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 March 31,Sept. 30, 2017
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001-35651


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

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

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

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

 ClassOutstanding as of
 
  March 31,Sept. 30, 2017
 
 Common Stock, $0.01 par value1,039,877,0201,024,022,353
 


THE BANK OF NEW YORK MELLON CORPORATION

FirstThird Quarter 2017 Form 10-Q
Table of Contents 
 
 


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

Consolidated Financial Highlights (unaudited)
Quarter endedQuarter ended Year-to-date
(dollar amounts in millions, except per common share amounts and unless otherwise noted)March 31, 2017
Dec. 31, 2016
March 31, 2016
(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$880
$822
$804
$983
$926
$974
 $2,789
$2,603
Basic earnings per share0.83
0.77
0.73
0.94
0.88
0.90
 2.66
2.39
Diluted earnings per share0.83
0.77
0.73
0.94
0.88
0.90
 2.64
2.38
    
Fee and other revenue3,018
2,954
2,970
$3,167
$3,120
$3,150
 $9,305
$9,119
Income (loss) from consolidated investment management funds33
5
(6)
Income from consolidated investment management funds10
10
17
 53
21
Net interest revenue792
831
766
839
826
774
 2,457
2,307
Total revenue$3,843
$3,790
$3,730
$4,016
$3,956
$3,941
 $11,815
$11,447
    
Return on common equity (annualized) (a)
10.2%9.3%9.2%10.6%10.4%10.8% 10.4%9.8%
Adjusted return on common equity (annualized) – Non-GAAP (a)(b)
10.7%9.8%9.7%11.0%10.8%11.3% 10.9%10.3%
    
Return on tangible common equity (annualized) – Non-GAAP (a)(c)
22.2%20.4%20.6%21.9%21.9%23.5% 22.0%21.5%
Adjusted return on tangible common equity (annualized) – Non-GAAP (a)(b)(c)
22.4%20.5%20.8%22.0%22.1%23.6% 22.1%21.7%
    
Return on average assets (annualized)
1.06%0.95%0.89%1.13%1.09%1.10% 1.09%0.96%
    
Fee revenue as a percentage of total revenue78%78%79%78%79%79% 79%79%
    
Percentage of non-U.S. total revenue34%34%33%36%35%36% 35%34%
    
Pre-tax operating margin (a)
31%30%29%34%33%33% 33%31%
Adjusted pre-tax operating marginNon-GAAP (a)(b)
33%32%31%35%35%35% 34%33%
    
Net interest margin1.13%1.16%0.99%1.15%1.14%1.05% 1.14%1.00%
Net interest margin on a fully taxable equivalent (“FTE”) basis – Non-GAAP (d)
1.14%1.17%1.01%1.16%1.16%1.06% 1.16%1.02%
    
Assets under management (“AUM”) at period end (in billions) (e)
$1,727
$1,648
$1,639
$1,824
$1,771
$1,715
 $1,824
$1,715
Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (f)
$30.6
$29.9
$29.1
$32.2
$31.1
$30.5
 $32.2
$30.5
Market value of securities on loan at period end (in billions) (g)
$314
$296
$300
$382
$336
$288
 $382
$288
    
Average common shares and equivalents outstanding (in thousands):(h)
    
Basic1,041,158
1,050,888
1,079,641
1,035,337
1,035,829
1,062,248
 1,037,431
1,071,457
Diluted1,047,746
1,056,818
1,085,284
1,041,138
1,041,879
1,067,682
 1,043,585
1,077,150
    
Selected average balances:    
Interest-earning assets$283,421
$287,947
$310,678
$291,841
$289,496
$296,703
 $288,283
$308,560
Assets of operations$335,080
$343,138
$363,245
$344,966
$341,607
$350,190
 $340,588
$362,092
Total assets$336,200
$344,142
$364,554
$345,709
$342,515
$351,230
 $341,510
$363,290
Interest-bearing deposits$139,820
$145,681
$162,017
$142,490
$142,336
$155,109
 $141,558
$160,728
Long-term debt$25,882
$24,986
$21,556
$28,138
$27,398
$23,930
 $27,148
$22,779
Noninterest-bearing deposits$73,555
$82,267
$82,944
$70,168
$73,886
$81,619
 $72,524
$82,861
Preferred stock$3,542
$3,542
$2,552
$3,542
$3,542
$3,284
 $3,542
$2,798
Total The Bank of New York Mellon Corporation common shareholders’ equity$34,965
$35,171
$35,252
$36,780
$35,862
$35,767
 $35,876
$35,616
    
Other information at period end:    
Cash dividends per common share$0.19
$0.19
$0.17
$0.24
$0.19
$0.19
 $0.62
$0.53
Common dividend payout ratio23%25%23%26%22%21% 23%22%
Common dividend yield (annualized)
1.6%1.6%1.9%1.8%1.5%1.9% 1.6%1.8%
Closing stock price per common share$47.23
$47.38
$36.83
$53.02
$51.02
$39.88
 $53.02
$39.88
Market capitalization$49,113
$49,630
$39,669
$54,294
$52,712
$42,167
 $54,294
$42,167
Book value per common share (a)
$34.23
$33.67
$33.34
$36.11
$35.26
$34.19
 $36.11
$34.19
Tangible book value per common share – Non-GAAP (a)(c)
$16.65
$16.19
$15.87
$18.19
$17.53
$16.67
 $18.19
$16.67
Full-time employees52,600
52,000
52,100
52,900
52,800
52,300
 52,900
52,300
Common shares outstanding (in thousands)
1,039,877
1,047,488
1,077,083
1,024,022
1,033,156
1,057,337
 1,024,022
1,057,337


2 BNY Mellon


Consolidated Financial Highlights (unaudited) (continued)
Regulatory ratiosMarch 31, 2017
Dec. 31, 2016
March 31, 2016
Regulatory and Capital ratiosSept. 30, 2017
June 30, 2017
Dec. 31, 2016
Average liquidity coverage ratio (“LCR”) (h)(i)
117%114%107%119%116%114%
  
Consolidated regulatory capital ratios: (i)
 
Regulatory capital ratios: (j)
 
Standardized:  
Common equity Tier 1 (“CET1”) ratio12.0%12.3%11.8%12.3%12.0%12.3%
Tier 1 capital ratio14.4
14.5
13.5
14.6
14.3
14.5
Total (Tier 1 plus Tier 2) capital ratio14.9
15.2
13.9
15.6
14.8
15.2
Advanced:  
CET1 ratio10.4
10.6
10.6
11.1
10.8
10.6
Tier 1 capital ratio12.5
12.6
12.0
13.2
12.9
12.6
Total (Tier 1 plus Tier 2) capital ratio12.8
13.0
12.3
14.0
13.2
13.0
  
Leverage capital ratio (i)(j)
6.6
6.6
5.9
6.8
6.7
6.6
Supplementary leverage ratio (“SLR”) (i)(j)
6.1
6.0
5.4
6.3
6.2
6.0
  
BNY Mellon shareholders’ equity to total assets ratio – GAAP11.6
11.6
10.3
11.4
11.3
11.6
BNY Mellon common shareholders’ equity to total assets ratio – GAAP10.5
10.6
9.6
10.4
10.3
10.6
  
Selected regulatory capital ratios – fully phased-in – Non-GAAP: (j)(k)
  
Estimated CET1 ratio:  
Standardized Approach11.5%11.3%11.0%11.9%11.5%11.3%
Advanced Approach10.0
9.7
9.8
10.7
10.4
9.7
  
Estimated SLR5.9
5.6
5.1
6.1
6.0
5.6
(a)See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 4749 for a reconciliation of Non-GAAP measures.
(b)Non-GAAP information for all periods presented excludes the amortization of intangible assets and merger and integration (“M&I,&I”), litigation and restructuring charges. Pre-taxNon-GAAP information for the third quarter of 2016 and for the first nine months of 2016 also excludes a recovery of the previously impaired loan to Sentinel Management Group, Inc. (“Sentinel”). Additionally, the pre-tax operating margin (Non-GAAP) also excludes the net income (loss) 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 4749 for the reconciliation of Non-GAAP measures.
(d)See “Average balances and interest rates” on page 1011 for a reconciliation of Non-GAAP measures.
(e)Excludes securities lending cash management assets and assets managed in the Investment Services business.
(f)Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.3 trillion at Sept. 30, 2017 and $1.2 trillion at March 31,both June 30, 2017 and Dec. 31, 2016 and $1.1 trillion at March 31,Sept. 30, 2016.
(g)Represents the total amount of securities on loan in our agency securities lending program managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $65$68 billion at March 31,Sept. 30, 2017, $63$66 billion at Dec. 31, 2016June 30, 2017 and $56$64 billion at March 31,Sept. 30, 2016.
(h)
Beginning in the third quarter of 2017, vested stock awards to retirement eligible employees are included in common shares outstanding for earnings per share purposes. This change increased both average basic and average diluted shares outstanding by approximately 6 million for the quarter, which resulted in a de minimis impact to both basic and diluted earnings per share. For additional information, see the “Consolidated Income Statement” beginning on page 57.
(i)For additional information on our LCR, see “Liquidity and dividends” beginning on page 30.33.
(i)(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 35.37.
(j)(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 35.37.



BNY Mellon 3


Part I - Financial Information


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

General

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

Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2016 (“2016 Annual Report”).

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

How we reported results

Throughout this Form 10-Q, certain measures, which are noted as “Non-GAAP financial measures,” exclude certain items or otherwise include components that differ from U.S. generally accepted accounting principles (“GAAP”). BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control or because they provide additional information about our ability to meet fully phased-in capital requirements. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 4749 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures. See “Net interest revenue,” including the “Average balances and interest rates” beginning on page 910 for information on measures presented on a fully taxable equivalent basis. Also see “Capital” beginning on page 3537 for information on our fully phased-in capital requirements.

Overview

The Bank of New York Mellon Corporation was the first company listed on the New York Stock Exchange (NYSE 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 March 31,Sept. 30, 2017, BNY Mellon had $30.6$32.2 trillion in assets under custody and/or administration (“AUC/A”), and $1.7$1.8 trillion in assets under management (“AUM”).

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

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

Key firstthird quarter 2017 and subsequent events

Established intermediate holding companyDefinitive agreement to sell CenterSquare Investment Management

In connection with our single point of entry resolution strategy,September 2017, we have established BNY Mellon IHC, LLC, a wholly-owned direct subsidiary of the Parent, (the “IHC”), to facilitate the provision of capital and liquidity resources to certain key subsidiaries in the event of material financial distress or failure. In the second quarter of 2017,announced that we entered into a binding supportdefinitive agreement that requiresto sell CenterSquare Investment Management (“CenterSquare”), one of our Investment Management boutiques. CenterSquare had approximately $9 billion in AUM in U.S. and global real estate and infrastructure investments. The transaction is subject to standard regulatory and other required approvals and is expected to be completed in the IHC to provide that support. See “Liquidity and dividends” beginning on page 30 for additional information.

Highlightsfourth quarter of first quarter 2017 results

We reported net income applicable to common shareholders of $880 million, or $0.83 per diluted common share, in the first quarter of 2017. Net2018.


4 BNY Mellon


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

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

Resolution plan

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

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

Increase in cash dividend on common stock

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

Highlights of third quarter 2017 results

We reported net income applicable to common shareholders of $983 million, or $0.94 per diluted common share, in the third quarter of 2017. Net income applicable to common shareholders was $804$974 million, or $0.73$0.90 per diluted common share, in the firstthird quarter of 2016 and $822$926 million, or $0.77$0.88 per diluted common share, in the fourthsecond quarter of 20162017.

Highlights of the firstthird quarter of 2017 include:

AUC/A totaled a record $30.6$32.2 trillion at March 31,Sept. 30, 2017 compared with $29.1$30.5 trillion at March 31,Sept. 30, 2016. The 5%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 17.19.)
AUM totaled $1.73a record $1.82 trillion at March 31,Sept. 30, 2017 compared with $1.64$1.72 trillion at March 31,Sept. 30, 2016. The 5%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. (See “Investment Management business” beginning on page 14.16.)
Investment services fees totaled $1.83$1.92 billion, an increase of 4%1% compared with $1.77$1.89 billion in the firstthird quarter of 2016. The increase primarily reflects higher money market fees, net new business and higher equity market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar and the impact of downsizing the retail UK transfer agency business.lower Depositary Receipts revenue. (See “Investment Services business” beginning on page 17.19.)
Investment management and performance fees totaled $842$901 million, an increase of 4%5% compared with $812$860 million in the firstthird quarter of 2016. The increase primarily reflects higher equity market values partially offset by the unfavorable impact of a stronger U.S. dollar and the impact of outflows of assets under management in the prior year.money market fees. (See “Investment Management business” beginning on page 14.16.)
Foreign exchange and other trading revenue totaled $164$173 million compared with $175$183 million in the firstthird quarter of 2016. Foreign exchange revenue totaled $154$158 million, a decrease of 10% compared with $171$175 million in the firstthird quarter of 2016, primarily reflecting lower volatility and the migration to lower margin products.Depositary Receipt-related foreign exchange activity, partially offset by higher volumes. (See “Fee and other revenue” beginning on page 6.7.)
Investment and other income totaled $77$63 million compared with $105$92 million in the firstthird quarter of 2016. The decrease primarily reflects lower lease-related gains and other income partially offsetdriven by a net gain related to an equity investment.our investments in renewable energy and lower seed capital gains. (See “Fee and other revenue” beginning on page 6.7.)


BNY Mellon 5


Net interest revenue totaled $792$839 million compared with $766$774 million in the firstthird quarter of 2016. The 8% increase was primarily driven by higher interest rates, and the impact of interest rate hedging activities, partially offset by lower average interest-earning assetsdeposits and higher average long-term debt.loans. Net interest margin was 1.13%1.15% in the firstthird quarter of 2017 compared with 0.99%1.05% in the firstthird quarter of 2016 and2016. The net interest margin (FTE) (Non-GAAP) was 1.14%1.16% in the firstthird quarter of 2017 compared with 1.01%1.06% in the firstthird quarter of 2016. (See “Net interest revenue” beginning on page 9.10.)
The provision for credit losses was a credit of $5$6 million in the firstthird quarter of 2017 and a provisioncredit of $10$19 million in the firstthird quarter of 2016. (See “Asset quality and allowance for credit losses” beginning on page 27.29.)
Noninterest expense totaled $2.64$2.65 billion compared with $2.63$2.64 billion in the firstthird quarter of 2016. The increase primarily reflects higher consultingsoftware and professional, legal and other purchased services expenses primarily driven by regulatory and compliance costs, and higher staff expense,, partially offset by the favorable impact of a stronger U.S. dollarlower litigation expense and lower other expense.bank assessment charges. (See “Noninterest expense” beginning on page 11.13.)
The provision for income taxes was $269$348 million and the effective rate was 22.3%25.4% in the firstthird quarter of 2017 compared with an income tax provision of $283$324 million and an effective tax rate of 25.9%24.6% in the firstthird quarter of 2016. The effective tax rate in the first quarter of 2017 reflects an approximate 3% benefit related to applying the new accounting guidance required in ASU 2016-09, Compensation Stock Compensation. (See “Income taxes” on page 12.14.)

The net unrealized pre-tax lossgain on the total investment securities portfolio was $23$257 million at March 31,Sept. 30, 2017 compared with $221a pre-tax gain of $151 million at Dec. 31, 2016.June 30, 2017. The improvement in the net unrealized pre-tax lossincrease was primarily driven by a decrease in marketlong-term interest rates. (See “Investment securities” beginning on page 23.25.)


BNY Mellon 5


Our CET1 ratio under the Advanced Approach was 10.4%11.1% at March 31,Sept. 30, 2017 and 10.6%10.8% at Dec. 31, 2016.June 30, 2017. The increase was primarily driven by CET1 generation. Our CET1 ratio under the Standardized Approach was 12.3% at Sept. 30, 2017 and 12.0% at March 31, 2017 and 12.3% at Dec. 31, 2016. The decreases reflect the additional phase-in requirements under the U.S. capital rules that became effective Jan. 1,June 30, 2017. (See “Capital” beginning on page 35.37.)
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a
fully phased-in basis was 10.0%10.7% at March 31,Sept. 30, 2017 and 9.7%10.4% at Dec. 31, 2016.June 30, 2017. The increase primarily reflects CET1 generation. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 11.9% at Sept. 30, 2017 and 11.5% at March 31, 2017 and 11.3% at Dec. 31, 2016. The increases reflect CET1 generation and lower risk-weighted assets.June 30, 2017. (See “Capital” beginning on page 35.37.)



6 BNY Mellon


Fee and other revenue

Fee and other revenue 1Q17 vs.    YTD17
 3Q17 vs.  vs.
(dollars in millions, unless otherwise noted)1Q17
4Q16
1Q16
4Q16
1Q16
3Q17
2Q17
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Investment services fees:       
Asset servicing (a)
$1,063
$1,068
$1,040
 %2 %$1,105
$1,085
$1,067
2 %4 % $3,253
$3,176
2 %
Clearing services376
355
350
6
7
383
394
349
(3)10
 1,153
1,049
10
Issuer services251
211
244
19
3
288
241
337
20
(15) 780
815
(4)
Treasury services139
140
131
(1)6
141
140
137
1
3
 420
407
3
Total investment services fees1,829
1,774
1,765
3
4
1,917
1,860
1,890
3
1
 5,606
5,447
3
Investment management and performance fees842
848
812
(1)4
901
879
860
3
5
 2,622
2,502
5
Foreign exchange and other trading revenue164
161
175
2
(6)173
165
183
5
(5) 502
540
(7)
Financing-related fees55
50
54
10
2
54
53
58
2
(7) 162
169
(4)
Distribution and servicing41
41
39

5
40
41
43
(2)(7) 122
125
(2)
Investment and other income77
70
105
N/M
N/M
63
122
92
N/M
N/M
 262
271
N/M
Total fee revenue3,008
2,944
2,950
2
2
3,148
3,120
3,126
1
1
 9,276
9,054
2
Net securities gains10
10
20
N/M
N/M
19

24
N/M
N/M
 29
65
N/M
Total fee and other revenue$3,018
$2,954
$2,970
2 %2 %$3,167
$3,120
$3,150
2 %1 % $9,305
$9,119
2 %
       
Fee revenue as a percentage of total revenue78%78%79% 78%79%79%  79%79% 
       
AUM at period end (in billions) (b)
$1,727
$1,648
$1,639
5 %5 %$1,824
$1,771
$1,715
3 %6 % $1,824
$1,715
6 %
AUC/A at period end (in trillions) (c)
$30.6
$29.9
$29.1
2 %5 %$32.2
$31.1
$30.5
4 %6 % $32.2
$30.5
6 %
(a)Asset servicing fees include securities lending revenue of $49$47 million in the third quarter of 2017, $48 million in the second quarter of 2017, $51 million in the third quarter of 2016, $144 million in the first quarternine months of 2017 $54 million in the fourth quarter of 2016 and $50$153 million in the first quarternine months of 2016.
(b)Excludes securities lending cash management assets and assets managed in the Investment Services business.
(c)
Includes the AUC/A of CIBC Mellon of $1.2$1.3 trillion at March 31,Sept. 30, 2017 and Dec. 31, 2016$1.2 trillion at both June 30, 2017 and $1.1 trillion at March 31,Sept. 30, 2016.
N/M - Not meaningful.


Fee and other revenue increased 2%1% compared with the firstthird quarter of 2016 and 2% (unannualized) compared with the fourthsecond quarter of 2016.2017. The increase compared with the firstthird quarter of 2016 primarily reflects higher investment management and performance fees, clearing services and asset servicing fees and clearing services fees, partially offset by lower issuer services fees, investment and other income and foreign exchange and other trading revenue. The increase compared with the second quarter of 2017 primarily reflects seasonally higher issuer services fees, investment management and performance fees, asset servicing fees and net securities gains, partially offset by lower investment and other income. The increase compared with the fourth quarter of 2016 was primarily driven by higher issuer services and clearing services fees.

Investment services fees

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

Asset servicing fees increased 2%4% compared with the firstthird quarter of 2016 and decreased slightly2% (unannualized) compared with the fourthsecond quarter of 2016.2017. The
increase compared with the firstthird quarter of 2016 primarily reflects higher equity market values and net new business, including growth ofin collateral optimization solutions, and higher equity market values,management, partially offset by the unfavorable impact of a stronger U.S. dollar


6 BNY Mellon


and 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 7%10% compared with the firstthird quarter of 2016 and 6%decreased 3% (unannualized) compared with the fourthsecond quarter of 2016. Both increases were2017. The increase was primarily driven byhigher money market fees and growth in long-term mutual fund fees.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 firstthird quarter of 2016 and 19% (unannualized) compared with the fourth quarter of 2016. Both increases reflect higher fees in Depositary Receipts, partially offset by lower fees in Corporate Trust.
Treasury services fees increased 6% compared with the first quarter of 2016 and decreased 1% (unannualized) compared with the fourthsecond quarter of 2016. The increase compared with the first quarter of 20162017. Both increases primarily reflects reflecthigher payment volumes, partially offset by higher compensating balance credits provided to clients, which reduces fee revenue and increases net interest revenue.

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

Investment management and performance fees

Investment management and performance fees increased 4%5% compared with the firstthird quarter of 2016 and decreased 1%3% (unannualized) compared with the fourthsecond quarter of 2016.2017, primarily reflecting higher equity market values and money market fees. The increase compared with the firstthird quarter of 2016 primarilyalso reflects higher market values, partially offset byperformance fees. The increase compared with the unfavorablesecond quarter of 2017 also reflects the favorable impact of a strongerweaker U.S. dollar (principally versusdollar. Changes in currency rates had an insignificant impact on the British pound) and the impactgrowth rate of outflows of assets under management in the prior year. On a constant currency basis, investment management and performance fees increased 8% (Non-GAAP) compared with the firstthird quarter of 2016. The decrease compared with the fourth quarter of 2016 was primarily driven by seasonally lower performancePerformance fees and fewer dayswere $15 million in the firstthird quarter of 2017, partially offset by higher market values. Performance fees were $12$8 million in the first quarter of 2017, $32 million in the fourththird quarter of 2016 and $11$17 million in the firstsecond quarter of 2016.2017.

Total AUM for the Investment Management business increased 5%6% compared with both March 31,Sept. 30, 2016 and Dec. 31, 2016.3% compared with June 30, 2017. The increase compared with the first quarter ofSept. 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 the fourth quarter of 2016June 30, 2017 primarily reflects the favorable impact of a weaker U.S. dollar (principally versus the British pound), higher market values and inflows of AUM.net inflows. Net long-term inflows of $14 billion in the first quarter of 2017 reflect inflows of liability-drivenfixed income and multi-asset and alternative investments and other active strategies, partiallywere offset by outflows of activeindex, equity investments.and liability-driven investments in the third quarter of 2017. Net short-term inflows of $13$10 billion in the firstthird quarter of 2017 were a result of increased distribution through our liquidity portals.

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

Foreign exchange and other trading revenue

Foreign exchange and other trading revenueForeign exchange and other trading revenue Foreign exchange and other trading revenue 
(in millions)1Q17
4Q16
1Q16
3Q17
2Q17
3Q16
YTD17
YTD16
Foreign exchange$154
$175
$171
$158
$151
$175
$463
$512
Other trading revenue (loss)10
(14)4
Other trading revenue15
14
8
39
28
Total foreign exchange and other trading revenue$164
$161
$175
$173
$165
$183
$502
$540


Foreign exchange and other trading revenue decreased 6%,5% compared with the firstthird quarter of 2016 and increased 2%5% (unannualized) compared with the fourthsecond quarter of 2016.2017.

Foreign exchange revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility, and the impact of foreign currency hedging activities. Foreign exchange revenue decreased 10% compared with the firstthird quarter of 2016, primarily reflecting lower volatility and 12%lower Depositary Receipt-related foreign exchange activity, partially offset by higher volumes. Foreign exchange revenue increased 5% (unannualized) compared with the fourthsecond quarter of 2016. Both decreases primarily reflect lower volatility2017 reflecting higher volumes. The decrease compared with the first quarter of 2016 also reflects the migration to lower margin products. Foreign exchange revenue is primarily reported in the Investment Services business and, to a lesser extent, the Investment Management business and the Other segment.

Our custody clients may enter into foreign exchange transactions in a number of ways, including through our standing instruction programs. While the shift of custody clients from our standing instruction programs to other trading options has recently abated, our foreign exchange revenue continues to be impacted by changes in volume and volatility. For


BNY Mellon 7


the quarter ended March 31,Sept. 30, 2017, our total revenue for all types of foreign exchange trading transactions was $154$158 million, or 4% of our total revenue, and approximately 25%28% of our foreign exchange revenue was generated by transactions in our standing instruction programs.

The increase in other trading revenue compared with the fourth quarter of 2016 primarily reflects the impact of interest rate hedging activities (offset in net interest revenue) recorded in the fourth quarter of 2016 and higher fixed income trading revenue. Other trading revenue is reported in all three business segments.


8 BNY Mellon


Financing-related fees

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

Distribution and servicing fees

The increase in distributionDistribution and servicing fees decreased compared with the firstthird quarter of 2016 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 income Investment and other income 
(in millions)1Q17
4Q16
1Q16
3Q17
2Q17
3Q16
YTD17
YTD16
Corporate/bank-owned life insurance$30
$53
$31
$37
$43
$34
$110
$96
Lease-related gains
51

52
44
Expense reimbursements from joint venture18
17
18
49
52
Equity investment income (loss)26
(2)(3)
7
(1)33
(8)
Expense reimbursements from joint venture14
15
17
Seed capital gains (a)
9
6
11
6
10
16
25
38
Asset-related gains3
1

Lease-related gains (loss)1
(6)44
Other (loss) income(6)3
5
Asset-related gains (losses)1
(5)8
(1)9
Other income (loss)1
(1)17
(6)40
Total investment and other income$77
$70
$105
$63
$122
$92
$262
$271
(a)Does not includeExcludes the gaingains (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 gaingains 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, $29 million in the first nine months of 2017 and $15 million in the first quarter of 2017 and $1 million in both the fourth quarter of 2016 and first quarternine months of 2016.


The changes in investment
Investment and other income decreased compared with both the firstthird quarter of 2016 and the fourthsecond quarter of 2016 primarily reflect the net gain related to an equity investment and decreases in other income due to our increased investments in renewable energy.2017. The decrease compared with the firstthird quarter of 2016 alsoprimarily reflects lower lease-relatedother income driven by increased pre-tax losses on our investments in renewable energy and lower seed capital gains. The increasepre-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 fourthsecond quarter of 2016 was partially offset by2017 primarily reflects lease-related gains recorded in the second quarter of 2017 and lower income from corporate/bank-owned life insurance.

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

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



8 BNY Mellon 9


Net interest revenue 

Net interest revenue 1Q17 vs.    YTD17
 3Q17 vs.  vs.
(dollars in millions)1Q17
4Q16
1Q16
4Q16
1Q16
3Q17
2Q17
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Net interest revenue$792
$831
$766
(5)%
3%
$839
$826
$774
2%8 % $2,457
$2,307
7 %
Tax equivalent adjustment12
12
14
N/M
N/M
12
12
12
N/M 36
39
N/M
Net interest revenue (FTE) – Non-GAAP (a)
$804
$843
$780
(5)%
3%
$851
$838
$786
2%8 % $2,493
$2,346
6 %
     
Average interest-earning assets$283,421
$287,947
$310,678
(2)%
(9)%
$291,841
$289,496
$296,703
1%(2)% $288,283
$308,560
(7)%
     
Net interest margin1.13%1.16%0.99%(3) bps14 bps1.15%1.14%1.05%1 bps10 bps 1.14%1.00%14 bps
Net interest margin (FTE) – Non-GAAP (a)
1.14%1.17%1.01%(3) bps13 bps1.16%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.


The increase in netNet interest revenue increased 8% compared with the firstthird quarter of 2016 and 2% (unannualized) compared with the second quarter of 2017 primarily reflectsreflecting higher interest rates, and the impact of interest rate hedging activities (which negatively impacted the first quarter of 2017 less than the first quarter of 2016), partially offset by lower average deposits and loans. The sequential increase also reflects an additional interest-earning assets and higher average long-term debt. The decrease in netday during the quarter.

Net interest revenuemargin increased 10 basis points compared with the fourththird quarter of 2016, primarily reflectsreflecting the impact of interest rate hedging activities and the fourth quarter of 2016 premium amortization adjustment which combined reduced net interest revenue by approximately $43 million, or 6 basis points to the net interest margin. Substantially all of the impact of interest rate hedging activities in the fourth quarter of 2016 was offset in foreign exchange and other trading revenue.factors listed above.

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

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

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

Average non-U.S. dollar deposits comprised approximately 20% of our average total deposits in the first quarter of 2017. Approximately 40% of the average non-U.S. dollar deposits in the first quarter of 2017 were euro-denominated.


10 BNY Mellon 9


Average balances and interest ratesQuarter endedQuarter ended
March 31, 2017 Dec. 31, 2016 March 31, 2016Sept. 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)$14,714
$22
0.60 % $15,447
$28
0.71 % $14,909
$26
0.69%$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 banks66,043
57
0.35
 61,672
28
0.18
 89,092
61
0.28
70,430
89
0.50
 69,316
71
0.41
 74,102
37
0.20
Federal funds sold and securities purchased under resale agreements25,312
67
1.07
 27,233
66
0.97
 23,623
49
0.84
28,120
119
1.67
 26,873
86
1.29
 26,376
62
0.93
Margin loans15,753
75
1.94
 17,547
71
1.61
 18,907
63
1.34
13,206
87
2.60
 15,058
87
2.32
 18,132
67
1.48
Non-margin loans:                
Domestic offices30,963
188
2.44
 32,730
183
2.23
 28,506
157
2.21
29,950
216
2.87
 30,734
207
2.70
 30,534
171
2.22
Foreign offices13,596
57
1.71
 13,370
53
1.58
 13,783
48
1.39
12,788
67
2.09
 13,001
65
1.99
 12,912
47
1.45
Total non-margin loans44,559
245
2.22
 46,100
236
2.04
 42,289
205
1.95
42,738
283
2.64
 43,735
272
2.49
 43,446
218
1.99
Securities:                
U.S. Government obligations26,239
104
1.60
 25,953
101
1.54
 24,479
92
1.50
25,349
106
1.67
 25,928
106
1.64
 25,279
94
1.49
U.S. Government agency obligations56,857
271
1.90
 57,049
259
1.82
 55,966
251
1.79
61,710
309
2.00
 59,533
290
1.95
 56,464
240
1.70
State and political subdivisions – tax-exempt3,373
26
3.11
 3,461
27
3.08
 3,979
29
2.89
3,226
25
3.06
 3,298
26
3.09
 3,598
27
2.98
Other securities28,317
88
1.25
 31,197
106
1.36
 34,114
103
1.22
28,804
98
1.34
 28,468
81
1.15
 33,064
102
1.23
Trading securities2,254
17
3.12
 2,288
18
3.17
 3,320
18
2.16
2,359
13
2.26
 2,455
18
2.85
 2,176
13
2.62
Total securities117,040
506
1.74
 119,948
511
1.70
 121,858
493
1.62
121,448
551
1.81
 119,682
521
1.74
 120,581
476
1.58
Total interest-earning assets (a)
$283,421
$972
1.38 % $287,947
$940
1.30 % $310,678
$897
1.16%$291,841
$1,163
1.59% $289,496
$1,064
1.47% $296,703
$886
1.19 %
Allowance for loan losses(169)   (148)   (157)  (165)   (164)   (165)  
Cash and due from banks5,097
   5,017
   3,879
  4,961
   4,972
   4,189
  
Other assets46,731
   50,322
   48,845
  48,329
   47,303
   49,463
  
Assets of consolidated investment management funds1,120
   1,004
   1,309
  743
   908
   1,040
  
Total assets$336,200
   $344,142
   $364,554
  $345,709
   $342,515
   $351,230
  
Liabilities                
Interest-bearing liabilities:                
Interest-bearing deposits:                
Money market rate accounts$7,510
$1
0.05 % $9,102
$1
0.04 % $7,385
$1
0.06%$7,509
$1
0.06% $7,379
$1
0.04% $7,346
$1
0.06 %
Savings1,094
2
0.61
 1,152
1
0.42
 1,235
1
0.27
837
1
0.76
 1,014
2
0.75
 1,201
1
0.41
Demand deposits5,371
1
0.12
 4,719
2
0.15
 864
1
0.50
5,932
5
0.27
 5,659
2
0.14
 2,681
3
0.36
Time deposits35,429
11
0.12
 37,766
7
0.07
 42,678
4
0.04
29,934
24
0.32
 34,757
15
0.18
 45,186
7
0.07
Foreign offices90,416
(6)(0.03) 92,942
(16)(0.07) 109,855
8
0.03
98,278
26
0.10
 93,527
12
0.05
 98,695
(18)(0.08)
Total interest-bearing deposits139,820
9
0.03
 145,681
(5)(0.01) 162,017
15
0.04
142,490
57
0.16
 142,336
32
0.09
 155,109
(6)(0.02)
Federal funds purchased and securities sold under repurchase agreements18,995
24
0.51
 11,567
8
0.30
 18,689
9
0.20
21,403
70
1.30
 17,970
38
0.84
 9,585
6
0.24
Trading liabilities908
2
0.89
 892
1
0.54
 551
2
1.43
1,434
2
0.54
 1,216
2
0.61
 735
2
1.11
Other borrowed funds822
2
0.98
 903
3
0.95
 759
2
0.97
2,197
7
1.38
 1,193
4
1.24
 874
1
0.76
Commercial paper2,164
5
0.88
 383

0.34
 22

0.33
2,736
8
1.15
 2,215
5
0.95
 1,173
1
0.35
Payables to customers and broker-dealers18,961
7
0.16
 17,091
3
0.07
 16,801
4
0.09
18,516
19
0.42
 20,609
16
0.30
 16,873
3
0.07
Long-term debt25,882
119
1.85
 24,986
87
1.36
 21,556
85
1.57
28,138
149
2.07
 27,398
129
1.87
 23,930
93
1.54
Total interest-bearing liabilities$207,552
$168
0.33 % $201,503
$97
0.19 % $220,395
$117
0.21%$216,914
$312
0.57% $212,937
$226
0.42% $208,279
$100
0.19 %
Total noninterest-bearing deposits73,555
   82,267
   82,944
  70,168
   73,886
   81,619
  
Other liabilities15,600
   20,760
   22,300
  17,728
   15,545
   21,343
  
Liabilities and obligations of consolidated investment management funds244
   229
   259
  35
   111
   238
  
Total liabilities296,951
   304,759
   325,898
  304,845
   302,479
   311,479
  
Temporary equity                
Redeemable noncontrolling interests161
   177
   190
  188
   172
   179
  
Permanent equity                
Total BNY Mellon shareholders’ equity38,507
   38,713
   37,804
  40,322
   39,404
   39,051
  
Noncontrolling interests581
   493
   662
  354
   460
   521
  
Total permanent equity39,088
   39,206
   38,466
  40,676
   39,864
   39,572
  
Total liabilities, temporary equity and permanent equity$336,200
   $344,142
   $364,554
  $345,709
   $342,515
   $351,230
  
Net interest revenue (FTE) – Non-GAAP $804
   $843
   $780
  $851
   $838
   $786
 
Net interest margin (FTE) – Non-GAAP 1.14 %  1.17 %  1.01% 1.16%  1.16%  1.06 %
Less: Tax equivalent adjustment (b)
 12
   12
   14
  12
   12
   12
 
Net interest revenue – GAAP $792
   $831
   $766
  $839
   $826
   $774
 
Net interest margin – GAAP 1.13 %  1.16 %  0.99% 1.15%  1.14%  1.05 %
Note:Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)Interest income and average yield are presented on an FTE basis (Non-GAAP).
(b)Based on the applicable tax rate of 35%.



10BNY Mellon 11


Average balances and interest ratesYear-to-date
 Sept. 30, 2017 Sept. 30, 2016
(dollar amounts in millions, presented on an FTE basis)Average balance
Interest
Average rates
 Average balance
Interest
Average rates
Assets       
Interest-earning assets:       
Interest-bearing deposits with banks (primarily foreign banks)$15,153
$83
0.73% $14,455
$76
0.70 %
Interest-bearing deposits held at the Federal Reserve and other central banks68,613
217
0.42
 86,947
170
0.26
Federal funds sold and securities purchased under resale agreements26,779
272
1.36
 25,275
167
0.88
Margin loans14,663
249
2.27
 18,420
194
1.41
Non-margin loans:       
Domestic offices30,545
611
2.67
 29,488
493
2.23
Foreign offices13,126
189
1.93
 13,112
144
1.47
Total non-margin loans43,671
800
2.45
 42,600
637
2.00
Securities:       
U.S. Government obligations25,835
316
1.64
 24,778
278
1.50
U.S. Government agency obligations59,384
870
1.95
 56,161
727
1.73
State and political subdivisions – tax-exempt3,298
77
3.09
 3,784
83
2.92
Other securities28,531
267
1.25
 33,592
309
1.23
Trading securities2,356
48
2.74
 2,548
45
2.37
Total securities119,404
1,578
1.76
 120,863
1,442
1.59
Total interest-earning assets (a)
$288,283
$3,199
1.48% $308,560
$2,686
1.16 %
Allowance for loan losses(166)   (162)  
Cash and due from banks5,010
   4,070
  
Other assets47,461
   49,624
  
Assets of consolidated investment management funds922
   1,198
  
Total assets$341,510
   $363,290
  
Liabilities       
Interest-bearing liabilities:       
Interest-bearing deposits:       
Money market rate accounts$7,466
$3
0.05% $7,337
$3
0.06 %
Savings980
5
0.70
 1,203
3
0.36
Demand deposits5,656
8
0.18
 1,782
5
0.40
Time deposits33,354
50
0.20
 44,832
19
0.06
Foreign offices94,102
32
0.05
 105,574
(9)(0.01)
Total interest-bearing deposits141,558
98
0.09
 160,728
21
0.02
Federal funds purchased and securities sold under repurchase agreements19,465
132
0.90
 15,471
28
0.24
Trading liabilities1,188
6
0.65
 650
5
1.05
Other borrowed funds1,409
13
1.26
 827
5
0.90
Commercial paper2,374
18
1.01
 1,657
5
0.37
Payables to customers and broker-dealers19,360
42
0.29
 16,870
9
0.07
Long-term debt27,148
397
1.93
 22,779
267
1.55
Total interest-bearing liabilities$212,502
$706
0.44% $218,982
$340
0.21 %
Total noninterest-bearing deposits72,524
   82,861
  
Other liabilities16,299
   21,993
  
Liabilities and obligations of consolidated investment management funds129
   250
  
Total liabilities301,454
   324,086
  
Temporary equity       
Redeemable noncontrolling interests174
   183
  
Permanent equity       
Total BNY Mellon shareholders’ equity39,418
   38,414
  
Noncontrolling interests464
   607
  
Total permanent equity39,882
   39,021
  
Total liabilities, temporary equity and permanent equity$341,510
   $363,290
  
Net interest revenue (FTE) – Non-GAAP $2,493
   $2,346
 
Net interest margin (FTE) – Non-GAAP  1.16%   1.02 %
Less: Tax equivalent adjustment (b)
 36
   39
 
Net interest revenue – GAAP $2,457
   $2,307
 
Net interest margin – GAAP  1.14%   1.00 %
Note:Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)Interest income and average yield are presented on an FTE basis (Non-GAAP).
(b)Based on the applicable tax rate of 35%.




