basis at Dec. 31, 2015
Total carrying
value

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

(dollar amounts in millions)Level 1
Level 2
Level 3
Netting (a)

Total carrying
value

Level 1
Level 2
Level 3
Netting (a)

Trading liabilities:  
Debt and equity instruments$422
$152
$
$
$574
$349
$236
$
$
$585
Derivative liabilities not designated as hedging:  
Interest rate5
9,957

(8,235)1,727
4
7,629

(6,634)999
Foreign exchange
4,682

(2,567)2,115

6,103

(3,363)2,740
Equity and other contracts5
147

(67)85

115

(50)65
Total derivative liabilities not designated as hedging10
14,786

(10,869)3,927
4
13,847

(10,047)3,804
Total trading liabilities432
14,938

(10,869)4,501
353
14,083

(10,047)4,389
Long-term debt (b)

359


359

363


363
Other liabilities - derivative liabilities designated as hedging: 
Other liabilities derivative liabilities designated as hedging:
 
Interest rate
372


372

545


545
Foreign exchange
20


20

52


52
Total other liabilities - derivative liabilities designated as hedging
392


392
Total other liabilities – derivative liabilities designated as hedging
597


597
Subtotal liabilities of operations at fair value432
15,689

(10,869)5,252
353
15,043

(10,047)5,349
Percentage of liabilities prior to netting3%97%% 
Liabilities of consolidated investment management funds: 
Trading liabilities
229


229
Other liabilities1
16


17
Total liabilities of consolidated investment management funds1
245


246
Percentage of liabilities of operations prior to netting2%98%% 
Liabilities of consolidated investment management funds3
312


315
Total liabilities$433
$15,934
$
$(10,869)$5,498
$356
$15,355
$
$(10,047)$5,664
Percentage of liabilities prior to netting3%97%% 
Percentage of total liabilities prior to netting2%98%% 
(a)ASC 815, Derivatives and Hedging, permits the netting of derivative receivables and derivative payables under legally enforceable master netting agreements and permits the netting of cash collateral. Netting is applicable to derivatives not designated as hedging instruments included in trading assets or trading liabilities, and derivatives designated as hedging instruments included in other assets or other liabilities. Netting is allocated to the derivative products based on the net fair value of each product.
(b)Includes certain interests in securitizations.
(c)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.
(d)Includes private equity investments and seed capital.



86 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Details of certain items measured at fair value
on a recurring basis
Sept. 30, 2016 Dec. 31, 2015Sept. 30, 2017 Dec. 31, 2016
Total
carrying
value (a)(b)

 Ratings 
Total
carrying value (a)

 Ratings
Total
carrying
value (a)(b)

 
Ratings (a)
 
Total
carrying value (b)

 
Ratings (a)
AAA/
AA-

A+/
A-

BBB+/
BBB-

BB+ and
lower

 
AAA/
AA-

A+/
A-

BBB+/
BBB-

BB+ and
lower
 
AAA/
AA-

A+/
A-

BBB+/
BBB-

BB+ and
lower

  
AAA/
AA-

A+/
A-

BBB+/
BBB-

BB+ and
lower

(dollar amounts in millions)    
Non-agency RMBS, originated in:            
2007$59
 %%%100% $66
 %%%100%$42
 %%%100% $58
 %%%100%
2006101
 


100
 115
 


100
85
 


100
 98
 


100
2005194
 24
4
9
63
 234
 19
9
13
59
152
 20
3
18
59
 180
 23
5
9
63
2004 and earlier319
 5
3
25
67
 378
 4
4
26
66
246
 4
2
27
67
 302
 5
3
24
68
Total non-agency RMBS$673
 9%3%14%74% $793
 8%4%16%72%$525
 8%2%14%76% $638
 9%3%14%74%
Commercial MBS - Domestic, originated in:              
2009-2016$632
 83%17%%% $626
 83%17%%%
2009-2017$909
 89%11%%% $674
 84%16%%%
200814
 100



 16
 100



5
 100



 14
 100



2007258
 75
25


 304
 62
22
16


 



 190
 71
29


20066
 96
4


 384
 76
24



 



 3
 7
93


Total commercial MBS - Domestic$910
 81%19%%% $1,330
 76%20%4%%$914
 89%11%%% $881
 81%19%%%
Foreign covered bonds:              
Canada$1,460
 100%%%% $1,014
 100%%%%$1,648
 100%%%% $1,320
 100%%%%
Australia261
 100



 40
 100



Netherlands177
 100



 160
 100



United Kingdom323
 100



 363
 100



136
 100



 280
 100



Norway181
 100



 191
 100



Other391
 100



 600
 100



320
 100



 341
 100



Total foreign covered bonds$2,355
 100%%%% $2,168
 100%%%%$2,542
 100%%%% $2,141
 100%%%%
European floating rate notes - available-for-sale:              
United Kingdom$494
 91%9%%% $780
 85%15%%%$204
 87%13%%% $379
 90%10%%%
Netherlands139
 100



 222
 100



113
 37
63


 125
 100



Ireland62
 

100

 121
 
45
55


 



 58
 

100

Total European floating rate notes - available-for-sale$695
 85%6%9%% $1,123
 79%15%6%%$317
 69%31%%% $562
 83%7%10%%
Sovereign debt/sovereign guaranteed:              
United Kingdom$3,413
 100%%%% $2,941
 100%%%%$3,036
 100%%%% $3,209
 100%%%%
France2,151
 100



 2,008
 100



1,993
 100



 1,998
 100



Spain2,030
 

100

 1,955
 

100

1,740
 

100

 1,749
 

100

Germany1,889
 100



 1,683
 100



1,688
 100



 1,347
 100



Italy1,335
 

100

 1,398
 

100

1,169
 

100

 1,130
 

100

Netherlands1,087
 100



 1,055
 100



1,016
 100



 1,061
 100



Ireland832
 
100


 736
 
100


Belgium975
 100



 1,108
 100



809
 100



 1,005
 100



Ireland791
 
100


 772
 

100

Other (b)
334
 79


21
 297
 68

32

Other (c)
282
 48
3

49
 254
 71


29
Total sovereign debt/sovereign guaranteed$14,005
 70%5%24%1% $13,217
 68%%32%%$12,565
 69%7%23%1% $12,489
 70%6%23%1%
Non-agency RMBS (c), originated in:
       
Non-agency RMBS (d), originated in:
       
2007$411
 %%%100% $502
 %%%100%$337
 %%%100% $387
 %%%100%
2006418
 


100
 530
 
1

99
345
 


100
 391
 


100
2005483
 
2
1
97
 580
 
2
1
97
387
 1
1
1
97
 437
 
2
1
97
2004 and earlier151
 2
2
9
87
 177
 
3
9
88
116
 2
2
22
74
 142
 2
2
17
79
Total non-agency RMBS (c)
$1,463
 %1%1%98% $1,789
 %1%1%98%
Total non-agency RMBS (d)
$1,185
 %1%3%96% $1,357
 %1%2%97%
(a)Represents ratings by S&P, or the equivalent.
(b)At Sept. 30, 20162017 and Dec. 31, 2015,2016, foreign covered bonds and sovereign debtdebt/sovereign guaranteed securities were included in Level 1 and Level 2 in the valuation hierarchy. All other assets in the table are Level 2 assets in the valuation hierarchy.
(b)(c)Includes $71 million of noninvestment grade sovereign debtdebt/sovereign guaranteed securities related to Brazil of $140 million at Sept. 30, 20162017 and $95$73 million of investment grade sovereign debt at Dec. 31, 2015 related to Brazil.2016.
(c)(d)Previously included in the Grantor Trust. The Grantor Trust was dissolved in 2011.


Changes in Level 3 fair value measurements

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

The Company has a Level 3 Pricing Committee which evaluates the valuation techniques used in determining the fair value of Level 3 assets and liabilities.



BNY Mellon 87

Notes to Consolidated Financial Statements (continued)
 

determining the fair value of Level 3 assets and liabilities.

There were no financial instruments recorded at fair value on a recurring basis classified in Level 3 of the valuation hierarchy in the first nine months of 2017.
The tablestable below includeincludes a roll forward of the balance sheet amountsamount for the three and nine months ended Sept. 30, 2016 and 2015 (including the change in fair value), for financial instruments classified in Level 3 of the valuation hierarchy.

Fair value measurements for assets using significant unobservable inputs for the three months ended Sept. 30, 2016
Fair value measurements for assets using significant unobservable inputsLoans
(in millions)Loans
 3Q16
YTD16
Fair value at June 30, 2016$101
 
Fair value at the beginning of the period$101
$
Transfers into Level 3
 
19
Total gains or (losses) for the period included in earnings
(a)
Issuances and sales:  
Total gains for the period included in earnings (a)

2
Purchases and sales: 
Purchases
113
Issuances1
 1
1
Sales(102) (102)(135)
Fair value at Sept. 30, 2016$
 $
$
Change in unrealized gains or (losses) for the period included in earnings for assets held at the end of the reporting period$
 
Change in unrealized gains for the period included in earnings for assets held at the end of the reporting period$
$
(a)Reported in investment and other income.


Fair value measurements for assets using significant unobservable inputs for the three months ended Sept. 30, 2015
 Available-for-sale securities Trading assets    
(in millions)State and  political
subdivisions
  Derivative
assets

(a)Other assets
 Total
assets

Fair value at June 30, 2015 $11
 $1
 $28
 $40
Transfers out of Level 3 
 
 
 
Total gains or (losses) for the period        
Included in earnings (or changes in net assets) 
(b)
(c)10
(d)10
Sales and settlements:        
Sales 
 
 (38) (38)
Settlements 
 (1) 
 (1)
Fair value at Sept. 30, 2015 $11
 $
 $
 $11
Change in unrealized gains or (losses) for the period included in earnings for assets held at the end of the reporting period   $
 $
 $
(a)Derivative assets are reported on a gross basis.
(b)Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss) except for the credit portion of OTTI losses which are recorded in securities gains (losses).
(c)Reported in foreign exchange and other trading revenue.
(d)Reported in investment and other income.


Fair value measurements for liabilities using significant unobservable inputs for the three months ended Sept. 30, 2015
 Trading liabilities  
(in millions)Derivative liabilities (a)
Fair value at June 30, 2015 $1
 
Transfers out of Level 3 
 
Total (gains) or losses for the period included in earnings 
(b)
Settlements (1) 
Fair value at Sept. 30, 2015 $
 
Change in unrealized (gains) or losses for the period included in earnings for liabilities held at the end of the reporting period $
 
(a)Derivative liabilities are reported on a gross basis.
(b)Reported in foreign exchange and other trading revenue.




88 BNY Mellon

Notes to Consolidated Financial Statements(continued)

Fair value measurements for assets using significant unobservable inputs for the nine months ended Sept. 30, 2016
(in millions)Loans
Fair value at Dec. 31, 2015$
Transfers into Level 319
Total gains or (losses) for the period included in earnings2
(a)
Purchases, issuances and sales:
Purchases113
Issuances1
Sales(135)
Fair value at Sept. 30, 2016$
Change in unrealized gains or (losses) for the period included in earnings for assets held at the end of the reporting period$
(a)Reported in investment and other income.


Fair value measurements for assets using significant unobservable inputs for the nine months ended Sept. 30, 2015
 Available-for-sale securities Trading assets    
(in millions)State and  political
subdivisions
  Derivative
assets

(a)Other assets
 
Total
assets

Fair value at Dec. 31, 2014 $11
 $9
 $35
 $55
Transfers out of Level 3 
 (3) 
 (3)
Total gains or (losses) for the period        
Included in earnings (or changes in net assets) 
(b)(1)(c)10
(d)9
Purchases, sales and settlements:        
Purchases 
 
 3
 3
Sales 
 
 (48) (48)
Settlements 
 (5) 
 (5)
Fair value at Sept. 30, 2015 $11
 $
 $
 $11
Change in unrealized gains or (losses) for the period included in earnings for assets held at the end of the reporting period   $
 $
 $
(a)Derivative assets are reported on a gross basis.
(b)Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss) except for the credit portion of OTTI losses which are recorded in securities gains (losses).
(c)Reported in foreign exchange and other trading revenue.
(d)Reported in investment and other income.


Fair value measurements for liabilities using significant unobservable inputs for the nine months ended Sept. 30, 2015
 Trading liabilities  
(in millions)Derivative liabilities (a)
Fair value at Dec. 31, 2014 $9
 
Transfers out of Level 3 (3) 
Total (gains) or losses for the period included in earnings (1)(b)
Settlements (5) 
Fair value at Sept. 30, 2015 $
 
Change in unrealized (gains) or losses for the period included in earnings for liabilities held at the end of the reporting period $
 
(a)Derivative liabilities are reported on a gross basis.
(b)Reported in foreign exchange and other trading revenue.


Assets and liabilities measured at fair value on a nonrecurring basis

Under certain circumstances, we make adjustments to fair value our assets, liabilities and unfunded lending-related commitments although they are not measured at fair value on an ongoing basis. An example would be the recording of an impairment of an asset.
 
The following tables present the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy as of Sept. 30, 20162017 and Dec. 31, 2015,2016, for which a nonrecurring change in fair value has been recorded during the quarters ended Sept. 30, 20162017 and Dec. 31, 2015.2016.