12 BNY Mellon


Noninterest expense

Noninterest expense 1Q17 vs.    YTD17
 3Q17 vs.  vs.
(dollars in millions)1Q17
4Q16
1Q16
4Q16
1Q16
3Q17
2Q17
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Staff$1,472
$1,395
$1,459
6 %1 %$1,469
$1,417
$1,467
4 % % $4,358
$4,338
 %
Professional, legal and other purchased services312
325
278
(4)12
305
319
292
(4)4
 936
860
9
Software166
177
154
(6)8
175
173
156
1
12
 514
470
9
Net occupancy136
153
142
(11)(4)141
139
143
1
(1) 416
437
(5)
Distribution and servicing100
98
100
2

109
104
105
5
4
 313
307
2
Sub-custodian64
57
59
12
8
62
65
59
(5)5
 191
188
2
Furniture and equipment57
60
65
(5)(12)58
59
59
(2)(2) 174
187
(7)
Bank assessment charges (a)
57
53
53
8
8
51
59
61
(14)(16) 167
166
1
Business development51
71
57
(28)(11)49
63
52
(22)(6) 163
174
(6)
Other (a)
167
175
188
(5)(11)177
192
170
(8)4
 536
546
(2)
Amortization of intangible assets52
60
57
(13)(9)52
53
61
(2)(15) 157
177
(11)
M&I, litigation and restructuring charges8
7
17
N/MN/M6
12
18
N/M 26
42
N/M
Total noninterest expense – GAAP$2,642
$2,631
$2,629
 % %$2,654
$2,655
$2,643
 % % $7,951
$7,892
1 %
       
Staff expense as a percentage of total revenue38%37%39% 37%36%37%  37%38% 
       
Full-time employees at period end52,600
52,000
52,100
1 %1 %52,900
52,800
52,300
 %1 % 52,900
52,300
1 %
       
Memo:       
Adjusted total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges – Non-GAAP$2,582
$2,564
$2,555
1 %1 %$2,596
$2,590
$2,564
 %1 % $7,768
$7,673
1 %
(a)In the first quarter of 2017, we began disclosing bank assessment charges on a quarterly basis. The bank assessment charges were previously included in other expense. All prior periods were reclassified.
N/M - Not meaningful.


Total noninterest expense increased less than 1% compared with the firstthird quarter of 2016 and the fourth quarter of 2016 (unannualized). The increasedecreased slightly compared with the firstsecond quarter of 20162017. The increase primarily reflects increases in consultinghigher software and staffprofessional, legal and other purchased services expenses, partially offset by lower otherlitigation expense and the favorable impact of the stronger U.S. dollar.bank assessment charges. The increase compared with the fourth quarter of 2016decrease primarily reflects higher staff expense, partially offset by lower business development, net occupancy,other, professional, legal and other purchased services and software expenses.business development expenses as well as lower bank assessment charges, partially offset by higher staff expense. Excluding amortization of intangible assets and M&I, litigation and restructuring charges, total noninterest expense, as adjusted (Non-GAAP), increased 1% compared with the firstthird quarter of 2016 and less than 1% (unannualized) compared with the fourthsecond quarter of 2016 (unannualized).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. We expectAs a result of the submission of our 2017 resolution plan, we began to experience a modest decrease in the run rate of the expenses relating to these functions beginning in the second halfthird quarter of 2017 after we submit our 2017 resolution plan.

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 firstthird quarter of 2017, 55%56% in the firstthird quarter of 2016 and 53% in the fourthsecond quarter of 2016.2017.

Staff expense increased 1%slightly compared with the firstthird quarter of 2016 and 6%as the annual employee merit increase was offset by lower severance. Staff expense increased 4% (unannualized) compared with the fourthsecond quarter of 2016. The increase in staff expense compared with the first quarter of 20162017, primarily reflects higher incentive expense, partially offset by the favorable impact of the stronger U.S. dollar. The increase in staff expense compareddue to the fourth quarter of 2016 primarily reflects higher incentives due toexpense reflecting stronger performance and the impact of vesting of long-term stock awards for retirement eligible employees, partially offset by lower severance expense.annual employee merit increase.

Non-staff expense

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



BNY Mellon 1113


Non-staff expense totaled $1.2 billion, in the first quarteran increase of 2017, flat1% compared with the firstthird quarter of 2016 and a decrease of 5%4% (unannualized) compared with the fourthsecond quarter of 2016. Year-over-year, consulting expenses increased primarily due to higher regulatory and compliance costs, which were offset by lower other expense.2017. The decrease compared with the fourth quarter of 2016increase primarily reflects lower business development, net occupancy,higher software and professional, legal and other purchased services expenses, partially offset by lower litigation expense and software expenses. Adjusted non-staffbank 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 excluding amortization of intangible assets and M&I, litigation and restructuring charges (Non-GAAP), totaled $1.1 billion in the first quarter ofrelated to resolution planning.

Year-to-date 2017 an increase ofcompared with year-to-date 2016

Noninterest expense increased 1% compared with the first quarternine months of 2016, primarily reflecting higher consulting and a decrease of 5% (unannualized) compared with the fourth quarter of 2016.

Wesoftware expenses, partially offset by lower net occupancy. The increase in consulting expense primarily reflects higher regulatory and compliance costs. Net occupancy expense decreased as we continue to benefit from the savings generated by the business improvement process, including improved efficiencies by changing the way we work, the continued impact from location strategy and vendor renegotiations, and optimizing our physical footprint.process.

Income taxes

BNY Mellon recorded an income tax provision of $269$348 million (22.3%(25.4% effective tax rate) in the firstthird quarter of 2017. The effective tax in the first quarter of 2017 reflects an approximate 3% benefit related to applying the new accounting guidance required in ASU 2016-09, Compensation – Stock Compensation, to the annual vesting of stock awards and our stock price appreciating above the awards’ original grant price.

The adoption of ASU 2016-09 results in increased volatility to the Company’s income tax expense. The income tax volatility is dependent on the Company’s stock price at the dates on which restricted stock units vest, which primarily occur in the first quarter of each year, and when employees choose to exercise stock options.

The income tax provision was $283$324 million (25.9%(24.6% effective tax rate) in the firstthird quarter of 2016 and $280$332 million (24.3%(25.4% effective tax rate) in the fourthsecond quarter of 2016.2017. For additional information, see Note 10 of the Notes to Consolidated Financial Statements.

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

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

Review of businesses

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

Business accounting principles

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

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

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

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


12 BNY Mellon


British pound and the euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency denominated expenses than revenues. However, our Investment


14 BNY Mellon


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

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

Key market metrics 1Q17 vs.    YTD17
 3Q17 vs.  vs.
1Q17
4Q16
3Q16
2Q16
1Q16
4Q16
1Q16
3Q17
2Q17
1Q17
4Q16
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Standard & Poor’s (“S&P”) 500 Index (a)
2363
2239
2168
2099
2060
6 %
15 %
2519
2423
2363
2239
2168
4  %16  % 2519
2168
16  %
S&P 500 Index – daily average2326
2185
2162
2075
1951
6
19
2467
2398
2326
2185
2162
3
14
 2397
2065
16
FTSE 100 Index (a)
7323
7143
6899
6504
6175
3
19
7373
7313
7323
7143
6899
1
7
 7373
6899
7
FTSE 100 Index – daily average7274
6923
6765
6204
5988
5
21
7380
7391
7274
6923
6765

9
 7348
6326
16
MSCI EAFE (a)
1793
1684
1702
1608
1652
6
9
1974
1883
1793
1684
1702
5
16
 1974
1702
16
MSCI EAFE – daily average1749
1660
1677
1648
1593
5
10
1934
1856
1749
1660
1677
4
15
 1847
1640
13
Barclays Capital Global Aggregate BondSM Index (a)(b)
459
451
486
482
468
2
(2)480
471
459
451
486
2
(1) 480
486
(1)
NYSE and NASDAQ share volume (in billions)
186
189
186
203
218
(2)(15)179
199
186
189
186
(10)(4) 565
608
(7)
JPMorgan G7 Volatility Index – daily average (c)
10.10
10.24
10.19
11.12
10.60
(1)(5)8.17
7.98
10.10
10.24
10.19
2
(20) 8.75
10.63
(18)
Average interest on excess reserves paid by the Federal Reserve0.79%0.55%0.50%0.50%0.50%24 bps
29 bps
1.25%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)
$1.25
$1.23
$1.30
$1.34
$1.44
2 %
(13) %
$1.34
$1.30
$1.25
$1.23
$1.30
3  %3  % $1.34
$1.30
3  %
British pound – average rate1.24
1.24
1.31
1.43
1.43

(13)1.31
1.28
1.24
1.24
1.31
2

 1.28
1.39
(8)
Euro (a)
1.07
1.05
1.12
1.11
1.14
2
(6)1.18
1.14
1.07
1.05
1.12
4
5
 1.18
1.12
5
Euro – average rate1.07
1.08
1.12
1.13
1.10
(1)(3)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 March 31,Sept. 30, 2017, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.02 to $0.04.

 
Fee waivers are highly sensitive to changes in the interest on excess reserves paid by the Federal Reserve. Since 2014, the interest on excess reserves paid by the Federal Reserve increased 75 basis points. As a result of the increases, we recovered nearly all of the pre-tax income related to interest rate sensitive fee waivers.

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 1315


Investment Management business

 1Q17 vs.    YTD17
(dollar amounts in millions)1Q17
4Q16
3Q16
2Q16
1Q16
4Q16
1Q16
 3Q17 vs.  vs.
(dollars in millions)3Q17
2Q17
1Q17
4Q16
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Revenue:       
Investment management fees:       
Mutual funds$299
$297
$309
$304
$300
1 % %$332
$314
$299
$297
$309
6 %7 % $945
$913
4 %
Institutional clients348
340
362
344
334
2
4
367
362
348
340
362
1
1
 1,077
1,040
4
Wealth management167
164
166
160
152
2
10
172
169
167
164
166
2
4
 508
478
6
Investment management fees (a)
814
801
837
808
786
2
4
871
845
814
801
837
3
4
 2,530
2,431
4
Performance fees12
32
8
9
11
N/M
9
15
17
12
32
8
N/M
88
 44
28
57
Investment management and performance fees826
833
845
817
797
(1)4
886
862
826
833
845
3
5
 2,574
2,459
5
Distribution and servicing52
48
49
49
46
8
13
51
53
52
48
49
(4)4
 156
144
8
Other (a)
(1)(1)(18)(10)(31)N/M
N/M
(19)(16)(1)(1)(18)N/M
N/M
 (36)(59)N/M
Total fee and other revenue (a)
877
880
876
856
812

8
918
899
877
880
876
2
5
 2,694
2,544
6
Net interest revenue86
80
82
82
83
8
4
82
87
86
80
82
(6)
 255
247
3
Total revenue963
960
958
938
895

8
1,000
986
963
960
958
1
4
 2,949
2,791
6
Provision for credit losses3
6

1
(1)N/M
N/M
(2)
3
6

N/M
N/M
 1

N/M
Noninterest expense (ex. amortization of intangible assets)668
672
680
684
660
(1)1
687
683
668
672
680
1
1
 2,038
2,024
1
Amortization of intangible assets15
22
22
19
19
(32)(21)15
15
15
22
22

(32) 45
60
(25)
Total noninterest expense683
694
702
703
679
(2)1
702
698
683
694
702
1

 2,083
2,084

Income before taxes$277
$260
$256
$234
$217
7 %28 %$300
$288
$277
$260
$256
4 %17 % $865
$707
22 %
Income before taxes (ex. amortization of intangible assets)Non-GAAP
$292
$282
$278
$253
$236
4 %24 %$315
$303
$292
$282
$278
4 %13 % $910
$767
19 %
       
Pre-tax operating margin29%27%27%25%24% 30%29%29%27%27%  29%25% 
Adjusted pre-tax operating marginNon-GAAP (b)
34%33%33%30%30% 35%34%34%33%33%  35%31% 
       
Average balances:       
Average loans$16,153
$15,673
$15,308
$14,795
$14,275
3 %13 %$16,724
$16,560
$16,153
$15,673
$15,308
1 %9 % $16,481
$14,795
11 %
Average deposits$15,781
$15,511
$15,600
$15,518
$15,971
2 %(1)%$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 5052 for a breakdown of the revenue line items in the Investment Management business impacted by the consolidated investment management funds. Additionally, other revenue includes asset servicing, treasury services, foreign exchange and other trading revenue and investment and other income.
(b)
Excludes amortization of intangible assets, provision for credit losses and distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 4749 for the reconciliation of this Non-GAAP measure.
N/M - Not meaningful.



1416 BNY Mellon


AUM trends (b)(a)
 1Q17 vs. 3Q17 vs.
(dollar amounts in billions)1Q17
4Q16
3Q16
2Q16
1Q16
4Q16
1Q16
(dollars in billions)3Q17
2Q17
1Q17
4Q16
3Q16
2Q17
3Q16
AUM at period end, by product type: (b)
    
Equity$158
$153
$156
$152
$151
3%5 %$158
$163
$158
$153
$156
(3)%1%
Fixed income191
186
194
192
194
3
(2)206
198
191
186
194
4
6
Index330
312
302
296
310
6
6
333
324
330
312
302
3
10
Liability-driven investments (c)(b)
584
554
607
573
542
5
8
622
607
584
554
607
2
2
Multi-asset and alternative investments188
181
189
183
177
4
6
207
192
188
181
189
8
10
Cash276
262
267
268
265
5
4
298
287
276
262
267
4
12
Total AUM$1,727
$1,648
$1,715
$1,664
$1,639
5%5 %$1,824
$1,771
$1,727
$1,648
$1,715
3 %6%
    
AUM at period end, by client type:    
Institutional$1,243
$1,182
$1,234
$1,182
$1,155
5%8 %$1,285
$1,265
$1,243
$1,182
$1,234
2 %4%
Mutual funds397
381
396
398
405
4
(2)447
418
397
381
396
7
13
Private client87
85
85
84
79
2
10
92
88
87
85
85
5
8
Total AUM$1,727
$1,648
$1,715
$1,664
$1,639
5%5 %$1,824
$1,771
$1,727
$1,648
$1,715
3 %6%
    
Changes in AUM: (b)
    
Beginning balance of AUM$1,648
$1,715
$1,664
$1,639
$1,625
 $1,771
$1,727
$1,648
$1,715
$1,664
 
Net inflows (outflows):    
Long-term strategies:    
Equity(4)(5)(6)(2)(2) (2)(2)(4)(5)(6) 
Fixed income2
(1)(1)(3)
 4
2
2
(1)(1) 
Liability-driven investments (c)(b)
14
(7)4
15
14
 (2)15
14
(7)4
 
Multi-asset and alternative investments2
3
7
2

 3
1
2
3
7
 
Total long-term active strategies inflows (outflows)14
(10)4
12
12
 3
16
14
(10)4
 
Index
(1)(3)(17)(11) (3)(13)
(1)(3) 
Total long-term strategies inflows (outflows)14
(11)1
(5)1
 
3
14
(11)1
 
Short term strategies:    
Cash13
(3)(1)4
(9) 10
11
13
(3)(1) 
Total net inflows (outflows)27
(14)
(1)(8) 10
14
27
(14)
 
Net market impact/other41
(11)80
71
41
 17
1
41
(11)80
 
Net currency impact11
(42)(29)(47)(19) 26
29
11
(42)(29) 
Acquisition


2

 
Ending balance of AUM$1,727
$1,648
$1,715
$1,664
$1,639
5%5 %$1,824
$1,771
$1,727
$1,648
$1,715
3 %6%
(a)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(b)In the first quarter of 2017, the AUM in our Wealth Management business and our multi-asset strategies has been reclassified into multi-asset and alternative investments. This reclassification does not change total AUM. All prior periods have been restated.
(c)
Includes currency overlay AUM.


Business description

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

Review of financial results

AUM increased 5%6% compared with March 31,Sept. 30, 2016 primarily reflecting higher market values, partially offset bynet inflows and the unfavorablefavorable impact of the strongerweaker U.S. dollar (principally versus the British pound). The increase compared with the fourth quarter of 2016June 30, 2017 primarily reflects the favorable impact of the weaker U.S. dollar (principally versus the British pound), higher market values and inflows of AUM.net inflows.

 
Net long-term inflows in the first quarter of 2017 reflect inflows of liability-drivenfixed income and multi-asset and alternative investments and other active strategies, partiallywere offset by outflows of activeindex, equity investments.and liability-driven investments in the third quarter of 2017. Net short-term inflows of $10 billion in the firstthird quarter of 2017 were a result of increased distribution through our liquidity portals. Market and regulatory trends are drivinghave driven investable assets toward investments in lower fee asset management products, which are negatively impactingimpacted our investment management fees. However, at the same time, these trends are also providing growth opportunities as clients are also investing in high value active solutions.

Total revenue increased 8%4% compared with the firstthird quarter of 2016 and increased slightly1% (unannualized) compared with the fourthsecond quarter of 2016. The increase compared with the first quarter of 20162017. Both increases primarily reflectsreflect higher market values, higher seed capital gainsinvestment management and losses on


BNY Mellon 15


hedging activity recorded in the first quarter of 2016, partially offset by the impact of a stronger U.S. dollar and net outflows of assets under management in the prior year.performance fees.

Revenue generated in the Investment Management business included 40%41% from non-U.S. sources in the first


BNY Mellon 17


third quarter of 2017, compared with 40% in both the firstthird quarter of 2016 and 42% in the fourthsecond quarter of 2016.2017.

Investment management fees in the Investment Management business increased 4% compared with the firstthird quarter of 2016 and 2%3% (unannualized) compared with the fourthsecond quarter of 2016.2017. Both increases primarily reflect higher equity market values and money market fees. The increase compared with the firstsecond quarter of 2017 also reflects the favorable impact of a weaker U.S. dollar.

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

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

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

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

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

Income before taxes increased 22% compared with the first nine months of 2016, primarily reflecting revenue growth of 6%, partially offset by a 1% increase in noninterest expense, excluding amortization of intangible assets. Fee and other revenue increased 6% primarily reflecting higher investment management and performance fees. The increase in investment management and performance fees primarily reflects higher market values, money market fees and performance fees, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound). Net interest revenue increased 3% primarily due to higher interest rates and the impact of outflows of assets under management in the prior year. On a constant currency basis, investment management fees increased 7% (Non-GAAP) compared with the first quarter of 2016. The increase compared with the fourth quarter of 2016 was primarily driven by higher market values,average loans, partially offset by fewer days in the first quarter of 2017.

Performance fees decreased compared with the fourth quarter of 2016 primarily reflecting seasonality.

Both increases in distribution and servicing fees were primarily driven by higher money market fees.

The improvement in other revenue compared with the first quarter of 2016 reflects higher seed capital gains and losses on hedging activity recorded in the first quarter of 2016, partially offset by payments to Investment Services related to higher money market fees.

Both increases in net interest revenue primarily reflect higher rates onlower average deposits. Average loans increased 13% compared with the first quarter of 2016 and 3% compared with the fourth quarter of 2016, while average deposits decreased 1% compared with the first quarter of 2016 and increased 2% compared with the fourth quarter of 2016. Record average loans were driven by extending banking solutions to high net worth clients.

Noninterest expense, excluding amortization of intangible assets, increased 1% compared with the first quarter of 2016 and decreased 1% (unannualized) compared with the fourth quarter of 2016. The increase compared with the first quarter of 2016 was primarily reflecting higher incentives expense, driven by higher incentive expense,stronger performance, partially offset by the favorable impact of a stronger U.S. dollar (principally versus the British pound). The decrease compared with the fourth quarter of 2016 primarily reflects lower business development expense.



1618 BNY Mellon


Investment Services business

 1Q17 vs.    YTD17
(dollar amounts in millions, unless otherwise noted) 3Q17 vs.  vs.
1Q17
4Q16
3Q16
2Q16
1Q16
4Q16
1Q16
3Q17
2Q17
1Q17
4Q16
3Q16
2Q17
3Q16
 YTD17
YTD16
YTD16
Revenue:       
Investment services fees:       
Asset servicing$1,038
$1,043
$1,039
$1,043
$1,016
 %2 %$1,081
$1,061
$1,038
$1,043
$1,039
2 %4 % $3,180
$3,098
3 %
Clearing services375
354
347
350
348
6
8
381
393
375
354
347
(3)10
 1,149
1,045
10
Issuer services250
211
336
233
244
18
2
288
241
250
211
336
20
(14) 779
813
(4)
Treasury services139
139
136
137
129

8
141
139
139
139
136
1
4
 419
402
4
Total investment services fees1,802
1,747
1,858
1,763
1,737
3
4
1,891
1,834
1,802
1,747
1,858
3
2
 5,527
5,358
3
Foreign exchange and other trading revenue153
157
177
161
168
(3)(9)154
145
153
157
177
6
(13) 452
506
(11)
Other (a)
129
128
148
130
125
1
3
142
136
129
128
148
4
(4) 407
403
1
Total fee and other revenue2,084
2,032
2,183
2,054
2,030
3
3
2,187
2,115
2,084
2,032
2,183
3

 6,386
6,267
2
Net interest revenue707
713
715
690
679
(1)4
777
761
707
713
715
2
9
 2,245
2,084
8
Total revenue2,791
2,745
2,898
2,744
2,709
2
3
2,964
2,876
2,791
2,745
2,898
3
2
 8,631
8,351
3
Provision for credit losses

1
(7)14
N/M(2)(3)

1
N/M (5)8
N/M
Noninterest expense (ex. amortization of intangible assets)1,812
1,786
1,812
1,819
1,770
1
2
1,837
1,889
1,812
1,786
1,812
(3)1
 5,538
5,401
3
Amortization of intangible assets37
38
39
40
38
(3)(3)37
38
37
38
39
(3)(5) 112
117
(4)
Total noninterest expense1,849
1,824
1,851
1,859
1,808
1
2
1,874
1,927
1,849
1,824
1,851
(3)1
 5,650
5,518
2
Income before taxes$942
$921
$1,046
$892
$887
2 %6 %$1,092
$952
$942
$921
$1,046
15 %4 % $2,986
$2,825
6 %
Income before taxes (ex. amortization of intangible assets)Non-GAAP
$979
$959
$1,085
$932
$925
2 %6 %$1,129
$990
$979
$959
$1,085
14 %4 % $3,098
$2,942
5 %
      
Pre-tax operating margin34%34%36%33%33% 37%33%34%34%36%  35%34%

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

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

      

Securities lending revenue$40
$44
$42
$42
$42
(9)%(5)%$41
$42
$40
$44
$42
(2)%(2)% $123
$126
(2)%
      
Metrics:      
Average loans$42,818
$45,832
$44,329
$43,786
$45,004
(7)%(5)%$38,038
$40,931
$42,818
$45,832
$44,329
(7)%(14)% $40,578
$44,373
(9)%
Average deposits$197,690
$213,531
$220,316
$221,998
$215,707
(7)%(8)%$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)
$30.6
$29.9
$30.5
$29.5
$29.1
2 %5 %$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)
$314
$296
$288
$278
$300
6 %5 %$382
$336
$314
$296
$288
14 %33 % $382
$288
33 %
      

Asset servicing:      

Estimated new business wins (AUC/A) (in billions)
$109
$141
$150
$167
$40
 $166
$152
$109
$141
$150
    
       
Depositary Receipts:  
Number of sponsored programs1,050
1,062
1,094
1,112
1,131
(1)%(7)%
  
Clearing services:       
Average active clearing accounts (U.S. platform) (in thousands)
6,058
5,960
5,942
5,946
5,947
2 %2 %6,203
6,159
6,058
5,960
5,942
1 %4 %   
Average long-term mutual fund assets (U.S. platform)$460,977
$438,460
$443,112
$431,150
$415,025
5 %11 %$500,998
$480,532
$460,977
$438,460
$443,112
4 %13 %   
Average investor margin loans (U.S. platform)$10,740
$10,562
$10,834
$10,633
$11,063
2 %(3)%$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)
$2,373
$2,307
$2,212
$2,108
$2,104
3 %13 %$2,534
$2,498
$2,373
$2,307
$2,212
1 %15 %   
(a)
Other revenue includes investment management fees, financing-related fees, distribution and servicing revenue and investment and other income.
(b)Includes the AUC/A of CIBC Mellon of $1.3 trillion at Sept. 30, 2017 and $1.2 trillion at June 30, 2017, March 31, 2017, Dec. 31, 2016 and Sept. 30, 2016 and $1.1 trillion at June 30, 2016 and March 31, 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 and $56 billion at June 30, 2016 and March 31, 2016.
N/M - Not meaningful.


BNY Mellon 1719


Business description

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

We are one of the leading global investment services providers with $30.6$32.2 trillion of AUC/A at March 31,Sept. 30, 2017.

We are a leader in both global andthe primary provider of U.S. government securities clearance settlingand a provider of non-U.S. government securities clearance. We provide services to settle securities transactions in overapproximately 100 markets.
We are a leader in servicingleading provider of tri-party repo collateral services with approximately $2.4$2.5 trillion serviced globally.
We serviceglobally and approximately $1.6 trillion or approximately 87%, of the $1.8 trillionU.S. tri-party repo market in the U.S.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 $3.1$3.3 trillion in 33 separate markets.
We serve as trustee and/or paying agent on more than 50,000 debt-related issuances globally.
As one of the largest providers of depositary receipts services in the world, we served as depositary for 1,050938 sponsored American and global depositary receiptreceipts programs at March 31,Sept. 30, 2017, acting in partnership with leading companies from 6259 countries.

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

With NEXEN®, our next generation digital technology ecosystem, we are leading the digital transformation of BNY Mellon and the services we provide to our clients. NEXEN® provides us with many competitive advantages. It is creating internal efficiencies while reducing costs and increasing speed of delivery, enhancing our clients’ experience and driving revenue opportunities as we continue to onboard clients to our new digital platform. We are collaborating with clients and leading financial technology startups, or fintechs, to develop and integrate new solutions and services, and attracting top information technology talent through our Innovation Centers worldwide.

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

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

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

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

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

Our broker-dealer services business clears and settles equity and fixed-income transactions globally and manages more than $2 trillion in collateral, includingserves as custodian for tri-party repo collateral worldwide.As a leader in the U.S. tri-party repo market, BNY Mellon led the way in reducing systemic risk through operational and technology enhancements.

Clearing services, primarily Pershing LLC, an indirect subsidiary of BNY Mellon (“Pershing”) and its affiliates, provides business and technology


18 BNY Mellon


solutions to financial organizations globally, delivering dependable operational support, robust trading services, flexible technology, an expansive array of investment and retirement solutions, practice management support and service excellence.

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

We are a leading provider to the debt capital markets, providing customized and market-driven solutions to investors, bondholders and lenders. Our corporate trust business delivers a full range of issuer and related investor services, including trustee, paying agency, fiduciary, escrow and other financial services.


20 BNY Mellon


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

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

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

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

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

Review of financial results

AUC/A increased 5%6% compared with March 31,Sept. 30, 2016 to a record $30.6 trillion. The increase$32.2 trillion, primarily reflectsreflecting higher market values, partially offset by the unfavorablefavorable impact of a strongerweaker U.S. dollar.dollar and net new business. AUC/A consisted of
37% equity securities and 63% fixed income securities at March 31,Sept. 30, 2017, compared with 34% equity securities and 66% fixed income securities at March 31,Sept. 30, 2016.

Investment services fees increased 4%2% compared with the firstthird quarter of 2016 and 3% (unannualized) compared with the fourthsecond quarter of 2016,2017, reflecting the following factors:

Asset servicing fees (custody, fund services, broker-dealer services, securities finance, collateral and liquidity services) increased 2%4% compared with the firstthird quarter of 2016 and decreased less than 1%2% (unannualized) compared with the fourthsecond quarter of 2016.2017. The increase compared with the firstthird quarter of 2016 primarily reflects higher equity market values and net new business, including growth ofin collateral optimization solutions, and higher equity market values,management, partially offset by the unfavorable impact of a stronger U.S. dollar and 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 8%10% compared with the firstthird quarter of 2016 primarily driven by higher money market fees and 6%growth in long-term mutual fund assets. Clearing services fees decreased 3% (unannualized) compared with the fourthsecond quarter of 2016. Both increases2017 primarily reflect higher money market and mutual fund fees.reflecting lower clearance volumes.
Issuer services fees (Depositary Receipts and Corporate Trust) increased 2%decreased 14% compared with the firstthird quarter of 2016 and 18%increased 20% (unannualized) compared with the fourthsecond quarter of 2016. Both increases2017. The decrease compared with the third quarter of 2016 primarily reflect reflectshigher fewer corporate actions, lost business and lower fees due to a reduction in


BNY Mellon 19


Depositary Receipts, shares outstanding in certain depositary receipts programs, partially offset by lower feeshigher Corporate Trust revenue. The increase compared with the second quarter of 2017 primarily reflects seasonality in Depositary Receipts revenue and higher Corporate Trust.Trust revenue.
Treasury services fees (global payments, trade finance and cash management) increased 8%4% compared with the firstthird quarter of 2016 and were flat1% (unannualized) compared with the fourthsecond quarter of 2016. The increase compared with the first quarter of 20162017 primarily reflects reflectinghigher payment volumes, partially offset by higher compensating


BNY Mellon 21


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

Market and regulatory trends are driving investable assets toward investments in 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 also providing additional outsourcing opportunities as clients and other market participants seek to comply with new regulations and reduce their operating costs.

Foreign exchange and other trading revenue decreased 9%13% compared with the firstthird quarter of 2016 primarily reflecting lower volatility and lower Depositary Receipt-related foreign exchange activity, partially offset by higher volumes. Foreign exchange and other trading revenue increased 6% (unannualized) compared with the second quarter of 2017 primarily reflecting higher volumes.

Other revenue decreased 4% compared with the third quarter of 2016 and 3%increased 4% (unannualized) compared with the fourthsecond quarter of 2016. Both decreases primarily reflect lower volatility.2017. The decrease compared with the firstthird quarter of 2016 also reflectsresults include termination fees related to the migration to lower margin products.
Other revenue increased 3% compared with the first quarter of 2016 and 1% compared with the fourth quarter of 2016. The increase compared with the first quarter of 2016 primarily reflectsclearing services business. Both comparisons reflect higher payments from Investment Management related to higher money market fees, and higher financing-related fees, partially offset by certain fees paid to introducing brokers.fees.

Net interest revenue increased 4%9% compared with the first quarter of 2016 and decreased 1% (unannualized) compared with the fourth quarter of 2016. The increase compared with the firstthird quarter of 2016 primarily reflectsreflecting the impact of the higher interest rates, partially offset by lower deposits. The decreaseaverage deposits and loans. Net interest revenue increased 2% (unannualized) compared with the fourth quarter of 2016 primarily reflects lower deposits and loans as well as fewer days in the firstsecond quarter of 2017 partially offset byprimarily reflecting higher short-terminterest rates.

Noninterest expense, excluding amortization of intangible assets, increased 2%1% compared with the third quarter of 2016 and decreased 3% (unannualized) compared with the second quarter of 2017. The increase primarily reflects additional technology related-costs, partially offset by lower staff expense. The decrease primarily reflects lower consulting expense, volume-related clearing and sub-custodian expenses and lower business development expense.

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

Income before taxes increased 6% compared with the first quarter of 2016 and 1% (unannualized) compared with the fourth quarter of 2016. The increase compared with the first quarternine months of 2016, primarily driven by revenue growth of 3%, partially offset by a 3% increase in noninterest expense, excluding amortization of intangible assets. Fee and other revenue increased 2% primarily reflecting higher clearing services and asset servicing fees, partially offset by lower foreign exchange and other trading revenue. The increase in clearing services fees primarily reflects higher money market fees and growth in long-term mutual fund assets. The increase in asset servicing fees primarily reflects net new business, including growth in collateral management and higher equity market values, partially offset by the impact of downsizing the retail UK transfer agency business and the unfavorable impact of a stronger U.S. dollar. The decrease in foreign exchange and other trading revenue primarily reflects lower volatility and lower Depositary Receipt-related foreign exchange activity. Net interest revenue increased 8% primarily due to higher interest rates, partially offset by lower average deposits. Noninterest expense, excluding amortization of intangible assets, increased 3% primarily reflecting higher expenses from regulatory and compliance costs and additional technology investments, and higher staff expenses,partially offset by lower litigation expense and the favorable impact of a stronger U.S. dollar. The increase compared with the fourth quarter of 2016 primarily reflects higher incentive expense, partially offset by lower severance and other general expenses.


22 BNY Mellon


Other segment

  
(in millions)1Q17
4Q16
3Q16
2Q16
1Q16
3Q17
2Q17
1Q17
4Q16
3Q16
YTD17
YTD16
Revenue:  
Fee and other revenue$72
$42
$100
$95
$129
$69
$113
$72
$42
$100
$254
$324
Net interest (expense) revenue(1)38
(23)(5)4
(20)(22)(1)38
(23)(43)(24)
Total revenue71
80
77
90
133
49
91
71
80
77
211
300
Provision for credit losses(8)1
(20)(3)(3)(2)(4)(8)1
(20)(14)(26)
Noninterest expense (ex. M&I and restructuring charges (recoveries))106
108
88
53
141
M&I and restructuring charges (recoveries)1
2

3
(1)
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 expense107
110
88
56
140
77
28
107
110
88
212
284
(Loss) income before taxes$(28)$(31)$9
$37
$(4)$(26)$67
$(28)$(31)$9
$13
$42
(Loss) income before taxes (ex. M&I and restructuring charges (recoveries))Non-GAAP
$(27)$(29)$9
$40
$(5)
(Loss) income before taxes (ex. M&I and restructuring charges)Non-GAAP
$(26)$67
$(27)$(29)$9
$14
$44
  
Average loans and leases$1,341
$2,142
$1,941
$1,703
$1,917
$1,182
$1,302
$1,341
$2,142
$1,941
$1,275
$1,853




20 BNY Mellon


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

Review of financial results

Total fee and other revenue decreased $57$31 million compared with the firstthird quarter of 2016 and increased $30$44 million compared with the fourthsecond quarter of 2016. Both comparisons primarily reflect the net gain related to an equity investment, the impact of interest rate hedging activities and lower other income due to increased investments in renewable energy.2017. The decrease compared with the firstthird quarter of 2016 alsoprimarily reflects lower lease-relatedother income, driven by increased losses on our investments in renewable energy, and lower asset-related and net securities gains. The increasedecrease compared with the fourthsecond quarter of 2016 was partially offset by2017 primarily reflects lease-related gains recorded in the second quarter of 2017 and lower income from corporate/bank-owned life insurance.insurance, partially offset by higher net securities gains.

Net interest revenueexpense decreased $5$3 million compared with the firstthird quarter of 2016 and $39$2 million compared with the fourthsecond quarter of 2016. The decrease compared with the first quarter of 2016 was2017. Both decreases primarily driven by the impact ofreflect higher interest rate hedging activities. The decrease compared with the fourth quarter of 2016 reflects the impact of interest rate hedging activities and the premium amortization adjustment recorded in the fourth quarter of 2016 which combined reduced net interest revenue by approximately $43 million.rates.

Noninterest expense, excluding M&I and restructuring charges, (recoveries), decreased $35$11 million compared with the third quarter of 2016 and increased $49 million compared with the second quarter of 2017. The decrease was primarily driven by lower litigation and other expenses. The increase was primarily driven by higher staff expense resulting from a methodology change in the second quarter of 2017 for allocating employee benefits expense to the business segments with no impact to consolidated results. The increase was partially offset by lower other and professional, legal and other purchased services expenses.
Year-to-date 2017 compared with year-to-date 2016

Income before taxes decreased $29 million compared with the first quarter of 2016 and decreased $2 million compared with the fourth quarternine months of 2016. The decrease compared withFee 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 first quarterimpact of 2016higher crediting rates to the businesses. Noninterest expense, excluding M&I and restructuring charges, decreased $71 million primarily reflectsreflecting lower incentive expense.staff, other and litigation expenses.

Critical accounting estimates

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 2016 Annual Report. Our critical accounting estimates are those related to the allowance for loan losses and allowance for lending-related commitments, fair value of financial instruments and derivatives, other-than-temporary impairment (“OTTI”), goodwill and other intangibles, and pension accounting, as referenced below.

Critical policyReference
Allowance for loan losses and allowance for lending-related commitments2016 Annual Report, pages 29 - 31.29-31.
Fair value of financial instruments and derivatives2016 Annual Report, pages 31 - 32.31-32.
OTTI2016 Annual Report, page 33.
Goodwill and other intangibles2016 Annual Report, pages 33 - 34.Second quarter 2017 Form 10-Q, page 24.
Pension accounting2016 Annual Report, pages 34 - 36.34-36.


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. In managing the balance sheet, appropriate consideration is given to balancing the competing needs to maintain sufficient levels of liquidity and complying with applicable regulations and supervisory expectations while optimizing profitability. 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 that 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 March 31,Sept. 30, 2017, total assets were $338$354 billion compared with $333 billion at Dec. 31, 2016. The increase in total assets was primarily driven by higher interest-bearing deposits with the Federal Reserve and other central banks, partially offset by lower loans. Deposits totaled $231 billion at Sept. 30, 2017 and $221 billion at both March 31, 2017 and Dec. 31, 2016.2016, and were driven by higher interest-bearing deposits in non-U.S. offices. At March 31,Sept. 30, 2017, total interest-bearing deposits were 50% of total interest-earning assets, compared with 51% at Dec. 31, 2016.

At March 31,Sept. 30, 2017, we had $40$43 billion of liquid funds (which include interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements) and $71$82 billion of cash (including $65$76 billion of overnight deposits with the Federal Reserve and other central banks) for a total of


BNY Mellon 21


$111 $125 billion of available funds. This compares with available funds of $104 billion at Dec. 31, 2016. Total available funds as a percentage of total assets were 33%35% at March 31,Sept. 30, 2017 compared with 31% at Dec. 31, 2016. For additional information on our liquid funds and available funds, see “Liquidity and dividends.”

Investment securities were $115.8$120.0 billion, or 34% of total assets, at March 31,Sept. 30, 2017, compared with $114.7 billion, or 34% of total assets, at Dec. 31, 20162016. The increase in investment securities primarily reflects additional investments in commercial mortgage-
backed securities (“MBS”) and residential mortgage-backed securities (“RMBS”), partially offset by fewer investments in consumer asset-backed securities (“ABS”). For additional information on our investment securities portfolio, see “Investment securities” and Note 4 of the Notes to Consolidated Financial Statements.

Loans were $60.9$59.1 billion, or 18%17% of total assets, at March 31,Sept. 30, 2017, compared with $64.5 billion, or 19% of total assets, at Dec. 31, 2016. The decrease in loans was primarily driven by lower margin loans and loans to financial institutions. For additional information on our loan portfolio, see “Loans” and Note 5 of the Notes to Consolidated Financial Statements.

Long-term debt totaled $26.3$28.4 billion at March 31,Sept. 30, 2017 and $24.5 billion at Dec. 31, 2016. The increase reflects issuances of $4.75 billion, partially offset by the maturity of $500 million and the redemption of trust preferred securities. For additional information on long-term debt, see “Liquidity and dividends.”

The Bank of New York Mellon Corporation total shareholders’ equity increased to $39.1$40.5 billion from $38.8 billion at Dec. 31, 2016. For additional information on our capital, see “Capital.”

Country risk exposure

We have exposure to certain countries and territories with higher risk profiles. Exposure described below reflects the country of operations and risk of the immediate counterparty. We continue to monitor our exposure to these and other countries as part of our Risk Managementrisk management process. See “Risk management” in our 2016 Annual Report for additional information on how our exposures are managed.

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

Italy 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 net exposure of $1.2$1.3 billion to Italy and $1.9$2.0 billion to Spain at March 31,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 March 31,Sept. 30, 2017 and Dec. 31, 2016, exposure to Italy and Spain primarily consisted of investment grade


24 BNY Mellon


sovereign debt. Investment securities exposure totaled $1.2 billion in Italy and $1.8$1.7 billion in Spain at March 31,Sept. 30, 2017 and $1.1 billion in Italy and $1.8 billion in Spain at Dec. 31, 2016.At March 31, 2017 and Dec. 31, 2016, we had exposure to Portugal of $4 million and $2 million, respectively.At both March 31, 2017 and Dec. 31, 2016, BNY Mellon had exposure of less than $1 million to Greece.

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 March 31,Sept. 30, 2017 and Dec. 31, 2016, we had total net exposure to Brazil of $1.4 billion and $1.3 billion, respectively. This included $1.2 billion and $1.3 billion, at both periods,respectively, in loans, which are primarily short-term trade finance loans extended to large financial institutions. At March 31,Sept. 30, 2017 and Dec. 31, 2016, we held $140 million and $73 million, respectively, of noninvestment grade sovereign debt.

Other countries and territoriesTurkey

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-10 largest financial institutions in the country. As of March 31,Sept. 30, 2017 and Dec. 31, 2016, our exposure totaled $735$780 million and $713 million, respectively, consisting primarily of syndicated credit facilities and trade finance loans. At March 31, 2017 and Dec. 31, 2016, our exposure to Russia was $54 million and $79 million, respectively. Related to Puerto Rico, BNY Mellon had $23 million of securities held in the trading account measured at fair value at March 31, 2017 as well as margin loan exposure that was collateralized with a concentration of Puerto Rican securities. The margin loan exposure was approximately $30 million and $45 million, at March 31, 2017 and Dec. 31, 2016, respectively.


22 BNY Mellon


Investment securities

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

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

Investment securities
portfolio


(dollars in millions)
Dec. 31, 2016
 
1Q17
change in
unrealized
gain (loss)

March 31, 2017
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$47,715
 $71
$48,044
$47,680
 99%$(364) 100%%%%%$49,544
 $81
$50,121
$49,917
 100%$(204) 100%%%%%
U.S. Treasury25,244
 107
26,288
26,149
 99
(139) 100




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




Sovereign debt/sovereign guaranteed (b)(c)
14,373
 (55)13,726
13,885
 101
159
 74
5
21


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

Non-agency RMBS (c)(d)
1,357
 5
1,016
1,298
 81
282
 
1
2
87
10
1,239
 9
885
1,185
 84
300
 
1
3
87
9
Non-agency RMBS718
 2
648
670
 95
22
 8
4
14
73
1
627
 9
555
594
 97
39
 7
4
17
71
1
European floating rate
notes (d)(e)
706
 3
647
639
 98
(8) 67
24
9


523
 (1)393
387
 98
(6) 63
37



Commercial MBS8,037
 26
8,839
8,796
 100
(43) 98
2



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



State and political subdivisions3,396
 25
3,312
3,322
 100
10
 80
17


3
3,299
 1
3,109
3,141
 101
32
 80
17


3
Foreign covered bonds (e)(f)
2,216
 1
2,127
2,144
 101
17
 100




2,471
 1
2,612
2,626
 101
14
 100




Corporate bonds1,396
 
1,361
1,366
 100
5
 18
68
14


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


CLOs2,598
 3
2,561
2,569
 100
8
 100




2,642
 1
2,542
2,550
 100
8
 99


1

U.S. government agencies1,964
 5
1,971
1,985
 101
14
 100




2,210
 2
2,480
2,496
 101
16
 100




Consumer ABS1,727
 4
1,454
1,456
 100
2
 90
3
6
1

1,330
 1
1,152
1,157
 100
5
 89
4
5
2

Other (f)(g)
2,833
 1
3,541
3,553
 100
12
 77

20

3
3,758
 (8)4,118
4,122
 100
4
 81
17


2
Total investment securities$114,280
(g)$198
$115,535
$115,512
(g)99%$(23)(g)(h)92%2%4%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 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, Norway,Australia, the Netherlands, Norway and UK.
(f)(g)
Includes commercial paper with a fair value of $401$700 million and $701700 million and money market funds with a fair value of $842$896 million and $853939 million at Dec. 31, 2016June 30, 2017 and March 31,Sept. 30, 2017, respectively.
(g)(h)
Includes net unrealized losses on derivatives hedging securities available-for-sale of $211$251 million at Dec. 31, 2016June 30, 2017 and $134$238 million at March 31,Sept. 30, 2017.
(h)(i)
Unrealized gains of $165$324 million at March 31,Sept. 30, 2017 related to available-for-sale securities, net of hedges.


BNY Mellon 25


The fair value of our total investment securities portfolio was $115.5$119.7 billion at March 31,Sept. 30, 2017, compared with $114.3 billion at Dec. 31, 2016. The higher level of securities primarily reflects increasesadditional investments in U.S. Treasury and commercial MBS securities,and agency RMBS, partially offset by a decrease in sovereign debt/ sovereign guaranteed.consumer ABS.

At March 31,Sept. 30, 2017, the total investment securities portfolio had a net unrealized pre-tax lossgain of $23$257 million compared with a pre-tax loss of $221 million at Dec. 31, 2016, including the impact of related hedges. The improvement in the net unrealized pre-tax lossgain 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 $131$226 million at March 31,Sept. 30, 2017, compared with $45$45 million at Dec. 31, 2016.

At March 31,Sept. 30, 2017, 92%93% of the securities in our portfolio were rated AAA/AA-, unchanged compared with 93% at Dec. 31, 2016.

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


BNY Mellon 23


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)1Q17
4Q16
3Q16
2Q16
1Q16
3Q17
2Q17
1Q17
4Q16
3Q16
Amortizable purchase premium (net of discount) relating to investment securities:  
Balance at period end$2,058
$2,188
$2,267
$2,251
$2,233
$2,053
$2,111
$2,058
$2,188
$2,267
Estimated average life remaining at period end (in years)
4.9
4.9
4.5
4.4
4.5
5.0
5.0
4.9
4.9
4.5
Amortization$138
$146
$163
$169
$163
$140
$134
$138
$146
$163
Accretable discount related to the prior restructuring of the investment securities portfolio:  
Balance at period end$299
$315
$331
$342
$325
$302
$279
$299
$315
$331
Estimated average life remaining at period end (in years)
6.2
6.2
5.9
5.9
6.0
6.5
6.3
6.2
6.2
5.9
Accretion$25
$25
$24
$26
$27
$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)1Q17
4Q16
1Q16
3Q17
2Q17
3Q16
YTD17
YTD16
Agency RMBS$1
$
$8
$4
$
$9
$5
$22
U.S. Treasury1
(1)(1)
4
Foreign covered bonds



10
Non-agency RMBS(1)7
(2)(1)
(1)(2)1
Other10
3
14
15
1
17
26
28
Total net securities gains$10
$10
$20
$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 firstthird quarter of 2017, this analysis resulted in other-than-temporary credit losses of $1 million primarily in our non-agency RMBS portfolio. At March 31,Sept. 30, 2017, if we were to increase or decrease each of our projected loss severity and default rates by 100 basis points on each of the positions in our non-agency RMBS
portfolio, including the securities previously held by the Grantor Trust, credit-related impairment charges on these securities would have increased or decreased by less than $1 million (pre-tax). See Note 4 of the
Notes to Consolidated Financial Statements for the projected weighted-average default rates and loss severities.

The following table shows the fair value of the European floating rate notes by geographical location at March 31, 2017.Sept. 30, 2017. The net unrealized loss on these securities was $8$6 million at March 31,Sept. 30, 2017,, compared with $11 million at Dec. 31, 2016.

European floating rate notes at March 31, 2017 (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$288
$56
$344
$169
$58
$227
The Netherlands238

238
Ireland57

57
Netherlands160

160
Total fair value$583
$56
$639
$329
$58
$387
(a)Sixty-sevenSixty-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.



24 BNY Mellon


Loans 

Total exposure – consolidatedMarch 31, 2017 Dec. 31, 2016Sept. 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$13.3
$33.4
$46.7
 $14.7
$33.7
$48.4
$11.9
$32.7
$44.6
 $14.7
$33.7
$48.4
Commercial2.9
17.3
20.2
 2.6
17.5
20.1
3.0
16.6
19.6
 2.6
17.5
20.1
Subtotal institutional16.2
50.7
66.9
 17.3
51.2
68.5
14.9
49.3
64.2
 17.3
51.2
68.5
Wealth management loans and mortgages16.0
1.2
17.2
 15.6
1.3
16.9
16.3
1.1
17.4
 15.6
1.3
16.9
Commercial real estate4.7
3.6
8.3
 4.7
3.2
7.9
4.9
3.5
8.4
 4.7
3.2
7.9
Lease financings1.6

1.6
 1.7

1.7
1.3

1.3
 1.7

1.7
Other residential mortgages0.8

0.8
 0.9

0.9
0.7

0.7
 0.9

0.9
Overdrafts4.3

4.3
 5.5

5.5
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 loans44.8
55.5
100.3
 46.9
55.7
102.6
45.2
53.9
99.1
 46.9
55.7
102.6
Margin loans16.1

16.1
 17.6
0.1
17.7
13.9

13.9
 17.6
0.1
17.7
Total$60.9
$55.5
$116.4
 $64.5
$55.8
$120.3
$59.1
$53.9
$113.0
 $64.5
$55.8
$120.3
 


At March 31,Sept. 30, 2017, total exposures were $116.4of $113.0 billion a decrease of 3%decreased 6% compared with Dec. 31, 2016. The decrease in total exposure2016, primarily reflectsreflecting lower margin loans and exposure to financial institutions, and lower margin loans, partially offset by higher unfunded commitments in the commercial real estate portfolio.wealth management loans and mortgages.
 
Our financial institutions and commercial portfolios comprise our largest concentrated risk. These portfolios comprised 57% of our total exposure at both March 31,Sept. 30, 2017 and Dec. 31, 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)
March 31, 2017 Dec. 31, 2016Sept. 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$3.1
$19.3
$22.4
99%99% $3.8
$19.2
$23.0
$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
Banks7.2
1.9
9.1
70
95
 7.9
2.0
9.9
6.3
1.4
7.7
68
94
 7.9
2.0
9.9
Asset managers1.6
6.2
7.8
99
83
 1.5
6.2
7.7
Insurance0.1
3.5
3.6
99
17
 0.1
3.8
3.9
0.1
3.4
3.5
99
17
 0.1
3.8
3.9
Government0.1
0.9
1.0
91
41
 0.1
0.9
1.0

1.0
1.0
91
46
 0.1
0.9
1.0
Other1.2
1.6
2.8
97
38
 1.3
1.6
2.9
1.0
1.4
2.4
98
45
 1.3
1.6
2.9
Total$13.3
$33.4
$46.7
93%85% $14.7
$33.7
$48.4
$11.9
$32.7
$44.6
93%86% $14.7
$33.7
$48.4
 


The financial institutions portfolio exposure was $46.7$44.6 billion at March 31,Sept. 30, 2017, compared with $48.4 billion at Dec. 31, 2016. The decrease primarily reflects lower exposure in the banks and securities industry and insurance 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 March 31,Sept. 30, 2017. Each customer is assigned an internal credit rating, which is mapped to
an equivalent external rating agency grade based upon a number of dimensions, which are continually
evaluated and may change over time. The exposure to financial institutions is generally short-term. Of these exposures, 85%86% expire within one year and 22%61% expire within 90 days. In addition, 80% of the financial institutions exposure is secured. For example, securities industry clients and asset managers often borrow against marketable securities held in custody.



BNY Mellon 27


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


BNY Mellon 25


rating assigned to the counterparty or the underlying collateral.

At March 31,Sept. 30, 2017, the secured intraday credit provided to dealers in connection with their tri-party repo activity totaled $18.7$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 95%94% due in less than one year. The investment grade percentage of our bank exposure was 70%68% at March 31,Sept. 30, 2017, compared with 69% at Dec. 31, 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 March 31,Sept. 30, 2017. These exposures are generally short-term liquidity facilities, with the vast majority to regulated mutual funds.

Commercial

The commercial portfolio is presented below.

Commercial portfolio exposureMarch 31, 2017 Dec. 31, 2016Sept. 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$1.4
$6.6
$8.0
96%14% $1.1
$6.7
$7.8
$1.4
$6.3
$7.7
96%22% $1.1
$6.7
$7.8
Services and other0.9
4.4
5.3
95
28
 0.6
4.3
4.9
Energy and utilities0.5
4.7
5.2
95
10
 0.6
4.7
5.3
0.6
4.5
5.1
95
7
 0.6
4.7
5.3
Services and other0.7
4.2
4.9
94
26
 0.6
4.3
4.9
Media and telecom0.3
1.8
2.1
96
8
 0.3
1.8
2.1
0.1
1.4
1.5
95
15
 0.3
1.8
2.1
Total$2.9
$17.3
$20.2
95%15% $2.6
$17.5
$20.1
$3.0
$16.6
$19.6
95%19% $2.6
$17.5
$20.1
 


The commercial portfolio exposure increased slightlydecreased to $20.2$19.6 billion at March 31,Sept. 30, 2017, from $20.1 billion at Dec. 31, 2016, primarily reflecting an increase in totallower exposure in the manufacturing portfolio, partially offset by a decrease in exposure to the energymedia and utilitiestelecom 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 76% investment grade at both March 31,Sept. 30, 2017 and Dec. 31, 2016.

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

Percentage of the portfolios that are investment gradePercentage of the portfolios that are investment grade Percentage of the portfolios that are investment grade 
March 31, 2017
Dec. 31, 2016
Sept. 30, 2016
June 30, 2016
March 31, 2016
Sept. 30, 2017
June 30, 2017
March 31, 2017
Dec. 31, 2016
Sept. 30, 2016
Financial institutions93%92%93%92%93%93%93%93%92%93%
Commercial95%94%94%94%93%95%96%95%94%94%


 
Our credit strategy is to focus on investment grade clients that are active users of our non-credit services. The execution of our strategy has resulted in 93% of our financial institutions portfolio and 95% of our commercial portfolio rated as investment grade at March 31,Sept. 30, 2017.

Wealth management loans and mortgages

Our wealth management exposure was $17.2$17.4 billion at March 31,Sept. 30, 2017, compared with $16.9 billion at Dec. 31, 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-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 March 31,Sept. 30, 2017.

At March 31,Sept. 30, 2017, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 24%; New York - 19%; Massachusetts - 12%11%; Florida - 7%8%; and other - 38%.



2628 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 $8.3 billion at March 31, 2017, compared with $7.9 billion at Dec. 31, 2016.

At March 31,Sept. 30, 2017, 58%59% of our commercial real estate portfolio was secured. The secured portfolio is diverse by project type, with 48%45% secured by residential buildings, 34%35% secured by office buildings, 12% secured by retail properties and 6%8% secured by other categories. Approximately 94%97% of the unsecured portfolio consists of real estate investment trusts (“REITs”) and real estate operating companies, which are both predominantly investment grade.

At March 31,Sept. 30, 2017, our commercial real estate portfolio consists of the following concentrations: New York metro - 41%40%; REITs and real estate operating companies - 40%; and other - 19%20%.

Lease financings

The leasing portfolio exposure totaled $1.6$1.3 billion at March 31,Sept. 30, 2017 compared with $1.7 billion at Dec. 31, 2016. At March 31,Sept. 30, 2017, approximately 93%94% of the leasing portfolio exposure was investment grade, or investment grade equivalent.

At March 31,Sept. 30, 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 $817$741 million at March 31,Sept. 30, 2017 and $854 million at Dec. 31, 2016. Included in this portfolio at March 31,Sept. 30, 2017 are $208$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 March 31,Sept. 30, 2017, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 14%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 include $5.3included $4.2 billion at March 31,Sept. 30, 2017 and $6.3 billion at Dec. 31, 2016 related to a term loan program that offers fully collateralized loans to broker-dealers.

Asset quality and allowance for credit losses

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. Our primary exposure to the credit risk of a customer consists of funded loans, unfunded contractual commitments to lend, standby letters of credit and overdrafts associated with our custody and securities clearance businesses.



BNY Mellon 2729


Allowance for credit losses activityMarch 31, 2017
Dec. 31, 2016
March 31, 2016
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$16,149
$17,590
$18,818
13,872
14,157
17,590
17,557
Non-margin loans44,719
46,868
42,421
Total loans$60,868
$64,458
$61,239
$59,068
$61,673
$64,458
$65,968
Beginning balance of allowance for credit losses$281
$274
$275
$270
$276
$274
$280
Provision for credit losses(5)7
10
(6)(7)7
(19)
Net recoveries (charge-offs): 
Net recoveries: 
Other residential mortgages

2
1
1


Net recoveries (charge-offs)

2
Financial institutions


13
Net recoveries1
1

13
Ending balance of allowance for credit losses$276
$281
$287
$265
$270
$281
$274
Allowance for loan losses$164
$169
$162
$161
$165
$169
$148
Allowance for lending-related commitments112
112
125
104
105
112
126
Allowance for loan losses as a percentage of total loans0.27%0.26%0.26%0.27%0.27%0.26%0.22%
Allowance for loan losses as a percentage of non-margin loans0.37
0.36
0.38
0.36
0.35
0.36
0.31
Total allowance for credit losses as a percentage of total loans0.45
0.44
0.47
0.45
0.44
0.44
0.42
Total allowance for credit losses as a percentage of non-margin loans0.62
0.60
0.68
0.59
0.57
0.60
0.57


ThereNet recoveries were no net charge-offs$1 million in the firstthird quarter of 2017 or fourthand second quarter of 2016.2017. Net recoveries were $2 million in the firstthird quarter of 2016.2016 of $13 million were recorded in the financial institutions portfolio.

The provision for credit losses was a credit of $5$6 million in the firstthird quarter of 2017, a provisioncredit of $7 million in the fourthsecond quarter of 20162017 and a provisioncredit of $10$19 million in the firstthird quarter of 2016.

The total allowance for credit losses was $276$265 million at March 31,Sept. 30, 2017, $281 million at Dec. 31, 2016 and $287$274 million at March 31,Sept. 30, 2016. The ratio of the total allowance for credit losses to non-margin loans was 0.62%0.59% at March 31,Sept. 30, 2017, 0.60% at Dec. 31, 2016 and 0.68%0.57% at March 31,Sept. 30, 2016. The ratio of the allowance for loan losses to non-margin loans was 0.37%0.36% at March 31,Sept. 30, 2017, 0.36% at Dec. 31, 2016 and 0.38%0.31% at March 31,Sept. 30, 2016.

We had $16.1$13.9 billion of secured margin loans on our balance sheet at March 31,Sept. 30, 2017 compared with $17.6 billion at Dec. 31, 2016 and $18.8$17.6 billion at March 31,Sept. 30, 2016. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to them. As a result, we believe that the ratio of total allowance for credit losses as a percentage of non-margin loans is a more appropriate metric to measure the adequacy of the reserve.

The allowance for loan losses and allowance for lending-related commitments represent management’s estimate of probable losses inherent in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. For
additional information on this process, see “Critical
accounting estimates” in our 2016 Annual Report.

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

Based on an evaluation of the allowance for credit losses as discussed in “Critical accounting estimates” and Note 1 of the Notes to Consolidated Financial Statements, both in our 2016 Annual Report, we have allocated our allowance for credit losses as follows.

 Allocation of allowanceMarch 31, 2017
Dec. 31, 2016
March 31, 2016
 
 Commercial30%29%31%
 Commercial real estate27
26
22
 Foreign13
13
13
 Other residential mortgages9
10
11
 
Wealth management (a)
9
8
6
 Financial institutions8
9
11
 Lease financing4
5
6
 Total100%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 $66$65 million, while if each credit were rated one grade worse, the allowance would have increased by $108$109 million. Similarly, if the loss given default were one rating worse, the


2830 BNY Mellon


allowance would have increased by $44$41 million, while if the loss given default were one rating better, the allowance would have decreased by $29 million. For impaired credits, if the net carrying value of the
loans was 10% higher or lower, the allowance would have decreased or increased by less than $1 million, respectively.


Nonperforming assets

The following table shows the distribution of nonperforming assets.

Nonperforming assetsMarch 31, 2017
Dec. 31, 2016
Sept. 30, 2017
June 30, 2017
Dec. 31, 2016
(dollars in millions)
Nonperforming loans:  
Other residential mortgages$88
$91
$80
$84
$91
Wealth management loans and mortgages10
8
8
10
8
Financial institutions2
2

Lease financings
4


4
Total nonperforming loans98
103
90
96
103
Other assets owned9
4
4
4
4
Total nonperforming assets$107
$107
$94
$100
$107
Nonperforming assets ratio0.18%0.17%0.16%0.16%0.17%
Nonperforming assets ratio, excluding margin loans0.24
0.23
0.21
0.21
0.23
Allowance for loan losses/
nonperforming loans
167.3
164.1
Allowance for loan losses/
nonperforming assets
153.3
157.9
Allowance for loan losses/nonperforming loans178.9
171.9
164.1
Allowance for loan losses/nonperforming assets171.3
165.0
157.9
Total allowance for credit losses/nonperforming loans281.6
272.8
294.4
281.3
272.8
Total allowance for credit losses/nonperforming assets257.9
262.6
281.9
270.0
262.6


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

Charge-offs


Paydowns/sales(8)(9)(6)
Balance at end of quarter$94
$100
$107
Nonperforming assets activityMarch 31, 2017
Dec. 31, 2016
(in millions)
Balance at beginning of quarter$107
$109
Additions9
4
Return to accrual status(4)
Charge-offs(1)
Paydowns/sales(4)(6)
Balance at end of quarter$107
$107


Nonperforming assets were $107decreased $13 million at March 31, 2017, unchanged compared with Dec. 31, 2016.2016, primarily reflecting lower other residential mortgages and lease financings.

The nonperforming assets ratio was 0.18%0.16% at March 31,Sept. 30, 2017, 0.16% at June 30, 2017 and 0.17% at Dec. 31, 2016. The ratio of the allowance for loan losses to nonperforming loans was 167.3%178.9% at March 31,Sept. 30, 2017, 171.9% at June 30, 2017 and 164.1% at Dec. 31, 2016. The ratio of the total allowance for credit losses to nonperforming loans was 281.6%294.4% at March 31,Sept. 30, 2017, 281.3% at June 30, 2017 and 272.8% at Dec. 31, 2016.

Deposits

Total deposits were $221.3$231.0 billion at March 31,Sept. 30, 2017, a decreasean increase of less than 1%4% compared with $221.5 billion at
Dec. 31, 2016. The decreaseincrease 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. and Non-U.S. offices, partially offset by higher noninterest-bearing deposits.offices.

Noninterest-bearing deposits were $79.8$80.4 billion at March 31,Sept. 30, 2017 compared with $78.3 billion at Dec. 31, 2016. Interest-bearing deposits were $141.5$150.6 billion at March 31,Sept. 30, 2017 compared with $143.2 billion at Dec. 31, 2016.

Short-term borrowings

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

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



BNY Mellon 31


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

Federal funds purchased and securities sold under
repurchase agreements
Federal funds purchased and securities sold under
repurchase agreements
Federal funds purchased and securities sold under
repurchase agreements
Quarter endedQuarter ended
(dollars in millions)March 31, 2017
Dec. 31, 2016
March 31, 2016
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
Maximum month-end balance during the quarter$18,703
$12,418
$25,995
$21,850
$19,786
$11,184
Average daily balance$18,995
$11,567
$18,689
$21,403
$17,970
$9,585
Weighted-average rate during the quarter0.51%0.30%0.20%1.30%0.84%0.24%
Ending balance$11,149
$9,989
$14,803
$10,314
$10,934
$8,052
Weighted-average rate at period end0.53%0.38%0.17%1.35%0.93%0.25%


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


BNY Mellon 29


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

Payables to customers and broker-dealers
Quarter endedQuarter ended
(dollars in millions)March 31, 2017
Dec. 31, 2016
March 31, 2016
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
Maximum month-end balance during the quarter$21,306
$21,082
$22,327
$21,563
$21,622
$21,162
Average daily balance (a)
$20,840
$20,978
$21,864
$21,280
$21,078
$20,616
Weighted-average rate during the quarter (a)
0.16%0.07%0.09%0.42%0.30%0.07%
Ending balance$21,306
$20,987
$22,008
$21,176
$21,622
$21,162
Weighted-average rate at period end0.18%0.09%0.09%0.43%0.34%0.07%
(a)
The weighted-average rate is calculated based on, and is applied to, the average interest-bearing payables to customers and broker-dealers, which were $18,961$18,516 million in the firstthird quarter of 2017, $17,091$20,609 million in the fourthsecond quarter of 20162017 and $16,801$16,873 million in the firstthird quarter of 2016.


Payables to customers and broker-dealers represent funds awaiting re-investment and short sale proceeds payable on demand. Payables to customers and broker-dealers are driven by customer trading activity levels and market volatility.

Information related to commercial paper is presented below.

Commercial paperQuarter endedQuarter ended
(dollars in millions)March 31, 2017
Dec. 31, 2016
March 31, 2016
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
Maximum month-end balance during the quarter$2,642
$1,239
$
$4,277
$2,193
$1,000
Average daily balance$2,164
$383
$22
$2,736
$2,215
$1,173
Weighted-average rate during the quarter0.88%0.34%0.33%1.15%0.95%0.35%
Ending balance$2,543
$
$
$2,501
$876
$
Weighted-average rate at period end0.93%%%1.18%0.98%%


The Bank of New York Mellon, our largest bank subsidiary, issues commercial paper that matures within 364397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. IncreasesThe increase in the balances of commercial paper betweenbalances, compared with prior periods, resulted from increased issuances as we manage ourprimarily reflects management of overall liquidity. The increase in the weighted-average rates, compared with prior periods, primarily reflects increases in the Fed Funds effective rate and the issuance of higher-yielding term commercial paper.

Information related to other borrowed funds is presented below.

Other borrowed fundsQuarter endedQuarter ended
(dollars in millions)March 31, 2017
Dec. 31, 2016
March 31, 2016
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
Maximum month-end balance during the quarter$1,173
$1,280
$828
$3,353
$2,379
$993
Average daily balance$822
$903
$759
$2,197
$1,193
$874
Weighted-average rate during the quarter0.98%0.95%0.97%1.38%1.24%0.76%
Ending balance$1,022
$754
$828
$3,353
$1,338
$993
Weighted-average rate at period end1.30%0.89%1.08%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 flowsflow 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


30 BNY Mellon


redemptions, net interest payments and net tax payments for the following 18-month period, and to provide sufficient collateral to satisfy transactions subject to Section 23A of the Federal Reserve Act. As of March 31,Sept. 30, 2017, the Parent was in compliance with this policy. For additional information on our liquidity policy, see “Risk Management - Liquidity risk” in our 2016 Annual Report. Our overall approach to liquidity management is further described in “Liquidity and dividends” in our 2016 Annual Report.

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

Available and liquid fundsMarch 31, 2017
Dec. 31, 2016
AverageSept. 30, 2017
Dec. 31, 2016
Average
(in millions)1Q17
4Q16
1Q16
(dollars in millions)Sept. 30, 2017
Dec. 31, 2016
3Q17
2Q17
3Q16
Available funds:  
Liquid funds:  
Interest-bearing deposits with banks$14,554
$15,086
$14,714
$15,447
$14,909
$15,256
$15,086
$15,899
$14,832
$14,066
Federal funds sold and securities purchased under resale agreements25,776
25,801
25,312
27,233
23,623
27,883
25,801
28,120
26,873
26,376
Total liquid funds40,330
40,887
40,026
42,680
38,532
43,139
40,887
44,019
41,705
40,442
Cash and due from banks5,366
4,822
5,097
5,017
3,879
5,557
4,822
4,961
4,972
4,189
Interest-bearing deposits with the Federal Reserve and other central banks65,086
58,041
66,043
61,672
89,092
75,808
58,041
70,430
69,316
74,102
Total available funds$110,782
$103,750
$111,166
$109,369
$131,503
$124,504
$103,750
$119,410
$115,993
$118,733
Total available funds as a percentage of total assets33%31%33%32%36%35%31%35%34%34%
 


At March 31, 2017, weWe had $40$43 billion of liquid funds compared withat Sept. 30, 2017 and $41 billionatDec. 31, 2016. Of the $40$43 billion in liquid funds held at March 31,Sept. 30, 2017, $15 billion was placed in interest-bearing deposits with large, highly-ratedhighly rated global financial institutions with a weighted-average life to maturity of approximately 25nine days. Of the $15 billion, $3 billion was placed with banks in the Eurozone.

Total available funds totaled $111were $125 billion at March 31,Sept. 30, 2017, compared with $104 billion at Dec. 31, 2016.
The increase was primarily due to an increase in interest-bearing deposits with the Federal Reserve and other central banks.

On an average basis for the threenine months ended March 31,Sept. 30, 2017 and the threenine months ended March 31,Sept. 30, 2016, non-core sources of funds, such as money market rate accounts, federal funds purchased and securities sold under repurchase agreements, trading liabilities, commercial paper and other borrowings, were $30.4$31.9 billion and $27.4$25.9 billion, respectively. The increase


BNY Mellon 33


primarily reflects an increase in commercial paper.securities sold under repurchase agreements.

Average foreign deposits, primarily from our European-based Investment Services business, were $90.4$94.1 billion for the threenine months ended March 31,Sept. 30, 2017, compared with $109.9$105.6 billion for the three
nine months ended March 31,Sept. 30, 2016. Domestic savings, interest-bearing demand and time deposits averaged $41.9$40.0 billion for the threenine months ended March 31,Sept. 30, 2017 and $44.8$47.8 billion for the threenine months ended March 31,Sept. 30, 2016. The decrease primarily reflects a decrease in time deposits, partially offset by an increase in demand deposits.

Average payables to customers and broker-dealers were $19.0$19.4 billion for the threenine months ended March 31,Sept. 30, 2017 and $16.8$16.9 billion for the threenine months ended March 31,Sept. 30, 2016. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.

Long-term debt averaged $25.9$27.1 billion for the threenine months ended March 31,Sept. 30, 2017 and $21.6$22.8 billion for the threenine months ended March 31, 2016.Sept. 30, 2016, reflecting issuances of long-term debt.

Average noninterest-bearing deposits decreased to $73.6$72.5 billion for the threenine months ended March 31,Sept. 30, 2017 from $82.9 billion for the threenine months ended March 31,Sept. 30, 2016, reflecting a decrease in client deposits.

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


BNY Mellon 31


Sources of liquidity

In connection with our single point of entry resolution strategy, we have established the IHC to facilitate the provision of capital and liquidity resources to certain key subsidiaries in the event of material financial distress or failure. In the second quarter of 2017, we entered into a binding support agreement that requiredwith certain key subsidiaries to facilitate the IHCprovision of capital and liquidity resources in the event of material financial distress or failure. Pursuant to provide that support. Thethe support agreement, required the Parent to transfertransferred its intercompany loans and most of its cash to the IHC,our intermediate holding company (“IHC”), and requires the Parent towill 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. The Parent’s and the IHC’s obligations under the support agreement are secured. 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. As a result, during business-as-usual circumstances,The Parent’s and the Parent is expected to continue to have access to the funds necessary to pay dividends, repurchase common stock, service its debt, and satisfy its other obligations. If our projected liquidity resources deteriorate so severely that resolution of the
Parent becomes imminent, the committed line of credit will automatically terminate, with all amounts outstanding becoming due and payable, andIHC’s obligations under the support agreement will require the Parent to transfer most of its remaining assets (other than stock in subsidiaries and a cash reserve to fund bankruptcy expenses) to the IHC. As a result, during a period of severe financial stress the Parent might commence bankruptcy proceedings at an earlier time than it otherwise would if the support agreement had not been implemented. See “Supervision and Regulation - Recovery and Resolution” in our 2016 Annual Report and “Risk Factors” in this Form 10-Q for additional information.are secured.

The Parent’s three major sources of liquidity are access to the debt and equity markets, dividends from its subsidiaries, and cash on hand and cash otherwise made readily available in business-as-usual circumstances to the Parent through a committed credit facility with the IHC, access to the debt and equity markets and dividends from its subsidiaries.our IHC.

The Parent had cash of $9.1 billion$416 million at March 31,Sept. 30, 2017, compared with $8.7 billion at Dec. 31, 2016, an increasea decrease of $337 million$8.3 billion, primarily reflecting the issuancetransfer of long-term debt, partially offset by common stock repurchases,cash to the redemption ofIHC pursuant to the trust preferred securities and dividends paid.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 March 31,Sept. 30, 2017       
  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)
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.


32 BNY Mellon


Long-term debt totaled $26.3$28.4 billion at March 31,Sept. 30, 2017 and $24.5 billion at Dec. 31, 2016. The increase reflects issuances of $2.25$4.75 billion, partially offset by the maturity of $500 million and the redemption of the trust preferred securities. The Parent has $750$250 million of long-term debt that will mature in the remainder of 2017.

All outstanding trust preferred securitiesIn August 2017, we issued by Mellon Capital III were redeemed on March 20, 2017. The redemption price for the trust preferred securities was equal to the par value plus$750 million of fixed rate senior subordinated notes maturing in 2029 at an annual interest accrued up to and excluding the redemption date. For additional information on our trust preferred securities, see Note 11rate of the Notes to Consolidated Financial Statements in our 2016 Annual Report.3.30%.

The Bank of New York Mellon, our largest bank subsidiary, issues commercial paper that matures within 364397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The average commercial paper borrowings were $2.2$2.7 billion in the firstthird quarter of 2017 and $22 million$1.2 billion in the firstthird quarter of 2016. Commercial paper outstanding was $2.5 billion at March 31,Sept. 30, 2017. There was no commercial paper outstanding at Dec. 31, 2016.

Subsequent to March 31,Sept. 30, 2017, our U.S. bank subsidiaries could declare dividends to the Parent of approximately $5.1$6.2 billion, without the need for a regulatory waiver. The Bank of New York Mellon, our primary subsidiary, may choose to resume paying regular dividends to the Parent as early as the second quarter of 2017. In addition, at March 31,Sept. 30, 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 17 of the Notes to Consolidated Financial Statements in our 2016 Annual Report.

Pershing has uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent. Pershing has eight separate uncommitted lines of credit amounting to $1.5 billion in aggregate. There were no borrowings under these lines in the firstthird quarter of 2017. Pershing Limited, an indirect UK-based subsidiary of BNY Mellon, has two separate uncommitted lines of credit amounting to $250 million in aggregate in place for liquidity purposes, which are guaranteed by the Parent.
aggregate. Average borrowings under these lines were $2$6 million, in aggregate, in the firstthird quarter of 2017.