BNY Mellon 89

Notes to Consolidated Financial Statements(continued)

Assets measured at fair value on a nonrecurring basis at Sept. 30, 2016
Total 
carrying
value

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

(in millions)Level 1
Level 2
Level 3
Total 
carrying
value

Level 1
Level 2
Level 3
Loans (a)
$
$87
$7
$
$75
$7
$82
Other assets (b)

5

5

4

4
Total assets at fair value on a nonrecurring basis$
$92
$7
$99
$
$79
$7
$86
 

Assets measured at fair value on a nonrecurring basis at Dec. 31, 2015
Total 
carrying
value

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

(in millions)Level 1
Level 2
Level 3
Total 
carrying
value

Level 1
Level 2
Level 3
Loans (a)
$
$97
$174
$
$84
$7
$91
Other assets (b)

6

6

4

4
Total assets at fair value on a nonrecurring basis$
$103
$174
$277
$
$88
$7
$95
(a)During the quarters ended Sept. 30, 20162017 and Dec. 31, 2015,2016, the fair value of these loans decreased less than $1 million and $1 million, respectively, based on the fair value of the underlying collateral as allowed bybased on guidance in ASC 310, Accounting by Creditors for Impairment of a loan,Receivables, with an offset to the allowance for credit losses.
(b)Includes other assets received in satisfaction of debt.


Estimated fair value of financial instruments

The following tables present the estimated fair value and the carrying amount of financial instruments not carried at fair value on the consolidated balance sheet at Sept. 30, 20162017 and Dec. 31, 2015,2016, by caption on the consolidated balance sheet and by the valuation
 
hierarchy. See Note 2018 of the Notes to Consolidated Financial Statements in our 20152016 Annual Report for additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value.


Summary of financial instrumentsSept. 30, 2016
(in millions)Level 1
Level 2
Level 3
Total
estimated
fair value

Carrying
amount

Assets:     
Interest-bearing deposits with the Federal Reserve and other central banks$
$80,359
$
$80,359
$80,359
Interest-bearing deposits with banks
14,420

14,420
14,416
Federal funds sold and securities purchased under resale agreements
34,851

34,851
34,851
Securities held-to-maturity11,400
29,987

41,387
40,728
Loans
64,360

64,360
64,072
Other financial assets4,957
1,060

6,017
6,017
Total$16,357
$225,037
$
$241,394
$240,443
Liabilities:     
Noninterest-bearing deposits$
$105,632
$
$105,632
$105,632
Interest-bearing deposits
154,591

154,591
155,746
Federal funds purchased and securities sold under repurchase agreements
8,052

8,052
8,052
Payables to customers and broker-dealers
21,162

21,162
21,162
Borrowings
1,137

1,137
1,137
Long-term debt
24,690

24,690
23,998
Total$
$315,264
$
$315,264
$315,727



9088 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Summary of financial instrumentsDec. 31, 2015Sept. 30, 2017
(in millions)Level 1
Level 2
Level 3
Total estimated
fair value

Carrying
amount

Level 1
Level 2
Level 3
Total
estimated
fair value

Carrying
amount

Assets:  
Interest-bearing deposits with the Federal Reserve and other central banks$
$113,203
$
$113,203
$113,203
$
$75,808
$
$75,808
$75,808
Interest-bearing deposits with banks
15,150

15,150
15,146

15,254

15,254
15,256
Federal funds sold and securities purchased under resale agreements
24,373

24,373
24,373

27,883

27,883
27,883
Securities held-to-maturity11,376
31,828

43,204
43,312
9,943
29,985

39,928
39,995
Loans(a)
61,421

61,421
61,267

57,709

57,709
57,562
Other financial assets6,537
1,096

7,633
7,633
5,557
1,169

6,726
6,726
Total$17,913
$247,071
$
$264,984
$264,934
$15,500
$207,808
$
$223,308
$223,230
Liabilities:  
Noninterest-bearing deposits$
$96,277
$
$96,277
$96,277
$
$80,380
$
$80,380
$80,380
Interest-bearing deposits
182,410

182,410
183,333

148,967

148,967
150,616
Federal funds purchased and securities sold under repurchase agreements
15,002

15,002
15,002

10,314

10,314
10,314
Payables to customers and broker-dealers
21,900

21,900
21,900

21,176

21,176
21,176
Commercial paper
2,501

2,501
2,501
Borrowings
698

698
698

3,544

3,544
3,544
Long-term debt
21,494

21,494
21,188

28,335

28,335
28,039
Total$
$337,781
$
$337,781
$338,398
$
$295,217
$
$295,217
$296,570
(a)Does not include the leasing portfolio.


Summary of financial instrumentsDec. 31, 2016
(in millions)Level 1
Level 2
Level 3
Total estimated
fair value

Carrying
amount

Assets:     
Interest-bearing deposits with the Federal Reserve and other central banks$
$58,041
$
$58,041
$58,041
Interest-bearing deposits with banks
15,091

15,091
15,086
Federal funds sold and securities purchased under resale agreements
25,801

25,801
25,801
Securities held-to-maturity11,173
29,496

40,669
40,905
Loans (a)

62,829

62,829
62,564
Other financial assets4,822
1,112

5,934
5,934
Total$15,995
$192,370
$
$208,365
$208,331
Liabilities:     
Noninterest-bearing deposits$
$78,342
$
$78,342
$78,342
Interest-bearing deposits
141,418

141,418
143,148
Federal funds purchased and securities sold under repurchase agreements
9,989

9,989
9,989
Payables to customers and broker-dealers
20,987

20,987
20,987
Borrowings
960

960
960
Long-term debt
24,184

24,184
24,100
Total$
$275,880
$
$275,880
$277,526
(a)Does not include the leasing portfolio.


The table below summarizes the carrying amount of the hedged financial instruments, the notional amount of the hedge and the unrealized gain (loss) (estimated fair value) of the derivatives.

Hedged financial instruments
Carrying
amount

Notional amount of hedge
 
Carrying
amount

Notional amount of hedge
 
UnrealizedUnrealized
(in millions)Gain
(Loss)
Gain
(Loss)
Sept. 30, 2016 
Sept. 30, 2017 
Securities available-for-sale$8,717
$8,016
$
$(1,034)$12,416
$12,333
$56
$(337)
Long-term debt20,645
19,950
761
(43)24,249
24,200
249
(157)
Dec. 31, 2015 
Dec. 31, 2016Dec. 31, 2016 
Securities available-for-sale$7,978
$7,918
$16
$(359)$9,184
$9,233
$83
$(342)
Long-term debt18,231
17,850
479
(14)20,511
20,450
330
(203)


BNY Mellon 9189

Notes to Consolidated Financial Statements (continued)
 

Note 15 - Fair value option

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

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

Assets and liabilities of consolidated investment management funds, at fair value
Sept. 30, 2016
Dec. 31, 2015
Sept. 30, 2017
Dec. 31, 2016
(in millions)
Assets of consolidated investment management funds:  
Trading assets$873
$1,228
$576
$979
Other assets136
173
226
252
Total assets of consolidated investment management funds$1,009
$1,401
$802
$1,231
Liabilities of consolidated investment management funds:  
Trading liabilities$219
$229
$
$282
Other liabilities13
17
27
33
Total liabilities of consolidated investment management funds$232
$246
$27
$315


BNY Mellon values the assets and liabilities of its consolidated assetinvestment management funds using quoted prices for identical assets or liabilities in active markets or observable inputs such as quoted prices for similar assets or liabilities. Quoted prices for either identical or similar assets or liabilities in inactive markets may also be used. Accordingly, fair value best reflects the interests BNY Mellon holds in the economic performance of the consolidated assetinvestment management funds. Changes in the value of the assets and liabilities are recorded in the income statement as investment income of consolidated investment management funds and in the interest of investment management fund note holders, respectively.

We have elected the fair value option on $29 million and $419 million of loans at Sept. 30, 2016 and Dec. 31, 2015, respectively. The fair value of these loans was $29 million at Sept. 30, 2016 and $422 million at Dec. 31, 2015. The loans were valued using observable market inputs to discount expected loan cash flows and are included in Level 2 of the valuation hierarchy.

We have elected the fair value option on $240 million of long-term debt. The fair value of this long-term debt was $376369 million at Sept. 30, 20162017 and $359$363 million at Dec. 31, 2015.2016. The long-term debt is
valued using observable market inputs and is included in Level 2 of the valuation hierarchy.

The following table presents the changes in fair value of the loans and long-term debt and certain loans for which we elected the fair value option that we previously held in 2016, and the location of the changes in the consolidated income statement.

Impact of changes in fair value in the income statement (a)
(in millions)3Q17
2Q17
3Q16
YTD17
YTD16
Loans:     
Investment and other income$
$
$(1)$
$13
Long-term debt:     
Foreign exchange and other trading revenue$(1)$(4)$2
$(6)$(17)
Impact of changes in fair value in the income statement (a)
 Quarter ended Year-to-date
(in millions)Sept. 30, 2016
June 30, 2016
Sept. 30, 2015
 Sept. 30, 2016
Sept. 30, 2015
Loans:      
Investment and other income$(1)$5
$6
 $13
$5
Long-term debt:      
Foreign exchange and other trading revenue$2
$(6)$(11) $(17)$(15)
(a)The changes in fair value of the loans and long-term debt are approximately offset by economic hedges included in foreign exchange and other trading revenue.


Note 16 - Derivative instruments

We use derivatives to manage exposure to market risk, including interest rate risk, equity price risk and foreign currency risk, as well as credit risk. Our trading activities are focused on acting as a market-maker for our customers and facilitating customer trades in compliance with the Volcker Rule.

The notional amounts for derivative financial instruments express the dollar volume of the transactions; however, credit risk is much smaller. We perform credit reviews and enter into netting agreements and collateral arrangements to minimize the credit risk of derivative financial instruments. We enter into offsetting positions to reduce exposure to foreign currency, interest rate and equity price risk.

Use of derivative financial instruments involves reliance on counterparties. Failure of a counterparty to honor its obligation under a derivative contract is a risk we assume whenever we engage in a derivative contract. There were no counterparty default losses recorded in the third quarter of 20162017 or the third quarter of 2015.2016.




92 BNY Mellon

Notes to Consolidated Financial Statements(continued)

Hedging derivatives

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



90 BNY Mellon

Notes to Consolidated Financial Statements(continued)

The available-for-sale investment securities hedged consist of sovereign debt, U.S. Treasury bonds, agency commercial mortgage-backed securitiesMBS, sovereign debt and covered bonds that had original maturities of 30 years or less at initial purchase. The swaps on all of these investment securities are not callable. All of these securities are hedged with “pay fixed rate, receive variable rate” swaps of similar maturity, repricing and fixed rate coupon. At Sept. 30, 2016, $7.92017, $12.4 billion face amount of securities were hedged with interest rate swaps that had notional values of $8.0$12.3 billion.

The fixed rate long-term debt instruments hedged generally have original maturities of five to 30 years. We issue both callable and non-callable debt. The non-callable debt is hedged with “receive fixed rate, pay variable rate” swaps with similar maturity, repricing and fixed rate coupon. Callable debt is hedged with callable swaps where the call dates of the swaps exactly match the call dates of the debt. At Sept. 30, 2016, $20.02017, $24.2 billion par value of debt was hedged with interest rate swaps that had notional values of $20.0$24.2 billion.

In addition, we enter into foreign exchange hedges. We use forward foreign exchange contracts with maturities of nine months or less to hedge our Indian rupee, British pound, euro, Hong Kong dollar, Indian rupeeSingapore dollar, Polish zloty, Canadian dollar and Singapore dollarJapanese yen foreign exchange exposure with respect to foreign currency forecasted revenue and expense transactions in entities that have the U.S. dollar as their functional currency. As of Sept. 30,
2016, 2017, the hedged forecasted foreign currency transactions and designated forward foreign exchange contract hedges were $434$539 million (notional), with a pre-tax gainloss of $5$9 million recorded in accumulated other comprehensive income. This gainloss will be reclassified to income or expense over the next nine months.

Forward foreign exchange contracts are also used to hedge the value of our net investments in foreign subsidiaries. These forward foreign exchange contracts have maturities of less than two years. The derivatives employed are designated as hedges of changes in value of our foreign investments due to exchange rates. Changes in the value of the forward foreign exchange contracts offset the changes in value of the foreign investments due to changes in foreign exchange rates. The change in fair market value of these forward foreign exchange contracts is deferred and reported within accumulatedforeign currency translation adjustments in shareholders’ equity, net of tax. At Sept. 30, 2016,2017, forward foreign exchange contracts with notional amounts totaling $7.1$7.8 billion were designated as hedges.

In addition to forward foreign exchange contracts, we also designate non-derivative financial instruments as hedges of our net investments in foreign subsidiaries. Those non-derivative financial instruments designated as hedges of our net investments in foreign subsidiaries were all long-term liabilities of BNY Mellon in various currencies, and, at Sept. 30, 2016,2017, had a combined U.S. dollar equivalent value of $432$181 million.

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

IneffectivenessNine months endedNine months ended
(in millions)Sept. 30, 2016
Sept. 30, 2015
Sept. 30, 2017
Sept. 30, 2016
Fair value hedges of securities$(19.4)$2.8
$(13.3)$(5.4)
Fair value hedges of long-term debt(9.0)(4.8)0.1
(23.0)
Cash flow hedges



Other (a)




Total$(28.4)$(2.0)$(13.2)$(28.4)
(a)Includes ineffectiveness recorded on foreign exchange hedges.



BNY Mellon 9391

Notes to Consolidated Financial Statements (continued)
 

The following table summarizes the notional amount and credit exposure of our total derivative portfolio at Sept. 30, 20162017 and Dec. 31, 20152016.

Impact of derivative instruments on the balance sheetNotional value 
Asset derivatives
fair value
 
Liability derivatives
fair value
Notional value 
Asset derivatives
fair value
 
Liability derivatives
fair value
(in millions)Sept. 30, 2016
Dec. 31, 2015
 Sept. 30, 2016
Dec. 31, 2015
 Sept. 30, 2016
Dec. 31, 2015
Sept. 30, 2017
Dec. 31, 2016
 Sept. 30, 2017
Dec. 31, 2016
 Sept. 30, 2017
Dec. 31, 2016
Derivatives designated as hedging instruments: (a)
          
Interest rate contracts$27,966
$25,768
 $764
$497
 $1,077
$372
$36,533
$29,683
 $307
$415
 $494
$545
Foreign exchange contracts7,493
6,839
 375
219
 43
20
8,399
7,796
 37
369
 318
52
Total derivatives designated as hedging instruments  $1,139
$716
 $1,120
$392
  $344
$784
 $812
$597
Derivatives not designated as hedging instruments: (b)
          
Interest rate contracts$401,827
$519,428
 $12,360
$10,044
 $12,332
$9,962
$283,384
$325,412
 $6,734
$7,587
 $6,684
$7,633
Foreign exchange contracts589,769
576,253
 3,289
4,905
 3,235
4,682
639,336
530,729
 4,879
6,104
 4,463
6,103
Equity contracts1,247
1,923
 62
127
 120
151
1,354
1,167
 74
46
 134
112
Credit contracts178
319
 1
8
 2
1
180
160
 

 4
3
Total derivatives not designated as hedging instruments  $15,712
$15,084
 $15,689
$14,796
  $11,687
$13,737
 $11,285
$13,851
Total derivatives fair value (c)
  $16,851
$15,800
 $16,809
$15,188
  $12,031
$14,521
 $12,097
$14,448
Effect of master netting agreements (d)
  (12,665)(11,115) (12,524)(10,869)  (8,470)(10,257) (8,875)(10,047)
Fair value after effect of master netting agreements  $4,186
$4,685
 $4,285
$4,319
  $3,561
$4,264
 $3,222
$4,401
(a)The fair value of asset derivatives and liability derivatives designated as hedging instruments is recorded as other assets and other liabilities, respectively, on the balance sheet.
(b)The fair value of asset derivatives and liability derivatives not designated as hedging instruments is recorded as trading assets and trading liabilities, respectively, on the balance sheet.
(c)Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815.815, Derivatives and Hedging.
(d)
Effect of master netting agreements includes cash collateral received and paid of $920$834 million and $779$1,239 million, respectively, at Sept. 30, 20162017, and $792$1,119 million and $546$909 million, respectively, at Dec. 31, 20152016.


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

Impact of derivative instruments on the income statement
(in millions)
   
Impact of derivative instruments in the income statement
(in millions)
Impact of derivative instruments in the income statement
(in millions)
  
Derivatives in fair value hedging relationships
Location of gain or
(loss) recognized in income on derivatives
 
Gain or (loss) recognized in income
on derivatives
 Location of gain or(loss) recognized in income on hedged item 
Gain or (loss) recognized
in hedged item
Location of
gain or (loss)
recognized in income
on derivatives
 
Gain or (loss) recognized in income
on derivatives
 
Location of
gain or (loss)
recognized in income
on hedged item
 
Gain or (loss) recognized
in hedged item
3Q16
 2Q16
 3Q15
 3Q16
 2Q16
 3Q15
3Q17
 2Q17
 3Q16
 3Q17
 2Q17
 3Q16
Interest rate contractsNet interest revenue $(174) $(123) $(93) Net interest revenue $168
 $115
 $87
Net interest revenue $(33) $2
 $(174) Net interest revenue $31
 $(9) $168


Derivatives in cash flow hedging
relationships
Gain or (loss) recognized
in accumulated
OCI on derivatives (effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 Gain or (loss) recognized in income on derivatives (ineffectiveness portion and amount excluded from effectiveness testing)
3Q16
2Q16
3Q15
  3Q16
2Q16
3Q15
  3Q16
2Q16
3Q15
FX contracts$(7)$(15)$
 Net interest revenue $(6)$(15)$
 Net interest revenue $
$
$
FX contracts


 Other revenue 


 Other revenue 


FX contracts(19)19

 Trading revenue (19)19

 Trading revenue 


FX contracts2
(14)(3) Salary expense (3)
(3) Salary expense 


Total$(24)$(10)$(3)   $(28)$4
$(3)   $
$
$


Derivatives in net
investment hedging
relationships
Gain or (loss) recognized in accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivative
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion and amount excluded from
effectiveness testing)
3Q16
2Q16
3Q15
  3Q16
2Q16
3Q15
  3Q16
2Q16
3Q15
FX contracts$47
$331
$213
 Net interest revenue $
$
$1
 Other revenue $
$
$
Derivatives in cash flow hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss)
reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion
and amount excluded from
effectiveness testing)
3Q17
2Q17
3Q16
  3Q17
2Q17
3Q16
  3Q17
2Q17
3Q16
FX contracts$
$
$(7) Net interest revenue $
$
$(6) Net interest revenue $
$
$
FX contracts3
(1)
 Other revenue 


 Other revenue 


FX contracts(1)
(19) Trading revenue (1)
(19) Trading revenue 


FX contracts(4)(7)2
 Salary expense (2)(9)(3) Salary expense 


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




9492 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Impact of derivative instruments on the income statement
(in millions)
 
Derivatives in fair value hedging relationships
Location of gain or
(loss) recognized in income on derivatives
 Gain or (loss) recognized in income on derivatives Location of gain or(loss) recognized in income on hedged item 
Gain or (loss) recognized
 in hedged item
YTD16
 YTD15
YTD16
 YTD15
Interest rate contractsNet interest revenue $(445) $10
 Net interest revenue $417
 $(12)
Derivatives in net
investment hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss)
reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion
and amount excluded from
effectiveness testing)
3Q17
2Q17
3Q16
  3Q17
2Q17
3Q16
  3Q17
2Q17
3Q16
FX contracts$(206)$(274)$47
 Net interest revenue $
$
$
 Other revenue $
$
$


Derivatives in cash flow hedging
relationships
Gain or (loss) recognized
in accumulated
OCI on derivatives(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized in income on derivatives 
(ineffectiveness portion and amount excluded from effectiveness testing)
YTD16
YTD15
  YTD16
YTD15
  YTD16
YTD15
FX contracts$(16)$(1) Net interest revenue $(16)$(1) Net interest revenue $
$
FX contracts

 Other revenue 

 Other revenue 

FX contracts(89)9
 Trading revenue (89)9
 Trading revenue 

FX contracts(10)(8) Salary expense (5)(19) Salary expense 

Total$(115)$
   $(110)$(11)   $
$
Impact of derivative instruments in the income statement
(in millions)
 
Derivatives in fair value hedging relationships
Location of
gain or (loss)
recognized in income
on derivatives
 Gain or (loss) recognized in income on derivatives 
Location of
gain or (loss)
recognized in income
on hedged item
 
Gain or (loss) recognized
in hedged item
YTD17
 YTD16
YTD17
 YTD16
Interest rate contractsNet interest revenue $(21) $(445) Net interest revenue $8
 $417


Derivatives in net
investment hedging
relationships
Gain or (loss) recognized in accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivative
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss)
recognized in income on
derivatives 
(ineffectiveness portion and amount excluded from
effectiveness testing)
YTD16
YTD15
  YTD16
YTD15
  YTD16
YTD15
FX contracts$320
$326
 Net interest revenue $
$1
 Other revenue $
$
Derivatives in cash flow hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion
and amount excluded from
effectiveness testing)
YTD17
YTD16
  YTD17
YTD16
  YTD17
YTD16
FX contracts$
$(16) Net interest revenue $
$(16) Net interest revenue $
$
FX contracts2

 Other revenue 

 Other revenue 

FX contracts2
(89) Trading revenue 2
(89) Trading revenue 

FX contracts
(10) Salary expense (15)(5) Salary expense 

Total$4
$(115)   $(13)$(110)   $
$


Derivatives in net
investment hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss)
reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives 
(ineffectiveness portion
and amount excluded from
effectiveness testing)
YTD17
YTD16
  YTD17
YTD16
  YTD17
YTD16
FX contracts$(576)$320
 Net interest revenue $
$
 Other revenue $
$


Trading activities (including trading derivatives)

We manage trading risk through a system of position limits, a VaR methodology based on Monte Carlo simulationshistorical simulation and other market sensitivity measures. Risk is monitored and reported to senior management by a separate unit, independent from trading, on a daily basis. Based on certain assumptions, the VaR methodology is designed to capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period, for most instruments, utilizes a 99% confidence level and incorporates the non-linear characteristics of options.product characteristics. The VaR model is one of several statistical models used to develop economic capital results, which isare allocated to lines of business for computing risk-adjusted performance.

As the VaR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and management’s assessment of market conditions. Additional stress scenarios based upon historical market events are also performed. Stress tests by their design,may incorporate
the impact of reduced market liquidity and the breakdown of historically observed correlations. The results of thesecorrelations and extreme scenarios. VaR and other statistical measures, stress teststesting and sensitivity analysis are reviewed weekly with senior management.incorporated in other risk management materials.


Revenue from

BNY Mellon 93

Notes to Consolidated Financial Statements(continued)

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

Foreign exchange and other trading revenueForeign exchange and other trading revenue Foreign exchange and other trading revenue
 Year-to-date
(in millions)3Q16
2Q16
3Q15
2016
2015
3Q17
2Q17
3Q16
YTD17
YTD16
Foreign exchange$175
$166
$180
$512
$578
$158
$151
$175
$463
$512
Other trading revenue (loss)8
16
(1)28
17
Other trading revenue15
14
8
39
28
Total foreign exchange and other trading revenue$183
$182
$179
$540
$595
$173
$165
$183
$502
$540


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




BNY Mellon 95

Notes to Consolidated Financial Statements(continued)

Counterparty credit risk and collateral

We assess credit risk of our counterparties through regular examination of their financial statements, confidential communication with the management of those counterparties and regular monitoring of publicly available credit rating information. This and other information is used to develop proprietary credit rating metrics used to assess credit quality.

Collateral requirements are determined after a comprehensive review of the credit quality of each counterparty. Collateral is generally held or pledged in the form of cash or highly liquid government securities. Collateral requirements are monitored and adjusted daily.

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

Disclosure of contingent features in over-the-counter (“OTC”)OTC derivative instruments

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

The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions as of Sept. 30, 20162017 for three key ratings triggers:triggers.

If The Bank of New York Mellon’s rating was changed to (Moody’s/S&P)
Potential close-out exposures (fair value) (a)
 
Potential close-out exposures (fair value) (a)
 
A3/A- $48 million $92 million
Baa2/BBB $782 million $430 million
Ba1/BB+ $2,813 million $1,899 million
(a)The amounts represent potential total close-out values if The Bank of New York Mellon’s rating were to immediately drop to the indicated levels.


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

Additionally, if The Bank of New York Mellon’s debt rating had fallen below investment grade on Sept. 30, 2016,2017, existing collateral arrangements would have required us to have postedpost an additional $176$151 million of collateral.





9694 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Offsetting assets and liabilities

The following tables present derivative instruments and financial instruments that are either subject to an enforceable netting agreement or offset by collateral arrangements. There were no derivative instruments or financial instruments subject to a legally enforceable netting agreement for which we are not currently netting.