The double leverage ratio is the ratio of our equity investment in subsidiaries divided by our consolidated parent company equity, which includes our noncumulative perpetual preferred stock. In short, the double leverage ratio measures the extent to which equity in subsidiaries is financed by Parent company debt. As the double leverage ratio increases, this can reflect greater demands on a company’s cash flows in order to service interest payments and debt maturities. BNY Mellon’s double leverage ratio is managed in a range considering the


BNY Mellon 35


high level of unencumbered available liquid assets held in its principal subsidiaries (such as central bank deposits and government securities), the Company’s cash generating fee-based business model, with fees representing approximately 80% of revenue, and the dividend capacity of our banking subsidiaries. Our double leverage ratio was 121.7%123.2% at March 31,Sept. 30, 2017 and 119.1% at Dec. 31, 2016, and within the range targeted by management.

Uses of funds

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

In FebruaryAugust 2017, a quarterly cash dividend was paid to common shareholders of $0.19$0.24 per common share. Our common stock dividend payout ratio was 23% for the first threenine months of 2017. The Federal Reserve’s instructions for the 2017 Comprehensive Capital Analysis and Review (“CCAR”)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 firstthird quarter of 2017, we repurchased 1912 million common shares at an average price of $45.90$52.74 per common share for a total cost of $879$650 million.

Liquidity coverage ratio

U.S. regulators have established an LCR that requires certain banking organizations, including BNY Mellon, to maintain a minimum amount of unencumbered high quality liquid assets (“HQLA”) sufficient to withstand the net cash outflow under a


BNY Mellon 33


hypothetical standardized acute liquidity stress scenario for a 30-day time horizon.

The following table presents the consolidated HQLA at March 31,Sept. 30, 2017, and the average for the first quarter of 2017,HQLA and the average LCR for the firstthird 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 LCRMarch 31, 2017
(in billions)
Securities (a)
$105
Cash (b)
59
Total consolidated HQLA (c)
$164
  
Total consolidated HQLA - average (c)
$159
Average LCR117%
(a)Primarily includes U.S. Treasury, U.S. agency, sovereign securities, securities of U.S. government-sponsored enterprises, investment-grade corporate debt and publicly traded common equity.
(b)Primarily includes cash on deposit with central banks.
(c)Consolidated HQLA presented before adjustments. After haircuts and the impact of trapped liquidity, consolidated HQLA totaled $130$137 billion at March 31,Sept. 30, 2017 and averaged $124$126 billion for the firstthird quarter of 2017.


The U.S. LCR rulesrule became fully phased-in on Jan. 1, 2017 and requirerequires BNY Mellon and each of our affected domestic bank subsidiaries to meet an LCR of at least 100%. The LCR for BNY Mellon and each of our domestic bank subsidiaries was compliant with the fully phased-in requirements of the U.S. LCR asrequirements for the third quarter of March 31, 2017.

2017. For additional information on the LCR, see “Supervision and Regulation - Liquidity Standards - Basel III and U.S. Rules and Proposals” in our 2016 Annual Report.

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

Beginning on Jan. 1, 2015, Bank Holding CompaniesAs part of our resolution planning, we monitor, among other measures, our Resolution Liquidity Adequacy and Positioning (“BHCs”RLAP”) with total consolidated assets.  The RLAP methodologies are designed to ensure that the liquidity needs of $50 billioncertain key subsidiaries in a stress environment can be met by available resources held at the entity or more were subject toat the Federal Reserve’s
Enhanced Prudential Standards, which include liquidity standards, described under “Supervision and Regulation - Enhanced Prudential Standards and Large Exposures” in our 2016 Annual Report. BNY Mellon has taken actions to comply with these standards, including the adoption of various liquidity risk management standards and maintenance of a liquidity buffer of unencumbered highly liquid assets based on the results of internal liquidity stress testing.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.

Cash used for operating activities was $1.2 billion in the three months ended March 31, 2017, compared withNet cash provided by operating activities of $1.8was $3.4 billion in the threenine months ended March 31,Sept. 30, 2017, compared with $1.6 billion in the nine months ended Sept. 30, 2016. In the threefirst nine months ended March 31,of 2017, cash flows forprovided by operations were principally the result of changes in accruals and otherearnings. In the first nine months of 2016, cash flows provided by operations were principally the result of earnings and changes in trading activities, partially offset by earnings. In the three months ended March 31, 2016, cash flows from operations were principally the result of changes in trading activities and earnings, partially offset by changes in accruals and other balances.accruals.

CashNet cash used for investing activities was $2.3$14.0 billion in the threenine months ended March 31,Sept. 30, 2017, compared with cash provided by investing activities
of $20.1$21.1 billion in the threenine months ended March 31,Sept. 30, 2016. In the threefirst nine months ended March 31,of 2017, an increasechanges in interest-bearing deposits with the Federal Reserve and other central banks was a significant use of funds, partially offset by net changes in loans.funds. In the threefirst nine months ended March 31,of 2016, a decreasechanges in interest-bearing deposits with the Federal Reserve and other central banks sales, paydowns and maturities of securities and net changes in loans werewas a significant sourcessource of funds, partially offset by purchases of securities and an increasechanges in federal funds sold and securities purchased under resale agreements.



34 BNY Mellon


CashNet cash provided by financing activities was $4.0$11.2 billion in the threenine months ended March 31,Sept. 30, 2017, compared with cash used for financing activities of $24.5$24.2 billion in the threenine months ended March 31,Sept. 30, 2016. In the threefirst nine months ended March 31,of 2017, the proceeds from the issuance of long-term debt, changes in deposits and increases in commercial paper and net proceeds from the issuance
of long-term debtother borrowed funds were significant sources of funds, partially offset by common stock repurchased. In the first nine months of 2016, changes in deposits. In the three months ended March 31, 2016, a decreasedeposits, changes in deposits, thefederal funds purchased and securities sold under repurchase agreements, repayment of long-term debt and commontreasury stock repurchases were significant uses of funds, partially offset by the issuance of long-term debt.


Capital

Capital data
(dollar amounts in millions except per share amounts; common shares in thousands)
March 31, 2017
Dec. 31, 2016
Sept. 30, 2017
June 30, 2017
Dec. 31, 2016
Average common equity to average assets10.4%10.2%10.6%10.5%10.2%
  
At period end:  
BNY Mellon shareholders’ equity to total assets ratio11.6%11.6%11.4%11.3%11.6%
BNY Mellon common shareholders’ equity to total assets ratio10.5%10.6%10.4%10.3%10.6%
Total BNY Mellon shareholders’ equity$39,138
$38,811
$40,523
$39,974
$38,811
Total BNY Mellon common shareholders’ equity$35,596
$35,269
$36,981
$36,432
$35,269
BNY Mellon tangible common shareholders’ equity – Non-GAAP (a)
$17,310
$16,957
$18,630
$18,106
$16,957
Book value per common share (a)
$34.23
$33.67
$36.11
$35.26
$33.67
Tangible book value per common share – Non-GAAP (a)
$16.65
$16.19
$18.19
$17.53
$16.19
Closing stock price per common share$47.23
$47.38
$53.02
$51.02
$47.38
Market capitalization$49,113
$49,630
$54,294
$52,712
$49,630
Common shares outstanding1,039,877
1,047,488
1,024,022
1,033,156
1,047,488
  
Cash dividends per common share$0.19
$0.19
$0.24
$0.19
$0.19
Common dividend payout ratio23%25%26%22%25%
Common dividend yield1.6%1.6%1.8%1.5%1.6%
(a)See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 4749 for a reconciliation of GAAP to Non-GAAP.




BNY Mellon 37


The Bank of New York Mellon Corporation total shareholders’ equity increased to $39.1$40.5 billion at March 31,Sept. 30, 2017 from $38.8 billion at Dec. 31, 2016. The increase primarily reflects earnings, approximately $290foreign currency translation adjustments, $638 million resulting from stock awards, the exercise of stock options and stock issued for employee benefit plans, foreign currency translation adjustments and the unrealized gain in our investment securities portfolio, partially offset by share repurchases and dividends.

The unrealized gain, net of tax, on our available-for-sale investment securities portfolio recorded in accumulated other comprehensive income was $131$226 million at March 31,Sept. 30, 2017, compared with $45 million at Dec. 31, 2016. The increase in the unrealized gain, net of tax, was primarily driven by a decrease in marketlong-term interest rates.

Our 2017 capital plan, submitted in connection with our CCAR, included the authorization to repurchase an average of $650 million of common stock each quarter starting in the third quarter of 2017 and continuing through the second quarter of 2018. In the firstthird quarter of 2017, we repurchased 1912 million common shares at an average price of $45.90$52.74 per common share for a total cost of $879$650 million.

On April 20,Also included in the 2017 The Bank of New York Mellon Corporation declaredcapital plan was a 26% increase in the quarterly cash dividend onto $0.24 per common stockshare. The first payment of $0.19 per share. Thisthe increased quarterly cash dividend is payablewas made on May 12, 2017 to shareholders of record as of the close of business on May 2, 2017.

We submitted our 2017 capital plan in connection with the CCAR on April 5, 2017. The Federal Reserve has indicated that it expects to publish its objection or non-objection to the capital plan and proposed capital actions, such as dividend payments and share repurchases, in JuneAug. 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.”


BNY Mellon 35


As of March 31,Sept. 30, 2017 and Dec. 31, 2016, BNY Mellon and our U.S. bank subsidiaries were “well capitalized.”

Failure to satisfy regulatory standards, including “well capitalized” status or capital adequacy rules more generally, could result in limitations on our activities and adversely affect our financial condition. See the discussion of these matters in “Supervision and Regulation - Regulated Entities of BNY Mellon and Ancillary Regulatory Requirements” and “Risk Factors - Operational Risk - Failure to satisfy regulatory standards, including “well capitalized” and “well managed” status or capital adequacy and liquidity rules more generally, could result in limitations on our activities and adversely affect our business and financial condition” in our 2016 Annual Report.

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

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

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



38 BNY Mellon


The transitional capital ratios for March 31,Sept. 30, 2017 and June 30, 2017 included in the following table were negatively impacted by the additional phase-in requirements that became effective on Jan. 1, 2017.


36 BNY Mellon


Consolidated and largest bank subsidiary regulatory capital ratiosMarch 31, 2017  Sept. 30, 2017    
Well capitalized
 Minimum
required

 
Capital
ratios

 Dec. 31, 2016
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)6.5% 12.0% 12.3%N/A
(c)6.5% 12.3% 12.0% 12.3%
Tier 1 capital ratio6% 8
 14.4
 14.5
6% 8
 14.6
 14.3
 14.5
Total (Tier 1 plus Tier 2) capital ratio10
 10
 14.9
 15.2
10
 10
 15.6
 14.8
 15.2
Advanced:       
Advanced Approach:         
CET1 ratioN/A
(c)6.5% 10.4% 10.6%N/A
(c)6.5% 11.1% 10.8% 10.6%
Tier 1 capital ratio6% 8
 12.5
 12.6
6% 8
 13.2
 12.9
 12.6
Total (Tier 1 plus Tier 2) capital ratio10
 10
 12.8
 13.0
10
 10
 14.0
 13.2
 13.0
Leverage capital ratio (b)
N/A
(c)4
 6.6
 6.6
N/A
(c)4
 6.8
 6.7
 6.6
SLR (d)
5
(c)(e)3
 6.1
 6.0
5
(c)(e)3
 6.3
 6.2
 6.0
                
Selected regulatory capital ratiosfully phased-inNon-GAAP: (c)
       
Selected regulatory capital ratios – fully phased-in – Non-GAAP: (c)
         
Estimated CET1 ratio:                
Standardized Approach8.5%(e)6.5% 11.5% 11.3%8.5%(e)6.5% 11.9% 11.5% 11.3%
Advanced Approach8.5
(e)6.5
 10.0
 9.7
8.5
(e)6.5
 10.7
 10.4
 9.7
Estimated SLR (d)
5
(e)3
 5.9
 5.6
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% 5.75% 13.9% 13.6%6.5% 5.75% 14.8% 14.1% 13.6%
Tier 1 capital ratio8
 7.25
 14.2
 13.9
8
 7.25
 15.1
 14.4
 13.9
Total (Tier 1 plus Tier 2) capital ratio10
 9.25
 14.6
 14.2
10
 9.25
 15.5
 14.8
 14.2
Leverage capital ratio5
 4
 7.6
 7.2
5
 4
 7.8
 7.6
 7.2
SLR (d)
6
 3
 6.9
 6.5
6
 3
 7.1
 6.9
 6.5
                
Selected regulatory capital ratios – fully phased-in – Non-GAAP:
                
Estimated SLR (d)
6% 3% 6.6% 6.1%6% 3% 6.8% 6.7% 6.1%
(a)
Minimum requirements for March 31,Sept. 30, 2017 include Basel III minimum thresholds plus currently applicable buffers.
(b)
For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The leverage capital ratio is based on Tier 1 capital, as phased-in and quarterly average total assets.
(c)
The Federal Reserve’s regulations do not establish well capitalized thresholds for these measures for bank holding companies.
(d)
The SLR does not become a binding measure until the first quarter of 2018. The SLR is based on Tier 1 capital, as phased-in, and average quarterly assets and certain off-balance sheet exposures.
(e)
Fully phased-in Basel III minimum with expected buffers. See page 3941 for the capital ratios with the phase-in of the capital conservation buffer and the U.S. G-SIB surcharge, as well as the introduction of the SLR buffer.


Our CET1 ratio determined under the Advanced Approach was 10.4%11.1% at March 31,Sept. 30, 2017 and 10.6% at Dec. 31, 2016. The decreaseincrease primarily reflects CET1 generation, partially offset by the additional phase-in requirements under the U.S. capital rules that became effective Jan. 1, 2017, partially offset by increased capital and lower RWAs.2017.

Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 10.0%10.7% at March 31,Sept. 30, 2017 and 9.7% at Dec. 31, 2016. The increase primarily reflects CET1 generation. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a
fully phased-in basis was 11.5%11.9% at March 31,Sept. 30, 2017 and 11.3% at Dec. 31, 2016.

The estimated fully phased-in SLR (Non-GAAP) of 5.9%6.1% at March 31,Sept. 30, 2017 and 5.6% at Dec. 31, 2016 was based on our interpretation of the U.S. capital
rules, as supplemented by the Federal Reserve’s final rules on the SLR. BNY Mellon will be 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.”

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

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


BNY Mellon 37


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

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

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

Minimum capital ratios and capital buffers

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

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

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

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



3840 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
 2017
 2018
 2019
  2017
 2018
 2019
 
Capital conservation buffer (CET1) 1.25% 1.875% 2.5%     1.25% 1.875% 2.5% 
U.S. G-SIB surcharge (CET1) (b)(c)
    0.75% 1.125% 1.5%     0.75% 1.125% 1.5% 
                    
Consolidated:                    
CET1 ratioN/A
 4.5% 6.5% 7.5% 8.5% N/A
 4.5% 6.5% 7.5% 8.5% 
Tier 1 capital ratio6.0% 6.0% 8.0% 9.0% 10.0% 6.0% 6.0% 8.0% 9.0% 10.0% 
Total capital ratio10.0% 8.0% 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
 2.0% 2.0% N/A
   N/A
 2.0% 2.0% 
SLRN/A
 3.0% N/A
 5.0% 5.0% N/A
 3.0% N/A
 5.0% 5.0% 
                    
Bank subsidiaries: (c)
                    
CET1 ratio6.5% 4.5% 5.75% 6.375% 7.0% 6.5% 4.5% 5.75% 6.375% 7.0% 
Tier 1 capital ratio8.0% 6.0% 7.25% 7.875% 8.5% 8.0% 6.0% 7.25% 7.875% 8.5% 
Total capital ratio10.0% 8.0% 9.25% 9.875% 10.5% 10.0% 8.0% 9.25% 9.875% 10.5% 
                    
SLR6.0% 3.0% 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.

Estimated CET1 generationQuarter ended March 31, 2017Quarter ended Sept. 30, 2017
(in millions)
Transitional basis (a)

Fully phased-in Non-GAAP (b)

Transitional basis (a)

Fully phased-in - Non-GAAP (b)

CET1 – Beginning of period$18,093
$16,490
$18,371
$17,629
Net income applicable to common shareholders of The Bank of New York Mellon Corporation880
880
983
983
Goodwill and intangible assets, net of related deferred tax liabilities(482)26
(33)(26)
Gross CET1 generated398
906
950
957
Capital deployed:  
Common stock dividends(201)(201)(253)(253)
Common stock repurchased(879)(879)(650)(650)
Total capital deployed(1,080)(1,080)(903)(903)
Other comprehensive income (loss): 
Other comprehensive income: 
Foreign currency translation124
123
281
281
Unrealized loss on assets available-for-sale77
88
13
16
Defined benefit plans(254)20
12
15
Unrealized gain on cash flow hedges10
10
Total other comprehensive income (loss)(43)241
Total other comprehensive income306
312
Additional paid-in capital (c)
286
286
156
156
Other additions (deductions):  
Net pension fund assets(17)
Deferred tax assets(8)(2)(1)(2)
Embedded goodwill(13)3
(9)(8)
Other(10)(9)
Total other deductions(48)(8)(10)(10)
Net CET1 (used) generated(487)345
Net CET1 generated499
512
CET1 – End of period$17,606
$16,835
$18,870
$18,141
(a)Reflects transitional adjustments to CET1 required under the U.S. capital rules.
(b)Estimated.
(c)Primarily related to stock awards, the exercise of stock options and stock issued for employee benefit plans.



BNY Mellon 3941


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 ratiosMarch 31, 2017 Dec. 31, 2016Sept. 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)

CET1:        
Common shareholders’ equity$35,837
$35,596
 $35,794
$35,269
$37,195
$36,981
 $36,652
$36,432
 $35,794
$35,269
Goodwill and intangible assets(17,796)(18,286) (17,314)(18,312)(17,876)(18,351) (17,843)(18,325) (17,314)(18,312)
Net pension fund assets(72)(90) (55)(90)(72)(90) (72)(90) (55)(90)
Equity method investments(326)(341) (313)(344)(334)(348) (325)(340) (313)(344)
Deferred tax assets(27)(34) (19)(32)(31)(39) (30)(37) (19)(32)
Other(10)(10) 
(1)(12)(12) (11)(11) 
(1)
Total CET117,606
16,835
 18,093
16,490
18,870
18,141

18,371
17,629
 18,093
16,490
Other Tier 1 capital:        
Preferred stock3,542
3,542
 3,542
3,542
3,542
3,542
 3,542
3,542
 3,542
3,542
Deferred tax assets(7)
 (13)
(8)
 (7)
 (13)
Net pension fund assets(18)
 (36)
(19)
 (18)
 (36)
Other(14)(14) (121)(121)(34)(34) (24)(24) (121)(121)
Total Tier 1 capital$21,109
$20,363
 $21,465
$19,911
$22,351
$21,649

$21,864
$21,147
 $21,465
$19,911
Tier 2 capital:        
Trust preferred securities$
$
 $148
$
Subordinated debt550
550
 550
550
$1,300
$1,250
 $550
$550
 $550
$550
Allowance for credit losses276
276
 281
281
265
265
 270
270
 281
281
Trust preferred securities

 

 148

Other(2)(2) (12)(11)(7)(7) (7)(7) (12)(11)
Total Tier 2 capital - Standardized Approach824
824
 967
820
1,558
1,508

813
813
 967
820
Excess of expected credit losses51
51
 50
50
49
49
 59
59
 50
50
Less: Allowance for credit losses276
276
 281
281
265
265
 270
270
 281
281
Total Tier 2 capital - Advanced Approach$599
$599
 $736
$589
$1,342
$1,292

$602
$602
 $736
$589
Total capital:        
Standardized Approach$21,933
$21,187
 $22,432
$20,731
$23,909
$23,157
 $22,677
$21,960
 $22,432
$20,731
Advanced Approach$21,708
$20,962
 $22,201
$20,500
$23,693
$22,941
 $22,466
$21,749
 $22,201
$20,500

        
Risk-weighted assets:        
Standardized Approach$146,747
$146,122
 $147,671
$146,475
$153,494
$152,995
 $153,179
$152,645
 $147,671
$146,475
Advanced Approach:        
Credit Risk$96,316
$95,655
 $97,659
$96,391
$98,201
$97,672
 $99,030
$98,465
 $97,659
$96,391
Market Risk3,566
3,566
 2,836
2,836
2,996
2,996
 3,225
3,225
 2,836
2,836
Operational Risk69,313
69,313
 70,000
70,000
68,625
68,625
 67,788
67,788
 70,000
70,000
Total Advanced Approach$169,195
$168,534
 $170,495
$169,227
$169,822
$169,293

$170,043
$169,478
 $170,495
$169,227
        
Standardized Approach:        
CET1 ratio12.0%11.5% 12.3%11.3%12.3%11.9% 12.0%11.5% 12.3%11.3%
Tier 1 capital ratio14.4
13.9
 14.5
13.6
14.6
14.2
 14.3
13.9
 14.5
13.6
Total (Tier 1 plus Tier 2) capital ratio14.9
14.5
 15.2
14.2
15.6
15.1
 14.8
14.4
 15.2
14.2
Advanced Approach:        
CET1 ratio10.4%10.0% 10.6%9.7%11.1%10.7% 10.8%10.4% 10.6%9.7%
Tier 1 capital ratio12.5
12.1
 12.6
11.8
13.2
12.8
 12.9
12.5
 12.6
11.8
Total (Tier 1 plus Tier 2) capital ratio12.8
12.4
 13.0
12.1
14.0
13.6
 13.2
12.8
 13.0
12.1
        
Average assets for leverage capital purposes$318,184
  $326,809
 $327,555
  $324,423
  $326,809
 
Total leverage exposure for SLR purposes $346,772
  $355,083
 $355,960
  $352,448
  $355,083
(a)Reflects transitional adjustments to CET1, Tier 1 capital and Tier 2 capital required in 2017 and 2016 under the U.S. capital rules.
(b)Estimated.




4042 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 March 31, 2017.

Capital above thresholds at March 31, 2017
(in millions)
Consolidated (a)

 
The Bank of New York Mellon (b)

CET1$6,608
 $10,081
Tier 1 capital7,573
 8,461
Total capital4,789
 6,197
Leverage capital8,382
 6,610
(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 March 31,Sept. 30, 2017 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 March 31, 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 6 
     
Tier 1 capital:    
Standardized Approach7 10 
Advanced Approach6 7 
     
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 


 
In the first quarter 2017, all outstanding trust preferred securities issued by Mellon Capital III were redeemed. Prior to the redemption, a portion of the trust preferred securities were eligible for inclusion in Tier 2 capital.

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

Supplementary Leverage Ratio

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



BNY Mellon 4143


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

SLRMarch 31, 2017 Dec. 31, 2016Sept. 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)

Consolidated:        
Total Tier 1 capital$21,109
$20,363
 $21,465
$19,911
$22,351
$21,649
 $21,864
$21,147
 $21,465
$19,911
        
Total leverage exposure:        
Quarterly average total assets$336,200
$336,200
 $344,142
$344,142
$345,709
$345,709
 $342,515
$342,515
 $344,142
$344,142
Less: Amounts deducted from Tier 1 capital18,016
18,763
 17,333
18,887
18,154
18,856
 18,092
18,810
 17,333
18,887
Total on-balance sheet assets, as adjusted318,184
317,437
 326,809
325,255
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)5,898
5,898
 6,021
6,021
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 exposures536
536
 533
533
1,034
1,034
 631
631
 533
533
Credit-equivalent amount of other off-balance sheet exposures (less SLR exclusions)22,901
22,901
 23,274
23,274
21,860
21,860
 22,098
22,098
 23,274
23,274
Total off-balance sheet exposures29,335
29,335
 29,828
29,828
29,107
29,107

28,743
28,743
 29,828
29,828
Total leverage exposure$347,519
$346,772
 $356,637
$355,083
$356,662
$355,960

$353,166
$352,448
 $356,637
$355,083
        
SLR - Consolidated(b)6.1%5.9% 6.0%5.6%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$19,320
$18,523
 $19,011
$17,708
$20,718
$19,955
 $19,897
$19,125
 $19,011
$17,708
Total leverage exposure$281,114
$280,741
 $291,022
$290,230
$292,759
$292,421
 $286,983
$286,634
 $291,022
$290,230
        
SLR - The Bank of New York Mellon(b)6.9%6.6% 6.5%6.1%7.1%6.8% 6.9%6.7% 6.5%6.1%
(a)Estimated.
(b)The estimated fully phased-in SLR (Non-GAAP) is based on our interpretation of the U.S. capital rules. When the SLR is fully phased-in in 2018 as a required minimum ratio, we expect to maintain an SLR of over 5%. The minimum required SLR is 3% and there is a 2% buffer, in addition to the minimum, that is applicable to U.S. G-SIBs. The insured depository institution subsidiaries of the U.S. G-SIBs, including those of BNY Mellon, must maintain a 6% SLR to be considered “well-capitalized.”


Trading activities and risk management

Our trading activities are focused on acting as a market-maker for our customers, facilitating customer trades and risk mitigating hedging in compliance with the Volcker Rule. The risk from market-making activities for customers is managed by our traders and limited in total exposure through a system of position limits, value-at-risk (“VaR”) methodology and other market sensitivity measures. VaR is the potential loss in value due to adverse market movements over a defined time horizon with a specified confidence level. The calculation of our VaR used by management and presented below assumes a one-day holding period, utilizes a 99% confidence level, and incorporates non-linear product characteristics. VaR facilitates comparisons across portfolios of different risk characteristics. VaR also captures the
diversification of aggregated risk at the firm wide level.

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

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

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



44 BNY Mellon


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

The following table indicatestables indicate the calculated VaR amounts for the trading portfolio for the designated periodperiods using the newly implemented historical simulation VaR model. The impact of changes in methodology is not material. For the first quarter of 2017, the average overall portfolio VaR using the newly implemented historical simulation model is $4.1 million. This represents a decrease of $1.3


42 BNY Mellon


million or 23% when compared to $5.4 million VaR for the comparable period using the former Monte Carlo model.

VaR (a)
1Q17March 31, 2017
3Q17Sept. 30, 2017
(in millions)Average
Minimum
Maximum
Average
Minimum
Maximum
Interest rate$3.9
$2.9
$4.9
$3.3
$3.3
$2.8
$4.2
$2.7
Foreign exchange3.6
2.6
4.9
3.3
3.7
3.1
5.6
4.8
Equity0.2
0.2
0.4
0.2
0.9
0.8
1.1
0.9
Credit1.3
1.1
1.7
1.2
1.0
0.6
1.4
1.0
Diversification(4.9)N/M
N/M
(4.5)(5.1)N/M
N/M
(5.3)
Overall portfolio4.1
3.3
5.0
3.5
3.8
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)
4Q16Dec. 31, 2016
3Q16Sept. 30, 2016
(in millions)Average
Minimum
Maximum
Average
Minimum
Maximum
Interest rate$6.3
$4.9
$8.0
$5.5
$7.3
$5.4
$8.9
$7.9
Foreign exchange3.3
2.7
4.2
2.8
4.2
3.2
7.5
3.7
Equity0.5
0.3
0.7
0.4
0.6
0.5
0.8
0.6
Credit0.3
0.3
0.4
0.3
0.3
0.3
0.4
0.4
Diversification(4.6)N/M
N/M
(3.7)(5.8)N/M
N/M
(5.7)
Overall portfolio5.8
4.6
7.1
5.3
6.6
5.0
7.7
6.9

VaR (a)
1Q16March 31, 2016
YTD16
(in millions)Average
Minimum
Maximum
Average
Minimum
Maximum
Interest rate$5.4
$4.3
$6.8
$6.1
$6.3
$4.3
$8.9
Foreign exchange1.6
1.2
2.5
2.5
2.8
1.2
11.1
Equity0.5
0.4
0.8
0.5
0.6
0.4
0.8
Credit0.3
0.2
0.3
0.3
0.3
0.2
0.4
Diversification(2.4)N/M
N/M
(3.7)(4.0)N/M
N/M
Overall portfolio5.4
4.3
6.6
5.7
6.0
4.3
7.7
(a)VaR figures do not reflect the impact of the CVA guidance in ASC 820, Fair Value Measurement. This is consistent with the regulatory treatment. VaR exposure does not include the impact of the Company’s consolidated investment management funds and seed capital investments.
N/M - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a minimum and maximum portfolio diversification effect.


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

The foreign exchange component of VaR represents instruments whose values predominantly vary with the level or volatility of currency exchange rates or interest rates. These instruments include, but are not limited to: currency balances, spot and forward transactions, currency options, exchange-traded futures and options, and other currency derivative products.

The equity component of VaR consists of instruments that represent an ownership interest in the form of domestic and foreign common stock or other equity-linked instruments. These instruments include, but are not limited to: common stock, exchange-traded funds, preferred stock, listed equity options (puts and calls), over-the-counter (“OTC”) equity options, equity total return swaps, equity index futures and other equity derivative products.



BNY Mellon 45


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

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

During the firstthird quarter of 2017, interest rate risk generated 43%37% of average gross VaR, foreign exchange risk generated 40%42% of average gross VaR, equity risk accounted for 2%10% of average gross VaR and credit risk generated 15%11% of average gross VaR. During the firstthird quarter of 2017, our daily trading loss did not exceed our calculated VaR amount of the overall portfolio.

The following table of total daily trading revenue or loss illustrates the number of trading days in which our trading revenue or loss fell within particular ranges during the past five quarters.


BNY Mellon 43


Distribution of trading revenue (loss) (a)
Distribution of trading revenue (loss) (a)
  
Distribution of trading revenue (loss) (a)
  
Quarter endedQuarter ended
(dollar amounts in millions)March 31,
2017

Dec. 31, 2016
Sept. 30, 2016
June 30,
2016

March 31, 2016
(dollars in millions)Sept. 30, 2017
June 30,
2017

March 31,
2017

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


1






$(2.5) – $01
3
6
2
3
1
2
1
3
6
$0 – $2.531
28
22
20
29
29
31
31
28
22
$2.5 – $5.026
23
25
38
21
29
27
26
23
25
More than $5.04
7
11
3
9
4
4
4
7
11
(a)Trading revenue (loss) includes realized and unrealized gains and losses primarily related to spot and forward foreign exchange transactions, derivatives and securities trades for our customers and excludes any associated commissions, underwriting fees and net interest revenue.


Trading assets include debt and equity instruments and derivative assets, primarily interest rate and foreign exchange contracts, not designated as hedging instruments. Trading assets were $5$4.7 billion at March 31,Sept. 30, 2017 and $6$5.7 billionat Dec. 31, 2016.2016.

Trading liabilities include debt and equity instruments and derivative liabilities, primarily interest rate and
foreign exchange contracts, not designated as hedging instruments. Trading liabilities were $3$3.3 billion at March 31,Sept. 30, 2017 and $4$4.4 billion at Dec. 31, 2016.

Under our fair value methodology for derivative contracts, an initial “risk-neutral” valuation is performed on each position assuming time-discounting based on a AA credit curve. In addition, we consider credit risk in arriving at the fair value of our derivatives.derivatives.

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

At March 31,Sept. 30, 2017,, our OTC derivative assets of $2.9$3.6 billion included a CVA deduction of $33$30 million. Our OTC derivative liabilities of $2.4$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 $2$1 million and the DVA was unchanged in the firstthird 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 firstsecond quarter of 2017.

In the fourth quarter of 2016, net of hedges, the CVA and the DVA were unchanged. As a result, foreign exchange and other trading revenue was not impacted.

In the firstthird quarter of 2016, net of hedges, the CVA decreased by $5$8 million and the DVA decreased $1by $4 million. The net impact of these adjustments increased foreign exchange and other trading revenue by $4 million in the firstthird quarter of 2016.

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


46 BNY Mellon

Foreign exchange and other trading counterparty risk
rating profile (a)
 Quarter ended
 March 31, 2017
Dec. 31, 2016
Sept. 30, 2016
June 30,
2016

March 31,
2016

Rating:     
AAA to AA-43%35%45%38%44%
A+ to A-36
39
32
40
37
BBB+ to BBB-17
22
19
18
14
Noninvestment grade (BB+ and lower)4
4
4
4
5
Total100%100%100%100%100%

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

March 31,
2017

Dec. 31, 2016
Sept. 30, 2016
Rating:     
AAA to AA-41%44%43%35%45%
A+ to A-30
27
36
39
32
BBB+ to BBB-24
22
17
22
19
Noninvestment grade (BB+ and lower)5
7
4
4
4
Total100%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


44 BNY Mellon


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

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

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

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

Estimated changes in net interest revenue
(dollars in millions)
March 31, 2017
Dec. 31, 2016
Sept. 30, 2016
June 30,
2016

March 31,
2016

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)
$(136)$6
$62
$91
$103
$(2)$(69)$(136)$6
$62
up 100 bps parallel rate ramp vs. baseline (a)
87
145
147
158
189
112
58
87
145
147
Long-term up 50 bps, short-term unchanged (b)
92
81
116
130
104
113
92
92
81
116
Long-term down 50 bps, short-term unchanged (b)
(104)(88)(128)(96)(93)(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 sequential decline in the interest rate sensitivity was primarily driven by an increase in the expected baseline scenario, resulting from the recent short-term interest rate increases. The baseline scenario used for the calculations in the estimated changes in net interest revenue table above as of Sept. 30, 2017, June 30, 2017, March 31, 2017 and Dec. 31, 2016 are based on our quarter-end balance sheet and the spot yield curve. The baseline scenariosscenario used for periods prior to Dec. 31,Sept. 30, 2016 werewas 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 flat


BNY Mellon 47


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

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

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

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

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


BNY Mellon 45


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.



4648 BNY Mellon


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

BNY Mellon has included in this Form 10-Q certain Non-GAAP financial measures based on estimated fully phased-in CET1 and other risk-based capital ratios, the estimated fully phased-in SLR and tangible common shareholders’ equity. BNY Mellon believes that the CET1 and other risk-based capital ratios, on a fully phased-in basis, and the SLR, on a fully phased-in basis, are measures of capital strength that provide additional useful information to investors, supplementing the capital ratios which are, or were, required by regulatory authorities. The tangible common shareholders’ equity ratio, which excludes goodwill and intangible assets, net of deferred tax liabilities, includes changes in investment securities valuations which are reflected in total shareholders’ equity. In addition, this ratio is expressed as a percentage of the actual book value of assets. BNY Mellon believes that the return on tangible common equity measure 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.

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

The presentation of revenue growth on a constant currency basis permits investors to assess the significance of changes in foreign currency exchange rates. Growth rates on a constant currency basis were determined by applying the current period foreign currency exchange rates to the prior period revenue. BNY Mellon believes that this presentation, as a supplement to GAAP information, gives investors a clearer picture of the related revenue results without the variability caused by fluctuations in foreign currency exchange rates.

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.



BNY Mellon 4749


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

Reconciliation of income before income taxes – pre-tax operating margin1Q17
4Q16
1Q16
Pre-tax operating margin3Q17
2Q17
3Q16
YTD17
YTD16
(dollars in millions)1Q17
4Q16
1Q16
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 funds18
4
(7)
Less: Net income attributable to noncontrolling interests of consolidated investment management funds3
3
9
24
6
Add: Amortization of intangible assets52
60
57
52
53
61
157
177
M&I, litigation and restructuring charges8
7
17
6
12
18
26
42
Recovery related to Sentinel

(13)
(13)
Income before income taxes, as adjusted – Non-GAAP (a)
$1,248
$1,215
$1,172
$1,423
$1,370
$1,374
$4,041
$3,773
  
Fee and other revenue – GAAP$3,018
$2,954
$2,970
$3,167
$3,120
$3,150
$9,305
$9,119
Income (loss) from consolidated investment management funds – GAAP33
5
(6)
Income from consolidated investment management funds – GAAP10
10
17
53
21
Net interest revenue – GAAP792
831
766
839
826
774
2,457
2,307
Total revenue – GAAP3,843
3,790
3,730
4,016
3,956
3,941
11,815
11,447
Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds18
4
(7)
Less: Net income attributable to noncontrolling interests of consolidated investment management funds3
3
9
24
6
Total revenue, as adjusted – Non-GAAP (a)
$3,825
$3,786
$3,737
$4,013
$3,953
$3,932
$11,791
$11,441
  
Pre-tax operating margin – GAAP (b)(c)
31%30%29%34%33%33%33%31%
Adjusted pre-tax operating margin – Non-GAAP (a)(b)(c)
33%32%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 $101$102 million for the third quarter of 2017, $106 million for the second quarter of 2017, $74 million for the third quarter of 2016, $309 million for the first quarternine months of 2017 $92 million for the fourth quarter of 2016 and $77$225 million for the first quarternine months of 2016 and would increase our pre-tax operating margin by approximately 1.6% for the third quarter of 2017, 1.8% for the firstsecond quarter of 2017, 1.2% for the third quarter of 2016, 1.7% for the fourth quarterfirst nine months of 20162017 and 1.4%1.3% for the first quarternine months of 2016.


The following table presents the reconciliation of operating leverage.

Operating leverage1Q17
4Q16
1Q16
1Q17 vs.3Q17
2Q17
3Q16
3Q17 vs.
(dollars in millions)4Q16
1Q16
2Q17
3Q16
Total revenue – GAAP$3,843
$3,790
$3,730
1.40%
3.03%
$4,016
$3,956
$3,941
1.52 %1.90%
Less: Net income (loss) attributable to noncontrolling interests of consolidated investment management funds18
4
(7) 
Less: Net income attributable to noncontrolling interests of consolidated investment management funds3
3
9
 
Total revenue, as adjusted – Non-GAAP$3,825
$3,786
$3,737
1.03%
2.35%
$4,013
$3,953
$3,932
1.52 %2.06%
    
Total noninterest expense – GAAP$2,642
$2,631
$2,629
0.42%
0.49%
$2,654
$2,655
$2,643
(0.04)%0.42%
Less: Amortization of intangible assets52
60
57
 52
53
61
 
M&I, litigation and restructuring charges8
7
17
 6
12
18
 
Total noninterest expense, as adjusted – Non-GAAP$2,582
$2,564
$2,555
0.70%
1.06%
$2,596
$2,590
$2,564
0.23 %1.25%
    
Operating leverage – GAAP (a)
 98 bps254 bps 156 bps148 bps
Adjusted operating leverage – Non-GAAP (a)(b)
 33 bps129 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.