Offsetting of derivative assets and financial assets at Sept. 30, 2016 
Offsetting of derivative assets and financial assets at Sept. 30, 2017Offsetting of derivative assets and financial assets at Sept. 30, 2017 
Gross assets recognized
Gross amounts offset in the balance sheet
 Net assets recognized on the balance sheet
Gross amounts not offset in the balance sheet Gross assets recognized
Gross amounts offset in the balance sheet
 Net assets recognized on the balance sheet
Gross amounts not offset in the balance sheet 
(in millions)(a)Financial instruments
Cash collateral received
Net amount
(a)Financial instruments
Cash collateral received
Net amount
Derivatives subject to netting arrangements:      
Interest rate contracts$11,962
$10,408
 $1,554
$493
$
$1,061
$6,182
$5,301
 $881
$189
$
$692
Foreign exchange contracts2,753
2,212
 541
102

439
4,281
3,120
 1,161
82

1,079
Equity and other contracts60
45
 15


15
69
49
 20


20
Total derivatives subject to netting arrangements14,775
12,665
 2,110
595

1,515
10,532
8,470
 2,062
271

1,791
Total derivatives not subject to netting arrangements2,076

 2,076


2,076
1,499

 1,499


1,499
Total derivatives16,851
12,665
 4,186
595

3,591
12,031
8,470
 3,561
271

3,290
Reverse repurchase agreements27,955
1,640
(b)26,315
26,240

75
36,118
19,171
(b)16,947
16,890

57
Securities borrowing8,536

 8,536
8,307

229
10,936

 10,936
10,627

309
Total$53,342
$14,305
 $39,037
$35,142
$
$3,895
$59,085
$27,641
 $31,444
$27,788
$
$3,656
(a)Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)Offsetting of reverse repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


Offsetting of derivative assets and financial assets at Dec. 31, 2015 
Offsetting of derivative assets and financial assets at Dec. 31, 2016Offsetting of derivative assets and financial assets at Dec. 31, 2016 
Gross assets recognized
Gross amounts offset in the balance sheet
 
Net assets recognized
on the
balance sheet

Gross amounts not offset in the balance sheet Gross assets recognized
Gross amounts offset in the balance sheet
 
Net assets recognized
on the
balance sheet

Gross amounts not offset in the balance sheet 
(in millions)(a)Financial instruments
Cash collateral received
Net amount
(a)Financial instruments
Cash collateral received
Net amount
Derivatives subject to netting arrangements:      
Interest rate contracts$9,554
$8,071
 $1,483
$432
$
$1,051
$7,205
$6,047
 $1,158
$321
$
$837
Foreign exchange contracts3,981
2,981
 1,000
63

937
5,265
4,172
 1,093
202

891
Equity and other contracts123
63
 60


60
44
38
 6


6
Total derivatives subject to netting arrangements13,658
11,115
 2,543
495

2,048
12,514
10,257
 2,257
523

1,734
Total derivatives not subject to netting arrangements2,142

 2,142


2,142
2,007

 2,007


2,007
Total derivatives15,800
11,115
 4,685
495

4,190
14,521
10,257
 4,264
523

3,741
Reverse repurchase agreements17,088
357
(b)16,731
16,726

5
17,588
481
(b)17,107
17,104

3
Securities borrowing7,630

 7,630
7,373

257
8,694

 8,694
8,425

269
Total$40,518
$11,472
 $29,046
$24,594
$
$4,452
$40,803
$10,738
 $30,065
$26,052
$
$4,013
(a)Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)Offsetting of reverse repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.




BNY Mellon 9795

Notes to Consolidated Financial Statements (continued)
 

Offsetting of derivative liabilities and financial liabilities at Sept. 30, 2016 
Offsetting of derivative liabilities and financial liabilities at Sept. 30, 2017Offsetting of derivative liabilities and financial liabilities at Sept. 30, 2017Net liabilities recognized on the balance sheet
 
Gross liabilities recognized
Gross amounts offset in the balance sheet
 Net liabilities recognized on the balance sheet
Gross amounts not offset in the balance sheet Gross liabilities recognized
Gross amounts offset in the balance sheet
 Gross amounts not offset in the balance sheet 
(in millions)(a)Financial instruments
Cash collateral pledged
Net amount
(a)Cash collateral pledged
Net liabilities recognized on the balance sheet
Net amount
Derivatives subject to netting arrangements:      
Interest rate contracts$13,217
$10,541
 $2,676
$2,524
$
$152
$7,103
$5,705
 $1,398
$1,311
$87
Foreign exchange contracts2,706
1,936
 770
242

528
4,074
3,095
 979
234

745
Equity and other contracts111
47
 64
63

1
130
75
 55
49

6
Total derivatives subject to netting arrangements16,034
12,524
 3,510
2,829

681
11,307
8,875
 2,432
1,594

838
Total derivatives not subject to netting arrangements775

 775


775
790

 790


790
Total derivatives16,809
12,524
 4,285
2,829

1,456
12,097
8,875
 3,222
1,594

1,628
Repurchase agreements7,868
1,640
(b)6,228
6,226

2
27,321
19,171
(b)8,150
8,149

1
Securities lending1,507

 1,507
1,443

64
1,904

 1,904
1,812

92
Total$26,184
$14,164
 $12,020
$10,498
$
$1,522
$41,322
$28,046
 $13,276
$11,555
$
$1,721
(a)Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)Offsetting of repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2015 
Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2016Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2016
Net liabilities recognized
on the
balance sheet

 
Gross liabilities recognized
Gross amounts offset in the balance sheet
 
Net liabilities recognized
on the
balance sheet

Gross amounts not offset in the balance sheet Gross liabilities recognized
Gross amounts offset in the balance sheet
 Gross amounts not offset in the balance sheet 
(in millions)(a)Financial instruments
Cash collateral pledged
Net amount
(a)Cash collateral pledged
Net liabilities recognized
on the
balance sheet

Net amount
Derivatives subject to netting arrangements:      
Interest rate contracts$10,188
$8,235
 $1,953
$1,795
$
$158
$8,116
$6,634
 $1,482
$1,266
$216
Foreign exchange contracts3,409
2,567
 842
274

568
4,957
3,363
 1,594
355

1,239
Equity and other contracts145
67
 78
71

7
104
50
 54
54


Total derivatives subject to netting arrangements13,742
10,869
 2,873
2,140

733
13,177
10,047
 3,130
1,675

1,455
Total derivatives not subject to netting arrangements1,446

 1,446


1,446
1,271

 1,271


1,271
Total derivatives15,188
10,869
 4,319
2,140

2,179
14,448
10,047
 4,401
1,675

2,726
Repurchase agreements7,737
357
(b)7,380
7,380


8,703
481
(b)8,222
8,222


Securities lending1,801

 1,801
1,727

74
1,615

 1,615
1,522

93
Total$24,726
$11,226
 $13,500
$11,247
$
$2,253
$24,766
$10,528
 $14,238
$11,419
$
$2,819
(a)Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)Offsetting of repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.




9896 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Secured borrowings

The following tables present the contract value of repurchase agreements and securities lending transactions accounted for as secured borrowings by the type of collateral provided to counterparties.

Repurchase agreements and securities lending transactions accounted for as secured borrowings at Sept. 30, 2016
Repurchase agreements and securities lending transactions accounted for as secured borrowings at Sept. 30, 2017Repurchase agreements and securities lending transactions accounted for as secured borrowings at Sept. 30, 2017
Remaining contractual maturity of the agreementsRemaining contractual maturity of the agreements
(in millions)Overnight and continuous
Up to 30 days
30 days or more
Total
Overnight and continuous
Up to 30 days
30 days or more
Total
Repurchase agreements:  
U.S. Treasury$2,366
$13
$
$2,379
$21,432
$
$
$21,432
U.S. Government agencies313


313
U.S. government agencies489
110

599
Agency RMBS2,867
87

2,954
1,798
190

1,988
Corporate bonds242

862
1,104
282

940
1,222
Other debt securities174

407
581
254

871
1,125
Equity securities506

31
537
466

489
955
Total$6,468
$100
$1,300
$7,868
$24,721
$300
$2,300
$27,321
Securities lending:  
U.S. Government agencies$43
$
$
$43
U.S. government agencies$15
$
$
$15
Other debt securities363


363
477


477
Equity securities1,101


1,101
1,412


1,412
Total$1,507
$
$
$1,507
$1,904
$
$
$1,904
Total borrowings$7,975
$100
$1,300
$9,375
$26,625
$300
$2,300
$29,225


Repurchase agreements and securities lending transactions accounted for as secured borrowings at Dec. 31, 2015
Repurchase agreements and securities lending transactions accounted for as secured borrowings at Dec. 31, 2016Repurchase agreements and securities lending transactions accounted for as secured borrowings at Dec. 31, 2016
Remaining contractual maturity of the agreementsRemaining contractual maturity of the agreements
(in millions)Overnight and continuous
Up to 30 days
30 days or more
Total
Overnight and continuous
Up to 30 days
30 days or more
Total
Repurchase agreements:  
U.S. Treasury$2,226
$
$
$2,226
$2,488
$4
$
$2,492
U.S. Government agencies319
42
5
366
U.S. government agencies396
10

406
Agency RMBS3,158


3,158
3,294
386

3,680
Corporate bonds372

665
1,037
304

694
998
Other debt securities106

149
255
146

563
709
Equity securities664

31
695
375

43
418
Total$6,845
$42
$850
$7,737
$7,003
$400
$1,300
$8,703
Securities lending:  
U.S. Government agencies$35
$
$
$35
U.S. government agencies$39
$
$
$39
Other debt securities254


254
477


477
Equity securities1,512


1,512
1,099


1,099
Total$1,801
$
$
$1,801
$1,615
$
$
$1,615
Total borrowings$8,646
$42
$850
$9,538
$8,618
$400
$1,300
$10,318


BNY Mellon’s repurchase agreements and securities lending transactions primarily encounter risk associated with liquidity. We are required to pledge collateral based on predetermined terms within the agreements. If we were to experience a decline in the fair value of the collateral pledged for these transactions, additional collateralwe could be required to provide
 
be providedadditional collateral to the counterparty;counterparty, therefore decreasing the amount of assets available for other liquidity needs that may arise. BNY Mellon also offers tri-party collateral agency services in the tri-party repo market where we are exposed to credit risk. In order to mitigate this risk, we require dealers to fully secure intraday credit.




BNY Mellon 9997

Notes to Consolidated Financial Statements (continued)
 

Note 17 - Commitments and contingent liabilities

Off-balance sheet arrangements

In the normal course of business, various commitments and contingent liabilities are outstanding that are not reflected in the accompanying consolidated balance sheets.

Our significant trading and off-balance sheet risks are securities, foreign currency and interest rate risk management products, commercial lending commitments, letters of credit and securities lending indemnifications. We assume these risks to reduce interest rate and foreign currency risks, to provide customers with the ability to meet credit and liquidity needs and to hedge foreign currency and interest rate risks. These items involve, to varying degrees, credit, foreign currency and interest rate risk not recognized inon the balance sheet. Our off-balance sheet risks are managed and monitored in manners similar to those used for on-balance sheet risks. Significant industry concentrations related to credit exposure at Sept. 30, 2016 are disclosed in the financial institutions portfolio exposure table and the commercial portfolio exposure table below.

Financial institutions
portfolio exposure
(in billions)
Sept. 30, 2016
Loans
Unfunded
commitments

Total
exposure

Securities industry$3.8
$20.9
$24.7
Banks7.8
2.0
9.8
Asset managers1.5
6.2
7.7
Insurance0.1
4.3
4.4
Government0.1
1.1
1.2
Other1.4
1.6
3.0
Total$14.7
$36.1
$50.8

Commercial portfolio
exposure
(in billions)
Sept. 30, 2016
Loans
Unfunded
commitments

Total
exposure

Manufacturing$1.1
$6.0
$7.1
Services and other0.7
4.7
5.4
Energy and utilities0.6
4.7
5.3
Media and telecom0.3
1.3
1.6
Total$2.7
$16.7
$19.4


Major concentrations in securities lending are primarily to broker-dealers and are generally collateralized with cash. Securities lending transactions are discussed below.

The following table presents a summary of our off-balance sheet credit risks, net of participations.risks.

Off-balance sheet credit risksSept. 30, 2016
Dec. 31, 2015
Sept. 30, 2017
Dec. 31, 2016
(in millions)
Lending commitments$52,807
$54,505
$49,983
$51,270
Standby letters of credit (a)
4,388
4,915
3,619
4,185
Commercial letters of credit266
303
265
339
Securities lending indemnifications (b)
309,420
294,108
406,434
317,690
(a)
Net of participations totaling $776$681 million at Sept. 30, 20162017 and $809$662 million at Dec. 31, 2015.
2016.
(b)
Excludes the indemnification for securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $62$65 billion at Sept. 30, 20162017 and $54$61 billion at Dec. 31, 2015.2016.


Also included in lending commitments are facilities that provide liquidity for variable rate tax-exempt securities wrapped by monoline insurers. The credit approval for these facilities is based on an assessment of the underlying tax-exempt issuer and considers factors other than the financial strength of the monoline insurer.

The total potential loss on undrawn lending commitments, standby and commercial letters of credit, and securities lending indemnifications is equal to the total notional amount if drawn upon, which does not consider the value of any collateral.

Since many of the lending commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. A summary of lending commitment maturities is as follows: $31.1$29.8 billion in less than one year, $21.4$20.0 billion in one to five years and $260$158 million over five years.

Standby letters of credit (“SBLC”) principally support corporate obligations and were collateralized with cash and securities of $391$178 million and $299 million at Sept. 30, 20162017 and $293 million at Dec. 31, 2015, respectively.2016. At Sept. 30, 2016, $2.72017, $2.3 billion of the SBLCs will expire within one year and $1.7$1.2 billion in one to five years and $48 million in over five years.

We must recognize, at the inception of an SBLC and foreign and other guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The fair value of the liability, which was recorded with a corresponding asset in other assets, was estimated as the present value of contractual customer fees.



100 BNY Mellon

Notes to Consolidated Financial Statements(continued)

The estimated liability for losses related to these commitmentsSBLCs and SBLCs,foreign and other guarantees, if any, is included in the allowance for lending-related commitments. The allowance for lending-related commitments was $126$104 million at Sept. 30, 20162017 and $118$112 million at Dec. 31, 2015.2016.

Payment/performance risk of SBLCs is monitored using both historical performance and internal ratings criteria. BNY Mellon’s historical experience is that SBLCs typically expire without being funded. SBLCs below investment grade are monitored closely for payment/performance risk. The table below shows SBLCs by investment grade:

Standby letters of creditSept. 30, 2016
Dec. 31, 2015
Sept. 30, 2017
Dec. 31, 2016
Investment grade87%86%86%89%
Non-investment grade13%14%14%11%


A commercial letter of credit is normally a short-term instrument used to finance a commercial contract for the shipment of goods from a seller to a buyer. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction. As a result, the total contractual amounts do not necessarily represent future cash requirements. Commercial letters of credit totaled $266$265 million at Sept. 30, 2016 compared with $3032017 and $339 million at Dec. 31, 2015.2016.

We expect many of the lending commitments and letters of credit to expire without the need to advance any cash. The revenue associated with guarantees frequently depends on the credit rating of the obligor and the structure of the transaction, including collateral, if any.


98 BNY Mellon

Notes to Consolidated Financial Statements(continued)

A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security (typically through an agent, in our case, The Bank of New York Mellon), to a borrower, usually a broker-dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract, which normally matures in less than 90 days.

We typically lend securities with indemnification against borrower default. We generally require the borrower to provide collateral with a minimum value of102% of the fair value of the securities borrowed, which is monitored on a daily basis, thus reducing credit risk. Market risk can also arise in securities lending transactions. These risks are controlled through policies limiting the level of risk that can be undertaken. Securities lending transactions are generally entered into only with highly rated counterparties. Securities lending indemnifications
were secured by collateral of $323424 billion at Sept. 30, 20162017 and $306331 billion at Dec. 31, 2015.2016.

CIBC Mellon, a joint venture between BNY Mellon and the Canadian Imperial Bank of Commerce (“CIBC”), engages in securities lending activities.  CIBC Mellon, BNY Mellon and CIBC jointly and severally indemnify securities lenders against specific types of borrower default.  At Sept. 30, 20162017 and Dec. 31, 2015, $622016, $65 billion and $54$61 billion, respectively, of borrowings at CIBC Mellon, for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, were secured by collateral of $66$69 billion and $56$64 billion, respectively. If, upon a default, a borrower’s collateral was not sufficient to cover its related obligations, certain losses related to the indemnification could be covered by the indemnitors.

Industry concentrations

We expect many of these guaranteeshave significant industry concentrations related to expire withoutcredit exposure at Sept. 30, 2017. The tables below present our credit exposure in the needfinancial institutions and commercial portfolios.

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

Total
exposure

Securities industry$2.9
$19.0
$21.9
Asset managers1.6
6.5
8.1
Banks6.3
1.4
7.7
Insurance0.1
3.4
3.5
Government
1.0
1.0
Other1.0
1.4
2.4
Total$11.9
$32.7
$44.6

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

Total
exposure

Manufacturing$1.4
$6.3
$7.7
Services and other0.9
4.4
5.3
Energy and utilities0.6
4.5
5.1
Media and telecom0.1
1.4
1.5
Total$3.0
$16.6
$19.6


Major concentrations in securities lending are primarily to advance any cash. The revenue associatedbroker-dealers and are generally collateralized with guarantees frequently depends on the credit rating of the obligor and the structure of the transaction, including collateral, if any.cash and/or securities.

Exposure for certain administrative errors

In connection with certain offshore tax-exempt funds that we manage, we may be liable to the funds for certain administrative errors. The errors relate to the resident status of such funds, potentially exposing the Company to a tax liability related to the funds’ earnings. The Company is in discussions with tax authorities regarding the funds. With the charge recorded in 2014 for this matter, weWe believe we are appropriately accrued and the additional reasonably possible exposure is not significant.

Indemnification arrangements

We have provided standard representations for underwriting agreements, acquisition and divestiture agreements, sales of loans and commitments, and other similar types of arrangements and customary indemnification for claims and legal proceedings related to providing financial services that are not otherwise included above. Insurance has been purchased to mitigate certain of these risks. Generally, there are no stated or notional amounts included in these indemnifications and the contingencies triggering the obligation for indemnification are not expected to occur. Furthermore, often counterparties to these transactions provide us with comparable indemnifications. We are unable to develop an estimate of the maximum payout under these



BNY Mellon 10199

Notes to Consolidated Financial Statements (continued)
 

indemnifications. We are unable to develop an estimate of the maximum payout under these indemnifications for several reasons. In addition to the lack of a stated or notional amount in a majority of such indemnifications, we are unable to predict the nature of events that would trigger indemnification or the level of indemnification for a certain event. We believe, however, that the possibility that we will have to make any material payments for these indemnifications is remote. At Sept. 30, 20162017 and Dec. 31, 2015,2016, we have not recorded any material liabilities under these arrangements.

Clearing and settlement exchanges

We are a noncontrolling equity investor in, and/or member of, several industry clearing or settlement exchanges through which foreign exchange, securities, derivatives or other transactions settle. Certain of these industry clearing and settlement exchanges require their members to guarantee their obligations and liabilities and/or to provide liquidity support in the event other members do not honor their obligations. We believe the likelihood that a clearing or settlement exchange (of which we are a member) would become insolvent is remote. Additionally, certain settlement exchanges have implemented loss allocation policies that enable the exchange to allocate settlement losses to the members of the exchange. It is not possible to quantify such mark-to-market loss until the loss occurs. In addition, anyAny ancillary costs that occur as a result of any mark-to-market loss cannot be quantified. In addition, we also sponsor clients as members on clearing and settlement exchanges and guarantee their obligations. At Sept. 30, 20162017 and Dec. 31, 2015,2016, we have not recorded any material liabilities under these arrangements.

Legal proceedings

In the ordinary course of business, BNY Mellon and its subsidiaries are routinely named as defendants in or made parties to pending and potential legal actions. We also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal). Claims for significant monetary damages are often asserted in many of these legal actions, while claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought in governmental and regulatory matters. It is inherently difficult to predict the eventual outcomes of such matters given their complexity and the particular facts and circumstances at issue in each of these matters. However, on the basis of our current knowledge and
 
knowledge and understanding, we do not believe that judgments, settlements or orders, if any, arising from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage) will have a material adverse effect on the consolidated financial position or liquidity of BNY Mellon, although they could have a material effect on net income in a given period.

In view of the inherent unpredictability of outcomes in litigation and governmental and regulatory matters, particularly where (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel legal theories or a large number of parties, as a matter of course there is considerable uncertainty surrounding the timing or ultimate resolution of litigation and governmental and regulatory matters, including a possible eventual loss, fine, penalty or business impact, if any, associated with each such matter. In accordance with applicable accounting guidance, BNY Mellon establishes accruals for litigation and governmental and regulatory matters when those matters proceed to a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. BNY Mellon will continue to monitor such matters for developments that could affect the amount of the accrual, and will adjust the accrual amount as appropriate. If the loss contingency in question is not both probable and reasonably estimable, BNY Mellon does not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. BNY Mellon believes that its accruals for legal proceedings are appropriate and, in the aggregate, are not material to the consolidated financial position of BNY Mellon, although future accruals could have a material effect on net income in a given period.

For certain of those matters described here for which a loss contingency may, in the future, be reasonably possible (whether in excess of a related accrued liability or where there is no accrued liability), BNY Mellon is currently unable to estimate a range of reasonably possible loss. For those matters described here where BNY Mellon is able to estimate a reasonably possible loss, the aggregate range of such reasonably possible loss is up to $940 million $900 million in excess of the accrued liability (if any) related to those matters.



102100 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

The following describes certain judicial, regulatory and arbitration proceedings involving BNY Mellon:

Sentinel Matters
On Jan. 18, 2008, The Bank of New York Mellon filed a proof of claim in the Chapter 11 bankruptcy proceeding of Sentinel Management Group, Inc. (“Sentinel”) pending in federal court in the Northern District of Illinois, seeking to recover approximately $312 million loaned to Sentinel and secured by securities and cash in an account maintained by Sentinel at The Bank of New York Mellon. On March 3, 2008, the bankruptcy trustee filed an adversary complaint against The Bank of New York Mellon seeking to disallow The Bank of New York Mellon’s claim and seeking damages for The Bank of New York Mellon’s allegedly aiding and abetting Sentinel insiders in misappropriating customer assets and improperly using those assets as collateral for the loan. In a decision dated Nov. 3, 2010, the court found for The Bank of New York Mellon and against the bankruptcy trustee, holding that The Bank of New York Mellon’s loan to Sentinel was valid, fully secured and not subject to equitable subordination. The bankruptcy trustee appealed this decision, and on Aug. 9, 2012, the United States Court of Appeals for the Seventh Circuit issued a decision affirming the trial court’s judgment. On Sept. 7, 2012, the bankruptcy trustee filed a petition for rehearing and, on Nov. 30, 2012, the Court of Appeals withdrew its opinion and vacated its judgment. On Aug. 26, 2013, the Court of Appeals reversed its own prior decision and the district court’s decision, and remanded the case to the district court for further proceedings. On Dec. 10, 2014, the district court issued a decision in favor of The Bank of New York Mellon holding that the transfers from Sentinel cannot be reversed and that The Bank of New York Mellon’s lien was valid and not subject to equitable subordination. The bankruptcy trustee appealed the decision. On Jan. 8, 2016, the Court of Appeals invalidated The Bank of New York Mellon’s lien but rejected the trustee’s request for equitable subordination. On July 13, 2016, the bankruptcy court approved a settlement between The Bank of New York Mellon and the bankruptcy trustee, under which both parties will dismiss all litigation between them and The Bank of New York Mellon will be granted an unsecured claim for the amount of the loan. We received distributions in August 2016 on a pro rata basis with other unsecured creditors.

In November 2009, the Division of Enforcement of the U.S. Commodities Futures Trading Commission (“CFTC”) indicated that it is considering a recommendation to the CFTC that it file a civil enforcement action against The Bank of New York Mellon for possible violations of the Commodity Exchange Act and CFTC regulations in connection with its relationship to Sentinel. The Bank of New York Mellon responded in writing to the CFTC on Jan. 29, 2010 and provided an explanation as to why an enforcement action is unwarranted.

Standing Instruction Matters
Beginning in December 2009, government authorities conducted inquiries seeking information relating primarily to standing instruction foreign exchange transactions in connection with custody services BNY Mellon provides to custody clients. On various dates beginning in 2009, BNY Mellon was named as a defendant in lawsuits by various government and private entities alleging BNY Mellon’s pricing of standing instruction foreign exchange transactions was improper.

On March 19, 2015, BNY Mellon announced that it had resolved substantially all of the pending standing instruction-related actions, resulting in a total of $714 million in settlement payments. On May 21, 2015, BNY Mellon settled a putative class action lawsuit asserting securities law violations. With these settlements, which are now all final, BNY Mellon has effectively resolved virtually all of the standing instruction FX-related actions, with the exception of several lawsuits brought by individual customers or shareholders asserting derivative claims.

Mortgage-Securitization Trusts Proceedings
The Bank of New York Mellon has been named as a defendant in a number of legal actions brought by MBS investors alleging that the trustee has expansive duties under the governing agreements, including the duty to investigate and pursue breach of representation and warranty claims against other parties to the MBS transactions. These actions include a lawsuit brought in New York State court on June 18, 2014, and later re-filed in federal court, by a group of institutional investors who purport to sue on behalf of 253 MBS trusts.

Matters Related to R. Allen Stanford
In late December 2005, Pershing LLC (“Pershing”) became a clearing firm for Stanford Group Co. (“SGC”), a registered broker-dealer that was part of a group of



BNY Mellon 103

Notes to Consolidated Financial Statements(continued)

entities ultimately controlled by R. Allen Stanford.Stanford (“Stanford”). Stanford International Bank (“SIB”), also controlled by Stanford, issued certificates of deposit (“CDs”). Some investors allegedly wired funds from their SGC accounts to purchase CDs. In 2009, the SEC charged Stanford with operating a Ponzi scheme in connection with the sale of CDs, and SGC was placed into receivership. Alleged purchasers of CDs have filed 15 lawsuits against Pershing that are pending in Texas, including two putative class actions. The purchasers allege that Pershing, as SGC’s clearing firm, assisted Stanford in a fraudulent scheme and assert contractual, statutory and common law claims. In addition, oneThe remaining FINRA arbitration matter brought by alleged purchasers remains pending.action has been resolved and dismissed.

Brazilian Postalis Litigation
BNY Mellon ServiceosServicos Financeiros DTVM S.A. (“DTVM”), a subsidiary that provides a number of asset services in Brazil, acts as administrator for certain investment funds in which the exclusive investor is a public pension fund for postal workers called Postalis-Instituto de Seguridade Social dos Correios e Telégrafos (“Postalis”). On Aug. 22, 2014, Postalis sued DTVM in Rio de Janeiro, Brazil for losses related to a Postalis investment fund for which DTVM serves as fund administrator. Postalis alleges that DTVM failed to properly perform alleged duties, including duties to conduct due diligence of and exert control over the fund manager, Atlântica Administração de Recursos (“Atlântica”), and Atlântica’s investments. On March 12, 2015, Postalis filed a lawsuit in Rio de Janeiro against DTVM and
BNY Mellon Administração de Ativos Ltda. (“Ativos”) alleging failure to properly perform alleged duties relating to another fund of which DTVM is administrator and Ativos is investment manager. On Dec. 14, 2015, AssociacãAssociaceão Dos Profissionais Dos Correiros (“ADCAP”), a Brazilian postal workers association, filed a lawsuit in São Paulo against DTVM and other defendants alleging that DTVM improperly contributed to investment losses in the Postalis portfolio. On March 20, 2017, the lawsuit was dismissed without prejudice, and ADCAP has appealed that decision. On Dec. 17, 2015, Postalis filed three additional lawsuits in Rio de Janeiro against DTVM and Ativos alleging failure to properly perform alleged duties and liabilities for losses with respect to investments in several other funds. On Feb. 4, 2016, Postalis filed another lawsuit in Brasilia against DTVM, Ativos and BNY Mellon Alocação de Patrimônio Ltda., an investment management subsidiary, alleging failure to properly perform duties and liability for losses with respect to investments in
various other funds of which the defendants were administrator and/or manager. The lawsuit has been transferred to São Paulo.