4850 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 equity1Q17
4Q16
1Q16
3Q17
2Q17
3Q16
YTD17
YTD16
(dollars in millions)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP$880
$822
$804
$983
$926
$974
$2,789
$2,603
Add: Amortization of intangible assets52
60
57
52
53
61
157
177
Less: Tax impact of amortization of intangible assets18
19
20
17
19
21
54
62
Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation excluding amortization of intangible assets – Non-GAAP914
863
841
1,018
960
1,014
2,892
2,718
Add: M&I, litigation and restructuring charges8
7
17
6
12
18
26
42
Recovery related to Sentinel

(13)
(13)
Less: Tax impact of M&I, litigation and restructuring charges2
3
6

3
5
5
13
Tax impact of recovery related to Sentinel

(5)
(5)
Adjusted net income applicable to common shareholders of The Bank of New York Mellon Corporation, as adjusted – Non-GAAP (a)
$920
$867
$852
$1,024
$969
$1,019
$2,913
$2,739
  
Average common shareholders’ equity$34,965
$35,171
$35,252
$36,780
$35,862
$35,767
$35,876
$35,616
Less: Average goodwill17,338
17,344
17,562
17,497
17,408
17,463
17,415
17,549
Average intangible assets3,578
3,638
3,812
3,487
3,532
3,711
3,532
3,770
Add: Deferred tax liability – tax deductible goodwill (b)
1,518
1,497
1,428
1,561
1,542
1,477
1,561
1,477
Deferred tax liability – intangible assets (b)
1,100
1,105
1,140
1,092
1,095
1,116
1,092
1,116
Average tangible common shareholders’ equity – Non-GAAP$16,667
$16,791
$16,446
$18,449
$17,559
$17,186
$17,582
$16,890
  
Return on common equity – GAAP (c)
10.2%9.3%9.2%10.6%10.4%10.8%10.4%9.8%
Adjusted return on common equity – Non-GAAP (a)(c)
10.7%9.8%9.7%11.0%10.8%11.3%10.9%10.3%
  
Return on tangible common equity – Non-GAAP (c)
22.2%20.4%20.6%21.9%21.9%23.5%22.0%21.5%
Adjusted return on tangible common equity – Non-GAAP (a)(c)
22.4%20.5%20.8%22.0%22.1%23.6%22.1%21.7%
(a)Non-GAAP information for all periods presented excludes the amortization of intangible assets and M&I, litigation and restructuring charges. Non-GAAP information for the third quarter of 2016 and for the first nine months of 2016 also excludes a recovery of the previously impaired Sentinel loan.
(b)Deferred tax liabilities are based on fully phased-in Basel III capital rules.
(c)Quarterly returns are annualized.


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

Book value per common shareMarch 31, 2017
Dec. 31, 2016
March 31,
2016

Sept. 30, 2017
June 30,
2017

Dec. 31, 2016
Sept. 30, 2016
(dollars in millions, unless otherwise noted)
BNY Mellon shareholders’ equity at period end – GAAP$39,138
$38,811
$38,459
$40,523
$39,974
$38,811
$39,695
Less: Preferred stock3,542
3,542
2,552
3,542
3,542
3,542
3,542
BNY Mellon common shareholders’ equity at period end – GAAP35,596
35,269
35,907
36,981
36,432
35,269
36,153
Less: Goodwill17,355
17,316
17,604
17,543
17,457
17,316
17,449
Intangible assets3,549
3,598
3,781
3,461
3,506
3,598
3,671
Add: Deferred tax liability – tax deductible goodwill (a)
1,518
1,497
1,428
1,561
1,542
1,497
1,477
Deferred tax liability – intangible assets (a)
1,100
1,105
1,140
1,092
1,095
1,105
1,116
BNY Mellon tangible common shareholders’ equity at period end – Non-GAAP$17,310
$16,957
$17,090
$18,630
$18,106
$16,957
$17,626
  
Period-end common shares outstanding (in thousands)
1,039,877
1,047,488
1,077,083
1,024,022
1,033,156
1,047,488
1,057,337
  
Book value per common share – GAAP$34.23
$33.67
$33.34
$36.11
$35.26
$33.67
$34.19
Tangible book value per common share – Non-GAAP$16.65
$16.19
$15.87
$18.19
$17.53
$16.19
$16.67
(a)Deferred tax liabilities are based on fully phased-in Basel III capital rules.







BNY Mellon 4951


The following table presents the impact of changes in foreign currency exchange rates on our consolidated investment management and performance fees.

Investment management and performance fees – Consolidated  1Q17 vs.
(dollars in millions)1Q17
1Q16
1Q16
Investment management and performance fees – GAAP$842
$812
4%
Impact of changes in foreign currency exchange rates
(30) 
Investment management and performance fees, as adjusted – Non-GAAP$842
$782
8%


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)1Q17
4Q16
1Q16
Income (loss) from consolidated investment management funds$33
$5
$(6)
Less: Net income (loss) attributable to noncontrolling interests of consolidated investment
management funds
18
4
(7)
Income from consolidated investment management funds, net of noncontrolling interests$15
$1
$1
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 impact of changes in foreign currency exchange rates on investment management fees reported in the Investment Management segment.

Investment management fees - Investment Management business  1Q17 vs.
(dollars in millions)1Q17
1Q16
1Q16
Investment management fees – GAAP$814
$786
4%
Impact of changes in foreign currency exchange rates
(28) 
Investment management fees, as adjusted – Non-GAAP$814
$758
7%


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)1Q17
4Q16
3Q16
2Q16
1Q16
3Q17
2Q17
1Q17
4Q16
3Q16
YTD17
YTD16
Investment management fees$2
$4
$2
$3
$2
$1
$2
$2
$4
$2
$5
$7
Other (Investment income (loss))13
(3)6
3
(1)6
5
13
(3)6
24
8
Income from consolidated investment management funds, net of noncontrolling interests$15
$1
$8
$6
$1
$7
$7
$15
$1
$8
$29
$15




50 BNY Mellon


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)1Q17
4Q16
3Q16
2Q16
1Q16
3Q17
2Q17
1Q17
4Q16
3Q16
YTD17
YTD16
Income before income taxes – GAAP$277
$260
$256
$234
$217
$300
$288
$277
$260
$256
$865
$707
Add: Amortization of intangible assets15
22
22
19
19
15
15
15
22
22
45
60
Provision for credit losses3
6

1
(1)(2)
3
6

1

Adjusted income before income taxes excluding amortization of intangible assets and provision for credit losses – Non-GAAP$295
$288
$278
$254
$235
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$963
$960
$958
$938
$895
$1,000
$986
$963
$960
$958
$2,949
$2,791
Less: Distribution and servicing expense
101
98
104
102
100
110
104
101
98
104
315
306
Adjusted total revenue net of distribution and servicing expense – Non-GAAP$862
$862
$854
$836
$795
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)
29%27%27%25%24%30%29%29%27%27%29%25%
Adjusted pre-tax operating margin, excluding amortization of intangible assets, provision for credit losses and distribution and servicing expense – Non-GAAP (a)
34%33%33%30%30%35%34%34%33%33%35%31%
(a)Income before taxes divided by total revenue.




52 BNY Mellon


Recent accounting and regulatory developments

Recently issued accounting standards

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

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

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

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

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

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

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

ASU 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, and 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 would be determined by the excess of the carrying value of a reporting unit over its fair value. To date, the Company has not been required to prepare a Step 2 computation for any of its reporting units. The Company will early adopt this standard in 2017.

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


BNY Mellon 51


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, but would expectand expects to include restricted cash (which totaled $3$4 billion as of March 31,Sept. 30, 2017) with cash and due from banks when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

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

In August 2016, the FASB issued an ASU, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on eight specific cash flow presentation issues and is effective for the first quarter of 2018. Earlier application is permitted, however all of the amendments must be adopted in the same period. BNY Mellon is assessing the impacts of the new


BNY Mellon 53


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

ASU 2014-09, Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which. This ASU, as amended, provides guidance on the recognition of revenue related to 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 non-cash consideration and completed contracts at transition, and provides a practical expedient for contract modifications. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers which provides amended guidance on narrow aspects of ASU 2014-09. The new standards areis effective for the first quarter of 2018 with early adoption permitted no earlier than the first quarter of 2017. The standards permit the use ofusing either the retrospective or cumulative effect transition method upon transition.adoption.

The Company has substantially completed its evaluation of the potential impact of this guidance on our accounting policies, and based on that evaluation, we expect the timing of most of our revenue recognition towill remain the same and the impacts towill not be material. To date, theThe impacts we have identified 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 is consideringplans to adopt the guidance as of Jan. 1, 2018 using the retrospective method of adoption, but has not yet finalized its decision as we are still evaluatingcumulative effect transition method. The Company is currently developing the relateddisclosures required about revenue and contract costs and benefits, including disclosure requirements in the year of adoption if the retrospective method is not used.finalizing changes to internal control.



52 BNY Mellon


ASU 2016-02, Leases

In February 2016, the FASB issued ASU 2016-02, Leases. The primary objective of this ASU is to increase transparency and comparability by recognizing lease assets and liabilities on the balance sheet and expand related disclosures. ASU 2016-02 requires a “right-of-use” asset and a payment obligation liability on the balance sheet for most leases and subleases. Additionally, depending on the lease classification under the standard, it may result in different expense recognition patterns and classification than under existing accounting principles. For leases classified as finance leases, it will result in higher expense recognition in the earlier periods and lower expense in the later periods of the lease.

The standard is effective for the first quarter of 2019, with early adoption permitted. The standard requires that aWe will utilize the modified retrospective transition approach be used by lessees and lessors to recognize and measure leases atas of the beginning of the earliest period presented, which will result in a cumulative effect recorded in the earliest period presented. This modified retrospective approach includes a number ofAdditionally, the standard allows for various optional practical expedients that entities may elect to apply.assist with the implementation and reporting requirements. We are currently evaluating the potential impact of the leasing standard on our consolidated financial statements and evaluating the practical expedients that may be elected. Upon adoption, the implementation of the leasing standard is expected to result in an immaterial increase in both assets and liabilities.

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

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


54 BNY Mellon


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

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

This ASU is effective forThe Company plans to adopt this guidance in the first quarter of 2018. If certain requirements are met, early adoption of2018 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 does not expect the adoption of this ASU to have a material impact.impact to the financial statements.

Recent regulatory developments

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

DepartmentFinal Rule on Qualified Financial Contracts

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

The U.S. Department of Labor issued a 60-day delayfinal rule allows G-SIBs to comply with respectthe rule by adhering to the applicability of its recent final rule regardingInternational Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol (the “Protocol”) or a similar protocol that accomplishes the conduct standards of certain service providers to employee benefit plans and individual retirement accounts. The rule, among other things, expands the definition of who is designated a “fiduciary” of an employee benefit plan or individual retirement account, and provides certain prohibited transaction exemptions. The delay changed the prior applicability date of April 10, 2017 to the new applicability date of June 9, 2017, and also delayed the applicability of certain restrictive conditions of the rule’s prohibited transaction exemptions until Jan. 1, 2018. BNY Mellon businesses that are impacted by this rule have remained focused on conforming their business practices to address changescontractual amendments required by the rule. For more information regarding thisBNY Mellon entities that engage in QFC activities covered by the Protocol have adhered to the Protocol.  Compliance with the Federal Reserve’s final rule see “Supervisionwill be required on a phased-in basis beginning on Jan. 1, 2019. BNY Mellon is evaluating the impact of the new regulations on its activities.

Resolution plan

As required by the Dodd-Frank Act, BNY Mellon must submit annually to the Federal Reserve and Regulation”the FDIC a plan for its rapid and orderly resolution in the event of material financial distress or failure. BNY Mellon filed its most recent resolution plan on July 1, 2017. We believe the 2017 resolution plan addresses all shortcomings and deficiencies identified by the FDIC and the Federal Reserve in the Company’s 2015 resolution plan. The public portion of our 2016 Annual Report.2017 resolution plan is available on the Federal Reserve’s and FDIC’s websites.

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



BNY Mellon 5355


Liquidity coverage ratio

The U.S. LCR rules became fully phased-in on Jan. 1, 2017 and require BNY Mellon and our affected domestic bank subsidiaries to meet an LCR of 100%. The LCR for BNY Mellon and our domestic bank subsidiaries was compliant with the fully phased-in requirements of the U.S. LCR as of March 31, 2017. On Dec. 19, 2016, the Federal Reserve issued a final rule requiring that large banking organizations, including BNY Mellon, publicly disclose certain quantitative liquidity metrics, including their consolidated average LCR each quarter and consolidated average HQLA amounts, broken down by HQLA category along with a qualitative discussion of material drivers of the ratio and related changes. BNY Mellon will commence this disclosure for the second quarter of 2017. For additional information on the LCR, see “Supervision and Regulation - Liquidity Standards - Basel III and U.S. Rules and Proposals” in our 2016 Annual Report.

Swap Margin Requirements

The U.S. prudential regulators have adopted joint final rules establishing minimum margin requirements for the uncleared swap transactions engaged in by those dealers subject to their jurisdiction (each, a “Covered Swap Entity”) with compliance requirements which began to apply in September 2016. From that point forward, variation margin requirements (the “VM Regulations”) were phased in over a six-month period while initial margin requirements are being phased in over a four-year period. In each instance, the higher a Covered Swap Entity’s derivatives exposure, the earlier in the phase-in period it is required to comply. In addition, the rules require the initial margin posted to or by a Covered Swap Entity be segregated at a third-party custodian. While BNY Mellon does not expect to be impacted by the initial margin component of these new rules in 2017, we did expect to become fully subject to the substantial, new, VM Regulations effective March 1, 2017. If the VM Regulations had been fully implemented on March 1, 2017, there would have been a risk that a number of BNY Mellon’s OTC derivatives trading relationships would have been temporarily interrupted. However, on Feb. 23, 2017, the U.S. prudential regulators released joint interagency guidance providing that with respect to counterparties of Covered Swap Entities that present significant credit and market risk exposures, compliance with VM Regulations is expected to be in
place on March 1, 2017. For other counterparties that do not present significant credit and market risk exposure, Covered Swap Entities are expected to make good faith efforts to comply with the VM Regulations as soon as possible, and in no case later than Sept. 1, 2017. Based in part on such guidance, no material interruptions occurred in BNY Mellon OTC derivatives trading relationships. 

BCBS Proposed Revisions to G-SIB Surcharge

On March 30, 2017, the Basel Committee on Banking Supervision (“BCBS”) proposed several changes to the framework for assessing and designating G-SIBs and determining their respective surcharges. The proposed changes would maintain the current assessment categories (cross-jurisdictional activity, size, interconnectedness, substitutability and complexity), but would revise indicators relating to certain categories.

The most significant proposed changes include:

Removal of the cap on the substitutability category, which includes payments, underwriting, and custody activities;
Modification of the weights in the substitutability category and introduction of a trading volume indicator; and
Potential inclusion of a short-term wholesale funding indicator in the interconnectedness category.

If adopted by the BCBS and implemented in the U.S., these revisions may increase the G-SIB surcharges on U.S banks that focus on providing investment services on an absolute basis and relative to other G-SIBs that do not focus on providing investment services.

BCBS Proposal on Step-in Risk

On March 15, 2017, the BCBS re-proposed guidelines that define and seek to manage the step-in risk that is potentially embedded in banks’ relationships with unconsolidated entities such as sponsored investment funds. Step-in risk is the risk that a bank might support entities beyond its contractual obligations in order to protect itself from any adverse reputational risk stemming from its connection to the entities. The guidelines propose criteria for identification of step-in risk that cover the risk characteristics of the entities based on, and in


54 BNY Mellon


some cases, in addition to banks’ relationships with them. The proposed framework entails no automatic capital or liquidity charge additional to the existing standards. Rather, the guidelines propose a framework in which banks would determine the appropriate response to significant step-in risk, subject to supervisory review.

Website information

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

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

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



56 BNY Mellon 55

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


Consolidated Income Statement (unaudited)

Quarter endedQuarter ended Year-to-date
March 31, 2017
Dec. 31, 2016
March 31, 2016
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$1,063
$1,068
$1,040
$1,105
$1,085
$1,067
 $3,253
$3,176
Clearing services376
355
350
383
394
349
 1,153
1,049
Issuer services251
211
244
288
241
337
 780
815
Treasury services139
140
131
141
140
137
 420
407
Total investment services fees1,829
1,774
1,765
1,917
1,860
1,890
 5,606
5,447
Investment management and performance fees842
848
812
901
879
860
 2,622
2,502
Foreign exchange and other trading revenue164
161
175
173
165
183
 502
540
Financing-related fees55
50
54
54
53
58
 162
169
Distribution and servicing41
41
39
40
41
43
 122
125
Investment and other income77
70
105
63
122
92
 262
271
Total fee revenue3,008
2,944
2,950
3,148
3,120
3,126
 9,276
9,054
Net securities gains — including other-than-temporary impairment10
12
19
18

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

2
(1)(1)
3
 (1)2
Net securities gains10
10
20
19

24
 29
65
Total fee and other revenue3,018
2,954
2,970
3,167
3,120
3,150
 9,305
9,119
Operations of consolidated investment management funds    
Investment income (loss)37
8
(3)
Investment income10
10
20
 57
27
Interest of investment management fund note holders4
3
3


3
 4
6
Income (loss) from consolidated investment management funds33
5
(6)
Income from consolidated investment management funds10
10
17
 53
21
Net interest revenue    
Interest revenue960
928
883
1,151
1,052
874
 3,163
2,647
Interest expense168
97
117
312
226
100
 706
340
Net interest revenue792
831
766
839
826
774
 2,457
2,307
Total revenue3,843
3,790
3,730
4,016
3,956
3,941
 11,815
11,447
Provision for credit losses(5)7
10
(6)(7)(19) (18)(18)
Noninterest expense    
Staff1,472
1,395
1,459
1,469
1,417
1,467
 4,358
4,338
Professional, legal and other purchased services312
325
278
305
319
292
 936
860
Software166
177
154
175
173
156
 514
470
Net occupancy136
153
142
141
139
143
 416
437
Distribution and servicing100
98
100
109
104
105
 313
307
Sub-custodian64
57
59
62
65
59
 191
188
Furniture and equipment57
60
65
58
59
59
 174
187
Bank assessment charges (a)
57
53
53
51
59
61
 167
166
Business development51
71
57
49
63
52
 163
174
Other (a)
167
175
188
177
192
170
 536
546
Amortization of intangible assets52
60
57
52
53
61
 157
177
Merger and integration, litigation and restructuring charges8
7
17
6
12
18
 26
42
Total noninterest expense2,642
2,631
2,629
2,654
2,655
2,643
 7,951
7,892
Income    
Income before income taxes1,206
1,152
1,091
1,368
1,308
1,317
 3,882
3,573
Provision for income taxes269
280
283
348
332
324
 949
897
Net income937
872
808
1,020
976
993
 2,933
2,676
Net (income) loss attributable to noncontrolling interests (includes $(18), $(4) and $7 related to consolidated investment management funds, respectively)(15)(2)9
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 Corporation922
870
817
1,018
975
987
 2,915
2,677
Preferred stock dividends(42)(48)(13)(35)(49)(13) (126)(74)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation$880
$822
$804
$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.




56 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 endedQuarter ended Year-to-date
March 31, 2017
Dec. 31, 2016
March 31, 2016
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$880
$822
$804
$983
$926
$974
 $2,789
$2,603
Less: Earnings allocated to participating securities(a)14
13
11
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$866
$809
$793
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 endedQuarter ended Year-to-date
March 31, 2017
Dec. 31, 2016
March 31, 2016
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in thousands) 
Basic1,041,158
1,050,888
1,079,641
1,035,337
1,035,829
1,062,248
 1,037,431
1,071,457
Common stock equivalents17,886
16,643
14,963
9,226
15,598
15,406
 14,216
15,306
Less: Participating securities(11,298)(10,713)(9,320)(3,425)(9,548)(9,972) (8,062)(9,613)
Diluted1,047,746
1,056,818
1,085,284
1,041,138
1,041,879
1,067,682
 1,043,585
1,077,150
    
Anti-dilutive securities (a)(b)
17,359
22,770
33,720
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
March 31, 2017
Dec. 31, 2016
March 31, 2016
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)March 31, 2017
Dec. 31, 2016
March 31, 2016
 
Basic$0.94
$0.88
$0.90
 $2.66
$2.39
Diluted$0.83
$0.77
$0.73
$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.


See accompanying Notes to Consolidated Financial Statements.



58 BNY Mellon 57

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

Consolidated Comprehensive Income Statement (unaudited)

Quarter endedQuarter ended Year-to-date
March 31, 2017
Dec. 31, 2016
March 31, 2016
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in millions) 
Net income$937
$872
$808
$1,020
$976
$993
 $2,933
$2,676
Other comprehensive income (loss), net of tax:    
Foreign currency translation adjustments125
(417)37
286
330
(186) 741
(433)
Unrealized gain (loss) on assets available-for-sale: 
Unrealized gain on assets available-for-sale:   
Unrealized gain (loss) arising during the period94
(469)163
28
91
(53) 213
227
Reclassification adjustment(6)(6)(15)(12)(1)(15) (19)(43)
Total unrealized gain (loss) on assets available-for-sale88
(475)148
16
90
(68) 194
184
Defined benefit plans:    
Net gain (loss) arising during the period2
(110)2
Net gain arising during the period


 2
2
Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost18
14
15
15
16
14
 49
43
Total defined benefit plans20
(96)17
15
16
14
 51
45
Net unrealized gain on cash flow hedges10

3
Net unrealized gain (loss) on cash flow hedges
1
2
 11
(4)
Total other comprehensive income (loss), net of tax (a)
243
(988)205
317
437
(238) 997
(208)
Total comprehensive income (loss)1,180
(116)1,013
Total comprehensive income1,337
1,413
755
 3,930
2,468
Net (income) loss attributable to noncontrolling interests(15)(2)9
(2)(1)(6) (18)1
Other comprehensive (income) loss attributable to noncontrolling interests(2)8
5
(5)(6)5
 (13)23
Comprehensive income (loss) applicable to the shareholders of The Bank of New York Mellon Corporation$1,163
$(110)$1,027
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 $241$312 million for the quarter ended March 31,Sept. 30, 2017, $(980)$431 million for the quarter ended Dec. 31, 2016 and $210June 30, 2017, $(233) million for the quarter ended March 31,Sept. 30, 2016, $984 million for the nine months ended Sept. 30, 2017 and $(185) million for the nine months ended Sept. 30, 2016.


See accompanying Notes to Consolidated Financial Statements.



58 BNY Mellon 59

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

Consolidated Balance Sheet (unaudited)

March 31, 2017
Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
(dollars in millions, except per share amounts)
Assets  
Cash and due from:  
Banks$5,366
$4,822
$5,557
$4,822
Interest-bearing deposits with the Federal Reserve and other central banks65,086
58,041
75,808
58,041
Interest-bearing deposits with banks14,554
15,086
15,256
15,086
Federal funds sold and securities purchased under resale agreements25,776
25,801
27,883
25,801
Securities:  

Held-to-maturity (fair value of $40,066 and $40,669)40,254
40,905
Held-to-maturity (fair value of $39,928 and $40,669)39,995
40,905
Available-for-sale75,580
73,822
80,054
73,822
Total securities115,834
114,727
120,049
114,727
Trading assets4,912
5,733
4,666
5,733
Loans60,868
64,458
59,068
64,458
Allowance for loan losses(164)(169)(161)(169)
Net loans60,704
64,289
58,907
64,289
Premises and equipment1,307
1,303
1,631
1,303
Accrued interest receivable551
568
547
568
Goodwill17,355
17,316
17,543
17,316
Intangible assets3,549
3,598
3,461
3,598
Other assets (includes $956 and $1,339, at fair value)21,515
20,954
Other assets (includes $827 and $1,339, at fair value)22,287
20,954
Subtotal assets of operations336,509
332,238
353,595
332,238
Assets of consolidated investment management funds, at fair value1,027
1,231
802
1,231
Total assets$337,536
$333,469
$354,397
$333,469
Liabilities  

Deposits:  

Noninterest-bearing (principally U.S. offices)$79,771
$78,342
$80,380
$78,342
Interest-bearing deposits in U.S. offices50,991
52,049
46,023
52,049
Interest-bearing deposits in Non-U.S. offices90,529
91,099
Interest-bearing deposits in non-U.S. offices104,593
91,099
Total deposits221,291
221,490
230,996
221,490
Federal funds purchased and securities sold under repurchase agreements11,149
9,989
10,314
9,989
Trading liabilities2,816
4,389
3,253
4,389
Payables to customers and broker-dealers21,306
20,987
21,176
20,987
Commercial paper2,543

2,501

Other borrowed funds1,022
754
3,353
754
Accrued taxes and other expenses
5,290
5,867
6,070
5,867
Other liabilities (including allowance for lending-related commitments of $112 and $112, also includes $555 and $597, at fair value)5,733
5,635
Long-term debt (includes $364 and $363, at fair value)26,346
24,463
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 operations297,496
293,574
313,266
293,574
Liabilities of consolidated investment management funds, at fair value209
315
27
315
Total liabilities297,705
293,889
313,293
293,889
Temporary equity  

Redeemable noncontrolling interests159
151
197
151
Permanent equity  

Preferred stock – par value $0.01 per share; authorized 100,000,000 shares; issued 35,826 and 35,826 shares3,542
3,542
3,542
3,542
Common stock – par value $0.01 per share; authorized 3,500,000,000 shares; issued 1,345,247,459 and 1,333,706,427 shares13
13
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 capital26,248
25,962
26,588
25,962
Retained earnings23,300
22,621
24,757
22,621
Accumulated other comprehensive loss, net of tax(3,524)(3,765)(2,781)(3,765)
Less: Treasury stock of 305,370,439 and 286,218,126 common shares, at cost(10,441)(9,562)
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’ equity39,138
38,811
40,523
38,811
Nonredeemable noncontrolling interests of consolidated investment management funds534
618
384
618
Total permanent equity39,672
39,429
40,907
39,429
Total liabilities, temporary equity and permanent equity$337,536
$333,469
$354,397
$333,469

See accompanying Notes to Consolidated Financial Statements.


BNY Mellon 59

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

Consolidated Statement of Cash Flows (unaudited)

 Three months ended March 31,
(in millions)2017
 2016
Operating activities   
Net income$937
 $808
Net (income) loss attributable to noncontrolling interests(15) 9
Net income applicable to shareholders of The Bank of New York Mellon Corporation922
 817
Adjustments to reconcile net income to net cash (used for) provided by operating activities:   
Provision for credit losses(5) 10
Pension plan contributions(5) (10)
Depreciation and amortization347
 364
Deferred tax (benefit)130
 (10)
Net securities (gains)(10) (20)
Change in trading assets and liabilities(751) 1,624
Originations of loans held-for-sale
 (142)
Proceeds from the sales of loans originated for sale
 199
Change in accruals and other, net(1,861) (1,038)
Net cash (used for) provided by operating activities(1,233) 1,794
Investing activities   
Change in interest-bearing deposits with banks738
 873
Change in interest-bearing deposits with the Federal Reserve and other central banks(6,569) 17,927
Purchases of securities held-to-maturity(2,896) (1,240)
Paydowns of securities held-to-maturity1,067
 979
Maturities of securities held-to-maturity2,469
 1,831
Purchases of securities available-for-sale(5,510) (7,018)
Sales of securities available-for-sale924
 1,989
Paydowns of securities available-for-sale2,023
 2,032
Maturities of securities available-for-sale1,462
 3,393
Net change in loans3,618
 1,942
Sales of loans and other real estate72
 168
Change in federal funds sold and securities purchased under resale agreements26
 (2,510)
Net change in seed capital investments72
 50
Purchases of premises and equipment/capitalized software(286) (148)
Other, net499
 (188)
Net cash (used for) provided by investing activities(2,291) 20,080
Financing activities   
Change in deposits(1,201) (23,675)
Change in federal funds purchased and securities sold under repurchase agreements1,160
 (199)
Change in payables to customers and broker-dealers311
 102
Change in other borrowed funds233
 251
Change in commercial paper2,543
 
Net proceeds from the issuance of long-term debt2,243
 997
Repayments of long-term debt(296) (1,200)
Proceeds from the exercise of stock options145
 42
Issuance of common stock7
 6
Treasury stock acquired(879) (577)
Common cash dividends paid(201) (186)
Preferred cash dividends paid(42) (13)
Other, net9
 (35)
Net cash provided by (used for) financing activities4,032
 (24,487)
Effect of exchange rate changes on cash36
 4
Change in cash and due from banks   
Change in cash and due from banks544
 (2,609)
Cash and due from banks at beginning of period4,822
 6,537
Cash and due from banks at end of period$5,366
 $3,928
Supplemental disclosures   
Interest paid$211
 $170
Income taxes paid100
 83
Income taxes refunded1
 25
See accompanying Notes to Consolidated Financial Statements.


60 BNY Mellon

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

Consolidated Statement of Cash Flows (unaudited)

 Nine months ended Sept. 30,
(in millions)2017
 2016
Operating activities   
Net income$2,933
 $2,676
Net (income) loss attributable to noncontrolling interests(18) 1
Net income applicable to shareholders of The Bank of New York Mellon Corporation2,915
 2,677
Adjustments to reconcile net income to net cash provided by operating activities:   
Provision for credit losses(18) (18)
Pension plan contributions(12) (17)
Depreciation and amortization1,044
 1,118
Deferred tax expense (benefit)272
 (282)
Net securities (gains)(29) (65)
Change in trading assets and liabilities(66) 1,680
Originations of loans held-for-sale
 (350)
Proceeds from the sales of loans originated for sale
 802
Change in accruals and other, net(756) (3,988)
Net cash provided by operating activities3,350
 1,557
Investing activities   
Change in interest-bearing deposits with banks507
 880
Change in interest-bearing deposits with the Federal Reserve and other central banks(14,467) 33,473
Purchases of securities held-to-maturity(5,878) (4,169)
Paydowns of securities held-to-maturity3,332
 3,577
Maturities of securities held-to-maturity3,412
 2,933
Purchases of securities available-for-sale(18,974) (21,491)
Sales of securities available-for-sale3,531
 5,624
Paydowns of securities available-for-sale7,047
 6,552
Maturities of securities available-for-sale4,820
 7,610
Net change in loans5,283
 (2,884)
Sales of loans and other real estate369
 172
Change in federal funds sold and securities purchased under resale agreements(2,082) (10,456)
Net change in seed capital investments(52) (57)
Purchases of premises and equipment/capitalized software(933) (495)
Proceeds from the sale of premises and equipment
 65
Acquisitions, net of cash
 (38)
Dispositions, net of cash
 1
Other, net82
 (239)
Net cash (used for) provided by investing activities(14,003) 21,058
Financing activities   
Change in deposits4,459
 (18,378)
Change in federal funds purchased and securities sold under repurchase agreements325
 (6,950)
Change in payables to customers and broker-dealers177
 (743)
Change in other borrowed funds2,187
 427
Change in commercial paper2,501
 
Net proceeds from the issuance of long-term debt4,739
 4,982
Repayments of long-term debt(796) (2,453)
Proceeds from the exercise of stock options383
 129
Issuance of common stock24
 20
Issuance of preferred stock
 990
Treasury stock acquired(2,035) (1,550)
Common cash dividends paid(653) (576)
Preferred cash dividends paid(126) (74)
Other, net46
 (2)
Net cash provided by (used for) financing activities11,231
 (24,178)
Effect of exchange rate changes on cash157
 (17)
Change in cash and due from banks   
Change in cash and due from banks735
 (1,580)
Cash and due from banks at beginning of period4,822
 6,537
Cash and due from banks at end of period$5,557
 $4,957
Supplemental disclosures   
Interest paid$721
 $371
Income taxes paid316
 597
Income taxes refunded19
 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 amount)
Preferred stock
Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated
other
comprehensive (loss) income,
net of tax

Treasury
stock

Preferred stock
Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated
other
comprehensive (loss) income,
net of tax

Treasury
stock

Balance at Dec. 31, 2016$3,542
$13
$25,962
$22,621
$(3,765)$(9,562)$618
$39,429
(a)$151
$3,542
$13
$25,962
$22,621
$(3,765)$(9,562)$618
$39,429
(a)$151
Shares issued to shareholders of noncontrolling interests







 13








 40
Redemption of subsidiary shares from noncontrolling interests







 (15)







 (16)
Other net changes in noncontrolling interests

(6)


(102)(108) 11


(11)


(258)(269) 15
Net income (loss)


922


18
940
 (3)


2,915


24
2,939
 (6)
Other comprehensive income



241


241
 2




984


984
 13
Dividends:      
Common stock at $0.19 per share


(201)


(201) 
Common stock at $0.62 per
share



(653)


(653) 
Preferred stock


(42)


(42) 



(126)


(126) 
Repurchase of common stock




(879)
(879) 





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

9




9
 


21




21
 
Direct stock purchase and dividend reinvestment plan

5




5
 


18




18
 
Stock awards and options exercised

278




278
 

1
598




599
 
Balance at March 31, 2017$3,542
$13
$26,248
$23,300
$(3,524)$(10,441)$534
$39,672
(a)$159
Balance at Sept. 30, 2017$3,542
$14
$26,588
$24,757
$(2,781)$(11,597)$384
$40,907
(a)$197
(a)Includes total The Bank of New York Mellon Corporation common shareholders’ equity of $35,269 million at Dec. 31, 2016 and $35,596$36,981 million at March 31,Sept. 30, 2017.


See accompanying Notes to Consolidated Financial Statements.




62 BNY Mellon 61

Notes to Consolidated Financial Statements
 


Note 1 - Basis of presentation

Basis of presentation

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

The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been made. These financial statements should be read in conjunction with BNY Mellon’s Annual Report on Form 10-K for the year ended Dec. 31, 2016. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with current period presentation.

Use of estimates

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

 
Note 2 - Accounting change and new accounting guidance

ASU 2017-04, Simplifying the Test for Goodwill Impairment

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

ASU 2016-09, Compensation Stock Compensation

In March 2016, the FASB issued ASU 2016-09, Compensation Stock Compensation. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classificationrecognition of awards as either equity or liabilitiesforfeitures and classification on the statement of cash flows. The adoption of this ASU results in increased volatility to the Company’s income tax expense. The income tax volatility is dependent on the Company’s stock price at dates restricted stock units vest, which occur on award vesting dates primarily in the first quarter of each year, and when employees choose to exercise stock options. The Company adopted this ASU effective Jan. 1, 2017.

As a result of applying this ASU, inFor the first quarternine months of 2017, we recorded an income tax benefit of approximately $32$45 million or $0.03 per common share, related to the annual vesting of stock awards and ouroption 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 price appreciating above the awards’ original grant price. Our effective tax rateunits vesting (which primarily occurs in the first quarter of 2017 also benefited by approximately 3%.each year), the number of stock options exercised and the change in value since the grant date.

We also determined that we will continue applying theto apply our accounting policy election to estimatefor estimating forfeitures.

Additionally, beginning in the quarter ended March 31, 2017, we are reportingreport excess tax benefits related to stock-based compensation as operating activities on the statement of cash flows on a prospective basis and the employee taxes paid will continue to be reported as financing activities.



62 BNY Mellon 63

Notes to Consolidated Financial Statements (continued)
 

Note 3 - Acquisitions and dispositions

We sometimes structure our acquisitions with both an initial payment and later contingent payments tied to post-closing revenue or income growth. There were no contingentContingent payments totaled $2 million in the third quarter of 2017 and the first quarternine months of 2017.

At March 31,Sept. 30, 2017, we are potentially obligated to pay additional consideration which, using reasonable assumptions, could range from $0 million to $1816 million over the next two years, but could be higher as certain of the arrangements do not contain a contractual maximum. The acquisition described below did not have a material impact on BNY Mellon’s results of operations.

Acquisition in 2016

On April 1, 2016, BNY Mellon acquired the assets of Atherton Lane Advisers, LLC, a U.S.-based investment manager with approximately $2.45 billion in AUM and servicer for approximately 700 high net 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 asset related to this acquisition is included in the Investment Management business, with an estimated life of 14 years, and totaled $30 million at acquisition.


 
Note 4 - Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of securities at March 31,Sept. 30, 2017 and Dec. 31, 2016.

Securities at March 31, 2017
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$15,692
$133
$158
$15,667
$15,389
$236
$123
$15,502
U.S. government agencies357
1
7
351
866
4
6
864
State and political subdivisions3,294
54
43
3,305
3,091
57
24
3,124
Agency RMBS22,912
142
320
22,734
24,546
135
250
24,431
Non-agency RMBS577
30
10
597
491
37
3
525
Other RMBS454
4
7
451
270
3
8
265
Commercial MBS913
7
9
911
960
9
4
965
Agency commercial MBS7,148
36
73
7,111
9,026
41
57
9,010
CLOs2,561
9

2,570
2,542
9
1
2,550
Other asset-backed securities1,454
5
3
1,456
1,152
5

1,157
Foreign covered bonds2,052
22
7
2,067
2,529
20
7
2,542
Corporate bonds1,361
20
15
1,366
1,262
21
8
1,275
Sovereign debt/sovereign guaranteed11,976
218
23
12,171
12,393
195
23
12,565
Other debt securities2,659
18
8
2,669
3,149
12
10
3,151
Equity securities2
1

3
2
2

4
Money market funds853


853
939


939
Non-agency RMBS (a)
1,016
287
5
1,298
885
304
4
1,185
Total securities available-for-sale (b)
$75,281
$987
$688
$75,580
$79,492
$1,090
$528
$80,054
Held-to-maturity:  
U.S. Treasury$10,596
$20
$37
$10,579
$9,867
$21
$29
$9,859
U.S. government agencies1,614

6
1,608
1,614

6
1,608
State and political subdivisions18

1
17
18

1
17
Agency RMBS25,132
85
271
24,946
25,575
96
185
25,486
Non-agency RMBS71
4
2
73
64
5

69
Other RMBS136

4
132
65

1
64
Commercial MBS7


7
6


6
Agency commercial MBS829
2
10
821
1,118
5
5
1,118
Foreign covered bonds75
2

77
83
1

84
Sovereign debt/sovereign guaranteed1,750
31
1
1,780
1,558
32

1,590
Other debt securities26


26
27


27
Total securities held-to-maturity$40,254
$144
$332
$40,066
$39,995
$160
$227
$39,928
Total securities$115,535
$1,131
$1,020
$115,646
$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 $59$53 million and gross unrealized losses of $179$155 million recorded in accumulated other comprehensive income related to investment securities that were transferred from available-for-sale to held-to-maturity. The unrealized gains and losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities.