Depositary Receipt MattersLitigation
Between late December 2015 and February 2016, four putative class action lawsuits were filed against BNY Mellon asserting claims relating to BNY Mellon’s foreign exchange pricing when converting dividends and other distributions from non-U.S. companies in its role as depositary bank to Depositary Receipt issuers. The primary claims are for breach of contract and violations of ERISA. The lawsuits have been consolidated into two suits whichthat are pending in federal court in the Southern District of New York and are all in their early stages.York.

Brazilian Silverado Litigation
DTVM acts as administrator for the Fundo de Investimento em Direitos Creditórios Multisetorial Silverado Maximum (“Silverado Maximum Fund”), which invests in commercial credit receivables. On June 2, 2016, the Silverado Maximum Fund sued DTVM in its capacity as administrator, along with Deutsche Bank S.A. - Banco Alemão in its capacity as custodian and Silverado Gestão e Investimentos Ltda. in its capacity as investment manager. The Fund alleges that each of the defendants failed to fulfill its respective duty, and caused losses to the Fund for which the defendants are jointly and severally liable.



BNY Mellon 101

Notes to Consolidated Financial Statements(continued)

Depositary Receipt Pre-Release Inquiry
In March 2014, the Staff of the U.S. Securities and Exchange Commission’s Enforcement Division (the “Staff”) commenced an investigation into certain issuers of American Depositary Receipts (“ADRs”), including BNY Mellon, for the period of 2011 to 2015. The Staff has issued several requests to BNY Mellon for information relating to the pre-release of ADRs. In May 2017, BNY Mellon began discussions with the Staff about a possible resolution of the investigation. BNY Mellon has fully cooperated with this matter.

Note 18 - Lines of business

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

Business accounting principles

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

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

Beginning in the first quarter of 2016, we revised the net interest revenue for our business to reflect



104 BNY Mellon

Notes to Consolidated Financial Statements(continued)

adjustments to our transfer pricing methodology to better reflect the value of certain deposits. Also beginning in the first quarter of 2016, we refined the expense allocation process for indirect expenses to simplify the expenses recorded in the Other segment to include only expenses not directly attributable to the Investment Management and Investment Services
operations. These changes did not impact the consolidated results.

The accounting policies of the businesses are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in our 20152016 Annual Report.


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


BusinessPrimary types of revenue
Investment Management
•   Investment management and performance fees from:
Mutual funds
Institutional clients
Private clients
High net worthHigh-net-worth individuals and families, endowments and foundations and related entities
   Distribution and servicing fees
   Other revenue from seed capital investments
Investment Services
   Asset servicing fees, including institutional trust and custody fees, fund services, broker-dealer services, globalsecurities finance and collateral services and securities lendingliquidity services
   Issuer services fees, including Depositary Receipts and Corporate Trust and Depositary Receipts
   Clearing services fees including broker-dealer services, registered investment advisor services and prime brokerage services
   Treasury services fees, including global payment servicespayments, trade finance and working capital solutionscash management
   Foreign exchange revenue
   Credit-relatedFinancing-related fees and net interest revenue from credit-related activities
Other segment
   LeasingNet interest revenue and lease-related gains (losses) from leasing operations
   CorporateGain (loss) on securities and net interest revenue from corporate treasury activitiesactivity
   Derivatives businessOther trading revenue from derivatives and other trading activity
   Global markets
   BusinessResults of business exits


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

Revenue amounts reflect fee and other revenue generated by each business. Fee and other revenue transferred between businesses under revenue transfer agreements is included within other revenue in each business.
Revenues and expenses associated with specific client bases are included in those businesses. For example, foreign exchange activity associated
with clients using custody products is included in Investment Services.
Net interest revenue is allocated to businesses based on the yields on the assets and liabilities generated by each business. We employ a funds transfer pricing system that matches funds with the specific assets and liabilities of each business based on their interest sensitivity and maturity characteristics.
The provision for credit losses associated with the respective credit portfolios is reflected in each business segment.

Incentive
102 BNY Mellon

Notes to Consolidated Financial Statements(continued)

Incentives expense related to restricted stock is allocated to the businesses.
Support and other indirect expenses are allocated to businesses based on internally developed methodologies.
Recurring FDIC expense is allocated to the businesses based on average deposits generated within each business.
Litigation expense is generally recorded in the business in which the charge occurs.
Management of the investment securities portfolio is a shared service contained in the Other segment. As a result, gains and losses associated with the valuation of the securities portfolio are included in the Other segment.
Client deposits serve as the primary funding source for our investment securities portfolio.
We typically allocate all interest revenue to the businesses generating the deposits. Accordingly, accretion related to the portion of the investment securities portfolio restructured in 2009 has been included in the results of the businesses.
M&I expense is a corporate level item and is recorded in the Other segment.



BNY Mellon 105

Notes to Consolidated Financial Statements(continued)

Restructuring charges relate to corporate-level initiatives and were therefore recorded in the Other segment.
Balance sheet assets and liabilities and their related income or expense are specifically
assigned to each business. Businesses with a net liability position have been allocated assets.
Goodwill and intangible assets are reflected within individual businesses.


The following consolidating schedules showpresents the contribution of our businesses to our overall profitability.

For the quarter ended Sept. 30, 2016Investment
Management

 
Investment
Services

 Other
 Consolidated
 
For the quarter ended Sept. 30, 2017Investment
Management

 Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)Investment
Management

 
Investment
Services

 Other
 Consolidated
 
Fee and other revenue$918
(a) $2,187
 $69
 $3,174
(a) 
Net interest revenue82
 715
 (23) 774
 
Net interest revenue (expense)82
 777
 (20) 839
 
Total revenue958
(a)2,898
 77
 3,933
(a)1,000
(a)2,964
 49
 4,013
(a)
Provision for credit losses
 1
 (20) (19) (2) (2) (2) (6) 
Noninterest expense702
 1,851
 88
 2,641
(b)702
 1,874
 77
 2,653
(b)
Income before taxes$256
(a) $1,046
 $9
 $1,311
(a)(b)
Income (loss) before taxes$300
(a) $1,092
 $(26) $1,366
(a)(b)
Pre-tax operating margin (c)
27% 36% N/M
 33% 30% 37% N/M
 34% 
Average assets$30,392
 $275,714
 $45,124
 $351,230
 $31,689
 $252,461
 $61,559
 $345,709
 
(a)
Both fee and other revenue and total revenue include the net income from consolidated investment management funds of $8$7 million representing $17$10 million of income and noncontrolling interests of $9$3 million. Income before taxes is net of noncontrolling interests of $9$3 million.
(b)Noninterest expense includes a loss attributable to noncontrolling interest of $2 million related to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.


For the quarter ended June 30, 2016
Investment
Management

 
Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)
Fee and other revenue$856
(a) $2,054
 $95
 $3,005
(a) 
Net interest revenue82
 690
 (5) 767
 
Total revenue938
(a)2,744
 90
 3,772
(a)
Provision for credit losses1
 (7) (3) (9) 
Noninterest expense703
 1,859
 56
 2,618
(b)
Income before taxes$234
(a) $892
 $37
 $1,163
(a)(b)
Pre-tax operating margin (c)
25% 33% N/M
 31% 
Average assets$30,229
 $277,225
 $66,766
 $374,220
 
(a)Both fee and other revenue and total revenue include the net income from consolidated investment management funds of $6 million, representing $10 million of income and noncontrolling interests of $4 million. Income before taxes is net of noncontrolling interests of $4 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interest of $2 million related to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.


For the quarter ended Sept. 30, 2015Investment
Management

 Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)
Fee and other revenue$843
(a) $2,134
 $59
 $3,036
(a) 
Net interest revenue83
 662
 14
 759
 
Total revenue926
(a)2,796
 73
 3,795
(a)
Provision for credit losses1
 7
 (7) 1
 
Noninterest expense689
 1,894
 96
 2,679
(b)
Income (loss) before taxes$236
(a) $895
 $(16) $1,115
(a)(b)
Pre-tax operating margin (c)
25% 32% N/M
 29% 
Average assets$30,960
 $285,195
 $57,298
 $373,453
 
(a)Both fee and other revenue and total revenue include net loss from consolidated investment management funds of $17 million, representing $22 million of losses and a loss attributable to noncontrolling interests of $5 million. Income (loss) before taxes is net of a loss attributable to noncontrolling interests of $5 million.
(b)Noninterest expense includes a loss attributable to noncontrolling interest of $1 million related to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.


For the quarter ended June 30, 2017
Investment
Management

 
Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)
Fee and other revenue$899
(a) $2,115
 $113
 $3,127
(a) 
Net interest revenue (expense)87
 761
 (22) 826
 
Total revenue986
(a)2,876
 91
 3,953
(a)
Provision for credit losses
 (3) (4) (7) 
Noninterest expense698
 1,927
 28
 2,653
(b)
Income before taxes$288
(a) $952
 $67
 $1,307
(a)(b)
Pre-tax operating margin (c)
29% 33% N/M
 33% 
Average assets$31,355
 $254,724
 $56,436
 $342,515
 
(a)Both fee and other revenue and total revenue include the net income from consolidated investment management funds of $7 million, representing $10 million of income and noncontrolling interests of $3 million. Income before taxes is net of noncontrolling interests of $3 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interest of $2 millionrelated to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.



106 BNY Mellon 103

Notes to Consolidated Financial Statements (continued)
 

For the nine months ended Sept. 30, 2016Investment
Management

 Investment
Services

 Other
 Consolidated
 
For the quarter ended Sept. 30, 2016Investment
Management

 Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)Investment
Management

 Investment
Services

 Other
 Consolidated
 
Fee and other revenue$876
(a) $2,183
 $100
 $3,159
(a) 
Net interest revenue247
 2,084
 (24) 2,307
 
Net interest revenue (expense)82
 715
 (23) 774
 
Total revenue2,791
(a)8,351
 300
 11,442
(a) 958
(a)2,898
 77
 3,933
(a)
Provision for credit losses
 8
 (26) (18) 
 1
 (20) (19) 
Noninterest expense2,084
 5,518
 284
 7,886
(b)702
 1,851
 88
 2,641
(b)
Income before taxes$707
(a)$2,825
 $42
 $3,574
(a)(b)$256
(a) $1,046
 $9
 $1,311
(a)(b)
Pre-tax operating margin (c)
25% 34% N/M
 31% 27% 36% N/M
 33% 
Average assets$30,048
 $275,410
 $57,832
 $363,290
 $30,392
 $275,714
 $45,124
 $351,230
 
(a)Both fee and other revenue and total revenue include net income from consolidated investment management funds of $8 million, representing $17 million of income and noncontrolling interests of $9 million. Income before taxes is net of noncontrolling interests of $9 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interest of $2 millionrelated to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.


For the nine months ended Sept. 30, 2017Investment
Management

 Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)
Fee and other revenue$2,694
(a)$6,386
 $254
 $9,334
(a) 
Net interest revenue (expense)255
 2,245
 (43) 2,457
 
Total revenue2,949
(a)8,631
 211
 11,791
(a) 
Provision for credit losses1
 (5) (14) (18) 
Noninterest expense2,083
 5,650
 212
 7,945
(b)
Income before taxes$865
(a)$2,986
 $13
 $3,864
(a)(b)
Pre-tax operating margin (c)
29% 35% N/M
 33% 
Average assets$31,372
 $252,675
 $57,463
 $341,510
 
(a)Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $29 million, representing $53 million of income and noncontrolling interests of $24 million. Income before taxes is net of noncontrolling interests of $24 million.
(b)Noninterest expense includes a loss attributable to noncontrolling interest of $6 million related to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.


For the nine months ended Sept. 30, 2016Investment
Management

 Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)
Fee and other revenue$2,544
(a)$6,267
 $324
 $9,135
(a)
Net interest revenue (expense)247
 2,084
 (24) 2,307
 
Total revenue2,791
(a)8,351
 300
 11,442
(a)
Provision for credit losses
 8
 (26) (18) 
Noninterest expense2,084
 5,518
 284
 7,886
(b)
Income before taxes$707
(a)$2,825
 $42
 $3,574
(a)(b)
Pre-tax operating margin (c)
25% 34% N/M
 31% 
Average assets$30,048
 $275,410
 $57,832
 $363,290
 
(a)Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $15 million, representing $21 million of income and noncontrolling interests of $6 million. Income before taxes is net of a loss attributable to noncontrolling interests of $6 million.
(b)Noninterest expense includes a loss attributable to noncontrolling interest of $6 million related to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.




104 BNY Mellon

For the nine months ended Sept. 30, 2015Investment
Management

 Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)
Fee and other revenue$2,672
(a)$6,220
 $247
 $9,139
(a)
Net interest revenue235
 1,958
 73
 2,266
 
Total revenue2,907
(a)8,178
 320
 11,405
(a)
Provision for credit losses3
 20
 (26) (3) 
Noninterest expense2,146
 5,671
 288
 8,105
(b)
Income before taxes$758
(a)$2,487
 $58
 $3,303
(a)(b)
Pre-tax operating margin (c)
26% 30% N/M
 29% 
Average assets$30,910
 $288,252
 $54,238
 $373,400
 
(a)Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $7 million, representing $70 million of income and noncontrolling interests of $63 million. Income before taxes is net of noncontrolling interests of $63 million.
(b)Noninterest expense includes a loss attributable
Notes to noncontrolling interest of $2 million related to other consolidated subsidiaries.
Consolidated Financial Statements(continued)
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.


Note 19 - Supplemental information to the Consolidated Statement of Cash Flows

Noncash investing and financing transactions that, appropriately, are not reflected in the Consolidated Statement of Cash Flows are listed below.

Noncash investing and financing transactionsNine months ended Sept. 30,Nine months ended Sept. 30,
(in millions)2016
2015
2017
 2016
Transfers from loans to other assets for other real estate owned (“OREO”)$4
$6
$3
 $4
Change in assets of consolidated VIEs392
6,985
429
 392
Change in liabilities of consolidated VIEs14
6,506
288
 14
Change in nonredeemable noncontrolling interests of consolidated investment management funds238
251
234
 238
Securities purchased not settled229
222
1,277
 229
Securities sales not settled218
676

 218
Available-for-sale securities transferred to held-to-maturity
11,602
Securities matured not settled350
 
Held-to-maturity securities transferred to available-for-sale10

74
 10
Premises and equipment/capitalized software funded by capital lease obligations12
48
347
 12
 



BNY Mellon 107105

Item 4. Controls and Procedures
 

Disclosure controls and procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, with participation by the members of the Disclosure Committee, has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining, and evaluating disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our SEC reports is timely recorded, processed, summarized and reported and that information required to be disclosed by BNY Mellon is accumulated and communicated to BNY Mellon’s management to allow timely decisions regarding the required disclosure. In addition, our ethics hotline can also be used by employees and others for the anonymous communication of concerns about financial controls or reporting matters. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

In the ordinary course of business, we may routinely modify, upgrade or enhance our internal controls and procedures for financial reporting. There have not been any changes in our internal controlscontrol over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the third quarter of 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





108106 BNY Mellon

Forward-looking Statements
 


Some statements in this document are forward-looking. These include all statements about the usefulness of Non-GAAP measures, the future results of BNY Mellon, our businesses, financial, liquidity and capital condition, results of operations, liquidity and capital management and processes, goals, strategies, outlook, objectives, expectations (including those regarding our performance results, regulatory, technology, market, economic or accounting developments, legal proceedings and other contingencies),contingencies, effective tax rate, estimates (including those regarding capital ratios and the impact of issuing additional debt in connection with our resolution strategy)ratios), intentions (including those regarding our resolution strategy), targets, opportunities and initiatives.

In this report, any other report, any press release or any written or oral statement that BNY Mellon or its executives may make, words, such as “estimate,” “forecast,” “project,” “anticipate,” “likely,” “target,” “expect,” “intend,” “continue,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “would,” “may,” “might,” “will,” “strategy,” “synergies,” “opportunities,” “trends” and words of similar meaning, may signify forward-looking statements.

Actual results may differ materially from those expressed or implied as a result of a number of factors, including those discussed in the “Risk Factors” section of our 20152016 Annual Report and this Form 10-Q, such as: an information security event or technology disruption that results in a loss of confidential information or impacts our ability to provide services to our clients and any material adverse effect on our business and results of operations; failure of our technology or that of a third party or vendor, or if we neglect to update our technology, develop and market new technology to meet clients’ needs or protect our intellectual property and any material adverse effect on our business; a determination that our resolution plan is not credible and any material negative impact on our business, reputation, results of operations and financial condition and the application of our Title I preferred resolution strategy or resolution under the Title II orderly liquidation authority and any adverse effects on our liquidity, financial condition and security holders; extensive government rulemaking regulation, and supervision, and the impact of the significant amount of rulemaking since the 2008 financial crisis, which have, and in the future may, compel us to change how we manage our businesses, could have a material adverse effect on our business, financial condition and results of operations and have increased our compliance and operational risks and costs; failure to satisfy regulatory standards, including “well capitalized” and “well
“well managed” status or capital adequacy and liquidity rules, and any resulting limitations on our activities, or adverse effects on our business and financial condition; our preferred resolution strategy
and any adverse effects on our liquidity, financial condition and security holders; regulatory or enforcement actions or litigation and any material adverse effect on our results of operations or harm to our businesses or reputation; adverse events, publicity, government scrutiny or other reputational harm and any negative effect on our businesses; the risks relating to new lines of business, new products and services or strategic project initiatives and the failure to implement these initiatives, which could affect our results of operations; the risks and uncertainties relating to our strategic transactions and any adverse effect on our business, results of operations and financial condition; operational risk and any material adverse effect on our business; failure or circumvention of our controls and procedures and any material adverse effect on our business, reputation, results of operations and financial condition; competition in all aspects of our business and any negative effect on our ability to maintain or increase our profitability; failure of our risk management framework to be effective in mitigating risk and reducing the potential for losses; change or uncertainty in monetary, tax and other governmental policies and the impact on our businesses, profitability and ability to compete; political, economic, legal, operational and other risks inherent in operating globally and any material adverse effect on our business; failure to attract and retain employees and any adverse effect on our business; acts of terrorism, natural disasters, pandemics and global conflicts and any negative impact on our business and operations; ongoing concerns about the financial stability of certain countries, the failure or instability of any of our significant global counterparties, new barriers to global trade or a breakup of the EU or Eurozone and any material adverse effect on our business and results of operations; the United Kingdom’s referendum decision to leave the EU and any negative effects on global economic conditions, global financial markets, and our business and results of operations; weakness and volatility in financial markets and the economy generally and any material adverse effect on our business, results of operations and financial condition; market volatility and any adverse impact on our business, financial condition and results of operations and our ability to manage risk; ongoing concerns about the financial stability of certain countries, the failure or instability of any of our significant global counterparties, or a breakup of the European Union or Eurozone and any material adverse effect on our business and results of operations; the UK referendum and any negative effects on global economic conditions, global financial markets, and our business and results of operations; continuing low or volatilechanges in interest rates and any material adverse effect on our profitability; write-downs of securities that we own and other losses related to volatile and illiquid market conditions and any reduction in our earnings or impact on our financial condition; our dependence on fee-based business for a substantial majority of our revenue and the potential adverse effects of a slowing



BNY Mellon 109

Forward-looking Statements (continued)

in market activity, weak financial markets, underperformance and/or negative trends in savings rates or in investment preferences; any adverse effect on our foreign exchange revenues from decreased market volatility or cross-border investment activity of our clients; the failure or perceived weakness of any of our significant counterparties, and our assumption of credit and counterparty risk, which could expose us to loss and adversely affect our business; credit, regulatory and reputational risks as a result of our tri-party repo collateral agency services, which could adversely affect our business and results of operations; any material reduction in our credit ratings or the credit ratings of


BNY Mellon 107

Forward-looking Statements (continued)

our principal bank subsidiaries, which could increase the cost of funding and borrowing to us and our rated subsidiaries and have a material adverse effect on our results of operations and financial condition and on the value of the securities we issue; any adverse effect on our business, financial condition and results of operations of not effectively managing our liquidity; inadequate reservesthe potential to incur losses if our allowance for credit losses including loan reserves,is inadequate; the risks relating to new lines of business, new products and services or transformational or strategic project initiatives and the failure to implement these initiatives, which could affect our results of operations; the risks and uncertainties relating to our strategic transactions and any resulting charges through provision expense;adverse effect on our business, results of operations and financial condition; competition in all aspects of our business and any negative effect on our ability to maintain or increase our profitability; failure to attract and retain employees and any adverse effect on our business; tax law changes or challenges to our tax positions and any adverse effect on our net income, effective tax rate and overall results of operations and financial condition; changes in accounting standards and any material impact on our reported financial condition, results of operations,
cash flows and other financial
data; risks associated with being a non-operating holding company, including our dependence on dividends from our subsidiaries to meet obligations, to provide funds for payment of dividends and for stock repurchases; and the impact of provisions of U.S. banking laws and regulations, including those governing capital and the approval of our capital plan, applicable provisions of Delaware law or failure to pay full and timely dividends on our preferred stock, on our ability to return capital to shareholders. In addition, the actual effects of our adopting a single point of entry resolution strategy may differ from those expressed or implied in forward-looking statements as a result of changes to our strategy and related assumptions.

Investors should consider all risksrisk factors discussed in our 20152016 Annual Report, this Form 10-Q and any subsequent reports filed with the SEC by BNY Mellon pursuant to the Exchange Act, including this Form 10-Q.Act. All forward-looking statements speak only as of the date on which such statements are made, and BNY Mellon undertakes no obligation to update any statement to reflect events or circumstances after the date on which such forward-looking statement is made or to reflect the occurrence of unanticipated events. The contents of BNY Mellon’s website or any other websites referenced herein are not part of this report.




110108 BNY Mellon

Part II - Other Information
 

Item 1. Legal Proceedings

The information required by this Item is set forth in the “Legal proceedings” section in Note 17 of the Notes to Consolidated Financial Statements, which portion is incorporated herein by reference in response to this item.

Item 1A. Risk Factors

The following discussion supplements the discussion of risk factors that could affect our business, financial condition or results of operations set forth in Part I, Item 1A, Risk Factors, on pages 9590 through 121116 of our 20152016 Annual Report. The discussion of Risk Factors, as so supplemented, sets forth our most significant risk factors that could affect our business, financial condition or results of operations. However, other factors, besides thosethat discussed below or in our 20152016 Annual Report or other of our reports filed with or furnished to the SEC, also could adversely affect our business or results. We cannot assure you that the risk factors described below or elsewhere in this report and such other reports address all potential risks that we may face. These risk factors also serve to describe factors which may cause our results to differ materially from those described in forward-looking statements included herein or in other documents or statements that make reference to this Form 10-Q. See Forward-looking Statements.

If our resolution plan is determined not to be credible or not to facilitate an orderly resolution under the U.S. Bankruptcy Code, our business, reputation, results of operations and financial condition could be materially negatively impacted. The application of our Title I preferred resolution strategy or resolution under the Title II orderly liquidation authority could adversely affect our liquidity and financial condition and our security holders.

Large BHCs must develop and submit to the Federal Reserve and the FDIC for review plans for their rapid and orderly resolution in the event of material financial distress or failure. BNY Mellon and The Bank of New York Mellon each file periodic complementary resolution plans. In April 2016, the Federal Reserve and the FDIC jointly determined that our 2015 resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code. The agencies issued a joint notice of deficiencies and shortcomings and the actions that
must be taken to address them, which we responded to in an Oct. 1, 2016 submission. In December 2016, the agencies jointly determined that our Oct. 1, 2016 submission adequately remedied the identified deficiencies. If the agencies determine that our future submissions are not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, and we fail to address the deficiencies in a timely manner, the agencies may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on our growth, activities or operations. If we continue to fail to adequately remedy any deficiencies identified in future submissions, we could be required to divest assets or operations that the agencies determine necessary to facilitate our orderly resolution.

Following the receipt of feedback from the Federal Reserve and the FDIC in April 2016 on our 2015 resolution plan, we determined that, in the event of our material financial distress or failure, our preferred resolution strategy under Title I of the Dodd-Frank Act would beis a single point of entry strategy. Under this strategy, before commencing proceedings in a U.S. Bankruptcy Court, we would recapitalize and provide liquidity to certain major subsidiaries with the goal of enabling these subsidiaries to continue operating. Following the recapitalizations and provision of liquidity, we would be resolved under the U.S. Bankruptcy Code.

In connection with the development of the single point of entry strategy, we intend to enter into a support agreement with certain of our major subsidiaries to facilitate the recapitalizations and
provision of liquidity. The support agreement is expected to require us to pledge a significant amount of our assets to support our obligations to recapitalize and provide liquidity to our major subsidiaries. We expect to continue to have sufficient liquidity to meet our obligations during business-as-usual circumstances. The terms of the support agreement have not been finalized and may change, possibly materially, from our current expectations.

Consistent with the Federal Reserve’s proposal regarding total loss-absorbing capacity (TLAC) and the FDIC’s single point of entry strategy under Title II’s Orderly Liquidation Authority, our single point of entry resolution strategy, we have established the IHC to facilitate the provision of capital and associatedliquidity resources to certain key subsidiaries in the event of material financial distress or failure. In the second quarter of 2017, we entered into a binding support agreement is being developedthat required the IHC to provide that support. The support agreement required the Parent to transfer its intercompany loans and most of its cash to the IHC, and requires the Parent to continue to transfer cash and other liquid financial assets to the IHC.