64 BNY Mellon 63

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) 
(in millions)1Q17
4Q16
1Q16
3Q17
2Q17
3Q16
YTD17
YTD16
Realized gross gains$11
$15
$22
$20
$3
$26
$34
$71
Realized gross losses
(3)

(2)(1)(2)(1)
Recognized gross impairments(1)(2)(2)(1)(1)(1)(3)(5)
Total net securities gains$10
$10
$20
$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 March 31,Sept. 30, 2017, the unrealized losses on the investment securities portfolio were primarily attributable to an increase in interest rates from date of purchase, and for certain securities that were transferred from available-for-sale to held-to-maturity, an increase in interest rates through the date they were transferred. Specifically, $179$155 million of the unrealized losses at March 31,Sept. 30, 2017 and $190 million at Dec. 31, 2016 reflected in the available-for-sale sections of the tables below relate to certain securities (primarily Agency RMBS) that were transferred in prior periods from available-for-sale to held-to-maturity. The unrealized losses will be amortized into net interest revenue over the contractual lives of the securities. The transfer created a new cost basis for the securities. As a result, if these securities have experienced unrealized losses since the date of transfer, the corresponding fair value and unrealized losses would be reflected in the held-to-maturity sections of the following tables. We do not intend to sell these securities and it is not more likely than not that we will have to sell these securities.



64 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 March 31,Sept. 30, 2017 and Dec. 31, 2016.

Temporarily impaired securities at March 31, 2017Less 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$9,290
$158
 $
$
 $9,290
$158
$7,900
$111
 $495
$12
 $8,395
$123
U.S. government agencies300
7
 

 300
7
399
6
 

 399
6
State and political subdivisions593
24
 129
19
 722
43
310
4
 384
20
 694
24
Agency RMBS13,412
132
 1,771
188
 15,183
320
8,935
72
 4,145
178
 13,080
250
Non-agency RMBS27

 319
10
 346
10
5

 156
3
 161
3
Other RMBS7

 148
7
 155
7
72
4
 83
4
 155
8
Commercial MBS360
7
 149
2
 509
9
193
2
 92
2
 285
4
Agency commercial MBS2,542
65
 651
8
 3,193
73
3,610
47
 561
10
 4,171
57
Other asset-backed securities243

 182
3
 425
3
CLOs449
1
 

 449
1
Foreign covered bonds1,017
7
 28

 1,045
7
Corporate bonds562
15
 8

 570
15
306
3
 144
5
 450
8
Sovereign debt/sovereign guaranteed1,488
23
 57

 1,545
23
2,263
20
 137
3
 2,400
23
Other debt securities1,347
9
 84
1
 1,431
10
Non-agency RMBS (a)
31
1
 36
4
 67
5
8
2
 13
2
 21
4
Other debt securities853
8
 25

 878
8
Foreign covered bonds773
7
 

 773
7
Total securities available-for-sale (b)
$30,481
$447
 $3,475
$241
 $33,956
$688
$26,814
$288
 $6,322
$240
 $33,136
$528
Held-to-maturity:          
U.S. Treasury$8,166
$37
 $
$
 $8,166
$37
$7,281
$29
 $
$
 $7,281
$29
U.S. government agencies1,558
6
 

 1,558
6
1,459
5
 99
1
 1,558
6
State and political subdivisions

 4
1
 4
1


 4
1
 4
1
Agency RMBS19,369
268
 177
3
 19,546
271
17,125
172
 847
13
 17,972
185
Non-agency RMBS3

 45
2
 48
2
Other RMBS15

 35
1
 50
1
Agency commercial MBS558
10
 

 558
10
557
5
 

 557
5
Sovereign debt/sovereign guaranteed156
1
 

 156
1
Other RMBS

 110
4
 110
4
Total securities held-to-maturity$29,810
$322
 $336
$10
 $30,146
$332
$26,437
$211
 $985
$16
 $27,422
$227
Total temporarily impaired securities$60,291
$769
 $3,811
$251
 $64,102
$1,020
$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 $179$155 million were recorded in accumulated other comprehensive income and related to investment securities that were transferred from available-for-sale to held-to-maturity. The unrealized losses are primarily related to Agency RMBS and will be amortized into net interest revenue over the contractual lives of the securities. There were no gross unrealized losses for less than 12 months.


66 BNY Mellon 65

Notes to Consolidated Financial Statements (continued)
 

Temporarily impaired securities at Dec. 31, 2016Less than 12 months 12 months or more TotalLess 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$8,489
$181
 $
$
 $8,489
$181
$8,489
$181
 $
$
 $8,489
$181
U.S. government agencies257
9
 

 257
9
257
9
 

 257
9
State and political subdivisions1,058
33
 131
19
 1,189
52
1,058
33
 131
19
 1,189
52
Agency RMBS14,766
141
 1,673
200
 16,439
341
14,766
141
 1,673
200
 16,439
341
Non-agency RMBS21

 332
13
 353
13
21

 332
13
 353
13
Other RMBS26

 136
8
 162
8
26

 136
8
 162
8
Commercial MBS302
7
 163
4
 465
11
302
7
 163
4
 465
11
Agency commercial MBS3,570
78
 589
6
 4,159
84
3,570
78
 589
6
 4,159
84
CLOs443
1
 404

 847
1
443
1
 404

 847
1
Other asset-backed securities276
1
 357
5
 633
6
276
1
 357
5
 633
6
Foreign covered bonds712
9
 

 712
9
Corporate bonds594
16
 7
1
 601
17
594
16
 7
1
 601
17
Sovereign debt/sovereign guaranteed1,521
20
 63

 1,584
20
1,521
20
 63

 1,584
20
Other debt securities742
10
 50

 792
10
Non-agency RMBS (a)
25

 47
9
 72
9
25

 47
9
 72
9
Other debt securities742
10
 50

 792
10
Foreign covered bonds712
9
 

 712
9
Total securities available-for-sale (b)
$32,802
$506

$3,952
$265

$36,754
$771
$32,802
$506

$3,952
$265

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

 1,533
6
1,533
6
 

 1,533
6
State and political subdivisions

 4
1
 4
1


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

 48
2
 52
2
4

 48
2
 52
2
Other RMBS15

 123
4
 138
4
Agency commercial MBS621
10
 

 621
10
621
10
 

 621
10
Other RMBS15

 123
4
 138
4
Total securities held-to-maturity$27,783
$354

$277
$9

$28,060
$363
$27,783
$354

$277
$9

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

$4,229
$274

$64,814
$1,134
$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 March 31,Sept. 30, 2017.

Maturity distribution and yield on investment securities at March 31, 2017U.S. Treasury 
U.S. government
agencies
 
State and political
subdivisions
 Other bonds, notes and debentures 
Mortgage/
asset-backed and
equity securities
  
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
Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Amount
Yield (a)

 Total
Securities available-for-sale:                                
One year or less$2,934
0.98% $
% $276
2.55% $3,580
0.94% $
% $6,790
$2,223
1.02% $
% $438
2.60% $3,852
1.01% $
% $6,513
Over 1 through 5 years5,057
1.51
 114
1.30
 1,732
2.98
 12,348
1.02
 

 19,251
5,790
1.66
 174
1.29
 1,576
3.07
 12,648
0.99
 

 20,188
Over 5 through 10 years4,302
1.88
 237
2.35
 1,085
3.52
 2,177
1.09
 

 7,801
4,002
1.90
 690
2.46
 912
3.34
 2,835
0.81
 

 8,439
Over 10 years3,374
3.11
 

 212
2.04
 168
1.67
 

 3,754
3,487
3.11
 

 198
2.36
 198
1.64
 

 3,883
Mortgage-backed securities

 

 

 

 33,102
2.75
 33,102


 

 

 

 36,381
2.78
 36,381
Asset-backed securities

 

 

 

 4,026
2.10
 4,026


 

 

 

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


 

 

 

 856

 856


 

 

 

 943

 943
Total$15,667
1.86% $351
2.01% $3,305
3.06% $18,273
1.02% $37,984
2.62% $75,580
$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$3,999
0.89% $475
0.91% $
% $438
0.62% $
% $4,912
$4,943
0.97% $731
0.99% $
% $700
0.60% $
% $6,374
Over 1 through 5 years5,092
1.47
 1,089
1.23
 1
7.06
 752
0.62
 

 6,934
3,517
1.67
 883
1.38
 2
6.88
 307
0.59
 

 4,709
Over 5 through 10 years1,505
1.94
 50
2.02
 3
6.71
 661
0.71
 

 2,219
1,407
1.92
 

 2
6.86
 661
0.73
 

 2,070
Over 10 years

 

 14
5.34
 

 

 14


 

 14
5.32
 

 

 14
Mortgage-backed securities

 

 

 

 26,175
2.75
 26,175


 

 

 

 26,828
2.80
 26,828
Total$10,596
1.32% $1,614
1.16% $18
5.69% $1,851
0.65% $26,175
2.75% $40,254
$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.


66 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 March 31,Sept. 30, 2017 and Dec. 31, 2016.

Projected weighted-average default rates and loss severities
March 31, 2017 Dec. 31, 2016Sept. 30, 2017 Dec. 31, 2016
Default rate
Severity
 Default rate
Severity
Default rate
Severity
 Default rate
Severity
Alt-A30%54% 30%54%22%54% 30%54%
Subprime49%67% 49%70%38%66% 49%70%
Prime18%39% 18%39%13%39% 18%39%

 
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)1Q17
4Q16
1Q16
3Q17
2Q17
3Q16
YTD17
YTD16
Agency RMBS$1
$
$8
$4
$
$9
$5
$22
U.S. Treasury1
(1)(1)
4
Foreign covered bonds



10
Non-agency RMBS(1)7
(2)(1)
(1)(2)1
Other10
3
14
15
1
17
26
28
Total net securities gains$10
$10
$20
$19
$
$24
$29
$65


The following table reflectstables 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)1Q17
1Q16
3Q17
3Q16
Beginning balance as of Jan.1$88
$91
Beginning balance as of June 30$85
$91
Add: Initial OTTI credit losses



Subsequent OTTI credit losses1
2
1
1
Less: Realized losses for securities sold

2
5
Ending balance as of March 31$89
$93
Ending balance as of Sept. 30$84
$87

Debt securities credit loss roll forward  
(in millions)YTD17
YTD16
Beginning balance as of Jan. 1$88
$91
Add: Initial OTTI credit losses

 Subsequent OTTI credit losses3
5
Less: Realized losses for securities sold7
9
Ending balance as of Sept. 30$84
$87


Pledged assets

At March 31,Sept. 30, 2017, BNY Mellon had pledged assets of $100$108 billion, including $84$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 March 31,Sept. 30, 2017 included $85$92 billion of securities, $8$13 billion of loans, $5$2 billion of trading assets and $1 billion of interest-bearing deposits with banks and $2 billion of trading assets.banks.



68 BNY Mellon

Notes to Consolidated Financial Statements(continued)

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



BNY Mellon 67

Notes to Consolidated Financial Statements(continued)

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

At March 31,Sept. 30, 2017 and Dec. 31, 2016, pledged assets included $5$13 billion and $6 billion, respectively, for which the recipients were permitted to sell or repledge the assets delivered.

We also obtain securities as collateral, including receipts under resale agreements, securities borrowed, derivative contracts and custody agreements on terms which permit us to sell or repledge the securities to others. At March 31,Sept. 30, 2017 and Dec. 31, 2016, the market value of the securities received that can be sold or repledged was $50$68 billion and $50 billion, respectively. We routinely sell or repledge these securities through delivery to third parties. As of March 31,Sept. 30, 2017 and Dec. 31, 2016, the market value of securities collateral sold or repledged was $23$39 billion and $20 billion, respectively.

Restricted cash and securities

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

 
Note 5 - Loans and asset quality

Loans

The table below provides the details of our loan portfolio and industry concentrations of credit risk at March 31,Sept. 30, 2017 and Dec. 31, 2016.

LoansMarch 31, 2017
Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
(in millions)
Domestic:  
Financial institutions$5,387
$6,342
$5,155
$6,342
Commercial2,543
2,286
2,698
2,286
Wealth management loans and mortgages15,909
15,555
16,161
15,555
Commercial real estate4,698
4,639
4,921
4,639
Lease financings846
989
823
989
Other residential mortgages817
854
741
854
Overdrafts673
1,055
1,487
1,055
Other1,119
1,202
1,159
1,202
Margin loans16,081
17,503
13,720
17,503
Total domestic48,073
50,425
46,865
50,425
Foreign:  
Financial institutions7,954
8,347
6,741
8,347
Commercial347
331
305
331
Wealth management loans and mortgages114
99
104
99
Commercial real estate19
15
6
15
Lease financings739
736
522
736
Other (primarily overdrafts)3,554
4,418
4,373
4,418
Margin loans68
87
152
87
Total foreign12,795
14,033
12,203
14,033
Total loans (a)
$60,868
$64,458
$59,068
$64,458
(a)
Net of unearned income of $511414 million at March 31,Sept. 30, 2017 and $527 million at Dec. 31, 2016 primarily on domestic and foreign lease financings.


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

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



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.

Allowance for credit losses activity for the quarter ended March 31, 2017Wealth 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$82
$73
$26
$13
$
 $36
$281
$80
$75
$23
$10
$25
$23
$
 $34
$270
Charge-offs




(1)
 
(1)






 

Recoveries




1

 
1





1

 
1
Net recoveries






 






1

 
1
Provision

(3)(3)3
(3)
 1
(5)1


(1)(4)(3)
 1
(6)
Ending balance$82
$73
$23
$10
$26
$25
$
 $37
$276
$81
$75
$23
$9
$21
$21
$
 $35
$265
Allowance for:      
Loan losses$24
$54
$5
$10
$22
$25
$
 $24
$164
$26
$57
$7
$9
$17
$21
$
 $24
$161
Lending-related commitments58
19
18

4


 13
112
55
18
16

4


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



3


 
3


2




 
2
Collectively evaluated for impairment:      
Loan balance$2,543
$4,698
$5,387
$846
$15,904
$817
$17,873
(a)$12,795
$60,863
$2,698
$4,921
$5,153
$823
$16,156
$741
$16,366
(a)$12,203
$59,061
Allowance for loan losses24
54
5
10
19
25

 24
161
26
57
5
9
17
21

 24
159
(a)Includes $673$1,487 million of domestic overdrafts, $16,081$13,720 million of margin loans and $1,119$1,159 million of other loans at March 31,Sept. 30, 2017.


Allowance for credit losses activity for the quarter ended Dec. 31, 2016Wealth management loans and mortgages
Other
residential
mortgages

   
Allowance for credit losses activity for the quarter ended June 30, 2017Allowance 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

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$91
$63
$29
$14
$
 $31
$274
$82
$73
$23
$10
$26
$25
$
 $37
$276
Charge-offs




(1)
 
(1)






 

Recoveries




1

 
1





1

 
1
Net recoveries






 






1

 
1
Provision(9)10
(3)(1)5


 5
7
(2)2


(1)(3)
 (3)(7)
Ending balance$82
$73
$26
$13
$23
$28
$
 $36
$281
$80
$75
$23
$10
$25
$23
$
 $34
$270
Allowance for:      
Loan losses$25
$52
$8
$13
$19
$28
$

$24
$169
$26
$55
$7
$10
$21
$23
$

$23
$165
Lending-related commitments57
21
18

4



12
112
54
20
16

4



11
105
Individually evaluated for impairment:      
Loan balance$
$
$
$4
$5
$
$

$
$9
$
$
$2
$
$7
$
$

$
$9
Allowance for loan losses


2
3




5


2

3




5
Collectively evaluated for impairment:      
Loan balance$2,286
$4,639
$6,342
$985
$15,550
$854
$19,760
(a)$14,033
$64,449
$2,580
$5,017
$5,952
$847
$16,024
$780
$15,950
(a)$14,514
$61,664
Allowance for loan losses25
52
8
11
16
28


24
164
26
55
5
10
18
23


23
160
(a)Includes $1,055$855 million of domestic overdrafts, $17,503$13,973 million of margin loans and $1,202$1,122 million of other loans at Dec. 31, 2016.June 30, 2017.




70 BNY Mellon 69

Notes to Consolidated Financial Statements (continued)
 

Allowance for credit losses activity for the quarter ended March 31, 2016Wealth management loans and mortgages
Other
residential
mortgages

All
Other

 Foreign
Total
Allowance for credit losses activity for the quarter ended Sept. 30, 2016Allowance 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

Wealth management loans and mortgages
Other
residential
mortgages

All
Other

 Foreign
Total
Commercial
Commercial
real estate

Financial
institutions

Lease
financings

 
Beginning balance$82
$59
$31
$15
 $90
$63
$29
$14
$18
$29
$
 $37
$280
Charge-offs






 






(1)
 
(1)
Recoveries




2

 
2


13


1

 
14
Net recoveries




2

 
2


13




 
13
Provision6
3
1
1
(1)(4)
 4
10
1

(13)

(1)
 (6)(19)
Ending balance$88
$62
$32
$16
$18
$32
$
 $39
$287
$91
$63
$29
$14
$18
$28
$
 $31
$274
Allowance for:      
Loan losses$25
$40
$11
$16
$15
$32
$
 $23
$162
$22
$45
$9
$14
$14
$28
$
 $16
$148
Lending-related commitments63
22
21

3


 16
125
69
18
20

4


 15
126
Individually evaluated for impairment:      
Loan balance$
$2
$171
$5
$8
$
$
 $
$186
$
$1
$
$4
$4
$
$
 $
$9
Allowance for loan losses
1

2
1


 
4

1

2



 
3
Collectively evaluated for impairment:      
Loan balance$2,130
$3,927
$5,415
$973
$13,874
$993
$20,697
(a)$13,044
$61,053
$2,292
$4,693
$6,783
$1,013
$15,027
$901
$20,189
(a)$15,061
$65,959
Allowance for loan losses25
39
11
14
14
32

 23
158
22
44
9
12
14
28

 16
145
(a)Includes $917$1,580 million of domestic overdrafts, $18,674$17,487 million of margin loans and $1,106$1,122 million of other loans at March 31,Sept. 30, 2016.


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


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 71

Notes to Consolidated Financial Statements(continued)

Nonperforming assets

The table below presents the distribution of our nonperforming assets. 

 
Nonperforming assets
(in millions)
March 31, 2017
Dec. 31, 2016
 
 Nonperforming loans:  
 Other residential mortgages$88
$91
 Wealth management loans and mortgages10
8
 Lease financings
4
 Total nonperforming loans98
103
 Other assets owned9
4
 Total nonperforming assets$107
$107
 
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 March 31,Sept. 30, 2017, undrawn commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material.
 
Lost interest

The table below presents the amount of lost interest income.

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





70 BNY Mellon

Notes to Consolidated Financial Statements(continued)


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 ended3Q172Q173Q16 YTD17YTD16
March 31, 2017 Dec. 31, 2016 March 31, 2016
(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

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

1



 1



Wealth management loans and mortgages3

 2

 6

2

3

3

 3

5

Lease financings2

 4

 2





4

 1

3

Total impaired loans with an allowance5

 6

 9

4

4

8

 5

9

Impaired loans without an allowance:
        
Commercial real estate

 

 1





1

 

1

Financial institutions

 

 171





85

 

128

Wealth management loans and mortgages2

 3

 2

4

3

3

 3

2

Total impaired loans without an allowance (a)
2

 3

 174

4

3

89

 3

131

Total impaired loans$7
$
 $9
$
 $183
$
$8
$
$7
$
$97
$
 $8
$
$140
$
(a)When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.




72 BNY Mellon

Notes to Consolidated Financial Statements(continued)

Impaired loansMarch 31, 2017 Dec. 31, 2016Sept. 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$
$3
$
 $
$3
$
$
$3
$
 $
$3
$
Financial institutions2
2
2
 


Wealth management loans and mortgages3
3
3
 3
3
3
1
1

 3
3
3
Lease financings


 4
4
2



 4
4
2
Total impaired loans with an allowance3
6
3
 7
10
5
3
6
2
 7
10
5
Impaired loans without an allowance:
      
Wealth management loans and mortgages2
2
N/A
 2
2
N/A
4
4
N/A
 2
2
N/A
Total impaired loans without an allowance (b)
2
2
N/A
 2
2
N/A
4
4
N/A
 2
2
N/A
Total impaired loans (c)
$5
$8
$3
 $9
$12
$5
$7
$10
$2
 $9
$12
$5
(a)The allowance for impaired loans is included in the allowance for loan losses.
(b)When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans.
(c)
Excludes an aggregate of less than $1 million of impaired loans in amounts individually less than $1 million at both March 31,Sept. 30, 2017 and Dec. 31, 2016, respectively. The allowance for loan losslosses associated with these loans totaled less than $1 million at both March 31,Sept. 30, 2017 and Dec. 31, 2016, respectively.


Past due loans

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

Past due loans and still accruing interestMarch 31, 2017 Dec. 31, 2016Sept. 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
Commercial real estate$51
$60
$
$111
 $78
$
$
$78
Wealth management loans and mortgages$25
$3
$
$28
 $21
$2
$
$23
86
15
1
102
 21
2

23
Commercial real estate21


21
 78


78
Other residential mortgages13
2
4
19
 20
6
7
33
20
3
5
28
 20
6
7
33
Financial institutions



 1
27

28




 1
27

28
Total past due loans$59
$5
$4
$68

$120
$35
$7
$162
$157
$78
$6
$241

$120
$35
$7
$162
 



BNY Mellon 71

Notes to Consolidated Financial Statements(continued)

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 first quarter of 2017, fourth quarter of 2016 and first quarter of 2016.our TDRs.

TDRs1Q17 4Q16 1Q163Q17 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 mortgages6
 $2
 $2
 17
 $3
 $4
 13
 $3
 $3
19
 $5
 $5
 16
 $4
 $4
 17
 $4
 $4
Wealth management loans and mortgages1
 4
 4
 
 
 
 2
 
 
1
 2
 2
 
 
 
 
 
 
Total TDRs7
 $6
 $6
 17
 $3
 $4
 15
 $3
 $3
20
 $7
 $7
 16
 $4
 $4
 17
 $4
 $4




BNY Mellon 73

Notes to Consolidated Financial Statements(continued)

Other residential mortgages

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

TDRs that subsequently defaulted

There were seventhree residential mortgage loans and one wealth management loan and mortgage that had been
restructured in a TDR during the previous 12
months and have subsequently defaulted in the firstthird quarter of 2017. The total recorded investment of these loans was $2less 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 category
Commercial Commercial real estate Financial institutionsCommercial Commercial real estate Financial institutions
March 31,
2017

Dec. 31, 2016
 March 31,
2017

Dec. 31, 2016
 March 31,
2017

Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
 Sept. 30, 2017
Dec. 31, 2016
 Sept. 30, 2017
Dec. 31, 2016
(in millions)    
Investment grade$2,697
$2,397
 $3,903
$3,823
 $10,255
$11,459
$2,857
$2,397
 $4,339
$3,823
 $9,217
$11,459
Non-investment grade193
220
 814
831
 3,086
3,230
146
220
 588
831
 2,679
3,230
Total$2,890
$2,617
 $4,717
$4,654
 $13,341
$14,689
$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.



72 BNY Mellon

Notes to Consolidated Financial Statements(continued)

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)March 31,
2017

Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
Wealth management loans:  
Investment grade$7,300
$7,127
$7,128
$7,127
Non-investment grade155
260
135
260
Wealth management mortgages8,568
8,267
9,002
8,267
Total$16,023
$15,654
$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

Notes to Consolidated Financial Statements(continued)

than 1% of the mortgages were past due at March 31,Sept. 30, 2017.

At March 31,Sept. 30, 2017, the wealth management mortgage portfolio consisted of the following geographic concentrations: California - 24%; New York - 19%; Massachusetts - 12%11%; Florida - 7%8%; and other - 38%.

Other residential mortgages

The other residential mortgage portfolio primarily consists of 1-4 family residential mortgage loans and
totaled $817$741 million at March 31,Sept. 30, 2017 and $854 million at Dec. 31, 2016. These loans are not typically correlated to external ratings. Included in this portfolio at March 31,Sept. 30, 2017 are $208$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 March 31,Sept. 30, 2017, the purchased loans in this portfolio had a weighted-average loan-to-value ratio of 76% at origination and 14%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 $4.2$5.8 billion at March 31, Sept. 30,
2017 and $5.5 billion at Dec. 31, 2016. Overdrafts occur on a daily basis in the custody and securities clearance business and are generally repaid within two business days.

Other loans

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

Margin loans

We had $16.1$13.9 billion of secured margin loans on our balance sheet at March 31,Sept. 30, 2017 compared with $17.6 billion at Dec. 31, 2016. Margin loans are collateralized with marketable securities, and borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. We have rarely suffered a loss on these types of loans and do not allocate any of our allowance for credit losses to margin loans.

Reverse repurchase agreements

Reverse repurchase agreements are transactions fully collateralized with high-quality liquid securities. These transactions carry minimal credit risk and therefore are not allocated an allowance for credit losses.



BNY Mellon 73

Notes to Consolidated Financial Statements(continued)

Note 6 - Goodwill and intangible assets

Goodwill

The tables below provide a breakdown of goodwill by business.

Goodwill by business
(in millions)
Investment
Management

Investment
Services

Other
Consolidated
Investment
Management

Investment
Services

Other
Consolidated
Balance at Dec. 31, 2016$9,000
$8,269
$47
$17,316
$9,000
$8,269
$47
$17,316
Foreign currency translation21
18

39
120
107

227
Balance at March 31, 2017$9,021
$8,287
$47
$17,355
Balance at Sept. 30, 2017$9,120
$8,376
$47
$17,543


Goodwill by business
(in millions)
Investment
Management

Investment
Services

Other
Consolidated
Investment
Management

Investment
Services

Other
Consolidated
Balance at Dec. 31, 2015$9,207
$8,366
$45
$17,618
$9,207
$8,366
$45
$17,618
Acquisitions29
(1)
28
Foreign currency translation(32)18

(14)(167)(30)
(197)
Balance at March 31, 2016$9,175
$8,384
$45
$17,604
Other (a)
2
(4)2

Balance at Sept. 30, 2016$9,071
$8,331
$47
$17,449


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(15)(37)
(52)
Foreign currency translation3


3
Balance at March 31, 2017$1,705
$995
$849
$3,549


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
Amortization(19)(38)
(57)
Foreign currency translation(6)2

(4)
Balance at March 31, 2016$1,782
$1,150
$849
$3,781

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



74 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 assetsMarch 31, 2017 Dec. 31, 2016Sept. 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

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)
   
Subject to amortization: (a)
   
Customer relationships—Investment Management$1,444
$(1,154)$290
11 years $1,439
$(1,136)$303
$1,483
$(1,221)$262
11 years $1,439
$(1,136)$303
Customer contracts—Investment Services2,251
(1,629)622
10 years 2,249
(1,590)659
2,257
(1,705)552
10 years 2,249
(1,590)659
Other38
(34)4
2 years 37
(33)4
25
(22)3
2 years 37
(33)4
Total subject to amortization3,733
(2,817)916
10 years 3,725
(2,759)966
3,765
(2,948)817
10 years 3,725
(2,759)966
Not subject to amortization: (b)
      
Trade name1,348
N/A
1,348
N/A 1,348
N/A
1,348
1,350
N/A
1,350
N/A 1,348
N/A
1,348
Customer relationships1,285
N/A
1,285
N/A 1,284
N/A
1,284
1,294
N/A
1,294
N/A 1,284
N/A
1,284
Total not subject to amortization2,633
N/A
2,633
N/A 2,632
N/A
2,632
2,644
N/A
2,644
N/A 2,632
N/A
2,632
Total intangible assets$6,366
$(2,817)$3,549
N/A $6,357
$(2,759)$3,598
$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)
 
Estimated amortization expense
(in millions)
 
2017 $208
 $209
2018 178
 180
2019 108
 109
2020 98
 98
2021 75
 75


Impairment testing

The goodwill impairment test is performed at least annually at the reporting unit level. Intangible assets not subject to amortization are tested for impairment annually or more often if events or circumstances indicate they may be impaired.

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


76 BNY Mellon

Notes to Consolidated Financial Statements(continued)

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

Note 7 - Other assets 

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

Other assetsMarch 31, 2017
Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
(in millions)
Corporate/bank-owned life insurance$4,806
$4,789
$4,824
$4,789
Accounts receivable4,684
4,060
3,899
4,060
Fails to deliver2,260
1,732
3,532
1,732
Software1,458
1,451
1,513
1,451
Renewable energy investments1,266
1,282
1,344
1,282
Equity in a joint venture and other investments1,153
1,063
Income taxes receivable1,214
1,172
1,020
1,172
Equity in a joint venture and other investments1,067
1,063
Tax advantaged low income housing investments900
914
Qualified affordable housing project investments

988
914
Prepaid pension assets874
836
951
836
Prepaid expenses522
438
512
438
Federal Reserve Bank stock474
466
Fair value of hedging derivatives482
784
344
784
Federal Reserve Bank stock469
466
Due from customers on acceptances318
340
Seed capital303
395
302
395
Due from customers on acceptances129
340
Private equity46
43
Other1,035
1,189
Other (a)
1,113
1,232
Total other assets$21,515
$20,954
$22,287
$20,954
(a)At Sept. 30, 2017, other assets include $76 million of Federal Home Loan Bank stock, at cost.


Qualified affordable housing project investments

We invest in affordable housing projects primarily to satisfy the Company’s requirements under the Community Reinvestment Act. Our total investment in qualified affordable housing projects totaled $988 million at Sept. 30, 2017 and $914 million at Dec. 31, 2016. Commitments to fund future investments in qualified affordable housing projects totaled $439 million at Sept. 30, 2017 and $369 million at Dec. 31, 2016. A summary of the commitments to fund future investments is as follows: 2017$75 million; 2018
$161 million; 2019$107 million; 2020$79 million; 2021$1 million; and 2022 and thereafter$16 million.

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

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

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

In our Investment Management business, we manage investment assets, including equities, fixed income, money market and alternative investment funds for institutions and other investors. As part of that activity, we make seed capital investments in certain


BNY Mellon 75

Notes to Consolidated Financial Statements(continued)

funds. BNY Mellon also holds private equity investments, specifically in small business investment companies (“SBICs”), which are compliant with the Volcker Rule. Seed capital and private equity investments are generally included in other assets. Certain risk retention investments in our CLOs are classified as available-for-sale securities.

The fair value of certain of these investments has been estimated using the NAV per share of BNY Mellon’s ownership interest in the funds. The table below presents information about 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
March 31, 2017 Dec. 31, 2016Sept. 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)
$104
 $1
Daily-quarterly1-95 days $171
 $1
Daily-quarterly1-180 days$97
 $2
Daily-quarterly1-95 days $171
 $1
Daily-quarterly1-180 days
Private equity investments (SBICs) (b)
46
 45
N/A 43
 46
N/A54
 47
N/A 43
 46
N/A
Total$150
 $46
  $214
 $47
 $151
 $49
  $214
 $47
 
(a)Other funds include various leveraged loans, hedge funds and structured credit funds. Redemption notice periods vary by fund.
(b)Private equity investments primarily include Volcker Rule-compliant investments in SBICs that invest in various sectors of the economy. Private equity investments do not have redemption rights. Distributions from such investments will be received as the underlying investments in the private equity investments are liquidated.


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 $900 million at March 31, 2017 and $914 million at Dec. 31, 2016. Commitments to fund future investments in qualified affordable housing projects totaled $355 million at March 31, 2017 and $369 million at Dec. 31, 2016. A summary of the commitments to fund future investments is as follows: 2017$126 million; 2018$132 million; 2019$81 million; 2020$2
million; 2021$1 million; and 2022 and thereafter$13 million.

Tax credits and other tax benefits recognized were $38 million in the first quarter 2017, $38 million in the first quarter of 2016 and $40 million in the fourth quarter of 2016.

Amortization expense included in the provision for income taxes was $27 million in the first quarter 2017, $28 million in the first quarter of 2016 and $29 million in the fourth quarter of 2016.



76 BNY Mellon 77

Notes to Consolidated Financial Statements (continued)
 

Note 8 - Net interest revenue

The following table provides the components of net interest revenue presented on the consolidated income statement.

Net interest revenueQuarter endedQuarter ended Year-to-date
March 31, 2017
Dec. 31, 2016
March 31, 2016
Sept. 30, 2017
June 30, 2017
Sept. 30, 2016
 Sept. 30, 2017
Sept. 30, 2016
(in millions) 
Interest revenue    
Non-margin loans$245
$236
$205
$283
$272
$218
 $800
$637
Margin loans75
71
63
87
87
67
 249
194
Securities:    
Taxable461
465
444
510
476
434
 1,447
1,307
Exempt from federal income taxes17
17
18
16
16
17
 49
53
Total securities478
482
462
526
492
451

1,496
1,360
Deposits with banks22
28
26
34
27
26
 83
76
Deposits with the Federal Reserve and other central banks57
28
61
89
71
37
 217
170
Federal funds sold and securities purchased under resale agreements67
66
49
119
86
62
 272
167
Trading assets16
17
17
13
17
13
 46
43
Total interest revenue960
928
883
1,151
1,052
874

3,163
2,647
Interest expense    
Deposits9
(5)15
57
32
(6) 98
21
Federal funds purchased and securities sold under repurchase agreements24
8
9
70
38
6
 132
28
Trading liabilities2
1
2
2
2
2
 6
5
Other borrowed funds2
3
2
7
4
1
 13
5
Commercial paper5


8
5
1
 18
5
Customer payables7
3
4
19
16
3
 42
9
Long-term debt119
87
85
149
129
93
 397
267
Total interest expense168
97
117
312
226
100

706
340
Net interest revenue792
831
766
839
826
774

2,457
2,307
Provision for credit losses(5)7
10
(6)(7)(19) (18)(18)
Net interest revenue after provision for credit losses$797
$824
$756
$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 endedQuarter ended
March 31, 2017 March 31, 2016
Net periodic benefit (credit) costSept. 30, 2017 June 30, 2017 Sept. 30, 2016
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
 Domestic pension benefits
Foreign pension benefits
Health care benefits
 Domestic pension benefits
Foreign pension benefits
Health care benefits
Service cost$
$7
$
 $
$8
$1
$
$7
$
 $
$7
$
 $
$8
$1
Interest cost45
8
2
 45
9
2
45
8
2
 45
8
2
 45
9
2
Expected return on assets(81)(12)(2) (82)(13)(2)(81)(12)(2) (81)(12)(2) (82)(13)(2)
Other17
9
(1) 18
4
(1)17
9
(1) 17
9
(1) 17
4
(1)
Net periodic benefit (credit) cost$(19)$12
$(1) $(19)$8
$
$(19)$12
$(1) $(19)$12
$(1) $(20)$8
$


Note 10 - Income taxes

BNY Mellon recorded an income tax provision of $269 million (22.3% effective tax rate) in the first quarter of 2017 and $283 million (25.9% effective tax rate) in the first quarter of 2016. The effective tax rate for the first quarter of 2017 reflects an approximate 3% benefit primarily driven by applying
the new accounting guidance included in ASU 2016-09, Compensation Stock Compensation, to the annual vesting of stock awards and our stock price appreciating above the awards’ original grant price.

Our total tax reserves as of March 31, 2017 were $150 million compared with $146 million at Dec. 31, 2016. If these tax reserves were unnecessary, $150


78 BNY Mellon 77

Notes to Consolidated Financial Statements (continued)
 

Net periodic benefit (credit) cost Year-to-date  
 Sept. 30, 2017 Sept. 30, 2016
(in millions)Domestic pension benefits
Foreign pension benefits
Health care benefits
 Domestic pension benefits
Foreign pension benefits
Health care benefits
Service cost$
$21
$
 $
$24
$3
Interest cost135
24
6
 135
27
6
Expected return on assets(243)(36)(6) (246)(39)(6)
Other51
27
(3) 52
13
(3)
Net periodic benefit (credit) cost$(57)$36
$(3) $(59)$25
$


Note 10 - Income taxes

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

Our total tax reserves as of Sept. 30, 2017 were $157 million compared with $143 million at June 30, 2017. If these tax reserves were unnecessary, $157 million would affect the effective tax rate in future periods. We recognize accrued interest and penalties, if applicable, related to income taxes in income tax expense. Included in the balance sheet at March 31,Sept. 30, 2017 is accrued interest, where applicable, of $21$24 million. The additional tax expense related to interest for the threenine months ended March 31,Sept. 30, 2017 was $2$7 million, compared with $2 million for the threenine months ended March 31,Sept. 30, 2016.

It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by approximately $13$57 million as a result of adjustments related to tax years that are still subject to examination.

Our federal income tax returns are closed to examination through 2013. Our New York State, New York City and UK income tax returns are closed to examination through 2012.

Note 11 - SecuritizationsVariable interest entities and variable interest entitiessecuritization

BNY Mellon has variable interests in VIEs, which include investments in retail, institutional and alternative investment funds, including collateralized loan obligation (“CLO”) structures in which we provide asset management services, some of which are consolidated. The investment funds are offered to our retail and institutional clients to provide them
with access to investment vehicles with specific investment objectives and strategies that address the client’s investment needs.

BNY Mellon earns management fees from these funds as well as performance fees in certain funds and may also provide start-up capital for its new funds. The funds are primarily financed by our customers’ investments in the funds’ equity or debt.

Additionally, BNY Mellon invests in qualified affordable housing and renewable energy projects, which are designed to generate a return primarily through the realization of tax credits by the Company. The projects, which are structured as limited partnerships and LLCs, are also VIEs, but are not consolidated.

The VIEs discussed above are included in the scope of ASU 2015-02, which was adopted effective Jan. 1, 2015, and are reviewed for consolidation based on the guidance in ASC 810, Consolidation.

We reconsider and reassess whether or not we are the primary beneficiary of a VIE when governing documents or contractual arrangements are changed that would reallocate the obligation to absorb expected losses or receive expected residual returns between BNY Mellon and the other investors. This could occur when BNY Mellon disposes of its variable interests in the fund, when additional variable interests are issued to other investors or when we acquire additional variable interests in the VIE.

The following tables present the incremental assets and liabilities included in BNY Mellon’s consolidated financial statements, after applying intercompany eliminations, as of March 31,Sept. 30, 2017 and Dec. 31, 2016. The net assets of any consolidated VIE are solely available to settle the liabilities of the VIE and to settle any investors’ ownership liquidation requests, including any seed capital invested in the VIE by BNY Mellon.

Investments consolidated at March 31, 2017
(in millions)
Investment
Management
funds
Securitizations
Total
consolidated
investments

Available-for-sale securities$
 $400
$400
Trading assets883
 
883
Other assets144
 
144
Total assets$1,027
(a)$400
$1,427
Other liabilities$209
 $364
$573
Total liabilities$209
(a)$364
$573
Nonredeemable noncontrolling interests$534
(a)$
$534
(a)Includes voting model entities (“VMEs”) with assets of $85 million, liabilities of $1 million and nonredeemable noncontrolling interests of $14 million.




78 BNY Mellon 79

Notes to Consolidated Financial Statements (continued)
 

Investments consolidated at Dec. 31, 2016
Investments consolidated at Sept. 30, 2017Investments consolidated at Sept. 30, 2017
(in millions)
Investment
Management
funds
Securitizations
Total
consolidated
investments

Investment
Management
funds
Securitization
Total
consolidated
investments

Available-for-sale securities$
 $400
$400
Securities - Available-for-sale$
 $400
$400
Trading assets979
 
979
576
 
576
Other assets252
 
252
226
 
226
Total assets$1,231
(a)$400
$1,631
$802
(a)$400
$1,202
Trading liabilities$282
 $
$282
Other liabilities33
 363
396
$27
 $369
$396
Total liabilities$315
(a)$363
$678
$27
(a)$369
$396
Nonredeemable noncontrolling interests$618
(a)$
$618
$384
(a)$
$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 $114 million, liabilities of $3 million and nonredeemable noncontrolling interests of $25 million.


BNY Mellon has not provided financial or other support that was not otherwise contractually required to be provided to our VIEs. Additionally, creditors of any consolidated VIEs do not have any recourse to the general credit of BNY Mellon.

 
Non-consolidated VIEs

As of March 31,Sept. 30, 2017 and Dec. 31, 2016, the following assets and liabilities related to the VIEs where BNY Mellon is not the primary beneficiary are included in our consolidated financial statements.statements and primarily relate to accounting for our investments in qualified affordable housing and renewable energy projects.

Non-consolidated VIEs at March 31, 2017
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$2,451
$355
$2,806
2,559
439
3,321
(a)Investments in the Company’s sponsored CLOs.


Non-consolidated VIEs at Dec. 31, 2016
(in millions)Assets
Liabilities
Maximum loss exposure
Assets
Liabilities
Maximum loss exposure
Securities - Available-for-sale (a)
$42
$
$42
Other$2,442
$369
$2,811
2,400
369
2,769
(a)Investments in the Company’s sponsored CLOs.


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



80 BNY Mellon

Notes to Consolidated Financial Statements(continued)

Note 12 - Preferred stock

BNY Mellon has 100 million authorized shares of preferred stock with a par value of $0.01 per share. The following table summarizes BNY Mellon’s preferred stock issued and outstanding at March 31,Sept. 30, 2017 and Dec. 31, 2016.

Preferred stock summary (a)
Preferred stock summary (a)
Total shares issued and outstanding 
Carrying value (b)
Preferred stock summary (a)
Total shares issued and outstanding 
Carrying value (b)
 (in millions) (in millions)
Per annum dividend rateMarch 31, 2017
Dec. 31, 2016
March 31, 2017
Dec. 31, 2016
Per annum dividend rateSept. 30, 2017
Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
Series AGreater of (i) three-month LIBOR plus 0.565% for the related distribution period; or (ii) 4.000%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
$500
Series C5.2%5,825
5,825
 568
568
5.2%5,825
5,825
 568
568
Series D4.50% 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
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 E4.95% 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
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 F4.625% 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
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
TotalTotal35,826
35,826
 $3,542
$3,542
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.


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

$1,000.001,022.22 per share on the Series A Preferred Stock (equivalent to $10.0000$10.2222 per Normal
Preferred Capital Security of Mellon Capital IV, each representing a 1/100th interest in a share of the Series A Preferred Stock);
$1,300.00 per share on the Series C Preferred Stock (equivalent to $0.3250 per depositary share, each representing a 1/4,000th interest in a share of the Series C Preferred Stock); and


BNY Mellon 79

Notes to Consolidated Financial Statements(continued)

$2,942.012,312.50 per share on the Series F Preferred Stock (equivalent to $29.4201$23.1250 per depositary share, each representing a 1/100th interest in a share of the Series F Preferred Stock).

For additional information on the preferred stock, see Note 13 of the Notes to Consolidated Financial Statements in our 2016 Annual Report.

Terms of the Series A, Series C, Series D, Series E and Series F preferred stock are more fully described in each of their Certificates of Designations, each of which is filed as an Exhibit to this Form 10-Q.



BNY Mellon 81

Notes to Consolidated Financial Statements(continued)

Note 13 - Other comprehensive income (loss)

Components of other comprehensive income (loss)Quarter endedQuarter ended
March 31, 2017 Dec. 31, 2016 March 31, 2016Sept. 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)
$96
$29
$125
 $(295)$(122)$(417) $45
$(8)$37
$221
$65
$286
 $249
$81
$330
 $(104)$(82)$(186)
Total foreign currency translation96
29
125
 (295)(122)(417) 45
(8)37
221
65
286
 249
81
330
 (104)(82)(186)
Unrealized gain (loss) on assets available-for-sale:          
Unrealized gain (loss) arising during period164
(70)94
 (726)257
(469) 243
(80)163
47
(19)28
 146
(55)91
 (87)34
(53)
Reclassification adjustment (b)
(10)4
(6) (10)4
(6) (20)5
(15)(19)7
(12) 
(1)(1) (24)9
(15)
Net unrealized gain (loss) on assets available-for-sale154
(66)88
 (736)261
(475) 223
(75)148
28
(12)16
 146
(56)90
 (111)43
(68)
Defined benefit plans:          
Net gain (loss) arising during the period3
(1)2
 (154)44
(110) 3
(1)2



 


 


Foreign exchange adjustment


 (1)1

 


Amortization of prior service credit, net loss and initial obligation included in net periodic benefit cost (b)
25
(7)18
 23
(9)14
 22
(7)15
25
(10)15
 24
(8)16
 22
(8)14
Total defined benefit plans28
(8)20
 (132)36
(96) 25
(8)17
25
(10)15
 24
(8)16
 22
(8)14
Unrealized gain (loss) on cash flow hedges:          
Unrealized hedge gain (loss) arising during period14
(5)9
 63
(20)43
 (81)27
(54)(2)
(2) (8)4
(4) (24)7
(17)
Reclassification adjustment (b)
1

1
 (65)22
(43) 86
(29)57
3
(1)2
 9
(4)5
 28
(9)19
Net unrealized gain (loss) on cash flow hedges15
(5)10
 (2)2

 5
(2)3
1
(1)
 1

1
 4
(2)2
Total other comprehensive income (loss)$293
$(50)$243
 $(1,165)$177
$(988) $298
$(93)$205
$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

Notes to Consolidated Financial Statements(continued)

Note 14 - Fair value measurement

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. A three-level hierarchy for fair value measurements is utilized based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. BNY Mellon’s own creditworthiness is considered when valuing liabilities. See Note 18 of the Notes to Consolidated Financial Statements in our 2016 Annual Report for information on how we determine fair value and the fair value hierarchy.
 
The following tables present the financial instruments carried at fair value at March 31,Sept. 30, 2017 and Dec. 31, 2016, by caption on the consolidated balance sheet and by the three-level valuation hierarchy. We have included credit ratings information in certain of the tables because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications could result in increased risk for us. There were no material transfers between Level 1 and Level 2 during the firstthird quarter of 2017.

Assets 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)

Available-for-sale securities:     
U.S. Treasury$15,502
$
$
$
$15,502
U.S. government agencies
864


864
Sovereign debt/sovereign guaranteed74
12,491


12,565
State and political subdivisions
3,124


3,124
Agency RMBS
24,431


24,431
Non-agency RMBS
525


525
Other RMBS
265


265
Commercial MBS
965


965
Agency commercial MBS
9,010


9,010
CLOs
2,550


2,550
Other asset-backed securities
1,157


1,157
Equity securities4



4
Money market funds (b)
939



939
Corporate bonds
1,275


1,275
Other debt securities
3,151


3,151
Foreign covered bonds2,284
258


2,542
Non-agency RMBS (c)

1,185


1,185
Total available-for-sale securities18,803
61,251


80,054
Trading assets:     
Debt and equity instruments (b)
433
1,016


1,449
Derivative assets not designated as hedging:     
Interest rate3
6,731

(5,301)1,433
Foreign exchange
4,879

(3,120)1,759
Equity and other contracts1
73

(49)25
Total derivative assets not designated as hedging4
11,683

(8,470)3,217
Total trading assets437
12,699

(8,470)4,666
Other assets:     
Derivative assets designated as hedging:     
Interest rate
307


307
Foreign exchange
37


37
Total derivative assets designated as hedging
344


344
Other assets (d)
148
184


332
Other assets measured at net asset value (d)
    151
Total other assets148
528


827
Subtotal assets of operations at fair value19,388
74,478

(8,470)85,547
Percentage of assets of operations prior to netting21%79%%  
Assets of consolidated investment management funds398
404


802
Total assets$19,786
$74,882
$
$(8,470)$86,349
Percentage of total assets prior to netting21%79%%  


80 BNY Mellon 83

Notes to Consolidated Financial Statements (continued)
 

Assets measured at fair value on a recurring basis at March 31, 2017Total carrying
value

(dollar amounts in millions)Level 1
Level 2
Level 3
Netting (a)

Available-for-sale securities:     
U.S. Treasury$15,667
$
$
$
$15,667
U.S. government agencies
351


351
Sovereign debt/sovereign guaranteed68
12,103


12,171
State and political subdivisions
3,305


3,305
Agency RMBS
22,734


22,734
Non-agency RMBS
597


597
Other RMBS
451


451
Commercial MBS
911


911
Agency commercial MBS
7,111


7,111
CLOs
2,570


2,570
Other asset-backed securities
1,456


1,456
Equity securities3



3
Money market funds (b)
853



853
Corporate bonds
1,366


1,366
Other debt securities
2,669


2,669
Foreign covered bonds1,897
170


2,067
Non-agency RMBS (c)

1,298


1,298
Total available-for-sale securities18,488
57,092


75,580
Trading assets:     
Debt and equity instruments (b)
340
2,109


2,449
Derivative assets not designated as hedging:     
Interest rate3
6,885

(5,365)1,523
Foreign exchange
3,119

(2,195)924
Equity and other contracts
51

(35)16
Total derivative assets not designated as hedging3
10,055

(7,595)2,463
Total trading assets343
12,164

(7,595)4,912
Other assets:     
Derivative assets designated as hedging:     
Interest rate
327


327
Foreign exchange
155


155
Total derivative assets designated as hedging
482


482
Other assets (d)
283
41


324
Other assets measured at net asset value (d)
    150
Total other assets283
523


956
Subtotal assets of operations at fair value19,114
69,779

(7,595)81,448
Percentage of assets prior to netting22%78%%  
Assets of consolidated investment management funds363
664


1,027
Total assets$19,477
$70,443
$
$(7,595)$82,475
Percentage of assets prior to netting22%78%%  


BNY Mellon 81

Notes to Consolidated Financial Statements(continued)

Liabilities measured at fair value on a recurring basis at March 31, 2017Total 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$777
$190
$
$
$967
$684
$159
$
$
$843
Derivative liabilities not designated as hedging:  
Interest rate2
6,899

(6,529)372
3
6,681

(5,705)979
Foreign exchange
3,055

(1,645)1,410

4,463

(3,095)1,368
Equity and other contracts
121

(54)67
3
135

(75)63
Total derivative liabilities not designated as hedging2
10,075

(8,228)1,849
6
11,279

(8,875)2,410
Total trading liabilities779
10,265

(8,228)2,816
690
11,438

(8,875)3,253
Long-term debt (b)

364


364

369


369
Other liabilities derivative liabilities designated as hedging:
  
Interest rate
467


467

494


494
Foreign exchange
88


88

318


318
Total other liabilities – derivative liabilities designated as hedging
555


555

812


812
Subtotal liabilities of operations at fair value779
11,184

(8,228)3,735
690
12,619

(8,875)4,434
Percentage of liabilities prior to netting7%93%% 
Percentage of liabilities of operations prior to netting5%95%% 
Liabilities of consolidated investment management funds1
208


209
2
25


27
Total liabilities$780
$11,392
$
$(8,228)$3,944
$692
$12,644
$
$(8,875)$4,461
Percentage of liabilities prior to netting6%94%% 
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.


8284 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

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

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

(dollar amounts in millions)Level 1
Level 2
Level 3
Netting (a)

Level 1
Level 2
Level 3
Netting (a)

Available-for-sale securities:  
U.S. Treasury$14,307
$
$
$
$14,307
$14,307
$
$
$
$14,307
U.S. government agencies
359


359

359


359
Sovereign debt/sovereign guaranteed66
12,423


12,489
66
12,423


12,489
State and political subdivisions
3,378


3,378

3,378


3,378
Agency RMBS
22,736


22,736

22,736


22,736
Non-agency RMBS
638


638

638


638
Other RMBS
513


513

513


513
Commercial MBS
928


928

928


928
Agency commercial MBS
6,449


6,449

6,449


6,449
CLOs
2,598


2,598

2,598


2,598
Other asset-backed securities
1,727


1,727

1,727


1,727
Equity securities3



3
3



3
Money market funds (b)
842



842
842



842
Corporate bonds
1,396


1,396

1,396


1,396
Other debt securities
1,961


1,961

1,961


1,961
Foreign covered bonds1,876
265


2,141
1,876
265


2,141
Non-agency RMBS (c)

1,357


1,357

1,357


1,357
Total available-for-sale securities17,094
56,728


73,822
17,094
56,728


73,822
Trading assets:  
Debt and equity instruments (b)
240
2,013


2,253
240
2,013


2,253
Derivative assets not designated as hedging:  
Interest rate4
7,583

(6,047)1,540
4
7,583

(6,047)1,540
Foreign exchange
6,104

(4,172)1,932

6,104

(4,172)1,932
Equity and other contracts
46

(38)8

46

(38)8
Total derivative assets not designated as hedging4
13,733

(10,257)3,480
4
13,733

(10,257)3,480
Total trading assets244
15,746

(10,257)5,733
244
15,746

(10,257)5,733
Other assets:
  
Derivative assets designated as hedging:  
Interest rate
415


415

415


415
Foreign exchange
369


369

369


369
Total derivative assets designated as hedging
784


784

784


784
Other assets (d)
268
73


341
268
73


341
Other assets measured at net asset value (d)
 214
 214
Total other assets268
857


1,339
268
857


1,339
Subtotal assets of operations at fair value17,606
73,331

(10,257)80,894
17,606
73,331

(10,257)80,894
Percentage of assets prior to netting19%81%% 
Percentage of assets of operations prior to netting19%81%% 
Assets of consolidated investment management funds464
767


1,231
464
767


1,231
Total assets$18,070
$74,098
$
$(10,257)$82,125
$18,070
$74,098
$
$(10,257)$82,125
Percentage of assets prior to netting20%80%% 
Percentage of total assets prior to netting20%80%% 



BNY Mellon 8385

Notes to Consolidated Financial Statements (continued)
 

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

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

(dollar amounts in millions)Level 1
Level 2
Level 3
Netting (a)

Level 1
Level 2
Level 3
Netting (a)

Trading liabilities:  
Debt and equity instruments$349
$236
$
$
$585
$349
$236
$
$
$585
Derivative liabilities not designated as hedging:  
Interest rate4
7,629

(6,634)999
4
7,629

(6,634)999
Foreign exchange
6,103

(3,363)2,740

6,103

(3,363)2,740
Equity and other contracts
115

(50)65

115

(50)65
Total derivative liabilities not designated as hedging4
13,847

(10,047)3,804
4
13,847

(10,047)3,804
Total trading liabilities353
14,083

(10,047)4,389
353
14,083

(10,047)4,389
Long-term debt (b)

363


363

363


363
Other liabilities derivative liabilities designated as hedging:
  
Interest rate
545


545

545


545
Foreign exchange
52


52

52


52
Total other liabilities – derivative liabilities designated as hedging
597


597

597


597
Subtotal liabilities of operations at fair value353
15,043

(10,047)5,349
353
15,043

(10,047)5,349
Percentage of liabilities prior to netting2%98%% 
Percentage of liabilities of operations prior to netting2%98%% 
Liabilities of consolidated investment management funds3
312


315
3
312


315
Total liabilities$356
$15,355
$
$(10,047)$5,664
$356
$15,355
$
$(10,047)$5,664
Percentage of liabilities prior to netting2%98%% 
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.



8486 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Details of certain items measured at fair value
on a recurring basis
March 31, 2017 Dec. 31, 2016Sept. 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$51
 %%%100% $58
 %%%100%$42
 %%%100% $58
 %%%100%
200693
 


100
 98
 


100
85
 


100
 98
 


100
2005169
 24
3
7
66
 180
 23
5
9
63
152
 20
3
18
59
 180
 23
5
9
63
2004 and earlier284
 5
3
23
69
 302
 5
3
24
68
246
 4
2
27
67
 302
 5
3
24
68
Total non-agency RMBS$597
 9%2%13%76% $638
 9%3%14%74%$525
 8%2%14%76% $638
 9%3%14%74%
Commercial MBS - Domestic, originated in:              
2009-2017$705
 86%14%%% $674
 84%16%%%$909
 89%11%%% $674
 84%16%%%
200813
 100



 14
 100



5
 100



 14
 100



2007142
 62
38


 190
 71
29



 



 190
 71
29


20062
 6
3

91
 3
 7
93



 



 3
 7
93


Total commercial MBS - Domestic$862
 82%18%%% $881
 81%19%%%$914
 89%11%%% $881
 81%19%%%
Foreign covered bonds:              
Canada$1,468
 100%%%% $1,320
 100%%%%$1,648
 100%%%% $1,320
 100%%%%
Australia261
 100



 40
 100



Netherlands177
 100



 160
 100



United Kingdom112
 100



 280
 100



136
 100



 280
 100



Netherlands162
 100



 160
 100



Other325
 100



 381
 100



320
 100



 341
 100



Total foreign covered bonds$2,067
 100%%%% $2,141
 100%%%%$2,542
 100%%%% $2,141
 100%%%%
European floating rate notes - available-for-sale:              
United Kingdom$321
 88%12%%% $379
 90%10%%%$204
 87%13%%% $379
 90%10%%%
Netherlands121
 100



 125
 100



113
 37
63


 125
 100



Ireland58
 

100

 58
 

100


 



 58
 

100

Total European floating rate notes - available-for-sale$500
 81%7%12%% $562
 83%7%10%%$317
 69%31%%% $562
 83%7%10%%
Sovereign debt/sovereign guaranteed:              
United Kingdom$2,816
 100%%%% $3,209
 100%%%%$3,036
 100%%%% $3,209
 100%%%%
France2,005
 100



 1,998
 100



1,993
 100



 1,998
 100



Spain1,774
 

100

 1,749
 

100

1,740
 

100

 1,749
 

100

Germany1,394
 100



 1,347
 100



1,688
 100



 1,347
 100



Italy1,138
 

100

 1,130
 

100

1,169
 

100

 1,130
 

100

Netherlands1,019
 100



 1,061
 100



1,016
 100



 1,061
 100



Ireland832
 
100


 736
 
100


Belgium958
 100



 1,005
 100



809
 100



 1,005
 100



Ireland735
 
100


 736
 
100


Other (b)
332
 58


42
 254
 71


29
Other (c)
282
 48
3

49
 254
 71


29
Total sovereign debt/sovereign guaranteed$12,171
 69%6%24%1% $12,489
 70%6%23%1%$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$376
 %%%100% $387
 %%%100%$337
 %%%100% $387
 %%%100%
2006373
 


100
 391
 


100
345
 


100
 391
 


100
2005414
 
2
1
97
 437
 
2
1
97
387
 1
1
1
97
 437
 
2
1
97
2004 and earlier135
 2
2
17
79
 142
 2
2
17
79
116
 2
2
22
74
 142
 2
2
17
79
Total non-agency RMBS (c)
$1,298
 %1%2%97% $1,357
 %1%2%97%
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 March 31,Sept. 30, 2017 and Dec. 31, 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)IncludedIncludes noninvestment grade sovereign debtdebt/sovereign guaranteed securities related to Brazil of $140 million at March 31,Sept. 30, 2017 and $73 million at Dec. 31, 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 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 8587

Notes to Consolidated Financial Statements (continued)
 

determining the fair value of Level 3 assets and liabilities.

There were no financial instruments recorded at fair value on a recurring basis classified in Level 3 of the valuation hierarchy in the first nine months of 2017.
The table below includes a roll forward of the balance sheet amount for the quarterthree and nine months ended March 31,Sept. 30, 2016 (including the change in fair value), for financial instruments classified in Level 3 of the valuation hierarchy.

Fair value measurements for assets using significant unobservable inputs for the quarter ended March 31, 2016
(in millions) Loans
 
Fair value at Dec. 31, 2015 $
 
Transfers into Level 3 19
 
Total gains or (losses) for the period included in earnings 2
(a)
Purchases 48
 
Fair value at March 31, 2016 $69
 
Change in unrealized gains or (losses) for the period included in earnings for assets held at the end of the reporting period $2
 
Fair value measurements for assets using significant unobservable inputsLoans
(in millions)3Q16
YTD16
Fair value at the beginning of the period$101
$
Transfers into Level 3
19
Total gains for the period included in earnings (a)

2
Purchases and sales:  
Purchases
113
Issuances1
1
Sales(102)(135)
Fair value at Sept. 30, 2016$
$
Change in unrealized gains for the period included in earnings for assets held at the end of the reporting period$
$
(a)Reported in investment and other income.


Assets and liabilities measured at fair value on a nonrecurring basis

Under certain circumstances, we make adjustments to fair value our assets, liabilities and unfunded lending-related commitments although they are not measured at fair value on an ongoing basis. An example would be the recording of an impairment of an asset.
 
The following tables present the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy as of March 31,Sept. 30, 2017 and Dec. 31, 2016, for which a nonrecurring change in fair value has been recorded during the quarters ended March 31,Sept. 30, 2017 and Dec. 31, 2016.

Assets measured at fair value on a nonrecurring basis at March 31, 2017
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)
$
$83
$3
$
$75
$7
$82
Other assets (b)

5
35
40

4

4
Total assets at fair value on a nonrecurring basis$
$88
$38
$126
$
$79
$7
$86
 

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

(in millions)Level 1
Level 2
Level 3
Loans (a)
$
$84
$7
$91
Other assets (b)

4

4
Total assets at fair value on a nonrecurring basis$
$88
$7
$95
(a)During the quarters ended March 31,Sept. 30, 2017 and Dec. 31, 2016, the fair value of these loans decreased less than $1 million and $1 million, respectively, based on the fair value of the underlying collateral based on guidance in ASC 310, Receivables, with an offset to the allowance for credit losses.
(b)Includes other assets received in satisfaction of debt.


Estimated fair value of financial instruments

The following tables present the estimated fair value and the carrying amount of financial instruments not carried at fair value on the consolidated balance sheet at March 31,Sept. 30, 2017 and Dec. 31, 2016, by caption on the consolidated balance sheet and by the valuation
 
hierarchy. See Note 18 of the Notes to Consolidated Financial Statements in our 2016 Annual Report for additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value.



8688 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Summary of financial instrumentsMarch 31, 2017Sept. 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$
$65,086
$
$65,086
$65,086
$
$75,808
$
$75,808
$75,808
Interest-bearing deposits with banks
14,554

14,554
14,554

15,254

15,254
15,256
Federal funds sold and securities purchased under resale agreements
25,776

25,776
25,776

27,883

27,883
27,883
Securities held-to-maturity10,656
29,410

40,066
40,254
9,943
29,985

39,928
39,995
Loans (a)

59,399

59,399
59,119

57,709

57,709
57,562
Other financial assets5,366
1,098

6,464
6,464
5,557
1,169

6,726
6,726
Total$16,022
$195,323
$
$211,345
$211,253
$15,500
$207,808
$
$223,308
$223,230
Liabilities:  
Noninterest-bearing deposits$
$79,771
$
$79,771
$79,771
$
$80,380
$
$80,380
$80,380
Interest-bearing deposits
139,777

139,777
141,520

148,967

148,967
150,616
Federal funds purchased and securities sold under repurchase agreements
11,149

11,149
11,149

10,314

10,314
10,314
Payables to customers and broker-dealers
21,306

21,306
21,306

21,176

21,176
21,176
Commercial paper
2,543

2,543
2,543

2,501

2,501
2,501
Borrowings
1,185

1,185
1,185

3,544

3,544
3,544
Long-term debt
26,149

26,149
25,982

28,335

28,335
28,039
Total$
$281,880
$
$281,880
$283,456
$
$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)
March 31, 2017 
Sept. 30, 2017 
Securities available-for-sale$10,494
$10,549
$96
$(271)$12,416
$12,333
$56
$(337)
Long-term debt22,192
22,200
228
(196)24,249
24,200
249
(157)
Dec. 31, 2016Dec. 31, 2016 Dec. 31, 2016 
Securities available-for-sale$9,184
$9,233
$83
$(342)$9,184
$9,233
$83
$(342)
Long-term debt20,511
20,450
330
(203)20,511
20,450
330
(203)


BNY Mellon 8789

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
March 31, 2017
Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
(in millions)
Assets of consolidated investment management funds:  
Trading assets$883
$979
$576
$979
Other assets144
252
226
252
Total assets of consolidated investment management funds$1,027
$1,231
$802
$1,231
Liabilities of consolidated investment management funds:  
Trading liabilities$
$282
$
$282
Other liabilities209
33
27
33
Total liabilities of consolidated investment management funds$209
$315
$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 $240 million of long-term debt. The fair value of this long-term debt was $364369 million at March 31,Sept. 30, 2017 and $363 million at Dec. 31, 2016. The long-term debt is valued using observable market inputs and is included in Level 2 of the valuation hierarchy.

The following table presents the changes in fair value of long-term debt and certain loans for which we elected the fair value option that we previously held in 2016, and the location of the changes in the consolidated income statement.

 
Impact of changes in fair value in the income statement (a)
Impact of changes in fair value in the income statement (a)
Impact of changes in fair value in the income statement (a)
Quarter ended
(in millions)March 31, 2017
Dec. 31, 2016
March 31, 2016
3Q17
2Q17
3Q16
YTD17
YTD16
Loans:  
Investment and other income$
$(1)$9
$
$
$(1)$
$13
Long-term debt:  
Foreign exchange and other trading (loss) revenue$(1)$13
$(13)
Foreign exchange and other trading revenue$(1)$(4)$2
$(6)$(17)
(a)The changes in fair value of the loans and long-term debt are approximately offset by economic hedges included in foreign exchange and other trading revenue.


Note 16 - Derivative instruments

We use derivatives to manage exposure to market risk, including interest rate risk, equity price risk and foreign currency risk, as well as credit risk. Our trading activities are focused on acting as a market-maker for our customers and facilitating customer trades in compliance with the Volcker Rule.

The notional amounts for derivative financial instruments express the dollar volume of the transactions; however, credit risk is much smaller. We perform credit reviews and enter into netting agreements and collateral arrangements to minimize the credit risk of derivative financial instruments. We enter into offsetting positions to reduce exposure to foreign currency, interest rate and equity price risk.

Use of derivative financial instruments involves reliance on counterparties. Failure of a counterparty to honor its obligation under a derivative contract is a risk we assume whenever we engage in a derivative contract. There were no counterparty default losses recorded in the firstthird quarter of 2017 or the firstthird quarter of 2016.

Hedging derivatives

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



8890 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

The available-for-sale investment securities hedged consist of U.S. Treasury bonds, agency commercial mortgage-backed securities,MBS, sovereign debt and covered bonds that had original maturities of 30 years or less at initial purchase. The swaps on all of these investment securities are not callable. All of these securities are hedged with “pay fixed rate, receive variable rate” swaps of similar maturity, repricing and fixed rate coupon. At March 31,Sept. 30, 2017, $10.5$12.4 billion face amount of securities were hedged with interest rate swaps that had notional values of $10.5$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 March 31,Sept. 30, 2017, $22.2$24.2 billion par value of debt was hedged with interest rate swaps that had notional values of $22.2$24.2 billion.

In addition, we enter into foreign exchange hedges. We use forward foreign exchange contracts with maturities of nine months or less to hedge our Indian rupee, British pound, Hong Kong dollar, Singapore dollar, euroPolish zloty, Canadian dollar and Canadian 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 March 31,Sept. 30, 2017, the hedged forecasted foreign currency transactions and designated forward foreign exchange contract hedges were $341$539 million (notional), with a pre-tax loss of $8$9 million recorded in accumulated other comprehensive income. This loss will be reclassified to income or expense over the next nine months.

 
Forward foreign exchange contracts are also used to hedge the value of our net investments in foreign subsidiaries. These forward foreign exchange contracts have maturities of less than two years. The derivatives employed are designated as hedges of changes in value of our foreign investments due to exchange rates. Changes in the value of the forward foreign exchange contracts offset the changes in value of the foreign investments due to changes in foreign exchange rates. The change in fair market value of these forward foreign exchange contracts is deferred and reported within foreign currency translation adjustments in shareholders’ equity, net of tax. At March 31,Sept. 30, 2017, forward foreign exchange contracts with notional amounts totaling $7.3$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 March 31,Sept. 30, 2017, had a combined U.S. dollar equivalent value of $163$181 million.

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

IneffectivenessQuarter endedNine months ended
(in millions)March 31, 2017
Dec. 31, 2016
March 31, 2016
Sept. 30, 2017
Sept. 30, 2016
Fair value hedges of securities$0.6
$7.0
$(1.1)$(13.3)$(5.4)
Fair value hedges of long-term debt(4.8)17.8
(12.5)0.1
(23.0)
Cash flow hedges




Other (a)





Total$(4.2)$24.8
$(13.6)$(13.2)$(28.4)
(a)Includes ineffectiveness recorded on foreign exchange hedges.


BNY Mellon 8991

Notes to Consolidated Financial Statements (continued)
 

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

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)March 31, 2017
Dec. 31, 2016
 March 31, 2017
Dec. 31, 2016
 March 31, 2017
Dec. 31, 2016
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$32,749
$29,683
 $327
$415
 $467
$545
$36,533
$29,683
 $307
$415
 $494
$545
Foreign exchange contracts7,605
7,796
 155
369
 88
52
8,399
7,796
 37
369
 318
52
Total derivatives designated as hedging instruments  $482
$784
 $555
$597
  $344
$784
 $812
$597
Derivatives not designated as hedging instruments: (b)
          
Interest rate contracts$291,694
$325,412
 $6,888
$7,587
 $6,901
$7,633
$283,384
$325,412
 $6,734
$7,587
 $6,684
$7,633
Foreign exchange contracts564,599
530,729
 3,119
6,104
 3,055
6,103
639,336
530,729
 4,879
6,104
 4,463
6,103
Equity contracts1,236
1,167
 51
46
 118
112
1,354
1,167
 74
46
 134
112
Credit contracts160
160
 

 3
3
180
160
 

 4
3
Total derivatives not designated as hedging instruments  $10,058
$13,737
 $10,077
$13,851
  $11,687
$13,737
 $11,285
$13,851
Total derivatives fair value (c)
  $10,540
$14,521
 $10,632
$14,448
  $12,031
$14,521
 $12,097
$14,448
Effect of master netting agreements (d)
  (7,595)(10,257) (8,228)(10,047)  (8,470)(10,257) (8,875)(10,047)
Fair value after effect of master netting agreements  $2,945
$4,264
 $2,404
$4,401
  $3,561
$4,264
 $3,222
$4,401
(a)The fair value of asset derivatives and liability derivatives designated as hedging instruments is recorded as other assets and other liabilities, respectively, on the balance sheet.
(b)The fair value of asset derivatives and liability derivatives not designated as hedging instruments is recorded as trading assets and trading liabilities, respectively, on the balance sheet.
(c)Fair values are on a gross basis, before consideration of master netting agreements, as required by ASC 815, Derivatives and Hedging.
(d)
Effect of master netting agreements includes cash collateral received and paid of $752$834 million and $1,385$1,239 million, respectively, at March 31,Sept. 30, 2017, and $1,119 million and $909 million, respectively, at Dec. 31, 2016.


The following tables present the impact of derivative instruments used in fair value, cash flow and net investment hedging relationships onin 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
1Q17
 4Q16
 1Q16
 1Q17
 4Q16
 1Q16
3Q17
 2Q17
 3Q16
 3Q17
 2Q17
 3Q16
Interest rate contractsNet interest revenue $10
 $171
 $(148) Net interest revenue $(14) $(147) $134
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)
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)
1Q17
4Q16
1Q16
 1Q17
4Q16
1Q16
 1Q17
4Q16
1Q16
3Q17
2Q17
3Q16
 3Q17
2Q17
3Q16
 3Q17
2Q17
3Q16
FX contracts$
$(2)$6
 Net interest revenue $
$(2)$5
 Net interest revenue $
$
$
$
$
$(7) Net interest revenue $
$
$(6) Net interest revenue $
$
$
FX contracts


 Other revenue 


 Other revenue 


3
(1)
 Other revenue 


 Other revenue 


FX contracts3
73
(89) Trading revenue 3
73
(89) Trading revenue 


(1)
(19) Trading revenue (1)
(19) Trading revenue 


FX contracts11
(8)2
 Salary expense (4)(6)(2) Salary expense 


(4)(7)2
 Salary expense (2)(9)(3) Salary expense 


Total$14
$63
$(81) $(1)$65
$(86) $
$
$
$(2)$(8)$(24) $(3)$(9)$(28) $
$
$

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)
1Q17
4Q16
1Q16
  1Q17
4Q16
1Q16
  1Q17
4Q16
1Q16
FX contracts$(96)$332
$(58) Net interest revenue $
$
$
 Other revenue $
$
$



9092 BNY Mellon

Notes to Consolidated Financial Statements (continued)
 

Derivatives in net
investment hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss)
reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion
and amount excluded from
effectiveness testing)
3Q17
2Q17
3Q16
  3Q17
2Q17
3Q16
  3Q17
2Q17
3Q16
FX contracts$(206)$(274)$47
 Net interest revenue $
$
$
 Other revenue $
$
$


Impact of derivative instruments in the income statement
(in millions)
 
Derivatives in fair value hedging relationships
Location of
gain or (loss)
recognized in income
on derivatives
 Gain or (loss) recognized in income on derivatives 
Location of
gain or (loss)
recognized in income
on hedged item
 
Gain or (loss) recognized
in hedged item
YTD17
 YTD16
YTD17
 YTD16
Interest rate contractsNet interest revenue $(21) $(445) Net interest revenue $8
 $417


Derivatives in cash flow hedging
relationships
Gain or (loss)
recognized in
accumulated OCI
on derivatives
(effective portion)
 
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Gain or (loss) reclassified
from accumulated
OCI into income
(effective portion)
 
Location of gain or
(loss) recognized in
income on derivatives
(ineffective portion and
amount excluded from
effectiveness testing)
 
Gain or (loss) recognized
in income on derivatives
(ineffectiveness portion
and amount excluded from
effectiveness testing)
YTD17
YTD16
  YTD17
YTD16
  YTD17
YTD16
FX contracts$
$(16) Net interest revenue $
$(16) Net interest revenue $
$
FX 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 historical simulation and other market sensitivity measures. Risk is monitored and reported to senior management by a separate unit, independent from trading, on a daily basis. Based on certain assumptions, the VaR methodology is designed to capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period, utilizes a 99% confidence level and incorporates non-linear product characteristics. The VaR model is one of several statistical models used to develop economic capital results, which 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 may incorporate the impact of reduced market liquidity and the breakdown of historically observed correlations and extreme scenarios. VaR and other statistical measures, stress testing and sensitivity analysis are incorporated in other risk management materials.

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 revenue
(in millions)1Q17
4Q16
1Q16
3Q17
2Q17
3Q16
YTD17
YTD16
Foreign exchange$154
$175
$171
$158
$151
$175
$463
$512
Other trading revenue (loss)10
(14)4
Other trading revenue15
14
8
39
28
Total foreign exchange and other trading revenue$164
$161
$175
$173
$165
$183
$502
$540


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

Counterparty credit risk and collateral

We assess credit risk of our counterparties through regular examination of their financial statements, confidential communication with the management of those counterparties and regular monitoring of publicly available credit rating information. This and other information is used to develop proprietary credit rating metrics used to assess credit quality.

Collateral requirements are determined after a comprehensive review of the credit quality of each counterparty. Collateral is generally held or pledged in the form of cash or highly liquid government securities. Collateral requirements are monitored and adjusted daily.

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

Disclosure of contingent features in OTC derivative instruments

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



BNY Mellon 91

Notes to Consolidated Financial Statements(continued)

The following table shows the fair value of contracts falling under early termination provisions that were in net liability positions as of March 31,Sept. 30, 2017 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- $26 million $92 million
Baa2/BBB $540 million $430 million
Ba1/BB+ $1,483 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 March 31,Sept. 30, 2017, existing collateral arrangements would have required us to post an additional $116$151 million of collateral.