If our projected liquidity resources deteriorate so severely that our shareholdersresolution of the Parent becomes imminent, the committed line of credit the IHC provided to the Parent will automatically terminate, with all amounts outstanding becoming due and unsecured creditors bear any losses resulting from our bankruptcy. Consequently,payable, and the support agreement will require the Parent to transfer most of its remaining assets (other than stock in subsidiaries and a cash reserve to fund bankruptcy expenses) to the IHC. As a result, during a period of severe financial stress the Parent might commence bankruptcy proceedings at an earlier time than it otherwise would if wethe support agreement had not been implemented.

If the Parent were to become subject to a bankruptcy proceeding and our single point of entry strategy is successful, creditors of some or all of our major subsidiaries would receive full recoveries on their claims, while our security holders could face significant losses, potentially including the loss of their entire investment. If this strategy is implemented and is not successful, our security holders may be in a worse position than if the strategy had not been implemented (and the recapitalizations and provision of liquidity had not occurred) because assets provided to our major subsidiaries would not be available to pay the holders of our securities.

The result of the United Kingdom’s referendum on whether to remain part of the European Union has had and may continue to have negative effects on global economic conditions, global financial markets, and our business and results of operations.

On June 23, 2016, the UK held a referendum on whether the UK should remain part of the EU, the outcome of which was a vote in favor of withdrawing from the EU. The result of the referendum has created an uncertain political and economic environment in the UK and may create such environments in other EU member states. Political and economic uncertainty has in the past led to, and the outcome of the referendum and the withdrawal of the UK from the EU could lead to, declines in market liquidity and activity levels, volatile market conditions, a contraction of available credit, lower or negative interest rates, weaker economic growth and reduced business confidence. Market disruptions, as well as adverse market and economic conditions, could, among other things, have a negative effect onmaterial



BNY Mellon 111109

Part II - Other Information (continued)
 

our fee revenues and leadentities would receive full recoveries on their claims, while the Parent’s security holders, including unsecured debt holders, could face significant losses, potentially including the loss of their entire investment. It is possible that the application of the single point of entry strategy – in which the Parent would be the only legal entity to a “flight to safety,” whichenter resolution proceedings – could result in increases in our client deposits and assets, altering the size and compositiongreater losses to holders of our balance sheetunsecured debt securities and other securities than the losses that could result from the application of a different resolution strategy. Further, if the single point of entry strategy is not successful, our liquidity and financial condition would be adversely affectingaffected and our leverage-based regulatory capital ratios. security holders may, as a consequence, be in a worse position than if the strategy had not been implemented.

The resultIn addition, Title II of the referendum means thatDodd-Frank Act established an orderly liquidation process in the long-term natureevent of the UK’s relationship withfailure of a large systemically important financial institution, such as BNY Mellon, in order to avoid or mitigate serious adverse effects on the EUU.S. financial system. Specifically, when a U.S. G-SIB, such as BNY Mellon is unclear (including with respect toin default or danger of default, and certain specified conditions are met, the lawsFDIC may be appointed receiver under the orderly liquidation authority, and regulationsBNY Mellon would be resolved under that will apply as the UK determines which EU laws to replicate or replace), and there is considerable uncertainty as to when the framework for any such relationship governing both the accessauthority instead of the UK to European markets and the access of EU Member States to the UK’s markets will be determined and implemented. As a result of the referendum, we, including our EU affiliates, may face additional operational, regulatory and compliance costs. In addition, the regulatory, tax and supervisory regimes applicable to our UK operations and those of its EU affiliates and their dealings with other EU member states are expected to change; however, the nature and timing of such changes are uncertain and cannot be predicted. Certain of our EU operations are conducted through a UK branch of The Bank of New York Mellon and subsidiaries located in the UK and other EU member states. If our UK subsidiaries are not able to retain their EU financial servicesU.S. Bankruptcy Code.

 
“passport,” which permits cross-border servicesU.S. supervisors have indicated that a single point of entry strategy may be a desirable strategy to resolve a large financial institution such as BNY Mellon under Title II in a manner that would, similar to our preferred strategy under our Title I resolution plan, impose losses on shareholders, unsecured debt holders and activities throughoutother unsecured creditors of the single EU market without needing to obtain local authorizations, we may incur costs to move operations and, potentially, personnel fromtop-tier holding company (in our UK branch andcase, the Parent), while permitting the holding company’s subsidiaries to ourcontinue to operate and remain solvent. Under such a strategy, assuming the Parent entered resolution proceedings and its subsidiaries based in other EU member states. The outcomeremained solvent, losses at the subsidiary level could be transferred to the Parent and ultimately borne by the Parent’s security holders (including holders of the referendum has also created uncertainty with regard toParent’s unsecured debt securities), while third-party creditors of the regulationParent’s subsidiaries would receive full recoveries on their claims. Accordingly, the Parent’s security holders (including holders of data protectionunsecured debt securities and other unsecured creditors) could face losses in excess of what otherwise would have been the UK and the transfer of data to and from the UK. case.

Following the referendum, volatility in the exchange rate for the British pound has increased. The decrease in the British pound compared to the U.S. dollar since the referendum has had, and may continue to have, a negative effect on our Investment Management business, which typically has more non-U.S. dollar denominated revenues than expenses. Volatility in exchange rates may also have a negative effect on our Investment Services business, which typically has more non-U.S. dollar denominated expenses than revenues.

The effects of the result of the referendum, including those described above, could adversely affect our business, results of operations and financial condition.





112110 BNY Mellon

Part II - Other Information (continued)
 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c)The following table discloses repurchases of our common stock made in the third quarter of 2016.2017. All of the Company’s preferred stock outstanding has preference over the Company’s common stock with respect to the payment of dividends.


Issuer purchases of equity securities

Share repurchases - third quarter of 2016   
(dollars in millions, except per share information; common shares in thousands)Total shares
repurchased

 Average price
per share

 Total shares repurchased as part of a publicly announced plan or program
Maximum approximate dollar value of shares that may yet be purchased under the publicly announced plans or programs at Sept. 30, 2016  
July 20166,850
 $39.92
 6,850
 $2,432
 
August 201614
 $39.55
 14
 2,432
 
September 20164,700
 $40.55
 4,700
 2,241
 
Third quarter of 2016 (a)
11,564
 $40.18
 11,564
 $2,241
(b)
Share repurchases - third quarter of 2017    Total shares repurchased as part of a publicly announced plan or program
Maximum approximate dollar value of shares that may yet be purchased under the publicly announced plans or programs at Sept. 30, 2017  
(dollars in millions, except per share information; common shares in thousands)Total shares
repurchased

 Average price
per share

  
July 20177
 $51.08
 7
 $2,600
 
August 201712,300
 52.74
 12,300
 1,951
 
September 20179
 52.29
 9
 1,950
 
Third quarter of 2017 (a)
12,316
 $52.74
 12,316
 $1,950
(b)
(a)Includes 3632 thousand shares repurchased at a purchase price of $1$2 million from employees, primarily in connection with the employees’ payment of taxes upon the vesting of restricted stock. The average price per share of open market purchases was $40.18.$52.74.
(b)Represents the maximum value of the shares authorized to be repurchased through the second quarter of 2017,2018, including employee benefit plan repurchases, in connection with the Federal Reserve’s non-objection to our 20162017 capital plan.


On June 29, 2016,28, 2017, in connection with the Federal Reserve’s non-objection to our 20162017 capital plan, BNY Mellon announced a stock purchase programshare repurchase plan providing for the repurchase of an aggregate of $2.14up to $2.6 billion of common stock and the repurchase of up to an additional $560$500 million of common stock contingent upon theon a prior issuance of $750$500 million of noncumulative perpetual preferred stock. The 20162017 capital plan began in the third quarter of 20162017 and continues through the second quarter of 2017.

In conjunction with the Federal Reserve’s non-objection to BNY Mellon’s 2016 capital2018. This new share repurchase plan in August 2016, we issued $1 billion of noncumulative perpetual preferred stock, $750 million of which satisfied the contingency for thereplaces all previously authorized share repurchase of up to $560 million of common stock in 2016. In the third quarter of 2016, we repurchased $464 million of common stock.plans.

Share repurchases may be executed through repurchase plans designed to comply with Rule 10b5-1 and through derivative, accelerated share repurchase and other structured transactions. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions and the common stock trading price; the Company’s capital position, liquidity and financial performance; alternative uses of capital; and legal and regulatory considerations.


 
Item 6. Exhibits

Pursuant to the rules and regulations of the SEC, BNY Mellon has filed certain agreements as exhibits to this Quarterly Report on Form 10-Q. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in BNY Mellon’s public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and, (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof and should not be relied upon.

The list of exhibits required to be filed as exhibits to this report appears on page 115 hereof, under “Index to Exhibits,” which is incorporated herein by reference.below.



BNY Mellon 111

Index to Exhibits

Exhibit No.DescriptionMethod of Filing
3.1Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference.
3.2Previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 5, 2007, and incorporated herein by reference.
3.3Previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form 8A12B (File No. 001-35651) as filed with the Commission on Sept. 14, 2012, and incorporated herein by reference.
3.4
Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on May 16, 2013, and incorporated herein by reference.

3.5

Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on April 28, 2015, and incorporated herein by reference.

3.6Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on Aug. 1, 2016, and incorporated herein by reference.
3.7Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on Oct. 19, 2015, and incorporated herein by reference.
4.1None of the instruments defining the rights of holders of long-term debt of the Parent or any of its subsidiaries represented long-term debt in excess of 10% of the total assets of the Company as of Sept. 30, 2017. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument.N/A


112 BNY Mellon

Index to Exhibits (continued)


Exhibit No.DescriptionMethod of Filing
12.1Filed herewith.
31.1Filed herewith.
31.2Filed herewith.
32.1Furnished herewith.
32.2Furnished herewith.
101.INSXBRL Instance Document.Filed herewith.
101.SCHXBRL Taxonomy Extension Schema Document.Filed herewith.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.Filed herewith.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.Filed herewith.
101.LABXBRL Taxonomy Extension Label Linkbase Document.Filed herewith.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.Filed herewith.





BNY Mellon 113







SIGNATURE








Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.










 THE BANK OF NEW YORK MELLON CORPORATION
 (Registrant)

    
Date: November 8, 20167, 2017By: /s/ Kurtis R. Kurimsky
   Kurtis R. Kurimsky
   Corporate Controller
   (Duly Authorized Officer and
   Principal Accounting Officer of
   the Registrant)




114 BNY Mellon

Index to Exhibits

Exhibit No.DescriptionMethod of Filing
2.1
Amended and Restated Agreement and Plan of Merger, dated as of Dec. 3, 2006, as amended and restated as of Feb. 23, 2007, and as further amended and restated as of March 30, 2007, between The Bank of New York Company, Inc., Mellon Financial Corporation and The Bank of New York Mellon Corporation (the “Company”).

Previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference.


3.1Restated Certificate of Incorporation of The Bank of New York Mellon Corporation.Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 2, 2007, and incorporated herein by reference.
3.2Certificate of Designations of The Bank of New York Mellon Corporation with respect to Series A Noncumulative Preferred Stock, dated June 15, 2007.Previously filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 000-52710) as filed with the Commission on July 5, 2007, and incorporated herein by reference.
3.3Certificate of Designations of The Bank of New York Mellon Corporation with respect to Series C Noncumulative Perpetual Preferred Stock, dated Sept. 13, 2012.Previously filed as Exhibit 3.2 to the Company’s Registration Statement on Form 8A12B (File No. 001-35651) as filed with the Commission on Sept. 14, 2012, and incorporated herein by reference.
3.4Certificate of Designations of The Bank of New York Mellon Corporation with respect to the Series D Noncumulative Perpetual Preferred Stock, dated May 16, 2013.
Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on May 16, 2013, and incorporated herein by reference.

3.5
Certificate of Designations of The Bank of New York Mellon Corporation with respect to the Series E Noncumulative Perpetual Preferred Stock, dated April 27, 2015.

Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on April 28, 2015, and incorporated herein by reference.

3.6Certificate of Designations of The Bank of New York Mellon Corporation with respect to the Series F Noncumulative Perpetual Preferred Stock, dated July 29, 2016.Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on Aug. 1, 2016, and incorporated herein by reference.
3.7Amended and Restated By-Laws of The Bank of New York Mellon Corporation, as amended and restated on Oct. 13, 2015.Previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35651) as filed with the Commission on Oct. 19, 2015, and incorporated herein by reference.


BNY Mellon 115

Index to Exhibits (continued)


Exhibit No.DescriptionMethod of Filing
4.1None of the instruments defining the rights of holders of long-term debt of the Parent or any of its subsidiaries represented long-term debt in excess of 10% of the total assets of the Company as of Sept. 30, 2016. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument.N/A
10.1*
The Bank of New York Mellon Corporation Executive Severance Plan, as amended.

Filed herewith.
12.1Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.Filed herewith.
31.1Certification of the Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Filed herewith.
31.2Certification of the Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Filed herewith.
32.1Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Furnished herewith.
32.2Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Furnished herewith.
101.INSXBRL Instance Document.Filed herewith.
101.SCHXBRL Taxonomy Extension Schema Document.Filed herewith.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.Filed herewith.
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.Filed herewith.
101.LABXBRL Taxonomy Extension Label Linkbase Document.Filed herewith.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.Filed herewith.

*Management contract or compensatory plan, contract or arrangement.


116 BNY Mellon