94 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 March 31, 2017 
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$6,582
$5,365
 $1,217
$277
$
$940
$6,182
$5,301
 $881
$189
$
$692
Foreign exchange contracts2,779
2,195
 584
73

511
4,281
3,120
 1,161
82

1,079
Equity and other contracts51
35
 16


16
69
49
 20


20
Total derivatives subject to netting arrangements9,412
7,595
 1,817
350

1,467
10,532
8,470
 2,062
271

1,791
Total derivatives not subject to netting arrangements1,128

 1,128


1,128
1,499

 1,499


1,499
Total derivatives10,540
7,595
 2,945
350

2,595
12,031
8,470
 3,561
271

3,290
Reverse repurchase agreements16,730
502
(b)16,228
16,228


36,118
19,171
(b)16,947
16,890

57
Securities borrowing9,548

 9,548
9,267

281
10,936

 10,936
10,627

309
Total$36,818
$8,097
 $28,721
$25,845
$
$2,876
$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.




92 BNY Mellon

Notes to Consolidated Financial Statements(continued)

Offsetting of derivative assets and financial assets at Dec. 31, 2016    
 Gross assets recognized
Gross amounts offset in the balance sheet
 
Net assets recognized
on the
balance sheet

Gross amounts not offset in the balance sheet 
(in millions)(a)Financial instruments
Cash collateral received
Net amount
Derivatives subject to netting arrangements:       
Interest rate contracts$7,205
$6,047
 $1,158
$321
$
$837
Foreign exchange contracts5,265
4,172
 1,093
202

891
Equity and other contracts44
38
 6


6
Total derivatives subject to netting arrangements12,514
10,257
 2,257
523

1,734
Total derivatives not subject to netting arrangements2,007

 2,007


2,007
Total derivatives14,521
10,257
 4,264
523

3,741
Reverse repurchase agreements17,588
481
(b)17,107
17,104

3
Securities borrowing8,694

 8,694
8,425

269
Total$40,803
$10,738
 $30,065
$26,052
$
$4,013
(a)Includes the effect of netting agreements and net cash collateral received. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)Offsetting of reverse repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.




BNY Mellon 95

Notes to Consolidated Financial Statements(continued)

Offsetting of derivative liabilities and financial liabilities at March 31, 2017Net liabilities recognized on the balance sheet
 
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
 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 liabilities recognized on the balance sheet
Net amount
(a)Cash collateral pledged
Net liabilities recognized on the balance sheet
Net amount
Derivatives subject to netting arrangements:      
Interest rate contracts$7,328
$6,529
 $799
$666
$133
$7,103
$5,705
 $1,398
$1,311
$87
Foreign exchange contracts2,560
1,645
 915
12

903
4,074
3,095
 979
234

745
Equity and other contracts112
54
 58
57

1
130
75
 55
49

6
Total derivatives subject to netting arrangements10,000
8,228
 1,772
735

1,037
11,307
8,875
 2,432
1,594

838
Total derivatives not subject to netting arrangements632

 632


632
790

 790


790
Total derivatives10,632
8,228
 2,404
735

1,669
12,097
8,875
 3,222
1,594

1,628
Repurchase agreements9,777
502
(b)9,275
9,275


27,321
19,171
(b)8,150
8,149

1
Securities lending1,501

 1,501
1,417

84
1,904

 1,904
1,812

92
Total$21,910
$8,730
 $13,180
$11,427
$
$1,753
$41,322
$28,046
 $13,276
$11,555
$
$1,721
(a)Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)Offsetting of repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


Offsetting of derivative liabilities and financial liabilities at Dec. 31, 2016
Net liabilities recognized
on the
balance sheet

   
 Gross liabilities recognized
Gross amounts offset in the balance sheet
 Gross amounts not offset in the balance sheet 
(in millions)(a)Financial instruments
Cash collateral pledged
Net amount
Derivatives subject to netting arrangements:       
Interest rate contracts$8,116
$6,634
 $1,482
$1,266
$
$216
Foreign exchange contracts4,957
3,363
 1,594
355

1,239
Equity and other contracts104
50
 54
54


Total derivatives subject to netting arrangements13,177
10,047
 3,130
1,675

1,455
Total derivatives not subject to netting arrangements1,271

 1,271


1,271
Total derivatives14,448
10,047
 4,401
1,675

2,726
Repurchase agreements8,703
481
(b)8,222
8,222


Securities lending1,615

 1,615
1,522

93
Total$24,766
$10,528
 $14,238
$11,419
$
$2,819
(a)Includes the effect of netting agreements and net cash collateral paid. The offset related to the OTC derivatives was allocated to the various types of derivatives based on the net positions.
(b)Offsetting of repurchase agreements relates to our involvement in the Fixed Income Clearing Corporation, where we settle government securities transactions on a net basis for payment and delivery through the Fedwire system.


96 BNY Mellon 93

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 March 31, 2017
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$3,014
$13
$
$3,027
$21,432
$
$
$21,432
U.S. government agencies523
64

587
489
110

599
Agency RMBS2,551
348

2,899
1,798
190

1,988
Corporate bonds428

1,138
1,566
282

940
1,222
Other debt securities616

390
1,006
254

871
1,125
Equity securities435

257
692
466

489
955
Total$7,567
$425
$1,785
$9,777
$24,721
$300
$2,300
$27,321
Securities lending:  
U.S. government agencies$45
$
$
$45
$15
$
$
$15
Other debt securities389


389
477


477
Equity securities1,067


1,067
1,412


1,412
Total$1,501
$
$
$1,501
$1,904
$
$
$1,904
Total borrowings$9,068
$425
$1,785
$11,278
$26,625
$300
$2,300
$29,225


Repurchase agreements and securities lending transactions accounted for as secured borrowings at Dec. 31, 2016
 Remaining contractual maturity of the agreements
(in millions)Overnight and continuous
Up to 30 days
30 days or more
Total
Repurchase agreements:    
U.S. Treasury$2,488
$4
$
$2,492
U.S. government agencies396
10

406
Agency RMBS3,294
386

3,680
Corporate bonds304

694
998
Other debt securities146

563
709
Equity securities375

43
418
Total$7,003
$400
$1,300
$8,703
Securities lending:    
U.S. government agencies$39
$
$
$39
Other debt securities477


477
Equity securities1,099


1,099
Total$1,615
$
$
$1,615
Total borrowings$8,618
$400
$1,300
$10,318


BNY Mellon’s repurchase agreements and securities lending transactions primarily encounter risk associated with liquidity. We are required to pledge collateral based on predetermined terms within the agreements. If we were to experience a decline in the fair value of the collateral pledged for these transactions, we could be required to provide
 
additional collateral to the counterparty, therefore decreasing the amount of assets available for other liquidity needs that may arise. BNY Mellon also offers tri-party collateral agency services in the tri-party repo market where we are exposed to credit risk. In order to mitigate this risk, we require dealers to fully secure intraday credit.



94 BNY Mellon 97

Notes to Consolidated Financial Statements (continued)
 

Note 17 - Commitments and contingent liabilities

Off-balance sheet arrangements

In the normal course of business, various commitments and contingent liabilities are outstanding that are not reflected in the accompanying consolidated balance sheets.

Our significant trading and off-balance sheet risks are securities, foreign currency and interest rate risk management products, commercial lending commitments, letters of credit and securities lending indemnifications. We assume these risks to reduce interest rate and foreign currency risks, to provide customers with the ability to meet credit and liquidity needs and to hedge foreign currency and interest rate risks. These items involve, to varying degrees, credit, foreign currency and interest rate risk not recognized 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 March 31, 2017 are disclosed in the financial institutions portfolio exposure and the commercial portfolio exposure tables below.

Financial institutions
portfolio exposure
(in billions)
March 31, 2017
Loans
Unfunded
commitments

Total
exposure

Securities industry$3.1
$19.3
$22.4
Banks7.2
1.9
9.1
Asset managers1.6
6.2
7.8
Insurance0.1
3.5
3.6
Government0.1
0.9
1.0
Other1.2
1.6
2.8
Total$13.3
$33.4
$46.7

Commercial portfolio
exposure
(in billions)
March 31, 2017
Loans
Unfunded
commitments

Total
exposure

Manufacturing$1.4
$6.6
$8.0
Energy and utilities0.5
4.7
5.2
Services and other0.7
4.2
4.9
Media and telecom0.3
1.8
2.1
Total$2.9
$17.3
$20.2


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 risksMarch 31, 2017
Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
(in millions)
Lending commitments$51,293
$51,270
$49,983
$51,270
Standby letters of credit (a)
3,932
4,185
3,619
4,185
Commercial letters of credit286
339
265
339
Securities lending indemnifications (b)
338,705
317,690
406,434
317,690
(a)
Net of participations totaling $684$681 million at March 31,Sept. 30, 2017 and $662$662 million at Dec. 31, 2016.
2016.
(b)
Excludes theindemnification for securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients,, which totaled $64$65 billion at March 31,Sept. 30, 2017 and $61 billion at Dec. 31, 2016.2016.


The total potential loss on undrawn lending commitments, standby and commercial letters of credit, and securities lending indemnifications is equal to the total notional amount if drawn upon, which does not consider the value of any collateral.

Since many of the lending commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. A summary of lending commitment maturities is as follows: $29.4$29.8 billion in less than one year, $21.5$20.0 billion in one to five years and $411$158 million over five years.

Standby letters of credit (“SBLC”) principally support corporate obligations and were collateralized with cash and securities of $283$178 million at March 31,Sept. 30, 2017 and $293$293 million at Dec. 31, 2016.2016. At March 31,Sept. 30, 2017,, $2.4 $2.3 billion of the SBLCs will expire within one year and $1.5$1.2 billion in one to five years and $48 million in over five years.

We must recognize, at the inception of an SBLC and foreign and other guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The fair value of the liability, which was recorded with a corresponding asset in other assets, was estimated as the present value of contractual customer fees. The estimated liability for losses related to 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 $112$104 million at March 31,Sept. 30, 2017 and $112$112 million at Dec. 31, 2016.2016.

Payment/performance risk of SBLCs is monitored using both historical performance and internal ratings


BNY Mellon 95

Notes to Consolidated Financial Statements(continued)

criteria. BNY Mellon’s historical experience is that


96 BNY Mellon

Notes to Consolidated Financial Statements(continued)

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 creditMarch 31, 2017
Dec. 31, 2016
Sept. 30, 2017
Dec. 31, 2016
Investment grade88%89%86%89%
Non-investment grade12%11%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 $286$265 million at March 31,Sept. 30, 2017 and $339 million at Dec. 31, 2016.

We expect many of the lending commitments and letters of credit to expire without the need to advance any cash. The revenue associated with guarantees frequently depends on the credit rating of the obligor and the structure of the transaction, including collateral, if any.


98 BNY Mellon

Notes to Consolidated Financial Statements(continued)

A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security (typically through an agent, in our case, The Bank of New York Mellon), to a borrower, usually a broker-dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract, which normally matures in less than 90 days.

We typically lend securities with indemnification against borrower default. We generally require the borrower to provide collateral with a minimum value 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 $353424 billion at March 31,Sept. 30, 2017 and $331 billion at Dec. 31, 2016.

CIBC Mellon, a joint venture between BNY Mellon and the Canadian Imperial Bank of Commerce (“CIBC”), engages in securities lending activities.  CIBC Mellon, BNY Mellon and CIBC jointly and severally indemnify securities lenders against specific types of borrower default.  At March 31,Sept. 30, 2017 and
Dec. 31, 2016,, $64 $65 billion and $61 billion,
respectively, of borrowings at CIBC Mellon, for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, were secured by collateral of $67$69 billion and $64 billion, respectively. If, upon a default, a borrower’s collateral was not sufficient to cover its related obligations, certain losses related to the indemnification could be covered by the indemnitors.

Industry concentrations

We 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 99

Notes to Consolidated Financial Statements(continued)

indemnifications for several reasons. In addition to the lack of a stated or notional amount in a majority of such indemnifications, we are unable to predict the nature of events that would trigger indemnification or the level of indemnification for a certain event. We believe, however, that the possibility that we will


BNY Mellon 97

Notes to Consolidated Financial Statements(continued)

have to make any material payments for these


98 BNY Mellon

Notes to Consolidated Financial Statements(continued)

indemnifications is remote. At March 31,Sept. 30, 2017 and Dec. 31, 2016, we have not recorded any material liabilities under these arrangements.

Clearing and settlement exchanges

We are a noncontrolling equity investor in, and/or member of, several industry clearing or settlement exchanges through which foreign exchange, securities, derivatives or other transactions settle. Certain of these industry clearing and settlement exchanges require their members to guarantee their obligations and liabilities and/or to provide liquidity support in the event other members do not honor their obligations. We believe the likelihood that a clearing or settlement exchange (of which we are a member) would become insolvent is remote. Additionally, certain settlement exchanges have implemented loss allocation policies that enable the exchange to allocate settlement losses to the members of the exchange. It is not possible to quantify such mark-to-market loss until the loss occurs. 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 March 31,Sept. 30, 2017 and Dec. 31, 2016, we have not recorded any material liabilities under these arrangements.

Legal proceedings

In the ordinary course of business, BNY Mellon and its subsidiaries are routinely named as defendants in or made parties to pending and potential legal actions. We also are subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal). Claims for significant monetary damages are often asserted in many of these legal actions, while claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought in governmental and regulatory matters. It is inherently difficult to predict the eventual outcomes of such matters given their complexity and the particular facts and circumstances at issue in each of these matters. However, on the basis of our current
knowledge and understanding, we do not believe that judgments, settlements or orders, if any, arising from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage) will have a material adverse effect on the consolidated financial position or liquidity of BNY Mellon, although they could have a material effect on net income in a given period.

In view of the inherent unpredictability of outcomes in litigation and governmental and regulatory matters, particularly where (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel legal theories or a large number of parties, as a matter of course there is considerable uncertainty surrounding the timing or ultimate resolution of litigation and governmental and regulatory matters, including a possible eventual loss, fine, penalty or business impact, if any, associated with each such matter. In accordance with applicable accounting guidance, BNY Mellon establishes accruals for litigation and governmental and regulatory matters when those matters proceed to a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. BNY Mellon will continue to monitor such matters for developments that could affect the amount of the accrual, and will adjust the accrual amount as appropriate. If the loss contingency in question is not both probable and reasonably estimable, BNY Mellon does not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. BNY Mellon believes that its accruals for legal proceedings are appropriate and, in the aggregate, are not material to the consolidated financial position of BNY Mellon, although future accruals could have a material effect on net income in a given period.

For certain of those matters described here for which a loss contingency may, in the future, be reasonably possible (whether in excess of a related accrued liability or where there is no accrued liability), BNY Mellon is currently unable to estimate a range of reasonably possible loss. For those matters described here where BNY Mellon is able to estimate a reasonably possible loss, the aggregate range of such reasonably possible loss is up to $940 million $920 million in excess of the accrued liability (if any) related to those matters.


100 BNY Mellon

Notes to Consolidated Financial Statements(continued)

The following describes certain judicial, regulatory and arbitration proceedings involving BNY Mellon:

Mortgage-Securitization Trusts Proceedings
The Bank of New York Mellon has been named as a defendant in a number of legal actions brought by MBS investors alleging that the trustee has expansive duties under the governing agreements, including the


BNY Mellon 99

Notes to Consolidated Financial Statements(continued)




100 BNY Mellon

Notes to Consolidated Financial Statements(continued)

duty to investigate and pursue breach of representation and warranty claims against other parties to the MBS transactions. These actions include a lawsuit brought in New York State court on June 18, 2014, and later re-filed in federal court, by a group of institutional investors who purport to sue on behalf of 253 MBS trusts.

Matters Related to R. Allen Stanford
In late December 2005, Pershing LLC (“Pershing”) became a clearing firm for Stanford Group Co. (“SGC”), a registered broker-dealer that was part of a group of entities ultimately controlled by R. Allen Stanford (“Stanford”). Stanford International Bank (“SIB”), also controlled by Stanford, issued certificates of deposit (“CDs”). Some investors allegedly wired funds from their SGC accounts to purchase CDs. In 2009, the SEC charged Stanford with operating a Ponzi scheme in connection with the sale of CDs, and SGC was placed into receivership. Alleged purchasers of CDs have filed 15 lawsuits against Pershing that are pending in Texas, including two putative class actions. The purchasers allege that Pershing, as SGC’s clearing firm, assisted Stanford in a fraudulent scheme and assert contractual, statutory and common law claims. In addition, oneThe remaining FINRA arbitration matter brought by alleged purchasers remains pending.action has been resolved and dismissed.

Brazilian Postalis Litigation
BNY Mellon Servicos Financeiros DTVM S.A. (“DTVM”), a subsidiary that provides a number of asset services in Brazil, acts as administrator for certain investment funds in which the exclusive investor is a public pension fund for postal workers called Postalis-Instituto de Seguridade Social dos Correios e Telégrafos (“Postalis”). On Aug. 22, 2014, Postalis sued DTVM in Rio de Janeiro, Brazil for losses related to a Postalis investment fund for which DTVM serves as fund administrator. Postalis alleges that DTVM failed to properly perform alleged duties, including duties to conduct due diligence of and exert control over the fund manager, Atlântica Administração de Recursos (“Atlântica”), and Atlântica’s investments. On March 12, 2015, Postalis filed a lawsuit in Rio de Janeiro against DTVM and
BNY Mellon Administração de Ativos Ltda. (“Ativos”) alleging failure to properly perform alleged duties relating to another fund of which DTVM is administrator and Ativos is investment manager. On Dec. 14, 2015, Associaceão Dos Profissionais Dos Correiros (“ADCAP”), a Brazilian postal workers association, filed a lawsuit in São Paulo

against DTVM and other defendants alleging that DTVM improperly contributed to investment losses in the Postalis portfolio. On March 20, 2017, the lawsuit was dismissed without prejudice.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 claims are for breach of contract and violations of ERISA. The lawsuits have been consolidated into two suits that are pending in federal court in the Southern District of New York.

Brazilian Silverado Litigation
DTVM acts as administrator for the Fundo de Investimento em Direitos Creditórios Multisetorial Silverado Maximum (“Silverado Maximum Fund”), which invests in commercial credit receivables. On June 2, 2016, the Silverado Maximum Fund sued DTVM in its capacity as administrator, along with Deutsche Bank S.A. - Banco Alemão in its capacity as custodian and Silverado Gestão e Investimentos Ltda. in its capacity as investment manager. The Fund alleges that each of the defendants failed to fulfill its respective duty, and caused losses to the Fund for which the defendants are jointly and severally liable.



BNY Mellon 101

Notes to Consolidated Financial Statements(continued)

Depositary Receipt Pre-Release Inquiry
In March 2014, the Staff of the U.S. Securities and Exchange Commission’s Enforcement Division (the “Staff”) commenced an investigation into certain issuers of American Depositary Receipts (“ADRs”), including BNY Mellon, for the period of 2011 to 2015. The Staff has issued several requests to BNY Mellon for information relating to the pre-release of ADRs. In May 2017, BNY Mellon began discussions with the Staff about a possible resolution of the investigation. BNY Mellon has fully cooperated with this matter.

Note 18 - Lines of business

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



BNY Mellon 101

Notes to Consolidated Financial Statements(continued)

Business accounting principles

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

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

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

The primary types of revenue for our two principal businesses and the Other segment are presented below: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 custody fees, fund services, broker-dealer services, securities finance and collateral and liquidity services
   Issuer services fees, including Depositary Receipts and Corporate Trust
   Clearing services fees
   Treasury services fees, including global payments, trade finance and cash management
   Foreign exchange revenue
   Financing-related fees and net interest revenue from credit-related activities
Other segment
   Net interest revenue and lease-related gains (losses) from leasing operations
   Gain (loss) on securities and net interest revenue from corporate treasury activity
   Other trading revenue from derivatives and other trading activity
   Results of business exits


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


102 BNY Mellon

Notes to Consolidated Financial Statements(continued)

We typically allocate all interest revenue to the businesses generating the deposits. Accordingly, accretion related to the portion of the investment securities portfolio restructured in 2009 has been included in the results of the businesses.
M&I expense is a corporate level item and is recorded in the Other segment.
Restructuring charges relate to corporate-level initiatives and were therefore recorded in the Other segment.
Balance sheet assets and liabilities and their related income or expense are specifically assigned to each business. Businesses with a net liability position have been allocated assets.
Goodwill and intangible assets are reflected within individual businesses.

The following consolidating schedules showpresents the contribution of our businesses to our overall profitability.

For the quarter ended March 31, 2017Investment
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 revenue (expense)86
 707
 (1) 792
 82
 777
 (20) 839
 
Total revenue963
(a)2,791
 71
 3,825
(a)1,000
(a)2,964
 49
 4,013
(a)
Provision for credit losses3
 
 (8) (5) (2) (2) (2) (6) 
Noninterest expense683
 1,849
 107
 2,639
(b)702
 1,874
 77
 2,653
(b)
Income (loss) before taxes$277
(a) $942
 $(28) $1,191
(a)(b)$300
(a) $1,092
 $(26) $1,366
(a)(b)
Pre-tax operating margin (c)
29% 34% N/M
 31% 30% 37% N/M
 34% 
Average assets$31,067
 $251,027
 $54,106
 $336,200
 $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 $15$7 million representing $33$10 million of income and noncontrolling interests of $18$3 million. Income before taxes is net of noncontrolling interests of $18$3 million.
(b)Noninterest expense includes a loss attributable to noncontrolling interest of $3$1 million related to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.


For the quarter ended Dec. 31, 2016
Investment
Management

 
Investment
Services

 Other
 Consolidated
 
For the quarter ended June 30, 2017
Investment
Management

 
Investment
Services

 Other
 Consolidated
 
(dollar amounts in millions)
Investment
Management

 
Investment
Services

 Other
 Consolidated
 
Fee and other revenue$899
(a) $2,115
 $113
 $3,127
(a) 
Net interest revenue80
 713
 38
 831
 
Net interest revenue (expense)87
 761
 (22) 826
 
Total revenue960
(a)2,745
 80
 3,785
(a)986
(a)2,876
 91
 3,953
(a)
Provision for credit losses6
 
 1
 7
 
 (3) (4) (7) 
Noninterest expense694
 1,824
 110
 2,628
(b)698
 1,927
 28
 2,653
(b)
Income (loss) before taxes$260
(a) $921
 $(31) $1,150
(a)(b)
Income before taxes$288
(a) $952
 $67
 $1,307
(a)(b)
Pre-tax operating margin (c)
27% 34% N/M
 30% 29% 33% N/M
 33% 
Average assets$30,529
 $269,036
 $44,577
 $344,142
 $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 $1$7 million, representing $5$10 million of income and noncontrolling interests of $4$3 million. Income before taxes is net of noncontrolling interests of $4$3 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interest of $3$2 million related to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.



BNY Mellon 103

Notes to Consolidated Financial Statements (continued)
 

For the quarter ended March 31, 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 revenue83
 679
 4
 766
 
Net interest revenue (expense)82
 715
 (23) 774
 
Total revenue895
(a)2,709
 133
 3,737
(a)958
(a)2,898
 77
 3,933
(a)
Provision for credit losses(1) 14
 (3) 10
 
 1
 (20) (19) 
Noninterest expense679
 1,808
 140
 2,627
(b)702
 1,851
 88
 2,641
(b)
Income (loss) before taxes$217
(a) $887
 $(4) $1,100
(a)(b)
Income before taxes$256
(a) $1,046
 $9
 $1,311
(a)(b)
Pre-tax operating margin (c)
24% 33% N/M
 29% 27% 36% N/M
 33% 
Average assets$29,971
 $273,289
 $61,294
 $364,554
 $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 $1$8 million, representing $6$17 million of lossesincome and a loss attributable to noncontrolling interests of $7$9 million. Income (loss) before taxes is net of a loss attributable to noncontrolling interests of $7$9 million.
(b)
Noninterest expense includes a loss attributable to noncontrolling interest of $2 million related to other consolidated subsidiaries.
(c)Income before taxes divided by total revenue.
N/M - Not meaningful.


For the nine months ended Sept. 30, 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

Notes to Consolidated Financial Statements(continued)

Note 19 - Supplemental information to the Consolidated Statement of Cash Flows

Noncash investing and financing transactions that, appropriately, are not reflected in the Consolidated Statement of Cash Flows are listed below.

Noncash investing and financing transactionsThree months ended March 31,Nine months ended Sept. 30,
(in millions)2017
 2016
2017
 2016
Transfers from loans to other assets for other real estate owned (“OREO”)$1
 $1
$3
 $4
Change in assets of consolidated VIEs204
 101
429
 392
Change in liabilities of consolidated VIEs106
 8
288
 14
Change in nonredeemable noncontrolling interests of consolidated investment management funds84
 81
234
 238
Securities purchased not settled580
 86
1,277
 229
Securities sales not settled81
 356

 218
Securities matured not settled350
 
Held-to-maturity securities transferred to available-for-sale74
 10
Premises and equipment/capitalized software funded by capital lease obligations1
 2
347
 12
 


104 BNY Mellon 105

Item 4. Controls and Procedures
 

Disclosure controls and procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, with participation by the members of the Disclosure Committee, has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining, and evaluating disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our SEC reports is timely recorded, processed, summarized and reported and that information required to be disclosed by BNY Mellon is accumulated and communicated to BNY Mellon’s management to allow timely decisions regarding the required disclosure. In addition, our ethics hotline can also be used by employees and others for the anonymous communication of concerns about financial controls or reporting matters. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

In the ordinary course of business, we may routinely modify, upgrade or enhance our internal controls and procedures for financial reporting. There have not been any changes in our internal controlscontrol over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the firstthird quarter of 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



105106 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), intentions (including those regarding our resolution strategy), targets, opportunities and initiatives.

In this report, any other report, any press release or any written or oral statement that BNY Mellon or its executives may make, words, such as “estimate,” “forecast,” “project,” “anticipate,” “likely,” “target,” “expect,” “intend,” “continue,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “would,” “may,” “might,” “will,” “strategy,” “synergies,” “opportunities,” “trends” and words of similar meaning, may signify forward-looking statements.

Actual results may differ materially from those expressed or implied as a result of a number of factors, including those discussed in the “Risk Factors” section of our 2016 Annual Report and this Form 10-Q, such as: an information security event or technology disruption that results in a loss of information or impacts our ability to provide services to our clients and any material adverse effect on our business and results of operations; failure of our technology or that of a third party or vendor, or if we neglect to update our technology, develop and market new technology to meet clients’ needs or protect our intellectual property and any material adverse effect on our business; a determination that our resolution plan is not credible and any material negative impact on our business, reputation, results of operations and financial condition and the application of our Title I preferred resolution strategy or resolution under the Title II orderly liquidation authority and any adverse effects on our liquidity, financial condition and security holders; extensive government rulemaking regulation, and supervision, which have, and in the future may, compel us to change how we manage our businesses, could have a material adverse effect on our business, financial condition and results of operations and have increased our compliance and operational risks and costs; failure to satisfy regulatory standards, including “well capitalized” and “well
“well managed” status or capital adequacy and
liquidity rules, and any resulting limitations on our activities, or adverse effects on our business and financial condition; regulatory or enforcement actions or litigation and any material adverse effect on our results of operations or harm to our businesses or reputation; adverse events, publicity, government scrutiny or other reputational harm and any negative effect on our businesses; operational risk and any material adverse effect on our business; failure or circumvention of our controls and procedures and any material adverse effect on our business, reputation, results of operations and financial condition; failure of our risk management framework to be effective in mitigating risk and reducing the potential for losses; change or uncertainty in monetary, tax and other governmental policies and the impact on our businesses, profitability and ability to compete; political, economic, legal, operational and other risks inherent in operating globally and any adverse effect on our business; acts of terrorism, natural disasters, pandemics and global conflicts and any negative impact on our business and operations; ongoing concerns about the financial stability of certain countries, the failure or instability of any of our significant global counterparties, new barriers to global trade or a breakup of the EU or Eurozone and any material adverse effect on our business and results of operations; the United Kingdom’s referendum decision to leave the EU and any negative effects on global economic conditions, global financial markets, and our business and results of operations; weakness and volatility in financial markets and the economy generally and any material adverse effect on our business, results of operations and financial condition; changes in interest rates and any material adverse effect on our profitability; write-downs of securities that we own and other losses related to volatile and illiquid market conditions and any reduction in our earnings or impact on our financial condition; our dependence on fee-based business for a substantial majority of our revenue and the adverse effects of a slowing in market activity, weak financial markets, underperformance and/or negative trends in savings rates or in investment preferences; any adverse effect on our foreign exchange revenues from decreased market volatility or cross-border investment activity of our clients; the failure or perceived weakness of any of our significant counterparties, and our assumption of credit and counterparty risk, which could expose us to loss and adversely affect our business; any material reduction in our credit ratings or the credit ratings of our principal bank subsidiaries, which could increase


BNY Mellon 106107

Forward-looking Statements (continued)
 

our principal bank subsidiaries, which could increase the cost of funding and borrowing to us and our rated subsidiaries and have a material adverse effect on our results of operations and financial condition and on the value of the securities we issue; any adverse effect on our business, financial condition and results of operations of not effectively managing our liquidity; the potential to incur losses if our allowance for credit losses is inadequate; the risks relating to new lines of business, new products and services or transformational or strategic project initiatives and the failure to implement these initiatives, which could affect our results of operations; the risks and uncertainties relating to our strategic transactions and any adverse effect on our business, results of operations and financial condition; competition in all aspects of our business and any negative effect on our ability to maintain or increase our profitability; failure to attract and retain employees and any adverse effect on our business; tax law changes or challenges to our tax positions and any adverse effect on our net income, effective tax rate and overall results of operations and financial condition; changes in accounting standards and any material impact on our reported financial condition, results of operations,
 
cash flows and other financial data; risks associated with being a non-operating holding company, including our dependence on dividends from our subsidiaries to meet obligations, to provide funds for payment of dividends and for stock repurchases; and the impact of provisions of U.S. banking laws and regulations, including those governing capital and the approval of our capital plan, applicable provisions of Delaware law or failure to pay full and timely dividends on our preferred stock, on our ability to return capital to shareholders.

Investors should consider all risk factors discussed in our 2016 Annual Report, this Form 10-Q and any subsequent reports filed with the SEC by BNY Mellon pursuant to the Exchange Act. All forward-looking statements speak only as of the date on which such statements are made, and BNY Mellon undertakes no obligation to update any statement to reflect events or circumstances after the date on which such forward-looking statement is made or to reflect the occurrence of unanticipated events. The contents of BNY Mellon’s website or any other websites referenced herein are not part of this report.



108 BNY Mellon 107

Part II - Other Information
 

Item 1. Legal Proceedings

The information required by this Item is set forth in the “Legal proceedings” section in Note 17 of the Notes to Consolidated Financial Statements, which portion is incorporated herein by reference in response to this item.

Item 1A. Risk Factors

The following discussion supplements the discussion of risk factors that could affect our business, financial condition or results of operations set forth in Part I, Item 1A, Risk Factors, on pages 90 through 116 of our 2016 Annual Report. The discussion of Risk Factors, as so supplemented, sets forth our most significant risk factors that could affect our business, financial condition or results of operations. However, other factors, besides that discussed below or in our 2016 Annual Report or other of our reports filed with or furnished to the SEC, also could adversely affect our business or results. We cannot assure you that the risk factors described below or elsewhere in this report and such other reports address all potential risks that we may face. These risk factors also serve to describe factors which may cause our results to differ materially from those described in forward-looking statements included herein or in other documents or statements that make reference to this Form 10-Q. See Forward-looking Statements.

If our resolution plan is determined not to be credible or not to facilitate an orderly resolution under the U.S. Bankruptcy Code, our business, reputation, results of operationoperations and financial condition could be materially negatively impacted. The application of our Title I preferred resolution strategy or resolution under the Title II orderly liquidation authority could adversely affect our liquidity and financial condition and our security holders.

Large BHCs must develop and submit to the Federal Reserve and the FDIC for review plans for their rapid and orderly resolution in the event of material financial distress or failure. BNY Mellon and The Bank of New York Mellon each file periodic complementary resolution plans. In April 2016, the Federal Reserve and the FDIC jointly determined that our 2015 resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code. The agencies issued a joint notice of deficiencies and shortcomings and the actions that
 
must be taken to address them, which we responded to in an Oct. 1, 2016 submission. In December 2016, the agencies jointly determined that our Oct. 1, 2016 submission adequately remedied the identified deficiencies. If the agencies determine that our future submissions are not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, and we fail to address the deficiencies in a timely manner, the agencies may jointly impose more stringent capital, leverage or liquidity requirements or restrictions on our growth, activities or operations. If we continue to fail to adequately remedy any deficiencies identified in future submissions, we could be required to divest assets or operations that the agencies determine necessary to facilitate our orderly resolution.

Following the receipt of feedback from the Federal Reserve and the FDIC in April 2016 on our 2015 resolution plan, we determined that, in the event of our material financial distress or failure, our preferred resolution strategy under Title I of the Dodd-Frank Act is a single point of entry strategy.

In connection with our single point of entry resolution strategy, we have established the IHC to facilitate the provision of capital and liquidity resources to certain key subsidiaries in the event of material financial distress or failure. In the second quarter of 2017, we entered into a binding support agreement that required the IHC to provide that support. The support agreement required the Parent to transfer its intercompany loans and most of its cash to the IHC, and requires the Parent to continue to transfer cash and other liquid financial assets to the IHC.

If our projected liquidity resources deteriorate so severely that resolution of the Parent becomes imminent, the committed line of credit the IHC provided to the Parent will automatically terminate, with all amounts outstanding becoming due and payable, and the support agreement will require the Parent to transfer most of its remaining assets (other than stock in subsidiaries and a cash reserve to fund bankruptcy expenses) to the IHC. As a result, during a period of severe financial stress the Parent might commence bankruptcy proceedings at an earlier time than it otherwise would if the support agreement had not been implemented.

If the Parent were to become subject to a bankruptcy proceeding and our single point of entry strategy is successful, creditors of some or all of our material


BNY Mellon 108109

Part II - Other Information (continued)
 

entities would receive full recoveries on their claims, while the Parent’s security holders, including unsecured debt holders, could face significant losses, potentially including the loss of their entire investment. It is possible that the application of the single point of entry strategy – in which the Parent would be the only legal entity to enter resolution proceedings – could result in greater losses to holders of our unsecured debt securities and other securities than the losses that could result from the application of a different resolution strategy. Further, if the single point of entry strategy is not successful, our liquidity and financial condition would be adversely affected and our security holders may, as a consequence, be in a worse position than if the strategy had not been implemented.

In addition, Title II of the Dodd-Frank Act established an orderly liquidation process in the event of the failure of a large systemically important financial institution, such as BNY Mellon, in order to avoid or mitigate serious adverse effects on the U.S. financial system. Specifically, when a U.S. G-SIB, such as BNY Mellon is in default or danger of default, and certain specified conditions are met, the FDIC may be appointed receiver under the orderly liquidation authority, and BNY Mellon would be resolved under that authority instead of the U.S. Bankruptcy Code.

 
U.S. supervisors have indicated that a single point of entry strategy may be a desirable strategy to resolve a large financial institution such as BNY Mellon under Title II in a manner that would, similar to our preferred strategy under our Title I resolution plan, impose losses on shareholders, unsecured debt holders and other unsecured creditors of the top-tier holding company (in our case, the Parent), while permitting the holding company’s subsidiaries to continue to operate and remain solvent. Under such a strategy, assuming the Parent entered resolution proceedings and its subsidiaries remained solvent, losses at the subsidiary level could be transferred to the Parent and ultimately borne by the Parent’s security holders (including holders of the Parent’s unsecured debt securities), while third-party creditors of the Parent’s subsidiaries would receive full recoveries on their claims. Accordingly, the Parent’s security holders (including holders of unsecured debt securities and other unsecured creditors) could face losses in excess of what otherwise would have been the case.




110 BNY Mellon 109

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 firstthird quarter of 2017. All of the Company’s preferred stock outstanding has preference over the Company’s common stock with respect to the payment of dividends.


Issuer purchases of equity securities

Share repurchases - first 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 March 31, 2017  
(dollars in millions, except per share information; common shares in thousands)Total shares
repurchased

 Average price
per share

  
January 201710,933
 $45.47
 10,933
 $896
 
February 20175,157
 46.32
 5,157
 657
 
March 20173,062
 46.73
 3,062
 514
 
First quarter of 2017 (a)
19,152
 $45.90
 19,152
 $514
(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 2.9 million32 thousand shares repurchased at a purchase price of $135$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 $45.68.$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 total repurchase of up to $2.7$2.6 billion of common stock and up to an additional $500 million of common stock contingent on a prior issuance of $500 million of noncumulative perpetual preferred stock. The 20162017 capital plan began in the third quarter of 20162017 and continues through the second quarter of 2017. Also, in connection with the 2016 capital2018. This new share repurchase plan in August 2016, BNY Mellon issued $1 billion of noncumulative perpetual preferred stock.replaces all previously authorized share repurchase plans.

Share repurchases may be executed through repurchase plans designed to comply with Rule 10b5-1 and through derivative, accelerated share repurchase and other structured transactions. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions and the common stock trading price; the Company’s capital position, liquidity and financial performance; alternative uses of capital; and legal and regulatory considerations.


 
Item 6. Exhibits

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 to such agreements. 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 109 hereof, under “Index to Exhibits,” which is incorporated herein by reference.below.



110BNY 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: May 8,November 7, 2017By: /s/ Kurtis R. Kurimsky
   Kurtis R. Kurimsky
   Corporate Controller
   (Duly Authorized Officer and
   Principal Accounting Officer of
   the Registrant)




111114 BNY Mellon

Index to Exhibits

Exhibit No.DescriptionMethod of Filing
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.
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 March 31, 2017. The Company hereby agrees to furnish to the Commission, upon request, a copy of any such instrument.N/A


BNY Mellon 112

Index to Exhibits (continued)


Exhibit No.DescriptionMethod of Filing
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.





BNY Mellon 113